htc (060710 yuanta)

ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 10. Yuanta does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Share price performance relative to TAIEX

264

314

364

414

464

514

Jul-09 Oct-09 Jan-10 Apr-10-46

-41

-36

-31

-26

-21

-16

-11

-6

-1Share Price (NT$) Performance relative to TAIEX (%)

Market cap US$11,315.1 mn 6M avg. daily turnover US$82.0 mn Outstanding shares 773.9 mn Free float 69.6% FINI ownership 58.8%

Major shareholders Wei Chih Investment, 5.1%

Net debt/equity Net cash BVPS (2010F) NT$90.97 P/B (2010F) 5.2x

Financial outlook (NT$ mn)

Year to Dec

2009 2010F 2011F 2012F

Sales 144,881 219,791 271,843 329,078 Op. profit 24,175 33,116 40,284 45,529 Net profit 22,609 30,111 36,719 41,367 EPS (NT$) 28.66 38.91 47.44 53.45 EPS growth (%) (20.6) 35.8 21.9 12.7

DPS (NT$) 26.01 27.23 33.21 37.41

P/E (X) 16.5 12.1 9.9 8.8 Div. yield (%) 5.5 5.8 7.0 7.9

ROE (%) 35.8 44.3 46.9 44.1

HTC (2498 TT) Standing out from the crowd Upgrade from Sell to BUY with a new TP of NT$595: We believe HTC has gained meaningful traction within the Android camp, and thus we anticipate its recent solid sell-through will last into 2H10. We previously expected demand to peak in 2Q10, but now expect demand to be sustainable through 2H10. Despite our expectations of intensifying competition and commoditization in the smartphone market, HTC has been able to build its brand awareness better than we had anticipated, which will allow it to stand out from the competition when the smartphone market matures.

► Demand strength to last into 2H10: Support from operators for HTC has not been diminished by the upcoming launch of Samsung’s Galaxy S and Motorola’s Droid X models. We estimate HTC’s shipments will increase further QoQ in 3Q10, backed by ongoing strong demand, despite tight component supply (AMOLED).

► Stable ASP trend: We believe HTC will be able to maintain stable ASP and margin trends in the near term thanks to solid demand for its high-end products and tight supply.

► Implications of CDMA iPhone may not necessarily be negative: Apple will likely roll out a CDMA iPhone with Verizon in 2011, which may be negative to HTC. However, with the end of iPhone exclusivity, AT&T may increase its support for Android phones.

Valuation: We raise our 2010/2011/2012 earnings forecasts by 34%/77%/100% to NT$38.91/47.44/53.45 to reflect better shipment, ASP and margin trends. We also lift our TP to NT$595, derived from the average of our P/E and DCF valuations and implying 26% upside.

Company Update

Taiwan: Handsets 6 July, 2010

Action

BUY (Upgrade) TP upside (downside) 26.2%

Close 5 July, 2010 Price NT$471.50 12M Target NT$595.00 Previous Target NT$325.00 TAIEX 7,440.0

What’s new?

► We upgrade HTC from Sell to BUY with a new TP of NT$595.

► We raise our earnings forecasts by 34%, 77% and 100% for 2010F, 2011F and 2012F to reflect better-than-expected recent sell-through strength.

Our view

► Our channel checks indicate HTC’s shipment strength could last into 2H10 as it has gained traction in the Android camp. Its progress in building brand awareness has been better than we had anticipated, helping HTC stand out from the competition.

Company profile: HTC manufactures and markets Microsoft Windows based and Google Android based smartphones.

Primary Analyst: Bonnie Chang +852 3969 9904 [email protected] With significant contribution from: Wenchu Hsu +886 2 3518 7943 [email protected]

Yuanta HTC (2498 TT) Taiwan: Handsets 6 Jul, 2010 Company Update of 12

Demand strength looks sustainable

Our channel checks indicate HTC’s shipment strength could last into 2H10 as it has gained traction within the Android camp thanks to its strong product cycle. This suggests our previous expectations for short-lived sell-in strength may be too conservative. We maintain our long-term negative view on the smartphone market given intensifying competition and commoditization. However, we believe HTC’s progress in building brand awareness has been better than we had anticipated. We regard this as a positive that will help HTC stand out from the competition once the smartphone market matures. 10-15% volume growth in 3Q10 followed by a mild decline in 4Q10 We do not believe support from operators for HTC has been affected by launches of other Android phones by HTC’s key competitors; i.e. Samsung’s Galaxy S and Motorola’s Droid X. HTC rolled out more new Android models in 1H10 and those products (i.e. the Desire, Incredible and EVO) have been competitive, with positive feedback and increased orders from operators. HTC will launch another wave of models on the Android (with Android OS 2.2) and WinPhone 7 platforms, and we expect this to sustain the company’s sales momentum in 2H10. Our latest industry checks suggest HTC’s demand strength could hold up well into 3Q10 with volume up 10-15% QoQ to 5.5-6.0 mn units, followed by a mild decline in 4Q10 given unclear visibility for now. Given that, we forecast HTC to achieve 20 mn units shipped in 2010, up 72% YoY. Supply/demand dynamic favors HTC HTC may have resolved the supply shortage of AMOLED display from Samsung Mobile Display during 2Q10 when it added Sony’s IPS LCD display as an additional source in July. We expect HTC to maintain stable ASP and gross margin trends in 2H10 thanks to solid demand for its high-end products and tight supply. CDMA iPhone not necessarily negative for HTC Our channel checks suggest Apple is likely to roll out a CDMA-standard iPhone with Verizon in 2011, which could be a negative for HTC considering rising competition within Verizon. However, this also means the end of iPhone exclusivity with AT&T, which could result in AT&T increasing its support for Android phones. Earnings revision We raise our earnings forecasts for 2010, 2011 and 2012 by 34%, 77% and 100% to NT$38.91, NT$47.44 and NT$53.45, respectively, to reflect our higher shipment, ASP and margin assumptions. We now are expecting HTC to ship 20 mn units in 2010, 26 mn in 2011F (up 31% YoY) and 35 mn units in 2012 (up 34% YoY). We expect the majority of shipments to be Android phones and high-end models. As such, we raise our ASP assumptions to US$335 in 2010, US$321 in 2011 and US$293 in 2012, vs. US$326, US$289 and US$255 previously. For gross margins, we are anticipating a relatively stable trend of 30.9% in 2010F, 29.9% in 2011F and 29.4% in 2012F, vs. our previous forecasts of 30.0%, 28.8% and 29.3%, respectively. In absolute terms, our operating expense assumptions are higher than our previous forecasts but are smaller as a percentage of sales due to larger sales bases.

HTC’s progress in building brand awareness has been better than we had anticipated

We expect HTC to maintain stable ASP and gross margin trends in 2H10 thanks to solid demand for its high-end products and tight supply

We raise our earnings forecasts for 2010, 2011 and 2012 by 34%, 77% and 100% to NT$38.91, NT$47.44 and NT$53.45, respectively


Figure 1: Our earnings revisions for HTC, 2010-2012F

NT$ mn 2010F 2011F 2012F

New Old Change New Old Change New Old Change

Revenue 219,791 174,387 26.0% 271,843 174,654 55.6% 329,078 176,315 86.6%

Gross Profit 67,936 52,396 29.7% 81,210 50,347 61.3% 96,865 51,591 87.8%

Operating Profit 33,116 24,612 34.6% 40,284 22,388 79.9% 45,529 22,323 104.0%

PBT 33,869 25,365 33.5% 41,060 23,164 77.3% 46,375 23,169 100.2%

PAT 30,111 22,541 33.6% 36,719 20,764 76.8% 41,367 20,713 99.7%

EPS (NT$) 38.91 29.13 33.6% 47.44 26.83 76.8% 53.45 26.76 99.7%

Wtd. avg. no. of shares 774 774 0.0% 774 774 0.0% 774 774 0.0%

Margin (%)

Gross margin 30.9% 30.0% 29.9% 28.8% 29.4% 29.3%

Operating margin 15.1% 14.1% 14.8% 12.8% 13.8% 12.7%

Net margin 13.7% 12.9% 13.5% 11.9% 12.6% 11.7%

Key assumptions

Shipment (mn units) 20 16 23.8% 26 19 42.0% 35 21 65.2%

ASP (US$) 335 326 2.6% 321 289 10.9% 293 255 14.6%

Source: Yuanta Research estimates


Valuation

We continue to use the average of our P/E and DCF valuations to derive our target price of NT$595, which implies 26% upside potential. Forward P/E valuation – NT$617 We apply a target P/E multiple of 13x to our 2011F EPS to derive a target price of NT$617 (vs. NT$336 previously). We switch from 2010 to 2011 EPS as we are nearing the middle of 2010 and believe the market will soon factor in HTC’s 2011 earnings outlook. We raise our P/E multiple to 13x from the previous 12x as we believe HTC has improved its brand awareness in the major smartphone markets, Europe and the US. HTC’s increased brand awareness globally also justifies the higher multiple, in our view. Our P/E multiple of 13x 2011F EPS is at the mid-to-high end of HTC’s trading range of 5x-20x since 2006. DCF valuation – NT$574 Our DCF target price is NT$574, vs. NT$310 previously. Our new value mainly reflects our upward earnings revisions. We use a DCF methodology to reflect HTC’s strong FCF-generating capability. The assumptions of our DCF valuation are unchanged. We use a WACC of 10%, a perpetual earnings growth rate of -2% and a risk-free rate of 2% to derive our DCF-driven target price. Please see Figure 2 for more details. 6% cash dividend yield HTC will pay out a NT$26 cash dividend from its 2009 earnings in 2010, representing a 6% yield rate based on the current share price. In view of the company’s ample cash position and lack of reinvestment plans, we believe HTC is likely to maintain a high cash dividend payout policy in the near term. We believe the stable dividend yield offers share price support.

Our target price of NT$595 is derived from the average of our P/E and DCF valuations

We believe HTC is likely to maintain a high cash dividend payout policy in the near term


Figure 2: DCF valuation for HTC’s core business (NT$ mn) 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F & beyond

EBITDA 33,764 40,975 46,263 47,419 48,605 49,820 51,065

Less changes in working capital -925 -1,359 -1,727 -1,744 -1,762 -1,779 -1,797

Less capex -900 -900 -900 -909 -918 -927 -937

Less tax -3,759 -4,341 -5,008 -5,236 -5,367 -5,501 -5,639 PV of FCF beyond 2017

Free cash flow (FCF) 28,180 34,375 38,627 39,530 40,558 41,612 42,693 351,292

Discount factor 0.91 0.83 0.75 0.69 0.62 0.57 0.52 0.52

PV of FCF 25,639 28,455 29,093 27,088 25,286 23,604 22,034 181,304

Growth to perpetuity (%) -2%

Corporate value 362,504

Debt & Preferred Stock 0

Excess Cash 82,082

Minority interest 0

Equity value 444,586

Value per share (NT$) 574.0

Shares outstanding 774

WACC calculations

Market cap (NT$ mn) 364,911

Latest gross debt in b/s (NT$ mn) 0

Equity + debt 364,911

Risk free rate 2.0%

Beta 1.13

Risk premium 7.0%

Cost of equity 9.9%

Actual interest rate on debt 1.0%

Tax rate -11.3%

Cost of debt 1.1%

WACC 9.9%


Figure 3: HTC- target price derivation and upside Target price derived from DCF valuation (NT$) 574

Target price derived from our P/E based valuation (NT$) 617

Final target price based on average of DCF and P/E valuation (NT$) 595 Target price upside/downside % 26.2%



Figure 4: Peer valuation comparison table

Company Ticker Rating TP Share price

EPS PER (x) EPS growth (%)

2009 2010F 2011F 2009 2010F 2011F 2009 2010F 2011F

HTC 2498 TT BUY 595 NT$471.5 28.7 38.9 47.4 16.5 12.1 9.9 -20.6% 35.8% 21.9%

Global peers Nokia* NOK1V FH Not rated N.A. €7.11 0.2 0.5 0.7 29.6 14.5 10.4 -77.6% 104.6% 38.9%

Motorola * MOT US Not rated N.A. US$7.11 0.0 0.3 0.5 N.M. 28.4 15.7 N.M. N.M. 80.8%

RIM* RIM CN Not rated N.A. CAD63.19 4.8 5.5 6.2 13.1 11.4 10.2 30.8% 14.2% 11.6%

Palm* PALM US Not rated N.A. US$5.7 -6.1 -1.9 -2.0 N.M. N.M. N.M. N.M. N.M. N.M.

Average 21.3 18.1 12.1 -23.4% 59.4% 43.8%

Local peers

Compal Comm. 8078 TT SELL 23 NT$27.45 1.3 1.4 1.6 21.2 19.2 16.9 -42.1% 10.8% 13.1%

Inventec Appliances 3367 TT Not rated N.A. NT$23.8 0.8 3.2 2.3 30.1 7.4 10.4 -80.7% 308.9% -29.1%

Average 25.7 13.3 13.7 -61.4% 159.8% -8.0%

Source: Company data, Yuanta Research estimates, Bloomberg

Notes: Price, EPS, and BVPS figures are denominated in local currency.

Notes: RIM fiscal year ends on Feb 28; Palm fiscal year ends on May 31; HTC, Nokia, Motorola, FIH year ends on Dec 31.

Figure 5: Peer valuation comparison table (continued)

Company Ticker Cash dividend yield (%) ROE (%) BVPS PBR (x)

2009 2010F 2011F 2009 2010F 2011F 2009 2010F 2011F 2009 2010F 2011F

HTC 2498 TT 5.5% 5.8% 7.0% 35.8% 44.3% 46.9% 83.2 91.0 111.2 5.7 5.2 4.2

Global peers Nokia* NOK1V FH 5.6% 5.7% 5.9% 6.5% 15.1% 18.1% 3.5 3.7 3.9 2.0 1.9 1.8

Motorola * MOT US 0.7% 0.0% 0.0% -0.5% 7.4% 9.7% 4.2 4.6 5.0 1.7 1.6 1.4

RIM* RIM CN 0.0% 0.0% 0.0% 36.5% 32.8% 26.9% 14.4 19.6 25.8 4.4 3.2 2.4

Palm* PALM US 0.0% 0.0% 0.0% -74.0% 156.6% 94.7% -1.7 -1.7 -4.2 -3.4 -3.3 -1.4

Average 1.6% 1.4% 1.5% -7.9% 53.0% 37.3% 1.2 0.9 1.1

Local peers

Compal Comm. 8078 TT 3.6% 4.0% 4.5% 7.0% 7.6% 8.4% 18.5 19.0 19.5 1.5 1.4 1.4

Inventec Appliances 3367 TT 6.6% 10.6% 8.1% 3.3% 18.2% N.A. 22.6 30.9 N.A. 1.1 0.8 N.A.

Average 5.1% 7.3% 6.3% 5.2% 12.9% 8.4% 1.3 1.1 1.4

Source: Company data, Yuanta Research estimates, Bloomberg


Figure 6: Quarterly highlights (consolidated basis) (NT$ mn) 1Q2010A 2Q2010F 3Q2010F 4Q2010F FY2010F 1Q2011F 2Q2011F 3Q2011F 4Q2011F FY2011F

Sales 37,697 55,864 63,688 62,542 219,791 53,636 64,682 73,885 79,640 271,843 COGS (26,291) (38,502) (43,778) (43,283) (151,855) (38,372) (45,584) (51,340) (55,337) (190,633) Gross profit 11,406 17,361 19,910 19,259 67,936 15,264 19,099 22,545 24,303 81,210 Opex 5,895 8,603 10,190 10,132 (34,820) 8,421 10,090 10,787 11,627 (40,926) Operating profit 5,511 8,758 9,720 9,127 33,116 6,843 9,008 11,758 12,675 40,284 Non-operating profit 209 178 181 185 753 188 192 196 200 776 Pre-tax profit 5,721 8,936 9,901 9,312 33,869 7,031 9,200 11,954 12,875 41,060 Minority interest 0 0 0 0 0 0 0 0 0 0 Income tax (722) (963) (1,069) (1,004) (3,759) (753) (901) (1,293) (1,394) (4,341) Net income 4,998 7,973 8,832 8,308 30,111 6,278 8,299 10,660 11,481 36,719 FD WA EPS (NT$) 6.46 10.30 11.41 10.73 38.91 8.11 10.72 13.77 14.83 47.44 Wtd. avg. no. of shares 774 774 774 774 774 774 774 774 774 774 Margin analysis Gross margin 30.3% 31.1% 31.3% 30.8% 30.9% 28.5% 29.5% 30.5% 30.5% 29.9% Operating margin 14.6% 15.7% 15.3% 14.6% 15.1% 12.8% 13.9% 15.9% 15.9% 14.8% Pre-tax margin 15.2% 16.0% 15.5% 14.9% 15.4% 13.1% 14.2% 16.2% 16.2% 15.1% Effective tax rate 12.6% 10.8% 10.8% 10.8% 11.1% 10.7% 9.8% 10.8% 10.8% 10.6% Growth (% QoQ) Sales (8.2%) 48.2% 14.0% (1.8%) 51.7% (14.2%) 20.6% 14.2% 7.8% 23.7% Operating profit (9.9%) 58.9% 11.0% (6.1%) 37.0% (25.0%) 31.6% 30.5% 7.8% 21.6% Net income (9.7%) 59.5% 10.8% (5.9%) 33.2% (24.4%) 32.2% 28.4% 7.7% 21.9% FD WA EPS (7.9%) 59.5% 10.8% (5.9%) 35.8% (24.4%) 32.2% 28.4% 7.7% 21.9% Sales breakdown (NT$ mn) PDA 1,700 1,700 1,400 1,500 6,300 1,530 1,530 1,260 1,350 5,670 PDA phones 32,000 47,103 54,168 53,085 186,357 45,313 54,920 63,158 68,084 231,475 Smartphone 3,997 7,061 8,120 7,957 27,135 6,792 8,232 9,467 10,206 34,698 ODM projects 0 0 0 0 0 0 0 0 0 0 = total phone 35,997 54,164 62,288 61,042 213,491 52,106 63,152 72,625 78,290 266,173 Total 37,697 55,864 63,688 62,542 219,791 53,636 64,682 73,885 79,640 271,843 Sales breakdown (%) PDA 4.5% 3.0% 2.2% 2.4% 2.9% 2.9% 2.4% 1.7% 1.7% 2.1% PDA phones 84.9% 84.3% 85.1% 84.9% 84.8% 84.5% 84.9% 85.5% 85.5% 85.2% Smartphone 10.6% 12.6% 12.7% 12.7% 12.3% 12.7% 12.7% 12.8% 12.8% 12.8% ODM projects 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% = total phone 95.5% 97.0% 97.8% 97.6% 97.1% 97.1% 97.6% 98.3% 98.3% 97.9% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Source: Company data, Yuanta Research estimates

Note: A represents historical data reconciled by Yuanta

Figure 7: 12-month forward looking P/E band chart

20.6x P/E

16.6x P/E

12.6x P/E

8.5x P/E

4.5x P/E98

198298398498598698798898

Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10

NT$

Source: Company data, Yuanta

Figure 8: 12-month forward looking P/B band chart

9.6x P/B

7.8x P/B

6.1x P/B

4.3x P/B

2.5x P/B

96196296396496596696796896996

Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10

NT$


Figure 9: Related equities – Yuanta-issued warrants Underlying

equity Stock code Stock price Warrant code

Listing date

Expiration date

Issued lots

Execution price

Warrant price Conversion rate Implied

volatility HTC 2498 471.5 03150P 2010/6/23 2010/12/22 20,000 370 0.78 0.05 45.55%

HTC 2498 471.5 030708 2010/6/14 2010/12/13 20,000 420 1.67 0.02 44.83%

HTC 2498 471.5 030319 2010/5/28 2010/11/29 10,000 490 2.16 0.05 42.15%

HTC 2498 471.5 030186 2010/5/21 2010/11/22 20,000 465 2.66 0.05 42.51%

HTC 2498 471.5 03024P 2010/5/21 2010/11/22 20,000 400 1.02 0.05 45.29%

HTC 2498 471.5 04204 2010/4/8 2010/10/7 30,000 390 1.88 0.02 46.04%

HTC 2498 471.5 04143P 2010/4/2 2010/10/1 20,000 335 0.12 0.05 45.68%

HTC 2498 471.5 03974 2010/3/24 2010/9/23 10,000 365 5.5 0.05 39.07%

HTC 2498 471.5 03856 2010/3/16 2010/9/15 10,000 322 7 0.05 0.00%

HTC 2498 471.5 03500 2010/2/23 2010/8/23 10,000 300 8.4 0.05 0.00%

HTC 2498 471.5 03107 2010/1/27 2010/7/26 10,000 440 3.81 0.1 41.15%

Source: Yuanta

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Balance Sheet Year as of Dec

(NT$ mn) 2008 2009 2010F 2011F 2012F

Cash & ST investment 61,827 64,192 84,598 106,267 133,305 Inventories 7,418 4,739 7,593 9,532 11,611 Accounts receivable 29,799 27,571 41,760 51,650 62,525 Others 2,228 4,524 4,524 4,524 4,524

Current assets 101,272 101,025 138,475 171,972 211,964 LT investments 5,161 6,506 6,958 7,411 7,863 Net fixed assets 7,376 8,314 8,567 8,777 8,943 Others 1,418 3,298 3,298 3,298 3,298

Other assets 13,954 18,118 18,823 19,485 20,104 Total assets 115,226 119,143 157,298 191,457 232,069 Accounts payable 27,907 24,882 41,001 51,471 62,697 ST borrowings 0 0 0 0 0 Others 26,651 28,619 45,895 53,942 67,664

Current liabilities 54,558 53,502 86,895 105,413 130,361 Long-term debts 0 0 0 0 0 Others 6 1 1 1 1

Long-term liabilities 6 1 1 1 1 Total liabilities 54,565 53,503 86,897 105,414 130,362 Paid-in capital 7,554 7,889 7,889 7,889 7,889 Capital surplus 4,418 9,100 9,100 9,100 9,100 Retained earnings 52,036 48,638 58,231 73,872 89,536 Capital adjustment (3,346) 13 (4,819) (4,819) (4,819)

Shareholders' equity 60,661 65,640 70,401 86,043 101,706


Cash Flow

Year to Dec (NT$ mn) 2008 2009 2010F 2011F 2012F

Net profit 28,635 22,609 30,111 36,719 41,367 Depr & amortization 604 674 647 690 733 Change in working cap. (5,727) 1,883 (925) (1,359) (1,727) Others 14,082 2,376 16,823 7,596 13,269

Operating cash flow 37,594 27,542 46,656 43,646 53,642 Capex (4,264) (1,612) (900) (900) (900)

Change in LT inv. (2,109) (1,164) 0 0 0 Change in other assets (330) (2,378) 0 0 0

Investment cash flow (6,702) (5,154) (900) (900) (900) Change in share capital (3,410) (2,407) (4,832) 0 0

Net change in debt 0 0 0 0 0 Other adjustments (20,691) (20,131) (20,518) (21,077) (25,703)

Financing cash flow (24,101) (22,538) (25,350) (21,077) (25,703)

Net cash flow 6,791 (150) 20,406 21,669 27,039 Free cash flow 20,869 25,120 31,939 38,716 43,635


Profit and Loss Year to Dec

(NT$ mn) 2008 2009 2010F 2011F 2012F

Sales 152,559 144,881 219,791 271,843 329,078 Cost of goods sold (101,876) (98,992) (151,855) (190,633) (232,212)

Gross profit 50,683 45,888 67,936 81,210 96,865 Operating expenses (20,426) (21,713) (34,820) (40,926) (51,336)

Operating profit 30,256 24,175 33,116 40,284 45,529 Interest income 1,368 349 266 324 394 Interest expense 0 0 0 0 0 Net interest 1,369 349 266 324 394

Net Invst.Inc/(loss) (57) 277 452 452 452

Net oth non-op.Inc/(loss) 23 412 34 0 0 Net extraordinaries 0 0 0 0 0 Pretax income 31,590 25,212 33,869 41,060 46,375 Income taxes (2,955) (2,604) (3,759) (4,341) (5,008)

Net profit 28,635 22,609 30,111 36,719 41,367

EBITDA 30,861 24,849 33,764 40,975 46,263 EPS (NT$) 36.10 28.66 38.91 47.44 53.45 EPS (NT$) Bonus Adj. 36.10 28.66 38.91 47.44 53.45


Key Ratios

Year to Dec 2008 2009 2010F 2011F 2012F Growth (% YoY) Sales 28.7 (5.0) 51.7 23.7 21.1 Op profit (0.9) (20.1) 37.0 21.6 13.0

EBITDA (0.7) (19.5) 35.9 21.4 12.9

Net profit (1.0) (21.0) 33.2 21.9 12.7 EPS (2.4) (20.6) 35.8 21.9 12.7

Profitability (%)

Gross margin 33.2 31.7 30.9 29.9 29.4 Operating margin 19.8 16.7 15.1 14.8 13.8

EBITDA margin 20.2 17.2 15.4 15.1 14.1

Net profit margin 18.8 15.6 13.7 13.5 12.6 ROA 27.8 19.3 21.8 21.1 19.5

ROE 49.1 35.8 44.3 46.9 44.1

Stability

Gross debt/equity (%) 0.0 0.0 0.0 0.0 0.0

Net cash (debt)/equity (%) 101.9 97.8 120.2 123.5 131.1 Int. coverage (X) (136,164.

(192,460.

(498,075.7

(603,826.

(681,983.

Int. & ST debt cover (X) (136,164.

(192,460. (498,075.7

(603,826.

(681,983.

Cash flow int. cover (X) (162,043.

(210,241. (686,111.0

(641,856.

(788,852.

Cash flow/int. & ST debt (X) (162,0

(210,241. (686,111.0

(641,856.

(788,852.

Current ratio (X) 1.9 1.9 1.6 1.6 1.6

Quick ratio (X) 1.7 1.8 1.5 1.5 1.5

Net debt (NT$ mn) (61,826.9 (64,192.0) (84,597.7) (106,266.

(133,305.

BVPS (NT$) 76.48 83.20 90.97 111.18 131.41

Valuation Metrics (x) P/E 13.1 16.5 12.1 9.9 8.8 P/FCF 17.9 14.8 11.4 9.4 8.4 P/B 6.2 5.7 5.2 4.2 3.6 P/EBITDA 12.1 15.0 10.8 8.9 7.9 P/S 2.5 2.6 1.7 1.3 1.1 Source: Company data, Yuanta


Appendix A: Important Disclosures Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. HTC (2498 TT) – Three-year recommendation and target price history

No. Date Closing Price (A) Target Price (B) Adjusted Target Price (C) Rating Analyst

1: 30 Jul 07 349.39 860.00 484.64 BUY Chialin Lu2: 03 Oct 07 408.79 800.00 586.08 BUY Chialin Lu3: 07 Nov 07 460.07 932.00 682.78 BUY Chialin Lu4: 31 Jan 08 435.16 N.A. Under review Yuanta Research5: 07 May 08 609.52 932.50 683.15 HOLD Vincent Chen6: 23 Jun 08 531.14 630.50 461.91 SELL Vincent Chen7: 01 Aug 08 477.14 353.70 336.86 SELL Vincent Chen8: 07 Oct 08 395.71 350.10 333.43 SELL Vincent Chen9: 03 Nov 08 385.71 282.00 268.57 SELL Vincent Chen10: 25 Nov 08 291.43 237.00 225.71 SELL Vincent Chen11: 09 Feb 09 336.19 254.00 241.91 SELL Vincent Chen12: 04 May 09 456.19 323.00 307.62 SELL Vincent Chen13: 07 Jul 09 454.29 358.00 340.95 SELL Vincent Chen14: 03 Aug 09 372.50 287.00 287.00 SELL Vincent Chen15: 10 Nov 09 362.00 276.00 276.00 SELL Vincent Chen16: 27 Jan 10 334.50 277.00 277.00 SELL Vincent Chen17: 06 Apr 10 381.00 315.00 315.00 SELL Vincent Chen18: 29 Apr 10 415.50 325.00 325.00 SELL Vincent Chen

1

2

34

5

6

7

89

10

11

12 13

14 15

16

1718

235

285

335385

435

485

535585

635

685

Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10235

285

335385

435

485

535585

635

685

Share Price NT$

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

Rating # of stocks %Buy 85 50%Hold 55 33%Sell 23 14%Under Review 5 3%Restricted 1 1%Total: 169 100% Source: Yuanta Research


Ratings Definitions BUY: We have a positive outlook on the stock based on our expected absolute or relative return over the investment period. Our thesis is based on our analysis of the company’s outlook, financial performance, catalysts, valuation and risk profile. We recommend investors add to their position. HOLD: We have a neutral outlook on the stock based on our expected absolute or relative return over the investment period. Our thesis is based on our analysis of the company’s outlook, financial performance, catalysts, valuation and risk profile. SELL: We have a negative outlook on the stock based on our expected absolute or relative return over the investment period. Our thesis is based on our analysis of the company’s outlook, financial performance, catalysts, valuation and risk profile. We recommend investors reduce their position. Under Review: We actively follow the company, although our estimates, rating and target price are under review. Restricted: The rating and target price have been suspended temporarily to comply with applicable regulations and/or Yuanta policies. Note: Yuanta research coverage with a Target Price is based on an investment period of 12 months. Greater China Discovery Series coverage does not have a formal 12 month Target Price and the recommendation is based on an investment period specified by the analyst in the report. Global Disclaimer © 2010 Yuanta. All rights reserved. The information in this report has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. It is not an offer to sell or solicitation of an offer to buy any securities. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This report provides general information only. Neither the information nor any opinion expressed herein constitutes an offer or invitation to make an offer to buy or sell securities or other investments. This material is prepared for general circulation to clients and is not intended to provide tailored investment advice and does not take into account the individual financial situation and objectives of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, investments or investment strategies discussed or recommended in this report. The information contained in this report has been compiled from sources believed to be reliable but no representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is not (and should not be construed as) a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on such business in that jurisdiction. Yuanta research is distributed in the United States only to Major U.S. Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended and SEC staff interpretations thereof). All transactions by a US person in the securities mentioned in this report must be effected through a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934, as amended. Yuanta research is distributed in Taiwan by Yuanta Securities Investment Consulting. Yuanta research is distributed in Hong Kong by Yuanta Securities (Hong Kong) Co. Limited, which is licensed in Hong Kong by the Securities and Futures Commission for regulated activities, including Type 4 regulated activity (advising on securities). In Hong Kong, this research report may not be redistributed, retransmitted or disclosed, in whole or in part or and any form or manner, without the express written consent of Yuanta Securities (Hong Kong) Co. Limited. Taiwan persons wishing to obtain further information on any of the securities mentioned in this publication should contact: Attn: Research Yuanta Securities Investment Consulting 10F, 225, Section 3 Nanking East Road, Taipei 104 Taiwan Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact: Attn: Research Yuanta Securities (Hong Kong) Co. Limited 23/F, Li Po Chun Chambers, 189 Des Voeux Road, Central Hong Kong

Yuanta Greater China Equities

Research Gary Chia Head of Greater China Research +886 2 3518 7900 [email protected]

John Brebeck, CFA Head of Taiwan Strategy Head of Research, Taiwan +886 2 3518 7906 [email protected]

Kelvin Ho Deputy Head of China Research Head of Telecom and Media +86 21 6187 3812 [email protected]

Ming Tan, CFA Deputy Head of HK Research Head of Financials +852 3969 9525 [email protected]

George Chang, CFA Head of Upstream Tech +886 2 3518 7907 [email protected]

Vincent Chen Head of Downstream Tech +886 2 3518 7903 [email protected]

Charles Z. Yan, CFA Head of Consumer +852 3969 9530 [email protected]

Dennis Chan – Notebook Supply Chain +886 2 3518 7913 [email protected]

Bonnie Chang – Handsets +886 2 3518 7925 [email protected]

Andrew C Chen – IC Backend +886 2 3518 7940 [email protected]

Larry Cho – Small Cap +852 3969 9523 [email protected]

Dale Gai – Display & Memory & LED +886 2 3518 7933 [email protected]

Danny Ho – Taiwan Petrochemical +886 2 3518 7923 [email protected]

Ming Hsun Lee, CFA – Taiwan Small & Mid Cap +886 2 3518 7938 [email protected]

Min Li – Alternative Energy +852 3969 9521 [email protected]

May Lin – Taiwan Telecom & Media +886 2 3518 7942 [email protected]

Luke Qian – China Retail +86 21 6187 3821 [email protected]

Kim-Chong Tan – China Energy +852 3969 9526 [email protected]

Tess Wang – Taiwan Financials +886 2 3518 7901 [email protected]

Johnny Wong - Transportation and Conglomerates +852 3969 9524 [email protected]

Sales and Trading James Poon Head of Hong Kong Cash Equities/President + 852 3969 9860 [email protected]

Arthur Lo Head of Greater China Sales Coverage +852 3969 9866 [email protected]

John Chang Head of Taiwan Equities +886 2 2175 8898 [email protected]

Juan Tseng Head of Taiwan Sales +886 2 2175 8962 [email protected]

Duncan Wun Head of Hong Kong Sales +852 3969 9869 [email protected]

Dan Clarke Head of Greater China Execution +886 2 2175 8958 [email protected]

Chris Dunham Head of HK Sales Trading & Execution +852 3969 9768 [email protected]

Fanny Lin Head of Dealing +886 2 2175 8818 [email protected]

Riga Saito Head of Taiwan Sales Trading +886 2 2175 8800 [email protected]

Kerry Chen - Sales +886 2 2175 8922 [email protected]

John Fu – Sales Trading +852 3969 9766 [email protected]

Leo Hu - Sales +886 2 2175 8880 [email protected]

Vickie Hu +852 3969 9878 [email protected]

Charles Nissen - Sales +852 3969 9832 [email protected]

Winnie Shek – Sales Trading +852 3969 9769 [email protected]

Joanna Shih - Sales +886 2 2175 8960 [email protected]

Ming Yi Tan +852 3969 9879 [email protected]

Joyce Wan - Sales +852 3969 9876 [email protected]

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