Information Technology / Taiwan 3008 TT Information Technology / Taiwan 2 April 2014

Largan Precision

Largan Precision Target (TWD): 1,150.00  1,750.00 Upside: 18.2% 3008 TT 1 Apr price (TWD): 1,480.00

Dual engines to drive earnings growth 1 Buy (from Hold) 2 Outperform • We expect Largan to land the lion’s share of iPhone 6 lens- 3 Hold module orders, for which it should see a 20-30% ASP premium 4 Underperform • We forecast China brands to contribute 30-35% of Largan’s 5 Sell revenue in 2014, up from 20% in 2013 • Upgrading to Buy (1), from Hold (3); raising target price to TWD1,750 for potential upside of 18.2%

How do we justify our view?

China brands: rising volumes because we are more positive on and ASPs. China brands are Largan’s prospects of winning Apple upgrading their cameras orders and its revenue from China this year, which should lead to higher brands. ASPs for Largan. We also expect Forecast revisions (%) Kylie Huang Largan to increase its share of such Year to 31 Dec 14E 15E 16E (886) 2 8758 6248 orders given its leading position in Revenue change 3.3 10.4 n.a. [email protected] high-end lens modules, and forecast Net profit change 10.0 18.9 n.a. Core EPS (FD) change 10.0 18.9 n.a. China brands to contribute 30-35% Jason Chen Source: Daiwa forecasts (886) 2 8758 6251 of its revenue in 2014 (20% in 2013). [email protected] Spec upgrades should continue. Share price performance We expect lens specifications to be (TWD) (% ) ■ What's new upgraded in the next few years, and 1,500 175 1,275 151 We turn more positive on Largan’s Largan, as an industry leader, looks prospects for 2014-15, as we believe 1,050 128 well placed to benefit from this trend. 825 104 the company is in poll position to 600 80 win the majority of lens-module ■ What we recommend Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 orders for the next iPhone and will Largan (LHS) On upgrades to our profit-margin Relative to TWSE Index (RHS) benefit from the increasing volumes and revenue forecasts, we revise up of China handsets. 2014-15E EPS by 10-19%. In turn, 12-month range 688.00-1,480.00 we upgrade Largan to Buy (1), from Market cap (USDbn) 6.54 ■ What's the impact Hold (3), and raise our 6-month 3m avg daily turnover (USDm) 39.00 Likely to win more iPhone 6 target price to TWD1,750 (from Shares outstanding (m) 134 Major shareholder Ch'en Shih Ch'ing (5.1%) orders. Our recent market research TWD 1,150), based on 18x 1-year has assuaged our concern that forward EPS (formerly 14x), a 1SD Largan might face new competition Financial summary (TWD) premium to the average of its 3-year Year to 31 Dec 14E 15E 16E in securing lens-module orders for range of 9-24x, as we expect Revenue (m) 34,750 40,680 46,830 the next iPhone (iPhone 6). We now stronger operating-profit growth for Operating profit (m) 14,466 17,086 19,940 believe it will win a dominant share 2014. We forecast soft 1Q14 revenue Net profit (m) 11,955 14,088 16,489 of these orders, backed by its and earnings, which should be an Core EPS (fully-diluted) 89.125 105.022 122.923 technological edge and execution EPS change (%) 24.4 17.8 17.0 opportunity to accumulate the Daiwa vs Cons. EPS (%) 6.9 11.1 3.3 skills. Though the camera should shares. The key risk is greater-than- PER (x) 16.6 14.1 12.0 remain at 8MP, the new design expected price competition. Dividend yield (%) 1.9 3.5 4.2 should be highly complex (likely DPS 28.5 52.5 61.5 with optical image stabilisation) and PBR (x) 5.2 4.1 3.4 ■ How we differ EV/EBITDA (x) 10.8 8.7 7.9 we estimate Largan could see a 20- We are above the Bloomberg ROE (%) 35.0 32.8 31.2 30% ASP premium over 5S modules. consensus on 2014-16E EPS, likely Source: FactSet, Daiwa forecasts

See important disclosures, including any required research certifications, beginning on page 14 Information Technology / Taiwan 3008 TT 2 April 2014

1 Buy (from Hold) How do we justify our view? 2 Outperform

3 Hold  Growth outlook

4 Underperform  Valuation 5 Sell  Earnings revisions

 Growth outlook  Largan: sales growth, EPS growth, and ROE trend Following our revisions to 2014-15E EPS, we forecast 40% 80% Largan’s earnings to grow by 24% YoY (13% previously) 35% 70% for 2014 and 18% YoY (9% previously) for 2015. The 30% 60% company reported 72% YoY growth in EPS for 2013. 25% 50%

20% 40% Given our expectation that Largan will secure the lion’s share of orders for lens modules for the iPhone 6 and 15% 30% see an increasing revenue contribution from China 10% 20% brands, we now forecast higher revenue growth of 27% 5% 10% YoY for 2014 (23% previously) and 17% for 2015 (10% 0% 0% previously). 2011 2012 2013 2014E 2015E 2016E ROE (LHS) Sales growth (RHS) EPS growth (RHS) Source: Company, Daiwa forecasts

 Valuation  Largan: one-year-forward PER We are upgrading our rating for Largan to Buy (1), from (TWD) Hold (3), and raising our 6-month target price to 1,600 TWD1,750 (from TWD1,150), based on a one-year- 1,400 forward PER of 18x (from 14x). Our new target multiple 1,200 of 18x is 1SD above the average of its past 3-year trading 1,000 800 range of 9-24x, which we think justified as we are now 600 more upbeat on Largan’s operating-profit growth in 400 2014. 200 0 The stock is trading at PERs of 16.6x for 2014E and Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 14.1x for 2015E, which we view as undemanding given Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 our forecast for solid earnings growth over the same Largan 6x 12x 18x 24x period. Source: TEJ, Daiwa forecasts

 Earnings revisions  Largan: Bloomberg 2014-15 EPS forecast revisions

The Bloomberg-consensus 2014-15 EPS forecasts have (TWD) risen steadily over the past 2 years in response to strong 120 growth in Largan’s revenue and earnings on the back of 100 Apple’s “iDevices”. Following the 10-19% increases to 80 our 2014-15 EPS forecasts, we are 7-11% above the consensus forecasts, likely because we are more positive 60 on the prospect of Largan winning the majority of lens 40 module orders for the iPhone 6 and on the revenue 20 contribution of China brands. 0 Jul-12 Jul-13 Jan-13 Jan-14 Mar-12 Mar-13 Mar-14 Sep-12 Nov-12 Sep-13 Nov-13 May-12 May-13

2014E EPS 2015E EPS Source: Bloomberg

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Financial summary

 Key assumptions Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Mobile phone lens shipment ('000 173,300 215,100 286,554 344,730 483,614 580,082 671,119 781,364 units) Blended ASP of handset lens (USD) 1.12 1.21 1.33 1.34 1.47 1.66 1.70 1.72 Gross margin of VCM assembly (%) 5.0 7.3 6.8 5.3 6.0 6.0 6.0 5.0

 Profit and loss (TWDm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Mobile Phone Lens Revenues 7,421 11,433 15,243 19,190 26,623 34,007 39,639 45,950 DSC Lens Revenues 377 555 391 415 449 452 446 109 Other Revenue 357 363 351 468 362 292 595 771 Total Revenue 8,154 12,351 15,984 20,072 27,433 34,750 40,680 46,830 Other income 00000000 COGS (4,580) (6,546) (9,043) (11,710) (14,472) (17,782) (20,828) (23,930) SG&A (345) (374) (506) (530) (887) (1,018) (1,126) (1,205) Other op.expenses (507) (770) (963) (1,034) (1,293) (1,484) (1,640) (1,755) Operating profit 2,722 4,661 5,472 6,798 10,781 14,466 17,086 19,940 Net-interest inc./(exp.) 30 28 50 84 122 168 233 321 Assoc/forex/extraord./others (109) (356) 314 (71) 598 (55) (54) (54) Pre-tax profit 2,643 4,334 5,837 6,811 11,501 14,580 17,264 20,207 Tax (157) (289) (638) (1,234) (1,891) (2,624) (3,177) (3,718) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 2,486 4,044 5,199 5,578 9,610 11,955 14,088 16,489 Net profit (adjusted) 2,486 4,044 5,199 5,578 9,610 11,955 14,088 16,489 EPS (reported)(TWD) 18.651 30.150 38.755 41.581 71.640 89.125 105.022 122.923 EPS (adjusted)(TWD) 18.651 30.150 38.755 41.581 71.640 89.125 105.022 122.923 EPS (adjusted fully-diluted)(TWD) 18.651 30.150 38.755 41.581 71.640 89.125 105.022 122.923 DPS (TWD) 10.064 13.500 17.000 17.000 34.000 28.500 52.511 61.461 EBIT 2,722 4,661 5,472 6,798 10,781 14,466 17,086 19,940 EBITDA 3,344 5,398 6,372 8,005 12,229 16,262 19,169 19,940

 Cash flow (TWDm) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Profit before tax 2,643 4,334 5,837 6,811 11,501 14,580 17,264 20,207 Depreciation and amortisation 622 737 900 1,208 1,448 1,796 2,083 2,371 Tax paid (157) (289) (638) (1,234) (1,891) (2,624) (3,177) (3,718) Change in working capital (466) (539) 1,202 (783) (363) (1,776) (1,058) (852) Other operational CF items 14 21 18 (2) 51 (5) (6) (6) Cash flow from operations 2,656 4,263 7,318 6,000 10,746 11,969 15,107 18,002 Capex (1,057) (1,066) (3,149) (2,865) (1,504) (2,500) (2,500) (2,500) Net (acquisitions)/disposals (20) (1) (2) (101) 9 (10) (10) (10) Other investing CF items (26) (21) (23) (19) (1,593) 1,654 0 0 Cash flow from investing (1,103) (1,088) (3,173) (2,985) (3,088) (856) (2,510) (2,510) Change in debt (120) 142 319 (356) 12 (4) 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (1,301) (1,341) (1,811) (2,280) (2,280) (4,561) (3,823) (7,044) Other financing CF items 591 (23) 37 (43) 51 0 0 0 Cash flow from financing (831) (1,223) (1,456) (2,679) (2,217) (4,565) (3,823) (7,044) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 723 1,952 2,690 336 5,440 6,549 8,774 8,448 Free cash flow 1,599 3,197 4,169 3,136 9,242 9,469 12,607 15,502 Source: FactSet, Daiwa forecasts

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Financial summary continued …

 Balance sheet (TWDm) As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Cash & short-term investment 6,627 8,579 11,268 11,604 17,045 23,594 32,368 40,816 Inventory 622 902 1,461 2,532 2,693 2,964 3,204 3,419 Accounts receivable 2,377 3,182 3,510 6,581 6,823 9,045 10,588 12,189 Other current assets 199 153 234 255 248 290 313 335 Total current assets 9,825 12,815 16,473 20,973 26,809 35,891 46,473 56,758 Fixed assets 5,453 5,795 8,057 9,731 9,800 10,504 10,921 11,050 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 397 386 379 485 2,004 365 381 397 Total assets 15,675 18,996 24,909 31,188 38,614 46,761 57,775 68,205 Short-term debt 16 112 444 93 83 100 100 100 Accounts payable 410 560 1,358 3,555 2,507 3,167 3,709 4,262 Other current liabilities 1,521 1,871 3,243 4,426 5,507 5,605 5,811 6,244 Total current liabilities 1,948 2,543 5,045 8,075 8,097 8,871 9,621 10,606 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 21 67 54 49 71 50 50 50 Total liabilities 1,969 2,610 5,099 8,124 8,168 8,921 9,671 10,656 Share capital 1,341 1,341 1,341 1,341 1,341 1,341 1,341 1,341 Reserves/R.E./others 12,365 15,045 18,469 21,723 29,104 36,498 46,763 56,208 Shareholders' equity 13,706 16,386 19,810 23,064 30,445 37,840 48,104 57,549 Minority interests 00000000 Total equity & liabilities 15,675 18,996 24,909 31,188 38,614 46,761 57,775 68,205 EV 191,917 190,061 187,703 187,016 181,565 175,034 166,260 157,811 Net debt/(cash) (6,610) (8,467) (10,824) (11,511) (16,962) (23,494) (32,268) (40,716) BVPS (TWD) 102.178 122.156 147.685 171.943 226.965 282.090 358.613 429.024

 Key ratios (%) Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E Sales (YoY) 9.0 51.5 29.4 25.6 36.7 26.7 17.1 15.1 EBITDA (YoY) (9.2) 61.4 18.0 25.6 52.8 33.0 17.9 4.0 Operating profit (YoY) (12.7) 71.3 17.4 24.2 58.6 34.2 18.1 16.7 Net profit (YoY) (23.3) 62.7 28.5 7.3 72.3 24.4 17.8 17.0 Core EPS (fully-diluted) (YoY) (24.3) 61.7 28.5 7.3 72.3 24.4 17.8 17.0 Gross-profit margin 43.8 47.0 43.4 41.7 47.2 48.8 48.8 48.9 EBITDA margin 41.0 43.7 39.9 39.9 44.6 46.8 47.1 42.6 Operating-profit margin 33.4 37.7 34.2 33.9 39.3 41.6 42.0 42.6 Net profit margin 30.5 32.7 32.5 27.8 35.0 34.4 34.6 35.2 ROAE 19.4 26.9 28.7 26.0 35.9 35.0 32.8 31.2 ROAA 17.0 23.3 23.7 19.9 27.5 28.0 27.0 26.2 ROCE 21.1 30.8 29.8 31.3 40.2 42.3 39.7 37.7 ROIC 38.7 57.9 57.7 54.2 72.0 85.3 92.4 99.6 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 6.0 6.7 10.9 18.1 16.4 18.0 18.4 18.4 Accounts receivable (days) 86.6 82.1 76.4 91.7 89.2 83.3 88.1 88.8 Current ratio (x) 5.0 5.0 3.3 2.6 3.3 4.0 4.8 5.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 54.0 44.8 43.9 40.9 47.5 32.0 50.0 50.0 Free cash flow yield 0.8 1.6 2.1 1.6 4.7 4.8 6.4 7.8 Source: FactSet, Daiwa forecasts

 Company profile In Asia ex-Japan, Largan Precision is the leading lens manufacturer for mobile handsets. , Motorola, Sony Ericsson, Apple, HTC, and Blackberry are the company’s major customers. It currently has about a 28% share of the global handset-lens market.

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Driver 2. China brand volumes are rising and specs are improving Our supply-chain research indicates that China brands are keen to boost the pixel counts of their smartphone cameras in 2014, and we expect Largan to be a major Dual engines to drive beneficiary of this trend given its leading position in the market for high-end lens modules. earnings growth In line with our market-research findings, leading China brands, such as Huawei, ZTE, and Coolpad, Business update announced upgrades to their high-end smartphone models, including a shift to 13MP cameras (from 8MP), Driver 1. Largan likely to win the lion’s at the 2014 Mobile World Congress (24-27 February). share of orders for the iPhone 6 Mediatek’s octa-core smartphone IC, the MT6592, In our view, Largan is well positioned to be a major which Daiwa expects to be adopted by China brands for beneficiary of Apple’s likely product launches for 2014. use in their flagship smartphone models, supports a We believe the iPhone 6, which we expect to be a key camera pixel count of up to 16MP and should be an product for the US company this year, will debut in late additional driver of spec upgrades for China brands’ 3Q14 and feature a larger display (4.7”) than existing in 2014, in our view. models. According to our market research, Largan is well placed to secure a dominant share (80%-plus) of On the back of spec upgrades and hence higher ASPs, lens-module orders for iPhone 6, backed by the as well as our forecast for continued volume growth for company’s technological edge and strong execution. China brands, we expect Largan to derive 30-35% of its revenue from China customers this year, up from 20% At the same time, we believe the iPhone 6 is likely to in 2013E. We also expect 10MP lens modules to require upgraded lens modules. For the rear camera, contribute 15-20% of Largan’s revenue in 2014, up which we expect to remain at 8MP, we expect the from 6% in 2013E. aperture ratio to increase to f/2.0 (from f/2.2 on the 5S) and OIS functionality to be added. Meanwhile, we  China’s top-10 smartphone players: shipment trends expect Apple to upgrade the front camera to full HD (m units) 2011 2012 2013 2014E (from HD on the 5S). Huawei 15 33 4570 ZTE 14 27 40 55 Lenovo 5 23 45 67 Given the increased complexity of the lens module and Coolpad 9 15 35 52 its likely incorporation of OIS, we believe the upgraded TCL Communication 3 12 20 38 specs for the iPhone 6 will allow Largan to command a Xiaomi 1 7 19 40 20-30% ASP premium compared with the lens modules Gionee 2 12 18 26 OPPO 2 7 13 23 for the 5S. BBK 1 5 12 20 Tianyu 1 5 10 16  Apple iPhone: camera spec comparison Top-10 players' shipments 53 146 257 407 Model iPhone 6 iPhone 5S iPhone 5 iPhone 4S iPhone 4 Source: Companies, Daiwa estimates and forecasts Rear Camera 8MP 8MP 8MP 8MP 5MP Camera 3264 x 2448 3264 x 2448 3264 x 2448 3264 x 2448 2592 x 1936 Resolution pixels pixels pixels pixels pixels Autofocus VCM+OIS VCM VCM VCM VCM Sensor size 1/2.6” 1/3.0'' 1/3.2'' 1/3.2'' 1/3.2'' Aperture ƒ/2.0 ƒ/2.2 ƒ/2.4 ƒ/2.4 ƒ/2.8 Lens elements 5 plastic 5 plastic 5 plastic 5 plastic 4 plastic Dual-LED Dual-LED Flash Single-LED Single-LED Single-LED (dual tone) (dual tone) Sapphire crystal Yes Yes Yes No No lens cover Front Camera: Full HD HD HD VGA VGA Source: Company

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 China’s top-10 smartphone brands and Largan’s market share All of these upgrades call for more complex lens-module 2013 2014E designs, which we think plays to the strengths of Largan, China top-10 brands’ smartphone shipments (m units) 257 407 ie, its technological edge and solid execution. Continuing

Rear camera specs breakdown by MP spec upgrades should boost Largan’s ASP and potentially 5M 30% 20% expand its addressable market in the coming 1-2 years. 8M 60% 50% 13M or above 10% 30%  LG: depiction of the benefits of OIS

Front camera specs breakdown by MP 1MP 60% 20% 2MP 30% 50% 5MP 10% 30%

Largan market share for China top-10 brands Rear camera 35% 48% Front camera 20% 25% Source: Companies, Daiwa estimates

 Spec comparison: China high-end models announced at MWC Source: LGE Model HUAWEI Mate 2 Lenovo S850 ZTE Grand Memo II Coolpad S6

 Comparison: smartphone camera with and without OIS

Model Picture:

Dimensions: 161 x 84.7 x 9.5 mm 141 x 71 x 8.2 mm 161.5 x 83 x 7.2 mm 163 x 82 x 7.5 mm Weight: 202 g 140g n.a. 169g Embedded OS: Android OS, v4.2 Android OS, v4.2 Android OS, v4.2 Android OS, v4.3 Cellular Data GSM/ TD-SCDMA/ GSM/ WCDMA/ TD- GSM/ CDMA/ TD- GSM/ WCDMA Links: TD-LTE LTE/ FDD-LTE LTE/ FDD-LTE Qualcomm Qualcomm MSM MTK MT6582 quad- Hisilicon Kirin 910 MSM8926 8226 Snapdragon CPU: core Snapdragon 400 400 CPU Clock: 1.6 GHz 1.3 GHz 1.2 GHz 1.2 GHz ROM capacity: 16GB 16GB 16GB 16GB RAM capacity: 2GB 1GB 2GB 2GB Display 6.1" 5.0" 6.0" 5.95" Diagonal: Source: ROHM Semiconductor, Daiwa Display 720 x 1280 pixels 720 x 1280 pixels 720 x 1280 pixels 720 x 1280 pixels Resolution: Pixel density: 241 ppi 294 ppi 245 ppi 247 ppi In addition to OIS functionality, which we believe Apple Rear Camera: 13MP 13MP 13MP 13MP will adopt in 2H14 and of which we expect Largan to be a Secondary 5MP 5MP 5MP 5MP Camera: major supplier, Largan is the major lens vendor for HTC’s Battery new flagship model, the HTC One (M8). The HTC One 4050 mAh 2,000mAh 3200mAh 2800mAh Capacity: features an innovative dual-lens camera system, which Release Date: Feb-14 Feb-14 Feb-14 Feb-14 the company terms a “Duo Camera”. The Duo Camera Price: CNY2688 CNY1560 TBD CNY1999 is a 4MP camera sporting an “Ultra Pixel” sensor (the Source: Companies same as in the existing M7 model) as well as a secondary image sensor placed above the main camera Industry trends that captures depth-perception data.

Spec upgrades to continue apace The Duo Camera system can detect and calculate the relative distance of subjects, leading to a fast autofocus As we discussed in Daiwa’s 2014 Outlook for Global time of around 0.3s. By using the “UFocus” feature, Technology, we expect upgrades to lens-module specs be which harnesses the depth-of-field sensor, users can a recurring theme, as camera functionality is a key select or adjust the focal point of a photo after it has consideration for consumers when purchasing been taken. We believe Largan’s addressable market smartphones. Examples of spec upgrades include higher could expand further if consumers respond well to this mega-pixel counts, larger aperture ratios, the addition of dual-camera design. OIS functionality, and, most recently, the use of dual cameras.

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 HTC: “Duo Camera” design investors take the opportunity to accumulate the shares before the strong earnings-growth momentum that we see in 2H14.

Upgrading to Buy (1)

Earnings-forecast revisions We are raising our 2014-15 revenue forecasts by 3-10% to reflect what we see as Largan’s more secure position for new iPhone orders and the rising revenue contribution from its China customers. We are raising Source: HTC our 2014-15 profit-margin assumptions to factor in the ongoing upgrades to lens module specs. In total, we are  HTC: “UFocus” effect raising our 2014-15 earnings forecast by 10-19%. Our new EPS forecasts are 7-11% higher than those of the Bloomberg consensus for 2014-15.

Accordingly, we are upgrading our rating on Largan to Buy (1) from Hold (3), and raising our 6-month target price to TWD1750 (from TWD1150), based on a 1-year- forward PER of 18x (14x previously), which is a 1SD premium to the average of its past-3-year trading range of 9-24x. We are raising our target multiple to 18x as we expect Largan’s stronger operating-profit growth in 2014 to justify a higher PER.

EPS sensitivity analysis We believe Largan’s ASP and gross margin are the key variables in our earnings forecasts for the company. The following tables show the sensitivity of our 2014-15 EPS forecasts to changes in these items.

 Largan: sensitivity of Daiwa’s 2014 EPS forecasts to changes in ASP and gross margin EPS 2014E % change in ASP (TWD) -12.00% -9.00% -6.00% -3.00% 0.00% 3.00% 6.00% 9.00% 12.00% Source: HTC 46.8% 73.5 76.3 79.2 82.0 84.9 87.7 90.6 93.4 96.3 47.3% 74.4 77.3 80.2 83.1 85.9 88.8 91.7 94.6 97.5 47.8% 75.4 78.3 81.2 84.1 87.0 89.9 92.8 95.7 98.6 Soft 1Q14E revenue/earnings should give 48.3% 76.3 79.2 82.2 85.1 88.1 91.0 93.9 96.9 99.8 investors the opportunity to accumulate 48.8% 77.2 80.2 83.2 86.2 89.1 92.1 95.1 98.0 101.0 49.3% 78.2 81.2 84.2 87.2 90.2 93.2 96.2 99.2 102.2

Largan has not provided any specific top-line or gross- Gross margin 49.8% 79.1 82.1 85.2 88.2 91.2 94.3 97.3 100.4 103.4 50.3% 80.0 83.1 86.2 89.2 92.3 95.4 98.5 101.5 104.6 margin guidance for 1Q14. We expect the company to post 50.8% 81.0 84.1 87.2 90.3 93.4 96.5 99.6 102.7 105.8 a 33% QoQ decline in revenue, due mainly to inventory Source: Daiwa estimates adjustments by its major client and seasonal weakness. Note: The column and rows in blue represent our base-case scenario in our earnings model Note 2: Other assumptions: 1) 70% of opex is fixed and 30% is variable (in proportion to We forecast its gross and operating margin to contract to sales growth or contraction), 2) non-op gain/loss (interest income/expense, forex 45.3% and 37.4% for 1Q14, from 48.3% and 41.0% in gains/losses, etc) and tax rate are unchanged in this sensitivity analysis 4Q13, respectively, on the back of reduced scale economies and limited revenue contribution from new products.

In all, we forecast a 1Q14 net profit of TWD2bn and an EPS of TWD14.9. Our 1Q14 revenue and earnings forecasts are almost the lowest among the Bloomberg consensus, and we think 1Q14 should be the trough for Largan’s both revenue and earnings in 2014. We suggest

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 Largan: sensitivity of Daiwa’s 2015 EPS forecasts to changes  Largan: one-year forward PER, trading average and +/-1 1SD in ASP and gross margin (x) EPS 2015E % change in ASP 25 (TWD) -12.00% -9.00% -6.00% -3.00% 0.00% 3.00% 6.00% 9.00% 12.00% 46.8% 86.8 90.1 93.4 96.7 100.1 103.4 106.7 110.0 113.4 20 18X 47.3% 87.9 91.2 94.6 98.0 101.3 104.7 108.0 111.4 114.8 47.8% 89.0 92.4 95.8 99.2 102.5 105.9 109.3 112.7 116.1 15 14X 48.3% 90.0 93.5 96.9 100.4 103.8 107.2 110.7 114.1 117.5 48.8% 91.1 94.6 98.1 101.6 105.0 108.5 112.0 115.4 118.9 10 49.3% 92.2 95.7 99.2 102.8 106.3 109.8 113.3 116.8 120.3 10X

Gross margin 49.8% 93.3 96.9 100.4 104.0 107.5 111.0 114.6 118.1 121.7 50.3% 94.4 98.0 101.6 105.2 108.7 112.3 115.9 119.5 123.1 5 50.8% 95.5 99.1 102.7 106.4 110.0 113.6 117.2 120.8 124.5 Source: Daiwa estimates 0 -12 Note: The column and rows in blue represent our base-case scenario in our earnings model. -11 -13 p y y

Note 2: Other assumptions: 1) 70% of opex is fixed and 30% is variable (in proportion to Jul-11 Jul-12 Jul-13 Jan-12 Jan-14 Jan-13 Jan-11 Mar-12 Mar-14 Mar-13 Mar-11 Sep-11 Nov-11 Se Sep-13 Nov-13 Nov-12 May-12 Ma sales growth or contraction), 2) non-op gains/losses (interest income/expense, forex Ma gain/loss, etc) and tax rate are unchanged in this sensitivity analysis PER 3-yrs-avg. Avg. +1 stdev Avg. -1 stdev Source: TEJ, Daiwa forecasts Investment risks The main risk to our rating and target price would be  Largan: share price vs. operating profit YoY greater-than-expected price competition, which could (TWD) lead to slower-than-expected operating-profit growth. 1,600 200% A secondary risk would be weaker-than-expected 1,400 150% 1,200 revenue contribution from Largan’s China customers. 100% 1,000 800 50%  Largan: one-year forward PER 600 0% (TWD) 400 1,600 200 (50%) 1,400 0 (100%) 1,200 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

1,000 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 800 Share price (LHS) Operating profit YoY (RHS) 600 Source: TEJ, company, Daiwa forecasts 400 200  Largan: share price vs. net profit YoY 0 (TWD) 1,600 250% Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 1,400 200% Largan 6x 12x 18x 24x 1,200 150% Source: TEJ, Daiwa forecasts 1,000 100% 800 50%  Largan: one-year forward PBR 600 0% (TWD) 400 1,600 200 -50% 1,400 0 -100% 1,200 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 1,000 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 800 Share price (LHS) Net Profit YoY (RHS) 600 Source: TEJ, company, Daiwa forecasts 400 200 0 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Largan 2x 4x 6x 8x Source: TEJ, Daiwa forecasts

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Largan: revenue and earnings forecasts and revisions New forecasts Previous forecasts Change % TWDm 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E Revenue 34,750 40,680 46,830 33,650 36,850 n.a. 3.3% 10.4% n.a. Gross profit 16,968 19,852 22,900 15,681 17,098 n.a. 8.2% 16.1% n.a. Operating expenses 2,502 2,766 2,960 2,524 2,690 n.a. -0.9% 2.8% n.a. Operating profit 14,466 17,086 19,940 13,157 14,408 n.a. 10.0% 18.6% n.a. Non-Operating gain 113 179 267 99 145 n.a. 14.3% 23.3% n.a. Pre-tax income 14,580 17,264 20,207 13,256 14,553 n.a. 10.0% 18.6% n.a. Net profit 11,955 14,088 16,489 10,870 11,846 n.a. 10.0% 18.9% n.a. EPS (TWD) 89.13 105.02 122.92 81.00 88.30 n.a. 10.0% 18.9% n.a.

Margins (%) Gross margin 48.8% 48.8% 48.9% 46.6% 46.4% n.a. Operating margin 41.6% 42.0% 42.6% 39.1% 39.1% n.a. Pretax margin 42.0% 42.4% 43.1% 39.4% 39.5% n.a. Net margin 34.4% 34.6% 35.2% 32.3% 32.1% n.a. Source: Daiwa forecasts

 Largan: quarterly and annual P&L statement 2013 2014E (TWDm) 1Q 2Q 3Q 4Q 1QE 2QE 3QE 4QE 2013 2014E 2015E Net sales 5,103 5,858 7,171 9,302 6,209 6,499 9,167 12,876 27,433 34,750 40,680 COGS 2,967 2,902 3,792 4,811 3,396 3,318 4,636 6,431 14,472 17,782 20,828 Gross profit 2,136 2,955 3,379 4,491 2,813 3,181 4,531 6,444 12,961 16,968 19,852 Operating expense 460 486 556 678 488 513 676 826 2,180 2,502 2,766 Operating profit 1,676 2,470 2,822 3,813 2,325 2,668 3,855 5,619 10,781 14,466 17,086 Pre-tax income 2,013 2,673 2,711 4,104 2,357 2,700 3,888 5,634 11,501 14,580 17,264 Net income 1,849 2,035 2,321 3,405 2,004 2,025 3,304 4,622 9,610 11,955 14,088 Net EPS (TWD) 13.79 15.17 17.30 25.38 14.94 15.10 24.63 34.46 71.64 89.13 105.02

Operating ratios Gross margin 41.9% 50.5% 47.1% 48.3% 45.3% 48.9% 49.4% 50.1% 47.2% 48.8% 48.8% Operating margin 32.8% 42.2% 39.4% 41.0% 37.4% 41.0% 42.1% 43.6% 39.3% 41.6% 42.0% Pre-tax margin 39.4% 45.6% 37.8% 44.1% 38.0% 41.5% 42.4% 43.8% 41.9% 42.0% 42.4% Net margin 36.2% 34.7% 32.4% 36.6% 32.3% 31.2% 36.0% 35.9% 35.0% 34.4% 34.6%

YoY (%) Net revenue 40% 76% 59% 8% 22% 11% 28% 38% 37% 27% 17% Gross profit 52% 138% 84% 16% 32% 8% 34% 43% 55% 31% 17% Operating income 51% 166% 91% 16% 39% 8% 37% 47% 59% 34% 18% Pre-tax income 96% 154% 92% 24% 17% 1% 43% 37% 69% 27% 18% Net income 110% 206% 100% 19% 8% -1% 42% 36% 72% 24% 18%

QoQ (%) Net revenue -41% 15% 22% 30% -33% 5% 41% 40% Gross profit -45% 38% 14% 33% -37% 13% 42% 42% Operating income -49% 47% 14% 35% -39% 15% 45% 46% Pre-tax income -39% 33% 1% 51% -43% 15% 44% 45% Net income -36% 10% 14% 47% -41% 1% 63% 40% Source: Company, Daiwa forecasts

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 OIS: sensor-shift method (LHS) vs. lens-shift method (RHS)

Appendix

Optical image stabilisation (OIS)

Source: Sony Insider In addition to the increase in megapixel count, we believe the adoption rate of OIS functionality in high-end The OIS system has long been widely used in digital smartphone models will increase in 2014. Having OIS cameras, although it is a new feature for smartphone functionality means users can avoid taking blurred cameras, most of which require slimmer and smaller photos – the OIS causes the camera lens or image OIS components. sensor to move to stabilise an image when the gyroscope sensor detects camera motion. Also, the lens design in an OIS system needs to be customised (ie, lens size or curvature will change in  OIS structure order to enhance accuracy and be better suited to the higher depth-of-field). In 2013, only limited flagship models such as the New HTC One (M7), and LG G2 had this function due to the high cost of installing it, the low yield rate of making it, and the ongoing development of the supply chain.

 HTC: OIS system in the New HTC One (M7)

Source: HTC

Source: InvenSense (modified by Daiwa) However, we believe the smartphone makers will use the OIS as one of their key functions to enhance their With a lens-based OIS system, once the gyroscope models in the years to come. Currently, each camera sensor determines the direction of the camera pixel in a smartphone receives little light compared with movement (both horizontal and vertical), it will pass the a digital camera, as the phones have smaller lens data to the OIS controller, which then drives the apertures and miniaturised sensors. actuator, mostly the VCM (voice coil motor), to move the lens in the opposite direction to compensate for any OIS functionality is an important feature for the movement. improvement of smartphone cameras, as it will offer better image quality and reduce blurring, especially in In a sensor-based OIS system, image stabilisation is low-light environments, where a longer exposure time is achieved by using actuators to move the image sensor, required to provide brighter photos. We expect to see rather than the lens, to cancel out any camera shake. For more smartphone makers add OIS-enabled cameras to smartphone cameras, the lens-based OIS system has their high-end models in 2014 to stand out, and so far been the mainstream over the past few years, although this year, we have seen the LG G Pro 2, Nokia Lumia we have seen a limited adoption rate so far, according to Icon, and ZTE Numbia X6 with this function. We expect our market research. the new iPhone to also have it when it is released later this year.

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 Spec comparison: smartphones with OIS function Model LG G Pro 2 Nokia Lumia Icon ZTE Nubia X6 New HTC One LG G2 LG Nexus 5 Nokia Lumia 1520

Model Picture:

Dimensions: 157.9 x 81.9 x 8.3 mm 137 x 71 x 9.8 mm 179.5 x 89 x 7.9mm 137.4 x 68 x 9.3 mm 138.5 x 70.9 x 8.9 mm 137.9 x 69.2 x 8.6 mm 162.8 x 85.4 x 8.7 mm Weight: 172 g 167 g 215 g 143 g 143 g 130 g 209 g Windows Microsoft Windows Embedded OS: Android OS, v4.4.2 Android OS, v4.3 Android OS, v4.1.2 Android OS, v4.2.2 Android OS, v4.4 Phone 8 Phone 8 GSM/ WCDMA/ TD- GSM/ HSDPA/ CDMA/ Cellular Data Links: GSM/ HSDPA/ LTE GSM/ HSDPA/ LTE GSM/ HSDPA/ LTE GSM/ HSDPA/ LTE GSM/ HSDPA/ LTE SCDMA/ LTE LTE Qualcomm Qualcomm MSM8974 Qualcomm MSM8974 Qualcomm APQ8064T Qualcomm MSM8974 Qualcomm MSM8974 Qualcomm MSM8974 CPU: MSM8974AB Snapdragon 800 Snapdragon 800 Snapdragon 600 Snapdragon 800 Snapdragon 800 Snapdragon 800 Snapdragon 801 CPU Clock: 2.26 GHz 2.2 GHz 2.3 GHz 1700 MHz 2.26 GHz 1.0 GHz 2.2 GHz ROM capacity: 16GB 32 GB 32 GB 16GB 32GB 16GB 16GB RAM capacity: 3GB 2 GB 2 GB 2GB 2GB 2GB 2GB Display Diagonal: 5.9" 5.0" 6.44" 4.7" 5.2" 4.95” 6.0" Display Resolution: 1080 x 1920 pixels 1080 x 1920 pixels 1080 x 1920 pixels 1080 x 1920 pixels 1080 x 1920 pixels 1080 x 1920 pixels 1080 x 1920 pixels Pixel density: 373 ppi 441 ppi 344 ppi 471 ppi 424 ppi 445 ppi 367 ppi Rear Camera: 13MP 20 MP 13MP 4MP (UltraPixel) 13MP 8MP 20MP Secondary Camera: 2.1MP 1.2 MP 13MP 2.1MP 2.1MP 1.3MP 1.2MP Battery Capacity: 3200 mAh 2420 mAh 4250 mAh 2300 mAh 3000 mAh 2300 mAh 3400 mAh Release Date: 14-Mar 14-Feb 14-Mar 13-Feb 13-Sep 13-Nov 13-Oct Price: USD684 USD549 USD646 USD599 USD499 USD349 USD584 Source: Companies

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Daiwa’s Asia Pacific Research Directory

HONG KONG SOUTH KOREA Hiroaki KATO (852) 2532 4121 [email protected] Chang H LEE (82) 2 787 9177 [email protected] Regional Research Head Head of Korea Research; Strategy; Banking John HETHERINGTON (852) 2773 8787 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Daiwa’sRegional Deputy Asia Head Pacific of Asia Pacific Research Research Directory Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Rohan DALZIELL (852) 2848 4938 [email protected] Shipbuilding; Steel Regional Head of Product Management Jun Yong BANG (82) 2 787 9168 [email protected] Kevin LAI (852) 2848 4926 [email protected] Tyres; Chemicals Deputy Head of Regional Economics; Macro Economics (Regional) Mike OH (82) 2 787 9179 [email protected] Christie CHIEN (852) 2848 4482 [email protected] Capital Goods (Construction and Machinery) Macro Economics (Taiwan) Sang Hee PARK (82) 2 787 9165 [email protected] Jonas KAN (852) 2848 4439 [email protected] Consumer/Retail Head of Hong Kong Research; Head of Hong Kong and China Property Jae H LEE (82) 2 787 9173 [email protected] Grace WU (852) 2532 4383 [email protected] IT/Electronics (Tech Hardware and Memory Chips) Head of Greater China FIG; Banking (Hong Kong, China) Joshua OH (82) 2 787 9176 [email protected] Jerry YANG (852) 2773 8842 [email protected] IT/Electronics (Handset Components) Banking (Taiwan); Insurance (Taiwan and China) Thomas Y KWON (82) 2 787 9181 [email protected] Leon QI (852) 2532 4381 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game Banking (Hong Kong, China); Broker (China) Winston CAO (852) 2848 4469 [email protected] TAIWAN Capital Goods – Machinery (China) Mark CHANG (886) 2 8758 6245 [email protected] Alison LAW (852) 2532 4308 [email protected] Head of Taiwan Research Head of Regional Consumer; Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Consumer (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Automation); Cement; Consumer Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Eric CHEN (852) 2773 8702 [email protected] IT/Technology Hardware (Handsets and Components) Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Lynn CHENG (852) 2773 8822 [email protected] INDIA IT/Electronics (Semiconductor) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Felix LAM (852) 2532 4341 [email protected] Head of India Research; Strategy; Banking/Finance Head of Materials (Hong Kong, China); Cement and Building Materials (China, Saurabh MEHTA (91) 22 6622 1009 [email protected] Taiwan); Property (China) Capital Goods; Utilities Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China) SINGAPORE John CHOI (852) 2773 8730 [email protected] Adrian LOH (65) 6499 6548 [email protected] Regional Head of Small/Mid Cap; Small/Mid Cap (Regional); Internet (China) Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and Jackson YU (852) 2848 4976 [email protected] China); Capital Goods (Singapore) Small/Mid Cap (Regional) Angeline LOH (65) 6499 6570 [email protected] Joey CHEN (852) 2848 4483 [email protected] Banking/Finance, Consumer/Retail Steel (China) David LUM (65) 6329 2102 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Property and REITs Head of Transportation (Hong Kong, China); Transportation (Regional) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Jibo MA (852) 2848 4489 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Head of Custom Products Group; Custom Products Group Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES Norman H PENA (63) 2 737 3021 [email protected] Banking/Property Michael David (63) 2 737 3023 [email protected] MONTEMAYOR Consumer/Retail Patricia PALANCA (63) 2 737 3024 [email protected] Utilities/Mining

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United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

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

Bahrain This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000).

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Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

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

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

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

Additional information may be available upon request.

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

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

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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