Osat Sector Taiwan

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT. Global Equity Research

Industry Report

6 November 2009 (No. of pages: 33)

OSAT Sector

Taiwan: Electronics

Neutral → PositiveAaron Jeng, CFA

(886) 2 8780 [email protected]

Focus on the structural winner

Summary We have upgraded our rating for the Taiwan Outsourced Semiconductor Assembly and Test

(OSAT) sector to Positive from Neutral as we believe that all the fundamental indicators point to positive for 2010. Although there may be some share-price corrections in the 4Q09-1Q10 slow season, we would expect these to be moderate, as most of the key fundamental parameters, including demand, supply and inventory levels, appear to be healthy at this time.

In addition, we have upgraded our rating for Advanced Semiconductor Engineering (ASE) to 2 (Outperform) from 4 (Underperform). We maintain our 3 (Hold) rating for Siliconware Precision (SPIL) as we expect ASE to continue to outperform SPIL (in terms of share-price performance) for several reasons, including: 1) ASE’s leading position in copper-wire technology should help it to increase its market share from 4Q FY09 onward, 2) MediaTek’s (2454 TT, NT$480, 3) transition to an RF-integrated single-chip solution for its mainstream handset IC platform in 2010 would hurt SPIL more than ASE, 3) ASE enjoys higher operating leverage than SPIL, 4) an increase in IDM outsourcing would benefit ASE more than SPIL, and 5) a rising gold price would hurt SPIL more than ASE.

We have raised our six-month target price for ASE to NT$33.0 (based on a PBR of 2.4x on our FY10 BVPS forecast) from NT$21.0 (based on a PBR of 1.4x on our FY09 BVPS forecast), and lowered our six-month target price for SPIL to NT$47.0 (based on a PBR of 2.2x on our FY10 BVPS forecast) from NT$48 (based on a PBR of 2.3x on our FY09 BVPS forecast).

Valuation comparison: ASE, SPIL, Powertech Technology (PTI) and peers

Bloomberg Six-month

target price Upside/ Mkt cap

Share price

EPS (local curr./share)

EPS change (YoY %) PER (x) PBR (x) ROE (%)

code Company Curr. Rating (NT$) downside (%) (US$m) (loc.) 2008 2009E 2010E 2009E 2010E 2009E 2010E 2009E 2010E 2009E 2010E Our coverage 2311 TT* ASE NT$ 4 → 2 33 20.7 4,605 27.35 1.14 1.08 2.00 (5.4) 85.2 25.3 13.7 2.2 2.0 8.8 15.4 2325 TT* SPIL NT$ 3 47 9.3 4,117 43.0 2.00 2.62 2.97 31.0 13.3 16.4 14.5 2.1 2.0 13.4 14.2 6239 TT* PTI NT$ 2 110 20.7 1,883 91.1 10.38 7.17 10.11 (30.9) 41.0 12.7 9.0 2.4 2.0 20.5 24.1 Logic IC AMKR US** Amkor US$ NR 1,009 5.5 0.99 0.37 0.63 (62.8) 71.2 15.0 8.7 3.3 3.3 26.97 44.97 STAT SP** STATSChipPAC S$ NR 1,872 0.9 n.a. n.a. n.a. n.m. n.m. n.a. n.a. 0.9 0.9 n.a. n.a. 2449 TT* King Yuan NT$ NR 504 13.0 0.93 (0.91) 0.89 n.m. n.m. n.a. 14.6 0.8 0.8 n.a. 6.11 2441 TT* Greatek NT$ NR 520 31.4 3.11 2.58 3.36 (17.1) 30.2 12.1 9.3 1.7 1.7 13.06 15.88 Memory IC IMOS US** ChipMOS US$ NR 63 0.8 n.a. n.a. n.a. n.m. n.m. n.a. n.a. 0.1 0.1 n.a. n.a. 8131 TT* FATC NT$ NR 532 40.3 2.32 0.07 3.16 (97.2) n.m. 601.5 12.4 2.2 2.2 0.34 15.80 Source: Companies, Bloomberg, Daiwa forecasts for ASE, SPIL and PTI only Note: *share prices as at 5 November 2009, **share prices as at 4 November 2009

Aaron Jeng, CFA (886) 2 8780 1469 OSAT Sector 2

Contents

Sector rating upgraded to Positive ....................................................................................3

Sector outlook ..................................................................................................................3

We prefer ASE to SPIL for 2010 .....................................................................................6

Key financial indicators..................................................................................................15

Valuation ........................................................................................................................16

Company section

Advanced Semiconductor Engineering (2311 TT)..................................................19

Siliconware Precision (2325 TT).............................................................................24


Sector rating upgraded to Positive We have upgraded our rating for the OSAT sector to Positive from Neutral, and upgraded our rating for ASE to 2 from 4. However, we maintain our 3 rating for SPIL. We have upgraded our sector rating as we believe all the fundamental indicators point to positive for 2010. We expect some share-price corrections in the 4Q09-1Q10 slow season. However, we would expect these to be moderate as most of the key fundamental parameters, including demand, and supply and inventory levels, appear to be healthy at this time. As long as there is not a sharp economic correction in 2010, we would advise investors to use the seasonal weakness to accumulate ASE, as we expect the company to undergo more positive structural changes than SPIL in 2010. We have raised our six-month target price for ASE to NT$33.0 (based on a PBR of 2.4x on our FY10 BVPS forecast) from NT$21.0 (based on a PBR of 1.4x on our FY09 BVPS forecast) and lowered our six-month target price for SPIL to NT$47.0 (based on a PBR of 2.2x on our FY10 BVPS forecast) from NT$48.0 (based on a PBR of 2.3x on our FY09 BVPS forecast). Sector outlook

Demand is recovering Global demand for electronic products has continued to exceed our expectations since early 2009. We think the upward revisions to forecasts for major electronic product shipments by the market will continue over the near term. We forecast semiconductor sales globally to increase by 8% YoY for 2010, and sales for foundry companies to rise by 18% YoY for 2010 due to increased outsourcing from IDM customers as economies continue to recover.

Daiwa revenue-growth forecasts by sector (YoY %) Fabless customers Foundry Semiconductor PC (unit shipments) Handsets (unit shipments) 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E 2008 2009E 2010E Sep-08 12.9 9.4 9.8 13.0 9.8 11.5 4.0 7.0 6.5 12.2 10.8 10.0 9.7 9.3 7.5 Nov-08 15.3 (2.2) 10.1 4.9 (8.2) 19.4 2.0 (9.0) 7.0 12.5 (2.5) 5.2 6.8 (4.1) 6.3 Feb-09 10.5 (24.0) 9.1 3.7 (34.8) 41.2 (2.8) (23.0) 2.0 11.0 (11.0) 2.1 4.5 (13.1) 4.0 May-09 10.5 (17.9) 4.4 3.7 (27.0) 18.8 (2.8) (19.0) 2.0 10.4 (7.4) 5.6 6.0 (6.8) 6.9 Aug-09 10.5 (10.9) 7.4 3.7 (18.1) 17.7 (2.8) (18.0) 8.0 10.4 (1.0) 8.6 6.0 (4.2) 6.9 Source: Companies, Daiwa forecasts

Supply – capex discipline expected to continue into 2010 According to ASE and SPIL, they will increase their FY10 capex by 70% YoY and 100% YoY, respectively. ASE has indicated that its FY10 capex will increase to US$400-500m from US$300m for FY09. SPIL has implied that its FY10 capex could double to NT$10bn from NT$5bn for FY09. However, even with these increases, the companies’ capex-to-sales ratios would remain under control for FY10, in our view: ASE’s would increase to 16% from 12% for FY09, while SPIL’s would rise to 15% from 9% for FY09. Compared with the very high levels of capex expansion for FY02 and FY04 (when capex-to-sales ratios reached 20-30%), we regard the two companies’ FY10 capex plans as disciplined. In addition, we believe the OSAT companies will adjust their capex plans quickly to adapt to the changing macro demand situation, which means their utilisation rates and gross-profit margins for FY10 should be sustained at the high ends of their past-five-year ranges.

We have upgraded our rating for ASE to 2, but maintain our 3 rating for SPIL

For 2010, we forecast semiconductor sales to rise by 8% YoY and foundry sales to increase 18% YoY

We expect the capex-to-sales ratios of ASE and SPIL to remain under control for 2010


Capex and capex-to-sales ratio: ASE vs. SPIL

0

5,000

10,000

15,000

20,000

25,000

30,000

2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E5

10

15

20

25

30

35

ASE capex (LHS) SPIL capex (LHS)ASE capex-to-sales ratio (RHS) SPIL capex-to-sales ratio (RHS)

(NT$m) (%)

Source: Companies, Daiwa forecasts

Gross-profit margin and utilisation rate: ASE vs. SPIL

0

10

20

30

40

2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E20

30

40

50

60

70

80

90

100

ASE GM (LHS) SPIL GM (LHS) ASE UTR (RHS) SPIL UTR (RHS)

(%)(%)


Capacity and utilisation rates: ASE vs. SPIL 2006 2007 2008 2009E 2010EASE Capacity Wirebonders (units) 6,526 8,003 8,446 8,781 9,848 Testers (units) 1,305 1,534 1,567 1,571 1,758 Utilisation rate Wirebonders (%) 87 83 75 76 84 Testers (%) 86 78 75 71 83 SPIL Capacity Wirebonders (units) 4,053 4,614 4,656 4,817 5,514 Testers (units) 317 353 374 381 412 Utilisation rate Wirebonders (%) 96 97 84 84 90 Testers (%) 92 85 72 70 85Source: Companies, Daiwa forecasts


Inventory – both upstream and downstream are healthy now As at the end of 3Q09, the average days of inventory (DOI) of both fabless and IDM customers were near post-2000-low levels. Among our sample of 34 fabless and IDM companies, the average DOI level for fabless companies (75% of sales to OSAT companies) at the end of 3Q09 was 52, down from 72 days at the end of 2008, while for IDM customers (25% of sales to OSAT companies) the end-3Q09 average inventory level was 72, a very low level and down from 87 days at the end of 2008. Based on the current sales-growth outlooks of foundry companies and IC-design and IDM customers, we expect the average DOI for IC-design and IDM customers to remain lean at the end of 2009. We expect the average DOI to increase in the 1Q10 slow season as history has shown that it can take only two-to-three quarters for the DOI to peak from a low level. However, inventory levels among downstream companies are possibly lean even now, due to the strong sell-through of handsets, PCs and most electronic products year-to-date. At the end of 3Q09, the average DOI levels were only 29, 14, 30 and 32 for the handset, PC, TFT-LCD and EMS sectors, respectively, while for downstream companies the DOI hit a past-five-year low of 24, down from 28 days one year earlier. Our PC-sector analyst, Calvin Huang, believes that inventory levels in the PC supply chain remain lean for now due to the strong sell-through. Our handset-component sector analyst, Andrew Chang, believes the recent build-up of inventory for the forthcoming peak season is normal and that inventory levels remain healthy currently. Our surveys of both the China-handset supply chain and the global-panel supply chain also point to inventory levels being healthy at this time. Indeed, there is tight supply for some components currently, such as optical-storage ICs and pick-up heads, DRAM, and flash memory. The low inventory levels across the board indicate to us that even if there were seasonal adjustments in inventory during the 1H10 slow season, the correction would not be sharp.

Key assumptions for Daiwa’s DOI forecasts 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09EFoundry sales (US$m) 4,333 4,553 4,615 3,159 1,884 3,549 4,256 4,298 QoQ (%) (3) 5 1 (32) (40) 88 20 1 Fabless sales (US$m) 9,315 9,681 10,464 8,045 7,521 8,789 9,514 9,038 QoQ (%) (6) 4 8 (23) (7) 17 8 (5)Gross-profit margin (%) 53 51 54 47 52 54 54 53DOI (days) 73 71 69 72 65 57 52 59 IDM sales (US$m) 22,305 21,961 23,540 18,832 16,269 17,950 20,235 20,864 QoQ (%) (10) (2) 7 (20) (14) 10 13 3 Gross-profit margin (%) 52 53 57 51 49 51 51 51DOI (days) 77 82 79 87 84 73 72 73 Source: Bloomberg, Daiwa forecasts

The average days of inventory for both fabless and IDM customers declined to low levels in 3Q09


Global fabless companies’ average DOI Global IDMs’ average DOI

50

60

70

80

90

100

1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q090

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

inventory (RHS) DOI fabless (LHS)

(days) (US$m)

60

70

80

90

100

110

120

1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q090

2,000

4,000

6,000

8,000

10,000

12,000

Inventory (RHS) DOI fabless (LHS)

(days) (US$m)

Source: Bloomberg, Daiwa estimates Source: Bloomberg, Daiwa estimates

Downstream inventory and DOI Downstream DOI by sector

05

1015202530354045

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

0

5

10

15

20

25

30

35

Inventory (LHS) DOI (RHS)

(US$bn) (days)

101520253035404550

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

Handset PC TFT-LCD EMS

(days)

Source: Bloomberg Source: Bloomberg

We prefer ASE to SPIL for 2010

As long as there is no repeat in 2010 of the sharp economic correction that took place in 4Q08, we expect ASE to continue to outperform SPIL (in terms of share-price performance) for a number of reasons, including: 1) ASE’s leading position in copper-wire technology should help it to increase its market share from 4Q FY09 onward, 2) MediaTek’s transition to an RF-integrated single-chip solution for its mainstream handset IC platform in 2010 would hurt SPIL more than ASE, 3) ASE enjoys higher operating leverage than SPIL, 4) an increase in IDM outsourcing would benefit ASE more than SPIL, and 5) a rising gold price would hurt SPIL more than ASE.

Summary – the factors we expect to affect ASE and SPIL in 2010

Factors ASE SPIL Copper wire Benefits due to its leading position Suffers due to its lagging position MediaTek's single-chip solution Suffers less than SPIL as it has less exposure Suffers more than ASE due to higher exposure Operating leverage Benefits more than SPIL during an upcycle Benefits less than ASE during an upcycle IDM outsourcing Benefits more than SPIL during an upturn due to its higher exposure to IDMs Benefits less than ASE

A rise in the gold price Suffers less due to: 1) less gold exposure, and 2) increasing usage of copper Suffers more than ASE due to its greater exposure to gold

Source: Daiwa estimates

We prefer ASE to SPIL for 2010


Use of copper wire likely to benefit ASE, but hurt SPIL Given the rise in the price of gold over the past few years, OSAT companies started to talk about replacing gold wire with copper wire. According to ASE, copper wire is 4-5x cheaper than gold wire. In addition, copper has superior electrical and thermal conductivity, so it dissipates heat faster than gold wire. However, the technological difficulties associated with using copper wire – copper oxidises more easily, the hardness of copper wire makes the bonding process more difficult than when using gold wire (gold is more ductile) – have troubled the OSAT companies for a long time. ASE has been quite aggressive about using copper wire in its wirebonding ICs and started R&D on it quite some time ago. Since last year, the company has been persuading customers to qualify its copper-wire technology. We estimate that ASE will invest at least US$75m (25% of its FY09 capex) in copper wire (including buying new copper wirebonders and upgrading its existing gold wirebonders). The company aims to install 1,000 sets of copper wirebonders by the end of this year, and will buy a further 2,000 sets of copper wirebonders in 2010. Its efforts started to bear fruit from the middle of 2009. ASE offers a 15% price discount to customers if they opt for copper wire rather than gold wire. By the end of 3Q FY09, ASE had been qualified by about 100 customers for its copper-wire process and more than 30 customers had started mass production, including some of ASE’s top-10 customers by revenue. The company expects copper wire to account for 8% of its 4Q FY09 wirebonding revenue, which would be a remarkable feat, in our opinion. Meanwhile, SPIL was relatively conservative in terms of its investment in copper wire, as it believed the ROIC from copper wire was not attractive. The company’s view was that the throughput (ie, the amount of wires a bonder can link from fingers to chip pads per second – eight is the industry standard) and yield of copper wire were too low, indicating that it would need more bonders to offset the loss in throughput and yield. Along with the lower selling price (eg, 15% lower than for gold wire at ASE), SPIL regarded such investment as unattractive. However, the company has been forced to invest in copper wire (we believe by MediaTek) since 3Q FY09 and is aiming to increase the number of copper wirebonders it has to 200 sets by the end of FY09, compared with only 10-20 sets by the end of 3Q FY09. It even plans to buy 200-300 wirebonder sets per quarter in FY10. SPIL’s current aggressive focus on copper wire has underlined that ASE’s early adoption was correct and implies that the cost-saving pressure from customers is rising. According to our industry survey, SPIL’s copper-wire throughput rate currently is about 75%, which compares with 95% for ASE. We believe this difference in throughput will be reflected in the companies’ gross-profit margins from 4Q FY10 onward. If SPIL is unable to enhance its throughput, we believe the increasing percentage of copper wire of its wirebonding IC products would erode its gross-profit margin. More importantly, ASE’s has the leading position in copper-wire technology – the company believes it has a more than six-month lead over its competitors. We believe it is about right, eg, currently ASE can provide copper-wire solutions for BGAs with more than 700 wires, while SPIL can only support no more than 200 wires, and believe it will lead to former’s market share improving in 2010 before other companies’ copper-wire solutions become competitive.

ASE has been quite aggressive about using copper wire, and we think this would help the company to gain market share


Copper wire solution comparison: ASE vs. SPIL Copper-wire

wirebonders (sets) Solutions to reduce costs Investment

Throughput of copper wire Customers

Technology capability Notes

ASE 1,000 sets by the end of 2009 and plans to buy a further 2,000 sets in 2010

ASE offers a 15% price discount to customers adopting copper wire

More than 25% of 2009 capex should be spent on copper wire

95% compared with gold wire

More than 100 customers are undergoing qualification with ASE and more than 30 customers had entered into mass production by the end of 3Q09

ASE can provide copper-wire solutions for wirebonding type ICs up to 700-800 wires

ASE expects 9% of wirebonding sales to come from copper wire for 4Q09

SPIL 200 sets by the end of 2009 and plans to buy 200-300 sets a quarter in 2010

1. Reducing its use of gold wire 2. 15% price discount to customers using copper wire

Plans to ramp up its copper investment from 4Q09

75% compared with gold wire

Some customers are undergoing qualification with SPIL, but no mass production had been undertaken by the end of 3Q09

SPIL can only provide copper-wire solutions for wirebonding type IC up to 200 wires.

Limited contribution from copper in 2009

Source: Companies, Daiwa estimates How can throughput affect the gross margin of copper wire? We have performed a gross-profit margin scenario simulation using different throughput assumptions. For gold wirebonding, the gross-profit margin is about 22% if capacity is fully loaded. At the current gold price (about US$1,000 an ounce), the difference between the gold cost and copper cost on the COGS is about 20%. However, the cost of copper wirebonders is about 1.2x the cost of gold wirebonders. After taking throughput into consideration, we estimate that the gross-profit margins are in the range of 9-21%, with throughput ranging from 75-95%. We believe that if SPIL is unable to enhance its throughput, the increasing percentage of copper wire would erode its gross-profit margin (based on our estimated gross-profit margins for gold and copper of 22% and 9%, respectively, given a throughput rate of 75% for copper wire). From SPIL’s point of view, we believe the pressure is rising. The company cannot turn down customers’ requests to provide copper-wire solutions even though its solution is not yet ready. Before being able to catch up in terms of copper-wire technology, we think SPIL will face the dilemma of maintaining its market share or gross-profit margin/ROE.

Copper wirebonding gross-profit margin scenario under different throughput assumptions Gold wirebonding Copper wirebonding Throughput assumption (%) 100 75 80 85 90 95 Selling price (%) 100 85 85 85 85 85 COGS (%) 78 77 74 72 69 67 Material cost (%) 47 31 31 31 31 31 Depreciation (%) 16 25 23 22 21 20 Labour cost (%) 16 21 20 18 17 16 Gross margin (%) (selling price - COGS) 22 9 13 16 18 21Source: Daiwa estimates Note: 1. ASE has indicated that it provides a 15% price discount for customers that switch from gold wire to copper wire

2. The cost difference between gold and copper is about 20% of the total COGS, or 33% of material costs 3. We assume the cost of a copper wirebonder is 1.2x that of a gold wirebonder. In addition, more machines are needed to achieve the same output if throughput is less than 100%. (Depreciation for a copper wirebonder = depreciation for goldwire bonder*1.2/ throughput). 4. We assume the labour cost per bonder is the same, irrespective of material. (Labour cost for copper = labour cost for gold/throughput).

We think an increasing copper-wire contribution would erode SPIL’s margin if SPIL cannot enhance its throughput


A rise in the gold price is likely to hurt SPIL more than ASE Gold costs accounted for 22% and 17% of the COGS for SPIL and ASE, respectively, for 3Q FY09. The price of gold has risen to more than US$1,000 an ounce currently from US$600 an ounce in early 2007, but OSAT companies have not been able to pass on the increase to customers, and have had to watch as their gross-profit margins are squeezed. According to the chairman of SPIL, Bough Lin, every US$50 an ounce rise in the price of gold would erode the company’s gross-profit margin by 1%. Given SPIL’s higher sales exposure to the wirebonding business, the cost of gold accounts for a greater portion of the COGS for SPIL than for ASE. As a result, SPIL’s gross-profit margin would suffer more from a rise in the gold price than that of ASE. In addition, given ASE’s aggressive moves into using copper wire, the company’s exposure to gold should fall gradually over time.

Revenue breakdown: ASE & SPIL 2005 2006 2007 2008 2009E 2010E 2011EASE Wirebonding 72 66 70 68 67 64 64Flip chips 7 11 8 9 12 16 17Testing 20 21 20 20 19 18 18Others 1 2 3 2 2 2 2 SPIL Wirebonding 71 81 79 77 77 75 76Flip chips 12 10 11 14 15 16 16Testing 9 9 9 9 8 9 8Others 8 0 0 1 0 0 0Source: Company, Daiwa forecasts

Gold price

600650700750800850900950

1,0001,050

Jan-

07

Mar-0

7

May-0

7

Jul-0

7

Sep-

07

Nov-0

7

Jan-

08

Mar-0

8

May-0

8

Jul-0

8

Sep-

08

Nov-0

8

Jan-

09

Mar-0

9

May-0

9

Jul-0

9

Sep-

09

(US$ per ounce)

Source: Bloomberg

We believe SPIL’s gross-profit margin would be more affected than that of ASE from a rise in the gold price, as gold costs for 3Q FY09 accounted for 22% and 17% of SPIL’s and ASE’s COGS, respectively


Gold cost as a % of COGS for ASE and SPIL

10

12

14

16

18

20

22

24

3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09700

750

800

850

900

950

1,000

SPIL (LHS) ASE (LHS) Spot market gold price (RHS)

(US$ per ounce)(%)

Source: Bloomberg, Daiwa estimates MediaTek’s RF-integrated single-chip solution expected to hurt SPIL more than ASE MediaTek’s first RF-integrated single chip, the MT6253, is scheduled to start mass production from the end of 4Q09. The MT6253 is the company’s first RF-integrated single chip. It integrates four of the chips used in the current MT6225 platform (the baseband MT6225, the RF MT6139, the MT6138 power-management IC, and the MT6302 dual SIM-card switch). Our cost analysis indicates that there are no savings in wafer costs from adopting the MT6253 (compared with the MT6225) due to the foundry companies’ aggressive price cuts on the MT6225 wafers. However, on the IC back-end side, we expect the transition to result in a cost saving of about 40% for MediaTek. In other words, all things being equal, we think the sales contribution from MediaTek to back-end companies would decrease by 20% after the complete transition to the MT6253 from the MT6225 (ie, currently, the MT6225 accounts for 60-70% of MediaTek’s total handset shipments and the handset business unit accounts for 70-80% of its total sales, which means the MT6225 accounts for almost 50% of MediaTek’s sales). Given that MediaTek is SPIL’s largest customer, accounting for about 10-15% of sales (compared with only 5-10% of sales for ASE), we expect SPIL (2-3% of sales would disappear once the transition to the MT6253 is completed) to suffer more than ASE (1-2% of sales would disappear) due to this product transition.

MediaTek: chip-cost breakdown Cost-breakdown analysis Part number Wafer cost per die (US$) Package type Back-end cost per die (US$) Total cost per die (US$) 6225 platform BB MT6225 0.6 BGA 0.6 1.2 RF MT6139 0.3 QFN 0.2 0.5 PMIC MT6138 0.2 BGA 0.3 0.5 Dual SIM card switch MT6302 <0.1 QFN 0.1 0.1 Total 1.1 1.1 2.2 6253 platform Four-in-one single chip MT6253 1.1 QFN 0.6 1.80 Cost saving (%) 0 40 20 Source: Daiwa estimates

MediaTek’s first RF-integrated single chip, the MT6253, would hurt SPIL more than ASE, in our opinion


ASE: customer breakdown (2Q09) SPIL: customer breakdown (2Q09)

Others

QualcommMediaTek

Broadcom

Intel (IDM)

Zoran

CSR

NEC (IDM)

Freescale (IDM)STM (IDM)

Marvell

MediaTek

Marvell

BRCM

Intel (IDM)nVidiaXillinix

Others

Atheros

Mstar

SandiskAMD (IDM)

Source: Daiwa estimates Source: Daiwa estimates

Operating leverage expected to benefit ASE more than SPIL during an upcycle ASE and SPIL have different cost structures, which result in different respective ROE performances during upcycles and downcycles. To avoid inconsistencies when comparing ASE and SPIL (eg, ASE books engineering costs under R&D expenses, while SPIL books them under COGS), we have combined the companies’ COGS, operating expenses and divided the total costs into variable (material costs, labour costs and sales expenses) and fixed costs (depreciation costs, administration expenses, and R&D expenses). ASE has a higher proportion of fixed costs as a percentage of total costs than SPIL (we estimate 31% for ASE and 22% for SPIL for FY09), indicating that: 1) during an upturn, ASE would have greater operating leverage than SPIL, and 2) SPIL has a higher proportion of material costs than ASE (we estimate 38% for ASE and 57% for SPIL for FY09), indicating that SPIL would suffer more than ASE from high gold prices. In addition, ASE’s testing segment accounts for the higher proportion of its total revenue than that of SPIL. No material cost is incurred for testing, and thus testing generates a higher gross-profit margin. For 3Q FY09, ASE derived about 18% of its revenue from testing, the gross-profit margin for which was 35.2%, much higher than the company’s overall gross-profit margin of 25.2%. Once fully loaded, we believe the gross-profit margin for testing could exceed 40%. Testing has accounted for only about 10% of SPIL’s revenue over each of the past two years. As a result, over the next six months, we see the potential for more upside surprises for ASE’s gross-profit margin than for SPIL’s.

We believe operating leverage would benefit ASE more than SPIL in an upcycle, as ASE has a higher proportion of fixed costs


ASE: COGS breakdown SPIL: COGS breakdown

41% 39% 38% 40% 41%

21% 23% 23% 24% 21% 20%

38% 39% 39% 38% 39% 39%

38%

0 10 20 30 40 50 60 70 80 90 100

2006 2007 2008 2009E 2010E 2011E

Raw-material costs Depreciation costs Labour & other costs

(%)

57% 57% 57% 59% 60%

17% 17% 19% 18% 16% 16%

26% 25% 26% 25% 25% 25%

55%

0 10 20 30 40 50 60 70 80 90 100

2006 2007 2008 2009E 2010E 2011E

Raw-material costs Depreciation costs Labour & other costs

(%)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

ASE: cost breakdown SPIL: cost breakdown

27% 30% 31% 28% 27%

73% 70% 69% 69% 72% 73%

31%

0 10 20 30 40 50 60 70 80 90 100

2006 2007 2008 2009E 2010E 2011E

Fixed costs Variable costs

(%)

21% 21% 22% 20% 19%

79% 79% 77% 78% 80% 81%

23% 0 10 20 30 40 50 60 70 80 90 100

2006 2007 2008 2009E 2010E 2011E

Fixed costs Variable costs

(%)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Depreciation costs to COGS: ASE vs. SPIL Operating expenses to sales: ASE vs. SPIL

02468

1012141618

2006 2007 2008 2009E 2010E 2011E0

5

10

15

20

25

30

ASE depreciation cost (LHS) SPIL depreciation cost (LHS)SPIL (RHS) ASE (RHS)

(NT$bn) (%)

0

2

4

6

8

10

12

2006 2007 2008 2009E 2010E 2011E0

2

4

6

8

10

12

ASE OP expense (LHS) SPIL OP expense (LHS)SPIL (RHS) ASE (RHS)

(NT$bn) (%)

Source: Companies, Daiwa forecasts Source: Companies, Daiwa forecasts


IDM outsourcing to benefit ASE more than SPIL When demand recovers and sales for the semiconductor industry bottom out, IDM customers usually resume outsourcing, especially if they have closed down factories during the downturn. For example, ASE’s sequential sales growth from IDM customers was stronger than that from IC-design customers during the 2Q FY04-3Q FY04 and 2H FY07 upcycles. During the current downturn, some IDM companies have closed their factories or stopped IC back-end investment, which we believe would lead to more opportunities in the future for ASE than SPIL. ASE has benefited from Intel’s outsourcing of the Southbridge chipset packaging process since early 2009 and Toshiba’s (6502 JP, ¥509, 3) outsourcing of NAND flash since 2Q09. We expect more outsourcing orders in the future from other IDMs, such as NEC (Not rated), STM (Not rated), Fujitsu (Not rated) and Numonyx (Not rated). As for SPIL, our supply-chain survey indicates that one of its main graphics customers is likely to outsource its CPU packaging orders from the middle of 2010, but the initial volume should be limited. We believe ASE’s IDM portion of sales bottomed out in 2Q09 at 30%, and that its greater exposure to IDM sales will result in it recording stronger revenue growth than its peers during the next upturn.

Sales to IDM customers for ASE and SPIL

10

20

30

40

50

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

E

1Q10

E

2Q10

E

3Q10

E

4Q10

E

ASE SPIL

ASE expects the IDM portion to return to 40% in 2H FY10

(%)


IDM companies started to increase outsourcing in 3Q09 and we think they would continue to do so in 2010


IDM companies’ backend plants closure schedule Date Company Closing back-end plant

location ASE's opportunity Notes

4Q06 NEC Ireland NEC is one of ASE's top-10 customers in terms of revenue, and we expect it to increase its outsourcing rate if it adopts a fab-lite policy.

To reduce operating costs and improve management efficiency, NEC Electronics will concentrate its test and assembly services on US and Europe automotive Micro Controller Unit (MCU) customers at NEC Semiconductors Singapore.

3Q08 Seiko Epson Japan Seiko Epson will close its assembly and test plant in Yamagata-ken, Japan, due to its inefficient cost structure. The plant was established in 1987 and provided PQ, TQ and BGA packaging products.

1H09 STMicroelectronics Morocco ASE Weihai may be able to earn discrete orders from STMicroelectronics.

1H09 Intel Philippines/Malaysia After the closure of backend plants in the Philippines and Malaysia, Intel outsourced its Southbridge chips backend orders to ASE, SPIL and StatsChip. We estimate Intel's revenue contribution to ASE increased by 120% QoQ for 2Q09.

The company plans to close two existing assembly test facilities in Penang, Malaysia, and one in Cavite, the Philippines, and will halt production at Fab 20, an older 200mm wafer fabrication facility in Hillsboro, Oregon. In addition, wafer-production operations will end at the D2 facility in Santa Clara, California. The closures will take place before the end of 2009.

1H09 Qimonda Germany Qimonda will cease operating its test plant in Germany. 1H09 Numonyx Philippines/Malaysia Numonyx has increased orders to ASE

since 2Q09. However, as the base was small previously we do not expect the absolute contribution to be significant.

1H10 Fuji Japan We expect ASE to gain orders from Fujitsu as Fujitsu is one of ASE's customers.

1H10 National Semi China ASE's customer but the orders are small. As part of a cost-reduction plan, the company will close its assembly and test plant in Suzhou, China. The plant provides SOIC TO and other packaging products. The closure will take place in phases over several quarters. The volume currently being supported by this facility will be transferred to other locations.

Source: Companies, Daiwa estimates

IDM and fabless customers’ portion of revenue for ASE and SPIL in the 2004 and 2007 upcycles 1Q04 2Q04 3Q04 4Q04 1Q07 2Q07 3Q07 4Q07ASE Total revenue (NT$m) 17,221 20,290 22,023 22,179 21,093 23,362 27,733 28,976 IDM 8,094 10,348 11,672 11,311 8,859 9,578 12,203 13,619 Fabless 9,127 9,942 10,351 10,868 12,234 13,784 15,530 15,357 QoQ change (%) Total revenue (7) 18 9 1 (7) 11 19 4 IDM (9) 28 13 (3) (4) 8 27 12 Fabless (5) 9 4 5 (8) 13 13 (1) SPIL Total revenue (NT$m) 8,248 8,712 8,946 9,103 13,751 15,233 17,909 17,729 IDM 1,485 1,742 1,789 1,821 2,750 3,047 3,940 4,432 Fabless 6,763 6,970 7,157 7,282 11,000 12,186 13,969 13,296 QoQ change (%) Total revenue 2 6 3 2 (6) 11 18 (1)IDM (8) 17 3 2 (11) 11 29 12 Fabless 5 3 3 2 (5) 11 15 (5)Source: Companies, Daiwa forecasts


Key financial indicators

Operating margins Operating margins appear to be a good indicator of ASE’s and SPIL’s relative share-price performance. ASE’s operating margin started to improve faster than that of SPIL from 1Q09 due to its ability to achieve greater cost savings over the previous few quarters and better operating leverage during the sector upcycle. Looking ahead, we forecast the operating-margin gap between ASE and SPIL to narrow to zero in 2H FY10, despite a temporary expansion in 1Q FY10 (due to the seasonally slow season), which might indicate that ASE’s share price should continue to outperform that of SPIL throughout 2010 (despite a potential temporary period of underperformance in 1Q10). ROE Given our view that ASE would outperform SPIL in terms of revenue growth in FY10, we expect ASE’s ROE to catch up with that of SPIL in FY10.

Operating-margin difference vs. relative share-price performance (SPIL over ASE)

0

50

100

150

200

250

300

350

400

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10(15)

(10)

(5)

0

5

10

15

Operating-margin diff (SPIL-ASE) (RHS) SPIL relative share price (LHS)

(%)

Source: Bloomberg, Daiwa forecasts

ROE comparison for ASE and SPIL

(15)(10)

(5)05

1015202530

2001 2002 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E

ASE SPIL

(%)

Source: Company, Daiwa forecasts

Operating margin and ROE are good indicators for ASE’s and SPIL’s relative share-price performance


ASE: PBR vs. ROE SPIL: PBR vs. ROE

(20)(15)(10)

(5)05

10152025

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

Jan-

12

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

ROE (LHS) PBR (RHS)

(%) (x)

(30)

(20)

(10)

0

10

20

30

40

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

0.00.51.01.52.02.53.03.54.0

ROE (LHS) PBR (RHS)

(%) (x)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts Valuation

Our foundry analyst, Pranab Kumar Sarmah, forecasts foundry-industry sales to increase by 18% YoY for 2010. We expect sales for the OSAT industry to rise in line with those for the foundry industry and expect ASE to outperform SPIL in terms of revenue growth due to the structural changes mentioned earlier in this report. We have used different scenarios for 2010 to test the upside and downside risk for ASE and SPIL. Given a 3% growth rate and an 8% cost of equity (risk-free rate of 3.6%, beta of 1.1 and risk premium of 4%), we arrive at a six-month target price of NT$33.0 for ASE based on our FY10 sales-growth forecast of 21% YoY. Should ASE’s FY10 sales increase by 16% YoY (equal to our forecast of SPIL’s annual sales growth for FY10) and all other things being equal (growth rate of 3% and a cost of equity of 8%), ASE’s fair value would drop to NT$27.0, similar to the 5 November closing share price of NT$27.35. Under the bear-case scenario (ASE’s FY10 revenue increases by only 10% YoY), ASE’s fair value would fall to NT$22.0, 19% lower than the 5 November closing share price. However, after backward testing, we think the downside risk for ASE’s share price is limited as investors usually assign a higher growth rate to ASE than to SPIL when the cycle bottoms out (probably given ASE’s higher operating leverage and higher exposure to IDM customers). For example, with an expectation of a 4% long-term growth rate and a 16% YoY rise in sales for FY10 (in line with that for SPIL), NT$30.0 would still be a reasonable price for ASE, in our view, implying 10% upside potential from the current share-price level. On the other hand, based on our forecast of a 16% YoY rise in SPIL’s FY10 revenue, we have a six-month target price of NT$47.0, based on a 3% growth rate and an 8% cost of equity. Under a bear-case scenario (SPIL’s FY10 revenue rises by only 10% YoY), SPIL’s fair value would fall to NT$38.0, 12% lower than its current share price if we keep the other parameters unchanged. However, its upside potential is not as significant as that of ASE, given what we see as its less-positive revenue-growth outlook and lower operating leverage. The major risk to our target prices for ASE and SPIL is a worse-than-expected 2010 macro environment, which we believe would lead to a slowdown in order outsourcing from IDM customers and make SPIL’s lower-operating-leverage business model more attractive.

Based on our valuation scenarios, we believe there is limited downside risk for ASE


ASE target price: based on ROE-adjusted PBR under different scenarios 2010 sales YoY 10 16 21 26

ROE g 11.3 13.1 15.4 18.2

2% 21 25 30 36 3% 22 27 33 41 4% 24 30 38 47

Source: Daiwa forecasts

SPIL target price: based on ROE-adjusted PBR under different scenarios 2010 sales YoY 10 16 20 25 ROE g 12.1 14.2 15.8 18.9

2% 35 43 48 59 3% 38 47 54 67 4% 42 53 61 77

Source: Daiwa forecasts Backward testing indicates investors expect a higher earnings-growth rate for ASE during an upcycle

We can achieve a target PBR through an ROE-adjusted PBR valuation. By contrast, we can also achieve the implied earnings-growth rate for investors based on the quarterly average PBR, the quarterly ROE (annualised) and the cost of equity. (We derive the cost of equity on the basis of the US Treasury bill rate [risk free rate], beta, and a risk premium of 4%). From 4Q03-3Q04 (the share prices of ASE and SPIL increased from 1Q03-1Q04, but we could not determine the implied growth rate for 1Q03-3Q03 as the ROE was lower than the required rate of return), ASE’s implied revenue-growth rate was in the range of 5-8%, while SPIL’s implied revenue-growth rate was 2-3%. In the 4Q06-3Q07 upcycle, ASE’s implied revenue-growth rate was in the range of 2-8%, while SPIL’s ranged only from 1-3%. We conclude that in upcycle periods, investors assign a higher earnings-growth rate to ASE than for SPIL.

Backward testing indicates investors expect a higher earnings-growth rate for ASE in an upcycle


The market’s implied growth rate in the past: ASE vs. SPIL 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q06 1Q07 2Q07 3Q07ASE ROE (annualised) (%) n.m. 2.8 4.3 15.6 11.4 13.6 13.1 14.2 8.7 13.6 20.5 Period PBR (x) Max PBR (x) 1.8 1.8 2.2 2.8 3.2 3.0 2.5 2.3 2.6 3.0 3.4 Min PBR (x) 1.3 1.4 1.7 2.1 2.8 1.8 1.9 1.9 2.2 2.5 2.1 Average PBR (x) 1.6 1.6 2.0 2.5 3.0 2.4 2.2 2.1 2.4 2.7 2.7 Assumptions Cost of equity (%) 9.2 8.9 9.5 9.4 9.1 9.8 9.2 10.8 10.5 9.6 8.9 Risk-free rate (%) 3.9 3.6 4.2 4.3 4.0 4.6 4.3 4.6 4.7 4.8 4.7 Beta (x) 1.3 1.3 1.3 1.3 1.3 1.3 1.2 1.5 1.5 1.2 1.0 Risk premium (%) 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 Implied growth rate (%) n.m. n.m. n.m. 5 8 7 6 8 n.m. 7 2 SPIL ROE (annualised) (%) (4.6) 9.5 15.7 18.6 17.8 18.1 13.1 24.6 22.2 24.0 30.3 Period PBR (x) Max PBR (x) 1.2 1.4 1.9 2.3 2.6 2.3 1.6 2.3 3.0 3.6 3.8 Min PBR (x) 1.0 1.0 1.5 1.7 1.9 1.3 1.2 1.7 2.1 2.8 2.8 Average PBR (x) 1.1 1.2 1.7 2.0 2.3 1.8 1.4 2.0 2.6 3.2 3.3 Assumptions Cost of equity (%) 8.1 8.6 10.5 9.4 8.5 9.4 10.5 9.8 9.9 9.8 9.9 Risk-free rate (%) 3.9 3.6 4.2 4.3 4.0 4.6 4.3 4.6 4.7 4.8 4.7 Beta (x) 1.0 1.2 1.6 1.3 1.1 1.2 1.5 1.3 1.3 1.3 1.3 Risk premium (%) 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 Implied growth rate (%) n.a. 3 3 2 2 2 3 1 2 3 1

Source: Daiwa


Advanced Semiconductor Engineering (2311 TT) Electronics: Taiwan

6-mth rating: 4 → 2Target price: NT$33.00 (+20.7)Share price: NT$27.35 (5 Nov)

Aaron Jeng, CFA(886) 2 8780 1469

[email protected]

Structural improvement in 2010

Rating upgraded to 2 We have upgraded our rating for ASE to 2 (Outperform) from 4 (Underperform), and raised our six-month target price from NT$21 to NT$33, now based on a target PBR of 2.4x on our FY10 BVPS forecast, given our view that the company will seestructural improvements in 2010.

Use of copper wire could lead to market-share gains ASE’s focus on copper wire started to bear fruit from the middle of 2009. At the end of 3Q FY09, ASE’s copper-wire process had been qualified by about 100 customers, and mass production has started for more than 30 customers, including some of ASE’s top-10 customers in terms of revenue. ASE expects copper wire to account for 8% of its 4Q FY09 wirebonding revenue, which would be a remarkable number, in our view.

Operating leverage and IDM outsourcing in an upcycle We believe ASE will outperform SPIL (in terms of share-price performance) during the upcycle, since ASE has higher operating leverage. In addition, increased outsourcing by IDM customers over the next few quarters would benefit the company, in our opinion. We believe it would also be less sensitive to gold-price hikes than SPIL, especially after its aggressive investments in copper wire.

Reuters code 2311.TW

Market data TWSE Index 7,417.46 Market cap (US$bn) 4.61 EV (US$bn; 09E) 6.0 3-mth avg daily T/O (US$m) 21.43 Shares outstanding (m) 5,480 Free float (%) 70.0 Major shareholder ASE Enterprises (16.7%) Exchange rate NT$/US$ 32.546 Performance (%)* 1M 3M 6M Absolute 4.4 20.5 37.1 Relative 4.7 11.2 17.9 Source: Daiwa Note: *Relative to TWSE Index

Investment indicators 2009E 2010E 2011E PER (x) 25.3 13.7 12.6 PCFR (x) 9.1 4.9 4.9 EV/EBITDA (x) 7.5 6.0 5.7 PBR (x) 2.2 2.0 1.8 Dividend yield (%) 2.3 2.8 5.1 ROE (%) 8.8 15.4 15.0 ROA (%) 4.1 7.6 7.8 Net debt equity (%) 64.0 44.4 34.2 Source: Daiwa forecasts

Price and relative performance

Source: Bloomberg, Daiwa

Income summary

Revenue EBITDA Net profit EPS CFPS DPS Year to 31 Dec (NT$m) (%) (NT$m) (%) (NT$m) (%) (NT$) (%) (NT$) (NT$) 2007 101,164 0.7 36,037 3.2 12,164 (33.5) 2.590 (5.4) 5.260 1.500 2008 94,431 (6.7) 29,044 (19.4) 6,331 (47.9) 1.141 (55.9) 5.571 1.700 2009E 85,027 (10.0) 26,004 (10.5) 6,203 (2.0) 1.079 (5.4) 2.993 0.628 2010E 102,595 20.7 32,459 24.8 11,486 85.2 1.998 85.2 5.558 0.777 2011E 109,711 6.9 34,684 6.9 12,439 8.3 2.164 8.3 5.570 1.399 Source: Company, Daiwa forecasts Note: The investment indicators and income summary on the front page of this report, as well as the back-page financial summary, are all based on the forex assumptions set out in the table at

the back of this report, unless stated otherwise.


Rating upgraded to 2 from 4

We have upgraded our rating for ASE to 2 from 4, and raised our six-month target price from NT$21 to NT$33, now based on a target PBR of 2.4x on our FY10 BVPS forecast (versus a post-2006 trading range of 0.8-3.4x), from a target PBR of 1.4x on our FY09 BVPS forecast previously, as we have revised up our 2010 ROE forecast to 15.4% from 10% to reflect our expectations of improvements in the outlook and gross-profit margin for 2010. Our new target PBR is derived from a long-term earnings-growth-rate forecast of 3%, our 2010 ROE forecast of 15.4%, and a cost-of-equity assumption of 8.2%. We expect ASE to continue to outperform (in terms of share-price performance) SPIL for a number of reasons, including: 1) ASE’s leading position in copper-wire technology should help it to increase its market share from 4Q FY09 onward, 2) ASE has higher operating leverage than SPIL, 3) an increase in IDM outsourcing would benefit ASE more than SPIL, 4) gold-price hikes would hurt SPIL more than ASE, and 5) MediaTek’s transition to a RF-integrated single-chip solution for its mainstream handset-IC platform in 2010 would hurt SPIL more than ASE. We forecast ASE 2010 sales to increase by 21% YoY. Due to its higher operating leverage than SPIL, we have revised up our 2010 ROE forecast for ASE to 15.4% from 10%. Beneficiary of having a leading position in copper-wire technology ASE has been focusing quite aggressively on copper-wire technology, and started R&D work in the area quite some time ago. Since last year, ASE has persuaded around 100 customers to undertake qualification of its copper-wire technology. We estimate ASE has invested US$75m (30% of 2009 capex) in copper wire (including procuring new copper-wire bonders and upgrading existing gold wirebonders) The company targets to install 1,000 sets of copper wirebonders by the end of this year, and plans to purchase 2,000 copper wirebonders next year. ASE’s efforts started to bear fruit from the middle of 2009. ASE offers a 15% price discount to customers if they opt for copper rather than gold wire. At the end of 3Q FY09, ASE’s copper-wire process had been qualified by about 100 customers, and mass production has started for more than 30 customers, including some of ASE’s top-10 customers in terms of revenue. ASE expects copper wire to account for 8% of its wirebonding revenue for 4Q FY09, which would be a remarkable number, in our view. In addition, we expect ASE’s leading position in copper-wire technology (ASE indicates that it has a six-month lead over its competitors, and it can now provide copper-wire solutions for BGAs with more than 700 wires, while SPIL can only support no more than 200 wires) to lead to its market share improving in 2010 before its competitors’ copper-wire solutions become competitive. Operating leverage and IDM outsourcing stories during the upcycle ASE has a higher proportion of fixed costs as a percentage of total costs (we estimate 31% for ASE) than SPIL, indicating that, during an upturn, ASE’s gross-profit margin would improve faster. Besides, ASE’s testing business accounts for around 20% of its total revenue. No material costs are incurred for testing, and thus testing results in higher margins. For 3Q FY09, ASE derived 18% of its revenue from testing, and its gross-profit margin of 35.2% for this segment was much higher than its overall gross-profit margin of 25.2%. Once fully-loaded, we believe that the gross-profit margin for testing could exceed 40%. When demand recovers and sales for the semiconductor industry bottom out, IDM customers usually resume their outsourcing strategies, especially after closing down their factories during a downturn. We expect more outsourcing orders to materialise in the future from other IDMs, such as NEC, STM, Fujitsu and Numonyx. We believe ASE’s IDM portion of sales bottomed out in 2Q FY09 at 30%, and that its greater exposure to IDM sales will result in it recording stronger revenue growth than its peers during the next upturn.

We have upgraded our rating for ASE to 2 from 4 and raised our six-month target price to NT$33 from NT$21

We believe ASE’s aggressive focus on copper wire would help it to gain market share in 2010

Operating leverage and IDM outsourcing story provide stronger revenue growth catalysts for ASE


ASE expects flat 4Q FY09 revenue with a flat gross-profit margin ASE expects its 4Q FY09 sales to be flat to up slightly, and the gross-profit margin to stay at the 3Q FY09 level with room to rise (even based on the assumption of a higher gold price). We think the company’s sales guidance is in line with the market consensus, but that its margin guidance is higher. The company emphasised that its efforts to come up with a low-cost solution, including copper wire, would help to offset the impact of rising gold prices. ASE raised its capex guidance for 2009 again to US$300m (from US$200m announced at the 2Q results conference). The additional amount will be spent on low-cost solutions, such as copper wirebonding and bumping fan out. ASE expects its 2010 capex to be around US$400-500m. The company had 500 sets of copper wirebonders at the end of 3Q FY09 and expects to add a further 500 sets and 2,000 sets in 4Q FY09 and 2010, respectively (even more aggressive than it was three months ago). Earnings-forecast revisions We have revised up our FY09, FY10, and FY11 EPS forecasts by 33.4%, 41.5% and 13.3%, respectively, mainly to factor in our more positive demand assumption for electronic products and ASE’s structural improvement.

ASE: Daiwa earnings-forecast revisions (NT$m) FY09E FY10E FY11E Previous New Change (%) Previous New Change (%) Previous New Change (%) Sales 81,009 85,027 5.0 90,492 102,595 13.4 101,165 109,711 8.4 Gross profit 16,361 18,018 10.1 21,043 26,294 25.0 25,252 28,195 11.7 Operating income 7,697 9,123 18.5 11,688 16,712 43.0 15,276 18,098 18.5 Pre-tax income 6,706 8,295 23.7 10,734 15,953 48.6 14,518 17,277 19.0 Net profit 4,409 6,203 40.7 7,729 11,486 48.6 10,453 12,439 19.0 EPS (NT$) 0.81 1.08 33.4 1.41 2.00 41.5 1.91 2.16 13.3 Source: Daiwa forecasts

Valuation and risks ASE is trading currently at a PBR of 2.0x on our FY10 BVPS forecast, which is around the mid point of its post-2006 PBR range of 0.8-3.4x. We see the main downside risk for the stock as a worse-than-expected 2010 macro outlook, which could lead to a slowdown in outsourcing from IDM customers. In addition, if the price of gold were to fall significantly, we believe ASE’s copper-wire solution would become less attractive.

ASE: PER bands ASE: PBR bands

0

10

20

30

40

50

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

32x28x24x

20x 16x

12x

8x

0

10

20

30

40

50

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

3.5x3.0x

2.5x2.0x

1.5x1.0x 0.5x

Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts

We have revised up our FY09, FY10, and FY11 EPS forecasts

ASE is trading currently at a PBR of 2.0x on our FY10 BVPS forecast


ASE: quarterly financial breakdown 1Q FY09 2Q FY09 3Q FY09E 4Q FY09E 1Q FY10E 2Q FY10E 3Q FY10E 4Q FY10E FY08 FY09E FY10E FY11E GAAP (NT$m) Net sales 13,397 20,881 25,205 25,544 22,977 25,301 28,372 25,944 94,431 85,027 102,595 109,711 COGS 12,739 16,357 18,848 19,065 17,768 18,819 20,252 19,462 71,902 67,009 76,300 81,516 Gross profit 658 4,524 6,357 6,479 5,209 6,483 8,121 6,482 22,529 18,018 26,294 28,195 SG&A 1,319 1,203 1,595 1,609 1,422 1,554 1,669 1,537 6,853 5,726 6,182 6,178 R&D expenses 750 825 795 800 850 850 850 850 3,877 3,170 3,400 3,920 Operating income (1,411) 2,496 3,967 4,070 2,938 4,079 5,602 4,094 11,800 9,123 16,712 18,098 Net non-operating income (235) (290) (110) (192) (218) (189) (177) (176) (2,152) (828) (760) (821) Pre-tax income (1,646) 2,206 3,857 3,878 2,720 3,890 5,425 3,918 9,647 8,295 15,953 17,277 Tax expenses (50) 559 558 659 544 778 1,085 784 2,268 1,726 3,191 3,455 Minority interests (29) (27) 112 310 218 311 434 313 1,047 365 1,276 1,382 Net income (1,567) 1,674 3,187 2,908 1,958 2,801 3,906 2,821 6,331 6,203 11,486 12,439 EPS (NT$) (0.27) 0.29 0.55 0.51 0.34 0.49 0.68 0.49 1.14 1.08 2.00 2.16 Profitability (%) GAAP Gross-profit margin 4.9 21.7 25.2 25.4 22.7 25.6 28.6 25.0 23.9 21.2 25.6 25.7 Operating-profit margin (10.5) 12.0 15.7 15.9 12.8 16.1 19.7 15.8 12.5 10.7 16.3 16.5 PBT margin (12.3) 10.6 15.3 15.2 11.8 15.4 19.1 15.1 10.2 9.8 15.5 15.7 Net-profit margin (11.7) 8.0 12.6 11.4 8.5 11.1 13.8 10.9 6.7 7.3 11.2 11.3 YoY (%) GAAP Sales (46) (18) (2) 39 72 21 13 2 (7) (10) 21 7 Gross profit (89) (32) (4) 102 691 43 28 0 (23) (20) 46 7 Operating profit n.m. (32) 2 321 n.m. 63 41 1 (39) (23) 83 8 Net profit n.m.) (31) 44 n.m. n.m. 67 23 (3) (48) (2) 85 8 QoQ (%) GAAP Sales (27) 56 21 1 (10) 10 12 (9) Gross profit (79) 587 41 2 (20) 24 25 (20) Operating income n.m. n.m. 59 3 (28) 39 37 (27) Net income 149 n.m. 90 (9) (33) 43 39 (28) Source: Company, Daiwa forecasts


Company background Advanced Semiconductor Engineering is the world’s largest semiconductor-assembly and testing company, with an estimated 15% share of the sales in the outsourced assembly and test sector worldwide for 2007. The company has been expanding aggressively through both organic and non-organic means.

Advanced Semiconductor Engineering – financial summary

Profit and loss (NT$m) Balance sheet (NT$m) Year to 31 Dec 2007 2008E 2009E 2010E 2011E Sales 101,164 94,431 85,027 102,595 109,711 Assembly 78,517 73,392 67,120 81,751 88,654 Testing 20,061 19,022 15,861 18,894 19,207 Others 2,586 2,017 2,046 1,950 1,850 Cost of goods sold 71,960 71,902 67,009 76,300 81,516 Gross profit 29,204 22,529 18,018 26,294 28,195 Operating expenses 9,793 10,730 8,896 9,582 10,098 Operating profit 19,411 11,800 9,123 16,712 18,098 Net other non-op. income (2,060) (2,152) (828) (760) (821) Pre-tax income 17,351 9,647 8,295 15,953 17,277 Tax currently payable 3,359 2,268 1,726 3,191 3,455 Minority interest deduction/(add) 1,828 1,047 365 1,276 1,382 Net profit 12,164 6,331 6,203 11,486 12,439 EBITDA 36,037 29,044 26,004 32,459 34,684 EPS(NT$) 2.59 1.14 1.08 2.00 2.16

Cash flow (NT$m) Year to 31 Dec 2007 2008E 2009E 2010E 2011E Operating cash flow 28,754 30,900 16,605 31,945 32,013 Net profit plus MI 13,992 7,379 6,568 12,762 13,822 Depreciation & amortisation 16,626 17,245 16,881 15,747 16,586 Change in working capital (6,144) 5,461 (2,351) (344) (2,161) Others 4,279 815 (4,493) 3,779 3,767 Investment cash flow (18,108) (36,359) (19,026) (16,857) (16,892) Net capex (17,190) (18,396) (10,901) (16,345) (16,345) Change in LT investment 102 (17,937) (7,836) (190) (198) Change in other assets (1,020) (26) (290) (322) (349) Free cash flow 10,645 (5,459) (2,421) 15,087 15,122 Financing cash flow (8,493) 13,862 (6,266) (6,288) (9,792) Inc. of borrowing 4,105 23,334 (1,390) (1,616) (1,520) Expenses of employee bonus and dir. 189 (358) (353) (206) (232) Cash dividend (6,669) (8,827) (3,482) (4,466) (8,040) Others (including TRG shares) (6,117) (286) (1,041) 0 0 FX adjustment (725) 578 (692) (1,193) (1,193) Net cash flow 1,428 8,981 (9,380) 7,606 4,137

Year to 31 Dec 2007 2008E 2009E 2010E 2011E Total assets 152,377 152,190 147,604 155,998 162,679 Current assets 56,902 46,367 48,849 57,074 64,284 Cash & equivalent 17,158 26,139 16,759 24,365 28,502 Short-term investment 11,058 1,267 8,391 8,391 8,391 Inventories 5,597 4,992 4,689 4,752 5,278 Accounts receivable 19,684 12,007 16,659 16,920 19,135 Others 3,405 1,962 2,351 2,646 2,978 Non-current assets 95,475 105,823 98,754 98,924 98,395 Long-term investments 4,850 4,327 4,679 4,869 5,067 Net fixed assets 81,788 84,758 78,742 79,346 79,159 Others 8,837 16,738 15,333 14,709 14,169 Total liabilities 62,638 80,229 77,978 76,488 75,873 Current liabilities 35,751 25,271 23,399 24,536 26,357 Accounts payable 13,437 5,167 6,152 6,234 6,924 Short-term debt 8,922 8,779 8,046 8,373 8,713 Others 13,392 11,324 9,201 9,929 10,720 Long-term liabilities 26,887 54,959 54,579 51,952 49,516 Shareholders' equity 89,740 71,961 69,626 79,510 86,805

Ratios Year to 31 Dec 2007 2008E 2009E 2010E 2011E Change (%YoY) Sales 0.7 (6.7) (10.0) 20.7 6.9 Operating profit (5.1) (39.2) (22.7) 83.2 8.3 EBITDA 3.2 (19.4) (10.5) 24.8 6.9 Net profit (33.5) (47.9) (2.0) 85.2 8.3 EPS (5.4) (55.9) (5.4) 85.2 8.3 Profitability (%) Net income/sales 12.0 6.7 7.3 11.2 11.3 Net income/total assets (ROA) 8.4 4.2 4.1 7.6 7.8 Net income/total net worth (ROE) 14.6 7.8 8.8 15.4 15.0 Operating profit/sales 19.2 12.5 10.7 16.3 16.5 Effective income-tax rate 19.4 23.5 20.8 20.0 20.0 Stability Gross debt/equity (%) 26.67 71.19 73.70 61.99 60.05 Current ratio 1.59 1.83 2.09 2.33 2.44 Quick ratio 1.44 1.64 1.89 2.13 2.24 Per-share data (NT$) EPS 2.59 1.14 1.08 2.00 2.16 CFPS 5.26 5.57 2.99 5.56 5.57 BVPS 16.42 12.97 12.55 13.83 15.10 Activity Asset turnover (x) 0.70 0.62 0.57 0.68 0.69 Receivables (days) 71.02 46.41 71.51 60.20 63.66 Inventory (days) 28.39 25.34 25.54 22.73 23.63 Payables (days) 68.16 26.23 33.51 29.82 31.00 Cash cycle (days) 31.25 45.52 63.55 53.11 56.29



Siliconware Precision (2325 TT) Electronics: Taiwan

6-mth rating: 3Target price: NT$47.0 (+9.3 %)

Share price: NT$43.0 (5 Nov)

Aaron Jeng, CFA(886) 2 8780 1469

[email protected]

Suffering from the trend toward copper wire and MediaTek’s single chip

Suffering from MediaTek’s migration to a single-chip solution We expect MediaTek’s upcoming single-chip solution to result in about a 40% back-end cost saving. In other words, all otherthings being equal, we estimate MediaTek’s contribution to back-end companies’ sales would decline by 20% after completion of the transition to the MT6253 from the MT6225(ie, the MT6225 accounts for 60-70% of MediaTek’s total handset shipments and the handset business unit accounts for 70-80% of its total sales currently). Given that MediaTek is SPIL’s largest customer, accounting for about 15% of the latter’s sales, we expect SPIL to suffer as a result of this product transition.

A laggard in copper wire technology We believe that rapid adoption of copper-wire technology wouldhurt SPIL, as we estimate that the throughput rate for SPIL’s copper wire of around only 75% is much worse than ASE’s 95%. In our view, SPIL’s low throughput rate for copper wire would force the company to choose between maintaining itsmarket share or gross margin/ROE.

3 (Hold) rating maintained We maintain our 3 rating, but have lowered our six-month target price to NT$47 from NT$48, now based on a target PBR of 2.2x on our 2010 BVPS forecast. We think SPIL will continue to underperform ASE (in terms of share-price performance) in2010 due to its less significant structural improvement thanASE.

Reuters code 2325.TW

Market data TWSE Index 7,417.46 Market cap (US$bn) 4.12 EV (US$bn; 09E) 3.6 3-mth avg daily T/O (US$m) 17.91 Shares outstanding (m) 3,116 Free float (%) 80.0 Major shareholder Siliconware Investment

(10.0%) Exchange rate NT$/US$ 32.546 Performance (%)* 1M 3M 6M Absolute (2.3) 3.4 (5.0) Relative (2.0) (4.6) (18.3) Source: Daiwa Note: *Relative to TWSE Index

Investment indicators 2009E 2010E 2011E PER (x) 16.4 14.5 11.8 PCFR (x) 9.2 7.0 7.0 EV/EBITDA (x) 7.1 6.0 5.3 PBR (x) 2.1 2.0 1.8 Dividend yield (%) 4.2 4.5 5.5 ROE (%) 13.4 14.2 15.8 ROA (%) 11.0 11.7 13.1 Net debt equity (%) Net cash Net cash Net cash Source: Daiwa forecasts

Price and relative performance

Source: Bloomberg, Daiwa

Income summary

Revenue EBITDA Net profit EPS CFPS DPS Year to 31 Dec (NT$m) (%) (NT$m) (%) (NT$m) (%) (NT$) (%) (NT$) (NT$) 2007 64,622 14.7 23,888 22.9 17,489 31.2 5.910 13.2 7.779 3.350 2008 60,474 (6.4) 17,879 (25.2) 6,314 (63.9) 2.003 (66.1) 6.890 4.500 2009E 56,635 (6.3) 16,497 (7.7) 8,271 31.0 2.624 31.0 4.667 1.800 2010E 65,554 15.7 19,405 17.6 9,368 13.3 2.971 13.3 6.169 1.947 2011E 70,560 7.6 21,809 12.4 11,482 22.6 3.642 22.6 6.166 2.347 Source: Company, Daiwa forecasts Note: The investment indicators and income summary on the front page of this report, as well as the back-page financial summary, are all based on the forex assumptions set out in the table at

the back of this report, unless stated otherwise.


Structurally weaker than ASE during the upturn

3 rating maintained, but six-month target price lowered to NT$47 We maintain our 3 rating, but have lowered our six-month target price to NT$47 from NT$48, now based on a new target PBR of 2.2x on our new 2010 BVPS forecast, from a target PBR of 2.3x on our 2009 BVPS forecast previously. Our target PBR is supported by a long-term earnings-growth-rate forecast of 3%, our 2010 ROE forecast of 14.2%, and a cost-of-equity assumption of 8%. Our target PBR of 2.2x is also near the mid point of the post-2006 range of 1.3-3.3x. We expect SPIL to underperform (in terms of share-price performance) ASE in 2010, given what we see as the structural negatives mentioned earlier. However, we maintain our 3 rating, as we regard the stock’s valuation as undemanding. Suffering from MediaTek’s migration to a single-chip solution MediaTek’s first RF-integrated single-chip solution, the MT6253, is scheduled to begin mass production at the end of 4Q FY09. The MT6253 integrates four of the chips used in the current MT6225 platform (the baseband MT6225, the RF MT6139, the MT6138 power-management IC, and the MT6302 dual-SIM-card switch). Our cost analysis indicates that there are no savings in wafer costs from adopting the MT6253 (compared with the MT6225) due to the foundry companies’ aggressive price cuts on the MT6225 wafers. However, on the IC back-end side, we expect the transition to result in about a 40% cost saving for MediaTek. In other words, all other things being equal, we estimate MediaTek’s contribution to back-end companies’ sales would decline by 20% after completion of the transition to the MT6253 from the MT6225 (ie, the MT6225 accounts for 60-70% of MediaTek’s total handset shipments and the handset business unit accounts for its 70-80% of total sales currently). Given that MediaTek is SPIL’s largest customer, accounting for about 15% of the latter’s sales, we expect SPIL to suffer as a result of this product transition, and for it to lose about 2-3% sales after the transition to a single-chip solution is completed. A laggard in copper-wire technology SPIL was reluctant to invest in copper wire in the past, but has turned more aggressive since 3Q FY09 due to cost-saving pressure from its big customers (ie, MediaTek, in our opinion). SPIL targets to have 200 sets of copper wire bonders by the end of 2009, and plans to purchase 200-300 sets per quarter next year. In our view, rapid adoption of copper-wire technology would hurt SPIL, as we estimate that the throughput rate for SPIL’s copper wire of around only 75% is much worse than ASE’s 95%. In our view, SPIL’s low throughput rate for copper wire would force the company to choose between maintaining its market share or gross margin/ROE. Relatively limited benefit from IDM outsourcing SPIL has relatively limited exposure to IDM customers. IDM customers have not been SPIL’s focus either. However, looking ahead to 2010, our supply-chain survey indicates that one of SPIL’s main graphics customers could start to outsource its back-end orders for another product line – CPUs. Nevertheless, we expect volume to be limited during the initial stage. Earnings-forecast revisions We have revised up our FY09, FY10, and FY11 EPS forecasts by 39.6%, 10.4% and 4.8%, respectively, mainly to factor in our more positive demand assumption for electronic products.

We maintain our 3 rating, but have lowered our six-month target price to NT$47 from NT$48

SPIL would suffer more from MediaTek’s migration to a single-chip solution, in our view

Lag in copper wire technology might erode SPIL’s margin

Low exposure to IDM customers would be of limited benefit to SPIL, in our view

We have revised up our FY09, FY10, and FY11 EPS forecasts


ASE: Daiwa earnings-forecast revisions (NT$m) FY09E FY10E FY11E Previous New Change (%) Previous New Change (%) Previous New Change (%) Sales 52,341 56,635 8.2 56,962 65,554 15.1 62,785 70,560 12.4 Gross profit 9,809 11,253 14.7 12,003 14,542 21.1 15,143 17,198 13.6 Operating income 6,923 8,170 18.0 8,657 11,031 27.4 11,506 13,399 16.5 Pre-tax income 7,256 10,104 39.2 10,160 11,424 12.4 13,127 14,175 8.0 Net profit 5,925 8,271 39.6 8,483 9,368 10.4 10,961 11,482 4.8 EPS (NT$) 1.88 2.62 39.6 2.69 2.97 10.4 3.48 3.64 4.8 Source: Daiwa forecasts

Valuation and risks SPIL is trading currently at a PBR of 2.0x on our FY10 BVPS forecast, which is around the mid point of its post-2006 PBR range of 1.3-3.3x. We see the main upside risks to our rating and forecasts as falling gold prices, more-than-expected outsourcing orders from IDM customers, and faster-than-expected progress by its competitors in copper-wire technology. We see the main downside risks as a worse-than-expected 2010 macro outlook and higher gold prices.

SPIL: PER bands SPIL: PBR bands

0

20

40

60

80

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

30x26x22x

17x

12x

8x5x

0

20

40

60

80Ja

n-01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

3.5x

3.0x

2.5x

2.0x

1.5x

1.0x

0.5x

Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts

SPIL is trading currently at a PBR of 2.0x on our FY10 BVPS forecast


SPIL: quarterly financial forecasts 1Q FY09 2Q FY09 3Q FY09E 4Q FY09E 1Q FY10E 2Q FY10E 3Q FY10E 4Q FY10E FY08 FY09E FY10E FY11E GAAP (NT$m) Net sales 9,203 14,137 16,732 16,562 14,932 16,933 17,634 16,055 60,474 56,635 65,554 70,560 COGS 8,325 11,210 12,856 12,992 11,824 13,010 13,499 12,679 47,686 45,382 51,012 53,362 Gross profit 879 2,927 3,877 3,571 3,107 3,924 4,135 3,376 12,789 11,253 14,542 17,198 SG&A 452 434 486 489 502 520 520 509 2,533 1,860 2,051 2,239 R&D expenses 237 294 343 350 360 370 380 350 1,383 1,224 1,460 1,560 Operating income 190 2,200 3,048 2,732 2,246 3,034 3,234 2,517 8,873 8,170 11,031 13,399 Net non-operating income 127 (49) 57 1,799 90 102 106 96 (2,364) 1,934 393 776 Pre-tax income 317 2,150 3,105 4,531 2,335 3,135 3,340 2,613 6,509 10,104 11,424 14,175 Tax expenses 55 486 544 748 420 564 601 470 196 1,833 2,056 2,693 Net income 262 1,664 2,561 3,784 1,915 2,571 2,739 2,143 6,314 8,271 9,368 11,482 EPS (NT$) 0.08 0.53 0.81 1.20 0.61 0.82 0.87 0.68 2.00 2.62 2.97 3.64 Profitability (%) GAAP Gross-profit margin 9.5 20.7 23.2 21.6 20.8 23.2 23.4 21.0 21.1 19.9 22.2 24.4 Operating-profit margin 2.1 15.6 18.2 16.5 15.0 17.9 18.3 15.7 14.7 14.4 16.8 19.0 PBT margin 3.4 15.2 18.6 27.4 15.6 18.5 18.9 16.3 10.8 17.8 17.4 20.1 Net-profit margin 2.8 11.8 15.3 22.8 12.8 15.2 15.5 13.3 10.4 14.6 14.3 16.3 YoY (%) GAAP Sales (38) (11) (3) 33 62 20 5 (3) (6) (6) 16 8 Gross profit (72) (10) (4) 49 254 34 7 (5) (33) (12) 29 18 Operating profit (91) (7) (1) 123 n.m. 38 6 (8) (44) (8) 35 21 Net profit (85) (31) (20) n.m. 632 54 7 (43) (64) 31 13 23 QoQ (%) GAAP Sales (26) 54 18 (1) (10) 13 4 (9) Gross profit (63) 233 32 (8) (13) 26 5 (18) Operating income (84) n.m. 39 (10) (18) 35 7 (22) Net income n.m. 536 54 48 (49) 34 7 (22) Source: Company, Daiwa forecasts


Company background SPIL is one of the world’s leading providers of advanced semiconductor assembly and testing services. Founded in 1984, it has become a strategic manufacturing partner for IC-design houses, integrated device manufacturers and wafer foundries globally, providing a broad array of package-design, assembly and testing solutions, and also established a reputation for high-quality products and services.

Siliconware Precision – financial summary Profit and loss (NT$m) Balance sheet (NT$m)

Year to 31 Dec 2007 2008 2009E 2010E 2011E Sales 64,622 60,474 56,635 65,554 70,560 Assembly 58,742 54,856 52,023 59,684 64,727 Testing 5,880 5,619 4,612 5,870 5,833 Cost of goods sold 45,444 47,686 45,382 51,012 53,362 Gross profit 19,179 12,789 11,253 14,542 17,198 Operating expense 3,201 3,916 3,084 3,511 3,799 Operating profit 15,978 8,873 8,170 11,031 13,399 Net other non-op. income 3,602 (2,364) 1,934 393 776 Pre-tax income 19,580 6,509 10,104 11,424 14,175 Tax currently payable 2,090 196 1,833 2,056 2,693 Net profit 17,489 6,314 8,271 9,368 11,482 EBITDA 23,888 17,879 16,497 19,405 21,809 EPS (NT$) 5.91 2.00 2.62 2.97 3.64

Cash flow (NT$m) Year to 31 Dec 2007 2008 2009E 2010E 2011E Operating cash flow 23,909 21,722 14,712 19,447 19,438 Net profit 17,489 6,314 8,271 9,368 11,482 Depreciation & amortisation 7,910 9,006 8,328 8,374 8,410 Change in working capital (3,135) 7,066 (3,047) 11 (1,562) Others 1,645 (664) 1,160 1,695 1,108 Investment cash flow (4,958) (9,812) (5,656) (10,070) (10,036) Net capex (11,030) (8,942) (5,070) (9,698) (9,698) Change in long-term investments 6,751 (323) (395) (285) (297) Change in other assets (680) (547) (191) (87) (41) Free cash flow 18,951 11,910 9,056 9,378 9,402 Financing cash flow (11,175) (15,173) (7,735) (6,363) (7,633) Inc. of borrowing (12) 2 (2,997) 0 0 Expenses of employee bonus and dir. (848) (1,250) 0 (224) (232) Cash dividend (9,974) (13,836) (5,609) (6,139) (7,401) Others (including TRG shares) (342) (88) 872 0 0 Net cash flow 7,776 (3,263) 1,321 3,015 1,770

As at 31 Dec 2007 2008 2009E 2010E 2011E Total assets 84,309 72,311 77,815 82,411 92,457 Current assets 37,801 28,477 35,151 37,730 45,779 Cash & equivalent 21,129 17,866 19,187 22,202 23,971 Short-term investment 0 0 0 0 0 Inventories 3,243 2,193 2,416 2,333 2,486 Accounts receivable 10,917 6,838 11,499 11,147 12,272 Others 2,512 1,580 2,049 2,049 7,049 Non-current assets 46,508 43,833 42,664 44,680 46,678 Long-term investments 8,825 5,013 7,028 7,313 7,610 Net fixed assets 36,287 35,958 33,927 35,553 37,143 Others 1,396 2,862 1,709 1,814 1,926 Total liabilities 15,401 12,996 13,775 14,147 15,151 Current liabilities 12,221 10,582 13,673 14,022 15,069 Accounts payable 8,404 4,690 6,674 6,447 6,869 Short-term debt 0 0 0 0 0 Others 3,817 5,892 6,998 7,575 8,199 Long-term liabilities 3,179 2,415 102 125 82 Shareholders' equity 68,908 59,314 64,040 68,264 77,306 Common stock 30,734 31,526 31,164 31,164 31,164 Capital reserve 19,999 21,909 22,216 23,155 23,238 Retained earnings 17,761 6,453 8,418 11,423 22,905 Others 414 (574) 2,241 2,523 0

Ratios Year to 31 Dec 2007 2008 2009E 2010E 2011E Change (% YoY) Sales 14.7 (6.4) (6.3) 15.7 7.6 Operating profit 29.6 (44.5) (7.9) 35.0 21.5 EBITDA 22.9 (25.2) (7.7) 17.6 12.4 Net profit 31.2 (63.9) 31.0 13.3 22.6 EPS 13.2 (66.1) 31.0 13.3 22.6 Profitability (%) Net income/sales 27.1 10.4 14.6 14.3 16.3 Net income/total assets (ROA) 21.6 8.1 11.0 11.7 13.1 Net income/total net worth (ROE) 26.5 9.8 13.4 14.2 15.8 Operating profit/sales 24.7 14.7 14.4 16.8 19.0 Effective income-tax rate 10.7 3.0 18.1 18.0 19.0 Stability Gross debt/equity (%) 4.61 4.07 0.16 0.18 0.11 Current ratio 3.09 2.69 2.57 2.69 3.04 Quick ratio 2.83 2.48 2.39 2.52 2.87 Per-share data (NT$) EPS 5.91 2.00 2.62 2.97 3.64 CFPS 7.78 6.89 4.67 6.17 6.17 BVPS 22.42 18.81 20.31 21.65 24.52 Activity Asset turnover (x) 0.80 0.77 0.75 0.82 0.81 Receivables (days) 61.66 41.27 74.11 62.06 63.48 Inventory (days) 26.05 16.79 19.43 16.70 17.01 Payables (days) 67.50 35.90 53.68 46.13 46.99 Cash cycle (days) 20.21 22.16 39.86 32.63 33.50



Daiwa forex assumptions (vs. US$) Year end Rmb HK$ W S$ NT$ A$ Rs Rp RM 2007 7.300 7.800 935.8 1.440 32.432 1.143 39.413 9,400 3.310 2008 6.828 7.750 1,259.6 1.430 32.792 1.423 48.803 11,120 3.460 2009E 6.700 7.800 1,200.0 1.440 32.500 1.250 47.000 9,800 3.480 2010E 6.450 7.800 1,160.0 1.420 32.200 1.120 46.100 9,500 3.440 2011E 6.200 7.800 1,100.0 1.400 32.400 1.160 45.500 9,500 3.420 Source: Daiwa


DAIWA’S ASIA PACIFIC RESEARCH DIRECTORY

Hong Kong Regional Research Head Nagahisa MIYABE (852) 2848 4971 [email protected] Regional Research Co-head Craig IRVINE (852) 2848 4485 [email protected] Macro Economy (Hong Kong, China) Kevin LAI (852) 2848 4926 [email protected] Strategy (Regional) Mun Hon THAM (852) 2848 4426 [email protected] Banking (Hong Kong), Insurance (China) Steven CHAN (852) 2848 4468 [email protected] Consumer/Retail (Hong Kong, China) Peter CHU (852) 2848 4430 [email protected] Industrials (Regional) Taiki KAJI (852) 2848 4460 [email protected] IT/Electronics (Regional, Taiwan, Singapore, Hong Kong and China)

Pranab Kumar SARMAH (Regional Head of IT/Electronics)


IT/Electronics (Hong Kong, China) Joseph HO (852) 2848 4443 [email protected] Materials/Energy (Regional) Alexander LATZER

(Regional Head of Materials) (852) 2848 4463 [email protected]

Materials/Energy (China) Jason LI (852) 2848 4499 [email protected] Oil & Gas (China, Korea) Andrew CHAN (852) 2848 4964 [email protected] Property Developers (Hong Kong) Jonas KAN

(Head of Hong Kong Research) (852) 2848 4439 [email protected]

Property Developers (China), Small/Medium Caps (Hong Kong, China)

Kevin LEUNG (852) 2848 4489 [email protected]

Telecommunication (Regional, Greater China, Korea and Singapore)

Marvin LO (852) 2848 4465 [email protected]

Transportation (Hong Kong, China) Geoffrey CHENG (852) 2848 4024 [email protected] Transportation (Hong Kong, China, Singapore) Kelvin LAU (852) 2848 4467 [email protected] China – Shanghai Strategy (Regional) Hirokazu YUIHAMA (Head of Research) (86) 21 5840 1338 [email protected] Automobiles Ricon XIA (86) 21 5879 6833 [email protected] Consumer/Retail Nicolas WANG (86) 21 5840 5653 [email protected] All Industries Hongxia ZHU (86) 21 5840 1138 [email protected] Singapore Head of Research Tatsuya TORIKOSHI (65) 6321 3050 [email protected] Macro Economy (Regional) Prasenjit K BASU

(Chief Economist, Asia Ex-Japan) (65) 6321 3069 [email protected]

Banking, Property and REITs (Singapore) David LUM (Regional Head of Banking/Finance)


Healthcare (Singapore, Hong Kong and China) Soo Kee ANG (65) 6329 2133 [email protected] Conglomerates, Commodities, Energy and Small/Medium Caps (Singapore)

Chris SANDA (65) 6321 3085 [email protected]

Taiwan Head of Research Hirokazu MITSUDA (886) 2 2758 8754 [email protected] Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8780 5987 [email protected] IT/Electronics (IC-design, Semiconductors) Aaron JENG (886) 2 8780 1469 [email protected] IT/Technology Hardware Calvin HUANG (886) 2 2758 8805 [email protected] IT/Technology Hardware (Components) Andrew CHANG (886) 2 8789 5341 [email protected] IT/Technology Hardware Mitsuharu WATANABE (886) 2 2758 9437 [email protected] Materials, Small/Medium Caps Albert HSU (886) 2 8786 2212 [email protected] South Korea Banking/Finance Chang H LEE (Head of Research) (82) 2 787 9177 [email protected] Automobiles, Shipbuilding, Industrials, Steel Sung Yop CHUNG (82) 2 787 9157 [email protected] Capital goods Mike OH (82) 2 787 9179 [email protected] Chemicals Daniel LEE (82) 2 787 9121 [email protected] Consumer/Retail Sang Hee PARK (82) 2 787 9165 [email protected] Industrials Naoki IEIRI (82) 2 787 9184 [email protected] IT/Electronics Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics, Software Thomas Y KWON (82) 2 787 9181 [email protected] Australia Banking/Insurance Johan VANDERLUGT (61) 3 9916 1335 [email protected] Resources/Mining/Petroleum David BRENNAN (61) 3 9916 1323 [email protected] India Strategy/Industrials Jaideep GOSWAMI (Head of Research) (91) 22 6622 1010 [email protected] Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Materials Vishal CHANDAK (91) 22 6622 1006 [email protected] Oil & Gas Atul RASTOGI (91) 22 6622 1020 [email protected] Pharmaceuticals and Healthcare, Consumer Kartik A. MEHTA (91) 22 6622 1012 [email protected] Software, Telecommunications R. RAVI (91) 22 6622 1014 [email protected]


DAIWA SECURITIES GROUP INC OFFICE / BRANCH / AFFILIATE ADDRESS TEL FAX

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, (03) 5555 3111 (03) 5555 0661 Tokyo, 100-6753

Daiwa Securities America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Securities Trust and Banking (Europe) PLC (Dublin Branch) Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

DAIWA SECURITIES SMBC LIMITED OFFICE / BRANCH / AFFILIATE ADDRESS TEL FAX

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, (03) 5555 3111 (03) 5555 0661 Tokyo, 100-6753

Daiwa Securities SMBC Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 (Daiwa SMBC Europe)

Daiwa Securities SMBC Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, (49) 69 717 080 (49) 69 723 340 (Daiwa SMBC Europe, Frankfurt) Federal Republic of Germany

Daiwa Securities SMBC Europe Limited, Paris Branch 112, Avenue Kléber, 75116 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 (Daiwa SMBC Europe, Paris)

Daiwa Securities SMBC Europe Limited, London, 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Geneva Branch (Daiwa SMBC Europe, Geneva)

Daiwa Securities SMBC Europe Limited, Milan Branch Via Senato 14/16, 20121 Milan, Italy (39) 02 763 271 (39) 02 763 27250 (Daiwa SMBC Europe, Milan)

Daiwa Securities SMBC Europe Limited, Sucursal en España Jose Ortega y Gasset 20, 7th floor, Madrid 28006, Spain (34) 91 529 9800 (34) 91 577 5887 (Daiwa SMBC Europe, Spain)

Daiwa Securities SMBC Europe Limited 25/9, build. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation (7) 495 617 1960 (7) 495 244 1977 Moscow Representative Office

Daiwa Securities SMBC Europe Limited, Middle East Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 (Daiwa SMBC Europe, Middle East) Manama, Bahrain

Daiwa Securities SMBC Europe Limited Dubai Branch The Gate village Building 1, 1st floor, Unit-6, DIFC, P.O.Box-506657, (971) 47 090 401 (971) 43 230 332 Dubai, UAE.

Daiwa Securities SMBC Hong Kong Limited Level 26, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Securities SMBC Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, (65) 6220 3666 (65) 6223 6198 Republic of Singapore

Daiwa Securities SMBC Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP Daiwa Securities SMBC Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines

Daiwa Securities SMBC-Cathay Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities SMBC Co Ltd, Seoul Branch 6th Floor, Hana Daetoo Securities Bldg 27-3, Yeouido-Dong, (82) 2 787 9100 (82) 2 787 9191 Yeongdeungpo-Gu, Seoul, Republic of Korea

Daiwa Securities SMBC Co Ltd, Beijing Office Room 3503/3504, Capital Tower Beijing, (86) 10 6500 6688 (86) 10 6500 3594 No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China

Daiwa SMBC-SSC Securities Co Ltd, Shanghai Office Room 011, 45F HSBC Tower, 1000 Lujiazui Ring Road, (86) 21 6859 8000 (86) 21 6859 8030 Pudong New Area, Shanghai 200120, People’s Republic of China

Daiwa Securities SMBC Co. Ltd, Bangkok Representative Office Level 8 Zuellig House, 1 Sliom Road, Bangkok 10500, (66) 2 231 8381 (66) 2 231 8121 Thailand

Daiwa Securities SMBC India Private Limited 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India

Daiwa Securities SMBC Co. Ltd, Hanoi Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD OFFICE / BRANCH / AFFILIATE ADDRESS TEL FAX

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

DIR America Inc 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 7103, 7104

DIR Europe Ltd 1/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8654

DIR Hong Kong Ltd Level 26, One Pacific Place, 88 Queensway, Hong Kong (852) 2536 9332 (852) 2845 2190

Paris Representative Office 112 Avenue Kleber, 75116 Paris, France (33) 156 26 2272 (33) 156 26 2270

Shanghai Representative Office Room 011, 45F HSBC Tower, 1000 Lujiazui Ring Road, (86) 21 5840 1181 (86) 21 5840 1178 Pudong New Area, Shanghai 200120, People’s Republic of China


DISCLAIMER This publication is produced by Daiwa Securities SMBC Co. Ltd and/or its non-U.S. affiliates, and distributed by Daiwa Securities SMBC Co. Ltd and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities SMBC Co. Ltd nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities SMBC Co. Ltd, and/or its affiliates except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities SMBC Co. Ltd, its parent, holding, subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in , or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Japan Daiwa Securities SMBC and Daiwa Securities Group

Daiwa Securities SMBC is a Daiwa Securities Group company that is 60% owned by parent Daiwa Securities Group and 40% by Sumitomo Mitsui Financial Group. Note, however, that the former has announced plans to acquire the stake of the latter on 31 December 2009, making Daiwa Securities SMBC into a wholly owned subsidiary.

Investment Banking Relationship

Within the preceding 12 months, The Affiliates of Daiwa Securities SMBC Co. Ltd* has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: China Zhongwang Holdings Ltd; Sundart International Holdings; China Automation Group; China Kangda Food Co Ltd; Glorious Property; Tong Yang Life; China Kangda Food Co Ltd; Great Group Co., Ltd, Patel Engineering.

*Affiliates of Daiwa Securities SMBC Co. Ltd. for the purposes of this section shall mean any one or more of: • Daiwa Securities SMBC Hong Kong Limited • Daiwa Securities SMBC Singapore Limited • Daiwa Securities SMBC Australia Limited • Daiwa Securities SMBC India Pvt. Limited • Daiwa Securities SMBC-Cathy Co., Ltd • Daiwa Securities SMBC Co., Ltd, Seoul branch

Hong Kong This research is distributed in Hong Kong by Daiwa Securities SMBC Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Ownership of Securities

For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at http://www.daiwausa.com/report_disclosure.html.

Investment Banking Relationship

For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at http://www.daiwausa.com/report_disclosure.html.

Relevant Relationship (DHK)

DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

DHK market making

DHK may from time to time make a market in securities covered by this research.

Singapore This research is distributed in Singapore by Daiwa Securities SMBC Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act. By virtue of distribution to these category of investors, Daiwa Securities SMBC Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Section 36 relates to disclosure of Daiwa Securities SMBC Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Securities SMBC Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Securities SMBC Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Securities SMBC Stockbroking Limited in respect of any matter arising from or in connection with the research.


For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at http://www.daiwausa.com/report_disclosure.html.

India This research is distributed in India by Daiwa Securities SMBC India Private Limited which is regulated by the Securities and Exchange Board of India. Recipients of this research in India may contact Daiwa Securities SMBC India Private Limited in respect of any matter arising from or in connection with this research.


DISCLAIMER (cont’d) United Kingdom This research report is distributed by Daiwa Securities SMBC Europe Limited, which is authorised and regulated by The Financial Services Authority and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Securities SMBC Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past three years for the issuer of such securities. In addition, employees of Daiwa Securities SMBC Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Securities SMBC Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Securities SMBC Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Securities SMBC Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. These include the requirement that the remuneration of Analysts must not be linked to specific transactions carried out by underwriting or investment banking departments, nor may any decisions on remunerations of Analysts involve the said departments directly. Daiwa Securities SMBC Europe Limited’s research has been published in accordance with our conflict management policy, which is available at http://www.daiwasmbc.co.uk/about-us/corporate-governance-and-regulatory.

Regulatory disclosures of investment banking relationships are available at http://www.daiwausa.com/report_disclosure.html.

Germany This document has been approved by Daiwa Securities SMBC Europe Ltd and is distributed in Germany by Daiwa Securities SMBC Europe Ltd, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

United States This report is distributed in the U.S. by Daiwa Securities America Inc. (DSA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DSA’s views at any time. Neither DSA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DSA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DSA: Daiwa Securities America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).


For “Ownership of Securities” information please visit BlueMatrix disclosure Link at http://www.daiwausa.com/report_disclosure.html.

Investment Banking Relationships

For “Investment Banking Relationships” please visit BlueMatrix disclosure link at http://www.daiwausa.com/report_disclosure.html.

DSA Market Making

For “DSA Market Making” please visit BlueMatrix disclosure link at http://www.daiwausa.com/report_disclosure.html. DSA made a market in securities or ADRs of the following issuers at the time this report was published.

Research Analyst Conflicts

For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at http://www.daiwausa.com/report_disclosure.html. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DSA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification

For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at http://www.daiwausa.com/report_disclosure.html. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months.

Additional information may be available upon request.

Documents

Osat Sector Taiwan