Neutral Smartphone Components - Kim Eng

SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

Regional Sector Report 12 December 2013

Smartphone Components Apple Plays: Pick The Low-Hanging Fruit We are selective among the Apple components suppliers. Apple’s strategy of diversifying its supply chain may represent the dominant factor affecting components suppliers under our coverage. We believe leadership in technology, strong execution capabilities and differentiated products are the keys to mitigating such adverse effects. We initiate coverage of Largan (3008TT) with a BUY rating but Catcher (2474TT) at HOLD. We downgrade AAC (2018 HK) to SELL from BUY as we transfer coverage to William Yang.

Smartphone innovation is slowing while margins under pressure. The gross profit on iPhones dropped 27% from USD381 per unit in 1Q12 to USD277 in 3Q13. Meanwhile, many companies in the Apple supply chain reported disappointing results in recent quarters. But at the same time, we saw mainland Chinese vendors quickly expand their market share, mainly through pricing. To cope with the growing competition, we believe Apple is accelerating the diversification of its supply chain, which is likely to have an adverse impact on pricing and consequently, the profitability of its existing as well as new supply partners. That said, on-going product migrations and new technology may present opportunities for the components suppliers.

What does history teach us? During the commoditization era of feature phones in the mid-2000s, the profitability of the supply-chain underwent a structural decline and therefore the valuation multiples of the respectively share prices were adversely impacted. The majority of the industry’s profits went to a few industry leaders, while the laggards failed to generate satisfactory returns at most times. We believe this will be no different in the smartphone cycle and differentiations in terms of technology leadership, strong execution and a diversified customer are the keys to defying such gravity. This forms our key thesis and consideration when selecting the component names/stocks.

Largan is our top pick as we believe it is well positioned to outperform its peers in terms of technology leadership. In addition, it has superior manufacturing capabilities and a favourable customer base. Equally important, ongoing camera advancements, such as pixel migration, 3D application, image stabilizer and larger aperture etc, play into Largan’s strengths. We think the downside risk for Catcher in 1H14 is considerable as business among its key customers is weak and the Street’s expectation of new business wins from Samsung and iPhone 5S may be too high. We are concerned about the deceleration of AAC’s revenue momentum and its core profitability owing to slowing high-end smartphone growth. Keen competition is another consideration.

Apple components’ valuation comparisons

Mkt cap TP Price PER (x) PBR (x) EV/EBITDA (x) EPS growth (%) ROE (%) Dividend yield (%)

Rating Ticker (USDm) (LCL) (LCL) FY13F FY14F FY13F FY14F FY13F FY14F FY13F FY14F FY13F FY14F FY13F FY14F Largan BUY 3008 TT 5,188 1,400 1,145 16.9 13.3 5.1 4.1 10.5 8.0 62% 27% 34% 34% 1.6% 2.9% Catcher HOLD 2474 TT 4,869 190 192 10.1 11.0 2.1 1.8 5.9 5.2 31% -8% 22% 18% 3.6% 3.2% AAC SELL 2018 HK 5,583 31 35.25 13.2 13.9 4.4 3.6 10.5 9.0 48% -6% 38% 29% 2.3% 2.2% Simplo NR 6121 TT 1,406 N/A 135 13.2 12.5 2.0 1.7 8.2 7.4 -8% 6% 17% 15% 4.2% 4.3% Radiant NR 6176 TT 1,649 N/A 105 10.7 9.5 1.9 1.6 6.6 5.7 -19% 10% 20% 18% 6.7% 6.9% Casetek NR 5264 TT 1,767 N/A 154 8.6 8.5 2.4 1.8 4.5 4.4 83% 4% 32% 24% 3.9% 4.8% Foxconn Tech NR 2354 TT 3,050 N/A 69.1 13.5 12.4 1.3 1.2 4.8 4.5 -13% 6% 10% 10% 1.4% 1.5% Average 12.3 11.6 2.8 2.3 7.3 6.3 26% 6% 25% 21% 3.4% 3.7% Source: Company data, Maybank Kim Eng, Bloomberg Finance LP; NR data from Bloomberg consensus

Neutral William YANG [email protected] (852) 2268 0675 Warren LAU [email protected] (852) 2268 0644 iPhone gross profit per unit (USD)

Blurred boundaries between devices Nowadays

We expect Apple to launch larger screen size iPhones and iPads

Source: Maybank Kim Eng

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iPhones iPhones iPads MacBook

2014~2015

iPads

12 December 2013 of 40

Smartphone components Sector Report

Contents

Tough Battle Ahead ......................................................3

Increasing risks to the components providers ..............7

Stay focused on the BEST! ..........................................9

Competition intensifies in the converged devices ..... 16

Largan Precision (3008 TT) ....................................... 19

AAC Technologies (2018 HK) ................................... 25

Catcher Technology (2474 TT) .................................. 32



Tough battle ahead

In this report, we review the investment case for Apple components companies AAC, Catcher and Largan. On the basis of our research, we conclude that Apple’s supply chain diversification will be the dominant factor affecting stock performances after Apple’s innovation slows down. We believe Apple has probably entered into a so-called ‘innovator dilemma stage’ and it’s likely to transfer its margin pressure across its supply chain in 2014-15.

Here we illustrate our recent observations, which signal that we are likely at the early stage of Apple’s strategies of introducing more supply chain vendors.

In Figure 1-3, we highlight that Apple’s iPhone gross profit per unit dropped by 23% to USD277 in 3Q13, vs. an average of USD362 in 1Q-3Q12. We note that management takes a view and appears to believe the profit decline was mainly due to product/model transition.

In Figure 4, we look at the recent results of key participants in the Apple supply chain. Most participants in this supply chain reported worse-than-consensus expected numbers for their recent results. We observe that only a few industry leaders (such as AAC, Catcher and Largan) reported healthy earnings results recently. We believe the disappointing results for many players in the Apple supply chain indicate that most companies may not yet have developed strategies to differentiate their products/services or diversify their customer base enough. As a result, their product pricing/earnings power was negatively affected by Apple’s product cycle or Apple’s pricing pressure.

In addition, we identified that the market share of the leading Chinese smartphone vendors grew sharply in the past few quarters (Figure 5). Most Chinese smartphone OEMs have stated aggressive targets to capture the growing smartphone opportunities in China. The lower technological entry barriers enable these companies to provide reasonably good features in their smartphone models at affordable prices. We think it may also reinforce the ASP pressure headwind.

We summarize some of the newsflows in Figure 6. Apple has not been immune from supply chain problems such as wage increase, labour shortage, safety concerns and worse case, production delays from its suppliers. Before 2011, a product cycle could last 18-24 months, so the cost from a 1-2 month production delay was manageable. But now, as the product cycle has been shortened to 6-12 months, a production delay will cost much more than before, especially as competition has intensified. We believe these events also give Apple further incentive to diversify its suppliers to lower operation risks.

Lastly, supply chain diversification will not only increase Apple’s bargaining power over its vendors, but it should also reduce production delay risks, which the company has experienced over the past 2-3 years once it reached a massive volume. While this might be a good strategy for Apple itself, it may not necessarily be positive for all its supply chain vendors. This is because while the new entrants (‘offenders’) may agree to the competitive terms in order to secure Apple’s business to revive their growth, the ‘defenders’ or existing suppliers would also need to do so to maintain their original share of the orders.



Figure 1: iPhone gross profit per unit (USD)

Source: Company data, Maybank Kim Eng

Figure 2: iPhone ASP (USD) Figure 3: Apple’s gross margin (%)

Source: Company data, Maybank Kim Eng Source: Company data, Maybank Kim Eng

Figure 4: The earnings power of most of Apple’s suppliers are declining Reported Net income

Unit 3Q13 2Q13 3Q12 QoQ (%) YoY (%)

AAC CNYm 898 542 473 65.8% 89.8% Catcher TWDm 2,771 3,636 1,981 -23.8% 39.9% Casetek TWDm 1,321 1,289 1,072 2.5% 23.2% Largan TWDm 2,321 2,035 1,160 14.1% 100.1% Genius TWDm (72) (223) 200 nm nm Radiant TWDm 1,051 746 1,230 40.9% -14.6% Simplo TWDm 835 650 948 28.5% -11.9% Dynapack TWDm 193 156 412 23.7% -53.2% Flexium TWDm 563 201 467 180.1% 20.6% Career TWDm 193 (56) 269 nm -28.3%


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Figure 5: Chinese smartphone OEMs raising the competition

Source: IDC, Gartner, Maybank Kim Eng

Figure 6: These events also give Apple the incentive to diversify its supply chain 30-Apr-12 Hon Hai asked Apple to share the wage increase. While neither Apple nor Foxconn has said what the cost-sharing arrangement, if any, is between the two companies, Wall Street is

assuming that Apple will have to cover at least part of the increase in wages. 10-Oct-12 iPhone 5's aluminium case causing supply delays. According to Bloomberg, the smartphone’s delicate aluminium housing, coupled with increasingly stricter quality control, has slowed

production and added to the device’s supply delays. Although the sixth generation iPhone is thinner and lighter than its predecessors, mostly thanks to its anodized aluminium casing,

now sources familiar with the matter have revealed to Bloomberg that the very same aluminium casing has caused major production issues and subsequent delivery delays.

12-Nov-12 Samsung raised Apple component price by 20%. Samsung has upped the price of its processors made for Apple by 20%, as the Korean firm looks to get one over on its closest rival,

media reports claimed. The Wall Street Journal cites a report which quotes a "person familiar with negotiations between the two tech giants", apparently

confirming this special price hike for Apple. 17-Apr-13 Bloomberg reported that Apple shares hit a 1-year low on talks of iPhone production slowdown. 22-Apr-13 Bloomberg reported that Apple's iPhone 5S launch delayed by fingerprint scanner. A supply chain source in Taiwan said Apple was trying to find a coating material that did not interfere with the fingerprint sensor, and

this may be causing a delay. 29-Jul-13 Apple responded to the latest labour-abuse allegations at one of its suppliers. Apple said it is committed to providing safe and fair work conditions throughout its supply chain. Apple said it leads the industry with

far-reaching and specialized audits, and the most transparent reporting and educational programmes that enrich the lives of workers who make its products. Apple is the first and only technology company to be admitted to the Fair Labour Association, and it is dedicated to protecting every worker in its supply chain.

Source: Bloomberg, Reuters

We see that Apple’s iPhone operating profit dropped from USD381 per unit in 1Q12 to USD277 in 3Q13. We believe Apple’s supply chain will encounter spillover effects (on pricing pressure) if history serves as a guide. During the past handset cycle, we noticed that once OEMs’ operations started to deteriorate, they would transfer the price pressure to their supply chain vendors. What’s more, once this started to happen, it tended to continue until the end of the product cycle, or until the industry or the company migrated to the next innovation cycle.

We observe that only the leading companies managed to generate healthy profits during this period. The leading companies usually have a more diversified customer base, better competitiveness and/or know-how to differentiate their business models. These characteristics allow them to enjoy better pricing power and/or higher market shares. For the industry followers, we saw that it was difficult for them to generate satisfactory returns. In addition, their earnings tended to be more volatile as execution risks tended to be higher when those companies tried various strategies to become a leading player. Using the insights we have seen from the feature-phone cycle, we believe all the components

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companies may need to enhance their competitiveness and/or leverage the product spec migration to counter the price pressures.

Based on these conclusions, we assess our price targets and earnings forecasts to reflect the potential allocation and ASP dynamic in 2014-15. We downgrade AAC (2018 HK) to SELL from BUY as we transfer coverage to William Yang. We initiate coverage of Catcher (2474TT) at HOLD but initiate Largan with a BUY as we think the company is in a better position to defy the gravity.

In Figure 7, we summarize our estimates for AAC, Catcher and Largan.

AAC: Our target price of HKD31 is based on 12x target P/E (15% discount to 14.2x mid-cycle P/E) and 2014F EPS of HKD2.57. We estimate the company’s operating income grew strongly by 30% YoY to HKD2,404m for 2013 (consensus HKD2,463m) and to increase mildly by 11% YoY to HKD2,662m for 2014F (consensus HKD2,856m). A key reason for our below-consensus forecasts is our expectation that the company will experience margin contraction, reflecting a slowing acoustic components spec migration and increased competition.

Catcher: Our target price of TWD190 is based on 11x target P/E (15% discount to 13x mid-cycle P/E). We estimate operating profit increased by 20% YoY to TWD14,630m for 2013F (consensus TWD13,874m) and will rise 12% YoY to TWD16,377m for 2014F (consensus TWD16,876m). Our FY14 forecast is slightly below consensus as we believe the Street’s recent upward earnings revisions on the back of speculation of Samsung and iPhone 5s metal casing order wins is unfounded and the market underestimates the iPad mini casing order loss.

Largan: Our target price of TWD1,400 is based on 16x target P/E (8% discount to 17.4x mid-cycle P/E). We estimate the company raised its operating income nicely by 53% YoY to TWD10,432m in 2013 (consensus TWD10,353m) and maintain a high growth of 31% YoY to TWD13,665m for 2014F (consensus TWD12,615m). Key drivers for our above-consensus forecasts are our belief that the company will defy the commoditization pressure through a differentiated product offering and a more competitive cost structure.

Figure 7: Summary of earnings for AAC, Catcher and Largan AAC 2011A 2012A 2013F 2014F 2015F Sales YoY growth (%) 21.2% 54.8% 33.0% 15.6% 9.5% OP YoY growth (%) 7.20% 62.8% 30.0% 10.9% 12.6% Reported EPS YoY growth (%) 5% 70.1% 48.1% -5.5% 12.5% ROE (%) 23% 33% 38% 29% 26% P/E (x) 14.2 12.2 13.2 13.9 12.3 Catcher 2011 2012 2013F 2014F 2015F Sales YoY growth (%) 64.4% 3.1% 17.4% 12.4% 12.7% OP YoY growth (%) 159.7% -8.0% 20.3% 11.9% 12.8% Reported EPS YoY growth (%) 141.0% 2.0% 30.6% -8.2% 11.6% ROE (%) 24% 19% 22% 18% 17% P/E (x) 8.2 11.8 10.1 11.0 10.0 Largan 2011 2012 2013F 2014F 2015F Sales YoY growth (%) 29.4% 25.6% 35.4% 30.6% 19.5% OP YoY growth (%) 17.4% 24.2% 53.5% 31.0% 18.8% Reported EPS YoY growth (%) 28.5% 7.3% 62.5% 27.5% 17.0% ROE (%) 29% 26% 34% 34% 33% P/E (x) 19.6 11.6 16.9 13.3 11.4 Source: Company data, Maybank Kim Eng



Increasing risks to the components providers

In Figures 8-10, we reviewe the historical data of the handset supply chain in 2001-12. Our study suggests growing pressure from OEMs will eventually disrupt the fundamentals of the components supply chains. The risks are particularly high for manufacturers that have a concentrated customer base and/or lower technological entry barriers. We also point out that the stocks could experience material de-rating pressure during this process. We summarize our key observations/implications as follows:

We see the potential for a declining margin trend for Apple supply chain companies in 2014-15. Our study shows that OEM customers had passed on the margin pressure to supply chain companies once handset products have less innovative designs. In Figure 8-9, we highlight that Silitech’s gross margin (GM) dropped to 23% in 2008 (from 30% in 2004), Merry’s GM declined to 19% in 2008 (from 39% in 2004), Ichia’s GM decreased to 8% in 2008 (from 27% in 2004), Genius’ GM fell to -26% in 2008 (from 74% in 2004) and Chicheng’s GM dipped to 13% in 2008 (from 27% in 2004).

Our studies also show that components companies with a more diversified customer base and higher technology entry barriers may be in a better position to counter the trend (e.g., Silitech). However, we may see higher earnings risk for components companies’ with weaker/single customer bases. For example, MOT’s weak performance disrupted its key supply chain companies’ profitability trend during the last handset cycle. Chicheng’s (casing supplier for MOT’s handsets) ROE decreased to a trough of negative 28% in 2010 (from a peak of 23% in 2006). Similarly, Genius’ (lens supplier for MOT’s handsets) ROE dropped to a trough of negative 19% in 2008 (from a peak of 68% in 2004).

Our valuation reviews indicate that supply chain companies’ trading P/Es may experience further de-ratings. For example, Silitech was trading at an average 13x P/E during 2007-11 (or 29% discount vs. the company’s mid-cycle P/E of 19x in 2004-06). Similarly, Merry was trading at average 15x P/E during 2007-11 (or 31% discount vs. the company’s mid-cycle valuation of 22x in 2004-06).

Figure 8: Companies with a more diversified customer base and higher technology entry barrier are in a better position

Figure 9: Companies with a weaker customer base suffered more

Source: Company data, Maybank Kim Eng Source: Company data, Maybank Kim Eng

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Figure 10: Historic data suggests components companies’ margins came under pressure when OEMs’ growth decelerated


In summary, we reviewed previous handset cycles between 1998 and 2011. We used this analysis to assess how OEMs’ market position dynamics could affect their components companies’ long-term fundamentals. We see three major trends. First, it would create headwinds that drag down industry profitability and stock valuations. Second, most of the industry profits go to the limited number of industry leaders. It is difficult for industry ‘followers’ to generate satisfactory returns. Third, we see significant transition risk at the end of product cycles; in 2008-11, for example, many companies failed to migrate to the next generation technology.

Sil i tech 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PER 2004-06 2007-11 DiscountTrailingP/E(x)

na na na 14.5 15.9 25.3 21.0 12.3 10.9 12.7 9.1 10.7 Avg 18.6 13.2 -29%

Mkt cap(US$m)

na na na 216 382 696 677 437 441 572 457 315 Peak 33.7 25.8 -23%

GM(%) 19% 26% 24% 30% 28% 27% 27% 23% 23% 22% 23% 25% Trough 10.1 5.8 -43%ROE(%) na 28% 32% 45% 41% 34% 34% 25% 26% 26% 21% 13%Majorcustomers

Nokia/RIM/Samsung/ Moto












Merry 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PER 2004-06 2007-11 DiscountTrailingP/E(x)

25.1 29.6 20.5 20 20.3 26.7 22.9 12.3 10.9 15.2 15.4 14 Avg 22.4 15.3 -32%

Mkt cap(US$m)

183 162 175 289 340 482 560 295 203 284 210 230 Peak 31.1 28.1 -10%

GM(%) 37% 38% 38% 39% 32% 27% 23% 19% 23% 21% 15% 19% Trough 16.3 5.8 -64%ROE(%) 11% 8% 17% 22% 17% 20% 21% 13% 12% 14% 7% 11%

Majorcustomers

Moto/SonyEricsson

Moto/SonyEricsson

Moto/SonyEricsson

Moto/SonyEricsson

Moto/SonyEricsson

Moto/SonyEricsson

Moto/SonyEricsson/

Nokia

Moto/SonyEricsson/

Nokia

Moto/SonyEricsson/

Nokia

Moto/SonyEricsson/

Nokia

Moto/SonyEricsson/

Nokia

Moto/SonyEricsson/

NokiaIchia 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012TrailingP/E(x)

27.2 35.4 25.2 18.8 18.4 189.1 16.9 17.9 99.6 32.7 133.4 47.7

Mkt cap(US$m)

218 216 269 448 293 353 325 199 154 181 189 169

GM(%) 37% 35% 31% 27% 10% 23% 14% 8% 11% 9% 9% 11%ROE(%) 11% 15% 20% 22% -5% 15% 5% -2% 3% -1% 1% 2%Majorcustomers

Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM Nokia/RIM

Genlus 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012TrailingP/E(x)

na na na na 11.1 15.7 36 nm nm 64.1 19.0 23.5

Mkt cap(US$m)

na na na na 1080 532 217 115 114 330 769 712

GM(%) na na 58% 74% 60% 42% -2% 26% -4% 26% 26% 23%ROE(%) na na na 68% 29% 7% -10% -19% -18% 16% 19% 12%Majorcustomers

Moto Moto Moto Moto Moto Moto Moto Moto/ Apple Moto/ Apple Moto/ Apple Moto/ Apple Moto/ Apple

Chicheng 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012TrailingP/E(x)

na na na na 26.9 29.8 26.9 22.2 196.2 nm 507.5 nm

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na na na na 164 310 369 120 117 137 107 42.5

GM(%) 21% 23% 23% 27% 18% 22% 20% 13% 14% 9% 15 -1%ROE(%) 6% 5% 8% 20% 14% 23% 7% -3% -14% -28% 0% -38%Majorcustomers

Moto Moto Moto Moto Moto Moto Moto Moto Moto Moto Moto Moto



Stay focused on the BEST!

In this section, we discuss in more depth our research on the investment case for Apple components companies AAC, Catcher and Largan. On the basis of our study, we conclude that Largan is our top pick as we think the company should manage to differentiate its products based on its cost/R&D leadership.

In Figure 11, we summarize our reasons to recommend Largan as our top pick across Apple components companies. We use four criteria to select the components companies. 1) Spec migration: we think it is important as the leader usually can leverage its technology leadership to enjoy price premium and secure a larger allocation of orders once spec migration happens. 2) The operation comparison between exist supply chain vendors. 3) The competitiveness of the potential newly added component maker. We believe the new entrant is likely to dilute existing vendors’ allocation of orders. Therefore, we think 2) and 3) are keys to assessing the risk profiles. If the new entrant is still considerably behind the leader in terms of technology or financial strength, we sense the risk for incumbents is relatively lower. 4) Valuations. As mentioned earlier, our valuation reviews indicate that supply chain companies’ trading P/Es may experience de-ratings, so we value the stocks on whether they are trading at below-mid cycle P/E. Currently, Catcher and Largan are both below their historical average but we estimate Largan has the biggest discount (trading at 13.3x FY14E PE or a 24% discount versus its historical average of 17.4x).

In Figure 12-13, we list Apple’s current supply chain vendors and the potential newly added makers in 2014. We sense competition is likely to intensify if the new entrant is from Taiwan/China because they are well-known for cutting costs and competing on price. Take the lens industry for example, we sense the competition should be relatively rational or mild as the new lens provider should be Kantatsu or Fujifilm. But for the acoustics and casing industry, the potential new offender (or entrant) is Merry and Catcher, respectively (both companies are Taiwanese). We believe they know how to compete in terms of pricing and flexibility.

One of the appeals of the smartphone is its rich set of multi-media features. Consumers consider the camera to be one of the most important selection criteria when buying a phone, along with other features and technology such as MP3 players, hands-free devices and video-broadcast capabilities, according to Gartner’s consumer survey. As a result, we believe OEMs will continue to offer phones with better, higher-resolution cameras to attract consumers and differentiate products. In Figure 14, we expect the camera quality for the iPhone 6 to be upgraded again (either to 13MP [likelihood 30%] or 8MP with ultrapixel [likelihood 70%]). However, we think the iPhone 6 will adopt the same unibody metal casing design (but bigger) and maintain similar acoustics specs and units (3 MEME MICs and 2 speaker boxes).

In Figure 15-26, we compare the competiveness between the incumbents and the followers. We believe the larger gap between the tier-one and tier-two companies will have less negative impact on the leader under the diversification trend.



Figure 11: Largan is our recommended stock after screening using the four criteria AAC Catcher Largan Will we expect spec migration in 2H14? No major change N Y Is the current second supplier competitive enough?

Y Y N

Is the potential new component vendor aggressive in terms of pricing or flexibility?

Y Y N

Is the company's current valuation undemanding?

N (no discount vs. historical average

of 14x)

Y (15% discount vs. historical average of

13x)

Y (24% discount vs. historical average of

17.4x) Source: Maybank Kim Eng

Figure 12: iPhone supply chain vendor list

iPhone supply chain Existing suppliers New makers in 2013 Potential new vendors in

2014 Camera module Sharp, LG Innotek

Sony

Camera lens Largan, Genius

Kantatsu Casing Hon Hai group, Jabil

Catcher

Speaker box AAC, GoerTek, Knowles

Merry Battery pack Desay Simplo. Dynapack

Connector Hon Hai, Foxlink, Tyco Luxshare EMS & ODM Hon Hai, Pegatron

Wistron, (Compal also received qualification but

Compal will focus on iPads at the current stage)


Figure 13: iPad supply chain vendor list

iPad supply chain Existing suppliers New makers in 2013 Potential new vendors

in 2014 Camera module Sharp, LG Innotek Sony Camera lens Largan, Genius Kantatsu Casing Hon Hai group, Casetek Catcher Speaker box AAC, GoerTek, Knowles Merry Battery pack Simplo. Dynapack Desay (for iPad mini only) Touch TPK, Wintek GIS Connector Hon Hai, Foxlink, Tyco Luxshare EMS & ODM Hon Hai, Pegatron Compal, (Wistron also

received qualification but Wistron will focus on

iPhones at the current stage)


Figure 14: Improving image quality will remain a trend over the next few years

Source: Samsung



Largan

We remain positive on Largan’s long-term outlook as we think fundamentals of camera lenses should turn more favourable in 2H14 with more higher-value-add projects. We also believe Largan's industry leadership remains solid and this should put it in a better position to benefit from the next technology migration in 2H14-2015. We think the short-term noise is the unclear demand for 1Q14. We suggest investors to buy the stock on any weakness related to this. We forecast 1Q14 sales to drop 30% QoQ, slightly better than consensus of a 30%-35% QoQ decline.

We believe the company can maintain its technology leadership thanks to the on-going camera pixel migration. Besides, we believe either Kantatsu (Sharp’s subsidiary) or Fujifilm (Sony’s camera lens partner) is likely to become the newly added lens supplier (or ‘offender’). We believe Largan still leads the new offenders in terms of costs and flexibilities. Largan's 3Q13 gross margin of ~47% was 3,630bps higher than its major competitor's. In addition, Largan has widened its sales difference versus its competitor from TWD1.8b in 1Q10 to TWD4.1b in 3Q13. We think these factors suggest Largan gained market share but not at the expense of its margins. This also demonstrates Largan's better production know-how (such as yield rate, automation and precision requirement) over its competitor. Besides, Largan had TWD13.2b net cash on hand in 3Q13 vs. its current major competitor's TWD2.3b net debt.

Figure 15: Largan gains market share…

Source: Company data, Maybank KE

Figure 16: …but not at the expense of margins


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Figure 17: Surprisingly, Largan’s high growth is not purely driven by capex


Figure 18: Largan’s net cash position is much stronger than Genius’s


AAC

Based on our recent research, we conclude that AAC's competitive position should remain solid in 2014 due to its superior acoustics design capabilities, higher production yield and strong in-house automation know-how.

However, our supply chain visits also suggest signs of growing competition, while visibility for technology migration remains unclear for 2014. As a result, we see a low probability of multiple year expansions for the medium term. This leads us to believe that dynamic changes in competition could gradually dilute AAC's earnings momentum. We forecast AAC’s operating income growth to decelerate to 11% YoY in 2014F, vs. 30% YoY in 2013F and 63% YoY in 2012. Specifically, we think GoerTek’s aggressive growth target could lead to more market share competition among Chinese brand names. In addition, our checks indicate Merry (a Taiwanese acoustics provider) is trying more aggressively to expand its product portfolios from current iMacs to iPhones/iPads though we cannot confirm it yet.

Our recent checks on the acoustics components technology roadmap indicate visibility for future technology remains unclear. Although there is a strong incentive for acoustics vendors to push the migration to higher dollar content in 2014, it appears there are more obstacles for these migrations. For example, there are debates about whether such migrations could significantly enhance

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consumers’ perceived value when choosing a smartphone (HTC One vs. Moto X can be an example). We suggest investors to trim their positions and wait for a better entry point or wait for a clear upward trend on acoustics spec migration.

AAC's 3Q13 gross margin of 42.5% was 14.5-15 percentage points higher than its major competitor GoerTek. However, the gap with another competitor, Merry, did not widen but instead narrowed from 26ppts in 1Q12 to 20ppts in 3Q13. Besides, although GoerTek’s sales are likely to be inflated due to its assembly business, we are aware it may be a signal that GoerTek is taking some market share from AAC. Our checks also indicate the thesis. AAC had substantial net cash on hand of CNY1b in 3Q13 vs. GoerTek’s CNY1 net debt.

Figure 19: Goretek outpaced AAC in terms of sales…


Figure 20: …But AAC still leads on margins


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Figure 21: Capex at both companies slowing down


Figure 22: AAC has by far a much stronger net cash position than GoerTek


Catcher

We believe the company can maintain its technology leadership due to its solid manufacturing know-how and higher production yield rate. But we see uncertainty going forward surrounding the allocation of orders and potential ASP pressure from Apple project tenders as Casetek and Foxconn Tech, Catcher’s two major competitors, turn increasingly competitive. Besides, both Foxconn Tech and Casetek have strong support from their parent companies, Hon Hai and Pegatron. We think this will be difficult for Catcher to overcome, although it still leads Casetek and Foxconn Tech in terms of margins. Lastly, we believe the recent rally in Catcher’s shares due to unfounded speculation of casing order wins from Samsung and for iPhone 5S also make us to suggest investors not to chase the stock at the current price level. We forecast its 1Q14 sales to drop 28% QoQ vs. consensus of a 10% decline.

Catcher's 3Q13 gross margin of ~41.7% was 13.6ppts higher than its major competitor Casetek, but the gap had narrowed from 27.7ppts in 2Q12. We think this highlights Casetek’s growing competitiveness in terms of production yield rate and manufacturing efficiency. In addition to the strong support from Casetek’s parent company, we do not anticipate the road to the expansion of the casing market share between the incumbent companies will progress smoothly.

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In terms of cash position, Catcher still had abundant net cash on hand of TWD20.3b in 3Q13 vs Casetek’s TWD5.3b.

Figure 23: Sales comparison (Catcher vs Casetek)


Figure 24: Gross margin comparison (Catcher vs Casetek)


Figure 25: Capex comparison (Catcher vs Casetek)


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Figure 26: Net cash comparison (Catcher vs Casetek)


Competition intensifies in the converged devices

Our reviews conclude that competition between traditional hardware device brand names and OS platform providers will intensify in 2014 due to: 1) vaguer boundaries between PC and post-PC devices (such as tablets); 2) rising competition from web-based companies such as Amazon and the traditional PC software giants like Microsoft. For instance, we expect Amazon to jump onto the bandwagon by launching its own smartphone; and 3) smartphones with a larger screen size (above 4.5-inch) will outgrow smaller screen size smartphones. IDC forecasts 4.5-inch to 5.49-inch smartphones will account for about 40% of total smartphone shipments in 2014, up from about 30% in 2013.

Under such scenarios, we attempt to project Apple’s upcoming product strategies:

iPhones: To regain its declining market share in the past 1-2 years owing to its smaller screen size, we anticipate Apple will at least launch an iPhone with a 4.7-4.8 inch screen size in 2H14. Besides, we think Apple will also develop a > 5-inch iPhone, but it is still too early to gauge whether Apple will launch it in 2H14 or not.

iPads: In addition to the current iPad mini and iPad Air, we sense Apple will consider launching a 12-inch or 12.9-inch iPad, although the introduction is likely to be in late 2014 or early 2015.

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Figure 27: We expect Apple to launch larger screen size iPhones and iPads to capture the growing demand from bigger screens and to cope with the vague boundaries between hardware devices

Source: Maybank KE

Figure 28: Worldwide smartphone shipments by screen size (m units) 2012 2013 2014 2015 2.5 - 2.99" 29.7 9.6 2.3 0 3 - 3.49" 97.4 49.9 21.5 5.1 3.5 - 3.99" 251.9 289.5 29.8 269.5 4 - 4.49" 203.9 285.7 313.3 344.6 4.5 - 4.99" 80.0 216.7 316.7 406.9 5 - 5.49" 21.0 77.7 144.8 206.6 5.5 - 5.99" 8.8 21.1 38.5 48.8 6 - 6.49" - 1.0 1.1 1.9

Source: IDC, Maybank KE

Figure 29: Blurred boundaries between smart devices

Previously Nowadays

Source: Maybank KE

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Figure 30: Smartphones vs. tablets


Figure 31: Tablets vs. notebooks


AGAIN, as the boundaries that define traditional hardware and software brand names are changing, we, thus, still expect to see growing device offerings and rising volumes from low-to-mid end products next year. Under such trend, we believe the supply chain companies with cost/R&D benefits and/or more diversified customer bases should have increasing bargaining power and benefit from the trend.


Regional Sector Report 12 December 2013

Largan Precision Stay With The Best; Initiate With A Buy Technology leadership, strong execution and solid growth. Initiate BUY with a target price of TWD1,400 based on 16x 2014PER. We believe Largan is well positioned to outperform its peers in terms of technology leadership. In addition, it has superior manufacturing capabilities and a favourable customer base. Equally important, ongoing camera advancements, such as pixel migration, 3D application, image stabilizer and larger aperture etc, play to Largan’s strengths. We expect Largan to deliver 27-17% earnings growth and sustain 30-35% ROE for 2014/15.

Competition risk exaggerated and growth momentum intact. Tier 1 customers are looking for large scale, sophisticated manufacturing capabilities to fulfill product design needs and increasing camera pixel migration. We expect Largan to maintain its gross margin at 45-46% in 2014 by providing one of the most complete offerings and fastest product turnaround time globally. In addition, Largan’s key customers such as Apple and Chinese brand names continuously improve their camera quality (such as higher pixels, image stabilizers, larger aperture), and Largan is not missing out. We expect 27.5% YoY EPS growth in 2014.

Selfie and multi-camera device could be a long-term upside surprise. To differentiate the hardware design or/and enhance the user experience (such as 3D applications or gesture motion), we expect more and more OEMs to launch hardware devices (PCs and smartphones) with more than 2 embedded camera modules in 2014. We believe Amazon/ViewSonics/HTC have this vision to expand multi-camera designs into their devices, and Largan could benefit from the trend should there be high consumer acceptance.

Largan is likely one of few to deliver earnings growth among the players in the smart devices on reasons stated above. Our target price of TWD1,400 is based on 16x 2014E P/E, which is still lower than the historical average of 17-18x or the hyper growth era. Our fair valuation appraisal yields a FV of TWD1000 (an implied 11x 2014 PER) based on a normalized 33-34% ROE. Downside risks include faster ASP decline due to competition, and slowing demand for smartphone/tablet PCs.

Largan – Summary Earnings Table FYE Dec (TWDm) 2011A 2012A 2013F 2014F 2015F Revenue 15,985 20,072 27,176 35,501 42,422 Operating Profit 5,473 6,798 10,432 13,665 16,239 Operating Profit Growth (%) 17.4 24.2 53.5 31.0 18.8 Reported EPS (TWD) 36.35 42.32 65.91 86.16 100.84 EPS growth (%) 28.5 7.3 62.5 27.5 17.0 PER 14.6 18.7 16.9 13.3 11.4 EV/EBITDA (x) 10.7 11.9 10.5 8.0 6.5 Div Yield (%) 2.4 2.2 1.7 3.0 3.8 P/BV(x) 3.8 4.5 4.6 3.7 3.0 Net cash per share (TWD) 57.3 70.9 101.1 129.8 170.9 ROE (%) 26.2 26.0 34.3 34.4 32.6 Consensus operating profit NM NM 10,353 12,615 15,170 Source: Company data, Maybank Kim Eng

Buy (Initiation) Share price: TWD1,145 Target price: TWD1,400 (New) William YANG [email protected] (852) 2268 0675

Stock Information Description: Largan is the largest plastic lens company by revenue and participates in various consumer electronics markets. Its major clients including Apple, Nokia, Chinese brand names, and HTC. We expect the company to start the business with Samsung in early 2014. Ticker: 3008.TT Shares Issued (m): 134.1 Market Cap (USDm): 5,188 3-mth Avg Daily Turnover (USDm): 33.6 TWSE: 8,361.3 Free Float (%): 69.3 Major Shareholders: % Management 27.7 Nan Shan Life Insurance 3.0 New Pension Labor Fund 2.8 Vanguard 2.2 Key Indicators ROE – annualised (%) 34.4 Net cash (TWDm): 17,410 NTA/shr (TWD): 278 Asset/Debt (x): 611 Historical Chart

Performance: 52-week High/Low TWD1,170/TWD688 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 14.7 21.5 14.5 46.5 37.6 Relative (%) 12.7 19.9 11.5 43.5 30.1

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Largan Precision

On track camera resolution upgrade and more functionality to weather the competition

We believe the Apple supply chain development we mention above will dilute Largan’s profitability and stock valuation. But we also believe Largan’s growth will be less affected as its ASP should be supported by providing additional value in handset cameras such as higher pixel migration, larger aperture and HD resolution/5MP for secondary cameras. In addition, our recent industry checks conclude that Largan's competitive position should remain solid in 2014 due to its superior lens set design capability, better production yield, and strong in-house automation know-how.

Consumers perceive camera resolution to be key feature for smartphone

One of the appeals of smartphones is their rich set of multimedia features. Consumers consider the camera to be one of the most important purchasing criteria, among other features and technology such as MP3 players, hands-free devices and video broadcast capabilities according to Gartner’s consumer survey. As a result, we believe OEMs will continue to offer phones with better, higher-resolution cameras to attract consumers and differentiate products. Particularly, from a competition point of view, we believe the “iPhone effect” will force other handset OEMs to upgrade to higher camera resolutions as well. We believe that to compete with the iPhone, most handset OEMs will likely upgrade to built-in camera specs better than the current 8MP of the iPhone 5S in product pipelines. Our supply chain checks also support this assessment.

Continuous smartphone camera migration is likely

We examined Digital Still Cameras’ (DSC) pixel migration from 2000-13. We use this observation to assess how the migration cycle may occur for the smartphone. We believe the current mainstream smartphone camera is still at 5/8/13MP, which is around two to three years behind DSCs’ mainstream pixel level of 16-20MP. This implies the smartphone camera pixel quality still has room to improve as more and more consumers perceive smartphones as a photo-taker to replace DSCs.

Figure 32: we believe smartphone camera will continue to be upgraded based on the history of DSCs (Megapixels) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 DSC mainstream pixel 3 3 4 4 5 5 6 7 8 10 12 14 14-16 16-20 Source: Company data, Maybank-KE

Don’t miss the “Selfie” trend

Our checks suggest smartphone OEMs are enhancing the front camera performance from 2MP lens even to 5MP/8MP. We believe this is incremental positive news for Largan. In addition to higher ASP, we believe the different lens design also increases production difficulties. As production parameters need to be re-adjusted case by case, Largan’s experienced manufacturing knowledge should put the company in a better position to capture the demand.

Figure 33: Front end camera spec from major Chinese brand names

Meitu Kiss Huawei Ascend P6 Oppo Ulike2 Vivo Xplay Front end camera spec 8MP 5MP 5MP 5MP Source: Company data, Maybank KE


Largan Precision

Valuation and risks

Our TP of TWD 1,400 implies 25% total return (including of 3% cash dividend). Our 2014F EPS of TWD86.2 is 12% above consensus as we believe its leadership can help the company withstand the competition and the Street, in our view, overlooks the potential contribution from multiple cameras in smartphone. Our TP is based on 16x target PER (8% discount vs mid-cycle P/E of 17.4x) to factor in low visibility for its end demand and high volatile operational performance owing to more consumer electronics contribution. Our fair valuation appraisal yields a FV of TWD1,002 (an implied 12x 2014 PER) based on a normalized 34% ROE. However, fair valuation appraisal ignores the potential growth opportunity and therefore we believe our 16x targeted PER, which factors in a potential 20% growth for 2014-15, is reasonable. Also, we believe Largan stands a better chance than its peers in defending its profitability and the ongoing camera technology migration favours Largan’s long-term growth.

Figure 34: Largan’s fair valuation appraisal Parameters Normalized ROE (%) 34.4% Cost of equity 11.0% Terminal growth 2% Fair value multiple 3.6x FY14F BPS (CNY) 278 Fair value (HKD) 1,002 Implied FY14F PER 11.6 Source: Company data, Maybank KE

Figure 35: Largan’s patents in US Figure 36: Largan’s patent in Taiwan

Source: US patent and trademark office, Maybank KE Source: Taiwan patent and trademark office, Maybank KE

Figure 37: Largan’s sales breakdown (2013F) Figure 38: Largan’s customer breakdown (2013F)

Source: Company data, Maybank KE Source: Company data, Maybank KE

Phone Camera 97.3%

DSC 1.9%

MFP 0.7%

Others 0.1%

Apple 54.7%

Chinnese brands 20.9%

HTC 6.7%

Nokia 4.5%

LG 3.3%

Others 9.9%


Largan Precision

Figure 39: Largan’s forward PE band


Figure 40: Largan’s margin trend Figure 41: Largan’s ROE trend


Figure 42: Largan’s financial model (TWDm) 1Q13A 2Q13A 3Q13A 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012A 2013F 2014F Revenue 5,103 5,857 7,171 9,045 5,916 7,059 9,565 12,961 20,072 27,176 35,501 COGS 2,966 2,902 3,792 4,931 3,448 3,507 5,041 7,191 11,710 14,591 19,187 Gross profit 2,136 2,955 3,379 4,114 2,468 3,553 4,524 5,770 8,362 12,584 16,315 OPEX 461 485 556 650 472 567 725 886 1,564 2,152 2,650 Operating profit 1,676 2,470 2,822 3,464 1,996 2,986 3,799 4,884 6,798 10,432 13,665 PBT 2,013 2,673 2,711 3,363 2,038 3,032 3,846 4,934 6,811 10,759 13,850 PAT 1,849 2,035 2,320 2,858 1,865 2,183 3,289 4,218 5,578 9,063 11,555 EPS (TWD) 13.79 15.18 17.30 21.31 13.91 16.28 24.52 31.46 41.59 67.59 86.16 Margin (%) Gross margin 41.9% 50.5% 47.1% 45.5% 41.7% 50.3% 47.3% 44.5% 41.7% 46.3% 46.0% Operating margin 32.8% 42.2% 39.4% 38.3% 33.7% 42.3% 39.7% 37.7% 33.9% 38.4% 38.5% Net margin 36.2% 34.8% 32.4% 31.6% 31.5% 30.9% 34.4% 32.5% 27.8% 33.4% 32.5% Growth (%) Revenue YoY 40.2% 75.5% 58.9% 5.4% 15.9% 20.5% 33.4% 43.3% 25.6% 35.4% 30.6% EPS YoY 109.6% 205.9% 100.0% -0.4% 0.9% 7.2% 41.7% 47.6% 7.3% 62.5% 27.5% Revenue QoQ -40.5% 14.8% 22.4% 26.1% -34.6% 19.3% 35.5% 35.5% EPS QoQ -35.6% 10.1% 14.0% 23.2% -34.8% 17.0% 50.7% 28.3% Source: Company data, Maybank-KE

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Largan Precision

Downside risks are weaker-than-expected handset demand, especially in iPhones and the mid- to high-end segment; severe ASP erosion due to competition or faster-than-expected yield-rate improvement from Largan's major competitor (Genius); market share loss of key customers and other replacement technology (such as wafer-level lenses, please see more details in the following paragraph).

Wafer-level optics (WLO) is a potential threat for mechanical optics. Wafer-level optics is the design and manufacture of miniaturized optics at the wafer level using advanced semiconductor-like techniques. Therefore, current CMOS image sensor makers such as Sony, Omnivision and Aptina are the main WLO suppliers. Their proposed advantages are cost effectiveness and miniaturized optics that enable the reduced form factor of camera modules for mobile devices. However, the current yield rate for WLO is still unstable, especially for more than one lens element. As lens designs are moving into more lens elements (even VGAs are using 3-4P from previous 2P) as well, Largan should mainly focus on the higher-end camera-lens market (VGA/1MP will account for <1% of sales in 2014) Therefore, we do not think WLO is a threat for Largan in the foreseeable future.


Largan Precision

INCOME STATEMENT BALANCE SHEET FYE Dec (TWDm) 2011A 2012A 2013F 2014F

FYE Dec (TWDm) 2011A 2012A 2013F 2014F Revenue 15,985 20,072 27,176 35,501 Fixed Assets 8,057 9,731 9,941 11,183 EBITDA 6,360 7,989 11,817 15,037 Other LT Assets 148 151 1,714 1,714 Depreciation & Amortisation 887 1,191 1,385 1,372 Cash/ST Investments 11,268 11,604 15,900 19,755 Operating Profit (EBIT) 5,473 6,798 10,432 13,665 Other Current Assets 234 255 220 220 Interest (Exp)/Inc 50 84 120 185 Total Assets 24,909 31,188 37,749 46,314 Associates - - - - One-offs 313 (71) 207 - ST Debt 444 93 76 76 Pre-Tax Profit 5,836 6,811 10,759 13,850 Other Current Liabilities 3,243 4,426 4,622 4,622 Tax 638 1,234 1,696 2,295 LT Debt 0 0 0 0 Minority Interest - - - - Other LT Liabilities 54 49 69 69 Net Profit 5,198 5,578 9,063 11,555 Minority Interest 0 0 0 0 Recurring Net Profit 5,198 5,578 9,063 11,555 Shareholders' Equity 19,810 23,064 29,845 37,321 Total Liabilities-Capital 24,909 31,188 37,749 46,314 Revenue Growth % 29.4% 25.6% 35.4% 30.6% EBITDA Growth (%) 18.1% 25.6% 47.9% 27.2% Share Capital (m) 1,341 1,341 1,341 1,341 EBIT Growth (%) 17.4% 24.2% 53.5% 31.0% Gross Debt/(Cash) 444 93 76 76 Net Profit Growth (%) 28.5% 7.3% 62.5% 27.5% Net Debt/(Cash) (7,680) (9,511) (13,554) (17,410) Recurring Net Profit Growth (%) 11.2% 16.4% 55.7% 30.7% Working Capital 11,428 12,898 17,967 24,200 Tax Rate % 10.9% 18.1% 15.8% 16.6% CASH FLOW RATES & RATIOS FYE Dec (TWDm) 2011A 2012A 2013F 2014F FYE Dec 2011A 2012A 2013F 2014F Profit before taxation 5,836 6,811 10,759 13,850

EBITDA Margin % 39.8% 39.8% 43.5% 42.4% Depreciation 887 1,191 1,385 1,372 Op. Profit Margin % 34.2% 33.9% 38.4% 38.5% Net interest receipts/(payments) 50 84 120 185 Net Profit Margin % 32.5% 27.8% 33.4% 32.5% Working capital change 120 (1,065) (987) (2,378) ROE % 28.7% 26.0% 34.3% 34.4% Cash tax paid 638 1,234 1,696 2,295 ROA % 20.9% 19.9% 26.3% 27.5% Others (incl'd exceptional items) 432 74 421 - Net Margin Ex. El % 32.5% 27.8% 33.4% 32.5% Cash flow from operations 6,634 5,742 9,951 10,549 Dividend Cover (x) 2.9 2.4 4.0 2.8 Capex (2,415) (2,677) (2,902) (2,615) Interest Cover (x) 108.7 80.6 86.7 73.9 Disposal/(purchase) 47 24 0 Asset Turnover (x) 0.6 0.6 0.7 0.8 Others (78) (19) (472) - Asset/Debt (x) 56.1 334.9 497.7 610.6 Cash flow from investing (2,085) (1,603) (3,630) (2,615) Debtors Turn (days) 4.8 4.0 4.0 4.4 Debt raised/(repaid) 332 (351) (17) Creditors Turn (days) 9.4 4.8 4.4 5.2 Equity raised/(repaid) - - - - Inventory Turn (days) 7.7 8.4 10.3 9.8 Dividends (paid) (1,811) (2,280) (2,280) (4,079) Net Gearing % 38.8% 41.2% 45.4% 46.6% Interest payments 50 84 120 185 Debt/ EBITDA (x) 0.1 0.0 0.0 0.0 Others (34) (9) (11) - Debt/ Market Cap (x) 0.0 0.0 0.0 0.0 Cash flow from financing (1,513) (2,640) (2,309) (4,079) Change in cash 3,068 1,480 4,026 3,856 PER SHARE DATA FYE Dec (TWD) 2011A 2012A 2013F 2014F EPS 38.8 41.6 67.6 86.2 CFPS 49.5 42.8 74.2 78.7 BVPS 147.7 172.0 222.6 278.3 SPS 119.2 149.7 202.7 264.7 EBITDA/share 47.4 59.6 88.1 112.1 DPS 13.5 17.0 17.0 30.4 Source: Company data, Maybank Kim Eng


Regional Initiating Coverage 11 December 2013

AAC Technologies Competition Heating Up – Sell For Now

Downgrade to SELL with a revised target price of HKD31 as we transfer stock coverage to William Yang. While we believe AAC is a company with advanced technologies, a solid management team and execution abilities, we expect slowing acoustic spec migration and growing competition in 2014 are likely to adversely impact AAC’s earnings outlook and therefore potentially depress its trading multiple. Importantly, we estimate 2014F EPS is likely to retreat 5% YoY as opposed to the current Street view of up 6% YoY.

Competition risk growing. We forecast AAC’s gross margin will decline to 40-41% in 2014F from 42-43% in 2013F and its OP will decelerate to 11% YoY growth in 2014F vs 30% in 2013 and 63% in 2012 as we believe 1) growing competition (from GoerTek and likely Merry) on Apple’s upcoming products owing to new suppliers and slowing spec migration; 2) the product mix toward mid-to-low-end smartphones; 3) growing ASP pressure among smartphone OEMs to cap the adoption of the more-expensive speaker boxes even in high end smartphones (Motorola X). Its 2014 topline is likely to slow down to 16% growth following 30-35% CAGR from 2011-2013.

Non-acoustic products could drive upside but takes time. We sense the Street has high expectations on AAC’s development of its non-acoustic business such as antennas and optics. We are positive on AAC’s integration of its antenna into speaker-box design, especially after its design was adopted in products for customers such as Xiaomi and Lenovo. However, we are skeptical that AAC will make a significant breakthrough with its optics business in the near future. We believe array camera’s inferior product quality with uncompetitive pricing vs current mainstream camera module design is a bottleneck.

Valuation multiple to compress given meaningful growth slowdown. Our target price of HKD31 is based on 12x 2014F P/E, which is lower than its historical average of 14-15x during the rapid growth era of smartphones and its dominant market position. Our fair valuation appraisal suggests a FV of HKD29 based on normalized ROE of 29%. Upside/downside risks include end of demand and competition.

AAC – Summary Earnings Table FYE Dec (CNYm) 2011A 2012A 2013F 2014F 2015F Revenue 4,060 6,283 8,356 9,638 10,577 Operating Profit 1,136 1,849 2,404 2,662 3,001 Operating Profit Growth (%) 7.2 62.8 30.0 10.8 12.6 Reported EPS (CNY) 0.84 1.44 2.13 2.01 2.26 EPS Growth (%) 5.0 70.1 48.1 (5.6) 12.5 PER 15.6 14.2 13.2 13.9 12.3 EV/EBITDA (x) 24.4 14.7 11.8 10.5 9.0 Div Yield (%) 1.2 2.1 3.0 2.8 3.2 P/BV(x) 7.3 5.7 4.6 3.7 3.0 Net Cash Per Share (CNY) 0.39 0.23 0.77 1.33 2.23 ROE (%) 23.2 32.6 37.8 28.6 26.3 ROA (%) 16.9 22.5 26.0 19.8 18.7 Consensus Operating Profit NM NM 2,463 2,856 3,293 Source: Company data, Maybank Kim Eng

Sell (from Buy) Share price: HKD35.25 Target price: HKD31 (from HKD45) William YANG, [email protected] (852) 2268 0675

Stock Information Description: AAC is the worldwide leading micro component total solutions provider for communications and consumer electronics market. Founded in 1993, AAC now offers superior products at competitive prices to its customers such as Apple, Samsung, HTC and Chinese brand names. Ticker: 2018 HK Shares Issued (m): 1,228 Market Cap (USDm): 5,583 3-mth Avg Daily Turnover (USDm): 27.6 HSI: 23,218.1 Free Float (%): 59.1 Major Shareholders: % Management 40.8 JP Morgan 18.3 Capital 10.2 Credit Suisse 7.6 Key Indicators – FY14 ROE – annualised (%) 28.6 Net cash (CNYm): 1,633 NTA/shr (CNY): 7.74 Asset/Debt (x): 7.8 Historical Chart

Performance: 52-week High/Low HKD46.4/HKD26.7 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 14.4 0.1 -19.3 24.0 27.7 Relative (%) 13.1 -1.0 -28.1 18.0 28.1

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AAC Technologies

We are conservative on AAC as we believe the risks to earnings/valuation will trend higher as we expect to see more intense competition in 2014 as the slowing acoustic design change for high end smartphone would provide new entrants more time/room to catch up with AAC. Additionally, existing incumbents such as Knowles are expected to introduce aggressive pricing strategies to combat the trend of the past few years of losing market share.

We believe AAC will withstand the competition and maintain its solid leadership in the acoustic industry by leveraging its technological supremacy, superior quality, competitive cost structure and close relationships with OEMs. However, we believe the company will be negatively affected by the decreasing high-end smartphone mix (which are less likely to adopt speaker boxes with high ASP) and increasing price pressure from its customers. At the same time, we expect AAC to face intense pressure from Knowles, GoerTek and potential new entrant Merry on iPhone6. In our view, this explains why AAC has heavily increased its capex in its non-acoustic business since late 2013 in its attempts to maintain future growth.

From the product mix point of view, we agree the majority of high-end smartphones should continue to use speaker boxes and other acoustic components to enhance product quality, but we note an interesting example in recent high-end smartphone models, which do not necessarily use speaker boxes to deliver similar good sound quality. Motorola’s X which does not carry speaker boxes is the best example. We think it is mainly due to the increasing pricing pressure on each smartphone OEM. Therefore, OEMs are using different designs to lower the BOM cost to defend the pricing competition even the BOM cost of acoustic is much smaller than other components such as memory/panel/mechanical parts. We agree Motorola is not big enough (unlike Samsung/Apple) to lead the design, but whether it will attract more OEMs to try this solution is worth watching.

Competition risk is increasing. Don’t overlook the potential new entrant Merry

AAC and the acoustic industry and have enjoyed strong growth in the past five years since iPhone was launched as Apple continuously improved its acoustic quality by incorporating speaker boxes and MEMS microphones into its designs. Other smartphone OEMs have also followed the design. However, we estimate that AAC’s sales will decelerate to 15.6% in 2014F from 33.0% in 2013F and 54.8% in 2012. Our assumptions are based on 1) increasing competition on Apple’s products owing to potential new suppliers and slowing spec migration; 2) we believe the faster-growing low-to-mid-end smartphones are likely to adopt less-expensive acoustic components such as speakers (instead of speaker boxes); 3) the speaker box adoption rate has already saturated in high end smartphone. On the flip side, we observe a small portion of smartphone brand names to cap the adoption of the more-expensive speaker boxes even in high end smartphones (Motorola X) due to the growing ASP pressure. We estimate these factors should lead to downward pressure on its product ASP. In the past, AAC stood firmly in the acoustic market due to its superior R&D capability and faster than competition turnaround time (which shortens the product cycle). However, a longer product cycle or less spec migration would help its peers such as GoerTek and Merry to catch up or narrow the gap.


AAC Technologies

In this paragraph, we would like to share more our thoughts on competition, especially for Apple’s products.

GoerTek

GoerTek, in our view, expanded its footprint on iPhone5s by expanding its allocation for speaker boxes to 40-50% compared to 30% for iPhone5, while its share for receivers was 40-50%, up from zero for iPhone5. Meanwhile, its MEMS MIC component achieved a 20-30% share. Additionally, we forecast GoerTek to supply MEMS MIC for iPad Air and iPad mini with Retina, with an estimated 20-30% of orders.

Knowles

Since 20011/12 AAC has gained market share on speaker boxes, receivers and MEMS MICs at the expense of Knowles due to its better product design turnaround time and flexibility rather than an aggressive pricing strategy. However, after years of losing ground, our latest checks indicate Knowles is likely to offer more aggressive pricing for speakers, receivers and MEMS MICs in an effort to prevent its existing market share declining further. We attribute this strategy to Knowles’ increased investment in the automation of its receiver and speaker production lines. Knowles’ MEMS MIC technology is vital to its future profitability. If it loses the battle for MEMS MIC, it will further negatively impact on its procurement bargaining power and its profitability. Our checks lead us to believe Knowles is expanding its MEMS MIC capacity to meet market demand and, more importantly, to regain market share. Therefore, we expect AAC to face further competition in the speakers and MEMS MIC business.

Merry

Merry is now the largest provider of speakers for MacBooks with more than 50% order allocation based on our checks. We believe Merry is the wild card to watch as a supplier of speaker boxes for iPhone6 and the next generation of iPads. Although we are unable to confirm it now, we believe Merry’s progress on speaker boxes for iPhone6 and iPads in 2H14 is another important factor to watch. For MEMS MIC, we do not believe Merry will have a major breakthrough in the next 1-2 years.

Figure 43: Market share on iPhone’s acoustic (Merry is key to watch) Acoustic Share Speakerbox MEMS MIC Allocation - iPhone AAC GoerTek Knowles Merry AAC GoerTek Knowles iPhone4 90% 0% 10% 0% 50% 0% 50% iPhone4S 70% 0% 30% 0% 50% 0% 50% iPhone5 70% 20% 10% 0% 50% 0% 50% iPhone5S/5C 60% 30% 10% 0% 40% 10% 50% iPhone 6 ? ? ? ?? 30-40% 10-20% 50% Source: Maybank KE

Figure 44: Market share on iPad’s acoustic (Merry is key to watch) Acoustic Share Speakerbox MEMS MIC Allocation - iPad AAC GoerTek Knowles Merry AAC GoerTek Knowles New iPad 70% 20% 10% 0% 20% 0% 80% iPad mini 70% 20% 10% 0% 20% 0% 80% iPad Air 60% 30% 10% 0% 20% 20-30% 50-60% iPad mini with Ritina 60% 30% 10% 0% 20% 20-30% 50-60% iPad Air2 ? ? ? ?? 20% 20-30% 50-60% iPad mini 3 ? ? ? ?? 20% 20-30% 50-60% Source: Maybank KE


AAC Technologies

Too early to celebrate the new business contribution

Another critical point to watch is AAC’s development of new business such as antenna and optics. Its antenna business should start to pay off from late 2013 as our checks indicate AAC has successfully integrated its antenna into its speaker boxes for customers such as Xiaomi and Lenovo. The GM for the business is 40-45%. We believe it is the right direction for AAC to leverage its core technology offering a one-stop-shop service for customers. However, we are less optimistic about its optics business which includes its wafer level lens and array camera technology. Currently, our supply chain visits suggest that the largest disadvantage of array camera is the inferior image quality compared to traditional camera solutions. Therefore, we do not expect array cameras to grab a meaningful slice of the pie in the near future as long as smartphone OEMs are still demanding better camera quality (even for low-to-mid-end smartphones). Although array cameras can provide a slimmer form factor, it is not necessarily cheaper owing to the low production yield rate.

Lastly, its non-acoustic business currently accounts for ~5% of its total sales and the Street expects it to reach 10% in 2014. We think the contribution is still not meaningful enough to reverse the decelerating trend of its acoustic business in 2014. In addition, management guided capex of RMB900m-1,000m in 2014 (versus ~900m in 2013), mostly for its non-acoustic business. This may imply that AAC’s growth from its acoustic business is decelerating and therefore needs to rely on growth from its non-acoustic business.

AAC has successfully penetrated most global smartphone OEMs and grabbed the majority shares among them thanks to its lead in acoustic components, mechanical design and technology. We believe AAC has fewer operational risks due to its diversified customer mix but we gauge its market share gain is likely to be capped as the company already owns the majority allocation of most smartphone OEMs such as Apple and Chinese brand names. Apple has been its biggest customer since 2012, accounting for over 40% of AAC’s total sales, followed by Chinese brand names, Samsung, and Nokia according to our estimates. For Chinese brand names such as Xiaomi, AAC currently provides multiple components including speaker boxes, receivers, MEMS microphones and headphones. Xiaomi is likely to ship 15-20m smartphones in 2013 and is targeting 40m units in 2014. We expect AAC to benefit from the rise in local brands like Xiaomi in the Chinese smartphone market.

Figure 45: AAC’s sales breakdown (2013F) Figure 46: AAC’s customer breakdown (2013F)


Dynamic Components

83.3%

Microphones 11.2%

Headsets 0.7%

Others 4.8%

Apple 48.0%

Chinnese brands 15.0%

Samsung 13.0%

Nokia 11.0%

Others 13.0%


AAC Technologies

Figure 47: AAC’s forward PE band


Our model assumes that AAC’s core EPS (excluding one-time gain) will grow by 8-13% YoY in 2014F-15F, following 63%-30% YoY growth in 2012-2013F. We expect AAC’s ROE to drop to 28.6% in 2014F from 37.8% in 2013F. Our estimates reflect AAC’s decelerating growth momentum and margin erosion due to a downward mix shift and competition in the smartphone acoustic business. Our target price of HKD31 is based on 12x target multiple and an EPS base of 14F PE. Our 2014E EPS of HKD2.57 is 5% below consensus as we believe the slowing acoustic product migration and increasing competition will negatively drag down the company’s EPS growth. Our target multiple of 12x target PER (15% discount vs. mid-cycle P/E of 14.2x) factors in the risks we mentioned above.

Upside risks are stronger-than-expected smartphone demand, especially for high end smartphones; less server ASP/order allocation competition from tier 2 suppliers; faster-than-expected non-acoustic business contribution; market share win of key customers.

Figure 48: AAC’s fair valuation appraisal Parameters Normalized ROE (%) 28.6% Cost of equity 11.0% Terminal growth 2.0% Fair value multiple 2.96x FY14F BPS (CNY) 7.74 Fair value (HKD) 29.3 Implied FY14F PER 11.4 Source: Company data, Maybank KE

Figure 49: AAC’s margin trend Figure 50: AAC’s ROE trend


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AAC Technologies

Figure 51: AAC’s financial model (CNYm) 1Q13A 2Q13A 3Q13A 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012A 2013F 2014F Revenue 1,905 1,926 2,083 2,442 2,138 2,257 2,521 2,722 6,283 8,356 9,658 COGS 1,090 1,101 1,198 1,418 1,279 1,354 1,497 1,604 3,509 4,807 5,748 Gross profit 814 825 885 1,025 859 903 1,024 1,118 2,774 3,549 3,910 OPEX (281) (256) (262) (347) (304) (278) (287) (373) (925) (1,145) (1,244) Operating profit 533 569 623 678 555 625 737 745 1,849 2,404 2,666 PBT 587 595 994 707 578 649 763 774 2,016 2,883 2,768 PAT 534 542 898 638 516 579 681 691 1,763 2,611 2,469 EPS (CNY) 0.43 0.44 0.73 0.52 0.42 0.47 0.55 0.56 1.44 2.13 2.01 EPS (HKD) 0.56 0.56 0.94 0.66 0.54 0.60 0.71 0.72 1.84 2.72 2.57 Margin (%) Gross margin 42.7% 42.8% 42.5% 42.0% 40.2% 40.0% 40.6% 41.1% 44.2% 42.5% 40.5% Operating margin 28.0% 29.6% 29.9% 27.8% 26.0% 27.7% 29.2% 27.4% 29.4% 28.8% 27.6% Net margin 28.0% 28.1% 43.1% 26.1% 24.1% 25.6% 27.0% 25.4% 28.1% 31.3% 25.6% Growth (%) Revenue YoY -4.6% 1.1% 8.1% 17.2% -12.5% 5.6% 11.7% 8.0% 54.8% 33.0% 15.6% EPS YoY -6.2% 1.5% 65.8% -29.0% -19.2% 12.3% 17.6% 1.4% 70.1% 48.1% -5.6% Revenue QoQ 59.7% 37.9% 22.7% 22.3% 12.3% 17.2% 21.0% 11.5% EPS QoQ 69.5% 33.6% 89.8% 12.1% -3.4% 6.9% -24.2% 8.3% Source: Company data, Maybank-KE


AAC Technologies

INCOME STATEMENT BALANCE SHEET FYE Dec (CNYm) 2011A 2012A 2013F 2014F

FYE Dec (CNYm) 2011A 2012A 2013F 2014F Revenue 4,060 6,283 8,356 9,658 Fixed Assets 2,697 3,624 4,344 5,064 EBITDA 1,398 2,329 2,928 3,238 Other LT Assets 592 694 702 703 Depreciation & Amortisation (259) (343) (408) (473) Cash/ST Investments 1,376 1,320 2,319 3,222 Operating Profit (EBIT) 1,138 1,986 2,520 2,766 Other Current Assets 2,049 3,287 3,782 4,723 Interest (Exp)/Inc 22 4 3 2 Total Assets 6,714 8,926 11,148 13,712 Associates (19) 26 34 0 One-offs 0 0 326 0 ST Debt 891 1,035 1,376 1,590 Pre-Tax Profit 1,142 2,016 2,883 2,768 Other Current Liabilities 996 1,717 1,912 2,505 Tax (109) (259) (278) (304) LT Debt 0 0 0 0 Minority Interest 3 6 6 6 Other LT Liabilities 16 44 54 58 Net Profit 1,036 1,763 2,611 2,469 Minority Interest 61 52 52 52 Recurring Net Profit 1,036 1,763 2,285 2,469 Shareholders' Equity 4,750 6,078 7,755 9,507 Total Liabilities-Capital 6,714 8,926 11,148 13,712 Revenue Growth % 21.2 54.8 33.0 15.6 EBITDA Growth (%) 9.6 66.6 25.7 10.6 Share Capital (m) 100 100 100 100 EBIT Growth (%) 5.5 74.5 26.9 9.8 Gross Debt/(Cash) 891 1,035 1,376 1,590 Net Profit Growth (%) 5.0 70.1 48.1 (5.5) Net Debt/(Cash) (485) (286) (943) (1,631) Recurring Net Profit Growth (%) 5.0 70.1 29.7 8.0 Working Capital 1,538 1,856 2,814 3,849 Tax Rate % 9.5 12.8 9.6 11.0 CASH FLOW RATES & RATIOS FYE Dec (CNYm) 2011A 2012A 2013F 2014F FYE Dec 2011A 2012A 2013F 2014F Profit before taxation 1,142 2,016 2,883 2,768

EBITDA Margin % 34.4 37.1 35.0 33.5 Depreciation 259 343 408 473 Op. Profit Margin % 28.0 31.6 30.2 28.6 Net interest receipts/(payments) (22) (4) (3) (2) Net Profit Margin % 25.5 28.1 31.3 25.6 Working capital change (403) (646) (331) (361) ROE % 23.2 32.6 37.8 28.6 Cash tax paid (73) (201) (215) (236) ROA % 16.9 22.5 26.0 19.9 Others (incl'd exceptional items) 42 27 (377) (18) Net Margin Ex. El % 25.5 28.1 27.4 25.6 Cash flow from operations 945 1,535 2,364 2,623 Dividend Cover (x) 2.5 2.5 2.5 2.5 Capex (1,308) (1,334) (906) (906) Interest Cover (x) 206.5 165.0 203.6 199.6 Disposal/(purchase) 0 7 0 0 Asset Turnover (x) 0.7 0.8 0.8 0.8 Others (11) (12) 16 16 Asset/Debt (x) 6.9 7.6 7.3 7.8 Cash flow from investing (1,319) (1,339) (890) (890) Debtors Turn (days) 97.8 88.1 87.5 90.5 Debt raised/(repaid) 427 191 341 214 Creditors Turn (days) 65.9 61.8 60.5 62.0 Equity raised/(repaid) 0 0 0 0 Inventory Turn (days) 72.3 78.9 77.2 79.1 Dividends (paid) (442) (417) (803) (1,031) Net Gearing % N/A N/A N/A N/A Interest payments (6) (12) (12) (14) Debt/ EBITDA (x) 0.6 0.4 0.5 0.5 Others 41 (13) 0 0 Debt/ Market Cap (x) 0.0 0.0 0.0 0.0 Cash flow from financing 21 (251) (475) (830) Change in cash (352) (56) 999 902 PER SHARE DATA FYE Dec (CNY) 2011A 2012A 2013F 2014F EPS 0.84 1.44 2.13 2.01 CFPS 0.77 1.25 1.92 2.14 BVPS 3.87 4.95 6.31 7.74 SPS 3.31 5.12 6.80 7.86 EBITDA/share 1.14 1.90 2.38 2.64 DPS 0.34 0.58 0.86 0.81 Source: Company data, Maybank Kim Eng


Regional Initiating Coverage 11 December 2013

Catcher Technology Hype Expectations; Initiate Hold Stay neutral for better entry price. Initiate HOLD and a target price of TWD190. Catcher is a company with solid manufacturing capabilities, but we think its 1H14 operations will likely be lower than consensus estimates on sluggish demand from its current customers like RIM/HTC/Apple (iPad mini & MacBooks). Besides, we think the current share price may have factored in new order wins for metal casings from Samsung and iPhone5s which may not materialize. Our 1H14 sales estimate is 8% below consensus.

Too early to cheer about Samsung and 5S. Our latest research indicates Samsung potentially will launch a smartphone with a new metal casing (in addition to Galaxy and Note series) but the company is actually working with casing vendors such as Casetek and BYD. For iPhone casing, our understanding is that Catcher is trying to penetrate into iPhone6, rather than 5s, which means the earliest contribution will kick in in late 2Q14 if everything goes well and is subject to possible delays if the experience of iPhone5/5s is anything to go by.

We expect 1H14 to be a light season due to lack of new projects. Catcher reported b-t-e November sales. We expect the company will maintain a high level of sales in 4Q13 (+28% QoQ) driven by Sony, commercial NB and iPad mini demand. However, we believe demand will drop at a faster-than-expected pace in 1Q14 mainly due to transition periods for some products (such as Sony smartphones) and other products being close to the end of their product cycles (such as iPad mini). We forecast Catcher’s sales to decline 28% QoQ for 1Q14 vs Street estimates of a 15-20% decrease in 1Q14. We think the current share price reflects fair risk/reward.

Good for now, awaiting catalyst. We think the current share price reflects a potentially strong 4Q13 but there is a potential weaker-than-expected outlook for 1H14. Also, new orders from Samsung and iPhone5s may not materialize in the near term. Our target price of TWD190 is based on 11x 2014F P/E, which is lower than the historical average of 13x. Our fair valuation appraisal yields a FV of TWD194 based on normalized ROE of 17-18%. Upside/downside risks include end demand and competition.

Catcher – Summary Earnings Table FYE Dec (TWDm) 2011A 2012A 2013F 2014F 2015F Revenue 35,913 37,029 43,485 48,893 55,081 Operating Profit 13,213 12,158 14,630 16,377 18,469 Operating Profit Growth (%) 159.7 -8.0 20.3 11.9 12.8 Reported EPS (TWD) 14.09 14.37 18.78 17.23 19.24 EPS growth (%) 126.4 2.0 30.6 -8.2 11.6 PER 9.6 9.9 10.1 11.0 10.0 EV/EBITDA (x) 5.6 5.7 5.9 5.2 4.7 Div Yield (%) 2.7 3.5 3.4 4.0 4.8 P/BV(x) 1.8 1.8 1.9 1.6 1.5 Net cash per share (TWD) 19.5 18.6 20.1 22.8 26.3 ROE (%) 24.1 18.6 22.0 17.5 17.1 Consensus operating profit NM NM 13,874 16,876 18,138 Source: Company data, Maybank Kim Eng

Hold (Initiation) Share price: TWD192 Target price: TWD190 (New) William YANG [email protected] (852) 2268 0675

Stock Information Description: Founded in 1988, Catcher started out its research on magnesium die casting technology. In recent years, with its successful efforts in aluminum extrusion, forging, CNC secondary processing and anodizing treatment, it has become the leading manufacturer in integral casing for consumer electronics. Ticker: 2474 TT Shares Issued (m): 750 Market Cap (USDm): 4,869 3-mth Avg Daily Turnover (USDm): 46.5 TWSE: 8,361.3 Free Float (%): 81.6 Major Shareholders: % Management 4.2 Cathay Life Insurance 3.8 Vanguard 2.7 New Labor Pension Fund 2.4 Key Indicators –FY14 ROE – annualised (%) 17.5 Net cash (TWDm): 17,298 NTA/shr (TWD): 106.8 Asset / Debt (x): 6.5 Historical Chart

Performance: 52-week High/Low TWD197/TWD126 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 6.1 28.4 23.5 31.0 31.1 Relative (%) 4.1 26.8 20.5 23.0 23.6

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AAC Technologies

Fundamentals for our growth projection

Our key assumptions for Catcher are:.

Apple is likely to be the only growth driver for Catcher in 2014 due to the potential iPhone6 metal casing kicking in in 2H14 (our model assumes Catcher will have 20% of iPhone6 metal casing). However, we expect Catcher’s MacBook and iPad mini business to be diluted due to competition from Casetek. We now model Catcher can grab 20% of iPhone6 casing but slightly decrease its MacBook and iPad mini allocation to 65% and 8% from 70% and 13%.

HTC may launch its flagship model “M8” in March 2014. We expect a similar casing design but a larger screen size from 4.7 inches to 5 inches. We estimate Catcher’s sales from HTC will drop 10-15% YoY due to weakened demand and market share dilution (because of similar design though slightly bigger).

We forecast RIM’s revenue contribution for Catcher will decrease 45-50% YoY due mainly to end demand.

After a strong growth of Sony’s smartphone (44m units in 2013F), Sony targets to deliver a 60m smartphone units in 2014. The increasing demand is positive for Catcher but our observations lead us to believe Sony is also eager to diversify its casing suppliers to have better bargaining power and less supply chain risk. Therefore, we believe Catcher’s share of the allocation of business from Sony will decrease in 2014.

Samsung: There have been some whispers that Samsung may change to a metal casing design for its upcoming smartphones. However, whatever Samsung eventually decides to do, we believe the impact on Catcher is largely irrelevant. We agree Samsung may launch a new model with a metal casing design but the casing supplier, in our view, should be Casetek or BYD. Besides, we expect Samsung to keep its plastic casing and Mg inner parts mechanical design for its current flagship models such as Galaxy and Note based on the strong demand and positive feedback for these series. Our supply chain checks also support this.

Dell/HP NB casing demand is relatively stable, in our view. We expect both Dell and HP to keep their unibody metal casing design for their high end ultrabook but the volume is small vs smartphone. Metal casing demand for commercial NB (mainly magnesium) is growing but we believe competition from another casing player, JuPal, is also increasing.

Lastly, ASP competition is another potential risk. First, large volume shipments on a single model also translate to higher ASP pressure. Unlike other OEMs with diversified model portfolios, Catcher can maintain or raise prices with frequent design changes. We sense Catcher is likely to face more price cutting pressure from its major customer, Apple, especially after the iPhone6 casing projects kick in. Besides, iPhone casing has been the profit driver for rivals Hon Hai Group and Jabil. We think they will also use more aggressive pricing strategies to defend their market share. Hence, we trim our gross margin forecast of Catcher to 42.7% in 2014 from 43.4% in 2013 even with a growing sales scale in 2014.


Catcher Technology

Figure 52: Catcher’s customers’ sales estimates (TWDb) 2013F 2014F YoY(%) Apple 20.6 30.4 47% HTC 5.2 4.5 -14% RIM 4.4 2.1 -53% Sony 5.6 4.2 -25% Dell 4.0 3.5 -14% Others 3.5 4.3 22% Total 43.3 48.9 13% Source: Company data, Maybank KE

Figure 53: Catcher’s sales breakdown (2013F) Figure 54: Catcher’s customer breakdown (2013F)


Figure 55: Catcher’s forward PE band


Figure 56: Catcher’s fair valuation appraisal Parameters Normalized ROE (%) 17.5% Cost of equity 10.5% Terminal growth 2% Fair value multiple 1.82x FY14F BPS (CNY) 107 Fair value (HKD) 194 Implied FY14F PER 11.3 Source: Company data, Maybank KE

Our target price of TWD190 implies 3% total return (including of 4.3% cash dividend). Our 1H14E EPS of NT$6.35 is 8% lower than consensus as we believe the Street is overly positive on the Samsung and iPhone5s casing orders in 1H14 and overlooks the decreasing contribution from iPad mini. Our target

NB 46.0%

Smartphone 35.0%

Tablet 16.0%

Others 3.0%

Apple 47.6%

HTC 12.1%

RIM 10.2%

Sony 12.5%

Dell 9.3%

Other 8.3%

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Catcher Technology

price is based on 11x target PER (15% discount vs. mid-cycle P/E of 13x) to factor in the risks we mentioned above and potential competition from other materials.

Upside risks are stronger than expected smartphone demand, especially in high-end smartphones; less server ASP/order allocation competition from tier 2 suppliers; market share wins of key customers.

Downside risks are weaker-than-expected handset demand, especially in iPhones and the mid- to high-end segment; severe ASP erosion due to competition or faster-than-expected yield-rate improvement from Catcher's major competitors such as Casetek; market share loss of key customers.

Figure 57: Catcher’s margin trend Figure 58: Catcher’s ROE trend


Figure 59: Catcher’s financial model (TWDm) 1Q13A 2Q13A 3Q13A 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012A 2013F 2014F Revenue 9,232 10,460 10,438 13,355 9,594 10,011 13,626 15,663 37,029 43,485 48,893 COGS 5,380 5,808 6,090 7,325 5,644 5,676 7,722 8,987 20,990 24,603 28,029 Gross profit 3,852 4,652 4,348 6,029 3,950 4,335 5,904 6,676 16,039 18,882 20,864 OPEX 922 1,025 1,103 1,202 940 1,021 1,226 1,300 3,881 4,252 4,488 Operating profit 2,930 3,627 3,245 4,828 3,010 3,313 4,677 5,376 12,158 14,630 16,377 PBT 4,650 4,866 3,415 4,881 3,070 3,394 4,747 5,453 13,951 17,813 16,664 PAT 3,922 3,636 2,771 3,897 2,606 2,202 3,839 4,410 10,890 14,226 13,057 EPS (TWD) 5.23 4.85 3.69 5.19 3.47 2.93 5.12 5.88 14.51 18.96 17.40 EPS (TWD) - FD 5.18 4.80 3.66 5.14 3.44 2.91 5.07 5.82 14.37 18.78 17.23 Margin (%) Gross margin 41.7% 44.5% 41.7% 45.1% 41.2% 43.3% 43.3% 42.6% 43.3% 43.4% 42.7% Operating margin 31.7% 34.7% 31.1% 36.1% 31.4% 33.1% 34.3% 34.3% 32.8% 33.6% 33.5% Net margin 42.5% 34.8% 26.5% 29.2% 27.2% 22.0% 28.2% 28.2% 29.4% 32.7% 26.7% Growth (%) Revenue YoY 6.7% 8.4% 18.4% 34.7% 3.9% -4.3% 30.5% 17.3% 3.1% 17.4% 12.4% EPS YoY 40.5% 138.8% 39.9% -15.2% -33.6% -39.4% 38.6% 13.2% 2.0% 30.6% -8.2% Revenue QoQ -6.9% 13.3% -0.2% 27.9% -28.2% 4.3% 36.1% 15.0% EPS QoQ -14.7% -7.3% -23.8% 40.7% -33.1% -15.5% 74.3% 14.9% Source: Company data, Maybank-KE

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INCOME STATEMENT BALANCE SHEET FYE Dec (TWDm) 2011A 2012A 2013F 2014F

FYE Dec (TWDm) 2011A 2012A 2013F 2014F Revenue 35,913 37,029 43,485 48,893 Fixed Assets 28,408 30,998 35,599 42,975 EBITDA 15,777 16,433 19,729 21,801 Other LT Assets 1,451 1,577 3,033 3,033 Depreciation & Amortisation 2,564 4,275 5,098 5,424 Cash/ST Investments 41,659 46,663 37,081 38,899 Operating Profit (EBIT) 13,213 12,158 14,630 16,377 Other Current Assets 1,475 2,347 1,586 1,586 Interest (Exp)/Inc 126 338 264 194 Total Assets 89,278 100,926 99,092 111,622 Associates 0 0 0 0 One-offs 366 1,455 2,919 93 ST Debt 17,993 28,767 17,401 17,401 Pre-Tax Profit 13,705 13,951 17,813 16,664 Other Current Liabilities 4,500 4,636 9,189 9,189 Tax 3,040 3,042 3,565 3,586 LT Debt 7,413 2,863 (63) (315) Minority Interest (12) 19 21 20 Other LT Liabilities 110 111 118 118 Net Profit 10,677 10,890 14,226 13,057 Minority Interest 0 179 158 87 Recurring Net Profit 10,437 9,568 11,422 13,077 Shareholders' Equity 56,005 61,031 68,501 80,915 Total Liabilities-Capital 89,278 100,926 99,092 111,622 Revenue Growth % 64.4% 3.1% 17.4% 12.4% EBITDA Growth (%) 121.5% 4.2% 20.1% 10.5% Share Capital (m) 7,506 7,507 7,507 7,507 EBIT Growth (%) 36.8% 32.8% 33.6% 33.5% Gross Debt/(Cash) 25,406 31,630 17,338 17,086 Net Profit Growth (%) 141.0% 2.0% 30.6% -8.2% Net Debt/(Cash) (14,792) (14,096) (15,212) (17,283) Recurring Net Profit Growth (%) 133.6% -8.3% 19.4% 14.5% Working Capital 32,244 29,891 28,089 32,805 Tax Rate % 22.2% 21.8% 20.0% 21.5% CASH FLOW RATES & RATIOS FYE Dec (TWDm) 2011A 2012A 2013F 2014F FYE Dec 2011A 2012A 2013F 2014F Profit before taxation 13,705 13,951 17,813 16,664

EBITDA Margin % 43.9% 44.4% 45.4% 44.6% Depreciation 2,564 4,275 5,098 5,424 Op. Profit Margin % 36.8% 32.8% 33.6% 33.5% Net interest receipts/(payments) 126 338 264 194 Net Profit Margin % 29.7% 29.4% 32.7% 26.7% Working capital change (3,180) (2,564) (1,727) (2,130) ROE % 24.1% 18.6% 22.0% 17.5% Cash tax paid 3,040 3,042 3,565 3,586 ROA % 12.0% 10.8% 14.4% 11.7% Others (incl'd exceptional items) 1,520 (997) 1,543 - Net Margin Ex. El % 29.7% 29.4% 32.7% 26.7% Cash flow from operations 11,494 11,479 19,025 16,238 Dividend Cover (x) 3.9 2.9 3.2 2.5 Capex (8,057) (8,387) (8,717) (8,915) Interest Cover (x) 104.7 36.0 55.4 84.5 Disposal/(purchase) 26 18 14 - Asset Turnover (x) 0.4 0.4 0.4 0.4 Others 1,520 (997) 1,543 - Asset/Debt (x) 3.5 3.2 5.7 6.5 Cash flow from investing (4,893) (8,343) (11,921) (8,915) Debtors Turn (days) 3.3 2.7 2.7 2.7 Debt raised/(repaid) 20,581 6,178 (17,074) (252) Creditors Turn (days) 5.9 6.4 6.9 7.0 Equity raised/(repaid) 6,209 - - - Inventory Turn (days) 8.1 8.4 8.8 8.0 Dividends (paid) (2,761) (3,753) (4,502) (5,253) Net Gearing % N/A N/A N/A N/A Interest payments 126 338 264 193 Debt/ EBITDA (x) 1.6 1.9 0.9 0.8 Others (9,223) 360 1,783 - Debt/ Market Cap (x) 0.2 0.3 0.1 0.1 Cash flow from financing 14,806 2,785 (19,793) (5,505) Change in cash 22,951 5,528 (13,135) 1,819 PER SHARE DATA FYE Dec (TWD) 2011A 2012A 2013F 2014F EPS 14.1 14.4 18.8 17.2 CFPS 4.72 4.15 13.8 9.8 BVPS 73.91 80.55 90.4 106.8 SPS 49.00 49.34 57.9 65.2 EBITDA/share 21.53 21.90 26.3 29.1 DPS 5.00 6.00 7.0 6.4 Source: Company data, Maybank Kim Eng


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RESEARCH OFFICES REGIONAL

WONG Chew Hann, CA Regional Head, Institutional Research (603) 2297 8686 [email protected]

Alexander GARTHOFF Institutional Product Manager (852) 2268 0638 [email protected]

ONG Seng Yeow Regional Head, Retail Research (65) 6432 1453 [email protected]

ECONOMICS Suhaimi ILIAS Chief Economist Singapore | Malaysia (603) 2297 8682 [email protected]

Luz LORENZO Philippines (63) 2 849 8836 [email protected]

Tim LEELAHAPHAN Thailand (662) 658 1420 [email protected]

JUNIMAN Chief Economist, BII Indonesia (62) 21 29228888 ext 29682 [email protected]

Josua PARDEDE Economist / Industry Analyst, BII Indonesia (62) 21 29228888 ext 29695 [email protected]

MALAYSIA WONG CHEW HANN, CA Head of Research (603) 2297 8686 [email protected] Strategy DESMOND CH’NG, ACA (603) 2297 8680 [email protected] Banking & Finance LIAW THONG JUNG (603) 2297 8688 [email protected] Oil & Gas – Regional Shipping ONG CHEE TING, CA (603) 2297 8678 [email protected] Plantations – Regional MOHSHIN AZIZ (603) 2297 8692 [email protected] Aviation – Regional Petrochem YIN SHAO YANG, CPA (603) 2297 8916 [email protected] Gaming – Regional Media TAN CHI WEI, CFA (603) 2297 8690 [email protected] Power Telcos WONG WEI SUM, CFA (603) 2297 8679 [email protected] Property & REITs LEE YEN LING (603) 2297 8691 [email protected] Building Materials Glove producers

CHAI LI SHIN (603) 2297 8684 [email protected] Plantation Construction & Infrastructure KANG CHUN EE (603) 2297 8675 [email protected] Consumer IVAN YAP (603) 2297 8612 [email protected] Automotive LEE Cheng Hooi, Regional Chartist (603) 2297 8694 [email protected] Tee Sze Chiah, Head of Retail Research (603) 2297 6858 [email protected]

HONG KONG / CHINA Howard WONG Head of Research (852) 2268 0648 [email protected] Oil & Gas - Regional Alexander LATZER (852) 2268 0647 [email protected] Metals & Mining - Regional Jacqueline KO, CFA (852) 2268 0633 [email protected] Consumer Karen KWAN (852) 2268 0640 [email protected] HK & China Property Osbert TANG, CFA (852) 2268 0800 [email protected] Transport & Industrials Philip TSE, CFA FRM (852) 2268 0643 [email protected] HK & China Property Simon QIAN, CFA (852) 2268 0634 [email protected] Telecom & Internet Steven CHAN (852) 2268 0645 [email protected] Banking & Financials Warren LAU (852) 2268 0644 [email protected] Technology – Regional William YANG (852) 2268 0675 [email protected] Technology – Regional

INDIA Jigar SHAH Head of Research (91) 22 6623 2601 [email protected] Oil & Gas Automobile Cement Anubhav GUPTA (91) 22 6623 2605 [email protected] Metal & Mining Capital goods Property Urmil SHAH (91) 22 6623 2606 [email protected] Technology Media

SINGAPORE NG Wee Siang Head of Research (65) 6432 1467 [email protected] Banking & Finance Gregory YAP (65) 6432 1450 [email protected] SMID Caps – Regional Technology & Manufacturing Telcos Wilson LIEW (65) 6432 1454 [email protected] Property Developers ONG Kian Lin (65) 6432 1470 [email protected] S-REITs James KOH (65) 6432 1431 [email protected] Consumer - Regional YEAK Chee Keong, CFA (65) 6432 1460 [email protected] Offshore & Marine Derrick HENG (65) 6432 1446 [email protected] Transport (Land, Shipping & Aviation) Wei Bin (65) 6432 1455 [email protected] Commodity Logistics S-chips Alison FOK (65) 6432 1447 [email protected] Small & Mid Caps Construction John CHEONG (65) 6432 1461 [email protected] Small & Mid Caps Healthcare

INDONESIA Lucky ARIESANDI, CFA (62) 21 2557 1127 [email protected] Base metals Mining Oil & Gas Wholesale Pandu ANUGRAH (62) 21 2557 1137 [email protected] Automotive Heavy equipment Plantation Toll road Rahmi MARINA (62) 21 2557 1128 [email protected] Banking Multifinance Adi N. WICAKSONO (62) 21 2557 1128 [email protected] Generalist Anthony YUNUS (62) 21 2557 1139 [email protected] Cement Infrastructure Property

PHILIPPINES Luz LORENZO Head of Research (63) 2 849 8836 [email protected] Strategy Laura DY-LIACCO (63) 2 849 8840 [email protected] Utilities Conglomerates Telcos Lovell SARREAL (63) 2 849 8841 [email protected] Consumer Media Cement Rommel RODRIGO (63) 2 849 8839 [email protected] Conglomerates Property Ports/ Logistics Gaming Katherine TAN (63) 2 849 8843 [email protected] Banks Construction Ramon ADVIENTO (63) 2 849 8845 [email protected] Mining

THAILAND Sukit UDOMSIRIKUL Head of Research (66) 2658 6300 ext 5090 [email protected]

Mayuree CHOWVIKRAN (66) 2658 6300 ext 1440 [email protected] Strategy Padon Vannarat (66) 2658 6300 ext 1450 [email protected] Strategy Surachai PRAMUALCHAROENKIT (66) 2658 6300 ext 1470 [email protected] Auto Conmat Contractor Steel Suttatip PEERASUB (66) 2658 6300 ext 1430 [email protected] Media Commerce Sutthichai KUMWORACHAI (66) 2658 6300 ext 1400 [email protected] Energy Petrochem Termporn TANTIVIVAT (66) 2658 6300 ext 1520 [email protected] Property Woraphon WIROONSRI (66) 2658 6300 ext 1560 [email protected] Banking & Finance Jaroonpan WATTANAWONG (66) 2658 6300 ext 1404 [email protected] Transportation Small cap. Chatchai JINDARAT (66) 2658 6300 ext 1401 [email protected] Electronics

Institutional Research

Maria LAPIZ Head of Institutional Research Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 [email protected] Consumer / Materials

Jesada TECHAHASDIN, CFA (66) 2658 6300 ext 1394 [email protected] Financial Services

Kittisorn PRUITIPAT, CFA, FRM (66) 2658 6300 ext 1395 [email protected] Real Estate

VIETNAM Le Hong Lien, ACCA Head of Institutional Research (84) 844 55 58 88 x 8181 [email protected] Strategy Consumer Diversified Utilities Thai Quang Trung, CFA, Deputy Manager, Institutional Research (84) 844 55 58 88 x 8180 [email protected] Real Estate Construction Materials Truong Thanh Hang (84) 844 55 58 88 x 8085 [email protected] Consumer Le Nguyen Nhat Chuyen (84) 844 55 58 88 x 8082 [email protected] Oil & Gas

Nguyen Thi Ngan Tuyen Head of Retail Research (84) 844 55 58 88 x 8081 [email protected] Food and Beverage Oil & Gas Sony Tra Mi (84) 844 55 58 88 x 8084 [email protected] Pharmaceutical Trinh Thi Ngoc Diep (84) 844 55 58 88 x 8242 [email protected] Technology Utilities Construction Dang Thi Kim Thoa (84) 844 55 58 88 x 8083 [email protected] Consumer Nguyen Trung Hoa (84) 844 55 58 88 x 8088 [email protected] Steel Sugar Resources


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APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES DISCLAIMERS This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. MKE may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in this report. This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report. Malaysia Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Singapore

This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. Thailand The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result. Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of MBKET. MBKET accepts no liability whatsoever for the actions of third parties in this respect. US

This research report prepared by MKE is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations. UK This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Services Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.


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DISCLOSURES Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities JSC (License Number: 71/UBCK-GP) is licensed under the State Securities Commission of Vietnam. Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.

Disclosure of Interest Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Singapore: As of 12 December 2013, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report. Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report. Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. As of 12 December 2013, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report. MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.

OTHERS Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Reminder Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE. Definition of Ratings Maybank Kim Eng Research uses the following rating system: BUY Return is expected to be above 10% in the next 12 months (excluding dividends) HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends) SELL Return is expected to be below -10% in the next 12 months (excluding dividends)

Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share

NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax


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Malaysia Maybank Investment Bank Berhad (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194

Singapore Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Research Pte Ltd 9 Temasek Boulevard #39-00 Suntec Tower 2 Singapore 038989 Tel: (65) 6336 9090 Fax: (65) 6339 6003

London Maybank Kim Eng Securities (London) Ltd 6/F, 20 St. Dunstan’s Hill London EC3R 8HY, UK Tel: (44) 20 7621 9298 Dealers’ Tel: (44) 20 7626 2828 Fax: (44) 20 7283 6674

New York Maybank Kim Eng Securities USA Inc 777 Third Avenue, 21st Floor New York, NY 10017, U.S.A. Tel: (212) 688 8886 Fax: (212) 688 3500

Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888 Fax: (603) 2282 5136

Hong Kong Kim Eng Securities (HK) Ltd Level 30, Three Pacific Place, 1 Queen’s Road East, Hong Kong Tel: (852) 2268 0800 Fax: (852) 2877 0104

Indonesia PT Maybank Kim Eng Securities Plaza Bapindo Citibank Tower 17th Floor Jl Jend. Sudirman Kav. 54-55 Jakarta 12190, Indonesia

Tel: (62) 21 2557 1188 Fax: (62) 21 2557 1189

India Kim Eng Securities India Pvt Ltd 2nd Floor, The International 16, Maharishi Karve Road, Churchgate Station, Mumbai City - 400 020, India Tel: (91).22.6623.2600 Fax: (91).22.6623.2604

Philippines Maybank ATR Kim Eng Securities Inc. 17/F, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines 1200 Tel: (63) 2 849 8888 Fax: (63) 2 848 5738

Thailand Maybank Kim Eng Securities (Thailand) Public Company Limited 999/9 The Offices at Central World, 20th - 21st Floor, Rama 1 Road Pathumwan, Bangkok 10330, Thailand Tel: (66) 2 658 6817 (sales) Tel: (66) 2 658 6801 (research)

Vietnam In association with Maybank Kim Eng Securities JSC 1st Floor, 255 Tran Hung Dao St. District 1 Ho Chi Minh City, Vietnam Tel : (84) 844 555 888 Fax : (84) 838 38 66 39

Saudi Arabia In association with Anfaal Capital Villa 47, Tujjar Jeddah Prince Mohammed bin Abdulaziz Street P.O. Box 126575 Jeddah 21352 Tel: (966) 2 6068686 Fax: (966) 26068787

South Asia Sales Trading Kevin FOY [email protected] Tel: (65) 6336-5157 US Toll Free: 1-866-406-7447

North Asia Sales Trading Alex TSUN [email protected] Tel: (852) 2268 0228 US Toll Free: 1 877 837 7635

www.maybank-ke.com | www.maybank-keresearch.com | www.kimeng.com.hk

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