03 December 2013 Asia Pacific/Taiwan Equity Research Financials (Financials (Asia))

Taiwan Market Strategy Research Analysts SECTOR FORECAST

Chung Hsu, CFA 886 2 2715 6362 [email protected] Taiwan outlook: Global health propels 2014 Michelle Chou, CFA 886 2 2715 6363 [email protected] Figure 1: US PMI leads consensus by five months with a 70% correlation (index) (NT$) Taiwan Research Team US PMI Consensus profit estimates for TWSE (RHS) 65 30 Randy Abrams, CFA Head of Taiwan Research, Semiconductors 60 25 Manish Nigam 55 20 Head of NJA Technology 50 Chung Hsu, CFA 15 Strategy / Financial 45 10 Pauline Chen 40 Tech component / Handset 5 Thompson Wu 35 Tech/Hardware 30 0

Jerry Su

Jul-11 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-12 Jul-13

Jan-06 Jan-04 Jan-05 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Display / LED / Automation Jan-03 Jeremy Chen Source: Datastream, CEIC, Credit Suisse research Non-tech Christiaan Tuntono ■ Profit growth of 14% in 2014E. We estimate that Taiwan will see another Economist 14% profit growth in 2014 after recording 33% growth in 2013 (or 10.5% ex- Chate Benchavitvilai petrochem and TFT), driven by a moderate acceleration in developed Telecom Timothy Ross market (DM) growth, further normalising non-tech profit and a much smaller Shipping drag from consumer tech after significant cuts in weighting and expectation. The strong correlation (70-80%) between US PMI and Taiwan consensus Derrick Yang Component/ handset / Display / LED earnings revisions trend should be supportive, as the global macroeconomic Michelle Chou, CFA backdrop stays in a sweet spot of moderate growth acceleration with a Strategy / Financial continued easing in monetary policy. Davin Wu Shipping ■ Favourable shift in government's policy focus. Domestically, we expect a shift in the government’s policy focus towards stimulus after having focused Contribution by on reforms over the past two years (i.e., tax reform on capital gains/luxury Nickie Yue Irene Wu tax, pension reform and the removal of subsidies on electricity/gasoline) as Chris Shieh the KMT party will try to revive its low approval rating ahead of the upcoming elections. However, new cross-strait progress is likely to be slower than expected, especially with the approval of service agreements potentially delayed until late 2Q-3Q14. ■ Stock calls. We set our year-end TAIEX target at 9,000, based on a ten-year average P/B of 1.7x with the market’s ROE recovering towards its long-term average of 11.7%. Stock/sector preference: we continue to like upstream tech that should see stronger and earlier benefits from improving DM growth (TSMC/ASE/Mediatek); stocks that are still in the early part of their up-cycle or with a secular growth profile (CTBC/St Shine/EVA Air); and select tech hardware names with positive drivers in 2014 (Hon Hai and Catcher).

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03 December 2013 Focus charts

Figure 2: Improving US job market—US non-farm payrolls' Figure 3: … and US PMI has reached its highest level 3 mma has consistently stayed above 200,000 … since 2Q11 US Purchasing Managers' Index 400 latest 202k 65 200 60 0

-200 55

-400 farm payrollsfarm (thousands)

- 50 -600 US US non 45 -800 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 40 US non-farm payrolls (3mma) Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Source: DataStream Source: CEIC, Credit Suisse Research

Figure 4: CS economics team expects global GDP growth Figure 5: Taiwan GDP growth tends to surprise positively to accelerate from 2.7% in 2Q13 to 3.50-3.75% in 4Q14 when DM growth outperforms EM growth and vice versa (index) (%) Consensus GDP growth vs actual DM PMI (RHS) EM PMI (RHS) 6 5.3 6% 65 5.1 5.2 5.2 5 4.7 4.7 4% 60 3.8 3.9 3.9 4 3.7 3.2 2% 2.8 2.7 2.9 55 3 2.3 0% 2 50 -2% 1 45 - -4%

(1) -0.4 -6% 40

2002 2006 2010 2000 2001 2003 2004 2005 2007 2008 2009 2011 2012

4Q11 2Q12 4Q12 2Q13 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 1Q12 3Q12 1Q13 3Q13

2014E 2015E 2013E Source: IMF, Credit Suisse estimates Source: Thomson Reuters DataStream, Haver Analytics®, Credit Suisse

Figure 6: Consensus 2014 growth estimate by sub-sector Figure 7: Consumer tech’s (PC hardware, handsets and —financials, telecoms to see lowest growth (ex-TFT-LCD) components) earnings weighting has declined notably 314% Consensus estimates: 2014E earnings growth Aggregate consumer electronics profits as % of total CS coverage 50% 40% 38% 45% 40% 35% 40% 29% 30% 25% 24% 22% 40% 20% 18% 33% 35% 14% 32% 20% 11% 11% 10% 35% 10% 4% 2% 30% 25% 26% 0% 24% 23% -10% 25% 21% -20% 20% -30% 15% -40% -31% 10%

LED 5%

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2013 E 2013 E 2014 TechComponents Source: DataStream, Credit Suisse estimates Source: Reuters, Credit Suisse estimates

Taiwan Market Strategy 2 03 December 2013 Global health propels 2014 We believe Taiwan is well positioned to benefit from a healthy global macroeconomic Taiwan should benefit from backdrop with earnings likely growing another 14% in 2014E after 33% profit growth in the healthy global 2013 (10.5% ex-TFT and petrochemicals). Earnings growth should be supported by better macroeconomic backdrop export growth in 2014E (4.3% vs 2.7% in 2013), continued normalising of non-tech profits with consensus' earnings (i.e. transportation and materials) and a much smaller drag from consumer tech after revisions trend for Taiwan significant reductions in both weightings and expectations for handsets, PC hardware and having a 70%-plus tech component sectors over the past two years. correlation to DM growth Historically, consensus' earnings revisions trend for Taiwan shows a 70%-plus correlation to developed market growth. Therefore, with the global macroeconomic backdrop likely staying in a sweet spot of moderate growth acceleration and a continued easing in monetary policy, consensus earnings revisions trend should stay supportive in 2014. A shift in government's policy focus: From reform to stimulus Domestically, we expect the government's policy to turn more supportive after much focus More stimulus policies from on reforms in the past two years (i.e., tax reform by introducing luxury and capital gains the government, i.e., tax, SOE reform by removing part of government subsidies on electricity/gasoline prices, facilitating private sector and pension reform by reducing benefits and extending the retirement age), as the KMT investments in public strives to revive its low approval rating ahead of the upcoming elections. We expect the infrastructure, setting up government's stimulus policies to focus on: (1) facilitating private sector investments in free trade zones and signing public infrastructure and/or the government securitising some existing projects to raise more free trade agreements funds for new projects; (2) setting up free trade zones to induce greater private to support domestic fund investments; and (3) signing more free trade agreements with trading partners. However, flows we do expect limited new cross-strait progress as both sides wait for the service agreement to be approved by the legislature, which could be delayed until the next legislative session in May-June 2014. This shift in the government's policy focus could help reverse the negative domestic fund flows in 2013 as both local institutions and government funds were net sellers while retail long margins remained depressed at less than NT$200 bn, a level only sustained and seen during crises (i.e., the tech bubble in 2000, SARS in 2003 and the Global Financial Crisis in 2008-09). Sector preference and stock picks We set our year-end 2014 index target at 9,000 (implies 7.1% potential upside) and is Our top picks are: TSMC, based on a ten-year average forward P/B of 1.7x (implies 15.6x P/E) with the market's ASE, Mediatek, CBTC, St. ROE recovering towards its long-term average of 11.7% (from 10.7% in 2013). Our stock Shine, Eva Air, Hon Hai and preferences are: Catcher (1) Upstream tech that continues to see earlier and stronger benefits from improving DM growth—TSMC (higher volumes, improving mix and return of cash flow), ASE (better capex control, improving margins from falling material costs and a new driver from fingerprint sensor) and Mediatek (high growth in EM smartphones). (2) Stocks still in the early part of their up-cycle or with a secular growth profile such as CTBC Financial (better profit growth with the stock priced for limited incremental profits from newly acquired businesses), St Shine (market share gains with new capacity online in 1Q14) and EVA Air (a low valuation with leverage to growing regional traffic, PRC inbound demand and TW outbound traffic to Japan). (3) Select downstream tech names with positive drivers into 2014, such as Hon Hai (faster-than-expected margins with an improved forecast visibility) and Catcher (better share gains with new smartphone project wins).

Taiwan Market Strategy 3 03 December 2013 CS model portfolio constituents

Figure 8: CS model portfolio constituents 2014E Sector Ticker Price TP Rationale PE PB ROE Div Yld Higher volume on demand for specialty technology with improving mix through its TSMC 2330 105.0 116.0 13.1 2.8 22.8% 3% high 28nm HPM and 20nm share + return of cash flow as capital intensity peaked in 2013 Better capex control and improving margins from lower material costs + new driver ASE 2311 29.4 34.0 12.3 1.7 14.7% 5% from the fingerprint sensor, with Apple AP packaging and test also coming in mid- 2014. The best play for the higher resolution story. GM for Chipbond's core business Chipbond 6147 61.9 72.0 11.8 1.9 16.8% 7% (bumping, testing, packaging) to improve in 2014 on better utilisation and depreciation roll-off. Leading position in the high growth EM smartphone space, growth in TD-SCDMA & MediaTek 2454 436.0 480.0 18.2 3.3 18.5% 4% tablets, catalyst from LTE and operating leverage from growth and improving GMs.

The best proxy to play the iPad product cycle. Radiant should rerate on margin Radiant 6176 105.5 126.0 8.9 2.0 23.9% 6% recovery on higher mix of tablet/NB and greater scale. Better share gains from a more diversified customer mix and better financial Catcher 2474 180.0 200.0 10.4 1.8 17.8% 3% transparency. Main catalysts include a better sales outlook and new smartphone project wins. We believe that the LED sector is heading into a recovery in 2014 and Epistar should Epistar 2448 51.2 65.0 26.6 1.0 3.7% 0% be well-positioned to ride on the trend with its superior technology and bigger scale. Opportunity to succeed in three areas: (1) smart-devices; (2) ability to provide Compal 2324 22.4 27.0 9.2 0.8 9.2% 5% customers with one-stop shopping; (3) servers with potentially new tier-1 server OEM wins. We expect the stock to re-rate as margins improve faster than the market expects, Hon Hai 2317 78.0 101.0 9.3 1.2 13.5% 2% and forecasting visibility improves post IFRS adoption.

Current valuation implies for very modest profit from the acquired new businesses CTBC Holding 2891 19.4 22.5 9.7 1.3 14.0% 4% while it remains the only TW bank to generate 1% ROA on a consistent basis.

One of the very few Taiwan insurers with a profitable underlying business and China's China Life TW 2823 28.5 34.0 11.9 1.1 9.6% 2% JV provides a long term growth upside for shareholders.

Better top-line momentum, lower credit cost for the next two years and compelling Ta Chong Bank 2847 10.7 13.0 8.2 0.8 10.1% 4% valuation with M&A upside from Carlyle exist.

Renewed upward trend for MEG driven by a dearth of new capacity required to Nan Ya Plastics 1303 64.8 75.0 14.4 2.0 14.3% 3% accommodate normal demand growth. Turnaround of Nanya Tech also adds tailwind

Preferred among our material coverage. We expect the positive pricing environment Taiwan Cement 1101 46.9 48.2 15.0 2.2 14.8% 5% should sustains into 2014, thanks to better supply discipline and improving demand. Strong rebound from 4Q13, stoked by the pricing increase. Also offers a volume Asia Cement 1102 39.3 44.0 14.0 1.8 13.2% 5% growth story for 2014 as new production lines at Jiangxi will be fully ramped by early 2014 . Undemanding valuation and leverage to growing regional traffic growth, capitalising EVA Air 2618 17.1 20.0 16.5 1.3 8.5% 0% on PRC inbound demand and TW outbound traffic growth to Japan and Southeast Asia. We believe on-going margin improvement at the CVS business and strong profit PCSC 2912 210.0 264.5 22.6 7.5 34.7% 3% growth at the non-CVS units continued to underpin our investment thesis on PCSC. A major beneficiary of global private label brands' share gain from the big-4, especially St. Shine 1565 891.0 990.0 19.8 8.9 50.4% 3% in Japan. In addition, new capacity is just around the corner with 14 new lines in 1Q14. Note: Priced as of 29 November 2013. Source: Bloomberg, Credit Suisse estimates

Taiwan Market Strategy 4 03 December 2013 Global health propels 2014 We believe Taiwan is well positioned to benefit from a healthy global macro backdrop with We expect Taiwan's earnings likely to grow by another 14% in 2014E after 33% profit growth in 2013 (10.5% earnings to grow another ex-TFT and petrochemical). Earnings growth should be supported by better export growth 14% in 2014 on: (1) better in 2014E (4.3% vs 2.7% in 2013), continued normalising of non-tech profits and a much developed market growth; smaller drag from consumer tech after significant reductions in both weightings and (2) continued normalising of expectations for handsets, PC hardware and tech component sectors in the past two years. non-tech profits; and (3) less drag from consumer tech Historically, the consensus earnings revision trend for Taiwan has shown a 70%-plus correlation to developed market growth. Therefore, with the global macro backdrop likely to stay in a sweet spot of moderate acceleration in growth with a continued easing in the monetary policy, consensus' earning revision trend should stay supportive in 2014.

Figure 9: CS economics team expects global GDP growth Figure 10: …and this should help drive Taiwan's export to accelerate from 2.7% in 2Q13 to 3.5-3.75% in 4Q14… recovery and GDP growth in 2014E

(%) (%) Taiwan export growth 6 5.3 40 33.6 5.1 5.2 5.2 5 4.7 4.7 30 3.8 3.9 3.7 3.9 19.8 4 20 3.2 12.8 10.6 12.3 2.8 2.7 2.9 3 10 7.8 5.7 2.3 4.3 2.7 4.3 2 - (1.2) 1 (10)

- (20) (19.4) -0.4 (1) (30)

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F

2002 2006 2010 2000 2001 2003 2004 2005 2007 2008 2009 2011 2012

2014E 2015E 2013E Source: IMF, Credit Suisse estimates Source: CEIC, Credit Suisse estimates

Figure 11: Earnings growth and valuation summary CS estimates Consensus estimates Valuation (2014E) Earnings Earnings Earnings Earnings P/B P/E ROE revision YTD growth revision YTD growth 2013E 2014E 2013E 2014E 2013E 2014E 2013E 2014E (x) (x) (X) Taiwan coverage -7% -9% 33% 14% -3% -6% 30% 13% 1.6 14.3 12% Taiwan tech -18% -16% 23% 18% -11% -12% 25% 14% 1.7 13.3 13% Taiwan non-tech 8% 0% 47% 10% 7% 4% 36% 12% 1.5 15.4 10% Breakdown by sub-sector Foundry 0% -5% 16% 8% 5% 3% 14% 10% 2.4 13.5 19% Backend -11% -3% 3% 24% -15% -4% 1% 29% 1.5 12.7 12% IC design 0% 22% 40% 10% -3% 5% 45% 24% 3.2 17.8 17% TFT LCD -68% -58% n.m 76% 22% -65% 131% -31% 0.7 14.5 5% Tech components -6% -6% 6% 12% -7% -7% 6% 14% 1.8 14.0 13% LED -35% -29% 458% 50% -9% -18% 515% 40% 1.2 19.0 7% Tech hardware -30% -22% -14% 29% -26% -21% -10% 20% 1.2 10.0 12% Handsets -62% -61% -61% 17% -58% -55% -61% 22% 2.5 25.9 10% Automation -3% -2% 23% 20% -4% -1% 21% 25% 2.4 18.7 14% Financials 7% 0% 20% 7% 28% 26% 21% 4% 1.1 13.1 9% Petrochemicals 14% 7% 256% 29% 0% -6% 217% 11% 2.0 17.6 12% Developers & asset plays 176% 8% 349% -61% -7% -4% 40% 18% 1.4 11.1 13% Materials 6% -2% 42% 18% 5% 7% 42% 38% 1.4 15.8 9% Healthcare 6% 18% 37% 36% 11% 27% 33% 35% 7.7 24.3 35% Transportation -92% -52% -57% 794% -83% -52% 1% 314% 1.0 18.6 6% Consumer 12% 17% 18% 13% 6% 5% 11% 11% 2.7 19.2 15% Telecom -10% 0% 4% 6% -7% -11% 3% 2% 2.4 16.6 14% Source: Reuters, Credit Suisse estimates

Taiwan Market Strategy 5 03 December 2013

Improving global macro backdrop with moderate growth acceleration in 4Q14E… The improving global macro backdrop is expected to be an important catalyst supporting Taiwan is leveraged to the Taiwan's growth, as exports still equate to 70% of its GDP. Improving US job data (Figure global macro backdrop with 12) and global PMI rising to its highest level since May 2011 (Figure 14) underpin our exports still equating to 70% positive view on the global macro backdrop. In addition, our economics team's basic of GDP material index (BMI) also points to a further rise in industrial products and supports the call for accelerating global GDP growth (driven by the developed markets) into 4Q14.

Figure 12: Improving US job market—US non-farm Figure 13: 65%+ of Taiwan's exports are ultimately sent to payrolls' 3 mma have consistently stayed above 200,000 developed markets (2012)

400 latest 202k 200 Others China & HK 10% 12% 0 Asian 6 14% -200

-400 USA farm payrollsfarm (thousands) - Europe 33%

-600 20% US US non -800 Japan Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 11% US non-farm payrolls (3mma)

Source: DataStream Source: Ministry of Finance, Credit Suisse estimates

Figure 14: US PMI has reached its highest level since Figure 15: CS BMI index points to further upside to 2Q11 industrial production US Purchasing Managers' Index 65

60

55

50

45

40 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Source: CEIC, Credit Suisse research Source: Thomson Reuters DataStream, Credit Suisse research …and developed market-driven growth is positive for Taiwan From 2Q11-1Q13 when global growth was better driven by emerging markets (Figure 16), Taiwan's GDP growth lagged and actually surprised more to the downside. Conversely, when growth was better driven by the developed markets (i.e., 2007 and 2010), Taiwan's growth tends to strengthen and see more positive surprises. As our global economics team estimates more than a doubling of developed market growth in 2014 (i.e., the US to 2.6% from 1.7% in 2013, the Euro area to 1.3% from -0.4% and the UK to 2.8% from 1.4%), there should be better prospects for Taiwan's exports and GDP to surprise positively in 2014.

Taiwan Market Strategy 6 03 December 2013

Figure 16: Taiwan GDP growth tends to surprise positively when DM growth outperforms EM growth

Consensus GDP growth vs actual DM PMI (RHS) EM PMI (RHS) (index) 6% 65

4% 60

2% 55 0% 50 -2%

45 -4%

-6% 40

4Q11 2Q12 4Q12 2Q13 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q10 Source: Thomson Reuters DataStream, Haver Analytics®, Credit Suisse research US PMI leads Taiwan consensus revision trend by four to five months with high correlation Largely because of Taiwan's significant export exposure to the US and high composition Consensus' earnings of tech, US manufacturing PMI leads Taiwan's consensus earnings revisions by four to revision trend for Taiwan in five months with a 70% correlation. For early cycle sectors (i.e., upstream tech), the 2014 could turn more correlation is even higher, at 80%, and the lead time is only two to three months. positive on improving PMI and BMI Therefore, with US PMI reaching its highest level since 2Q11 and CS BMI pointing to further upside in industrial production, consensus' earnings revision trend for Taiwan in 2014 could stay supportive, especially as both weightings and expectations for consumer tech (PC/handset/tech components) have decreased significantly over the past two years.

Figure 17: PMI leads consensus estimates by five months Figure 18: PMI leads consensus estimates for upstream with a 70% correlation tech by 2-3 months with an 80% correlation

(index) US PMI Consensus profit estimates for TWSE (RHS) (NT$) (index) US PMI Consensus profit estimates for Upstream Tech (NT$bn) 65 30 65 300

60 25 60 250 55 55 20 200 50 50 15 150 45 45 10 100 40 40

35 5 35 50

30 0 30 0

Jul-11 Jul-05 Jul-06 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-12 Jul-13 Jul-03 Jul-04 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Jan-06 Jan-12 Jan-04 Jan-05 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-13 Jan-03 Source: DataStream, CEIC, Credit Suisse Research Source: DataStream, CEIC, Credit Suisse estimates Saw some stabilisation in earnings revisions in 2013 After two very difficult years in 2011 and 2012 when aggregate Taiwan saw nearly a 30% profit decline, we have started seeing a bit of stabilisation in 2013 (only a 3% cumulative earnings cut) despite concerns about downstream tech, as upgrades in financials and upstream tech helped offset a part of the weakness (Figure 21).

Taiwan Market Strategy 7 03 December 2013

For 2014, while we do not expect to see similar upgrades for financials, negative drags from downstream tech are much smaller after a 25% earnings cut since 2010. Aggregate earnings of the PC hardware, handsets and tech components' composition of Taiwan have declined from 40% of our Taiwan coverage universe in 2008 to 21% now.

Figure 19: Consensus earnings growth estimates for Figure 20: Consensus earnings revisions for Taiwan Taiwan 50% 46% 40% 71% 80% 129%47% 76%66% 34% 40% 36% 36% 30% 32% 24% 30% 22% 30% 26% 20% 24% 20% 21% 20% 14% 20% 12% 13% 10% 6% 7% 3% 4% 5% 10% 1% 0% 0% -3% -1% -10% -6% -10% -6% -5% -10% -12% -13% -20% -15% -20% -17% -18% -66% -54% -20% -66% -31%

-30% -23% -33% -30% -24% -52%

2006 2003 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012

2014E 2013E 2014E 2013E Source: DataStream, Reuters, Credit Suisse Research Source: DataStream, Reuters, Credit Suisse Research

Figure 21: 2013 consensus earnings revisions by major Figure 22: Consumer tech’s (PC hardware, handsets and sub-sector in Taiwan components) earnings weighting has declined notably Aggregate consumer electronics profits as % of total CS coverage Upstream Tech Downstream Tech Financials Non-Tech ex Financial 45% 40% 40% 40% 35% 30% 33% 35% 32% 20% 30% 25% 26% 24% 23% 10% 25% 21% 0% 20% 15% -10% 10% -20% 2013E Consensus estimates earning revision 5% -30%

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May-13 2014 E 2014 E 2013 Source: DataStream, Reuters, Credit Suisse Research Source: Credit Suisse estimates

Figure 23: Aggregate profit growth of top-five sectors as a Figure 24: Aggregate profit growth of top-five sectors as a % of TW profit—better breadth for profit growth in 2014 % of total Taiwan profit growth

100% 200% 560% 90% 80% 160% 70% 60% 120% 50% 40% 80% 30% 20% 40% 10% 0% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Note: Top-five sector aggregate profit increase/ decline as % of total Note: Top-five sector aggregate profit increase/decline as % of total Taiwan profit of the year Taiwan profit increase/ decline Source: Company, TEJ, Credit Suisse estimates Source: Company, TEJ, Credit Suisse estimates

Taiwan Market Strategy 8 03 December 2013

Figure 25: 2014E earnings growth—CS vs consensus Figure 26: P/B-ROE by sub-sector (2014E)

100% CS vs consensus : 2014E earnings 200% 81% 80% 150% 60% 100% Premium 40% 28%

20% 8% 7% 50% 5% 4% 4% 3% 2% 0% 0% 0% -1% -2% -2% -2% -3% -4% -20% Discount -15%

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TechComponents Source: Reuters, Credit Suisse estimates Source: Reuters, Credit Suisse estimates

Figure 27: Consensus 2014E growth by sub-sector Figure 28: CS 2014 growth estimates by sub-sector 314% Consensus estimates: 2014E earnings growth 794% CS estimates: 2014E earnings growth 50% 76% 40% 38% 60% 50% 40% 35% 29% 50% 30% 25% 24% 22% 36% 20% 18% 40% 20% 14% 30% 29% 29% 11% 11% 10% 30% 24% 10% 4% 2% 20% 18% 17% 20% 13% 12% 0% 8% 7% 10% 6% -10% 0% -20% -10% -30%

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TechComponents Source: Reuters, Credit Suisse estimates Source: Reuters, Credit Suisse estimates Taiwan market's ROE to recover to 11.7%… With 12.5% profit growth in 2014, we estimate that Taiwan market's ROE will recover Improving ROE will help towards its long-term average of 11.7% versus 10.7% in 2013. We believe this will help TAIEX to trade back to its the TAIEX to trade back to its mid-cycle valuation of 1.7x forward P/B and 15.6x P/E. mid-cycle valuation of 1.7x forward P/B and 15.6x P/E Within Taiwan, backend (i.e., ASE/SPIL) and IC design (i.e., Mediatek) are still delivering ROE below their mid-cycle levels which we expect to grow faster than the average profit growth so this implies faster ROE improvement in the coming year. Within non- tech/financial sectors, we expect the transportation sector to show the best earnings growth momentum with ROE only at slightly above its mid-cycle average (Figure 29).

Figure 29: 2014E ROE returns to the historical average Figure 30: 2014E ROE vs. historical average by sub-sector Taiwan Average (std) 20% 2.0 18% 18% 17% 1.5 16% 1.0 15% 14% 14% 0.5 14% 13% 12% 12% 11% - 10% 9% 10% 9% (0.5) 8% (1.0) 8% 7% (1.5) 6% 5% (2.0) 4%

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2009 2012 2002 2003 2004 2005 2006 2007 2008 2010 2011 2013 2014 2001 Source: TEJ, Credit Suisse estimates Source: TEJ, Credit Suisse estimates

Taiwan Market Strategy 9 03 December 2013

Figure 31: 2014E ROE vs historical peak and trough levels by sub-sector 80%

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Transportation Petrochemicals TechHardware Source: TEJ, Credit Suisse estimates …but comes with QE tapering in 1H14 The flipside of a better macro backdrop in 2014 is the concern that quantitative easing Taiwan's strong current (QE) tapering will come, especially with such a notable improvement in US job data. While account and forex reserve moderate growth acceleration should keep the pace of QE tapering gradual, our US rate position could help to strategist expects tapering to come in 1H14. This would inevitably raise volatility for capital provide a buffer when QE markets, especially EMs, though Taiwan's strong current account and forex reserve tapering happens position could help provide a buffer compared to other emerging markets that have relied on external funding. According to our economist, Taiwan's current account surplus is at 10.6% of GDP with a forex reserve of 82.5% of GDP.

Figure 32: Taiwan's market volatility has contracted over the past few years Volatility 30%

25%

20%

15%

10%

5%

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

Source: TEJ, Credit Suisse research

Taiwan Market Strategy 10 03 December 2013

Figure 33: Taiwan is supported by a stronger current account and forex reserve

Korea Taiwan Indonesia India 1997 Latest* 1997 Latest* 1997 Latest* 1997 Latest* USD bn GDP 526.2 1,157.6 297.8 496.0 215.8 887.7 423.1 1,844.2 FX Reserves 20.4 329.7 83.5 409.1 17.4 92.7 29.7 282.5 Current Account (8.2) 59.1 7.1 52.8 (5.0) (28.8) (5.5) (87.8) Short-term External Debt 63.8 122.3 23.4 125.0 32.9 45.2 5.0 96.7 Ratio FX Reserves/GDP 3.9% 28.5% 28.0% 82.5% 8.1% 10.4% 7.0% 15.3% Current Account/GDP -1.6% 5.1% 2.4% 10.6% -2.3% -3.2% -1.3% -4.8% Short-term External Debt/FX Reserves 312.7% 37.1% 28.0% 30.6% 188.6% 48.8% 17.0% 34.2% Note: Korea, Taiwan, Indonesia as of 2Q13, India as of 1Q13. Source: CEIC, World Bank, Credit Suisse. QFIIs fund flow and portfolio weighting QFIIs bought US$7.1 bn worth of Taiwanese stocks in 11M13 and this marks the third QFIIs net bought Taiwan for consecutive year of net buying since US$15 bn of net selling in 2008. While the amount of three consecutive years. net buying is not as huge as in some of the previous years, it was spread out across most 80% of net buying in 2013 is major sub-sectors except telecoms, panel and PC hardware (Figure 34). Nearly 80% of in non-tech/ financials … the net buying in 2013 is in non-tech/financials compared with their sector representation of 47% in MSCI Taiwan, reflecting the concern about the structural issue faced by some of Taiwan consumer tech sectors and weak end-demand. However, if we take another look at the funds flow in 2H13, it is actually less skewed to … with slight net buying in non-tech/financials. In fact, we have seen a slight net buying in the tech hardware space tech hardware since 2H13 (the largest QFII net selling sector in 2011 and 2013) every month so far in 2H13, despite the ongoing concerns about the sector. This seems to suggest that most of the known negatives are already reflected in share prices/valuations, possibly presenting some opportunities in the sector.

Figure 34: QFII funds flow by sub-sector (US$ mn) 2011 2012 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 1H13 YTD Foundry 1,363 2,295 -204 -634 547 604 -647 -20 -354 IC design -369 2,056 33 78 309 558 94 604 1,677 Backend -200 64 -39 -29 237 228 84 69 550 TFT+ touch -1,674 -126 -217 26 98 -242 -187 -307 -830 Handset -1,859 -2,648 -353 105 59 109 99 85 103 Tech components -555 -136 145 -54 316 336 43 1,176 1,963 Tech hardware -3,334 1,761 426 79 469 28 151 -3,319 -2,165 Total tech -6,439 3,015 -197 -449 2,132 1,690 -319 -1,562 1,295 Financial -1,077 928 1,186 -337 856 540 5 1,126 3,376 Materials -1,701 433 174 51 323 164 -36 -232 444 Petrochem 1,078 -339 449 -185 169 159 -106 -381 104 Property -1,038 166 187 -66 97 -6 -114 65 163 Consumer 417 164 205 -155 163 158 -214 673 829 Industrial 716 677 239 32 48 244 -9 754 1,308 Healthcare/biotech 99 151 -11 4 11 62 35 188 288 Telecom -498 -1,013 380 -140 9 -426 -209 -724 -1,110 Transportation -259 446 68 -51 131 7 5 48 208 Total non-tech -2,421 1,900 2,892 -896 1,849 1,030 -676 1,615 5,816 Total -8,859 4,915 2,695 -1,345 3,981 2,721 -995 53 7,111 Source: TEJ, Credit Suisse research After the rotation in 2013, QFIIs portfolio weighting is most overweighted on consumer, healthcare and industrial, while financials is back to neutral relative to the historical weighting (Figure 41-46). Tech's weighting is lowered to the low end of the historical range (Figure 35) and in particular, the weighting on tech hardware is near the lowest level in ten

Taiwan Market Strategy 11 03 December 2013 years (Figure 37-38). We note our tech hardware analyst, Thompson Wu, recently upgraded both Hon Hai and Compal Electronics to an OUTPERFORM.

Figure 35: QFII portfolio weighting on tech Figure 36: Domestic ITC's portfolio weighting on tech 90% 90%

80% 80%

70% 70%

60% 60%

50% 50%

40% 40%

Jul-02 Jul-13 Jul-02 Jul-13 Jul-01 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-01 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

Jan-07 Jan-07 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

QFII portfolio weighting in Tech Average +1std -1std +2std -2 std Domestic institution portfolio weighting in Tech Average +1std -1std +2std -2 std Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse research

Figure 37: QFII's absolute weighting on tech hardware Figure 38: QFII's relative weighting on tech hardware

5% 21% 4% 19% 3% 17% 2%

15% 1% 0% 13% -1% 11% -2% 9% -3% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Tech Hardware Average +1 std -1 std +2 std -2 std Tech Hardware Average +1 std -1 std +2 std -2 std

Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse research

Figure 39: QFII's absolute weighting on financials Figure 40: QFII's relative weighting on financials

18% 0%

-2% 15% -4%

-6% 12% -8%

9% -10% -12%

6% -14% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Financial Average +1 std -1 std +2 std -2 std Financial Average +1 std -1 std +2 std -2 std

Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse research

Taiwan Market Strategy 12 03 December 2013

Figure 41: QFIIs absolute weighting on consumer Figure 42: QFIIs relative weighting on consumer

8% 3.0% 7% 2.5% 6% 2.0% 5% 4% 1.5%

3% 1.0% 2% 0.5% 1% 0.0% 0% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Consumer Average +1 std -1 std +2 std -2 std Consumer Average +1 std -1 std +2 std -2 std

Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse research

Figure 43: QFIIs absolute weighting on healthcare Figure 44: QFIIs relative weighting on healthcare

2.0% 1.8% 1.5% 1.6% 1.2% 1.2% 0.9% 0.6% 0.8% 0.3% 0.4% 0.0%

0.0% -0.3% -0.6% -0.4% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Healthcare / biotech Average +1 std -1 std +2 std -2 std Healthcare / biotech Average +1 std -1 std +2 std -2 std

Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse research

Figure 45: QFII's absolute weighting on industrials Figure 46: QFII's relative weighting on industrials

4.5% 2.1% 4.0% 1.8% 3.5% 1.5% 3.0% 1.2% 2.5% 0.9% 2.0% 0.6% 1.5% 0.3% 1.0% 0.0% 0.5% -0.3% 0.0% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Industrial Average +1 std -1 std +2 std -2 std Industrial Average +1 std -1 std +2 std -2 std

Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse research Domestic fund flows were less supportive In contrast to positive QFII inflows, domestic fund flows have been less supportive largely because of mutual fund redemptions by domestic institutional investors.

Taiwan Market Strategy 13 03 December 2013

Figure 47: Domestic institutional funds have net sold Figure 48: Government funds have net sold NT$18.3 bn NT$61 bn YTD YTD (NT$bn) (NT$bn) Net buy sell of 8 major state controlled brokers (NT$bn) 25 40 20 30 15 20 10 10 5 - - (10) (5) (20) (10) (30) (15) (40) (20) (50)

(25) (60)

Jul-12 Jul-13

Jul-11 Jul-12 Jul-13

Apr-12 Oct-12 Apr-13 Oct-13

Jun-12 Jan-12 Jan-13 Jun-13

Feb-12 Mar-12 Feb-13 Mar-13

Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13

Nov-11 Dec-11 Aug-12 Sep-12 Nov-12 Dec-12 Aug-13 Sep-13 Nov-13

Jan-13 Jan-11 Jun-11 Jan-12 Jun-12 Jun-13

May-12 May-13

Mar-11 Mar-12 Mar-13

Feb-11 Feb-12 Feb-13

Dec-12 Nov-11 Dec-11 Nov-12

Aug-11 Sep-11 Aug-12 Sep-12 Aug-13 Sep-13

May-12 May-13 May-11 Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse research

Figure 49: Retail long-margin balance remains low Figure 50: Margin balance-implied TAIEX (NT$ bn) Outstanding long margin balance (Index) TAIEX Margin implied TAIEX 700 12,000 Asian financial Tech SARS Global Tech Global crisis bubble financial crisis bubble financial crisis 600 10,000 500 8,000 400 6,000 300 4,000 200 Asian financial crisis 100 2,000

- -

Jul-99

Apr-04 Oct-13

Jun-05 Jan-09 Jun-11

Jan-01 Jan-08 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Mar-97 Feb-03 Mar-10

Nov-01 Sep-00 Aug-06 Nov-07 Aug-12 May-98 Source: TEJ, Credit Suisse research Source: TEJ, Credit Suisse estimates

Taiwan Market Strategy 14 03 December 2013 A shift in government's policy focus: From reform to stimulus Domestically, we expect the government's policy to turn more supportive after much focus on reform over the past two years (i.e., tax reform by introducing a luxury and capital gains tax, SOE reform by removing part of government subsidies on electricity/gasoline prices and pension reform by reducing benefits and extending the retirement age), as the KMT strives to revive its low approval rating ahead of the upcoming elections. We expect the government's stimulus policies to focus on: (1) facilitating private sector investment in public infrastructure and/or the government securitising some existing projects to raise funds; (2) setting up free trade zones to induce greater private investment; and (3) signing more free trade agreements with trading partners. However, we do expect limited new cross-strait progress, as both sides wait for the service agreements to be approved by the Legislature which could be delayed to the next Legislative session in May-June 2014.

Figure 51: Key reform policies over the past two years Date Event Details Taxation of 10-15% for property not lived in by the owner and sold within two years of purchase Jun-11 Luxury tax Taxation of 10% for luxury goods Government ended a long-standing government subsidy to raise electricity rates in three stages (40%, 40%, Removal of government May-12 20%) with an average increase of 35% for industrials, 30% for commercials and 16.9% for households. The subsidies on electricity rate increase magnitude is larger for the heavier users. Post the revision in June 2013, CGT applies to IPO gains and a 0.1% tax on trading accounts that sell more Jul-12 Capital gains tax than NT$1 bn worth of stocks per year. QFIIs remain exempted. The Executive Yuan approved amendments to laws relating to the national labour insurance system and the Apr-13 Pension reforms special systems for public schoolteachers and military personnel. The revision is with the Legislature for deliberation. Source: Economic Daily News, Commercial Times, major government websites, Credit Suisse

Figure 52: Expected benefits of ASTEP and FEPZs Items ASTEP (Singapore and Taiwan's ECA) Free Economic Pilot Zones (FEPZs) Effective date 7-Nov-13 8-Aug-13 Expected benefit By 2028 1. Increase private sector investment by NT$20 bn by 2014 1. Increase GDP by US$700 mn 2. Raise GDP by NT$30 bn by 2014 2. Increase total national output by US$1.4 bn 3. Create 13,000 jobs by 2014 3. Create 6,154 jobs 4. Increase trade volume in the zones to NT$1 tn by 2015 5. Develop innovative business models 6. Create favourable conditions for TPP and RCEP Source: Ministry of Economic Affairs, CEPD, Credit Suisse research But expect slower progress on cross straits However, we do expect limited new cross-strait progress in 2014, as both sides wait for the service agreement to be approved by the Legislature before continuing to discuss and signing other major agreements. With the service agreement likely to be delayed to late 2Q or 3Q14, a meaningful new cross-strait agreement is likely to stay muted through 1H14. Historically, cross-strait talks tend to slow around Taiwanese elections and this could put another brake on major cross-strait agreements in 4Q14.

Taiwan Market Strategy 15 03 December 2013

Figure 53: Major cross-strait events Date Items Details

Jun-08: Charter flights begin on weekends. 18 flights per weekend are allowed. Nov-08: Daily flights (on weekends only) commence. 108 flights per week Aug-09: Regular flights allowed (rather than chartered); 270 flights per week

Jun-08 to May-10: Another 100 weekly flights permitted (370 flights in total) with Shanghai Hongqiao Direct flights Aug 13 International Airport and Shijiazhuang Airport added to the list of allowed destinations. Jun-11: Direct flights increased to 558 per week (from 370). In addition, Taiwan starts a trial programme to allow individual tourists from Shanghai, Beijing and Xiamen to visit Taiwan Feb-13: Direct flights increased to 616 per week Aug-13: Direct flights increased to 670 per week Jul-08: Taiwan opened to 3,000 mainland tourists per day May-10: Tourism offices opened in each other's regions with 4,000 mainland tourists per day Jun-11: Taiwan starts a trial programme to allow individual tourists from Shanghai, Beijing and Jul-08 to Xiamen to visit Taiwan (up to 500 individuals per day). Chinese tourists Dec-13 Apr-12: The daily limit of individual mainland tourists to Taiwan increased to 1,000 persons Apr-13: The daily limit of individual mainland tourists increased to 2,000 people and group tourists to 5,000 people Dec-13: The daily limit of individual mainland tourists increased to 3,000 persons

Investment threshold increased to 60% NAV. MNC subsidiaries will be exempt from any investment Outbound limits. There are two options for SMEs' mainland Chinese investment cap: (1) maximum investment of Aug-08 investment NT$80 mn and (2) 60% of NAV. Large corps will be allowed to invest up to 60% of NAV or group combined NAV in China, up from the previous ceiling of 40%.

Feb-09: MOUs on banking, insurance and securities were signed. The MOUs established the financial supervisory framework and opened the discussion on cross-strait financial market access Aug-10: CBRC / FSC approved on branches/representative offices Jan-12: Taiwan allows direct inbound financial investment (5% stake), limited to listed FHC/banks Sep-12: MOUs on cross-strait currency clearing agreement Financial MOU, Jan-13: FSC/CSRC meeting with agreements on: (1) a doubling of the QDII quota to US$1 bn; (2) a pilot Sep-09 to market access RQFII programme with up to a Rmb100 bn quota; and (3) allowing qualified Taiwan securities brokers to Mar-13 and currency take a 51% stake in full licence JVs in Shanghai, Fujian and Shenzhen. The T-share listing is set for settlement further discussion after both sides agreed on a joint supervision framework.

Feb-13: Taiwan bank DBUs start conducting RMB business

Mar-13: FSC/CBRC meeting: (1) Taiwan raises direct investment limit: 10% for listed banks/FHC and 15% for unlisted banks/FHC. or up to 20% for subsidiaries of FHC; (2) removes the OECD requirement; (3) a general agreement on a more expedited approval process for Taiwan banks' branch set-ups and business licence in China. Under the Financial MOU agreement reached on 16 November 2009, Taiwan allows up to a 5% direct Inbound investment from China and another 5% through QDII with an aggregate amount of no more than Jan-10 investment US$500 mn. Separate approval from MOEA is required for buying an investment stake of more than 10%. The two sides signed the Cross-Strait Economic Cooperation Framework Agreement (ECFA), under which (1) China will cut tariffs on 539 items while Taiwan will cut tariffs on 267 items (2011-13); Jun-10 ECFA and (2) Taiwan banks can do Rmb business with Taiwanese corporates in China one year after a branch upgrade (vs two years under CEPA and three years under WTO).

Cross-Strait Dec-10: China and Taiwan reach consensus on the Cross-Strait Agreement on Investment Protection. Dec-10 to Agreement on Both sides agreed to establish a contact platform and dispute settlement mechanism featuring a Aug-12 Investment transparent investment process and full communication. Protection Aug-12: Cross-Strait Agreement on Investment Protection signed Jun-13: Taiwan and China sign the Cross-Strait Trade and Service Agreement. This stipulates the Cross Strait Trade liberalisation of cross-strait goods and services trade, along with the protection of investments and Jun-13 and Service promotion of economic cooperation. Agreement Jan-14E: Legislative Yuan (Taiwan) to approve the pact

Source: Economic Daily News, Commercial Times, major government websites, Credit Suisse research

Taiwan Market Strategy 16 03 December 2013 Sector preference and stock picks We set our year-end 2014 index target at 9,000 (implying 7.1% upside) based on a ten-year average forward P/B of 1.7x (implying 15.6x forward P/E) with the market's ROE expected to recover towards its long-term average of 11.7% (up from 10.7% in 2013).

Figure 54: CS Taiwan coverage historical P/E Figure 55: CS Taiwan coverage historical P/B (X) CS Taiwan coverage P/E (X) CS Taiwan coverage P/B 30.0 2.6

25.0 2.2 20.0 1.8 15.0 1.4 10.0

5.0 1.0

Jul-04 Jul-05 Jul-03 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Jul-04 Jul-05 Jul-11 Jul-03 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-12 Jul-13

Jan-05 Jan-03 Jan-04 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Jan-03 Jan-13 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Forward PE Average +1std -1std +2std -2std Forward PB Average +1std -1std +2std -2std Source: TEJ, Credit Suisse estimates Source: TEJ, Credit Suisse estimates

Figure 56: CS Taiwan coverage dividend yield vs ten-year Figure 57: TWSE market cap as % of GDP bond yield Dividend yield vs 10 year bond yield gap 210% 6% 5% 180%

4% 150% 3% 120% 2% 90% 1%

0% 60% -1%

30%

Jul-08 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Jan-13 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 TWSE market cap as % of GDP Average +1std -1std +2std -2std Div. yld vs 10Y bond yield Average +1std -1std +2std -2std Note: Taiwan coverage dividend yield minus ten-year Taiwan Source: TEJ, CEIC, Credit Suisse research government bond yield Source: TEJ, Credit Suisse estimates

Figure 58: Taiwan vs regional valuation summary 12M forward P/E Trailing P/B (x) Trailing div. yield (%) EPS growth 3-mth chg. in EPS est. (%) Current 5-yr avg. Current 5-yr avg. Current 5-yr avg. 2013 2014 2015 2013 2014 Australia 14.5 12.7 2.1 1.9 4.2 4.6 -4.0 7.4 8.6 0.8 0.6 China 9.3 10.6 1.6 2.0 3.1 2.7 10.6 9.2 11.5 0.5 0.2 Hong Kong 15.1 15.0 1.4 1.4 2.5 2.9 10.1 9.3 10.7 0.5 -0.1 India 14.1 14.3 2.6 2.9 1.4 1.2 8.3 17.9 14.8 -0.3 0.5 Indonesia 12.8 13.0 3.3 3.8 2.7 2.7 7.9 14.5 15.7 -2.8 -3.2 Japan 14.7 15.7 1.4 1.1 1.7 2.1 34.3 69.1 9.4 0.1 0.1 Korea 9.0 9.4 1.2 1.3 1.0 1.3 9.5 21.7 10.2 -4.2 -2.0 Malaysia 15.5 14.4 2.2 2.1 3.0 2.8 -0.9 7.9 9.1 -0.8 -0.9 Philippines 18.1 15.2 3.2 2.7 1.9 2.5 10.1 5.9 15.1 1.5 -0.1 Singapore 14.0 13.5 1.5 1.6 3.2 3.4 -3.4 8.8 10.3 -1.2 -1.0 Taiwan 14.3 15.4 1.9 1.8 2.9 3.8 33.3 13.8 10.6 -3.5 -3.1 Thailand 11.2 10.9 2.2 2.1 3.2 3.3 11.6 14.0 11.6 -2.0 -1.8 Source: MSCI, Factset, Thomson Financial DataStream, Credit Suisse estimates

Taiwan Market Strategy 17 03 December 2013

Sector and stock preferences We continue to prefer upstream tech, which continues to see stronger/earlier benefits from improving developed market growth (TSMC/ASE/Mediatek), the stocks that are still in the early part of their up-cycle or with a secular growth profile (CTBC/St Shine/EVA Air) and selective downstream tech with positive drivers in 2014 (Hon Hai and Catcher). Our top sell ideas are Taishin and HTC.

Figure 59: Top stock ideas for 2014 Mkt Yield P/B ROE Net debt/ Target cap P/E (x) (%) (x) (%) equity Company RIC Rating Price price (mn) FY12A FY13E FY14E FY14E FY14E FY14E FY14E TSMC 2330.TW O 105.0 116.0 91,955 16.3 14.7 13.1 2.9% 2.8 22.8% -1% ASE 2311.TW O 29.4 34.0 7,551 16.9 15.1 12.3 4.9% 1.7 14.7% 31% Mediatek 2454.TW O 436.0 480.0 19,589 34.2 21.8 18.2 4.1% 3.3 18.5% -50% CTBC Holding 2891.TW O 19.4 22.5 9,539 11.0 15.3 9.7 3.7% 1.3 14.0% n/m St. Shine 1565.TWO O 891.0 990.0 1,517 37.3 27.3 19.8 3.8% 8.9 50.4% -18% Eva Air 2618.TW O 17.1 20.0 1,877 110.2 23.7 16.5 0.0% 1.3 8.5% 66% Hon Hai 2317.TW O 78.0 101.0 34,110 9.7 10.5 9.3 2.1% 1.2 13.5% -27% Catcher 2474.TW O 180.0 200.0 4,564 12.4 10.1 10.4 3.3% 1.8 17.8% -26% Taishin 2887.TW U 14.6 12.0 3,677 11.2 8.2 10.2 2.7% 1.0 10.6% n.m HTC 2498.TW U 151.0 97.0 4,337 7.7 n.m 147.3 0.1% 1.6 1.1% -59% Note: O = Outperform, U = Underperform. Priced as of 29 November 2013. Source: Bloomberg, TEJ, Credit Suisse estimates TSMC (2330.TW, OUTPERFORM, TP NT$116). We continue to prefer TSMC for its sustained strong margins, growth outlook and technology position. We maintain our OUTPERFORM rating and target price of NT$116, representing 14.5x 2014E EPS, as the company retains pricing and profitability through its high 28nm HPM and 20nm share, given good demand drivers for speciality technology and return of cash flows, as capital intensity peaks in 2013.

Figure 60: TSMC's financial and valuation metrics Year 12/11A 12/12A 12/13E 12/14E 12/15E Sales (NT$ mn) 427,081 506,745 597,121 687,802 780,993 Operating profit (NT$ mn) 249,313 312,980 367,982 453,704 517,921 Net profit (NT$ mn) 134,779 166,968 184,924 207,357 233,389 EPS (reported) (NT$/sh) 5.20 6.44 7.13 8.00 9.00 EPS (IBES) (NT$/sh) 5.18 6.41 7.14 7.98 8.99 BVPS (NT$/sh) 24.3 27.9 32.6 37.6 43.6 ROE (%) 22.4 24.7 23.6 22.8 22.2 ROA (%) 17.4 17.5 15.6 15.4 15.5 P/B (x) 4.3 3.8 3.2 2.8 2.4 P/E (x) 20.2 16.3 14.7 13.1 11.7 Net debt (NT$ mn) -96,275 -33,000 33,261 -11,102 -114,913 Note: Priced as of 29 November 2013. Source: Company data, Credit Suisse estimates ASE (2311.TW, OUTPERFORM, TP NT$34). We maintain our positive view as the sector is seeing capex control and improving margins from lower material costs. At the same time, ASE has several incremental growth opportunities, including the ramp-up of fingerprint IC into more products, flip chip and testing for Apple AP, the ramp-up of DRAM memory packaging, and the recovery of the IDM business, which often rebounds if macro remains stable. Our target price of NT$34 is based on 2.2x FY14E P/B.

Taiwan Market Strategy 18 03 December 2013

Figure 61: ASE's financial and valuation metrics Year 12/11A 12/12A 12/13E 12/14E 12/15E Sales (NT$ mn) 185,347 193,972 217,582 244,472 268,255 Operating profit (NT$ mn) 37,989 39,320 45,109 48,107 54,068 Net profit (NT$ mn) 13,725 13,091 14,855 18,354 21,408 EPS (reported) (NT$/sh) 1.85 1.74 1.95 2.40 2.80 EPS (IBES) (NT$/sh) 1.78 1.71 1.95 2.39 2.74 BVPS (NT$/sh) 13.6 14.6 15.8 17.0 18.3 ROE (%) 14.5 12.4 12.9 14.7 15.8 ROA (%) 6.1 5.3 5.4 6.3 7.1 P/B (x) 2.2 2.0 1.9 1.7 1.6 P/E (x) 15.9 16.9 15.1 12.3 10.5 Net debt (NT$ mn) 51,525 60,254 45,108 42,067 37,226 Note: Priced as of 29 November 2013. Source: Company data, Credit Suisse estimates Mediatek (2454.TW, OUTPERFORM, TP NT$480). Our positive thesis on the stock is based on: (1) a strong product cycle in emerging market smartphones and tablets which is only in the second year of a 4-5-year growth cycle; (2) market leadership continuing to sustain in the face of tough competition due to fast product innovation both on lower cost and higher performance solutions; and (3) additional drivers from shift to multi- core/big.LITTLE, tablets and TD-SCDMA in 2013, and LTE over the next few years. Our NT$480 target price sets MediaTek at 20x our revised 2014E EPS of NT$24.

Figure 62: MediaTek financial and valuation metrics Year 12/11A 12/12A 12/13E 12/14E 12/15E Sales (NT$ mn) 86,857 99,263 134,332 190,942 213,214 Operating profit (NT$ mn) 15,074 16,100 27,174 41,506 47,167 Net profit (NT$ mn) 13,614 15,474 26,836 37,051 42,171 EPS (reported) (NT$/sh) 12.51 12.76 20.00 24.00 27.00 EPS (IBES) (NT$/sh) 12.21 12.83 19.85 25.27 28.00 BVPS (NT$/sh) 106.9 144.9 144.9 133.6 138.0 ROE (%) 11.9 10.6 14.5 18.5 20.0 ROA (%) 9.2 7.4 10.9 13.8 15.0 P/B (x) 4.1 3.0 3.0 3.3 3.2 P/E (x) 34.8 34.2 21.8 18.2 16.1 Net debt (NT$ mn) -86,777 -81,253 -94,947 -103,824 -111,453 Note: Priced as of 29 November 2013. Source: Company data, Credit Suisse estimates CTBC Holding (2891.TW, OUTPERFORM, TP NT$22.50). We continue to like CTBC Holding, as we believe the stock's current valuation implies very modest incremental profit contribution from the acquired businesses (Tokyo Star Bank and Taiwan Life). With underlying business momentum remaining strong, CTBC is still the only Taiwan bank that has the capacity to generate a 1% ROA (and hence 12-15% ROE) consistently. The bank's larger USD loan exposure also provides stronger leverage to improving USD loan demand and spreads in 2014. The stock is trading at 1.3x and 9.7x FY14E P/B and P/E, respectively.

Taiwan Market Strategy 19 03 December 2013

Figure 63: CTBC's Holding financial and valuation metrics Year 12/11A 12/12A 12/13E 12/14E 12/15E PPOP (NT$mn) 22,134 25,120 27,441 36,600 34,049 Net profit (NT$mn) 17,240 20,132 17,759 29,370 26,562 EPS (reported) (NT$/sh) 1.61 1.76 1.26 2.00 1.81 EPS (IBES) (NT$/sh) 1.43 1.54 1.43 1.77 1.84 BVPS (NT$/sh) 11.6 12.7 13.5 15.0 15.9 ROE (%) 12.7 12.9 9.6 14.0 11.7 ROA (%) 0.9 1.0 0.8 1.3 1.1 P/B (x) 1.7 1.5 1.4 1.3 1.2 P/E (x) 12.0 11.0 15.3 9.7 10.7 Tier 1 (%) 11.6 11.4 10.6 11.0 10.5 Note: Priced as of 29 November 2013. Source: Company data, Credit Suisse estimates St. Shine (1565.TWO, OUTPERFORM, TP NT$990.00). We view St. Shine as a major beneficiary of global private label brand’s share gain from the Big 4, especially in Japan. With strong 3Q13, we anticipate consensus estimates will lean towards our street-high forecasts. At the same time, new capacity addition is just around the corner. The plan to add 14 new lines in 1Q14 is still intact. This should bring total production lines to 58, or 71% capacity growth compared with 34 in 1Q13. St. Shine remains our top pick in the non- tech space. We reiterate our OUTPERFORM with a target price of NT$990.

Figure 64: St. Shine's financial and valuation metrics Year 12/11A 12/12A 12/13E 12/14E 12/15E Sales (NT$ mn) 3,459 4,169 5,443 7,520 9,450 Operating profit (NT$ mn) 1,375 1,603 2,049 2,813 3,492 Net profit (NT$ mn) 1,067 1,204 1,646 2,269 2,840 EPS (reported) (NT$/sh) 21.16 23.88 32.65 45.00 56.34 EPS (IBES) (NT$/sh) 21.04 23.77 28.91 36.66 42.59 BVPS (NT$/sh) 55.6 64.0 79.1 99.6 122.2 ROE (%) 40.5 40.0 45.6 50.4 50.8 ROA (%) 27.2 22.9 27.2 31.1 33.4 P/B (x) 16.0 13.9 11.3 8.9 7.3 P/E (x) 42.1 37.3 27.3 19.8 15.8 Net debt (NT$ mn) -804 -535 -446 -922 -1,482 Note: Priced as of 29 November 2013. Source: Company data, Credit Suisse estimates Eva Air (2618.TW, OUTPERFORM, TP NT$20). Our top transport pick in Taiwan is EVA Airways on account of its undemanding valuation and compelling leverage to growing regional traffic growth, capitalising on PRC inbound demand and Taiwanese outbound traffic growth to Japan and Southeast Asia. Our target price of NT$20 implies 23% potential upside and is based on a target EV/CFMV of 167%, which, in our view, is justified by its above-WACC ROIC of 11.2%—equivalent to 2014E EV/EBITDAR of 6.3x, matching the APAC sector average.

Taiwan Market Strategy 20 03 December 2013

Figure 65: Eva Air's financial and valuation metrics Year 12/11A 12/12A 12/13E 12/14E 12/15E Sales (NT$ mn) 113,619 120,121 123,328 127,614 131,871 Operating profit (NT$ mn) 11,983 12,083 15,050 16,455 17,122 Net profit (NT$ mn) 209 646 1,445 3,377 3,953 EPS (reported) (NT$/sh) 0.09 0.15 0.72 1.04 1.21 EPS (IBES) (NT$/sh) 0.06 0.15 0.79 1.06 1.04 BVPS (NT$/sh) 11.6 11.2 11.7 12.7 13.9 ROE (%) 0.8 1.4 6.3 8.5 9.1 ROA (%) 0.2 0.3 1.6 2.3 2.7 P/B (x) 1.5 1.5 1.5 1.3 1.2 P/E (x) 182.3 110.2 23.7 16.5 14.1 Net debt (NT$ mn) 48,776 44,123 40,233 30,271 19,452 Note: Priced as of 29 November 2013. Source: Company data, Credit Suisse estimates Hon Hai (2317.TW, OUTPERFORM, TP NT$101). Hon Hai is our top pick in the Taiwan downstream space. We expect the stock to re-rate as margins improve faster than the market expects, and forecast that the visibility will improve post IFRS adoption with the identification of key variable costs (i.e., warranties and royalties) previously in opex. Importantly, we see an inflection point in 2014, as earnings growth outstrips sales growth. We expect Hon Hai's P/E to return to its historical average of 12x, from 11x over the past year, as P/F gross margins return to the 9% level (back in 2009) and earnings forecasts improve, albeit slightly, with the adoption of IFRS.

Figure 66: Hon Hai's financial and valuation metrics Year 12/11A 12/12A 12/13E 12/14E 12/15E Sales (NT$ mn) 3,452,681 3,905,395 3,787,417 3,903,575 3,966,216 Operating profit (NT$ mn) 134,301 176,334 173,993 197,577 202,404 Net profit (NT$ mn) 81,591 94,762 97,046 109,919 116,365 EPS (reported) (NT$/sh) 7.65 8.03 7.43 8.42 8.91 EPS (IBES) (NT$/sh) 6.19 6.91 7.58 8.11 8.57 BVPS (NT$/sh) 57.7 57.8 58.8 65.8 73.2 ROE (%) 14.5 14.6 13.4 13.5 12.8 ROA (%) 4.7 4.6 4.4 4.8 4.8 P/B (x) 1.4 1.4 1.3 1.2 1.1 P/E (x) 10.2 9.7 10.5 9.3 8.8 Net debt (NT$ mn) 56,953 -44,966 -126,841 -229,570 -337,855 Note: Priced as of 29 November 2013. Source: Company data, Credit Suisse estimates Catcher (2474.TW, OUTPERFORM, TP NT$200). We believe that diversification is an important factor to mitigate the cyclical factor of the casing sector. Arguably, Catcher is one of the most diversified players in terms of product mix, technology mix and material mix. New materials, such as carbon fibre, are expected to triple their revenue at Catcher in 2014 (albeit with still a single-digit contribution). Penetration of carbon fibre remains low, but Catcher has proved its capability to provide various materials to various products. Key catalysts are a better sales outlook and new smartphone project wins.

Taiwan Market Strategy 21 03 December 2013

Figure 67: Catcher's financial and valuation metrics Year 12/11A 12/12A 12/13E 12/14E 12/15E Sales (NT$ mn) 35,914 37,029 41,796 47,738 52,430 Operating profit (NT$ mn) 15,778 16,433 18,433 21,122 22,906 Net profit (NT$ mn) 10,677 10,890 13,419 12,953 13,860 EPS (reported) (NT$/sh) 14.22 14.51 17.87 17.25 18.46 EPS (IBES) (NT$/sh) 14.20 14.18 17.69 16.99 19.22 BVPS (NT$/sh) 74.6 81.5 91.4 102.7 115.1 ROE (%) 24.0 18.6 20.7 17.8 17.0 ROA (%) 12.0 10.8 13.1 11.7 11.7 P/B (x) 2.4 2.2 2.0 1.8 1.6 P/E (x) 12.7 12.4 10.1 10.4 9.7 Net debt (NT$ mn) -16,253 -15,033 -14,545 -19,655 -27,137 Note: Priced as of 29 November 2013. Source: Company data, Credit Suisse estimates

Taiwan Market Strategy 22 03 December 2013 CS Taiwan model portfolio

Figure 68: Recommended sector and stock weightings (%) Mkt Cap Price ($) Target Price PE PB ROE Div Yield Sector Ticker (US$ mn) 29-Nov-13 Base % Up Rating 2014E 2014E 2014E 2014E MSCI CS vs MSCI A B C=B-A Tech 52.7 57.7 5.0 Foundry 21.4 19.6 (1.8) TSMC 2330 91,955 105.0 116.0 10.5 OPFM 13.1 2.8 22.8% 3% 20.1 19.6 (0.5) Backend 2.4 8.4 6.0 ASE 2311 7,551 29.4 34.0 15.6 OPFM 12.3 1.7 14.7% 5% 1.4 5.0 3.6 Chipbond 6147 1,272 61.9 72.0 16.3 OPFM 11.8 1.9 16.8% 7% 0.0 3.4 3.4 IC Design 5.7 6.7 1.1 MediaTek Inc. 2454 19,589 436.0 480.0 10.1 OPFM 18.2 3.3 18.5% 4% 4.1 6.7 2.6 Display 1.8 3.8 2.0 Radiant 6176 1,657 105.5 126.0 19.4 OPFM 8.9 2.0 23.9% 6% 0.4 3.8 3.5 Components 5.5 5.5 0.0 Catcher Technology 2474 4,564 180.0 200.0 11.1 OPFM 10.4 1.8 17.8% 3% 1.0 3.5 2.6 Epistar 2448 1,605 51.2 65.0 27.0 OPFM 26.6 1.0 3.7% 0% 0.3 2.0 1.7 Tech Hardware 11.7 13.7 2.0 Compal Electronics 2324 3,283 22.4 27.0 20.8 OPFM 9.2 0.8 9.2% 5% 0.8 4.2 3.4 Hon Hai Precision 2317 34,110 78.0 101.0 29.5 OPFM 9.3 1.2 13.5% 2% 6.7 9.5 2.8 Handset 1.7 0.0 (1.7) Automation 0.3 0.0 (0.3) Other Tech 2.3 0.0 (2.3) Non-tech 46.9 42.3 (4.6) Financials 17.7 17.7 (0.0) CTBC Holding 2891 9,539 19.4 22.5 16.3 OPFM 9.7 1.3 14.0% 4% 2.0 6.0 4.0 China Life Taiwan 2823 2,592 28.5 34.0 19.4 OPFM 11.9 1.1 9.6% 2% 0.5 6.0 5.5 Ta Chong Bank Ltd 2847 859 10.7 13.0 21.5 OPFM 8.2 0.8 10.1% 4% 0.0 5.7 5.7 Petrochem 8.0 5.0 (3.0) Nan Ya Plastics 1303 17,343 64.8 75.0 15.7 OPFM 14.4 2.0 14.3% 3% 2.4 5.0 2.6 Property 1.1 0.0 (1.1) Materials 6.3 8.3 2.0 Taiwan Cement 1101 5,842 46.9 48.2 2.9 OPFM 15.0 2.2 14.8% 5% 1.1 4.3 3.2 Asia Cement 1102 4,247 39.3 44.0 12.0 OPFM 14.0 1.8 13.2% 5% 0.7 4.0 3.3 Telecom 4.9 0.0 (4.9) Transportation 1.1 5.0 3.9 EVA Air 2618 1,877 17.1 20.0 17.3 OPFM 16.5 1.3 8.5% 0% 0.2 5.0 4.8 Consumer 3.1 2.0 (1.1) Prsident Chain Store 2912 7,374 210.0 264.5 26.0 OPFM 22.6 7.5 34.7% 3% 0.9 2.0 1.1 Health Care 0.0 4.3 4.3 St. Shine 1565 1,517 891.0 990.0 11.1 OPFM 19.8 8.9 50.4% 3% 0.0 4.3 4.3 Industrials/Others 4.7 0.0 (4.7) Total 100.0 100.0 0.0 Source: Bloomberg, TEJ, Credit Suisse estimates

Taiwan Market Strategy 23

Strategy Market Taiwan Figure 69: CS Taiwan coverage universe valuation (1-2) Market Share Monthly Price 12mth Inv'ment TP 52 Week EPS Earning growth P/E P/B ROAE Div Yld Price movement (%) QFII Holding Net debt/ Equity Analyst Company Cap count Volume 29-Nov Target Rating upside high/low 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 1wk 1mth 1qtr 1yr YTD 2013 US$m mn US$m NT$ NT$ 7 30 91 365 Dec-12 Foundry 2330.TW TSMC 91,955 25,929 3,727 105.0 116.0 OPFM 10.5% 94.4-115.5 7.13 8.00 10.8% 12.1% 14.7 13.1 3.2 2.8 23.6% 22.8% 2.9% 2.9% 5.0% -4.5% 4.5% 8.8% 8.2% 77.0% 3.9% Randy Abrams 2303.TW UMC 5,199 12,515 810 12.3 13.0 NTRL 5.7% 10.9-15.1 0.91 0.35 168.7% -61.5% 13.5 35.0 0.7 0.7 5.5% 2.1% 4.0% 0.0% 2.9% -6.1% 0.0% 10.8% 5.1% 40.4% -12.7% Randy Abrams 5347.TWO Vanguard Semi 1,876 1,599 222 34.8 35.0 NTRL 0.7% 18.9-38.0 2.72 3.15 93.7% 12.2% 12.8 11.0 2.3 2.1 19.2% 19.8% 4.7% 4.7% 12.5% 8.6% 7.4% 90.9% 72.5% 21.2% -65.1% Randy Abrams Foundry 99,031 40,042 4,759 15.7% 8.0% 14.6 13.5 2.7 2.4 19.8% 18.9% 2.9% 2.9% 5.0% -4.4% 4.3% 10.5% 9.3% Packaging & testing

2311.TW ASE 7,551 7,604 406 29.4 34.0 OPFM 15.6% 23.6-30.7 1.95 2.40 13.5% 23.6% 15.1 12.3 1.9 1.73 12.9% 14.7% 4.0% 4.9% 2.8% -0.3% 11.2% 24.3% 16.7% 74.2% 36.2% Randy Abrams 6239.TW Powertech 1,183 766 226 45.8 56.0 NTRL 22.4% 41.3-58.9 2.65 3.00 -43.9% 13.1% 17.3 15.3 1.0 1.0 5.7% 6.5% 5.3% 6.0% 10.8% -11.2% -16.4% 8.2% -2.6% 52.0% -4.2% Randy Abrams 6147.TWO Chipbond 1,272 608 310 61.9 72.0 OPFM 16.3% 53.7-82.6 4.25 5.23 1.6% 30.8% 14.6 11.8 1.9 1.9 14.0% 16.8% 5.9% 7.3% 11.9% 4.0% -7.5% 9.2% 8.4% 41.0% -2.1% Jerry Su 2325.TW SPIL 3,669 3,104 224 35.0 42.0 OPFM 20.0% 30.2-39.0 2.00 2.50 10.3% 25.9% 17.5 14.0 1.8 1.70 10.2% 12.3% 4.8% 4.8% 2.9% -4.5% 4.2% 12.9% 12.9% 55.5% 7.6% Randy Abrams Packaging & testing 13,675 12,082 1,166 3.2% 24.0% 15.8 12.7 1.6 1.5 10.7% 12.5% 4.3% 4.5% 4.4% -2.0% 5.2% 18.4% 13.2% IC design 2458.TW Elan Microelectronics 636 432 398 43.6 60.0 OPFM 37.6% 41.1-80.0 3.43 4.02 25.5% 18.4% 12.7 10.8 3.0 2.8 22.1% 26.7% 7.8% 8.8% 5.4% -2.7% -13.8% -2.5% -6.7% 5.5% -32.7% Jerry Su 2454.TW MediaTek Inc. 19,589 1,330 1,844 436.0 480.0 OPFM 10.1% 301.5-435.0 20.00 24.00 73.4% 38.1% 21.8 18.2 3.0 3.3 14.5% 18.5% 3.0% 4.1% 2.8% 10.4% 18.8% 33.1% 34.8% 57.1% -48.8% Randy Abrams 3697.TW Mstar 5,928 529 298 331.5 NA NA NA 197.0-332.0 13.95 NA 15.9% NA 23.8 NA 4.8 NA 20.9% NA NA NA 2.6% 10.5% 21.4% 33.9% 52.1% 35.3% -79.7% Randy Abrams 3034.TW Novatek Micro 2,455 608 345 119.5 118.0 NTRL -1.3% 107.0-156.5 7.64 9.02 4.5% 18.3% 15.6 13.2 3.5 3.2 20.6% 24.9% 6.2% 7.3% 8.1% 1.3% -4.0% 3.9% 1.7% 43.1% -56.5% Jerry Su 2379.TW Realtek Semiconductor 1,214 501 209 71.7 75.0 NTRL 4.6% 57.4-89.0 5.65 6.00 25.8% 6.9% 12.7 11.9 2.0 1.9 15.5% 16.1% 5.9% 5.9% 5.0% 2.9% 8.0% 24.9% 18.1% 45.1% -60.7% Randy Abrams 3702.TW WPG Holdings Ltd 1,876 1,648 152 33.7 38.5 NTRL 14.2% 32.6-40.1 2.90 3.20 5.6% 10.9% 11.6 10.5 1.4 1.4 12.5% 13.3% 6.6% 7.1% 2.9% -5.9% -2.0% -10.1% -11.3% 31.2% 91.7% Randy Abrams IC design 31,698 5,049 3,247 40.0% 9.7% 19.6 17.8 3.0 3.2 15.6% 17.2% 2.8% 3.1% 3.3% 8.2% 15.2% 27.4% 31.2% TFT LCD 2409.TW AU Optronics 2,979 9,554 784 9.2 13.5 OPFM 46.3% 8.4-14.2 0.23 0.69 n.m 214.3% 40.9 13.4 0.5 0.5 1.4% 4.0% 0.0% 0.7% 8.6% -6.8% -21.8% -22.8% -29.0% 25.6% 70.2% Jerry Su 5371.TWO Coretronic Corp 653 724 109 26.7 30.0 OPFM 12.4% 21.0-27.2 2.47 2.79 101.2% 12.7% 10.8 9.6 0.9 0.9 8.8% 9.5% 3.3% 6.4% 1.3% 6.8% 2.3% 27.4% 18.7% 28.4% -39.2% Jerry Su 3481.TW Innolux 3,367 8,902 909 11.2 10.8 NTRL -3.6% 9.8-20.7 0.64 0.52 n.m -18.9% 17.4 21.7 0.5 0.5 3.2% 2.4% 0.0% 1.7% 13.1% -3.0% -25.3% -10.0% -28.2% 30.8% 80.4% Jerry Su 8069.TWO E Ink 614 1,136 176 16.0 16.0 NTRL 0.0% 13.7-24.3 -0.07 0.88 n.m n.m n.m 18.3 0.7 0.7 -0.3% 3.8% 0.0% 3.3% 0.6% -3.6% -6.2% -24.5% -27.8% 9.7% 15.6% Jerry Su 3149.TW G-Tech 317 268 123 35.0 33.0 UPFM -5.7% 33.2-79.0 -3.16 2.04 n.m n.m n.m 17.2 1.0 1.0 -8.7% 5.7% 0.0% 2.1% 4.3% -31.9% -38.3% -53.1% -53.9% 9.6% 26.4% Jerry Su 6176.TW Radiant 1,657 465 296 105.5 126.0 OPFM 19.4% 86.1-132.0 9.64 11.84 -17.6% 22.7% 10.9 8.9 2.3 2.0 21.1% 23.9% 7.6% 5.7% 7.4% -3.7% 11.1% -16.4% -9.1% 66.2% -100.8% Jerry Su 3673.TW TPK Holding 1,839 329 1,734 165.5 207.0 NTRL 25.1% 153.5-635.0 20.88 18.81 -49.2% -11.5% 7.9 8.8 1.5 1.4 17.5% 16.7% 12.6% 6.4% 2.2% -21.4% -48.0% -48.0% -67.7% 56.7% 75.5% Jerry Su 6278.TW TSMT 389 270 67 42.7 47.0 NTRL 10.1% 39.4-48.7 4.16 4.44 9.3% 6.6% 10.3 9.6 1.1 1.0 11.1% 11.3% 3.5% 3.7% 4.4% 1.2% -2.6% 4.9% 1.7% 18.7% -45.9% Jerry Su 2384.TW Wintek Corp 570 1,848 310 9.1 7.8 UPFM -14.6% 8.5-16.9 -3.92 -1.51 n.m n.m n.m n.m 0.6 0.6 -23.0% -10.2% 0.0% 0.0% 7.9% -18.5% -25.5% -29.8% -40.7% 5.7% 120.4% Jerry Su 3622.TW Young Fast Opto 134 151 49 26.2 45.0 NTRL 72.1% 24.2-65.8 1.01 2.04 n.m 101.3% 25.8 12.8 0.4 0.4 1.5% 3.0% 2.0% 2.0% 2.1% -18.5% -36.7% -56.4% -55.8% 8.7% -23.8% Jerry Su TFT LCD 12,519 23,647 4,558 n.m 75.7% 25.5 14.5 0.7 0.7 2.7% 4.7% 2.8% 3.2% 7.6% -7.7% -20.4% -20.3% -29.8% Tech Components 2385.TW Chicony 1,715 686 119 74.0 82.0 NTRL 10.8% 63.5-86.2 5.62 6.38 0.5% 13.4% 13.2 11.6 2.6 2.4 20.3% 21.8% 6.3% 5.4% 0.3% 1.4% 6.9% 10.6% 11.4% 38.8% 19.7% Pauline Chen 2308.TW Delta Electronics 12,966 2,430 450 158.0 164.0 NTRL 3.8% 102.0-158.0 7.22 7.81 9.0% 8.1% 21.9 20.2 4.2 4.0 18.5% 20.3% 3.6% 3.9% 3.9% 3.6% 16.6% 47.7% 48.4% 75.9% -34.5% Pauline Chen 2301.TW Lite-On Tech 3,770 2,323 186 48.1 57.0 OPFM 18.6% 37.5-53.7 3.69 4.20 13.7% 14.0% 13.0 11.4 1.5 1.4 10.4% 12.8% 5.7% 6.5% 2.9% -6.5% -5.2% 26.1% 25.3% 51.6% -24.5% Pauline Chen 2354.TW Foxconn Tech 3,096 1,306 299 70.2 72.0 NTRL 2.6% 64.1-97.1 5.50 6.29 -14.2% 14.4% 12.8 11.2 1.3 1.2 10.9% 11.0% 1.2% 1.3% 9.2% -4.7% -8.0% -26.3% -18.9% 16.4% -34.5% Pauline Chen 2474.TW Catcher Technology 4,564 751 1,004 180.0 200.0 OPFM 11.1% 126.0-181.0 17.87 17.25 23.2% -3.5% 10.1 10.4 2.0 1.8 20.7% 17.8% 3.3% 3.3% 4.0% 4.7% 26.3% 22.4% 25.0% 45.5% -21.2% Pauline Chen 3189.TW Kinsus Interconnect 1,537 446 163 102.0 120.0 NTRL 17.6% 87.8-117.0 7.41 8.57 18.1% 15.7% 13.8 11.9 1.8 1.6 12.9% 14.2% 3.5% 3.8% 2.4% -1.9% -6.8% 11.2% 12.0% 24.4% -31.2% Pauline Chen 8046.TW Nan Ya PCB 792 646 58 36.3 41.0 NTRL 12.9% 30.7-45.0 -0.93 1.72 n.m n.m n.m 21.1 0.7 0.7 -1.9% 3.3% 0.0% 1.9% 4.6% -10.0% 11.0% 5.2% 1.1% 9.4% -30.3% Pauline Chen 8021.TW Topoint Technology 115 158 24 21.6 26.0 OPFM 20.6% 16.6-22.9 1.76 1.89 1.6% 7.0% 12.2 11.4 0.8 0.8 6.8% 6.9% 3.4% 3.6% 4.9% -2.7% 19.7% 28.5% 28.1% 7.1% 2.4% Pauline Chen 3044.TW Tripod Technology 905 526 121 51.0 61.0 NTRL 19.6% 45.4-72.1 4.48 4.92 -19.8% 10.0% 11.4 10.4 1.1 1.0 9.6% 10.1% 3.9% 4.3% 11.6% -11.8% -14.0% -15.0% -18.1% 44.3% -9.4% Pauline Chen 3042.TW TXC 346 310 56 33.1 36.0 NTRL 8.8% 30.6-49.7 3.02 3.53 -18.5% 16.7% 10.9 9.4 1.3 1.3 12.1% 13.9% 5.8% 6.7% 7.1% -8.6% -17.9% -32.9% -30.8% 22.3% 11.0% Derrick Yang 3037.TW Unimicron Technology 1,141 1,539 121 22.0 29.0 NTRL 32.1% 19.8-32.9 1.07 1.32 -52.6% 23.5% 20.6 16.7 0.7 0.7 3.5% 4.3% 2.4% 2.9% 6.3% -8.5% -9.7% -29.2% -28.7% 22.1% 17.5% Pauline Chen Tech Components 30,948 11,120 2,602 5.8% 11.5% 15.7 14.0 2.0 1.8 12.4% 13.4% 3.5% 3.6% 4.4% -0.1% 8.8% 23.3% 24.6% LED 2360.TW Chroma 764 377 41 60.0 70.0 NTRL 16.7% 50.0-73.5 3.15 3.91 25.5% 24.3% 19.1 15.3 3.0 2.7 15.6% 18.5% 3.7% 4.6% 5.3% -5.1% -13.4% -9.0% -7.3% 47.2% -10.3% Jerry Su 2448.TW Epistar 1,605 928 301 51.2 65.0 OPFM 27.0% 43.2-61.6 0.18 1.92 n.m 993.9% 291.3 26.6 1.0 1.0 0.3% 3.7% 0.0% 0.2% 13.8% 0.2% 4.5% 18.8% -2.8% 37.0% -3.0% Derrick Yang 3698.TW Lextar 421 516 128 24.2 31.0 OPFM 28.4% 21.7-34.2 1.81 1.63 223.2% -9.0% 13.3 14.8 1.1 1.0 9.3% 7.2% 1.9% 2.2% 6.9% -4.0% -11.4% 9.3% 1.9% 4.1% -4.1% Derrick Yang 2393.TW Everlight Electronics 783 419 171 55.3 57.0 NTRL 3.1% 33.3-56.0 3.38 3.47 159.7% 2.6% 16.4 15.9 1.6 1.5 9.9% 9.8% 2.2% 4.9% 2.8% -1.3% 15.2% 61.5% 45.1% 30.4% 19.8% Derrick Yang LED 3,572 2,240 641 457.6% 50.5% 28.5 19.0 1.3 1.2 4.6% 6.6% 2.6% 1.5% 8.7% -1.7% 1.1% 21.1% 7.3% Tech Hardware 2353.TW Acer Inc. 1,476 2,722 239 16.1 11.0 UPFM -31.5% 14.9-27.5 -6.99 0.05 n.m n.m n.m 300.0 0.8 0.8 -28.9% 0.3% 0.0% 0.1% -2.1% -17.1% -19.5% -35.3% -36.3% 22.5% -21.1% Thompson Wu 2357.TW Asustek Computer 6,583 748 840 260.5 183.0 UPFM -29.8% 209.0-377.0 27.62 22.88 -7.9% -17.1% 9.4 11.4 1.5 1.4 16.0% 12.7% 6.4% 5.3% 7.0% 13.3% 9.2% -17.4% -20.2% 48.0% -39.0% Thompson Wu 2324.TW Compal Electronics 3,283 4,350 286 22.4 27.0 OPFM 20.8% 16.1-23.8 0.56 2.44 -62.1% 335.7% 40.0 9.2 0.9 0.8 2.1% 9.2% 1.3% 5.5% 0.7% -4.3% 10.9% 21.5% 14.3% 55.1% -3.0% Thompson Wu 2317.TW Hon Hai Precision 34,110 12,947 2,086 78.0 101.0 OPFM 29.5% 63.6-87.4 7.43 8.42 2.4% 13.3% 10.5 9.3 1.3 1.2 13.4% 13.5% 1.8% 2.0% 4.6% 4.0% 5.7% -7.7% -3.5% 42.5% -16.5% Thompson Wu 4938.TW Pegatron 2,840 2,285 355 36.8 34.0 NTRL -7.6% 34.2-55.4 3.68 3.80 37.8% 3.4% 10.0 9.7 0.6 0.6 6.4% 6.5% 5.0% 5.2% 7.3% -9.8% -20.5% -20.5% -2.0% 31.6% -12.6% Thompson Wu 2382.TW Quanta Computer 8,555 3,843 355 65.9 58.0 NTRL -12.0% 56.8-73.0 5.02 5.75 -16.2% 14.7% 13.1 11.5 1.9 1.8 14.7% 16.2% 5.0% 5.7% 4.9% -7.1% 4.4% -8.5% -3.5% 37.9% -15.8% Thompson Wu 2347.TW Synnex 2,381 1,586 308 44.5 46.0 NTRL 3.5% 37.3-62.5 3.28 3.86 -10.4% 17.4% 13.5 11.5 1.6 1.5 12.4% 13.6% 4.0% 4.7% 3.4% -6.4% -5.7% -19.9% -16.9% 38.5% 59.6% Thompson Wu 3231.TW Wistron 2,025 2,259 252 26.6 21.0 UPFM -20.9% 24.6-34.3 2.73 2.60 -7.2% -3.6% 9.7 10.2 0.9 0.9 9.7% 8.8% 5.0% 4.4% 5.4% -3.8% -1.1% -9.0% -7.4% 42.3% 22.7% Thompson Wu Tech Hardware 61,253 30,740 4,722 -13.6% 28.9% 12.9 10.0 1.3 1.2 10.0% 12.0% 3.5% 3.0% 4.6% 1.2% 3.7% -9.1% -5.7% Handsets 2498.TW HTC 4,337 850 2,346 151.0 97.0 UPFM -35.8% 125.5-303.0 -0.23 1.03 n.m n.m n.m 147.3 1.6 1.6 -0.2% 1.1% 0.0% 0.1% -2.6% 4.1% -3.5% -41.7% -49.8% 24.3% -63.2% Pauline Chen 3008.TW Largan Precision 4,780 134 1,028 1055.0 1130.0 OPFM 7.1%688.0-1120.0 67.29 71.39 61.8% 6.1% 15.7 14.8 6.5 5.1 40.1% 38.4% 2.6% 2.7% 5.0% 5.5% 1.0% 38.6% 35.6% 30.6% -44.4% Pauline Chen

03 December 2013 03 December 3311.TW Silitech Technology 220 188 34 34.8 31.0 NTRL -10.8% 32.4-57.2 1.59 1.28 -65.2% -19.4% 21.9 27.1 1.2 1.1 4.9% 4.2% 3.2% 2.6% 5.8% -9.4% -14.7% -29.8% -29.8% 14.0% -59.7% Pauline Chen Handsets 9,337 1,172 3,407 -60.7% 17.0% 30.3 25.9 2.6 2.5 8.5% 9.8% 1.7% 1.4% 1.5% 4.5% -1.5% -0.3% -5.6% Source: Reuters, Credit Suisse estimates

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Strategy Market Taiwan Figure 70: CS Taiwan coverage universe valuation (2-2) Market Share Monthly Price 12mth Inv'ment TP 52 Week EPS Earning growth P/E P/B ROAE Div Yld Price movement (%) QFII Holding Net debt/ Equity Analyst Company Cap count Volume 29-Nov Target Rating upside high/low 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 1wk 1mth 1qtr 1yr YTD 2013 US$m mn US$m NT$ NT$ 7 30 91 365 Dec-12 Automation 2049.TW Hiwin 2,105 254 353 245.5 220.0 NTRL -10.4% 166.5-247.0 7.84 10.39 -0.7% 32.6% 31.3 23.6 5.6 4.7 18.7% 21.6% 1.0% 1.3% 3.6% 7.2% 25.3% 21.3% 18.7% 32.0% 88.7% Jerry Su 1590.TW Airtac 1,352 170 92 236.0 214.0 NTRL -9.3% 129.9-245.0 10.18 11.88 49.3% 22.9% 23.2 19.9 4.5 4.1 22.6% 21.6% 2.3% 2.8% 4.9% 10.8% 19.5% 65.6% 50.3% 73.3% 23.7% Jerry Su 1504.TW Teco 2,181 1,987 124 32.5 36.0 NTRL 10.8% 21.1-34.5 1.98 2.14 28.8% 12.1% 16.4 15.2 1.6 1.6 9.8% 10.5% 3.5% 4.1% 4.8% 2.2% 3.7% 57.0% 46.1% 48.9% -15.3% Jerry Su Automation 5,638 2,410 570 22.8% 19.9% 22.4 18.7 2.6 2.4 12.4% 13.6% 1.9% 2.3% 4.4% 6.1% 15.5% 45.7% 36.9% Financial Services

Insurers 2882.TW Cathay FHC 18,642 11,869 699 46.5 47.5 NTRL 2.2% 28.6-46.6 2.54 2.63 78.9% 3.3% 18.3 17.7 2.1 2.0 11.9% 11.5% 0.8% 0.8% 2.4% 6.9% 17.1% 63.5% 58.6% 23.1% -34.9% Chung Hsu 2881.TW Fubon FHC 14,532 10,172 590 42.3 43.0 NTRL 1.7% 33.0-44.0 3.32 3.45 17.4% 3.8% 12.7 12.3 1.2 1.1 10.3% 9.6% 2.6% 2.6% 2.7% -1.5% 3.2% 30.8% 20.5% 30.1% -6.0% Chung Hsu 2888.TW Shin Kong FHC 3,187 9,251 228 10.2 8.8 UPFM -13.7% 7.8-10.6 1.49 0.85 34.8% -40.3% 6.8 12.1 1.0 0.9 15.0% 7.9% 0.0% 0.0% 2.0% 0.0% 3.6% 31.2% 27.8% 24.5% -28.6% Chung Hsu 2823.TW China Life Taiwan 2,592 2,693 286 28.5 34.0 OPFM 19.4% 21.9-29.5 2.12 2.39 20.9% 12.5% 13.4 11.9 1.2 1.1 9.3% 9.6% 1.2% 1.7% 2.5% -1.0% 9.9% 30.2% 24.0% 48.6% -105.7% Chung Hsu Private Banks 2891.TW CTBC Holding 9,539 14,596 507 19.4 22.5 OPFM 16.3% 15.1-20.1 1.26 2.00 -11.8% 65.4% 15.3 9.7 1.4 1.3 9.6% 14.0% 2.7% 4.3% 1.8% -3.0% 2.7% 27.2% 22.8% 41.3% -12.2% Chung Hsu 2884.TW E.Sun FHC 3,674 5,479 203 19.9 18.6 NTRL -6.1% 14.4-20.5 1.54 1.63 20.6% 6.1% 12.9 12.1 1.3 1.2 10.8% 10.6% 1.6% 1.6% -0.3% 0.3% 4.7% 39.1% 34.4% 53.4% -68.3% Chung Hsu 2890.TW Sinopac Holdings 4,019 8,149 184 14.6 15.0 NTRL 2.7% 11.3-14.8 1.21 1.22 3.6% 1.0% 12.1 12.0 1.1 1.1 9.7% 9.3% 3.3% 3.3% 1.7% -1.0% 9.4% 30.8% 26.6% 35.6% -10.0% Chung Hsu 2847.TW Ta Chong Bank Ltd 859 2,377 31 10.7 13.0 OPFM 21.5% 8.8-10.8 1.20 1.30 61.4% 11.3% 8.9 8.2 0.9 0.8 9.8% 10.1% 3.3% 4.0% 1.9% 2.9% 12.9% 21.2% 14.0% 18.8% -14.6% Chung Hsu 2887.TW Taishin FHC 3,677 7,457 206 14.6 12.0 UPFM -17.8% 10.1-14.9 1.78 1.43 48.9% -19.6% 8.2 10.2 1.1 1.0 14.6% 10.6% 2.1% 2.4% -1.7% -1.0% 13.2% 47.2% 37.7% 35.3% -13.8% Chung Hsu State banks 2801.TW Chang Hwa Bank 4,749 7,746 134 18.2 16.0 NTRL -11.8% 14.6-18.2 1.19 1.23 5.5% 6.6% 15.2 14.8 1.2 1.1 8.1% 7.9% 1.9% 2.0% 3.7% 2.8% 12.0% 24.9% 21.8% 12.8% -7.1% Chung Hsu 2892.TW First FHC 5,218 8,607 149 18.0 16.0 UPFM -10.9% 16.1-18.2 1.25 1.41 3.2% 16.3% 14.3 12.7 1.1 1.0 7.6% 8.4% 2.1% 2.4% 2.0% -1.4% 3.8% 8.9% 8.0% 20.9% -58.2% Chung Hsu 2880.TW Hua Nan FHC 5,239 9,018 81 17.2 14.5 UPFM -15.8% 15.4-17.5 1.05 1.16 4.4% 13.2% 16.4 14.9 1.1 1.1 6.8% 7.3% 1.5% 1.7% 2.1% -1.4% 5.5% 11.8% 7.5% 14.6% -37.7% Chung Hsu 2886.TW Mega FHC 9,743 11,608 392 24.9 24.2 NTRL -2.7% 21.8-25.4 1.95 2.02 5.0% 3.7% 12.8 12.3 1.3 1.2 10.3% 10.0% 3.5% 3.7% 3.5% -1.0% 10.3% 11.7% 11.5% 27.2% -140.1% Chung Hsu Broker 2885.TW Yuanta FHC 5,430 10,016 184 16.1 19.5 OPFM 21.5% 14.1-16.6 0.70 0.82 14.8% 17.1% 22.8 19.5 1.0 1.0 4.5% 5.2% 1.5% 2.6% 3.9% 0.6% 7.0% 8.4% 7.4% 35.1% -6.9% Chung Hsu 2883.TW China Development 4,404 15,110 278 8.6 9.6 OPFM 11.2% 7.1-9.1 0.50 0.56 47.3% 14.3% 17.3 15.5 0.8 0.7 4.7% 5.0% 2.0% 3.2% 2.4% -2.3% 5.1% 20.2% 13.6% 21.9% -12.7% Michelle Chou Financial Services 95,505 134,150 4,152 19.8% 7.1% 14.0 13.1 1.2 1.1 8.9% 8.8% 1.8% 2.0% 2.3% 0.6% 8.5% 31.4% 26.6% Consumer 2912.TW President Chain Store 7,374 1,040 181 210.0 264.5 OPFM 26.0% 149.0-223.5 8.37 9.28 28.2% 10.9% 25.1 22.6 8.2 7.5 35.0% 34.7% 2.3% 3.0% 5.0% -1.4% 0.5% 38.2% 35.0% 43.6% -66.0% Jeremy Chen 1216.TW Uni-President 9,192 5,154 393 52.8 56.6 NTRL 7.2% 48.4-63.3 2.70 3.09 12.1% 14.7% 19.6 17.1 3.1 2.9 16.7% 17.5% 3.0% 3.4% 4.8% -6.0% -3.1% 8.3% 5.0% 48.6% 62.2% Jeremy Chen Consumer 16,566 6,194 574 17.8% 13.2% 21.7 19.2 2.9 2.7 13.9% 14.8% 2.5% 2.7% 4.9% -4.0% -1.5% 21.6% 18.4% Developers & asset plays 2548.TW Huaku 858 277 88 91.8 111.0 OPFM 20.9% 63.6-109.0 11.03 11.23 80.9% 1.8% 8.3 8.2 1.9 1.7 23.7% 21.7% 7.2% 7.3% 0.9% 11.7% 4.6% 45.5% 29.7% 45.4% 59.2% Jeremy Chen 1722.TW Taiwan Fertilizer 2,284 980 171 69.0 74.0 NTRL 7.2% 66.9-78.1 3.28 4.63 -3.7% 41.1% 21.0 14.9 1.2 1.2 6.0% 8.0% 3.3% 4.7% 2.1% -1.4% 0.4% -6.6% -9.0% 25.3% -5.5% Michelle Chou 9945.TW Ruentex Develop 2,400 1,169 254 60.8 64.0 NTRL 5.3% 49.6-66.2 26.55 6.02 831.2% -77.3% 2.3 10.1 1.6 1.7 93.3% 16.2% 2.2% 2.5% 1.3% -0.5% 2.9% 10.9% 4.1% 19.3% 30.9% Chung Hsu Developers & asset plays 5,542 2,425 513 348.9% -60.8% 4.3 11.1 1.4 1.4 37.4% 12.8% 2.6% 3.4% 1.6% 1.0% 2.1% 9.0% 2.7% Petrochemicals 1326.TW Formosa Chemical 16,568 5,882 257 83.4 78.0 NTRL -6.5% 64.3-84.9 4.56 5.00 276.9% 10.6% 18.3 16.7 2.5 2.4 14.7% 14.6% 2.7% 3.0% 1.7% -1.7% 7.3% 24.5% 14.5% 35.2% 26.4% Jeremy Chen 6505.TW Formosa Petrochemical 25,965 9,526 118 80.7 69.0 UPFM -14.5% 69.0-89.4 2.85 3.84 899.9% 34.5% 28.3 21.0 3.3 3.1 12.4% 15.2% 2.5% 3.3% 4.3% -0.4% 6.2% -8.3% -6.2% 7.4% 64.7% Jeremy Chen 1301.TW Formosa Plastics 16,728 6,366 343 77.8 75.0 NTRL -3.6% 65.2-79.8 3.12 4.16 35.5% 33.3% 24.9 18.7 2.5 2.3 10.5% 13.0% 2.0% 2.7% 3.6% -2.1% 4.3% 6.5% 2.9% 33.3% 11.0% Jeremy Chen 1303.TW Nan Ya Plastics 17,343 7,924 303 64.8 75.0 OPFM 15.7% 50.5-67.0 3.22 4.50 626.0% 40.0% 20.1 14.4 2.2 2.0 11.3% 14.3% 2.7% 3.8% 1.9% -3.1% 10.6% 27.6% 16.9% 27.5% 24.7% Jeremy Chen Petrochemicals 76,604 29,697 1,021 255.8% 29.3% 22.7 17.6 2.2 2.0 9.9% 11.9% 0.7% 2.5% 3.0% -1.7% 7.0% 10.1% 5.5% Materials 1101.TW Taiwan Cement 5,842 3,692 227 46.9 48.2 OPFM 2.9% 33.8-46.0 2.66 3.13 27.0% 17.8% 17.6 15.0 2.2 2.2 13.0% 14.8% 5.1% 6.1% 10.0% 9.6% 18.6% 25.6% 20.4% 39.5% 51.6% Jeremy Chen 1102.TW Asia Cement 4,247 3,200 120 39.3 44.0 OPFM 12.0% 34.3-40.0 2.41 2.81 23.9% 16.2% 16.3 14.0 1.9 1.8 11.8% 13.2% 4.6% 5.4% 4.5% -0.5% 5.1% 8.8% 7.3% 20.5% 62.8% Jeremy Chen 2002.TW China Steel Corp. 13,185 15,339 285 25.5 23.1 UPFM -9.2% 22.9-28.0 0.95 1.16 149.7% 23.0% 26.9 21.9 1.5 1.4 5.5% 6.6% 2.6% 3.2% 1.8% -1.9% 0.6% -2.1% -6.0% 14.3% 71.9% Jeremy Chen 2105.TW Cheng Shin Rubber 8,496 3,241 414 77.6 97.5 OPFM 25.6% 63.7-87.6 5.70 6.50 16.3% 14.0% 13.6 11.9 3.3 2.9 26.8% 25.6% 3.7% 4.2% 4.3% -2.5% 0.8% 20.8% 18.4% 16.5% 54.0% Jeremy Chen Materials 31,770 25,472 1,046 41.7% 17.7% 18.6 15.8 1.5 1.4 8.2% 9.3% 2.5% 3.2% 4.3% 0.2% 4.6% 10.6% 7.1% Healthcare 8406.TWO Ginko 1,920 90 195 632.0 515.0 NTRL -18.5% 322.0-641.0 15.90 21.24 36.4% 33.6% 39.8 29.8 8.4 7.0 22.7% 25.6% 1.0% 1.3% 1.4% 13.7% 22.7% 78.0% 95.1% 0.0% -25.9% Jeremy Chen 1565.TWO St. Shine 1,517 50 208 891.0 990.0 OPFM 11.1% 426.0-899.0 32.65 45.00 36.7% 37.8% 27.3 19.8 11.3 8.9 45.6% 50.4% 2.7% 3.8% 3.8% 1.9% 9.5% 107.5% 101.6% 49.3% -11.1% Jeremy Chen Healthcare 3,437 140 403 36.5% 35.8% 33.0 24.3 9.3 7.7 30.7% 34.6% 1.3% 1.8% 2.5% 8.5% 16.9% 91.0% 97.9%

Transportation 2610.TW China Airlines 1,905 5,200 75 10.9 9.8 UPFM -9.7% 10.3-13.2 0.28 0.81 559% 164.4% 38.5 13.3 1.1 1.0 2.8% 7.7% 0.6% 1.8% 2.8% 2.4% 3.3% -6.5% -9.6% 11.5% 160.9% Timothy Ross 2618.TW EVA Air 1,877 3,259 96 17.1 20.0 OPFM 17.3% 15.7-19.2 0.72 1.04 123.7% 133.7% 23.7 16.5 1.5 1.3 6.3% 8.5% 0.0% 0.0% 5.2% 4.9% 7.2% 2.7% 0.3% 16.8% 95.4% Timothy Ross 2603.TW Evergreen Marine 2,053 3,473 90 17.5 14.4 UPFM -17.7% 16.0-20.0 -1.12 0.33 n.m n.m n.m 53.3 1.1 1.0 -6.7% 2.0% 0.0% 0.7% 4.8% 1.4% 3.6% 4.5% 0.9% 27.8% 82.9% Timothy Ross 2615.TW Wan Hai Lines 1,102 2,113 14 15.5 15.5 NTRL 0.3% 14.9-17.6 0.37 0.61 -37.3% 13.3% 41.4 25.1 1.0 1.0 2.5% 4.1% 0.7% 0.8% 2.3% -6.6% -4.6% -2.5% -7.8% 41.5% -7.9% Timothy Ross Transportation 6,938 14,045 276 -56.6% 793.8% 166.2 18.6 1.1 1.0 0.7% 5.8% 0.2% 0.3% 4.0% 1.4% 3.2% -0.1% -3.5% Telecom 2412.TW ChungHwa Telecom 24,315 7,757 514 92.8 80.0 UPFM -13.8% 90.6-102.0 5.11 5.33 -0.7% 4.4% 18.2 17.4 2.0 2.0 10.9% 11.4% 5.8% 5.8% 1.4% -1.7% -1.9% -1.1% -1.8% 16.0% -3.5% Chate Benchavitvilai 3045.TW Taiwan Mobile 8,804 2,690 398 96.9 100.0 NTRL 3.2% 88.3-118.5 5.95 6.21 9.0% 4.3% 16.3 15.6 4.1 4.1 19.8% 20.7% 6.1% 6.4% 0.7% -2.1% -10.3% -7.3% -9.4% 34.0% 81.1% Chate Benchavitvilai 4904.TW Far East Tone 6,978 3,259 325 63.4 69.0 NTRL 8.8% 61.0-83.0 3.66 4.14 12.4% 13.3% 17.3 15.3 2.9 2.9 17.7% 20.1% 6.1% 6.9% 3.8% -1.6% -16.2% -11.9% -14.4% 29.4% -3.2% Chate Benchavitvilai Telecom 40,097 13,706 1,237 3.6% 5.9% 17.6 16.6 2.4 2.4 13.7% 14.5% 5.7% 5.9% 1.7% -1.8% -6.2% -4.3% -5.7%

Taiwan 544,128 354,332 34,892 33.3% 13.8% 16.2 14.3 1.7 1.6 11.0% 11.7% 2.6% 3.0% 3.7% -0.6% 4.8% 13.0% 10.8% 2013 03 December

Source: Reuters, Credit Suisse estimates

25

03 December 2013 Taiwan macroeconomic research Analyst: Christiaan Tuntono Growth improvement delayed We expect Taiwan’s growth to improve in 2014, but remain more sceptical about the strength of the recovery. We have revised up Taiwan's 2014 GDP growth forecast to 3.2%, from the 3% previously anticipated, to reflect the improved outlook of the US and the global economy next year. But that said, our current forecast is still slower than the 3.6% consensus growth estimate as surveyed by Asia Pacific Consensus Forecast. In our view, although the global indicators are making positive signals on future growth momentum, the macroeconomic data coming from the US and the EU have remained largely mixed, casting doubt over the sustainability and strength of the expected growth trend. We are waiting to see more positive data from the developed markets and the actual start of QE tapering to give us more confidence on the strength and sustainability of the global growth recovery in 2014. We maintain our view that export and overall growth momentum will improve. October exports improved after the sharp dive seen in September, but still undershot market expectations moderately. We are surprised by the weak performance, despite a stable uptrend in IP and export orders, healthy PMI and the good leading indicators of Taiwan's major trading partners. A lagged pick-up in US activity and a high proportion of overseas production for the faster growing tech products, such as information and communication equipment, and electronics, could be the drags, in our view. Nonetheless, export orders and IP growth remained resilient throughout 3Q13, supporting our sanguine outlook. We continue to expect an uptick in developed market demand, with its transfusion into Taiwan's export demand, or both, to manifest in the coming months. Similarly, we expect GDP growth to improve in 4Q13, though it may not be strong enough to pull up the full-year growth pace to the level we had anticipated. Figure 71: We expect Taiwan’s export and overall growth Figure 72: Leading indicators remain supportive of a pick- momentum to improve up in economic activity

Chemical exports (% yoy, 3m mav) Taiwan exports to US (% yoy, 3m mav) US ISM New orders (3m forward) 100 Electronic exports (% yoy, 3m mav) 50 90 Machinery exports (% yoy, 3m mav) 80 40 Info & Comm exports (% yoy, 3m mav) 80 30 60 70 20 40 10 60 20 0 50 0 -10 40 -20 -20 30 -30 -40 -40 20

-60 -50 10

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Mar-12 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-13

Sep-06 Sep-09 Sep-05 Sep-07 Sep-08 Sep-10 Sep-11 Sep-12 Sep-13

Oct-09 Oct-12 Oct-08 Oct-10 Oct-11 Oct-13

Apr-11 Apr-09 Apr-10 Apr-12 Apr-13

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-09 Source: MoF, Credit Suisse research Source: CEIC, ISM, Credit Suisse research

Leading indicators remain supportive of our expectation of a pick-up in economic activity. The US ISM new orders index stayed high throughout 3Q and above 60 in October. Assuming a three-month lead by the index over Taiwan’s macro-indicators, we expect to see further support in the next few months. The German Ifo expectation index remained supportive at 103.6 as of October, only moderating slightly from September's level. The Chinese economy picked up visibly in 3Q, with its GDP growth surpassing 9% annualised sequential growth. We expect 4Q growth to remain steadfast at 7.7% YoY, though on a sequential basis, momentum may slow from 3Q, assuming that our 7.6% 2013 full-year growth target is on track.

Taiwan Market Strategy 26 03 December 2013

CPI stays low, policy rate on hold We believe that deflation is not a near-term threat for Taiwan, but the disinflationary pressure in the economy is persistent nonetheless. The 0.6% YoY headline CPI inflation has surprised market expectations on the downside. The headline rate was dragged down by an unanticipated fall in clothing prices, as the seasonal pick-up in autumn and winter clothing prices this year was weaker than that of a year ago. Coupled with weaker service inflation, core CPI inflation in October slowed to 0.2% YoY from 0.6% YoY in the previous month. We believe that core inflation may continue to see pressure in the coming months, though a more favourable statistical base would start to support the headline inflation rate in November. We have lowered our forecast for Taiwan’s 2014 CPI inflation to 1.6% from 1.9% previously in anticipation of a weaker-than- expected rise in the price pressure of the economy.

Figure 73: Deflation is not a near-term threat, though Figure 74: CBC shall remain on hold in 2014 disinflationary pressure persists

Consumer price index (% yoy) Taiwan rediscount rate (%) Core CPI (% yoy) 6 Taiwan overnight rate (%) Import price inflation (% yoy, RHS) Forecast 6 30 US Federal Funds rate (%) 5 25 5 4 20 3 15 4 2 10 3 1 5 0 0 2 -1 -5 1 -2 -10

-3 -15 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2006 2008 2010 2012 2014

Source: NBS, Credit Suisse research Source: CEIC, Credit Suisse research

We do not think the Central Bank of China will adjust its policy rediscount rate for the rest of 2013 nor throughout 2014. As growth is on the verge of improvement into 2014, we expect the CBC to keep the policy rediscount rate on hold, allowing better external demand to do the heavy lifting of raising Taiwan’s growth momentum. The risk of a rate hike may tilt to the upside in 2H 2014, if the developed market economies show signs of a stronger pick-up and global oil prices surge to exert stronger-than-expected upside pressure on inflation. Looking ahead, although the US is expected to gradually exit from QE in 2014, we believe the performance of Taiwan’s macro data will remain the ultimate driver behind CBC’s monetary policy decision. TWD: Near-term strength, longer-term weakness The TWD should see short-term strength, but we expect it to be weakened by the potential depreciation of the JPY and the KRW in 2014. Despite the recent spike in USD/TWD driven by a strong USD, we think a cyclical rise in export growth and the favourable seasonality in its current account balance will lend short-term strength to the TWD. Hence, we maintain our end-2013 forecast for USD/TWD at 29.2. Our FX team has maintained its expectation for the JPY to weaken in 2014, but has turned less aggressive regarding the extent. This should translate into less pressure on the KRW and the TWD, in our view, prompting us to revise down our end-2014 USD/TWD forecast to 30.3, from the 31.4 we forecast previously. But in the event that the JPY is more resilient than we expected, we think the cyclical improvement in Taiwan's exports and growth in 2014 could continue to support the TWD through the trade balance and portfolio inflows.

Taiwan Market Strategy 27 03 December 2013

Figure 75: We expect short-term strength, but longer term Figure 76: Social welfare spending is anticipated to rise in weakness for the TWD the coming years

USDTWD General government expenditure 36 Pension and Survivors Benefit (% of GDP) 8% Forecast 35 Community & Environment (% of GDP) 7% Social welfare (% of GDP) 34 6% 33 5% 32 4% TWD strength 31 3% 30 2% 29 1%

28 0%

2003 2005 2007 2009 2011 2013

1990 2008 1992 1994 1996 1998 2000 2002 2004 2006 2010 2012 2014 2016 2018

Source: CEIC, Credit Suisse research Source: MoF, CEIC, Credit Suisse research

The 2014 fiscal budget will make a 1.7% increase in expenditure, despite a mild decline in expected revenue receipts, with social welfare spending making up the largest share of the expenditure base. Central government expenditure is expected to reach NT$1.94 tn in 2014, of which social welfare spending will comprise about 22%. Central government’s revenue, on the other hand, is expected to stay largely flat, reflecting lower tax revenue and fee income next year. The government expects to continue to incur a deficit next year, estimated at NT$210 bn or 1.4% of forecast 2014 GDP. As we argued in Taiwan: How steep is Taiwan’s fiscal cliff? – An analysis of government debt dynamics (11 March 2013), we expect the Taiwanese government to record successive years of fiscal deficits if growth stays below trend (around 4%) and expenditure keeps rising on higher age-related expenses. This should push the central government’s debt level above the current debt limit by 2016, by our estimate.

Taiwan Market Strategy 28 03 December 2013

Outlook for Taiwan sub-sectors

Taiwan Market Strategy 29 03 December 2013 Foundry: Market Weight Sector Research Analyst: Randy Abrams Demand: Hardware demand modest, but outsourcing and mobility gains still drive growth Semiconductor unit growth has slowed from +13% CAGR over 2002-08 since the financial Semiconductor unit and crisis to +5% CAGR since 2008 due to slower consumer tech markets. A sum of CS tech sales growth has slowed to hardware revenue projections for chip industry drivers (computing, mobile, telco, capex, 5%, but foundries are out- auto and industrial) projects only 4% growth in 2013 and 2-3% growth in 2014-15, down growing with outsourcing from 7-12% over 2003-11 and now only in line with 3-4% global GDP growth. Our and mobility gains semiconductor industry forecast has continuation of 5% growth CAGR over 2013-15, a modest premium to hardware revenue growth from more silicon per device.

Figure 77: Demand drivers for foundries showing moderate growth into 2012 Weights End market (sales) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 30.0% PC, server and tablet revenue (bn) 192.9 200.1 201.2 203.9 233.2 242.4 221.1 253.2 279.8 284.9 273.3 271.4 272.5 y/y growth 11% 4% 1% 1% 14% 4% -9% 15% 10% 2% -4% -1% 0% 25.0% Handset revenue (bn) 99.3 118.5 129.6 150.8 161.6 170.3 184.9 218.2 267.8 310.8 347.2 357.1 359.1 y/y growth 22% 19% 9% 16% 7% 5% 9% 18% 23% 16% 12% 3% 1% 20.0% US Consumer Growth ($bn - CEA) 113.5 120.6 137.3 156.5 169.1 181.5 169.8 181.1 195.0 206.5 215.8 226.6 237.9 y/y growth 0% 6% 14% 14% 8% 7% -6% 7% 8% 6% 5% 5% 5% 10.0% Telecom Carrier Capex (bn) 116.8 158.1 178.8 215.4 238.1 252.3 238.0 231.1 246.6 254.0 264.2 274.8 285.8 y/y growth 3% 35% 13% 20% 11% 6% -6% -3% 7% 3% 4% 4% 4% 7.5% Global auto production (m) 60.6 64.5 66.5 69.2 73.3 70.5 61.8 77.9 80.0 84.1 88.3 92.8 97.4 y/y growth 3% 6% 3% 4% 6% -4% -12% 26% 3% 5% 5% 5% 5% 7.5% Global Ind. Production (indexed) 787.0 838.4 881.0 942.0 1,004.0 1,034.1 992.8 1,042.4 1,073.7 1,105.9 1,150.1 1,196.1 1,244.0 y/y growth 4% 7% 5% 7% 7% 3% -4% 5% 3% 3% 4% 4% 4% Weighted Growth (YoY) 9.6% 11.7% 7.2% 10.1% 9.7% 4.5% -3.6% 12.2% 11.5% 6.7% 3.7% 2.6% 2.3% CS Semi Revenues ($bn) 166.4 213.0 227.5 247.7 255.6 248.6 226.3 298.2 299.5 290.6 305.5 319.5 337.1 YoY Growth 3.9% 28.0% 6.8% 8.9% 3.2% -2.8% -9.0% 31.8% 0.4% -3.0% 5.1% 4.6% 5.5% Source: Company data, Credit Suisse estimates Despite lacklustre demand, foundries have continued to grow faster than the broader industry due to rising outsourcing, higher market share in mobility and rising pricing as leading edge manufacturing grows more complex and expensive. We estimate foundries are now over 60% of outsourced IC production excluding memory, processors and discretes and over 30% of all IC production, allowing still further room to grow.

Figure 78: Semiconductor unit growth has moderated Figure 79: Foundries still growing into their addressable since the financial crisis market IC Units (K) Quarterly IC Production (70% of COGS) ($m) % outsourced 30,000 80% 20,000,000 5% CAGR 08-13 70% 25,000 60% 15,000,000 20,000 50% 13% CAGR 02-08 40% 10,000,000 15,000 30% 9% CAGR 91-02 10,000 20% 5,000,000 10% 5,000 0%

0 0 -10%

2Q90 1Q91 4Q91 3Q92 2Q93 1Q94 4Q94 3Q95 2Q96 1Q97 4Q97 3Q98 2Q99 1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13

Dec-94 Dec-11 Dec-92 Dec-93 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-12 Dec-13 Dec-91 IC Production (70% of COGS) IC Production (Ex memory, MPU, discretes) IC Units (3mo avg) Growth Rate Foundry % of IC Prod Foundries % of IC Prod (ex Memory, MPU, Discretes) Source: Semiconductor Industry Association, Credit Suisse estimates Source: Semiconductor Industry Association, Credit Suisse estimates TSMC has maintained a 12% growth CAGR in the past decade, slightly faster than fabless, We see headroom for which have grown at 11% and well above IDMs (integrated semiconductor device foundries to continue manufacturers), which have grown only 1%. IDMs' outsourcing has still been a boost, with penetrating its addressable production growing at an +8% CAGR. This area still has some potential as only 15% of market IDM production is now outsourced versus less than 10% outsourced after the financial crisis.

Taiwan Market Strategy 30 03 December 2013

Figure 80: TSMC keeping pace with fabless and growing from incremental IDM outsourcing IDM outsourcing 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 02-13 CAGR IDM Production: 26,873 21,930 21,794 24,703 26,577 27,052 29,835 29,262 26,416 23,737 29,682 28,318 25,842 25,947 1% YoY Growth -18% -1% 13% 8% 2% 10% -2% -10% -10% 25% -5% -9% 0% % outsourced 15% 11% 11% 12% 15% 16% 17% 17% 19% 15% 17% 19% 22% 23% IDM outsourcing: 4,102 2,479 2,435 2,997 4,036 4,195 4,954 5,018 5,034 3,483 5,039 5,458 5,657 5,840 8% YoY Growth -40% -2% 23% 35% 4% 18% 1% 0% -31% 45% 8% 4% 3% Fabless revenue: 22,206 17,672 18,873 22,917 28,216 32,640 39,062 43,786 45,636 44,036 54,147 57,461 62,458 63,656 11% YoY Growth -20% 7% 21% 23% 16% 20% 12% 4% -4% 23% 6% 9% 2% TSMC Revenue 4,031 4,758 5,758 7,367 7,519 9,945 9,888 10,148 9,417 12,764 13,562 17,252 20,268 23,375 12% YoY Growth 18% 21% 28% 2% 32% -1% 3% -7% 36% 6% 27% 17% 15% IDMs % of TSMC 46% 24% 21% 20% 29% 22% 25% 29% 30% 13% 20% 15% 11% 11% Source: Company data, Credit Suisse estimates

Figure 81: IDM mix for the foundries declining… Figure 82: …as fabless outgrows IDMs US$mn % outsourced / % of TSMC Revenue ($ mn) Y/Y Growth production $90,000 30% 40,000 40% $80,000 35,000 35% 20% $70,000 30,000 30% $60,000 10% 25,000 25% $50,000 20,000 20% 0% 15,000 15% $40,000 10,000 10% $30,000 -10% 5,000 5% $20,000 -20% 0 0% $10,000

$0 -30%

2004 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013

2005 2013 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2012 IDM production TAM Foundry IDM sales 2000 IDMs Fabless YoY IDM YoY Fabless IDM mix outsourced % of TSMC Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates ARM ecosystem remains a growth driver for foundry The foundries' growth is being led by semiconductor companies licensing the ARM The ARM core’s proliferation processor core, which is a low-cost, low-power chipset licensed into a number of high with the fabless companies volume devices including tablets, smartphones, microcontrollers, set-tops, TV controllers, is a key driver for the and digital cameras and starting to be adapted into higher-end computing, networking and foundry sector servers as it moves up from 32-bit to 64-bit processing. ARM has experienced steady revenue growth as its licence business model and low power system-on-chip enable the creation of low-cost and low-power computing devices. Many of the ARM licensees with the exception of Samsung also run an asset light business model so they license the core, focus on chip design and then manufacture at the foundries.

Figure 83: TSMC sales track ARM shipments Figure 84: ARM growing units in a range of applications 20,000 Others (headsets, DVDs, 18,902 consoles, etc.) Arm Sales/TSMC Shipments (ARM lagged one quarter) Microcontrollers

6.0 17,500 16,921 Smart Cards 5.0 Automotive 15,000 14,612 Hard Disk & SSDs 4.0 Printers 12,373 12,500 Networking 3.0 Servers 10,149 10,000 Desktop PCs 2.0 8,655 7,923 Digital TV & Set-top box 1.0 7,500 Digital Cameras Laptops/Netbooks - 5,000 Tablets

ARM chipbased(mn) shipments ARM Portable Media Players

2,500

1Q06 2Q10 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

3Q03 Voice-only phones

4Q13E 1Q14E 2Q14E Feature phones Arm sales (lagged one quarter) TSMC shipments 0 Smartphones 2011 2012 2013E 2014E 2015E 2016E 2017E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates ARM has had a high correlation to TSMC's sales historically with growth in the past few years led by communications, with TSMC communication sales reaching 55% of revenue, up from 40% before the financial crisis. Competition is driving to stay competitive on performance and power and push to the most advanced technology node. A look at the 28nm ramp for TSMC and expected 20nm ramp in 2014 shows higher revenue ramps on these nodes despite widespread industry talk of slowing Moore’s Law. Moore's Law is

Taiwan Market Strategy 31 03 December 2013 driving fewer customers and products to the advanced node but high volume products in mobile and computing are still making that push. 2014 will remain a strong year for the leading edge with Chinese customers migrating to TSMC will ramp 20nm to 28nm and Apple filling TSMC 20nm capacity along with a few designs from its existing 10% of sales with high graphics, networking, PLD and mobile customers. TSMC also retains good content at share and retain 75% share Apple on the lagging edge with baseband, fingerprint sensor, power management, driver on 28nm IC, and connectivity. 2015 challenges rise as Samsung and Intel both make aggressive pushes on 14nm in mobile, with TSMC needing to protect and keep its customer base market share intact and maintain some Apple share.

Figure 85: Communications—another year of high growth Figure 86: 28/20nm ramps supporting pricing NT$mn Revenue (NT$) 120,000 60,000

100,000 50,000

80,000 40,000

60,000 30,000

40,000 20,000

20,000 10,000

- -

1Q99 3Q09 4Q99 3Q00 2Q01 1Q02 4Q02 3Q03 2Q04 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14

1Q04 3Q10 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 Computer Communication 1Q99 Consumer Other/Industrial 0.5um+ 0.25/0.35um 0.15/0.18um 0.13um 90nm Memory Linear (Communication) 65nm 40nm 28nm 20nm Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 87: TSMC sales by end market driven by communications and industrial End market sales (NT$mn) 2010 2011 2012 2013 2014 2015 03-08 CAGR 08-13 CAGR 13-15 CAGR Computer 105,740 87,310 87,788 86,509 90,068 84,559 7% -3% -1% Communication 164,814 189,834 230,990 309,818 374,470 435,035 12% 20% 18% Consumer 52,225 40,202 38,993 37,267 37,184 34,269 12% -8% -4% Other/Industrial 62,118 74,472 105,762 113,707 133,850 151,301 17% 42% 15% Memory 0 0 0 0 0 0 6% Total by Application: 384,897 391,817 463,534 547,300 635,572 705,164 11% 13% 14% Source: Company data, Credit Suisse estimates A notable concern is the mobile opportunity reaching late innings and slowing down, with developed markets already saturated. Beyond Apple ramp keeping TSMC's high-end growing in 2014, we note the two levers for mobile growth from new penetration and replacement cycles can still come through.

Figure 88: High-end smartphone growth stalls Figure 89: Apple in 2014 allows TSMC’s high-end to grow Unit: mn YoY (%) (Unit: NT$) 1200 100% $4,500 18% $4,000 16% 1000 80% $3,500 14% 800 $3,000 12% 60% $2,500 10% 600 $2,000 8% 40% 400 $1,500 6%

20% $1,000 4% 200 $500 2% 0 0% $0 0% 2010 2011 2012E 2013E 2014E 2015E 2010 2011 2012E 2013E 2014E 2015E Sub $400 phones $400+ smartphones TSMC high-end Non-Apple TSMC high-end Apple Sub $400 YoY Growth (%) $400+ YoY Growth (%) High-end smartphone % of TSMC Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Our base smartphone model slows to 6% revenue growth in 2015 before going ex-growth in 2016-17 but we would note that base model and street models imply slowing replacement and new subscriber growth rates. We would note an upside scenario where penetration rates are stable at current 6.4% rates and replacement rates remain stable at

Taiwan Market Strategy 32 03 December 2013

2.5 years would raise the 2012-17 CAGR from 8% to 12% and keep smartphones growing 7% in 2016 and 5% in 2017. Smartphones have now penetrated 26% of the mobile subscriber base in 2013, similar to penetration rates for handsets in 2003 implying far more penetration in emerging markets still lie ahead, with developed market growth still possible if a good replacement driver emerges to re-accelerate growth at the high-end.

Figure 90: Smartphone penetration at 26% is where Figure 91: Faster replacements/penetration could handset penetration was in 2003 accelerate handset growth Subscribers (mn) Penetration (%) 7,000 100% 90% Smartphone Replacement Years 6,000 80% $1,230 3.00 2.75 2.50 2.25 2.00 5,000 70% 5.1% 1,012 1,063 1,125 1,200 1,294 4,000 60% 50% 5.6% 1,047 1,098 1,160 1,235 1,329 3,000 40% 6.1% 1,082 1,133 1,195 1,270 1,364 2,000 30% 20% 6.6% 1,117 1,168 1,230 1,305 1,399 1,000 10% 7.1% 1,152 1,203 1,265 1,340 1,434 0 0% 7.6% 1,187 1,238 1,300 1,375 1,469

Penetration Pace Penetration 8.1% 1,222 1,273 1,335 1,410 1,504

2008/2018 1998/2008 1999/2009 2000/2010 2001/2011 2002/2012 2003/2013 2004/2014 2005/2015 2006/2016 2007/2017 2009/2019 2010/2020 2011/2021 2012/2022 2013/2023 Handset subscribers Smartphone subscribers Handset penetration Smartphone penetration Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Wearables could create a new growth market: More products to emerge in 2014 The wearable market opens up a potential new market for silicon profiled by our tech team Wearables would scale to in an initial and follow-up report (Pitzer/Garcha) at a potential US$43 bn addressable US$2 bn in foundry sales at opportunity at 15% penetration of the smartphone subscriber base at US$100 device ASP. 15% penetration We believe this could open up US$1.9 bn in additional foundry manufacturing content and 4% of incremental sales for TSMC by 2015 if it could take 50% manufacturing share of the ICs, primarily application processors or microcontrollers along with connectivity chips and multiple sensors. (Also see our China smartphone/tablet supply chain report.)

Figure 92: Wearables could add 4% to TSMC’s sales by 2015 2013 2014 2015 Smartphone subscribers 1,690.6 1,690.6 1,690.6 2,263.7 2,263.7 2,263.7 2,837.4 2,837.4 2,837.4 Penetration 3.0% 5.0% 7.0% 7.0% 10.0% 13.0% 12.0% 15.0% 18.0% Units 50.7 84.5 118.3 158.5 226.4 294.3 340.5 425.6 510.7 ASP ($) $50 $100 $200 $50 $100 $200 $50 $100 $200 TAM ($m) $2,536 $8,453 $23,668 $7,923 $22,637 $58,856 $17,025 $42,562 $102,148 COGS (35% GM) $1,648 $5,494 $15,384 $5,150 $14,714 $38,256 $11,066 $27,665 $66,396 Semi Content (20% of COGS) $330 $1,099 $3,077 $1,030 $2,943 $7,651 $2,213 $5,533 $13,279 Foundry (35% of Semi content) $115 $385 $1,077 $360 $1,030 $2,678 $775 $1,937 $4,648 TSMC (50% market share) $58 $192 $538 $180 $515 $1,339 $387 $968 $2,324 TSMC % of sales 0.3% 1.0% 2.7% 0.8% 2.2% 5.8% 1.5% 3.8% 9.0% Connectivity $110 $440 $820 $343 $1,177 $2,040 $738 $2,213 $3,541 CPU $55 $176 $1,026 $172 $471 $2,550 $369 $885 $4,426 Power $55 $117 $308 $172 $314 $765 $369 $590 $1,328 Sensor $55 $147 $513 $172 $392 $1,275 $369 $738 $2,213 GPS $0 $73 $205 $0 $196 $510 $0 $369 $885 Misc $55 $147 $205 $172 $392 $510 $369 $738 $885 Source: Company data, Credit Suisse estimates Inventory is getting leaner exiting 2013 Our inventory analysis following 3Q13 results shows inventory is staying in control for the supply chain, with downstream inventory in line with its 45-day long-term average, semiconductor inventory ex-Intel down 4 days to 70 days and down 1 week from its 3Q12

Taiwan Market Strategy 33 03 December 2013 peak. Fabless inventory is a notable bright spot, with our sample of 22 companies down 8 days to 61 days and at the low end of its 55-70 day historical range. We expect even moderate seasonal sell through and new products (Sony PS4/XBOX One, Downstream inventory iPad Air/Retina iPad Mini, iPhone 5S) to deplete inventory in 4Q13. A seasonal sell- normal, upstream coming through for downstream of +15% QoQ will far outpace the -9% QoQ foundry and -3% QoQ down exiting 2013 for the back-end expectation and help drive inventory lower into 2014. We expect another round of restocking coming out of Chinese New Year in 2014.

Figure 93: Semiconductor inventory starting to drop Figure 94: Slow upstream in 2H helps inventory deplete Asian Upstream sales 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E 90 Foundry $4,878 $5,932 $6,394 $6,147 $6,116 $7,016 $7,280 $6,658 QoQ 3.7% 21.6% 7.8% -3.9% -0.5% 14.7% 3.8% -8.5% Back-end $2,538 $2,765 $2,810 $2,937 $2,627 $2,951 $3,055 $2,966 80 QoQ -5.9% 9.0% 1.6% 4.5% -10.6% 12.3% 3.5% -2.9% Upstream sales (US$) 7,416 8,697 9,205 9,084 8,743 9,967 10,335 9,624 70 QoQ 0.2% 17.3% 5.8% -1.3% -3.8% 14.0% 3.7% -6.9% Semis, 71.5 Semi Customer sales 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E 60 Fabless/IDM Customers 12,458 12,115 12,678 12,914 12,162 12,709 13,345 13,345

QoQ 3.7% -2.8% 4.6% 1.9% -5.8% 4.5% 5.0% 0.0% Days Days ofInventory 50 Total Tech, 44.9 Downstream units 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E Smartphone units 151.5 160.9 181.4 222.4 210.4 223.3 246.7 295.0 40 QoQ 0.9% 6.2% 12.7% 22.6% -5.4% 6.1% 10.5% 19.6% TV units 47.0 48.1 50.5 57.5 48.3 49.8 50.8 55.8 Supply Chain, 41.9 30 QoQ -27.3% 2.5% 5.0% 13.8% -16.0% 3.0% 2.0% 10.0% PC/Tablet units 107.5 110.3 119.5 128.6 111.8 115.7 129.0 137.6

QoQ -16% 3% 8% 8% -13% 4% 11% 7%

1Q'13

1Q '96 1Q '00 1Q '08 3Q 3Q'95 3Q'96 1Q'97 3Q'97 1Q'98 3Q'98 1Q'99 3Q'99 3Q'00 1Q'01 3Q'01 1Q'02 3Q'02 1Q'03 3Q'03 1Q'04 3Q'04 1Q'05 3Q'05 1Q'06 3Q'06 1Q'07 3Q'07 1Q'08 1Q'09 3Q'09 1Q'10 3Q'10 1Q'11 3Q'11 1Q'12 3Q'12 3Q'13 1Q'95 Handsets/PCs/TVs/Tablets 305.9 319.4 351.4 408.5 370.5 388.8 426.5 488.5 Total Tech Semis Supply Chain QoQ -10.8% 4.4% 10.0% 16.2% -9.3% 4.9% 9.7% 14.5% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Supply: Capex concentrated at TSMC as other foundries stay more conservative While official 2014 capex guidance will not be out until January, we believe TSMC will stay aggressive as the only foundry offering a meaningful 20nm process to third party customers and Apple finally moving to TSMC from 2Q14. We model TSMC capex flat at US$10 bn, representing a modest drop in capital intensity from 48-50% the last three years to 43% in 2014 as some capacity was spent early on 20nm. The company will see a ramp up in operating cash flow which should fund capex and the dividend. We expect the other foundries to be more conservative on capex, modelling UMC flat at Modeling US$10 bn capex US$1.5-1.6 bn, SMIC up slightly at US$720 mn for its Beijing JV fab equipment, and for TSMC, overall capex up Global Foundries up 10% YoY to US$4.8 bn as it equips its New York fab. The biggest <10% swing factor is Samsung where our Samsung analyst Keon Han models capex at US$6 bn, up from US$5.2 bn but may see further ramp based on how much Exynos/Apple and third- party foundry customers it plans into 2015 with 14nm FinFet.

Figure 95: Foundry capex could grow from US$11.0 bn to US$12.9 bn in 2011E In US$ mn, unless otherwise stated US$mn Metric 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E Totals Share Sales 7,275 8,290 9,728 9,827 10,608 8,998 13,323 14,543 17,154 20,121 23,315 26,474 125,677 48% TSMC Capex 2,165 2,308 2,413 2,559 1,886 2,671 5,936 7,286 8,332 9,716 10,000 10,121 46,343 42% Capex/Sales 30% 28% 25% 26% 18% 30% 45% 50% 49% 48% 43% 38% 37% Sales 3,334 2,844 3,190 3,252 2,946 2,696 3,824 3,605 3,916 4,153 4,424 4,672 36,203 14% UMC Capex 1,378 582 956 856 364 536 1,851 1,580 1,720 1,500 1,495 1,576 11,686 11% Capex/Sales 41% 20% 30% 26% 12% 20% 48% 44% 44% 36% 34% 34% 32% Sales 975 1,171 1,465 1,550 1,354 1,070 1,555 1,319 1,702 2,086 2,357 2,663 14,613 6% SMIC Capex 1,838 903 911 860 665 200 775 765 499 675 720 760 8,580 8% Capex/Sales 189% 77% 62% 55% 49% 19% 50% 58% 29% 32% 31% 29% 59% Sales 932 1,033 1,415 1,355 1,661 2,393 3,774 3,637 4,114 4,531 5,060 5,570 25,396 10% GF Capex 686 628 554 758 576 1,050 2,700 4,700 3,800 4,400 4,800 5,000 20,074 18% Capex/Sales 74% 61% 39% 56% 35% 44% 72% 129% 92% 97% 95% 90% 79% Sales 2,047 1,804 1,984 2,567 3,598 4,093 5,926 10,055 12,404 14,595 17,788 22,172 60,715 23% Samsung Capex 449 1,346 808 619 539 449 2,693 4,668 7,002 5,200 6,000 7,500 24,284 22% Capex/Sales 22% 75% 41% 24% 15% 11% 45% 46% 56% 36% 34% 34% 40% Sales 14,562 15,143 17,782 18,552 20,167 19,250 28,401 33,161 39,289 45,485 52,944 61,551 262,604 100% Total Capex 6,516 5,768 5,643 5,653 4,029 4,905 13,955 18,999 21,353 21,491 23,015 24,957 110,967 100% Capex/Sales 45% 38% 32% 30% 20% 25% 49% 57% 54% 47% 43% 41% 42% Source: Company data, Credit Suisse estimates. Totals and share are calculated from 2000-2013

Taiwan Market Strategy 34 03 December 2013

The foundries have seen a significant step up in aggregate capex the past few years due to much higher capital intensity on the advanced nodes and an acceleration of leading edge growth as smartphone processors are now manufactured at the most advanced geometries. TSMC is only getting low teens supply growth despite capex 4-5x higher than the 2003-07 period when the shift from 8” to 12” fabs lowered its capital intensity. We expect the high investment per incremental wafer capacity to limit supply growth as it has the past few years to constrain the oversupply risk.

Figure 96: Foundry supply moderate despite high capex Figure 97: Foundry utilisation should bottom in 1Q12 US$mn (%) Industry Utilization (%) Capex (US$mn) Shipments and Capacity (YoY) Foundry Capacity (K WPQ) 10,000 110 12,000 90% 9,000 8,000 100 10,000 70% 7,000 90 8,000 50% 6,000 80 5,000 6,000 30% 70 4,000 60 4,000 10% 3,000 50 2,000 2,000 -10% 1,000 40

0 -30% 0 30

2002 2010 2000 2001 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014

2Q03 1Q04 1Q95 4Q95 3Q96 2Q97 1Q98 4Q98 3Q99 2Q00 1Q01 4Q01 3Q02 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 Capex (US$mn) Capacity YoY (%) Shipment YoY (%) Foundry Shipments (Top 5) Foundry Capacity (Top 5) Utilization (%) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates TSMC's peak capital intensity in 2013 is at 48% capex/revenue and we project could come TSMC capital intensity down to 43% in 2014 and 38% by 2015. The company has invested and ramped 20nm coming down in 2014 from capacity ahead of the volume ramp next year due to equipment qualification times so will peak levels; no more debt be able to maintain capex at more stable levels. As growth moderates, we also project a issuance planned harvest period that could allow return to solid positive FCF at 6-7% by 2015, potentially allowing some increase in dividend payouts in a couple of years.

Figure 98: FCF yields set to rebound from 2014 Figure 99: Cash flows can support rising dividends soon Capex and FCF (NT$mn) FCF Yield (%) Dividend FCF and Dividends 500,000 7% Yield per Share 8.0% $8.00 450,000 6% 400,000 7.0% $7.00 350,000 5% 6.0% $6.00 300,000 4% 5.0% $5.00 250,000 3% 4.0% $4.00 200,000 3.0% $3.00 150,000 2% 100,000 2.0% $2.00 50,000 1% 1.0% $1.00

0 0% 0.0% $0.00

CY09 CY12 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY10 CY11

CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY11 CY12

CY13E CY14E CY15E

CY15E CY10A CY13E CY14E Operating cash flow Capital spending FCF Yield (%) Dividend Yield (%) (lhs) FCF / Share (rhs) Dividend / Share (rhs) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Profitability: Most of the pool still going to TSMC

■ Margins sustaining despite huge depreciation hurdle to get over. TSMC TSMC maintains most of the expressed confidence in maintaining structural profitability despite depreciation being industry profits though Intel up 35% YoY in 2014 due to volume scale bringing down manufacturing cost per unit and Samsung are targeting and richer mix improving pricing. Next year is the most difficult year for depreciation as the space; impact would be the low capex spent in the financial crisis drops off the depreciation schedule and is after 2014 replaced by another year of high capex getting depreciated; the 2015 increase will be much less and will be paired with the graphics and networking moving to 16nm FinFet to provide another leg of support for 2015 leading edge volume. We believe the company is counting on pulling through a significant drop in non- depreciation costs from scale efficiencies to offset the rise in depreciation though we model about 60 bp decline. The GM risk if the company only reduces non-depreciation costs in line with the 2010-12 average would be about 150 bp more to GMs.

Taiwan Market Strategy 35 03 December 2013

Figure 100: 2014 the worst year for depreciation growth Figure 101: Higher ASPs still offsetting depreciation rises Depreciation and YoY Depr. Shipments (mn) US$ Increase 4,500 $1,800 capex (NT$) 5 year equip 4,000 $350,000 depreciation 45% $1,600 40% 3,500 $300,000 period 35% 3,000 $1,400 $250,000 30% 2,500 $200,000 25% $1,200 20% 2,000 $150,000 15% 1,500 $1,000 10% $100,000 1,000 5% $800 $50,000 0% 500

$0 -5% 0 $600

2004 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

3Q99 1Q05 1Q08 3Q13 1Q97 3Q97 1Q98 3Q98 1Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 3Q05 1Q06 3Q06 1Q07 3Q07 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13

Shipments ASPs Capex Depreciation Depreciation / Sales YoY Increase

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates TSMC has opened a wide lead in advanced manufacturing with its traditional competitors. UMC and SMIC do not have the resources to keep up with TSMC’s rapid investments. UMC’s operating cash flow has dropped from 75% to 16% of TSMC’s operating cash flow since 2000, even below its revenue share. Also, SMIC is now only generating 5% of the operating cash flow of TSMC, below its sales scale as well. We expect both of these competitors to continue focusing on the second source business and more specialty applications on mature technology nodes to improve their balance sheets and cash flows.

Figure 102: UMC sales/cash flow declining vs TSMC Figure 103: SMIC sales/cash flow stabilising at a low level US$mn (%) US$mn (%) 18,000 80% 18,000 18% 16,000 70% 16,000 16% 14,000 60% 14,000 14% 12,000 12,000 12% 50% 10,000 10,000 10% 40% 8,000 8,000 8% 30% 6,000 6,000 6% 4,000 20% 4,000 4% 2,000 10% 2,000 2% 0 0% 0 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

UMC Operating Cashflow TSMC Operating Cashflow SMIC Operating Cashflow TSMC Operating Cashflow UMC OCF as % of TSMC OCF UMC Sales as % of TSMC Sales SMIC OCF as % of TSMC OCF SMIC Sales as % of TSMC Sales

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Valuation: Reasonable near the Taiwan tech average We believe TSMC at 13x 2014E EPS of NT$8 is reasonably in line with Taiwan tech and still keep our NT$116 target at 14.5x EPS, similar to its recent range and range from 2003- 07. The stock would also maintain slightly over 3x P/B as it has through those same periods. We expect a solid year in 2014 due to high 28nm HPM and 20nm market share though we acknowledge a rerating well above our target may be difficult due to overhang from Intel/Samsung’s strategy to compete in foundry and with internal silicon for mobile.

Figure 104: TSMC near its average historical P/E Figure 105: TSMC trading near its mid-cycle P/B (NT$) (NT$) 130 17x 130 3.5x 120 120 15x 3.1x 110 110 100 2.7x 13x 100 90 90 80 10.5x 80 2x 70 70 60 60 50 50 40 40 30 30 20 20 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Source: TEJ, company data, Credit Suisse estimates Source: TEJ, company data, Credit Suisse estimates

Taiwan Market Strategy 36 03 December 2013

Among other foundries, Vanguard is a better cash return story than growth story as it has TSMC has reasonable US$450 mn net cash, offers low teen FCF yield and growing dividend yield at 4% and valuation in line with its rising as the company maintains near full utilisation at its two fabs but remains 2003-08 range conservative investing in more capacity. SMIC has re-rated well due to better execution to restore profitability and good leverage to Chinese fabless and specialty applications but we took it back to NEUTRAL following strong outperformance in 1H14 and believe the company may stay at only a small premium to book value with ROE remaining in the mid- high single digit range. For UMC, we also retain NEUTRAL as the company’s technology continues to lag, keeping operating profit in a 0-10% range through the cycle and ROEs at mid-single-digits.

Figure 106: Foundry valuation comparison Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 29-Nov Local Curcy Rating upside 2013 2014 2013 2014 2012 2013 2014 Foundry TSMC 91,955 105.0 116.0 OPFM 10.5% 14.7 13.1 3.2 2.8 24.7% 23.6% 22.8% UMC 5,199 12.3 13.0 NTRL 5.7% 13.5 35.0 0.7 0.7 2.1% 5.5% 2.1% SMIC 2,607 0.63 0.68 NTRL 7.9% n.m n.m 1.1 1.0 0.7% 4.9% 4.7% Vanguard Semi 1,876 34.8 35.0 NTRL 0.7% 12.8 11.0 2.3 2.1 11.3% 19.2% 19.8% Total 101,638 14.7 13.7 2.6 2.3 19.2% 21.0% 20.2% Source: Company data, Credit Suisse estimates Risk: Competitive landscape shifting as Intel and Samsung target mobile and foundry The biggest investor concern in the foundry sector is Samsung and Intel more Samsung and Intel both are aggressively targeting their own silicon for smartphones and tablets and also making more targeting internal silicon for aggressive overtures in the foundry business. mobile and foundry business Intel’s CEO Brian Kryzanich is open to dialogue with any potential foundry customer including low cost mobile, mobile SoC and FPGA/ASIC, opening the door to 60% of TSMC’s base. Intel pitched its technology as 3-4 years ahead, though foundry and mobile are actually on comparable timelines. Obstacles for Intel will be building up its IP for external customers (5,700 IP blocks in TSMC’s OIP), mobile companies' conflicts fabbing at Intel, Intel’s priority for internal design+manufacturing over foundry and culture used to sell expensive/high-margin processors (US$33k sales/US$13k COGs/US$5k SG&A) over lean foundry (US$8k sales/US$4k COGs/US$320 SG&A).

Figure 107: Intel and TSMC’s mobile timeline are closer together 2011 2012 2013 1H14 2H14 1H15 14nm2H15 14nm Cherry 14nm Broxton Broxton / Intel Mobile 45nm 32nm 32nm 22nm Trail / SoFIA (mid '15) / SoFIA INTC SoC Moorestown Medfield Medfield Merrifield TSMC SoFIA TSMC (late '15)

TSMC 16nm 16nm Mobile 40nm 28nm 28nm 28/20nm 20nm FinFet FinFet Source: Company data, Credit Suisse estimates Intel is also finally pushing toward integration, aiming to catch-up to Qualcomm/Mediatek. Consistent with our October update, Intel has engaged low-cost tablet makers and targets 4x growth to 40 mn+ units (15% share) and will ramp LTE more sharply in 2H14. Intel in mobile will have low impact on TSMC the next two years, as its integrated LTE baseband + AP will not be out until mid-2015 and its low-cost chip stays at TSMC through 4Q15.

Taiwan Market Strategy 37 03 December 2013

Figure 108: Intel 2014 roadmap Figure 109: Intel 2015 roadmap—4G LTE and low-end integrated solution at TSMC

Source: Intel Source: Intel Samsung's analyst day on 5 November featured a presentation from System LSI President/GM NS Woo which focused on its three platforms: (1) Mobile SoCs (Application processor + connectivity), (2) LSI chipsets (CMOS sensor, driver ICs, smart card ICs, power ICs) and (3) foundry.

Figure 110: Samsung's three business areas Figure 111: Samsung Foundry 2.0—10nm FinFET

Source: Samsung Source: Samsung Samsung making a bigger foundry push in 2015 with FinFet and Widcon, though this is a smaller risk for TSMC Samsung's foundry business ex-Apple remains modest at 10% of its semiconductor division Samsung aggressive on sales (System LSI) and will likely stay that way through 2014 as Samsung is largely only 14nm FinFet, ramping in using 20nm for in-house and potentially Apple, with external foundry customers asked to early 2015, but less a risk wait for 14nm. Samsung is more aggressive on 14nm FinFet, with risk production early 2014 since TSMC will still have (TSMC starts in November 2013), slating both foundries for volume ramp in early 2015. majority share for foundry Samsung is also looking to offer more IP and target all customers rather than just tier-one customers and supply a 3D package that joins the application processor and memory.

Taiwan Market Strategy 38 03 December 2013

Figure 112: Intel trying to push down into smartphones Figure 113: Samsung timing 14nm FinFet closely to TSMC

Source: Intel Source: Samsung GlobalFoundries securing some 2nd source business GlobalFoundries spun out of AMD and acquired Chartered Semiconductor after the financial crisis but has had only modest success in the ensuing years trying to stay GlobalFoundries capacity competitive with Intel in CPUs and catch up with TSMC in foundry. Capacity growth has additions have slightly lagged TSMC’s aggressive expansion at 39% of the latter's 300mm capacity, down from lagged TSMC installations 48% in 4Q09 and could fall further to 36% by 4Q14 under our baseline projection, though subject to how it secures additional customers.

Figure 114: GlobalFoundries 12” capacity slightly trailing TSMC’s capacity ramp-up TSMC capacity (8" Eq.) 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 200mm 507,063 513,813 541,813 544,337 544,337 544,337 300mm 364,500 540,750 630,750 801,750 945,000 1,058,400 Total 871,563 1,054,563 1,172,563 1,346,087 1,489,337 1,602,737 YoY Growth 21% 11% 15% 11% 8% Global Foundries capacity 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 Fab 1 Module 1 25,000 20,000 20,000 20,000 20,000 20,000 Fab 1 Module 2 3,000 20,000 33,000 43,000 50,000 50,000 New York - Fab 8 0 10,000 23,000 35,000 Chartered 12" 40,000 40,000 50,000 50,000 50,000 50,000 Chartered 200mm (12" eq.) 68,000 78,222 80,000 80,000 80,000 80,000 Total 12" 136,000 158,222 183,000 203,000 223,000 235,000 Total Incl AMD MPU (8" eq.) 306,000 356,000 411,750 456,750 501,750 528,750 GF 300mm % of TSMC 300mm 65% 51% 53% 47% 45% 42% % of TSMC total 35% 34% 35% 34% 34% 33% Less Microprocessors 63,000 55,440 59,321 62,287 65,401 68,671 Total Ex AMD MPU (8" eq.) 243,000 300,560 352,429 394,463 436,349 460,079 YoY Growth 24% 17% 12% 11% 5% Percent of TSMC 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 GF 300mm % of TSMC 300mm 48% 41% 43% 39% 38% 36% GF Total % of TSMC total 28% 29% 30% 29% 29% 29% Source: Company data, Credit Suisse estimates Some more encouraging recent developments for GlobalFoundries The company has had a few encouraging developments recently. It has secured several 28nm customers including Qualcomm, Mediatek, Rockchip, Marvell, Broadcom and RDA. GlobalFoundries recently The company’s New York fab is in an R&D heavy centre for the industry and near the announced its intention to epicentre of IBM’s process development work and could also be suitable for some US launch a 14nm FinFet fabless customers looking at domestic manufacturing. That fab will be the primary driver of solution its 14nm process development. We believe GlobalFoundries is of comparable size now to UMC but still loss making so will need to show a path to profitability in the coming years to continue receiving strong support from Abu Dhabi. In the meantime, we expect the company to compete for more 28nm business and also to be brought in with Samsung to compete for one track of Apple's business on 14nm.

Taiwan Market Strategy 39 03 December 2013

TSMC’s share higher on advanced nodes Despite fears on competition, TSMC’s market share remains high and will sustain at least through 2014 as the other foundries are largely skipping 20nm and waiting until 14nm to offer a competitive process. TSMC’s market share is still higher on advanced nodes than lagging nodes: its 8” market share for 130nm and above is 50%, share on 65 and 90nm is still close to 60%, and 40nm and below is at 70%. TSMC has regained capacity market share from 43% in 2005 to 50% in 2013. For a competitor to add 1% industry capacity at US$130 mn capex per 1,000 wafers (the foundry industry has 1.3 mn WPM capacity in 12” equivalents), it would cost US$1.7 bn capex.

Figure 115: TSMC share higher on advanced nodes Figure 116: Capacity installed base a barrier to rapid shifts Industry revenue by node (US$mn) TSMC Market Share % Total Quarterly capacity (kpcs) $10,000 80% 5,000 4,500 $8,000 60% 4,000 3,500 $6,000 3,000 40% $4,000 2,500 2,000 20% $2,000 1,500 1,000 $0 0% 500

-

2Q02 3Q10 1Q00 4Q00 3Q01 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 2Q11 1Q12 4Q12 3Q13

250nm+ 150/180nm 130nm

1Q00 3Q00 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13

90nm 65nm 40nm 1Q01 3Q13E 28nm 20nm TSMC 130nm+ share TSMC UMC SMIC GlobalFoundries Vanguard Samsung total TSMC 90nm/65nm share TSMC 40nm and below share Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Taiwan Market Strategy 40 03 December 2013 IC design: Overweight Sector Research Analyst: Randy Abrams Demand: Mediatek’s leadership and market growth from emerging market smartphones drives the space Demand drivers in IC design are unique to each individual company's ability to penetrate IC design demand drivers its chips into new and existing market segments and manage price erosion by innovating are company specific with new or better performing products at competitive cost structure. Taiwan as an IC design centre has emerged with strong support from local foundries/back-end, good proximity to downstream 3C manufacturers in Greater China, and focus on local support, rapid feature integration and competitive cost reductions on its chips. In recent years, the market has consolidated with large players integrating more and taking share from point players. Mediatek is emerging as one of the global consolidators having acquired, or in the process of acquiring, Ralink and MStar to offer competitive platforms for mobility products and the digital home. The smaller Taiwan fabless have focused on success in more niche solutions including analog, driver ICs, networking, and MCUs though most are seeing only modest growth and stable margins as the consumer tech environment matures. We continue to view Mediatek as offering access to the strongest unit growth cycle, with China-built smartphones and tablets growing over 100% YoY in 2013 to 618 mn units and we project growing 41% YoY to 869 mn units in 2014.

Figure 117: China smartphone and tablet projections, 2011-15E China built devices 2011 2012 2013E 2014E 2015E 11-15 CAGR Smartphones (mn units) 70.0 248.8 517.6 709.1 956.4 192% YoY growth 256% 108% 37% 35% Tablets (mn units) 12.0 50.0 100.0 160.0 220.0 207% YoY growth 317% 100% 60% 38% Smartphone and tablets (mn) 82.0 298.8 617.6 869.1 1,176.4 195% YoY growth 264% 107% 41% 35% Source: Company data, Credit Suisse estimates Emerging market smartphones still the focus in 2014 The Asian IC design space will be dominated by suppliers into the high growth emerging 2014 will be driven by market smartphone space, with consolidation around a couple of major suppliers. The emerging market combination of Mediatek + MStar creates a formidable player in emerging market mobility smartphones and the initial while Tsinghua University’s acquisition of both RDA and Spreadtrum creates a Chinese launch of LTE rival that will stay aggressive to capture the unit growth opportunity and move up into more advanced products. We also see IC distribution leader WPG’s primary growth driver to stay in the low-cost smartphone and tablet space (approaching 40% of sales).

Taiwan Market Strategy 41 03 December 2013

Figure 118: Tier 2 brands now gaining share in China Figure 119: Emerging markets driving industry growth Thousand (units) Local brand share (%) Mn (units) Emerging mkt share (%) 70,000 80% 180,000 80% 160,000 60,000 70% 70% 140,000 60% 60% 50,000 120,000 50% 50% 40,000 100,000 40% 40% 80,000 30,000 30% 30% 60,000 20,000 20% 20% 40,000 20,000 10% 10,000 10% 0 0% 0 0%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

3Q11 2Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Tier 2 brands Huawei/ZTE/Lenovo/Coolpad 1Q11 Tier one's Mediatek Smartphone Units Developed market units Emerging market units China brand share Emerging market share Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We remain positive on the growth opportunity in 2014 with strong market expansion and product innovation opportunities including shift to more cores (quad/octa) and higher- performance GPUs to support the larger and higher resolution displays and more advanced cameras and multimedia. A broad range of products from ultra-low-cost sub US$30 prices up to US$200-250 6.5” phablets are allowing the Chinese handset makers to gain share of global units. We also expect 2014 to have its first impact, with 30-40mn LTE smartphones and low-cost platforms coming out across Qualcomm, Mediatek, Spreadtrum, Intel and Marvell.

Figure 120: Marketing shifting up to chips with more cores Units (mn) ASPs (US$) 100% $27 90% $24 80% $21 70% $18 60% $15 50% $12 40% 30% $9 20% $6 10% $3 0% $0 3Q11 1Q12 3Q12 1Q13 3Q13E 1Q14E 3Q14E Single Units Dual Units Quad Units Octa Units Single ASPs Dual ASPs Quad ASPs Octa ASPs Blended ASPs

Source: Company data Quad- and Octa-core chipsets to become mainstream Quad core chipsets pushed the performance of mass market smartphones in 2013 and octa-core led by Mediatek’s solution could further drive better product for the large full HD phablet category in 2014. While dual core still had the largest volume in 2013, quad core and the newest generation with octa-core will expand in the mix in 2014. Tier-one Chinese smartphone makers are migrating their high-end product portfolio to octa-core chipsets with advanced features (5-7” full HD display, 13MP camera, Android 4.3 OS, 2GB DRAM + 16GB NAND).

Taiwan Market Strategy 42 03 December 2013

Figure 121: Quad-core chipset (with integrated baseband) ramping up with mass market smartphones in 1H13 Mediatek Qualcomm Qualcomm Marvell Broadcom Spreadtrum MT6589 MSM8225Q/8625Q MSM8226/8626 PXA 1088 BCM28155 SC88xx Availability 1Q13 1Q13 3Q13 2Q13 1Q13 1H13E Baseband HSPA+ / TD-SCDMA HSPA+ / CDMA HSPA+ / CDMA TD-SCDMA / WCDMA HSPA+ TD-SCDMA # of cores Quad core Quad core Quad core Quad core Double Dual Core Quad core ARM core Cortex-A7 Cortex-A5 Cortex-A7 Cortex-A9 Cortex-A9 Cortex-A7 Clock speed 1.3 GHz 1.2 GHz 1.2-1.4 GHz 1.x GHz 1.2 GHz 1.4 GHz Graphics PowerVR SGX544 Adreno 203 Adreno 305 Vivante GC1000 VideoCore 4 ARM Mali Camera support 8-Mpixels 8-Mpixels 13-Mpixels 16-Mpixels 20-Mpixels 16-Mpixels Video performance 720p 720p 1080p HD 1080p HD 1080p HD 1080p HD Process 28nm 45nm 28nm 28nm 40nm 28nm Source: Company data

Figure 122: The latest quad-core smartphones from major Chinese smartphone vendors Company Lenovo Lenovo TCL Huawei Huawei Oppo Micromax Coolpad Coolpad Model name Vibe X S960 S5000 Y910 G610 G700 R819 Canvas Doodle 2 SII 8750 9970

Image Technology HSDPA HSDPA WCDMA WCDMA WCDMA TD-WCDMA WCDMA TD-WCDMA CDMA Operating System Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Pixels 1920 x 1080 1280 x 800 1920 x 1080 960 x 540 1280 x 720 1280 x 720 1280 x 720 1920 x 1080 1920 x 1080 RAM 2GB 1GB 2GB 1GB 2GB 1GB 1GB 1GB 2GB ROM 16GB 16GB 32GB 4GB 8GB 16GB 16GB 16GB 16GB Display 5.0" 7.0" 6.0" 5.0" 5.0" 4.7" 5.7" 5.5" 5.9" Camera 13MP+5MP 5MP+1.6MP 13MP+2.1MP 5MP+0.3MP 8MP+1.3MP 8MP+2MP 5MP+12NP 8MP+2MP 13mp Battery 2,000mAh 3,450mAh 3,400mAh 2,150mAh 2,150mAh 2,000mAh 2,600mAh 2,500mAh 3,000mAh CPU Speed 1.5GHz 1.2GHz 1.5GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.2GHz 1.8GHz Processor Chip MT6589T MT8389 MT6589T MT6589M MT6589 MT6589 MT6589 Marvell PXA1088 Nvidia Tegra 4 Price NA $260 NA $232 $330 2,298Rmb $315 1,999Rmb NA Source: Company data, Credit Suisse estimates High resolution phablets proliferating and moving toward octa-core The Chinese brands are proliferating a wide array of 5.7-6.5” phablet models with full HD 1920x1080 resolution for US$180-220 FOB prices and high specs including 5MP + 13 MP camera, 1-2GB DRAM and 8-16GB NAND. Most of these solutions originally used Mediatek’s MT6589 but are providing a pin-for-pin compatible option between the new quad core and octa-core MT6592 for fast roll-out of new models on the new chipset once it is available late in the year. Multiple customers are sampling the Octa-core in November and have started launching products after Mediatek's high profile launch event in Shenzhen on 20 November.

Taiwan Market Strategy 43 03 December 2013

Figure 123: Mediatek octa-core MT6592 design wins Company UMI ThL OKAL ZOPO G Five Goophone Mlais Model name X2S ThL II N6592 Zopo II Kivu S4 Max MX69

Image Technology WCDMA + TD WCDMA + TD WCDMA WCDMA WCDMA WCDMA WCDMA Operating System Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Android 4.2 Pixels 1920 x 1080 1920 x 1080 1920 x 1080 1920 x 1080 1920 x 1080 1920 x 1080 1920 x 1080 RAM 2GB 2GB 2GB 2GB 2GB 2GB 2GB ROM 32GB 16GB 16GB 16GB 16GB 32GB 32GB Display 5.0" NA 5.5" NA 6.0" 6.44" 5.7" Camera 13MP NA 5MP + 12MP NA 1.9MP+13MP 13MP+5MP NA Battery NA NA NA NA NA NA NA CPU Speed 1.5GHz 2GHz 2GHz 2GHz 2GHz 2GHz 2GHz Processor Chip MT6592 MT6592 MT6592 MT6592 MT6592 MT6592 MT6592 Price $250 NA $150 NA NA $400 $350 Source: Company data, Credit Suisse estimates New LTE chipsets on the roadmap for late 2013 sampling, with integration in 2014 Qualcomm is well ahead of the market and dominating tier-one business with its integrated LTE Snapdragon chipsets. In this area, Mediatek is behind but should still be timed to catch the growth in emerging markets. Mediatek’s first LTE modem (MT6590) is sampling in 1H14 to support both versions of LTE, TD-SCDMA, WCDMA and TD-SCDMA. The company will also plan an integrated solution pairing its LTE baseband to both its quad core and octa-core for sampling in 2Q14/3Q14 and launching by year-end.

Figure 124: Mediatek has a broad product line rolling out in the coming quarters MT6592 MT6589 MT6588 MT6582 MT6572 MT6571 Status NEW in 4Q13 Available (1Q13) NEW in 4Q13 NEW in 4Q13 Available (2Q13) New in 2Q14 Multi-core Octa-core Quad-core Quad-core Dual-core Dual-core Dual-core CPU ARM Cortex-A7 ARM Cortex-A7 ARM Cortex-A7 ARM Cortex-A7 ARM Cortex-A7 ARM Cortex-A7 Clock speed 1.7-2.0GHz 1.2GHz 1.7GHz 1.3GHz 1.3GHz 1.0GHz ARM Mali-450 ARM Mali-400 ARM Mali-450 ARM Mali-400 ARM Mali-400 Graphics ARM Mali-400 700MHz 500MHz 600MHz 500MHz 500MHz

32-bit 400Mbps LP- LPDDR2 533MHz LPDDR2 533MHz Memory DDR / 32-bit 1066 LPDDR2 533MHz LPDDR2 266MHz LPDDR2 266MHz LPDDR3 666MHz LPDDR3 666MHz Mbps LP-DDR2

Camera 13MP 13MP 13MP 13MP 5MP 5MP 1080p 30fps 1080p 30fps 1080p 30fps Video Decode 720p 30fps 1080p 30fps 720p 30fps 720p 30fps HEVC/VPS HEVC/VP9 HEVC/VPS Video Encode 1080p 30fps 1080p 30fps 1080p 30fps 1080p 30fps 720p 30fps 720p 30fps HD1080 HD1080 HD1080 Display HD720 1280x720 qHD 960 x 540 qHD 960 x 540 1920 x 1080 1920 x 1080 1920 x 1080

HSPA+ Rel. 8 HSPA+ Rel. 8 HSPA+ Rel. 8 HSPA+ Rel. 8 HSPA+ Rel. 8 HSPA+ Rel. 8 Modem 21Mbps/5.76Mbps 21Mbps/5.76Mbps 21Mbps/5.76Mbps 21Mbps/5.76Mbps 21Mbps/5.76Mbps 21Mbps/5.76Mbps

Integrated Wifi Integrated Wifi Integrated Wifi Integrated Wifi Integrated Wifi Integrated Wifi Connectivity abgn/BT/FM/GPS bgn/BT/FM/GPS abgn/BT/FM/GPS bgn/BT/FM/GPS bgn/BT/FM/GPS bgn/BT/FM/GPS Process node 28nm HPM 28nm 28nm HPM 28nm 28nm 28nm Foundry TSMC TSMC TSMC TSMC TSMC GlobalFoundries Source: Company data, Credit Suisse estimates

Taiwan Market Strategy 44 03 December 2013

Low-cost tablets expanding the opportunity for components The global tablet market is seeing a new stage of growth similar to feature phones and now smartphones where a new class of whitebox tablets is expanding the global market into a new entry level tier of products for emerging markets. ARM is lowering the entry barrier for chip companies to enable low cost computing, allowing multiple Chinese IC design companies to scale up to quad core in 2013 and also into octa-core in 2014.

Figure 125: Low-cost white-box tablets—product line-up

Ultra-low-end Low-end Mid-end (3G) High-end Ultra-high-end ONDA Ampe Global Circuit Ainol Ainol Tablet model Momo7 A78 Dual MT71C Novo8 Novo9 Allwinner Rockchip Mediatek Actions Semic Allwinner Chipset A13 RK3066 MT8377 OWL ATM7029 A31 Chipset ASP US$4 US$6-8 US$8-10 US$10-12 US$16-20 ARM CPU Single-core Dual-core Dual-core Quad-Core Quad-Core Cortex-A8 Cortex-A9 Cortex-A9 Cortex-A7 Cortex-A7 Speed 1.0GHz 1.2-1.5GHz 1.2-1.5GHz 1.2-1.5GHz 1.2-1.5GHz Graphics ARM Mali-400 PowerVR SGX540 PowerVR SGX540 Vivante GC1000 PoweVR SGX544MP2 Screen Size 7" 7" IPS 7" 8" 9.7" IPS Resolution 800x600 1024x600 1024x768 1024x768 2048 × 1536 (Retina) Video 1080p 1080p 1080p 2160P 4K×2K capable Camera 0.3MP 0.3MP + 2MP 0.3MP + 2MP 0.3MP + 2MP 2MP + 5MP DRAM / Flash 512MB / 8GB 1G DDR3 / 8GB 1GB DDR3 / 8GB 1GB DDR3 / 16GB 2GB DDR3 / 16GB WiFi Realtek Realtek Mediatek Realtek 8723 Realtek 8188 OS Android 4.0 Android 4.1 Android 4.1 Android 4.1 Android 4.2 3G built-in NO NO YES NO NO Retail price US$65 US$100 US$125 US$150 US$180 Source: Company data, Credit Suisse estimates Whitebox tablets expanding the tablet TAM The global tablet market is accelerating as low-cost tablets are rapidly improving in Low-cost tablets could add functionality in the $40-200 price range, below tier-one tablets. Initial demand is led by 50 mn units in 2012 and 100 Chinese makers exporting to emerging markets with low PC penetration, with usage mn units in 2013 to our mainly for entertainment (games, movies and music) but starting to offer productivity as global tablet estimates keyboard attachments and applications proliferate. Component builds added 50 mn units to our 112 mn global estimate in 2012 and 100 mn to our 171 mn global tablet estimate in 2013E (47% upside).

Taiwan Market Strategy 45 03 December 2013

Figure 126: White box tablets have added to the branded tablet market Units ('000) QoQ growth 100,000 100% 90,000 80% 80,000 70,000 60% 60,000 40% 50,000 40,000 20% 30,000 0% 20,000 10,000 -20%

0 -40%

Jun-11 Jun-12 Jun-13

Mar-11 Mar-12 Mar-13

Sep-13 Sep-11 Dec-11 Sep-12 Dec-13 Dec-13E

Branded tablets Whitebox tablets QoQ growth

Source: Company data, Credit Suisse estimates Greater Chinese IC Design leading momentum Greater China fabless leads in low-cost tablets due to close ties with the Shenzhen manufacturing and design base. ARM has lowered the entry barrier with its dual and quad core Cortex A-series processors, with domestic Chinese fabless Allwinner, Rockchip, Actions, and AMLogic all out with quad core solutions. For higher-end tablets, Mediatek is supplying its quad core and big.LITTLE products bundled with 3G and Wifi + GPS + Bluetooth + FM. For other components, CMOS sensors are led by Galaxycore, touch controller by Goodix, FocalTech, Elan, and Pixcir, connectivity by Realtek and RDA, driver ICs by Novatek, Himax, Orise, and Silicon Works, audio codec by Richtek and crystal by TXC. Figure 127: White-box tablet semiconductor supply chain map

Silicon IPs Touch / Display IC

China tier-2 / white-box tablets

Processors Wireless connectivity CMOS image sensors

Source: Credit Suisse research

Taiwan Market Strategy 46 03 December 2013

Chinese tablet suppliers adapting their solutions for performance, cost and 4G connectivity Allwinner, Rockchip, Am Logic and Actions have adjusted their offerings to stay competitive on price/performance due to more competition from Mediatek, Intel and Samsung and also from branded OEMs (Amazon, Acer, Asus, Lenovo, HP) putting pressure on local brands. Notably, Rockchip is focusing on integrating its quad core with LTE module from Sequans and Altair for a 4G add-on card for about US$40, upgrading from 3G add-on modules currently from Huawei/Hi-Silicon. AM Logic is focused on a higher end solution with quad core CPU + 8 core graphics manufactured on TSMC’s 28nm HPM process. Allwinner, Rockchip and Actions are also all introducing lower-cost dual-core solutions, with Allwinner introducing an A23 (lower cost from A20), Rockchip RK3026 (lower cost from RK3066/RK3188) and Actions an ATM 7021 (lower cost than ATM 7023).

Figure 128: China whitebox Quad core chipsets Figure 129: China whitebox Dual core chipsets Allwinner Allwinner Rockchip Rockchip Actions Allwinner Allwinner Rockchip Actions A31 A31s RK3188 RK3066 ATM7039 A23 A20 RK3026 ATM7021 Technology 40nm 40nm 28HKMG 40nm NA Technology 40nm 40nm 40nm NA Quad-core Quad-core Dual-core CPU Quad-core A9 Quad-core A9 Quad-core A9 CPU Dual-core Dual-core A9 Dual-core A9 Cortex A7 Cortex A7 Cortex A7 Frequency 1.3GHz 1.2GHz 1.6GHz 1.6GHz 1.6GHz Frequency 1.5GHz 1.2GHz 1.0GHz 1.3GHz GPU SGX544MP2 SGX544MP2 Mali-400 MP4 Mali-400 MP4 PowerVR GPU Mali400MP2 Mali400MP2 Mali-400 MP2 PowerVR Video Playback 4Kx2K 2160p 1080p NA 4Kx2K Video Playback 1080p 2160p NA 1080p H.264 HP H.264 HP H.264 HP H.264 HP HVEC/H.265 H.264 HP Video capture 1080p@30fps NA Video capture 1080p@30fps NA HVEC/H.265 1080p@60fps 1080p@60fps video 1080p@60fps 720p@60fps 720p@60fps Tablet Tablet Applications Phablet Tablet Tablet Tablet Applications Tablet Tablet Entry-level tablet Smart TV Smart TV Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Stocks to play the theme Most leveraged sales contribution to the growth in smartphone and tablets includes 60% of sales for SMIC and Mediatek, 40% from WPG, 15% from Realtek and 10-15% for TXC, Chipbond, Novatek and Himax.

Figure 130: Semiconductor suppliers in the tablet supply chain Segments Listed companies Private companies Foundries TSMC, SMIC, UMC Back-end ASE, SPIL Apps processors Mediatek, Ingenic Allwinner, Rockchip, Nufront, AMLogic CMOS image sensor Omnivision GalaxyCore Touch screen controllers Elan, Goodix (Mediatek subsidiary) FocalTech, Pixcir Wireless Realtek, RDA Huawei/Hisilicon Driver ICs Novatek, Himax, Orise Audio Realtek Silicon IP ARM, Imaginations technologies Vivante

Source: Company data, Credit Suisse research Competition is the biggest risk IC design presents challenges of forcing companies to innovate to drive new applications Innovation toward LTE, and improve performance and features on existing applications to replace commoditising more advanced ARM/GPU end markets where slower unit growth gets overshadowed by pricing pressure. Mediatek cores and 64-bit can support saw a price collapse in feature phones so it continues an aggressive pace of cost down more processor and innovation to stabilise margins at these levels. The company is taking a number of enhancements initiatives including optimising on the GPU core, speed binning, migration to newer generations of ARM cores, and supporting multi-mode network standards including LTE. We still see several important drivers over the next few years including higher performance 64-bit computing, new variations of ARM architecture, 4k2k higher resolution displays in mobile devices, and LTE in emerging markets to continue to support blended pricing.

Taiwan Market Strategy 47 03 December 2013

Figure 131: Margins now starting to rebound Figure 132: Smartphones have reset pricing higher Revenue Mediatek GM Chipset units (mn) ASPs (US$) (NT$mn) (%) 280 $21 30,000 60% 240 $18 25,000 50% 200 $15 20,000 160 $12 40% 120 $9 15,000 30% 80 $6 10,000 20% 40 $3 5,000 10% 0 $0

0 0%

3Q06 1Q09 3Q11 1Q05 3Q05 1Q06 1Q07 3Q07 1Q08 3Q08 3Q09 1Q10 3Q10 1Q11 1Q12 3Q12 1Q13

1Q14E 3Q13E 3Q14E 1Q15E 3Q15E

3Q06 1Q13 1Q05 3Q05 1Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

1Q14E 3Q14E 3Q13E Feature phone units Smartphones units Feature phone sales Smartphone sales Total GM% Op Margins Feature phone ASPs Smartphone ASPs

Source: IDC, 2009 April Source: IDC, 2009 April Valuation and key ideas

■ Mediatek. We rate Mediatek OUTPERFORM with NT$480 target based on: (1) a Maintain OUTPERFORM on strong product cycle in emerging market smartphone and tablets that is only in the Mediatek with a NT$480 second year of a 4-5 year growth cycle, (2) market leadership continuing to sustain in target the face of tough competition due to fast product innovation both on lower cost and higher performance solutions, and (3) additional drivers from shift to multi- core/big.LITTLE, tablets and TD-SCDMA this year and LTE over the next few years. Our NT$480 target sets Mediatek at 20x our revised 2014 EPS of NT$24.

Figure 133: Mediatek gaining shares among local brands Smartphone chipsets 2011 2012 2013 2014 2015 Mediatek 10.0 109.8 220.4 315.5 447.0 Mediatek share (%) 14% 44% 45% 46% 48% Spreadtrum 0.2 32.0 115.7 145.7 208.3 RDA - - - 24.3 49.8 Leadcore 3.0 5.0 15.0 22.5 30.0 Asian suppliers 13.2 146.8 351.1 508.0 735.1 YoY Growth 1009% 139% 45% 45% Share 19% 59% 71% 75% 79% Qualcomm 35.2 81.0 120.6 150.3 174.5 Broadcom 1.5 2.5 7.0 10.0 15.0 Marvell 12.0 15.0 13.0 12.0 10.0 ST-Ericsson 8.0 3.5 0.5 - - Overseas suppliers 56.7 102.0 141.1 172.3 199.5 YoY Growth 80% 38% 22% 16% Share 81% 41% 29% 25% 21% Total 70.0 248.8 492.1 680.3 934.7 YoY Growth 256% 98% 38% 37% Source: Gartner, company data, Credit Suisse estimates

■ Spreadtrum + RDA. Spreadtrum and RDA are both getting acquired by Tsinghua Unigroup so the stocks will trade off the deal closing rather than underlying fundamentals. At this stage, both deals look on track and thereafter we expect a period of privatisation, merger of the two companies and preparation for re-listing as an A-Share. We believe immediate synergy will be pairing Spreadtrum’s more developed smartphone application processor with RDA’s connectivity and power amplifier for a lower cost solution. After the merger, we see a combination of the roadmap building around Spreadtrum’s TD-SCDMA expertise, RDA’s strong capability in integrating discrete components into a low-cost solution and ultra low-cost platform. The company will still need to accelerate speed of product development and expand

Taiwan Market Strategy 48 03 December 2013

its customer support and software teams to close the gap with the much larger Mediatek (10,000 employees with MStar versus <2,000 for RDA+Spreadtrum).

■ WPG maintains its long-term potential to consolidate distribution, grow its communications presence with low-cost tablets and smartphones (30% of sales) and should benefit once the supply chain completes its de-stocking process. We maintain our NEUTRAL rating and target price of NT$38.5, representing 12x average 2013/2014 to 12x 2014 EPS.

■ Realtek is making progress penetrating China DTV, capitalising on the delayed integration of Mediatek and MStar's DTV business. The company is also seeing 802.11n and 802.11ac share gains in notebooks and further penetration of Wifi into TVs, OTT set-tops and autos. The company has good relationships with processor suppliers from Intel to Chinese vendors Rockchip, Allwinner and Actions. However, product cycles remain mixed, with bright spots from TVs and some new areas for Wifi offset by 40% PC exposure, and rising competition in smartphones/tablet Wifi from Mediatek, Broadcom and RDA. We stay NEUTRAL with NT$75 TP, based on same 13x 2013E EPS and in line with peers.

Figure 134: IC Design valuation comparison Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 29-Nov Local Curcy Rating upside 2013 2014 2013 2014 2012 2013 2014 IC design MediaTek Inc. 19,589 436.0 480.0 OPFM NA 21.8 18.2 3.0 3.3 10.6% 14.5% 18.5% Realtek Semiconductor 1,214 71.7 75.0 NTRL 4.6% 12.7 11.9 2.0 1.9 12.7% 15.5% 16.1% RDA 857 17.8 17.5 OPFM -1.5% 17.9 16.1 9.0 6.7 98.3% 60.5% 48.0% Spreadtrum 1,708 30.6 31.0 NTRL 1.3% 10.1 10.2 3.1 2.6 37.9% 38.9% 28.2% WPG Holdings Ltd 1,876 33.7 38.5 NTRL 14.2% 11.6 10.5 1.4 1.4 12.2% 12.5% 13.3% Total 31,171 19.2 17.7 3.0 3.1 16.2% 19.2% 17.5% Source: Company data, Credit Suisse estimates

Taiwan Market Strategy 49 03 December 2013 Back-end: Overweight Sector Research Analyst: Randy Abrams Demand: Taiwan suppliers gaining share and benefitting from emerging market mobile growth The Taiwan back-end saw a rebound in growth in 2013 that should continue in 2014. The Growth led by emerging sector’s revenue growth through 2010-12 was deflated by conversion of gold wirebond to market smartphone growth copper wirebond at lower cost but also lower price. That transition is maturing and and some share gains for replaced with a positive sales driver from conversion of smartphones from wirebond to flip ASE and SPIL chip at higher ASPs. At the same time, ASE and SPIL are gaining market share, with ASE adding fingerprint IC module assembly in 2H13 and one of Apple’s three processor back- end suppliers in 2014 and SPIL seeing two-year penetration into overseas flip chip and having the highest concentration of sales to China/Taiwan fabless in low-cost smart- phones and tablets. The back-end sector should see high single-digit sales decline in 1Q14 followed by restocking and new builds for smartphones and tablets along with some recovery from the IDM customer base.

Figure 135: Back-end back to positive sales growth Figure 136: Taiwan back-end gaining share

US$ mn YoY Growth Indexed Revenue $3,500 100% 6.30 80% $3,000 5.30 $2,500 60% 40% 4.30 $2,000 20% $1,500 3.30 0% $1,000 -20% 2.30 $500 -40% 1.30 $0 -60%

0.30

1Q00 3Q04 1Q07 3Q11 1Q99 3Q99 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 1Q05 3Q05 1Q06 3Q06 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 1Q12 3Q12 1Q13

3Q13E

3Q01 1Q09 1Q00 4Q00 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13E ASE SPIL Amkor Stats YoY Growth TSMC UMC SMIC Vanguard ASE SPIL Amkor Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Supply: Capex getting more conservative Overall industry equipment bookings have retreated from peak levels, a sign of disciplined Back-end capex has been supply again into 2014. Equipment bookings, which reflect orders for new test and coming down packaging equipment, are down 56% from the May 2012 peak and 41% below the post financial crisis peak set in July 2010. The much lower level for equipment orders in 2H13 implies very limited capacity additions through the low season and another period of tightening supply by 2Q14.

Taiwan Market Strategy 50 03 December 2013

Figure 137: Back-end equipment orders on a downward trend Stock Price Equipment Bookings (US$ mn) 70 700 60 600 50 500 40 400 30 300 20 200 10 100

0 0

Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Sep-95 Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13

May-98 May-04 May-10 May-94 May-96 May-00 May-02 May-06 May-08 May-12 BE Bookings ASE Stock Price SPIL Stock Price

Source: Company data, Credit Suisse estimates We believe many IDMs are moving to being more asset light and are also not spending materially, so we expect more outsourcing in 2014 particularly as more fabless customers are moving into lower cost copper and backend suppliers into higher throughput packaging. Capex/sales for the sector is falling back to 15-16%, right in line with the 2005-08 levels when the group re-re-rated for having capex discipline.

Figure 138: Bonder capacity additions have slowed Figure 139: Capex pointing down again in 2014 In mn, unless otherwise stated Wirebonders Utilization (%) Sales & Capex Capex/Sales (%) (US$ mn) 30,000 100% $13,500 40% 90% $12,000 35% 25,000 80% $10,500 30% 70% 20,000 $9,000 60% 25% 15,000 50% $7,500 20% 40% $6,000 15% 10,000 30% $4,500 10% 5,000 20% $3,000 10% $1,500 5% - 0%

$0 0%

4Q02 2Q03 2Q12 4Q12 4Q99 2Q00 4Q00 2Q01 4Q01 2Q02 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q13

2008 2009 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2010 2011 2012

4Q13E 2Q14E 4Q14E

2013E 2014E ASE SPIL Stats Wirebonder YoY Utilization Sales Capex Capex/Sales

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Profitability: GMs back on an improving trend The back-end has moved past its challenges with rising material costs from the increase in GM has improved as gold gold price. SPIL saw the most notable drag since 2007 from the rise in gold price, but has costs drop been progressively ramping up copper to over 70% of sales, with ASE over 60% due to a larger base of IDM business that are in less cost-sensitive applications.

Taiwan Market Strategy 51 03 December 2013

Figure 140: ASE margins back to 2010 levels Figure 141: SPIL margins also on a rebounding trend Utilization % GM% Utilization % Gross margin 100% 35% 105% 35% 90% 30% 95% 30%

80% 25% 85% 25%

70% 20% 75% 20% 65% 15% 60% 15% 55% 10% 50% 10% 45% 5% 40% 5%

35% 0%

1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13

2Q00 1Q01 4Q01 3Q02 2Q03 1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 Assembly utilization Gross margin Assembly utilization Gross margin Linear (Test utilization)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates SPIL, in particular, has eased its burden from gold costs, reducing gold wire from 19% to 4% of sales since early 2010. We expect some tailwinds to margins to continue from migration from wirebond to flip chip on smartphones, less drag from gold price and supply control keeping utilisation at relatively full levels.

Figure 142: NT$ and gold have supported profitability Figure 143: Gold purchases have dropped significantly Gold bought (NT$mn) GM % NT$ $3,000 25% USD stronger Gold $/ounce 36 • 2,000 $2,500 35 1,800 20% 34 1,600 $2,000 15% 33 1,400 1,200 $1,500 32 10% 31 1,000 $1,000 800 30 5% 600 $500 29 TWD stronger 400 28 $0 0% 200

01 02 03 04 05 06 07 08 09 10 11 12 13

4Q11 1Q13 4Q10 1Q11 2Q11 3Q11 1Q12 2Q12 3Q12 4Q12 2Q13 3Q13 02 03 04 05 06 07 08 09 10 11 12 13 3Q10 Gold $'s bought (NT$mn) Gold % of sales GM %

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Stocks: ASE and SPIL remain top picks We believe the sector is improving on its ability to cut costs from the switch to copper ASE/SPIL in the cyclical wirebonding, revenue drivers from low-cost smartphones, share gains for the Taiwan sweet spot back-end and lift from outsourcing and capex control. We still see 15-20% upside for the stocks to return to 2.2x P/B seen during prior upturns. While Powertech is near its trough at 1.0x P/B, we stay NEUTRAL due to continued decline in memory profitability and stagnant volumes, though we would look for opportunities to accumulate on evidence of stabilisation in memory and growth coming through in high-end logic.

Figure 144: ASE trading at a discount on a P/B basis Figure 145: SPIL still trading below mid-cycle levels NT$ ASE Historical PB Band NT$ SPIL Historical PB Band 60

65 50 3x 3x 40 2.2x 50 2.2x 30 1.4x 35 1.7x 20 0.8x 1.2x 10 20

0

5

Jan/01 Jan/03 Jan/05 Jan/07 Jan/09 Jan/11 Jan/13

Sep/11 Sep/99 Sep/01 Sep/03 Sep/05 Sep/07 Sep/09 Sep/13

May/08 May/00 May/02 May/04 May/06 May/10 May/12

Jan/08 Jan/09 Jan/97 Jan/98 Jan/99 Jan/00 Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/10 Jan/11 Jan/12 Jan/13 Jan/96 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Taiwan Market Strategy 52 03 December 2013

Figure 146: Back-end valuation comparison Market Cap Price Target Inv'ment Target P/E P/B ROE US$mn 29-Nov Local Curcy Rating upside 2013 2014 2013 2014 2012 2013 2014 Packaging & testing ASE 7,551 29.4 34.0 OPFM 15.6% 15.1 12.3 1.9 1.7 12.4% 12.9% 14.7% SPIL 3,669 35.0 42.0 OPFM 20.0% 17.5 14.0 1.8 1.7 9.5% 10.2% 12.3% Powertech 1,183 45.8 56.0 NTRL 22.4% 17.3 15.3 1.0 1.0 10.0% 5.7% 6.5% Total 12,403 15.9 12.9 1.6 1.5 11.6% 11.2% 12.8% Source: Company data, Credit Suisse estimates Key risk: Macro and PC recovery Sector is highly geared to the macro The back-end is highly sensitive to the macro environment, as the businesses have high operating leverage and any macro shock would drive order cuts, negative operating leverage and price pressure from the excess capacity. At this stage, a moderately improving global macro coupled with share gains and lower material costs should be positive for the stocks in 2014.

Taiwan Market Strategy 53 03 December 2013 TFT-LCD: Overweight Sector Research Analysts: Jerry Su, Derrick Yang Prefer component over panel makers We believe that higher resolution and larger size displays should be the key trend in 2014 and prefer the TFT component makers (driver IC, BLM, etc.) over panel makers for 2014 in Taiwan, as component makers should benefit more from higher specifications and richer content trend for new product cycles. Although we expect panel supply-demand to improve after 2Q14, we believe only panel makers with better technology and a more diversified customer base will stand out in the next battle. Panel supply-demand to improve after 2Q14 TFT is seeing an oversupply in 2H13 given weaker TV panel demand, as a result of the Area supply growth of ~5% early pull-in in 1H13 before China ended the subsidy in May. As panel makers started YoY in 2014 is manageable cutting their utilisation and reducing inventory levels in 4Q13, we think panel ASP should find its bottom by end-1Q14 and will stabilise in 2Q14 as supply-demand improves. We believe the three new Gen 8.5 fabs in China from Samsung, BOE, and LGD will gradually ramp up in 2014, which will add ~5% area capacity YoY. We also estimate area demand could grow mid- to high-single digit YoY mainly driven by TV size migration, as every 1" of TV size increase will lead to 4% area growth. Therefore, we expect supply-demand in 2014 to return to more normal seasonality, i.e. loose in 1H and tight in 2H. Figure 147: Global TFT-LCD capacity growth slowing… Figure 148: …capacity allocated for large sizes growing slower 90 80% 80 80% Total area capacity (mn sq. meters) Total large-size area capacity (mn sq. meters) 80 70% 70 70% Growth (YoY) Growth (YoY) 70 60% 60 67% 60% 64% 60 58% 58% 55% 57% 55% 50% 50 50% 50 54% 47% 45% 40% 40 47% 46% 40% 40 42% 44% 30% 30 30 30% 28% 28% 29% 29% 20 20% 20 20% 22% 8% 23% 5% 4% 6% 10 10% 10 6% 5% 10% 15% 14% 2% 2%

0 0% 0 0%

2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2013E 2014E 2015E

2014E 2015E 2013E Source: Company data, DisplaySearch, Credit Suisse estimates Source: Company data, DisplaySearch, Credit Suisse estimates

Taiwan Market Strategy 54 03 December 2013

Figure 149: Global TV size migration trend Figure 150: China Gen 8.5 fab ramp schedule Equipment MP (inch) Manufacturer Factory Phase Gen MG size Tech Applications 45 max ramp North America BOE Beijing B4 1 8 2200*2500 a-Si LCD 45 3Q11 BOE BOE Beijing B4 2 8 2200*2500 a-Si LCD 45 2Q12 Western Europe 42 BOE Beijing B4 3 8 2200*2500 a-Si LCD 30 3Q13 China CSOT Shenzhen 1 1 8 2200*2500 a-Si LCD 60 4Q11 China Star CSOT Shenzhen 1 2 8 2200*2500 a-Si LCD 60 2Q12 Worldwide 39 SD Suzhou 1 8 2200*2500 a-Si LCD 38 4Q13 Samsung SD Suzhou 2 8 2200*2500 a-Si LCD 17 3Q14 SD Suzhou 3 8 2200*2500 a-Si LCD 30 3Q15 36 BOE Hefei B5 1 8 2200*2500 a-Si/Oxide LCD+AMOLED 30 1Q14 BOE BOE Hefei B5 2 8 2200*2500 a-Si LCD 30 4Q14 LGD Guangzhou 1 1 8 2200*2500 a-Si LCD 87 3Q14 LG Display 33 LGD Guangzhou 1 2 8 2200*2500 a-Si LCD 33 4Q15 CEC-Panda PND Nanjing G8 1 8 2200*2500 a-Si LCD 60 2Q15 CSOT Shenzhen 2 1 8 2200*2500 a-Si LCD 50 2Q15 30 China Star CSOT Shenzhen 2 2 8 2200*2500 a-Si LCD 50 2Q16 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E BOE Chongqing B8 1 8 2200*2500 a-Si/Oxide LCD 35 2Q15 BOE BOE Chongqing B8 2 8 2200*2500 a-Si/Oxide LCD 35 4Q15 BOE Chongqing B8 3 8 2200*2500 a-Si/Oxide LCD 30 3Q16 Source: DisplaySearch, Credit Suisse estimates Source: DisplaySearch, Credit Suisse estimates Higher resolution and larger size displays continue to be the trend for mobile devices

Smartphone and mobile devices have been shifting to larger sizes with higher resolution Smartphone display displays since 2010. Our supply chain checks also suggest Chinese smartphone brands migrating to larger sizes with are now shifting from WVGA into higher resolution (qHD and HD) given the competition higher resolutions from Hongmi (4.7" HD display, Rmb799). Global smartphone brands are also entering the mid-end segment with higher resolution products to offset the slowdown in high-end market. We think this trend will continue into 2014, given that display is one of the most important hardware components that could influence consumer’s purchasing decision.

Figure 151: What do consumers want from mobile devices?

Cost Low power Touch consumption enabled down

Higher Bigger Screen? Resolution

Thinner and High color gamut, Wide viewing angle, Lighter High contrast ratio

Source: Company data, Credit Suisse research As shown in Figure 152, high resolution (>350 PPI) displays for smartphone have been steadily increasing and the trend is expected to continue over the next three years with greater adoption of HD720 and FHD displays. Mainstream smartphone sizes are also shifting from 4"-4.3" towards 4.5"+ since 2Q13 with the adoption of FHD panels for over 400PPI resolution. We think smartphone sizes will continue to migrate towards bigger sizes with a trend towards higher resolution. We forecast 4.5"+ smartphones to account for 50%+ of total smartphone shipments in 2014, vs 20% in 2012 and ~35% in 1H13. The higher resolution trend is also spreading to the tablet market (Figure 153) as Google and Branded and whitebox Amazon have both announced higher-resolution 7" tablets in the past few months. Although tablets also moving into most whitebox tablets that hit the market in 2013 are equipped with lower resolution panels larger sizes and higher PPI

Taiwan Market Strategy 55 03 December 2013

(7" WVGA or XGA), we believe this is due to supply constraints of high-resolution tablet panels in 1H13. Nevertheless, this constraint is being resolved in 2H13.

Figure 152: Smartphone shifting to >350 PPI Figure 153: Tablet shifting to >300 PPI Smartphone panel resolution migration Tablet panel resolution migration 60% 45% 40% 50% 35% 40% 30% 25% 30% 20% 20% 15% 10% 10% 5% 0% 0% 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016

>300 PPI >350 PPI >250 PPI >300 PPI

Source: Company data, DisplaySearch, Credit Suisse estimates Source: Company data, DisplaySearch, Credit Suisse estimates Tablet shifting to larger sizes and thinner designs, besides higher PPI

Tablets with less than 9" form factor have been gaining share in 2013 on the back of a Entry level tablet size booming whitebox market and launch of the 7.9" iPad mini. We forecast ~60% of the moving from 7" to ~8" shipments from the top six branded tablets were below 9" in 2013 vs 40% in 2012. With Apple adding retina display onto its iPad mini and fewer supply constraints on higher resolution tablet panels, we are already seeing more whitebox tablets shifting their entry product sizes from 7" to 7.9"/8" with higher resolutions in 2014 designs. We expect the mix of below 9" vs 9"-above to remain similar in 2014, but the average size to increase given the introduction of iPad Air, entry level whitebox tablets moving from 7" to ~8", and multiple new Win8.1 tablets.

Figure 154: <9" tablet mix to remain at ~60% in 2013-14 <9" tablet mix increasing in 2013 160 100% 140 90% 80% 120 70% 100 60% 80 50% 60 40% 30% 40 20% 20 10% 0 0% Apple Samsung Amazon Google Asus Acer Top 6 total

< 9" 9.7" and above <9" % (RHS) 2012 <9" % (RHS)

Source: Company data, DisplaySearch, Credit Suisse estimates The higher resolution and thinner tablets are mostly adopted by international brands, hence are more positive for leading BLM makers. iPad is the representative product that has continued using slimmer light guide plates (LGP) for thinner BLM, while Samsung, Amazon, and several Win 8 tablets have also started to adopt thinner BLM designs in 2013. We think the trend will carry into 2014 with both tablets and Ultrabooks being the main growth driver for the driver IC and BLM industry in 2014-15. We also think branded tablets could see faster growth vs whitebox in 2014, which we believe should help premium BLM makers to increase their TAM in 2014.

Taiwan Market Strategy 56 03 December 2013

Figure 155: iPad BLM structure continues to evolve iPad iPad 2 New iPad iPad Air

LED LED Light guide plate Light guide plate LED Light guide plate LED

0.8 mm 0.8 mm 0.7 mm 0.5 mm 0.68 mm 0.5 mm 0.68 mm

Display size 9.7” 9.7” 9.7” 9.7” Resolution 1,024 x 768 (132 dpi) 1,024 x 768 (132 dpi) 2,048 x 1,536 (264 dpi) 2,048 x 1,536 (264 dpi) # of LED light bars 1 1 2 1 LGP Thickness 0.8 mm 0.7 mm at edge, 0.5 mm at center 0.68 mm at edge, 0.5 mm at center slimmer TFT suppliers LGD, Samsung LGD, Samsung, CMI LGD, Samsung, Sharp LGD, Samsung, Sharp BLM suppliers Radiant, Heesung Radiant, Heesung, Coretronic Radiant, Heesung, NMB Radiant, Heesung, Coretronic BLM ASP 0.6x 0.7-0.75x 1x 0.85-0.9x Source: Company data, DisplaySearch, Credit Suisse estimates More 4K2K (UHD) TVs in 2014 The larger size and higher resolution trend is also moving into the TV market as Taiwanese panel makers push 4K2K TVs into the Chinese market. Innolux and AUO are the two panel makers that have been aggressive on 4K2K TV panels since early 2013, while Korean panel makers were more focused on AMOLED technology. However, both LGD and Samsung adjusted their strategies in mid-2013 as the pricing of AMOLED TV remains at a significant premium to LCD TV. With improving yield of 4K2K panels and more suppliers, we think the price gap of 4K2K vs FHD panels could shrink to 1.1-1.3x in 2014, vs 1.2-1.7x in 2H13.

Figure 156: TVs shifting to larger size and higher resolution Sony 55" 4K2K TV 4K2K vs. FHD

Source: Sony

Figure 157: OLED TV remains at significant premium vs LCD TV Samsung 55” OLED TV (FHD)—US$8,999 Sony 65” Curved TV (FHD)—US$3,999 Sony 55” 4K2K TV—US$3,499

Source: Company data, Credit Suisse Chinese TV brands are early adopters of 4K2K TV panels and the pricing has dropped 4K2K TV penetration will ~40% in 2013. While Innolux maintains a higher market share (~60%) over other panel continue to increase in makers in China, we believe it will face aggressive competition from local panel makers 2014-15E: Positive for driver (BOE, CSOT), as well as global peers such as AUO and LGD. Notably, AUO is currently IC demand more focused on high-end 4K2K TV panels for Sony but it aims to introduce the second- gen 4K2K TV panels for 2014 with narrower border, wide colour gamut, 120 Hz frequency,

Taiwan Market Strategy 57 03 December 2013 and one chip solution that integrates TV chipset and MEMC chip. It will also expand into other sizes from 55"/65" now to capture the 4K2K growth in mainstream pricing segment. We forecast 2013 4K2K TV panel shipment of 2.0-2.5 mn units (~1% penetration), but would expect to see faster growth in 2014-15 on more production ramp by Korean panel makers, more 4K2K content, as well as better infrastructure for 4K2K broadcasting. We expect 4K2K TV panel shipments of 6-10 mn units in 2014 (3-5% penetration). Our sensitivity analysis suggests every 1% increase in 4K2K penetration, will boost driver IC demand by 1.7% as 4K2K TV adopts 30-40 driver ICs vs 11-14 for FHD.

Figure 158: 4K2K TV panel suppliers vs brands 39" 42" 50" 55" 58" 60" 65" 70"/75" 84"/85" Samsung INX Samsung, AUO Samsung, AUO, INX Samsung Samsung LGE INX? INX? LGD INX? LGD LGD Sony AUO AUO, INX LGD TCL INX INX INX AUO, CSOT AUO, INX Toshiba INX? INX? AUO INX AUO, INX LGD Panasonic INX? INX? AUO INX? AUO, INX Skyworth INX INX INX AUO, CSOT INX AUO, INX LGD Hisense INX INX INX AUO, CSOT INX AUO, INX LGD AOC/Philips INX INX INX AUO, CSOT INX AUO Sharp INX Sharp Sharp Konka INX INX INX CSOT INX INX LGD Changhong INX INX INX AUO, CSOT INX AUO, INX Haier INX INX INX AUO AUO Vizio AUO Sharp AUO Sharp LGD Source: DisplaySearch, Credit Suisse estimates Stock picks: Chipbond, Radiant and AUO We continue to favour driver IC backend supplier Chipbond, over fabless driver IC maker Novatek, given less competition and better pricing power. Driver IC backend suppliers have been able to maintain a stable pricing environment and pass the gold price fluctuation risk to their customers since 2H10. We think the longer testing time for higher PPI smartphone panels, and higher resolution trends for tablets and TVs will boost driver IC demand and lift Chipbond's utilisation, which will lead to better GM. We also favour Radiant to play the iPad and tablet/Ultrabook product cycle, as Radiant accounts for 70%+ of iPad BLM allocation and ~80% of its sales come from NB/tablet. Radiant has established a high entry barrier with LGP (light guide plate) production know- how and better quality. It has also consistently maintained its position as the main BLM supplier for iPad since 2010 as the overall BLM thickness continues to shrink with improving power consumption. With the continued ramp of iPads and thinner BLM design for tablet/Ultrabook, we believe Radiant will continue to benefit. We continue to like AUO over INX due to better technology and a stronger balance sheet. AUO's investment in new technologies will continue to pay off, evidenced by its leadership in the higher value-add product for premium 4K2K TVs for Sony, higher resolution smartphones for Chinese brands, and being the first to ramp low-cost NB touch solutions. Key risks: Macro environment and capacity overbuild The TFT industry is highly sensitive to the macro environment as weaker economy normally leads to lower TV demand, resulting in sharp ASP decline, accompanied by utilisation cuts, which will result in huge earnings risk. Capacity overbuild could also be a major risk for the industry as some new entrants might cut pricing aggressively to gain share or produce niche size panels in uneconomical fabs to maintain utilisation.

Taiwan Market Strategy 58 03 December 2013 Touch panel: Market Weight Sector Research Analysts: Jerry Su, Derrick Yang Technology continues to evolve in 2014, prefer touch controller IC makers over touch panel makers Touch technologies will continue to evolve in 2014 as touch panel makers seek thinner, Touch technology still lighter and cheaper solutions. Film-based touch will remain the mainstream for non-Apple evolving in 2014 and AMOLED smartphones, while one glass solution (OGS) and single layer film (GF) might be more attractive given a thinner and cheaper design. Tablet is following a similar trend as iPad Air migrates from Glass/Glass to DITO Film structure (GF2). NB touch will still be dominated by glass-based OGS and SSG (Strengthen Sensor Glass) given better production efficiency and a more mature process. Figure 159: 65%+ of mobile phone are film-based PCT… Figure 160: …and tablets are following a similar path

G1F GF Triangle GF1 GF2 G1F GF metal mesh GF nanowire GF2 GFF GG DITO GG or SITO OGS/G2 GFF GG DITO GG or SITO OGS/G2 100% 100% 8.5% 11.3% 12.6% 14.2% 9.1% OGS/G2 15.2% OGS/G2 16.0% 17.1% 80% 18.1% 21.0% 20.6% 19.7% 80% GG /SITO 60% 60% 34.1% 34.7% GFF 31.2% GFF 40% 53.4% 52.3% 51.5% 47.2% 40% 20% 20% 28.6% 29.2% GF2 34.7% 34.8% 5.7% 7.5% GF 9.3% 10.1% 0% 4.8% 2012 2013 2014 2015 0% 2012 2013 2014 2015 Source: DisplaySearch Source: DisplaySearch Besides the existing glass-based and film-based ITO camps, new materials such as silver nano-wire (SNW), metal mesh (copper or silver), on-cell or hybrid structure, etc, are under development and are expected to hit the market in 2014. As competition between touch panel makers intensifies, we think leading touch controller IC makers are better plays given they could supply multiple touch structures, have better margins and see less competition than touch panel makers. Figure 161: NB touch will still be dominated by glass Figure 162: ITO replacement material comparison G1F GF metal mesh GF nanowire GFF New material Metal mesh Silver nano wire GG or SITO OGS/G2 SSG High conductivity, high 100% 0.0% 5.8% transparency, cost competitive 13.2% 14.3% Pros Low resistance: 0.1-30 ohm/sq SSG and easy to use, well 80% established supply chain Mesh visibility, moire patterns (need 60% 85.6% 63.2% Cons to match each LCD panel), long Increased haze < 30 ohm/sq 85.2% OGS/G2 75.0% 40% design cycle time

20% 7.6% GFF 13.9% 7.3% 8.2% 0% 2012 2013 2014 2015 Source: DisplaySearch Source: DisplaySearch, Credit Suisse Touch NB will continue to proliferate in 2014 Touch penetration for NB has been disappointing in 2013 given the higher cost of touch, Touch NB penetration to lack of a killer application, and the wait for a new chipset/platform to be launched in 4Q, reach ~20% in 2014 which caused rising inventory in the channel. Although touch penetration for NB could only be 10-12% in 2013 (vs 1H13's expectation of 15-20%), we think touch penetration for NB should continue to increase in 2014-15 as cost should be less of an issue given: (1) subsidy from MSFT (US$50 subsidy under SST programme), (2) new Bay Trail

Taiwan Market Strategy 59 03 December 2013 architecture by INTC for cheaper cost, and (3) new touch design/structure leading to lower cost structure. We are also seeing more design-ins for 2-in-1/convertible devices, which should also help to increase NB touch penetration. Therefore, we therefore forecast NB touch penetration to rise from ~12% in 2013 to ~21% in 2014 and ~33% by 2015.

Figure 163: ~12% touch NB penetration in 2013E Figure 164: … but is likely to increase quickly in 2014-15E

Touch NB penetration for NB brands mn units Touch NB NB touch penetration (RHS) 30 35% 30% 60 32.6% 35% 25 30% 50 30% 25% 20 25% 20% 40 20.8% 15 14% 20% 13% Avg 15% 11% 10% 30 10 9% 13% 10% 11.7% 15% 5% 20 5 5% 10% 0% 10 - 0% 1.6% 2.2% 5% Lenovo HP Acer Dell Asus Samsung Apple Toshiba Sony Non-touch NB Touch NB Touch penetration 2013 WW touch penetration 0 0% 2011 2012 2013 2014E 2015E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates New touch design for lower BOM cost, but price competition remains intense Different touch panel structures have led to a wide range of ASP for NB and tablet. For MSFT lifting design touch NB, MSFT has been lifting the design restrictions since 4Q12 to drive down the restrictions for lower BOM overall BOM cost. The eTP solution from AUO can save 15-20% of cover glass area with cost less processing work, which led to ~20% lower pricing vs edge-to-edge OGS. Another good example for cost saving is to remove the shielding layer during air bonding by adopting a better touch controller IC and a smaller gap between the touch module and TFT. We estimate removing the shielding film can save costs of ~U$6-10, representing ~15% of total BOM cost for NB touch. We think efforts by the touch supply chain will continue to lower NB touch pricing in 2014, which will help to lift NB touch penetration, but could lead to more intense competition between touch panel and TFT makers.

Figure 165: MSFT lifting design restrictions for better touch panel cost structure will help penetration Edge-Edge OGS SSG in 4Q12 SSG in 1Q13 SSG in 2Q13 20mm border narrow bezel >= 20mm bezel with z-height 5mm ink ink bezel narrow traces flat from ink to display active area

trace trace trace OGS Sensor trace SSG Sensor SSG Sensor SSG Sensor

LCD Active Area LCD Active Area LCD Active Area LCD Active Area

Source: Company data, Credit Suisse estimates Similarly, touch panels for tablets also have a wide range of pricing given the different touch structure and specification requirements. As tablet pricing is more fragmented, touch panel pricing also has a wide range. Chinese touch makers quoting lower pricing for entry level products, has also put pressure on Taiwanese touch suppliers, although they do not compete in the same segment.

Taiwan Market Strategy 60 03 December 2013

Figure 166: Removing shielding layer could save ~15% of Figure 167: Touch panel ASP varies on different design cost for air gap bonding and specification 7" tablet Sensor structure Cover glass Sensor ASP (US$) 0.7 mm Cover Lens SITO, GFF, OGS, 0.55 mm High-end edge-to-edge, narrow bezel 15~25 Cover Lens TOL ITO Shielding layer ITO Mid-end GF, GFF edge-to-edge 10~12 Air gap bonding 0.3 mm Air gap bonding 0.1 mm LCD LCD Protecetd by bezel, no Low-end GF 7~9 strengthening Source: Company data, DisplaySearch, Credit Suisse estimates Source: Company data, DisplaySearch, Credit Suisse estimates Stock pick: Elan We think Elan's share price looks attractive at ~11x 2014 P/E. Elan has been winning more NB touch projects in 4Q13 and its smartphone business is also improving for branded (Sony, Huawei, Coolpad, Lenovo) and whitebox markets. Elan has also been working with various sensor partners in Taiwan, China, Japan, etc., and its touch controller IC supports all touch structures (eTP, InnoTouch, G2F, G/G, G/F/F, metal mesh, OGS, silver nano-wire, and the like).

Figure 168: Elan is ahead on Win 8/8.1 certificates Figure 169: Elan smartphone touch controller IC shipments growing… 700 '000 units Smartphone touch controller IC shipment 600 6,000 126 500 5,000 54 57 400 45 47 48 4,000 45 80 300 34 35 37 80 30 73 80 25 124 3,000 200 24 70 124 59 111 111 94 2,000 100 66 151 160 77 82 101 102 0 1,000 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 0 Elan EETI Atmel Synaptics SIS Ilitek Wacom N-trig Focaltech 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 Source: Company data Source: Company data, Credit Suisse estimates Key risk: Macro environment and cost structure The touch panel industry is highly sensitive to the macro environment and cost structure. A demand slowdown for mobile computing devices (smartphone, tablet, NB) could lead to lower earnings. At the same time, the cost structure for both touch controller IC makers and touch panel makers will impact their profitability if the cost reduction from process migration or yield improvement fails to meet the price concession curve.

Taiwan Market Strategy 61 03 December 2013 LED: Market Weight Sector Research Analysts: Derrick Yang, Jerry Su General lighting to drive growth We estimate that the overall LED penetration rate will rise to 29% in 2014 and 37% in LED general lighting 2015 (from 21% in 2013) to reach an overall LED lighting market size of US$25.6 bn in revenues to see a 38% 2014 and US$34.3 bn in 2015, with a CAGR of 38% over 2014-15E. With the rapid growth, CAGR during 2014-15E total general lighting revenues are expected to account for 43% and 51% of total LED revenues in 2014 and 2015, respectively (up from 34% in 2013), to become the new growth driver of the LED industry. Our optimism about LED lighting demand is based on: (1) our view that prices for LED lighting products have hit the level of economic viability, after a few years of decline at an annual rate of 15-20%, backed by cost reductions, lighting efficacy improvement and production efficiency; (2) the changing attitude from traditional lighting companies towards LED products; and (3) the government policy on either banning incandescent light bulbs or setting up industry standards for LED lighting products.

Figure 170: Global LED lighting market forecast Figure 171: Global lighting market breakdown (2014E)

100 40% Others 4% 37% Signage 7% 35% 29% 80 Automotive 5% 30% 21% 60 25% General lighting Mobile 11% 43% 16% 20% US$bn 40 15% 11% 7% 10% 20 5% 0 0% Backlighting 30% 2010 2011 2012 2013E 2014E 2015E Total lighting revenues LED lighting revenues LED penetration rate Source: OSRAM, Credit Suisse estimates Source: Yole, Credit Suisse estimates Due to long operating hours in commercial and architectural applications, we expect Commercial and penetration in these areas to be higher than the industry average in 2014, but the same in architectural have higher the residential segment which is catching up quickly on lower light bulb prices and LED penetration but government policies. residential is catching up

Figure 172: Global LED lighting market breakdown by Figure 173: Global LED lighting market breakdown by application (2013E) application (2014E) Outdoor 12% Outdoor 12%

Residential 31% Residential Architectural 34% Architectural 13% 16%

Industrial 3%

Industrial 3%

Commercial Commercial 38% 38% Source: McKinsey, Credit Suisse estimates Source: McKinsey, Credit Suisse estimates

Taiwan Market Strategy 62 03 December 2013

In terms of geographic breakdown, we are seeing above-average LED penetration in Japan, the US and Europe Japan, Europe and the US, as a result of higher electricity costs and government policies. are ahead in LED Penetration in China is similar to the global average now, but might increase faster going penetration forward on policies and higher industry standards. Other regions are now below the global average. Given penetration rates are still low, we believe growth should be strong across all regions in the next few years.

Figure 174: Global LED lighting market breakdown by Figure 175: Global LED lighting market breakdown by region (2013E) region (2014E) Middle East & Middle East & Africa 3% Africa 3% Latin America Latin America 4% 5% Europe 29% Europe 32%

China 16% China 18%

Asia excluding China 22% Asia excluding North America North America China 23% 22% 24%

Source: McKinsey, Credit Suisse estimates Source: McKinsey, Credit Suisse estimates

A good way to see where the LED lighting opportunity lies might be to look at electricity costs Good potential for LED and GDP per capita for different countries. By dividing the electricity cost by the GDP for lighting from the emerging each country, we can derive an affordability proxy, and to put the proxy numbers into markets perspective, we benchmark those in other countries against the US to get an index. The results based on 2012 data seem quite consistent with what we see for current penetration rates, as Japan and most European countries had much higher index numbers than the US. On the other hand, emerging markets such as China, Chile and Mexico should have good potential going forward, given the high electricity-to-GDP per capita index.

Figure 176: Electricity costs vs. GDP per capita for different countries (2012) Index Electricity cost (US$/kWh) GDP per capita (US$) Population (mn) Thailand 7.2 0.098 5,678 67 South Africa 6.7 0.120 7,507 49 Turkey 6.2 0.159 10,609 81 Chile 6.0 0.207 14,278 17 China 5.7 0.074 5,414 1,350 Brazil 5.1 0.342 12,079 201 Portugal 4.5 0.241 22,413 11 Malaysia 4.0 0.092 9,700 30 Mexico 3.8 0.093 10,153 116 Spain 3.7 0.290 32,360 47 Germany 3.3 0.346 43,742 81 Netherlands 2.6 0.289 46,142 17 Japan 2.3 0.256 45,950 127 UK 2.2 0.201 38,597 63 Sweden 2.0 0.271 55,158 9 France 1.7 0.184 44,008 66 US 1.0 0.116 48,387 317 Norway 0.7 0.168 97,255 5 Source: IEA, IMF, CIA World Factbook, DisplaySearch

Taiwan Market Strategy 63 03 December 2013

Disciplined capacity expansion positive for margins Our checks indicate that the global MOCVD shipment is around 150 sets in 2013 and is likely to remain subdued at less than 200 sets in 2014, as mostly LED chip manufacturers do not have aggressive expansion plans, except for China. We believe that the limited capacity expansion in 2013-14 should point to a stable pricing environment in 2014-15. Historically, we can see a negative correlation between the MOCVD shipment and upstream chipmakers’ margins, with a time difference of one year. Thus, we believe that profitability should improve among chipmakers in 2014 with their continuous cost reductions outweighing ASP decline.

Figure 177: Global MOCVD shipment versus chipmaker’s Figure 178: Global MOCVD tool shipment GM 1,000 45% 1,000 300% MOCVD shipment (units) - 1yr lag (LHS) TW upstream chipmakers' GM (RHS) 40% 250% 800 800 35% 200% 30% 600 150% 600 25% 100% 20% 400 400 50% 15% 0% 200 200 10% -50% 5% - -100%

- 0%

2005 2009 1999 2000 2001 2002 2003 2004 2006 2007 2008 2010 2011 2012

2013E 2015E 2014E MOCVD shipment (sets) Growth (YoY)

Source: TEJ Source: Bloomberg Stocks: Epistar and Lextar We prefer Epistar in the Taiwan LED space as we believe that it is well-positioned to benefit from the ELD lighting upcycle with its superior technology and bigger scale. In addition, Epistar is adopting the virtual vertical integration model and the embedded LED chip (ELC) products to get involved in more downstream activities, so that it can better understand its customers’ need to try to optimise the product offerings from the very beginning of the chip design. We have an OUTPERFORM rating for Epistar and our target price of NT$65 based on 1.3x 12-month forward P/B. We also like Lextar as its integrated business model is a good fit into the fragmented nature of the general lighting market, where most customers are migrating from the traditional lighting market with limited LED knowledge and are likely to prefer total solutions from existing LED players such as Lextar. Though it still has 70% of its revenues from the backlighting market, we believe that the design change in the direct-type LED BLM to a thinner form factor in 2014 should benefit quality chip providers such as Lextar, leading to some market share gains from Chinese suppliers. We have an OUTPERFORM rating for Lextar and our target price of NT$31 is based on 1.3x 12-month P/B. Key risks: Lower penetration and price competition Major risks to our view include lower LED lighting penetration and price competition. As we expect general lighting to become the major growth driver for the LED sector, if LED penetration into the general lighting market turns out to be lower than expected, the extent of the LED sector recovery will be milder, leading to risks on LED players’ earnings. Though we believe that the disciplined capacity expansion in 2013 is a good indicator that the price environment should remain stable in 2014, if Chinese LED makers become more aggressive in their pricing strategy aiming for higher market shares, the price competition could be more intense, which will be negative for the profitability of LED players.

Taiwan Market Strategy 64 03 December 2013 Machinery and automation: Market Weight Sector Research Analyst: Jerry Su Demand should continue to recover in 2014 The Taiwan machinery and automation sector has started to recover in 2H13 as export Demand started to recover contraction narrowed to ~1% YoY vs 6% YoY decline in 1H13. Although machine tool in 2H13 and should continue exports remain weak due to intense price competition from the depreciation of the into 2014 Japanese yen, component and general machinery export to the US and other non-China regions. Machinery export orders to China/HK also turned positive in October, which we believe should support YoY growth of total export orders turning positive in the coming months. We believe demand should continue to recover into 2014 on better global economic growth, the Chinese government's policy tilt, proliferation of automation and higher capital spending for the consumer electronic industry.

Figure 179: Taiwan machinery exports started to recover Figure 180: Machinery export order growth is also turning in 2H13 after 6% YoY decline in 1H positive YoY

Machinery export YoY Taiwan total machinery export order YoY 50% Taiwan machinery export order to CN/HK YoY 40% 100% 30% 80% 20% 60% 10% 40% 0% 20% -10% 0% -20% -20% -30% -40% -40% -60% Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

Source: TEJ Source: MOEA China still the main export market for Taiwan machinery/automation makers, followed by the US China should remain the biggest market (~30% of export) for Taiwan's machinery/ China accounts for ~30% of automation makers in 2014 on proliferation of automation due to rising wages, labour Taiwan machinery export shortage, and industry upgrades. China's PMI and PMI new order indices have stayed above the 50-level since late 4Q12 and the increasing spend on machinery and automation in the private sector has helped Taiwan automation industry names since 2Q13. Among different sectors, we expect consumer electronics, transportation, automotive, infrastructure, and construction to lead the recovery in 2014, as a result of new capacity additions for consumer electronic EMS makers and automation upgrades by the private sector, as well as the new infrastructure/construction stimulus programme from the Chinese government. We think solution providers and component suppliers (linear motion, pneumatic, motor, controllers, etc), should be better plays than discrete equipment makers for 2014, as the latter could face intense pricing competition from local suppliers for entry- level products and Japanese peers for mid- to high-end products.

Taiwan Market Strategy 65 03 December 2013

Figure 181: Taiwan machinery export and YoY growth in Jan-Oct 2013 Ranking Country Export (US$ mn) % of total % YoY 1 China 4,655 28.7% -5.5% 2 USA 2,616 16.1% -0.8% 3 Japan 949 5.8% -4.5% 4 Thailand 692 4.3% -12.7% 5 Indonesia 519 3.2% -7.5% 6 Vietnam 493 3.0% -3.1% 7 Germany 435 2.7% -11.5% 8 Korea 431 2.7% 4.0% 9 India 355 2.2% -6.4% 10 Singapore 352 2.2% -10.5% 11 Malaysia 344 2.1% -5.6% 12 Turkey 300 1.8% -8.9% 13 Netherlands 269 1.7% 7.1% 14 Philippines 247 1.5% 67.3% 15 Russia 209 1.3% 10.9% 16 United Kingdom 209 1.3% -9.0% 17 Brazil 182 1.1% -9.2% 18 Mexico 162 1.0% 27.0% Others 2,812 17.3% Total 16,230 100.0% -4.1% Source: TAMI The US is the second largest export market for Taiwan's machinery industry and accounts for 15-20% of export value, while Europe accounted for 10-15% of its machinery exports. As machinery exports to the US turned positive YoY in 2H13, we think the US will see stronger recovery than the European market in 2014, which should benefit Taiwanese machinery makers with higher US exposure.

Figure 182: China PMI and PMI new orders stay above the Figure 183: Europe is also recovering 50-level 70 65

65 60 60 55 55 50 50 45 45 40 40 35 35 30 30

25 25

20 20 J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12 J-13 J-07 J-08 J-09 J-10 J-11 J-12 J-13 China PMI China PMI new order German PMI Euro zone PMI

Source: Bloomberg Source: Bloomberg

Taiwan Market Strategy 66 03 December 2013

Yen depreciation will continue to weigh on Taiwan machine tool supply chain

Taiwan machinery and component makers have been pricing their products at 20-30% Machine tool plays remain discount versus Japanese peers in the past years, while maintaining a comparable quality challenging on Yen with faster delivery time and more flexible design. Nevertheless, the 20%+ Yen depreciation depreciation since October 2012 is impacting Taiwan's machinery exports negatively as the price gap has narrowed to within 10%. Besides China, the US, and Japan, the yen depreciation has also put the Taiwan machinery supply chain in more competition in Southeast Asian markets such as Vietnam, Thailand, Indonesia, where Japanese manufacturing enterprises have been increasing their investment over the last few years. We think the yen's depreciation will continue to weigh on the machine tool supply chain in 2014, as its Japanese peers are now in a better position to start a pricing war after inventory digestion in 2013. We believe Taiwanese machine tool makers should focus on providing "better products", instead of "cheaper pricing".

Figure 184: NTD appreciated by 20%+ vs yen since Figure 185: Taiwan machine tool exports estimated to October 2012 decline 15-20% YoY in 2013 on yen depreciation 100% US$ mn CN+HK ROW TW Machine Tool export 3M avg YoY (RHS)

95% 450 25% 400 20% 90% 350 15% 10% 85% 300 5% 250 0% 80% 200 -5% 150 75% -10% 100 -15% 70% 50 -20% Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 0 -25% Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Source: Bloomberg Source: Taiwan Customs Administration Stock pick: Prefer Teco and Airtac over Hiwin We prefer Teco and Airtac over Hiwin to play the 2014 machinery/automation recovery. Teco has greater exposure in the US market and is gaining share in China for the system automation business. Airtac has ~90% sales exposure in China and has consistently maintained 50%+ gross margin since its listing in 2010. Hiwin is our least preferred stock on higher valuation, weaker cash flow (more debt is needed to support expansion), and concerns on higher inventory and account receivables.

Taiwan Market Strategy 67 03 December 2013

Figure 186: Airtac has the greatest China exposure, while Figure 187: Teco has better dividend yield than Airtac and Teco has the greatest US exposure Hiwin in the past two years 100% 1% 25% Others 8% 7% Hiwin Airtac Teco 4% 17% 7.0% Taiwan 17% 80% 20% 6.0% US 7% 27% 60% 15% 5.0% 26% EU 32% 4.0% 40% 10% 88% 3.0% China 20% 42% 3% 5% 21% 2.0% 0% 0% 1.0% Hiwin Airtac Teco (Motor+IA)

Machine tool (RHS) Infrastructure/mining/petrochem (RHS) 0.0%

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Source: Company data, Credit Suisse Source: TEJ, Company data, Credit Suisse estimates Key risks: Macro slowdown and tightened lending The automation/machinery industry is highly sensitive to the macro environment as a weaker economic environment normally leads to less spending for both the infrastructure and private sectors. China has been the main driver for the Taiwanese automation and machinery industry. Hence, a delayed recovery of China’s economy and a tightening lending policy, especially for SMEs, would have a negative impact on Taiwan’s automation and machinery industry.

Taiwan Market Strategy 68 03 December 2013 Tech Hardware: Overweight Sector Research Analyst: Thompson Wu PC demand themes Corporate PC demand bottoming first with pocket of strength Gartner PC data suggests the global corporate PC market is stabilising. In particular, global large enterprise PC shipments increased 4.5% YoY in 3Q13 after trailing a three- Winners: Lenovo, Compal, quarter average decline of 2.6% YoY. US corporate PC shipments increased 1.9% YoY vs and Digital China 9% declines for trailing three-quarter average. The US forms ~20% of the global corporate PC market. Results from leading corporate PC vendors affirmed Gartner's data. The largest corporate PC vendor, Lenovo, reported 2% YoY increase in PC shipments in the Sep quarter. It also said in its earnings conference that it was confident the "commercial PC market will improve". HP's 4Q FY13 (October) results reported 4% YoY growth in commercial revenues. We believe this pick-up in commercial PC demand is driven by end-of-life of Win XP support in April 2014 and natural upgrade on ageing corporate PCs (6.4 years exiting 2013). Corporate is 53% of global PC shipments and 53% of sales YTD.

Figure 188: Commercial PC more stable than consumer PC, especially for US commercial

10.0%

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0.0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

-5.0%

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WW consumer PC unit YoY chg WW commercial PC unit YoY chg US commercial PC unit YoY chg

Source: Gartner Lenovo was the largest corporate PC vendor globally with 18.6% market share YTD, and had 60% of its PC shipments into the corporate PC market. We believe Lenovo will continue to benefit from a corporate PC recovery given its current market positioning and product line-up. Compal expects its notebook shipments to increase mid-single digits in 2014. We believe it will gain order share at Lenovo and Dell, and in particular, corporate notebook models from Wistron. We rate Compal OUTPERFORM and Wistron UNDERPERFORM. Digital China is the leading IT vendor in China with 26% of its sales derived from PC distribution YTD. We believe its key customers include China large enterprises and SOEs. We believe China's corporate PC market will improve and Digital China will benefit from the distribution of corporate PC from HP, Dell, and to a lesser extent, Lenovo.

Taiwan Market Strategy 69 03 December 2013

Figure 189: Lenovo was the largest corporate PC vendor Figure 190: Lenovo had 60% of its PC shipments into the globally with 18.6% market share YTD corporate PC market

25.0% 100% 90% 20.0% 80% 70% 15.0% 60% 50% 10.0% 40%

30% 60% 64% 60% 48% 5.0% 20% 35% 10% 0.0% 0% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 HP Acer Dell Lenovo ASUS

HP Acer Dell Lenovo ASUS Commercial PC (1-3Q13) Consumer PC (1-3Q13)

Source: Gartner Source: Gartner China PC market bottoms Winners: Lenovo and Digital China PC shipments have declined 13.6% YoY YTD; 3Q13 recorded the worst annual China decline in the China market at 16.5% YoY decline. We expect China PC declines to bottom in 3Q13, and to decelerate in 2014. Our conversations with Lenovo, Synnex and Digital China suggest increasing optimism in the market. Each of these companies cited improvement towards the end of September and continued demand pick-up in October. Lenovo, on its Sep quarter earnings call, said it is confident China PC demand would improve in 2014. China represents 21% of YTD global PC shipments and 18% of sales. Lenovo is the market leader in China with 34% market share in 3Q13. It should benefit disproportionately from a deceleration in China PC declines. In addition, national policy changes from the Third Plenary committee appear to support local brands. Digital China's PC distribution business should also see some support, but it distributes largely for global brands such as HP and Dell. We would watch how the national policy dictates and impacts PC industry specific demand.

Figure 191: China PC unit declines may be bottoming in 3Q13 20.0%

15.0%

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0.0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 -5.0%

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WW Developed market PC unit YoY chg WW E.M. PC unit YoY chg China PC unit YoY chg

Source: Gartner

Taiwan Market Strategy 70 03 December 2013

Desktop AIO Demand for AIO surged in 2013 and we expect this trend to continue into 2014. Global AIO shipments increased 26% YoY YTD, a strong pick-up versus 1.5% growth in 2012. We believe consumers are gravitating towards a tablet and AIO computing configuration. Tablets provide consumers with on-the-go portability, while AIOs are use-at-home. In addition to the strong end demand, ASP is close to US$1,000 and is about 2x regular desktop ASP and 1.5x mainstream notebook ASP; this provides a healthy sales opportunity. AIOs are 10% of global desktop shipments YTD and 18% of sales.

Figure 192: YTD WW PC shipment mix (2013 YTD) Figure 193: YTD AIO shipments increased 26% YoY Ultraportable YoY% US$ Tablet PC 8% 50% 1,400 0% All-in-One 5% Mini PC 40% 1,200 3% 30% 1,000 Mini Notebook 2% 20% 800 Deskbound 36% 10% 600

0% 400

-10% 200 Mainstream Notebook -20% 0 45% 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 Desktop Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Replacement 1% WW AIO ASP WW AIO shipments YoY chg

Source: Gartner Source: Gartner Apple and Lenovo are the key market share leaders in the global AIO market. Lenovo's AIO market share improved to 26.7% YTD, from 26.2% in 2012 and 15.5% in 2011; this was largely at the expense of Apple. We expect Lenovo's attack strategy in the consumer market in the US and Europe to help drive continued share gains.

Figure 194: Lenovo's AIO market share has exceeded Figure 195: AIO shipments YoY Apple's iMac YTD and is global #1 now

30.0% 250.0%

200.0% 25.0%

150.0% 20.0% 100.0% 15.0% 50.0%

10.0% 0.0%

-50.0% 5.0%

-100.0% 0.0% 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

HP

Dell

Acer

Sony

Apple

Others

Lenovo Toshiba

Asustek Lenovo Apple Global AIO (ex-Lenovo & Apple) Samsung

Source: Gartner Source: Gartner

Taiwan Market Strategy 71 03 December 2013

2-in-1 devices Intel unveiled its new Bay Trail processors at its developer conference in September. Intel announced three Atom processors including Bay Trail T, M and D. In particular, Bay Trail T is targeting a new computing category pushed by Intel called 2-in-1 devices. These 2-in- 1 devices combine features of a tablet and a notebook, are at least 10" screen sizes, run full PC Windows 8 OS, offer integrated keyboard design, and offer attractive starting price points of US$349 compared to a traditional notebook price of US$728.

Figure 196: Intel tapping Bay Trail's high performance lower power features to drive 2-in- 1 devices adoption in 2014

Source: Company data, Credit Suisse. The starting price points for these 2-in-1 devices place them in the same price point of netbooks. We have seen starting price for 10" 2-in-1 devices at US$349; 8" are at US$299. Netbook ASP has averaged US$362 YTD. We believe the significant technology advancements in 2-in-1 devices (i.e., processor speed, touch, battery life, and size/form- factor) at relatively comparable price points to netbooks provide a significant market opportunity. At the peak of the netbook product cycle in 4Q09, quarterly shipments exceeded 10 mn and were 20% of global notebook shipments.

Figure 197: At the peak of the netbook product cycle in 4Q09, quarterly shipments exceeded 10 mn and were 20% of global notebook shipments

000s 12,000 25%

10,000 20%

8,000 15% 6,000 10% 4,000

5% 2,000

0 0% 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13

Netbook shipments % of global notebook shipments

Source: Gartner The top PC brands Lenovo, HP, Dell, Acer, Asus, Sony, Samsung, and Toshiba have introduced Bay Trail-T 2-in-1 devices for this holiday season. Asus Transformer Book T100 has received positive feedback after its initial launch, and has become the best- selling notebook/2-in-1 device on Amazon. Asus shipped 500,000 T100 devices in 3Q13 and expects sequential growth in 4Q13. We believe Asus and Lenovo will be successful in

Taiwan Market Strategy 72 03 December 2013

2-in-1 devices based on consumer brand recognition, product portfolio, and channel relationships.

Figure 198: Bay Trail tablet product portfolio Manufacturer ASUS Lenovo Acer HP Dell Toshiba

Model Transformer Book T100 Miix 2 Iconia W4 Omni 10 Venue 8 / 11 Pro Encore 8 Announce date Sep-13 Oct-13 Oct-13 Sep-13 Oct-13 Sep-13 Ship date Oct-13 Oct-13 Oct-13 Nov-13 Oct-13 / Nov-13 Nov-13

Form factor: Display size (in) 10.1 8.0 8.0 10.1 8.0 / 10.8 8.0 Resolution 1366 x 768 1280 x 800 1280 x 800 1920 x 1200 1280 x 800 / 1920 x 1080 1280 x 800 Height x Width x Depth (mm) 263 x 171 x 10.5 215.6 x 131.6 x 8.35 134.9 x 218.9 x 9.75-10.75 259.08 x 180.34 x 10.16 216.2 x 130 x 9 / 280 x 177 x 10.2-15.4 213 x 135.9 x 10.68 Weight Tablet: 0.55kg 350g 415g 0.63kg 395g / 726g 450g

Core internals Processor Intel Bay Trail-T Z3740 1.33 GHz Intel Bay Trail-T quad-core Intel Bay Trail-T Z3740 quad-core Intel Bay Trail-T Z3770 1.46 GHz Intel Bay Trail Z3740D / Z3770 Intel Bay Trail-T Z3740 1.33 GHz Memory 2GB 2GB 2GB 2GB 2GB / Up to 8GB 2GB Operating system Window s 8.1 Window s 8.1 Window s 8.1 Window s 8.1 Window s 8.1 Window s 8.1 Storage type/capacity (GB) 32 / 64GB 32 / 64 GB 32 / 64GB 32GB 32 & 64GB / Up to 256GB 32GB

Features Battery life (hrs) 11 7 8 8.5 9.9 NA Camera Yes Yes Yes Yes Yes Yes Rear-camera (MP) NA 5.0 5.0 8.0 5.0 / 8.0 8.0 Front-camera (MP) 1.2 2.0 2.0 2.0 1.2 / 2.0 2.0 Wireless technology NA Optional 3G NA NA Optional 3G / LTE NA

Retail Price ($USD) $349/$399 Starting at $299 Starting at $ 329.99 $399 $299.99 / $499.99 $329 Source: Company data, Credit Suisse China smartphone We expect China smartphone demand to remain healthy in 2014. Credit Suisse expects China smartphone shipments to increase 64% YoY in 2013 and 22% YoY in 2014. This compares with our global smartphone market forecasts of 37%/25% YoY. Based on these estimates, China will represent about 32% of global smartphone shipments in 2014. Local vendors we would keep an eye out for include Lenovo, Xiaomi, Yulong and ZTE.

Figure 199: CS forecasts China smartphone units to increase 22%/15% in 2014/15E 000s 600,000 200% 179% 180% 500,000 151% 160% 140% 400,000 120% 300,000 100% 64% 80% 200,000 60%

22% 40% 100,000 15% 7% 8% 20% 0 0% 2011 2012 2013E 2014E 2015E 2016E 2017E

China smartphone shipments YoY% change

Source: Garter, Credit Suisse estimates We expect Lenovo to continue its share gain momentum in the China market in 2014. Specifically, it will focus on the Rmb2,000 and above market. According to SINO research, the >Rmb2,000 price-band is ~50% of China's smartphone value. The price-band is currently dominated by Samsung (>50%) and Apple (28%) with 75-80% share.

Taiwan Market Strategy 73 03 December 2013

We expect Lenovo's brand, combined with quickening product development and manufacturing times from its Wuhan facility to refresh a richer and fuller product portfolio. In addition, covering a wider range of open distribution channels faster than its competitors will allow it to gain share in this premium price-band. Lenovo recently launched two devices in the price band—VIBE X and S898t—and received healthy initial traction according to management (click here). We forecast Lenovo to ship 46/50 mn smartphones in China in FY14/15E and total smartphone shipments of 50/60 mn.

Figure 200: China smartphone shipment market share—Lenovo maintains at #2 in 3Q13 Vendor 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Samsung 20.6% 17.7% 16.5% 15.9% 17.7% 18.6% 17.7% Lenovo 7.3% 11.1% 14.6% 13.6% 10.2% 12.9% 13.1% Yulong 5.4% 8.5% 9.7% 10.0% 9.8% 9.4% 9.0% Huawei 10.4% 8.8% 10.5% 9.4% 10.1% 8.2% 8.2% Apple 17.0% 12.3% 8.0% 8.7% 9.7% 7.3% 6.4% ZTE 8.1% 8.7% 8.5% 8.2% 7.4% 7.8% 5.7% BBK Communication 0.5% 0.7% 1.8% 2.1% 2.4% 2.6% 4.4% Tianyu 0.5% 1.8% 0.8% 4.1% 4.3% 4.6% 4.4% Xiaomi 1.5% 2.2% 1.2% 1.5% 2.6% 3.0% 4.0% OPPO 0.7% 1.2% 2.2% 2.4% 2.8% 3.3% 3.5% Gionee 1.5% 3.2% 4.6% 4.8% 4.0% 3.0% 3.1% Hisense 1.4% 1.8% 2.1% 2.1% 2.2% 2.2% 2.2% HTC 2.2% 4.6% 4.4% 3.2% 2.3% 1.7% 1.3% Others 3.3% 2.9% 3.2% 4.1% 5.0% 5.7% 7.8% Source: Gartner

Figure 201: Mid- to high-end smartphone offerings growing rapidly Manufacturer Lenovo Lenovo Lenovo Lenovo

Model K900 VIBE X S960 S898t S820e Announce date Jan-13 IFA 2013 3Q13 3Q13 Ship date May-13 Oct-13 4Q13 4Q13

Spec: Display size (in) 5.5 5.0 5.3 4.7 Resolution 1080 x 1920 1920 x 1080 1280 x 720 1280 x 720 Height x Width x Depth (mm) 157 x 78 x 6.9 144 x 74 x 6.9 147 x 75.6 x 7.9 139.5 x 69.75 x 8.85 Weight 162g 121g 140g 135g Processor Intel Atom Z2580 2.0GHz MT6589W 1.5GHz Quad Core 1.5GHz Quad Core MSM8625Q Quad-core 1.2GHz Memory 2GB 2GB 1GB 1GB Operating system Android JB 4.2 Android 4.2 Android 4.2 Android 4.1 Storage type/capacity (GB) 16/32 GB ROM 16GB ROM 8GB ROM 4GB ROM Rear-camera (MP) 13M 13M 13M 8M Front-camera (MP) 2M 5M 2M 1.6M

Retail Price ($USD) $492 $476 $377 $261

Source: Company data, Credit Suisse White-box hyper-scale datacentre servers We expect the white-box server market (i.e., direct server) to continue to be a key growth driver in 2014. Cloud adoption and the need for hyper-scale server platforms will continue to favour the low-cost, scalable, yet customisable solutions provided by Taiwan ODMs Quanta, Wistron, Inventec and MiTAC. Key customers shifting to this white-box server market are Internet and cloud-companies in the US; however, we are hearing of projects in Asia-Pac by Internet and telecom companies. Gartner forecasts white-box server units from ODMs to increase 11.1% compounded from 2012 through 2016, and for revenues to grow at 13.6%. This suggests ODM server revenue TAM will reach US$1.5 bn in 2016 vs US$904 mn in 2012, accounting for 3.2% of

Taiwan Market Strategy 74 03 December 2013 total x86 server sales in 2016. We believe the white-box server market opportunity is significantly larger than Gartner's forecast, which is based on the existing OEM server market. Companies such as Google and Amazon have assembled their own servers in the past and these servers have not been traditionally covered by Gartner.

Figure 202: Gartner expects ODM server sales to account for 3.2% of total x86 server sales by 2016 2012 2013E 2014E 2015E 2016E ODM units 347,766 395,250 438,123 482,606 528,898 Share to x86 units (%) 3.6 3.8 4.0 4.2 4.4 ODM revenue (US$ mn) 904 1,058 1,197 1,345 1,503 Share to x86 revenue (%) 2.4 2.6 2.7 3.0 3.2 Source: Gartner (January 2013) Quanta was an early mover in offering white-box servers to Internet companies. We believe it has the broadest capability in this shifting OEM strategy and will continue to lead new wins. Nevertheless, market competition has intensified from two fronts: (1) ODMs Wistron (Wiwynn), Inventec and MiTAC (working with Synnex US Hyve Solutions) entering the market; and (2) traditional server resellers HP (Moonshot) and Dell offering purposely designed hyper-scale data-centre server solutions. We believe this will erode at least some revenue opportunity for Quanta and some of the valuation premium it has received for its leadership in the space. Stocks: Lenovo, Hon Hai, Digital China, and Compal Lenovo (OP, TP HK$10.3): Top pick in the PC sector To gain share in both commercial and consumer PC market: Lenovo has benefitted from the commercial PC replacement cycle, particularly in the US. It was in the top three commercial PC position in every region in 1-3Q13. We believe Asia-Pac ex-China is the most immediate region where Lenovo can continue to gain commercial PC share. North America may be challenging given the positioning of HP and Dell, which control roughly a quarter of the market. Lenovo's strategy of attacking the consumer PC market in mature markets continues to play out nicely. It is now the strong #2 in EMEA. With new products launching in this holiday season, combined with the integration with CCE in Brazil, we believe Lenovo will continue to attack the consumer PC markets in North America and Latin America, where its market share remains fairly low, and improve scale.

Figure 203: Lenovo has ample opportunity to gain share in both commercial and consumer PC market 2010 2011 2012 1-3Q13 #1 #2 #3 Commercial market share% China 32.2% 34.0% 38.5% 37.8% Lenovo (37.8%) Dell (8.2%) HP (7.4%) APAC ex-China 8.1% 9.8% 11.6% 9.6% HP (21.6%) Dell (12.6%) Lenovo (9.6%) Japan 7.7% 19.0% 28.4% 26.9% Lenovo (26.9%) Fujitsu (21.9%) Dell (14.6%) EMEA 6.3% 8.1% 9.7% 11.9% HP (21.6%) Lenovo (11.9%) Dell (11.3%) North America 8.5% 11.0% 11.6% 13.0% Dell (26.4%) HP (24.5%) Lenovo (13.0%) Latin America 8.1% 9.7% 12.0% 18.8% Lenovo (18.8%) HP (14.6%) Dell (9.5%) Worldwide 12.6% 15.2% 17.7% 18.6% Lenovo (18.6%) HP (18.3%) Dell (14.1%)

Consumer market share% China 21.0% 25.6% 28.0% 27.9% Lenovo (27.9%) Dell (9.1%) ASUS (8.2%) APAC ex-China 4.7% 5.6% 7.6% 10.0% Acer Group (13.8%) HP (11.7%) Samsung (11.3%) Japan 4.5% 12.8% 21.9% 22.9% Lenovo (22.9%) Toshiba (13.4%) Fujitsu (12.9%) EMEA 3.8% 4.1% 9.6% 14.0% HP (15.0%) Lenovo (14.0%) Acer Group (11.0%) North America 2.0% 2.7% 5.1% 6.9% HP (26.5%) Dell (16.4%) Apple (13.7%) Latin America 1.7% 2.6% 2.5% 3.9% Samsung (12.8%) HP (11.7%) Positivo Informatica (10.1%) Worldwide 6.2% 8.4% 11.8% 14.0% Lenovo (14.0%) HP (13.8%) Acer Group (9.0%) Source: Gartner, Credit Suisse research

Taiwan Market Strategy 75 03 December 2013

Smartphone profitability could grow faster than market expectation: Lenovo acknowledges if it wants to be the global smartphone leader and improve its China smartphone profitability, the key step is to lift its product portfolio into the >Rmb2,000 price band. It is switching gears leveraging its new Wuhan, China facility to quicken its product development cycles in higher-value devices. It recently launched two devices in the >Rmb2,000 price band: VIBE X and S898t. Including the K900, it has three devices in the said price band, and we expect this number to increase in coming months. In addition, Lenovo continues to emphasise its open channel for smartphone distribution, where it generates better margins than when sold into operator channels. We believe it not only shifts into but improves the quality of its open channels to accelerate operating profit growth. Overall, we believe its smartphone profitability is likely to grow faster than the market predicts. Expect IBM's x86 server deal done in CY14: We continue to expect Lenovo to acquire IBM's x86 server business in CY14. We estimate at least 13% CY14 EPS accretion based on a US$3.0 bn purchase price and assuming 25% of the deal is financed with equity. The accretion can be even greater depending on how the deal is financed and execution integration. EMC cooperation: Lenovo's partnership with EMC is an important step for it to reach its target of growing the server/storage business to become a relevant global player in three years. The partnership includes: (1) expanding Lenovo’s server capabilities and delivery through EMC storage systems; (2) an OEM and reseller agreement for Lenovo to offer EMC’s networked storage solutions in China initially; and (3) a JV with Lenovo and EMC’s Iomega business for NAS systems. Lenovo said the first part of the alliance is in the process, and it needs to strengthen its server product portfolio before seeing positive results. The progress of the second part of the alliance is going well; Lenovo is building capability to sell storage products, particularly high-end storage, to larger enterprise customers. Lastly for the JV, Lenovo is shifting focus to SMB from consumer customers, which they believe is the right direction. Key downside risks: (1) China PC demand remains soft and has not yet reached a bottom as Lenovo expects; (2) intensifying smartphone competition in both China and outside China leads to profitability risk, and (3) IBM x86 server deal does not occur in CY14 as widely speculated. Hon Hai (OP, TP NT$101): Margins improve faster than market's expectation Our estimates are conservative: We believe our current forecasts for Hon Hai may be conservative, factoring only 3.1%/1.6% sales growth in 2014/15. This is a result of assuming Apple iPad and iPhone volumes at Hon Hai to be flat in 2014/15; with incremental unit growth going to Compal (iPad Air) and Wistron (iPhone). The conceivable mis-execution by Compal and Wistron would lead to order-flow coming back to Hon Hai and/or Pegatron. Additionally, we may have upgrade potential based on: (1) the launch of Apple iTV; iWatch; and China Mobile iPhone—all projects still in progress based on our supply chain updates; (2) stronger demand of PlayStation 4; and (3) a pick-up in PC/server spending, which we believe is bottoming out as of 3Q13. Apple-related profits are improving: We expect Apple profits at Hon Hai to improve through a combination of inland China expansion and its ability to better manage labour and manufacturing overheads as Apple's order growth slows at Hon Hai. Hon Hai constructed two product-specific facilities in inland China—Zhengzhou (iPhone) and Chengdu (iPad)— for Apple. We believe the construction of these two facilities was largely completed in 2012 and Apple orders began shifting over in 2013. We expect the orders to move fully over in 2014. We believe in addition to these facilities being designed for specific Apple products, these facilities also have greater automation capabilities and in compination will lift GMs. We have seen evidence of this over the last three quarters and expect this trajectory to at least maintain and improve in 2014.

Taiwan Market Strategy 76 03 December 2013

Apple incentivised to maintain Hon Hai's utilisation and relationship long-term: We expect Hon Hai to remain Apple's premier partner and the "go-to-guy" for new product launches (i.e., Apple iTV and iWatch). We do NOT see any other assembly partner competing with Hon Hai's (1) manufacturing capacity and scale; (2) efficiency in moving up the manufacturing curve (i.e., mass production from zero units to >5 mn units per month); and (3) capex commitment on behalf of Apple with new facilities built in Zhengzhou (iPhone) and Chengdu (iPad). We believe for these reasons, it is also in Apple's best interest to maintain minimum volumes and utilisation at Hon Hai. Improving free cash flow: We expect free cash flow to improve by all traditional levers including: (1) margins and higher net income growth; (2) improving work-capital cycles; and (3) declining capex investments (declined 23.5% YoY in 2012 and has declined 4% YoY YTD 2013). Key downside risks: (1) The seasonality of its manufacturing business keeps its OPM fluctuating significantly; and (2) capex increases for 4G in Taiwan and the US expansion could negatively impact its cash flow near term. Digital China (OP, TP HK$12): Benefit from pick-ups in China IT demand We believe consumer and corporate China IT spending is nearing an inflection point, and Digital China's leading tech distribution position provides it ample opportunity to benefit alongside a pick-up. Besides, its near-term key catalyst of back-door listing of its IT service business (DCITS) via Shenzhen Techo Telecom is on track for year-end close. We expect the back-door listing will not only unlock the value of DCITS to Digital China's shareholders, but also accelerate order wins and provides financial flexibility for potential IT-services M&A. In addition, through its 21.08%-owned HC International, DC is able to tap into China's fast growing B2B e-commerce market. Overall, we do not believe Digital China's share price fairly reflects the value of its core distribution business and its holdings in HC and DCITS. Our 12M TP of HK$12 is based on SOTP analysis. Key downside risks: (1) US IT brands get further squeezed due to China's push for China IT brands to gain market share; and (2) the pick-up for China IT spending is softer than expected. Pair trade: Long Compal (OP, TP NT$27) and short Wistron (UP, TP NT$21) Compal—Turnaround story in 2014: First, Compal's 2014 turnaround depends on the stabilisation in its notebook business. Our view on 1H14 RFQ suggests Compal is consolidating orders at Dell, Lenovo and Acer, and with an increase in corporate notebook orders. Second, it could strengthen its smart-devices (i.e. smartphones and tablets) capabilities with the integration of CCI, which also affords it to provide customers with one- stop shopping by combining its notebook capabilities with CCI. Lastly, potential new tier-1 server OEM order wins (likely Dell/Lenovo, which are key notebook customers) in mid- 2014 could drive its growth momentum. Key downside risks include the continued softness in notebook demand and the execution risk of CCI integration. Wistron—iPhone is the only opportunity to offset notebook order loss, but execution is at risk: Wistron's core notebook business is deteriorating. It guided notebook units to decline 15% in 2014, which we believe is due to order loss at Acer and Lenovo. The de-scaling from notebooks will create utilisation pressure and impact profitability, in our view. We do not expect server/storage growth can offset this. In addition, although we believe Apple's iPhone assembly orders could offset the Blackberry order decline at the top line level, we foresee margin dilution to its overall business due to the difficulty of ramping Apple products. Key upside risk includes better-than-expected yield of ramping iPhone.

Taiwan Market Strategy 77 03 December 2013 Handsets: Underweight Sector Research Analysts: Pauline Chen Emerging markets and LTE the key drivers For 2014, Credit Suisse’s global telecom equipment team (led by Kulbinder Garcha) forecasts global smartphone unit growth will decelerate to 25% YoY to 1,219 mn units, from 36% in 2013E (or 976 mn units). We expect emerging markets and LTE smartphones to be key growth drivers in the smartphone space. Credit Suisse estimates emerging markets including China, India, Brazil, Russia and MEA will see stronger unit growth of 33% YoY in 2014, or representing 71% of global smartphone unit demand, given increasing affordability and readiness in infrastructure. LTE demand is expected to accelerate to 298 mn units, or 24% of total smartphone volume in 2014, given increasing demand for data traffic. On the other hand, feature phones are expected to see a 16% YoY decline in 2014. As demand is largely driven by growing data traffic and better affordability, we expect LTE smartphones to continue to feature bigger-size/higher resolution screen, longer battery life and better sound/picture quality, i.e., instant shooting, gesture detection, etc. The trend should increase the entry barriers for components design, and should favour technology leaders, in our view.

Figure 204: CS global handset demand forecast (2009-15E) 2009A 2010A 2011A 2012A 2013E 2014E 2015E Global handset units ('000) 1,368,064 1,652,349 1,852,303 1,974,785 2,085,670 2,149,291 2,208,702 % change YoY 4.6% 20.8% 12.1% 6.6% 5.6% 3.1% 2.8% Factory ASP ($) 134 135 147 159 168 167 163 % change YoY 2% 1% 9% 8% 6% -1% -3% Global handset revenues 183,481 222,929 272,698 313,991 350,393 359,276 359,976 % change YoY 6.7% 21.5% 22.3% 15.1% 11.6% 2.5% 0.2%

Global smartphone units ('000) 172,376 298,847 472,891 716,258 976,309 1,219,126 1,425,035 % change YoY 23.8% 73.4% 58.2% 51.5% 36.3% 24.9% 16.9% % of global handset market 12.6% 18.1% 25.5% 36.3% 46.8% 56.7% 64.5% Factory ASP 333 263 302 299 276 251 227 % change YoY 9% -21% 15% -1% -8% -9% -10% Global smartphone revenues 57,366 78,511 142,737 214,353 269,197 305,895 323,592 % change YoY 34.3% 36.9% 81.8% 50.2% 25.6% 13.6% 5.8% % of global handset market 31.3% 35.2% 52.3% 68.3% 76.8% 85.1% 89.9%

Global non-smartphone units 1,195,688 1,353,502 1,379,412 1,258,527 1,109,360 930,165 783,667 % change YoY 2% 13% 2% -9% -12% -16% -16% Non-smartphone ASP ($) 105 107 94 79 73 57 46 % change YoY -5% 1% -12% -16% -8% -22% -19% Global non-smartphone revenues 126,115 144,417 129,962 99,638 81,196 53,381 36,385 % change YoY -2% 15% -10% -23% -19% -34% -32% Source: Gartner, company data, Credit Suisse estimates

Taiwan Market Strategy 78 03 December 2013

Figure 205: Smartphone unit growth still strong Figure 206: Emerging markets will be the long-term driver 2,000 80.0% 1,800 100% Growth is slowing but volumes will double 1,800 70.0% 07-12 volume CAGR: 42% 1,500 1,600 12-17 volume GACR: 19% 80% 60.0% 1,400 1,200 1,200 50.0% 1,324 60% 1,180 1,000 40.0% 900 1,046

865 mn unitsmn mn unitsmn 40% 800 30.0% 600 651 600 419 20.0% 223 20% 400 300 116 200 10.0% 51 51 64 0 0.0% 0 0% 2007A2008A2009A2010A2011A2012A 2013E 2014E 2015E 2016E 2017E 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Developed markets Emerging markets Emerging market growth (YoY) Global smartphone shipment Growth (YoY) Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Brand consolidation; components leaders widening the gap We expect brand consolidation in the smartphone space, as the industry’s profits are largely attributed to just the top two makers (Samsung and Apple). We had seen some M&A activities in the past, including Google buying Motorola and MSFT snapping up Nokia. We expect more to come in 2014, either in the form of M&A or partnership. We also expect local brands with big home market support i.e., China and India to gain market shares in 2014. However, we expect international brands to adopt different pricing/supply chain strategy, versus Chinese brands. Given that high-end smartphone growth is decelerating, we expect international brands to move down to mid- to low-end price segments, which may lead to increasing outsourcing opportunity. On the other hand, Chinese domestic brands will try to move up to mid- to high-end price segments, which may lead to more M&A activities and more components insourcing. Spec-wise, we expect smartphone brands to continue focusing on bigger-size/higher resolution screen, longer battery life (through better component design and battery power management), and better sound/picture quality, i.e., instant shooting, gesture detection, etc. Industrial design and connectivity between different devices are also getting more important. The trend should increase the entry barriers for components design, and should favour technology leaders, in our view.

Figure 207: Smartphone shipments by brand (3Q13) Figure 208: Smartphone brands’ operating profits (2013E) 90 80 70 60 50

40 mnunits 30 20 10 0

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

Taiwan Market Strategy 79 03 December 2013

Stocks: Stick with quality names Casing. We stick with our preference for Catcher over FTC. We believe that the diversification is an important factor to mitigate the cyclical factor of the casing sector. Arguably, Catcher and the Hon Hai group are the most diversified players in terms of product mix, technology mix and material mix. We expect Catcher to gain share from a more diversified customer mix and its major customer’s multi-sourcing strategy. It also has better financial transparency over FTC. Power supply. We prefer LOT/Delta over Chicony, given less volatility in core earnings. Delta continues to be the best-in-class stock. However, trading at 19x NTM EPS, we believe a further re-rating will require another uptick in OPM. We would buy Delta on weakness. LOT, on the other hand, remains relatively under-owned in the space. Directionally, we believe its margin expansion story (through its share gains in handset camera module, data centres and automotive electronics) remains intact, though the pace of the recovery is dampened by its increasing investment in R&D and its subsidiaries (LOM and Silitech). Handset components. Largan is our only preferred pick. We note that Largan continues widening its technology leadership over its local competitors. Industry trends (for higher MP, bigger aperture, OIS) and its solid patent portfolio create higher entry barriers for new players. Key risks: Demand and competition There could be general industry-wide demand disappointment, driven by macroeconomic factors (although the secular nature of smartphone growth should mitigate these risks). Moreover, competition from China (due to its brands’ growing market share) and Japan (due to JPY depreciation) could be a concern. As a result, we believe components with technology leadership and scale advantage will do better.

Taiwan Market Strategy 80 03 December 2013 PCB: Underweight Sector Research Analyst: Pauline Chen FPCB / FC CSP to drive growth The PCB market is expected to see slightly stronger YoY growth of 3-4% in 2014E, from a flattish year in 2013E. FPCB is expected to lead the growth (estimated up ~10% YoY), given the trend for thinner and lighter devices, i.e., smartphones and tablets. On the other hand, IC substrates and conventional PCB are expected to see a YoY decline in 2014, hurt by weak PC demand. For IC substrates, FC-CSP is expected to be the only growing area, driven by decent smartphone unit growth and increasing demand for multi-core processors. For conventional PCB, automotive PCB and server PCB are the two growing segments.

Figure 209: Global PCB production value (YoY growth) Figure 210: FPCB the key growth driver

(US$bn) WW PCB production value (LHS) YoY growth (RHS) 100% 15% 70 40% 90% 20% 23% 80% 60 30% 70% 50 FPCB 20% 60% Substrates 40 50% 10% HDI 30 40% Multi-layer 0% 30% 20 Commodity 20% 10 -10% 10% 0 -20% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 0% 2007 2012 2017E

Source: Company data Source: Company data Continuous industry consolidation Given the increasing difficulty to expand capacity in China, due to regulatory controls, there have been several M&A activities in the PCB space since 2008 (see figure below). However, most deals turned out to be bigger PCB shops buying smaller PCB shops. As a result, the overall capacity is not declining as the headline suggests. We note that most conventional PCB-makers have been underutilised in 2013, hurt by weak overall demand and rising cost pressure.

Figure 211: Top ten PCB-makers continue to gain share 100% 90%

80% 44% 44% 41% 40% 70% 60% rest 50% 29% 27% top 11-30 40% 30% 29% top 10 30% 20% 33% 27% 30% 10% 26% 0% 2009 2010 2011 2012

Source: Company data

Taiwan Market Strategy 81 03 December 2013

Figure 212: Major M&A in the PCB space Announced date Acquirer name Target name Announced total value (US$mn) 5/8/2008 IEC Electronics Corp IEC Electronics Wire & Cable Inc 10 6/26/2008 Taiwan PCB Techvest Co Ltd T-Mac Techvest PCB Co Ltd 4.45 10/21/2008 Samsung Electro-Mechanics Co Ltd Unicap Electronics Industrial 19.95 10/22/2008 Taiwan PCB Techvest Co Ltd T-Mac Techvest PCB Co Ltd 8.54 11/25/2008 Boardtek Electronics Corp Uniflex Technology Inc 3.48 3/20/2009 Unimicron Technology Corp Phoenix Precision Technology Corp 327.94 5/22/2009 Kingboard Chemical Holdings Ltd Elec & Eltek International Co Ltd 267.36 8/5/2009 Hi-P International Ltd Global Flex Suzhou Plant II Co Ltd 18.96 10/26/2009 Viasystems North America Inc DDI Toronto Corp 23.14 11/16/2009 TTM Technologies Inc PCB business 512.35 2/25/2010 Taiflex Scientific Co Ltd Koatech Technology Corp 7.61 3/24/2010 Hannstar Board Corp Global Brands Manufacture Ltd 149.17 5/25/2010 Simm Tech Co Ltd Sustio Co Ltd 3.3 6/15/2010 Uniplus Electronics Co Ltd Long Billion Industrial Ltd 12.3 6/30/2010 KCE Electronics PCL Thai Laminate Manufacturer Co Ltd 7.51 9/21/2010 Meiko Electronics Co Ltd Schweizer Electronic AG 6.2 12/27/2010 Taiwan PCB Techvest Co Ltd Yeu Hwan Technology Corp Ltd 3.52 2/24/2011 Itochu Enex Co Ltd IP Power Systems Corp 12.23 3/18/2011 Korea Circuit Co Ltd, Korea Zinc Co Ltd Interflex Co Ltd 44.41 4/26/2011 IsuPetasys Co Ltd Samshin Circuit Co Ltd 11.09 6/30/2011 Unimicron Technology Corp RUWEL International GmbH 21.98 7/5/2011 WUS Printed Circuit Kunshan Co Ltd Kunshan Xianchuangli Electronics Co Ltd 6.46 10/13/2011 Unimicron Technology Corp,Unnamed Buyer Clover Electronics Co Ltd 40.32 12/20/2011 Automobile & PCB,Insprit Inc,Melfas Inc Enspert Inc 5.57 2/16/2012 Unimicron Technology Corp UniDisplay Inc 16.9 2/17/2012 Chin-Poon Industrial Co Draco PCB PCL 9.06 3/9/2012 Advanced Integrated Manufacturing Corp Ltd Colbree Precision Ltd 1.32 5/10/2012 Industrial Bank of Korea Youknow Tech Co Ltd 4.38 9/19/2012 KCE Electronics PCL Chemtronics Technology Thailand Co Ltd 7.58 11/13/2012 Shanghai Yuxing Investment Center LP Topsearch Printed Circuits Shenzhen Ltd 39.31 11/20/2012 Guangdong Chaohua Technology Co Ltd Huizhou Hezheng Electronic Technology Co 35.78 12/17/2012 Meiko Electronics Co Ltd Schweizer Electronic AG 2.99 12/20/2012 Unimicron Technology Corp UniDisplay Inc 0.34 1/8/2013 Shenzhen Fastprint Circuit Tech Co Ltd Exception Pcb Ltd,Exception Var Ltd 10.5 1/13/2013 Kingwell Group Ltd Port First Ltd, Jinxin Co, Jinhui Co 59.52 2/25/2013 NGK Spark Plug Co Ltd Eastern Co Ltd/Japan 24.32 5/10/2013 Seven Technologies Ltd Datong PLC 6.81 7/3/2013 Shenzhen Fastprint Circuit Tech Co Ltd Exception PCB Solutions Ltd 13.9 7/19/2013 Shenzhen Deren Electronic Co Ltd Shenzhen Hualin Circuit Technology Co Ltd 11.73 8/6/2013 Kyocera Corp NEC Toppan Circuit Solutions Inc 199.45 8/30/2013 Unimicron Technology Corp Neoconix Inc 3.9 Source: Bloomberg Profitability: Monitor copper, gold and labour costs There are three factors that will impact PCB margins: raw material prices (copper and gold in particular), labour costs and currency movements. Theoretically, a 10% increase in both copper and gold prices is estimated to erode PCB-makers' gross margin by 150-200 bp (though the actual impact is smaller as companies offset increases with efficiency gains). To offset rising labour costs, Taiwan’s major PCB companies have focused on improving worker productivity and more tightly manage headcount. There is not much PCBs can do on currency movement. Most PCB companies use a natural hedge and build an RMB asset position to hedge currency risks.

Taiwan Market Strategy 82 03 December 2013

Figure 213: Both gold/copper prices have come down Figure 214: NTD (against USD) appreciation is another risk 36 (US$/MT) Copper (LHS) Gold (RHS) (US$/oz) 12,000 2,100 35

10,000 1,750 34

8,000 1,400 33 32 6,000 1,050 NT$/US$ 31

4,000 700 30

2,000 350 29

28 0 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 2007/01 2008/01 2009/01 2010/01 2011/01 2012/01 2013/01

Source: TEJ Source: Bloomberg Stocks: Kinsus (stable) and Unimicron (high beta) Relatively, we prefer Kinsus in the Taiwan PCB space, given its technology leadership to capture growing demand from smartphones and PLD. However, we believe easy money has been made, and further outperformance would require overall market bullishness, faster ramp in Apple/PLD and a benign competition landscape in substrates. Unimicron will be the stock to watch in 2014, if the company can execute on the growth opportunities in coreless substrate, ABF-based FC-CSP and FC-BGA. For small cap, we remain constructive on Topoint, given its involving business model (by adding the service business) to secure its market share in core driller bits. Key risks: Currency and a shorter lead time Asian currency appreciation, especially from the RMB and the NTD, is difficult to hedge and will hurt PCB profitability the most. Theoretically, every 1% NTD appreciation against the USD might lead to 10-15 bp gross margin erosion for Taiwan PCBs, and every 1% RMB appreciation against the USD might lead to 15-25 bp gross margin erosion. Most PCB companies use a natural hedge and build RMB asset positions to hedge the currency risks. Another key risk is a shorter lead time, which might lead to lower revenue visibility and higher volatility in utilisation rates and profitability. This might also trigger bigger pricing competition when utilisation rates are lower in the near term, and industry consolidation in the long term.

Taiwan Market Strategy 83 03 December 2013 Financials: Market Weight Sector Research Analysts: Chung Hsu, Michelle Chou Slower bank profit growth While economists are generally expecting slightly better macroeconomic growth in 2014, we believe Taiwan banks will see a substantial earnings growth slowdown in 2014 as rise We expect banks (and in net interest income should be partly offset by the normalisation (decline) of banks' non- financials) to deliver one of interest income that has reached 43% of bank operating income in 2013 from the historical the lowest profit growth average of 30%. Meanwhile, the continued normalisation (rise) of credit cost toward 50 bp among the key sub-sectors in the next two-three years (from 20-25 bp) could represent further headwinds for bank in Taiwan in 2014 earnings growth. In fact, we expect banks (and financials) to deliver the lowest profit growth among the key sub-sectors in Taiwan in 2014 and if we exclude CTCB in our coverage universe, we estimate the sector will see zero profit growth in 2014.

Figure 215: Financials should see the slowest profit growth Figure 216:System loan growth in 2014 CS estimates: 2014E earnings growth Total Corporate SME Consumer Other Foreign 794% 76% 60% 50% YoY % Loans loans loans loans Mortgage consumer currency Gov't 50% Sep-13 3.4% 5.0% 7.9% 1.3% 1.4% 1.2% 11.1% 0.2% 40% 36% 30% 29% 29% 30% 24% Jun-13 2.9% 4.4% 7.0% 1.2% 1.2% 1.3% 9.3% -0.6% 20% 18% 17% 20% 13% 12% Dec-12 2.8% 3.7% 9.3% 0.9% 0.8% 2.9% -1.8% 4.0% 8% 7% 10% 6% Dec-11 5.8% 9.4% 10.6% 0.9% 0.6% 6.5% 11.5% 2.1% 0% Dec-10 6.7% 11.0% 14.7% 1.9% 2.7% 2.9% 27.5% 0.9% -10% -20% Dec-09 1.0% -0.2% 2.1% -0.7% 1.0% -4.3% -1.1% 19.1% Dec-08 2.6% 7.2% 4.4% -1.4% 0.7% -5.6% 8.4% -8.0%

LED Dec-07 2.7% 7.0% 9.5% 1.5% 6.2% -9.5% -4.4% -14.5%

Foundry

Telecom

Backend

Materials

TFTLCD

IC design IC Handsets

Financials

Consumer Healthcare

Automation Dec-06 2.5% 7.7% 8.3% 0.0% 9.8% -16.9% 1.1% -10.6%

Transportation TechHardware Petrochemicals Dec-05 8.3% 8.4% 12.5% 13.2% 12.1% 15.6% -9.6% -7.1% TechComponents Source: Reuters, Credit Suisse estimates Source: CEIC, Credit Suisse research

Figure 217: Export recovery likely to see strength with Figure 218: Non-interest income should normalise better growth in DM and drive FC loan demand (decrease) in 2014 Export growth FC loan growth 60% 8 year average 9M13 additional 80% 50% 60% 1H13 sector average 43% 40% 40% sector historical average 30% 30% 20% 20%

0% 10%

-20% 0%

-40% -10%

First

CHB

Mega

Taishi

Fubon

Jul-99 Jul-04 Jul-09

E.Sun

Cathay

Yuanta

Jan-97 Jan-02 Jan-07 Jan-12

Mar-01 Mar-96 Mar-06 Mar-11

Nov-97 Sep-98 Nov-02 Sep-03 Nov-07 Sep-08 Nov-12

May-00 May-05 May-10

SinoPac

Hua Nan Hua

TaChong Chinatrust Shin Kong Source: IMF, Credit Suisse estimates Source: TEJ, Credit Suisse estimates

Taiwan Market Strategy 84 03 December 2013

Figure 219: Expect credit cost normalisation (rise) to Figure 220: Aggregated TWSE corporate interest continue but not as noticeably with one-off reserve in 2013 coverage remains strong, hence limited systematic risks

(%) (x) Interest coverage ratio 234 240 50 44 207 42 43 39 40 40 40 200 40 37 37 38 37 38 37 167 33 31 32 160 29 30 25 25 23 120 89 92 20 13 80 72 54 10 40 23 23 12 12 11 1 - 0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Jun-09 Jun-12 Jun-08 Jun-10 Jun-11 Jun-13

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

Sep-09 Sep-10 Sep-11 Sep-12 Sep-08 Note: Aggregate of all TWSE listed companies. Note: Aggregate of all TWSE listed companies. Source: TEJ, Credit Suisse estimates Source: TEJ, Credit Suisse Research Improving loan growth capped by modest margin expansion For banks, we do expect to see moderate improvement in loan growth to 6-7% from 3-4%, Expect 2014E loan growth driven by stronger foreign currency loan demand (12-15%) as export recovery is likely to to be driven by FC loan see strength with better growth in developed markets. Hence, we expect banks with larger demand amid a cyclical loan exposure to USD (i.e., Mega/CTBC) to see better loan growth momentum. recovery; yet, sector NIM improvement will likely stay However, margin improvement for banks will stay modest as we believe Taiwan's Central modest Bank will keep its policy rate intact at least until June 2014. Foreign currency loan will likely be the only segment that will see meaningful yield improvement in 1H14, and possibly there could be a slight improvement in domestic corporate loans on the back of much higher market yields. Normalising (declining) non-interest income Non-interest income has been the largest profit growth driver for Taiwan banks in 2013 The sector in aggregate with total contribution increasing from 30-33% of operating income historically to 43%. This could face a 7-10% decline is largely driven by: (1) TMU income from selling FX derivatives to corporates; (2) wealth in non-interest income to management fee income on better bancassurance and mutual fund sales; and (3) trading offset growth from net gains against the backdrop of a better capital market. interest income Even if we hold the view that fees and other non-interest income should continue to outgrow net interest income in Taiwan due to low loan growth/margin and some of the ongoing changes in the market (i.e., addition of RMB to the system and higher penetration of wealth management, etc), we believe the non-interest income to operating income ratio of more than 37-38% is too high in the near term. This means that as non-interest income normalises from 43% in 2013, the sector in aggregate could witness a 7-10% decline in non-interest income to offset growth from net interest income. Credit cost normalisation continues We believe Taiwan banks can justify a long-term credit cost of 50-60 bp (from 100-110 bp For the next two to three since 1998) after taking into account: (1) subdued credit growth in the past five years; (2) years, banks should excess system liquidity that is likely to stay very liquid with moderate QE tapering; and (3) continue to see support from high collateral value as asset prices remain high. normalisation (rise) of credit costs However, for the next two to three years, banks should continue to see normalisation (rise) of credit cost from 20-25 bp in 2013, after taking into account extra provisions that many banks take at year-end. This normalisation process should be facilitated by continued decline of NPL recoveries that we estimate will mitigate credit cost by 10-15 bp.

Taiwan Market Strategy 85 03 December 2013

Insurers: A dip before a rebound Taiwan Insurers have done well in 2013 as expectations for both bond yields and the Insurers' earnings for the sector's earnings were very low at the beginning of the year. However, as we estimate the sector are likely to see a dip sector has priced in a 3% US ten-year treasury yield and earnings for the sector are likely in 2014 (lower fixed income to see a dip in 2014 (lower fixed income gains and a bit higher FX hedging cost), we gains and a bit higher FX believe the sector will remain range-bound for at least the early part of 2014. In the near hedging cost) term, we see sustained capital market strength as a potential catalyst for the sector, although we still see securities brokers as a better play given their lower base vs insurers. Brokers: Rebound from a low base Brokers carried on a lacklustre performance for two consecutive years with the market’s Brokerage profits should average daily turnover at just NT$96 bn (TSE + OTC), versus a ten-year historical average easily improve in 2014 after of NT$120 bn. More importantly, the retail long margin that typically contributes 20-30% to two bad years brokerage profits was also near the lowest level in history, and therefore further depressed brokerage profits and valuations. With the revision of the capital gains tax bill (June 2013) and a better 2014 economic outlook, improvement started towards the year-end 2013. With both turnover/retail long margin having a very low base for two years and the potential policy stimulus ahead of major Mayors and Councils elections in December 2014, we believe brokerage profits could easily improve in 2014. Stocks: Prefer CTBC, Ta Chong, China Life Taiwan and Yuanta CTBC Holding (2891.TW): We continue to like CTBC Holding as we believe the stock's current valuation implies very modest incremental profit contribution from the acquired new businesses (Tokyo Star Bank and Taiwan Life). With underlying business momentum remaining strong, CTBC is still the only Taiwan bank that has the capacity to generate 1% ROA (hence 12-15% ROE) on a consistent basis. The bank's larger USD loan exposure also provides stronger leverage to improving USD loan demand and spread in 2014. The stock is trading at 1.3x and 9.7x FY14E P/B and P/B, respectively. We like Ta Chong Bank (2847.TW) owing to its better top-line momentum and much lower-than-expected credit cost for the next two years. We believe Ta Chong is the only bank under our coverage that will see much lower credit cost in 2014-15 after new management's extra provisioning over the past 18 months. It has the second-highest reserve-to-loan ratio of 1.4% (versus 1.2% for the sector, and support from consumer NPL recoveries of NT$700-800 mn/year. Core profits should be sustained in 2014 with the bank resuming asset growth after it is done with the adjustment on its unsecured loan portfolio in 3Q13. This should offset normalising non-NII that we expect to see for the sector in 2014. Its compelling valuation of 8.2x FY14E P/E and 0.80x FY14E P/B (or a 25% discount to peers) versus a 10% ROE that we expect to sustain for the next two years should provide downside protection for the stock. The potential Carlyle exit and M&A upside in the medium term remain an optionality for the stock While we are more conservative on Taiwan insurers' outlook in 2014, China Life Taiwan (2823.TW) remains our top pick among Taiwan insurers as we believe it is one of the very few Taiwan insurers with a profitable underlying business. Its much smaller legacy book and lower cost of liability should enable the company to continue to both lower its cost of liability and improve recurring yields faster than most of its peers. Its China JV also provides a long-term growth upside for shareholders, in our view.

Taiwan Market Strategy 86 03 December 2013 Cement: Overweight Sector Research Analyst: Jeremy Chen Demand Given a lean inventory level and seasonal demand pick-up in the fourth quarter, cement Looking into 2014, despite prices have risen in most regions in recent weeks, especially in southern, central and our China team forecasting southwest. Specifically, cement prices were hiked by Rmb40-55/t in Jiangxi, Hunan, Fujian relatively stable demand and Hainan, Rmb25/t in GD/GX, and Rmb10-15/t in YZD. On a relative basis, we estimate growth, we expect better the cement price is Rmb63/t higher than in 3Q13 for southern China, Rmb45/t better for pricing environment on the eastern and central, while northern regions in the range of +/-Rmb15/t, based on spot back of better supply prices quoted by the China Cement Association. Looking into 2014, although our China discipline team forecasts relatively stable demand growth, we expect a better pricing environment on the back of better supply discipline. As for the Taiwan market, we expect cement demand to grow by a modest 1% to 12.7 mn tonnes in 2014 due to a lukewarm private construction market.

Figure 221: Regional cement prices (ex-VAT)—Southern China (especially GD/GX) saw the biggest price rebound from the trough in 3Q12

Source: China Cement Association, CEIC, Credit Suisse estimates

Figure 222: China cement industry supply-demand outlook Cement 2009A 2010A 2011A 2012A 2013E 2014E Output mn tonnes 1,644 1,882 2,099 2,210 2,271 2,303 YoY % 15% 14% 12% 5% 3% 1% Demand mn tonnes 1,628 1,866 2,048 2,168 2,256 2,288 YoY % 17% 15% 10% 6% 4% 1% Net export mn tonnes 16 16 11 12 15 15 Source: Credit Suisse estimates

Taiwan Market Strategy 87 03 December 2013

Figure 223: Flattish domestic demand growth in Taiwan Figure 224: Government spending on infrastructure – Taiwan mn MT 400 40% 25 20% 350 30% 15% 20 10% 300 20% 15 5% 250 10% 0% 200 0% 10 -5% 150 -10% -10% 5 100 -20% -15% 0 -20% 50 -30%

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2013E 2014E Total Shipment Total Domestic Demand Major infrastructure investment YoY (%; RHS) Total demand - YoY growth (%) Source: Taiwan Cement Manufacturers' Association, Credit Suisse Source: Executive Yuan, Credit Suisse estimates estimates Supply Our China team forecasts 1% capacity growth in 2014 amidst the Chinese government’s determination to fight excessive capacity. This is much slower than the 5%/3% growth in 2012/13, and a CAGR of 15% during 2007–11. PRC cracking down outdated capacities, again In late July, the Chinese government unveiled its plan to eliminate 92.8 mn tonnes outdated cement capacities, or 3% of China’s total cement supply. This is 27% higher than the previous target of 73.5 mn announced in April. We believe the continuous exit of outdated capacities and more stringent environmental standards for newly added production lines should help to support cement pricing into 2014.

Figure 225: New capacity by region—we expect limited Figure 226: Total cement capacity in China supply addition in 2014 mn tons 3,500 20% 3,000 2,500 15% 2,000 10% 1,500 1,000 5% 500 - 0% 2008A 2009A 2010A 2011A 2012A 2013E 2014E Capacity yoy growth (%; RHS)

Source: China Cement Association, Credit Suisse estimates Source: China Cement Association, Credit Suisse estimates Profitability Strong cement ASP recovery Both TCC and ACC have witnessed strong ASP rebound across their production bases lately, which drove significant GP/ton recovery. For example, TCC has witnessed cement prices at GD/GX surging 58%/36% to hit a three-year high since June, while ACC is also expecting a 10-15% QoQ ASP hike in 4Q13.

Taiwan Market Strategy 88 03 December 2013

Coal price The coal price has retreated from US$98/t to a YTD average of US$84/t and we expect it to stay relatively stable throughout 2014 on a balanced supply-demand outlook.

Figure 227: TCC—GD/GX cement price surged 58%/36% Figure 228: ACC already hiked cement price by 19/14% in since June Wuhan and Jiangxi since end of September Rmb/ton Rmb/ton 400 500

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Figure 229: Coal price trending lower in 2013 (US$/MT) China and Regional Coal Pricing Trend (6,000 kcal/kg) 200

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Source: CEIC, Bloomberg Stock pick: Taiwan Cement and Asia Cement

Taiwan Cement We like Taiwan Cement (TCC) given (1) its larger We like Taiwan Cement (TCC) given: (1) its larger scale (56.5 mn t; No. 6 in China) and scale (56.5 mn t; No. 6 in (2) strong pricing power in Guangdong/Guandxi areas (48% of total China capacity); and China), (2) strong pricing (3) as Hoping Power Plant and Hoping Harbour continue to be stable profit contributors. power in GD/GX areas (48% China operation of total China capacity) and (3) Hoping Power Plant and After the latest round of ASP hike of Rmb30/20 in GD/GX in early November, TCC’s Hoping Harbour continued cement prices have reached a three-year high of Rmb340-380/t. Since June, cement to be stable profit prices at GD/GX have surged 58%/36% as inventory levels in GD/GX are low at 20-40%, contributors. much lower than 50-60% in the same period last year, according to our regional team’s recent visits. We project TCC’s GP/ton could rise from 3Q13’s Rmb58 to Rmb70, thanks to strong cement pricing and stable coal costs. In our view, TCC is a major beneficiary as the

Taiwan Market Strategy 89 03 December 2013 cement industry’s fundamentals improved on better supply discipline, pricing coordination, and steady recovery in infrastructure demand. 3Q13 recap TCC’s 3Q13 results beat our street-high numbers by 12% and we note that it is the highest quarterly income for TCC since 3Q07. Despite solid cement operations, profit from Hoping Power Plant amounted to NT$1.3 bn, up 30% YoY from 3Q12’s NT$1 bn. TCC indicated that Hoping Power Plant was able to maintain a higher operating rate due to fewer typhoons in Taiwan.

Figure 230: TCC has 56.5 mn t cement capacity in China Figure 231: TCC to better leverage ASP recovery with larger operating scale in China Rmb 80 70 60 50 40 30 20 10 0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E

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

Figure 232: 3Q13 result—the highest quarterly income since 3Q07 (NT$ mn) 3Q13 2Q13 QoQ 3Q12 YoY 9M13 9M12 YoY Total sales 30,107 28,670 5.0% 29,480 2.1% 82,891 86,681 -4.4% Gross profit 7,054 5,622 25.5% 4,081 72.9% 15,800 11,663 35.5% Operating profit 5,911 4,589 28.8% 3,163 86.9% 12,526 8,526 46.9% Pre-tax profit 6,518 4,609 41.4% 3,160 106.3% 13,468 8,883 51.6% Net profit 3,594 2,587 38.9% 2,008 79.0% 7,594 5,942 27.8% EPS 0.97 0.70 38.9% 0.54 79.0% 2.06 1.61 27.8% Margin Gross margin 23.4% 19.6% 13.8% 19.1% 13.5% Operating margin 19.6% 16.0% 10.7% 15.1% 9.8% Net margin 11.9% 9.0% 6.8% 9.2% 6.9% Source: Company data Asia Cement We also like Asia Cement as: (1) the cement price has bottomed out in 3Q13, (2) a 27% We also like Asia Cement capacity growth in late 2013 will likely drive volume growth for 2014, and (3) improving as: (1) the cement price has operations at its major subsidiaries U-Ming Marine and FENC. bottomed out in 3Q13, (2) a 27% capacity growth in late Cement price bottoming out in 3Q13 2013 will likely drive volume After 5% QoQ cement ASP decline in 3Q, we are upbeat on 4Q13 pricing recovery given growth for 2014, and (3) the lean inventory level and improving demand. ACC already hiked cement prices by improving operations at its 19%/14% in Wuhan and Jiangxi, respectively, since the end of September and major subsidiaries U-Ming management looks to raise it by Rmb50/t (15%) in Chengdu in November, thanks to the Marine and FENC lean inventory level and strong seasonal demand in 4Q. As a result, we expect 4Q13 GP/ton to rebound to Rmb70/ton, the highest since 2011.

Taiwan Market Strategy 90 03 December 2013

Capacity addition to drive 2014 growth ACC has started its new no.5 production line at Jiangxi. It will ramp up another line by the year-end. These two lines represent 27% growth in ACC's total capacity (from 22 mn to 28 mn t/year). We expect ACC China to enjoy 21% volume growth for 2014. Improving operation at U-Ming Marine and FENC U-Ming Marine contributed NT$167 mn profit, surpassing 1H13’s NT$145 mn on better dry bulk demand. We forecast a NT$110 mn profit for 4Q13 as BDI pulled back to 1,500 after reaching the recent high of 2,000 in October. FENC also posted NT$354 mn in profit contribution, or a 61% YoY increase. We expect better earnings visibility on FENC on better PTA outlook and polyester demand for 2014.

Figure 233: We expect 4Q13 GP/ton to rebound to Figure 234: ACC already hiked cement prices by 19/14% Rmb70/ton, the highest since 2011 in Wuhan and Jiangxi since end-September 80 Rmb/ton 70 500 60 450 50 400 40 350

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Aug-13 Dec-12 GP/ton (Rmb) May-13 Chengdu Jiangxi Wuhan Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Valuation metrics Company Ticker Rating Price TP Up/dn Year EPS Chg(%) EPS EPS grth (%) P/E (x) Div. yld ROE P/B (prev. Chg to TP (%) (%) (x) rating) Local Target (%) (%) T T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+1 T+1 Taiwan Cement 1101.TW O 46.85 48.20 0 3 12/12 0 0 2.66 3.13 27 18 17.6 15.0 4.1 13.0 1.7 Asia Cement 1102.TW O 39.30 44.00 0 12 12/12 0 0 2.41 2.81 24 16 16.3 14.0 4.3 11.8 1.4 Anhui Conch 0914.HK N 30.30 25.80 0 (15) 12/12 0 0 1.71 1.64 43 (4) 13.9 14.5 1.5 17.3 2.2 Shanshui 0691.HK N 3.05 3.90 0 28 12/12 0 0 0.30 0.37 (44) 23 8.0 6.5 1.5 9.6 0.7 CNBM 3323.HK U 8.68 4.80 0 (45) 12/12 0 0 0.84 0.78 (19) (7) 8.2 8.8 1.2 14.0 1.1 Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates Risks Key risks to our bullish view on TCC and ACC include: (1) larger-than-expected ASP decline during CNY shutdown, (2) worse supply discipline, (3) higher coal cost and (4) weaker-than- expected recovery at subsidiary operations, such as TPCC, U-Ming Marine and FENC.

Taiwan Market Strategy 91 03 December 2013 Petrochemical: Underweight Sector Research Analyst: Jeremy Chen Supply-demand After tough business conditions over the past 24 months, it is difficult to believe there will Operating rate for ethylene be more strong years ahead in the ethylene market, especially closer to the end of the to rise by 120-200 bp year when the market is supposed to be seasonally muted. However, we should not forget annually during 2014-16 that this is a cyclical business, that we are likely at the bottom of the current cycle and that in the next few years it could produce significant profits. One can easily forget that the industry is notorious for announcing "plans" for new projects that either are a year behind (sometimes a few years) or never built, especially in times of an economic depression when demand is the more difficult part to forecast. We see global operating rates for ethylene rising by 120-200 bp annually during 2014-16 (Figure 235). This implies potential shortages by late 2015/early 2016 and perhaps earlier. We find comfort in our projections, given that global capacity was in the order of 160 mn MT/year in 2014 and the trend growth in demand is 4-5% per year, equivalent to five to six world-scale plants (1 mn MT/year) of new demand each year. It takes at least 36 months to build a grassroots world-scale facility and six months to go through commissioning and commercial start-up. So, if a plant is not under construction by now, it cannot affect supply until at least 2018. Our comprehensive review of various commodity chemicals in Asia suggests increasingly We prefer MEG and dislike attractive risk-reward for a few products including MEG with a clear-cut opposite seen in PX PX, while the general trend appears modestly constructive, if not compelling, on a 12-24- month time horizon (Figure 236 and Figure 237). However, the near-term outlook seems bleak, for an unfavourable seasonal pattern closer to winter.

Figure 235: Global ethylene capacity utilisation, 1990-2015E

Source: Credit Suisse estimates

Taiwan Market Strategy 92 03 December 2013

Figure 236: Olefin supply additions / shutdowns in 2014

Source: IHS, Datastream, Credit Suisse estimates

Figure 237: Olefin supply additions / shutdowns in 2015

Source: IHS, DataStream, Credit Suisse estimates

Figure 238: PX exposure by company Figure 239: MEG exposure by company

Source: Bloomberg, Reuters, company data, Credit Suisse estimates Source: Bloomberg, Reuters, company data, Credit Suisse estimates

Taiwan Market Strategy 93 03 December 2013

Stock pick: Nanya Plastics We see a renewed uptrend for MEG, driven by a lack of new capacity required to Nanya Plastics has the accommodate normal demand growth. We forecast MEG spread to grow 47% from highest MEG exposure US$278/ton to US$408/ton as operating rate tightens from 86% in 2013 to 91% by 2015. (27% of revenue) in our Nanya Plastics, as one of the largest MEG producers (~6% market share) in the world, regional coverage universe stands to benefit from this trend. With 1.44 mn t/year of MEG capacity, MEG accounts for 27% of Nanya Plastics’ total revenue. This represents the highest MEG exposure within our regional coverage universe. Our analysis shows that Nanya Plastics’ EBIT could rise by 43% if the MEG spread increases from 2012 average to a five-year quarterly high. DRAM no longer a drag The turnaround in Nanya Tech has removed a key overhang on Nanya Plastics as investors were previously concerned over the risk of more capital injections into and a prolonged profit drag. In view of the improved DRAM outlook, we now forecast Nanya Plastics to recognise NT$3.2 bn/NT$5.3 bn gain from Nanya Tech in 2013/14E, up from no profit contribution.

Figure 240: We forecast MEG spread to increase 47% Figure 241: MEG operating rate to hit 91% by 2015 from 2013 to 2015

Source: Datastream, Credit Suisse estimates Source: Credit Suisse estimates Valuation metrics Company Ticker Rating Price TP Up/dn Year EPS Chg(%) EPS EPS grth (%) P/E (x) Div. yld ROE P/B (prev. Chg to TP (%) (%) (x) rating) Local Target (%) (%) T T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+1 T+1 Formosa Plastics 1301.TW N 77.80 75.00 0 (4) 12/12 0 0 3.12 4.16 36 33 24.9 18.7 1.5 10.5 2.1 NYPC 1303.TW O 64.80 75.00 0 16 12/12 0 0 3.22 4.50 499 40 20.1 14.4 0.5 11.3 1.9 FCFC 1326.TW N 83.40 78.00 0 (6) 12/12 0 0 4.56 5.00 292 10 18.3 16.7 0.8 14.7 1.9 FPCC 6505.TW U 80.70 69.00 0 (14) 12/12 0 0 2.85 3.84 900 35 28.3 21.0 0.3 12.4 3.3 Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM Source: Company data, Credit Suisse estimates Risks Key risks to our view on Nanya Plastics include: (1) DRAM demand slump on a prolonged tech weakness; (2) faster-than-expected ramp-up of China’s coal-to-olefin projects, (3) feedstock cost fluctuations, and (4) weaker-than-expected PCB demand to dampen Nanya Plastics' CCL operation.

Taiwan Market Strategy 94 03 December 2013 Steel: Underweight Sector Research Analyst: Jeremy Chen 2014 outlook We believe the continued weakening yen will reshape the competitive landscape of the Weakening yen intensifies Asia steel sector, making Japan potentially the most competitive producer, particularly in competition in the export the Asia export market and the high-end flat steel segment. We believe the negative market impact of incremental steel supply from Japan on Asia’s regional steel price will be higher than expected, especially in this weak demand environment. If the yen further moves from 95 to 120, we estimate Japan could gain an extra US$50- 65/t cost advantage versus its peers in the Asia steel export market, all else being equal. We think the much-improved export profitability for Japan (which may nearly double if the yen goes to 120 assuming same steel pricing in our estimates), makes it inevitable for Japanese mills to become more aggressive in selling incremental available volume to the export market. The incremental steel supply from Japan, potentially 11-22 mn t based on 90-98% capacity utilisation by our estimates, although it is just 1-2% of the total Asia market, is equal to 11-23% of the intra-Asia steel trade, 22-45% of the North Asia exports to South Asia, and 50-100% of the Asia auto sheet segment. While exports to south Asia are where the competition will likely intensify, we believe the impact will feed through to the rest of the Asian steel market in the end. We see further downward pressure on Asia's flat steel pricing/margin, with Japan competing for market share against other top Asia We see further downward exporters such as China, Korea and Taiwan. Among all these, we believe Chinese exports pressure on Asia's flat steel face more challenge, given their floored margin and appreciating currency outlook. pricing/margin At the country level, we see direct benefits in higher export volumes and export margins for Japan, and negative implications for China, Korea, Taiwan and, moderately, India. We conducted a proprietary survey of top steel mills in Asia with 15-30% of sales exposure to Japanese competition. Key takeaways suggest that the steel market is in “perfect competition”, as end-users of steel remain price-sensitive, in particular in the export market, where a moderate incentive pricing can lead to customers switching. Although most mills have not made changes in strategy, all believe they will follow price cuts to protect market shares. On the other hand, Japanese mills are more confident about their cost competitiveness; some believe it is “the lowest cost in Asia”. While they plan to “maintain price and leave sales volume unchanged”, the incremental focus is now on South Asia, where they feel confident of gaining share in the sheets and plates segments.

Taiwan Market Strategy 95 03 December 2013

Figure 242: Asia steel sector supply/demand forecasts Unit 2008 2009 2010 2011 2012 2013E 2014E 2015E Capacity China mn tonnes 665 718 800 900 926 924 922 932 Japan mn tonnes 130 130 132 132 131 131 131 131 Korea mn tonnes 56 59 63 72 72 74 78 78 India mn tonnes 60 66 75 78 85 89 96 103 Taiwan mn tonnes 20 16 20 23 23 25 25 25 Subtotal mn tonnes 931 989 1,090 1,205 1,237 1,243 1,252 1,269 Output China mn tonnes 512 577 639 696 717 734 736 735 Japan mn tonnes 119 88 110 108 107 110 115 118 Korea mn tonnes 60 57 66 72 73 74 77 77 India mn tonnes 55 55 67 70 73 79 84 90 Taiwan mn tonnes 19 15 19 22 20 21 21 21 Subtotal mn tonnes 765 792 901 968 990 1,018 1,033 1,041 Capacity utilisation China % 80% 83% 84% 82% 79% 79% 80% 79% Japan % 91% 68% 84% 82% 81% 84% 88% 90% Korea % 108% 99% 108% 107% 101% 101% 101% 99% India % 94% 87% 95% 92% 90% 91% 91% 90% Taiwan % 92% 83% 106% 102% 87% 88% 84% 84% Subtotal % 82% 83% 87% 84% 81% 82% 83% 83% Domestic demand China mn tonnes 467 575 613 663 675 696 709 718 Japan mn tonnes 67 46 56 56 55 56 57 58 Korea mn tonnes 50 45 52 56 55 56 57 58 India mn tonnes 55 55 67 70 73 79 84 90 Taiwan mn tonnes 17 11 18 18 18 18 19 19 Subtotal mn tonnes 656 732 806 863 876 905 926 943 Net imports China mn tonnes (45) (2) (26) (33) (42) (37) (27) (17) Japan mn tonnes (30) (30) (36) (33) (34) (37) (39) (41) Korea mn tonnes (9) (12) (14) (16) (18) (19) (20) (19) India mn tonnes 2 1 4 3 2 3 3 3 Taiwan mn tonnes (2) (4) (2) (4) (2) (3) (2) (2) Subtotal mn tonnes (84) (47) (74) (83) (94) (93) (85) (76) Source: Company data, Credit Suisse estimates

Taiwan Market Strategy 96 03 December 2013

Stock call: China Steel Looking into 4Q13, we expect sales volume to drop to ~5% to 2.2 mn tns as China We raise CSC’s 2013/14E Steel has shut down its no.4 blast furnace for a 158-days scheduled maintenance. On EPS by 19%/1% the cost side, we expect coal input cost to increase by about 5% QoQ due to the respectively and tweak our recent increase in regional prices. Iron ore costs, on the other hand, should remain target price to NT$23.1 steady vs the 3Q13 level. China Steel has announced that it will keep its contract price flattish for December; hence, we expect ASP to stay largely stable. Another headwind for 4Q13 would be the expected increase of NT$160 mn in electricity cost, after the government announced hike became effective from October. We recently raised our 2013/14 EPS by 19%/1% on better-than-expected 3Q13 and tweaked our target price from NT$22.18 to NT$23.1 as we rolled over to 2014E P/B. However, on the back of China’s overcapacity risk and weak Taiwan export growth, we believe the risk-reward on China Steel is still unattractive. The stock’s valuation at 1.3x 2014E P/B vs regional peers’ 0.7x still appears stretched.

Figure 243: CSC—3Q13 results overview Figure 244: China Steel kept contract price flattish for 4Q13

Source: Company data Source: Company data Risks Key upside risks to our view on China Steel include: (1) a stronger-than-expected recovery in global macro outlook; (2) China government implements tougher stance on shutting down obsolete steel capacities, (3) sharp drop in feedstock costs, and (4) sharp appreciation of the Japanese yen.

Taiwan Market Strategy 97 03 December 2013 Consumer: Underweight Sector Research Analyst: Jeremy Chen CVS stood out amid economic downturn CVS as a percentage of Dragged by sluggish economic growth in Taiwan, private consumption growth has slowed retail sales continued to rise down from an average of 4.3% in 2010-11 to 1.9% in 1H13, which has negatively from 20% in 1999 to 27% in impacted retail sales of all formats. However, convenience store (CVS) as a percentage of 9M13, which was retail sales continued to rise from 20% in 1999 to 27% in 9M13, which in our opinion, was attributable to: (1) extensive attributable to: (1) extensive networks, (2) transition into larger format stores, and (3) networks, (2) transition into various value-added services such as ticket booking and receipt collecting. In particular, larger format stores, and (3) per store daily sales (PSD) have grown significantly, from ~NT$59k in 2001 to ~NT$74k by various value-added 2012, while the total store number has also increased from 6,300 to approximately 10,000. services

Figure 245: Private consumption has slowed down in the Figure 246: …which has negatively impacted all formats past two years… of retail operations NT$bn 20% 2,300 12% 15% 10% 2,100 10% 8%

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1,100 -6% Dept. store Supermarket CVS Circulate Trade Other Private consumption YoY Source: CEIC Source: CEIC

Figure 247: CVS as % of retail rose from 20% in 1999 to Figure 248: CVS - per store daily sales grew 26% in the 27% in 9M13 past decade 100% 80,000 90% 21 20 19 17 17 18 17 17 16 16 16 16 16 15 16 80% 75,000 20 18 17 17 17 17 17 17 17 17 17 70% 18 20 20 19 60% 70,000 25 26 26 25 25 25 25 26 27 50% 20 20 22 23 24 23 65,000 40% 16 14 14 13 13 13 13 13 14 14 15 15 15 15 15 30% 60,000 20% 25 25 25 27 26 27 28 27 28 27 27 27 28 27 25 10% 55,000 0% 50,000 2001 2012

Dept. store Supermarket CVS Circulate Trade Other Per store daily sales (NT$)

Source: CEIC Source: CEIC, Credit Suisse Research

Taiwan Market Strategy 98 03 December 2013

Improved outlook for 2014 Our economist Christiaan Tuntono recently revised up Taiwan's 2014 GDP growth forecast to 3.2%, from 3% before, to reflect the improved outlook on the US and global economy in 2014. In the latest numbers, we forecast private consumption growth to accelerate again from 2013’s trough of 1.3% to 1.9%/2.2% in 2014/15. We also note that there is a positive correlation between CVS sales and GDP growth (Figure 249). As such, we expect stronger CVS growth in 2014, thanks to better a macroeconomic environment and recovering consumer confidence.

Figure 249: Positive correlation between CVS sales and Figure 250: We forecast 3.2% GDP growth for 2014 on GDP growth improved outlook on US and global economy 20% (%) 12.0 10.7 15% 10.0 10% 8.0 6.2 6.0 5% 5.4 6.0 4.7 4.0 0% 4.0 3.2 2.0 1.3 -5% 2.0 0.7 -10% - (2.0) -15% (1.8)

(4.0)

1Q00 4Q00 3Q01 2Q02 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13

GDP growth (%) CVS sales growth (%)

Source: CEIC, MoEA Source: MoEA, Credit Suisse estimates

Figure 251: We are raising our 2014 forecasts Figure 252: Recovering consumer confidence 100 90 80 70 60 50 40 30 20 10 0

Consumer confidence index

Source: Directorate-general for Budget, Accounting and Statistics, Source: CEIC Credit Suisse estimates

Taiwan Market Strategy 99 03 December 2013

Stock call: PCSC We like PCSC for: (1) its GPM/OPM expansion story driven by its on-going transition into large stores and increasing private label brand (PL) contribution, (2) solid non-CVS operations, especially Shanghai Starbucks and Philippine 7-11, and (3) established leadership in Taiwan consumer space. Margin expansion story We forecast PCSC’s OPM to expand to 5.2%/5.4% in 2013/14 on the back of ongoing transition into large stores and increasing PL contribution. As of 3Q13, large format stores represent 58.6% of its total 4,886 stores. PCSC aims at a 90% large store ratio while adding 50 stores per annum. The large store format, according to management, generates 3-5% higher profit than traditional ones. In addition, contribution from PL picked up quickly from 16% in 2007 to 31% as of 3Q13, which enjoys a 5-10 pp GPM premium to non-PL merchandise. Management expects it to reach 50% in the long run. Solid non-CVS operations Shanghai Starbucks and Philippine 7-11 are the two brightest stars among PCSC’s subsidiaries. Shanghai Starbucks reported over 40%/80% YoY sales/profit growth in 3Q13 as it expanded into the untapped Jiangsu and Zhejiang markets, where landlords (mall/department stores) offer zero-rent in the first year to help attract traffic with Starbucks’ strong brand equity. Therefore we expect strong operating leverage to continue as PCSC targets growing total stores from 327 at end-2012 to 427/547 by end of 2013/14. Philippine 7-11 also posted 30%/80% YoY sales/profit growth in 3Q13. We note that OPM has turned profitable since 2012 and we expect it to pick up gradually toward parent Taiwan 7-11’s 4-5% in the long run, thanks to increasing economies of scale and its dominant market share (over 50%) locally. We expect total store count to grow at a 10- 15% pace per annum, from 829 at end-2012. We estimate a combined sales contribution by Shanghai Starbucks and Philippine 7-11 to pick up from 10% in 2013 to 15% by 2015. Elsewhere, Cosmed and President Pharmaceutical also witnessed 30% profit growth in 3Q13, while Shanghai 7-11 also saw losses narrowing from NT$100 mn/quarter in 2012 to NT$70 mn/quarter as PCSC shut down more unprofitable stores.

Figure 253: Sum-of-the-parts valuation—PCSC (NT$ mn) Valuation Target Valuation Valuation Weighting method Multiple per share (%) Core business 201,719 194.0 73.3% Taiwan CVS operation 25x 2014E P/E 25.0 197,321 189.8 71.7% Starbucks Taiwan 20x 2014E P/E 20.0 4,398 4.2 1.6% Overseas 30,055 28.9 10.9% Starbucks China 25x 2014E P/E 25.0 18,433 17.7 6.7% Shandong Uni-Mart 20x 2014E P/E 20.0 1,375 1.3 0.5% 7-Eleven Philippines 20x 2014E P/E 20.0 7,765 7.5 2.8% 7-Eleven Shanghai, China 1x 2014E P/B 1.0 383 0.4 0.1% Other 1x 2014E P/B 1.0 2,100 2.0 0.8% Other LT investments 23,530 22.6 8.6% Net cash 19,715 19.0 7.2% Shares outstanding 1,040 FV 275,018 FVPS (NT$) 264.5 100% Source: Company data, Credit Suisse estimates

Taiwan Market Strategy 100 03 December 2013 Telecoms: Underweight Sector Research Analysts: Chate Benchavitvilai Mid- and low-end smartphones to still drive growth… Headline smartphone penetration in Taiwan reached ~50% of the postpaid subscriber base as of the end of September 2013, and we still expect this to continue to increase steadily into FY14E as smartphones now account for as much as 89-97% of big three operators’ (CHT, TWM and FET) total new handsets sold in 3Q13 (compared with 67-82% in 3Q12.) Given the higher penetration level (suggesting the higher end is already fully penetrated), mid- and low-end smartphones are already playing an important role in driving smartphone growth (e.g., mid- to low-end phones accounted for ~76% of CHT’s total handsets sold in 3Q13) and we expect this trend to continue into FY14. While ARPU from mid- to low-end smartphones would be lower than that from high-end phones, subsidies would also be lower, and higher penetration should help contribute to both revenue and profit growth.

Figure 254: Smartphone penetration projection

20.0 80.0% 67.6% 18.0 70.0% 60.6% 16.0 60.0% 14.0 49.9% 12.0 50.0% 37.2% 10.0 40.0% 8.0 17.3 21.9% 15.2 30.0% 6.0 12.3 20.0% 4.0 9.2% 9.0 2.0 5.2 10.0% 2.1 - 0.0% 2010 2011 2012 2013E 2014E 2015E

Estimated "Active" SWD (mn) Penetration of Postpaid base Penetration of Total base

Source: Company data, Credit Suisse estimates We also note that not all subscribers with smartphone handsets are using data currently. For example, while FET’s headline smartphone penetration was 57% of the postpaid base as of Sep-13, only ~77% of these are using data services, i.e., a “real” smartphone penetration of ~44%, and could provide room for growth as these users start using data (although we suspect would be on the mid- to lower-end plans at least in the near term). …and we expect 4G launch in 2H14 After 393 rounds of bidding, 4G auction in Taiwan finally concluded on 30 October 2013. Figure 255 summarises the auction result. The final price was NT$118.7 bn, or a 230.5% increase from the floor price, much higher than what the market expected before the auction. The three incumbents of course won the majority of the spectrum. CHT spent NT$39.1 bn (5% of market cap) for 2x35 MHz spectrum in 900 MHz and 1,800 MHz including the most sought-after C5 block in 1,800 MHz while FET spent NT$31.3 bn (15% of market cap) and TWM spent NT$29.0 bn (9% of market cap) for 2x30 MHz spectrum in 700 MHz and 1,800 MHz bands. CHT noted during its 3Q13 conference call on 1 November 2013 (a few days after the auction concluded) that it believed it now has an advantage over its peers in 4G, given

Taiwan Market Strategy 101 03 December 2013 that: (1) it acquired the C5 block (2x15 MHz in 1,800 MHz) which is a larger block and is currently unused (allowing it to launch 4G services sooner, and with better ecosystem) and (2) other spectrum blocks it acquired are currently occupied by itself thus allowing it to continue to maintain 2G services and offering 4G at the same time. CHT expects to launch 4G 1,800 MHz in 2H14E, and will focus its rollout in six major cities first.

Figure 255: Taiwan 4G auction results Company Unit code Range of frequencies Bandwidth Floor price Final price Change (%) ("paired") (NT$B) (NT$ bn) Upload Download CHT B2 895-905MHz 940-950MHz 2x10MHz 2.1 3.3 58.1% C2 1725-1735MHz 1820-1830MHz 2x10MHz 1.4 10.1 619.3% C5 1755-1770MHz 1850-1865MHz 2x15MHz 3.0 25.7 756.2% 2x35MHz 6.5 39.1 501.2% TWM A4 733-748MHz 788-803MHz 2x15MHz 6.9 10.5 52.0% C1 1710-1725MHz 1805-1820MHz 2x15MHz 2.2 18.5 742.0% 2x30MHz 9.1 29.0 218.8% FET A2 713-723MHz 768-778MHz 2x10MHz 4.6 6.8 48.0% C3 1735-1745MHz 1830-1840MHz 2x10MHz 1.4 12.8 813.6% C4 1745-1755MHz 1840-1850MHz 2x10MHz 1.4 11.7 736.8% 2x30MHz 7.4 31.3 323.2% Ambit (Hon Hai Group) A3 723-733MHz 778-788MHz 2x10MHz 4.6 6.8 48.0% B3 905-915MHz 950-960MHz 2x10MHz 2.1 2.4 12.9% 2x20MHz 6.7 9.2 37.0% APT A1 703-713MHz 758-768MHz 2x10MHz 4.6 6.4 39.5% Star of Taiwan (Ting Hsin Group) B1 885-895MHz 930-940MHz 2x10MHz 1.6 3.7 128.4% Total 2x135MHz 35.9 118.7 230.5% Source: NCC We note though that TWM is also expected to launch 4G services in both 700 MHz and 1,800 MHz in FY14E. For 700 MHz, while the ecosystem is much less developed compared with 4G in 1,800 MHz, TWM's management noted that (1) the ecosystem is improving quickly, with vendors expecting greater availability of both equipment and handsets in FY14E and (2) TWM has advantage given its larger 2x15 MHz spectrum (50% faster than competitors in theory). For 1,800 MHz, given that TWM won C1 (now occupied by FET) while FET won C4 (now occupied by TWM), both parties must negotiate over the next six months in order to be able to launch 4G services on 1,800 MHz (e.g., spectrum swap). Overall, while CHT might have some advantages over TWM and FET, we expect the actual timing of 4G services launch for all three operators to be quite close to each other in 2H14E given that: (1) one of the key purposes of 4G services launch was to introduce tiered-pricing, and we believe the shift in tariff structure, particularly towards the upside, will be more effective if all key players adjust together or not too far apart, (2) we expect initial 4G launch to only cover key areas (e.g., CHT already stated that it would focus on six major cities first) and (3) 4G launch timing is also important for marketing purposes, and thus TWM and FET would not want to fall too far away behind CHT on launch timing. We note that neither of the potential new entrants won 1,800 MHz nor the bigger 2x15 MHz block in 700 MHz, which, in our view, offer a better chance to become market challenger. While Hon Hai and APT did win 2x10 MHz in 700 MHz which arguably has an advantage in covering larger areas/penetrating building, its ecosystem (e.g., equipment, handsets) would still take time to develop while relatively limited amount of spectrum would also mean service quality and speed would be at a disadvantage relative to incumbents. For both Hon Hai and Ting Hsin (which subsequently also acquired existing 3G operator Vibo), 900 MHz spectrum would only become available to them after Jun-17, which means they could be late in launching services relative to the incumbents. While

Taiwan Market Strategy 102 03 December 2013 new entrant risk is now lower, in our view, we do note that any effort to enter the market by a well-capitalised new entrant(s), whether successful or not, would still be negative for incumbents. The real challenge has just begun We reiterate our view that higher-than-expected spectrum cost is negative for the sector, as it does not automatically result in higher revenues. Mobile service revenues are based on tariff level and structure, which in our view is mainly determined by competitive pressure (and in Taiwan, some regulatory pressure) and not the cost itself. The real challenge, and our underlying concern about the sector, is therefore how these incumbents would be able to improve the monetisation of increasing mobile data usage in order to both offset the impact from higher cost and deliver medium-longer term growth. As highlighted by FET, the average smartphone data usage on its network is now closer to ~3 GB/month, doubled YoY, but 70% of its smartphone users are on unlimited plans. This is of significant concern, given that these subscribers are not contributing any incremental revenue despite consuming more network resources from higher data usage.

Figure 256: Average smartphone data usage increasing… Figure 257: …but poor monetisation means limited growth

3500 40 Effective mobile monthly fee* for different data usage level (US$/mth) ~3GB 35 3000

2.5GB 30 2500 25 2GB 2GB 2000 20 1.5GB 1500 1.2-1.5GB 15

~900MB ~800MB ~1GB ~1GB 10 1000 700-800MB 700-800MB 5 400-500MB 500 - Non-data users Low Low-Medium Medium Medium-high High volume 0 CHT (bundled) TWM (bundled) FET (bundled) 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 Source: FET, average monthly smartphone data usage * Adjusted for handset subsidies, Low = 250MB, Low-mid = 700MB, Mid= 1GB, Mid-high = 2.5GB, high = 4GB. Source: Company data, Credit Suisse estimates We note that all the three incumbents have widely discussed an introduction of tiered- pricing for 4G when they launch their services (and stated that they have already started building in tiered pricing in their internal budgeting/4G spectrum bid). The comments so far also suggested that the government and regulator are also supportive of the plan. The introduction of tiered pricing, of course, would be positive for the sector but we would highlight two things. Firstly, the real impact would greatly depend on details and implementation of tiered-pricing—e.g., What would the new data allowance be? Would (and by how much) the monthly fee be higher/lower than 3G? Would there still be unlimited data on 3G? And importantly, would the fee structure allow subscribers to actually “trade down” the packages as usage awareness increases. Second, regulatory risk: with higher spectrum cost, we believe there is a risk that the regulator would be concerned that the cost would be passed on the consumer, and thus might implement some rule that reduces the effectiveness of data monetisation (e.g., soft price cap or other requirements).

Taiwan Market Strategy 103 03 December 2013

Figure 258: Taiwan mobile market—service revenue Figure 259: YoY service revenue growth forecasts 7.0% 250.0 6.0% 5.8% 200.0 19.7 5.0% 4.5% 23.1 28.6 40.5 56.3 74.8 89.0 98.7 150.0 4.0% 3.6%

100.0 3.0% 168.3 158.9 154.3 142.9 135.5 128.1 121.2 50.0 114.8 2.0% 1.6%

1.0% 0.5% - 0.3% 2008 2009 2010 2011 2012 2013E 2014E 2015E 0.0% 2010 2011 2012 2013E 2014E 2015E

Voice revenue (NT$ bn) Data revenue (NT$ bn) Industry service revenue YoY growth (%)

Note: (1) Includes CHT, TWM, and FET only; (2) TWM based on Note: (1) Includes CHT, TWM, and FET only; (2) TWM based on comparable accounting method. comparable accounting method. Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Overall, we still forecast that the big three mobile operators in Taiwan will deliver 19.0% YoY growth in mobile data revenue in FY14, driven by higher smartphone adoption particularly in the mid-lower segment, slower than 32.9% in FY13E due to higher revenue base YoY (also note that CHT’s YoY data revenue growth in FY13E was boosted by the expiration of discount provided in FY12A). We expect this growth to be enough to offset a 5.4% YoY decline in voice revenues (regulatory, competition, data substitution), and lead to 3.6% YoY growth in overall mobile service revenue into FY14E. However, we believe growth could slow down materially into FY16E unless tariff structure is improved. Stocks: Overall bearish view on the sector We maintain our bearish view on the sector. For TWM and FET, while recent share price corrections have largely factored in the impact from higher spectrum costs (and thus we maintain our NEUTRAL ratings on both after adjusting for higher 4G spectrum costs), we see limited catalysts and/or upside to consensus earnings. The sector clearly needs to improve mobile data monetisation, particularly given growing mobile data usage, higher costs and traditional revenues (voice + SMS) decline. The introduction of tiered pricing should be positive, but as discussed above the impact would depend on details and could take time. We maintain our UNDERPERFORM rating on CHT. On fixed-line business, while there might be growth opportunities from fibre ARPU uplift and ICT/Cloud services, we expect CHT to continue to face pressure from: (1) limited room for growth in a saturated market, (2) regulatory pressure (e.g., mandatory tariff reduction) which has already started affecting its growth area, i.e., fibre broadband and (3) increasing competition from cable broadband. On the mobile side, while CHT could have an advantage over peers given its 4G 1,800 MHz spectrum and while a wider subscriber base could allow it to grow better into the mid-low-end segment, it would also face similar challenges from peers in the medium-long term unless mobile data monetisation could be improved.

Figure 260: Taiwan telecoms sector—comparative multiples Current Target Upside P/E (x) EV/EBITDA (x) FCF yield (%) Div yield (%) price price (%) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E (NT$) (NT$) CHT 92.80 89.00 -4.1 17.7 17.2 8.2 7.9 5.5 6.7 5.6 5.8 FET 63.40 69.00 8.8 14.6 13.9 7.3 6.9 7.3 7.7 6.9 7.3 TWM 96.90 100.00 3.2 15.2 15.6 9.4 8.8 5.4 5.8 6.4 6.4 Asia ex-Japan Integrated 16.6 14.1 6.2 5.9 3.6 4.9 4.3 4.7 Asia ex-Japan Wireless 15.7 13.8 6.1 5.6 3.4 4.1 4.0 4.2 Source: Company data, Credit Suisse estimates

Taiwan Market Strategy 104 03 December 2013 Transportation: Overweight Sector Research Analyst: Timothy Ross We see the pressures on earnings and stock prices for the transport sector in the year 2014 sees more of the ahead as little changed from those that have characterised 2013. Capacity management same, with dry bulk players will be the key to performance, in our view, with dry bulk and full-service carriers (FSCs) the probable doing better than liners or low-cost carriers (LCCs), but oil prices, currency fluctuations outperformers… and regional demand patterns will also play their parts. Thematically, dry bulk operators have the clearest path, ports are less exciting but have fewer moving parts to complicate outcomes followed by airlines and liner stocks in declining order of preference. Key themes for 2014 Capacity: This is the only variable with respect to which we have a modest degree of …as they have had better insight given the capital intensity of all of our sectors' businesses and the lead time capacity management thrust required for fleet/facility expansion. Constrained liquidity (in the case of shipping upon them than other companies) and the high cost of jet kerosene forcing accelerated retirement (in the case of sectors airlines) has seen orderbooks dwindle and installed capacity moderate—especially for the dry bulk and airline sectors. We expect to see this result in upward pressure on utilisation and some pricing power in 2014, especially for capesize and handysize players (this last category of vessels already shrinking) as well as for FSCs. A flood of new narrow body capacity is expected to affect LCC pricing in the year ahead, while ongoing orders for ultra-large container ships (combined with those already on order) should see another down year for liner freight rates. Newly-constructed port capacity is not expected to pose issues, with most major existing facilities operating at or above typical congestion levels already. Financing: The retreat of specialist lenders such as Commerzbank, RBS and HSH Newfound pools of capital Nordbank from transportation asset financing has been a net positive to the industry over are financing both shipping the past few years, limiting access to cash for a sector inclined to binge on over-ordering and airline sectors…will this whenever capital is made available. While the names above and the reduced influence of lead to over-ordering? the German KG lending model continue to reduce capital extended to transport operators, other innovative pools have been found. These range from direct investment by some of the doyens of private equity (Blackstone, WL Ross, Carlyle, Oaktree and York Capital have all been linked in recent months to shipping investments) to cash being siphoned out of sibling corporations (Korean Air's investment in Hanjin Shipping) or related industries (CIMC—a container manufacturer—is financing around ten vessels for MSC, the world's number two liner company). A rush of funds into asset (particularly aircraft) leasing has also meant that even start-ups like Vietjet of Vietnam with no real earnings history and a fleet of only eight planes can order up to 100 new A320 family aircraft with the backing of a lessor (in its case, AWAS). While we acknowledge the impact of such renewed access to capital will take time to make its presence felt, the potential for "zombies" (such as the Korean shipping companies) kept alive by non-traditional capital sources or new entrants to upset the broad industry's delicate supply-demand balance is intensifying. Global growth: Demand for the services that airlines, ports and shipping companies All transport segments are provide are highly geared to rates of global economic growth. CS's expectation of above- levered to rising global trend world GDP growth of 3.7% for 2014 is broadly supportive of such leveraged demand…with FSCs and industries, although US GDP growth of 3% and EU of 1.3% mean those segments closer dry bulk operators the best allied to Emerging Markets should enjoy a greater ratchet to rising demand. To that extent, exposures demand growth exceeding 7% for the airline sector tops our table, driven by PRC and LCC passenger traffic. At >6% for the dry bulk segment we see this propelled by shifting sourcing patterns for PRC steel mill feedstock that favours higher quality and (probably) cheaper foreign sourced material. We also see China becoming increasingly reliant on imported agricultural commodities as protein consumption increases, with both these trends playing out well for owners of capesize and handysize/handymax vessels, given

Taiwan Market Strategy 105 03 December 2013 their focus on iron ore and minor bulks, respectively. Liner volumes are likely to run marginally ahead of global GDP growth given their general reliance on EU and US demand, the two major blocs of world economic growth that are running 3% or less. We are looking for ~4% increase, up on less-than-expected 2-3% rise in 2013. Sector valuations Aggregate airline EV valuations are still tending towards the trough end at 6x 2014E Airline stocks look cheap, EV/EBITDAR so, as a sector, we cannot accuse it of overvaluation. Neither of the and we prefer BR for its Taiwanese airlines look stretched relative to its peers, but China Airlines (CI) seems to be leverage to regional demand missing much of the growth in outbound demand to ASEAN/Japanese destinations that is growth propelling EVA Airways (BR). With BR also on less challenging earnings multiples and less perilously financially geared this remains our preferred exposure to Taiwanese aviation.

Figure 261: Airline company EV/EBITDAR (2014E) Figure 262: Airline company forward EV/EBITDAR multiples

10.0 11.0

9.0 10.0 8.0

7.0 9.0

6.0 8.0 5.0 7.0 4.0

3.0 6.0 2.0 5.0 1.0

0.0 4.0 SQ QF BR CX CZ KE 5J AK FD CA TR MU CI GA VA TG OZ D7 MH Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates On earnings multiples, HPHT falls short of its peer group average in 2014 and—on a 7%- HPHT looks attractive on plus yield, comfortably exceeds where we believe it needs to be to compensate investors both earnings and yields for near-term earnings pressure and is consequently our preferred play. Moreover, we see the ports sector generally as due some multiple expansion as modest throughput growth returns in 2014 and prefer this as a way of playing any improvement in Western consumption to an investment in liner shipping.

Taiwan Market Strategy 106 03 December 2013

Figure 263: Port company EV/EBITDA multiples (2014E) Figure 264: Port company forward EV/EBITDA multiples

20.0 16.0

15.0 15.0 14.0

10.0 13.0

12.0 5.0 11.0

0.0 10.0

GPI

POT

DPW WHB

Novo

SIPG

ICTSI CMHI

Adani

HPHT

Dalian Bintulu

Xiamen 9.0

COSPAC Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13 SZ-Chiwan Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates We compare shipping companies both to the market value of their assets and to the book Dry bulk shipping value over extended periods to get a constant benchmark of valuation. On the basis of the companies trade at an former comparison, it is clear that our optimism concerning dry bulk earnings unwarranted discount to improvements is shared with the broader operating industry, with most of our universe their assets' market trading at or below replacement cost as physical asset values have run up >28% YTD for values… average five-year old dry bulk vessels. Book values have clearly been static and fail to reflect the upward move in market values, with price to book ratios ahead but well below where they were in 2010 when the industry earned less than we expect in 2014.

Figure 265: Shipping company adjusted P/NAV (2014E) Figure 266: Shipping company forward P/B ratio 1.8 60% 56% 1.6

40% 1.4 26% 28% 1.2 20% 14% 8% 10% 11% 1.0 0% 0.8 -6% -20% -12% -11% 0.6 -23% -28% -40% 0.4

Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13 Sep-13

NYK

NOL

CSD

MOL

EMC

OOIL

CSCL K-Line

COSCO Liner Drybulk

Wan Hai Wan PacBasin Sinotrans Source: Company data, Clarksons, Credit Suisse estimates Source: Company data, Credit Suisse estimates Liner companies are almost the converse: there have been limited improvements in …whereas liners are at an market values, stocks are trading at premiums and P/B ratios at ~1x still overstate the unjustified premium sector's worth, in our opinion. Wan Hai (WHL) is most overvalued relative to its fleet give the value erosion that has occurred amongst smaller vessels as scale economies available for larger craft have seen valuations plunge. Evergreen Marine (EMC) is much less over valued in our view, given the recent acquisition of its fleet and its skew towards larger vessels.

Taiwan Market Strategy 107 03 December 2013

Earnings outlook 2014 will likely be "chalk and cheese" for the two segments that we cover in the shipping Sanguine view on mean industry. Our expectations for dry bulk earnings in 2014 are the most sanguine of our reversion for dry bulk freight universe as demand exceeds supply, especially for ore ships and those used to transport rates over the next two agricultural commodities. Seasonality influences rates most in this sub-sector, with 1Q years plays out in 2014E… typically the weakest period for earnings. We expect our universe to produce an annual turnaround of US$3.4 bn pre-exceptional NPAT growth between 2013 and 2014, coming off the lowest earnings base in recent years. This contrasts with the liner segment where a larger universe is expected to make only …while excess supply half as much money, and that might yet prove optimistic. Liner stocks are just as means that cost reductions susceptible to slack activity in 1Q as dry bulk players, but stocks often pop during the pre- have to be liner companies' Lunar New Year freight rush, confusing activity with profitability. We perceive that the focus greatest opportunity for earnings growth in this segment over the next two years is likely to be derived from managing cost better rather than any revenue upside, with demand less than compelling and oversupply a characteristic of all trade lanes as tonnage continues to cascade from major lanes onto more niche trades.

Figure 267: Aggregate dry bulk universe earnings Figure 268: Aggregate liner universe earnings (US$ mn) (US$ mn) 4,000 5,000

4,000 3,000 3,000

2,000 2,000

1,000 1,000 -

- (1,000)

(2,000) (1,000) (3,000)

(2,000) (4,000) 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Airlines should also see improved earnings in 2014, although that is based on a static view Absent currency or jet fuel of both currency and jet kerosene. Global demand continues to improve, front-end traffic fluctuation airline earnings recovers and there is a small but incrementally positive lift in freight division earnings that should almost double in have been something of an albatross around the necks of most FSCs for the past three 2014, with FSCs doing best years. We expect aggregate earnings to rise almost 90%, but FSCs should do 50% better than LCCs, whose earnings are expected to be ~27% below their 2012 peak.

Taiwan Market Strategy 108 03 December 2013

Figure 269: Aggregate airline universe earnings (US$ mn)

10000

8000

6000

4000

2000

0

-2000

-4000

-6000

-8000 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Source: Company data, Credit Suisse estimates Ports have been the most consistently profitable sector under coverage and we see them recovering earnings ground lost since 2010 this year and setting new records in 2014. While we acknowledge the general pressure on margins from labour cost increases and the unevenness of growth (typically favouring Northern China and non PRC-based operators), sector operating leverage (with typical EBITDA margins of >40%) translates modest revenue growth into significant bottom line contributions.

Figure 270: Aggregate port universe earnings (US$ mn) Port companies are consistently profitable with 2,400 high operating leverage the key to earnings growth 2,200

2,000

1,800

1,600

1,400

1,200 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

Source: Company data, Credit Suisse estimates Risks to earnings Changes in currency and weak freight performance have hit airline earnings in 2013 and we still see elements featuring heavily in 2014, along with the perennial risk to earnings that fluctuating jet fuel prices pose. Our concerns are also mounting over the large amount of capacity due to enter the market at the low cost end of the spectrum and the ripple effect that this is having on short-haul fares. Two LCC start-ups in Taiwan have recently been announced but we do not see these impacting incumbents for another two years given the lead time to market and time to build scale.

Taiwan Market Strategy 109 03 December 2013

The shipping sector shares airlines' exposure to fuel as a risk, but its greatest driver is the Fuel currency and capacity gap between demand and supply. Absence of orders, accelerated scrapping and a remain the biggest risks to recovering level of PRC demand for imported commodities has "squared the books" for earnings and stock price the dry bulk segment, but the liner sector remains oversupplied, with still slow global performance, in our view growth and Western consumption unlikely to lift growth in box volumes above box slots. The risks to both is a renewed bout of ordering—particularly as private equity interest and investment in the broader shipping industry accelerates, bridging the gap left by the retreat of relationship banks and specialist lenders. However, we do concede that the ability for orders to change the shape of the forward delivery curve would require activation of fresh yard capacity. On the positive side, liners could also benefit from better cost control should alliances become tighter knit organisations. Focus on costs by liners (in terms of reducing transhipments, better empties repositioning and fewer port calls), changes to shipping alliance sailing schedules and shifting centres of consumption and manufactured goods production are the greatest threats to the port industry that we perceive in 2014. China's export growth is likely to be surpassed by Vietnam's and on-shoring/near-sourcing trends could adversely affect imports to the US/EU. Stock picks In Taiwan, our top transport pick is EVA Airways (OUTPERFORM) on account of its EVA Airways is our favoured undemanding valuation and compelling leverage to growing regional traffic growth, Taiwanese transport capitalising on PRC inbound demand and Taiwanese outbound traffic growth to Japan and name… Southeast Asia. China Airlines is rated UNDERPERFORM on account of the amount of capacity it is adding (and associated cost) along with its heavier commitment to an underperforming freight segment and focus on lower yielding passenger routes than BR. In the marine sector, Wan Hai Lines is rated NEUTRAL on account of its profit resilience …as shipping companies rather than its valuation relative to its assets. The truth is that it needs this vessel type to won't be able to shrug off access size and draught-constrained ports and to undertake its high frequency port call the cycle business model the fact that it can return any form of profit when the rest of the industry in Asia is clearly languishing speaks volumes. We just feel that consensus estimates are too high. Likewise for UNDERPERFORM-rated Evergreen Marine, where 4Q numbers will likely make it five out of five straight quarterly losses, meaning a sharp reduction to consensus is required. Despite the company's rhetoric and attempts to massage capacity data, it is one of the current offenders on the supply-side in an over-tonnaged world, with an orderbook >30% of its (large) fleet. With a heavy exposure to both of the major deepsea lanes where rate outlooks are weakest, we continue to see pressure on its stock price in 2014.

Taiwan Market Strategy 110 03 December 2013

Companies Mentioned (Price as of 29-Nov-2013) ARM Holdings (ARM.L, 1018.0p) AU Optronics (2409.TW, NT$9.23, OUTPERFORM, TP NT$13.5) Acer Group (2353.TW, NT$16.05) Advanced Micro Devices, Inc. (AMD.N, $3.64) Advanced Semicon. Engr. (2311.TW, NT$29.4, OUTPERFORM, TP NT$34.0) Airtac (1590.TW, NT$236.0, NEUTRAL, TP NT$214.0) Amazon com Inc. (AMZN.OQ, $393.62) Amkor Technology Inc. (AMKR.OQ, $6.0) Anhui Conch Cement Co. Ltd. (0914.HK, HK$30.25, NEUTRAL, TP HK$25.8) Apple Inc (AAPL.OQ, $556.07) Asia Cement (1102.TW, NT$39.3, OUTPERFORM, TP NT$44.0) Asustek (2357.TW, NT$260.5) Blackstone Group (BX.N, $28.58) Boeing (BA.N, $134.25) Broadcom Corp. (BRCM.OQ, $26.69) CIMC (000039.SZ, Rmb14.39) CTBC Holding (2891.TW, NT$19.35, OUTPERFORM, TP NT$22.5) Caltex Australia (CTX.AX, A$19.05) Catcher Technology (2474.TW, NT$180.0, OUTPERFORM, TP NT$200.0) Cathay Financial Holding (2882.TW, NT$46.5) Chang Hwa Commercial Bank (2801.TW, NT$18.15) Changhong (600839.SS, Rmb3.38) Chaoyue Group (0147.HK, HK$0.41) Cheng Shin Rubber (2105.TW, NT$77.6) Chicony (2385.TW, NT$74.0) China Airlines (2610.TW, NT$10.85) China Coal Energy Co. (1898.HK, HK$5.2) China Development Financial (2883.TW, NT$8.63) China Life Taiwan (2823.TW, NT$28.5, OUTPERFORM, TP NT$34.04) China National Building Material Co (3323.HK, HK$8.67, UNDERPERFORM, TP HK$4.8) China Petroleum & Chemical Corporation - H (0386.HK, HK$6.66) China Shanshui Cement Group Ltd. (0691.HK, HK$3.08, NEUTRAL[V], TP HK$3.9) China Shenhua Energy Company Limited (1088.HK, HK$26.3) China Starch (3838.HK, HK$0.22) China Steel (2002.TW, NT$25.45) Chipbond (6147.TWO, NT$61.9, OUTPERFORM, TP NT$72.0) ChungHwa Telecom (2412.TW, NT$92.8) Commerzbank (CBKG.F, €10.95) Compal Electronics (2324.TW, NT$22.35, OUTPERFORM, TP NT$27.0) Coolpad (Unlisted) Coretronic Corp (5371.TWO, NT$26.7) Dell Inc. (DELL.OQ, $13.86) Delta Electronics (2308.TW, NT$158.0) Digital China Holdings Limited (0861.HK, HK$9.05) E.Sun Financial Holding Co. (2884.TW, NT$19.85) EVA Air (2618.TW, NT$17.05, OUTPERFORM, TP NT$20.0) Elan Microelectronics Corp (2458.TW, NT$43.6, OUTPERFORM[V], TP NT$60.0) Epistar Corporation (2448.TW, NT$51.2, OUTPERFORM, TP NT$65.0) Evergreen Marine (2603.TW, NT$17.5) Far EasTone Telecom (4904.TW, NT$63.4) First Financial Holding Co Ltd (2892.TW, NT$17.95) FocalTech Corporation, Ltd. (5280.TW, NT$241.5) Formosa Chemical & Fibre (1326.TW, NT$83.4, NEUTRAL, TP NT$78.0) Formosa Petrochemical (6505.TW, NT$80.7) Formosa Plastics (1301.TW, NT$77.8, NEUTRAL, TP NT$75.0) Foxconn Technology Corp (2354.TW, NT$70.2) Fubon Financial Holding (2881.TW, NT$42.3) Ginko (8406.TWO, NT$632.0) Google, Inc. (GOOG.OQ, $1059.59) HANJIN SHIPPING (117930.KS, W6,060) HTC Corp (2498.TW, NT$151.0) Haier (600690.SS, Rmb17.22) HannStar Board (5469.TW, NT$11.1) Hewlett Packard (HPQ.N, $27.35) Hi-P International (HIPI.SI, S$0.61) HiSilicon (Unlisted) Himax Technologies (HIMX.OQ, $10.0) Hisense Kelon (0921.HK, HK$10.22) Hiwin (2049.TW, NT$245.5) Hon Hai Precision (2317.TW, NT$78.0, OUTPERFORM, TP NT$101.0) Hua Nan Financial Holding (2880.TW, NT$17.2) Huaku Development Co Ltd (2548.TW, NT$91.8) IRPC (IRPC.BK, Bt3.54) Imagination Technologies (IMG.L, 248.6p) Ingenico (INGC.PA, €55.03) Innolux Corporation (3481.TW, NT$11.2) Intel Corp. (INTC.OQ, $23.84) International Business Machines Corp. (IBM.N, $179.68) Inventec Co Ltd (2356.TW, NT$24.9) Itochu Enex (8133.T, ¥547) Kinsus Interconnect Tech (3189.TW, NT$102.0, NEUTRAL, TP NT$120.0) Konka (000016.SZ, Rmb3.99)

Taiwan Market Strategy 111 03 December 2013

Korean Air (003490.KS, W30,450) Kyocera (6971.T, ¥5,420) LG Chem Ltd. (051910.KS, W290,500) LG Display Co Ltd. (034220.KS, W24,400) LG Electronics Inc (066570.KS, W68,400) Largan Precision (3008.TW, NT$1055.0, OUTPERFORM, TP NT$1130.0) Lenovo Group Ltd (0992.HK, HK$9.19) Lextar (3698.TW, NT$24.15, OUTPERFORM[V], TP NT$31.0) Lite-On Technology (2301.TW, NT$48.05) Lotte Chemical (011170.KS, W219,000) MMI Holdings Limited (MMIJ.J, R25.97) Marvell Technology Group Ltd. (MRVL.OQ, $14.23) MediaTek Inc. (2454.TW, NT$436.0, OUTPERFORM, TP NT$480.0) Mega Financial Holding Co Ltd (2886.TW, NT$24.85) Meiko Electronic (6787.T, ¥923) Microsoft Corporation (MSFT.OQ, $38.13) Mitsubishi Chemical Holdings (4188.T, ¥476) Motorola Solutions (MSI.N, $65.88) Mstar Semiconductor (3697.TW, NT$331.5) NGK Spark Plug (5334.T, ¥2,378) Nan Ya Plastics (1303.TW, NT$64.8, OUTPERFORM, TP NT$75.0) Nokia (NOK1V.HE, €5.96) Novatek Microelectronics Corp Ltd (3034.TW, NT$119.5) Oil & Natural Gas Corporation Limited (ONGC.BO, Rs298.5) OmniVision Techs (OVTI.OQ, $16.03) Orisetech (3545.TW, NT$44.7) PTT Global Chemical (PTTGC.BK, Bt76.25) Panasonic Corporation (6752.T, ¥1,175) Petron Corporation (PCOR.PS, P13.74) Philips (PHG.AS, €26.345) Powertech Technology (6239.TW, NT$45.75) President Chain Store (2912.TW, NT$210.0, OUTPERFORM, TP NT$264.5) QUALCOMM Inc. (QCOM.OQ, $73.58) RDA Microelectronics (RDA.OQ, $17.62, OUTPERFORM, TP $17.5) Radiant Opto-Electronics (6176.TW, NT$105.5, OUTPERFORM, TP NT$126.0) Ralink (3534.TW, NT$102.5) Realtek Semiconductor (2379.TW, NT$71.7, NEUTRAL, TP NT$75.0) Richtek Technology (6286.TW, NT$137.5) Royal Bank of Scotland (RBS.L, 327.2p) Ruentex Development (9945.TW, NT$60.8) SPC (0338.HK, HK$2.29) ST-Ericsson (Unlisted) STATS (STTS.SI, S$0.31) Salt Lake Indust (000792.SZ, Rmb17.36) Samsung Electro-Mechanics (009150.KS, W81,800) Samsung Electronics (005930.KS, W1,494,000, OUTPERFORM, TP W1,900,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.64) Sequans Communic (SQNS.N, $1.93) Seven Industries (7896.T, ¥140) Sharp Corp. (6753.T, ¥335) Shin Kong Financial Holding (2888.TW, NT$10.2) Silicon Works (108320.KQ, W24,750) Siliconware Precision (2325.TW, NT$35.0, OUTPERFORM, TP NT$42.0) Silitech Technology Corp (3311.TW, NT$34.75) Sinochem Intl (600500.SS, Rmb6.68) Sinopac Holdings (2890.TW, NT$14.6) Skyworth Digital (0751.HK, HK$4.64) Sony (6758.T, ¥1,867) Sony Financial Holdings (8729.T, ¥1,824) Spreadtrum Communication (SPRD.OQ, $30.61, NEUTRAL[V], TP $31.0) St. Shine (1565.TWO, NT$891.0, OUTPERFORM, TP NT$990.0) Sumitomo Chemical (4005.T, ¥412) Synnex Technology International Corp (2347.TW, NT$44.45) TCL Multimedia (1070.HK, HK$3.66) TXC Corp. (3042.TW, NT$33.1) Ta Chong Bank Ltd (2847.TW, NT$10.7, OUTPERFORM, TP NT$13.0) Taiflex (8039.TW, NT$61.2) Taishin Financial Holding (2887.TW, NT$14.6) Taiwan Cement (1101.TW, NT$46.85, OUTPERFORM, TP NT$48.2) Taiwan Fertilizer Co Ltd (1722.TW, NT$69.0) Taiwan Life Ins (2833.TW, NT$26.6) Taiwan Mobile (3045.TW, NT$96.9) Taiwan Semiconductor Manufacturing (2330.TW, NT$105.0, OUTPERFORM, TP NT$116.0) Teco (1504.TW, NT$32.5, NEUTRAL, TP NT$36.0) The Carlyle Group L.P. (CG.OQ, $32.5) Topoint Technology Co Ltd (8021.TW, NT$21.55) Toshiba (6502.T, ¥442) Transcontinental Incorporated (SVS) (TCLa.TO, C$16.88) Uni-President Enterprises (1216.TW, NT$52.8) Unimicron Technology Corp (3037.TW, NT$21.95, NEUTRAL, TP NT$29.0) United Microelectronics (2303.TW, NT$12.3) Vanguard International Semiconductor (5347.TWO, NT$34.75) WH Polyurethanes (600309.SS, Rmb19.84) WPG Holdings Ltd (3702.TW, NT$33.7, NEUTRAL, TP NT$38.5)

Taiwan Market Strategy 112 03 December 2013

WUS (2316.TW, NT$13.2) Wan Hai Lines (2615.TW, NT$15.45) Wistron (3231.TW, NT$26.55, UNDERPERFORM, TP NT$21.0) Xiaomi (Unlisted) Yuanta Financial Holding Co Ltd (2885.TW, NT$16.05, OUTPERFORM, TP NT$19.5) ZTE Corporation (0763.HK, HK$17.3)

Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for AU Optronics (2409.TW)

2409.TW Closing Price Target Price Date (NT$) (NT$) Rating 24-Jan-11 28.60 32.00 N 10-Mar-11 26.70 33.00 O 28-Apr-11 24.15 31.00 * 28-Jul-11 16.70 23.00 24-Oct-11 12.40 16.00 * 09-Feb-12 16.30 19.00 11-Jul-12 11.50 18.00 25-Jul-12 9.50 15.00 28-Sep-12 10.60 14.00 13-Dec-12 13.95 16.90 NEUTRAL OUTPERFORM 06-Feb-13 11.30 16.30 09-Apr-13 12.80 17.00 10-Oct-13 10.15 13.50 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Advanced Semicon. Engr. (2311.TW)

2311.TW Closing Price Target Price Date (NT$) (NT$) Rating 07-Jan-11 25.14 27.86 N 31-Jan-11 28.80 30.69 08-Jul-11 25.57 28.33 10-Aug-11 23.06 28.33 O 31-Oct-11 23.64 29.83 23-Apr-12 25.40 31.58 26-Jul-12 19.48 27.20 26-Apr-13 25.85 31.00 16-Jul-13 25.35 R

29-Aug-13 25.45 31.00 O NEUTRAL 09-Oct-13 29.00 34.00 OUTPERFORM REST RICT ED * Asterisk signifies initiation or assumption of coverage.

Taiwan Market Strategy 113 03 December 2013

3-Year Price and Rating History for Airtac (1590.TW)

1590.TW Closing Price Target Price Date (NT$) (NT$) Rating 14-Aug-12 151.87 158.88 N * 30-Oct-12 128.04 140.19 16-Jan-13 157.48 158.88 12-Jul-13 162.00 166.00 24-Jul-13 172.50 203.00 O 16-Sep-13 203.00 210.00 N 24-Oct-13 221.50 214.00 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL OUTPERFORM

3-Year Price and Rating History for Anhui Conch Cement Co. Ltd. (0914.HK)

0914.HK Closing Price Target Price Date (HK$) (HK$) Rating 04-Jan-11 24.93 25.33 N 30-Mar-11 31.47 32.00 05-Jul-11 38.75 37.00 06-Sep-11 26.50 28.00 29-Feb-12 27.00 24.00 U 19-Apr-12 25.20 20.00 14-Jun-12 22.35 16.50 06-Dec-12 27.40 24.30 N 25-Mar-13 26.25 23.30 20-Aug-13 25.80 23.60 NEUTRAL UNDERPERFORM 29-Oct-13 26.50 25.80 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Asia Cement (1102.TW)

1102.TW Closing Price Target Price Date (NT$) (NT$) Rating 14-Dec-10 29.39 27.62 N 14-Apr-11 33.45 40.22 O 12-May-11 35.83 45.17 09-Jan-12 32.31 38.45 29-Oct-12 35.25 35.59 N * 29-Mar-13 35.74 33.43 14-Aug-13 36.72 36.27 08-Oct-13 39.20 45.00 O 14-Nov-13 37.35 44.00 * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM

Taiwan Market Strategy 114 03 December 2013

3-Year Price and Rating History for CTBC Holding (2891.TW)

2891.TW Closing Price Target Price Date (NT$) (NT$) Rating 13-Jan-11 18.14 21.70 O 27-Apr-11 20.09 23.37 12-May-11 19.81 24.20 09-Aug-11 17.87 23.37 14-Sep-11 15.31 20.86 12-Oct-11 16.19 20.03 21-Nov-11 13.85 19.61 01-Feb-12 16.19 19.19 10-Feb-12 17.15 15.21 U

11-Apr-12 15.12 15.21 N OUTPERFORM 02-May-12 15.92 15.63 UNDERPERFORM NEUTRAL 09-Aug-12 15.67 16.05 31-Oct-12 14.80 16.54 03-Apr-13 17.15 20.09 O 13-Aug-13 18.18 21.03 04-Nov-13 19.00 22.50 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Catcher Technology (2474.TW)

2474.TW Closing Price Target Price Date (NT$) (NT$) Rating 07-Dec-10 102.00 115.00 O 10-Jan-11 109.00 120.00 28-Feb-11 124.00 140.00 18-Apr-11 167.00 186.00 26-Jul-11 248.50 286.00 27-Sep-11 164.00 210.00 29-Nov-11 144.00 178.00 21-Feb-12 199.00 220.00 23-Apr-12 190.00 225.00

30-Jul-12 155.50 140.00 U OUTPERFORM 12-Sep-12 146.00 155.00 N UNDERPERFORM NEUTRAL 29-Oct-12 119.00 135.00 07-Jan-13 145.00 155.00 01-Apr-13 140.00 163.00 O 06-May-13 160.00 184.00 01-Nov-13 172.00 200.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for China Life Taiwan (2823.TW)

2823.TW Closing Price Target Price Date (NT$) (NT$) Rating 20-Jul-12 23.97 34.07 O * 20-Sep-12 24.30 34.04 03-Jan-13 23.16 33.33 22-May-13 27.94 34.04 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

Taiwan Market Strategy 115 03 December 2013

3-Year Price and Rating History for China National Building Material Co (3323.HK)

3323.HK Closing Price Target Price Date (HK$) (HK$) Rating 04-Jan-11 9.62 11.75 O 11-Mar-11 11.30 18.00 05-Jul-11 16.32 23.30 06-Sep-11 10.66 9.00 U 29-Feb-12 11.22 7.20 14-Jun-12 9.07 6.70 06-Dec-12 10.58 7.20 25-Mar-13 10.36 7.40 25-Aug-13 7.62 4.80 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM UNDERPERFORM

3-Year Price and Rating History for China Shanshui Cement Group Ltd. (0691.HK)

0691.HK Closing Price Target Price Date (HK$) (HK$) Rating 14-Dec-10 6.46 5.70 O 04-Jan-11 5.98 7.20 28-Mar-11 6.50 8.80 05-Jul-11 9.81 10.40 11-Jul-11 9.60 R 19-Jul-11 9.29 10.40 O 06-Sep-11 6.58 8.50 N 26-Mar-12 5.13 5.70 10-Apr-12 6.16 R

21-Apr-12 6.23 5.70 N OUTPERFORM 14-Jun-12 6.04 5.20 REST RICT ED NEUTRAL 24-Aug-12 4.20 4.90 06-Dec-12 5.56 5.50 18-Mar-13 4.80 4.20 26-Aug-13 3.31 3.90 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Chipbond (6147.TWO)

6147.TWO Closing Price Target Price Date (NT$) (NT$) Rating 17-Apr-12 37.15 48.00 O 18-Apr-12 38.20 * 30-Apr-12 39.60 48.00 O 28-Sep-12 46.50 50.00 15-Oct-12 48.15 52.50 24-Oct-12 49.80 55.00 18-Nov-12 51.60 57.00 30-Nov-12 56.30 57.00 N 30-Jan-13 60.50 60.00 02-May-13 79.00 68.00 OUTPERFORM NEUTRAL 11-Jun-13 78.70 70.00 12-Aug-13 60.50 75.00 O 14-Oct-13 55.50 72.00 * Asterisk signifies initiation or assumption of coverage.

Taiwan Market Strategy 116 03 December 2013

3-Year Price and Rating History for Compal Electronics (2324.TW)

2324.TW Closing Price Target Price Date (NT$) (NT$) Rating 10-Mar-11 34.20 35.00 N 11-Aug-11 30.15 28.00 12-Aug-11 29.00 * 25-Oct-11 27.25 28.00 N 01-Nov-11 27.60 26.00 02-Apr-12 33.70 38.00 01-May-12 33.60 35.00 24-Jun-12 27.60 31.00 03-Sep-12 25.05 29.00 26-Oct-12 19.25 20.00 NEUTRAL OUTPERFORM 11-Oct-13 23.30 23.00 13-Nov-13 20.90 27.00 O * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for EVA Air (2618.TW)

2618.TW Closing Price Target Price Date (NT$) (NT$) Rating 07-Mar-11 22.95 28.18 O 24-Mar-11 21.86 27.27 13-Jun-11 24.77 22.73 N 06-Nov-11 21.05 16.00 U 27-Mar-12 18.65 NR 15-Jun-12 18.35 26.70 O * 22-Aug-12 17.25 21.80 29-Aug-12 16.95 19.40 27-Oct-12 16.80 19.00

24-Jan-13 17.90 28.50 OUTPERFORM 02-Apr-13 17.75 24.00 NEUTRAL UNDERPERFORM 14-Aug-13 16.50 20.00 N O T RA T ED * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Elan Microelectronics Corp (2458.TW)

2458.TW Closing Price Target Price Date (NT$) (NT$) Rating 23-Feb-11 42.20 38.00 N 11-May-11 38.85 36.00 * 31-Aug-11 31.35 22.00 U 16-Oct-11 33.05 25.00 23-Nov-11 23.75 25.00 N 06-Jan-12 27.70 30.00 16-Feb-12 39.60 34.00 18-Apr-12 40.00 38.00 02-Jul-12 43.20 41.00

17-Jul-12 45.90 48.00 NEUTRAL 22-Oct-12 49.05 60.00 O UNDERPERFORM OUTPERFORM 29-Jan-13 49.20 62.00 23-Apr-13 73.30 92.00 * 02-Aug-13 56.60 80.00 07-Aug-13 51.20 76.00 15-Sep-13 49.05 60.00 * Asterisk signifies initiation or assumption of coverage.

Taiwan Market Strategy 117 03 December 2013

3-Year Price and Rating History for Epistar Corporation (2448.TW)

2448.TW Closing Price Target Price Date (NT$) (NT$) Rating 10-Mar-11 113.50 133.00 O 31-Mar-11 108.00 * 02-May-11 94.90 116.00 O 14-Jul-11 67.60 88.00 23-Aug-11 53.00 79.00 20-Oct-11 56.00 65.00 N 13-Jun-12 59.50 75.00 O 18-Jun-12 66.60 * 16-Jul-12 56.60 75.00 O 15-Oct-12 54.40 70.00 OUTPERFORM NEUTRAL 26-Mar-13 55.00 66.00 20-Aug-13 49.80 65.00 * * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Formosa Chemical & Fibre (1326.TW)

1326.TW Closing Price Target Price Date (NT$) (NT$) Rating 08-Feb-11 102.91 122.52 O 03-Aug-11 86.02 110.58 18-Nov-11 77.67 103.49 08-Oct-12 73.79 67.57 N * 09-Aug-13 74.50 74.00 11-Nov-13 81.00 78.00 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

3-Year Price and Rating History for Formosa Plastics (1301.TW)

1301.TW Closing Price Target Price Date (NT$) (NT$) Rating 15-Feb-11 96.15 100.19 N 03-Aug-11 90.48 96.35 18-Nov-11 77.21 90.58 08-Oct-12 77.88 93.27 O * 03-May-13 68.08 79.81 29-Jul-13 75.80 85.60 12-Nov-13 76.70 75.00 N * Asterisk signifies initiation or assumption of coverage.

NEUTRAL OUTPERFORM

Taiwan Market Strategy 118 03 December 2013

3-Year Price and Rating History for Hon Hai Precision (2317.TW)

2317.TW Closing Price Target Price Date (NT$) (NT$) Rating 30-Nov-11 65.87 73.55 N 01-Dec-11 68.43 * 07-Dec-11 67.19 73.55 N 06-Feb-12 77.69 82.64 22-May-12 72.07 79.34 18-Oct-12 79.55 86.36 14-Nov-12 81.64 90.91 21-Feb-13 75.64 85.45 15-Apr-13 70.09 78.18 24-Apr-13 71.00 75.45 NEUTRAL OUTPERFORM 16-May-13 71.55 67.27 24-Jul-13 71.82 69.09 14-Aug-13 71.91 83.00 21-Nov-13 75.00 101.00 O * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Kinsus Interconnect Tech (3189.TW)

3189.TW Closing Price Target Price Date (NT$) (NT$) Rating 07-Jan-11 94.00 111.81 O 28-Jan-11 94.00 111.80 29-Mar-11 82.10 97.00 28-Apr-11 102.50 110.00 28-Jul-11 123.00 142.00 N 03-Oct-11 98.00 114.00 27-Oct-11 97.50 110.00 12-Jan-12 83.50 96.00 07-Jun-12 82.80 93.00 12-Jul-12 79.70 90.00 OUTPERFORM NEUTRAL 30-Oct-12 79.90 87.00 03-Jan-13 95.00 97.00 18-Feb-13 97.50 111.00 O 17-Jun-13 116.50 128.00 N 30-Jul-13 107.00 122.00 24-Oct-13 105.50 120.00 * Asterisk signifies initiation or assumption of coverage.

Taiwan Market Strategy 119 03 December 2013

3-Year Price and Rating History for Largan Precision (3008.TW)

3008.TW Closing Price Target Price Date (NT$) (NT$) Rating 29-Mar-11 773.00 830.00 N 19-Aug-11 776.00 920.00 06-Oct-11 638.00 700.00 29-Nov-11 517.00 640.00 26-Apr-12 536.00 600.00 18-Jun-12 615.00 640.00 09-Aug-12 609.00 670.00 25-Oct-12 595.00 700.00 O 05-Nov-12 615.00 710.00 07-Jan-13 746.00 830.00 N NEUTRAL OUTPERFORM 31-Jan-13 773.00 850.00 25-Apr-13 688.00 825.00 O 23-Jul-13 875.00 999.00 25-Jul-13 935.00 1060.00 07-Oct-13 1000.00 1130.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Lextar (3698.TW)

3698.TW Closing Price Target Price Date (NT$) (NT$) Rating 13-Jun-12 32.85 37.00 N 18-Jun-12 34.70 * 13-Aug-12 27.15 37.00 N 08-Nov-12 21.80 24.00 07-Mar-13 29.90 35.00 O 06-May-13 33.00 36.80 20-Aug-13 26.15 32.00 * 05-Nov-13 24.65 31.00 * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM

3-Year Price and Rating History for MediaTek Inc. (2454.TW)

2454.TW Closing Price Target Price Date (NT$) (NT$) Rating 08-Mar-11 341.00 315.00 U 19-Apr-11 309.00 295.00 02-May-11 316.50 315.00 N 23-May-11 310.00 300.00 07-Jun-11 313.50 280.00 U 28-Jul-11 266.00 255.00 07-Sep-11 282.50 260.00 31-Oct-11 318.00 306.00 06-Jan-12 278.50 270.00

04-Apr-12 277.00 300.00 N UNDERPERFORM 30-Apr-12 253.00 260.00 NEUTRAL REST RICT ED 25-Jun-12 280.50 300.00 OUTPERFORM 29-Jun-12 273.00 R 27-Jun-13 328.00 400.00 O 09-Sep-13 370.00 440.00 01-Nov-13 404.50 480.00 * Asterisk signifies initiation or assumption of coverage.

Taiwan Market Strategy 120 03 December 2013

3-Year Price and Rating History for Nan Ya Plastics (1303.TW)

1303.TW Closing Price Target Price Date (NT$) (NT$) Rating 14-Feb-11 80.40 93.86 O 03-Aug-11 69.80 83.96 18-Nov-11 60.50 63.76 N 08-Oct-12 56.24 47.52 U * 15-May-13 62.08 65.25 N 13-Aug-13 60.00 61.00 13-Nov-13 63.00 75.00 O * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL UNDERPERFORM

3-Year Price and Rating History for President Chain Store (2912.TW)

2912.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Feb-11 121.50 137.00 O 28-Apr-11 151.00 140.40 N 07-Nov-11 162.00 138.80 U 26-Jun-12 157.00 * 02-Aug-12 162.00 137.00 U 29-Oct-12 146.00 140.00 N 28-Mar-13 164.00 156.00 07-Aug-13 200.00 240.00 O * 13-Aug-13 221.00 264.50 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL UNDERPERFORM

3-Year Price and Rating History for RDA Microelectronics (RDA.OQ)

RDA.OQ Closing Price Target Price Date (US$) (US$) Rating 07-Jan-11 14.55 17.00 O * 26-Apr-11 13.20 R 05-May-11 13.00 17.00 O 12-May-11 12.73 18.00 13-May-11 12.75 R 13-Jun-11 9.98 18.00 O 05-Aug-11 10.08 16.00 09-Nov-11 9.01 17.00 10-Feb-12 13.85 17.50 04-May-12 11.63 18.00 OUTPERFORM REST RICT ED 04-Jul-12 10.12 17.00 15-Mar-13 11.61 R 28-Mar-13 9.25 17.00 O 06-Aug-13 11.20 15.00 30-Sep-13 15.29 17.50 * Asterisk signifies initiation or assumption of coverage.

Taiwan Market Strategy 121 03 December 2013

3-Year Price and Rating History for Radiant Opto-Electronics (6176.TW)

6176.TW Closing Price Target Price Date (NT$) (NT$) Rating 28-Nov-11 83.70 114.05 O * 08-Feb-12 119.71 130.08 30-May-12 128.19 138.56 N 27-Jul-12 116.88 131.96 16-Aug-12 126.70 132.04 25-Oct-12 122.82 135.92 24-Jan-13 101.94 119.42 05-Jul-13 101.94 111.65 09-Aug-13 88.40 112.00 O 16-Sep-13 109.00 126.00 OUTPERFORM NEUTRAL * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Realtek Semiconductor (2379.TW)

2379.TW Closing Price Target Price Date (NT$) (NT$) Rating 10-Jan-11 66.97 58.24 U 22-Apr-11 59.21 53.38 04-May-11 56.88 57.26 11-Jul-11 53.19 54.35 31-Oct-11 49.70 49.01 05-Jan-12 45.14 44.11 06-Feb-12 53.62 58.82 N 11-May-12 62.35 68.62 01-Aug-12 51.96 59.80 01-Feb-13 66.04 70.79 UNDERPERFORM NEUTRAL 29-Apr-13 80.00 84.16 10-Jun-13 70.99 74.26 01-Nov-13 69.60 75.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Samsung Electronics (005930.KS)

005930.KS Closing Price Target Price Date (W) (W) Rating 05-Jan-11 942,000 1,100,000 O 05-Jan-12 1,055,000 * 14-Mar-12 1,250,000 1,490,000 O 30-Apr-12 1,390,000 1,610,000 26-Jun-12 1,139,000 1,700,000 * 27-Nov-12 1,416,000 1,720,000 06-Feb-13 1,427,000 1,900,000 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

Taiwan Market Strategy 122 03 December 2013

3-Year Price and Rating History for Siliconware Precision (2325.TW)

2325.TW Closing Price Target Price Date (NT$) (NT$) Rating 27-Jan-11 40.60 36.00 N 28-Jul-11 29.70 33.00 10-Aug-11 26.00 33.00 O 17-Oct-11 31.70 36.00 31-Jan-12 34.00 39.00 24-Apr-12 33.20 41.00 26-Jul-12 28.65 36.00 30-Apr-13 35.00 40.00 01-Nov-13 35.10 42.00 * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM

3-Year Price and Rating History for Spreadtrum Communication (SPRD.OQ)

SPRD.OQ Closing Price Target Price Date (US$) (US$) Rating 17-Nov-11 27.78 39.00 O 18-Nov-11 27.21 * 05-Jan-12 19.26 33.00 O 29-Feb-12 13.88 21.50 13-Sep-12 20.28 26.50 26-Feb-13 15.71 23.80 15-Apr-13 20.37 26.50 09-May-13 19.26 27.00 24-Jun-13 25.73 28.50 N 23-Jul-13 29.73 31.00 OUTPERFORM NEUTRAL * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for St. Shine (1565.TWO)

1565.TWO Closing Price Target Price Date (NT$) (NT$) Rating 01-Mar-13 529.00 504.00 N * 15-Apr-13 582.00 524.00 08-May-13 633.00 750.00 O 27-Jun-13 750.00 950.00 09-Aug-13 825.00 990.00 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL OUTPERFORM

Taiwan Market Strategy 123 03 December 2013

3-Year Price and Rating History for Ta Chong Bank Ltd (2847.TW)

2847.TW Closing Price Target Price Date (NT$) (NT$) Rating 13-Jan-11 11.17 11.85 N 14-Sep-11 7.70 10.03 21-Nov-11 7.58 8.66 01-Feb-12 6.98 8.02 11-Jul-12 8.47 8.48 03-Jan-13 9.39 9.86 01-Apr-13 10.47 10.33 18-Nov-13 10.30 13.00 O * Asterisk signifies initiation or assumption of coverage. NEUTRAL OUTPERFORM

3-Year Price and Rating History for Taiwan Cement (1101.TW)

1101.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Feb-11 30.25 37.30 O 14-Apr-11 37.70 41.30 03-May-11 40.05 44.10 21-Sep-11 34.30 43.50 09-Jan-12 34.45 41.40 23-Oct-12 37.60 43.30 * 05-Feb-13 39.75 42.50 29-Mar-13 37.50 40.00 14-Aug-13 38.60 45.00 30-Oct-13 42.75 48.20 OUTPERFORM

* Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)

2330.TW Closing Price Target Price Date (NT$) (NT$) Rating 11-Jan-11 74.50 83.00 O 28-Jan-11 76.30 87.00 15-Apr-11 69.20 84.00 29-Apr-11 73.20 86.00 04-Jul-11 73.50 83.00 03-Oct-11 68.60 77.00 27-Oct-11 71.90 79.00 19-Mar-12 83.70 90.00 27-Apr-12 86.00 95.00 19-Jul-12 77.50 87.00 OUTPERFORM NEUTRAL 08-Oct-12 89.10 95.00 N 06-Dec-12 96.60 109.00 O 19-Apr-13 106.50 116.00 * Asterisk signifies initiation or assumption of coverage.

Taiwan Market Strategy 124 03 December 2013

3-Year Price and Rating History for Teco (1504.TW)

1504.TW Closing Price Target Price Date (NT$) (NT$) Rating 14-Aug-12 19.25 24.00 O * 16-Jan-13 23.20 25.70 09-May-13 27.50 32.50 23-Jul-13 34.50 36.00 N * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

3-Year Price and Rating History for Unimicron Technology Corp (3037.TW)

3037.TW Closing Price Target Price Date (NT$) (NT$) Rating 31-Jan-11 60.50 70.00 O 29-Mar-11 46.40 62.00 29-Apr-11 47.15 58.00 29-Jul-11 51.30 58.00 N 03-Oct-11 42.25 47.00 27-Oct-11 39.50 43.00 29-Nov-11 33.95 40.00 12-Jul-12 33.20 38.00 18-Oct-12 31.80 37.00 30-Oct-12 30.30 35.00 OUTPERFORM NEUTRAL 18-Feb-13 28.30 32.00 30-Apr-13 31.10 33.50 10-Jul-13 28.50 33.00 31-Jul-13 27.55 32.00 24-Oct-13 24.10 29.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for WPG Holdings Ltd (3702.TW)

3702.TW Closing Price Target Price Date (NT$) (NT$) Rating 31-Jan-11 52.48 55.05 N 12-Jul-11 43.07 50.46 01-Aug-11 47.25 53.21 O 08-Sep-11 41.60 50.00 31-Oct-11 36.70 44.00 09-Jan-12 36.10 38.50 N 03-Feb-12 40.65 41.00 23-May-12 35.40 38.50 06-Aug-12 32.80 37.50 02-Nov-12 34.85 36.50 NEUTRAL OUTPERFORM 01-Feb-13 39.95 36.00 03-May-13 36.65 39.00 23-Jul-13 38.00 40.00 01-Nov-13 34.50 38.50 * Asterisk signifies initiation or assumption of coverage.

Taiwan Market Strategy 125 03 December 2013

3-Year Price and Rating History for Wistron (3231.TW)

3231.TW Closing Price Target Price Date (NT$) (NT$) Rating 15-Mar-11 41.12 49.24 O 11-Aug-11 35.42 43.19 12-Aug-11 35.33 * 07-Oct-11 31.11 42.63 O 31-Oct-11 31.93 41.72 08-Feb-12 44.58 49.89 30-Apr-12 39.77 45.35 23-Jul-12 31.66 36.28 27-Aug-12 31.81 36.19

31-Oct-12 26.71 32.38 OUTPERFORM 17-Jan-13 31.90 36.19 NEUTRAL UNDERPERFORM 26-Mar-13 32.48 33.33 N 14-May-13 27.86 31.43 04-Jul-13 26.57 28.57 12-Aug-13 24.70 21.00 23-Oct-13 28.10 21.00 U * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Yuanta Financial Holding Co Ltd (2885.TW)

2885.TW Closing Price Target Price Date (NT$) (NT$) Rating 04-Jan-11 19.74 24.73 O 14-Sep-11 14.80 23.50 05-Oct-11 14.65 21.00 01-Feb-12 16.95 20.50 28-Sep-12 15.40 18.00 21-Jan-13 15.15 15.50 N 08-Oct-13 15.95 19.50 O * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Taiwan Market Strategy 126 03 December 2013

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 42% (54% banking clients) Neutral/Hold* 41% (50% banking clients) Underperform/Sell* 15% (41% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Price Target: (12 months) for Nan Ya Plastics (1303.TW) Method: Our 12-month target price of NT$75 for Nan Ya Plastics is based on 1.9x 14E P/B, which is in line with its mid-cycle average during 2000- 2012. Risk: Risks to our 12-month target price of NT$75 for Nan Ya Plastics include a downturn in the petrochemical sector, supply shocks, and declines in the value of its long-term investments, including Nan Ya Technology (2408.TW), Nan Ya PCB (8046.TW), Formosa Petrochemical (6505.TW) and Formosa Chemical & Fiber (1326.TW).

Price Target: (12 months) for Formosa Plastics (1301.TW) Method: Our 12-month target price of NT$75 for Formosa Plastics is based on 1.9x 14E P/B, which is in line with its mid-cycle 5-year average. Risk: Risks to our 12-month target price of NT$75 for Formosa Plastics are on the downside of petrochemical sector, supply shock and value decline of its long term investments, including Formosa Petrochemical (6505.TW), Formosa Chemical & Fiber (1326.TW) and Nan Ya plastics (1303.TW).

Price Target: (12 months) for Formosa Chemical & Fibre (1326.TW) Method: Our 12-month target price of NT$78 for Formosa Chemical and Fibre is based on 1.7x 14E P/B, which is in line with mid-cycle average during 2008-2013. Risk: Risks to our 12-month target price of NT$78 for Formosa Chemical and Fibre are on the downside of petrochemical sector, supply shock and value decline of its long term investments, including Formosa Plastics (1301.TW), Formosa Petrochemical (6505.TW) and Nan Ya Plastics (1303.TW).

Price Target: (12 months) for Hon Hai Precision (2317.TW) Method: Our NT$101 target price for Hon Hai Precision is based on 12x our 2014E earnings per share (EPS). Over the last five years, Hon Hai has traded at 12x calendar two EPS and 15x post the 2008 financial crisis. We believe a 12x multiple is appropriate as Hon Hai has not returned to operating profitability and ROE (return on equity) levels prior to the 2008 financial crisis.

Taiwan Market Strategy 127 03 December 2013

Risk: Risks to our NT$101 target price for Hon Hai Precision: (1) the impact from rising China labour costs is larger than expected; (2) the potential of key clients cutting orders due to the labour events, or the potential and orders are stronger than expected due to PC product cycles and devices including tablets and smartphones; and (3) change in Hon Hai's relationship with Apple, its largest customer in revenue contribution terms.

Price Target: (12 months) for Samsung Electronics (005930.KS) Method: Our 12-month target price of W1,900,000 for Samsung Electronics is based on price-to-book (P/B) target multiple of 1.85x, which is the average P/B multiple for the past ten years and at the top end of the post-2007 P/B range.

Risk: Risks that may impede achievement of our 12-month target price of W1,900,000 for Samsung Electronics include: (1) Heavy earnings dependence on the strength of its smartphone products and its margin sustainability given the intensifying competition within the smartphone industry. (2) Meaningful downgrade in PC and handset industry outlook. (3) Samsung’s System LSI and OLED businesses which are ultimately tied to its handset business, and to certain extent the growth of its key customers businesses.

Price Target: (12 months) for China Shanshui Cement Group Ltd. (0691.HK) Method: Our target price of HK$3.9/sh for Shanshui Cement is based on 7x EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) .

Risk: The key risks to our HK$3.9/sh target price for China Shanshui Cement include highly leveraged earnings to local cement prices, rising coal costs under tight supply, potential upward adjustments to power tariffs by the PRC government and aggressive capex.

Price Target: (12 months) for Anhui Conch Cement Co. Ltd. (0914.HK) Method: Our target price of HK$25.8 for Anhui Conch Cement Co. Ltd. is based on 8x EV/EBITDA (enterprise value to EBITDA) on 2013E unit EBITDA (earnings before interest, tax, depreciation and amortisation) of US$11.5/t, versus the peer range of 5.6-8.0x EV/EBITDA, implied EV/output of Rmb570/t. For every Rmb10/t change in ASP, we estimate earnings and valuation will swing by 20% and HK$4.4/sh, respectively.

Risk: Key risks to our target price of HK$25.8 for Anhui Conch include: (1) cement prices, determined by the industry supply-demand balance, and (2) cost pressure from coal, power and other raw materials. Potentially more stringent controls on cement exports by the government may also be detrimental to the domestic cement market and Anhui Conch's earnings.

Price Target: (12 months) for China National Building Material Co (3323.HK) Method: Our target price of HK$4.8/sh for China National Building Material is based on SOTP, including HK$0/sh for cement based on 7.0x EV/EBITDA(due to high debt), HK$1.1 for RMC based on 5x PE, HK$0.5/sh for other sector on 10x PE and HK$ 3.2 for VAT rebate and subsidy based on 5x PE .

Risk: Risks to our HK$4.8/sh target price for China Building Material Co. (CNBM) include cement and gypsum prices, which are affected by the supply and demand balance of the industry. Demand for building materials can be negatively affective by China's investment trend as well as global economic growth. The engineering services order book may see higher volatility due to limited visibility. CNBM is also enjoying preferential taxes, which could be taken away in the future. Renminbi appreciation poses negative risks for its overseas contracts.

Price Target: (12 months) for Taiwan Cement (1101.TW) Method: Our NT$48.2 target price for Taiwan Cement is based on sum of parts valuation. We apply EV/EBITDA multiple for cement business in Taiwan and China, price/book (PB) multiple for Hoping Power and marked-to-market for other listing companies. In our valuation, cement business accounts for 48%, Hoping Power 16%, LT investment 23% and land & others 13%. Risk: The following risks could impede achievement of our NT$48.2 target price for Taiwan Cement: (1) fluctuations in raw material pricing and supply can reduce demand, (2) squeezed margins, (3) domestic and export average selling price (ASP) decrease, and (4) profitability at the power and port subsidiaries.

Price Target: (12 months) for Asia Cement (1102.TW)

Method: We set our 12-month price target on Asia Cement at NT$44 through the sum-of-the-parts (SOTP) method. In our valuation, cement business accounts for 50% of valuation, FENC for 24%, U-Ming for 10% and other long-term investments for 16%. Risk: The following risks could impede achievement of our NT$44 target price for Asia Cement: (1) fluctuations in raw material pricing and supply could reduce demand and/or squeeze margins, (2) strong pricing competition in the China cement sector could also affect margins and (3) share prices fluctuation of two major holdings (FENC and U-Ming Marine).

Taiwan Market Strategy 128 03 December 2013

Price Target: (12 months) for St. Shine (1565.TWO) Method: Our 12-month target price of NT$990 for St. Shine is based on 22x 2014E EPS, which is 20% higher than mid-cycle average in the past three years, thanks to (1) 31%/34% CAGR in top line/net profit through 2012-2014 and (2) high ROE

Risk: Risks to our 12-month target price of NT$990 for St. Shine include: (1) further margin erosion due to intensifying competition in Taiwan market, (2) unfavourable FX movement, (3) potential share loss to new players in domestic market and 4) LASIK.

Price Target: (12 months) for Teco (1504.TW) Method: Our target price of NT$36 is based on our sum-of-parts model, implying 1.7x FY14 P/B.

Risk: The risks to our target price of NT$36 mainly include (1) higher or lower material prices that would impact its GM, (2) better- or weaker- than-expected demand from North America, and (3) a slower or faster recovery of motor and system automation demand in China.

Price Target: (12 months) for Airtac (1590.TW) Method: Our target price of NT$214 for Airtac is based on 18x 2014 P/E (price-to-earnings), the mid-end of the 13-23x range post the 4Q10 IPO (initial public offering). Risk: The downside risks to our target price of NT$214 for Airtac include the following. (1) Higher-than-expected wage increases which would impact its gross margin. We estimate every 10% wage increase would impact its gross margin by ~3%. (2) Weaker-than-expected demand in 2014. (3) Failure to expand its business in Japan, Taiwan, and Europe. We estimate every 10% revenue loss would impact its EPS by 9%.

Price Target: (12 months) for Advanced Semicon. Engr. (2311.TW)

Method: Our NT$34 target price for ASE is based on 2.2x BVPS and 14x P/E 2014E. We stay positive due to good control on capex, improving margins from lower material cost and incremental sales drivers for ASE. Risk: The risks that may impede achievement of our NT$34 target price for ASE include: (1) The global semiconductor up-cycle not as strong as expected; being an upstream company, ASE tends to be more cyclical than other tech plays. (2) Price competition from peers more severe than expected. (3) ASE, like its peers, would be affected by an unexpected slowdown of the global economy. (4) Cost control not as good as expected.

Price Target: (12 months) for Compal Electronics (2324.TW)

Method: Our NT$27 target price for Compal is about 11x our 2014E EPS. We apply the high-end of its historical range P/E of 11x reflecting a successful turnaround in 2014. Risk: The risks to our NT$27 12-month target price for Compal include the following: (1) further end-demand weakness in both notebooks and tablets for Compal's primary customer, Acer, leading to downward revisions to our estimates, and (2) end-demand for LCD TV is worse than we expect, particularly for Compal's primary customer, Toshiba.

Price Target: (12 months) for Siliconware Precision (2325.TW) Method: Our NT$42 target price for SPIL is based on 2.2x 2013 BVPS, versus the historical trading range of 1.2-2.4x P/B. Risk: The risks that may impede achievement of our NT$42 target price for SPIL are: (1) The 2H13 tech correction. (2) Price competition from peers is more severe than expected. (3) SPIL, like its peers, would be affected by an unexpected slowdown of the global economy. (4) Cost control is not as good as the company expects.

Price Target: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW) Method: Our NT$116 target price for TSMC is reflective of 14.5x of our average 2014E EPS, as the company retains pricing and profitability through its high 28nm HPM and 20nm share, demand drivers for specialty technology and return of cash flows as capital intensity peaks in 2013 and debt issuance is now largely complete. Risk: The risks that may impede achievement of our NT$116 target price for TSMC are: 1) low free cash flows, which we believe will rebound starting in 2014, 2) inventory correction risk which is already running its course through 4Q13, 3) slowdown in smartphone and tablets, mitigated by Apple’s ramp next year and a push up in specs by the China brands, and 4) Apple shifting business to other foundries after 20nm though we believe TSMC can grow this customer in 2014 and 2015 even if it only ramps to 40% allocation.

Price Target: (12 months) for AU Optronics (2409.TW) Method: Our target price of NT$13.5 for AU Optronics is based on 0.75x 12 months forward price to book value, which is the mid cycle multiple for the stock from 2011-2013. We use mid cycle multiple and 12 month forward book value to reflect more accurately the company's earnings potential.

Taiwan Market Strategy 129 03 December 2013

Risk: Risks to our AU Optronics target price of NT$13.5 include the following industry risks: (1) Weaker than-expected TV, IT and handset demand; (2) market share loss to competitors; (3) significant ASP decline; (4) greater losses from solar operation.

Price Target: (12 months) for Epistar Corporation (2448.TW) Method: Our NT$65 target price for Epistar is derived from 1.3x 12 months forward P/B, average of 2009-2013 valuation. Risk: Risks to our NT$65 target price for Epistar includes 1) More new capacity additions in China; (2) weak LED TV demand; (3) slower-than- expected take off for LED general lighting; (4) dilution from private placement; and (5) market share loss to competitors.

Price Target: (12 months) for MediaTek Inc. (2454.TW) Method: Our target price of NT$480 for MediaTek is based on a P/E (price-to-earnings) of 20x 2014E EPS of NT$24 (earnings per share), due to leading position in EM smartphones, growth into TD-SCDMA and tablets, LTE and octa-core launching by end 2013, and operating leverage. Risk: Risks that could impede achievement of our NT$480 target price for Mediatek include: (1) share price volatility and potential downside from inventory and demand swings at its emerging market customer base; (2) competition pressuring pricing and margins more than expected; and (3) local news and market commentary swinging sentiment, typical for a stock with high retail interest in the Taiwan market.

Price Target: (12 months) for Elan Microelectronics Corp (2458.TW) Method: Our target price of NT$60 for Elan Microelectronics is based on 16x forward EPS (earnings per share). The target P/E (price to earnings ratio) is based on its mid-cycle average P/E of 13-20x in the company's recent trading history vs fabless companies' average of 15-25x. Risk: Risks to our target price are: (1) ASP decline on market competition, (2) market share loss to competitors, (3) failure to lower its costs, and (4) weaker-than-expected demand for global NB market.

Price Target: (12 months) for Catcher Technology (2474.TW) Method: Our target price of NT$200 for Catcher is based on 11x FY14 EPS. We use 11x, cycle average P/E.

Risk: Risks to our NT$200 target price for Catcher may include: (1) high customer concentration which could lead to higher volatility in earnings, (2) competitors' yield rates issues, (3) Asian currency appreciation, and (4) end-market demand.

Price Target: (12 months) for EVA Air (2618.TW) Method: Our 12-month target price of NT$20.00 is based on a target EV/CFMV of 167% based on an average of 11.2 % ROIC over 2012-14E and an industry WACC of 6.7%. Risk: Risks to our 12-month target price of NT$20.00 include general exposure to risks from rising fuel prices, competition, uncertain demand and their combined impact on fares, as well as labour unrest and interest rate exposure. BR is also highly sensitive to changes in currency and - with a significant component of revenue generated from freight activities - to competition from dedicated freight operators and other modes of transport. Its high level of network orientation towards regional markets also makes it susceptible to any localized downturn in demand and absence of LCC ownership exposes it to incursions that these might make in the Taiwanese market.

Price Target: (12 months) for China Life Taiwan (2823.TW) Method: We value China Life at a target price of NT$34.04, based on a rolling average of our FY13 EV, using an investment return assumption of 3.5% for VIF and 2.75% for new business. Our adjusted investment return assumption is consistent with our assumption for other insurers but arguably a bit conservative given the company has consistently generated 4.1-5.0% return in the past eight years.

Risk: Key risks that may impede achievement of our NT$34.04 target price for China Life include: (1) sudden change of macroeconomic conditions that will affect China Life's investment return, or an interest rate cut that will affect China Life's recurring yield; (2) capital market risks; (3) operational risks such as key management changes, execution risk, procedural risk or impact of competition; and (4) changes in regulation.

Price Target: (12 months) for Ta Chong Bank Ltd (2847.TW) Method: Our 12-month target price of NT$13 for Ta Chong Bank is based on: (1) a 12-year discounted free cashflow (FCF) valuation with 10% discount rate and 3% terminal growth rate assumptions; and (2) 1.0x price to book (P/B), which is derived using (return on equity (ROE) - g/ r-g) with 10% normalised ROE, 10% discount rate and 3% growth. Risk: Our 12-month target price of NT$13 for Ta Chong could be at risk if: (1) higher credit cost which would have negative impact on the bank's profit or (2) Ta Chong opts to raise more capital to faster finance its business growth plans.

Taiwan Market Strategy 130 03 December 2013

Price Target: (12 months) for Yuanta Financial Holding Co Ltd (2885.TW) Method: Our target price of NT$19.5 for Yuanta FHC (2885.TW) implies 1.4x price to book ratio (P/B, ex goodwill), based on our sum-of-the-parts: 1.6x P/B for brokerage, 1x P/B for margin finance, 1x P/B for the bank and 1x P/B for other subsidiaries.

Risk: Key risk factors to our target price of NT$19.5 for Yuanta FHC (2885.TW) include potentially weak equity market conditions, as the company's earnings are highly leveraged to capital market performance

Price Target: (12 months) for CTBC Holding (2891.TW) Method: Our target price of NT$22.5 for CTBC Holding is based on the Gordon growth model. The assumptions include minimum Tier 1 ratio of 7.5%, cost of capital of 11.7% and 3% terminal growth. We value Chinatrust's share at 1.3x P/B (price-to-book). Risk: Risks to our target price of NT$22.5 for CTBC Holding include: If credit costs increases more than we anticipated or the cycle prolongs and extends to what we currently anticipate, Chinatrust's earnings per share (EPS) and return on equity (ROE) will fall short of our expectations.

Price Target: (12 months) for President Chain Store (2912.TW) Method: Our NT$264.5 target price for President Chain Store is based on sum-of-the-parts method. In our valuation, Taiwan CVS business accounts for 73% of valuation, while other retailing business and long-term investments account for 27%. Risk: Potential risks to our NT$264.5 target price for President Chain store include: government intervention, further write-offs on the non-core investments, margin contraction/expansion, industrial competition and property market risks.

Price Target: (12 months) for Wistron (3231.TW) Method: Our 12M TP of NT$21 is based on 8x 2014E EPS, below historical average P/E of 8.5x, due to the declining core notebook businesses. Risk: Risks to our NT$21, 12-month target price for Wistron include the following: (1) Commercial PC refreshment slows, creating risks for Wistron's notebook PC business. Missteps by Wistron's key customers, Dell and Lenovo, could also heighten risks in its notebook business, (2) The LCD TV business continues to suffer from customer concentration at Sony and the inability of Wistron to diversify its customer base further, (3) The evolving server-ODM model into a direct sales model disrupts existing server ODM business. A weakness in its relationships with its key OEM customers here could seep into other areas, including PCs and storage, and 4) Further dilution through financing activities (i.e. convertible bonds) to raise capital could disrupt shareholder confidence.

Price Target: (12 months) for Kinsus Interconnect Tech (3189.TW) Method: Our TP is NT$120 puts the stock at 2x P/B, versus its historical trading range of 0.7-3.3x (P/B).

Risk: Risks to our NT$120 target price for Kinsus include: (1) margin compression due to more aggressive price competition or undisciplined capacity expansion; (2) weaker/better-than-expected handset and networking demand; (3) competition landscape change due to the change of FC-CSP material; (4) raw material prices hikes i.e. gold, and (5) faster/slower-than-expected progress in China basestation installation

Price Target: (12 months) for Largan Precision (3008.TW) Method: Our target price of NT$1,130 for Largan Precision is based on 16x FY14E EPS (earnings per share), to reflect the multiple catalysts including (1) better than expected Q2 outlook, (2) brands’increasing focus on better image quality and (3) current undemanding valuation.

Risk: The downside risks to our target price of NT$1,130 for Largan Precision include (1) Apple apparently gives the supply chain pretty aggressive forecasts for H2, (2) Largan should have much lower share at low-priced iPhone (this is already in our model); and (3) Sunny Optical is ramping up faster than expected.

Price Target: (12 months) for Unimicron Technology Corp (3037.TW) Method: Our target price of NT$29 for Unimicron is based on 0.9x P/B (price-to-book), justified by a slower growth outlook and cycle-average ROE (return on equity) of 7-8%.

Risk: Risk factors to our target price of NT$29 for Unimicron are: (1) weaker demand for handsets, consumer electronic products, and NB PCs, (2) bigger-than-expected margin erosion, given increased competition, weaker demand for high-end handsets, rising raw material prices (copper and gold), and unfavourable currency movement, (3) aggressive expansion from its substrate peers may lead to over-supply and unfavourable pricing environment for entry-level HDI PCBs, and (4) slower/faster than expected penetration into new FC BGA substrate customer.

Taiwan Market Strategy 131 03 December 2013

Price Target: (12 months) for Lextar (3698.TW) Method: Our target price of NT$31 for Lextar is based on 1.3x 12-month forward P/B, its mid-cycle average.

Risk: Risks that could impede achievement of our NT$31 target price for Lextar include: (1) Slower-than-expected take off for LED general lighting; (2) global economic slowdown, less LED TV demand; (3) a major shareholder sell down; and (4) failure to deliver synergy on the Wellypower acquisition.

Price Target: (12 months) for WPG Holdings Ltd (3702.TW) Method: WPG's target price of NT$38.5 is based on 12x our 2014E EPS, in-line with the midpoint of its ex-Lehman 9-15x range from 2006-10.

Risk: The major risks to our 12-month target price of NT$38.5 for WPG (3702.TW) include: (1) Outlook of WPG's semiconductor distribution business is tied to the overall semiconductor demand. (2) Relationship with IC suppliers (3) Risk of excess component inventory and cash flow management and (4) Financial costs and availability of bank credits.

Price Target: (12 months) for Chipbond (6147.TWO) Method: Our 12-month forward target price of NT$72 for Chipbond is based on 13x 12M price-to-earnings. Risk: Key risks to our target price of NT$72 for Chipbond include: (1) weaker-than-expected demand for smartphones, tablet PCs, NBs, monitors and TVs , (2) market share loss, (3) NTD appreciation and (4) labour wage hike.

Price Target: (12 months) for Radiant Opto-Electronics (6176.TW) Method: Our target price of NT$126 for Radiant is based on 11x 12M P/E (price-to-earnings), the mid cycle of its historical range.

Risk: The upside risks to our target price of NT$126 for Radiant include: (1) Better-than-expected iPad shipments on greater demand or share gain; (2) Faster-than-expected transition to ultrabook; and (3) Recovery of high-end TVs. Downside risks include: (1) Market share loss to Korean counterparts or TFT makers in-house BLM capacity for iPad; (2) Weaker-than-expected tablet PC and ultrabook demand on global economic slowdown; and (3) Long-term threat of adoption of AMOLED display for tablets and NB PCs by global brands as it does not require a backlight module.

Price Target: (12 months) for RDA Microelectronics (RDA.OQ) Method: Our target price of US$17.5 is based on 13.5x 2014E EPS, a slight premium to US/Taiwan peers at 13x but well below China tech A- shares at 35x 2014E EPS. RDA as acquisition candidate could focus on long-term product development and optionality for relisting in US, HK or as a China A-Share. Risk: Our target price of US$17.5 has following risks: (1) Concentration on handsets and small customers, (2) Lack of tier one customers, (3) Risk of bundling and integration from base and competitors, (4) Risk of more aggressive price competition, (5) Technology migration risk, (6) Concentrated share ownership and 180 day lock-up, and (7) Litigation risk.

Price Target: (12 months) for Spreadtrum Communication (SPRD.OQ) Method: Our US$31 target price reflects a 10% upside now to the revised offer price. The valuation at take-out is reasonable at 13x 2013E GAAP EPS, in-line with the peer group. Risk: Upside risk to our US$31 target price for Spreadtrum include: (1) a negotiated higher bid price (RF/Comms peers average 13x 2013E EPS), (2) rival bid from another chip company, (3) further 2H sales momentum. Downside risk is the bid falls through and fundamentals correct on rising competition or from excess channel inventory.

Price Target: (12 months) for Realtek Semiconductor (2379.TW) Method: Our target price of NT$75 is based on 13x 2013E EPS, in-line with its peers. Realtek has concentrated exposure to competitive PC products seeing maturing growth and price erosion, overshadowing contribution from consumer, wireless and digital home applications with more potential. Risk: The major risk to Realtek achieving our NT$75 target price is the company's business concentration on the PC industry. Realtek derives 66% of its sales supplying products into the PC industry, a sector known for standardization and focus on continuous cost reduction. Due to the large size and standard nature of the architecture, many of Realtek's products face competition and commoditization, placing risks on pricing and margins. The segment is also at risk of slowdown as the consumer purchasing shifts to tablets or other media consumption devices where Realtek may have less silicon designed in. Other risks include: (1) its capability to gain market share in key products; (2) its margins trends, and (3) foundry manufacturing risks, (4) inventory cycle risks to sales when channel inventories are at high levels.

Taiwan Market Strategy 132 03 December 2013

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (2317.TW, 005930.KS, 0691.HK, 3323.HK, 1101.TW, 2311.TW, 2324.TW, 2330.TW, 2448.TW, 2454.TW, 2823.TW, 2847.TW, 2891.TW, 3231.TW, 3037.TW, 3698.TW, RDA.OQ, BX.N, 2603.TW, CG.OQ, 2615.TW, RBS.L, 2610.TW, CBKG.F, 0861.HK, 0992.HK, 0763.HK, MMIJ.J, 009150.KS, 066570.KS, 2498.TW, 2354.TW, 0386.HK, CTX.AX, PCOR.PS, 1898.HK, 4005.T, 051910.KS, 1088.HK, 2888.TW, 1216.TW, 2002.TW, 2890.TW, 2886.TW, 2801.TW, 2881.TW, 2892.TW, 2880.TW, 2412.TW, 2883.TW, 2882.TW, 2887.TW, AMZN.OQ, 6752.T, 2353.TW, 3481.TW, 2357.TW, 034220.KS, 1070.HK, TCLa.TO, 3034.TW, AMD.N, BA.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2317.TW, 005930.KS, 3323.HK, 2311.TW, 2454.TW, RDA.OQ, BX.N, CG.OQ, CBKG.F, 0861.HK, 0992.HK, MMIJ.J, 0386.HK, PCOR.PS, 1898.HK, 1088.HK, 1216.TW, 2883.TW, AMZN.OQ, 6752.T, 3481.TW, 034220.KS, AMD.N, BA.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (2317.TW, 005930.KS, 0691.HK, 2823.TW, 2847.TW, 2891.TW, BX.N, 2603.TW, 2615.TW, RBS.L, 2610.TW, CBKG.F, 0861.HK, 0992.HK, 0763.HK, 066570.KS, PCOR.PS, 2888.TW, 2890.TW, 2886.TW, 2801.TW, 2881.TW, 2892.TW, 2880.TW, 2412.TW, 2883.TW, 2882.TW, 2887.TW, BA.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (2311.TW, RDA.OQ, BX.N, CG.OQ, CBKG.F, 0861.HK, MMIJ.J, 1216.TW, 3481.TW, 034220.KS, BA.N) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (2317.TW, 005930.KS, 3323.HK, 2311.TW, 2454.TW, RDA.OQ, BX.N, CG.OQ, CBKG.F, 0861.HK, 0992.HK, MMIJ.J, 0386.HK, PCOR.PS, 1898.HK, 1088.HK, 1216.TW, 2883.TW, AMZN.OQ, 6752.T, 3481.TW, 034220.KS, AMD.N, BA.N) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (1303.TW, 1301.TW, 2317.TW, 005930.KS, 0691.HK, 3323.HK, 1101.TW, 1504.TW, 2311.TW, 2324.TW, 2448.TW, 2454.TW, 2458.TW, 2474.TW, 2823.TW, 2891.TW, 2912.TW, 3231.TW, 3008.TW, 3037.TW, 3698.TW, RDA.OQ, SPRD.OQ, BX.N, 2603.TW, CG.OQ, 2610.TW, CBKG.F, 0861.HK, 0992.HK, MMIJ.J, 2308.TW, 009150.KS, 066570.KS, 2498.TW, 6971.T, 2301.TW, 2385.TW, 011170.KS, 0386.HK, CTX.AX, PCOR.PS, 1898.HK, 4005.T, 051910.KS, 1088.HK, 1216.TW, 2002.TW, 2890.TW, 2881.TW, 6505.TW, 2883.TW, 2882.TW, 2887.TW, AMZN.OQ, 6752.T, 2353.TW, 3481.TW, 2357.TW, 034220.KS, 0751.HK, 1070.HK, TCLa.TO, 3034.TW, 6239.TW, AMD.N, BA.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (2317.TW, 005930.KS, 0691.HK, 2823.TW, 2847.TW, 2891.TW, BX.N, 2603.TW, 2615.TW, RBS.L, 2610.TW, CBKG.F, 0861.HK, 0992.HK, 0763.HK, 066570.KS, PCOR.PS, 2888.TW, 2890.TW, 2886.TW, 2801.TW, 2881.TW, 2892.TW, 2880.TW, 2412.TW, 2883.TW, 2882.TW, 2887.TW, BA.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (RDA.OQ, SPRD.OQ, BX.N, CG.OQ, 6971.T, AMZN.OQ, 6752.T, AMD.N, BA.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2317.TW, 0914.HK, 3323.HK, 1101.TW, 1102.TW, 1565.TWO, 1504.TW, 2311.TW, 2324.TW, 2325.TW, 2330.TW, 2409.TW, 2448.TW, 2454.TW, 2458.TW, 2474.TW, 2823.TW, 2891.TW, 2912.TW, 3231.TW, 3008.TW, 3037.TW, 3702.TW, 6176.TW, 2379.TW, 2603.TW, CG.OQ, 009150.KS, 2498.TW, 2301.TW, 0386.HK, PCOR.PS, 1898.HK, 051910.KS, 1088.HK, 2888.TW, 2002.TW, 2886.TW, 2884.TW, 2882.TW, 2887.TW, 2353.TW, 3481.TW, 2357.TW, 3034.TW, 3697.TW, 6239.TW, 3042.TW, 2303.TW, 2347.TW). Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd. Credit Suisse has a material conflict of interest with the subject company (0386.HK) . Credit Suisse is acting as financial advisor to both CNOOC Ltd. and SINOPEC on the acquisition of Marathon Oil Corporation's 20% interest in Block 32, offshore Angola. Credit Suisse has a material conflict of interest with the subject company (3697.TW) . Credit Suisse is acting as the Joint non-exclusive financial advisor and facilitator to Mediatek on their announced tender offer for Mstar Semiconductor Inc. Credit Suisse has a material conflict of interest with the subject company (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (1303.TW, 1301.TW, 1326.TW, 2317.TW, 005930.KS, 0691.HK, 0914.HK, 3323.HK, 1101.TW, 1102.TW, 1565.TWO, 1504.TW, 1590.TW, 2311.TW, 2324.TW, 2325.TW, 2330.TW, 2409.TW, 2448.TW, 2454.TW, 2458.TW, 2474.TW, 2618.TW, 2823.TW, 2847.TW, 2885.TW, 2891.TW, 2912.TW, 3231.TW, 3189.TW, 3008.TW, 3037.TW, 3698.TW, 3702.TW, 6147.TWO, 6176.TW, RDA.OQ, SPRD.OQ, 2379.TW, BX.N, 2603.TW, CG.OQ, 2615.TW, RBS.L, 2610.TW, CBKG.F, 0861.HK, 0992.HK, 0763.HK, MMIJ.J, 2308.TW, 009150.KS, 066570.KS, 2498.TW, 2354.TW, 6971.T, 2301.TW, 2385.TW, 011170.KS, 0386.HK, CTX.AX, PCOR.PS, 1898.HK, 4005.T, 051910.KS, PTTGC.BK, 1088.HK, 1088.HK, 2888.TW, 1216.TW, 2002.TW, 2890.TW, 2548.TW, 1722.TW, 2886.TW, 2801.TW, 3045.TW, 2884.TW, 2881.TW, 2892.TW, 6505.TW, 2880.TW, 2412.TW, 2883.TW, 4904.TW, 2882.TW,

Taiwan Market Strategy 133 03 December 2013

2105.TW, 2887.TW, AMZN.OQ, 6752.T, 2353.TW, 3481.TW, 2357.TW, 034220.KS, 0751.HK, 1070.HK, ARM.L, TCLa.TO, 3034.TW, 3697.TW, 0981.HK, 6239.TW, 3042.TW, AMD.N, 2303.TW, BA.N, 2347.TW) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. The following disclosed European company/ies have estimates that comply with IFRS: (RBS.L, CBKG.F). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (0691.HK, 2311.TW, RDA.OQ, BX.N, CG.OQ, RBS.L, CBKG.F, 0861.HK, 0992.HK, MMIJ.J, 066570.KS, 0386.HK, PCOR.PS, PTTGC.BK, 1216.TW, 2002.TW, 3481.TW, 034220.KS, 3034.TW, BA.N) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Thai listed companies mentioned in this report, the independent 2013 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: PTT Global Chemical (Excellent) Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Please find the full reports, including disclosure information, on Credit Suisse's Research and Analytics Website (http://www.researchandanalytics.com) Important MSCI Disclosures The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create and financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. and Standard & Poor’s. GICS is a service mark of MSCI and S&P and has been licensed for use by Credit Suisse.

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Taiwan Market Strategy 134 03 December 2013

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Taiwan Market Strategy TW0089.doc135