Deutsche Bank Markets Research
Asia Strategy Date Taiwan 7 September 2012 Taiwan Strategy Update Strategy Update
Joelian Tseng John Chou Strategist Research Associate Trapped in a narrow range (+886) 2 2192 2841 (+886) 2 2192 2847 [email protected] [email protected]
Stock selection in a flattish market TWSE Index Level and Turnover
2Q results delivered largely in-line sales but some earnings downside surprises (Index) Turnover (RHS) TAIEX (LHS) (NT$bn) 12,000 350 in weaker tech sectors and petrochemical. Apple plays are the highlight in 10,000 300 250 8,000 tech, but with a lackluster PC outlook and a flattish outlook in the non-tech and 200 6,000 150 financial space, we maintain a neutral stance and our index target at 7,400. 4,000 100 The mixed sector outlooks are likely to keep the index in a narrow trading 2,000 50 0 0 range. Stock selection remains the key for alpha, even in Apple supply chains. Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
2Q wrap for DB universe: stabilizing earnings revisions after 2Q12 results TWSE Key Forecast and Statistics Although downward market earnings revisions have been quite aggressive, TWSE Key Forecast and Statistics weaker sectors such as DRAM, TFT, PC and components continued to surprise TWSE Index Target 7,400 on the downside. In tech upstream, foundry, OSAT and PCB results were Target Multiple: F12M P/E (x) 14.4 mostly in line while DRAM and TFT missed. Most IC design companies beat 12m Forward P/BV (x) 1.6 our earnings estimates, including Mediatek, Novatek, GMT, Phison and Elan. In 12m Trailing P/BV (x) 1.6 tech downstream and components, only Hon Hai, Delta, Asustek, Epistar, Current Index Level 7,327 WPG and TPK produced earnings beats. Key misses were mainly in PC Current Mkt. Cap. (US$bn) 674.9 Adjusted 12m Forward P/E (x) 14.2 (Compal, Acer, Wistron), components (Largan, Silitech, Catcher, Wintek), and 12m Forward P/BV (x) 1.6 petrochemical (Formosa Group and OUCC). Due to changes in team structure 12m Trailing P/BV (x) 1.6 and coverage, the financials of some companies are still under analyst review. Model Portfolio Allocation vs. TWSE Weight. Strategist’s angle on TSMC and Mediatek – the two non-Apple plays Our strategist’s angle supports our Buy ratings on TSMC and Mediatek. TSMC -10% 0% 10% used to be viewed as a global economic proxy with sales growth highly Elec. Comp. (4.4%) correlated to OECD leading indicators. It has broken away from the correlation Optoelectronics (4.3%) Financials (12.4%) this year, indicating that its technology leadership is now strong enough to Other Electronics (6.7%) defy global growth trends. Mediatek’s sharp increase in R&D and home market Non-Tech: Other (20.1%) advantage has helped it crack the dominance of Qualcomm in 3G. Its R&D to Info Services (0.1%) sales has risen to the level of Qualcomm and nVidia since 2008, enabling it to Computer & Peri. (7.2%) catch up in technological migration to enhance its product competitiveness. Plastic (7.6%) Electronics Dist. (1.2%)
Maintaining TWSE index target at 7,400 Transportation (2.0%) Deutsche Bank earnings estimates have been revised down another 3.7%/4.2% Steel (2.7%) for 2012/2013 since our last update. As we are only four months away from Gas &Oil (4.2%) the year end and 2013 earnings estimates have now become more realistic Semicon. (18.5%) given the 16.8% downward revisions year to date, we move our earnings base Com & Internet (8.6%) forward 12 months and maintain our index target at 7,400 or 14.4x forward 12- -10% 0% 10% month earnings. Key risks to our neutral market outlook include a potential liquidity rally driven by a new round of quantitative easing (QE3) by the US Model Portfolio FED, potentially stronger seasonal product sell-through than currently Model Portfolio Non-Tech Mega FHC estimated, and a better-than-expected product margin recovery. Chailease Uni President Investment strategy and model portfolio changes FPC Taifer Our bottom-up selection leads to another increase in tech weight. We maintain Cheng Shin Rubber Tech Delta overweight in Apple supply chains and favor TSMC and Mediatek outside the Hon Hai Apple basket. We add Zhen Ding as it should enjoy further market share gains TSMC FTC from Japanese competitors in flexible PCB through lower costs. We remove Epistar Far Eastern Dept Store as the weak economic growth, policy tightening in the MediaTek TPK real estate market, slow equity market turnover and hike in utility prices hit Zhen Ding New department store sales harder than consumer staples and convenience stores. Simplo ______Deutsche Bank AG/Hong Kong All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
6 September 2012
Taiwan Strategy Update
The market is flat
Market outlook remains flattish with mixed sector outlook
More downward earnings revisions following 2Q12 results, but the trend is stabilizing With the completion of the 2Q12 results and upcoming tech seasonality, we have begun to see the pace of downward earnings revisions slowing. As expectations have scaled back and we are almost through three quarters of the year, further downward earnings revisions for 2012 are unlikely to be as aggressive as previously. As to whether there could be upside to earnings revisions, this is subject to seasonal new product sell-through. Given that Europe, the US and China continue to be overshadowed by their respective sovereign, fiscal and economic issues, and the peripheral commodity-centric economies such as Brazil and Australia are inevitably affected by the demand slowdown in China, it would be a surprise to see strong upside surprise to new tech product sell-through. 2Q12 results provided few surprises on the top line as forecasts were revised down significantly during the course of the quarter, driven by weaker-than-expected external demand and sluggish domestic consumption due to the capital gains tax controversy and utility price hikes. On the bottom line, however, there were still some downside surprises in earnings, mainly in DRAM, TFT, PC and selective components (please see Figure 12). In the non-tech space, after the severe post-results earnings cut, we expect downward revisions for petrochemical earnings to stabilize towards the end of the year. Net net, 2012 market earnings have been taken down another 4% compared to our last update of -19%, to -23% YTD.
Figure 1: Momentum of earnings revisions improved following 2Q12 results 2Q12 result MoM Earnings Revision (LHS) Weekly Trend (RHS) 10% season 2%
5% 1%
0% 0%
-5% -1%
-10% -2%
-15% -3%
-20% -4% Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Source: Deutsche Bank, Bloomberg Finance LP
TWSE index target remains unchanged at 7,400 The Taiwan market remains a “Hold” in stock recommendation terms as growth catalysts remain sluggish from both a macro and sector perspective, except for selective companies. Seasonality is supportive for tech but some of the expectations were factored in during the summer rally in August. Investors are more likely to anticipate the upcoming slow season, not just for tech but for consumer/retail segment. The recovery in the commodity sector is largely contingent on China’s economic growth, where recovery momentum remains weak. Finally, the anticipation of a cross-strait RMB clearing MOU has been largely reflected in the
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recent rebound in the financial sector. While the MOU is an important catalyst to support the sector’s growth, the economic benefits will take time to manifest. With this flattish market outlook, the TWSE index remains trapped in a narrow trading range. Investors may continue to seek alpha at an individual stock level, however. We prefer TSMC, Mediatek, Hon Hai, TPK, Novatek, Zhen Ding, Delta, Foxconn Tech and Simplo. In non-tech, we like Uni President, Chailease, Formosa Plastic, Mega, Cheng Shin Rubber, and Taiwan Fertilizer. Key risks to our more neutral view for the market would be a potential kick-off of QE3 by the US FED, which could potentially trigger another liquidity rally.
Figure 2: TWSE trading range YTD the second tightest and turnover the fourth lowest since 1997
10,000
8,000
6,000 TWSE
4,000
2,000 150
100
50
-
Turnover (NT$bn) 199519961997199819992000200120022003200420052006200720082009201020112012 YTD
Source: Deutsche Bank, TEJ
Figure 3: Short interest approaches peak after market Figure 4: Liquidity has also seen some improvement rebound
(bn shares) Margin Long Balance (LHS) (bn shares) 100% TWSE YoY (LHS) 25% M1B/M2 YoY (RHS) 20 Short Interest Balance (RHS) 1.2 80% 20% 18 60% 15% 16 1.0 10% 14 40% 0.8 5% 12 20% 10 0.6 0% 8 0% 0.4 -5% 6 -20% -10% 4 0.2 -40% 2 -15% 0 0.0 -60% -20% Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 -80% -25% Jan-91 Feb-94 Mar-97 Apr-00 May-03 Jun-06 Jul-09 Source: Deutsche Bank, TEJ Source: Deutsche Bank, TEJ, Bloomberg Finance LP
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Taiwan Strategy Update
Apple harvest time, but not all components are sweet The apple harvest in the United States typically lasts from late August to December and peaks in October. The harvest timing seems quite apt for Apple’s supply chains. We have been pitching an overweight in Apple supply chains since the beginning of the year, which is not extraordinary when compared to the street. However, the supply chains have been on a rollercoaster ride from high expectations for this year’s new products to a faster-than- expected demand contraction for existing products ahead of new product launches. Now that the upcoming launches of iPhone 5 and iPad Mini have become more concrete, we can surely expect a volume pick-up among Apple’s suppliers. Weak market sentiment had prevented investors from positioning too early for Apple plays, providing good opportunities for re-entry. The product ramp-up suggests stronger top-line growth in the next 2-3 months. Among the Apple plays, our most differentiated stock picks have been Hon Hai and TPK, on which investors had been highly skeptical. The 2Q12 results confirmed our theses – Hon Hai on its margin improvement and Apple’s compensation for labor cost hikes and TPK on its ability to diversify out of Apple – and have propelled analyst upgrades since August. Given Hon Hai’s strong seasonal differences between 1H and 2H historically and the potential write-back of Sharp investment losses in 3Q12, Hon Hai remains our top pick in tech hardware in 2H12. Coming into the peak season, our preferred names remain Hon Hai, TPK, Foxconn Tech, Zhen Ding and Simplo. Michael Chou initiated on Zhen Ding, which benefits from the increased applications of flexible PCB for Apple products. Our less preferred Apple component supplier is Wintek. Key risks to our preference for Apple plays coming into the peak season are (1) the yield rate of the new product ramp up, particular the in-cell touch technology, and (2) market acceptance of the new iPhone and iPad Mini designs and features.
Figure 5: 2Q12 results of Apple supply chain - not all components are sweet Name Ticker Close Market Cap 1H12 2Q12 (NT$) (US$mn) Revenue HoH YoY OPM Net Income HoH YoY Revenue QoQ YoY OPM Net Income QoQ YoY Hon Hai 2317 TT 88.4 35,052 1,893,203 -2.3% 24.9% 1.9% 27,533 -49.2% 0.5% 891,917 -10.9% 13.5% 2.4% 12,610 -15.5% -2.9% Simplo 6121 TT 176.5 1,823 26,159 -1.8% 21.9% 8.1% 1,705 -18.0% 6.0% 14,344 21.4% 19.6% 8.8% 947 25.0% -0.4% Dynapack 3211 TT 140.5 714 13,957 2.2% 41.6% 7.1% 854 -8.2% 44.7% 7,727 24.0% 45.7% 7.6% 457 14.8% 50.6% TPK 3673 TT 399.5 4,140 76,557 -10.5% 32.3% 9.7% 5,567 7.9% -10.0% 36,081 -10.9% 10.9% 10.6% 2,943 12.1% -20.8% Wintek 2384 TT 15.35 950 51,182 1.3% 20.4% -0.2% (658) n.a. n.a. 22,383 -22.3% 5.2% -2.4% (806) n.a. n.a. Cheng Uei 2392 TT 67 1,099 24,310 -28.1% -5.3% 2.6% 115 -90.0% -88.6% 12,389 3.9% -9.4% 3.9% 49 -26.4% -92.2% ROEC 6176 TT 130.5 1,974 38,890 26.2% 19.2% 8.7% 2,949 44.3% 25.8% 21,296 21.0% 22.2% 10.0% 1,744 44.8% 29.0% Foxconn Tech 2354 TT 118 4,890 39,765 -44.6% -33.4% 7.8% 514 -88.3% -85.8% 18,944 -9.0% -21.2% 7.0% (2,023) n.a. n.a. Pegatron 4938 TT 37.9 2,865 391,109 8.6% 63.2% 1.2% 2,099 56.4% n.a. 219,214 27.5% 68.6% 1.4% 822 -35.6% n.a. Largan 3008 TT 642 2,885 6,978 -17.0% -7.9% 29.2% 1,548 -46.7% -32.5% 3,338 -8.3% -17.9% 27.8% 665 -24.6% -39.4% Genius 3406 TT 212.5 635 5,191 7.2% 44.7% 11.7% 314 -51.2% 6.4% 2,169 -28.2% 7.3% 10.1% 63 -74.6% -61.6% Zhen Ding Tech 4958 TT 98.4 2,319 24,553 -3.0% 29.5% 8.5% 1,875 16.0% 153.4% 12,136 -2.3% 21.9% 9.3% 893 -9.2% 73.8% Flexium 6269 TT 127 809 4,397 -2.1% 43.1% 15.3% 646 -11.9% 55.0% 1,800 -30.7% 7.5% 8.8% 237 -42.0% 1.1% Career 6153 TT 41.8 455 6,157 0.2% 16.7% 5.6% 297 -55.7% -49.7% 3,082 0.2% 8.9% 4.1% 116 -36.3% -60.4% AU Optronics 2409 TT 9.52 2,815 176,290 -6.4% -7.8% -13.6% (25,878) n.a. n.a. 95,189 17.4% -2.9% -11.0% (12,274) n.a. n.a. Chimei Innolux 3481 TT 9.41 2,495 225,087 -13.9% -9.5% -8.9% (22,331) n.a. n.a. 111,941 -1.1% -8.4% -7.0% (9,564) n.a. n.a. Source: Deutsche Bank, TEJ
What if I have had enough Apple? TSMC and Mediatek are the answer For investors who do not want all Apple components in one basket, our top picks are TSMC and Mediatek. While TSMC’s foundry leadership is already beyond doubt, the business cyclicality inevitably correlates with global growth trends given its association with the corporate capex cycle. However, TSMC has broken away from that correlation pattern YTD given its strong technology leadership in 28nm and market share gains. This is the first time we have seen TSMC’s company-specific strengths defy economic weakness. The upcoming weaker season in 4Q12 may offer a reentry opportunity for investors who are reluctant to chase.
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Figure 6: TSMC’s business not immune to global economic cycle but more resilient 5.0% OECD Leading Indicator YoY (LHS) TSMC- Revenue YoY (RHS) 130.0% 4.0% 110.0% 90.0% 3.0% 70.0% 2.0% 50.0% 1.0% 30.0% 10.0% 0.0% -10.0% -1.0% -30.0% -2.0% -50.0% 1996 1998 2000 2002 2004 2006 2008 2010 2012 YTD*
Source: Deutsche Bank, TEJ
Mediatek’s ability to make a comeback is rather unusual in the Taiwan tech space. We have seen in the past that once the competitiveness is gone, it is usually gone forever. Although “Buy” is turning into the consensus recommendation now, we recall there was little belief that the company could take more than 30% 3G baseband market share from Qualcomm in 2012 when our IC design analyst Jessica Chang upgraded the stock from Sell to Hold last summer. Qualcomm’s dominant position in 3G and the need to pay loyalty fees appeared to seal the argument. It took a year for Mediatek to prove it could bounce back. We attribute Mediatek’s turnaround to three key factors: 1. Home market advantage: The white-box handset market in China was literally created by Mediatek. It knows best the needs and gripes of its thousands of clients and is better capable of designing and providing one-stop total solutions for them. China is a home market for Mediatek, but it is just one of many markets for Qualcomm. Hence, Mediatek has devoted more resources to it than Qualcomm. 2. Willingness to invest in R&D: Prior to 2008, Mediatek’s R&D expense to sales ratio was in line with the Taiwan IC design industry average. In other words, it was adopting the same business strategy of market share gains through product cost- down. Since 2008, however, it has increased its ratio to the level of US IC designers such as Qualcomm and nVidia as it realized that without the necessary R&D expenses, it would not be able to compete with Qualcomm. This commitment to R&D has begun to pay off four years later. 3. Industry consolidation to prevent cut-throat competition. The merger with MStar removed the street’s last concern on pricing competition as MStar was stronger in TV, which could be a stable cash cow business to provide the ammunition for fighting the handset baseband competition. Luckily, the two companies were smart enough to achieve a win-win solution by merging to fend off the competition from local Chinese players.
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Taiwan Strategy Update
Figure 7: Now Mediatek’s R&D to sales ratio is higher than Qualcomm’s QCOM R&D (RHS) MediaTek R&D (RHS) (NT$bn) QCOM- R&D % Sales (LHS) NVDA- R&D % Sales (LHS) 35% MediaTek- R&D % Sales (LHS) Other TW IC Design- R&D % Sales (LHS) 100 90 30% 80 25% 70 20% 60 50 15% 40 10% 30 20 5% 10 0% - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12
Source: Deutsche Bank, TEJ, Bloomberg Finance LP
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2Q12 result wrap
Sector review In 2Q12, market sales were flattish QoQ and down 1% YoY. Net profit grew 5% QoQ but declined 28% YoY, and missed consensus by 22%. The most profit disappointment came from chemical, biotech, paper, steel, and retail. Tech, textile, machinery, rubber and tourism also missed consensus by 15-17%. Auto, construction and others were the bright spots: the sectors registered 17%/17%/14% sales growth YoY, and delivered earnings growth of 60%/31%/39% YoY. Tech sales grew 3% YoY, but earnings declined 7%.
Figure 8: 2Q12 sector sales – flattish QoQ and YoY Figure 9: 2Q12 net profit – significant decline YoY vs. vs. Ticker 2Q12 QoQ YoY consensus* Ticker 2Q12 QoQ YoY consensus* TWSECEM Cement 52,052 18% -3% -1% TWSECEM Cement 5,010 35% -26% 31% TWSEFOOD Food 169,416 3% 10% -2% TWSEFOOD Food 5,387 11% 2% 3% TWSEPLAS Plastic 281,479 -6% -8% -9% TWSEPLAS Plastic (6,938) n.a. n.a. n.a. TWSETEXT Textile 133,091 -2% -2% 5% TWSETEXT Textile 4,482 -29% -38% -16% TWSEMACH Machinery 79,105 11% 1% -2% TWSEMACH Machinery 5,072 22% 8% -17% TWSEEAW Cable & Wire 80,305 10% -12% -6% TWSEEAW Cable & Wire (628) n.a. n.a. n.a. TWSECHI Chemical 71,989 -2% -7% 1% TWSECHI Chemical 2,955 -32% -48% -45% TWSEBMC Biotech 26,308 5% -10% -5% TWSEBMC Biotech 1,642 -31% -23% -38% TWSEGLP Glass 13,724 21% -1% 8% TWSEGLP Glass (597) n.a. n.a. n.a. TWSEPP Paper 30,059 6% 2% -1% TWSEPP Paper 585 n.a. -40% -51% TWSESTEE Steel 215,299 2% -7% -3% TWSESTEE Steel 3,194 507% -73% -29% TWSERUB Rubber 74,918 12% 1% 1% TWSERUB Rubber 5,723 4% -12% -15% TWSEAUTO Auto 69,519 -11% 17% 5% TWSEAUTO Auto 5,829 19% 60% 51% TWSECON Construct. 88,088 40% 17% 5% TWSECON Construct. 13,423 70% 31% -2% TWSETRAN Transport. 145,723 10% 5% 2% TWSETRAN Transport. 5,034 n.a. 636% 14% TWSETOUR Tourism 12,954 -3% 13% -1% TWSETOUR Tourism 848 -25% -41% -15% TWSEBKI Financials 568,519 -12% -18% n.a. TWSEBKI Financials 51,660 -11% -6% 9% TWSEDEPT Retail 121,581 -1% 13% -3% TWSEDEPT Retail 4,220 20% -13% -29% TWSEOEG Elec. & Gas 225,176 -10% -2% -4% TWSEOEG Elec. & Gas (12,198) n.a. n.a. n.a. TWSEOTHR Others 196,734 4% 14% 1% TWSEOTHR Others 13,510 32% 37% 8% TWSEELEC Tech 4,295,263 3% 3% -1% TWSEELEC Tech 107,354 39% -7% -17% TWSE 6,951,302 1% 0% -1% TWSE 215,568 5% -28% -22% Source: Deutsche Bank, TEJ, Bloomberg Finance LP * for companies with comparable consensus forecasts Source: Deutsche Bank, TEJ, Bloomberg Finance LP * for companies with comparable consensus forecasts only. ** Use consolidated financial when available, else, use stand-alone financials only. ** “n.a.”= unable to calculate growth due to reported net loss
Figure 10: 1H12 sector sales – flattish HoH and YoY Figure 11: 1H12 net profit – significant decline YoY
Ticker 1H12 HoH YoY Ticker 1H12 HoH YoY TWSECEM Cement 96,145 -11% -1% TWSECEM Cement 8,708 3% -18% TWSEFOOD Food 333,670 -1% 9% TWSEFOOD Food 10,224 17% 1% TWSEPLAS Plastic 581,336 2% -8% TWSEPLAS Plastic 7,192 -73% -92% TWSETEXT Textile 268,593 -1% -1% TWSETEXT Textile 10,808 192% -44% TWSEMACH Machinery 150,106 -4% 3% TWSEMACH Machinery 9,232 -20% -8% TWSEEAW Cable & Wire 153,535 -9% -13% TWSEEAW Cable & Wire (293) n.a. n.a. TWSECHI Chemical 145,366 -2% -4% TWSECHI Chemical 7,320 -14% -43% TWSEBMC Biotech 51,310 7% -2% TWSEBMC Biotech 3,998 -2% -15% TWSEGLP Glass 24,797 -10% -6% TWSEGLP Glass (1,107) n.a. n.a. TWSEPP Paper 58,487 -7% 0% TWSEPP Paper 567 -68% -70% TWSESTEE Steel 427,145 -4% -7% TWSESTEE Steel 3,721 -26% -84% TWSERUB Rubber 142,063 -2% 5% TWSERUB Rubber 11,208 22% -14% TWSEAUTO Auto 147,640 7% 5% TWSEAUTO Auto 10,720 21% 14% TWSECON Construct. 150,740 -4% -4% TWSECON Construct. 21,179 0% -18% TWSETRAN Transport. 277,639 -2% 2% TWSETRAN Transport. (3,695) n.a. n.a. TWSETOUR Tourism 26,336 1% 16% TWSETOUR Tourism 1,976 -5% -24% TWSEBKI Financials 1,216,035 15% 3% TWSEBKI Financials 109,473 68% 3% TWSEDEPT Retail 244,547 -1% 13% TWSEDEPT Retail 7,727 3% -10% TWSEOEG Elec. & Gas 474,680 19% 0% TWSEOEG Elec. & Gas (7,181) n.a. n.a. TWSEOTHR Others 386,356 0% 13% TWSEOTHR Others 23,678 12% 18% TWSEELEC Tech 8,471,369 -6% 4% TWSEELEC Tech 184,688 4% -25% TWSE 13,827,896 -3% 3% TWSE 420,144 11% -36% Source: Deutsche Bank, TEJ, Bloomberg Finance LP Source: Deutsche Bank, TEJ, Bloomberg Finance LP * “n.a.”= unable to calculate growth due to reported net loss
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2Q12 review of Deutsche Bank coverage universe Even though downward market earnings revisions have been quite aggressive, down 19% in 2012 as of our last strategy update, the weaker sectors such as DRAM, TFT, PC and components continued to surprise on the downside. In tech upstream, foundry, OSAT and PCB results were mostly in line, while DRAM and TFT missed. Most IC design companies beat our earnings estimates, including Mediatek, Novatek, GMT, Phison and Elan. In tech downstream and components, the only earnings beats were from Hon Hai, Delta, Asustek, Epistar, WPG and TPK. Key misses were mainly related to PC (Compal, Acer, Wistron), components (Largan, Silitech, Catcher, Wintek), and petrochemical (OUCC). Due to changes in team structure and coverage, the financial numbers of several companies are still under analyst review.
Foundry, OSAT and substrate TSMC's 2Q12 results were in line with our and consensus estimates. UMC's 2Q12 results were better than our and consensus estimates due to higher margins and non-operating income. ASE's 2Q12 results were below expectations owing to lower margins in 2Q12. SPIL's 2Q12 results were in line with our and consensus estimates. Kinsus' and Unimicron's results were in line with our and consensus estimates in 2Q12. Following 2Q12 inventory data, we maintain our view that inventory correction should continue into 1Q13, despite a higher-than-expected increase in global major fabless’ inventory days. We expect the foundry/OSAT/substrate sectors to experience order weakness in 1) PCs (GPU, hard disk drive, and PC-related power management ICs), 2) wireline solutions (FPGA and switch/router ICs), 3) 3G smartphone chips, and 4) consumer chips (LCD/LED TV and set-top-box chips) in 4Q12 and 1Q13. We anticipate the areas of strength in 4Q12 and 1Q13 will be 28nm 4G smartphone chips, tablet chips, and MCU. (Michael Chou)
IC design 2Q12 sales for this sector came in at the mid- to low-end of guidance ranges. Upside was capped as the tech supply chain began to turn cautious on end demand given a weakened worldwide economy. On the margins front, we noted that the sector has been seeing a stabilization in GMs, thanks to progress in cost reduction and product mix improvement. We expect sector sales to grow 5-12% QoQ in 3Q12. We note that the outlook varies among different fabless companies, depending on the product segments they operate in. For instance, MediaTek guides sales to grow strongly by 13-18% MoM, thanks to its ramps and market share gains in the booming China smartphone market. Elan demonstrates above-seasonal performance on the back of its market share gains in touch pad and smooth ramps of touch screen controller IC for tablet. Novatek is also doing well in tablet and smartphone ICs and TV controller ICs. Yet business for analog IC players Richtek and GMT is relatively stable as seasonal TV and PC demand is soft this year, while Realtek's 3Q12 is muted as it has high PC exposure. Our top picks for the IC design sector are MediaTek (large cap), Novatek (mid cap) and Elan (small cap). (Jessica Chang)
Touch panel The sector was in its low season in 2Q12, especially before the launches of new products from Apple and other non-Apple tablets. TPK's sales arrived in line with guidance while Wintek was weak due to sharp declines in Apple orders. On the earnings front, TPK beat its guidance and market expectations with good operating margin expansion. Yet Wintek incurred huge losses in 2Q12 due to a lack of scale, weak pricing power, and the still loss- making TFT LCD business. Sector sales have started to warm up since August, with both TPK and Wintek reporting higher-than-expected August sales. The strength for TPK was in the non-Apple tablet ramp starting from late August, while Wintek saw its iPad business recover with iPhone being
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largely stable. We see upside to sales for both companies for 3Q12 and we thus feel TPK has a good chance to beat our expectations. However, whether Wintek can turn profitable remains uncertain due to its low margins. Our top pick for the touch sector is TPK. (Jessica Chang)
Tech hardware The majority of tech hardware companies reported weaker-than-expected 2Q results due to lukewarm PC demand and higher costs associated with new project ramp in 2H (Win8 products). However, a few companies reported better-than-expected results (Asustek, Delta and Hon Hai) on improving cost structure/product mix. In 2H, we expect NB shipment to grow by 0%-5% QoQ and 10% QoQ on the back of new Win8 product launches. We expect the Apple supply chain (Hon Hai) to deliver strong revenue growth momentum in 4Q12E (+34% QoQ) on the back of new Apple product launches in September. Hon Hai and Wistron are our preferred picks in the tech hardware sector. We believe Hon Hai's EPS could revive to 37% YoY growth in 2013E and 10% YoY growth in 2014E (driven by improving mix and less depreciation cost burden). Trading at 9x-10x 13E EPS, we think Hon Hai's favorable earnings recovery is not yet in the price. We like Wistron as we think the company's favorable developments in the service/server areas could translate into earnings growth of 19%-10% YoY in 13E-14E. We view the weak near-term earnings momentum as a good buying opportunity to accumulate the stock. (Ivy Lee)
Tech components We remain positive on Simplo/Foxconn Tech, which are the major beneficiaries of iPhone 5 and iPad Mini demand in 2H12. Besides, we believe their superior balance sheet management should help them weather the macro uncertainties better than peers. Lighting incumbents such as Philips, in our view, will outsource more LED manufacturing in 2013 and Epistar should be the major beneficiary due to its superior R&D and manufacturing capabilities. We suggest accumulating Epistar in 4Q12 during the traditional light season. (William Yang)
Petrochemical 2Q12 results disappointed both us and the street, mostly attributable to inventory loss led by oil price deflation, along with sluggish demand. For 3Q12, in spite of slow demand growth, we forecast a QoQ EPS recovery given 1) the write-back of inventory loss with an oil price rebound, 2) time-lagged petrochem margins improving, and 3) cash dividend income. There will be a bumpy improvement in 2H12 as the demand recovery slows. We foresee QoQ earnings improvements through 4Q12, assuming crude oil price stabilization triggers moderate restocking demand. However, we expect a more meaningful demand growth acceleration in early 2013. (Alden Lin)
Deutsche Bank AG/Hong Kong Page 9
6 September 2012
Taiwan Strategy Update
Figure 12: 2Q12 results comparison with DB estimates 2Q12 2Q12 2Q12 2Q12 Actual Result Actual QoQ % vs. Deutsche Bank Estimate vs. DBe Beat/In Line/Miss (NT$ mn, NT$ for EPS) PX Sales OM Net Profit Sales Net Profit Sales OM Net Profit Sales OM Net Profit Foundry UMC 2303.TW 11.65 27,620 11.5% 2,990 16% 124% 0% 1.7% 18% In Line In Line BEAT TSMC 2330.TW 81.1 128,061 36.5% 41,813 21% 25% 0% 0.9% 0% In Line In Line In Line Packaging & Testing ASE 2311.TW 22.7 45,872 9.1% 3,202 6% 56% 0% -0.5% -4% In Line In Line In Line SPIL 2325.TW 33.6 16,545 11.4% 1,470 9% 65% 0% 1.1% 0% In Line In Line In Line Powertech 6239.TW 57.6 11,909 14.8% 1,323 36% 17% 0% 0.5% 3% In Line In Line In Line Memory Nanya Tech 2408.TW 1.97 10,320 -52.9% (6,684) 15% n.a. -9% 9.2% n.a. MISS BEAT MISS Inotera 3474.TW 4.93 9,564 -29.2% (2,977) 21% n.a. -15% -8.2% n.a. MISS MISS MISS Display AUO 2409.TW 9.52 95,189 -11.0% (12,274) 17% n.a. 5% -2.4% n.a. In Line In Line MISS CMI 3481.TW 9.41 111,941 -7.0% (9,564) -1% n.a. -9% -2.0% n.a. MISS In Line MISS PCB & Substrate Kinsus 3189.TW 85.8 5,691 14.0% 756 10% 23% 1% 0.7% -1% In Line In Line In Line Unimicron 3037.TW 32.7 16,669 6.2% 969 2% 59% 0% -1.6% -4% In Line In Line In Line IC Design Realtek 2379.TW 57.1 6,603 16.7% 586 24% 5% 1% 0.5% -18% In Line In Line Miss MediaTek 2454.TW 314 23,440 11.8% 3,357 19% 34% 0% -0.1% 6% In Line In line Beat Novatek 3034.TW 97.3 8,566 14.6% 1,033 14% 32% -2% 1.0% 6% In Line In Line Beat Richtek 6286.TW 172 2,943 19.8% 491 13% 23% -2% 0.0% 1% In Line In Line In Line Orise 3545.TW 38.55 956 2.1% 23 21% 98% n.a. n.a. n.a. n.a. n.a. n.a. GMT 8081.TW 98.4 1,213 17.0% 211 10% 51% -1% 0.0% 17% In Line In Line Beat Phison 8299.TWO 220 8,037 8.4% 588 -2% -14% 7% 0.0% 7% Beat In Line Beat Elan 2458.TW 47.1 1,888 19.1% 286 30% 42% 2% 0.0% 5% In Line In Line Beat Pixart 3227.TWO 86.8 677 8.6% 37 10% 6% 1% -2.0% -30% In Line Miss Miss MStar 3697.TW237.5Not Reported n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a. IC Distribution WPG 3702.TW 35.15 90,961 1.9% 1,207 13% 29% -3% 0.1% 9% Miss In Line Beat Touch Panel Wintek 2384.TW 15.35 22,383 -2.4% (806) -22% n.a. 0% -2.0% n.a. In Line Miss Miss JTOUCH 3584.TW 29.5 1,004 -24.4% (230) 17% n.a. n.a. n.a. n.a. n.a. n.a. n.a. YoungFast 3622.TW 72.5 2,285 -22.0% (389) -10% n.a. n.a. n.a. n.a. n.a. n.a. n.a. TPK 3673.TW 399.5 36,081 10.6% 2,943 -11% 12% -3% 1.0% 12% Miss In Line Beat EMS Hon Hai 2317.TW 88.4 891,917 2.4% 12,610 -11% -16% -9% +70 bps 62% Miss Beat Beat Notebook Compal 2324.TW 25.2 164,876 1.6% 1,571 2% -16% 0% -30 bps -25% In Line Miss Miss Acer 2353.TW 26.1 110,545 0.4% 56 -2% -83% -2% +10 bps -80% In Line In Line Miss Quanta 2382.TW 77.7 237,521 1.2% 5,989 1% 18% -11% -80 bps 3% Miss MIss inline Wistron 3231.TW 33.6 158,872 1.3% 1,462 -10% -22% 0% 0 bps -9% In Line In Line Miss Asustek 2357.TW 295 94,197 5.8% 4,817 4% -4% 0% 30 bps 17% In Line Beat Beat Handset HTC 2498.TW 254 91,041 9.0% 7,402 34% 66% 0% 0.0% 0% In Line In Line In Line Largan 3008.TW 642 3,338 27.8% 665 -8% -25% 0% -190 bps -19% In Line Miss Miss Silitech 3311.TW 54.3 2,160 11.3% 235 -16% 11% -20% -70 bps -15% Miss Miss Miss Components and related Delta 2308.TW 107 45,962 9.1% 3,998 15% 9% 0% 30 bps 9% In Line Beat Beat Synnex 2347.TW 65.9 73,900 1.5% 1,232 2% -31% -3% -50 bps -36% In Line Miss Miss Foxconn Tech 2354.TW 118 18,944 7.0% (2,023) -9% nm 1% -330 bps -40% In Line Miss Miss Catcher 2474.TW 141 9,646 34.6% 1,522 11% -46% 0% 0bps -41% In Line In Line Miss Simplo 6121.TWO 176.5 14,344 8.8% 947 21% 25% 0% 10 bps 1% In Line In Line In Line LED Everlight 2393.TW 45.35 4,769 5.5% 231 14% 179% -2% 20 bps -5% In Line In Line In Line Epistar 2448.TW 59 5,564 3.4% 377 31% n.a. 0% 150 bps 51% In Line Beat Beat Telecom and related CHT 2412.TW 90.4 54,188 26.7% 11,271 -2% 19% n.a. n.a. n.a. n.a. n.a. n.a. TCC 3045.TW 103 23,722 20.2% 3,914 -1% 17% n.a. n.a. n.a. n.a. n.a. n.a. FETone 4904.TW 72.4 21,400 17.5% 2,720 0% 13% n.a. n.a. n.a. n.a. n.a. n.a. Cement Taiwan Cement 1101.TW 32.5 5,994 8.5% 2,466 8% 68% n.a. n.a. n.a. n.a. n.a. n.a. Asia Cement 1102.TW 33.95 2,801 1.5% 2,428 1% 46% n.a. n.a. n.a. n.a. n.a. n.a. Steel China Steel 2002.TW 24.05 57,069 2.3% 2,657 6% n.a. n.a. n.a. n.a. n.a. n.a. n.a. Chemical Formosa Plastics 1301.TW 80.3 41,435 1.3% (1,187) -12% n.a. -4% -3.4% n.a. In Line MISS MISS Nan Ya Plastics 1303.TW 53.4 43,706 -5.0% (2,925) -9% n.a. -1% -8.4% n.a. In Line MISS MISS FCFC 1326.TW 75 72,017 -8.0% (6,135) -9% n.a. -5% -7.9% n.a. MISS MISS MISS FPCC 6505.TW 83.4 205,811 -7.2% (13,105) -10% n.a. 4% -6.4% n.a. In Line MISS MISS OUCC 1710.TW 33 2,939 -1.0% 4 -15% -99% -16% -13.5% -99% MISS MISS MISS Transportation Yang Ming Marine 2609.TW 11.75 n.a. n.a. 191 n.a. n.a. n.a. n.a. -21% n.a. n.a. MISS Evergreen Marine 2603.TW 15.8 n.a. n.a. 858 n.a. n.a. n.a. n.a. 16% n.a. n.a. BEAT CAL 2610.TW 11.5 33,297 -0.7% (100) 4% n.a. 0% 5.1% n.a. In Line BEAT In Line Evaair 2618.TW 16.6 26,369 0.5% 199 3% n.a. 0% -5.1% -5% In Line MISS MISS Retail / Industrial PCSC 2912.TW 155.5 33,438 4.0% 1,710 4% -1% n.a. n.a. n.a. n.a. n.a. n.a. Uni President 1216.TW 48.05 11,719 5.1% 3,202 5% 6% n.a. n.a. n.a. n.a. n.a. n.a. Financial Chailease 5871.TW 50.1 5,307 27.3% 1,034 11% 30% 0.0% 2.0% 9.9% In Line In Line BEAT Source: Deutsche Bank estimates, company data, TEJ
Page 10 Deutsche Bank AG/Hong Kong
6 September 2012 Taiwan Strategy Update
Figure 13: 3Q12 estimates and corporate guidance 3Q12 3Q12 3Q12 Deutsche Bank Estimate DBe QoQ Guidance (NT$ mn, NT$ for EPS) PX Sales OM Net Profit Sales Net Profit Sales Margins Foundry UMC 2303.TW 11.65 28,544 13.1% 3,466 3% 16% Marginally up QoQ GM: Mid 20% TSMC 2330.TW 81.1 137,095 35.1% 45,330 7% 8% Up 6-8% QoQ GM: 46-48% Packaging & Testing ASE 2311.TW 22.7 49,284 9.7% 3,873 7% 21% Up 5-7% QoQ GM: 22.5% SPIL 2325.TW 33.6 17,373 14.0% 2,096 5% 43% Up 2-5% QoQ GM: 20-22% Powertech 6239.TW 57.6 11,075 13.5% 1,054 -7% -20% Down 5-10% QoQ GM: decline QoQ Memory Nanya Tech 2408.TW 1.97 11,997 -38.1% (5,977) 16% n.a. n.a. n.a. Inotera 3474.TW 4.93 9,832 -20.0% (2,282) 3% n.a. n.a. Possibility of higher COGS Display AUO 2409.TW 9.52 97,093 -6.9% (7,704) 2% n.a. n.a. n.a. CMI 3481.TW 9.41 120,350 -5.0% (8,768) 8% n.a. n.a. n.a. PCB & Substrate Kinsus 3189.TW 85.8 6,017 14.7% 844 6% 12% Up 5% QoQ n.a. Unimicron 3037.TW 32.7 18,226 9.3% 1,566 9% 62% n.a. n.a. IC Design Realtek 2379.TW 57.1 6,708 14.9% 618 2% 5% flat or slightly up QoQ flat GMs MediaTek 2454.TW 314 27,423 15.3% 4,889 17% 46% up 13-18% QoQ GMs 41-43% Novatek 3034.TW 97.3 9,879 15.7% 1,285 15% 24% up 10-14% QoQ flat GMs Richtek 6286.TW 172 3,104 17.9% 490 5% 0% down 4% to up 6% QoQ GMs 37-40% and OMs 16-19% Orise 3545.TW 38.55 n.a. n.a. n.a. n.a. n.a. n.a. n.a. GMT 8081.TW 98.4 1,247 17.0% 184 3% -13% down 3% to up 7% QoQ flat GMs Phison 8299.TWO 220 9,113 9.4% 766 13% 30% n.a. n.a. Elan 2458.TW 47.1 1,969 20.6% 322 4% 13% up 5-10% QoQ n.a. Pixart 3227.TWO 86.8 1,180 20.6% 197 74% 429% up 40-50% QoQ GMs 43-45% MStar 3697.TW 237.5 10,909 18.8% 1,975 n.a. n.a. IC Distribution WPG 3702.TW 35.15 96,388 2.0% 1,434 6% 19% up 2-8% QoQ GMs 5.0-5.2%; OMs 1.7-1.9% Touch Panel Wintek 2384.TW 15.35 23,612 -0.2% (196) 5% n.a. 5% QoQ n.a. JTOUCH 3584.TW 29.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. YoungFast 3622.TW 72.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. TPK 3673.TW 399.5 37,391 10.6% 3,052 4% 4% low single digit growth improved OMs EMS Hon Hai 2317.TW 88.4 885,202 2.1% 18,624 -1% 48% n.a. n.a. Notebook Compal 2324.TW 25.2 176,841 1.8% 2,437 7% 55% NB shipment to be up 5%-10% QoQ n.a. Acer 2353.TW 26.1 111,611 0.5% 498 1% 789% NB shipment be flat to mild growth QoQ Similar as in 2Q Quanta 2382.TW 77.7 311,331 1.4% 6,686 31% 12% NB shipment up 0%-5% QoQ; sales growth higher Target to keep profit-before-tax be flat (or up) QoQ Wistron 3231.TW 33.6 159,171 1.4% 1,752 0% 20% Sales to be flat/or slightly improve QoQ Sales to be flat/or slightly improve QoQ Asustek 2357.TW 295 105,216 5.2% 4,898 12% 2% Sales to be up over 10% QoQ OM to keep at similar level as in 1Q (5.2%) Handset HTC 2498.TW 254 74,000 7.1% 4,600 -19% -38% decline 12-23% QoQ ~25% Largan 3008.TW 642 4,144 37.1% 1,498 24% 125% rise QoQ but no guidance improving but no guidance Silitech 3311.TW 54.3 3,934 13.7% 410 46% 66% slightly down slightly down Components and related Delta 2308.TW 107 49,718 9.6% 4,035 8% 1% Sales to grow QoQ GM to keep at similar level as in 2Q Synnex 2347.TW 65.9 88,680 2.1% 2,229 20% 81% Sales to grow QoQ Improve QoQ Foxconn Tech 2354.TW 118 30,428 9.3% 3,012 61% n.a. Should grow QoQ n.a. Catcher 2474.TW 141 9,757 33.8% 2,707 1% 78% 0% QoQ n.a. Simplo 6121.TWO 176.5 16,087 7.6% 1,070 12% 13% +10-12% QoQ trend down LED Everlight 2393.TW 45.35 5,006 7.7% 369 5% 60% a better 2H than 1H n.a. Epistar 2448.TW 59 5,871 8.0% 417 6% 11% n.a. should be better due to porduct mix Telecom and related CHT 2412.TW 90.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. TCC 3045.TW 103 n.a. n.a. n.a. n.a. n.a. n.a. n.a. FETone 4904.TW 72.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Cement Taiwan Cement 1101.TW 32.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Asia Cement 1102.TW 33.95 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Steel China Steel 2002.TW 24.05 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Chemical Formosa Plastics 1301.TW 80.3 44,430 9.2% 7,901 7% n.a. n.a. n.a. Nan Ya Plastics 1303.TW 53.4 47,088 8.2% 7,088 8% n.a. n.a. n.a. FCFC 1326.TW 75 73,159 5.6% 7,003 2% n.a. n.a. n.a. FPCC 6505.TW 83.4 176,484 3.6% 7,119 -14% n.a. n.a. n.a. OUCC 1710.TW 33 3,058 18.4% 438 4% 10936% n.a. n.a. Transportation Yang Ming Marine 2609.TW 11.75 38,203 12.6% 4,321 n.a. 2161% n.a. n.a Evergreen Marine 2603.TW 15.8 34,102 13.3% 4,415 n.a. 414% n.a. n.a CAL 2610.TW 11.5 37,587 4.2% 951 13% n.a. n.a. n.a Evaair 2618.TW 16.6 29,135 8.7% 2,281 10% 1046% n.a. n.a Retail / Industrial PCSC 2912.TW 155.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Uni President 1216.TW 48.05 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Financial Chailease 5871.TW 50.1 5,739 24.6% 978 8% -5% n.a. n.a
Source: Deutsche Bank estimates, company data, TEJ
Deutsche Bank AG/Hong Kong Page 11
6 September 2012
Taiwan Strategy Update
Figure 14: Sector outlook for 2H12 Coverage Sector 2H12 Sector Outlook
Weak GDP growth and utility price hikes could be a drag on consumption. Companies with specific strategies to expand market Food shares should weather the lackluster environment better than others We see no rush to weigh back into cement until earnings expectations become more realistic and cement ASP recovers. Cement With coal prices declining, we see more room for price declines in 3Q. Catalysts may not appear until 4Q12, when policy relaxation effects kick in. No fundamental catalyst for steel stocks as destocking trend continues. The high stockpiles of China domestic producers Steel should prevent the price from overshooting. A bumpy take-off in 2H12 as demand recovery slows. We foresee QoQ earnings improvements through 4Q12, Petrochemical/Chemical assuming crude oil price stabilization triggers moderate restocking demand. However, we expect a more meaningful demand growth acceleration in early 2013. Auto Construction Financial Weak GDP growth and utility price hikes could be a drag on consumer demand, leading to weaker-than-expected retail sales. Retail Growth should be stronger in 3Q12, helped by summer seasonality and anniversary sales. Tourism We expect YoY revenue growth to pick up considering a gradual recovery in air cargo demand to augment ongoing strength Transportation in cross-strait passenger traffic demand
We expect sales to fall 4-6% QoQ for TSMC and UMC in 4Q12 due to inventory correction. We still expect the Foundry supply chain to finish inventory correction in 1Q13 We expect pricing competition in flip-chip packaging to intensify in 4Q12 due to 30-40% HoH capacity in 2H12. We OSAT Expect OSAT companies to see more margin pressure from 4Q12 onwards Despite the weakening economy we expect DRAM industry revenues to show strong growth in 2H12 as the DRAM industry is less demand driven and more supply driven. We expect DRAM supply growth to remain below 40% for the next two years, DRAM which should lead to a favorable DRAM pricing environment. DRAM prices have started to recover and positive pricing trends may continue in 2013 as the industry capex to sales ratio could fall to a historical low of 17% in 2012. We expect iPhone 5 and iPad Mini to drive strong HDI PCB orders for PCB makers in 2H12. We project Unimicron to gain PCB & Substrate market share of substrates for smartphone chips in Qualcomm and MediaTek in 2H12
We expect sector sales to grow by 5-12% QoQ in 3Q12. We note that the outlook varies among different fabless companies, depending on the product segments they operate in. For instance, MediaTek guides sales to grow strongly by 13-18% MoM, thanks to its ramps and market share gains in the booming China smartphone market. Elan demonstrates above IC Design seasonal performance on the back of its market share gains in touch pad and smooth ramps of touch screen controller IC for tablet. Novatek is also doing well on tablet and smartphone ICs and TV controller ICs. Yet business for analog IC players Richtek and GMT is relatively stable as seasonal TV and PC demand is soft this year while Realtek's 3Q12 is muted as it has high PC exposure. Our top picks for the IC design sector are MediaTek (large cap), Novatek (mid cap) and Elan (small cap)
Sector sales have started to warm up since August, with both TPK and Wintek reporting higher-than-expected August sales. The strength for TPK was in non-Apple tablet ramp starting late August while Wintek saw its iPad business recover Touch Panel with iPhone largely stable. We see upside in sales for both companies for 3Q12 and we thus feel TPK has a good chance to beat our expectations. However, whether Wintek can turn profitable remains uncertain due to its low margins. Our top pick for the touch sector is TPK. We believe LCD revenues should moderate in 2H12 due to slowing shipment growth from a weakening macro environment and TFT-LCD slowing end demand. In the near term, demand/supply in the LCD industry should improve with a TV panel demand pick up from restocking demand and average TV size increases, which are leading to higher utilization rates. EMS Launch of new Apple products to drive stronger growth momentum in 4Q PC/Notebook A back end loaded year due to new Win 8 tablet PC/NB projects ramp Handset Improving 2H demand due to production adjustment in 2Q and new model launches in September Components A back end loaded year due to many new projects kicking in LED 3Q should grow due to sell in demand for TV/lighting but 4Q should decline due to seasonality
Source: Deutsche Bank estimates
Page 12 Deutsche Bank AG/Hong Kong
6 September 2012 Taiwan Strategy Update
Market valuation
Revenue and earnings revisions
With the completion of the 2Q12 results and upcoming tech seasonality, we have begun to see the pace of downward earnings revisions slowing down. Further downward earnings revisions for 2012 are unlikely to be as aggressive as in 1H12. The 2Q12 results provided few surprises on the top line as forecasts were revised down significantly in 2Q12. However, there were still some downside surprises in earnings, mainly in DRAM, TFT, PC, components and petrochemical. Net net, 2012 market earnings have been further taken down by 4% to -23% YTD compared to our last update in early August.
Figure 15: TWSE earnings revision trends – further south 2Q12 result MoM Earnings Revision (LHS) Weekly Trend (RHS) 10% season 2%
5% 1%
0% 0%
-5% -1%
-10% -2%
-15% -3%
-20% -4% Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Source: Deutsche Bank estimates, Bloomberg Finance LP
Figure 16: Taiwan saw the heaviest downward earnings Figure 17: 2012 implied earnings growth still higher revisions YTD relative to the region 10% 70% FY12E 5% 60% Earnings Earnings 50% 0% Revision YoY YTD 40% Growth -5% 30% DB-2012 DB: 17-Jan-12 -10% 20% -15% 10% DB-2013 DB:4-Sep-12 -20% 0% -10% PCOMP SENSEX FBMKLCI FFSTI JCI KOSPI TWSE HSCEI SET NKY HIS BBG:17-Jan-12 -25% BBG-2012 HSCEI HIS JCI FBMKLCI KOSPI SENSEX SET FFSTI PCOMP NKY TWSE
BBG-2013 BBG:4-Sep-12
Source: Deutsche Bank estimates, Bloomberg Finance LP Source: Deutsche Bank estimates, Bloomberg Finance LP
Deutsche Bank AG/Hong Kong Page 13
6 September 2012
Taiwan Strategy Update
Figure 18: Earnings revisions by sector
30% FY12 Earnings Revisions % YTD FY13 Earnings Revisions % YTD 20% 10% 0% -10% -20% -30% -40% -50% -60% -70% Others Financials Transportation Gl Cement Paper Chemical Plastic Machinery Textile Steel Gas & Electricity Food Biotech Retail Construction Tourism Auto Rubber TWSE Tech TWSE ass
Source: Deutsche Bank, Bloomberg Finance LP
Figure 19: TWSE 2H 12/13 seasonality Figure 20: Tech 2H 12/13 seasonality 59% 59% 2H revenue as a % of 2H revenue as a % of 58% 57% full year revenue full year revenue 50% 57% 50% 55% 56% 53.3% 53% 55% 53.8% 54% 51% 53% 49% 52% 52.8% 51% 47% 46.5% 50% 45% 49% 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Source: Deutsche Bank, Bloomberg Finance LP * for companies with comparable consensus forecasts only Source: Deutsche Bank, Bloomberg Finance LP * for companies with comparable consensus forecasts only
Figure 21: Consensus revenue QoQ growth trend Figure 22: Consensus revenue YoY growth trend TWSE Consensus Revenue QoQ TWSE Consensus Revenue YoY Upstream Tech QoQ Upstream Tech YoY Downstream QoQ 15% Downstream YoY 15% Non-Tech QoQ Non-Tech YoY 10% 10% 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% -20% -20% -25% -25% -30% -30% -35% 1Q12(A) 2Q12(A) 3Q12 4Q12 1Q12(A) 2Q12(A) 3Q12 4Q12 Source: Deutsche Bank, Bloomberg Finance LP * for companies with comparable consensus only Source: Deutsche Bank, Bloomberg Finance LP * for companies with comparable consensus only
Page 14 Deutsche Bank AG/Hong Kong
6 September 2012 Taiwan Strategy Update
Maintaining TWSE index target at 7,400
Deutsche Bank earnings estimates for 2012/2013 have been revised down another 3.7%/4.2% since our last update. As we are only four months away from the year end and given that 2013 earnings estimates have now become more realistic following the 16.8% downward revisions year to date, we move our earnings base forward 12 months and maintain our index target at 7,400 or 14.4x forward 12-month earnings. The key risks to our neutral market outlook include a potential liquidity rally driven by a new round of quantitative easing (QE3) by the US FED, potentially stronger seasonal product sell-through than currently estimated, and better-than-expected product margins.
Figure 23: TWSE earnings: Deutsche Bank estimates vs. consensus Bloomberg Consensus Estimate DBe Earnings with Mid Cycle Valuation Current PER BBG Field Consensus Consensus DBe EPS DBe EPS Revision- Revision- Implied Consensus DBe Mid Cycle:14.6x EPS YoY YoY YTD last update TWSE Forward 12M "F12 Est" 508 48.2% 515 50.4% - -1.8% 7,540 14.4 14.2 FY11E n.a. 396 -29.2% 400 -28.4% -16.5% -0.5% 5,852 18.5 18.3 FY12E "Y" 468 11.9% 437 9.2% -21.8% -3.7% 6,393 15.7 16.8 FY13E "Y+1" 587 26.0% 553 26.6% -16.8% -4.2% 8,092 12.5 13.2 Source: Deutsche Bank, Bloomberg Finance LP Note: Bloomberg Forward 12M EPS is based on forward quarters. DB forward 12M EPS estimate is based on daily weighted average of FY12/FY13 earnings, excluding the financial sector
Figure 24: PE ratio trend since 1995 Figure 25: PER slightly lower than adjusted 10Y average 12M Forward PER Adjusted 10Y AVG (x) (x) TWSE Mean +1 Std Dev -1 Std Dev +1 Std Dev -1 Std Dev 80 21 +2 Std Dev -2 Std Dev 70 19 60 18.1x 50 17 16.4x 40 15 14.6x 30 13 20 12.8x 10 11 11.0x
- 9 1995 1997 1999 2001 2003 2005 2007 2009 2011 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP
Figure 26: TWSE book value: Deutsche Bank estimates vs. consensus Bloomberg Consensus Estimate DBe BPS Current PBR BBG Field Consensus Consensus DBe BPS DBe BPS YoY Revision- YTD Revision- last Consensus DBe BPS YoY update Forward 12M "F12 Est" 4,387 -7.7% 4,736 -0.4% - 0.8% 1.67 1.55 FY11E n.a. 4,433 -4.2% 4,558 -1.5% -5.5% 0.0% 1.65 1.61 FY12E "Y" 4,387 -1.0% 4,629 1.5% -10.9% -0.4% 1.67 1.58 FY13E "Y+1" 4,632 5.6% 4,789 3.5% -4.0% -0.6% 1.58 1.53 Source: Deutsche Bank, Bloomberg Finance LP Note: Bloomberg Forward 12M BPS is based on forward quarters. DB forward 12M BPS estimate is based on daily weighted average of FY12/FY13 earnings, excluding the financial sector
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Figure 27: PB ratio trend since 1995 Figure 28: Current PBR inline with adjusted 10Y average 12M Forward PBR Adjusted 10Y AVG (x) (x) +1 Std Dev -1 Std Dev 4.0 TWSE Mean +1 Std Dev -1 Std Dev 2.3 +2 Std Dev -2 Std Dev
3.5 2.1 2.04x 3.0 1.9 2.5 1.79x 1.7 2.0 1.5 1.54x 1.5 1.3 1.0 1.29x 1.1 0.5 1.04x - 0.9 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP
Figure 29: Consensus valuation comparison by country Region Ticker PX_Last YTD RTN Aug FY12 PE FY13 PE FY12 PB FY13 PB APAC MXAP INDEX 116 4.1% -0.4% 12.10 10.58 1.17 1.09 Taiwan TWSE INDEX 7,327 7.3% 2.7% 15.71 12.54 1.67 1.58 Japan NKY INDEX 8,681 3.9% 1.8% 13.80 12.21 1.05 0.98 Korea KOSPI INDEX 1,881 3.0% 1.2% 10.01 8.27 1.10 0.99 China SHCOMP INDEX 2,046 -4.8% -2.6% 9.37 8.14 1.36 1.21 Hong Kong HSI INDEX 19,157 7.4% -1.3% 10.21 9.40 1.25 1.16 Singapore FSSTI INDEX 2,985 15.8% 0.5% 13.87 12.68 1.33 1.24 Malaysia FBMKLCI INDEX 1,617 8.1% 1.2% 14.89 13.51 2.14 1.97 Indonesia JCI INDEX 4,083 8.9% -2.0% 14.71 12.59 2.83 2.45 India SENSEX INDEX 17,350 14.0% 1.3% 13.69 12.07 2.28 2.00
US SPX INDEX 1,403 13.3% 2.3% 13.56 12.14 2.10 1.92 SOX INDEX 390 8.3% 3.5% 15.01 11.89 2.07 1.87 UK UKX INDEX 5,658 5.2% 2.2% 10.88 9.86 1.56 1.44 France CAC INDEX 3,406 11.6% 3.7% 10.40 9.55 1.07 1.01 German DAX INDEX 6,965 18.1% 2.9% 10.57 9.71 1.28 1.19 Source: Deutsche Bank, Bloomberg Finance LP
Market performance
The Taiwan market enjoyed a summer rally in August following the ECB’s firm stance to support the Euro and heightened expectations of QE3. Domestic policy announcements such as unfreezing the public land auction for plots below 500 pings have further strengthened the performance of the construction sector. The financial sector concluded its three-month outperformance and succumbed to profit taking in August upon the realization of the cross-strait RMB clearing MOU. Tech rebounded upon the confirmation of the launch of iPhone 5 and iPad Mini. With mixed sector outlooks for 2H12, we expect the TWSE index to remain trapped in a narrow trading range.
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Figure 30: TW August performance led peers Figure 31: Construction the largest outperformer in Aug 3% 10% TWSE sector relative performance- August 8% 2% 6% 4% 1% 2% 0% 0% -2% -1% -4% -6% -2% -8% Chemical Tourism Electricity Plastic Cement Construct. Auto Tech Glass Biotech Rubber Others Financials Machinery Transport. Paper Textile Retail Steel Food Regional performance comparison- August Wire Cable & -3% China Japan India Malaysia Singapore Indonesia Taiwan Korea Hong Kong
Source: Deutsche Bank, Bloomberg Finance LP *Mainboard in local currency, total return Source: Deutsche Bank, Bloomberg Finance LP
Figure 32: YTD performance improving vs. peers Figure 33: Auto index the largest outperformer YTD
20% 30% Regional performance comparison- YTD 25% TWSE sector relative performance- YTD 15% 20% 10% 15% 10% 5% 5% 0% 0% -5% -10% -5% -15% -20% Electricity Chemical Cement Plastic Others Construct. Biotech Machinery Tourism Financials Transport. Auto Rubber Tech Glass Steel Paper Food Textile Retail -10% Wire Cable & China Singapore India Indonesia Malaysia Taiwan Japan Korea Hong Kong
Source: Deutsche Bank, Bloomberg Finance LP *Mainboard in local currency, total return Source: Deutsche Bank, Bloomberg Finance LP
Sector allocation
With minor adjustments in our model portfolio (we replace Far Eastern Dept. Store with Zhen Ding), we increase the allocation to the tech sector again in anticipation of the upcoming tech seasonality. In the non-tech sector, we remain more bullish on the “downstreamers” or the users of commodities which benefit from the peaking of commodity prices. The only exception is Formosa Plastic, which benefits from exposure to shale gas through its US subsidiary, helping it withstand the cost pressure. We also maintain a neutral stance on the financial sector as there could be future catalysts stemming from more regulatory relaxations and potential M&A and product introductions associated with the signed cross-strait RMB clearing MOU.
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Figure 34: TWSE sector rotation – tech and non-tech relative performance converging 0.6% TWSE Tech Stocks Daily Return (Rel. to TWSE) 0.5% TWSE Non-Tech Stocks Daily Return (Rel. to TWSE) 0.4% 0.3% 0.2% 0.1% 0.0% -0.1% -0.2% -0.3% 1995 1997 1999 2001 2003 2005 2007 2009 2011
Source: Deutsche Bank, TEJ
Figure 35: Sector allocation
Underweight Overweight -10% 0% 10%
Elec. Comp. (4.4%)
Optoelectronics (4.3%)
Financials (12.4%)
Other Electronics (6.7%)
Non-Tech: Other (20.1%)
Info Services (0.1%)
Computer & Peri. (7.2%)
Plastic (7.6%)
Electronics Dist. (1.2%)
Transportation (2.0%) Sector (TWSE) Weighting Steel (2.7%)
Gas &Oil (4.2%)
Semicon. (18.5%)
Com & Internet (8.6%)
-10% 0% 10% Source: TEJ, Bloomberg Finance LP, compiled by Deutsche Bank *Numbers in parenthesis are sector weighting in TWSE ** Deutsche Bank Taiwan Model Portfolio is an equal weight portfolio
Model portfolio
Our bottom-up stock selection leads to an overweight in tech again. We add Zhen Ding as it should continue to enjoy market share gains from Japanese competitors in flexible PCB. We remove Far Eastern Dept Store as the weak economic growth, policy tightening in the real estate market, slow equity market turnover and hike in utility prices hit department store sales harder than consumer staples and convenience stores.
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Figure 36: DB Taiwan model portfolio total return vs. TWSE and MSCI Taiwan
(%) TWSE DB Model Portfolio 5 MSCI Taiwan -
(5)
(10)
(15)
(20)
(25) Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12
Source: Deutsche Bank, Bloomberg Finance LP
Figure 37: Deutsche Bank Taiwan model portfolio Subindex Name Ticker DB TP Close YTD Mkt Daily FY12 FY12 FY12 FY10A FY11A FY12E Rating RTN Cap T/O * EPS PE PB ROE ROE ROE (NT$) (NT$) (NT$) (%) (US$mn) (US$mn) (NT$) (x) (x) (%) (%) (%) Technology Elec. Comp. Delta 2308 TT Buy 107 107 54.2 8,634 19.1 6.22 17.21 2.49 19.3% 12.0% 15.6% Computer Hon Hai 2317 TT Buy 98 88.4 19.2 34,821 125.7 6.70 13.20 1.72 16.6% 15.4% 13.4% Semicon. TSMC 2330 TT Buy 94 81.1 10.9 70,412 83.1 6.19 13.10 3.00 30.2% 22.3% 24.0% Other Elec. FTC 2354 TT Buy 125 118 29.3 4,890 57.5 5.74 20.57 2.45 15.5% 15.3% 12.5% Opto. Epistar 2448 TT Buy 80 59 (6.4) 1,702 9.0 0.71 83.45 1.03 13.0% 0.9% 1.3% Semicon. MediaTek 2454 TT Buy 435 314 17.3 12,072 134.5 12.35 25.42 2.22 28.0% 11.9% 10.3% Opto. TPK 3673 TT Buy 560 399.5 36.7 4,137 93.1 39.76 10.05 3.39 47.2% 51.5% 37.1% New Elec. Comp. Zhen Ding 4958 TT Buy 116 98.4 99.9 2,319 16.5 5.79 16.99 3.28 5.5% 15.3% 20.8% Elec. Comp. Simplo 6121 TT Buy 210 176.5 13.1 1,823 13.5 12.92 13.67 3.16 26.9% 25.2% 24.0% Non Tech FHC Mega FHC 2886 TT NR - 21.9 16.1 8,400 22.0 1.80 12.20 1.12 7.6% 9.1% 9.0% Other Fin Serv. Chailease 5871 TT Buy 56 50.1 91.5 1,318 9.2 4.66 10.74 1.58 14.5% 16.0% 17.6% Food UPE 1216 TT Buy 46.7 48.05 18.2 7,827 16.1 2.42 19.87 2.67 16.3% 13.2% 14.3% Plastics FPC 1301 TT Hold 76.3 80.3 4.8 16,466 13.6 3.35 23.97 2.07 18.7% 14.2% 8.6% Chemical Taifer 1722 TT NR - 72.5 7.0 2,380 10.6 3.67 19.78 1.32 3.5% 5.9% 7.3% Rubber Cheng Shin 2105 TT NR - 71.1 27.6 6,714 14.5 5.82 12.21 2.54 24.3% 17.7% 23.4% FHC Mega FHC 2886 TT NR - 21.9 16.1 8,400 22.0 1.80 12.20 1.12 7.6% 9.1% 9.0% Rel. Performance to TWSE (%): 10.26% Source: Deutsche Bank estimates, Bloomberg Finance LP (use Deutsche Bank estimate for DB rated companies, else, use Bloomberg Finance LP consensus forecast, use consolidated financials when available, else, use standalone financials) *20-day daily average ** Deutsche Bank Taiwan Model Portfolio is an equal weight portfolio
New stock Zhen Ding – We estimate smartphones and tablet PCs should generate 50% of ZDT’s sales in 2012 and 53% in 2013. ZDT is the main beneficiary of strong demand for Apple products as it is one of the main FPCB suppliers for Apple’s iPhone, iPad and Macbook. We expect ZDT’s operating margin to improve to 9.0% in 2012 and 10.7% in 2013 from 5.8% in 2011 owing to better product mix and higher manufacturing automation. We project FPCB with higher margins to account for 58% of sales in 2012 and 71% in 2013 vs. 37% in 2011.
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Deleted stock Far Eastern Dept Store – The weak economic growth, policy tightening in the real estate market, slow equity market turnover and hike in utility prices hit department store sales harder than consumer staples and convenience stores.
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Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Joelian Tseng
Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 450 56 % share-holder return (TSR = percentage change in 400 share price from current price to projected target price 350 300 38 % plus pro-jected dividend yield ) , we recommend that 250 investors buy the stock. 200 150 Sell: Based on a current 12-month view of total share- 100 10 % 14 % 5 % holder return, we recommend that investors sell the 50 8 % stock 0 Hold: We take a neutral view on the stock 12-months Buy Hol d Sel l out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: Asia-Pacific Universe
1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period
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