initiation: two growth engines at work 1 4...

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■ Investment case We initiate on ASE with an Outperform (2) rating and TP of TWD40. We highlight 2 growth engines that we see driving its structural profitability – the flip-chip (FC) migration trend and its system in packaging (SiP) expansion, as well as its counter-seasonal revenue strength in the near term. However, we think the market has priced in anything that ASE might announce in the short term. Thus, we prefer SPIL (2325 TT, TWD40.73, Buy [1]) in the OSAT space for its more attractive valuations. ■ Catalysts Both growth engines should lead to a 2014-16 revenue CAGR of over 15% for ASE, boosting its structural

ROE to the 14-15% level. While the migration to FC trend should help ASE gain OSAT market share, its SiP expansion should help it gain ground in the EMS market. FC migration. ASE has been increasing its share of the OSAT market since the GFC, due to its early entry in the copper wirebonding (Cu WB) market and timely shift to the next trend in WB-to-FC migration. In light of growing demand for FC from mobile computing devices (MCD) and advanced technologies, we think ASE is well positioned to gain further market share. SiP expansion. This is the second growth engine we see for ASE, helping it expand its share of the EMS market. Indeed, ASE has delivered counter-seasonal revenue growth post-1Q14, and we look for such strength to continue in 4Q14, thanks to fast-growing SiP demand related to the new iPhones. Upbeat results and guidance. We expect ASE to deliver upbeat 3Q14 earnings and 4Q14 revenue/margin guidance, thanks to its SiP strength, which should help offset any seasonal weakness in its OSAT business. However, 4Q14 guidance is unlikely to surprise.

■ Valuation We set our 6-month target price at TWD40, based on our ROE-adjusted PBR of 2.1x applied to our average BVPS forecast for 2014-15. ■ Risks The key risk would be if FC competition from peers were to intensify by more than we expect.

Information Technology / Taiwan2311 TT

24 October 2014

Advanced Semiconductor Engineering

Initiation: two growth engines at work • FC and SiP businesses are the 2 drivers helping to boost ASE’s

structural ROE • FC business is helping ASE gain share of the OSAT market,

while its SiP business is helping it gain share of EMS market • Initiating with Outperform (2) and 6-month TP of TWD40; but

in the OSAT space, we prefer SPIL on valuation grounds

Source: FactSet, Daiwa forecasts

Information Technology / Taiwan

Advanced Semiconductor Engineering2311 TT

Target (TWD): 40.00Upside: 13.0%22 Oct price (TWD): 35.40

BuyOutperform (initiation)HoldUnderperformSell

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Share price performance

Adv Semi (LHS)Relative to TWSE Index (RHS)

(TWD) (%)

12-month range 25.75-41.00Market cap (USDbn) 9.103m avg daily turnover (USDm) 31.79Shares outstanding (m) 7,810Major shareholder ASE Enterprises Ltd. (17.0%)

Financial summary (TWD)Year to 31 Dec 14E 15E 16ERevenue (m) 252,218 296,241 348,113Operating profit (m) 26,733 28,933 33,894Net profit (m) 19,845 21,701 25,814Core EPS (fully-diluted) 2.541 2.778 3.305EPS change (%) 25.6 9.3 19.0Daiwa vs Cons. EPS (%) (4.3) (8.8) (4.5)PER (x) 13.9 12.7 10.7Dividend yield (%) 3.6 4.0 4.2DPS 1.3 1.4 1.5PBR (x) 2.0 1.8 1.7EV/EBITDA (x) 6.3 5.9 5.2ROE (%) 15.1 15.0 16.4

Rick Hsu(886) 2 8758 [email protected]

Lynn Cheng(852) 2773 [email protected]

Olivia Hsu(886) 2 8758 [email protected]

How do we justify our view?How do we justify our view?

Information Technology / Taiwan 2311 TT

24 October 2014

- 2 -

Growth outlook ASE: quarterly net profit

In our view, ASE’s earnings growth prospects have improved after some volatility following the GFC, driven by the transition in wirebonding from gold-to-Cu. Thanks to the ramp-up in its FC and SiP (EMS) businesses, ASE’s earnings have become stable in terms of quarterly trends since 2Q13, regardless of seasonality. We forecast its quarterly net profit to see a CAGR of 15% for 4Q14-2016, thanks to the 2 growth engines that we see for the company (ongoing FC migration and SiP expansion), which should help ASE gain shares of the OSAT and EMS markets.

Source: Company, Daiwa forecasts

Valuation ASE: 12-month forward PER bands

We use our ROE-adjusted PBR methodology to value the SCM stocks under our coverage, including the foundries and OSAT players, as this method captures a company’s structural profitability over the course of cyclicality in the chip industry and benchmarks it against its theoretical fair value. But we believe the one-year forward PER band is an effective valuation tool to help time investment and stock volatility. ASE has traded within a fair 10-15x range post the GFC. Now trading at 13x 12-month forward earnings, ASE does not look undervalued but we still see room for the shares to rise.

Source: TEJ, Company, Daiwa Forecasts

Earnings revisions ASE: Bloomberg-consensus EPS revisions

The Bloomberg consensus revisions to 2014-15 EPSforecasts for ASE appear to be flattening out, which we believe is because the market is now in sync with ASE’s near-term outlook, and anything the company announces in its 4Q14 outlook is unlikely to surprise. Notwithstanding the likely lack of near-term share-price catalysts, we are positive on the longer-term outlook for the stock and would take advantage of any near-term price volatility to accumulate the shares.

Source: Bloomberg

How do we justify our view?

Growth outlook

Valuation

Earnings revisions

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Key assumptions

Profit and loss (TWDm)

Cash flow (TWDm)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EPackaging Utilization Rate (%) 74.9 93.9 88.2 82.5 83.2 84.9 88.1 93.4Testing Utilization Rate (%) 70.0 84.2 79.7 81.6 79.5 84.8 87.1 93.1FC&bumping utilization (%) 70.7 88.4 94.3 90.4 85.3 87.8 94.9 98.8

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EPackaging Revenue 52,295 101,073 102,719 104,392 112,604 122,161 134,440 151,318Testing Revenue 12,159 21,956 21,946 22,657 24,732 26,230 28,794 32,382Other Revenue 21,321 65,714 60,682 66,923 82,526 103,827 133,006 164,413Total Revenue 85,775 188,743 185,347 193,972 219,862 252,218 296,241 348,113Other income 0 0 0 0 0 0 0 0COGS (67,629) (148,198) (150,337) (157,348) (177,049) (201,499) (239,698) (281,905)SG&A (5,520) (10,283) (11,070) (10,988) (11,700) (13,456) (15,562) (18,156)Other op.expenses (3,612) (6,162) (7,118) (7,874) (9,069) (10,530) (12,048) (14,158)Operating profit 9,014 24,099 16,823 17,762 22,044 26,733 28,933 33,894Net-interest inc./(exp.) (1,334) (1,171) (1,336) (1,682) (2,095) (2,230) (2,237) (2,023)Assoc/forex/extraord./others 708 (105) 1,512 511 (593) 62 600 600Pre-tax profit 8,388 22,824 16,999 16,591 19,356 24,565 27,296 32,471Tax (1,485) (3,629) (3,018) (3,042) (3,202) (4,106) (4,913) (5,845)Min. int./pref. div./others (159) (857) (253) (458) (466) (613) (682) (812)Net profit (reported) 6,745 18,337 13,727 13,092 15,689 19,845 21,701 25,814Net profit (adjusted) 6,745 18,337 13,727 13,092 15,689 19,845 21,701 25,814EPS (reported)(TWD) 1.306 3.105 2.082 1.758 2.089 2.541 2.778 3.305EPS (adjusted)(TWD) 1.306 3.105 2.082 1.758 2.089 2.541 2.778 3.305EPS (adjusted fully-diluted)(TWD) 0.880 2.384 1.783 1.724 2.023 2.541 2.778 3.305DPS (TWD) 0.499 0.329 0.585 0.570 1.043 1.281 1.400 1.500EBIT 9,014 24,099 16,823 17,762 22,044 26,733 28,933 33,894EBITDA 26,652 43,953 39,767 41,176 47,515 52,842 56,459 62,570

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 8,388 22,824 16,999 16,591 19,356 24,565 27,296 32,471Depreciation and amortisation 17,638 19,854 22,945 23,414 25,471 26,109 27,526 28,677Tax paid (1,485) (3,629) (3,018) (3,042) (3,202) (4,106) (4,913) (5,845)Change in working capital (10,064) (10,713) (7,065) (5,705) (4,058) (4,500) (13,500) (8,000)Other operational CF items 1,040 8,629 2,077 (2,241) 3,729 1,387 1,318 1,188Cash flow from operations 15,517 36,965 31,937 29,018 41,296 43,454 37,726 48,491Capex (11,446) (34,109) (29,418) (39,301) (29,143) (35,300) (27,400) (27,400)Net (acquisitions)/disposals (3,607) (1,980) (1,819) (294) (471) 141 0 0Other investing CF items (928) 3 (794) (500) (312) 0 0 0Cash flow from investing (15,981) (36,085) (32,031) (40,094) (29,926) (35,159) (27,400) (27,400)Change in debt 337 6,593 7,010 7,969 18,383 2,992 (7,659) (12,860)Net share issues/(repurchases) 0 0 0 0 3,393 0 0 0Dividends paid (2,576) (1,941) (3,858) (4,242) (7,835) (10,005) (10,935) (11,716)Other financing CF items (879) (4,692) (2,034) 3,193 (279) 0 0 0Cash flow from financing (3,118) (40) 1,118 6,920 13,663 (7,013) (18,593) (24,575)Forex effect/others 0 0 0 0 0 0 0 0Change in cash (3,581) 840 1,024 (4,156) 25,033 1,283 (8,267) (3,485)Free cash flow 4,072 2,856 2,519 (10,283) 12,153 8,154 10,326 21,091

Financial summary


24 October 2014

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Balance sheet (TWDm)

Key ratios (%)


Company profile Advanced Semiconductor Engineering (ASE) is the world’s largest Outsourced Semiconductor Assembly and Test (OSAT) maker

offering integrated circuit (IC) packaging and testing services with a wide range of technologies, including leadframe-based wirebonding (WB), substrate-based WB, flip-chip (FC) packaging, system in packaging (SiP) and electronics manufacturing services (EMS). Its client base overlaps to a high degree with the IC foundry companies, including the fabless chipmakers and IDMs globally. The revenue breakdown for 2013 was: packaging (51%), testing (11%) and EMS (36%).

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 27,578 25,095 25,268 24,436 50,440 51,581 43,314 39,829Inventory 12,206 23,296 30,070 32,073 34,870 38,870 48,870 54,870Accounts receivable 17,812 33,382 30,476 37,213 43,236 46,236 58,736 64,736Other current assets 3,818 3,826 4,317 4,321 3,631 4,000 4,000 4,000Total current assets 61,413 85,599 90,132 98,042 132,176 140,687 154,920 163,436Fixed assets 79,364 99,854 111,779 126,150 131,497 149,060 153,913 154,395Goodwill & intangibles 16,124 20,287 19,747 19,946 20,784 14,000 12,000 11,000Other non-current assets 5,160 2,400 2,221 2,366 2,357 2,357 2,357 2,357Total assets 162,061 208,140 223,878 246,504 286,814 306,104 323,190 331,187Short-term debt 13,960 17,174 26,426 40,099 50,626 52,277 52,478 51,299Accounts payable 8,954 24,389 21,192 24,227 28,989 31,489 40,489 44,489Other current liabilities 11,660 18,172 19,144 20,378 21,220 20,117 23,154 24,031Total current liabilities 34,574 59,735 66,762 84,703 100,835 103,883 116,121 119,819Long-term debt 49,080 52,375 50,167 44,592 51,057 52,399 44,539 32,858Other non-current liabilities 3,693 4,191 4,667 4,750 7,756 6,000 7,000 7,700Total liabilities 87,347 116,300 121,596 134,045 159,649 162,281 167,660 160,377Share capital 54,799 60,520 67,536 75,941 77,560 77,560 77,560 77,560Reserves/R.E./others 16,817 28,036 33,634 33,573 45,461 61,505 72,531 86,999Shareholders' equity 71,616 88,556 101,170 109,515 123,021 139,065 150,091 164,559Minority interests 3,098 3,283 1,113 2,944 4,144 4,757 5,440 6,251Total equity & liabilities 162,061 208,140 223,878 246,504 286,814 306,104 323,190 331,187EV 312,707 321,883 326,585 337,345 329,535 331,999 333,289 324,726Net debt/(cash) 35,463 44,453 51,325 60,254 51,244 53,095 53,703 44,328BVPS (TWD) 13.069 11.512 14.980 14.421 15.861 17.805 19.217 21.069

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) (9.2) 120.0 (1.8) 4.7 13.3 14.7 17.5 17.5EBITDA (YoY) (8.2) 64.9 (9.5) 3.5 15.4 11.2 6.8 10.8Operating profit (YoY) (23.6) 167.3 (30.2) 5.6 24.1 21.3 8.2 17.1Net profit (YoY) 9.5 171.9 (25.1) (4.6) 19.8 26.5 9.3 19.0Core EPS (fully-diluted) (YoY) 13.7 170.8 (25.2) (3.3) 17.3 25.6 9.3 19.0Gross-profit margin 21.2 21.5 18.9 18.9 19.5 20.1 19.1 19.0EBITDA margin 31.1 23.3 21.5 21.2 21.6 21.0 19.1 18.0Operating-profit margin 10.5 12.8 9.1 9.2 10.0 10.6 9.8 9.7Net profit margin 7.9 9.7 7.4 6.7 7.1 7.9 7.3 7.4ROAE 9.5 22.9 14.5 12.4 13.5 15.1 15.0 16.4ROAA 4.3 9.9 6.4 5.6 5.9 6.7 6.9 7.9ROCE 6.6 16.1 9.9 9.4 10.3 11.2 11.5 13.4ROIC 6.8 16.4 9.5 8.9 10.5 11.9 11.7 13.1Net debt to equity 49.5 50.2 50.7 55.0 41.7 38.2 35.8 26.9Effective tax rate 17.7 15.9 17.8 18.3 16.5 16.7 18.0 18.0Accounts receivable (days) 62.1 49.5 62.9 63.7 66.8 64.7 64.7 64.7Current ratio (x) 1.8 1.4 1.4 1.2 1.3 1.4 1.3 1.4Net interest cover (x) 6.8 20.6 12.6 10.6 10.5 12.0 12.9 16.8Net dividend payout 38.2 10.6 28.1 32.4 49.9 50.4 50.4 45.4Free cash flow yield 1.5 1.0 0.9 n.a. 4.4 3.0 3.8 7.7

Financial summary continued …


24 October 2014

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Two engines at work We like ASE for its 2 growth engines (FC and SiP) longer term, and counter-seasonal revenue strength near term. But our preferred OSAT name is SPIL.

Initiating with Outperform (2)

We initiate coverage on ASE with an Outperform (2) rating and 6-month target price of TWD40. Similar to what TSMC has seen in the front-end foundry space, ASE has seen above-seasonal business strength post-1Q14 in the backend OSAT space, all thanks to non-organic demand from Apple, in our opinion. We expect such counter-seasonal strength to continue at ASE for 4Q14, and remain positive on its 2015-16E outlook, on the back of two growth engines: 1) its FC migration, and 2) its SiP expansion. However, we also think the market has priced in anything that ASE might announce and that it does not expect any short-term surprises, making its valuations not that attractive, in our view. Therefore, if we are to make a relative investment call in the OSAT space, we prefer SPIL due to its valuations. We see the 2 OSAT players (SPIL and ASE) as delivering similar structural profitability in terms of long-term ROE over 2014-16, but SPIL’s PBR is trading at a 5% discount to that of ASE.

FC migration

We view the ongoing FC migration trend as one growth engine that is driving ASE’s long-term share gains of the global OSAT market, supporting its around 15% revenue CAGR over the 2014-16 period and boosting its structural ROE to the 14-15% level. Based on our observations, despite some seasonal revenue volatility on the back of temporary plant shutdowns due to polluted water issues early this year, ASE has been able to capture the right (ie, most lucrative) trends in the industry (Cu WB and FC migration), in a timely way. And it should remain on the right track to ramp up its FC sales in order to sustain its long-term market-share-gain story.

Structural market-share gains As the leader in the global OSAT industry in terms of revenue, ASE has gained further market share since the GFC, mainly from SPIL and STATS-ChipPAC, thanks to ASE’s early move into the Cu wirebonding technology (ASE was able to capture the industry trend of replacing expensive gold wires with cheaper Cu wires as key materials for both lead-frame and substrate-based WB – the gold-to-Cu WB transition). Global OSAT market-share dynamics

Source: Company, *ASE includes only SAT ex-EMS sales

ASE’s market-share gains took a breather in 2H11, when SPIL entered the Cu WB market and had to play catch-up. Share gains resumed from 2Q12, however, thanks to ASE’s timely switch from Cu WB to the FC migration, which enables ASE to well capture the next demand trend (WB-to-FC), in our opinion. ASE increased its FC sales contribution (as a percentage of total packaging revenue) from a high-teens percentage on average in 2011, to over 25% in 4Q13. Although this pace of FC sales ramp-up declined in 1H14, thereby leading to a pause in market share gains, we expect ASE to resume its market share gains from 3Q14. ASE: Cu and FC sales ramp-up


We note that ASE’s market share volatility in 1H14 was due mainly to the temporary closure of ASE’s K7 plant

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in southern Taiwan, due to environmental issues. As this was a temporary issue, we see no harm to ASE’s long-term FC business uptrend given the ongoing migration. On our checks, the K7 plant resumed operations in May, after the company received conditional approval from the government, and utilisation now exceeds 80% (which is approaching the corporate average). Rising demand for FC packaging As we mentioned in our SPIL report (see, Initiation: inflection point round the corner, 10 October 2014), the ongoing WB-to-FC migration has been a secular trend in the OSAT industry since 2012-13, on the back of rising demand for mobile computing devices (MCD) that demand more advanced front-end process technologies (


24 October 2014

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ASE: gross margin breakdown by business


Blended margins to contract, but not ROE According to our research in the market, ASE has earned new orders for Apple Watch-related SiP which, despite the likelihood of only modest volumes initially, should contribute to 2015E business growth and lift ASE’s SiP revenue. Although the total gross margin for ASE’s EMS business is low (at around 10%) relative to the OSAT gross margin (around 25%), and therefore drives down the total gross margin on a blended basis, the 2 business lines have similar ROEs. Indeed, we expect some SiP business lines (for example, fingerprint sensors) to support a higher gross margin than the EMS average, which should help lift the overall EMS gross margin and improve ASE’s ROE.

Valuation and risk

We set our 6-month target price for ASE at TWD40, which is based on our ROE-adjusted PBR of 2.1x applied to our forecast average BVPS for 2014-15. With potential upside at 13%, we initiate coverage with an Outperform (2) rating. Target price set at TWD40 We use our ROE-adjusted PBR methodology to value the SCM stocks under our coverage, including the foundries and OSAT players, as we believe this method captures an SCM company’s structural profitability over the course of cyclicality in the chip industry and benchmarks it against the company’s theoretical fair value. ASE’s ROE has been volatile in recent years due to a few factors, including the post-Y2K inventory correction, fire damage at its plants, and the impact of the GFC. But, since 2011, its ROE has steadily improved, and we forecast it to reach 14% this year and around 15% in the coming 2-3 years, on the back of the 2 aforementioned growth engines.

In light of the consistent market-share gains that we expect ASE to make, we forecast its structural ROE (or normalised long-term ROE) will settle at around 14-15%, or about 8% higher than its historical ROE of 13.4% over 1994-2013. Applying this 8% premium to the stock’s historical mean PBR of 2x (ex-Y2K and GFC distortion), we derive an ROE-adjusted PBR of 2.1x and a target price of TWD40, based on our forecast average BVPS over 2014-15. ASE: long-term ROE trend*

*Single-year calculation, ie, not based on 2-year average equity. Source: Company, Daiwa forecasts

ASE: PBR valuation trend

Source: TEJ, Daiwa forecasts

Risks to our call The main risk to our call on ASE would be greater-than-expected competition in the FC space from peers such as Amkor and SPIL, which could add to pricing pressure, weigh on margins, and hurt ASE’s structural ROE and hence valuations. A secondary risk would be stronger-than-expected competition in the EMS space should existing EMS players, such as Hon Hai and Jabil, target backward integration in their own business models.

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3Q14 preview and 4Q14 outlook

We expect ASE to report strong bottom-line results for 3Q14 that meet consensus expectations. Its prospects for 4Q14 are likely to be similarly upbeat, with strong EMS demand likely to offset seasonal drops in OSAT demand, in our view. However, we believe there is little room for near-term share-price catalysts, as market expectations on the 4Q14 outlook for ASE appear to be well calibrated. Hence, within the OSAT space, we prefer SPIL on valuation grounds. 3Q14 results preview ASE’s reported consolidated revenue of TWD66.6bn for 3Q14 (up 14% QoQ and 17% YoY) grew by more than its peers’ thanks to the addition of SiP to its EMS business (fingerprint modules for the new iPhones were a key demand driver). In light of its upbeat top-line performance, we expect ASE to report 3Q14 EPS of TWD0.74, in line with the consensus forecast (range: TWD0.55-0.85; mean: TWD0.75). ASE is scheduled to report its 3Q14 results after the market close on 30 October. 4Q14 outlook In light of seasonality driven by year-end inventory adjustments at the chip end of the technology food chain, we expect ASE’s OSAT revenue for 4Q14 to contract by a low- to mid-single digit percentage QoQ. In our view, this will be a seasonal effect, as we do not foresee abnormal inventory corrections like those in 4Q13 and 4Q12 (see our 16 October memo on TSMC, click here, Results beat and guidance upbeat.). EMS revenue, on the other hand, should remain strong, with a 20-30% QoQ rise (we forecast a 25% QoQ increase), backed by the continued ramp-up of finger-print module orders, seasonally strong demand for WiFi modules, and the possible addition of Apple Watch modules, according to our research in the market.

Less attractive than SPIL on valuations Overall, we forecast ASE’s 4Q14 consolidated revenue to grow by 8% QoQ to TWD72bn, vs. consensus forecasts ranging from TWD70bn to TWD83bn (mean: TWD76bn). Our takeaway from these figures is that near-term share-price catalysts are likely to be limited, even allowing for upbeat results and guidance. Indeed, despite our view of ASE’s solid long-term fundamentals, within our OSAT coverage we prefer SPIL on valuation grounds. In recent years, SPIL has tended to trade at a premium of around 10% to ASE in terms of PBR (on a 12-month forward basis), likely because its profitability is less volatile and its balance sheet is more transparent. SPIL currently trades at a 5% discount to ASE. Relative PBR valuations – SPIL/ASE

Source: TEJ, Daiwa forecasts

SCM valuations

PER (x) PBR (x) ROE (%) Earning growth

Stock Ticker Price LC*

ADR USD Rating 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E

TSMC 2330 TT 129 21.39 Buy 13.4 11.9 10.6 3.3 2.8 2.3 26.8 25.2 23.7 32.4 12.4 12.6 UMC 2303 TT 12.45 1.98 Hold 18.8 17.0 n.a. 0.7 0.9 n.a. 3.9 4.6 n.a. (37.3) 11.6 n.a. SMIC 981 HK 0.81 n.a. Hold 21.7 18.2 13.9 1.1 1.0 1.0 5.7 6.0 7.2 32.1 12.1 10.0 ASE 2311 TT 35.40 5.89 Outperform 13.9 12.7 10.7 2.0 1.8 1.7 15.1 15.0 16.4 26.5 9.3 19.0 SPIL 2325 TT 40.40 6.59 Buy 11.5 10.6 9.0 1.9 1.7 1.6 16.9 17.0 18.1 86.3 8.6 17.1 Source: Bloomberg, Daiwa forecasts, *Local currency, based on share prices as of 22 October 2014

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De-rated againstASE on Cu lag

Re-rated onCu catch-up

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Re-rateon FC?

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/MEMO_20141016_TSMC_results.pdf#page=1


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Company background

Founded in 1984, ASE is the world’s largest outsourced semiconductor assembly and test (OSAT) maker offering integrated circuit (IC) packaging and testing services with a wide range of technologies, including leadframe-based wirebonding (WB), substrate-based WB, flip-chip (FC) packaging, system in packaging (SiP) and electronics manufacturing services (EMS). Its client base largely overlaps with that of the frontend IC

foundries, including fabless chipmakers and integrated device manufacturers (IDM). The company acquired EMS provider Universal Scientific Industrial (USI) in 2010 and expanded its business scope from chip-level assembly to circuit-board-level EMS/module assembly, clearing the way for ASE to look at selectively penetrating the EMS market. Its revenue breakdown in 2013 was packaging (51%), testing (11%) and EMS (36%).

ASE: quarterly P&L TWDm 1Q14 2Q14 3Q14E 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 2013 2014E 2015E 2016EPackaging revenue 26,722 30,641 32,715 32,083 29,629 33,643 36,187 34,981 112,604 122,162 134,440 151,318 Testing revenue 5,785 6,600 7,001 6,844 6,367 7,133 7,679 7,616 24,732 26,231 28,794 32,382 EMS & other revenue 22,193 21,374 26,915 33,344 28,124 29,357 35,418 40,107 82,526 103,827 133,006 164,413 Total revenue 54,700 58,615 66,632 72,272 64,120 70,133 79,285 82,704 219,862 252,219 296,241 348,113 COGS -44,351 -46,015 -52,845 -58,289 -52,503 -56,568 -63,576 -67,050 -177,049 -201,499 -239,698 -281,905 Gross profit 10,350 12,600 13,787 13,983 11,616 13,565 15,708 15,654 42,813 50,720 56,543 66,208 Opex -5,280 -6,000 -6,130 -6,577 -6,155 -6,592 -7,294 -7,567 -20,769 -23,987 -27,610 -32,314 Operating profit 5,070 6,600 7,657 7,406 5,461 6,972 8,414 8,087 22,044 26,733 28,933 33,894 EBITDA 11,475 12,982 14,280 14,105 12,159 13,799 15,372 15,129 47,515 52,842 56,459 62,570 Pretax profit 4,283 6,051 7,227 7,003 5,021 6,537 8,029 7,710 19,356 24,565 27,296 32,471 Income taxes -727 -818 -1,301 -1,261 -904 -1,177 -1,445 -1,388 -3,202 -4,106 -4,913 -5,845 Net profit 3,438 5,094 5,745 5,568 3,992 5,197 6,383 6,129 15,689 19,845 21,701 25,814 FD O/S (m) 7,787 7,810 7,810 7,810 7,810 7,810 7,810 7,810 7,756 7,810 7,810 7,810 FD EPS (TWD) 0.44 0.65 0.74 0.71 0.51 0.67 0.82 0.78 2.02 2.54 2.78 3.31 Margin Gross 19% 21% 21% 19% 18% 19% 20% 19% 19% 20% 19% 19%Operating 9% 11% 11% 10% 9% 10% 11% 10% 10% 11% 10% 10%EBITDA 21% 22% 21% 20% 19% 20% 19% 18% 22% 21% 19% 18%Net 6% 9% 9% 8% 6% 7% 8% 7% 7% 8% 7% 7%Growth (QoQ) Packaging revenue -7% 15% 7% -2% -8% 14% 8% -3%Testing revenue -7% 14% 6% -2% -7% 12% 8% -1%EMS & other revenue -24% -4% 26% 24% -16% 4% 21% 13%Total revenue -15% 7% 14% 8% -11% 9% 13% 4%Gross profit -17% 22% 9% 1% -17% 17% 16% 0%Operating profit -27% 30% 16% -3% -26% 28% 21% -4%EBITDA -15% 13% 10% -1% -14% 13% 11% -2%Net profit -34% 48% 13% -3% -28% 30% 23% -4%FD EPS -34% 48% 13% -3% -28% 30% 23% -4%Growth (YoY) Packaging revenue 7% 6% 9% 12% 11% 10% 11% 9% 8% 8% 10% 13%Testing revenue 1% 1% 12% 10% 10% 8% 10% 11% 9% 6% 10% 12%EMS & other revenue 26% 40% 31% 14% 27% 37% 32% 20% 23% 26% 28% 24%Total revenue 14% 15% 17% 13% 17% 20% 19% 14% 13% 15% 17% 18%Gross profit 25% 21% 19% 12% 12% 8% 14% 12% 17% 18% 11% 17%Operating profit 41% 22% 26% 7% 8% 6% 10% 9% 24% 21% 8% 17%EBITDA 16% 11% 15% 5% 6% 6% 8% 7% 15% 11% 7% 11%Net profit 54% 33% 30% 7% 16% 2% 11% 10% 20% 26% 9% 19%FD EPS 51% 30% 26% 6% 16% 2% 11% 10% 17% 26% 9% 19%Source: Company, Daiwa forecasts


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Daiwa’s Asia Pacific Research Directory HONG KONG Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head Kosuke MIZUNO (852) 2848 4949 /

(852) 2773 8273 [email protected]

Regional Research Co-head John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management Kevin LAI (852) 2848 4926 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional) Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China) Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China); Broker (China); Insurance (China) Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China) Jamie SOO (852) 2773 8529 [email protected] Gaming and Leisure (Hong Kong/China) Lynn CHENG (852) 2773 8822 [email protected] IT/Electronics (Semiconductor) (Greater China) Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Joey CHEN (852) 2848 4483 [email protected] Steel (China) Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong/China); Transportation (Regional) Carrie YEUNG (852) 2773 8243 [email protected] Transportation (Hong Kong/China) Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group Thomas HO (852) 2773 8716 [email protected] Custom Products Group PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Utilities and Energy

SOUTH KOREA Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery) Jun Yong BANG (82) 2 787 9168 [email protected] Oil; Chemicals; TyresThomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected] Head of Regional IT/Electronics; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected] IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; ConsumerKylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components) INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities SINGAPORE Ramakrishna MARUVADA (65) 6499 6543 [email protected] Telecommunications (China/ASEAN/India) Royston TAN (65) 6321 3086 [email protected] Oil and Gas (ASEAN/China); Capital Goods (Singapore) David LUM (65) 6329 2102 [email protected] Property and REITs Evon TAN (65) 6499 6546 [email protected] Property and REITs Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


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Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

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Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

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(49) 69 717 080 (49) 69 723 340

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Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

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(82) 2 787 9100 (82) 2 787 9191

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Room 301/302，Kerry Center， 1 Guanghua Road，Chaoyang District， Beijing 100020, People’s Republic of China

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18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

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Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); China Everbright Bank Company Limited (6818 HK); econtext Asia Ltd (1390 HK); Lotte Shopping Co (023530 KS); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576_TT); Accordia Golf Trust (AGT SP). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

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Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.


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This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

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Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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