05 January 2016 Asia Pacific/Taiwan Equity Research Semiconductor Devices

Egis Technology Inc.

(6462.TWO / 6462 TT) Rating OUTPERFORM* [V] Price (04 Jan 16, NT$) 136.00 INITIATION

Target price (NT$) 220.00¹ Upside/downside (%) 61.8 Mkt cap (NT$ mn) 9,311.8 (US$ 281.3) Attractive play on supercycle Enterprise value (NT$ mn) 8,366 Number of shares (mn) 68.47 ■ Initiate with OUTPERFORM and NT$220 TP. We believe Free float (%) 85.0 fingerprint proliferation is still at an early stage and Egis is the only non- 52-week price range 169.5 - 94.0 Apple solution provider with its own algorithm and a proven record for mobile ADTO - 6M (US$ mn) 1.9

*Stock ratings are relative to the coverage universe in each payment. We believe its proprietary algorithm for payment (proven by analyst's or each team's respective sector. ) and higher die/wafer (lower cost) should help gain share and ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). support high EPS growth in 2016-17E. ■ Fingerprint supercycle to be driven by payments. We forecast non-Apple Research Analysts smartphone fingerprint shipment CAGR of 60% over 2015-18, reaching 57% Jerry Su 886 2 2715 6361 penetration in 2018 versus 16% in 2015. We believe this hyper growth should [email protected] be driven by launch of mobile payment platforms (Samsung/Apple Pay, and Derrick Yang others). According to Statista, global transactions at POS processed via 886 2 2715 6367 are expected to witness a 100% CAGR over 2015-20. We also [email protected] believe that fingerprint-enabled credit cards could be the next driver. ■ Egis's algorithm and IP offer share gain opportunities. Egis's passive sensing technology and proprietary algorithm support small-size fingerprint matching and also offers 360-degree matching. Its algorithm has been adopted by Samsung's flagship models in 2015, and it has also started shipping its own sensor chip to Chinese brands. We believe fingerprint authentication for mobile payment has a higher entry barrier, and Egis will be a good second-source partner for non-Apple smartphone makers. ■ Higher growth and entry barrier support valuation. We rate Egis OUTPERFORM with our NT$220 target price implying 15x 2H16-1H17E EPS, which is at a 7% premium to Taiwan fabless peers; we believe Egis's valuation is justified by higher EPS growth on growing fingerprint opportunities, and the potential take-off of fingerprint-enabled credit cards after 2018. Key risks include slower adoption of fingerprint sensor, share loss and lower ASP.

Share price performance Financial and valuation metrics

Year 12/14A 12/15E 12/16E 12/17E Price (LHS) Rebased Rel (RHS) Revenue (NT$ mn) 45.5 515.9 2,439.1 6,236.0 180 120 EBITDA (NT$ mn) -261.0 -8.5 491.9 1,774.5 100 EBIT (NT$ mn) -267.2 -22.1 473.7 1,751.7 130 80 Net profit (NT$ mn) -230.2 -41.8 403.2 1,479.8 60 EPS (CS adj.) (NT$) -3.88 -0.67 5.89 21.61 80 40 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Change from previous EPS (%) n.a. n.m Consensus EPS (NT$) n.a. -0.0 8.1 24.2 The price relative chart measures performance against the EPS growth (%) n.m. n.m. n.m. 267.0 TAIWAN SE WEIGHTED INDEX which closed at 8114.26 on P/E (x) -35.0 -202.7 23.1 6.3 04/01/16 On 04/01/16 the spot exchange rate was NT$33.11/US$1 Dividend yield (%) 0 0 2.2 7.9 EV/EBITDA (x) -34.6 -982.0 17.5 4.2 Performance over 1M 3M 12M P/B (x) 12.8 6.8 5.3 3.1 Absolute (%) -9.9 15.1 23.6 — ROE (%) -52.0 -4.1 25.7 61.4

Relative (%) -6.5 18.4 36.5 —

Net debt/equity (%) Net cash Net cash Net cash Net cash Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

05 January 2016 Focus charts and table Figure 1: Global mobile wallet POS payments to see faster Figure 2: 's non-cash payment is seeing a growth at 100% CAGR over 2015-2020E significant change from 1Q15

US$ bn Mobile wallet POS payments YoY On-line Mobile/POS/Other ATM Telephone Others 800 400% 100% 700 80% 600 300% 1.2% 4.8% 500 60% 0.2% 0.6% 14.9% 400 200% 13.4% 300 40% 76% 73% 64% 66% 200 100% 54% 50% 20% 100 0 0% 0% 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 1Q15 2Q15 3Q15 Source: Statista Source: PBOC

Figure 3: for mobile payments to be the next Figure 4: Non-Apple smartphone fingerprint penetration to new feature on smartphones reach 57% by 2018E and Egis should capture a 19% share 2011 2012 2013 2014 2015 2106 2017 mn units 2014 2015E 2016E 2017E 2018E Samsung shipments 318 330 340 345 350 4G Pre-5G Generation Fingerprint penetration 14% 27% 39% 54% 65% Samsung fingerprint shipments 45 89 133 186 228 <4" 4-5" 5"+ Egis market share at Samsung 0% 0% 4% 6% 8% Display size Egis smartphone fingerprint shipments to Samsung - - 5 11 18

Single core Dual core Quad core Octa core Deca core China and others smartphone shipments 793 873 941 979 1,019 Processor cores Fingerprint penetration 3% 11% 27% 44% 54% 5MP 8MP >13MP China/others fingerprint shipments 26 99 251 435 545 Main camera Egis market share at China/Others 0% 1% 8% 17% 23% Egis smartphone fingerprint shipments to China/Others - 1 19 74 127 15-20% penetration 30% penetration 40-50% penetration NFC Non-Apple smartphone fingerprint shipments 71 188 385 621 774 Unlock Payment Non-Apple smartphone fingerprint penetration 6% 16% 30% 47% 57% Fingerprint Egis fingerprint shipments - 1 24 85 145 Egis total market share at non-Apple brands 0% 1% 6% 14% 19% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: Global credit/debit/prepaid cards install base Figure 6: Zwipe's next-generation fingerprint-enabled credit reached ~9 bn units as of 2014 cards will be powered by payment terminals via NFC

Discover/Diners Club

JCB

American Express

MasterCard

Visa

UnionPay

0 1,000 2,000 3,000 4,000 5,000 6,000 mn units

Source: Company data Source: Company data

Figure 7: Egis' revenue to see strong growth in 2016-17E Figure 8: Egis's GM to be ahead of Taiwan fabless IC peers NT$ mn 77.8% Licensing Sensor chip/module Others 60% 2,000 55% 50% 1,500 45% 40% 1,000 35% 30% 25% 500 20% 2014 2015E 2016E 2017E - Egis Mediatek Realtek Elan FocalTech non-DDI Novatek non-DDI 1Q15 3Q15 1Q16E 3Q16E 1Q17E 3Q17E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Egis Technology Inc. (6462.TWO / 6462 TT) 2 05 January 2016 Attractive play on fingerprint supercycle We believe smartphone fingerprint proliferation is still at an early stage and expect mobile Non-Apple smartphone payments to be the main growth driver over 2016-18. Egis is the only fingerprint solution fingerprint demand should provider besides Apple/AuthenTec that has its own IC/algorithm, and a proven record for post a 60% CAGR over mobile payments. We estimate non-Apple fingerprint shipments will witness a 60% CAGR 2015-18E versus 4% for over 2015-2018—reaching 774 mn units by 2018—versus a 4% CAGR for smartphone unit smartphone units growth over the same period (1.61 bn units in 2018). We believe Egis's proprietary algorithm, lower cost, and dual-sourcing opportunity should drive its earnings growth during 2016-17. Fingerprint proliferation is still at an early stage The launch of mobile payment platforms such as Samsung/Apple Pay, and others (ZTE Fingerprint proliferation will Pay, Alipay, WeChat Pay, etc) will be the main driver for fingerprint adoption on mobile likely be driven by mobile devices. According to Statista, global transactions at POS processed via smartphones are payment and smart cards expected to witness a 100% CAGR over 2015-2020. We estimate global smartphone fingerprint adoption of 29% in 2015 (418 mn units) and will reach 40%/55% in 2016/17E (~100% for iPhone). For non-Apple phones, we estimate penetration of 16% in 2015, increasing to 30%/47%/57% in 2016/17/18. The industry is also developing fingerprint- enabled credit cards, which we believe could be the next growth area after 2018. Egis’s algorithm and IP offer share gain opportunities Egis was formed as a result of a merger of three early specialists in Taiwan's fingerprint Fingerprint authentication industry. Its passive sensing technology and proprietary algorithm support small-size for mobile payment has a fingerprint matching and also offers 360-degree matching, especially for area-type higher entry barrier sensors, that are adopted for mobile payment applications. Its algorithm has been adopted by Samsung's flagship smartphones in 2015, and the company has also started shipping its own sensor chip for Chinese customers in 2H15. We believe fingerprint authentication for mobile payment has a higher entry barrier, and Egis will be a good second source partner as Finger Print Cards dominate the China market with a ~90% share in 2015. Moreover, Egis's 30-40% smaller die size (more die per wafer, lower cost structure) and own algorithm for payment (4-7% support on GM) with a proven track record should help it gain share in 2016-17E. Fingerprint embedded within display will be an opportunity rather than a threat for Egis We believe capacitive fingerprint sensing will be the mainstream technology for mobile Fingerprint embedded devices in the next 2-3 years, given the mature ecosystem and lower cost structure. In the display may require longer term, we see the possibility that fingerprint sensing could be integrated into displays. a more complicated IC If this happens, we believe pure fingerprint module makers could be the most vulnerable, but and algorithm we believe the impact on Egis should be minimal as it can work with display makers by providing processing chip and algorithm. Moreover, as all panel makers are in Asia and fingerprint-embedded display could require a more complicated IC and algorithm, we view the integration trend to be an opportunity rather than a threat for Egis. Higher growth and entry barrier support valuation We initiate coverage on Egis with an OUTPERFORM rating and a target price of NT$220, Our TP of NT$220 is based based on 15x of our 2H16-1H17 EPS or 10.2x 2017 EPS. While the multiple is at a 7% on 15x 2H16-1H17E EPS premium to TW IC design peers (14x), we believe it is justified by higher earnings growth on the back of growing fingerprint opportunities (60% CAGR for non-Apple in 2015-18E), further share gains, and the higher technology barrier for mobile payment. Potential near-term catalysts include earlier-than-expected pull-in for Samsung's A-series models, more design-wins from non-Apple smartphone makers, and alliances with strategic partners for mobile payment in China. Key risks include slower adoption of fingerprint sensors for non-Apple smartphones, market share loss, and weaker ASP.

Egis Technology Inc. (6462.TWO / 6462 TT) 3 05 January 2016

Egis Technology Inc. 6462.TWO / 6462 TT Price (04 Jan 16): NT$136.00, Rating: OUTPERFORM [V], Target Price: NT$220.00, Analyst: Jerry Su Target price scenario Key earnings drivers 12/14A 12/15E 12/16E 12/17E Scenario TP %Up/Dwn Assumptions Licensing (NT$ mn) 0.9 271.8 146.6 224.0 Upside 350.00 157.35 20.0x P/E Sensor chip/module (NT$ mn) 26 177 2,272 5,992 Central case 220.00 61.76 15x P/E Others (NT$ mn) 18.6 67.2 20.0 20.0 Downside 100.00 (26.47) 8.0x P/E

Income statement (NT$ mn) 12/14A 12/15E 12/16E 12/17E Per share data 12/14A 12/15E 12/16E 12/17E Sales revenue 45 516 2,439 6,236 Shares (wtd avg.) (mn) 59.3 62.3 68.5 68.5 Cost of goods sold 32 114 1,237 3,513 EPS (Credit Suisse) (3.9) (0.7) 5.9 21.6 SG&A 131.2 174.4 269.7 349.6 (NT$)DPS (NT$) — — 2.9 10.8 Other operating exp./(inc.) 143.7 235.5 440.6 599.3 BVPS (NT$) 10.6 20.0 25.9 44.5 EBITDA (261) (9) 492 1,775 Operating CFPS (NT$) (6.7) (0.9) (3.4) 20.5 Depreciation & amortisation 6.1 13.6 18.2 22.9 Key ratios and 12/14A 12/15E 12/16E 12/17E EBIT (267) (22) 474 1,752 valuation Net interest expense/(inc.) (4.3) (3.2) (10.7) (13.5) Growth(%) Non-operating inc./(exp.) 3.5 5.5 1.5 17.7 Sales revenue (46) 1,034 373 156 Associates/JV — — — — EBIT (223) 92 2,241 270 Recurring PBT (259) (13) 486 1,783 Net profit (218) 82 1,065 267 Exceptionals/extraordinaries — — — — EPS (173) 83 978 267 Taxes (29.2) 28.4 82.6 303.1 Margins (%) Profit after tax (230) (42) 403 1,480 EBITDA (574) (2) 20 28 Other after tax income — — — — EBIT (588) (4) 19 28 Minority interests — — — — Pre-tax profit (570) (3) 20 29 Preferred dividends — — — — Net profit (506) (8) 17 24 Reported net profit (230) (42) 403 1,480 Valuation metrics (x) Analyst adjustments — — — — P/E (35) (203) 23 6 Net profit (Credit Suisse) (230) (42) 403 1,480 P/B 12.8 6.8 5.3 3.1 Cash flow (NT$ mn) 12/14A 12/15E 12/16E 12/17E Dividend yield (%) — — 2.17 7.95 EBIT (267) (22) 474 1,752 P/CF (20) (154) (39) 7 Net interest — — — — EV/sales 199 16 4 1 Tax paid — — — — EV/EBITDA (35) (982) 18 4 Working capital (172.7) (26.7) (657.4) (96.8) EV/EBIT (34) (378) 18 4 Other cash & non-cash items 43.1 (6.1) (52.2) (249.1) ROE analysis (%) Operating cash flow (397) (55) (236) 1,406 ROE (52.0) (4.1) 25.7 61.4 Capex (15.5) (19.6) (22.9) (22.9) ROIC (83) (17) 52 128 Free cash flow to the firm (412) (74) (259) 1,383 Asset turnover (x) 0.06 0.34 0.86 1.24 Disposals of fixed assets — — — — Interest burden (x) 0.97 0.61 1.03 1.02 Acquisitions — — — — Tax burden (x) 0.89 3.11 0.83 0.83 Divestments — — — — Financial leverage (x) 1.14 1.11 1.60 1.65 Associate investments — — — — Credit ratios Other investment/(outflows) (28.9) 0.0 (2.3) (2.3) Net debt/equity (%) (41.3) (69.1) (38.6) (61.1) Investing cash flow (44.4) (19.5) (25.2) (25.2) Net debt/EBITDA (x) 1 111 (1) (1) Equity raised 99.0 63.2 — — Interest cover (x) 62 7 (44) (130) Dividends paid — — — (201.6) Source: Company data, Thomson Reuters, Credit Suisse estimates Net borrowings (30.1) 30.0 — — Other financing cash flow 563.1 682.4 — — 12MF P/E multiple Financing cash flow 632.0 775.6 — (201.6) 35 Total cash flow 191 701 (261) 1,179 30 Adjustments — — — — Net change in cash 191 701 (261) 1,179 25 Balance sheet (NT$ mn) 12/14A 12/15E 12/16E 12/17E 20 Cash & cash equivalents 275 976 715 1,894 15 Current receivables 10 159 1,219 2,012 Inventories 22.4 30.7 530.9 768.0 10 Other current assets 272.9 176.2 176.2 176.2 5

Current assets 580 1,342 2,640 4,850 0 Property, plant & equip. 13.4 19.3 26.3 28.7 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Investments — — — — Intangibles 162.5 162.6 162.6 162.6 Other non-current assets — — — — 12MF P/B multiple Total assets 756 1,524 2,829 5,041 Accounts payable 9 46 533 1,145 5.0 Short-term debt — 30.0 30.0 30.0 4.5 Current provisions — — — — 4.0 3.5 Other current liabilities 83.2 79.1 494.7 816.8 3.0 Current liabilities 92 156 1,058 1,992 2.5 Long-term debt — — — — 2.0 Non-current provisions — — — — 1.5 Other non-current liab. — — — — 1.0 Total liabilities 92 156 1,058 1,992 0.5 Shareholders' equity 660 1,368 1,771 3,049 0.0 Minority interests — — — — Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Total liabilities & equity 756 1,524 2,829 5,041

Source: IBES

Egis Technology Inc. (6462.TWO / 6462 TT) 4 05 January 2016 Fingerprint proliferation is still at an early stage Egis was funded in December 2007, focusing on fingerprint sensor, algorithm, security Egis was formed through a , etc. It was formed through the merger of three early specialists in Taiwan's merger of three companies fingerprint industry, including LighTuning Tech (focused on fingerprint sensor IC), ABIG (focused on algorithm), and HiTrust (focused on encryption and security software). Egis focused on the NB/tablet market during 2008-11 and supplied fingerprint solution provider for leading NB/tablet brands such as , Acer, HP, , ViewSonic, etc. In 2012, Egis started to provide fingerprint solution for China's Social Welfare program, which helped it to further strengthen its algorithm capability. Egis started to work on fingerprint solutions for mobile devices in 2014 and successfully entered Samsung supply chain by providing the algorithm to Galaxy S6-series. It also developed its own IC, which could be placed on the front, back, and side of the handset, depending on customer requirements. Its proprietary passive sensing technology and strong IP portfolio makes it the only fingerprint solution provider besides Apple/AuthenTec that offers total fingerprint solution, including sensor and algorithm, especially for mobile payment applications.

Figure 9: Egis was formed through the merger of three companies in 2007 Company name Main Business

LighTuning was established in 2002 and is specialised in developing swipe/area type fingerprint ICs

ABiG was established in 2000 and is specialised in fingerprint matching algorithm. Its main customers were Authentec, UPEK, and Validity

HiTrust was established in 1998 and is specialised in encryption and security software

Source: Company data, Credit Suisse Payment is the main driver for fingerprint proliferation on mobile devices Passwords and drawing patterns are used as the primary method to unlock mobile devices until Apple integrated the fingerprint sensor in its iPhone 5S in 3Q13. Although fingerprint identification can provide better security versus passwords and drawing patterns, the penetration rate for non-Apple handset didn’t really take off in 2014-15 given the higher cost, lack of end-application/ecosystem besides unlocking the device, and limited support from the Android . According to Statista, the global mobile payment transaction is expected to reach US$721 Global mobile wallet POS bn by 2017, ~30% CAGR over 2015-17. It also forecasts that the global mobile wallet POS payments to see 100% payments, which are the transactions at Point-of-Sale that are processed via smartphone CAGR in 2015-2020E applications (i.e. mobile wallets), to see a 100% CAGR over 2015-20. We believe this is mainly driven by the launch of mobile payment platforms by Samsung, Apple, and others (ZTE Pay, Alipay, WeChat Pay, etc) and change of consumer behaviour. We also believe the support by FIDO (Fast IDentity Online) Alliance to further accelerate mobile payment

Egis Technology Inc. (6462.TWO / 6462 TT) 5 05 January 2016 via NFC in the next few years and will also support fingerprint proliferation. With the more mature ecosystem and lower component cost, we believe fingerprint will become the mainstream authentication method for these payments, replacing pin or password, as fingerprint identification is faster and more secure.

Figure 10: Global mobile payment transaction to grow at Figure 11: Global mobile wallet POS payments to see ~30% CAGR during 2015-17E faster growth at 100% CAGR during 2015-20E

US$ bn Annual transaction volume YoY (RHS) US$ bn Mobile wallet POS payments YoY 800 100% 800 400% 700 90% 700 350% 80% 600 600 300% 70% 500 60% 500 250% 400 50% 400 200% 300 40% 300 150% 30% 200 200 100% 20% 100 10% 100 50% 0 0% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2014 2015 2016 2017 2018 2019 2020

Source: Statista Source: Statista

Figure 12: Adoption and transaction value for global Figure 13: China's non-cash payment seeing a significant mobile wallet POS payment will also see strong growth change from 1Q15 mn User Avg transaction value per user every year (RHS) US$ On-line Mobile/POS/Other ATM Telephone Others 500 1,800 100% 450 1,600 90% 400 80% 1,400 1.2% 4.8% 70% 350 1,200 300 60% 0.2% 0.6% 14.9% 1,000 13.4% 250 50% 800 200 40% 76% 73% 600 66% 150 30% 64% 400 54% 50% 100 20% 200 50 10% 0 0 0% 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 1Q15 2Q15 3Q15

Source: Statista Source: PBOC Multiple payment platforms roll out in China would propel fingerprint adoption for mobile devices Apple announced Apple Pay service on 9 September 2014 and launched the service in the Apple and Samsung plan to US on 20 October 2014. The service was then rolled out to the UK in July 2015 and then roll-out their payment to Canada/Australia in November 2015. Besides using Apple Pay in the stores with NFC platforms in China in early contactless reader, it also supports using Apple Pay in various apps such as Best Buy, 2016 Starbucks, Target, etc. Samsung also announced its payment service at 2015 MWC and launched Samsung Pay in South Korea and the US in August 2015 and September 2015, respectively. Samsung Pay supports both NFC and MST (Magnetic Secure Transmission), which can work with more POS terminals in the US. However, Samsung’s support on in- app payments will be enabled some time in 2016. For the China market, both Apple and Samsung entered agreements with China’s ZTE also announced ZTE UnionPay on 18 December 2015, and are expected to extend their payment service into Pay in Dec 2015 China in early 2016. Separately, ZTE announced its ZTE Pay on 23 December 2015, providing similar mobile payment service as Apple Pay but can also support payments for

Egis Technology Inc. (6462.TWO / 6462 TT) 6 05 January 2016 public transportation. Although China’s mobile payment today is dominated by Alipay and WeChat pay, we believe the introduction of Apple/Samsung/ZTE Pay with NFC might change the competitive landscape, especially other local handset makers will introduce more fingerprint-enabled devices with their own mobile payment platform or alliance with third parties (ZTE Pay, Alipay, WeChat Pay, UnionPay, individual banks, etc) in 2016-17.

Figure 14: Mobile payment platforms to drive fingerprint authentication Apple Pay Samsung Pay ZTE Pay Android Pay Available countries US, UK, Canada, Australia, Korea, US, China (2016) China US China (2016) Supported devices iPhone 6/6+, iPhone Galaxy S6, S6 Edge, S6 Android phones with NFC Android phones with NFC 6S/6S+, Watch, iPad Air2, Edge+, Note 5 and Fingerprint sensor and HCE support running iPad Mini 3/4, iPad Pro KitKat (4.4) or higher

Authentication methods Fingerprint Fingerprint or PIN Fingerprint PIN, fingerprint (future)

Cards accepted Credit, debit, and selected Credit and debit cards Credit, debit, public Credit, debit, and selected loyalty cards transportation cards loyalty cards Data transfer method NFC NFC and MST NFC NFC

In app payment Available now Available soon Developing Available now

Source: Company data, Credit Suisse Lack of new selling points for smartphone also make fingerprint a nice to have feature CS Hardware team estimates global smartphone shipment growth to slow down to 4% Fingerprint is becoming CAGR over 2015-18E versus 19% CAGR in 2013-15E and 36% CAGR during 2010-15E. more popular on We believe this is mainly due to the already high installation base of smartphone, smartphone given lack of especially in China, and that smartphone today lacks new selling points to attract new features consumers’ attentions. The smartphone industry has experienced rapid growth in 2010- 2014 but competition intensified in 2015 as more local brands and whitebox makers entered the market. Under this competitive environment, most brands tried to differentiate themselves by offering larger size and higher resolution display, multi-core CPU, more memory content, better camera, more stylish design (casing, curved, thickness); however, we believe the size and spec upgrades are reaching a limit.

Figure 15: Global smartphone growth is slowing down

mn units Smartphone YoY (RHS)

2,000 80% 1,800 70% 1,600 60% 1,400 1,200 50% 1,000 40% 800 30% 600 20% 400 200 10% - 0% 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Source: Company data, Credit Suisse estimates For 2016, we believe smartphone makers will adopt fingerprint sensor, force-touch, dual Native support from Android camera, embedded touch, etc features as their selling points for the new models. For the 6.0 will also help on the non-Apple smartphone makers, we believe fingerprint will see faster proliferation from proliferation 2016 on more established ecosystem, more affordable pricing, and the native support from

Egis Technology Inc. (6462.TWO / 6462 TT) 7 05 January 2016

Android 6.0 operating system. According to the smartphone supply chain, the latest Android 6.0 Marshmallow added a new fingerprint application programing interface (API), which support not only unlocking of the device, but also enables users to authorize mobile payments and in-app purchases with their fingerprints.

Figure 16: Fingerprint for mobile payment to be the next new feature on smartphone 2011 2012 2013 2014 2015 2106 2017 3G 4G Pre-5G Generation

<4" 4-5" 5"+ Display size

Single core Dual core Quad core Octa core Deca core Processor cores

5MP 8MP >13MP Main camera

15-20% penetration 30% penetration 40-50% penetration NFC

Unlock Payment Fingerprint

Source: Company data, Credit Suisse estimates We also believe force-touch and dual camera are nice to have functions but we think the proliferation take-off might be in 2017 or later since the ecosystem and apps are still not that ready in the near term. Nevertheless, we expect more non-Apple smartphones to adopt force-touch sensor in their 2016 models and dual camera might become more popular in 2017, especially after the next iPhone includes dual-camera feature by 3Q16. 30% penetration for non-Apple smartphone in 2016E We estimate the penetration for smartphone with fingerprint sensors of 29% in 2015E and 60% CAGR for will increase to 40% in 2016E with ~100% of iPhone will be equipped with fingerprint non-Apple sensor. For the non-Apple smartphone devices, we estimate its fingerprint penetration only fingerprint shipment reached 16% in 2015E but should increase to 30% in 2016E, thanks to the push by in 2015-18E Samsung and Chinese brands. We estimate the fingerprint sensor adoption rate for non- Apple will further increase to 47% in 2017 and 57% by 2018, with 60% CAGR for fingerprint sensor shipment growth in 2015-2018E versus 4% CAGR for non-Apple smartphone unit growth in the same period.

Figure 17: Global smartphone fingerprint penetration to Figure 18: Non-Apple smartphone fingerprint penetration reach 67% by 2018E to reach 57% by 2018E mn units Global smartphone fingerprint shipments Penetration (RHS) mn units Non-Apple smartphone fingerprint shipments Penetration (RHS) 1,200 80% 900 60% 57% 70% 800 1,000 67% 50% 60% 700 47% 800 55% 600 40% 50% 500 600 40% 40% 30% 30% 400 29% 30% 400 300 20% 20% 16% 19% 200 200 10% 10% 100 6% - 0% - 0% 2014 2015E 2016E 2017E 2018E 2014 2015E 2016E 2017E 2018E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates For Samsung, it currently adopts fingerprint sensors on its flagship models such as Galaxy S6, Galaxy S6 edge, and Galaxy Note 5, as well as some mid- to high-end models. We believe Samsung will extend the fingerprint adoption to its mid-range A-series models in

Egis Technology Inc. (6462.TWO / 6462 TT) 8 05 January 2016

2016 and in the long term it will also expand it to the entry level J series and make fingerprint sensor a standard feature for its smartphones. We also believe other non-Chinese Android smartphone makers in North Asia, such as Whitebox is also adopting Asus, LG, HTC, , Panasonic, etc will introduce more fingerprint-enabled smartphones fingerprint on their mid- to in 2016. The Chinese smartphone makers, , , , Vivo, etc have high-end devices announced their fingerprint-enabled smartphones since 2014 and we have also seen other brands such as LeTV, , Lenovo, ZTE, Gionee, etc launched their products in 2015. Our supply chain visit in October 2015 also suggests whitebox makers such as Elephone, Malata, Leagoo, etc are now adopting fingerprint onto their mid- to high-end devices.

Figure 19: Global smartphone fingerprint shipment estimates: Non-Apple to grow at 60% CAGR over 2015-18E mn units 2014 2015E 2016E 2017E 2018E 15-18E CAGR Total Smartphone 1,303 1,438 1,504 1,559 1,614 3.9% YoY (RHS) 28% 10% 5% 4% 4% iPhone shipments 193 235 222 235 245 1.4% Fingerprint penetration 91% 98% 100% 100% 100% iPhone fingerprint shipments 175 230 222 235 245 2.1%

Samsung shipments 318 330 340 345 350 2.0% Fingerprint penetration 14% 27% 39% 54% 65% Samsung fingerprint shipments 45 89 133 186 228 36.9%

China and other smartphone shipments 793 873 941 979 1,019 5.3% Fingerprint penetration 3% 11% 27% 44% 54% China and other smartphone fingerprint shipments 26 99 251 435 545 76.8%

Global smartphone fingerprint shipments 246 418 607 856 1,082 37.3% Non-Apple smartphone fingerprint shipments 71 188 385 621 774 60.3%

Global smartphone fingerprint penetration 19% 29% 40% 55% 67% Non-Apple smartphone fingerprint penetration 6% 16% 30% 47% 57% Source: Company data, Credit Suisse estimates However, some of the fingerprint devices announced in 2015 (for example Sony Z5, ZTE Not all fingerprint-enabled Blade A1, LeTV Max, , etc), only supports unlock function, not for the payment devices support payment authentication. Nevertheless, we believe the native support by Android 6.0, maturing ecosystems, and cheaper components cost will be the main push for the fingerprint authentication for mobile payments among the Chinese smartphone makers.

Egis Technology Inc. (6462.TWO / 6462 TT) 9 05 January 2016

Figure 20: Selective branded smartphones with fingerprint enabled Brand Coolpad Dove Huawei LeTV LeTV LG Meizu Samsung Model name Dazen Note 3 L5 Pro Nexux 6P 7 1S Max V10 MX5 A5

Fingerprint sensor FPC Goodix FPC FPC Goodix FPC FPC FPC Synaptics/Egis Algorithm Precise Biometric Goodix Precise Biometric Precise Biometric Goodix Precise Biometric Precise Biometric Precise Biometric Samsung/Egis Location Back Front Back Back Back Back Back Back Front

Brand Meizu Nubia OnePlus Oppo Samsung ZTE ZTE Lenovo Samsung Model name Pro 5 Z9 Max OnePlus 2 R7+ Galaxy S6 Blade S7 Axon ZUK Z1 A7

Fingerprint sensor FPC Egis FPC FPC Synaptics Goodix FPC FPC Synaptics/Egis Algorithm Precise Biometric Egis Precise Biometric Precise Biometric Egis Goodix Precise Biometric Precise Biometric Samsung/Egis Location Front Side Front Back Front Front Back Front Front Source: Company data

Figure 21: Increasing numbers of whitebox smartphones adopting fingerprint solutions Company Bluboo Blackview Quality Malata Bluboo DOOGEE Maysun Malata LEAGOO Elephone Elephone 8Smobile Model name X6 Alife P1 Pro QT-815 L508 X6 Plus F5 M5530L M1 Elite 1 P9000 Vowney 8S5631

Image Size 5.5" 5.5" 5.5" 5.0" 5.5" 5.5" 5.5'' 5.2'' 5.5'' 5.5'' 5.5'' 5.5'' Technology TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE TDD-LTE/FDD-LTE Pixels 1280*720 1280*720 1280*720 1280*720 1920*1080 1920*1080 1920*1080 1920*1080 1920*1080 1920*1080 2560*1440 2560*1440 PPI 267 267 267 293 400 400 400 423 400 400 534 534 Touch Capacitive G/F/F Capacitive G/F/F Capacitive Capacitive G/F/F G/F/F Capacitive Capacitive Capacitive Capacitive Fingerprint ID Area (front) Area (front) Area (back) Area (front) Area (front) Area (back) Area (back) Area (back) Area (front) Area (side) Area (back) Area (back) RAM 1GB 2GB 1GB 1GB 3GB 3GB 3GB 3GB 3GB 4GB 4GB 3GB ROM 8GB 16GB 8GB 8GB 16GB 16GB 16GB 16GB 32GB 32GB 32GB 32GB Camera 2MP + 8MP 5MP + 13MP 2MP + 5MP 5MP + 13MP 5MP + 13MP 5MP + 13MP 5MP + 13MP 8MP + 21MP 13MP + 16MP 8MP + 21MP 5MP + 21MP 8MP + 21MP Battery 3000mAh 2600mAh 2900mAh 2400mAh 3000mAh 2660mAh 4000mAh 2300mAh 2400mAh 4000mAh 4000mAh Processor Chip MT6735 MT6735 MT6735 MT6735 MT6753 MT6753 MT6753 MT6755 MT6755 (P10) MT6755 MT6795 (X10) MT6795 (X10) Multi-core Quad Quad Quad Quad Octa Octa Octa Octa Octa Octa Octa Octa Factory Price (USD) $85 $99 $110 $120 $125 $130 $154 $160 $167 $240 $250 $270 Source: Company data Smart/Credit cards could be the next growth area Master Card announced in October 2014 that it has partnered with Zwipe and introduced the world’s first contactless payment card that integrated a fingerprint sensor. The prototype demonstrated by Zwipe included its secure biometric authentication technology that stores the cardholders’ biometric data on the card, not in an external database. It claims its biometric authentication can replace the PIN entry, thus allowing cardholders to make payments of any amount, versus current contactless payment cards in the market today, which still requires PIN or signature for spending that exceeds a certain amount. According to Zwipe, it is using Fingerprint Cards’ (FPC) fingerprint sensor in the pilot product. Master Card/Zwipe are also working on the next generation of the fingerprint-enabled Fingerprint enabled credit credit card that can harvest energy from the credit card payment terminals without the card is under development need for a battery. We believe this could be a new growth driver for the fingerprint sensor industry given the biometric authentication with contactless payment card offers security and convenience for consumers, merchants, and banks. This technology can also be used for other applications such as access card, networking/PC login, and other security required applications.

Egis Technology Inc. (6462.TWO / 6462 TT) 10 05 January 2016

Figure 22: Zwipe's fingerprint-enabled credit card Figure 23: Zwipe's next generation fingerprint-enabled prototype and next generation product credit card will be powered by payment terminal via NFC

Source: Company data Source: Company data According to our analysis, global credit, debit, and pre-paid cards issued by Visa, Master Global credit, debit, and pre- Card, American Express, JCB, and UnionPay have reached ~9 bn units as of 2014. The paid cards install base is 5- installation base is 5-6x of the smartphone annual shipments and represents a huge 6x of the smartphone opportunity for the fingerprint sensor supply chain. Other than Master Card, China’s shipments UnionPay is also interested to develop fingerprint authentication solutions.

Figure 24: Global credit/debit/pre-paid cards install based Figure 25: China's credit cards and banking cards saw reached ~9 bn units as of 2014 significant growth in the past few years

Discover/Diners Club mn units 5,500 JCB 5,000 American Express 4,500 MasterCard 4,000 Visa 3,500 3,000 UnionPay 2,500 0 1,000 2,000 3,000 4,000 5,000 6,000 2,000 mn units 2011 2012 2013 2014 3Q15

Source: Company data Source: PBOC

Egis Technology Inc. (6462.TWO / 6462 TT) 11 05 January 2016 Egis’s algorithm and IP offer share gain opportunities Capacitive sensing is the mainstream technology for mobile devices Fingerprint sensing has been around and applied to various devices and applications for Area-type capacitive the past decades. There are four major steps for the fingerprint sensing process flow: sensing is the mainstream fingerprint scanning, minutiae (feature) extraction, digital processing and matching. Before fingerprint sensing Apple adopted the capacitive touch fingerprint sensor on the iPhone, optical and technology capacitive swipe was the mainstream sensing technology of fingerprint scanning and was adopted on door locks, NB, national security, banking, etc. Nevertheless, the market size for these applications is relatively small and shipments didn’t take off until Apple adopted the fingerprint sensor onto iPhone 5S.

Figure 26: Optical fingerprint module Figure 27: Capacitive fingerprint sensor

Source: Gingytech Source: Egis Although optical fingerprint scanning is a mature technology, its requirement for a high photo sensitivity camera with thicker design makes it difficult to fit into mobile devices. The fingerprint sensors used on iPhone and other Android devices have adopted capacitive scanning as it has the advantages of smaller form-factor, higher resolution, lower power consumption and cheaper cost. Among the swipe and area-type capacitive fingerprint sensing technologies, we believe area-type will become the mainstream as it is more accurate, easier to use, and offers more flexible industrial design.

Figure 28: Comparison of area and swipe-type capacitive fingerprint sensors Area Swipe Chip size Medium to small Small Image quality Good Weak Cost Low Low Accuracy High accuracy Less accurate User experience Good More difficult to use Source: Company data, Credit Suisse Active capacitive sensing is widely adopted but need to get around Apple’s IP Capacitive fingerprint sensing in general measures capacitance of the finger, which varies between the ridges and valleys of the fingerprint, to form the image of the fingerprint. There are two different sensing methods:

1) Active sensing: Active capacitive fingerprint sensing is widely adopted by several Active sensing might face IP fingerprint sensor providers such as FPC, IDEX, Synaptics, Goodix, Silead, etc, issues despite potential risk for violating Apple/AuthenTec’s patents. The fingerprint module applies a small voltage to the skin and the sensor measures the capacitance on the finger to reform an image of the fingerprint. The pros of active sensing is that it can measure the live skin cell layer, hence does not require the need for clean,

Egis Technology Inc. (6462.TWO / 6462 TT) 12 05 January 2016

undamaged skin and a clean sensing surface. However, active sensing requires additional circuits, shielding layers, metal rings, which results in a higher cost versus passive sensing. 2) Passive sensing: Passive sensing use the sensor array to detect the Passive sensing with lower capacitance on the fingerprint, which varies between the ridges and valleys of the cost structure is feasible fingerprint. Passive sensing has the advantages of less complicated wafer processing with the right algorithm and better cost structure, but has a weaker signal. It requires a unique hardware design and software/algorithm to achieve better results. Egis. Elan, IMD, FocalTech, etc have developed their fingerprint sensors based on passive sensing technology but we believe Egis is the only vendor that has enabled passive fingerprint sensing on mobile devices given its superior algorithm capability.

Figure 29: Passive capacitive fingerprint sensing Figure 30: Active capacitive fingerprint sensing structure structure

Source: Company data, Credit Suisse Source: Company data, Credit Suisse Algorithm for mobile payment sets a higher entry barrier Most of the non-Apple fingerprint solution suppliers can offer their own algorithm for using Egis is the only non-Apple fingerprint to unlock the phone, but still rely on third-party algorithm suppliers for the fingerprint vendor that has mobile payment application. Currently, leading fingerprint solution providers such as FPC its own algorithm and Synaptics, as well as new comers such as Elan, FocalTech, Silead, etc all license algorithm from third-party suppliers such as Precise Biometric or Egis. We believe the main reasons for this is because: (1) the sizes for the fingerprint sensor/ module become smaller on the mobile devices, which results in a smaller detection area and requires a more complicated algorithm to meet the FAR (False Acceptance Rate, <1/50,000) and FRR (False Rejection Rate, <3%) standards, and (2) algorithm and software for mobile payment require longer design-in cycle as it is more complex to integrate payment function with handset makers, payment platforms, and within an acceptable response time. Some payment or handset makers might also require FIDO (Fast Identity Online) certificate, which build a higher entry barrier for new entrants.

Egis Technology Inc. (6462.TWO / 6462 TT) 13 05 January 2016

Figure 31: Integration of payment APK and design complexity lead to higher entry barrier

Source: Egis Egis' proprietary algorithm supports (1) small size fingerprint matching and (2) 360-degree matching, especially for area-type sensors that are adopted for mobile payment applications. Egis signed licensing agreements with Synaptics and Samsung in 2015, and its algorithm has been used on Samsung’s flagship smartphone with Synaptics’ sensor. Egis also started to develop its own sensor chip from 2014 and already have commenced shipments for Chinese smartphone customers in 2H15. We believe Egis is the only fingerprint solution provider for the non-Apple camp that can provide its own sensor, and has a proven record and experience for the payment algorithm.

Figure 32: Egis is the only non-Apple fingerprint sensor supplier that has proven experience of its own algorithm Apple Synaptics Fingerprint IDEX Egistec Goodix Silead Elan FocalTech (AuthenTec) (Validity) Cards Country US US Sweden Norway Taiwan China China Taiwan Taiwan Technology Active Active Active Active Passive Active Active Active/Passive Active/Passive Area/Swipe Area Area/Swipe Area/Swipe Area/Swipe Area/Swipe Area Area Area/Swipe Area/Swipe Algorithm In-house Egis, In- Precise 3rd party In-house In-house Precise Precise Precise house Biometric Biometric Biometric Biometric Main market Internal use Samsung China Asia China China China China/Taiwan China Korea Source: Company data EGIS’ know-how and solid IP portfolio will help it to gain shares in 2016-17 EGIS was established in Dec 2007 by acquiring LighTuning (sensor maker), ABIG Egis has strong IP and (algorithm provider), and HiTrust (encryption and security). Notably, ABIG was founded in know-how for fingerprint 2000 with customers including AuthenTec (acquired by Apple in 2012), UPEK (acquired by AuthenTec in 2010), and Validity (acquired by Synaptics in 2013). According to Egis, it has a total of 157 patents granted with 114 patents remaining active (107 invention patents, seven utility patents) as of October 2015. Egis claims it has 26 fingerprint-related patents granted in the US versus 32 for Synaptics and nine for FPC. Its patents cover chip design, packaging technology, image capture, algorithm, firmware, mobile payment, encryption, etc. We estimate non-Apple fingerprint sensor shipment will grow by 105% and 61% in 2016 and 2017, respectively. Given the potential patent infringement concerns for late comers on active sensing, we believe Egis is a good second source partner for the top-tier non- Apple smartphone makers (Samsung, Lenovo/) and Chinese brands (Huawei, ZTE, Xiaomi, Gionee, TCL, etc) which has a sizeable overseas business. Egis’ passive

Egis Technology Inc. (6462.TWO / 6462 TT) 14 05 January 2016 sensing technology has less complicated wafer processing and smaller die size, which lead to a more competitive cost structure versus its peers. We also believe its proprietary sensing, feature extracting, and algorithm know-how on mobile payment should help it to secure more new design-wins in 2016-17.

Figure 33: Egis has 114 active patents globally with 26 granted in the US

Source: Company data New entrants try to catch up but most lack algorithm or may have IP infringement issues Besides Egis, several other new fingerprint solution providers in Taiwan and China are Elan, FocalTech, and Silead trying to enter this hyper growth market. However, most source fingerprint algorithms from all license algorithm from Precise Biometrics and are adopting active sensing technology, which might have Precise Biometrics potential IP infringement issues. Elan: Elan started to develop its own fingerprint sensor in 2H14 and allied with Startek for algorithm. Its initial target was to start shipments in mid-2015 with swipe fingerprint sensor but it decided to shift its focus to area-type in early 2015. Given that Finger Print Card (with algorithm from Precise Biometrics) dominated more than 90% of the market in China, it signed a licensing agreement with Precise Biometrics in August 2015. Elan has submitted their sample to several Asian smartphone brands and Asus. We think it could enter Asus' supplychain and start shipment from 2Q16. Elan's fingerprint sensor adopts a hybrid solution, i.e., active and passive, which it believes can avoid potential patent infringement issues. It has a flexible business model as it could provide wafer, packaged strip, or module, depending on customers' requirement. Management believe fingerprint business should be accretive to its corporate gross margin. FocalTech: FocalTech announced in 3Q14 that it plans to enter the fingerprint market by sourcing fingerprint ICs from third parties (IMD and IDEX) with its own algorithm. Nevertheless, the progress has been slow due to higher chip cost and higher entry barrier on algorithm for mobile payment. It decided to develop its own fingerprint chip in 2H15 and signed a licensing agreement with Precise Biometrics in December 2015. It plans to have its chip ready for sampling in 1H16 and we targets for shipment take-off by 2H16. FocalTech's fingerprint sensors will adopt active sensing but it plans to remove the metal ring to minimise the IP infringement risk. Nevertheless, the company said it will still target Chinese brands and whitebox makers initially. Goodix: Goodix has already received several designs in China, such as Dove L5 Pro, LeTV 1S, ZTE Blade S7, Vivo X6, and Meizu MX4 Pro and commenced shipment in 2015.

Egis Technology Inc. (6462.TWO / 6462 TT) 15 05 January 2016

Goodix has adopted active sensing structure and developed its own algorithm, but most of the branded smartphone makers or those focused on overseas market still have concerns on potential IP infringement issues. Goodix is also working on under-glass sensing solutions with leading touch module maker. Silead: Silead is a subsidiary of GalaxyCore and focus touch IC, stylus, and fingerprint sensors. It also licenses the algorithm from Precise Biometrics and adopts active sensing structure. Its fingerprint solutions have been adopted by several whitebox makers in 2H15 and it plans to further support payment applications in 2016. Fingerprint value chain and technology are still evolving Fingerprint sensor supply chain involves four major parts: chip, algorithm, semiconductor Fingerprint ASP to decline in foundries, and module makers. Most fingerprint sensors today adopt a sensor-on-chip 2016-17E on cost reduction design are manufactured on 8” 0.18um process with LGA packaging. Our analysis and competition suggests fingerprint sensor chip accounts for 50-60% of over the BOM cost, and the remaining 40-50% are for module assembly material/process (cover glass, coating, connector, assembly, etc). Module assembly is an important and critical process since the fingerprint module will appear on the outer parts of the devices and needs to match the overall industrial design (shape, position, colour, etc). We estimate the square/round shape of fingerprint chip ASP of US$4-7 (die and LGA packaging) in 2H15 but will fall to US$3-5 in 2H16-2017 as more suppliers enter the market. We also believe the overall module cost for square/round shape will fall to US$4-7 by 2H16-2017 from current US$6-10.

Figure 34: Design process flow on fingerprint sensor selection Decide Decide hardware Decide location Decide shape coating/cover glass platform

Decide operating Decide Decide payment Integration and testing system algorithm system/platform

Source: Company data

Figure 35: Cost structure analysis of different types of Figure 36: Stack up of different fingerprint sensor fingerprint modules (3Q15) modules

Chip Package (LGA) FPC Protection coating/cover Connector/others Gross profit Coating solution Cover solution $12 Matte/Glossy Ceramic Glass Sapphire $10 $8 $6 $4 $2 $0 Total Rectangle Rectangle Rectangle Square/Round Square/Round Square/Round 160um 180um 300um 350um (hard coating) (cover glass) (sapphire) (hard coating) (cover glass) (sapphire) thickness

Source: IHS, Credit Suisse estimates Source: Elan

Egis Technology Inc. (6462.TWO / 6462 TT) 16 05 January 2016

Capacitive fingerprint sensing has better cost structure versus other biometric identification technologies Biometric identification has become one of the new features for non-Apple smartphone brands, especially after Samsung also adopted fingerprint sensor on its flagship models in March 2015. Fingerprint sensing has several different detecting technologies including optical, capacitive, and ultrasonic, but we believe capacitive fingerprint sensing is the most mature and has better cost structure versus others. Ultrasonic fingerprint sensing still not mature We noted that Sonavation and have introduced ultrasonic fingerprint sensing Ultrasonic sensing technology for mobile devices in 2015. Ultrasonic sensing has the advantage of achieving is still not mature under-glass sensing without changing industrial design of the cover glass, although capacitive fingerprint makers are also developing similar solution. Comparing with capacitive fingerprint sensing, ultrasonic sensing in theory should have better performance as it can sense fingerprints even with dirty or sweaty fingers. However, we believe this technology still requires a more complicated sensing mechanism to solve the higher noise level & more complex data processing. We believe it might still take some more time before this technology becomes more mature. Nevertheless, ultrasonic fingerprint sensing will still require algorithm for fingerprint matching, hence should be less negative for Egis if it takes off.

Figure 37: Sonavation's ultrasonic fingerprint sensing Figure 38: Qualcomm also introduced its ultrasonic structure fingerprint technology

Source: Sonavation Source: Qualcomm Other biometric identification technologies are not suitable for mobile payment and smart card applications Other than fingerprint sensing, competing technologies for biometric identification include Iris and blood vein has eyeprint recognition, iris recognition, vein recognition, etc. EyeVerify’s Eyeprint ID detects higher security but might not the eye veins and other micro features in and around the eye with the front camera. It be suitable on mobile received multiple design wins from Alcatel (Idol 3), Vivo (X5 Pro) etc, after it being adopted devices by ZTE’s Grand S III smartphone in March 2015. We believe eyeprint detection has the lowest hardware requirement as it uses the existing front camera, but has the disadvantages of potentially impacted by surrounding lights, weaker user experience, and cannot be used on smart cards. Iris and blood vein recognition both has higher security level than fingerprint and are being used on government and high-end banking applications, but both require usage of infrared light for detection. We believe the cost addition and user acceptance on using iris/blood vein recognition will limit the adoption on mobile payment and smart card. As a result, we believe capacitive fingerprint sensing is the most mature and has better cost structure versus other biometric identification technologies on mobile devices and smart cards.

Egis Technology Inc. (6462.TWO / 6462 TT) 17 05 January 2016

Figure 39: Comparison of different biometric identification technologies Capacitive Ultrasonic Eyeprint Iris Blood vein fingerprint fingerprint Security High High Medium Very high High Cost Low Medium Low High High Form factor Small Small Small Large Large User experience Good Good Medium Medium Good Source: Company data, Credit Suisse Fingerprint Commodification could happen in 2017-18 In 2014, the fingerprint chip providers are limited to a handful of players including Fingerprint Commodification AuthenTec (for Apple internal use), FPC, and Synaptics. However, there has been multiple will hurt the module makers new entrants in 2015 including Goodix, Silead, Elan, Egis, FocalTech, Qualcomm, etc, which aim to capture the fast growing opportunity in 2016-17; especially many of them has licensed the algorithm from Precise Biometric and received couple design wins in 2H15. The business model for fingerprint supply chain for smartphone brands is different from that of the whitebox makers. Smartphone brands (including the Chinese) currently negotiate with the fingerprint sensor chip providers directly, instead of via module makers, as the fingerprint proliferation is driven by the more complicated mobile payment, not just unlocking the device, while whitebox makers rely on handset integrators. However, we believe the fingerprint module for mobile devices could commoditise by 2017-18, after multiple chip and module makers enter the market and pricing to decline after technology/ ecosystem becomes mature. Nevertheless, we believe top-tier solution providers, especially those with its own algorithm, should have a better competitiveness given better cost structure and greater scale.

Figure 40: Capacitive fingerprint process flow: Upstream players have better margins Algorithm Precise Biometric provider Egis (100% GM)

Sensor chip Wafer foundry Backend foundry Module house design house (30-40% GM) (20-30% GM) (10-15% GM) (40-50% GM) FPC Goodix TSMC Vanguard ASE ChipMOS O-Film Dreamtech Synaptics Silead UMC Magnachip SPIL Lingsen Truly Partron Egis Focaltech SMIC Amkor Greatek CrucialTec Idex Elan JCET Flextronics Source: Company data, Credit Suisse estimates Fingerprint supply chain business model is following the path of touch panels We believe business models for fingerprint sensor industry is going through a similar path Chip makers have better as the touch panel industry, with chip makers and algorithm providers enjoying better margins over the cycle return over the cycle; especially mobile payment being the main driver for fingerprint authentication. The touch industry started to take off in 2009, two years after Apple introduced the first iPhone, despite the growth plateaued and started to decline from late 2013 on oversupply and commodification. During 2010-2013, multiple touch panel module makers expanded their capacity after a good 2010-11, but their profits deteriorated after 2013 on intense pricing competition and oversupply.

Egis Technology Inc. (6462.TWO / 6462 TT) 18 05 January 2016

Figure 41: We believe fingerprint supply chain business model is following the touch industry 2007 2008 2009 2010 2011 2012 2013 2014 Key milestones for First iPhone Android phone hit iPhone 3GS TPK and Wintek Samsung adopts on- iPhone shifted to in- TPK and Wintek's Wintek filed for touch industry launched the market launched expand capacity; cell technology; cell profit deteriorate bankruptcy FocalTech Mediatek invested introduced its touch into Goodix (touch IC IC maker)

2013 2014 2015 2016E 2017E 2018E Key milestones for Apple integrated Android fingerprint Samsung adopts Fingerprint Fingerprint module Fingerprint module fingerprint touch ID on iPhone phone hit the area-type fingerprint penetration takes price sees greater commoditise industry 5S market; iPhone sensor; FPC off; multiple new decline; new 6/6+ launch captured ~90% players enter the technologies share in China market and expand emerge module capacity

Source: Company data, Credit Suisse estimates For fingerprint sensor industry, we believe top-tier chip suppliers and algorithm providers will be the long-term winner on the mobile payment trend. We acknowledge that the current industry environment is similar to the touch industry back in 2010-11 with multiple tier-two fingerprint chip makers trying to catch up, and module makers (including new comers) are expanding their capacity to meet the demand. We believe the ASPs for fingerprint sensor chips and modules for mobile devices will see a quick decline during 2016-18. Nevertheless, we believe the chip providers should maintain better margins than module makers given cost reduction from new design, process migration, and lower fixed cost. Longer-term, we believe chip providers with algorithm capability such as Egis should have better competitiveness even if fingerprint sensing is integrated within the display.

Figure 42: Touch controller IC makers had higher GM vs Figure 43: Module makers OPM deteriorated from 2013 on touch module makers in 2009-14 oversupply and intense pricing competition TPK O Film Wintek Synaptics FocalTech Elan TPK O Film Wintek Synaptics FocalTech Elan 60% 25% 50% 20% 40% 15% 10% 30% 5% 20% 0% 10% -5% 0% -10% -10% -15% -20% -20% 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 Source: Company data Source: Company data, Credit Suisse estimates

Egis Technology Inc. (6462.TWO / 6462 TT) 19 05 January 2016 Fingerprint embedded within display will be an opportunity rather than a threat for Egis We believe capacitive fingerprint sensor will be the mainstream for mobile devices in the Fingerprint and touch next two to three years given the mature ecosystem and lower cost structure. However, on embedded display is still a longer-term basis, we see the possibility that the fingerprint sensing function could be under development integrated onto display panels. Apple filed patents with fingerprint sensor integrated into the display module According to Apple’s patent filings, it may plan to integrate fingerprint and the touch onto a full panel fingerprint sensor, which carries both fingerprint and touch sensing functions. It also mentioned in the filing that fingerprint sensing technology could be capacitive, ultrasonic, optical, infrared, thermal, etc, and the fingerprints can be acquired at the same time. If Apple or other display makers can successfully integrate fingerprint sensing into the display module, we believe it could negatively impact module makers’ value-adds, where we believe it will be negative for pure fingerprint module assembler but positive for display/touch makers.

Figure 44: Apple may plan to integrate fingerprint onto the display…

Source: Company data, USPTO AUO also developed display panel that embedded fingerprint sensing AUO has showcased a 2.8” QVGA mobile display with image and fingerprint scanning technology with sensing resolution of 288 PPI in 2008. In 2014 Touch Taiwan Exhibition, it showcased a 4.3” display with fingerprint sensing resolution of 500 PPI and is able to scan multiple fingerprints simultaneously. Although the embedded fingerprint display technology is not mature now, we believe it could be disruptive technology once it commercialise.

Figure 45: AUO already showcased a 2.8" Figure 46: AUO introduced 4.3" display QVGA panel with fingerprint scanning (288 with 500 PPI resolution fingerprint PPI) in 2008 scanning in 2014

Source: Company data Source: Company data

Egis Technology Inc. (6462.TWO / 6462 TT) 20 05 January 2016

Implications to Egis and the fingerprint supply chain We believe pure fingerprint module makers could be the most vulnerable if fingerprint Full display fingerprint sensor is being integrated into the display or touch module. Under this scenario, the value- sensing could be more add will shift to touch panel or display makers from module makers, but will still require complicated and might processing chip and algorithm for matching. If the fingerprint sensor is embedded into the require a more powerful TFT process like in-cell touch, then we believe it will negatively impact fingerprint and IC/algorithm touch module makers’ business but would still require processing chips and algorithms. As a result, we believe the impact for Egis is minimal as it can work with touch or panel makers by providing processing chip and algorithm. Moreover, as all the panel makers are in Asia and full display fingerprint sensing could be more complicated, we believe the integration trend should be viewed as an opportunity rather than a threat to Egis.

Egis Technology Inc. (6462.TWO / 6462 TT) 21 05 January 2016 Higher growth and entry barrier support valuation Egis has turned (operating) profitable in 3Q15, thanks to the algorithm licensing income Egis turned OP profitable from Samsung. Its gross margin of 82.9% in 9M15 were mainly due to higher mix of in 3Q15 licensing income (55-60%), while its GM for fingerprint sensor of 35-50% (some shipments in the form of module are lower) is in line with industry average. We believe the proliferation of fingerprint sensors on mobile devices, customers’ demand for dual sourcing, and Egis’ strong know-how/IP on passive sensing and algorithm should drive its revenue and earnings growth in 2016-17. Longer-term, we believe the opportunity on smart card/credit card could be the next growth driver.

Figure 47: Egis' quarterly revenue versus GM Figure 48: Egis' revenue to see strong growth in 2016-17E

NT$ mn Revenue GM (RHS) NT$ mn Revenue 300 100% 7,000 6,236 90% 6,000 250 80% 70% 5,000 200 60% 50% 4,000 150 40% 3,000 2,439 100 30% 20% 2,000 10% 50 1,000 516 0% 206 139 84 45 0 -10% - 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 2011 2012 2013 2014 2015E 2016E 2017E Source: Company data Source: Company data, Credit Suisse estimates Entering Samsung supply chain as a second source in 2016 We model Egis’ revenue to take off from 2H16, as we believe it could start shipment for Egis to become the second Samsung’s mid-range products and receives more design wins from Chinese smartphone source for Samsung's mid- makers. Samsung’s Galaxy S6 adopted fingerprint sensor from Synaptics with Egis’ range products in 2H16 algorithm since 1Q15 and Egis has recognized decent licensing income from 2Q15. Egis also submitted its own fingerprint sensor to Samsung for qualification, and we believe it’s likely that Samsung will use Egis as a second source for the fingerprint solution on the mid-range A series models. Therefore, we estimate Egis to capture 15-20% allocation at Samsung’s A series models in 2H16 and could increase to 20-25% in 2017. Samsung has been developing its algorithm internally and plans to adopt it on the next generation of Galaxy S7 models in 2016. Although it is unclear whether Samsung can successfully implement its own algorithm, we conservatively assume that Egis’ licensing income from Samsung will end from 2Q16. China poses a greater opportunity for Egis We believe China will be the main growth driver for Egis in 2016-17, given increasing Egis is adding design-wins adoption of fingerprint on mobile devices, fast growth of mobile payments, and the push by in China multiple payment platforms including Apple Pay, Samsung Pay, Alipay, ZTE Pay, etc. We estimate China and other brands' smartphone fingerprint unit demand of 251 mn and 435 mn units in 2016 and 2017, representing the adoption rate of 27% and 44%, respectively. We believe Egis’ superior design capability and its proprietary algorithm know-how will lead to a much better cost structure versus peers. Egis has already started shipment to several Chinese smartphone makers such as ZTE, Xiaolajiao, Haier, Oukitel, etc in 2H15 and we expect it to penetrate to other brands

Egis Technology Inc. (6462.TWO / 6462 TT) 22 05 January 2016 including tier ones such as Huawei, Xiaomi, Lenovo/Motorola, etc. Our checks suggest it has partnered with fingerprint and touch module makers, which we believe should also help Egis capture tier-two brands and the whitebox market. Although FPC dominated the fingerprint market for China/others smartphone with over 90% market share in 2015 and will remain the leader in 2016, we still expect Egis to catch up with ~10% and ~20% share in 2016 and 2017, respectively.

Figure 49: Egis' fingerprint IC has been adopted by several Chinese brands Brand ZTE ZTE Xiaolajiao Philips Haier Calme Oukitel Model name Nubia Z9 Weiwu 3 Red Pepper X1 i999 I701 CM7 U9

Fingerprint sensor Egis Egis Egis Egis Egis Egis Egis algorithm Egis Egis Egis Egis Egis Egis Egis Location Side Back Back Back Back Back Back Source: Company data Algorithm and better design to protect GM We model Egis’ fingerprint sensor chip shipment of 24 mn units in 2016 for 6% market Having its own algorithm share at non-Apple camp, and will further grow to 85 mn units in 2017 for 14% market can help GM by 4-7% share. We noted that there are several chip design houses in Taiwan and China that have developed their own fingerprint solutions, but we would point out that Egis is the only one that can provide both algorithm and chip and has a proven track record on algorithm with Samsung. Egis' unique passive sensing structure also has the least issue on violating Apple/AuthenTec's IPs, which is one of the concerns for top Chinese brands as they are shifting their focus to the export market.

Figure 50: Egis' smartphone fingerprint shipment growth is driven by share gain at Samsung and China mn units 2014 2015E 2016E 2017E 2018E Samsung shipments 318 330 340 345 350 Fingerprint penetration 14% 27% 39% 54% 65% Samsung fingerprint shipments 45 89 133 186 228 Egis market share at Samsung 0% 0% 4% 6% 8% Egis smartphone fingerprint shipments to Samsung - - 5 11 18

China and others smartphone shipments 793 873 941 979 1,019 Fingerprint penetration 3% 11% 27% 44% 54% China/others fingerprint shipments 26 99 251 435 545 Egis market share at China/Others 0% 1% 8% 17% 23% Egis smartphone fingerprint shipments to China/Others - 1 19 74 127

Non-Apple smartphone fingerprint shipments 71 188 385 621 774 Non-Apple smartphone fingerprint penetration 6% 16% 30% 47% 57% Egis fingerprint shipments - 1 24 85 145 Egis total market share at non-Apple brands 0% 1% 6% 14% 19% Source: Company data, Credit Suisse estimates In terms of pricing, we expect the fingerprint module ASP to fall from current US$6-10 to US$4-7 by 2H16-2017, and chip ASP to reach US$3-5 in 2H16-2017 versus current US$4-7 (die and LGA packaging) as more suppliers enter the market. As a result, we forecast Egis' revenue of NT$2,439 mn in 2016 and NT$6,236 mn in 2017 (versus NT$516 mn in 2015). We have not included the potential revenue contribution from smart cards in our 2016-17 revenue assumptions.

Egis Technology Inc. (6462.TWO / 6462 TT) 23 05 January 2016

We estimate Egis' GM to normalise at 44-49% in 2016-17 on product mix change (more sales from fingerprint ships, less licensing) and ASP decline, offset by cost reduction. This will still be above its peers’ ~40% range as Egis does not need to pay additional licensing fee to algorithm providers (4-7% impact to chip makers’ GM). We also expect Egis to start showing operating leverage from 2016 as the OPEX growth should be much lower than its top-line/gross profit growth, given the nature of fabless IC design industry. We have also baked into the employee bonus and BoD remuneration expenses from 2016 after it turns profitable. We therefore estimate an OPM of 19% in 2016 and 28% in 2017.

Figure 51: Egis quarterly revenue mix Figure 52: Egis to see operating leverage from 2H16

NT$ mn Licensing Sensor chip/module Others GM OPM 100% 2,000 80% 60% 1,500 40% 20% 0% 1,000 -20% -40% 500 -60% -80% - -100% 1Q15 3Q15 1Q16E 3Q16E 1Q17E 3Q17E 1Q15 3Q15 1Q16E 3Q16E 1Q17E 3Q17E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Strong earnings growth in 2016-17 We estimate Egis will remain in a slight loss in 2015 but would see significant earnings improvement in 2016-17 on fingerprint print proliferation for non-Apple smartphones and operating leverage. We estimate its EPS of NT$5.89 in 2016 and NT$21.61 in 2017 with 26% and 61% ROAE, respectively. We estimate every 5 mn units (~1% share gain) of incremental fingerprint chip shipments will result in 9% upside to our 2017 EPS estimate.

Figure 53: Sensitivity analysis of Egis' market share at Figure 54: Sensitivity analysis of Egis' market share at Samsung and Chinese/other brands (2016) Samsung and Chinese/other brands (2017) Egis market share at CN/Others Egis market share at CN/Others 5.89 5.0% 7.7% 10.0% 12.0% 15.0% 20.0% 25.0% 21.61 12.0% 17.1% 20.0% 22.0% 25.0% 27.0% 30.0% 1.0% 0.61 4.14 7.18 9.81 13.75 20.33 26.90 3.0% 11.98 19.77 24.27 27.34 31.96 35.03 39.64 3.5% 2.35 5.89 8.93 11.55 15.50 22.07 28.64 5.8% 13.82 21.61 26.12 29.19 33.80 36.87 41.48 5.0% 3.40 6.94 9.97 12.60 16.55 23.12 29.69 8.0% 15.27 23.06 27.56 30.64 35.25 38.32 42.93 7.0% 4.80 8.33 11.37 14.00 17.94 24.51 31.09 12.0% 17.90 25.70 30.20 33.27 37.88 40.96 45.57

10.0% 6.89 10.43 13.46 16.09 20.03 26.61 33.18 15.0% 19.88 27.67 32.18 35.25 39.86 42.93 47.55

Samsung Samsung

12.0% 8.29 11.82 14.86 17.49 21.43 28.00 34.58 18.0% 21.86 29.65 34.15 37.23 41.84 44.91 49.52 Egis Egis mrket share at Egis Egis mrket share at 15.0% 10.38 13.92 16.95 19.58 23.52 30.10 36.67 20.0% 23.17 30.97 35.47 38.54 43.15 46.23 50.84 Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Smartcard is not in our model but could lead to upside if it happens earlier Egis has setup a team to work with smartcard/credit card issuers on the potential adoption of fingerprint sensor on smartcard. We believe its initial opportunity will be more with the Chinese customers, rather than the global credit card agencies. We also believe it will need several years for the banking system and regulators to develop, verify, approve, and build the ecosystem for fingerprint smartcard. We therefore did not include the smartcard opportunity into our 2016-17 earnings estimates. Nevertheless, if the fingerprint adoption on smartcard happens earlier than expected, we estimate every 10 mn units of incremental fingerprint chip shipment could result in 20% upside to our 2017E EPS.

Egis Technology Inc. (6462.TWO / 6462 TT) 24 05 January 2016

Figure 55: China's credit and banking cards saw Figure 56: Egis' GM should be better than its Taiwanese significant growth in the past few years fabless IC peers 77.8% mn units 60% 5,500 55% 5,000 50% 45% 4,500 40% 4,000 35% 3,500 30% 3,000 25% 2,500 20% 2014 2015E 2016E 2017E 2,000 Egis Mediatek Realtek Elan FocalTech non-DDI Novatek non-DDI 2011 2012 2013 2014 3Q15 Source: PBOC Source: Company data, Credit Suisse estimates Balance sheet to improve after shipment takes off As of 3Q15, Egis had 180 days of inventory turnover days as it prepares wafers for its Balance sheet and cash customers’ new model launches. We believe its inventory turnover days will improve in flow to improve from 2016 2016 as volume picks up and should normalise at 70-80 days. We also believe its account receivable days should increase from 45-60 days now (mostly licensing income) to ~100 days as its product mix changes (more fingerprint chip, less licensing income). We believe its balance sheet will become more solid in 2016.

Figure 57: Egis' balance sheet will become more solid in 2016E Balance Sheet Comparison (NT$ mn) 3Q15A 2016E 2017E Cash and equivalents 162.1 714.6 1,893.6 Total debt 30.0 30.0 30.0 Net cash 132.1 684.6 1,863.6 Net cash/share 2.1 10.0 27.2 Accounts receivable 235.0 1,218.6 2,011.9 AR turnover days 54.6 103.1 94.5 Inventory 90.0 530.9 768.0 Inventory days 180.3 82.9 67.5 Accounts payable days 100.0 43.4 49.1 Cash conversion cycle (days) 134.9 142.6 112.9 Shareholder's equity 661.3 1,771.4 3,049.5 Book value per share 10.6 25.9 44.5 Source: Company data, Credit Suisse estimates Fabless business model should lead to good dividend Egis’ business model is not capital intensive as it is a fabless IC design house. Although it shipped some fingerprint modules in 2015, management said it prefers to ship wafer or die only and let module houses like O-film take care of assembly and the coating process. We expect majority of Egis’ fingerprint sensor shipment to be in the format of packaged dies, which should require less capital and internal management effort, leading to a better operating cash flow and return. We estimate Egis will generate NT$0.5–1.7 bn of free cash flow or NT$6.8-25.6 FCF/share over 2016-17, reflecting a 5-19% FCF yield. As we believe Egis will swing into profitability from 2016, we expect the company to start paying dividend from next year. We assume a dividend payout ratio of 50%, as management said it will need to consider R&D and future acquisition opportunities.

Egis Technology Inc. (6462.TWO / 6462 TT) 25 05 January 2016

Figure 58: Egis' cash flow will also improve from 2016 (NT$ mn) 2011 2012 2013 2014 2015E 2016E 2017E Revenue 206 139 84 45 516 2,439 6,236 Capex 7 0 1 15 20 23 23 Capex/sales (%) 3.2 0.3 1.7 34.0 3.8 0.9 0.4 Depreciation and amortization 47 26 17 6 14 18 23 D&A/sales (%) 23 19 20 13 3 1 0 EBITDA (44) 10 (66) (261) (9) 492 1,775 Free cash flow (50) 10 (67) (277) (28) 469 1,752

FCF and dividend yield FCF per share (1.01) 0.20 (1.29) (4.45) (0.41) 6.85 25.58 FCF yield (%) (0.75) 0.15 (0.95) (3.27) (0.30) 5.04 18.81 Dividend per share (NT$) - - - - - 2.94 10.81 Ex dividend price 136.0 136.0 Dividend yield (%) 2.2 7.9 Source: Company data, Credit Suisse estimates Initiate with OUTPERFORM and NT$220 TP We believe fingerprint proliferation for smartphone is still at the early stage, driven by NT$220 TP is based on 15x mobile payment and shipment for non-Apple smartphone market, which is likely to grow at 2H16-1H17 EPS 60% CAGR during 2015-18E. We believe Egis is the only fingerprint solution provider besides Apple/AuthenTec that can offer a total solution, especially for the mobile payment application. We note that FPC will continue to dominate the non-Apple camp in 2016, but smartphone makers' demand for dual sourcing, Egis' know-how/IP on passive sensing, and its proprietary algorithm will build an entry barrier for new entrants in the mobile payment applications. Moreover, we believe Egis’ proprietary algorithm will lead to a cost competitive chip design, which offers a better margin profile versus peers. Longer-term, we believe the opportunity on smart card/credit card could be the next growth driver for the company. Target price reflects 15x 2016E or 10.2x 2017E We set our target price at NT$220, reflecting 15x our 2H16-1H17 EPS or 10.2x 2017 EPS, based on our expectation for 60% growth CAGR for non-Apple smartphone fingerprint sensors in 2015-18E and 14% market share for Egis in 2017E. While the multiple is at a 7% premium to slow growth IC design peers in Taiwan of 14x in 2H16-1H17, we believe it is justified by the higher revenue and earnings growth off a much lower base on the growing market opportunities for fingerprint sensors, further share expansion, and the potential take-off of fingerprint-enabled credit cards after 2018.

Figure 59: Egis' forward P/E Figure 60: Egis' forward P/B NT$ Stock Price vs. PE (US GAAP) NT$ Stock Price vs. One-Year Forward PB 200 200 180 180 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Stock Price 10x 15x 20x 25x 30x Stock Price 3.0x 4.0x 5.0x 6.0x 7.0x Source: Company data, TEJ, Credit Suisse estimates Source: Company data, TEJ, Credit Suisse estimates

Egis Technology Inc. (6462.TWO / 6462 TT) 26 05 January 2016

Figure 61: Egis' stock price versus QFII holding Figure 62: Finger Print Card's market cap since 2014 NT$ Stock Price vs. QFII Holding US$ mn FPC marketcap 5,000 180 65% 4,500 160 60% 4,000 55% 140 3,500 50% 3,000 120 45% 2,500 100 40% 2,000

80 35% 1,500 1,000 60 30%

500

Jul-14 Jul-15

Oct-15 Oct-14 Apr-15

Jan-15 Jun-14 Jun-15

Mar-15

Feb-15

Dec-15 Nov-14 Dec-14 Nov-15

Aug-14 Sep-14 Aug-15 Sep-15 May-15 - Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Stock Price QFII Holding (RHS) Source: TEJ Source: Company data Comparing with global fingerprint sensor supply chain, our valuation method of 15x 2H16- 1H17 P/E is at ~20% discount with its peer and industry leader FPC. Egis' stock is currently trading at 18x/5.6x 2016/2017 Bloomberg consensus P/E and 23x/6.3x of our 2016/17 estimates. Our target price of NT$220 implies 62% upside from the current level.

Figure 63: Valuation comparison of Taiwan fabless and global fingerprint supply chain Price Marketcap Target EPS P/E (X) P/B (X) ROAE (%) Div yield (%) Ticker Company Name 1/4/2016 US$ mn Rating price 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 6462.TWO Egis 136.00 281 O 220.0 5.89 21.61 23.1 6.3 5.3 3.1 25.7 61.4 2.2 7.9 Taiwan fabless IC 2454.TW Mediatek 245.00 13,267 N 250.0 15.70 16.70 15.6 14.7 1.5 1.5 9.8 10.1 5.2 4.8 3034.TW Novatek 126.50 2,325 O 140.0 10.66 11.16 11.9 11.3 3.3 3.1 28.2 28.0 7.1 7.4 2379.TW Realtek 76.60 1,168 N 73.5 5.25 5.75 14.6 13.3 1.8 1.8 12.9 13.5 4.6 5.1 2458.TW Elan 45.10 599 N 38.0 2.55 2.93 17.7 15.4 2.7 2.6 15.5 17.0 4.7 5.5 3545.TW FocalTech 34.25 303 N 25.5 2.59 3.41 13.2 10.0 0.8 0.7 6.0 7.6 3.4 4.5 Median 15.1 12.3 2.3 2.2 14.2 15.3 4.7 5.3 Mean 16.0 11.8 2.6 2.1 16.4 22.9 4.5 5.9 Fingerprint supply chain FINGb.ST FPC* 591.00 4,350 NC NA 30.90 34.70 19.1 17.0 14.8 8.9 93.0 51.9 - - SYNA Synaptics* 80.34 2,911 NC NA 7.01 7.69 11.5 10.5 3.3 2.6 25.1 23.4 NA NA IDEX.OL IDEX* 10.55 635 NC NA (0.40) (0.20) NM NM NA NA (81.3) (48.2) - - 2458.TW Elan 45.10 599 N 38.0 2.55 2.93 17.7 15.4 2.7 2.6 15.5 17.0 4.7 5.5 PREC.ST Precise Biometric* 6.10 250 NC NA NA NA NA NA NA NA NA NA NA NA 002456.SZ O-Film 27.92 4,420 U 16.1 0.66 0.91 42.3 30.7 4.2 3.8 10.4 13.0 0.4 0.5 0732.HK Truly* 1.86 698 NC NA 0.29 0.30 6.4 6.3 0.7 0.6 10.5 10.2 4.7 5.6 114120.KQ CrucialTec* 15,350 365 NC NA NA NA NA NA NA NA NA NA - - 091700.KQ Partron* 9,970 455 NC NA 1,076 1,175 9.3 8.5 1.4 1.3 16.1 15.6 3.0 3.1 Median 17.7 10.5 3.3 2.6 15.8 16.3 1.3 1.8 Mean 18.5 13.5 4.6 3.3 14.4 18.0 1.9 2.8 Source: Company data, *IBES consensus estimates, Credit Suisse estimates

Egis Technology Inc. (6462.TWO / 6462 TT) 27 05 January 2016

Investment risks: Slower adoption rate, competition, and delay in ramp-up of shipments We note the key risks to Egis that could materially impact the investment thesis and our positive view on the stock: (1) Slower adoption rate of fingerprint sensor for non-Apple smartphone. Egis is focused on fingerprint sensor and algorithm, where it generates the majority of its revenue. A slower adoption rate for fingerprint sensor for non-Apple smartphone means smaller TAM for Egis, which could negatively cap its growth potential and lead to a more competitive pricing environment. We estimate a 2% shortfall of fingerprint attachment rate for non-Apple smartphone in 2016-17 would impact Egis’ earnings by 5% and 4%, respectively. (2) New entrants might intensify the competition. Multiple fabless IC makers in Taiwan and China are developing their own fingerprint solutions. Although we believe Egis has a better cost structure and has set a higher entry barrier, an irrational price competition would still impact Egis’ profitability. We estimate every 2% additional price cut from current 24-26% YoY decline assumption will impact Egis’ 2016-17 earnings by 10% and 7%, respectively (3) Delay ramp of shipments could lead to negative operating leverage. We estimate Egis’ fingerprint chip shipment of 24 mn units for 2016 and 85 mn units in 2017. We believe Egis has engaged several Chinese smartphone brands and its volume should pick up from 3Q16. If Egis fails to ramp shipments, we believe it will result in negative operating leverage as it is difficult to cut OPEX immediately. We estimate every 10% shortfall of its shipment in 2016 and 2017 would impact Egis’ earnings by 23% and 15%, respectively (4) Slower growth might de-rate the stock. Our target price of NT$220 is based on 15x 2H16-1H17 EPS, which is at a 7% premium over Taiwan fabless IC peers. We believe Egis should trade at a premium over other fabless peers given the fast growth of fingerprint sensor in 2016-17E and the higher entry barrier for mobile payment applications. However, we believe the stock might de-rate if the fingerprint adoption for non-Apple smartphone is slower than expected, or Egis fails to ramp its shipment to meet its customers’ demand in the next 12-18 months.

Egis Technology Inc. (6462.TWO / 6462 TT) 28

(6462.TWO/6462 TT) TechnologyEgis Inc. Figure 64: Egis' quarterly P/L Year-end 31 Dec (NT$mn) 1Q15 2Q15 3Q15 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2014 2015E 2016E 2017E Sales 59 57 239 162 283 440 705 1,011 1,253 1,525 1,789 1,669 45 516 2,439 6,236 COGS 7 14 40 54 133 230 343 531 684 854 1,015 960 32 114 1,237 3,513 Gross Profits 52 43 199 108 150 210 362 480 569 671 774 709 14 401 1,202 2,723 Total Operating Exp. 87 91 114 131 150 177 192 209 229 236 256 252 281 423 728 972

Operating Exp. Promotion 17 21 24 28 32 37 41 44 48 50 54 53 41 89 154 206

Operating Exp. Administrative 22 18 20 26 25 26 31 34 36 35 38 35 90 85 115 144 Operating Expense R&D 48 53 70 78 94 114 121 131 144 151 164 163 150 249 459 622

EBIT (35) (48) 85 (23) 0 33 170 271 340 436 518 457 (267) (22) 474 1,752 Non-Oper. Income (Loss) 1 0 6 2 1 2 4 5 6 8 9 8 8 9 12 31 Interest expenses 0 (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (1) (1) Interest income 1 1 1 1 3 3 3 2 3 3 4 5 5 4 11 14 Other Non-Op. Income/(Loss) (1) (1) 5 1 (2) (0) 1 3 4 5 5 4 3 5 2 18 Pretax Income (35) (48) 91 (21) 1 35 173 276 347 443 527 466 (259) (13) 486 1,783 Income Taxes Exp./(Gains) 0 12 (45) 5 (0) (6) (29) (47) (59) (75) (90) (79) 29 (28) (83) (303) Net Income before Extraord. (35) (36) 46 (17) 1 29 144 229 288 368 437 387 (230) (42) 403 1,480 Net Income (35) (36) 46 (17) 1 29 144 229 288 368 437 387 (230) (42) 403 1,480 EPS (0.56) (0.58) 0.73 (0.27) 0.02 0.42 2.10 3.35 4.20 5.37 6.39 5.65 (3.88) (0.67) 5.89 21.61 Aveage shares 62 62 62 63 68 68 68 68 68 68 68 68 59 62 68 68 EBITDA (33) (45) 89 (19) 4 37 175 276 346 441 524 464 (261) (9) 566 2,048

Margins (%) Gross Margin 87.8 75.9 83.3 66.8 53.1 47.7 51.4 47.5 45.4 44.0 43.3 42.5 30.3 77.8 49.3 43.7 Operating Margin (60.2) (85.8) 35.5 (14.2) 0.0 7.5 24.1 26.8 27.2 28.6 29.0 27.4 (587.5) (4.3) 19.4 28.1 EBITDA Margin (55.6) (80.2) 37.1 (11.9) 1.5 8.5 24.8 27.3 27.6 28.9 29.3 27.8 (574.1) (1.7) 23.2 32.8 Tax Rate - (25.4) (49.9) (22.0) (20.0) (17.0) (17.0) (17.0) (17.0) (17.0) (17.0) (17.0) (11.3) 211.1 (17.0) (17.0) Net Margin (59.1) (63.6) 19.1 (10.3) 0.4 6.6 20.4 22.7 23.0 24.1 24.5 23.2 (506.1) (8.1) 16.5 23.7

QoQ (%) Sales 300 (4) 323 (32) 75 55 60 43 24 22 17 (7) COGS (51) 90 193 35 147 73 49 55 29 25 19 (5) Gross Profit 53,619 (17) 364 (46) 39 40 73 32 19 18 15 (8) Operating Profit NM NM NM (127) NM 223,261 419 59 26 28 19 (12) Net Profit NM NM NM (137) NM 2,439 396 59 26 28 19 (12)

YoY (%) Sales 536 608 1,663 1,000 382 678 195 525 343 247 154 65 (46) 1,034 373 156 COGS 124 66 605 268 1,750 1,589 759 887 415 271 196 81 17 261 980 184 Gross Profit 755 NM 2,423 112,350 191 389 82 345 279 220 114 48 (76) 2,810 200 127 Operating Profit NM NM NM NM NM NM 101 NM 2,319,882 1,229 205 69 NM NM NM 270 Net Profit NM NM NM NM NM NM 216 NM 25,067 1,167 204 69 NM NM NM 267 Source: Company data, Credit Suisse estimates

05 January05 2016

29

05 January 2016 Appendix: Company profile and strategy Company background Founded in December 2007, Egis focuses on fingerprint sensor IC, algorithm, security Egis has both IC and software, among others. Egis was formed through the merger of three companies, algorithm capability for LighTuning Tech (focused on fingerprint sensor IC), ABIG (focused on algorithm), and swipe and area type HiTrust (focused on security software). Egis can provide both area type and swipe type fingerprint sensor solutions fingerprint sensors for smartphones on the front side, back side, or edge side, depending on customers' requirements. Egis is listed on the emerging board and was transferred to the Taipei Exchange on 23 December 2015. Strong IC and algorithm capability should lead to lower cost Management indicates that Egis' competitive advantages lie in its unique IC design Advantages of the passive technology and strong algorithm capability. First of all, Egis's fingerprint sensor is based capacitive structure only on passive capacitive structure versus the mainstream active capacitive structure used by feasible with strong AuthenTec/Apple, Synaptics, Fingerprint Cards, etc. Compared with the active capacitive algorithm structure, Egis believes its passive capacitive structure has lower power consumption, lower noise level, simpler IC layout, lower manufacturing cost, though this structure is feasible because of its superior algorithm being able to compensate lower sensitivity.

Figure 65: Passive capacitive fingerprint sensing Figure 66: Active capacitive fingerprint sensing structure structure

Source: Company data, Credit Suisse Source: Company data, Credit Suisse Secondly, Egis uses a smaller chip size to achieve the same performance versus peers. Smaller chip size could lead Compared with peers' 10x4 mm sensing area for rectangular shape fingerprint sensors, to lower cost and more Egis can provide similar products with a ~40% less sensing area (7.2x3.2mm), enabled design flexibility again by its algorithm capability. Smaller chip sizes could lead to lower manufacturing costs and better flexibility in customer's industrial design.

Egis Technology Inc. (6462.TWO / 6462 TT) 30 05 January 2016

Figure 67: Sensing area for Egis' solution is only 57% as big as that for peers

Source: Company data, Credit Suisse Strong patent portfolio to protect its intellectual properties As strong capability in fingerprint IC, algorithm, security systems has been one of its 114 patents granted globally competitive advantages, Egis has been aggressive in seeking protection for its intellectual properties. As of Oct 2015, Egis has received 114 patents globally, including 54 in Taiwan, 28 in China, 26 in the US, 3 I the UK and 2 in Japan. In addition, another 71 patents are pending approval.

Figure 68: 107 patents granted globally

Source: Company data, Credit Suisse QFII holdings and major shareholders Top 10 shareholders collectively own a 35.3% stake in Egis, while management owns ~13.4% in the company. Its Chairman Steve Lo has a 4.7% stake directly and another 4.3% indirectly through its 100%-owned Headway Capital. QFII holdings at Egis has increased from 40.9% in the beginning of 2015 to 55% as end of 2015.

Figure 69: Egis—QFII holdings vs share prices Figure 70: Egis—major shareholders as of Nov 2015

NT$ mn Share price QFII Holdings (RHS) Shareholder Stake 1 GIC PRIVATE LIMITED 6.4% 180 65% 2 Zhi Jiou Venture Investment Co., Ltd. 4.8% 160 60% 3 Steve Lo 4.7% 55% 4 HEADWAY CAPITAL LIMITED 4.3% 140 50% 5 ORIENTAL GOLD HOLDINGS LIMITED 4.3% 120 6 HSBC & HAV3 (I) Limited (Cayman) Investm 2.5% 45% 100 7 Standard & Credit Suisse Security 2.4% 40% 8 Standard Bank & EVENSTAR Excellence Fund 2.1% 80 35% 9 Yuanta Bank & SBI Holding Inc. Investmen 1.9% 60 30% 10 EAGLEFRAME LIMITED 1.9% Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Top 10 35.3% Source: Company data, TEJ, Credit Suisse Source: Company data, TEJ, Credit Suisse

Egis Technology Inc. (6462.TWO / 6462 TT) 31 05 January 2016

Figure 71: Egis—management profile Title Name Experience Education Chairman & CEO Steve Lo President at Intervideo Master of Computer Science at California State University Bachelor of Computer at Soochow University COO Todd Lin Director at Synopsys (Asia) Master of Electronics Engineering at National Chiao Tung University SVP of Sales Chi Lin VP at Supermicro Master of Computer Science at California Poly State University VP of Sales Fuchung Lee VP of Sales at Intervideo Bachelor of Electrical Engineering at ROC Military Academy VP of Sales Sky Su VP of Sales at ABIG Master of Management Science at National Chiao Tung University VP of Sales Chichung Lin GM at Cyberlink (Japan) Bachelor of Communication Engineering at Japan Electronics College VP of Production Nienhung Huang GM at Wison Technology Master of Statistics at Michigan State University and Operations CTO at Software Yuanlin Chiang CTO at ABIG Bachelor of Computer Science at National Taiwan Division University Source: Company data, Credit Suisse

Figure 72: Egis—key milestones Time Milestone Dec-07 Jinda International Tech founded Feb-08 Acquired ABIG, a fingerprint sensor algorithm developer Apr-08 Merged with Egis International Tech (controlling shareholder of HiTrust) and changed the name to Egistec Jul-08 Acquired LighTuning Tech, a fabless fingerprint sensor IC vendor Aug-09 Set up Egis Technology (Japan) Jun-14 Listed on the Emerging Board (Taiwan) Dec-15 Listed on Taipei Exchange Source: Company data, Credit Suisse

Egis Technology Inc. (6462.TWO / 6462 TT) 32 05 January 2016

Companies Mentioned (Price as of 04-Jan-2016) AU Optronics (2409.TW, NT$9.46) Acer Group (2353.TW, NT$11.6) American Express Co. (AXP.N, $69.55) Amkor Technology Inc. (AMKR.OQ, $6.08) Apple Inc (AAPL.OQ, $105.26) Asustek (2357.TW, NT$262.0) ChipMOS Technologies Inc. (8150.TW, NT$30.1) Coolpad Group Limited (2369.HK, HK$1.47) Crucialtec (114120.KQ, W15,350) Egis Technology Inc. (6462.TWO, NT$136.0, OUTPERFORM[V], TP NT$220.0) Elan Microelectronics Corp (2458.TW, NT$45.1) FPC (FINGb.ST, Skr591.0) Flextronics International (FLEX.OQ, $11.21) FocalTech Corporation, Ltd. (3545.TW, NT$34.25) Foxconn Technology Corp (2354.TW, NT$68.0) GTK (2441.TW, NT$35.35) Haier Electronics Group Co., Ltd. (1169.HK, HK$15.02) Hewlett Packard (HPQ.N, $11.84) Hon Hai Precision (2317.TW, NT$79.0) Idex (IDEX.OL, Nkr10.55) LG Electronics Inc (066570.KS, W52,500) Lenovo Group Ltd (0992.HK, HK$7.46) MasterCard Inc. (MA.N, $97.36) Novatek Microelectronics Corp Ltd (3034.TW, NT$126.5) Panasonic (6752.T, ¥1,218) Partron (091700.KQ, W9,970) Precise Bio (PREC.ST, Skr6.1) QUALCOMM Inc. (QCOM.OQ, $49.98) Realtek Semiconductor (2379.TW, NT$76.6) (005930.KS, W1,205,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.77) Shenzhen O-film Tech Co., Ltd (002456.SZ, Rmb27.92) Siliconware Precision (2325.TW, NT$51.6) Sony (6758.T, ¥2,957) Synaptics (SYNA.OQ, $80.34) TCL Communication Technology Holdings Limited (2618.HK, HK$5.7) Taiwan Semiconductor Manufacturing (2330.TW, NT$139.5) Truly International (0732.HK, HK$1.81) United Microelectronics (2303.TW, NT$11.8) Vanguard International Semiconductor (5347.TWO, NT$41.9) ZTE Corporation (0763.HK, HK$16.94)

Disclosure Appendix

Important Global Disclosures Jerry Su and Derrick Yang 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. 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 attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European 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. 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; 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 attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less th an or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.

Egis Technology Inc. (6462.TWO / 6462 TT) 33 05 January 2016

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

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

Analysts’ 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* 58% (29% banking clients) Neutral/Hold* 29% (31% banking clients) Underperform/Sell* 12% (25% banking clients) Restricted 1% *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.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and- analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Egis Technology Inc. (6462.TWO) Method: We set our target price at NT$220, reflecting 15x our 2H16-1H17 EPS or 10.2x 2017 EPS, based on our expectation for 60% growth CAGR for non-Apple smartphone fingerprint sensors in 2015-18E and 14% market share for Egis in 2017E. We rate Egis OUTPERFORM as we believe it should be one of the major beneficiary of the fingerprint sensor proliferation in the next few years. Risk: Risks to our view would include (1) Slower adoption rate of fingerprint sensor for non-Apple smartphone; (2) new entrants intensifying the competition; (3) delayed ramp-up of shipments leading to negative operating leverage; (4) slower growth leading to de-rating of the stock.

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 (005930.KS, 2330.TW, AXP.N, 6752.T, 3545.TW, AAPL.OQ, 2353.TW, 3034.TW, QCOM.OQ, 2357.TW, 0763.HK, 066570.KS, 2354.TW, 0992.HK, AMKR.OQ, 2317.TW, 2303.TW, 2325.TW, HPQ.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 (AXP.N, 6752.T, AAPL.OQ, 3034.TW, 0992.HK, 2303.TW, 2325.TW, HPQ.N) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (AXP.N, HPQ.N) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (AXP.N, AAPL.OQ, 0992.HK, 2303.TW) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (AXP.N, 6752.T, AAPL.OQ, 3034.TW, 0992.HK, 2303.TW, 2325.TW, HPQ.N) within the past 12 months

Egis Technology Inc. (6462.TWO / 6462 TT) 34 05 January 2016

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (005930.KS, AXP.N, 5347.TWO, 6752.T, 3545.TW, AAPL.OQ, 2618.HK, 2353.TW, 2458.TW, 3034.TW, QCOM.OQ, 2357.TW, 1169.HK, 066570.KS, 0992.HK, AMKR.OQ, 2317.TW, 2303.TW, 2325.TW, HPQ.N) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (AXP.N, HPQ.N) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (AXP.N, 6752.T, AAPL.OQ, QCOM.OQ, 6758.T, HPQ.N). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (6462.TWO, 2353.TW, 2458.TW, 3034.TW, 2357.TW, 0763.HK, 2379.TW, 2354.TW, 2317.TW, 2303.TW, 2325.TW, 2409.TW). Credit Suisse has a material conflict of interest with the subject company (005930.KS) . Credit Suisse is acting as exclusive financial advisor to Samsung Electronics and Samsung Fine Chemicals in relation to the proposed sale of their ownership stakes in the semiconductor wafer joint ventures with SunEdison, SMP Ltd and MEMC Korea Company Ltd, to SunEdison. 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 (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor. Credit Suisse has a material conflict of interest with the subject company (0992.HK) . Credit Suisse is acting as financial advisor to Lenovo Group Limited for its proposed acquisition of Group from Google. As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. 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 may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. 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 https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (HPQ.N) Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (AXP.N, AAPL.OQ, 0992.HK, AMKR.OQ, 2303.TW, HPQ.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. 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. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Taipei Securities Branch ...... Jerry Su ; Derrick Yang

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683.

Egis Technology Inc. (6462.TWO / 6462 TT) 35 05 January 2016

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse International, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2016 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

Egis Technology Inc. TC2239 (6462.TWO / 6462 TT) 36