2009-03-18 (credit sui) taiwan led sector. dim ...the led industry in...

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

18 March 2009 Asia Pacific/Taiwan

Equity Research Electronic Components & Connectors / UNDERWEIGHT

Taiwan LED Sector SECTOR REVIEW

Dim outlook for the LED industry in 2009 2009 hiccup in high-brightness (HB) LED market growth

0

2,000

4,000

6,000

8,000

2005 2006 2007 2008 2009E 2010E 2011E

Handset Notebook Netbook TV Automotiv e Lighting Others

US$ 4.8 bn

-6%

Source: Credit Suisse estimates

■ We believe the LED industry is overcrowded with giant incumbents, hundreds of small-to-mid size standalone LED players and newcomers (LCD panel makers). Coupled with the expected 2009 market decline, we expect competition within the LED industry to intensify.

■ We forecast a 6% HB (high brightness) LED market decline in 2009, as the LED end markets are mostly declining according to our global tech research team forecast. We expect only a few growth drivers in 2009. LED notebook (NB) penetration is increasing (helped by the shrinking cost gap between LED and CCFL BLU) while street lighting is moving ahead of general lighting due to justified cost efficiency.

■ We assessed Taiwan and Korean LED companies’ balance sheets to see if they can survive the ongoing global recession/credit crunch. Of the three Taiwanese LED firms under our coverage, Epistar and I-Chiun have a longer cash conversion cycle due to their weaker customer bargaining power. Epistar’s Altman Z-score falls into the “safe area” helped by larger market capital and net cash position.

■ LED companies in Taiwan and Korea enjoyed higher valuations than other tech firms as the market has always had high expectations for industry growth. However, we believe industry competition is intensifying due to fragmentation and overcrowding. We are Underweight on the LED sector and have Neutral or Underperform ratings for Taiwan/Korea companies in our coverage (we revised Everlight from Neutral to Underperform). We prefer Taiwan firms as they are more established with relatively lower valuations (P/B-ROE) than their Korean peers.

Research Analysts

Darryl Cheng 8862 2715 6333

[email protected]

Robert Cheng 8862 2715 6361

[email protected]

Sang Hoon Kim 822 3707 3737

[email protected]

18 March 2009

Taiwan LED Sector 2

Focus charts Figure 1: The LED industry is already highly fragmented Figure 2: Patent licensing network (leading LED players)

SAS (5483.TWO)Acme (8121.TWO)San Chih (3579.TWE)Crystalwise (NL)Teraxtal (NL)Wafer Works Optronics(NL)…

Lite-On Tech (2301.TW)Opto Tech (2340.TW)Epistar (2448.TW)Visual Photonics (2455.TW)Formosa Epitaxy (3061.TW)Tekcore (3339.TWO)Genesis Photonics (3383.TW)Arima Opto (6289.TW)Huga (8199.TWE)Lextar (NL)Chi Mei Lighting Tech (NL)Youngtek (6261.TWO)…

Wafer productionEpitaxygrowth

Upstream Midstream Downstream

Chip processing(front-end)

Chip processing(back-end)

ApplicationPackaging

Lite-On Tech (2301.TW)Everlight (2393.TW)Unity (2499.TW)Bright (3031.TW)Apex (3052.TW)Taiwan Oasis (3066.TWO)Advanced Optoelectronic (3437.TWE)Lighthouse (3547.TWE)Edison Opto (3591.TWE)Ledtech (6164.TW)Harvatek (6168.TW)Ligitek (8111.TWO)Lextar (NL)Chi Mei Lighting Tech (NL)…

Bright (3031.TW)Opto Tech (2340.TW)Foxconn Tech (2354.TW)Foxsemicon (3413.TWE)Coretronic (5371.TWO)Radiant (6176.TW)Nano-Op (6255.TW)Kenmos (8107.TWO)Lextar (NL)…

SEMCO (009150.KS)LG Innotek (011070.KS)Epi Valley (068630.KQ)Nainex (NL)Epi Plus (NL)Opto Wafer Tech (NL)…

SEMCO (009150.KS)LG Innotek (011070.KS)Epi Valley (068630.KQ)Itswell (NL)Nainex (NL)Seoul Opto Device (NL)Opto Well (NL)Wooree LSD (NL)…

SEMCO (009150.KS)LG Innotek (011070.KS)Seoul Semi (046890.KQ)Alti-Electronics (032290.KQ)Lumimicro (082800.KQ)CTL (036170.KQ)AUK Corp (017900.KS)Luxpia (NL)Opto Well (NL)Wooree LED (NL)…

SEMCO (009150.KS)LG Innotek (011070.KS)Seoul Semi (046890.KQ)Wooree ETI (082850.KQ)Kumho Electric (001210.KS)SEC (005930.KS)LGE (066570.KS)DS LCD (051710.KQ)…



Wafer productionEpitaxygrowth




ApplicationPackagingWafer productionEpitaxygrowth











Lumileds(Philips)

Nichia

Osram

Toyoda Gosei Cree

Epistar

Avago(ex. Agilent)

Opto Tech Citizen Dominant

Harvatek, Vishay,Samsung SEM,

Lite-On, Everlight,ROHM, Ya Hsin,Lednium (Optek)

Kingbright

Cotco, Stanley, ROHM, Lite-OnBridgeLuxSeoul Semi

lawsuit

dispute (resolved)

investment, chip license

white LED license

dispute (resolved)

dispute (resolved)

white LED license

lawsuit

lawsuit

license

cross license

license

dispute/lawsuit

chip supply

Lumileds(Philips)

Nichia

Osram

Toyoda Gosei Cree

Epistar

Avago(ex. Agilent)




Kingbright


lawsuit

dispute (resolved)


white LED license

dispute (resolved)

dispute (resolved)

white LED license

lawsuit

lawsuit

license

cross license

license

dispute/lawsuit

chip supply

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 3: LCD panel makers march into the LED industry Figure 4: We forecast 6% drop in 2009 HB LED market AUO

(2409.TW)

Lextar(NL)

100%

Lighthouse(3547.TWE)

16.6%

Wellypower(3080.TW)

9.0%

EpitaxyChip

PackagingApplication



CMO(3009.TW)

Chi MeiLighting

(NL)

56.7%

Tera Xtal(NL)

18.7%

Alpha Xtal(NL)

34.3%

EpitaxyChip


Wafer Wafer

Kang-LiInvestment

(NL)

100%

Yuan-ChiInvestment

(NL)

100%

ChinaElectric

(1611.TW)

3.4%

Lighting

TOAOptronics

(NL)

40%

Lighting

42.0%20.6%

Chi-DingInvestment

(NL)

8.7%

Unity(2499.TW)

0.2%


SEC(005930.KS)

LGE(066570.KS)

SEMCO(009150.KS)

Samsung LED(NL)

LG Innotek(011070.KS)

50%24%

50%

50%

WaferEpitaxy

ChipPackaging

WaferEpitaxy

ChipPackaging

AUO(2409.TW)

Lextar(NL)

100%


16.6%

Wellypower(3080.TW)

9.0%

EpitaxyChip




CMO(3009.TW)

Chi MeiLighting

(NL)

56.7%

Tera Xtal(NL)

18.7%

Alpha Xtal(NL)

34.3%

EpitaxyChip


Wafer Wafer

Kang-LiInvestment

(NL)

100%

Yuan-ChiInvestment

(NL)

100%

ChinaElectric

(1611.TW)

3.4%

Lighting

TOAOptronics

(NL)

40%

Lighting

42.0%20.6%

Chi-DingInvestment

(NL)

8.7%

Unity(2499.TW)

0.2%


SEC(005930.KS)

LGE(066570.KS)

SEMCO(009150.KS)

Samsung LED(NL)


50%24%

50%

50%

WaferEpitaxy

ChipPackaging

WaferEpitaxy

ChipPackaging

0

2,000

4,000

6,000

8,000

2005 2006 2007 2008 2009E 2010E 2011E

Handset Notebook Netbook TV

Automotiv e Lighting Others

US$ 4.8 bn

-6%

Source: Credit Suisse estimates Source: Credit Suisse estimates

Figure 5: LED NB is the most addressable growing market Figure 6: P/B-ROE – expensive valuation

9.1

29.8

60.3

85.2

0.60

50

100

150

200

2007 2008 2009 2010 2011

-

20

40

60

80

100

Notebook (LHS) Netbook (LHS) Penetration (RHS)

(mn) (%)

Ev erlight

I-Chiun

SEMCO

LG Innotek

Epistar

0.0

0.5

1.0

1.5

2.0

2.5

-2 0 2 4 6 8 10

09E ROE (%)

09E P/B (x )

Source: LEDinside Source: Company data, Credit Suisse estimates

18 March 2009

Taiwan LED Sector 3

Dim outlook for the LED industry in 2009 We are Underweight on the LED (light emitting diode) sector and have a Neutral or Underperform rating for the five Taiwanese/Korean LED companies in our coverage. We expect a dim 2009 outlook for the LED industry as LED end markets are mainly falling in the global recession plus there are only a few addressable growing LED end applications. We believe competition within the industry is intensifying. Hence ASP/margin erosion should outweigh unit shipment growth which will weaken individual LED companies’ growth and profitability. We believe the capital market had an overly expectation for LED industry growth which, in turn, led to unrealistically higher LED company valuations than for other tech sectors.

Intensified competition within the LED industry The LED industry was already highly fragmented with hundreds of small standalone companies due to low entry barriers, the result of mature production technology and low capital requirement. Global leaders (in the LED field) are well positioned in the industry with patent protection, and major global LCD panel makers are also building their own LED supply chain aimed at the LCD panel backlighting market. Coupled with the expected decline in end markets in 2009, we expect even more intense competition within the industry between existing LED companies.

Few growth drivers in the global recession Overall, we forecast a 6% decline in the global high-brightness LED market to US$4.8 bn in 2009. We expect most LED end markets to decline in 2009 (hit by the ongoing global recession) – the exception will be new applications (LCD panel backlighting and street lighting). LED notebook (NB) penetration is likely to reach 30% in 2009 helped by the narrower cost gap between LED and CCFL BLU (backlight units). Street lighting is way ahead of general lighting due to more justified cost efficiency.

Check on financials Amid the ongoing global recession and credit crunch, we have examined listed Taiwanese and Korean LED companies’ balance sheets to assess their ability to survive the downturn. Of the five companies in our coverage (Epistar, Everlight and I-Chiun in Taiwan; SEMCO and LG Innotek in Korea), Epistar and I-Chiun have a longer cash conversion cycle as they both focus on upstream only and have weaker customer bargaining power. Everlight, I-Chiun, and SEMCO have about a 20% net debt to equity ratio. When using the Altman Z-score, Everlight and I-Chiun fell into the “grey area’ while our remaining three companies (Epistar, SEMCO and LG Innotek) all made it to Altman’s “safe area”.

Valuation and recommendation The LED companies in Taiwan and Korea have enjoyed higher valuations than other tech companies as the market always held a high expectation on LED industry growth. However, we believe competition in the LED industry is intensifying as the industry is fragmented and overcrowded. We are Underweight on the LED sector and have Neutral or Underperform ratings for the five Taiwanese/Korean LED companies in our coverage. Generally, we prefer Taiwanese LED firms (versus their Korean counterparts) as the Taiwan firms are more established and have relatively lower valuations (in terms of P/B-ROE).

We are Underweight on the LED sector as our dim industry outlook for 2009 also expects more intense competition in the long term

The industry is overcrowded with giant incumbents, small standalone players and newcomers

We forecast a 4% overall LED market decline in 2009

Epistar’s Z-score is in the “safe area” while Everlight and I-Chiun are in the grey area

We generally prefer Taiwanese LED firms due to their relatively cheaper valuations

18 March 2009

Taiwan LED Sector 4

Intensified competition within the LED industry Giant incumbents well positioned with core patents Introducing the ‘big five’

The earliest history of LED can be traced back to the 1950s, when Rubin Braunstein of the Radio Corporation of America (not listed) reported on infra red emissions from gallium arsenide (GaAs) and other semiconductor alloys in 1955. After years of industry consolidation, there are now five leading LED companies worldwide, each possessing different core patents for LED production technology. The ‘big five’ are: CREE (US, CREE, US$21.40, not rated), Lumileds/Philips (US, not listed), Nichia (Japan, not listed), Toyoda Gosei (Japan, 7282, JPY1,321, NEUTRAL, TP JPY1,050) and Osram (Germany, not listed).

Figure 7: Top five global LED companies Company Description

CREE Founded in 1987 and listed in 1993, CREE was the first company to adopt SiC substrate for production of LED. It remains the only major player that uses SiC substrate today. CREE works closely with the US government on the solid state lighting development initiative.

Philips/Lumileds Lumileds began as the opto-electronics division of Hewlett-Packard (HP) almost 40 years ago. In 1999, HP split its company into two. The opto-electronics division was assigned to the new Agilent Technologies and became a JV between Agilent and Philips later in the same year. In 2005, Philips acquired Agilent's interest in Lumileds. Philips Lumileds is a fully integrated manufacturer of LED specialising in general lighting.

Nichia Founded in 1956, Nichia first started out as a chemical company focusing on high purity calcium compounds. Nichia successfully commercialised many of the world's first LEDs (e.g., high-brightness blue LED in 1993 (1 cd), ultra-violet LED in 1997, InGaN-based Yellow LED in 1998 – to name a few). Nichia is known to hold the most 'key' patents for LED production technologies.

Toyoda Gosei Founded in 1949, Toyoda Gosei (TG) – originally known as Nagoya Rubber – was a rubber research company incorporated by Toyota Motor Industry. TG is a major automotive parts supplier for Toyota, and it did not launch LED production until 1995. TG specialises in LED for display products, e.g. notebooks.

Osram Founded in 1906, Osram is one of the two largest lighting equipment manufacturers in the world. Headquartered in Munich, Osram is the world’s leading supplier of LED for automotive.

Source: Company data

Patents licensing network

Although LED production technology is mature, small-to-mid-sized standalone LED companies frequently face lawsuits filed by the world’s top LED players. The ‘big five’ global firms have built a sophisticated patent licensing network over the past few decades. They often file lawsuits against newcomers or second-tier LED companies to prevent them from entering the end markets of focus.

Five giant incumbents in the global LED industry after decades of industry consolidation

Patent issues affect smaller LED firms despite mature production technology

18 March 2009

Taiwan LED Sector 5

Figure 8: Global LED companies have a sophisticated patent licensing network

Lumileds(Philips)

Nichia

Osram

Toyoda Gosei Cree

Epistar

Avago(ex. Agilent)




Kingbright


lawsuit

dispute (resolved)


white LED license

dispute (resolved)

dispute (resolved)

white LED license

lawsuit

lawsuit

license

cross license

license

dispute/lawsuit

chip supply

Lumileds(Philips)

Nichia

Osram

Toyoda Gosei Cree

Epistar

Avago(ex. Agilent)




Kingbright


lawsuit

dispute (resolved)


white LED license

dispute (resolved)

dispute (resolved)

white LED license

lawsuit

lawsuit

license

cross license

license

dispute/lawsuit

chip supply

Source: Company data, Credit Suisse estimates

Fragmented industry due to low entry barriers Introduction of LED production processes

The LED production process is usually categorised into three sub-sets: 1) epitaxy growth (upstream), 2) chip processing (midstream) and 3) packaging (downstream). After packaging, LEDs are shipped to system or sub-system makers and become one of the components to be assembled into the system as one of the components for final assembly onto different end applications.

The top global LED companies (industry pioneers with core patents for LED production technologies) have mostly built integrated production lines from upstream epitaxy growth all the way through to downstream packaging. In contrast, Taiwanese LED companies (who entered the LED industry relatively recently; two to three decades ago) opted to focus on either upstream/midstream or downstream. The two Korean LED companies in our coverage, SEMCO and LG Innotek, who entered the LED industry even more recently, were once again back to vertically integrated as they both focus on specific end application for now – LCD panel backlighting.

LED process: 1) upstream epitaxy growth, 2) midstream chip process and 3) downstream packaging

18 March 2009

Taiwan LED Sector 6

Figure 9: LED production processes

Testing

Sorting

Shipping

Upstream epitaxy growth

Downstream packaging

Midstream chip processing

Testing

Sorting

Shipping

Testing

Sorting

Shipping

Upstream epitaxy growth

Downstream packaging

Midstream chip processing

Source: Credit Suisse

Fragmented supply chain due to low entry barriers

LED production technology is already mature and the required capital for a small-to-mid size LED company is relatively lower compared with other industries. The most expensive equipment in the LED supply chain is probably the metal organic chemical vapour deposition (MOCVD) – which deposits a light emitting layer onto raw substrate – costing around NT$100 mn (US$3 mn). Low entry barriers, coupled with high expectation for LED application growth, have attracted many ventures keen to break into the industry.

In Taiwan, the emergence of LED companies dates back to as early as the 1980s. After more than two decades of development, Taiwan’s LED industry has become highly fragmented leading to fierce competition. Korean LED firm were latecomers, entering the industry in around 2000. Korea’s LED industry is less fragmented than Taiwan with three major players: 1) Samsung LED (not listed), a JV between SEC (005930.KS, W523,000, NEUTRAL, TP W520,000) and SEMCO (009150.KS, W44,200, UNDERPERFORM [V], TP W27,300), 2) LG Innotek (011070.KS, W66,100, UNDERPERFORM [V], TP W47,500), a subsidiary of LGE (066570.KS, W87,500, UNDERPERFORM [V], TP W60,500), and 3) Seoul Semi (046890.KQ, W28,000, not rated).

Low entry barrier has led to fragmentation in the LED industry

Taiwan’s LED industry is more fragmented than Korea

18 March 2009

Taiwan LED Sector 7

Figure 10: Taiwan and Korea LED companies along the supply chain



Wafer production Epitaxygrowth













Wafer production Epitaxygrowth




ApplicationPackagingWafer production Epitaxygrowth











Source: Company data,

LCD panel makers march into the LED industry Since the most addressable growing market for LED in the near future is LCD panel backlighting, Taiwanese and Korean LCD panel makers are also building their own in-house capacities to secure LED supplies (and to boost profitability from home-made components). This is exactly what happened in recent years to the LCD driver IC industry. Panel prices kept falling due to oversupply which, in turn, resulted in continual capacity competition between major panel makers. Hence, the TFT LCD industry has exited the so-called ‘crystal’ cycle and entered cycles dominated by supply and demand. Panel makers, therefore, must try all possibilities to secure more profitability to compensate from potential losses in pure panel manufacturing in downturns.

Furthermore, LCD panel makers are integrating the LED production processes in order to custom design and manufacture the LEDs more suited to panel backlighting applications. LED BLU is assembled into LCM (LCD module) and shipped to customers like NB and monitor OEM by LCD panel makers. With the current supply chain, it is difficult for LCD panel makers to determine who in the supply chain is responsible when they have quality issues with LED BLU. An in-house LED supply chain would therefore help LCD panel makers ensure better quality.

LCD panel makers entered the LED industry to boost profitability from home-made components

LCD panel makers’ in-house LCD supply chain also helps with quality assurance

18 March 2009

Taiwan LED Sector 8

Figure 11: Major Taiwanese and Korean LCD panel makers building in-house LED supply chain

AUO(2409.TW)

Lextar(NL)

100%


16.6%

Wellypower(3080.TW)

9.0%

EpitaxyChip




CMO(3009.TW)

Chi MeiLighting

(NL)

56.7%

Tera Xtal(NL)

18.7%

Alpha Xtal(NL)

34.3%

EpitaxyChip


Wafer Wafer

Kang-LiInvestment

(NL)

100%

Yuan-ChiInvestment

(NL)

100%

ChinaElectric

(1611.TW)

3.4%

Lighting

TOAOptronics

(NL)

40%

Lighting

42.0%20.6%

Chi-DingInvestment

(NL)

8.7%

Unity(2499.TW)

0.2%


SEC(005930.KS)

LGE(066570.KS)

SEMCO(009150.KS)

Samsung LED(NL)


50%24%

50%

50%

WaferEpitaxy

ChipPackaging

WaferEpitaxy

ChipPackaging

AUO(2409.TW)

Lextar(NL)

100%


16.6%

Wellypower(3080.TW)

9.0%

EpitaxyChip




CMO(3009.TW)

Chi MeiLighting

(NL)

56.7%

Tera Xtal(NL)

18.7%

Alpha Xtal(NL)

34.3%

EpitaxyChip


Wafer Wafer

Kang-LiInvestment

(NL)

100%

Yuan-ChiInvestment

(NL)

100%

ChinaElectric

(1611.TW)

3.4%

Lighting

TOAOptronics

(NL)

40%

Lighting

42.0%20.6%

Chi-DingInvestment

(NL)

8.7%

Unity(2499.TW)

0.2%


SEC(005930.KS)

LGE(066570.KS)

SEMCO(009150.KS)

Samsung LED(NL)


50%24%

50%

50%

WaferEpitaxy

ChipPackaging

WaferEpitaxy

ChipPackaging

Source: Company data

In Taiwan, both AUO (2409.TW, NT$27.50, NEUTRAL [V], TP NT$29.00) and CMO (3009.TW, NT$13.20, UNDERPERFORM [V], TP NT$8.00) have established an integrated LED company within their group – Lextar (not listed) and Chi Mei Lighting (not listed) respectively. These are in addition to existing LED firms that focus only on part of the production process. In Korea, SEC and LGE have built Samsung LED (tentative name only, the actual name has not been determined) and LG Innotek, respectively, to cover the entire LED production process.

LCD panel makers’ in-house LED supply chain is, in our view, the most serious threat to existing standalone LED companies in the future. Such standalone firms may benefit from LCD panel backlighting in the near term (as panel makers’ capacity is not yet sufficient), but we believe the panel makers will soon be transformed into competitors from customers.

The top four LCD panel makers in Taiwan and Korea have established subsidiaries for LED production

Standalone LED firms are less likely to benefit from LCD panel backlighting in the future

18 March 2009

Taiwan LED Sector 9

Few growth drivers amid the global recession Decline in 2009 LED market Light emitting diode (LED) is a technology widely adopted in various end applications – as a lighting source, for status indication, information display, etc. It is difficult to closely associate the growth of the LED industry with the growth of an individual end market. In our view, the growth of the LED industry as a whole depends more on the macro economy (due to the broad range of LED end applications).

Our global tech research team forecasts a 2009 unit shipment decline for most end markets for high-brightness (HB) LED – for use in desktops, mobile phones, PCs, handsets, LCD panels etc – due to the ongoing global recession. Except for a few new applications for HB LED (mentioned later), LED shipment to each end market will roughly mirror the growth of that market as LED penetration in the existing applications is already high. Unless we see clear signs of a major macro economic recovery, the LED industry as a whole is likely to remain growing slowly or it may even see negative growth if there is worse price erosion. In 2008, high brightness LED market size was about US$5.1 bn, representing a 9% YoY growth from 2007. We forecast a 2009 HB LED market decline of 6% YoY to US$4.8 bn.

Figure 12: Credit Suisse’s view on 2009 HB LED end markets (mn units) 2008E 2009E Growth (%)

Desktop PCs 149 109 -26.6

Mobile PCs 142 137 -3.7

Handsets 1,250 1,153 -7.7

LCD panels 392 355 -9.4


Figure 13: High brightness (HB) LED market is likely to decline in 2009

0

2,000

4,000

6,000

8,000

2005 2006 2007 2008 2009E 2010E 2011E

Handset Notebook Netbook TV Automotiv e Lighting Others

US$ 4.8 bn

-6%


We forecast 2009 HB LED market to fall 4% to US$4.9 bn, as LED end markets will mostly decline in 2009 based on our global tech research team’s forecast

18 March 2009

Taiwan LED Sector 10

Not many growing LED applications in 2009 In 2009, we expect slow growth or even a decline for most LED end markets – except LED NB and LED street lighting (and special lighting) – which are expected to grow from a low 2008 base. LED general lighting, the long-awaited trend pushed by governments and worldwide leading LED companies, is not expected to show strong near-term growth due to the still high initial purchase cost and thus unjustified cost efficiency.

LED NB is the most addressable growing market

According to LEDinside, a market research institute and an affiliate of DRAMexchange (not listed), LED NB penetration (including netbooks) is estimated to be 9.1% in 2008 and 29.8% in 2009. The four major LCD panel makers (Samsung, LG, AUO, and CMO) have also set their own goal for LED NB penetration rate, mostly higher than the 29.8% forecast by LEDinside except for CMO.

Figure 14: LED NB penetration expected to grow in 2009 Figure 15: Major panel makers’ target LED NB in 2009

9.1

29.8

60.3

85.2

0.60

50

100

150

200

2007 2008 2009 2010 2011

-

10

20

30

40

50

60

70

80

90

100

Notebook (LHS) Netbook (LHS) Penetration (RHS)

(mn) (%)

0

10

20

30

40

50

60

70

80

90

100

Samsung LGD AUO CMO

Tergat LED NB penetration in 2009

(%)

Source: LEDinside Source: Company data

In the near term, LED notebooks are expected to be the most addressable end market for Taiwan LED companies, as Taiwan built a complete supply chain for TFT LCD panel backlight units (BLU) in the past decade. Taiwanese LED companies are well positioned to cut into the supply chain. LED backlighting provides several advantages (low power consumption and thinner form factor) which are key features for a notebook. Lower power consumption means longer battery time for each charge and the thinner form factor improves notebook mobility. LED backlighting was not widely adopted until late 2008, as the significant cost gap between LED BLU and conventional CCFL BLU previously stopped the top PC brands from applying LED BLU in their mainstream NB models.

Figure 16: LED backlighting enables thinner notebooks

Reflector

CCFL tube

Reflectivesheet

Light guideplate

Diffussion sheetPrism sheetLCD panel

Reflector

LED light bar

Reflectivesheet

Light guideplate

Diffussion sheetPrism sheetLCD panel


LED NB and LED street lighting are the most addressable growing LED applications in the near term

LCD panel makers have set an even more aggressive goal for 2009 LED NB penetration

LED NB an addressable growing market for Taiwan LED players due to built TFT LCD component supply chain

18 March 2009


In early 2008, the cost of LED BLU for a 12” NB panel was still about 1.8-2.0x for CCFL BLU (depending on LED suppliers). Currently, this has dropped to around 1.6-1.8x or less. The cost reduction was largely helped by the LED chip price erosion, which roughly falls 10-20% each year. The redesign of the light guide plate (LGP) plus improved production yield and helped cut the cost of LED BLU.

Figure 17: Cost multiple of LED BLU vs CCFL BLU

2.0 2.0 2.0 2.0 1.91.9

1.61.5 1.5 1.5 1.5

1.7 1.8 1.8 1.8 1.7 1.7

1.4

1.21.21.21.21.0

1.3

1.5

1.8

2.0

2.3

2.5

2Q07 2Q08 2Q11

LED (sV-Cut LGP) v s CCFL LED (Microlens LGP) v s CCFL

(x )

Source: DisplaySearch, Credit Suisse estimates

Encouraged by the continually shrinking cost gap between CCFL and LED BLU, the world’s top PC brands are expediting their move toward LED backlighting for mainstream NB models. Among them, Apple (AAPL, $95.42, OUTPERFORM [V], TP $120.00) and Sony (6758, ¥1,913, UNDERPERFORM [V], TP ¥1,000, UNDERWEIGHT) are the early movers. They have been the most aggressive in adopting LED backlighting, with > 70% model penetration. Other leading PC brands also announced their goal to adopt LED backlighting.

Figure 18: LED NB models from world’s top PC brands (end-2008) Brand Total NB models LED NB models LED NB model penetration (%)

HPQ 14 2 14 DELL 9 3 33 Toshiba 24 2 8 Acer 78 2 3 Asustek 103 7 7 Lenovo 35 2 6 Sony 21 15 71 Apple 5 4 80 Fujitsu 15 4 27

Total model No. 304 41 13

Source: Company website, Credit Suisse estimates

In our view, existing or standalone LED companies may benefit in the near term from the trend of using LED backlighting for notebooks. However, the world’s top LCD panel makers are also building their own in-house LED supply chain aimed at the panel backlighting market (notebooks and – in the future – TVs). We believe panel makers will soon dominate the market, and existing/standalone LED firms will not be long-term beneficiaries.

Shrinking cost gap between LED and CCFL BLU helped boost LED notebooks

World’s top PC brands are rolling out more LED NB models

Existing or standalone LED firms may benefit from rising LED NB penetration, in the near term

18 March 2009


Street lighting is growing, encouraged by the public sector

LED street lighting (plus other special lighting applications) is another addressable growing market for Taiwanese LED companies. LED street lighting is expected to grow faster than LED general lighting (or commercial lighting) as regulations for LED streetlights are less strict than LED general lighting. LED general lighting is such a huge market that it will take longer before the many interest groups can reach an agreement on standards. On the other hand, the installation of LED streetlights is usually part of infrastructure construction projects conducted by local governments. While central governments around the world are setting national standards for LED street lighting (the Taiwan government announced its second revision of street lighting standards in August 2008), streetlight makers can usually approach local governments directly and bid for projects.

The higher initial purchase cost of LED lighting equipment is also less an issue for street lighting. In 2008, the price of LED lighting equipment was about 2-10 times that of fluorescent lighting equipment (depending on the equivalent lumen output). For general lighting, a 280-lm LED bulb costs US$19.9, nearly four times that of a comparable 250-lm fluorescent bulb (US$5.0). We estimate it will take more than eight years (assuming six-hours use per day) before the saved electricity cost by LED bulb can fully compensate the higher initial purchase cost. Hence we believe there is still much effort ahead until the cost efficiency of LED lighting becomes more justified.

LED street lighting, once again, is more an addressable market in terms of cost efficiency. Streetlights are typically switched on at night (usually 12 hours daily) and they generally consume more power. Based on current technology, the higher initial purchase cost of LED street-lighting equipment can be compensated by the saved electricity cost in about two years based on our estimation.

Figure 19: Assumptions for cost comparisons between LED and other lighting sources General lighting Street lighting

Number of hours per day 6 Hours per day 12 Electricity fee (US$/kWh) 0.10 Electricity fee (NT$/kWh) 0.25 Fluorescent LED High pressure sodium LED

Power (AC W) 5 4 Power (AC W) 250 60 Luminous efficacy (lm/W) 50 70 Luminous efficacy (lm/W) 60 70 Lumen (lm) 250 280 Lumen (lm) 15,000 4,200 Lifetime (hr) 6,000 35,000 Lifetime (hr) 4,000 35,000 Lamp price (US$) 5.0 19.9 Lamp price (NT$) 6,000 20,000 Annual maintenance (NT$) 5,000 0


Street lighting expected to move faster than general lighting as it only needs local government approval

The higher initial purchase cost of general lighting equipment is not yet justified by the saved electricity cost

The higher initial purchase cost of streetlight is compensated after two years (from the saved electricity cost)

18 March 2009


Figure 20: General lighting – cost crossover in about

eight years

Figure 21: Street-lighting – cost crossover in about two

years

0

10

20

30

40

0 2 4 6 8 10

Fluorescent LED

(US$)

(Year)

0

15

30

45

60

0 2 4

High pressure sodium LED

(NT$ 000)

(Year)

Source: Credit Suisse estimates Source: Credit Suisse estimates

According to PIDA (Photonics Industry & Technology Development Association of Taiwan), the worldwide shipment of LED streetlights in 2008 will reach 460 k units (worth NT$23 bn) which will exceed NT$40 bn for 2009. Worldwide, China is expected to become the largest LED streetlight market as it is still rapidly growing and needs to enhance its infrastructure.

LED will potentially replace conventional lighting, but not just yet

LED is also considered the best lighting source to potentially replace existing light sources (incandescent and fluorescent bulbs) due to LED’s high luminous efficacy, its longer life, stable light output and superior colour rendering. Lighting accounts for 12-15% of global power consumption (even higher in developed countries) which encourages governments to use LED lighting equipment as part of their energy policies. For example, many governments have established a timetable for banning the use (or production of) incandescent bulbs. LED is seen as the best replacement, as its miniature size also enables it to be packaged into different fixtures to suit various installation environments.

Figure 22: Comparison of various light sources Efficacy Lifetime

Light source (lm/W) (hour) Characteristics Applications

Incandescent 8-18 1,000 Easy installation Residential

Instantly on Decoration

Low cost

High pressure mercury 40-61 1,000-12,000 High efficacy Residential/public areas

Long lifetime Gyms

Good colour rendering

High pressure sodium 68-150 8,000-10,000 High efficacy Streets/tunnels

Long lifetime Industry

Stable light output Greenhouses

LED 70-80 30,000-50,000 High efficacy Residential

Long lifetime Indoor/outdoor decoration

Stable light output Streets/tunnels

High colour rendering Industry

Source: LEDinside, Credit Suisse estimates

LED is viewed as a best replacement for current lighting sources due to high luminous efficacy, long lifetime, stable light output, and good colour rendering

18 March 2009


Figure 23: Timetable for banning incandescent lamps Country Year Country Year

Ireland 2009 Netherlands 2011

Australia 2010 Taiwan 2012

Argentina 2010 Canada 2012

Italy 2010 USA 2014

France 2010 China 2017

UK 2011

Source: Industrial Economics & Knowledge Centre, Credit Suisse estimates

While we believe LED general lighting has great potential to replace conventional light sources, we see two issues that need to be solved before LED general lighting replaces LED – namely standardisation and cost.

The lack of international standards, coupled with the still high initial purchase cost of LED lighting equipment has, to date, hindered the wide use of LED general lighting (especially residential). The LED general lighting market is huge and it will take a while before the many interest groups can reach an agreement on standards. In our view, the interest groups include: 1) LED companies, 2) conventional light source makers, and 3) light fixture makers.

Apart from the above, LED general lighting equipment is usually sold direct to consumers in the retail market, and the brand of LED lighting equipment will play an important role in consumer choice. In our view, Taiwanese LED players should partner with the world’s top lighting equipment giants or OEM in order to share a piece of the pie.

Adoption of general lighting will take a while until an agreement is reached on standards

18 March 2009


Checking financials Balance sheets We examined listed Taiwanese and Korean LED companies’ balance sheets (end-3Q08) to assess their ability to survive the ongoing global recession and credit crunch.

Taiwanese LED companies’ cash conversion cycle (averaging 159 days) is generally longer than that of their Korean peers (103 days). Of the three Taiwan LED companies in our coverage, Epistar (2448.TW, NT$51.60, UNDERPERFORM [V], TP NT$42.20) and I-Chiun (2486.TW, NT$20.00, NEUTRAL [V], TP NT$18.50) have a longer cash conversion cycle than Everlight (2393.TW, NT$61.80, NEUTRAL [V], TP NT$68.00). This is because they are located in the upstream in the supply chain and have weaker customer bargaining power.

Amid the ongoing global recession and credit crunch, the long account receivable days will increase company exposure to customer default risk. The long inventory days also magnify the impact of SFAS No. 10 (the newly adopted accounting standard in Taiwan that requires Taiwanese companies to book loss on inventory revaluation into cost of goods sold) thus further weakening profitability.

Figure 24: Balance sheet highlights of Taiwanese LED companies (1-3Q08) Turnover (days) Leverage (%) Cash

Companies Ticker A/R Inv A/P CCC Curr Quick L/E L/A GD/E ND/E (NT$ mn) C/E

Opto Tech 2340 TT 95 117 91 121 180 110 91 48 57 20 2,195 19

Epistar 2448 TT 125 126 39 212 352 274 26 21 14 -8 4,954 17

Visual Photonics 2455 TT 86 105 69 122 200 111 43 30 26 12 234 10

Formosa Epitaxy 3061 TT 130 71 57 143 308 237 55 35 39 12 844 18

Tekcore 3339 TT 122 158 80 201 147 69 126 56 99 98 16 1

Genesis Photonics 3383 TT 157 111 65 203 258 183 71 41 54 46 144 5

Arima Opto 6289 TT 151 146 42 255 244 154 91 48 69 37 939 16

Youngtek 6261 TT 97 37 52 82 217 187 40 29 19 11 222 6

Everlight 2393 TT 99 43 95 48 148 121 86 46 46 21 2,462 14

Unity 2499 TT 152 194 119 227 157 76 90 47 58 50 305 4

Bright 3031 TT 146 68 86 128 181 123 61 38 29 15 419 9

Apex 3052 TT 43 379 79 343 126 22 191 66 91 65 365 9

Taiwan Oasis 3066 TT 84 41 48 77 74 41 62 38 41 36 99 3

Ledtech 6164 TT 104 93 68 130 259 192 35 26 9 -16 338 19

Harvatek 6168 TT 103 149 84 168 370 209 32 24 8 -2 272 7

Ligitek 8111 TT 98 80 56 122 180 118 115 53 69 39 340 14

I-Chiun 2486 TT 147 38 58 127 212 178 95 49 49 20 943 15

Taiwan average 114 115 70 159 213 142 77 41 46 27 888 11

Source: TEJ, Credit Suisse estimates

Upstream LED companies have a longer cash conversion cycle due to their weaker bargaining power

18 March 2009


Figure 25: Balance sheet highlights of Korean LED companies Turnover (days) Leverage (%) Cash

Ticker A/R Inv A/P CCC Curr Quick L/E L/A GD/E ND/E (W bn) C/E

Kumho 001210.KQ 45 75 40 80 112 63 55 36 37 30 14 7

SEMCO 009150.KS 35 33 35 34 131 94 68 40 33 27 118 6

LGI 011070.KS 37 23 56 4 176 146 69 41 7 -8 74 15

Mirae 025560.KQ 215 141 68 289 126 91 78 44 59 53 5 6

Alti-Elec 032290.KQ 34 70 46 58 100 59 116 54 84 77 3 7

CTL 036170.KQ 42 66 17 91 100 67 141 58 118 100 3 18

Hansung Elcom 037950.KQ 69 69 48 90 87 57 215 68 153 146 3 6

Lumens 038060.KQ 44 34 49 30 101 74 168 63 81 47 9 34

Fawoo Tech 045890.KQ 128 188 78 237 245 159 84 46 49 35 10 14

N-Hitech 046720.KQ 58 56 27 87 122 84 108 52 93 68 6 25

Seoul Semi 046890.KQ 77 50 38 89 253 211 40 28 13 -21 63 34

Epivalley 068630.KQ 45 73 26 92 75 40 175 64 130 123 5 7

Wooree ETI 082850.KQ 66 33 17 82 214 184 121 55 89 84 5 5

Daejin DMP 065690.KQ 131 22 88 64 400 377 25 20 0 -50 27 50

RF Semi 096610.KQ 99 23 48 73 510 340 26 21 16 -6 5 21

Lumimicro 082800.KQ 114 158 29 243 82 26 250 71 179 177 0 3

AUK 017900.KQ 58 107 50 115 191 116 121 55 91 78 9 13

Korea average 76 72 45 103 178 129 109 48 73 56 21 10


Altman Z-score We also calculated Taiwanese and Korean LED companies according to the Altman Z-score (one of the most widely quoted measurements of a company’s financial health) based on 3Q08 actual financial results. Fifteen out of the 34 companies assessed had a Z-score above 3.0 (the “safe area”). This suggests such firms are less likely to suffer financial stress in one to two years based on the financial snapshot. However, eleven firms fell into the Z-score’s “danger zone” (a score of less than 1.8). This suggests the “danger zone” companies are likely to face financial difficulties in one to two years. The remaining eight firms fell into the so-called “grey area.” As mentioned earlier, the LED industry is fragmented with many small players (thanks to relatively low entry barriers) hence we expect to see industry consolidation accelerate if the global recession lasts longer.

Of the three Taiwanese LED companies in our coverage, only Epistar fell into the “safe area”, helped largely by its higher market capital to liabilities ratio.

11 of the 34 LED firms were in the Z-score “danger area”

18 March 2009


Figure 26: Altman Z-score for Taiwanese LED companies Working Retained Market

capital earnings EBIT capital Sales Altman

Company (1-3Q08) Ticker to assets to assets to assets to liab to assets Z-score

Opto Tech 2340 TT 0.26 0.05 0.06 1.56 0.64 2.18

Epistar 2448 TT 0.37 0.04 0.03 5.34 0.39 4.19

Visual Photonics 2455 TT 0.24 0.03 0.05 2.92 0.56 2.82

Formosa Epitaxy 3061 TT 0.25 0.03 0.04 2.36 0.34 2.23

Tekcore 3339 TT 0.12 0.02 0.00 0.53 0.35 0.85

Genesis Photonics 3383 TT 0.25 0.11 0.15 3.80 0.47 3.70

Arima Opto 6289 TT 0.28 -0.08 -0.04 0.63 0.44 0.93

Youngtek 6261 TT 0.18 0.29 0.18 3.29 0.57 3.75

Everlight 2393 TT 0.13 0.13 0.09 2.45 0.64 2.76

Unity 2499 TT 0.19 0.03 0.01 1.00 0.47 1.37

Bright 3031 TT 0.29 0.14 0.07 3.03 0.82 3.42

Apex 3052 TT 0.17 -0.03 0.04 0.42 0.58 1.11

Taiwan Oasis 3066 TT -0.08 -0.09 -0.14 0.89 0.46 0.31

Ledtech 6164 TT 0.37 0.09 0.08 3.34 0.76 3.59

Harvatek 6168 TT 0.47 0.13 0.11 3.82 0.85 4.25

Ligitek 8111 TT 0.27 0.00 0.00 0.83 0.86 1.68

I-Chiun 2486 TT 0.33 0.12 0.10 1.06 0.84 2.39

Source: TEJ, Credit Suisse estimates

Figure 27: Altman Z-score for Korean LED companies Working Retained Market

capital earnings EBIT capital Sales Altman

Company (1-3Q08) Ticker to assets to assets to assets to liab to assets Z-score

Kumho 001210.KQ 0.0 0.3 0.1 3.1 0.7 3.2

SEMCO 009150.KS 0.1 0.1 0.0 5.4 0.9 4.4

LGI 011070.KS 0.3 0.3 0.1 24.0 1.8 17.1

Mirae 025560.KQ 0.1 -0.4 0.0 0.9 0.4 0.4

Alti-Elec 032290.KQ 0.0 0.1 0.0 2.7 1.1 2.9

CTL 036170.KQ 0.0 -1.1 0.0 1.6 0.7 0.0

Hansung Elcom 037950.KQ -0.1 0.2 0.1 0.8 1.1 2.0

Lumens 038060.KQ 0.0 0.1 0.1 7.8 1.2 6.3

Fawoo Tech 045890.KQ 0.4 0.1 0.1 7.1 0.6 5.9

N-Hitech 046720.KQ 0.1 0.2 0.0 2.4 0.9 2.8

Seoul Semi 046890.KQ 0.4 0.3 0.0 59.6 1.1 37.9

Epivalley 068630.KQ -0.1 0.0 0.1 0.9 0.9 1.5

Wooree ETI 082850.KQ 0.2 0.3 0.1 2.0 0.8 3.1

Daejin DMP 065690.KQ -0.3 -1.4 -0.3 0.2 0.5 -2.6

RF Semi 096610.KQ 0.6 0.6 0.1 131.0 0.9 81.6

Lumimicro 082800.KQ 0.5 0.4 0.2 9.7 0.6 8.1

AUK 017900.KQ -0.1 -0.2 -0.1 0.9 0.9 0.7


18 March 2009


Valuation and recommendation Unrealistic expectation on LED industry growth has led to expensive valuation Taiwanese and Korean LED companies enjoyed higher valuations than other tech companies over the past three years as the market had a high expectation for LED industry growth, an unrealistic expectation, in our view.

In 2009, amid the global recession, we forecast that earnings for most LED companies in our coverage will decline (from 2008) as LED end markets are generally falling. In the longer term, we believe intensified competition in the industry will lead to ASP and margin erosion; outweighing the effect of unit shipment growth. We are Underweight on the LED sector as we believe the industry is overcrowded, leaving little room for individual companies to outperform others.

In the longer term, we expect LED general lighting will be the major growth driver for the LED industry. However, we do not expect the wide adoption of LED general lighting to happen before 2012 due to still high initial purchase costs. We also believe standalone Taiwanese and Korean LED companies must ally with leading lighting equipment brands (or OEM) to gain a piece of the pie. Hence, we do not expect existing standalone LED firms to significantly benefit from the LED general lighting trend.

Taiwan LED firms better positioned for LCD BLU In the near term, we believe Taiwanese LED firms are better positioned for LED backlighting as Taiwan has built a complete supply chain for LCD panel backlighting in the past decade. However, we expect LCD panel makers’ in-house LED supply chain will eventually have a negative impact on standalones (either located in the up/midstream or downstream). Korean LED companies are enjoying a higher P/B-ROE than Taiwanese LED companies (except for Epistar which is forecast to be a loss maker in 2009). We generally prefer Taiwan LED companies (vs their Korean peers), although we have Neutral or Underperform ratings for all the Taiwanese LED firms in our coverage and are Underweight on the LED sector.

Figure 28: P/B versus ROE – Taiwanese LED companies are relatively cheaper

Ev erlight

I-Chiun

SEMCO

LG Innotek

Epistar

0.0

0.5

1.0

1.5

2.0

2.5

-2 -1 0 1 2 3 4 5 6 7 8 9

09E ROE (%)

09E P/B (x )


We believe market expectation was too high for LED industry growth

We are less optimistic due to a weak 2009 outlook and intensified competition

LED general lighting unlikely to be widely adopted before 2012

Taiwan LED firms are better positioned to capture backlighting market and have a relatively cheaper valuation, in our view

18 March 2009


Figure 29: Epistar – forward-looking P/B vs forward-

looking ROE

Figure 30: Everlight – forward-looking P/B vs forward-

looking ROE

1.7

2.4

-2

0

2

4

6

8

10

12

14

16

Nov 02 Apr 04 Sep 05 Mar 07 Aug 08

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Epistar FL ROE (LHS, %) FL PB (x )

Av g 2000- Av g 2006-

1.9

3.0

0

4

8

12

16

20

Jan 00 May 01 Nov 02 Apr 04 Sep 05 Mar 07 Aug 08

0

1

2

3

4

5

FL ROE (LHS, %) FL PB (x )

Av g 2000- Av g 2006-

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 31: I-Chiun – forward-looking P/B vs forward-ROE

1.4

1.7

0

2

4

6

8

10

12

14

16

18

Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08

0.0

0.5

1.0

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2.0

2.5

3.0

3.5

4.0

4.5

5.0

I-Chiun FL ROE (LHS, %) FL PB (x ) Av g 2000- Av g 2006-


Figure 32: Valuation metrics – LED companies in Credit Suisse coverage Price EPS P/E BVPS P/B

Taiwan Ticker Rating 17-Mar Target Up/Dn 08E 09E 08E 09E 08E 09E 08E 09E

Epistar 2448.TW U 51.60 34.60 -33 0.16 -0.33 316.3 -156.5 35.14 34.57 1.5 1.5 Everlight 2393.TW U 60.80 42.20 -31 4.16 2.10 14.6 28.9 27.40 28.12 2.2 2.2 I-Chiun 2486.TW N 20.15 18.50 -8 2.08 1.02 9.7 19.8 18.79 18.52 1.1 1.1

Average 113.5 -35.9 1.6 1.6

Price EPS P/E BVPS P/B

Korea Ticker Rating 17-Mar Target Up/Dn 08E 09E 08E 09E 08E 09E 08E 09E

SEMCO 009150.KS U 44,200 27,300 -38.2 635 477 69.6 92.6 25,054 25,273 1.8 1.7 LG Innotek 011070.KS U 66,100 47,500 -28.1 5,580 2,395 11.8 27.6 35,458 37,630 1.9 1.8

Price EPS P/E BVPS P/B

International Ticker Rating 17-Mar Target Up/Dn 08E 09E 08E 09E 08E 09E 08E 09E

Aixtron AIXG.DE N 3.75 3.70 -1 0.25 0.05 15.0 75.0 2.38 2.31 1.6 1.6 Toyoda Gosei 7282 N 1,444 1,050 -27.3 238 8 6.1 186.8 1,783 1,621 0.8 0.9 Stanley 6923 N 1,115 1,000 -10.3 166 75 6.7 14.9 1,074 988 1.0 1.1

Average 21.9 79.4 1.4 1.4


18 March 2009


Asia Pacific / Taiwan Electronic Components & Connectors

Epistar Corp (2448.TW / 2448 TT)

Waiting for the upcycle ■ Event: We initiate coverage of Epistar with an UNDERPERFORM rating and

a NT$34.6 target price.

■ View: Epistar has built the largest LED up/midstream capacity in Taiwan. Amid the global recession, we believe its operational scale will become a burden and lead to margin contraction. We currently forecast a loss-making 2009 for Epistar. We also believe it will face intensifying competition from LCD panel makers’ in-house capacities and difficulties in expanding its ODM customer base in 2009. However, we believe Epistar will survive the credit crunch with sufficient cash in hand and a net cash position. We view Epistar as a cycle play and the company should enjoy both top-line growth and margin expansion when the industry swings to the upturn.

■ Catalyst: After weak 4Q08 sales, LED downstream packagers have been cautiously controlling inventory levels. Epistar’s recent strong share performance has been driven by rush orders for re-stocking and, in part, by potentially benefiting from LCD panel backlighting. We believe the weak 1H09 and still uncertain 2H09 will gradually lower market sentiment, and expect the share price to return to match its fundamentals. We suggest investors sell into strength and wait for the upcycle.

■ Valuation: We derive our NT$34.6 target price of NT$34.57 for Epistar from 1x 2009E BVPS. Epistar has traded at 0.4-4.1x 12M forward P/B since its listing in 2001, with an average of 1.7x. We apply a conservative 1x, as we forecast a loss-making 2009 and believe the market has over-expectations for Epistar’s growth. However, we believe Epistar’s healthy balance sheet will cushion the downside and support our 1x target P/B multiple.

Share price performance

050

100150200

Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08

20

70

120Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the TAIWAN SE WEIGHTED index which closed at 5041.39 on 17/03/09 On 17/03/09 the spot exchange rate was NT$34.41/US$1

Performance Over 1M 3M 12M Absolute (%) 24.0 67.8 -42.3 Relative (%) 10.5 54.7 -8.4

Financial and valuation metrics

Year 12/07A 12/08E 12/09E 12/10E Revenue (NT$ mn) 10,205.9 10,294.8 8,321.8 9,197.5 EBITDA (NT$ mn) 3,455.7 2,463.0 1,923.4 2,204.8 EBIT (NT$ mn) 2,110.7 468.7 -170.5 178.0 Net income (NT$ mn) 1,498.6 102.7 -208.7 142.9 EPS (CS adj., NT$) 2.84 0.16 -0.33 0.23 Change from previous EPS (%) n.a. Consensus EPS n.a. 0.68 0.34 0.99 EPS growth (%) 228.8 -94.2 n.a. n.a. P/E (x) 18.2 316.3 NM 228.6 Dividend yield (%) 5.5 0.0 — 0.2 P/B (x) 1.4 1.5 1.5 1.5 ROE (%) 8.9 0.5 -1.0 0.6 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Financial Datastream, Credit Suisse estimates.

*Stock ratings are relative to the relevant country index. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts


[email protected]


[email protected]

Rating UNDERPERFORM* [V] Price (17 Mar 09, NT$) 51.60 Target price (NT$) 34.60¹ Chg to TP (%) -32.9 Market cap. (NT$ mn) 32,666.00 (US$ 949.39) Enterprise value (NT$ mn) 30,990 Number of shares (mn) 633.06 Free float (%) 70.41 52-week price range 99.4 - 25.6

18 March 2009


Financial summary Figure 33: Epistar financial summary Income statement (NT$ mn) 2006A 2007A 2008E 2009E 2010E

Net sales 6,290 10,206 10,295 8,322 9,197

Gross profit 1,919 3,259 1,868 1,069 1,480

Operating income 1,151 2,111 469 -171 178

Total non-op inc/(exp) 117 114 -341 -34 -22

Pretax income 1,268 2,225 128 -205 156

Net income – reported 1,240 2,094 103 -209 143

Net income – post-bonus 321 1,499 103 -209 143

Dir/emp bonus expenses 919 595 74 11 42

Growth (%) 2006A 2007A 2008E 2009E 2010E

Net sales 87.2 62.2 0.9 -19.2 10.5

Net income – reported 92.9 68.9 -95.1 -303.3 -168.5

Net income – post-bonus 12.6 367.3 -93.2 -303.3 -168.5

Profitability (%) 2006A 2007A 2008E 2009E 2010E

Gross margin 30.5 31.9 18.1 12.9 16.1

Operating margin 18.3 20.7 4.6 -2.0 1.9

Pretax margin 20.2 21.8 1.2 -2.5 1.7

Net margin – post-bonus 5.1 14.7 1.0 -2.5 1.6

Effective tax rate 2.2 5.9 19.9 -1.9 8.6

Bonus dilution 74.1 28.4 41.8 -5.5 22.9

ROA – post-bonus 2.7 7.1 0.4 -0.8 0.5

ROE – post-bonus 4.0 9.3 0.4 -0.9 0.7

ROIC – post-bonus 3.1 8.1 0.4 -0.8 0.6

Turnover 2006A 2007A 2008E 2009E 2010E

Receivable (days) 125 107 125 142 125

Inventory (days) 112 122 126 136 136

Payable (days) 47 42 37 35 35

Leverage (%) 2006A 2007A 2008E 2009E 2010E

Total liabilities/total assets 31.9 20.6 18.2 18.7 19.9

Gross debt/equity 27.1 8.8 12.4 12.9 13.5

Net debt/equity 19.6 -9.0 -7.7 -11.4 -11.3

Current ratio 305.7 358.9 418.8 429.2 393.6

Quick ratio 229.2 287.8 335.3 347.3 312.5

Interest coverage (x) 76.2 46.7 -1,072.6 -205.4 -117.6

Valuation 2006A 2007A 2008E 2009E 2010E

P/E – post-bonus (x) 111.0 57.5 182.5 -156.5 228.6

P/B (x) 4.1 3.6 0.8 1.5 1.5

EV/EBIT (x) 32.4 39.8 36.4 -177.0 169.6

EV/EBITDA (x) 19.1 22.2 6.8 15.7 13.7

EV/invested capital (x) 3.4 3.3 0.7 1.2 1.2

Market capital (NT$ mn) 35,581 86,245 18,739 32,666 32,666

Enterprise value (NT$ mn) 37,274 84,107 17,047 30,179 30,182

Cash div yield (%) 4.7 5.5 0.0 -- 0.2

Per share data (NT$) 2006A 2007A 2008E 2009E 2010E

EPS – reported 3.61 4.28 0.18 -0.33 0.23

EPS – post-bonus, CS adj 0.86 2.84 0.16 -0.33 0.23

DPS, CS adj 2.43 2.82 0.02 -- 0.12

BVPS, CS adj 23.26 44.78 35.14 34.57 34.79


18 March 2009


Asia Pacific / Taiwan Electronic Equipment & Instruments

Everlight Electronics Co Ltd (2393.TW / 2393 TT)

Near-term positives fairly priced in ■ Event: We revise down our earnings forecast for Everlight and downgrade

our rating to UNDERPERFORM from Neutral.

■ View: LED firms have enjoyed valuation premium since 2006, as the market began to hold high expectation for new LED applications (panel backlighting and general lighting). In our view, backlighting is already a bloody battlefield, with potential threats from LCD panel makers’ in-house supply chain. However, we believe general lighting commercialisation is still years away and will not significantly drive LED company’s growth in the near term.

■ Catalyst: Everlight’s February sales of NT$600 mn (reported on 9 March) rose 13.3% MoM and were down 30.5% YoY. The company said the February increase was across all end applications (handsets, IT, consumer, etc) except for automotive. We believe February was helped by inventory replenishment after a one-quarter inventory correction (November 2008 to January 2009) by system customers. March sales are likely to rise following upstream LED chip maker and lead frame maker’s February sales increase. However, visibility along the supply chain is still short (two to three weeks). We believe the current valuation is not supported by fundamentals.

■ Valuation: Everlight’s share price rebounded 21% in the past month and it is now trading at 2.2x 2009E BVPS, well above the 1.3x average of component makers in our coverage. Everlight was trading at an average of 1.2x forward P/B in 2000-05 and 3.0x forward P/B since 2006. We derive our new NT$42.2 target price from 1.5x 2009E BVPS of NT$28.12 versus a previous target price of NT$68 (15x 2009E EPS). Our 1.5x target P/B represents the company’s median 12-month forward P/B multiple since 2000.


050

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Year 12/07A 12/08E 12/09E 12/10E Revenue (NT$ mn) 9,852.7 11,028.1 8,819.7 9,578.2 EBITDA (NT$ mn) 2,187.9 1,748.8 1,599.0 1,976.7 EBIT (NT$ mn) 2,062.9 1,380.2 690.0 1,088.6 Net income (NT$ mn) 1,495.9 1,503.6 766.7 1,129.0 EPS (CS adj., NT$) 4.37 4.16 2.10 3.10 Change from previous EPS (%) n.a. -6.4 -53.8 -44.4 Consensus EPS n.a. 4.37 3.33 4.30 EPS growth (%) 126.1 -4.6 -49.5 47.3 P/E (x) 13.9 14.6 28.9 19.6 Dividend yield (%) 6.6 1.8 0.9 3.3 P/B (x) 2.1 2.2 2.2 2.0 ROE (%) 21.5 15.2 7.5 10.1 Net debt/equity (%) net cash 20.8 17.9 7.1



Research Analysts


[email protected]


[email protected]

Rating (from Neutral) UNDERPERFORM* [V] Price (17 Mar 09, NT$) 60.80 Target price (NT$) (from 68.00) 42.20¹ Chg to TP (%) -30.6 Market cap. (NT$ mn) 22,167.92 (US$ 644.28) Enterprise value (NT$ mn) 24,827 Number of shares (mn) 364.60 Free float (%) 73.69 52-week price range 125.0 - 33.8

18 March 2009


Financial summary Figure 34: Everlight financial summary Income statement (NT$ mn) 2006A 2007A 2008E 2009E 2010E

Net sales 7,949 9,853 11,028 8,820 9,578

Gross profit 2,576 3,032 2,867 1,963 2,493

Operating income 1,740 2,063 1,380 690 1,089

Total non-op inc/(exp) 458 402 303 153 166

Pretax income 2,198 2,465 1,683 843 1,254

Net income – reported 1,892 2,210 1,504 767 1,129

Net income – post-bonus 644 1,496 1,504 767 1,129

Dir/emp bonus expenses 1,248 714 236 139 205

Growth (%) 2006A 2007A 2008E 2009E 2010E

Net sales 18.0 23.9 11.9 -20.0 8.6

Net income – reported 28.7 16.8 -32.0 -49.0 47.3

Net income – post-bonus -37.8 132.2 0.5 -49.0 47.3


Gross margin 32.4 30.8 26.0 22.3 26.0

Operating margin 21.9 20.9 12.5 7.8 11.4

Pretax margin 27.6 25.0 15.3 9.6 13.1

Net margin – post-bonus 8.1 15.2 13.6 8.7 11.8

Effective tax rate 14.2 10.3 10.7 9.1 10.0

Bonus dilution 65.9 32.3 13.5 15.3 15.4

ROA – post-bonus 5.7 10.1 8.9 4.5 6.4

ROE – post-bonus 8.2 16.1 14.9 7.6 10.5

ROIC – post-bonus 7.2 12.5 11.0 5.5 7.8

Turnover 2006A 2007A 2008E 2009E 2010E

Receivable (days) 94 96 103 131 116

Inventory (days) 36 37 38 49 46

Payable (days) 125 116 104 114 108

Leverage (%) 2006A 2007A 2008E 2009E 2010E



Net debt/equity -31.5 -11.8 20.8 17.9 7.1

Current ratio 292.8 288.2 187.7 194.0 229.1

Quick ratio 269.2 264.5 158.6 165.0 200.1

Interest coverage (x) -62.6 -70.1 125.4 30.1 43.2

Valuation 2006A 2007A 2008E 2009E 2010E

P/E – post-bonus (x) 46.1 27.9 10.5 28.9 19.6

P/B (x) 3.6 4.1 1.6 2.2 2.0

EV/EBIT (x) 15.5 19.7 12.9 34.8 21.1

EV/EBITDA (x) 12.8 16.5 8.8 15.0 11.6




Cash div yield (%) 6.6 6.6 1.8 0.9 3.3


EPS – reported 5.96 6.67 4.17 2.10 3.10

EPS – post-bonus, CS adj 1.93 4.37 4.16 2.10 3.10

DPS, CS adj 4.02 4.00 1.12 0.57 2.01

BVPS, CS adj 25.02 29.94 27.40 28.12 30.65


18 March 2009


Asia Pacific / Taiwan Electronic Components & Connectors

I-Chiun Precision Industry Co Ltd (2486.TW / 2486 TT)

February sales rebound implies better downstream revenue ahead ■ Event: We maintain our NEUTRAL rating for I-Chiun.

■ View: I-Chiun is a major supplier of LED lead frames, the key component of LED downstream packaging. The company’s sales, therefore, are a good revenue indicator for LED downstream packagers. I-Chiun announced unaudited February consolidated sales of NT$254 mn on 4 March 2009, a 62.4% jump from January. As such, we expect LED downstream packagers to report increased February sales soon.

■ Catalyst: The company’s CFO said February sales increased across both product lines (LED lead frames and LCD reflectors), in line with our recent LED industry checks and our house view of growing LCD panel shipments. However, order visibility remains at only two weeks, with no improvement from 4Q08. The two-week order visibility implies that LED packagers are still cautious about end-market demand and are still maintaining minimum inventory level. We are not turning positive yet.

■ Valuation: We maintain our target price at NT$18.5 (1.0x 2009E BVPS). I-Chiun has been trading at 0.5-2.8x 12-month forward P/B, with a 1.3x average since its March 2000 listing. Our 1.0x target P/B multiple is conservative and is supported by the company’s fundamentals, as we believe I-Chiun should remain profitable in 2009 even based on our conservative forecast.


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Year 12/07A 12/08E 12/09E 12/10E Revenue (NT$ mn) 4,537.8 4,762.5 3,240.7 4,027.3 EBITDA (NT$ mn) 856.9 805.5 520.6 766.4 EBIT (NT$ mn) 746.0 509.7 150.7 414.8 Net income (NT$ mn) 475.7 354.1 173.8 373.2 EPS (CS adj., NT$) 2.81 2.08 1.02 2.19 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS n.a. 2.90 2.27 2.39 EPS growth (%) 38.4 -26.0 -51.1 114.7 P/E (x) 7.2 9.7 19.8 9.2 Dividend yield (%) 8.3 6.1 3.0 6.4 P/B (x) 1.1 1.1 1.1 1.0 ROE (%) 18.5 11.1 5.5 10.9 Net debt/equity (%) 10.2 4.0 net cash net cash



Research Analysts


[email protected]

Rating NEUTRAL* [V] Price (17 Mar 09, NT$) 20.15 Target price (NT$) 18.50¹ Chg to TP (%) -8.2 Market cap. (NT$ mn) 3,441.62 (US$ 100.03) Enterprise value (NT$ mn) 3,899 Number of shares (mn) 170.80 Free float (%) 74.00 52-week price range 42.9 - 12.0

18 March 2009


Financial summary Figure 35: I-Chiun financial summary Income statement (NT$ mn) 2006A 2007A 2008E 2009E 2010E

Net sales 3,613 4,538 4,762 3,241 4,027

Gross profit 871 1,089 962 541 839

Operating income 554 746 510 151 415

Total non-op inc/(exp) -4 26 22 87 96

Pre-tax income 550 772 532 238 511

Net income – reported 409 559 354 174 373

Net income – post-bonus 324 476 354 174 373

Dir/emp bonus expenses 86 83 47 -- --

Growth (%) 2006A 2007A 2008E 2009E 2010E

Net sales 38.3 25.6 5.0 -32.0 24.3

Net income – reported 69.7 36.5 -36.6 -50.9 114.7

Net income – post-bonus 67.7 47.0 -25.6 -50.9 114.7


Gross margin 24.1 24.0 20.2 16.7 20.8

Operating margin 15.3 16.4 10.7 4.6 10.3

Pretax margin 15.2 17.0 11.2 7.3 12.7

Net margin – post-bonus 9.0 10.5 7.4 5.4 9.3

Effective tax rate 25.6 27.6 33.4 27.0 27.0

Bonus dilution 20.9 14.8 11.7 -- --

ROA – post-bonus 8.2 10.1 6.5 3.0 6.2

ROE – post-bonus 14.7 16.7 11.4 5.5 11.3

ROIC – post-bonus 10.2 12.5 7.9 3.6 7.4

Turnover 2006A 2007A 2008E 2009E 2010E

Receivable (days) 141 144 140 173 143

Inventory (days) 40 41 40 51 41

Payable (days) 66 59 51 66 69

Leverage (%) 2006A 2007A 2008E 2009E 2010E



Net debt/equity 0.0 10.2 4.0 -0.4 -6.1

Current ratio 196.3 176.3 256.1 255.1 234.5

Quick ratio 171.0 152.2 225.6 228.8 212.6

Interest coverage (x) 26.0 52.0 20.6 12.2 17.7

Valuation 2006A 2007A 2008E 2009E 2010E

P/E – post-bonus (x) 16.3 12.5 7.0 19.8 9.2

P/B (x) 2.0 2.0 0.8 1.1 1.0

EV/EBIT (x) 9.5 8.4 5.1 22.8 7.8

EV/EBITDA (x) 6.3 5.9 3.0 6.6 4.2




Cash div yield (%) 7.2 8.3 6.1 3.0 6.4


EPS – reported 2.86 3.46 2.07 1.02 2.19

EPS – post-bonus, CS adj 2.03 2.81 2.08 1.02 2.19

DPS, CS adj 1.44 1.67 1.22 0.60 1.28

BVPS, CS adj 16.83 17.89 18.79 18.52 20.10


18 March 2009


Companies Mentioned (Price as of 17 Mar 09) Epistar (2448.TW, NT$51.60, UNDERPERFORM [V], TP NT$34.60) Everlight (2393.TW, NT$60.80, UNDERPERFORM [V], TP NT$42.20) I-Chiun (2486.TW, NT$20.15, NEUTRAL [V], TP NT$18.50) Acer Inc. (2353.TW, NT$48.30, NEUTRAL, TP NT$47.90) Acme (8121.TWO, NT$14.50, NOT RATED) AIXTRON (AIXG.DE, Eu 3.75, NEUTRAL [V], TP Eu 3.70, OVERWEIGHT) Alti-Electronics (032290.KQ, W4,735, NOT RATED) Apex (3052.TW, NT$7.20, NOT RATED) Apple Inc. (AAPL, $95.42, OUTPERFORM [V], TP $120.00) Arima Opto (6289.TW, NT$8.57, NOT RATED) Asustek Computer (2357.TW, NT$35.90, UNDERPERFORM, TP NT$28.30) AU Optronics (2409.TW, NT$27.50, NEUTRAL [V], TP NT$29.00) AUK (017900.KS, W1,450, NOT RATED) Bright (3031.TW, NT$28.90, NOT RATED) Chi Mei Optoelectronics (3009.TW, NT$13.20, UNDERPERFORM [V], TP NT$8.00) China Electric (1611.TW, NT$12.10, NOT RATED) Coretronic Corp (5371.TWO, NT$20.60, OUTPERFORM, TP NT$24.00) Cree (CREE, $21.40, NOT RATED) CTL (036170.KQ, W1,190, NOT RATED) Daejin DMP (065690.KQ, W10,000, NOT RATED) Dell Inc. (DELL, $8.90, OUTPERFORM, TP $11.00) Epi Valley (068630.KQ, W3,175, NOT RATED) Fawoo Tech (045890.KQ, W27,350, NOT RATED) Formosa Epitaxy (3061.TW, NT$20.10, NOT RATED) Foxconn Technology Corp (2354.TW, NT$83.50, UNDERPERFORM [V], TP NT$73.00) Fujitsu (6702, ¥355, RESTRICTED [V], MARKET WEIGHT) Genesis Photonics (3383.TW, NT$49.00, NOT RATED) Hansung Elcom (037950.KQ, W6,560, NOT RATED) Harvatek (6168.TW, NT$20.60, NOT RATED) Hewlett-Packard (HPQ, $29.02, NEUTRAL, TP $30.00) Kenmos (8107.TWO, NT$16.30, NOT RATED) Kumho Electric (001210.KS, W32,350, NOT RATED) Ledtech (6164.TW, NT$15.20, NOT RATED) Lenovo Group Ltd (0992.HK, HK$1.67, NOT RATED) LG Electronics Inc (066570.KS, W87,500, UNDERPERFORM [V], TP W60,500) LG Innotek (011070.KS, W66,100, UNDERPERFORM [V], TP W47,500) Ligitek (8111.TWO, NT$12.30, NOT RATED) Lite-On Technology Corp (2301.TW, NT$24.00, NOT RATED) Lumens (038060.KQ, W5,400, NOT RATED) Lumimicro (082800.KQ, W1,915, NOT RATED) Mirae (025560.KS, W270, NOT RATED) Nano-Op (6255.TW, NT$13.25, NOT RATED) N-Hitech (046720.KQ, W4,245, NOT RATED) Opto Tech (2340.TW, NT$17.00, NOT RATED) Radiant Opto-Electronics Corp (6176.TW, NT$29.50, NOT RATED) RF Semi (096610.KQ, W6,000, NOT RATED) Samsung Electro-Mechanics (009150.KS, W44,200, UNDERPERFORM [V], TP W27,300) Samsung Electronics (005930.KS, W523,000, NEUTRAL, TP W520,000) Seoul Semi (046890.KQ, W28,000, NOT RATED) Sino-American Silicon Products (5483.TWO, NT$66.00, NEUTRAL [V], TP NT$58.00) Sony (6758, ¥1,913, UNDERPERFORM [V], TP ¥1,000, UNDERWEIGHT) Stanley Electric (6923, ¥1,115, NEUTRAL [V], TP ¥1,000, MARKET WEIGHT) Taiwan Oasis (3066.TWO, NT$6.90, NOT RATED) Tekcore (3339.TW, NT$10.45, NOT RATED) Toshiba (6502, ¥247, NEUTRAL [V], TP ¥290, MARKET WEIGHT) Toyoda Gosei (7282, ¥1,444, NEUTRAL [V], TP ¥1,050, MARKET WEIGHT) Unity (2499.TW, NT$14.25, NOT RATED) Visual Photonics (2455.TW, NT$17.05, NOT RATED) Wellypower (3080.TW, NT$22.90, NOT RATED) Wooree ETI (082850.KQ, W9,630, NOT RATED) Youngtek (6261.TWO, NT$46.05, NOT RATED)

18 March 2009


Disclosure Appendix Important Global Disclosures Darryl Cheng, Robert Cheng & Sang Hoon Kim each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 2448.TW 2448.TW Closing

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O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for 2393.TW 2393.TW Closing

Price Target

Price

Initiation/ Date (TWD) (TWD) Rating Assumption 5-May-08 110.784 105.882 N X 3-Jul-08 83.333 90 25-Aug-08 76.9 88 16-Oct-08 54.1 69 3-Nov-08 51.9 68

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3-Year Price, Target Price and Rating Change History Chart for 2486.TW 2486.TW Closing

Price Target

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Initiation/ Date (TWD) (TWD) Rating Assumption 12-Jun-08 33.714 48.571 O X 16-Jul-08 30.286 47.619 16-Oct-08 23 35 4-Dec-08 12.75 13.2 N 5-Mar-09 19.55 18.5

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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities.

18 March 2009


Analysts’ stock ratings are defined as follows***: Outperform (O): The stock’s total return is expected to exceed the industry average* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the industry average* (range of ±10%) over the next 12 months. Underperform (U)**: The stock’s total return is expected to underperform the industry average* by 10-15% or more over the next 12 months.

*The industry average refers to the average total return of the relevant country or regional index (except with respect to Europe, where stock ratings are relative to the analyst’s industry coverage universe). **In an effort to achieve a more balanced distribution of stock ratings, the Firm has requested that analysts maintain at least 15% of their rated coverage universe as Underperform. This guideline is subject to change depending on several factors, including general market conditions. ***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions, with a required equity return overlay applied.

Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 37% (57% banking clients) Neutral/Hold* 44% (55% banking clients) Underperform/Sell* 17% (48% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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See the Companies Mentioned section for full company names. Price Target: (12 months) for (2448.TW) Method: Our NT$34.6 target price for Epistar is derived from 1x our 2009E BVPS of NT$34.57. Epistar has traded at 0.4-4.1x forward BVPS since its listing in May 2001, at an average of 1.7x. Our target P/B multiple is not demanding compared to its trading history. We use the conservative 1x target P/B multiple as we forecast a loss-making 2009. Epistar's healthy balance sheet and substantial cash position should cushion the downside risk. Risks: Risks to our NT$34.6 target price for Epistar includes 1) 2H09 recovery might come in stronger than our expectations and 2) LCD panel makers might focus more on downstream packaging. Price Target: (12 months) for (2393.TW) Method: Our NT$42.2 target price for Everlight is derived from 1.5x our 2009E BVPS of NT$28.12. Everlight has traded at 0.3-4.9x forward BVPS in the past decade, at an average of 1.9x. Our 1.5x target P/B multiple is not demanding compared to its trading history. We believe Everlight deserves a premium owing to its better economies of scale, best-of-class profitability, and investment in the largest upstream wafer/chip maker in Taiwan. Risks: Risks to our NT$42.2 target price for Everlight includes 1) adverse pricing environment due to intensified competition in LED packaging industry, 2) LCD panel makers entering LED industry, and 3) macroeconomic slowdown that will slow Everlight's growth momentum. Price Target: (12 months) for (2486.TW) Method: Our NT$18.5 target price for I-Chiun is derived from 1.0x our 2009E BVPS of NT$18.52. I-Chiun has traded at 0.6x-2.8x forward BVPS in the past three years, at an average of 1.7x. We believe our 1.0x target P/B multiple is conservative and supported as the company should remain profitable in our forecast horizon. Risks: Risks to our NT$18.5 target price for I-Chiun includes 1) rising material costs, 2) new entrants entering the market, and 3) deteriorating macro economy.

18 March 2009


See the Companies Mentioned section for full company names. The subject company (2448.TW) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2448.TW) within the past 12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (2448.TW) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2448.TW) within the next 3 months. Important Regional Disclosures The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (2448.TW, 2393.TW, 2486.TW) within the past 12 months.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Darryl Cheng, non-U.S. analyst, is a research analyst employed by Credit Suisse Taipei Branch. • Robert Cheng, non-U.S. analyst, is a research analyst employed by Credit Suisse Taipei Branch. • Sang Hoon Kim, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (Europe) Limited, Seoul Branch. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

18 March 2009 Asia Pacific / Taiwan

Equity Research

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2009-03-18 (credit sui) taiwan led sector. dim ...the led industry in...

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