April 7, 2014

Largan Precision (3008 TT)

Share Price: TWD1,510.00 MCap (USD): 6.7B Taiwan (Unchanged) Target Price: TWD1,995.00(+32%) ADTV (USD): 40M Technology BUY TP RevisionTP

Key Data | Don’t look at the price chart; BUY 52w high/low (TWD) 1,525.00/688.00 . Maintain BUY and raise TP to Street-high of TWD1,995 based Free float (%) 69.0 on SOTP and upward earnings revision for FY14/15. . Benefits from camera advancements over next few years Issued shares (m) 134 driven by pixel migration, OIS, larger apertures, selfies, Market capitalization TWD202.5B multi-cameras, optical zooms, array and MEMS cameras. Major shareholders: RESEARCH

. Extends and consolidates global No1 position. Quality of -CHEN SHIH CHING 5% earnings and ROIC to reach new high of 80% (FY13-16) vs 50% -CHIANG TSUI YING 5% (FY07-12) and trigger valuation re-rating. -LIN EN PING 4% Revise up TP to TWD1,995 from TWD1,400 Our revised TP is based on SOTP backed by the fair valuation Share Price Performance COMPANY appraisal approach (ROIC/WACC & EV/IC) and net cash of 280 TWD169/share. We lift our FY14/15 earnings forecasts by 4%/6% to 260 reflect higher profit margins, the result of a richer product mix 240 driven by more precision requirements and a potential high end 220 lens shortage. Our revised forecasts are now 8%/12% higher than 200 consensus. We estimate Largan will deliver a 21% earnings CAGR 180 for 2014F-16F thanks to the continuous camera quality 160 enhancements. 140 Acceleration of quality migration 120 100

As consumers perceive camera quality as one of the most 80 important factors when choosing smartphones, it has become a key Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 upgrade feature for most vendors. Our survey leads us to believe Largan Precision Taiwan TAIEX this driving force will continue for several years. The complexity of integrating new camera features into smart devices which are 1 Mth 3 Mth 12 Mth becoming increasingly thinner requires significant R&D, solid Absolute(%) 9.4 24.3 94.1 execution, manufacturing scale and strong financial strength – all Relative to index (%) 5.3 19.5 73.4 of which Largan possesses. We believe it is inevitable Largan will dominate the high-end of the market in the years to come. Maybank vs Market Street still underestimates Largan’s earning power Positive Neutral Negative We believe the Street still underestimates the technology Market Recs 18 5 2 migration for advanced camera features and OIS technology. Maybank Consensus % +/- Recent new models from Huawei/Xiaomi/HTC/ZTE/LG are strong proof of such a trend. Importantly, Largan’s earnings quality is Target Price (TWD) 1,995.00 1,474.00 35.3 likely to show significant improvement, extending its ROIC to 80% 2013 PATMI(TWDm) 9,610 9,610 (0.0) (FY13-16) from 50% in FY07-12, unmatched within the industry and 2014 PATMI(TWDm) 12,018 11,179 7.5

likely to result in valuation re-rating. Source: FactSet; Maybank

FYE Dec (TWD m) FY11A FY12A FY13E FY14E FY15E Revenue 15,985.4 20,071.5 27,432.8 35,982.0 42,817.2 EBITDA 6,359.8 7,988.7 12,215.6 16,115.4 19,182.4 Core net profit 5,198.3 5,577.6 9,610.0 12,017.5 14,327.0 Core EPS (TWD) 38.76 41.59 71.66 89.62 106.84 Core EPS growth (%) 28.5 7.3 72.3 25.1 19.2 Net DPS (TWD) 17.00 17.00 28.67 35.85 42.74 Core P/E (x) 39.0 36.3 21.1 16.8 14.1 P/BV (x) 10.2 8.8 6.7 5.2 4.2 Net dividend yield (%) 1.1 1.1 1.9 2.4 2.8 ROAE (%) 28.7 26.0 35.9 34.8 33.0 William Yang ROAA (%) 23.7 19.9 27.5 27.7 26.8 (852) 2268-0675 EV/EBITDA (x) 10.7 11.9 15.5 11.4 9.2 [email protected] Net debt/equity (%) net cash net cash net cash net cash net cash

SEE PAGE 14 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Co. Reg No: 198700034E MICA (P) : 099/03/2012

Largan Precision

More than migration We remain positive on Largan’s long-term outlook as we think camera quality migration is still in the upward cycle. The trend will be towards higher-value-add enhancements such as optical image stabilizers (OIS), larger apertures, dual or multiple cameras, selfies, MEMS/array cameras and optical zooms. We also believe Largan's industry leadership remains solid putting it in a better position to benefit from the technology migration in 2014-2016.

Figure 1: Street always underestimates Largan’s earnings profile Jan 01, 2013 Jul 01, 2013 Jan 01, 2014 Act. FY13 EPS

Consensus estimates on 47.2 56.9 66.2 71.7 FY13 EPS (TWD) % of upward revision 21% 16%

Source: Bloomberg

Consumers perceive camera resolution to be key feature for smartphone

One of the appeals of smartphones is their abundant multimedia features. Consumers consider the camera to be one of the most important purchasing criteria, among other features such as MP3 players, hands-free devices and video broadcast capability according to Gartner’s and O2’s consumer survey. As a result, we believe OEMs will continue to offer phones with better quality cameras to attract consumers and differentiate products. Particularly, from a competition point of view, we believe the “iPhone effect” will force other handset OEMs to upgrade to higher camera resolutions. We believe that to compete with the iPhone, most handset OEMs will likely upgrade to built-in camera specs better than the current 8MP of the iPhone 5s and 8MP with optical image stabilizer of iPhone6. We think this driving force can continue to at least FY2016.

Figure 2: Taking photos is one of the most used function

Taking photographs 74% Making phone calls 71% Text messaging 69% Surfing the internet 69% Alarm clock 64% Email 52% Using it as an address book 50% As a watch 50% Using social networks 49% Use it as a diary 39% Music 39% Playing games 38% Watching TV/films 22% Reading books 13%

Source: consumer survey from O2

Don’t miss the “Selfie” trend

Our checks suggest that smartphone OEMs are enhancing front camera performance from a 2MP lens to 5MP (Lenovo and Oppo) or 8MP (Huawei, Xiaomi and Meitu). We believe this is positive news for Largan. In addition to higher ASPs, we believe the different lens design also increases

April 7, 2014 2

Largan Precision production difficulties. As production parameters need to be re-adjusted case by case, Largan’s experienced manufacturing knowledge should put the company in a better position to capture the demand, in our view. Figure 3: Front end camera spec from major Chinese brand names Huawei P7 Meitu Kiss Xiaomi Mi4 Lenovo Vibe Z Oppo Ulike2 Vivo Xplay 8MP 8MP 8MP 5MP 5MP 5MP

Source: Company data, Maybank

Expanding addressable market driven by more rear cameras

In order to differentiate hardware design or/and enhance the user experience (such as 3D applications or gesture motion or enhanced depth- sensing), we expect more and more OEMs to launch hardware devices (PCs and smartphones) with more than two embedded camera modules in 2014. HTC has already demonstrated this trend for two rear cameras with its latest One (M8) smartphone. We believe Amazon could be the next one to initiate a smartphone with six cameras embedded (one high-end, one mid- end and four low-end). Brand names are looking to expand multi-camera designs into their devices, and Largan could benefit from the trend should there be high consumer acceptance.

Figure 4: HTC One (M8)

Source: HTC

The power of OIS

OIS allows a photographer to take hand-held photos and videos and enjoy blur-free results. A sensor is used to measure the unwanted shaking motion of the camera and optical components inside the lens move in the opposite direction to compensate. This keeps the image stationary despite the camera movement and results in a clearer picture.

In order to catch up with digital still cameras (DSCs), we believe OIS will inevitably become the next hot smartphone feature. In fact, LGE and ZTE have already showcased their smartphones with OIS functionality and we assume OIS will be more popular in 2015F. Despite sticking with 8MPs we expect iPhone 6 to add OIS to improve its camera quality.

The actuator suppliers are the major beneficiaries under this development. Largan, in our view, is an indirect beneficiary as the motion of the OIS actuator usually moves the lens to counteract any shake from the users. It, therefore, will also increase the precision requirements on lens design.

April 7, 2014 3

Largan Precision

Figure 5: OIS improves the photo qualities a lot

Source: Amazon

Two fronts of pixel migration

There are another two methods to enhance the quality of smartphone cameras. One is to migrate the camera megapixel (such as from 8MP to 13/16MP), and the other way is to increase the pixel size to reduce the noise, as adopted by HTC’s One and One (M8) (HTC calls it an UltraPixel camera). Increasing the pixel size can improve performance, especially in low-light scenarios, as a larger pixel decreases the interrupt between each pixel and can increase the incoming light impingement to sensor per pixel.

First, increase the die size (e.g. from 1/3.2” to 1/2.5”) while keeping the same pixel size (1.4um). The trade-off compromises smartphone form factors in both area and height since: 1) it requires a larger numerical aperture, thus increasing the camera module height, and 2) it requires more space/area.

Figure 6: To keep the same pixel size, OEMs need to increase the die size

Source: Maybank

Second, increase the pixel size (e.g. from 1.1um to 1.4um or 2um) while keeping the same die size (1/3.2”) or slightly increasing it to 1/3” (e.g. HTC One). The trade-off is that a larger pixel size grows incoming light impingement to sensor per pixel, resulting in the sensor being more sensitive to light and inherently less prone to noise on image quality. However, the performance may fall when printing the images or enlarging the photo size to a certain level.

April 7, 2014 4

Largan Precision

Figure 7: Fixed or similar sensor size scenarios

Source: Maybank

Figure 8: On the road to 20MP MT6595 MT6752 MT6732 MT6589T MT6572 S801 S400 S401 Camera (MP) 20 16 13 13 8 20 13 13 Availability 3Q14 4Q14 4Q14 3Q13 3Q13 1Q14 4Q13 3Q14

Source: Company data, Maybank estimates

Aperture also matters

In order to enhance photo quality in a low light environment, brand names also increase camera aperture design. For example, iPhone 5s in comparison to the 4s edition, has a larger aperture of f2.2 vs. iPhone 4s of f2.4. Aperture is a hole within a lens, through which light goes into the camera module. It can expand or shrink the size to allow more or less light to enter (ie. human’s pupil).

Figure 9: Aperture comparison

Source: Wikipedia

April 7, 2014 5

Largan Precision

Leading position remains if not further expanding

We believe the company can maintain its technology leadership thanks to the on-going camera pixel migration. Besides, even if we believe Kantatsu (Sharp’s subsidiary) is likely to become the new added lens supplier (or ‘offender’) for upcoming iDevices, we believe Largan still leads the new offenders in terms of costs and flexibility. After reading Largan’s and Genius’ 4Q13 operating performance, we reaffirm that Largan’s leading position remains unchanged.

Largan's 4Q13 gross margin of 48.3% (47.1% in 3Q13) was significantly higher than Genius’s 8.9% (10.8% in 3Q13). In addition, Largan widened its sales difference versus its competitor from TWD4.1b in 3Q13 to TWD6.9b in 4Q13. This suggests to us that Largan has gained market share but not at the expense of its margins. More surprisingly, Largan’s accumulated capex of TWD5.7b since 2012 was only slightly higher than Genius’ capex of TWD5.5b, demonstrating Largan's better production know-how (such as yield rate, automation and precision requirement) over its competitor. Largan had TWD13.4b net cash on hand in 4Q13 vs. its current major competitor's TWD1.9b net debt.

Figure 10: Largan gains market share…..

(TWDm) Sales difference (Largan - Genius) 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

Source: Company data, Maybank

Figure 11: ..and widens the gross margin gap

(GM %) Largan Genius 60

50

40

30

20

10

0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

Source: Company data, Maybank

April 7, 2014 6

Largan Precision

Figure 12: Surprisingly, Largan’s strong growth is not purely driven by capex (TWDm) Largan Genius 1,400

1,200

1,000

800

600

400

200

0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

Source: Company data, Maybank

Figure 13: Largan has also much stronger balance sheet (TWDm) Largan Genius 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 (2,000) (4,000) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

Source: Company data, Maybank

Valuation and risks

Our TP of TWD1,995 implies 34% return (including 2% cash dividend), backed by the fair valuation appraisal approach (ROIC/WACC & EV/IC) and net cash of TWD169/share. Our 2014F/2015F EPS of TWD90/TWD107 is 8%/12% higher than consensus as we believe its leadership can help the company withstand the competition. The Street, in our view, underestimates the contribution from OIS & larger apertures and overlooks the potential contribution from other smartphone advancement features such as MEMS cameras, multiple cameras and optical zooms. We note Largan’s net cash accounts for almost half of its shareholder equity which dilutes the “true return” of its underlying business, using ROE (mid-30%) as a measurement. One could argue that the mid-30% ROE stands out by any standard and far more profitable than major companies such as Samsung Electronics, TSMC, MediaTek and Delta (all generated low-to-mid-20%s ROE), we note that the ROIC generated by Largan is far more impressive - reaching a new high of 67% in FY13 and likely to further expand to 80%+ in the next couple of years. This underpins the efficiency of Largan’s ability to generate return through its core-asset but

April 7, 2014 7

Largan Precision importantly, Largan’s dominant market share, technical know-how and perhaps customers’ high switching costs. Because of its rapid increase of cash position, we think using EV/IC is a more appropriate approach valuing Largan’s share price. The EV multiple values the business as a whole and is more comprehensive than the equity multiple, which focuses solely on the value of the equity holders’ claims. In addition, EV multiples are less affected by capital structure differences, as they measure the unlevered value of an enterprise. Figure 14 illustrates the structural improvement of Largan’s ROIC over time.

Our fair valuation appraisal (FVP) methodology is shown in Figure 15. Such an approach yields a FV of TWD1,828 per share using a conservative 17% discount rate. The spread between ROIC and WACC is over 5x, indicating Largan’s ability to create economic value. We note Largan’s net cash worth of approximately TWD169 per share or 11% of the current share price. So, using the sum-of-the-part, we think the share price could worth close to TWD2,000. Our TP of TWD1,995 is based on 22x 2014F target PER which is at the high end of last cycle’s trading range of 10x-25x as we factor in the structural expansion of ROIC, gains in market share and leadership in the industry and rapid migration and advancement of camera features in the smart device industry.

Figure 14: Maybank new estimates 2014F 2015F (TWDm) New Old Diff. (%) New Old Diff. (%) Revenue 35,982 35,501 1.4% 42,817 42,422 0.9% Gross profit 16,983 16,315 4.1% 20,169 19,305 4.5% Operating profit 14,361 13,665 5.1% 17,191 16,239 5.9% PBT 14,571 13,850 5.2% 17,476 16,491 6.0% PAT 12,020 11,555 4.0% 14,330 13,523 6.0% EPS (TWD) 89.63 86.16 4.0% 106.86 100.84 6.0%

Margin (%) New Old New Old

Gross margin 47.2% 46.0% 47.1% 45.5% Operating margin 39.9% 38.5% 40.1% 38.3% Net margin 33.4% 32.5% 33.5% 31.9%

Source: Maybank estimates

Figure 15: Record high ROIC in 2013

ROE (%) ROIC (%) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F

Source: Company data, Maybank estimates

April 7, 2014 8

Largan Precision

Figure 16: Fair valuation appraisal Parameters Remarks Normalized ROIC 79.8% Avg. FY13-16 WACC (there is no debt, so WACC=COE) 17.1% Beta 1.21; 100% equity Terminal growth 2.0% Fair value multiple 5.2x Invested capital (TWDm) 43,461 Avg. FY14-15 EV (TWDm) 245,111 Net cash (TWDm) 22,638 Avg. FY14-15 Market cap (TWDm) 245,769 Fair value per share (TWD) 1,828 Net cash per share (TWD) 169 Avg. FY14-15 Sum-of-the-Part valuation (TWD) 1,997 Implied 22x FY14 PER

Source: Bloomberg, Maybank KE estimates

Figure 17: Forward PER

TWD ( ) 25x 1,800 20x

1,500

15x 1,200

900 10x

600

5x 300

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Blomberg, Maybank

Downside risks are weaker-than-expected handset demand, (especially iPhones) and the mid- to high-end segment; severe ASP erosion due to competition or faster-than-expected yield-rate improvement from Largan's major competitor (Genius); market share loss of key customers and other replacement technology (such as wafer-level lenses, please see more details in the following paragraph).

Wafer-level optics (WLO) is a potential threat for mechanical optics. Wafer-level optics is the design and manufacture of miniaturized optics at the wafer level using advanced semiconductor-like techniques. Therefore, current CMOS image sensor makers such as Sony, Omnivision and Aptina are the main WLO suppliers. Their proposed advantages are cost effectiveness and miniaturized optics that enable the reduced form factor of camera modules for mobile devices. However, the current yield rate for WLO is still unstable, especially for more than one lens element. As lens designs are moving into more lens elements (even VGAs are using 3-4P from previous 2P), Largan would mainly focus on the higher-end camera- lens market (VGA/1MP will account for <1% of sales in 2014) Therefore, we do not think WLO is a threat for Largan in the foreseeable future.

April 7, 2014 9

Largan Precision

1Q14 preview and 2Q14 outlook For 1Q14, we expect Largan’s sales to decline by 35% QoQ owing to its major client’s product transition. We estimate its GM to decline 610bps QoQ but up 30bps YoY to 42.2% to reflect the combination of less sales benefits but better product mix. We think the short-term noise is the unclear demand for 2Q14 due to Apple’s product transition. However, we believe strong demand from Chinese brand names such as Xiaomi, Huawei and Coolpad and a better product mix towards high-end lens will help the company to increase its sales in 2Q14F to TWD6.8b, up 13% QoQ.

Figure 18: Earnings model (TWDm) 1Q13 2Q13 3Q13 4Q13 1Q14F 2Q14F 3Q14F 4Q14F 2013 2014F 2015F Revenue 5,103 5,857 7,171 9,302 6,029 6,959 9,225 13,769 27,433 35,982 42,817 COGS 2,966 2,902 3,792 4,811 3,487 3,393 4,863 7,257 14,472 18,999 22,648 Gross profit 2,136 2,955 3,379 4,491 2,542 3,566 4,362 6,513 12,961 16,983 20,169 OPEX 461 485 556 678 473 552 696 900 2,180 2,621 2,979 Operating profit 1,676 2,470 2,822 3,813 2,069 3,014 3,666 5,612 10,781 14,361 17,191 PBT 2,013 2,673 2,711 4,104 2,115 3,065 3,720 5,670 11,501 14,571 17,476 PAT 1,849 2,035 2,320 3,405 1,935 2,084 3,181 4,820 9,610 12,020 14,330 EPS (NT$) 13.79 15.18 17.30 25.39 14.43 15.54 23.72 35.94 71.66 89.63 106.86

Margin (%) 41.9% 50.5% 47.1% 48.3% 42.2% 51.2% 47.3% 47.3% 47.2% 47.2% 47.1% Gross margin 32.8% 42.2% 39.4% 41.0% 34.3% 43.3% 39.7% 40.8% 39.3% 39.9% 40.1% Operating margin 36.2% 34.8% 32.4% 36.6% 32.1% 30.0% 34.5% 35.0% 35.0% 33.4% 33.5% Net margin

Growth (%) Revenue YoY 40.2% 75.5% 58.9% 8.4% 18.1% 18.8% 28.6% 48.0% 36.7% 31.2% 19.0% EPS YoY 109.6% 205.9% 100.0% 18.7% 4.6% 2.4% 37.1% 41.6% 72.3% 25.1% 19.2% Revenue QoQ -40.5% 14.8% 22.4% 29.7% -35.2% 15.4% 32.5% 49.3% EPS QoQ -35.6% 10.1% 14.0% 46.7% -43.2% 7.7% 52.6% 51.5%

Source: Company data, Maybank KE estimates

April 7, 2014 10

Largan Precision

FYE 31 Dec FY11A FY12A FY13E FY14E FY15E Key Metrics P/BV (x) 10.2 8.8 6.7 5.2 4.2 Net dividend yield (%) 1.1 1.1 1.9 2.4 2.8 FCF yield (%) 2.1 1.5 4.1 4.7 5.9 EV/EBITDA (x) 10.7 11.9 15.5 11.4 9.2 EV/EBIT (x) 12.5 13.9 17.5 12.8 10.3

INCOME STATEMENT (TWD m) Revenue 15,985.4 20,071.5 27,432.8 35,982.0 42,817.2 Gross profit 6,941.2 8,361.5 12,961.0 16,983.0 20,169.6 EBITDA 6,359.8 7,988.7 12,215.6 16,115.4 19,182.4 Depreciation (887.0) (1,191.2) (1,434.4) (1,753.5) (1,991.0) Amortisation 0.0 0.0 0.0 0.0 0.0 EBIT 5,472.7 6,797.5 10,781.2 14,361.9 17,191.4 Net interest income /(exp) 50.4 84.4 122.0 205.7 280.7 Associates & JV 0.0 0.0 0.0 0.0 0.0 Exceptionals 0.0 0.0 0.0 0.0 0.0 Other pretax income 313.1 (70.8) 597.7 0.0 0.0 Pretax profit 5,836.2 6,811.1 11,500.9 14,567.6 17,472.1 Income tax (638.0) (1,233.5) (1,890.9) (2,550.1) (3,145.1) Minorities 0.0 0.0 0.0 0.0 0.0 Reported net profit 5,198.3 5,577.6 9,610.0 12,017.5 14,327.0 Core net profit 5,198.3 5,577.6 9,610.0 12,017.5 14,327.0

BALANCE SHEET (TWD m) Cash & Short Term Investments 8,123.6 9,604.0 13,502.8 19,195.7 26,244.9 Accounts receivable 3,510.2 6,580.6 6,823.3 8,790.6 10,460.4 Inventory 1,460.6 2,532.1 2,693.3 3,430.0 4,088.7 Property, Plant & Equip (net) 8,057.0 9,730.8 9,800.3 11,048.9 11,955.3 Intangible assets 0.0 0.0 0.0 0.0 0.0 Investment in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other assets 3,758.0 2,740.6 5,793.9 5,793.9 5,793.9 Total assets 24,909.4 31,188.2 38,613.6 48,259.1 58,543.3 ST interest bearing debt 443.9 93.1 82.6 82.6 82.6 Accounts payable 1,358.0 3,555.0 2,507.4 3,979.5 4,743.7 LT interest bearing debt 0.0 0.0 0.0 0.0 0.0 Other liabilities 3,297.1 4,475.6 5,578.4 5,578.4 5,578.4 Total Liabilities 5,099.0 8,123.7 8,168.4 9,640.4 10,404.7 Shareholders Equity 19,810.4 23,064.4 30,445.2 38,618.7 48,138.6 Minority Interest 0.0 0.0 0.0 0.0 0.0 Total shareholder equity 19,810.4 23,064.4 30,445.2 38,618.7 48,138.6

CASH FLOW (TWD m) Pretax profit 5,836.2 6,811.1 11,500.9 14,567.6 17,472.1 Depreciation & amortisation 887.0 1,191.2 1,434.4 1,753.5 1,991.0 Adj net interest (income)/exp 0.0 0.0 0.0 0.0 0.0 Change in working capital (88.9) (1,944.9) (1,451.3) (1,232.0) (1,564.3) Cash taxes paid (638.0) (1,233.5) (1,890.9) (2,550.1) (3,145.1) Other operating cash flow 0.0 0.0 0.0 0.0 0.0 Cash flow from operations 6,633.7 5,741.5 11,300.5 12,539.0 14,753.6 Capex (2,414.8) (2,677.1) (3,057.0) (3,002.1) (2,897.4) Free cash flow 4,219.0 3,064.4 8,243.5 9,536.9 11,856.3 Dividends paid (1,810.9) (2,280.4) (2,280.4) (3,844.0) (4,807.0) Equity raised / (purchased) 0.0 0.0 0.0 0.0 0.0 Change in Debt 332.0 (350.8) (10.6) 0.0 0.0 OTH investing/financing cash flow 295.0 1,064.6 (2,114.2) 0.0 0.0 Effect of exch rate changes 32.6 (17.4) 60.4 0.0 0.0 Net cash flow 3,067.8 1,480.4 3,898.8 5,692.9 7,049.3

April 7, 2014 11

Largan Precision

FYE 31 Dec FY11A FY12A FY13E FY14E FY15E Key Ratios Growth ratios (%) EBIT growth 17.4 24.2 58.6 33.2 19.7 Pretax growth 34.7 16.7 68.9 26.7 19.9 Reported net profit growth 28.5 7.3 72.3 25.1 19.2 Core net profit growth 28.5 7.3 72.3 25.1 19.2

Profitability ratios (%) Pretax profit margin 36.5 33.9 41.9 40.5 40.8 Payout ratio 43.9 40.9 40.0 40.0 40.0

DuPont analysis Assets/Equity (x) 1.3 1.4 1.3 1.2 1.2 ROAE (%) 28.7 26.0 35.9 34.8 33.0 ROAA (%) 23.7 19.9 27.5 27.7 26.8

Liquidity & Efficiency Days payables outstanding 38.2 75.5 75.4 61.5 69.3 Dividend cover (x) 2.3 2.4 2.5 2.5 2.5 Current ratio (x) 3.3 2.6 3.3 3.7 4.3

Leverage & Expense Analysis Net debt/equity (%) net cash net cash net cash net cash net cash Debt/EBITDA (x) 0.1 0.0 0.0 0.0 0.0 Capex/revenue (%) 15.1 13.3 11.1 8.3 6.8 Net debt/ (net cash) (7,679.7) (9,510.9) (13,420.2) (19,113.1) (26,162.3)

April 7, 2014 12

Largan Precision

Research Offices

REGIONAL HONG KONG / CHINA INDONESIA Surachai PRAMUALCHAROENKIT (66) 2658 6300 ext 1470 WONG Chew Hann, CA Howard WONG Head of Research Wilianto IE Head of Research [email protected] Regional Head of Institutional Research (852) 2268 0648 (62) 21 2557 1125 • Auto • Conmat • Contractor • Steel (603) 2297 8686 [email protected] [email protected] [email protected] • Oil & Gas - Regional • Strategy Suttatip PEERASUB ONG Seng Yeow Alexander LATZER Rahmi MARINA (66) 2658 6300 ext 1430 Regional Head of Retail Research (852) 2268 0647 (62) 21 2557 1128 [email protected] (65) 6432 1453 [email protected] [email protected] • Media • Commerce [email protected] • Metals & Mining - Regional • Banking & Finance Sutthichai KUMWORACHAI Alexander GARTHOFF Jacqueline KO, CFA Aurellia SETIABUDI (66) 2658 6300 ext 1400 Institutional Product Manager (852) 2268 0633 [email protected] (62) 21 2953 0785 [email protected] (852) 2268 0638 • Consumer [email protected] • Energy • Petrochem • Property [email protected] Karen KWAN Termporn TANTIVIVAT (852) 2268 0640 [email protected] Anthony YUNUS (66) 2658 6300 ext 1520 ECONOMICS • Property & REITs (62) 21 2557 1136 [email protected] [email protected] • Property Suhaimi ILIAS Osbert TANG, CFA • Consumer • Poultry Chief Economist (86) 21 5096 8370 Singapore | Malaysia [email protected] Isnaputra ISKANDAR Woraphon WIROONSRI (603) 2297 8682 • Transport & Industrials (62) 21 2557 1129 (66) 2658 6300 ext 1560 [email protected] [email protected] [email protected] Philip TSE, CFA FRM • Metals & Mining • Cement • Banking & Finance (852) 2268 0643 [email protected] Luz LORENZO • Property & REITs Pandu ANUGRAH Jaroonpan WATTANAWONG Philippines (62) 21 2557 1137 (66) 2658 6300 ext 1404 (63) 2 849 8836 Ricky WK NG, CFA [email protected] [email protected] [email protected] (852) 2268 0689 [email protected] • Infrastructure • Construction • Transport • Utilities & Renewable Energy • Transportation • Small cap Tim LEELAHAPHAN Janni ASMAN Simon QIAN, CFA Chatchai JINDARAT Thailand (62) 21 2953 0784 (852) 2268 0634 [email protected] (66) 2658 6300 ext 1401 (662) 658 1420 [email protected] [email protected] • Cigarette • Healthcare • Retail [email protected] • Telecom & Internet • Electronics JUNIMAN PHILIPPINES Chief Economist, BII Steven ST CHAN VIETNAM Indonesia (852) 2268 0645 [email protected] Luz LORENZO Head of Research LE Hong Lien, ACCA (62) 21 29228888 ext 29682 • Banking & Financials (63) 2 849 8836 [email protected] Head of Institutional Research [email protected] Warren LAU • Strategy (84) 844 55 58 88 x 8181 (852) 2268 0644 [email protected] Josua PARDEDE [email protected] Laura DY-LIACCO • Strategy • Consumer • Diversified • Utilities Economist / Industry Analyst, BII • Technology – Regional (63) 2 849 8840 Indonesia [email protected] THAI Quang Trung, CFA, Deputy Manager, (62) 21 29228888 ext 29695 William YANG • Utilities • Conglomerates • Telcos Institutional Research (852) 2268 0675 [email protected] (84) 844 55 58 88 x 8180 [email protected] Lovell SARREAL [email protected] • Technology – Regional (63) 2 849 8841 • Real Estate • Construction • Materials MALAYSIA [email protected] WONG Chew Hann, CA Head of Research INDIA • Consumer • Media • Cement Le Nguyen Nhat Chuyen (603) 2297 8686 [email protected] (84) 844 55 58 88 x 8082 Jigar SHAH Head of Research Rommel RODRIGO • Strategy • Construction & Infrastructure [email protected] (91) 22 6623 2601 (63) 2 849 8839 • Oil & Gas Desmond CH’NG, ACA [email protected] [email protected] (603) 2297 8680 • Oil & Gas • Automobile • Cement • Conglomerates • Property • Gaming NGUYEN Thi Ngan Tuyen, Head of Retail Research • Ports/ Logistics [email protected] (84) 8 44 555 888 x 8081 • Banking & Finance Anubhav GUPTA [email protected] Katherine TAN • Food & Beverage • Oil&Gas • Banking (91) 22 6623 2605 (63) 2 849 8843 LIAW Thong Jung [email protected] [email protected] (603) 2297 8688 [email protected] • Metal & Mining • Capital Goods • Property • Banks • Construction NGUYEN Trung Hoa, Dy Head of Retail Research • Oil & Gas - Regional • Shipping (84) 8 44 555 888 x 8088 Urmil SHAH Ramon ADVIENTO [email protected] ONG Chee Ting, CA (91) 22 6623 2606 [email protected] (63) 2 849 8845 • Macro • Steel • Real estate (603) 2297 8678 [email protected] • Technology • Media [email protected] • Plantations - Regional • Mining TRINH Thi Ngoc Diep (84) 4 44 555 888 x 8208 Mohshin AZIZ SINGAPORE THAILAND [email protected] (603) 2297 8692 [email protected] NG Wee Siang Head of Research • Technology • Utilities • Construction • Aviation - Regional • Petrochem (65) 6432 1467 [email protected] Maria LAPIZ Head of Institutional Research • Banking & Finance Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 YIN Shao Yang, CPA [email protected] TRUONG Quang Binh (603) 2297 8916 [email protected] Gregory YAP • Consumer / Materials (84) 4 44 555 888 x 8087 • Gaming – Regional • Media (65) 6432 1450 [email protected] [email protected] • Rubber plantation • Tyres and Tubes • Oil&Gas • SMID Caps – Regional Jesada TECHAHUSDIN, CFA TAN Chi Wei, C FA • Technology & Manufacturing • Tel co s (66) 2658 6300 ext 1394 (603) 2297 8690 [email protected] [email protected] PHAM Nhat Bich • Power • Telcos Wilson LIEW • Financial Services (84) 8 44 555 888 x 8083 (65) 6432 1454 [email protected] [email protected] WONG Wei Sum, C FA • Property Developers • Consumer • Manufacturing • Fishery (603) 2297 8679 [email protected] Kittisorn PRUITIPAT, CFA, FRM ONG Kian Lin (66) 2658 6300 ext 1395 • Property & REITs NGUYEN Thi Sony Tra Mi (65) 6432 1470 [email protected] [email protected] (84) 8 44 555 888 x 8084 LEE Yen Ling • S-R E I Ts • Real Estate [email protected] (603) 2297 8691 [email protected] • Port operation • Pharmaceutical • Building Materials • Glove Producers James KOH Sittichai DUANGRATTANACHAYA • Food & Beverage (65) 6432 1431 [email protected] (66) 2658 6300 ext 1393 CHAI Li Shin • Consumer - Regional [email protected] (603) 2297 8684 [email protected] • Services Sector • Plantation • Construction & Infrastructure YEAK Chee Keong, CFA (65) 6432 1460 KANG Chun Ee [email protected] Sukit UDOMSIRIKUL Head of Retail Research (603) 2297 8675 [email protected] • Offshore & Marine (66) 2658 6300 ext 5090 • Consumer [email protected] Derrick HENG Ivan YAP (65) 6432 1446 [email protected] Mayuree CHOWVIKRAN (603) 2297 8612 [email protected] • Transport (Land, Shipping & Aviation) (66) 2658 6300 ext 1440 • Automotive [email protected] WEI Bin • Strategy LEE Cheng Hooi Regional Chartist (65) 6432 1455 [email protected] (603) 2297 8694 • Commodity • Logistics • S-chips [email protected] Padon VANNARAT John CHEONG (66) 2658 6300 ext 1450 Tee Sze Chiah Head of Retail Research (65) 6432 1461 [email protected] [email protected] (603) 2297 6858 [email protected] • Small & Mid Caps • Healthcare • Strategy

TRUONG Thanh Hang (65) 6432 1451 [email protected] • Small & Mid Caps

April 7, 2014 13

Largan Precision

APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES

DISCLAIMERS This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. MKE may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in this report. This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report. Malaysia Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Singapore This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. Thailand The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result. Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of MBKET. MBKET accepts no liability whatsoever for the actions of third parties in this respect. US This research report prepared by MKE is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations. UK This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Services Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.

April 7, 2014 14

Largan Precision

DISCLOSURES Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities JSC (License Number: 71/UBCK-GP) is licensed under the State Securities Commission of Vietnam.Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.

Disclosure of Interest Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies.

Singapore: As of 7 April 2014, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.

Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.

Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

As of 7 April 2014, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.

OTHERS Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Reminder Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.

Definition of Ratings Maybank Kim Eng Research uses the following rating system BUY Return is expected to be above 10% in the next 12 months (excluding dividends) HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends) SELL Return is expected to be below -10% in the next 12 months (excluding dividends)

Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

April 7, 2014 15

Largan Precision

 Malaysia  Singapore  London  New York Maybank Investment Bank Berhad Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Securities Maybank Kim Eng Securities USA (A Participating Organisation of Maybank Kim Eng Research Pte Ltd (London) Ltd Inc Bursa Malaysia Securities Berhad) 9 Temasek Boulevard 6/F, 20 St. Dunstan’s Hill 777 Third Avenue, 21st Floor 33rd Floor, Menara Maybank, #39-00 Suntec Tower 2 London EC3R 8HY, UK New York, NY 10017, U.S.A. 100 Jalan Tun Perak, Singapore 038989 50050 Kuala Lumpur Tel: (44) 20 7621 9298 Tel: (212) 688 8886 Tel: (603) 2059 1888; Tel: (65) 6336 9090 Dealers’ Tel: (44) 20 7626 2828 Fax: (212) 688 3500 Fax: (603) 2078 4194 Fax: (65) 6339 6003 Fax: (44) 20 7283 6674

Stockbroking Business:  Hong Kong  Indonesia  India Level 8, Tower C, Dataran Maybank, Kim Eng Securities (HK) Ltd PT Maybank Kim Eng Securities Kim Eng Securities India Pvt Ltd No.1, Jalan Maarof Level 30, Plaza Bapindo 2nd Floor, The International 16, 59000 Kuala Lumpur th Three Pacific Place, Citibank Tower 17 Floor Maharishi Karve Road, Tel: (603) 2297 8888 1 Queen’s Road East, Jl Jend. Sudirman Kav. 54-55 Churchgate Station, Fax: (603) 2282 5136 Hong Kong Jakarta 12190, Indonesia Mumbai City - 400 020, India

Tel: (852) 2268 0800 Tel: (62) 21 2557 1188 Tel: (91).22.6623.2600 Fax: (852) 2877 0104 Fax: (62) 21 2557 1189 Fax: (91).22.6623.2604

 Philippines  Thailand  Vietnam  Saudi Arabia Maybank ATR Kim Eng Securities Inc. Maybank Kim Eng Securities Maybank Kim Eng Securities Limited In association with 17/F, Tower One & Exchange Plaza (Thailand) Public Company Limited 4A-15+16 Floor Vincom Center Dong Anfaal Capital Ayala Triangle, Ayala Avenue 999/9 The Offices at Central World, Khoi, 72 Le Thanh Ton St. District 1 Villa 47, Tujjar Jeddah Makati City, Philippines 1200 20th - 21st Floor, Ho Chi Minh City, Vietnam Prince Mohammed bin Abdulaziz Rama 1 Road Pathumwan, Street P.O. Box 126575 Tel: (63) 2 849 8888 Bangkok 10330, Thailand Tel : (84) 844 555 888 Jeddah 21352 Fax: (63) 2 848 5738 Fax : (84) 8 38 271 030 Tel: (66) 2 658 6817 (sales) Tel: (966) 2 6068686 Tel: (66) 2 658 6801 (research) Fax: (966) 26068787

 South Asia Sales Trading  North Asia Sales Trading Kevin FOY Alex TSUN [email protected] [email protected] Tel: (65) 6336-5157 Tel: (852) 2268 0228 US Toll Free: 1-866-406-7447 US Toll Free: 1 877 837 7635 www.maybank-ke.com | www.maybank-keresearch.com

April 7, 2014 16