MORGAN STANLEY RESEARCH ASIA/PACIFIC

Morgan Stanley Limited+ Jerry Su [email protected] +886 2 2730 2860 Frank A.Y. Wang [email protected] +886 2 2730 2869

April 27, 2011

Stock Rating Equal-weight

Industry View Gross Margin to Improve on Cautious Better ASP Environment Key Ratios and Statistics Reuters: 2451.TW Bloomberg: 2451 TT Taiwan DRAM What's Changed Price target NT$85.00 Price Target NT$77.00 to NT$85.00 Up/downside to price target (%) 2 2011/12 EPS Up 11%, 6% Shr price, close (Apr 26, 2011) NT$83.30 52-Week Range NT$110.50-69.10 Sh out, dil, curr (mn) 426

Price target up from NT$77 to NT$ 85 on better ASP Mkt cap, curr (mn) US$1,229 environment. We expect 2011 gross margin to improve EV, curr (mn) US$927 ~350 bps, as DRAM ASP has rebounded on supply Avg daily trading value (mn) US$3

tightness post the Japan earthquake, and NAND Flash Fiscal Year ending 12/10 12/11e 12/12e 12/13e ASP has improved on more balanced supply/demand. ModelWare EPS (NT$) 3.42 6.53 7.19 7.63 We maintain our Equal-weight rating as revenue growth Prior ModelWare EPS (NT$) 3.51 5.86 6.78 - in Europe is slowing, and its business outlook in China EPS, basic (NT$)* 3.47 6.61 7.19 7.63 and other emerging markets still needs to be examined. Prior EPS, basic (NT$)* 3.56 5.93 6.78 - Consensus EPS (NT$)§ 3.58 5.85 6.95 - 1Q11 preview: Transcend is due to report 1Q results by Revenue, net (NT$ mn) 31,440 33,300 36,957 39,971 end-April. We forecast 1Q gross margin of 13.8%, up EBITDA (NT$ mn) 2,239 3,422 3,632 3,854 630 bps QoQ and 350 bps YoY on better ASP. We ModelWare net inc (NT$ mn) 1,475 2,812 3,059 3,246 forecast 1Q1revenue mix of 63% for NAND, 19% for P/E 23.1 12.8 11.6 10.9 DRAM, and 18% for strategic products. 2Q11 forecast: P/BV 2.0 1.9 1.8 1.7 We forecast 2Q revenue growth of 5-10% QoQ on ~12% RNOA (%) 22.7 32.0 35.0 32.5 ROE (%) 8.1 16.5 16.4 16.5 gross margin. EV/EBITDA 11.3 7.3 6.8 6.2 Div yld (%) 3.5 4.9 5.3 5.7 Building inventory ahead of ASP rise: Transcend is FCF yld ratio (%) 2.1 1.0 4.3 7.1 adding inventory for both commodity DRAM and NAND Leverage (EOP) (%) (52.0) (57.8) (54.6) (55.7) Flash on positive outlook for ASP. We estimate Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework (please see explanation later in this note). commodity DRAM inventory has increased from 1–2 § = Consensus data is provided by FactSet Estimates. * = GAAP or approximated based on GAAP weeks to 2–3 weeks and NAND Flash inventory has e = Morgan Stanley Research estimates increased from 4–5 weeks to 5–6 weeks. Industry DRAM inventory is normal at 1–2 months, given limited output and customer requests.

Risks: 1) European market (except Germany) growth is Morgan Stanley does and seeks to do business with slowing on weak demand. Europe is one of Transcend’s companies covered in Morgan Stanley Research. As main growth drivers, accounting for ~35% sales. 2) a result, investors should be aware that the firm may Transcend leads in India but is facing more competition have a conflict of interest that could affect the on ASP. It could lose market share if it fails to launch objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a competitive new products. 3) Transcend has 10% single factor in making their investment decision. exposure to the Japanese market. We estimate that For analyst certification and other important every 10% loss of its Japan business on weak demand disclosures, refer to the Disclosure Section, would have a negative impact of 1.1% on 2011 EPS. located at the end of this report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Financial Summary

Profit and Loss Statement Cash Flow Statement NT$mn 2010 2011E 2012E 2013E NT$mn 2010 2011E 2012E 2013E Sales 31,440 33,300 36,957 39,971 Net income 1,475 2,812 3,059 3,246 COGS 28,889 29,441 32,812 35,621 Add : Depreciation 52 60 70 72 Depreciation 52 60 70 72 Add : Amortization - - - - Non Depreciation Cost - - - - Associate Share of (P)/L (457) (506) (444) (444) Gross Profit 28,837 29,381 32,742 35,549 Change in working cap (163) (70) (1,138) (333) Operating Expense 2,551 3,859 4,145 4,350 Cash Flow-Operation 908 2,295 1,546 2,541 R&D 821 1,003 1,027 1,013 SG&A 135 196 198 273 Change in LT invest 41 506 444 444 Others 466 639 657 586 Change in FA (490) 338 (40) (40) Operating Profit 144 169 172 153 Change in other asset (4) - - - Non Operating Items 1,730 2,856 3,118 3,337 Cash Flow-Investing (453) 844 404 404 Net Interest 138 479 620 631 Investment Gain (Loss) 9 7 7 8 Change in debt and liab 25 (10) 32 9 Other Non Ops 41 159 183 195 Change in equity (2,600) (1,215) (1,929) (2,105) Pretax Profit 457 506 444 444 issuance of stock (326) 2,101 0 - Taxes (Gain) (351) (180) - - cash dividend (2,545) (1,171) (1,739) (1,892) Net Profit before extra 1,868 3,335 3,738 3,969 others 270 (2,145) (190) (213) Extraordinary 392 523 679 723 Cash Flow-Financing (2,576) (1,225) (1,897) (2,096) Net Profit 1,475 2,812 3,059 3,246 Pretax EPS 4.39 7.84 8.79 9.33 Change in cash (2,121) 1,915 53 849 EPS 3.47 6.61 7.19 7.63 Shares 425 425 425 425 Cash at the beg of yr 7,629 5,507 7,422 7,475 Cash at the end of yr 5,507 7,422 7,475 8,324 EBITDA 1,782 2,916 3,187 3,409 Change in cash (2,121) 1,915 53 849

Balance Sheet Ratio Analysis NT$mn 2010 2011E 2012E 2013E 2010 2011E 2012E 2013E Assets YoY growth (%) Cash & Cash Equi. 5,007 7,422 7,475 8,324 Sales -5.9 5.9 11.0 8.2 Marketable Sec. 501 - - - Cost of goods sold 3.9 1.9 11.4 8.6 A/R & N/R 3,680 3,830 4,496 4,683 Gross profit -54.6 51.3 7.4 4.9 Inventories 2,855 2,874 3,328 3,502 Other operating exp. 552.5 N.M. N.M. N.M. Prepaid Advance - - - - EBITDA -63.2 63.6 9.3 7.0 Other C.Assets 82 1,958 2,298 2,394 EBIT -63.9 65.1 9.2 7.0 Total Current Assets 13,923 16,084 17,598 18,904 Pre-tax profit -66.5 78.5 12.1 6.2 Long-term Investment 3,701 3,701 3,701 3,701 Net income -66.1 90.6 8.8 6.1 Total Fixed Assets 1,967 1,569 1,539 1,507 EPS -66.7 90.5 8.8 6.1 Total Other Assets 17 17 17 17 Total Assets 19,609 21,372 22,857 24,130 Margins (%) Cost of goods sold 91.9 88.4 88.8 89.1 Interest Bearing ST Liab 357 347 379 388 Gross profit 8.1 11.6 11.2 10.9 Non-Interest B ST Liab 1,907 2,083 2,406 2,529 Other operating expenses 0.2 0.0 0.0 0.0 Total Current Liab 2,264 2,430 2,785 2,917 EBIT 5.5 8.6 8.4 8.3 Long-term Liabilities - - - - EBITDA 5.7 8.8 8.6 8.5 Total Other L-T Liab 344 344 344 344 Pre-tax income 5.9 10.0 10.1 9.9 Total Liabilities 2,608 2,774 3,129 3,261 Net income 4.7 8.4 8.3 8.1

Common Stocks 4,255 4,255 4,255 4,255 Balance Sheet Ratios (%) Capital Reserves 4,718 4,804 4,804 4,804 Return on equity (Year end) 8.7 15.1 15.5 15.6 Retained Earnings 5,928 9,539 10,669 11,810 Return on equity (Average) 8.4 15.8 16.0 16.0 Treasury Stock - - - - Return on Asset 7.3 13.7 13.8 13.8 Adjustment For FX (9) - - - Gross debt/equity 2.1 1.9 1.9 1.9 Others 2,110 - - - Net debt/equity -30.3 -38.0 -36.0 -38.0 Total Equity 17,001 18,598 19,728 20,869 Total Liab & Equity 19,609 21,372 22,857 24,130 E=Morgan Stanley Research estimates Source: Morgan Stanley Research, Company data

2 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Transcend Information (2451.TW, NT$83.30, EW, PT NT$85.00)

Risk-Reward View: Balanced Upside/Downside on Our New Target Investment Thesis NT$140 • Improving ASP environment for both DRAM and NAND Flash. 120 • Transcend is adjusting its business model, aiming to increase its 100 NT$100 (+20%) NT$ 83.30 exposure to industrial applications for NT$85.00 (+2%) 80 more stable profitability. • Dividend payout likely to remain

60 NT$60 (-28%) consistent despite softer business. • European and emerging market 40 growth need to be examined. Key Value Drivers 20 • DRAM and NAND pricing. 0 • Gross margin trend amid memory Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Price Target (Apr-12) Historical Stock Performance Current Stock Price cycle and inventory writedown/ reversal.

• Market share gain. Price target NT$85 Base-Case scenario, residual income model. Downside Risks Bull Implies 15x Multi-growth strategy reward: 1) Margin improves on Case bull case NAND/DRAM ASP rebound and higher strategic product mix; 2) • Weaker-than-expected ASP and NT$100 forward P/E faster than expected ramp up of solid state disks (SSD); 3) share inventory writedown. gain in China on strong execution and brand image. • Revenue disruption from weak Base Implies 12x Good execution on strategic products, consistent market European and Japanese economic Case base case share gain for DRAM/NAND modules: Gross margin of 10-12% outlook. NT$85 forward P/E on stable pricing and product mix. Market share gain in Taiwan, • Market share loss on high competition China, Europe, and emerging markets. in Europe, Taiwan and emerging Bear Implies 9x Fails to execute strategy: 1) Failure on strategic product markets. Case bear case execution; 2) market share loss owing to high competition in • Sharper competition erodes margins. NT$60 forward P/E Europe, Taiwan and emerging markets; 3) inventory write-down • New competitors enter. on weak ASP environment; and 4) gross margin erosion on NAND/DRAM oversupply. Upside Risks • Margin improvement on better than Bull-Base-Bear Driven by Market Share Gain and ASP expected DRAM/NAND ASP.

120 • Share gain in China on strong 5 6 execution and brand image. 100 Price Target: 85 10 4 8 100 80 7 • Better-than-expected growth for 85 60 strategic products lifts margins. 60 40 • Faster-than-expected adoption of

20 solid state disks (SSD). New TaiwanDollar (NT$) 0 Bear Market Weak ASP Invenotry Base Market Better than GM further Bull Case share loss write-down Case share gain expected improves on Case in Emerging in Japan ASP better than Markets on and China expected high growth for competition strategic products

Source: FactSet, Morgan Stanley Research estimates

3 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Investment Case

Adjusting price target and EPS estimates: We raise our Exhibit 1 price target to NT$85 from NT$77, implying a P/E of 12x our Transcend Cash Dividend Payout: revised 2011 EPS estimate. We raise our 2011 and 2012 EPS Cash Dividend per Share Dividend Payout (RHS) NT$ estimates by 11% and 6%, respectively, to reflect higher revenue and gross margin assumptions on better ASP 7.0 100% 90% 6.0 environment. 80% 5.0 70% Building inventory ahead of ASP rise: Transcend is adding 4.0 60% inventory for both commodity DRAM and NAND Flash on 50% 3.0 40% positive outlook for ASP. As of end-March, Transcend has 2.0 30% inventory of NT$4 bn, up from ~NT$3.2 bn as of end-4Q10 on a 20% 1.0 consolidated basis. We estimate its commodity DRAM 10% inventory has increased from 1–2 weeks to 2–3 weeks and - 0% NAND Flash inventory has increased from 4–5 weeks to 5–6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e weeks. Industry DRAM inventory is normal at 1–2 months given limited output and customer requests. Source: Company data, Morgan Stanley Research

Chinese business increasing: Transcend’s business from China has increased to 9% now vs. ~5% a year ago. It has Exhibit 2 been working with Synnex for retail distribution in China since DDR III Spot Price vs. Contract: Contract Price is October 2010. It is also is working with ZTE and Hua Wei to sell Increasing…. cards in a bundled business model for handset (US$) % of (Spot - Contract)/Contract Contract Price Spot Price (%) and digital still camera (DSC) application. Management DDR3 1Gb 128Mx8 1033MHz expects China to account for 10-15% of sales in 2011. 4 50

40 Adding SMT lines in Taiwan for better productivity: 3 Transcend aims to add 20 high-speed SMT (Surface Mount 30

Technology) lines (~8mn units/mth) in Taipei to replace the 2 20 existing five slower-speed SMT lines and improve productivity. Transcend will use its Taiwan production site for rush orders 10 from emerging markets given better custom efficiency. Its 1 0 China site will focus on planned production and labor- intensive assembly to support its business in other regions. 0 -10 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Oct-10 Jan-11

Source: DRAMeXchange, Morgan Stanley Research

4 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Exhibit 3 Exhibit 5 NAND 32Gb Spot Price vs. Contract: Bottoming Transcend: Revisions to 2012 Morgan Stanley Earnings Forecasts % of (Spot - Contract)/Contract Contract Price Spot Price (US$) Y/E Dec 31 (NT$ mn) 2012e Previous 2012e Revised Variance NAND 32Gb 4Gx8 MLC (%) Revenue 36,361 36,957 2% 60 30 COGS 32,363 32,812 1% 25 50 Depreciation 76 70 -8% 20 Gross Profit 3,998 4,145 4% 15 40 Operating Cost 915 1,027 12% 10 R&D 202 198 -2% 30 5 Promotion 550 657 19% 0 20 Administrative 162 172 6% -5 Operating Profit 3,084 3,118 1% -10 10 Non Operating Items 513 620 21% -15 Pretax Profit 3,597 3,738 4% 0 -20 Taxes (Gain) 719 679 -6% Net Income 2,878 3,059 6% Jul-08 Jul-09 Apr-09 Oct-08 Jun-07 Jan-09 Feb-07 Mar-08 Feb-10 Mar-11 Sep-07 Dec-07 Aug-10 Dec-10 Nov-06 Nov-09 May-10 Pretax EPS 8.47 8.79 4% Source: DRAMeXchange, Morgan Stanley Research EPS 6.78 7.19 6% Weighted Avg Shares 425 425 0%

Gross Margin 11.0% 11.2% 20 bp Exhibit 4 Operating Margin 8.5% 8.4% 0 bp Transcend: Revisions to 2011 Morgan Stanley Net Margin 7.9% 8.3% 40 bp Earnings Forecasts Source: Morgan Stanley Research

Y/E Dec 31 (NT$ mn) 2011e Previous 2011e Revised Variance Revenue 33,153 33,300 0% COGS 29,594 29,441 -1% Depreciation 66 60 -9% Gross Profit 3,559 3,859 8% Operating Cost 942 1,003 6% R&D 184 196 7% Promotion 586 639 9% Administrative 173 169 -2% Operating Profit 2,617 2,856 9% Non Operating Items 530 479 -10% Pretax Profit 3,146 3,335 6% Taxes (Gain) 629 523 -17% Net Income 2,517 2,812 12%

Pretax EPS 7.41 7.84 6% EPS 5.93 6.61 11% Weighted Avg Shares 425 425 0%

Gross Margin 10.7% 11.6% 90 bp Operating Margin 7.9% 8.6% 70 bp Net Margin 7.6% 8.4% 90 bp Company Description Source: Morgan Stanley Research Founded in 1988, Transcend Information Inc produces over 2,000 memory modules of all types, flash memory cards, USB pen drives, MP3 players, digital photo frames, portable hard disk drives, multimedia products, and accessories. Taiwan DRAM Industry View: Cautious

5 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Valuation Methodology and Risks

We derive our 12-month price target of NT$85 from our RI Exhibit 7 model. We continue to assume a 9% cost of equity, a Transcend: Forward P/E vs. EPS Growth (NT$) steady-state revenue growth rate of 4%, and cash dividend TW 5x 10x 15x 20x EPS Growth (RHS) 250 150% payout of 60-70%. Our new target implies a P/E of 12x our revised 2011 estimate. 200 100%

Risks 150 50% Downside risks to our price target include: 1) Weaker-than- 100 0% expected ASP and inventory write-down; 2) Revenue disruption from weak European and Japan economic outlook ; 50 -50% 3) market share loss on high competition in Europe, Taiwan and emerging markets; 4) margin erosion on higher 0 -100% competition; and 5) entry of new competitors. May- Mar- Feb- Jan- Dec- Nov- Oct- Aug- Jul- Jun- May- Apr- 01 02 03 04 04 05 06 07 08 09 10 11 Upside risks to our target include: 1) Margin improvement Source: TEJ, Morgan Stanley Research on better-than-expected DRAM/NAND ASP; 2) share gain in China thanks to strong execution and brand image; 3) better-than- expected growth for strategic products, leading to higher margins; 4) faster-than-expected adoption of solid state disks (SSD).

Exhibit 6 Transcend: P/B vs. Forward ROE

(NT$) TW 0.75x 1.5x 2x 3x 4.5x Forward ROE (RHS) 250 40%

35% 200 30%

150 25% 20%

100 15%

10% 50 5%

0 0% May- Mar- Feb- Jan- Dec- Nov- Oct- Aug- Jul- Jun- May- Apr- 01 02 03 04 04 05 06 07 08 09 10 11 Source: TEJ, Morgan Stanley Research

6 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Exhibit 8 Transcend Residual Income Model: Base Case

120.00 14% 12.3% 100.00 12.1% 14.97 12% 2.07 80.00 -5.88 10% 9.0% 9.4%

60.00 8%

85.37 83.30 40.00 76.27 6% TRUE 20.00 4%

2% 0.00 Value of Value of Value of Estimated VALUE GAP Current 0% current growth in growth in intrinsic value price Cost of Equity Price-Implied Cost of WACC Price-Implied WACC earnings explicit period terminal period Equity

Source: Morgan Stanley Research, ModelWare Source: Morgan Stanley Research, ModelWare Decimals

Intrinsic Value Model Inputs: Outputs: Cost of equity 9.0% Price 83.30 Long-term ROE on new investments 9.5% IV Per Share (12 Month), Ex. Div Apr-12 85.37 Years to reach steady-state growth 20 Expected share price return 2.48% Steady-state revenue growth rate (%) 4% Expected dividend yield 6.09 3.31% Shares Outstanding 431 Expected total return 5.79% Steady-state borrowing cost (net of tax) 3.0% Steady-state leverage (Net debt/Equity) -50% WACC 12.3% Price target horizon (months) 12 Long-term RNOA on new investments 16.0% Conv. factor - Model to traded Ccy 1.00 Explicit forecast period (years) 8 Decimals 2 Fiscal Year Ending 12

Value Breakdown Residual Income (operating): Beginning NOA 8,275 DCF (operating): Sum of PVRI 17,362 Sum of PVFCFO 25,637 Beginning NNOAL 8,726 Beginning NNOAL 8,726 ROI equity value 34,363 DCF Equity Value 34,363

Residual Income (equity): DDM (Equity): Beginning equity 17,001 Sum of div & net rep 34,363 Sum of PVRI 17,362 DDM equity value 34,363 RI equity value 34,363

Source: Company data, Morgan Stanley Research estimates

7 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Exhibit 9 Global Memory Module Comparison C. Price 52 wk 52 wk Price Mkt Cap EPS P/E (X) P/S (X) P/B (X) EV/EBITDA ROE (%) Company (Ticker) 4/25/2011 High Low Rating Target (US$ m) 11E 12E 11E 12E 11E 12E 11E 12E 11E 12E 11E 12E

Memory Module Transcend (2451.TW) - NT$ 82.20 111.00 69.10 E 85.0 1,210 6.61 7.19 12.4 11.4 1.1 1.0 1.9 1.8 8.3 7.8 15.8 16.0 *Adata (3260.TW) - NT$ 43.00 87.40 41.05 NC NA 339 3.96 NA 10.9 NA 0.3 NA 1.3 NA NA NA 12.2 NA *PQI (6145-TW) - NT$ 16.00 30.40 13.55 NC NA 151 NA NA NA NA NA NA NA NA NA NA NA NA SanDisk (SNDK.O) - US$ 49.78 53.61 33.03 O 65.0 11,783 4.27 5.59 11.7 8.9 2.0 1.7 1.8 1.5 5.3 4.2 16.6 18.6 *Smart Modular (SMOD.N) - US$ 8.18 8.88 4.31 NC NA 519 0.67 0.93 12.3 8.8 0.7 0.6 1.4 1.3 NA NA 12.4 15.8

Taiwan DRAM (2344.TW) - NT$ 8.98 11.15 6.92 O 13.0 1,138 0.87 1.03 10.4 8.8 1.0 1.0 0.8 0.8 3.5 3.2 8.1 9.0 Nanya (2408.TW) - NT$ 14.70 29.63 14.00 U 13.0 1,767 (1.67) 0.73 NM 20.2 0.9 0.7 2.3 2.1 11.9 6.3 (23.0) 10.7 (5346.TWO) - NT$ 5.97 9.84 5.07 U 4.00 1,144 (1.08) 0.60 NM 9.9 0.6 0.5 1.3 1.1 4.1 3.0 (20.4) 11.9 Inotera (3474.TW) - NT$ 14.85 24.00 12.80 E 15.0 2,384 (0.86) 0.21 NM 69.2 1.4 1.3 1.4 1.4 4.2 3.7 (7.8) 2.0 *ProMOS (5387.TWO) - NT$ 1.45 8.14 1.41 NC NA 128 (2.39) NA NM NA 0.2 NA NA NA NA NA NA NA

Global DRAM (005930.KS) - W$ 889,000 1,014,000 735,000 O 1,190,000 121,103 101,829 118,071 8.7 7.5 0.8 0.7 1.3 1.1 3.8 3.0 15.6 15.8 Hynix (000660.KS) - W$ 36,450 37,400 20,100 O 37,000 19,898 3,794 3,864 9.6 9.4 1.7 1.5 2.0 1.6 4.7 4.2 24.1 19.7 Elpida (6665.T) - Yen 1,174 2,109 716 O 1,450 2,910 109 73 10.8 16.1 0.4 0.4 0.9 0.8 3.2 3.1 8.6 5.4 Micron (MU.O) - US$ 11.33 11.95 6.36 O 13.5 11,347 1.10 2.19 NA NA 1.2 1.0 1.2 1.0 3.6 2.1 12.5 20.7 N/A = Not applicable/available * NC = Non covered, NR = Non rated. Forecasts are FactSet consensus estimates E=Morgan Stanley Research estimates, except where noted (*) Source: FactSet, Morgan Stanley Research. For valuation methodology and risks associated with any price targets above, except for the subject company of this report, please email [email protected] with a request for valuation methodology and risks on a particular stock.

8 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Exhibit 10 Transcend Quarterly Income Statement and Forecasts – Reported Basis 2010-13E NT$ (mn) 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011E 2Q2011E 3Q2011E 4Q2011E 1Q2012E 2Q2012E 3Q2012E 4Q2012E 2010 2011E 2012E 2013E Sales 8,101 6,671 8,170 8,498 7,563 8,110 8,783 8,844 8,020 8,704 9,850 10,383 31,440 33,300 36,957 39,971 COGS 7,270 5,925 7,834 7,860 6,517 7,159 7,850 7,914 7,196 7,747 8,705 9,165 28,889 29,441 32,812 35,621 Depreciation 13 13 13 13 13 15 16 16 17 17 17 18 52 60 70 72 Non Depreciation Cost 7,257 5,912 7,821 7,847 6,504 7,144 7,835 7,898 7,178 7,729 8,687 9,147 28,837 29,381 32,742 35,549 Gross Profit 830 746 336 638 1,046 951 933 930 825 958 1,145 1,218 2,551 3,859 4,145 4,350 Total Operating Exp 232 157 147 285 200 257 272 274 235 241 266 285 821 1,003 1,027 1,013 SG&A 118 105 113 130 135 161 170 172 157 153 167 180 466 639 657 586 R&D 37 40 33 34 37 42 45 45 41 40 44 47 144 169 172 153 EBIT 598 589 189 353 846 694 660 656 590 716 879 933 1,730 2,856 3,118 3,337 Non-Oper. Income (Loss) 34 (13) 138 (21) 142 112 113 113 150 157 158 156 138 479 620 631 Net Interest 2 2 2 2 2 2 2 2 2 2 2 2 9 7 7 8 Net Investment Income/ (Loss) 275 (88) 98 171 173 111 111 111 111 111 111 111 457 506 444 444 Other Non-Op. Income/(Loss) (243) 67 31 (205) (60) (40) (40) (40) - - - - (351) (180) - - Pretax Income 632 577 327 332 987 806 773 769 740 873 1,036 1,089 1,868 3,335 3,738 3,969 Income Taxes Exp. /(Gains) 121 177 52 42 59 201 131 131 126 192 176 185 392 523 679 723 Net Profit 511 399 275 291 928 604 642 638 614 681 860 904 1,475 2,812 3,059 3,246 EBITDA 611 603 202 366 859 708 676 672 607 734 896 950 1,782 2,916 3,187 3,409 Reported EPS 1.21 0.94 0.65 0.68 2.18 1.42 1.51 1.50 1.44 1.60 2.02 2.12 3.47 6.61 7.19 7.63 Weighted Average shares 424 425 425 425 425 425 425 425 425 425 425 425 425 425 425 425 EBITDA Margin 7.5% 9.0% 2.5% 4.3% 11.4% 8.7% 7.7% 7.6% 7.6% 8.4% 9.1% 9.2% 5.7% 8.8% 8.6% 8.5% Gross Margin 10.3% 11.2% 4.1% 7.5% 13.8% 11.7% 10.6% 10.5% 10.3% 11.0% 11.6% 11.7% 8.1% 11.6% 11.2% 10.9% Operating Margin 7.4% 8.8% 2.3% 4.2% 11.2% 8.6% 7.5% 7.4% 7.4% 8.2% 8.9% 9.0% 5.5% 8.6% 8.4% 8.3% Tax Rate 19.1% 30.8% 16.0% 12.5% 6.0% 25.0% 17.0% 17.0% 17.0% 22.0% 17.0% 17.0% 21.0% 15.7% 18.2% 18.2% Net Margin 6.3% 6.0% 3.4% 3.4% 12.3% 7.4% 7.3% 7.2% 7.7% 7.8% 8.7% 8.7% 4.7% 8.4% 8.3% 8.1% QoQ(%) Sales QOQ -10% -18% 22% 4% -11% 7% 8% 1% -9% 9% 13% 5% COGS QOQ -3% -19% 32% 0% -17% 10% 10% 1% -9% 8% 12% 5% Gross Profit QOQ -45% -10% -55% 90% 64% -9% -2% 0% -11% 16% 20% 6% Operating Profit QOQ -58% -1% -68% 86% 140% -18% -5% -1% -10% 21% 23% 6% Net Profit QOQ -63% -22% -31% 6% 219% -35% 6% -1% -4% 11% 26% 5% YoY(%) Sales YOY 4% -10% -11% -5% -7% 22% 8% 4% 6% 7% 12% 17% -6% 6% 11% 8% COGS YOY 9% -1% 2% 5% -10% 21% 0% 1% 10% 8% 11% 16% 4% 2% 11% 9% Gross Profit YOY -26% -49% -78% -58% 26% 27% 178% 46% -21% 1% 23% 31% -55% 51% 7% 5% Operating Profit YOY -29% -55% -85% -75% 41% 18% 249% 86% -30% 3% 33% 42% -64% 65% 9% 7% Net Profit YOY -44% -56% -76% -79% 82% 51% 134% 120% -34% 13% 34% 42% -66% 91% 9% 6% Source: Company data, Morgan Stanley Research. E = Morgan Stanley Research estimates

9 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO

basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.

Disclosure Section The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Jerry Su. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Inotera Memories, Inc., Nanya Technology Corp.. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Inotera Memories, Inc., Nanya Technology Corp.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Winbond Electronics. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of March 31, 2011) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

10 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Stock Rating Category Count Total Count Total IBC Category Overweight/Buy 1195 42% 469 47% 39% Equal-weight/Hold 1153 40% 406 40% 35% Not-Rated/Hold 114 4% 22 2% 19% Underweight/Sell 389 14% 108 11% 28% Total 2,851 1005

Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. . Stock Price, Price Target and Rating History (See Rating Definitions)

11 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. Other Important Disclosures Morgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons. With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments. Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Certain information in Morgan Stanley Research was sourced by employees of the Shanghai Representative Office of Morgan Stanley Asia Limited for the use of Morgan Stanley Asia Limited. Morgan Stanley is not incorporated under PRC law and the research in relation to this research is conducted outside the PRC. Morgan Stanley Research will be distributed only upon request of a specific recipient. Morgan Stanley Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves. Morgan Stanley Research is disseminated in Brazil by Morgan Stanley C.T.V.M. S.A.; in Japan by Morgan Stanley MUFG Securities Co., Ltd.; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia to "wholesale clients" within the meaning of the Australian Corporations Act by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents; in Australia to "wholesale clients" and "retail clients" within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of Morgan Stanley Research in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main and Morgan Stanley Private Wealth Management Limited, Niederlassung Deutschland, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by the Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Morgan Stanley Private Wealth Management Limited, authorized and regulated by the Financial Services Authority, also disseminates Morgan Stanley Research in the UK. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc or Morgan Stanley Private Wealth Management representative about the investments concerned. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at Professional Clients only, as defined by the DFSA. The financial products or financial services to which this research relates will only be made available to a customer who we are satisfied meets the regulatory criteria to be a Professional Client.

12 MORGAN STANLEY RESEARCH April 27, 2011 Transcend Information

The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley has based its projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on publicly available information. MSCI has not reviewed, approved or endorsed the projections, opinions, forecasts and trading strategies contained herein. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request.

13 MORGAN STANLEY RESEARCH

The Americas Europe Japan Asia/Pacific 1585 Broadway 20 Bank Street, Canary Wharf 4-20-3 Ebisu, Shibuya-ku 1 Austin Road West New York, NY 10036-8293 London E14 4AD Tokyo 150-6008 Kowloon United States United Kingdom Japan Hong Kong Tel: +1 (1) 212 761 4000 Tel: +44 (0) 20 7 425 8000 Tel: +81 (0) 3 5424 5000 Tel: +852 2848 5200

Industry Coverage:Taiwan DRAM

Company (Ticker) Rating (as of)Price* (04/26/2011)

Jerry Su Phison Electronics Corp. O (02/21/2011) NT$157.5 (8299.TWO) Transcend Information (2451.TW) E (09/21/2009) NT$83.3 Frank A.Y. Wang Inotera Memories, Inc. (3474.TW) E (01/15/2010) NT$14.8 Nanya Technology Corp. U (09/10/2010) NT$14.95 (2408.TW) Powerchip Technology Corporation U (07/17/2008) NT$6.02 (5346.TWO) Winbond Electronics (2344.TW) O (04/02/2010) NT$9.12

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.

© 2011 Morgan Stanley