13 April 2017 Asia Pacific Equity Research Semiconductor Devices

Asia Semiconductor Sector Research Analysts SECTOR FORECAST Randy Abrams, CFA 886 2 2715 6366 1Q17 preview: Choppy results season looms [email protected] Haas Liu Figure 1: Semiconductor revisions ahead of the 1Q17 results season: 886 2 2715 6365 TSMC, UMC, SMIC, Vanguard, Powertech, Mediatek, Realtek and WPG [email protected] 2017 EPS Target Price Price Target Inv'ment Target P/E P/B ROE Div Yld Change Change 12-Apr Local Curcy Rating upside 2017 2018 2017 2018 2017 2018 Foundry TSMC -2% Maintain at NT$205 191.0 205.0 OPFM 7.3% 14.3 13.0 3.2 2.9 23.9% 23.5% UMC 0% Maintain at NT$12 12.0 12.0 NTRL 0.0% 22.2 20.5 0.7 0.6 3.0% 3.2% SMIC 0% Maintain at HK$10.8 9.36 10.80 NTRL 15.4% 18.1 14.1 1.1 1.0 6.5% 7.7% Vanguard -6% Lower to NT$53 58.8 53.0 NTRL -9.9% 17.8 15.5 3.3 3.2 18.7% 20.9% Hua Hong 0% Maintain at HK$11 10.42 11.00 OPFM 5.6% 12.0 11.7 0.9 0.9 7.7% 7.5% Packaging & testing ASE 0% Restricted 38.3 RSTR RSTR NA 12.5 12.0 1.8 1.7 14.5% 14.4% Powertech 0% Maintain at NT$102 86.5 102.0 OPFM 17.9% 11.8 10.8 1.8 1.7 15.4% 16.1% Amkor 0% Maintain at US$9.5 11.2 9.5 NTRL -15.2% 14.9 13.2 1.7 1.5 12.2% 12.2% IC design MediaTek -8% Lower to NT$200 214.0 200.0 NTRL -6.5% 16.1 13.0 1.3 1.2 8.5% 9.9% Realtek -3% Lower to NT$130 107.5 130.0 OPFM 20.9% 13.2 12.0 2.3 3.8 17.7% 23.9% WPG -5% Lower to NT$38 38.2 38.0 NTRL -0.5% 10.1 9.1 1.2 1.1 12.5% 12.9% Source: Company data, Credit Suisse research. Note estimates already revised in the past week for Realtek and Mediatek We summarise key themes through the results season for our semiconductor coverage and preview each of our covered companies in this preview report, including updates from TSMC’s recent technology symposium. ■ A sub-seasonal 1Q17 result dampened by the rising TWD. We expect a conservative results season, with 1Q17 sales below seasonal and dampened by the slowdown in China smartphones, low season for iPhone components, some excess fabless inventory and a 5% YTD appreciation in the TWD. The foundries (TSMC and Vanguard), fabless (Mediatek) and distribution (WPG) only reached the low-end of guidance on these factors. ■ 2Q17 guidance could be light for several companies. We expect most of the companies to see modest improvement in 2Q17 from a low base in 1Q17, though we would note the momentum will stay sub-seasonal on still muted demand for smartphone and PC and continued inventory correction in fabless. In 2Q17, we expect guidance below street across TSMC, SMIC, Vanguard, Mediatek and Powertech as the communications space is in a lull ahead of iPhone 8 and also depleting some excess chip inventory built up during the tight period in 2016. The overseas chip companies should be more constructive as the broad-based auto/industrial remained healthy. ■ Estimate revisions. We already revised down TSMC (fabless inventory, China smartphone slowdown), Mediatek (China smartphone softness, some high-end share loss to Qualcomm) and Realtek (FX loss). In this report, we trim estimates on WPG (China smartphones) and Vanguard (push-out of fingerprint to 2H and slower small panel driver ICs). We also lowered 2Q17 for Powertech but keep full year intact after a better 1Q17 and potential rebound in 2H17 as iPhone NAND shipments ramp. We also see some risk to SMIC expectations into 2Q17 due to high exposure to China smartphones. ■ Wait for a better entry post results. We stay conservative on several stocks in our coverage with a risk of shortfall relative to street, including TSMC, Vanguard, SMIC, Mediatek and Powertech, with a better set-up for 2H17 as the business should rebound. We still see catalyst post results as iPhone ramps for TSMC and Powertech and also see decent growth outlook continuing for Realtek as some new products contribute. 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.

13 April 2017

Focus charts and tables Figure 2: Asian Semis valuation metrics Market Cap Price Target Inv'ment Target 52 Week P/E P/B ROE Div Yld US$mn 12-Apr Local Curcy Rating upside high/low 2017 2018 2017 2018 2017 2018 Foundry TSMC 162,078 191.0 205.0 OPFM 7.3% 144.0-195.0 14.3 13.0 3.2 2.9 23.9% 23.5% UMC 4,837 12.0 12.0 NTRL 0.0% 11.2-13.0 22.2 20.5 0.7 0.6 3.0% 3.2% SMIC 5,173 9.36 10.80 NTRL 15.4% 5.90-12.18 18.1 14.1 1.1 1.0 6.5% 7.7% Vanguard Semi 3,181 58.8 53.0 NTRL -9.9% 49.1-67.1 17.8 15.5 3.3 3.2 18.7% 20.9% Hua Hong Semi 1,394 10.42 11.00 OPFM 5.6% 6.49-11.20 12.0 11.7 0.9 0.9 7.7% 7.5% Total 175,270 14.9 14.6 2.7 2.4 19.4% 19.4% Packaging & testing ASE 9,651 38.3 RSTR RSTR NA 28.5-39.9 12.5 12.0 1.8 1.7 14.5% 14.4% Powertech 2,205 86.5 102.0 OPFM 17.9% 63.0-93.5 11.8 10.8 1.8 1.7 15.4% 16.1% Amkor 2,676 11.2 9.5 NTRL -15.2% 5.4-12.3 14.9 13.2 1.7 1.5 12.2% 12.2% Total 19,574 14.5 13.3 1.7 1.7 13.4% 13.6% IC design MediaTek Inc. 10,950 214.0 200.0 NTRL -6.5% 192.0-256.5 16.1 13.0 1.3 1.2 8.5% 9.9% Realtek Semiconductor 1,776 107.5 130.0 OPFM 20.9% 85.5-130.0 13.2 12.0 2.3 3.8 17.7% 23.9% WPG Holdings Ltd 2,097 38.2 38.0 NTRL -0.5% 33.4-41.0 10.1 9.1 1.2 1.1 12.5% 12.9% Total 14,824 14.6 14.4 1.3 1.3 9.7% 11.1% Semiconductor equipment ASM Pacific 5,603 107.0 127.0 OPFM 18.7% 52.1-108.0 21.2 18.5 4.5 4.0 22.7% 23.2% Total 5,603 21.2 18.5 4.5 4.0 22.7% 23.2% Source: Company data, Credit Suisse

Figure 3: China smartphone will tougher compares Figure 4: NTD appreciated against USD by 6% YTD China smartphones (mn) YTD YoY % NTD/USD 550 25% 35 440 20% 34 330 15% 33 220 10% 32 110 5% 31 - 0% 30 (110) -5% 29 (220) -10% 28 (330) -15% 27 (440) -20% 26 (550) -25% 25

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Jul-14 Jul-12 Jul-13 Jul-15 Jul-16

2014 2015 2016 Jul-11

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 2017 2014 YTD YoY 2015 YTD YoY NTD/USD 2016 YTD YoY 2017 YTD YoY Source: Company data, Credit Suisse Source: Company data, Credit Suisse

Figure 5: TSMC’s 1H17 is soft but will rebound in 3Q Figure 6: TSMC +1SD P/E despite softer 1H17

Sales (NT$) QoQ Change (X) 2330.TW P/E $300,000 30% 20.0 $250,000 25% 18.0 $200,000 20% 16.0 $150,000 15%

$100,000 10% 14.0

$50,000 5% 12.0 $0 0% 10.0

-$50,000 -5% 8.0

-$100,000 -10%

Jul-06 Jul-13

Apr-08 Oct-04 Oct-11 Apr-15

Jun-16 Jan-03 Jun-09 Jan-10 Jan-17

Mar-04 Mar-11

Feb-07 Feb-14

Dec-05 Nov-08 Dec-12 Nov-15

Aug-03 Sep-07 Aug-10 Sep-14

May-05 May-12

4Q10 3Q12 2Q14 1Q16 4Q17 2Q10 3Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Forward PE Average +1std -1std +2std -2std Revenue QoQ Growth

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

Asia Semiconductor Sector 2 13 April 2017

1Q17 preview: Choppy results loom Stocks are holding up The stocks have been resilient through 1Q17 despite a mixed outlook due to relatively high despite a soft outlook for fabless inventory, slowdown in China smartphone demand from the strength in 2016 and the group through 1H17 also an incremental headwind from the 5% TWD appreciation, which impacts the Taiwan as China smartphones exporters’ translated sales and margins. TSMC kicks off results on Thursday and should and a rising TWD weigh maintain a conservative tone on 1H17 business due to these factors and also a weaker 10nm launch from its customer Mediatek and some Qualcomm chips still moving to 14nm Samsung. We expect the company to guide a modest decline in 2Q17 (vs street’s -0-1% QoQ) following a sub-seasonal 1Q17, putting the street’s full-year earnings estimates at risk for a modest downward revision. 1Q17 sales was already below seasonal down 9% QoQ in USD and down 11% QoQ in TWD due to low season for Apple and the China smartphone slowdown and should stay soft through 2Q17 as fabless deplete inventory and respond to slower China smartphone volumes. Apple orders will also trough out in 2Q17 before a sharp 2H17 ramp. We do expect TSMC’s risk on the shares to stay modest though with a more notable iPhone refresh in 2H17 and continued optimism from the company on its technology position. The company's technology updates at its recent tech symposium profiled in the report shows a broadening of its platform offerings to address its new target markets (high performance computing, automotive, IoT) and still aggressive roadmap with 28nm shrink to 22nm, 16nm shrink to 12nm and a fast migration through 10nm and 7nm for the first wave customers to address high-end mobile, graphics, data center acceleration and potentially some intensive ADAS computing requirements.

Figure 7: 1Q17 sales tracked toward the mid-to-lower end of expectations % 1Q17 1Q-17 1Q-17 CS 1Q-17 4Q-16 1Q17 Actual 1Q17 CS 1Q17 Street 2Q17 QoQ 2Q17 QoQ 1Q-17 Guide Tracking Guidance Actual CS original original CS Actual QoQ QoQ QoQ (CS) (Street) TSMC 233,914 237,012 98.7% 233,914 262,227 -10.8% -10.8% -8.6% Down 9% to 10% QoQ Slightly below -5.1% 0.8% UMC 37,418 36,858 101.5% 37,418 38,306 -2.3% -2.3% -3.3% Down 4% QoQ in NT$ Slightly above 4.4% 0.8% Vanguard 6,263 6,471 96.8% 6,263 6,596 -5.0% -5.1% -3.5% Down 0.7% to 5.2% QoQ Tracking to low-end 0.2% 9.0% Foundries 277,595 280,341 99.0% 277,595 307,129 -9.6% -9.6% -7.6% Tracking to low-end -3.7% 1.0% ASE IC ATM 38,385 38,682 99.2% 38,385 43,463 -11.7% -11.0% N/A Down low teens QoQ On track 8.2% N/A ASE Consol. 66,551 66,601 99.9% 66,551 77,129 -13.7% -13.6% -14.1% On track 5.9% 4.1% Powertech 12,660 12,285 103.1% 12,660 13,650 -7.3% -7.2% 3.7% Down less than 11% QoQ Slightly above 2.3% 7.7% Back-end 98,762 99,356 99.4% 98,762 112,956 -12.6% -11.7% -13.4% On track 5.5% 5.0% Mediatek 56,083 57,312 97.9% 56,083 68,675 -18.3% -18.3% -17.3% Down 14-22% QoQ Tracking to mid-end 12.6% 19.9% Realtek 9,983 9,899 100.9% 9,983 9,801 1.9% 1.9% 1.2% Mild QoQ growth Slightly above 5.7% 5.5% WPG 119,100 126,775 93.9% 119,100 139,311 -14.5% -14.5% -5.3% Down 9-10% QoQ Below 16.3% 18.3% IC Design 185,166 193,986 95.5% 185,166 217,787 -15.0% -15.0% -12.8% Tracking to low-end 14.6% 13.4% Total 561,523 573,683 97.9% 561,523 637,873 -12.0% -11.8% -9.9% Tracking to low-end 3.9% 5.4% Source: Company data, Credit Suisse estimates

2Q17 guidance could be The broader semiconductor coverage is also progressing through a slower 1H17. In 1Q17, below street for TSMC, TSMC, Vanguard and WPG were light, with currency having an impact on each, and China SMIC, Vanguard, smartphones impacting Vanguard’s small panel driver IC shipments and WPG’s distribution Mediatek and Powertech business. In 2Q17, we expect guidance below street across TSMC, SMIC, Vanguard, Mediatek and Powertech as the communications space is in a lull ahead of iPhone 8 and also depleting some excess chip inventory built up during the tight period in 2016. The overseas chip companies should be more constructive as the broad-based auto/industrial remained healthy and notebook builds tracked better than feared down mid-teens vs earlier down 20% QoQ expectations on HP and Dell strength and Acer restocking. Downward revisions for 1H17 estimates continues before a 2H17 pick up For earnings revisions, we already revised down TSMC estimates in late February (fabless inventory, China smartphone slowdown), Mediatek in early March (China smartphone softness, some high-end share loss to Qualcomm) and Realtek in the past week (FX loss and modest PC slowdown). In this report, we also trim our estimates on WPG (China smartphones) and Vanguard (push-out of fingerprint to 2H and slower small panel driver ICs due to Android slowdown). We also lowered our 2Q17 estimate for Powertech with memory

Asia Semiconductor Sector 3 13 April 2017

units slow into PCs and smartphones but keep full year intact after a better 1Q17 and potential rebound in 2H17 as iPhone NAND shipments ramp. We also see some risk to SMIC expectations into 2Q17 as its business remains slowed by high exposure (30% of sales) China smartphones. Stay conservative on We have the following stock calls into results. TSMC, Vanguard, SMIC and Mediatek into 1) TSMC results may weigh but 2H17 iPhone catalyst still looms. TSMC's 1H17 results, although business is impacted by the smartphone slowdown and TWD appreciation, potentially setting up a keeping 1Q17 sales and profitability tracking to the low-end. We already trimmed better entry 2Q17 estimates reflecting smartphone adjustments and less 10nm in February. The stock has been a range trade for three quarters following its earlier re-rating, and so could finally get another leg up following the 1H17 slowdown as the business will at least see a good ramp in 2H17 as iPhone orders grow and retain a good technology position with half node enhancements for its 28nm and 16nm nodes and a fast migration through 10nm to 7nm ahead of its peers. 2) Vanguard risk into results. We expect a disappointing outlook for Vanguard with sales potentially only flat vs street and normal seasonal growth of +5-10% QoQ. The company is seeing a modest decline in small panel driver ICs as some volume converts to TDDI or OLED, eroding that business on top of the already soft China smartphone market. In addition, the company’s fingerprint orders have pushed out to 2H17. We would view the company better post a reset as its strong cash generative asset light business model remains intact. 3) SMIC may continue to correct into 2Q17 as its full-year target has risk. SMIC is at least on track to its toned down 1Q17 outlook although we expect limited growth continuing in 2Q17 due to continued pre-announcements at a lead 8” customer FPC and smartphone weakness which also affects its connectivity and power management orders. The company has held to a +20% YoY outlook which we believe is at risk or at the least back-end loaded and will remain uncertain until visibility into a rebound firms. We would see a better entry closer to 1x P/B at HK$8.40. 4) Stay conservative on Mediatek due to slow China smartphones and some high-end share loss. We keep a more conservative NEUTRAL view on Mediatek with an NT$200 target. The company tracked close to the midpoint of a below seasonal guidance in 1Q17 and the rebound in 2Q17 may only be modest due to some market share loss to Qualcomm and softness in China and emerging markets (we model +15% QoQ, below street up 20-25% QoQ). We still expect GMs to stay capped or have modest downside risk due to tough pricing on LTE with Qualcomm and worse cost structure on LTE until its new cost down chips can ramp in 4Q17. 5) Powertech better following a soft 2Q17 outlook. Though we expect a below seasonal 2Q17 growth ahead of iPhone 8 launch, we keep our Powertech estimates for 2017 with the business remaining healthy across mobile DRAM, NAND and its Greatek logic subsidiary. Key support in 2017 should come from ramp of Micron assembly in Xian, Intel NAND in Dalian, higher density NAND in smartphones and logic back-end consolidation in Taiwan. Our target reflects 14x our 2017 estimates. We summarise some of the key themes that will play out through the results season for our semiconductor coverage, and have a preview and focus charts for each of our covered companies in the following sections of this note.

Asia Semiconductor Sector 4 13 April 2017

TSMC should guide a muted 2Q, 2H17 still supported by iPhone 8 TSMC's business outlook TSMC already released 1Q17 sales at the lower-half of guidance on Thursday due to the stays muted through stronger TWD, and we expect profitability will also have a similar impact from the currency. 1H17; we model 2Q17 TSMC prices wafers in USD, and so it has a 1% translation impact to sales for each 1% down modestly after a currency appreciation and a 40 bp impact to GMs/OpM due to some costs being in TWD. low 1Q17 The company’s 4Q16 sales were released this past Monday at NT$234 bn (-10.8% QoQ), below the guidance for -9-10% QoQ. Sales were dampened by a 2.6% TWD appreciation, causing NT$6 bn impact to sales, the delta reaching the high-end of guidance. Even leaving the currency impact aside, the company’s below seasonal ~9% decline in 1Q17 was below the post crisis flat average due to rising exposure to Apple which sees a 30- 35% component/shipment reduction in 1Q17 and also a slowdown from China smartphones. We model TSMC down 5% QoQ in 2Q17 due to the mixed tech end market outlook. Sales are being impacted by headwinds including a further 2% impact from the TWD at the current rates, 10nm cuts from Mediatek and broader china smartphone slowdown, fabless inventory depletion and launch of Qualcomm modem and 2 Snapdragon 600 chipsets to Samsung 14nm. Despite softer near-term business outlook, we believe 2H17 is on track for a 19% HoH rebound on the back of a decent ramp into 2H17 for iPhone 8 including a new premium model, supporting TSMC to stay within its long-term 5-10% growth range through 2017. Figure 8: TSMC's low-base in 1H17 sets up a 19% HoH rebound in 2H17

Sales (NT$) QoQ Change $300,000 30%

$250,000 25%

$200,000 20%

$150,000 15%

$100,000 10%

$50,000 5%

$0 0%

-$50,000 -5%

-$100,000 -10%

4Q10 3Q12 2Q14 1Q16 4Q17 2Q10 3Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Revenue QoQ Growth

Source: Company data, Credit Suisse research Longer-term growth still diversifying from mobile Management has indicated high performance computing, automotive and IoT can account for about half its growth through 2020, offsetting some of the slowdown in mobile. At its recent technology symposium, its VP of Business Development, BJ Woo, indicated it expects 7% CAGR for mobile, 10% for high performance computing, 12% for automotive and 25% for automotive. The company also sees growth drivers from AI, natural user interfaces, security, 5G, parallel processing, infrastructure and smarter and more environmental safe cars. In wearables, the company sees good opportunity to fill mature capacity with low power sensors connectivity and security ICs.

Asia Semiconductor Sector 5 13 April 2017

Figure 9: TSMC targeting growth drivers from high performance computing, automotive and IoT TSMC growth drivers 2015 2016 2017 2018 2019 2020 15-20 CAGR % of growth HPC - TSMC $3.0 $3.5 $4.1 $4.9 $5.7 $6.7 18% 27% HPC - Market $10.0 $10.7 $11.7 $12.7 $13.8 $15.0 8% TSMC share (%) 30.0% 32.8% 35.4% 38.3% 41.4% 44.8% Automotive - TSMC $0.7 $0.9 $1.02 $1.2 $1.5 $1.8 20% 8% Automotive - Market $4.0 $4.3 $4.7 $5.1 $5.5 $6.0 9% TSMC share (%) 17.5% 19.6% 21.7% 24.0% 26.5% 29.3% IoT - TSMC $0.6 $0.8 $1.2 $1.6 $2.3 $3.2 40% 19% IoT - Market $2.0 $2.5 $3.1 $3.9 $4.8 $6.0 25% TSMC share (%) 30.0% 33.7% 37.9% 42.7% 48.0% 53.9% Growth Areas - TSMC $4.3 $5.2 $6.3 $7.7 $9.5 $11.7 22% 53% Growth Areas - Market $16.0 $17.6 $19.5 $21.7 $24.1 $27.0 11% TSMC Growth Areas share (%) 26.9% 29.7% 32.5% 35.7% 39.3% 43.4% TSMC Growth Areas YoY 21.3% 21.5% 22.1% 22.7% 23.4% Mobile - TSMC $11.1 $12.9 $14.3 $15.5 $16.0 $16.3 8% 37% Mobile - Market $20.9 $21.6 $22.9 $24.2 $25.0 $25.5 4% TSMC Mobile share (%) 52.8% 59.5% 62.7% 63.9% 63.9% 63.9% TSMC Mobile YoY 16.3% 11.6% 8.0% 3.0% 2.0% Rest of TSMC $11.3 $11.3 $11.2 $11.9 $12.3 $12.6 2.3% 10% YoY Growth 0.8% -1.6% 6.6% 3.5% 2.4% TSMC CS Estimates $26.6 $29.4 $31.8 $35.1 $37.8 $40.6 8.8% 100.0% YoY Growth 10.6% 8.2% 10.3% 7.5% 7.5%

Source: Company data, Credit Suisse estimates

Qualcomm is still shifting In mobile, we believe the company will start approaching market growth rates as it is now some chips to Samsung fully penetrated into Apple’s new iOS products since 2H16 and we believe will only 14nm/10nm, TSMC’s stabilise its share at Qualcomm rather than regain substantially as new products continue rebound at that customer to migrate to 14nm. TSMC’s market share with Qualcomm has been dropping from 65% in may be modest in 2018 2014-15 to 40-45% this year. This year, we expect two Snapdragon 600 and the thin modem to migrate to Samsung 14nm, and the Snapdragon 800, which TSMC already lost to Samsung 14nm, to stay at Samsung now on 10nm. The Intel modem, in contrast, is staying at TSMC’s 28nm for one more year, though it will move to Intel’s fabs in 2018, though we do see potential or Qualcomm to migrate a future modem to TSMC 7nm.

Figure 10: TSMC’s Qualcomm business down from 2015-2017, stable in 2018 TSMC Qualcomm Mix 2014 2015 2016 2017 2018 2017 Chg Snapdragon 400/200 30% 33% 35% 35% 35% 0% Snapdragon 600 100% 100% 66% 65% 69% -1% Snapdragon 800 100% 100% 0% 0% 25% 0% Baseband 100% 100% 100% 63% 25% -38% Networking 40% 45% 40% 40% 40% 0% TSMC Share at Qualcomm 65% 65% 52% 43% 42% -9% Snapdragon 400/200 $1,035 $888 $639 $532 $557 -$107 Snapdragon 600 $978 $755 $724 $995 $875 $270 Snapdragon 800 $1,688 $713 $0 $0 $563 $0 Baseband $1,246 $1,498 $1,644 $1,018 $637 -$626 Networking $239 $425 $378 $380 $400 $2 TSMC Qualcomm (US$mn) $5,185 $4,280 $3,385 $2,925 $3,031 -$460 TSMC Qualcomm YoY (%) -17% -21% -14% 4%

Source: Company data, Credit Suisse estimates

TSMC’s other business We believe only a modest amount of Qualcomm business will shift to TSMC’s early 7nm looks better, with Apple ramp, with the back-end packaging companies seeing potential for a split architecture likely staying at TSMC where a smaller digital chip is migrated to 7nm to take advantage of performance but other through 2018 mixed signal content stays back on mature nodes and is joined in a fan-out package. The implications are TSMC stabilises some share but does not fully recover share. We believe Qualcomm is considering a more aggressive move to 7nm with EUV in 2019 which could be a battle between TSMC and Samsung for design wins. Despite mixed position at Qualcomm, TSMC’s share is holding well, as we believe its Apple processor business is intact through 2017-2018.

Asia Semiconductor Sector 6 13 April 2017

Figure 11: QCOM share should stabilize after 2017 Figure 12: TSMC continues to gain share into Apple US$mn Allocation % US$mn Apple % of TSMC $9,000 90% $3,000 30%

$7,500 75% $2,500 25%

$6,000 60% $2,000 20%

$4,500 45% $1,500 15% $1,000 10% $3,000 30% $500 5% $1,500 15% $0 0% $0 0%

2010 2011 2012 2013 2014 2015 2016 2017 2018

3Q16 4Q17 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 4Q16 1Q17 2Q17 3Q17 Qualcomm Production Qualcomm TSMC TSMC Share of QCOM Samsung Apple share TSMC Apple share Apple Processor % of TSMC Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

We would also note that the consensus outlook for the fabless customer base is more positive right now for 2017. The street models fabless reaccelerating from +2% YoY to +8% YoY growth though most of that growth is coming from Broadcom and NVIDIA. Hi- Silicon though which is part of Huawei is targeted to grow double digits to about US$5 bn, lifting it to about 5-6% of TSMC’s sales as most of its 28nm and below is at TSMC.

Figure 13: TSMC's top customers' sales are rebounding to positive growth in millions, unless otherwise stated Top Fabless Sales 2010 2011 2012 2013 2014 2015 2016 2017E CAGR 11-17 QCOM QCT $7,204 $9,828 $13,177 $17,211 $19,291 $16,008 $14,728 $14,834 7% BRCM $6,818 $7,389 $8,006 $8,305 $8,388 $8,472 $13,246 $16,200 14% AVGO $2,093 $2,336 $2,364 $2,520 $4,269 $4,300 In BRCM In BRCM NM NVDA $3,543 $3,998 $4,280 $4,130 $4,682 $5,010 $6,800 $7,800 12% MRVL $3,612 $3,393 $3,169 $3,404 $3,707 $2,726 $2,393 $2,386 -6% MediaTek $3,605 $2,958 $3,339 $4,581 $6,781 $6,787 $8,769 $8,348 19% XLNX $1,896 $2,437 $2,315 $2,256 $2,485 $2,481 $2,340 $2,477 0% AMD (+ ATYT) $6,579 $6,657 $5,519 $5,481 $5,668 $4,111 $4,529 $4,980 -5% ALTR $1,954 $2,064 $1,783 $1,733 $1,932 $1,722 $1,842 $1,842 -2% LSI (Acquired by Avago) $1,870 $2,044 $2,506 $2,370 $2,371 In Avago In BRCM In BRCM NM Novatek $1,153 $1,194 $1,246 $1,396 $1,721 $1,619 $1,453 $1,534 4% Total Top 10 $40,327 $44,298 $47,704 $53,387 $61,294 $53,236 $56,099 $60,402 5% YoY % Top 10 34% 10% 8% 12% 15% -13% 5% 8% Total Smaller Fabless $14,506 $15,228 $15,984 $16,269 $15,336 $15,064 $14,917 $16,028 1% YoY % Small Fabless 20% 5% 5% 2% -6% -2% -1% 7% Total Fabless $54,833 $59,526 $63,688 $69,656 $76,631 $68,299 $71,016 $76,430 4% YoY % Total Fabless 30% 9% 7% 9% 10% -11% 4% 8% Source: Company data, Credit Suisse estimates

We project that TSMC’s gains into Apple and migration of customers to 16nm FFC should keep it at least to the low-end of its +5-10% YoY growth projection, with the stronger currency affecting the TWD growth. The company will have a full year of 100% market share into Apple in 2017 after splitting the business through 1H16 and also benefit from the OLED iPhone cycle. We would also note that IDM sales have reaccelerated some since 2014 as some of the industry M&A is resulting in more outsourcing flowing to foundries, also with more of the incremental IDM growth shifting to more advanced nodes.

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Figure 14: TSMC revenue drivers from 2014-2018 TSMC Market Share 2014 2015 2016 2017 2018 2017 Chg TSMC Apple Share 46% 67% 69% 89% 98% 20% TSMC Qualcomm Share 65% 65% 52% 43% 42% -9% TSMC Fabless Share (Ex-QCOM) 47% 50% 56% 52% 54% -4% TSMC IDM Outsourcing Share 51% 57% 56% 56% 56% 0% TSMC Share 51% 55% 57% 57% 59% 0% TSMC Apple Sales $2,482 $4,342 $5,001 $6,916 $8,213 $1,915 YoY 74.9% 15.2% 38.3% 18.8% 38.3% TSMC Qualcomm Sales $5,185 $4,280 $3,385 $2,925 $3,031 -$460 YoY -17.4% -20.9% -13.6% 3.6% -13.6% TSMC Fabless Sales (Ex-QCOM) $13,759 $13,195 $15,838 $16,515 $17,977 $677 YoY -4.1% 20.0% 4.3% 8.9% 4.3% TSMC IDM Sales $3,748 $4,789 $5,196 $5,475 $5,774 $279 YoY 27.8% 8.5% 5.4% 5.5% 5.4% TSMC Sales (US$mn) $25,173 $26,606 $29,420 $31,831 $34,996 $2,411 TSMC YoY (%) 5.7% 10.6% 8.2% 9.9% 8.2%

Source: Company data, Credit Suisse estimates Recent tech symposium previews TSMC’s updates at the upcoming conference TSMC’s technology The company normally delivers an upbeat presentation on its technology milestones and symposium gives more we believe its recent technology symposium on 15 March for its ecosystem in Santa Clara updates noted below that offers a good preview of developments likely to be discussed at the investor conference. should be discussed at The following are key updates from its recent tech symposium that keep it well positioned its conference on to continue market share gains on the advanced technology nodes: Thursday ■ 28nm maintains staying power with a 22nm shrink. TSMC indicated it has shipped 4.5 mn 28nm wafers to date and has a 2 mn wafer capacity (165k WPM) capacity running on 1228nm now, with capacity still growing by 15% per year. The company now has 800 different chips taped out on its 28nm. To extend the node and compete with GF/Samsung 22nm FD-SOI, it has launched a 22nm process targeting 5G RF, image processors, and IoT components. The ultra-low power 22nm process claims 20% area advantage and either 0.45x the power or 1.32x the speed of 28nm HPM. It also has 10% smaller size and either 35% lower power or 1.15x the speed of its 28nm HPC+ process despite using same mask counts, design rules, SRAM cells and I/O devices. The company indicated that its ultra-low power processes will have 70 tape-outs for IoT from 55-28nm, demonstrating these applications can fill some mature 12” nodes.

■ 16nm FFC in high-volume production. TSMC has achieved 30% of revenue on 20nm +16nm through 2H16 and targets keeping its 100k WPM capacity near full with 2nd wave business. The company has attracted a broadening base of graphics, mobile and networking customers to supplement the Apple business. The company is ramping its lower cost FinFet Compact process for mobile and IoT which we believe has allowed 12" wafer prices to come down to a more competitive US$6,000-7,000 for the FFC vs over US$8,000 at the start of the node. Sales at the node are broadening now with NVIDIA/AMD's high-end graphics shifting to 16nm and joining high-end mobile chips including Mediatek Helio P20 launching late this year and follow-on P series in 2Q17, Hi-Silicon 950, the iPhone processor and Xilinx FPGAs. The company has set-up 10/7nm to allow for efficient conversion of 16nm capacity to that node if demand falls short.

■ 12nm half node shrink extending the life of 16nm. TSMC also confirmed it will launch a 12nm half node shrink version and an ultra-low power (ULP) version of the 16nm process with risk production in June 2017 with a further ramp in 2018. The 12nm process allows customers an opportunity to gain better performance/power/area

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migrating applications from 28nm or 16nm down to 12nm to gain some density advantage. The node claims 10% more speed or 30% better power over 16nm FFC and could have 20% area shrink for mobile chips. The 12nm process uses the same design rules, mask layers, cell layouts, voltage range and I/O qualified for 16nm FFC, with a low power version operating at 0.5V and a separate RF version for 5G RF on the millimeter bands. The company targets applications like mid-range mobile and video processors and high-end IoT devices to move to this node. We believe TSMC is using the new shrink to protect its high FinFET market share and provide a competitive alternative to Samsung’s 14nm, which will have some excess capacity following Exynos/Qualcomm migrating to 10nm.

Figure 15: 2nd wave customers migrating to 16nm Figure 16: 10nm driven by Apple, MTK and HiSilicon 16nm US$mn TSMC 16nm (%) 10nm US$mn TSMC 10nm (%) $2,250 36% $2,250 36% $2,000 32% $2,000 32% $1,750 28% $1,750 28% $1,500 24% $1,500 24% $1,250 20% $1,250 20% $1,000 16% $1,000 16% $750 12% $750 12% $500 8% $500 8% $250 4% $250 4% $0 0% $0 0% 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Apple Qualcomm AMD Apple Qualcomm AMD NVIDIA Xilinx Mediatek NVIDIA Broadcom Marvell Hi-Silicon Oracle Spreadtrum Xilinx Mediatek Hi-Silicon Broadcom Marvell % of TSMC wafer sales Oracle Spreadtrum % of TSMC wafer sales Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

■ 10nm a bit more modest but ramping steeply in 2H17. TSMC's aggressive push through 10nm with 35k capacity in for 1H17 orders and 65k by 2H17 and more than half node shrink to 7nm in 2018 should keep it positioned well in the next couple years in core mobility and some emerging applications across automotive, IoT, VR and potentially data center. TSMC’s 10nm and 7nm timeline would put it ahead of peers as its competitors are adopting a strategy of using EUV that would put it in the market later in 2018. TSMC’s 10nm node is a short one but offers technology improvement from 16nm, with 2x the gate density and either 25% lower power or 10% higher speed than 16nm. TSMC’s 10nm process now has five tape-outs and features ramps from Apple for its next iPad in 2Q17 and iPhone 7S in 2H17 and is joined by Mediatek x30 and a new Hi- Silicon high-end refresh. TSMC's 10nm ramp is seeing a more modest 1H17 following the disappointment of Mediatek’s Helio x30. The node was about 1% of sales in 1Q17 and will ramp to 2-3% in 2Q17 before its steep ramp with the iPhone 8 launch toward 15-20% of sales by 4Q17. We still project 65k wafers per month by 2H17 but now believe combined 10nm + 7nm next year may end up 85-90k versus original 100k as Mediatek is using 12nm more aggressively rather than moving as aggressive to 10nm/7nm due to its higher cost and its own only modest traction at the high-end of the mobile market. TSMC is building in 95% tool re-use between the nodes, giving it flexibility to migrate products from 10nm to 7nm in 2018.

■ 7nm to ramp production in 2018, with an enhanced EUV version in 2019. The company’s 1st generation 7nm will start risk production this month with the first of 12 tape-outs in process from May and 20 tape-outs in the first 12 months. The company claims the process would have 3.3x greater density and either 35% more speed or 60% less power than 16nm FF+. The company will also have versions for automotive, smartphones, high performance computing and IoT. A high performance computing platform would be released in June and automotive version will be ready in 2018.

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TSMC noted it would have an enhanced 7nm+ version in 2019 implementing EUV in the second year of the node that would keep it competitive as its competitors bring up their full shrink version of 7nm. The 7nm+ node is expected to offer 20% more density, 10% more speed and 15% lower power over the first 7nm node.

TSMC is still improving ■ InFO to remain a custom project in 2017, CoWoS qualifying for high-end server its wafer level packaging and mobile. TSMC ramped its InFO (Integrated fan out) packaging for Apple's next integration a10 chipset in the iPhone 7 and we expect it will stay with TSMC through the iPhone 8 generation. The InFO packaging uses fan out wafer level packaging rather than a flip chip substrate to provide 20% reduction in package thickness, 20% speed gain, and 10% better thermal performance. TSMC does a die first InFO process which implies placing the die before building up the redistribution layers so can lead to yield loss on the good die and likely implies limited incremental profit adding the InFO process. The first and second generation InFO processes are still highly customised and likely have Apple as the primary customer, although we believe TSMC is also engaged with its Hi-Silicon and Mediatek; it does not yet have other high volume projects. The back- end packagers and Samsung are trialing panel level InFO (rather than TSMC's 300mm carrier) for better scale efficiencies and will compete for commercial projects though more likely for 2018 volume ramps. TSMC also has its own enhancements to InFO multi-chip packaging which allows RF options, additional InFO die and high bandwidth memory stack variations. The company is also improving its other wafer level back-end processes, with more advanced wafer bumping with smaller bump pitches, integrated passives on multi-die packages, larger interposers and support for larger packages. It also showed a reference design with graphics and up to 4 Hynix memory cubes on a silicon interposer. In addition to InFO, TSMC also offers its CoWoS with silicon interposer for high-end networking, FPGAs, and graphics. The company is designed in with Xilinx and NVIDIA and is now engaged with other data center suppliers for additional projects, despite volume staying modest it could although support push into the data center. TSMC is optimistic on the new AI architectures and is not tied to proprietary architectures (implying Intel’s x86), thereby allowing innovation from a host of new fabless and system companies. Memory market remains in tight supply Supply chain continues to see memory in tight supply, with NAND tighter than DRAM and constraining some shipments into data center and 2nd tier mobile handset OEMs. Most of the companies see memory makers/channel controlling the shipment for higher ASPs. Samsung stays conservative on DRAM capex with focus only on supplementary wafer inputs to make up the output loss from 18nm migration and stressed there's no further room for DRAM capacity expansion, keeping supply/demand balanced its own OpMs above 50%.

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Figure 17: NAND shortage continues through 2017 Figure 18: DRAM supply/demand more balanced

Source: Company data, Credit Suisse Research Source: Company data, Credit Suisse Research

NAND is staying in short supply with bit supply increase (+30% YoY) lagging demand growth (+40% YoY) through 2017, lifting ASPs by 5-30% in 1Q17 and another 5-20% QoQ in 2Q17. Samsung believes it is leading its peers by 1.5 years in both DRAM and NAND due to faster node migration on 18nm NAND and layer migration in 3D NAND. The company targets 50% of 3D NAND input to be 64 layers by the year-end to help it continue to lead in enterprise SSD shipments. Toshiba has also started shipping 64-layer 256 GB 3D NAND and plans to sample 512 GB products for production in 2H17. Management targets to convert 50% of NAND capacity from planar NAND to 3D NAND by the end of this year. Toshiba has announced that ten companies will be bidding for its stake of its memory business during the extraordinary general meeting on 30 March, demonstrating the growing strategic importance of memory. Back-end assembly and test awaiting consolidation, fan-out adoption and new SiP developments Back-end awaiting The back-end sector is currently moving through a pause in catalysts awaiting its next drivers from wave of new drivers from consolidation, fan-out packaging adoption and system in consolidation, fan-out package: and system in package ■ Consolidation moving slowly. The major Taiwan suppliers are still operating independently until US/China approvals go through and not yet integrating systems although competitive intensity is down slightly with less fierce competition. The partnerships between Taiwan and China have also progressed slowly, with Tsinghua's stake in Powertech likely to expire on 14 February. The ChipMOS JV with Tsinghua Unigroup has been approved and should allow collaboration on memory, driver IC and logic assembly although impact to the space is marginal.

■ Fan-out packaging also in a lull between Apple and the rest of the chain. TSMC ramped up fan-out integrating the application processor and memory stack for the iPhone processor in 2016 and we expect will sustain that project in 2017. Beyond Apple, we believe TSMC has been conservative in bringing on many more projects due to high customisation involved and still added costs relative to mature flip chip. Development work at the back-end packaging houses is also progressing slowly. We believe Powertech is working with its US customer on a panel level packaging and also see wafer level project with the larger Taiwan assembler, Deca and a US power management IC and the smaller Taiwan assembler working on a networking project for a Chinese system company. Adoption of high volume fan-out for mobile is still not mature at the back-end subcontractors.

■ SiP ramp at the system level stalls, chip level SiP maintains growth. The system in package ramp at the back-end and EMS suppliers has also slowed after an initial

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wave of adoption for fingerprint, watch, force touch, and power savings. Profitability has stayed modest due to high materials pass through content and concentration of projects and revenue with Apple which desires multiple sources competing for business. The package level SiP work for wireless front-end modules, sensor modules, fingerprint modules and baseband continues. Amkor splits out this stream and noted it now generates 20% of sales from these projects built in its K4 facility in Korea. We also believe the largest Taiwan supplier is sharing in these RF projects although only splits out the board level projects. Though the progress of system-in package integration was slower in the past year due to low profitability, it returns as a key theme as suppliers continue working to develop modules to miniaturise the electronic system, simplify assembly and speed time to market. ASE’s SiP adjustments have been made the outlook better, with major revenue from security and wearable. ASE believes it is the lowest cost producer in security and will build linearly to lower cost further and gain significant share, though it acknowledges the product is a sunset project. ASE will also maintain a power savings module but revenue is smaller for this project and it expects to have other reasonable customer opportunities for next year. The back-end sector may stay in a holding period near term without the catalyst of a meaningful new SiP or fan-out projects, although the positive indications of regulatory approval of consolidation may help sector sentiment through 2017. In addition, we expect the iPhone 8 product cycle to also still lift the packaging content opportunity in 2H17. Otherwise, the key opportunity is in memory (Powertech gaining share into Micron, Toshiba and Intel) and RF packaging (Chipbond providing gold bumping to PA suppliers). Back-end capex slowdown in 2017 following the rebound in 2016 Back-end capex may Back-end capex faces tough compares in 2017 and our bottom's up projects a decline decline in 2017 after the after a strong +20% YoY rebound in 2016. Capex last year was driven by demand for strong growth in 2016 advanced wafer level packaging (Fan-out/InFO) from TSMC, system in package shifting to JCET/Stats and higher overall China capex after the Stats/JCET merger and Nantong Fujitsu acquisition of AMD assets. In addition, Powertech increased logic/memory bumping capex and added a panel level fan-out pilot line. Figure 19: Back-end capex could decline 15% after the strong rebound in 2016 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E YoY ASE $262 $363 $447 $397 $349 $954 $789 $1,075 $668 $1,055 $583 $683 $800 17% Powertech $210 $270 $343 $294 $130 $362 $469 $193 $282 $340 $208 $518 $382 -26% King Yuan $184 $280 $257 $270 $88 $151 $157 $133 $168 $278 $215 $222 $140 -37% Amkor $291 $327 $236 $386 $197 $505 $453 $533 $460 $643 $388 $450 $400 -11% Stats $278 $348 $269 $239 $159 $277 $304 $410 $482 $356 $316 NA NA NM JCET $47 $57 $96 $133 $47 $101 $241 $167 $182 $193 $365 $590 $363 -38% TSHT $8 $12 $19 $28 $30 $67 $68 $44 $86 $97 $193 $238 $215 -9% NFME $41 $31 $52 $27 $40 $74 $93 $46 $19 $108 $138 $229 $173 -24% China $95 $100 $167 $189 $118 $242 $402 $257 $287 $398 $696 $1,057 $752 -29% Taiwan $905 $1,233 $1,394 $1,250 $712 $1,955 $1,789 $1,915 $1,622 $2,127 $1,460 $1,992 $1,814 -9% China & Taiwan $1,000 $1,333 $1,561 $1,439 $829 $2,198 $2,191 $2,172 $1,909 $2,525 $2,156 $3,049 $2,566 -16% YoY 33.2% 17.2% -7.9% -42.4% 165.0% -0.3% -0.9% -12.1% 32.3% -14.6% 41.4% -15.8% Total $1,569 $2,008 $2,066 $2,064 $1,185 $2,979 $2,949 $3,115 $2,851 $3,524 $2,860 $3,499 $2,966 -15% YoY 28.0% 2.9% -0.1% -42.6% 151.3% -1.0% 5.6% -8.5% 23.6% -18.8% 22.3% -15.2%

Source: Company data, Credit Suisse research Due to the high base in 2016, our bottom's up of the top players projects capex down 15% YoY to US$2.92 bn in 2017 as China back-end suppliers are shifting the focus from capacity expansion to reaping acquisition synergies with their capex declining 29% YoY from US$1 bn in 2016 to US$710 mn. The Taiwan back-end industry is also showing a slowdown in investment due to limited earnings opportunity in SiP and a slow adoption of fan-out packaging in mainstream applications, which is pushing out that spend toward

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2018. Taiwan's top two back-end players are also in the process of consolidation and could cut some redundant spend.

Figure 20: Back-end capex could decline in 2017 Figure 21: Capex may rebound in 2H17 US$mn US$mn YoY (%) $4,000 50% $4,000 100% $3,500 80% $2,400 30% $3,000 60% $800 10% $2,500 40% $2,000 20% -$800 -10% $1,500 0% $1,000 -20% -$2,400 -30% $500 -40%

-$4,000 -50% $0 -60%

2009 2016 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015

1H09 2H12 1H05 2H05 1H06 2H06 1H07 2H07 1H08 2H08 2H09 1H10 2H10 1H11 2H11 1H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 2017E Amkor China Taiwan Stats Total YoY Amkor China Taiwan Stats YoY

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

Despite a potential slowdown in back-end equipment spending, we expect ASM Pacific to lead the industry with about 60% more scale than KnS and BESI and 5-6x scale over Towa and Shinkawa. The company has gained share in the low I/O flip chip bonders and is now seeing growth in CMOS image sensor packaging and active alignment lens tools to support dual camera upgrades. ASM Pacific also expects the global SMT market to grow from US$2.6 bn in 2016 to US$3.0 bn in 2017, with outgrowth supported by a retooling of equipment to support the new iPhone 8. ASM Pacific's incremental orders could add 10% to sales in 2017 for this retooling project which last came through in 2014.

Figure 22: ASMP shares track ahead of BE orders Figure 23: Back-end book-to-bill starting to rebound Stock Price Equipment Stock Price Back-end Bookings (US$ mn) book-to-bill 150 450 150 1.8 125 375 125 1.5 100 300 100 1.2 75 225 75 0.9 50 150 50 0.6 25 75 25 0.3

0 0 0 0.0

Jan-08 Jan-12 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-09 Jan-10 Jan-11 Jan-13 Jan-14 Jan-15 Jan-16

Jan-07 Jan-10 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-08 Jan-09 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

BE Bookings ASM Pacific Stock Price BE Book-to-Bill ASM Pacific Stock Price

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates China smartphone outlook remains slow post Chinese New Year China shipments have China’s MIIT indicates smartphone shipments were down 26% QoQ 1Q17 even with slowed from teens March rebounding 41% MoM. China smartphones in 1Q17 were +6% YoY but face tough growth to mid-single digit compares in 2Q17 as last year was up 22% QoQ and +14% YoY. We believe China growth in 2017 smartphones demand stayed muted post Chinese New Year, with the leading vendors Huawei, Oppo and Vivo revising down forecasts from overly aggressive early targets as noted in our update in February. Suppliers are also pointing to still sluggish trends at the other China brands and also some export channels including Middle East and Africa and no pick-up in India yet despite the heavy 4G carrier subsidies.

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Figure 24: China smartphone will tougher compares Figure 25: China 4G additions slowing down in 2017 China smartphones (mn) YTD YoY % China 4G subscriber net adds YTD (Mn) Net adds YTD (%) 550 25% 400 80% 440 20% 350 70% 330 15% 220 10% 300 60% 110 5% 250 50% - 0% 200 40% (110) -5% (220) -10% 150 30% (330) -15% 100 20% (440) -20% 50 10% (550) -25% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec - 0% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 2014 2015 2016 2017 2014 YTD YoY 2015 YTD YoY 2014 2015 2016 2017 2016 YTD YoY 2017 YTD YoY 2016 YTD YoY 2017 YTD YoY Source: Company data, Credit Suisse Source: Company data, Credit Suisse 4G penetration has one year left to ramp in China, further room in other emerging markets Off a higher base, however, China growth should moderate in 2017. China subscriber penetration of 3G and 4G is now much higher and leaves less room for growth from new smartphone subscribers. Following last year's surge in 4G addition, we would note 3G+4G penetration in China has increased from 64% in the end of 2015 to 80% in the end of 2016 and we expect it will reach 98% by the end of 2017 (3G 20% and 4G 78%). The market LTE shipments have also stabilised now in the past six months already at 90%+ of shipments, leaving less room now for 3G to 4G conversion of units in China. Figure 26: China 4G crosses over 3G this year Figure 27: China has gained, though iPhone 8 could repeat the modest gains seen with iPhone 6 in 4Q14 Subscriber base (mn) Penetration (%) Units: mn YoY (%) 1,500 100% 150 225% 1,350 90% 135 200% 1,200 80% 120 175% 70% 1,050 60% 105 150% 900 50% 90 125% 750 40% 75 100% 600 30% 60 75% 20% 450 45 50% 10% 300 0% 30 25% 150 -10% 15 0%

0 -20% - -25%

1Q12 1Q16 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 2Q16 3Q16 2009 2010 2011 2012 2013 2014 2015 2016 2017E 1Q10 2G subscriber base 3G subscriber base 4G subscriber base China ex-AAPL/SEC Samsung units Apple units 2G penetration 3G penetration 4G penetration YoY Ex-AAPL/SEC YoY Source: Company data, Credit Suisse Source: Company data, Credit Suisse

The component price increase also led to higher smartphone ASPs, dampening demand. We would note memory alone added US$10 incremental cost to the smartphone BOM with 2 GB mobile DRAM rising from US$7 in the middle of 2016 to US$13 and NAND pricing also went up from US$10 to US$14. Display ASPs for mid-end smartphones also increased by US$2-3. We expect bottom’s up units for China built smartphones at +6% to 966 mn in 2017 and +6% to 1,020 mn in 2018, down from 980 mn/1,090 mn and +7%/+11% growth at the start of the year.

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Figure 28: China smartphone brands decelerating from a high base in 2016 China brand units (mn) 2011 2012 2013 2014 2015 2016 2017E 2018E 15-18 CAGR Huawei 15.6 27.2 52.0 77.0 107.0 140.0 160.0 185.0 20% Oppo 0.1 3.1 11.0 30.0 40.0 95.0 125.0 160.0 59% Xiaomi 0.4 7.2 18.7 61.1 72.5 52.0 55.0 60.0 -6% Vivo 0.0 2.5 11.2 30.0 36.0 75.0 95.0 120.0 49% ZTE 10.5 26.8 40.0 48.0 50.0 45.0 48.0 50.0 0% Lenovo 3.7 23.7 45.5 59.4 43.5 30.0 32.0 34.0 -8% Lenovo's Moto 21.0 22.5 24.0 NM TCL/Alcatel 0.3 6.5 17.5 39.6 40.8 33.0 35.0 37.0 -3% Coolpad 3.9 16.1 35.0 43.5 28.7 18.0 19.5 21.0 -10% Meizu 1.0 2.0 3.0 5.2 24.8 17.5 20.0 23.0 -2% Gionee 0.0 6.8 11.4 16.0 12.8 30.0 34.0 37.0 42% Tecno - 1.0 2.0 4.0 7.5 11.0 13.0 15.0 26% Hisense 0.3 3.4 8.3 11.7 6.0 5.0 4.0 4.0 -13% Tianyu / K-Touch 0.4 7.4 13.3 11.2 4.3 2.3 1.5 1.0 -39% Bird 0.0 0.3 2.1 2.5 1.2 0.7 0.8 0.8 -13% G-Five 0.0 0.0 2.0 5.0 0.5 0.2 0.2 0.2 -26% Others 51.5 103.3 193.1 278.9 302.0 338.6 300.7 248.0 -6% China brand units (mn) 87.9 237.2 466.1 723.1 777.6 914.3 966.2 1,020.0 9% Growth (YoY) 170% 96% 55% 8% 18% 6% 6% Source: Company data, Credit Suisse estimates Mediatek shifts its focus from Helio X-series to mainstream P-series and cost improvement Mediatek has backed off Mediatek still targets launching a new modem architecture to close the cost gap with taking flagship share Qualcomm in late 3Q17 starting with the entry tier and then moving into the Helio tier in from Qualcomm to focus 2018. The company has built in more redundancies and merged different architectures on a more cost with pieces over the years from ADI, Coresonic, Datang, Altair, NTT Docomo and internal competitive mainstream development that it will re-architect for better efficiency. The new chipsets would likely only offering contribute to profitability from 4Q17, though we will need to monitor if Spreadtrum can reach better volumes on its new SC9861 built on Intel’s 14nm or view competitive response from Qualcomm. Qualcomm to date has used its stronger position at the high- end to maintain a more aggressive pricing stance in the entry tiers to protect share but also impact Mediatek’s profitability in these segments where it ships 80% of its units.

Figure 29: Mediatek roadmap shifted from Helio X-series to P-series 2015 2016 2017 1H 2H 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

X20 X25 X

- X30 X10 MT6797 MT6797T MT6795 LTE Cat 10 Deca, Dual A72 + Octa (1H17) Deca, Dual A72 + A53, 64bit big.LITTLE, 64-bit Octa, 2.2GHz, Helio Octa A53, 64bit 20nm, 25MP, H.265 Decacore, 64bit big.LITTLE, 28nm HPM, Cat4 big.LITTLE, 4K2K 30fps video, LTE 10nm, 40MP, H.265 4K2K 20nm, Cat-6, R11 Cat-6, 2x20 30fps video CA+C2K SRLTE Octa, 1.3- P10 P3x

4G 1.5GHz, 8 A53, MT6755 64 bit, 28nm LP, Cat4+ 64bit big.LITTLE, Dual camera Octa A53, 28nm P20 support LP, 2.0 GHz, 21MP, MT6753 1080p30 video FHD Octa A53, 64bit, P25 P18 LTE + C2K SoC (1920x1080), LTE MT6750/T Cat6, big.LITTLE, Mainstream Mainstream (MT6755S) R11 Cat6 2x20 CA 16nm + C2K SRLTE Octa A53, 28nm HPM, 1.5 GHz, 16nm, Octa A53, 16MP, HD Display, LTE Cat6 24MP, Dual 16nm, Octa A53, 2xCA + C2K SRLTE camera, Cat 6 21MP, Dual MT6735 camera, Cat 6 LTE + C2K SoC MT6738 Quad A53, 1.3GHz, 13MP, 28nm Octa A53, 1.5 GHz, 28nm, LP, 64 bit, FHD (1920x1080), LTE 13MP, HD Display, LTE Cat6 R9 Cat4/HSPA+ (42/11)/TD, CDMA2000 1x/EVDO Rev. A MT6737 MT6750 S/ N

Entry Entry 4G MT6735P/M Quad A53, 1.3 -1.5 GHz, LTE + C2K SoC 28nm, 13MP, HD Display, Octa A53, 16MP, LTE Cat6 2xCA + C2K Cat 6 Quad A53, 1.0GHz, HD (P) / qHD SRLTE (M), 8MP, 1080p qHD, 28nm LP, 64 bit, LTE R9 Cat4+ CDMA2000 Quad A7, 1.3GHz, MT6580 HD720, HSPA+ (21/5.76)/EDGE MT6570 MT6570 28nm, Dual A7,

Dual A7, 1.3GHz, qHD, 5MP Entry Entry 3G HSPA+ (21/5.76)/EDGESource: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research

Asia Semiconductor Sector 15 13 April 2017

Mediatek has not quite closed the gap with its high-end products to Qualcomm with its Helio family. The company has changed its strategy to compete with Qualcomm in the low growth premium market and shifted its focus to the mainstream Helio P-series and lso will try to further optimise the cost structure for its mid-end chipsets through new generation modem introduced late in the year. Qualcomm's high-end and mass market innovation keeps the pressure on Mediatek Qualcomm's refresh and Qualcomm targets to maintain its high-end lead for Snapdragon 800 and match up solutions for super- competitively with MediaTek on the mid-tier Snapdragon 400 and 600 platforms. The regional and global company has introduced MSM8998 in early 2017 using Samsung’s 10nm process and models should keep using at CAT 12/CAT 16 modems to stay ahead of MediaTek shifting to CAT 10 in 1H17. competitive pressure high In the Snapdragon 600 tier, Qualcomm is moving back from TSMC’s to 28nm HPM to Samsung’s 14nm. The product would be optimised for emerging markets mid-high-end and with CAT 7 modem meeting China Mobile’s target for that modem standard in its Rmb2,000+ smartphones. In the Snapdragon 400 tier, Qualcomm would also offer a CAT 7 modem with its MSM8940 built on a low-cost 28nm LP process capable of multi-sourcing across Samsung, TSMC, UMC, GlobalFoundries and SMIC. This product would be positioned against MediaTek’s older MT6753 chipset (mainstream octa-core). For the low-end of the market, Qualcomm’s Snapdragon 200 series 8908/8909 would offer a quad core option against MediaTek’s MT6735/MT6737. Qualcomm has also improved tools for its reference design including Global Pass to speed time to market gap and a comprehensive online database of qualified suppliers.

Figure 30: Qualcomm roadmap is staying competitive with new chipset introductions across tiers 2015 2016 2017 1H 2H 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 64-bit, X16 8994/ S810 8976/ S620 8996/ S820 LTE CA 450Mbps, 8998 10FF modem, Kryo, 20nm SoC 28nm HPM 14FF Hydra 64 bit Cat 16, 4k 60fps LTE CA X10 Cat 9, Octa, 4 A72 + 4 A53,

S800 TD, 64-bit big.LITTLE, 1.4 GHz, CA, 4K, X8 CAT 7 Premium Premium 8992/ S808 20nm SoC 8976 Pro 64-bit, 8 Kryo,, LTE CA X10 Cat 28nm HPM S660 9, TD, 64-bit WQXGA 60fps X9 LTE modem, Cat 7, 14nm S618 8956/ QHD, 4A72 + 4 A53 28nm HPM 8953/ S625 Octa, 8 A53,, 64-bit, S630 64-bit, 8 A53, 8952/ S617 14nm FF X9 Cat 7, CA, FHD 28nm LP Hexa, 2 A72 + 4 14nm QXGA 60fps

A53, X8 CAT 7, CA, Mainstream 1.2 GHz, 4K

Qualcomm S600 Qualcomm Octa, 8 A53, 1.5 GHz, X8 Cat 7, CA, FHD

8929/ S425 8937 / S430 28nm LP 28nm LP S4xxx / 8940 Octa A53, 1.4 GHz, 64- Octa, 8 A53, 1.7 GHz, 28nm LP bit, Cat 4, FHD 64-bit, X6 modem Cat 4, FHD X9 LTE modem, Cat 7,

FHD, 4 A53 + 4 A53 Entry Entry S400 S412 / 8917 28nm LP S4xxx / 8920 X9 LTE modem, Cat 7, 28nm LP HD, 4 A53 Quad, 4 A53, 1.4 GHz, 64-bit, X6 Cat 4, FHD

Source: Company data, Credit Suisse estimates 8909/ S215 LTE CA Cat4, TD, 28nm LP Quad A7 1.1 GHz

8908/ S210 TD-SCDMA 8905 X5 LTE modem, Cat

Low 28nm LP 4,, 2 A7 S200 Dual A7 1.1 GHz 28nm LP

Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 16 13 April 2017

Higher fabless inventory is putting risk to the 1H17 foundry outlook Fabless inventory at Our inventory analysis following 4Q16 results shows downstream declined slightly more higher levels now than seasonality and the overall semiconductor inventory was flat, in line with seasonal mainly due to the continued inventory depletion in IDMs down from 103 days in 2Q16 to 91 days exiting 2016 offsetting the one week increase in fabless to 73 days (vs post-crisis average 62 days), at the high-end of the 55-80 day range. The following is a summary of inventory changes in 4Q16:

Figure 31: Tech declines seasonally, fabless higher Figure 32: Foundry customer inventory growing Inventory Days 120 85 Semis, 74.6 110 75 100 90 65 Fabless, 72.9 80 70 55 Total Tech, 60 38.4 45 50 Days Days ofInventory 40 35 Supply Chain, 30

25 32.1

1998/1C 2014/1C 1995/1C 1996/1C 1997/1C 1999/1C 2000/1C 2001/1C 2002/1C 2003/1C 2004/1C 2005/1C 2006/1C 2007/1C 2008/1C 2009/1C 2010/1C 2011/1C 2012/1C 2013/1C 2015/1C 2016/1C

1Q'13

1Q '97 1Q 1Q'95 1Q'96 1Q'98 1Q'99 1Q'00 1Q'01 1Q'02 1Q'03 1Q'04 1Q'05 1Q'06 1Q'07 1Q'08 1Q'09 1Q'10 1Q'11 1Q'12 1Q'14 1Q'15 1Q'16 Total Tech Semis Supply Chain Fabless Fabless IDMs (hybrid) Foundry Customers Source: Company data, Credit Suisse Research Source: Company data, Credit Suisse Research

Total tech inventory declines slightly better than the 4Q normal trend. Total tech inventory declined from 47 days to 39 days, slightly better than normal seasonal of down seven days QoQ and in line with the post-crisis 39-day level. Downstream inventory also below normal levels for 4Q. Downstream supply chain inventory was also down from 40 days to 32 days, slightly below the historical 4Q five-year average of 33 days. The better-than-expected inventory control in 4Q16 is consistent with most of the companies' better-than-expected sales in 1Q17 across PCs, automotive, gaming and networking. Semiconductor inventory—IDMs deplete, while fabless builds inventory. Total semiconductor inventory was flat at 75 days, slightly above its 71-day average, though still below the higher 75-85 day range the past two years. The inventory in 4Q16 saw IDMs down but fabless up. IDMs declined from 94 days in 3Q16 to 91 days in 4Q16 though excluding Intel was flat at 97 days in 4Q16 (vs post-crisis average 92 days). However, we would note fabless grew its inventory to the high-end of its range from 64 days in 3Q16 to 73 days, lifting total foundry customer inventory from 78 days in 3Q16 to 88 days in 4Q16 vs the 70-95 day range since the financial crisis. The tech demand picture is mixed across companies, with Lenovo seeing seasonal weakness in PC demand after Chinese New Year and shipments in the low season down over 20% QoQ. Apple component suppliers also continue to point to slow orders for iPhone 7, with orders ramping from July for the iPhone 8 anniversary edition launch in 3Q17. Android smartphones are also showing a sub-seasonal slowdown due to weak demand in China and emerging markets and channel inventory build-up at the start of the year. The smartphone supply chain is also conservative on the demand rebound in 2Q17 due to the delay in Qualcomm’s new S600 chipsets to late 2Q17 and some demand impact from rising memory prices amid tight supply. On a brighter note, AUO expects supply and demand to remain tight through 2017 with 3% supply growth and 5% area demand growth on the back of continued TV size migration.

Asia Semiconductor Sector 17 13 April 2017

Figure 33: Semiconductor companies rebounding in 3Q17 to catch-up to mild demand growth (in mn, unless otherwise stated) Asian Upstream sales 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 2013 2014 2015 2016 2017 Foundry $8,166 $9,040 $10,361 $10,592 $9,610 $9,291 $10,881 $11,142 $27,062 $32,555 $34,150 $38,159 $40,923 QoQ 1.4% 10.7% 14.6% 2.2% -9.3% -3.3% 17.1% 2.4% 15.9% 20.3% 4.9% 11.7% 7.2% Back-end $3,251 $3,715 $4,184 $4,308 $3,885 $4,156 $4,437 $4,359 $13,283 $14,771 $14,376 $15,458 $16,837 QoQ -6.3% 14.3% 12.6% 3.0% -9.8% 7.0% 6.8% -1.8% 8.4% 11.2% -2.7% 7.5% 8.9% Upstream sales (US$) 11,417 12,755 14,545 14,900 13,495 13,447 15,318 15,501 $40,345 $47,325 $48,526 $53,616 $57,760 QoQ -0.9% 11.7% 14.0% 2.4% -9.4% -0.4% 13.9% 1.2% 13.3% 17.3% 2.5% 10.5% 7.7% Semi Customer sales 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 2013 2014 2015 2016 2017 Fabless/IDM Customers 9,723 10,900 12,208 11,964 10,528 11,265 12,335 12,088 $46,862 $48,922 $44,583 $44,794 $46,216 QoQ -7.8% 12.1% 12.0% -2.0% -12.0% 7.0% 9.5% -2.0% 4.0% 4.4% -8.9% 0.5% 3.2% Downstream units 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 2013 2014 2015 2016 2017 Smartphone units 357.0 379.5 393.5 413.5 365.4 415.6 426.7 395.7 1,019 1,303 1,438 1,544 1,603 QoQ -11.7% 6.3% 3.7% 5.1% -11.6% 13.7% 2.7% -7.3% 40.5% 27.9% 10.3% 7.3% 3.9% TV units 51.2 53.7 59.1 65.6 55.8 57.4 60.3 63.3 205 225 221 230 237 QoQ -15.0% 5.0% 10.0% 11.0% -15.0% 3.0% 5.0% 5.0% 0.7% 10.1% -1.8% 3.7% 3.1% Tablet units 53.4 54.4 57.2 62.9 50.3 51.3 53.9 59.3 259 274 242 228 215 QoQ -30.0% 2.0% 5.0% 10.0% -20.0% 2.0% 5.0% 10.0% 63.3% 5.9% -11.6% -5.9% -5.8% PC units 59.9 62.6 67.5 68.5 58.8 62.6 68.5 69.9 315 308 276 258 260 QoQ -16.0% 4.4% 7.8% 1.5% -14.2% 6.5% 9.4% 2.1% -9.8% -2.1% -10.6% -6.3% 0.5% Total Demand Units 521.4 550.3 577.3 610.5 530.3 586.9 609.3 588.2 1,798 2,111 2,177 2,259 2,315 QoQ -14.8% 5.5% 4.9% 5.7% -13.1% 10.7% 3.8% -3.5% 25.2% 17.4% 3.1% 3.8% 2.4% Source: Company data, Credit Suisse estimates

Due to the weakness in 1H17 for the tech supply chain, we have revised down foundry estimates mildly to the lower-half of guidance in 1Q17 and expect a muted outlook to continue through 2Q17. We now project a 9% QoQ decline in 1Q17 and a flat 2Q17 for the Asian upstream semiconductor industry. TWD strength had a moderate additional impact on sales and profitability

Figure 34: TSMC correcting in 1H17 vs back-end peers Figure 35: TWD appreciated against USD by 6% YTD

Relative performance since 1Q14 NTD/USD 35 1.90 34 1.70 33 1.50 32 31 1.30 30 1.10 29 0.90 28 0.70 27 26 0.50 25

0.30

Jul-14 Jul-11 Jul-12 Jul-13 Jul-15 Jul-16

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

3Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 4Q16

2Q17E 3Q17E 4Q17E 1Q17E NTD/USD

Back-end TSMC Source: Company data, Credit Suisse Research Source: Company data, Credit Suisse Research

The Taiwanese dollar The New Taiwan Dollar (TWD) has been appreciating against the USD by 6% since the has appreciated 5% beginning of 2017, hurting the Taiwan tech exporters’ sales and profitability. The sales of since the beginning of most Taiwanese tech companies are quoted in USD but reported in TWD so the TWD the year, impacting sales appreciation has a direct 1% impact to translated sales for each 1% appreciation. The and margins for our GMs of foundries, back-end suppliers and panel and LED makers attending our semiconductor coverage conference also cited 1% TWD appreciation would have 0.4% negative impact on GMs as some costs are still in TWD. However, fabless which have both revenue and COGs in USD would have a 1% translation impact on sales but no incremental hit to margins.

Asia Semiconductor Sector 18 13 April 2017

Valuation at the upper end of its historical range Valuation relatively high Semiconductor companies’ stock price has already moved higher through 2016 on the against its post-crisis improving inventory cycle and decent demand which has lifted utilisation to high levels, range, though lags global leaving less easy cyclical upside. Though the valuation of most of the semiconductor chip peers that have re- stocks is still stay at higher levels despite softer near-term outlook, we expect the supply rated further chain to set a more conservative tone due to muted tech end market demand and elevated inventory levels, raising risk of downward earnings revision and limiting further upside in the stock prices through results season.

Figure 36: TSMC +1 s.d. P/E despite softer outlook Figure 37: TSMC trading at the high end of P/B (X) 2330.TW P/E (X) 2330.TW P/B 20.0 4.0

18.0 3.5 16.0 3.0 14.0 2.5 12.0

10.0 2.0

8.0 1.5

Jul-06 Jul-13

Jul-06 Jul-13

Apr-08 Oct-04 Oct-11 Apr-15

Apr-08 Oct-04 Oct-11 Apr-15

Jun-09 Jan-03 Jan-10 Jun-16 Jan-17

Jun-16 Jan-03 Jun-09 Jan-10 Jan-17

Mar-04 Mar-11

Feb-14 Feb-07

Mar-04 Mar-11

Feb-07 Feb-14

Dec-05 Nov-08 Dec-12 Nov-15

Aug-03 Sep-07 Aug-10 Sep-14

Dec-05 Nov-08 Dec-12 Nov-15

Aug-03 Sep-07 Aug-10 Sep-14

May-05 May-12

May-05 May-12 Forward PE Average +1std -1std +2std -2std Forward PB Average +1std -1std +2std -2std

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

We still do not expect too sharp a correction as 2017 will be back half loaded with Apple adding a third premium OLED model in addition to its 4.7/5.5" models. We would view potentially better entry in the group post results in companies that may issue weak 2Q17 guidance including TSMC, Powertech, and SMIC. While TSMC will have a seasonal lull, catalysts from iPhone 8 leverage should provide a boost post the upcoming results reset in April. Powertech remains supported by new memory projects and logic consolidation and Realtek has incremental growth from IoT, USB Type C and SSD to supplement WiFi. Powertech topped 1Q17 but will only have modest growth in 2Q17 as the iPhone NAND ramp is more geared to 2H17 and should have a better catalyst approaching that launch with the rest of the business at Toshiba, Micron and Intel intact. We stay more conservative on Mediatek due to some share loss in the mid-high-end of the market to Qualcomm and due to slower China smartphone sales, with only a modest catalyst from some resumption of China Android launches in late 2Q17 and then better anticipatory catalyst from refreshed lower cost mainstream chipsets in late 3Q17. TSMC's global holders supporting re-rating along with overseas peers TSMC is well-owned by TSMC's ownership has shifted completely to global funds support, with 79% now owned foreign investors, but still by foreign investors. The stock's valuation is now 14x 2017 earnings, in line with post- at a discount to some crisis high 14x but shy of its valuation in 2006-2007 and the 1990s. The company can still global semis re-rate further as it closes the gap to overseas semiconductor stocks re-rating faster, possible as perceptions of competition with Intel and Samsung continue to subside as it accelerates its roadmap through 10/7nm and also with the company's cash yield moving higher as it harvests more cash flows to increase its dividend. Compared with the average P/E multiple for its key chip customers (Qualcomm, Mediatek, Broadcom, Xilinx, Marvell, and NVIDIA) averaging at 18x, TSMC is trading at a discount at only 14x – a gap that has widened compared with 2H14 and 1H15. TSMC is also at a smaller premium than its overseas peers, with its current multiple 9% higher than its post-crisis average but consistent with overseas customers NVIDIA, Xilinx, Marvell and TI trading at 30-40% premiums to their long-term average. While TSMC does have the high capital intensity from owning fabs, its 38-40% operating margins is also allowing strong FCF generation (5% FCF yield in 2017).

Asia Semiconductor Sector 19 13 April 2017

Figure 38: TSMC trades at a discount vs customers Figure 39: TSMC's P/E at a more modest premium to its history than the overseas chip companies P/E (x) P/E (x) P/E premium (%) vs. post-crisis average 35.0 50 100% 30.0 40 80% 25.0 30 60%

20.0 20 40% 15.0 10 20% 10.0 0 0% 5.0 -10 -20% 0.0

-20 -40%

Jul-12 Jul-08 Jul-09 Jul-10 Jul-11 Jul-13 Jul-14 Jul-15 Jul-16

Jul-07 NVDA MRVL XLNX TXN INTC TSMC BRCM QCOM MTK

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Current P/E Avg. P/E post-crisis TSMC BRCM, Marvell, QCOM, NVDA, XLNX, Mediatek average P/E Avg. P/E P/E premium vs. post-crisis

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

TSMC's valuation is still reasonable in Taiwanese context, in line with the Taiwan tech average of 14x 2017E P/E, despite having double the ROE of the index at 22% and in line dividend yield of 3.7%. We would view the stock still capped during the soft 1H17 but could see a catalyst as the iPhone ramps in 2H17 after lagging other suppliers geared to that product cycle through 1H17.

Figure 40: TSMC's P/E could continue to be re-rate Figure 41: TSMC trading in line with the TAIEX P/E

TSMC share price (NT$) Consensus P/E (x) TWSE vs. TSMC - 12 M Fwd PE 200 16 34.0

175 15 29.0 150 14 24.0 125 13 100 12 19.0 75 11 14.0 50 10 9.0 25 9 4.0

0 8

3-Jul-07 3-Jul-03 3-Jul-04 3-Jul-05 3-Jul-06 3-Jul-08 3-Jul-09 3-Jul-10 3-Jul-11 3-Jul-12 3-Jul-13 3-Jul-14 3-Jul-15 3-Jul-16

3-Jan-03 3-Jan-04 3-Jan-05 3-Jan-06 3-Jan-07 3-Jan-08 3-Jan-09 3-Jan-10 3-Jan-11 3-Jan-12 3-Jan-13 3-Jan-14 3-Jan-15 3-Jan-16

Jan-15 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-16 Jan-17

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

May-11 May-12 May-13 May-14 May-15 May-16 May-10 TWSE - 12m fwd PE Ave. TWSE - 12m fwd PE TSMC share price TSMC - 12m fwd PE Ave. TSMC - 12m fwd PE Consensus P/E at each time point Source: Company data, Credit Suisse Source: Company data, Credit Suisse SMIC's stock pulling back, reasonable at its 1x P/B support SMIC would get more We downgraded SMIC post 3Q16 results with the view the stock had priced in recent reasonable if the strength and had some risk of over-heating fundamentals after management had guided correction returns the visibility out to 1Q17 for growth, suggesting long lead times and over aggressive customer stock back to 1x P/B ordering. The company is now pulling back due to a softer-than-expected 1Q17 business outlook on China smartphone slowdown and multiple revenue warnings from one of its key customers Fingerprint Cards. We could see better entry following the reset in 1H17, as many funds view the company as a beneficiary of China semiconductor growth due to its leading position and government support. We would note the risk-reward would be more favorable at HK$8.4 (1x P/B), a traditional good support for the company as it maintains some degree of modest profitability throughout the cycle now.

Asia Semiconductor Sector 20 13 April 2017

Figure 42: SMIC stock pull back on soft 1H17 outlook Figure 43: Hua Hong now has lifted to +1 s.d. P/B (X) 0981.HK P/B (X) 1347.HK P/B 1.8 1.2 1.6 1.1 1.4 1.0 1.2 0.9 1.0 0.8 0.8 0.7 0.6 0.6 0.4 0.5 0.2 0.4

- 0.3

Jul-06 Jul-13

Oct-11 Oct-04 Apr-08 Apr-15 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16

Jan-03 Jun-09 Jan-10 Jun-16 Jan-17 Jun-15 Jun-16

Mar-04 Mar-11

Feb-07 Feb-14 Feb-15 Feb-16 Feb-17

Dec-05 Nov-08 Dec-12 Nov-15 Dec-14 Dec-15 Dec-16

Sep-07 Aug-03 Aug-10 Sep-14 Aug-15 Aug-16

May-05 May-12 Forward PB Average +1std -1std +2std -2std Forward PB Average +1std -1std +2std -2std

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

Hua Hong has Hua Hong’s stock has been up 30% YTD and is already trading at 0.9x P/B as the rebounded from deep company's business outlook is more stable supported by its local customers' share gains. value territory We expect the company to report sales in line with guidance for a modest decline in 1Q17 and guide a better than peer modest growth in 2Q17. We believe the company will maintain 10% YoY growth at decent margins and operates a less capital intensive 8” foundry model. Mediatek at the lower-end due to softer demand and margin pressure

Figure 44: Mediatek trading below post crisis P/E Figure 45: Realtek still trading below 15-year average (X) 2454.TW P/E (X) 2379.TW P/E 35.0 40.0 35.0 30.0 30.0 25.0 25.0 20.0 20.0 15.0 15.0 10.0 10.0 5.0

5.0 0.0

Jul-05 Jul-10 Jul-04 Jul-08 Jul-03 Jul-04 Jul-06 Jul-07 Jul-08 Jul-09 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-03 Jul-05 Jul-06 Jul-07 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Jan-06 Jan-08 Jan-12 Jan-03 Jan-04 Jan-05 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-09 Jan-10 Jan-11 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Forward PE Average +1std -1std +2std -2std Forward PE Average +1std -1std +2std -2std

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

Mediatek is trading at a Mediatek's stock has been range bound in 2016 and is trading at 16x P/E, below its post more reasonable P/E but crisis average of 18x, but owing to its continued pricing and margin pressure from the earnings continue to competition in 3G/4G smartphone market and. We still see mixed picture for the company have risk due to market share loss to Qualcomm due to its lag on the high-end modem, late year slowdown in China and impact from the demonetisation in India, limiting the company's growth opportunity in 1H17. GMs still seeing limited push higher until cost down chips are delivered in 4Q17. The company has made a break-through finally with Samsung but that will need to be joined by margin recovery and other high-end share gains into Qualcomm to allow a re-rating. We follow with company previews and key focus charts for our coverage ahead of results season.

Asia Semiconductor Sector 21 13 April 2017

Asia Pacific/Taiwan Semiconductor Devices

Taiwan Semiconductor Manufacturing

(2330.TW / 2330 TT) Rating OUTPERFORM Price (12-Apr-17, NT$) 191.00 Target price (NT$) 205.00 Upside/downside (%) 7.3

Mkt cap (NT$/US$ mn) 4,952,703 / 162,081 Sales light due to FX; still need to get through Enterprise value (NT$ mn) 4,550,771 Number of shares (mn) 25,930 1H headwinds Free float (%) 87.3 52-wk price range (NT$) 195-144 ■ 1Q17 below seasonal but also impacted by FX. TSMC should report ADTO-6M (US$ mn) 178.1 1Q17 results at the lower-half of guidance on Thursday. 4Q16 sales were Target price is for 12 months. released Monday at NT$234 bn (-10.8% QoQ), below the guidance for -9%

Research Analysts to -10% QoQ due to the stronger NT$. Excluding the 2.6% NT$ appreciation

Randy Abrams, CFA and NT$6 bn impact to sales, sales would have reached the high-end -9% 886 2 2715 6366 QoQ. The below-seasonal decline in 1Q17 was mainly due to low season of [email protected] products for smartphones and fabless inventory adjustments. Due to the Haas Liu stronger NT$, we expect GMs to reach 52%, at the lower-half of 51.5-53.5% 886 2 2715 6365 [email protected] guidance, causing us to trim 1Q EPS from NT$3.39 to NT$3.33. ■ Business outlook stays muted through 1H17. We expect TSMC to see a further 5% QoQ decline in 2Q17 due to the mixed tech end market outlook. Sales are being impacted by headwinds including a further 2% impact from the NT$ at current rates, 10nm cuts from Mediatek and broader china smartphone slowdown, fabless inventory depletion and launch of Qualcomm modem and 2 Snapdragon 600 chipsets to Samsung 14nm. ■ 2H17 rebound supported by iPhone 8, longer-term outlook intact. Despite the near-term inventory and China smartphone overhang, TSMC should rebound in 3Q16 with 100% processor share and high peripheral content in iPhone, supporting rise in Apple contribution from 17% to 22% and more growth in longer term into computing, auto and IoT. TSMC’s technology position is also still intact with a migration of 16nm business to 12nm and fast migration through 10/7nm to maintain foundry leadership. ■ Staying positive looking past the slowdown. We maintain 2017/2018E EPS at NT$13.40/NT$14.70 vs the street's NT$14.05/NT$15.21 and maintain our NT$205 TP at 14x 2018E. While near term should weigh on sentiment into the results, we stay positive on a 2H ramp-up of iPhone 8 and good share position on 10/7nm in 2H17 into 2018 and diversifying growth into IoT, high performance computing and automotive. Share price performance Financial and valuation metrics

Year 12/15A 12/16A 12/17E 12/18E Revenue (NT$ mn) 843,497.4 947,938.3 1,003,577.6 1,105,873.1 EBITDA (NT$ mn) 544,097.9 600,889.9 656,408.0 719,279.0 EBIT (NT$ mn) 322,345.6 377,928.7 395,616.0 437,229.1 Net profit (NT$ mn) 287,469.2 334,245.1 347,398.6 381,182.1 EPS (CS adj.) (NT$) 11.09 12.89 13.40 14.70 Change from previous EPS (%) n.a. n.a. 0.0 0.0 Consensus EPS (NT$) n.a. n.a. 13.89 15.10 EPS growth (%) 9.0 16.3 3.9 9.7 The price relative chart measures performance against the P/E (x) 17.2 14.8 14.3 13.0 TAIWAN SE WEIGHTED INDEX which closed at 9,817.68 Dividend yield (%) 2.4 3.1 3.7 3.7 on 12/04/17. On 12/04/17 the spot exchange rate was EV/EBITDA (x) 8.5 7.6 6.9 6.1 NT$30.56/US$1 P/B (x) 4.05 3.56 3.18 2.86

Performance 1M 3M 12M ROE (%) 25.4 25.6 23.6 23.2 Absolute (%) 2.4 3.5 20.5 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Relative (%) 1.2 -0.8 5.4 Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 22 13 April 2017

Focus table and charts: TSMC

Figure 46: QCOM will shift back to TSMC on 7nm Figure 47: TSMC continues to gain share into Apple US$mn Allocation % US$mn Apple % of TSMC $9,000 90% $3,000 30%

$7,500 75% $2,500 25%

$6,000 60% $2,000 20%

$4,500 45% $1,500 15% $1,000 10% $3,000 30% $500 5% $1,500 15% $0 0% $0 0%

2010 2011 2012 2013 2014 2015 2016 2017 2018

3Q16 4Q17 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 4Q16 1Q17 2Q17 3Q17 Qualcomm Production Qualcomm TSMC TSMC Share of QCOM Samsung Apple share TSMC Apple share Apple Processor % of TSMC Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 48: TSMC's FCF supports rising dividends Figure 49: 2nd wave customers migrating to 16nm Dividend FCF and Dividends 16nm US$mn TSMC 16nm (%) Yield per Share $2,250 36% 7% $14 $2,000 32% 6% $12 $1,750 28% 5% $10 $1,500 24% 4% $8 $1,250 20% 3% $6 $1,000 16% 2% $4 $750 12% 1% $2 $500 8% 0% $0 $250 4%

$0 0%

CY07 CY15 CY05 CY06 CY08 CY09 CY10 CY10 CY11 CY12 CY13 CY14 CY16

CY04 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

CY18E CY19E CY17E Apple Qualcomm AMD Dividend Yield (%) (lhs) FCF / Share (rhs) Dividend / Share (rhs) NVIDIA Xilinx Mediatek Hi-Silicon Oracle Spreadtrum Broadcom Marvell % of TSMC wafer sales Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 50: TSMC trades at a discount vs customers Figure 51: TSMC's P/E premium lower than peers P/E (x) P/E (x) P/E premium (%) vs. post-crisis average 35.0 50 100% 30.0 40 80%

25.0 30 60%

20.0 20 40% 15.0 10 20% 10.0 0 0% 5.0 -10 -20% 0.0

-20 -40%

Jul-12 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-13 Jul-14 Jul-15 Jul-16

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-07 NVDA MRVL XLNX TXN INTC TSMC BRCM QCOM MTK Current P/E Avg. P/E post-crisis TSMC BRCM, Marvell, QCOM, NVDA, XLNX, Mediatek average P/E Avg. P/E P/E premium vs. post-crisis

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 52: TSMC 1Q17-3Q17 and 2017-18 estimates CS vs street 1Q17 2Q17 3Q17 2016 2017 2018 (NT$ mn) CS Street Guidance CS Street CS Street Adtual CS Street CS Street Sales 233,914 238,911 NT$236-239bn 221,888 237,472 266,395 273,801 947,938 1,003,578 1,024,492 1,105,873 1,117,743 Chg (%) -10.8 -8.9 -8.9% to -10.0% QoQ -5.1 -0.6 20.1 15.3 12.4 5.9 8.1 10.2 9.1 GM (%) 52.0 52.2 51.5-53.5% 49.5 50.6 50.1 50.2 50.1 50.5 50.5 50.7 50.3 OpM (%) 40.8 41.4 40.5-42.5% 37.2 40.2 39.2 39.8 39.9 39.4 40.1 39.5 39.9 Net Inc. 86,406 88,993 FX: NT$32:1 64,116 78,277 94,525 97,204 334,338 347,399 361,077 381,182 392,920 EPS (NT$) 3.33 3.45 2.47 2.99 3.65 3.75 12.89 13.40 13.93 14.70 15.15 Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 23 13 April 2017

Asia Pacific/Taiwan Semiconductor Devices

United Microelectronics (2303.TW / 2303 TT) Rating NEUTRAL Price (12-Apr-17, NT$) 12.00 Target price (NT$) 12.00 Upside/downside (%) 0.0

Mkt cap (NT$/US$ mn) 151,492 / 4,958 1Q17 sales slightly better, profitability Enterprise value (NT$ mn) 147,487 Number of shares (mn) 12,624 dampened by the 28nm and China fab ramp-up Free float (%) 89.9 52-wk price range (NT$) 12.95-11.20 ■ 1Q17 sales in line with guidance. UMC 1Q17 sales were down 2.3% QoQ to ADTO-6M (US$ mn) 10.5 NT$37.4 bn, slightly better than guidance for shipments down 1% QoQ and Target price is for 12 months. blended NT$ ASPs down 3% QoQ. Mix is still toward lagging nodes as 28nm is Research Analysts declining sharply as first wave customers shift to 14/16nm, only partially offset

Randy Abrams, CFA by a ramp of consumer MCUs and 8" applications. On slightly better sales, we 886 2 2715 6366 expect GMs to track to guidance for mid-teens (CS 16.0%), down 500 bp QoQ [email protected] ex-insurance recovery due to weaker mix, an annual pricing reset and about Haas Liu 400 bp impact in 2017 from the ramp up of Xiamen JV. 886 2 2715 6365 [email protected] ■ 2Q17 should see a modest improvement on 28nm ramp-up. We expect UMC’s sales to grow low-mid-single digits QoQ in 2Q17, outperforming its foundry peers, due to less exposure in the Apple business (vs TSMC), mild China smartphone builds ahead of the iPhone 8 launch in 2H17. UMC is still targeting business on fingerprint, image sensors, MCUs, and display drivers to improve its 8’’ utilisation and stabilise wafer ASPs. ■ Capex is coming down from a higher base. UMC spent US$2.8 bn vs its initial US$2.2 bn capex budget in 2016 to accelerate Xiamen but is reducing 2017 spend. Capex was guided down to US$2.2 bn, with 50% allocated to Xiamen to ramp up capacity from 3k to 11k and most of the balance to Fab 12A Tainan to ramp up 28nm from 29k to 35k. The company expects 28nm to be low in 1H17 before rebounding to over 20% of sales by 2H17. ■ Maintain NEUTRAL. We maintain 2017E EPS of NT$0.60. We believe UMC’s ramp up of its Xiamen fab and lower loadings on 28nm as customers shift to rivals more advanced nodes will impact profitability until the second wave of applications qualify. We stay conservative as the core business sales and profitability remain muted and management maintains its high investment level to add a China footprint but at limited incremental profitability. We stay NEUTRAL and maintain TP of NT$12, representing 0.65x forward P/B. The stock lacks catalysts for re-rating as modest tech progress (28nm at 20% of sales four years after 40nm) and China investments lower its profitability. Share price performance Financial and valuation metrics

Year 12/15A 12/16A 12/17E 12/18E Revenue (NT$ mn) 144,830.4 147,870.1 156,806.4 165,721.6 EBITDA (NT$ mn) 56,307.8 58,177.2 58,014.0 64,406.1 EBIT (NT$ mn) 10,835.7 6,193.6 2,234.7 5,579.3 Net profit (NT$ mn) 13,448.2 8,823.9 6,718.4 7,294.4 EPS (CS adj.) (NT$) 1.08 0.71 0.55 0.60 Change from previous EPS (%) n.a. n.a. (0.0) 0.0 Consensus EPS (NT$) n.a. n.a. 0.67 0.75 EPS growth (%) 10.7 (33.6) (22.9) 8.6 The price relative chart measures performance against the P/E (x) 11.2 16.8 21.8 20.1 TAIWAN SE WEIGHTED INDEX which closed at 9,817.68 Dividend yield (%) 4.6 3.9 3.9 2.8 on 12/04/17. On 12/04/17 the spot exchange rate was EV/EBITDA (x) 2.1 2.6 2.4 1.9 NT$30.56/US$1 P/B (x) 0.66 0.68 0.66 0.65

Performance 1M 3M 12M ROE (%) 5.9 3.9 3.0 3.3 Absolute (%) -1.6 1.7 -7.0 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Relative (%) -2.9 -2.6 -22.1 Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 24 13 April 2017

Focus tables and charts: UMC Figure 53: UMC 1Q17-3Q17 and 2017/2018 estimate CS vs Street NT$ 1Q17 2Q17 3Q17 2017 2018 (mn) CS CS(Old) Street Guidance CS CS(old) Street CS CS(old) Street CS CS(old) Street CS CS(old) Street Sales 37,418 36,858 36,418 Shipments -1% 39,066 39,066 37,721 41,796 41,796 40,533 156,806 156,806 154,081 165,722 165,722 160,471 Chg: -2.3 -3.8 -3.3 NT$ ASPs -3% 4.4 6.0 0.8 7.0 7.0 7.5 6.0 6.0 4.2 5.7 5.7 4.1 GM 16.0 16.0 15.8 Mid-Teens 18.5 18.5 18.1 20.6 20.6 20.4 18.3 18.3 18.5 20.2 20.2 19.4 OpM -1.2 -1.2 0.2 Util: 90% 1.6 1.7 2.5 4.3 4.3 5.1 1.3 1.4 3.3 3.3 3.4 4.9 NI 1,190 1,190 1,069 1,770 1,770 1,767 2,937 2,937 2,730 6,718 6,718 7,838 7,294 7,294 9,275 EPS 0.10 0.10 0.10 0.14 0.14 0.16 0.24 0.24 0.24 0.55 0.55 0.65 0.60 0.60 0.73 Source: Company data, Credit Suisse estimates

Figure 54: UMC's growth slowed in communications Figure 55: 28nm ramp slowing Wafer Sales (NT$) Wafer Revenue (NT$) 2.5 years 2 years 2.5 years 24,000 3 years 4 years 4 years 14,000 20,000 12,000 16,000 10,000 12,000 8,000 8,000 6,000 4,000 4,000 2,000 -

-

4Q01 2Q10 4Q12 2Q15 4Q17 4Q99 2Q00 4Q00 2Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 4Q10 2Q11 4Q11 2Q12 2Q13 4Q13 2Q14 4Q14 4Q15 2Q16 4Q16 2Q17

2Q07 2Q08 4Q99 2Q00 4Q00 2Q01 4Q01 2Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 4Q07 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 Computer Communication Consumer 0.25um 0.18um 0.13um 90nm 65nm 40nm 28nm Other/Industrial Memory

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 56: FCF worse on higher capex on 28nm Figure 57: 40nm and below approaching half of sales Cash flow/Capex NT$mn FCF Yield (%) Revenue (US$mn) % from 40nm and below 80,000 25% $1,000 60% 50% 60,000 20% $800 40% 15% 40,000 $600 30% 10% 20% 20,000 $400 5% 10% 0 0% 0% $200 -10% -20,000 -5% $0 -20%

-40,000 -10%

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

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

2000 65nm and above 40nm 2018E 2017E 28nm 40nm and below as % of sales Operating Cash Flow Capex (ex JV funding) 40nm and below YoY growth Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 58: UMC—operating metrics NT$mn 1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E 2013 2014 2015 2016 2017E 2018E Capacity (8" equivalent WPM) 1,805 1,860 1,887 1,907 1,899 1,941 1,987 2,001 6,106 6,322 6,619 6,983 7,458 11,844 Sequential change (%) 1% 3% 1% 1% 0% 2% 2% 1% 11% 4% 5% 5% 7% 59% Shipment (8" equivalent WPM) 1,689 1,747 1,872 1,727 1,693 1,851 2,006 1,878 4,998 5,576 5,867 6,171 7,035 10,550 Sequential change (%) 2% 3% 7% -8% -2% 9% 8% -6% 16% 12% 5% 5% 14% 50% Utilization rate (%) 94% 94% 99% 91% 89% 95% 101% 94% 82% 88% 89% 88% 94% 89% ASP (US$) 709 702 701 700 700 703 699 698 783 757 754 745 703 796 Sequential change (%) -3% -1% 0% 0% 0% 1% -1% 0% -6% -3% 0% -1% -6% 13% FX rate 31.2 31.8 31.8 31.8 31.8 31.8 31.8 31.8 29.9 30.3 31.8 32.1 31.6 31.9 Other Revenue 84 86 88 88 89 90 92 93 7,044 10,567 4,630 433 347 364 Total Revenue (NT$mn) 37,418 39,066 41,796 38,527 37,758 41,482 44,690 41,792 123,972 140,012 145,152 147,955 156,806 269,820 Revenue % of 90nm&below 63% 63% 63% 64% 64% 66% 66% 66% 58% 59% 61% 64% 63% 65% Capex (US$mn) 481 472 691 362 472 669 701 358 1,101 1,425 1,901 2,851 2,006 3,160 Capex/revenue (%) 40% 38% 53% 30% 40% 51% 50% 27% 27% 31% 42% 62% 40% 37% Revenue (NT$mn) 37,418 39,066 41,796 38,527 37,758 41,482 44,690 41,792 123,812 140,012 144,830 147,870 156,806 165,722 EPS (NT$) 0.10 0.14 0.24 0.07 0.03 0.16 0.29 0.12 1.01 0.97 1.08 0.71 0.55 0.60 Gross margin (%) 16.0% 18.5% 20.6% 18.0% 17.2% 20.6% 22.6% 19.8% 19.0% 22.7% 21.9% 20.5% 18.3% 20.2% Operating margin (%) -1.2% 1.6% 4.3% 0.4% -0.6% 3.9% 6.6% 2.6% 3.3% 7.2% 7.5% 4.2% 1.3% 3.3% Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 25 13 April 2017

Asia Pacific/China Semiconductor Equipment

Semiconductor Manufacturing

International Corp. (0981.HK / 981 HK) Rating NEUTRAL Price (12-Apr-17, HK$) 9.36 Target price (HK$) 10.80 Upside/downside (%) 15.4

Mkt cap (HK$/US$ mn) 43,504 / 5,598 1H17 remains slow; China smartphone Enterprise value (US$ mn) 6,226 Number of shares (mn) 4,648 slowdown could weigh on +20% YoY target Free float (%) 66.0 52-wk price range (HK$) 12.18-5.90 ■ Near-term tracking in line. The company guided to a 2-4% QoQ decline with ADTO-6M (US$ mn) 41.6 GMs at 25-28% and is still on track, with utilisation pulling back from near full in Target price is for 12 months. 2H16 to 90% now, with 12" being slightly below the corporate average. SMIC was aware of customer Fingerprint Cards slowdown; so it does not see Research Analysts additional impact there. Management acknowledged China smartphones have Randy Abrams, CFA slowed and customers are more conservative with iPhone 8 coming. 886 2 2715 6366 [email protected] ■ 2017 back-end loaded growth due to the slowdown in 1H17. SMIC Haas Liu targets 2017 for +20% YoY, though will be back-half loaded and subject to 886 2 2715 6365 macro and slowdown in China smartphones, leading us to model sales below [email protected] its target of +17% YoY. The company expects 2H17 drivers, including (1) 28nm growing to 7-9% of sales by 2H17, (2) LFoundry CMOS sensor utilisation rising and (3) new applications on legacy capacity including MEMs and a new fingerprint client that will gradually ramp up from 2H17. ■ Capex down but R&D funding up YoY. Capex guidance was US$2.3 bn, down from US$2.9 bn in 2016, with $900mn to expand the Beijing JV from 18K to 27K plus capacity for R&D and other 8/12" capacity. Overall capacity is expanding from 405k in 4Q16 to 450k by 4Q17, with utilisation targeted to be 90-95% to allow flexibility for incremental orders. R&D funding was $52 mn last year and $65-70 mn in 2017 as new projects ramp up. The company’s target is to make 14nm commercial in 2020 and is now doing pathfinding to pull 7nm sooner after 14nm more in parallel with 16nm development rather than do one node sequentially after the other. ■ Stock has priced in more of the upside case. Despite a decent growth outlook from local semiconductor ecosystem development, we maintain NEUTRAL and keep our TP at HK$10.80 on 1.2x P/B. We downgraded after the 3Q16 results with the multiples demanding sustained high growth and setting-up some risk on any slowdown, which is coming through now. With near-term outlook still slow through 1H17, we expect the range-trade to continue and would view the stock as more reasonable closer to 1x P/B ($8.40) based on ROE in the high single digits but solid growth prospects on China’s IC development. Share price performance Financial and valuation metrics

Year 12/14A 12/15A 12/16E 12/17E Revenue (US$ mn) 1,970.0 2,236.4 2,914.2 3,412.3 EBITDA (US$ mn) 679.7 745.6 1,069.1 1,413.5 EBIT (US$ mn) 130.2 222.0 339.2 313.5 Net profit (US$ mn) 112.0 206.4 334.0 281.3 EPS (CS adj.) (US$) 0.03 0.05 0.08 0.07 Change from previous EPS (%) n.a. n.a. 0.0 0.0 Consensus EPS (US$) n.a. n.a. 0.08 0.08 EPS growth (%) (44.4) 53.6 61.0 (13.7) The price relative chart measures performance against the P/E (x) 38.6 25.1 15.6 18.1 MSCI CHINA F IDX which closed at 6,853.52 on 12/04/17. Dividend yield (%) 0.0 0.0 0.0 0.0 On 12/04/17 the spot exchange rate was HK$7.77/US$1 EV/EBITDA (x) 7.9 7.2 5.7 4.7

Performance 1M 3M 12M P/B (x) 1.46 1.39 1.25 1.13 Absolute (%) -9.8 -12.8 37.6 ROE (%) 4.1 6.2 8.5 6.5 Relative (%) -12.1 -22.1 18.4 Net debt/equity (%) Net Cash Net Cash 8.9 16.1

Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 26 13 April 2017

Focus tables and charts: SMIC Figure 59: SMIC – Maintaining 1Q17-3Q17 and 2017/2018 estimates for CS below street 1Q17 2Q17 3Q17 2016 2017 2018 (US$ mn) CS Street Guidance CS Street CS Street Actual CS Street CS Street Net sales $794 $850 $782-799mn $842 $948 $897 $1,039 $2,914 $3,412 $3,530 $4,019 $4,125 Change -2.5% 4.3% -2-4% QoQ 6.0% 11.5% 6.5% 9.6% 30.3% 17.1% 21.4% 17.8% 16.9% GM % 27.7% 24.2% 25-28% 27.4% 26.6% 28.4% 28.3% 29.2% 27.8% 27.9% 27.6% 27.9% OpM % 7.5% 9.2% Opex $158-164mn 8.4% 10.2% 10.7% 11.0% 11.6% 9.2% 11.1% 9.9% 11.6% Net income 61 52 72 80 95 109 368 334 405 415 467 EPS (US$) $0.014 $0.008 $0.017 $0.014 $0.023 $0.019 $0.085 $0.079 $0.088 $0.098 $0.103 ADR EPS (US$) $0.72 $0.40 $0.85 $0.70 $1.13 $0.95 $4.26 $3.96 $4.40 $4.91 $5.15 HK EPS (HK$) $0.112 $0.062 $0.132 $0.109 $0.175 $0.147 $0.660 $0.613 $0.682 $0.762 $0.798

Source: Company data, Credit Suisse estimates

Figure 60: SMIC's growth keyed on China customers Figure 61: SMIC 28nm slow as 40nm take priority US$mn 100% $500 90% $450 80% $400 70% $350 60% 50% $300 40% $250 30% $200 20% $150 10% 0% $100

$50

3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 $0 1Q10

28nm 40nm 65nm 90nm 0.13um

1Q09 3Q17 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q09 0.15um 0.18um 0.25um 0.35um North America China Eurasia Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 62: SMIC stock pull back on soft 1H17 outlook Figure 63: SMIC margins may stay contained (X) 0981.HK P/B Sales (US$) Utilization and Margins (%) $4,000 110% 1.8 $3,600 90% 1.6 $3,200 70% 1.4 $2,800 50% 1.2 $2,400 30% 1.0 $2,000 10% 0.8 $1,600 -10% 0.6 $1,200 -30% 0.4 $800 -50% 0.2 $400 -70%

- $0 -90%

2007 2014 2005 2006 2008 2009 2010 2011 2012 2013

2015F 2016F 2017F

Jul-06 Jul-13

Oct-11 Oct-04 Apr-08 Apr-15

Jan-03 Jun-09 Jan-10 Jun-16 Jan-17

Mar-04 Mar-11

Feb-07 Feb-14

Dec-05 Nov-08 Dec-12 Nov-15

Sep-07 Aug-03 Aug-10 Sep-14

May-05 May-12 Revenue Utilization GM % OpM % Forward PB Average +1std -1std +2std -2std

Source: Company data, Credit Suisse Source: Company data, Credit Suisse research

Figure 64: SMIC operating metrics 1Q16 2Q16 3Q16 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 2014 2015 2016 2017E 2018E Capacity (8" equivalent) 908 1,017 1,052 1,099 1,099 1,112 1,196 1,213 2,958 3,181 4,076 4,620 5,398 Sequential Change (%) 6% 12% 3% 4% 0% 1% 8% 1% 8% 8% 28% 13% 17% Shipment (8" equivalent) 868 935 1,058 1,096 1,083 1,164 1,255 1,237 2,559 3,016 3,958 4,740 5,677 Sequential Change (%) 6% 8% 13% 4% -1% 7% 8% -1% 0% 18% 31% 20% 20% Utilization (Shipments/Capacity)96% 92% 101% 100% 99% 105% 105% 102% 87% 95% 97% 103% 105% Logic ASP $699 $707 $709 $717 $707 $697 $689 $685 $729 $707 $708 $694 $679 Sequential Change (%) -1% 1% 0% 1% -1% -1% -1% -1% -4% -3% 0% -2% -2% Capex (US$mn) (Management) $751 $792 $671 $481 $575 $575 $575 $575 $1,014 $1,573 $2,695 $2,300 $2,450 Capex (US$mn) (Cash Flows) $578 $933 $756 $490 $575 $575 $575 $575 $653 $1,231 $2,757 $2,300 $2,450 Capex/revenue (%) 95% 141% 101% 62% 75% 71% 67% 68% 35% 58% 98% 70% 239% Revenue $634 $690 $775 $815 $794 $842 $897 $879 $1,970 $2,236 $2,914 $3,412 $4,019 EPS $0.66 $1.16 $1.35 $1.23 $0.72 $0.85 $1.13 $1.26 $2.11 $2.96 $4.40 $3.96 $4.91 Gross Margin (%) 24% 32% 30% 30% 28% 27% 28% 28% 25% 31% 29% 28% 28% Operating Margin (%) 10% 17% 14% 6% 8% 8% 11% 10% 7% 10% 12% 9% 10% Depreciation/Wafer $140 $137 $129 $146 $175 $178 $171 $183 Non Depreciation/Wafer $412 $367 $383 $372 $354 $346 $340 $329 Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 27 13 April 2017

Asia Pacific/Taiwan Semiconductor Devices

Vanguard International Semiconductor

(5347.TWO / 5347 TT) Rating NEUTRAL Price (12-Apr-17, NT$) 58.80 Target price (NT$) (from 57.00) 53.00 Upside/downside (%) -9.9 1Q17 sales at the low end; business stays slow

Mkt cap (NT$/US$ mn) 96,280 / 3,151 Enterprise value (NT$ mn) 96,280 before adding fingerprint sensors in 2H17 Number of shares (mn) 1,637 Free float (%) 40.4 ■ 1Q17 sales at the low end of guidance. Vanguard’s 1Q17 sales were down 52-wk price range (NT$) 67.10-49.05 5% QoQ, at the low end of guidance for -0.7% to -5.2% QoQ, as the mild ADTO-6M (US$ mn) 4.9 improvement in large driver IC and power management and ramp-up from Target price is for 12 months. fingerprint are offset by a slowdown in small panel driver IC and a mild impact from the rising NT$. With lower utilisation and the NTD appreciation, we Research Analysts

expect gross margins to reach the lower-half of guidance of 32-34%. Randy Abrams, CFA 886 2 2715 6366 ■ Business outlook stays muted through 1H17. We expect Vanguard to see [email protected] sales flat QoQ in 2Q17 vs our prior +6% QoQ and the street's +9% QoQ as Haas Liu customers stay conservative building inventory. We believe small panel driver 886 2 2715 6365 ICs remain soft, offsetting stable demand for large panel driver ICs and power [email protected] management ICs. GMs will also still be under pressure at low 30% levels due to the new labour act, higher electricity cost and impact from NTD appreciation. ■ Moderate 2017 growth outlook led by power management. We lower full year sales from +8% to +5% YoY growth, following the softness in 1H17. We still expect a 2H17 rebound with power management still targeted for mid- teens YoY growth in 2017 with continued ramp-ups from US/Europe IDMs for auto/industrial applications. Fingerprint sensor is also ramping up from 2% in 4Q16 to mid-single digits in 2H17 on the back of outsourcing from TSMC customer share gains (Egis). We model large size flat to up on rising 4K2K penetration and small panel down slightly as OLED is supplied by Korean vendors and TDDI shifts to 12”. ■ Stock has risk into downside guidance, potentially setting up a better entry post results. We trim our 2017/18E EPS from NT$3.50/NT$3.90 to NT$3.30/NT$3.80 to reflect a worse sales and profitability outlook in 1H17. We stay NEUTRAL but lower our target price from NT$57 to NT$53, based on 16x 2017E P/E (13x ex-cash). Vanguard’s NT$3 cash dividend for 2016 earnings implies a 90% payout ratio. Despite the near-term risk, the stock could be reasonable on a pullback for income funds with US$550 mn cash, 6% FCF yield and 5% cash yield.

Share price performance Financial and valuation metrics

Year 12/15A 12/16A 12/17E 12/18E Revenue (NT$ mn) 23,319.7 25,828.6 27,198.2 29,377.7 EBITDA (NT$ mn) 6,931.3 8,154.1 8,441.2 9,189.1 EBIT (NT$ mn) 4,612.0 6,100.9 6,412.1 7,291.7 Net profit (NT$ mn) 4,157.6 5,357.5 5,428.4 6,261.6 EPS (CS adj.) (NT$) 2.50 3.24 3.30 3.80 Change from previous EPS (%) n.a. n.a. (5.9) (2.5) Consensus EPS (NT$) n.a. n.a. 3.60 4.04 EPS growth (%) (24.2) 29.3 1.9 15.4 The price relative chart measures performance against the P/E (x) 23.5 18.2 17.8 15.5 TAIWAN SE WEIGHTED INDEX which closed at 9,817.68 Dividend yield (%) 4.4 5.0 5.0 5.0 on 12/04/17. On 12/04/17 the spot exchange rate was EV/EBITDA (x) 13.9 11.8 11.4 10.5 NT$30.56/US$1 P/B (x) 3.57 3.39 3.30 3.15

Performance 1M 3M 12M ROE (%) 15.1 19.1 18.7 20.9 Absolute (%) -2.8 1.4 17.6 Net debt/equity (%) 0.0 0.0 0.0 0.0

Relative (%) -4.1 -3.0 2.5 Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 28 13 April 2017

Focus tables and charts: Vanguard Figure 65: Vanguard 1Q17-3Q17 and 2017/2018 estimate CS vs Street

1Q17 2Q17 3Q17 2017 2018 (NT$ mn) CS CS(Old) Street Guidance CS CS (Old) Street CS CS(Old) Street CS CS (Old) Street CS CS (Old) Street Sales 6,263 6,471 6,330 NT$6.25-6.55bn 6,274 6,859 6,827 7,100 7,381 7,397 27,198 28,018 27,933 29,378 30,042 29,864 QoQ (%) -5.1% -1.9% 15.5% -0.7% to -5.2% 0.2% 6.0% 9.0% 13.2% 7.6% 8.4% 5.3% 8.5% 8.3% 8.0% 7.2% 6.9% GM (%) 32.5% 33.5% 33.2% 32-34% 32.3% 34.8% 34.7% 36.0% 36.2% 36.0% 34.4% 35.1% 35.0% 35.5% 35.6% 36.2% OpM (%) 21.3% 22.4% 22.1% 21-23% 21.1% 23.8% 23.9% 25.3% 25.5% 25.4% 23.6% 24.1% 24.3% 24.8% 25.1% 25.8% Net Inc: 1,065 1,257 1,240 FX: 31.5:1 1,087 1,329 1,442 1,571 1,628 1,649 5,428 5,766 1,649 6,262 6,420 1,649 EPS (NT$) 0.65 0.76 0.76 0.66 0.81 0.88 0.95 0.99 1.00 3.30 3.50 3.62 3.80 3.90 4.04 Source: Company data, Credit Suisse estimates

Figure 66: Power management now over 40% of sales Figure 67: Vanguard GMs remaining stable Quarterly sales (NT$mn) Utilization (%) Winbond fab buy GM (%) $3,600 100% 50% $3,000 $2,400 80% 40% $1,800 60% 30% $1,200 $600 40% 20%

$0 20% 10%

3Q09 3Q11 3Q13 3Q15 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 4Q15 1Q16 2Q16 3Q16 4Q16

4Q09 0% 0%

3Q17E 1Q17E 2Q17E 4Q17E

1Q06 3Q06 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

Driver IC (Large) Driver IC (Small) 1Q07

1Q17E 3Q17E Analog+Power management Others Utilization GM %

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 68: Low capex model generates strong FCF Figure 69: Vanguard pricing has stabilized post 2009 OP CF / Capex (NT$mn) Dividend / FCF Yield (%) Shipments (8" WPM) US$ ASP 600 $720 10,000 10.0% 500 $660 8,000 8.0% 400 $600

6,000 6.0% 300 $540

4,000 4.0% 200 $480 100 $420 2,000 2.0% 0 $360

0 0.0%

1Q09 1Q10 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 3Q09 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

1Q17E

CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 Shipments ASPs (US$) Op Cash Flow Capex FCF Yield Dividend Yield Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 70: Vanguard operating metrics 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 2012 2013 2014 2015 2016E 2017E Capacity (8" equivalent) 549 558 569 570 561 570 600 609 1,686 1,626 1,836 2,139 2,246 2,340 Sequential Change 1% 2% 2% 0% -2% 2% 5% 1% 9% -4% 13% 17% 5% 4% Shipment (8" equivalent) 457 497 513 525 502 516 566 603 1,328 1,632 1,835 1,731 1,992 2,186 Sequential Change 16% 9% 3% 2% -4% 3% 10% 6% 15% 23% 12% -6% 15% 10% Utilization rate 83% 89% 90% 92% 89% 90% 94% 99% 79% 100% 100% 81% 89% 93% ASP $410 $401 $400 $399 $397 $398 $398 $398 $437 $436 $433 $425 $402 $398 Sequential Change -3% -2% 0% 0% 0% 0% 0% 0% -2% 0% -1% -2% -5% -1% Total Revenue (NT$mn) 6,215 6,443 6,555 6,596 6,263 6,274 7,100 7,561 17,174 21,134 23,932 23,259 25,810 27,198 Capex (US$mn) $6 $15 $7 $11 $14 $15 $14 $14 $46 $32 $104 $48 $40 $58 Capex/revenue 3% 8% 4% 5% 7% 7% 6% 6% 8% 5% 13% 6% 5% 7%

Revenue 6,215 6,463 6,555 6,596 6,263 6,274 7,100 7,561 17,175 21,135 23,931 23,320 25,829 27,198 EPS 0.82 0.91 0.79 0.71 0.65 0.66 0.95 1.04 1.48 2.71 3.30 2.50 3.24 3.30 Gross Margin 35.2% 34.8% 34.4% 33.7% 32.5% 32.3% 36.0% 36.2% 23.7% 32.5% 36.0% 29.6% 34.6% 34.4% Operating Margin 26% 24% 23% 22% 21% 21% 25% 26% 14% 23% 26% 20% 24% 24% Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 29 13 April 2017

Asia Pacific/China Semiconductor Devices

Hua Hong Semiconductor Limited (1347.HK /

1347 HK) Rating OUTPERFORM Price (12-Apr-17, HK$) 10.42 Target price (HK$) 11.00 Upside/downside (%) 5.6 Business fares better than its foundry peers

Mkt cap (HK$/US$ mn) 10,773 / 1,386 Enterprise value (US$ mn) 1,079 ■ Sales and margins on track in 1Q17. We believe Hua Hong's 1Q17 sales Number of shares (mn) 1,034 should be on track to the guidance for -6% QoQ, off a higher base of Free float (%) 25.0 52-wk price range (HK$) 11.20-6.49 US$182-183 mn on better smart card and analog performance. We expect ADTO-6M (US$ mn) 1.6 GMs to be in line with guidance for 29% on lower utilisation and annual Target price is for 12 months. maintenance. We expect Hua Hong to outperform its foundry peers and model 6% QoQ growth in 2Q17 due to less China smartphone exposure. Research Analysts ■ Moderate growth could continue in 2017. We expect the company's 2017 Randy Abrams, CFA 886 2 2715 6366 sales growth to be high single digits YoY, supported by the ASP lift through [email protected] product mix improvement and share gains with China customers (now 53% of Haas Liu sales). Growth will likely be led by MCU and eNVM (smart card), which 886 2 2715 6365 should continue on China customers’ share gains. The company targets to [email protected] grow share from 10-20% in 2016 to 30% in 2017 in the China bank card market with TAM of 200k wafer demand and higher ASPs (US$600-700). Discretes are seeing high growth as the company adds capacity in Fab 2 and brings in higher margin super junction business (discretes ~27% of 2016) due to healthy demand from China customers. Hua Hong will also start mass production on 90nm in 2017 for MCUs and smart cards, lifting wafer ASPs. ■ Capacity expansion on track and GMs staying at high levels. Hua Hong had 153K capacity in its 3 China 8" fabs running at full utilisation in 4Q16 and we expect it to maintain 95-100% through 2017. The company plans to grow capacity +10% YoY to 169k WPM in 2017 with US$200 mn capex split mainly for Fab 1 and 2 upgrades and Fab 3 expansion. Management is also considering M&A if demand remains strong. Management targets to maintain GMs at 30% levels in 2017 by bringing in higher margin business (bank card and logic ICs on 0.13/0.11um and 90nm) and also adding more higher-end discretes (super junction and IGBT) to offset rising depreciation. ■ Stock now close to our target on better business outlook. We keep 2017E EPS at HK$0.87. The stock has appreciated 30% YTD on the improving outlook and is now trading at 0.9x P/B. The company offers good growth as #2 foundry in China supplying differentiated specialty products with a profitable model (capex light on 8" with mid-teens OpM) and 17% ownership of a 12" fab. We maintain our OUTPERFORM with HK$11 TP (0.9x P/B). Share price performance Financial and valuation metrics

Year 12/14A 12/15A 12/16E 12/17E Revenue (US$ mn) 664.6 650.1 721.4 773.6 EBITDA (US$ mn) 174.4 168.3 201.2 232.1 EBIT (US$ mn) 91.6 89.3 116.1 117.1 Net profit (US$ mn) 93.0 112.4 128.8 117.6 EPS (CS adj.) (US$) 0.11 0.11 0.12 0.11 Change from previous EPS (%) n.a. n.a. 0.0 0.0 Consensus EPS (US$) n.a. n.a. 0.12 0.12 EPS growth (%) 41.8 (0.3) 14.4 (9.5) The price relative chart measures performance against the P/E (x) 12.3 12.3 10.8 11.9 MSCI CHINA F IDX which closed at 6,853.52 on 12/04/17. Dividend yield (%) 0.0 0.0 0.1 2.8 On 12/04/17 the spot exchange rate was HK$7.77/US$1 EV/EBITDA (x) 4.1 5.8 5.3 4.7

Performance 1M 3M 12M P/B (x) 0.78 0.93 0.93 0.89 Absolute (%) 1.8 23.3 35.1 ROE (%) 7.4 7.6 8.6 7.7 Relative (%) -0.5 14.1 15.9 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 30 13 April 2017

Focus tables and charts: Hua Hong Figure 71: CS vs. Street estimates 1Q17-3Q17 and 2017/2018 Huahong Mar-17E Jun-17E Sep-17E 2017E 2018E Actual Cons Guidance CS New Cons CT Cons CS Cons CS Cons Sales $182.8 $181.6 $182-183mn $193.7 $194.8 $199.6 $203.8 $773.6 $791.4 $816.9 $848.8 % Q/Q chng -5.8% -6.4% 6.0% 7.3% 3.0% 4.6% % Y/Y chng 11.2% 10.4% 9.0% 12.0% 7.7% 22.7% 7.2% 11.3% 5.6% 7.2% GMs 29.2% 28.9% 29% 30.4% 30.0% 30.1% 30.3% 29.7% 30.3% 29.5% 30.2% Opex $27.5 $27.9 $28.4 $112.3 $114.0 OpM 14.1% 15.6% 15.9% 16.6% 15.9% 16.3% 15.1% 16.4% 15.5% 16.6% Op Inc. $25.8 $29.3 $30.9 $31.7 $31.7 $34.0 $117.1 $123.5 $126.9 $137.6 Pretax M. 18.0% 16.2% 19.6% 16.3% 19.4% 16.7% 18.8% 15.6% 18.2% 16.2% Net Income $26.6 $28.3 $30.7 $32.3 $31.3 $33.3 $117.6 $129.7 $120.6 $140.8 Net Margin 14.5% 15.6% 15.8% 16.6% 15.7% 16.3% 15.2% 16.4% 14.8% 16.6% EPS (US$) $0.03 $0.03 $0.03 $0.03 $0.03 $0.03 $0.11 $0.13 $0.11 $0.13 EPS (HK$) $0.20 $0.23 $0.23 $0.25 $0.23 $0.25 $0.87 $0.97 $0.89 $1.04

Source: Company data, Credit Suisse estimates

Figure 72: 8" wafer capacity growth staying modest Figure 73: eNVM contributes over 40% of revenue 8" Capacity (K) YoY (%) 100% 20,000 80% 90% 80% 16,000 60% 70% 60% 12,000 40% 50% 40% 8,000 20% 30% 20% 4,000 0% 10% 0%

- -20%

1996 1999 2002 2005 2008 2011 2014 1995 1997 1998 2000 2001 2003 2004 2006 2007 2009 2010 2012 2013

Jun-14 Jun-15 Jun-16

Mar-14 Mar-15 Mar-16

2015E

Sep-14 Dec-14 Sep-15 Dec-15 Sep-16 Dec-16

Jun-17E

Mar-17E Dec-17E TSMC UMC SMIC GlobalFoundries Sep-17E Vanguard Hua Hong Semi Samsung YoY (%) eNVM Logic & RF Discrete Analog & PM Standalone NVM Others

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 74: Hua Hong historical sales and margins Figure 75: Hua Hong still reasonable at 0.9x P/B Sales (US$) Utilization and Margins (%) $225 120% $200 110% 100% Price Mkt Cap P/E Multiple (x) P/B Multiple (x) ROE (%) Trough/Peak (EV/Sales) $175 90% $150 80% Company Ticker 4/12/2017 (US$mn) 2016 2017 2018 2016 2017 2018 2016 2017 2018 Select foundry peers $125 70% 60% Hua Hong 1347.HK $10.82 $987 12.9 12.8 12.4 1.0 0.9 0.9 7.5 7.4 7.2 $100 50% TSMC 2330.TW $191.00 $161,710 14.8 14.3 13.0 3.6 3.2 2.9 24.1 22.3 22.0 $75 40% SMIC 0981.HK $9.44 $5,646 15.8 18.3 14.2 1.3 1.1 1.0 8.0 6.3 7.4 $50 30% 20% Vanguard 5347.TWO $58.70 $3,138 17.6 16.8 15.1 3.4 3.3 3.1 19.3 19.5 20.9 $25 10% UMC 2303.TW $12.15 $5,008 18.1 22.1 20.3 0.7 0.7 0.7 3.8 3.0 3.2

$0 0% Peer Mean 15.8 16.8 15.0 2.0 1.8 1.7 12.5 11.7 12.2

Jun-14 Jun-15 Jun-16

Mar-14 Mar-15 Mar-16

Dec-14 Dec-15 Dec-16

Sep-14 Sep-15 Sep-16

Jun-17E

Mar-17E

Sep-17E Dec-17E

2011 Avg 2011 Avg 2013 2012 Avg 2012 Revenue Utilization GM % OpM %

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 76: Hua Hong continuing to invest in capacity expansion 8" WPM capacity (000) Mar-17E Jun-17E Sep-17E 2014 2015 2016E 2017E CAGR ('11-17) Fab 1 - 0.13um and above 56.0 60.0 60.0 50.0 56.0 56.0 60.0 3.1% Fab 2 - 0.35um and above 57.0 57.0 57.0 39.0 50.0 57.0 57.0 10.1% Fab 3 - 90nm and above 49.0 50.0 51.0 40.0 40.0 42.0 52.0 5.8% WPM capacity 162.0 167.0 168.0 129.0 146.0 155.0 169.0 6.0% YoY Growth 4.0% 13.2% 6.2% 9.0% Simple Utilization 94.5% 97.2% 99.5% 91.5% 88.4% 98.5% 97.3% Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 31 13 April 2017

Asia Pacific/Taiwan Semiconductor Devices

Advanced Semicon. Engr. (2311.TW / 2311 TT) Rating RESTRICTED Price (12-Apr-17, NT$) 38.30 Target price (NT$) Upside/downside (%)

Mkt cap (NT$/US$ mn) 315,779 / 10,334 Back-end to see mild growth, outpacing the Enterprise value (NT$ mn) 382,126 Number of shares (mn) 8,245 foundries dampened by customer inventory Free float (%) 70.5 ■ 1Q17 in line; 2Q17 to see mild growth. ASE's March consolidated/back- 52-wk price range (NT$) 39.90-28.54 ADTO-6M (US$ mn) 17.7 end sales were reported at NT$22.8 bn/NT$13.3 bn, up 8% MoM and in line Target price is for 12 months. with our expectations. 1Q17 consolidated and back-end sales declined 14%

and 12% QoQ, respectively, both in line with CS estimates and guidance (IC Research Analysts

ATM down low teens QoQ and EMS down 20%). The NTD has appreciated Randy Abrams, CFA against the USD and has a 50 bp impact on GMs for NT$0.5 movement. We 886 2 2715 6366 expect ASE to see a mid-high single digits rebound in 2Q17, still a few [email protected] percent below the above seasonal 4Q16 levels. Haas Liu 886 2 2715 6365 ■ Market share position improving. ASE was impacted in 2015 when its [email protected] bumping lines went down following the K7 incident and saw demand slowdown. However, management has indicated the company’s position is recovering with improving share. ASE’s SiP adjustments have been made; so the outlook is better, with major revenue from security and wearables. ASE believes it is the lowest cost producer in security and will build linearly to lower cost further and gain significant share, although it acknowledges that the product is a sunset project. The company is profitable in version two of a wearable and expects some growth in version three. ASE will also maintain a power savings module but revenue is smaller for this project. ■ Fan-out capacity ramping up, capex up modestly YoY. ASE has 15k WPM capacity on fan-out and targets 20-30k by the end of the year, ranging from low to high-end. Overall capex was US$680 mn; the equipment capex last year and this year would be between US$680 mn and US$880 mn depreciation, with more of the increase from fine-pitch copper pillar bumping and fan-out packaging. Wirebonder orders are mostly for replacements. ■ Maintaining estimates, deal still in progress. We remain restricted on ASE. We maintain our 2017/18E EPS at NT$2.95/NT$3.10. ASE indicated that the regulatory filing has been approved by the Taiwan FTC and is now under Phase II review with China’s MOFCOM. Management is also cooperating with the US FTC’s investigation and still expects to close the deal in 2017 subject to approval by shareholders and authorities. Share price performance Financial and valuation metrics

Year 12/15A 12/16A 12/17E 12/18E Revenue (NT$ mn) 285,202.0 274,884.0 289,734.9 305,282.4 EBITDA (NT$ mn) 53,139.2 54,964.2 56,427.0 57,501.7 EBIT (NT$ mn) 24,894.0 26,704.0 28,054.5 29,135.3 Net profit (NT$ mn) 19,185.0 21,973.0 23,512.4 24,646.0 EPS (CS adj.) (NT$) 2.50 2.85 3.05 3.20 Change from previous EPS (%) n.a. n.a. 0.0 0.0 Consensus EPS (NT$) n.a. n.a. 2.98 3.24 EPS growth (%) (15.2) 14.0 7.0 4.8 The price relative chart measures performance against the P/E (x) 15.3 13.4 12.5 12.0 TAIWAN SE WEIGHTED INDEX which closed at 9,817.68 Dividend yield (%) 5.2 4.2 4.3 4.5 on 12/04/17. On 12/04/17 the spot exchange rate was EV/EBITDA (x) 7.1 7.0 6.6 6.5 NT$30.56/US$1 P/B (x) 1.87 1.87 1.77 1.68

Performance 1M 3M 12M ROE (%) 12.5 14.0 14.5 14.4 Absolute (%) -0.6 10.9 11.1 Net debt/equity (%) 36.1 40.9 32.9 31.5

Relative (%) -1.9 6.6 -4.0 Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 32 13 April 2017

Focus tables and charts: ASE

Figure 77: ASE operating metrics NT$ mn 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 2011 2012 2013 2014 2015 2016 2017E Revenue 35,543 38,504 43,006 43,463 38,682 41,854 46,039 45,027 127,623 130,007 143,322 159,743 154,544 160,516 171,602 QoQ/YoY % -7% 8% 12% 1% -11% 8% 10% -2% 2% 2% 10% 11% -3% 4% 7% Gross profit 7,832 9,561 10,969 11,647 8,844 10,492 12,686 11,997 28,737 28,664 35,037 44,689 40,127 40,009 44,020 Gross Margin 22.0% 24.8% 25.5% 26.8% 22.9% 25.1% 27.6% 26.6% 22.5% 22.0% 24.4% 28.0% 26.0% 24.9% 25.7% Operating profit 3,222 4,957 6,193 6,372 3,727 5,273 7,348 6,628 15,326 14,363 19,009 26,467 21,604 20,744 22,976 Operating Margin 9.1% 12.9% 14.4% 14.7% 9.6% 12.6% 16.0% 14.7% 12.0% 11.0% 13.3% 16.6% 14.0% 12.9% 13.4% Capacity (000 bonders) Wirebonder 15,629 15,920 15,905 15,897 15,867 15,928 15,988 16,068 13,846 15,549 15,692 15,792 15,568 15,897 16,068 Tester 3,453 3,629 3,725 3,739 3,789 4,019 4,249 4,294 2,585 2,905 3,227 3,267 3,435 3,739 4,294 Copper % of wirebond 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% 31.8% 57.4% 63.1% 81.4% 85.7% 86.7% 87.7% Capex (US$mn) 115 257 184 127 140 256 256 148 789 1,075 668 1,055 583 683 800 Capex/Sales 10.7% 21.6% 13.6% 9.2% 11.4% 19.2% 17.5% 10.4% 18.1% 24.3% 13.8% 19.6% 11.2% 12.6% 13.8% Depreciation (US$mn) 193 197 205 205 208 206 206 201 692 705 779 799 821 799 821 Depr/Sales 17.9% 16.6% 15.1% 14.9% 17.0% 15.5% 14.1% 14.1% 15.9% 15.9% 16.1% 57.9% -44.7% 17.2% 17.1% Utilization Packaging 73% 78% 85% 83% 79% 83% 89% 89% 86% 80% 80% 82% 75% 80% 85% Testing 73% 77% 80% 80% 63% 65% 69% 67% 80% 80% 79% 77% 77% 78% 66% IDM % of mix 35% 33% 36% 35% 36% 36% 37% 37% 36% 34% 34% 34% 34% 35% 36% Flip chip % of mix 29% 31% 33% 32% 30% 32% 34% 33% 19% 24% 29% 28% 33% 31% 32% SiP % of sales 0.0% 0.0% 4.3% 11.2% 20.3% 18.3% 18.1% Source: Company data, Credit Suisse estimates

Figure 78: ASE estimates for 1Q17-3Q17 and 2017/2018 1Q17 2Q17 3Q17 2017 2018 ATM USI CS Street ATM USI CS Street ATM USI CS Street ATM USI CS Street ATM USI CS Street Sales 38,682 28,919 66,601 66,825 41,854 29,209 70,563 69,266 46,039 30,669 75,408 77,587 171,602 122,533 289,735 294,948 181,121 128,561 305,282 318,131 Chg (%) -11.0 -16.5 -13.6 7.1 8.2 1.0 5.9 3.7 10.0 5.0 6.9 12.0 6.9 6.1 5.4 7.3 5.5 4.9 5.4 7.9 GM (%) 22.9 9.7 17.5 18.1 25.1 9.7 18.9 19.1 27.6 9.9 20.9 19.4 25.7 9.8 19.3 19.0 25.4 9.9 19.3 18.7 OpM (%) 9.6 3.1 6.9 8.4 12.6 3.1 8.8 9.6 16.0 3.6 11.2 10.3 13.4 3.5 9.4 9.7 13.1 3.6 9.3 9.9 Net Inc. 3,726 547 3,726 4,813 4,808 561 4,808 5,402 7,301 709 7,301 6,950 22,712 2,744 22,712 24,150 23,846 3,012 23,846 26,015 EPS (NT$) 0.48 0.07 0.48 0.59 0.62 0.07 0.62 0.67 0.95 0.09 0.95 0.88 2.95 0.33 2.95 3.00 3.10 0.37 3.10 3.24 Source: Company data, Credit Suisse estimates

Figure 79: Back-end GMs maintain their range Figure 80: EMS GMs and OpM now stabilizing Utilization % GM% Margin (%) 14.0% 100% 35% 12.0% 90% 30% 10.0% 80% 25% 8.0% 70% 20% 6.0% 60% 15% 4.0% 50% 10% 2.0%

40% 5% 0.0%

1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17

4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 Assembly utilization Gross margin EMS GM EMS OpM

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 81: ASE can monetize its real estate projects Figure 82: ASE is generating positive FCF Real Estate inventory 2014 2015 Capex (US$ FCF (US$mn) mn) Land and buildings for sale $6 $5 $2,000 1,200 $1,750 1,000 Construction in progress $22,242 $23,957 $1,500 800 Land for construction $1,739 $1,751 $1,250 600 Real Estate Inventory $23,986 $25,714 $1,000 400 Real Estate Inventory Days 43.1 39.9 $750 200 $500 - Chip/EMS Inventory $20,163 $23,258 $250 -200

Chip/EMS Inventory Days 36.2 36.1 $0 -400

2003 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total Inventory $44,150 $48,972 1997 2017E Inventory Days 79.4 76.0 Operating CF Capex FCF

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Asia Semiconductor Sector 33 13 April 2017

Asia Pacific/Taiwan Semiconductor Devices

Powertech Technology (6239.TW / 6239 TT) Rating OUTPERFORM Price (12-Apr-17, NT$) 86.50 Target price (NT$) 102.00 Upside/downside (%) 17.9 A good start to the year as 1Q17 tops sales

Mkt cap (NT$/US$ mn) 67,396 / 2,206 Enterprise value (NT$ mn) 67,707 guidance, though 2Q17 growth will be modest Number of shares (mn) 779.15 Free float (%) 77.6 ■ 1Q17 sales better than expected on healthy memory demand. Powertech 52-wk price range (NT$) 93.50-63.00 reported March sales NT$4.3 bn, putting 1Q17 sales down 7% QoQ, ahead ADTO-6M (US$ mn) 7.7 of guidance for a high single digits to low teens decline and CS expectation Target price is for 12 months. for -10%. The better-than-expected 1Q17 sales were mainly driven by continued ramp-up of DRAM assembly production in Xian and healthy Research Analysts

demand for NAND. On seasonally lower utilisation and the impact from NTD Randy Abrams, CFA appreciation, GMs should decline modestly, by 100 bp to 21.5%. 886 2 2715 6366 [email protected] ■ Growth will stay mild in 2Q before a meaningful pick up in 2H17. Despite Haas Liu better 1Q17 sales, we expect 2Q17 to be up only low to mid-single digits due 886 2 2715 6365 to slower iPhone demand and weakness in China smartphone. However, the [email protected] momentum should start picking up in 3Q17 on the back of iPhone 8 launch, taking full year sales on track for high single digits to low-teens growth. GMs could see a mild improvement in 2017 from rising utilization but not as much from better mix as it did in 2016. ■ 2017 still supported by growth across logic and memory. Powertech expects the back-end industry to grow 7% YoY in 2017 and the company will continue to outgrow the industry with drivers including (1) ramp-up of Xian assembly with Micron from 5% of 2H16 to 10% of sales by mid-2017, (2) addition of Intel turnkey assembly, test and SSD SMT assembly (~3-5% sales), (3) 3D-NAND ramp-up from Toshiba, and (4) ongoing margin improvement and logic capacity expansion at Greatek. We maintain our 2017 estimates for 9% YoY sales growth to NT$52.6 bn and EPS growth of 18% YoY to NT$7.30. Powertech is not yet actively engaged with the new China memory projects but it noted that it ramped up high volume at Xian in 3 quarters and has existing facilities in Suzhou China to supply potential business. ■ Project visibility supports the outlook. We keep our 2017/2018 EPS estimates unchanged at NT$7.30/NT$7.87. We stay positive on the growth outlook and maintain OUTPERFORM and TP of NT$102, based on 14x 2017E EPS, at the upper end of its 11-15x range on continued sales growth across memory and logic, which should also support a rising dividend. Share price performance Financial and valuation metrics

Year 12/15A 12/16A 12/17E 12/18E Revenue (NT$ mn) 42,523.5 48,343.5 52,616.7 56,057.1 EBITDA (NT$ mn) 14,461.3 16,204.5 18,119.4 19,379.8 EBIT (NT$ mn) 5,643.8 7,632.4 8,454.8 9,021.9 Net profit (NT$ mn) 4,015.8 4,834.6 5,689.6 6,216.3 EPS (CS adj.) (NT$) 5.20 6.21 7.30 7.98 Change from previous EPS (%) n.a. n.a. 0.0 0.0 Consensus EPS (NT$) n.a. n.a. 7.36 8.17 EPS growth (%) 22.6 19.3 17.7 9.3 The price relative chart measures performance against the P/E (x) 16.6 13.9 11.8 10.8 TAIWAN SE WEIGHTED INDEX which closed at 9,817.68 Dividend yield (%) 3.5 4.0 5.0 5.9 on 12/04/17. On 12/04/17 the spot exchange rate was EV/EBITDA (x) 4.4 4.3 3.6 3.3 NT$30.56/US$1 P/B (x) 1.97 1.88 1.77 1.72

Performance 1M 3M 12M ROE (%) 12.3 13.9 15.4 16.1 Absolute (%) 0.1 -0.1 19.5 Net debt/equity (%) Net Cash 3.3 Net Cash Net Cash

Relative (%) -1.1 -4.4 4.4 Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 34 13 April 2017

Focus tables and charts: Powertech Figure 83: Powertech—1Q17-3Q17 and 2017-18 estimates CS vs street

1Q17 2Q17 3Q17 2016 2017 2018 (NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street Sales 12,660 12,478 Sales decline <12% QoQ 12,952 13,127 13,708 14,137 48,344 47,889 52,617 53,551 56,057 57,703 Chg (%) -7.2 -8.6 DRAM Positive 2.3 3.7 5.8 7.7 13.7 12.6 8.8 10.8 6.5 7.8 GM (%) 21.5 21.0 Flash positive 21.5 21.6 22.8 22.4 21.6 22.4 21.9 21.8 22.0 21.8 OpM (%) 15.5 15.2 Logic decline seasonally 15.6 15.8 17.1 16.7 15.8 4.9 16.1 15.9 16.1 16.3 Net Inc. 1,310 1,266 Flip chip and bump down 1,302 1,365 1,627 1,596 4,835 1,596 5,690 5,778 6,130 6,510 EPS (NT$) 1.68 1.63 1.67 1.76 2.09 2.05 6.21 6.28 7.30 7.48 7.87 8.18

Source: Company data, Credit Suisse estimates

Figure 84: Commodity DRAM has been stabilised Figure 85: Mix shifts toward logic and NAND flash Quarterly sales (NT$mn) 100% $7,000 90% $6,000 80% 70% $5,000 60% $4,000 50% $3,000 40% 30% $2,000 20% $1,000 10%

0%

2Q09 3Q11 4Q13 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

$0 1Q09

3Q11 4Q15 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 1Q16 2Q16 3Q16 4Q16 Commodity DRAM Mobile DRAM NAND Greatek Advanced Logic Advanced Logic Greatek NAND Mobile DRAM Commodity DRAM Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 86: Valuation near the midpoint of its range Figure 87: FCF to rebound in 2017 NT$ Powertech US GAAP PE band Op CF / Capex (NT$mn) Dividend / FCF Yield (%) 160 20,000 30%

140 16,000 18% 120 15x 12,000 6% 100 11x 80 8,000 -6% 60 7x 4,000 -18% 40 4x 0 -30% 20

0

CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 Op Cash Flow Capex FCF Yield

Dividend Yield Linear (FCF Yield)

May/07 May/08 May/04 May/05 May/06 May/09 May/10 May/11 May/12 May/13 May/14 May/15 May/16 May/03 Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Figure 88: GMs supported by stabilizing depreciation Figure 89: Powertech GMs continue to rebound Depreciation (NT$mn) GM % Revenue (NT$mn) GM / OpM (%) $3,500 35% $16,000 40%

$3,000 30% $14,000 35% $12,000 30% $2,500 25% $10,000 25% $2,000 20% $8,000 20% $1,500 15% $6,000 15% $1,000 10% $4,000 10% $500 5% $2,000 5%

$0 0% $0 0%

3Q17 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

3Q11 1Q15 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 3Q15 1Q16 3Q16 1Q17 3Q17

3Q06 1Q07 Depreciation GM % Revenue Gross Margin Operating Margin Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Asia Semiconductor Sector 35 13 April 2017

Americas/United States Semiconductor Equipment

Amkor Technology Inc. (AMKR) Rating NEUTRAL [V] Price (11-Apr-17, US$) 11.20 Target price (US$) 9.50 52-week price range (US$) 12.32 - 5.37

Market cap (US$ m) 2,676.96 1Q17 sales tracking in line with its peers, 2Q17 Target price is for 12 months. growth outlook supported by Samsung [V] = Stock Considered Volatile (see Disclosure Appendix)

Research Analysts ■ 1Q17 sales on track, 2Q17 to see a mild rebound. We believe Amkor is on

Randy Abrams, CFA track to reach the guidance for a sub-seasonal 8-16% QoQ decline 886 2 2715 6366 consistent with its Taiwan peers due to seasonal correction, inventory [email protected] adjustments in smartphones and delayed launch of Samsung’s Galaxy S8, Haas Liu offsetting more stable consumer, networking and automotive. For 2Q17, we 886 2 2715 6365 [email protected] expect somewhat more mild growth relative to our original +11% QoQ and possibly up high single digits with some lift from Samsung related builds plus still healthy demand from broad based IDMs into auto/industrial. ■ GMs to improve on higher utilization from a dip in 1Q17. The company’s 1Q17 GMs were guided down from 22.2% in 4Q16 to 13-17% due to lower utilization and higher opex from the K5 ramp. GMs will return to high-teens level though sales may fall shy of US$1bn+ reached in 4Q16. Management eventually targets leverage to be in the 20-25% range by improving efficiency and loading advanced capacity loaded with 2nd wave Asian customers. ■ Business should see its normal resumption post 1Q. Amkor’s 2017 target is to slightly outgrow semis from growing greater China sales from 5% exiting 2016 (still underpenetrated relative to Taiwan peers around 30%, growing automotive (25% of sales), adding fingerprint IC customers and SiP (20% of sales) with rising RF content. The company will add 1% sales adding Nanium single die fan out in 2Q17. 2017 capex was maintained at US$500mn, implying about US$200mn FCF and some debt repayment. ■ Maintain NEUTRAL - growth outlook already priced in. We largely maintain full year sales at US$4.1bn and keep 2017/2018E EPS $0.85/$0.95. We maintain our TP at $9.50 based on 13x 2017E EPS and 1.5x forward P/B based on 12% ROE and improving FCF (6% FCF/EV). We believe the company’s opportunity in Samsung and growth from China are already priced in with the stock is trading in line with its peers. Share price performance Financial and valuation metrics

Year 12/14A 12/15A 12/16E 12/17E EPS (Excl. ESO) (US$) 0.87 0.24 0.69 0.75 EPS (CS adj., ) 0.87 0.24 0.69 0.75 Prev. EPS (CS adj., US$) - - - - P/E (CS adj.) (x) 12.9 46.2 16.2 14.9 P/E rel. (CS adj., %) - 226.5 87.5 90.1 Revenue (US$ m) 3,129.4 2,884.6 3,893.6 4,087.5 EBITDA (US$ m) 761.2 659.8 849.1 925.9 Net Debt (US$ m) 1,078 1,071 923 690 On 11-Apr-2017 the S&P 500 INDEX closed at 2353.78 OCFPS (US$) 2.59 2.43 3.12 3.06 Daily Apr12, 2016 - Apr11, 2017, 04/12/16 = US$5.41 P/OCF (x) 2.7 2.5 3.6 3.7

Quarterly EPS Q1 Q2 Q3 Q4 Number of shares (m) 239.01 Price/Sales (x) 0.68 2015A 0.12 0.04 0.12 -0.04 BV/share (Next Qtr., US$) 5.2 P/BVPS (x) 1.9 2016E -0.00 0.02 0.25 0.42 Net debt (Next Qtr., US$ m) 1,119.1 Dividend (current, US$) - 2017E 0.01 0.18 0.29 0.27 Dividend yield (%) -

Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 36 13 April 2017

Focus tables and charts: Amkor Figure 90: Amkor 1Q17—3Q17 and 2017-2018 CS estimates vs Street AMKR Mar-17 Jun-17 Sep-17 F2016 F2017E F2018E CS Cons Guidance CS Cons CS Cons Reported Actual Cons Actual Cons Total Revenue $904.1 $900.0 $860-940mn $1,003.6 $954.0 $1,100.9 $1,126.0 $3,893.6 $4,087.5 $4,068.5 $4,289.5 $4,242.0 % Q/Q chng -11.5% -11.9% -8% to -16% 11.0% 5.5% 9.7% 18.0% % Y/Y chng 4.1% 3.6% 9.4% 4.0% 1.4% 3.7% 35.0% 5.0% 4.5% 4.9% 3.8% Total GM* 15.2% 15.0% 13-17% 19.1% 16.5% 20.6% 21.0% 17.9% 18.9% 18.3% 19.0% 19.3% R&D Expense* $38.2 $38.8 $37.6 $117.2 $151.0 $153.1 SG&A Expense* $72.0 $73.0 $72.3 $284.3 $288.9 $301.6 Operating Exp.* $110.1 $111.8 $109.9 $401.5 $439.9 $454.7 Operating Mgin* 3.0% 2.8% 7.9% 4.6% 10.6% 10.9% 7.5% 8.1% 7.7% 8.4% 8.3% Net Income* $3.2 ($7.0) ($27mn) to $12mn $42.5 $16.0 $70.5 $76.0 $164.7 $179.8 $163.0 $202.5 $198.0 Net Margin* 0.0% -0.8% 4.2% 1.7% 6.4% 6.7% 4.2% 4.4% 4.0% 4.7% 4.7% EPS* $0.01 -$0.03 ($0.11) to $0.05 $0.18 $0.07 $0.29 $0.30 $0.69 $0.75 $0.64 $0.85 $0.77 Fully diluted shares 239.2 239.2 239.2 238.8 239.2 239.2 Source: Company data, Credit Suisse estimates

Figure 91: Sales diversify beyond its top 2 customers Figure 92: GMs dropped on utilization in 1Q17 US$K GM (%) $1,200,000 30.0% $1,050,000 2013 2014 2015 % of '15 25.0% $900,000 Qualcomm $701 $548 $415 14.4% 20.0% Toshiba $310 $413 $317 11.0% $750,000 $600,000 15.0% Qualcomm + Toshiba $1,011 $961 $733 25.4% $450,000 YoY 0.0% -5.0% -23.7% 10.0% $300,000 Rest of Amkor $1,946 $2,168 $2,152 74.6% 5.0% $150,000 0.0% YoY 0.0% 11.4% -0.7% $0 Total Amkor $2,957 $3,129 $2,885 100.0% -$150,000 -5.0%

YoY 0.0% 5.8% -7.8%

Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Revenue GM% OpM%

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 93: FCF to rebound in 2017 after K5 is completed Figure 94: AMKR EV/EBITDA is in line with its range Capex (US$ mn) FCF (US$mn) EV/EBITDA $1,000 400 7.5 7.0 $800 300 6.5 6.0 $600 200 5.5 $400 5.0 100 4.5 $200 4.0 - 3.5 $0 3.0 -100 2.5 -$200 2.0 -200 1.5 -$400 1.0 -$600 -300 0.5

0.0

F2012 F2016 F1998 F1999 F2000 F2001 F2002 F2003 F2004 F2005 F2006 F2007 F2008 F2009 F2010 F2011 F2013 F2014 F2015

F2017E F2018E

Mar-09 Mar-06 Mar-07 Mar-08 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

Sep-11 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Operating CF Capex FCF Sep-05 EV/EBITDA Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 95: Amkor has closed the P/B gap to peers with improving ROE Price Mkt Cap EV/Sales (x) EV/EBITDA (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales) Company Ticker 4/11/2017 (US$mn) 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 Select backend peers Amkor AMKR $11.39 $2,470 0.9 0.8 0.7 4.1 3.6 3.0 20.9 17.4 13.5 1.9 1.8 1.5 9.4 10.1 11.5 ASE 2311.TW $38.70 $8,464 1.4 1.3 1.2 7.1 6.7 6.6 15.0 14.9 12.1 1.9 1.8 1.7 12.8 12.2 14.0 Chipbond 6147.TWO $47.30 $960 1.9 1.6 1.4 5.9 4.8 4.4 16.0 12.0 11.2 1.3 1.2 1.2 8.1 10.2 10.5 ChipMOS 8150.TW $26.75 $714 1.3 1.3 1.2 4.7 4.5 3.8 20.2 12.7 9.8 1.4 1.3 1.1 6.8 16.4 11.7 Powertech 6239.TW $86.00 $2,114 1.4 1.2 1.1 4.2 3.5 3.3 13.6 11.8 10.8 1.9 1.8 1.7 13.7 14.9 15.9 Median 1.4 1.3 1.2 5.3 4.7 4.1 16.3 13.8 11.6 1.9 1.8 1.6 11.1 13.3 12.9 Mean 1.5 1.3 1.2 5.5 4.9 4.5 17.0 14.0 12.0 1.8 1.7 1.6 10.7 13.0 13.0 Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 37 13 April 2017

Asia Pacific/Taiwan Semiconductor Devices

MediaTek Inc. (2454.TW / 2454 TT) Rating NEUTRAL Price (12-Apr-17, NT$) 214.00 Target price (NT$) 200.00 Upside/downside (%) -6.5 Sales near in line, but MIIT signals a soft China

Mkt cap (NT$/US$ mn) 338,572 / 11,080 Enterprise value (NT$ mn) 207,404 smartphone market Number of shares (mn) 1,582 Free float (%) 89.1 ■ 1Q17 sales just below the midpoint of guidance. Mediatek reported March 52-wk price range (NT$) 256-192 sales NT$20.8 bn, bringing 1Q17 sales down 18.3% QoQ versus -14% to ADTO-6M (US$ mn) 39.7 -22% guidance and slightly above our -20% estimate. The high teens sales Target price is for 12 months. decline in 1Q17 was mainly due to low season sales exacerbated by inventory adjustments from overbooking at leading China brands, limited Research Analysts

traction of its Helio x30 where it has cut most of its 10nm orders to TSMC, Randy Abrams, CFA some loss back to Qualcomm at the mid-high-end, and impact from rising 886 2 2715 6366 [email protected] NT$. We expect 1Q17 GMs to reach the lower-half of 32.5-35.5% guidance at 33.5% due to on-going competition and limited product refreshes. Haas Liu 886 2 2715 6365 ■ Slow China smartphones keep 2Q17 sales rebound muted. China [email protected] domestic sell-in data from China's MIIT (Ministry of Industry and Information Technology) indicates that smartphone shipments were down 26% QoQ 1Q17—even March rebounding 41% MoM. China smartphones in 1Q17 were +6% YoY but face tougher compares in 2Q17 as last year was up 22% QoQ and +14% YoY. We are below street for Mediatek now +15% QoQ in 2Q17 versus street +20-25%. ■ Stable non handset business offset by declining smartphones. We expect Mediatek’s sales to decline 2% YoY in 2017 as 10% growth from non- smartphones at above 40% GMs offset by the decline in smartphone business on limited shipment growth and continued pricing pressure. Growth across the non-handset business comes from Wi-Fi, ASIC, set-top and IoT chipsets and power management. In ASIC, Mediatek is shipping chipsets to two gaming console customers and the AP + connectivity in the Amazon Echo. For IoT, Mediatek has the modem, connectivity and compute for IoT for consumer devices, machine to machine (NB-IoT), and digital home. ■ Staying conservative with limited near-term catalysts. We keep our 2017/2018 Pro Forma EPS at NT$13.32/NT$16.50 and maintain our target price of NT$200, based on 15x 2017E EPS (12x cash). We stay conservative with sales decelerating and still declining margins holding back improvement for a few more quarters. Full year guidance implies a meaningful rebound in 2Q17, raising risk of further estimate cuts. Share price performance Financial and valuation metrics

Year 12/15A 12/16A 12/17E 12/18E Revenue (NT$ mn) 213,255.2 275,511.7 269,649.8 283,809.9 EBITDA (NT$ mn) 31,041.7 29,971.9 27,174.5 32,573.7 EBIT (NT$ mn) 25,908.0 23,075.8 20,025.0 25,435.6 Net profit (NT$ mn) 25,937.0 22,630.7 20,827.1 25,794.7 EPS (CS adj.) (NT$) 16.74 14.47 13.32 16.50 Change from previous EPS (%) n.a. n.a. 0.0 0.0 Consensus EPS (NT$) n.a. n.a. 14.96 16.54 EPS growth (%) (43.6) (13.6) (8.0) 23.9 The price relative chart measures performance against the P/E (x) 12.8 14.8 16.1 13.0 TAIWAN SE WEIGHTED INDEX which closed at 9,817.68 Dividend yield (%) 10.3 5.1 4.6 4.0 on 12/04/17. On 12/04/17 the spot exchange rate was EV/EBITDA (x) 6.4 7.1 7.0 4.9 NT$30.56/US$1 P/B (x) 1.38 1.42 1.31 1.25

Performance 1M 3M 12M ROE (%) 10.6 9.5 8.5 9.9 Absolute (%) -3.8 -1.4 -3.6 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Relative (%) -5.1 -5.7 -18.7 Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 38 13 April 2017

Focus tables and charts: Mediatek Figure 96: Mediatek 1Q17—3Q17 and 2017-2018 estimates CS vs. Street 1Q17 2Q17 3Q17 2016 2017 2018 (NT$ mn) CS Street Guidance CS Street CS Street Actual CS Street CS Street Sales $56,083 $56,777 NT$53.6-59.1bn $63,155 $68,097 $77,152 $77,863 $275,512 $269,650 $280,141 $283,810 $290,291 Chg -18.3% -17.3% -14-22% QoQ 12.6% 19.9% 22.2% 14.3% 29.2% -2.1% 1.2% 5.3% 4.9% GM% 33.5% 34.2% 32.5-35.5% 33.4% 34.2% 33.9% 34.8% 35.6% 34.0% 34.7% 35.2% 35.1% OpM% 2.0% 4.6% 1.7-2.3% 5.2% 6.8% 10.4% 8.4% 8.4% 7.4% 7.2% 9.0% 8.2% Net Inc. 2,114 4,789 FX: 31.8 3,562 6,469 7,732 6,628 22,631 20,827 24,349 25,795 27,038 GAAP EPS $3.91 $3.05 $2.28 $4.04 $4.94 $4.23 $14.47 $15.88 $15.33 $19.05 $16.94 $1.35 $3.05 $2.28 $4.04 $4.94 $4.23 $14.47 $13.32 $15.33 $16.50 $16.94 Pro Forma EPS Source: Company data, Credit Suisse estimates

Figure 2: China smartphone will tougher compares Figure 3: China 4G additions slowing down in 2017 China smartphones (mn) YTD YoY % China 4G subscriber net adds YTD (Mn) Net adds YTD (%) 550 25% 400 80% 440 20% 350 70% 330 15% 220 10% 300 60% 110 5% 250 50% - 0% 200 40% (110) -5% 150 30% (220) -10% (330) -15% 100 20% (440) -20% 50 10% (550) -25% - 0% Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 2014 2015 2016 2017 2014 YTD YoY 2015 YTD YoY 2014 2015 2016 2017 2016 YTD YoY 2017 YTD YoY 2016 YTD YoY 2017 YTD YoY Source: MIIT, Credit Suisse Source: Company data, Credit Suisse estimates

Figure 4: Helio declines in 4Q on a shift to exports Figure 5: Mediatek's stock pressured by lower GMs Revenue (NT$bn) Helio % of Mediatek sales Mediatek Stock GM / OpMs (%) $50 40% Price (NT$) $700 70% $45 35% $40 $600 60% 30% $35 $500 50% 25% $30 $400 40% $25 20% $300 30% $20 15% $200 20% $15 10% $10 $100 10% $5 5% $0 0%

$0 0%

1Q03 4Q15 2Q02 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 3Q16 1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 3Q01 3G 4G Mainstream 4G Helio 4G Helio Share price Corporate GM % Corporate OpM % Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 6: Mediatek operating assumptions

NT$mn unless noted 2013 2014 2015 2016 2017F 2018F 2019F 3G Smartphones (mn) 223.2 324.5 236.8 168.2 126.8 114.0 95.9 4G Smartphones (mn) 0.0 31.8 158.6 334.6 356.8 385.9 422.7 Smartphones (mn) 223.2 356.4 395.4 502.7 483.5 500.0 518.6 Tablets (mn) 21.9 41.3 44.1 41.9 38.9 36.5 33.1 Feature phones (mn) 354.0 300.0 257.0 251.6 216.8 192.1 158.5 Total Sales 135,968 213,062 213,255 275,510 269,650 283,810 291,422 GM % 44.0% 48.8% 43.2% 35.6% 34.0% 35.2% 35.3% Op M% 18.6% 22.2% 12.1% 8.4% 7.4% 9.0% 9.3% EPS $20.13 $29.67 $16.74 $14.47 $13.32 $16.50 $17.04 EPS growth 57.1% 47.4% -43.6% -13.6% -8.0% 23.9% 3.3% Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 39 13 April 2017

Asia Pacific/Taiwan Semiconductor Devices

Realtek Semiconductor (2379.TW / 2379 TT) Rating OUTPERFORM Price (12-Apr-17, NT$) 107.50 Target price (NT$) 130.00 Upside/downside (%) 20.9 1Q17 sales slightly better, new products still

Mkt cap (NT$/US$ mn) 54,282 / 1,776 Enterprise value (NT$ mn) 34,134 support +10% growth in 2017 Number of shares (mn) 504.95 Free float (%) 73.7 ■ 1Q17 sales top guidance, 2Q17 on track for a mild growth. 1Q17 sales 52-wk price range (NT$) 130-85.50 were up 1.9% QoQ, at the high-end of guidance for 0% to +2% QoQ as ADTO-6M (US$ mn) 8.2 orders pushed out from 4Q16 and networking, TV and set-top box stayed Target price is for 12 months. stable, offsetting PC peripherals slowdown in March and NTD appreciation. We expect 1Q17 GMs to decline modestly QoQ to the midpoint of its 42-44% Research Analysts

long-term range due to product mix shifting to lower margin TV SoCs. We Randy Abrams, CFA believe Realtek's sales should grow mid-single digits in 2Q17 from continued 886 2 2715 6366 [email protected] stable networking demand and new TV product ramps. Haas Liu ■ Existing growth drivers to drive some growth in 2017. Realtek has 886 2 2715 6365 several growth drivers in 2017 to support +10% YoY growth including (1) TV [email protected] controller: share gains in Korea and China, (2) Wi-Fi/Bluetooth: continued upgrades to 802.11ac migration and share gain in OTT set-tops, notebooks and low-end enterprise markets following BRCM's pullback (25% share) and (3) switch and broadband router: China home gateway projects with PON, Wifi and Switch continuing and supporting above corporate average growth. ■ New products shipping and adding incremental contribution. Realtek's growth in 2017 will be supplemented by new products including: (1) USB Type C: Realtek started shipments on its 2nd gen single chip in 2H16 integrating power delivery and video support. Management estimates 25-30% penetration in PCs/peripherals and potential for 10-15% share. (2) SSD: Sales started in late 2016 cooperation with Toshiba, Hynix, and Micron for PCI Express/SATA solutions at module houses with potential 5mn units. The company sees no impact from recent SSD shortage due to still limited volume and 3) IoT: Realtek’s IoT device with Arm M-series MCU and Wifi and Bluetooth (Bee) in remote controls/home audio could contribute 3% of sales. ■ Maintain OUTPERFORM as decent growth can drive EPS upside. We recently trimmed our 2017/2018E EPS from NT$8.40/NT$9.17 to NT$8.15/NT$9.00, vs the street's NT$7.61/8.02 on a potential NT$300 mn FX loss in 1Q17. We lowered our TP from NT$133.50 to NT$130.00 (16x 2017E P/E and 12x ex-US$500 mn net cash) but stay positive on Realtek's outlook on share gains in TV, Wi-Fi and networking and new products (SSD, Type- C). Share price performance Financial and valuation metrics

Year 12/14A 12/15A 12/16E 12/17E Revenue (NT$ mn) 31,263.3 31,745.8 38,914.0 42,628.2 EBITDA (NT$ mn) 3,953.2 3,267.7 5,042.7 6,048.2 EBIT (NT$ mn) 2,817.5 1,820.1 3,342.8 4,368.9 Net profit (NT$ mn) 3,092.5 2,428.0 3,039.9 4,113.0 EPS (CS adj.) (NT$) 6.12 4.81 6.02 8.15 Change from previous EPS (%) n.a. n.a. 0.0 0.0 Consensus EPS (NT$) n.a. n.a. 5.91 7.49 EPS growth (%) 1.2 (21.5) 25.2 35.3 The price relative chart measures performance against the P/E (x) 17.6 22.4 17.9 13.2 TAIWAN SE WEIGHTED INDEX which closed at 9,817.68 Dividend yield (%) 4.7 5.6 3.4 4.2 on 12/04/17. On 12/04/17 the spot exchange rate was EV/EBITDA (x) 9.1 11.1 6.9 5.4 NT$30.56/US$1 P/B (x) 2.46 2.44 2.38 2.28

Performance 1M 3M 12M ROE (%) 14.9 10.9 13.5 17.7 Absolute (%) -1.4 2.4 25.4 Net debt/equity (%) Net Cash Net Cash Net Cash Net Cash

Relative (%) -2.6 -1.9 10.4 Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 40 13 April 2017

Focus tables and charts: Realtek Figure 97: Realtek 1Q17—3Q17 and 2017-2018 CS estimates vs the street

1Q17 2Q17 3Q17 2016 2017 2018 (NT$ mn) CS Street CS Street CS Street Actual CS Street CS Street Sales $9,983 $9,917 $10,557 $10,530 $11,319 $11,303 $38,914 $42,628 $42,688 $46,291 $45,145 Chg 1.9% 1.2% 5.7% 5.5% 7.2% 7.3% 22.6% 9.5% 9.9% 8.6% 5.8% GM (%) 43.1% 43.3% 43.7% 43.5% 43.5% 43.0% 43.4% 43.5% 43.2% 43.5% 42.9% OpM (%) 9.4% 8.4% 10.8% 9.4% 11.2% 9.4% 8.6% 10.2% 8.9% 9.8% 9.1% PF EPS (NT$) $1.34 $1.59 $2.26 $1.98 $2.50 $2.18 $6.02 $8.15 $7.61 $9.00 $8.02

Source: Company data, Credit Suisse estimates Figure 98: Realtek GMs/OpMs improving with Figure 99: Realtek seeing growth in Wi-Fi and product mix and leverage switch, with SSD/IoT for 2017 Revenue GM/OpM (NT$mn) (%) Key Products % of FY16 % of FY17 Business Update 12,000 60 Wifi 31% 30% Share gains and migration to 11ac in PC Wifi 10,000 50 Switch/Router/DSL 19% 19% Telecom projects to continue through 2017 LCD TV/Monitor 20% 18% Gains into Korea #2 but at lower margins 8,000 40 Ethernet 14% 13% Mature product line, automotive a LT Driver Audio Codec 7% 7% Audio codec penetrating smartphones/tablets 6,000 30 Card Reader / Type C 4% 5% Target 10% share and 25-30% penetration 4,000 20 Camera Controller 4% 3% Gaining share in PC camera solutions SSD Controller 0% 2% Targeting 5-10% share with PCI/SATA designs 2,000 10 IoT 1% 3% Ameba/Bee designs expand, 2x+ growth in 2017 Total 100% 100%

0 0

1Q10 3Q11 1Q13 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 3Q10 1Q11 1Q12 3Q12 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16

1Q17E 3Q17E Revenue GM (excluding bonus) OpM Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research Figure 100: Realtek share price recently pulled back Figure 101: Realtek expanding R&D base to grow new business NT$ Realtek US GAAP PE Band Realtek headcount Realtek R&D % of total headcount 5,000 100% 180 22x 4,500 90% 150 4,000 80% 3,500 70% 120 15x 3,000 60% 2,500 50% 90 10x 2,000 40% 60 1,500 30% 6x 1,000 20% 30 500 10% 0 0%

0

Jul/07 Jul/08 Jul/01 Jul/02 Jul/03 Jul/04 Jul/05 Jul/06 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16

Jan/10 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E Employees R&D employees R&D as % of total headcount Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 102: Realtek P/E valuation is now more attractive vs. its peers Price Mkt Cap EV/Sales (x) EV/EBITDA (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales) Company 4/12/2017 (US$mn) 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 Realtek $108.50 $1,789 0.9 0.8 0.9 7.0 5.5 7.0 18.0 13.3 12.1 2.4 2.3 3.9 13.3 17.3 32.0 Mediatek $212.00 $10,951 0.8 0.7 0.6 7.0 7.2 5.2 14.6 15.9 12.9 1.4 1.3 1.2 9.6 8.1 9.6 Novatek $116.50 $2,315 1.2 1.1 1.0 9.1 8.0 6.9 14.2 12.5 10.9 2.5 2.4 2.3 17.9 19.3 21.0 Broadcom $217.55 $98,531 8.2 6.5 6.1 19.2 13.9 12.9 19.5 16.1 14.9 3.8 3.4 3.1 19.4 21.1 21.3 Silicon Labs $70.45 $2,979 4.2 3.9 3.6 18.7 18.9 15.9 25.3 24.5 21.3 3.6 3.3 2.8 14.8 12.3 14.1 Skyworks $100.14 $18,475 5.3 4.9 4.4 11.9 11.1 9.9 18.0 16.1 14.1 5.3 4.6 3.8 30.3 29.0 27.0 Median 3.2 3.3 3.2 15.3 12.5 11.1 18.7 16.1 14.5 3.1 2.9 2.6 16.4 15.8 17.5 Mean 3.7 3.3 3.1 18.2 13.5 10.5 22.0 18.2 14.8 3.1 2.8 2.6 16.1 16.3 17.8 Source: Company data, Credit Suisse estimates

Asia Semiconductor Sector 41 13 April 2017

Asia Pacific/Taiwan Technology Distribution

WPG Holdings Ltd (3702.TW / 3702 TT) Rating NEUTRAL Price (12-Apr-17, NT$) 38.20 Target price (NT$) (from 40.00) 38.00 Upside/downside (%) -0.5

Mkt cap (NT$/US$ mn) 65,853 / 2,155 A modest rebound from 2Q17 following the Enterprise value (NT$ mn) 126,548 Number of shares (mn) 1,724 sub-seasonal decline in 1Q17 Free float (%) 79.0 52-wk price range (NT$) 41.00-33.40 ■ 1Q17 sales decline below expectations. WPG reported March sales ADTO-6M (US$ mn) 5.9 NT$46.2 bn, up 25% MoM, taking 1Q17 sales down 14.5% QoQ and below Target price is for 12 months. initial expectations for a 9-10% decline due to China smartphone slowdown Research Analysts and Apple’s seasonality, offsetting the incremental contribution from server

Randy Abrams, CFA ICs (NT$10-12 bn quarterly run-rate). 886 2 2715 6366 [email protected] ■ Seasonal rebound in 2Q17. We expect the company to see growth in 2Q17 Haas Liu (CS +16% QoQ) as China smartphone brands start launching models from 886 2 2715 6365 mid-2Q17. The growth could continue through 3Q17 with Apple launching its [email protected] iPhone 8 anniversary edition, keeping full year sales up low-mid single digits YoY, below its recent 10%+ range as the focuses on profitability over growth. We model 5% YoY growth for the year on growth broadening to sensors, connectivity and MCUs for IoT, auto and industrial. The company also targets higher margin server and cloud projects with its US/European customers. ■ Growth drivers now diversifying into non-mobile. WPG noted that total distributors’ addressable market traditionally accounts for 30% of total semis but it sees that TAM rising. In addition to the existing growing exposure in China smartphone and Apple (analog, passive components, memory and controller chipsets) on share gains, WPG is positive on rising applications including sensors, connectivity and MCUs for IoT, automotive and industrial. ■ Maintain NEUTRAL but trimming estimates due to the China smartphone weakness. On softer 1Q17 sales, we trim 2017/2018E EPS from NT$4.00/NT$4.45 to NT$3.80/NT$4.20 vs the street's NT$4.16/NT$4.47. We maintain NEUTRAL but lower our target price to NT$38 (from NT$40), based on the same 10x 2017E EPS. The stock is trading at 9.6x/8.6x 2017/18E P/E, in line with its peers' 10.2x/9.7x 2017/18E P/E. WPG pays a solid 7% dividend yield (70% payout ratio) although will see more limited growth catalysts as it passes on lower margin fulfillment orders. Share price performance Financial and valuation metrics

Year 12/16A 12/17E 12/18E 12/19E Revenue (NT$ mn) 536,918.8 563,902.4 598,963.3 633,552.8 EBITDA (NT$ mn) 8,286.7 10,237.5 11,249.5 11,828.8 EBIT (NT$ mn) 7,975.9 9,926.7 10,938.7 11,518.0 Net profit (NT$ mn) 5,312.9 6,467.9 7,160.3 7,511.8 EPS (CS adj.) (NT$) 3.19 3.80 4.20 4.41 Change from previous EPS (%) n.a. (5.1) (5.6) - Consensus EPS (NT$) n.a. 4.15 4.48 EPS growth (%) (2.7) 19.2 10.7 4.9 The price relative chart measures performance against the P/E (x) 12.0 10.1 9.1 8.7 TAIWAN SE WEIGHTED INDEX which closed at 9,817.68 Dividend yield (%) 6.2 5.7 7.0 7.7 on 12/04/17. On 12/04/17 the spot exchange rate was EV/EBITDA (x) 15.4 12.2 10.9 10.8 NT$30.56/US$1 P/B (x) 1.28 1.19 1.13 1.08

Performance 1M 3M 12M ROE (%) 10.9 12.4 12.7 12.8 Absolute (%) -1.4 0.8 14.5 Net debt/equity (%) 122.2 105.9 98.5 101.6

Relative (%) -2.7 -3.5 -0.5 Source: Company data, Thomson Reuters, Credit Suisse estimates

Asia Semiconductor Sector 42 13 April 2017

Focus tables and charts: WPG Figure 103: WPG 1Q17—3Q17 and 2017-2018 CS estimates vs the street 1Q17 2Q17 3Q17 2016 2017 2018 (NT$ bn) CS CS(old) Street CS CS(old) Street CS CS(old) Street CS CS(old) Street CS CS(old) Street CS CS(old) Street Sales $119.1 $126.8 $126.6 $138.5 $142.4 $140.8 $155.1 $154.2 $152.8 $536.9 $536.9 $539.6 $563.9 $573.6 $570.2 $599.0 $608.1 $598.0 Chg -14.5% -9.0% -5.3% 16.3% 12.3% 18.3% 12.0% 8.3% 8.5% 4.1% 4.1% 4.7% 5.0% 6.8% 5.7% 6.2% 6.0% 4.9% GM (%) 4.18% 4.24% 4.25% 4.20% 4.27% 4.21% 4.12% 4.19% 4.18% 4.21% 4.21% 4.19% 4.14% 4.21% 4.19% 4.19% 4.22% 4.20% Op.M(%) 1.70% 1.68% 1.74% 1.84% 1.84% 1.80% 1.80% 1.83% 1.87% 1.49% 1.48% 1.70% 1.76% 1.80% 1.82% 1.83% 1.89% 1.87% Net Inc. 1,261 1,360 1,552 1,621 1,686 1,706 1,908 1,930 2,059 5,313 5,347 6,388 6,468 6,813 7,173 7,160 7,586 7,604 EPS (NT$) $0.74 0.80 $0.89 $0.95 0.99 $0.99 $1.12 1.13 $1.20 $3.19 $3.21 $3.76 $3.80 $4.00 $4.16 $4.20 $4.45 $4.47

Source: Company data, Credit Suisse estimates

Figure 104: WPG margins starting to stabilize Figure 105: WPG inventory days are below peak

WPG Revenue WPG GM and Op WPG Inventory Inventory days (NT$mn) Margin (%) (NT$bn) 180,000 7.0 $70,000 70

160,000 6.0 $60,000 60 140,000 5.0 $50,000 50 120,000 100,000 4.0 $40,000 40 80,000 3.0 $30,000 30 60,000 2.0 $20,000 20 40,000 20,000 1.0 $10,000 10

0 0.0 $0 -

1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

3Q07 3Q14 1Q06 3Q06 1Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 1Q15 3Q15 1Q16 3Q16 Sales GM (%) OpM (%) Inventory dollars Inventory days Linear (GM (%)) Linear (OpM (%)) Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 106: WPG revenue mix keeping stable Figure 107: WPG mix driven by 3Cs (%) 100 (%) 90 100 80 90 70 80 60 70 50 60 40 50 30 40 30 20 20 10 10 0

-

3Q06 1Q07 1Q17 1Q06 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 3Q17

3Q06 1Q12 1Q14 1Q16 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 3Q12 1Q13 3Q13 3Q14 1Q15 3Q15 3Q16 1Q17 3Q17 CoreComponent Analog & Mixed Signal Logic 1Q06 Discrete & Logic Memory Passive PC Communication Consumer Industrial Automotive Others PEMCO Optical Others Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 108: WPG’s P/E has stabilized at 10x Figure 109: WPG in-line with its distributor peers WPG US GAAP PE Band NT$ 70 17x 60 Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x) 50 13x Company Ticker 4/11/2017 (US$mn) 2016 2017 2018 2016 2017 2018 2016 2017 2018 WPG 3702.TW 38.3 2,155 0.2 0.2 0.2 11.9 9.6 8.6 1.3 1.2 1.8 40 10x WT Micro 3036.TW 44.15 679 0.1 0.1 0.1 12.7 8.9 8.0 1.2 1.1 1.1 Digital China 0861.HK 6.73 115 0.8 0.7 0.6 -47.7 28.5 15.7 1.7 1.8 1.7 30 Synnex 2347.TW 32.9 1,791 0.3 0.3 0.2 11.3 10.2 10.0 1.3 1.1 1.1 Arrow ARW 71.11 6,341 0.4 0.4 0.3 10.7 10.1 9.4 1.4 1.3 1.1 20 Avnet AVT 44.64 5,754 0.3 0.4 0.4 10.6 13.5 11.2 1.2 1.0 0.9 4x Median 0.3 0.3 0.3 11.0 10.2 9.7 1.3 1.2 1.1 Mean 0.4 0.3 0.3 1.6 13.5 10.5 1.4 1.3 1.3 10

0

Jul/06 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Jul/13 Jul/14 Jul/15 Jul/16

Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Jan/12 Jan/13 Jan/14 Jan/15 Jan/16 Jan/17 Jan/06 Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Asia Semiconductor Sector 43 13 April 2017

Companies Mentioned (Price as of 12-Apr-2017) ASM Pacific Technology Ltd (0522.HK, HK$107.0, OUTPERFORM, TP HK$127.0) Advanced Semicon. Engr. (2311.TW, NT$38.3) Amkor Technology Inc. (AMKR.OQ, $11.2, NEUTRAL[V], TP $9.5) Apple Inc (AAPL.OQ, $141.63) Broadcom Ltd (AVGO.OQ, $217.55) Egis Technology Inc. (6462.TWO, NT$229.5) GTK (2441.TW, NT$41.95) GlobalFoundries (Unlisted) Goodix (Unlisted) Hi Silicon (Unlisted) Hua Hong Semiconductor Limited (1347.HK, HK$10.42, OUTPERFORM, TP HK$11.0) Intel Corp. (INTC.OQ, $35.74) Jiangsu Changjiang Electronics Technology Co., Ltd (600584.SS, Rmb18.71) KYEC (2449.TW, NT$27.1) Marvell Technology Group Ltd. (MRVL.OQ, $14.85) MediaTek Inc. (2454.TW, NT$214.0, NEUTRAL, TP NT$200.0) Micron Technology Inc. (MU.OQ, $27.18) NVIDIA Corporation (NVDA.OQ, $98.12) Powertech Technology (6239.TW, NT$86.5, OUTPERFORM, TP NT$102.0) QUALCOMM Inc. (QCOM.OQ, $55.35) Realtek Semiconductor (2379.TW, NT$107.5, OUTPERFORM, TP NT$130.0) STATS ChipPAC (STTS.SI) Samsung Electronics (005930.KS, W2,095,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$9.36, NEUTRAL, TP HK$10.8) Spreadtrum Communication (SPRD.OQ^L13) Taiwan Semiconductor Manufacturing (2330.TW, NT$191.0, OUTPERFORM, TP NT$205.0) Texas Instruments Inc. (TXN.OQ, $79.41) Tianshui Huatian Technology Co., Ltd (002185.SZ, Rmb13.2) TongFu Microelectronics Co.,Ltd. (002156.SZ, Rmb10.88) Tsinghua Unigroup (Unlisted) United Microelectronics (2303.TW, NT$12.0, NEUTRAL, TP NT$12.0) Vanguard International Semiconductor (5347.TWO, NT$58.8, NEUTRAL, TP NT$53.0) WPG Holdings Ltd (3702.TW, NT$38.2, NEUTRAL, TP NT$38.0) Xiaomi (Unlisted) Xilinx (XLNX.OQ, $55.96)

Disclosure Appendix Analyst Certification I, Randy Abrams, CFA, 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 ASM Pacific Technology Ltd (0522.HK)

0522.HK Closing Price Target Price Date (HK$) (HK$) Rating 24-Apr-14 82.80 97.00 O 18-Jun-15 81.95 86.00 N 31-Jul-15 70.20 75.00 30-Oct-15 55.30 75.00 O 29-Jul-16 57.65 63.00 N 27-Oct-16 71.00 69.00 07-Feb-17 95.35 118.00 O * 06-Mar-17 104.60 124.00 22-Mar-17 106.20 127.00

* Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL

Asia Semiconductor Sector 44 13 April 2017

3-Year Price and Rating History for Amkor Technology Inc. (AMKR.OQ)

AMKR.OQ Closing Price Target Price Date (US$) (US$) Rating 29-Apr-14 7.80 8.40 O 29-Jul-14 9.43 10.20 N * 28-Oct-14 6.33 8.00 11-Feb-15 8.69 9.00 15-Jul-15 5.65 7.40 28-Jul-15 4.20 5.50 21-Aug-15 4.39 5.50 O 28-Apr-16 5.88 6.00 N 02-Aug-16 7.30 7.80

01-Nov-16 10.23 8.50 OUTPERFORM NEUTRAL 14-Feb-17 9.61 9.50 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Hua Hong Semiconductor Limited (1347.HK)

1347.HK Closing Price Target Price Date (HK$) (HK$) Rating 14-Oct-14 14.00 O * 05-Aug-15 7.87 12.00 12-Nov-15 7.74 11.00 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM

3-Year Price and Rating History for MediaTek Inc. (2454.TW)

2454.TW Closing Price Target Price Date (NT$) (NT$) Rating 01-May-14 472.00 570.00 O 07-Oct-14 455.50 540.00 10-Feb-15 454.00 520.00 29-Mar-15 419.00 425.00 N 27-Apr-15 410.50 405.00 15-Jun-15 409.00 430.00 03-Aug-15 299.00 300.00 02-Nov-15 270.00 250.00 11-Jan-16 209.00 230.00

18-Apr-16 234.50 250.00 OUTPERFORM NEUTRAL 02-May-16 230.00 225.00 27-Jan-17 213.50 220.00 22-Mar-17 227.50 200.00 * Asterisk signifies initiation or assumption of coverage.

Asia Semiconductor Sector 45 13 April 2017

3-Year Price and Rating History for Powertech Technology (6239.TW)

6239.TW Closing Price Target Price Date (NT$) (NT$) Rating 29-Apr-14 46.25 59.00 O 07-Jul-14 54.60 63.00 16-Oct-14 50.60 60.00 26-Jan-15 52.60 55.00 N 16-Apr-15 54.40 56.00 29-Jul-15 56.90 62.00 O 27-Oct-15 65.30 78.00 30-Oct-15 72.00 78.00 N 13-Jul-16 73.90 85.80 O 10-Oct-16 83.60 95.00 OUTPERFORM NEUTRAL 25-Oct-16 91.40 102.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Realtek Semiconductor (2379.TW)

2379.TW Closing Price Target Price Date (NT$) (NT$) Rating 12-May-14 87.80 84.00 N 07-Aug-14 98.80 98.00 28-Apr-15 99.30 94.00 15-Jul-15 75.80 88.00 28-Jul-15 70.20 73.50 18-Jan-16 74.00 76.00 18-Apr-16 86.90 97.50 05-Jul-16 98.90 107.50 26-Jul-16 108.00 133.50 O 10-Apr-17 109.50 130.00 NEUTRAL OUTPERFORM * Asterisk signifies initiation or assumption of coverage.

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

005930.KS Closing Price Target Price Date (W) (W) Rating 06-May-14 1,346,000 1,760,000 O 07-Jul-14 1,292,000 1,740,000 08-Jul-14 1,295,000 1,720,000 28-Aug-14 1,242,000 1,700,000 07-Oct-14 1,162,000 1,680,000 03-Sep-15 1,122,000 1,630,000 29-Oct-15 1,325,000 1,785,000 11-Jan-16 1,152,000 1,690,000 28-Jan-16 1,145,000 1,550,000 01-Jun-16 1,333,000 1,702,000 OUTPERFORM

28-Jul-16 1,507,000 1,790,000 15-Dec-16 1,759,000 2,400,000 24-Jan-17 1,908,000 2,650,000 09-Mar-17 2,010,000 2,900,000 * Asterisk signifies initiation or assumption of coverage.

Asia Semiconductor Sector 46 13 April 2017

3-Year Price and Rating History for Semiconductor Manufacturing International Corp. (0981.HK)

0981.HK Closing Price Target Price Date (HK$) (HK$) Rating 30-Apr-14 6.30 7.30 N 21-Jul-14 7.70 8.00 23-Mar-15 6.80 8.60 O 16-Apr-15 8.50 10.00 08-May-15 8.40 9.00 N 12-Aug-15 7.40 8.00 12-Nov-15 8.80 9.70 O 19-Feb-16 6.60 9.30 11-Nov-16 11.20 10.90 N 16-Jan-17 10.56 10.80 NEUTRAL OUTPERFORM * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Taiwan Semiconductor Manufacturing (2330.TW)

2330.TW Closing Price Target Price Date (NT$) (NT$) Rating 18-Apr-14 123.00 137.00 O 10-Jul-14 134.50 150.00 17-Jul-14 124.50 145.00 08-Jan-15 138.00 145.00 N 17-Jul-15 140.00 150.00 16-Oct-15 137.50 156.00 11-Dec-15 139.50 163.00 O 31-Mar-16 162.00 177.00 11-Jul-16 170.00 185.00 12-Oct-16 189.50 205.00 OUTPERFORM NEUTRAL * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for United Microelectronics (2303.TW)

2303.TW Closing Price Target Price Date (NT$) (NT$) Rating 02-May-14 13.15 14.00 N 30-Oct-14 13.20 14.50 26-Jan-15 15.50 16.00 28-Jan-15 15.65 18.00 11-May-15 14.00 R 12-May-15 14.00 18.00 N 30-Jul-15 11.35 13.50 27-Jul-16 12.55 13.00 23-Jan-17 11.55 12.00 * Asterisk signifies initiation or assumption of coverage. NEUTRAL REST RICT ED

Asia Semiconductor Sector 47 13 April 2017

3-Year Price and Rating History for Vanguard International Semiconductor (5347.TWO)

5347.TWO Closing Price Target Price Date (NT$) (NT$) Rating 30-Apr-14 41.20 50.00 N 26-Jan-15 54.50 56.00 04-May-15 44.25 56.00 O 10-Jul-15 40.80 54.00 04-Aug-15 34.30 50.00 28-Jan-16 43.00 52.00 18-Apr-16 51.60 52.00 N 04-May-16 49.75 53.00 08-Aug-16 54.70 54.00 07-Oct-16 60.00 59.00 NEUTRAL OUTPERFORM 23-Feb-17 60.70 57.00 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for WPG Holdings Ltd (3702.TW)

3702.TW Closing Price Target Price Date (NT$) (NT$) Rating 13-May-14 39.60 41.00 N 05-Aug-14 41.30 43.00 31-Oct-14 37.00 42.00 04-Feb-15 40.20 43.00 05-Aug-15 34.75 40.00 03-Feb-16 32.40 37.00 04-May-16 34.15 38.00 13-Jul-16 39.30 40.20 07-Nov-16 37.70 43.00 11-Jan-17 37.50 41.00 NEUTRAL

07-Feb-17 38.00 40.00 * Asterisk signifies initiation or assumption of coverage. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most 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 ra tings 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 se ctor, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative 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 ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich 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:

Asia Semiconductor Sector 48 13 April 2017

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors. Credit Suisse's distribution of stock ratings (and banking clients) is:

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Target Price and Rating Valuation Methodology and Risks: (12 months) for ASM Pacific Technology Ltd (0522.HK) Method: Our target price of HK$127 for ASM Pacific Tech reflects 22x 2018E P/E (price-to-earnings), which is in-line with its -0.5SD of its 5-year range which is supported by 30% pro-forma EPS CAGR. ASMPT has maintained its share in back-end and SMT with GMs resilient vs. 2012-13 shifting to more Asian production and outsourcing. Company specific growth drivers include 1) fan-out packaging ramp, 2) JV with Taiwan back-end player for MIS, 3) CMOS image sensor growth with more advanced/dual camera and 4) equipment retooling in 2017 for iPhone 8. We have a OUTPERFORM rating on the stock as we believe ASMPT worth for a re-rating driven by growth cycle, higher shareholder return and beneficiary on SZ-HK Connect. Risk: Risks that could impede achievement of our HK$127 target price and OUTPERFORM rating for ASM Pacific include the slower than expected back-end equipment booking rebound and an extended inventory correction cycle or a global macro slowdown, hurting backend capex spending and industry equipment bookings. Target Price and Rating Valuation Methodology and Risks: (12 months) for Amkor Technology Inc. (AMKR.OQ) Method: Our target price of $9.50 for Amkor Technology is based on the 1.5x forward P/B. Valuation is at the lower-end, at 0.8x EV/sales vs. its 0.5-1.2x range and 3.2x EV/EBITDA vs. its 2.5-5x range. We maintain our NEUTRAL on Amkor due to less upside with the tech outlook more mixed and potentially a more mild 2H refresh from iPhone 7. Risk: The following are risks to our $9.50 price target and NEUTRAL rating for Amkor Technology. We think there is a risk that a worse-than- expected inventory correction or macro demand weakness could result in pricing, margin, estimate and multiple risks for the group. Target Price and Rating Valuation Methodology and Risks: (12 months) for Hua Hong Semiconductor Limited (1347.HK) Method: Our target price of HK$11 for Hua Hong Semiconductor Limited is based on 0.9x P/B (price-to-book). Hua Hong offers stable and profitable low teens growth, mid-teens pretax margins and positive FCF as an 8" China foundry targeting specialty semiconductors using legacy capacity and also receiving China gov't support on R&D and Manufacturing. We maintain Outperform on Hua Hong. Risk: Hua Hong has several risks that could impact the business outlook and our HK$11 target price cause us to change our Outperform rating: (1) 8" applications could migrate to 12". (2) Hua Hong's access to the Huali 12" fab is not assured. (3) China support could wane – private forces sometimes prevail. (4) The company will stay closely held and government backed post the IPO. Target Price and Rating Valuation Methodology and Risks: (12 months) for MediaTek Inc. (2454.TW)

Asia Semiconductor Sector 49 13 April 2017

Method: Our target price of NT$200 for Mediatek is based on 15x 2017E EPS (earnings per share), in-line with global peers. We have a conservative outlook as the company does yet control its destiny on pricing and margins due to fierce competition and thus have a NEUTRAL rating on Mediatek. Risk: Risks that could cause the share price to diverge from our NT$200 target price and cause us to change our NEUTRAL rating for Mediatek include the impact of competitive products and pricing, timely design acceptance by its customers, timely introduction of new technologies, ability to ramp new products into volume, industry-wide shifts in supply and demand for semiconductor products, industry overcapacity, availability of manufacturing capacity, and financial stability in end markets. Target Price and Rating Valuation Methodology and Risks: (12 months) for Powertech Technology (6239.TW) Method: Our NT$102 target price for Powertech Technology is based on a 14x forward P/E (price-to-book), midpoint of its post crisis range. The stock is protected by 60% payout ratio, implying a 6% yield, also providing some downside protection for the stock, with lift into 2016 for the Xian assembly. We have an OUTPERFORM rating on Powertech as we see the company's business outlook improving with growing content in Apple and also new opportunities in Micron and Intel. Risk: The risks that may impede achievement of our NT$102 target price and our OUTPERFORM rating for Powertech are: (1) The strong strategic partnerships with Kingston, Toshiba, and Elpida limit its ability to supply the rest of the industry, and also create a concentrated customer risk with close to 80% of sales coming from the Japan memory sector; (2) Price competition from its peers is more severe than expected; (3) Powertech, like its peers, would be affected by an unexpected slowdown in the global economy; (4) Cost control is not as good as expected; and (5) There is a more severe drop in DRAM pricing than expected, leading to higher pricing pressure and a decline in ASPs. Target Price and Rating Valuation Methodology and Risks: (12 months) for Realtek Semiconductor (2379.TW) Method: Our target price of NT$130 and OUTPERFORM rating are based on 16x 2017E EPS, in line with its peers. Realtek's upside could continue from sales into new products, and more benign competition also drives operating leverage. Risk: The major risk to Realtek achieving our NT$130 target price and cause us to change our OUTPERFORM rating is the company's business concentration on the PC industry. Due to the large size and standard nature of the architecture, many of Realtek's products face competition and commoditization, placing risks on pricing and margins. The segment is also at risk of slowdown as consumer purchasing shifts to tablets or other media consumption devices where Realtek may have less silicon designed in. Other risks include: 1) its capability to gain market share in key products; 2) its margins trends, 3) foundry manufacturing risks, and 4) inventory cycle risks to sales when channel inventories are at high levels. Target Price and Rating Valuation Methodology and Risks: (12 months) for Semiconductor Manufacturing International Corp. (0981.HK) Method: Our HK$10.8 target price for Semiconductor Manufacturing International Corp. is based on 1.3x P/B (price-to-book), at the high end of its 1-1.4x past three-year range. We have a NEUTRAL rating on SMIC due to profitabilty upside limited by its investment. Risk: Risks that could impede achievement of our HK$10.8 target price and cause us to change our NEUTRAL rating for SMIC include: (1) the global semiconductor up-cycle is not as strong as market expected (being an upstream company, SMIC tends to be more cyclical than other tech plays). (2) Price competition from peers is more severe than expected. (3) SMIC, like its peers, will be affected by any unexpected slowdown in the global economy. (4) Its advanced technology products do not come out as the company has scheduled them to. Target Price and Rating Valuation Methodology and Risks: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW) Method: Our NT$205 target price for TSMC is based on 14x 2018 EPS (earnings per share), implying 3x P/B (price-to-book), near the midpoint of its average 11-15x and 2.5-3.5x range. We see its business outlook improving and technology leadership should keep its market share and profitability intact and dividends will likely rise again as capex moderates; we therefore have an OUTPERFORM rating on the stock. Risk: Risks that could impede achievement of our NT$205 target price and OUTPERFORM rating for TSMC would include: fierce competition, demand failing to pick up or Apple orders not being as strong as expected. Target Price and Rating Valuation Methodology and Risks: (12 months) for United Microelectronics (2303.TW) Method: Our NT$12.00 target representing 0.65x P/B as we could see a bounce from over-sold levels once cyclical trends show signs of improvement. While the stock normally sees a trade into a bottoming and also ramp on its most advanced node, upside may be contained by muted profitability, sluggish end markets and a still competitive end market with TSMC also targeting to protect share and grow its 28nm in 2016. We maintain Neutral on UMC.

Asia Semiconductor Sector 50 13 April 2017

Risk: Risks to our NT$12.00 target price and cause us to change our Neutral rating for United Microelectronics include: While the positive trade could continue, we stay Neutral balancing rising competition and slow ramp in 28nm dampens its margins. In addition, the company is also seeing some market share loss in its 8 inch foundry business. Target Price and Rating Valuation Methodology and Risks: (12 months) for Vanguard International Semiconductor (5347.TWO) Method: Our target price of NT$53 for Vanguard International Semiconductor is based on 15x forward P/E (price-to-earnings) and 12x ex-cash 2017 P/E (price-to-earnings) as near-term restocking is cooling down in 2H16 though it would still offer 7% cash yield at that level supported by US$700 mn cash that could be returned in buybacks (38% of its market cap) and 8-10% FCF (free cash flow) yield. While ROE (return on equity) looks modest at 15%, RONA (return on net assets), excluding the cash, is a healthy 32%. Thus, we have an NEUTRAL rating on Vanguard. Risk: The upside risk that may impede achievement of our NT$53 target price and NEUTRAL rating for Vanguard International Semiconductor includes a growing fingerprint business. The downside risk would be weaker-than-expected driver IC demand. Target Price and Rating Valuation Methodology and Risks: (12 months) for WPG Holdings Ltd (3702.TW) Method: WPG's target price of NT$38 is based on mid-cycle 10x 2017 EPS. WPG offers decent unit growth from its EM exposure and pays a solid 7% dividend yield (50-70% payout ratio). The company continues to strategically grow sales and manage opex to offset modest gross margin erosion to maintain stable earnings. We maintain Neutral on WPG. Risk: The major risks to our 12-month target price of NT$38 and Neutral rating for WPG (3702.TW) include: (1) outlook of WPG's semiconductor distribution business is tied to the overall semiconductor demand; (2) relationship with IC suppliers; (3) risk of excess component and cash flow management; and (4) financial costs and availability of bank credits.

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 The subject company (2303.TW, AMKR.OQ, 2330.TW, 005930.KS, AAPL.OQ, INTC.OQ, QCOM.OQ, NVDA.OQ, MRVL.OQ, XLNX.OQ, AVGO.OQ, 6462.TWO, MU.OQ, 2311.TW) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (005930.KS, AAPL.OQ, INTC.OQ, QCOM.OQ, MRVL.OQ, AVGO.OQ, MU.OQ, 2311.TW) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (005930.KS, AAPL.OQ, INTC.OQ, QCOM.OQ, XLNX.OQ, AVGO.OQ) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (AVGO.OQ, MU.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (005930.KS, AAPL.OQ, INTC.OQ, QCOM.OQ, MRVL.OQ, AVGO.OQ, MU.OQ, 2311.TW) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2303.TW, 0522.HK, 0981.HK, 2454.TW, 6239.TW, AMKR.OQ, 2330.TW, 2379.TW, 005930.KS, AAPL.OQ, INTC.OQ, QCOM.OQ, 002185.SZ, TXN.OQ, NVDA.OQ, MRVL.OQ, XLNX.OQ, AVGO.OQ, 6462.TWO, MU.OQ, 2311.TW) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (005930.KS, AAPL.OQ, INTC.OQ, QCOM.OQ, XLNX.OQ, AVGO.OQ) within the past 12 months As of the date of this report, Credit Suisse makes a market in the following subject companies (AAPL.OQ). 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 (2303.TW, 0522.HK, 0981.HK, 1347.HK, 2454.TW, 3702.TW, 6239.TW, AMKR.OQ, 2330.TW, 2379.TW, 005930.KS, INTC.OQ, QCOM.OQ, 600584.SS, 002185.SZ, TXN.OQ, MRVL.OQ, XLNX.OQ, AVGO.OQ, 6462.TWO, MU.OQ, 2311.TW) within the past 12 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2303.TW, 2454.TW, 3702.TW, 6239.TW, 2330.TW, 2379.TW, 6462.TWO, 2311.TW). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (005930.KS). Credit Suisse beneficially holds >0.5% short position of the total issued share capital of the subject company (3702.TW). Credit Suisse has a material conflict of interest with the subject company (INTC.OQ) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Intel Corp (INTL) on its announced proposed acquisition of LSI’s Axxia Networking Business from Avago Technologies Limited (AVGO). Credit Suisse has a material conflict of interest with the subject company (QCOM.OQ) . Credit Suisse is Financial Advisor to NXP Semiconductors (NXPI.OQ) on their sale to Qualcomm Incorporated (QCOM.OQ). Credit Suisse has a material conflict of interest with the subject company (AVGO.OQ) . Credit Suisse is Financial Advisor to Broadcom Limited (AVGO.OQ) on their acquisition of Brocade Communications Systems, Inc. (BRCD.OQ). Credit Suisse has a material conflict of interest with the subject company (2311.TW) . Credit Suisse is acting as a financial advisor to Advanced Semiconductor Engineering, Inc. in relation to the proposed merger with Siliconware Precision Industries Co. Ltd.

Asia Semiconductor Sector 51 13 April 2017

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Asia Semiconductor Sector 52 13 April 2017

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