News Commentary: Everlight (2393 TT/ Buy/ NT$114.5)  May.09, 2008
Event: April results inline with our estimates and market consensus (Neutral to slightly positive.)
Primasia Comment
Everlight’s April 2008 revenues came to NT$946mn, up 33% YoY and 3% MoM, which was in line with our estimate and market consensus. Management offered guidance of 10%-15% sequential top line growth in 2Q08, mainly driven by 7’’-10’’ panel and NB backlight applications. Everlight is the first LED packager in Taiwan to be certified by three top-tier global NB vendors, and initial shipments began in May at small volumes. We project sales contributions from NB backlight applications to account for 5% of Everlight’s total sales in 2008.
In terms of valuation, Everlight now trades at 15.7x our 2008 estimates, which is near the middle of its historical range of 6x-22x. We believe the company already stands on solid ground to capitalize on new LED applications (i.e. NB backlights) to boost earnings, and therefore hold a positive view. Our target price of NT$131 based on 18x forward PE suggests a 14% upside potential. Maintain Buy.

  News Commentary: Motech (6244 TT/ Hold/ NT$275)  May.09, 2008
Event: Receives 120 MW order from Solar Semiconductor (IN) (Short-term positive.)
Primasia Comment
Local media reported that Motech Industries received a large order from Solar Semiconductor (IN). We consider this a short-term positive story as it is likely to bring positive sentiment to Motech’s share price. According to the contract, Motech will ship 120MW of solar cells to Solar Semiconductor, the third largest solar module maker in India. Details about the dollar value of the order and shipment schedule have not been disclosed yet.
In our view, the key concern is whether or not Motech can acquire sufficient materials to deliver the contracted amount of solar cells to Solar Semiconductor. We don’t expect Motech to substantially benefit from this contract in 2008, given the concerns of materials procurement. By our estimates, LT material contracts will only provide 60% procurement for Motech's 2008 output target of 280MW. If Motech intends to begin shipments to Solar Semiconductor this year, it will have to source additional solar wafers from the spot market, where prices are significantly higher than in the contract, which will further erode the company's margins.
Motech now trades at 21.9x our 2008 estimate, which is already comparable to global solar peer average of 25x-30x. Although this news is likely to bring positive sentiment to Motech’s share price in the short term, we don’t suggest investors to rush in, due to its demanding valuation.

  News Commentary: Telecommunications Sector  May.09, 2008
Event: Minimal impact on 3 incumbents from Shinkong Group/Asia Pacific Telecom plan (Short-term neutral.)
Primasia Comment
Local media reported that Mr. Wu Tung-chin, chairman of Shinkong FHC (2888 TT/ NR/ NT$26.85), is interested in investing NT$10bn in 3G operator Asia Pacific Telecom (APT) and later merging it with PHS operator First International Telecom (FITEL) (unlisted) and broadband service provider Greater Taipei Broadband (unlisted) to form an integrated telecom operator. The company would provide services such as 3G, PHS, WiMAX, broadband Internet access and fixed-line.
APT’s paid-in capital is currently NT$32.8bn after recently conducting a 50% capital reduction. The article reported that Mr. Wu would like APT to reduce its capital to NT$15bn, and that he also plans to welcome Japan’s CDMA operator KDDI as a partner for a total investment of NT$20bn. The Shinkong group is FITEL’s second largest shareholder with 20% holdings, and currently has a 1.36% stake in APT with one seat on its board. Mr. Wu is also the chairman of Greater Taipei Broadband.
APT provides 3G (CDMA-2000) mobile services with estimated subscribers of about 1mn. We believe that if these transactions are successful it may impact the three major incumbents in the long-term due to increased competition, although it should have minimal impact on their operations in the short-term.
Taiwan's three telecom incumbents comprise Far EasTone (4904 TT/Buy/NT$49.9), Chunghwa Telecom (2412 TT/Hold/76.7 NT$), and Taiwan Mobile (3045 TT/Hold/ NT$55.0).

  SPIL (2325 )    May. 02, 2008
Only dividend yield will support share price

• . Downgrade to Hold on decelerating growth. The counter appreciated 12% since our last Buy call issued a quarter ago. It now trades at 7.5x 2008 EV/EBITDA and 2.5x PB, which is approaching the high end of its historical range of 1.0x-3.4x. With disappointing 1Q08 results and decelerating sales growth, we see that the only catalyst to support its share price is its 8% dividend yield. Hence, we downgrade our rating to Hold but keep TP at NT$57.0, based on 2.5x 2008 PB and a cash dividend of NT$4.5.
• . 1Q08 EPS at NT$0.58, 33% below our estimate. 1Q08 sales of NT$14.9bn (-16% QoQ, +9% YoY) were well below SPIL’s guidance of a 10%-13% QoQ drop. This was mainly due to slower-than-expected sales of handset ICs and flash memory. Gross/operating margins were 21%/15%, lower than 29%/24% in 4Q07 and 28%/22% in 1Q07. Net income plunged to NT$1.8bn (-54% YoY, -63% QoQ), or EPS of NT$0.58.
• . Impacted by strong NT dollar and gold price. Surging gold prices and rapid NT dollar appreciation were the main cause for the 1Q08 disappointment. The company reported a forex loss of NT$340mn and a negative impact of NT$470mn from higher gold costs. Employee bonus expenses came in at approximately NT$300mn in 1Q08, or 2% of sales and 15% of net income.
• . Decelerating 2008 sales growth. SPIL guides 1%-5% QoQ (or -1% to +3% YoY) sales growth and 15%-17% operating margin in 2Q08. It sees the 2Q08 as benefiting from the strong demand for communication products, but believes it will be negatively affected by the strong NT dollar. It also offers its view towards 2008 as “stagnating growth”. We forecast that its YoY sales growth will drop to 0% or lower, compared to a 20% increase in 4Q07, and margins will no longer expand as they have for the past four years.

Source: Primasia Investment Consultancy Co., Ltd.

  UMC (2303 )    May. 02, 2008
Better-than-expected 1Q08 results: maintain Buy

• . 1Q08 results beat guidance. UMC posted 1Q08 sales of NT$24.0bn (+4% YoY, -13% QoQ). Gross/operating margins were 14.9%/0.8%, compared with 20.5%/4.8% in 4Q07 and 16.0%/0.1% in 1Q07. Both sales and GM were higher than the company’s guidance due to greater high-end wafer shipments. Net income came in at NT$206mn (-85.9% YoY, -84.8% QoQ), or NT$0.02 per share. Note that 1Q08, 4Q07 and 1Q07 booked gains on disposal investments of NT$0.7bn, NT$1.6bn and NT$2.0bn, respectively.
• . 2Q08 sales to grow 2%-5% QoQ. UMC expects 2Q08 sales to increase 2%-5% QoQ (10% shipment increase, 2% ASP drop, 3%-5% negative FX impact) and GM to grow to 20%. The company pointed out that demand is strongest in communications, followed by consumer electronics and computers. We note that two of UMC’s major clients in communications, MediaTek (2454 TT/ Buy/ NT$395.0) and Infineon (DE) are expected to have a strong run in 2Q08.
• . Cost structure continues to improve. UMC’s 2008 capex (US$500mn-$700mn) is one-third lower than its 2007 capex of US$1bn. Its depreciation dropped from NT$46bn in 2005 to NT$36bn in 2007, and the company forecasts 2008 depreciation will further decline by 2%-3%. We note that the company, like its peers, has lowered the capex/sales ratio down to 20% (Exhibit 3).
• . Maintain Buy. The counter currently trades at 1.1x 1Q08 PB and 4.7x 2008 EV/EBITDA. Its PB ratio is still in the lower half of its four-year historical range of 1.0-1.5x. With the current industry-wide trend of disciplined capital spending and UMC’s improving cost structure, we believe its core business will improve gradually. Therefore, we remain our Buy rating and set TP at NT$24.0, based on 1.4x 2008 BVPS and a cash dividend of NT$0.75.

Source: Primasia Investment Consultancy Co., Ltd.