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Please refer to the important disclosures and analyst certification on inside back cover of this document, or on ourwebsite www.macquarie.com.au/disclosures.

TAIWAN

Inside

Big is beautiful 2Tablets the next boom 3Projected capacitive strong growth of

38% CAGR in 2009-13E 6Competitive landscape 8Oversupply not a real issue in 2011 9Stock recommendations 11TPK Holding Co 12Wintek 29Young Fast Optoelectronics 34Appendix 1. Touch panel supply chain 39Appendix 2. Touch panel technology 40Taiwan touch panel sector coverage

Company TickerPriceNT$

MACQrating

Mkt capUS$m

TPNT$

Diff(%)

TPK 3673 TT 700 OP 5,425 850 21.4%Wintek 2384 TT 49.7 OP 2,573 63 26.7%Young Fast 3622 TT 285.5 N 1,400 265 -7.2%

Source: Macquarie Research, February 2011; 8 Feb 2011prices

Kylie Huang+886 2 2734 7528 [email protected] Lin+886 2 2734 7523 [email protected]

9 February 2011

Taiwan touch panel sectorBig is beautifulJust the beginning of the secular uptrendWe are assuming coverage of the Taiwan touch panel sector with a positive view on

the back of the industrys expected multi-year secular growth. We see over-supply

as a minor issue in 2011 and believe that tablet PCs will be the most exciting market

this year. TPK and Wintek appear well-positioned to ride this uptrend, in our view.

Tablet PCs the next boomWhile handsets should remain the largest market contributor, driven by the rapidly

growing smartphone trend, we believe tablet PCs will provide the most excitinggrowth for the touch panel market this year. The Macquarie tech team estimates the

tablet PC market could reach 56m units in 2011. This volume may look small

compared to handsets (

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Macquarie Research Taiwan touch panel sector

17 January 2011 2

Big is beautifulA multi-year secular growth industry

Driven by the impressive success of Apple iProducts and the increasing adoption of a

graphical user interface in consumer electronics, consumers awareness of the touch

concept is growing significantly and is gradually becoming an intuitive behaviour for display-equipped devices. The user-friendly interface of data input and the optimization of the use of

the display have made touch panels a major attraction for consumers in choosing IT products

and we expect touch to be applied to increasingly more devices in the coming years.

DisplaySearch estimates the global touch panel market will deliver secular multi-year growth

with a 7-year CAGR of 17.8% to reach US$13.6bn in 2016.

Fig 1 Global touch panel shipments and revenue

Source: Display Search, Macquarie Research, February 2011

$0

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Touch panel market

is expected to

deliver multi-yeargrowth of a 17.8%

CAGR in 2009-2016

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17 January 2011 3

Tablets the next boomHandsets industry growth riding on the prevailing smartphones

According to DisplaySearch, handsets are the biggest applications for the touch panel

industry, accounting for 61% of the shipment share in 2009. We expect handset applications

to remain the largest contributors in the coming years on the back of the growing touchpenetration, lower touch-module cost, and the growing amount of touch-friendly software on

handset platforms.

Smartphones, in particular, is the major drivers of touch penetration in handsets given their

well-built operating systems can better exploit the touch function advantages through their

user friendly interfaces and touch-applicable software. In 2009, the touch panel penetration

rate in smartphones was 51% (vs. penetration of total handsets of 30%), and the penetration

is likely to increase to 74%/83% in 2011/2012, based on Gartner estimates. We believe the

rapidly growing smartphone trend (45% CAGR in 2009-2013E, Gartner) will speed up touch

penetration in the handset market.

Taiwan touch panel markers such as TPK, Wintek, Young Fast, and J-touch all have sizeable

exposure to smartphone/handset markets and should benefit from this trend, in our view.

Fig 2 Global touch panel shipment share byapplication 2009

Fig 3 Touch penetration rate in handsets andsmartphones

Source: Display Search, Macquarie Research, February 2011 Source: Gartner, Macquarie Research, February 2011

Fig 4 Smartphones expected to deliver stellar growthof 45% CAGR in 2009-2013

Fig 5 Touch penetration in handsets expected togrow over time

Source: Gartner, Macquarie Research, February 2011 Source: Gartner, Macquarie Research, February 2011

Game-portable

5%

Factory

automation

3%

Handset

61%Camcorder

2%

Portable

Navigation

Device

9%

PMP/MP3

Player

6%

Others

12%

Auto Monitor

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2008 2009 2010E 2011E 2012E 2013E

Touch penetration rate in smartphone Touch penetration rate in handset

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Handset shipmenst (LHS : mn units)

Handset touch penetration (RHS: %)

Tablet PC is the

most exciting touch

panel market thisyear

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17 January 2011 4

Size does matter tablet PCs provide another exciting market boost

Apples iPad, launched in April 2010, and, recognized as one of the most successful IT

products in 2010, has sparked strong interest in tablet PCs and triggered robust demand for

larger-size touch panels. Following the impressive success of the iPad with ~15m units sold

in its first year of launch, Apple is planning to launch the iPad 2 in 2011 to further spur the

tablet PC market. Meanwhile, almost all the PC and handset OEMs (HP, Dell, Acer, Asus,Lenovo, HTC, RIM, Nokia, LG, etc) are following Apple in launching their own tablet products

in 2011 to get a bite at this rapidly growing market. Macquaries tech team expects the tablet

PC market could reach 56m units in 2011 with secular growth of a 93% CAGR in 2010-2014

(please refer to our report, MacqTech Thematic Semiconductors: The Year of the Tablet,

and its impact on semiconductors, 12 Jan, 2011)

Although tablet PC shipments are much lower than those of handsets (

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17 January 2011 5

Fig 8 2011 is the year of the Tablet: A non-comprehensive list of tablet products

TabletCompany Product OS Launch Display Processor DRAM NAND flash storage Weight

Acer ICONIA TabA500

Android 3.0 1Q11 10.1" 1280x800 1GHz NVIDIA Tegra 2 ARM Cortex A9-based dual-core

Unknown Unknown Unknown

Acer Unknown Windows 7 1Q11 10.1" AMD C-50 "Ontario" Unknown Unknown "

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17 January 2011 6

Projected capacitive strong growth of 38%CAGR in 2009-13EProjected capacitive (P-Cap), in particular, should be the rising star in overall touch solutions

in the coming years, thanks to the technology migration and new emerging applications.

DisplaySearch estimates the P-Cap market will deliver a strong CAGR of 38% in 2009-13

outgrowing the overall touch industry growth of 24% during the same period.

Technology migrating from resistive to projected capacitive inhandsets

Resistive was the dominant touch technology for mobile phones in 2007-2009 with 70%+

share by shipments thanks to its low-cost advantage and relatively reasonable touch quality.

However, the resistive technology has lost ground to projected capacitive in recent years.

Compared to P-Cap, resistive technology is much cheaper (ASP 20-50% lower) but is much

less sensitive, less durable and lacks multi-touch functionality.

Apple introduced the first-generation iPhone in 2007 and created a best-ever user experience

for mobile phones by taking advantage of projected capacitive technologys multi-touchfunction integrated with its user-friendly graphic interface. Now, the multi touch function is

gradually becoming a must for smartphones / high-end feature phones to provide consumers

with a better user experience and in turn is boosting demand for projected capacitive touch

panels. According to DisplaySearch, P-Cap touch panel shipments will surpass those of

resistive in 2011 and are expected to deliver stellar shipment growth of 45% CAGR in mobile

phones in 2009-2013 versus the 10% CAGR for resistive technology.

In terms of market segmentation, glass-type P-Cap should dominate the high-end handset

market (mid-to-high-end smartphones) due to the better touch quality compared to other

solutions despite the higher cost. Film-type P-Cap could win in mid-end handsets (low-to-mid-

end smartphones /high-end feature phone) given its relatively lower cost, faster product

design time, and fair touch performance. The resistive solution will still exist but will likely be

further pushed down to lower end mobile phones and experience more severe ASP erosiongiven the crowded competitive environment, in our view. In the Taiwan touch panel universe,

we view TPK as best-positioned to benefit from the technology migration trends given its

leading position in glass-type P-Cap, that it is a major supplier (first source) of Apples iPad,

and has recently successfully penetration into film-type P-Cap products with top tier

customers wins. Wintek, another major supplier to Apples iPad, should also benefit from the

trend, in our view. Young Fast and J-Touch could suffer as a result of this trend due to their

higher resistive product exposure (Young Fast / J-Touch resistive products account for 65%

/35% of total sales, as of 3Q10).

Fig 9 P-Cap is expected to become the mainstream for handsets in 2011E

Source: Display Search, Macquarie Research, February 2011

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(P-Cap) should be

the rising star with a

38% CAGR in

2009-13E

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17 January 2011 7

Fig 10 P-Cap is gaining share in the handset market at the expense of resistive technology

Source: Company data, Macquarie Research, February 2011

Glass-type P-Cap should get ahead in the booming tablet PC marketProjected capacitive solutions should dominate the tablet PC market on the back of the higher

transmittance, better touch sensitivity, and multi-touch function, in our view. In particular, we

expect glass-type P-Cap to be the mainstream with an 80%+ share of the tablet PC market.

In addition to Apples iPad and the upcoming iPad 2, our supply chain checks indicate that a

majority of OEMs prefer glass-type solutions for tablet PC products given glass-type P-Caps

major advantage over film-type significantly better light transmittance (3-5%) and images

becoming easier to recognize when the size increases. On the cost side, theoretically, film-

type solutions should be 20-30% cheaper but in practice the pricing gap is minimal when the

panel size goes beyond 7 due to the yield rate issue for film-type products given the

material restriction (film carries a higher resistance), yield rate improvements become more

difficult to achieve when the size increases. Samsungs Galaxy Tab (7) is now the only

product with film-type touch in the market and we see the possibility it will switch to glass-typefor its upcoming new 10-inch Tablet PC product. TPK and Wintek, the leading glass-type P-

Cap companies in Taiwan, should benefit from this industry trend.

Fig 11 Key comparison of touch technology

ResistiveFilm-typeP-Cap

Glass-typeP-Cap

Input Method Finger or stylus Finger or conductive pen Finger or conductive Pen

Transmittance

Sensitivity

Durability

Cost

Handwriting Recognition

Touch Resolution

Multi Touch

Product Thickness

Product Weight

Suitable application For devices withdisplay size

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17 January 2011 8

Competitive landscapeResistive players move toward film-type P-Cap

As P-Cap technology is expected to become the mainstream for handset and tablet PC touch

solutions, we are seeing original resistive touch panel suppliers such as YoungFast and J-

Touch, leverage their previous know-how in film material to expand into the film-type P-Capfield, in order to capture the strong growth. We believe film-type P-Cap technology would be

the preferred solution in mid-end handsets (low-to-mid-end smartphones/high-end feature

phones) given the relatively lower cost, faster product design time, and reasonable touch

performance. However, due to the yield rate issue and film-type products inferior

transmittance performance, it could be difficult for film-type to penetrate into larger size

applications (>7) and may be limited to smaller-size applications such as handsets.

Colour filter companies enter into touch sensor production

Colour filter companies such as Sintek and Cando are using their existing colour filter

equipment (after some adjustments) to expand into glass-type P-Cap touch sensor (front-end)

manufacturing. These companies have certain cost advantages compared to new entrants

given most of their equipment has been fully or almost fully depreciated. However, themanufacturing yield rate remains the key hurdle for these companies, especially when they

want to further expand into the touch module business (back-end lamination) where they

have a lack of knowledge.

TFT-LCD players eager to penetrate touch market

The TFT-LCD players have also been eagerly eyeing the touch panel market, attracted by the

promising industry outlook. For example, Chimei Innolux (CMI) is targeting to provide total

solutions from touch panel to system integration by leveraging the Hon Hai groups strong

footprint in the EMS space. AUO (2409 TT, OP), on the other hand, is aiming to provide an

in-cell touch solution to build touch sensors inside the display panel to offer thinner, lighter,

and more cost effective touch panel products. However, the production yield for in-cell

technology remains unsatisfactory (< 50%), thus it should not be considered a threat tocurrent mainstream technology in the short term, in our view. So far, Wintek is the most

successful TFT-LCD company to shift its core business from LCD to touch panels.

Lamination capability remains the key

Within the manufacturing process for touch panels (resistive, film-type P-Cap or glass-type P-

Cap), the most challenging procedure, while at the same time widely regarded as the major

technological obstacle for new market entrants, is the lamination, in our view. Lamination is

the process to make a cover lens adhere to the touch sensor to complete a touch module.

Glass-to-glass lamination (glass-type P-Cap touch panels) is much more difficult than film-to-

glass lamination (film-type P-Cap or resistive touch panels), given the process is irreversible

any defects are difficult to rework and very costly. The whole process is pressure-sensitive

and needs to be conducted in a clean room to avoid any particles or air bubbles. There is no

turnkey equipment for lamination and there is no single formula to fit all solutions.

Sophisticated know-how and experienced lamination techniques are thus critical. In addition,

lamination for larger size touch panels is much more challenging than small size; this makes it

even more difficult for new entrants/less experienced touch panel makers to penetrate the

market. We believe lamination capability remains the key to success in the touch panel

industry.

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17 January 2011 9

Oversupply not a real issue in 2011Aggressive capacity expansion = oversupply = ASP deterioration?We are not surprised to see more newcomers jumping into this industry focusing especially

on the glass type P-Cap touch panels, given its bright industry outlook and the very positive

customer feedback on the early adoption of Apple products. On the other side, existing touchpanel suppliers are also expanding capacity to fulfil the expected strong demand. Markets are

sceptical that this seemingly aggressive capacity expansion could result in oversupply and

then ASP deterioration, similar to what happened in the DRAM or TFT-LCD industries.

Yes, we could see oversupply in 2011

Indeed, the touch panel industry could see oversupply in 2011 if all suggested capacity is

executed as planned and the yield rate is tuned up on schedule, according to our

supply/demand model (Fig 12). Even if we count the back-end module capacity, we might

still see the overall touch panel output surpass demand, especially in large size panels

(targeting tablets)

Fig 12 Taiwan glass type P-Cap touch panel supply and demand analysis 2Q11Substrate

(K units/Cuts persubstrate

Allocation%

Yieldrate%

Monthlyoutputs

Company Fab FabType

Substratesize

m) TP % Loadingrate %

3.5" 10" 3.5" 10" 3.5" 10" 3.5" 10"

TPK 2/2.5 TP 400*500 180 100% 90% 36 4 100% 0% 95% 95% 5,540 -3 TP 550*650 200 100% 90% 60 9 0% 100% 95% 95% - 1,539

Wintek 2.5 TP 400*500 180 100% 95% 36 4 100% 0% 95% 90% 5,848 -3 CF/TP 550*650 60 100% 90% 60 9 0% 100% 95% 90% - 4373 TP 550*650 330 100% 90% 60 9 0% 100% 95% 90% - 2,406

Sintek 5 CF/TP 1200*1300 100 100% 60% 320 36 0% 100% na 85% - 1,836Cando 3.5 CF/TP 620*750 50 100% 80% 90 12 0% 100% na 80% - 384

4.5 CF/TP 730*920 70 100% 80% 130 16 0% 100% na 80% - 717CMI 4.5 CF/TP 730*920 90 70% 80% 130 16 0% 100% 90% 90% - 726

2.5 TP 400*500 100 100% 80% 36 4 100% 0% 90% 90% 2,592 -

Ritek/YFO 2 TP 370*470 60 100% 80% 30 4 100% 0% 70% 50% 1,008 -Giantplus 2.5 TP 370*470 25 100% 50% 36 4 80% 20% 50% 50% 180 5Total sensor (front-end) supply (K units) 15,169 8,050Total touch module (back-end lamination) supply (K units) 16,934 6,497Total touch module supply (K units) 15,169 6,497Total demand (K units) 12,500 3,967Over-supply /( supply-shortage) 21% 64%


however, the module side is dominated by industry leaders withlimited possibility to switch profitability to utilization

However, if we take a closer look of the touch module (back-end lamination) capacity, we see

the majority is contributed by industry leaders TPK, Wintek, and CMI. TPK and Wintek, the

major two touch panel suppliers for Apples iPhone and iPad, account for around 80% of totalmodule capacity (Fig 13). As industry leaders, TPK and Wintek are unlikely to start a pricing

war just to fulfil their capacities, in our view.

In addition, Fig 14 shows touch panel module makers like TPK and Wintek have very light

depreciation burdens much lower depreciation costs (2-8%) compared to DRAM (30%-50%

or higher) or TFT-LCD (15-25%) and more similar to handset component vendors such as

Silitech and Largan given the majority of the value addition is in the customization and light

capex back-end process (lamination). A 30-40% utilization rate is good enough for touch

module makers to make profits again, there is likely to be a limited intention for them to

lower pricing in order to push up the utilization rate.

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17 January 2011 10

Fig 13 Taiwan glass type P-Cap touch module supply 2Q11

Company Capacity Loading rate % Yield rate Yielded capacity (k units/m)

3.5" 3.5" 10.1" 3.5" 10.1"

TPK 10,000 90% 95% 92% 8,550 2,484Wintek 7,000 85% 92% 90% 5,474 2,678

Sintek 50% 50% - 250Cando 50% 70% - 525

CMI 4,000 80% 80% 70% 2,560 560

Giantplus 1,000 70% 50% 350 -Total module supply (K units) 16,934 6,497

Source: Company data., Macquarie Research, February 2011

Fig 14 Depreciation to sales % - TPK and Wintek have very light depreciationburden


Oversupply not a real issue in 2011

We do not view oversupply as a significant issue in 2011 based on our above analyses. We

expect to see a normal range ASP decline of ~10% for same spec touch products just like

other IT products but the overall ASP decline could be even milder given more higher spec

touch products coming to the market. Touch sensor suppliers or second tier vendors might

face more ASP pressure given no secured orders and sufficient supply on the sensor side.

On top of that, we would like to highlight that touch panel is still a highly customized industry

every model /every customer could have different requests on the product design and in turn

vendors need to adjust their manufacturing process especially in the lamination stage. Thatswhy we do not see touch panel as similar to the commodity business TFT-LCD and DRAM

with pricing highly related to overall supply/demand dynamics but more similar to handset

components (i.e.: camera module and keypads), where quality is the key to win orders and

industry leaders continue to enjoy decent profitability regardless of the supply/demand

conditions.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%90.0%

Hynix Inotera Nanya

Tech

AUO LGD Wintek TPK Silitech Largan

Dep/Sales %

2009 2010E 2011E 2012E

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17 January 2011 11

Stock recommendationsTPK and Wintek are rated Outperform

We believe TPK (3673 TT, OP) will be the major beneficiary of this tablet PC Big (larger

panel) boom given its industry leading position and solid customer profile (Apple, HTC,

Motorola, RIM, Samsung, and etc.). According to our estimates, TPK could deliver stellarearnings growth of 114%/91% YoY to reach EPS of NT$24.3/42.3 in 2010/2011 with ROE of

40%+, riding on the robust demand in smartphones and tablet PCs. We initiate on TPK with

an Outperform and a TP of NT$850, representing 21%+ upside. Our target price of NT$850

is derived from 20x 2011E EPS, a premium to the average of its industry peers of 14x, which

we see justified given its industry leading position , superior technology, solid relationships

with top tier brands, and the impressive ROE of 40%+ (vs. the industry average of 26%).

We also like Wintek (2374 TT, OP) for its strong footprint in the glass-type P-Cap market,

attractive valuation, and the impressive business turnaround. We believe Wintek is another

major beneficiary of the rising tablet PC trend. The company has successfully transformed

itself from a small panel maker to a professional touch panel provider, in our view. In 2011,

we expect the touch panel business to contribute 80%+ of Winteks revenue and the

companys earnings should grow at 160% to reach NT$6.3 B or EPS of NT$4.3 with ROEback to 15%+. We rate Wintek an Outperform with a TP of NT$63, based on 15x 2011 PER.

For Young Fast (3622 TT, N), we are concerned about its ramp up speed in mid-size touch

panels and its high exposure to resistive touch products. We assume coverage of Young Fast

with a Neutral rating and a TP of NT$265, based on 12x 2011E PER, the lower end of its

historical range of 10-20x to reflect its soft earnings outlook due to the product transition. We

could review our opinions if the company delivers an earlier breakthrough in mid-size

products, but if there were further delay or any order loss on mid-size touch products, we

could see a further de-rating in the stock.

Fig 15 Peer comparison

MACQ Price (lc) MACQ Mkt cap PER (x) PBR (x) EPS Growth % EV/EBITDA ROE (%)Company Ticker Rating 8/02/11 TP (lc) (US$ m) 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E

TPK 3673 TT OP 700 850 5,425 28.9 16.6 9.5 6.1 71.0 74.8 21.8 10.7 45.6 44.8Wintek 2384 TT OP 49.7 64 2,573 25.4 11.7 2.2 1.6 NA 117.6 9.2 6.3 9.1 16.7Youngfast 3622 TT N 285.5 265 1,400 12.7 12.6 3.7 3.2 (1.3) 0.8 8.5 7.9 33.9 27.2Sintek 3049 TT NR 22.85 NR 694 NA 15.1 2.3 2.0 NA NA 17.2 6.9 (2.8) 13.7J-Touch 3584 TT NR 103 NR 349 20.9 10.1 6 .4 4.1 NA 106.6 14.8 8 .4 33.4 64.9Melfas 096640 KQ NR 38250 NR 582 16.9 12.1 4.9 3.3 74.3 39.9 15.5 10.0 29.4 31.3Digitech 091690 KS NR 21300 NR 264 13.0 7.8 2.7 2.0 (7.6) 66.3 8.3 5.1 22.7 29.6Nissha Printing 7915 JP UP 2176 1600 1,191 13.7 NA 1.1 1.3 (17.2) NA 4.5 15.3 8.2 (4.2)Wacom 6727 JP NR 133300 NR 683 28.2 25.1 3.0 3.0 (19.7) 12.3 12.1 11.3 10.7 11.7Average 20.0 13.9 4.0 3.0 16.6 59.8 12.4 9.1 21.1 26.2

Source: Bloomberg, Macquarie Research, February 2011

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9 February 2011 12

TAIWAN

3673 TT Outperform

Price 8 Feb 11 NT$700.00

12-month target NT$ 850.00Upside/Downside % 21.4Valuation NT$ 850.00- PERGICS sector

Technology Hardware & Equipment

Market cap NT$m 156,87030-day avg turnover US$m 21.6Market cap US$m 5,404Number shares on issue m 224.1

Investment fundamentals

Year end 31 Dec 2009A 2010E 2011E 2012E

Revenue bn 18.7 62.1 112.0 133.1

Reported profit bn 2.3 5.0 9.5 12.0Profit bonus exp bn 2.3 5.0 9.5 12.0Bon exp/rep profit % 0.0 0.0 0.0 0.0Adjusted profit bn 2.3 5.0 9.5 12.0EPS rep NT$ 14.15 24.19 42.29 53.74EPS rep growth % 510.7 71.0 74.8 27.1EPS bonus exp NT$ 14.15 24.19 42.29 53.74EPS bonus growth % 510.7 71.0 74.8 27.1PER rep x 49.5 28.9 16.6 13.0PER bonus exp x 49.5 28.9 16.6 13.0Total DPS NT$ 0.00 0.00 21.15 26.87Total div yield % 0.0 0.0 3.0 3.8ROA % 26.7 24.9 26.2 26.4ROE % 54.1 45.6 44.8 40.7EV/EBITDA x 34.9 21.8 10.7 8.2Net debt/equity % 10.8 5.5 -2.5 -27.1P/BV x 21.6 9.5 6.1 4.7

3673 TT rel TAIEX performance

Source: FactSet, Macquarie Research, February 2011

(all figures in NT$ unless noted)


9 February 2011

TPK Holding CoThe Champion

Event We initiate coverage on TPK Holdings (TPK), the largest glass-type P-Cap

touch panel maker in the world, with an Outperform rating and a target price

of NT$850.

Impact

A leader in fast-growing P-Cap industry: We expect projected capacitive

(P-Cap) to become the mainstream touch solution for handsets and tablet

PCs in 2011. DisplaySearch estimates the P-Cap market will have a 38%

CAGR over 200913. TPK, as the industry leader, is well positioned to

capture this impressive growth, in our view.

Apple, but not just Apple: We estimate that Apple, TPKs largest customer

with a 70%+ revenue contribution, could double or triple its iPhone and iPad

shipments to reach 80m and 3540m units, respectively, in 2011. If so, TPK

will be the key beneficiary, we believe, since it supplies 4050% of Apples P-

Cap requirements. TPK is also a major supplier to other tier-one

smartphone/PC brands such as HTC, RIM, Samsung, Motorola and HP. In

particular, HTC, TPKs second-largest customer with a 4050% share of

HTCs products, could be another important driver, stimulated by the

increasing popularity of the Android OS. We expect TPKs revenue to grow by

80% YoY to reach NT$112bn in 2011.

A winning formula thats difficult to duplicate: We believe new entrants

will not find it easy to catch up with TPK, given that its success is a

combination of many factors. These include solid R&D capability with cutting-

edge technology, lamination expertise backed by years of experience, vertical

integration and a one-stop shopping strategy. Furthermore, the industry trendtowards full lamination should favour TPK and enable it to widen its gap with

its followers, in our view.

Impressive earnings growth with 40%+ ROE: Driven by robust revenue

growth and margin expansion due to the increase in the yield rate, benefits from

vertical integration, and larger economic scale, we expect TPK to deliver

impressive earnings growth of 114%/91% YoY to reach EPS of NT$24.2/42.3 in

2010/11, respectively, with ROE of 40%+, higher than the industry average of

26%.

Earnings and target price revision

Initiation of coverage.

Price catalyst 12-month price target: NT$850.00 based on a PER methodology.

Catalyst: Short term: Strong 4Q10 results; the launch of the next iPad/iPhone.

Long term: Impressive earnings growth and a superior ROE.

Action and recommendation

Our target price of NT$850 is based on a 20x 2011E PER and supported by

our fair value analysis of NT$896 (Fig 2). We are willing to assign a higher

multiple to TPK than to its peers (14x on average), given its industry leading

position, solid customer profile, superior ROE, and impressive earnings

growth.

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9 February 2011 13

Valuation and recommendation

We initiate coverage of TPK with an Outperform rating. TPK is the largest glass-type projected

capacitive (P-Cap) touch panel maker in the world. P-Cap is a fast-growing industry, with a

projected 38% CAGR over 200913, based on DisplaySearch estimates. With a solid customer

profile (Apple, HTC, Palm, RIM and other tier-one handset/PC OEMs), cutting-edge technology,

strong R&D capability, and lamination expertise, we expect TPK to maintain its leading position inthe P-Cap industry and to post impressive revenue and earnings growth in the coming years.

Our target price of NT$850 is derived from 20x 2011E PER, a premium to the average of its

industry peers of 14x. We believe this is justified, given its industry-leading position, superior

technology, solid relationships with top-tier brands, and impressive ROE of 40%+ (vs. the industry

average of 26%). The target price is also supported by our fair value analysis of NT$896 (Fig 2).

TPK had its IPO on the TAIEX on 29 October 2010, and since then, it has been trading within a

range of 1619x, based on our estimates. We view the recent pullbacks, which we attribute to the

softer revenue momentum of the slow season and to product transitions, as good entry points. We

expect revenue momentum to pick up in March and suggest investors accumulate stock before

the uptrend.

Fig 1 Peer comparison table

MACQ Price (lc) MACQ Mkt cap PER (x) P/BV (x) EPS Growth % EV/EBITDA ROE (%)Company Ticker Rating 8/02/11 TP (lc) (US$ m) 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E

TPK 3673 TT OP 700 850 5,425 28.9 16.6 9.5 6.1 71.0 74.8 21.8 10.7 45.6 44.8Wintek 2384 TT OP 49.7 63 2,573 25.4 11.7 2.2 1.6 NA 117.6 9.2 6.3 9.1 16.7Youngfast 3622 TT N 285.5 265 1,400 12.7 12.6 3.7 3.2 (1.3) 0.8 8.5 7.9 33.9 27.2Sintek 3049 TT NR 22.85 NR 694 NA 15.1 2.3 2.0 NA NA 17.2 6.9 (2.8) 13.7J-Touch 3584 TT NR 103 NR 349 20.9 10.1 6.4 4.1 NA 106.6 14.8 8.4 33.4 64.9Melfas 096640 KQ NR 38250 NR 582 16.9 12.1 4.9 3.3 74.3 39.9 15.5 10.0 29.4 31.3Digitech 091690 KS NR 21300 NR 264 13.0 7.8 2.7 2.0 (7.6) 66.3 8.3 5.1 22.7 29.6NisshaPrinting

7915 JP UP 2176 1600 1,191 13.7 NA 1.1 1.3 (17.2) NA 4.5 15.3 8.2 (4.2)

Wacom 6727 JP NR 133300 NR 683 28.2 25.1 3.0 3.0 (19.7) 12.3 12.1 11.3 10.7 11.7Average 20.0 13.9 4.0 3.0 16.6 59.8 12.4 9.1 21.1 26.2

Note: Non-rated stocks based on Bloomberg consensus dataSource: Bloomberg, Macquarie Research, February 2011

Fig 2 ROE-g/COE-g fair value analysis

Valuation

Beta 1.0Risk free rate 2%Market risk premium 6%COE 8.0%ROE (average 2011-2012) 42.8%Long term growth rate (g) 2%ROE-g/COE-g 6.8

BVPS (Average 2011-2012) 131.9Fair value (NT$/sh) 896


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9 February 2011 14

Fig 3 TPK forward PERs


Fig 4 TPK P/BV bands


400

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(NT$)

Share price 16x 18x 20x 22x

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(NT$)


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9 February 2011 15

The leader in the fast-growing P-Cap industry

TPK is the largest glass-type projected capacitive (P-Cap) touch panel maker in the world. In our

industry report, Taiwan touch panel sectorBig is beautiful, published concurrently with this report,

we highlighted the P-Cap solution as the rising star in the touch panel industry. DisplaySearch

projects a CAGR of 38% for 200913, outstripping the industry average of 24% forecast for the same

period. We think glass-type P-Caps in particular should see the most growth, as it dominates thehigh-end handset market and the tablet PC market, due to its superiority in transmittance, touch

sensitivity and support of multi-touch functionality. We think that TPK, as the industry leader, is well

positioned to capture the coming secular growth.

Fig 5 Global P-Cap touch panel shipment by vendor2009

Fig 6 P-Cap expected to outgrow the industry with aCAGR of 38% in 200913

Source: DisplaySearch Macquarie Research, February 2011 Source: DisplaySearch Macquarie Research, February 2011

Fig 7 P-Cap is expected to become the mainstream for handsets


TPK

26%

Nissha

15%

Wintek

12%

Melfas

9%

Optrex

5%

Others

13%AUO

2%

Jtouch

3%ELK

3%Truly

5%

Synpatics

7%

-

2,000

4,000

6,000

8,000

10,000

12,000

2009 2010E 2011E 2012E 2013E

US$ mn

Projective Capacitive Surface Capacitive Resistive

Optical Imaging On-Cell Infrared

In-Cell Digitizer Combo

Acoustic others

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9 February 2011 16

Fig 8 Tablet PCs should see a 93% CAGR in 201014Fig 9 Tablet PCs market could reach 65%+ of handsetmarket in 2011

Source: Macquarie Research, February 2011 Source: DisplaySearch Macquarie Research, February 2011

Apple, but not just Apple

TPK has a strong customer profile, with Apple as its largest customer, followed by HTC, Palm, and

the other tier-one handset brands. As of 9M10, Apple accounted for 70% of TPKs total revenue,

HTC for 11%, with Palm and other tier-one brands accounting for the remainder, according to the

company. Through Apple, HTC, and other tier-one brands, we think that TPK should be a key

beneficiary of the rising demand for smartphones and tablet PCs, and deliver a robust revenue

growth of 80% to reach NT$112.0bn in 2011.

Long-term partnership lets it ride the iProducts boom

TPK a long-time touch technology innovation partner to Apple: Apple was one of the mostimportant companies that popularised the touch panel. Apples iPhone, introduced in June 2007,

provided a novel handset experience for consumers. It not only accelerated smartphone penetration,

but also turned Apple from a PC/consumer electronics company into a top handset brand. We

believe the seamless touch experience on iPhones capacitive touch screen is one of the keys to the

success of the product and TPK is the company behind that screen. TPK has worked with Apple

since 2004 and focused on becoming a critical touch technology innovation partner for Apple. For

example, DITO (double-sided ITO), a sensor technology, requires ITO patterns to be coated on both

sides of the glass. This technology is widely used in Apples touch screen embedded products, and

was co-developed by TPK and Apple.

The continuing solid relationship is shown by TPKs ~50% share of all Apple touch screen-embedded

products, even though new vendors such as Wintek and CMI entered the supply chain in 200809.

Given the longstanding partnership, TPKs leading touch technology, and the superior product qualityand stability, we expect TPK to remain Apples major touch panel supplier with allocation share of

4050% going forward.

iPhone and iPad sales expected to double or even triple in 2011: Following the success with the

iPhone series, Apple is targeting to launch a CDMA version of the iPhone and a new model (iPhone

5) in 1H11 to further boost iPhone sales. We think that total iPhone shipments could reach 80m units

in 2011, up from 45m+ units in 2010. In addition to the strong growth in iPhones, Apples iPad, which

debuted in April 2010 and achieved impressive success with a strong sell-through of ~15m in 2010,

is another important growth driver for TPK. The ASP of iPads touch module is 4-5x higher than that

of the iPhone due to the larger panel size (iPhone: 3.5 / iPad: 9.7). Oursupply chain checks show

that Apple is planning to launch the next generation iPad (or called iPad 2) with further

hardware/software upgrades by 1Q11, and we think that total shipments could reach 35-40m units

this year. The total touch panel market for iPad should significantly exceed that for iPhone, webelieve, given the strong volume growth and the higher ASP per unit, based on our estimates. Driven

by the robust growth of the iPhone and iPad, we expect TPKs sales from Apple to grow by 90%+

YoY to reach NT$86.2bn in 2011, representing 77% of total sales (vs. 70% in 9M10).

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93% CAGR

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9 February 2011 17

Fig 10 Macq assumptions: Apple touch products order allocation by suppliers

% 1Q11E 2Q11E 3Q11E 4Q11E

iPhoneTPK 50 50 50 50Wintek 40 38 35 35

CMI 10 12 15 15iPadTPK 50 45 42 42Wintek 45 45 42 42CMI 5 10 16 16iPod touchTPK 50 48 42 42Wintek 40 38 35 35CMI 10 14 23 23

Source: Macquarie Research, February 2011

Fig 11 iPhone /iPad touch panel market size

Note: iPhone market size only includes touch module portion (excluding the display value)


Fig 12 Apple iPad touch panel supply chain 2011EFig 13 Apple iPhone touch panel supply chain2011E

Source: Company data, Macquarie Research, February 2011 Source: Company data, Macquarie Research, February 2011

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9 February 2011 18

Well penetrated the non-Apple camp

TPK is widely recognized in the industry as the top glass-type P-Cap touch panel supplier. In addition

to its well-known customer, Apple, TPK has penetrated into other top tier smartphone and PC OEMs

such as HTC, Palm, RIM, Samsung, LG, Motorola, Sony Ericsson and HP. We believe TPK is well

positioned to benefit from the improving trend in smartphone and tablet PCs through these top-tier

brand vendors. We particularly see upside from HTC (2498 TT, NT$927.00, Outperform, TP:

NT$1,125.00). According to our hardware analyst, Daniel Chang, HTC is a key beneficiary of the

increasing popularity of Android OS in the smartphone place. Daniel expects HTC to continue to gain

market share and to achieve shipment growth of over 70% in 2011. TPK, as the major supplier to

HTC (4050% of HTCs P-Caps), should benefit from that strong growth, in our view. In all, TPKs

sales from non-Apple customers should grow by ~50% YoY to NT$25.8 bn in 2011, according to our

estimates. We think the non-Apple vendors should account for 23% of TPKs total sales this year (vs.

30% in 9M10).

Solid customer profile to ensure growth

Apple is a heavy user of the glass-type P-Cap touch solution. Based on our estimates, the Apple

iPhone should account for more than 55% of total glass-type P-Cap touch phones in 2011. HTC is

using P-Caps in all its products. In the P-Cap touchphone market (including glass-type and film-type),

Apple and HTC combined should comprise one-third of the shipments in 2011, in our view. For tabletPCs, we think Apples iPad should maintain its dominant share of 6070% of total tablets in 2011.

We believe the strong industry positions of Apple and HTC should benefit TPK and ensure its growth

for the next 23 years.

Fig 14 Global P-Cap touch phone shipments 2011Eby vendor Fig 15 Global tablet PC shipments 2011E by vendor

Source: Macquarie Research, February 2011 Source: Macquarie Research, February 2011

Capacity expansion in glass-type/film-type to meet rising demand

TPK had monthly glass-type touch module capacity of 7m units (3.5 equivalent) for handsets and

1.2m units (10 equivalent) for tablets in 3Q10. To fulfil rising robust demand, especially from Apple,

TPK is planning to expand its total capacity to 10m units (3.5 equivalent) for handsets and to 1.5m

units (10 equivalent) for tablets by 2Q11. In addition to glass-type, TPK is also adding capacity in

film-type products from 1.2m units (3.5 for handsets) to 3m units to further broaden its product

offerings and to meet demand from various customers such as HTC and Samsung. TPK had 90%+

utilization as of 4Q10.

Fig 16 TPK monthly capacity module (m units)

3Q10 4Q10E 2Q11E

Glass-type touch module -3.5 equivalent 7.0 7.5 10.0Glass-type touch module -10 equivalent 1.2 1.5 3.0Film-type touch module - 3.5 equivalent 1.2 1.2 3.0


Apple

21%

HTC

12%

Nokia

15%

Samusng

27%

LG

8%

Sony Ericssion

2%

RIM

4%

Others

11%

Apple

66%

Samsung

19%

HTC

4%

Others

11%

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9 February 2011 19

The winners formula is difficult to duplicate

We have noted that, attracted by the promising industry outlook, there are more and more new

entrants into the market. Although the competition seems to have intensified, we think TPK should

maintain its leading position. We view TPKs success as a combination of the following key factors,

which TPK has achieved over the years, and we see limited possibility that competitors will be able to

duplicate these in a short time.Solid R&D capability with cutting edge technology

TPK is a pioneer in P-Cap technology and has devoted itself to touch product development since it

was established in 2003. Apple, TPKs major customer, has a reputation for having strict

requirements of product design and quality. To fulfil Apples high-standard requirements, TPK has

been a front-runner of new touch solutions and has developed many cutting-edge technologies. For

example, the DITO (double-sided ITO) sensor technology, which is widely used in Apples

touchcreen embedded products, was co-developed by TPK and Apple. To broaden the market size,

TPK developed SITO (single-sided ITO) technology for non-Apple customers. In addition to sensor

technology, TPK also co-developed with other vendors OCA (optical clear adhesive) for touch

products. As a result, TPK holds a number of patents on different touch technologies/manufacturing

processes. TPK has become the technology leader in the industry; it doesnt stop its R&D

investments and always thinks ahead. TPK is developing a new touch solution, touch on cover lens,which could further reduce the cost and improve the transmittance and thickness of touch modules.

According to TPK, it already has the mass production capability on touch on lens solution. We

believe this could be the next trend and that there might be products coming out in the next 1-2 years.

We view this solid R&D capability as one of the key strengths for TPK that makes it always ready for

the next technology trend.

Fig 17 TPK granted patents Fig 18 Touch one lens technology structure

Source: Company data, Macquarie Research, February 2011 Source: Company data, February 2011

0

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9 February 2011 20

Lamination expertise backed by years of experience

Within the touch module production process, the most critical stage is the final process lamination,

which attaches cover glass to touch sensor to complete a touch module. The glass to glass

lamination (glass-type P-Cap) is even more difficult than film to glass lamination (film-type P-Cap)

given it is irreversible once the two glass substances are attached. As a result, any defect/yield rate

loss is very costly. TPK stands out among its peers on its lamination expertise due to years of

experience, comprehensive know-how, in-house design lamination equipment, and the profound

process control system. We believe TPKs lamination yield rate is 90 -95%, 5-10ppt higher than that

of its closest competitor Wintek. In turn, TPKs gross margin forthe same product is 1-2% higher

than that of Wintek, based on our estimates. On the other side, TPKs superior yield rate also stands

out when brand vendors choose touch panel suppliers or decide the allocation share among

suppliers. Because handsets or tablet PCs have short product life cycles of 6-12 months, its very

important to ensure on-schedule and sufficient touch panel supply. We view TPKs lamination

expertise as one of its major competencies that is difficult for competitors to match in a short time.

Since the lamination process has no turnkey equipment or one formula for all products, we estimate

it could take a year or longer for new entrants to build up their yield rate to a desirable level of 70-

80%, based on our industry checks.

Vertical integration with one-stop shopping strategy to further strengthen the leading edge

TPK owns in-house capability and capacity to manufacture products from cover glass, touch sensor

and module lamination, and to provide system integration service. This vertical integrated business

enables TPK to provide one-stop shopping to fulfil various customers demands. In addition, by

controlling each stage of the production process, TPK is able to achieve mass production within a

more-efficient timeframe and to shorten the production cycle with higher operating efficiency. We

believe this is valuable for TPKs customers in the rapidly changing consumer electronics markets.

On the other side, we think its vertical integration could also help to keep most profits inside the

company and to further increase TPKs profitability.

Fig 19 TPK runs a vertical integration business model, producing products from front-end to back-end


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9 February 2011 21

Full lamination trend could further widen the gap between TPK and its competitors

The adoption of full lamination in the Apple iPhone 4 has further raised the entry barrier and

increased the importance of lamination know-how and capability. Compared to edge lamination

(called Gasket type), full lamination removes the air gap between touch module and display panel,

resulting in better outdoor readability, less light reflection, higher light transmission, and better touch

sensing accuracy. We believe Apple will continue to adopt full lamination in its products going

forward and think this could be the trend for other brands given the better touch and display

performance it offers. Unlike edge lamination, which is not difficult (yield rate of 99%+) to do and is

usually conducted by the EMS/ODM vendors themselves, full lamination requires complete adhesion

between touch module and display panel a similar process to touch sensors and the cover glass.

EMS/ODM vendors normally do not have the qualified clean room nor lamination knowhow to

conduct the full lamination process, so touch module makers handle this and can make extra profit

from it. However, an extra lamination process means the possibility of additional yield rate loss. In

addition, the yield loss on full lamination is more expensive given the extra display panel cost.

Looking at the iPhone 4, for example, the loss on one defective item could reach US$3540, 3x

higher than for the iPhone 3GS. As a result, we believe lamination know-how and capability will be

even more critical for touch module suppliers to succeed in the market if full lamination becomes the

mainstream in the future. We believe this will further widen the gap between TPK and its competitors.

Our checks indicate that TPKs yield rate on the full lamination process is reaching 95%+.

Fig 20 Edge lamination vs full lamination

Source: Company data, February 2011

Financial highlights

Impressive earnings growth with 40%+ ROE

Based on robust revenue growth, driven by favourable industry trends, plus further operating margin

expansion, we expect TPK to deliver impressive YoY earnings growth of 114%/91% to NT$4.96bn/

NT$9.48bn, or EPS of NT$24.2/NT$42.3, with a ROE of 45.6% and 44.8% in 2010 and 2011,

respectively.

We estimate the companys total revenue rose to NT$62.1bn in 2010 and should rise to NT$112.0bn

in 2011, up 232% and 80% YoY, respectively, on the back of rising demand for smartphones and

tablet PCs. We think Apple, in particular, should be the major contributor due to the popularity of its

touch products, especially its iPhone and iPad. We estimate that Apples iPhone and iPad sales willincrease to 80m and 35m units, respectively, in 2011, and we expect TPK to maintain its 40-50%

share of Apples products. In total, we expect Apples contribution to TPK to increase to 77% in 2011

from 70% in 9M10.

We further expect TPKs operating margin to improve to 10.6% in 2011 from 9.2% in 9M10 due to the

better economic scale, the continuous yield rate improvement and the increase in in-house sensor

adoption. TPKs gross margin is sensitive to the full-lamination product weighting of the total product

mix. For iPhone 4 and iPod touch, Apple has adopted full lamination requiring an additional

lamination process to combine touch module with TFT-LCD display. TPK generates additional profits

for the extra lamination process, but the gross margin for full lamination products is lower given their

much higher ASP (~3x). Full lamination carries a GM of about 10% compared to 20% for normal

touch module products. That explains why TPK experienced a gross margin decline from 21.2% in

2Q10 to 14.3% in 3Q10. We view full lamination as value added given it is positive for TPK s bottom

line (Fig 25). We expect full lamination products to account for 45-50% of TPKs revenue going

forward.

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9 February 2011 22

Fig 21 TPKs GM and OPM 1Q102012E Fig 22 TPK to maintain ROE of over 40% in 201012E


Fig 23 TPK ROE DuPont analysis Fig 24 Improving B/S TPK to reach net cash in 2011E


Fig 25 Margin / profit analysis iPhone 3GS (touch module) & iPhone4 (full lamination)

iPhone 3GS iPhone 4

Module type Touch module Display module (Touch module with TFT-LCD display)Display lamination type Edge lamination Full laminationASP (US$/unit) 15 43COGS (US$/unit) 12.0 38.7- TFT-LCD na 26- ITO glass 3.8 3.8- Cover glass 4.5 4.5- FPC 0.7 0.7- IC 1.2 1.2- Depreciation 0.5 0.5- Labour & overhead 1.4 2.1

Gross Margin 20% 10%Gross Profits (US$/unit) 3.0 4.3


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9 February 2011 23

4Q10 results preview and 1Q11 outlook

Driven by the strong shipments in iPhone 4 (full lamination), iPad and e-readers (Nook), TPKs 4Q10

revenue reached a record high of NT$29.3bn (up 70% QoQ/454% YoY), in our view. We think TPKs

gross margin improved to 15%+ in 4Q10 from 14.3% in 3Q10, driven by yield rate improvement,

especially in mid-size touch panels. We think its operating margin expanded further to 10%+ in 4Q10

from 7.9% in 3Q10, due to the companys large economies of scale. In all, we believe TPKs 4Q

results reached earnings of NT$2.4bn (EPS of NT$10.6), 10-15% higher than the Street consensus.

Looking at 1Q11, given the traditional seasonality, product transition, and high base in 4Q10, we

expect TPKs revenue to decline by 18.7% QoQ and to rise by 369% YoY to NT$23.8bn. We expect

a slight gross margin decline in 1Q11 due to the initial lower yield rate of the new model, iPad 2. Net-

net, we expect 1Q11 earnings to come in at NT$1.65bn, or EPS of NT$7.4.

Fig 26 TPK quarterly financial highlights

NT$m 1Q10 2Q10 3Q10 4Q10E 2010E 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E

Sales 5082 10508 17213 29329 62132 23844 26530 28927 32700 112000 133100Gross profits 932 2228 2457 4435 10052 3452 4038 4647 5430 17567 21276Op. profits 360 1340 1316 3008 6023 2082 2627 3207 3962 11879 15075

Non-op 20 6 40 -46 21 -16 -16 -1 3 -30 -18Pre-tax income 380 1347 1355 2962 6044 2066 2611 3206 3965 11848 15057Net profit 326 1120 1130 2379 4956 1653 2089 2565 3172 9479 12046EPS (NT$) 1.81 5.93 5.84 10.62 24.20 7.37 9.32 11.44 14.15 42.29 53.74# of shares 180 189 194 224 205 224 224 224 224 224 224Margin Analysis (%)Gross profits 18.3 21.2 14.3 15.1 16.2 14.5 15.2 16.1 16.6 15.7 16.0Op. profits 7.1 12.8 7.6 10.3 9.7 8.7 9.9 11.1 12.1 10.6 11.3Pre-tax income 7.5 12.8 7.9 10.1 9.7 8.7 9.8 11.1 12.1 10.6 11.3Tax rate 14.3 16.8 16.6 19.7 18.0 20.0 20.0 20.0 20.0 20.0 20.0QoQ growthSales -4.0% 106.8% 63.8% 70.4% -18.7% 11.3% 9.0% 13.0%Gross profits -31.0% 139.1% 10.3% 80.5% -22.2% 17.0% 15.1% 16.9%Operating income -57.1% 272.5% -1.8% 128.6% -30.8% 26.2% 22.1% 23.5%Pre-tax income -54.9% 254.3% 0.7% 118.5% -30.2% 26.4% 22.8% 23.7%Net income -58.0% 243.9% 0.9% 110.5% -30.5% 26.4% 22.8% 23.7%

YoY growthSales 23.8% 156.0% 230.7% 453.9% 232.1% 369.2% 152.5% 68.1% 11.5% 80.3% 18.8%Gross profits 12.7% 169.4% 99.6% 228.4% 137.3% 270.5% 81.2% 89.1% 22.4% 74.8% 21.1%Operating income -24.6% 180.7% 60.7% 258.7% 130.6% 478.8% 96.0% 143.8% 31.7% 97.2% 26.9%Pre-tax income -17.4% 192.8% 69.1% 251.5% 135.7% 443.7% 93.9% 136.5% 33.9% 96.0% 27.1%Net income -20.8% 172.4% 57.4% 206.5% 113.9% 407.3% 86.4% 126.9% 33.3% 91.3% 27.1%


Investment risks

High customer concentration: We think TPKs major risk is its high customer concentration. Apple

is TPKs largest customer, accounting for 46% and 70% of total revenues in 2009 and 9M10,

according to the company. Although TPK is trying to diversify its customer base and has penetrated

other tier-1 handset/PC brand vendors, we believe Apple will remain its largest customer in 2011

given the robust growth in Apple iProducts. Therefore, any order loss from Apple or worse-than-

expected demand for Apple products could have a significant negative impact on TPK. Conversely,

any further order wins or better-than-expected Apple product sales could have a significant positive

impact on TPK. We have conducted sensitivity analyses on both iPhone and iPad shipments to

better forecast the companys potential upside and downside risks (Fig 27 and Fig 28).

Fig 27 TPK earnings sensitivity analysis iPhone shipments

TPK EPS (NT$/sh) iPhone total shipments - 2011E

70.0 75.0 80.0 85.0 90.0TPK's share of iPhone 40% 36.7 37.6 38.6 39.5 40.4

45% 38.3 39.4 40.4 41.5 42.550% 40.0 41.1 42.3 43.5 44.6

55% 41.6 42.9 44.2 45.4 46.760% 43.2 44.6 46.0 47.4 48.8


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9 February 2011 24

Fig 28 TPK earnings sensitivity analysis iPad shipments

TPK EPS (NT$/sh) iPad total shipments - 2011E

30.0 32.5 35.0 37.5 40.0TPK's share of iPhone 35% 36.7 37.7 38.7 39.7 40.8

40% 38.4 39.6 40.8 41.9 43.1

44% 39.8 41.0 42.3 43.6 44.850% 41.9 43.4 44.8 46.2 47.755% 43.6 45.2 46.8 48.4 50.0


Intensified industry competition: Attracted by the bright industry outlook, many new companies

are entering the P-Cap touch panel industry. Colour filter vendors such as Sintek (3049 TT, NR) and

Cando (8056 TT, NR) and TFT LCD companies such as Chimei Innolux (3481 TT, NT$37.30,

Outperform, TP: NT$57.00, Jeffrey Su) are the more aggressive ones. Although we do not view the

potential oversupply as a real issue in the industry this year (refer to Taiwan touch panel sector

Big is beautiful, published concurrently with this report), we cannot rule out the possibility that the

intensified competition might result in more severe ASP erosion, which could negatively affect TPKs

margin.

Potential technology shift in the industry: The touch panel industry is a rapidly growing market

sector, with many new technologies emerging. Although we believe P-Cap should be the mainstream

technology in the coming years, we see competition from other rising technologies. In particular, in-

cell and on-cell technologies could be threats to the P-Cap solution in the long term if any

breakthrough in yield rate improvement and mass production, in our view. The shift in touch

technology could have a negative impact on TPK, which focuses on P-Cap touch solution

developments.

Company overview

Company background

Established in 2003, TPK pioneered capacitive-type touch panels and was the inventor and the first

mass producer. The company has been a dedicated touch panel provider for all solutions, includingresistive, capacitive, SAW and infrared used in smartphone, tablet PCs and other 3C devices.

Through years of dedication in this field, TPK has become one of the largest touch panel suppliers in

the world and a major supplier for Apples touch products, including iPhone and iPad. The company

is now dedicated to P-Cap touch products. TPK has about 30,000 employees worldwide.

Company organisation

TPK has 14 subsidiaries for touch panel manufacture and sales. It is aiming to become a vertical

integrated total solution provider by setting up subsidiaries to work on different production, R&D, and

sales sites. Its headquarters are in Taipei and it has product facilities in Xiamen; TPK also has

customer service centres and sales divisions in the US, Japan and Korea.

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9 February 2011 25

Fig 29 TPK company structure


Management

Most of TPKs management team has been in the touch panel industry for 510 years or more.

TPKs chairman/founder, Michael Chiang, was previously the chairman and GM of Taiwan Video and

Monitor; and Tom Sun, CEO of TPK, was the CEO of Motorola Taiwan before joining TPK in 2007.

Fig 30 TPK management team

Name Title Introduction

Michael Chiang Chairman Mr. Michael Chiang was the Chairman and GM of Taiwan Video and MonitorCorporation before joining TPK. He holds a BS in Business Administration from Fu JenUniversity, Taiwan.

Tom Sun CEO Mr. Tom Sun previously acted as the CEO of Motorola Taiwan and was arepresentative of Motorola China before taking the CEO position at TPK in 2007. Hehas an MS from Illinois State University in the US.

Eric Chang Senior VP Mr. Chang was previously employed at eTurboTouch China and GVC before joiningTPK in 2004. He holds an MS from China University of Science & Technology, Taiwan.

Ann Wu Senior VP Ms. Yu was CEO at both Taiwan Video & Monitor Corporation and Fiege Goth

Corporation before joining TPK in 2005. She has a BS from Soochow University,Taiwan.

Freddie Liu CFO Mr. Freddie Liu was previously employed at ASE as CFO. He holds an MBA fromUniversity of Michigan.

Source: Company data, February 2011

Customer mix and suppliers

TPKs customers include most of the top-tier handset and tablet makers, including Apple, HTC, Palm,

RIM, Samsung and LG. Apple and HTC accounted for nearly 80% of sales in 9M10, while the rest

account for low single-digit sales.

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9 February 2011 26

Fig 31 Sales breakdown by major customers 9M10 Fig 32 TPK major suppliers


Product mix

TPK produces vertical integrated product lines from front-end ITO glass and glass sensor to back-

end module and TFT lamination (so called full lamination module or display module). Touch

modules account for more than 95% of the companys total revenue.

Fig 33 TPK product mix breakdown in 2010E Fig 34 Touch product applications

Source: Company data, Macquarie Research, February 2011 Source: Company data, February 2011

Cost structure

Fig 35 TPK cost structure

Cost structure % of COGS

Raw material 85Labour 6-8Depreciation and amortization 3-4Overhead 3-6


Apple

70%

Palm

5%

HTC

11%

Others

14%

Glass-type

touch module -

small

Film-type touch

module - small

Glass-type

touch module -

mid

ITO glass

Glass-type

touch module -

small with full

lamination

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9 February 2011 27

Shareholding structure

After releasing 28m shares to employees and outside investors for TPKs IPO on 29 October, Balda

is still the major shareholder, with a 16% stake, followed by Max Gain Management with 8.3% and

Capable Way Investment with 7.6%. Note that Michael Chiang, the founder of TPK, and his family,

considered as one entity, are still the biggest shareholders at 30% of the holdings.

Fig 36 TPK shareholding structure

Holder Name Holding %

Balda Investments Singapore Pte. Ltd. 16.1Max Gain Management Ltd. 8.3Capable Way Investments Ltd. 7.6Apollo Forum Ltd. 6.5Chiang (Chao Jui) 5.7Wealth Faith Enterprise Inc. 5.6High Focus Holdings Ltd. 4.4Fairmont Development Ltd. 3.0Maxwood Global Ltd. 3.0Multigroup International Ltd. 2.4

Source: TEJ, Company data, Macquarie Research, February 2011

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9 February 2011 28

TPK Holding Co (3673 TT, Outperform, Target Price: NT$850.00)Quarterly Results 3Q/10A 4Q/10E 1Q/11E 2Q/11E Profit & Loss 2009A 2010E 2011E 2012E

Revenue m 17,213 29,329 23,844 26,530 Revenue m 18,709 62,132 112,000 133,100Gross Profit m 2,457 4,435 3,452 4,038 Gross Profit m 4,236 10,052 17,567 21,276Operating Expenses m -1,142 -1,427 -1,370 -1,411 Operating Expenses m -1,624 -4,029 -5,688 -6,201Operating Income m 1,316 3,008 2,082 2,627 Operating Income m 2,612 6,023 11,879 15,075Net Non-operating income m 40 -46 -16 -16 Net Non-operating income m -48 21 -30 -18Pre-Tax Income m 1,355 2,962 2,066 2,611 Pre-Tax Income m 2,564 6,044 11,848 15,057Tax Expense m -229 -589 -413 -522 Tax Expense m -254 -1,088 -2,370 -3,011Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0Minority Interests m 4 7 0 0 Minority Interests m 7 0 0 0

Reported Earnings m 1,130 2,379 1,653 2,089 Reported Earnings m 2,317 4,956 9,479 12,046Reported Earnings (bonus exp) m 1,130 2,379 1,653 2,089 Reported Earnings (bonus exp) m 2,317 4,956 9,479 12,046Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0 Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0Adjusted Earnings m 1,130 2,379 1,653 2,089 Adjusted Earnings m 2,317 4,956 9,479 12,046EBITDA m 1,615 3,307 2,782 3,327 EBITDA m 3,312 7,220 14,678 19,345

EPS (rep) NT$ 5.84 10.62 7.37 9.32 EPS (rep) NT$ 14.15 24.19 42.29 53.74EPS pcp growth (rep) % 33.2 124.0 344.8 70.9 EPS growth (rep) % 510.7 71.0 74.8 27.1EPS (rep bonus exp) NT$ 5.84 10.62 7.37 9.32 EPS (rep bonus exp) NT$ 14.15 24.19 42.29 53.74EPS pcp growth (rep bonus exp) % 33.2 124.0 344.8 70.9 EPS growth (rep bonus exp) % 510.7 71.0 74.8 27.1EPS (adj) NT$ 5.84 10.62 7.37 9.32 EPS (adj) NT$ 14.15 23.57 42.29 53.74EPS pcp growth (adj) % 33.2 124.0 344.8 70.9 EPS growth (adj) % 510.7 66.6 79.4 27.1

Revenue pcp growth % 230.7 453.9 369.2 152.5 PE (rep) x 49.5 28.9 16.6 13.0Operating Income pcp growth % 60.7 258.7 478.8 96.0 PE (rep bonus adj) x 49.5 28.9 16.6 13.0Reported Earnings pcp growth % 57.4 206.5 407.3 86.4 PE (adj) x 49.5 29.7 16.6 13.0

Gross Profit Margin % 14.3 15.1 14.5 15.2 Total DPS NT$ 0.00 0.00 21.15 26.87

Operating Income Margin % 7.6 10.3 8.7 9.9 Total Div Yield % 0.0 0.0 3.0 3.8Reported Earnings Margin % 6.6 8.1 6.9 7.9 Weighted Average Shares m 163.8 204.9 224.1 224.1EBITDA Margin % 9.4 11.3 11.7 12.5 Period End Shares m 163.8 224.1 224.1 224.1

Profit and Loss Ratios 2009A 2010E 2011E 2012E Cashflow Analysis 2009A 2010E 2011E 2012E

Revenue Growth % 44.6 232.1 80.3 18.8 Reported Earnings m 2,317 4,956 9,479 12,046Gross Profit Growth % 141.4 137.3 74.8 21.1 Depreciation & Amortisation m 700 1,196 2,799 4,270Operating Income Growth % 430.7 130.6 97.2 26.9 Chgs in Working Cap m -479 -2,663 1,274 -229Reported Earnings Growth % 496.4 113.9 91.3 27.1 Other m -0 -0 -0 0EBITDA Growth % 234.0 118.0 103.3 31.8 Operating Cashflow m 2,538 3,490 13,553 16,087

Acquisitions m 0 0 0 0Gross Profit Margin % 22.6 16.2 15.7 16.0 Capex m -1,356 -10,000 -12,000 -3,000Operating Income Margin % 14.0 9.7 10.6 11.3 Asset Sales m 0 0 0 0Reported Earnings Margin % 12.4 8.0 8.5 9.0 Other m -41 0 0 0EBITDA Margin % 17.7 11.6 13.1 14.5 Investing Cashflow m -1,397 -10,000 -12,000 -3,000

Dividend (Ordinary) m 0 0 0 -4,739Payout Ratio % 0.0 0.0 50.0 50.0 Equity Raised m -239 6,160 -0 0EV/EBITDA x 34.9 21.8 10.7 8.2 Debt Movements m 207 8,208 -308 -2,844EV/EBIT x 44.2 26.2 13.3 10.5 Other m 0 0 0 0

Financing Cashflow m -32 14,368 -308 -7,584Balance Sheet RatiosROE % 54.1 45.6 44.8 40.7 Net Chg in Cash/Debt m 1,109 7,858 1,244 5,503ROA % 26.7 24.9 26.2 26.4ROIC % 49.7 83.8 54.8 47.7 Free Cashflow m 1,182 -6,510 1,553 13,087Net Debt/Equity % 10.8 5.5 -2.5 -27.1 FCF per Share NT$ 7.21 -31.77 6.93 58.39Interest Cover x 39.7 58.1 72.0 120.8 P/FCF x 97.0 -22.0 101.1 12.0Price/Book x 21.6 9.5 6.1 4.7Book Value per Share NT$ 32.5 73.3 115.6 148.2

Balance Sheet 2009A 2010E 2011E 2012E

Cash m 1,671 9,529 10,773 16,276Receivables m 835 6,809 10,740 12,763Inventories m 971 4,735 6,296 7,455Investments m 0 0 0 0Fixed Assets m 5,959 14,763 23,963 22,693Intangibles m 517 0 0 0Other Assets m 1,020 1,561 1,561 1,561Total Assets m 10,974 37,396 53,333 60,749

Payables m 2,204 9,275 16,041 18,995Short Term Debt m 1,650 7,305 5,570 4,006Long Term Debt m 595 3,131 4,557 3,277Provisions m 0 0 0 0Other Liabilities m 1,205 1,250 1,250 1,250Total Liabilities m 5,654 20,960 27,418 27,528Total S/H Equity m 5,320 16,436 25,915 33,221Total Liab & S/H Funds m 10,974 37,396 53,333 60,749

All figures in NT$ unless noted.Source: Company data, Macquarie Research, February 2011

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9 February 2011 29

TAIWAN

2384 TT Outperform


12-month target NT$ 63.00Upside/Downside % 26.8Valuation NT$ 63.00- PERGICS sector

Technology Hardware & Equipment

Market cap NT$m 64,46130-day avg turnover US$m 46.5Market cap US$m 2,220Number shares on issue m 1,297

Investment fundamentals

Year end 31 Dec 2009A 2010E 2011E 2012E

Revenue bn 27.4 64.5 93.9 105.2

Reported profit bn -2.6 2.4 6.3 7.7Profit bonus exp bn -2.6 2.4 6.3 7.7Bon exp/rep profit % 0.0 0.0 0.0 0.0Adjusted profit bn -2.6 2.4 6.3 7.7EPS rep NT$ -2.36 1.96 4.25 5.22EPS rep growth % -5.8 nmf 117.6 22.8EPS bonus exp NT$ -2.36 1.96 4.25 5.22EPS bonus growth % -5.8 nmf 117.6 22.8PER rep x nmf 25.4 11.7 9.5PER bonus exp x nmf 25.4 11.7 9.5Total DPS NT$ 0.00 0.00 0.86 0.85Total div yield % 0.0 0.0 1.7 1.7ROA % -3.7 4.4 8.9 9.3ROE % -10.6 9.1 16.7 15.9EV/EBITDA x 19.7 9.2 6.3 5.6Net debt/equity % 81.2 69.5 32.0 14.6P/BV x 2.4 2.2 1.6 1.4

2384 TT rel TAIEX performance, & rechistory

Note: Recommendation timeline - if not a continuous line, then there was noMacquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, January 2011

(all figures in NT$ unless noted)


9 February 2011

WintekLooks very attractive

Event Winteks share price has pulled back around 20% from its peak on account of

slower sales due to product transition. Thus we see this as a good time to

accumulate. We are resuming coverage with an Outperform rating and target

price of NT$63.

Impact

A key beneficiary of Apple boom: We believe Wintek is well positioned to

enjoy the expected strong growth of Apples iPhone and iPad in 2011, given

its strong position in the Apple supply chain (a 3050% share of iPhone, iPod

touch, iPad and iPod nano). Our supply chain checks show that total

shipments for Apples iPhone and iPad could challenge 80m and 3540m

units, respectively, in 2011, and we expect Winteks sales to Apple could grow

78% this year despite factoring in a more conservative order allocation (Fig 2).The contribution from Apple should account for 74% of Wintek sales in 2011

(vs 60% in 2010), on our estimates.

Bearing fruit from old relationship: Since 2006 Wintek has built up a strong

relationship with Nokia (TFT-LCD/STN products). Along with Nokias more

aggressive move into touch phones, Wintek should start to bear fruit from this

relationship, in our view. Motorola, another company with which Wintek has a

long-standing relationship, is seeking a strong comeback in handsets and

targets tapping into the growing Tablet PC market this year. Our checks

indicate that Wintek has order wins for one to two Nokia models and

Motorolas upcoming 10 tablet PC, which we believe has a lot of growth

potential, although we believe the initial contribution should be limited.

Better product mix with impressive margin improvement: Thanks to the

robust demand for touch panels and the phasing-out of low-margin legacy

products (TFT-LCD/STN panels); we expect the touch business to contribute

80%+ of Winteks revenue in 2011, up from only 28% in 2009. As a result, we

expect Winteks gross margin should see an impressive improvement,

reaching 12.6% in 2011E from 9.3%/(0.1%) in 2010/2009, respectively.

A turnaround company with attractive valuation: We expect Wintek to

deliver a strong turnaround in 2011, with earnings growing at 160%, to reach

NT$6.3bn, or EPS of NT$4.3, with ROE back to 15%+. The shares trade at a

12x 2011E PER, lower than peers at 14x, which we view as very attractive.

Earnings and target price revision

Resuming coverage.

Price catalyst

12-month price target: NT$63.00 based on a PER methodology.

Catalyst: The debut of new iPad and iPhone. Strong earnings growth.

Action and recommendation

Buy ahead of the uptrend: We view Wintek as an undervalued touch play

and expect the launch of the next iPad-(late 1Q) to provide positive stock

momentum. We suggest investors accumulate the shares before the expected

uptrend. Our TP of NT$63 is based on 15x 2011E EPS (after GDR dilution),

supported by our fair value analysis of NT$60.

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9 February 2011 30

Analysis

Fig 1 Apple touch products order allocation by supplier

1Q11E 2Q11E 3Q11E 4Q11E

iPhoneTPK 50% 50% 50% 50%Wintek 40% 38% 35% 35%CMI 10% 12% 15% 15%iPadTPK 50% 45% 42% 42%Wintek 45% 45% 42% 42%CMI 5% 10% 16% 16%iPod touchTPK 50% 48% 42% 42%Wintek 40% 38% 35% 35%CMI 10% 14% 23% 23%


Fig 2 Majority of Nokias newly launched phones equipped with touch panelsName N8 E7 C6 C7 E5 C3 C5-03

Model Picture

Dimensions 59.12 x 113.5 x 12.9mm

123.7 x 62.4 x 13.6mm

103.8 x 52.5 x13.9 mm

57 x 117 x 11 mm 58.9 x 115 x12.8 mm

115.5 x 58.1 x13.8 mm

51 x 105.8 x13.8 mm

Weight: 135 g 176 g 131 g 130 g 126 g 114 g 93 gEmbedded OS: Symbian^3 Symbian^3 Symbian^3 Symbian^3 Symbian OS 9.3 Symbian OS Symbian OS 9.4CPU: ARM 11 Qualcomm

SnapdragonQualcommSnapdragon

ARM 11 ARM 1136J-S ARM 1136J-S ARM 1136JF-S

CPU Clock: 680 MHz 1GHz 680 MHz 680 MHz 600 MHz 600 MHz 600 MHzDisplay Diagonal: 3.5" 4" 3.2" 3.5 " 2.4 " 2.4" 3.2 "Display Resolution: 360 x 640 640 X 360 640 X 360 640 X 360 320 x 240 320 x 240 360 x 640Touch Panel Yes Yes Yes Yes No No YesBluetooth: Yes Yes Yes Yes Yes Yes YesGPS: Yes Yes Yes Yes Yes Yes YesCamera resolution: 12MP 8MP 8MP 8MP 5 MP 2MP 5MPAutofocus (AF): Yes Yes Yes Yes Yes Yes YesSecondary Camera: 0.3MP 0.3MP 0.3MP 0.3MP No No NoBattery Capacity: 1200 mAh 1200 mAh 1050 mAh 1200 mAh 1200 mAh 1320 mAh 1000 mAh


Fig 3 Sales breakdown by product line Fig 4 Impressive margin expansion


0%10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q10 2Q10 3Q10 4Q10E 1Q11E 2Q11E 3Q11E 4Q11E

TFT-LCD STN-LCD Touch panel - small Touch panel - mid Others

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

2008 2009 2010E 2011E 2012E

%

Gross margin Operating margin Net margin

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9 February 2011 31

Fig 5 Winteks ROE back to 15%+ in 2011E Fig 6 Improving balance sheet


Fig 7 ROE-g/COE-g fair value analysis

Valuation

Beta 1.3Risk free rate 2%Market risk premium 6%COE 9.8%ROE (average 2011-2012) 16.3%Long term growth rate (g) 2%ROE-g/COE-g 1.8BVPS (Average 2011-2012) 32.9Fair value (NT$/SH) 60


Fig 8 Wintek quarterly financial highlights

1Q10 2Q10 3Q10 4Q10E 2010E 1Q11E 2Q11E 3Q11E 4Q11E 2011E 2012E

Sales 7532 12922 19050 25001 64506 21410 22931 23861 25648 93850 105200Gross profits -358 969 2130 3256 5996 2501 2855 3080 3431 11867 13964Op. profits -958 277 1318 2228 2864 1499 1803 1976 2271 7549 8992Non-op -90 94 43 -234 -187 -189 -189 -104 -104 -587 -388Pre-tax income -1048 371 1360 1994 2677 1310 1614 1871 2166 6961 8603Net profit -999 313 1239 1856 2409 1179 1452 1684 1950 6265 7743EPS (NT$) -0.81 0.25 1.01 1.51 1.96 0.80 0.99 1.14 1.32 4.25 5.22# of shares 1,232 1,232 1,232 1,232 1,232 1,473 1,473 1,473 1,473 1,473 1,482Margin Analysis (%)Gross profits - 4.8 7.5 11.2 13.0 9.3 11.7 12.5 12.9 13.4 12.6 13.3

Op. profits - 12.7 2.1 6.9 8.9 4.4 7.0 7.9 8.3 8.9 8.0 8.5Pre-tax income - 13.9 2.9 7.1 8.0 4.2 6.1 7.0 7.8 8.4 7.4 8.2Tax rate 4.7 15.7 8.9 6.9 10.0 10.0 10.0 10.0 10.0 10.0 10.0Sales BK (%)TFT-LCDs 30.0% 23.0% 20.0% 16.2% 20.3% 16.4% 14.6% 15.3% 15.5% 15.4% 15.0%STN-LCDs 24.0% 13.0% 4.0% 1.2% 7.0% 1.2% 1.0% 0.9% 0.8% 1.0% 0.6%Touch panel - small 28.8% 29.1% 47.0% 53.3% 43.7% 55.1% 49.6% 46.4% 45.6% 49.0% 46.4%Touch panel - mid 8.1% 26.9% 27.0% 27.6% 25.0% 26.5% 34.1% 36.8% 37.7% 34.1% 37.5%Others 9.2% 7.9% 2.0% 1.7% 3.9% 0.7% 0.7% 0.7% 0.5% 0.6% 0.6%Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%QoQ growthSales -7.0% 71.6% 47.4% 31.2% -14.4% 7.1% 4.1% 7.5%Gross profits -204.3% -370.5% 119.8% 52.9% -23.2% 14.2% 7.9% 11.4%Operating income 216.4% -128.9% 375.5% 69.1% -32.7% 20.3% 9.6% 14.9%Pre-tax income 93.4% -135.4% 267.0% 46.6% -34.3% 23.2% 15.9% 15.8%Net income 92.8% -131.3% 296.4% 49.8% -36.5% 23.2% 15.9% 15.8%

YoY growthSales 44.0% 98.9% 151.5% 208.8% 135.4% 184.2% 77.5% 25.3% 2.6% 45.5% 12.1%Gross profits -45.5% -638.1% 367.8% 847.5% -15700.9% -798.0% 194.6% 44.6% 5.4% 97.9% 17.7%Operating income -11.8% -142.9% -6389.6% -835.4% -239.3% -256.4% 550.7% 49.9% 1.9% 163.5% 19.1%Pre-tax income -16.6% -147.3% -939.7% -467.9% -197.5% -224.9% 335.3% 37.5% 8.6% 160.0% 23.6%Net income -14.6% -143.8% -662.7% -458.1% -191.9% -218.0% 364.5% 35.9% 5.0% 160.0% 23.6%


-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2008 2009 2010E 2011E 2012E

%

ROE ROA

0%

20%

40%

60%

80%

100%

120%

2008 2009 2010E 2011E 2012E

Gross debt/ Equity Net debt / Equity

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9 February 2011 32

Fig 9 Forward P/E band - annual


Fig 10 P/BV band annual


-60

-40

-20

0

2040

60

80

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

(NT$)


0

10

20

30

40

50

60

70

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

(NT$)

Share price 0.5x 1x 1.5x 2x 2.5x

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9 February 2011 33

Wintek (2384 TT, Outperform, Target Price: NT$63.00)Quarterly Results 3Q/10A 4Q/10E 1Q/11E 2Q/11E Profit & Loss 2009A 2010E 2011E 2012E

Revenue m 19,050 25,001 21,410 22,931 Revenue m 27,399 64,506 93,850 105,200Gross Profit m 2,130 3,256 2,501 2,855 Gross Profit m -38 5,996 11,867 13,964Operating Expenses m -812 -1,028 -1,002 -1,052 Operating Expenses m -2,018 -3,132 -4,318 -4,972Operating Income m 1,318 2,228 1,499 1,803 Operating Income m -2,056 2,864 7,549 8,992Net Non-operating income m 43 -234 -189 -189 Net Non-operating income m -650 -187 -587 -388Pre-Tax Income m 1,360 1,994 1,310 1,614 Pre-Tax Income m -2,706 2,677 6,961 8,603Tax Expense m -121 -138 -131 -161 Tax Expense m 123 -268 -696 -860Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0Minority Interests m 0 0 0 0 Minority Interests m -39 0 0 0

Reported Earnings m 1,239 1,856 1,179 1,452 Reported Earnings m -2,622 2,409 6,265 7,743Reported Earnings (bonus exp) m 1,239 1,856 1,179 1,452 Reported Earnings (bonus exp) m -2,622 2,409 6,265 7,743Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0 Bonus exp / Reported Earnings % 0.0 0.0 0.0 0.0Adjusted Earnings m 1,239 1,856 1,179 1,452 Adjusted Earnings m -2,622 2,409 6,265 7,743EBITDA m 2,879 3,790 3,350 3,653 EBITDA m 3,897 9,112 14,950 16,701

EPS (rep) NT$ 1.01 1.51 0.80 0.99 EPS (rep) NT$ -2.36 1.96 4.25 5.22EPS pcp growth (rep) % nmf nmf nmf 288.6 EPS growth (rep) % -5.8 nmf 117.6 22.8EPS (rep bonus exp) NT$ 1.01 1.51 0.80 0.99 EPS (rep bonus exp) NT$ -2.36 1.96 4.25 5.22EPS pcp growth (rep bonus exp) % nmf nmf nmf 288.6 EPS growth (rep bonus exp) % -5.8 nmf 117.6 22.8EPS (adj) NT$ 1.01 1.51 0.80 0.99 EPS (adj) NT$ -2.38 1.96 4.25 5.22EPS pcp growth (adj) % nmf nmf nmf 288.6 EPS growth (adj) % -7.3 nmf 117.6 22.8

Revenue pcp growth % 151.5 208.8 184.2 77.5 PE (rep) x nmf 25.4 11.7 9.5Operating Income pcp growth % nmf nmf nmf 550.7 PE (rep bonus adj) x nmf 25.4 11.7 9.5Reported Earnings pcp growth % nmf nmf nmf 364.5 PE (adj) x nmf 25.4 11.7 9.5

Gross Profit Margin % 11.2 13.0 11.7 12.5 Total DPS NT$ 0.00 0.00 0.86 0.85

Operating Income Margin % 6.9 8.9 7.0 7.9 Total Div Yield % 0.0 0.0 1.7 1.7Reported Earnings Margin % 6.5 7.4 5.5 6.3 Weighted Average Shares m 1,110 1,232 1,473 1,482EBITDA Margin % 15.1 15.2 15.6 15.9 Period End Shares m 1,132 1,282 1,482 1,482

Profit and Loss Ratios 2009A 2010E 2011E 2012E Cashflow Analysis 2009A 2010E 2011E 2012E

Revenue Growth % -15.1 135.4 45.5 12.1 Reported Earnings m -2,622 2,409 6,265 7,743Gross Profit Growth % nmf nmf 97.9 17.7 Depreciation & Amortisation m 5,953 6,247 7,401 7,709Operating Income Growth % -88.3 nmf 163.5 19.1 Chgs in Working Cap m 1,460 -5,028 -5,381 -2,089Reported Earnings Growth % -9.0 nmf 160.0 23.6 Other m 17 -10 -0 -0EBITDA Growth % -6.9 133.8 64.1 11.7 Operating Cashflow m 4,808 3,619 8,285 13,363

Acquisitions m 856 -10 -10 -10Gross Profit Margin % -0.1 9.3 12.6 13.3 Capex m -1,994 -10,000 -12,000 -5,000Operating Income Margin % -7.5 4.4 8.0 8.5 Asset Sales m 0 0 0 0Reported Earnings Margin % -9.6 3.7 6.7 7.4 Other m -276 925 -138 -138EBITDA Margin % 14.2 14.1 15.9 15.9 Investing Cashflow m -1,415 -9,085 -12,148 -5,148

Dividend (Ordinary) m 0 0 0 -1,261Payout Ratio % nmf 0.0 20.1 16.3 Equity Raised m -143 3,825 9,786 0EV/EBITDA x 19.7 9.2 6.3 5.6 Debt Movements m -1,511 5,006 -5,945 -3,171EV/EBIT x -36.8 29.2 12.4 10.4 Other m 0 0 0 0

Financing Cashflow m -1,655 8,831 3,841 -4,432Balance Sheet RatiosROE % -10.6 9.1 16.7 15.9 Net Chg in Cash/Debt m 1,739 3,366 -22 3,783ROA % -3.7 4.4 8.9 9.3ROIC % -4.1 6.1 13.6 13.5 Free Cashflow m 2,814 -6,381 -3,715 8,363Net Debt/Equity % 81.2 69.5 32.0 14.6 FCF per Share NT$ 2.53 -5.18 -2.52 5.64Interest Cover x -4.2 6.2 17.3 26.8 P/FCF x 19.6 -9.6 -19.7 8.8Price/Book x 2.4 2.2 1.6 1.4Book Value per Share NT$ 20.5 23.0 30.7 35.1

Balance Sheet 2009A 2010E 2011E 2012E

Cash m 6,155 9,520 9,499 13,282Receivables m 5,320 12,371 17,999 20,175Inventories m 6,981 13,931 19,520 21,723Investments m 476 496 506 516Fixed Assets m 33,374 37,263 41,997 39,424Intangibles m 247 0 0 0Other Assets m 2,164 3,006 4,342 4,860Total Assets m 54,717 76,587 93,862 99,980

Payables m 3,755 11,221 15,723 17,497Short Term Debt m 10,968 17,993 14,426 12,524Long Term Debt m 14,057 11,996 9,617 8,349Provisions m 0 0 0 0Other Liabilities m 2,702 5,906 8,574 9,606Total Liabilities m 31,481 47,116 48,340 47,976Total S/H Equity m 23,236 29,471 45,522 52,004Total Liab & S/H Funds m 54,717 76,587 93,862 99,980

All figures in NT$ unless noted.Source: Company data, Macquarie Research, January 2011

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TAIWAN

3622 TT Neutral


12-month target NT$ 265.00Upside/Downside % -7.2Valuation NT$

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(0002)Touch Panel