Taiwan Downstream Sector 6M 2020 Review: EMS Piling up Raw Material Inventory

3 September 2020 Equity Research Asia Pacific | Taiwan

Taiwan Downstream Sector 6M 2020 review: EMS piling up raw material inventory

IT Hardware | Quarterly

Figure 1: PCB still led the EPS growth Research Analysts

(NT$) 6M20 6M19 Pauline Chen 20 886 2 2715 6323 18 [email protected] 16 14 Angela Pan 12 886 2 27156352 10 [email protected] 8 6 4 2 0 Lens Passives Battery Hinge Power Cooling Connector Casing PC com PCB HS ex lens

Source: Company data, Credit Suisse estimates 6M 2020 financial data from 131 sample downstream (components/EMS/IPC) companies showed (1) revenue growth acceleration, except lens, IC substrate, auto, and IPC; (2) profit recovery from COVID-19 lows, with power supply and CCL reporting record-high GM in 6M20; (3) nine out of 12 companies with record-high GM in 6M20 were PC/NB related, thanks to very favourable pricing/cost structure driven by WFH; (4) concerning inventory data, with EMS seeing a spike in raw materials days, vs relatively stable days in WIP and finished goods, and components’ finished goods inventory days still close to record-high level (only two days below); (5) YoY OPM improvement in most sub-sectors, except audio components, auto, and IPC; (6) IPC relatively underperformed EMS, given the former’s no revenue/OPM recovery, higher capex/labour intensity, and higher inventory days (from both raw material and finished goods). Stock calls: The set of data suggests sequential but sub-seasonal revenue growth in 3Q, as EMS inventory suggests that part of the supply chain strength is driven by EMS’ cautiousness to pile up raw material inventory as much as possible to avoid any supply constraints. The tighter restrictions on Huawei could also lead to a pause in order momentum, with base-station redesign (to less complicated spec) and smartphone market share shift (with O/V/X revising up orders and continued order strength in Apple/Samsung). We prefer diversified plays (Sinbon/BizLink/Delta) to mitigate single customer/market risks, and see value in Largan, for a technology leader in a multi-year upgrade cycle. We think caution is warranted for IC substrates, given Huawei uncertainties and valuation back to prior cycle peak but margin still way below.

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

3 September 2020

Focus Charts

Figure 2: Revenue comparison (6M 2020) Figure 3: Components rising as % of EMS’ op profit

(NT$mn) Revenue (LHS) Revenue growth (RHS) Components as of EMS op Ex-passive components 350,000 20% 350% 300% 300,000 10%

250,000 250% 0% 200,000 200% -10% 150,000 150% -20% 100,000 100%

50,000 -30% 50%

0 -40% 0%

Mar

19 20

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

Figure 4: Operating profit comparison (6M 2020) Figure 5: Component inventory days down from record high

(NT$mn) operating profit (LHS) OPM (RHS) (days) component EMS 25,000 50% 80 45% 70 20,000 40%

35% 60 15,000 30% 25% 50 10,000 20% 40 15% 5,000 10% 30 5%

Mar

Mar 20 Mar 0 0%

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

Figure 6: EPS comparison Figure 7: Capex comparison (6M 2020)

(NT$mn) (NT$) 6M19 EPS (LHS) 6M20 EPS (LHS) YoY (RHS) capex (LHS) capex-to-sales (RHS) 20.00 80% 40,000 30% 18.00 60% 35,000 20% 16.00 40% 30,000 14.00 10% 12.00 20% 25,000 10.00 0% 0% 20,000 8.00 -20% -10% 6.00 15,000 -40% -20% 4.00 10,000 2.00 -60% -30% 0.00 -80% 5,000 0 -40%

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

Taiwan Downstream Sector 2

3 September 2020

6M 2020 review: Sub-sector highlights

6M 2020 financial data from 131 sample downstream (components/EMS/IPC) companies showed: (1) revenue growth acceleration, except lens, IC substrate, auto, and IPC; (2) profit recovery from COVID-19 lows, with power supply and CCL reporting record-high GM in 6M20; (3) 9 out of 12 companies with record-high GM in 6M20 were PC/NB related, thanks to very favourable pricing/cost structure driven by WFH; (4) concerning inventory data, with EMS seeing a spike in raw materials days, vs relatively stable days in WIP and finished goods, and components’ finished goods inventory days still close to record-high level (only two days below); (5) YoY OPM improvement in most sub-sectors, except audio components, auto, and IPC; (6) IPC relatively underperformed EMS, given the former’s no revenue/OPM recovery, higher capex/labour intensity, and higher inventory days (from both raw material and finished goods). Stock highlights

Power supply: Delta is our top pick in power supply, supported by its widening OPM gap with Lite-on Tech and Chicony, driven by passive components strength, industrial automation rebound, and better IT power supply outlook. Lite-on Tech regained its No.2 position in terms of profitability, given higher exposure to WFH. Risks: end demand, international COVID-19 outbreak, FX volatility (NTD appreciation). Handset components: The smartphone datapoints remain bumpy, given brands’ aggressive push for cost-affordable models and tighter restrictions on Huawei. We, however, stay with our positive view on Largan, given multi-year main camera lens upgrade. We think Merry’s leading ODM position in headset might become less meaningful in booming TWS market when more IT brands are joining the competition. For TXC, we will monitor the risk of Apple adding new miniaturised supplier and tighter Huawei restrictions. Risks: Slower smartphone sell through, cost down pressure to launch 5G smartphone dampening spec upgrade and international COVID-19 outbreak. Casings: The sector’s competition landscape is largely impacted by Apple’s China localisation strategy, with Casetek being privatised and Catcher’s smartphone capacity sold to Lens Tech. Risks: Apple's product demand, pricing pressure from customer/peers and international COVID-19 outbreak. PCB (printed circuit board): We think the escalating restriction on Huawei not just impacts ABF substrates but also BT/HDI, given less complicated design from its peers. We think caution is warranted for IC substrates, given Huawei uncertainties and valuation back to prior cycle peak but margin still way below. Risks: end demand, international COVID-19 outbreak, slower 5G deployment, and slower recovery of GPU/CPU or server. Connectors: We like both Sinbon/BizLink, given their diversified customer/product/end- market mix to mitigate single market/customer risks. Hu Lane’s improving near-term outlook is offset by rising copper prices. Risks: end demand, copper price, and international outbreak. EMS/IPC: EMS outlook is shadowed by Apple’s China localisation strategy, and we think Pegatron has relatively higher risks due to its lack of vertical integration capability and higher exposure to legacy models. 2020 could be a slow year for IPC sector. Risks: end demand, international COVID-19 outbreak.

Taiwan Downstream Sector 3

3 September 2020

Sector valuation matrix

Figure 8: Sector valuation table Company Ticker CS rating P/E (x) P/B (x) ROE (%) 2020 2021 2020 2021 2020 2021 Delta 2308 TT O 22.8 20.6 3.3 3.1 15% 15% LOT 2301 TT N 10.2 10.1 1.4 1.3 14% 13% Chicony 2385 TT N 11.9 10.7 2.2 2.0 19% 19% Catcher 2474 TT N 11.7 14.2 1.0 1.0 9% 7% FTC 2354 TT N 9.8 8.8 0.7 0.7 7% 8% Casetek 5264 TT O n.a. 29.5 1.2 1.3 0% 4% Largan 3008 TT O 18.7 16.3 3.2 2.8 17% 17% Merry 2439 TT N 14.6 12.9 2.5 2.3 17% 18% TXC 3042 TT N 17.4 15.4 2.7 2.5 15% 16% BizLink 3665 TT O 20.8 18.8 2.6 2.5 13% 13% Sinbon 3023 TT O 22.1 19.5 5.0 4.3 23% 22% Hu Lane 6279 TT N 16.0 12.2 1.7 1.6 10% 13% Chin Poon 2355 TT O 64.0 28.4 0.7 0.6 1% 2% Kinsus 3189 TT O 22.9 15.9 1.2 1.1 5% 7% Unimicron 3037 TT N 20.3 15.4 2.4 2.1 12% 14% Tripod 3044 TT N 10.7 9.3 1.6 1.5 15% 16% NYPCB 8046 TT N 24.0 20.8 2.6 2.4 11% 12% Topoint 8021 TT O 12.0 10.4 0.8 0.7 6% 7% Hon Hai 2317 TT O 10.9 9.5 0.9 0.8 8% 9% Pegatron 4938 TT N 9.7 10.3 1.0 1.0 11% 10% Advantech 2395 TT O 30.3 27.7 7.9 7.3 26% 26% Company Ticker CS rating Price Target EPS (NT$) EPS Growth (%) Local Local 2020 2021 2020 2021 Delta 2308 TT O 189.5 216.0 8.33 9.21 -6% 11% LOT 2301 TT N 46.1 51.0 4.51 4.56 13% 1% Chicony 2385 TT N 88.8 99.0 7.48 8.33 -6% 11% Catcher 2474 TT N 204.0 200.0 17.42 14.38 19% -17% FTC 2354 TT N 53.4 59.0 5.48 6.10 9% 11% Casetek 5264 TT O 85.1 87.5 -0.30 2.88 n.a. n.a. Largan 3008 TT O 3650.0 4800.0 194.86 223.93 -8% 15% Merry 2439 TT N 153.5 167.0 10.51 11.94 -14% 14% TXC 3042 TT N 81.0 85.0 4.66 5.26 115% 13% BizLink 3665 TT O 257.5 245.0 12.38 13.69 -12% 11% Sinbon 3023 TT O 186.0 193.0 8.42 9.54 14% 13% Hu Lane 6279 TT N 75.3 86.8 4.69 6.19 1% 32% Chin Poon 2355 TT O 26.0 32.0 0.41 0.92 -76% 125% Kinsus 3189 TT O 67.4 80.0 2.94 4.24 n.a. 44% Unimicron 3037 TT N 76.8 64.0 3.79 4.99 75% 32% Tripod 3044 TT N 115.0 135.0 10.72 12.32 -7% 15% NYPCB 8046 TT N 131.0 120.0 5.46 6.30 1045% 15% Topoint 8021 TT O 22.9 30.0 1.91 2.21 43% 15% Hon Hai 2317 TT O 77.8 91.0 7.14 8.15 -14% 14% Pegatron 4938 TT N 63.7 70.0 6.58 6.20 -11% -6% Advantech 2395 TT O 303.5 341.0 10.03 10.97 -5% 9%

Source: Company data, Credit Suisse estimates

Taiwan Downstream Sector 4

3 September 2020

Key findings in 6M 2020 financial reports

We summarise the key findings from 131 sample downstream (components/EMS/IPC) companies' 6M 2020 financial reports. Revenue growth

Revenue for the component sector reversed the YoY decline trend to 2% YoY growth in 6M20, driven by WFH demand, 5G network build and new iPhone SE launch in low season. We see double digit sales growth in hinge and battery, as well as 7% YoY growth in PC components, reflecting WFH strength. Cooling led the YoY growth, also thanks to WFH demand in PC and server. Lens grew 13% YoY, mainly driven by new iPhone SE. CCL and substrate saw double digit sales growth on 5G network (higher build ahead of Huawei Sep restriction) and server pull in, but strong growth was offset by rigid PCB (-2% YoY) and FPC (4% YoY). Yageo resumed YoY growth with KEMET consolidation starting in mid-June, which it claimed represents ~7% of its sales. Handset components excluding lens saw the heaviest YoY decline (-15% YoY), as wearables (including TWS) and consumer suffer the most from lockdowns. Power supply and connector saw single digit YoY decline, also negatively impacted by soft consumer demand. PCB remained the largest revenue industry, with higher revenue share YoY (from 28% in 6M19 to 29% in 6M20).

Figure 9: 6M 2020 revenue comparison Figure 10: 6M 2020 revenue-mix by sector

(NT$mn) Revenue (LHS) Revenue growth (RHS) 350,000 20%

300,000 10%

250,000 Pow er, 26% 0% PCB, 29% 200,000 -10% Battery, 5% 150,000 -20% Cooling, 4% 100,000 Hinge, 1%

50,000 -30% Passives, 5% HS ex lens, 6% 0 -40% PC com, 5%

Lens, 3% Casing, 11% Connector, 5%

Source: Company data Source: Company data Operating profit growth and operating margin (OPM)

The Component sector saw accelerated YoY growth in operating profit to 29% YoY, driven by shipment and production recovery across the industry chain, and the sector further benefited from the sweetness of rush orders (in terms of pricing and margin). We saw 30%+ YoY growth in operating profit in power supply, battery, PC components, casing, cooling and PCB. Power supply attributed strong operating profit growth to production recovery, rush order effect, as well as better opex control from global lock down. Battery and PC components’ outperformance might come from rush order effect. Cooling saw 74% YoY growth in 6M20 op profit, as the sector also benefited from WFH pull in, on the PC and server side. PCB’s operating profit growth of 60% YoY was driven by substrate (NYPCB and Kinsus’ turnaround, and Unimicron’s strong growth). FPC and CCL still enjoyed double digit op profit growth, while growth for rigid PCB’s op was slower at 9% YoY. Passive resumed operating profit growth after five declining quarters, thanks to pricing strength noted in the chain, further helped by KEMET consolidation. Connector managed to deliver 22% YoY growth in op profit, despite flattish revenue (2% YoY decline). Handset components excluding lens were the only subsector reporting YoY decline in 6M20 operating profit, but TXC saw operating profit more than doubled in 6M20, thanks to better pricing. PCB replaced lens and became the largest

Taiwan Downstream Sector 5

3 September 2020 contributor to the components’ operating profit (23% of components’ operating profit), followed by power supply (22%). Lens is now the third-largest contributor of op profit (17%). OPM for the components sector expanded 196 bp YoY to 9.3% in 6M20, above historical average of 8.5%. Ex-passive, components saw 202 bp YoY expansion to 8.6%, also above historical average (8.1%). Over 200 bp YoY expansion was seen in power supply, connector, cooling and PCB, with the former three benefited from better ASP and profitability in WFH rush orders (mainly notebook), while the latter continued to benefit from ABF substrate momentum. The four sub-sectors, along with lens and passive saw OPM above historical average. Handset ex-lens was the only sub-sector reporting OPM YoY contraction of 170 bp YoY to 1.5%, hurt by softness in consumer demand. In 6M20, Lens still had the highest OPM of 46.7%. Handset ex-lens (replaced PC components) had the lowest OPM of 1.5%.

Figure 11: 6M 2020 operating profit comparison Figure 12: 6M 2020 operating profit-mix by sector

(NT$mn) operating profit (LHS) OPM (RHS) 25,000 50%

45% PCB Pow er 20,000 40% 23% 22%

35% Battery 15,000 30% 3% Cooling Hinge 25% 4% 2% 10,000 20% PC com Passives 2% 15% 12% 5,000 10% Casing Connector 6% 5% Lens 8% 0 0% HS ex lens 17% 1%

Source: Company data Source: Company data EBITDA margin

EBITDA margin for the components sector was up 205 bp YoY to 15.5% in 6M 2020, mainly driven by expansion in power supply, connector, cooling and PCB. Cooling saw the biggest YoY expansion (up 304 bp YoY), thanks to strong and aggressive build for WFH (notebook and server), followed by power supply (+288 bp YoY), which benefited from similar WFH strength. Handset ex-lens and casing were the only two sub-sectors reporting EBITDA margin YoY decline. Lens still enjoyed the highest EBITDA margin at 56.8%, while handset components excluding lens still had the lowest EBITDA margin at 7.3%. PCB consolidated more EBITDA share on YoY comparison, accounting for 28% of components’ EBITDA.

Figure 13: 6M 2020 EBITDA margin comparison Figure 14: 6M 2020 EBITDA by sector

(NT$mn) EBITDA (LHS) EBITDA margin (RHS) 50,000 60% 45,000 50% 40,000 Pow er, 21% Battery, 2% 35,000 PCB, 28% 40% 30,000 Hinge, 2% 25,000 30% 20,000 Cooling, 3% 20% PC com, 2% 15,000 Passives, 10,000 9% Connector, 5% 10% 5,000

0 0% HS ex lens, 3% Casing, 12%

Lens, 13%

Source: Company data Source: Company data

Taiwan Downstream Sector 6

3 September 2020

Labour costs

In 6M 2020, labour costs for the components sector grew 3% YoY (vs 2% YoY sales growth), accounting for 18.2% of the components sector's revenue, up 30 bp YoY. Power supply saw the biggest increase on labour as % of sales, though the percentage was down slightly from 3M 2020, with most increase coming from Delta. Casing also saw higher YoY labour intensity. On the other hand, hinge, PC components, lens, passive and cooling saw declining labour intensity. Lens still had the highest labour intensity, with labour cost at 22.3% of 6M 2020 revenue. Battery packs still had the lowest labour intensity at 7.1%.

Figure 15: 6M 2020 labour cost comparison Figure 16: 6M 2020 labour cost by sector

(NT$mn) labour cost (LHS) labour cost as of sales (RHS) 60,000 25%

50,000 20% Pow er, 26% 40,000 PCB, 30% 15% Battery, 2% 30,000 10% Hinge, 1% 20,000 Cooling, 4%

5% 10,000 Passives, 5% PC com, 4% HS ex lens, 6% 0 0% Connector, 5%

Lens, 4% Casing, 13%

Source: Company data Source: Company data Capex

Capex for the components sector was down slightly at 1% YoY in 6M 2020, as increase in power supply (+25% YoY), battery (+157%), hinge (+167%), cooling (+45%), PCB (+7%) and lens (+4%), was offset by decline in casing, handset ex-lens components, connector, PC component and passive. Hinge led the capex growth (for foldable smartphone and other new products, as well as production enhancement & relocation), followed by battery (driven by Simplo) and lens (for new spec/technology, as well as share gains). Cooling’s high growth was driven by CCI (relocation to Vietnam), Forcecon (TGP expansion), and Anli (growth in non- PC). PCB still accounted for the largest part of components capex dollar (46%), followed by power supply, lens and passive. Capex-to-sales for the components sector decreased 21 bp YoY to 7.0%, with larger decrease seen in passive, casing, lens and PC. Lens had the highest capex intensity in 6M 2020 (replacing passive), with capex-to-sales ratio at 17.2%, followed by PCB (11.3%) and passive (10.4%); and battery still had the lowest capex intensity (2.5%).

Taiwan Downstream Sector 7

3 September 2020

Figure 17: 6M 2020 capex comparison Figure 18: 6M 2020 capex by sector

(NT$mn) capex (LHS) capex-to-sales (RHS) 40,000 30% Battery, 2% 35,000 20% Pow er, 16% Hinge, 1% 30,000 10% 25,000 0% PC com, 4% 20,000 -10% Connector, 3% 15,000 PCB, 46% Casing, 4% -20% 10,000

5,000 -30% Lens, 8%

0 -40% HS ex lens, 5% Cooling, 4% Passives, 7%

Source: Company data Source: Company data Depreciation & amortisation expense

In 6M 2020, the components sector saw 1% YoY decline in depreciation expense but 17% YoY growth in amortisation expense. For depreciation expense, double digit YoY growth was found in PC components, lens, passive (consolidation of Kemet) and cooling, and all sub- sectors above, except cooling, which saw depreciation expense outgrowing capex. This was nevertheless offset by decline in casing and connectors’ depreciation expense. The components sector’s amortisation YoY growth was led by power supply (+35% YoY), hinge (+43%), lens (+37%) and passive (+44%). Components sector’s D&A-to-sales expanded 8 bp YoY to 6.2% in 6M 2020, with larger increases in power supply, lens, handset ex-lens component, and passive. Casing has the highest D&A-to-sales ratio of 12.2%, followed by lens (10.1%). Lens (replaced casing) had the highest D&A-to-sales ratio among components, at 10.1%, while battery still has the lowest D&A-to-sales ratio (1.8%).

Figure 19: Capex-to-sales vs D&A-to-sales (6M 2020) Figure 20: 6M 2020 depreciation by sector

D&A-to-sales capex-to-sales 20% Battery, 1% Pow er, 16% 16% Hinge, 1%

12% PC com, 3% PCB, 38% 8% Connector, 4%

Casing, 17% 0% Cooling, 2%

Passives, 6% HS ex lens, 6%

Lens, 6%

Source: Company data Source: Company data

Inventory and cash conversion cycle

Inventory dollar for the components sector returned to growth (2% YoY) in 6M 2020, driven by supply chain production recovery in China and chain’s aggressive build to avoid unstable pull- in from COVID-19 as well as intensified trade restriction. Inventory dollar growth was driven mainly by raw material (+14% YoY) and WIP (+2%), offsetting finished goods inventory decline (-5%). By sub-sectors, passive, hinge, cooling, battery, PCB and connector saw double Taiwan Downstream Sector 8

3 September 2020 digit YoY growth in inventory dollar. On the other hand, casing reported double digit YoY decline (-35% YoY). On QoQ basis, inventory dollar grew 7% QoQ, driven by improved supply chain procurement (raw material +20% QoQ) and overall production recovery (finished goods +14% QoQ). By sub-sectors, passive showed the strongest QoQ rebound (+61% QoQ), with power supply, battery, connector and lens also reporting 10%+ QoQ growth. In 6M 2020, power supply overtook PCB and became the largest sub-sector in inventory dollar mix. EMS’ inventory dollar was down 3% YoY, as growth in raw material was offset by WIP and finished goods inventory. Inventory days improved sequentially (QoQ) but was still higher YoY (+2 days YoY) at 72 days, 20 days above 2008-19 historical 2Q average. Passive saw significant YoY and QoQ increase to 152 days, due to consolidation of KEMET starting 15 June 2020. Connector also saw 16 days YoY increase in inventory days, as its non-China production exposure was hit by COVID- 19. Casing and lens, on the other hand, saw over 26/3 days YoY decline. EMS’ Inventory days was almost flat YoY (+1 days YoY) at 47 days, 8 days above 2008-19 2Q. Inventory gap slightly widen between components and EMS (at 25 days, vs historical 2Q average of 13 days). CCC (cash conversion cycle) for the components sector was down 5 days YoY to 81 days in 6M 2020, but was still above historical 2Q average of 65 days. EMS showed YoY increase in CCC days to 51 days, 20 days above historical 2Q average. Sub-sector wise, power supply, battery, casing, lens and cooling saw CCC days improve (decrease), while PCB saw the largest YoY increase in CCC days, despite YoY improvement seen in substrate, with FPC and rigid board showing larger increase.

Figure 21: Component inventory days still high Figure 22: 6M 2020 total inventory-mix

(days) component EMS 80

70 PCB, 26% 60 Pow er, 28%

50 Cooling, 5% Battery, 6% 40

Hinge, 1%

30 Passives, 8%

Mar

Mar Mar 20 Mar HS com-ex

lens, 6% PC com, 4%

19 20 CasingLens, 7%, 3% Connector, 7%

Source: Company data Source: Company data ROIC

ROIC (return on invested capital) for the components sector improved 238 bp YoY to 13.3% in 6M 2020, still below 2008-19 historical average of 14.4%. Power supply, battery, PC components, cooling and PCB saw larger ROIC improvement. Power supply and cooling’s ROICs were above 2008-19 historical average. All sub-sectors saw YoY improvement in ROIC, except passive and handset ex-lens components, but passive ROIC at 24.3% was still above historical average of 20.7%. Lens, replacing passive, had the highest ROIC of 24.5% among components. Handset components (excl. lens) still had the lowest ROIC but now turned positive from 3M 2020 at 2.7%.

Taiwan Downstream Sector 9

3 September 2020

Figure 23: ROIC comparison Figure 24: 6M 2020 invested-capital-mix

ROIC (6M19) ROIC (6M20) Battery, 2% 45.0% 40.0% Pow er, 15% Hinge, 2% 35.0% 30.0% PCB, 33% 25.0% PC com, 2% 20.0% Connector, 5% 15.0% 10.0% Cooling, 2% 5.0% 0.0% Passives, 6% Casing, 18%

HS ex lens, 5%

Lens, 9%

Source: Company data Source: Company data R&D spending

The components sector’s R&D spending grew 5% YoY in 6M 2020, driven by handset ex- lens component, hinge, PCB and connector. PC components and casing saw YoY decline in R&D spending. R&D-to-sales ratio increased 14 bp YoY to 4.1% in 6M 2020, vs 2008-19 average of 2.9%. Handset ex-lens components, power supply, and connector saw higher than components YoY expansion in R&D-to-sales ratio. Hinge, PC components, casing, lens and cooling saw YoY contraction in R&D-to-sales. Lens still had the highest R&D-to-sales ratio at 7.8%, while battery packs still had the lowest R&D-to-sales ratio of 1.8%.

Figure 25: 6M 2020 R&D comparison Figure 26: 6M 2020 R&D mix by sector

(NT$mn) R&D expense (LHS) R&D-to-sales (RHS) 20,000 9% 18,000 8% PCB, 20% 16,000 7% 14,000 6% Cooling, 5% Pow er, 41% 12,000 5% 10,000 Passives, 2% 4% 8,000 3% 6,000 HS ex lens, 6% 4,000 2% 1% 2,000 Battery, 2% 0 0% Lens, 6% Hinge, 1% Casing, 7%

Connector, 4%PC com, 4% Source: Company data Source: Company data Other highlights

Components vs EMS: Operating profit for the components sector vs that of EMS was still 168% in 6M 2020 (149% excluding passive), reflecting the pricing strength from rush orders and spec uptrend still intact for several components sub-sectors. Operating profit distribution: On YoY basis, hinges, connectors, casing, lens, handset components and cooling saw operating profit concentration strengthening to top-two suppliers, while power supply, battery, PC components, passive and PCB saw weakening concentration of operating profit from top-two suppliers. The number of suppliers with operating losses increased YoY in 6M 2020 (to 21 companies among the 11 sub-sectors), with increase found in battery (C Tech turned into losses), casing (AVY turned into losses), lens (Newmax turned into losses), and handset ex-lens components Taiwan Downstream Sector 10

3 September 2020

(Concraft and Easetech remained in losses, Ichia turned to losses while Cheng Uei and Merry returned to profit from 3M 2020).

Figure 27: Components as % of EMS’ operating profit Figure 28: Top 2 as percentage of operating profit

Components as of EMS op Ex-passive components Top-2 as % of op (6M19) Top-2 as % of op (6M20) 350% 120% 300% 100% 250% 80% 200% 60% 150%

100% 40%

50% 20%

0% 0%

Mar

19 20

Source: Company data Source: Company data

Taiwan Downstream Sector 11

3 September 2020

Sub-sector highlights EMS/ODM sector: Key highlights EMS’ sales were down 4% YoY in 6M 2020, and Pegatron is the only one showing YoY growth (+2% YoY), thanks to its larger share in new iPhone SE and better iPhone 11 demand. EMS’ operating profit grew 6% YoY in 6M 2020, despite falling top-line, and OPM improved 13 bp YoY to 1.4%, thanks to better GM (up 13 bp YoY) from strong WFH demand and new product launch holding up production UT in normally low season, offsetting labour cost increase (which grew 4% YoY, hurting margin by 44 bp YoY), heavy R&D cost (up 11% YoY, impacting margin by 25 bp YoY), and stringent depreciation/amortisation (5 bp YoY impact on margin). Hon Hai decreased in the operating profit mix, with share picked up by Quanta (21% of op, up from 12%) and Pegatron (11% of op, up from 6%). Inventory was down 3% YoY and down 2% QoQ. Inventory days was down sequentially from historical high to 47 days, but still high YoY and 8 days above 2Q historical average. While WIP and finished goods inventory days were stable or down YoY, raw material inventory days showed 5 days increase vs 6M 2019. CCC days increased 3 days to 51 days exiting 6M 2020, above historical 2Q average of 31 days. EMS’ capex was down 14% YoY in 6M 2020, and capex-to-sales of 1.1% was slightly above 2008-19 average of 0.9%. QFII portfolio weighting suggests that Hon Hai holds higher QFII interests (2.79%), but interests for both Hon Hai and Pegatron have declined from previous quarter.

Figure 29: EMS/ODM overview Company Ticker 2Q20A 3Q20E Sales OPM EPS (NT$) Sales QoQ OPM EPS (NT$) HHP 2317 TT 1,128,337 2.0% 1.65 8% 2.4% 2.21 Pegatron 4938 TT 327,843 2.0% 2.71 4% 1.4% 1.32 Quanta 2382 TT 270,182 3.5% 1.62 14% 3.5% 1.83 Compal 2324 TT 263,654 0.9% 0.46 4% 1.0% 0.54 Wistron 3231 TT 221,107 2.1% 1.01 -1% 1.8% 0.63 Inventec 2356 TT 148,758 1.4% 0.46 -4% 1.3% 0.44 Arima Com 8101 TT 600 -27.7% -0.59 n.a. n.a. n.a.

Source: Company data, the BLOOMBERG PROFESSIONALTM service or IBES estimates for Arima Com; Credit Suisse estimates

Note: ODM sector (Quanta, Compal, Wistron, Inventec) is covered by Jerry Su.

Figure 30: Top 2 assemblers had 63% of revenue share… Figure 31: … and 68% of op profit share in 6M 2020

Inventec Arima Com 50% 6% 0% 47%

40% Wistron 9% 30% Compal 21% 11% HHP 49% 20%

11% 11% Quanta 10% 11% 6% 4%

Pegatron 0% 14% 0%

-10% HHP Pegatron Quanta Compal Wistron Inventec Arima Com

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

Taiwan Downstream Sector 12

3 September 2020

IPC sector: Key highlights IPC saw 3% revenue YoY decline in 6M 2020, and the sector’s OPM was down 10 bp YoY, despite higher gross margin (up 121 bp YoY to 31.7%) from product mix, as it saw negative impact from: (1) labour cost outgrowth (which grew 2% YoY, with labour-cost to-sales at 20.1%, up 106 bp YoY); (2) depreciation cost outgrowth (up 5% YoY, with D&A-to-sales at 3.2%, up 28 bp YoY); and (3) ongoing R&D spending (up 9% YoY, accounting for 9.1% of sales, up 102 bp YoY). The sector’s capex grew 84% YoY, driven by Ibase and Arbor, for expansion at Taiwan plants, and capex-to-sales ratio increased 95 bp YoY to 2.0% in 6M 2020, but was below 2008-19 average of 2.4%. Inventory dollar grew 5% QoQ, driven mainly by finished goods and raw material inventory. On YoY basis, inventory dollar was up 9% YoY, driven by raw material and finished goods inventory. Inventory days grew QoQ/YoY to 116 days, 12 days above 2008-19 1Q average, with increase in raw material inventory days (YoY) and finished goods inventory days (both QoQ/YoY). IPC’s ROIC was 17.8% in 6M 2020, down 182 bp YoY. QFII portfolio weighting suggests that Advantech’s QFII interests was stable at 0.62%, above historical average (0.4%)

Figure 32: IPC overview Company Ticker 2Q20A 3Q20E Sales OPM EPS (NT$) Sales QoQ OPM EPS (NT$) Advantech 2395 TT 14,018 20.3% 3.29 -3% 19.0% 2.74 Ennoconn 6414 TT 18,559 4.7% 3.62 12% 4.4% 3.87 IEI Integration 3022 TT 1,632 16.7% 1.53 n.a. n.a. n.a. Adlink 6166 TT 2,153 3.1% 0.13 6% 4.2% 0.33 ATEN 6277 TT 1,083 5.1% 7.62 23% 17.2% 1.61 Ibase 8050 TT 920 -1.8% 0.44 n.a. n.a. n.a. Vivotek 3454 TT 1,402 2.0% 0.53 n.a. n.a. n.a. DFI Inc. 2397 TT 2,040 6.3% 0.67 3% 8.2% 1.07 NEXCOM 8234 TT 1,662 3.4% 0.24 n.a. n.a. n.a. Avalue 3479 TT 993 3.8% 0.37 7% 5.9% 0.72 Axiomtek 3088 TT 1,125 11.5% 1.34 6% 8.4% 0.97 Caswell 6416 TT 1,453 11.4% 1.48 1% 10.2% 1.65 Lanner 6245 TT 1,744 8.0% 1.58 24% 10.0% 1.40 Winmate 3416 TT 371 16.5% 0.80 n.a. n.a. n.a. AIC 3693 TT 742 3.3% 0.10 n.a. n.a. n.a. ICP DAS 3577 TT 180 4.4% 0.12 n.a. n.a. n.a. Arbor 3594 TT 438 6.6% 0.27 n.a. n.a. n.a. AEWIN 3564 TT 378 2.4% 0.09 n.a. n.a. n.a. UniTech Elec. 3652 TT 461 -2.6% -0.18 n.a. n.a. n.a. Litemax 4995 TT 257 12.2% 0.57 n.a. n.a. n.a. Nextron 8147 TT 235 11.2% 0.88 n.a. n.a. n.a. Flytech 6206 TT 950 15.5% 0.77 n.a. n.a. n.a. Posiflex 8114 TT 1,901 5.1% 0.35 12% 6.7% 0.84 Firich 8076 TT 557 5.3% -0.04 n.a. n.a. n.a. XAC Automation 5490 TT 400 17.9% 0.55 n.a. n.a. n.a.

Source: Company data, the BLOOMBERG PROFESSIONALTM service or IBES estimates for all stocks except Advantech; Credit Suisse estimates

Taiwan Downstream Sector 13

3 September 2020

Figure 33: Top 2 IPC had 56% of revenue share… Figure 34: …and 65% of op profit share in 6M 2020

Litemax Firich Posiflex XAC Automation 60% UniTech Elec. 0% 3% 1% 1% Nextron Partner Tech 1% 0% 49% AEWIN Flytech 1% 50% Arbor 1% 2% ICP 1% 40% AIC DAS 1% 0% Winmate Lanner 3% 30% 1% Casw ell Advantech 23% 2% 20% 16% Axiomtek 2% Avalue 4% 10% 4% 2% 2% 4% 2%3% 3% 2% 0%1% 1% 2% 1% 1% 0%0%0% 1% 0% 2% 0% 1% 0% NEXCOM 0% 3% DFI Inc. 0% 4% -10% Vivotek Ennoconn 3%

33% AIC

Ibase

Arbor

Firich

ATEN

Adlink Avalue

Ibase Lanner

Flytech AEWIN

ATEN Vivotek

DFI Inc.

Caswell

Litemax

Nextron

Posiflex

Winmate ICPDAS 2% Axiomtek

2% NEXCOM

Ennoconn Advantech

Adlink PartnerTech IEI IEI Integration 4% IEI Integration UniTechElec. 2% XAC Automation

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Power supply Key highlights In 6M 2020, power supply makers' revenue was down 4% YoY, but Chicony and Voltornic managed to deliver YoY growth in 6M2020, driven by WFH demand (for notebook and server). Power supply’s OPM expanded 230 bp YoY to 7.9%, above 2008-19 historical average, driven by gross margin expansion (up 316 bp YoY), which the chain attributed mainly to better ASP and pricing from rush orders (especially those for surging WFH demand), in addition to improving product mix and spec upgrade. On the cost side, we still see continued R&D spending (+5% YoY, with R&D-to-sales impacting margin by 57 bp YoY), stringent opex (+1% YoY, with opex ratio up 86 bp YoY), depreciation and amortisation outgrowth (+6%/35% YoY respectively, impacting margin by 58 bp YoY), and heavier employee cost (up 2% YoY, impacting margin by 119 bp YoY). The group's capex grew 25% YoY, mainly because of Chicony’s property divestment last year. The group’s inventory dollar declined 5% YoY but increased 12% QoQ exiting 6M 2020. Finished goods inventory saw 23% QoQ increase exiting 6M 2020. Inventory days were stable QoQ/YoY at 79 days exiting 6M 2020, and was 24 days above 2008-19 2Q average. The sub-sector’s ROIC improved 492 bp YoY to 19.4% in 6M2020, above 2008-19 historical average of 16.5%. QFII portfolio weighting suggests Delta still has been consolidating QFII interests, with holding increasing to 1.31%, while interests for Lite-On and Chicony have shrunk from the previous quarter.

Figure 35: Power supply overview Company Ticker 2Q20A 3Q20E Sales (NT$ mn) OPM (%) EPS (NT$) Sales QoQ OPM EPS (NT$) Delta 2308 TT 70,694 13.1% 2.92 2% 11.6% 2.65 LOT 2301 TT 41,796 8.7% 1.47 11% 7.6% 1.34 Chicony 2385 TT 25,096 9.2% 3.23 4% 9.1% 2.16 AcBel 6282 TT 5,065 3.2% 2.06 11% 4.8% 0.97 FSP 3015 TT 3,617 3.6% 1.43 n.a. n.a. n.a. Voltronic 6409 TT 3,857 23.5% 9.57 0% 21.0% 8.08 P-Duke 8109 TT 335 36.7% 1.18 n.a. n.a. n.a. Zippy 2420 TT 562 20.7% 0.66 n.a. n.a. n.a. Lien Chang 2431 TT 432 -2.4% -0.08 n.a. n.a. n.a.

Note: The BLOOMBERG PROFESSIONALTM service estimates for AcBel, FSP, Voltronic, Lien Chang, P-Duke, and Zippy. Source: Company data, the BLOOMBERG PROFESSIONALTM service estimates, Credit Suisse estimates

Taiwan Downstream Sector 14

3 September 2020

Figure 36: Top 2 power supply had 75% rev share… Figure 37: …and 73% op profit share in 6M 2020

FSP Voltronic P-Duke Lien 60% 2% 2% 0% Zippy Chang 53% AcBel 1% 0% 4% 50%

40%

Chicony 30% 16% Delta 47% 21% 20% 17%

10% 6% LOT 28% 1% 0% 1% 1% 0% 0% Delta LOT Chicony AcBel FSP Voltronic P-Duke Zippy Lien Chang

Source: Company data Source: Company data

Casing Key highlights In 6M 2020, the major Taiwan casing makers’ revenue returned to YoY growth track (+4% YoY), driven by WFH demand and better-than-expected iPhone demand. The group’s OPM improved 160 bp YoY to 6.9%, thanks to: (1) better UT reflected in slightly higher gross margin YoY; (2) relief from depreciation and amortisation, with both in 10-15% YoY decline, vs. 4% sales YoY decline; (3) opex control (opex down 11% YoY, with opex ratio down 1.5 pp YoY), and (4) less R&D burden (down 9% YoY, lifting margin by 40 bp YoY). Labour cost, however, remained on the rise (+9% YoY, outgrowing revenue), and labour-cost-to-sales was up 86 bp YoY to 20.2%. EBITDA margin flattish YoY (down 4 bp YoY) at 16.2% in 6M 2020. Inventory dollar declined QoQ/YoY, with larger decline in WIP and finished goods inventory (on both QoQ/YoY comparison). Inventory days has normalised to 44 days, but was still 8 days above 2008-19 2Q average, mainly on the finished goods inventory days. CCC days for the group was 66 days, 10 days below 2008-19 2Q average. The group's capex was down 49% YoY, though Casetek added capex YoY (+27% YoY), and capex-to-sales ratio was down 264 bp YoY to 2.6% in 6M 2020. ROIC for the group improved 188 bp YoY to 6.2%, but still well below 2008-19 historical average of 16.1%. QFII portfolio weighting suggests that investors still prefer Catcher in the space (0.41%), followed by FTC (0.19%) and then Casetek (0.09%), but Catcher’s QFII interests has fallen below historical average.

Figure 38: Casing overview Company Ticker 2Q20A 3Q20E Sales (NT$ mn) OPM EPS (NT$) Sales QoQ OPM EPS (NT$) Catcher 2474 TT 22,538 15.0% 3.59 9% 15.7% 4.65 FTC 2354 TT 22,740 2.5% 1.03 62% 6.5% 1.86 Casetek 5264 TT 11,546 10.1% 1.86 -12% 0.1% 0.28 E-Son 5243 TT 2,020 5.5% 0.46 n.a. n.a. n.a. AVY 5392 TT 2,497 -0.7% 0.71 n.a. n.a. n.a. Bin Chuan 1569 TT 1,474 14.4% 1.36 n.a. n.a. n.a. Ways 3508 TT 207 -43.0% -0.31 n.a. n.a. n.a. Lemtek 4912 TT 1,165 11.2% 2.06 n.a. n.a. n.a. G-Shank 2476 TT 1,176 8.0% 0.57 n.a. n.a. n.a. Nishoku 3679 TT 1,107 22.0% 3.77 -1% 12.8% 1.94 Chia Chang 4942 TT 1,842 14.2% 1.58 n.a. n.a. n.a. Chenbro 8210 TT 2,199 14.8% 2.18 -8% 14.2% 1.99 Coxon 3607 TT 710 -18.3% -0.97 n.a. n.a. n.a.

Source: Company data, the BLOOMBERG PROFESSIONALTM service or IBES estimates for E-son, AVY, Bin Chuan, Ways, Lemtek, G-Shank, Nishoku, Chia Chang, ChenBro and Coxon, Credit Suisse estimates

Taiwan Downstream Sector 15

3 September 2020

Figure 39: Top 2 casing had 64% of revenue share… Figure 40: …and 87% op profit share in 6M 2020 90% G-Shank Nishoku Coxon Chia Chang ChenBro 2% 2% 1% 3% 77% 3% Lemtek 80% 2% Ways 70% 0% Bin Chuan 60% 2% AVY 50% 4% Catcher Eson 35% 40% 3% 30%

Casetek 20% 14% 10% 10% 6% 4% 2% 3% 3% 2% 3% 0% 0% FTC -10% -2% -4% 29% -4%

Source: Company data Source: Company data Handset components Key highlights Handset components makers’ accelerating revenue YoY declined (-7% YoY) in 6M 2020, with lens revenue growth decelerating to 13% YoY. The sector's OPM expanded 208 bp YoY to 17.7%, but the driver shifted from lens (up 147 bp YoY) to ex-lens handset components, mainly by TXC, which rode on pricing strength and share gains. The sector saw 322 bp YoY expansion on gross margin, and TXC remained the core driver, with lens showing 76 bp YoY expansion. On cost analysis, we see: (1) labour cost control for lens (with labour-to-sales down 175 bp YoY); (2) depreciation outgrowth of 8% YoY, with lens overseeing 17% YoY growth in depreciation as a result of continuous expansion, and D&A-to-sales for the sector was up 103 bp YoY to 7.4%, above 2008-19 average of 5.4%; (3) R&D spending outgrowth of 10% YoY to account for 5.5% of sales, up 88 bp YoY and above 2008-19 average of 3.6%; and (4) heavy opex (up 3% YoY), hurting margin by 114 bp YoY. EBITDA margin for the sector (including lens) was up 311 bp YoY to 25.1%, vs 2008-19 historical average of 18.2%. The group's capex was flat YoY (-1% YoY), with lens’ capex up 4% YoY, and capex-to-sales ratio increased 66 bp YoY to 10.0%, vs 2008-19 average of 7.0%. Inventory dollar for the group (including lens) was up 9% QoQ but down 4% YoY exiting 6M 2020. Lens’ inventory dollar saw 17% QoQ and 7% YoY growth. The group’s inventory days grew YoY to 73 days, 19 days above 2008-19 2Q average. Lens’ inventory days was down YoY to 105 days but remain well above 2008-19 2Q average. QFII portfolio weighting suggests Largan’s QFII interests has been on the decline (1.19%), while interests for Merry (0.09%) and TXC (0.06%) were stable.

Taiwan Downstream Sector 16

3 September 2020

Figure 41: Handset components overview Company Ticker 2Q20A 3Q20E Sales OPM EPS (NT$) Sales QoQ OPM EPS (NT$) Largan 3008 TT 12,650 59.1% 37.19 12% 57.0% 51.57 Genius 3406 TT 3,090 26.2% 4.44 60% 30.8% 10.31 Newmax 3630 TT 707 -13.1% -0.41 n.a. n.a. n.a. Kinko 6209 TT 612 -7.1% -0.32 n.a. n.a. n.a. Ability 3362 TT 810 3.6% -0.04 n.a. n.a. n.a. TXC 3042 TT 2,524 14.1% 1.19 17% 15.6% 1.33 Cheng Uei 2392 TT 20,500 2.0% 0.86 n.a. n.a. n.a. Merry 2439 TT 6,445 4.3% 1.35 59% 8.1% 3.88 Eastech 5225 TT 1,896 -5.5% -1.48 n.a. n.a. n.a. Silitech 3311 TT 315 -15.6% -0.14 n.a. n.a. n.a. UMT 3491 TT 428 16.0% 1.43 13% 17.0% 1.09 Sporton 6146 TT 914 28.2% 2.10 -1% 30.0% 2.41 Concraft 4943 TT 937 -3.5% -0.48 86% 18.9% 2.04 Ichia 2402 TT 1,059 -1.5% -0.05 n.a. n.a. n.a.

Source: Company data, the BLOOMBERG PROFESSIONALTM service or IBES estimates for Genius, Newmax, Kinko, Ability, Cheng Uei, Eastech, Silitech, UMT, Sporton, Concraft, and Ichia, Credit Suisse estimates

Figure 42: Top 2 handset had 63% of revenue share… Figure 43: ...and Largan was 88% of op profit in 6M 2020

Eastech UMT Silitech Ichia Sporton Largan OP share 3% 1% 1% 2% 2% 120% Concraft 2% 100% Largan Merry 26% 80% 12%

60% Genius 6% 40% Cheng Uei New max 37% Kinko 1% 20% 1% TXC

Mar

Mar 0% Mar 5% Ability

- 1% -

Source: Company data Source: Company data PCB Key highlights In 6M 2020, PCB’s revenue grew 5% YoY, driven by substrate (+18% YoY) and CCL (+14%), offsetting declining rigid board (-2%). OPM for the group improved 249 bp YoY to 7.3%, above 2008-19 historical average of 6.7%, thanks to (1) gross margin YoY expansion (240 bp YoY), disciplined opex (+4% YoY, with opex ratio down 9 bp YoY), well controlled labour cost (+6% YoY, vs revenue up 5% YoY) and depreciation cost (with D&A-to-sales down 16 bp YoY). Substrate saw the most significant improvement on OPM (+7.7 pp YoY), thanks to turnaround of NYPCB and Kinsus. The group's Capex grew 7% YoY in 6M 2020, driven mainly by FPC (+63% YoY), offsetting decline in rigid board and CCL. Capex-to-sales ratio increased slightly at 12 bp YoY to 11.3%, still above 2008-19 average of 9.0%. The group’s inventory was up 13% YoY, driven by raw material and WIP inventory. Inventory days were up YoY but down QoQ at 61 days, 15 days above 2008-19 2Q average. FPCB's combined revenue market share was 21% in 6M 2020 (flattish YoY), but combined operating profit share declined to 18% in 6M 2020 from 22% in 6M 2019. Substrate, on the other hand, saw increased revenue contribution (to 24%) and increased op profit contribution (to 19%). In 6M 2020, CCL's combined revenue market share was up slightly YoY at 12%, but combined

Taiwan Downstream Sector 17

3 September 2020 operating profit share declined YoY to 24%. ZDT reclaimed its leading revenue share (15%), followed by Unimicron (14%). ZDT replaced Compeq as the largest op profit share holder (14%). QFII portfolio weighting suggests that QFII for Unimicron (0.29%) and NYPCB (0.21%) have strengthened, exceeding QFII interest for Tripod (0.16%). Kinsus (0.07%), Chin Poon (0.03%) and Topoint (0.01%) QFII interests were stable.

Figure 44: PCB overview Company Ticker 2Q20A 3Q20E Sales OPM EPS (NT$) Sales QoQ OPM EPS (NT$) Kinsus 3189 TT 6,786 6.3% 0.52 5% 8.7% 1.08 Unimicron 3037 TT 21,710 6.1% 0.95 5% 10.4% 1.19 Tripod 3044 TT 13,010 10.9% 2.50 17% 14.0% 3.43 NYPCB 8046 TT 9,104 10.9% 1.29 16% 13.7% 1.85 Topoint 8021 TT 735 13.6% 0.44 6% 17.3% 0.69 EMC 2383 TT 6,301 17.6% 2.69 14% 19.2% 3.30 ITEQ 6213 TT 7,472 14.5% 2.6 -4% 14.0% 2.44 HBI 5469 TT 11,704 12.9% 1.68 0% 12.9% 1.61 GCE 2368 TT 6,310 15.3% 1.36 -6% 14.5% 1.16 TPT 8213 TT 5,874 7.7% 1.28 n.a. n.a. n.a. Compeq 2313 TT 13,421 10.9% 0.84 22% 13.3% 1.22 Unitech 2367 TT 2,250 -47.2% -1.11 94% 7.6% 0.35 Chin Poon 2355 TT 3,068 -3.8% -0.08 17% 0.5% 0.15 Apex 4927 TT 2,983 11.5% 1.83 13% 12.5% 2.20 Boardtek 5349 TT 1,365 -24.6% -1.85 n.a. n.a. n.a. ZDT 4958 TT 26,490 6.9% 1.41 37% 15.4% 3.35 Flexium 6269 TT 6,559 10.3% 1.58 28% 17.1% 3.32 Careertech 6153 TT 4,090 7.4% 0.45 n.a. n.a. n.a. TUC 6274 TT 5,256 15.6% 2.54 0% 15.5% 2.54 Dynamic 6251 TT 2,715 6.6% 0.37 16% 6.9% 0.49 Plotech 6141 TT 789 9.5% 0.42 n.a. n.a. n.a. APCB 6108 TT 2,172 6.1% 0.93 n.a. n.a. n.a. NEE 4909 TT 164 -8.0% 0.49 n.a. n.a. n.a.

Source: Company data, the BLOOMBERG PROFESSIONALTM service or IBES estimates for EMC, ITEQ, HBI, GCE, TPT, Compeq, Unitech, Apex, Boardtek, ZDT, Flexium, Careertech, TUC, Dynamic, Plotech, APCB and NEE, Credit Suisse estimates

Figure 45: Top 2 PCB had 29% of revenue share… Figure 46: …and 27% op profit share in 6M 2020 15% 14% Flexium Career Tech Kinsus 13% 4% 2% 4% 10%10% 9% 10% 9% 8% 7% NEE ZDT 6% 6% 0% Unimicron 5% 15% 5% 14% 3% APCB 2% 2% 1% 1% Tripod 1% 0% 0% Plotech 8% 0% 0% 0% -1% -1% Dynamic NYPCB -2% 2% APEX 6% -5% Compeq 2% Topoint -5% 9% Boardtek EMC 0% 1% HBI 4% -10% Chin Poon 7% ITEQ 2% TPT TUT 4% Unitech 4% GCE 2% 4% 3%

Source: Company data Source: Company data

Taiwan Downstream Sector 18

3 September 2020

Connectors/Cable Key highlights In 6M 2020, connector/cable makers saw narrowing YoY revenue decline at 2% YoY decline, with several suppliers (including Lotes, UDE, Alltop) returning to YoY growth track from 3M 2020. OPM for the group saw 222 bp expansion YoY, to 11.4%, above 2008-19 historical average of 10.0%, driven by: (1) gross margin expansion of 296 bp YoY, thanks to mix improvement (AIM and type C) and growing WFH demand; (2) declining depreciation (down 3% YoY, but D&A-to-sales at 4.6 still above historical average); and (3) controlled labour cost (down 1% YoY, but labour-cost-to-sales at 20.0% still above historical average), offsetting increased opex (+3% YoY, with opex ratio up 74 bp YoY to 15.2%). The group’s RD expense continued, up, outgrowing revenue (+8% YoY), resulting in 35 bp YoY impact on margin. The group's capex declined 20% YoY, and capex-to-sales ratio was down 99 bp YoY to 4.5%, lower than 2008-19 average of 4.9%. The group's inventory grew 11% YoY and 12% QoQ, and inventory days was up 16 days YoY /1 day QoQ to 106 days, 31 days above 2008-19 2Q average, with finished goods and raw material inventory days well above historical. CCC days saw YoY growth to 141 days exiting 6M 2020, 21 days above 2008-19 2Q. QFII portfolio weighting suggests that Sinbon (0.11%) still holds the highest QFII interest, followed by Bizlink (0.08%) and Hu Lane (0.02%).

Figure 47: Connectors/cable overview Company Ticker 2Q20A 3Q20E Sales OPM EPS (NT$) Sales QoQ OPM EPS (NT$) Lotes 3533 TT 4,735 26.0% 8.69 -9% 23.3% 7.64 UDE 3689 TT 1,463 7.8% 1.72 n.a. n.a. n.a. Sinbon 3023 TT 5,288 12.7% 2.52 6% 11.9% 2.42 CviLux 8103 TT 867 16.3% 1.17 6% 15.1% 1.19 Longwell 6290 TT 1,721 15.2% 1.50 24% 18.7% 2.31 I-Sheng 6115 TT 1,563 18.0% 0.76 n.a. n.a. n.a. Well Shin 3501 TT 1,096 12.4% 0.87 8% 11.8% 1.36 Alltop 3526 TT 691 35.6% 2.88 -21% 26.7% 1.76 BizLink 3665 TT 5,269 11.2% 3.86 8% 10.2% 3.20 Hu Lane 6279 TT 723 8.7% 0.41 26% 15.4% 1.17 KST 3003 TT 848 18.4% 0.46 9% 17.9% 0.84 GEM 2460 TT 860 5.2% 0.13 n.a. n.a. n.a. Aces 3605 TT 2,065 6.1% 1.08 n.a. n.a. n.a. LineTek 2462 TT 1,298 6.1% 0.68 n.a. n.a. n.a.

Source: Company data, the BLOOMBERG PROFESSIONALTM service or IBES estimates for Lotes, UDE, Cvilux, Longwell, I-Sheng, Well Shin, Alltop, KST, GEM, ACES, and LineTek, We also use BLOOMBERG PROFESSIONALTM estimates for Sinbon; Credit Suisse estimates

Taiwan Downstream Sector 19

3 September 2020

Figure 48: Top 2 connector had 40% of revenue share… Figure 49: …and 51% op profit share in 6M 2020

KS terminal GEM terminal FIT 35% 3% 3% 0% 30% Hulane 30% 3% Lotes 25% 16% 21% UDE 20% 5% 17% BizLink 15% 20% 10% 5% 6% 5% Sinbon 4% 4% 5% 3% 2% 2% ACES 19% 1% 1% 7% 0%

-1% Alltop -5% 2% Linetek CviLux 4% Well Shin I-Sheng Longw ell 3% 4% 5% 6%

Source: Company data Source: Company data

Taiwan Downstream Sector 20

3 September 2020 3Septemb Valuation, Methodology and Risks

Target Price and Rating er2020 Valuation Methodology and Risks: (12 months) for Advantech Co., Ltd. (2395.TW) Method: Our NT$341 target price for Advantech is based on 41x P/21E for its China business at 41x (or 10% discount to Shenzhen Inovance) and 28x P/21E for rest business, its historical trading average of 19x. We rate the stock OUTPERFORM, as (1) we expect its more aggressive M&A activities in IPC to provide earnings upside, (2) LT we still expect Advantech to benefit from the ample growth opportunities in xIoT, and (3) we are reluctant to downgrade a high-quality company with improving ESG in the liquidity-driven market. Risk: We believe the key risks to our OUTPERFORM rating and 12M target price of NT$341 for Advantech include: (1) macro weakness which could push out smart city build-outs; (2) China macro, in particular, given the country has been aggressively investing in manufacturing automation; (3) miss-step in technology transitions, which could impact ability to win new projects; and (4) execution of M&A delay entry into new channels, regions, or markets. Target Price and Rating Valuation Methodology and Risks: (12 months) for Apple Inc (AAPL.OQ)

Method:Our $380 target price and Neutral rating for AAPL are based on 25x our $15.15 calendar 2021 EPS estimate. Our 25x multiple is a premium vs. Apple’ s three-year average of 14x, reflecting the increasing mix toward Services which warrants a higher multiple than the company’s hardware-centric past. We rate AAPL Neutral as we expect it to perform inline with its peers. Risk: Risks to our $380 target price and Neutral rating for AAPL are a slowdown in smartphone demand, the company's ability to monetize Services, regulatory issues, and US-China trade tensions. Target Price and Rating Valuation Methodology and Risks: (12 months) for BizLink Holding Inc (3665.TW) Method: Our target price of NT$245 for Bizlink Holding is based on 18x FY2021E EPS, at the higher end of its historical trading range of 8-25x. We rate the stock OUTPERFORM, as as we expect a more diversified product mix to higher-margin medical/industrial to sustain its growth outlook, improve its profitability, and narrow its valuation gap with Sinbon. Risk: Risks that could impede our NT$245 target price and OUTPERFORM rating for BizLink Holding Inc include: (1) integration of Leoni's electrical appliance division to increase its margin volatility from copper price movement, (2) Tesla's Model 3 production bottleneck to hurt its sentiment, (3) margin volatility in IT solutions, and (4) USD and RMB movement. Target Price and Rating Valuation Methodology and Risks: (12 months) for Casetek Holdings Limited (5264.TW) Method: Our NT$87.5 target price for Casetek is based on the tender offer price, proposed by Pegatron. We rate the stock at OUTPERFORM, given its preferential position in the Apple supply chain. Risk: Risks that could impede achievement of our NT$87.5 target price and OUTPERFORM rating for Casetek include: (1) customer concentration risk, which could lead to higher volatility in earnings; (2) yield rates for new product cycle; (3) high capex being a risk to margins; (4) potential fund raising plans that may pose risks to our EPS; (5) end-market demand, and (6) margin outlook for the new smartphone project win. Target Price and Rating Valuation Methodology and Risks: (12 months) for Catcher Technology (2474.TW) Method: Our target price of NT$200 for Catcher is based on 1x P/B, at the lower end of historical P/B trading range of 0.8-2.4x. We rate the stock NEUTRAL, as it takes time to mitigate the revenue loss, but downside support by sizable net cash at 1x P/B. Risk: Risks to our NT$200 target price for Catcher include: (1) increasing customer concentration risk, which could lead to higher volatility in earnings; (2) faster/slower yield rates for new product cycle; (3) high capex being a risk to margins; (4) Asian currency fluctuation; and (5) end-market demand recovery post pandemic. Risks to our NEUTRAL rating for Catcher include: (1) New supplier entry in iPhone; (2) Apple share allocation; (3) iPhone demand; (4) FX movement; and (5) China's operational risks. Target Price and Rating Valuation Methodology and Risks: (12 months) for Chicony (2385.TW) Method: Our target price of NT$99 on Chicony is based on 12x 2021 EPS (earnings per share), using its historical trading P/E average. We rate Chicony NEUTRAL, as we think its larger consumer electronics exposure could see higher risks from COVID-19 disease outbreak and continued trade war tension. Risk: Risks to our TP of NT$99 and NEUTRAL rating for Chicony include: (1) better- or worse-than-expected end-market demand; (2) faster- or slower-than- expected market share expansion into NB-related segments and new areas; (3) NTD, RMB and commodity prices, i.e., copper and petrochemical; (4) unexpected quality issues for its power supply products; and (5) the impact of the trade war. Target Price and Rating Valuation Methodology and Risks: (12 months) for Chin-Poon Industrial Co., Ltd. (2355.TW) Taiwan Downstream Sector 21

3 September 2020 3September 2020 Method: Our target price of NT$32.0 is based on 0.8x P/B, versus its historical trading range of 0.5-1.8x P/B. We rate Chin Poon OUTPERFORM, as we expect earnings to find a deep bottom in 2Q20 driven by global auto restocking (from China to US/Europe), and still supportive valuation (below -1x STD P/B). Risk: Risks that could impede our TP of NT$32.0 and OUTPERFORM rating include: (1) USD movement; we estimate every 1% USD change will lead to a 60-70 bp change in gross margin; (2) copper price; we estimate every 1% copper price change will lead to a 10 bp change in gross margins; (3)

competition to lead to share loss or intensified pricing competition; and (4) demand uncertainty from rising trade war tension and pandemic.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Compal Electronics (2324.TW) Method: We have a NEUTRAL rating and TP of NT$20.5 is based on 10.5x 2021E P/E (price-to-earnings). We believe Compal's notebook shipment will outgrow the market in 2020E as the top three NB brands continue to gain share, and there is better demand from commercial notebooks. We also expect Compal's non-PC (personal computer) business to see faster growth in 2020, driven by better iPad build and share gain on Apple Watch with potential turn-around in 2020. Nevertheless, we see limited upside from the current valuation. Risk: The risks to our NEUTRAL rating and NT$20.5 TP for Compal include: (1) stronger/weaker iPad/Watch shipment; 2) better or continuing CPU supply constraint; and 3) share gain/loss at its NB customers. Target Price and Rating Valuation Methodology and Risks: (12 months) for Delta Electronics (2308.TW) Method: Our target price of NT$216 for Delta is based on 23x 2021E EPS, using +1 STD P/E. We rate Delta at OUTPERFORM, as we remain positive on Delta's 5G and EV story, and near-term catalysts include strong 2Q result and resilient margin guidance. Risk: Risks that could impede achievement of our NT$216 target price for Delta could include: (1) end-market demand, especially on industrial automation, (2) opex controls, as the company is migrating from a component supplier to a solution provider, and (3) execution capability to improve Eltek's OPM, through cross-selling opportunities. Risks to our OUTPERFORM rating for Delta could include (1) slower-than-expected OPM expansion, due to weak end-demand or mis-execution in M&A; and (2) unexpected changes in Delta's business strategy due to a new management team. Target Price and Rating Valuation Methodology and Risks: (12 months) for Foxconn Technology Corp (2354.TW) Method: We set our NT$59 target price for Foxconn Technology by putting the stock at 10x FY21E EPS (next twelve months earnings per share). We use a multiple of 10x, below its historical trading average of 13x (since 2008). We rate the stock NEUTRAL, as we still see risks on its core earnings driver - casing, which could see intense competition given its top customer's China localisation strategy. Risk: The risks to our target price of NT$59 and NEUTRAL rating for Foxconn Technology include: (1) sharp investment might lead to P&L volatility; (2) a potential profit-sharing scheme between Foxconn Tech and Hon Hai would impact our EPS (earnings per share) estimates; (3) potential fund raising plans that may pose risks to our EPS; and (4) both smartphone and consumer elctronics end-market demand. Target Price and Rating Valuation Methodology and Risks: (12 months) for Hon Hai Precision (2317.TW) Method: We have an OUTPERFORM rating on Hon Hai Precision, given that it is well positioned in cloud and 5G, and it has undemanding valuation with shares trading below book. Our TP of NT$91 is based on 11x FY2021 EPS, based on its historical average trading P/E. Risk: Risks to our OUTPERFORM rating and NT$91 target price for Hon Hai Precision include: (1) the impact from rising China labour costs being bigger than expected; (2) the potential of key clients cutting orders due to labour events, or potential orders being stronger than expected due to PC product cycles and devices, including tablets and smartphones; (3) a change in Hon Hai's relationship with Apple, its largest customer in revenue contribution terms; (4) slowdown in 5G infrastructure build and 5G smartphone launch; and (5) slower demand due to escalating trade war tension. Target Price and Rating

Valuation Methodology and Risks: (12 months) for Hu Lane Associate Inc. (6279.TWO)

Method: Our target price of NT$86.8 for Hu Lane Associate Inc. is based on 14x 2021E EPS, vs historical trading average of 9x-19x, reflecting improving China auto market outlook and accelerating earnings growth. We rate the stock NEUTRAL, as we think its valuation is less attractive at cycle-average P/E, vs. Chin Poon at below -1 STD P/B with higher exposure to non-China auto production normalization Risk: Risks to our NEUTRAL rating and NT$86.8 target price for Hu Lane Associate Inc. include: (1) Hu Lane's market share in China domestic brands; (2) China domestic brands' market share; (3) copper price & PA66 price movement; (4) RMB/USD trend; and (5) cost improvement on lower margin fuse box. Target Price and Rating Valuation Methodology and Risks: (12 months) for Inventec Co Ltd (2356.TW) Method: We rate Inventec NEUTRAL with a 12-month target price of NT$24.0 based on 13x 2021E P/E (price-to-earnings), 2 standard deviation above its historical average. We like Inventec as we believe it will be the key beneficiary on improving hyperscalers' capex spending from 2020; however, we see risk of continued share loss in IAC capping the upside for its earnings growth.

Taiwan Downstream Sector 22

3 September 2020 3September 2020 Risk: The risks to our NEUTRAL rating and NT$24.0 target price for Inventec include: (1) PC share gain/loss and overall market momentum; (2) better/weaker than expected IAC momentum; (3) currency impact on the data-centre business; and (4) higher/lower than expected production cost. Target Price and Rating Valuation Methodology and Risks: (12 months) for Kinsus Interconnect Tech (3189.TW)

Method: Our target price of NT$80 for Kinsus Interconnect Tech is based on 1.4x P/B (price-to-book), vs. its historical trading average at 1.4x. We rate the stock at OUTPERFORM, given decent ABF exposure (from 25% in 19 to 30-35% in 20E), more active engagement in AiP/SiP, and undemanding valuation (still below historical trading average P/B). Risk: Risks to our NT$80 target price and OUTPERFORM call for Kinsus include: (1) margin compression due to more aggressive price competition or undisciplined capacity expansion; (2) weaker-than-expected handset and networking demand; (3) competition landscape change due to the change of FC-CSP material; (4) raw material price hikes, i.e., gold; (5) slower-than-expected progress in InFo or SLPCB technology; and (6) demand/production disruption from COVID-19 outbreak. Target Price and Rating Valuation Methodology and Risks: (12 months) for Largan Precision (3008.TW) Method: Our NT$4,800 target price for Largan Precision is based on 21x 2021E EPS, vs. past average trading range of 5-29x, and we rate the stock OUTPERFORM, as we continue to believe that Largan should benefit from multi-years lens spec upcycle. Risk: Risks that could impede achievement of our NT$4,800 target price and OUTPERFORM rating for Largan Precision are: (1) weaker-than-expected smartphone demand, (2) slower-than-expected technology roadmap, (3) an intensifying competition landscape, (4) longer yield ramp dampening margin outlook, (5) unexpected NTD appreciation (against USD), and (6) competition from new lens/module technology. Target Price and Rating Valuation Methodology and Risks: (12 months) for Lite-On Technology (2301.TW) Method: Our target price of NT$51 for Lite-On is based on 11x 2021E EPS (next-12-month earnings per share), versus its historical trading range of 7x-25x. We rate Lite-On NEUTRAL, as we see limited revenue growth opportunity, which could limit its margin strength in the upcycle. Risk: Risks that may impede achievement of our NT$51 target price and NEUTRAL rating for Lite-On may include: (1) a faster or slower development from new growth sectors including cloud computing, LED components/lighting, and AI smart home/gaming; (2) greater pricing pressure from intensifying competition; and (3) the demand uncertainties from the trade war. Target Price and Rating Valuation Methodology and Risks: (12 months) for Luxshare (002475.SZ) Method: Our target price of Rmb73.1 for Luxshare Precision Industry is derived by DCF valuation (7.8% WACC, 3.9% terminal growth from 2030). Our OUTPERFORM rating is based on Luxshare's business portfolio expansion, rising Type C adoption and key US client's business, and strong earnings growth. Luxshare is likely to maintain its bluechip position in A-share tech, given its strong execution, continuous share/content gain in iOS devices, high ROE (30%+), solid long-term outlook. Risk: Key investment risks to our OUTPERFORM rating and target price of Rmb73.1 for Luxshare Precision Industry are: worse-than-expected demand from key clients' products; execution risks on new businesses; worse-than-expected pricing and margin pressures; trade dispute, prolonged coronavirus impact, M&A; and forex risks. Target Price and Rating Valuation Methodology and Risks: (12 months) for Merry Electronics Co. Ltd (2439.TW) Method: Our NT$167 target price for Merry Electronics is derived from a 14x 2021E EPS (earnings per share), vs its historical trading range of 8-27x, and we rate the stock NEUTRAL,as we expect its revenue to bottom out, but margin still under pressure with mix shifting to highly competitive TWS market.

Risk: Risks that could impede achievement of our NT$167 target price and NEUTRAL rating for Merry Electronics include: (1) slower or faster progress in increasing the order allocation in its major speaker customer; (2) weaker or stronger demand for audio peripherals on market saturation; (3) a lower or higher outsourcing ratio from major headset customers; (4) rising labour costs outweighing the benefit of production automation and relocation; and (5) an aggressive pricing strategy from competitors for market share expansions. Target Price and Rating Valuation Methodology and Risks: (12 months) for Nan Ya Printed Circuit Board (8046.TW) Method: Our target price for Nan Ya PCB is NT$120, based on a P/B (price-to-book) of 2.4x, or +1.5 STD. We rate the stock NEUTRAL, given its higher exposure to China base-station customer and less compelling valuation to peers. Risk: Risks to our target price of NT$120 for Nan Ya PCB may include: (1) PC/networking demand; (2) its progress in new full-line MCP substrate business; (3) high customer concentration risk; (4) any aggressive price competition from its peers; (5) rising raw material prices and unfavourable currency movement; and (6) worsening trade war impact. Risks to our NEUTRAL rating for Nan Ya PCB may include: (1) weaker PC/server demand, (2) slower progress in FC-CSP and SiP, (3) unexpected pricing competition, (4) unexpected movement in FX (NTD/USD) and commodity prices (copper in particular), and (5) unexpected M&A in the substrate space.

Taiwan Downstream Sector 23

3 September 2020 3September 2020 Target Price and Rating Valuation Methodology and Risks: (12 months) for Pegatron (4938.TW) Method: Our Pegatron's 12-month target price of NT$70 is based on 11x NTM EPS, or its historical average P/E. We rate the stock at NEUTRAL, as we think 2Q OPM likely marked the near-term peak, rising core earnings risks from China suppliers' entrance to iOS assembly, and deteriorating earnings

quality with rising non-op contribution to 34% in 2019/51% in 1H20.

Risk: Key risks to our NEUTRAL rating and 12-month target price of NT$70 for Pegatron include: 1) iOS assembly competition landscape, 2) Casetek iPhone casing yields, 3) iphone demand, 4) personal computer (PC) demand, and 5) Kinsus and Casetek profitability. Target Price and Rating Valuation Methodology and Risks: (12 months) for Quanta Computer (2382.TW) Method: We have an OUTPERFORM rating for Quanta because we see its cloud data centre sales accelerating along with 5G take-off, leveraging its long experience and design know-how. Its diversified customer base should also provide more stable profitability growth. Our target price of NT$95.0 is based on 16x 2021E forward P/E, 2SD above the one-year average. Risk: Downside risks to our OUTPERFORM rating and NT$95.0 target price for Quanta include the following: (1) worse-than-expected notebook/Apple Macbook and Watch/server and data centre demand and share gains; and (2) currency and macro impact on non-operating income. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung Electronics (005930.KS) Method: Our 12-month target price of W75,100 for Samsung Electronics is based on 1.7x FY21E up-cycle P/B. The dividend yield should rise for the next few years, driving P/E multiple expansion as Samsung Electronics ’ yield approaches the global tech average of about 2.5%. We assign an OUTPERFORM rating to the stock given our confidence on higher earnings and dividends led by, resilient DRAM profitability, OLED or 3D NAND top- line growth, smartphone recovery with new product-cycle, and a more proactive shareholder return policy. Risk: Risks that may impede the achievement of our 12-month target price of W75,100 and our OUTPERFORM rating for Samsung Electronics include: (1) smartphone margin sustainability given intensifying competition, (2) an earlier China entrance into 3D NAND, and (3) worse-than-expected memory pricing. Target Price and Rating Valuation Methodology and Risks: (12 months) for Sinbon Electronics Co., Ltd (3023.TW) Method: We set our target price for Sinbon Electronics Co., Ltd at NT$193.00, based on 20x 2021E EPS (earnings per share), or+1 STD P/E of its peer, BizLink. We rate the stock OUTPERFORM, as we believe its consistent earnings beat amid rising demand environment is a solid re-rating story, and the liquidity driven rally should continue to support the re-rating story. Risk: Risks that could impede achievement of our OUTPERFORM rating and NT$193.00 target price for Sinbon Electronics Co., Ltd include: (1) volatile green energy demand on a quarterly basis, given this segment is largely driven by government policy, (2) copper price movement to hurt its consumer electronic business' margin; and (3) growth in China's automotive and medical market. Target Price and Rating Valuation Methodology and Risks: (12 months) for TXC Corp. (3042.TW) Method: Our target price of NT$50 for TXC, based on 16x FY20E EPS (earnings-per-share), or +1 STD P/E. We stay NEUTRAL on TXC, as the key earnings driver mainly stem from smartphone - a market we see inventory overbuilds in the near term, we would suggest investors to wait for better entry points amid rising macro uncertainties. Risk: Upside risks to the NEUTRAL rating and our NT$50 target price for TXC Corp. include: (1) end-market demand for smartphones/consumer electronics; (2) the yen exchange rate; and (3) pricing pressure. Downside risks include weaker consumer electronics demand and competition from Japanese

peers. Target Price and Rating Valuation Methodology and Risks: (12 months) for Topoint Technology Co Ltd (8021.TW) Method: Our target price of NT$30 for Topoint Technology Co Ltd is based on 1x P/B (price-to-book), vs historical trading average of 0.9x, reflecting liquidity- driven market rally for a profitable company in the PCB upcycle. We have an OUTPERFORM rating on the stock mainly as we think the strategic adjustment on drills and drilling could better mitigate macro uncertainty and sustain earnings growth into 2021. Risk: Risks to our target price of NT$30 and OUTPERFORM rating for Topoint Technology Co Ltd may include: (1) a potential slowdown in end-market demand, (2) raw material pricing volatility, (3) bigger-than-expected price erosion, (4) failure to reduce costs as much as expected, (5) slower-than- expected expansion for high end business or slower-than-expected downsizing of low profit businesses, (6) RMB/NTD and USD/NTD fluctuations, and (7) poor liquidity of the stock. Target Price and Rating Valuation Methodology and Risks: (12 months) for Tripod Technology (3044.TW)

Taiwan Downstream Sector 24

3 September 2020 3September 2020 Method: Our target price of NT$135 for Tripod is based on 11x FY21E EPS (earnings per share), or its historical trading average P/E. We rate Tripod NEUTRAL, as we appreciate Tripod's solid execution to outgrow the commodity PCB market, but expect better entry point given decelerating earnings momentum. Risk: Risk factors to our target price of NT$135 for Tripod may include: (1) raw material price trends (copper and gold in particular); (2) unexpected inventory write-down or write-offs if Tripod penetrates tier-one handset brands; (3) weaker-than-expected demand which might lead to bigger pricing pressure;

(4) unexpected difficulty in expanding its capacity; and (5) USD and RMB appreciation. Risks to our NEUTRAL rating for Tripod may include: (1) unexpected movement in RMB and USD, (2) unexpected shutdown in its China operations, and (3) unexpected changes from its top customers. Target Price and Rating Valuation Methodology and Risks: (12 months) for Unimicron Technology Corp (3037.TW) Method: Our target price of NT$64 for Unimicron is based on 2.0x P/B, or +2 STD P/B. We rate Unimicron NEUTRAL, as we expect the ABF upcycle and its strengthening relationship with TSMC to be diluted by non-substrates exposure, HiSilicon restriction, and its aggressive capex, with valuation close to +2 STD P/B. Risk: Risk factors to our target price of NT$64 for Unimicron may include: (1) weaker or stronger demand; (2) margin volatility, given increased competition, weaker or stronger demand for high-end handsets, rising raw material prices (copper foil and gold), and unfavourable currency movements; (3) aggressive expansion from its substrate peers may lead to oversupply and an unfavourable pricing environment for entry-level HDI PCBs; (4) faster- or slower-than-expected penetration into new FC BGA substrate customer; and (5) whether manufacturing in China is a sustainable strategy given labour tightness and environmental issues. Risks to our NEUTRAL rating for Unimicron may include: (1) stronger or softer end-market demand, (2) lighter or heavier price competition, (3) faster or slower yield rate improvement for new BGA substrate business, (4) unexpected change in its China operations, and (5) material tightness or softness. Target Price and Rating Valuation Methodology and Risks: (12 months) for Wistron (3231.TW) Method: We have a NEUTRAL rating and 12-month target price of NT$33.5 for Wistron as we believe positives from both smart devices and cloud data-center are largely priced-in. Our target price is based on a P/E (price-to-earnings) of 12x 2021E P/E, or at its three-year average. Risk: Risks to our NEUTRAL rating and 12-month target price of NT$33.5 for Wistron include the following: (1) the profitability Wistron is able to generate on iPhone assembly, which also goes hand-in-hand with units and volumes; (2) notebook order gain/loss to other ODMs; (3) higher capex to build India

manufacturing; and (4) LCM business may be outdated as all iPhone moves to OLED in long term.

Taiwan Downstream Sector 25

3 September 2020 3September 2020

Companies Mentioned (Price as of 02-Sep-2020) ACES (3605.TW, NT$31.6) ADLINK (6166.TW, NT$71.5) AOET (3362.TWO, NT$36.05) APCB (6108.TW, NT$22.15) AVY (5392.TWO, NT$25.0) AcBel (6282.TW, NT$25.5) Advantech Co., Ltd. (2395.TW, NT$303.5) Alltop (3526.TWO, NT$88.8) Apex Intl (4927.TW, NT$70.8) Apple Inc (AAPL.OQ, $134.18) Arima Comm. (8101.TW, NT$3.75) Axiomtek (3088.TWO, NT$52.8) Bin Chuan (1569.TWO, NT$32.4) BizLink Holding Inc (3665.TW, NT$257.5) BoardTek (5349.TWO, NT$24.7) COMPEQ MFG. (2313.TW, NT$45.0) CONCRAFT (4943.TW, NT$90.2) Career Tech. (6153.TW, NT$29.0) Casetek Holdings Limited (5264.TW, NT$85.1) Catcher Technology (2474.TW, NT$204.0) Chenbro (8210.TW, NT$90.7) Cheng Uei Precision Industry Co. (2392.TW, NT$42.8) Chia Chang (4942.TW, NT$39.1) Chicony (2385.TW, NT$88.8) Chicony Power (6412.TW, NT$71.0) Chin-Poon Industrial Co., Ltd. (2355.TW, NT$26.0) Compal Electronics (2324.TW, NT$19.6) Coxon (3607.TW, NT$12.85) CviLux (8103.TW, NT$33.5) Delta Elec TH (DELTA.BK, Bt119.0) Delta Electronics (2308.TW, NT$189.5) Dynamic Elec (6251.TW, NT$18.9) Eastech (5225.TW, NT$24.55) Elite Material (2383.TW, NT$172.5) Ennoconn (6414.TW, NT$287.5) Eson Precision (5243.TW, NT$34.15) FIRICH (8076.TWO, NT$27.6) FSP (3015.TW, NT$36.1) Flexium (6269.TW, NT$127.5) Flytech (6206.TW, NT$62.7) Foxconn Technology Corp (2354.TW, NT$53.4) G-Shank Enter (2476.TW, NT$19.3) GCE (2368.TW, NT$53.8) GSEO (3406.TW, NT$620.0) Gem Terminal (2460.TW, NT$12.9) HSB (5469.TW, NT$44.6) Hon Hai Precision (2317.TW, NT$77.8) Hu Lane Associate Inc. (6279.TWO, NT$75.3) I-Sheng (6115.TW, NT$41.2) IBASE (8050.TWO, NT$46.5) IEI (3022.TW, NT$45.5) ITEQ CORP (6213.TW, NT$119.5) Ichia (2402.TW, NT$16.85) Inventec Co Ltd (2356.TW, NT$23.1) KS Terminals (3003.TW, NT$41.9) Kinko Optical (6209.TW, NT$37.6) Kinsus Interconnect Tech (3189.TW, NT$67.4) Lanner Elec (6245.TWO, NT$55.1) Largan Precision (3008.TW, NT$3650.0) Lemtech-KY (4912.TW, NT$147.5) Lien Chang (2431.TW, NT$10.3) LineTek (2462.TW, NT$25.45) Lite-On Technology (2301.TW, NT$46.05) Longwell (6290.TWO, NT$54.4) Lotes (3533.TW, NT$427.0)

Luxshare (002475.SZ, Rmb57.33) Merry Electronics Co. Ltd (2439.TW, NT$153.5) Nan Ya Printed Circuit Board (8046.TW, NT$131.0) New Era Elec (4909.TWO, NT$17.4) Newmax (3630.TWO, NT$46.0) Nintendo (7974.T, ¥59,550) Nishoku (3679.TW, NT$95.0) P-DUKE (8109.TWO, NT$67.9) PEGAVISION (6491.TW, NT$199.5) Pegatron (4938.TW, NT$63.7) Plotech (6141.TW, NT$27.15) Posiflex (8114.TW, NT$84.0) Quanta Computer (2382.TW, NT$77.8) Samsung Electronics (005930.KS, W54,400) Silitech Technology Corp (3311.TW, NT$29.3) Sinbon Electronics Co., Ltd (3023.TW, NT$186.0) Sporton (6146.TWO, NT$265.0) TXC Corp. (3042.TW, NT$81.0) Taiwan PCB (8213.TW, NT$43.35) Topoint Technology Co Ltd (8021.TW, NT$22.85) Tripod Technology (3044.TW, NT$115.0) UDE (3689.TWO, NT$34.0) Taiwan Downstream Sector 26

3 September 2020 3September 2020

UMT (3491.TWO, NT$80.5) Unimicron Technology Corp (3037.TW, NT$76.8) Unitech Print (2367.TW, NT$21.35) Vivotek (3454.TW, NT$75.0) Voltronic (6409.TW, NT$1035.0) Ways Technical (3508.TWO, NT$18.25) Well Shin (3501.TW, NT$47.2) Wistron (3231.TW, NT$32.25)

ZDT (4958.TW, NT$127.5) Zippy (2420.TW, NT$35.8) tuc (6274.TWO, NT$121.0)

Disclosure Appendix Analyst Certification I, Pauline Chen, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

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

005930.KS Closing Price Target Price Date (W) (W) Rating 31-Oct-17 55,080 72,400 O 09-Mar-18 49,740 70,800 27-Apr-18 53,000 74,000 11-Jun-18 49,900 72,000 21-Sep-18 47,400 70,000 13-Dec-18 40,000 64,500 08-Jan-19 38,100 53,000 31-Jan-19 46,150 58,000 15-Mar-19 44,200 54,800 19-Sep-19 49,150 61,300 OUTPERFORM 31-Jan-20 56,400 82,000 02-Apr-20 46,800 66,000 29-Apr-20 50,000 65,000 30-Jul-20 59,000 75,100 * Asterisk signifies initiation or assumption of coverage. As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European (excluding Turkey) rat ings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms represe nting the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin America, Turkey and Asia (excluding Japan and Australia), stock ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR r anges for Outperform and Underperform ratings did not

overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

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

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 50% (33% banking clients) Neutral/Hold* 37% (28% banking clients) Underperform/Sell* 12% (19% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investo r's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing- conflicts.html . Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. Credit Suisse has decided not to enter into business relationships with companies that Credit Suisse has determined to be involved in the development, manufacture, or acquisition of anti-personnel mines and cluster munitions. For Credit Suisse's position on the issue, please see https://www.credit- suisse.com/media/assets/corporate/docs/about-us/responsibility/banking/policy-summaries-en.pdf . The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): 4958.TW, AAPL.OQ Credit Suisse provided investment banking services to the subject company (4958.TW, AAPL.OQ) within the past 12 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): AAPL.OQ, 005930.KS Credit Suisse has managed or co-managed a public offering of securities for the subject company (4958.TW) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): 4958.TW, AAPL.OQ Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AAPL.OQ, 005930.KS) within the next 3 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: AAPL.OQ, 005930.KS Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, non securities-related: 005930.KS Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): 2395.TW, AAPL.OQ, 3665.TW, 5264.TW, 2474.TW, 2385.TW, 2355.TW, 2324.TW, 2308.TW, 2354.TW, 2317.TW, 6279.TWO, 2356.TW, 3189.TW, 3008.TW, 2301.TW, 002475.SZ, 2439.TW, 8046.TW, 7974.T, 4938.TW, 2382.TW, 005930.KS, 3023.TW, 3042.TW, 8021.TW, 3044.TW, 3037.TW, 3231.TW, 4958.TW

A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (4958.TW, AAPL.OQ) within the past 12 months. As of the date of this report, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2308.TW, 3023.TW, 5264.TW, 2474.TW, 3037.TW, 3189.TW, 4958.TW, 8021.TW, 3231.TW, AAPL.OQ). For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=548188&v=-3y22b3lt6xqkkp59bi8ou8al2 . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment.

Taiwan Downstream Sector 28

3 September 2020 3September 2020 Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk and note they may be subject to the applicable rules and regulations in Taiwan. Investment results are the responsibility of the investor. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered as recommendations to buy or sell securities. Reports may not be reproduced without the permission of Credit Suisse. Pursuant to the ‘Taiwan Stock Exchange Regulations Governing Securities Firms Recommending Trades in Securities to Customers’ and the ‘Taipei Exchange Rules Governing Securities Firms Recommending Trades in Securities to Customers’, in order for a non-client of Credit Suisse AG, Taipei Securities Branch to receive this research report, no provision by such non-client of the content of the report to a third party, nor any conflict of interest, is permitted. By receiving this research report, any such non-client is deemed to acknowledge and accept our terms and disclaimers included herein. This research report is authored by: Credit Suisse AG, Taipei Securities Branch ...... Pauline Chen ; Angela Pan To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse AG, Taipei Securities Branch ...... Pauline Chen ; Angela Pan Important disclosures regarding companies that are the subject of this report are available by calling +1 (877) 291-2683. The same important disclosures, with the exception of valuation methodology and risk discussions, are also available on Credit Suisse’s disclosure website at https://rave.credit- suisse.com/disclosures . For valuation methodology and risks associated with any recommendation, price target, or rating referenced in this report, please refer to the disclosures section of the most recent report regarding the subject company.

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