Electronics / Taiwan 29 May 2012

Simplo Technology Target price: NT$235.00 Up/downside: +12.7% 6121 TT Share price (29 May): NT$208.50

Initiation: power surge coming

• Initiating with an Outperform rating and a six-month target price of NT$235 • We highlight the EV battery-pack business as a key growth driver in 2013-14E, in addition to tablet and Ultrabook battery packs

• Management discipline, recruitment philosophy and good business outlook offer long-term investment appeal

How do we justify our view?

forecast the company’s total EV Forecast revisions (%) battery-pack business (BEV + LEV) to Year to 31 Dec 12E 13E 14E reach about 10% of its 2014E sales, up Revenue change n.a. n.a. n.a. Net-profit change n.a. n.a. n.a. from less than 2% in 2012E. We also EPS change n.a. n.a. n.a. highlight the disciplined management Source: Daiwa forecasts Chris Lin style of Simplo’s chairman, its (886) 2 8758 6251 Share price performance [email protected] recruitment philosophy and what we regard as a favourable business (NT$) (%) William Yang outlook. 290 160 (886) 2 8758 6259 250 140 [email protected] What we recommend 210 120 We initiate coverage with an 170 100 Outperform (2) rating and a DCF- 130 80 What's new May-11 Aug-11 Nov-11 Feb-12 May-12 We see Simplo Technology’s (Simplo) derived six-month target price of Simplo Technology (LHS) NT$235, equivalent to a 13x PER on Relative to TWSE (RHS) electric vehicles (EV) battery-pack business as a key business growth our average 2012-13E EPS of 12-month range 148.00-259.00 driver in 2013-14, in addition to rising NT$18.20. Simplo has a good record Market cap (US$bn) 1.97 demand for the company’s lithium- of delivering on its guidance, along Average daily turnover (US$m) 14.63 ion polymer (Li-polymer) battery- with solid financials in growth Shares outstanding (m) 280 packs for tablets and Ultrabooks. In segments (for not only tablets and Major shareholder Pao Hsin International (4.2%) addition, we believe Simplo’s Ultrabooks but also EVs), which we disciplined management approach believe justifies a PER at par with Financial summary (NT$) and other success factors should peers globally. We see the main risks Year to 31 Dec 12E 13E 14E Revenue (m) 62,390 79,740 95,390 continue to support its business as: 1) pricing pressure from peers and brand makers, 2) market-share loss to Operating profit (m) 5,193 6,724 8,294 growth in the future. Net profit (m) 4,491 5,704 7,006 battery-cell makers in the battery- pack business, 3) lower-than-expected Core EPS 16.024 20.353 24.998 What's the impact EPS change (%) 21.8 27.0 22.8 tablet and Ultrabook demand, and 4) Aided by government subsidies, global Daiwa vs Cons. EPS (%) 1.93 6.36 19.49 shipments of battery-powered electric slower-than-expected EV battery PER (x) 13.0 10.2 8.3 vehicles (BEV) should reach 1.97m business. Dividend yield (%) 2.4 2.5 3.3 units (up 66% YoY) for 2012 and DPS 4.980 5.312 6.889 2.66m units (up 35% YoY) for 2013, How we differ PBR (x) 3.1 2.6 2.1 on our forecasts. Simplo plans to start Our 2013-14E EPS are 6% and 19%, EV/EBITDA (x) 9.2 7.0 5.4 shipping BEV battery-packs in 4Q12, respectively, above the Bloomberg ROE (%) 25.9 27.6 27.9 in addition to its existing battery-pack consensus figures, as we believe high- Source: Bloomberg, Daiwa forecasts shipments for light electric vehicles margin battery-packs for EVs should (LEV), ebikes and escooters. We trigger a surge in Simplo’s business growth in the next few years.

Important disclosures, including any required research certifications, are provided on the last two pages of this report. Electronics / Taiwan 6121 TT 29 May 2012

Table of contents

Power surge coming ...... 6 Outperform rating and target price of NT$235 ...... 6 2012-14 outlook appears very promising ...... 7 Fundamentals look very solid ...... 7 Risks ...... 8 EV battery-packs: the growth driver beyond 3C products ...... 8 The more Li-polymer shipments, the better the dollar profit ...... 10 Profit streams = purchasing scale + cost controls + good yield rate ...... 11 Distinct management style with self-discipline at its core ...... 12 A successful model that has turned a profit since Sung took over ...... 13 More about the battery industry ...... 15 Appendix A: DCF valuation ...... 16 Appendix B: Simplo’s quarterly range-guidance track record ...... 17 Appendix C: peer valuations ...... 18 Appendix D: Simplo, consolidated P&L ...... 19 Appendix E: commonly used batteries for mobile devices ...... 20 Appendix F: the anatomy of a battery by type ...... 21 Appendix G: EV-battery projects by automakers ...... 22 Appendix H: different government subsidies for EVs ...... 23 Appendix I: battery-pack supply chain ...... 24 Appendix J: Glossary ...... 25

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How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook Global BEV market: shipments and shipment growth

While most investors should be familiar with Simplo’s ('000 units) 66% business-growth story for 2012-13E from Li-polymer 5,000 70% battery-packs for tablets and Ultrabooks, we believe high 60% 4,000 demand for lithium-ion battery-packs (Libs) and charging 43% 50% systems for EVs is likely to trigger a surge in Simplo’s 3,000 35% 29% 40% business growth and in the next few years. 2,000 23% 21% 22% 30% 20% 1,000 We believe Simplo is running ahead of the game in 10% preparing new sales-growth drivers, such as batteries for 0 0% light EVs, ebikes and escooters, and for battery-powered 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E EVs for electric buses, taxis and public-sector vehicles. We HEV (Ni-MH) HEV (Li-ion) PHEV (Li-ion) forecast EV battery sales to account for about 10% of its EV (Li-ion) YoY (% , RHS) total sales in 2014 (from less than 2% in 2012) and note Source: Consolidation of various company materials, Daiwa forecasts that they have higher gross margins than 3C products. Note: Please refer to the glossary for definitions of the different types of EVs

Valuation Simplo: DCF valuation summary We set a six-month target price for Simplo of NT$235, Economic-profit valuation NT$m derived from our DCF valuation (assuming a WACC of Adjusted opening invested capital 12,819 NPV of economic profit during explicit period 8,151 13.52%, a risk-free rate of 1.27% and a beta of 0.99). Our NPV of economic profit of remaining business 15,261 target price is equivalent to a PER of 13x (three-year NPV of economic profit of net investments (growth business) 24,174 historical range of 7-17x) on our average 2012-13E EPS Enterprise value 60,405 of NT$18.20. We believe Simplo’s good track record of Plus net cash (2012E) 5,682 delivering on its guidance (see Appendix B), along with Equity value 66,087 No. of shares (m) 280.3 its solid financials and favourable business-growth Equity value per share (NT$) 235.0 outlook, justify a valuation at a par with regional peers’ Source: Daiwa estimates average 2012E PER of 12.9x (see Appendix C).

Earnings revisions Simplo: QFII holdings vs. consensus 2012E EPS

The Bloomberg consensus 2012 EPS forecast for Simplo (NT$) (NT$) has been revised down since the end of 2011, due to: 1) 55 18.0 the product transition from the iPad 2 to the new iPad, 17.5 and 2) expectations of a weak 1Q12 and subdued results 50 for that quarter. 17.0 45 16.5

However, we expect the company’s quarterly results to 16.0 improve sequentially for the rest of this year. As the 40 company has a consistent track record of meeting or 15.5 beating its guidance and the current consensus numbers 35 15.0 look conservative to us, we do not envisage downward May-10 Nov-10 May-11 Nov-11 May-12 revisions by the consensus in the near term and would see QFII Holdings (LHS) 2012E EPS Consensus (RHS) recent share-price weakness as a good entry point. Source: Bloomberg, TEJ

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Financial summary

Key assumptions Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Notebook battery shipment ('000) 21,616 30,214 33,036 38,633 44,751 46,479 47,446 48,978 Tablet battery shipment ('000) 0 0 0 7,827 25,446 45,762 67,259 83,205 LEV battery shipment ('000) 0 0 0 19 89 117 184 266 BEV battery shipment ('000) 0 0 0 0 0 0 6 17 NB (incl. Ultrabook) battery ASP 31.2 30.8 30.0 26.0 24.1 23.9 24.8 26.6 (USD) Tablet battery ASP (USD) 0.0 0.0 0.0 20.1 19.3 19.5 18.9 17.8 LEV battery ASP (USD) 0 0 0 177 189 228 256 260 BEV battery ASP (USD) 0 0 0 0 0 18,000 15,612 15,478

Profit and loss (NT$m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E NB Battery 22,170 29,315 32,742 31,743 31,782 33,054 35,335 39,035 Tablet Battery 0 0 0 4,982 14,436 26,560 38,182 44,420 Others 916 1,421 1,511 1,974 1,895 2,776 6,222 11,934 Total revenue 23,086 30,736 34,253 38,699 48,114 62,390 79,740 95,390 Other income 0 0 0 0 0 0 0 0 COGS (18,742) (25,540) (28,351) (31,702) (41,231) (53,759) (68,774) (81,595) SG&A (1,152) (1,707) (1,515) (1,798) (1,825) (2,172) (2,616) (3,241) Other op. expenses (470) (982) (1,061) (1,201) (1,009) (1,266) (1,626) (2,260) Operating profit 2,723 2,507 3,326 3,999 4,049 5,193 6,724 8,294 Net-interest inc./(exp.) 77 117 53 40 110 155 158 159 Assoc/forex/extraord./others (76) 551 14 123 216 252 221 286 Pre-tax profit 2,723 3,175 3,392 4,162 4,375 5,601 7,103 8,739 Tax (664) (830) (961) (874) (692) (1,110) (1,398) (1,734) Min. int./pref. div./others (2) 8 27 41 5 0 0 0 Net profit (reported) 2,057 2,354 2,458 3,329 3,688 4,491 5,704 7,006 Net profit (adjusted) 2,057 2,354 2,458 3,329 3,688 4,491 5,704 7,006 EPS (reported) (NT$) 11.655 11.283 10.667 13.065 13.158 16.024 20.353 24.998 EPS (adjusted) (NT$) 11.655 11.283 10.667 13.065 13.158 16.024 20.353 24.998 EPS (adjusted fully-diluted) (NT$) 7.571 8.477 8.770 11.877 13.158 16.024 20.353 24.998 DPS (NT$) 3.061 3.558 3.621 3.636 4.150 4.980 5.312 6.889 EBIT 2,723 2,507 3,326 3,999 4,049 5,193 6,724 8,294 EBITDA 2,930 2,933 3,566 4,395 4,505 5,709 7,312 8,975

Cash flow (NT$m) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 2,723 3,175 3,392 4,162 4,375 5,601 7,103 8,739 Depreciation and amortisation 208 426 240 397 456 516 588 681 Tax paid (664) (830) (961) (874) (692) (1,110) (1,398) (1,734) Change in working capital (684) (752) (1,709) (540) (1,806) (2,466) (1,751) (3,025) Other operational CF items 428 (54) 1,616 855 347 1,049 68 709 Cash flow from operations 2,010 1,966 2,579 4,000 2,679 3,589 4,610 5,370 Capex (727) (1,316) (507) (923) (1,742) (900) (989) (1,069) Net (acquisitions)/disposals (217) 77 254 128 101 (25) 0 0 Other investing CF items 34 (59) 33 (130) (1,220) 9 0 0 Cash flow from investing (910) (1,298) (220) (925) (2,861) (916) (989) (1,069) Change in debt 0 329 (8) 626 2,195 154 (291) (42) Net share issues/(repurchases) 1,434 0 0 0 0 (93) 103 99 Dividends paid (675) (928) (1,043) (1,158) (1,401) (1,682) (1,794) (2,326) Other financing CF items (76) 46 35 81 (201) 221 0 0 Cash flow from financing 683 (553) (1,016) (451) 593 (1,399) (1,981) (2,269) Forex effect/others 67 147 (128) (357) 389 314 0 0 Change in cash 1,850 262 1,214 2,267 800 1,588 1,640 2,033 Free cash flow 1,283 650 2,072 3,077 937 2,690 3,621 4,302

Source: Company, Daiwa forecasts

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Financial summary continued …

Balance sheet (NT$m) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 3,513 3,783 4,760 7,228 7,706 8,977 10,617 12,650 Inventory 2,955 4,239 4,712 5,117 7,159 9,962 11,365 14,560 Accounts receivable 5,179 5,837 6,829 8,029 9,022 13,428 15,476 18,126 Other current assets 716 1,044 297 241 1,364 1,363 1,548 1,903 Total current assets 12,362 14,904 16,598 20,615 25,251 33,730 39,007 47,238 Fixed assets 2,144 3,021 3,265 3,699 4,932 5,316 5,716 6,104 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 265 246 206 230 374 388 388 388 Total assets 14,770 18,171 20,068 24,544 30,557 39,434 45,112 53,730 Short-term debt 0 329 320 946 3,142 3,295 3,005 2,963 Accounts payable 4,356 5,547 5,303 6,368 7,597 12,340 14,041 16,859 Other current liabilities 1,766 1,993 2,470 3,266 3,344 4,392 4,645 5,708 Total current liabilities 6,122 7,869 8,093 10,581 14,083 20,027 21,691 25,531 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 194 182 377 591 508 729 729 729 Total liabilities 6,316 8,051 8,469 11,172 14,590 20,756 22,420 26,259 Share capital 1,856 2,086 2,316 2,548 2,803 2,803 2,803 2,803 Reserves/R.E./others 6,599 7,880 9,153 10,744 13,164 15,881 19,895 24,674 Shareholders' equity 8,454 9,966 11,470 13,292 15,967 18,684 22,698 27,476 Minority interests 0 155 129 80 0 0 0 0 Total equity & liabilities 14,770 18,171 20,068 24,544 30,557 39,440 45,117 53,736 EV 35,174 40,194 43,982 46,920 53,869 52,752 50,821 48,747 Net debt/(cash) (3,513) (3,455) (4,440) (6,282) (4,565) (5,682) (7,613) (9,687) BVPS (NT$) 45.563 47.773 49.520 52.169 56.973 66.667 80.988 98.039

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) 36.0 33.1 11.4 13.0 24.3 29.7 27.8 19.6 EBITDA (YoY) 47.4 0.1 21.6 23.3 2.5 26.7 28.1 22.7 Operating profit (YoY) 49.2 (7.9) 32.7 20.2 1.3 28.3 29.5 23.4 Net profit (YoY) 48.0 14.4 4.4 35.4 10.8 21.8 27.0 22.8 EPS (YoY) 18.7 (3.2) (5.5) 22.5 0.7 21.8 27.0 22.8 Gross-profit margin 18.8 16.9 17.2 18.1 14.3 13.8 13.8 14.5 EBITDA margin 12.7 9.5 10.4 11.4 9.4 9.2 9.2 9.4 Operating-profit margin 11.8 8.2 9.7 10.3 8.4 8.3 8.4 8.7 ROAE 29.3 25.6 22.9 26.9 25.2 25.9 27.6 27.9 ROAA 16.9 14.3 12.9 14.9 13.4 12.8 13.5 14.2 ROCE 38.6 26.5 29.7 30.5 24.2 25.3 28.2 29.5 ROIC 45.0 31.9 34.5 44.3 36.9 34.1 38.5 40.4 Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash Effective tax rate 24.4 26.1 28.3 21.0 15.8 19.8 19.7 19.8 Accounts receivable (days) 72.1 65.4 67.5 70.1 64.7 65.7 66.2 64.3 Payables (days) 58.6 58.8 57.8 55.0 53.0 58.3 60.4 59.1 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 31.2 30.5 32.1 34.1 31.8 37.8 33.1 33.8 Source: Company, Daiwa forecasts

Company profile Established in 1992, Simplo Technology (Simplo) is the world’s leading provider of notebook batteries, with shares of around 25% of the global cylindrical battery-pack market and 50% of the polymer battery-pack market. Its customers include all the key notebook ODMs and OEMs except Samsung. Notebook batteries (including for regular notebooks, Ultrabooks and tablets) accounted for around 96% of Simplo’s total sales for 2011, and the company is expanding into batteries for electric vehicles

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Simplo: one-year forward PER bands (NT$) 300 16.9x

13.1x Power surge coming 200 9.3x

100 We envisage a strong sales contribution 5.5x from the EV battery business, along with good prospects for the impact from rising 0 demand for (Li)-polymer battery-packs May-08 May-09 May-10 May-11 May-12 Source: TEJ; Daiwa forecasts for tablets and Ultrabooks. Also, we highlight the company’s management Simplo: one-year forward PBR bands style and its key success factors. (NT$) 300 3.9x

Outperform rating and target 3.0x price of NT$235 200 2.1x We initiate coverage of Simplo with an Outperform (2) 100 ` 1.2x rating. Simplo is trading currently at a PER of 13.0x based on our 2012 EPS forecast of NT$16.02. Our six- month target price of NT$235 is derived from our DCF 0 valuation, with assumptions of a WACC of 13.52%, a May-08 May-09 May-10 May-11 May-12 risk-free rate of 1.27% and a beta of 0.99). We see the Source: TEJ: Daiwa forecasts DCF methodology as an appropriate way to value Simplo as it has been cash-generative and in a net cash In contrast to the TWSE Index, Simplo’s absolute position since 2004. We provide a full DCF valuation share-price performance has been quite resilient amid and a WACC sensitivity analysis for our DCF value in the selling pressure in the broader market since March Appendix A of this report. 2012. We attribute the stock’s resilience to the company’s sturdy fundamentals, which we elaborate on Our target price is equivalent to a PER of 13x on our in the next section. average 2012-13E EPS of NT$18.20 (corresponding to the mid-to-high end of the stock’s past-three-year PER Simplo’s share price and TWSE Index: absolute performance trading range of 7-17x). 10%

Our analysis shows that Simplo has a good track record 5% of delivering on and sometimes exceeding its guidance 0% for sales and earnings (Appendix B) and offers solid financials with good earnings-growth prospects. We (5% ) believe these factors justify a PER at par with its peers globally (Appendix C). (10% )

(15% ) 16-Mar 30-Mar 13-Apr 27-Apr 11-May 25-May

TWSE Index (Pt, LHS) Simplo(NT$, RHS)

Source: Bloomberg

Note: Simplo only provides parent-based figures at its quarterly results releases and gives guidance only at a parent-based level. The main differences between the consolidated and parent-based numbers are: 1) a 1-2% difference in quarterly sales figures, and 2) the

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consolidated figures include additional operating believe this should underpin the company’s solid expenses for its overseas offices, so consolidated fundamentals. operating expenses are about 1% higher than the parent-based figures. Our financial model for the 1. Net profit exceeded paid-in share company and discussion of its financials in this report capital in 2007-11 and should do so over are on a consolidated basis (unless where otherwise 2012-14 stated). Since 2007, Simplo’s annual net profit has surpassed its paid-in share capital, even in 2008 and 2009 during 2012-14 outlook appears very the financial crisis. We expect its net profit to exceed its paid-in share capital over 2012-14, as its successful promising cash-generative business model and management style should allow growth to continue to be funded internally, We forecast Simplo to generate sales growth of 30% ie, without the need to raise further capital. YoY for 2012. This is likely to be back-end loaded to 2H12, when we forecast sales to rise by 42% HoH as we Simplo: net profit vs. share capital expect the company’s Li-polymer battery-packs for (NT$m) Ultrabooks and tablets to start gaining momentum in 4,000 3Q12 (Li-polymer battery-packs have a higher ASP by 3,500 20-50% than 18650 cylindrical battery-packs), and as 3,000 the company plans to start shipping much higher ASP 2,500 (US$15,000-20,000/car) battery-packs for BEVs in 2,000 4Q12. 1,500 1,000 We forecast net-profit growth for 2012 of 22% YoY, a 500 sound level albeit lower than our sales-growth forecast 0 of 30% YoY, due to the sharp net-profit drop in 1Q12 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (down 29% QoQ) which was due to: 1) the usual slow Share Capital Net income period, in line with seasonality, 2) iPad product Source: Company transition, and 3) a 1pp QoQ contraction in its gross margin due to unfavourable forex rates (NT dollar 2. ROAE stable over 2006-11 and should appreciation against the US dollar), which we believe is remain so from 2012 unlikely to be made up fully by 2Q-4Q12E earnings, while its R&D expense for 2012 should be slightly Simplo’s ROAE averaged 26% from 2006-11 and was higher than for 2011 given new product development resilient during the financial crisis in 2008-09, at 26% this year. (Please refer to Appendix D for details of the in 2008 and 23% in 2009. We forecast the company to company’s 1Q12 figures and our quarterly forecasts.) maintain its ROAE at the 27% level for the next three years, which we believe is conservative given the upside For 2013, we forecast sales growth of 28% YoY and net- potential we see for the higher-margin EV businesses. profit growth of 27% YoY, as we believe the potential Simplo: ROAE over 2006-14E decline in the ASP for Li-polymer battery-packs for notebook-like products (regular notebooks, tablets, and 50% Ultrabooks) will be offset by a much higher ASP for the initial EV battery-pack business. Still, we do not expect 40% the overall gross-profit margin for the company’s EV 30% battery-pack business to improve substantially until 2014 (when we forecast the company’s total sales to 20% grow by 20% YoY and its net profit to rise by 23% YoY), when all production set-up costs should be incurred for 10% the new product lines and the overall yield rate should become more stable for the EV battery-pack business. 0% 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E ROAE (%)

Fundamentals look very solid Source: Company, Daiwa forecasts

Demand for Simplo’s products (battery-packs for tablets, Ultrabooks and EVs) continues to rise, and we

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3. Often beats its guidance Risks We have looked at Simplo’s quarterly guidance for sales and EPS on a parent basis since 1Q06 and compared We have identified the following risks to our rating, the guidance with the results. For sales, we have found target price and forecasts for Simplo: 1) pricing that the company beat its sales guidance 16 times and pressure from peers and brand makers globally, 2) met its guidance on 9 occasions out of 25 quarterly market-share loss to battery-cell makers in the battery- results. pack business, 3) lower-than-expected demand for

tablets and Ultrabooks, and 4) slower-than-expected As for its EPS, the company only missed its guidance EV battery-pack business. once, in 1Q08 (by 3.8%), but had a better target rate than its sales, beating its guidance 18 times and meeting it by 6 times. (For more details on sales and EV battery-packs: the growth EPS guidance compared with the results, please refer to Appendix B.) driver beyond 3C products

Simplo: 1Q06-1Q12 sales and EPS guidance vs. results We forecast notebook-like (regular notebook, tablets, Sales beat guidance? Number of times % of times and Ultrabooks) battery-packs to account for 96% of Yes 16 64% Simplo’s sales still in 2012E. However, Simplo is In line 9 36% Miss 0 0% aiming to lessen its dependency on 3C products in the Total 25 100% longer term, and to penetrate the market for high- EPS beat guidance? power (watt) battery-packs for EVs, which offer a Yes 18 72% higher dollar profit than notebook battery-packs once In line 6 24% scale economies have been attained. Miss 1 4% Total 25 100% Source: Company, Daiwa estimates We expect demand to continue rising for Lib battery- Note: packs for tablets and Ultrabooks (both offer a higher 1) Company guidance figures are on a parent basis 2) We have backward-adjusted the EPS guidance using the actual number shares in each dollar profit per unit than regular notebook battery- quarter as the EPS guidance was based on the outstanding shares for the previous quarter packs) in the next couple of years. However, their premium in terms of pricing and profit margins over 4. Net cash in 2006-11 and likely over regular notebook battery-packs is likely to narrow soon, 2012-14 when Libs takes up the lion’s share of the market for Simplo has been in a net cash position since 2006, even notebook battery-packs. in 2008 and 2009 during the financial crisis. We expect it to remain in a net cash position for the next Battery-packs for EVs should enjoy higher gross three years given the secular growth we see for its cash- margins than notebook battery-packs due to the higher generative battery-pack business, not only for tablets entry barriers to the EV battery-pack business and and Ultrabooks but also for the EV markets. stable customer relationship for higher quality requirements/standards, in our view, As such, while Simplo: net cash/equity over 2006-14E most investors are familiar with Simplo’s business- 50% growth story over 2011-13E from Li-polymer battery- packs for tablets and Ultrabooks, we believe that 40% demand for Libs and charging systems for EVs is likely to trigger a surge in Simplo’s business growth in the 30% next few years.

20% Simplo appears to be ahead of the game in preparing 10% new sales-growth drivers, such as battery-packs for light EVs and electric bikes (ASP: US$120/unit and 0% electric scooters (ASP: US$350/unit), and battery- 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E packs for BEVs like electric buses, taxis and public- Net cash/equity (%) sector vehicles. Source: Company, Daiwa forecasts The company plans to start shipping battery-packs for BEVs in 4Q12 (with a guided ASP of around US$15,000-20,000/unit, depending on various sizes and capacities). We expect these types of battery-packs

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to generate gross margins of below 10% initially but to An electric bicycle increase their gross margins gradually as shipments gain traction and Simplo reaches economies of scale producing these battery-packs. We expect the gross margin for the company’s EV battery-pack business to surpass its overall gross margin from 3Q13E onward.

ASPs and gross margins of Simplo's products in 4Q14E Regular MacBook Ultrabook Tablet Products notebook LEV BEV * (Polymer) (Polymer) (Polymer) (cylindrical) ASP (US$) 19 31 37 18 262 15,824 Gross margin 10 12.9 17.5 13.5 19.0 21.0 (%) Source: Daiwa forecasts * As Simplo plans to start shipping BEV battery-packs in 4Q12, its initial margin should be lower than 10% but increase gradually to 21% by 4Q14 as scale economies are reached in production within this segment. Source: EVWorld.com EV: mainly LEV, but very minimal in 2012E We forecast Simplo’s EV battery-pack business to BEV should be more significant in 2013 account for less than 2% of its 2012E sales, coming Globally, there are many BEV projects by automakers mainly from battery-packs for LEVs. Simplo currently (listed in Appendix G). Daiwa’s Auto Sector team makes most of its LEV battery-packs for: 1) Sangyang expects the BEV market to flourish in the coming years, Industry (Not rated), a Taiwan scooter company, and 2) especially in China where the government has been ebikes for the European markets. Simplo is also a promoting energy-saving industries for its next Five- supplier to Giant Bicycle (Not rated). Year Plan.

Electric scooters Global BEV market: shipments and growth ('000 units) 66% 5,000 70% 60% 4,000 43% 50% 3,000 35% 29% 40% 2,000 23% 21% 22% 30% 20% 1,000 10% 0 0% Source: Sangyang Industry 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

HEV (Ni-MH) HEV (Li-ion) PHEV (Li-ion) We forecast Simplo’s shipments of LEV battery-packs EV (Li-ion) YoY (% , RHS) to total 117,000 units in 2012 and its sales of LEV Source: Consolidation of various company materials, Daiwa forecasts battery-packs to rise at a CAGR of 44% over 2011-14 Note: Please refer to the glossary for definitions of the different types of EVs and to account for about 2% of the company’s sales in 2014. While Daiwa forecasts worldwide BEV shipments to reach 1.97m units (up 66% YoY) in 2012 and 2.66m units (up 35% YoY) in 2013, we expect Simplo to start benefiting only from 2013, once its ongoing projects (see below for details) start to bear fruit.

The company has said that it will start to ship BEV battery-packs in 4Q12. We forecast BEV battery-packs to account for 4% of 2013 sales and 8% of 2014 sales. We believe shipment growth could be boosted by demand from EV projects with 1) China Potevio (Not rated) (Potevio), and/or 2) Yulon Motor (Not rated).

Project 1. In February 2010, Simplo joined with Potevio, a state-owned enterprise in China, to set up a

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Rmb100m joint-venture in Shanghai developing Although it is difficult to think ahead of the China batteries and exchange/leasing systems for EVs. government in terms of whether there will be more Potevio (which owns 48% of the venture) is responsible subsidy programmes nation-wide, it did target in its for setting the EV battery standards and establishing FY12 Five-Year Plan to have about 500,000 EVs by channel networks in China, while Simplo (52% stake) 2015. focuses on all things related to the manufacturing procedures and technology development. Project 2. The project with Yulon Motor is not yet at the mass-production stage (this will most likely come China Potevio: car battery unloading/loading within 3 min in 2013), but we expect Simplo to be the battery-pack maker for Yulon Motor’s Luxgen brand of MPVs, SUVs, and luxury sedans.

While preparatory work on producing EV sedans with Yulon is ongoing, Simplo has said that most of the current revenue contribution to the BEV business is coming from electric buses from some city governments in China (Chengdu, Shanghai, and Beijing) in 2012.

Despite the high cost of BEV battery-packs (US$15,000-20,000/car), we are positive about Simplo’s continuing expansion of this business through Potevio in China, given government incentives to

Source: China Potevio promote LiB EVs (a key to increasing the adoption rate) and charging stations. Note. Potevio also has a joint venture with China National Offshore Oil Corporation (883 HK, HK$14.72, Simplo believes that another way of increasing the BEV Buy [1]), which has invested in Tianjin Lishen (a adoption rate would be by not selling the battery-packs battery-cell maker) as part of its R&D efforts into EV and instead making it available through the following battery-packs: we believe this means Simplo is mechanisms (like paying for petrol): vertically integrated in the China EV market, benefiting 1) fees based on a battery-pack leasing programme, from its early entry into the sector. 2) fees based on the mileage driven, and/or Simplo and Potevio JV structure 3) fees based on the usage (how much power is Rmb52m Rmb100m Rmb48m charged/ discharged).

CNOOC Module Potevio Charge Station Simplo We forecast the EV business, comprising LEVs and Battery Cell (883 HK) (600680 CH) BEVs, to account for 5% of 2013 sales, driven mainly by Lishe Battery Cell n BEVs.

Note. Other than the collaborations with Potevio and Battery Charging Battery Cell Module Station Yulon, Simplo has also formed alliances with

CNOOC / Lishen* Simplo / Potevio Potevio / CNOOC Changchun FAWAY Automobile Components (Not CNOOC invested US$732 mn in Lishen Simplo(48%) sets up a JV w ith Potevio(52%) China Potevio / CNOOC New Energy and Power, Ltd., this JV w as set up by Potevio rated), SAIC Motor (Not rated), and ChangAn (Not *Lishen: Tianjin Lishen Battery Co and CNOOC. (manufacture lithium battery for EV). rated) on BEVs.

The more Li-polymer shipments, the better the dollar profit Target for the market… We forecast notebook-like battery-packs to account for

Government service cars and taxis 96% of Simplo’s 2012 revenue. With the drive for mobile devices, especially tablets and Ultrabooks, to

Source: compiled by Daiwa become lighter, and have slimmer and flatter form factors, Li-polymer battery-packs are becoming more popular than 18650 cylindrical-type battery-packs - 10 - Electronics / Taiwan 6121 TT 29 May 2012

(refer to Appendices E and F for comparisons among continue to increase over the next few years, and the various types of lithium battery-packs). shipments of cylindrical-type battery-packs to decline.

Companies in the notebook sector forecast annual Simplo: notebook battery-pack shipment mix by battery type 120 shipment growth of 5-10% YoY for 2012. But with the 105 rising demand for tablets, along with the start of 100 Ultrabook demand, we think Simplo (given its leading 83 position in Li-polymer battery-packs) should enjoy a 80 higher dollar profit per unit (than that of the regular 60 54 notebook) in its battery-pack business, even if the 41 36 38 31 gross-profit margin for Li-polymer battery-packs was 40 29 27 not substantially different to that for the 18650 10 cylindrical-type battery-packs, as the ASP for Li- 20 polymer battery-packs is 50% higher. 0 2010 2011 2012E 2013E 2014E Cylindrical Polymer For 2012-14, we forecast global annual tablet shipments to increase by 79%, 35%, and 23%, Source: Consolidation of company materials, Daiwa forecasts respectively, and shipments of Ultrabook to rise by 53%, Note: Polymer battery-packs include batteries for MacBook Pro, MacBook Air, iPad, and Ultrabooks 148%, and 59% YoY, respectively, both surpassing the annual shipment growth we forecast for regular We therefore believe that the company’s quarterly net- notebooks. profit growth will rise at a faster pace than its revenue, on the back of rising Li-polymer battery-pack iPad and other tablets: shipment and growth shipments (which have a higher dollar profit per unit (m units) than cylindrical-type battery-packs) for not only the 200 300% 271% new iPad, but also new versions of the MacBook Pro, 250% MacBook Air, Ultrabooks, and other tablets. As a result, 150 86 200% we forecast 2Q12 net profit to rise by 20% QoQ 76 compared with sales growth of 18% QoQ, and 3Q12 net 100 47 150% profit to rise by 43% QoQ compared with sales growth 100% of 20% QoQ. 50 25 79% 109 70 82 50% 40 23% 3 35% 0 15 0% 2010 2011 2012E 2013E 2014E Profit streams = purchasing scale iPad (LHS) Others (LHS) Total Tablets (% RHS) + cost controls + good yield rate

Source: Consolidation of company materials, Daiwa forecasts As shown in the following chart, notebook battery-cells Global Ultrabook shipments, growth, and penetration rate account for the highest proportion of bill of material (m units) (BOM) costs; as such, there is pressure on the notebook 195 196 148% 200 191 160% battery-pack makers to reduce the cost of battery-cells. 176 162 140% 150 120% As we see it, Simplo’s comprehensive list of suppliers in 100% battery-cells, good relationships with its suppliers, 100 83 80% 53% procurement scale, cost-control ability, and ability to 41% 53 59% 60% 50 40% design and produce quality products with high safety 21 5% 14 10% 20% standards and efficiency are key contributing factors in 10 7% 23% 34% 0 0% its leading position within the industry — and in its 2010 2011 2012E 2013E 2014E higher gross-profit margin than those of its Regular notebooks (LHS) Total Ultrabooks (LHS) competitors.

Ultrabook penetration (% RHS) Ultrabook YoY (% ) Source: Consolidation of company materials, Daiwa forecasts Note: Both MacBook Pro and MacBook Air use Li-Polymer battery-packs, and are thus shown as Ultrabooks in this chart

The following chart shows that we expect Simplo’s overall shipments of Li-polymer battery-packs (including for MacBooks, Ultrabooks, and tablets) to

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Ultrabook (2.6Ah/six cell): Li-polymer battery-pack BOM cost Gross margin: peer comparisons breakdown (%) 2nd protection 20 IC Others 7% Frame 1% 18 6% 16 PCB 6% 14 12 Gas gauge 6% 10 8 6 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Cell Simplo Dynapack Celxpert 74% Source: TEJ Source: Daiwa estimates

Regular notebook (2.6Ah/six cell): 18650 battery-pack BOM Distinct management style with cost breakdown self-discipline at its core 2nd protection Others IC 7% 3% While many investors are aware of the sales-growth Housing prospects of tablets and Ultrabooks, not many sell-side 7% analysts have mentioned the management style at PCB 7% Simplo and the company’s unique business model on how it is capable of delivering good results. Here, we Gas gauge outline the chairman’s management style and the 8% company’s recruitment philosophy. Cell 68% Fu-Hsiang Sung, Simplo’s chairman, has a unique approach in terms of self-discipline, operations

Source: Daiwa estimates management, and business model.

On the following chart, it can be seen that Simplo’s Self-discipline. Mr. Sung himself refrains from: 1) average consolidated gross-profit margin has been smoking, 2) drinking alcohol, 3) ‘playfulness’, 4) adult higher than its peers by 4-5pp for the past four years – entertainment, and 5) golf. His philosophy is to build the only exception was 1Q12, when the company’s his credibility with safe and quality deliverable factors, margin dropped by 1.7 pp due to: 1) unfavourable rather than by socialising and partaking in the above- foreign-exchange movements (NT dollar appreciation mentioned activities. against the US dollar), 2) lower shipment volume amid the slow season, and 3) a negative impact on shipments Recruitment. Mr. Sung does not like to hire people from problems with the panel makers’ yield rates for who have graduated from Ivy League or famous schools, the new iPad. However, we forecast a 2Q12 gross instead favouring those with mediocre grade-point margin of 13.6% (from 1Q12’s 12.9%). averages. He believes in team work and that ego and a lack of cohesiveness are the key reasons for failure. There are five rules that each employee must abide by: 1) ensure client confidentially, 2) be punctual, 3) be law-abiding, 4) be trustworthy, and 5) be virtuous.

On unity and problem-solving. Mr. Sung dismisses people for forming factions/cliques, blaming others, and/or not admitting to mistakes. In other words, he favours those that work and solve problems in concert with others and deliver work effectively and efficiently rather than blaming others and wasting time to resolve issues.

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Simplo: diversified battery-cell supplier mix by type of battery- A successful model that has pack 100% 5% 5% turned a profit since Sung took 7% 5% 8% 10% over 80% 10% 15% 60% Mr. Sung’s management-style and philosophy put the 30% business on track – and kept it there – since he joined 30% the company and assumed responsibility as the 40% chairman in 1998. The company became profitable in 20% 40% the same year, after it was restructured to focus on 35% perfecting manufacturing procedures, providing 0% quality products, and enhancing operating efficiency. Cylindrical Polymer We believe the following factors are the main reasons Samsung SDI LG Chem Sanyo Panasonic BAK Lishan for Simplo’s success. Source: Daiwa 1) Aims for stable production and top-notch quality products with high safety levels. The 5) Practises flexibility by having a 30% buffer aim is to build credibility, as brand makers care a in capacity for potential rush orders from lot about their image, given that the consequences existing or new clients. For example, in 2006, the of fire hazards and/or recall of batteries can be company delivered a 400,000 rush order on time highly damaging to their clients’ brand image. after Dell had an issue with its supply of batteries 2) Offering competitive prices through 1) from Sony. This paved the way for more business automation: provides a more stable yield rate from existing clients and helped turn prospective than manual labour (battery-pack production customers into actual clients. automation is designed to allow faster employee 6) Invests time and effort in R&D for second- training), 2) achieving economies of scale tier clients to enhance its R&D skills. The and vertical integration (through the in-house company has never frozen its R&D expenses, not production of printed circuit boards and injection even during the financial crisis of 2008-09, moulding for battery cases, etc.) to reduce overall because it believes that means there will be no costs. future business growth. Every year, Simplo spends 3) Short product-development life cycles with about 2-3% of its annual sales on R&D to sustain a short time to market through the use of in- its technological lead in the field. house laboratories, thus obviating the need to wait for long periods to get prototypes qualified and pay Comparison of R&D expenses and as a % of sales R&D expense (NT$bn) 2006 2007 2008 2009 2010 2011 for expensive external regulatory agencies, such as Simplo (6121 TT) 0.52 0.47 0.98 1.06 1.20 1.01 Underwriters Laboratories and TUV Rheinland, to Dynapack (3211 TT) 0.16 0.13 0.22 0.24 0.26 0.28 qualify for safety assurance standards and Celxpert (3323 TT) 0.07 0.08 0.12 0.20 0.25 0.12 certifications. The in-house certified labs take only R&D expense/sales 2006 2007 2008 2009 2010 2011 two weeks for qualification, compared with more Simplo (6121 TT) 3.1% 2.0% 3.2% 3.1% 3.1% 2.1% Dynapack (3211 TT) 1.9% 0.9% 1.3% 1.5% 1.5% 1.2% than two months if prototypes are sent out Celxpert (3323 TT) 1.2% 0.9% 1.4% 2.4% 2.8% 2.6% externally. Source: Companies, Bloomberg, Daiwa estimates 4) Diversifies its supply sources to increase bargaining power, but enjoys good 7) As a pack maker, enhancing relationships with suppliers, ensuring cells collaboration/co-operation with ODMs (eg, are delivered in a timely manner. It is Wistron and Quanta) is crucial to securing orders, unusual for Simplo to switch suppliers as the as ODMs also have sourcing rights (as opposed to company views them as strategic partners that are consignment by brand makers) from the brand committed to expanding together. In other words, makers. The following chart shows that purchasing if a supplier does not meet Simplo’s expectations power lies not only with the brand makers, but also (eg, poor performance or high costs), it would work with the ODMs. on the issues with the company to deliver solutions collaboratively, as opposed to leaving it to resolve the issue on its own.

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Battery cell and battery-pack supply chain Global market share: cylindrical battery-pack makers

60% Cell maker 52% 49% 50% battery dell 40% 1b) battery final products: NB, module tablet, etc. 26% Pack maker Brand maker 30% 20% 20% 13% 2b) battery module 11%

2a) battery module 9% 6% 10% 5% 5% 4% 0% ODM/OEM 0% Simplo Dynapack Samsung SDI ATL Sony Others 2011 2012E Source: Daiwa Source: Companies; Daiwa forecasts 8) Caps its market share at 30% to maintain its bargaining power (as opposed to having any 2. Sales mix by product type particular leading buyer accounting for too much of We expect Simplo’s notebook battery-pack business its business). Simplo has a wide range of clients (including tablet battery-packs) to account for more and does business with all the major notebook than 96% of 2012 sales and 92% in 2013. We believe brand makers so as not to be too dependent on any Simplo is running ahead of the game in preparing new one customer. sales-growth drivers, such as batteries for light EVs, ebikes and escooters, and for battery-powered EVs for The company’s major customers include: Apple electric buses, taxis and public-sector vehicles. We (AAPL, US$562.29, Outperform [2]), ASUSTeK forecast EV battery sales to account for about 10% of its (2357 TT, NT$306.50, Hold [3]), Dell (DELL, total sales in 2014 (from less than 2% in 2012) and note US$12.46, Hold [3]), HP (HPQ, US$22.33, Hold that they have higher gross margins than 3C products. [3]), Acer (2353 TT, NT$31.25, Sell [5]), Quanta (2382 TT, NT$79.10, Underperform [4]), and Simplo: sales breakdown by product Lenovo (992 HK, HK$6.67, Outperform [2]). 100% 5% 3% 3% 2% 2% 1% 1% 5% 13% 10% 1. Market-share leader 80% 7% 30% 43% 1% 48% Established in 1992, Simplo has become the leading 6% 47% notebook battery-pack maker globally, with a 2012E 60% 8% market share of 25%, or is ranked No. 2 in the global 40% 6% 75% 16% cylindrical battery-pack supply market, with a 52% 59% 20% share of the market, or ranked No.1 in the polymer 6% 20% 39% 5% 22% battery-pack supply business. 16% 0% Global market shares: cylindrical battery-pack companies 2010 2011 2012E 2013E 2014E Regular NB (Cylindrical) MacBook Ultrabook Tablet EV Others 35% 32% Source: Company; Daiwa forecasts 30% 25% 25% 21% 22% 3. A name worth investing in: QFIIs like 20% 16% 16% 15% Simplo more than local funds 15% 12% 12% 10% 11% Aside from Hon Hai and its affiliates, which own about 10% 8% 8.22% of the company’s share capital, QFIIs have been 5% accumulating shares in Simplo since the beginning of

0% 2009, with their combined shareholding reaching 53% Panasonic/ Simplo Samsung LG Chem Dynapack Others in 2Q12 (from 15% in 2009). Unlike the QFIIs, local Sanyo SDI institutional investors do not seem to like the Simplo 2011 2012E name much because of a perceived lack of earnings Source: Companies, Daiwa transparency.

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Simplo: shareholder structure Global market share: cylindrical battery-cell makers Shareholder % 40% 36% Pao Hsin International 4.18 35% Hung Yang (Hyield) Venture Capital Co. 4.04 30% 30% Fubon Life Insurance 3.87 25% 24% 22% 23% Cathay Life Insurance 2.74 25% 20% Deutsche Bank AG 2.57 20% TLC Capital Co. 2.45 15% 9% 8% J.P.Morgan (trustee of Te-Pao-Feng China Funds Inv. Account) 2.07 10% New Labor Pension Fund 1.88 3% 5% J.P.Morgan (trustee of Saudi Arabian Monetary Agency) 1.64 Chairman (CEO) Sung Fu Hsiang 0.63 0% Samsung SDI Panasonic/ LG Chem Sony Others Other Management 0.12 Sanyo Source: TEJ, Daiwa estimates 2011 2012E Note: data is as of end-April 2012 Source: Companies, Daiwa forecasts

Shareholdings in Simplo: QFIIs vs. local funds Global market shares: polymer battery-cell makers % 60% 60 48% 50% 38% 50 40% 28% 40 30% 24% 17% 30 20% 11% 8% 9% 20 10% 4%4% 4% 5% 0% 10 ATL Samsung LG Chem Sanyo Sony Others SDI 0 2011 2012E Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Companies, Daiwa forecasts QFII holdings Local funds holdings Source: Company, Daiwa estimates 2. Battery-cell makers with in-house We see Simplo’s continuous expansion in the field of battery-pack capacity battery-pack production, not only for 3C consumer While the battery-cell (seen as a commodity) is not as products but also for EVs and energy storage, its solid profitable as the pack due to the nature of the business, fundamentals, and ability to record a net profit in the cell makers have expanded their territory into the excess of its paid-in capital for many years. The pack business (more stable net profit outlook). In the company also offers a steady cash dividend (its payout following table, we highlight the major cell suppliers, ratio has averaged at 45% for the past six years) to its with or without pack capacity. shareholders. Cell players with or without in-house capacity Simplo: EPS, dividend and payout ratio Notebook battery-cell players Tablet battery-cell players

2006 2007 2008 2009 2010 2011 2012E In-house pack makers In-house pack makers

Supplier Yes/No? Supplier Yes/No? EPS (NT$) 9.82 11.66 11.28 10.67 13.06 13.16 16.02 Sanyo Yes Sony Yes Cash dividend (NT$) 4.00 4.50 5.00 5.00 5.00 5.50 6.00 Sony Yes ATL No Dividend payout (%) 46 43 44 47 42 46 n.a. SDI Yes SDI Yes Source: Company, Daiwa forecasts LGC Yes LGC Yes Note: Dividends are listed in the years they were paid, the payout ratio is calculated by cash dividend divided by the previous year's EPS. BYD No Lishen No

Source: Companies, Daiwa

More about the battery industry Although the cell makers’ move into the pack business could average out any potential losses that they may 1. Cell makers by battery type see in their cell businesses over the long term, the source of their cells is limited to their in-house While there are many battery-cell makers (see production. Thus, they will not be exposed enough to Appendix I) on the list, we list here the primary other cell makers, such as the pure pack makers, which suppliers and their worldwide market shares. means they will not grow faster than independent

battery-pack makers in terms of technology migration, nor will they benefit from any cost advantages through bargaining with various battery-cell suppliers.

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Appendix A: DCF valuation

ƒ Simplo: economic profit valuation ƒ Simplo: DCF valuation summary NT$m % NT$m % Adjusted opening invested capital 12,819 21 Value of Phase 1: explicit (2012-14E) 7,315 12 NPV of economic profit during explicit period 8,151 13 Value of Phase 2: value driver (2015-29E) 34,900 58 NPV of economic profit of remaining business (1, 2) 15,261 25 Value of Phase 3: fade (2030-51E) 16,834 28 NPV of economic profit of net inv. (growth business) (1, 3) 24,174 40 Terminal value 1,535 3 Enterprise value 60,405 100 Enterprise value 60,585 100 Plus net cash (2012E) 5,682 9 Equity value 66,087 109 FCF growth rate at end of phase 1 implied by DCF Valuation 7.5 FCF growth rate at end of phase 1 implied by current price 7.8

No. of shares (m) 280.3 Equity value per share (NT$) 235.00

ƒ Simplo: sensitivity of DCF value to WACC ƒ Returns, WACC and NPV of free cash flow No. of years in the fade period (NT$m)NT$ 18 20 22 24 26 50% 3500 11.5% 274 272 293 297 302 45% 12.5% 246 245 262 265 270 3000 WACC 13.5% 223 222 235 238 243 40% 204 203 213 216 220 14.5% 35% 2500 15.5% 87 186 194 197 200 30% 2000 ƒ Simplo: performance summary 25% 1500 Phase 2 Avg. 20% 2012E 2013E 2014E (2015-29E) 15% Invested capital growth (%) 14.0 16.0 17.9 11.8 1000 Operating margin (%) 8.3 8.4 8.7 6.9 10% Capital turnover (x) 5.5 6.1 6.3 5.0 500 5%

0% 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 Phase 1 NPV of FCF (RHS) Phase 2 NPV of FCF (RHS) Phase 3 NPV of FCF (RHS) T otal Business ROIC Growth Business ROIC WA C C Remaining Business ROIC Source: Bloomberg, Daiwa forecasts Note: All years are estimated

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Appendix B: Simplo’s quarterly range-guidance track record

Sales (NT$m) 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Low 2,850 3,300 4,200 4,900 4,300 4,950 5,850 6,550 6,450 6,850 8,200 8,650 6,600 8,000 9,400 9,500 High 3,050 3,600 4,400 5,000 4,400 5,050 5,950 6,650 6,550 7,000 8,400 8,850 6,800 8,200 9,500 9,600 Actual 3,006 3,518 4,516 5,270 4,419 5,151 6,027 7,335 6,513 7,025 8,440 8,821 6,912 8,239 9,513 9,552 Beat guidance? In line In line Yes Yes Yes Yes Yes Yes In line Yes Yes In line Yes Yes Yes In line EPS (NT$) 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Low 1.52 1.55 2.28 2.85 2.14 2.07 2.56 3.21 2.60 2.45 3.00 3.01 1.69 2.48 2.85 3.05 High 1.64 1.63 2.43 2.95 2.20 2.11 2.61 3.25 2.64 2.54 3.12 3.12 1.77 2.57 2.95 3.17 Actual 1.93 1.85 2.70 3.17 2.31 2.41 2.94 3.87 2.50 2.64 3.30 3.11 2.02 2.53 3.09 3.17 Beat guidance? Yes Yes Yes Yes Yes Yes Yes Yes Miss Yes Yes In line Yes In line Yes In line

Sales (NT$m) 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Low 8,000 9,700 10,000 9,650 9,300 11,500 13,600 13,000 11,600 High 8,100 9,900 10,200 9,850 9,500 12,000 13,800 13,800 11,800 Actual 8,211 9,753 10,160 10,258 9,561 12,071 13,732 13,016 11,818 Beat guidance? Yes In line In line Yes Yes Yes In line In line Yes EPS (NT$) 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Low 2.16 3.13 3.40 3.30 2.29 3.38 3.53 3.67 2.61 High 2.17 3.17 3.47 3.34 2.37 3.45 3.60 3.82 2.66 Actual 2.60 3.89 3.48 3.33 2.58 3.39 3.59 3.83 2.70 Beat guidance? Yes Yes Yes In line Yes In line In line Yes Yes

1Q06-1Q12 quarterly sales and EPS guidance vs. actual Sales beat guidance? Number of times % of times Yes 16 64% In line 9 36% Miss 0 0% Total 25 100% EPS beat guidance? Yes 18 72% In line 6 24% Miss 1 4% Total 25 100% Source: Company; TEJ; MOPS Notes: 1) Company guidance is parent-based; 2) we have backward-adjusted the EPS guidance using the actual number of shares of the quarter as the EPS guidance was based on the outstanding shares from the previous quarter

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Appendix C: peer valuations

Economic Company Market cap Share price EPS (local curr.) PER (x) BVPS (local curr.) PBR (x) ROE (%) DPS (local curr.) Dividend yield Bloomberg code Entity Touch sensor/ module Product (US$ m) (local curr.) 2011 2012E 2013E 2012E 2013E 2011 2012E 2013E 2012E 2013E 2011 2012E 2013E 2011 2012E 2013E 2012E 2013E 6121 TT Taiwan SIMPLO TECHNOLOGY CO LTD Li-ion Battery 1,973 208.50 13.16 16.02 20.35 13.0 10.2 57.0 66.7 81.0 3.13 2.57 25.2% 25.9% 27.6% 5.00 6.00 6.40 2.9% 3.1% 3211 TT Taiwan DYNAPACK INTERNATIONAL TECH Li-ion Battery 681 155.00 11.40 12.45 14.36 12.4 10.8 42.7 52.6 59.9 2.95 2.59 29.2% 30.5% 28.3% 7.00 6.67 7.25 4.3% 4.7% 3323 TT Taiwan CELXPERT ENERGY CORP Li-ion Battery 82 22.70 -0.17 0.75 na 30.3 na na na na na na na na na na na na na na 3625 TT Taiwan C-TECH UNITED CORP Li-ion Battery 16 8.66 na na na na na na na na na na na na na na na na na na 051910 KS Korea LG CHEM LTD Li-ion Battery 16,906 300,000 33,185 28,310 36,231 10.6 8.3 147,696 170,464 200,687 1.76 1.49 24.9% 17.8% 19.5% 4000 5000 5000 1.7% 1.7% 006400 KS Korea SAMSUNG SDI CO LTD Li-ion Battery 5,985 154,500 7,706 12,152 12,209 12.7 12.7 134,292 147,323 160,410 1.05 0.96 5.8% 8.6% 7.9% 0.00 0.00 0.00 0.0% 0.0% 6501 JP Japan HITACHI LTD Li-ion Battery 26,760 459.00 48.77 60.34 50.24 7.6 9.1 326 361 412 1.27 1.11 15.1% 16.8% 12.4% 8.04 7.77 8.90 1.7% 1.9% 6752 JP Japan PANASONIC CORP Li-ion Battery 16,498 536.00 44.13 -341.1 34.23 na 15.7 1,325 858 846 0.62 0.63 3.3% -33.4% 4.1% 10.11 10.00 10.72 1.9% 2.0% 6502 JP Japan TOSHIBA CORP Li-ion Battery 16,087 302.00 25.67 16.02 29.98 18.9 10.1 216 217 233 1.39 1.30 11.3% 7.4% 13.9% 4.91 6.90 8.43 2.3% 2.8% 6758 JP Japan SONY CORP Li-ion Battery 13,538 1,074.00 -259.0 -518.8 45.59 na 23.6 2,925 2,071 2,104 0.52 0.51 -9.3% -19.4% 2.6% 25.00 25.00 25.00 2.3% 2.3% 6701 JP Japan NEC CORP Li-ion Battery 3,667 112.00 -4.86 -38.31 10.25 na 10.9 295 253 262 0.44 0.43 -1.4% -12.7% 3.5% 1.83 0.00 3.75 0.0% 3.3% 6674 JP Japan GS YUASA CORP Li-ion Battery 1,768 341.00 25.48 27.57 34.20 12.4 10.0 266 276 309 1.23 1.10 9.3% 10.3% 11.8% 7.33 7.91 8.40 2.3% 2.5% 1211 HK China BYD CO LTD-H Li-ion Battery 7,666 16.06 0.44 0.55 0.72 29.0 22.2 9.0 9.6 10.4 1.67 1.54 5.6% 6.0% 7.0% 0.03 0.05 0.06 0.3% 0.4% 729 HK China SINOPOLY BATTERY LTD Li-ion Battery 489 0.35 na na na na na na na na na na na na na na na na na na JCI US US JOHNSON CONTROLS INC Li-ion Battery 20,773 30.54 2.42 2.72 3.30 11.2 9.3 16.9 18.5 21.2 1.65 1.44 14.9% 15.7% 17.2% 0.59 0.68 0.74 2.2% 2.4% AONE US US A123 SYSTEMS INC Li-ion Battery 148 1.01 -1.96 -1.82 -0.73 na na 2.5 0.8 1.0 1.21 1.04 -67.3% -95.1% -68.9% 0.00 0.00 na 0.0% na VLNC US US VALENCE TECHNOLOGY INC Li-ion Battery 117 0.69 -0.09 -0.06 na na na na -0.4 na na na na na na na na na na na CBAK US US CHINA BAK BATTERY INC Li-ion Battery 45 0.70 na na na na na na na na na na na na na na na na na na SAFT FP France SAFT GROUPE SA Li-ion Battery 583 18.48 1.73 1.92 2.08 9.6 8.9 16.0 16.6 17.9 1.11 1.03 13.8% 12.0% 11.7% 0.72 0.80 0.82 4.3% 4.5% Battery Wtg. Avg 12.9 12.4 2317 TT Taiwan HON HAI PRECISION INDUSTRY PC OEM 32,306 89.50 6.78 8.30 10.29 10.8 8.7 53.5 61.2 69.4 1.46 1.29 13.4% 13.9% 15.4% 1.24 1.51 1.76 1.7% 2.0% 2382 TT Taiwan QUANTA COMPUTER INC PC OEM 10,256 79.10 5.76 5.48 5.89 14.4 13.4 26.6 27.8 29.6 2.85 2.67 20.7% 20.2% 20.5% 3.60 4.28 4.07 5.4% 5.1% 2357 TT Taiwan ASUSTEK COMPUTER INC PC OEM 7,791 306.50 21.45 20.95 23.24 14.6 13.2 136.3 146.1 158.3 2.10 1.94 15.5% 14.8% 15.3% 13.78 11.24 10.98 3.7% 3.6% 2324 TT Taiwan COMPAL ELECTRONICS PC OEM 4,719 31.80 2.74 3.65 4.04 8.7 7.9 21.9 24.1 26.2 1.32 1.21 11.5% 15.9% 16.1% 2.71 1.42 1.87 4.5% 5.9% 4938 TT Taiwan PEGATRON CORP PC OEM 3,162 41.50 -0.15 3.34 4.47 12.4 9.3 39.3 43.2 46.6 0.96 0.89 -0.3% 7.6% 9.5% 1.01 0.97 1.93 2.3% 4.7% 3231 TT Taiwan WISTRON CORP PC OEM 2,686 38.00 4.23 4.90 5.87 7.7 6.5 25.5 28.2 31.5 1.35 1.21 16.0% 18.2% 19.6% 3.02 2.22 2.57 5.8% 6.8% 2353 TT Taiwan ACER INC PC OEM 2,853 31.25 -2.32 2.57 3.22 12.1 9.7 31.1 33.7 35.3 0.93 0.89 -6.9% 7.9% 9.3% 3.60 0.00 1.65 0.0% 5.3% PC OEM Wtg. Avg 11.7 9.9 2308 TT Taiwan DELTA ELECTRONICS INC Component 6,947 85.50 4.55 5.87 6.65 14.6 12.9 33.2 36.8 38.8 2.32 2.20 13.1% 15.2% 16.1% 4.19 3.89 4.66 4.6% 5.4% 2474 TT Taiwan CATCHER TECHNOLOGY CO LTD Component 4,817 190.00 13.51 15.97 20.37 11.9 9.3 73.7 81.2 91.7 2.34 2.07 23.0% 20.6% 23.6% 4.15 8.42 9.96 4.4% 5.2% 2354 TT Taiwan FOXCONN TECHNOLOGY CO LTD Component 4,237 107.00 7.09 7.48 9.31 14.3 11.5 53.2 57.0 65.3 1.88 1.64 14.9% 14.7% 16.3% 1.44 1.80 1.94 1.7% 1.8% 3673 TT Taiwan TPK HOLDING CO LTD Component 3,396 427.50 48.22 58.13 72.96 7.4 5.9 124.2 160.7 215.1 2.66 1.99 51.5% 40.8% 38.8% 0.00 20.00 20.00 4.7% 4.7% 3008 TT Taiwan LARGAN PRECISION CO LTD Component 2,641 583.00 38.76 32.14 44.58 18.1 13.1 147.7 166.3 199.7 3.50 2.92 28.7% 20.5% 24.4% 13.50 13.50 11.20 2.3% 1.9% 6176 TT Taiwan RADIANT OPTO-ELECTRONICS COR Component 2,104 142.00 10.01 13.76 16.60 10.3 8.6 51.7 56.5 64.7 2.51 2.20 26.1% 27.5% 27.4% 3.69 7.47 9.10 5.3% 6.4% 2384 TT Taiwan WINTEK CORP Component 1,024 18.40 -1.16 1.04 1.63 17.7 11.3 27.9 22.5 23.6 0.82 0.78 -5.9% 4.7% 7.1% 0.98 0.00 0.83 0.0% 4.5% 8008 TT Taiwan LITE-ON IT CORP Component 881 28.60 3.19 3.31 3.67 8.6 7.8 27.0 28.8 na 0.99 na 12.0% 10.5% na 2.33 2.35 2.35 8.2% 8.2% 3406 TT Taiwan GENIUS ELECTRONIC OPTICAL CO Component 650 218.00 13.08 12.85 11.85 17.0 18.4 na 80.0 84.1 2.73 2.59 na 14.5% 14.2% na 6.25 na 2.9% na 6269 TT Taiwan FLEXIUM INTERCONNECT INC Component 682 118.00 6.48 9.82 12.93 12.0 9.1 24.9 35.1 43.4 3.36 2.72 36.6% 35.3% 35.2% 2.50 3.00 3.92 2.5% 3.3% 6153 TT Taiwan CAREER TECHNOLOGY CO LTD Component 501 45.75 3.75 4.06 5.22 11.3 8.8 22.5 24.7 27.1 1.85 1.69 19.5% 18.9% 22.2% 2.20 2.34 2.41 5.1% 5.3% 3042 TT Taiwan TXC CORP Component 431 42.25 3.54 3.70 4.39 11.4 9.6 23.2 24.9 27.0 1.70 1.56 16.1% 15.8% 17.4% 2.21 2.27 2.61 5.4% 6.2% 3376 TT Taiwan SHIN ZU SHING CO LTD Component 430 80.40 3.04 4.65 5.99 17.3 13.4 47.2 51.3 54.0 1.57 1.49 6.8% 9.7% 12.3% 2.46 2.28 3.53 2.8% 4.4% 2387 TT Taiwan SUNREX TECHNOLOGY CORP Component 186 14.80 1.24 2.00 na 7.4 na na na na na na na na na na na na na na 2385 TT Taiwan CHICONY ELECTRONICS CO LTD Component 1,223 56.20 6.85 6.22 3.89 9.0 14.5 27.1 29.5 31.8 1.90 1.77 25.9% 22.8% 18.7% 4.06 3.86 3.57 6.9% 6.3% Component Wtg. Avg 12.9 10.8 Source: Bloomberg, Daiwa forecasts; Note: Prices as at 29 May 2012 - 18 - Electronics / Taiwan 6121 TT 29 May 2012

Appendix D: Simplo, consolidated P&L

2012E 2013E 2014E (NT$m, year-end Dec) 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE 2012E 2013E 2014E Revenue 11,815 13,984 16,829 19,763 17,895 19,238 20,540 22,066 20,484 22,581 25,212 27,114 62,390 79,740 95,390 Depreciation & amortisation (127) (128) (134) (138) (141) (147) (153) (158) (164) (170) (176) (182) (527) (600) (692) COGS (10,285) (12,076) (14,453) (16,945) (15,468) (16,603) (17,702) (19,000) (17,667) (19,290) (21,494) (23,144) (53,759) (68,774) (81,595) Gross profit 1,530 1,908 2,376 2,818 2,427 2,635 2,838 3,066 2,817 3,291 3,717 3,970 8,631 10,966 13,795 Operating expenses (656) (766) (927) (1,089) (1,080) (1,154) (926) (1,082) (1,105) (1,307) (1,480) (1,610) (3,438) (4,242) (5,501) EBIT 874 1,142 1,448 1,729 1,347 1,481 1,912 1,984 1,712 1,984 2,237 2,360 5,193 6,724 8,294 Net interest income 33 50 37 35 48 42 35 33 42 38 41 38 155 158 159 Net other income 19 70 84 79 36 58 62 66 61 68 76 81 252 221 286 Pre-tax profit 926 1,262 1,570 1,843 1,431 1,581 2,008 2,083 1,815 2,090 2,354 2,480 5,601 7,103 8,739 Tax (168) (353) (275) (313) (272) (411) (361) (354) (345) (543) (424) (422) (1,110) (1,398) (1,734) Net profit 758 909 1,295 1,530 1,159 1,170 1,647 1,729 1,470 1,547 1,930 2,058 4,491 5,704 7,006 EPS (NT$) 2.70 3.24 4.62 5.46 4.14 4.17 5.88 6.17 5.25 5.52 6.89 7.34 16.02 20.35 25.00 Fully diluted EPS (NT$) 2.70 3.24 4.62 5.46 4.14 4.17 5.88 6.17 5.25 5.52 6.89 7.34 16.02 20.35 25.00 Key drivers ('000 units) Regular notebooks cylindrical) 8,974 9,692 9,983 9,484 8,535 8,108 7,460 7,161 6,803 6,735 6,601 6,733 38,132 31,265 26,872 Ultrabooks & MacBooks (polymer) 926 1,268 2,505 3,648 3,391 3,811 4,457 4,521 4,144 5,023 6,068 6,871 8,347 16,181 22,106 Tablet 7,770 9,946 11,935 16,112 14,823 16,157 17,611 18,668 18,108 19,375 22,088 23,634 45,762 67,259 83,205 Electronic vehicle batteries 20.4 26.6 33 37 35.1 44.3 52.1 58.9 57.8 69.2 76.1 79.9 117 190 283 Margins (%) Gross margin 12.9 13.6 14.1 14.3 13.6 13.7 13.8 13.9 13.8 14.6 14.7 14.6 13.8 13.8 14.5 Operating margin 7.4 8.2 8.6 8.7 7.5 7.7 9.3 9.0 8.4 8.8 8.9 8.7 8.3 8.4 8.7 EBITDA margin 8.5 9.1 9.4 9.4 8.3 8.5 10.0 9.7 9.2 9.5 9.6 9.4 9.2 9.2 9.4 Net margin 6.4 6.5 7.7 7.7 6.5 6.1 8.0 7.8 7.2 6.8 7.7 7.6 7.2 7.2 7.3 Sequential growth (%) Revenue (8.3) 18.4 20.3 17.4 (9.4) 7.5 6.8 7.4 (7.2) 10.2 11.7 7.5 29.7 27.8 19.6 Gross profit (18.7) 24.7 24.5 18.6 (13.9) 8.6 7.7 8.0 (8.1) 16.8 13.0 6.8 25.4 27.1 25.8 EBIT (26.5) 30.7 26.8 19.4 (22.1) 10.0 29.1 3.8 (13.7) 15.9 12.7 5.5 28.3 29.5 23.4 Net profit (29.4) 19.9 42.5 18.1 (24.2) 0.9 40.8 5.0 (14.9) 5.2 24.8 6.6 21.8 27.0 22.8 EPS (29.4) 19.9 42.5 18.1 (24.2) 0.9 40.8 5.0 (14.9) 5.2 24.8 6.6 21.8 27.0 22.8 Source: Company, Daiwa forecasts Note: Net income is after minority interests

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Appendix E: commonly used batteries for mobile devices

Lithium-ion (Li-ion) Nickel-cadmium Nickel–metal hydride Cylindrical Attributes (Ni-Cd) (Ni-MH) 18650 16650 Pouch Prismatic Polymer

Picture

Consumer electronics: radios, flashlights, and Mobile phones, notebooks, digital Mobile phones, digital cameras, Mobile phones, aigital cameras, Applications Notebooks, netbooks toys; home appliances: remote controllers cameras, PDAs, consumer electronics PDAs, consumer electronics PDAs, consumer electronics Cost Low Medium Mid-to-high Mid-to-high Mid-to-low Mid-to-low High 1) Fast-charging 1) Fast charging (70% charged in 1 hour) 2) Lower internal resistance 2) High voltage 1) Higher capacity (1.5~2.0x) than Ni-Cd 1) Same as those depicted on the Advantages 3) Higher maximum discharge rate 3) Light weight 2) environmentally friendly left, but no limitation on form factors 4) Terminal voltage declines slowly 4) High density 5) Lasts longer in terms of charge cycles 5) Environmentally friendly 1) Use of highly toxic cadmium 1) Low voltage 1) Higher-cost 1) Capacity is relatively lower than Disadvantages 2) Negative temperature coefficient: as the cell 2) Slower charging than Ni-Cd 2) Poor reliability under high temperatures for Li-ion temperature rises, the internal resistance falls Memory Effect Yes Yes No No Cycle times (Life) 2,000 cycles 500-1,000 cycles 400-1,200 cycles 500-600 cycles Self-discharge/month (%)* 10%~15% 25~35% 5%~8% 5%~8% Weight density (Wh/Kg) 40-60 Wh/Kg 61-120 Wh/Kg 100-250 Wh/Kg 160-170 Wh/Kg Capacity density (Wh/L) 130-160 Wh/L 280-370 Wh/L 450-550 Wh/L 300-400 Wh/L Cell voltage range 1.2V 1.2V 3.6-3.7V 3.6-3.7v Toxic level Hazardous Less hazardous Less hazardous Less hazardous Source: Wikipedia; Daiwa research Note: *At room temperature

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Appendix F: the anatomy of a battery by type

Prismatic Polymer Cylindrical

Source: Compiled by Daiwa Source: Compiled by Daiwa Source: Compiled by Daiwa

- 21 - Electronics / Taiwan 6121 TT 29 May 2012

Appendix G: EV-battery projects by automakers

Make Model Remarks BMW Active E Pilot run of 1,000 cars in 2012 and mass production in 2013 BYD E6 To roll out in the US and China in 2012 To partner with Daimler for the China market Chevy Spark To reintroduce in 2012 Daimler-Benz SLS eDrive To roll out in 2015 Fiat 500 EV Limited production plan for 2013 GM Volt 45,000 to be rolled out in 2012 Honda Fit To launch in 2013 EV-N To roll out in 2012 Hyundai i10 To roll out in 2013 Mitsubishi i-MIEV 40,000 to be rolled out in 2012 PHEV/EV to account for 20% of sales volume Nissan LEAF 500,000 to be rolled out in 2015 Peugeot BB1 On schedule to be rolled out in 2012 Renault Fluence To roll out in Israel and Denmark in 2012 To roll out in Korea in 2013 Toyota Prius To roll out the Prius PHEV in 2012, with a sales target of 50,000 units iQ To roll out in 2012 Volkswagen Jetta Hybrid To roll out in North America in 2012 Passat and Golf Hybrid To roll out in 2013 To account for 3% of 2018 sales or 300,000 units Source: Companies, compiled by Daiwa

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Appendix H: different government subsidies for EVs

Country Subsidy (local currency) Subsidy (US$) Details Belgium €9,000 $12,300 30% of the EV purchase price (including value-added tax) can be deducted on the personal income tax form, up to €9,000. Canada CA$8,500 $8,300 Quebec subsidises up to CA$8,500 for the first 10,000 purchases of a new PHEV (same as Ontario); full CA$8,000 rebate for a new BEV, and CA$1,000 for a new HEV, until 2015. China Rmb60,000 $8,800 Government subsidises manufacturer up to Rmb60,000 for the sale of a new BEV, and up to Rmb50,000 for a new PHEV. The subsidy will be reduced when 50,000 units are sold. Denmark €29,300 $40,000 Electric vehicles weighing under 2,000kg are exempt from the new car registration tax (which can be up to 180% of the car purchase price, but the exemption is not applicable to HEVs). The government also grants free parking in downtown Copenhagen. France €5,000 $6,800 Up to €5,000 or 20% of the car purchase price (including VAT) be granted for a new BEV or PHEV. The subsidy for HEVs is up to €2,000, or 20% of the car purchase price. Germany €0 $0 BEVs and PHEVs were exempt from the circulation tax for the first five years since purchase. But in May 2010, the government announced that it will only fund research on electric mobility instead of subsidising sales of electric cars. India Rs100,000 $2,200 Government subsidises up to 20% or up to Rs100,000 of the ex-factory price of a new EV. Ireland €5,000 $6,800 Government grants €5,000 for the purchase of a new EV. Before the end of 2010, BEVs and HEVs were also exempt from an up to €2,500 registration tax. Norway €0 $0 BEVs are exempt from all one-off vehicle fees (including sales tax), annual road tax, public parking fees, and toll payments. They can also use bus lanes. (Not applicable to PHEVs) The Netherlands €15,000 $20,450 Vehicles (including EVs, HEVs, and diesel-powered vehicles) that have carbon-emission are exempt from registration tax and road tax. EVs also have access to special parking spaces for EVs in Amsterdam. Portugal €5,000 $6,800 EVs are exempt from registration tax. A used car could also be turned in as part of the down-payment to get a waiver of €1,500. The first 5,000 new EVs sold in the country and receive a €5,000 subsidy each from the government. Romania €5,000 $6,800 Government subsidises up to 25% or up to €5,000 of the purchase price of a new EV. Used cars could also be exchanged for other grants. Spain €6,000 $8,600 Government subsidises up to 25% or up to €6,000 of the purchase price of a new EV, before tax; and up to 25%, or up to €15,000 to €30,000 for electric buses or vans, depending on the type of vehicle. UK £5,000 $8,250 Government subsidises up to 25% or up to £5,000 for a purchase of a new EV, before tax. US US$7,500 $7,500 Tax credit for a new plug-in EV is $2,500 plus $417 for each kilowatt-hour of battery capacity over 4kwh, up to $5,000 (combined not exceeding $7,500). A federal tax credit of 30%, or up to $1,000 of the cost of a home-based charge station, and up to $30,000 for a commercial charge station. Japan Tax deductions and subsidies for a new EV purchase. Taiwan NT$11,000 $375 Government subsidises up to NT$11,000 for the purchase of a new electric scooter. Source: EVsroll.com, Wikipedia Note: Not all of the subsidies are in cash, but they range from tax and fee deductions to free parking

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Appendix I: battery-pack supply chain

Anode

Anode materials Mitsubishi Chemical (4188 JP) Hitachi Chemical (4217 JP) Copper foil Nippon Carbon (5302 JP) Nippon Foil (5739 JP) JFE (5411 JP) Furukawa Electric (5801 JP) Tokai Carbon (5301 JP) Nippon Denkai (JP) Mitsui Mining & Smelting (5706 JP) LS Mtron (KR) BTR New Energy (CN) Iljin Materials (020150 KS Shanghai Shanshan (600884 CH)

Cathode Cathode materials 3M (MMM US) Sumitomo Chemical (5713 JP) Toda Kogyo (4094 JP) Tanaka Chemical (4080 JP) Manganese Nippon Chemical (4092 JP) Nippon Denko (5563 JP) Sumitomo Metal Mining (5713 JP) Nippon Denko (5563 JP) Cobalt AGC Seimi Chemical (JP) Sumitomo Metal Mining (5713 JP) Nichia (5393 JP) Umicore (UMI BB) Umicore (UMI BB) L&F Advanced Materials (066970 KS) JGC Catalysts and Chemicals (JP) Battery Cell Battery Pack Nihon Kagaku Sangyo (4094 JP) Easpring (300073 CH) Hunan Reshine NewMaterials (CH) Hunan Shanshan (600884 CH) Cell makers Pack makers Sanyo/Panasonic (6752 JP) Sanyo/Panasonic (6752 JP) Samsung SDI (006400 KS) Toshiba (6502 JP) Aluminum film Sony (6758 JP) GS Yuasa (6674JP) Sumitomo Light Metal (5738 JP) Toshiba (6502 JP) Hitachi (6501 JP) Nippon Foil (5739 JP) GS Yuasa (6674 JP) LG Chemical (051910 KS) Amita (2490 JP) SK Innovation (096770 KS) LG Chemical (051910 KS) Sony (6758 JP) BYD (1211 HK) Simplo (6121 TT) Electrolyte SK Innovation (096770 KS) Dynapack (3211 TT) Electrolyte solution GP (GPI SP) Welldone (6170 TT) Mitsubishi Chemical (4188 JP) Sinopoly Battery (729 HK) Ube industries (4208 JP) China BAK Battery (CBAK US) China Aviation Lithium Battery (CN) China Aviation Lithium Battery (CN) Tomiyama Pure Chemical (JP) Lishen (CN) Electrolyte Cheil Industries (001300 KS) Lishen (CN) Amperex (CN) Saft (SAFT FP) Kanto Denka Kogyo (4047 JP) `` Guotai Huarong (002091 CH) Huanyu Power (CN) A123 Systems (AONE US) Stella Chemifa (4109 JP) Tianjin Jinniu (CN) E-One (3127 TT) Valence (VLNC US) Monita Chemical (IN) Ferro (Suzhou) (CN) CAEC (8038 TT) Celxpert Dongguan Shanshan (600884 CH) Pihsiang (1729 TT) Shenzhen Capchem (300037 CH) Samsung SDI (006400 KS) Shantou Jinguang High Tech (CN)

Separator Separator Asahi Kasei (3407 JP) Sumitomo Chemical (4005 JP) Mitsubishi Chemical (4188 JP) Celgard (US) Ube Industries`` (4208 JP) TonenGeneral Sekiyu (5012 JP) SK Innovation (096770 KS) Toray Tonen Specialty seperator (JP) Entek energy (US) Foshan Jinhui Hi-Tech (CN) Shenzhen Senior Technology (CN)

Protection Circuits

Protection circuit-related Battery protection`` IC PTC thermistors Temperature fuses, etc

Source: Daiwa

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Appendix J: Glossary

Terminology Definition 18650 (cylindrical) The number ‘18650’ is used as the codename for the conventional cylindrical Li-ion battery cells used in regular notebook PC battery packs. The cell has a cylindrical shape. The name comes from the 18mm diameter and the 65mm length of the cylinder, the ‘0’ denotes that the shape of the battery is cylindrical. Ampere (amp), mA A measure of the amount of electric charge that passed a point in an electric circuit in a time unit. The ampere can be seen as a flow rate, while ampere-hour is simply an amount of electric charge. ‘mA’ stands for milliampere, or one-thousandth of an ampere. Ampere-hour (Ah), mAh Ampere-hour is a unit of electric charge, measuring the electric charge transferred by a steady current of one ampere in an hour. ‘mAh’ stands for milliampere- hour, equivalent to one-thousandth of an ampere-hour. This is the unit most often used to express the capacity of a battery. Anode One of the two electrodes through which electric current flows out of (electrons flow into) the battery (The anode is always the electrode where oxidation takes place). So, when a battery is discharging, the anode is the negative terminal; while when a battery is charging, the anode is the positive terminal. Battery cell (battery) A battery is an electrochemical device that can convert its stored chemical energy into electrical energy. A battery cell is a unit of a battery, which can provide electrical energy by itself but can also be combined with other cells to construct a battery pack. Battery pack A battery pack is composed of a number of battery cells. The cells are aligned in a series, parallel, or as a combination of both, to provide the required voltage, current or capacity. BEV Battery electric vehicles (BEV) are equipped with only electric motors, and have no internal-combustion engine. BEV also refers to all-electric vehicles.

Cathode One of the two electrodes that electric current flows into (electrons flow out) the battery (The cathode is always the electrode where the reduction takes place). So, when a battery is discharging, the cathode is the positive terminal; while when a battery is charging, the cathode is the negative terminal. Charge-rate (C-rate, C) Charge rate denotes the rate of charging or discharging of a specific battery. Rather than a universal unit, it is battery-specific. It is simply the ampere a battery could charge or discharge within one hour. For a battery with a capacity of 1100mAh, its C is 1100mA. If it is discharging at a C of 0.5C (550mA in this case), it would take two hours for the battery to discharge fully from a fully-charged state. Cycle life Cycle life is defined as the number of complete charge-discharge cycles a battery can perform before its nominal capacity falls below 80% of its initial rated capacity. ‘Deep discharges’ (discharging the battery fully before recharging) will decrease the cycle life, or even damage the battery permanently Energy density The denotation on the amount of energy stored in a battery divided by its weight (gravimetric energy density: Wh/kg), or by its volume (volumetric energy density: Wh/l). The volumetric energy density of Lithium batteries is about 1.8x that of Ni-Mh batteries and 2.5x that of Ni-Cd batteries. HEV Hybrid electric vehicles combine traditional internal-combustion engine propulsion (fossil fuel) systems with an electric propulsion system in various ways. One such way is to convert the kinetic energy into electric energy and charge the battery when applying the brake, rather than converting it to waste heat, as conventional brakes do. LEV Light electric vehicles, also known as electric bikes, are bicycles that are equipped with electric motors and rechargeable batteries. The energy cost of operating an electric bike compared with the battery replacement cost is small. Li-ion battery Lithium-ion batteries are a group of rechargeable batteries. The cathodes are often graphite, while the anodes are usually lithium cobalt oxide, lithium iron phosphate, or lithium manganese oxide. They are the most popular types of rechargeable battery for portable electronics, with the best energy densities, no memory effect, and have only a slight self-discharge when not in use. However, if overheated, Li-ion batteries can explode. Li-polymer battery Lithium-polymer batteries are rechargeable batteries with lithium metal as anodes and lithium cobalt-oxide as cathodes.. The battery contains no liquid, but a very thin plastic sheet divides the electrodes. Li-polymer cells do not need a casing and are thus lighter than equivalent cylindrical cells, and are flexible in design. As with Li-ion batteries, overheating can lead to Li-poly batteries exploding or busting into flames. Memory effect This phenomenon whereby a rechargeable battery gradually loses its maximum charge capacity as a result of repeatedly being recharged after only being partially discharged. Ni-Cd batteries are most affected by this, and Ni-Mh batteries to a lesser extent. Ni-Cd battery The abbreviation for nickel-cadmium battery, a common type of rechargeable battery using nickel-oxide hydroxide as cathodes and cadmium metal as anodes. Ni-Cd batteries last longer than normal lead-acid batteries. Despite an energy density lower than Ni-Mh and Li-ion batteries, Ni-Cd batteries can sustain very high discharge rates with no damage or loss of capacity. Ni-Mh battery The abbreviation for nickel-metal hydride battery, a common type of rechargeable battery using nickel-oxide hydroxide as cathodes and metal hydride (usually alloys of iron, lanthanum, or magnesium) as anodes. The energy density of Ni-Mh batteries is about 100Wh/Kg, higher than the 60Wh/Kg of Ni-Cd batteries, and similar to Li-ion batteries. Ni-Mh batteries have a significant drawback: a high self-discharge rate (3% per week). PHEV In addition to the electric motor and fossil-fuel internal-combustion engine, a HEV has a plug-in hybrid vehicle (PHEV) is also equipped with a rechargeable battery, which can be charged by connecting it to a plug from an external electric power source. Safety vent When battery overcharging or other events cause temperature to increase greatly, it also increases the internal pressure of battery, which in turns generates more heat. This could lead to a cell rupturing or exploding. To prevent this happening, sealed battery cells normally incorporate a vent to release the pressure in a controlled way when it becomes excessive. Self-discharge Internal chemical reactions in batteries that reduce the energy stored even when the battery is not in use. Self-discharge tends to occur faster at high temperatures. Lithium batteries self-discharge the least (about 5% per month), followed by Ni-Cd batteries (about 15% per month), and Ni-Mh batteries (about 30% per month). Source: Wikipedia, Daiwa

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Daiwa’s Asia Pacific Research Directory Hong Kong Regional Research Head Nagahisa MIYABE (852) 2848 4971 [email protected] Regional Research Co-head Christopher LOBELLO (852) 2848 4916 [email protected] Head of Product Management John HETHERINGTON (852) 2773 8787 [email protected] Head of Thematic Research; Product Management Tathagata Guha ROY (852) 2773 8731 [email protected] Head of China Research; Chief Economist (Regional) Mingchun SUN (852) 2773 8751 [email protected] Deputy Head of Hong Kong and China Research; Regional Head of Clean Energy and Dave DAI (852) 2848 4068 [email protected] Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China) Deputy Head of Regional Economics; Macro Economics (Regional) Kevin LAI (852) 2848 4926 [email protected] Head of Hong Kong Research; Regional Property Coordinator; Jonas KAN (852) 2848 4439 [email protected] Co-head of Hong Kong and China Property; Property Developers (Hong Kong) Automobiles and Components (China) Jeff CHUNG (852) 2773 8783 [email protected] Head of Greater China FIG; Banking (Hong Kong, China) Grace WU (852) 2532 4383 [email protected] Banking/Diversified Financials (Taiwan) Jerry YANG (852) 2773 8842 [email protected] Banking (Hong Kong, China) Queenie POON (852) 2532 4381 [email protected] Capital Goods –Electronics Equipments and Machinery (Hong Kong, China) Joseph HO (852) 2848 4443 [email protected] Consumer/Retail (Hong Kong, China) Bing Zhou (852) 2773 8782 [email protected] Consumer, Pharmaceuticals and Healthcare (China) Hongxia ZHU (852) 2848 4460 [email protected] Internet (Hong Kong, China) Alicia HU (852) 2532 4180 [email protected] Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Eric CHEN (852) 2773 8702 [email protected] Regional Head of Materials; Materials/Energy (Regional) Alexander LATZER (852) 2848 4463 [email protected] Materials (China) Felix LAM (852) 2532 4341 [email protected] Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Mark CHANG (852) 2773 8729 [email protected] Small/Medium Cap (Regional) John CHOI (852) 2773 8730 [email protected] Head of Solar Pranab Kumar SARMAH (852) 2848 4441 [email protected] Transportation – Aviation, Land and Transportation Infrastructure (Regional) Kelvin LAU (852) 2848 4467 [email protected] Head of Custom Products Group; Custom Products Group Justin LAU (852) 2773 8741 [email protected] Custom Products Group Philip LO (852) 2773 8714 [email protected] Custom Products Group Jibo MA (852) 2848 4489 [email protected]

South Korea Head of Korea Research; Strategy; Banking/Finance Chang H LEE (82) 2 787 9177 [email protected] Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Sung Yop CHUNG (82) 2 787 9157 [email protected] Banking/Finance Anderson CHA (82) 2 787 9185 [email protected] Capital Goods (Construction and Machinery) Mike OH (82) 2 787 9179 [email protected] Consumer/Retail Sang Hee PARK (82) 2 787 9165 [email protected] IT/Electronics (Tech Hardware and Memory Chips) Jae H LEE (82) 2 787 9173 [email protected] Materials (Chemicals); Oil and Gas Jihye CHOI (82) 2 787 9121 [email protected] Telecommunications; Software (Internet/Online Games) Thomas Y KWON (82) 2 787 9181 [email protected] Custom Products Group Shannen PARK (82) 2 787 9184 [email protected]

Taiwan Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8758 6247 [email protected] IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Handsets and Components) Alex CHANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (PC Hardware - Panels) Chris LIN (886) 2 8758 6251 [email protected]

India Head of India Research; Regional Head of Pharmaceuticals and Healthcare Kartik A. MEHTA (91) 22 6622 1012 [email protected] Deputy Head of Research; Strategy; Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Capital Goods/Utilities Saurabh MEHTA (91) 22 6622 1009 [email protected] FMCG; Consumer Percy PANTHAKI (91) 22 6622 1063 [email protected]

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Singapore Head of Singapore Research Tony DARWELL (65) 6321 3050 [email protected] Quantitative Research Josh CHERIAN (65) 6499 6549 [email protected] Quantitative Research Suzanne HO (65) 6499 6545 [email protected] Banking (ASEAN) Srikanth VADLAMANI (65) 6499 6570 [email protected] Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Adrian LOH (65) 6499 6548 [email protected] Property and REITs David LUM (65) 6329 2102 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Thematic Research Amy CHEW (65) 6321 3085 [email protected]

Philippines Head of Philippines Research; Strategy; Capital Goods; Materials Rommel RODRIGO (63) 2 813 7344 ext 302 [email protected] Economy; Consumer; Power and Utilities; Transportation – Aviation Alvin AROGO (63) 2 813 7344 ext 301 [email protected] Property; Banking; Transportation – Port Danielo PICACHE (63) 2 813 7344 ext 293 [email protected]

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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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