Taiwanese Strategy: 2019 Bear Market Correction Inevitable; Value Investing Key

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RESEARCH
Market Report
Taiwan
Taiwanese Strategy
December 10, 2018
2019 BEAR MARKET CORRECTION INEVITABLE; VALUE
INVESTING IS KEY
> Two internal concerns – overly-high inventory and a lack of new products – coupled
with two external challenges – the Sino-US trade war and fund outflows – will likely
create a perfect storm for the Taiex in 2019F. We expect the Taiex to dip to 8,500 (PB
of 1.2x) in 2019 on: (1) overly-high inventory – By 3Q18, the global tech industry’s
downstream inventory had surpassed the mean by one SD for three straight quarters,
which had only happened in 2008, 2011, and 2015 on systemic risks, suggesting the
inventory issue is at crisis level; current inventory adjustment could extend into 2H19F
as the Sino-US trade war eventually weakens end demand; (2) a lack of new products
– For the next one to two years, killer applications, such as AI, IoT, and 5G won’t
contribute enough and the tech sector will see demand enter structural stagnation,
limiting upside for corporate earnings; (3) trade war – end demand will be seriously
impacted if the Sino-US trade war escalates further, worsening the tech industry’s
inventory. Taiex earnings typically contract in the year of and the year after tech
inventory reaches an overly-high level, but market consensus still optimistically
projects single-digit earnings growth in 2018-19F, implying continued downward
earnings revisions to come; and (4) fund outflows – International capital will continue
to flee emerging markets and the Taiex, triggered by weakening export data from
Taiwan and Korea, central banks’ tightening policies, trade disputes, and geopolitical
tensions.
> Should a brief period of restocking demand arise in 1Q19, coupled with the current
trade war truce, and some reprieve before next earnings season and prior to another
US Fed rate hike, the Taiex could rise to 10,500 (PB of 1.5x) in the best-case
scenario, assuming: (1) a brief period of seasonal restocking demand appears for
China’s Android smartphones and petrochemicals in the run up to and in the wake of
Chinese New Year; and (2) before next March, the trade war truce, and some reprieve
before the next earnings season and prior to another US Fed rate hike should support
market risk appetite.
> We see the largest potential for mid- and small-cap stocks to rebound in 2019F, on: (1)
the current valuation of many mid- and small-cap stocks is close to the worst seen in
2011 and 2015. The Taiex (excluding the ten largest by market cap) has dipped as low
as PB of 1.09x (versus PB of 1.17x currently) only once since it last pulled back; and
(2) while we don’t expect a rosy outlook for the Taiex, we see quite a lot of confirmed
uptrends or subsectors featuring spec upgrades and growing applications. Stocks
exposed to these themes will become highly sought after.
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Strategy Taiwan
Taiwan strategy 2019
2019 bear market correction inevitable; value investing is key

Two internal concerns & two external challenges could extend Taiex bear run to
2H19F
Key messages
Two internal concerns – overly-high inventory and a lack of new products – coupled with
two external challenges – the Sino-US trade war and fund outflows – will likely create a
Two internal concerns – overly-high inventory perfect storm for the Taiex in 2019F. We expect the Taiex to dip to 8,500 (PB of 1.2x) in
and a lack of new products – coupled with two 2019 on:
external challenges – the Sino-US trade war
and fund outflows could extend the Taiex bear
(1) overly-high inventory – By 3Q18, the global tech industry’s downstream inventory had
run to 2H19F and drag down the Taiex to
surpassed the mean by one SD for three straight quarters, which had only happened in 2008,
8,500. Nevertheless, the temporary trade war
2011, and 2015 on systemic risks, suggesting the inventory issue is at crisis level; current
truce, and some reprieve before the next
inventory adjustment could extend into 2H19F as the Sino-US trade war eventually weakens
earnings season and ahead of another US Fed
end demand;
rate hike could cause the Taiex to rebound to (2) a lack of new products – For the next one to two years, killer applications, such as AI, IoT,
10,500 (PB of 1.5x) in the best-case scenario. and 5G won’t contribute enough and the tech sector will see demand enter structural
Following a recent, sudden market slump, a stagnation, limiting upside for corporate earnings;
number of mid- and small-cap stocks have (3) trade war – end demand will be seriously impacted if the Sino-US trade war escalates
begun to exhibit long-term investment value. In further, worsening the tech industry’s inventory. Taiex earnings typically contract in the year
particular, we favor the following seven of and the year after tech inventory reaches an overly-high level, but market consensus still
subsectors featuring spec upgrades, growing optimistically projects single-digit earnings growth in 2018-19F, implying continued
applications, and positive trends, namely: (1) downward earnings revisions to come; and
CCL; (2) cloud & data center; (3) OLED; (4)
(4) fund outflows – International capital will continue to flee emerging markets and the Taiex,
automotive electronics; (5) sports & leisure; (6)
triggered by weakening export data from Taiwan and Korea, central banks’ tightening
financials; and (7) aromatics. We offer 18 top
policies, trade disputes, and geopolitical tensions.
picks.
Potential short-term restocking demand, trade truce, & reprieve before earnings
season & prior to US Fed rate hike to support Taiex rebound in 1Q19F
Should a brief period of restocking demand arise in 1Q19, coupled with the current trade
war truce, and some reprieve before next earnings season and prior to another US Fed rate
hike, the Taiex could rise to 10,500 (PB of 1.5x) in the best-case scenario, assuming: (1) a
brief period of seasonal restocking demand appears for China’s Android smartphones and
petrochemicals in the run up to and in the wake of Chinese New Year; and (2) before next
March, the trade war truce, and some reprieve before the next earnings season and prior to
another US Fed rate hike should support market risk appetite.
Long-term investment value of mid- & small-caps starting to surface on spec

upgrades, growing apps, & positive trends
We see the largest potential for mid- and small-cap stocks to rebound in 2019F, on: (1) the
current valuation of many mid- and small-cap stocks is close to the worst seen in 2011 and
2015. The Taiex (excluding the ten largest by market cap) has dipped as low as PB of 1.09x
(versus PB of 1.17x currently) only once since it last pulled back; and (2) while we don’t
expect a rosy outlook for the Taiex, we see quite a lot of confirmed uptrends or subsectors
featuring spec upgrades and growing applications. Stocks exposed to these themes will
become highly sought after.
Our top picks

Two internal concerns and two external challenges could extend the Taiex bear run to
2H19F. Nevertheless, we see a number of mid- and small-cap stocks that have begun
exhibiting investment value. These are our top picks within seven industry trends: (1) PCB
spec upgrades on 5G: EMC (2383 TT) and TUC (6274 TT); (2) data center expansion
demand on internet traffic growth: Lotes (3533 TT) and Parade (4966 TT); (3) driver IC
demand on the handset industry’s switch to OLED displays: Novatek (3034 TT) and
Chipbond (6147 TT); (4) wider applications for automotive electronics on EV and
autonomous driving: Cub Elecparts (2231 TT) and Global PMX (4551 TT); (5) rising
Taiwan research team
demand for athletic footwear and apparel on growing popularity of sports and leisure:
886.2.2181.8888 Feng Tay (9910 TT) and Taiwan Paiho (9938 TT); (6) widening FCY spread on Fed rate
hikes: SCSB (5876 TT); (7) tightening supply of downstream aromatics: GPPC (1312 TT),
See last page for the important disclosures
FENC (1402 TT), and TPCC (4725 TT); and (8) others: Taiwan Fertilizer (1722 TT), Poya
(5904 TT), PharmaEssentia (6446 TT), and Dadi (8437 TT).
December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R Powered by the EFA Platform 1
Taiwan Market strategy
Table of contents
Page
Market strategy 2019
2019 bear market correction inevitable; value investing is key 1
Investment themes & top stock picks

Theme 1: PCB sector: New CCL expansion cycle to engage 5G, auto electronics 14
EMC (2383.TW/2383 TT): Rejoining major SLP chain; network communications & automotive HDI applications paying off 16
TUC (6274.TW/6274 TT): RF & microwave materials poised to take off 20
Theme 2: Cloud data center: Demand remains healthy; an attractive valuation appears 24
Lotes (3533.TW/3533 TT): Solid 2019 outlook intact on server & Thunderbolt cable sales expansion 28
Parade Technologies (4966.TW/4966 TTT): Growing momentum from high-speed interface & eDP to resume in 2019F 33
Theme 3: Driver IC sector: Skyrocketing demand for AMOLED driver chipsets 37
Novatek (3034.TT/3034 TT): Returning to glory on AMOLED market penetration 39
Chipbond (6147.twTW/6147 TT): Robust TDDI shipments & growing AMOLED demand lead to COF & testing capacity tightness 43
Theme 4: Auto parts sector: Electric vehicle & autonomous driving are bright spots amid industry headwinds 47
Cub Elecparts (2231.TW/2231 TT): Looking forward to 2019F growth 49
Global PMX (4551.TW/4551 TT): Strong EPS growth in 2019F 53
Theme 5: Sportswear sector: 2019 athletics & leisure Industry investment strategy 58
Feng Tay (9910.TW/9910 TT): 2019F net profit to reach record high; ROE to 41% 60
Taiwan Paiho (9938.TW/9938 TT): 2019F earnings to resume positive growth 64
Theme 6: Financials sector: Widening FCY interest spreads & high-yield plays are 2019F investment focus 68
Shanghai Commercial & Savings Bank (5876.TW/5876 TT): Beneficiary of widening FCY spread & high-yield play 73
Theme 7: Petrochemicals sector: Aromatic derivatives spreads to keep widening 76
GPPC (1312.TW/1312 TT): Continued SM-ABS upcycle in 2019F 78
FENC (1402.TW/1402 TT): Continued PTA upcycle in 2019F 82
TPCC (4725.TW/4725 TT): Continued phenol-acetone & BPA upcycle in 2019F 86
Other top picks 90
Taiwan Fertilizer (1722.TW/1722 TT): Urea upcycle entering strongest stage 92
Poya (5904.TW/5904 TT): SSSG recovery to reignite share momentum 96
PharmaEssentia (6446.TW/6446 TT): Potential EMA approval of Ropeg in 2Q19F 100
Dadi (8437.TW/8437 TT): China kindergarten industry outlook favors Dadi profit growth 105
Appendix
KGI universe valuation table 110
December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R 2

Figure 1: Multiple negatives to extend downstream tech inventory adjustment to 2H19F; Taiex to remain in bear run
Global EMS inventory days mean and SD (LHS); Taiex, points (RHS)
Financial crisis US sovereign debt derating + Renminbi reform Stagnant smartphone
2.5 European debt crisis turmoil demand + trade war
2.0 11,000
1.5
1.0 9,000
0.5
0.0
7,000
(0.5)
(1.0)
(1.5) 5,000
(2.0)
(2.5) 3,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Global EMS inventory days (adjusted using Z-score) Taiex

Note: Samples include Hon Hai, Quanta, Compal, Wistron, Inventec, and Pegatron, and inventory days have been adjusted with Z-score and updated to 3Q18.
Note: Z-score = (current-quarter inventory ůmean inventory)Ɲstandard deviation
Note: Shaded area represents the period when quarterly inventory is one or nearly one SD higher than mean
Source: TEJ; Bloomberg; KGI Research
Figure 2: Our top picks

Target Share Change
Company Code Investment EPS (NT$) PE (x) P/B (x) ROE (%) Cash yield (%)
price price +/-
rating
(NT$) (NT$) (%) 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F
PCB Elite Material 2383 TT Outperform 103.0 76.3 35.0 5.70 7.91 13.4 9.6 2.0 1.9 15.2 19.9 6.3 6.3
Taiwan Union Tech 6274 TT Outperform 115.0 97.7 17.7 7.77 8.85 12.6 11.0 3.2 3.0 26.2 27.8 6.2 7.1
Cloud data Lotes 3533 TT Outperform 265.0 201.5 31.5 16.28 20.46 12.4 9.8 2.1 2.0 17.7 20.6 4.8 6.1
Parade 4966 TT Outperform 610.0 465.0 31.2 25.30 33.16 18.4 14.0 3.9 3.4 22.0 25.6 2.7 3.6
OLED Nov atek 3034 TT Outperform 175.0 142.0 23.2 10.00 11.65 14.2 12.2 3.0 2.9 21.1 24.1 6.1 7.0
Chipbond 6147 TT Outperform 78.0 62.6 24.6 7.36 5.65 8.5 11.1 1.4 1.4 18.2 12.9 7.8 5.9
Auto part CUB 2231 TT Outperform 292.0 250.5 16.6 10.11 13.26 24.8 18.9 8.3 7.3 35.7 41.7 2.9 3.8
Global PMX 4551 TT Outperform 126.0 109.5 15.1 6.12 9.01 17.9 12.2 3.0 2.8 17.0 24.0 4.5 6.6
Sportswear Feng Tay 9910 TT Outperform 230.0 187.5 22.7 7.89 9.64 23.8 19.4 8.4 7.6 36.8 41.0 3.2 3.9
Taiwan Paiho 9938 TT Outperform 62.0 53.2 16.5 4.38 5.04 12.1 10.6 1.8 1.7 15.2 16.3 4.9 5.7
Financial Shanghai Commercial Bank 5876 TT Outperform 44.5 39.1 14.0 3.34 3.52 11.7 11.1 1.2 1.1 10.7 10.4 5.0 5.2
Petrochemical Grand Pacific Petro 1312 TT Outperform 31.0 24.2 28.4 3.38 3.86 7.1 6.3 0.9 0.9 14.0 14.3 4.1 4.1
FENC 1402 TT Outperform 41.0 28.4 44.4 2.56 2.49 11.1 11.4 0.7 0.7 6.4 6.1 6.6 6.6
TPCC 4725 TT Outperform 38.0 26.5 43.4 1.76 3.32 15.0 8.0 2.0 1.6 14.6 22.4 0.0 7.5
Domestic demand Taiwan Fertilizer 1722 TT Outperform 60.0 46.4 29.4 2.54 2.72 18.2 17.1 0.9 0.9 5.0 5.2 4.5 4.5
Poya 5904 TT Outperform 438.0 296.5 47.7 17.51 20.08 16.9 14.8 7.1 6.3 44.4 45.4 5.2 6.0
PharmaEssentia 6446 TT Outperform 248.0 180.0 37.8 (4.37) (3.75) (41.2) (48.0) 15.7 23.4 (32.1) (39.2) 0.0 0.0
Dadi 8437 TT Outperform 334.0 207.0 61.4 14.00 16.71 14.8 12.4 3.4 2.8 24.5 25.0 4.1 4.8
Source: KGI Research
December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 3

The global tech industry’s downstream inventory Stagnant smartphone demand, Sino-US trade war to escalate tech inventory issue
has surpassed the mean by one SD for three to crisis level
straight quarters. We expect current inventory
adjustment to repeat the 2011-12 experience on By 3Q18, the global tech industry’s downstream inventory had surpassed the mean by one
multiple negatives – stagnant smartphone SD for three straight quarters, mainly as the smartphone segment is facing a structural
demand and the Sino-US trade war – and extend predicament characterized by stagnant demand. If slowing end demand triggered by the
into 2H19F.
Sino-US trade war persists for another year, current inventory adjustment could extend
into 2H19F. In the past, tech inventory adjustment resulting from large systemic risk
typically lasted for three to four quarters. However, with more than one negative factor,
such as US debt derating and the European debt crisis in 2011-12, inventory adjustment
extended for seven quarters (Figures 1 and 3). We expect current inventory adjustment to
repeat the 2011-12 experience on multiple negatives – stagnant smartphone demand and
the Sino-US trade war – and extend into 2H19F.
By 3Q18, global downstream tech EMS providers’ inventory had surpassed the mean by
one SD for three straight quarters on lackluster iPhone sell-through and overstocking of
upstream components that were in short supply. Looking forward, higher prices triggered
by the trade war could seriously impact end-market demand, further worsening the
inventory issue.
By 3Q18, global downstream tech EMS providers’ inventory had surpassed the mean by
one SD for three straight quarters, which had only happened during the 2008 financial
crisis, 2011 US sovereign debt derating and European debt crisis, and 2015 renminbi
reform turmoil. Thus, we are experiencing the tech sector version of the financial crisis.
Figure 3: Tech downstream EMS providers’ inventory at historical high at

end-3Q18
Global EMS inventory, days
50 2Q18 48 days
45
40
35
30
3Q18 45 days
25
1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18
Note: Samples include Hon Hai, Quanta, Compal, Wistron, Inventec, and Pegatron
Source: TEJ; Bloomberg; KGI Research
Smartphones, which contribute over 60% of Lack of new products will pit tech sector against a structural dilemma
tech sector end-device revenue, are seeing
characterized by stagnant demand over the next 1-2 years
stagnant demand and killer products will be
lacking in the next one to two years, pitting the Current high-tech sector inventory will eventually be digested after a period of destocking,
tech sector against a structural dilemma but it doesn’t change the fact that smartphones (contributing over 60% of tech sector
characterized by stagnant demand. end-device revenue) are seeing slow replacement demand and that killer products will be
lacking in the next one to two years. Therefore, demand is likely to face structural
stagnation (Figures 4 and 5).
The tech sector posted a 2005-07 earnings CAGR of 34% when NB replacement demand
boomed and a 2012-15 earnings CAGR of 24% when smartphones became popular. For
the next one to two years, killer applications, such as AI, IoT, and 5G, won’t contribute
enough and tech sector earnings will significantly slow to single digits or even contract.

Figure 4: AI, IoT, & 5G can’t be counted on yet; tech earnings growth momentum
to significantly slow
Global tech sector production value by app, US$mn (top); tech sector and Taiex earnings YoY,
percent (bottom)
NB cycle Smartphone cycle AI/IOT/5G cycle?
1,000,000
800,000
600,000
400,000
200,000
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018F
2019F
Desktops Notebook Smart phone Tablet Wearable&IOT AI
100
50
(50)
(100)
2018F
2019F
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Tech Taiex
Source: Gartner; Bloomberg; KGI Research
Figure 5: Global smartphone shipments to decline in 2018-19F

Worldwide end-device shipments by type
Server 2015 2016 2017 2018F 2019F
Shipments (mn units) 11.1 11.2 11.4 12.7 13.5
YoY growth (%) 9.9 1.3 1.2 11.7 6.0
NB PC 2015 2016 2017 2018F 2019F

YoY growth (%) (5.9) (4.3) (1.1) (3.0) (2.0)
Smartphone 2015 2016 2017 2018F 2019F

Shipments (mn units) 1,423.9 1,496.0 1,536.5 1,531.8 1,516.7
YoY growth (%) 14.4 5.1 2.7 (0.3) (1.0)
Smartphone by brand 2015 2016 2017 2018F 2019F

Samsung (mn units) 320.2 306.4 321.3 295.9 290.0
YoY growth (%) 4.1 (4.3) 4.8 (7.9) (2.0)
Apple (mn units) 231.5 215.4 215.8 210.0 195.0
YoY growth (%) 21.0 (7.0) 0.2 (2.7) (7.1)
Top-4 China (mn units) 244.5 351.8 451.3 517.1 565.0
YoY growth (%) 47.7 43.9 28.3 14.6 9.3
Source: Gartner; KGI Research

According to past experiences, Taiex earnings Overly optimistic consensus implies downcycle of earnings revisions isn’t close to
typically contract in the year of and year after
over
tech inventory reached crisis level, but current
consensus still optimistically projects YoY growth Since October, the market has rapidly cut 2018-19F corporate earnings forecasts in light
for 2018-19F earnings, implying the downcycle of the tech industry’s high inventory and the Sino-US trade war. Past experience shows
of earnings revisions isn’t close to over. Taiex earnings typically contract in the year of and year after tech inventory reached crisis
level (Figure 6), but current consensus still optimistically projects 5% and 2% YoY growth
for 2018-19F earnings (Figure 7), implying the downcycle of earnings revisions could have
just begun.
Taiex earnings retreated a respective 31% and 2% in 2011-12, when the US debt derating
and European debt crisis caused inventory levels to reach crisis levels. When renminbi
reform turmoil hit in 2015-16, Taiex earnings retreated 1% in both that year and the year
after. In 2018, stagnant smartphone demand has caused tech industry inventory to pile up,
with potential demand downside from 2019F, dragged down by the Sino-US trade war.
However, market consensus still optimistically projects single-digit earnings growth for
2018-19F, implying the above-said negatives have yet to be fully priced in.
In our view, if the US seeks to slap 10% or 25% tariffs on the remaining US$276bn of
Chinese imports, overall Taiex earnings growth will very likely turn negative.
In the past three times we saw high industry inventory, earnings downcycles typically
lasted for 12-20 months, with earnings cut by 13-70% (Figure 8), implying the current
earnings downcycle that started in October has a long way to go.
Figure 6: Taiex earnings typically contracted in the year of & year after tech
inventory reached crisis level
Taiex earnings YoY, percent
80 Financial US sovereign debt Renminbi Stagnant smartphone
60 crisis derating + European reform turmoil demand + trade war
debt crisis
40
20 56 2
0
(20) (2)(6) (1)(4) (1) (0) (0)
(40) (31) (33)
(60)
(80)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F
Taiex Taiex (ex-TSMC)
Source: Bloomberg; KGI Research
Figure 7: Current consensus still too optimistic despite earnings cuts

Taiex 2018-19F earnings YoY (consensus), percent
9
8 7.4%
7.0%
7
6
5 5.3%
4
3
2
2.3%
1
Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18
2018F earnings 2019F earnings
Note: Shaded area represents time after October 2019

Figure 8: Past earnings downcycles have lasted 12-20 months, with earnings cut
13-70%
Taiex EPS forecast, NT$ (LHS); Taiex, points (RHS)
150
11,000
125
9,000
100
75 7,000
50 5,000
25 3,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Taiex EPS forecast Taiex
Note: Taiex EPS forecast in January 2006 = 100
Note: Shaded areas represent downcycles of corporate earnings
Figure 9: Projected earnings of Taiex & individual sectors in 2017-19F

Earnings (NT$bn) Earnings YoY (%)
Taiex & individual sector
2017 2018F 2019F 2017 2018F 2019F
Semiconductor 382 394 448 3.3 3.0 13.8
Apple supply chain 227 216 234 6.4 (5.2) 8.5
Panel 69 16 4 616.1 (77.5) (72.1)
Petrochemcials 245 245 238 15.9 (0.1) (2.5)
Financials 223 238 238 17.9 6.9 (0.2)
Taiex 2,059 2,169 2,195 17.7 5.3 1.2
Taiex (ex-TSMC) 1,716 1,819 1,817 14.4 6.0 (0.1)
Note: Sector earnings forecasts are based on KGI’s core coverage universe.
Note: Above earnings forcasts still have downside risks
Source: TEJ; KGI Research
Four negatives – slowing export data from Multiple negatives to trigger continued int’l fund outflows from EM & Taiex
Taiwan and Korea, central banks’ policy
tightening bias, trade disputes, and geopolitical
Our experience tracking international capital’s long-term deployment in Asian emerging
tensions – will continue to trigger international markets tells us that international capital’s attitude toward deployment in Asian emerging
fund outflows from EM and the Taiex. markets is subject to five swing factors: (1) export data from Taiwan and Korea; (2) the US
Fed’s monetary policy; (3) local government policies; (4) trade conflicts; and (5) geopolitics.
Four of the five, excluding local government policy, are now unfavorable for EM to attract
international capital. As such, we don’t see a light at the end of the tunnel yet.
Among the five factors, export data from Taiwan and Korea is usually the most important
indicator for the direction of international capital’s mid-term deployment. International
capital flight from emerging Asia began in 2H17, and Taiwan’s and Korea’s export growth
rates have weakened since peaking in September 2017 at 21.6% to a current low of
2.2% (Figure 10). We expect each country’s export growth to remain on the downward
spiral until 2H19F as the downstream tech supply chain is struggling with inventory
adjustment and the trade war.
The US Fed started reducing its balance sheet in October 2017 by no longer replacing
bonds that rolled off its portfolio, while the ECB also plans to end its QE program at
end-2018. The combined asset size of both the US Fed and the ECB peaked in April 2018,
driving the US Dollar Index to rally, and causing international capital exodus to accelerate
(Figure 11).
Our experience tracking international capital’s net selling of the Taiex shows that large
systemic risk typically triggered FINI selling of US$8-10bn each time (Figure 12). FINI began
selling off the Taiex when the Sino-US trade war escalated in October, and since then
accumulated FINI selling of the Taiex was worth US$4.0bn, implying at least another
US$4.0bn has yet to be sold off.

MSCI Emerging Markets Index has slumped 25% (versus the Taiex’s meager 15% retreat
during the current correction at its lowest level), confirming the existence of a bear market.
Since 1990, emerging markets have entered bear market territory nine times, and the
Taiex followed in their footsteps each and every time (Figure 13). This suggests the Taiex
has yet to reach bottom. As the Taiex is part of the Emerging Market Index and FINI hold
nearly 40% of the Taiex, it is inevitable that international capital will continue fleeing out
the Taiex with emerging markets falling into a bear market. Moreover, the Taiex is trading
in the middle of emerging markets’ valuation range, making its defensiveness
unsustainable.
Figure 10: Slowing export data from Taiwan & Korea to continue triggering EM
selloff by international capital
Taiwan & Korea’s exports YoY, percent (LHS); int’l capital accumulated net buying/selling of emerging
Asia, US$bn (RHS)
30 21.6% 100
20 80
60
10
40
0 2.2% 20
(10) 0
(20) (20)
2015 2016 2017 2018
Taiwan’s & Korea’s export YoY Int’l capital accumulated net-buying/selling
Note: Accumulated net buying and selling since January 1, 2014
Note: We use 3-month moving average for Taiwan & Korea exports YoY
Figure 11: Central banks’ tightening policy unfavorable to EM risk appetite

US Fed & ECB asset size (LHS), US$bn; FINI accumulated net buying/ selling of emerging Asia, US$bn
(RHS)
11,000 350
10,000 300
9,000 250
200
8,000
150
7,000
100
6,000 50
5,000 0
4,000 (50)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fed & ECB asset size Int’l capital accumulated net-buying/selling
Figure 12: Big negative events have typically triggered FINI selling of Taiex to the
tune of US$8-10bn each time
FINI accumulated net buying/ selling of emerging Asia, US$bn
US sovereign debt European debt Renminbi reform Stagnant Trade war
derating crisis turmoil smartphone
(-US$10B) (-US$8bn) (-US$8bn) demand (-US$9bn)
80
70
60
50
40
30
20
10
0
(10)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Note: Number inside parenthesis represent FINI selling in the period

Figure 13: EM Index already in bear market, boding ill for Taiex outlook
MSCI Emerging Markets Index (top), point; Taiex (bottom), point
1,000
32% 25%
37%
67%
32%
58% 54% 30%
31%
26%
100
1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
14,000
12,000
10,000
8,000
15%
6,000 28%
4,000 67% 28%
48% 60%
2,000 80% 37% 26%
51% 41%
0
1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Note: Shaded areas represent bear markets

Note: MSCI Emerging Markets Index value is logarithm adjusted
Two internal concerns combined with two Potential Taiex rebound to 10,500 in 1Q19 before retreat to 8,500 in 2019F
external challenges will likely create a perfect
Two internal concerns – overly-high inventory and a lack of new products – combined with
storm for the Taiex. We expect the Taiex to dip
to 8,500 in 2019. Nevertheless, should a brief two external challenges – the trade war and fund outflows – will likely create a perfect
period of restocking demand arise by 1Q19, storm for the Taiex. We expect the Taiex to dip to 8,500 (1.2x PB) in 2019. Nevertheless,
coupled with the trade truce, and some reprieve should a brief period of restocking demand arise by 1Q19, coupled with the trade truce,
before the next earnings season and prior to
and some reprieve before the next earnings season and another Fed rate hike, the Taiex
another US Fed rate hike, the Taiex could rise to
10,500 in the best-case scenario. could rise to 10,500 (1.5x PB) in the best-case scenario.
Our rationale for fair valuation as low as PB of 1.2x (Taiex: 8,500) in 2019 is that the tech
industry’s current inventory has reached the level seen during past crises, but the Taiex
currently remains above crisis level (Fig 14). During the 2015 renminbi reform turmoil, the
Taiex dipped as low as 1.24x PB versus the lowest valuation of 1.31x PB this time.
Furthermore, we believe the negative of an escalating trade war denting end demand has
yet to be fully priced in.
Should a brief period of restocking demand arise by 1Q19, coupled with the trade truce,
and some reprieve before the next earnings season and prior to another US Fed rate hike,
the Taiex could rise to 10,500 (1.5x PB) in the best-case scenario, assuming: (1) a brief
period of seasonal restocking demand appears for China’s Android smartphones and
petrochemicals in the run up to and in the wake of the Chinese New Year; and (2) the Fed
won’t raise interest rates before March 2019, supporting market risk appetite. Of the ten
Taiex bear markets since 1990, a meaningful rally has occurred within one to three
months afterward seven times (Fig 19).
Figure 14: Current valutation above crisis level despite tech inventory at crisis level
Taiex PB ratio, x
2.4 Financial US sovereign debt Renminbi Stagnant
crisis derating + European reform smartphone
2.2 debt crisis turmoil demand +
2.0 trade war
1.8
Avg.=1.65x
1.6
1.4
1.2 1.47x 1.31x
1.24x
1.0 1.03x
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 15: Positives & negatives facing Taiex in 2019F
1Q19F 2Q19F 3Q19F 4Q19F

Peak - bottom
9,500-10,500 8,700-10,000 8,500-9,200 8,500-9,300
(points)
(1) Listed companies' early year lofty (1) Stocking for new Chinese Android (1) Apple will release new iPhone with (1) Peak sales season in Europe/America
expectations smartphones triple camera
(2) Potential restocking demand (2) First 5G smartphones will hit the (2) Loads of cash dividends will return (2) Policy support ahead of Taiwan's
Positives market to the market presidential elections in January 2020
(3) China-US trade truce till February (3) Window-dressing by conglomerates
(4) Continued 5G deployment by global
leading operators
(1) China-US trade war will escalate (1) China-US trade war will impact end (1) China-US trade war will impact end (1) Replacement demand from new iPhone
from March demand demand may disppoint
(2) Lackluster iPhone sell-through (2) Potential US Treasury yield curve (2) Index subject to dividend (2) China-US trade war will impact end
inversion adjustments demand
Negatives (3) Possible Fed rate hike by 25bps (in (3) Potential Fed rate hike by 25bps (in (3) FINI on summer break
March) June)
(4) Suspension of US debt ceiling will (3) BoJ's potential exit from QQE
expire
(5) A higher weighting of A-shares on
MSCI EM Index
Figure 16: We forecast Taiex fair valuation at 1.2-1.5x PB in 2019

Taiex PB (high, low & mean), x
2.5
2.3
2.1
2.0
1.9
1.7 1.7 1.7 1.8 1.8
1.7 1.6 1.6 1.7 1.6 1.6
1.6 1.6 1.6 1.65
1.5 1.5 1.5 1.5 1.4
1.3
1.1
0.9
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018F
2019F
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F
Peak PB(X) 2.0 2.1 1.9 2.1 1.8 1.9 2.3 2.2 1.9 2.0 2.0 1.8 1.7 1.7 1.7 1.6 1.7 1.7 1.5
Valley
1.1 1.3 1.3 1.5 1.5 1.6 1.8 1.0 1.0 1.5 1.5 1.5 1.5 1.4 1.3 1.2 1.5 1.5 1.2
PB(X)
Avg. PB
1.6 1.7 1.6 1.7 1.6 1.7 2.0 1.7 1.5 1.8 1.8 1.6 1.6 1.6 1.5 1.5 1.6 1.6 1.4
PB(X)
ROE(%) 1.5 2.5 9.6 12.9 10.3 10.6 13.9 4.4 7.8 12.6 8.2 7.9 9.7 10.9 10.3 9.9 10.4 10.5 9.8
earning
-82.1 137.4 249.3 60.6 -11.9 15.5 39.4 -64.3 59.6 77.7 -30.9 -2.2 46.0 21.9 -0.7 -1.1 17.7 5.3 1.2
YoY(%)
Note: Above earnings forcasts still have downside risks

Figure 17: Taiwan 2018F & 2019F GDP growth at 2.5% & 2.2% Figure 18: Taiwan’s GDP growth to slow down
Taiwan annual GDP growth forecast, percent Taiwan quarterly GDP growth forecast, percent
12 3.2
3.1
10
8 2.3 2.4
2.2 2.1
2.0 2.0
6
4 2.5
2.2
2
0
(2)
2000 2003 2006 2009 2012 2015 2018 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19
Source: TEJ; KGI Research Source: TEJ; KGI Research
Figure 19: Probability of a Taiex rebound after a bear market is formed is 70%
Taiex performance during bear runs since 1990
105
100
95
90
Mean
85
80 Median
75
70
0 10 20 30 40 50 60
Start of bear run 1990/2/10 1991/5/9 1994/10/3 1997/8/26 2000/2/17 2002/4/22 2004/3/4 2007/10/29 2011/1/28 2015/4/27
Decline (%) (50.8) (11.4) (14.7) (29.9) (16.3) (23.1) (12.8) (24.5) (10.0) (25.7)
Rebound (%) 27.8 9.8 11.7 13.9 19.3 9.0 12.2 25.5 10.0 17.6
Rebound to decline (%) 26.9 76.0 67.5 32.6 99.0 30.0 82.9 78.6 90.9 50.8
We see mid- and small-caps as having the best Long-term investment value of mid- & small-caps exposed to new specs, apps &
potential to stage a rebound in 2019, due to the
trends gradually surfacing
following: (1) a number of mid- and small-caps
are currently trading close to the worst levels We see mid- and small-cap stocks as having the best potential to stage a rebound in 2019,
seen in 2011 and 2015; and (2) we see quite a based on the following: (1) the Taiex (excluding the largest ten caps) dipped to as low as
few confirmed uptrends or subsectors featuring 1.09x PB (versus 1.17xPB currently) since it last pulled back, still above 0.77x PB reached in
new specs, applications, and trends, and stocks
the 2008 financial crisis, but close to the worst levels seen in 2011 and 2015 (Fig 20),
exposed to these themes will become sought
after. suggesting the long-term investment value of a number of mid- and small-cap stocks may
have begun to surface; and (2) while we don’t expect a rosy picture of the Taiex, we see
quite a few confirmed uptrends or subsectors featuring new specs, applications, and
trends, and stocks exposed to these themes will be in demand.

Figure 20: Current Taiex (ex-ten largest caps) close to level seen in previous two crises
Taiex (ex-ten largest caps) PB, x
2.2
2.0
1.8
Avg.=1.37x
1.6
1.4
1.2
1.0 1.17x
0.8 1.07x 1.09x
0.77x
0.6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Figure 21: Taiwan 50 Index constituents still trading high

Taiwan 50 Index constituents PB, x
2.8
2.6
2.4 Avg.=1.97x
2.2
2.0
1.8
1.6 1.80 x
1.71x
1.4 1.57 x
1.28x
1.2
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Figure 22: Taiwan Mid-Cap 100 Index valuation near last two bear runs
Taiwan Mid-Cap 100 Index constituents PB, x
2.5
2.3
2.1
1.9 Avg.=1.57x
1.7
1.5
1.3
1.1 1.31x 1.28x
0.9 1.25x
0.78x
0.7
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Our top picks

Two internal concerns and two external challenges could extend the Taiex bear run to
2H19F. Nevertheless, we see a number of mid- and small-cap stocks that have begun
exhibiting investment value. These are our top picks within seven industry trends: (1) PCB
spec upgrades on 5G: EMC (2383 TT) and TUC (6274 TT); (2) data center expansion
demand on internet traffic growth: Lotes (3533 TT) and Parade (4966 TT); (3) driver IC
demand on the handset industry’s switch to OLED displays: Novatek (3034 TT) and
Chipbond (6147 TT); (4) wider applications for automotive electronics on EV and
autonomous driving: Cub Elecparts (2231 TT) and Global PMX (4551 TT); (5) rising
demand for athletic footwear and apparel on growing popularity of sports and leisure:
Feng Tay (9910 TT) and Taiwan Paiho (9938 TT); (6) widening FCY spread on Fed rate
hikes: SCSB (5876 TT); (7) tightening supply of downstream aromatics: GPPC (1312 TT),
FENC (1402 TT), and TPCC (4725 TT); and (8) others: Taiwan Fertilizer (1722 TT), Poya
(5904 TT), PharmaEssentia (6446 TT), and Dadi (8437 TT).

Figure 23: Our top picks

Target Share Change
Company Code Investment EPS (NT$) PE (x) P/B (x) ROE (%) Cash yield (%)
price price +/-
rating
(NT$) (NT$) (%) 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F
PCB Elite Material 2383 TT Outperform 103.0 76.3 35.0 5.70 7.91 13.4 9.6 2.0 1.9 15.2 19.9 6.3 6.3
Taiwan Union Tech 6274 TT Outperform 115.0 97.7 17.7 7.77 8.85 12.6 11.0 3.2 3.0 26.2 27.8 6.2 7.1
Cloud data Lotes 3533 TT Outperform 265.0 201.5 31.5 16.28 20.46 12.4 9.8 2.1 2.0 17.7 20.6 4.8 6.1
Parade 4966 TT Outperform 610.0 465.0 31.2 25.30 33.16 18.4 14.0 3.9 3.4 22.0 25.6 2.7 3.6
OLED Nov atek 3034 TT Outperform 175.0 142.0 23.2 10.00 11.65 14.2 12.2 3.0 2.9 21.1 24.1 6.1 7.0
Chipbond 6147 TT Outperform 78.0 62.6 24.6 7.36 5.65 8.5 11.1 1.4 1.4 18.2 12.9 7.8 5.9
Auto part CUB 2231 TT Outperform 292.0 250.5 16.6 10.11 13.26 24.8 18.9 8.3 7.3 35.7 41.7 2.9 3.8
Global PMX 4551 TT Outperform 126.0 109.5 15.1 6.12 9.01 17.9 12.2 3.0 2.8 17.0 24.0 4.5 6.6
Sportswear Feng Tay 9910 TT Outperform 230.0 187.5 22.7 7.89 9.64 23.8 19.4 8.4 7.6 36.8 41.0 3.2 3.9
Taiwan Paiho 9938 TT Outperform 62.0 53.2 16.5 4.38 5.04 12.1 10.6 1.8 1.7 15.2 16.3 4.9 5.7
Financial Shanghai Commercial Bank 5876 TT Outperform 44.5 39.1 14.0 3.34 3.52 11.7 11.1 1.2 1.1 10.7 10.4 5.0 5.2
Petrochemical Grand Pacific Petro 1312 TT Outperform 31.0 24.2 28.4 3.38 3.86 7.1 6.3 0.9 0.9 14.0 14.3 4.1 4.1
FENC 1402 TT Outperform 41.0 28.4 44.4 2.56 2.49 11.1 11.4 0.7 0.7 6.4 6.1 6.6 6.6
TPCC 4725 TT Outperform 38.0 26.5 43.4 1.76 3.32 15.0 8.0 2.0 1.6 14.6 22.4 0.0 7.5
Domestic demand Taiwan Fertilizer 1722 TT Outperform 60.0 46.4 29.4 2.54 2.72 18.2 17.1 0.9 0.9 5.0 5.2 4.5 4.5
Poya 5904 TT Outperform 438.0 296.5 47.7 17.51 20.08 16.9 14.8 7.1 6.3 44.4 45.4 5.2 6.0
PharmaEssentia 6446 TT Outperform 248.0 180.0 37.8 (4.37) (3.75) (41.2) (48.0) 15.7 23.4 (32.1) (39.2) 0.0 0.0
Dadi 8437 TT Outperform 334.0 207.0 61.4 14.00 16.71 14.8 12.4 3.4 2.8 24.5 25.0 4.1 4.8

Theme 1 Taiwan
PCB sector
New CCL expansion cycle to engage 5G, auto electronics

Overweight ‧ Maintained Impact
5G infrastructure raises the bar for PCB in both volume & specs. As currently defined,
Key message
5G network is essentially distinguished by ultra-high-speed transmission (using
millimeter-wave frequency bands on a large scale), high deployment density (ten times
We like TUC (6274 TT, NT$ 93.7, OP), ITEQ more small-/medium-sized base stations), low latency access, and connections to a huge
(6213 TT, NT$ 48.35, NR) and EMC (2383 TT,
number of devices (from 6.4bn devices in 2016 to 20.4bn devices in 2020F). For PCB, this
NT$ 76.3, OP) on their plans to vigorously
expand capacity in 2019 to capture the 5G will lead to demand for larger unit area size and higher stacked layers, which will generate
deployment boom and auto electronics greater demand for CCL with advanced high-frequency, high-speed (Dk) and super low
demand, which we believe is promising for a loss (Df) properties.
new growth cycle.
Auto PCB market value to grow at CAGR of 6.7% in 2016-20F on rising adoption
of auto electronics. Car sales will likely grow at a CAGR of only 1.7% in 2016-20.
However, we expect automobile PCB will benefit from demand for automated driving, EV,
infotainment and safety car-use electronic components, which will grow at a CAGR of
134%, 23%, 12%, and 10%, respectively, in the same period. We estimate PCB spending
per automobile will rise from US$62 in 2016 to US$75 in 2020.
CCL suppliers to vigorously expand capacity in 2019F to meet demand boom.

Taiwan’s CCL suppliers TUC (6274 TT, NT$ 93.7, OP), ITEQ (6213 TT, NT$ 48.35, NR) and
EMC (2383 TT, NT$ 76.3, OP) have made great strides in mobile and networking
applications in recent years, catching up with top Japanese peers and now getting ahead.
They will be vigorously expanding capacity in 2019F to capture the 5G deployment boom
and auto electronics demand, which we believe is promising for a new growth cycle.
Stocks for Action

We like TUC, ITEQ and EMC due to their vigorous capex plans in 2019 to capture the 5G
deployment and auto electronics trends, which will generate demand for PCB with more
advanced qualities and at larger scales, boding well for a new growth cycle.
Risks
Copper foil price slumps on more availability; end demand falls short.
Jack Lin
886.2.2181.8725
jacklin.lin@kgi.com
See the last page for important disclosures.

Taiwan PCB sector
Figure 1: Taiwanese suppliers set to expand capacity by 20% YoY in 2019F

Capacity
2017 2018 2019 2020
(K sheet/ month; K m/ month)
Company Ticker CCL PP CCL YOY(%) PP YOY(%) CCL YOY(%) PP YOY(%) CCL YOY(%)
Kingboard 1888 HK 9,000 9,975 10.8 10,875 9.0
Shengyi 600183 SH 5,505 8,807 6,292 14.3 9,032 2.6 7,859 24.9 10,890 20.6
Nanya 8046 TT 6,030 10,160 6,030 0.0 6,030 0.0 7,130 18.2
ITEQ 6213 TT 3,250 3,250 0.0 14,800 3,850 18.5 19,300 30.4
EMC 2383 TT 2,950 2,950 0.0 8,600 3,550 20.3 9,800 14.0
TUC 6274 TT 1,800 1,800 0.0 7,518 2,100 16.7 8,868 18.0
Doosan 000150 KS 1,570 4,462 1,760 12.1 5,212 1,760 0.0
Source: company data; KGI research
Figure 2: Peer comparison – Sales structure by application Figure 3: Peer comparison - Sales structure by shipment type
type
(percent) TUC EMC ITEQ (percent) TUC EMC ITEQ
Mobile device 10 49 10 CCL 61 52 66
Networking and Server 66 24 32 PP 28 44 25
PCB
Automotives 14 11
Mass lamination 10 4 3
Consumer electronics 24 47
Raw materials
Others 13 Others 1 6
Sum 100 100 100 Sum 100 100 100
Source: 2017 company data; KGI research Source: 2017 company data; KGI research
Figure 4: Global laminate market weighting & value Figure 5: Global green laminate market weighting & value
Market share, US$mn (outside) & percent (inside) Market share, US$mn (outside) & percent (inside)
14 Others Kingboard, 1665 14 Kingboard, 41 Others, 135
Hitachi, 60
18 14 6
SYTECH,154 3 2 EMC, 433
Rogers, 301 SYTECH, 1515 7
2 12 27
MGS, 310 3
ITEQ, 209 10
Isola, 387 3
Hitachi,425 4
12
4 Nan Ya Plastics, 10 13
Doosan, 460 4 1472 Doosan, 216
4 8 Panasonic, 274
TUC,473 6 11 11
6
GDM, 533 Nan Ya Plastics,
Panasonic, 945
ITEQ, 696 EMC, 740 221 TUC, 235
Source: Prismark; Company data; KGI Research Source: Prismark; Company data; KGI Research
Figure 6: Copper foil & CCL peer comparison – Valuation

Company Ticker Mkt Cap Price EPS PE (x) PB (x) ROE (%) Dividend yield (%)
(US$mn) (LCY) 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F
Elite 2383 TT 790 76.30 5.70 7.91 13.4 9.6 2.0 1.9 15.2 19.9 6.3 6.3
TUC 6274 TT 750 93.70 7.77 8.85 12.1 10.6 3.1 2.8 26.2 27.8 6.5 7.4
ITEQ 6213 TT 475 48.35 5.37 5.57 9.0 8.7 1.9 1.7 22.4 22.5 7.9 9.3
Kingboard 1888 HK 2,851 7.23 1.15 1.21 6.3 6.0 1.2 1.1 19.2 18.7 9.0 8.7

Company update PCB‧Taiwan
EMC
(2383.TW/2383 TT)
Rejoining major SLP chain; network communications &

Outperform‧ Maintained automotive HDI applications paying off
Price as of December 6 (NT$) 76.30 Event

12M target price (NT$) 103.0 Elite Material Co. (EMC) is the world’s largest supplier of halogen-free substrates with
Previous target price (NT$) N/A market share of 27%. In 2019, it will expand production capacity by 20%, targeting
Unchanged / Revised up (down) (%) N/A demand from 5G network and automotive electronics. We are positive that on automotive
Upside (%) 35.0 HDI, network communications infrastructure construction, and SLP market share
expansion, EMC will see sales and EPS growth of 8% and 39% YoY, respectively.
Key message
Impact
We assign EMC with Outperform and a 12M Automotive HDI shipments up on automotive electronics trend. Due to growth of
target price of NT$103, as we expect EMC will the automotive electronics market and higher precision required for circuitry, HDI PCB
benefit from automotive HDI, network market penetration is rising, replacing conventional PCB, and making up for falling mobile
communications infrastructure and market device application demand. In 2018, we forecast handheld device PCB sales weighting will
share expansion for substrate-like PCB (SLP), drop to 41%, compared to 7% for automotive HDI and 14% for traditional automotive
resulting in strong growth momentum.
PCB. In 2019, we estimate automotive HDI board sales will grow over 10% YoY.
Trading data Solid demand for data center and 5G network applications. Benefiting from a US
network communications client’s demand for high-end, high-layer count PCB for servers,
Mkt cap (NT$bn/US$mn) 24.39 / 793
switches, and edge computing equipment, as well as telecoms’ demand for small and
Outstanding shares (mn) 319.6
medium-sized 5G base stations, we estimate in 2018, network communications-related
Foreign ownership (mn) 149.6 sales will come in at NT$6.92bn, including NT$1.17bn from HDI and NT$5.76bn from
3M avg. daily trading (mn) 2.05 high-layer count multi-stacked PCB, up 22% YoY, for sales weighting of 30%. In 2019,
52-week trading range (NT$) 56.20 –113.0 we forecast network communications product sales will grow 25% YoY.
Performance 3M 6M 12M
SLP penetration to significantly increase in 2019. In 2017, the US client’s smartphone
Absolute (%) -13.9 -13.2 -21.9 began to use SLP, with suppliers sourcing orders from Japanese manufacturers. We
Relative (%) -2.5 0.4 -15.1 estimate in 2018, with Korean and Chinese handset brands ramping up production,
advanced HDI (SLP) will contribute sales of NT$370mn. In 2H19, we believe EMC will
Quarterly EPS return to a US smartphone client’s SLP supply chain. On contribution from three brands,
NT$ 1Q 2Q 3Q 4Q we forecast EMC’s 2019 SLP sales will grow 189% YoY to NT$1.08bn, for sales weighting
2017 2.26A 2.29A 2.41A 1.78A of 4%.
2018 0.86A 1.25A 2.04A 1.55F
2019 1.45F 1.53F 2.52F 2.39F Valuation & Action
On potentially strong earnings recovery, we assign EMC with Outperform and a 12M
Share price chart target price of NT$103, equivalent to 2019F PE of 13x.
Price Close Relative to TAIEX (rhs)
120.0
110.0
121.0
112.4 Risks
100.0 103.9
90.0
80.0
95.3
86.7 Customer demand is poorer than expected; competitors gaining development lead.
70.0 78.1
60.0 69.6
50.0 61.0
16
14
12
10
8
6
4
2 Key financials and valuations
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F

Revenue (NT$mn) 20,870 22,070 23,610 23,069 24,989
Gross profit (NT$mn) 5,064 5,766 5,828 4,767 5,346
Operating profit (NT$mn) 3,249 3,939 4,007 2,904 3,414
Net profit (NT$mn) 2,389 2,770 2,791 1,821 2,524
EPS (NT$) 7.55 8.70 8.74 5.70 7.91
DPS (NT$) 4.29 4.70 4.80 4.80 4.80
EPS growth (%) 55.0 15.3 0.5 (34.8) 38.6
PE (x) 10.1 8.8 8.7 13.4 9.6
Jack Lin PB (x) 2.5 2.3 2.1 2.0 1.9
886.2.2181.8725
jacklin.lin@kgi.com EV/EBITDA (x) 5.8 4.9 4.6 6.4 5.4
Net debt to equity (%) Net cash Net cash Net cash Net cash Net cash
See the last page for important disclosures. Dividend yield (%) 5.6 6.2 6.3 6.3 6.3
Return on average equity (%) 26.8 27.5 24.9 15.2 19.9
Source: Company data, KGI Research estimates
December 10, 2018 https://www.kgisia.com.tw/Portal/Report/Index/En/R Powered by the EFA Platform 16

Taiwan EMC
Figure 1: Company profile Figure 2: 3Q18 sales by application

Established in 1992, Elite Material Corp. (EMC) is one of the four Sales breakdown by application, percent
largest producers of CCL in Taiwan and is the world’s largest
halogen-free substrate supplier with a market share of 31%, Automotive-HDI Others
specializing in the production of CCL, PP, and multi-stacked PCB 4
(M/L). In 2017, EMC derived 54% of sales from CCL, 41% from Automotive -HR 7
PP, and 5% from M/L. By materials, the company derives 40% of 13
sales from halogen-free substrate (used in HDI mobile devices and Infrastructure- 37
5 Handheld-HDI
HDI
other high-end products), 17% from automotive base materials,
and 31% from high-frequency/high-temperature base materials 25
(used in network communications and cloud computing products). Commun. 3
Infrastructure- 6
Advanced-HDI
Monthly capacities are now 2.95mn pieces of CCL, 8.6mn meters HLC
of PP, 800,000 square feet of M/L, and 40,000 pieces of SSD & memory modules
heat-dissipation substrate.
Source: KGI Research Source: KGI Research
Figure 3: Sales Figure 4: EPS

Sales, NT$mn EPS, NT$
8,000 3.00
7,029 6,975
7,000 2.52
6,459 2.41 2.39
6,141 2.50 2.29
5,982 2.26
6,000 5,767 5,721 5,716 5,582 5,704
5,312 5,281 2.04
2.00 1.78
5,000
1.55 1.53
1.45
4,000 1.50
1.25
3,000
1.00 0.86
2,000
0.50
1,000
0 0.00
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F
Figure 5: Gross Margin Figure 6: Rolling PE

Gross margin, percent 18.2
29.0%
16.2
27.0%
25.0% 14.2
23.0%
12.2
21.0%
19.0%
10.2
17.0%
15.0% 8.2
13.0%
6.2
11.0%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Figure 7: Operating Margin Figure 8: Rolling PB

Operating Margin, percent 4.80
20.6% 4.30
18.6%
3.80
16.6%
14.6% 3.30
12.6%
2.80
10.6%
8.6% 2.30
6.6%
1.80
4.6%
1.30
2.6%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan EMC
Income statement
Quarterly Annually
Mar-18A Jun-18A Sep-18A Dec-18F Mar-19F Jun-19F Sep-19F Dec-19F Dec-17A Dec-18F Dec-19F
Income statement (NT$mn)
Revenue 5,312 5,716 6,459 5,582 5,281 5,704 7,029 6,975 23,610 23,069 24,989
Cost of goods sold (4,310) (4,547) (5,034) (4,412) (4,226) (4,524) (5,443) (5,450) (17,782) (18,302) (19,643)
Gross profit 1,002 1,169 1,425 1,170 1,055 1,180 1,586 1,525 5,828 4,767 5,346
Operating expenses (440) (472) (487) (464) (440) (476) (510) (506) (1,821) (1,863) (1,932)
Operating profit 562 698 938 706 615 704 1,076 1,019 4,007 2,904 3,414
Depreciation of fixed assets (112) (115) (118) (85) (120) (120) (120) (120) (441) (430) (480)
Amortisation of intangible assets (1) (1) (1) (1) (1) (1) (1) (1) (4) (4) (4)
EBITDA 676 814 1,058 791 736 825 1,197 1,140 4,452 3,338 3,898
Interest income 12 17 19 19 19 19 19 19 51 67 76
Investment income - - - - - - - - - - -
Other non-op income 4 12 3 4 4 4 4 4 70 23 16
Non-operating income 16 30 21 23 23 23 23 23 121 90 92
Interest expense (7) (7) (8) (8) (8) (8) (8) (8) (35) (29) (32)
Investment loss - - - - - - - - - - -
Other non-op expenses (12) (10) (2) - (5) (5) (5) (5) (64) (24) (20)
Non-operating expenses (19) (17) (10) (8) (13) (13) (13) (13) (99) (53) (52)
Pre-tax profit 560 711 949 721 625 714 1,086 1,029 4,028 2,941 3,454
Current taxation (284) (311) (297) (224) (160) (225) (278) (263) (1,233) (1,117) (926)
Minorities (1) (1) (1) (1) (1) (1) (1) (1) (4) (3) (4)
Normalised net profit 276 398 651 496 464 488 807 765 2,791 1,821 2,524
Extraordinary items 0 0 0 (0) - - - - - - -
Net profit 276 398 651 496 464 488 807 765 2,791 1,821 2,524
EPS (NT$) 0.86 1.25 2.04 1.55 1.45 1.53 2.52 2.39 8.74 5.70 7.91
Margins (%)
Gross profit margin 18.9 20.5 22.1 21.0 20.0 20.7 22.6 21.9 24.7 20.7 21.4
Operating margin 10.6 12.2 14.5 12.6 11.6 12.3 15.3 14.6 17.0 12.6 13.7
EBITDA margin 12.7 14.2 16.4 14.2 13.9 14.5 17.0 16.3 18.9 14.5 15.6
Pretax profit margin 10.5 12.4 14.7 12.9 11.8 12.5 15.5 14.8 17.1 12.7 13.8
Net profit margin 5.2 7.0 10.1 8.9 8.8 8.6 11.5 11.0 11.8 7.9 10.1
Sequential growth (%)
Revenue growth (7.1) 7.6 13.0 (13.6) (5.4) 8.0 23.2 (0.8)
Gross profit growth (20.5) 16.6 21.9 (17.9) (9.8) 11.8 34.4 (3.8)
Operating profit growth (29.9) 24.0 34.5 (24.8) (12.9) 14.5 52.8 (5.3)
EBITDA growth (26.3) 20.4 29.9 (25.2) (7.0) 12.1 45.1 (4.8)
Pretax profit growth (30.5) 26.9 33.6 (24.1) (13.3) 14.2 52.1 (5.2)
Net profit growth (51.4) 44.6 63.4 (23.8) (6.5) 5.2 65.4 (5.2)
YoY growth (%)
Revenue growth (7.9) (4.4) 5.2 (2.4) (0.6) (0.2) 8.8 25.0 7.0 (2.3) 8.3
Gross profit growth (28.6) (25.9) (10.0) (7.2) 5.2 0.9 11.3 30.3 1.1 (18.2) 12.1
Operating profit growth (43.9) (37.8) (13.1) (12.0) 9.4 0.9 14.7 44.3 1.7 (27.5) 17.6
EBITDA growth (39.2) (33.9) (11.3) (13.7) 8.9 1.4 13.2 44.1 1.0 (25.0) 16.8
Pretax profit growth (43.8) (37.5) (12.9) (10.5) 11.6 0.5 14.4 42.7 2.8 (27.0) 17.4
Net profit growth (61.8) (45.6) (15.6) (12.6) 68.4 22.5 24.0 54.2 0.7 (34.8) 38.6

Taiwan EMC
Balance sheet Profit & loss

NT$mn Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F NT$mn Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Total assets 17,708 19,233 20,801 20,476 21,548 Revenue 20,870 22,070 23,610 23,069 24,989
Current assets 12,576 14,132 15,480 13,818 14,573 Cost of goods sold (15,805) (16,304) (17,782) (18,302) (19,643)
Cash & ST securities 3,911 4,230 5,300 3,734 3,687 Gross profit 5,064 5,766 5,828 4,767 5,346
Inventory 1,790 2,075 2,552 2,627 2,819 Operating expenses (1,815) (1,827) (1,821) (1,863) (1,932)
Accounts receivable 6,773 7,713 7,500 7,329 7,938 Operating profit 3,249 3,939 4,007 2,904 3,414
Other current assets 102 114 128 128 128 Non-operating income 145 55 121 90 92
Non-current assets 5,132 5,101 5,320 6,658 6,975 Interest income 7 23 51 67 76
LT investments 19 18 17 17 17 Investment income - - - - -
Net fixed assets 4,657 4,623 4,803 6,146 6,467 Other non-op income 138 32 70 23 16
Total other assets 456 460 500 496 491 Non-operating expenses (63) (76) (99) (53) (52)
Total liabilities 8,016 8,721 8,917 8,302 8,381 Interest expense (36) (27) (35) (29) (32)
Current liabilities 6,295 7,247 6,947 7,538 7,525 Investment loss - - - - -
Accounts payable 4,474 5,042 5,164 5,315 5,705 Other non-op expenses (28) (49) (64) (24) (20)
Interest bearing ST liabilities 325 480 150 590 188 Pre-tax profit 3,331 3,917 4,028 2,941 3,454
Other current liabilities 1,496 1,724 1,633 1,633 1,633 Current taxation (938) (1,143) (1,233) (1,117) (926)
Non-current liabilities 1,721 1,474 1,970 764 855 Minorities (3) (4) (4) (3) (4)
Long-term debt 1,220 871 1,320 114 205 Extraordinary items - 0 0 - -
Other L-T liabilities 501 603 650 650 650 Net profit 2,389 2,770 2,791 1,821 2,524
Total equity 9,692 10,512 11,884 12,174 13,167 EBITDA 3,786 4,407 4,452 3,338 3,898
Share capital 3,175 3,189 3,197 3,197 3,197 EPS (NT$) 7.55 8.70 8.74 5.70 7.91
Retained earnings reserve 4,876 6,015 6,905 7,192 8,182
Minority interests 11 11 12 15 19 Cash flow
Preferred shareholders funds - - - - - NT$mn Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Operations cash flow 3,575 2,601 3,060 2,503 2,595
Key ratios Net profit 2,389 2,770 2,791 1,821 2,524
Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F Depreciation & amortisation 537 469 445 434 484
Growth Decrease in working capital (14) (657) (143) 248 (413)
Revenue growth 10.5% 5.7% 7.0% (2.3%) 8.3% Other operating cash flow 662 18 (33) 0 (0)
Operating profit growth 77.3% 21.2% 1.7% (27.5%) 17.6% Investing cash flow (234) (520) (722) (1,772) (800)
EBITDA growth 60.2% 16.4% 1.0% (25.0%) 16.8% Sale of ST investment - - - - -
Net profit growth 55.3% 16.0% 0.7% (34.8%) 38.6% New investments - - - - -
EPS growth 55.0% 15.3% 0.5% (34.8%) 38.6% Capital expenditure (234) (519) (717) (1,772) (800)
Profitability Others investing cashflow 0 (2) (5) (0) 0
Gross profit margin 24.3% 26.1% 24.7% 20.7% 21.4% Free cash flow 2,621 2,080 2,362 707 1,766
Operating margin 15.6% 17.8% 17.0% 12.6% 13.7% Financing cash flow (1,562) (1,534) (1,201) (2,297) (1,841)
EBITDA margin 18.1% 20.0% 18.9% 14.5% 15.6% Increase in short term debt (1,090) 118 20
Net profit margin 11.4% 12.6% 11.8% 7.9% 10.1% Increase in long term loans 298 (311) (1,221) (766) (311)
Return on average assets 13.9% 15.0% 13.9% 8.8% 12.0% New ordinary shares issued - - - - -
Return on average equity 26.8% 27.5% 24.9% 15.2% 19.9% Ordinary dividends paid (791) (1,371) (1,502) (1,534) (1,534)
Stability Other financing cashflow 20 30 1,502 3 4
Gross debt to equity 15.9% 12.9% 12.4% 5.8% 3.0% Forex effects (36) (227) (74) (74) (74)
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated 1,742 319 1,064 (1,639) (120)
Interest coverage (x) 94.1 145.0 116.6 100.9 108.9 Cashflow by merger - - - - -
Interest & ST debt coverage (x) 0.9 0.9 1.0 0.8 0.9
Cash flow interest coverage(x) 99.9 95.6 87.8 85.0 81.1 ROIC
Cash flow/int. & ST debt (x) 9.9 5.1 16.5 4.0 11.8 Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Current ratio (x) 2.0 2.0 2.2 1.8 1.9 1 - COGS/revenue 24.3% 26.1% 24.7% 20.7% 21.4%
Quick ratio (x) 1.7 1.7 1.9 1.5 1.6 - Operating exp./revenue 8.7% 8.3% 7.7% 8.1% 7.7%
Net debt (NT$mn) (2,366) (2,879) (3,823) (3,023) (3,287) = Operating margin 15.6% 17.8% 17.0% 12.6% 13.7%
Per share data
EPS (NT$) 7.55 8.70 8.74 5.70 7.91 1 / (Working capital/revenue 0.1 0.1 0.1 0.1 0.1
CFPS (NT$) 11.29 8.17 9.59 7.84 8.13 + Net PPE/revenue 0.2 0.2 0.2 0.3 0.3
BVPS (NT$) 30.49 32.93 37.14 38.04 41.13 + Other assets/revenue) 0.0 0.0 0.0 0.0 0.0
Adj BVPS (NT$) 30.57 32.98 37.19 38.09 41.19 = Capital turnover 2.7 2.7 2.7 2.4 2.4
SPS (NT$) 65.91 69.31 73.96 72.27 78.28
EBITDA/share (NT$) 11.96 13.84 13.95 10.46 12.21 Operating margin 15.6% 17.8% 17.0% 12.6% 13.7%
DPS (NT$) 4.29 4.70 4.80 4.80 4.80 x Capital turnover 2.7 2.7 2.7 2.4 2.4
Activity x (1 - tax rate) 71.8% 70.8% 69.4% 62.0% 73.2%
Sales / avg assets 1.21 1.19 1.18 1.12 1.19 = After-tax ROIC 29.9% 33.9% 32.0% 18.4% 23.8%
Days receivable 118.5 127.9 116.0 116.0 116.0 Source: Company data, KGI Research estimates
Days inventory 41.3 46.6 52.4 52.4 52.4
Days payable 103.3 113.2 106.0 106.0 106.0
Cash cycle 56.5 61.3 62.3 62.3 62.3

Company update PCB‧Taiwan
TUC
(6274.TW/6274 TT)
RF & microwave materials poised to take off

Outperform‧Maintained Event
TUC, commanding over 70% market share in very-low-loss category materials, expects
Price as of December 6 (NT$) 93.70
this category to replace mid-low-loss as the most widely used category of products. TUC
12M target price (NT$) 115.0
plans to expand capacity by 17% in 2019F, targeting 5G demand. We forecast sequential
Previous target price (NT$) 115.0
0.0
earnings growth on the ramp up of new products: radio frequency materials and
Unchanged (%)
Upside (%) 22.7 microwave materials.
Impact
Key message
Efforts in high-margin low-loss HSD to bear fruit. In recent years, TUC has been
TUC plans to expand capacity by 17% in deploying high-frequency and high-speed products, widely applied in the networking
2019F, targeting 5G demand. We forecast market, including data centers and 5G infrastructure. High-speed digital (HSD) weighting
sequential earnings growth on the ramp up
rose from 66% in 2017 to 74% and 77% in 1H18 and 3Q18, with low-loss HSD rising
of new products: radio frequency materials
and microwave materials. We assign
from 27% in 2017 to 31% and 32% in 1H18 and 3Q18, and non-low-loss HSD’s 39% in
upbeat on TUC’s leading position in the 2017 to 43% and 45% in 1H18 and 3Q18. Continuously rising penetration of the
field of high-frequency applications and for low-loss HSD line caused gross margin to reach an all-time high and beat expectations in
its infrastructure deployment. We maintain 3Q18.
our target price at NT$115, based on 13x
2019F EPS. Maintain Outperform. Planned 17% capacity increase in 2019F to pave way for 5G. We forecast CCL
monthly output will expand from 1.8mn sheets to 2.1mn sheets in 2Q19, and three PP
Trading data production lines will be added, equal to new capacity of 1.35mn meters. New capacity will
Mkt cap (NT$bn/US$mn) 23.15 / 753 be mainly for low-loss products, targeting 5G demand. We project monthly production
Outstanding shares (mn) 247.1 value will rise by over 20%.
Foreign ownership (mn) 60.46
2.98
Radio frequency materials poised to take off. TUC’s super-low-loss solution designed
3M avg. daily trading (mn)
for high-speed telecommunications is gradually applied in backplane, HPCs, Line cards,
52-week trading range (NT$) 74.00 –124.0
storage, servers, 100G switches, and base stations. In 2019, we expect new products –
radio frequency materials and microwave materials – to be applied in base station
Absolute (%) -18.5 -10.3 26.3
antennas, RFID tags, automotive radar and sensors, LNB (for satellite broadcasting), small
Relative (%) -7.1 3.3 33.1
cell transceiver, and 400G switches.
Quarterly EPS
Valuation & Action
NT$ 1Q 2Q 3Q 4Q
We assign upbeat on TUC’s leading position in the field of high-frequency applications
2017 1.30A 1.05A 1.06A 0.71A
and for its infrastructure deployment. We give our target price of NT$115, based on 13x
2018 1.63A 1.84A 2.19A 2.07F
2019F EPS. Maintain Outperform.
2019 1.92F 1.80F 2.46F 2.68F
Risks
Share price chart Poor demand for high-end networking products; rivals take lead; gross margin pressure
129.0
119.0
172
159
mounting on material price hikes.
109.0 145
99.0 132
89.0
79.0
119
105
Key financials and valuations
Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
69.0 92
16
14
12
10
8
6
4
Revenue (NT$mn) 12,903 13,423 16,103 18,225 19,007
2
12-17 02-18 04-18 06-18 08-18 10-18

Source: TEJ Operating profit (NT$mn) 1,022 1,217 1,341 2,558 2,927
Net profit (NT$mn) 751 909 1,002 1,900 2,166
EPS (NT$) 3.11 3.76 4.12 7.76 8.85
DPS (NT$) 1.60 2.10 3.19 6.09 6.95
EPS growth (%) 0.1 20.9 9.4 88.6 14.0
PE (x) 30.1 24.9 22.8 12.1 10.6
Jack Lin PB (x) 3.6 3.5 3.3 3.1 2.8
886.2.2181.8725 EV/EBITDA (x) 14.4 13.8 13.5 7.8 6.6
jacklin.lin@kgi.com
Net debt to equity (%) Net cash Net cash 1.1 Net cash Net cash
See the last page for important disclosures. Dividend yield (%) 1.7 2.2 3.4 6.5 7.4
Taiwan TUC
Figure 1: Company profile Figure 2: Product mix

TUC was established in 1974 and is one of the four largest Product weighting, percent
copper-clad laminate (CCL) makers in Taiwan. TUC listed in 2003 100
as a producer of optical glass and later transitioned into CCL and 80

prepreg (PP). In 2001, it added mass lamination. In 2016, sales mix
60
was HSD 53%, normal PCB 25%, HDI 7%, and mass lamination
(M/L) 15%. CCL capacity has reached 1.8mn sheets/ month (750k 40
in Taiwan, 1,050k in China), while lamination capacity is 2.4mn sq.
20
ft/ month. A PP production line (400k meters/ month) was
scheduled to enter mass production in China in late-4Q15 to fulfill 0
2014 2015 2016 2017F 2018F 2019F
high-end handset CCL orders. M/L HDI HSD (25G /50G /100G/400G) HSD Normal

6,000 3.00
5,297 2.68
5,059
2.46
5,000 4,577 4,682 2.50
4,437 4,530
4,243 4,346 4,305 2.19
4,051 2.07
3,975
4,000 3,834 2.00 1.92
1.84 1.80
1.63
3,000 1.50 1.30

1.05 1.06
2,000 1.00
0.71
1,000 0.50
0 0.00

26.0% 20.1
18.1
24.0%
16.1
22.0%
14.1
20.0%
12.1
18.0% 10.1
16.0% 8.1
6.1
14.0%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

18.0% 4.10
16.0% 3.60
14.0% 3.10
12.0% 2.60
10.0% 2.10
8.0% 1.60
6.0% 1.10
0.60
4.0%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan TUC
Income statement
Quarterly Annually
Revenue 4,437 4,577 4,682 4,530 4,346 4,305 5,059 5,297 16,103 18,225 19,007
Gross profit 916 1,030 1,139 1,092 1,018 999 1,232 1,307 3,338 4,177 4,557
Operating profit 522 608 737 691 616 598 817 895 1,341 2,558 2,927
EBITDA 613 699 821 789 721 703 973 1,050 1,697 2,923 3,447
Interest income 5 8 9 8 8 8 8 8 16 29 32
Other non-op income 14 110 (104) 12 12 12 12 12 47 32 48
Non-operating income 18 118 (95) 20 20 20 20 20 63 61 80
Investment loss - - - - - - - - - - -
Other non-op expenses (12) (105) 96 (14) (14) (14) (14) (14) (42) (35) (56)
Non-operating expenses (24) (120) 83 (30) (30) (30) (30) (30) (82) (92) (120)
Pre-tax profit 516 606 725 681 606 588 807 885 1,322 2,528 2,887
Current taxation (116) (153) (184) (174) (137) (149) (206) (229) (321) (627) (721)
Minorities - - - - - - - - - - -
Extraordinary items (0) 0 (0) - - - - - - 0 -
Net profit 400 452 541 507 469 439 601 656 1,002 1,900 2,166
EPS (NT$) 1.63 1.84 2.19 2.07 1.92 1.80 2.46 2.68 4.12 7.76 8.85
Margins (%)
EBITDA margin 13.8 15.3 17.5 17.4 16.6 16.3 19.2 19.8 10.5 16.0 18.1
Revenue growth 4.6 3.2 2.3 (3.3) (4.1) (0.9) 17.5 4.7
Gross profit growth 6.3 12.4 10.6 (4.2) (6.7) (1.9) 23.3 6.0
Operating profit growth 134.3 16.4 21.2 (6.3) (10.8) (2.9) 36.6 9.5
EBITDA growth 96.0 14.1 17.4 (3.9) (8.7) (2.5) 38.4 8.0
Pretax profit growth 123.1 17.3 19.6 (6.0) (10.9) (3.0) 37.2 9.6
Net profit growth 132.1 13.1 19.5 (6.2) (7.5) (6.4) 36.9 9.1
YoY growth (%)
Revenue growth 11.6 19.4 15.6 6.7 (2.1) (5.9) 8.0 16.9 20.0 13.2 4.3
Gross profit growth 1.3 33.7 41.9 26.7 11.2 (2.9) 8.2 19.7 24.1 25.1 9.1
Operating profit growth 12.8 86.5 123.8 209.9 18.0 (1.6) 10.9 29.5 10.2 90.8 14.4
EBITDA growth 11.1 69.1 96.3 152.3 17.6 0.5 18.4 33.1 5.1 72.3 17.9
Pretax profit growth 17.6 88.0 119.6 194.3 17.5 (2.9) 11.4 30.0 13.0 91.2 14.2
Net profit growth 26.8 77.1 109.3 194.4 17.4 (2.9) 11.2 29.3 10.1 89.7 14.0

Taiwan TUC

LT investments 5 5 5 5 5 Investment income 1 - - - -
Interest bearing ST liabilities 205 859 585 724 678 Pre-tax profit 983 1,169 1,322 2,528 2,887
Other current liabilities 777 883 876 1,508 1,718 Current taxation (231) (260) (321) (627) (721)
Non-current liabilities 1,226 194 819 681 961 Minorities - - - - -
Long-term debt 1,050 - 616 477 758 Extraordinary items - (0) (0) 0 -
Other L-T liabilities 175 194 203 203 203 Net profit 751 909 1,002 1,900 2,166
Minority interests - - - - - Cash flow
Operations cash flow 1,552 1,396 (254) 1,594 2,342
Key ratios Net profit 751 909 1,002 1,900 2,166
Growth Decrease in working capital 170 12 (1,655) (728) (244)
Revenue growth (3.8%) 4.0% 20.0% 13.2% 4.3% Other operating cash flow 90 78 44 57 (100)
Operating profit growth 9.5% 19.0% 10.2% 90.8% 14.4% Investing cash flow (452) (747) 367 (800) (850)
EBITDA growth 5.2% 3.3% 5.1% 72.3% 17.9% Sale of ST investment 41 - -
Net profit growth 0.4% 21.0% 10.1% 89.7% 14.0% New investments (118) - - - -
EPS growth 0.1% 20.9% 9.4% 88.6% 14.0% Capital expenditure (313) (405) (213) (800) (850)
Profitability Others investing cashflow (62) (341) 580 (0) 0
Gross profit margin 19.5% 20.0% 20.7% 22.9% 24.0% Free cash flow 1,112 944 (502) 906 1,512
Operating margin 7.9% 9.1% 8.3% 14.0% 15.4% Financing cash flow (946) (745) (62) (742) (1,206)
EBITDA margin 12.1% 12.0% 10.5% 16.0% 18.1% Increase in short term debt (228) 123 224
Net profit margin 5.8% 6.8% 6.2% 10.4% 11.4% Increase in long term loans (278) (519) 119 (50) 184
Return on average assets 6.8% 8.1% 8.3% 14.3% 14.9% New ordinary shares issued - - -
Return on average equity 12.2% 14.2% 14.8% 26.1% 27.8% Ordinary dividends paid (388) (388) (512) (786) (1,491)
Stability Other financing cashflow (52) 39 107 94 103
Gross debt to equity 20.0% 13.1% 17.1% 16.0% 17.8% Forex effects (3) (158) (86)
Net debt to equity Net cash Net cash 1.1% Net cash Net cash Total cash generated 151 (253) (36) 152 286
Interest coverage (x) 29.3 34.4 34.1 45.0 46.1 Cashflow by merger - - -
Cash flow interest coverage(x) 44.6 39.9 (6.4) 26.7 36.6 ROIC
Cash flow/int. & ST debt (x) 6.5 1.6 (0.4) 2.0 3.2 Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Net debt (NT$mn) (155) (299) 80 (72) (124) = Operating margin 7.9% 9.1% 8.3% 14.0% 15.4%
Per share data
CFPS (NT$) 6.43 5.78 (1.04) 6.51 9.57 + Net PPE/revenue 0.2 0.2 0.2 0.2 0.2
SPS (NT$) 53.43 55.52 66.19 74.46 77.65
Days inventory 38.0 53.1 58.9 58.9 58.9
Days payable 81.1 110.0 93.0 93.0 93.0
Cash cycle 77.2 70.8 98.8 98.8 98.8

Theme 2 Taiwan
Cloud data center

Demand remains healthy; an attractive valuation appears
Impact
Stronger 2018F server demand growth on hyperscale data center expansion.
Global server shipments witnessed YoY growth of 15% in 1Q-3Q18, stronger than the
Key message market’s expectation of 7-10% for 2018F, due mainly to: (1) solid growth from Chinese
server brands including Huawei, Inspur and Lenovo, which enjoyed 28-33% YoY growth
While server demand witnessed in 1Q-3Q18; (2) white-box shipments growth, mostly to hyperscale data center operators,
stronger-than-expected growth of 15% YoY in which enjoyed over 40% YoY shipments growth over the period; and (3) Dell’s (US)
1Q-3Q18, the market expects a slowdown of shipments rebound to 15% YoY growth. We expect 2018F server shipments to grow
data center capex growth and server demand 11-12% YoY to 12.7mn units.
growth in 2019F due to noise around US tariffs
on China. We think these near-term concerns 2019F server shipments growth expected at 6%. We forecast global server demand
have seen supply chain shares correct to a low growth to be 6% in 2019F, vs. 11.7% in 2018F, as we expect cloud service providers’
valuation level. As the 2019F earnings outlook (CSPs) data center capex growth to remain at 10-20% next year. We also expect Purley
for some server players is decent, we see now platform adoption rate to rise given its higher performance (by 65%), lower power
as good timing for bottom-fishing. We think consumption (by 20%), and reduced latency (by 56%), which all meet data center
server products with higher dollar content, like operators’ requirements. We expect Purley penetration rate will rise to 70-80% in 2H19F
CPU socket, and client contribution from data on potential CPU price downward adjustment, as AMD (US) is scheduled to launch 7nm
center operators, in particular Facebook (US), EPYC Rome CPU for server in 1H19F. The upcoming 5G, AI, and autonomous driving era
Amazon (US), Microsoft (US), Alibaba (CN) and will further trigger data traffic demand and require faster data transmission speeds. We
Tencent (HK), should see stronger growth in thus think the server demand growth trend should continue. Near-term server
2019F. Lotes (3533 TT, NT$196.5, OP), motherboard production site adjustment should complete by end of 2018F to avoid tariffs
Wiwynn (6669 TT, NT$294.06, NR), TUC (6274 of 25% after 1Q19, and most ODMs have server system/ rack assembly lines outside China,
TT, NT$93.7, OP) and Parade (4966 TT, in Mexico and the US, not impacted by tariffs. We remain more positive on white-box
NT$466, OP) are our top picks. server (self-build/ direct ODM) shipments growth (mainly for data center demand), and on
Chinese brands continuing to gain market share, both of which should enjoy over 20%
growth in 2019F. White-box server shipments and Chinese brands will account for
25-30% and 23-25% of total server shipments in 2019F.
Cloud data center capex growth slower, but still up 10-20% YoY in 2019F. As data
traffic keeps growing, and as data transmission speed requirements remain high, coupled
with AI, 5G, and autonomous driving trends after 2020F, we expect data center expansion
demand to remain healthy. We have learnt from Cisco Global Cloud Index that hyperscale
data centers will grow from 386 units in 2017 to 448 units in 2018F and 509 units in
2019F (14-16% growth per year), and that global data center IP traffic will see a 25%
CAGR from 2016-21F. We thus expect data center capex will continue growing at
10-20% YoY in 2019F. Market consensus on the capex of major CSP is for 14% YoY
growth in 2019F, vs. 40% growth in 2018F, with a high comparison base after aggressive
data center expansion in 2017-18. Despite so, we still see strong capex growth from
Facebook (US) (26% in 2019F), Amazon (US) (20%), Microsoft (US) (16%), Alibaba (CN)
(34%) and Tencent (HK) (37%), which are focused on data center expansion.
Valuation-wise, now is good investment timing. Server supply chain share valuations
have pulled back quite a lot. Based on the cloud data center pick up trend, which has been
widely discussed in the market since early 2014, most companies enjoyed significant
valuation uptrends during 2017-3Q18. Current valuations have witnessed a discount of
5-40% for several companies as compared to early 2017, and we see new-low PE ratios
for Inventec (2356 TT, NT$21.95, N), Lotes (3533 TT, NT$196.5, OP) and Aspeed (5274 TT,
NT$603, N) in the last two years. However, these companies all should see earnings
growth of 15-35% YoY in 2019F. We thus think these names are worth watching, as we
think demand growth should resume after the recent adjustment of production sites and
capex expectations have been reset.
Stocks for Action
We think server products with higher dollar content, like CPU socket, and client
contribution from data center operators, in particular Facebook, Amazon, Microsoft,
Alibaba and Tencent, should see stronger growth in 2019F. Lotes, Wiwynn (6669 TT,
Angela Hsiang
886 2 2181 8726 NT$294.06, NR), TUC (6274 TT, NT$93.7, OP) and Parade (4966 TT, NT$466, OP) are our
angelah@kgi.com top picks.
Risks
See the last page for important disclosures. Prolonged CPU shortage; greater cost increase than expected under production site shift.
December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R Powered by EFA Platform 24

Taiwan IT hardware
Figure 1: 2018F server demand to be stronger than expected

1Q18 2Q18 3Q18 4Q18F 2017 1-3Q18
Shipments (mn units) 3.1 3.2 3.1 3.3 11.4 9.4
Shipments YoY (%) 17.4 17.2 11.0 3.0 1.2 15.1
2014 2015 2016 2017 2018F

Shipments YoY (%) 2.2 9.9 1.3 1.2 11.7
Source: Gartner, KGI Research
Figure 2: Chinese brands & self-build ODMs (white-box) drive server demand
Server shipments breakdown by customer type, percent
27.3 27.6 27.1 26.0 24.6

8.7 11.1 12.6 16.3 19.9
18.6 18.8 20.4 20.4 21.5
45.4 42.6 39.9 37.3 33.9
2014 2015 2016 2017 1H18

US brands China brands Self-build/ODM Other
Source: Gartner, KGI Research
Figure 3: Server ODM global production sites

Company Asia America Europe
Quanta Computer Taiwană China US Germany
Taiwană Chinaă Philippines ă
Wistron Mexicoă US Czech Republic
Malaysiaă India
Inventec Taiwană Indonesiaă Malaysia Mexico Czech Republic
Pegatron Taiwan、China Mexico Czech Republic
Compal Electronics Taiwană Vietnam Mexico Poland
Slovakiaă Hungary ă
Hon Hai Precision Chinaă Indiaă Turkey Mexicoă Brazilă US
Czech Republic
Figure 4 : Intel’s & AMD’s server CPU roadmap

Intel Xeon SP Families AMD Zen Families
Cascade lake- Ice Lake-
Skylake-SP Cooper Lake Zen 1 Zen 1/ Zen+ Zen 2 Zen 2+/ Zen 3
SP/AP SP/AP
Process code 14nm+ 14nm++ 14nm++ 10nm+ 14nm 14nm/12nm 7nm 7nm+/5nm
Platform Name Intel Purley Intel Purley Intel Purley Intel Whitley EPYC Naples EPYC Naples EPYC Rome EPYC Milan
Max Core Count 32 28 TBA TBA 32 32 64 TBA
Max Thread Count 64 56 TBA TBA 64 64 128 TBA
Memory Support 6-Channel DDR4 6-Channel DDR4 TBA 8-Channel 8-channel DDR4 8-channel DDR4 8-channel DDR4 8-Channel
TDP Range 140-205W 165-205W TBA Up to 230W 120-180W 120-180W TBA TBA
Competition AMD EPYC Naples 14nm AMD EPYC Rome 7nm AMD EPYC Rome 7nm AMD EPYC Milan 7nm+ Intel Purley Intel Purley Intel Purley Intel Whitley
Launch 2017 2018/2019 2019 2020 2017 2018 2019 2020

Taiwan IT hardware
Figure 5 : Server shipments witnessed stronger YoY growth in 1Q-3Q18

Server shipments ('000 units)
Vendor
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 2014 2015 2016 2017 1-3Q18
Dell 507 486 501 528 464 529 452 562 467 493 503 583 556 575 556 1,972 2,022 2,008 2,045 1,687
HP 535 584 613 626 526 529 493 598 438 483 463 471 401 406 400 2,316 2,357 2,161 1,855 1,206
Huawei 106 123 134 150 131 140 163 266 157 176 145 258 182 235 220 386 512 700 736 638
Inspur 92 82 99 140 109 120 120 144 139 158 203 217 200 247 202 322 413 492 718 650
Lenov o/IBM 220 222 242 257 199 235 228 207 146 146 152 175 157 223 189 988 941 862 618 569
Cisco 85 82 87 88 77 80 85 89 76 80 81 81 68 68 72 295 342 329 318 208
Sugon 48 48 60 64 57 50 63 59 60 71 73 76 69 89 71 184 221 220 280 229
Fujitsu 73 55 67 60 66 47 57 66 63 44 62 59 57 52 62 269 255 234 228 171
Others 1,003 1,022 959 1,043 1,086 1,027 1,064 1,045 1,056 1,080 1,147 1,282 1,363 1,305 1,369 3,360 4,027 4,228 4,564 4,037
Total 2,669 2,703 2,763 2,956 2,716 2,758 2,725 3,035 2,602 2,732 2,829 3,202 3,053 3,201 3,140 10,091 11,091 11,234 11,364 9,394
YoY (%)
Dell 9.3 (0.4) 2.1 (0.3) (8.5) 8.9 (9.8) 6.5 0.5 (6.9) 11.2 3.7 19.1 16.6 10.6 (4.1) 2.5 (0.7) 1.9 15.3
HP (0.0) 2.5 7.7 (2.6) (1.6) (9.3) (19.5) (4.4) (16.7) (8.7) (6.2) (21.2) (8.5) (16.0) (13.6) (9.4) 1.8 (8.3) (14.1) (12.8)
Huawei 23.1 38.5 43.6 27.0 23.6 14.1 21.8 77.4 19.7 26.1 (11.0) (2.9) 16.4 33.2 51.5 38.6 32.8 36.6 5.3 33.3
Inspur 13.5 41.5 9.0 53.3 19.1 46.8 20.6 2.9 27.3 31.5 69.5 50.8 43.9 56.1 (0.5) 60.6 28.6 19.0 46.0 29.7
Lenov o/IBM (4.7) (17.3) (1.4) 5.9 (9.6) 5.9 (5.7) (19.4) (26.7) (38.1) (33.5) (15.3) 7.4 53.3 24.5 (8.3) (4.7) (8.4) (28.2) 28.3
Cisco 35.8 4.0 5.0 23.5 (9.5) (3.3) (2.3) 1.4 (1.2) 0.5 (4.7) (9.2) (10.3) (15.0) (11.2) 11.7 15.7 (3.7) (3.5) (12.2)
Sugon 36.6 7.5 39.5 6.1 18.9 3.4 4.9 (9.1) 4.7 44.0 16.3 29.4 14.1 25.5 (3.4) 24.8 20.1 (0.4) 27.6 11.8
Fujitsu (2.6) (7.8) (3.7) (7.8) (10.0) (13.6) (15.6) 8.9 (4.7) (6.4) 9.9 (10.1) (8.1) 18.2 (1.3) 3.3 (5.3) (8.1) (2.7) 1.3
Others 26.6 22.1 13.4 17.8 8.3 0.5 10.9 0.2 (2.8) 5.1 7.8 22.7 29.0 20.9 19.4 10.7 19.9 5.0 8.0 23.0
Total 13.0 8.5 9.2 9.2 1.7 2.0 (1.4) 2.7 (4.2) (0.9) 3.8 5.5 17.4 17.2 11.0 2.2 9.9 1.3 1.2 15.1
Global market share (%)
Dell 19.0 18.0 18.1 17.9 17.1 19.2 16.6 18.5 17.9 18.0 17.8 18.2 18.2 18.0 17.7 19.5 18.2 17.9 18.0 18.0
HP 20.0 21.6 22.2 21.2 19.4 19.2 18.1 19.7 16.8 17.7 16.4 14.7 13.1 12.7 12.7 22.9 21.3 19.2 16.3 12.8
Huawei 4.0 4.5 4.9 5.1 4.8 5.1 6.0 8.8 6.0 6.5 5.1 8.1 6.0 7.3 7.0 3.8 4.6 6.2 6.5 6.8
Inspur 3.4 3.0 3.6 4.7 4.0 4.4 4.4 4.8 5.4 5.8 7.2 6.8 6.6 7.7 6.4 3.2 3.7 4.4 6.3 6.9
Lenov o/IBM 8.3 8.2 8.8 8.7 7.3 8.5 8.4 6.8 5.6 5.3 5.4 5.5 5.1 7.0 6.0 9.8 8.5 7.7 5.4 6.1
Cisco 3.2 3.1 3.1 3.0 2.8 2.9 3.1 2.9 2.9 2.9 2.9 2.5 2.2 2.1 2.3 2.9 3.1 2.9 2.8 2.2
Sugon 1.8 1.8 2.2 2.2 2.1 1.8 2.3 1.9 2.3 2.6 2.6 2.4 2.2 2.8 2.3 1.8 2.0 2.0 2.5 2.4
Fujitsu 2.7 2.0 2.4 2.0 2.4 1.7 2.1 2.2 2.4 1.6 2.2 1.8 1.9 1.6 2.0 2.7 2.3 2.1 2.0 1.8
Others 37.6 37.8 34.7 35.3 40.0 37.2 39.0 34.4 40.6 39.5 40.5 40.0 44.6 40.8 43.6 33.3 36.3 37.6 40.2 43.0
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
QoQ (%)
Dell (4.2) (4.3) 3.2 5.3 (12.0) 14.0 (14.5) 24.2 (16.9) 5.6 2.0 15.9 (4.6) 3.4 (3.3)
HP (16.7) 9.2 5.0 2.0 (15.9) 0.6 (6.8) 21.3 (26.7) 10.3 (4.2) 1.8 (14.9) 1.2 (1.5)
Huawei (10.3) 15.8 9.5 11.6 (12.6) 7.0 16.8 62.6 (41.1) 12.7 (17.6) 77.3 (29.3) 29.0 (6.2)
Inspur 0.4 (10.7) 21.2 41.0 (22.0) 10.1 (0.4) 20.2 (3.5) 13.8 28.4 7.0 (7.9) 23.4 (18.2)
Lenov o/IBM (9.1) 0.8 8.9 6.0 (22.4) 18.1 (3.0) (9.3) (29.4) (0.2) 4.1 15.5 (10.4) 42.4 (15.5)
Cisco 19.9 (3.1) 5.0 1.3 (12.2) 3.5 6.1 5.1 (14.3) 5.2 0.7 0.0 (15.4) (0.3) 5.2
Sugon (20.6) (0.7) 25.3 7.3 (11.0) (13.6) 27.1 (6.9) 2.5 18.7 2.6 3.6 (9.6) 30.6 (21.0)
Fujitsu 11.4 (25.3) 23.3 (10.2) 8.8 (28.3) 20.4 16.0 (4.9) (29.5) 41.3 (5.2) (2.7) (9.3) 18.0
Others 13.2 1.9 (6.2) 8.8 4.1 (5.4) 3.6 (1.7) 1.0 2.2 6.2 11.8 6.3 (4.2) 4.9
Total (1.4) 1.3 2.2 7.0 (8.1) 1.5 (1.2) 11.4 (14.3) 5.0 3.5 13.2 (4.7) 4.8 (1.9)
Figure 6: Lower CSP capex in 2019F but remaining a healthy growth

Capex (US$mn) YoY growth, (%)
2015 2016 2017 2018F 2019F 2020F 2016 2017 2018F 2019F 2020F
Google 9,950 10,212 13,184 22,571 22,489 24,922 3 29 71 (0) 11
Apple 11,670 12,665 12,527 13,767 14,890 15,099 9 (1) 10 8 1
Facebook 2,523 4,491 6,733 14,420 18,195 20,082 78 50 114 26 10
Amazon 5,387 7,804 11,955 13,104 15,679 18,179 45 53 10 20 16
Microsoft 7,142 8,247 9,895 12,961 15,002 16,984 15 20 31 16 13
IBM 3,579 3,567 3,229 3,729 3,520 3,579 (0) (9) 15 (6) 2
Oracle 1,271 1,679 1,854 1,740 1,778 1,869 32 10 (6) 2 5
Paypal 722 669 667 791 890 1,026 (7) (0) 19 13 15
eBay 668 626 666 730 775 828 (6) 6 10 6 7
Salesforce 674 485 528 614 729 848 (28) 9 16 19 16
Twitter 347 219 161 489 422 449 (37) (26) 204 (14) 6
Alibaba 1,588 2,390 4,041 5,814 7,795 9,647 50 69 44 34 24
Tencent 1,350 1,492 1,801 3,591 4,914 5,916 10 21 99 37 20
Baidu 832 631 708 919 1,007 1,061 (24) 12 30 10 5
Total 47,704 55,174 67,948 95,240 108,085 120,489 16 23 40 13 11
Top-5 US CSP 36,672 43,418 54,294 76,824 86,254 95,266 18 25 41 12 10
BAT 3,771 4,512 6,549 10,324 13,716 16,623 20 45 58 33 21
Source: Bloomberg consensus

Taiwan IT hardware
Figure 7: Global hyperscale data center unit growth at 14% Figure 8: Global data center IP traffic CAGR 25% during
in 2019F & CAGR of 13% during 2016-21F 2016-21F
Global hyperscale data center number, units Global data center IP traffic, Zettabytes per year
628 20.6
570 CAGR= 17.1
509 13%
448 14.1
386 CAGR=
338 11.6 25%
9.1
6.8
2016 2017 2018F 2019F 2020F 2021F 2016 2017 2018F 2019F 2020F 2021F
Source: Cisco Global Cloud Index, 2016-21 Source: Cisco Global Cloud Index, 2016-21
Figure 9: White-box/ self-build ODM shipments keep Figure 10: Server demand growth at 6% in 2019F
outperforming server industry
Global total, traditional & self-build ODM server shipments YoY growth, Global server shipments, mn units (LHS); YoY growth, percent (RHS)
percent
80 18 18
Romley Grantley Purley Whitley
1Q12-2Q14 3Q14-2Q17 3Q17~4Q19 1Q20~ 16
60
15 14
40 12
25 10
20 12
11 8
8
0 6
9 4
(20)
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 2
Self-build/ODM shipments Traditional server shipments Total server shipments 6 0
2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F
Source: Gartner; KGI Research Source: Gartner, KGI forecast
Figure 11: Most companies’ PE at two-year low Figure 12: Several companies’ PE at two-year low
PE relative level, x (100 = January 4, 2017) PE relative level, x (100 = January 4, 2017)
180 220
190
140
160
100 130
100
60
70
20 40
Jan-17 Apr-17 Jul-17 Oct-17 Feb-18 May-18 Aug-18 Dec-18 Jan-17 Apr-17 Jul-17 Oct-17 Feb-18 May-18 Aug-18 Dec-18
Quanta Inventec CCI Lotes King Slide Aspeed TUC Accton Iteq
Source: TEJ; KGI Research Source: TEJ; KGI forecast
Figure 13: Current valuations at low-end of PE bands Figure 14: Top picks with solid earnings growth and low
valuation
PE high-low range & current level (2014-present), x 2019F EPS growth, percent (x-axis); current PE, x (y-axis)
50 30
44 Aspeed
42 25
40
30 20 King Slide Accton

26 25 Sunonwealth Parade
24 24 15
20 19 21 Quanta TUC CCI
17 Lotes
16 15 17 16 Wiwynn
12 14 13 13 15 14 10 Iteq
10 10 11 11 11 10 Inventec
10 8
8 5 5 5 5
4 4 5
0
Quanta Inventec CCI Sunonwealth Lotes King Slide Aspeed TUC Accton Iteq Parade 0
High Low Current 0 3 6 9 12 15 18 21 24 27 30 33
Source: TEJ; KGI Research Source: TEJ; KGI forecast

Company update Connectors‧Taiwan
Lotes
(3533.TW/3533 TT)
Solid 2019 outlook intact on server & Thunderbolt cable

Outperform‧Maintained sales expansion
Event
We think demand growth should resume following the recent site adjustments caused by
the Sino-US trade war, and capex expectations have been reset. Under the positive
industry outlook, with server shipments growing, we remain positive on the firm’s 2019
Unchanged (%) 0.0 business outlook and solid earnings growth.
Upside (%) 34.9
Impact
Key message Positive 2019 outlook intact. We estimate worldwide server shipment growth of 6%
YoY and cloud data center capex growth of 10-20% YoY in 2019. Under the decent
We think demand growth should resume industry outlook, we remain positive on Lotes’ 2019 business outlook, in particular for
following the recent site adjustments caused by server sales. We estimate the Purley platform adoption rate will rise from 40-50% in 2018
the Sino-US trade war and capex expectations to 70-80% in 2019 on the potential downward adjustment of CPU prices, which would
have been reset. Under the positive industry boost server socket ILM shipments and ASP. Furthermore, we expect Lotes will likely start
outlook, with server shipments growing, we shipping Intel’s CPU sockets with the current ILM in 1H19, which will further enhance the
remain positive on the firm’s 2019 business
blended ASP of server products. The next-generation Whitley platform is scheduled to
outlook and solid earnings growth. Lotes’
current valuation of 11x 2019F EPS is in the low
launch in 1H20, and it will also positively impact Lotes due to higher socket ASP. Thus, we
end of the historical PE band. On a solid 2019 forecast the weighting of server sales will expand from 25-30% in 2018 to 30-40% in
earnings growth outlook, we assign an 2019, fueling gross and operating margin growth. Our 2019 EPS forecast is NT$18.31
Outperform rating and target price of NT$265, (based on shares after rights issue), for impressive YoY growth of 25%.
16x our 2018-19F average fully diluted EPS.
Intel & AMD driving sales. Lotes is not only the main supplier of Intel’s (US) connectors
and sockets, but it is also the primary supplier of AMD’s (US) connectors and sockets.
Trading data Server socket sales to AMD rose significantly after July 2018, while PC connector sales to
Mkt cap (NT$bn/US$mn) 20.33 / 661 AMD surged after September 2018. AMD’s 7nm EPYC Rome CPU for servers will be
103.5
launched in 1H19F, and we think Lotes will benefit. To reflect growing business, Lotes’
Outstanding shares (mn)
capex will total NT$1.0-1.5bn in both 2018F and 2019F. The recent rights issue was for
Foreign ownership (mn) 14.47 financial structure improvement during this expansion period
3M avg. daily trading (mn) 1.66
Lintes contributing earnings growth to Lotes. With new client Lenovo (CN) likely
52-week trading range (NT$) 149.0 –243.5 starting contribution from late 4Q18, 59%-owned subsidiary Lintes’ (6715 TT, NT$80, NR)
Performance 3M 6M 12M 2019 earnings outlook remains bright. We estimate that Lintes’ Thunderbolt cable sales
Absolute (%) -19.3 -1.5 17 will expand, with rising earnings contribution due to operating margin improvement in
2019. We expect Lintes’ sales contribution to Lotes will expand to 16-18% in 2019 (2018F:
Relative (%) -7.9 12.1 23.8
14-15%) while profit contribution will grow to around 20% in 2019, fueling Lotes’
earnings growth.
Quarterly EPS
NT$ 1Q 2Q 3Q 4Q
Valuation & Action
2017 2.11A 2.31A 3.80A 2.00A
Lotes’ current valuation of 11x 2019F EPS is in the low end of the historical PE band. On a
solid 2019 earnings growth outlook, we assign an Outperform rating and target price of
2018 2.73A 4.03A 5.28A 4.13F
NT$265, 16x our 2018-19F average fully diluted EPS.
2019 2.94F 4.26F 5.56F 5.55F
Risks
Share price chart Intel PC CPU supply tightness; server demand and costs due to the Sino-US trade war.
250 149.0

230 139.0
210 129.0
190 119.0
170
150
109.0
99.0
130
12
10
89.0
Revenue (NT$mn) 8,197 8,863 10,483 13,039 14,757
8
6
4
2
12-17 02-18 04-18 06-18 08-18 10-18 Operating profit (NT$mn) 780 728 1,220 1,909 2,419
Source: TEJ Net profit (NT$mn) 796 690 956 1,515 1,894
EPS (NT$) 8.52 7.38 10.23 16.07 18.31
DPS (NT$) 4.50 4.00 5.50 8.78 10.98
EPS growth (%) (26.1) (13.3) 38.5 57.1 13.9
PE (x) 23.1 26.6 19.2 12.2 10.7
PB (x) 2.3 2.3 2.2 2.3 2.1
Angela Hsiang EV/EBITDA (x) 15.2 15.7 9.4 6.7 5.9
886.2.2181.8726 Net debt to equity (%) Net cash Net cash Net cash Net cash Net cash
angelah@kgi.com Dividend yield (%) 2.3 2.0 2.8 4.5 5.6
See the last page for important disclosures. Return on average equity (%) 10.1 8.7 11.8 17.6 20.4

Taiwan Lotes
Figure 1: Server-related sales weighting to rise to around 30% in 2019F

Total sales, NT$mn (LHS); server-related sales weighting, percent (RHS)
20,000 30
25
15,000
20
10,000 15
10
5,000
5
0 0
2015 2016 2017 2018F 2019F
Total sales Server-related sales weighting
Figure 2: Operating margin to continue uptrend on server-related sales weighting

expansion
Server-related sales, NT$mn (LHS); Operating margin, percent (RHS)
5,000 20
4,000
15
3,000
10
2,000
5
1,000
0 0
2015 2016 2017 2018F 2019F
Server-related sales Operating margin

Taiwan Lotes
Figure 3: Company profile Figure 4: PC, NB & tablet contribute bulk of sales
Lotes is a connector manufacturer tapping the growth of server Sales weighting in 2018F, percent
Others
CPU upgrades and rising USB Type-C adoption. Sales of CPU
sockets, DDR, and USB 3.0 connectors for desktop made up 42% Lintes 7
of the total in 2017, while CPU sockets, mini PCI, and IO 15

DT(CPU socket, DDR
and USB 3.0 connector)
connectors for NB accounted for 18-20%. Sales of server CPU ILM 38
(socket metal fasteners, covers, and backplates) contributed 26

20-22, while USB Type-C connectors, docking cables, Thunderbolt Server (socket metal
fasteners, covers and 14
cables, and others made up 10-15%. In addition, 8-9% came back plates)
from 60.35%-owned Lintes. NB (CPU sockets, mini

PCI, and IO connectors)

4,500 6.0 5.56 5.55
4,059 4,099
5.28
4,000 3,707
3,529 5.0
3,500 3,255 3,336
4.13 4.26
2,990 3,069 4.03
2,899 3.80
3,000 2,741 4.0
2,442
2,500 2,152 2.94
3.0 2.73
2,000 2.31
2.11 2.00
1,500 2.0
1,000
1.0
500
0 0.0
Figure 7: Gross margin Figure 8: 12M forward PE band

Gross margin, percent Share price, NT$ (LHS); PE ratio, x (RHS)
38.0% 350
17.0x
36.0% 300
14.0x
34.0% 250
11.0x
32.0%
200
150 8.0x
30.0%
100 5.0x
28.0%
50
26.0%
2.0x
0
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Figure 9: Operating margin Figure 10: 12M forward PB band

Operating margin, percent Share price, NT$ (LHS); PB ratio, x (RHS)
19.1%
300
17.1%
2.6x
15.1%
250
2.2x
13.1% 200
1.8x
11.1%
150 1.4x
9.1%
7.1% 100 1.0x

5.1% 50 0.6x
3.1% 0.2x
0
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan Lotes
Income statement
Quarterly Annually
Revenue 2,741 3,255 3,707 3,336 3,069 3,529 4,059 4,099 10,483 13,039 14,757
Gross profit 850 1,048 1,243 1,084 982 1,182 1,380 1,394 3,391 4,226 4,938
EBITDA 582 688 733 626 652 788 922 921 1,852 2,630 3,283
Interest income 3 4 3 4 6 6 6 6 23 14 25
Investment income - - 0 (0) 0 0 0 0 0 0 0
Investment loss - - - - - - - - - - -
Other non-op expenses (63) 44 (17) (66) (31) (31) (31) (31) (190) (102) (122)
Non-operating expenses (66) 39 (21) (72) (35) (35) (35) (35) (196) (120) (140)
Pre-tax profit 321 542 694 533 462 598 733 731 1,252 2,090 2,524
Minorities (13) (24) (27) (26) (25) (25) (25) (25) (26) (90) (100)
Normalised net profit 255 377 494 390 305 441 575 574 956 1,515 1,894
Extraordinary items (0) (0) 0 (0) - - - - - - -
Net profit 255 377 494 390 305 441 575 574 956 1,515 1,894
EPS (NT$) 2.73 4.03 5.28 4.13 2.94 4.26 5.56 5.55 10.23 16.07 18.31
Margins (%)
EBITDA margin 21.2 21.2 19.8 18.8 21.2 22.3 22.7 22.5 17.7 20.2 22.2
Revenue growth (8.3) 18.7 13.9 (10.0) (8.0) 15.0 15.0 1.0
Gross profit growth (8.7) 23.3 18.6 (12.8) (9.4) 20.4 16.7 1.0
Operating profit growth 17.7 39.3 34.6 (22.7) (9.9) 31.2 23.5 (0.2)
EBITDA growth 23.0 18.2 6.5 (14.7) 4.2 20.9 17.1 (0.1)
Pretax profit growth 23.0 68.8 28.1 (23.1) (13.4) 29.4 22.5 (0.2)
Net profit growth 35.9 47.9 31.0 (21.0) (21.9) 44.6 30.5 (0.2)
YoY growth (%)
Revenue growth 27.4 33.3 27.8 11.6 12.0 8.4 9.5 22.9 18.3 24.4 13.2
Gross profit growth 11.0 42.0 30.1 16.5 15.5 12.8 11.0 28.6 20.3 24.6 16.9
Operating profit growth 19.4 77.8 58.8 70.4 30.4 22.9 12.8 45.8 67.6 56.6 26.7
EBITDA growth 78.0 52.4 22.4 32.1 11.9 14.4 25.8 47.2 75.8 42.0 24.8
Pretax profit growth 28.6 83.3 55.4 104.5 44.0 10.4 5.6 37.1 40.0 66.9 20.8
Net profit growth 29.1 74.2 39.0 108.0 19.6 16.9 16.5 47.2 38.5 58.4 25.0

Taiwan Lotes

Accounts receivable 3,271 3,745 4,300 4,644 5,256 Operating profit 780 728 1,220 1,909 2,419
LT investments 300 269 243 243 244 Investment income 0 0 0 0 0
Current liabilities 2,691 2,460 3,277 4,013 4,475 Investment loss (1) - - - -
Interest bearing ST liabilities 416 108 601 601 601 Pre-tax profit 1,090 895 1,252 2,090 2,524
Non-current liabilities 78 43 44 44 44 Minorities 16 43 (26) (90) (100)
Long-term debt - - - - - Extraordinary items - 0 0 - -
Other L-T liabilities 78 43 44 44 44 Net profit 796 690 956 1,515 1,894
Share capital 935 935 935 1,035 1,035 EPS (NT$) 8.52 7.38 10.23 16.07 18.31
Operations cash flow 2,094 879 1,026 1,798 2,126
Key ratios Net profit 796 690 956 1,515 1,894
Growth Decrease in working capital (196) (663) (530) (437) (632)
Revenue growth (1.3%) 8.1% 18.3% 24.4% 13.2% Other operating cash flow 1,211 526 (33) (0) (0)
Operating profit growth (29.3%) (6.7%) 67.6% 56.6% 26.7% Investing cash flow (739) (390) (1,138) (1,200) (1,200)
EBITDA growth (23.2%) (0.9%) 75.8% 42.0% 24.8% Sale of ST investment - - 3
Net profit growth (26.1%) (13.3%) 38.5% 58.4% 25.0% New investments - - - - -
EPS growth (26.1%) (13.3%) 38.5% 57.1% 13.9% Capital expenditure (470) (527) (1,046) (1,200) (1,200)
Profitability Others investing cashflow (269) 137 (95) (0) 0
Gross profit margin 33.7% 31.8% 32.3% 32.4% 33.5% Free cash flow 168 (344) 7 542 936
Operating margin 9.5% 8.2% 11.6% 14.6% 16.4% Financing cash flow (683) (636) 186 (424) (809)
EBITDA margin 13.0% 11.9% 17.7% 20.2% 22.2% Increase in short term debt (176) (308) 493
Net profit margin 9.7% 7.8% 9.1% 11.6% 12.8% Increase in long term loans - - - - -
Return on average assets 7.5% 6.5% 8.6% 12.1% 13.7% New ordinary shares issued - - - -
Return on average equity 10.1% 8.7% 11.8% 17.6% 20.4% Ordinary dividends paid (514) (421) (374) (514) (909)
Stability Other financing cashflow 7 92 67 90 100
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated 645 (576) (146) 174 117
Net debt (NT$mn) (1,625) (1,357) (718) (892) (1,009) = Operating margin 9.5% 8.2% 11.6% 14.6% 16.4%
Per share data
SPS (NT$) 87.69 94.81 112.14 138.31 142.61
Days inventory 85.8 94.3 92.1 92.1 92.1
Days payable 91.5 88.0 88.1 85.0 85.0
Cash cycle 140.0 161.0 153.8 137.1 137.1

Company update IC manufacturing‧Taiwan
Parade Technologies
(4966.TW/4966 TTT)
Outperform‧Maintained Growing momentum from high-speed interface & eDP to

resume in 2019F
12M target price (NT$) 610 Event
Previous target price (NT$) 610 Parade will benefit from the pursuit of higher data rates and resolutions, as the NB/tablet
Unchanged (%) 0.0 industry is migrating toward eDP 1.3/1.4 and converting to PSR. In addition, its high-speed
Upside (%) 30.9 interface will enjoy increasing demand for USB 3.1/3.2. Meanwhile, the company is
positive on continuing migration from SATA to PCIe for the server industry, especially once
Key message PCIe Gen 4 prevails. As a result, we forecast Parade’s top-line to grow in the teens in 2019
Parade will benefit from the pursuit of higher and 2020.
data rates and resolutions, as the NB/tablet Impact
industry is migrating toward eDP 1.3/1.4 and
USB 3.1/3.2. In addition, we feel confident that
High-speed interface standard upgrade on track. With the rising penetration rate of
the company will gain 20-30% of the global USB Type-C in smartphone, NB, and other consumer electronics, shipments of USB Type-C
server market in 2020 given that Parade is now devices are expected to exceed 2bn units in 2019. Therefore, we feel confident that
working with both major server CPU vendors, Parade’s high-speed interface business will deliver over 10% revenue growth in 2019. As
Intel (US) and AMD (US). end devices with USB Type-C will require at least USB 3.1 Gen 2 and DP1.3 specs inside,
implying that data rates need to increase from 5Gbps to 10Gbps, Parade could capture
Trading data the robust demand given its competitive solution.
Mkt cap (NT$bn/US$mn) 36.82 / 1,198
Confident in PCIe Gen 4 schedule in the coming years. We reiterate that Parade’s
PCIe design roadmap is ahead of peers’, and PCIe business will provide sales and earnings
Foreign ownership (mn) 40.4 upside for Parade when the standard migrates from 8Gbps to 16Gbps in late 2019F.
3M avg. daily trading (mn) 0.60 Parade has started testing PCIe Gen 4 samples received in 3Q18, and is working with both
52-week trading range (NT$) 370.0 –620 major server CPU vendors, Intel (US) and AMD (US). Along with its well-functioning
Performance 3M 6M 12M chipsets, Parade’s PCIe Gen 4 will probably start contributing to revenue from 2019.
Furthermore, as Parade’s retime chipsets boast a low-power consumption advantage, we
Absolute (%) 0.8 -7.9 -16.3
expect the company will gain 20-30% of the global server market in 2020.
Relative (%) 12.2 5.7 -9.5
Advanced eDP technology provides technical moat. Looking to 2019, we believe that
Quarterly EPS Parade’s leading-edge eDP portfolios will underpin 10-20% revenue growth and prevent
NT$ 1Q 2Q 3Q 4Q potential ASP and margin erosion. On one hand, in 2019F Parade will launch
next-generation eDP used to support mini LED panels. On the other hand, the non-Apple
2017 4.92A 5.95A 8.89A 5.77A
(US) NB/tablet camp is gradually migrating from eDP 1.1/1.2 to eDP 1.3/1.4, and Parade
2018 5.30A 4.80A 6.57F 8.70F
will become the major beneficiary of this trend.
2019 6.84F 7.81F 9.12F 9.33F
Valuation & Action
Share price chart As Parade will likely see rising demand for high-speed interface standards, eDP upgrades,
640
113.0
and potential market share gains in PCIe Gen 4 in 2019F, we suggest long-term investors
590
540
105.5
98.0
continue accumulating shares. We give Outperform rating with a target price of NT$610,
490
440
90.5
83.0
based on 18x 2019F EPS.
390 75.5
340
3
3
68.0
Risks
2
2
1
1
Slow progress in PCIe chipset; competition in eDP market; ASP erosion.
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ
Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Revenue (NT$mn) 9,107 10,352 10,330 12,064 13,348
Net profit (NT$mn) 1,356 1,932 1,947 2,552 3,011
EPS (NT$) 18.04 25.49 25.30 33.16 39.13
Benjamin Chiang DPS (NT$) 9.00 12.32 12.65 16.58 19.57
886.2.2181.8743 EPS growth (%) 17.9 41.3 (0.7) 31.1 18.0
benjamin.chiang@kgi.com PE (x) 25.8 18.3 18.4 14.1 11.9
PB (x) 4.8 4.4 3.9 3.5 3.0
Jimmy Huang
886.2.2181.8018 EV/EBITDA (x) 17.5 13.5 13.5 9.5 7.7
jimmy.huang@kgi.com Net debt to equity (%) Net cash Net cash Net cash Net cash Net cash
Dividend yield (%) 1.9 2.6 2.7 3.6 4.2

Taiwan Parade Technologies
Figure 1: Company profile Figure 2: Sales mix

Founded in 2005 and listed on TPEx in 2011, Parade is a leading Sales, NT$ mn; weighting, percent
fabless design house for mixed-signal IC for a variety of popular 12,064

displays and high-speed interface standards used in computers, 10,351 10,330 5
9,107 8
4 5
consumer electronics, and panels. With headquarters in Silicon 7,189 3 16 10
32
0 18
Valley, California and a design center in Shanghai, Parade also has 12 26 31
20 27
subsidiaries in Nanjing and Seoul, along with branch offices in
55
Hong Kong and Taiwan. As a cofounder and board member of 68 52 54 54
VESA, Parade has engaged in developing standards for DP and

2015 2016 2017 2018F 2019F
eDP.
T-con High-speed interface Touch DDI

3,500 3,261 10.0 9.33
3,199 9.12
3,090 8.89 8.70
2,919 9.0
3,000 2,743 7.81
2,657 2,625 2,686 8.0
2,600
2,500 2,352 2,363 6.84
2,253 7.0 6.57
5.95 5.77
6.0 5.30
2,000
4.92 4.80
5.0
1,500
4.0
1,000 3.0
2.0
500
1.0
0 0.0
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18F 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F
Figure 5: Gross margin Figure 6: 12M forward PE band

650 22x
44.0% 19x
42.0% 550
16x
40.0%
450
38.0% 13x
36.0%
350
10x
34.0%
250
32.0%
30.0%
150
3Q18F
4Q18F
1Q19F
2Q19F
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
Dec-15 Dec-16 Dec-17 Dec-18
Figure 7: Operating margin Figure 8: 12M forward PB band

650
26.0%
4.5x
24.0%
550 4.0x
22.0%
20.0% 3.5x
450
18.0%
3.0x
16.0%
350 2.5x
14.0%
12.0%
250
10.0%
8.0%
150
3Q18F
4Q18F
1Q19F
2Q19F
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
Dec-15 Dec-16 Dec-17 Dec-18

Income statement
Quarterly Annually
Mar-18A Jun-18A Sep-18F Dec-18F Mar-19F Jun-19F Sep-19F Dec-19F Dec-18F Dec-19F Dec-20F
Revenue 2,363 2,253 2,625 3,090 2,686 2,919 3,261 3,199 10,330 12,064 13,348
Gross profit 965 924 1,100 1,298 1,127 1,234 1,397 1,369 4,288 5,127 5,777
EBITDA 488 438 565 730 636 723 817 835 2,221 3,011 3,534
Interest income 1 1 7 2 3 3 2 2 11 13 4
Other non-op income 2 2 - - - - - - 4 2 -
Interest expense - - - - - - - - - - -
Investment loss - - - - - - - - - - -
Other non-op expenses (4) (0) - - - - - - (4) (0) -
Non-operating expenses (4) (0) - - - - - - (4) (0) -
Pre-tax profit 404 356 504 691 566 653 746 764 1,955 2,734 3,227
Current taxation 0 11 2 (21) (40) (52) (45) (46) (8) (182) (215)
Minorities - - - - - - - - - - -
Extraordinary items (0) 0 - - - - - - - 0 -
Net profit 405 367 506 670 527 601 702 718 1,947 2,552 3,011
EPS (NT$) 5.30 4.80 6.57 8.70 6.84 7.81 9.12 9.33 25.30 33.16 39.13
Margins (%)
EBITDA margin 20.6 19.4 21.5 23.6 23.7 24.8 25.1 26.1 21.5 25.0 26.5
Revenue growth (11.1) (4.7) 16.5 17.7 (13.1) 8.7 11.7 (1.9)
Gross profit growth (10.3) (4.2) 19.1 17.9 (13.2) 9.5 13.2 (2.0)
Operating profit growth (18.2) (12.9) 40.4 38.9 (18.3) 15.4 14.5 2.3
EBITDA growth (15.4) (10.3) 29.1 29.2 (12.9) 13.7 13.1 2.1
Pretax profit growth (18.5) (11.9) 41.4 37.2 (18.1) 15.3 14.3 2.3
Net profit growth (7.4) (9.3) 37.9 32.4 (21.4) 14.1 16.8 2.3
YoY growth (%)
Revenue growth 0.5 (13.3) (4.3) 16.3 13.6 29.6 24.2 3.5 (0.2) 16.8 10.6
Gross profit growth 2.6 (11.4) (2.4) 20.7 16.8 33.5 26.9 5.5 2.4 19.6 12.7
Operating profit growth 0.7 (29.4) (12.6) 38.8 38.7 83.9 50.0 10.5 (1.2) 39.8 18.5
EBITDA growth 2.7 (23.7) (12.2) 26.6 30.4 65.2 44.6 14.3 (2.1) 35.6 17.4
Pretax profit growth 0.1 (28.9) (11.2) 39.2 40.0 83.4 48.2 10.5 (0.7) 39.8 18.0
Net profit growth 8.9 (18.2) (25.0) 53.3 30.1 63.8 38.7 7.2 0.8 31.1 18.0


NT$mn Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F NT$mn Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Inventory 849 1,020 1,000 1,148 1,249 Operating expenses (2,253) (2,219) (2,343) (2,408) (2,555)
Other current assets 243 288 288 288 288 Non-operating income 13 - 15 15 4
Non-current assets 3,201 2,965 2,820 2,694 2,531 Interest income 1 - 11 13 4
LT investments - - - - - Investment income - - - - -
Net fixed assets 142 261 322 386 398 Other non-op income 12 - 4 2 -
Total other assets 3,059 2,703 2,498 2,308 2,133 Non-operating expenses (3) - (4) (0) -
Total liabilities 2,356 2,214 2,224 2,644 2,954 Interest expense (3) - - - -
Accounts payable 968 767 752 864 940 Other non-op expenses - - (4) (0) -
Interest bearing ST liabilities - - - - - Pre-tax profit 1,497 1,969 1,955 2,734 3,227
Other current liabilities 1,388 1,446 1,472 1,780 2,014 Current taxation (141) (39) (8) (182) (215)
Non-current liabilities - - - - - Minorities - - - - -
Long-term debt - - - - - Extraordinary items - 2 0 0 -
Other L-T liabilities - - - - - Net profit 1,356 1,932 1,947 2,552 3,011
Share capital 773 784 784 784 784 EPS (NT$) 18.04 25.49 25.30 33.16 39.13
Preferred shareholders funds - - - - - NT$mn Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Depreciation & amortisation 292 300 276 292 311
Growth Decrease in working capital (250) (394) 8 (297) (212)
Revenue growth 26.7% 13.7% (0.2%) 16.8% 10.6% Other operating cash flow 466 231 0 (0) (0)
Operating profit growth 22.9% 32.4% (1.2%) 39.8% 18.5% Investing cash flow (305) (317) (131) (166) (148)
EBITDA growth 31.7% 27.6% (2.1%) 35.6% 17.4% Sale of ST investment - -
Net profit growth 18.5% 42.4% 0.8% 31.1% 18.0% New investments - - - - -
EPS growth 17.9% 41.3% (0.7%) 31.1% 18.0% Capital expenditure (60) (201) (131) (166) (148)
Gross profit margin 41.1% 40.4% 41.5% 42.5% 43.3% Free cash flow 1,107 1,408 1,885 2,177 2,783
EBITDA margin 19.5% 21.9% 21.5% 25.0% 26.5% Increase in short term debt - -
Return on average assets 15.0% 18.9% 17.6% 20.6% 21.3% New ordinary shares issued - -
Return on average equity 19.4% 24.3% 22.0% 25.6% 26.6% Ordinary dividends paid (382) (696) (966) (992) (1,300)
Stability Other financing cashflow 68 94 (0) - (0)
Gross debt to equity 0.0% 0.0% 0.0% 0.0% 0.0% Forex effects (102) (357)
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated 1,143 732 1,135 1,389 1,662
Interest coverage (x) 485.9 Cashflow by merger - -
Cash flow interest coverage(x) 604.0 ROIC
Cash flow/int. & ST debt (x) 604.0 Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Per share data
SPS (NT$) 121.12 136.60 134.24 156.77 173.45
Days inventory 57.9 60.4 60.4 60.4 60.4
Days payable 66.0 45.4 45.4 45.4 45.4
Cash cycle 53.5 69.8 69.8 69.8 69.8

Theme 3 Taiwan
Driver IC sector
Skyrocketing demand for AMOLED driver chipsets
Impact
Demand for AMOLED driver chipset is likely to rise in 2019-20. Per conversations
with China smartphone vendors and China panel supply chain firms, we expect China
Key message smartphone vendors will require over 140mn and 180mn AMOLED panels in 2019 and
2020, respectively, from around 100mn units in 2018. Most importantly, these panel
In order to compete with iPhone 3D sensing
makers will book many more AMOLED drivers, as their AMOLED panel yield rate is poor.
technology, China smartphone vendors will
focus on optical fingerprint technology with
Given that the 2019 yield rates for China panel makers, LGD, and Samsung are 30%,
AMOLED panels in 2019F, especially as these 60%, and 95%, we estimate total AMOLED driver chipset shipments will grow from
vendors continue to migrate to full-screen 125mn in 2018 to 176mn units in 2019 and 224mn units in 2020. We believe that
panel specs for mid- and high-end Novatek (3034 TT, NT$135, OP) could benefit from first-mover advantage in AMOLED
smartphones. As a result, China smartphone
driver chipsets, as the company is likely to become a major supplier for China panel
vendors will require over 140mn and 180mn
AMOLED panels in 2019F and 2020F, makers and LG Display.
respectively, from around 100mn units in
2018F. Therefore, we believe that Novatek AMOLED driver chipset provides ASP upside. Given that competition in the AMOLED
(3034 TT, NT$135, OP) could get out of the driver IC industry is limited and China AMOLED panel makers focus on providing qualified
mud in the smartphone driver IC market by AMOLED panels rather than implementing cost-down strategies, driver IC suppliers could
penetrating into the AMOLED driver IC market.
enjoy a higher ASP. For example, ASP for AMOLED driver is likely to be US$4-5, compared
In addition, we remain positive on Chipbond
(6147 TT, NT$58.2, OP), as we feel confident to US$1.5 for TDDI and $1 for traditional full-HD driver. This implies that AMOLED driver
that increasing shipments of TDDI and chipset provides a higher gross margin.
AMOLED driver chipsets could lead to robust
COF demand continue into the coming years. Solid TDDI shipment growth to offset ASP erosion next year. We expect TDDI
shipment could reach over 400mn units in 2019 from over 300mn units in 2018.
Compared to stable ASP for TDDI this year, ASP erosion is likely to occur next year since
most TDDI players will likely get sufficient capacity support from foundries in 90nm or
55nm process node. However, ASP erosion could be offset by solid TDDI shipments.
Novatek, Focaltech (3545 TT, NT$25.55, NR), and Synaptics (US) will continue to dominate
the TDDI market next year.
More price hikes for testing & COF in 1H19F. Given that utilization rates for testing
and COF packaging will remain high in 2019F, the driver IC industry is likely to face
tightness/ bottleneck issues in packaging and testing. As a result, we believe that
Chipbond (6147 TT, NT$58.2, OP) will have strong bargaining power to increase COF and
testing prices in 1H19, as it had in 2Q18.
Valuation & Action

We are cautious about intensifying TDDI competition in 2019F as competitors are likely to
find sufficient 12-inch capacity support. Thus, TDDI shipment growth might be offset by
ASP erosion. However, we believe that Novatek could get out of the mud in the
smartphone driver IC market by penetrating into the AMOLED driver IC market. As a result,
AMOLED driver IC business could contribute 9% and 15% of Novatek’s total revenue in
2019 and 2020, from less than 1% in 2018. We also expect the company will deliver 16%
and 16% profit growth in 2019 and 2020, respectively. We give Outperform rating and
suggest investors accumulate shares to participate in the AMOLED panel trend in
Benjamin Chiang
smartphones. In addition, we remain positive on Chipbond, as we feel confident that
886.2.2181.8743 increasing shipments of TDDI and AMOLED driver chipsets could lead robust COF demand
benjamin.chiang@kgi.com
to continue into the coming years.
Jimmy Huang
886.2.2181.8018 Risks
jimmy.huang@kgi.com Soft smartphone demand and lower-than-expected demand for AMOLED panels.

Taiwan Lotes
Figure 1: AMOLED panel shipments to grow at CAGR of 16% Figure 2: China panel vendors’ capacity for AMOLED panel
during 2018-2022F could reach 25% in 2021, up from less than 10% in 2017
2
AMOLED panel total shipments, mn units AMOLED panel monthly capacity, substrate area km ; share by country,
percent
800 745 4,000
700 3,347
652 3,500
640 3,000
545 25%
2,500
480 414 435
405 2,000 35%
1,500 1,015 South
320 277
1,000 Korea: 74%
26% South 39%
160 500
66% Korea: 92%
-
0 2017 monthly capacity 2021F monthly capacity
2015 2016 2017 2018F 2019F 2020F 2021F 2022F Samsung LGD China Taiwan Japan
Source: IHS; KGI Research Source: Gartner; KGI Research
Figure 3: ASP of AMOLED driver is around 3 times & 5 times Figure 4: AMOLED driver chipset shipments could reach
higher than ASPs of TDDI & traditional full-HD driver close to 224mn units in 2020 from around 125mn in 2018
2
ASP, $ AMOLED panel monthly capacity, substrate area km ; share by country,
percent
240
$6 224
210
$4-5 176 180

180
$4 150 140
125 126
120
120 110116
99
90 95
90
$2 $1.5
60
$1.0 60
38
30 30 30+ 30
30
15 15 20+
6 10
$0 0
3
Full HD TDDI AMOLED driver China LGD Samsung Total China LGD Samsung Total China LGD Samsung Total
2018F 2019F 2020F
Panel Driver IC
Source: KGI Research estimates Source: Company data; KGI Research estimates
Figure 5: Novatek could gain a 70% share in China AMOLED Figure 6: Novatek could get the majority shares of LGD’s
panel industry AMOLED used in China smartphone market
Driver IC market share, % Driver IC market share, %
10%
30%
70%
90%
Novatek Synaptics Novatek Silicon Works

Source: KGI Research estimates Source: KGI Research estimates
Figure 7: Peer comparison – Valuations

Mkt Cap Price TP GM (%) ROE (%) EPS (LCY) P/E (x) P/B (x)
Company Rating
(US$mn) (LCY) (NT$) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F
Novatek 2,672 135.0 OP 175 30.5 31.1 31.6 21.1 24.1 27.1 10.0 11.6 13.5 13.5 11.6 10.0 2.8 2.8 2.7
Chipbond 1,238 58.2 OP 78 27.7 29.4 30.2 18.2 12.9 14.1 7.4 5.6 6.4 7.9 10.3 9.1 1.3 1.3 1.2
Note: Price (LCY) as of close price on Dec 3rd, 2018
Source: KGI Research, Bloomberg

Company update IC design‧Taiwan
Novatek
(3034.TT/3034 TT)
Returning to glory on AMOLED market penetration

We expect Novatek could benefit from the first-mover advantage in AMOLED driver
chipsets, as the company is likely to become a major supplier for China panel makers and
LG Display (KR; LGD), which will aggressively penetrate the China smartphone panel
market in the following years. Given that solid TDDI shipment growth will offset potential
Unchanged (%) 0.0
ASP erosion and SoC business could be stable, we forecast profit growth of 16% and
Upside (%) 29.6
16% in 2019F and 2020F, thanks to increasing shipments of AMOLED driver chipsets with
higher gross margin.
Key message
Impact
We give Outperform rating and target price at Getting out of the mud by penetrating AMOLED driver chipset market. In order to
NT$175, based on 15x 2019F EPS, as we compete with iPhone 3D sensing technology, China smartphone vendors will focus on
foresee Novatek penetrating into the AMOLED optical fingerprint technology in 2019F with AMOLED panels. We believe that Novatek
market in the coming years. Coupled with solid could be the key beneficiary, as the company will ship 40-50mn units and 70-80mn units
TDDI shipments offsetting ASP erosion, we of AMOLED drivers in 2019F and 2020F, contributing 9% and 15% of total revenue from
expect Novatek to deliver profit growth of 16% less than 1% in 2018. As ASP for AMOLED driver is likely to be US$4-5, compared to
and 16% in 2019 and 2020. US$1.5 for TDDI and $1 for traditional full-HD driver, this business provides margin upside.
Solid TDDI shipment growth to offset ASP erosion next year. Looking into 2019, we
Trading data expect Novatek is still likely to ship around 160mn TDDI chipset units versus around
Mkt cap (NT$bn/US$mn) 82.15 / 2,672 120mn in 2018, as global smartphone industry TDDI shipments will grow from over
Outstanding shares (mn) 609 300mn units in 2018F to over 400mn units in 2019F. However, ASP erosion could offset
Foreign ownership (mn) 417 TDDI shipment growth, especially while competition may intensify as competitors find
3.84 sufficient 55nm-process capacity support from foundries. As a result, we expect revenue
from TDDI business to be flattish YoY.
Performance 3M 6M 12M TV SoC business remains stable. We note that the company has penetrated the China
TV SoC market this year, driving SoC business growth of over 10% this year. Going
Absolute (%) -12.1 -4.9 20
forward, Novatek could gradually increase its share in the China TV SoC market by
Relative (%) -0.7 8.7 26.8
leveraging its successful experience in the Korea TV market. Most importantly is that there
are overcapacity issues in foundries’ 28nm process node, implying that Novatek could get
Quarterly EPS
a better 28nm process price to offset any ASP erosion from TV brand vendors.
NT$ 1Q 2Q 3Q 4Q
Valuation & Action
2017 1.53A 2.01A 2.55A 2.16A
Given that penetrating the AMOLED driver chipset market could lead Novatek to enjoy
2018 1.51A 2.60A 3.02A 2.88F
over 15% profit growth in 2019 and 2020, we suggest investors accumulate shares,
2019 2.56F 2.90F 3.21F 2.98F
especially as solid TDDI shipment growth will offset ASP erosion. We give Outperform
rating and target price at NT$175, based on 15x 2019F EPS,.
Share price chart
Price Close Relative to TAIEX (rhs) Risks
170.0
Downside risks include soft smartphone demand, lower-than-expected demand for

143.0
160.0 135.9
150.0 128.7
140.0
130.0
121.6
114.4 AMOLED driver chipsets and patent infringement lawsuits.
120.0 107.3
110.0 100.1
100.0 93.0
20
15
10
5
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ Revenue (NT$mn) 45,651 47,074 54,448 60,913 66,411

Net profit (NT$mn) 5,004 5,024 6,088 7,088 8,201
EPS (NT$) 8.22 8.26 10.00 11.65 13.48
DPS (NT$) 7.00 7.10 8.60 9.90 11.60
Benjamin Chiang
886.2.2181.8743
EPS growth (%) (21.8) 0.4 21.2 16.4 15.7
benjamin.chiang@kgi.com PE (x) 16.4 16.4 13.5 11.6 10.0
PB (x) 2.9 2.9 2.8 2.8 2.7
Jimmy Huang EV/EBITDA (x) 10.1 9.9 7.2 6.1 5.1
886.2.2181.8018
jimmy.huang@kgi.com
Dividend yield (%) 5.2 5.3 6.4 7.3 8.6

Taiwan Novatek
Figure 1: Company profile Figure 2: QFII holdings above 60%

Established in 1997, Novatek was listed in 2002 and has emerged as QFII holdings, percent (LHS); share price, NT$ (RHS)
the world’s leading provider of flat-panel display driver IC and SoC 100 250
solutions. Thanks to its advanced silicon foundry services in Taiwan, 80 200

Novatek has successfully diversified its product range and achieved
60 150
major design wins with top global flat-panel vendors. To meet
40 100
demand for consumer electronics ranging from mobile technology
to large home devices, the company supplies a broad range of 20 50
products. The firm had 30% market share in large-display driver IC 0 0

Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
in 2013. QFII Holding Stock Price

18,000 3.50
16,442 3.21
15,757 15,482 3.02
16,000 14,961 15,247 2.90 2.98
3.00 2.88
13,742 2.60
14,000 13,265 2.55 2.56
12,398
11,806 11,951 2.50
12,000 10,919 2.16
10,466 2.01
10,000 2.00
1.53 1.51
8,000 1.50
6,000
1.00
4,000
0.50
2,000
0 0.00
Figure 5: Gross Margin Figure 6: 12M forward PE band

32.00% 170 16x 14x
12x
31.00%
30.00% 130 10x
29.00%
8x
28.00%
90
27.00%
26.00%
50
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Figure 7: Operating Margin Figure 8: 12M forward PB band

Operating Margin, percent Share price, NT$ (LHS); PB ratio, x (RHS)
16.00% 170 3.4x
15.00%
3.0x
14.00% 130
2.6x
13.00%
12.00% 90 2.4x
11.00% 1.8x
10.00% 50
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Taiwan Novatek
Income statement
Quarterly Annually
Mar-18A Jun-18A Sep-18A Dec-18F Mar-19F Jun-19F Sep-19F Dec-19F Dec-18F Dec-19F Dec-20F
Revenue 10,466 13,265 15,757 14,961 13,742 15,247 16,442 15,482 54,448 60,913 66,411
Gross profit 3,081 4,007 4,911 4,627 4,259 4,761 5,137 4,788 16,626 18,945 21,002
Operating expenses (1,926) (2,253) (2,638) (2,454) (2,377) (2,562) (2,729) (2,555) (9,270) (10,223) (10,927)
Operating profit 1,156 1,754 2,272 2,174 1,882 2,200 2,408 2,233 7,356 8,722 10,075
EBITDA 1,297 1,900 2,423 2,383 2,044 2,362 2,569 2,395 8,002 9,369 10,724
Interest income 27 30 28 - 5 5 5 5 86 20 40
Investment income - - 2 - - - - - 2 - -
Other non-op income (59) 204 (6) - - - - - 139 - -
Non-operating income (32) 234 25 - 5 5 5 5 227 20 40
Interest expense (11) (10) (16) - - - - - (37) - -
Investment loss - - - - - - - - - - -
Other non-op expenses (1) (1) (1) - - - - - (3) - -
Non-operating expenses (12) (10) (17) - - - - - (39) - -
Pre-tax profit 1,112 1,977 2,280 2,174 1,887 2,205 2,413 2,238 7,543 8,742 10,115
Current taxation (195) (395) (441) (424) (330) (441) (458) (425) (1,456) (1,655) (1,913)
Minorities - - - - - - - - - - -
Normalised net profit 917 1,582 1,839 1,750 1,557 1,764 1,954 1,813 6,088 7,088 8,201
Extraordinary items 0 (0) 0 - - - - - - - -
Net profit 917 1,582 1,839 1,750 1,557 1,764 1,954 1,813 6,088 7,088 8,201
EPS (NT$) 1.51 2.60 3.02 2.88 2.56 2.90 3.21 2.98 10.00 11.65 13.48
Margins (%)
EBITDA margin 12.4 14.3 15.4 15.9 14.9 15.5 15.6 15.5 14.7 15.4 16.1
Revenue growth (12.4) 26.7 18.8 (5.1) (8.1) 11.0 7.8 (5.8)
EBITDA growth (24.2) 46.5 27.5 (1.6) (14.2) 15.6 8.8 (6.8)
Net profit growth (30.3) 72.6 16.2 (4.8) (11.0) 13.3 10.8 (7.2)
YoY growth (%)
Revenue growth (4.1) 12.4 27.1 25.2 31.3 14.9 4.3 3.5 15.7 11.9 9.0
Gross profit growth (0.9) 20.0 36.5 31.8 38.2 18.8 4.6 3.5 22.7 13.9 10.9
Operating profit growth (4.2) 26.7 42.4 38.6 62.9 25.4 5.9 2.7 27.8 18.6 15.5
EBITDA growth (2.4) 25.0 39.2 39.2 57.6 24.3 6.1 0.5 27.0 17.1 14.5
Pretax profit growth 0.9 35.4 24.6 40.7 69.7 11.5 5.8 3.0
Net profit growth (1.3) 29.1 18.3 33.1 69.8 11.5 6.3 3.6 21.2 16.4 15.7

Taiwan Novatek

Other current assets 407 342 287 241 202 Non-operating income - 344 227 20 40
Non-current assets 6,181 6,421 6,100 5,742 5,398 Interest income - 106 86 20 40
LT investments 1,563 1,376 1,452 1,489 1,544 Investment income - - 2 - -
Net fixed assets 2,003 1,963 1,841 1,695 1,524 Other non-op income - 238 139 - -
Total other assets 2,616 3,082 2,807 2,557 2,330 Non-operating expenses - (163) (39) - -
Total liabilities 13,582 12,305 18,622 20,519 22,565 Interest expense - (48) (37) - -
Accounts payable 7,138 6,441 7,269 8,065 8,703 Other non-op expenses - (114) (3) - -
Interest bearing ST liabilities 3,191 2,351 2,351 2,351 2,351 Pre-tax profit 5,644 5,937 7,543 8,742 10,115
Other current liabilities 2,839 3,048 8,481 9,517 10,853 Current taxation (781) (913) (1,456) (1,655) (1,913)
Non-current liabilities 414 465 522 586 658 Minorities - - - - -
Long-term debt - - - - - Extraordinary items 141 0 (0) - -
Growth Decrease in working capital 1,501 (1,383) (1,284) (1,041) (760)
Revenue growth (10.3%) 3.1% 15.7% 11.9% 9.0% Other operating cash flow 109 196 (2) - 0
Operating profit growth (18.7%) 2.0% 27.8% 18.6% 15.5% Investing cash flow (667) (750) (323) (288) (306)
EBITDA growth (17.7%) 3.6% 27.0% 17.1% 14.5% Sale of ST investment - 283
Net profit growth (21.8%) 0.4% 21.2% 16.4% 15.7% New investments (147) - (74) (37) (55)
EPS growth (21.8%) 0.4% 21.2% 16.4% 15.7% Capital expenditure (247) (253) (250) (251) (251)
Profitability Others investing cashflow (274) (780) (0) 0 (0)
Operating margin 12.4% 12.2% 13.5% 14.3% 15.2% Financing cash flow (5,849) (5,148) (282) (5,497) (6,269)
EBITDA margin 13.3% 13.4% 14.7% 15.4% 16.1% Increase in short term debt (354) (840)
Return on average assets 12.1% 12.2% 13.7% 14.5% 15.8% New ordinary shares issued - -
Return on average equity 17.7% 17.8% 21.1% 24.1% 27.1% Ordinary dividends paid (5,477) (4,260) - (5,233) (6,024)
Stability Other financing cashflow (18) (49) (282) (264) (245)
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated 518 (1,530) 4,843 908 1,516
Interest coverage (x) 123.5 205.1 Cashflow by merger - -
Cash flow interest coverage(x) 90.4 147.4 ROIC
Cash flow/int. & ST debt (x) 2.2 1.8 2.3 2.8 3.4 Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Per share data
SPS (NT$) 75.02 77.36 89.48 100.10 109.14
Days inventory 52.5 54.6 54.6 54.6 54.6
Days payable 79.9 70.1 70.1 70.1 70.1
Cash cycle 57.8 69.7 69.7 69.7 69.7

Company update Package/test‧Taiwan
Chipbond
(6147.twTW/6147 TT)
Robust TDDI shipments & growing AMOLED demand lead

Outperform‧Maintained to COF & testing capacity tightness

12M target price (NT$) 78.00 As highlighted in our October 31 report, “Growing demand for TDDI & COF drives solid
Previous target price (NT$) 78.00 2019F growth”, we see potential order adjustment from iPhone-related chipsets partially
Unchanged (%) 0.0 offsetting robust demand for TDDI and COF business. Also, we expect increasing demand
Upside (%) 34.0 for AMOLED driver chipset to lead to further tightness in COF capacity in coming years.
Key message Impact

Solid 2019F growth on robust Android demand for TDDI & COF. iPhone driver
That China smartphone vendors are increasing chipset will enter slow season in 1H19F, especially as sell-through is not strong. However,
demand for TDDI and AMOLED driver chipset Android smartphones are increasing demand for TDDI and COF, offsetting potential
will lead to further tightness in COF capacity in headwinds in 1H19. In addition, we believe the TDDI trend will continue since a growing
coming years. High utilization rates for both
number of Chinese smartphone vendors are adopting in-cell panel for new models. We
COF packaging and testing in 2019F will
forecast global TDDI shipments will keep growing from over 300mn units in 2018F to over
enable Chipbond to increase COF and testing
prices in 1H19, pointing to continued margin
400mn units in 2019F. This trend will help Chipbond maintain high-level utilization rates
upside in 2018-20F. in gold bumping and testing in 2019F.
Increased demand for AMOLED driver chipset a bonus. As we have highlighted in

Trading data our Driver IC sector note, China smartphone vendors will require over 140mn and 180mn
Mkt cap (NT$bn/US$mn) 38.08 / 1,238 AMOLED panels in 2019F and 2020F, respectively, from around 100mn units in 2018F.
Outstanding shares (mn) 654 Excluding Samsung (KR) AMOLED panels, Chinese panel makers and LGD (KR) will ship
Foreign ownership (mn) 301 over 30mn and 60mn AMOLED panels to Chinese smartphone vendors in 2019F and
2020F. These AMOLED panels will use Novatek’s (3034 TT, NT$135.0, OP), Synaptics’ (US)
and Silicon Works’ (KR) AMOLED driver chipsets, which will also be packaged and tested
by Chipbond. This means Chipbond is a key beneficiary of the AMOLED trend.
Absolute (%) -17.1 -12 1.4 More price hikes in 1H19F to drive margin upside. Given that utilization rates for
Relative (%) -5.7 1.6 8.2 testing and COF packaging will stay high in 2019F, the driver IC industry is likely to face
tightness/ bottleneck issues in packaging and testing. As a result, we believe that
Quarterly EPS Chipbond will have strong bargaining power to increase COF and testing prices in 1H19,
NT$ 1Q 2Q 3Q 4Q as it had in 2Q18. This points to continued margin upside in 2018-20F.
2017 0.41A 0.78A 1.08A 1.20A
Valuation & Action
2018 0.58A 1.15A 4.17A 1.46F
2019 1.09F 1.26F 1.58F 1.72F
We recommend long-term investors accumulate the shares to benefit from solid earnings
growth in 2019F on strong TDDI demand and ramp-up of COF for LCD and AMOLED
smartphones. Our target price is NT$78, on 15x 4Q18-3Q19F EPS. Give Outperform.
Share price chart
Risks
75.0 123.0
70.0 116.0
65.0 109.0 Low penetration rate for TDDI; low demand for AMOLED.
60.0 102.0

55.0 95.0
50.0 88.0
35
30

25
20
15
10
5
12-17 02-18 04-18 06-18 08-18 10-18

Revenue (NT$mn) 17,256 18,428 18,488 20,968 22,832
Source: TEJ Gross profit (NT$mn) 4,169 4,482 5,122 6,172 6,886
Net profit (NT$mn) 1,992 2,254 4,783 3,670 5,179
EPS (NT$) 3.07 3.47 7.36 5.65 7.97
DPS (NT$) 2.10 2.35 4.90 3.70 -
Benjamin Chiang EPS growth (%) (3.8) 13.1 112.1 (23.3) 41.1
886.2.2181.8743 PE (x) 19.0 16.8 7.9 10.3 7.3
benjamin.chiang@kgi.com
PB (x) 1.6 1.6 1.3 1.3 1.2
Jimmy Huang EV/EBITDA (x) 7.2 6.6 4.8 4.1 3.5
jimmy.huang@kgi.com Dividend yield (%) 3.6 4.0 8.4 6.4 0.0

Taiwan Chipbond
Figure 1: Company profile Figure 2: Ramp up of new non-DDI products continues

Chipbond is the world’s largest driver IC packaging and testing Sales weighting, percent
player, grossing sales of NT$18.4bn in 2017, up 6.8% YoY. In

2017, Eight-inch gold bumping accounts for around 30% of sales, 10+ 15+ ~20 ~20 ~25
12-inch gold bumping accounts for 10-13%, testing business
brings in 15%, COF makes up 25%, and COG accounts for less
90
than 10%. By application, TVs make up 40%, smartphones 85 ~80 ~80 ~75
account for 30%, tablets generate 10%, and PC/ NBs bring in
15%. Main clients are Himax (US-listed), Renesas (JP), Novatek
2015 2016 2017 2018F 2019F
(3034 TT, NT$135.0, OP), and Raydium (TW; unlisted). DDI Non-DDI (Logic + RF + PMIC + PA)

7,000 4.50 4.17
5,748 5,819 4.00

6,000
5,314
4,995 5,070 4,975 3.50
4,876
5,000
4,327 4,426 3.00
4,229 4,253
3,851
4,000 2.50
3,000 2.00 1.72

1.58
1.46
1.50 1.20 1.26
2,000 1.08 1.15 1.09
1.00 0.78
0.58
1,000 0.41
0.50
0 0.00
Figure 5: Gross Margin Figure 6: 12-month forward PE band

100
34.0%
16x
32.0%
30.0% 80 14x
28.0% 12x
26.0% 60 10x
24.0%
8x
22.0% 40
20.0%
18.0%
20
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Figure 7: Operating Margin Figure 8: 12-month forward PB band

Operating Margin, percent Share price, NT$ (LHS); PB ratio, x (RHS)
25.0% 100
23.0% 2.0x
21.0% 80
1.7x1
19.0%
17.0% 60 1.4x
15.0%
1.1x
13.0% 40
11.0% 0.8x
9.0%
20
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan Chipbond
Income statement
Quarterly Annually
Revenue 3,851 4,253 5,314 5,070 4,426 4,975 5,748 5,819 18,488 20,968 22,832
Gross profit 840 994 1,728 1,560 1,186 1,420 1,785 1,781 5,122 6,172 6,886
Operating profit 560 663 1,266 1,117 872 1,072 1,313 1,304 3,606 4,561 5,155
Depreciation of fixed assets (637) (652) (610) (689) (636) (636) (648) (666) (2,588) (2,585) (2,645)
Amortisation of intangible assets (10) (14) (11) 36 - - - - - - -
EBITDA 1,208 1,329 1,887 1,770 1,508 1,708 1,960 1,971 6,194 7,147 7,800
Interest income 4 9 2 25 10 12 13 13 40 50 7
Investment income - - 11 25 25 25 35 35 36 120 -
Other non-op income 18 174 39 - - (0) 15 15 231 30 (20)
Non-operating income 21 183 52 50 35 37 63 63 307 199 (13)
Investment loss - - - - - - - - - - -
Other non-op expenses (159) 154 5 - - - - - (1) - -
Pre-tax profit 405 983 1,309 1,145 885 1,087 1,354 1,345 3,842 4,672 5,084
Current taxation (87) (264) (341) (195) (177) (272) (325) (229) (887) (1,003) 95
Minorities (6) (21) - - - - - - (27) - -
Normalised net profit 312 698 968 950 708 816 1,029 1,116 2,929 3,670 5,179
Extraordinary items 63 50 1,742 - - - - - 1,855 - -
Net profit 375 748 2,710 950 708 816 1,029 1,116 4,783 3,670 5,179
EPS (NT$) 0.58 1.15 4.17 1.46 1.09 1.26 1.58 1.72 7.36 5.65 7.97
Margins (%)
EBITDA margin 31.4 31.2 35.5 34.9 34.1 34.3 34.1 33.9 33.5 34.1 34.2
Revenue growth (21.0) 10.5 24.9 (4.6) (12.7) 12.4 15.5 1.2
EBITDA growth (25.1) 10.1 42.0 (6.2) (14.8) 13.2 14.8 0.5
Net profit growth (51.8) 99.6 262.1 (64.9) (25.5) 15.1 26.2 8.5
YoY growth (%)
Revenue growth (9.0) (1.7) 6.4 4.0 14.9 17.0 8.2 14.8 0.3 13.4 8.9
Gross profit growth (12.0) 10.2 35.9 15.3 41.2 42.8 3.3 14.2 14.3 20.5 11.6
EBITDA growth (10.1) 2.4 20.0 9.8 24.9 28.5 3.9 11.3 6.3 15.4 9.1
Net profit growth 42.0 46.8 285.9 22.1 89.0 9.0 (62.0) 17.5 112.2 (23.3) 41.1

Taiwan Chipbond

Inventory 963 1,044 979 1,162 1,209 Operating expenses (1,400) (1,294) (1,516) (1,611) (1,731)
Other current assets 620 1,064 131 131 131 Non-operating income 207 164 307 199 (13)
LT investments 2 - 4,811 4,931 5,051 Investment income - - 36 120 -
Net fixed assets 14,315 14,840 16,879 16,494 15,448 Other non-op income 83 95 231 30 (20)
Total other assets 7,821 7,864 5,974 5,974 5,974 Non-operating expenses (306) (514) (70) (89) (57)
Accounts payable 828 727 772 813 896 Other non-op expenses (184) (445) (1) - -
Other current liabilities 2,353 3,444 5,199 5,247 5,248 Current taxation (603) (526) (887) (1,003) 95
Non-current liabilities 4,466 2,965 3,833 3,833 3,833 Minorities (75) (58) (27) - -
Long-term debt 3,718 2,200 2,900 2,900 2,900 Extraordinary items - (0) 1,855 - -
Minority interests 811 853 - - - Cash flow
Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F Depreciation & amortisation 2,617 2,638 2,588 2,585 2,645
Growth Decrease in working capital (813) (187) 4,156 2,393 2,070
Revenue growth 2.3% 6.8% 0.3% 13.4% 8.9% Other operating cash flow 274 154 (5,683) (3,539) (3,707)
Operating profit growth 8.7% 15.1% 13.1% 26.5% 13.0% Investing cash flow 2,143 (2,683) (4,636) (2,200) (1,600)
EBITDA growth 0.4% 8.2% 6.3% 15.4% 9.1% Sale of ST investment - - - - -
Net profit growth (3.5%) 13.1% 112.2% (23.3%) 41.1% New investments - - 2,055 0 -
EPS growth (3.8%) 13.1% 112.1% (23.3%) 41.1% Capital expenditure (2,226) (2,332) (6,356) (2,200) (1,600)
Profitability Others investing cashflow 4,368 (351) (334) - -
Operating margin 16.0% 17.3% 19.5% 21.8% 22.6% Financing cash flow (5,814) (2,186) (830) (3,180) (2,440)
EBITDA margin 31.2% 31.6% 33.5% 34.1% 34.2% Increase in short term debt (4,526) 779 (847) - -
Net profit margin 11.5% 12.2% 25.9% 17.5% 22.7% Increase in long term loans (86) (1,600) 700 - -
Return on average equity 8.5% 9.4% 18.2% 12.9% 17.6% Ordinary dividends paid (1,363) (1,363) (1,538) (3,180) (2,440)
Stability Other financing cashflow 160 (1) 855 - -
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated 280 (46) 379 (272) 2,147
Interest coverage (x) 22.8 42.5 56.4 53.8 89.6 Cashflow by merger - -
Net debt (NT$mn) (171) (947) (1,571) (1,539) (3,806) = Operating margin 16.0% 17.3% 19.5% 21.8% 22.6%
Per share data
EPS (NT$) 3.07 3.47 7.36 5.65 7.97 1 / (Working capital/revenue 0.2 0.1 (0.0) 0.0 0.0
SPS (NT$) 26.58 28.38 28.46 32.28 35.15
DPS (NT$) 2.10 2.35 4.90 3.70 - x Capital turnover 0.7 0.7 0.8 0.9 1.0
Days inventory 26.9 27.3 26.7 28.7 27.8
Days payable 23.2 19.0 21.1 20.1 20.6
Cash cycle 99.6 97.8 98.4 102.5 100.1

Theme 4 Taiwan
Auto parts sector
Electric vehicle & autonomous driving are bright spots

amid industry headwinds
Impact
EV & autonomous driving are bright spots amid lukewarm global automotive market.
Key message
China, the US and Europe, the major three global autonotmive markets representing 66%
of global automotive sales in 1Q-3Q18, experienced noticeable sales growth deceleration
Electric vehicle and autonomous driving are or sales decline in 3Q18. With YTD sales growth of -0.1%, 0.6%, and 1.5%, China, US
sustainable trends amid lackluster global and Europe are estimated to post -3%, 0% and 1% YoY growth in 2018. The global
automotive sales momentum and unfavorable automotive market and industry are facing multiple challenges including worldwide trade
macro market developments. We project
conflicts, China demand weakness, cost hikes (partially due to trade conflicts) and rising
business and financial momentum of related
interest rates in the US, suggesting a gloomy demand growth outlook for major markets
automotive semiconductor and component/
part suppliers to outpace that of traditional ICE as well as margin pressure for suppliers. We currently forecast the global automotive
vehicle component makers and OEMs in 2019. market will see 0-1% volume growth in 2019, with the China market declining 1%
assuming no stimulus policy and the US and Europe achiving 0-1% volume growth.
Nevertheless, the global automotive market is not without bright spots, as we see electric
vehicle and autonomous driving (including ADAS) being sustainable trends. Recently, GM
(US) announced a major restructuring plan, calling for cost cutting efforts, including the
trimming of its ICE vehicle line-up and the closing five plants located in the US and abroad,
and doubling investment in self-driving and electric vehicles. The combined EV sales of
China, the US and the EU grew 65.4% in 1Q-3Q18, up from the 44.8% YoY growth
achieved in 2017. BNEF projects global EV sales will grow at CAGR of 29.5% in 2017-25F.
We project EV- & autonomous driving-related semiconductor & component

makers to outgrow traditional ICE component makers & OEMs. Amid disappointing
3Q18 earnings across the global automotive supply chain, vendors with exposure to EV or
autonomous driving clearly stood out in terms of earnings growth and sustainability. With
accelerated production and sales of Model 3, Tesla (US) reported positive earnings and
cash flow in 3Q18, with its supply chain posting decent sales and earnings growth.
Furthermore, in its 3Q18 earnings call, Infineon (DE) revealed double digit sales growth
from automotive business, which outpaced other applications amid recent semiconductor
industry headwinds. Infineon, the second largest automotive semicondtor vendor, with
10.8% market share, projects semiconductor content per car will increase from US$375
for an ICE to US$750 for a battery electric vehicle (BEV) and from US$160 for level two
autonomous driving to US$630 for level three autonomous driving. We project vendors
who are in the automotive semiconductor supply chain or who are suppliers of EV
components and ADAS sensors will achieve better business and financial momentum
compared to ICE peers.
Stocks for Action

Our top picks for the automotive sector for 2019 are CUB (2231 TT, NT$235, OP) and
Jennifer Liang, CFA Global PMX (4551 TT, NT$102.5, OP), given their strong earnings growth outlook. We
886.2.2181.8728 currently have a Neutral rating for Tesla component makers, including Bizlink (3665 TT,
jenliang@kgi.com
NT$189, N) and Hota (1536 TT, NT$125.5, N).
Roger Huang
886.2.2181.8745 Risks
roger.huang@kgi.com Rising competition and pricing pressure amid industry headwinds to further weigh on
Terry Lee industry earnings.
886.2.2181.8729
terry.lee@kgi.com
December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R Powered by EFA Platform 47

Taiwan Auto parts sector
Figure 1: Muted growth outlook in 2018-19F Figure 2: Lack of sales momentum for top 3 major markets
Sales, mn units (LHS); YoY growth, percent (RHS) Sales growth YoY, percent
100 20 15
90 15
10
80 10
5
70 5
60 0 0
50 (5) (5)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2016 2017 2018F 2019F
Sales YoY China US Europe
Source: OICA, KGI Research Source: KGI Research
Figure 3: China, US & Europe combined EV sales achieved Figure 4: China EV sales grew 75.6% YoY in January-October
65.4% growth in 1Q-3Q18
EV sales, k units (LHS); YoY growth, percent (RHS) EV sales, k units (LHS); YoY growth, percent (RHS)
600 100 200 200
175 175
500 80
150 150
400 60 125 125
100 100
300 40
75 75
200 20 50 50
25 25
100 0 0 0
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
Sales YoY Sales YoY
Source: KGI Research Source: CAAM, KGI Research
Figure 5: US EV sales grew 71.7% YoY in January-October Figure 6: BNEF forecasts global EV sales to grow at CAGR of
29.5% in 2017-25F
EV sales, k units (LHS); YoY growth, percent (RHS) EV sales, mn units
50 150 10
40 120 8
30 90
6
20 60
4
10 30
2
0 0
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 0
Sales YoY 2017 2018F 2019F 2020F 2021F 2022F 2023F 2024F 2025F
Source: InsideEV, KGI Research Source: BNEF, KGI Research
Figure 7: Electrification to drive semiconductor contents Figure 8: Autonomous driving to drive semiconductor contents
Semiconductor content value per vehicle, US$ Semiconductor content value per vehicle, US$
740 750 970
475 630
375
160
ICE MHEV FHEV/PHEV BEV L2 (2020F) L3 (2025F) L4/L5 (2030F)
Source: Infineon, KGI Research Source: Infineon, KGI Research

Company update Auto parts‧Taiwan
Cub Elecparts
(2231.TW/2231 TT)
Outperform‧Maintained Looking forward to 2019F growth

12M target price (NT$) 292.0 Cub Elecparts (Cub) will benefit from the materialization of multiple radar development
Previous target price (NT$) 292.0 projects in 2019F. Along with limited impact from the Sino-US trade conflict and limited
Unchanged (%) 0.0
China market exposure, we project Cub to achieve EPS growth of 31.2% in 2019F,
Upside (%) 24.3
outperforming Taiwan automotive component peers.
Key message Impact
We maintain a positive view on the firm’s
radar sales growth outlook, as we anticipate
Radar business expansion will mitigate sales volatility; we estimate strong radar
client and market expansion will support radar sales growth of 144% YoY in 2019F. Management states radar project development
sales growth of 144% YoY in 2019F. Along for various automotive sub-segments is ongoing, and guides decreasing sales volatility on
with limited impact from the Sino-US trade
conflict and limited China market exposure, client and market diversification. Following RV radar shipments in February and the launch
we project Cub to achieved EPS growth of of a Taiwan OEM project and two US pick-up truck projects in 2Q18 and 3Q18, Cub has
31.2% in 2019F. scheduled more radar project launches for the aftermarket from 4Q18F onward, including
Trading data a blind-spot detection (BSD) system for a third pick-up truck customer, a universal BSD
Mkt cap (NT$bn/US$mn) 27.01 / 878 solution for passenger vehicles, and a pedestrian detection system for US school buses.
Outstanding shares (mn) 114.9 Furthermore, Cub continues its efforts to deepen penetration of each market and is in
13.46
negotiations with automotive OEMs. We forecast radar sales will increase from NT$503mn
Foreign ownership (mn)
in 2018 to NT$1.23bn in 2019F.
52-week trading range (NT$) 175.0 –459.0 We forecast 2019F sales & EPS of NT$5.33bn and NT$13.26, up 31.4% & 31.2%
Performance 3M 6M 12M YoY. On top of strong radar growth, we project improving TPMS momentum on client
Absolute (%) -10 -33.8 -23.5 inventory restocking in 2019F. Given the firm’s primary exposure to US and EU
Relative (%) 1.4 -20.2 -16.7 aftermarkets, as well as Taiwan production capabilities, we believe Cub is insulated from
the lackluster global automotive OEM sales outlook and the Sino-US trade war. We
Quarterly EPS forecast 2019F sales will grow 31.4% YoY to NT$5.33bn and EPS will grow 31.2% YoY to
NT$ 1Q 2Q 3Q 4Q NT$13.26.
2017 1.75A 3.27A 2.94A 2.49A
Valuation & Action
2018 2.39A 3.04A 2.16A 2.78F
2019 2.86F 3.15F 3.58F 3.68F We believe the severe share price pullback over the past two quarters fully reflects market
disappointment of the delay of radar contributions. As we forecast strong financial growth
Share price chart in 2019F, we see more share price upside than downside. Cub is our top pick within
490
152
Taiwan automotive component sectors. We assign an Outperform rating with a 12-month
target price of NT$292, based on 22x 2019F EPS of NT$13.26. We recommend
440 138
390 123
340 109
accumulating shares before momentum resumes in 1H19F.

290 95
240 81
190 66
140 52
5
4
3
Risks
2
Poor execution of radar projects in the US aftermarket.

1
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ
Revenue (NT$mn) 2,822 3,417 3,520 4,058 5,333
Net profit (NT$mn) 1,120 1,116 1,012 1,159 1,522
EPS (NT$) 13.45 12.14 10.00 10.11 13.26
Jennifer Liang, CFA DPS (NT$) 9.00 8.50 7.50 7.19 9.44
886.2.2181.8728 EPS growth (%) 28.9 (9.7) (17.6) 1.1 31.2
jenliang@kgi.com PE (x) 17.5 19.4 23.5 23.3 17.7
PB (x) 8.7 8.4 8.6 7.8 6.8
Roger Huang
EV/EBITDA (x) 14.2 16.3 19.4 21.8 14.7
886.2.2181.8745
roger.huang@kgi.com Net debt to equity (%) Net cash Net cash 5.8 2.3 Net cash
Dividend yield (%) 3.8 3.6 3.2 3.1 4.0
Taiwan Cub Elecparts
Figure 1: Company profile Figure 2: Radar will be the next growth catalyst
Established in 1979, Cub Elecparts is a leading manufacturer of Sales weighting by business segment, percent
tire pressure monitoring system (TPMS) in Taiwan and ventured 10 11 12
23
into the automotive radar market in 2016. TPMS and electrical 20
39 32
switches/sensors contributed a respective 56% and 44% of 2016 12 22
20 30
revenue (excluding subsidiary Harbinger). Cub has been
30 24
prospering in North America’s AM as a first-mover with its 51 57
universal TPMS solution, via market share of around 13%. Cub 38 38 30
has plants in Changhua (Taiwan) and Shanghai (China), with 2016 2017 2018F 2019F
shipment volume of 3.5mn TPMS units in 2017. TPMS Traditional switches Harbinger ADAS

1,600 4.00
3.68
1,405 1,425 3.58
1,400 1,311 3.50 3.27
3.15
1,192 3.04
2.94 2.86
1,200 3.00 2.78
1,015 1,028 1,017 998 2.49
2.39
1,000 891 915 886 2.50
829 2.16
800 2.00 1.75
600 1.50
400 1.00
200 0.50
0 0.00
Figure 5: Gross margin Figure 6: 12-month forward PE band

58.0%
500
56.0% 36.0x
54.0% 400 31.0x
52.0%
26.0x
50.0% 300
48.0%
21.0x
46.0% 200 16.0x
44.0% 11.0x
42.0% 100
6.0x
40.0%
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
0
Figure 7: Operating margin Figure 8: 12-month forward PB band

47.0%
500
13.0x
42.0%
400 11.0x
37.0%
300 9.0x
32.0% 7.0x
200
5.0x
27.0%
100 3.0x
22.0% 1.0x
0
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Income statement
Quarterly Annually
Revenue 1,015 1,028 1,017 998 1,192 1,311 1,405 1,425 3,520 4,058 5,333
Cost of goods sold (543) (536) (533) (519) (623) (675) (713) (717) (1,646) (2,131) (2,727)
Gross profit 472 492 484 479 569 636 693 708 1,875 1,927 2,606
Operating expenses (156) (167) (185) (170) (170) (181) (187) (188) (573) (678) (726)
EBITDA 357 366 339 352 442 498 548 563 1,451 1,413 2,051
Interest income 3 3 1 3 3 3 3 3 10 10 12
Investment loss (1) (3) (3) (2) (1) (1) (1) (1) - (10) (4)
Other non-op expenses (51) 55 (0) - - - - - (211) 4 -
Pre-tax profit 265 413 299 309 400 456 507 521 1,153 1,286 1,884
Current taxation (45) (74) (61) - (72) (92) (91) (94) (192) (180) (349)
Minorities 22 10 10 10 - (3) (5) (5) 51 53 (13)
Extraordinary items (0) (0) 0 0 - - - - - - -
Net profit 242 349 249 319 328 361 410 422 1,012 1,159 1,522
EPS (NT$) 2.39 3.04 2.16 2.78 2.86 3.15 3.58 3.68 10.00 10.11 13.26
Margins (%)
EBITDA margin 35.2 35.6 33.3 35.2 37.1 38.0 39.0 39.5 41.2 34.8 38.5
Revenue growth 14.6 1.3 (1.1) (1.8) 19.4 10.0 7.2 1.4
Gross profit growth (6.2) 4.3 (1.6) (1.0) 18.9 11.7 8.9 2.3
Operating profit growth (12.9) 2.8 (8.1) 3.5 29.0 14.0 11.2 2.9
EBITDA growth (11.4) 2.5 (7.3) 3.8 25.6 12.7 10.2 2.7
Pretax profit growth (19.6) 56.0 (27.7) 3.5 29.3 14.0 11.1 2.9
Net profit growth (3.8) 44.1 (28.8) 28.4 2.7 10.0 13.7 2.9
YoY growth (%)
Revenue growth 22.3 15.4 11.2 12.7 17.5 27.6 38.2 42.8 3.0 15.3 31.4
Gross profit growth 5.6 7.9 3.3 (4.8) 20.7 29.2 43.1 47.9 1.1 2.8 35.3
Operating profit growth 0.1 6.8 (6.3) (14.8) 26.2 40.0 69.3 68.2 (3.9) (4.1) 50.5
EBITDA growth 1.4 7.5 (5.1) (12.6) 23.8 36.1 61.9 60.1 (2.1) (2.7) 45.2
Pretax profit growth 61.9 16.9 (2.5) (6.2) 51.0 10.3 69.5 68.6 (14.0) 11.5 46.5
Net profit growth 50.7 15.9 (16.5) 26.7 35.4 3.4 65.1 32.3 (9.3) 14.6 31.2


Cash & ST securities 989 2,976 2,127 2,237 2,256 Gross profit 1,562 1,855 1,875 1,927 2,606
Inventory 356 513 555 718 919 Operating expenses (313) (500) (573) (678) (726)
Accounts receivable 928 1,019 1,248 1,439 1,891 Operating profit 1,249 1,355 1,302 1,249 1,880
Non-current assets 978 1,794 2,406 2,361 2,317 Interest income 2 7 10 10 12
LT investments - - 15 13 21 Investment income - - - - -
Net fixed assets 862 1,123 1,355 1,329 1,296 Other non-op income 55 11 75 54 16
Total other assets 116 671 1,037 1,018 1,000 Non-operating expenses (2) (32) (233) (26) (24)
Total liabilities 805 3,190 2,945 3,068 3,227 Interest expense (2) (21) (22) (21) (20)
Current liabilities 582 2,480 2,904 2,194 2,821 Investment loss - - - (10) (4)
Accounts payable 189 254 264 342 437 Other non-op expenses (1) (11) (211) 4 -
Interest bearing ST liabilities 127 1,849 2,308 1,468 1,745 Pre-tax profit 1,304 1,341 1,153 1,286 1,884
Other current liabilities 266 378 332 385 638 Current taxation (182) (227) (192) (180) (349)
Non-current liabilities 223 710 41 874 406 Minorities (2) 2 51 53 (13)
Long-term debt 207 690 27 860 393 Extraordinary items - 0 0 - -
Share capital 834 920 1,012 1,128 1,128 EPS (NT$) 13.45 12.14 10.00 10.11 13.26
Operations cash flow 942 1,222 733 1,056 1,139
Revenue growth 30.9% 21.1% 3.0% 15.3% 31.4% Other operating cash flow 7 164 (168) 10 4
Operating profit growth 52.1% 8.5% (3.9%) (4.1%) 50.5% Investing cash flow (123) (536) (759) (128) (131)
EBITDA growth 49.0% 9.4% (2.1%) (2.7%) 45.2% Sale of ST investment - - -
Net profit growth 50.3% (0.4%) (9.3%) 14.6% 31.2% New investments - - (15) (8) (11)
EPS growth 28.9% (9.7%) (17.6%) 1.1% 31.2% Capital expenditure (120) (102) (353) (120) (120)
Profitability Others investing cashflow (3) (434) (391) 0 (0)
Gross profit margin 55.4% 54.3% 53.2% 47.5% 48.9% Free cash flow 765 961 603 824 1,007
Operating margin 44.3% 39.7% 37.0% 30.8% 35.2% Financing cash flow (293) 1,330 (817) (819) (988)
EBITDA margin 48.0% 43.4% 41.2% 34.8% 38.5% Increase in short term debt 86 1,189 158
Net profit margin 39.7% 32.7% 28.7% 28.6% 28.5% Increase in long term loans 204 358 (373) (7) (190)
Stability Other financing cashflow 0 535 182 (53) 13
Net debt to equity Net cash Net cash 5.8% 2.3% Net cash Total cash generated 524 1,986 (849) 110 19
Net debt (NT$mn) (656) (437) 208 91 (118) = Operating margin 44.3% 39.7% 37.0% 30.8% 35.2%
Per share data
SPS (NT$) 33.87 37.16 34.79 35.37 46.49
Days inventory 103.1 120.3 123.0 123.0 123.0
Days payable 54.8 59.5 58.5 58.5 58.5
Cash cycle 168.4 170.1 193.9 193.9 193.9

Company update Auto parts‧Taiwan
Global PMX
(4551.TW/4551 TT)
Strong EPS growth in 2019F

Outperform‧Maintained
Event
Price as of December 6 (NT$) 102.5 We are upbeat on Global PMX’s earnings outlook in 2019F on new automotive project
shipments and margin expansion.
Unchanged (%) 0.0 Impact
Upside (%) 22.9 2019F automotive sales to grow 6.3%, fueled by gasoline direct injection
components & dual clutch transmission components. Through co-development with
Key message
clients, Global PMX guides gasoline direct injection (GDI) components and dual clutch
transmission (DCT) components will serve as the strongest growth catalysts in 2019.
With new automotive projects set to bear fruit, Shipment of GDI high-pressure pump components to Bosch (DE) and high-pressure pump
we forecast earnings growth of 47%, margin
body to Delphi (US) began in 3Q18 and should gradually ramp up in 4Q18. We forecast
expansion, and a lower tax rate in 2019.
GDI sales contribution will grow 32.4% in 2018, before surging another 44.7% YoY in
2019, with sales weighting increasing from 15.3% to 20.5%. We forecast DCT
components sales will rise 7.6% YoY in 2019, accounting for 18% of total sales, driving
Trading data
automotive sales growth of 6.3% YoY.
Mkt cap (NT$bn/US$mn) 8.40 / 273.1
Outstanding shares (mn) 81.93 Margin recovery on track, with strong earnings growth of 47% YoY in 2019F.
Foreign ownership (mn) 41.77 Global PMX saw 1Q-3Q18 gross margin fall 3ppts YoY to 28.4% on higher tooling costs
for new projects set to ramp up and a lower utilization rate for DCT orders. We estimate
gross margin will gradually improve to 30.2% in 2019, up 1.6ppts, on rising utilization
rate, improving production yield for new projects, and an optimized product mix. The firm
saw gross margin fall 2.8ppts YoY to 22.9% in 2015 as it booked higher costs for new
Absolute (%) 14.4 -36.1 -36.7
GDI projects scheduled to ramp up in 4Q15, before delivering stellar sales growth of 15%
Relative (%) 25.8 -22.5 -29.9 YoY and margin recovery of 6.5ppts YoY to 29.4% in 2016. Also, sales contribution from
GDI components surged to 8% of 2016 revenue. We believe Global PMX is undergoing a
Quarterly EPS
similar cycle in 2018, booking higher costs ahead of mass production of new projects,
NT$ 1Q 2Q 3Q 4Q
including high-pressure pump body, driving 2019F revenue growth. On back of a lower
2017 1.54A 1.69A 2.00A 2.09A
tax rate of 24% (versus 31% in 2018) due to high new-technology enterprise tax
2018 1.67A 1.19A 1.35A 1.91F
incentives, we forecast 2019F EPS will significantly rise to NT$9.01, up 47%.
2019 2.02F 2.21F 2.33F 2.45F
Valuation & Action
Share price chart Shares have rebounded 53% over the past month, reflecting the decent growth outlook
for 2019. Our target price is NT$126, based on 14x 2019F EPS of NT$9.01. In light of a
217 126
197 115
177
157
137
104
92
81
peer-leading earnings recovery outlook for 2019, we see an attractive risk-reward profile
for long-term investors, and recommend accumulating shares on any pullback. We assign
117 70
97 59
77 47
an Outperform rating.
57 36
3
2
2
1
Risks
1
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ Slower-than-expected ramp up of new projects.

Revenue (NT$mn) 3,066 3,527 4,049 4,451 4,814
Gross profit (NT$mn) 701 1,036 1,291 1,272 1,453
Operating profit (NT$mn) 404 717 877 819 979
Net profit (NT$mn) 292 488 600 502 738
EPS (NT$) 3.74 5.95 7.32 6.12 9.01
Jennifer Liang, CFA DPS (NT$) 3.25 4.60 6.35 4.90 7.21
886.2.2181.8728 EPS growth (%) (12.4) 59.3 22.9 (16.3) 47.1
jenliang@kgi.com PE (x) 27.4 17.2 14.0 16.7 11.4
PB (x) 3.2 3.1 2.9 2.8 2.7
Roger Huang
886.2.2181.8745
EV/EBITDA (x) 12.6 8.9 8.1 8.8 7.3
roger.huang@kgi.com Net debt to equity (%) 23.1 7.8 29.9 59.2 49.7
Dividend yield (%) 3.2 4.5 6.2 4.8 7.0

Taiwan Global PMX
Figure 1: We expect GDI & DCT sales to drive 2019 growth

Sales, NT$mn; sales weighting by application, percent
6,000
5,000
18
4,000 11 18
5 16
3,000 22 20 18
24 13 15 20
8
2,000 34 29 27 18
22
1,000
40 36 29 27 28
0
2015 2016 2017 2018F 2019F
Others Other auto GDI ABS/ESC DCT
Figure 2: Margins contracted in 2018 on preparations for ramp up of new

projects, but are likely to improve in 2019
Gross margin & operating margin, percent
35
30
25
20
15
10
5
0
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18F 1Q19F 3Q19F
Gross margin Operating margin
Figure 3: We forecast 2019 EPS will surge 47% YoY to a record-high NT$9.01
EPS, NT$ (LHS); EPS growth, percent (RHS)
10 80
8 60
6 40
4 20
2 0
0 (20)
2014 2015 2016 2017 2018F 2019F
EPS EPS growth
Figure 4: We see an attractive risk-reward profile for long-term investors

Share price, NT$ (LHS); operating margin, x (RHS)
240 30
200 25
160 20
120 15
80 10
40 5
0 0
2015 2016 2017 2018 2019 F
Price Operating margin

Taiwan Global PMX

Established in 1987, Global PMX currently has four major business Sales weighting in 2017, percent
segments: auto parts (70% of 2017 revenue), storage (13%), Others
medical equipment (12%), and others (5%). For auto applications,
Medical 5
the firm primarily produces precision engine components and
brake system parts, diesel/ gasoline nozzles and control valves for 12
anti-lock braking systems (ABS) and electronic stability control
(ESC). For storage applications, the main product is hard drive Storage 13
spacers. As for medical applications, the firm manufactures
70
surgical and orthopedic devices, such as vascular clamps. Leading
auto parts vendors like Continental (DE), Bosch (DE) and Delphi Auto parts
(US), as well as leading hard drive manufacturer Seagate (US) are
among the firm’s major clients.

1,400 3.00
1,217 1,247
1,186 1,162 1,188
1,200 1,144 2.45
1,100 1,089 1,076 2.50 2.33
1,025 2.21
2.09
1,000 940 939 2.00 2.02
2.00 1.91
1.69 1.67
800 1.54
1.50 1.35
600 1.19
1.00
400
200 0.50
0 0.00
Figure 9: Gross margin Figure 10: 12-month forward PE band

29.0x 25.5x
35.0% 210
33.0% 22.0x
31.0%
180
18.5x
29.0% 150
27.0% 15.0x
120
25.0%
11.5x
23.0% 90
21.0% 8.0x
60
19.0%
17.0% 30
4Q18F
1Q19F
2Q19F
3Q19F
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Aug-15 Feb-16 Sep-16 Apr-17 Oct-17 May-18 Dec-18
Figure 11: Operating margin Figure 12: 12-month forward PB band

28.0%
210
26.0% 5.3x
24.0% 180 4.7x
22.0%
4.1x
20.0% 150
18.0%
3.5x
120 2.9x
16.0%
14.0% 90 2.3x
12.0%
60 1.7x
10.0%
8.0% 30
4Q18F
1Q19F
2Q19F
3Q19F
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Aug-15 Feb-16 Sep-16 Apr-17 Oct-17 May-18 Dec-18

Taiwan Global PMX
Income statement
Quarterly Annually
Revenue 1,100 1,089 1,076 1,186 1,162 1,188 1,217 1,247 4,049 4,451 4,814
Cost of goods sold (779) (796) (762) (842) (824) (832) (846) (860) (2,758) (3,179) (3,361)
Gross profit 321 293 314 344 338 356 372 387 1,291 1,272 1,453
Operating profit 226 167 206 220 220 240 253 266 877 819 979
Amortisation of intangible assets (1) (2) (2) 2 (1) (1) (1) (1) (3) (4) (3)
EBITDA 306 252 292 305 317 337 351 364 1,139 1,156 1,370
Interest income 2 2 3 1 1 1 1 1 3 7 4
Investment loss - - - - - - - - - - -
Other non-op expenses (66) (41) (83) (2) (2) (2) (2) (2) (106) (193) (8)
Pre-tax profit 215 136 155 218 218 238 251 264 828 723 971
Minorities - - - - - - - - - - -
Normalised net profit 137 98 111 157 165 181 191 201 600 502 738
Extraordinary items (0) 0 0 - - - - - - - -
Net profit 137 98 111 157 165 181 191 201 600 502 738
EPS (NT$) 1.67 1.19 1.35 1.91 2.02 2.21 2.33 2.45 7.32 6.12 9.01
Margins (%)
EBITDA margin 27.9 23.1 27.1 25.7 27.3 28.4 28.8 29.2 28.1 26.0 28.5
Revenue growth (3.9) (1.0) (1.1) 10.2 (2.1) 2.3 2.4 2.4
Gross profit growth (15.4) (8.7) 7.2 9.6 (1.8) 5.4 4.3 4.3
Operating profit growth 4.4 (26.0) 23.5 6.5 (0.0) 9.2 5.7 5.1
EBITDA growth 6.8 (17.8) 15.8 4.7 3.9 6.4 4.0 3.7
Pretax profit growth (3.5) (36.9) 14.0 40.8 (0.0) 9.3 5.7 5.2
Net profit growth (20.3) (28.4) 13.0 41.7 5.5 9.3 5.7 5.2
YoY growth (%)
Revenue growth 16.9 15.9 5.0 3.7 5.6 9.2 13.1 5.1 14.8 9.9 8.2
Gross profit growth 3.8 2.0 (0.4) (9.2) 5.4 21.6 18.3 12.5 24.6 (1.4) 14.2
Operating profit growth (6.3) (13.5) (9.0) 1.6 (2.7) 43.6 22.9 21.3 22.3 (6.6) 19.6
EBITDA growth 1.3 (1.6) (0.7) 6.4 3.5 34.0 20.3 19.2 17.5 1.4 18.5
Pretax profit growth 16.8 (29.9) (32.0) (2.3) 1.2 75.4 62.6 21.5 21.1 (12.7) 34.4
Net profit growth 8.3 (29.2) (32.5) (8.6) 21.1 84.8 72.8 28.2 22.9 (16.3) 47.1

Taiwan Global PMX

Cash & ST securities 828 852 563 152 566 Gross profit 701 1,036 1,291 1,272 1,453
Accounts receivable 915 1,051 1,332 1,464 1,584 Operating profit 404 717 877 819 979
Accounts payable 143 183 324 373 394 Other non-op expenses (109) (139) (106) (193) (8)
Interest bearing ST liabilities 1,183 1,022 1,432 1,632 1,932 Pre-tax profit 378 684 828 723 971
Other current liabilities 672 847 1,010 931 1,140 Current taxation (87) (196) (228) (221) (233)
Long-term debt - - - 300 202 Extraordinary items - 0 (0) - -
Other L-T liabilities 85 113 169 169 169 Net profit 292 488 600 502 738
Total equity 2,633 2,705 2,907 3,008 3,156 EBITDA 682 970 1,139 1,156 1,370
Retained earnings reserve 585 777 886 987 1,134
Operations cash flow 235 858 718 709 1,014
Key ratios Net profit 292 488 600 502 738
Growth Decrease in working capital (299) 52 (291) (130) (115)
Revenue growth 9.7% 15.0% 14.8% 9.9% 8.2% Other operating cash flow (37) 65 147 0 -
Operating profit growth (4.4%) 77.7% 22.3% (6.6%) 19.6% Investing cash flow (589) (192) (981) (1,100) (400)
EBITDA growth 2.6% 42.1% 17.5% 1.4% 18.5% Sale of ST investment (218) 176 42
Net profit growth (8.9%) 67.3% 22.9% (16.3%) 47.1% New investments - - - - -
EPS growth (12.4%) 59.3% 22.9% (16.3%) 47.1% Capital expenditure (465) (441) (1,047) (1,100) (400)
Profitability Others investing cashflow 94 73 24 0 (0)
Gross profit margin 22.9% 29.4% 31.9% 28.6% 30.2% Free cash flow (177) 373 (443) (328) 616
Operating margin 13.2% 20.3% 21.7% 18.4% 20.3% Financing cash flow 495 (406) 30 (20) (199)
EBITDA margin 22.3% 27.5% 28.1% 26.0% 28.5% Increase in short term debt 346 (161) 410 200 200
Net profit margin 9.5% 13.8% 14.8% 11.3% 15.3% Increase in long term loans - - - 300 2
Return on average assets 6.6% 10.2% 11.2% 8.2% 11.0% New ordinary shares issued 504 - -
Stability Other financing cashflow 4 21 (4) - (0)
Net debt to equity 23.1% 7.8% 29.9% 59.2% 49.7% Total cash generated 140 235 (247) (411) 414
Net debt (NT$mn) 608 212 869 1,780 1,568 = Operating margin 13.2% 20.3% 21.7% 18.4% 20.3%
Per share data
SPS (NT$) 39.29 43.05 49.42 54.32 58.76
Days inventory 87.4 61.2 75.1 75.1 75.1
Days payable 22.1 26.8 42.8 42.8 42.8
Cash cycle 174.1 143.5 152.3 152.3 152.3

Theme 5 Taiwan
Sportswear sector
2019 athletics & leisure Industry investment strategy

Impact
Global sport-leisure trend still unfolding. The improvement of living standards, the
Key message popularization of sports science, and social media have helped sports growth match that of
fashion in recent years. According to the International Association of Health and Sports
We think the global sport-leisure trend still
Clubs (IHRSA), global gym members will grow from 145mn in 2014 to 230mn by 2030.
unfolding and observe that the outlook of
sportswear brands is better than fast fashion Participation in sports and leisure activities will drive steady global sportswear and garment
brands. In 2019, key investment trends include: market growth. According to Statista, 2017-21 sportswear demand CAGR will reach 3%,
(1) large suppliers will remain large as the and overall market value will reach US$281.4bn by 2021.
supply chain shift accelerates; and (2) new shoe
materials and new shoe styles will be the focus Outlook of sportswear brands better than fast fashion brands. Unlike fast fashion
of product development. Our top picks are
brands, whose demand switches more frequently, traditional sportswear brand rankings
Feng Tay (9910 TT, NT$192, OP),the major
supplier for Nike’s high-end basketball and
have been relatively stable over the past ten years. This is because they offer more
Jordan Brand sneakers, for which we forecast a diversified and differentiated products and their customer loyalty is higher. The market
record high ROE of 40% in 2019, and Taiwan predicts sportswear brand sales will grow 5-23% and 6-14% in 2019 and 2020,
Paiho (9938 TT, NT$51.3, OP), a one-piece respectively, while fast fashion brand sales will grow a respective 5-9% and 2-8%.
upper and high-end supplements supplier. The
valuation of high-end fabric supplier Eclat Nike is the solid sportswear leader worldwide. With a significantly larger business
Textile (1476 TT, NT$338, N) is unattractive
scale, a dominant position in the sports star endorsement market, strong production
because earnings will slow YoY in 2019. We
also recommend investors buy Power Wind innovation and rising direct-sales weighting, Nike has grown its market capitalization by
Health (8462 TT, NT$154.5, OP), the second 232% since 2010 to US$135.7bn, with the top ranking in terms of global market share.
largest gym operator in Taiwan with 2017-19F Nike guides sales growth will remain in the high single digits in 2019, thanks to strong
earnings CAGR of 27%.
demand in North America, which accounts for 40% of Nike sales, better-than-peers new
product offerings, and limited impact from the Sino-US trade war, the latter due to early
production site shifts. We have noted that its inventory growth for 1Q19 is near 0%,
indicating a healthy inventory level.
Stocks for Action

A steadily growing sports-playing population and Nike’s positive business outlook in 2019
will help the development of the Taiwan supply chain. Key investment trends include: (1)
large suppliers will remain large as the supply chain shift accelerates; and (2) new shoe
materials and new shoe styles will be the focus of product development. Our top picks
are Feng Tay (9910 TT, NT$192, OP),the major supplier for Nike’s high-end basketball and
Jordan Brand sneakers, for which we forecast a record high ROE of 41% in 2019, and
Taiwan Paiho (9938 TT, NT$51.3, OP), a one-piece upper and high-end supplements
supplier. The valuation of high-end fabric supplier Eclat Textile (1476 TT, NT$338, N) is
unattractive because earnings will slow YoY in 2019. We also recommend investors buy
Power Wind Health (8462 TT, NT$154.5, OP), the second largest gym operator in Taiwan
with 2017-19F earnings CAGR of 27%.
Risks
Brand popularity weaker than expected; macroeconomic risks.
Chien An Lai, CSIA

886 2 2181 8749
chienan.lai@kgi.com
Jackson Wang
886.2.2181.8008
jackson.wang@kgi.com
December 10, 2018 https://www.kgisia.com.tw/Portal/Report/Index/Zh/R Powered by the EFA Platform 58

Taiwan Nike supply chain
Figure 1: Global sportswear demand keeps rising Figure 2: Global gym membership up at CAGR of 6.3%, from
145mn in 2014 to 174mn in 2017
Sportswear market value, US$bn Global gym memberships, mn people
300 210
250 180
200 150
120
150
90
100
60
50
30
0
2017 2018F 2019F 2020F 2021F 0
2009 2010 2011 2012 2013 2014 2015 2016 2017
Footwear Apparel
Source: Statista; KGI Research Source: IHRSA; KGI Research
Figure 3: Global top ten sports brand market share is rising Figure 4: Market expects to see sports brands will
outpace fast fashion brands in terms of revenue growth
Market share, percent Average revenue growth, percent
70.3 20
62.9
15
37.1 10
29.7
5
0
2013 2014 2015 2016 2017 2018 2019F 2020F
Others Top 10 sports brands
2008 2017 Sports brands Fast fashion brands
Source: Euromonitor; KGI Research Source: Bloomberg; KGI Research
Figure 5: Eclat’s revenue growth momentum has outpaced Figure 6: Shenzhou International leads Chinese vendors in
peers’ since 2017 revenue growth
Revenue growth, percent Revenue growth, percent
36 25
30 20
24 15
18 10
12 5
6 0
0
(5)
(6)
(10)
2013 2014 2015 2016 2017 9M18
2013 2014 2015 2016 2017 1H18
Taiwan suppliers Taiwan suppliers, excluding Eclat Eclat
China suppliers China suppliers, excluding Shenzhou Shenzhou
Source: Bloomberg; company data; KGI Research Source: Bloomberg; KGI Research
*Taiwanese supply chain members include Eclat, Paiho, Everest, FENC, Formosa Taffeta, Li Cheng, and De Licacy. *Chinese supply chain members include Shenzhou Int’l, Best Pacific, Pacific Textiles, and Win Hanverky Holdings.
Figure 7: Feng Tay sales growth has been stronger than Feng Tay Figure 8: Operating margin has been improving
sales growth since 2H17
Quarterly revenue growth, percent Gross & operating margins, percent
30 30
25
20
20
10 15
10
0
5
(10) 0
3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18
Feng Tay Nike footwear sales Gross margin Operating margin
Source: Company; KGI Research Source: Company; KGI Research
December 10, 2018 https://www.kgisia.com.tw/Portal/Report/Index/En/R 59

COMPANY UPDATE Footwear‧Taiwan
Feng Tay
(9910.TW/9910 TT)
FTSE4Good TIP Taiwan ESG Index stock
2019F net profit to reach record high; ROE to 41%

Event
Outperform‧Maintained We forecast 2019F net profit of NT$6.44bn, up 22% YoY, for EPS of NT$9.64
Price as of 6 December 2018 192.0
Impact
Previous target price (NT$) 230.0 October net profit up 16% YoY to NT$507mn. Feng Tay sold 9.8mn pairs of finished
Unchanged (%) 0.0 shoes in October, achieving 32% of 4Q18 target. October sales came in at NT$5.47bn, up
Upside (%) 19.8 10% YoY, while operating profit grew 45% YoY to NT$715mn, on operating margin of
13.1%, up 3.1ppts YoY. EPS was NT$0.76, achieving 33% and 33% of our 4Q18 forecast
Key message and consensus. Thanks to Nike’s (US) positive outlook and full-price retail strategy, Feng
Tay guides 4Q18F shoe output and shipments to grow 11% YoY and 13% YoY,
October net profit grew 16% YoY to
respectively, both reaching record highs.
NT$507mn. We forecast net profit to advance
22% YoY to NT$6.44bn and ROE to climb to
41% in 2019F, both record highs, on robust
2019F operating margin expansion. Our analysis shows the correlation between Feng
demand, economies of scale and automation. Tay’s monthly footwear shipments and operating margin is nearly 70%. However, since
We give our target price at NT$230 (24x 2019F footwear pricing agreements signed between Feng Tay and customers are on a cost-plus
EPS), with Outperform rating.
basis, the company only managed to raise operating margin from 9.5% in 2014 to 9.9%
in 2017 when footwear shipments grew from 79.15mn pairs to 102mn pairs. This is why
Trading data investors by and large have predicted limited margin expansion. In June-October, however,
Mkt cap (NT$bn/US$mn) 128.2 / 4,171 Feng Tay’s average operating margin jumped to 13.0% from the 2016-17 average of
Outstanding shares (mn) 668 10.5%, which the company attributes to economies of scale, improved worker efficiency,
Foreign ownership (mn) 152 and automated equipment. On account of positive guidance from brand clients, we expect
3M avg. daily trading (mn) 1.46 shipments to grow 11% to 127mn pairs in 2019, operating margin to rise from 11.1% in
52-week trading range (NT$) 125.0 –208.0 2018 to 11.9%, above consensus of 11.4%, and net profit to advance 22% YoY to
Performance (%) 3M 6M 12M NT$6.44bn and NT$9.64 per share, boosting ROE from 37% to 41%.
Absolute 6.4 39.1 43.8
Relative 17.8 52.7 50.6 Valuation & Action
We are upbeat on Feng Tay as robust demand, economies of scale and automation will
Quarterly EPS boost profitability. We forecast earnings and ROE will both hit record highs in 2019. We
NT$ 1Q 2Q 3Q 4Q give our target price at NT$230, with Outperform rating, based on 24x 2019F PE, derived
2017 1.14A 1.74A 1.90A 1.80A from the five-year average plus standard deviation of 0.5x.
2018 1.14A 2.12A 2.36A 2.27F
2019 2.07F 2.26F 2.59F 2.73F Risks
Weak sales of Nike products; NT dollar appreciation.
Share price chart
230 165
210 152
190 138
170 125
150 112
130

98
110 85
7
6
5
4
3
2
Revenue (NT$mn) 55,804 58,122 58,633 65,061 71,978
1
12-17 02-18 04-18 06-18 08-18 10-18
Net profit (NT$mn) 4,238 4,453 4,395 5,272 6,442
EPS (NT$) 7.11 6.67 6.58 7.89 9.64
DPS (NT$) 5.00 5.20 5.00 6.00 7.33
Chien-an Lai, CSIA EPS growth (%) 33.3 (6.2) (1.3) 20.0 22.2
866.2.2181.8749 PE (x) 27.0 28.8 29.2 24.3 19.9
chienan.lai@kgi.com PB (x) 8.7 9.3 9.4 8.6 7.8
EV/EBITDA (x) 17.5 16.7 18.5 15.6 13.5
Jackson Wang
866.2.2181.8008 Net debt to equity (%) 2.3 2.0 10.3 5.1 Net cash
jackson.wang@kgi.com Dividend yield (%) 2.6 2.7 2.6 3.1 3.8

Taiwan Feng Tay
Figure 1: Company profile Figure 2: Shareholder mix

Established in 1971, Feng Tay has over 110k employees and Shareholder weighting, percent
specializes in the production of athletic and casual footwear,

deriving 85% of revenue from athletic shoes, 11% from casual Board of directors
shoes and sports equipment, 2% from ball production, and 2% 17
from the wholesale of everyday items. Headquartered in Yunlin,

Taiwan, Feng Tay has production bases in China, Indonesia, 62
Others 21
Vietnam and India, with capacity weightings of 11%, 13%, 52%, FINI
and 24%, respectively. About 85% of revenue comes from its
largest client, Nike (US).

25,000 3.00
2.73
2.59
19,132 19,457 2.50 2.36

2.27
20,000 2.26
17,160 17,429 17,259 2.12 2.07
15,662 15,639 16,131 1.90
15,308 14,833 2.00 1.80
14,144 1.74
15,000 13,520
1.50
1.14 1.14
10,000
1.00
5,000
0.50
0 0.00
Figure 5: Gross margin Figure 6: Rolling PE

27.0%
26.0
26.0%
25.0% 24.0
24.0%
23.0% 22.0
22.0%
21.0% 20.0
20.0%
19.0% 18.0
18.0%
16.0
17.0%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Figure 7: Operating margin Figure 8: Rolling PB

Operating margin, percent 9.20
14.0% 8.70
13.0%
8.20
12.0%
11.0% 7.70
10.0% 7.20
9.0%
6.70
8.0%
7.0% 6.20
6.0%
5.70
5.0%
5.20
4.0%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan Feng Tay
Income statement
Quarterly Annually
Revenue 14,833 15,639 17,160 17,429 16,131 17,259 19,132 19,457 58,633 65,061 71,978
Gross profit 3,125 3,814 4,461 4,061 3,742 4,056 4,553 4,709 13,479 15,461 17,060
Depreciation of fixed assets (435) (453) (449) (418) (478) (478) (478) (478) (1,671) (1,755) (1,914)
EBITDA 1,617 2,255 2,724 2,456 2,334 2,501 2,800 2,918 7,512 9,052 10,554
Interest income 6 15 10 11 11 11 11 11 24 41 44
Investment income - 28 36 5 5 5 5 5 42 69 20
Other non-op income 151 521 340 180 180 180 180 180 851 1,192 720
Non-operating income 157 563 386 196 196 196 196 196 917 1,303 784
Investment loss (13) 13 - - - - - - - - -
Other non-op expenses (40) 11 (41) (50) (50) (50) (50) (50) (256) (119) (200)
Pre-tax profit 1,260 2,355 2,596 2,156 1,975 2,142 2,441 2,559 6,401 8,367 9,117
Current taxation (424) (772) (824) (539) (494) (535) (610) (640) (1,596) (2,559) (2,279)
Minorities (74) (167) (196) (99) (99) (99) (99) (99) (410) (536) (396)
Normalised net profit 763 1,416 1,575 1,518 1,382 1,507 1,732 1,820 4,395 5,272 6,442
Extraordinary items 0 0 0 (0) - - - - - - -
Net profit 763 1,416 1,575 1,518 1,382 1,507 1,732 1,820 4,395 5,272 6,442
EPS (NT$) 1.14 2.12 2.36 2.27 2.07 2.26 2.59 2.73 6.58 7.89 9.64
Margins (%)
EBITDA margin 10.9 14.4 15.9 14.1 14.5 14.5 14.6 15.0 12.8 13.9 14.7
Revenue growth (5.3) 5.4 9.7 1.6 (7.5) 7.0 10.9 1.7
Gross profit growth (22.2) 22.0 17.0 (9.0) (7.8) 8.4 12.3 3.4
Operating profit growth (29.2) 53.0 26.4 (10.5) (8.9) 9.0 14.9 5.1
EBITDA growth (22.6) 39.4 20.8 (9.8) (4.9) 7.1 12.0 4.2
Pretax profit growth (31.4) 86.9 10.2 (16.9) (8.4) 8.4 14.0 4.8
Net profit growth (36.6) 85.7 11.2 (3.6) (8.9) 9.0 14.9 5.1
YoY growth (%)
Revenue growth 9.7 10.6 12.1 11.3 8.7 10.4 11.5 11.6 0.9 11.0 10.6
Operating profit growth 10.7 27.5 34.7 22.6 57.7 12.3 2.1 19.9 (9.7) 25.1 18.6
EBITDA growth 9.2 23.5 28.9 17.5 44.3 10.9 2.8 18.8 (7.5) 20.5 16.6
Pretax profit growth 7.6 49.1 43.2 17.4 56.7 (9.1) (5.9) 18.7 (9.2) 30.7 9.0
Net profit growth 0.5 21.7 24.1 26.1 81.2 6.4 10.0 19.9 (1.3) 20.0 22.2

Taiwan Feng Tay

Other current assets 1,828 1,744 1,571 1,571 1,571 Non-operating income 1,025 857 917 1,303 784
LT investments 896 867 821 884 898 Investment income 72 28 42 69 20
Net fixed assets 13,273 14,000 14,130 15,050 15,776 Other non-op income 928 803 851 1,192 720
Other current liabilities 3,655 4,829 4,429 5,095 5,984 Current taxation (1,597) (2,345) (1,596) (2,559) (2,279)
Non-current liabilities 5,503 6,413 5,983 5,546 5,842 Minorities (424) (254) (410) (536) (396)
Long-term debt 1,414 1,425 1,623 1,186 1,483 Extraordinary items - 0 (0) - -
Other L-T liabilities 4,088 4,988 4,360 4,360 4,360 Net profit 4,238 4,453 4,395 5,272 6,442
Minority interests 1,777 1,613 1,757 2,293 2,689 Cash flow
Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F Depreciation & amortisation 1,470 1,702 1,717 1,800 1,957
Growth Decrease in working capital 52 (1,715) (362) (833) (929)
Revenue growth 17.1% 4.2% 0.9% 11.0% 10.6% Other operating cash flow 1,103 1,706 (553) (63) (14)
Operating profit growth 22.7% 16.3% (9.7%) 25.1% 18.6% Investing cash flow (3,086) (2,795) (2,541) (2,676) (2,640)
EBITDA growth 20.2% 16.2% (7.5%) 20.5% 16.6% Sale of ST investment - - -
Net profit growth 37.3% 5.1% (1.3%) 20.0% 22.2% New investments (186) - - - -
EPS growth 33.3% (6.2%) (1.3%) 20.0% 22.2% Capital expenditure (2,982) (2,746) (2,605) (2,676) (2,640)
Profitability Others investing cashflow 82 (48) 64 (0) 0
EBITDA margin 12.5% 14.0% 12.8% 13.9% 14.7% Increase in short term debt (675) 78 606
Net profit margin 7.6% 7.7% 7.5% 8.1% 8.9% Increase in long term loans 55 10 198 104 151
Stability Other financing cashflow (241) (181) (274) 536 396
Net debt to equity 2.3% 2.0% 10.3% 5.1% Net cash Total cash generated 483 125 (472) 801 1,356
Net debt (NT$mn) 344 306 1,582 885 (320) = Operating margin 9.9% 11.0% 9.9% 11.1% 11.9%
Per share data
SPS (NT$) 93.57 87.02 87.78 97.40 107.76
Days inventory 44.8 46.6 48.2 48.2 48.2
Days payable 27.9 23.0 25.9 25.9 25.9
Cash cycle 41.5 52.8 54.2 54.2 54.2

Company update Footwear‧Taiwan
Taiwan Paiho
(9938.TW/9938 TT)
Outperform‧Maintained 2019F earnings to resume positive growth

12M target price (NT$) 62.00 We forecast 2019F net profit of NT$1.5bn, up 14% YoY, for EPS of NT$5.04.
Impact
Unchanged (%) 0.0
3Q18 preliminary net profit of NT$290mn, down 37% YoY. Paiho posted 3Q18
Upside (%) 20.9
preliminary revenue of NT$3.16bn, up 0.1% YoY and up 5.2% QoQ, but lower than our
forecast by 6.5% and consensus by 3.5%. Preliminary operating profit was NT$539mn,
Key message down 27% YoY. Preliminary operating margin was 17.1%, down 6.2ppts YoY.
Preliminary EPS was down 37% YoY to NT$0.97, missing our forecast and consensus by a
3Q18 preliminary earnings were NT$290mn, respective 35% and 25%, mainly due to ASP decline, rising costs of raw materials, and
down 37% YoY, missing consensus. YTD, the depreciation/amortization expenses eating into profit from a new shoe materials capacity
transition from old to new products has utilization of below 20%.
dragged down share performance, but the
company’s scale of operations and profitability New shoe materials shipments will ramp up again in 4Q18-1H19F. In the first nine
are both much improved from 2010-14, and its months of 2018, new shoe materials (one-piece upper, four-way stretch fabric) suffered
market share will keep rising. Target price is
from poor demand, with shipment value coming in at only NT$90mn, down around 75%
NT$62, with Outperform rating.
YoY to account for only 1% of total sales, down from 4% in the same period last year,
which dragged down overall gross margin by about 1ppt. However, shipments of
500-600k pairs of soccer shoes will be delivered to a German client in 4Q18F, and a
Trading data
one-piece running shoe upper product is likely to start mass shipments in 1H19 for the
Mkt cap (NT$bn/US$mn) 15.28 / 497.1 2019 autumn/winter line. As such, new shoe materials’ shipment value weighting is likely
Outstanding shares (mn) 298.0 to rise to a respective 2% and 3% in 4Q18 and in 2019, which will boost operating
Foreign ownership (mn) 81 margin back to 20.7% and 20.2%.
3M avg. daily trading (mn) 1.89 Gross margin of traditional auxiliary materials remains high. Since 2014, Paiho has
52-week trading range (NT$) 42.70 –130.0 continued to improve its product offerings, and its gross margin is set to rise from the
Performance 3M 6M 12M 2010-14 average of 29% to an average of 39% in 2015-19F, indicating the company is
highly competitive and innovative. In response to the Sino-US trade conflict and the
Absolute (%) -28.3 -30.2 -56.9
planned operations of brand-name clients, Paiho has continued to expand production
Relative (%) -16.9 -16.6 -50.1 capacities in Vietnam and Indonesia, where revenue weighting had risen from 29% and
3% in 2017 to 31% and 5% in the first nine months of 2018, respectively. In addition,
Quarterly EPS Paiho only derives 4% of revenue from direct Chinese exports to the US, so we think the
NT$ 1Q 2Q 3Q 4Q impact of additional US tariffs will be limited.
2017 1.37A 1.30A 1.55A 1.21A
Valuation & Action
2018 1.23A 1.07A 0.96A 1.13F
Shares are trading at only 9x our 2019 EPS forecast, a valuation last seen in 2010-14, but
2019 1.12F 1.23F 1.30F 1.39F
we think the company’s scale of operations and profitability are both much improved from
the past. YTD, the transition from old to new products has weighed on the shares, but
Share price chart market share will continue to pick up long term. Our target price is NT$62, with
153
115 Outperform rating.
133 102
Risks
113 88
93 75
73 62
53
33
12
48
35
Weak shipment volume; raw material price volatility.
10
8
6
4
2
12-17 02-18 04-18 06-18 08-18 10-18

Source: TEJ Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Revenue (NT$mn) 9,443 10,630 11,748 12,044 13,061
Net profit (NT$mn) 1,140 1,490 1,620 1,306 1,501
EPS (NT$) 3.83 5.00 5.44 4.38 5.04
Chien-an Lai, CSIA
DPS (NT$) 2.00 3.00 3.00 2.63 3.02
866.2.2181.8749 EPS growth (%) 16.4 30.7 8.7 (19.4) 14.9
chienan.lai@kgi.com PE (x) 13.4 10.3 9.4 11.7 10.2
PB (x) 2.1 2.0 1.8 1.7 1.6
Jackson Wang EV/EBITDA (x) 7.9 6.8 7.0 8.1 6.9
886.2.2181.8008
jackson.wang@kgi.com Net debt to equity (%) Net cash 6.0 39.1 46.7 49.0
Dividend yield (%) 3.9 5.8 5.8 5.1 5.9
See the last page for important disclosures. Source: Company data, KGI Research estimates

Taiwan Taiwan Paiho

Established in 1985, Taiwan Paiho is the world’s largest fastening Sales weighting, percent
tape maker. Major products are fastening tape, webbing, elastic, 100 18 16 8 5 4
4 3
touch reflective bars, injection hooks, bamboo charcoal products 5
8 9 10
80 6 5
and knitted uppers. Fastening tape capacity is 1.3mn km per year, 6 7
8
9 14 15
8
60
for over 10% market share. R&D and sales specifically cater to 24
22 20 18
26
brand clients, with a broad product offering protected by many 40
patents. Gross margin is steadily above 30%, indicating strong 20 35 40 48 49 50
profitability. Plants are located in Taiwan, China and Vietnam. 0

Investment in Taiwan and Vietnam increased in 2013-14 on 2013 2014 2015 2016 2017
capacity expansion for touch reflective bars and knitted uppers. Webbings/shoelaces Touch fasteners Elastics Molded hooks Power coatings Others

4,000 1.80
3,391 1.60 1.55
3,500 3,265 3,301
3,154 3,146 3,105 1.39
3,002 3,007 1.37
2,863 2,931 2,889 1.40 1.30 1.30
3,000 2,799
1.21 1.23 1.23
1.20 1.13 1.12
2,500 1.07
0.96
1.00
2,000
0.80
1,500
0.60
1,000
0.40
500 0.20
0 0.00

26.4
43.0%
24.4
41.0%
22.4
39.0%
20.4
37.0%
18.4
35.0% 16.4
33.0% 14.4
31.0% 12.4
29.0% 10.4
8.4
27.0%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

25.0% 5.20
4.70
23.0%
4.20
21.0%
3.70
19.0%
3.20
17.0% 2.70
15.0% 2.20
13.0% 1.70
1.20
11.0%
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan Taiwan Paiho
Income statement
Quarterly Annually
Revenue 2,889 3,002 3,146 3,007 3,105 3,265 3,391 3,301 11,748 12,044 13,061
Gross profit 1,129 1,117 1,146 1,177 1,215 1,266 1,324 1,293 4,705 4,570 5,098
Depreciation of fixed assets (188) (195) (200) (235) (256) (256) (256) (256) (696) (817) (1,024)
Amortisation of intangible assets (4) (4) (4) 1 (3) (3) (3) (3) (11) (11) (10)
EBITDA 774 714 722 857 868 905 938 967 3,381 3,067 3,678
Interest income 7 2 13 10 10 12 12 12 42 33 46
Investment income - - - - - - - - 4 - -
Investment loss (1) (2) - - - - - - - (3) -
Other non-op expenses (35) (11) (63) (12) (12) (12) (12) (12) (119) (120) (48)
Pre-tax profit 528 518 438 584 572 616 647 687 2,592 2,067 2,523
Minorities (44) (38) 8 (65) (60) (60) (60) (60) (213) (139) (240)
Extraordinary items (0) (0) (0) - - - - - - (0) -
Net profit 366 318 285 338 335 365 387 414 1,620 1,306 1,501
EPS (NT$) 1.23 1.07 0.96 1.13 1.12 1.23 1.30 1.39 5.44 4.38 5.04
Margins (%)
EBITDA margin 26.8 23.8 23.0 28.5 28.0 27.7 27.7 29.3 28.8 25.5 28.2
Revenue growth (1.4) 3.9 4.8 (4.4) 3.2 5.2 3.9 (2.7)
Gross profit growth (0.2) (1.1) 2.6 2.7 3.2 4.2 4.5 (2.3)
Operating profit growth (3.7) (11.5) 0.7 20.1 (2.2) 6.0 5.2 4.3
EBITDA growth (3.4) (7.7) 1.2 18.6 1.3 4.2 3.7 3.1
Pretax profit growth (7.7) (2.0) (15.4) 33.4 (2.0) 7.6 5.1 6.1
Net profit growth 1.1 (13.2) (10.3) 18.6 (0.9) 9.0 5.9 7.0
YoY growth (%)
Revenue growth 3.2 4.8 (0.3) 2.6 7.5 8.8 7.8 9.8 10.5 2.5 8.4
Gross profit growth (1.0) (4.2) (9.5) 4.0 7.6 13.3 15.5 9.9 12.6 (2.9) 11.6
Operating profit growth (11.7) (23.9) (29.3) 3.0 4.7 25.3 31.0 13.8 15.3 (16.3) 18.1
EBITDA growth (6.0) (15.7) (20.6) 7.0 12.2 26.7 29.8 12.9 15.6 (9.3) 19.9
Pretax profit growth (15.6) (22.7) (39.5) 2.1 8.4 19.0 47.9 17.6 10.0 (20.2) 22.0
Net profit growth (10.5) (17.9) (38.4) (6.6) (8.4) 14.9 35.7 22.5 8.7 (19.4) 14.9

Taiwan Taiwan Paiho

LT investments 267 219 209 208 210 Investment income 2 1 4 - -
Current liabilities 3,755 4,886 6,383 6,902 7,215 Investment loss - - - (3) -
Accounts payable 352 397 481 511 544 Other non-op expenses (72) (83) (119) (120) (48)
Other current liabilities 1,316 1,583 2,243 2,290 2,517 Current taxation (574) (633) (759) (622) (782)
Long-term debt 1,564 760 3,238 3,091 3,178 Extraordinary items - 0 (0) (0) -
Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F Depreciation & amortisation 523 605 707 828 1,034
Growth Decrease in working capital (1,345) (379) (1,162) (257) (496)
Revenue growth 3.6% 12.6% 10.5% 2.5% 8.4% Other operating cash flow 1,755 457 (7) 3 0
Operating profit growth 25.1% 20.9% 15.3% (16.3%) 18.1% Investing cash flow (1,722) (1,945) (4,128) (2,669) (3,160)
EBITDA growth 16.8% 19.8% 15.6% (9.3%) 19.9% Sale of ST investment - - -
Net profit growth 16.4% 30.7% 8.7% (19.4%) 14.9% New investments - (1) (3) (2) (2)
EPS growth 16.4% 30.7% 8.7% (19.4%) 14.9% Capital expenditure (1,693) (1,686) (3,648) (2,667) (3,158)
Profitability Others investing cashflow (29) (258) (477) (0) 0
Gross profit margin 37.1% 39.3% 40.0% 37.9% 39.0% Free cash flow (1,171) 224 (2,223) (542) (806)
Operating margin 20.3% 21.8% 22.8% 18.6% 20.2% Financing cash flow (75) (583) 2,558 (34) 509
EBITDA margin 25.9% 27.5% 28.8% 25.5% 28.2% Increase in short term debt 330 1,077 939
Net profit margin 12.1% 14.0% 13.8% 10.8% 11.5% Increase in long term loans 381 (1,062) 2,292 295 140
Stability Other financing cashflow (190) (2) 221 565 1,153
Gross debt to equity 38.9% 36.9% 65.0% 63.8% 59.7% Forex effects (82) (333) 89
Net debt to equity Net cash 6.0% 39.1% 46.7% 49.0% Total cash generated 195 (688) (323) (823) (612)
Net debt (NT$mn) (105) 599 4,152 5,270 6,022 = Operating margin 20.3% 21.8% 22.8% 18.6% 20.2%
Per share data
SPS (NT$) 31.69 35.67 39.43 40.42 43.83
Days inventory 184.2 174.3 216.1 216.1 216.1
Days payable 21.7 22.5 24.9 24.9 24.9
Cash cycle 228.8 222.8 259.9 259.9 259.9

Theme 6 Taiwan
Financials sector
Widening FCY interest spreads & high-yield plays are

2019F investment focus
Key message
Impact
We believe ongoing capital market rerating will Capital market rerating continues on slowing 2019F economic growth. Taiwan’s
affect capital gains for life insurers and business economic recovery, which began in 2016, plateaued in 2Q18. In 2H18, Taiwan exports
momentum for brokerages in 2019. However, slipped due to Sino-US trade friction. In addition, Taiwanese iPhone component makers
Mega Bank, SCSB and CTBC Bank (2891 TT, have seen orders and earnings revised down due to poor iPhone sales. The Taiex and the
NT$20.35, OP) will benefit the most in 2019F financial sub-index both corrected as a result. The Directorate General of Budget,
from wider net interest margin (NIM) and Accounting and Statistics (DGBAS) revised down Taiwan’s 2018F and 2019F economic
overseas earnings growth on higher overseas growth from a respective 2.69% and 2.73% to 2.66% and 2.41% in November for the
exposure and FCY loan weighting. SCSB first time this year. Our analysis of the 2008, 2011, and 2015 economic cycles shows that
(5876 TT, NT$38.8, OP) and Mega FHC (2886 order cuts trigger a decline in exports, which in turn leads to lower capital expenditures,
TT, NT$25.8, OP) are our top picks in the layoffs, and leave without pay. In addition, shrinking wealth indirectly hurts private
financial sector in 2019. consumption. Our economist forecasts Taiwan’s economic growth will be revised down
QoQ in 2019 to as low as 2.2%, prompting stocks to correct by both value and volume,
which will affect capital gains for life insurers and business momentum for brokerages.
Life insurers to face lower capital gains, higher hedging costs and yield curve
inversion in 1H19F. As the Taiex has corrected to 9,500-10,000 since October, we expect
financial sector correction will result in lower valuations for risk assets at life insurers,
reducing net worth by 19% MoM in October, or NT$266.1bn. We estimate Cathay FHC
(2882 TT, NT$48.25, N) and Fubon FHC (2881 TT, NT$48, N) have seen unrealized gains
on financial assets drop by a respective NT$42bn and NT$38bn since 3Q18. Due to lower
unrealized gains , we forecast life insurers will face the challenge of lower capital gains in
1H19. Moreover, as the interest spread between the US and Taiwan continues to widen,
CS/NDF hedging costs will climb to over 3%, offsetting an increase in recurring gains
brought about by US interest rate hikes. In addition, as US long-term treasury yields went
down, leading to yield curve inversion, the improving recurring yields for life insurers will
be capped. We forecast Cathay FHC and Fubon FHC earnings will contract a respective
6% and 5% in 2019.
US rate hikes to boost FCY interest spread & overseas earnings growth. Following
the recent dovish statement from US Fed Chair Powell, the market now expects two rate
hikes from the Fed in 2019. In contrast, Taiwan’s central bank is unlikely to start a rate hike
cycle amid a slowing economy. We therefore expect a wider FCY interest spread to offset
a competition-led decrease in NT-dollar interest spread. Due to the relocation of
China-based Taiwanese firms to Southeast Asia and Taiwan amid the intensifying Sino-US
trade war, we predict Mega Bank (2886 TT, NT$25.8, OP), Shanghai Commercial &
Savings Bank (SCSB; 5876 TT, NT$38.8, OP), and CTBC Bank (2891 TT, NT$20.35, OP) will
be the primary beneficiaries of wider NIM and overseas earnings growth in 2019 on higher
overseas exposure and FCY loan weighting. In October, financial market correction turned
life insurers’ unrealized gains on financial assets to a negative value, likely reducing their
2018 cash dividend payout ratio. We forecast Mega FHC and SCSB cash dividend yields
will be a respective 6% and 5% higher than the financial sector averages.
Stocks for Action

Due to intensifying financial market volatility, both overseas and at home, and a
downward revision to Taiwan economic growth, we forecast the ongoing capital market
correction will affect capital gains for life insurers and business momentum for brokerages
in 2019. Life insurance-focused Cathay FHC and Fubon FHC will be under net worth and
Eric Shih earnings pressures in 2019F, while securities-centric Yuanta FHC (2885 TT, NT$15.2, N)
886.2.2181.8733 will be under earnings pressure. However, Mega Bank, SCSB, and CTBC Bank will benefit
eric.shih@kgi.com the most in 2019F from wider NIM and overseas earnings growth, thanks to higher
overseas exposure and FCY loan weighting. We believe banking-focused SCSB and Mega
Jenny Liu FHC will be the focus of investors with long-term investment horizons in 2019 on the
886.2.2181.8035 themes of widening FCY interest spreads and high cash dividend yields.
tseen.liu@kgi.com
See the last page for important disclosures. Risks
Intense capital market volatility; sharper-than-expected credit costs at banks.

Taiwan Financials sector
Figure 1: Taiwan economic growth plateaued in 2Q18; Sino-US trade friction led
to downward revisions to Taiwan exports & 2018-19F economic growth, causing
Taiex & financial sub-index correction
Taiwan GDP growth, percent (LHS); Taiex, points (RHS)
15.0 1,500
peak peak peak peak
10.0 7.72 7.37 3.56 1,300
1,206
5.0 3.29 1,100
0.0 900
(5.0) 700
(10.0) 500
Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19
Taiwan GDP YoY Finance & insurance sub-index
Source: Bloomberg, DGBAS; KGI Research
Figure 2: Following recent dovish statement from US Fed Chair Powell, the
market now expects two rate hikes from the Fed in 2019
US & Taiwan interest rates, percent (LHS); financial sub-index, points (RHS)
6.0 1,500
1,206
5.0
1,200
4.0
3.0 900
2.25
2.0 1.375 600
1.0
0.0 300
Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18
US Fed rate Taiwan discount rate Taiex financial sub-index
Source: TEJ, Bloomberg; KGI Research
Figure 3: Life insurers’ net worth, unrealized gains/losses on financial assets are
positively correlated with Taiex; in October, Taiex fell 10.9% & life insurer net
worth slipped by NT$266.1bn, down 19% MoM & a record-high monthly decline
Life insurer net worth, NT$bn (LHS); Taiex returns, percent (RHS)
2,000 12,000
9,685
10,000
1,500
8,000
1,000 1,118
6,000
500
4,000
0 2,000
Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18
Net value of life insurers TAIEX
Source: Taiwan’s central bank, TEJ; KGI Research

Figure 4: As market expects pace of rate hikes will slow down, 10Y US Treasury
yields have declined 30bps MoM to around 2.90%-2.95%; yield spread between
2Y & 10Y Treasuries narrowed to 13bps; yield curve inversion will cap improving
recurring yields for life insurers
US Treasury yield, percent
4.0
3.15
2.74 2.76 2.76 2.89
3.0 2.40
2.73
2.0 2.34
1.81 2.13
1.0 1.52 1.28
0.0
US 3-Month 3-month 2-year Treasury 5-year Treasury 10-year 30-year
Libor Treasury Yield Yield Yield Treasury Yield Treasury Yield
2018/12/6 2017/12/6
Figure 5: Taiex down 12% since 4Q18, significantly cutting unrealized gains on financial assets for life insurers; we estimate
respective declines in unrealized gains of at least NT$42bn & NT$38bn for Cathay Life & Fubon Life
3Q18 (Classification under IFRS 9) Cathay Life Fubon Life Shin Kong Life Taiwan Life Nan Shan Life Mercuries Life
NT$mn 2882 TT 2881 TT 2888 TT 2891 TT 5874 TT 2867 TT
Fair value through Profit and Loss (FVTPL - Overlay) 1,094,287 724,043 197,420 131,010 705,261 113,682
Fair value through other comprehensive income (FVOCI) 971,908 654,707 317,962 191,850 892,702 56,437
Amortized Cost (AC) 2,242,556 1,797,084 1,648,887 997,327 1,978,491 715,098
Unrealized gains & losses on FVOCI 31,489 11,910 4,666 7,313 47,799 4,152
Other comprehensive income under overlay approach 55,612 22,285 5,400 1,553 (2,797) (1,291)
1/1 total unrealized gains & losses(A) 87,100 34,195 10,066 8,866 45,002 2,861
Unrealized gains & losses on FVOCI (10,974) (1,642) 3,666 (3,816) (11,295) 1,332
Other comprehensive income under overlay approach 16,238 (293) 693 (5,205) (25,515) (6,650)
3Q18 total unrealized gains & losses(B) 5,264 (1,935) 4,359 (9,021) (36,811) (5,318)
YTD change in unrealized gains & losses (B)-(A) (81,836) (36,130) (5,707) (17,888) (81,813) (8,179)
3Q18 Unrealized gains & losses on AC (C) (69,301) (53,206) (59,982) (15,699) (84,975) (35,929)
Total potential unrealized gains & losses (B)+(C) (64,037) (55,141) (55,623) (24,721) (121,786) (41,247)
3Q18 domestic equities investment position 464,000 382,900 269,069 146,763 166,793 46,185
Since 4Q18, TAIEX fell from 11,000 points to 9,684 points (-12%) (50,172) (41,403) (29,094) (13,224) (24,047) (4,439)
Change in international bonds (US 10-year treasury yields down to 2.95%) 8,266 3,346 2,243 1,635 12,097 644
Decrease in unrealized gains & losses (D) (41,906) (38,057) (26,851) (11,589) (11,950) (3,795)
Total unrealized gains & losses (B)+(D) (36,642) (39,992) (22,492) (20,611) (48,761) (9,113)
Sensitive analysis
Since 4Q18, TAIEX fell to 8,500 points (-23%) (95,095) (78,474) (55,145) (25,065) (45,578) (8,414)
Change in international bonds (US 10-year treasury yields down to 2.8%) 19,335 7,826 5,247 3,825 28,297 5,285
Change in unrealized gains & losses (75,760) (70,647) (49,898) (21,240) (17,281) (3,129)
Since 4Q18, TAIEX fell to 7,800 points (-29%) (121,654) (100,391) (70,546) (32,066) (58,308) (10,764)
Change in international bonds (US 10-year treasury yields down to 2.7%) 26,715 10,814 7,249 5,285 39,098 (555)
Change in unrealized gains & losses (94,939) (89,577) (63,297) (26,781) (19,210) (11,318)
Source: Company data; KGI Research

Figure 6: In 1H19, life insurers will face: (1) lower capital gains; (2) higher hedging costs and (3) yield curve inversion
Life insurers' investment position Cathay Life Fubon Life Shin Kong Life Taiwan Life
Percent 1-3Q18 1-3Q17 YoY (%) 1-3Q18 1-3Q17 YoY (%) 1-3Q18 1-3Q17 YoY (%) 1-3Q18 1-3Q17 YoY (%)
Investment return (A)=(B)+(C) 4.19 4.16 0.03 4.10 4.08 0.02 4.13 4.28 (0.15) 3.94 4.13 (0.19)
Pre-hedging recurring yield 3.54 3.47 0.07 3.72 3.72 - 4.04 3.97 0.07 3.80 3.65 0.15
Hedging cost (1.22) (0.94) (0.28) (1.38) (1.42) 0.04 (1.76) (1.21) (0.55) (1.25) (0.98) (0.27)
After-hedging recurring yield (B) 2.75 2.89 (0.14) 2.87 3.19 (0.32) 2.83 2.47 0.36 3.00 3.02 (0.02)
Capital gain(C) 1.44 1.27 0.17 1.23 0.89 0.34 1.30 1.81 (0.51) 0.94 1.11 (0.17)
Equities - domestic 12.1 10.6 1.5 11.4 14.2 (2.8) 8.4 3.7 4.7
Equities - international 10.8 8.8 2.0 8.2 2.0 6.2 3.8 4.1 (0.3)
Bonds - domestic 3.3 2.1 1.2 2.8 2.8 0.0 8.4 3.7 4.7
Bonds - international 4.7 5.0 (0.3) 4.7 5.1 (0.4) 3.8 4.1 (0.3)
Cost of liability 4.05 4.14 (0.09) 3.67 3.73 (0.06) 4.13 4.28 (0.15) 3.63 3.70 (0.07)
Investment income (NT$mn) 178,063 160,809 10.7 108,630 96,552 12.5 84,952 68,487 24.0 46,078 40,719 13.2
Recurring investment 150,182 133,157 12.8 97,982 88,886 10.2 64,448 60,316 6.9 42,189 35,199 19.9
Interest revenue 108,536 102,506 5.9 71,756 62,767 14.3 62,471 57,212 9.2 36,464 31,531 15.6
Dividend revenue 23,153 22,567 2.6 22,959 23,379 (1.8) 1,977 3,104 (36.3) 5,273 3,263 61.6
Hedging cost (29,164) (21,749) (34.1) (21,127) (23,346) 9.5 (21,247) (17,469) 21.6 (10,818) (3,964) 172.9
Capital gain 57,677 49,772 15.9 30,955 30,953 0.0 41,751 25,640 62.8 14,706 9,484 55.1
Equities 44,944 33,302 35.0 24,089 19,089 26.2
Bonds 12,733 16,470 (22.7) 6,866 11,864 (42.1)
Real estate (632) (373) 69.4 868 58 1,396.6
Figure 7: Life insurers’ unrealized gains on financial assets have turned negative, affecting 2018F cash dividend payout ratio; we
expect bank high cash dividend to be market focus
2882 TT 2881 TT 2891 TT 2888 TT 2867 TT 5874 TT
NT$mn Cathay FHC Fubon FHC CTBC FHC Shin Kong FHC* Mercuries* Nan Shan*
Net income (2018F) 58,399 56,627 39,567 22,017 3,524 21,907
Plus: undistributed retained earnings 60,169 158,209 13,594 10,176 7,799 385
Distributable earnings 118,568 214,836 53,161 32,193 11,323 22,292
Minus: Legal reserve (2018F) 5,840 5,663 3,957 2,202 705 4,381
Minus: Cash dividends on preferred stock (2018F) 3,391 2,916 750 - - -
Undistributed earnings (2018F) 109,337 206,257 48,454 29,992 10,618 17,911
2018F other equities (37,918) (59,414) (34,543) (21,431) (9,117) (48,620)
2018F distributable earnings 71,418 146,843 23,156 8,561 1,502 (30,710)
2018F distributable earnings per share 5.68 14.35 1.19 0.78 0.78 (3.01)
2018F dividends per share (2017 level) 2.59 2.41 1.15 0.70 - -
2018F dividends per share (KGI forecasts) 2.20 2.10 1.00
Figure 8: Life insurers’ CS/NDF hedging costs have risen to 3% as interest spread
between US & Taiwan widens
NT dollar per US dollar (LHS); hedging costs, percent (RHS)
34 1.0
0.0
32 30.86 (1.0)
30 (2.0)
(3.23)
(3.0)
28
(3.36) (4.0)
26 (5.0)
Apr-14 Dec-14 Aug-15 Apr-16 Dec-16 Aug-17 Apr-18 Dec-18
NT dollar per US dollar CS NDF

Figure 9: Mega FHC’s and SCSB’s cash dividend yield of 5% are higher than peer
average
Cash dividend, NT$ per share (LHS); cash dividend yield, percent (RHS)
4.0 8.0
6.2
3.0 5.3 5.0 4.9 6.0
4.8 4.6 4.4 4.1
2.0 3.1 4.0
2.20 2.10
1.95
1.60 1.49
1.0 2.0
1.00
0.80 0.55 0.63
0.0 0.0
Mega Yuanta SCSB CTBC KTB Cathay Fubon Taishin E.Sun
Cash dividend Cash dividend yield
Figure 10: FHC & bank valuations

Market Share PB PE ROE Net Profit Net Profit EPS EPS Growth Cash yield
Company Code Rating cap price (x) (x) (%) (NT$mn) Growth (%) (NT$) (%) (%)
(US$ mn) (LCY) 2018F 2019F 2018F 2019F 2017 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2017 2018F 2019F
CTBC FHC 2891 TT Outperform 12,882 20.35 1.24 1.11 10.0 9.7 12.4 12.4 12.1 39,567 41,007 6.3 3.6 2.03 2.10 6.3 3.6 5.3 4.9 5.2
Mega FHC 2886 TT Outperform 11,392 25.80 1.11 1.01 12.3 11.5 8.7 9.3 9.2 28,539 30,384 10.9 6.5 2.10 2.23 10.9 6.5 5.8 6.2 6.4
SCSB 5876 TT Outperform 5,167 38.80 1.20 1.09 11.6 11.0 10.2 10.7 10.4 13,624 14,373 10.0 5.5 3.34 3.52 9.9 5.5 4.6 5.0 5.3
Cathay FHC 2882 TT Neutral 19,681 48.25 1.22 1.15 10.4 10.9 11.0 11.2 10.9 58,399 55,731 3.7 (4.6) 4.65 4.44 3.7 (4.6) 5.2 4.6 4.1
Fubon FHC 2881 TT Neutral 15,948 48.00 1.15 1.06 8.7 9.0 12.8 12.9 12.3 56,627 54,878 4.6 (3.1) 5.53 5.36 4.6 (3.1) 4.8 4.4 4.3
E.Sun FHC 2884 TT Neutral 7,190 20.45 1.37 1.28 13.3 13.2 10.6 10.7 10.3 16,599 17,807 12.5 7.3 1.53 1.55 5.8 0.9 3.0 3.1 3.1
Yuanta FHC 2885 TT Neutral 5,767 15.20 0.80 0.74 9.1 9.4 8.0 9.0 8.1 19,282 18,617 16.5 (3.4) 1.67 1.61 18.5 (3.4) 3.7 5.3 5.2
Taishin FHC 2887 TT Neutral 4,558 13.45 1.07 0.97 10.3 10.2 10.8 10.7 10.0 13,648 13,800 4.5 1.1 1.31 1.32 (0.0) 1.1 4.0 4.0 4.0
King's Town Ba 2809 TT Neutral 1,159 31.00 0.92 0.82 7.3 7.2 16.1 12.9 12.1 4,867 4,981 (13.2) 2.3 4.23 4.33 (13.2) 2.3 4.8 4.8 4.8
TW Peer Average 1.12 1.02 10.3 10.2 11.2 11.1 10.6 27,906 27,953 6.2 1.7 5.2 1.0 4.6 4.7 4.7

Company update Financial‧Taiwan
Shanghai Commercial & Savings Bank

(5876.TW/5876 TT)
Beneficiary of widening FCY spread & high-yield play

Price as of December 6 (NT$) 38.80 We are upbeat on SCSB as 2019F earnings growth, boosted by net interest income
44.50
growth in the mid- to high-single digits and Hong Kong business, will outpace banking
12M target price (NT$)
peers and life insurance earnings.
Upside (%) 14.7 Taiwan & Hong Kong are twin engines of earnings growth. In Taiwan, private bank
SCSB focuses on corporate banking. The bank has formed a strategic alliance with Hong
Key message Kong subsidiary Shanghai Commercial Bank (SCB (HK)) and China’s Bank of Shanghai.
SCSB’s 1Q-3Q18 earnings were fueled by loan growth and a rising net interest margin
(NIM) in Taiwan, which drove net interest income up 7.8% and net profit up 9% YoY at
We forecast SCSB’s net interest income will
SCB (HK). SCSB’s 1Q-3Q18 net profit was NT$10.2bn, up 9.5% YoY. Annualized ROE of
maintain mid- to high single-digit growth in
10.9% beat peer average of 8%. SCB (HK) contributed 40% of pretax earnings in
2018-19F. Foreign currency loans of Taiwan
1Q-3Q18, and total overseas profits from overseas branches and OBUs accounted for a
and HK units will continue to benefit from US
hefty 60% of SCSB earnings, higher than the peer average of 37%. Thanks to its overseas
rate hikes.
network and highly loyal corporate customers, we predict SCSB will be a primary
beneficiary of the relocation of China-based Taiwanese companies to Southeast Asia and
Trading data Taiwan amid the intensifying Sino-US trade war.
Mkt cap (NT$bn/US$mn) 159.1 / 5,176 Both Taiwan & Hong Kong NIM to benefit from US interest rate hikes. SCSB
4,102
Taiwan’s foreign currency (FCY) loans accounted for 27% of total loans in 3Q18, while
Outstanding shares (mn)
bonds continue to see NIM expand on rising US interest rates. As a result, SCSB Taiwan’s
Foreign ownership (mn) 1,909 NIM increased 7bps YTD to 1.22% in 3Q18, second only to that of Mega Bank. SCSB
3M avg. daily trading (mn) 4.40 remains positive on NIM growth due to interest rate hikes in the US and Taiwan, guiding
52-week trading range (NT$) 33.04 –40.80 low-single digit basis point increase. Also, SCB (HK)’s NIM climbed 12bps from 2017 to
Performance 3M 6M 12M 1.98% in 1H18, reflecting rising interbank offered rates, loans and investment yields along
with US rate hikes.
Absolute (%) 9.5 4.6 12.9
Relative (%) 20.9 18.2 19.7 Cash dividend yield of 5% is higher than peer average. For 2018, we forecast EPS of
NT$3.34 and cash dividend of NT$1.95 per share. Cash dividend yield will be 4.9%, higher
Share price chart than the peer average of 4.6%, attractive to investors with long-term investment horizons.
In addition, with average market capitalization of NT$158.9bn (around US$5.1bn) since
listing, SCSB will likely be a constituent of the MSCI Taiwan Index in 2019.
42.0 127.0
41.0 123.0
40.0 119.0
39.0 115.0
38.0 111.0
Valuation & Action

37.0 107.0
36.0 103.0
35.0 99.0
34.0 95.0
We forecast SCSB’s net interest income will maintain mid- to high single-digit growth in
33.0 91.0
32.0 87.0
25
20
15
10
2018-19F. FCY loans yields of Taiwan and HK units will continue to benefit from US rate
hikes. In addition, the cash dividend yield is higher than peers. Our target price of NT$44.5
5
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ is based on 1.25x our 2019F BVPS. We assign an Outperform rating.
Risks
Fast deterioration of asset quality; slow US rate hike process.

Net revenue (NT$mn) 31,439 32,455 34,764 37,037 40,567
Provision charges (NT$mn) (625) (687) (832) (760) (968)
PPOP (NT$mn) 19,498 19,906 22,041 23,662 26,120
Net profit (NT$mn) 11,898 11,748 12,385 13,624 14,373
EPS (NT$) 2.98 2.88 3.04 3.34 3.52
BVPS (NT$) 28.82 29.48 30.01 32.20 35.72
DPS (NT$) 1.50 1.50 1.80 1.95 2.05
Eric Shih
886.2.2181.8733 EPS growth (%) 3.9 (3.2) 5.4 9.9 5.5
eric.shih@kgi.com Net profit growth (%) 9.1 (1.3) 5.4 10.0 5.5
PE (x) 13.0 13.5 12.8 11.6 11.0
Jenny Liu PB (x) 1.3 1.3 1.3 1.2 1.1
886.2.2181.8035
Dividend yield (%) 3.9 3.9 4.6 5.0 5.3
tseen.liu@kgi.com
See the last page for important disclosures. Return on average assets (%) 0.8 0.7 0.7 0.8 0.7

Taiwan Shanghai Commercial & Saving Bank
Figure 1: Company profile Figure 2: Organization Chart

Established in 1915 in Shanghai, Shanghai Commercial & Savings Shanghai Commercial & Savings Bank (SCSB)
(5876 TT)
Bank (SCSB) had assets valued at NT$1.02tn (US$33.87bn) as of
1Q17, making it a mid-sized bank, ranking fifteenth of thirty-nine
Overseas
Taiwan banks by outstanding loans. It has sixty-nine branches in Branches: 57.6%
Wells Fargo
Taiwan, with overseas branches in Hong Kong, Vietnam, and HK, Vietnam, 20% Shanghai 3.0%
Bank of Shanghai
Singapore. SCSB holds a 57.6% stake in Hong Kong subsidiary, 22.4% Commercial Bank
(601229 CH)
Overseas Offices: Shanghai (HK)
Shanghai Commercial Bank, which has a 3% stake in Bank of Bangkok, United Int'l
Shanghai (601229 CH, Rmb11.34, NR). SCSB in Taiwan, Shanghai Cambodia, Jakarta Investment
Overseas Branches:
Commercial Bank in Hong Kong, and Bank of Shanghai in China UK: London
US: NY, SF, LA
have formed a strategic alliance to jointly offer banking services. China: Shenzhen,
SCSB listed on the Emerging Market in May 2014, with the IPO Shanghai
plan approved at a shareholder meeting in June 2017. The firm

will be listed on the Taiex in October 2018.
Source: Company data; KGI Research Source: KGI Research
Figure 3: Net profit Figure 4: EPS

Net profit, NT$mn EPS, NT$
4.00
14,008
13,325 3.52
11,898 12,385 3.50 3.34

11,748 3.04
10,905 3.00 2.86
2.98
2.88
10,144 2.73
2.50
2.00
1.50
1.00
0.50
0.00
2013 2014 2015 2016 2017 2018F 2019F Dec-13A Dec-14A Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Figure 5: ROAE Figure 6: SCSB Taiwan’s foreign currency (FCY) loans

accounted for 27% of total loans, second only to that of
Mega Bank. We expect SCSB will continue to benefit from
US rate hikes.
ROAE NIM, percent (LHS); FCY loans as percentage of total loans, percent (RHS)
3.0 36.6 45.0
11.00%
10.80% 10.7%
2.5 26.8 35.0
10.7% 24.8 23.7
10.6% 10.5% 21.8
10.60% 18.6 17.2 18.3 25.0
10.4% 2.0 14.9 15.7
10.40%
10.2% 15.0
10.20% 1.5 1.50 1.36 1.27
10.0% 1.49 1.35 1.26 1.27 1.22 1.26 1.22 1.27 5.0
10.00%
1.0 1.48 1.34 1.36 1.26 1.26 1.06 1.26
1.21 1.22 1.21
9.80% 1.33 1.35 1.24 1.24 1.20 1.20 1.16 1.03 (5.0)
0.5 1.01
9.60% (15.0)
9.40%
0.0 (25.0)
9.20% CTBC Taishin E.Sun Yuanta Cathay First SCSB Mega Fubon Ave.
9.00%
Dec-13A Dec-14A Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F 1Q18NIM 2Q18NIM 3Q18NIM FCY loans to total loans
Source: KGI Research Source: Company data; KGI Research
Figure 7: SCB (HK)’s 1H18 NIM is higher than the peer Figure 8: Cash dividend yield will be 5%, higher than the
average peer average of 4.7%
NIM, percent cash dividend per share (LHS); cash dividend yield, percent (RHS)
2.5 4.0 8.0
1.98
2.10 2.09 2.03 6.2
2.0 1.86
1.94 1.98
1.88
1.70 1.98 1.72 1.75 1.69 1.74 3.0 5.3 5.0 6.0
1.69
1.60 1.64 1.85 1.66 4.9 4.8
1.5
1.57
1.45
1.55 1.43 4.6 4.4
1.33 1.53
1.52 4.1
1.43
2.0 2.20 3.1 4.0
1.0
1.95 2.10
1.60 1.49
0.5 1.0 2.0
1.00
0.0 0.80 0.55 0.63
SCB (HK) The Bank of Hang Seng BOC HK Fubon Bank Dah Sing Chong Hing HSBC HK Standard 0.0 0.0
East Asia Bank HK Banking Bank Chartered Mega Yuanta SCSB CTBC KTB Cathay Fubon Taishin E.Sun
Group HK
Cash dividend Cash dividend yield
2016 2017 1H18
Source: Company data; KGI Research Company data; KGI Research

Taiwan Shanghai Commercial & Saving Bank
Balance sheet Profit & Loss - Shanghai Commercial & Saving Bank (Unconsolidated Financial Statements)
Gross loans to customers 857,896 859,573 937,161 1,066,444 1,164,783 Interest Income 17,447 16,358 17,519 20,439 22,757
Interest Expense 6,586 5,442 5,737 7,271 8,244
Net loans & advances 847,606 849,331 926,653 1,057,271 1,155,543
Interest Net Revenue 10,861 10,916 11,782 13,168 14,513
Due from banks & call loans 195,330 244,371 219,571 140,552 145,197 Commissions & Fees 2,599 2,434 2,369 2,439 2,562
FVTOCIandAC 425,243 436,550 463,816 505,060 529,812 Trading Income 6,994 7,095 7,107 7,415 7,603
Other interest earning assets - - (0) 0 (0) Other non-interest income 192 157 317 187 80
Cash and equivalents 96,924 66,776 74,683 123,080 128,384 Non Interest Income 9,786 9,685 9,793 10,041 10,245
Long-term equity investments 1,361 1,422 1,473 1,574 1,574 Total Operating Income 20,647 20,601 21,575 23,209 24,758
Operating Expenses 6,459 6,385 6,567 6,915 7,488
Property investments - - - - -
Operating Profit 14,187 14,216 15,008 16,294 17,270
Net fixed assets 28,139 28,041 26,584 26,947 26,947 Total Provision Charges 600 600 600 669 790
Total intangible assets 191 119 96 1 1 Pre-tax Profit 13,587 13,616 14,408 15,625 16,479
Other non-interest earning assets 30,074 20,199 20,624 14,870 15,045 Current taxation 1,689 1,868 2,023 2,299 2,472
Total non-interest earning assets 156,690 116,557 123,461 166,472 171,950 Ordinary Income 11,898 11,748 12,385 13,325 14,008
Total assets 1,624,869 1,646,809 1,733,500 1,869,354 2,002,501 Consolidated net income 11,898 11,748 12,385 13,325 14,008
Minorities - - - - -
Due to banks and call loans from banks 37,920 35,429 33,742 50,730 58,048 Net Profit 11,898 11,748 12,385 13,325 14,008
Deposits from mutual loans accounts 1,343,639 1,354,362 1,403,781 1,467,113 1,542,683 Dividends 5,999 6,119 7,342 7,755 8,194
Other interest bearing liabilities 80,918 88,469 126,888 137,065 177,099 Retained earning reserve 5,899 5,630 5,043 5,570 5,813
Total interest-bearing liabilities 1,462,477 1,478,260 1,564,410 1,654,908 1,777,830 EPS 2.98 2.88 3.04 3.26 3.42
Reserve for operation - - - - - Cash dividends per share 1.50 1.50 1.80 1.90 2.00
ROAE 10.7% 10.0% 10.2% 10.5% 10.2%
Other non-interest bearing liabilities 6,495 5,527 6,057 34,683 29,606
ROA 1.2% 1.2% 1.2% 1.2% 1.2%
Total non-interest bearing liabilities 6,495 5,527 6,057 34,683 29,606
NPL Ratio 0.26% 0.28% 0.32% 0.26% 0.25%
Total liabilities 1,468,973 1,483,787 1,570,467 1,689,590 1,807,436 Coverage Ratio 590.6% 542.9% 45122.4% 498.4% 473.9%
Common stocks 39,991 40,791 40,791 40,814 40,814 Credit cost 0.10% 0.10% 0.09% 0.09% 0.10%
Proceeds - new issued - - - - - Cost-income Ratio 31.3% 31.0% 30.4% 29.8% 30.2%
Share capital 39,991 40,791 40,791 40,814 40,814 NIM 1.20% 1.17% 1.21% 1.23% 1.25%
Loan to Deposit Ratio 72.3% 74.9% 75.3% 80.9% 87.0%
Fee Growth -0.9% -6.4% -2.6% 2.9% 5.0%
Capital and other reserves 13,572 12,904 8,896 19,246 19,246 PPOP Growth 4.7% 0.2% 5.6% 8.6% 6.0%
Shareholders' funds 115,239 120,234 122,410 131,428 145,801 Net Profit Growth 9.1% -1.3% 5.4% 7.6% 5.1%
Minority interests 40,657 42,789 40,623 48,335 49,264 Loan Growth -0.3% 1.0% 8.3% 11.1% 9.8%
Preferred shareholders funds - - - - -
Total equity 155,896 163,022 163,033 179,763 195,065 Balance Sheet - Shanghai Commercial Bank (HK)
HK$mn Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Total liabilities & equity 1,624,869 1,646,809 1,733,500 1,869,354 2,002,501
Net Loans & Advances 64,101 64,520 78,297 87,183 87,183
Due from banks & call loans 14,268 26,563 17,633 15,232 15,232
Profit & loss Investments FVTOCI and AC 41,498 48,504 54,529 60,730 60,730
Other Interest Earning Assets
NT$mn Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Cash and equivalents 34,841 24,620 28,755 23,721 23,721
Interest income 32,605 31,775 34,524 41,100 45,637 Long-term equity investments 304 304 339 352 352
Interest expense (11,501) (9,809) (10,548) (13,882) (15,633) Property investments
Net interest revenue 21,104 21,966 23,977 27,218 30,004 Net Fixed Assets 996 1,028 1,021 1,017 1,017
Commissions & fees [net] 5,386 4,751 5,072 5,281 5,830 Other Non-Interest Earning Assets 225 239 141 258 258
Net insurance income - - - - - Total Non-Interest Earning Assets 743 895 1,053 2,388 2,388
Total Assets 159,613 169,369 184,531 193,625 193,625
Trading income 3,697 4,343 4,152 3,115 3,534
Due to banks and call loans from banks 5,988 5,901 6,781 7,607 7,607
Other non-interest income 1,253 1,395 1,564 1,423 1,199 Deposits from mutual loans accounts 129,205 136,884 146,953 153,167 153,167
Non interest income 10,335 10,489 10,788 9,819 10,563 Other Interest Bearing Liabilities
Net revenue 31,439 32,455 34,764 37,037 40,567 Total Interest-Bearing Liabilities 2,000 2,000 2,000 2,000 2,000
Operating expenses (11,941) (12,549) (12,723) (13,375) (14,447) Reserve for operation 96 95 157 110 110
Operating profit 19,498 19,906 22,041 23,662 26,120 Other Non-Interest Bearing Liabilities 1,683 2,109 5,095 5,057 5,057
Total Non-Interest Bearing Liabilities 1,780 2,204 5,251 5,167 5,167
Charge for bad debts (625) (687) (832) (760) (968)
Total Liabilities 136,973 144,990 158,985 165,941 165,941
Provision bad debts on credit card - - - - - Common Stocks 2,000 2,000 2,000 2,000 2,000
Provision of insurance duty - - - - - Retained earnings reserve 11,004 11,951 13,446 15,133 15,133
Provision charges (625) (687) (832) (760) (968) Capital Reserve
Pre-tax profit 18,873 19,219 21,209 22,902 25,152 Other Reserves 9,568 10,358 10,022 10,472 10,472
Current taxation (3,677) (4,107) (4,590) (4,748) (5,555) Shareholders' Funds 22,572 24,308 25,468 27,605 27,605
Minority interests 68 71 77 78 78
Ordinary income 15,196 15,112 16,619 18,154 19,597
Preferred shareholders funds
Consolidated net income 15,196 15,112 16,619 18,154 19,597 Total Equity 159,613 169,369 184,531 193,625 193,625
Minorities (3,298) (3,364) (4,234) (4,529) (5,224) Total Liabilities & Equity 159,613 169,369 184,531 193,625 193,625
Net profit 11,898 11,748 12,385 13,624 14,373
Dividends (5,999) (6,119) (7,342) (7,970) (8,365) Profit & Loss - Shanghai Commercial Bank (HK)
HK$mn Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F
Interest Income 3,687 3,695 4,344 5,198 5,692
Normalised net profit 11,898 11,748 12,385 13,624 14,373
Interest Expense 1,206 1,058 1,244 1,631 1,839
Interest Net Revenue 2,481 2,637 3,100 3,568 3,852
Key ratios Commissions & Fees 790 676 784 784 805
Trading Income 285 435 573 343 360
Other non-interest income 107 144 201 191 172
Growth Non Interest Income 1,182 1,255 1,558 1,318 1,337
Net interest income growth 3.6% 4.1% 9.2% 13.5% 10.2% Total Operating Income 3,663 3,892 4,658 4,886 5,190
Operating profit growth 5.3% 2.1% 10.7% 7.4% 10.4% Operating Expenses 1,277 1,428 1,520 1,538 1,687
Net profit growth 9.1% (1.3%) 5.4% 10.0% 5.5% Operating Profit 2,386 2,464 3,138 3,348 3,503
Total Provision Charges 5 20 59 61 74
EPS growth 3.9% (3.2%) 5.4% 9.9% 5.5%
Pre-tax Profit 2,381 2,444 3,079 3,287 3,429
Profitability
Current taxation 479 531 648 643 720
Return on average assets 0.8% 0.7% 0.7% 0.8% 0.7% Ordinary Income 1,902 1,913 2,431 2,644 2,709
Return on average equity 10.7% 10.0% 10.2% 10.7% 10.4% Consolidated net income 1,902 1,913 2,431 2,644 2,709
Per share data Minorities 4 4 6 6 6
EPS (NT$) 2.98 2.88 3.04 3.34 3.52 Net Profit 1,899 1,909 2,424 2,638 2,703
Dividends 1,129 1,215 1,273 1,380 1,515
BVPS (NT$) 28.82 29.48 30.01 32.20 35.72
Retained earning reserve 770 694 1,151 1,258 1,188
DPS (NT$) 1.50 1.50 1.80 1.95 2.05 EPS 94.9 95.5 121.2 131.9 135.2
Cash dividends per share 47.0 47.0 47.0 47.0 47.0
Balance Sheet - Shanghai Commercial & Saving Bank (Unconsolidated Financial Statements) ROAE 8.6% 8.1% 9.7% 9.9% 9.3%
NT$mn Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F ROA 1.2% 1.2% 1.4% 1.4% 1.3%
Net Loans & Advances 577,110 582,835 630,998 701,105 770,114 NPL Ratio 0.3% 0.3% 0.6% 0.5% 0.4%
Due from banks & call loans 59,424 74,414 85,250 81,062 82,695 Coverage Ratio 154.0% 146.6% 73.4% 88.9% 99.3%
Investments FVTOCI and AC 249,688 235,720 258,099 267,870 273,268 Credit cost 0.01% 0.03% 0.08% 0.07% 0.08%
Other Interest Earning Assets 17,844 7,512 7,387 8,688 8,863 Cost-income Ratio 34.9% 36.7% 32.6% 31.5% 32.5%
Cash and equivalents 22,852 26,214 33,056 30,434 31,047 NIM 1.64% 1.69% 1.85% 2.00% 2.03%
Long-term equity investments 60,163 63,220 60,884 64,312 64,312 Loan to Deposit Ratio 49.6% 47.1% 53.3% 56.9% 56.9%
Property investments Fee Growth 11.4% -14.4% 15.9% 0.1% 2.7%
Net Fixed Assets 12,565 12,423 12,124 12,073 12,073 PPOP Growth 1.2% 3.3% 27.3% 6.7% 4.6%
Other Non-Interest Earning Assets 3,170 3,275 3,082 3,048 3,048 Net Profit Growth 0.1% 0.6% 27.0% 8.8% 2.5%
Total Non-Interest Earning Assets 75,899 78,918 76,090 79,432 79,432 Loan Growth -4.6% 0.7% 21.4% 11.3% 8.1%
Total Assets 1,002,817 1,005,613 1,090,880 1,168,591 1,245,419 Source: Company data, KGI Research estimates
Due to banks and call loans from banks 12,559 13,081 8,332 19,452 25,563
Deposits from mutual loans accounts 798,149 789,785 850,155 877,957 895,648
Other Interest Bearing Liabilities 72,096 78,496 95,821 124,187 163,204
Total Interest-Bearing Liabilities 882,805 881,362 954,308 1,021,596 1,084,416
Reserve for operation
Other Non-Interest Bearing Liabilities 4,773 4,018 14,162 16,321 16,321
Total Non-Interest Bearing Liabilities 4,773 4,018 14,162 16,321 16,321
Total Liabilities 887,578 885,380 968,470 1,037,917 1,100,737
Common Stocks 39,991 40,791 40,791 40,814 40,814
Capital Reserve 4,640 4,648 4,656 5,878 5,878
Other Reserves 8,932 8,256 11,779 12,819 12,819
Shareholders' Funds 115,239 120,234 122,410 130,674 144,681
Minority interests - - - - -
Preferred shareholders funds
Total Equity 115,239 120,234 122,410 130,674 144,681
Total Liabilities & Equity 1,002,817 1,005,613 1,090,880 1,168,591 1,245,419

Theme 7 Taiwan
Petrochemicals sector
Aromatic derivatives spreads to keep widening
Key message Impact

2015-18F upcycle to end in 2019F; upstream first to see eased supply tightness.
Our reasoning is based on the following: (1) China and global macroeconomic demand
We forecast the petrochemicals sector will
enter an earnings downcycle in 2019, and growth will slow in 2019F; and (2) we forecast global production capacity of upstream raw
believe aromatic derivatives spreads will widen, materials, such as olefin and aromatics, will expand significantly faster in 2019, easing
driving makers’ earnings outlook and share supply tightness. We forecast capacity expansion for upstream raw materials will drag the
valuation.
petrochemicals sector into a downcycle in 2019.
Downcycle beckons, but not a severe one. We think the market is overly pessimistic on
the petrochemicals sector in 2019, and believe the sector earnings decline will be less than
consensus next year. Our reasoning is based on the following: (1) poor earnings
performance in 4Q18 has lowered the comparison base; (2) the crude oil price has
dropped to a low level in 4Q18, making it easier for petrochemicals manufacturers to
reflect the cost in selling prices in 2019F; (3) we forecast global capacity growth of
downstream derivatives, such as the five major general resins, to slow next year, indicating
supply will remain tight in the downstream. We expect the petrochemicals sector will start
a new round of restocking after the oil price bottoms, prompting the street to revise up
2019 earnings forecasts, which we believe will happen around the coming Chinese New
Year.
Aromatic derivatives spreads to keep widening. Among all petrochemical products,

we think the spreads of upstream raw materials ethylene, benzene, and PX will narrow as
new capacity comes on stream. We are upbeat on aromatic downstream derivatives
phenol-acetone-BPA and PTA in 2019, as their spreads will expand further, or at least
suastain at high levels, mainly because emerging privately owned naphtha crackers in
China will focus on ramping up refining and aromatics plants in 2019F, and will not be
able to ramp up aromatic downstream derivatives plants until 2020F. We forecast the
global capacity growth rate of those key aromatic derivatives will range in a low level
between 0-4%.
Stocks for Action

We recommend investors accumulate petrochemicals stocks at current low valuations,
before a new round of restocking takes place. We are upbeat on the earnings prospects
and share valuations of SM-ABS maker GPPC (1312 TT, NT$24.30, OP),
phenol-acetone-BPA maker TPCC (4725 TT, NT$25.45, OP) and PTA maker FENC (1402 TT,
NT28.75, OP).
Risks
Crude oil price slump; weak commodity demand.
Tom Hsu
886.2.2181.8707
tom.hsu@kgi.com
Jackson Wang
886.2.2181.8008
December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R Powered by EFA Platform 76

Taiwan CSRC
Figure 1: We forecast capacity expansion for upstream raw materials will drag
the petrochemicals sector into a downcycle in 2019
UTR of upstream raw materials olefin & aromatics, & downstream derivatives five general resins, percent (LHS);
blended integrated spread of five general resins (weighted by capacities of four FPG members), US$/mt (RHS)
92 700
88 600
84 500
80 400
76 300
2007 2009 2011 2013 2015 2017 2019F
UTR of uptream UTR of downstream Spread of five general resins
Source: chem99.com; KGI Research
Figure 2: Capacity growth of aromatic downstream derivatives in 2019F, such as SM-ABS, phenol-acetone-BPA, & PTA, will be insufficient
Global capacity growth rate in 2019F, percent
+4% Ethylene PE +4%
MEG +6%
PVC +2%
+3% Propylene PP +3%
Upstream olefins Downstream olefins
Upstream aromatics Downstream aromatics
+5% Benzene +0% SM PS +0%
ABS +2%
Phenol BPA +3%

+0%
+17% +4%
PX PTA Polyester +8%
Source: chem99.com; KGI Research

Company update Plastics‧Taiwan
GPPC
(1312.TW/1312 TT)
Continued SM-ABS upcycle in 2019F

We remain positive on a continued SM-ABS upcycle that will drive GPPC earnings growth
in 2019.
Impact
Unchanged (%) 0.0
SM-ABS supply continues to tighten. We forecast the SM and ABS spreads will be
Upside (%) 32.5
US$300/mt and US$380/mt respectively in 2019, similar to the high US$300/mt and
Key message US$340/mt in 2018, and in an upcycle, given: (1) China’s non-state naphtha crackers’
aromatics plants are expected to start operations in 2019. Since they branch out from the
polyester sector chain to naphtha cracking, their downstream SM-ABS plants are unlikely
We remain positive on a continued SM-ABS
upcycle that will drive GPPC earnings growth in to ramp up production at the same time; and (2) we predict the global ethylene and
2019. benzene supply-demand structure will loosen in 2019, capping ethylene and benzene
costs. We forecast global SM capacity will grow 0.5% YoY in 2019, lower than demand
growth of 2% YoY, boosting global capacity utilization by 2ppts. Meanwhile, we project
Trading data global ABS capacity will grow 2% YoY in 2019, on a par with demand growth of 3% YoY,
Mkt cap (NT$bn/US$mn) 21.21 / 690
supporting global capacity utilization to flatten at a high level of 77%. We expect GPPC’s
Outstanding shares (mn) 907
EPS to reach NT$3.86 in 2019, and forecast the SM upcycle will drive operating income
Foreign ownership (mn) 391 growth of 18% YoY and the ABS upcycle will drive reinvestment income of Zhenjiang
3M avg. daily trading (mn) 5.12 Chimei (CN) to grow 20% YoY.
Performance 3M 6M 12M PVC inventory adjustment ongoing. We found some SM and ABS makers have cut
Absolute (%) -18.6 -24.9 -12 production in 4Q18 under slower macro demand growth, accelerating inventory
Relative (%) -7.2 -11.3 -5.2 adjustment. The leading SM and ABS makers didn’t cut production on the strength of
better sales channels and cost competitiveness, making SM and ABS among the laggards
Quarterly EPS
in inventory adjustment in the petrochemical industry.
NT$ 1Q 2Q 3Q 4Q
2017 0.87A 0.22A 1.36A 1.20A Valuation & Action
2018 1.08A 0.88A 1.05A 0.37F We give our target price of NT$31, on 1.1x 2019F BVPS of NT$28, with Outperform rating.
2019 0.97F 0.73F 1.08F 1.08F We recommend investors accumulate shares at the current low valuation, before a new
round of restocking takes place.
Share price chart
36.0
137.0
Risks
34.0 130.3
32.0
30.0
28.0
123.7
117.0
110.3
Oil price plunge; lackluster commodity demand.
26.0 103.7
24.0 97.0
22.0 90.3
20.0 83.7
18.0 77.0

Source: TEJ
Revenue (NT$mn) 19,919 23,351 25,036 24,705 23,718
Net profit (NT$mn) 2,401 3,289 3,057 3,484 2,911
EPS (NT$) 2.67 3.65 3.38 3.86 3.22
DPS (NT$) 1.00 1.00 1.00 1.00 1.00
Tom Hsu
886.2.2181.8707 EPS growth (%) 63.1 36.9 (7.3) 14.0 (16.4)
tom.hsu@kgi.com PE (x) 8.8 6.4 6.9 6.1 7.3
PB (x) 1.2 1.0 0.9 0.8 0.8
886.2.2181.8008
Dividend yield (%) 4.3 4.3 4.3 4.3 4.3

Taiwan GPPC
Figure 1: Company profile Figure 2: SM, ABS, & PS are core products
Founded in 1973, Grand Pacific Petrochemical (GPPC) is an SM Sales weighting by product (internal transactions excluded), percent
producer that integrates downstream with production mainly Other

Packaging
based in Dashe District, Kaohsiung. It sources ethylene, benzene
Nylon66 2
and butadiene from CPC (unlisted). Its integrated capacity 10
5
includes SM and ABS, as well as PS, which is operated via
Media SM
13 46
100%-owned subsidiary GPPC Chemical (unlisted). Moreover,
GPPC manufactures packaging materials and nylon 66 and has a 8
foothold in the media sector via a 62.29% stake in Videoland PS 17
Television Network.
ABS

8,000 1.60
6,728 1.36
7,000 6,387
1.40
6,114 6,272 6,113 6,113 6,239 6,239
5,905 6,017 1.20
6,000 5,393 5,573 1.20 1.08 1.08
1.05 1.08
0.97
5,000 1.00 0.88
0.87
4,000 0.80 0.73
3,000 0.60
0.37
2,000 0.40
0.22
1,000 0.20
0 0.00

22.3% 9.20
20.3%
8.70
18.3%
16.3% 8.20
14.3% 7.70
12.3%
7.20
10.3%
8.3% 6.70
6.3%
6.20
4.3%
5.70
2.3%
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

20.0% 1.40
1.30
15.0%
1.20
10.0%
1.10
5.0%
1.00
0.0% 0.90
-5.0% 0.80
0.70
-10.0%
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan GPPC
Income statement
Quarterly Annually
Revenue 6,387 5,905 6,728 6,017 6,113 6,113 6,239 6,239 25,036 24,705 23,718
Gross profit 1,125 1,054 1,269 703 1,063 1,063 1,228 1,294 4,151 4,648 3,927
EBITDA 1,181 1,125 1,286 931 1,156 1,156 1,321 1,387 4,523 5,020 4,299
Interest income 11 15 19 20 10 10 10 10 65 40 40
Investment income 440 440 279 41 340 340 340 340 1,200 1,359 1,346
Other non-op income 3 71 32 (23) - - - - 83 - -
Non-operating income 455 526 330 37 350 350 350 350 1,348 1,399 1,386
Interest expense (1) (0) (0) 0 (0) (0) (0) (0) (1) (1) (1)
Investment loss - - - - - - - - - - -
Other non-op expenses (30) 24 (17) 23 - - - - - - -
Non-operating expenses (31) 24 (17) 23 (0) (0) (0) (0) (1) (1) (1)
Pre-tax profit 1,202 1,268 1,246 432 1,075 1,075 1,240 1,306 4,149 4,696 3,962
Current taxation (196) (433) (214) (70) (158) (367) (219) (290) (913) (1,033) (872)
Minorities (29) (36) (83) (32) (45) (45) (45) (45) (179) (179) (179)
Extraordinary items (0) 0 (0) 0 - - - - - - -
Net profit 977 799 950 331 873 664 976 971 3,057 3,484 2,911
EPS (NT$) 1.08 0.88 1.05 0.37 0.97 0.73 1.08 1.08 3.38 3.86 3.22
Margins (%)
EBITDA margin 18.5 19.1 19.1 15.5 18.9 18.9 21.2 22.2 18.1 20.3 18.1
Revenue growth 1.8 (7.5) 13.9 (10.6) 1.6 0.0 2.1 0.0
Gross profit growth 2.2 (6.3) 20.4 (44.6) 51.2 0.0 15.5 5.4
Operating profit growth 1.3 (7.7) 29.9 (60.2) 95.4 0.0 22.7 7.4
EBITDA growth (3.4) (4.8) 14.3 (27.6) 24.2 0.0 14.3 5.0
Pretax profit growth (8.4) 5.5 (1.7) (65.3) 148.7 0.0 15.3 5.3
Net profit growth (9.8) (18.2) 18.8 (65.2) 163.8 (24.0) 47.1 (0.5)
YoY growth (%)
Revenue growth 18.4 6.0 10.0 (4.1) (4.3) 3.5 (7.3) 3.7 7.2 (1.3) (4.0)
Gross profit growth 17.4 83.5 9.3 (36.1) (5.5) 0.8 (3.2) 84.0 9.4 12.0 (15.5)
Operating profit growth 22.8 160.3 15.8 (51.7) (6.8) 1.0 (4.6) 157.6 12.8 17.7 (21.9)
EBITDA growth 5.2 58.5 4.6 (23.9) (2.2) 2.8 2.7 49.0 5.5 11.0 (14.4)
Pretax profit growth 29.3 180.5 (16.3) (67.0) (10.5) (15.2) (0.5) 202.1 (0.8) 13.2 (15.6)
Net profit growth 25.3 294.8 (22.4) (69.5) (10.7) (17.0) 2.8 193.6 (7.1) 14.0 (16.4)

Taiwan GPPC

Other current assets 1,893 2,076 2,907 2,033 1,058 Non-operating income 967 1,773 1,348 1,399 1,386
LT investments 8,075 9,611 10,217 11,356 12,591 Investment income 758 1,702 1,200 1,359 1,346
Net fixed assets 8,260 7,778 7,629 7,529 7,429 Other non-op income 186 36 83 - -
Total other assets 899 1,136 (718) (1,640) (2,562) Non-operating expenses (50) (73) (1) (1) (1)
Accounts payable 1,860 1,945 1,845 2,045 2,045 Other non-op expenses (45) (72) - - -
Other current liabilities 928 1,147 1,152 1,152 1,152 Current taxation (505) (735) (913) (1,033) (872)
Long-term debt 2 - 5 5 5 Extraordinary items - (0) - - -
Preferred shareholders funds 200 200 - - - NT$mn Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Growth Decrease in working capital (581) (507) (1,305) 674 975
Revenue growth (0.5%) 17.2% 7.2% (1.3%) (4.0%) Other operating cash flow (393) (572) 771 (960) (1,057)
Operating profit growth 18.7% 14.6% 12.8% 17.7% (21.9%) Investing cash flow (1,743) (1,898) (700) (700) (700)
EBITDA growth 15.1% 10.3% 5.5% 11.0% (14.4%) Sale of ST investment 128 -
Net profit growth 63.1% 37.0% (7.1%) 14.0% (16.4%) New investments - (116) - - -
EPS growth 63.1% 36.9% (7.3%) 14.0% (16.4%) Capital expenditure (837) (450) (700) (700) (700)
Profitability Others investing cashflow (1,034) (1,332) - - -
Gross profit margin 17.2% 16.2% 16.6% 18.8% 16.6% Free cash flow 1,236 1,970 980 3,347 3,085
Operating margin 10.9% 10.6% 11.2% 13.3% 10.9% Financing cash flow (1,104) (962) (977) (903) (903)
EBITDA margin 19.5% 18.4% 18.1% 20.3% 18.1% Increase in short term debt (87) (58) - - -
Net profit margin 12.1% 14.1% 12.2% 14.1% 12.3% Increase in long term loans (204) (4) 5 - -
Return on average assets 10.0% 12.4% 10.4% 10.9% 8.4% New ordinary shares issued - (23) - - -
Stability Other financing cashflow 0 1 - - -
Gross debt to equity 0.5% 0.2% 0.2% 0.2% 0.1% Forex effects (42) (95) - - -
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated 256 1,057 2,567 3,317 2,948
Interest coverage (x) 647.3 2,910.0 4,149.5 4,697.1 3,962.8 Cashflow by merger - - - - -
Cash flow interest coverage(x) 659.0 2,789.1 4,243.8 4,920.3 4,551.5 ROIC
Net debt (NT$mn) (965) (2,083) (4,646) (7,962) (10,910) = Operating margin 10.9% 10.6% 11.2% 13.3% 10.9%
Per share data
BVPS (NT$) 19.90 22.63 25.45 28.29 30.71 + Other assets/revenue) 0.0 0.0 (0.0) (0.1) (0.1)
SPS (NT$) 22.13 25.92 27.71 27.34 26.25
Days inventory 36.6 37.8 40.7 46.0 46.8
Days payable 41.3 36.3 32.3 37.2 37.8
Cash cycle 51.1 52.3 58.1 62.0 64.6

Company update Textiles‧Taiwan
FENC
(1402.TW/1402 TT)
Continued PTA upcycle in 2019F

We remain positive that a continued PTA upcycle and the ramp up of FENC’s new PTA and
41.00
polyester plants will drive FENC earnings growth in 2019.
12M target price (NT$)
Impact
Unchanged (%) 0.0
PTA supply continues to tighten. We expect the PTA upcycle will extend into 2019,
Upside (%) 45.6
widening the PTA spread from US$165/metric ton (mt) in 2018 to US$200/mt in 2019. As
Key message the sector’s idle capacity during the 2012-17 downcycle had not been largely digested
until 2018, manufacturers that had a wait-and-see attitude toward capacity expansion
during the downcycle will not be able to ramp up new capacities in 2019F. Only some
We remain positive that a continued PTA
upcycle and the ramp up of FENC’s new PTA existing idle capacities and capacities that have been built but have not started operation
and polyester plants will drive FENC earnings are planned to begin production. We forecast global PTA capacity will grow 4% in 2019,
growth in 2019. below the 6% YoY growth of demand, boosting capacity utilization by 2ppts. We
estimate the PTA upcycle and FENC’s new plant in Guanyin will drive income from the
petrochemical division to grow by 199% in 2019.
Trading data
Mkt cap (NT$bn/US$mn) 150.7 / 4,901 Polyester margin to shrink. We expect the polyester spread will fall from US$230/mt in
Outstanding shares (mn) 5,353 2018 to US$200/mt in 2019, the start of a downcycle, given: (1) Tight supply seen in the
Foreign ownership (mn) 1,345 latest upcycle has prompted polyester makers to accelerate capacity additions or to
3M avg. daily trading (mn) 10.63 acquire restarted idle capacity. We therefore forecast global polyester capacity will grow
52-week trading range (NT$) 24.30 –37.40 8% YoY, outpacing demand growth of 6% YoY. Consequently, capacity utilization will
Performance 3M 6M 12M slip 1ppt. (2) As Chinese regenerated plastics makers have been gradually resuming
Absolute (%) -18.1 -6 10 production in Southeast Asian countries, we predict 540k mt of virgin polyester demand
Relative (%) -6.7 7.6 16.8 will shift back to regenerated polyester. This will impact polyester demand by 0.7%. While
the polyester downcycle will drag the profit margin, we expect the new polyester plants in
Quarterly EPS
Vietnam and West Virginia will help support income from the chemical fiber segment to
NT$ 1Q 2Q 3Q 4Q
stay flattish YoY in 2019.
2017 0.26A 0.31A 0.72A 0.33A
2018 0.49A 0.98A 0.70A 0.38F Valuation & Action
2019 0.56F 0.56F 0.69F 0.69F
Our target price is NT$41, on 1.6x adjusted 2019F BVPS. We give Outperform rating. We
recommend investors accumulate shares at the current low valuation, before a new round
Share price chart
of restocking takes place.
40.0 149.0
38.0 142.3
Risks
36.0 135.7
34.0 129.0
32.0 122.3
30.0 115.7
28.0
26.0
24.0
109.0
102.3
95.7
Plunging crude oil price; weak demand for commodities.
22.0 89.0
50
40
30
20

10
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F

Revenue (NT$mn) 215,822 216,200 232,345 256,297 246,609
Net profit (NT$mn) 6,308 8,066 12,775 12,465 9,592
EPS (NT$) 1.26 1.61 2.56 2.49 1.92
Tom Hsu DPS (NT$) 0.80 1.20 1.87 1.87 1.40
886.2.2181.8707 EPS growth (%) (21.4) 27.9 58.4 (2.4) (23.0)
tom.hsu@kgi.com PE (x) 22.3 17.4 11.0 11.3 14.7
Jackson Wang PB (x) 0.8 0.8 0.7 0.7 0.7
886.2.2181.8008 EV/EBITDA (x) 5.9 6.0 5.5 5.0 5.2
jackson.wang@kgi.com Net debt to equity (%) 63.5 65.8 62.9 57.4 53.8
Dividend yield (%) 2.8 4.3 6.6 6.6 5.0
Source: Company data KGI Research estimates

Taiwan FENC
Figure 1: Company data Figure 2: PTA, bottle-grade polyester, polyester filament,

knitted fabric, & apparel are main products
Established in 1942, FENC is a PTA, polyester raw yarn, knitted Sales weighting by product (excluding internal sales), percent
fabric, and apparel integrated producer within the Far Eastern
Group, with production bases located in Guanyin of Taoyuan PTA
Other
Township Taiwan, Shanghai and Yangzhou China, and Vietnam. Bottle-grade
7 polyester
FENC operates telecom business via 38%-owned Far EasTone 17
(4904 TT, NT$72.8, N). In addition, FENC holds stakes in Asia 14
Cement (1102 TT, NT$33.5, OP), Far Eastern Department Stores 7 PSF
(2903 TT, NT$15.55, NR), MEG makers OUCC (1710 TT, 3
44
NT$25.35, OP) and Far Eastern Union Petrochemical (CN), and Far 5 Yarn
Eastern International Bank (2845 TT, NT$10.2, NR). The firm books 3 Knitted fabrics
investment income using the equity method. We consider FENC a Telecom Apparel
holding company within Far Eastern Group.

70,000 65,150 66,119 1.20
64,497 64,497
61,799 61,185
58,132 0.98
60,000 54,890 1.00
52,908 53,939
50,270 51,458
50,000
0.80 0.72 0.70 0.69 0.69
40,000
0.60 0.56 0.56
0.49
30,000
0.38
0.40 0.31 0.33
20,000 0.26
10,000 0.20
0 0.00

26.0%
20.0
24.0%
18.0
22.0%
16.0
20.0%
14.0
18.0%
12.0
16.0%
10.0
14.0%
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

9.8% 0.950
8.8% 0.900
7.8%
0.850
6.8%
0.800
5.8%
4.8% 0.750
3.8% 0.700
2.8%
0.650
1.8%
0.600
0.8%
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan FENC
Income statement
Quarterly Annually
Revenue 51,458 53,939 61,799 65,150 64,497 64,497 66,119 61,185 232,345 256,297 246,609
Gross profit 10,766 12,262 12,259 10,249 11,510 11,510 12,148 12,148 45,536 47,316 43,889
Depreciation of fixed assets (3,955) (3,946) (4,098) (4,501) (4,250) (4,250) (4,250) (4,250) (16,500) (17,000) (17,000)
Amortisation of intangible assets (1,186) (1,266) (1,151) (1,397) (1,250) (1,250) (1,250) (1,250) (5,000) (5,000) (5,000)
EBITDA 8,633 10,218 10,267 9,292 9,854 9,854 10,491 10,491 38,410 40,690 37,263
Interest income 74 53 73 81 70 70 70 70 280 280 280
Investment income 1,393 1,840 1,652 1,503 1,711 1,711 1,711 1,711 6,430 6,845 5,941
Other non-op income 597 2,411 616 2 - - - - 2,400 - -
Non-operating income 2,064 4,304 2,340 1,586 1,781 1,781 1,781 1,781 9,110 7,125 6,221
Interest expense (619) (605) (703) (673) (650) (650) (650) (650) (2,600) (2,600) (2,600)
Investment loss - - - - - - - - - - -
Other non-op expenses (309) (362) (513) - - - - - - - -
Non-operating expenses (928) (967) (1,216) (673) (650) (650) (650) (650) (2,600) (2,600) (2,600)
Pre-tax profit 4,628 8,342 6,142 4,307 5,485 5,485 6,122 6,122 23,419 23,215 18,884
Current taxation (526) (1,632) (704) (829) (902) (902) (902) (902) (3,690) (3,608) (2,923)
Minorities (1,633) (1,805) (1,962) (1,555) (1,785) (1,785) (1,785) (1,785) (6,955) (7,141) (6,369)
Normalised net profit 2,469 4,906 3,476 1,923 2,798 2,798 3,435 3,435 12,775 12,465 9,592
Extraordinary items 0 0 0 - - - - - - - -
Net profit 2,469 4,906 3,476 1,923 2,798 2,798 3,435 3,435 12,775 12,465 9,592
EPS (NT$) 0.49 0.98 0.70 0.38 0.56 0.56 0.69 0.69 2.56 2.49 1.92
Margins (%)
EBITDA margin 16.8 18.9 16.6 14.3 15.3 15.3 15.9 17.1 16.5 15.9 15.1
Revenue growth (11.5) 4.8 14.6 5.4 (1.0) 0.0 2.5 (7.5)
Gross profit growth (6.2) 13.9 (0.0) (16.4) 12.3 0.0 5.5 0.0
Operating profit growth 5.1 43.3 0.3 (32.4) 28.2 0.0 14.6 0.0
EBITDA growth 0.9 18.4 0.5 (9.5) 6.0 0.0 6.5 0.0
Pretax profit growth 41.6 80.3 (26.4) (29.9) 27.3 0.0 11.6 0.0
Net profit growth 51.3 98.7 (29.1) (44.7) 45.5 0.0 22.8 0.0
YoY growth (%)
Revenue growth 2.4 1.9 12.6 12.1 25.3 19.6 7.0 (6.1) 7.5 10.3 (3.8)
Gross profit growth (11.7) 6.1 (4.4) (10.7) 6.9 (6.1) (0.9) 18.5 (5.2) 3.9 (7.2)
Operating profit growth (4.0) 75.8 26.2 2.2 24.7 (13.0) (0.5) 47.0 22.6 10.5 (18.3)
EBITDA growth (0.1) 29.0 11.8 8.6 14.1 (3.6) 2.2 12.9 12.0 5.9 (8.4)
Pretax profit growth 30.2 115.8 (1.0) 31.7 18.5 (34.3) (0.3) 42.1 38.6 (0.9) (18.7)
Net profit growth 92.1 217.0 (3.5) 17.8 13.3 (43.0) (1.2) 78.6 58.4 (2.4) (23.0)

Taiwan FENC

Other current assets 12,768 11,278 10,097 4,661 (102) Non-operating income 7,235 8,835 9,110 7,125 6,221
LT investments 183,561 187,234 192,692 199,437 205,329 Investment income 2,076 4,373 6,430 6,845 5,941
Net fixed assets 148,316 152,733 158,889 163,019 166,148 Other non-op income 4,717 3,975 2,400 - -
Total other assets 74,044 76,746 78,561 73,561 68,561 Non-operating expenses (5,778) (5,730) (2,600) (2,600) (2,600)
Total liabilities 261,268 261,227 277,041 277,041 277,041 Interest expense (2,487) (2,606) (2,600) (2,600) (2,600)
Accounts payable 16,330 20,253 22,815 22,815 22,815 Other non-op expenses (3,291) (3,124) - - -
Other current liabilities 26,387 26,110 38,841 38,841 38,841 Current taxation (3,257) (2,691) (3,690) (3,608) (2,923)
Non-current liabilities 154,084 159,587 153,531 153,531 153,531 Minorities (6,395) (6,135) (6,955) (7,141) (6,369)
Long-term debt 131,356 138,252 131,655 131,655 131,655 Extraordinary items - 0 - - -
Growth Decrease in working capital 1,092 (1,823) (2,595) 5,436 7,262
Revenue growth (0.7%) 0.2% 7.5% 10.3% (3.8%) Other operating cash flow 7,834 3,034 (4,609) 396 (2,021)
Operating profit growth 4.6% (4.9%) 22.6% 10.5% (18.3%) Investing cash flow (28,635) (26,736) (28,944) (21,130) (20,130)
EBITDA growth 5.3% 1.4% 12.0% 5.9% (8.4%) Sale of ST investment 190 (375)
Net profit growth (21.5%) 27.9% 58.4% (2.4%) (23.0%) New investments (183) (380) - - -
EPS growth (21.4%) 27.9% 58.4% (2.4%) (23.0%) Capital expenditure (19,516) (23,130) (22,130) (21,130) (20,130)
Profitability Others investing cashflow (9,125) (2,851) (6,815) - -
EBITDA margin 15.7% 15.9% 16.5% 15.9% 15.1% Increase in short term debt 13,125 (5,822) - - -
Net profit margin 2.9% 3.7% 5.5% 4.9% 3.9% Increase in long term loans (5,645) (2,717) - - -
Return on average assets 1.2% 1.6% 2.4% 2.3% 1.7% New ordinary shares issued 92 1,354 577 - -
Stability Other financing cashflow (13,284) (1,606) 1 - -
Net debt to equity 63.5% 65.8% 62.9% 57.4% 53.8% Total cash generated (5,203) (10,211) (7,720) 9,171 6,706
Interest coverage (x) 7.4 7.5 10.0 9.9 8.3 Cashflow by merger - -
Net debt (NT$mn) 160,148 168,066 168,951 159,780 153,074 = Operating margin 6.7% 6.4% 7.3% 7.3% 6.2%
Per share data
SPS (NT$) 43.17 43.25 46.48 51.27 49.33
Days inventory 51.8 61.2 74.5 66.6 68.8
Days payable 36.3 44.0 44.6 39.8 41.2
Cash cycle 57.6 60.6 79.0 71.2 74.0

Company update Chemicals‧Taiwan
TPCC
(4725.TW/4725 TT)
Continued phenol-acetone & BPA upcycle in 2019F

We remain positive that a continued phenol-acetone and BPA upcycle and the resumption of
12M target price (NT$) 38.00 TPCC’s BPA and the cumene plant will drive TPCC earnings growth in 2019-20.
Impact
Unchanged (%) 0.0
51.7
Phenol-acetone supply to continue to tighten. We estimate the
Upside (%)
phenol-acetone-benzene/propylene spread will extend the upcycle, widening from
Key message US$368/mt in 2018 to US$468/mt in 2019 on: 1) Cumene-phenol-acetone supplies have
not been tight enough to stimulate producers into aggressive capacity expansion, and
We remain positive that a continued
hence seeing limited new capacities. On the other hand, MMA and PC producers will
phenol-acetone and BPA upcycle and the
resumption of TPCC’s BPA and the cumene continue to engage in capacity ramp-up, driving up demand. We forecast global phenol
plant will drive TPCC earnings growth in capacity will remain flattish in 2019, lower than demand growth of 5%, while UTR will
2019-20. grow 5ppts YoY. 2) Scheduled capacity ramp up at the anone plant of Jiangsu Weiming
Petrochemical, invested in by CPDC in 1Q19, will propel phenol demand growth. 3) New
Trading data MMA capacity will mainly come from the acetone cyanohydrin method, which can digest
Mkt cap (NT$bn/US$mn) 7.31 / 237.9 acetone supplies, slightly easing the phenol-acetone imbalance. 4) JXTG plans to close its
cumene plant in 1Q19F, thus limiting phenol–acetone output growth.
Foreign ownership (mn) 6
3M avg. daily trading (mn) 3.39 BPA supply to continue to tighten. We estimate the BPA segment will extend the
52-week trading range (NT$) 20.30 –39.75 upcycle, with the spread rising from US$215/mt and US$380/mt in 2017-18 to US$450/mt
Performance 3M 6M 12M in 2019 mainly as BPA supplies have not been tight enough to stimulate producers into
Absolute (%) -23.3 -22.3 1.6 aggressive capacity expansion, and hence seeing limited new capacities. On the other
Relative (%) -11.9 -8.7 8.4 hand, PC producers will continue to engage in capacity ramp-up, driving up BPA demand.
We forecast global BPA capacity will rise 3% YoY in 2019, lower than demand growth of
Quarterly EPS 4%, while UTR will grow 1ppt YoY. TPCC already restarted its BPA Line 1 in 4Q18 and
NT$ 1Q 2Q 3Q 4Q expected to restart the BPA Line 2 by 2Q19F. We estimate BPA will contribute to TPCC’s
2017 0.14A (0.88)A (0.57)A 0.10A
2019 EPS of NT$0.74.
2018 0.26A 0.75A 0.10A 0.65F
2019 0.68F 0.68F 1.02F 0.93F Valuation & Action
We give our target price of NT$38, on 2.4x 2019F BVPS of NT$16, with Outperform rating.
Share price chart We recommend investors accumulate shares at the current low valuation, before a new
43.0
38.0
163
145
round of restocking takes place.
33.0 127
Risks
28.0 109
23.0 91
Crude oil price plunges; weak raw material demand.

18.0 73
60
50
40
30
20
10
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ
Revenue (NT$mn) 9,787 13,193 16,384 19,057 20,158
Gross profit (NT$mn) 71 117 940 1,576 2,082
Operating profit (NT$mn) (232) (240) 540 1,126 1,632
Net profit (NT$mn) (416) (355) 515 969 1,266
EPS (NT$) (1.43) (1.21) 1.76 3.32 4.34
DPS (NT$) - - - 2.00 2.00
Tom Hsu EPS growth (%) (77.7) (14.8) 0.0 88.2 30.7
886.2.2181.8707 PE (x) N.A. N.A. 14.2 7.5 5.8
tom.hsu@kgi.com
PB (x) 2.1 2.3 1.9 1.5 1.3
886.2.2181.8008 Net debt to equity (%) 180.8 162.6 112.2 54.3 21.9
jackson.wang@kgi.com Dividend yield (%) 0.0 0.0 0.0 8.0 8.0
See the last page for important disclosures. Return on average equity (%) (11.6) (10.7) 14.6 22.4 24.5

Taiwan TPCC
Figure 1: Company profile Figure 2: Phenol & acetone are core products of TPCC
Established in 1990, TPCC is a producer of phenol-acetone under Sales weighting by product, percent
Taiwan Cement Group, with production based in Linyuan,

MA Other
Kaohsiung. The firm sources benzene and propylene as feedstock
4
5
from CPC Corp. (TW; unlisted) to produce phenol and acetone,
Cyclohexanone
which are then processed to make cyclohexanone and BPA. 20 Phenol
44
27
Acetone

6,000 1.60
5,000 4,764 4,764 4,764 4,764

4,548 1.10 1.02
4,286 0.93
4,053 0.75
4,000 0.65 0.68 0.68
3,416 3,440 3,496
3,298 0.60
3,039
3,000 0.26
0.14 0.10 0.10
0.10
2,000
-0.40
1,000
(0.57)
0 -0.90
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F 1Q17 (0.88)
2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F
Figure 5: Gross margin Figure 6: TPCC capacity allocation

Gross margin, percent
Cyclohexanone CPL
15.0%
150k mt
10.0%
Phenol Phenolic
5.0%
0.0% Benzene 360k mt
-5.0% Cumune BPA PC
-10.0% 460k mt 107k mt
-15.0% Propylene Acetone Epoxy
-20.0% 221k mt
-25.0%
MMA
-30.0%
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
Solvents

3.20
10.0%
3.00
5.0%
2.80
0.0%
2.60
-5.0%
2.40
-10.0% 2.20
-15.0% 2.00
-20.0% 1.80
-25.0% 1.60
1.40
-30.0%
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan TPCC
Income statement
Quarterly Annually
Revenue 3,496 4,286 4,053 4,548 4,764 4,764 4,764 4,764 16,384 19,057 20,158
Gross profit 150 354 106 330 354 354 434 434 940 1,576 2,082
Operating profit 62 264 4 210 242 242 322 322 540 1,126 1,632
Amortisation of intangible assets - - - - - - - - - - -
EBITDA 252 455 195 388 429 429 509 509 1,290 1,876 2,382
Interest income 1 3 7 (0) 3 3 3 3 10 10 10
Investment income - - 40 - - - 30 - 30 30 30
Other non-op income - 25 0 (10) - - - - 25 - -
Non-operating income 1 28 47 (11) 3 3 33 3 65 40 40
Investment loss - - - - - - - - - - -
Other non-op expenses (4) 4 - - - - - - - - -
Pre-tax profit 37 273 27 178 222 222 332 302 515 1,076 1,582
Current taxation 40 (55) 3 12 (22) (22) (33) (30) - (108) (316)
Minorities - - - - - - - - - - -
Normalised net profit 77 218 29 191 199 199 298 271 515 969 1,266
Extraordinary items (0) 0 (0) 0 - - - - - - -
Net profit 77 218 29 191 199 199 298 271 515 969 1,266
EPS (NT$) 0.26 0.75 0.10 0.65 0.68 0.68 1.02 0.93 1.76 3.32 4.34
Margins (%)
EBITDA margin 7.2 10.6 4.8 8.5 9.0 9.0 10.7 10.7 7.9 9.8 11.8
Revenue growth 1.6 22.6 (5.4) 12.2 4.7 0.0 0.0 0.0
Gross profit growth (1.3) 135.6 (70.0) 210.9 7.4 0.0 22.6 0.0
Operating profit growth 8.3 329.0 (98.6) 5506.6 14.9 0.0 33.1 0.0
EBITDA growth 2.2 81.0 (57.1) 98.6 10.7 0.0 18.6 0.0
Pretax profit growth 5.8 644.3 (90.3) 572.2 24.2 0.0 49.6 (9.0)
Net profit growth 175.5 184.7 (86.7) 554.1 4.7 0.0 49.6 (9.0)
YoY growth (%)
Revenue growth 2.3 30.0 33.4 32.2 36.3 11.1 17.5 4.7 24.2 16.3 5.8
Gross profit growth (15.3) 116.9 135.8 0.1 309.2 31.6 706.4 67.7 32.1
Operating profit growth (38.4) 269.6 292.3 (8.6) 8475.8 53.0 108.7 44.9
EBITDA growth (13.8) 5311.4 57.5 70.6 (5.7) 160.7 31.3 147.7 45.5 27.0
Pretax profit growth (23.1) 414.3 503.9 (18.9) 1149.3 69.0 109.1 47.0
Net profit growth 93.9 584.3 160.0 (8.7) 924.4 42.4 88.2 30.7

Taiwan TPCC

Cash & ST securities 1,188 1,972 3,002 4,701 6,113 Gross profit 71 117 940 1,576 2,082
Accounts receivable 1,301 1,173 1,803 1,803 1,803 Operating profit (232) (240) 540 1,126 1,632
LT investments - - - - - Investment income 32 37 30 30 30
Net fixed assets 7,077 6,100 5,402 4,702 4,002 Other non-op income - - 25 - -
Accounts payable 828 991 1,412 1,412 1,412 Other non-op expenses (20) (21) - - -
Interest bearing ST liabilities 2,911 4,787 4,503 4,503 4,503 Pre-tax profit (406) (349) 515 1,076 1,582
Other current liabilities 379 295 511 511 511 Current taxation (10) (6) - (108) (316)
Non-current liabilities 3,698 1,521 1,817 1,817 1,817 Minorities - - - - -
Long-term debt 3,603 1,398 1,682 1,682 1,682 Extraordinary items - (0) - - -
Other L-T liabilities 94 123 136 136 136 Net profit (416) (355) 515 969 1,266
Total equity 3,406 3,218 3,848 4,817 5,499 EBITDA 433 521 1,290 1,876 2,382
Share capital 2,920 2,920 2,920 2,920 2,920 EPS (NT$) (1.43) (1.21) 1.76 3.32 4.34
Retained earnings reserve (416) (791) (277) 108 790
Operations cash flow 615 487 966 1,749 2,046
Key ratios Net profit (416) (355) 515 969 1,266
Growth Decrease in working capital 164 147 (248) (554) 30
Revenue growth (16.6%) 34.8% 24.2% 16.3% 5.8% Other operating cash flow 202 (66) (51) 584 0
Operating profit growth (85.8%) 3.6% 108.7% 44.9% Investing cash flow (117) 115 (50) (50) (50)
EBITDA growth 20.2% 147.7% 45.5% 27.0% Sale of ST investment - -
Net profit growth (77.7%) (14.8%) 88.2% 30.7% New investments - - - - -
EPS growth (77.7%) (14.8%) 88.2% 30.7% Capital expenditure (112) (43) (50) (50) (50)
Profitability Others investing cashflow (4) 158 - - -
Gross profit margin 0.7% 0.9% 5.7% 8.3% 10.3% Free cash flow 480 620 992 1,160 2,036
Operating margin (2.4%) (1.8%) 3.3% 5.9% 8.1% Financing cash flow (459) (4) - - (584)
EBITDA margin 4.4% 3.9% 7.9% 9.8% 11.8% Increase in short term debt 201 801 - - -
Net profit margin (4.3%) (2.7%) 3.1% 5.1% 6.3% Increase in long term loans (522) (1,131) - - -
Return on average assets (3.6%) (3.2%) 4.5% 7.7% 9.4% New ordinary shares issued - - - - -
Return on average equity (11.6%) (10.7%) 14.6% 22.4% 24.5% Ordinary dividends paid - - - - (584)
Stability Other financing cashflow (138) 326 - - -
Gross debt to equity 191.3% 192.2% 160.7% 128.4% 112.5% Forex effects - - - - -
Net debt to equity 180.8% 162.6% 112.2% 54.3% 21.9% Total cash generated 40 597 916 1,699 1,412
Interest coverage (x) (1.2) (1.7) 6.7 13.0 18.6 Cashflow by merger - -
Interest & ST debt coverage (x) (0.2) (0.1) 0.1 0.2 0.2
Net debt (NT$mn) 6,159 5,232 4,316 2,617 1,205 = Operating margin (2.4%) (1.8%) 3.3% 5.9% 8.1%
Per share data
EPS (NT$) (1.43) (1.21) 1.76 3.32 4.34 1 / (Working capital/revenue 0.1 0.1 0.1 0.1 0.0
SPS (NT$) 33.52 45.19 56.11 65.27 69.04
EBITDA/share (NT$) 1.48 1.78 4.42 6.43 8.16 Operating margin (2.4%) (1.8%) 3.3% 5.9% 8.1%
DPS (NT$) - - - 2.00 2.00 x Capital turnover 1.1 1.7 2.3 3.0 3.5
Sales / avg assets 0.86 1.20 1.43 1.52 1.50 = After-tax ROIC (2.7%) (3.2%) 7.5% 15.8% 22.9%
Days inventory 23.3 21.3 20.8 18.4 17.8
Days payable 31.2 27.7 33.4 29.5 28.6
Cash cycle 40.7 26.1 27.6 23.5 22.0

Taiwan
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upgrades that feature better space management (putting top-selling products in a more
visible place on the shelves), Poya targets SSSG returning to positive territory next year, up
2-3%, driven by stabilized foot traffic and sustained per-ticket sales.
Benefitting from enlarged scale. The firm has enjoyed gross margin expansion of
50-60bps on average annually in the past five years thanks to growing bargaining power
over supply vendors. Poya plans to add 28 new stores in 2019, versus estimated additions
of 25 this year, with more openings in lower-penetrated northern Taiwan. We believe the
enlarged scale will allow the firm to continue expanding gross margin. In addition, Poya
will activate a new distribution center in Taoyuan in 2019F, which can help reduce
inventory while cutting the number of store staff, offsetting a planned increase in
minimum wage next year. We forecast Poya’s operating margin will extend a recovery, up
0.1ppts YoY in 2019.
Solid earnings growth with generous dividend payout. We have fine-tuned our
earnings forecasts to reflect expectations of SSSG recovery and the new store opening
target. We believe Poya is on track to deliver earnings growth of 19.8% in 2018 and a
further 15.1% to NT$20.17/share next year. We expect the firm to sustain its cash
dividend payout of 85% in the next two years, as it can fund its expansion with operating
cash flow. We expect Poya to pay a cash dividend of NT$15.6 for 2018, implying a yield of
5% based on Thursday’s closing price.

Taiwan Other top picks
PharmaEssentia (6446.TW/6446 TT): Potential EMA approval of Ropeg in 2Q19F

Ropeg will be the leading treatment for polycythemia vera, with peak sales of
more than US$1.0bn in the EU. Ropeg is a next-generation long-lasting interferon for
first-line treatment of polycythemia vera (PV) patients. There are around 150k PV patients
in the EU and US, respectively. PharmaEssentia estimates Ropeg will capture 10-20k PV
patients within three years of launch in the EU, and expects the price of Ropeg in the EU to
be US$30-50k per year.
EMA Ropeg approval expected in 2Q19. In September, the EMA requested an expert
meeting to discuss a labeling issue for Ropeg. The meeting yielded positive results, with
the review process moved to the Committee for Medicinal Products for Human Use
(CHMP). The CHMP meeting is expected to be held by the end of 2018, with results to be
released in January 2019F. If everything goes well, official market authorization will be
granted for Ropeg 67 days after the CHMP decision, likely in 2Q19.
Potentially profitable in 2020F. The launch of Ropeg will bring PharmaEssentia

significant revenue growth in the near future. PharmaEssentia’s commercial partner AOP
orphan pharmaceuticals is one of the first companies to engage the rare disease market in
Europe. It has good connections and networks with key opinion leaders (KOL) in
hematology. Good relations with KOLs will help Ropeg be adopted for treating PV patients
quickly after launch. AOP has doubled its marketing team for Ropeg’s commercialization
in 2H19F. Upon Ropeg launch in the EU market, PharmaEssentia will be responsible for
manufacturing. AOP will have to purchase Ropeg from PharmaEssentia. PharmaEssentia
will also be entitled to sales royalties, which are tiered according to product sales, ranging
from 12-20%.
Dadi (8437.TW/8437 TT): China kindergarten industry outlook favors Dadi profit
growth
In China, policy & social circumstances favor development of kindergartens. In
China, social circumstances and policies favor positive development of the kindergarten
industry. Regarding social circumstances, legalization of having a second child has boosted
the birth rate and increased household spending on education. In addition, the
government has increased fiscal spending on preschool education and requires a
minimum 85% enrollment ratio for kindergartens by 2020, up from nearly 80% in 2017.
With kindergartens remaining in short supply, existing kindergartens will see enrollment
ratios and tuition fees grow in tandem. Also, rising demand for new kindergartens will
boost the market share of kindergartens with famous brands.
Policy adjustments to resolve limited space & high tuition fee issues. China has
recently changed its preschool educational policies, stating that: (1) kindergartens may not
be operated as a business group; (2) private kindergartens may not be listed as an
independent entity; and (3) community kindergartens may not be for-profit. Instead of
operating a kindergarten, Dadi generates sales mainly by providing consulting services,
pre-school educational tools and software. This means the company is not the intended
target of the government’s restrictive policies. Rather, many competitors are exiting the
market given the policy changes, which bodes well for Dadi’s licensing expansion.
Dadi’s 2018-20 profit CAGR likely to hit 19.3% on high profit visibility. We estimate
with 50-55 kindergartens franchised and a 6.5-8% hike in consulting fees every year, Dadi
will likely grow 2018-20 revenue by CAGR of 17.1%. And with gross margin stable at
85% and economies of scale, operating margin will rise from 67.7% in 2018F to 71.6% in
2020F. Net profit CAGR should come in at 19.3% in 2018-20.

Company update Chemical‧Taiwan
Taiwan Fertilizer
(1722.TW/1722 TT)
Urea upcycle entering strongest stage

Price as of December 6 (NT$) 45.55 We forecast a 2018-20 urea upcycle will boost Taiwan Fertilize’s earnings and share
12M target price (NT$) 60.00 valuation.
Upside (%) 31.7 Rising global urea prices boosting reinvestment income from Al Jubail. Taiwan
Fertilizer and SABIC jointly own Saudi Arabia-based integrated ammonia-urea maker Al
Key message
Jubail. The joint venture contributed EPS of NT$3.20-3.34 in 2011-12 at the peak of the
urea upcycle, but just NT$(-0.26)-1.80 in 2013-17 when the urea market was in a
We forecast a 2018-20 urea upcycle will downcycle. With the market recovering, Al Jubail has turned profitable in 2017-18. We
boost Taiwan Fertilize’s earnings and share forecast Al Jubail will contribute EPS of NT$1.60-2.06 in 2019-20 on rising urea prices.
valuation.
Primary drivers are: (1) urea makers have reduced investment in the wake of severe
oversupply in 2013-17, and China’s environmental protection policy has forced urea
makers to cut or close production capacity, resulting in a global capacity growth of just
Trading data
Mkt cap (NT$bn/US$mn) 44.64 / 1,452 1% in 2019F and 1% in 2020F, lagging likely demand growth of 2%, boosting the
Outstanding shares (mn) 980 utilization rate (UTR); and (2) costs of China’s natural gas-based urea producers are the
155
highest worldwide. China’s environmental protection policy has significantly driven up
Foreign ownership (mn)
3.01
production costs and, in turn, pushed up global urea prices. Meanwhile, since Al Jubail’s
35.69 –48.40 natural gas is supplied by SABIC at a fixed contract price, its earnings have risen along with
52-week trading range (NT$)
Performance 3M 6M 12M rising urea prices.
Absolute (%) 2.4 10.2 24.8
Real estate undervalued. Taiwan Fertilizer owns 510k pings of land for investment
Relative (%) 13.8 23.8 31.6
purposes, mainly in Nangang Economic and Trade Park and Hsinchu Science Park. We
Quarterly EPS estimate net present value of the land is NT$40.71 per share, higher than its net book
NT$ 1Q 2Q 3Q 4Q value of NT$35.63.
2017 0.52A 0.48A 0.37A 0.28A
Valuation & Action
2018 0.43A 0.66A 0.58A 0.86F
2019 0.60F 0.60F 0.78F 0.73F Using the SOTP method, we assign a target price of NT$60, implying 1.3x 2019F BVPS of
NT$52, a level seen during the 2006 urea upcycle. We recommend investors accumulate
Share price chart shares.
50.0 135.0
48.0
46.0
129.4
123.8 Risks
44.0 118.1
42.0 112.5
40.0
38.0
106.9
101.3 Crude oil price plunges; weaker-than-expected demand for raw materials.
36.0 95.6
34.0 90.0
20
15
10
12-17 02-18 04-18 06-18 08-18 10-18

Source: TEJ
Revenue (NT$mn) 12,241 11,659 11,550 11,600 11,600
Operating profit (NT$mn) 596 1,228 1,450 1,550 1,550
Net profit (NT$mn) (73) 1,619 2,492 2,663 3,036
EPS (NT$) (0.07) 1.65 2.54 2.72 3.10
DPS (NT$) 2.10 2.10 2.10 2.10 2.10
Tom Hsu
886.2.2181.8707 EPS growth (%) (103.0) 0.0 53.9 6.9 14.0
tom.hsu@kgi.com PE (x) N.A. 27.6 17.9 16.8 14.7
PB (x) 0.9 0.9 0.9 0.9 0.9
886.2.2181.8008
Dividend yield (%) 4.6 4.6 4.6 4.6 4.6
See the last page for important disclosures. Return on average equity (%) (0.1) 3.3 5.0 5.2 5.9

Taiwan Taiwan Fertilizer
Figure 1: Company profile Figure 2: Composite fertilizer & rentals are key sales sources
Established in 1946, Taiwan Fertilizer is engaged in fertilizer Sales weighting by product, percent
production and land development. Its main production base is in

Other
Taichung Port, making primarily nitrogen fertilizer, composite
fertilizer, and organic fertilizer. The firm also manages integrated 18 Composite
Housing sales fertilizer
ammonia-urea business via a 50% stake in Al Jubail. Of the various 2
39
lots of land it owns, those in Nangang Economic and Trade Park Rental
13
and Hsinchu Science Park would be most valuable if developed,

6
with profit mainly coming from disposal gains and rentals 7 15
Urea
(including royalties). Urea from Al Ammonia from
Jubail import
Figure 3 Sales Figure 4: EPS

3,500 3,249 1.00
3,174
2,965 0.90 0.86
2,938 2,900 2,900 2,900 2,900
3,000 2,815 2,798 2,797 0.78
0.80 0.73
2,472
2,500 0.70 0.66
0.58 0.60 0.60
0.60
2,000 0.52
0.48
0.50 0.43
1,500 0.37
0.40
0.28
1,000 0.30
0.20
500
0.10
0 0.00

Gross margin, percent 600
50.0%
500
40.0%
400
30.0%
300
20.0%
200
10.0%
100
0.0%
0
-10.0%
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

40.0% 0.900
30.0% 0.850
20.0% 0.800
10.0% 0.750
0.0% 0.700
-10.0% 0.650
0.600
-20.0%
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Income statement
Quarterly Annually
Revenue 3,174 2,938 2,965 2,472 2,900 2,900 2,900 2,900 11,550 11,600 11,600
Gross profit 668 686 707 639 700 700 700 700 2,700 2,800 2,800
EBITDA 566 569 609 490 584 584 584 584 2,235 2,335 2,335
Interest income 23 22 18 17 20 20 20 20 80 80 80
Investment income 93 205 328 149 313 313 521 470 51 51 51
Other non-op income 92 194 (7) 507 - - - - 734 - -
Interest expense (0) (0) (0) 0 - - - - - - -
Investment loss - - - - - - - - 724 1,567 2,022
Other non-op expenses (49) 16 (18) - - - - - - - -
Non-operating expenses (50) 16 (18) 0 - - - - 724 1,567 2,022
Pre-tax profit 518 787 694 1,039 721 721 929 878 3,039 3,248 3,703
Minorities - - - - - - - - - - -
Extraordinary items (0) (0) 0 - - - - - - - -
Net profit 426 648 570 848 591 591 761 720 2,492 2,663 3,036
EPS (NT$) 0.43 0.66 0.58 0.86 0.60 0.60 0.78 0.73 2.54 2.72 3.10
Margins (%)
EBITDA margin 17.8 19.4 20.5 19.8 20.1 20.1 20.1 20.1 19.3 20.1 20.1
Revenue growth 13.5 (7.4) 0.9 (16.6) 17.3 0.0 0.0 0.0
Gross profit growth 10.0 2.6 3.1 (9.5) 9.5 0.0 0.0 0.0
Operating profit growth 80.7 (2.4) 6.5 (2.1) 6.0 0.0 0.0 0.0
EBITDA growth 35.4 0.6 7.0 (19.5) 19.1 0.0 0.0 0.0
Pretax profit growth 160.3 51.9 (11.9) 49.8 (30.6) 0.0 28.8 (5.5)
Net profit growth 52.7 51.9 (12.0) 48.7 (30.3) 0.0 28.8 (5.5)
YoY growth (%)
Revenue growth (2.3) 4.4 6.0 (11.6) (8.6) (1.3) (2.2) 17.3 (0.9) 0.4 0.0
Gross profit growth (6.0) 11.7 5.6 5.2 4.8 2.1 (0.9) 9.5 3.8 3.7 0.0
EBITDA growth (2.0) 17.6 7.7 17.3 3.1 2.5 (4.2) 19.1 9.3 4.5 0.0
Pretax profit growth (16.2) 41.0 51.5 421.7 39.1 (8.4) 33.8 (15.5) 65.7 6.9 14.0
Net profit growth (15.9) 37.7 57.3 203.5 38.7 (8.7) 33.6 (15.1) 53.9 6.9 14.0


Accounts receivable 1,672 1,565 1,315 1,315 1,315 Operating profit 596 1,228 1,450 1,550 1,550
Other current assets 7,496 6,340 6,088 4,991 3,525 Non-operating income 208 941 865 131 131
LT investments 32,001 45,110 47,284 48,800 50,821 Investment income 42 661 51 51 51
Net fixed assets 26,753 13,744 13,441 13,041 12,641 Other non-op income 104 197 734 - -
Total other assets 2,160 2,110 3,762 3,678 3,593 Non-operating expenses (756) (335) 724 1,567 2,022
Total liabilities 26,028 26,064 26,524 26,524 26,524 Interest expense (7) (1) - - -
Current liabilities 1,680 2,232 2,900 2,900 2,900 Investment loss (187) - 724 1,567 2,022
Accounts payable 905 1,218 518 518 518 Other non-op expenses (562) (335) - - -
Interest bearing ST liabilities 46 35 35 35 35 Pre-tax profit 47 1,834 3,039 3,248 3,703
Other current liabilities 729 978 2,347 2,347 2,347 Current taxation (120) (215) (547) (585) (666)
Non-current liabilities 24,348 23,833 23,623 23,623 23,623 Minorities - - - - -
Long-term debt - - - - - Extraordinary items - (0) - - -
Other L-T liabilities 24,348 23,833 23,623 23,623 23,623 Net profit (73) 1,619 2,492 2,663 3,036
Share capital 9,800 9,800 9,800 9,800 9,800 EPS (NT$) (0.07) 1.65 2.54 2.72 3.10
Retained earnings reserve 286 1,961 2,395 3,000 3,978
Operations cash flow 1,637 2,599 871 3,029 3,265
Key ratios Net profit (73) 1,619 2,492 2,663 3,036
Growth Decrease in working capital 512 383 (292) 1,097 1,466
Revenue growth (30.0%) (4.8%) (0.9%) 0.4% 0.0% Other operating cash flow 404 (220) (2,112) (1,516) (2,022)
Operating profit growth (74.6%) 106.1% 18.1% 6.9% 0.0% Investing cash flow (1,096) 664 (300) (300) (300)
EBITDA growth (55.2%) 47.2% 9.3% 4.5% 0.0% Sale of ST investment 5,522 1,106
Net profit growth (103.0%) 53.9% 6.9% 14.0% New investments - (97) - - -
EPS growth (103.0%) 53.9% 6.9% 14.0% Capital expenditure (753) (449) (300) (300) (300)
Profitability Others investing cashflow (5,865) 104 - - -
Gross profit margin 16.4% 22.3% 23.4% 24.1% 24.1% Free cash flow (448) 1,750 1,297 2,768 3,137
EBITDA margin 11.4% 17.5% 19.3% 20.1% 20.1% Increase in short term debt 36 (11) - - -
Net profit margin (0.6%) 13.9% 21.6% 23.0% 26.2% Increase in long term loans - - - - -
Return on average assets (0.1%) 2.1% 3.3% 3.4% 3.9% New ordinary shares issued - - - - -
Return on average equity (0.1%) 3.3% 5.0% 5.2% 5.9% Ordinary dividends paid (2,058) (2,058) (1,176) (2,058) (2,058)
Stability Other financing cashflow 95 (7) (882) - -
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated (1,390) 1,181 (1,487) 671 907
Interest coverage (x) 7.7 3,305.6 Cashflow by merger - -
Cash flow interest coverage(x) 232.9 4,683.5 ROIC
Net debt (NT$mn) (1,039) (2,231) (745) (1,415) (2,323) = Operating margin 4.9% 10.5% 12.6% 13.4% 13.4%
Per share data
EPS (NT$) (0.07) 1.65 2.54 2.72 3.10 1 / (Working capital/revenue 0.8 0.6 0.6 0.5 0.4
SPS (NT$) 12.49 11.90 11.79 11.84 11.84
Activity x (1 - tax rate) (153.9%) 88.3% 82.0% 82.0% 82.0%
Sales / avg assets 0.16 0.15 0.15 0.15 0.15 = After-tax ROIC (2.4%) 4.6% 4.9% 5.6% 6.2%
Days inventory 64.4 74.1 99.8 100.4 100.7
Days payable 32.4 49.1 21.4 21.5 21.5
Cash cycle 82.1 74.0 120.0 120.3 120.6

COMPANY UPDATE Retail‧Taiwan
Poya
(5904.TW/5904 TT)
SSSG recovery to reignite share momentum

Poya’s share price has declined 17% year to date, underperforming the Taiex’s 9% drop
Price as of 6 December 2018 297.0
due to same store sales growth (SSSG) misses. The firm has stepped up marketing
campaigns to members. Combined with efforts to drive per-ticket sales, including rolling
Previous target price (NT$) 438.0 out new format stores and product premiumization, we expected SSSG to return to
Unchanged (%) 0.0 positive territory next year, which in our view should help the stock regain momentum.
Upside (%) 47.5
Impact
Key message Target SSSG of 2-3% in 2019F. Poya’s SSSG has trailed expectations, falling 2-3% in the
past few quarters, as the government’s pension reforms combined with stricter labor law
Poya shares have lagged the Taiex due to
regarding overtime soured consumption sentiment, while unfavorable weather conditions
sluggish same store sales growth (SSSG). The
resulted in a decline in customer traffic. While some of these effects will likely remain in
firm has strengthened marketing campaigns to 2019, the company has stepped up marketing campaigns to repeat customers as the
members. Combined with efforts to drive per-ticket size of members is 40-50% higher than non-members. Combined with store
per-ticket sales, we expect SSSG to return to upgrades that feature better space management (putting top-selling products in a more
positive territory next year, which should help visible place on the shelves), Poya targets SSSG returning to positive territory next year, up
the stock regain momentum. We assign an 2-3%, driven by stabilized foot traffic and sustained per-ticket sales.
Outperform rating and target price of NT$438 Benefitting from enlarged scale. The firm has enjoyed gross margin expansion of
based on 25x PE. 50-60bps on average annually in the past five years thanks to growing bargaining power
over supply vendors. Poya plans to add 28 new stores in 2019, versus estimated additions
Trading data of 25 this year, with more openings in lower-penetrated northern Taiwan. We believe the
Mkt cap (NT$bn/US$mn) 29.01 / 944 enlarged scale will allow the firm to continue expanding gross margin. In addition, Poya
will activate a new distribution center in Taoyuan in 2019F, which can help reduce
inventory while cutting the number of store staff, offsetting a planned increase in
Foreign ownership (mn) 35.0 minimum wage next year. We forecast Poya’s operating margin will extend a recovery, up
3M avg. daily trading (mn) 0.08 0.1ppts YoY in 2019.
52-week trading range (NT$) 238.0 –381.0 Solid earnings growth with generous dividend payout. We have fine-tuned our
Performance (%) 3M 6M 12M earnings forecasts to reflect expectations of SSSG recovery and the new store opening
Absolute -6.2 -9 -21.2 target. We believe Poya is on track to deliver earnings growth of 19.8% in 2018 and a
further 15.1% to NT$20.17/share next year. We expect the firm to sustain its cash
Relative 5.2 4.6 -14.4
dividend payout of 85% in the next two years, as it can fund its expansion with operating
cash flow. We expect Poya to pay a cash dividend of NT$15.6 for 2018, implying a yield of
Quarterly EPS
5% based on Thursday’s closing price.
NT$ 1Q 2Q 3Q 4Q
2017 3.41A 3.01A 4.41A 3.84A Valuation & Action
2018 4.54A 3.75A 4.93A 4.31F The stock is currently trading at 16.9x PE, at the low end of its historical band of 15-35x,
2019 5.11F 4.18F 5.96F 4.93F versus 23x for the Taiwan retail sector. Given Poya’s solid earnings growth profile, we view
the valuation attractive and expect improving SSSG to serve as a positive catalyst. We
assign an Outperform rating and target price of NT$438 based on 25x PE.
Share price chart
40 0
103.0 Risks
38 0 98.6
Slow SSSG recovery; delayed new store openings.

36 0 94.1
34 0 89.7
32 0 85.2
30 0 80.8
28 0 76.3

26 0 71.9
24 0 67.4
22 0 63.0
50 0

40 0
30 0
20 0
10 0
Revenue (NT$mn) 10,688 12,424 13,262 14,459 16,541
12 -17 02-18 04-1 8 06-1 8 08 -18 10-18
Net profit (NT$mn) 952 1,169 1,429 1,712 1,970
EPS (NT$) 10.00 12.13 14.63 17.53 20.17
Angus Chuang DPS (NT$) 8.80 10.70 13.00 15.58 17.92
886.2.2181.8719 EPS growth (%) 21.9 21.2 20.7 19.8 15.1
angus.chuang@kgi.com PE (x) 29.7 24.5 20.3 16.9 14.7
PB (x) 10.3 9.1 8.0 7.1 6.3
Jenny Liu
886 2 2181 8035 EV/EBITDA (x) 19.1 16.5 13.5 11.0 9.4
tseen.liu@kgi.com Net debt to equity (%) Net cash 4.1 9.8 Net cash Net cash
Dividend yield (%) 3.0 3.6 4.4 5.2 6.0

Taiwan Poya
Figure 1: Company profile Figure 2: Poya plans to open 25 new stores in 2018
Established in 1997, Poya operates chain stores selling cosmetics, Number of stores (LHS); YoY growth, percent (RHS)
250 30
skincare products, apparel and accessories. The stores target
200 25
female customers aged 15-49. Store GFA is 300-500 ping (1 ping
20
= 3.3 sq.m), larger than that of Taiwan peers Watsons (unlisted) 150
15
and Cosmed (unlisted). Poya’s stores are concentrated in 100
10
townships and cities with populations over 40k across Taiwan, and 50 5
its diversified product offerings have more exposure to 0 0
home-brand products. Poya had 177 stores as of end-2017. 2010 2011 2012 2013 2014 2015 2016 2017 2018F
Management holds around 60% of shares, while QFII controls Number of stores YoY growth
35.3%.

5,000 7.0
4,500 4,337 4,347 5.96
3,949 3,937 3,920 6.0
4,000 3,668 5.11
3,462 3,443 4.93 4.93
3,382 3,400 5.0
3,500 3,240 3,178 4.41 4.54
4.31 4.18
3,000 3.84 3.75
4.0
3.41
2,500 3.01
3.0
2,000
1,500 2.0
1,000
1.0
500
0 0.0

46.0%
38.0
44.0%
42.0% 33.0
40.0%
28.0
38.0%
36.0% 23.0
34.0%
18.0
32.0%
30.0% 13.0
1Q18F
2Q18F
3Q18F
4Q18F
4Q18F
1Q19F
2Q19F
3Q19F
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

19.0% 14.7
13.7
17.0%
12.7
15.0%
11.7
13.0% 10.7
11.0% 9.7
8.7
9.0%
7.7
7.0%
6.7
5.0% 5.7
1Q18F
2Q18F
3Q18F
4Q18F
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
4Q18F
1Q19F
2Q19F
3Q19F
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan Poya
Income statement
Quarterly Annually
Revenue 3,400 3,443 3,668 3,949 3,937 3,920 4,337 4,347 13,262 14,459 16,541
Gross profit 1,517 1,447 1,652 1,659 1,764 1,656 1,962 1,834 5,679 6,274 7,216
Operating expenses (979) (997) (1,057) (1,137) (1,150) (1,153) (1,249) (1,239) (3,957) (4,170) (4,790)
Amortisation of intangible assets - - - - - - - - - - -
EBITDA 660 576 722 660 756 644 854 738 2,167 2,619 2,993
Interest income 0 1 0 2 1 1 1 1 2 3 5
Investment loss - - - - - - - - - - -
Other non-op expenses (0) (0) (0) 0 - - - - (40) - -
Pre-tax profit 548 458 604 531 622 513 722 606 1,723 2,141 2,463
Minorities - - - - - - - - - - -
Extraordinary items (0) (0) 0 0 - - - - - - -
Net profit 443 366 482 421 499 408 582 481 1,429 1,712 1,970
EPS (NT$) 4.54 3.75 4.93 4.31 5.11 4.18 5.96 4.93 14.63 17.53 20.17
Margins (%)
EBITDA margin 19.4 16.7 19.7 16.7 19.2 16.4 19.7 17.0 16.3 18.1 18.1
Revenue growth 0.5 1.3 6.5 7.7 (0.3) (0.4) 10.6 0.2
Gross profit growth 6.0 (4.6) 14.2 0.4 6.4 (6.2) 18.5 (6.5)
Operating profit growth 19.1 (16.4) 32.2 (12.4) 18.0 (18.2) 41.7 (16.4)
EBITDA growth 15.8 (12.7) 25.2 (8.5) 14.5 (14.8) 32.6 (13.6)
Pretax profit growth 21.1 (16.4) 31.8 (12.1) 17.3 (17.6) 40.7 (16.1)
Net profit growth 18.2 (17.4) 31.5 (12.5) 18.4 (18.3) 42.6 (17.3)
YoY growth (%)
Revenue growth 4.9 8.3 5.9 16.8 15.8 13.9 18.2 10.1 6.7 9.0 14.4
EBITDA growth 32.4 21.1 15.9 15.8 14.5 11.8 18.4 11.8 23.9 20.8 14.3

Taiwan Poya

Cash & ST securities 764 833 973 1,759 2,588 Gross profit 4,378 5,108 5,679 6,274 7,216
Accounts receivable 574 666 687 749 857 Operating profit 1,129 1,361 1,722 2,105 2,426
Accounts payable 1,573 1,583 1,702 1,837 2,093 Other non-op expenses (9) (1) (40) - -
Non-current liabilities 349 574 811 1,203 1,192 Minorities - - - - -
Long-term debt 338 556 793 1,186 1,175 Extraordinary items - (0) 0 - -
Other L-T liabilities 11 17 17 17 18 Net profit 952 1,169 1,429 1,712 1,970
Retained earnings reserve 953 1,174 1,443 1,634 1,853
Key ratios Net profit 952 1,169 1,429 1,712 1,970
Revenue growth 16.6% 16.2% 6.7% 9.0% 14.4% Other operating cash flow 83 190 167 - (0)
Operating profit growth 26.1% 20.6% 26.5% 22.2% 15.3% Investing cash flow (672) (806) (1,012) (420) (420)
EBITDA growth 24.1% 18.3% 23.9% 20.8% 14.3% Sale of ST investment - - -
Net profit growth 23.3% 22.8% 22.2% 19.8% 15.1% New investments - - - - -
Profitability Others investing cashflow 109 168 (71) - -
Gross profit margin 41.0% 41.1% 42.8% 43.4% 43.6% Free cash flow 271 213 707 1,661 1,905
EBITDA margin 13.8% 14.1% 16.3% 18.1% 18.1% Increase in short term debt - - -
Net profit margin 8.9% 9.4% 10.8% 11.8% 11.9% Increase in long term loans 206 294 368 120 120
Return on average equity 37.1% 39.8% 42.2% 44.5% 45.6% Ordinary dividends paid (696) (838) (1,032) (1,270) (1,522)
Stability Other financing cashflow 2 1 (0) 246 296
Gross debt to equity 24.4% 30.6% 36.6% 35.7% 34.3% Forex effects - - -
Net debt to equity Net cash 4.1% 9.8% Net cash Net cash Total cash generated (8) 70 140 786 829
Net debt (NT$mn) (96) 129 357 (309) (1,018) = Operating margin 10.6% 11.0% 13.0% 14.6% 14.7%
Per share data
SPS (NT$) 112.29 128.82 135.81 148.02 169.33
Days inventory 119.6 115.8 127.0 127.0 127.0
Days payable 91.0 79.2 81.9 81.9 81.9
Cash cycle 48.2 56.2 64.0 64.0 64.0

Company update Biotech‧Taiwan
PharmaEssentia
(6446.TW/6446 TT)
Potential EMA approval of Ropeg in 2Q19F

Price as of December 6 (NT$) 179.5 PharmaEssentia’s leading product Ropeg is in the final review stage of market
12M target price (NT$) 248.0 authorization application (MAA). The result is be very likely to be released in 2Q19.
Impact
Unchanged (%) 0.0
Upside (%) 38.2 Ropeg will be the leading treatment for polycythemia vera, with peak sales of
more than US$1.0bn in the EU. Ropeg is a next-generation long-lasting interferon for
Key message first-line treatment of polycythemia vera (PV) patients. There are around 150k PV patients
in the EU and US, respectively. PharmaEssentia estimates Ropeg will capture 10-20k PV
PharmaEssentia has received the EMA’s patients within three years of launch in the EU, and expects the price of Ropeg in the EU to
questions following secondary evaluation of be US$30-50k per year.
Ropeg. The EMA requested an expert meeting
to discuss a labeling issue in September. Results EMA Ropeg approval expected in 2Q19. In September, the EMA requested an expert
of the expert meeting were positive. The meeting to discuss a labeling issue for Ropeg. The meeting yielded positive results, with
Committee for Medicinal Products for Human the review process moved to the Committee for Medicinal Products for Human Use
Use (CHMP) meeting is expected in December, (CHMP). The CHMP meeting is expected to be held by the end of 2018, with results to be
with opinions to be released in January. A released in January 2019F. If everything goes well, official market authorization will be
best-case scenario will see official market granted for Ropeg 67 days after the CHMP decision, likely in 2Q19.
authorization for Ropeg 67 days after the
CHMP decision, likely in 2Q19. Potentially profitable in 2020F. The launch of Ropeg will bring PharmaEssentia
significant revenue growth in the near future. PharmaEssentia’s commercial partner AOP
orphan pharmaceuticals is one of the first companies to engage the rare disease market in
Trading data
Europe. It has good connections and networks with key opinion leaders (KOL) in
Mkt cap (NT$bn/US$mn) 39.34 / 1,280
hematology. Good relations with KOLs will help Ropeg be adopted for treating PV patients
Outstanding shares (mn) 219.2 quickly after launch. AOP has doubled its marketing team for Ropeg’s commercialization
Foreign ownership (mn) 0.49 in 2H19F. Upon Ropeg launch in the EU market, PharmaEssentia will be responsible for
3M avg. daily trading (mn) 0.28 manufacturing. AOP will have to purchase Ropeg from PharmaEssentia. PharmaEssentia
will also be entitled to sales royalties, which are tiered according to product sales, ranging
from 12-20%.
Absolute (%) 1.7 0.6 21.7 Valuation & Action
Relative (%) 13.1 14.2 28.5 We think after the CHMP meeting, the schedule for EMA approval of Ropeg will be clear.
We maintain our expectation of a potential product launch in Europe of 2H19, with the
Quarterly EPS penetration rate of Ropeg determining sales royalties PharmaEssentia will receive. We give
NT$ 1Q 2Q 3Q 4Q our target price of NT$248 and Outperform rating.
2017 (1.04)A (0.94)A (0.89)A (1.14)A
2018 (1.06)A (1.04)F (1.28)F (0.99)F Risks
2019 (1.05)F (0.65)F (1.07)F (0.98)F Failure of EMA approval; delay of Ropeg launch in EU.
Share price chart

210
146.0
200 138.5
190
180
131.0
123.5
170 116.0
160
150
108.5
101.0
Revenue (NT$mn) 5 4 1 258 2,140
140
Gross profit (NT$mn) 4 4 1 201 1,862

93.5
130 86.0
5
4
3
2
Operating profit (NT$mn) (849) (889) (971) (855) 150
Net profit (NT$mn) (845) (872) (957) (819) 311
1
12-17 02-18 04-18 06-18 08-18 10-18
Source: TEJ EPS (NT$) (4.14) (4.01) (4.37) (3.75) 1.42

DPS (NT$) - - - - -
EPS growth (%) (8.1) (3.1) 9.2 (14.3) 0.0
PE (x) N.A. N.A. N.A. N.A. 126.1
PB (x) 9.2 11.4 15.7 23.4 19.7
Yu-Ying Yang EV/EBITDA (x) N.A. N.A. N.A. N.A. (35.8)
yy.yang@kgi.com
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
See the last page for important disclosures. Return on average equity (%) (34.1) (22.6) (32.1) (39.2) 16.9

Taiwan PharmaEssentia
Figure 1: Ropeg’s status in EMA’s evaluation process for marketing authorization
December :
CHMP meeting
January: April :
CHMP opinion EMA grants MAA
Source: EMA, Company, KGI Research
Figure 2: PV current treatments & Ropeg’s target population

First line treatment Treated PV patients Share of treated FDA/EMA Dosing frequency Side effects
(total 119.5k) patients (%) apprvoal
Ropeg 2Q19 Biweekly or monthly Flu-like symptoms
Phlembotomy +/-low
35,853 30 Yes Monthly Blood clotting
dose Aspirin
Splenomegaly, leukemogenic, anemia,
Hydroxyurea (HU) 52,584 43 Yes Daily
neutropenia, skin rash
Traditional IFN 13,146 10 No Weekly Flu-like symptoms, fever, weight loss, anemia
Other 17,927 15 No Depends
Second line treatment PV patients failed HU Share of treated

treatment (>13k) patients (%)
Jakafi 2,629 25 Yes Daily Anemia, neutropenia, thrombocytopenia
Source: Company, KGI Research
Figure 3: Ropeg’s potential market in the EU and US
EU US
PV patients ('000) 125-150 150
Patients treated first three years after launch ('000) 10-15 10-15
Price (US$'000)/ year 30-50 50-80
First three-year potential market (US$mn) 300-750 500-1,200
Source: Company, KGI Research

Figure 4: Company profile Figure 5: Besremi (Ropeg)

PharmaEssentia Corp. is the second largest biotech company in
Taiwan, and EMA decision on its leading product, Ropeg, is
expected in 2Q19. Ropeg is used in treating polycythemia vera (PV)
patients who currently have no effective therapy. There are around
150k PV patients in the EU, and the potential market size is up to
US$1bn. PharmaEssentia’s EU partner, AOP, will be responsible for
the sales and marketing of Ropeg, and PharmaEssentia will be
granted sales royalties of up to 20% after launch. In addition to
PV, PharmaEssentia also develops treatments for chronic hepatitis
C, chronic hepatitis B, and cancer.

100 0.10
90
90
-0.10
80 72
70 -0.30
60 57
-0.50
50
39 -0.70
40 (0.65)
30 -0.90
(0.89)
20 (0.94)
(0.98)
(0.99)
-1.10 (1.04) (1.06) (1.04) (1.05)
10 (1.07)
1 1 1 1 1 0 0 0 (1.14)
0 -1.30
1Q17 2Q17 3Q17 4Q17 1Q18 2Q18F 3Q18F 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18F (1.28)
3Q18F 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F
Figure 8: Gross Margin Figure 9: Rolling PB

320%
14.30
220%
120% 13.30
20%
-80% 12.30
-180%
-280% 11.30
-380%
10.30
-480%
-580%
9.30
-680%
Jan-18F
Apr-18F
2Q18F
3Q18F
4Q18F
1Q19F
2Q13
4Q13
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18

Income statement
Quarterly Annually
Mar-18A Jun-18F Sep-18F Dec-18F Mar-19F Jun-19F Sep-19F Dec-19F Dec-18F Dec-19F Dec-20F
Revenue 1 0 0 0 39 57 90 72 1 258 2,140
Cost of goods sold (0) (0) (0) (0) (13) (13) (14) (17) (1) (57) (278)
Gross profit 0 0 0 0 26 44 76 55 1 201 1,862
Operating expenses (236) (231) (284) (219) (264) (195) (320) (277) (971) (1,056) (1,712)
Operating profit (236) (231) (284) (219) (238) (151) (244) (222) (971) (855) 150
EBITDA (220) (215) (268) (202) (221) (134) (227) (205) (905) (788) 219
Interest income 5 4 4 3 9 9 9 9 16 37 163
Other non-op income 0 - - (0) - - - - - - -
Investment loss - - - - - - - - - - -
Other non-op expenses (1) - - 1 - - - - - - -
Non-operating expenses (1) (0) (0) 1 (0) (0) (0) (0) (2) (2) (1)
Pre-tax profit (232) (228) (281) (216) (229) (142) (235) (213) (957) (819) 311
Current taxation - - - - - - - - - - -
Minorities - - - - - - - - - - -
Normalised net profit (232) (228) (281) (216) (229) (142) (235) (213) (957) (819) 311
Extraordinary items (0) - - 0 - - - - - - -
Net profit (232) (228) (281) (216) (229) (142) (235) (213) (957) (819) 311
EPS (NT$) (1.06) (1.04) (1.28) (0.99) (1.05) (0.65) (1.07) (0.98) (4.37) (3.75) 1.42
Margins (%)
Operating margin (38186.2) (231377.6) (142167.4) (219320.4) (614.2) (265.9) (270.0) (307.4) (95441.7) (331.2) 7.0
EBITDA margin (35654.5) (215072.0) (134014.6) (202330.3) (570.9) (236.4) (251.4) (284.2) (89028.5) (305.2) 10.3
Pretax profit margin (37545.5) (227894.9) (140426.1) (216308.1) (591.2) (250.2) (260.1) (295.1) (94071.9) (317.4) 14.5
Net profit margin (37545.5) (227894.9) (140426.1) (216308.1) (591.2) (250.2) (260.1) (295.1) (94071.9) (317.4) 14.5
Revenue growth (58.4) (83.8) 100.0 (50.0) 38628.1 46.7 59.1 (20.0)
Gross profit growth (88.0) (83.8) 100.0 (50.0) 52537.8 67.0 74.3 (27.5)
Operating profit growth (6.8) (1.8) 22.9 (22.9) 8.5 (36.5) 61.5 (8.9)
EBITDA growth (7.1) (2.2) 24.6 (24.5) 9.3 (39.3) 69.2 (9.6)
Pretax profit growth (6.7) (1.6) 23.2 (23.0) 5.8 (37.9) 65.4 (9.2)
Net profit growth (6.7) (1.6) 23.2 (23.0) 5.8 (37.9) 65.4 (9.2)
YoY growth (%)
Revenue growth 7.9 (93.2) (61.5) (93.3) 6176.8 56701.3 45082.8 72192.5 (74.8) 25287.2 729.0
Gross profit growth 446.4 (96.4) (68.5) (98.1) 8431.3 87822.5 76543.0 110960.0 (88.3) 39713.8 827.5
Operating profit growth 2.8 11.5 42.1 (13.3) 1.0 (34.7) (14.2) 1.3 9.1 (11.9)
EBITDA growth 3.1 12.3 45.6 (14.6) 0.5 (37.6) (15.2) 1.5 9.6 (13.0)
Pretax profit growth 2.5 11.3 45.3 (12.9) (1.2) (37.6) (16.3) (1.4) 9.7 (14.3)
Net profit growth 2.5 11.3 45.3 (12.9) (1.2) (37.6) (16.3) (1.4) 9.7 (14.3)


Total assets 4,499 3,669 2,669 (1,302) (13,136) Revenue 5 4 1 258 2,140
Current assets 4,086 3,259 2,300 (1,628) (13,418) Cost of goods sold (1) 0 (1) (57) (278)
Cash & ST securities 4,047 3,188 2,400 10,929 47,197 Gross profit 4 4 1 201 1,862
Inventory 29 58 (113) (12,601) (60,884) Operating expenses (853) (894) (971) (1,056) (1,712)
Accounts receivable 1 0 0 31 257 Operating profit (849) (889) (971) (855) 150
Non-current assets 412 410 369 327 282 Interest income 7 20 16 37 163
Net fixed assets 288 245 208 168 126 Other non-op income 2 0 - - -
Total liabilities 228 212 168 (2,983) (15,129) Interest expense (2) (2) (2) (2) (1)
Current liabilities 128 118 104 (3,051) (15,190) Investment loss - - - - -
Accounts payable 12 15 (28) (3,179) (15,362) Other non-op expenses (3) (2) - - -
Interest bearing ST liabilities 16 16 40 30 31 Pre-tax profit (845) (872) (957) (819) 311
Other current liabilities 100 87 92 98 140 Current taxation - - - - -
Long-term debt 96 90 60 64 57 Extraordinary items - 0 - - -
Other L-T liabilities 5 4 4 4 4 Net profit (845) (872) (957) (819) 311
Total equity 4,270 3,457 2,501 1,681 1,993 EBITDA (784) (826) (905) (788) 219
Share capital 2,185 2,187 2,187 2,187 2,187 EPS (NT$) (4.14) (4.01) (4.37) (3.75) 1.42
Retained earnings reserve (2,175) (873) (1,830) (2,649) (2,338)
Preferred shareholders funds - - - - -
NT$mn Dec-16A Dec-17A Dec-18F Dec-19F Dec-20F
Operations cash flow (657) (790) (759) 8,560 36,299
Key ratios Net profit (845) (872) (957) (819) 311
Growth Decrease in working capital (10) (26) 133 9,312 35,918
Revenue growth (52.8%) (26.3%) (74.8%) 25287.2% 729.0% Other operating cash flow 134 44 0 - (0)
Operating profit growth (1.5%) 4.8% 9.1% (11.9%) Investing cash flow (29) (62) (24) (25) (24)
EBITDA growth (0.1%) 5.3% 9.6% (13.0%) Sale of ST investment - -
Net profit growth (1.0%) 3.2% 9.7% (14.3%) New investments - - - - -
EPS growth (8.1%) (3.1%) 9.2% (14.3%) Capital expenditure (23) (25) (24) (25) (24)
Gross profit margin 79.2% 106.5% 49.6% 77.8% 87.0% Free cash flow (823) (882) (801) 8,496 36,111
Operating margin (15506.7%) (22044.0%) (95441.7%) (331.2%) 7.0% Financing cash flow 4,167 (5) (6) (6) (6)
EBITDA margin (14332.8%) (20467.2%) (89028.5%) (305.2%) 10.3% Increase in short term debt - -
Net profit margin (15437.9%) (21618.5%) (94071.9%) (317.4%) 14.5% Increase in long term loans (6) (6) (6) (6) (6)
Return on average assets (30.5%) (21.4%) (30.2%) (119.9%) (4.3%) New ordinary shares issued 4,143 -
Return on average equity (34.1%) (22.6%) (32.1%) (39.2%) 16.9% Ordinary dividends paid - - - - -
Stability Other financing cashflow 30 1 0 - (0)
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated 3,480 (858) (789) 8,529 36,268
Interest coverage (x) (446.3) (496.0) (574.9) (521.8) 211.7 Cashflow by merger - -
Cash flow interest coverage(x) (347.9) (450.4) (456.8) 5,460.5 24,561.7 ROIC
Cash flow/int. & ST debt (x) (37.2) (45.0) (18.2) 271.3 1,104.9
Current ratio (x) 32.0 27.7 22.1 0.5 0.9
1 - COGS/revenue 79.2% 106.5% 49.6% 77.8% 87.0%
Quick ratio (x) 31.8 27.2 23.2 (3.6) (3.1)
- Operating exp./revenue 15585.9% 22150.5% 95491.3% 409.0% 80.0%
Net debt (NT$mn) (3,933) (3,080) (2,297) (10,832) (47,106)
= Operating margin (15506.7%) (22044.0%) (95441.7%) (331.2%) 7.0%
Per share data
EPS (NT$) (4.14) (4.01) (4.37) (3.75) 1.42
1 / (Working capital/revenue (13.2) (7.8) (161.1) (36.7) (21.2)
CFPS (NT$) (3.22) (3.63) (3.47) 39.13 165.96
+ Net PPE/revenue 52.7 60.8 204.4 0.7 0.1
BVPS (NT$) 19.55 15.81 11.43 7.69 9.11
+ Other assets/revenue) 22.6 40.8 158.4 0.6 0.1
Adj BVPS (NT$) 20.91 15.88 11.43 7.69 9.11
= Capital turnover 0.0 0.0 0.0 (0.0) (0.0)
SPS (NT$) 0.03 0.02 0.00 1.18 9.79
EBITDA/share (NT$) (3.84) (3.79) (4.14) (3.60) 1.00
Operating margin (15506.7%) (22044.0%) (95441.7%) (331.2%) 7.0%
DPS (NT$) - - - - -
x Capital turnover 0.0 0.0 0.0 (0.0) (0.0)
Activity
x (1 - tax rate) 100.0% 100.0% 100.0% 100.0% 100.0%
Sales / avg assets 0.00 0.00 0.00 0.38 (0.30) = After-tax ROIC (249.7%) (234.8%) (473.3%) 9.3% (0.3%)
Days receivable 64.5 43.9 43.9 43.9 43.9
Days inventory 9,174.1 (80,162.1) (80,162.1) (80,162.1) (80,162.1)
Days payable 3,934.3 (20,225.5) (20,225.5) (20,225.5) (20,225.5)
Cash cycle 5,304.4 (59,892.7) (59,892.7) (59,892.7) (59,892.7)

Company update Consumer‧Taiwan
Dadi
(8437.TW/8437 TT)
China kindergarten industry outlook favors Dadi profit growth

Policy and social circumstances will continue to drive China’s kindergarten industry toward
positive development, and many families’ second child will begin attending preschool
from 2019F. We believe Dadi will benefit from the positivity of China’s kindergarten
market cycle and high profit visibility. We forecast profit will grow by a 2018-20 CAGR of
Unchanged (%) 0.0
19.3%.
Upside (%) 62.1
Impact
Key message In China, policy & social circumstances favor development of kindergartens. In
China, social circumstances and policies favor positive development of the kindergarten
Policy and social circumstances will continue to industry. Regarding social circumstances, legalization of having a second child has boosted
drive China’s kindergarten industry toward the birth rate and increased household spending on education. In addition, the
positive development. We believe Dadi will government has increased fiscal spending on preschool education and requires a
benefit from the positivity of China’s minimum 85% enrollment ratio for kindergartens by 2020, up from nearly 80% in 2017.
kindergarten market cycle and high profit With kindergartens remaining in short supply, existing kindergartens will see enrollment
visibility. We forecast profit will grow by a
ratios and tuition fees grow in tandem. Also, rising demand for new kindergartens will
2018-20 CAGR of 19.3%.
boost the market share of kindergartens with famous brands.
Policy adjustments to resolve limited space & high tuition fee issues. China has
Trading data recently changed its preschool educational policies, stating that: (1) kindergartens may not
Mkt cap (NT$bn/US$mn) 7.85 / 253.5 be operated as a business group; (2) private kindergartens may not be listed as an
Outstanding shares (mn) 38.18 independent entity; and (3) community kindergartens may not be for-profit. Instead of
Foreign ownership (mn) 17.91 operating a kindergarten, Dadi generates sales mainly by providing consulting services,
3M avg. daily trading (mn) 0.03 pre-school educational tools and software. This means the company is not the intended
52-week trading range (NT$) 193.0 –298.5 target of the government’s restrictive policies. Rather, many competitors are exiting the
3M 6M 12M
market given the policy changes, which bodes well for Dadi’s licensing expansion.
Performance
Absolute (%) -4.6 -19.2 7.3 Dadi’s 2018-20 profit CAGR likely to hit 19.3% on high profit visibility. We estimate
Relative (%) 6.8 -5.6 14.1 with 50-55 kindergartens franchised and a 6.5-8% hike in consulting fees every year, Dadi
will likely grow 2018-20 revenue by CAGR of 17.1%. And with gross margin stable at
Quarterly EPS 85% and economies of scale, operating margin will rise from 67.7% in 2018F to 71.6% in
NT$ 1Q 2Q 3Q 4Q 2020F. Net profit CAGR should come in at 19.3% in 2018-20.
2017 2.73A 2.56A 3.85A 3.54A
Valuation & Action
2018 3.35A 2.75A 4.27A 3.68F
Dadi, as a beneficiary of an increasingly robust kindergarten market in China, enjoys high
2019 3.84F 3.60F 5.02F 4.24F
profit visibility that is set to grow by a 2018-20F CAGR of 19.3%. We give our one-year
target price of NT$334, equivalent to 2019F PE of 20x. Assign an outperform rating.
Share price chart
31 0
163.0
Risks
29 0
27 0
153.0
143.0
Slow increase in consulting fees.
25 0 133.0
23 0 123.0
21 0 113.0
19 0 103.0

17 0 93.0
2
1
1
1

1
1
12 -17 02-18 04-1 8 06 -18 08-1 8 10 -18

Revenue (NT$mn) 729 811 982 1,148 1,347
Source: TEJ
Gross profit (NT$mn) 590 666 836 981 1,154
Operating profit (NT$mn) 447 526 664 801 964
Net profit (NT$mn) 336 427 536 640 762
EPS (NT$) 10.32 12.59 14.00 16.71 19.92
DPS (NT$) 6.15 7.10 8.40 10.03 11.95
EPS growth (%) 28.1 22.0 11.2 19.4 19.2
PE (x) 20.0 16.4 14.7 12.3 10.3
PB (x) 4.1 3.5 3.4 2.8 2.4
Fan-Jen Tseng
886.2.2181.8734 EV/EBITDA (x) 13.7 11.8 10.1 8.2 6.6
victort@kgi.com Net debt to equity (%) Net cash Net cash Net cash Net cash Net cash
Dividend yield (%) 3.0 3.4 4.1 4.9 5.8
Taiwan Dadi
Figure 1: Legalization of a second child is boosting the birth rate

Newborns, mn
17.86
17.23
16.87
16.35 16.4 16.55
16.08 16.15 16.04
15.94 15.74
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: National Bureau of Statistics of China
Figure 2: Spending on education as share of total consumption rising annually

Spending on education, culture & entertainment, Rmb ’000 (LHS); share of consumption, percent (RHS)
2.5 2.1 11.5
11.4
1.9
2.0 1.7 11.2
1.5 11.2
1.4
1.5 11.0 10.9
1.0 10.6 10.6

10.6
0.5 10.3
0.0 10.0
2013 2014 2015 2016 2017
Spending on education, cultural events, and entertainment Share of total consumption
Source: National Bureau of Statistics of China
Figure 3: China’s fiscal spending on preschool education is rising annually

Fiscal spending on preschool education, Rmb bn
325.5
280.2
242.6
204.8
175.8
2013 2014 2015 2016 2017

Source: Ministry of Education of China

Taiwan Dadi
Figure 4: Dadi had 331 licensed kindergartens in 1Q-3Q18

Number of kindergartens licensed by Dadi
161
140
99
34 70
17 54
2
144 144 146 145 152 155 170
127 131
2010 2011 2012 2013 2014 2015 2016 2017 1-9M18

Without decoration With decoration
Source: Company data
Note: Short-term licensees not included in the calculation of franchised kindergartens
Figure 5: In 2018, consulting fees have risen 6.7%

Monthly consulting fee per kindergarten, Rmb ‘000 (LHS), growth, percent (RHS)
40 20
17.2
30 15.6 15
20 10
7.9
7.0 7.4 6.6
10 4.9 5
0 0
2012 2013 2014 2015 2016 2017 2018
Average consulting fee per client YoY
Source: Company data
Figure 6: On economies of scale, Dadi likely to see operating margin rise annually
Operating margin, percent
71.6
67.7 69.8
64.9
61.4
54.4 52.7
49.4
2013 2014 2015 2016 2017 2018F 2019F 2020F


Taiwan Dadi
Founded in the Cayman Islands in 2008, Dadi is a leading Sales weighting by product, percent
community kindergarten brand in China, providing early childhood 12.8 14.9 15.0 15.5 16.2 16.0
education consultancy that ranges from campus development to 23.3 26.0 26.6 26.5 25.5 24.4
building engineering, curriculum design, teaching materials, early
childhood education products, and campus software. The
company uses the Dadi brand name in China to provide services. 64.0 59.1 58.4 57.9 58.4 59.6
The firm has licensed over 300 kindergartens in 120 cities in China,
covering over 80% of provinces. 2014 2015 2016 2017 2018F 2019F
Consulting service Preschool tools Preschool software

400 6.0
357
350 5.02
306 5.0
300 283 4.27 4.24
274
258 3.85 3.84
238 4.0 3.54 3.68 3.60
250 235 235
3.35
194 203 203
200 3.0 2.73 2.75
2.56
157
150
2.0
100
1.0
50
0 0.0

22.0
95.0%
21.0
90.0% 20.0
19.0
85.0% 18.0
17.0
80.0%
16.0
15.0
75.0%
14.0
13.0
70.0%
1Q18F
2Q18F
3Q18F
4Q18F
1Q17
2Q17
3Q17
4Q17
4Q18F
1Q19F
2Q19F
3Q19F
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

80.0%
4.80
75.0%
70.0%
4.30
65.0%
60.0% 3.80
55.0%
50.0% 3.30
45.0%
2.80
40.0%
1Q18F
2Q18F
3Q18F
4Q18F
1Q17
2Q17
3Q17
4Q17
4Q18F
1Q19F
2Q19F
3Q19F
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18

Taiwan Dadi
Income statement
Quarterly Annually
Revenue 235 203 306 238 274 235 357 283 982 1,148 1,347
Cost of goods sold (35) (22) (62) (27) (41) (20) (71) (35) (146) (167) (193)
Gross profit 200 181 244 211 233 215 285 248 836 981 1,154
Operating profit 160 138 204 162 191 172 237 200 664 801 964
EBITDA 160 138 204 163 191 173 238 200 665 802 965
Interest income 5 6 11 (2) 5 5 5 5 20 20 20
Investment loss - - - - - - - - - - -
Other non-op expenses (2) (5) (0) 5 - - - - (2) - -
Non-operating expenses (4) (7) (3) 3 (2) (2) (3) (3) (11) (10) (11)
Pre-tax profit 172 138 219 190 197 181 256 217 719 852 1,015
Minorities - - - - - - - - - - -
Normalised net profit 128 104 162 141 147 138 192 162 536 640 762
Extraordinary items 0 (0) 0 (0) - - - - - - -
Net profit 128 104 162 141 147 138 192 162 536 640 762
EPS (NT$) 3.35 2.75 4.27 3.68 3.84 3.60 5.02 4.24 14.00 16.71 19.92
Margins (%)
EBITDA margin 68.2 68.2 66.6 68.4 69.8 73.5 66.6 70.9 67.7 69.8 71.6
Revenue growth 15.9 (13.6) 50.8 (22.2) 15.2 (14.3) 51.8 (20.7)
Gross profit growth 16.3 (9.6) 34.6 (13.4) 10.6 (7.8) 32.5 (13.2)
Operating profit growth 11.9 (13.6) 47.2 (20.2) 17.7 (9.9) 37.8 (15.7)
EBITDA growth 11.9 (13.6) 47.2 (20.1) 17.6 (9.9) 37.7 (15.7)
Pretax profit growth 9.3 (19.8) 59.6 (13.2) 3.7 (8.2) 41.4 (15.6)
Net profit growth 7.1 (18.7) 55.6 (13.3) 4.5 (6.3) 39.6 (15.6)
YoY growth (%)
Revenue growth 21.2 29.6 18.7 17.5 16.7 15.7 16.5 18.7 21.1 16.9 17.4
EBITDA growth 33.5 32.0 28.4 13.7 19.4 24.6 16.6 23.0 26.3 20.5 20.3

Taiwan Dadi

Total assets 2,268 2,736 2,838 3,270 3,897 Revenue 729 811 982 1,148 1,347
Current assets 1,279 1,510 1,716 1,924 2,342 Cost of goods sold (139) (145) (146) (167) (193)
Cash & ST securities 947 1,120 1,376 1,484 1,791 Gross profit 590 666 836 981 1,154
Accounts receivable 158 204 158 230 306 Operating profit 447 526 664 801 964
Non-current assets 989 1,226 1,122 1,346 1,555 Interest income 17 19 20 20 20
LT investments 1 23 1 1 1 Investment income - - - - -
Net fixed assets 142 91 132 206 320 Other non-op income 27 36 46 41 41
Total other assets 846 1,112 988 1,139 1,235 Non-operating expenses (29) (11) (11) (10) (11)
Total liabilities 629 704 493 489 556 Interest expense (8) (10) (10) (10) (11)
Current liabilities 157 394 189 199 266 Investment loss - - - - -
Accounts payable 9 7 9 8 10 Other non-op expenses (21) (1) (2) - -
Interest bearing ST liabilities 2 185 2 9 36 Pre-tax profit 462 571 719 852 1,015
Other current liabilities 146 202 178 182 221 Current taxation (126) (144) (183) (212) (253)
Long-term debt 389 210 221 198 198 Extraordinary items - (0) - - -
Other L-T liabilities 83 100 83 92 92 Net profit 336 427 536 640 762
Total equity 1,639 2,032 2,345 2,781 3,340 EBITDA 448 527 665 802 965
Retained earnings reserve 952 980 1,260 1,696 2,255
Operations cash flow 353 522 618 544 693
Key ratios Net profit 336 427 536 640 762
Growth Decrease in working capital (59) (53) 82 (97) (70)
Revenue growth 18.4% 11.2% 21.1% 16.9% 17.4% Other operating cash flow 75 148 (0) 0 0
Operating profit growth 37.9% 17.6% 26.3% 20.6% 20.4% Investing cash flow (455) (318) (177) (486) (470)
EBITDA growth 37.7% 17.6% 26.3% 20.5% 20.3% Sale of ST investment - (23) - - -
Net profit growth 34.0% 27.1% 25.6% 19.4% 19.2% New investments - (23) - - -
Profitability Others investing cashflow (198) 9 124 (150) (96)
Gross profit margin 80.9% 82.1% 85.2% 85.5% 85.7% Free cash flow 10 59 276 169 280
Operating margin 61.3% 64.9% 67.7% 69.8% 71.6% Financing cash flow 339 (21) (331) (197) (207)
EBITDA margin 61.5% 65.0% 67.7% 69.8% 71.6% Increase in short term debt (4) 182 (4) (4) (4)
Stability Other financing cashflow 494 - (71) 9 (0)
Gross debt to equity 23.9% 19.4% 9.5% 7.4% 7.0% Forex effects (73) (12) (73) (73) (73)
Net debt to equity Net cash Net cash Net cash Net cash Net cash Total cash generated 164 172 37 (214) (57)
Interest coverage (x) 56.2 59.9 74.0 85.8 97.3 Cashflow by merger - - - - -
Net debt (NT$mn) (556) (725) (1,153) (1,277) (1,557) = Operating margin 61.3% 64.9% 67.7% 69.8% 71.6%
Per share data
SPS (NT$) 22.41 23.94 25.66 30.00 35.20
Days inventory 432.3 428.0 411.8 422.2 432.0
Days payable 24.3 18.2 23.1 18.0 18.2
Cash cycle 487.6 501.6 447.6 477.3 496.8

Taiwan Appendix
Appendix: KGI universe valuation table
Valuation table
Ticker Company Recommendation Mkt cap TargetPrice Price Up/down EPS (NT$) PE (x) PB (x) ROE (%) YIELD (%)
(US$mn) (NT$) (NT$) (%) 2017 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F
1101 Taiwan Cement Outperform 5,746.6 52.0 34.65 50.1 2.03 4.66 4.68 7.4 7.4 1.0 0.8 14.6 12.0 10.7 11.3
1102 Asia Cement Outperform 3,617.9 51.0 33.15 53.8 1.74 3.96 4.14 8.4 8.0 0.8 0.8 9.5 9.4 8.2 8.6
1216 Uni-President Neutral 12,434.0 69.0 67.40 2.4 7.01 3.14 3.48 21.5 19.4 3.1 3.0 14.6 15.7 3.6 4.0
1301 Formosa Plastics Outperform 20,668.0 122.0 100.00 22.0 7.76 8.52 8.50 11.7 11.8 1.7 1.6 15.1 14.2 6.5 6.5
1303 Nan Ya Plastics Outperform 18,668.3 85.0 72.50 17.2 6.87 7.39 6.68 9.8 10.8 1.5 1.5 15.7 13.5 8.3 7.0
1305 China General Outperform 366.9 28.0 22.30 25.6 2.58 3.01 3.03 7.4 7.4 1.3 1.2 18.6 17.1 7.9 7.9
1312 Grand Pacific Petro Outperform 688.8 31.0 23.40 32.5 3.65 3.38 3.86 6.9 6.1 0.9 0.8 14.0 14.3 4.3 4.3
1326 Formosa Chem & Fibre Outperform 20,076.5 124.0 105.50 17.5 9.33 9.05 9.18 11.7 11.5 1.6 1.5 14.0 13.3 6.6 6.6
1402 FENC Outperform 4,892.3 41.0 28.15 45.6 1.61 2.56 2.49 11.0 11.3 0.7 0.7 6.4 6.1 6.6 6.6
1444 Lealea Outperform 312.3 12.8 10.05 27.4 (0.01) 0.61 0.67 16.5 15.0 0.9 0.9 5.3 5.8 4.9 4.2
1476 Eclat Textile Neutral 3,010.9 396.0 338.00 17.2 11.12 16.09 18.00 21.0 18.8 5.6 4.5 27.9 26.6 4.1 4.5
1504 Teco Neutral 1,167.1 22.0 17.95 22.6 1.56 1.47 1.47 12.2 12.2 0.7 0.6 5.6 5.4 4.5 4.5
1536 Hota Industrial Neutral 1,038.8 108.0 125.50 (13.9) 4.81 5.15 5.69 24.4 22.0 4.7 4.5 19.6 20.9 3.2 4.0
1565 St. Shine Outperform 892.1 720.0 545.00 32.1 31.52 33.30 35.99 16.4 15.1 4.8 4.5 30.2 30.6 4.8 5.2
1589 Yeong Guan Energy Neutral 171.2 95.0 47.25 101.1 5.04 7.07 #N/A 6.7 N.A. 0.5 #N/A 8.1 #N/A 5.7 #N/A
1590 Airtac Underperform 2,034.4 196.0 331.50 (40.9) 18.06 15.11 14.00 21.9 23.7 3.5 3.3 17.0 14.4 1.8 2.1
1710 Oriental Union Chem Outperform 724.6 36.0 25.20 42.9 2.01 2.23 2.97 11.3 8.5 1.5 1.4 12.9 16.5 7.8 7.8
1722 Taiwan Fertilizer Outperform 1,449.3 60.0 45.55 31.7 1.65 2.54 2.72 17.9 16.8 0.9 0.9 5.0 5.2 4.6 4.6
2049 Hiwin Underperform 2,303.0 174.0 236.00 (26.3) 9.77 22.23 13.41 10.6 17.6 3.5 3.1 35.0 18.6 3.2 2.0
2059 King Slide Outperform 996.3 410.0 322.00 27.3 9.54 18.05 18.68 17.8 17.2 3.2 2.9 18.7 17.8 2.9 3.0
2104 China Rubber Neutral 1,111.9 37.0 39.30 (5.9) 3.69 4.06 3.62 9.7 10.9 1.1 1.0 13.7 9.8 6.4 6.4
2231 CUB Outperform 876.9 292.0 235.00 24.3 10.00 10.11 13.26 23.3 17.7 7.8 6.8 35.7 41.7 3.1 4.0
2303 United Microelec. Neutral 4,558.2 13.2 11.30 16.8 0.79 0.86 0.76 13.2 14.8 0.7 0.7 5.0 4.5 6.7 6.0
2308 Delta Electronics Neutral 10,752.8 113.0 127.50 (11.4) 7.08 6.63 7.08 19.2 18.0 2.5 2.4 13.5 13.8 3.5 3.8
2313 Compeq Mfg. Neutral 787.4 24.0 20.35 17.9 3.00 2.54 2.67 8.0 7.6 1.0 0.9 12.7 12.3 5.0 5.2
2330 TSMC Outperform 185,217.0 270.0 220.00 22.7 13.23 13.50 14.57 16.3 15.1 3.4 3.1 21.9 21.6 4.1 4.3
2345 Accton Neutral 1,790.3 89.0 98.90 (10.0) 4.68 5.56 5.90 17.8 16.8 5.3 5.0 30.9 30.8 5.0 5.4
2352 Qisda Corp. Outperform 1,184.5 25.0 18.55 34.8 2.69 1.91 1.98 9.7 9.3 1.1 1.1 11.8 11.7 6.1 6.3
2355 Chin-Poon Neutral 472.3 36.0 36.60 (1.6) 3.78 1.27 3.60 28.8 10.2 0.9 0.8 3.1 8.3 2.1 5.9
2356 Inventec Neutral 2,556.7 28.0 21.95 27.6 1.88 1.98 2.27 11.1 9.7 1.4 1.4 12.7 14.3 7.9 9.1
2357 Asustek Underperform 5,112.5 188.0 212.00 (11.3) 20.93 11.93 17.05 17.8 12.4 0.8 0.8 4.9 6.5 7.1 7.1
2377 Micro-Star Outperform 1,881.7 93.0 68.60 35.6 5.84 8.05 8.42 8.5 8.1 2.0 1.9 23.8 23.6 9.0 9.5
2379 Realtek Neutral 2,276.5 118.0 138.00 (14.5) 6.71 8.30 8.60 16.6 16.1 3.0 2.9 18.8 18.5 4.3 4.7
2382 Quanta Computer Neutral 6,120.0 54.0 48.80 10.7 3.73 3.76 4.18 13.0 11.7 1.4 1.3 10.8 11.7 6.2 6.8
2383 Elite Material Outperform 791.9 103.0 76.30 35.0 8.74 5.70 7.91 13.4 9.6 2.0 1.9 15.2 19.9 6.3 6.3
2385 Chicony Outperform 1,456.0 70.0 61.40 14.0 5.92 5.48 6.20 11.2 9.9 1.6 1.3 14.5 13.8 6.3 7.2
2409 AU Optronics Neutral 3,905.9 11.6 12.50 (7.2) 3.36 1.20 0.27 10.4 46.8 0.6 0.6 5.6 1.3 4.8 1.2
2412 Chunghwa Telecom Neutral 26,823.6 96.0 106.50 (9.9) 5.01 4.71 4.47 22.6 23.8 2.3 2.2 10.0 9.5 4.5 4.5
2421 Sunonwealth Outperform 319.4 45.0 39.20 14.8 2.62 2.44 2.98 16.1 13.2 2.3 2.3 14.7 17.5 5.5 6.7
2454 MediaTek Outperform 11,858.8 340.0 229.50 48.1 15.56 13.97 16.97 16.4 13.5 1.4 1.4 8.5 10.2 3.9 4.8
2474 Catcher Outperform 5,928.0 276.0 237.00 16.5 28.35 37.85 30.72 6.3 7.7 1.2 1.1 20.7 15.2 6.4 5.2
2640 Taiwan Taxi Outperform 97.7 130.0 58.80 121.1 4.56 6.50 7.56 9.1 7.8 2.0 1.7 22.7 23.0 6.0 8.5
2723 Gourmet Neutral 1,332.5 212.0 228.00 (7.0) 13.12 10.24 11.79 22.3 19.3 3.8 3.5 17.1 18.8 2.0 2.4
2809 KTB Neutral 1,158.7 34.0 31.00 9.7 4.87 4.23 4.33 7.3 7.2 0.9 0.8 12.9 12.1 4.8 4.8
2881 Fubon FHC Neutral 15,948.4 52.0 48.00 8.3 5.29 5.53 5.36 8.7 9.0 1.1 1.1 12.9 12.3 4.4 4.3
2882 Cathay Holdings Neutral 19,681.0 52.0 48.25 7.8 4.48 4.65 4.44 10.4 10.9 1.2 1.2 11.2 10.9 4.6 4.1
2884 E.S.F.H Neutral 7,190.0 22.5 20.45 10.0 1.45 1.53 1.55 13.3 13.2 1.4 1.3 10.7 10.3 3.1 3.1
2885 Yuanta Group Neutral 5,767.2 16.5 15.20 8.6 1.41 1.67 1.61 9.1 9.4 0.8 0.7 9.0 8.1 5.3 5.2
2886 MEGA FHC Outperform 11,392.0 29.0 25.80 12.4 1.89 2.10 2.23 12.3 11.5 1.1 1.0 9.3 9.2 6.2 6.4
2887 Taishin FHC Neutral 4,557.6 14.5 13.45 7.8 1.31 1.31 1.32 10.3 10.2 1.1 1.0 10.7 10.0 4.0 4.0
2891 CTBC Holding Outperform 12,881.9 23.6 20.35 16.0 1.91 2.03 2.10 10.0 9.7 1.2 1.1 12.4 12.1 4.9 5.2
5876 Shanghai Commercial Bank Outperform 5,166.9 44.5 38.80 14.7 3.04 3.34 3.52 11.6 11.0 1.2 1.1 10.7 10.4 5.0 5.3
2912 Pre. Chain Store Neutral 10,362.4 288.0 307.00 (6.2) 29.83 10.24 11.09 30.0 27.7 6.0 5.8 20.6 21.4 2.8 3.0
3034 Novatek Outperform 2,667.1 175.0 135.00 29.6 8.26 10.00 11.65 13.5 11.6 2.8 2.8 21.1 24.1 6.4 7.3
3045 Taiwan Mobile Neutral 11,894.4 106.0 107.00 (0.9) 5.21 5.02 4.83 21.3 22.1 6.2 6.4 23.1 22.6 5.0 5.0
3081 Land Mark Underperform 701.5 175.0 237.50 (26.3) 7.27 7.61 8.64 31.2 27.5 5.5 5.3 17.9 19.4 2.2 2.9
3105 Win Underperform 1,568.6 80.0 114.00 (29.8) 9.34 6.91 6.64 16.5 17.2 1.9 1.8 11.3 10.5 4.6 4.6
3189 Kinsus Neutral 688.0 36.0 47.00 (23.4) 1.10 1.73 3.31 27.2 14.2 0.7 0.7 2.7 4.9 2.2 4.2
3231 Wistron Neutral 1,753.2 25.0 19.00 31.6 1.48 1.52 2.33 12.5 8.2 0.8 0.9 6.5 10.3 6.4 9.8
3376 SZS Outperform 513.5 90.0 88.50 1.7 4.10 6.64 7.55 13.3 11.7 1.3 1.2 9.7 10.7 4.1 4.7
3481 INX Neutral 3,263.5 10.0 10.10 (1.0) 3.72 0.41 0.18 24.8 55.8 0.4 0.4 1.6 0.7 1.0 0.5
3529 eMemory Neutral 573.3 340.0 233.00 45.9 8.18 12.06 #N/A 19.3 N.A. 8.7 #N/A 45.6 #N/A 5.2 #N/A
3533 Lotes Outperform 660.2 265.0 196.50 34.9 10.23 16.28 20.46 12.1 9.6 2.1 1.9 17.7 20.6 5.0 6.2
3611 TSC Auto ID Outperform 249.1 320.0 199.00 60.8 16.02 17.33 20.01 11.5 9.9 2.6 2.4 24.0 25.2 5.4 6.3
3645 Taimide Tech. Neutral 195.3 57.0 48.80 16.8 2.35 3.23 3.82 15.1 12.8 2.5 2.3 17.0 18.8 4.2 5.0
3665 BHI (Bizlink) Neutral 727.2 176.0 189.00 (6.9) 10.68 11.17 13.02 16.9 14.5 2.7 2.5 16.8 18.4 3.9 4.6
4105 TTY Biopharm Outperform 663.6 98.6 82.20 20.0 5.41 5.34 5.20 15.4 15.8 3.6 3.4 23.7 22.2 5.4 5.3
4147 TaiMed Outperform 1,243.7 242.0 152.50 58.7 (2.10) (1.97) (0.75) N.M. N.M. 10.0 10.6 (12.2) (5.1) 0.0 0.0
4438 Quang Viet Outperform 345.7 189.0 103.00 83.5 5.07 8.38 10.50 12.3 9.8 1.7 1.6 13.7 16.8 7.3 9.2
4551 Global PMX Outperform 272.7 126.0 102.50 22.9 7.32 6.12 9.01 16.7 11.4 2.8 2.7 17.0 24.0 4.8 7.0
December 10, 2018 Institutional portal: http://research.kgi.com 111

Taiwan Appendix
Valuation table
Ticker Company Recommendation Mkt cap TargetPrice Price Up/down EPS (NT$) PE (x) PB (x) ROE (%) YIELD (%)
(US$mn) (NT$) (NT$) (%) 2017 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F
4725 TPCC Outperform 237.4 38.0 25.05 51.7 (1.21) 1.76 3.32 14.2 7.5 1.9 1.5 14.6 22.4 0.0 8.0
4746 Formosa Neutral 122.1 40.1 38.00 5.5 2.62 0.69 2.23 54.9 17.0 0.8 0.8 1.5 4.7 1.1 3.5
4904 Far EasTone Telecom Neutral 7,596.1 71.0 71.80 (1.1) 3.33 3.14 3.03 22.9 23.7 3.4 3.5 14.9 14.7 5.2 5.2
4938 Pegatron Neutral 4,249.4 61.0 50.10 21.8 5.66 4.77 6.06 10.5 8.3 0.9 0.8 8.3 10.2 6.6 8.4
4958 Zhen Ding Tech Neutral 2,105.9 99.0 80.60 22.8 6.43 10.70 11.01 7.5 7.3 1.3 1.2 18.5 17.5 6.8 7.0
4966 Parade Outperform 1,195.5 610.0 466.00 30.9 25.49 25.30 33.16 18.4 14.1 3.9 3.5 22.0 25.6 2.7 3.6
5264 Casetek Outperform 518.7 55.0 38.00 44.7 4.88 (5.29) 1.72 N.M. 22.1 0.5 0.5 (7.3) 2.2 0.0 2.5
5274 Aspeed Neutral 666.9 540.0 603.00 (10.4) 15.70 19.95 24.52 30.2 24.6 9.3 7.5 31.7 32.3 3.2 3.9
5287 Addcn Outperform 331.8 336.0 240.00 40.0 15.00 14.97 16.78 16.0 14.3 5.1 4.5 32.8 33.0 6.3 6.3
5347 Vanguard Neutral 3,091.7 60.0 58.10 3.3 2.75 3.64 4.00 15.9 14.5 3.9 3.7 22.9 26.3 5.5 5.9
5388 SerComm Neutral 482.5 61.0 60.50 0.8 5.38 3.70 4.79 16.4 12.6 2.0 1.9 12.3 15.3 4.3 5.6
5904 Poya Outperform 941.9 438.0 297.00 47.5 14.63 17.51 20.08 17.0 14.8 7.1 6.3 44.4 45.4 5.2 6.0
6147 Chipbond Outperform 1,236.3 78.0 58.20 34.0 3.47 7.36 5.65 7.9 10.3 1.3 1.3 18.2 12.9 8.4 6.4
6230 Chaun-Choung Outperform 261.0 111.0 93.10 19.2 5.79 6.52 7.93 14.3 11.7 2.1 2.0 15.3 17.7 4.9 6.0
6244 Motech Underperform 144.1 18.5 8.21 125.3 (5.92) (4.50) #N/A N.M. N.A. 0.5 #N/A (24.5) #N/A 0.0 #N/A
6269 Flexium Neutral 807.3 86.0 78.20 10.0 10.07 8.11 8.73 9.6 9.0 1.3 1.2 13.8 13.7 4.7 5.0
6274 Taiwan Union Tech Outperform 751.7 115.0 93.70 22.7 4.12 7.77 8.85 12.1 10.6 3.1 2.8 26.2 27.8 6.5 7.4
6279 Hu Lane Underperform 249.7 62.0 79.10 (21.6) 10.00 5.52 5.62 14.3 14.1 1.6 1.6 11.6 11.4 5.6 5.7
6446 PharmaEssentia Outperform 1,277.3 248.0 179.50 38.2 (4.01) (4.37) (3.75) N.M. N.M. 15.7 23.4 (32.1) (39.2) 0.0 0.0
6505 Formosa Petrochem. Neutral 34,175.9 117.0 110.50 5.9 8.42 7.57 7.41 14.6 14.9 3.0 2.8 20.7 19.4 5.2 5.2
6510 CHPT Neutral 498.2 430.0 468.00 (8.1) 23.51 20.98 21.69 22.3 21.6 2.6 2.5 11.9 11.8 1.8 1.9
6541 Tanvex Outperform 473.8 93.0 60.10 54.7 (7.29) (8.68) (11.28) N.M. N.M. 3.1 7.2 (47.1) (80.9) 0.0 0.0
6568 Rafael Micro Outperform 113.1 220.0 141.00 56.0 9.65 9.14 12.30 15.4 11.5 2.7 2.4 18.3 22.4 3.5 4.6
6576 Foresee Outperform 174.1 116.0 60.80 90.8 (5.67) 1.16 11.50 52.5 5.3 7.6 3.1 15.6 83.6 0.0 0.0
8044 PChome Online Outperform 542.0 190.0 142.50 33.3 0.31 (7.83) 4.71 N.M. 30.3 4.2 4.0 (21.0) 13.6 0.0 2.0
8349 QST International Outperform 304.2 106.0 80.60 31.5 6.98 5.85 6.56 13.8 12.3 2.0 1.8 14.7 15.4 6.4 7.5
8404 Paiho Shih Neutral 404.1 35.0 42.65 (17.9) 2.20 2.41 #N/A 17.7 N.A. 1.8 #N/A 10.9 #N/A 0.7 #N/A
8437 Dadi Outperform 254.8 334.0 206.00 62.1 12.59 14.00 16.71 14.7 12.3 3.4 2.8 24.5 25.0 4.1 4.9
8462 Power Wind Health Outperform 307.0 230.0 154.50 48.9 6.01 6.63 7.74 23.3 20.0 6.4 6.1 30.2 32.5 2.1 2.8
9910 Feng Tay Outperform 4,163.8 230.0 192.00 19.8 6.58 7.89 9.64 24.3 19.9 8.6 7.8 36.8 41.0 3.1 3.8
9914 Merida Outperform 1,363.9 158.0 140.50 12.5 2.67 5.80 7.56 24.2 18.6 3.5 3.4 14.7 18.6 3.1 4.0
9933 CTCI Outperform 1,080.5 58.0 43.60 33.0 3.68 2.84 3.48 15.3 12.5 1.8 1.8 12.0 14.5 5.9 7.2
9938 Taiwan Paiho Outperform 496.3 62.0 51.30 20.9 5.44 4.38 5.04 11.7 10.2 1.7 1.6 15.2 16.3 5.1 5.9
9939 Hon Chuan Neutral 446.9 56.0 47.00 19.1 4.20 4.10 4.57 11.5 10.3 1.2 1.2 10.6 12.1 5.2 5.8
9951 Macauto Neutral 172.9 73.0 71.10 2.7 8.84 7.14 7.29 10.0 9.8 1.9 1.6 20.0 18.0 6.0 6.2

Taiwan Taiwan strategy 2019
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Taiwanese Strategy: 2019 Bear Market Correction Inevitable; Value Investing Key

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IMPORTANT DISCLOSURE ON LAST PAGE

Taiwan strategy 2019

2019 bear market correction inevitable; value investing is key

Long-term investment value of mid- & small-caps starting to surface on spec

Our top picks

Investment themes & top stock picks

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R 2

Global EMS inventory days (adjusted using Z-score) Taiex

Figure 2: Our top picks

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 3

Figure 3: Tech downstream EMS providers’ inventory at historical high at

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 4

Figure 5: Global smartphone shipments to decline in 2018-19F

NB PC 2015 2016 2017 2018F 2019F

Smartphone 2015 2016 2017 2018F 2019F

Smartphone by brand 2015 2016 2017 2018F 2019F

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 5

Figure 7: Current consensus still too optimistic despite earnings cuts

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 6

Figure 9: Projected earnings of Taiex & individual sectors in 2017-19F

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 7

Figure 11: Central banks’ tightening policy unfavorable to EM risk appetite

Note: Accumulated net buying and selling since January 1, 2009

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 8

Note: Shaded areas represent bear markets

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 9

Figure 15: Positives & negatives facing Taiex in 2019F

1Q19F 2Q19F 3Q19F 4Q19F

Figure 16: We forecast Taiex fair valuation at 1.2-1.5x PB in 2019

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 10

Source: TEJ; KGI Research Source: TEJ; KGI Research

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 11

Source: TEJ; KGI Research

Figure 21: Taiwan 50 Index constituents still trading high

Source: TEJ; KGI Research

Our top picks

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 12

Figure 23: Our top picks

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R 13

New CCL expansion cycle to engage 5G, auto electronics

CCL suppliers to vigorously expand capacity in 2019F to meet demand boom.

Stocks for Action

See the last page for important disclosures.

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R 14

Figure 1: Taiwanese suppliers set to expand capacity by 20% YoY in 2019F

Figure 6: Copper foil & CCL peer comparison – Valuation

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/Zh/R 15

Rejoining major SLP chain; network communications &

Price as of December 6 (NT$) 76.30 Event

Source: TEJ Dec-15A Dec-16A Dec-17A Dec-18F Dec-19F

December 10, 2018 https://www.kgisia.com.tw/Portal/Report/Index/En/R Powered by the EFA Platform 16

Figure 1: Company profile Figure 2: 3Q18 sales by application

Figure 3: Sales Figure 4: EPS

Source: KGI Research Source: KGI Research

Figure 5: Gross Margin Figure 6: Rolling PE

Source: KGI Research Source: KGI Research

Figure 7: Operating Margin Figure 8: Rolling PB

Source: KGI Research Source: KGI Research

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 17

December 10, 2018 Institutional portal: https://www.kgisia.com.tw/Portal/Report/Index/En/R 18

Balance sheet Profit & loss