ASE Industrial Holding (3711 TT) ASE Industrial H Oldi Ng

Taiwan Information Technology 14 May 2018

ASE Industrial Holding (3711 TT) ASE Industrial H oldi ng

Target price: TWD100.00 Share price (14 May): TWD79.80 | Up/downside: +25.3%

Initiation: reborn stronger Rick Hsu  Strong No.1 OSAT player, with ROE/valuation accretion… (886) 2 8758 6261 [email protected]  …thanks to business synergies and financial reengineering efforts Martin Lee  Initiating coverage with a Buy (1) rating and 12-month TP of TWD100 (886) 2 8758 6262 [email protected]

Investment case: We initiate coverage of ASE Industrial Holding Co Share price performance (HoldCo) with a Buy (1) rating and 12-month TP of TWD100. As outlined in (TWD) (%) our July 2016 pro forma analysis, we expect the creation of HoldCo, which 95 115 89 108 now controls full stakes in the 2 delisted entities, ASE and SPIL, to become 83 100 a strong No.1 in the global outsourced semiconductor assembly & test 76 93 (OSAT) industry. We view this holding-structure setup as both ROE- and 70 85 May-17 Aug-17 Nov-17 Feb-18 valuation-accretive, against the backdrop of business synergies and ASE Indust (LHS) financial reengineering bringing about cost reductions, pricing-power Relative to TWSE Index (RHS) enhancement, and market-share expansion despite high leverage. 12-month range 71.20-91.00 Catalysts: business synergies. ASE and SPIL combined have lost Market cap (USDbn) 11.70 ground in the global OSAT market since 1Q16, post ASE’s purchase of 3m avg daily turnover (USDm) 30.66 Shares outstanding (m) 4,362 SPIL stock, likely as customers worried about doing business with the 2 Major shareholder ASE Enterprises Ltd. (15.9%) vendors and hence sought diversification, especially those that used ASE and SPIL as primary and secondary sources. But we expect the combined Financial summary (TWD) market share to recover from 2H18, thanks to implementation of the Year to 31 Dec 18E 19E 20E HoldCo controlling operations, which should ease customers’ uncertainties Revenue (m) 388,092 454,076 531,537 Operating profit (m) 35,154 47,496 57,316 and, more importantly, create synergies as a result of broadened product Net profit (m) 25,925 34,515 42,107 offerings as well as enhanced pricing power. We forecast the combined Core EPS (fully-diluted) 5.943 7.913 9.653 market share, now to be delivered by HoldCo, to reach 29% in 4Q18 and EPS change (%) n.a. 33.1 22.0 31-33% by end-2020, from 27-28% in 1Q18. Daiwa vs Cons. EPS (%) 11.6 15.1 8.7 PER (x) 13.4 10.1 8.3 Dividend yield (%) 1.6 3.8 4.1 Financial reengineering. We view this HoldCo deal as a highly leveraged DPS 1.3 3.0 3.3 buyout (LBO), which should lead to a spike in net gearing to over 70% in PBR (x) 1.9 1.6 1.4 EV/EBITDA (x) 6.1 5.1 4.6 2018 but, in return, enhance structural profitability, where we forecast ROE (%) 12.8 17.4 18.6 HoldCo’s single-year ROE at 15-16% for 2019-20E, or 3-4pp above the normalised ROE of standalone ASE and 7-12pp higher than that of China majors post the GFC. Hence, this financial reengineering appears to be ROE-accretive and should support a valuation rerating from an ROE/PBR proposition, in our view. We expect gearing to drop in 2020, when structural profitability is enhanced and cash flows are improved.

Valuation: For the Asian semiconductor stocks under our coverage, we use an ROE-adjusted PBR method to judge their fair valuations. For HoldCo, applying a regression analysis through peer comparisons due to its limited trading history gives us a fair PBR of 2.2x, justified by our 15- 16% normalised ROE projection, which translates into our 12-month TP of TWD100 based on 2018E BVPS. This implies 25% potential upside, which prompts us to initiate coverage with a Buy (1) rating.

Risks: The risk to our call would be execution of HoldCo’s business synergies failing to meet our expectations for improvements in cost structure, pricing power, market share and structural profitability.

See important disclosures, including any required research certifications, beginning on page 29

ASE Industrial Holding (3711 TT): 14 May 2018

Table of contents

Initiation: reborn stronger ...... 6 Business synergies ...... 6 Financial reengineering ...... 10 Valuation and risks ...... 12 Appendix 1: the company and the market...... 16 The company ...... 16 OSAT market forecasts ...... 18 Appendix 2: glossary of terms ...... 20 Wirebonding ...... 20 Flip-chip & bumping ...... 23 System in package ...... 25

ASE Industrial Holding (3711 TT): 14 May 2018

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook HoldCo: pro forma quarterly P&L growth trend After YoY contractions in the past few quarters following (TWDm) the announcement of the HoldCo deal, HoldCo’s quarterly 18,000 70% 60% operating-profit growth will turn around from 2Q18, on our 16,000 14,000 50% forecasts, and then be sustained at around 20% YoY 12,000 40% 30% 10,000 through 4Q20, excluding a surge in 1H19 on a favourable 20% 8,000 base. 10% 6,000 0% 4,000 (10%) In our view, this promising growth profile suggests that our 2,000 (20%)

target valuation is undemanding from a PEG perspective, 0 (30%)

1Q17 2Q17 4Q17 1Q18

since our 12-month TP of TWD100 translates to a PER of 3Q17

3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E 17x 2018E EPS, or just a 0.85x PEG. 2Q18E Operating profit Growth (YoY)

Source: Company, Daiwa estimates & forecasts

Valuation SCM majors: PBR/ROE regression analysis Given HoldCo’s limited ROE and trading history (listed on (X) 30 April 2018), we employ a regression analysis by 4.0 Vanguard comparing HoldCo with other chip majors in terms of 3.5 JCET TFME TSMC normalised ROE projections against the stocks’ prevailing 3.0 SPIL PBR multiples. 2.5 HoldCo? TSHT 2.0 Our analysis suggests that HoldCo, for which we project a PTI 1.5 KYEC ASE 15-16% normalised ROE for the next 3-5 years, should SMIC HH Semi Amkor 1.0 trade fairly at a 2.2x PBR, which yields our 12-month TP of y = 7.9858x + 1.0773 UMC ChipMOS TWD100 based on 2018E BVPS. 0.5 R² = 0.1994 0.0 0% 5% 10% 15% 20% 25% Source: TEJ, Bloomberg, Daiwa forecasts:

Earnings revision HoldCo: net profit forecast comparison (Daiwa vs. consensus) Our net-profit forecasts of TWD25.9bn, TWD34.5bn and (TWDm) TWD42.1bn for HoldCo for 2018, 2019 and 2020, 45,000 respectively, are 9-15% above the Bloomberg-consensus 40,000 forecasts, likely due to our more positive expectations of 35,000 30,000 enhanced profitability stemming from an improved cost 25,000 structure and pricing power supporting market-share gains 20,000 as a result of business synergies. 15,000 10,000 Hence, we expect a series of upward revisions to the 5,000 market’s forecasts in the next few quarters. 0 2018E 2019E 2020E

Daiwa Consensus

Source: Bloomberg, Daiwa forecasts:

ASE Industrial Holding (3711 TT): 14 May 2018

Financial summary Key assumptions Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Packaging utilisation (%) n.a. n.a. n.a. n.a. 79.9 82.0 88.2 95.8 Testing utilisation (%) n.a. n.a. n.a. n.a. 74.3 75.6 78.6 83.3 FC & bumping utilisation (%) n.a. n.a. n.a. n.a. 73.0 71.5 76.3 81.7

Profit and loss (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E SAT sales n.a. n.a. n.a. n.a. 240,046 248,246 290,640 329,728 EMS sales n.a. n.a. n.a. n.a. 133,948 139,846 163,437 201,808 Other Revenue n.a. n.a. n.a. n.a. 0 0 0 0 Total Revenue n.a. n.a. n.a. n.a. 373,994 388,092 454,076 531,537 Other income n.a. n.a. n.a. n.a. 0 0 0 0 COGS n.a. n.a. n.a. n.a. (304,451) (317,857) (366,691) (427,765) SG&A n.a. n.a. n.a. n.a. (20,064) (18,836) (21,520) (25,078) Other op.expenses n.a. n.a. n.a. n.a. (15,589) (16,245) (18,370) (21,378) Operating profit n.a. n.a. n.a. n.a. 33,890 35,154 47,496 57,316 Net-interest inc./(exp.) n.a. n.a. n.a. n.a. (1,936) (2,368) (3,161) (2,966) Assoc/forex/extraord./others n.a. n.a. n.a. n.a. 7,676 2,164 1,200 1,200 Pre-tax profit n.a. n.a. n.a. n.a. 39,630 34,950 45,535 55,550 Tax n.a. n.a. n.a. n.a. (8,063) (7,032) (9,107) (11,110) Min. int./pref. div./others n.a. n.a. n.a. n.a. (1,680) (1,994) (1,912) (2,333) Net profit (reported) n.a. n.a. n.a. n.a. 29,888 25,925 34,515 42,107 Net profit (adjusted) n.a. n.a. n.a. n.a. 29,888 25,925 34,515 42,107 EPS (reported)(TWD) n.a. n.a. n.a. n.a. 2.764 5.943 7.913 9.653 EPS (adjusted)(TWD) n.a. n.a. n.a. n.a. 2.764 5.943 7.913 9.653 EPS (adjusted fully-diluted)(TWD) n.a. n.a. n.a. n.a. 2.764 5.943 7.913 9.653 DPS (TWD) n.a. n.a. n.a. n.a. 3.130 1.300 3.000 3.300 EBIT n.a. n.a. n.a. n.a. 33,890 35,154 47,496 57,316 EBITDA n.a. n.a. n.a. n.a. 77,720 81,014 93,198 103,018

Cash flow (TWDm) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Profit before tax n.a. n.a. n.a. n.a. 39,630 34,950 45,535 55,550 Depreciation and amortisation n.a. n.a. n.a. n.a. 43,830 45,860 45,702 45,702 Tax paid n.a. n.a. n.a. n.a. (8,063) (7,032) (9,107) (11,110) Change in working capital n.a. n.a. n.a. n.a. 13,497 (19,500) (3,500) (26,000) Other operational CF items n.a. n.a. n.a. n.a. (22,068) 6 (1,912) (2,333) Cash flow from operations n.a. n.a. n.a. n.a. 66,826 54,284 76,718 61,809 Capex n.a. n.a. n.a. n.a. (37,632) (47,200) (43,225) (45,053) Net (acquisitions)/disposals n.a. n.a. n.a. n.a. 7,550 (105,579) 0 0 Other investing CF items n.a. n.a. n.a. n.a. 1,631 1,500 1,500 1,500 Cash flow from investing n.a. n.a. n.a. n.a. (28,451) (151,279) (41,725) (43,553) Change in debt n.a. n.a. n.a. n.a. (23,646) 72,404 (19,503) (20,602) Net share issues/(repurchases) n.a. n.a. n.a. n.a. 10,290 0 0 0 Dividends paid n.a. n.a. n.a. n.a. (16,668) (11,362) (13,086) (14,395) Other financing CF items n.a. n.a. n.a. n.a. 3,767 0 0 0 Cash flow from financing n.a. n.a. n.a. n.a. (26,256) 61,042 (32,589) (34,997) Forex effect/others n.a. n.a. n.a. n.a. (4,466) 0 0 0 Change in cash n.a. n.a. n.a. n.a. 7,653 (35,953) 2,404 (16,741) Free cash flow n.a. n.a. n.a. n.a. 29,194 7,084 33,493 16,756 Source: FactSet, Daiwa forecasts

ASE Industrial Holding (3711 TT): 14 May 2018

Financial summary continued … Balance sheet (TWDm) As at 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash & short-term investment n.a. n.a. n.a. n.a. 75,834 38,569 40,973 24,232 Inventory n.a. n.a. n.a. n.a. 40,204 55,704 54,704 73,704 Accounts receivable n.a. n.a. n.a. n.a. 72,078 74,578 94,078 105,078 Other current assets n.a. n.a. n.a. n.a. 5,888 21,391 36,500 36,500 Total current assets n.a. n.a. n.a. n.a. 194,004 190,242 226,255 239,514 Fixed assets n.a. n.a. n.a. n.a. 197,566 215,873 228,565 233,951 Goodwill & intangibles n.a. n.a. n.a. n.a. 22,061 38,100 36,000 30,000 Other non-current assets n.a. n.a. n.a. n.a. 33,277 35,063 35,063 35,063 Total assets n.a. n.a. n.a. n.a. 446,909 479,279 525,883 538,528 Short-term debt n.a. n.a. n.a. n.a. 21,385 21,385 21,385 21,385 Accounts payable n.a. n.a. n.a. n.a. 49,129 47,629 62,629 66,629 Other current liabilities n.a. n.a. n.a. n.a. 61,301 53,324 73,003 70,602 Total current liabilities n.a. n.a. n.a. n.a. 131,816 122,338 157,017 158,616 Long-term debt n.a. n.a. n.a. n.a. 68,808 147,515 128,012 107,410 Other non-current liabilities n.a. n.a. n.a. n.a. 11,799 9,500 11,500 12,000 Total liabilities n.a. n.a. n.a. n.a. 212,423 279,353 296,529 278,026 Share capital n.a. n.a. n.a. n.a. 108,126 43,620 43,620 43,620 Reserves/R.E./others n.a. n.a. n.a. n.a. 113,160 141,112 168,628 197,443 Shareholders' equity n.a. n.a. n.a. n.a. 221,285 184,732 212,248 241,063 Minority interests n.a. n.a. n.a. n.a. 13,200 15,193 17,106 19,439 Total equity & liabilities n.a. n.a. n.a. n.a. 446,909 479,279 525,883 538,528 EV n.a. n.a. n.a. n.a. 375,647 493,612 473,617 472,089 Net debt/(cash) n.a. n.a. n.a. n.a. 14,359 130,331 108,424 104,563 BVPS (TWD) n.a. n.a. n.a. n.a. 20.466 42.350 48.658 55.264

Key ratios (%) Year to 31 Dec 2013 2014 2015 2016 2017 2018E 2019E 2020E Sales (YoY) n.a. n.a. n.a. n.a. n.a. 3.8 17.0 17.1 EBITDA (YoY) n.a. n.a. n.a. n.a. n.a. 4.2 15.0 10.5 Operating profit (YoY) n.a. n.a. n.a. n.a. n.a. 3.7 35.1 20.7 Net profit (YoY) n.a. n.a. n.a. n.a. n.a. (13.3) 33.1 22.0 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. n.a. n.a. 33.1 22.0 Gross-profit margin n.a. n.a. n.a. n.a. 18.6 18.1 19.2 19.5 EBITDA margin n.a. n.a. n.a. n.a. 20.8 20.9 20.5 19.4 Operating-profit margin n.a. n.a. n.a. n.a. 9.1 9.1 10.5 10.8 Net profit margin n.a. n.a. n.a. n.a. 8.0 6.7 7.6 7.9 ROAE n.a. n.a. n.a. n.a. 27.0 12.8 17.4 18.6 ROAA n.a. n.a. n.a. n.a. 13.4 5.6 6.9 7.9 ROCE n.a. n.a. n.a. n.a. 20.9 10.1 12.7 14.9 ROIC n.a. n.a. n.a. n.a. 10.8 9.7 11.4 13.0 Net debt to equity n.a. n.a. n.a. n.a. 6.5 70.6 51.1 43.4 Effective tax rate n.a. n.a. n.a. n.a. 20.3 20.1 20.0 20.0 Accounts receivable (days) n.a. n.a. n.a. n.a. 35.2 69.0 67.8 68.4 Current ratio (x) n.a. n.a. n.a. n.a. 1.5 1.6 1.4 1.5 Net interest cover (x) n.a. n.a. n.a. n.a. 17.5 14.8 15.0 19.3 Net dividend payout n.a. n.a. n.a. n.a. 113.2 21.9 37.9 34.2 Free cash flow yield n.a. n.a. n.a. n.a. 8.4 2.0 9.6 4.8

Source: FactSet, Daiwa forecasts

Company profile

ASE Industrial Holding Co (HoldCo) is a holding company which privatised ASE and SPIL on 30 April 2018 through equity and cash swaps, respectively, and listed on the same day. Senior management were mainly assigned by ASE. HoldCo is the world's No.1 OSAT maker, offering a comprehensive product portfolio ranging from wirebonding, flip-chip & bumping, and system-in-package (SiP) to broad-based electronics manufacturing services (EMS).

ASE Industrial Holding (3711 TT): 14 May 2018

Initiation: reborn stronger

We initiate coverage of ASE Industrial Holding Co (HoldCo) with a Buy (1) rating and 12-month TP of TWD100. In our July 2016 Taiwan OSAT report, What HoldCo means for ASE/SPIL: pro forma analysis, we analysed the likely business synergies, implications for financials and valuations, shareholder structure, as well as the timetable for the HoldCo deal, after ASE and SPIL jointly announced a plan to set up a holding company to consolidate the 2 companies while keeping their operations independent. Since then, we have outlined our expectations for the creation of HoldCo, now controlling full stakes in ASE and SPIL, to become a strong No.1 in the global OSAT industry.

We see the progress as intact, despite the protracted timetable for the deal to go through, as well as the 2 companies’ combined share loss in the OSAT market proving to be worse than we expected. We reiterate our view that the HoldCo deal, despite high leverage, will be ROE- and valuation-accretive on the back of business synergies and financial reengineering leading to cost reductions, pricing-power enhancement, and market-share recovery. HoldCo shares were listed on 30 April with a listing price of TWD89; ASE and SPIL were privatised by HoldCo on the same day through equity and cash swaps, respectively (ASE memo, 27 April).

Business synergies We expect the HoldCo We believe that ASE and SPIL combined have lost ground in the global OSAT market since operations to help 1Q16, post ASE’s purchase of SPIL stock, as uncertainties over doing business with the 2 recover the combined vendors led to customers seeking diversification, especially those that mainly used ASE market share of ASE and and SPIL as primary and secondary sources, such as MediaTek (MTK) and HiSilicon. But SPIL as synergies are we expect the combined market share to recover from 2H18, thanks to the implementation realised of the HoldCo controlling operations, which should ease customers’ uncertainties and, more importantly, create synergies as a result of broadened product offerings as well as enhanced pricing power. We forecast the combined market share, now to be delivered by HoldCo, to reach 29% in 4Q18 and 31-33% by end-2020, from 27-28% in 1Q18.

Share loss since deal announced Prior to a series of M&A moves, the top 5 players — ASE, Amkor, SPIL, STATS-ChipPAC and Jiangsu Changjiang Electronics Technology (JCET [江蘇長電]) — collectively increased their share of the global OSAT market post the GFC, led by Taiwan-based ASE and SPIL on the back of their technology advances, economies of scale, and geographic advantages. These gains by the top 5 players have continued in the past 2 years at the expense of marginal peers, but a closer look at the mix indicates that the dynamics have changed.

ASE and SPIL combined Despite their technology and scale advantages, ASE and SPIL saw their combined share have lost market share of the OSAT market fall over the 4Q15 to 1Q18 period. China-based JCET appears to have to their China been the biggest winner, boosted by non-organic growth arising from its acquisition of the counterparts in the past STATS-ChipPAC group. Despite their tier-2 status, Tianshui Huatian Technology (TSHT [華 2 years 天科技]) and Tongfu Microelectronics (TFME [通富微電子]) saw their aggregate market share increase from 4.3% to 8.3% over the same period. Indeed, China’s top-3 OSAT makers — JCET, TSHT and TFME — increased their aggregate market share from around 15% in 4Q15 to 21% in 1Q18, which led to ASE’s management expressing its concern about losing competitiveness to China when it proposed the HoldCo deal in May 2016.

As of 2017, ASE retained its global No.1 position, with around a 19% share of the OSAT market, followed by Amkor (15%) and JCET (13%). SPIL dropped out of the top 3 players in 2016 and claimed only a 10% market share last year.

ASE Industrial Holding (3711 TT): 14 May 2018

Global OSAT market share (2017) Quarterly OSAT market share dynamics 40% Others ASE* 21% 19% 35% 30% ChipMOS 25% 2% KYEC 20% 2% Amkor 15% 15% UTAC 3% 10% TFME 5% 3%

TSHT

3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q11 3Q14 1Q18

1Q19E 3Q19E 1Q20E 3Q20E 4% JCET 3Q18E PTI 13% 7% SPIL HoldCo* JCET** 10% Amkor China top-3*** Source: Company, Daiwa estimates Source: Company, Daiwa estimates & forecasts Note: * ASE includes pure OSAT revenue only; excludes EMS business Note: * HoldCo = ASE + SPIL excluding ASE’s EMS business; ** JCET started consolidating STATS-ChipPAC in 3Q15; Amkor started consolidating J-Devices in 1Q16; *** China top- 3 includes JCET, TSHT and TFME

JCET has gained c. 4- Since ASE announced the plan to consolidate SPIL in order to cope with rising competition 5pp in market share in from China and started purchasing SPIL stock in August 2015, the 2 companies’ combined the past 2 years, while market-share gains, which began post the GFC, have come to an end. We believe this ASE and SPIL combined development reflects customers’ caution about the potential uncertainties of doing have lost 3-4pp business with ASE and SPIL. The companies’ combined market share dropped to 29% in 4Q16 and 28% in 4Q17, from a peak of c. 30% over 2H14-1H15, and we estimate it is likely to fall further to 27-28% in 1H18. By contrast, JCET made meaningful market-share gains, going from an 11% share in 4Q15 to 12% in 4Q16, 14% in 4Q17 and c. 13-14% in 1H18E. However, we believe that industry consolidation has continued in the past 2 years at the expense of marginal players which lack niche advantages, since the OSAT sector is still much less consolidated than the foundries in the semiconductor contract manufacturing (SCM) industry.

Following its acquisition of the global No.4 player, STATS-ChipPAC, and consolidation of the latter’s operations in 3Q15, JCET has enhanced its competitiveness with a broadened scale, product scope and technology offerings, on top of its strategic position in China’s semiconductor ecosystem. In turn, its market share expanded by 2.7pp to 11% in 4Q15 and by a total of 4-5pp in 3Q15-2Q18, though its revenue may include system-in-package (SiP), which would inflate its pure OSAT sales by c.20%. Amkor, on the other hand, has seen its market share stagnate during the same period, despite recording a share gain of 3.6pp in 1Q16 to 14.7% as a result of its acquisition of J-Devices operations – a JV with Toshiba.

Combined share forecast to recover on synergies We expect HoldCo to With HoldCo now listed, customer uncertainties should start to ease, in our opinion. The help recover the table below summarises the key customers of ASE, SPIL, Amkor and JCET, according to combined share of ASE our market research. MTK and HiSilicon (a design arm of Huawei Technologies [華為]) and SPIL in the OSAT both are now customers of JCET following the HoldCo deal announcement. Whereas we market to 31-33% by see limited scope for HoldCo to stop the 2 customers from doing business with JCET, our end-2020 focus is on customers using multiple OSAT sources (ie, more than 2). We believe that these customers are likely to shift a larger share of orders to HoldCo if it can match or exceed the product quality of the likes of JCET, TSHT and TFME while offering more competitive pricing. In this group of potential customers we include QCOM, AVGO, MRVL, STM, IFX, Microchip and Renesas.

We expect HoldCo to help recover the combined share of ASE and SPIL in the OSAT market to c. 29% in 4Q18 and 31-33% by end-2020, from 27-28% in 1H18, as it realises business synergies as a result of a broadening of its product offerings and enhanced pricing power.

ASE Industrial Holding (3711 TT): 14 May 2018

Major OSAT players: key customer comparison ASE SPIL Amkor JCET QCOM QCOM QCOM QCOM AVGO AVGO AVGO AVGO MRVL MRVL MRVL MRVL STM STM STM STM MTK MTK MTK NXP NXP XLNX XLNX Synaptics NVDA TXN TXN IFX IFX IFX INTC INTC AMD AMD AMD HiSilicon HiSilicon HiSilicon Sandisk Sandisk Samsung Samsung Samsung Micron Micron Spreadtrum Spreadtrum Renesas Renesas Renesas Microchip Microchip Microchip Toshiba Toshiba AuthenTec Dialog Semi QRVO MPS InvenSense Sony NEC OnSemi IDT Apple Apple Top 10 ~ 50% of sales ~ 60% ~ 67% na

Source: Daiwa Note: QCOM = Qualcomm, AVGO = Broadcom Ltd. (post AVGO-BRCM merger), MRVL = Marvell Technology Group, STM = ST Microelectronics, MTK = MediaTek, XLNL = Xilinx, NVDA = Nvidia, IFX = Infineon, TXN = Texas Instruments, INTC = Intel, QRVO = Qorvo, Microchip acquired Atmel, NXP = NXP Semiconductors which acquired Freescale, MPS = Monolithic Power Systems, IDT = Integrated Device Technology

Major OSAT players: product offering spectrum comparison Wirebonding FC bumping SiP Product type Leadframe-based Substrate-based CLP WLP Chip-level Board-level SOP/TSOP DIP QFP/TQFP QFN/aQFN BGA/PBGA FCBGA FCCSP Fan-in Fan-out PoP InFO CoWoS/3D IC Major player HoldCo ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ASE ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ SPIL ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ x x Amkor ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ x JCET* ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ ˅ x x Example

Source: Company, Daiwa Note: * JCET including STATS-ChipPAC product offerings

Offering a complete Product-wise, we expect HoldCo to help recover the loss of combined market share product portfolio, through more comprehensive product offerings, which should expand its customer reach, HoldCo could lead and cost reductions resulting from scale economies, allowing it to offer competitive pricing Chinese peers on 2.5/3D to win orders. As shown above, HoldCo will be in a position to offer a complete range of technologies packaging technologies, from leadframe-based small outline package (SOP) and substrate-based ball grid array (BGA) under wirebonding (WB) technologies, to chip-level package (CLP) such as flip-chip BGA (FCBGA) and wafer-level package (WLP) such as fan-in/fan-out (FO) under FC bumping technologies, to system-level packages like chip- level package-on-package (PoP) and integrated FO (InFO) under system-in-package (SiP) technologies. Moreover, we believe these technologies will be closely comparable to, if not more advanced, than those of Amkor and JCET. At the next-generation 2.5/3D packaging, such as chip-on-wafer-on-substrate (CoWoS) developed by TSMC, HoldCo could be faster in developing such technologies than all of its Chinese peers, including JCET, in our opinion. Readers with an interest in engineering should refer to Appendix 2 for our elaboration of the key packaging technology offerings.

Further, on broad-based SiP, including an integration of chip-level SiP into board-level assembly, we believe this board-level SiP offering will help HoldCo address the electronics manufacturing services (EMS) market, where OSAT makers currently have little traction, thanks to ASE’s early-bird advantages in cultivating this business.

ASE Industrial Holding (3711 TT): 14 May 2018

EMS to add upside Early-bird advantage in Thanks to its early-bird advantage in cultivating the EMS market through its purchase of a EMS to gain traction with stake in Universal Scientific Industrial (USI) in the late-1990s (full merger in 2010), ASE Apple has gained traction with Apple and produced 3 SiP modules at board level (wearable, security and power saving), according to our research. We see a high probability that it will add 1 more SiP project this year. SPIL has been keen to expand its product reach into the EMS market yet lacks experience because it only considered making this move in 2015. Now, with ASE’s help under HoldCo, we expect the combined share of the EMS market to grow, as ASE currently claims only 1% of the global EMS market, or some 5% of the SiP segment in the EMS market, despite its many years of experience. We estimate the EMS market was worth c.USD400bn in 2017, while ASE recorded EMS sales of USD4.4bn (TWD134bn) last year (two-thirds SiP and the rest traditional EMS business).

Trend of board-level SiP We see a trend of rising demand for board-level SiP under the expansion of the Internet-of- under the IoT cycle Things (IoT) cycle, for which the optimisation of form factors, power, performance and should bode well for costs requires greater levels of system integration than the prior mobile computing device HoldCo (MCD) cycle. Rising levels of system integration require greater product-design complexity, where engineering cooperation between chip-level packaging and board-level circuit-layout design should add value in terms of manufacturing efficiency, allowing companies to put out the right form factors, with optimised power/performance/cost propositions, at the right time, in our opinion.

We view this board-level SiP as a premium segment of the EMS market, where incumbents such as Hon Hai, Pegatron and Jabil may not have a competitive edge over HoldCo due to their lack of the semiconductor backend process knowhow, including chip- level packaging & testing. We expect HoldCo to dominate this premium segment, which should add to its business upside in the coming years. We forecast its EMS revenue to post a 15% CAGR over 2017-20E, reaching USD7bn (over TWD200bn) in 2020.

Global EMS market share by key players* (2017) HoldCo: EMS sales trend* Others (TWDm) Lite-on Tech Sanmina 11% 250,000 40% 2% 2% 30% Inventec 200,000 4% 20% Jabil Hon Hai 150,000 5% 38% 10% Flex tronics 100,000 0% 6% 50,000 -10% Wistron 7% 0 -20%

Compal

2010 2011 2013 2014 2015 2016 2017

Pegatron 2012

2019E 2020E 7% Quanta 2018E 10% 8% EMS sales Growth (RHS)

Source: Company, Daiwa estimates Source: Company, Daiwa forecasts Note: * USI took c. 1% market share as proxy for ASE Note: * Including advanced SiP and traditional EMS business

ASE Industrial Holding (3711 TT): 14 May 2018

Typical OSAT cost structure HoldCo: opex ratio trend (as a % of revenue) Other 12% overheads 14% 11%

10% Direct materials 41% 9% Depreciation & amortization 8% 26% 7%

Other variable

1Q15 2Q15 3Q15 4Q15 1Q16 3Q16 4Q16 2Q17 3Q17 4Q17 1Q18 1Q17

Direct labor 2Q16

2Q18E 3Q18E 1Q19E 2Q19E 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E 3Q19E costs 4Q18E 13% 6% HoldCo ASE SPIL

Source: Daiwa estimates Source: Company, Daiwa forecasts

Pricing power through cost savings Economies of scale We expect HoldCo to enhance its pricing power over time by realising cost savings at the should boost HoldCo’s cost-of-goods-sold (COGS) level, and then sharing these savings with customers while competitiveness on benefiting its gross margin. As opposed to the front-end chip fabrication of foundries, pricing and margin, where fixed overheads, mainly depreciation and amortisation, account for the majority of through cost savings COGS, SAT is a material-intense business and less capital-intensive, where raw materials, and opex control direct and indirect including IC substrates, gold/copper wires and other fine chemicals, account for nearly half of COGS, on our estimates. As a result, scale is crucial to an OSAT maker seeking to bring down materials costs on a per unit basis. The combined market share of HoldCo should significantly outweigh the shares of either ASE or SPIL, increasing HoldCo’s bargaining power over its materials suppliers and paving the way for it to have a better cost structure than its peers.

In addition to these materials cost savings, we expect a rising revenue base to help HoldCo to save opex per unit at the operating level. According to SPIL’s Letter to Shareholders (23 January 2018), despite China’s Ministry of Commerce (MOFCOM) having approved the deal conditional upon ASE and SPIL continuing to operate independently with separate P&Ls and ensure no customer discrimination for 2 years, HoldCo is permitted to establish a committee to coordinate R&D plans, as well as related businesses, in addition to the SAT services carried out by both entities. Hence, we believe HoldCo is in a position to reduce opex per unit, especially on R&D, through staff integration and resource sharing, which we estimate would allow it to bring down its opex-to-revenue ratio faster than 2 entities with separate operations would be able to. We forecast HoldCo to have an opex-to-revenue ratio of around 9.0% in 2018, falling to 8.8% in 2019 and c.8.5% by 4Q20.

Financial reengineering Debt financing for the Through the holding-company setup, we estimate HoldCo’s operating assets, including the HoldCo deal forecast to intangibles associated with the premium that HoldCo paid for the SPIL purchase, to reach lead to spike in net some TWD400bn by end-2018; owners’ equity should be around TWD200bn, not much gearing… different from ASE’s TWD204bn as of end-2017 before the consolidation. The difference will be covered by debt financing, estimated at TWD180-200bn. As a result, we forecast HoldCo’s net gearing to rise to over 70%, or a 140% debt/equity ratio, by end-2018. Still, we see this highly LBO deal being ROE-accretive, considering the combined earnings from ASE and SPIL set against the deflated equity relative to HoldCo’s consolidated balance sheet.

ASE Industrial Holding (3711 TT): 14 May 2018

HoldCo: 2018E funding requirement (TWDbn) HoldCo: forecast net gearing trend 80% Cash position as of end-2017 60% 2018E free cashflow 40% Acquisition of SPIL 20% Cash dividend payout 0% Debts payback (20%) Working capital requirement

(40%)

2011 2012 2013 2014 2016 2017 2015

Total cash gap 2010

2018E 2019E 2020E HoldCo ASE SPIL (120) (100) (80) (60) (40) (20) 0 20 40 60 80 Source: Daiwa forecasts Source: Daiwa forecasts

HoldCo: ROE trend Major peers: ROE trend post GFC 20% 25%

20% 15% 15% 10% 10%

5% 5%

2010 2011 2012 2013 2014 2015 2016 2017

2010 2011 2012 2013 2015 2016 2017 2014

2018E 2020E 2019E ASE SPIL Amkor HoldCo ASE SPIL JCET TSHT TFME Source: Daiwa estimates Source: Company, Daiwa forecasts

Against HoldCo’s cash position of around TWD70bn as at end-2017, as well as only c. TWD7bn in free cash flow in 2018, on our estimates, we foresee a cash gap totalling TWD60-70bn in 2018, which HoldCo would need to fill with external funding in order to cover the TWD107bn to acquire the remaining 67% stake in SPIL, as well as cash dividend payment, debt payback and working capital requirement. During our recent visit to ASE, management indicated that it plans to raise up to TWD90bn from syndicated loans in 2Q18, which should be sufficient to cover this estimated cash gap.

… but ROE should be On the flip side, we forecast HoldCo to realise single-year ROEs of 13%/15%/16% for enhanced to 15-16% 2018/19/20E, roughly 3-4pp above the normalised ROE of standalone ASE and 7-12pp over 2019-20 higher than the post-GFC averages of peers JCET, TSHT and TFME (note: Amkor had an average ROE of 14% over the same period thanks to its high gearing and non-organic M&A). We believe this ROE accretion will support a rerating of HoldCo shares from an ROE/PBR perspective. Although we forecast net gearing to jump to 73% in 2018 and remain high at 62% in 2019, we expect this ratio to drop in 2020 on improved cash flows to pay down debts and strengthen the balance sheet. Meanwhile, we expect HoldCo to pay cash dividends of TWD3.0 in 2019 and TWD3.3 in 2020, representing a 40-50% payout ratio and 3.8-4.1% yields, based on the closing price of 14 May.

Financial updates OSAT revenue forecast ASE and SPIL reported 1Q18 results in April. ASE did not provide pro forma figures for the to register a high single- combined financials under HoldCo, but on our estimates HoldCo had a consolidated digit growth QoQ in revenue of nearly TWD84bn (ASE: TWD65bn, SPIL: TWD19bn) and a gross margin (GM) 2Q18 of 16% (ASE: 16%, SPIL: 15.8%) (see tables on page 14 for details). SPIL gave no guidance for its 2Q18 outlook, but ASE expects its 2Q18 IC assembly, testing and materials (IC ATM) (ie, OSAT-related, including materials business, by our definition) to recover to high single-digit growth QoQ following an 11% QoQ contraction in 1Q18. It expects demand strength to be driven by computing and industrial applications (ASE Memo, 27 April).

ASE Industrial Holding (3711 TT): 14 May 2018

We forecast net profit to On the back of our market research, we forecast HoldCo’s consolidated revenue to expand grow by 33% YoY in by 8% QoQ (+5% YoY) in 2Q18 to TWD90.6bn (ASE: TWD70.1bn, SPIL: TWD20.5bn), 2019, after a 13% YoY with strong orders related to graphics processors and Android smartphone chipset contraction this year restocking being partly offset by continued chip and SiP demand weakness for the iPhone X. We expect the gross margin to improve by 1.7pp sequentially, on improved loadings and market-share stabilisation. Also, we forecast both revenue and margins to recover further in 2H18 given our thesis that HoldCo will make structural market-share gains as it realises business synergies, which underpins our forecasts for revenue of TWD248bn and a gross margin of 18.1% for 2018.

Our forecasts call for only 4% YoY revenue growth this year, as HoldCo’s OSAT business recovers from the trough in terms of market share. However, we forecast its revenue to grow by 17% YoY in each of 2019 and 2020, when the company reverses its market-share trend and starts to regain share structurally. In turn, its gross margin should recover to around 19% in 2H18 and 19.2-19.5% in 2019-20, for net profit growth of 33% YoY in 2019 and 22% YoY in 2020 (vs. -13% YoY in 2018, on our forecasts). Bottom-line growth should exceed top-line growth over our forecast period due to our forecast for gross-margin expansion, as well as a fall in the opex ratio arising from economies of scale as business synergies are realised.

Valuation and risks We use an ROE-adjusted In the SCM space, we use ROE-adjusted PBR methodology to value the stocks under our PBR method to value coverage by comparing a company’s normalised ROE projection with its historical ROE SCM stocks including average and then applying the premium/discount resulting from the comparison to its HoldCo historical PBR average for a fair PBR calculation. In the case of HoldCo, owing to its lack of ROE and trading history, we compare its normalised ROE projection – in the form of our forecast ROE average for the next 3-5 years – with those of major peers in the SCM space. We then apply what we believe is a fair PBR to the stock through regression analysis.

Given HoldCo’s limited Given our view of this ROE-accretive business synergies, we forecast HoldCo to record a history, we apply a 15-16% normalised ROE over the next 3-5 years (excluding 2018 off from a low base), regression analysis with which should help rerate its valuations post its relisting on 30 April, from an ROE/PBR a peer comparison, proposition point of view. A simple regression analysis on peers in the SCM sector yielding our TP of illustrated below suggests that HoldCo, with a 15% normalised ROE projection, should TWD100 theoretically trade at a 2.2x PBR (R-square = 0.2), which would translate into an intrinsic value of TWD100 per share based on our pro-forma book value forecast of TWD200bn as of end-2018, or 25% potential upside based on its closing price as of 14 May. We therefore set our 12-month target price for HoldCo at TWD100.

PBR/ROE regression analysis for SCM majors Typical PBR valuation hierarchy with different ROEs for tech (X) Normalized ROE projection Fair PBR 4.0 <10% <=1x Vanguard 10-15% ~1.5x 3.5 JCET 15-20% >2x TFME TSMC 3.0 20-25% >3x SPIL 25-30% >4x 2.5 HoldCo? TSHT >30% >5x

2.0 PTI 1.5 KYEC ASE SMIC HH Semi Amkor 1.0 y = 7.9858x + 1.0773 UMC ChipMOS 0.5 R² = 0.1994 0.0 0% 5% 10% 15% 20% 25% Source: TEJ, Bloomberg, Daiwa estimates Source: Daiwa estimates

ASE Industrial Holding (3711 TT): 14 May 2018

HoldCo: valuation sensitivity on varied PBR assumptions ROE-adjusted P/BV = 1.9 2.0 2.1 2.2 2.3 2.4 2018E book (TWDm) = 199,926 199,926 199,926 199,926 199,926 199,926 Fair value (TWDm) = 381,858 391,854 415,845 437,837 459,829 479,822 O/S (m, as of 2018) = 4,362 4,362 4,362 4,362 4,362 4,362 Fair value / share = 88 90 95 100 105 110

Source: Daiwa forecasts

This analysis is not unrealistic, in our opinion, since the valuation at which the market is willing to price a tech stock with a certain level of normalised ROE is normally around a 1x PBR or lower for a company delivering a single-digit normalised ROE, such as UMC and SMIC, on our observations. The premium rises to around a 1.5x PBR when a company delivers a 10-15% ROE, such as ASE, KYEC, PTI and ChipMOS, up to above a 2x PBR when a company delivers a 15-20% ROE, such as Amkor and Vanguard, or up to above 3x when a company delivers over a 20-25% normalised ROE, in the case of TSMC, with variances depending on the company’s earnings growth power that determines the direction of its ROE trend (upward or downward), barring some outliers.

Key downside risk: The key downside risk to our call would be any execution on business synergies failing to execution of business generate enough economies of scale to improve HoldCo’s cost structure, resulting in synergy limited gains in its pricing power and market-share gains below our expectations.

Secondary risks include: 1) China OSAT makers continuing with non-organic expansion through M&A to match, if not exceed, HoldCo’s revenue scale, and 2) the EMS business failing to see the expansion in market share that we expect due to limited applications turning out to be from the IoT cycle.

ASE Industrial Holding (3711 TT): 14 May 2018

HoldCo: pro forma business assumptions 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18E 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E Sales analysis - SAT Capacity (quarter end)

# wirebonders 24,211 24,623 24,539 24,283 24,746 25,400 26,800 27,800 28,500 29,200 30,150 30,500 FC & bump ('000 wpm, 8" equ) 762 786 800 844 849 918 974 1,024 1,035 1,069 1,098 1,121 # testers 4,352 4,373 4,331 4,355 4,411 4,681 5,071 5,236 5,236 5,411 5,531 5,586 Utilization

Wirebonder (WB) 76% 78% 83% 84% 76% 81% 87% 83% 80% 87% 92% 93% FC & bump (FC) 70% 71% 78% 73% 68% 70% 75% 72% 70% 76% 81% 79% Tester (TT) 70% 72% 79% 76% 71% 76% 78% 76% 73% 78% 81% 81% ASP (USD)

Production value / WB 45,536 46,802 45,839 45,603 45,367 44,641 44,322 44,000 43,168 42,328 41,987 41,477 Production value / wafer 337 338 336 341 324 318 316 313 310 310 307 308 Production value / TT 94,103 96,500 97,879 101,064 92,288 90,536 90,219 90,170 89,482 89,180 88,652 88,594 Revenue (TWDm)

WB 26,009 27,018 28,241 27,894 25,115 26,928 30,175 29,869 29,034 31,719 34,358 34,838 FC 16,845 17,064 19,012 19,003 16,498 17,937 20,330 20,332 19,855 22,194 24,048 23,990 TT 8,983 9,209 10,182 10,013 8,516 9,474 10,492 10,486 10,100 11,133 11,767 11,876 Total SAT revenue 51,837 53,291 57,435 56,910 50,129 54,338 60,997 60,688 58,989 65,045 70,173 70,703 Growth (QoQ) -12% 3% 8% -1% -12% 8% 12% -1% -3% 10% 8% 1% Sales analysis - EMS

Traditional EMS 11,742 9,874 9,929 10,821 7,172 7,132 7,472 8,558 6,877 7,231 4,324 4,965 Advanced SiP 17,613 18,337 23,169 32,464 21,515 23,877 29,887 34,233 27,507 28,924 38,919 44,689 Total EMS revenue 29,355 28,210 33,098 43,285 28,686 31,010 37,358 42,792 34,384 36,155 43,243 49,654 Growth (QoQ) -15% -4% 17% 31% -34% 8% 20% 15% -20% 5% 20% 15% Other revenue 4,910 4,949 5,300 5,413 5,064 5,250 5,897 5,883 5,706 6,299 6,798 6,925 Total SAT+EMS revenue 86,103 86,450 95,833 105,608 83,879 90,598 104,252 109,363 99,079 107,499 120,214 127,283 Growth (QoQ) -13% 0% 11% 10% -21% 8% 15% 5% -9% 8% 12% 6% Revenue mix

WB 30% 31% 29% 26% 30% 30% 29% 27% 29% 30% 29% 27% FC 20% 20% 20% 18% 20% 20% 20% 19% 20% 21% 20% 19% TT 10% 11% 11% 9% 10% 10% 10% 10% 10% 10% 10% 9% EMS 34% 33% 35% 41% 34% 34% 36% 39% 35% 34% 36% 39% Other 6% 6% 6% 5% 6% 6% 6% 5% 6% 6% 6% 5% Margin analysis - SAT

Direct material 16,291 16,753 18,055 17,888 16,217 17,579 19,734 19,632 19,536 21,541 23,241 23,410 Director labour 4,989 5,110 5,511 5,468 4,997 5,416 6,076 6,050 6,173 6,807 7,337 7,420 Depreciation & amortization 10,721 10,770 11,078 11,261 11,293 11,401 11,578 11,588 11,126 11,301 11,579 11,697 Other overhead 8,017 8,489 8,475 8,482 7,779 8,446 9,489 9,429 9,616 10,603 11,452 11,478 SAT COGS 40,018 41,121 43,119 43,099 40,286 42,841 46,877 46,700 46,451 50,251 53,609 54,006 Cost structure

Direct material 41% 41% 42% 42% 40% 41% 42% 42% 42% 43% 43% 43% Director labour 12% 12% 13% 13% 12% 13% 13% 13% 13% 14% 14% 14% Depreciation & amortization 27% 26% 26% 26% 28% 27% 25% 25% 24% 22% 22% 22% Other overhead 20% 21% 20% 20% 19% 20% 20% 20% 21% 21% 21% 21% Gross margin (GM)

SAT 22.8% 22.8% 24.9% 24.3% 19.6% 21.2% 23.1% 23.0% 21.3% 22.7% 23.6% 23.6% EMS 10.6% 11.1% 10.3% 9.2% 9.4% 9.5% 10.0% 10.0% 10.0% 11.0% 11.0% 10.5% Total GM 18.3% 18.4% 19.5% 18.3% 16.0% 17.7% 19.4% 18.9% 17.9% 19.5% 20.0% 19.4%

Source: Company, Daiwa estimates & forecasts

ASE Industrial Holding (3711 TT): 14 May 2018

HoldCo: quarterly pro forma P&L forecasts TWDm (year to 31 Dec) 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18E 3Q18E 4Q18E 2017 2018E 2019E 2020E SAT revenue 56,748 58,240 62,735 62,323 55,193 59,589 66,894 66,571 240,046 248,246 290,640 329,728 EMS revenue 29,355 28,210 33,098 43,285 28,686 31,010 37,358 42,792 133,948 139,846 163,437 201,808 Total revenue 86,103 86,450 95,833 105,608 83,879 90,598 104,252 109,363 373,994 388,092 454,076 531,537 SAT COGS -44,126 -45,491 -47,482 -47,048 -44,510 -46,516 -50,415 -50,230 -184,147 -191,672 -220,640 -246,935 EMS COGS -26,243 -25,089 -29,689 -39,283 -25,986 -28,064 -33,623 -38,512 -120,304 -126,185 -146,051 -180,830 Total COGS -70,369 -70,580 -77,171 -86,331 -70,496 -74,580 -84,038 -88,743 -304,451 -317,857 -366,691 -427,765 SAT GP 12,622 12,749 15,253 15,275 10,683 13,072 16,478 16,341 55,899 56,574 69,999 82,793 EMS GP 3,112 3,121 3,409 4,002 2,700 2,946 3,736 4,279 13,644 13,661 17,386 20,978 Total gross profit (GP) 15,734 15,870 18,662 19,277 13,383 16,018 20,214 20,620 69,543 70,235 87,385 103,772 SG&A -5,039 -4,895 -4,867 -5,262 -4,192 -4,650 -4,940 -5,054 -20,064 -18,836 -21,520 -25,078 R&D -3,729 -3,884 -3,986 -3,990 -3,704 -3,767 -4,285 -4,489 -15,589 -16,245 -18,370 -21,378 Operating profit 6,966 7,091 9,808 10,025 5,487 7,601 10,988 11,078 33,890 35,154 47,496 57,316 Net interest income (expense) -543 -477 -473 -443 -460 -411 -760 -737 -1,936 -2,368 -3,161 -2,966 Other non-op gains (losses) -1,305 7,715 1,037 229 -816 576 1,200 1,204 7,676 2,164 1,200 1,200 Pre-tax profit 5,118 14,329 10,372 9,811 4,211 7,766 11,429 11,545 39,630 34,950 45,535 55,550 Income tax -1,151 -3,999 -1,385 -1,528 -1,591 -1,188 -2,116 -2,138 -8,063 -7,032 -9,107 -11,110 Minority interest & others -402 -334 -395 -548 -260 -438 -644 -652 -1,680 -1,994 -1,912 -2,333 Net profit 3,566 9,995 8,592 7,735 2,360 6,141 8,669 8,755 29,888 25,925 34,515 42,107 EPS 0.33 0.92 0.79 0.72 0.54 1.41 1.99 2.01 2.76 5.94 7.91 9.65 O/S (m) 10,813 10,813 10,813 10,813 4,362 4,362 4,362 4,362 10,813 4,362 4,362 4,362 EBITDA 17,504 17,689 20,728 21,132 16,624 18,812 22,346 22,451 77,054 80,234 92,398 102,218 Margin SAT GM 22% 22% 24% 25% 19% 22% 25% 25% 23% 23% 24% 25% EMS GM 11% 11% 10% 9% 9% 9% 10% 10% 10% 10% 11% 10% Total GM 18% 18% 19% 18% 16% 18% 19% 19% 19% 18% 19% 20% Operating 12% 12% 16% 16% 10% 13% 16% 17% 14% 14% 16% 17% Net 12% 35% 26% 18% 8% 20% 23% 20% 22% 19% 21% 21% Growth (QoQ) Total revenue -13% 0% 11% 10% -21% 8% 15% 5%

Gross profit -24% 1% 18% 3% -31% 20% 26% 2%

Operating profit -38% 2% 38% 2% -45% 39% 45% 1%

Net profit -67% 180% -14% -10% -69% 160% 41% 1%

EPS -70% 180% -14% -10% -24% 160% 41% 1%

Growth (YoY) Total revenue 5% 3% 1% 6% -3% 5% 9% 4% 4% 4% 17% 17% Gross profit 2% -9% -3% -6% -15% 1% 8% 7% -4% 1% 24% 19% Operating profit -2% -19% -6% -10% -21% 7% 12% 11% -10% 4% 35% 21% Net profit -39% 33% 13% -29% -34% -39% 1% 13% -6% -13% 33% 22% EPS -43% 23% 5% -34% 64% 52% 150% 181% -13% 115% 33% 22%

Source: Company, Daiwa estimates & forecasts Note: * 2017 O/S was summation of O/S of ASE and SPIL deducted 33% stake purchased by ASE

ASE Industrial Holding (3711 TT): 14 May 2018

Appendix 1: the company and the market

In this section we provide some background as to how ASE and SPIL have gained a structural share of the outsourced semiconductor assembly & test (OSAT) market over the past few decades; and how HoldCo was created later on as a holding company of the 2 OSAT markers to consolidate their businesses in order to cope with increased competition from China. In addition, we look at the new board of directors and detail our view on the outlook for the global OSAT market.

The company ASE and SPIL were Founded in the same year of 1984, ASE and SPIL are the 2 largest full-service OSAT ranked No.1 and No.4 in makers in Taiwan, focusing primarily on logic chip packaging, testing and system-in- the global OSAT market package (SiP). ASE further extended its footprint into electronics manufacturing services in 2017 (EMS) in a bid to expand its total addressable market (TAM). With around 19% and 10% shares by revenue of the OSAT market in 2017, respectively on our estimates, ASE and SPIL were ranked No.1 and No.4 globally in 2017, competing against other global majors like Amkor (No.2, 15% market share), Jiangsu Changjiang Electronics Technology (JCET [江蘇長電]) (No.3, 13%), Powertech (PTi) (No.5, 7%), Tianshui Huatian Technology (TSHT [華天科技]) (No.6, 4%) and Tongfu Microelectronics (TFME [通富微電子]) (No.7, 4%).

ASE and SPIL have ASE and SPIL saw their market share expand significantly in the 2000s, thanks to their together gained prudent R&D on technology development (such as advanced flip-chip (FC) bumping), significant market share acquisitions of integrated device manufacturers’ (IDM) backend packaging & testing in the past 15 years… facilities, and their strategic respective positions in Taiwan’s semiconductor contract manufacturing (SCM) ecosystem allowing them to benefit from the business growth of front-end foundries, especially TSMC which has significantly increased its share of the global semiconductor market (ex. memory). ASE beat Amkor in 2003 to become the largest OSAT maker in the world. ASE and SPIL’s market share in aggregate further expanded post the GFC, when the 2 Taiwan OSAT makers accurately identified the right trend of copper (Cu) wirebonding, where Cu wires overwhelmingly replaced gold wires as the key material for bonding IC dies onto substrates as a result of the surge in gold prices. Their combined market share reached a peak of 30% in 2014-15.

…but JCET rose to However, in recent years China’s progress in developing its semiconductor supply-chain become the No.3 in 2016 ecosystem has moved ahead in leaps and bounds under a national project to increase the after acquiring STATS- country’s self-sufficiency of chip supply and reduce its import dependence. As such, OSAT ChipPAC in 2014 has been one of its strategic focuses in addition to logic foundries and memory chip start- ups. With funding support, JCET struck the biggest deal ever in OSAT history, when it spent around USD780m to acquire STATS-ChipPAC in 2014, which was ranked No.4 globally by revenue at the time. The deal was completed in 3Q15 and JCET’s market share jumped to 11% in 2016.

Global OSAT market share (2017) Global OSAT market-share trend 25% Others ASE* 21% 19% 20%

ChipMOS 15% 2% KYEC 10% 2% Amkor 15% UTAC 5% 3% TFME 0%

2000 2001 2002 2003 2004 2005 2008 2009 2010 2011 2012 2013 2014 2016 2017 2007 2015 TSHT 2006 4% JCET PTI 13% ASE Amkor SPIL 7% SPIL STATS-ChipPAC* JCET PTI 10% Source: Company, Daiwa estimates Source: Company, Daiwa estimates & forecasts Note: * ASE includes its pure OSAT revenue only, excluding EMS business Note: * STATS-ChipPAC was fully consolidated into JCET post 2015

ASE Industrial Holding (3711 TT): 14 May 2018

Timetable of the HoldCo deal

26 May 2016 30 Jun 16 Nov 15 May 2017 24 Nov 30 Apr 2018

ASE and SPIL announced to set up HoldCo ASE and SPIL both passed Board approval to ink an MoU Approved by Taiwan FTC Approved by US FTC Approved by MOFCOM

Delisted ASE and SPIL Listed HoldCo Source: Company, Daiwa

To cope with the rising China’s strategic initiatives and JCET’s moves concerned ASE, whose management feared threat from China, in the company would lose competitiveness in the Taiwan OSAT industry to the other side of 2015 ASE proposed a the Straits. The company was acutely aware that scale is crucial in this industry where plan to acquire SPIL materials costs account for the biggest portion of COGS, and also that this industry is much less consolidated than other segments of the chip sector, such as the foundry and memory segments. As such, in 2Q15, ASE proposed a strategic plan to SPIL that involved consolidating both operations in order to cope with the rising threat from China. ASE subsequently started purchasing SPIL shares from the open market, buying up to a 25% stake in SPIL in 3Q15, and further made a tender offer to acquire the rest for a price of TWD55/share (which subsequently dropped to TWD51.2/share in 2016 after SPIL’s cash dividend adjustment).

After a series of discussions and negotiations, both companies agreed to set up a holding company to consolidate their operations and announced jointly on 26 May 2016 that they planned to set up HoldCo, which would acquire the rest of the SPIL stake through a cash swap at TWD51.2/share, and ASE through an equity swap at a 1-for-2 scheme (1 HoldCo share for 2 ASE shares), hence privatising the 2 companies and becoming the holding company of the 2 after the privatisation.

Despite taking about a The deal was subject to antitrust scrutiny by 3 major authorities – the US, China and year longer than Taiwan – and received approval on 16 November 2016 from the Taiwan Fair Trade expected, the deal was Commission (FTC), on 15 May 2017 from the US Federal Trade Commission (US FTC), finally closed in late and conditional approval on 24 November 2017 from the Ministry of Commerce of the 2017 People’s Republic of China (MOFCOM). Accordingly, ASE and SPIL managements called an EGM on 12 February 2018 and set a concrete timetable for a last trading date of 17 April for both stocks, and to list HoldCo on 30 April, while delisting ASE and SPIL stocks on the same day. Although the whole process took about a year longer than we originally expected (see 2016 Pro forma report), the deal was finally sealed at the end of 2017.

The board New board structure After approvals of the deal, HoldCo selected 11 directors for the new board and 3 indicates that ASE supervisors on 12 February 2018 (see the next page table for brief backgrounds on these management is taking key management personnel). Jason Chang, for example, was the chairman of the ASE the driver’s seat group and has now become the chairman & CEO of HoldCo. Richard Chang, a brother of Jason, was the chairman of USI Shanghai and now serves as the vice chairman & president of HoldCo. Tien Wu, the director & COO of ASE, has become the COO of HoldCo. Joseph Tung, the director & CFO of ASE, has become the CFO of HoldCo. Bough Lin, the chairman & CEO of SPIL, has now become a director of HoldCo’s board, and CW Tsai, the vice chairman & president of SPIL, has now become another director of HoldCo’s board. These 8 – Jason Chang, Tien Wu, Joseph Tung, Raymond Lo, Jeffery Chen, TS Chen, Bough Lin and CW Tsai – are also representatives of ASE Enterprises (香港商微電子國際) which owned c.17% of ASE prior to its delisting. The structure of the board supports our view depicted earlier that ASE management would take the driver’s seat.

ASE Industrial Holding (3711 TT): 14 May 2018

HoldCo: board of directors and supervisors Name Title Background Director Jason Chang Chairman & CEO Jason has served as the Managing Director, Chairman & CEO of HoldCo since its founding in April 2018. Jason holds a bachelor's degree in electrical (張虔生) engineering from National Taiwan University and a master's degree from the Illinois Institute of Technology. He is the brother of Richard Chang, the Vice Chairman and President. Richard Chang Vice Chairman Serving as the Managing Director, Vice Chairman & President of HoldCo since April 2018, Richard has also served as the Chairman of Universal Scientific (張洪本) & President (USI), Shanghai since June 2008. He holds a bachelor's degree in industrial engineering from Chung Yuan Christian University in Taiwan. Richard is the brother of Jason Chang. Tien Wu COO Serving as the MD & COO of HoldCo since April 2018, Tien is also a Director of ASE since June 2003 and COO of ASE since April 2006. Previously, he was (吳田玉) the President of Worldwide Marketing & Strategy for the ASE Group. Tien holds a bachelor's degree in civil engineering from National Taiwan University, a master's degree and doctorate degree in mechanical engineering and applied mechanics from the University of Pennsylvania. Joseph Tung CFO Joseph has been a Director of ASE since April 1997 and CFO of ASE since December 1994, and now also served as the MD & CFO of HoldCo. He was an (董宏思) Independent Director of Ta Chong Bank over October 2007-December 2017 and a VP of Citibank prior to ASE. Joseph holds a bachelor's degree in economics from the National Chengchi University in Taiwan and a master's degree in business administration from the University of Southern California. Rutherford Chang Managing Director Rutherford has served as the MD of HoldCo since April 2018, as well as a Director of ASE since June 2009 and General Manager of ASE Group's China (張能傑) operations since June 2010. As a son of Jason Chang, the Chairman & CEO of HoldCo, Rutherford received the bachelor's degree in psychology from Wesleyan University in Connecticut. Raymond Lo Managing Director Serving as the MD of HoldCo since April 2018, Raymond has been a Director of ASE since May 2006 and General Manager of ASE's packaging facilities in (羅瑞榮) Kaohsiung, Taiwan since April 2006. Raymond holds a bachelor's degree in electronic physics from the National Chiao-Tung University in Taiwan. TS Chen Managing Director In addition to serving as the MD of HoldCo since April 2018, Tien Szu (TS) has also served as a Director of ASE since June 2015 and General Manager of (陳天賜) ASE's Chung Li branch since August 2015. TS held several key management positions in the ASE Group from June 1988, and worked at TSMC and Philips Semiconductor Kaohsiung before joining ASE. He received a bachelor's degree in industrial engineering from Chung Yuan Christian University in Taiwan. Jeffery Chen Managing Director In addition to serving as the MD of HoldCo since April 2018, Jeffery has also served as a Director of ASE since June 2003 and General Manager of ASE's (陳昌益) China headquarters in Shanghai. He worked at the corporate banking department of Citibank in Taipei and served as a VP of corporate finance at Bankers Trust in Taipei, before joining ASE. Jeffery holds a bachelor's degree in finance & economics from Simon Fraser University in Canada and a master's degree in business administration from the University of British Columbia in Canada. Bough Lin Managing Director In addition to serving as the MD of HoldCo since April 2018, Bough has been SPIL's Director since August 1984 and is currently SPIL's Chairman & CEO. (林文伯) Bough graduated from National Chiao Tung University (NCTU) in Taiwan in 1973 with a bachelor's degree in electronic physics and was awarded an honorary PhD from NCTU in 2014. CW Tsai Managing Director In addition to serving as the MD of HoldCo since April 2018, Chi Wen (CW) has been SPIL's Director since August 1984 and is currently SPIL's Vice (蔡祺文) Chairman & President. He graduated from the National Taipei Institute of Technology in 1969 with a bachelor's degree in electrical engineering. Freddie Liu none Freddie has served as the non-managing director and a member of the Audit Committee of HoldCo since April 2018. He is currently the Chief Strategy (劉詩亮) Officer of TPK Holding, and was a CFO & VP of TPK in September 2009-August 2017. Before joining TPK, Freddie served as the VP at Finance Department of ASE over 1997-2009, and a VP of Citibank before that. He received a master's degree in business administration from the University of Michigan. Supervisor Alan Cheng none Alan has served as the Supervisor of HoldCo since April 2018. He is also the Chairman of HR Silvine Electronics and the Supervisor of ASE Test. Alan holds (鄭天正) a degree in industrial engineering from Chung Yuan Christian University and a master's degree in industrial engineering from Rhode Island University. YC Fung none Yuan Chuang (YC) Fung has served as the Supervisor of HoldCo since April 2018, and is currently a director of Accton Technology. He was a director of (馮源泉) Claridy Solution and a general manager of Wang Laboratories Taiwan. YC holds a bachelor's degree in engineering from Purdue University. FY Chen none Fang Yin has served as the Supervisor of HoldCo since April 2018, and is currently a director & VP at the Finance Department of Hung Ching Development (陳芳瑩) & Construction. She worked at Deloitte Taiwan until June 1992 and then joined Hung Ching. She holds a degree in accounting from Tamkang University.

Source: Company

OSAT market forecasts We forecast OSAT We forecast the global OSAT market to expand at an 8% CAGR over 2017-20 in revenue market revenue to rise at terms to reach nearly USD35bn (USD27.6bn in 2017), roughly in line with the front-end an 8% CAGR over 2017- foundry growth for the same period. We expect the 2 sectors to enjoy the same demand 20 drivers by capitalising on the “5+1” demand verticals of consumer IoT, smart-car IoT, smart- home IoT, industrial IoT, healthcare IoT plus the cloud computing infrastructure build under the next BigData/IoT demand cycle, where we see high-performance computing (HPC) processors under the rising artificial intelligence (AI) trend facilitating cloud computing for datacentres and edge-computing for terminal devices, such as self-driving cars and smartphones, as delivering the best potential for new revenue growth (see 2018 Global Tech Outlook report: Focus on themes that are set to shine, 2 January).

The OSAT industry has The OSAT sector grew roughly in line with the dedicated foundry sector from Y2K to the underperformed the GFC, both gaining shares in the semiconductor market (ex-memory) thanks to OSAT foundries in revenue companies’ strategic position in Taiwan’s supply chain enjoying the same trends that the growth post the GFC foundries enjoy: 1) IDM outsourcing as a result of global IDMs’ asset-lite/fabless business transformation, and 2) mobile computing device (MCD) demand cycle including smartphones as the big-ticket item. However, the revenue growth trends of the 2 sectors have diverged post the GFC, with the OSAT sector underperforming the foundries due to: 1) more competition in backend since there are still over 70 players in the global OSAT industry, on our observations, while only 10+ players in the foundry industry, and 2) the foundries’ in-house investments for next-generation packaging & testing technologies such as integrated fan-out (InFO) and chip-on-wafer-on-substrate (CoWoS) with capacity build, especially TSMC.

ASE Industrial Holding (3711 TT): 14 May 2018

Global OSAT market forecasts Growth correlation between OSAT and foundry* (USDm) 80% 40,000 50% 60% 35,000 40% 40% 30,000 30% 20% 25,000 20% 10% 20,000 0% 0% 15,000 (10%) (20%) 10,000 (20%) (40%) 5,000 (30%)

0 (40%) (60%)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2001 2003 2004 2005 2006 2007 2009 2010 2011 2012 2014 2015 2016 2017 2002 2008 2013

2018E 2019E 2020E

2018E 2020E 2019E Global OSAT revenue Growth (YoY) Global OSAT Global foundry

Source: Company, Daiwa estimates Source: Company, Daiwa estimates & forecasts Note: * ASE includes its pure OSAT revenue only, excluding EMS business Note: * Dedicated foundries only, excluding part-time IDMs such as SEC and Intel

Competition from the foundry sector? We do not think the While this topic has drawn market attention with observers worried that the foundries’ foundry sector’s extended footprint, especially that of TSMC, into the high-end FO and 2.5/3D IC packaging growing footprint is a would induce structural market-share losses for the OSAT makers, we are not concerned threat to the OSAT about this perceived threat. Rather, we believe TSMC will build advanced packaging sector capacity, including its already commercialised InFO for application processors (AP) and CoWoS for graphics processing units (GPU), up to a certain level, aiming to ensure its global-leading position in front-end wafer fabrication technologies instead of competing against OSAT makers which have long been their supply-chain partners in the SCM industry. Customers’ requirement for business diversification when a new technology ramps up in volume should be another push for the OSAT makers to build capacity and mitigate TSMC’s impact in the OSAT market in the next 1-2 years, in our view.

Foundries’ investment in Indeed this perceived foundry threat in the advanced packaging is not unprecedented. Flip- FC & bumping may chip (FC) & bumping technologies were considered a leading-edge technology a decade serve as an example to ago in the OSAT sector where, owing to higher investment costs than the mainstay address market technologies of wirebonding, OSAT makers hesitated to build capacity initially. But TSMC concerns had to jump in and build capacity in order to ensure smooth migration of its customers to leading-edge wafer fabrication technologies. After volume was stimulated by TSMC and customer adoption rose, economies of scale emerged and diversification was needed, spurring the OSAT makers to take over the build from the foundries. Nowadays, the FC & bumping capacity of HoldCo is already more than 2x that of TSMC, on our estimates, therefore we believe FO and 2.5/3D packaging will replicate the FC & bumping trend a decade ago. Prior to the ASE-SPIL deal, we understand ASE, for example, was already offering CoWoS packaging services to AMD in the GPU space.

As highlighted in the previous section, we expect HoldCo’s share of the global OSAT market to start recovering from 2H18 after its integration of ASE and SPIL’s operations on the likes of R&D, equipment and materials procurement centralisation which will enhance HoldCo’s cost structure and pricing power. After that, we expect HoldCo to outgrow the industry average with its advanced technology offerings of FO and CoWoS ahead of the competition to gain further market share.

ASE Industrial Holding (3711 TT): 14 May 2018

Appendix 2: glossary of terms

Despite slow migrations in process technologies of the SAT industry relative to the front- end foundry, the technologies an OSAT maker adopts for packaging IC chips are comprehensive and broad in both width and depth of the product offerings. Therefore, in this section we provide a detailed introduction and explanation of each major packaging technology widely used in the industry for investors’ engineering interests.

Wirebonding WB is the most After a front-end wafer-fabrication chipmaker, such as a foundry or an integrated device common-used manufacturer (IDM), prints transistors onto a silicon wafer, the wafer is sliced into pieces of packaging technology silicon squares which are called “bare dies” or simply a die for each piece. The most conventional way of packaging a die into a chip is to mount the die onto a carrier, which is a substrate made with plastic or ceramic, and then electrical connections are extended outside from the die to exterior printed circuit board (PCB). Such a packaged die is then named a chip.

For the wirebonding (WB) packaging technologies, interconnection between a die and a carrier is made by using wires, which can be gold, aluminium (Al), or copper (Cu) wires. The die is attached to the carrier face up (or face down in the case of a flip-chip package), and the wires are bonded first to the die, then looped and bonded to the carrier. Although WB looks to be an old-fashioned way of packaging, around 60-70% of the IC packages still use this technology due to its advantage of cost and reliability. WB is widely used for analog, automotive and sensor ICs. The WB technology can be divided into 2 segments depending on the type of materials it uses for carriers: leadframe or substrate.

Leadframe-based Leadframe-based WB A leadframe is an alloy frame that consists of package leads and a paddle. In a leaded packages include DIP, package, a silicon die is attached onto the paddle, and the leads are connected to the die SOP, TSOP, QFP, LQFP, through WB. Leadframe-based packages are the most widely used package type in the QFN, aQFN, etc SAT industry, employed in almost every electronic application. Many types of packages are based on leadframe, such as DIP, SOP, TSOP, QFP, LQFP, TQFP, QFN and aQFN.

DIP. Dual-in-line package (DIP) was invented back in 1960s and was very popular in IC packages until the 1980s. DIP is a packaging method characterised by a rectangular housing and 2 parallel rows of electrical connecting pins. The pins are all parallel, point downward, and extend past the bottom of the package and then mounted to a PCB. Given its advantage of competitive manufacturing cost and high reliability, DIP is still widely used in low pin-count devices, such as memory, analog and micro-controller ICs for automotive applications. Plastic DIP (PDIP) and shrink DIP (SDIP) are 2 popular versions of DIP.

SOP/TSOP. Small outline package (SOP) can be viewed as an advanced version of DIP as it makes the lead interval of DIP into half and expands the lead for the surface mounting to the external “gull wing” shape. SOP’s application includes low pin-count packages used in cellular phones, wireless LAN, digital cameras, video and information appliances. Thin SOP (TSOP) is an advanced version of SOP with reduced thickness. Given its thinner form factor than SOP, TSOP is suitable for applications in portable electronic products, cell phones and memory modules.

QFP. Quad flat package (QFP) is similar to DIP but with gull-wing shaped leads extending from each of the four sides. The squared external shape enables the gull-wing leads to protrude from the four borders and the fine leadframe enables QFP to contain more leads and feature a smaller profile. It is extensively used in application-specific IC (ASIC), digital signal processors (DSP), micro-controlling units (MCU) and memory ICs such as flash, DRAM and SRAM.

ASE Industrial Holding (3711 TT): 14 May 2018

QFN/aQFN. Quad flat no-leads package (QFN) is an advanced form of QFP, except for the absence of leads protruding from its sides. Metal pads or lands around the bottom periphery of a QFN package work as an electrical connection to the exterior. Because the QFN has no leads and has shorter WB lengths, it exhibits less inductance than leaded packages and therefore provides an enhanced electrical performance. The QFN package also includes an exposed thermal pad at the package bottom to facilitate heat dissipation from the die.

The QFN package is suitable for applications that require enhanced electrical and thermal performance with reduced size, thickness and weight. Examples are radio frequency (RF), power management IC (PMIC), analog, microelectrical-mechanical system (MEMS) and logic ICs, with applications like Internet of Things (IoT), mobile phones, wearable and automotive safety and sensor devices. An advanced QFN package, or aQFN, is an enhanced version of QFN with applications across telecommunications like cellular phones and wireless LAN, and portable products such as digital cameras.

Substrate-based Instead of a leadframe, an IC substrate is applied in a WB package for applications that require pin-count higher than the leadframe-based packages, as well as finer pitch.

BGA/PBGA. Ball-grid-arrays (BGA) is a name characterising the way a substrate is connected to IC packages which place output pins in a form of a solder-ball matrix. Plastic ball grid array (PBGA) is a BGA package that adopts plastic (epoxy moulding compound) as the encapsulation. The traces of the BGA are generally fabricated on laminated substrates or polyimide-based films. Therefore, the entire area of substrates or films can be used to route the interconnection. Compared to leadframe-based wirebonding, BGA provides more interconnection pins as well as high density of pins and is suitable for high power and high speed ICs requiring electrical and thermal enhancement.

ASE Industrial Holding (3711 TT): 14 May 2018

Example of a DIP product Side-view of a DIP product

Source: Company, Daiwa Source: Company, Daiwa

Example of a TSOP product Side-view of a SOP product

Source: Company, Daiwa Source: Company, Daiwa

Example of a QFP product Example of a QFN product

Source: Company, Daiwa Source: Company, Daiwa

Example of a PBGA product Side-view of a wirebonding BGA product

Source: Company, Daiwa Source: Company, Daiwa

ASE Industrial Holding (3711 TT): 14 May 2018

Flip-chip & bumping FC was developed to Conventional WB works well for silicon geometries above certain technology nodes, extend the technology approximately 65nm and above, when a packaged size is not crucially required. However, reach of WB to as the front-end chipmakers had been following the Moore’s Law to shrink transistor accommodate front-end distances and/or a die size, flip-chip (FC) package was developed to meet the need for chipmakers’ process packaging higher pin-count and smaller form factor dies manufactured by advanced wafer- migration fabrication processes. FC package involves flipping over a die to connect with a substrate. Unlike the conventional interconnection through WB, FC package uses solder balls, or gold bumps for lower-end solutions in this space. Therefore, the I/O pads can be distributed all over the surface of the chip, not only the peripheral region, which allows the chip size to be reduced and the circuit path to be optimized. Another advantage of FC over WB is the absence of bonding wires, thus helping reduce signal interferences.

Wafer bumping is an essential process for FC packaging, making FC & bumping an advanced packaging technique where ‘bumps’ or ‘balls’ made of solders are formed on the wafers before being diced into individual chips. Those bumps function as interconnects between a die and a substrate, while at the same time playing an important role in the electrical, mechanical and thermal performance of the FC package. FC package is traditionally used for high-end niche applications, but recent technology developments have extended this process broadly into consumer electronics applications, especially for those requiring small form factors such as mobile applications. In these applications, FC interconnects are replacing WB to reduce size and weight of the package. Currently most mobile application processors and chips manufactured at 28nm or below are packaged with FC & bumping processes.

Chip level package Chip-level package (CLP) packages a chip using FC & bumping technology after a bare die is cut off a finished wafer, where FCBGA and FCCSP are 2 common-used packaging types.

FCBGA. Flip-chip ball-grid arrays (FCBGA) offer a better electrical performance than WB- type BGA package especially in high-frequency, high reliability applications. Major applications for FCBGA include graphics processors, microprocessors and PC chipsets in the computer application, memory chips for game consoles and telecommunication chips for networking products like LAN, data switch, data transmission and cellular base stations.

FCCSP. Flip-chip chip scale package (FCCSP) has a smaller form factor than FCBGA. With the advantage of its compacted form factor, FCCSP is widely used in baseband processors and application processors (AP) for tablets and smartphones.

Example of a FCBGA product Side-view of a FCBGA product

Source: Company, Daiwa Source: Company, Daiwa

ASE Industrial Holding (3711 TT): 14 May 2018

Wafer level package In conventional packaging technologies, the finished wafer is sliced into dies, which are then packaged into chips for final testing. Wafer-level package (WLP) technology, on the other hand, packages dies while they are still on the wafer, and then the wafer is diced into individual chips. Because the sides are not coated under WLP, the packaged chips are smaller in size than CLP, nearly the same size of the die itself. This miniaturization is an important consideration for mobile devices such as smartphones that require small form factors. Other advantages include streamlined manufacturing and ability to test chip functionality before dicing. There are 2 types of WLP package: fan-in and fan-out.

Fan-in. Fan-in (FI) is the first version of WLP, with the solder bumps that connect to the PCB being limited only to the die area, resulting in the final-packaged device approximately the same size as the die itself. Therefore, the FI package is also called a wafer level chip scale package (WLCSP). But with I/O limited only to the die area, FI is usually adopted for low pin-count chips, such as PMIC and RF chips.

Fan-out. Fan-out (FO) WLP refers to a process that embeds singulated dies from a finished wafer in a moulding-compound to create a reconstituted wafer. Interconnect traces are “fanned out” through a redistribution layer (RDL) to solder bumps to achieve high I/O density and flexible integration. Therefore, FO is best suited for high pin-count and small form-factor at the same time, aiming for applications such as smartphone AP and baseband chipsets.

Wafer level package vs. conventional package

Source: Daiwa

Fan-in vs. fan-out Side-view of a fan-out product

Source: Company, Daiwa Source: Daiwa

ASE Industrial Holding (3711 TT): 14 May 2018

System in package SiP can be a functional System-in-package (SiP) meets the growing demand for semiconductor miniaturisation electronics system or and multiple functions. SiP is a functional electronic system or sub-system that includes 2 sub-system or more heterogeneous semiconductor dies (often from different technology nodes optimised for their individual functionalities) usually with passive components. The physical form of SiP is a module, which can include a logic chip, memory chip, integrated passive devices (IPD), RF filter, sensor, heat sink, antenna, connector and/or power-analog chip in packaged or bare-die forms. Depending on the application requirements and product complexity, a SiP can be configured ranging from the conventional 2D module with multiple active and passive components, interconnected through FC, WB and surface-mount technology (SMT), to a more complex module such as package-in-package (PiP), package-on-package (PoP), and 2.5/3D integrated solutions.

Package on package Package-on-package (PoP) is a packaging technology placing one package on top of another to integrate different functionalities while maintaining a compact size. PoP offers procurement flexibility, low cost of ownership and fast time to market. A designer uses top package for memory chips and bottom package for ASICs, baseband chips or processors. The development cycle time and cost can be reduced since memory is decoupled from ASIC, baseband, or processor from the perspective of qualification, yield, sourcing, procurement timing and logistic. Major applications of PoP include analog, ASIC, baseband chip, processor, integrated passives and RF components.

Integrated FO Introduced by TSMC, the integrated fan-out (InFO) packaging technology is suitable for the integration of wireless communication systems that require low power consumption, good heat dissipation, compact size and high bandwidth, aiming for applications of smartphone, tablet, as well as the rising IoT devices. In 2015, TSMC’s InFO successfully integrated its 16nm system-on-a-chip (SoC) and DRAM in an advanced mobile application. Volume production of this technology started in 1H16, and TSMC is expanding its InFO footprint onto 10nm, 7nm and below.

Chip on wafer on substrate Chip-on-wafer-on-substrate (CoWoS) is another of TSMC’s advanced packaging technology, which integrates logic computing and memory chips in a 2.5/3D way for advanced products targeting on artificial intelligence (AI) high-performance computing (HPC), cloud computing, datacentre and super-computer applications. This revolutionary IC packaging technology facilitates power-efficient high-speed computing while reducing heat and CO2 emissions.

In 2012, TSMC successfully used CoWoS to integrate four 28nm chips, providing customers with high-performance field-programmable gate array (FPGA) devices with the shortest time-to-market during that time. In 2014, TSMC produced the world’s first 16nm three-chip integrated device with networking capabilities using CoWoS. In 2015, TSMC developed and qualified a super-large interposer (greater than 32mm x 26mm) using CoWoS-XL technology. This process integrates multiple large advanced chips on a single CoWoS module. Commercial volume in 2016 and 2017 included FPGA with 20nm multi- chip structure and super-high performance computing chips that integrated a 16nm SoC with a new generation high bandwidth (HBM2) DRAM. Currently, TSMC is developing 7nm CoWoS advanced packaging technology.

ASE Industrial Holding (3711 TT): 14 May 2018

2.5/3D IC packaging Inside the structure of a 2.5/3D IC packaging, multiple dies are stacked one on top of another and interconnected vertically using through-silicon via (TSV) technology. This technology involves stacking similar dies (”memory cubes”, for example), or stacking a pure memory die with a separate controller logic die at the bottom. This represents a simple explanation of how a 2.5/3D package works.

TSV Through-silicon via (TSV) is an essential technology enabling the realization of 2.5/3D package. It uses etching process or laser beam to create holes from the active area on top of a die right through the substrate to its backside, which helps establish an electrical connection from the active side to the backside of the die, thus providing the shortest interconnect path for 3D integration. Compared with WB and FC, TSV has advantages of higher space efficiencies and interconnect densities. When combined with microbump bonding and advanced FC technology, TSV enables a higher level of functional integration and performance in a smaller form factor.

Example of a PoP product Side-view of a PoP chip

Source: Daiwa Source: Daiwa

InFO process flow Side-view of CoWoS

Source: Daiwa Source: Daiwa

ASE Industrial Holding (3711 TT): 14 May 2018

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Craig CORK (852) 2848 4463 [email protected] Consumer/Retail Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Strategist for Asia Pacific; Strategy (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Kevin LAI (852) 2848 4926 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Chief Economist for Asia ex-Japan; Macro Economics (Regional) Olivia XIA (852) 2773 8736 [email protected] TAIWAN Macro Economics (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design (Regional) Head of Automobiles; Transportation and Industrial (Hong Kong/China) Nora HOU (886) 2 8758 6249 [email protected] Jay LU (852) 2848 4970 [email protected] Banking; Diversified financials; Insurance Automobiles and Components (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (PC Hardware) Regional Head of Financials; Banking; Diversified financials; Insurance (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Yan LI (852) 2773 8822 [email protected] IT/Technology Hardware (Handsets and Components) Helen CHIEN (886) 2 8758 6254 [email protected] Banking (China) Anson CHAN (852) 2532 4350 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Adrian CHAN (852) 2848 4427 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Consumer (Hong Kong/China) Jamie SOO (852) 2773 8529 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Gaming and Leisure (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] Capital Goods; Utilities

Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap SINGAPORE Fiona LIANG (852) 2532 4341 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Industrial (Hong Kong/China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Dennis IP (852) 2848 4068 [email protected] David LUM (65) 6228 6740 [email protected] Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China) Banking; Property and REITs Daniel YANG (852) 2848 4443 [email protected] Royston TAN (65) 6228 6745 [email protected] Power, Utilities, Renewable and Environment (PURE) – Solar and Nuclear (China) Oil and Gas; Capital Goods Don LAU (852) 2848 4469 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong) Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore) Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property JAPAN Cynthia CHAN (852) 2773 8243 [email protected] Yukino YAMADA (81) 3 5555 7295 [email protected] Strategy (Regional) Property (China) Carlton LAI (852) 2532 4349 [email protected] Small/Mid Cap (Hong Kong/China) Michelle WANG (852) 2773 8842 [email protected] Transportation (Hong Kong/China) Fan LI (852) 2773 8741 [email protected] Custom Products Group

PHILIPPINES Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg Ilag (63) 2 737 3023 [email protected] Utilities; Energy

ASE Industrial Holding (3711 TT): 14 May 2018

Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100 Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935 Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600 Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340 Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808 Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441 Daiwa Capital Markets Europe Limited, Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, (7) 495 641 3416 (7) 495 775 6238 Moscow Representative Office Russian Federation Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, (973) 17 534 452 (973) 17 535 113 Manama, Bahrain Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621 Daiwa Capital Markets Singapore Limited 7 Straits View, Marina One East Tower, #16-05 & #16-06, (65) 6387 8888 (65) 6282 8030 Singapore 018936, Republic of Singapore Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, (61) 3 9916 1300 (61) 3 9916 1330 Victoria 3000, Australia DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, (632) 813 7344 (632) 848 0105 Makati City, Republic of the Philippines Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638 Daiwa Securities Capital Markets Korea Co., Ltd. 20 Fl.& 21Fl. One IFC, 10 Gukjegeumyung-Ro, Yeongdeungpo-gu, (82) 2 787 9100 (82) 2 787 9191 Seoul, Korea Daiwa Securities Co. Ltd., Beijing Representative Office Room 301/302，Kerry Center，1 Guanghua Road，Chaoyang District， (86) 10 6500 6688 (86) 10 6500 3594 Beijing 100020, People’s Republic of China Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, (86) 21 3858 2000 (86) 21 3858 2111 Shanghai China 200120 , People’s Republic of China Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, (66) 2 252 5650 (66) 2 252 5665 Lumpini, Pathumwan, Bangkok 10330, Thailand Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, (91) 22 6622 1000 (91) 22 6622 1019 Bandra East, Mumbai – 400051, India Daiwa Securities Co. Ltd., Hanoi Representative Office Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, (84) 4 3946 0460 (84) 4 3946 0461 Hoan Kiem Dist. Hanoi, Vietnam

DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417 London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

ASE Industrial Holding (3711 TT): 14 May 2018

Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc., its subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: PT Totalindo Eka Persada Tbk (TOPS IJ), PT Integra Indocabinet Tbk (WOOD IJ), PT Buyung Putera Sembada (HOKI IJ), Cromwell European REIT (CERT_SP), Beijing Enterprises Water Group Ltd (371 HK), Mirae Asset Daewoo Co Ltd (006800 KS).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research.

Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

Australia This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report. Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited.

Taiwan This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it may only be distributed in Taiwan to specific customers who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd. and non-customers including (i) professional institutional investors, (ii) TWSE or TPEx listed companies, upstream and downstream vendors, and specialists that offer or seek advice, and (iii) potential customers with an actual need for business development in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research including non-customer recipients of this research shall not provide it to others or engage in any activities in connection with this research which may involve conflicts of interests. Neither Daiwa-Cathay Capital Markets Co., Ltd. nor its personnel who writes or reviews the research report has any conflict of interest in this research. Since Daiwa-Cathay Capital Markets Co., Ltd. does not operate brokerage trading business in foreign markets, this research is prepared on a “without recommendation” to any foreign securities basis and Daiwa-Cathay Capital Markets Co., Ltd. does not accept orders from customers to trade in such foreign securities that are without recommendation. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd. in respect of any matter arising from or in connection with the research.

Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph and http://www.pse.com.ph/ respectively.

Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. TNS, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

ASE Industrial Holding (3711 TT): 14 May 2018

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions. Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT: https://daiwa3.bluematrix.com/sellside/Disclosures.action

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 68.4% Hold** 21.2% Sell*** 10.4% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2018. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association