Handset Industry - Yuanta IN140707 PDF

I ndust r y I ni t i at i on
Handset I ndust r y
Di al i ng up new smar t phone t r ends

Primary Analyst: Jeff Pu, CFA
+886 2 3518 7913 jeff.pu@yuanta.com
With significant contribution from:
Caitlin Huang
+886 2 3518 7911 caitlin.huang@yuanta.com

I ndust r y I ni t i at i on

Tai w an: Handset s

7 J ul y, 2014
Top r ec ommendat i ons
Largan (3008 TT; BUY) with a TP of
NT$3,060 for 29% upside.
Catcher (2474 TT; BUY) with a TP of
NT$345 for 26% upside.
HTC (2498 TT; SELL) with a TP of
NT$88 for 37% downside.

What s new ?
We initiate coverage on
Taiwans handset sector,
focusing on six companies.
Largan and Catcher are our top
picks due to a mix of iPhone 6
share gains, ASP improvement,
and high exposure to fast
growing Chinese OEMs.
I ndust r y out l ook
We expect iPhone shipments to
pick up strongly in 4Q14, with
YoY expansion into 1H15.
In the low-end, the geographic
expansion of Chinese OEMs will
accelerate, while the growth of
e-commerce is favorable for
high-end components.

Handset I ndust r y
Primary Analyst: Jeff Pu, CFA
Caitlin Huang

http://research.yuanta.com
Bloomberg code: YUTA

Di al i ng up new smar t phone t r ends
Structural changes amid industry deceleration: We expect smartphone
shipment growth to turn moderate over the next three years, and
highlight three potential structural trends: 1) weakening of Samsungs
no.1 position (positive for Taiwan component makers); 2) tier-two global
brands may exit the market as their share of profits contracts; and 3)
vendors will start selling more peripherals to enhance their portfolios,
with power banks and wearables being the new focus areas.
Figure 1: Companies mentioned
Company Ticker Rating TP (NT$)
Largan 3008 TT BUY 3,060
Catcher 2474 TT BUY 345
Simplo 6121 TT HOLD-OPF 188
HTC 2498 TT SELL 88
Foxconn Tech 2354 TT SELL 52
Dynapack 3211 TT SELL 55
Conquering the high-end iPhone mass production to commence in July:
We expect EMS makers to start mass production for the 4.7 iPhone 6 in
July and 5.5 model in August. We believe the iPhone 6 cycle will be very
strong, driven by the release of pent-up demand, iOS replacement, and
share gains from Android. As such, we forecast total iPhone builds will
grow by 85% QoQ in 4Q14, and expect better than historical shipments in
1H15, with strong YoY growth in 4Q14-2Q15, positive for the supply chain.
Meanwhile, we expect other high-end brands will face pressure given high-
end saturation. We prefer stocks enjoying ASP improvement and market
share gains into the iPhone 6 cycle Largan, Catcher, and Wistron.
Source: Yuanta Investment Consulting

Redefining the low-end space: Despite a slowdown in Chinas domestic
market, we believe most Chinese OEMs have maintained (or even
increased) their targets for 2014, suggesting faster geographical
expansion. We forecast the top-nine Chinese OEMs will capture 70% of
global smartphone unit growth this year, leaving little opportunities for
other players. In China, the sales channel is evolving with e-commerce
channels emerging strongly. This will lead to high-spec components
moving to lower price points, and we believe high-end component
makers with significant exposure to Chinese OEMs will outperform.
Recommendations: We have BUY ratings on Largan, given its ASP and
volume upside, and Catcher, for its iPhone market share gains. We expect
Simplo to make iPhone 6 share gains, but see little valuation upside and
assign it a HOLD-OPF rating. We rate SELL on Foxconn Tech, Dynapack,
and HTC due to competition.

ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ARE LOCATED IN APPENDIX A.
Yuanta does and seeks to do business with companies covered in its research reports. As a result, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision.

I nvest ment Summar y
Long-term structural changes amid industry deceleration
With the recent flagship cycle turning weak, Chinas 3G/4G transition, and potential
pent-up demand ahead for new iPhones, we believe smartphone shipments will be
slow in 1Q-3Q14, with 4Q14 likely to record a strong uptick. On a three-year view,
we expect smartphone shipment growth to turn moderate, and highlight three
potential structural trends: 1) weakening of Samsungs no.1 position (positive for
Taiwan component makers); 2) tier-two global brands may exit the market as their
share of profits contracts; and 3) in addition to smartphones, vendors will start
selling peripherals to enhance their portfolios and/or to increase revenue, with
OEMs to focus on power banks and wearables.
On a three-year view, we
expect smartphone shipment
growth to turn moderate

Conquering the high-end iPhone mass production to commence in July
We expect EMS makers to start mass production for the 4.7 iPhone 6 in July and
5.5 model in August, and believe the iPhone 6 will enjoy a strong launch driven by
released pent-up demand, iOS replacement, and a market share shift from Android
(where user stickiness is a lot lower). According to our forecast, we expect iPhone 6
builds to reach 61 mn units in 4Q14, from 19 mn in 3Q14, resulting in total iPhone
builds growing 85% QoQ in 4Q14. Driven by improving component supply for the
two new iPhone models, we expect to see better than historical momentum in 1Q15,
with strong YoY increases in 4Q14-2Q15, boosting supply chain revenue.
Meanwhile, we expect that demand for other high-end brands (i.e. Sony, HTC, and
even Samsung) will be difficult to sustain with the high-end saturation. Within the
supply chain, we prefer companies benefiting from ASP improvement and market
share gains into the iPhone 6 cycle Largan (ASP improvement), Catcher (market
share upside) and Wistron (share gains, covered by our analyst Vincent Chen).
We expect EMS makers to start
mass production for the 4.7
iPhone 6 in July and 5.5
model in August

Redefining the low-end space
We expect only 10% YoY shipment growth in Chinas domestic smartphone market
this year, down significantly from 64% YoY in 2013. However, we believe the
demand pattern will be very back-end loaded with TD-LTE developing rapidly,
driven by increasing subsidy allocation and better availability of RMB1,000 4G
phones. Despite a YoY domestic market slowdown, we believe Chinese OEMs are
maintaining (or even increasing) their shipment targets for 2014, suggesting
further geographical expansion. We forecast the top-nine Chinese OEMs will
capture 70% of global smartphone unit growth this year, leaving little opportunities
for other players. In China, the proliferation of e-commerce sales is worth watching,
and we expect e-commerce smartphone sales to represent 18% of the China market
in 2014, up from 10% in 2013. We note that the new business model will lower
channel and marketing costs significantly, helping high-spec components move to
lower price points. We believe these trends will benefit high-end component
makers that have significant exposure to Chinese OEMs.
We expect only 10% YoY
shipment growth in Chinas
domestic smartphone market
this year, but believe Chinese
OEMs will move aggressi vely
to overseas markets

Investment recommendations
In our view, component makers are the better plays in this space, given our
expectation of iPhone strength and changes in the low-end market. Largan should
be a primary beneficiary of this trend, as camera lens content will increase in
smartphones. We see Catcher as poised for a strong earnings uptick, benefiting
from potential market share gains in the iPhone 6. While we believe Simplo will also
benefit, we only see limited valuation upside for the stock. In contrast, we are
negative on HTC (sales and earnings peaking in 2Q14), Foxconn Tech (competition
from Catcher and Hon Hai), and Dynapack (competition from Chinese packers).
In our view, component makers
are the better plays in this
space
Tai w an: Handset s 7 J ul , 2014 Handset I ndust r y Page 3 of 79

Figure 2: Valuation summary table of initiated stocks
EPS (NT$) PER (x) ROE (%)
Company Ticker Rating
TP
(NT$)
Mkt Cap
(US$ mn)
2013 2014F 2015F 2013 2014F 2015F 2013 2014F 2015F
Largan 3008 TT BUY 3,060 10,658 72.3 127.9 170.1 32.8 18.5 13.9x 36% 46% 45%
Catcher 2474 TT BUY 345 6,905 18.4 19.7 26.6 14.9 13.9 10.3 21% 19% 22%
Simplo 6121 TT HOLD-OPF 188 1,948 10.5 11.4 12.4 18.0 16.6 15.2 18% 18% 18%
HTC 2498 TT SELL 88 3,902 (1.6) (1.3) (3.0) N.A. N.A. N.A. (2)% (1)% (3)%
Foxconn Tech 2354 TT SELL 52 3,263 5.4 3.5 3.9 13.8 21.2 19.2 11% 7% 7%
Dynapack 3211 TT SELL 55 453 5.5 5.7 4.1 16.2 15.7 21.6 12% 12% 9%
Figure 3: Valuation Comparison Table
EPS Growth (%) PER (x) P/B (x) ROE (%)
Company Ticker
Mkt Cap
(US$ mn)
2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F
Handsets
HTC 2498 TT 3,902 N.A. N.A. N.A. N.A. 1.5 1.6 (1)% (3)%
Apple AAPL US 566,970 11% 9% 14.6 13.6 4.79 4.27 32% 33%
Samsung 005930 KS 190,657 (10)% 3% 7.3 7.1 1.23 1.07 18% 16%
Blackberry BBRY US 5,591 56% 42% N.A. N.A. 1.68 1.71 (9)% (5)%
LG Electronics 066570 KS 12,391 347% 41% 15.8 11.2 1.08 0.99 7% 9%
Coolpad 2369 HK 1,190 13% 17% 11.4 9.8 2.55 2.28 24% 24%
ZTE 763 HK 7,219 82% 20% 16.6 14.0 1.73 1.53 11% 11%
Average 13.2x 11.1x 2.1x 1.9x
Components
Largan 3008 TT 10,658 77% 33% 18.5 13.9 7.3 5.4 46% 45%
Catcher 2474 TT 6,905 7% 35% 13.9 10.3 2.4 2.1 19% 22%
Foxconn Tech 2354 TT 3,263 (35)% 11% 21.1 19.2 1.3 1.3 7% 7%
Casetek 5264 TT 1,987 (2)% 7% 9.84 9.18 2.2 1.9 25% 24%
Simplo 6121 TT 1,948 9% 9% 16.6 15.2 2.9 2.7 18% 18%
Dynapack 3211 TT 453 3% (27)% 15.7 21.6 1.8 1.9 12% 9%
Flexium 6269 TT 558 (14)% (5)% 10.1 10.6 1.8 1.6 19% 16%
Career 6153 TT 487 84% 30% 12.2 9.4 1.7 1.5 15% 17%
Unimicron 3037 TT 44,773 52% 17% 25.1 21.5 1.0 1.0 4% 4%
Merry 2439 TT 1,001 65% 18% 17.6 14.9 4.6 3.9 29% 28%
Goertek 002241 CH 6,519 50% 37% 20.6 15.0 5.1 3.9 25% 27%
AAC Tech 2018 HK 8,269 16% 18% 19.0 16.1 5.3 4.3 30% 29%
Average 16.7x 14.7x 3.1x 2.6x

Long-t er m st r uc t ur al changes ami d
dec el er at i ng i ndust r y gr ow t h
A slow start to 2014
After a decent 1Q14 (30% YoY global smartphone shipment growth), we expect
shipment growth to slow in 2Q/3Q14 as recent flagship product cycles (Galaxy S5,
HTC M8, and Sony Z2) have been weaker than expected. Specifically, sell-through
of the M8 turned weak in late-May, and Sony failed to deliver its Z2 globally, while
Samsungs Galaxy S5 is performing relatively well. Furthermore, 3Q14 will likely
experience pent-up demand ahead of the iPhone 6 launch, but this should then
create a very strong uptick in 4Q14.
After a decent 1Q14 (30% YoY
global smartphone shipment
growth), we expect shipment
growth to slow in 2Q/3Q14

For China, we believe shipments were slow in 1H14, due to 4G/3G transition and
possibly 3G inventory adjustment ahead of lower operators subsidies. We note that
China has been a key driver of global smartphone sales over the past two years.

Figure 4: Global smartphone shipment forecast (Unit: mn)

Source: IDC; Yuanta Investment Consulting
Growth to be driven by the low-end space
We expect the total cost of ownership for smartphones to decline while affordability
improves, driving further cannibalization of feature phones. On pricing, based on
our retail price survey, 3G smartphones using 4 (800x480) screens and dual-core
(some even quad-core) have reached as low as RMB299 in the open channel without
subsidy, and single core smartphones could reach the RMB150-180 level. Therefore,
we expect low-end smartphones to cannibalize feature phones further, driving
increasing penetration (although at a mild level as the penetration rate is already
high). The majority of the volume growth will come from the lower priced market i.e.
priced below US$200.
We expect the total cost of
ownership for smartphones to
decline while affordability
improves

Figure 5: Smartphone shipments by price band

From a penetration rate perspective, smartphone penetration could reach 64%, 70%,
75%, in 2014/15/16 respectively, according to IDC.

Figure 6: Smartphone penetration forecast by region

Source: IDC; Gartner, Yuanta Investment Consulting
How we see the smartphone industry evolving over the next three years
Gartner expects global
smartphone shipments will
grow from 1.02 bn units in 2013
to 1.76 bn units in 2017
Gartner expects global smartphone shipments will grow from 1.02 bn units in 2013
to 1.76 bn units in 2017, representing a four-year CAGR of 15%. After years of very
high growth, smartphone growth is expected to slow moving forward.

On a three-year view, we expect smartphone shipment growth to be moderate, and
identify three structural trends: 1) weakening Samsungs no.1 position (positive for
Taiwan component makers); 2) tier-two global brands may exit; and 3) smartphone
vendors may start to offer more than just smartphones to customers.


Three-year view #1: Samsungs market share erosion to lead to addressable market
expansion for Taiwan component makers
We expect Samsungs smartphone market share to fall from 30% in 2013 to 27% in
2014, and is likely to trend down further in 2015, driven by competition from China
OEMs (mid/low-end) and Apple (high-end). This trend will effectively expand the
addressable markets of most Taiwan component makers due to their low level of
exposure to Samsung.
We expect Samsungs
smartphone share to fall from
30% in 2013 to 27% in 2014

Based on our build plan forecast, further analysis suggests Samsung began facing
pressure in 2Q14, when mid/low-end smartphone shipments fell sharply QoQ.
Although we expect Samsung will maintain its build plan for 3Q14, we believe this
number faces downside risk given the launch of Apples iPhone 6.

2Q14 to be impacted by
Chinese OEMs, and Apple to
add more pressure in 3Q14
Figure 7: Our assembly build plan forecast for Samsungs smartphones (Unit: mn)
8
6 5
4
19
14
10
10
9
6
5
3
3
11
18
8
6
6 5
55
64
44
55
70
0
20
40
60
80
100
120
4Q13 1Q14 2Q14F 3Q14F 4Q14F
Others (mostly mid/low)
Other high-end
Note 4
Note 3
Galaxy S5
Galaxy S4
84
89
80
88
102
84
89
80
88
102
84
89
80
88
102
84
89
80
88
102

In the high-end market, we expect Apple to catch up to the large-screen product
cycle with its new larger-sized models in 2H14. Considering relatively flat high-end
market growth, any market share gain for the iPhone could squeeze other high-end
brands significantly. Although we expect Samsung will launch a competitive model
in the Note 4 in 4Q14 with potentially a bended AMOLED display, we note that the
volume could be low given limited display supply and a lack of applications.
In the high-end market, we
expect Apple to catch up to the
large-screen product cycle
with its new larger-sized
models in 2H14

In the mid/low-end market, we believe Samsung has been impacted by Chinese
OEMs since early-2Q14, due to a weaker price proposition, and our checks suggest
increased inventory for Samsung in China. Longer term, the potential expansion of
Chinese OEMs export business will pose another threat to Samsung. Unless
Samsung decides to accept lower OPM and partially abandon its pricing premium, it
will struggle to compete with Chinese OEMs which have OPMs close to zero.
In the mid/low-end market, we
believe Samsung has been
impacted by Chinese OEMs
since early-2Q14

In all, as Taiwan component makers have very limited exposure to Samsung, we
believe the addressable market for these component makers will expand going
forward. However, we do not expect HTC to benefit, as HTC has a similar but
weaker product position than Samsung.

Figure 8: Samsung market share trend

Three-year view #2: Tier-two global brands may exit
With Chinese smartphone OEMs dominating the sub-US$200 segment, the
shrinking mid-end market, and the Apple/Samsung (especially Apple) duopoly, we
see limited room for other global OEMs in this space. Profitability-wise, only four of
the top 11 OEMs were profitable in 2013 - Apple and Samsung banked operating
profit of US$69 bn, LG and Coolpad US$0.1 bn, and the rest lost US$2.4 bn
combined. With Apple/Samsung continuing to share the majority of profits, we
expect many OEMs who lack scale to exit the market in the next few years.

Figure 9: Smartphone industry profit share analysis
The top two represent the
majority of the industrys
profits, while others are
struggling to turn a profit
Operating Profit
(US$ bn)
2011 2012 2013 2014F
Apple 29.7 42.7 44.7 52
Samsung 7.9 19.0 24.5 19.6
LG (0.3) 0.1 0.1 0.2
HTC 2.3 0.6 (0.1) (0.2)
Motorola (0.1) (0.2) (0.7) (0.5)
Nokia 1.4 (1.2) (0.2) (0.2)
Sony 0.1 (0.7) (0.3) (0.2)
RIMM 1.8 (1.5) (1.0) (0.7)
ZTE 0 (0.1) 0 0
Lenovo 0 (0.1) 0 0
Coolpad 0 0 0.1 0.2
Profit share of
Apple/Samsung
88% 105% 103% 102%
Source: Companies; Yuanta Investment Consulting
Three-year view #3: Smartphone vendors to sell more than just smartphones
The increasing penetration of smartphones is driving a shift in accessory design
toward smart accessories that offer higher levels of consumer interaction, user
experience, product value, and brand recognition. In addition to traditional
accessories (i.e., cover case, wireless earphone, etc), we expect power banks and
wearables to be the next areas of focus.

Option #1: Power bank
Due to the limitation of mobile phone batteries and increasing number of functions,
we expect the power bank market to pick up, mainly driven by China. According to
ITRI, around 20-40% of smartphone users in China buy a power bank when they
acquire a smartphone.

From a brand-owner perspective, power banks represent a potential new revenue
stream. Xiaomi has performed strongly, selling 2.5 mn units/month of its power
bank in the first quarter after launch. With a bundling strategy and rising after-
market demand, we believe battery makers will benefit. From an ASP perspective,
we have seen cylindrical cell type prices stabilizing since 1Q14, resulting in more
favorable pricing for battery packers.
Power banks represent a
potential new revenue stream

Figure 10: Xiaomis power bank
Xiaomi Xiaomi

Retail price (RMB) 69 49
Capacity (mAh) 10400 5200
Battery cell Samsung SDI, LG Chemical Samsung SDI, LG Chemical
Battery packers Desay, SCUD Desay, SCUD
Control IC TI TI
Source: Xiaomi; Yuanta Investment Consulting
Figure 11: Global power bank demand forecast (Unit: mn)

Taiwan battery packers are
likely to benefit, as the majority
of demand is from China
Source: ITRI; Yuanta Investment Consulting

Option #2: Wearables
We have seen many new wearable product launches and investments from global
OEMs since 2012. In addition to non-IT brands (i.e. Nike and Jawbone), we expect
more IT OEMs to enter this space.

Demand-wise, we note that sports trackers account for the majority, while smart-
watches are still at a very early stage due to incorrect product positioning and high
price tags. Going forward, we believe these products should be positioned as
active devices, and remove unnecessary functions. If properly positioned, we
believe costs will fall and adoption rates will increase.

Figure 12: Global wearable market forecast (Unit: mn)

61
Source: ABI Research; Yuanta Investment Consulting
Design-wise, due to small display size and battery constraints, we do not expect
the devices or components inside to be powerful. From a power consumption
perspective, display and APU/MCU are the key parts that need to be reduced,
especially display given the always-on requirement.
Sensor and wireless charging
are key components taking
good content value in
smartwatches

With the trend of reducing component usage, the number beneficiaries will be
limited from a content value perspective, and we only see sensors and potentially
wireless charging to gain content value.

Figure 13: Smartwatch power consumption and design trends
Parts
Power consumption per
hour (run mode)
Potential trends
MCU 380mW Cortex M3, Intels Quark
APU 500mW Cortex A5 or A7. Sports trackers don't need APU
1.5" LCD display
(320x320)
70mW
E-Paper (black and white), Mirasol display
Wireless Module 100mW
Sensors 18mW Up to 10 sensors
GPS 20mW
Bluetooth 70mW Bluetooth LE

Functionally, we believe the key use of smartwatches (outside of syncing with
smartphones to provide time, missed calls and message alerts), is to take an active
role from a health perspective collecting user data and providing analysis/alerts.
We have not seen such a device in the market yet, but do expect the iWatch to act in
this way (by using the M7 co-processor). Thus, we expect the iWatch to stand out,
and boost the overall market size for smartphone-compatible watches. Our supply
chain checks suggest a build plan of 5-7 mn iWatch units in 2H14.
iWatch could be the first
acti ve smartwatch , and we
forecast shipments to be 5-7
mn units in 2014

Figure 14: iWatch plays
Industry Company Ticker
2014
Sales %
2015
Sales %
Rating TP
EPS
2014(F)
EPS
2015(F)
ODM/EMS Quanta 2382 6% 14% BUY 89 5.5 6.7
SATS ASE 2311 5% 6% HOLD-OPF 35 2.6 2.9
IC Substrate Kinsus 3189 5% 6% BUY 154 9.6 10.9
FPC Career 6153 7% 17% BUY 56 3.7 4.8
IC Design Richtek 6286 <5% <5% HOLD-UPF 157 11.1 12.2
Panel F-TPK 3673 5% 5-10% BUY 292 11.7 20.4
Electronic
Components
TXC 3042 <5% <5% BUY 52 3.4 3.7
Figure 15: Smartwatch product line-up
Apple (Forecast) Motorola LG Samsung Samsung
Product iWatch Moto360 G-Watch Galaxy Fit Galaxy Gear 2
Launch time Oct-14 J ul-14 J ul-14 Apr-14 Apr-14
OS iOS 8 Android Wear Android Wear Tizen Tizen
APU Apple M7 -- Snapdragon 400 180 MHz ARM Cortex M4 1.0 GHz dual-core
Display 1.34, 1.53" 320x320 flexible
AMOLED Display
-- 1.65" 280x280 TFT LCD 1.84" 432x128 Super
AMOLED
1.63" 320 x 320 AMOLED
RAM 512MB -- 512MB -- 512MB
Storage 4GB -- 4GB -- 4GB
Camera 1.9MP -- N.A. N.A. 2MP
Battery 200-340mAh,
wireless charging
-- 400mAh 210mAh 300mAh
Retail prices >USD$399 USD$249 USD$199-279 USD$199 USD$299
Samsung Omate Sony Qualcomm Pebble

Product Galaxy Gear Omate TrueSmart SamrtWatch2 Toq Pebble Steel
Launch time Sep-13 J an-14 Sep-13 Dec-13 J an-14
OS Tizen Android 4.2 Android 4.0 Android 4.0.3 Pebble OS 2.0
APU 800MHz Exynos single-core 1.3GHz Cortex A7 dual-core 200MHz Cortex M3 200MHz Cortex M3 800MHz Cortex M3
Display 1.63" 320 x 320 AMOLED 1.54" 240 x 240 TFT LCD 1.6" 220 x 176 LCD 1.55" 288 192 Mirasol 1.25" 144 x 168 LCD
RAM 512MB 1GB -- -- 128KB
Storage 4GB 8GB -- -- 8MB
Camera 1.9MP 5MP No camera No camera No camera
Battery 315mAh 600mAh 140mAh 240mAh 130mAh
Retail prices USD$299 USD$249 USD$250 USD$349 USD$229
Source: Companies

Conquer i ng t he hi gh-end new i Phone
ac t i vi t i es t o begi n i n Jul y
iPhone 6 (4.7) mass production to start in July
Based on our checks, we expect EMS suppliers to start mass production for the 4.7
iPhone 6 in July and the 5.5 model in August. We believe the 4.7 version will be on
sale in the 2H of Sep, and the 5.5 version may hit the market a few weeks later. We
note that the 5.5 model features a display of around 400 ppi (vs. iPhone 5s/iPhone
6 (4.7) 326ppi), which requires more time to improve its product yield.

We introduce our build-plan estimates for the iPhone range in below. We note that
the yield rate of display (driver/touch IC for 4.7 and in-cell for 5.5) and metal
casing will have some impact on shipments at the initial stages. Together with likely
higher price points, we expect the iPhone 6 (4.7) to represent 79% and 74% of total
new iPhone 6 shipments in 3Q14 and 4Q14, respectively.
Supply chain bottlenecks at
the initial stages are likely in
display and metal casing

Figure 16: Our iPhone assembly build plan forecast (Unit: mn)

We expect the 4.7 iPhone 6 to
account for over 70% of total
new iPhone 6 shipments
during 2H14-1H15
Likely hardware features of the iPhone 6, and its competitors (Note 4, M8 Prime)
We predicted that Apple will adopt one platform for the two iPhone models in
different sizes - similar RF, quad-core A8 (some differences in graphics), and most
of the components for two devices. The key differences are likely to display (size,
ppi, and sapphire), metal casing, battery, OIS camera, and connector.

Figure 17: Our projected new iPhone spec
iPhone 6 (4.7" ) iPhone 6 (5.5" )
EMS production J ul-14 Aug-14
Display 4.7" LTPS (1334x750, 326ppi) 5.5" LTPS (1920x1080, 401ppi)
Touch In-Cell In-Cell (5% with Sapphire cover lens)
Storage 16G/32G/64G 16G/32G/64G
APU Quad core A8 Quad core A8
NFC Yes Yes
DRAM 1GB LPDDR3 1GB LPDDR3
Camera 1.2MP, 8MP f2.2, without OIS 1.2MP, 8MP f2.2, OIS
Battery 1820mAh 2800mAh
Adopter 5W 10W
Thickness 6.5~7mm 7-7.5mm

At the same time as the iPhone 6 launch, we also expect Samsung and HTC to
announce their 4Q14 models Note 4 and M8 Prime. From a product perspective,
Note 4 will also come with decent spec (high-resolution camera, 2k AMOLED screen)
and potentially with an L-shape curved screen for the Note 4 premium version.
Thus, we expect the M8 Prime will face pressure in the high-end market in 2H14.

Figure 18: Our projected spec for Samsung and HTCs next flagship models
Galaxy Note 4 M8 Prime
EMS prodution Sep-14 Oct-14
Display 5.9" QHD Blended AMOLED 5.5" WQHD Display
Touch On-Cell GFF
Storage 32G/64G 16G/32G/64G
APU Exynos 64-bit APQ8084
NFC Yes Yes
DRAM 3GB LPDDR3 3GB LPDDR3
Camera 3MP, 20MP or 16MP OIS 5MP, 13MP duo camera
Battery TBD 2800mAh
Thickness around 9mm around 8mm
More aggressive product portfolio after the launch of the iPhone 6
We expect the price band of Apples iPhone portfolio to widen after the iPhone 6s
launch. According to our checks, we expect Apple will keep the iPhone 5s, iPhone
5c, and iPhone 4s into the holiday season, but with lower price points, likely
USD$100 lower than current prices. For the iPhone 6, the 4.7 version will likely
assume the mainstream iPhone starting price of USD$649, while the 5.5 model is
likely to be positioned similar to Samsungs Galaxy Note, which has a higher price
point than its mainstream Galaxy S series.

Figure 19: Likely changes in iPhone portfolio

Large-sized iPhone to gain users from Android
iOS users in general have a high level of stickiness, while Android users typically
shop around when picking new smartphones. According to Consumer Intelligence
Researchs 3Q13 survey, 78% of iOS users chose another iPhone, while 67% of
Android users stayed with Googles OS, but switched among Android brands. As
Samsung accounts for the largest share of new Android purchases, we believe that
Samsungs large-screen strategy and promotional campaign played key roles.
However, we believe that those two advantages can be overcome by Apple in 2H14.

In the high-end market, we
expect the Note 4 will be in
second position in 2H14,
followed by the M8 Prime
We expect the price band of
Apples iPhone portfolio to
widen after the iPhone 6s
launch
Apples future product strategy
will likely capture demand from
phablets and the mid-end
segment
iOS users in general have a
high level of stickiness, while
Android users typically shop
around when picking new
smartphones
B ef o r e i Ph o n e 6 A f t er i Ph o n e 6
USD750
USD650
USD550
USD500
USD450
USD400
USD350
4.7
5.5

Figure 20: A comparison of consumers previous phone brands, and the next phone
brand purchased
Previous phone brand
New phone brand
Apple Samsung HTC LG Nokia
Apple 78% 31% 31% 35% 30%
Samsung 11% 52% 35% 28% 30%
HTC 4% 6% 27% 7% 20%
LG 1% 5% 0% 18% 15%
Nokia 1% 2% 0% 0% 0%
Others 5% 4% 7% 12% 5%
Source: Consumer Intelligence Research, Yuanta Investment Consulting
Apples market share may rise, at the expense of Samsung/HTC/Sony
Since the launch of the iPhone 4S, the market share of the iPhone peaked in the
launch quarter with YoY growth deceleration. However, we expect the iPhone 6 to
see a strong start as the pent-up demand for a larger screen is released, and given
the likely market share shift to iOS from Android, where user stickiness is lower.
According to our build plan forecast, the incremental >USD$500 iPhone builds will
grow by nearly 30 mn units, and Galaxy Note 4 will also build around 14 mn units
in 2H14. Given the high-end market saturation, it is very difficult for other high-
end brands (i.e. Sony, HTC) to maintain their share.
Given the high-end market
saturation, it is very difficult for
high-end brands such as Sony
and HTC to maintain their
share

Figure 21: High-end (USD$500) market share forecast
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14F 3Q14F 4Q14F
Others
Sony
HTC
Samsung
Apple

Source: IDC, Yuanta Investment Consulting
Driven by improving supply chain production for the two new iPhones, we expect to
see better than historical shipment momentum in 1Q15, with strong YoY increase
in 4Q14-2Q15, boosting supply chains revenue momentum.

Figure 22: iPhone shipment (Unit: mn), market share, and shipment YoY
28%
57%
29%
7%
20%
26%
7%
11%
17%
12%
39%
44%
26%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
20
40
60
80
100
1
Q
1
2
2
Q
1
2
3
Q
1
2
4
Q
1
2
1
Q
1
3
2
Q
1
3
3
Q
1
3
4
Q
1
3
1
Q
1
4
2
Q
1
4
F
3
Q
1
4
F
4
Q
1
4
F
1
Q
1
5
F
2
Q
1
5
F
Total iPhone shipment
iPhone shipment YoY
Apple's market share

iPhone shipments will expand
YoY in 4Q14-2Q15F
Supply chain beneficiaries - new components with better functionality, rising
content per box, and/or share gains
While we believe the large-screen iPhone 6 cycle will boost volumes significantly,
we suggest investors focus on value/allocation gainers, and we highlight our
findings/views below for major hardware components related to this report:

Metal casing: Our industry checks suggest that both the 4.7 and 5.5 iPhone
will use metal casings with a very thin structure. We believe official allocation for
Hon Hai Group, Catcher, and Jabil is 70%, 15%, and 15% respectively, but our
supply chain checks suggest Jabils yield rate is very low, while Catcher's rate is
the highest. Thus, we expect Catcher to take more market share in iPhone. We
expect the low effective output to result in more stable ASP for metal-casing
makers and to help margins.
Catchers market share in
iPhone could be higher than
expected
Camera: We expect the iPhone 6 camera to retain an 8MP resolution with the
same aperture. However, given the thinner iPhone structure and potentially
larger pixel size, we expect the lens structure to be even thinner, making it
difficult for tier-two suppliers to catch up. We do not expect OIS to be featured
in the 4.7 iPhone this time, due to slower than expected ramp up from Alps and
Mitsumi.
Largan will still lead in iPhone
6 due to the requirement for
higher-quality lenses, leading
to higher ASPs
Battery: We expect battery capacity to reach 1800mAh and 2800mAh in the two
new iPhones, vs. 1470mAh for the iPhone 5s, resulting in a 3-5% increase in ASP.
We do not believe that Simplo (30-35% allocation) will lose share, as Apple may
need to keep one stable supplier (Simplo is the best in automation for single-
cell), while using Desay (40-45%) to take shares from Dynapack on better cost
and flexibility.
Simplos market share will be
maintained, while Dynapacks
share will be potentially eroded
Flexible PCB (covered by our analyst Steve Huang, CFA): We do not believe the
ASP upgrade will be meaningful during the size migration from 4 to 4.7 display.
Besides, Apple is increasing the number of suppliers in a single FPC piece, which
will accelerate the quarterly ASP erosion by more than 3-5%.
Continuing to suffer from ASP
pressure

Figure 23: iPhone 6 supply chain
Part Manufacturer Ticker Rating 2014F revenue % 2014F order allocation%
EMS&ODM Hon Hai 2317 TT BUY 38% 65%
Pegatron 4938 TT HOLD-UPF 20% 25%
Wistron 3231 TT BUY 9% 7-10%
Largan 3008 TT BUY 40% 80+% (back camera)
Camera Lens
Genius 3406 TT not rated 50+% <20% (back camera)
Foxconn Tech 2354 TT SELL 23% 70% (share with Hon Hai)
Casing
Catcher 2474 TT BUY 16% 14% (may have upside)
Connector
Cheng Uei 2392 TT BUY 15-20% 40%
Crystal
TXC 3042 TT BUY 5-6% 30-40%
Compeq 2313 TT HOLD-UPF 10% 10%
Unimicron 3037 TT HOLD-UPF 10% 20%
PCB
Tripod 3044 TT HOLD-UPF N.A. N.A.
IC substrate
Kinsus 3189 TT BUY 10% N.A.
AP
TSMC 2330 TT BUY 3-5% 90-100%
Flexium 6269 TT HOLD-OPF 65+% 12%
Career 6153 TT BUY 8% 1.5%
Flexible PCB
Zhen Ding 4958 TT HOLD-OPF 35+% 30%
Simplo 6121 TT HOLD-OPF 8-9% 40-45%
Battery
Dynapack 3211 TT SELL 0-1% Small


Redef i ni ng t he l ow -end mar ket
A slow start in the China market
MIITs 1Q14 smartphone data of 9.8% YoY was very weak, and we expect the
softness to last into 2Q14, due to China Mobiles 4G transition and increased
channel inventory, especially for 3G phones. For 2Q14, our checks suggest many
vendors, including global OEMs, are clearing 3G phone inventories due to China
Mobiles defocus on 3G. We believe consumers may have delayed their purchases in
anticipation of new 4G smartphones.

On the other hand, we believe the TD-LTE chipset and PA supply has been capped
the TD-LTE expansion YTD. For chipset, the only quality and low/mid end SoC
appears to be Qualcomms MSM8926, which is priced at USD$14-15. Marvell
(PXA1088) gained traction in 4Q13/1Q14, but the acceptance turned weak in 2Q14,
given unstable performance (evidenced by Marvels flat July-quarter revenue
guidance). MediaTek tried to keep its presence in TD-LTE by offering MT6582+90
with an aggressive price, but the volume was low, according to our checks. For PA,
the requirement of 5-mode in China Mobile and the late launch of MSM8916 (with
RF360) also worsened the shortage, in our view.
3G/4G transition, China
Mobiles subsidy, and
component shortage for 4G
phones led to softness in 1H14

Figure 24: China smartphone shipment QoQ

China domestic market growth of only 10% YoY in 2014
Although we believe demand will pick up in 2H14 when vendors launch their sub-
RMB1,000 4G smartphone models, the high penetration rate will likely lead to
moderate long-term growth. Chinas smartphone penetration hit 81% in 2013,
according to IDC, suggesting little opportunity for penetration to grow further.
Chinese OEMs are now seeing more intensive competition due to market saturation.
Chinese OEMs are now seeing
more intensive competition
due to market saturation

Figure 25: China smartphone penetration forecast

TD-LTE ramp up to lead to a back-end loaded 2014
Although 4G device demand has been disappointing YTD (1Q14 TD-LTE device was
around 10 mn), we expect a very back-end loaded 2014 with further growth in
2015-16, driven by China Mobiles TD-LTE subsidy shift (China Mobile only accepts
TD-LTE phones on its subsidy portfolio from June 1), increasing number of low-
priced 4G phones, and the ramp up of FDD-LTE in 2H14. For device makers, device
migration to 4G appears to be the way to capture the new growth stream in
domestic market.
Demand catalysts in 2H14:
China Mobiles subsidy on 4G,
sub-RMB1,000 4G phones, and
partial subsidy on FDD devices

On device pricing, we have seen Coolpads TD-LTE smartphone priced below
RMB1,000 (Coolpad 8720L supporting 3-modes at RMB699, 8730L supporting 5-
modes at RMB969), and we expect the retail prices of TD-LTE smartphones to reach
as low as RMB500-600 by 4Q14, helping the transition from 3G to 4G in 2H14. On
the other hand, we believe the trend of lower-priced LTE devices and a potential
clearance of 3G phones will impact industry ASP.


Figure 26: China TD-LTE smartphone line-up
ZTE Coolpad Samsung Huawei Samsung
Product Q802T 8730L (4G) G3518 Ascend P7 N9008V
Technology TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE TD/FDD-LTE
Modes 5 mode 5 mode 5 mode 5 mode 5 mode
Operating
System
Android 4.3 Android 4.3 Android 4.3 Android 4.4 Android 4.3
Pixels 1280 x 720 1280 x 720 480 x 800 1920 x 1080 1920 x 1080
RAM 1GB 1GB 1GB 2GB 3GB
ROM 4GB 8GB 8GB 16GB 32GB
Display 5.0 5.5 4.5 5.0 5.7
Camera 5MP +0.3MP 8MP +2MP 8MP 13MP +8MP 13MP +2MP
Battery 2300mAh 2500mAh 2000mAh 2500mAh 3200mAh
CPU Speed 1.2GHz 1.2GHz 1.2GHz 1.8GHz 2.4GHz
Processor
Chip
MSM8926 MSM8226 MSM8226 Kirin 910T MSM8926
Modes from
chips
5 mode 5 mode 5 mode 5 mode 5 mode
Muti-core Quad Quad Quad Quad Quad
Price (RMB) 1,099 1,648 1,858 2,888 4,279
Source: JD.com; Yuanta Investment Consulting
Figure 27: Chipset solutions for RMB1,000
Company Model Cores, Mode
Supporting display
and camera
Handset retail price Others
MTK MT6582+MT6590 Quad-core, 5-mode
4" display, 13MP rear
cam, 5MP front cam
<599RMB
MTK MT6753 Quad-core, 5-mode
4.7" display, 13MP rear
cam, 5MP front cam
<799RMB 64-bit
MTK MT6591+MT6590 Six-core, 5-mode
cam, 5MP front cam
<599RMB
MTK MT6592/6590 Octa-core, 5-mode
cam, 8MP front cam
<799RMB
MTK MT6752 Octa-core, 5-mode
cam, 8MP front cam
<999RMB 64-bit
MTK MT6595M Octa-core, 5-mode
cam, 13MP front cam
<1400RMB
MT6595's low-priced
version
Qualcomm MSM8916 Quad-core, 5-mode
cam, 5MP front cam
<999RMB 64-bit, RF360
Qualcomm MSM8X26/8926 Quad-core, 5-mode
cam, 5MP front cam
<999RMB First 5-mode platform
Qualcomm MSM8939/8939 Octa-core, 5-mode
cam, 13MP front cam
<1299RMB 64-bit
Spreadtrum SC9610 Quad-core, 5-mode Baseband
LeadCore LC1860 Six-core, 5-mode
cam, 5MP front cam
<599RMB Six-core on A7
Marvell PXA1920LTE Quad-core, 5-mode
4.5." display, 13MP rear
cam, 5MP front cam
<999RMB
Marvell PXA1928LTE Quad-core, 5-mode
cam, 5MP front cam
<999RMB 64-bit
We believe shipments will be split roughly 20%/80% in 1H/2H14, given that China
Mobile, China Telecom and China Unicom are targeting LTE smartphone shipments
of 70 mn, 17 mn and 25 mn units in 2014 (1H14 shipments were around 20 mn).

Figure 28: China LTE smartphone shipment forecast (Unit: mn)

China market saturation forces vendors to lift exports
Because of saturation in the domestic market, many Chinese OEMs have already
planned to expand their businesses overseas. While this trend has already started in
2013, we expect it to accelerate in 2014. Gartner sees strong growth for Chinese
vendors in the Middle East and Africa, Eastern Europe and, more recently, in
Western Europe. This could disrupt many markets in which Chinese vendors started
to emerge. Our recent supply chain checks suggest China overseas smartphone
shipments remain robust.

Therefore, we expect Chinese vendors to dominate the low-end market in the long
run in both China and overseas, backed by lower costs (i.e., low marketing
expenses and proximity to the supply chain), better flexibility (short lead time), and
lower requirement for margins (most are taking zero OPM). On the other hand,
global OEMs such as Samsung, HTC, Nokia, and LG will feel the pressure.

Figure 29: Chinese vendors market share in each region

Because of saturation in the
domestic market, many
Chinese OEMs have already
planned to expand their
businesses overseas
Source: Gartner, Yuanta Investment Consulting

Outside China, the market is not easy for all Chinese OEMs to be successful in
because of the limited channels to market and higher standards of quality for
carriers in mature markets (i.e., more complicated certification processes and
patent portfolios). To overcome these barriers, we believe Chinese OEMs will invest
more resources in overseas markets to sustain growth - TCL's acquisition of
Alcatel-Lucent has provided TCL with a successful opportunity for leveraging
Alcatel-Lucent's global brand and established sales network. Lenovo's deal to buy
Motorola Mobility demonstrates another way of entering the global market, while
Huawei increased its marketing activities in Europe, and even smaller players, such
as Oppo, BBK, Gionee and Xiaomi, are lifting their international expansion.
Outside China, the market is
not easy for all Chinese OEMs
to be successful in because of
the limited channels to market
and higher standards of quality
for carriers in mature markets

For specific markets, we believe Huaweis market share in the Europe is likely to
increase (9% in 4Q13), ZTEs market share in the Latin America/US is also on the
rise, and TCL remains solid in Europe/MEA/Latin America. Lenovo will immediately
emerge as the No.5 player in Latin America, by leveraging Motorolas channel
network, and possibly some expansion in Southeast market.
The top-nine Chinese brands
will account for 70% of global
smartphone industry growth in
2014

Figure 30: Chinese vendors shipment forecast, and export ratio
China vendors shipments
(Unit: mn)
Export ratio
Vendors
2013 2014F 2013 2014F
Lenovo 45 63 8% 13%
Huawei 48 70 36% 46%
Coolpad 32 57 3% 12%
Xiaomi 13 66 0% 17%
OPPO 10 13 1% 8%
BBK 12 16 0% 15%
ZTE 42 50 47% 50%
Gionee 12 16 7% 15%
TCL 17 33 89% 90%
Total 231 386 25% 31%
Global shipment YoY growth 155
Percentage of global unit growth 70%
Shipment YoY growth outside of China 61
Percentage of unit growth in ex-China 34%
Source: Gartner, IDC; Yuanta Investment Consulting
Increasing popularity of e-commerce to redefine low-end
By imitating Xiaomi's success and increasing consumer coverage, many OEMs have
started to invest more in internet distribution with models dedicated to online
channels. According to Gartner, China has 591 mn internet users, with
approximately 50% using the internet to purchase products or services. In terms
distribution channel share, we forecast sales through online channels will grow to
18% in 2014, from 10% in 2013. 18% represents around 70 mn smartphones
(Xiaomi 40-45 mn, Coolpad 12-15 mn, Huawei 10 mn, ZTE 3-5 mn).
By imitating Xiaomi's success
and increasing consumer
coverage, many OEMs have
started to invest more in
internet distribution

Figure 31: China smartphone sales breakdown by channel type
10%
18%
21%
8%
9%
9%
47%
37%
32%
35%
36%
38%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014F 2015F
Carriers
Traditional retailers
Direct retail channel
retailers
On-line platform

Within online stores, although there are over 2,000 stores, we believe tier-one
platforms such JD.com, Tmall, and Sunning around a 90% share of the B2C e-
commerce market. Thus, co-operation with JD.com is becoming the focus of OEMs,
and Coolpad and ZTE have developed close relationships with JD.com.

Figure 32: Major online platforms
Tier-1
Tier-2
Others

Increasing market share of e-
commerce is positive to high-
end components reaching
lower-priced market
In our view, the increasing market share of e-commerce is positive to the
smartphone supply chain, and especially to components. Thus, we believe the
addressable market for high-end components will expand into lower-price point
segment. For more industry implications:
1) We expect online retail channels will enhance the competitiveness of local
brands to compete with global OEMs due to the high-spec/lower-price strategy.
2) E-commerce channels could improve OEMs ASPs, given the higher BOM cost
(using better components), amid better profitability as a result of cost savings
(channel cost and even marketing expenses) and better inventory management.
These savings could be allocated to high-end components.
3) The increasing BOM is favorable to high-end components, such as APUs,
cameras, display and even touch panels. For instance, RMB799-988 online
models feature similar specs as RMB2,000 models (720p display, 13MP camera,
Quad-core), and RMB1,500-2,000 models come with even higher-end
components (1080p display, 13/16MP cam, the most advanced processor).

Figure 33: Supply chain profitability distribution

Online
For OEMs, to avoid conflicts with existing retail sales channels, many develop sub-
brands to expand their market coverage; for example, Huawei's Honor, Coolpads
Great God, and ZTEs Nubia. Xiaomi leads in e-commerce with its unique online-
oriented business model (around 70% of total shipments). Other leading e-
commerce OEMs are Huawei, Coolpad, and ZTE, which have around 15-20%, 20-
25%, and 10% of their total shipments from online channels respectively.

Figure 34: Major online smartphone models
Xiaomi Xiaomi ZTE ZTE Huawei Huawei Coolpad Coolpad
Model Mi3 Hongmi Note Z5S Z5S mini Honor 3X Honor 3C Great God F1 Great God 1S
Release
date
13-Sep 13-J un 13-Dec 13-Nov 13-Dec 13-Dec 14-Apr 14-May
Display
5" 1920x1080
441 ppi
5.5" 1280x720
267 ppi
5" 1920x1080
441 ppi
4.7" 1280x720
312 ppi
5.5" 1280x720
267 ppi
5" 1280x720 294
ppi
5" 1280x720 294
ppi
7" 1920x1080
318 ppi
Internal
storage
16/64GB storage
2GB RAM
8GB storage
1GB RAM
16GB storage
2GB RAM
16GB storage
2GB RAM
8GB storage
2GB RAM
4/8GB storage
1/2GB RAM
8GB storage
2GB RAM
16GB storage
2GB RAM
Camera 13MP, 2MP 13MP, 5MP 13MP, 5MP 13MP, 5MP 13MP, 5MP 8MP, 5MP 13MP, 5MP 13MP, 5MP
CPU
Quad-core
2.3GHz
Qualcomm
Snapdragon
MSM8974AB
Octa-core
1.7GHz
Mediatek MT6592
Quad-core
2.3GHz
Qualcomm
Snapdragon
MSM8974AB
Quad-core
1.7GHz
Qualcomm
Snapdragon 600
Octa-core
1.7GHz
Mediatek MT6592
Quad-core
1.3GHz
Mediatek MT6582
Octa-core
1.7GHz
Mediatek MT6592
Octa-core
1.7GHz
Mediatek MT6592
Battery 3,050mAh 3,100mAh 2,300mAh 2,000mAh 3,000mAh 2,300mAh 2,500mAh 4,000mAh
Starting
Price
(RMB)
RMB 1,499
(16GB)
RMB 799 RMB 1,799 RMB 1,499 RMB 1,598 RMB 798 (4GB) RMB 888 RMB 1,888
Source: JD.com; Yuanta Investment Consulting

Beneficiaries of the overseas expansion of Chinese vendors and e-commerce model
As mentioned, we believe component makers are better plays to capture the
volume/share expansion of China vendors and the addressable market expansion
of high-end components due to the emergence of e-commerce. We see a limited
number of EMS beneficiaries (only FIH Mobile), as the market is dominated by
Chinese EMS/ODM makers. By sub-sector, we expect the main beneficiaries to be:
Proccesor: MediaTek (2454 TT; HOLD-OPF)
Display/touch: HannStar (6116 TT; NR), AUO (2409 TT; BUY), Innolux (3481 TT;
HOLD-OPF), O-film (002456 CH; NR), Truly (732 HK; NR)
Display ICs: Orise (3545 TT; HOLD-OPF), Ilitek (3598 TT; BUY), Novatek (3034 TT;
BUY), Himax (HIMX US; NR)
Touch ICs: Focal Tech (5280 TT; BUY), Elan (2458 TT; BUY)
Crystal components: TXC (3042 TT; BUY), Siward (2484 TT; NR)
Camera modules: Sunny Optical (2382 HK; NR), Truly (732 HK; NR), BYDE (285 HK;
NR), Hon Hai (2317 TT; BUY), Lite-On (2301 TT; NR), O-Film (002456 CH; NR),
Primax (4915 TT; NR)
Lens: Sunny Optical (2382 HK; NR), Largan (3008 TT; BUY)
Acoustics: Goertek (002241 CH; NR), AAC Tech (2018 HK; NR)
Mechanical parts: BYDE (285 HK; NR), FIH Mobile (2038 HK, NR)
EMS: FIH Mobile. We note that Chinese EMS makers dominate the EMS business with
Water World, Wingtech, Hai Pai, Huan Huang and Huaqin making up the top-five,
with a run rate of over 4 mn units a month.

I ni t i at i on
Tai w an: Handset s

7 J ul y, 2014
Ac t i on
BUY (Initiation)

TP upsi de (dow nsi de) 29.1%
Cl ose 4 J ul y, 2014
Price NT$2,370.00
12M Target NT$3,060.00
Previous Target N.A.
TAIEX 9,510.05
What s new ?
We initiate coverage of Largan
with a BUY rating and TP of
NT$3,060, based on 18x
2015F P/E.
Our vi ew
We anticipate upside on both
volume and ASP, with the
company to benefit from
Samsungs market share loss,
addressable market expansion
for high-end components,
multi-camera design, and spec
migration.

Company pr of i l e: Largan is a leading manufacturer of lenses used in handsets and other consumer IT products such
as digital still cameras (DSCs), multi-function printers (MFPs) and webcams.

Shar e pr i c e per f or manc e r el at i ve t o TAI EX
Lar gan (3008 TT)
823
1,023
1,223
1,423
1,623
1,823
2,023
2,223
J un-13 Sep-13 Dec-13 Mar-14
-12
8
28
48
68
88
Share Price (NT$) Performance relative to TAIEX (%)

The best i s yet t o c ome
Initiate coverage with a BUY rating: We initiate coverage of Largan with
a BUY rating and TP of NT$3,060, based on 18x 2015F EPS, with our
valuation multiple 10% higher than its historical average of 16x. In the
near-term, we believe new products from key customers will drive
strong monthly sales until the end of the year. In the mid- to long-
term, we anticipate upside on both ASP and volume, and expect
Largans share price to continue to outperform.
Market cap US$10,658.2 mn
6M avg. dail y turnover US$48.8 mn
Outstanding shares 134.1 mn
Free float 74.6%
FINI ownership 22.1%
Major shareholders
Chen Shih Ching,
5.1%
Net debt/equity (69.2%)
BVPS (2014F) NT$326.37
P/B (2014F) 7.3x
Volume upside: We expect weakening Samsung market share to lead
to share gains for Largans key customers. Meanwhile, the rise of the
e-commerce business model in the China smartphone market will help
high-end component providers penetrate the low-price smartphone
market. In terms of handset design, we expect duo-cameras (i.e. HTC
M8) and multi-cameras (Amazon) to become more prevalent, serving
as a positive driver for Largan.
Fi nanc i al out l ook (NT$ mn)
ASP upside: We expect the upward ASP trend to last into 2015/16,
driven by thinner lens structures. Apple and HTC will continue to
reduce handset thickness while increasing pixel size and pitch, while
other clients will likely use higher pixel counts. We expect Sony and
Samsung to use up to 20MP in 4Q14, with Chinese OEMs to follow.
The rise of OIS will also add more complexity given higher precision on
lens edges. Although we do not anticipate new features such as array
cameras and optical zoom to become more common in the near-term,
we note Largan is the leader in this space.
Year to
Dec
2013 2014F 2015F 2016F
Sales 27,433 43,978 59,673 69,364
Op. profit 10,781 21,051 28,004 32,282
Net profit 9,610 17,157 22,823 26,335
EPS (NT$) 72.32 127.90 170.14 196.32
EPS growth
(%)
74.3 76.9 33.0 15.4
DPS (NT$) 28.50 58.00 80.00 90.00
P/E (X) 32.8 18.5 13.9 12.1
Div. yield
(%)
1.2 2.4 3.4 3.8
Sustainable growth: We see limited threats from competition. Genius
remains slow on yield improvement and client base expansion. Korean
and Japanese makers continue to operate on smaller scales and focus
mostly on local markets. Given the continued spec upgrades, we
expect Largans dominance to be sustained.
ROE (%) 35.9 46.2 44.5 39.5

ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ARE

Primary Analyst: Jeff Pu CFA
Caitlin Huang


LOCATED IN APPENDIX A.
Yuanta does and seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in
making their investment decision.

Ear ni ngs out l ook
Volume upside - weakening Samsung market share
We expect Samsungs market share to continue to weaken, with Apple and Chinese
OEMs to take share from both ends. Please see page 17 of this report for more
details on China smartphone shipments. Given Largans dominance with Apple and
Chinese vendors (high-spec segment), its addressable market will likely expand.

Figure 35: Smartphone market share

Volume upside the e-commerce business model
The rise of the e-commerce business model in the China smartphone market is also
positive for smartphone component makers, in our view, as the addressable market
for high-end components will expand into the lower-price smartphone segment.
From OEMs perspective, e-commerce channels could lead to greater cost savings,
with lower channel costs and marketing expenses, and better inventory
management. These savings could in turn be allocated to high-end components to
strengthen product line-ups.
The addressable market for
high-end components will
expand into the lower-price
smartphone segment

For instance, the current RMB799-988 online models feature a similar spec to the
RMB2,000 models (720p display, 13MP camera, Quad-core), while the RMB1,500-
2,000 online models come with even higher-end components (1080p display,
13/16MP cam, the most advanced processor).
Tai w an: Handset s 7 J ul , 2014 Lar gan (3008 TT) Page 26 of 79

Figure 36: China smartphone sales breakdown by channel type
10%
18%
21%
8%
9%
9%
47%
37%
32%
35%
36%
38%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014F 2015F
Carriers
Traditional retailers
Direct retail channel
retailers
On-line platform

Volume upside - multi-camera design
In terms of handset design, we expect duo-cameras (i.e. HTC M8) and multi-
cameras (Amazon) to become more prevalent, serving as a positive driver for
Largan. Our supply chain checks suggest several Chinese OEMs are likely to adopt
multi-camera design for either front (detecting motion) or rear cameras (depth +
image). This will be supported by the integration of SoC (Snapdragon 801, 805) and
the improvement of software to fix calibration issues. We believe this will help
boost the total market for lenses and at the same time help sustain ASPs given
higher requirements for even front cameras. For example, Amazons VGA sensor
actually has a higher ASP due to its tiny structure but wide angle.
Our supply chain checks
suggest several Chinese OEMs
are likely to adopt multi-
camera design for either front
or rear cameras

Figure 37: HTC M8 and Amazons Fire Phone
Amazon Fire Phone HTC One M8

Launch date J ul-14 Mar-14
Display 4.7" 720p 5" 1080p
APU Qualcomm Snapdragon 800 Qualcomm Snapdragon 801
Normal cameras 13MP/f2.0, 2.1MP Duo camera (4MP, 2MP), 5MP
Additional 4 cameras VGA
Functions of multi-camera
Gesture detection and head/eye
tracking
Gesture detection and head/eye
tracking
Source: Company, Yuanta Investment Consulting

Upside to ASP
After a likely 9-10% YoY ASP expansion in 2014, we forecast its lens ASP to increase
by another 9% YoY in 2015, driven mainly by the thinner lens structures. We note
that Apple and HTC will continue to reduce handset thickness while increasing pixel
size and pitch, leading to thinner lens structure. We expect OEMs will use higher
pixel counts, and we expect to see more 20MP smartphone cameras by 4Q14, led
by Sony and Samsung, with Chinese OEMs to follow in early 2015.

Moreover, the rise of OIS will also add more complexity given higher precision on
lens edge and refraction. Although we do not anticipate new features such as array
cameras and optical zoom to become more common in the near-term, we note
Largan is the leader in this space.

Figure 38: Spec comparison for Apple iPhones 8MP camera

iPhone 4S iPhone 5 iPhone 5c iPhone 5s iPhone 6 (4.7" )
iPhone 6
(5.5" )
Smartphone
thickness 9.3mm 7.6mm 8.97mm 7.6mm around 7mm 7~7.5mm
Pixel counts 8MP 8MP 8MP 8MP 8MP 8MP
Aperture f2.4 f2.4 f2.4 f2.2 f2.2 f2.2
Sensor size 1/3.2" 1/3.2" 1/3.2" 1/3" Larger than 5s Larger than 5s
Pixel size 1.4um 1.4um 1.4um 1.5um Larger than 5s Larger than 5s
Focal length 4.28mm 4.1mm 4.1mm 4.12mm
Lens element 5 5 5 5 5 5
Image
stabilizer
No No Digital Digital Digital Optical
Figure 39: Largans shipment mix forecast

Apple and HTC will continue to
reduce handset thickness
while increasing pixel size and
pitch, leading to thinner lens
structure

Sustainable secular growth
There are, of course macro risks, which could potentially lead to an overall demand
slowdown or smartphone demand weakness. However, we see limited threats from
competitors. Following a significant improvement in iPhone 4S camera production
yield, Genius encountered yield rate problems when lens structure becomes thinner
(see Figure 6 - monthly sales chart). Our supply chain checks suggest Genius
remains slow in yield improvement for high-end lenses. Korean and Japanese
makers lack scale and tend to focus on local markets. Thus, as long as specs
continue to migrate, we do not expect strong competition for Largan, and believe it
will be able to sustain its dominance.
As long as specs continue to
migrate, we do not expect
strong competition for Largan,
and believe it will be able to
sustain its dominance.

Figure 40: Monthly revenue for Largan and Genius

Source: TEJ, Yuanta Investment Consulting

Earnings outlook
We expect Largans sales momentum to remain strong through 2014, driven mainly
by the launches of new iPhones, ASP improvement, and potential market share
gains in China. With GM increasing, we forecast 2014F EPS to reach NT$128, up
77% YoY.

For 2015F, we forecast sales to grow by 36% YoY due to a combination of a 23-24%
shipment increase and a 9-10% YoY blended ASP improvement on limited
competition and spec migration. We forecast gross margin will drop slightly YoY on
slightly higher VCM and OIS mix. Net-net, we expect EPS growth to remain strong
into 2015F, up 33% YoY.
We expect EPS growth to
remain strong into 2015F, up
33% YoY


Figure 41: Largans EPS vs. ROE, 2009-15F

(NT$)
Figure 42: Largans quarterly & annual earnings highlights (consolidated basis)
(NT$ mn) 1Q2014A 2Q2014F 3Q2014F 4Q2014F FY2014F 1Q2015F 2Q2015F 3Q2015F 4Q2015F FY2015F
Sales 6,858 9,963 11,594 15,563 43,978 11,664 12,950 15,284 19,775 59,673
COGS (3,045) (4,177) (5,386) (6,998) (19,607) (5,535) (5,854) (7,146) (8,788) (27,323)
Gross profit 3,814 5,786 6,207 8,565 24,372 6,129 7,096 8,137 10,987 32,349
Opex (601) (770) (870) (1,080) (3,321) (900) (970) (1,115) (1,360) (4,345)
Op. profit 3,213 5,016 5,337 7,485 21,051 5,229 6,126 7,022 9,627 28,004
Non-op 314 70 70 70 524 111 111 111 111 444
Pretax 3,527 5,086 5,407 7,555 21,576 5,340 6,237 7,133 9,738 28,448
Minority 0 0 0 0 0 0 0 0 0 0
Income tax (528) (1,882) (838) (1,171) (4,419) (828) (2,183) (1,106) (1,509) (5,626)
Net income 3,000 3,204 4,569 6,384 17,157 4,512 4,054 6,028 8,228 22,823
FD WA EPS (NT$) 22.36 23.89 34.06 47.59 127.90 33.64 30.22 44.93 61.34 170.14
Wtd. avg. no. of shrs 134 134 134 134 134 134 134 134 134 134
Margin analysis
Gross margin 55.6% 58.1% 53.5% 55.0% 55.4% 52.5% 54.8% 53.2% 55.6% 54.2%
Op. margin 46.9% 50.3% 46.0% 48.1% 47.9% 44.8% 47.3% 45.9% 48.7% 46.9%
Pre-tax margin 51.4% 51.0% 46.6% 48.5% 49.1% 45.8% 48.2% 46.7% 49.2% 47.7%
Effective tax rate 15.0% 37.0% 15.5% 15.5% 20.5% 15.5% 35.0% 15.5% 15.5% 19.8%
Growth (% QoQ)
Sales (26.3%) 45.3% 16.4% 34.2% 60.3% (25.1%) 11.0% 18.0% 29.4% 35.7%
Op. profit (15.7%) 56.1% 6.4% 40.2% 95.3% (30.1%) 17.2% 14.6% 37.1% 33.0%
Net income (11.9%) 6.8% 42.6% 39.7% 78.5% (29.3%) (10.2%) 48.7% 36.5% 33.0%
FD WA EPS (12.7%) 6.8% 42.6% 39.7% 76.9% (29.3%) (10.2%) 48.7% 36.5% 33.0%
Source: Company data, Yuanta Investment Consulting
Note: A * represents historical data reconciled by Yuanta


Val uat i on
We initiate coverage on Largan with a BUY, and TP of NT$3,060, based on 18x
2015F EPS and equivalent to 7.0x 2015F BVPS, using a ROE-P/B methodology.

18x 2015F EPS - NT$3,060
We use 18x P/E in our valuation, 10% higher than its historical trading average of
16x. We expect earnings to remain strong over our forecast period. We apply 2015F
earnings to better reflect Largan's long-term growth potential. Our valuation is
undemanding compared to the valuation in previous up-cycles (over 19x). We use a
P/E-based valuation methodology, as we believe the market will be primarily
focused on Largans earnings outlook as the dynamics of the smartphone industry
remain advantageous to the company. We generally adopt P/E methodology in our
valuation of most downstream component makers.

ROE P/B valuation NT$3,060
We use ROE-P/B as an alternative valuation methodology. This approach takes into
consideration both ROE and cost of equity. Our ROE-P/B valuation analysis also
yields a target price of NT$3,060, which is the same as our P/E based target price.

Figure 43: Largan- target price derivation
Target price derived from P/E valuation (NT$)
3,060
Target price derived from ROE-P/B valuation (NT$)
3,060
Final target price based on average of DCF and P/B valuation (NT$)
3,060
Source: Yuanta Investment Consulting estimates
Figure 44: 12-month forward looking P/E band chart



Figure 45: 12-month forward looking P/B band chart

Figure 46: ROE P/B methodology
COE ROE-P/B
Risk-free rate 1.4% ROE 2015F 44.5%
Risk premium 7.0% Cost of equity 8.1%
Company beta
0.96
(ROE-9)/(Cost of Equity-g)
*g =2% 7.0
Cost of equity 8.1% BVPS 2015F (NT$) 439
Fair value NT$3,060

Balance Sheet
Year as of Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Cash & ST investment 11,604 17,045 30,554 43,760 63,184
Inventories 2,532 2,693 4,043 5,634 6,602
Accounts receivable 6,581 6,823 7,832 10,627 7,602
Others 255 248 397 539 626
Current assets 20,973 26,809 42,825 60,559 78,014
LT investments 334 274 266 271 276
Net fixed assets 9,731 9,800 11,082 12,428 13,225
Others 151 1,730 1,730 1,730 1,730
Other assets 10,216 11,804 13,079 14,430 15,232
Total assets 31,188 38,614 55,904 74,989 93,246
Accounts payable 3,555 2,507 2,954 4,117 4,825
ST borrowings 93 83 271 0 0
Others 4,426 5,507 8,828 11,979 13,924
Current liabilities 8,075 8,097 12,054 16,096 18,749
Long-term debts 0 0 0 0 0
Others 49 71 71 71 71
Long-term liabilities 49 71 71 71 71
Total liabilities 8,124 8,168 12,125 16,167 18,821
Paid-in capital 1,341 1,341 1,341 1,341 1,341
Capital surplus 1,694 1,796 1,796 1,796 1,796
Retained earnings 20,029 27,308 40,642 55,684 71,288
Capital adjustment 0 0 0 0 0
Shareholders' equity 23,064 30,445 43,779 58,821 74,425
Source: Company data, Yuanta

Cash Flow
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Net profit 5,578 9,610 17,157 22,823 26,335
Depr & amortization 1,208 1,448 1,731 1,968 2,205
Change in working cap. (783) (363) 1,261 (214) 4,622
Others (2) 51 12 0 0
Operating cash flow 6,000 10,746 20,161 24,576 33,162
Capex (2,865) (1,504) (3,000) (3,300) (2,989)
Change in LT inv. (101) 9 (5) (5) (5)
Change in other assets (19) (1,593) (13) (13) (13)
Investment cash flow (2,985) (3,088) (3,018) (3,318) (3,007)
Change in share capital (2,324) (2,229) (3,823) (7,780) (10,731)
Net change in debt (356) 12 189 (271) 0
Other adjustments 0 0 0 0 0
Financing cash flow (2,679) (2,217) (3,634) (8,051) (10,731)
Net cash flow 336 5,440 13,509 13,206 19,424
Free cash flow 3,015 7,658 17,143 21,258 30,155
Profit and Loss
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Sales 20,072 27,433 43,978 59,673 69,364
Cost of goods sold (11,710) (14,472) (19,607) (27,323) (32,022)
Gross profit 8,362 12,961 24,372 32,349 37,342
Operating expenses (1,564) (2,180) (3,321) (4,345) (5,060)
Operating profit 6,798 10,781 21,051 28,004 32,282
Interest income 84 122 238 409 588
Interest expense 0 0 (6) (5) 0
Net interest 84 122 232 404 588
Net Invst.Inc/(loss) 2 (51) (12) 0 0
Net oth non-op.Inc/(loss) (73) 649 305 40 40
Net extraordinaries 0 0 0 0 0
Pretax income 6,811 11,501 21,576 28,448 32,911
Income taxes (1,234) (1,891) (4,419) (5,626) (6,576)
Net profit 5,578 9,610 17,157 22,823 26,335
EBITDA 8,005 12,229 22,782 29,972 34,488
EPS (NT$) 41.50 72.32 127.90 170.14 196.32
EPS (NT$) Bonus Adj. 41.50 72.32 127.90 170.14 196.32

Key Ratios
Year to Dec 2012 2013 2014F 2015F 2016F
Growth (% YoY)
Sales 25.6 36.7 60.3 35.7 16.2
Op profit 24.2 58.6 95.3 33.0 15.3
EBITDA 25.6 52.8 86.3 31.6 15.1
Net profit 7.3 72.3 78.5 33.0 15.4
EPS 7.9 74.3 76.9 33.0 15.4
Profitability (%)

Gross margin 41.7 47.2 55.4 54.2 53.8
Operating margin 33.9 39.3 47.9 46.9 46.5
EBITDA margin 39.9 44.6 51.8 50.2 49.7
Net profit margin 27.8 35.0 39.0 38.2 38.0
ROA 19.9 27.5 36.3 34.9 31.3
ROE 26.0 35.9 46.2 44.5 39.5
Stability

Gross debt/equity (%) 0.4 0.3 0.6 0.0 0.0
Net cash (debt)/equity (%) 49.9 55.7 69.2 74.4 84.9
Int. coverage (X) 128,513.4 302,651.4 3,484.3 5,991.6 N.A.
Int. & ST debt cover (X) 73.1 139.2 77.8 5,991.6 N.A.
Cash flow int. cover (X) 113,216.2 282,787.3 3,255.0 5,175.2 N.A.
Cash flow/int. & ST debt (X) 64.4 130.1 72.6 5,175.2 N.A.
Current ratio (X) 2.6 3.3 3.6 3.8 4.2
Quick ratio (X) 2.3 3.0 3.2 3.4 3.8
Net debt (NT$ mn) (11,511.3 (16,962.4) (30,282.4) (43,760.2 (63,184.0)
BVPS (NT$) 171.59 229.11 326.37 438.51 554.83
Valuation Metrics (x)
P/E 57.1 32.8 18.5 13.9 12.1
P/FCF 105.6 41.1 18.5 15.0 10.5
P/B 13.8 10.3 7.3 5.4 4.3
P/EBITDA 39.8 25.8 14.0 10.6 9.2
P/S 15.9 11.5 7.2 5.3 4.6

I ni t i at i on
Tai w an: El ec t r oni c Component s

7 J ul y, 2014
Ac t i on
BUY (Initiation)

TP upsi de (dow nsi de) 25.9%
Price NT$274.00
12M Target NT$345.00
TAIEX 9,510.1
What s new ?
We initiate coverage of Catcher
with a BUY rating and TP of
NT$345.
We forecast EPS to grow by
35% YoY to NT$26.6 in 2015F,
10% above the consensus
estimate.
Our vi ew
The sizable iPhone addressable
market and Catchers superior
technology will lead to upside to
the Street earnings estimates.
We believe Catcher will benefit
the most from healthy industry
supply/demand.

Company pr of i l e: Catcher manufactures aluminum and magnesium alloy casing for notebook computers, handsets
and other consumer electronics devices.

Cat c her (2474 TT)
-18
-8
2
12
22
32
42
52
62
123
173
223
273
323
J ul-13 Oct-13 J an-14 Apr-14

Upsi de f r om si zabl e addr essabl e mar k et
Initiate coverage with a BUY: We initiate coverage of Catcher with a BUY
rating and TP of NT$345, based on 13x 2015F EPS, or 2.6x 2015F
BVPS. We expect Catcher to see strong earnings expansion in 4Q14-
2015F, driven mainly by an increasing share of iPhone allocation. In
addition, industry supply/demand should remain fairly healthy into
2015, and we expect Catcher to be the major beneficiary.
Free float 70.6%
Major shareholders
Chairman Hung,
8.8%
BVPS (2014F) NT$112.87
P/B (2014F) 2.4x
Sizable iPhone TAM: We expect shipments of iPhones featuring metal-
casing will grow to 215 mn units in 2015 (out of 235 mn total iPhones),
up from 155-160 mn in 2014. Based on a casing ASP of US$30-35,
the addressable market for Catcher could reach US$6.5-7.5 bn in
2015, vs. its annual sales of US$2 bn. We expect Catcher to gain
allocation share from Jabil, which lags in technology and scale. We
estimate that Catcher will hold a 20% market share of the 4.7 iPhone
in 2015, which will represent 46% of our 2015F sales forecast. Our
2015F earnings estimate is 10% higher than the consensus forecast.
Year to
Dec
2013 2014F 2015F 2016F
Sales 43,246 55,779 74,225 86,586
Op. profit 13,916 17,956 24,944 29,521
Net profit 13,801 14,754 19,994 23,820
EPS (NT$) 18.42 19.66 26.59 31.67
EPS growth
(%)
27.0 6.8 35.2 19.1
DPS (NT$) 5.00 8.00 8.00 9.00
P/E (X) 14.9 13.9 10.3 8.7
Div. yield
(%)
1.8 2.9 2.9 3.3
Improving NB demand for Apple and Dell: Driven by more affordable
prices, we estimate that the total build plan for MacBook is 15 mn
units in 2014, compared to 12.4 mn in 2013. In addition, Dell is
performing well, supported by stable commercial replacement demand.
We believe Catcher is the prime beneficiary given its sales exposure to
MacBook (17-20%) and Dell (8-9%).
Balanced supply/demand: Our analysis suggests only 14% YoY CNC
machine installed base expansion in 2014, which could lead to more
balanced supply/demand in 2H14 as several models are launched.
With likely demand acceleration in 2015 (led by the iPhone), we expect
industry dynamics to remain fairly healthy, benefiting Catcher the
most given its faster expansion pace and new client additions.
ROE (%) 20.5 18.6 21.8 22.1

Caitlin Huang



Ear ni ngs Out l ook
Sizable iPhone TAM
We forecast shipments of iPhones featuring metal-casing will grow to 215 mn units
in 2015 (out of 235 mn total iPhones), up from 155-160 mn in 2014. Based on a
casing ASP of US$30-35, Catchers addressable market for iPhone casing could
reach US6.5-7.5 bn in 2015, vs. Catchers annual sales of around US$2 bn in 2014F.
In our view, this figure of US$6.5-7.5 bn is actually conservative when considering
the value of the iPhone 4S (stainless steel rim) and some inner parts.
We forecast shipments of
iPhones featuring metal-casing
will grow to 215 mn units in
2015

Among iPhone outer-casing parts suppliers (Hon Hai, Foxconn Tech, Catcher, Jabil),
we expect Catcher to gain share from Jabil, which lags in technology and scale.
Indeed, we note that Jabils yield rate during the initial ramp up was lower than its
peers. We estimate that Catcher will take a 20% market share in 2015, representing
46% of our 2015F sales forecast. Despite recent noise around yield-rate issues, with
iPhone shipments increasing our supply chain checks suggest that Apple might
further diversify its suppliers, and we believe Catcher is likely to be the main
supplier to gain meaningfully from this move, given its superior product quality,
large scale, and long-term partnership with Apple.
We expect Catcher to gain
share from Jabil, which lags in
technology and scale

Figure 47: Our iPhone 6 contribution estimates for Catcher
Units (mn) 2H14F 2015F
Total iPhone builds 114 235
iPhone 6 & next gen 78 215
4.7" iPhone 6 & next gen 64 161
Metal casing-4.7" iPhone 6 &
next gen (10% higher than set)
70 177
Our forecasts for Catcher 2H14F
2015F - our
forecast
2015F - 10%
from Jabil
2015F - 15%
from Jabil
Catcher's shipment (mn units) 10.0 34.8 44 53
Allocation assumption 14% 20% 25% 30%
Sales contribution 32% 46%
Upside to our sales forecast 13% 25%
Improving NB demand
On April 29, Apple updated the MacBook Air with faster processors and lower prices
(starting price is now US$899, from US$999 previously), strengthening its sales
outlook. Thus, we estimate that the industry build plan for MacBook is around 15
mn units in 2014, compared to 12.4 mn in 2013.

In addition, Dell (another key account of Catcher) is also tracking well in terms of its
target of 21 mn units in 2014, vs. 19.2 mn in 2013. We believe the momentum is
driven by the stable commercial replacement demand as Windows XP support is
discontinued. We believe Catcher is a prime beneficiary given its sales exposure to
MacBook (17-20%) and Dell (8-9%).
Tai w an: El ec t r oni c Component s 7 J ul , 2014 Cat c her (2474 TT) Page 35 of 79

Figure 48: Our estimated build plans for MacBook and Dells NBs

Industry supply expansion remains slow
On an aggregate basis, we believe there could be 14% YoY CNC machine additions
in 2014 by major vendors. Among metal casing vendors, Catcher is the most
aggressive casing maker in CNC expansion, while others remain fairly
conservative/disciplined. However, we note that the BYD-Es number is
underestimated, as the company can rent CNC machines from many small local
enterprises. With limited capacity addition this year and demand acceleration in
2015 (led by Apples iPhone), we expect industry supply/demand to remain very
healthy, with Catcher to benefit the most.
We expect industry
supply/demand to remain very
healthy, with Catcher to benefit
the most

Figure 49: Industry CNC additions for major vendors
CNC Machine capacity (k units, year-end) 2012 2013 2014F
Catcher 14.0 16.0 20.0
Foxconn Tech 12.0 15.0 16.0
Hon Hai and FIH 8.0 9.5 11.0
Casetek 4.0 5.5 6.5
J uteng - Compal 2.5 3.0 3.5
Green Point / J abil 6.5 8.0 8.0
BYD-E 2.0 4.0 4.8
Total 49.0 61.0 69.8
YoY growth 38% 24% 14%


Figure 50: Industry demand analysis
(Units: mn) 2012 2013 2014F 2015F
Smartphone using CNC
HTC 13 11 9 8
Sony 5 9 14 17
RIM 8 7 3 2
Apple 136 153 171 227
Samsung 0 0 2 5
Chinese brands 4 6 20 30
Subtotal 166 186 218 288
Growth (YoY) 28% 12% 17% 32%
Tablets using CNC
iPads 66 74 71 65
Others 3 6 7 8
Total 69 80 78 73
Growth (YoY) 64% 17% -3% -6%
NB using CNC
MacBook 13.5 12.4 14.9 15.2
Other ultrabooks 8.0 7.5 9.0 10.0
Total 21.5 19.9 23.9 25.2
Growth (YoY) 46% -7% 20% 5%
Earnings outlook
We estimate the iPhone will
account for 16% and 46% of
Catchers 2014 and 2015 sales
respecti vely
Driven by a faster ramp up of the iPhone 6 and stable NB demand, we expect
Catchers top-line growth to accelerate to 29% YoY in 2014, followed by 33% YoY in
2015. In our earnings model, we estimate the iPhone will account for 16% and 46%
of Catchers 2014 and 2015 sales respectively.

In addition, NB demand appears to be stabilizing following the retirement of
Windows XP and a slowdown in tablet demand. We conservatively forecast NB PC
casing sales to be flat in 2014 and down 4% YoY in 2015. On the other hand, we
believe that the iPad mini will be the key drag due to slowing tablet demand and
limited spec changes into the next-generation iPad mini with Retina (touch ID is the
only difference).

Figure 51: Catchers EPS vs. ROE, 2009-15F

(NT$)


Figure 52: Quarterly highlights (consolidated basis)
Sales 10,416 12,519 13,836 19,008 55,779 16,196 17,102 18,496 22,431 74,225
COGS (6,112) (7,309) (8,234) (10,912) (32,568) (9,449) (9,960) (10,683) (12,748) (42,841)
Gross profit 4,303 5,210 5,602 8,096 23,211 6,746 7,141 7,813 9,683 31,384
Opex (1,095) (1,220) (1,300) (1,640) (5,255) (1,465) (1,545) (1,605) (1,825) (6,440)
Operating profit 3,208 3,990 4,302 6,456 17,956 5,281 5,596 6,208 7,858 24,944
Non-operating profit 651 215 215 215 1,294 250 250 250 250 999
Pre-tax profit 3,859 4,205 4,517 6,671 19,250 5,531 5,846 6,458 8,107 25,943
Income tax (872) (1,387) (903) (1,334) (4,497) (1,106) (1,929) (1,292) (1,621) (5,948)
Net income 2,984 2,817 3,613 5,336 14,754 4,425 3,917 5,166 6,486 19,994
FD WA EPS (NT$) 3.98 3.75 4.82 7.11 19.66 5.88 5.21 6.87 8.62 26.59
Wtd. avg. no. of shares 752 752 752 752 752 752 752 752 752 752
Margin analysis
Gross margin 41.3% 41.6% 40.5% 42.6% 41.6% 41.7% 41.8% 42.2% 43.2% 42.3%
Operating margin 30.8% 31.9% 31.1% 34.0% 32.2% 32.6% 32.7% 33.6% 35.0% 33.6%
Pre-tax margin 37.0% 33.6% 32.6% 35.1% 34.5% 34.2% 34.2% 34.9% 36.1% 35.0%
Growth (% QoQ)
Sales (20.6%) 20.2% 10.5% 37.4% 29.0% (14.8%) 5.6% 8.2% 21.3% 33.1%
Operating profit (22.0%) 24.4% 7.8% 50.1% 29.0% (18.2%) 6.0% 10.9% 26.6% 38.9%
Net income (14.1%) (5.6%) 28.3% 47.7% 6.9% (17.1%) (11.5%) 31.9% 25.5% 35.5%
EPS (14.2%) (5.6%) 28.3% 47.7% 6.8% (17.3%) (11.5%) 31.9% 25.5% 35.2%
Source: Company data, Yuanta Investment Consulting estimates


Val uat i on
We initiate coverage of Catcher with a BUY rating, and set our target price at
NT$345, based on 13x 2015F EPS, or 2.6x 2015F BVPS.

13x 2015F EPS - NT$345
Our target multiple of 13x P/E is 10% higher than its historical trading average over
the past five years, given its robust earnings outlook for 2014 and 2015. We use a
P/E-based valuation methodology, as we believe the market will be primarily
focused on Catcher's earnings outlook as the dynamics of the smartphone and NB
industry change to its advantage. We use 2015 estimates to better capture
Catchers growth potential in the next 12 months.

ROE P/B valuation NT$345
consideration both ROE and cost of equity. The ROE-P/B valuation analysis yields
NT$345, which is the same as our P/E based target price.

Figure 53: Catcher - target price derivation
345
345
345




COE ROE-P/B
Company beta 1.2 (ROE-g/(Cost of equity - g) 2.6
Fair value 345
Source:TEJ; Yuanta Investment Consulting

Balance Sheet
Year as of Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Inventories 2,449 3,873 5,428 7,140 8,330
Others 2,347 1,325 1,709 2,274 2,653
Current assets 66,633 65,347 78,545 89,430 98,371
LT investments 1,718 1,991 2,294 2,594 2,894
Net fixed assets 30,998 34,903 41,311 41,621 40,227
Others 1,577 3,139 3,139 3,139 3,139
Other assets 34,293 40,032 46,744 47,354 46,260
Total assets 100,926 105,379 125,289 136,784 144,631
ST borrowings 28,767 20,648 26,746 19,814 6,829
Others 4,636 6,144 7,925 10,545 12,301
Long-term debts 2,863 0 0 0 0
Others 111 124 124 124 124
Long-term liabilities 2,974 124 124 124 124
Paid-in capital 7,507 7,507 7,521 7,521 7,521
Capital surplus 17,552 17,956 17,956 17,956 17,956

Cash Flow
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Net profit 10,890 13,801 14,754 19,994 23,820
Change in working cap. (3,417) 218 (2,266) (4,650) 19,423
Others (114) (56) (3) 0 0
Capex (6,742) (9,084) (12,600) (8,000) (7,000)
Change in LT inv. (179) (216) (300) (300) (300)
Net change in debt 6,225 (10,969) 6,098 (6,932) (12,985)
Financing cash flow 540 (12,300) 2,358 (12,949) (19,001)
Net cash flow 5,004 (4,020) 8,134 1,786 25,336
Free cash flow 4,464 8,280 5,776 14,735 44,337
Profit and Loss
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Sales 37,029 43,246 55,779 74,225 86,586
Gross profit 16,039 18,321 23,211 31,384 36,606
Interest expense (303) (291) (261) (256) (147)
Net interest 338 367 440 519 832
Net Invst.Inc/(loss) 114 56 3 0 0
Net oth non-op.Inc/(loss) 1,341 3,190 851 480 480
Pretax income 13,951 17,528 19,250 25,943 30,833
Income taxes (3,042) (3,711) (4,497) (5,948) (7,013)
Net profit 10,890 13,801 14,754 19,994 23,820
EBITDA 16,433 19,141 24,195 32,680 37,962
EPS (NT$) 14.50 18.42 19.66 26.59 31.67
EPS (NT$) Bonus Adj. 14.50 18.42 19.66 26.59 31.67

Key Ratios
Year to Dec 2012 2013 2014F 2015F 2016F
Growth (% YoY)
Sales 3.1 16.8 29.0 33.1 16.7
Op profit (8.0) 14.5 29.0 38.9 18.4
EBITDA 4.2 16.5 26.4 35.1 16.2
Net profit 2.0 26.7 6.9 35.5 19.1
EPS 2.3 27.0 6.8 35.2 19.1
Profitability (%)

Gross margin 43.3 42.4 41.6 42.3 42.3
EBITDA margin 44.4 44.3 43.4 44.0 43.8
ROA 11.5 13.4 12.8 15.3 16.9
ROE 18.6 20.5 18.6 21.8 22.1
Stability

Int. coverage (X) 47.1 61.1 74.8 102.3 211.4
Int. & ST debt cover (X) 0.5 0.9 0.7 1.3 4.4
Cash flow int. cover (X) 38.5 65.8 71.8 90.1 352.7
Cash flow/int. & ST debt (X) 0.4 0.9 0.7 1.2 7.4
Current ratio (X) 1.8 2.1 1.9 2.4 3.5
Quick ratio (X) 1.7 1.9 1.8 2.2 3.2
Net debt (NT$ mn) (15,033.0 (21,994.8) (24,030.9) (32,749.0 (71,069.9)
BVPS (NT$) 81.51 98.31 112.87 131.20 154.88
P/E 18.9 14.9 13.9 10.3 8.7
P/FCF 46.1 24.8 35.6 14.0 4.6
P/B 3.4 2.8 2.4 2.1 1.8
P/EBITDA 12.5 10.7 8.5 6.3 5.4
P/S 5.6 4.7 3.7 2.8 2.4

I ni t i at i on
Tai w an: Bat t er i es & Component s

7 J ul y, 2014
Ac t i on
HOLD-OPF (Initiation)

TP upsi de (dow nsi de) (0.3)%
Price NT$188.50
12M Target NT$188.00
TAIEX 9,510.05
What s new ?
We initiate coverage on Simplo
with a HOLD-OPF rating and a
TP of NT$188.
EPS growth should improve
slightly in 2014-15F (around
9% YoY), vs. the EPS CAGR of
8% in 2009-13.
Our vi ew
We believe margin expansion
remains uncertain with the
rising mix of polymer/prismatic
and decreasing NB cell usage.
However, we do not see Chinese
vendors as a threat to Simplos
Apple businesses.

Company pr of i l e: Simplo is the world's largest assembler of notebook batteries. Its major clients include HP, Dell,
Apple, Acer and Asus.

Si mpl o (6121 TT)
-11
-6
-1
4
9
14
19
24
113
123
133
143
153
163
173
183
193
203

Ri sk /r ew ar d appear s bal anc ed
Initiate coverage with a HOLD-OPF rating: Simplos margins have been
negatively impacted after the iPad launched in 2010. We now expect
its margins to stabilize, but further recovery will largely be driven by
its non-IT business, which remains insignificant at present. Given our
expectations of around 9% YoY earnings growth in 2014 and 2015,
with an ROE in the high teens, we believe the stocks risk/reward is
fairly balanced at the current level. We derive a TP of NT$188, based
on the average of 14x 2015F EPS and 2.8x 2015F BVPS.
Free float 67.2%
Major shareholders
Hon Hai,
9.0%
BVPS (2014F) NT$65.84
P/B (2014F) 2.9x
Investment postives:1) While Apple is diversifying its supplier list by
adding Desay as an iPhone supplier, we do not expect Simplo to be
impacted, as Apple needs to rely on Simplos stable yield and quality.
We thus expect Simplos iPhone 6 allocation share to be 40-45%, vs.
around 33% in the iPhone 5s. We see a 40-45% allocation as the limit
considering Desays leading position in this space; 2) battery ASP is
also likely to rise slightly in the new iPhone models, considering the
higher battery capacity and thinner structure; and 3) easing tablet
cannibalization in NBs (however, NB cell usage is decreasing).
Year to
Dec
2013 2014F 2015F 2016F
Sales 54,736 60,951 68,568 73,752
Op. profit 3,678 4,060 4,491 4,569
Net profit 3,236 3,510 3,819 3,851
EPS (NT$) 10.50 11.38 12.39 12.49
EPS growth
(%)
(2.0) 8.5 8.8 0.8
DPS (NT$) 6.80 7.20 7.50 7.50
P/E (X) 18.0 16.6 15.2 15.1
Div. yield
(%)
3.6 3.8 4.0 4.0
Why not a Buy? With revenue unlikely to rise significantly in 2015 due
to limited share growth from a high base, margin will be the key
upside area, in our view. However, margin expansion faces challenges,
due to decreasing cell usage, the increasing mix of lower-margin
prismatic/polymer batteries, and rising single-cell smartphone
business. Moving to non-IT (EV/LEV) appears to be a viable solution,
and Simplo has set up a new business unit to focus on this. The key
problem here is the addressable market is small (lithium-type) and
fragmented, and we see limited contribution in the near to mid-term.
ROE (%) 17.8 17.9 18.1 17.0

Caitlin Huang



Margin expansion is the key for upside
With a fairly high market share in the higher-margin NB market (25-30% share),
iPad (50%), iPad mini (40%), and iPhone (around 40% in iPhone 6), further revenue
upside appears limited, and margin expansion will be the key for driving
ROE/earnings growth. We forecast relatively flat gross margin in 2014F and 2015F
and believe the likelihood for meaningful margin expansion is slim, given
decreasing cell usage (NB), increasing lower-margin prismatic/polymer batteries
(NB), and rising mix of single-cell smartphone business. On the other hand, we see
limited impact on cylindrical battery cell supply tightness to Simpo given its large
scale.
With a high share in the NB
market, further revenue upside
appears limited, and margin
expansion will be the key for
driving ROE/earnings growth

We see the move to non-IT (EV/LEV) as a viable solution to boost margins, but we
note that the market is small and fragmented. In all, with revenue unlikely to
expand significantly in 2015F and margin likely to remain relatively flat, we see
limited earnings drivers in the near to mid-term.

Figure 57: Gross margin trend

Potentially higher share and ASP for iPhone 6
While Apple is diversifying its supplier list by adding Desay as an iPhone supplier,
we do not expect Simplo to be impacted, as Apple will still need to rely on Simplos
stable yield and the good quality of its highly automated process. On the other
hand, other battery packers (including Desay, Dynapack, Sunwoda, Celxpert) are
behind Simplo in automation, according to our supply chain checks. Thus, we
believe the victim of Desays entry is likely to be Dynapack. We expect Simplos
market share for the iPhone 6 to be 40-45%, vs. 33% in the iPhone 5s. From an ASP
perspective, we believe ASP will increase slightly (3-5%) into next iPhone cycle,
given higher battery capacity (iPhone 6: 1,820mAh and 2,800mAh, vs. iPhone 5s
1470mAh) and thinner structure.
While Apple is diversifying its
supplier list by adding Desay
as an iPhone supplier, we do
not expect Simplo to be
impacted

Tai w an: Bat t er i es & Component s 7 J ul , 2014 Si mpl o (6121 TT) Page 43 of 79

Figure 58: iPhone battery comparison
iPhone 5s iPhone 6 (4.7 ) iPhone 6 (5.5 )

Battery
capacity
1470mAh 1820mAh 2800mAh
Positives and negatives for NB business

Positive - easing tablet cannibalization: Aside from smartphones, the decreasing
mix of NB (while tablets increased) led to margin pressure to Simplo. However,
we believe the trend will stabilize, as cannibalization from NBs is easing with a
slowdown in the tablet market. We note that one NB typically features 3-6 cells,
while a tablet has only 1-3 cells.
Negative average cells per NB are declining: Despite stabilization in the NB
market, we forecast the average number of cells per NB will keep declining,
driven by the thin and light trend, plus higher-capacity cells. This will lead to
less value for packers.
Negative rising mix of low-margin slim-type batteries: The rise of slim-type
NBs will increase the demand for slim-type batteries (polymer is the slimmest,
followed by prismatic). However, the gross margin of the polymer and prismatic
batteries could be lower than that of the cylindrical battery, given less
complicated parallel-connecting/serial-connecting structure.

Figure 59: Average cells by type in NB

Source: B3, Yuanta Investment Consulting

Figure 60: NB breakdown by battery type

Long-term opportunities - e-bike and e-bus
We believe the company has seen progress in e-bus (China) and e-bike (Taiwan, US,
Japan), and has set up a new business unit to focus on non-IT applications. For the
e-bike and e-bus markets, we expect underlying demand to increase in the long
term given lead-acid replacement and government policy. Technology-wise, the
entry barrier for EV battery is higher than that for IT devices due to higher power
current, complex parallel-connecting/serial-connecting (one EV could have as
many as 7-8 k batteries), battery management system, and strict environmental
tests.

Simplo entered this space by first focusing on e-bike batteries. According to our
supply chain checks, Simplo has landed deals with major bike brands in Taiwan,
Japan and US. For the EV market, we believe general EVs battery businesses will be
handled by car makers and battery cell makers. For e-bus, although we believe
Simplo has landed e-bus projects for local cities in China, we believe the e-bus
market will be difficult to access in China (the market for Simplo) for non-China
vendors given its highly localized nature.
We expect underlying demand
to increase in the long term for
e-bikes and e-buses
According to our supply chain
checks, Simplo has landed
deals with major bike brands in
Taiwan, Japan and US

The sales contribution from its e-bike and EV businesses may reach around 5% of
sales in 2014F.

Figure 61: Global e-bike market forecast

Figure 62: China e-Bus market forecast

Source: ITRI, Yuanta Investment Consulting
Earnings outlook
We expect Simplo to post net profit of NT$3.5 bn in 2014 (up 8.5% YoY) and EPS of
NT$11.4 with sales of NT$60.95 bn (up 11.4% YoY). Segment-wise, we expect
Simplos smartphone business will be the key sales driver, growing 92% in 2014F,
driven by iPhone strength and allocation gains. After sales declining for three
consecutive years, we expect its NB business to stabilize in 2014F, and the trend
should last into 2015F, on the back of a broader market recovery. EV/LEV business
is likely to remain low in terms of revenue contribution, accounting for 3% and 5%
of 2014F and 2015F sales respectively.

Despite 11-22% sales growth in 2009-2012, Simplos gross margin has declined
over the same period. Aside from competition, we believe this decline is mainly due
to its product mix shifting towards single/two-cell battery products. Although we
expect its gross margin decline to turn more moderate, we forecast its earnings
expansion to be slow (around 9% YoY in 2014-15F), while further margin
improvement may translate to earnings upside.

Figure 63: Simplos EPS and ROE

Figure 64: Simplos revenue breakdown

(NT$)


Figure 65: Simplos quarterly & annual earnings highlights (consolidated basis)
Sales 12,128 13,630 16,005 19,189 60,951 14,634 15,267 17,404 21,262 68,568
COGS (10,746) (12,097) (14,231) (17,027) (54,102) (13,020) (13,574) (15,488) (18,964) (61,046)
Gross profit 1,381 1,533 1,774 2,162 6,850 1,614 1,693 1,916 2,298 7,521
Opex (600) (650) (730) (810) (2,790) (680) (710) (770) (870) (3,030)
Op. profit 781 883 1,044 1,352 4,060 934 983 1,146 1,428 4,491
Non-op 176 86 86 86 435 94 94 94 94 377
Pretax 957 969 1,130 1,438 4,495 1,028 1,077 1,240 1,523 4,868
Minority 1 0 0 0 1 0 0 0 0 0
Income tax (202) (281) (215) (288) (986) (206) (291) (248) (305) (1,049)
Net income 756 688 915 1,151 3,510 823 786 992 1,218 3,819
FD WA EPS (NT$) 2.45 2.23 2.97 3.73 11.38 2.67 2.55 3.22 3.95 12.39
Wtd. avg. no. of shrs 308 308 308 308 308 308 308 308 308 308
Margin analysis
Gross margin 11.4% 11.2% 11.1% 11.3% 11.2% 11.0% 11.1% 11.0% 10.8% 11.0%
Op. margin 6.4% 6.5% 6.5% 7.0% 6.7% 6.4% 6.4% 6.6% 6.7% 6.6%
Pre-tax margin 7.9% 7.1% 7.1% 7.5% 7.4% 7.0% 7.1% 7.1% 7.2% 7.1%
Growth (% QoQ)
Sales (29.6%) 12.4% 17.4% 19.9% (23.7%) 4.3% 14.0% 22.2%
Op. profit (39.0%) 13.0% 18.2% 29.6% (30.9%) 5.3% 16.5% 24.7%
Net income (26.9%) (9.0%) 33.0% 25.7% (28.5%) (4.4%) 26.1% 22.8%
FD WA EPS (26.9%) (9.0%) 33.0% 25.7% (28.5%) (4.4%) 26.1% 22.8%


Val uat i on
We assign Simplo a HOLD-OPF rating and set our target price at NT$188, which is
based on the average of 14x 2015F EPS and 2.8x 2015F BVPS on ROE-P/B
methodology.

14x 2015F EPS - NT$173
14x 2015F P/E is in line with the stocks historical trading average over the past
five years. We expect Simplo to post 2014-15F EPS growth of around 9% YoY in
both years, which is similar to its 2009-13 EPS CAGR of 8%. We therefore believe
14x is a fair target multiple for Simplo.

ROE-P/B NT$202
consideration both ROE and cost of equity. The ROE-PB valuation analysis yields
NT$202, which is also equivalent to 2.8x 2015F BVPS.

Figure 66: Simplo - target price derivation
173
202
188




COE ROE P/B
Company beta
0.9
(ROE-g)/(Cost of equity-g)
* g =2% 2.8
Fair value 202
Source: TEJ; Yuanta Investment Consulting

Balance Sheet
Year as of Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Inventories 6,477 6,400 7,411 8,363 9,053
Others 391 293 326 367 394
Current assets 29,120 33,209 32,644 35,811 36,522
LT investments 156 95 145 175 205
Net fixed assets 5,854 6,520 6,836 7,149 6,968
Others 251 634 634 634 634
Other assets 6,262 7,249 7,615 7,958 7,807
Total assets 35,382 40,458 40,259 43,769 44,329
ST borrowings 3,684 3,189 3,157 3,008 563
Others 3,810 4,550 5,067 5,700 6,131
Others 424 619 619 619 619
Paid-in capital 3,083 3,083 3,083 3,083 3,083
Capital surplus 3,304 3,449 3,449 3,449 3,449

Cash Flow
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Net profit 3,303 3,236 3,510 3,819 3,851
Depr & amortization 574 918 1,048 1,202 1,254
Change in working cap. 97 1,485 944 (497) 6,755
Others 6 13 0 0 0
Capex (1,468) (1,568) (1,350) (1,500) (1,072)
Change in LT inv. (27) 48 (50) (30) (30)
Change in other assets (40) (397) (15) (15) (1)
Net change in debt 459 (300) (32) (149) (2,445)
Financing cash flow (1,435) (2,026) (2,129) (2,369) (4,757)
Net cash flow 1,009 1,708 1,959 610 6,000
Free cash flow 2,444 3,734 4,087 2,979 10,757
Profit and Loss
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Sales 58,833 54,736 60,951 68,568 73,752
Gross profit 7,089 6,166 6,850 7,521 7,669
Net interest 128 28 137 177 275
Net Invst.Inc/(loss) (5) (12) 0 0 0
Net oth non-op.Inc/(loss) 185 539 298 200 50
Pretax income 4,599 4,234 4,495 4,868 4,894
Income taxes (1,297) (998) (986) (1,049) (1,043)
Net profit 3,303 3,236 3,510 3,819 3,851
EBITDA 4,865 4,596 5,108 5,693 5,823
EPS (NT$) 10.71 10.50 11.38 12.39 12.49
EPS (NT$) Bonus Adj. 10.71 10.50 11.38 12.39 12.49

Key Ratios
Year to Dec 2012 2013 2014F 2015F 2016F
Growth (% YoY)
Sales 22.3 (7.0) 11.4 12.5 7.6
Op profit 6.0 (14.3) 10.4 10.6 1.7
EBITDA 8.0 (5.5) 11.2 11.4 2.3
Net profit (10.4) (2.0) 8.5 8.8 0.8
EPS (17.8) (2.0) 8.5 8.8 0.8
Profitability (%)

Gross margin 12.0 11.3 11.2 11.0 10.4
EBITDA margin 8.3 8.4 8.4 8.3 7.9
ROA 10.0 8.5 8.7 9.1 8.7
ROE 19.8 17.8 17.9 18.1 17.0
Stability

Int. coverage (X) 47.0 66.4 57.7 64.2 110.7
Current ratio (X) 1.7 1.6 1.7 1.7 1.8
Quick ratio (X) 1.3 1.3 1.3 1.3 1.4
Net debt (NT$ mn) (5,031.4) (7,234.5) (9,225.7) (9,985.3) (18,430.2)
BVPS (NT$) 56.36 61.26 65.84 71.03 76.02
P/E 17.6 18.0 16.6 15.2 15.1
P/FCF 23.8 15.6 14.2 19.5 5.4
P/B 3.3 3.1 2.9 2.7 2.5
P/EBITDA 11.9 12.6 11.4 10.2 10.0
P/S 1.0 1.1 1.0 0.8 0.8

I ni t i at i on
Tai w an: Handset s

7 J ul y, 2014
Ac t i on
SELL (Initiation)

Price NT$138.50
12M Target NT$88.00
TAIEX 9,510.05
What s new ?
We initiate coverage of HTC
with a SELL rating and a TP of
NT$88.
After a strong 2Q14, we project
HTC will fall to breakeven in
3Q14F, and post losses in
4Q14F, 2015F, and 2016F.
Our vi ew
New models lack wow factors,
which may place pressure on
2H14 shipments/sales.
Low/high-end structural
problems for HTC are likely to
persist, with the situation to
deteriorate in 2015/16.

Company pr of i l e: HTC manufactures and markets Microsoft Windows and Android based smartphones.
HTC (2498 TT)
-47
-42
-37
-32
-27
-22
-17
-12
-7
-2
119
139
159
179
199
219

Headw i nds t o c ont i nue
Initiate with a SELL: We expect 2Q14 will be the revenue/profit peak for
2014, and forecast HTC to post losses over our forecast period.
Historically, it is difficult to reverse a downtrend when a brand starts to
fall, and this typically leads to a vicious cycle, where declining shipments
lead to marketing and R&D budget cuts, impairing competitiveness
further. The stock is trading at 1.6x 2015F P/B, which we believe is
unjustified as there is no visibility of a turnaround and diminishing
acquisition value. Our TP of NT$88 is based on 1.0x 2015F BVPS.
Free float 74.56%
Major shareholders
Wei-Chih Investment,
5.1%
BVPS (2014F) NT$91.19
P/B (2014F) 1.5x
Facing pressure in 2H14: With a shortening flagship lifecycle, we believe
HTC will repeat the pattern of shipments peaking in 2Q every year,
unless it implements a new product strategy. While it plans to launch
several new models, such as the M8 Prime, A21, Google tablet, and
smartwatches, we believe none offer much in terms of wow factors.
Hence, we expect 3Q/4Q14 sales to decline by 26%/17% QoQ.
Year to
Dec
2013 2014F 2015F 2016F
Sales 203,403 186,321 168,826 156,137
Op. profit (3,971) (1,306) (2,951) (4,184)
Net profit (1,324) (1,053) (2,531) (3,722)
EPS (NT$) (1.57) (1.25) (3.01) (4.43)
EPS growth
(%)
N/A N/A N/A N/A
DPS (NT$) 0.00 0.00 0.00 0.00
P/E (X) N/A N/A N/A N/A
Div. yield
(%)
0.0 0.0 0.0 0.0
High-end challenges: The high-end market is simply not large enough for
Apple, Samsung, Sony, and HTC to co-exist. Samsung's S5 raised
competition with the M8, and the iPhone 6 launch in late 3Q14 could
make the situation worse for HTC. More importantly, as smartphones have
become increasingly adopted by the general public (vs. early adopters in
the past), marketing and branding are now a major factor in purchase
decisions.
Problems in the mid/low-end space and tablets: Despite cooperating with
MTK and ODMs, HTCs mid/low-end shipments remain lackluster given
the dramatic price declines in the China market in 1H14 (4G market share
war and 3G inventory clearance). In our view, the Google Nexus tablet will
not help, given the late launch schedule (Oct) and high price tag. We
believe Google is more concerned about the quality of its Nexus tablets,
and is not as focused on volume.
ROE (%) (1.7) (1.4) (3.4) (5.2)

Caitlin Huang



Facing pressure in 2H14
We estimate HTCs 2Q14 smartphone shipments were around 6.4 mn units (vs 3.7
mn in 1Q14). 2Q14 could be the sales/profit peak of 2014 (similar to 2013), and
we expect 3Q14 sales to decline QoQ, given our expectations of HTC One M8
demand slowing. Although we agree the HTC One M8 is a solid product, Samsungs
aggressive marketing and market saturation have placed pressure on HTC.
We estimate HTCs 2Q14
smartphone shipments were
around 6.4 mn units (vs 3.7 mn
in 1Q14), and forecast its
shipments to drop to 5.2 mn
and 4.4 mn units in 3Q14 and
4Q14 respectively

While HTC plans to launch several new models, such as the M8 Prime (APQ8084,
13MP duo cam), A21 (low-end), Google tablet and smartwatches, we believe none
offer much in terms of wow factors. Hence, we expect its 3Q14F and 4Q14F
shipments to decline by 18% and 15% QoQ respectively, implying a return to loss-
making status in 4Q14.

The market is just not big enough
We believe that the high-end market is simply not large enough for Apple, Samsung,
Sony, and HTC to co-exist. In 2Q14, we believe Samsung's S5 launch weakened
HTC M8s momentum significantly in many regions since late-April, due to
Samsungs aggressive marketing campaign. Samsung's S5 raised competition with
the M8, and the iPhone 6 launch in late 3Q14 could make the situation worse for
HTC (please see page 12 of this report for details on iPhone 6's impact), especially
considering HTCs weak product line-up in 2H14, in our view. More importantly, as
smartphones have become increasingly adopted by the general public (vs. early
adopters in the past) marketing and branding are now a major factor in purchase
decisions. As such, we believe revamping its marketing and execution strategy will
be the key for recovery.
We believe that the high-end
market simply is not big
enough for Apple, Samsung,
Sony, and HTC to co-exist

Figure 70: HTCs sales vs. product cycles
0
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Monthly revenue Share price
NT$ NT$
Desire
Droid Incredible
EVO 4G
Desire HD,
Desire Z,
ThunderBo
lt
Rhyme,
Sensation,
Rezound,
Vivid
One X
Diamond
Hero
Nexus
M7
M8


Tai w an: Handset s 7 J ul , 2014 HTC (2498 TT) Page 53 of 79

Figure 71: Our projections for HTCs new products in 2H14
iPhone 6 Galaxy Note 4 M8 Prime Google Tablet A21
Estimated production
schedule
14-J ul 14-Sep 14-Sep 14-Sep 14-Aug
Display 4.7" 326ppi
5.9" QHD Blended
AMOLED
5.5" WQHD Display 8.9" 2,048x1440 4.7" QHD
Storage 32G/64G 32G/64G 16G/32G/64G 16G/32GB 8G
APU Exynos 64-bit Exynos 64-bit APQ8084 Tegra K1 MSM8916
DRAM 3GB LPDDR3 3GB LPDDR3 3GB LPDDR3 2GB 1G DDR
Camera 3MP, 20MP or 16MP OIS 3MP, 20MP or 16MP OIS 5MP, Duo camera 8MP OIS, 3MP 5MP, VGA
Battery TBD TBD 2800mAh NA 2100mAh
Thickness around 9mm around 9mm around 8mm around 8mm around 10mm
Casing Metal casing Plastic Metal casing Metal casing Plastic
Problems in the mid/low-end space and tablets
Despite recently implemented strategies (using MediaTek and ODMs to lower cost),
HTCs mid/low-end momentum remains lackluster. We believe the dramatic price
declines of China local smartphones have capped HTC's momentum in China. Since
1Q14, Chinese vendors aggressively launched low-priced 4G phones for China
Mobiles RMB1,000 4G smartphone target, which on the other hand led to the price
decline of 3G phones.
We believe the dramatic price
declines of China local
smartphones have capped
HTC's momentum in China

We believe that pricing is the key that HTC needs to focus on, and it may need to
abandon its brand premium and/or build a new business model to improve its cost
structure (i.e. e-commerce). HTC sells its mid-end flagship model, Desire 816 (5.5
720p), at RMB1799, but we note that Xiaomi, Huawei, ZTE, and Coolpad offer
models for RMB799-1599 with similar spec.

For tablets, we believe that Google places more priority on the quality of its Nexus
models rather than volume, which is evidenced by its second-generation Nexus 7
(decent spec, but priced at US$229).

Earnings outlook
As mentioned above, we expect HTC to report breakeven in 3Q14 and quarterly
losses in 4Q14, as sales of the HTC One M8 will decline as this model approaches
the end of its life cycle. In addition, the demand for new products is likely to be
lukewarm. The launch of a new wave of flagship devices, including the iPhone 6
(4.7 and 5.5), Galaxy Note 4 (2k bended AMOLED, 64-bit APU, 20MP), will make
the high-end smartphone market even more crowded. The combination of these
factors could lead to a sales decline in 2H14, in our view. OPM could fall
continuously, due to a smaller operational scale and weakening high-end sales.
We expect HTC to report
quarterly losses in 4Q14, as
sales of the HTC One M8 will
decline as this model
approaches the end of its life
cycle

We expect the situation to get even worse in 2015, due to industry growth
deceleration, Apples large-screen product cycles, and more competition from
other vendors. Historically, no player could catch up after missing one to two cycles.
(i.e. Palm, Nokia, Motorola, and RIM). As such, we expect HTC to continue to post
losses in 2015, unless 1) it can deliver more wow factors in its products with
effective marketing; 2) Samsung or Apple make big mistakes in their next product
launch; and 3) HTC moves earlier in the next technology migration phase (i.e. 5G).

Figure 72: HTCs EPS vs. ROE, 2009-15F

(NT$)
Figure 73: HTCs quarterly & annual earnings highlights (consolidated basis)
(NT$ mn) 1Q2014 2Q2014F 3Q2014F 4Q2014F FY2014F 1Q2015F 2Q2015F 3Q2015F 4Q2015F FY2015F
Sales 33,121 65,060 48,135 40,005 186,321 32,282 57,345 43,065 36,134 168,826
COGS (26,157) (50,830) (38,457) (32,471) (147,915) (26,541) (45,515) (34,688) (29,534) (136,277)
Gross profit 6,964 14,230 9,678 7,534 38,405 5,741 11,830 8,377 6,601 32,549
Opex (9,011) (11,800) (9,600) (9,300) (39,711) (8,000) (10,500) (8,700) (8,300) (35,500)
Op. profit (2,048) 2,430 78 (1,766) (1,306) (2,259) 1,330 (323) (1,700) (2,951)
Non-op 166 330 134 134 764 123 123 123 123 492
Pretax (1,881) 2,760 212 (1,632) (542) (2,136) 1,453 (200) (1,576) (2,458)
Minority 0 0 0 0 0 0 0 0 0 0
Income tax 0 (500) (11) 0 (511) 0 (73) 0 0 (73)
Net income (1,881) 2,260 201 (1,632) (1,053) (2,136) 1,381 (200) (1,576) (2,531)
FD WA EPS (NT$) (2.24) 2.69 0.24 (1.94) (1.25) (2.54) 1.64 (0.24) (1.88) (3.01)
Wtd. avg. no. of shrs 840 840 840 840 840 840 840 840 840 840
Margin analysis
Gross margin 21.0% 21.9% 20.1% 18.8% 20.6% 17.8% 20.6% 19.5% 18.3% 19.3%
Op. margin (6.2%) 3.7% 0.2% (4.4%) (0.7%) (7.0%) 2.3% (0.7%) (4.7%) (1.7%)
Pre-tax margin (5.7%) 4.2% 0.4% (4.1%) (0.3%) (6.6%) 2.5% (0.5%) (4.4%) (1.5%)
Effective tax rate N.A. 18.1% 5.0% N.A. N.A. N.A. 5.0% N.A. N.A. N.A.
Growth (% QoQ)
Sales (22.8%) 96.4% (26.0%) (16.9%) (8.4%) (19.3%) 77.6% (24.9%) (16.1%) (9.4%)
Op. profit 31.3% (218.7%) (96.8%) (2,366.4%) (67.1%) 27.9% (158.9%) (124.3%) 426.5% 125.9%
Net income (696.6%) (220.1%) (91.1%) (912.0%) (20.5%) 30.8% (164.7%) (114.5%) 689.1% 140.5%
FD WA EPS (698.1%) (220.1%) (91.1%) (912.0%) (20.3%) 30.8% (164.7%) (114.5%) 689.1% 140.5%


Val uat i on
We assign HTC a SELL rating, and set our target price at NT$88, which is based on
1.0x 2015F BVPS. Our target price is solely based on our P/B valuation method
given a lack of earnings and EBITDA. In line with our expectation that HTC will
continue to post losses over our forecast period, we expect a de-rating to 1x P/B
from the current level of 1.6x P/B. On the other hand, we note HTC still has a
strong and clean balance sheet, with a high net cash position. Thus, we see 1x
2015F BVPS as reasonable for its intrinsic value.

We assign HTC a SELL rating,
and set our target price at
NT$88

Figure 75: Peer valuation comparison table
EPS Growth (%) PER (x) P/B (x) ROE (%)
Company Ticker
Mkt Cap
(US$ mn)
2014F 2015F 2014F 2015F 2014F 2015F 2014F 2015F
HTC 2498 TT 3,902.0 N.A. N.A. N.A. N.A. 1.5x 1.6x (1)% (3)%
Global peers

Apple AAPL US 566,970 11% 9% 14.6x 13.6x 4.8x 4.3x 32% 33%
Samsung 005930 KS 190,657 (10)% 3% 7.3x 7.1x 1.2x 1.1x 18% 16%
Blackberry BBRY US 5,591 56% 42% N.A. N.A. 1.7x 1.7x (9)% (5)%
LG Electronics 066570 KS 12,391 347% 41% 15.8x 11.2x 1.1x 1.0x 7% 9%
Coolpad 2369 HK 1,190 13% 17% 11.4x 9.8x 2.6x 2.3x 24% 24%
ZTE 763 HK 7,219 82% 20% 16.6x 14.0x 1.7x 1.5x 11% 11%
Global Average 83% 22% 13.1x 11.1x 2.2x 2.0x 14% 15%
Source: Company data, Yuanta Investment Consulting, Bloomberg
Notes: EPS figures are denominated in local currency

Balance Sheet
Year as of Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Inventories 23,809 23,600 24,248 22,340 20,872
Others 13,813 11,075 10,145 9,193 8,502
Current assets 139,659 111,507 109,155 99,726 91,154
LT investments 10,197 4,831 5,032 5,232 5,432
Net fixed assets 25,651 25,561 24,943 23,665 22,362
Others 31,097 30,730 30,730 30,730 30,730
Other assets 66,945 61,122 60,704 59,627 58,523
Total assets 206,604 172,629 169,859 159,353 149,677
ST borrowings 0 0 0 0 0
Others 52,557 48,238 44,187 40,038 37,029
Others 60 408 408 408 408
Paid-in capital 8,521 8,424 8,404 8,404 8,404
Capital surplus 1,700 2,998 2,998 2,998 2,998

Cash Flow
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Net profit 16,781 (1,324) (1,053) (2,531) (3,722)
Change in working cap. (1,670) (10,831) 1,536 (3,198) (2,404)
Others (371) (197) (1) 0 0
Operating cash flow 19,000 (7,467) 5,570 (483) (2,822)
Capex (6,361) (2,827) (2,500) (2,000) (2,000)
Change in LT inv. (6,141) 5,564 (200) (200) (200)
Change in other assets 4,605 (1,602) (1,968) (1,968) (1)
Investment cash flow (7,897) 1,135 (4,668) (4,168) (2,201)
Change in share capital (38,831) (1,338) (20) 0 0
Net change in debt 17 348 0 0 0
Financing cash flow (38,814) (990) (20) 0 0
Net cash flow (27,711) (7,322) 882 (4,651) (5,023)
Free cash flow 11,103 (6,331) 902 (4,651) (5,023)
Profit and Loss
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Sales 289,020 203,403 186,321 168,826 156,137
Gross profit 72,925 42,271 38,405 32,549 28,816
Operating profit 18,820 (3,971) (1,306) (2,951) (4,184)
Interest expense (2) (8) 0 0 0
Net interest 616 546 323 312 283
Net oth non-op.Inc/(loss) (373) 3,016 440 180 180
Pretax income 19,450 (196) (542) (2,458) (3,721)
Income taxes (1,861) (1,128) (511) (73) (1)
Net profit 16,781 (1,324) (1,053) (2,531) (3,722)
EBITDA 23,080 915 3,781 2,295 (879)
EPS (NT$) 19.94 (1.57) (1.25) (3.01) (4.43)
EPS (NT$) Bonus Adj. 19.94 (1.57) (1.25) (3.01) (4.43)

Key Ratios
Year to Dec 2012 2013 2014F 2015F 2016F
Growth (% YoY)
Sales (38.0) (29.6) (8.4) (9.4) (7.5)
Op profit (72.6) (121.1) (67.1) 125.9 41.8
EBITDA (67.6) (96.0) 313.4 (39.3) (138.3)
Net profit (72.9) (107.9) (20.5) 140.5 47.1
EPS (73.0) (107.9) (20.3) 140.5 47.1
Profitability (%)

Gross margin 25.2 20.8 20.6 19.3 18.5
Operating margin 6.5 (2.0) (0.7) (1.7) (2.7)
EBITDA margin 8.0 0.4 2.0 1.4 (0.6)
Net profit margin 5.8 (0.7) (0.6) (1.5) (2.4)
ROA 7.6 (0.7) (0.6) (1.5) (2.4)
ROE 18.4 (1.7) (1.4) (3.4) (5.2)
Stability

Int. coverage (X) 11,342.4 N.A. N.A. N.A. N.A.
Int. & ST debt cover (X) 11,342.4 N.A. N.A. N.A. N.A.
Cash flow int. cover (X) 11,078.5 N.A. N.A. N.A. N.A.
Cash flow/int. & ST debt (X) 11,07 N.A. N.A. N.A. N.A.
Current ratio (X) 1.1 1.2 1.2 1.2 1.2
Quick ratio (X) 0.9 0.9 0.9 0.9 0.9
Net debt (NT$ mn) (60,782.9 (53,461.2) (54,342.8) (49,691.6 (44,669.0)
BVPS (NT$) 95.52 92.25 91.19 88.18 83.75
P/E 6.9 (88.1) (110.6) (46.0) (31.3)
P/FCF 10.5 (18.4) 129.1 (25.0) (23.2)
P/B 1.4 1.5 1.5 1.6 1.7
P/EBITDA 5.0 127.5 30.8 50.7 (132.3)
P/S 0.4 0.6 0.6 0.7 0.7

I ni t i at i on
Tai w an: El ec t r oni c Component s

7 J ul y, 2014
Ac t i on
SELL (Initiation)

Price NT$74.50
12M Target NT$52.00
TAIEX 9,510.05
What s new ?
We initiate coverage of
Foxconn Tech with a SELL
rating and TP of NT$52.
Our 2014/15F EPS forecasts
are NT$3.5 and NT$3.9
respectively, 15% lower than
consensus in both years.
Our vi ew
FTCs metal-casing business, its
key earnings driver, is likely to
face pressure due to Apples
diversification strategy and
internal competition within
FTCs own group.

Company pr of i l e: Foxconn Tech produces magnesium and aluminum light metal casings and thermal modules, and
performs games console assembly.

Fox c onn Tec h (2354 TT)
60
65
70
75
80
85
J un-13 Sep-13 Dec-13 Mar-14
-20
-15
-10
-5
0
5
10 Share Price (NT$) Performance relative to TAIEX (%)

Appl e busi ness det er i or at i on vi si bl e
We initiate coverage of Foxconn Tech (FTC) with a SELL rating and TP
of NT$52, based on the average of 12x 2015F EPS and 1.0x 2015F
BVPS. With FTCs Apple casing business likely to slow and Nintendos
weakness to continue, we expect stagnant earnings in coming years,
leading to a de-rating risk. Trading at 19x 2015F EPS and 1.3x 2015F
BVPS with only mid-single digit ROE, we believe FTCs current share
price is at the level to exit, or short.
Outstanding shares 1,306.5 mn
Free float 59.5%
Major shareholders
Hon Hai,
10.1%
BVPS (2014F) NT$55.53
P/B (2014F) 1.3x
Apple casing business under pressure: Apples diversification policy,
with it adding Catcher (2474 TT; BUY) as a casing supplier for iPhone,
as well internal competition from group members Hon Hai (2317 TT;
BUY) and FIH (2038 HK; NR), has led to downside risk to FTCs iPhone
allocation, in our view. Historically, FTCs gross margin and gross
profit have had little relationship with iPhone shipments. As such, we
do not expect FTC to outperform in 2H14 amidst iPhone 6 strength.
For its iPad business, momentum looks set to slow in the near- to
mid-term due to market saturation and limited spec upgrades in next
generation models. Without meaningful customer additions, we
forecast FTCs metal-casing sales to be only flat YoY in 2014/15F.
Year to
Dec
2013 2014F 2015F 2016F
Sales 94,598 73,496 66,446 64,945
Op. profit 6,974 5,047 5,124 5,234
Net profit 7,028 4,585 5,067 5,282
EPS (NT$) 5.39 3.51 3.88 4.04
EPS growth
(%)
(19.7) (34.9) 10.5 4.3
DPS (NT$) 1.00 1.00 1.00 1.00
P/E (X) 13.8 21.2 19.2 18.4
Div. yield
(%)
1.3 1.3 1.3 1.3
Nintendo game console business remains a drag: The downward trend
for FTCs assembly business is unlikely to be reversed anytime soon,
given high exposure to Nintendo DS and Wii, which have been
consistently losing market share to Microsoft (Xbox) and Sony
(PS3/PS4) over the past three years. Without new generation game
consoles in coming years, and with cannibalization from mobile
devices, Nintendos momentum is expected to remain weak, which is a
negative for FTC.
ROE (%) 10.8 6.5 6.8 6.7

Caitlin Huang



Apple casing business to disappoint
We forecast metal-casing business sales growth of -1% and +1% YoY in 2014 and
2015 respectively. Apple is likely to add new casing suppliers for the iPhone 6, such
as Catcher, as part of its diversification policy. Internally, Hon Hai is likely to take a
portion of iPhone casing business, and FIH is also doing vertical integration into
metal casing via its assembly services. With more players competing for Apple
business, we believe FTCs allocation on iPhone faces downside risks.
With more players competing
for Apple business, we believe
FTCs allocation on iPhone
faces downside risks

Historically, gross margin and gross profit have had little relationship with iPhone
shipments. Gross profit growth YoY has not correlated to iPhone shipments YoY.

Figure 76: FTCs gross margin, gross profit growth YoY and iPhone shipments

Source: IDC, TEJ, Yuanta Investment Consulting
For its iPad business, we believe growth momentum will slow in 2014 due to market
saturation and very limited spec upgrades in next generation products. The
rumored 12.85 iPad should be a 2Q15 story, and the benefit to FTC will be less
than expected, in our view, given likely small volume and Apples multiple-supplier
strategy. As we do not expect any meaningful new projects in the near- to mid-
term, we expect metal casing earnings to be lackluster in both 2014 and 2015.

Nintendo game consoles the key drag
We believe FTCs assembly business is on a long-term downtrend, as game console
demand is being cannibalized by smart devices. FTCs assembly business has high
exposure to Nintendo Wii, which has been consistently losing market share to
Microsoft (Xbox) and Sony (PS3/PS4) over the past three years. In 1Q14, Nintendo
lowered its sales target for the Wii U console, due to poor sales over the key holiday
season, while, at the same time, Sonys PS4 and Microsofts Xbox One did very well.
Without new generation game consoles in coming years, Nintendos momentum is
expected to remain weak. This will negatively impact FTC as Nintendos major
supplier (30-40% allocation), and we forecast its game console revenue to drop 47%
and 34% YoY in 2014 and 2015 respectively.
Without new generation game
consoles in coming years,
Nintendos momentum is
expected to remain weak
(mn units)

Tai w an: El ec t r oni c Component s 7 J ul , 2014 Fox c onn Tec h (2354 TT) Page 59 of 79

Earnings outlook
We expect FTC to post EPS of NT$3.5 in 2014F, down 35% YoY, with sales of
NT$73.5 bn, down 22% YoY. For 2015F, we expect operating profit to be similar to
2014s level. Segment-wise, due to Apples supply chain diversification efforts, we
expect metal-casing sales to decline slightly YoY in 2014F, ending the multi-year
growth streak from Apple and NB metal casing. In addition, we expect its Nintendo
Wii assembly business to be weak in the near- to mid-term, but is not a significant
factor for earnings, with only 2-3% gross margin. In contrast, a decline in FTCs
metal-casing sales will lead directly to a decline in net profit.
Due to Apples supply chain
diversification efforts, we
expect metal-casing sales to
decline slightly YoY in 2014F

Figure 77: FTCs revenue breakdown

Figure 78: FTCs gross profit breakdown


Figure 79: FTCs EPS and ROE

Figure 80: Quarterly highlights (consolidated basis)
Sales 11,198 12,629 19,411 30,257 73,496 14,926 12,800 16,043 22,677 66,446
COGS (9,576) (10,811) (16,763) (26,222) (63,372) (12,531) (10,809) (13,699) (19,603) (56,642)
Gross profit 1,622 1,819 2,648 4,035 10,125 2,395 1,991 2,344 3,074 9,804
Opex (1,113) (1,005) (1,310) (1,650) (5,078) (1,070) (970) (1,170) (1,470) (4,680)
Operating profit 509 814 1,338 2,385 5,047 1,325 1,021 1,174 1,604 5,124
Non-operating profit (68) 221 221 221 595 266 266 266 266 1,064
Pre-tax profit 442 1,035 1,559 2,606 5,642 1,590 1,287 1,440 1,870 6,188
Minority 5 0 0 0 0 0 0 0 0 0
Income tax (111) (321) (234) (391) (1,057) (239) (386) (216) (281) (1,121)
Net income 336 714 1,325 2,215 4,585 1,352 901 1,224 1,590 5,067
FD WA EPS (NT$) 0.26 0.55 1.01 1.70 3.51 1.03 0.69 0.94 1.22 3.88
Wtd. avg. no. of shares 1,306 1,306 1,306 1,306 1,306 1,306 1,306 1,306 1,306 1,306
Margin analysis
Gross margin 14.5% 14.4% 13.6% 13.3% 13.8% 16.0% 15.6% 14.6% 13.6% 14.8%
Operating margin 4.5% 6.4% 6.9% 7.9% 6.9% 8.9% 8.0% 7.3% 7.1% 7.7%
Pre-tax margin 3.9% 8.2% 8.0% 8.6% 7.7% 10.7% 10.1% 9.0% 8.2% 9.3%
Growth (% QoQ)
Sales (62.9%) 12.8% 53.7% 55.9% (22.3%) (50.7%) (14.2%) 25.3% 41.4% (9.6%)
Operating profit (80.5%) 59.7% 64.5% 78.2% (27.6%) (44.5%) (22.9%) 14.9% 36.7% 1.5%
Net income (88.5%) 112.6% 85.6% 67.1% (34.8%) (39.0%) (33.3%) 35.8% 29.9% 10.5%
EPS (88.5%) 112.6% 85.6% 67.1% (34.9%) (39.0%) (33.3%) 35.8% 29.9% 10.5%
Source: Company data, Yuanta Investment Consulting estimates


Val uat i on
We initiate coverage of FTC with a SELL rating, and set our target price at NT$52,
based on the average of 12x 2015F EPS and 1.0x 2015F BVPS using a ROE-P/B
methodology.

12x 2015F EPS - NT$47
Our P/E valuation is based on 12x 2015F P/E, with our target multiple lower than its
historical trading average of 14.5x, reflecting the companys weak earnings outlook.
Over the past five years, FTC has been trading in a range of 1020x P/E, averaging
14.5x. We believe earnings momentum will deteriorate in the mid- to long-term,
and anticipate a de-rating.

ROE-P/B methodology NT$57
We also use ROE-P/B valuation methodology. This approach takes into
consideration both ROE and cost of equity. The ROE-P/B valuation analysis yields a
TP of NT$57, which is equivalent to 1.0x 2015F BVPS.

Figure 81: FTC - target price derivation
47
57
52
x




COE ROE/PB
Company beta
0.8
(ROE-g)/(Cost of equity-g)
* g =2% 1.0
Fair value 57
Source:TEJ; Yuanta Investment Consulting

Balance Sheet
Year as of Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Inventories 5,614 2,135 2,112 1,888 1,830
Others 5,165 8,462 6,574 5,944 5,809
Current assets 82,295 71,368 75,022 77,370 82,926
LT investments 4,425 4,346 4,640 4,940 5,240
Net fixed assets 19,181 16,806 13,200 9,640 5,774
Others 1,129 2,719 2,719 2,719 2,719
Other assets 24,735 23,872 20,559 17,299 13,733
Total assets 107,031 95,240 95,581 94,668 96,659
ST borrowings 6,093 6,797 5,172 2,242 680
Others 12,941 8,545 6,639 6,002 5,866
Others 342 807 807 807 807
Paid-in capital 12,370 13,065 13,065 13,065 13,065
Capital surplus 7,253 9,575 9,575 9,575 9,575

Cash Flow
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Net profit 8,377 7,028 4,585 5,067 5,282
Change in working cap. 2,594 (3,625) 1,258 1,043 10,856
Others 101 3 6 0 0
Capex (692) (1,829) (812) (1,000) (800)
Change in LT inv. (1,205) 77 (300) (300) (300)
Change in share capital (1,616) 1,066 (1,306) (1,306) (1,306)
Net change in debt (3,589) 1,170 (1,625) (2,930) (1,562)
Financing cash flow (5,204) 2,235 (2,931) (4,237) (2,868)
Net cash flow 7,880 6,502 6,224 5,134 16,836
Free cash flow 13,084 4,267 9,156 9,371 19,704
Profit and Loss
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Sales 133,617 94,598 73,496 66,446 64,945
Gross profit 13,993 12,048 10,125 9,804 10,054
Net interest 205 214 385 504 685
Net Invst.Inc/(loss) 1 99 (6) 0 0
Pretax income 9,839 8,177 5,642 6,188 6,479
Income taxes (1,494) (1,166) (1,057) (1,121) (1,196)
Net profit 8,377 7,028 4,585 5,067 5,282
EBITDA 13,423 11,215 9,502 9,722 9,936
EPS (NT$) 6.71 5.39 3.51 3.88 4.04
EPS (NT$) Bonus Adj. 6.71 5.39 3.51 3.88 4.04

Key Ratios
Year to Dec 2012 2013 2014F 2015F 2016F
Growth (% YoY)
Sales 1.6 (29.2) (22.3) (9.6) (2.3)
Op profit 29.1 (23.5) (27.6) 1.5 2.1
EBITDA 9.4 (16.5) (15.3) 2.3 2.2
Net profit 4.6 (16.1) (34.8) 10.5 4.3
EPS 0.1 (19.7) (34.9) 10.5 4.3
Profitability (%)

Gross margin 10.5 12.7 13.8 14.8 15.5
EBITDA margin 10.0 11.9 12.9 14.6 15.3
ROA 8.2 6.9 4.8 5.3 5.5
ROE 14.5 10.8 6.5 6.8 6.7
Stability

Int. coverage (X) 58.6 51.5 43.9 76.9 202.6
Current ratio (X) 1.8 2.8 3.4 4.4 5.3
Quick ratio (X) 1.7 2.8 3.3 4.3 5.2
Net debt (NT$ mn) (27,381.0 (33,178.4) (41,027.5) (49,091.5 (67,489.5)
BVPS (NT$) 49.01 53.12 55.53 58.41 61.45
P/E 11.1 13.8 21.2 19.2 18.4
P/FCF 7.1 22.8 10.6 10.4 4.9
P/B 1.5 1.4 1.3 1.3 1.2
P/EBITDA 6.9 8.7 10.2 10.0 9.8
P/S 0.7 1.0 1.3 1.5 1.5

I ni t i at i on
Tai w an: Bat t er i es & Component s

7 J ul y, 2014
Ac t i on
SELL (Initiation)

Price NT$89.00
12M Target NT$55.00
TAIEX 9,510.05
What s new ?
We initiate coverage with a
SELL rating and a TP of NT$55.
After a slight YoY improvement
in 2014F, we expect the
companys earnings to return
to a downward trend in 2015F
and 2016F.
Our vi ew
We believe Dynapack is a victim
of Apples diversification
strategy.
We expect its margins to
contract on cost pressure, weak
bargaining power and limited
contribution from EV/LEV.

Company pr of i l e: Dynapack manufactures and markets battery packs for notebook computers, smartphones, and
DVD players.

Dynapac k (3211 TT)
-26
-21
-16
-11
-6
-1
67
72
77
82
87
92
97
102

Wel l behi nd t he l eader s
We initiate coverage of Dynapack with a SELL rating and a target price
of NT$55, derived from the average of 12x 2015F EPS and 1.3x 2015F
BVPS. After a 12% increase in the past three months, we believe the
share price has run ahead of fundamentals. Moreover, Dynapack is
lagging behind peer Simplo in terms of automation, scale, client
diversification, and electric vehicle (EV) and light electric vehicle (LEV)
exposure. Thus, Dynapack is more vulnerable to industry headwinds,
such as increasing competition and cell supply tightness.
Market cap US$453.4 mn
Free float 67.8%
Major shareholders
Chung (Tsung
Ming), 0.1%
BVPS (2014F) NT$48.42
P/B (2014F) 1.8x
Victims of Apples diversification strategy: We believe Apple is
diversifying its supplier list by adding Desay as a major supplier for
the iPhone and iPad mini. Given limited improvements in automation (a
key differentiation factor vs. Chinese packers), we forecast Dynapacks
iPad mini market share will be eroded, with no exposure to the iPhone
6. We expect revenue contribution from Apple to fall 18% YoY in 2015. Fi nanc i al out l ook (NT$ mn)
Year to
Dec
2013 2014F 2015F 2016F
Sales 25,936 26,561 22,745 20,242
Op. profit 826 817 567 461
Net profit 836 863 626 563
EPS (NT$) 5.50 5.68 4.12 3.70
EPS growth
(%)
(45.1) 3.3 (27.4) (10.2)
DPS (NT$) 5.00 4.80 3.30 2.80
P/E (X) 16.2 15.7 21.6 24.0
Div. yield
(%)
5.6 5.4 3.7 3.1
Near-term NB strength, but risk on margins: Our supply chain checks
suggest strong pull-in demand from HP in 3Q14, resulting in near-
term revenue strength. However, we note cylindrical battery cell supply
tightness, adding pressure to Dynapacks cost. Given a lack of client
diversification, it will be difficult for Dynapack to increase its
bargaining power with its customers.
Progress into non-IT is slow: Non-IT sectors such as EV and LEV will
be future margin drivers for battery packers due to higher entry
barriers, in the form of complex battery cell connection, BMS, and
environment tests. However, Dynapack only relies on one distributor
for the China market, where the market is fragmented and price
sensitive. As such, we expect the non-IT sectors to account for just a
low single-digit proportion of overall sales in the years ahead.
ROE (%) 11.6 11.8 8.6 7.7

Caitlin Huang



EPS to decline to NT$4.1 and NT$3.7 in 2015 and 2016, from NT$5.7 in 2014
We expect Dynapacks EPS to decline to NT$4.1 and NT$3.7 in 2015 and 2016,
respectively, from NT$5.7 in 2014 due to shrinking revenue scale and margin
erosion. Segment-wise, we expect Dynapacks Apple business will be impacted by
Apples diversification strategy of adding Chinese packers. We therefore expect
Dynapacks allocation share in iPad mini and iPhone to be negatively impacted. In
addition, despite stabilizing NB demand, we believe the pricing pressure will lead to
further revenue decline in the segment. In all, we forecast its revenue to be down by
14% YoY and 11% YoY in 2015F and 2016F respectively, after a temporary
stabilization in 2014.

Profitability-wise, Dynapacks gross margin has been on a downtrend since 2008,
and we expect the trend to continue. Aside from competition, we believe this
decline will be driven by cost pressure on a lack of scale, weak bargaining power,
and cylindrical battery cells supply tightness.

Figure 85: Dynapacks GM and OPM


Tai w an: Bat t er i es & Component s 7 J ul , 2014 Dynapac k (3211 TT) Page 66 of 79

Figure 86: Dynapacks EPS and ROE

Figure 87: Dynapacks revenue breakdown

(NT$)

Figure 88: Dynapacks quarterly & annual earnings highlights (consolidated basis)
Sales 5,925 6,329 6,814 7,493 26,561 5,465 5,071 5,702 6,507 22,745
COGS (5,584) (5,962) (6,427) (7,073) (25,046) (5,175) (4,809) (5,412) (6,173) (21,568)
Gross profit 341 368 387 420 1,515 290 262 290 334 1,177
Opex (164) (169) (179) (186) (698) (152) (137) (151) (170) (610)
Op. profit 177 199 208 234 817 138 125 139 164 567
Non-op 163 47 47 47 305 58 58 58 58 232
Pretax 340 246 255 281 1,122 196 184 197 222 799
Minority 0 0 0 0 0 0 0 0 0 0
Income tax (81) (71) (51) (56) (259) (39) (50) (39) (44) (173)
Net income 259 175 204 225 863 157 134 158 178 626
FD WA EPS (NT$) 1.71 1.15 1.34 1.48 5.68 1.03 0.88 1.04 1.17 4.12
Wtd. avg. no. of shrs 152 152 152 152 152 152 152 152 152 152
Margin analysis
Gross margin 5.7% 5.8% 5.7% 5.6% 5.7% 5.3% 5.2% 5.1% 5.1% 5.2%
Op. margin 3.0% 3.1% 3.0% 3.1% 3.1% 2.5% 2.5% 2.4% 2.5% 2.5%
Pre-tax margin 5.7% 3.9% 3.7% 3.8% 4.2% 3.6% 3.6% 3.5% 3.4% 3.5%
Growth (% QoQ)
Sales (30.6%) 6.8% 7.7% 10.0% 2.4% (27.1%) (7.2%) 12.4% 14.1% (14.4%)
Op. profit (44.9%) 12.3% 4.6% 12.5% (1.0%) (40.9%) (9.1%) 10.7% 18.3% (30.6%)
Net income 13.8% (32.6%) 16.8% 10.2% 3.3% (30.2%) (14.6%) 17.6% 12.9% (27.4%)
FD WA EPS 13.8% (32.6%) 16.8% 10.2% 3.3% (30.2%) (14.6%) 17.6% 12.9% (27.4%)


Val uat i on
We initiate coverage with a SELL rating and a target price of NT$55, which is derived
from the average of 12x 2015F EPS and 1.3x 2015F BVPS, on a ROE-P/B
methodology.

12x 2015F EPS, deriving a target price of NT$49
12x 2014E P/E is lower than the stocks trading average of 15x since 2011, as we
forecast its earnings to decline by 27% YoY in 2015 and 10% YoY in 2016, after a
temporary recovery in 2014. 12x is also 10-15% lower that the target multiple of
14x we assign to Simplo, which reflects Simplos competitive advantages.

ROE-P/B, deriving a target price of NT$61
We also use ROE-P/B to derive our target price. This approach takes into
consideration both ROE and cost of equity. The ROE-P/B valuation analysis yields
NT$61, which is also equivalent to 1.3x 2015F BVPS.

Figure 89: Dynapack - target price derivation
49
61
55




COE ROE-P/B
Company beta 0.83
(ROE-g)/(Cost of equity-g). *g
=2%
1.3
Fair value 61
Source: TEJ; Yuanta Investment Consulting

Balance Sheet
Year as of Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Inventories 2,455 2,342 2,385 2,054 1,829
Others 1,444 1,825 1,869 1,600 1,424
Current assets 13,113 14,639 13,690 12,242 10,547
LT investments 15 15 23 28 33
Net fixed assets 1,684 1,716 1,852 1,834 1,680
Others 186 1,629 1,629 1,629 1,629
Other assets 1,884 3,360 3,504 3,491 3,342
Total assets 14,997 17,999 17,194 15,734 13,889
ST borrowings 947 1,404 1,726 2,294 988
Others 1,503 1,510 1,546 1,324 1,178
Long-term debts 1,000 1,000 1,036 0 0
Others 602 725 725 725 725
Long-term liabilities 1,602 1,725 1,760 725 725
Paid-in capital 1,520 1,520 1,520 1,520 1,520
Capital surplus 1,993 2,247 2,247 2,247 2,247

Cash Flow
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Net profit 1,522 836 863 626 563
Depr & amortization 231 347 437 491 528
Change in working cap. (60) (236) 455 390 1,634
Others 16 0 (3) 0 0
Operating cash flow 1,709 947 1,751 1,508 2,724
Capex (1,022) (306) (500) (400) (300)
Change in LT inv. (31) 0 (5) (5) (5)
Investment cash flow (1,104) (1,823) (578) (478) (378)
Change in share capital (183) (738) (760) (729) (501)
Net change in debt (707) 580 359 (468) (1,306)
Financing cash flow (889) (159) (401) (1,198) (1,808)
Net cash flow (284) (1,034) 772 (168) 538
Free cash flow 605 (876) 1,173 1,029 2,346
Profit and Loss
Year to Dec
(NT$ mn)
2012 2013 2014F 2015F 2016F
Sales 28,083 25,936 26,561 22,745 20,242
Gross profit 2,563 1,503 1,515 1,177 1,042
Operating expenses (834) (677) (698) (610) (581)
Operating profit 1,729 826 817 567 461
Net interest 96 77 (13) (8) 17
Pretax income 2,176 1,136 1,122 799 718
Income taxes (654) (300) (259) (173) (155)
Net profit 1,522 836 863 626 563
EBITDA 1,960 1,173 1,254 1,058 988
EPS (NT$) 10.02 5.50 5.68 4.12 3.70
EPS (NT$) Bonus Adj. 10.02 5.50 5.68 4.12 3.70

Key Ratios
Year to Dec 2012 2013 2014F 2015F 2016F
Growth (% YoY)
Sales 19.4 (7.6) 2.4 (14.4) (11.0)
Op profit 2.5 (52.3) (1.0) (30.6) (18.7)
EBITDA 4.3 (40.2) 6.9 (15.6) (6.6)
Net profit 0.1 (45.1) 3.3 (27.4) (10.2)
EPS (14.2) (45.1) 3.3 (27.4) (10.2)
Profitability (%)

Gross margin 9.1 5.8 5.7 5.2 5.1
EBITDA margin 7.0 4.5 4.7 4.7 4.9
ROA 10.3 5.1 4.9 3.8 3.8
ROE 23.5 11.6 11.8 8.6 7.7
Stability

Int. coverage (X) 65.8 36.7 18.4 13.6 18.5
Current ratio (X) 2.1 1.6 1.7 1.6 1.8
Quick ratio (X) 1.7 1.4 1.4 1.3 1.5
Net debt (NT$ mn) (3,021.6) (1,530.2) (1,943.6) (2,243.5) (4,087.8)
BVPS (NT$) 47.11 47.74 48.42 47.74 48.14
P/E 8.9 16.2 15.7 21.6 24.0
P/FCF 22.3 (15.4) 11.5 13.1 5.8
P/B 1.9 1.9 1.8 1.9 1.8
P/EBITDA 6.9 11.5 10.8 12.8 13.7
P/S 0.5 0.5 0.5 0.6 0.7

Appendi x A: I mpor t ant Di scl osur es
Analyst Certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to
each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal
views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related
to the specific recommendations or views expressed by that research analyst in the research report.

Largan (3008 TT) Three-year recommendation and target price history
No. Dat e Closing Pr ice (A) Tar get Pr ice (B)
Adjust ed Tar get
Pr ice (C)
Rat ing Analyst
1: 18 Aug 11 834.00 1030.00 1060.14 BUY Bonnie Chang
2: 20 Oct 11 667.00 800.00 823.41 BUY Bonnie Chang
3: 09 Feb 12 685.00 700.00 720.48 HOLD Bonnie Chang
4: 26 Apr 12 536.00 490.00 504.34 HOLD Bonnie Chang
5: 09 Aug 12 609.00 565.00 565.00 HOLD Dennis Chan
6: 04 Sep 12 635.00 565.00 565.00 HOLD-OPF Dennis Chan
7: 25 Oct 12 595.00 730.00 730.00 BUY Dennis Chan
8: 29 Nov 12 761.00 915.00 915.00 BUY Dennis Chan
9: 31 J an 13 773.00 1040.00 1040.00 BUY Dennis Chan
10: 25 Apr 13 688.00 1090.00 1090.00 BUY Dennis Chan
11: 28 May 13 1000.00 1335.00 1335.00 BUY Dennis Chan
12: 28 J ul 13 1000.00 1490.00 1490.00 BUY Dennis Chan
14: 06 Mar 14 1390.00 1790.00 1790.00 BUY Dennis Chan
16: 06 J un 14 2045.00 N.R. Under review
1
2 3
4
5
6
7
8
9
10
11
12 13
14
15
16
418
918
1418
1918
2418
418
918
1418
1918
2418
J ul-11 J an-12 J ul-12 J an-13 J ul-13 J an-14 J ul-14
Share Price NT$

Source: Bloomberg, Yuanta Investment Consulting
Notes: A = price adjusted for stock & cash dividends; B = unadjusted target price; C = target price adjusted for stock & cash
dividends. Employee bonus dilution is not reflected in A, B or C.


Catcher (2474 TT) Three-year recommendation and target price history
Adjust ed Tar get
Pr ice (C)
Rat ing Analyst
2: 13 Sep 11 228.50 275.00 289.39 BUY Dennis Chan
4: 22 Dec 11 142.50 220.00 227.51 BUY Dennis Chan
7: 27 May 12 176.50 245.00 253.36 BUY Dennis Chan
10: 30 J ul 12 155.50 155.00 160.29 HOLD Dennis Chan
11: 26 Aug 12 159.00 189.00 195.45 BUY Dennis Chan
13: 18 Dec 12 136.50 137.00 137.00 HOLD-UPF Dennis Chan
14: 31 Mar 13 136.00 157.00 157.00 HOLD-UPF Dennis Chan
15: 06 May 13 160.00 174.00 174.00 HOLD-UPF Dennis Chan
16: 18 J ul 13 145.00 126.00 126.00 HOLD-UPF Dennis Chan
17: 31 J ul 13 130.00 129.00 129.00 HOLD-UPF Dennis Chan
18: 03 Nov 13 172.00 166.00 166.00 HOLD-UPF Dennis Chan
19: 06 Feb 14 208.00 198.00 198.00 HOLD-UPF Dennis Chan
20: 29 Apr 14 273.50 254.00 254.00 HOLD-UPF Dennis Chan
21: 06 J un 14 284.00 N.A. Under review
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
107
157
207
257
307
107
157
207
257
307
J ul-11 J an-12 J ul-12 J an-13 J ul-13 J an-14
Share Price NT$



Simplo (6121 TT) Three-year recommendation and target price history
Adjust ed Tar get
Pr ice (C)
Rat ing Analyst
4: 24 Oct 11 165.00 154.00 154.00 HOLD Dennis Chan
5: 29 J an 12 178.18 225.00 225.00 BUY
10: 04 Sep 12 178.00 163.00 163.00 HOLD-UPF Dennis Chan
11: 29 Oct 12 166.00 136.00 136.00 HOLD-UPF Dennis Chan
12: 05 Feb 13 135.00 101.00 101.00 SELL Dennis Chan
13: 01 Sep 13 143.00 103.00 103.00 SELL Dennis Chan
14: 13 Nov 13 129.50 104.00 104.00 SELL Dennis Chan
15: 02 May 14 161.50 109.00 109.00 SELL Dennis Chan
1
2
3
4
5
6
7
8 9
10
11
12
13
14
15
16
107
127
147
167
187
207
227
247
107
127
147
167
187
207
227
247
Share Price NT$



HTC (2498 TT) Three-year recommendation and target price history
Adjust ed Tar get
Pr ice (C)
Rat ing Analyst
1: 17 J ul 11 863.81 1020.00 1134.29 HOLD Bonnie Chang
4: 31 Oct 11 686.00 770.00 856.28 HOLD Bonnie Chang
5: 25 Nov 11 489.50 495.00 550.46 HOLD Bonnie Chang
6: 22 Dec 11 509.00 615.00 683.91 BUY Bonnie Chang
7: 07 Feb 12 513.00 600.00 667.23 BUY Bonnie Chang
8: 28 Feb 12 629.00 730.00 811.79 BUY Bonnie Chang
9: 24 Apr 12 478.50 715.00 795.11 BUY Bonnie Chang
10: 27 May 12 413.00 340.00 378.10 SELL Bonnie Chang
11: 06 J un 12 406.00 325.00 361.42 SELL Bonnie Chang
12: 08 J ul 12 322.00 250.00 250.00 SELL Dennis Chan
13: 03 Aug 12 277.50 196.00 196.00 SELL Dennis Chan
14: 28 Oct 12 236.00 107.00 107.00 SELL Dennis Chan
15: 31 Mar 13 244.50 105.00 105.00 SELL Dennis Chan
19: 15 Oct 13 127.50 81.00 81.00 SELL Dennis Chan
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
113
313
513
713
913
1113
113
313
513
713
913
1113
Share Price NT$



Foxconn Tech (2354 TT) Three-year recommendation and target price history
Adjust ed Tar get
Pr ice (C)
Rat ing Analyst
4: 16 Nov 11 96.67 134.00 127.62 BUY Dennis Chan
5: 28 Mar 12 116.67 120.00 114.29 HOLD Dennis Chan
6: 15 May 12 90.19 80.00 76.19 HOLD Dennis Chan
8: 04 Sep 12 116.50 104.00 104.00 HOLD-OPF Dennis Chan
9: 13 Nov 12 94.80 108.00 108.00 HOLD-OPF Dennis Chan
10: 27 Mar 13 82.80 79.90 79.90 HOLD-OPF Dennis Chan
11: 13 Aug 13 79.50 76.00 76.00 HOLD-OPF Dennis Chan
1
2
3
4
5
6
7
8
9
10
11
12
13
58
68
78
88
98
108
118
128
138
58
68
78
88
98
108
118
128
138
Share Price NT$



Dynapack (3211 TT) Three-year recommendation and target price history
Adjust ed Tar get
Pr ice (C)
Rat ing Analyst
2: 27 Oct 11 117.00 119.00 124.41 HOLD Dennis Chan
3: 29 J an 12 131.00 178.00 186.09 BUY
4: 07 Mar 12 170.00 165.00 172.50 HOLD Dennis Chan
5: 01 May 12 150.00 173.00 180.86 HOLD Dennis Chan
8: 04 Sep 12 148.00 135.00 135.00 HOLD-UPF Dennis Chan
9: 29 Oct 12 103.50 112.00 112.00 HOLD-UPF Dennis Chan
10: 05 Feb 13 110.50 107.00 107.00 HOLD-UPF Dennis Chan
11: 10 Mar 13 106.50 72.00 72.00 SELL Dennis Chan
13: 01 Aug 13 83.40 66.00 66.00 SELL Dennis Chan
15: 30 Apr 14 78.60 61.00 61.00 SELL Dennis Chan
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
64
84
104
124
144
164
184
204
64
84
104
124
144
164
184
204
Share Price NT$


Current distribution of Yuanta ratings

Rating # of stocks %
Buy 176 45%
HOLD-OPF 91 23%
HOLD-UPF 52 13%
Sell 4 1%
Under Review 67 17%
Restricted 1 0%
Total: 391 100%


Ratings Definitions
BUY: We have a positive outlook on the stock based on our expected absolute or relative return over the investment period. Our
thesis is based on our analysis of the companys outlook, financial performance, catalysts, valuation and risk profile. We
recommend investors add to their position.
HOLD-Outperform: In our view, the stocks fundamentals are relatively more attractive than peers at the current price. Our thesis
is based on our analysis of the companys outlook, financial performance, catalysts, valuation and risk profile.
HOLD-Underperform: In our view, the stocks fundamentals are relatively less attractive than peers at the current price. Our thesis
is based on our analysis of the companys outlook, financial performance, catalysts, valuation and risk profile.
SELL: We have a negative outlook on the stock based on our expected absolute or relative return over the investment period. Our
thesis is based on our analysis of the companys outlook, financial performance, catalysts, valuation and risk profile. We
recommend investors reduce their position.
Under Review: We actively follow the company, although our estimates, rating and target price are under review.

Restricted: The rating and target price have been suspended temporarily to comply with applicable regulations and/or Yuanta
policies.

Note: Yuanta research coverage with a Target Price is based on an investment period of 12 months. Greater China Discovery
Series coverage does not have a formal 12 month Target Price and the recommendation is based on an investment period
specified by the analyst in the report.

Global Disclaimer
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we do not hold ourselves responsible for its completeness or accuracy. It is not an offer to sell or solicitation of an offer to buy any
securities. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change
without notice.

This report provides general information only. Neither the information nor any opinion expressed herein constitutes an offer or
invitation to make an offer to buy or sell securities or other investments. This material is prepared for general circulation to clients
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Yuanta research is distributed in the United States only to Major U.S. Institutional Investors (as defined in Rule 15a-6 under the
Securities Exchange Act of 1934, as amended and SEC staff interpretations thereof). All transactions by a US person in the
securities mentioned in this report must be effected through a registered broker-dealer under Section 15 of the Securities
Exchange Act of 1934, as amended. Yuanta research is distributed in Taiwan by Yuanta Securities Investment Consulting. Yuanta
research is distributed in Hong Kong by Yuanta Securities (Hong Kong) Co. Limited, which is licensed in Hong Kong by the
Securities and Futures Commission for regulated activities, including Type 4 regulated activity (advising on securities). In Hong
Kong, this research report may not be redistributed, retransmitted or disclosed, in whole or in part or and any form or manner,
without the express written consent of Yuanta Securities (Hong Kong) Co. Limited.

Taiwan persons wishing to obtain further information on any of the securities mentioned in this publication should contact:

Attn: Research
Yuanta Securities Investment Consulting
4F, 225,
Section 3 Nanking East Road, Taipei 104
Taiwan

Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact:

Attn: Research
Yuanta Securities (Hong Kong) Co. Ltd
23/F, Tower 1, Admiralty Centre
18 Harcourt Road,
Hong Kong

Yuant a Gr eat er Chi na Equi t i es
Resear c h - Tai w an

Vincent Chen
Head of Taiwan Research
+886 2 3518 7903
vincent.chen@yuanta.com
George Chang, CFA
Co-Head of Tech
+886 2 3518 7907
george.chang@yuanta.com
DC Wang
Co-Head of Tech
+886 2 3518 7962
dc.wang@yuanta.com
Bonnie Chang
Head of Non-Tech
+886 2 3518 7925
bonnie.chang@yuanta.com
Aidan Wang
Head of Macroeconomics
+886 2 3518 7992
aidanwang@yuanta.com
Andrew C Chen
IC Backend, IC Substrate, PCB
and LED
+886 2 3518 7940
andrew.chen@yuanta.com
Steve Huang, CFA
Semiconductors & Display
+886 2 3518 7905
steve.huang@yuanta.com
Jeff Pu, CFA
Handsets
+886 2 3518 7913
jeff.pu@yuanta.com
Calvin Wei
PC/NB, Passive Components,
IPC
+886 2 3518 7971
calvin.wei@yuanta.com

Chuanchuan Chen
IC Design
+886 2 3518 7970
chuanchuan.chen@yuanta.com
Felix Hsu
Semiconductor, Solar, Car
Electronics
+886 2 3518 7946
felix.hsu@yuanta.com

Yvonne Tsai
Petrochem/Textile/Medical
Devices/Shipping
+886 2 3518 7942
yvonne.tsai@yuanta.com
Peggy Shih
Taiwan Financials,
Environmental Eng
+886 2 3518 7901
peggy.shih@yuanta.com
Peggy Lee
Pharmaceuticals
+886 2 3518 7984
peggy.lee@yuanta.com
Yen-liang Chen
Asset Plays, Non-tech
+886 2 3518 7967
yl.chen@yuanta.com
Robbie Tseng
Petrochemicals & Chemicals
+886 2 3518 7945
robbie.tseng@yuanta.com
April Chang
RA - Strategy, Downstream Tech
+886 2 3518 7977
april.chang@yuanta.com

Hannah Cheng
RA - Upstream Tech
+886 2 3518 7930
hannah.cheng@yuanta.com
Maggie Chi
RA - Upstream Tech
+886 2 3518 7969
maggie.chi@yuanta.com
Caitlin Huang
RA Downstream Tech
+886 2 3518 7911
caitlin.huang@yuanta.com
Leo Lee
RA Non-tech
+886 2 3518 7983
leo.kc.lee@yuanta.com
Jessie Lo
RA Non-tech
+886 2 3518 7949
Jessie.lo@yuanta.com
Jamie Su
RA Upstream Tech
+886 2 3518 7939
jamie.su@yuanta.com
Rainy Wang
RA Upstream Tech
+886 2 3518 7916
rainy.wang@yuanta.com

Livia Wu
RA Non-tech
+886 2 3518 7920
livia.wu@yuanta.com

Mike Yang
RA Downstream Tech
+886 2 3518 7961
mike.yang@yuanta.com

Resear c h - Hong Kong/Shanghai

Peter Chu, CFA
Head of HK Research
Consumer Research
+852 3969 9521
peter.kk.chu@yuanta.com
Samuel Kwok, CFA
Autos & Machinery
+852 3969 9527
samuel.kwok@yuanta.com
Kelvin Ng
Renewable Energy
+852 3969 9518
kelvin.kc.ng@yuanta.com
Benson Wan
Oil & Gas/Industrial
+852 3969 9529
benson.cf.wan@yuanta.com
Nice Wang
China Strategy
+86 21 6187 3821
nice.wang521@yuanta.com
Sal es and Tr adi ng
Juan Tseng
Head of Taiwan Sales
+886 2 2175 8962
juan.tseng@yuanta.com
Duncan Wun
Head of HK Cash Equities
+852 3969 9869
duncan.wun@yuanta.com
Jason Wang Head of
Taiwan Sales Trading
+886 2 2175 8888
jason.wang@yuanta.com
Jenny Lo
Head of HK Sales Trading
+852 3969 9769
jenny.lo@yuanta.com

Sharon Chao Sales Trading
+886 2 2175 8915
sharon.chao@yuanta.com
Kerry Chen - Sales
+886 2 2175 8922
kerrychen@yuanta.com
Philip Kong Sales
+852 3969 9879
philip.kong@yuanta.com
Kate Jackson Sales
Trading
+852 3969 9767
kate.jackson@yuanta.com

Jason Lin - Sales
+886 2 2175-8998
jason.lin@yuanta.com
Michael Lin - Sales
+886 2 2175 8977
michael.lin@yuanta.com
Terence Lok Sales Trading
+852 3969 9728
terence.lok@yuanta.com
Carlos Ng Sales Trading
+852 3969 9712
Carlos.ng@yuanta.com
Joyce Wan Sales
+852 3969 9876
joyce.wan@yuanta.com
Paula Wong Sales
+852 3969 9832
paula.wong@yuanta.com
Sal es of Non-Tai w an Equi t i es
Franker Lin
Head of Foreign Equity
Department
+886 2 2175 8720
laiochenlin@yuanta.com
Lunghui Chen
Co-Head of Sales, Foreign
Equity Department
+886 2 2175 8730
lunghuichen@yuanta.com
Oscar Yang
Co-Head of Sales, Foreign
Equity Department
+886 2 2175 8733
oscaryang@yuanta.com

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