Stock Code: 2324 Compal Electronics, Inc. 2015 Annual Report Notice to readers This English-version annual report is a summary translation of the Chinese version and is not an official document approved in a shareholders’ meeting in accordance with Taiwanese laws. Should any discrepancy arise between the English and Chinese versions, the Chinese version shall prevail. Taiwan Stock Exchange Market Observation Post System: http://newmops.twse.com.tw Company Annual Report is available at: http://www.compal.com Printed on May 11, 2016 0 I. Spokesperson Spokesperson: Gary Lu / Vice President Deputy Spokesperson: Jack Wang / Director of Accounting Dept. Tel: 886-2-8797-8588 E-mail: [email protected] II. Headquarters, Branches and Plant Headquarters Address: No.581, Ruiguang Rd., Neihu District, Taipei, Taiwan Tel: 886-2- 8797-8588 Manufacturing Site Address: No. 8, South East Rd., Pingzhen City, Taoyuan County Tel: 886-3-439-1707 III. Share Administration Agency Chinatrust Transfer Agent Address: 5F, No. 83, Sec 1, Chung Ching Nan Road, Taipei, Taiwan Tel: 886-2-6636-5566 Website: https://www.ctbcbank.com IV. Auditors CPA Firm: KPMG Auditors: Kuo, Kuan Ying and Lo, Jui Lan Address: 68F, No. 7, Sec. 5, Xinyi Road, Taipei, Taiwan Tel.: 886-2-8101-6666 Website: http://www.kpmg.com.tw V. Overseas Securities Exchange Luxembourg Stock Exchange: http://www.bourse.lu London Stock Exchange http://www.londonstockexchange.com VI. Corporate Website http://www.compal.com 1 Table of Contents 3 I. Letter to Shareholders II. Company Profile 6 2.1 Date of Incorporation 6 2.2 Company History III. Corporate Governance Report 8 3.1 Organization 10 3.2 Directors, Supervisors and Management Team 33 3.3 Implementation of Corporate Governance 61 3.4 Information Regarding the Company’s Audit Fee and Independence 62 3.5 Changes in Shareholding of Directors, Supervisors, Managers and Major Shareholders 64 3.6 Relationship among the Top Ten Shareholders 66 3.7 Ownership of shares in Affiliated Enterprises IV. Capital Overview 68 4.1 Capital and Shares 73 4.2 Bonds 73 4.3 Global Depository Receipts 74 4.4 Employee Warrants 74 4.5 Subscription of New Shares by Employees and Restricted Shares 76 4.6 New Share Issuance in Connection with Mergers and Acquisitions 76 4.7 Financing Plans and Implementation V. Operational Highlights 77 5.1 Business Activities 81 5.2 Market and Sales Overview 84 5.3 Human Resources 84 5.4 Environmental Protection Expenditure 85 5.5 Labor Relations 88 5.6 Important Contracts VI. Financial Information 89 6.1 Five-Year Financial Summary 97 6.2 Five-Year Financial Analysis 101 6.3 Audit Committee’s Report in the Most Recent Year 102 6.4 Consolidated Financial Statements and Independent Auditors’ Report 102 6.5 Parent-Company-Only Financial Statements and Independent Auditors’ Report 1 VII. Review of Financial Position, Operating Results, and Risk Management 103 7.1 Analysis of Financial Status 104 7.2 Analysis of Operation Results 105 7.3 Analysis of Cash Flow 106 7.4 Major Capital Expenditures 106 7.5 Investment Policy in Last Year, Main Causes for Profits or Losses, Improvement Plans and Investment Plans for the Coming Year 108 7.6 Analysis of Risk Management VIII. Special Disclosure 112 8.1 Summary of Affiliated Companies 113 8.2 Private Placement of Securities in the Most Recent Year 113 8.3 Subsidiaries’ Holding of the Company’s Shares in the Most Recent Year 113 8.4 Events with Significant Impacts 2 I. Letter to Shareholders Dear Shareholders: Thank you all for your support of Compal Electronics, Inc. (hereafter referred to as “Compal”) over the past year! The year of 2015 was a dramatic year in a way resembling the “chameleon” as a period of time when the global economic change was indeed beyond everyone’s expectation significantly. Despite the impact of economic recession and weak market demands, with the endeavors and efforts of the entire staff of Compal, the annual sales of the company was well maintained and the net profit also showed a growth over the previous fiscal year. Looking ahead of this year, the global economy is likely to be still in recession. However, we believe that corporations should continue to strive for research and developments and vigorously expand new businesses to be ready for the future challenges ahead without using the excuse of the economic recession. Here, with respect to the operational performance of last year and the operation outlook of this year, we summarize the following for you: 2015 Financial Performance The consolidated sales of Compal in 2015 was NT$847,306 million dollars, slightly up by 0.2% year-on-year, in which the business contribution of non-notebook computer products continued to increase from 23% to 28%. The consolidated operating profit was NT$11,312 million dollars, down 3% year-on-year. Nevertheless, with significant improvement in the non-operating segment and reduction of non-operating loss, the net profit attributed to the parent company was NT$ 8,685 million dollars, up 24% year-on-year. The earning per share (EPS) of the company was NT$ 2.01. 2015 Business Development The total shipment of computer products of the Computer Business Group (PCBG) in 2015 was down by 10% less than the previous year, and it was mainly affected by the weaker demands of the overall market and the global recession. Nevertheless, with the change of the usage habit of the consumers, various types of demands emerged, such as the demands for ultra-slim notebooks, high-end gaming notebooks and two-in-one notebooks, of which the products required more precise market segmentation and positioning. In the fields of slim type material technology, power-saving technology and heat dissipation technology etc., the Company will continue to develop state-of-the art innovative and quality products in cooperation with our clients in order to satisfy the market demands. The total shipment of the products of the Smart Device Business Group (SDBG) in 2015 was up by 30% over the previous year. Such rapid growth benefited from the development of the tablet business and the continuous investment in the development of the new technology of LTE smartphone as well as the cooperation with our new prospective clients. For tablets, Compal constantly develops new usage models and integrates with the application of the Internet-of-Things (IoT). For smartphones, the company also vigorously develops image technology and new designs of software services in order to create unique products. Accordingly, Compal continues to maintain its leading position in the industry. 3 Corporate Governance & Social Responsibility During the development of the business, Compal is also committed to invest in the corporate sustainability for business operations in a long term. With regard to the corporate governance, Compal has established the Auditing Committee in 2015 and received the award for top 5% ranking in the “First-Term Corporate Governance Evaluation” by the Taiwan Stock Exchange Corporation (TWSE). With regard to the green environment, in addition to the promotion on the green and halogen-free products, the company has also been included in the Climate Disclosure Leadership Index (CDLI) for the first time with recognition by international institutes. In terms of social welfare, Compal continues to fulfill the corporate social responsibility and engages in the promotion of the rural children digital learning program. In 2015, the Commonweath Magazine ranked the company No. 16 in the “CSR Corporate Citizen Awards” for large corporations, and the commitment of Compal in the corporate sustainability was recognized by society once again. 2016 New business Development With years of experience in the technology platform and research and development in the information technology and communication industry, Compal has been able to rapidly and effectively enter various new business fields, including the fields of Server, Auto Electronics, Smart Home, IoT Vertical Solution, Smart Medical and Healthcare and Smart Wearable Devices etc. For the development of new businesses, Compal develops customized and competitive products according to the demands in each field such that the company is not merely acting as a hardware supplier but further engages in the development of integrated system service, and the goal is to establish a new service-oriented business model with sources of revenue. Moreover, with the emerging trend of aging society and health management and the rise of sports fashion, we are of the opinion that smart medical and healthcare will soon be an important area and topic for future industrial development. Considering our solid experience in the information technology and communication along with the advantages in integration and product developments, not to mention our active cross-industry alliance, Compal is able to rapidly develop comprehensive and diverse products and services in light of providing greater sources and developments for the industry of medical and healthcare industry in Taiwan in the future. Business Outlook According to market research firms (IDC), the global market demands for notebook and tablet in 2016 will be down year-over-year, and the annual growth of the smartphone demand will be reduced. Nevertheless, the new application fields, such as server, auto electronics, IoT and smart wearable devices are expected to have opportunities for significant growths and will become competitive areas for all companies. Despite the global economy still being in its down time, with consideration to the global market condition and the business development of the company, Compal expects the total shipment of 5C (Computing, Communication, Consumer, Cloud, Connecting) related electronic products to continue to grow over the previous year. The revenue contribution of the non-notebook business in 2016 is expected to head toward the goal of exceeding 30% contribution in total.