TWSE: 1907 YFY Inc. 2016 Annual Report YFY Inc. 2016Annual Report Company Website: http://www.yfy.com YFY Inc. TWSE Website: http://mops.twse.com.tw/ Publishing Date: 4/30/2017 No. 51, Chongqing S. Road Sec. 2, Taipei Tel／(02)2396-1166 I. Name, title, contact number, and email of the Company's spokesperson: Assistant Vice President Yin, K. T. Tel: (02) 2396-1166 E-mail: [email protected] II. Addressed and phone numbers of the company headquarters, branch offices, and plants: YFY Inc. No. 14, Jioutang Road, Jioutang Village, Dashu District, Kaohsiung Tel: (07) 651-2611~9 Taipei branch 15F, No. 51, Chongqing S. Road Sec. 2, Taipei Tel: (02) 2396-1166 (x50) YFY Packaging Inc.: Taoyuan plant No. 1078, Sec. 3, Fuguo Road, Luzhu Village, Luzhu Township, Taoyuan Tel: (03) 322-2411~5322-1699 Changhua plant No. 8, Gongxi Second Road, Xidi Village, Shengang Township, Changhua Tel: (04) 798-9567 Jhunan plant No. 8-1, Dapuding, Seventh Neighborhood, Gongguan Village, Jhunan Township, Miaoli Tel: (037) 635-192 Kaohsiung plant No. 21, Yongfeng Road, Alian Village, Alian District, Kaohsiung Tel: (07) 631-7181 Chenggong plant No. 546, Sec. 3, Zhongshan Road, Rongchuan Village, Wuri District, Taichung Tel: (04) 2338-1126~7 Xinwu plant No. 281 Yongfu Road, Yongan Village, Xinwu District, Taoyuan City Tel: (03) 486-1701 YFY Consumer Products Co., Ltd.: Yangmei plant No. 41-2, Beigao Shanding, Gaorong Village, Yangmei District, Taoyuan City Tel: (03) 490-2631 Qingshui plant No. 22-1, Jiuzhuang Road, Haifeng Village, Qingshui Township, Taichung Tel: (04) 2620-1200 YFY Inc. Chung Hwa Pulp Corp.: Jioutang plant No. 112, Jioutang Road, Jioutang Village, Dashu District, Kaohsiung Tel: (07) 651-2611~9 Taitung plant No. 371, Sec. 4, Zhongxing Road, Taitung City, Taitung Tel: (089) 382-250~5 Hualien plant No. 100, Guanghua Street, Ji-an Township, Hualien County Tel: (03) 842-1171~80 Taipei branch 12F, No. 51, Chongqing S. Road Sec. 2, Taipei Tel: (02) 2396-1166 (x50) Taichung branch 5F, No. 188, Zhonggong Second Road,Xitun District, Taichung Tel: (04) 2359-6021 2359-9584 Tainan branch 3F, No. 502, Sec. 2, Yonghua Road, Tainan Tel: (06) 295-4799 3. Stock administration name, address, URL, and telephone No.: Sinopac Securities Company Limited - Share Registration Services Department 3F, No. 17, Boai Road, Zhongzheng District, Taipei http://www.sinotrade.com.tw Tel: (02) 2381-6288 4. Auditor's name, company, address, URL, and telephone No.: Chih-Ming Shao, Cheng-Hong Kuo, CPA Chairman Deloitte and Touche 12F, No. 156, Sec. 3, Minsheng East Road, Taipei http://www2.deloitte.com Tel: (02) 2545-9988 5. Stock exchange(s) on which the stock is traded overseas and ways to obtain relevant information: None 6. Company website: http://www.yfy.com Contents 2 Letter to Shareholders 4 Company Profile 5 1. Date of Establishment 5 2. Company History 8 Corporate 9 1. Organization 10 2. Information on Directors, Supervisors, Presidents, Vice Presidents, Governance Assistant Vice Presidents, and the Management Team Report 14 3. Remuneration of Directors, Supervisors, Presidents, and Vice Presidents 18 4. Implementation of Corporate Governance 33 5. Auditors' Fees 33 6. Change of Certified Public Accountant (CPA) 33 7. The Chairman, President and Financial or Accounting Manager of the Company who had Worked for the CPA Firm or the Related Parties in The Last Year 34 8. Shareholding Transferred or Pledged by Directors, Management, and Major Shareholders Who Holds 10% of The Company Shares or More 35 9. Information disclosing the spouse, kinship within second degree, and relationship between any of the top ten shareholders 36 10. Comprehensive Shareholding Information Relating to Company, Directors, Management, and Companies Affiliated through Direct and Indirect Investment 37 Capital and 38 1. YFY's Capital and Shares, Corporate Bonds, Preferred Shares, Global Depositary Receipts, Employee Stock Options, New Shares Shares to Employees with Restricted Rights (including Mergers and Acquisitions, or after Company Split) 40 2. Utilization of Funds 41 Business 42 1. Scope of Business 45 2. Market and Sales Outlook Overview 47 3. Employee Information in the Last Two Fiscal Years and Up to the Publishing Date of this Annual Report 48 4. Environmental Protection Expenditures 50 5. Employer-Employee Relationship 52 6. Material Contracts 53 Financial 54 1. Condenced Balance Sheets and Statement of Comprehensive Income from the Past Five Years Summary 62 2. Financial Analysis of the Past Five Years 68 3. Audit Committee Review Report 69 4. Financial Statements 82 5. Any Financial Difficulty and the Impact on YFY's Finance in the Last Fiscal Year and Up to the Publishing Date of this Annual Report 83 Review of 84 1. Financial Comparison Analysis 85 2. Financial Performance Review and Analysis Financial 85 3. Cash Flow Analysis Conditions and 86 4. Major Capital Expenditures and Impact on Financial Operations in the Last Fiscal Year Performance, 86 5. Subsidiary Investment Policy, Reasons for Profit or Loss, Operating Improvement Plans, and Investment Plans for the Next Year Results, and 86 6. Risk Analysis and Assessment in the Last Fiscal Year and Up to the Publishing Date for this Annual Report Risks 90 7. Other Material Items 91 Special 92 1. Affiliate Information 110 2. Privately Purchased Securities in the Last Fiscal Year and Up to the Disclosures Publishing Date of this Annual Report 110 3. YFY's Shares Held or Disposed of by Subsidiaries in the Last Fiscal Year and Up to the Publishing Date of this Annual Report 110 4. Other Information Which Should be Disclosed 110 5. Any Incidents That have a Material Impact on Shareholders Equity or Share Price as Described Under Article 36, Paragraph 3, Subparagraph 2 of the Securities and Exchange Act in the Last Fiscal Year and Up to the Publishing Date of this Annual Report Appendix Contents 1 Letter to Shareholders Dear Shareholders, In our medtech portfolio, Lumosa Therapeutics (6365) became publicly listed in 2016, while Taigexyn®, a new treatment for 2016 was a difficult year for YFY. Business transformation and operational drug-resistant bacterial infections developed by TaiGen Biotechnology (4157), obtained China FDA approval. TaiGen also realignment across multiple portfolio companies were ongoing as we faced a entered into a joint venture with Yichang HEC Changjiang Pharmaceutical Co. Ltd. to develop an all-oral hepatitis C drug volatile market with adverse conditions. While these efforts will improve our future for the Chinese market. Medeon Biodesign (6499), was also successfully listed in 2016. competitiveness, 2016 results were disappointing. YFY recorded a consolidated Global ePaper leader E Ink Holdings (8069) has grown beyond eReader markets in recent year. In 2016, E Ink furthered its operating revenue of NT$63.354 billion, flat compared to 2015; however, net push into wearable, portable and medical devices, smart packaging, and digital signage. Profits continue to grow through profit after taxes was only NT$126 million, with an EPS of NT$0.08. innovative products created in collaboration with leading brands across multiple fields. Across the globe, economic recovery lacked momentum in 2016, resulting in Notwithstanding strong competition in 2016, Arizon actively entered new markets and became the world’s No. 1 ODM of the lowest growth rate since the 2008 financial crisis. Financial markets were RFID inlays, special labels and tags. In addition to market leading capacity and capabilities, Arizon is also the leader in volatile, with delayed US interest rate hike weakening the US dollar during the customized designs. Shin Foong Specialty and Applied Materials also became a leading global supplier for synthetic latex first half, and the eventual rate increase in the second half driving fund flows back medical gloves. Backed by its steady and excellent profitability performance, Shin Foong registered on the Taiwan Emerging to the United States. RMB continued its depreciation, but fluctuated dramatically Stock Market this year and is applying to go public on TWSE in 2017. Chairman: Ho, Felix through the year. Major events such as Brexit and Trump’s victory added further Market consensus believe the global economy will make steps toward recovery in 2017, with IMF estimating global instability to global markets. Taiwan’s economy only began to slowly climb out economic growth of 3.4%, from 3.1% this year. Taiwan’s economy is expected to improve slightly, but the overall outlook of the doldrums in Q3 and ended the year with an annual growth rate of 1.4%, a slight increase over 2015. The Chinese remains relatively conservative, with economic growth predicted to rise to 1.7%. China’s “New Normal” will continue to economy continued with its “new normal”, marked by slower growth, tighter funds, and policy induced fluctuation in raw have an impact on the overall economy, although growth will likely remain steady around 6.5%. Around the world, volatility material prices. is likely to persist: Trump’s US economic and trade policies will have a major influences on the world’s supply chains; YFY began investing in Mainland China in the 1990s. With funding strategy based primarily around offshore debt, the Brexit negotiations will impact UK and European Union; while the Dutch election narrowly avoided a shift to a far-right company enjoyed benefits of interest rate spread between domestic RMB and offshore USD funding, as well as exchange government, the jury is out on the ensuing French and German elections. All in all, rapid fluctuations in global raw material gains due to RMB appreciation. For almost two decades, we booked currency gains while minimizing our funding costs. prices will inevitably lead to substantial increases in operating costs. However, starting in 2015, RMB reversed course and started to depreciate. Unfortunately, due to cross-strait regulations In face of changes and challenges, YFY marches ahead.