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   Aug.22, 2014

  •  LED sector: Rumors of Chinese tariff and antitrust action are overblown in our view


  E.Sun Financial Holding Co. (玉山金 2884 TT, NR, NT$18.4)  Aug.21, 2014
Sturdy fundamentals offset capital raising dilution effect
  • Management guides annualized ROE of 12.1% for 1H14 and EPS of NT$0.86.
  • New funding will accelerate loan and interest income growth.
  • Net fee income rose 23% y-y, contributed primarily by wealth management.
  • Asset quality remained solid and capital adequacy increased after 2Q's capital raising.
  • Fundamentals have been catching up following 2Q share dilution effect.
  • We anticipate double-digit share price returns in the coming six months.

  EVERLIGHT (2393 )    Aug. 18, 2014
2Q14 results missed our forecasts; we see more margin pressure ahead
  • Everlight missed our 2Q14 sales/net income forecasts by 4%/38% on non-operating factors. It suffered an impairment loss of NT$768.5m mainly connected to Taiwan Polysilicon Corporation's (TPSi) 50% capital reduction announced in June. This offset Everlight's NT$688.6m gain from disposal of equity investments in 2Q14 (66% from the disposal of Epistar shares in April-May). Excluding non-operating factors, its profit would be NT$1.31.
  • It faces margin pressure from 3Q14 onward. Its 2Q14 GM of 24.9% missed our forecast by 1.6 ppt due to lower sales contribution from WOFI on seasonality and weather issues, as well as a 2-3% decline in ASPs and relatively flat prices for upstream chip inputs. We expect GM to decline to 24.6% on a more aggressive pricing strategy, weakening demand for backlight LEDs (GM: 25-27%) and seasonally stronger demand for lighting components (~10% of sales; GM <20%). These negatives may offset the benefit brought by seasonally higher sales contribution from WOFI (10% of sales, GM: 30%+). We also lower our 2015 GM forecast by 1.8 ppt to 24.0% on these factors.
  • Strict operating expense controls will mitigate margin pressures. Everlight has had a good record in controlling operating expenses, which was 19% below our forecast in 2Q14. Correspondingly, OM of 9.4% was 1.3 ppt above our forecast. In light of its strong expense management, we raise our 2014E/15E OM forecasts by 0.8 ppt/0.1 ppt to 8.7%/7.7%. However, the company's continuous decline in R&D expense makes us worry about its long-run product development capability in the fast-changing lighting market.
  • In response to the lighting uptrend, the company raised its 2014 capex target to NT$1.5bn-1.7bn to expand its LED chip capacity by 29% in 2H14. Compared with a previous target of NT$800m-NT$1.0bn, this will raise annual capacity to 4.0bn by the end of year and incremental capacity will contribute to sales in late 2014. Factoring in an annual 15%-20% ASP decline, we therefore raise our 2015 sales forecast by 9% to NT$35bn.
  • We sustain our LT rating at Hold and cut our target price by 5.7% to NT$72.8. We apply a lower PE multiple of 15x PER to our 2015E EPS forecast in light of its downside risks of GM pressure and limited profitability growth. We think its current PER valuation of 13.6x, which is similar to local peers' average of 13.5 PER, is fairly justified in view of challenges. Upside is 9.1%.
 



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