Asia semi 0716

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST

CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™

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15 July 2014

Asia Pacific/China&Taiwan

Equity Research

Technology

Asia Semiconductor Sector PRE RESULTS COMMENT

2Q14 Preview: Reasonable outlook into 3Q14

Figure 1: Sales tracked better across the upstream in 2Q14 2Q-14

Actual

2Q14

QoQ

2Q Orig

CS

QoQ

2Q Street

QoQ2Q-14 Guide

Qtr vs.

Guide

3Q QoQ

(CS)

3Q QoQ

(Street)

TSMC 183,020 23.5% 21.5% 22.6% +21-24% QoQ High-end 12.8% 8.2%

UMC 35,869 13.2% 11.9% 10.3% +Low teens High-end 5.0% 4.5%

Vanguard 5,822 5.7% 4.7% 4.1% +1-6% QoQ High-end 13.5% 7.9%

Foundries 224,711 21.2% 19.4% 7.4% +15-20% High-end 11.4% 7.4%

ASE (ATM) 39,265 14.3% 10.0% N/A +10% QoQ Above 7.0% N/A

ASE (Cons.) 58,615 7.2% 7.2% 5.9% +5-10% QoQ In-line 12.9% 15.2%

SPIL 21,928 21.4% 13.5% 14.8% +11-15% QoQ Above 7.5% 0.8%

Powertech 10,580 14.7% 12.0% 11.7% >10% QoQ Above 5.0% 3.9%

Back-end 91,123 11.1% 10.9% 10.4% +10% Above 10.7% 10.4%

Mediatek 54,133 17.7% 20.5% 14.7% +12-20% QoQ High-end 6.6% 4.6%

Realtek 8,075 10.2% 9.8% 6.5% Up Above 3.1% 4.2%

WPG 113,650 11.0% 7.2% 8.8% +3-8% QoQ Above 8.5% 10.1%

IC Design 175,858 12.9% 11.3% -5.0% +10% Above 5.3% 5.6%

Total 491,692 16.2% 14.7% 7.3% Above 9.1% 7.3% Source: Company data, CS estimates, the BLOOMBERG PROFESSIONAL™ service consensus

■ Solid 2Q14 and reasonable 3Q14 expectations set up a good results season. 2Q14 sales tracked well across the group and 3Q14 expectations are up by moderate high single digits QoQ and supported by emerging market smartphones, the Apple refresh, stabilisation of PCs and tight capacity. We already revised up TSMC, ASE, SPIL, Mediatek and Powertech estimates following monthly sales and in this preview report profile expectations on each company and revise up ASM Pacific estimates following capex revisions across the back-end sector.

■ Upward momentum starting to moderate. Following strong outperformance, with foundry up 29% YTD and back-end up 37% YTD and strong sales growth for the upstream +16% QoQ vs mid-high single digit hardware builds, we are seeing rolling forecasts stabilise. We would monitor inventory and expect another late year slowdown and potential inventory correction in 1Q15.

■ Bookings cycle may slow down. We have seen back-end revise up capex

44% since January and is now pointing up 22% YoY for the top five players and supporting bookings momentum and sales growth for ASM Pacific, where we revise up 2Q14 sales from +26% to +32% QoQ, in line with street. Back-end equipment bookings for the industry are now at $286mn/month in line with the average peak and close to where ASM Pacific/back-end seasonally peaks.

■ TSMC / ASE supported by the Apple product cycle. While we are monitoring the impact of the extended tightness and rising inventory triggering a late year correction, we still see some support into Apple cycle with TSMC Apple contribution rising from 3% to 15% of sales and ASE generating 15-20% of iPhone related content in 2H14. For Mediatek, we maintain OUTPERFORM with upside to our NT$570 TP on 19x 2014 EPS, with also reasonable bar for 2H14 and exports/initial LTE offsetting TD slowdown.

Research Analysts

Randy Abrams, CFA

886 2 2715 6366

[email protected]

Nickie Yue

886 2 2715 6364

[email protected]

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15 July 2014

Asia Semiconductor Sector 2

Focus table Figure 2: Taiwan tech 2Q14 earnings calendar TW Tech 2Q14 Results Calendar

Ticker Company Date (HKT) Time (HKT) Time (HKT) Conference call details

2330.TW TSMC Randy Abrams 7/16/2014 2:00 PM

3008.TW Largan Precision Pauline Chen 7/17/2014 Dial in: +852-3001-3832; Passcode: 3141381

6239.TW Powertech Randy Abrams 7/22/2014 2:30 PM http://pti.ic.learn.hinet.net/ConferenceLaunch.aspx?aid=G6fsV7fxTQg=

3673.TW TPK Holding Jerry Su 7/24/2014 Dial in: +65 67239388 | Passcode: 27261568

0522.HK ASM Pacific Randy Abrams 7/24/2014 12:30 PM

2308.TW Delta Electronics Pauline Chen 7/29/2014

2311.TW ASE Randy Abrams 7/30/2014 2:00 PM

2409.TW AU Optronics Jerry Su 7/30/2014 2:00 PM +886-2-2192-8016 | Passcode: 989775 #

2325.TW SPIL Randy Abrams 7/30/2014 2:30 PM 8:00 PM

3037.TW Unimicron Pauline Chen 7/31/2014

2454.TW MediaTek Inc. Randy Abrams Late July

5371.TWO Coretronic Corp Jerry Su 8/1/2014 2:30 PM

5347.TWO Vanguard Semi Randy Abrams 8/4/2014 2:00 PM

2360.TW Chroma Jerry Su 8/5/2014 2:30 PM

3034.TW Novatek Micro Jerry Su 8/6/2014 2:00 PM

0981.HK SMIC Randy Abrams 8/7/2014

2303.TW UMC Randy Abrams 8/8/2014

3044.TW Tripod Technology Pauline Chen 8/8/2014

2301.TW Lite-On Tech Pauline Chen 8/13/2014

2385.TW Chicony Pauline Chen 8/14/2014

3698.TW Lextar Derrick Yang 8/14/2014

2618.HK TCL Communications Jerry Su 8/14/2014

2474.TW Catcher Technology Pauline Chen Early August

2498.TW HTC Pauline Chen TBC

8021.TW Topoint Technology Pauline Chen TBC

3311.TW Silitech Technology Pauline Chen TBC

2354.TW Foxconn Tech Pauline Chen TBC

8046.TW Nan Ya PCB Pauline Chen TBC

3189.TW Kinsus Interconnect Pauline Chen TBC

2458.TW Elan Microelectronics Jerry Su TBD

2049.TW Hiwin Jerry Su TBD

3481.TW INX Jerry Su TBD

HIMX.OQ Himax Jerry Su TBD

5280.TW Focaltech Jerry Su TBD

8150.TW ChipMOS Jerry Su TBD

0763.HK ZTE Jerry Su TBD

2369.HK Coolpad Jerry Su TBD

8069.TWO E Ink Jerry Su TBD

2379.TW Realtek Semiconductor Randy Abrams TBD

AMKR.OQ Amkor Randy Abrams TBD

3702.TW WPG Holdings Ltd Randy Abrams TBD

2357.TW Asustek Computer Thompson Wu TBD

4938.TW Pegatron Thompson Wu TBD

2324.TW Compal Electronics Thompson Wu TBD

2382.TW Quanta Computer Thompson Wu TBD

3231.TW Wistron Thompson Wu TBD

2353.TW Acer Inc. Thompson Wu TBD

2347.TW Synnex Thompson Wu TBD

2317.TW Hon Hai Precision Thompson Wu TBD

0992.HK Lenovo Thompson Wu TBD

0861.HK Digital China Thompson Wu TBD

3042.TW TXC Derrick Yang No analyst meeting

2448.TW Epistar Derrick Yang No analyst meeting

2393.TW Everlight Electronics Derrick Yang No analyst meeting

2439.TW Merry Derrick Yang No analyst meeting

6278.TW TSMT Jerry Su No analyst meeting

2384.TW Wintek Corp Jerry Su No analyst meeting

1590.TW Airtac Jerry Su No analyst meeting

1504.TW Teco Jerry Su No analyst meeting

6147.TWO Chipbond Jerry Su No analyst meeting

Conference Conference Call

Source: Company data, Credit Suisse

15 July 2014


2Q14 preview: Solid sales and reasonable outlook for 3Q14 We preview our expectations for 2Q14 results and 3Q14 guidance and key drivers into the

earnings season for our foundry, back-end and IC design coverage reporting in the next

month. Within our Taiwan upstream coverage, most companies topped 2Q14 guidance as

foundry and back-end capacity tightened and triggered inventory rebuilding ahead of the

high season and Apple's product refresh in 2H14. The demand environment remained

healthy for the PC supply chain and emerging market smartphone exports, offsetting some

weakness in tablets and Samsung related components. We already revised up TSMC,

ASE, SPIL, Mediatek and Powertech results following monthly sales and in this preview

revise up our ASM Pacific estimates following capex revisions across the back-end sector.

Foundries: Tight supply continues into 3Q14 Foundry results kick off with TSMC on Wednesday, 16 July, with SMIC, Vanguard and

UMC on the week of 4 August. Due to tight supply across 8" and leading edge nodes

driven by inventory restocking from low levels early in the year and fears of capacity due to

Apple's shift to Taiwan, foundry delivery times have stretched out and pushed some

orders into 4Q14. Foundries will stay positive on 2H14 though may caution to expect a

short correction early next year. We also see focus on TSMC's progress on 16nm as key

issues and its outlook relative to Samsung's 14nm challenge and Intel's push in mobile.

Backend: Business drivers shift in 2H14 The back-end business was supported by non-Apple related drivers in 1H14 including PC

stabilisation, consumer/TV builds, and low-cost smartphones but will shift to the Apple

ramp, game console and 4G LTE in 2H14. The group topped 2Q14 guidance though has

noted upward revisions to rolling forecasts now moderating and stable the past month.

We still expect reasonable growth in 3Q14, with incremental momentum for ASE relative

to the group due to its 2H weighted SiP builds for fingerprint and wearables. While outlook

into results remains favourable, upside is a bit more limited following the strong

outperformance and cyclical signals of inventory and equipment orders more elevated.

IC-design: Weathering the 3G to 4G transition IC design had a solid 2Q14 driven by China brand export demand and octa-core growth

and upside for PC and consumer. Off a better 1H14, we expect guidance to be up by

moderate mid-high single digits QoQ into the peak season, near current street estimates

but below traditional 10-30% QoQ strength. We view Mediatek still weathering the 3G to

4G transition due to strength of export shipments, short gap to peers launching LTE SoCs

in 2H14 and less impact this transition from the China IC vendors. We also expect a

decent outlook for Realtek and WPG into high season demand.

Stock picks: TSMC and ASE supported by the Apple

product cycle While we are monitoring the impact of the extended tightness and rising inventory triggering a

late year correction, we still see some support into Apple cycle with TSMC Apple contribution

rising from 3% to 15% of sales and ASE generating 15-20% of iPhone related content in 2H14.

For Mediatek, we maintain OUTPERFORM with upside to our NT$570 target price on 19x

2014 EPS, with also reasonable bar for 2H14 and exports/initial LTE offsetting TD slowdown.

We also retain OUTPERFORM on Amkor, SPIL, and ASM Pacific into a positive results

season though see less upside following the strong 1H outperformance.

2Q14 tracked better for the

group, 3Q14 should see

moderate growth

Foundry supply stays tight

into 3Q14

Back-end sales supported

by game console, Apple

ramps and 4G LTE in 2H14,

monitor rising inventory and

capex for a late year

adjustment

Mediatek LTE ramp

offsetting some of the TD-

SCDMA pullback

TSMC and ASE supported

by Apple's ramp in 2H14

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15 July 2014


Valuation Figure 3: Valuation summary—Foundry, Back-end, IC design

Market Cap Price Target Inv'ment Target P/E P/B ROE

US$mn 14-Jul Local Curcy Rating upside 2014 2015 2014 2015 2014 2015

Foundry

TSMC 114,770 132.5 150.0 OPFM 13.2% 14.1 13.2 9.4 10.0 26.8% 23.6%

UMC 6,612 15.9 14.0 NTRL -11.7% 19.5 17.2 0.8 0.9 4.7% 5.3%

SMIC 3,302 0.75 0.73 NTRL -2.7% n.m n.m n.m n.m 6.1% 6.7%

Vanguard Semi 2,516 47.7 50.0 NTRL 4.8% 13.2 11.4 3.6 4.2 21.9% 23.1%

Total 127,200 14.4 13.5 3.7 3.4 24.8% 22.9%

Packaging & testing

ASE 10,209 39.4 47.0 OPFM 19.3% 14.6 12.5 2.7 3.2 16.2% 17.3%

SPIL 5,168 49.8 56.0 OPFM 12.4% 12.6 11.7 3.9 4.2 18.4% 18.4%

Powertech 1,316 51.5 63.0 OPFM 22.3% 13.5 12.1 3.8 4.3 9.6% 10.3%

Amkor 2,569 11.1 8.4 OPFM -24.4% 15.3 13.6 0.7 0.8 16.4% 15.7%

ASM Pacific 33,769 84.4 97.0 OPFM 14.9% 24.1 19.8 3.5 4.3 19.7% 22.4%

Total 16,693 6.0 5.1 1.2 1.1 18.5% 20.0%

IC design

MediaTek Inc. 24,353 503.0 570.0 OPFM NA 16.8 15.2 30.0 33.0 21.4% 20.9%

Realtek Semiconductor1,577 93.8 84.0 NTRL -10.4% 15.6 14.8 6.0 6.3 16.6% 18.4%

WPG Holdings Ltd 2,243 40.6 41.0 NTRL 1.1% 11.9 10.5 3.4 3.9 13.6% 14.1%

Total 29,016 15.3 13.7 3.6 3.3 22.7% 22.2% Source: Company data, Credit Suisse estimates

Figure 4: Factoring in some decline of TSMC's share at

QCOM/Apple

Figure 5: MIIT data indicates that LTE shipment is up to

35% of total units shipped in June 2011 2012 2013 2014 2015 2016

Qualcomm Production $3,318 $4,352 $6,260 $6,736 $7,319 $8,270

Qualcomm TSMC $2,086 $2,953 $4,426 $4,716 $4,391 $4,549

TSMC Share of QCOM 63% 68% 71% 70% 60% 55%

Apple Production $1,630 $2,975 $3,094 $4,371 $4,405 $4,550

Apple TSMC $0 $0 $0 $1,878 $3,083 $2,958

TSMC Share of Apple 0% 0% 0% 43% 70% 65%

Rest of TSMC $12,457 $14,185 $15,685 $18,176 $19,822 $21,639

YoY Growth 2.8% 13.9% 10.6% 15.9% 9.1% 9.2%

Total TSMC $14,543 $17,137 $20,111 $24,769 $27,297 $29,145

YoY Growth 9.2% 17.8% 17.4% 23.2% 10.2% 6.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

5

10

15

20

25

30

35

40

45

50

Jan-1

2

Mar-1

2

Ma

y-12

Jul-1

2

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2

Nov-1

2

Jan-1

3

Mar-1

3

Ma

y-13

Jul-1

3

Sep-1

3

Nov-1

3

Jan-1

4

Mar-1

4

May-1

4

Mkt shareShipments: mn

LTE % 2G 3G LTE Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates, MIIT

Figure 6: SPIL has outperformed TAIEX by 25% YTD Figure 7: Back-end trading above mid-cycle P/B

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 TAIEX Average SPIL Average 2014 TAIEX

SPIL Indexed share price

-40

-20

0

20

40

60

80

100

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Jan-0

2

Aug

-02

Ma

r-0

3

Oct-

03

Ma

y-04

Dec-0

4

Jul-0

5

Fe

b-0

6

Sep

-06

Apr-

07

Nov-0

7

Jun-0

8

Jan-0

9

Aug

-09

Ma

r-1

0

Oct-

10

Ma

y-11

Dec-1

1

Jul-1

2

Fe

b-1

3

Sep

-13

Apr-

14

SPIL PB premium ASE SPIL

PB (x) %

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

15 July 2014


Foundries: Tight supply continues into 3Q14 Foundry results kick off with TSMC on Wednesday, 16 July, with SMIC, Vanguard and

UMC on the week of 4 August. Due to tight supply across 8" and leading edge nodes

driven by inventory restocking from low levels early in the year and fears of capacity due to

Apple's shift to Taiwan, foundry delivery times have stretched out and pushed some

orders into 4Q14. Foundries should stay positive on 2H14 though may caution to expect a

short correction early next year. We also see focus on TSMC's progress on 16nm as key

issues and its outlook relative to Samsung's 14nm challenge and Intel's push in mobile.

We highlight key expectations for the foundries.

■ TSMC to retain its bullish outlook. We expect TSMC to have strong 2Q14 results

with sales already at the top end of guidance, margins supported by full capacity and

one-time profit booking from sale of some Vanguard shares helping the headline EPS.

We believe yields are ramping up well on 20nm at the largest new customer, helping

hold up margins into 3Q14 despite the high depreciation increase (+27% QoQ) and

new node always starting up well below corporate GMs. Beyond the 20nm ramp,

TSMC should update progress on 16nm FF+ tape-outs for 2H15, progress with INFO

for smartphone adoption and view on medium-term growth opportunities from higher

performance computing and Internet of Things.

The company is also moving closer to a period of moderate growth after its strong

20nm/28nm market share so should begin shifting focus on rising cash flows and

dividend yield, with capex staying more stable at current levels. Key swing factors are

still TSMC's position at its two largest customers so we would look for confidence

holding share here and overall in the next few years despite competitive inroads. We

also look for an update on the industry cycle, where TSMC used several 2Q

conferences to guide toward a future 4Q correction, though this year may push that

out a quarter with tight capacity shifting some orders out from 3Q to 4Q and potentially

also limiting some overbuild in its view.

■ UMC spirits should be lifted by 28nm ramp and a better cycle. UMC 2Q14 sales

were NT$35.9 bn, +13.2% QoQ, in line with implied guidance for low teens QoQ

growth (shipment guided to grow low teens and ASPs stable). The company is seeing

pretty strong demand from its middle to lagging nodes in 2Q14 from TV, set-tops,

connectivity and HDD/SSD controllers driving growth and PCs rebounding. We also

now expect the company to guide up 3Q14 high single digit to low teens QoQ versus

original +5% QoQ as customers respond to tight capacity by holding in orders and

ramp for 2H14 LTE smartphones in China.

UMC has made progress on its 28nm and is now expanding capacity from 10K WPM

to 12K WPM and should reach its 1% of sales in 2Q14 and 5%+ by year-end, with

over half on High-K metal gate. UMC highlighted 10 customers and 20 products

though we believe most of the business will be with its core mobile and

communications customers (BRCM, Mediatek, QCOM, Realtek and STM).

GlobalFoundries and IDMs Samsung/Intel capping a sustained upside beyond the

cyclical rebound and catalyst from 28nm finally moving ahead.

■ SMIC gaining from its leverage to the China industry support and growth. SMIC

shares have rallied 53% YTD on longer-term positioning for its opportunity in the China

semiconductor chain and potential to benefit from rising government support and

subsidies on manufacturing and chip design. We see fair value at 1.25x P/B, giving it

some growth premium to book value despite mid-single digit ROE. We view the recent

rally outperforming fundamentals which are only slightly better than guidance and in line

with market expectations. We expect sales at the high end of 2Q14 guidance for sales

Foundries should stay

positive on 2H14 though

may caution to expect a

short correction early next

year

15 July 2014


up 12-15% and GMs to reach the high end of 22-24% guidance. We estimate 3Q14

sales +13% QoQ, slightly below street's +15% QoQ as the company has still a modest

customer base and limited capacity for 40nm. We believe the company will continue to

focus on optimising profitability and should have GMs trend toward mid-20% level in

3Q14. We see strong 2Q14 results and 3Q14 guidance but may see adjustments from

4Q14 as inventory already built coming out of 1Q and may build again exiting 2Q. We

believe foundry customers are booking out orders now into early 4Q14 as foundry

capacity is approaching full across all the top foundries.

■ Vanguard fab purchase comes in for 2H14. Vanguard 2Q14 sales reached NT$5.8

bn, +5.7% QoQ, above CS/Street +4.7%/+4.1% QoQ and guidance for shipments and

ASPs both up 1-3% QoQ, driven by power management IC. However, large panel ICs

mix declined due to continued inventory adjustments after the 1Q14 pull-ins. Small

panels were flat in the quarter but impacted by capacity constraints that drove

management to allocate mix to higher-margin products.

3Q14 will be a high season and the company views supply/demand as balanced, with

no slowdown from both large and small panel. We expect further mix shift to higher

margin power management and also higher utilisation to help outset some of the

Nanya fab drag. The acquired Nanya fab will add 30k capacity and 18k shipments at

60% utilisation starting in 3Q14, adding 12-13% growth off Vanguard's current 140K

WPM capacity albeit at lower ASPs than Vanguard's mix. We still factor close to

300bp GM decline in 3Q14 as the company takes on the weaker product mix. We

estimate the Nanya fab will give Vanguard an EPS lift in 2014/2015 from

NT$3.26/NT$3.59 to NT$3.60/NT$4.20 as 2H14 growth is no longer capped and the

company can now achieve 10% additional growth off 2H14 with flat depreciation/sales

to allow stable GMs.

Figure 8: Credit Suisse and street expectations for 2Q14/3Q14/4Q14 and 2014/2015 In NT$ mn, unless otherwise stated

2Q14 3Q14 4Q14 2014 2015

(NT$ mn) CS Street CS Street CS Street CS Street CS Street

TSMC sales 183,020 181,707 206,530 197,967 206,530 196,635 744,295 721,478 818,911 812,073

Growth 23.5 22.6 12.8 8.2 0.0 -0.7 24.7 20.8 10.0 12.6

Operating Profit 69,594 78,804 76,812 277,732 297,134

Net income 56,916 56,371 70,481 66,297 68,604 63,325 243,822 232,762 259,366 255,486

EPS (NT$) 2.20 2.17 2.72 2.55 2.65 2.43 9.40 8.92 10.00 9.81

UMC sales 35,470 34,960 37,243 37,064 34,239 35,270 138,646 139,027 149,638 149,615

Growth 11.9 10.3 5.0 4.5 -8.1 -4.8 12.0 20.2 7.9 7.6


Net income 3,158 2,787 4,354 3,813 1,458 2,384 10,149 10,110 11,500 11,403

EPS (NT$) 0.25 0.22 0.35 0.31 0.12 0.20 0.81 0.82 0.92 0.91

Vanguard sales 5,768 5,731 6,546 6,221 6,501 6,153 24,322 23,666 27,879 26,853

Growth 4.7 4.1 13.5 7.9 -0.7 -1.1 15.1 12.0 14.6 13.5


Net income 1,437 1,385 1,484 1,385 1,443 1,353 5,706 5,495 6,654 6,259

EPS (NT$) 0.91 0.85 0.94 0.86 0.91 0.83 3.60 3.35 4.20 3.71

SMIC sales (US$mn) 519 529 586 596 610 588 2,166 2,166 2,404 2,460

Growth 15.0 17.3 13.0 14.9 4.0 -1.4 4.7 4.7 11.0 13.6

Operating Profit 39 56 58 184 211

Net income 34 39 49 52 51 46 156 151 183 195

EPS (HK$) 0.007 0.101 0.010 0.225 0.011 0.155 0.034 0.031 0.039 0.047 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

We profile our expectations for results and guidance along with themes and issues for the

companies in our coverage below.

15 July 2014


TSMC: Apple ramp to sustain the outlook, factoring

multi-sourcing further out

Earnings details: 16 July 2PM HKT

TSMC will report results on Wednesday 16 July at 2pm Taiwan time (2am ET) with a live

conference at the Far Eastern Hotel Taipei with dial-ins US: +1 845 675 0437, Hong Kong:

+852 2475 0994, UK: +44 203 059 8139; Password TSMC. The conference will be

attended by Chairman Dr. Morris Chang, Co-CEOs Dr. Mark Liu and Dr. C.C. Wei and

CFO Ms. Lora Ho. We expect strong 2Q14 results consistent with the upside on sales and

guidance for low-mid teens QoQ growth in 3Q14, with strong builds for the Apple AP ramp

supporting 2H14 momentum and some tightness pushing orders into 4Q14. We also

expect the company to maintain its bullish tone on its technology leadership and

competitive advantage.

We preview our expectations for results and guidance and also key themes for the

investor conference:

Figure 9: Credit Suisse versus street estimates for 2Q14/3Q14/4Q14 and 2014-2015 In NT$ mn, unless otherwise stated

2Q14 3Q14 4Q14 2014 2015 2016

(NT$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street

Sales 183,020 181,707 NT$180-183bn 206,530 197,967 206,530 196,635 744,295 721,478 818,911 812,073 878,978 881,608

Chg (%) 23.5 22.6 +21.4-23.5% QoQ 12.8 8.2 0.0 -0.7 24.7 20.8 10.0 12.6 7.3 8.6

GM (%) 49.0 49.0 47.5-49.5% 49.0 48.7 48.3 47.3 48.5 48.1 47.8 47.2 47.5 46.5

OpM (%) 38.0 37.3 36.5-38.5% 38.2 37.7 37.2 36.2 37.3 36.8 36.3 36.4 35.8 36.4

Net Inc. 56,916 56,371 FX NT$30.1, Tax 21% 70,481 66,297 68,604 63,325 243,822 232,762 259,366 255,486 275,548 275,849

EPS (NT$) 2.20 2.17 2.72 2.55 2.65 2.43 9.40 8.92 10.00 9.81 10.63 10.58

ADR EPS 0.37 0.36 0.45 0.43 0.44 0.41 1.57 1.50 1.67 1.65 1.77 1.77 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

■ 2Q14 reaches the high end of guidance as capacity fills up. TSMC reported 2Q14

sales at NT$183.0 bn, up 23.5% QoQ, and top of its NT$180-183 bn range driven by

broad based strength and inventory restocking. After June sales, we lifted GMs to

49.0% vs 47.5-49.5% range and OpM from 37.4% to 38.0% vs 37.5-39.5% range on

operating leverage and full utilisation. We also factored in TSMC's disposal of 82mn

(5%) of Vanguard's shares at NT$42.55/share at a carrying cost of NT$16.74/share,

so we estimate a NT$2.1 bn profit or NT$0.07-0.08 EPS non-op contribution. We

raised our 2Q14 EPS from NT$2.06 to NT$2.20, above street's NT$2.15.

Figure 10: TSMC’s operating metrics—Credit Suisse at US$10 bn capex in 2014 and stays flat in 2015 NT$ mn 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E 3Q14E 4Q14E 2013 2014E 2015E 2016E

Capacity (8" WPM, Kpcs) 3,983 4,101 4,360 4,412 4,492 4,645 4,769 4,778 16,856 18,683 20,493 22,233

Sequential change (%) -1% 3% 6% 1% 2% 3% 3% 0% 11% 11% 10% 8%

Shipment (8" WPM. Kpcs) 3,570 4,034 4,194 3,868 3,779 4,634 5,032 4,981 15,666 18,426 19,404 20,827

Sequential change (%) 0% 13% 4% -8% -2% 23% 9% -1% 12% 18% 5% 7%

Utilization rate (%) 90% 98% 96% 88% 84% 100% 106% 104% 93% 99% 95% 94%

ASP (US$) 1,154 1,180 1,178 1,166 1,200 1,219 1,279 1,292 1,173 1,251 1,315 1,315

Sequential change (%) 0% 2% 0% -1% 3% 2% 5% 1% 5.0% 6.6% 5.1% 0.0%

Wafer Revenue (US$ mn) 4,121 4,776 4,973 4,512 4,537 5,649 6,434 6,434 18,383 23,054 25,511 27,383

Total Revenue (NT$ mn) 132,755 155,886 162,577 145,806 148,215 183,020 206,530 206,530 597,025 744,295 818,911 878,978

Revenue % of 28nm&below 24% 29% 32% 34% 34% 37% 46% 50% 30% 43% 55% 54%

Capex (US$ mn) 2,731 2,628 1,835 2,503 3,799 2,667 2,134 1,400 9,697 10,000 10,002 10,533

Capex/revenue (%) 61% 50% 34% 51% 78% 44% 31% 20% 48% 40% 37% 36%

Gross margin (%) 45.8% 49.0% 48.6% 44.5% 47% 49% 49% 48% 47.1% 48.5% 47.8% 47.5%

Operating margin (%) 33% 37% 37% 33% 35% 38% 38% 37% 35% 37% 36% 36% Source: Company data, Credit Suisse estimates

2Q14 sales +23.5% QoQ,

reaching the high end of

guidance

http://www.tsmc.com/uploadfile/ir/BusinessRelease/0411%20VIS%20E.pdf

15 July 2014


■ GM should hold up despite higher depreciation. TSMC is facing its biggest

depreciation test in the next two quarters but being managed well due to full utilisation,

strong share, good pricing, cost reductions and yields. The company should have a

sharp 14% QoQ increase in 2Q14 followed by a further 27% QoQ increase in 3Q14 as

its 20nm capacity starts being depreciated, lifting depreciation from 24% to 29% of

sales by year-end. We are modelling GMs holding up at 49% in 3Q14 and only down

slightly to 48.3% in 4Q14, with full year GMs 140 bp higher due to improved structural

profitability on the yields, pricing and cost down measures. TSMC's depreciation will

begin normalising next year and will only grow by single digits by 2016.

Figure 11: TSMC is maintaining its GMs despite depreciation up 35% in 2014 and up 14%

in 2Q14 and 27% in 3Q14

4Q13 1Q14 2Q14 3Q14 4Q14 2013 2014 2015

Sales $145,806 $148,215 $183,020 $206,530 $206,530 $597,024 $744,295 $818,911

QoQ / YoY 1.7% 23.5% 12.8% 0.0% 17.8% 24.7% 10.0%

Depreciation (37,334) (37,791) (43,159) (54,942) (55,766) (142,157) (191,658) (226,434)

QoQ / YoY 1.2% 14.2% 27.3% 1.5% 18.8% 34.8% 18.1%

Dep/Sales -26% 25.5% 23.6% 26.6% 27.0% 23.8% 25.8% 27.7%

Non-Dep / Wafer 11,279 10,591 10,834 10,022 10,222 11,101 10,397 10,365

Total COGS 80,965 77,815 93,366 105,368 106,688 316,058 383,236 427,553

Gross Profit $64,841 $70,400 $89,654 $101,162 $99,842 $280,966 $361,059 $391,358

GM% 44.5% 47.5% 49.0% 49.0% 48.3% 47.1% 48.5% 47.8% Source: Company data, Credit Suisse estimates

Figure 12: 2014 the worst year for depreciation growth Figure 13: Higher ASPs still offsetting depreciation rises

-5%0%5%10%15%20%25%30%35%40%45%

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

20

02

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Capex Depreciation Depreciation / Sales YoY Increase

Depreciation and capex (NT$)

YoY Depr. Increase

5 year equipdepreciation

period

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

0

1,000

2,000

3,000

4,000

5,000

6,000 1

Q9

7 3

Q9

7 1

Q9

8 3

Q9

8 1

Q9

9 3

Q9

9 1

Q0

0 3

Q0

0 1

Q0

1 3

Q0

1 1

Q0

2 3

Q0

2 1

Q0

3 3

Q0

3 1

Q0

4 3

Q0

4 1

Q0

5 3

Q0

5 1

Q0

6 3

Q0

6 1

Q0

7 3

Q0

7 1

Q0

8 3

Q0

8 1

Q0

9 3

Q0

9 1

Q1

0 3

Q1

0 1

Q1

1 3

Q1

1 1

Q1

2 3

Q1

2 1

Q1

3 3

Q1

3 1

Q1

4 3

Q1

4E

1Q

15E

3Q

15E

1Q

16E

3Q

16E

1Q

17E

3Q

17E

US$Shipments (mn)

Shipments ASPs

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

■ 2H14 strength intact as long-awaited Apple business ramps. We expect bullish

tone on 2H14 from the high 28nm HKMG share and 100% 20nm share. We model in

+13% QoQ in 3Q14 as Apple grows from 3% to 10%+ and other nodes are full, forcing

some rescheduling into 4Q14. GMs could hold flat as firm pricing and the full capacity

offsets +27% QoQ depreciation. Management should address 16nm FF+ volumes for

2H15, with design time for the FF+ the bottleneck rather than yields. While GF is

ordering for NY Malta now, we believe its 14nm ramp will be after TSMC and

Samsung.

15 July 2014


Figure 14: Apple ramping to 15% of sales in 4Q14 – Apple adds 7 points to 3Q14 / 4Q14 growth Apple volumes (mn units) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2013 2014 2015

iPad 19.5 14.6 14.1 26.0 16.4 13.1 12.4 21.1 74.2 63.0 69.2

iPhone 37.4 31.2 33.8 51.0 43.7 37.2 39.4 59.1 153.5 179.3 177.8

iPods 2.8 2.1 1.5 3.0 1.3 1.0 1.3 1.6 9.4 5.2 3.5

Apple TV set-top units 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 1.6 1.7 2.0

Total units (mn) 60.1 48.3 49.8 80.5 61.8 51.7 53.5 82.3 238.7 249.2 252.5

QoQ / YoY -23% -20% 3% 62% -23% -16% 3% 54% 4% 1%

Apple mfg potential (mn units) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2013 2014 2015

Blended die size 118 105 108 109 107 107 107 107 108 108 108

Die per wafer 407 459 446 442 448 449 451 448 445 445 445

Wafer per quarter (thousands) 148 105 112 182 138 115 119 184 546 555 565

Wafer per month demand 49.3 35.1 37.2 60.6 46.0 38.4 39.5 61.2 182.1 185.1 188.2

TSMC potential 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2013 2014 2015

Wafer demand (thousands) 148 105 112 182 138 115 119 184 546 555 565Revenue per 12" wafer, US$ 5,894 5,747 5,603 5,463 8,200 7,995 7,795 7,600 5,663 7,873 7,799

Apple Processor Sales (US$ mn) $871 $604 $625 $994 $1,131 $920 $925 $1,395 $3,094 $4,371 $4,405

TSMC share: 0% 0% 0% 0% 0% 20% 70% 75% 0% 43% 70%

TSMC Apple assumption: $0 $0 $0 $0 $0 $184 $647 $1,046 $0 $1,878 $3,075

Apple % of TSMC 0% 0% 0% 0% 0.0% 3.0% 9.4% 15.2% 0.0% 7.6% 11.3%

Rest of TSMC $4,509 $5,225 $5,441 $4,936 $4,900 $5,917 $6,237 $5,838 $20,111 $22,892 $24,222

QoQ / YoY 0.1% 15.9% 4.1% -9.3% -0.7% 20.7% 5.4% -6.4% 13.8% 5.8%

TSMC sales (US$ mn) $4,509 $5,225 $5,441 $4,936 $4,900 $6,101 $6,884 $6,884 $20,111 $24,769 $27,297 QoQ / YoY 0.1% 15.9% 4.1% -9.3% -0.7% 24.5% 12.8% 0.0% 23.2% 10.2%

Source: Company data, Credit Suisse estimates

■ Factoring in Qualcomm/Apple multi-sourcing scenarios. Although TSMC will

remain confident in its share position, we acknowledge potential for the large

customers to multi-source and Samsung to secure some Qualcomm/Apple and a few

smaller customers with its 14nm process. Qualcomm has been trying to multi-source

for several years although TSMC's share has instead increased from 63% to 70% as

other foundries lagged on 28nm yields and move up to 28nm HKMG. We do factor

Samsung being more competitive followed by its process licensee GlobalFoundries a

couple quarters later to take some market share. Our base case assumes TSMC's

QCOM allocation falls from 70% to 60% and Apple at 70%, still allowing TSMC to

grow +10% YoY in 2015 and generate NT$10 EPS.

Figure 15: Factoring in some decline of TSMC's share at

QCOM/Apple

Figure 16: TSMC Stock price range based on 12-17x P/E

and NT$8-11 earnings range from QCOM/Apple 2011 2012 2013 2014 2015 2016

Qualcomm Production $3,318 $4,352 $6,260 $6,736 $7,319 $8,270

Qualcomm TSMC $2,086 $2,953 $4,426 $4,716 $4,391 $4,549

TSMC Share of QCOM 63% 68% 71% 70% 60% 55%

Apple Production $1,630 $2,975 $3,094 $4,371 $4,405 $4,550

Apple TSMC $0 $0 $0 $1,878 $3,083 $2,958

TSMC Share of Apple 0% 0% 0% 43% 70% 65%

Rest of TSMC $12,457 $14,185 $15,685 $18,176 $19,822 $21,639

YoY Growth 2.8% 13.9% 10.6% 15.9% 9.1% 9.2%

Total TSMC $14,543 $17,137 $20,111 $24,769 $27,297 $29,145

YoY Growth 9.2% 17.8% 17.4% 23.2% 10.2% 6.8%

TSMC EPS based on QCOM/Apple share$8.00 $8.50 $9.00 $10.00 $10.50 $11.00

12x $96 $102 $108 $120 $126 $132

13x $104 $111 $117 $130 $137 $143

14x $112 $119 $126 $140 $147 $154

15x $120 $128 $135 $150 $158 $165

16x $128 $136 $144 $160 $168 $176

17x $136 $145 $153 $170 $179 $187TS

MC

mu

ltip

le


We also present sensitivity analysis on those two customers as they represent largest

swing factor in 2H15/2016. On our base case of NT$10 EPS in 2015, TSMC's stock at

15x and a slight premium to the TAIEX 14x would reach NT$150. A range of earnings

from NT$8-11 and multiples across TSMC's 12-17x range could create a swing of

outcomes for the share price with about 30% potential downside and 20% further upside

from our base case.

15 July 2014


Figure 17: TSMC 2015 sales growth sensitivity to

allocation of Qualcomm and Apple’s manufacturing

Figure 18: TSMC 2015 EPS sensitivity to allocation of

Qualcomm and Apple’s manufacturing

TSMC's Qualcomm allocation

$0 30% 40% 50% 60% 70% 80%

0% -11.1% -8.2% -5.2% -2.2% 0.7% 3.7%

15% -8.4% -5.5% -2.5% 0.4% 3.4% 6.3%

25% -6.7% -3.7% -0.8% 2.2% 5.2% 8.1%

30% -5.8% -2.8% 0.1% 3.1% 6.0% 9.0%

60% -0.4% 2.5% 5.5% 8.4% 11.4% 14.3%

70% 1.3% 4.3% 7.2% 10.2% 13.2% 16.1%

80% 3.1% 6.1% 9.0% 12.0% 14.9% 17.9%

100% 6.7% 9.6% 12.6% 15.5% 18.5% 21.4%

TS

MC

's A

pp

le

All

ocati

on

TSMC's Qualcomm allocation TSMC EPS based on QCOM/Apple share

$10 30% 40% 50% 60% 70% 80%

0% $6.19 $6.68 $7.19 $7.70 $8.23 $8.77

15% $6.64 $7.14 $7.65 $8.18 $8.71 $9.26

25% $6.94 $7.45 $7.97 $8.50 $9.04 $9.60

30% $7.09 $7.60 $8.13 $8.66 $9.21 $9.77

60% $8.02 $8.56 $9.10 $9.66 $10.23 $10.81

70% $8.34 $8.88 $9.44 $10.00 $10.58 $11.16

80% $8.67 $9.21 $9.77 $10.35 $10.93 $11.52

100% $9.33 $9.89 $10.46 $11.05 $11.65 $12.26

TS

MC

's A

pp

le

All

ocati

on


■ Technology progress on track, though 14nm competition will still heat up. (1)

16nm on track to ramp in 2015. TSMC noted at its AGM over 20 tape-outs on 16nm

FF+ in 2014, up from 15 from its earlier commentary, and also maintained confident

that its 16nm FF+ will deliver the strongest performance among existing 16/14nm

technologies. (2) 10nm for ramp in 2016. Management expects "important tape-outs"

and risk production next year, and also maintains its target for ramp in 2016. (3) 7nm

for R&D. TSMC's 7nm R&D has started and its progress will also continue

simultaneously with 10nm. However, we believe TSMC is now competing fiercely for

16nm business with its FF+ against Samsung with our base case expecting some

QCOM/Apple and a few smaller customers to be at Samsung from late 2015.

Figure 19: TSMC’s next few nodes be shorter and faster Figure 20: Continued technology migration

0%

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TSMC contribution from n TSMC contribution from n-1

250/180 180/150 150/130 130/90 90/65 65/40 40/28 28/20 20/16 10

-

10,000

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3Q

17

Revenue (NT$)

0.5um+ 0.25/0.35um 0.15/0.18um 0.13um

90nm 65nm 40nm 28nm

20nm 16nm 10nm


Figure 21: TSMC higher leading edge pricing on the new

nodes supporting rising blended ASPs

Figure 22: TSMC 28nm/20nm ramp by customer

$0

$500

$1,000

$1,500

$2,000

$2,500

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$3,500

$4,000

$4,500

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150nm 130nm 90nm 65nm40nm 28nm 20nm 16nm FF+10nm Blended ASP

US$ 8" equiv. ASP

0%

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50%

0

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1Q

12

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TSMC 28nm and below (%)

28nm and below US$mn

Qualcomm QCT Apple NVIDIAAMD graphics AMD NBs/chips/gaming OracleAltera Xilinx MediatekSpreadtrum Broadcom TILSI Freescale Marvell


15 July 2014


■ Shifting toward moderating growth but rising cash returns. After this year’s sharp

Apple ramp on top of very high 28nm/20nm share through 1H15, TSMC would need to

be content with mobile TAM slowing to a still respectable mid-high single digit growth

the next couple years but also some sharing of its 14nm mobile back with Samsung.

We expect the company to hold capex flat to down and focus on tool-reuse on new

nodes rather than new green-field lines of capacity. As a result, we project a harvest

period with FCF increasing from US$4.5 bn in 2014 to US$6.5 bn in 2015 and lifting

FCF yield to 6% by 2015, allowing dividend to rise from NT$3 to NT$3.50-4.00 next

year and start on a path toward dividend growth, a cash return trend that is re-rating

some chip stocks now.

Figure 23: FCF yields set to rebound from 2014 Figure 24: Cash flows can support rising dividends soon

0%

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0

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10

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11

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13

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14

E

CY

15

E

Operating cash flow Capital spending FCF Yield (%)

Capex and FCF (NT$mn)Capex and FCF (NT$mn) FCF Yield (%)Capex and FCF (NT$mn)Capex and FCF (NT$mn)

-30%

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14

Capex (US$mn) Capacity YoY (%) Shipment YoY (%)

US$mn (%)Capex (US$mn) Shipments and Capacity (YoY)


■ Maintain OUTPERFORM at NT$150 TP. We view TSMC’s valuation as in line at

15.4x/14.2x 2014E/2015E EPS vs Taiwan tech's 15.4x/13.8x. We recently raised our

2014/2015 estimates from NT$8.75/NT$9.50 to NT$9.40/NT$10.0 and target price

from NT$137 to NT$150, based on same 15x average 2014/2015 EPS. We remain

positive into strong results and see story post the Apple ramp shifting toward

moderating growth but higher FCF and dividends.

Figure 25: TSMC PE band – trading at 13.4x forward EPS Figure 26: TSMC PB band – trading at 2.9x forward BV

10.5x

13x

15x

17x

20

30

40

50

60

70

80

90

100

110

120

130

140

150

Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14

(NT$)

2x

2.7x

3.1x

3.5x

20

40

60

80

100

120

140

160

180

200

Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14

(NT$)

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

TSMC valuation in line with

Taiwan tech

15 July 2014


UMC: 2Q14 growth in line with guidance and

expectations

Earnings details: 8 Aug 5PM HK time

Figure 27: UMC 2Q14/3Q14/4Q14 and 2014-2016 CS estimates vs street In NT$ mn, unless otherwise stated

NT$ 2Q14 3Q14 4Q14 2014 2015 2016

(mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street

Sales 35,470 34,960 Up low teens 37,243 37,064 34,239 35,270 138,646 139,027 149,638 149,615 159,473 155,501

Chg (%) 11.9 10.3 ASPs flat 5.0 4.5 -8.1 -4.8 12.0 20.2 7.9 7.6 6.6 3.9

GM (%) 24.3 22.4 25% foundry GM 25.2 23.4 20.5 20.6 22.3 21.3 21.0 20.4 21.1 17.9

OpM (%) 9.4 7.9 High 80% Util. 10.4 8.9 4.0 5.8 6.9 6.9 7.5 7.7 7.8 8.4

Net Inc. 3,158 2,787 4,354 3,813 1,458 2,384 10,149 10,110 11,500 11,403 12,633 11,885

EPS (NT$) 0.25 0.22 0.35 0.31 0.12 0.20 0.81 0.82 0.92 0.91 1.01 0.97ADR EPS

(US$) 0.04 0.01 0.06 0.01 0.02 0.01 0.14 0.14 0.15 0.15 0.17 0.16 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

■ 2Q14 sales in line, 3Q14 may get revised higher. UMC 2Q14 sales were NT$35.9 bn,

+13.2% QoQ, in line with implied guidance for low teens QoQ growth (shipment guided

to grow low teens and ASPs stable). The company is seeing pretty strong demand from

its middle to lagging nodes in 2Q14 from TV, set-tops, connectivity and HDD/SSD

controllers driving growth and PCs rebounding. With tighter 8" capacity and higher than

expected utilisation, we expect GMs closer to our 24.3%, vs street at 22.3% and foundry

GM guidance of 25%. We also now expect the company to guide up 3Q14 high single

digit to low teens QoQ versus original +5% QoQ as customers respond to tight capacity

by holding in orders and ramp for 2H14 LTE smartphones in China.

■ 28nm finally ramping up. UMC has made progress on its 28nm and is now

expanding capacity from 10K WPM to 12K WPM and should reach its 1% of sales in

2Q14 and 5%+ by year-end, with over half on High-K metal gate. UMC highlighted 10

customers and 20 products though we believe most of the business would be with its

core mobile and communications customers (BRCM, Mediatek, QCOM, Realtek and

STM). While the progress is encouraging, the ramp from 0 to 5% is four years after a

similar ramp on 40nm vs traditional 2.0 to 2.5 year pace, dampening the lifetime

profitability for the node and limiting the potential size and breadth of business as

some customers move to 20/16nm in 2014/15.

Figure 28: 28nm finally to have 5% sales by 4Q14 Figure 29: Communications stable at about NT$16 bn/qtr

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

Wafer Sales (NT$)

0.25um 0.18um 0.13um 90nm

65nm 40nm 28nm

2.5 years 2 years 2.5 years 3 years 4 years

-

4,000

8,000

12,000

16,000

20,000

4Q

99

2Q

00

4Q

00

2Q

01

4Q

01

2Q

02

4Q

02

2Q

03

4Q

03

2Q

04

4Q

04

2Q

05

4Q

05

2Q

06

4Q

06

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

Computer Communication ConsumerOther/Industrial Memory

Wafer Revenue (NT$)

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

■ Capex should grow into next year. UMC guided US$1.1-1.3 bn for capex in 2014

though may start ordering in 2H14 for additional 28nm capacity for 2015. We expect

the company to ramp up from current 12K WPM toward 25-20K, requiring US$1.5-$2

bn capex. The company's 28nm investment cycle could take capex back slightly

above FCF during the investment phase.

UMC 2Q14 sales in line with

expectations

15 July 2014


■ Maintain NEUTRAL. We maintain our 2014/2015 EPS estimates of NT$0.81/NT$0.92

and our target price of NT$14, based on 0.8x forward P/B vs 0.6-1.0x post-crisis

range. While near-term is moving to the high end of that range supported by seasonal

ramp and improving profitability, we keep UMC NEUTRAL due to slow migration to

advanced technology and rising technology challenges. We would see risk of a

pullback as well as tight supply eases later in 3Q14 into 4Q14 into the low season.

Figure 30: UMC has a slightly negative FCFs Figure 31: UMC trading at high end of its post crisis range

-10%

-5%

0%

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5E

Operating Cash Flow Capex FCF Yield

Cash flow/Capex NT$mn FCF Yield (%)Cash flow/Capex NT$mn FCF Yield (%)

0.6x

0.8x

1x

1.4x

5

10

15

20

25

30

Jan/03 Apr/04 Jul/05 Oct/06 Jan/08 Apr/09 Jul/10 Oct/11 Jan/13 Apr/14

(NT$)


Figure 32: UMC operating metrics NT$mn 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14E 3Q14E 4Q14E 2012 2013E 2014E 2015E 2016E

Capacity (8" equivalent WPM) 1,461 1,537 1,548 1,560 1,562 1,600 1,629 1,634 5,513 6,106 6,425 6,947 7,552

Sequential change (%) 4% 5% 1% 1% 0% 2% 2% 0% 4% 11% 5% 8% 9%

Shipment (8" equivalent WPM) 1,125 1,307 1,329 1,236 1,258 1,422 1,486 1,358 4,306 4,998 5,524 5,952 6,370

Sequential change (%) 5% 16% 2% -7% 2% 13% 5% -9% 2% 16% 11% 8% 7%

Utilization rate (%) 77% 85% 86% 79% 81% 89% 91% 83% 78% 82% 86% 86% 84%

ASP (US$) 785 773 794 778 749 749 752 749 833 783 750 751 749

Sequential change (%) -7% -2% 3% -2% -4% 0% 0% 0% -3% -6% -4% 0% 0%

FX rate 29.8 30.0 29.9 29.9 30.5 30.5 30.5 30.5 29.6 29.9 30.5 30.5 30.5

Other Revenue 1,435 1,611 1,834 2,164 2,999 3,005 3,155 3,218 - 7,044 12,378 13,281 13,956

Total Revenue (NT$mn) 27,781 31,905 33,407 30,879 31,694 35,470 37,243 34,239 105,998 123,972 138,646 149,638 159,473

Revenue % of 90nm&below 56% 57% 60% 60% 58% 59% 59% 60% 59% 58% 65% 54% 0%

Capex (US$mn) 241 266 335 260 206 361 371 262 1,718 1,101 1,200 1,300 1,400

Capex/revenue (%) 26% 25% 30% 25% 20% 31% 30% 23% 48% 27% 26% 26% 27%

Revenue (NT$mn) 27,781 31,905 33,407 30,719 31,694 35,470 37,243 34,239 115,675 123,812 138,646 149,638 159,473

EPS (NT$) 0.52 0.15 0.28 0.06 0.09 0.25 0.35 0.12 0.49 1.01 0.81 0.92 1.01

Gross margin (%) 16% 19% 22% 18% 19% 24% 25% 20% 17% 19% 22% 21% 21%

Operating margin (%) 1% 4% 7% 1% 3% 9% 10% 4% 1% 3% 7% 7% 8% Source: Company data, Credit Suisse estimates

Vanguard: 2Q14 sales at the high end; acquired fab

dilution looks manageable

Earnings details: 4 Aug 2PM HK time

Figure 33: Credit Suisse versus Street estimates for 2Q14/3Q14/4Q14 and 2014-2015 In NT$ mn, unless otherwise stated

2Q14 3Q14 4Q14 2014 2015 2016


Sales 5,768 5,731 Ship +1-3% 6,546 6,221 6,501 6,153 24,322 23,666 27,879 26,853 30,597 28,093

QoQ (%) 4.7% 4.1% ASPs +1-3% 13.5% 7.9% -0.7% -1.1% 15.1% 12.0% 14.6% 13.5% 9.8% 4.6%

GM (%) 38.3% 38.0% 37-39% 35.8% 36.3% 35.7% 35.7% 36.7% 36.6% 37.2% 35.9% 38.3%

OpM (%) 28.5% 27.7% Util: >100% 25.9% 26.3% 25.5% 25.8% 26.7% 26.6% 27.4% 26.7% 28.5%

Net Inc: 1,437 1,385 1,484 1,385 1,443 1,353 5,706 5,495 6,654 6,259 7,603 6,822

EPS (NT$) 0.91 0.85 0.94 0.86 0.91 0.83 3.60 3.35 4.20 3.71 4.80 3.94

Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

Vanguard sales and track to

the higher-end of guidance

15 July 2014


■ 2Q14 reaches the high end of its guidance. Vanguard 2Q14 sales reached NT$5.8

bn, +5.7% QoQ, above CS/Street +4.7%/+4.1% QoQ and guidance for shipments and

ASPs both up 1-3% QoQ, driven by power management IC. However, large panel ICs

mix declined due to continued inventory adjustments after the 1Q14 pull-ins. Small

panels were flat in the quarter but impacted by capacity constraints that drove

management to allocate mix to higher-margin products.

■ Margins could reach the high end of guidance, but higher tax may keep EPS in

line. Due to mix shift to power management and utilisation staying over 100%, we

expect GM to reach higher-end of 37-39% guidance and in the range of our 38.3%

GM. We estimate OpM at 28.5%, above street at 27.7%, but offset by higher corporate

tax of 20% due to retained earnings tax to keep EPS in line.

Figure 34: Nanya fab accretive to earnings

No New Capacity New Fab

2012 2013 2014E 2015E 2012 2013 2014E 2015E

Capacity 1686.0 1626.0 1671.0 1671.0 Capacity 1686.0 1626.0 1851.0 2070.0

Shipments 1328.4 1632.1 1770.0 1787.7 Shipments 1328.4 1632.1 1857.2 2058.1

Utilization 79% 100% 106% 107% Utilization 79% 100% 100% 99%

ASP $437 $436 $428 $440 ASP $437 $436 $434 $449

Forex 29.6 29.7 30.2 30.2 Forex 29.6 29.7 30.2 30.2

Revenue 17,174 21,134 22,839 23,755 Revenue 17,174 21,134 24,322 27,879

Y/Y Growth 13% 23% 8% 4% Y/Y Growth 13% 23% 15% 15%

Depreciation -3,465 -2,274 -$2,000 -$1,826 Depreciation -3,465 -2,274 -2,100 -2400

Per Wafer Cost 7.2 7.2 7.1 7.2 Per Wafer Cost 7.2 7.2 7.2 7.3

Non Depr COGS -9,626 -11,673 -12,644 -12,943 Non Depr COGS -9,626 -11,673 -13,298 -15,117

Total COGS -13,092 -13,946 -14,644 -14,769 Total COGS -13,092 -13,946 -15,397 -17,517

Gross Profit 4,083 7,187 8,194 8,986 Gross Profit 4,083 7,187 8,925 10,362

GM% 23.8% 34.0% 35.9% 37.8% GM% 23.8% 34.0% 36.7% 37.2%

Net Income 2,346 4,695 5,170 5,689 Net Income 2,346 4,695 5,706 6,653

EPS $1.49 $2.98 $3.26 $3.59 EPS $1.49 $2.98 $3.60 $4.20

Shares 1,575.5 1,573.2 1,584.0 1,584.0 Shares 1,575.5 1,573.2 1,584.0 1,584.0 Source: Company data, Credit Suisse estimates

■ Nanya fab dilutes margins in 3Q14, but should improve from that level. The

acquired Nanya fab will add 30k capacity and 18k shipments at 60% utilisation starting

in 3Q14, adding 12-13% growth off Vanguard's current 140K WPM capacity albeit at

lower ASPs than Vanguard's mix. We still factor close to 300 bp GM decline in 3Q14

as the company takes on the weaker product mix. Nanya had booked an NT$361 mn

operating loss on that fab in 1Q14. Vanguard's customer qualification normally takes

two quarters, but it has started the fab 3 qualification work in 2Q14 and expects to also

use that facility for debottleneck tool use even ahead of bringing in new products in

4Q14. The company views no material negative profit impact for the full year and

expects 3Q14 dilution to be offset by new product qualification in 4Q14.

■ 3Q14 outlook stable. 3Q14 will be a high season and the company views

supply/demand balanced, with no slowdown from both large and small panel. We

expect further mix shift to higher margin power management and also higher utilisation

to help outset some of the Nanya fab drag. Growth drivers to fill the fab include 8%

driver IC unit CAGR, power IC/audio codec for Apple, diversified analog IDMs, and

longer-term potential for touch integrated driver and fingerprint ICs. We estimate 3Q14

sales to grow 12.4% QoQ vs street 6.8% QoQ and GM at 35.8% vs street's 36.3%.

15 July 2014


Figure 35: Rising power management lifts margins Figure 36: High free cash flows allows for a rising DPS

$0

$400

$800

$1,200

$1,600

$2,000

$2,400

$2,8003Q

09

4Q

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10

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10

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10

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10

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13

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14E

Driver IC (Large) Driver IC (Small)

Analog+Power management Others

Quarterly sales (NT$mn)

-10%

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15

Op Cash Flow Capex FCF Yield

Dividend Yield Linear (FCF Yield)

OP CF / Capex (NT$mn) Dividend / FCF Yield (%)


■ 2014 outlook solid. We estimate the Nanya fab will give Vanguard a EPS lift in

2014/2015 from NT$3.26/NT$3.59 to NT$3.60/NT$4.20 as 2H14 growth is no longer

capped and the company can now achieve 10% additional growth off 2H14 with flat

depreciation/sales to allow stable GMs. (Please see Exhibit 4) The company may

need to look for another fab by late 2015 due to relatively small scale of this fab.

■ Maintain NEUTRAL. We maintain our NT$50 target price based on 14x 2014 and 12x

2015 and up-cycle range of 2.6x P/B, high end of its 0.7-2.6x range. Vanguard is

trading at 2.4x P/B and 12.8x P/E, factoring in a full fab scenario allowing NT$4.20 of

earnings power next year.

Figure 37: Vanguard’s stock has pulled back from its recent highs

0.75x

1.6x

2.3x

2.9x

5

10

15

20

25

30

35

40

45

50

55

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3

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7

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8

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9

Dec/1

0

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1

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2

Dec/1

3

Dec/1

4

NT$ Vanguard PB Band


15 July 2014


Figure 38: Vanguard operating metrics 1Q14E 2Q14E 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2011 2012 2013E 2014E 2015E 2016E

Capacity (8" equivalent) 411 423 513 504 513 522 522 513 1,551 1,686 1,626 1,851 2,070 2,166

Sequential Change 1% 3% 21% -2% 2% 2% 0% -2% 11% 9% -4% 14% 12% 5%

Shipment (8" equivalent) 428 436 498 495 482 512 536 529 1,156 1,328 1,632 1,857 2,058 2,240

Sequential Change 4% 2% 14% -1% -3% 6% 5% -1% 0% 15% 23% 14% 11% 9%

Utilization rate 104% 103% 97% 98% 94% 98% 103% 103% 75% 79% 100% 100% 99% 103%

ASP $427 $438 $435 $435 $440 $445 $451 $457 $448 $437 $436 $434 $449 $452

Sequential Change -4% 3% -1% 0% 1% 1% 1% 1% 2% -2% 0% 0% 3% 1%

Wafer Revenue (US$mn) 183 191 217 215 212 228 242 242 518 580 711 806 923 1,013

FX rate 30.1 30.2 30.2 30.2 30.2 30.2 30.2 30.2 31.0 29.6 29.7 30.2 30.2 30.2

Other Revenue - - - - - - - - - - - - - -

Total Revenue (NT$mn) 5,507 5,768 6,546 6,501 6,403 6,883 7,296 7,296 15,191 17,174 21,134 24,321 27,879 30,597

Capex (US$mn) $15 $8 $67 $36 $7 $7 $7 $7 $90 $46 $32 $126 $30 $40

Capex/revenue 8% 4% 31% 17% 4% 3% 3% 3% 18% 8% 5% 16% 3% 4%

Revenue 5,507 5,768 6,546 6,501 6,403 6,883 7,296 7,296 15,190 17,175 21,135 24,322 27,879 30,597

EPS 0.85 0.91 0.94 0.91 0.84 1.03 1.18 1.15 0.53 1.48 2.78 3.60 4.20 4.80

Gross Margin 37% 38% 36% 36% 34% 37% 39% 39% 15% 24% 32% 37% 37% 38%

Operating Margin 27% 29% 26% 25% 24% 27% 29% 29% 6% 14% 23% 27% 27% 29% Source: Company data, Credit Suisse estimates

SMIC: Specialty and 40nm ramp driving continued

growth in 2014

Earnings details: 7 Aug 8:30AM HK time

Figure 39: SMIC 2Q14/3Q14/4Q14 and 2014-2016 estimates vs street summary In US$ mn, unless otherwise stated

2Q14 3Q14 4Q14 2014 2015 2016

(US$ mn) CS Street Guidance CS Street CS Street CS Street CS Street CS Street

Net sales $519 $529 $505-519mn $586 $596 $610 $588 $2,166 $2,166 $2,404 $2,460 $2,613 $2,679

Change 15.0% 17.3% +12 to 15%

QoQ

13.0% 14.9% 4.0% -1.4% 4.7% 4.7% 11.0% 13.6% 8.7% 8.9%

GM % 23.6% 22.8% 22-24% 24.2% 24.6% 23.9% 24.5% 23.4% 22.9% 23.9% 24.2% 24.5% 25.2%

OpM % 7.6% 8.1% Opex $89-

93mn

9.6% 10.2% 9.6% 9.6% 8.5% 8.1% 8.8% 9.0% 9.4% 9.7%

Net income 34 39 49 52 51 46 156 151 183 195 213 219

EPS (US$) $0.001 $0.013 $0.001 $0.029 $0.001 $0.020 $0.004 $0.004 $0.005 $0.006 $0.006 $0.079

ADR EPS

(US$)

$0.05 $0.65 $0.07 $1.45 $0.07 $1.00 $0.22 $0.20 $0.25 $0.30 $0.29 $3.95

HK EPS (HK$) $0.007 $0.101 $0.010 $0.22 $0.011 $0.16 $0.034 $0.03 $0.039 $0.05 $0.045 $0.61

Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service

■ 2Q14 tracking well; no major impact from BRCM's baseband exit. We estimate

2Q14 to reach high end of guidance of +12-15% QoQ due to broad-based rebound

across communications and specialty also consistent with overall foundry/back-end

upside in 2Q14. We do not see impact from 10-15% customer BRCM's baseband

exit/sale as SMIC is mainly supplying 40nm/65nm set-top and connectivity.

■ 3Q14 sales tracking to moderate growth – CS slightly below street. We estimate

3Q14 sales +13% QoQ, slightly below street +15% QoQ as the company has still a

modest customer base and limited capacity for 40nm. We believe the company will

continue to focus on optimising profitability and should have GMs trend toward mid-

20% level in 3Q14.

■ SMIC and QCOM announced 28nm production in China for 2015. SMIC and

Qualcomm announced on 3 July to work together on 28nm PolySiON and HKMG

process technology and manufacturing for Qualcomm's Snapdragon processors for

smartphones. Previously, SMIC has supported Qualcomm on power management,

wireless and connectivity related ICs at various process nodes and we estimate their

top customer last year at 21% of sales. SMIC also targets to extend its technology

1Q14 tracking to high end of

its 12-15% QoQ guidance

http://www.smics.com/eng/press/press_releases_details.php?id=223741

15 July 2014


offerings on 3DIC and RF front-end wafer manufacturing to support continued

expansion of Snapdragon's product portfolio.

■ Consistent with our expectations and a modest portion of the TAM, though a

negative for sentiment for TSMC/UMC. We have noted our expectations in our

Taiwan Daily for a SMIC announcement on QCOM for 28nm, as SMIC has been a

long-time supplier for power management on 0.18um and also fits into QCOM’s

strategy of lowering costs and manufacturing in China for the China market and helps

politically in China to localize some of its manufacturing there. We expect negative

market sentiment on TSMC and a lesser extent UMC on SMIC's headline customer on

28nm though volume would start small from 2015 as SMIC's capacity would reach 6k

in Beijing + 1-2K R&D line in Shanghai by end of this year, keeping its share of

Qualcomm's leading edge baseband business to under 10% in the initial year. We

expect initial revenue by 1Q15 and ramping to 8% by 4Q15. Qualcomm should play an

important role helping SMIC get more competitive on its 28nm process for 2nd

wave

business and also to attract other overseas and Chinese design houses.

■ Foundry supply tightness suggests inventory build. We note that foundry lead

times have stretched out so foundries are rescheduling orders from 3Q14 into 4Q14.

While the upside appears decent now, chip companies usually respond to longer lead

times by over-ordering when they are more concerned with supply than demand. We

see strong 2Q14 results and 3Q14 guidance but may see adjustments from 4Q14 as

inventory already built coming out of 1Q and may build again exiting 2Q. We believe

foundry customers are booking out orders now into early 4Q14 as foundry capacity is

approaching full across all the top foundries.

Figure 40: 28nm ramp only starting from late 2014 Figure 41: China fabless companies driving SMIC growth

0%

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40%

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60%

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28nm 40nm 65nm 90nm 0.13um 0.15um 0.18um 0.25um 0.35um

$0

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14E

US$mn

North America China Eurasia Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

■ SMIC raises US$391mn capital via new share issuance and CB. SMIC announced

on 4 June that it will raise capital through issuance of (1) 2.59 bn new shares (8% of

current outstanding shares) at HK$0.60 per share (5% discount to close) targeted to

complete on 9 June 2014, (2) US$95 mn zero couple convertible bonds, convertible at

the price of HK$0.8 for 925 bn shares due Nov 2018 (4% dilution) and (3) rights

issuance to its large shareholders (3% dilution) for US$100 mn. Total net proceeds

would be US$391.4 mn. The new securities issuance is triggering the exercise of pre-

emptive rights by Datang and Country Hill to purchase a pro rata portion of the new

shares to avoid dilution and maintain their ownership will stay at 18% and 10%

respectively. The total dilution for equity and assuming conversion would approximate

15% additional shares.

SMIC raising US$391mn

capital for its Beijing 12" fab

http://www.smics.com/attachment/20140605083201001931531_en.pdf

15 July 2014


Figure 42: SMIC diluting up to 15% with its convert/equity issuance

Instruments (US$mn) Shares Price (HK$) Valuation Dilution

Existing shares 32,232 $0.63 $2,620.1

Equity issuance 2,590 $0.60 $201.4 8.0%

Datang & Country Hill rights issuance 1,294 $0.60 $100.2 4.0%

Convertibles (US$mn) 925 $0.80 $95.5 2.9%

Gross proceeds (US$mn) $397.1

Net proceeds (US$mn) $391.4 14.9% Source: Company data, Credit Suisse estimates

■ Fund raising to support the Beijing Fab build-out. SMIC needs funding to support

its long-term capex expansion and 12" fab build-out in Beijing, one of the triggers

when we downgraded last 10 June that could require a new investment cycle. SMIC

has US$736 mn cash and financial assets and US$1.2bn debt so can fund current

year's capex from operating cash flows but would need funds for the next couple

year's 8" and 12" capacity expansion.

SMIC last year entered a 55/45 JV with ZDG and BIDIMC (Beijing government owned)

to build a 40nm/28nm fab with monthly capacity of 35,000 wafers. SMIC will own 55%

stake and invest US$2 bn of US$3.6 bn from 2014-17, with JV revenue consolidated

but SMIC only retaining 55% share of the profits. SMIC targets initial build in 2014 to

be 6K WPM in 2014, followed by an additional 4K in 2015 and the eventually targeting

to ramp to 35K WPM over the next three years.

Figure 43: Beijing JV spending ramps the next few years

2012 2013 2014 2015

Beijing JV capex - - -$570 -$900

Foundry Core capex -$499 -$650 -$441 -$450

Dormitory capex -$120 -$110

SMIC reported capex -$499 -$770 -$1,110 -$1,350

Cash flow capex (SMIC's portion) -$417 -$650 -$865 -$945

Operating cash flow $454 $738 $694 $830

Free cash flow $37 $88 -$171 -$115 Source: Company data, Credit Suisse estimates

■ Maintain NEUTRAL— near-term sales upside and China policy support balances

the dilution hit and late year inventory risk. We recently raised 2014/2015E net

profit from US$150/US$175 mn to US$156/US$183 mn vs street of US$158/US$192

mn. We kept our target price at HK$0.73 based on 1.25x forward P/B and maintain

NEUTRAL. We balance dilution and late year inventory risk with near-term catalysts

from business upside and potential China policy support.

Figure 44: FCF remains near break-even for SMIC Figure 45: SMIC stock now trading at 1.2x 2014 P/B

-$1,500

-$1,000

-$500

$0

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$1,000

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$2,000

20

04

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07

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08

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11

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14F

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1.5x

0

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1

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2.5

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HK$ SMIC PB Band

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

http://www.eetimes.com/document.asp?doc_id=1321616

15 July 2014


Figure 46: SMIC operating metrics 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14E 3Q14E 4Q14E 2013 2014E 2015E 2016E 2017E

Capacity (8" equivalent) 659 670 695 702 731 734 743 770 2,726 2,976 3,339 3,662 4,025

Sequential Change (%) 0% 2% 4% 1% 4% 0% 1% 4% 13% 9% 12% 10% 10%

Shipment (8" equivalent) 630 684 653 602 582 653 745 783 2,568 2,762 3,072 3,378 3,724

Sequential Change (%) 4% 9% -5% -8% -3% 12% 14% 5% 16% 8% 11% 10% 10%

Utilization (Shipments/Capacity) 96% 102% 94% 86% 80% 89% 100% 102% 94% 93% 92% 92% 93%

Logic ASP $750 $761 $767 $762 $724 $741 $734 $727 $760 $731 $730 $722 $713

Sequential Change (%) 0% 2% 1% -1% -5% 2% -1% -1% 5% -4% 0% -1% -1%

Simple ASP (Revenue/Shipments) $797 $791 $818 $817 $776 $795 $787 $779 $760 $731 $730 $722 $713

Sequential Change (%) 0% -1% 3% 0% -5% 2% -1% -1% 5% -4% 0% -1% -1%

Capex (US$mn) (Management) $185 $302 $169 $114 $108 $410 $302 $290 $770 $1,110 $1,350 $1,400 $1,500

Capex (US$mn) (Cash Flows) $123 $188 $256 $83 $108 $410 $302 $290 $650 $1,110 $1,350 $1,400 $1,320

Capex/revenue (%) 26% 36% 51% 18% 26% 85% 55% 51% 33% 55% 60% 57% 50%

Revenue $502 $541 $534 $492 $451 $519 $586 $610 $2,069 $2,166 $2,404 $2,613 $2,847

EPS $0.03 $0.07 $0.05 $0.01 $0.03 $0.05 $0.07 $0.07 $0.16 $0.21 $0.25 $0.29 $0.31

Gross Margin (%) 20% 25% 21% 19% 21% 24% 24% 24% 21% 23% 24% 25% 24%

Operating Margin (%) 6% 9% 8% 2% 7% 8% 10% 10% 6% 8% 9% 9% 9%

Depreciation/Wafer $202 $158 $194 $188 $191 $171 $169 $174

Non Depreciation/Wafer $438 $433 $451 $473 $418 $435 $426 $417 Source: Company data, Credit Suisse estimates

15 July 2014


Backend: Business drivers shift in 2H14 We recently revised up estimates on ASE, SPIL and Powertech to reflect 2Q14 sales

upside and decent outlook into 3Q14. The back-end business was supported by non-

Apple related drivers in 1H14 including PC stabilisation, consumer/TV builds, and low cost

smartphones but will shift to the Apple ramp, game console and 4G LTE in 2H14. The

group topped 2Q14 guidance though has noted upward revisions to rolling forecasts now

moderating and stable the past month.

We still expect reasonable growth in 3Q14, with incremental momentum for ASE relative

to the group due to its 2H weighted SiP builds for fingerprint and wearables. ASE and

SPIL are gaining market share, with ASE adding fingerprint IC module assembly in 2H13

and one of Apple’s 3 processor back-end suppliers in 2014 and SPIL seeing two year

penetration into a major flip chip customer and having high of sales to China/Taiwan

fabless in low cost smartphones and tablets.

Figure 47: ASE and SPIL have gained market share Figure 48: Back-end trading above mid-cycle P/B

0.30

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TSMC UMC SMIC Vanguard ASE SPIL Amkor

Indexed Revenue

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SPIL PB premium ASE SPIL

PB (x) %


■ ASE supported by SiP project ramps. ASE 2Q14 ATM sales reached NT$29.3 bn,

+14.3% QoQ, above CS and guidance +10% QoQ, driven by communications and

IDMs. Due to tighter capacity (wirebond was at full 85-90% utilisation and FC/test at

80%), we recently raised our GM estimates from 20.3% to 21.2%, above

guidance/street of 20%. We also increase OpM from 11.1% to 12%, taking EPS from

NT$0.56 to NT$0.65, above street NT$0.59. 2Q14 consolidated sales came in line

with our estimates at NT$58.6bn, +7.2% QoQ, despite weaker USI, down 9.5% QoQ,

as the Apple-related ramp is more timed to 2H14.

We believe rolling forecasts are stabilising after several months of increases on

inventory restocking. Despite that, the company has good visibility for strength due to

Apple's refresh, ramp of LTE in China and better macro lifting broad based IDMs (30-

35% of sales). ASE noted at its AGM that it expects capacity full through 3Q14, driven

by good SiP momentum and recovery of output from K7. We model ASE IC ATM

3Q14 up high single digit QoQ and 4Q14 up low single QoQ and EMS could up

25/45% in 3Q14/4Q14.

■ SPIL revenue drivers shifting into 2H14. 2Q14 sales reached NT$21.9bn, +21.4%

QoQ, above guidance for +11-15% QoQ and CS/Street +13.5%. Better 2Q14 sales

were driven by strength from communications (Taiwan and overseas) with strong 3G &

4G baseband demand, China networking momentum due to 4G LTE build, and initial

pickup of Apple-related PMIC, while game console and PC were more mild. We

expect rotation of strength between SPIL's revenue drivers into 2H14. We expect pick-

up from overseas baseband, power mgmt. and game console and moderation in local

customers after the strong 1H14 ramp. We lift our 3Q13 sales from +5% QoQ to

15 July 2014


+7.5% QoQ and GMs from 25.1% to 27.2%. We now model 7% QoQ decline in 4Q14

after the strong momentum.

Figure 49: Credit Suisse and street expectations for 2Q14/3Q14/4Q14 and 2014/2015 In NT$ mn, unless otherwise stated

Back-end 2Q14 3Q14 4Q14 2014 2015


ASE Con. sales 58,616 57,947 66,202 67,532 78,347 75,453 257,865 256,225 292,368 293,437

Growth 7.2 5.9 12.9 15.2 18.3 11.7 17.3 16.5 13.4 13.8


ASE ATM sales 39,266 57,947 42,015 67,532 43,275 158,907 256,225 175,325 332,153

Growth 14.3% 5.9% 7.0% 15.2% 3.0% 10.9% 16.5% 10.3% 13.2%


GM% 26.7% 20.3% 27.7% 20.2% 28.3% 18.8% 26.8% 19.6% 26.9% 19.6%

OpM% 16.1% 10.7% 17.4% 11.2% 18.0% 10.4% 16.1% 10.5% 16.2% 10.5%

Net income 5,044 4,636 5,775 5,758 6,793 6,100 21,050 20,187 24,571 24,124

EPS (NT$) 0.65 0.60 0.74 0.74 0.87 0.78 2.70 2.58 3.15 3.05

SPIL sales 21,928 20,737 23,573 22,105 21,932 20,941 85,493 88,287 91,622 95,688

Growth 21.4% 14.8% 7.5% 0.8% -7.0% -5.3% 23.3% 36.6% 7.2% 8.4%


GM% 26.2% 24.5% 27.2% 25.0% 23.9% 23.7% 25.0% 24.1% 25.3% 23.6%

OpM% 18.1% 15.5% 19.6% 16.4% 15.6% 14.9% 16.8% 15.6% 17.0% 16.1%

Net income 3,367 2,749 3,869 2,989 2,902 2,571 12,229 11,303 13,156 12,538

EPS (NT$) 1.09 0.90 1.25 0.96 0.94 0.82 3.95 3.66 4.25 4.02

Powertech sales 10,580 10,308 11,109 10,992 11,109 10,413 42,024 41,162 45,190 44,803

Growth 14.7 11.7 5.0 3.9 0.0 -5.3 11.8 9.5 7.5 8.8


Net income 715 721 807 867 785 779 2,904 2,990 3,249 3,540

EPS (NT$) 0.94 0.90 1.06 1.11 1.03 0.99 3.80 3.71 4.25 4.29 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

■ Amkor also should match its Taiwan peers with upside. We expect AMKR to

report its 2Q14 revenue above CS/Street estimates of $762mn (+9.5% QoQ)/$761 mn

(+9.4% QoQ) and above the mid-point of the Company's guidance calling for $735 mn

to $785 mn (implies +5.6% to +12.8% QoQ) and above normal seasonal of up 8.4%

QoQ as we are seeing low supply chain inventory drive better restocking across most

of the upstream. Early 20nm strength could be an offsetting factor and drive above

expected growth into 2H14.

We expect AMKR to guide 3Q14 revenue in line with CS/Street estimates of $853 mn

(+12% QoQ)/$827 mn (+8.6% QoQ) – the five-year (excluding 2009) mean/median

sequential revenue growth rates are +4.5%/+4.5% QoQ in C3Q. We expect: (1) the

continued ramp of 20nm mobile design wins including AAPL, (2) the fingerprint design

win the company mentioned during its 4Q13 and 1Q14 earnings conference call (while

the company did not specify the exact details, we think leverage to Samsung's Galaxy

S5) to support the expected sequential growth during the Sep quarter.

■ Powertech upside in 2Q14, some growth drivers to continue in 2H14. Powertech

2Q14 sales reached NT$10.6 bn, +14.7% QoQ and above CS /Street of 12.0%/11.7%

QoQ growth, but in line with our latest expectations. We believe sales upside is

coming from commodity and mobile DRAM, with sales mix split pretty evenly with

DRAM and NAND each about 35% and logic 30%. We expect higher sales and rising

utilisation (assembly at 90%, test above 80%) to lift GM above company guidance for

15%+ and our 15.6%.

15 July 2014


We model +5% QoQ growth off the higher 2Q14 sales base in 3Q14. The company

has several growth drivers: (1) mobile DRAM ramping with flagship models, with

models converting from LPDDR2 to LPDDR3 also requiring high speed test, an area

of lower utilisation for Powertech, (2) GDDR5 output ramping up for the Sony game

console, (3) additional supply coming from late 3Q14 from Toshiba Fab 5 Phase 2, (4)

more product for eMC:DP/eMMC paired with Kingston, which is seeing 50% volume

growth in this area YoY, and (5) steady growth from Greatek and advanced logic

where the company has qualified US customer for bumping and a local Taiwan and

China fabless

Back-end sector fundamentals have been positive

though approaching a momentum peak

Back-end test and packaging suppliers ASE and SPIL have seen improving fundamentals

the past year as the sector stayed conservative on capex until recently, saw a margin uplift

from better costs, product mix and firming pricing and growth from incremental product

drivers. ASE and Amkor both have notable incremental growth driver from the fingerprint

sensor and Apple processor orders in 2014. SPIL also has another year of growth

penetrating an overseas mobile customer, a base station/baseband customer in China and

ramping full year of game console orders.

After strong outperformance, we would note potential for short-term corrections in the

stocks from reversals in order momentum triggered by seasonal build peak, inventory shift

from restocking to destocking and slowdown in equipment orders after the recent surge.

The back-end companies have noted a slowing of upward revisions, though with capacity

tight and some product drivers into 3Q14 are not seeing order cuts.

Back-end bookings may push past last year’s peak

levels

According to the Semi back-end book-to-bill data, industry equipment bookings for new

capacity through May have rebounded to last year’s booking peak of US$286mn/month

and also are approaching the average industry bookings levels where stock prices

traditionally have a cyclical peak. Due to better macro, stabilising PCs, Apple replacement

cycle and China LTE, bookings may ultimately pass last year’s highs as the industry

supply adds to meet the improving demand drivers. While rising inventory and capacity

additions are rising risks, next catalyst is still a likely beat and raise result for the company

and its upstream peers along with coming Apple product refresh, which could continue to

support the shares.

Figure 50: Back-end bookings close to last stock peak Figure 51: Back-end bookings close to last stock peak

Current Month May-14 Apr-14 MoM

Current bookings $286 $247 15.4%

Bookings vs. Hi/Lo/Avg Current Hi/Lo/Avg +/-

Bookings vs. last trough $286 $104 174.0%

Bookings vs. last peak $286 $288 -0.8%

Bookings vs. post crisis avg $286 $203 40.4%

Stock peak level ASE SPIL

Current bookings $286 $286

Last peak: $152 $200

Current to last peak: 88% 43%

Current bookings $286 $286

Average peak: $297 $308

Current to average peak: -4% -7% Source: Company data, Credit Suisse Source: Company data, Credit Suisse estimates

■ Aggressive Capex for the back-end and rising inventory pose risks later in the

year. ASE management noted potential to further raise capex from 1Q14's view of

US$900-950mn and will continue to invest next year. Although ASE still views semi

industry capacity expansion disciplined, we note that the 5 leading back-end players

have revised up Capex by 44% since the start of the year, taking full year capex +22%

YoY. A risk for the whole group is supply growth accelerates just as broader-based

inventory adjustments come in from late 3Q14 into 4Q14.

ASE and SPIL share

increasing and benefiting

from better supply control

and lower material costs

Industry equipment orders

are approaching cycle peak

15 July 2014


Figure 52: Back-end equipment orders rising in millions, unless otherwise stated

Figure 53: Back-end capex up 44% YTD and +22% YoY in US$ millions, unless otherwise stated

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Stock Price

BE Bookings ASE Stock Price SPIL Stock Price

Capex (US$mn) 2013 2014 orig 1Q14 view Current view YoY (%) Revision %

ASE $668 $700 $900-950 $1,000+ 50% 43%

SPIL $503 $323 $490 $600 19% 86%

Amkor $567 $450 $575 $575 1% 28%

Powertech $267 $233 $267-300 $267-300 6% 28%

King Yuan $166 $133 $167 $200 21% 50%

Total $2,171 $1,840 $2,465 $2,659 22% 44%

YoY (%) -15% 14% 22%

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

Profitability: GMs back to pre-crisis levels

The back-end has moved past its challenges with rising material costs from the increase in

gold price. SPIL saw the most notable drag since 2007 from the rise in gold price, but has

been progressively ramping up copper to over 70% of sales, with ASE over 60% due to

larger base of IDM business that are in less cost sensitive applications. The companies

have now eased burden of gold cost and improved mix of flip chip and test and used a

relatively sustained upturn for the past few years to restore margins.

Figure 54: ASE margins back to 2010 levels Figure 55: SPIL margins also on a rebounding trend

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Inventory needs to be monitored in the coming

months

Inventory rebuilt in 1Q14, with total tech inventory up 5 days to 42 days, above the normal

3 day build and 1 day above the 10-year average for 1Q. Semiconductor inventory also

built 4 days to 73 days, above the normal 2 days build and 72 day 10-year average for 1Q.

Excluding Intel, semiconductor days increased 6 days to 74 days, above the normal 4-day

build and historical average of 71 days. Our database of 90 Taiwan corporates showed an

increase from 35 days to 43 days, now 7 days above the 36-day average from 2005 to

2013. The Taiwan chain saw an inventory build across every sub-sector, with builds most

notable in handset related (+11 days QoQ), Hon Hai (+11 days QoQ), components (+9

days QoQ) and IC design (+18 days QoQ).

GM has improved as gold

costs drop

Inventory level rebuilding

15 July 2014


Figure 56: Taiwan inventory started to build in 1Q14 Figure 57: Fabless and Semis building inventory in 1Q14

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Fabless IDMs (hybrid) Foundry Customers Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

The over-build in upstream relative to downstream repeated in 2011, 2012 and 2013, with

foundry and back-end significantly outgrowing the downstream in 1H but correcting more

in 2H as noted by the table below. We note that upstream sales in 1Q14 declined only

4.3% vs 11% decline in downstream units, and guidance for 2Q14 reflects 17.1% growth

outpacing the 4.9% growth fo0072 downstream. We believe this trend is becoming an

increasingly seasonal event following robust guidance for the foundry and back-end,

potentially triggering another slowdown in orders later in 2H14.

Figure 58: Backend valuation comp Price Mkt Cap EV/Sales (x) EV/EBITDA (x) P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales)

Company Ticker 7/14/2014 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

Select backend peers

Amkor AMKR $11.11 $2,628 1.2 1.2 1.1 5.6 5.0 4.8 21.1 15.3 13.6 2.3 2.1 1.8 12.5 15.2 14.5

ASE 2311.TW $39.40 $10,147 1.6 1.3 1.1 7.3 6.3 5.5 17.2 14.6 12.5 2.5 2.3 2.1 14.4 15.5 16.6

SPIL 2325.TW $49.80 $5,131 2.3 1.9 1.7 8.2 5.8 5.2 22.9 12.6 11.7 2.5 2.2 2.1 10.9 17.4 18.0

Chipbond 6147.TWO $51.90 $1,104 2.4 2.1 1.7 7.4 6.1 5.0 12.6 13.4 10.2 1.4 1.5 1.4 11.4 11.0 13.5

ChipMOS 8150.TW $40.80 $1,175 1.6 1.4 1.3 5.8 4.7 4.1 14.8 12.3 12.0 2.2 2.0 1.8 15.0 16.2 15.4

Powertech 6239.TW $51.50 $1,319 1.1 0.9 0.8 3.1 2.9 2.5 -9.5 13.5 12.1 1.3 1.3 1.2 -14.0 9.4 10.1

Median 1.6 1.4 1.2 6.6 5.4 4.9 16.0 13.5 12.1 2.3 2.1 1.8 11.9 15.3 14.9

Mean 1.7 1.5 1.3 6.2 5.1 4.5 13.2 13.6 12.0 2.0 1.9 1.7 8.4 14.1 14.7 Source: Company data, Credit Suisse estimates

ASE: Sales upside lifts profitability even ahead of the

new projects

Earnings details: 30 July 2:00PM HK time

Figure 59: ASE 2Q14/3Q14/4Q14 CS estimates vs Street in millions, unless otherwise stated

2Q14 3Q14 4Q14

ATM USI CS Street Guidance ATM USI CS Street ATM USI CS Street

Sales 39,266 19,350 58,616 57,947 ATM: +10% 42,015 24,188 66,202 67,532 43,275 35,072 78,347 75,453

Chg (%) 14.3 -9.5 7.2 5.9 EMS: Flat to Down 7.0 25.0 12.9 15.2 3.0 45.0 18.3 11.7

GM (%) 26.7 9.9 21.2 20.3 Cons. GMs: >20% 27.7 7.7 20.4 20.2 28.3 7.5 19.0 18.8

OpM (%) 16.1 3.5 12.0 10.7 17.4 2.5 11.9 11.2 18.0 3.8 11.6 10.4

Net Inc. 5,044 542 5,044 4,636 5,775 483 5,775 5,758 6,793 1,074 6,793 6,100

EPS (NT$) 0.65 0.08 0.65 0.60 0.74 0.07 0.74 0.74 0.87 0.16 0.87 0.78


■ 2Q14 results positive ahead of a stronger 2H14. ASE 2Q14 ATM sales reached

NT$29.3bn, +14.3% QoQ, above CS and guidance +10% QoQ, driven by

communications and IDMs. Due to tighter capacity (wirebond was at full 85-90%

utilisation and FC/test at 80%), we recently raised our GM estimates from 20.3% to

21.2%, above guidance/street of 20%. We also increase OpM from 11.1% to 12%,

taking EPS from NT$0.56 to NT$0.65, above street NT$0.59. 2Q14 consolidated sales

came in in line with our estimates at NT$58.6bn, +7.2% QoQ, despite weaker USI,

down 9.5% QoQ, as the Apple-related ramp is more timed to 2H14. We believe ASE is

2Q14 IC ATM grew 14.3%

QoQ, above CS/guidance

for up 10% QoQ

15 July 2014


evaluating possibility to grow capex from current US$952 mn to US$1 bn for stronger

advanced packaging and SiP demand, though the company also noted stable order

forecast vs uptrend in previous months.

■ 2H14 growth driven by Comms and Apple-related. The company cited good

visibility through 3Q14 and also stays prudently positive on 4Q14, but will continue

monitor any signs of correction towards year end. ASE guided capacity utilisation full

through 3Q14, driven by good SiP momentum and recovery of output for its K7 plant.

We believe rolling forecasts are stabilising after several months of increases on

inventory restocking. Despite that, the company has good visibility for strength due to

Apple's refresh, ramp of LTE in China and better macro lifting broad based IDMs (30-

35% of sales). ASE noted at its AGM that it expects capacity full through 3Q14, driven

by good SiP momentum and recovery of output from K7. We model ASE IC ATM

3Q14 up high single digit QoQ and 4Q14 up low single QoQ and EMS could up

25/45% in 3Q14/4Q14.

Figure 60: SiP business adds an additional 20% growth to 2H14

Consolidated 1Q14 2Q14 3Q14 4Q14 2013 2014

Fingerprint units 13.2 16.7 38.9 71.1 39.7 139.9

Fingerprint ASPs $8.41 $8.15 $7.91 $7.67 $8.78 $7.86

NT$ $30.2 $30.2 $30.2 $30.2 $29.8 $30.2

Consolidated Sales $3,344 $4,103 $9,268 $16,453 $10,387 $33,168

COGS $2,942 $3,611 $8,156 $14,479 $9,141 $29,188

Gross Profit $401 $492 $1,112 $1,974 $1,246 $3,980

GM% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%

Benefit 1Q14 2Q14 3Q14 4Q14 2013 2014

Additional sales 6.4% 7.5% 16.3% 26.6% 4.9% 14.7%

Additional GP 4.1% 4.1% 9.0% 15.3% 3.0% 8.4%

GM dilution -0.4% -0.7% -1.4% -1.9% -0.4% -1.1% Source: Company data, Credit Suisse estimates

■ iPhone related contribution could drive 15-20% of ASE's 2H14. We believe ASE

has strong penetration for projects into the iPhone refresh in 2H14. We estimate close

to US$14 content per device from SiP module for fingerprint IC, Wifi module from the

EMS division and share of packaging for the major ICs (AP, baseband, connectivity,

sensors, and security)..

Figure 61: ASE iPhone-related contribution summary

ComponentChipset

ASP

Back-end

ASPASE share

ASE ASP

(US$)

SiP Module (Fingerprint) $8.0 $8.0 80% $6.4

Wifi Module (EMS) $3.0 $3.0 100% $3.0

Application processor $20.0 $1.2 30% $0.4

LTE Baseband $30.0 $2.1 50% $1.1

Connectivity $5.0 $1.0 40% $0.4

Memory (DRAM/NAND/Controller) $40.0 $4.0 10% $0.4

PA/Switch $10.0 $1.0 10% $0.1

Sensors (Accel, Compass, Gyro, Temp, Touch) $12.0 $2.4 40% $1.0

Analog $7.5 $1.9 20% $0.4

NFC $2.0 $0.6 50% $0.3

Sensor hub $2.5 $0.6 50% $0.3

Audio Codec $3.0 $0.6 20% $0.1

CMOS sensor $3.0 $1.2 0% $0.0

Major silicon content (US$): $143.0 $26.4 $13.8

3Q14 4Q14 Total

ASE sales

(US$mn)

Apple 4.7" (CS Garcha) 8.0 39.0 47.0 $647.5

Apple 5.5" (CS Garcha) 3.0 12.0 15.0 $206.7

IPhone related sales: $854.2

% of ASE 2H14: 17.7% Source: Company data, Credit Suisse estimates

15 July 2014


ASE still expects SiP to top 20% by 4Q14 even without additional wearable projects,

up from 6-7% in 2Q14. ASE will be one of the partners for the Apple AP – volume has

started this month but will see the bigger ramp in August. We believe ASE will do

fingerprint for both iPhone 6 and iPad and also likely the iWatch SiP. However,

camera module could be over-hyped, as ASE will only be a back-up for some CIS

packaging but premature for the iPhone camera module

■ Aggressive Capex for the back-end and rising inventory pose risks later in the

year. Management noted at its AGM potential to further raise capex from 1Q14's view

of US$900-950mn and will continue to invest next year, as ASE's utilisation stays full

and still sees good demand from smartphones, tablets and also wearables and IoT in

the future. Although ASE still views semi industry capacity expansion disciplined, we

note that the 5 leading back-end players have revised up Capex by 44% since the

start of the year, taking full year capex +22% YoY. A risk for the whole group is supply

growth accelerates just as broader-based inventory adjustments come in from late

3Q14 into 4Q14, though ASE gets some insulation ramping up SiP in 2H.

■ FCF improvement more moderate now with the Capex growth. Potential capex

increase could be supported by ASE's future growth drivers, including 1) 20nm

advanced packaging, 2) system level flip chip, 3) MEMS, and 4) SiP to drive growth in

the next 3-5 years. However, we note that if Capex grows from our current assumption

of US$952mn to US$1bn, FCF would decline from US$526mn to US$453mn for 2014

(5.5% FCF yield). We model ASE's 2015 Capex to stay around US$954mn. ASE is

also still relatively leveraged, as of 1Q14, ASE already had net debt of NT$46bn

though manageable 0.31 net debt/equity ratio particularly with potential to monetize

some of its US$5.1bn USI Shanghai stake starting next year. ASE’s NT$1.3 dividend

is in line with CS, implying 64% payout ratio and 3% yield.

■ Maintain OUTPERFORM. We recently raised our 2014/2015 EPS estimates from

NT$2.50/NT$2.80 to NT$2.70/NT$3.15 and our TP from NT$42 to NT$47, based on

2.5x forward P/B, implying 15x P/E, back to the levels it reached during the prior

upturns. We stay positive on reasonable valuation factoring in the USI ownership and

potential catalysts from upcoming results upside, SiP projects, Apple A8 back-end,

DRAM, and IDM recovery.

Figure 62: ASE 2014-2016 estimates summary

2014 2015 2016

ATM USI CS Street ATM USI CS Street ATM USI CS Street

Sales 158,907 99,985 257,865 256,225 175,325 117,044 292,368 293,437 192,678 129,713 322,392 332,153

Chg (%) 10.9 27.3 17.3 16.5 10.3 17.1 13.4 13.8 9.9 10.8 10.3 13.2

GM (%) 26.8 8.5 19.8 19.6 26.9 8.7 19.6 19.6 26.8 9.0 19.6 18.8

OpM (%) 16.1 3.4 11.3 10.5 16.2 4.2 11.4 10.5 16.2 4.4 11.4 10.6

Net Inc. 21,050 2,731 21,050 20,187 24,571 3,901 24,571 24,124 27,468 4,549 27,468 27,117

EPS (NT$) 2.70 0.41 2.70 2.58 3.15 0.59 3.15 3.05 3.53 0.68 3.53 3.44


Figure 63: FCF still better even on the higher capex Figure 64: ASE trading at 2.3x 2014 BV

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NT$ ASE Historical PB Band

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

15 July 2014


Exhibit 65: ASE operating metrics NT$ mn 1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E 2011 2012 2013 2014E 2015E 2016E 2017E

Revenue 31,317 36,295 37,810 37,900 34,351 39,266 42,015 43,275 127,623 130,007 143,322 158,907 175,325 192,678 210,819

QoQ/YoY % -9% 16% 4% 0% -9% 14% 7% 3% 2% 2% 10% 11% 10% 10% 9%

Gross profit 6,224 8,719 9,646 10,448 8,243 10,492 11,655 12,230 28,737 28,664 35,037 42,620 47,161 51,554 56,245

Gross Margin 19.9% 24.0% 25.5% 27.6% 24.0% 26.7% 27.7% 28.3% 22.5% 22.0% 24.4% 26.8% 26.9% 26.8% 26.7%

Operating profit 2,669 4,807 5,383 6,150 4,210 6,338 7,293 7,781 15,326 14,363 19,009 25,622 28,482 31,162 33,983

Operating Margin 8.5% 13.2% 14.2% 16.2% 12.3% 16.1% 17.4% 18.0% 12.0% 11.0% 13.3% 16.1% 16.2% 16.2% 16.1%

Capacity (000 bonders)

Wirebonder 15,559 15,565 15,765 15,692 15,375 15,387 15,498 15,509 13,846 15,549 15,692 15,509 16,202 17,501 18,372

Tester 2,945 3,057 3,147 3,227 3,265 3,405 3,465 3,495 2,585 2,905 3,227 3,495 3,915 4,395 4,950

Copper % of wirebond 60.0% 63.4% 64.0% 65.0% 65.0% 66.0% 67.0% 68.0% 31.8% 57.4% 63.1% 79.5% 79.8% 81.0% 83.9%

Capex (US$mn) 116 236 233 83 117 402 260 146 789 1,075 668 925 950 1,000 1,050

Capex/Sales 10.9% 19.4% 18.4% 6.4% 10.3% 30.9% 18.7% 10.2% 18.1% 24.3% 13.8% 17.3% 16.1% 15.4% 14.8%

Depreciation (US$mn) 193 194 192 201 193 190 202 208 692 705 779 794 864 885 852

Depr/Sales 18.1% 15.9% 15.1% 15.6% 17.0% 14.6% 14.5% 14.5% 15.9% 15.9% 16.1% 38.5% 2.6% 5.3% 5.0%

Utilization

Packaging 75% 83% 83% 80% 81% 87% 89% 88% 86% 80% 80% 86% 90% 91% 93%

Testing 75% 82% 79% 78% 71% 83% 87% 90% 80% 80% 79% 83% 85% 85% 85%

IDM % of mix 34% 34% 35% 34% 36% 37% 37% 38% 36% 34% 34% 37% 39% 41% 43%

Flip chip % of mix 26% 27% 28% 33% 27% 28% 30% 33% 19% 24% 29% 30% 31% 34% 36% Source: Company data, Credit Suisse estimates

SPIL: Strength continues into results, but cyclical

risks rising

Earnings details: 30 July 2:30PM HKT

Figure 66: SPIL 2Q14/3Q14/4Q14 and 2014-2016 CS estimates vs street

in millions, unless otherwise stated 2Q14 3Q14 4Q14 2014 2015 2016


Net sales 21,928 20,737 NT$20.1-20.8bn 23,573 22,105 21,932 20,941 85,493 88,287 91,622 95,688 98,583 93,712

QoQ (%) 21.4% 14.8% +11-15% QoQ 7.5% 0.8% -7.0% -5.3% 23.3% 36.6% 7.2% 8.4% 7.6% -2.1%

GM (%) 26.2% 24.5% 23.9-25.0% 27.2% 25.0% 23.9% 23.7% 25.0% 24.1% 25.3% 23.6% 25.5% 23.8%

OpM (%) 18.1% 15.5% 15.4-16.3% 19.6% 16.4% 15.6% 14.9% 16.8% 15.6% 17.0% 16.1% 17.2% 15.3%

Net income 3,367 2,749 3,869 2,989 2,902 2,571 12,229 11,303 13,156 12,538 14,246 11,772

EPS (NT$) 1.09 0.90 $0.87-$0.96 1.25 0.96 0.94 0.82 3.95 3.66 4.25 4.02 4.60 3.75ADR EPS

(US$) 0.18 0.15 0.21 0.16 0.16 0.14 0.64 0.62 0.68 0.68 0.74 0.63 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

■ 2Q14 sales beat on Comms strength and China networking build. SPIL 2Q14

sales reached NT$21.9 bn, +21.4% QoQ, above guidance for +11-15% QoQ and

CS/Street +13.5%. Better 2Q14 sales were driven by strength from communications

(Taiwan and overseas) with strong 3G & 4G baseband demand, China networking

momentum due to 4G LTE build, and initial pickup of Apple-related PMIC, while game

console and PC were more mild. SPIL expects FC CSP's revenue contribution to grow

>25% QoQ. On higher sales and higher flip chip mix, we raised GMs from 24.8% to

26.2% above 24-25% guidance, taking OpM from 16.2% to 18.1% vs 15-16%

guidance and EPS up from NT$0.91 to NT$1.09, above guidance of NT$0.87-0.96.

■ 2H14 mix shift towards US flip chip, PMIC and game console. We expect rotation

of strength between SPIL's revenue drivers into 2H14. We expect pick-up from

overseas baseband, power mgmt. and game console and moderation in local

customers after the strong 1H14 ramp. We lifted our 3Q13 sales from +5% QoQ to

+7.5% QoQ and GMs from 25.1% to 27.2%. We model 7% QoQ decline in 4Q14 after

the strong momentum.

2Q14 beat guidance, up

21.4% QoQ, above

guidance 11-15% QoQ

15 July 2014


■ Risks from slowing momentum, rising inventory and rising capex. We still see

positive momentum carrying into results season on earnings upgrades and also

upcoming Apple refresh and China LTE builds for the October holiday. Beyond that,

however, we monitor several cyclical risks due to inventory builds, rising capex and

slowing QoQ and YoY momentum through 1H15 off the higher base. We note back-

end capex has been revised up 44% and is now +22% YoY, indicating more supply

coming on as sequential momentum slows.

Figure 67: SPIL price vs inventory Figure 68: SPIL stock correlated with utilisation

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SPIL stock Assembly Utilization Test Utilization


■ We've held a positive view, but now upside growing more limited. We have held

positive view on SPIL due to good demand drivers, share gains, improving margins

from lower material costs and reasonable valuation. Following strong 2Q14 and some

different drivers into 3Q14, we took up our estimates and target slightly. Beyond that,

we monitor risk from rising inventory, rising back-end capex and valuation near prior

peak as opportunities to take profits.

Figure 69: SPIL trading at 2.2x P/B Figure 70: SPIL has outperformed TAIEX by 25% YTD

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NT$ SPIL Historical PB Band

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 TAIEX Average SPIL Average 2014 TAIEX

SPIL Indexed share price

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

■ Maintain OUTPERFORM, less upside after the run. We maintain OUTPERFORM

factoring in better 1H14 and recently lifted our TP from NT$54 to NT$56, based on

same 2.4x forward P/B, a level achieved in the '98, 00, 02, 04, 07 and 2010 up-cycles

and achievable with ROEs moving back to high teens and margins at post-crisis highs.

https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x569879&serialid=A68h%2fFitONomYcIfmst6K8RMO7cuhJOXOqfFQtshN88%3d

15 July 2014


Figure 71: SPIL operating metrics NT$ mn 1Q13 2Q13 3Q13 4Q13 1Q14E 2Q14E 3Q14E 4Q14E 2011 2012 2013E 2014E 2015E 2015E 2015E

Revenue 13,819 17,602 19,092 18,844 18,060 21,928 23,573 21,932 61,237 64,655 69,356 85,493 91,622 98,583 ######

QoQ/YoY % -14% 27% 8% -1% -4% 21% 8% -7% -4% 6% 7% 23% 7% 8% 8%

Gross profit 2,017 3,676 4,417 4,320 3,995 5,734 6,408 5,242 9,490 11,777 14,429 21,379 23,184 25,138 27,614

Gross Margin 14.6% 20.9% 23.1% 22.9% 22.1% 26.2% 27.2% 23.9% 15.5% 18.2% 20.8% 25.0% 25.3% 25.5% 26.0%

Operating profit 637 1,896 2,758 2,646 2,392 3,972 4,609 3,430 5,090 6,446 7,937 14,402 15,607 16,936 18,717

Operating Margin 4.6% 10.8% 14.4% 14.0% 13.2% 18.1% 19.6% 15.6% 8.3% 10.0% 11.4% 16.8% 17.0% 17.2% 17.6%

Capacity (0000 bonders)

Wirebonders 7,805 7,893 7,903 7,541 7,326 7,539 7,751 7,812 6,405 7,805 7,805 7,326 7,943 8,281 8,532

Testers 403 409 419 417 431 481 538 545 334 407 417 545 579 637 684

Copper % of wirebond 64.4% 70.6% 72.6% 74.6% 75.1% 75.6% 76.1% 76.6% 26.7% 49.9% 70.6% 75.9% 77.9% 78.4% 78.9%

Capex (US$mn) 101 151 171 80 99 201 214 84 374 512 503 599 510 517 522

Capex/Revenue 21.8% 25.5% 26.8% 12.5% 16.7% 27.5% 27.2% 11.5% 17.9% 23.4% 21.6% 21.1% 16.7% 15.7% 14.7%

Depreciation (US$mn) 86 87 90 95 94 101 105 111 318 330 358 411 471 509 509

Depr/Sales 18.5% 14.8% 14.1% 14.9% 15.8% 13.8% 13.4% 15.1% 15.2% 15.1% 15.4% 14.4% 15.4% 15.5% 14.4%

Utilisation

Packaging 78% 98% 95% 80% 76% 93% 96% 89% 90% 96% 88% 89% 89% 92% 94%

Testing 68% 80% 91% 95% 86% 97% 94% 87% 71% 77% 83% 91% 89% 90% 94%

IDM % of mix 6% 6% 5% 6% 5% 5% 5% 5% 13% 10% 6% 4% 4% 4% 3%

Bumping & FCBGA 26% 28% 31% 38% 39% 40% 41% 42% 20% 24% 31% 40% 44% 47% 50% Source: Company data, Credit Suisse estimates

Powertech: Better memory trends keep the business

on track for improvement


Figure 72: Powertech 2Q14/3Q14/4Q14 estimates vs Street summary In NT$ mn, unless otherwise stated

2Q14 3Q14 4Q14 2014 2015 2016


Sales 10,580 10,330 Up >10% QoQ 11,109 11,001 11,109 10,427 42,024 41,259 45,190 44,968 48,920 46,575

Chg (%) 14.7 12.0 5.0 4.0 0.0 -5.2 11.8 9.7 7.5 9.0 8.3 3.6

GM (%) 16.0 16.3 ~15%+ 16.4 17.4 16.2 16.7 15.7 16.2 16.4 16.4 16.3 NM

OpM (%) 10.3 10.3 10.7 11.2 10.5 10.6 9.9 10.2 10.6 11.3 10.6 11.3

Net Inc. 715 731 807 869 785 779 2,904 3,021 3,249 3,564 3,593 3,386

EPS (NT$) 0.94 0.93 1.06 1.11 1.03 0.99 3.80 3.75 4.25 4.32 4.70 4.08


■ 2Q14 sales upside in line with latest expectations. Powertech 2Q14 sales reached

NT$10.6bn, +14.7% QoQ and above CS /Street of 12.0%/11.7% QoQ growth, but in

line with our latest expectations. We believe sales upside is coming from commodity

and mobile DRAM, with sales mix split pretty evenly with DRAM and NAND each

about 35% and logic 30%. We expect higher sales and rising utilisation (assembly at

90%, test above 80%) to lift GM above company guidance for 15%+ and our 15.6%.

We revise estimates to factor better 2Q14 sales, lift GMs from 15.6% to 16% and OpM

from 9.8% to 10.3%, taking EPS from NT$0.85 to NT$0.94. We note that 2Q14 GM

could still have room for even more upside to our estimates on the higher utilisation.

■ 2H14 should have more growth off the higher base. We model +5% QoQ growth

off the higher 2Q14 sales base. The company has several growth drivers: (1) mobile

DRAM ramping with flagship models, with models converting from LPDDR2 to

LPDDR3 also requiring high speed test, an area of lower utilisation for Powertech, (2)

GDDR5 output ramping up for the Sony game console, (3) additional supply coming

from late 3Q14 from Toshiba Fab 5 Phase 2, (4) more product for eMC:DP/eMMC

paired with Kingston, which is seeing 50% volume growth in this area YoY, and (5)

steady growth from Greatek and advanced logic where the company has qualified US

customer for bumping and a local Taiwan and China fabless

Powertech 2Q14 sales

above +15% QoQ, GM

should follow

15 July 2014


Figure 73: Powertech margins stabilising at a lower level

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■ Commodity exposure down, though still a risk to monitor. Powertech has reduced

commodity DRAM test from 80% to 15% of sales the past 5 years but still supplies the

Micron camp for most of that stream. We expect Micron would move some test to its

Xian facility next year on 20nm though could still use its outsource partners for

assembly, keeping business with Powertech and competitors ChipMOS, ASE and

Walton. Powertech may keep most of its mobile DRAM but could face some risk on

the commodity test portion. We would monitor the development for 2015 but expect

2014 share to stay stable among the industry players.

Figure 74: Commodity DRAM revenue coming down Figure 75: Powertech working on growing logic

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Commodity DRAM Mobile DRAM NANDGreatek Advanced Logic

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Advanced Logic Greatek NAND Mobile DRAM Commodity DRAM Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

■ Maintain OUTPERFORM with valuation reasonable. We recently raised our

2014/2015/2016 EPS from NT$3.50/NT$4.00/NT$4.50 to NT$3.80/NT$4.25/NT$4.70

and also lift our TP from NT$59 to NT$63, using 1.5x P/B, midpoint the post crisis

range, with additional upside possible from operating leverage or scale in the logic

business. With operating cash flow at NT$11 bn per year vs capex of NT$8 bn, the

company is generating over NT$4 per share in free cash flow (8% free cash flow

yield), still enough to maintain 70% dividend payout to fund its NT$2 cash dividend

(3.8% yield). Powertech is still at reasonable valuation at 1.3x P/B vs 1.0-3.0x range

and business improving this year and driving some return of earnings upgrades.

Still monitoring the

commodity risk in 2015

15 July 2014


Figure 76: Powertech still trading near trough at 1.3x P/B Figure 77: Powertech FCF yield near 8% and rising

1x

1.5x

2x

2.8x

5

25

45

65

85

105

Apr/03 Jul/04 Oct/05 Jan/07 Apr/08 Jul/09 Oct/10 Jan/12 Apr/13 Jul/14

NT$Powertech historical PB band

-10%

0%

10%

20%

30%

40%

0

4,000

8,000

12,000

16,000

20,000

CY

05

CY

06

CY

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CY

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11

CY

12

CY

13

CY

14

CY

15

Op Cash Flow Capex FCF Yield

Dividend Yield Linear (FCF Yield)

Op CF / Capex (NT$mn) Dividend / FCF Yield (%)


ASM Pacific: LED/Back-end capex revisions to lift the

company's results and outlook


Figure 78: ASM 2Q14/3Q14 and 2014/2015 estimates revisions vs Street summary in HK$ millions, unless otherwise stated ASM Pacific Jun-14E Sep-14E 2014E 2015E 2016E

CS CS Orig. Cons Guidance CS CS Orig. Cons CS CS Orig. Cons CS CS Orig. Cons

Revenue $3,299.7 $3,133.8 $3,314.3 Mod. Double Digit $3,657.1 $3,542.7 $3,641.3 $12,924.6 $12,535.5 $12,994.5 $14,373.9 $13,922.4 $14,428.3

% Q/Q chng 32.3% 25.7% 32.9% YoY Growth 10.8% 13.0% 10.4%

% Y/Y chng 15.8% 10.0% 16.3% 17.9% 14.2% 17.4% 19.2% 15.6% 19.9% 11.2% 11.1% 11.0%

Gross Margin 35.5% 34.3% 35.0% Profitability up 37.6% 35.9% 36.2% 34.9% 34.0% 34.3% 34.2% 33.4% 35.0%

R&D Expense $244.9 $245 $254.6 $255 $984 $984 $991 $991

SG&A Expense $382.8 $383 $398.1 $398 $1,539 $1,539 $1,550 $1,550

Op. Expenses $627.6 $628 $652.7 $653 $2,523 $2,523 $2,541 $2,541

Op Margin 16.4% 14.2% 13.4% 19.8% 17.5% 14.9% 15.4% 13.9% 14.2% 16.5% 15.1% 15.4%

Net Income (PF) $439.8 $360.4 $364.3 $588.2 $502.0 $441.0 $1,601.3 $1,401.9 $1,552.0 $1,923.2 $1,704.5 $1,869.5

Net Margin 13.3% 11.5% 11.0% 16.1% 14.2% 12.1% 12.4% 11.2% 11.9% 13.4% 12.2% 13.0%

GAAP EPS $1.10 $0.90 $0.88 $1.47 $1.25 $1.07 $4.00 $3.50 $3.83 $4.80 $4.25 $4.59

Diluted shares 400.6 400.6 400.6 400.6 400.6 400.6 400.6 400.6 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

■ 2Q14 tracking to upside. ASM guided 2Q14 to grow double digits YoY, driven by

strength across lead frame, back-end and SMT. We raise our estimate from

HK$3,114mn, +26% QoQ and +10% YoY to HK$3,300 bn, +32% QoQ and +16%

YoY, vs street +32.9% QoQ and +16.3% YoY but consistent with management tone to

grow moderate double digits YoY. On better sales we also revise up GM from 34.3%

to 35.5%, vs street 35%.

Figure 79: Assembly & packaging up to 51% of sales Figure 80: ASM sales trend by product

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mar-0

7

Se

p-0

7

Mar-0

8

Se

p-0

8

Mar-0

9

Se

p-0

9

Mar-1

0

Se

p-1

0

Mar-1

1

Se

p-1

1

Mar-1

2

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p-1

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3

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Se

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4E

Assembly and Packaging Lead frame Surface mount technology

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Mar-0

7

Sep-0

7

Mar-0

8

Sep-0

8

Mar-0

9

Sep-0

9

Mar-1

0

Sep-1

0

Mar-1

1

Sep-1

1

Mar-1

2

Sep-1

2

Mar-1

3

Sep-1

3

Mar-1

4E

Sep-1

4E

Sales: HK$mn

Assembly and Packaging Lead frame Surface mount technology Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

We take up our OpM estimates from 14.2% to 16.4%, vs street 13.4% on operating

leverage after the company's transition to a more flexible model to outsource more

15 July 2014


and replace departed full-time workers with contract workers. ASM Pacific also has

good market share of 22% in its addressable took market.

■ 3Q14 outlook supported by the DEK acquisition. We model +11% QoQ growth off

higher base in 3Q14, lifting GMs to 37.6% and OpM to 19.8%. The company should

benefit from the rising bookings in 2Q14 across LED and back-end, with industry back-

end orders now at last year's highs but likely pushing a bit higher. The company

announced completion of its DEK acquisition on 3 July. It expects the DEK business to

contribute to higher SMT segment growth, as DEK has recent run rate around US$35-

40 mn/quarter (incremental 6% of sales) at 35% GMs and 10% OpMs but peak run

rate of $70mn quarter and original margin structure closer to 40% GMs and 20%

OpMs. The company should get synergies from the product as the DEK product line

adds the screen printer, a process step that directs solder paste placement on a PCB

board and complements its strong existing position in pick and place machines. The

company will also develop an intermediate solder paste inspection tool to offer an end

to end product suite for more synergies.

Figure 81: ASM long-term revenue by segment vs gross

margins trends

Figure 82: Backlog as an early indicator of forward sales

15%

20%

25%

30%

35%

40%

45%

50%

55%

0

500

1,000

1,500

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4,000

Mar-0

7

Se

p-0

7

Mar-0

8

Se

p-0

8

Mar-0

9

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p-0

9

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0

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p-1

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p-1

1

Mar-1

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p-1

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3

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p-1

3

Mar-1

4

Se

p-1

4E

GM (%)

Surface mount technology Lead frameAssembly and Packaging Back-end GMSMT GM Total GM

Sales (US$mn)

0%

20%

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60%

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100%

120%

140%

160%

180%

$0

$75

$150

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Ma

r-0

7Jun-0

7S

ep-0

7D

ec-0

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ar-

08

Jun-0

8S

ep-0

8D

ec-0

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ar-

09

Jun-0

9S

ep-0

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ar-

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Jun-1

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ar-

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ec-1

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ar-

14

Backlog Forward Qtr Sales Backlog % of forward qtr sales

Backlog as % of forward salesBacklog / Forward Sales (US$mn)

Average: 96%


■ Industry bookings approaching last peak. ASM stock traditionally peaks ahead of

industry bookings peak and as of May, industry bookings had reached last year's

peak. However, we note that continued upward Capex revision from back-end

customers YTD could support a higher peak as the industry catches up from low

investment the past couple years and the LED market also resumes capex. ASM

Pacific saw strong bookings momentum for its back-end and SMT business in 1Q14,

up 54% and 34% QoQ respectively as the industry cyclically rebounds from 4Q13 lows

following the industry inventory correction. The company's book:bill ratio recovered to

1.26 and lifted backlog 33% to US$341mn, pointing to good growth into 2Q14.

Figure 83: ASM stock peaking ahead of bookings peak Figure 84: ASM book-to-bill improving across segments

0

75

150

225

300

375

450

0

25

50

75

100

125

150

Jan

-01

Se

p-0

1

Ma

y-0

2

Jan

-03

Se

p-0

3

Ma

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4

Jan

-05

Se

p-0

5

Ma

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6

Jan

-07

Se

p-0

7

Ma

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8

Jan

-09

Se

p-0

9

Ma

y-1

0

Jan

-11

Se

p-1

1

Ma

y-1

2

Jan

-13

Se

p-1

3

Ma

y-1

4

Equipment Bookings (US$ mn)

Stock Price

BE Bookings ASM Pacific Stock Price

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

0

100

200

300

400

500

600

Ma

r-0

7Jun-0

7S

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08

Jun-0

8S

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ec-0

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ar-

09

Jun-0

9S

ep-0

9D

ec-0

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ar-

10

Jun-1

0S

ep-1

0D

ec-1

0M

ar-

11

Jun-1

1S

ep-1

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ar-

12

Jun-1

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ar-

13

Jun-1

3S

ep-1

3D

ec-1

3M

ar-

14

Bookings Billings B:Bill

Book to Bill RatioBookings / Billings (US$mn)

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

Expect low teens QoQ

growth in 3Q14

http://www.asmpacific.com/asmpt/images/press%20release_20140703_e_vc.pdf

15 July 2014


■ Raising estimates, maintain OUTPERFORM ahead of results. We raise our

2014/2015E sales from HK$12,536 mn/HK$13,922 mn to HK$12,925mn/HK$14,374

mn and EPS from HK$3.50/HK$4.25 to HK$4.00/HK$4.80, slightly above street EPS

of HK$3.83/HK$4.59 respectively. With the industry still recovering and management

taking strides to improve profitability, maintain our target at HK$97, reflecting 5x

forward P/B, midpoint of its broad trading range of 3-7x P/B. The stock traditionally has

maintained a high multiple during periods of improving sales and margins though we

would acknowledge some risk later in the year from the shortening industry cycles in

electronics, as orders should seasonally decelerate by 3Q14. ASM is currently trading

at 4.6x/4.3x 2014/2015 P/B and 24.1x/19.8x 2014/2015 P/E.

Figure 85: ASM Pacific P/E - trading at 24x 2014E EPS Figure 86: ASM Pacific P/B – trading at 4.6x 2014E P/B

10.5x

20x

40x

60x

0

50

100

150

200

250

300

350

400

450

Jan

-03

Se

p-0

3

Ma

y-0

4

Jan

-05

Se

p-0

5

Ma

y-0

6

Jan

-07

Se

p-0

7

Ma

y-0

8

Jan

-09

Se

p-0

9

Ma

y-1

0

Jan

-11

Se

p-1

1

Ma

y-1

2

Jan

-13

Se

p-1

3

Ma

y-1

4

(NT$)

2.5x

3.8x

5.0x

7.0x

0102030405060708090

100110120130

Jan

-03

Sep

-03

May-0

4

Jan

-05

Sep

-05

May-0

6

Jan

-07

Sep

-07

May-0

8

Jan

-09

Sep

-09

May-1

0

Jan

-11

Sep

-11

May-1

2

Jan

-13

Sep

-13

May-1

4

(NT$)

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

Amkor: IPhone 6 and emerging market smartphone

strength to drive beat and raise quarter

Earnings details: TBD

Figure 87: AMKR summary of expectations US$ in millions, unless otherwise stated

AMKR Mar-14

Reported CS Cons Guidance CS Cons CS Cons CS Cons

Total Revenue $696.0 $762.0 $761.4 $735-785m $853.4 $826.7 $3,139.3 $3,124.2 $3,332.3 $3,329.1

% Q/Q chng -7.8% 9.5% 9.4% 12.0% 8.6%

% Y/Y chng 1.2% 2.1% 2.1% 11.1% 7.6% 6.2% 5.7% 6.1% 6.6%

Total GM* 18.5% 20.1% 18-21% 22.6% 20.8% 21.1%

R&D Expense* $21.0 $21.7 $21.5 $85.6 $88.9

SG&A Expense* $62.4 $64.4 $63.7 $253.9 $265.0

Operating Exp.* $83.5 $86.1 $85.1 $339.5 $353.8

Operating Mgin* 6.5% 8.8% 7.9% 12.6% 9.7% 9.9% 10.5%

Net Income* $20.6 $32.9 $64.8 $171.2 $192.1

Net Margin* 3.0% 0.0% 7.6% 5.5% 5.8%

EPS* $0.09 $0.14 $0.15 $0.08 to $0.18 $0.28 $0.24 $0.73 $0.70 $0.82 $0.87

Fully diluted shares 235.5 235.5 235.5 235.5 235.5

Sep-14Jun-14 F2014E F2015E

Source: Thomson One, Company data, Credit Suisse estimates

15 July 2014


AMKR: Recap of recent stock performance

Exhibit 88: AMKR absolute price Exhibit 89: LTM performance vs SOXX vs SPX

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

$10.0

$11.0

$12.0

$13.0

Jun-1

3

Jul-

13

Au

g-1

3

Se

p-1

3

Oct

-13

Nov-

13

Dec-

13

Jan

-14

Fe

b-1

4

Ma

r-1

4

Ap

r-14

Ma

y-14

Jun

-14

AMKR 50DMA 200DMA

0.75x

1.00x

1.25x

1.50x

1.75x

2.00x

2.25x

2.50x

Jun

-13

Jul-

13

Aug

-13

Se

p-1

3

Oct

-13

Nov

-13

Dec

-13

Jan

-14

Fe

b-1

4

Ma

r-1

4

Ap

r-14

Ma

y-14

Jun

-14

AMKR vs. SOXX AMKR vs. S&P 500

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

■ Expect 2Q14 (JunQ) results in line with CS/Street estimates. We expect AMKR to

report its 2Q14 revenue above CS/Street estimates of $762mn (+9.5% QoQ)/$761 mn

(+9.4% QoQ) and above the mid-point of the Company's guidance calling for $735 mn

to $785 mn (implies +5.6% to +12.8% QoQ) and above normal seasonal of up 8.4%

QoQ as we are seeing low supply chain inventory drive better restocking across most

of the upstream. While AMKR's exposure to Asian fabless Semiconductor companies

is relatively low (Asian semi are <5% of revenue for AMKR versus >15% for peers)

which could potentially result in lower than peer growth, early 20nm strength could be

an offsetting factor and drive above expected growth into 2H14. We would also point

out TSMC's June quarter revenue is tracking to the high end of guidance of +21.4-

23.5% QoQ. We currently model GM of 20.1% (+160 bp QoQ), above the mid-point of

the Company's guidance calling for 18% to 21%. We currently model OpEx of $86.1

mn (+3.2% QoQ). We expect that higher revenues can drive EPS above CS/Street

estimate of $0.14/0.15.

■ Expect 3Q14 (SepQ) guidance in line with CS/Street estimates. We expect AMKR

to guide 3Q14 revenue in line with CS/Street estimates of $853 mn (+12% QoQ)/$827

mn (+8.6% QoQ) – the five-year (excluding 2009) mean/median sequential revenue

growth rates are +4.5%/+4.5% QoQ in C3Q. We expect: (1) the continued ramp of

20nm mobile design wins including AAPL, (2) the fingerprint design win the company

mentioned during its 4Q13 and 1Q14 earnings conference call (while the Company did

not specify the exact details, we think leverage to Samsung's Galaxy S5) to support

the expected sequential growth during the Sep quarter. We currently model GM of

22.6% (+250 bp QoQ) driven by the expected sequential revenue growth with an

implied incremental GM of 43%, in line with historical patterns. We currently model

OpEx of $86.1 mn (-1.1% QoQ) driving our EPS estimate of $0.28 – Street is currently

modelling EPS of $0.24.

■ 2014 Outlook. AMKR continues its focus to emphasize increasing exposure/leverage

to fabless Chinese and Taiwanese players (1 fab in China and 3 fabs in Taiwan) – the

Company indicated that while the current exposure is limited to 1-2% of total revenue,

it hopes to achieve 2-3x 2013 sales level in 2014. In addition, AMKR is focusing on

improving mainstream packaging with its power discrete and J-Devices higher focus

on stable growth areas in Auto. In MarQ call, management also indicated its

increasing focus to penetrate the Analog space and is hoping to penetrate a wider

customer base in 2014. Relative to financials, AMKR expects (1) a sequential growth

in C3Q14 and now targets growth over the Semi industry, (2) GM to continue to

improve and reach low 20% GM in C2H14, (3) quarterly OpEx in the range of ~$85m

and (4) a tax rate of roughly 22% for the year, down from the original 27% projection.

CapEx was also raised from $450m to $575m to support communications ramps, with

~50% for advanced, ~30% mainstream, ~10% infrastructure and ~10% for R&D

15 July 2014


(largely 2.5-D and 3-D). We are modeling CY14 revenues of $3.94 bn (up 6.2%

YoY)/$0.73 vs Street at $3.12 bn (up 5.7% YoY)/$0.70. We expect GM of 20.8% (up

200 bp YoY) and Opex of $340 mn (up 8.6% YoY).

■ 20nm commentary is supportive of AAPL's expected product refreshes in

C2H14. AMKR's commentary indicating 20nm revenue ramping in C1H14 is

supportive of AAPL's expected product refreshes in C2H14. AMKR has stated that the

Company is working closely with multiple customers on high-volume 20nm designs

and is observing good yields – AMKR also believes that it will observe meaningful

revenue ramp from new products during C2H14 – all of these comments are

consistent with the expected ramp for AAPL's 20nm products. We believe Amkor

would be one of 3 suppliers for the Apple processor orders as it shifts from Samsung

to TSMC starting from 2Q14. The revenue opportunity may stay somewhat moderate

as we believe TSMC would retain bumping and Apple may consign its own substrates.

Based on remaining revenue for flip chip and test, we project Apple could add 4-5% of

sales once fully ramped.

Exhibit 90: AMKR AAPL opportunity

Back-end opportunity 2009 2010 2011 2012 2013 2014 2015

Apple processor units (mn) 46.4 87.3 153.2 219.8 239.3 230.7 227.1

Flip chip (US$) $1.0 $1.0 $0.9 $0.9 $0.8 $0.8 $0.7

Flip chip sales (US$mn) $46 $83 $138 $188 $195 $179 $167

Wafers (000) 56.8 106.9 327.2 586.9 585.8 565.6 556.5

Bumping ($/wafer) $400.0 $384.0 $368.6 $353.9 $339.7 $326.1 $313.1

Bumping sales (US$mn) $23 $41 $121 $208 $199 $184 $174

Testing/unit (US$) $0.50 $0.48 $0.45 $0.43 $0.41 $0.39 $0.37

Test sales (US$) $23 $41 $69 $94 $97 $89 $83

Apple back-end opportunity: $92 $165 $328 $490 $491 $452 $425

ASE share: 0% 0% 0% 0% 0% 25% 40%

Amkor Apple opportunity: $0 $0 $0 $0 $0 $113 $170

% of Amkor sales 0.0% 0.0% 0.0% 0.0% 0.0% 3.6% 5.2%

Amkor sales $2,179 $2,939 $2,776 $2,760 $2,956 $3,123 $3,261 Source: Company data, Credit Suisse estimates

■ QCOM share loss could impact 2014. QCOM is AMKR's largest customer and

represented 20-25% of revenue in 2013. We estimate that AMKR had a 33-35%

market share of QCOM's Assembly and Test business. In addition to AMKR, ASE and

Stats ChipPAC were the other major OSAT suppliers for QCOM in 2012, but QCOM

has recently started to ramp production at SPIL. We believe that this will result in

approximately a 7% market share loss for AMKR, implying that even with

approximately a 10% growth in packaging services for QCOM, AMKR's revenue from

QCOM can potentially decline in 2014 by approximately $100m.

■ Outlook drivers. Amkor expects to outpace the semiconductor industry growth rate,

which CS now estimates at +8% YoY and industry forecasts have in the 5-8% YoY

range. Amkor has several key drivers: (1) 20nm production ramp of high-end

application processor for Apple and, (2) seasonal ramp by its largest customer

Qualcomm, with Snapdragon 800 leading the high-end and first wave of China LTE

launching, (3) ramp of fingerprint IC packaging, an upside driver through 1H14, (4)

addition of low cost Asian smartphone customers (from 1-2% of sales now to 3%+

exiting 2014, (5) memory growth from Toshiba NAND/Mobile DRAM (+10% YoY to

US$330m), and (6) better utilisation of analog and power discrete assets. As one

offset, we believe Qualcomm is still ramping up its fourth source in SPIL this year and

Amkor still remains a bit under-exposed to Taiwan/China despite recent new design

win and focus on this area. We believe Amkor would be one of 3 suppliers for the

Apple processor orders as it shifts from Samsung to TSMC starting from 2Q14. The

revenue opportunity may stay somewhat moderate as we believe TSMC would retain

bumping and Apple may consign its own substrates. Based on remaining revenue for

flip chip and test, we project Apple could add up to 5% of sales once fully ramped.

15 July 2014


■ Investment view and valuation. AMKR is a technology leader in packaging and has

the highest exposure among OSAT’s to flip chip and Wafer-level Packaging (43% of

revenue from advanced packaging versus 25-30% for ASE and SPIL) – we think this

will help the company improve its sales and margin outlook as the packaging industry

transitions from wirebonding to advanced packaging. AMKR is also increasing its

focus on gaining market share at Asian chip companies which serve the low/mid end

smartphone markets and are moving to more advanced packaging and adding new

supply sources as they grow. At the same time, execution on mainstream products is

improving by shifting to add more automotive business and pull in IDM acquisitions

including J-Devices and Toshiba's Malaysia discrete facility.

AMKR’s high exposure to high-end smartphone segment is a concern, but AAPL

20nm ramp provides an incremental opportunity for revenue growth at the high end

from 2Q14. AAPL could add revenue of ~$120 mn in 2014 and ~$175 mn in 2015. Our

2014 revenue estimate includes ~$160 mn of revenue arising from the Discrete Power

business acquisition but factoring approximately a $100 mn drag to reflect QCOM

diversifying to SPIL. Our TP of $8.40 represents 2x of BV, 4x EV/EBITDA, 11.5x

2014E EPS and 10.0x 2015E EPS.

Exhibit 91: P/BV: AMKR cheap vs historical levels Exhibit 92: EV/EBITDA: AMKR cheap vs historical levels

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

P/BV

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

EV/EBITDA

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

15 July 2014


IC-Design: Weathering the 3G to 4G transition Figure 93: Credit Suisse versus street estimates for IC Design In NT$ mn, unless otherwise stated

IC design 2Q14 3Q14 4Q14 2014 2015


MediaTek sales 54,133 52,787 57,682 56,635 51,538 53,792 209,358 208,360 231,117 237,073

Growth 17.7 14.7 6.6 4.6 -10.7 -5.0 53.9 53.1 10.4 13.8


Net income 12,509 11,831 13,679 13,027 10,325 11,917 46,307 46,694 51,535 51,737

EPS (NT$) 8.01 7.65 8.76 8.45 6.61 7.71 30.00 30.13 33.00 32.83

Realtek sales 8,045 7,776 8,293 8,105 7,485 7,800 31,156 30,882 32,659 32,062

Growth 9.7 6.5 3.1 4.2 -9.7 -3.8 10.6 9.6 4.8 3.8

Operating Profit 831 804 418 2,846 3,045 3,045

Net income 863 815 848 832 500 781 3,031 3,160 3,200 2,941

EPS (NT$) 1.71 1.61 1.68 1.63 0.99 1.48 6.00 6.47 6.34 5.90

WPG sales 109,799 111,298 119,132 120,885 111,388 115,492 442,648 448,186 480,147 480,852

Growth 7.3 8.8 8.5 10.1 -6.5 -4.5 9.0 10.3 8.5 7.3


Net income 1,498 1,414 1,576 1,634 1,186 1,453 5,656 5,722 6,378 6,536

EPS (NT$) 0.90 0.86 0.95 0.98 0.72 0.87 3.42 3.42 3.85 3.85 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

IC design had a solid 2Q14 driven by China brand export demand and octa-core growth

and upside for PC and consumer. Off a better 1H14, we expect guidance to be up a

moderate mid-high single digits QoQ into the peak season, near current street estimates

but below traditional 10-30% QoQ strength. We view Mediatek still weathering the 3G to

4G transition due to strength of export shipments, short gap to peers launching LTE SoCs

in 2H14 and less impact this transition from the China IC vendors. We also expect a

decent outlook for Realtek and WPG into high season demand.

■ Mediatek 2Q14 at the upper half of guidance, 3Q14 supported by reasonable

expectations. 2Q14 sales came in at NT$54.1 bn, +17.7% QoQ, reaching the upper

end of guidance of +12-20% QoQ, but slightly below CS' original +20.5% QoQ due to

faster 4G LTE transition in China at the expense of TD-SCDMA. 2Q14 growth has

been led by export 3G share gains and continued growth of octa-core in the mix to

take smartphone units to ~88 mn. Mediatek should enter high season in 3Q14, with a

faster pick-up in August as export market returns to normal seasonal peak. We model in

LTE ramping up to 5 mn units out of 97 mn units. Our 3Q14 sales growth now implies

+6.6% QoQ vs street +4.6% QoQ with flat to slightly down GMs at 48.5% as octa-core

price declines and LTE ramps, though OpM stays steady at 24.7% and EPS at NT$8.76.

Mediatek remains on track to 15mn LTE shipment guidance with high-end 6595

launching today July 15th and SoC on track for 4Q14 volume.

■ Realtek rebound as mature PC products, audio codec and TVs coming back on

share gains. Realtek June sales declined 3.1% MoM to NT$2.45bn, taking 2Q14 to

grow 10.2% QoQ, in line with CS 9.8% QoQ and company guidance for growth across

communications networks, computer peripheral and multimedia. 2Q14 sales were

mainly driven by PC as market stabilises and Realtek gains share since competitors

(Atheros, Broadcom) exit mature products (10/100, HD audio codec and Gigabyte

NIC). Other areas of growth include Internet (gigabyte Ethernet switch, ASDL, router,

card reader) and some Audio for consumer (CE codec reference designs with Intel

and NVIDIA on Xiaomi's tablet). TV growth is also up 40% YoY with traction with the

Chinese brands (Hisense, TCL, Skyworth). The company expects July will be slightly

better than June, as customers traditionally hold back orders at quarter end to better

15 July 2014


manage inventory levels. It has not seen correction through July and 3Q is a normal

seasonal peak, though will continue to monitor any year end slowdown.

■ WPG also sees upside from smartphones and tablets. 2Q14 sales reached

NT$113.7bn, +11% QoQ, significantly above guidance of 3-8% QoQ growth. WPG

noted that 2Q14 will see even growth across all end markets, with smartphone growth

persisting. It also expects to see incremental rebound in PC/NB driven by replacement

demand as Microsoft discontinued Windows XP support. WPG views 2014 slightly more

second half loaded with seasonal peak in 2Q/3Q and does not see a major 4Q

correction yet. We model 3Q14 sales +9% QoQ, near street of +10% QoQ as the

customer sees builds for smartphones, Apple related and some improvement in PC

orders.

Mediatek: A break from strong upside, but ramps

continue for LTE/exports

Earnings details: Late July 2PM HK time (Mandarin), 4PM HK time (English)

Figure 94: Mediatek CS vs street estimates for 4Q13/1Q14/2Q14 and 2013-2015 In mn, unless otherwise stated

2Q14 3Q14 4Q14 2014 2015 2016


Sales $54,133 $52,787 NT$51.5-55.2bn $57,682 $56,635 $51,538 $53,792 $209,358 $208,360 $231,117 $237,073 $244,740 $252,973

Chg 17.7% 14.7% +12-20% QoQ 6.6% 4.6% -10.7% -5.0% 53.9% 53.1% 10.4% 13.8% 5.9% 6.7%

GM% 49.0% 48.4% 47.5-49.5% 48.5% 47.9% 47.5% 47.6% 48.4% 47.8% 48.1% 46.4% 47.9% 45.3%

OpM% 24.6% 22.8% 20.5-26.5% 24.7% 23.8% 20.7% 23.2% 23.4% 23.8% 23.3% 23.3% 24.3% 23.5%

Net Inc. 12,509 11,831 13,679 13,027 10,325 11,917 46,307 46,694 51,535 51,737 56,679 54,088

EPS (NT$) $8.01 $7.65 $8.76 $8.45 $6.61 $7.71 $30.00 $30.13 $33.00 $32.83 $36.29 $33.67 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

■ 2Q14 reaches the upper half of guidance. 2Q14 sales came in at NT$54.1 bn,

+17.7% QoQ, reaching the upper end of guidance of +12-20% QoQ, but slightly below

CS' original +20.5% QoQ due to faster 4G LTE transition in China at the expense of TD-

SCDMA. 2Q14 growth has been led by export 3G share gains and continued growth of

octa-core in the mix to take smartphone units to ~88 mn. We believe it has seen more

demand than it built for its LTE modem paired with quad core MT6582 from Chinese

customers in June. Following June sales, we factored in 2Q14 sales, kept our GM

estimates at the upper end of 47.5-49.5% guidance at 49%, but slightly trimmed OpM

from 25.1% to 24.6% on less operating leverage, taking EPS down from NT$8.35 to

NT$8.01.

■ MIIT market data as a read on the 3G to 4G transition. We analysed China's MIIT

data as well for broader trends on the market, which is the government's figures for

handset shipments by standard and phone type. We would analyse MIIT only for

directional trends as the data has shown a pretty wide mismatch with brands

performance and the supply chain the past year. The government’s MIIT data does not

always track the market trend or supply chain, having shown a smartphone peak last

year in 2Q13 ahead of 3 quarters of stronger shipments in the market by the supply

chain and China brands.

The following is a summary of the key data with rising mix in June:

o China handset shipments up. China handsets were +16% MoM and flat YoY at

42.5mn.

o China smartphones also increase. China smartphones increased +17% MoM

and 23% YoY to 37mn units

o 4G ramps, 3G holds flat. 4G smartphone shipments increased 59% MoM to

14.8mn while 3G held up flat MoM at 22.7mn.

2Q14 sales reached 17.7%

QoQ, reaching high end of

guidance +12-20% QoQ

15 July 2014


o New models also skewing to 4G. LTE new models also surpassed 3G for the

first time in May, and in June it accounts for 56% of total 230 new models vs 3G

29%

Figure 95: MIIT data indicates that LTE shipment is up to

35% of total units shipped in June

Figure 96: May LTE new models reached 56% of mix

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TD-LTE % 2G 3G TD-LTE Source: Company data, Credit Suisse research, MIIT Source: Company data, Credit Suisse research, MIIT

■ MIIT also shows the LTE ramp accelerating throughout 2Q14. The following is a

summary of full quarter data.

o China handset shipments up. China handsets were +19% QoQ but down 24%

YoY at 119.6 mn.

o China smartphones also increase. China smartphones increased +17% QoQ

but down 13% YoY to 104.2 mn units

o 4G rises while 3G declines. 4G smartphone shipments increased 215% QoQ to

30.7 mn and is now at 40.7 mn YTD while 3G declined 7% QoQ and 33% YoY to

74.4 mn units and is now at 154mn YTD. LTE mix of handsets increased from

10% in 1Q14 to 26% in 2Q14, suggesting an accelerating ramp.

o New models also skewing to 4G. LTE new models grew 43% QoQ from 51 in

1Q14 to 298 in 2Q14, exceeding 3G new models at 284. LTE new model mix

increased from only 9% in 1Q14 to 43%, while 3G declined from 70% to 41%.

YTD, 349 new LTE models have been released vs 689 3G.

Figure 97: QTD LTE shipment has penetrated 26% of mix Figure 98: LTE new models has exceeded 3G new models

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■ Mediatek's 3Q14 still holding up for mild growth on export health. Mediatek

should enter high season in 3Q14, with a faster pick-up in August as export market

returns to normal seasonal peak. We model in LTE ramping up to 5 mn units out of 97

mn units. Our 3Q14 sales growth now implies +6.6% QoQ vs street +4.6% QoQ with

flat to slightly down GMs at 48.5% as octa-core price declines and LTE ramps, though

OpM stays steady at 24.7% and EPS at NT$8.76. Mediatek remains on track to 15mn

15 July 2014


LTE shipment guidance with high-end 6595 launching next week and SoC on track for

4Q14 volume.

Figure 99: Implied 3G vs 4G run rates for China brands

including exports for Mediatek to reach our estimates

Figure 100: Implied 3G vs 4G run rates for China brands

including exports for Mediatek to reach our estimates China 1Q14 2Q14 3Q14 4Q14 2014

3G units 74 76 76 50 276

QoQ 3% 0% -34%

4G units 2 8 15 25 50

QoQ 300% 88% 67%

Total 76 84 91 75 326

QoQ 11% 8% -18%

Emerging Markets 1Q14 2Q14 3Q14 4Q14 2014

3G units 64 78 92 87 321

QoQ 22% 18% -5%

4G units 7 10 13 15 45

QoQ 43% 30% 15%

Total 71 88 105 102 366

QoQ 24% 19% -3%

Total 1Q14 2Q14 3Q14 4Q14 2014

Mediatek 3G (CS) 75 86 92 74 327

Share (%) 54% 56% 55% 54%

3G units 138 154 168 137 597

QoQ 12% 9% -18%

Mediatek 4G (CS) 0 2 5 9 15

Share (%) 0% 11% 17% 21%

4G units 9 18 28 40 95

QoQ 100% 56% 43%

Total 147 172 196 177 692

QoQ 17% 14% -10%


■ Factoring modest margin erosion for LTE in 2H14. We expect LTE price

competition to be high between Mediatek and Qualcomm, with QCOM MSM8916

reaching low-mid teens to compete with Mediatek's entry quad core MT6372. Margin

pressure should be manageable at 10% of volume on 4Q14 exit rate (and 5% of total

Mediatek sales), a factor diluting overall GMs by 50-100 bp. Blended ASPs are more

steady as big.LITTLE octa-core will still have 3x corporate ASP and 64 bit quad/octa

SoCs around 1.5-2x. We model 4Q14 down 11% QoQ to factor in late year

adjustments post October holiday from 3G offsetting some of the volume ramp on LTE.

Figure 101: Mediatek approaching 50% in 2015 Figure 102: Mediatek LTE on track to 15 mn units this year Smartphone chipsets 2012 2013 2014E 2015E 2016E 13-17 CAGR

Mediatek 109.8 223.2 342.4 430.7 520.2 28%

Mediatek share (%) 44% 45% 49% 52% 53%

Spreadtrum 32.0 141.1 124.6 130.0 143.5 5%

RDA - 0.5 6.0 15.0 30.0 NM

Leadcore 5.0 12.0 18.0 22.0 25.0 26%

Asian suppliers 146.8 376.8 491.0 597.8 718.7 23%

YoY Growth 1009% 157% 30% 22% 20%

Share 59% 76% 71% 72% 73%

Qualcomm 81.6 98.9 164.3 196.9 219.9 26%

Broadcom 2.5 7.0 10.0 13.0 15.0 27%

Marvell 15.0 13.0 27.0 25.0 27.0 23%

ST-Ericsson 3.5 0.5 - - - NM

Overseas suppliers 102.6 119.4 201.3 234.9 261.9 26%

YoY Growth 37% 16% 69% 17% 11%

Share 41% 24% 29% 28% 27%

Total 249.4 496.2 692.3 832.6 980.6 24%

YoY Growth 183% 99% 40% 20% 18%

2014 technology EDGE WCDMA TD-SCDMA CDMA 2000 LTE

Mediatek 51.4 208.7 72.2 - 15.2

Spreadtrum 25.1 20.5 76.8 - 2.1

RDA 5.0 3.0 - - -

Leadcore - 0.5 17.5 - -

Asian suppliers 81.5 232.8 166.4 0.0 17.3

% of shipments 16% 47% 33% 0% 3%

Share 100% 74% 89% 0% 24%

Qualcomm - 64.3 10.0 50.0 40.0

Broadcom - 10.0 - - -

Marvell - 5.4 10.8 - 15.0

ST-Ericsson - - - - -

Overseas suppliers 0.0 79.7 20.8 50.0 55.0

% of shipments 0% 39% 10% 24% 27%

Share 0% 26% 11% 100% 76%

Total 81.5 312.5 187.2 50.0 72.3

% of shipments 12% 44% 27% 7% 10% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

■ 4G pricing looks very competitive, but Mediatek has time to manage that margin

risk. Biggest risk is margin pressure but likely not until 2015 due to low contribution of

LTE to 2H14. Qualcomm has streamlined its supply chain and design focus and pulled

back R&D growth to compete in emerging markets at lower pricing so pricing will be

competitive by 4Q14, with LTE quad core entry dropping from US$20-25 on the

MSM8926 to low-teens by 4Q14 on the cost down MSM8916 against Mediatek’s entry

quad core MT6732. Mediatek will focus on 2nd

generation SoC design for lower cost

and a move to 20nm for better power/performance for a refresh. Important to keep in

mind that LTE at 10% of volume on 4Q14 exit rate (and 5% of total Mediatek sales)

would only dilute GMs 50-100 bp for each 10 points below corporate average LTE

starts up, giving Mediatek a couple quarters to bring out a better cost product.

■ New MT6795 – an enhanced version of MT6595. MT6795 is speculated to be the

next 64-bit octa-core LTE SoC on Mediatek's product roadmap. It will be on 28nm

15 July 2014


HPM with 4 A57 + 4 A53 CPU and up to 2.2GHz. It supports 5-mode and uses

Imagination PowerVR GPU. Additionally, it integrates Mediatek's new 5-in-1

connectivity chipset MT6630, with Wi-Fi 802.11b/g/n/ac, Wi-fi Direct/Miracast, low

power Bluetooth, GPS/GLONASS and FM. MT6795 is positioned to compete head-to-

head with the high-end Snapdragon 810 and will be ready for customer sample by

December 2014 and ramp before Chinese New Year.

Figure 103: Mediatek vs Qualcomm LTE offerings – New MT 6795 timed for 1Q15 LTE Mediatek Mediatek Mediatek Mediatek Mediatek Qualcomm Qualcomm Qualcomm Qualcomm

LTE chipsets MT6590 MT6595 MT6732 MT6752 MT6795 Snapdragon 615 Snapdragon 610 Snapdragon 400 Snapdragon 410

SoC Two chip SoC SoC SoC SoC SoC SoC SoC SoC

Technology 28nm HPM 28nm HPM 28nm 28nm HPM 28nm HPM 28nm LP 28nm LP 28nm LP 28nm LP

Multi-core Quad core Octa core Quad core Octa core Octa core Octa core Quad core Quad core Quad core

CPU Coresonic SIMT 4 Cortex A7

+ 4 A17

4 Cortex A53

64-bit

8 Cortex A53

64 bit

4 A57 + 4 A53

64-bit

8 Cortex A53

64-bit

4 Cortex A53

64-bit 4 Cortex A7

4 Cortex A53

64-bit

Baseband FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

FDD/TDD LTE

W/TD/EDGE

Frequency 1.3GHz 2.2-2.5GHz

(big.LITTLE) 1.5GHz 1.7GHz 2.2GHz NA NA 1.6GHz 1.4GHz

GPU Mali 450 PowerVR 6 Mali-T760 Mali-T760 IMG G6200 Adreno 405 Adreno 405 Adreno 305/306 Adreno 306

Display qHD 4K2K HD 720 HD1080 4K2K NA NA FHD FHD

Video playback H.264 & VP9 30fps 1080p 30fps 1080p 30fps H.265/H.264 NA NA 1080 HD 1080 HD

Video recording H.265 H.264 H.265/H.264

Sampling 1Q14 2Q14 3Q14 3Q14 4Q14 3Q14 3Q14 4Q13 4Q13

Ramp 2Q14 4Q14 4Q14 4Q14 1Q15 4Q14 4Q14 1Q14 2Q14 Source: Company data, Credit Suisse estimates

Figure 104: Mediatek product roadmap


15 July 2014


■ New LTE launches. Mediatek is hosting an official introduction of its high-end octa-

core LTE MT6595 SoC on 15 July in Shenzhen. TCL will also have a new 4G model

launch following Mediatek's event on 16 July and some expect it to be based on

MT6595. Other vendors will also have new 4G models launching in the next couple

days, including DOOV's C9 on 16 July and Lenovo's Golden Warrior A8 on 18 July,

though both will still be based on its two-chip solution.

Figure 105: Upcoming LTE smartphone launches

Company Lenovo DOOV Coolpad ZXD Mobile Maysun

Model nameGolden Warrior

A8C9 Dashen G504 MID4511

Image

Technology TDD/FDD-LTE TDD/FDD-LTE TDD/FDD-LTE FDD-LTE FDD-LTE

Operating System Android 4.3 Android 4.4 Android 4.3 Android 4.4 Android 4.3

Pixels 720 x 1280 NA 720 x 1280 720 x 1280 960 x 540

RAM 2GB 1GB 2GB 1GB 1GB

ROM 16GB 16GB 16GB 16GB 4GB

Display 5.0" 5.0" 7.0" 5.0" 4.5"

Camera 13MP + 5MP 8MP + 5MP NA 8MP + 2MP 5MP + 0.3MP

Battery NA 2000mAh NA NA 2000mAh

CPU Speed 1.7GHz 1.7GHz 1.7GHz 1.7GHz 1.7GHz

Processor ChipMT6590 +

MT6595

MT6590 +

MT6582M

MT6290 +

MT6592

MT6290 +

MT6592

MT6590 +

MT6582M

Multi-core Octa Quad Octa Octa Quad Source: Company data, Credit Suisse research, mtksj

Figure 106: Mediatek operating assumptions In mn, unless otherwise stated

Quarters Years

NT$mn unless noted 1Q14 2Q14E 3Q14E 4Q14E 2011 2012 2013 2014F 2015F

Smartphones (mn) 75.0 88.1 96.9 82.4 10.0 109.8 223.2 342.4 430.7

ASPs (US$) $10.16 $10.01 $9.89 $9.84 $13.33 $10.82 $9.93 $9.97 $9.45

Tablets (mn) 7.3 9.5 13.3 14.0 0.0 0.0 21.9 44.2 65.9

ASPs (US$) $11.26 $11.26 $11.04 $10.82 $0.00 $0.00 $12.28 $11.05 $9.99

Feature phones (mn) 88.7 84.3 81.7 69.5 530.2 391.9 354.0 324.2 262.4

ASPs (US$) $1.71 $1.64 $1.57 $1.51 $3.58 $2.26 $1.88 $1.61 $1.37

Handset/Tablet Sales 29,893 34,174 37,045 32,026 59,512 61,419 93,424 133,138 152,654

DTV 7,726 10,549 11,008 10,518 10,722 13,490 16,104 39,801 41,593

PC Optical 2,313 2,209 2,233 2,160 10,596 11,489 10,476 8,915 7,089

Consumer DVD 694 764 859 758 4,160 3,515 3,515 3,075 2,843

WLAN (Ralink) 3,831 4,144 4,158 3,812 1,867 9,365 12,450 15,945 17,265

LCD Monitor 448 702 712 694 0 0 0 2,556 2,659

STB 764 1,248 1,318 1,215 0 0 0 4,546 5,265

Op M% 23.5% 24.6% 24.7% 20.7% 14.2% 12.5% 18.6% 23.4% 23.3%

EPS $6.82 $8.01 $8.76 $6.61 $12.52 $12.81 $20.13 $30.00 $33.00 Source: Company data, Credit Suisse estimates

■ Maintain OUTPERFORM; LTE catalyst should emerge from late 3Q14. We

maintain our 2014/2015E EPS at NT$30/NT$33 and our NT$570 TP on 19x 2014E

EPS balancing out upside from export growth and LTE ramp with modest initial impact

on GMs in the early ramp. We stay constructive as we still see the next 12-18 months

extending the product cycle with LTE, with Mediatek now showing progress launching

its solutions. Near-term catalysts should include its MT6595 octa-core SoC launch on

15 July and LTE SoCs in late 3Q14.

Maintain OUTPERFORM

with a NT$570 target price

15 July 2014


Figure 107: Mediatek PE band – trading at 17x 2014 EPS Figure 108: Mediatek Qfii holding now at 62%

10x

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

NT$ Mediatek US GAAP PE Band

ccccccccccccccccccccccc

25x

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Mediatek QFII % (RHS) Mediatek Price NT$ (LHS) Mediatek QFII as % of TAIEX QFII (%)

NT$ %NT$ %NT$ stock %

-2 STD

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+1 STD

+2 STD

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

Realtek: 2Q14 sales upside consistent with CS as PC

growth offsets mixed wireless outlook


Figure 109: Realtek 2Q14/3Q14/4Q14 and 2014-2016 CS estimates vs Street

2Q14 3Q14 4Q14 2014 2015 2016


Sales $8,045 $7,776 Up $8,293 $8,105 $7,485 $7,800 $31,156 $30,882 $32,659 $32,062 $33,958 $33,869

QoQ 9.7% 6.5% 3.1% 4.2% -9.7% -3.8% 10.6% 9.6% 4.8% 3.8% 4.0% 5.6%

GM (%) 44.1% 43.2% Flat +/- 44.0% 43.0% 44.0% 43.0% 44.0% 43.1% 44.1% 42.2% 44.1% NA

OpM (%) 10.3% 9.6% 9.7% 9.9% 5.6% 8.5% 9.1% 9.4% 9.3% 8.1% 10.2% 8.4%

Net Inc. 863 815 848 832 500 781 3,031 3,160 3,200 2,941 3,565 3,331

EPS (NT$) $1.71 $1.61 $1.68 $1.63 $0.99 $1.48 $6.00 $6.47 $6.34 $5.90 $7.06 $6.63


■ 2Q14 in line with CS expectations but above street. Realtek June sales declined

3.1% MoM to NT$2.45 bn, taking 2Q14 to grow 10.2% QoQ, in line with CS 9.8% QoQ

and company guidance for growth across communications networks, computer

peripheral and multimedia. We note that street has lagged reflecting upside so still

modelling 6% QoQ growth for 2Q14. The company expects July will be slightly better

than June, as customers traditionally hold back orders at quarter end to better manage

inventory levels. It has not seen correction through July and 3Q is a normal seasonal

peak, though will continue to monitor any year end slowdown.

■ Mature PC products, audio codec and TVs coming back on share gains. 2Q14

sales were mainly driven by PC as market stabilises and Realtek gains share since

competitors (Atheros, Broadcom) exit mature products (10/100, HD audio codec and

Gigabyte NIC). Other areas of growth include Internet (gigabyte Ethernet switch,

ASDL, router, card reader) and some Audio for consumer (CE codec reference

designs with Intel and NVIDIA on Xiaomi's tablet). TV growth is also up 40% YoY with

traction with the Chinese brands (Hisense, TCL, Skyworth).

■ Wifi in tablets/smartphones more mixed. Realtek's wireless/Wifi outlook remains

mixed with mobile Wifi weaker as China whitebox smartphone growth slows down YoY

and its main customer Spreadtrum still suffering. In tablets, the whitebox have slowed

materially this year although Realtek has secured more branded designs with Lenovo,

Acer and Asus on Intel's reference design. The company is sampling GPS and

Wifi+BT 4.0 to improve its connectivity offering.

2Q14 grew 10% QoQ, in

line with CS expectations

15 July 2014


■ GMs holding stable. Realtek noted its ASPs have been stable and not seeing ASP

erosion from pricing pressure, as competitors exit the mature product market. We

believe pricing is managed to normal seasonal decline across products to keep GMs

around 43-44% vs our estimate of 44.1%.

■ ISSC sale provides a one-time EPS boost in 2014. Microchip announced on 22 May

its acquisition of ISSC, a low power Bluetooth and advanced wireless company, to

complement its initiatives in wireless and IoT. Microchip offers a tender offer to acquire

all ISSC outstanding shares for NT$143/share (16.7% premium), with the deal

expected to close in 3Q14 and merger to close in 4Q14. Realtek now holds 10.91% of

ISSC (down from 19% in 4Q13), so we estimate the transaction could contribute an

after tax one-time non-operating gain of NT$728 mn or NT$1.44 EPS, slightly lower

than local press estimates of NT$1.64, on top of CS/Street 2014 EPS estimate of

NT$6.0/NT$6.32.

Figure 110: Realtek Non-operating gain from Microchip's ISSC acquisition

2Q14 ISSC sale Non-operating gain

Realtek ISSC ownership % 10.91%

Total ISSC shares held 7,025,000

Microchip acquisition price (NT$) 143

Revenue from sale (NT$mn) 1,005

Holding cost (NT$mn) 196

Non-op profit booked (NT$mn) 809

Tax rate 10%

After tax Non-op profit (NT$mn) 728

Realtek outstanding shares 505

EPS contribution (NT$) 1.44

2014E EPS estimate (NT$) 6.00

2014E EPS + Non-op gain (NT$) 7.44 Source: Company data, Credit Suisse estimates

■ Maintain NEUTRAL. We maintain our 2014/2015 EPS at NT$6.00/NT$6.34, vs street

NT$6.32/NT$5.92. We stay NEUTRAL and our target NT$84, based on 14x 2014E

EPS. We still view Realtek product cycles mixed, with mild growth drivers from Wifi

into more applications and TV gains from a low base (8-10% of sales) offset by 40%

PC exposure, a segment that bounced but sustainability is in question. Realtek is now

trading at 16.4/15.5x 2014/2015 P/E.

Figure 111: Realtek trading slightly above peers median P/E

Price Mkt Cap P/E Multiple (x) P/B Multiple (x) ROE Trough/Peak (EV/Sales)

Company 7/14/2014 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015

Realtek $93.80 $1,582 15.5 15.6 14.8 2.4 2.8 2.7 15.6 17.9 17.9

Novatek $151.50 $3,080 19.4 15.0 13.9 3.7 3.4 3.2 19.3 22.7 23.1

Qualcomm $79.60 $134,355 17.6 15.2 13.4 3.9 4.0 3.7 22.4 26.0 27.5

PMCS $7.36 $1,434 22.3 19.7 16.2 2.6 2.4 2.2 n.a. 11.6 12.4

Broadcom $37.78 $22,101 13.9 15.0 14.3 2.6 2.3 2.0 19.9 15.8 14.3

Marvell $14.11 $7,171 16.4 13.6 12.2 1.8 1.6 1.5 11.1 11.5 12.2

Skyworks $47.23 $8,954 21.5 16.0 13.5 4.2 3.7 3.2 21.0 21.7 21.1

Median 17.5 15.4 13.7 3.2 3.1 2.9 19.6 19.8 19.5

Mean 18.0 15.7 13.8 3.3 3.1 2.7 18.2 21.1 20.9 Source: Company data, Credit Suisse estimates

http://www.microchip.com/acquisitions/ISSC_Acquisition_Press_Release_May22_2014.pdf

http://www.issc-tech.com/index.php

http://udn.com/NEWS/STOCK/STO5/8695660.shtml

15 July 2014


Figure 112: Realtek is trading at 16x 2014E EPS, in line with IC design peers at 14.1x P/E

6x

10x

16x

22x

0

30

60

90

120

150

180

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

NT$ Realtek US GAAP PE Band

Source: Company data, Credit Suisse research

WPG: Sales beats expectations on smartphone

growth and PC demand improvement


Figure 113: WPG CS and Street estimates summary for 2Q14/3Q14/4Q14 and 2014/2015 In mn, unless otherwise stated

2Q14 3Q14 4Q14 2014 2015 2016


Sales $109,799 $111,298 NT$105-110bn $119,132 $120,885 $111,388 $115,492 $442,648 $448,186 $480,147 $480,852 $518,003 $519,141

Chg 7.3% 8.8% Up 2.6-7.5% 8.5% 10.1% -6.5% -4.5% 9.0% 10.3% 8.5% 7.3% 7.9% 8.0%

GM (%) 4.6% 4.5% 4.4-4.7% 4.6% 4.5% 4.6% 4.5% 4.6% 4.5% 4.6% 4.5% 4.6% NA

Op.M(%) 1.8% 1.8% 1.65-1.9% 1.8% 1.8% 1.5% 1.7% 1.7% 1.7% 1.8% 1.8% 1.9% 1.9%

Net Inc. 1,498 1,414 NT$30.1 to US$1 1,576 1,634 1,186 1,453 5,656 5,722 6,378 6,536 6,947 6,992

EPS (NT$) $0.90 $0.86 $0.95 $0.98 $0.72 $0.87 $3.42 $3.42 $3.85 $3.85 $4.20 $4.22 Source: Company data, Credit Suisse estimates, the BLOOMBERG PROFESSIONAL™ service consensus

■ 2Q14 beat with customer strength, 3Q14 could grow close to 10% QoQ. 2Q14

sales reached NT$113.7bn, +11% QoQ, significantly above guidance of 3-8% QoQ

growth. WPG noted that 2Q14 will see even growth across all end markets, with

smartphone growth persisting. It also expects to see incremental rebound in PC/NB

driven by replacement demand as Microsoft discontinued Windows XP support. GM

was guided 4.4-4.7%, vs CS/Street 4.6%/4.5% and OpM was guided 1.65-1.9% and

we model at the high end at 1.8% with operating leverage from better sales. WPG

views 2014 slightly more second half loaded with seasonal peak in 2Q/3Q and does

not see a major 4Q correction yet. We model 3Q14 sales +9% QoQ, near street of

+10% QoQ as the customer sees builds for smartphones, Apple related and some

improvement in PC orders.

■ Margins seeing initial signs of stabilisation. WPG has worked to reduce its PC

exposure and increase mix of lower margins mobile products, which has dampened its

GMs. However, it sees GMs to stay around 4.5-4.7% in the long-term as product mix

finally stabilises. We estimate smartphone + tablet currently contribute 45-48% of total

revenue, with tablets accounting for less than 50% of computer and the company

targets to raise it to half by end of the year. WPG now increases its focus on OpM

through Opex control measures, including subsidiary consolidation to improve

operations and efficient staffing away from the PC segment. Full year Opex is targeted

at NT$2.9-3.1 bn/quarter, with Opex/sales down from 3.6% in 1Q12 to 2.8%, though

Opex could see a small uptick in 4Q14.

15 July 2014


■ Maintain NEUTRAL. We keep our 2014/2015E EPS at NT$3.42/NT$3.85, in line with

street. We stay NEUTRAL and keep our target price at NT$41, based on 12x 2014

EPS. WPG offers emerging market unit exposure and solid 6-7% dividend yield based

on NT$2.40 payout, but the stock is fairly valued at 11.9x 2014 EPS and 1.5x P/B,

above average for its IT distribution peers at 10.6x P/E and 1.4x P/B .

Figure 114: WPG trading slightly above its distributor peers

Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x)

Company Ticker 7/14/2014 (US$mn) 2013 2014 2015 2013 2014 2015 2013 2014 2015

WPG 3702.TW 40.55 2,243 0.3 0.3 0.3 14.1 11.9 10.5 1.7 1.5 1.4

WT Micro 3036.TW 45.05 508 0.1 0.1 0.1 11.7 10.1 9.0 1.2 1.2 1.2

Synnex 2347.TW 46.65 2,473 0.3 0.3 0.3 14.1 13.4 11.4 1.7 1.7 1.6

Arrow ARW 60.41 6,019 0.4 0.4 0.3 12.1 10.6 9.7 1.4 1.4 1.2

Avnet AVT 43.45 6,013 0.3 0.3 0.2 12.5 10.4 9.4 1.4 1.3 1.1

Median 0.3 0.3 0.3 12.5 10.6 9.7 1.4 1.4 1.2

Mean 0.3 0.2 0.2 12.9 11.3 10.0 1.5 1.4 1.3 Source: Company data, Credit Suisse estimates

15 July 2014


Companies Mentioned (Price as of 14-Jul-2014)

ASM Pacific Tech. (0522.HK, HK$84.4, OUTPERFORM, TP HK$97.0) AU Optronics (2409.TW, NT$13.8) Acer Group (2353.TW, NT$21.95) Advanced Semicon. Engr. (2311.TW, NT$39.4, OUTPERFORM, TP NT$47.0) Airtac (1590.TW, NT$281.0) Amkor Technology Inc. (AMKR.OQ, $11.11) Apple Inc (AAPL.OQ, $95.23) Asustek (2357.TW, NT$326.0) BlackBerry (BBRY.OQ, $11.51) Broadcom Corp. (BRCM.OQ, $37.78) Catcher Technology (2474.TW, NT$275.0) Chicony (2385.TW, NT$82.6) Chipbond (6147.TWO, NT$51.9) Chroma (2360.TW, NT$87.6) Compal Electronics (2324.TW, NT$26.8) Coretronic Corp (5371.TWO, NT$33.4) Delta Electronics (2308.TW, NT$205.0) Digital China Holdings Limited (0861.HK, HK$6.86) E Ink Holdings Inc (8069.TWO, NT$20.2) Elan Microelectronics Corp (2458.TW, NT$55.1) Epistar Corporation (2448.TW, NT$74.1) Everlight Electronics Co Ltd (2393.TW, NT$77.1) Foxconn Technology Corp (2354.TW, NT$74.5) G-Tech (3149.TW, NT$33.95) HTC Corp (2498.TW, NT$139.0) Hiwin (2049.TW, NT$332.0) Hon Hai Precision (2317.TW, NT$110.0) Innolux Corporation (3481.TW, NT$15.2) Intel Corp. (INTC.OQ, $31.25) International Business Machines Corp. (IBM.N, $188.0) Kinsus Interconnect Tech (3189.TW, NT$130.5) Largan Precision (3008.TW, NT$2560.0) Lenovo Group Ltd (0992.HK, HK$10.9) Lextar (3698.TW, NT$29.6) Lite-On Technology (2301.TW, NT$54.3) MediaTek Inc. (2454.TW, NT$503.0, OUTPERFORM, TP NT$570.0) Nan Ya Printed Circuit Board (8046.TW, NT$48.4) Nokia (NOK1V.HE, €5.48) Novatek Microelectronics Corp Ltd (3034.TW, NT$151.5) Pegatron (4938.TW, NT$59.4) Powertech Technology (6239.TW, NT$51.5) QUALCOMM Inc. (QCOM.OQ, $79.6) Quanta Computer (2382.TW, NT$85.7) RDA Microelectronics (RDA.OQ, $17.3) Radiant Opto-Electronics (6176.TW, NT$136.0) Realtek Semiconductor (2379.TW, NT$93.8) STMicroelectronics NV (STM.PA, €6.46) Samsung Electronics (005930.KS, W1,286,000) Semiconductor Manufacturing International Corp. (0981.HK, HK$0.75) Siliconware Precision (2325.TW, NT$49.8) Silitech Technology Corp (3311.TW, NT$34.05) Synnex Technology International Corp (2347.TW, NT$46.65) TPK Holdings (3673.TW, NT$263.0) TXC Corp. (3042.TW, NT$46.2) Taiwan Semiconductor Manufacturing (2330.TW, NT$132.5, OUTPERFORM, TP NT$150.0) Taiwan Surface Mounting Technology (6278.TW, NT$45.55) Teco (1504.TW, NT$34.65) Topoint Technology Co Ltd (8021.TW, NT$31.75) Tripod Technology (3044.TW, NT$59.1) Unimicron Technology Corp (3037.TW, NT$28.2) United Microelectronics (2303.TW, NT$15.85) Vanguard International Semiconductor (5347.TWO, NT$47.7) WPG Holdings Ltd (3702.TW, NT$40.55) Wintek Corp (2384.TW, NT$10.9) Wistron (3231.TW, NT$30.6) Xilinx (XLNX.OQ, $48.25) Young Fast Optoelectronics (3622.TW, NT$28.65)

Disclosure Appendix

Important Global Disclosures

I, Randy Abrams, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

15 July 2014


3-Year Price and Rating History for ASM Pacific Tech. (0522.HK)

0522.HK Closing Price Target Price

Date (HK$) (HK$) Rating

29-Jul-11 85.60 71.50 U

30-Oct-11 95.40 68.00

08-Mar-12 98.95 79.50

25-Apr-12 103.10 89.50 N

27-Jul-12 101.10 77.50 U

22-Aug-12 85.05 73.50

26-Oct-12 86.70 67.50

07-Mar-13 101.60 93.00 N

24-Apr-13 78.80 72.50

26-Jul-13 86.20 75.50

04-Nov-13 68.05 55.20 U

27-Feb-14 70.25 78.00 O

13-Mar-14 67.50 *

24-Apr-14 82.80 97.00 O

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

N EU T RA L

O U T PERFO RM

3-Year Price and Rating History for Advanced Semicon. Engr. (2311.TW)

2311.TW Closing Price Target Price

Date (NT$) (NT$) Rating

10-Aug-11 23.06 28.33 O

31-Oct-11 23.64 29.83

23-Apr-12 25.40 31.58

26-Jul-12 19.48 27.20

26-Apr-13 25.85 31.00

16-Jul-13 25.35 R

29-Aug-13 25.45 31.00 O

09-Oct-13 29.00 34.00

20-Dec-13 27.25 31.50

10-Feb-14 29.15 32.50

08-Apr-14 33.45 40.00

28-Apr-14 34.75 42.00

08-Jul-14 39.90 47.00


O U T PERFO RM

REST RICT ED

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



28-Jul-11 266.00 255.00 U

07-Sep-11 282.50 260.00

31-Oct-11 318.00 306.00

06-Jan-12 278.50 270.00

04-Apr-12 277.00 300.00 N

30-Apr-12 253.00 260.00

25-Jun-12 280.50 300.00

29-Jun-12 273.00 R

27-Jun-13 328.00 400.00 O

09-Sep-13 370.00 440.00

01-Nov-13 404.50 480.00

06-Jan-14 431.50 500.00

08-Apr-14 460.00 540.00

01-May-14 472.00 570.00


U N D ERPERFO RM

N EU T RA L

REST RICT ED

O U T PERFO RM

15 July 2014


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



03-Oct-11 68.60 77.00 O

27-Oct-11 71.90 79.00

19-Mar-12 83.70 90.00

27-Apr-12 86.00 95.00

19-Jul-12 77.50 87.00

08-Oct-12 89.10 95.00 N

06-Dec-12 96.60 109.00 O

19-Apr-13 106.50 116.00

19-Feb-14 108.00 122.00

12-Mar-14 113.00 130.00

18-Apr-14 123.00 137.00

10-Jul-14 134.50 150.00


O U T PERFO RM

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relativ e to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

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*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 45% (54% banking clients)

Neutral/Hold* 40% (49% banking clients)

Underperform/Sell* 13% (48% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

15 July 2014


Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

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Price Target: (12 months) for ASM Pacific Tech. (0522.HK)

Method: Our target price of HK$97.00 for ASM Pacific is based on 5x forward P/B with a HK$19.42 BVPS for 2015E. In prior industry cycles from 2001-12, ASM's share price bottomed at a 3x trough cycle P/B and peaked at 7x upcycle P/B. With a cyclical upturn, we value ASM with an up-cycle valuation of 5x 2015E P/B.

Risk: Risks to our HK$97.00 target price for ASM Pacific include: (1) a shorter-than-expected recovery in semiconductor equipment investment, which would have a direct negative impact on ASM's backend equipment business. (2) The cyclical nature of the semiconductor industry and a short order leadtime are the major risks in terms of the accuracy of earnings forecasts, which form the basis of our target price derivation.

Price Target: (12 months) for Taiwan Semiconductor Manufacturing (2330.TW)

Method: Our NT$150 target price for TSMC is reflective of 15x average 2014/2015 EPS. We stay positive on the stock with TSMC's business holding better in 2014 on 28nm/20nm strong share and into 2015 where 20nm SoC and 16nm FinFET tape-outs are building and dividend likely rises with higher FCF

Risk: The risks that may impede achievement of our NT$150 target price for TSMC include: (1) low free cash flows, which we believe will rebound starting in 2014; (2) inventory correction risk; (3) a slowdown in smartphone and tablets, mitigated by Apple’s ramp next year and a push up in specs by the China brands; and (4) Apple shifting business to other foundries after 20nm though we believe TSMC can grow this customer in 2014 and 2015 even if it only ramps to 40% allocation.

Price Target: (12 months) for Advanced Semicon. Engr. (2311.TW)

Method: Our NT$47 target price for ASE is based on 2.4x forward P/B (price-to-book), back to the levels it reached during the prior 2000, 2002, 2004 and 2007 upturns. We see potential catalysts for continued re-rating from ramp of more SiP projects, resumption of K7 operations, start of Apple A8 packaging and test, and growth from DRAM.

Risk: Risks that could impede achievement of our NT$47 target price for ASE include: (1) The global semiconductor up-cycle not as strong as expected; being an upstream company, ASE tends to be more cyclical than other tech plays. (2) Price competition from peers more severe than expected. (3) ASE, like its peers, would be affected by an unexpected slowdown of the global economy. (4) Cost control not as good as expected. (5) 2H14 inventory correction.

Price Target: (12 months) for MediaTek Inc. (2454.TW)

Method: Our target price of NT$570 for MediaTek Inc. is based on 19x 2014E EPS of NT$30, as ASP/GMs mix improves but still reflects a bit of risk on the 3G to 4G transition in the coming few months.. We believe the stock can reach that level by year-end on successful LTE launch, similar to its range the past few years. We are positive on Mediatek due to: (1) a strong product cycle in emerging market smartphone and tablets; (2) market leadership continuing to sustain in the face of tough competition due to fast product innovation both on lower cost and higher performance solutions; and (3) additional drivers from China brands ramping export markets and push to more advanced processors, tablets and TD-SCDMA and LTE over the next few years.

Risk: Risks that could impede achievement of our NT$570 target price for Mediatek include volatility near-term due to 1) post-May holiday lull, 2) risk of price cuts on 3G from QCOM ahead of the high season, and 3) LTE news flow starts out negative as QCOM, BRCM, MRVL and INTC have solutions ahead of Mediatek's competitive SoCs from late 3Q14.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (2330.TW, 2311.TW, 2454.TW, 3149.TW, 3481.TW, 3037.TW, 8069.TWO, 2324.TW, 0992.HK, 4938.TW, 2357.TW, 0861.HK, 2354.TW, 2317.TW, 2498.TW, 3034.TW, 2448.TW, 2353.TW, 3231.TW, 005930.KS, NOK1V.HE, XLNX.OQ, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (2311.TW, 3149.TW, 3481.TW, 0992.HK, 0861.HK, 2317.TW, 005930.KS, NOK1V.HE, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ) within the past 12 months.

15 July 2014


Credit Suisse provided non-investment banking services to the subject company (0992.HK, 0861.HK, 2317.TW, 005930.KS, NOK1V.HE, XLNX.OQ, IBM.N, INTC.OQ) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (2311.TW, 0992.HK, IBM.N) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (2311.TW, 3149.TW, 3481.TW, 0992.HK, 0861.HK, 2317.TW, 005930.KS, NOK1V.HE, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0522.HK, 2311.TW, 2454.TW, 3149.TW, 3008.TW, 3481.TW, 2384.TW, 3037.TW, 8069.TWO, 2324.TW, 0992.HK, 4938.TW, 2474.TW, 3044.TW, 2357.TW, 0861.HK, 2458.TW, 2317.TW, 2498.TW, 3034.TW, 3698.TW, 1504.TW, 3673.TW, 2448.TW, 8046.TW, 2301.TW, 2353.TW, 3231.TW, 2308.TW, 2385.TW, 005930.KS, NOK1V.HE, XLNX.OQ, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ, 6239.TW, 5347.TWO) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0992.HK, 0861.HK, 2317.TW, 005930.KS, NOK1V.HE, XLNX.OQ, IBM.N, INTC.OQ) within the past 12 months

As of the date of this report, Credit Suisse makes a market in the following subject companies (BBRY.OQ, XLNX.OQ, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2330.TW, 2311.TW, 2454.TW, 3149.TW, 3622.TW, 5371.TWO, 3008.TW, 3481.TW, 2409.TW, 2049.TW, 3037.TW, 2324.TW, 4938.TW, 2474.TW, 3042.TW, 6147.TWO, 2357.TW, 2458.TW, 2317.TW, 2498.TW, 3034.TW, 1504.TW, 2347.TW, 3673.TW, 2448.TW, 6176.TW, 2301.TW, 2353.TW, 2382.TW, 3231.TW, 2308.TW, 2385.TW, 6239.TW, 5347.TWO, 3702.TW, 2379.TW, 2325.TW, 2303.TW).

Credit Suisse has a material conflict of interest with the subject company (2330.TW) . Credit Suisse is acting as the financial advisor to Motech Industries Inc in relation to the share subscription by Taiwan Semiconductor Manufacturing Co., Ltd.

Credit Suisse has a material conflict of interest with the subject company (0992.HK) . Credit Suisse is acting as financial advisor to Lenovo Group Limited for the announced acquisition of server business of IBM Corp. Credit Suisse is acting as financial advisor to Lenovo Group Limited for its proposed acquisition of Motorola Mobility Group from Google.

Credit Suisse has a material conflict of interest with the subject company (005930.KS) . Credit Suisse is acting as exclusive financial advisor to Samsung Electronics and Samsung Fine Chemicals in relation to the proposed sale of their ownership stakes in the semiconductor wafer joint ventures with SunEdison, SMP Ltd and MEMC Korea Company Ltd, to SunEdison.

Credit Suisse has a material conflict of interest with the subject company (0981.HK) . Credit Suisse USA LLC is acting as an advisor to Atmel Corp on the potential transaction with Microchip Technology and On Semiconductor.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (0522.HK, 2330.TW, 2311.TW, 2454.TW, 3149.TW, 3622.TW, 5371.TWO, 3008.TW, 3481.TW, 2409.TW, 2049.TW, 2384.TW, 8021.TW, 3037.TW, 8069.TWO, 2324.TW, 0992.HK, 4938.TW, 2474.TW, 3189.TW, 1590.TW, 3042.TW, 3044.TW, 6147.TWO, 2357.TW, 0861.HK, 2354.TW, 2458.TW, 2317.TW, 2498.TW, 3311.TW, 3034.TW, 3698.TW, 1504.TW, 2360.TW, 2347.TW, 3673.TW, 2393.TW, 6278.TW, 2448.TW, 8046.TW, 6176.TW, 2301.TW, 2353.TW, 2382.TW, 3231.TW, 2308.TW, 2385.TW, 005930.KS, BBRY.OQ, NOK1V.HE, XLNX.OQ, QCOM.OQ, IBM.N, INTC.OQ, RDA.OQ, 6239.TW, 5347.TWO, 3702.TW, 2379.TW, 2325.TW, 2303.TW, 0981.HK) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (NOK1V.HE).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (2311.TW, 3481.TW, 0992.HK, 0861.HK, 3034.TW, NOK1V.HE, IBM.N, INTC.OQ, RDA.OQ) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports

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written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse AG, Taipei Securities Branch ........................................................................................................ Randy Abrams, CFA ; Nickie Yue

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

15 July 2014


References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. 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(transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. 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Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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