greater china smartphone sector 130904

See important disclosures, including any required research certifications, beginning on page 49

4 September 2013

Curtain call on new iPhones: likely winners and losers

• Probable new range: 5S (high-end), 5C (mid-range), 4S (low end) • We forecast total production of 90m units for 2H13, with the

high-end model accounting for only 38% vs. about 70% a year ago• We prefer EMS players over component companies. Top pick:

Hon Hai. Avoid Largan, AAC and TXC

Greater China Smartphone Sector

Information Technology / China and Taiwan

Positive (unchanged)

Neutral

Negative

How do we justify our view?How do we justify our view?

Greater China Smartphone Sector 4 September 2013

Contents

New iPhones: we prefer the EMS companies to the component suppliers ................................. 3

‘Wow’ factor likely to be limited for new iPhones .................................................................... 3

Market expectations are low .................................................................................................... 4

A change in focus in the product mix to the mid-range .......................................................... 4

EMS companies should do better; components makers likely to suffer .................................. 5

What we recommend ................................................................................................................ 5

Appendix I: Pan-Asia Apple iPhone 5S/5C supply chain ............................................................ 7

Appendix II: what’s new in iOS 7 ................................................................................................ 9

New features and a new look ................................................................................................... 9

Appendix III: fingerprint scanner .............................................................................................. 11

A closer look at the technology ............................................................................................... 11

Appendix IV: comparison of likely specs of 5S with those of other handsets ........................... 12

Appendix V: comparison of likely specs of 5C with those of other handsets ............................ 13 Company Section

Hon Hai Precision Industry .................................................................................................... 14

Largan Precision .................................................................................................................... 22

AAC Technologies .................................................................................................................. 30

TXC Corp ................................................................................................................................ 38

Pegatron Corp ........................................................................................................................ 42


■What’s new On 10 September, Apple is widely expected to unveil new iPhones. We outline our expectations for the new products and production volumes, and assess the implications for the Greater China supply chain. This report marks a transfer of coverage. ■ What’s the impact New iPhones: ‘wow’ factor likely to be limited. We expect Apple to announce two new handsets: a high-end flagship model (the 5S), and a new mid-range model (the 5C). We believe the 5S will be physically similar to the 5 but will have small upgrades to the battery, CPU and camera. The inclusion for the first time of a fingerprint scanner is likely to provide the only ‘wow’ factor. As for the 5C, we expect lower specs than for the 5, with a plastic, coloured casing and lower memory. We think prices for the 5C will range from USD429-479 (USD49-99 with a contract), and that Apple will keep the 4S, as the low-end model offered free by operators with a contract.

Market’s expectations low enough. Although we think the market sees limited spec upgrades for the new iPhones, we believe the market’s expectations on the iPhone volumes are too low. We forecast the total iPhone production volume to be 90m for 2H13, higher than the market’s expectation of 80-85m. Our research indicates that yield-rate issues with the fingerprint and display driver-ICs of the 5S, which are of concern to the market, were resolved recently. iPhone mix shifting focus to the mid-range. As the high-end smartphone segment is becoming saturated, we view the 5C as a clear indication that Apple is changing its focus to the mid-range segment. We forecast mid-range/legacy products to account for 62% of total iPhones for 2H13, up from 31% for 2H12. Electronic manufacturing services (EMS) players should do better than components suppliers. We expect the components firms to face increased pricing pressure, especially after the initial sell-in, due to the unfavourable product-mix change and the limited spec upgrades. Meanwhile, we believe the EMS firms – which are volume players – should enjoy scale benefits from the production-volume growth and possibly fast ramp-ups in yield rates due to the limited product-design changes. ■ What we recommend Within the Greater China Smartphone Sector, we prefer the EMS

companies when it comes to the forthcoming iPhones. For Hon Hai Precision Industry (Hon Hai), we reaffirm our Buy (1) rating given the 2H13 volume growth that we see from iPhones and overdone market concerns about new competition. We also like Pegatron Corp (Pegatron) for its expanding iPhone exposure. Among the components players, we downgrade both Largan Precision (Largan) and AAC Technologies (AAC) to Underperform (4) from Buy (1) due to rising margin risks on the back of the product-mix change. We downgrade TXC Corp (TXC) to Hold (3) from Buy (1) due to pricing pressure but see limited downside due to its undemanding valuation. The key risk to our sector view would be weaker-than-expected volumes for the new i-devices. ■ How we differ We are more positive on the iPhone production volume than the market for 2H13, but more concerned about pricing pressure on the components firms due to Apple’s product-mix change and limited spec upgrades to new products.

4 September 2013

Curtain call on new iPhones: likely winners and losers

• Probable new range: 5S (high-end), 5C (mid-range), 4S (low end) • We forecast total production of 90m units for 2H13, with the

high-end model accounting for only 38% vs. about 70% a year ago• We prefer EMS players over component companies. Top pick:

Hon Hai. Avoid Largan, AAC and TXC

Greater China Smartphone Sector

Key stock calls

Source: Daiwa forecasts.

Information Technology / China and Taiwan

Positive (unchanged)

Neutral

Negative

Kylie Huang(886) 2 8758 [email protected]

Jason Chen(886) 2 8758 [email protected]

New Prev.Hon Hai Precision Industry (2317 TT)Rating Buy BuyTarget 98.00 105.00Upside 19.5%

Largan Precision (3008 TT)Rating Underperform BuyTarget 920.00 1,250.00Downside 12.4%



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Source: Daiwa forecasts

Note: prices as of close on 3 September 2013

Sector stocks: key indicators

Share

Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg

AAC Technologies 2018 HK 36.50 Underperform Buy 33.50 44.50 (24.7%) 1.840 1.988 (7.4%) 2.046 2.489 (17.8%)

Hon Hai Precision Industry 2317 TT 82.00 Buy Buy 98.00 105.00 (6.7%) 8.177 8.759 (6.6%) 9.204 9.868 (6.7%)

Largan Precision 3008 TT 1,050.00 Underperform Buy 920.00 1,250.00 (26.4%) 65.796 64.826 1.5% 71.547 80.150 (10.7%)

Pegatron Corp 4938 TT 45.50 Buy Buy 62.00 62.00 0.0% 4.487 4.487 0.0% 5.962 5.962 0.0%

TXC Corp 3042 TT 40.50 Hold Buy 41.00 57.00 (28.1%) 3.115 4.062 (23.3%) 3.589 4.769 (24.7%)

Rating Target price (local curr.) FY1

EPS (local curr.)

FY2


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New iPhones: we prefer the EMS companies to the component suppliers

‘Wow’ factor likely to be limited for new iPhones

We expect two new iPhones this year Apple will hold a media event on 10 September, and is likely to unveil its new phones. We expect two new products – a high-end flagship model, the 5S, and a mid-range model, the 5C. We expect prices for the 5S to start at USD649 (USD199 with a contract) and for the 5C to range from USD429-479 (USD49-99 with a contract). We also believe Apple will keep the 4S in its line-up as a low-end model, free with a contract. We expect the 5S and 5C to have TD versions for the China market. Specs comparison – iPhone 5 vs. iPhone 5S and iPhone 5C Model iPhone 5S iPhone 5C iPhone 5

Photo

Launch date Sep-13 Sep-13 Sep-12 Price (Contract price) USD199 (16GB) USD49-99 (8GB) USD199 (16GB) Price (unlock price) USD649 (16GB) USD429-479 (8GB) USD649 (16GB)

Cellular LTE/ 3G TD-LTE

TD-SCDMA

3G TD-SCDMA

LTE/ 3G

Dimensions 123.8 x 58.6 x 7.6 mm 123.8 x 58.6 x 8.2 mm 123.8 x 58.6 x 7.6 mmWeight 112 g (3.95 oz) 125g(4.41 oz) 112 g (3.95 oz) Casing Aluminium Plastic Aluminium Colour Black/white/gold 6 colours Black/white Fingerprint scanner Yes No No Embedded OS iOS 7 iOS 7 iOS 6 Display diagonal 4.0" (Retina) 4.0"(Retina) 4.0"(Retina) Display resolution 1136 x 640 pixels 1136 x 640 pixels 1136 x 640 pixels PPI 326 ppi 326 ppi 326 ppi CPU Apple A7 dual-core Apple A6 dual-core Apple A6 dual-core ROM capacity 16/32/64/128GB 8/16GB 16/32/64GB RAM capacity 2GB 1GB 1GB Wireless LAN 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n Camera resolution 8 MP, f/2.0 8MP, f/2.4 8MP, f/2.4 Flash (Dual-LED flash) (Single-LED flash) (Single-LED flash) Camcorder 1080p@30fps 1080p@30fps 1080p@30fps

Secondary camera 1.2MP 1.2MP 1.2MP

Source: Company, Daiwa estimates

Note: We highlight the likely spec upgrades in dark blue and spec downgrades in light blue

Apple iPhone product profile expectations in 2H13 Category High-end Mid-range Low-end Model iPhone 5S iPhone 5C iPhone 4S

Photo

Price (contract price) USD199 (16GB) USD49-99 (8GB) USD0 (16GB) Price (unlock price) USD649 (16GB) USD429-479 (8GB) USD399 (16GB)

Source: Company, Daiwa forecasts

The 5S: fingerprint scanner may offer the only ‘wow’ factor, but value addition capped by lack of NFC Our market research suggests the 5S will be little different in appearance to the 5 (as was the case with the 4S and the 4), with small upgrades to the CPU, memory, battery, and camera, and the inclusion of a fingerprint scanner, which may be the only exceptional feature. We expect the fingerprint scanner to be used instead of passwords and the need to log in for some applications, and maybe to enhance security when one purchases items in the App Store. We believe this new feature would enhance the user experience but do not see it as a killer feature to attract consumers. In our view, the best use of a fingerprint scanner would be to enhance security, and provide privacy protection in an e-wallet environment. Meanwhile, our market research suggests there will be no NFC feature (which can turn the smartphone into an e-wallet) in the 5S. However, we do not see NFC as a technology whose time has come. While a good idea conceptually, the reality is that there is no international industry standard. The lack of an agreed standard is not just a “global” issue. There are no standards at a country level (or even at a city level), because of vested interests of the phone makers, credit-card issuers, mobile-service providers, and other related parties. Each party wants to take the lead, handle transactions, keep client data, and collect fees. Another limitation is that equipping smartphones with an NFC chip is not all that is required – two-way communication is needed for NFC to work. On the retail side, all shops and outlets would have to install scanners. This leads to the question of who would subsidise the hardware costs for retail stores (many of which may be mom-and-pop shops, rather than chain stores). iPhone 5C and iPhone 4S Based on our market research, we expect the mid-range 5C to be a lower-specification version of the 5, with a plastic, coloured casing and less memory. We think Apple will no longer offer the 5, replacing it with the 5C.


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The iPhone 5C should be a little thicker than the 5 due to the change in the casing material, but the other features – such as the camera specs, display resolution, and acoustic design– should remain the same. We expect prices for the 5C to range from USD429-479, targeting the mid-range smartphone segment. Our research also indicates that Apple will keep making the 4S, as a low-end model that is free with a contract.

Market expectations are low

Although we expect limited spec upgrades in the new iPhones, we believe market expectations of iPhone production volume in 2H13 are low. The market appears to be worried that production yield-rate issues for the 5S will affect production volume this year. Our research suggests that production bottlenecks on the 5S – possible yield-rate issues with the fingerprint IC and display-driver IC – were resolved recently. We now expect mass production of the iPhone 5S to start in September, and forecast total iPhone production volume of 90m for 2H13, a 36% HoH rise compared with the 26% HoH increase for 2H12, and higher than the market’s recently cut expectation of 80-85m. iPhone total production volume forecasts by quarter


Note: This chart represents Daiwa’s iPhone production forecasts, which should be slightly different from the iPhone sales figures announced by Apple

A change in focus in the product mix to the mid-range

IDC forecasts a high-end smartphone shipments (those retailing at more than USD500) CAGR of 3.9% for 2013-15 compared with a CAGR of 19.4% for all smartphones over the same period. As Apple has to face the challenge of the high-end smartphone segment becoming saturated, we view its forthcoming iPhone 5C as a clear indication of the company’s strategy shift to a more mid-range focus. We forecast its mid-range/legacy phones to account for 62% of total iPhones for 2H13 compared with 31% for 2H12.

Global smartphone shipment forecasts by segment

Source: IDC, Daiwa forecasts

Note: We define low-end smartphones as those that cost less than USD200, mid-range as those costing USD200-500 and those costing more than USD500 as high-end

Global smartphone shipment forecasts by segment mix

Source: IDC, Daiwa forecasts

iPhone: production-volume forecasts by model (m units) 1Q13 2Q13 3Q13E 4Q13E 2013EiPhone 4 & 4S 15.5 12.0 10.0 7.5 45.0iPhone 5 20.0 18.5 8.5 - 47.0 iPhone 5C - - 10.0 20.0 30.0 iPhone 5S - - 5.0 29.0 34.0 Total 35.5 30.5 33.5 56.5 156.0


Note: This table represents Daiwa’s iPhone production forecasts, which will be slightly different from Apple’s iPhone sales figures

iPhone: production volume forecast by model mix


Note: This chart represents Daiwa’s iPhone production forecasts, which will be slightly different from Apple’s iPhone sales figures

0

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2012 2013E 2014E 2015E

(m units)

Low-end (LHS) Mid-range (LHS) High-end (LHS)Low-end YOY (RHS) Mid-range YoY (RHS) High-end YoY (RHS)Total YoY (RHS)

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iPhone 3GS iPhone 4&4S iPhone 5 iPhone 5C iPhone 5S

Flagship Model

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Mid-range/ legacy models


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EMS companies should do better; components makers likely to suffer

We consider Apple’s change in iPhone strategy – ie, moving from purely high-end iPhones to focus more on a mid-range one – and the implications on the supply chain. The EMS companies that focus on volume and delivering on the overall yield rate should benefit from the change in product mix, due to scale benefits from the volume growth and because they expect a fast ramp-up in the yield rate (because the design of the mid-range iPhone is not that different from the original design). However, we think the components makers could be adversely affected by the introduction of the new mid-range phone. Based on our estimates, the bill of material (BOM) cost for the iPhone 5C might be only 10-15% lower than that of the iPhone 5, but the retail price could be 25-35% lower than the iPhone 5, which implies to us that Apple might carry a lower margin for the iPhone 5C and it could, in turn, put more pressure on its component vendors. In addition, the market widely expects the components specs for the iPhone 5C to be the same as those for the iPhone 5, which should give Apple even more room to squeeze its vendors. We also see less pricing bargaining power for the vendors involved in making the iPhone 5S, due to the limited specs upgrades. We think this will be especially true for Apple’s main components suppliers, Largan and AAC (which usually enjoy better pricing power on new product launches, on the back of spec upgrades and better yield-rate delivery compared with Apple’s second-tier suppliers), given Apple’s decision to introduce a mid-range product with limited component spec improvements. Apple: Daiwa’s forecasts for the iPhone 5C Unit: USD iPhone 5 iPhone 5C

Retail price 649 429-479

Factory ASP 550 370-410

BOM cost 240 210

Other cost 60 50

Total COGS 300 260

Gross profit 250 110-150

Gross margin (%) 45% 30-37%


Component ASP – product life cycle


Notes: x-axis is the month that a new product is launched, and y-axis is. the original ASP and how it declines over time

What we recommend

Prefer EMS companies to the components makers In terms of the forthcoming iPhones, we are confident about the production-volume growth outlooks for 2H13 for both the EMS companies and the components makers, but we are concerned about the pricing pressure that the component makers are likely to face due to the change in Apple’s product mix. We believe Apple’s iPhone product-mix shift to a more mid-range focus could benefit the EMS vendors, but result in margin risk for the components vendors.

Within the Greater China Smartphone Sector, Hon Hai is our top pick as we see its earnings-growth momentum resuming in 2H13, driven by the launch of the next wave of i-devices and because we think the market’s concerns about new competition are overdone. We suggest investors avoid the leading components companies, Largan and AAC, due to rising margin risks on the back of the change in iPhone mix.

Following are our ratings and valuations for the Greater China iPhone supply chain stocks that we cover.

Hon Hai (2317 TT, TWD82.00, Buy [1], TP: TWD98)

We reiterate our Buy (1) rating on Hon Hai and believe the company will be the major beneficiary of the new i-devices. Our six-month target price is TWD98, based on a one-year forward PER of 11x (its past-three-year average). We forecast Hon Hai to regain its revenue-growth momentum in 2H13, as we expect the company to become the sole supplier for both the iPhone 5S and the next iPad, and that it will secure 25-30% of the mid-range iPhone orders. Moreover, we foresee margin

75%

80%

85%

90%

95%

100%

1 2 3 4 5 6 7 8 9

(Month)

Component ASP Cycle


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expansion for Hon Hai given its cost savings from relocating its production plants inland within China, increasing vertical integration and automation, as well as the product-mix change of its major client, Apple. The main risk to our rating would be slower-than-expected margin expansion. Largan (3008 TT, TWD1,050.00, Underperform [4], TP: TWD920)

We are downgrading our rating on Largan to Underperform (4) from Buy (1). We like Largan for its quality management and leading industry position, but we foresee pricing pressure in 4Q13 and think its current valuation of 16x 2013E PER is unattractive compared with its past-three-year average of 14x. For 2H13, we expect its earnings-growth momentum to slow from 4Q13 given the change in the iPhone product mix and limited contribution from new clients, after a stellar 3Q13 on the back of new product launches and the effects of the peak season. Our new six-month target price is TWD920, based on a one-year rolling-forward PER of 14x. The major risk to our negative view would be better-than-expected orders from new clients. AAC (2018 HK, HKD36.50, Underperform [4], TP: HKD33.50)

We are downgrading our rating on AAC to Underperform (4) from Buy (1). Our new six-month target price is HKD33.50, based on a one-year forward PER of 14x (in line with its past-three-year average). We are concerned about the saturation that we see in the high-end smartphone market and consider the stock‘s current valuation, at a one-year forward PER of 15.4x, unjustified. Furthermore, we believe AAC could be negatively affected by its major client’s product-mix change, with limited spec upgrades resulting in more severe pricing pressure. Overall, we expect AAC’s earnings growth to decelerate to a double-digit percentage YoY in the following 2-3 years from 70% for 2012. A better-than-expected margin would be the major upside risk to our negative view.

TXC (3042 TT, TWD40.50, Hold [3], TP: TWD41)

We are downgrading our rating on TXC to Hold (3) from Buy (1). We believe the worst of unfavourable currency fluctuations are now over for TXC and forecast 15% HoH revenue growth for 2H13. However, we expect TXC to experience pricing pressure in 2H13, on the back of its major client’s product-mix change. As such, we are more cautious than the market on the company’s margin expansion for 2013 and forecast a mild recovery in the operating margin to 11.5-12.0% for 2H13 (from 9.5-10% for 1H13). We believe TXC could regain its revenue-growth momentum in 2014, given the start of revenue contributions from new clients and its solid i-device orders. Our new six-month target price is TWD41, now based on a one-year forward PER of 12.5x (in line with its past-three-year average). The main upside risk to our view would be faster-than-expected margin recovery, while the main downside risk would be further sharp Yen depreciation.


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Appendix I: Pan-Asia Apple iPhone 5S/5C supply chain Pan-Asia Apple iPhone 5S/5C supply chain Part Ticker Manufacturer iPhone 5S allocation iPhone 5C allocationSemiconductor

Processor 005930 KS Samsung Electronics 100% 100%4G modem QCOM US Qualcomm 100% 100%Wifi module 6981 JP Murata 70% 70% 6762 JP TDK 30% 30%WIFI, Bluetooth, GPS BRCM US Broadcom 100% 100%Nand Flash 6502 JP Toshiba 65% 65% 000660 KS SK Hynix 35% 35%Mobile DRAM 005930 KS Samsung 20% 20% 000660 KS SK Hynix 40% 40% MU US Micron (Elpida) 40% 40%PWM IC DLG GR Dialog Semiconductor 100% 100%AP substrate 009150 KS SEMCO 50% 50% 4062 JP Ibiden 50% 50%Display Incell TFT 6753 JP Sharp 20-25% 20-25% Not listed Japan Display 40% 40% 034220 KS LGD 35-40% 35-40%Polarizer 6988 JP Nitto Denko 40% 40% 4005 JP Sumitomo Chemi 60% 60%Display driver IC 6723 JP Renesas 100% 100%Component

8MP camera module 011070 KS LG Innotek 50% 50% 6753 JP Sharp 50% 50%8MP camera lens 3008 TT Largan 85-90% 60-70% 3406 TT Genius 10-15% 30-40%1.3MP camera lens 3406 TT Genius 40-50% 40-50% 3008 TT Largan 30-40% 30-40% Private Kantatsu 10-20% 10-20%VCM for lens module 6770 JP ALPS 60% 60% 6767 JP Mitsumi 40% 40%1.3 MP CMOS sensor OVT US Omni vision 100% 100%8MP CMOS sensor 6758 JP SONY 100% 100%MLCC 6981 JP Murata 40-45% 40-45%

009150 KS SEMCO 20-30% 20-30% 6976 JP Taiyo Yuden 10-20% 10-20% 6762 JP TDK 0-5% 0-5%Duplexer 6981 JP Murata 10-15% 10-15% 6762 JP TDK 20-30% 20-30% TQNT US Triquint 15-20% 15-20% AVGO US Avago 15-20% 15-20% 6752 JP Panasonic 20-30% 20-30%Antenna switch module 6981 JP Murata 100% 100%Connector 6807 JP Japan Aviation 35% 35% 6981 JP Murata 20% 20% MOLX US Molex 10% 10% 6752 JP Panasonic 20% 20% 6806 JP Hirose 15% 15%Connector, cable and charger 2392 TT Cheng Uei 70% 70% 6290 TT Longwell 15% 15% 3501 TT Wellshin 15% 15%



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Part Ticker Manufacturer iPhone 5S allocation iPhone 5C allocationComponent (Cont’d)

Crystal 3042 TT TXC 40% 40% 6779 JP NDK 40% 40%Power inductor 6762 JP TDK 30% 30% 6976 JP Taiyo Yuden 30% 30% Not listed Cymtec (Taiwan) 30% 30% 6801 JP Toko 10% 10%Vibration 6594 JP Nidec 100% 100%HDI PCB 4062 JP Ibiden 40% 40% 2313 TT Compeq 15-25% 15-25%

011070 KS LG Innotek 10-20% 10-20%3037 TT Unimicron 10-15% 10-15%

Flexible PCB 7240 JP NOK 15-20% 15-20% 5802 JP Sumitomo 15-20% 15-20% 4958 TT ZD Tech 10-15% 10-15% MFLX US M-flex 10-15% 10-15%

5803 JP Fujikura 10-15% 10-15%051370 KS Interflex 10% 10%6269 TT Flexium 5-10% 5-10%

Acoustic 2018 HK AAC 50% 50% 002241 CH Goertek 35-40% 35-40% Private Knowles 10-15% 10-15%PA TQNT US Triquint 25-50% 25-50% SWKS US Skyworks 25% 25% AVGO US Avago 25-50% 25-50%Metal casing 2317 TT Hon Hai 40% n.a. 2354 TT Foxconn Tech 40% n.a. JBL US Jabil 20% n.a.Plastic casing 2317 TT Hon Hai n.a. 30-40% JBL US Jabil n.a. 30-40% HIP SP Hi-P n.a. 20-30%Fingerprint sensor Private AuthenTec 100% n.a.Fingerprint scanner (module) SYNA US Snaptics 100% n.a.Gyro sensor INVN US Invensense 100% 100%Battery cell 6762 JP TDK/ATL 20-25% 20-25% Private Tianjin Lishen 20-25% 20-25% 006400 KS Samsung SDI 20-25% 20-25% 051910 KS LG Chemical 20-25% 20-25%Battery packaging 6121 TT Simplo 50-60% 50-60% 3211 TT Dynapack 40-50% 40-50%Assembling 2317 TT Hon Hai 100% 25-30% 4938 TT Pagatron 0% 70-75%



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Appendix II: what’s new in iOS 7

New features and a new look

Arguably the most sweeping redesign of the iOS since it was launched in 2007, iOS 7 is expected to be released in mid-September. We believe the new iPhones will come pre-installed with the new OS, and some older iPhone models will be able to upgrade to it. Judging from the beta versions now in testing, we expect key upgrades in the new OS to include: 1) a new, more modern design, 2) new features such as AirDrop, Control Center, and enhanced multitasking, and 3) new features specifically designed for business users. Visual overhaul With Apple’s hardware design head Jonathan Ive now tasked with overseeing Human Interfaces in the company’s software, too, the icons and home screen in iOS 7 have an all-new look. Bars, buttons and shadows under icons and text on the home screen have been removed, though the underlying mode of interacting with the software is unchanged. We think the stripped-down, refined design of iOS 7 will impress users. iOS 6 (RHS) vs. iOS 7 (LHS): home screen comparison

Source: Company, Daiwa

iOS 6 (LHS) vs. iOS 7 (RHS): icon comparison


iOS 6 (RHS) vs. iOS 7 (LHS):UI comparison


New features Apple has added many new features, but we think AirDrop and Control Center are among the most impressive additions. Others, such as updates to Siri and the Photos app, along with iTunes Radio, may not be eye-catching enough, in our view.


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1) AirDrop With supported iDevices, this feature allows iOS users to share pictures, videos and other items from any app and save them in a convenient, secure way using WiFi and Bluetooth. One of the selling points is that no prior set-up is required. 2) Control Center The new Control Center in iOS 7 gives users a way to access commonly-used features with a simple swipe gesture. The five (non-customisable) rows in the beta software include mode setting (Airplane, Wi-Fi, Bluetooth, Do Not Disturb mode and Rotation Lock), brightness control, multimedia controls with a sound-volume bar, shortcuts for AirDrop and AirPlay, and quick access to the LED flashlight, timer, calculator, and camera. 3) Multitasking Given improved battery management, multitasking allows users to switch between different apps in the background, almost instantly, without draining resources. Similar to HTC’s Sense Task switcher, screenshots of previously opened apps are displayed and applications can be closed with a simple swipe gesture. Among the other new features are an image editor incorporated into the Photos app, clearer, more natural-sounding female or male voices in Siri, and the new iTunes Radio service.

New features in iOS 7: AirDrop (LHS), Control Center (middle) and Multitasking (RHS)


New features for business iOS 7 incorporates several upgrades designed to cater to business users, such as per-app virtual private network (VPN) connections, enterprise single sign on (SSO), and new mobile device management (MDM) configuration options. Overall, iOS 7 appears to offer enhanced security management functions.


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Appendix III: fingerprint scanner

A closer look at the technology

A fingerprint sensor is an electronic device widely used for personal identification and verification, since it can capture the loops, arches and spirals that make every fingerprint unique. Such a system would be useful on mobile devices, as the security of mobile data is a growing concern among many users. There are several fingerprint sensor technologies, but the most commonly used today are optical-based sensors and capacitance-based sensors. Optical-based sensors Similar to digital cameras and camcorders, optical-based fingerprint sensors detect fingerprints by illuminating the surface of the finger. A charge-coupled device (CCD) system is used in the scanner to generate electrical signals in response to a fingerprint, from which a digital image is generated. This is a relatively low-cost solution, but the system’s accuracy can be affected by dirt and the hardware is prone to damage. Capacitance-based sensors Capacitance-based sensors, on the other hand, contain small capacitive plates in which integrated circuits detect very low electrical charges sent from the user’s finger. By sensing the difference in the voltage output of a finger's ridges and valleys, the sensor forms the image of the fingerprint.

AuthenTec: acquired by Apple in 2012 Apple acquired AuthenTec, a developer of fingerprint sensor technology, for USD356m in cash (USD8 a share) on 27 July 2012. AuthenTec has long provided security solutions for global handset makers including Samsung, Nokia, Motorola and LG. On 8 May 2012, it announced that it had developed “its first smart sensor specifically tailored for secure NFC mobile commerce”. AuthenTec’s fingerprint technology is a type of capacitance-based sensor incorporating capacitive and RF technologies in its biometric chips to capture the fingerprint image. We expect Apple to incorporate the fingerprint sensor under a durable, sapphire-covered, convex-shaped home button in the 5S, and to use it to provide secure authentication for various transactions without requiring the user to enter a password. Cross-section of AuthenTec's fingerprint sensor



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Appendix IV: comparison of likely specs of 5S with those of other handsets

iPhone 5S vs. flagship models from global tier-one brands Model iPhone 5S Samsung Galaxy S4 Nokia Lumia 1020 Motorola Moto X Sony Xperia ZL LG G2 HTC One BlackBerry Q10

Photo

Release date Sep-13 Apr-13 Jul-13 13-Aug Mar-13 3Q13 Mar-13 Apr-13 Current unlocked price USD649/749/849 USD619.99 USD759.50 TBD $549.99 TBD USD649.99 (32GB) USD579.99 Dimensions 123.8 x 58.6 x 7.6 mm 136.6 x 69.8 x 7.9 mm 130.4 x 71.4 x 10.4 mm 129.3 x 65.3 x 10.4 mm 131.6 x 69.3 x 9.8 mm 138.5 x 70.9 x 8.9 mm 137.4 x 68.2 x 9.3 mm 119.6 x 66.8 x 10.4 mm Weight: 112 g (3.95 oz) 130 g (4.59 oz) 158 g (5.57 oz) 130 g (4.59 oz) 151 g (5.33 oz) 143 g (5.04 oz) 143 g (5.04 oz) 139 g (4.90 oz) Embedded OS iOS 7 Android 4.2.2 MS Windows Phone 8 Android 4.2.2 Android 4.1.2 Android 4.2.2 Android 4.1.2 BlackBerry 10 OS Display diagonal 4.0" (Retina) 5.0" Super AMOLED 4.5" AMOLED 4.7" AMOLED 5.0'' 5.2'' IPS 4.7" Super LCD3 3.1" Super AMOLED Display resolution 1136 x 640 pixels 1080 x 1920 pixels 768 x 1280 pixels 720 x 1280 pixels 1080 x 1920 pixels 1080 x 1920 pixels 1080 x 1920 pixels 720 x 720 pixels PPI 326 ppi 441 ppi 332 ppi 312 ppi 441 ppi 424 ppi 469 ppi 328 ppi Fingerprint scanner Yes No No No No No No No CPU Apple A7 Dual-core Cortex-A15 & A7 Quad-

core Qualcomm MSM8960 Snapdragon Dual-core

Qualcomm MSM8960 Pro Snapdragon Dual-

core

Qualcomm MDM9215M / APQ8064 Quad-core

Qualcomm MSM8974 Snapdragon 800 Quad-

core

Qualcomm APQ8064T Snapdragon 600 Quad-

core

Snapdragon S4 Dual-core

CPU Clock 1.6GHz 1.6 & 1.2 GHz 1.5 GHz 1.7 GHz 1.5 GHz 2.26 GHz 1.7 GHz 1.5 GHz ROM capacity: 16/32/64/128GB 16/32/64GB 32GB 16/32GB 16GB 32GB 16/32/64GB 16GB RAM capacity 2GB 2GB 2GB 2GB 2GB 2GB 2GB 2GB Wireless LAN 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n/ac 802.11 a/ac/b/g/n 802.11 a/b/g/n GPS Yes Yes Yes Yes Yes Yes Yes Yes Camera resolution 8MP 13MP 41MP 10MP 13MP 13MP 4MP 8MP Aperture f/2.0 f/2.2 n.a. n.a. f/2.2 f/2.4 f/2.0 n.a. Autofocus (AF) Yes Yes Yes Yes Yes Yes Yes Yes Flash (dual-LED flash) (Single-LED flash) Xenon & LED flash (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) Camcorder 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps

Secondary camera 1.2MP 2MP 1.2MP 2MP 2MP 2.1MP 2.1MP 2MP Battery capacity Li-Po 1600mAh Li-Ion 2600 mAh Li-Ion 2000 mAh Li-Ion 2200 mAh Li-Ion 2370 mAh Li-Po 3000 mAh Li-Po 2300 mAh Li-Ion 2100 mAh Loudspeaker Yes Yes Yes Yes Yes Yes Yes Yes

Source: Companies, Daiwa

Note: specs for the iPhone 5S are likely rather than confirmed

iPhone 5S vs. flagship models from China brands Model iPhone 5S Lenovo K900 ZTE GrandS Huawei Ascend D2 Huawei Ascend P2 Oppo Find 5 Nubia Z5 vivo Xplay

Photo

Release date Sep-13 Apr-13 Mar-13 Mar-13 Apr-13 Feb-13 2013 2013 Current unlocked price USD649/749/849 CNY2580 (16GB) CNY2600 CNY2750 CNY2999 CNY2998 CNY2788 CNY2998 Dimensions 123.8 x 58.6 x 7.6 mm 157 x 78 x 6.9 mm 142 x 70 x 6.9mm 140 x 71 x 9.4 mm 136.2 x 66.7 x 8.4 mm 141.8 x 68.8 x 8.9 mm 138 x 68.8 x 7.6mm 153.8 x 79.9 x 8mm Weight: 112 g (3.95 oz) 162 g (5.71 oz) 110 g (3.88 oz) 170 g (6.00 oz) 122 g (4.30 oz) 165 g (5.82 oz) 126 g (4.44 oz) 187 g (6.60 oz) Embedded OS iOS 7 Android 4.2 Android 4.1 Android 4.1 Android 4.1.2 Android 4.1 Android 4.2 Android 4.2 Display diagonal 4.0" (Retina) 5.5" IPS 5.0" IPS 5.0" IPS 4.7" IPS 5.0" IPS 5.0" OGS 5.0" IPS Display resolution 1136 x 640 pixels 1080*1920 pixels 1080*1920 pixels 1080*1920 pixels 720 x 1280 pixels 1080*1920 pixels 1080*1920 pixels 1080*1920 pixels PPI 326 ppi 401 ppi 441 ppi 441 ppi 312 ppi 441 ppi 441 ppi 386 ppi Fingerprint scanner Yes No No No No No No No CPU Apple A7 Dual-core Intel Atom Z2580 Dual-core Qcom APQ8064

Quad-core Haisi K3V2 Quad-core Haisi K3V2 Quad-core Qualcomm APQ8064

Snapdragon Qualcomm APQ8064

Snapdragon Qualcomm APQ8064

Snapdragon CPU Clock 1.6GHz 2.0GHz 1.5GHz 1.5GHz 1.5GHz 1.5GHz 1.5GHz 1.6GHz ROM capacity: 16/32/64/128GB 16/32 GB 16GB 32GB 16GB 16GB 16GB 16GB RAM capacity 2GB 2GB 2GB 2GB 1GB 2GB 2GB 2GB Wireless LAN 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 b/g/n 802.12 b/g/n GPS Yes Yes Yes Yes Yes Yes Yes Yes Camera resolution 8MP 13MP 13MP 13MP 13MP 13MP 13MP 13MP Aperture f/2.0 f/1.8 n.a. n.a. n.a. f/2.2 f/2.2 f/2.2 Autofocus (AF) Yes Yes Yes Yes Yes Yes Yes Yes Flash (dual-LED flash) dual-LED LED flash LED flash LED flash LED flash LED flash LED flash Camcorder 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps

Secondary camera 1.2MP 2MP 2MP 1.3MP 1.3MP 1.9MP 2MP 5MP Battery capacity Li-Po 1600mAh Li-Po 2500 mAh Li-Ion 1780 mAh Li-Ion 3000 mAh Li-Ion 2420 mAh Li-Ion 2500 mAh 2300mAh 3400mAh Loudspeaker Yes Yes Yes Yes Yes Yes Yes Yes


Note: specs for the iPhone 5S are likely rather than confirmed


- 13 -

Appendix V: comparison of likely specs of 5C with those of other handsets iPhone 5C vs. mid-range models from global tier-one brands Model iPhone 5C Samsun Galaxy S4 mini Nokia Lumia 925 Motorola DROID Mini Sony Xperia ZR LG Optimus L9 II HTC Desire 600 dual sim

Photo

Release date Sep-13 Jul-13 Jul-13 13-Aug Jun-13 3Q13 Jun-13 Current unlocked price USD429-479 (8GB) USD429.99 USD490.00 (16GB) TBD USD479.99 TBD USD449.99 Dimensions 123.8 x 58.6 x 8.2 mm 124.6 x 61.3 x 8.9 mm 129 x 70.6 x 8.5 mm 121.3 x 61.3 x 8.9 mm 131.3 x 67.3 x 10.5 mm TBD 134.8 x 67 x 9.3 mm Weight 125 g (4.41 oz) 107 g (3.77 oz) 139 g (4.90 oz) 130 g (4.59 oz) 138 g (4.87 oz) TBD 130 g (4.59 oz) Embedded OS iOS 7 Android 4.0.4 MS Windows Phone 8 Android 4.2 Android 4.1 Android OS, v4.1 Android 4.1.2 Display diagonal 4.0"(Retina) 4.8" Super AMOLED 4.5" AMOLED 4.3" 4.55" 4.7" True HD-IPS 4.5" Super LCD2 Display resolution 1136 x 640 pixels 720 x 1280 pixels 768 x 1280 pixels 720 x 1280 pixels 720 x 1280 pixels 720 x 1280 pixels 540 x 960 pixels PPI 326 ppi 306 ppi 332 ppi 342 ppi 323 ppi 312 ppi 245 ppi CPU: Apple A6 Dual-core Exynos 4412 Quad-core Qualcomm MSM8960

Snapdragon Dual-core Qualcomm Snapdragon

S4Pro Dual-core Qualcomm Snapdragon

APQ8064 Quad-core Qualcomm 8230

Snapdragon 400 Dual-core

Qualcomm MSM8625Q Snapdragon 200 Quad-

core CPU clock: 1.3GHz 1.4 GHz 1.5 GHz 1.7 GHz 1.5 GHz 1.4 GHz 1.2 GHz ROM capacity 8/16GB 8GB 16/32GB 16GB 8GB 8GB 8GB RAM capacity 1GB 1.5GB 1GB 2GB 2GB 1GB 1GB Wireless LAN 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n/ac 802.11 b/g/n 802.11 b/g/n GPS: Yes Yes Yes Yes Yes Yes Yes Camera resolution 8MP 8MP 8MP 10MP 13.1 MP 8MP 8 MP Aperture f/2.4 n.a. f/2.0 n.a. n.a. n.a. f/2.0 Autofocus (AF) Yes Yes Yes Yes Yes Yes Yes Flash (Single-LED flash) (Single-LED flash) (Dual-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) Camcorder 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 720p@24fps

Secondary camera 1.2MP 1.9MP 1.3MP 2MP VGA 1.3MP 1.6MP Battery capacity Li-Ion 1600 mAh Li-Ion 1900 mAh Li-Ion 2000 mAh Li-Ion 2000 mAh Li-ion 2300 mAh Li-Ion 2150 mAh Li-Ion 1860 mAh Loudspeaker Yes Yes Yes Yes Yes Yes Yes


Note: specs for the iPhone 5C are likely rather than confirmed

iPhone 5C vs. mid-range models from China brands Model iPhone 5C Xiaomi 2S ZTE U5 (Grand Memo) Huawei Mate Huawei Ascend P6 Oppo R819T Vivo X1St

Photo

Release date Sep-13 Apr-13 Mar-13 Mar-13 Jun-13 3Q13 Aug-13 Current unlocked price USD429-479 (8GB) CNY 2088 (32GB) CNY2120 CNY2400 CNY2400 CNY2298 CNY2498 Dimensions 123.8 x 58.6 x 8.2 mm 126 x 62 x 10.2 mm 159.9 x 82.4 x 8.5mm 163.5 x 85.7 x 9.9 mm 132.7 x 65.5 x 6.2 mm 136.5 x 68 x 7.3mm 136.3 x 68.3 x 6.55mm Weight 125 g (4.41 oz) 145 g (5.11 oz) 189g (6.65 oz) 198 g (6.98 oz) 120g (4.23 oz) 110 g (3.88 oz) 143g (5.03 oz) Embedded OS iOS 7 Android 4.1 Android 4.1.2 Android 4.1 Android 4.2 Android 4.2 Android 4.2 Display diagonal 4.0"(Retina) 4.3" IPS 5.7" IPS 6.1"IPS 4.7" IPS 4.7" IPS 4.7" IPS Display resolution 1136 x 640 pixels 720*1280 pixels 720*1280 pixels 720*1280 pixels 720*1280 pixels 720 x 1280 pixels 720*1280 pixels PPI 326 ppi 342 ppi 258 ppi 241 ppi 312 ppi 312 ppi 312 ppi CPU: Apple A6 Dual-core Qcom APQ8064 Pro Quad-

core Nvidia Tegra3 Quad-core Haisi K3V2 Quad-core Haisi K3V2E Quad-core MediaTek MT6589 Quad-

core MediaTek MT6589 Quad-

core CPU clock: 1.3GHz 1.7GHz 1.5GHz 1.5GHz 1.5GHz 1.2 GHz 1.2 GHz ROM capacity 8/16GB 16/32GB 16GB 8GB 8GB 16GB 16GB RAM capacity 1GB 2GB 2GB 2GB 2GB 1GB 1GB Wireless LAN 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 a/b/g/n 802.11 b/g/n 802.11 a/b/g/n GPS: Yes Yes Yes Yes Yes Yes Yes Camera resolution 8MP 8MP 13MP 8MP 8MP 8MP 8MP Aperture f/2.4 f/2.0 n.a. n.a. f/2.0 f/2.0 f/2.2 Autofocus (AF) Yes Yes Yes Yes Yes Yes Yes Flash (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) (Single-LED flash) Camcorder 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p@30fps 1080p n.a. Secondary camera 1.2MP 2MP 1MP 1MP 5MP 2MP 1.3MP Battery capacity Li-Ion 1600 mAh Li-Ion 2000 mAh Li-ion 3200 mAh Li-Ion 4050 mAh Li-Po 2000 mAh 2000 mAh 2000mAh Loudspeaker Yes Yes Yes Yes Yes Yes Yes


Note: Specs for the iPhone 5C are likely rather than confirmed


■ What's new We like Hon Hai and regard market concerns about competition as overdone. This report marks the transfer of analyst coverage. ■What's the impact We see strong earnings growth in 2H13. We assume Hon Hai will be the sole assembly company for both the iPhone 5S and next iPad, and that it is likely to secure 25-30% of the mid-range iPhone 5C orders. Thanks to its better product mix and increasing operating leverage, we forecast its earnings to grow by 90% HoH for 2H13. The robust 2H13 should enable Hon Hai to post modest earnings growth on a YoY basis for 2013, despite a tough year for its main customer Apple. Concerns about competition seem overdone. We think Hon Hai’s competitive cost structure, quick time to mass production and superior execution capability are hard to duplicate, and that Apple is

unlikely to add a new iPhone assembler until 2H14, if it does at all. We expect Hon Hai to remain Apple’s major EMS partner, and assume a 75-80% order allocation for the iPhone/iPad in 2014. Margin expansion on the way. Thanks to cost savings from the relocation of Hon Hai’s production to inland China, more stable ASP environment, and the favourable trend that we see from its major client’s move to the mid-range iPhone focus, we expect Hon Hai’s operating margin to expand from 2.8% for 2012 to 2.9%/3.1% for 2013/14, respectively. ■ What we recommend Following our transfer of coverage, we lower our 2013-15E EPS by 3-7%. We reaffirm our Buy (1) rating and lower our six-month target price to TWD98 (from TWD105), based on a one-year forward PER of 11x (12x 2013E previously), the stock’s past-three-year average. Its strong 2H13E earnings growth should act as a share-price catalyst and be a positive for active investors. We would also advise long-term investors to gradually accumulate the shares as we think they are underpriced given the market’s overly pessimistic view on Hon Hai’s position in the Apple supply chain. Risk would be slower-than-expected margin expansion.

How we differ We are more positive than the market on the firm’s order allocation for new iPhones and its margin expansion.

Information Technology / Taiwan2317 TT

4 September 2013

Hon Hai Precision Industry

Strong earnings growth in 2H13; margin expansion on the way

• As Apple’s major EMS partner, Hon Hai is well positioned to enjoy shipment growth when the new i-devices are launched

• Market concerns about competition appear overdone. We forecast Hon Hai to account for 75-80% of iPhone/iPad orders

• Reaffirm Buy (1) rating; we expect secular earnings growth in 2H13 to be a near-term share-price catalyst


Source: FactSet, Daiwa forecasts

Information Technology / Taiwan

Hon Hai Precision Industry2317 TT

Target (TWD): 105.00 98.00Upside: 19.5%3 Sep price (TWD): 82.00

Buy (unchanged)

OutperformHoldUnderperformSell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (3.1) (1.9) (0.7)Net profit change (6.6) (6.7) (2.7)Core EPS (FD) change (6.6) (6.7) (2.7)

70

79

88

96

105

65

74

83

91

100

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

Share price performance

Hon Hai P (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 70.00-97.50Market cap (USDbn) 32.563m avg daily turnover (USDm) 86.63Shares outstanding (m) 11,836Major shareholder Terry Kuo (12.5%)

Financial summary (TWD)Year to 31 Dec 13E 14E 15ERevenue (m) 3,825,580 4,202,250 4,617,520Operating profit (m) 109,029 130,270 145,452Net profit (m) 96,782 108,936 123,965Core EPS (fully-diluted) 8.177 9.204 10.474EPS change (%) 1.7 12.6 13.8Daiwa vs Cons. EPS (%) 5.9 10.3 18.6PER (x) 10.0 8.9 7.8Dividend yield (%) 2.5 2.8 3.2DPS 2.0 2.3 2.6PBR (x) 1.3 1.2 1.1EV/EBITDA (x) 4.9 3.9 3.1ROE (%) 14.1 14.2 14.4




- 15 -

Growth outlook Hon Hai: sales growth, EPS growth and ROE trend

After disappointing 1H13 results due to inventory adjusments by Hon Hai’s main client, we expect the company’s revenue growth momentum to resume in late-3Q13 on the back of the launch of new i-devices. We expect Hon Hai to be the sole assembler for both the iPhone 5S and the next iPad, while it should also secure 25-30% of orders for the mid-range iPhone. As a result, we expect the company’s top line to rise by 24.4% HoH for 2H13E and 9.8% YoY for 2014E. On back of the company’s increasing operating leverage, we forecast Hon Hai’s earnings to grow by 90% HoH for 2H13 and 12.6 % YoY in 2014. Source: Company, Daiwa forecasts

Valuation Hon Hai: one-year forward PER bands

Following our transfer of coverage, we are cutting our2013/2014/2015 EPS forecasts by 7%/7%/3% to TWD8.2/TWD9.2/TWD10.5, respectively. We set our new six-month target price at TWD98 (from TWD105), now based on a one-year forward PER of 11x, the stock’s past-three-year average. We believe a PER methodology is the most appropriate way to evaluate downstream tech firms such as Hon Hai. We acknowledge that there are flaws with a PER methodology, such as a lack of insight into the long-term business outlook, a mismatch between earnings/cash flow, etc. But we think it is a more straightforward, intuitive and arguably more accurate way to predict a tech company’s earnings power, at least in the near term.

Source: TEJ, Daiwa forecasts

Earnings revisions Hon Hai: Bloomberg 2013-14E EPS forecast revisions (TWD)

According to the Bloomberg consensus, analysts have been gradually revising down Hon Hai’s 2013-14 EPS forecasts since late 1Q13, given the rising concerns about competition. Although we are cutting our 2013-15 earnings forecasts by 3-7%, we believe the market has been too pessimistic; our 2014 EPS forecast is still 10.3% higher than that of the consensus. We expect Hon Hai’s margin expansion (gross and operating) to continue in 2014 on the back of Apple’s product mix change, production relocation and increasing operating leverage.

Source: Bloomberg

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

-5%

0%

5%

10%

15%

20%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

2011 2012 2013E 2014E 2015E

ROE (LHS) Sales growth (RHS) EPS growth (RHS)

020406080

100120140160180

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

(TWD)

Hon Hai 5x 10x 15x 20x

0

2

4

6

8

10

12

14

Aug-

10

Nov

-10

Feb-

11

May

-11

Aug-

11

Nov

-11

Feb-

12

May

-12

Aug-

12

Nov

-12

Feb-

13

May

-13

Aug-

13

2013E EPS 2014E EPS

Buy (unchanged)


1

2

3

4

5


- 16 -

Key assumptions

Profit and loss (TWDm)

Cash flow (TWDm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EConsumer related sales growth 31.1 5.3 11.6 11.5 18.0 20.5 15.1 17.7

PC and networking related sales growth (YoY%)

9.4 (7.2) 44.8 (5.4) (19.5) (1.8) (0.5) 1.6

iPhone shipment (mn units) 13.7 25.1 47.2 80.5 119.7 117.0 136.0 156.4iPad shipment (mn units) 0.0 0.0 14.3 40.0 60.1 55.0 63.5 74.3

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EPC/NB/networking Revenues 1,041,906 1,009,676 1,521,104 1,531,057 1,322,734 1,271,751 1,218,867 1,227,539Consumer electronics Revenues 357,896 376,979 420,625 468,801 553,134 666,626 767,103 903,255Other Revenue 550,680 572,527 1,055,476 1,452,823 2,029,527 1,887,203 2,216,280 2,486,726Total Revenue 1,950,481 1,959,182 2,997,205 3,452,681 3,905,395 3,825,580 4,202,250 4,617,520Other income 0 0 0 0 0 0 0 0COGS (1,782,377) (1,772,629) (2,753,003) (3,186,299) (3,575,766) (3,573,092) (3,918,598) (4,308,146)SG&A (73,837) (76,982) (119,265) (142,691) (175,552) (93,249) (99,698) (106,549)Other op.expenses (23,660) (26,082) (38,791) (40,847) (45,627) (50,211) (53,684) (57,373)Operating profit 70,607 83,489 86,146 82,845 108,450 109,029 130,270 145,452Net-interest inc./(exp.) (1,964) (435) 492 2,721 3,752 1,967 3,880 5,509Assoc/forex/extraord./others 3,951 4,977 4,839 16,970 6,177 13,806 3,936 4,396Pre-tax profit 72,594 88,031 91,477 102,536 118,379 124,802 138,086 155,357Tax (15,904) (11,651) (16,005) (20,602) (26,592) (27,956) (29,274) (31,538)Min. int./pref. div./others (1,557) (695) 1,682 (344) 2,975 (64) 125 145Net profit (reported) 55,133 75,685 77,155 81,591 94,762 96,782 108,936 123,965Net profit (adjusted) 55,133 75,685 77,155 81,591 94,762 96,782 108,936 123,965EPS (reported)(TWD) 4.869 6.539 6.632 6.967 8.039 8.177 9.204 10.474EPS (adjusted)(TWD) 4.869 6.539 6.632 6.967 8.039 8.177 9.204 10.474EPS (adjusted fully-diluted)(TWD) 4.869 6.539 6.632 6.967 8.039 8.177 9.204 10.474DPS (TWD) 0.720 1.482 0.830 1.369 1.506 2.044 2.301 2.618EBIT 70,607 83,489 86,146 82,845 108,450 109,029 130,270 145,452EBITDA 103,343 121,888 127,276 134,301 176,334 174,025 203,720 226,935

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 72,594 88,031 91,477 102,536 118,379 124,802 138,086 155,357Depreciation and amortisation 32,736 38,399 41,131 51,456 67,883 64,996 73,451 81,483Tax paid (15,904) (11,651) (16,005) (20,602) (26,592) (27,956) (29,274) (31,538)Change in working capital (19,401) (17,186) (37,014) (64,472) 90,647 18,945 (12,636) (13,256)Other operational CF items (3,524) (3,694) (1,552) (3,067) 1,016 (2,843) (1,232) (1,619)Cash flow from operations 66,501 93,899 78,038 65,852 251,333 177,945 168,394 190,427Capex (79,568) (13,618) (74,394) (128,885) (93,086) (71,536) (68,046) (64,732)Net (acquisitions)/disposals 30,767 (17,095) (52,600) 64,657 (12,350) (14,990) (13,990) (12,990)Other investing CF items (14,433) (7,186) (4,517) (15,164) (15,290) (954) (973) (993)Cash flow from investing (63,234) (37,899) (131,511) (79,392) (120,727) (87,480) (83,009) (78,715)Change in debt (4,398) 20,152 166,043 73,134 71,362 25,182 26,441 27,763Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (18,872) (8,156) (17,158) (9,661) (16,034) (17,754) (24,196) (27,234)Other financing CF items (25,785) 11,160 (19,259) 25,309 (10,028) 0 0 0Cash flow from financing (49,055) 23,155 129,626 88,782 45,300 7,428 2,245 529Forex effect/others 0 0 0 0 0 0 0 0Change in cash (45,789) 79,155 76,153 75,242 175,906 97,892 87,630 112,241Free cash flow (13,067) 80,281 3,644 (63,033) 158,247 106,408 100,348 125,695

Financial summary


- 17 -

Balance sheet (TWDm)

Key ratios (%)


Company profile

Established in 1974, Hon Hai Precision Industry (Hon Hai) started out making plastic products, connector products and cable assemblies. It is now the largest electronics manufacturing service (EMS) provider globally in terms of design, manufacturing, global logistics and after-market service.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 99,988 179,143 255,296 330,538 506,445 604,337 691,967 804,208Inventory 166,725 180,980 259,384 380,522 349,883 357,309 391,860 430,815Accounts receivable 267,349 307,606 409,819 476,050 633,049 524,052 575,651 632,537Other current assets 24,688 31,846 40,049 96,558 53,582 69,556 76,405 83,955Total current assets 558,749 699,574 964,548 1,283,668 1,542,957 1,555,254 1,735,882 1,951,514Fixed assets 253,931 234,618 272,150 355,373 390,298 396,838 391,433 374,683Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 65,940 87,753 143,835 91,270 111,148 129,871 146,192 161,938Total assets 878,621 1,021,945 1,380,532 1,730,311 2,044,404 2,081,963 2,273,507 2,488,136Short-term debt 77,582 86,245 230,455 271,512 355,790 363,415 381,585 400,665Accounts payable 266,104 300,530 427,153 548,494 638,371 636,304 697,833 767,204Other current liabilities 78,403 88,462 113,644 171,710 255,863 191,279 210,113 230,876Total current liabilities 422,089 475,236 771,252 991,716 1,250,024 1,190,998 1,289,530 1,398,745Long-term debt 50,628 62,649 87,955 115,979 105,688 121,138 127,195 133,555Other non-current liabilities 44,737 44,205 40,732 44,785 42,159 44,267 46,480 48,804Total liabilities 517,454 582,090 899,939 1,152,480 1,397,871 1,356,402 1,463,205 1,581,103Share capital 74,146 85,789 96,612 106,891 118,359 118,359 118,359 118,359Reserves/R.E./others 287,021 354,066 383,980 470,941 528,174 607,202 691,943 788,674Shareholders' equity 361,167 439,855 480,593 577,832 646,532 725,561 810,302 907,032Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 878,621 1,021,945 1,380,532 1,730,311 2,044,404 2,081,963 2,273,507 2,488,136EV 998,763 940,292 1,033,655 1,027,494 925,575 850,757 787,355 700,553Net debt/(cash) 28,222 (30,249) 63,114 56,953 (44,966) (119,784) (183,186) (269,988)BVPS (TWD) 31.343 37.905 41.162 49.176 54.625 61.302 68.462 76.634

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 14.6 0.4 53.0 15.2 13.1 (2.0) 9.8 9.9EBITDA (YoY) (13.6) 17.9 4.4 5.5 31.3 (1.3) 17.1 11.4Operating profit (YoY) (24.5) 18.2 3.2 (3.8) 30.9 0.5 19.5 11.7Net profit (YoY) (29.0) 37.3 1.9 5.8 16.1 2.1 12.6 13.8Core EPS (fully-diluted) (YoY) (30.5) 34.3 1.4 5.1 15.4 1.7 12.6 13.8Gross-profit margin 8.6 9.5 8.1 7.7 8.4 6.6 6.8 6.7EBITDA margin 5.3 6.2 4.2 3.9 4.5 4.5 4.8 4.9Operating-profit margin 3.6 4.3 2.9 2.4 2.8 2.9 3.1 3.2Net profit margin 2.8 3.9 2.6 2.4 2.4 2.5 2.6 2.7ROAE 15.5 18.9 16.8 15.4 15.5 14.1 14.2 14.4ROAA 6.3 8.0 6.4 5.2 5.0 4.7 5.0 5.2ROCE 14.5 15.5 12.4 9.4 10.5 9.4 10.3 10.5ROIC 15.2 18.1 14.9 11.2 13.6 14.0 16.7 18.3Net debt to equity 7.8 net cash 13.1 9.9 net cash net cash net cash net cashEffective tax rate 21.9 13.2 17.5 20.1 22.5 22.4 21.2 20.3Accounts receivable (days) 49.1 53.6 43.7 46.8 51.8 55.2 47.8 47.8Current ratio (x) 1.3 1.5 1.3 1.3 1.2 1.3 1.3 1.4Net interest cover (x) 36.0 191.7 n.a. n.a. n.a. n.a. n.a. n.a.Net dividend payout 14.8 22.7 12.5 19.7 18.7 25.0 25.0 25.0Free cash flow yield n.a. 8.3 0.4 n.a. 16.3 11.0 10.3 13.0

Financial summary continued …


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We see strong earnings growth in 2H13, margin expansion on the way

We believe Hon Hai has been overly punished by the market’s concerns on competition. We believe Hon Hai’s position in the Apple supply chain is secure and expect strong margin recovery soon.

Likely to be a major beneficiary of the new i-devices

Resume strong earnings growth in 2H13. Apple will host a media event on 10 September, at which we expect it to unveil its new phones, likely the high-end flagship model, the iPhone 5S, and a mid-range phone, the iPhone 5C. Hon Hai, as Apple’s major EMS partner on the iPhone, should be a major beneficiary of the new products, in our view. For the iPhones, our supply chain market research indicates that Hon Hai is likely to be the sole assembler for the iPhone 5S and that it will secure 25-30% of the iPhone 5C order allocation. We do not expect the company to lose all its iPhone 5C business to its competitors like the market does. Regarding the legacy phone, the iPhone 4S, we believe Apple will keep it as its low-end model, at a USD0 price tag (ie free) when bought from a mobile-phone operator with a contract, and that Hon Hai will remain the main assembler. In total, we expect Hon Hai’s iPhone shipments to reach 65-70m in 2H13E, representing 20% HoH growth. In addition to the iPhone, we expect Hon Hai to start mass production of the next iPad in September, 2013. Driven by the likely launches of Apple’s new i-devices, along with the forthcoming peak season, we expect Hon Hai to regain its revenue-growth momentum from late-3Q13. We forecast its revenue to grow QoQ by 9%/18% for 3Q13/4Q13, respectively. Benefiting from its increasing economies of scale and operating leverage, Hon Hai should deliver strong earnings

growth in 2H13, with around 90% HoH growth in EPS, to TWD 5.4 for 2H13E from TWD2.8 in 1H13. Hon Hai: revenue and earnings


More i-devices to come in 2014 We expect Apple to release the next version of the iPad mini in mid-1Q14 and that Hon Hai is likely to be a major supplier, with an order allocation of 50-60%, based on our forecasts. In addition to the new iPad mini, we expect Apple to release a new flagship iPhone with a larger screen in mid-2014, and that Hon Hai is likely to remain the sole supplier. Based on our analysis of the supply chain, we forecast total iPhone and iPad shipments to increase from 156m and 73m for 2013 to 180m and 84m in 2014, respectively. We forecast Hon Hai to account for 75-80% of both iPhone and iPad production in 2014.

Margin expansion is on the way

Due to the cost savings it has made from relocating its production in-land within China over the past year or so, more stable ASP environment, along with what we see as the favourable trend of its major client expanding its product mix to include mid-range phones, we expect Hon Hai’s operating margin to continue its upward trend for 2013/14. We forecast Hon Hai’s operating margin to expand from 2.8% for 2012 to 2.9%/3.1% in 2013/14, respectively.

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Hon Hai: operating margin and net profit margin


A more stable ASP environment In general, a declining ASP should now be the norm in the EMS industry, but for Hon Hai, we have been seeing a more stable ASP environment since 2012. Our market research shows Hon Hai was even able to raise its ASP (or its manufacturing value added (MVA), as it is called in the assembly business) for its major client, Apple, for the iPhone and iPad in 2Q12. We do not expect this price hike to continue but see this as evidence that Hon Hai has been getting more bargaining power when it comes to pricing. Our recent market research also indicates that the ASP pressure should ease in the coming quarters.

The benefits from moving inland should gradually kick in Hon Hai started to switch production sites in 4Q08, from the south coast of china, where labour costs are high, to inland China, where labour costs are lower. After year of efforts, Hon Hai has almost completed its relocation. The company has gradually ramped up its capacity in the Zhengzhou and Chengdu industrial parks (two major inland China production sites for the iPhone and iPad, respectively) since 2011.

According to our estimates, Hon Hai’s inland China production sites should account for about 50% of its total production output in 2013E, from about 30% in late 2012 and less than 20% in 2011. We expect the trend to continue and estimate that inland production output could reach 70% in 2014E. Although Hon Hai will still face rising labour-cost issues inland, our market research shows that the current inland China labour cost is about 30% lower than on the coast, which should give Hon Hai a further competitive cost edge and the potential for margin expansion, in our view.

In addition to the lower labour costs, Hon Hai will receive tax incentives from the local governments (Zhengzhou and Chengdu). We forecast Hon Hai’s tax rate to fall gradually to 20% for 2015, from 23% in 2012.

Major client’s product mix change could help its margin As Apple is facing the challenge of the high-end smartphone segment becoming saturated, we think Apple’s forthcoming iphone 5C is a clear indication of its strategy change to more mid-range options. We estimate that Apple’s mid-range/legacy models could account for 62% of total iPhones in 2H13 compared with 31% in 2H12. We believe this should benefit Hon Hai in terms of its operating margin, on the back of increasing economies of scale and vertical integration (more in-house components) for its legacy model, and a lower production-yield loss rate for the mid-range model, as this model is likely to have limited changes to the product design. iPhone: production forecasts by model (m units) 1Q13 2Q13 3Q13E 4Q13E 2013EiPhone 4 & 4S 15.5 12.0 10.0 7.5 45.0iPhone 5 20.0 18.5 8.5 - 47.0 iPhone 5C - - 10.0 20.0 30.0 iPhone 5S - - 5.0 29.0 34.0 Total 35.5 30.5 33.5 56.5 156.0


Note: This table represents Daiwa’s iPhone production forecasts, which will be slightly different to Apple’s iPhone sales figures iPhone: production forecast by model mix


Note: This table represents Daiwa’s iPhone production forecasts, which will be slightly different to Apple’s iPhone sales figures

Market concerns on competition appear overdone

We believe the market is worrying that Apple might further diversify its assembly outsourcing orders and add new vendors into the supply chain. We think these concerns are overdone. We think Hon Hai’s winning formula is a combination of its competitive cost structure on the back of its larger economies of scale and strong vertical integration, its time to get to mass production, and superior execution capability, all of which would be difficult for newcomers to duplicate in the short term and should secure Hon Hai’s position in the Apple supply chain. According to our market

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research, we believe Apple is unlikely to add new iPhone assembly companies until 2H14 or later, if at all. Even if there are newcomers to the supply chain in 2H14, we believe they will start with small orders (highly unlikely to be profitable due to the lack of scale) and, thus, the impact on Hon Hai is likely to be limited for the next 2-3 years. Hon Hai: vertically integrated components

Company Name Ticker Hon Hai's holding Main products

GIS Not-listed 100% Touch panels Wcube Co., Ltd Not-listed 100% Camera lenses

FIH Mobile 2038 HK 68% Handset design & assembly, enclosure, keypad, connector

Zhen Ding Tech 4958 TT 41% Flexible PCB Fitipower Integrated Tech 4961 TT 36% Power management IC and display driver IC Foxconn Tech 2354 TT 30% Casing G-Tech 3149 TT 28% Cover glass Pan International 2328 TT 27% Component EMS Foxsemicon Integrated Tech 3413 TT 20% Equipment modules and components for

semiconductor and TFT-LCD

UVAT Tech 3580 TT 17% Sputtering system and vacuum-coating system equipments

Advanced OptoelectronicTech 3437 TT 14% SMD LEDs for mobile phones and other related

applications Ways Tech 3508 TT 13% Plastic surface decorating related products CyberTan Tech 3062 TT 11% Broadband and wireless networking products Simplo Tech 6121 TT 8% Battery-pack Innolux 3481 TT 4% LCD Solytech 1471 TT 3% Power supply-related products

Cheng Uei 2392 TT Related Company Connectors, cable assemblies, and power packs

Source: Companies, TEJ

Valuation and target price

Reiterate our Buy (1) rating Following our transfer of coverage, we are lowering our 2013/2014/2015 EPS forecasts to TWD8.2/TWD9.2/ TWD10.5, respectively. We believe margin expansion will drive Hon Hai’s EPS growth over 2013-15.

We set our new six-month target price at TWD98, which is now based on a one-year forward PER of 11x (2013E PER of 12x previously), which is in line with the stock’s past-three-year trading average.

Catalysts/risks We expect the major share-price catalysts to be: 1) solid revenue growth from 3Q13, and 2) margin expansion from 3Q13.

The key risks to our target price would include: 1) the weaker-than-expected sell-through of new iPhones, 2) the Taiwan Dollar appreciating against the US Dollar by more than we expect, and 3) a higher-than-expected increase in labour/raw material costs.

Hon Hai: one-year forward PER bands


Hon Hai: one-year forward PBR bands


Hon Hai: share price vs. operating profit

Source: TEJ, Company

Hon Hai: share price vs. net profit


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EMS/ODM companies: valuations

Company Ticker Price (lc) 3 Sept-13

TargetPrice (LC)

Daiwa Rating

Mkt cap (USDm)

EPS (local currency) PER (x) EPS growth (%) ROE(%) PBR (x)

2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015ERegional peers

Hon Hai* 2317 TT 82.00 98.0 Buy 32,562 8.2 9.2 10.5 10.0 8.9 7.8 1.7 12.6 13.8 14.1 14.2 14.4 1.3 1.2 1.1 Pegatron* 4938 TT 45.50 62.0 Buy 3,498 4.5 6.0 7.1 10.1 7.6 6.4 68.3 32.9 19.5 10.1 12.4 13.8 1.0 0.9 0.9Quanta* 2382 TT 64.10 68.0 Outperform 8,282 5.3 6.6 6.9 12.1 9.7 9.2 -11.4 24.2 5.2 16.9 20.7 20.2 2.1 1.9 1.8 Compal* 2324 TT 20.10 18.0 Hold 2,978 1.7 1.9 2.1 11.7 10.7 9.6 18.4 9.5 11.5 6.7 6.8 7.3 0.7 0.7 0.7 Wistron* 3231 TT 30.50 28.0 Hold 2,386 3.5 3.6 3.8 8.8 8.4 8.1 14.4 5.1 3.3 11.8 11.5 11.2 1.0 0.9 0.9 Global peers

Flectronics FLEX US 8.98 n.a. Not rated 5,497 0.8 1.0 1.2 10.7 8.8 7.4 1.7 21.5 18.7 21.2 20.5 n.a. 2.4 1.8 1.5 Jabil Circuit JBL US 22.82 n.a. Not rated 4,625 2.2 2.7 2.9 10.2 8.5 8.0 -96.9 19.7 6.1 19.8 21.3 18.6 2.1 1.8 1.5 BYD Elec. 0285 HK 3.7 n.a. Not rated 1,075 0.3 0.4 0.5 11.6 9.1 7.9 -72.5 26.9 15.5 6.8 7.9 8.3 0.8 0.7 0.7 Average 10.6 9.0 8.1 1.4 1.2 1.1

Source: Bloomberg, *Daiwa forecasts

Hon Hai: quarterly P& L statement

2012 2013E 2011 2012 2013E 2014E(TWDm) 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE

Net sales 1,001,286 891,917 874,442 1,137,750 809,012 895,617 973,132 1,147,819 3,452,681 3,905,395 3,825,580 4,202,250 COGS 934,760 821,218 791,003 1,028,786 763,099 843,685 905,692 1,060,616 3,186,299 3,575,766 3,573,092 3,918,598Gross profit 66,526 70,700 83,439 108,964 45,913 51,933 67,440 87,202 266,382 329,629 252,488 283,652Operating costs 51,301 49,181 53,474 67,223 32,006 33,330 36,150 41,973 183,537 221,179 143,459 153,382Operating profit 15,225 21,519 29,965 41,742 13,907 18,603 31,290 45,229 82,845 108,450 109,029 130,270Pretax profit 19,381 17,146 34,438 47,415 22,597 25,544 31,390 45,271 102,536 118,379 124,802 138,086Net profit 14,924 12,610 30,256 36,973 16,353 16,978 26,038 37,415 81,591 94,762 96,782 108,936Net EPS (TWD) 1.27 1.07 2.57 3.14 1.38 1.43 2.20 3.16 6.97 8.04 8.18 9.20 Operating Ratios Gross margin 6.6% 7.9% 9.5% 9.6% 5.7%1 5.8%1 6.9%1 7.6%1 7.7% 8.4% 6.6%1 6.8%1

Operating margin 1.5% 2.4% 3.4% 3.7% 1.7% 2.1% 3.2% 3.9% 2.4% 2.8% 2.9% 3.1%Pre-tax margin 1.9% 1.9% 3.9% 4.2% 2.8% 2.9% 3.2% 3.9% 3.0% 3.0% 3.3% 3.3%Net margin 1.5% 1.4% 3.5% 3.2% 2.0% 1.9% 2.7% 3.3% 2.4% 2.4% 2.5% 2.6% YoY (%) Net revenue 37% 13% 1% 6% -19% 0% 11% 1% 15% 13% -2% 10%Gross profit 26% 24% 37% 14% -31% -27% -19% -20% 9% 24% -23% 12%Operating income 20% 36% 58% 18% -9% -14% 4% 8% -4% 31% 1% 20%Pretax income 14% -18% 49% 14% 17% 49% -9% -5% 12% 15% 5% 11%Net income 4% -3% 58% 6% 10% 35% -14% 1% 6% 16% 2% 13% QoQ (%) Net revenue -7% -11% -2% 30% -29% 11% 9% 18%Gross profit -30% 6% 18% 31% -58% 13% 30% 29%Operating income -57% 41% 39% 39% -67% 34% 68% 45%Pretax income -53% -12% 101% 38% -52% 13% 23% 44%Net income -57% -16% 140% 22% -56% 4% 53% 44%


Note: 1 All listed companies in Taiwan have been required to adopt IFRS since 2013, and one major difference between IFRS and ROC GAAP is the reclassification of some items, such as warranties and provisions from operating expenses to COGS, thus the gross margins since 2013 cannot be directly compared with past numbers.


■ What's new We are turning cautious on Largan’s prospects due to rising margin risks from the change in its main client’s product mix. This report marks the transfer of analyst coverage. ■ What's the impact Not immune to change. We expect Apple to shift the focus of its iPhones from solely the high-end segment to the mid-range segment. We expect this to result in greater pricing pressure on Largan, as the mid-range/legacy iPhones will not have upgraded camera lenses. Last piece may still be missing. The market has been optimistic about Largan winning orders from Samsung Electronics (SEC). Investors expect Largan to be a key 8MP/13MP lens vendor for SEC in 2H13 and for SEC to become one of its top-three clients in 2014. We believe there has been a delay in the qualification process, and so expect Largan’s shipments for SEC in 4Q13 to be small. Given this, and

that SEC’s current vendors have sufficient lens supply, there is uncertainty about potential orders from SEC for Largan in 2014. Strong 3Q13 still likely, but 4Q13 could disappoint. We forecast 20% QoQ revenue growth for Largan for 3Q13, driven by the peak season and new-product launches. However, we expect pricing pressure to emerge in 4Q13 following the initial sell-in of new products and forecast its gross margin to fall to 45.4% for 4Q13, below the Bloomberg-consensus forecast of 47-48%. We are cutting our 2014-15 EPS forecasts by 11-14% to factor in the rising margin risk. ■ What we recommend We like Largan for its quality management and leading industry position, but the current 2013E PER of 16x looks unattractive to us. We downgrade the stock to Underperform (4) from Buy (1) and lower our six-month target price to TWD920 (from TWD1,250 [one-year-forward PER of 16x]), now based on a one-year forward PER of 14x, in line with its past-three-year average. The major risk to our call would be better-than-expected orders from new clients. ■ How we differ We are more concerned than the market about margin risk due to the

change in the iPhone product mix and uncertain SEC orders.


4 September 2013

Largan Precision

Rising margin risk

• Change in iPhone mix should mean rise in pricing pressure for Largan, with no change in specs for mid-range/legacy models

• Market’s expectations on SEC orders could be overly optimistic: we expect contribution from SEC to remain limited in 2014

• We see the risk of a margin disappointment for 4Q13. Valuation unattractive: down to Underperform




Largan Precision3008 TT

Target (TWD): 1,250.00 920.00Downside: 12.4%3 Sep price (TWD): 1,050.00

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Largan (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 592.00-1,120.00Market cap (USDbn) 4.723m avg daily turnover (USDm) 55.62Shares outstanding (m) 134Major shareholder Cathay Life Insurance Co., Ltd. (5.2%)

Financial summary (TWD)Year to 31 Dec 13E 14E 15ERevenue (m) 26,650 30,805 35,500Operating profit (m) 10,074 11,552 13,171Net profit (m) 8,826 9,597 10,877Core EPS (fully-diluted) 65.796 71.547 81.083EPS change (%) 58.2 8.7 13.3Daiwa vs Cons. EPS (%) (2.5) (7.7) (4.9)PER (x) 16.0 14.7 12.9Dividend yield (%) 3.1 3.4 3.9DPS 32.9 35.8 40.5PBR (x) 4.8 4.1 3.5EV/EBITDA (x) 11.0 9.1 7.7ROE (%) 33.8 30.2 29.1




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Growth outlook Largan: sales, EPS, and ROE

Largan has had a strong 2013 so far. This follows a tough 2012 on the back of a disappointing gross margin and reduced revenue growth, driven by weakness in end demand and a low utilisation rate. Although we expect revenue-growth momentum to remain strong for 2H13, we believe the company’s earnings growth will decelerate significantly, to a double-digit YoY percentage for the coming year (3Q13-2Q14), driven by margin pressure from an unfavourable change in the iPhone model mix and limited contributions from new clients. We believe consensus expectations for SEC orders for 2014 are too optimistic and expect an insignificant revenue contribution from SEC in 2014. Source: Company, Daiwa forecasts

Valuation Largan: one-year forward PER bands

Our six-month target price is based on a 14x one-year forward PER, in line with the stock’s past-three-year average. Considering the decelerating earnings growth we expect, we view the risk-reward profile unattractive at the current level, a 2013E PER of 16x. We believe PER is the most appropriate way to evaluate downstream tech companies such as Largan. We recognise the flaws in the methodology, such as a lack of insight into the long-term business outlook, and a mismatch between earnings and cash flow. However, we think it is a more straightforward, intuitive, and accurate way to predict a tech company’s earnings power, at least over the near term.


Earnings revisions Largan: consensus 2013-14 EPS-forecast revisions (TWD)

The 2013-14 Bloomberg-consensus earnings forecasts have been raised gradually since late 4Q12, driven by the market’s anticipation of the announcement of the addition of a new client, the expectation of shipment volume growth from new iPhones, and the company’s strong margin in 1H13. Our 2014 EPS forecast is 8% below that of the consensus, which we expect to be cut on the back of rising margin pressure.

Source: Bloomberg


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Key assumptions


Cash flow (TWDm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EMobile phone lens shipment (K units) 200,491 173,300 215,100 286,554 344,730 478,434 563,891 663,559Blended ASP of handset lens (USD) 1.01 1.12 1.21 1.33 1.34 1.44 1.44 1.43Gross margin of VCM assembly (%) 0.0 5.0 7.3 6.8 5.3 6.0 6.0 5.8

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EMobile Phone Lens Revenues 6,412 7,421 11,433 15,243 19,190 25,823 30,007 34,785DSC Lens Revenues 507 377 555 391 415 453 470 465Other Revenue 559 357 363 351 468 373 328 251Total Revenue 7,478 8,154 12,351 15,984 20,072 26,650 30,805 35,500Other income 0 0 0 0 0 0 0 0COGS (3,491) (4,580) (6,546) (9,043) (11,710) (14,284) (16,696) (19,383)SG&A (412) (345) (374) (506) (530) (777) (866) (999)Other op.expenses (456) (507) (770) (963) (1,034) (1,515) (1,690) (1,948)Operating profit 3,119 2,722 4,661 5,472 6,798 10,074 11,552 13,171Net-interest inc./(exp.) 56 30 28 50 84 113 145 184Assoc/forex/extraord./others 163 (109) (356) 314 (71) 447 7 7Pre-tax profit 3,338 2,643 4,334 5,837 6,811 10,634 11,704 13,362Tax (96) (157) (289) (638) (1,234) (1,808) (2,107) (2,485)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 3,242 2,486 4,044 5,199 5,578 8,826 9,597 10,877Net profit (adjusted) 3,242 2,486 4,044 5,199 5,578 8,826 9,597 10,877EPS (reported)(TWD) 24.653 18.651 30.150 38.755 41.581 65.796 71.547 81.083EPS (adjusted)(TWD) 24.653 18.651 30.150 38.755 41.581 65.796 71.547 81.083EPS (adjusted fully-diluted)(TWD) 24.653 18.651 30.150 38.755 41.581 65.796 71.547 81.083DPS (TWD) 9.895 10.064 13.500 17.000 20.000 32.898 35.773 40.542EBIT 3,119 2,722 4,661 5,472 6,798 10,074 11,552 13,171EBITDA 3,684 3,344 5,398 6,372 8,005 11,508 13,389 15,255

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 3,338 2,643 4,334 5,837 6,811 10,634 11,704 13,362Depreciation and amortisation 565 622 737 900 1,208 1,434 1,837 2,084Tax paid (96) (157) (289) (638) (1,234) (1,808) (2,107) (2,485)Change in working capital 711 (466) (539) 1,202 (783) (937) (921) (468)Other operational CF items (17) 14 21 18 (2) (7) (7) (7)Cash flow from operations 4,502 2,656 4,263 7,318 6,000 9,317 10,506 12,485Capex (1,420) (1,057) (1,066) (3,149) (2,865) (3,500) (2,150) (2,150)Net (acquisitions)/disposals (39) (20) (1) (2) (101) (10) (10) (10)Other investing CF items (16) (26) (21) (23) (19) 75 0 0Cash flow from investing (1,475) (1,103) (1,088) (3,173) (2,985) (3,435) (2,160) (2,160)Change in debt 94 (120) 142 319 (356) 10 (52) 0Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (1,232) (1,301) (1,341) (1,811) (2,280) (2,683) (4,413) (4,799)Other financing CF items (200) 591 (23) 37 (43) 0 0 0Cash flow from financing (1,338) (831) (1,223) (1,456) (2,679) (2,673) (4,465) (4,799)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 1,688 723 1,952 2,690 336 3,208 3,881 5,527Free cash flow 3,081 1,599 3,197 4,169 3,136 5,817 8,356 10,335

Financial summary


- 25 -


Key ratios (%)


Company profile

In Asia ex-Japan, Largan Precision (Largan) is the leading lens manufacturer for mobile handsets. Nokia, Motorola, Sony Ericsson, Apple, HTC and RIM are the company’s major customers. It currently has around a 28% share of the global handset lens market.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 5,904 6,627 8,579 11,268 11,604 14,813 18,694 24,221Inventory 625 622 902 1,461 2,532 3,089 4,174 4,846Accounts receivable 1,494 2,377 3,182 3,510 6,581 8,737 10,128 11,671Other current assets 234 199 153 234 255 333 362 394Total current assets 8,257 9,825 12,815 16,473 20,973 26,972 33,358 41,132Fixed assets 5,018 5,453 5,795 8,057 9,731 11,796 12,109 12,175Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 365 397 386 379 485 427 444 461Total assets 13,640 15,675 18,996 24,909 31,188 39,195 45,912 53,769Short-term debt 111 16 112 444 93 100 100 100Accounts payable 273 410 560 1,358 3,555 3,914 4,574 5,310Other current liabilities 1,278 1,521 1,871 3,243 4,426 5,922 6,846 7,889Total current liabilities 1,662 1,948 2,543 5,045 8,075 9,936 11,520 13,299Long-term debt 0 0 0 0 0 0 0 0Other non-current liabilities 47 21 67 54 49 52 0 0Total liabilities 1,709 1,969 2,610 5,099 8,124 9,988 11,520 13,299Share capital 1,301 1,341 1,341 1,341 1,341 1,341 1,341 1,341Reserves/R.E./others 10,629 12,365 15,045 18,469 21,723 27,866 33,050 39,128Shareholders' equity 11,931 13,706 16,386 19,810 23,064 29,207 34,392 40,470Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 13,640 15,675 18,996 24,909 31,188 39,195 45,912 53,769EV 135,054 134,237 132,381 130,023 129,336 126,134 122,253 116,726Net debt/(cash) (5,793) (6,610) (8,467) (10,824) (11,511) (14,713) (18,594) (24,121)BVPS (TWD) 89.902 102.178 122.156 147.685 171.943 217.738 256.387 301.697

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 27.1 9.0 51.5 29.4 25.6 32.8 15.6 15.2EBITDA (YoY) 6.2 (9.2) 61.4 18.0 25.6 43.8 16.3 13.9Operating profit (YoY) 6.9 (12.7) 71.3 17.4 24.2 48.2 14.7 14.0Net profit (YoY) 26.2 (23.3) 62.7 28.5 7.3 58.2 8.7 13.3Core EPS (fully-diluted) (YoY) 24.2 (24.3) 61.7 28.5 7.3 58.2 8.7 13.3Gross-profit margin 53.3 43.8 47.0 43.4 41.7 46.4 45.8 45.4EBITDA margin 49.3 41.0 43.7 39.9 39.9 43.2 43.5 43.0Operating-profit margin 41.7 33.4 37.7 34.2 33.9 37.8 37.5 37.1Net profit margin 43.4 30.5 32.7 32.5 27.8 33.1 31.2 30.6ROAE 29.4 19.4 26.9 28.7 26.0 33.8 30.2 29.1ROAA 26.1 17.0 23.3 23.7 19.9 25.1 22.6 21.8ROCE 28.1 21.1 30.8 29.8 31.3 38.4 36.2 35.1ROIC 50.2 38.7 57.9 57.7 54.2 64.2 62.5 66.7Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cashEffective tax rate 2.9 6.0 6.7 10.9 18.1 17.0 18.0 18.6Accounts receivable (days) 79.9 86.6 82.1 76.4 91.7 104.9 111.8 112.1Current ratio (x) 5.0 5.0 5.0 3.3 2.6 2.7 2.9 3.1Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Net dividend payout 40.1 54.0 44.8 43.9 48.1 50.0 50.0 50.0Free cash flow yield 2.2 1.1 2.3 3.0 2.2 4.1 5.9 7.3



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Rising margin risk

We like Largan for its quality management and leading industry position. However, we worry it might encounter gross-margin pressure due to Apple’s changes to the iPhone mix and the limited contribution from its possible new client – Samsung.

Not immune to changes in Apple’s iPhone mix

Apple is Largan’s largest customer, accounting for about 50% of its total revenue, based on our estimates. As Apple is facing the challenge of the high-end smartphone segment becoming saturated, we expect it to release two new iPhones in September 2013 – the iPhone 5C and its high-end flagship model, the iPhone 5S. We think the iPhone 5C would mark a clear indication of a change in Apple’s strategy, ie, moving from purely high-end phones to a focus on mid-range ones. We forecast the mid-range/legacy products to account for 62% of total iPhones in 2H13, double from 31% in 2H12. Our market research of the supply chain indicates that the iPhone 5C will use the same lens module as the legacy model (the iPhone 5), which should bring more pricing pressure for Largan this year due to no specs upgrades (to lens modules), in our view. In addition, we estimate Largan’s share of orders for the iPhone 5C and legacy products would be 60-70% for 2H13. For the iPhone 5S, the new high-end model, we expect small upgrades in the lens module, with the aperture ratio increasing from f/2.4 to f/2.0. We believe Largan will remain the major supplier of this module, with an allocation of 85-90% and a 10-20% ASP premium.

iPhone: production forecast by model mix


Note: This chart represents Daiwa’s iPhone production forecasts, which are slightly different from the iPhone sales figures reported by Apple

Too much hype about the new client

Last piece should remain missing Over the past six months, the market has been optimistic about Largan finding the final missing piece in its client base – ie, new-order wins from SEC. The market seems to be expecting Largan to become a key 8MP/13MP lens vendor for SEC’s mid-range to high-end smartphones and may be thinking that SEC could become one of Largan’s top-three clients in 2014. We hold different view on this. According to our market research, Largan has sent out lens-module samples for SEC’s S4 and Note 3 smartphones. However, the process may have been delayed, and Largan’s lens modules do not yet appear to have been qualified for either model. Considering the life cycles of these products (the S4 was launched nearly six months ago while the Note 3 is due to be launched in early September), we think it is unlikely that Largan will become a major lens vendor for either model this year. We therefore expect SEC’s revenue contribution to Largan to be limited for 4Q13, with only small volume shipments for the S4 or Note 3. In addition, our market research shows there should be sufficient high-end lens module capacity among the Korea lens-module makers (SEC’s current vendors) from 4Q13, which could lead to further uncertainty about SEC’s orders to Largan into 2014. Rising risks from aggressive capacity expansion Our market research also indicates that Largan has been aggressively expanding its capacity for 2H13, which is supported by Largan’s capex rising in 1H13 (up 85% YoY). We forecast Largan’s capacity to

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- 27 -

increase by 20-30% HoH for 2H13, and estimate that over 30% of the new capacity is likely to be allocated to SEC. But, we now see rising risks from this aggressive capacity expansion due to uncertainty over the SEC orders. If there are further delays or if SEC cancels orders, Largan might have to cut prices to win orders to fill its capacity, which in turn could result in further margin pressure in 2014. Largan: capex trend

Source: Company

3Q13 outlook looks intact but 4Q13 could disappoint

We forecast Largan to deliver strong 3Q13 revenue growth on a ramp-up in shipments of new products for the peak season. We estimate Largan to deliver 20% QoQ revenue growth for 3Q13, with an EPS of TWD17.4 (up 15% QoQ, 101% YoY). However, we expect more pricing pressure in 4Q13 after the initial sell-in period. Despite greater economies of scale, we forecast Largan’s gross margin to decline to 47.5% in 3Q13 and 45.4% in 4Q13, lower than the Bloomberg-consensus forecast of 47-48%. For the coming year (3Q13-2Q14), we forecast Largan’s earnings growth to be only 11.5% YoY, significantly lower than growth of 78% YoY a year ago (3Q12-2Q13), given the likely unfavourable product mix change for Apple, limited spec upgrades in the new models, and a likely delay in orders from SEC.

Valuation and recommendation

Good company, but risk/reward not attractive We like Largan for its solid management team, superior execution, and its leading industry position. However, we believe the market has priced in most of the positives. Largan’s share price has rallied by about 50% since April 2013, driven by the market’s optimism about the new client (SEC), its strong 2Q13 results, and the expectation of strong revenue-growth momentum in 2H13. The stock is trading at a 16x 2013E PER, at the high end of its past-three-year trading range of 10-20x and at a premium to its past-three-year average of 14x. We view the current risk/reward profile as unattractive and believe it leaves little room for any disappointment. Although we think the near-term revenue-growth momentum remains intact, we see potential downside risks due to margin pressure and a decelerating revenue-growth outlook from 4Q13. Following the transfer of analyst coverage, we are raising our 2013 EPS forecast to TWD65.8 and cutting our 2014/2015 EPS forecasts to TWD71.6/TWD81.1, respectively. We set our new six-month target price at TWD920, which is now based on a 14x one-year forward PER, in line with the stock’s past-three-year average. Catalysts and risks Downside risk would come from: 1) disappointing margin delivery and earnings growth from 4Q13, and 2) further delays or cancellation in orders from SEC. We would turn more positive on Largan if we were to see: 1) better-than-expected orders from new clients, or 2) stronger-than-expected sell-through of the iPhone 5S, leading to what we would see as a favourable shift in Largan’s product mix.

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Largan: share price vs. operating profit


Largan: share price vs. net profit


Largan: one-year forward PER bands


Largan: one-year forward PBR bands


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- 29 -

Handset component companies: valuations Company

BBG code

Share price (lc) 3-Sept-2013

Target price

Daiwa Rating

Mkt. cap (USDm)

EPS (local currency) PER (x) EPS growth (%) ROE (%) PBR (x)


Largan* 3008 TT 1,050.00 920.0 Underperform 4,728 65.8 71.5 81.1 16.0 14.7 12.9 58.2 8.7 13.3 33.8 30.2 29.1 4.8 4.1 3.5AAC Technologies* 2018 HK 36.50 33.50 Underperform 5,780 1.8 2.0 2.3 15.7 14.1 12.4 28.2 11.2 13.7 33.3 30.0 28.3 4.7 3.9 3.2TXC* 3042 TT 40.50 41.0 Hold 420 3.1 3.6 4.2 13.0 11.3 9.7 -19.4 15.2 15.9 12.0 13.1 14.2 1.5 1.4 1.3Sunny Optical* 2382 HK 9.04 11.60 Buy 1,166 0.6 0.8 1.0 14.7 11.0 8.6 45.4 34.1 26.8 22.3 25.3 26.4 3.1 2.5 2.0Catcher 2474 TT 148.50 n.a. Not rated 3,742 17.8 15.2 16.8 8.4 9.7 8.8 46.6 -14.2 10.5 20.2 15.5 15.3 1.6 1.4 1.3Foxconn Tech 2354 TT 77.10 n.a. Not rated 3,382 6.2 6.6 7.1 12.5 11.6 10.9 -0.9 7.5 6.6 12.5 12.4 11.7 1.4 1.2 1.2Genius Optical 3406 TT 173.00 n.a. Not rated 579 8.95 10.8 n.a. 19.3 16.0 n.a. -2.1 20.7 n.a. 6.0 12.5 n.a. 4.8 2.4 n.a.Merry 2439 TT 76.70 n.a. Not rated 453 4.751 5.51 5.9 16.1 13.9 13.0 86.8 16.0 7.1 17.5 18.6 18.8 2.7 2.5 2.4Silitech 3311 TT 43.95 n.a. Not rated 277 3.6 3.8 4.5 12.0 11.5 9.7 -20.1 4.5 18.4 9.9 10.7 12.7 1.2 1.3 1.2Ichia 2402 TT 16.20 n.a. Not rated 181 1.3 1.8 n.a. 12.2 9.1 n.a. 241.3 33.4 n.a. 4.9 4.9 n.a. 0.8 n.a. n.a.ChengUei 2392 TT 61.90 n.a. Not rated 1,026 4.8 5.3 4.4 12.9 11.7 14.2 64.2 10.5 -17.6 8.7 10.4 8.8 1.3 1.3 1.2Flexium interconnect 6269 TT 117.00 n.a. Not rated 789 9.9 11.5 13.5 11.8 10.1 8.7 10.7 16.7 16.8 29.0 27.3 25.1 3.1 2.4 1.9Career Technology 6153 TT 31.95 n.a. Not rated 348 2.4 3.0 3.2 13.4 10.7 10.1 -18.2 24.5 6.6 10.1 12.3 11.7 1.3 1.2 1.1Zhen Ding Tech 4958 TT 78.90 n.a. Not rated 1,956 6.8 7.8 9.3 11.6 10.1 8.5 21.7 14.2 19.4 23.4 22.6 22.4 2.3 1.9 1.7BYD Elec. 0285 HK 3.70 n.a. Not rated 1,075 0.3 0.4 0.5 11.6 9.1 7.9 -72.5 26.9 15.5 6.8 7.9 8.3 0.8 0.7 0.7Average 13.4 11.7 10.4 2.4 2.0 1.7


Largan: quarterly P&L statement

2012 2013E

2011 2012 2013E 2014E(TWDm) 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QENet sales 3,640 3,338 4,512 8,583 5,103 5,858 7,046 8,643 15,984 20,072 26,650 30,805 COGS 2,238 2,096 2,676 4,700 2,967 2,902 3,698 4,717 9,043 11,710 14,284 16,696Gross profit 1,402 1,242 1,836 3,882 2,136 2,956 3,347 3,926 6,941 8,362 12,366 14,109Operating costs 291 315 361 597 460 486 585 761 1,468 1,564 2,292 2,557Operating profit 1,110 927 1,475 3,286 1,676 2,470 2,762 3,165 5,472 6,798 10,074 11,552Pre-tax profit 1,025 1,054 1,413 3,319 2,013 2,673 2,782 3,165 5,837 6,811 10,634 11,704Net profit 882 665 1,160 2,869 1,849 2,035 2,337 2,604 5,199 5,578 8,826 9,597Net EPS (TWD) 6.58 4.96 8.65 21.39 13.79 15.17 17.42 19.42 38.76 41.58 65.80 71.55Operating ratios Gross margin 38.5% 37.2% 40.7% 45.2% 41.9% 50.5% 47.5% 45.4% 43.4% 41.7% 46.4% 45.8%Operating margin 30.5% 27.8% 32.7% 38.3% 32.8% 42.2% 39.2% 36.6% 34.2% 33.9% 37.8% 37.5%Pre-tax margin 28.2% 31.6% 31.3% 38.7% 39.4% 45.6% 39.5% 36.6% 36.5% 33.9% 39.9% 38.0%Net margin 24.2% 19.9% 25.7% 33.4% 36.2% 34.7% 33.2% 30.1% 32.5% 27.8% 33.1% 31.2%YoY (%) Net revenue 4% -18% 3% 114% 40% 76% 56% 1% 29% 26% 33% 16%Gross profit -6% -32% -9% 144% 52% 138% 82% 1% 20% 20% 48% 14%Operating income -4% -37% -6% 158% 51% 167% 87% -4% 17% 24% 48% 15%Pre-tax income -18% -24% -25% 156% 96% 154% 97% -5% 35% 17% 56% 10%Net income -26% -39% -34% 147% 110% 206% 101% -9% 29% 7% 58% 9%QoQ (%) Net revenue -9% -8% 35% 90% -41% 15% 20% 23%Gross profit -12% -11% 48% 111% -45% 38% 13% 17%Operating income -13% -17% 59% 123% -49% 47% 12% 15%Pre-tax income -21% 3% 34% 135% -39% 33% 4% 14%Net income -24% -25% 74% 147% -36% 10% 15% 11%



■ What's new We have turned cautious on AAC due to the increasingly unfavourable industry trend and its unattractive valuation. This report marks a transfer of analyst coverage. ■ What's the impact Affected by major client’s product mix change. AAC’s largest client, Apple, looks likely to become more focused on mid-range iPhones. We forecast Apple’s mid-range and legacy iPhones to account for 62% of its iPhone production volume in 2H13, from 31% in 2H12. We believe this change would result in more pricing pressure on AAC, due to unlikely spec upgrades on mid-end/legacy models. Upside capped for high-end, uncertainty of being able to tap into mid-to-low end. We are concerned about the business

potential for AAC in the high-end smartphone segment, which we see as saturated with slower volume growth and limited room for further sound-quality enhancements. AAC’s intention to win orders in the mid-to-low-end segment could be a long-term positive if it can deliver solid profitability in this pricing-competitive segment. However, we believe AAC could see its margins decline during this transition period. Valuation premium looks unjustified. Driven by the increasingly unfavourable industry trend, AAC’s EPS growth rate should decelerate to around 12% YoY for 3Q13E-2Q14E, compared with 60-70% for 3Q12-2Q13, on our forecasts. ■ What we recommend Following a transfer of coverage, to factor in the margin risks, we cut our 2013-15E EPS by 7-18% and downgrade AAC to Underperform (4) (from Buy [1]). Our new six-month target price of HKD33.50, based on a 14x one-year forward (ie, 3Q13E-2Q14E) PER, is in line with the stock’s past-3-year average (formerly HKD44.50 on a 16x PER). A better-than-expected margin would be the main risk to our view. ■ How we differ We are more concerned than the market about margin pressure on

AAC due to the increasingly unfavourable product mix for smartphones overall.

Information Technology / China2018 HK

4 September 2013

AAC Technologies

Not immune to the unfavourable product mix shift

• AAC could come under more pricing pressure due to Apple’s product mix shifting to focus more on mid-range iPhones

• Limited upside for high-end/uncertainty of tapping into mid-range phones could lead to decelerating earnings growth

• Premium valuation looks unjustified; downgrade to Underperform



Information Technology / China

AAC Technologies2018 HK

Target (HKD): 44.50 33.50Downside: 8.2%3 Sep price (HKD): 36.50


Sell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (1.1) (6.3) (4.6)Net profit change (7.4) (17.8) (17.3)Core EPS (FD) change (7.4) (17.8) (17.3)

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AAC Tech (LHS) Relative to HSI (RHS)

(HKD) (%)

12-month range 25.85-46.40Market cap (USDbn) 5.783m avg daily turnover (USDm) 27.75Shares outstanding (m) 1,228Major shareholder Chun Yuan Wu Ingrid (21.4%)

Financial summary (CNY)Year to 31 Dec 13E 14E 15ERevenue (m) 8,385 9,675 11,025Operating profit (m) 2,453 2,815 3,197Net profit (m) 2,260 2,512 2,858Core EPS (fully-diluted) 1.840 2.046 2.327EPS change (%) 28.2 11.2 13.7Daiwa vs Cons. EPS (%) (2.6) (7.0) (5.8)PER (x) 15.7 14.1 12.4Dividend yield (%) 2.6 2.8 3.2DPS 0.736 0.818 0.931PBR (x) 4.7 3.9 3.2EV/EBITDA (x) 14.3 12.4 10.8ROE (%) 33.3 30.0 28.3

Kylie Huang(886) 2 8758 6248

[email protected]

Eric Chen(852) 2773 [email protected]



- 31 -

Growth outlook AAC: sales growth, EPS growth and ROE trend

We expect AAC’s revenue and earnings growth to decelerate from 3Q13 onwards, driven by: 1) Apple’s product mix shift to mid-range smartphones, 2) limited possibilities for product spec upgrades for AAC’s clients, and 3) a slowdown in demand for high-end smartphones. We forecast AAC’s rate of annual EPS growth to decelerate to 11% YoY for 2014 and 14% YoY for 2015 from the 70% YoY growth the company posted for 2012.


Valuation AAC: one-year forward PER bands

We have a new six-month target price for AAC of HKD33.50, based on a one-year forward PER of 14x, in line with the stock’s past-3-year average (formerly HKD44.50 on a 16x PER). AAC trades at a 15.4x one-year forward PER, which we view as unattractive based on its past-3-year average, and we see the risk of a derating due to the lukewarm near-term earnings-growth outlook. We believe the PER methodology is more appropriate to evaluate downstream tech companies like AAC. While we recognise flaws with this methodology, such as a lack of insight into the long-term business outlook, a mismatch between earnings/cash flow, etc., we think it is a more straightforward, intuitive and arguably accurate way to predict a tech company’s earnings power, at least in the near term

Source: Bloomberg, Daiwa forecasts

Earnings revisions AAC: consensus 2013-14 EPS forecast revisions (CNY)

Following a transfer of coverage, we are cutting our 2013/2014/2015 EPS forecasts for AAC to CNY1.84/ CNY2.05/CNY2.33, respectively, representing cuts of 7%/18%/17%, respectively. We believe the 2013-14 Bloomberg-consensus earnings forecasts for AAC have reached the peak; they have trended down since late 2Q13, due mainly to market concerns about high-end smartphone saturation. Our 2013E EPS is slightly (2.6%) lower than that of the consensus, while our 2014E EPS is around 7% lower.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

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- 32 -

Key assumptions

Profit and loss (CNYm)

Cash flow (CNYm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EReceiver sales growth (% YoY) 28.5 (38.0) 39.9 35.8 49.0 38.6 19.0 15.3Speaker box sales growth (% YoY) 0.0 0.0 0.0 109.0 91.4 76.4 17.7 18.8MEMS microphone sales growth (% 0.0 0.0 0.0 44.9 151.5 27.8 20.6 15.2

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EDynamic components Revenues 1,645 1,678 2,483 3,228 5,052 7,025 8,115 9,350Microphone Revenues 158 146 366 459 774 866 1,001 1,140Other Revenue 453 379 500 372 457 494 559 535Total Revenue 2,256 2,203 3,349 4,060 6,283 8,385 9,675 11,025Other income 0 0 0 0 0 0 0 0COGS (1,316) (1,214) (1,839) (2,275) (3,509) (4,771) (5,534) (6,339)SG&A (223) (184) (237) (290) (464) (755) (862) (967)Other op.expenses (123) (159) (214) (358) (462) (406) (464) (521)Operating profit 594 646 1,060 1,136 1,849 2,453 2,815 3,197Net-interest inc./(exp.) 20 12 20 22 4 2 3 5Assoc/forex/extraord./others 3 19 20 (17) 163 78 (2) 2Pre-tax profit 616 676 1,099 1,142 2,016 2,533 2,816 3,204Tax (26) (67) (112) (109) (259) (279) (310) (352)Min. int./pref. div./others (0) 5 (1) 3 6 6 6 6Net profit (reported) 590 615 987 1,036 1,763 2,260 2,512 2,858Net profit (adjusted) 590 615 987 1,036 1,763 2,260 2,512 2,858EPS (reported)(CNY) 0.481 0.501 0.804 0.844 1.435 1.840 2.046 2.327EPS (adjusted)(CNY) 0.481 0.501 0.804 0.844 1.435 1.840 2.046 2.327EPS (adjusted fully-diluted)(CNY) 0.481 0.501 0.804 0.844 1.435 1.840 2.046 2.327DPS (CNY) 0.096 0.199 0.359 0.360 0.574 0.736 0.818 0.931EBIT 594 646 1,060 1,136 1,849 2,453 2,815 3,197EBITDA 727 816 1,257 1,395 1,849 2,453 2,815 3,197

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 616 676 1,099 1,142 2,016 2,533 2,816 3,204Depreciation and amortisation 133 170 197 259 0 0 0 0Tax paid (26) (67) (112) (109) (259) (279) (310) (352)Change in working capital (43) 133 (155) (369) (469) (593) (600) (558)Other operational CF items (0) 5 (1) (0) 6 19 15 12Cash flow from operations 680 918 1,029 923 1,294 1,680 1,921 2,305Capex (588) (245) (576) (1,189) (927) (900) (855) (898)Net (acquisitions)/disposals 0 0 (104) (75) (60) 0 0 0Other investing CF items 120 4 (177) (100) (43) (14) (14) (14)Cash flow from investing (469) (241) (857) (1,363) (1,030) (914) (869) (912)Change in debt 18 (13) 283 421 144 31 32 33Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid 0 (118) (245) (441) (442) (705) (904) (1,005)Other financing CF items 12 (77) (211) 100 (26) 0 0 0Cash flow from financing 30 (208) (172) 80 (324) (674) (872) (972)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 241 469 (1) (361) (60) 92 180 421Free cash flow 212 677 172 (441) 264 766 1,052 1,393

Financial summary


- 33 -

Balance sheet (CNYm)

Key ratios (%)


Company profile

AAC Technologies designs and manufactures miniature acoustic components, including speakers, receivers, microphones and hands-free headsets, for use in mobile phones and other consumer handheld devices.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 1,266 1,735 1,735 1,374 1,314 1,406 1,587 2,008Inventory 296 230 343 559 958 1,325 1,581 1,981Accounts receivable 563 729 1,293 1,488 2,329 3,108 3,587 4,087Other current assets 129 38 32 5 6 9 10 11Total current assets 2,254 2,733 3,402 3,425 4,607 5,849 6,764 8,087Fixed assets 1,289 1,364 1,752 2,697 3,624 4,524 5,379 6,277Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 161 157 430 592 694 695 699 708Total assets 3,704 4,254 5,584 6,714 8,926 11,068 12,843 15,072Short-term debt 200 187 470 891 1,035 1,066 1,098 1,131Accounts payable 366 482 857 897 1,575 2,142 2,274 2,605Other current liabilities 75 101 241 216 310 299 302 315Total current liabilities 641 770 1,569 2,004 2,921 3,508 3,675 4,051Long-term debt 0 0 0 0 0 0 0 0Other non-current liabilities 0 0 0 0 0 0 0 0Total liabilities 641 770 1,569 2,004 2,921 3,508 3,675 4,051Share capital 100 100 100 100 100 100 100 100Reserves/R.E./others 2,964 3,384 3,915 4,611 5,905 7,460 9,069 10,922Shareholders' equity 3,064 3,484 4,015 4,710 6,005 7,560 9,168 11,021Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 3,704 4,254 5,584 6,714 8,926 11,068 12,843 15,072EV 34,311 33,828 34,112 34,893 35,097 35,036 34,888 34,499Net debt/(cash) (1,066) (1,548) (1,264) (483) (279) (340) (489) (877)BVPS (CNY) 2.495 2.836 3.270 3.836 4.890 6.156 7.466 8.975

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 15.6 (2.3) 52.0 21.2 54.8 33.5 15.4 14.0EBITDA (YoY) 11.1 12.3 54.1 11.0 32.5 32.7 14.8 13.6Operating profit (YoY) 3.8 8.8 64.1 7.2 62.8 32.7 14.8 13.6Net profit (YoY) 8.3 4.2 60.5 5.0 70.1 28.2 11.2 13.7Core EPS (fully-diluted) (YoY) 9.9 4.1 60.5 5.0 70.1 28.2 11.2 13.7Gross-profit margin 41.7 44.9 45.1 44.0 44.2 43.1 42.8 42.5EBITDA margin 32.2 37.0 37.5 34.4 29.4 29.3 29.1 29.0Operating-profit margin 26.3 29.3 31.6 28.0 29.4 29.3 29.1 29.0Net profit margin 26.2 27.9 29.5 25.5 28.1 27.0 26.0 25.9ROAE 21.4 18.8 26.3 23.8 32.9 33.3 30.0 28.3ROAA 17.1 15.5 20.1 16.9 22.5 22.6 21.0 20.5ROCE 20.1 18.6 26.0 22.5 29.3 31.3 29.8 28.5ROIC 31.5 29.6 40.6 29.5 32.4 33.7 31.5 30.2Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cashEffective tax rate 4.2 9.9 10.2 9.5 12.8 11.0 11.0 11.0Accounts receivable (days) 107.2 107.0 110.2 125.0 110.9 118.4 126.3 127.0Current ratio (x) 3.5 3.5 2.2 1.7 1.6 1.7 1.8 2.0Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Net dividend payout 20.0 39.8 44.7 42.7 40.0 40.0 40.0 40.0Free cash flow yield 0.6 1.9 0.5 n.a. 0.7 2.2 3.0 3.9



- 34 -

Not immune to the product mix change

We like AAC’s leading position in the acoustic components industry, but are concerned that it could see margin pressure due to the increasingly unfavourable industry trend towards mid to low-end smartphones.

Likely to be adversely impacted by product mix change

Apple is AAC’s largest client, with a 45%+ revenue contribution for 2013, based on our forecasts. Facing the challenge of the high-end smartphone segment moving into the saturated stage, Apple is expected to release two new iPhones this September – a mid-end iPhone 5C, and a high-end flagship model, iPhone 5S. We see the iPhone 5C as a clear indication of Apple’s strategy to shift its focus from being purely high-end to be more mid-range. We forecast Apple’s mid-range and legacy handsets to account for 62% of total iPhone production volume in 2H13, up two-fold from 31% in 2H12 (the following bar chart shows). Our supply chain research indicates that the mid-range iPhone 5C will use the same acoustic components as the legacy model, which would mean more severe pricing pressure for AAC due to the likely lack of spec upgrades. AAC: revenue breakdown by client (2013E)


Note: Samsung – Samsung Electronics

iPhone: production breakdown by model mix

Source: Daiwa estimates and forecasts

Note: This chart represents Daiwa’s iPhone production forecasts, which will be slightly different from the iPhone sales figures reported by Apple

Upside looks capped for high-end; rising uncertainties from move into mid-low range phones

We are positive about AAC’s leading position in the acoustic components industry through its competitive technology, solid execution, and quality management team. However, we believe the company might enter a transition period due to the changing dynamics in the smartphone industry. For the high-end smartphone segment, in addition to the likelihood that sales-volume growth could slow from 2H13 onwards due to this segment moving into the saturated stage, we are concerned that the room for further upgrades to acoustic components could be limited or proceed at a slower pace. Take Apple for example. To fulfil the sound quality requirement for popular apps like Siri (personal voice assistant) and Facetime (video call), Apple added another MEMS microphone and upgraded the receiver to HD for the iPhone 5 (released in September 2012) to enhance its sound quality. However, we do not expect a similar degree of upgrades for the new forthcoming iPhone 5S. Our market research shows that the iPhone 5S may only have small upgrades to the receiver, and as such, we believe AAC may only post a single-digit rise in its ASPs for its components supplied for this new model for 2H13, compared with a 20-30% ASP increase on average for its components for the iPhone 5 last year. We also view this limited acoustic upgrade on the iPhone 5S as an indication that the sound quality is already good enough for this new high-end smartphone, and that there is no urgency for an immediate further significant improvement.

Apple45.2%

Samsung15.4%

Nokia11.8%

Motorola3.3%

HTC3.1%

Blackberry2.3%

Chinese brands17.4%

Others1.5%

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2H12 2H13E


Mid-Range/ Legacy Models

Flagship Model

Mid-Range/ Legacy Models

Flagship Model


- 35 -

During the 2Q13 results meeting for analysts held on 16 August, AAC’s management team indicated its intention to gain more shares with customers other than Apple in the mid-to-low end smartphone segment. We have two perspectives on this statement: 1) it may indicate that AAC expects its business to be adversely affected by its major client’s product mix change and that’s why the company is willing to move from the very profitable high-end segment to the mid-to-low end one, or 2) it could broaden AAC’s addressable market given that currently the company has limited exposure to mid-to-low end phones, and if AAC can deliver solid margins and profitability in a lower and more competitive pricing environment, this could be a long-term positive for the company. However, we believe this switch in strategy will take time to bear fruit, and expect AAC’s profit margins to come under more pressure during the transition period, which we expect in coming years.

Decelerated growth outlook

Driven by the unfavourable industry trend and AAC’s major client’s change in its product mix, AAC’s gross margin could be under pressure in the coming year. For 2H13, although we expect AAC to post solid revenue growth (up 20%+ YoY) on the back of new product launches and peak seasonality, we forecast its gross margin to recover only mildly, from 42.8% for 1H13 to 43.5%, lower than the 44-45% in 2H12, despite its greater economies of scale. In all, we forecast AAC’s EPS growth rate to decelerate to 12% YoY in the coming year (3Q13E-2Q14E), compared with 60-70% YoY growth a year ago (3Q12-2Q13).

Valuation and recommendation

Valuation looks unattractive; downgrade to Underperform Following a transfer of coverage, we are reducing our 2013/2014/2015 EPS forecasts for AAC to CNY1.84/CNY2.05/ CNY2.33, respectively, ie, by 7%, 18% and 17% respectively. We set our new six-month target price at HKD33.50, which is based on a one-year forward (ie, 3Q13E-2Q14E) PER of 14x, in line with the stock’s past-three-year average multiple.

The AAC stock is trading at a one-year forward PER of 15.4x, at a premium to its past-3-year average trading multiple of 14x, which we view as unjustified. We see a risk of a de-rating during the next 6-12 months given the lukewarm near-term earnings-growth outlook we see for the company. Thus, we downgrade our rating on the stock to Underperform (4) (from Buy [1]). Catalysts and risks We expect the major downside risks for AAC to be: 1) potentially disappointing profit margins in 2H13E, and 2) a slowdown in earnings growth for 3Q13E onwards. The key upside risk to our Underperform rating would be a better-than-expected margin delivery by the company. We could turn more positive on AAC if we saw: 1) a faster ramp-up in the earnings contribution from its non-acoustic products, or 2) faster-than-expected significant upgrades to acoustic products for high-end smartphones due to new innovative apps or functionality. AAC: one-year forward PER bands


AAC: one-year forward PBR bands


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- 36 -

AAC: share price vs. operating profit YoY change

Source: Bloomberg, Company

AAC: share price vs. net profit YoY change

Source: Bloomberg, Company

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- 37 -

Valuations: handset component companies

Company Ticker Price (lc)

3-Sept-13 Target

priceDaiwa rating

Mkt cap (USDm)

EPS (local currency) PER (x) EPS growth (%) ROE(%) PBR (x)


Largan* 3008 TT 1,050.00 920.00 Underperform 4,728 65.8 71.5 81.1 16.0 14.7 12.9 58.2 8.7 13.3 33.8 30.2 29.1 4.8 4.1 3.5 AAC Technologies* 2018 HK 36.50 33.50 Underperform 5,780 1.8 2.0 2.3 15.7 14.1 12.4 28.2 11.2 13.7 33.3 30.0 28.3 4.7 3.9 3.2 TXC* 3042 TT 40.50 41.00 Hold 420 3.1 3.6 4.2 13.0 11.3 9.7 (19.4) 15.2 15.9 12.0 13.1 14.2 1.5 1.4 1.3 Sunny Optical* 2382 HK 9.04 11.60 Buy 1,166 0.6 0.8 1.0 14.7 11.0 8.6 45.4 34.1 26.8 22.3 25.3 26.4 3.1 2.5 2.0 Catcher 2474 TT 148.50 n.a. Not rated 3,742 17.8 15.2 16.8 8.4 9.7 8.8 46.6 (14.2) 10.5 20.2 15.5 15.3 1.6 1.4 1.3 Foxconn Tech 2354 TT 77.10 n.a. Not rated 3,382 6.2 6.6 7.1 12.5 11.6 10.9 (0.9) 7.5 6.6 12.5 12.4 11.7 1.4 1.2 1.2 Genius Optical 3406 TT 173.00 n.a. Not rated 579 9.0 10.8 n.a. 19.3 16.0 n.a. (2.1) 20.7 n.a. 6.0 12.5 n.a. 4.8 2.4 n.a.Merry 2439 TT 76.70 n.a. Not rated 453 4.8 5.5 5.9 16.1 13.9 13.0 86.8 16.0 7.1 17.5 18.6 18.8 2.7 2.5 2.4 Silitech 3311 TT 43.95 n.a. Not rated 277 3.6 3.8 4.5 12.0 11.5 9.7 (20.1) 4.5 18.4 9.9 10.7 12.7 1.2 1.3 1.2 Ichia 2402 TT 16.20 n.a. Not rated 181 1.3 1.8 n.a. 12.2 9.1 n.a. 241.3 33.4 n.a. 4.9 4.9 n.a. 0.8 n.a. n.a.ChengUei 2392 TT 61.90 n.a. Not rated 1,026 4.8 5.3 4.4 12.9 11.7 14.2 64.2 10.5 (17.6) 8.7 10.4 8.8 1.3 1.3 1.2 Flexium interconnect 6269 TT 117.00 n.a. Not rated 789 9.9 11.5 13.5 11.8 10.1 8.7 10.7 16.7 16.8 29.0 27.3 25.1 3.1 2.4 1.9 Career Technology 6153 TT 31.95 n.a. Not rated 348 2.4 3.0 3.2 13.4 10.7 10.1 (18.2) 24.5 6.6 10.1 12.3 11.7 1.3 1.2 1.1 Zhen Ding Technology 4958 TT 78.90 n.a. Not rated 1,956 6.8 7.8 9.3 11.6 10.1 8.5 21.7 14.2 19.4 23.4 22.6 22.4 2.3 1.9 1.7 BYD Elec. 0285 HK 3.70 n.a. Not rated 1,075 0.3 0.4 0.5 11.6 9.1 7.9 (72.5) 26.9 15.5 6.8 7.9 8.3 0.8 0.7 0.7 Average 13.4 11.7 10.4 2.4 2.0 1.7


AAC: quarterly P&L statement

2012 2013

2011 2012 2013E 2014E(CNYm) 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QENet sales 1,192 1,397 1,697 1,997 1,905 1,926 2,110 2,445 4,060 6,283 8,385 9,675 COGS 680 783 950 1,095 1,090 1,101 1,191 1,388 2,275 3,509 4,771 5,534Gross profit 512 613 747 901 814 825 918 1,056 1,784 2,774 3,614 4,141Operating costs 179 178 231 337 281 256 281 344 649 925 1,161 1,325Operating profit 333 435 516 565 533 569 637 713 1,136 1,849 2,453 2,815Pre-tax profit 351 451 524 690 587 595 638 712 1,142 2,016 2,533 2,816Net profit 314 406 473 569 534 542 576 609 1,036 1,763 2,260 2,512Net EPS (CNY) 0.26 0.33 0.39 0.46 0.44 0.44 0.47 0.50 0.84 1.44 1.84 2.05Net EPS (HKD) 0.31 0.40 0.47 0.57 0.53 0.54 0.57 0.61 1.03 1.75 2.25 2.50 Margins Gross margins 43.0% 43.9% 44.0% 45.1% 42.7% 42.8% 43.5% 43.2% 43.9% 44.2% 43.1% 42.8%Operating margin 27.9% 31.1% 30.4% 28.3% 28.0% 29.5% 30.2% 29.2% 28.0% 29.4% 29.3% 29.1%Pre-tax margin 29.4% 32.3% 30.9% 34.6% 30.8% 30.9% 30.2% 29.1% 28.1% 32.1% 30.2% 29.1%Net margin 26.3% 29.1% 27.9% 28.5% 28.0% 28.1% 27.3% 24.9% 25.5% 28.1% 27.0% 26.0% YoY (%) Net revenue 23% 53% 62% 76% 60% 38% 24% 22% 21% 55% 34% 15%Gross profit 22% 54% 62% 79% 59% 35% 23% 17% 18% 56% 30% 15%Operating income 16% 74% 74% 87% 60% 31% 24% 26% 7% 63% 33% 15%Pre-tax income 18% 77% 82% 130% 67% 32% 22% 3% 4% 77% 26% 11%Net income 16% 71% 81% 115% 70% 33% 22% 7% 5% 70% 28% 11% QoQ (%) Net revenues 5% 17% 22% 18% -5% 1% 10% 16%Gross profit 2% 20% 22% 21% -10% 1% 11% 15%Operating income 10% 31% 19% 10% -6% 7% 12% 12%Pre-tax income 17% 29% 16% 32% -15% 1% 7% 12%Net income 19% 29% 17% 20% -6% 2% 6% 6%


When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.daiwacm.com/hk/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.


■ What's new Following an unfavourable change in the product mix of a major client and the market’s high earnings expectations, we have become less positive on the stock. This report marks a transfer of the coverage. ■ What's the impact Worst should be over... TXC had weak 1H13 results, due mainly to a market-share loss and pricing competition from Japan peers (weak Yen). We do not expect sharp currency volatility to continue and believe TXC has seen the worst of the impact from the weak Yen. …but market expectations too high and client’s product-mix change should have an impact. The market expects TXC to have a back-loaded year, with 2H13 revenue rising by about 30% HoH and the operating margin recovering to 12.5-13.0% (2Q13: 10.2%). However, the likelihood of pricing pressure in 2H13 is being overlooked. In particular, Apple, (15-

20% of revenue), could switch its focus to mid-range products, thus increasing pricing pressure on TXC given no upgrade in specs to mid-range/legacy models. For 2H13, we forecast TXC’s revenue to rise by 15% HoH with the operating margin recovering to 11.5-12.0%. 2014 should be better. Our research suggests TXC recently won new clients for high-end networking products and two new smartphone-chip vendors. We expect the contribution to ramp up in 2014 and be revenue-growth drivers for TXC. It should also benefit the volume growth of i-devices in 2014 as we expect it to have a stable market share from 2H13. Overall, we expect TXC to see double-digit EPS growth for 2014 from a fall of about 20% YoY for this year. To factor in a slower margin recovery, we cut our respective 2013-14 EPS forecasts. ■ What we recommend We are downgrading our rating to Hold (3) from Buy (1), and lowering our six-month target price to TWD41 (from TWD57), now based on a 12.5x one year forward PER (14x 2013E PER previously), in line with the stock’s past-three-year average. Upside risk would be a faster-than-expected margin recovery, while downside risk would be further sharp Yen depreciation.

■ How we differ We are more cautious than the market on TXC’s 2H13 recovery story given the pricing pressure we expect.


4 September 2013

TXC Corp

Market expectations too high

• We believe TXC has come through the worst of pricing competition from Japan peers as a result of Yen depreciation

• Sales growth should resume in 2H13; but the market may be overlooking possible pricing pressure from a major client

• Valuation undemanding but we suggest investors wait for the market to cut earnings expectations. Downgrade to Hold




TXC Corp3042 TT


BuyOutperformHold (from Buy)

UnderperformSell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (12.8) (18.9) n.a.Net profit change (21.4) (22.9) n.a.Core EPS (FD) change (23.3) (24.7) n.a.

75

85

95

105

115

38

42

47

51

55



TXC Corp (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 38.75-52.70Market cap (USDbn) 0.423m avg daily turnover (USDm) 1.90Shares outstanding (m) 310Major shareholder Matthews Int'l (8.6%)

Financial summary (TWD)Year to 31 Dec 13E 14E 15ERevenue (m) 10,015 10,975 12,030Operating profit (m) 1,082 1,262 1,458Net profit (m) 965 1,112 1,289Core EPS (fully-diluted) 3.115 3.589 4.160EPS change (%) (19.4) 15.2 15.9Daiwa vs Cons. EPS (%) (15.3) (9.9) (13.9)PER (x) 13.0 11.3 9.7Dividend yield (%) 4.6 5.3 6.1DPS 1.9 2.2 2.5PBR (x) 1.5 1.4 1.3EV/EBITDA (x) 6.8 5.9 5.0ROE (%) 12.0 13.1 14.2




- 39 -

Growth outlook TXC: sales, EPS, and ROE

Given that the worst of the impact from Yen depreciation should be over for TXC, we expect the company’s revenue to recover in 2H13. However, we believe that the consensus forecasts of about 30% HoH revenue growth and an operating margin of 12.5-13.0% is too optimistic given the strong likelihood of pricing pressure from one of its major customers. Overall, we expect 2014 to be a better year for TXC. Given the contributions from new clients and solid orders of i-devices, we forecast 2014 EPS to rise by 15.2% YoY, up from a decline of 19.4% YoY for 2013. Source: Company, Daiwa forecasts

Valuation TXC: one-year forward PER bands

We see limited downside to the current PER valuation (12x on a one-year forward basis), which we regard as undemanding, given the improved growth outlook we expect for 2014. At the same time, we see limited upside given what we see as the market’s high 2013-14 expectations. Our new six-month target price of TWD41 is based on a one-year forward PER of 12.5x, in line with the stock’s past-three-year average. We suggest investors revisit the stock after the market revises its expectations.


Earnings revisions TXC: consensus 2013-14 EPS forecast revisions (TWD)

The share price has fallen by 15% YTD, underperforming the Taiex by 20%, as the consensus 2013-14 earnings forecasts have been cut gradually on the back of the company’s disappointing 1H13 results and increased competition from peers. However, we are still less optimistic on its margin recovery in 2H13 given an unfavourable product-mix change by one of the company’s major customers. Our 2013 EPS forecast is about 15.3% lower than that of the consensus. We expect the consensus forecasts to be cut further over the coming months given the pricing pressure that we expect.

Source: Bloomberg


Growth outlook

Valuation

Earnings revisions

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(TWD)

TXC 6x 10x 14x 18x

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-12

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BuyOutperformHold (from Buy)

UnderperformSell

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- 40 -

Key assumptions


Cash flow (TWDm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EHandset sales growth (YoY%) 135.6 26.1 44.4 15.9 37.2 (13.5) 15.2 12.5Consumer sales growth (YoY%) (43.7) (8.0) 8.2 (1.4) (1.2) 6.6 (0.9) 1.2

PC and networking related sales growth (YoY%)

1.0 2.7 22.2 23.6 (8.2) (8.8) 8.2 7.6

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ENetworking component 1,914 2,051 2,481 2,350 2,285 2,384 2,661 2,933Mobile component 1,325 1,671 2,413 2,797 3,836 3,320 3,824 4,303Other Revenue 4,123 4,005 4,757 4,750 4,807 4,311 4,490 4,794Total Revenue 7,362 7,728 9,651 9,897 10,928 10,015 10,975 12,030Other income 0 0 0 0 0 0 0 1COGS (5,321) (5,823) (7,114) (7,497) (8,420) (7,581) (8,297) (9,083)SG&A (596) (584) (781) (786) (828) (879) (920) (970)Other op.expenses (317) (316) (408) (463) (423) (473) (496) (521)Operating profit 1,127 1,004 1,347 1,152 1,258 1,082 1,262 1,458Net-interest inc./(exp.) (25) (25) (22) (17) (21) (21) (17) (16)Assoc/forex/extraord./others (47) (10) 0 78 66 36 18 22Pre-tax profit 1,056 968 1,325 1,213 1,303 1,096 1,263 1,464Tax (104) (186) (135) (163) (154) (132) (152) (175)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 952 782 1,190 1,050 1,149 965 1,112 1,289Net profit (adjusted) 952 782 1,190 1,050 1,149 965 1,112 1,289EPS (reported)(TWD) 3.289 2.668 3.966 3.475 3.863 3.115 3.589 4.160EPS (adjusted)(TWD) 3.289 2.668 3.966 3.475 3.863 3.115 3.589 4.160EPS (adjusted fully-diluted)(TWD) 3.289 2.668 3.966 3.475 3.863 3.115 3.589 4.160DPS (TWD) 1.877 1.981 2.469 2.200 2.291 1.869 2.153 2.487EBIT 1,127 1,004 1,347 1,152 1,258 1,082 1,262 1,458EBITDA 1,866 1,849 2,199 2,074 2,136 1,950 2,226 2,542

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 1,056 968 1,325 1,213 1,303 1,096 1,263 1,464Depreciation and amortisation 739 845 852 922 878 868 964 1,084Tax paid (104) (186) (135) (163) (154) (132) (152) (175)Change in working capital (419) 232 (125) (471) (567) 36 (285) (313)Other operational CF items 0 0 (4) (16) (3) (6) (6) (8)Cash flow from operations 1,271 1,859 1,914 1,486 1,458 1,863 1,784 2,052Capex (1,910) (499) (1,780) (1,519) (897) (800) (1,000) (1,000)Net (acquisitions)/disposals 0 0 (131) (140) (3) (10) (10) (10)Other investing CF items (9) (104) (26) (86) (19) (5) (5) (5)Cash flow from investing (1,919) (603) (1,937) (1,745) (918) (815) (1,015) (1,015)Change in debt 839 (193) 673 333 216 89 92 94Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (480) (543) (581) (741) (665) (681) (579) (667)Other financing CF items 36 57 (2) 322 236 75 0 0Cash flow from financing 395 (680) 90 (86) (212) (518) (487) (573)Forex effect/others 0 0 0 0 0 0 0 0Change in cash (253) 576 67 (345) 327 531 283 465Free cash flow (639) 1,360 133 (33) 561 1,063 784 1,052

Financial summary


- 41 -


Key ratios (%)


Company profile

TXC Corporation (TXC) was founded in 1983. The company designs, manufactures, and sells frequency-control crystal components.TXC has two major production sites, one in North Taiwan (Ping-Cheng) and the other in East China (NingBo). Each accounts for roughly 50% of the firm’s total output value, but the Taiwan company is mainly engaged in small crystal production and advanced optical modules.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 992 1,568 1,635 1,290 1,618 2,148 2,431 2,891Inventory 902 837 1,128 1,160 1,477 1,516 1,659 1,817Accounts receivable 2,262 2,468 2,788 3,134 3,482 3,191 3,496 3,832Other current assets 113 302 140 143 162 148 162 178Total current assets 4,270 5,175 5,691 5,727 6,737 7,003 7,749 8,718Fixed assets 4,439 4,110 5,062 5,690 5,734 5,666 5,702 5,618Goodwill & intangibles 0 0 0 0 0 0 0 0Other non-current assets 93 180 316 527 524 545 566 587Total assets 8,801 9,465 11,069 11,943 12,996 13,215 14,017 14,924Short-term debt 832 810 729 634 1,340 1,380 1,421 1,464Accounts payable 747 1,264 1,310 1,271 1,418 1,246 1,364 1,493Other current liabilities 448 492 769 718 688 631 691 758Total current liabilities 2,027 2,566 2,809 2,623 3,446 3,257 3,476 3,715Long-term debt 1,136 893 1,718 2,088 1,526 1,571 1,619 1,667Other non-current liabilities 19 91 19 77 150 153 156 159Total liabilities 3,181 3,549 4,545 4,788 5,121 4,981 5,251 5,541Share capital 2,717 2,873 2,972 3,022 3,022 3,097 3,097 3,097Reserves/R.E./others 2,903 3,042 3,552 4,133 4,853 5,136 5,669 6,285Shareholders' equity 5,620 5,915 6,523 7,155 7,875 8,233 8,766 9,383Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 8,801 9,465 11,069 11,943 12,996 13,215 14,017 14,924EV 13,521 12,679 13,356 13,976 13,792 13,348 13,154 12,784Net debt/(cash) 976 135 812 1,431 1,248 803 609 240BVPS (TWD) 19.152 19.993 21.738 23.673 26.055 26.581 28.302 30.292

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 17.8 5.0 24.9 2.6 10.4 (8.4) 9.6 9.6EBITDA (YoY) 5.3 (0.9) 18.9 (5.7) 3.0 (8.7) 14.2 14.2Operating profit (YoY) (9.4) (10.9) 34.2 (14.5) 9.2 (14.0) 16.7 15.5Net profit (YoY) (16.5) (17.8) 52.2 (11.8) 9.4 (16.0) 15.2 15.9Core EPS (fully-diluted) (YoY) (21.2) (18.9) 48.6 (12.4) 11.2 (19.4) 15.2 15.9Gross-profit margin 27.7 24.6 26.3 24.3 23.0 24.3 24.4 24.5EBITDA margin 25.3 23.9 22.8 21.0 19.5 19.5 20.3 21.1Operating-profit margin 15.3 13.0 14.0 11.6 11.5 10.8 11.5 12.1Net profit margin 12.9 10.1 12.3 10.6 10.5 9.6 10.1 10.7ROAE 17.7 13.6 19.1 15.4 15.3 12.0 13.1 14.2ROAA 11.5 8.6 11.6 9.1 9.2 7.4 8.2 8.9ROCE 16.3 13.2 16.2 12.2 12.2 9.9 11.0 12.0ROIC 17.6 12.8 18.1 12.5 12.5 10.5 12.1 13.5Net debt to equity 17.4 2.3 12.4 20.0 15.8 9.8 6.9 2.6Effective tax rate 9.9 19.2 10.2 13.4 11.8 12.0 12.0 12.0Accounts receivable (days) 111.0 111.7 99.4 109.2 110.5 121.6 111.2 111.2Current ratio (x) 2.1 2.0 2.0 2.2 2.0 2.2 2.2 2.3Net interest cover (x) 45.9 40.0 60.3 69.6 58.9 51.0 73.6 93.8Net dividend payout 57.1 74.2 62.2 63.3 59.3 60.0 60.0 59.8Free cash flow yield n.a. 10.8 1.1 n.a. 4.5 8.5 6.3 8.4



■ What's new We expect Apple to unveil two new phones on 10 September. As a major assembly firm for Apple’s consumer (in addition to Hon Hai), we expect Pegatron to benefit from the sales-volume growth of the new i-devices. ■ What's the impact Should be a major beneficiary of the likely mid-range iPhone 5C. The mid-range 5C should be a lower-spec version of the iPhone 5, with a plastic, coloured casing and less memory. We would expect prices for the 5C to range from USD429 to USD479. We also expect Apple to continue selling the 4S as a low-end model. Our market research suggests that Pegatron began mass production of the iPhone 5C in August. The company should be the major supplier of the 5C, and we would expect it to account for 70-75% of Apple’s order allocation for

this model. Meanwhile, in the PC business, we believe Pegatron is losing its share of Asustek’s outsourcing business and is only seeing modest order gains from other clients. However, we expect the weakness in the PC segment to be offset by solid revenue growth in its non-PC business. Operating margin should rise in 2H13. For 2Q13, Pegatron had a lower-than-expected operating margin of 0.3-0.4%, due to: 1) a less-favourable product mix, 2) higher initial costs/expenses for new products (we believe these were for the new mid-range iPhone), and 3) some notebook-capacity relocation. However, we expect the margin to recover in 2H13 on the back of better operating leverage and rising capacity utilisation, due to revenue-growth momentum from a rise in shipment volumes of new i-devices. ■ What we recommend We reiterate our Buy (1) rating for Pegatron and our six-month target price of TWD62, based on a one-year forward PER of 12x, equivalent to the stock’s past-two-year average. The key risk would be weaker-than-expected shipment volume for the new i-devices. ■ How we differ Our 2014 EPS forecast is 18% higher

than that of the Bloomberg consensus as a result of our more positive view on revenue growth and the operating margin.


4 September 2013

Pegatron Corp

A major beneficiary of the likely mid-range iPhone

• New orders from probable iPhone 5C should offset a decline in the PC business

• We expect an operating-margin recovery to drive up the share price

• Reaffirm Pegatron as our top pick in the Taiwan ODM Sector with a Buy (1) rating




Pegatron Corp4938 TT


Buy (unchanged)


1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change - - -Net profit change - - -Core EPS (FD) change - - -

85

96

108

119

130

35

41

48

54

60



Pegatron (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 35.20-55.40Market cap (USDbn) 3.503m avg daily turnover (USDm) 17.59Shares outstanding (m) 2,290Major shareholder Asustek Computer Inc. (19.6%)

Financial summary (TWD)Year to 31 Dec 13E 14E 15ERevenue (m) 956,897 1,178,836 1,311,838Operating profit (m) 8,292 12,780 15,946Net profit (m) 10,276 13,654 16,320Core EPS (fully-diluted) 4.487 5.962 7.126EPS change (%) 68.3 32.9 19.5Daiwa vs Cons. EPS (%) 7.0 18.2 21.9PER (x) 10.1 7.6 6.4Dividend yield (%) 3.5 5.9 7.9DPS 1.6 2.7 3.6PBR (x) 1.0 0.9 0.9EV/EBITDA (x) 6.2 4.1 3.0ROE (%) 10.1 12.4 13.8

Steven Tseng(886) 2 8758 6252

[email protected]

Jason Chen(886) 2 8758 [email protected]



- 43 -

Growth outlook Pegatron: revenue and earnings growth

We expect Pegatron to record strong net-profit growth for both 2013 and 2014, due mainly to it being allocated new orders from Apple’s likely iPhone 5C and a steady improvement in its operating margin on the back of better operating leverage and rising capacity utilisation.

(TWDm) 2013E YoY (%) 2014E YoY (%)Net sales 956,897 25% 1,178,836 23%Gross profit 29,492 35% 37,932 29%Operating profit 8,292 377% 12,780 54%Pre-tax profit 11,973 72% 16,450 37%Net profit 10,276 68% 13,654 33%Net EPS (TWD) 4.49 68% 5.96 33%


Valuation Pegatron: one-year forward PER bands

Our six-month target price of TWD62 is based on a PER of 12x applied to our one-year forward EPS forecast. Our PER multiple is equivalent to the stock’s past-two-year average. We reiterate our Buy (1) rating as the current 2013E PER of 10.1x looks attractive to us compared withthe stock’s past-three-year range of 8-14.5x.


Earnings revisions Pegatron: consensus 2013-14 EPS-forecast revision (TWD)

The Bloomberg-consensus 2013-14 EPS forecasts have been cut recently to factor in the weak 2Q13 results and a potential delay in the new iPad mini. We believe that a recovery in the operating margin will be the major catalyst for the share price over the coming months. Our 2013 and 2014 EPS forecasts are respectively 7% and 18% higher than those of the consensus.

Source: xxx


Growth outlook

Valuation

Earnings revisions

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Jul10 Oct10 Jan11 Apr11 Jul11 Oct11 Jan12 Apr12 Jul12 Oct12 Jan13 Apr13 Jul13

8x 9.5x 12x 14.5x Pegatron

(TWD)

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Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13

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Buy (unchanged)


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- 44 -

Key assumptions


Cash flow (TWDm)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ENotebook shipment (m unit) n.a. n.a. 15.4 13.3 16.9 14.8 15.4 15.9Tablet sales revenue YoY (%) n.a. n.a. n.a. n.a. n.a. 241 16 31Communication revenue YoY (%) n.a. n.a. n.a. 118 99 22 54 11Computing revenue YoY (%) n.a. n.a. n.a. 3 23 (0) 1 6

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECommunication n.a. n.a. 57,621 125,790 249,704 304,607 469,218 520,040Computing n.a. n.a. 294,770 303,953 374,977 373,562 378,362 400,198Other Revenue n.a. n.a. 83,097 70,823 143,379 278,727 331,256 391,601Total Revenue n.a. n.a. 435,488 500,566 768,059 956,897 1,178,836 1,311,838Other income n.a. n.a. 0 0 0 0 0 0COGS n.a. n.a. (419,695) (489,112) (746,220) (927,405) (1,140,904) (1,267,991)SG&A n.a. n.a. 0 0 0 0 0 0Other op.expenses n.a. n.a. (13,964) (15,739) (20,100) (21,200) (25,152) (27,901)Operating profit n.a. n.a. 1,829 (4,285) 1,739 8,292 12,780 15,946Net-interest inc./(exp.) n.a. n.a. (225) (603) 0 (199) (480) (433)Assoc/forex/extraord./others n.a. n.a. 5,711 4,951 5,241 3,880 4,150 4,150Pre-tax profit n.a. n.a. 7,315 63 6,980 11,973 16,450 19,663Tax n.a. n.a. (1,104) 48 (876) (1,697) (2,797) (3,343)Min. int./pref. div./others n.a. n.a. 0 0 0 0 0 0Net profit (reported) n.a. n.a. 6,211 111 6,104 10,276 13,654 16,320Net profit (adjusted) n.a. n.a. 6,211 111 6,104 10,276 13,654 16,320EPS (reported)(TWD) n.a. n.a. 2.753 0.049 2.665 4.487 5.962 7.126EPS (adjusted)(TWD) n.a. n.a. 2.753 0.049 2.665 4.487 5.962 7.126EPS (adjusted fully-diluted)(TWD) n.a. n.a. 2.753 0.049 2.665 4.487 5.962 7.126DPS (TWD) n.a. n.a. 0.000 0.000 0.000 1.599 2.692 3.577EBIT n.a. n.a. 1,829 (4,285) 1,739 8,292 12,780 15,946EBITDA n.a. n.a. 7,556 1,342 8,063 15,313 20,699 24,792

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax n.a. n.a. 7,315 63 6,980 11,973 16,450 19,663Depreciation and amortisation n.a. n.a. 5,727 5,627 6,324 7,021 7,919 8,846Tax paid n.a. n.a. (1,104) 48 (876) (1,697) (2,797) (3,343)Change in working capital n.a. n.a. 8,485 (4,790) 6,674 942 942 942Other operational CF items n.a. n.a. 0 0 (6,324) 0 0 (0)Cash flow from operations n.a. n.a. 20,423 948 12,778 18,239 22,514 26,108Capex n.a. n.a. (10,729) (15,922) (20,261) (6,102) (7,427) (8,265)Net (acquisitions)/disposals n.a. n.a. 0 0 0 0 0 0Other investing CF items n.a. n.a. 6,228 980 9,472 5,226 5,226 5,226Cash flow from investing n.a. n.a. (4,501) (14,942) (10,789) (876) (2,201) (3,039)Change in debt n.a. n.a. 12,144 3,775 (1,138) 2,956 5,321 9,223Net share issues/(repurchases) n.a. n.a. 0 0 0 0 0 0Dividends paid n.a. n.a. 0 0 0 (3,662) (6,165) (8,192)Other financing CF items n.a. n.a. (14,001) 9,215 9,166 9,166 9,166 9,166Cash flow from financing n.a. n.a. (1,857) 12,990 8,028 8,460 8,322 10,197Forex effect/others n.a. n.a. (2,625) 1,685 (1,636) (859) (1,247) (1,247)Change in cash n.a. n.a. 11,440 681 8,381 24,964 27,388 32,019Free cash flow n.a. n.a. 9,694 (14,974) (7,483) 12,137 15,088 17,843

Financial summary


- 45 -


Key ratios (%)


Company profile

Founded in January 2008, Pegatron is a subsidiary of Asustek and an electronic and computing DMS (design and manufacturing service) company with extensive experience in product development. It also has vertically integrated capabilities. Pegatron’s product line includes motherboards, desktop PCs, notebooks, smartphones, tablets, broadband, wireless systems, game consoles, networking equipment, set-top boxes, multimedia, and LCD TVs.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment n.a. n.a. 23,393 24,074 34,414 57,419 84,807 116,826Inventory n.a. n.a. 31,260 51,899 79,587 81,706 100,515 111,712Accounts receivable n.a. n.a. 39,885 69,689 105,032 108,839 134,083 149,211Other current assets n.a. n.a. 2,082 8,602 23,225 11,303 11,303 11,303Total current assets n.a. n.a. 96,620 154,264 242,258 259,267 330,708 389,051Fixed assets n.a. n.a. 27,973 30,223 32,128 38,156 45,583 53,848Goodwill & intangibles n.a. n.a. 0 0 0 0 0 0Other non-current assets n.a. n.a. 35,497 43,118 43,394 48,182 52,913 57,686Total assets n.a. n.a. 160,090 227,605 317,780 345,605 429,204 500,585Short-term debt n.a. n.a. 12,144 15,919 14,781 17,737 23,058 32,282Accounts payable n.a. n.a. 40,615 83,812 161,151 152,220 187,263 208,123Other current liabilities n.a. n.a. 8,925 17,423 25,022 38,327 61,900 82,168Total current liabilities n.a. n.a. 61,684 117,154 200,954 208,285 272,222 322,573Long-term debt n.a. n.a. 6,991 18,165 20,026 30,039 42,055 54,671Other non-current liabilities n.a. n.a. 574 702 721 793 952 1,237Total liabilities n.a. n.a. 69,249 136,021 221,701 239,117 315,228 378,481Share capital n.a. n.a. 22,564 22,564 22,903 22,903 22,903 22,903Reserves/R.E./others n.a. n.a. 68,277 69,020 73,176 83,585 91,074 99,201Shareholders' equity n.a. n.a. 90,841 91,584 96,079 106,488 113,977 122,104Minority interests n.a. n.a. 0 0 0 0 0 0Total equity & liabilities n.a. n.a. 160,090 227,605 317,780 345,605 429,204 500,585EV n.a. n.a. 99,951 114,219 104,602 94,567 84,515 74,336Net debt/(cash) n.a. n.a. (4,258) 10,010 393 (9,642) (19,694) (29,873)BVPS (TWD) n.a. n.a. 40.260 40.589 41.950 46.495 49.765 53.314

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) n.a. n.a. n.a. 14.9 53.4 24.6 23.2 11.3EBITDA (YoY) n.a. n.a. n.a. (82.2) 500.8 89.9 35.2 19.8Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. 376.8 54.1 24.8Net profit (YoY) n.a. n.a. n.a. (98.2) 5,399.1 68.3 32.9 19.5Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. (98.2) 5,317.6 68.3 32.9 19.5Gross-profit margin n.a. n.a. 3.6 2.3 2.8 3.1 3.2 3.3EBITDA margin n.a. n.a. 1.7 0.3 1.0 1.6 1.8 1.9Operating-profit margin n.a. n.a. 0.4 n.a. 0.2 0.9 1.1 1.2Net profit margin n.a. n.a. 1.4 0.0 0.8 1.1 1.2 1.2ROAE n.a. n.a. 13.7 0.1 6.5 10.1 12.4 13.8ROAA n.a. n.a. 7.8 0.1 2.2 3.1 3.5 3.5ROCE n.a. n.a. 3.3 n.a. 1.4 5.8 7.7 8.2ROIC n.a. n.a. 1.8 (4.6) 1.5 7.4 11.1 14.2Net debt to equity 0.0 0.0 net cash 10.9 0.4 net cash net cash net cashEffective tax rate n.a. n.a. 15.1 n.a. 12.6 14.2 17.0 17.0Accounts receivable (days) n.a. n.a. 16.7 39.9 41.5 40.8 37.6 39.4Current ratio (x) n.a. n.a. 1.6 1.3 1.2 1.2 1.2 1.2Net interest cover (x) n.a. n.a. 8.1 n.a. n.a. 41.6 26.6 36.8Net dividend payout n.a. n.a. 0.0 0.0 0.0 35.6 45.2 50.2Free cash flow yield n.a. n.a. 9.3 n.a. n.a. 11.6 14.5 17.1



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Daiwa’s Asia Pacific Research Directory

Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research; Regional Head of Product Management

Pranab Kumar SARMAH (852) 2848 4441 [email protected] Regional Head of Research Promotion

Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)

Hui MIAO (852) 2848 4464 [email protected] Macro Economics (China)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Taiwan)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Property Coordinator; Property Developers (Hong Kong)

Jeff CHUNG (852) 2773 8783 [email protected] Automobiles and Components (China)

Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China)

Jerry YANG (852) 2773 8842 [email protected] Banking (Taiwan)/Diversified Financials (Taiwan and China)

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China)

Joseph HO (852) 2848 4443 [email protected] Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China)

Winston CAO (852) 2848 4469 [email protected] Capital Goods – Machinery (China)

Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected] Regional Head of Small/Medium Cap; Small/Mid Cap (Regional); Head of Multi-Industries (Hong Kong, China); Internet (China)

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Rommel RODRIGO (63) 2 813 7344 ext 302

[email protected]

Head of Philippines Research; Strategy; Capital Goods; Materials

SOUTH KOREA

Chang H LEE (82) 2 787 9177 [email protected] Head of Korea Research; Strategy

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Jun Yong BANG (82) 2 787 9168 [email protected] Tyres; Chemicals

Anderson CHA (82) 2 787 9185 [email protected] Banking/Finance

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics (Tech Hardware and Memory Chips)

Joshua OH (82) 2 787 9176 [email protected] IT/Electronics (Handset Components)

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game

SoYoung WANG (82) 2 787 9133 [email protected] Transportation/Logistics

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Research

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Cement; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Lynn CHENG (886) 2 8758 6253 [email protected] IT/Electronics (Semiconductor)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Research; Strategy; Banking/Finance

Navin MATTA (91) 22 6622 8411 [email protected] Automobiles and Components

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer

Deepak PODDAR (91) 22 6622 1016 [email protected]

Materials

Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities

SINGAPORE

Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

David LUM (65) 6329 2102 [email protected] Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)


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Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

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 Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

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

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

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

Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, Federal Republic of Germany

(49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Representative Office 36, rue de Naples, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

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

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

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

Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai 200120, People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office

18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

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

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550


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Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. 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 Group Inc. 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 Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees 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 Group Inc., its 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 Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: REXLot Holdings Limited (555 HK); Huadian Fuxin Energy Corporation Limited (816 HK); Chaowei Power Holdings Limited (951 HK); CITIC Securities Company Limited (6030 HK); China Outfitters Holdings Limited (1146 HK); The People's Insurance Company (Group) of China Limited (1339 HK); China Precious Metal Resources Holdings Company Limited (1194 HK); Jiangnan Group Limited (1366 HK); Blackgold International Holdings Ltd (BGG AU); Tosei Corporation (8923 JP); Modern Land (China) Co. Ltd (1107 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets 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 https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. 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 Capital Markets 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 (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets 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 Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or 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 twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets 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.


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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets 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 Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). 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 DCMA’s views at any time. Neither DCMA 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 DCMA’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 DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. 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 DCMA, 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 https://daiwa3.bluematrix.com/sellside/Disclosures.action. 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. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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