1. Capital Securities Corp.
Daily Commentary Feb 8, 2012
Taiwan Stock Market News Briefing
Last Price %Chg
TAIEX
Event: Formosa Epitaxy (3061 TT) bottoms out in 4Q11, and sees
7,707 0.25
TAISDAQ 111 0.15 escalating profits on rising backlighting demand in FY12.
Turnover Comment: FY12 revenue is estimated at NTD4.92bn (+19% YoY) with
124.09 0.93
(NTD bn)
Market Cap
EPS of NTD0.59. In view of: a) relatively lower inventory level at the panel
21,016 0.25
(NTD bn) supply chain; b) higher penetration of LED TV and MNT products; and c)
rising demand for tablet PC and smartphone, future outlook for the
Market Information
Volume +/- company is bright. We estimate it may return to profit in 2Q12. The
Purchase on company is currently trading at PBR 1x. Recommend Trading Buy
Margin Value 191,893 974 between NTD24~30 (1~1.2x FY11 PBR).
(NTD mn)
Short Sale Company Update
760,026 5,872
(1000 Shares)
E-Lead (2497 TT, STRONG BUY)
Institutional Trading
In addition to booming shipments to existing clients, E-Lead is expected
(NTD bn)
to benefit from rush orders thanks to Japan’s earthquake in MAR11 and
FINI Net 6.50
Thailand flooding. Besides, the company is expected to penetrate into
Local Funds Net -0.67
Dongfeng Honda and Guangzhou Honda. We thus estimate demand to
Local Dealers Net 0.41 be better than expected in 1Q12. Coupled with GM growth compared
with FY11, we recommend STRONG BUY with 3M/12M TP of NTD32.5
(12x FY12 PER).
ADR (USD)
Last Price %Chg Company Note
TSMC 14.05 0.43 HTC (2498 TT, BUY, NTD513)
UMC 2.66 0 Revenue to bottom in 1Q12 topped with bright 2Q12 outlook on new
ASX 4.97 2.26 model launches
SPIL 5.35 1.52 Realtek (2379 TT, NEUTRAL, NTD58.5)
AUO 5.67 -0.53 Weak growth momentum in the short term
CHT 32.14 0.09 Sector report
HIMX 1.73 9.49
Steel prices in China are likely to hike following Lantern Festival,
HKEx (HKD)
boosting Taiwan steel makers’ earnings
Last Price %Chg
Generally speaking, hot-rolled steel prices in Northern Europe and the
FIH 5.13 0.39 US rebounded by 7.4% and 14.8%, respectively (vs. 5.63% in China).
YUE YUEN 25.4 4.74 As the price increases in China were the lowest, we do not rule out the
TINGYI 22.25 1.6 possibility that steel prices in China might pick up when its steel market
YORKEY 0.85 4.94 returns to normal following the Lantern Festival (Feb. 06). Overall, we
TPV 1.9 2.15 believe sales of export-oriented steel plates may recover gradually from
its bottom in FY11. The latest wave of steel price rebound in the
international market may give plate sales a boost. Thus, steel plate
Currency Rates (USD)
suppliers may report better profits in FY12.
Last Price %Chg
Our top pick is Hsin Kuang Steel (2031 TT), which is a supplier of
NTD 29.57 -0.10 carbon steel, and its costs and selling ASP are close to the market
JPY 76.78 0.19 conditions. Thus, steel price hikes in China and worldwide can be
RMB 6.31 0.03
quickly reflected by the company’s performances. As costs of materials
have dropped to the bottom in FY11 year-end, we believe Hsin Kuang
Steel will see profit ratio rebound no latter than MAR12.
1

2. News Briefing
Event: Formosa Epitaxy (3061 TT) bottoms out in 4Q11, and sees escalating profits on rising backlighting
demand in FY12.
Comment:
1) 4Q11 revenue came in at NTD862mn (-17% QoQ; -22% YoY). 4Q11 average capacity utilization may be close
to 70%. As ASP has dropped by 10%, coupled with declining capacity utilization rate, 4Q11 provision for
inventory valuation losses is expected to go up. 4Q11 GM may be negative as the company is keen to develop
new market and clients. 4Q11 operating expenses are believed to drop due to writing-back of bad debts in
2Q11. In terms of non-operating investment, Canyan Optoelectronics, a subsidiary in Jiangsu, reports 4Q11
capacity utilization of 60~70%, below the breakeven rate. 4Q11 net losses are estimated at 98mn with LPS of
NTD0.2.
2) Looking forward, demand for TV is picking up in JAN-FEB12. The company’s FEB12 capacity utilization rate
has risen to 80%, and may further enhance in MAR12 as demand for consumer electronics and IT panel
recovers. We believe capacity utilization rate will rebound to >90% by the end of 2Q12. On the other hand,
1Q12 ASP may decline within 5%. JAN12 revenue may report considerable MoM growth, and FEB12/MAR12
revenue may hit over NTD300mn.
3) FY12 revenue is estimated at NTD4.92bn (+19% YoY) with EPS of NTD0.59. In view of: a) relatively lower
inventory level at the panel supply chain; b) higher penetration of LED TV and MNT products; and c) rising
demand for tablet PC and smartphone, future outlook for the company is bright. We estimate it may return to
profit in 2Q12. The company is currently trading at PBR 1x. Recommend Trading Buy between NTD24~30
(1~1.2x FY11 PBR).
2

3. Company Update
E-Lead (2497 TT, STRONG BUY)
1) E-Lead is a Taiwan-based manufacturer of OE/OES auto parts with a focus on multimedia electronic products,
such as audio-video navigation systems, rear-seat entertainment systems and other accessories. Its
audio-video navigation systems can be categorized into three divisions: (a) high-end products (priced at
NTD15K-20K) with GM of 35-40% (high-end products are viewed as its core products for the future); (b)
mid-end products (priced at NTD9-12K) with GM of 20-25%; (c) low-end products, including MP3/CD (priced at
NTD2-3K) with GM of 15%. The company is keen to expand its market share in audio-video navigation
systems. Given increasing sales of audio-video navigation systems, the company’s consolidated GM is
expected to rise incrementally in FY12.
2) E-Lead’s major clients in China include: (a) Shanghai Volkswagen (Touran, Tiguan, and Passat); (b)
FAW-Volkswagen (Sagitar and Magotan); (c) Dongfeng Nissan (TIIDA and March). China’s automobile market
is expected to resume growth in FY12. FY12 sales of Touran and Tiguan are estimate to reach 38.4K units and
162.4K units, respectively, implying a combined growth rate of 16.7% YoY. At present, around 40% of Touran
and Tiguan vehicles are installed with an audio-video navigation system. Accordingly, a total of about 80K
Touran/Tiguan vehicles are estimated to be installed with an audio-video navigation system in FY12. Besides,
a total of 36K TIIDA/March vehicles are forecasted to be installed with an audio-video navigation system in
FY12.
3) In light of supply chain disruption cased by Thailand flooding in MAR11, coupled with JPY appreciation,
Japanese automakers have increased outsourcing orders to overseas auto-parts suppliers due to risk
diversification. Hence, E-Lead has started to supply a small volume of auto-parts to Dongfeng Honda,
FAW Toyota and Guangzhou Honda (rush orders triggered by Thailand flooding). If E-Lead’s products can be
certified by these automakers, outsourcing orders from Japanese clients are expected to serve as its major
growth engines in the years ahead. Moreover, E-Lead is likely to tap into Japanese auto vendors in Taiwan.
4) In addition to booming shipments to existing clients, E-Lead is expected to benefit from rush orders thanks to
Japan’s earthquake in MAR11 and Thailand flooding. Besides, the company is expected to penetrate into
Dongfeng Honda and Guangzhou Honda. We thus estimate demand to be better than expected in 1Q12.
Coupled with GM growth compared with FY11, we recommend STRONG BUY with 3M/12M TP of NTD32.5
(12x FY12 PER).
3

4. 07 Feb 2012
HTC (2498 TT) BUY
Close (NTD) 513
3M target price (NTD) 635 Revenue to bottom in 1Q12 topped with bright 2Q12 outlook
12M target price (NTD) 530 on new model launches
Company information Investment conclusion:
Sector Handset
(1) Weaker-than-expected revenue and earnings in 1Q12: HTC guided
Shares O/S (mn) 852.1
1Q12 revenue to reach only NTD65-70bn (-31~-36% QoQ) on account of
Market cap (NTD bn) 437.1
product transition. Besides, the company guided its GM to dip from 27.1% in
FINI holding (%) 54.74
4Q11 to 25% in 1Q12 given: (a) ASP cuts; (b) most products are old models.
Local fund holding (%) 2.00
We revise down our forecast on its 1Q12 revenue from NTD79.7bn to
Major shareholders (%) 5.73
NTD65.7bn (-35% QoQ). In light of sliding ASP during the product
Product mix transitional period, we estimate its GM to fall to 25% in 1Q12. Its 1Q12 net
4Q11 profit is estimated at NTD4.34bn (-61% QoQ) or EPS of NTD5.1 (vs.
previous forecast of NTD11.7).
(2) Promising 2Q12 outlook on new model launches: As HTC’s new flagship
models (Ville, EDGE and Primo) are scheduled to hit the market in
MAR-APR12, we forecast its monthly revenue to exceed NTD30bn starting
from MAR12. 2Q12 revenue is estimated at NTD100bn (+52% QoQ). 2Q12
GM is likely to recover to 27.2% thanks to new model launches and
enhanced economies of scale. We forecast its 2Q12 net profit to reach
NTD12.02bn (+177% QoQ) or EPS of NTD14.1.
(3) FY11 shipment estimate revised down: Given fewer-than-expected
Share performance relative to TAIEX orders in 1Q12, we revise down our forecast on HTC’s FY12 revenue from
1400 10000 NTD444.93bn to NTD411.63bn (-12% YoY) with shipment estimate trimmed
1200
to 44.4mn units. Our estimate on its FY12 GM is also revised downward
8500
1000
from 27.3% to 26.6% given fierce price competition and rising sales
800
600
7000
proportion of low/mid-end models. Its FY12 net profit is estimated at
400
5500
NTD44.91bn (-27.5% YoY) or EPS of NTD52.7 (vs. prior forecast of
200 2498 TT HTC TAIEX
NTD63.2).
0 4000
201102 201104 201106 201107 201109 201111 201112
(4) Recommendation: ST-wise, we upgrade HTC from NEUTRAL to BUY in
view of the following reasons: (a) Its revenue is expected to bottom in 1Q12;
(b) Driven by new model launches, 2Q12 revenue is likely to soar by over
50% QoQ. Investors are suggested to accumulate on weakness with 3M TP
of NTD635 (12x FY12 PER). LT-wise, 12M TP is set at NTD530 (10x FY12
PER) given: (a) weaker earnings compared with the past; (b) price
competition has intensified in the smartphone market due to the low-price
smartphone trend; (c) lack of product differentiation.
4Q 1 1 1Q 1 2( E ) 2Q 1 2( F) 3Q 1 2( F ) 2010 2011 2 0 1 2( F )
Sales (NTD mn) 1 0 1, 4 1 9 6 5, 7 0 8 1 0 0, 0 6 6 1 1 8, 2 2 0 2 7 8, 7 6 1 4 6 5, 7 9 5 411,628
QoQ / YoY (%) ( 25) ( 35) 52 18 93 67 ( 12)
Gross margin (%) 27.1 25.0 2 7. 2 2 6. 8 3 0. 1 2 8. 3 2 6. 6
Operating margin (%) 12.7 7.5 1 3. 7 1 3. 3 1 5. 8 1 4. 8 1 2. 4
Pre-tax profit (NTD mn) 1 3, 1 2 0 4, 9 9 1 1 3, 8 1 5 1 5, 8 4 3 4 4, 9 6 7 7 1, 4 4 0 51,624
Net profit (NTD mn) 1 0, 9 4 2 4, 3 4 2 1 2, 0 1 9 1 3, 7 8 4 3 9, 5 3 4 6 1, 9 7 5 44,913
QoQ / YoY (%) ( 41) ( 60) 177 15 75 57 ( 28)
EPS (NTD) 1 2. 8 4 5.10 1 4. 1 1 1 6. 1 8 4 6. 4 0 7 2. 7 3 52.71
Source: TEJ; Capital Securities estimates
4

5. New LTE models dragged down 4Q11 revenue
(1) 4Q11 revenue missed guidance: Despite robust shipment of a low-end
smartphone model (Explorer), HTC’s shipments of new high-end LTE
models (Rezound and Vivid) were weaker than anticipated in 4Q11. As a
result, the company’s 4Q11 revenue arrived at merely NTD101.4bn
(-25.3% QoQ), below its guidance of NTD104bn.
(2) Declines in 4Q11 GM and earnings: Due to unfavorable product mix and
EUR depreciation, its GM dropped from 28% in 3Q11 to 27.12% in 4Q11.
HTC reported 4Q11 net profit of NTD10.94bn (-41.4% QoQ) or EPS of
NTD13.06.
(3) Reasons for lukewarm shipments of new LTE models: The
weaker-than-expected shipments of new LTE models in 4Q11 could be
attributed to the following reasons: (a) inferior hardware compared with
Motorola (razor-thin exterior design) and Samsung (Super AMOLED
panel); (b) decreased orders triggered by its patent lawsuits against Apple;
(c) some telecom operators’ orders crowded by iPhone 4S.
FY11 results
HTC posted FY11 revenue of NTD465.79bn (+67% YoY) with GM of
28.3%. FY11 net profit came in at NTD61.97bn (+57% YoY) or EPS of
NTD72.7.
Reminders for investors
Although we expect HTC’s revenue to bottom out in 2Q12, investors
should still keep an eye on the following: (a) if MAR12 revenue fails to
exceed NTD30bn, 1Q12 revenue might fall below expectation again; (b)
whether or not new flagship models can tap into tier-one telecom operators
in 1Q12 and be well received by consumers.
5

6. Balance sheet Income statement
(NTD mn) 2008 2009 2010 2011 2012 (NTD mn) 2008 2009 2010 2011 2012
Assets 115,742 118,951 190,382 345,377 303,667 Revenue 152,353 144,493 278,761 465,795 411,628
Current assets 104,257 104,422 168,640 312,151 273,854 Cost of sales 101,363 98,330 194,893 334,017 302,222
Cash & cash Gross profit
64,238 64,638 74,463 176,397 149,993 50,991 46,163 83,869 131,778 109,406
equivalents
Operating expenses 20,645 21,540 39,736 63,004 58,198
Accounts receivable 29,455 27,126 61,614 93,484 83,623
Operating profit 30,345 24,623 44,133 68,774 51,208
Inventories 8,250 5,558 26,414 29,092 26,848
EBITDA 29,478 24,049 45,659 72,425 52,694
L/T investments 541 810 1,232 1,294 1,358
Non-operating items 1,390 774 832 95 393
Fixed assets 8,916 9,900 14,024 15,973 16,825
Pre-tax profit 31,736 25,396 44,967 71,440 51,624
Liabilities 55,052 53,276 115,667 176,134 158,653
Current liabilities Income taxes 3,183 2,782 5,450 9,447 6,711
54,999 53,250 115,641 177,845 159,987
Accounts payable Net income 28,635 22,609 39,534 61,975 44,913
48,272 46,541 104,594 157,463 142,061
Long-term liabilities 47 24 12 84 55 Basic EPS (NTD) 33.61 26.53 46.40 72.73 52.71
Other liabilities 6 1 14 15 15 Diluted EPS (NTD) 33.61 26.53 46.40 72.73 52.71
Shareholders' equity 60,690 65,675 74,714 169,243 145,013 Source: Cmoney; Capital Securities
Share capital 7,554 7,889 8,177 8,177 8,177
Retained earnings 52,036 48,638 63,151 81,129 126,042
Liabilities & Ratio analysis
shareholders' equity 115,742 118,951 190,382 345,377 303,667
Source: Cmoney; Capital Securities
(%) 2008 2009 2010 2011 2012
Cash flow statement
Growth analysis
(NTD mn) 2008 2009 2010 2011 2012 Revenue 28.9% -5.2% 92.9% 67.1% -11.6%
Operating cash flows 37,627 27,721 46,048 94,014 58,708 Gross profit 13.8% -9.5% 81.7% 57.1% -17.0%
Net income 28,635 22,609 39,534 61,975 44,913 Operating profit -3.1% -18.9% 79.2% 55.8% -25.5%
Depreciation &
amortization 808 974 1,002 1,051 1,148 Net income -1.0% -21.0% 74.9% 56.8% -27.5%
Increase in working Profitability analysis
capital (5,593) 1,578 (16,578) 18,321 (3,297)
Other operating cash Gross margin 33.5% 31.9% 30.1% 28.3% 26.6%
flows 2,839 (1,285) 36,447 12,667 15,943
EBITDA margin 19.3% 16.6% 16.4% 15.5% 12.8%
Investing cash flows (5,814) (4,742) (3,808) (7,186) (7,523)
Operating margin 19.9% 17.0% 15.8% 14.8% 12.4%
Capital expenditures (5,639) (1,911) (4,991) (3,000) (2,000) Net margin 18.8% 15.6% 14.2% 13.3% 10.9%
Free cash flow 31,988 25,810 41,057 91,014 56,708
Return on asset 24.7% 19.0% 20.8% 17.9% 14.8%
Other investing cash
flows (175) (8,378) (4,005) (4,186) (5,523)
Return on equity 47.2% 34.4% 52.9% 36.6% 31.0%
Financing cash flows (24,047) (22,569) (31,877) 15,106 (77,589) Debt & liquidity analysis
Dividends paid (19,487) (20,396) (20,512) (26,599) (43,996) Debt ratio 47.6% 44.8% 60.8% 51.0% 52.2%
Other financing cash
(4,614) (2,412) (11,659) 41,706 (33,593) Debt-to-equity ratio 90.7% 81.1% 154.8% 104.1% 109.4%
flows
Increase in cash & Current ratio 189.6% 196.1% 145.8% 175.5% 171.2%
cash equivalents 7,748 401 9,825 101,934 (26,404)
Activity analysis
Cash & cash
equivalents - year 56,490 64,238 64,638 74,463 176,397 Inventory days 27.9 25.6 29.9 30.3 33.8
begin
Cash & cash Accounts receivable days 58.6 71.5 58.1 60.8 78.5
equivalents - year 64,238 64,638 74,463 176,397 149,993
end Source: Cmoney; Capital Securities
Source: Cmoney; Capital Securities
6

7. 07 Feb 2012
Realtek (2379 TT) NEUTRAL
Close (NTD) 58.5
3M target price (NTD) 51 Weak growth momentum in the short term
12M target price (NTD) 54
Investment conclusion:
Company information
The company is likely to experience weak growth momentum in the short
Sector IC design
term on account of limited contribution from new products and intensifying
Shares O/S (mn) 492.1
ASP pressure. Realtek trades at 15x PER at the stage, implying
Market cap (NTD bn) 28.8 unattractive valuation. We thus recommend NEUTRAL with 3M TP of
FINI holding (%) 26.67 NTD51 (14x FY12 PER). 12M TP is set at NTD54 (15x FY12 PER).
Local fund holding (%) 3.72
Key takeaways:
Major shareholders (%) 5.16
(1) 4Q11 EPS fell short of expectation: 4Q11 revenue arrived at
Product mix
NTD5.15bn (+9.2% YoY and +2.8% QoQ), slightly ahead of expectation.
2011 (F)
In particular, DEC11 revenue climbed by 9.9% MoM to NTD1.84bn driven
by inventory ramp-up prior to the Lunar New Year holiday. 4Q11 GM
improved by 1.35ppt to 41.5% on favorable product mix and cost down
measures. However, net profit slid by 30.7% QoQ to NTD280mn in 4Q11
due to increased R&D expenses for new product development. 4Q11 EPS
hit NTD0.57, behind our expectation.
(2) FY11 revenue edged down by 1.7% YoY: FY11 revenue came in at
NTD21.9bn (-1.7% YoY). Revenue breakdown by product in FY11 was as
follows: Communication 58%, PC 25% and Multi-Media 17%. In particular,
revenue derived from communication product climbed further while
Share performance relative to TAIEX revenue generated by PC product declined in FY11. FY11 Net profit
70 10000
reached NTD1.59bn (-4.7% YoY) with EPS of NTD3.24.
60
50
8500 (3) 1Q12 outlook: The company’s JAN12 unaudited revenue arrived at
40 NTD1.55bn (-17.7% YoY and -15.6% MoM). 1Q11 revenue is estimated
7000
30
to edge up by 1% QoQ to NTD5.2bn. 1Q11 net profit is forecasted to hit
20
5500 NTD410mn (+36% QoQ) with EPS of NTD0.78. 2Q11 outlook appears
10 2379 Realtek
Y9999 TAIEX Index
conservative given low order visibility.
0 4000
201102 201104 201106 201107 201109 201111 201112
(4) Intensifying ASP pressure in FY12: Shipment of communication
products (like Wi-Fi, Gb Ethernet, ASL and router) is likely to rise further in
FY12. As to the Multi-Media business, Realtek’s market share of TV chip
in China is expected to climb further in FY12. However, shipment of PC
product is likely to remain flattish in FY12. FY12 revenue is forecasted to
reach NTD23.05bn (+5% QoQ). Net profit is estimated at NTD1.78bn
(+11.5% YoY) with EPS of NTD3.61 in FY12.
3Q11 4Q11F 1Q12F 2Q12 2010 2011F 2012F
Sales (NTD mn) 5,015 5,154 5,202 5,657 22,271 21,897 23,058
QoQ / YoY (%) (20.8) 2.8 0.9 8.7 9.9 (1.7) 5.3
Gross margin (%) 40.2 41.5 40.3 40.1 38.0 38.4 39.7
Operating margin (%) 12.3 12.2 13.6 14.1 14.2 12.7 14.0
Pre-tax profit (NTD mn) 446 321 437 504 1,784 1,747 2,018
Net profit (NTD mn) 408 283 385 444 1,672 1,594 1,776
QoQ / YoY (%) (34.78) (30.56) 35.72 15.39 (20.19) (4.65) 11.40
EPS (NTD) 0.83 0.58 0.78 0.90 3.44 3.24 3.61
Source：TEJ; Capital Securities estimates
7

8. Balance sheet Income statement
(NTD mn) 2008 2009 2010 2011F 2012F (NTD mn) 2008 2009 2010 2011F 2012F
Assets 18,094 22,816 20,853 24,504 26,357 Revenue 16,744 20,272 22,271 21,897 23,058
Current assets 8,495 14,760 9,725 12,236 13,252 Cost of sales 9,668 11,940 13,808 13,497 13,910
Cash & cash
equivalents 3,904 8,289 3,340 5,781 6,325 Gross profit 7,076 8,331 8,463 8,400 9,148
Accounts receivable 1,781 3,375 2,947 2,957 3,335 Operating expenses 4,708 5,091 5,299 5,618 5,924
Inventories 1,942 2,738 3,187 2,877 3,148 Operating profit 2,369 3,241 3,164 2,782 3,224
L/T investments 5,169 4,145 6,578 6,907 7,252 EBITDA 1,723 3,162 2,847 2,580 2,958
Fixed assets 2,969 3,114 3,621 3,788 3,848 Non-operating items (1,444) (1,029) (1,380) (1,035) (1,206)
Liabilities 2,866 5,716 4,009 4,594 5,164 Pre-tax profit 925 2,211 1,784 1,747 2,018
Current liabilities 2,732 5,599 3,914 4,490 5,050 Income taxes 44 117 112 153 242
Accounts payable 2,732 5,599 3,914 4,490 5,050
Net income 881 2,095 1,672 1,594 1,776
Long-term liabilities 0 0 0 0 0
Basic EPS (NTD) 1.79 4.26 3.40 3.24 3.61
Other liabilities 134 116 95 100 105
Diluted EPS (NTD) 1.79 4.26 3.40 3.24 3.61
Shareholders' equity 15,228 17,100 16,843 19,909 21,194
Share capital 4,686 4,770 4,854 4,854 4,854 Source: Cmoney; Capital Securities
Retained earnings 5,594 6,892 6,680 6,965 8,741
Liabilities &
shareholders' equity 18,094 22,816 20,853 24,504 26,357
Ratio analysis
Source: Cmoney; Capital Securities
(%) 2008 2009 2010 2011F 2012F
Cash flow statement Growth analysis
(NTD mn) 2008 2009 2010 2011F 2012F Revenue 6.6% 21.1% 9.9% -1.7% 5.3%
Operating cash flows 4,411 5,682 2,595 5,126 4,385 Gross profit -4.5% 17.7% 1.6% -0.7% 8.9%
Net income 881 2,095 1,672 1,594 1,776 Operating profit -33.6% 36.8% -2.4% -12.1% 15.9%
Depreciation &
amortization 952 979 1,094 833 940 Net income -53.0% 137.7% -20.2% -4.7% 11.4%
Increase in working Profitability analysis
capital (606) (263) (1,878) 876 (88)
Other operating cash Gross margin 42.3% 41.1% 38.0% 38.4% 39.7%
flows 2,018 1,986 1,464 1,823 1,757
EBITDA margin 10.3% 15.6% 12.8% 11.8% 12.8%
Investing cash flows (4,155) (548) (5,708) (3,372) (3,135)
Operating margin 14.1% 16.0% 14.2% 12.7% 14.0%
Capital expenditures (1,074) (913) (1,310) (1,000) (1,000) Net margin 5.3% 10.3% 7.5% 7.3% 7.7%
Free cash flow 3,336 4,770 1,285 4,126 3,385
Return on asset 4.9% 9.2% 8.0% 6.5% 6.7%
Other investing cash
flows (3,081) 365 (4,398) (2,372) (2,135)
Return on equity 5.8% 12.2% 9.9% 8.0% 8.4%
Financing cash flows (1,555) (750) (1,835) 687 (706)
Debt & liquidity analysis
Dividends paid (1,358) (750) (1,836) (1,213) (1,309)
Debt ratio 15.8% 25.1% 19.2% 18.7% 19.6%
Other financing cash
flows (33) 0 1 1,900 603 Debt-to-equity ratio 18.8% 33.4% 23.8% 23.1% 24.4%
Increase in cash &
cash equivalents (1,299) 4,384 (4,948) 2,441 544 Current ratio 310.9% 263.6% 248.4% 272.5% 262.4%
Cash & cash Activity analysis
equivalents - year 5,204 3,904 8,289 3,340 5,781
begin
Inventory days 64.6 71.5 78.3 82.0 79.0
Cash & cash
equivalents - year end 3,904 8,289 3,340 5,781 6,325 Accounts receivable days 42.1 46.4 51.8 49.2 49.8
Source: Cmoney; Capital Securities
Source: Cmoney; Capital Securities
8

9. Feb 07, 2012
Steel prices in China are likely to hike following
Lantern Festival, boosting Taiwan steel makers’ earnings
Investment Conclusion
(1) Steel price hikes in China were mildest:
Hot-rolled steel prices in the US and Europe rebounded starting from mid
NOV11 and such price hikes showed no signs of abating until the end of
JAN12.
General speaking, hot-rolled steel prices in Northern Europe and the US
rebounded by 7.4% and 14.8%, respectively (vs. 5.63% in China).
As the price increases in China were the lowest, we do not rule out the
possibility that steel prices in China might pick up when its steel market
returns to normal following the Lantern Festival (Feb. 06).
Exhibit 1: Hot-rolled steel price hikes in China, the US and Northern Europe
China US Northern Europe
RMB/mt USD/mt EUR/mt
2011 top level 4800 875 633
2011 bottom level 4035 640 490
As of 2012/01/31 4262 735 526
Change (%) from 2011 top level to
-15.94 -26.86 -22.59
2011 bottom level
Change (%) from 2011 bottom
5.63 14.84 7.35
level to 2012/01/31
Source: Capital Securities
(2) Steel price hikes in China to persist on bright economic outlook:
Compared with the US and Europe, the increases in China’s hot-rolled
steel prices were the lowest from the bottom level in 2011 to 2012/01/31.
However, hot-rolled steel prices in the US and Northern Europe dropped
most significantly from the top level in 2011 to the bottom level in 2011
while hot-rolled steel prices in China recorded the most moderate decline.
Hence, our view that hot-rolled steel prices in China might climb further is
not primarily based on the mildest price hikes the country previously
experienced, but rather based on outlooks for its steel industry and overall
economy.
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10. (3) Sustainable steel prices expected worldwide:
PMI expansion in the US, Europe and China in JAN12 was seen as a
positive signal for global economic growth: (a) The US PMI came in at
54.1, marking the third straight monthly increase; (b) The European PMI
expanded for the second straight month to 48.8; (c) China PMI stood at
50.5, also showing the second straight monthly growth. If their PMIs
continue to rise, steel prices worldwide are likely to recover sequentially.
Moreover, various countries’ loose monetary policies are expected to
sustain commodity prices. Iron ore and coking coal prices are likely to
stay firm or even to rise slightly. Accordingly, it is quite impossible for steel
prices across the globe to dip again.
(4) China’s steel market:
China’s steel price remains the most valuable reference for Taiwan steel
companies to decide its steel price. China’s JAN12 steel price made little
movement compared to the price FY11 year-end. Take hot-rolled steel as
an example. China’s JAN12 hot-rolled steel price nudged upward by 0.8%
MoM, in contrast to Europe’s 5.4% MoM and US’ 6%. The relatively stable
price was mainly attributed to the 20-day absence of production activities
around the Lunar New Year holidays. Thus, any change after the Lantern
Festival may have an effective impact on China Steel’s quotations.
Since DOI of China’s steel hit the bottom in JUN-JUL11, only limited
inventory ramp-up was seen, partly due to weakening demand in the
domestic market. Furthermore, rising cost of capital kept DOI in check.
Lately, there have been reports concerning steel traders going bust in
China. In the end of FY11, the Chinese government took a softer attitude
towards its credit-tightening policy. In FY11, steel heavyweights reported
significant losses, and the steel price was suffered setbacks for some
time. We believe they may turn upward any time in FY12.
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11. Exhibit 2: Trends of China’s HR and RB stock volume
Source: Capital Securities
(5) Taiwan’s steel market:
China Steel’s JAN-FEB12 steel price dipped significantly to
NTD1,756/ton, and its MAR12 price stays unchanged. Such quotations
secure clients’ low-price supplies for at least three months. If, however,
steel price in China rebounded sharply after the Lantern Festival, China
Steel’s APR-MAY12 steel price may pick up a little. Other steel makers in
Taiwan may increase their prices at least in MAR12, and may report
greater profits in APR-MAY12.
The most notable change in Taiwan’s steel market is that, domestic
demand becomes weaker compared to the FY11 market. This is due to
the fact that large-scale facilities investments and household sales have
been sluggish, and government budget for the public projects dropped by
almost 20%. Thus, steel bar consumption is bound to report YoY decline.
(6) Recommendation:
Overall, we believe sales of export-oriented steel plates may recover
gradually from its bottom in FY11. The latest wave of steel price rebound
in the international market may give plate sales a boost. Thus, steel plate
suppliers may report better profits in FY12.
Our top pick is Hsin Kuang Steel (2031 TT), which is a supplier of carbon
steel, and its costs and selling ASP are close to the market conditions.
Thus, steel price hikes in China and worldwide can be quickly reflected by
the company’s performances. As costs of materials have dropped to the
bottom in FY11 year-end, we believe Hsin Kuang Steel will see profit ratio
rebound no latter than MAR12.
11

12. Market Statistics Top 10 Institutional Investor Holdings & Net Buys/Sells (1000 shares)
QFII Net Sales & Buys (NTD bn) 6.50
QFII Net Sales & Buys (1000 shares)
Code Stocks Net Buys Code Stocks Net Sells
2317 HON HAI 27,144 2891 CFHC -12,488
2311 ASE 23,609 2409 AUO -12,245
2303 UMC 16,590 2412 CHT -12,152
2337 Macronix 9,985 2890 SINOPACHOLDINGS -9,507
2324 Compal 8,915 3037 UNIMICRON -6,339
1504 TECO 8,614 2885 Yuanta Group -5,742
2330 TSMC 8,299 2347 Synnex -4,628
2603 EMC 8,267 2884 E.S.F.H -3,947
2448 EPISTAR 6,989 2474 CATCHER -3,049
3481 CMI 6,662 1301 FPC -3,043
Fund Net Sales & Buys (NTD bn)
-0.67
Fund Net Sales & Buys (1000 shares)
Code Stocks Net Buys Code Stocks Net Sells
2618 EVAAIR 4,549 2847 TC Bank -4,111
8078 CCI 3,656 9945 RUENTEX DEVELOP -3,994
2891 CFHC 2,815 3037 UNIMICRON -3,738
1905 CHP 2,519 1312 GPPC -2,920
3035 Faraday 2,201 2402 ICHIA -2,896
3481 CMI 2,044 2915 RUENTEX IND.LTD -2,011
2204 CMC 1,850 8101 Arima Comm. -1,781
8213 tpt 1,838 4532 RECHI -1,539
2890 SINOPACHOLDINGS 1,649 3311 Silitech -1,462
2801 CHANG HWA BANK 1,500 2601 FSC -1,454
Long Margin Short Sales
Purchase on Margin +/- Short Sale
(NTD mn) 974 191,893 5,872 760,026
Value (NTD mn) (1000 Shares) (1000 Shares)
Long Margin 1000 Long Margin 1000 Short Sales 1000 Short Sales 1000
Increasing Shares Decreasing Shares Increasing Shares Decreasing Shares
2409 AUO 7,259 2891 CFHC -9,316 3481 CMI 3,767 3047 EDIMAX -2,444
2383 EMC 3,755 2311 ASE -5,787 2317 HON HAI 1,784 2474 CATCHER -677
2847 TC Bank 3,693 2371 TATUNG -3,372 3043 PCM 1,358 2344 WEC -660
1718 CMFC 2,596 2384 WINTEK -2,793 2610 CAL 1,237 2409 AUO -630
2823 CHINA LI 2,559 2303 UMC -2,790 3035 Faraday 1,108 2349 RITEK -549
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13. STOCK & SECTOR RATING
STRONG BUY
The stock or sector under our analyst's coverage is expected to generate a return exceeding or equal to 25% in three months.
BUY
The stock or sector under our analyst's coverage is expected to generate a return between 15% and 25% in three months.
NEUTRAL
The stock or sector under our analyst's coverage is expected to generate a return between 15% and -15% in three months.
REDUCE
The stock or sector under our analyst's coverage is expected to generate a return between -15% and -25% in three months.
SELL
The stock or sector under our analyst's coverage is expected to generate a return below or equal to -25% in three months.
Disclosure
This report is for circulation to Capital Securities Corp. clients only. This report or any portion hereof may not be reprinted, sold, or redistributed without the
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under the jurisdiction of the ROC law, even if viewed from outside of Taiwan, Republic of China.
This report is written for information purposes only. Capital Securities Corp. makes every effort to use reliable, comprehensive information, but we make no
representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend
to discontinue research coverage of a subject company.
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and
objectives or persons who receive it and is provided with the understanding that Capital Securities Corp. is not acting in fiduciary capacities. The securities
discussed in this report may not be suitable for all investors. Capital Securities Corp. recommends that investors independently evaluate particular investment
or strategies. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This report is
neither an offer, nor an invitation to buy or sell any security or to participate in any trading strategy.
Compensation of research analysts is determined by equity research department and senior management of Capital Securities Corp. and is not linked to
specific transactions or recommendations. The research analysts primarily responsible for the preparation and content of this report certify that all of the views
expressed in this report accurately reflect their personal views about those issuers or securities. The research analysts also certify that no part of their
compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Materials presented in this report are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, other business units of Capital Securities Corp., including investment banking. We have established information barriers between
research and certain business units, including investment banking. Investors should assume that Capital Securities Corp. may seek investment banking or
other business opportunities with companies mentioned in this report.
Equity research department of Capital Securities Corp. conducts periodic reviews of research reports to track quality, accuracy and changes in ratings and
price targets.
Investors should note that the value of and income from your investment may vary because of changes in interest rate or foreign exchange rates, securities
prices or market indexes, operational or financial conditions of companies or other factors. Additionally, investors in securities such as ADRs, whose values
are influenced by the currency of the underlying security, effectively assume currency risk. Estimates of future performance are based on assumptions that
may not be realized and should not be relied upon as such.
Additional information on recommended securities is available upon request.
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