MStar Semiconductor

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

17 November 2011Asia Pacific/Taiwan

Equity ResearchSemiconductor Devices / OVERWEIGHT

MStar Semiconductor (3697.TW / 3697 TT)

INITIATION

Handsets and set-tops improve the picture ■ Initiate with an OUTPERFORM. We initiate coverage on MStar with an

OUTPERFORM rating and a target price of NT$223, based on 15x our 2012E EPS of NT$14.85, in line with its peer group. MStar combines a stable, profitable and market-leading display business with potential growth drivers from handsets and set-tops, which we expect to drive its double-digit sales growth in 2012/13.

■ Display consolidation improves stability. MStar has consolidated its market share at 60% for monitor and TV controller ICs. The business is maturing into single-digit unit growth, offset by moderating price erosion due to content additions from Smart TV and 3DTV, and higher refresh rates. We expect display to steady gross margins in the low 40% range and operating margins near 20%.

■ Handsets and set-tops provide a growth option. The contribution of handsets and set-tops to MStar�s sales has risen from 5% to 15% in 2011, and we expect it to reach 50% by 2015. In handsets, the company has grown its share among Asian brands from 2% to 7% and we model a 14% share by 2015, including its 15% emerging market share in smartphones. The company will have its 40nm 1 GHz HSPA+ / WCDMA and TD-HSPA sampling in 1Q12. For set-tops, the company has grown share from 5% to 10% and we model a 25% share by 2015.

■ Valuation remains reasonable. We estimate 2012 revenue and EPS of NT$41.9 bn and NT$14.85, above the street�s estimates of NT$40.9 bn and NT$14.26, respectively. MStar trades at 12x our 2012E EPS, versus the peer group average of 15x and MediaTek�s 21x. Our target price of NT$223 is based on 15x EPS (in line with peers) and supported by Credit Suisse HOLT® valuation, which suggests an even higher valuation of NT$238, based on our assumptions for sales, EBITDA and investments. Key risks are revenue concentration on display, inventory cycle and pricing pressure.

Share price performance

0100200300400

Dec-10 Apr-11 Aug-11406080100120

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 7387.52 on 16/11/11 On 16/11/11 the spot exchange rate was NT$30.22/US$1

Performance Over 1M 3M 12M Absolute (%) -1.7 25.9 � Relative (%) -0.7 28.9 �

Financial and valuation metrics

Year 12/10A 12/11E 12/12E 12/13ERevenue (NT$ mn) 33,594.1 35,474.5 41,880.2 47,988.7EBITDA (NT$ mn) 8,047.2 7,764.2 9,415.6 11,017.0EBIT (NT$ mn) 6,970.3 6,473.6 8,133.7 9,735.8Net income (NT$ mn) 6,537.2 6,290.9 7,852.9 9,327.2EPS (CS adj.) (NT$) 13.40 11.89 14.85 17.64Change from previous EPS (%) n.a. Consensus EPS (NT$) n.a. 12.0 14.1 16.7EPS growth (%) 26.2 -11.2 24.9 18.8P/E (x) 13.1 14.7 11.8 9.9Dividend yield (%) 1.2 5.2 5.1 6.4EV/EBITDA (x) 8.6 8.8 7.1 5.8P/B (x) 2.8 2.8 2.6 2.4ROE (%) 26.9 19.8 22.9 24.8Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

Rating OUTPERFORM* [V] Price (16 Nov 11, NT$) 175.00 Target price (NT$) 223.00¹ Chg to TP (%) 27.4 Market cap. (NT$ mn) 93,696 Enterprise value (NT$ mn) 68,485 Number of shares (mn) 535.41 Free float (%) 82.1 52-week price range 299.8 - 115.0 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts Randy Abrams, CFA

886 2 2715 6366 [email protected]

Kevin Chen 886 2 2715 6364

[email protected]

17 November 2011

MStar Semiconductor

(3697.TW / 3697 TT) 2

Focus charts and table Figure 1: MStar�s growth driven by product-line expansion

Figure 2: MStar�s current product mix

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12%

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12%

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3%STB4%

LCD TV

69%

Source: Company data, Credit Suisse estimates Source: Company data

Figure 3: MStar�s smartphone ramp up starts from 2012E Figure 4: 3G will quickly be the driver of handset sales

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Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 5: MStar�s margins have remained stable Figure 6: Set-tops could approach 15% of sales

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Figure 7: MStar�summary of CS� 3Q/4Q11 and 2011-13 estimates 3Q11 4Q11 1Q12 2011 2012 2013

(NT$ mn) Actual CS(old) Street Guidance CS CS(old) Street Guidance CS Street CS Street CS Street CS StreetNet sales $9,327 $9,339 $9,185 NT$8.8-

$$9,590 $9,467 $9,332 NT$9.3-$9.9bn $9,089 $8,905 $35,474 $35,455 $41,880 $40,929 $47,989 $47,367

Chg 11.7% 11.8% 10.0% +5-10% 2.8% 1.4% 1.6% -3% to +3% -5.2% -4.6% 5.6% 4.7% 18.1% 15.4% 14.6% 15.7%GM (%) 42.1% 41.3% 40-42% 41.9% 41.2% 40-42% 41.8% 41.9% 41.6% 41.5%Op. M (%) 18.3% 18.8% 18.8% 15-19% 18.6% 19.4% 18.2% 15-19% 17.5% 20.0% 18.2% 18.5% 19.4% 19.0% 20.3% 19.2%Net income 1,618 1,628 1,621 1,731 1,699 1,619 1,554 1,558 6,291 6,180 7,853 7,506 9,327 8,652

EPS (NT$) $3.06 $4.39 $3.12 $3.27 $4.58 $3.09 $2.94 $2.96 $11.89 $11.99 $14.85 $14.26 $17.64 $16.92

Source: Company data, Credit Suisse estimates, Bloomberg consensus

17 November 2011

MStar Semiconductor

(3697.TW / 3697 TT) 3

Handsets and set-tops improve the picture MStar is a Taiwan-based fabless semiconductor company that came into being in 2002 when the display and RFID divisions split off from System General Technology (now part of Fairchild), an analog design house. The company�s initial competencies were an analog to digital converter and a silicon technology for displays, which the company later used to break in and eventually dominate the TV and monitor controller IC markets. The company is now expanding, using its competencies in integration, analog to digital control and multimedia processing to enter into handset baseband, GPS, set-top and RFID markets.

Display business provides the base MStar�s product mix in 2011 is still dominated by display�with about 70% LCD TV controllers and 12% monitor controllers. In monitors, MStar retains its stable 60% share by shipping to all the top monitor manufacturers, including Samsung, LG, ACO, Philips, ViewSonic, Dell, Lenovo and HP. We model sales slightly down in the next few years as single-digit unit growth is more than offset by about 10% annual price erosion. In TVs, MStar is also consolidating its market share, accounting for 60% of the 200 mn-unit DTV market. The chipset landscape has consolidated as smaller stand-alone suppliers have struggled to maintain their development cost and a competitive cost structure with larger or Asia-based fabless companies coming closer to OEMs. For MStar, we project market share in DTV controllers remaining close to 60% but dropping from a peak of 75% of sales in 2009 to 45% of sales by 2015 as newer product categories grow faster. Revenue should hold stable near 2011 levels in the next few years as modest unit growth offsets price erosion.

Handsets and set-tops open up new opportunities MStar has seen a good volume ramp up this year in handsets, growing its volumes from 10 mn units in 2010 to 50 mn units in 2011. Even with this success, MStar still has a <10% share of emerging market platforms, allowing much more room for potential unit upside. Blended pricing could expand, as MStar is starting to sample its smartphone platforms with two 40nm 3.75G basebands (one with HSPA+ / WCDMA, another with TD-SCDMA/TD-HSPA) with integrated 1 GHz. We model a ramp up to 9 mn smartphone units in 2012 (out of 90 mn) and 24 mn in 2013 (out of 123 mn). A 14% share of the Asian chipset market should scale handsets to 35% of MStar�s total sales by 2015, up from only 12% of sales in 2011. The set-top business is on pace to almost double from NT$800 mn in 2010 to NT$1.5 bn in 2011 and we project sales to again double in 2012, modelling NT$3.4 bn in sales. MStar should have an added boost by starting shipments to the cable space at higher ASPs. We factor in set-top share expanding to 25% by 2015 and reaching 15% of MStar�s total sales.

Solid growth and profitability outlook MStar has maintained a solid model of moderate growth from new products and good profitability with stable 40-43% gross margins and about 20% operating margins. The growth model has enabled MStar to grow cash reserve to 25% of the company�s market cap and FCF yield to 13-15%. Due to the additional growth drivers from handsets and set-tops, we project a reacceleration of growth to +18% YoY in 2012 and +13% in 2013 and model EPS above the street�s expectations for both the years (NT$14.85/NT$17.64 versus the street�s forecasts of NT$14.26/NT$16.92 for 2012/13).

Valuation remains reasonable We initiate coverage on MStar with an OUTPERFORM and a NT$223 target price, based on 15x our 2012E EPS of NT$14.85, in line with its Asian and overseas peer group. We believe MStar is an attractive investment due to its potential upside to grow handsets and set-tops operations, stable and profitable margin profile and cash flow and valuation support.

MStar is a fabless semiconductor company initially focused on display but now expanding into handsets and set-tops

MStar has a stable, mature and profitable TV and monitor controller business

Handsets and set-tops grew from 5% to 15% of sales in 2011 and could combine for a 50% share by 2015

MStar could see accelerating revenue growth and stable margins

Valuation is reasonable�at a discount to the peer group

17 November 2011

MStar Semiconductor

(3697.TW / 3697 TT) 4

Financial summary Figure 8: MStar�income statement summary Summary Income Statement 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2009 2010F 2011F 2012F 2013FNet Sales 8,207 8,351 9,327 9,590 9,089 10,068 11,380 11,343 27,712 33,594 35,474 41,880 47,989 Sequential Change 1.0% 1.8% 11.7% 2.8% -5.2% 10.8% 13.0% -0.3% Y/Y Change -2.1% 8.9% -0.9% 18.0% 10.7% 20.6% 22.0% 18.3% 82.6% 21.2% 5.6% 18.1% 14.6%Cost of Goods Sold 4,818 4,803 5,401 5,572 5,286 5,869 6,649 6,649 15,825 19,394 20,595 24,452 28,077 Gross Profits 3,388 3,548 3,925 4,018 3,803 4,199 4,732 4,694 11,886 14,200 14,880 17,428 19,912 Gross Margin 41.3% 42.5% 42.1% 41.9% 41.8% 41.7% 41.6% 41.4% 42.9% 42.3% 41.9% 41.6% 41.5% Operating Exp. Promotion 396 390 518 520 515 525 568 562 899 998 1,824 2,170 2,413 % of Sales 4.8% 4.7% 5.6% 5.4% 5.7% 5.2% 5.0% 5.0% 3.2% 3.0% 5.1% 5.2% 5.0% Operating Exp. Administrative 326 381 456 458 453 462 490 485 1,088 1,517 1,621 1,891 2,044 % of Sales 4.0% 4.6% 4.9% 4.8% 5.0% 4.6% 4.3% 4.3% 3.9% 4.5% 4.6% 4.5% 4.3% Operating Expense R&D 1,218 1,238 1,247 1,259 1,247 1,272 1,364 1,351 4,313 4,715 4,961 5,233 5,719 % of Sales 14.8% 14.8% 13.4% 13.1% 13.7% 12.6% 12.0% 11.9% 15.6% 14.0% 14.0% 12.5% 11.9%Total Operating Exp 1,939 2,009 2,220 2,237 2,215 2,259 2,422 2,398 6,300 7,230 8,406 9,294 10,176 Income from Operations 1,449 1,539 1,705 1,781 1,588 1,939 2,310 2,296 5,586 6,970 6,474 8,134 9,736 % of Sales 17.7% 18.4% 18.3% 18.6% 17.5% 19.3% 20.3% 20.2% 20.2% 20.7% 18.2% 19.4% 20.3%Non Operating Income 98 125 33 100 100 100 100 100 (408) 184 356 400 400 Pretax Income 1,547 1,664 1,740 1,882 1,689 2,040 2,410 2,397 5,177 7,158 6,832 8,537 10,139 % of Sales 18.8% 19.9% 18.7% 19.6% 18.6% 20.3% 21.2% 21.1% 18.7% 21.3% 19.3% 20.4% 21.1%Income Taxes Exp. /(Gains) 115 154 121 151 135 163 193 192 362 620 541 683 811 Tax Rate 7.4% 9.2% 7.0% 8.0% 8.0% 8.0% 8.0% 8.0% 3.0% 8.7% 7.9% 8.0% 8.0%Net Income after Extraordinaries 1,432 1,510 1,618 1,731 1,554 1,877 2,217 2,205 4,815 6,537 6,291 7,853 9,327 % of Sales 17.4% 18.1% 17.4% 18.0% 17.1% 18.6% 19.5% 19.4% 17.4% 19.5% 17.7% 18.8% 19.4%Dividend to Common Share Holders - - 4,804 - - - 4,718 - 1,057 4,804 4,718 5,890 Net EPS (diluted) 2.70 2.86 3.06 3.27 2.94 3.55 4.19 4.17 12.98 13.40 11.89 14.85 17.64Share Count 529 529 529 529 529 529 529 529 454 488 529 529 529

Figure 9: MStar�balance sheet summary* NT$ mn 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2009 2010 2011 2012 2013Cash, Cash Equivalent 25,566 26,485 24,591 26,080 27,741 28,907 25,487 27,985 13,896 25,212 26,080 27,985 30,738Inventories 4,283 3,906 4,052 3,969 3,765 4,502 5,465 5,101 3,077 4,381 3,969 5,101 5,530Account receivables 4,950 4,331 5,408 5,255 4,980 5,517 6,236 6,215 3,873 4,109 5,255 6,215 6,750Other current assets 624 557 733 754 715 791 895 892 785 605 754 892 968Total current asset 35,422 35,278 34,785 36,057 37,201 39,717 38,082 40,193 21,631 34,307 36,057 40,193 43,986LT investment 0 0 264 264 264 264 264 264 0 0 264 264 264Fixed Assets 1,976 1,960 2,095 2,155 2,211 2,276 2,354 2,431 2,211 1,966 2,155 2,431 2,769Intangible Assets 0 1,077 1,410 1,410 1,410 1,410 1,410 1,410 0 0 1,410 1,410 1,410Other Assets 1,561 574 537 537 537 537 537 537 1,414 1,467 537 537 537Total Non-Current Assets 3,537 3,610 4,306 4,366 4,421 4,486 4,564 4,642 3,626 3,433 4,366 4,642 4,979Total assets 38,960 38,889 39,090 40,423 41,622 44,203 42,646 44,834 25,257 37,741 40,423 44,834 48,965Accounts payable 2,336 2,090 2,961 2,442 2,317 2,573 2,914 2,915 2,758 2,194 2,442 2,915 3,160Other current liabilities 4,191 8,055 4,279 4,400 4,170 4,619 5,221 5,204 3,915 3,807 4,400 5,204 5,652Total current liabilities 6,527 10,231 7,327 6,929 6,574 7,279 8,222 8,206 6,674 6,068 6,929 8,206 8,898Other LT liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0Total Long Term liabilities 868 781 781 781 781 781 781 781 868 868 781 781 781Total Liabilities 7,395 11,013 8,108 7,710 7,355 8,060 9,004 8,987 7,542 6,936 7,710 8,987 9,680Total Equity 31,562 27,873 30,978 32,709 34,263 36,140 33,639 35,844 17,715 30,802 32,709 35,844 39,282Total Liabilities & Equity 38,960 38,889 39,090 40,423 41,622 44,203 42,646 44,834 25,257 37,741 40,423 44,834 48,965

Figure 10: MStar�operating metrics Revenue by product (NT$mn) 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2009 2010F 2011F 2012F 2013FHandsets 646 893 1,155 1,560 1,450 1,703 2,205 2,604 0 1,151 4,254 7,962 11,476LCD Monitor 1191 1,086 1,090 1,026 970 1,040 1,095 1,068 5,250 5,301 4,392 4,174 4,050LCD TV 5,869 5,807 6,430 6,149 5,754 6,234 6,755 6,321 21,507 25,118 24,255 25,064 24,988STB 264 292 352 571 628 759 961 1,004 111 839 1,479 3,352 6,257Other (GPS, RFID) 237 273 300 285 288 331 364 346 844 1,187 1,094 1,328 1,218Total Revenue (NT$mn) 8207 8,351 9,327 9,590 9089 10,068 11,380 11,343 27,712 33,595 35,474 41,880 47,989Handset Units (mn) 7 11 15 20 19 21 24 25 0 10 52 90 123Handset ASPs (US$) 3.09 2.93 2.76 2.62 3 3 3 3 3.62 2.79 2.96 3.10

Handset Revenue (NT$mn) 646 893 1,155 1,560 1,450 1,703 2,205 2,604 0 1,151 4,254 7,962 11,4762.5G units (mn - for all below) 7.2 10.5 14.5 19.9 19.0 20.2 21.8 19.3 0.0 10.1 52.0 80.3 92.6TD-SCDMA units 0.0 0.0 0.0 0.0 0.0 0.2 0.9 2.3 0.0 0.0 0.0 3.4 13.5WCDMA units 0.0 0.0 0.0 0.0 0.0 0.5 1.7 3.9 0.0 0.0 0.0 6.0 17.4Feature phone units 7.2 10.5 14.5 19.9 18.9 19.9 21.5 20.4 0.0 10.1 52.0 80.7 99.2Smartphone units 3.1 2.9 2.8 2.6 2.5 2.4 2.3 2.2 0.0 3.6 2.8 2.4 2.0FX Rate (NT$/US$) 29.3 29.0 28.9 30.0 30.0 30.0 30.0 30.0 33.1 31.4 29.3 30.0 30.0

Source for all the above charts: Company data, Credit Suisse estimates

17 November 2011

MStar Semiconductor (3697.TW / 3697 TT) 5

Display business provides the base MStar is a Taiwan-based fabless semiconductor company that came into being in 2002 when the display and RFID divisions split off from System General Technology (now part of Fairchild), an analog design house. Wayne Liang, one of the four co-founders, remains the president of the company, while the other three have now assumed consulting roles in the company (Steve Yang, former CEO; Sterling Smith, former R&D leader; and Henry Yung, R&D manager). Much of the core R&D management team at MStar started at Texas Instruments. The company retains an engineering focus, with 66% of its 2,900 staff in R&D and 5% with a PhD and 75% with a Master�s degree.

MStar�s initial core competencies were an analog to digital converter and a silicon technology for displays, which the company later used to break in and eventually dominate the TV and monitor controller IC markets. The company is now moving beyond that, using its competencies in integration, analog to digital control and multimedia processing to enter the handset baseband, GPS, set-top and RFID markets.

Figure 11: MStar�product overview Category % of sales Description Applications Customers Competitors

LCD TV 68.4% Mstar offers a complete digital TV controller integrating broadcasting, Internet, and set-top functionalities.

TVs Samsung, LG, Panasonic, Skyworth, Hisense, TCL

Mediatek, Novatek, Realtek, STM, Sunplus, Trident, Zoran, HiSilicon

LCD monitor 12.4% An SoC for monitors that perform s scaling, deinterlacing, and im age processing.

LCD monitors Samsung, Dell, HP, Lenovo, Philips, ViewSonic, AOC

Realtek, STM, Pixelworks

Handset baseband

12.0% An integrated m obile chipset and protocol stack to process voice com mands and run the handset software.

Handsets Tianyu, Wingtech, Longcheer, Micromax, Sm art, Karbonn, Zen, Videocon, Venera

Mediatek, Spreadtrum , Qualcom m, Broadcom , Marvell, ST-Ericsson, Intel/Infineon, Coolsand

Set-top box 4.2% An SoC that combines demodulation and back-end image processing for cable and free to air set- tops.

Set-tops Broad-base Broadcom, STM, Ali, Sunplus, Hi Silicon

GPS 2.0% A chipset that allows navigation using the GPS and GLONASS satellite networks.

PnDs, handsets, consumer products.

Various ODMs CSR/SIRF, Mediatek, Broadcom

RFID 1.0% A technology that uses radio waves to transfer data from an electronic tag in an object to a reader to identify and track the objec t.

Portable 2-Way Radios

Broad-base TI, Atmel, Cypress, ON Semi, Triquint, NXP, STM, Freescale

Source: Company data

MStar�s product mix this year is still heavily loaded towards display�with about 70% LCD TV controllers and 12% monitor controllers. Beyond that, handsets and set-tops have emerged in the past 18 months to drive 12% and 4% of sales, respectively, with GPS and RFIDs remaining small niche product segments. A profile of MStar�s product mix shows display should remain a mature business with new product areas driving the growth.

Figure 12: MStar�product mix weighs towards display (2011)

Figure 13: MStar�growth driven by product-line expansion

LCD Monitor

12%

Handsets

12%

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3%STB4%

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69%

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MStar has 66% of its 2,900 staff in R&D

17 November 2011


Monitors now a mature and stable business Monitor controllers was one of MStar�s initial success areas. The company used its low-cost integrated Tsunami product line to capture a 60% market share by 2008 from established incumbents Genesis Microchip (now acquired by STM) and Realtek. MStar was challenged and lost a suit to Genesis but later settled and signed a royalty-paying license agreement that allowed it to ship products.

The business is now mature, with market share between MStar, STM, Novatek and Realtek stable and market growth tied to the mature PC monitor business. MStar retains a stable 60% share by shipping to all of the top monitor manufacturers, including Samsung, LG, ACO, Philips, ViewSonic, Dell, Lenovo and HP.

We model sales slightly down the next few years as single-digit unit growth is more than offset by about 10% annual price erosion. Price reductions on similar products is greater, but a shift to higher frame rates, 3D processing and more advanced image processing supports blended pricing. The company notes it is shipping inside every 3D monitor and has shifted into higher-end monitor markets requiring advanced imaging such as medical. With sales flat to down in a growing business, we expect monitors to decline from the current 12% of sales to 6% of sales by 2015.

Figure 14: Monitor sales now flattening out Figure 15: Monitors becoming a smaller driver of sales

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Digital TV leadership intact MStar extended its success in monitors into Digital TV, focusing on offering a high level of customisation and software support to entrench itself in OEM and ODM platforms. MStar has been increasingly integrating more, starting with a scaler and de-interlacer, then adding video decode, image processing, HDMI/DVI controllers, audio processors and support for higher frame rates and 3DTV.

The DTV space continues to see new content adders that support blended pricing. MStar�s TV controller ranges from US$6 to US$14-15, with average pricing still in the US$7-8 range. The current trends involve adding 3DTV, which often requires higher MHz processor (up to 1GHz), timing controller integration, addition of connectivity and shift to higher speed frame rate conversion (120/240 Hz refresh rates).

Monitor controller was MStar�s first high-volume product group, but is now only about 10% of sales

DTV is a strong product line for MStar but is now getting mature

17 November 2011


Figure 16: Digital TV ICs continuing to add new functionality 2007 2008 2009 2010 2011 2012 2013 2014 2015

Tuner

Wireless networking

Wired networking

Bigger CPU up to 1GHz

3DTV

TCON Integration

Frame rate conversion/MPEG 4

MPEG-4 Integrated

MPEG-2 Integrated

Source: DisplaySearch

MStar has also created its branded product MStar Connected, which brings together its catalogue of chipset suites, a wide portfolio of software and rapidly growing library of content, applications and widgets:

■ HBBTV solution: MStar is leading the development of Hybrid Broadcast Broadband TV (HbbTV), a solution that allows TVs to receive content from both the cable broadcast network and internet network. MStar acquired a team of engineers from Pleyo that had developed an HbbTV web browser based on Webkit (Apple�s open source web engine) and add-on widgets. MStar is now delivering solutions to the market, partnering with Toshiba for its new TL and RL series for Europe that uses MStar�s motion compensation technology, DVB-T2 demodulator and SoC controller with the Toshiba Places portal for video-on-demand and internet services. Separately, MStar partnered with Skyworth and Shanxi Broadcast and TV Network Group to deliver e-commerce and entertainment.

Figure 17: MStar is leading in bringing hybrid (HbbTV) connected TV platforms delivering broadcast and internet content to the TV display

Source: HbbTV.org

MStar is leading in bringing together hybrid connected TV systems, combining broadcast and internet content

17 November 2011


■ On demand solutions: MStar has added software to support premium software and services over its connected TVs. The company partnered with Acetrax premium service to deliver movies to rent or buy over the TV without a subscription. MStar also integrated in support for Vudu�s connected TV streaming movie service and RoxioNow�s library of TV and movies.

■ Connected TV interface: MStar partnered with Thinking Screen Media to create an AppChannel with user interface and applications from third-party content providers.

■ High-quality audio: MStar integrated dbx-tv�s audio product suite to enhance TV audio. The dbx enhancement allows for automatic volume control and compensates for deficiencies from small or incorrectly placed speakers.

■ Gaming direct to the TV: MStar is incorporating a higher-end processor and graphics engine to run gaming using the TV processor rather than a proprietary game console. MStar worked with Antix Game Service and integrated is software client on its platform to enable high-quality games to run on TVs and set-tops.

■ DLNA support: MStar integrated the AwoX�s DLNA technology into its platform. The DLNA component gives MStar�s chipset the capability to play back content available on any DLNA server on the local network and serve content to the rest of the network.

■ Secure content: MStar has also added additional security features. The company has added Civolution�s PayTV watermarking core on its chipset. The watermarking technology puts a unique mark on each video content so that illegally copied content is more easily traceable.

MStar should benefit from the rise of Smart TV services, which will likely create more barriers to the TV platform and require higher performance silicon controllers and wired/wireless connectivity chipsets. DisplaySearch estimates connected TV integration has reached 30% in 2011 and 3D TV only 10%. The scale-up of these features allow bundling of more capable image processing and connectivity to support pricing.

Figure 18: Connected TV penetration steadily rising Figure 19: 3D TV growing to 40% penetration by 2015E

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By enhancing its silicon and software platform, MStar has consolidated its market share. Based on our estimate for 110 mn unit shipments in 2010, we believe MStar had 60% of the DTV market share. In 2011, we estimate the company will ship 120-125 mn units, maintaining its market share. The chipset landscape has consolidated as smaller stand-alone suppliers (Genesis, Pixelworks, Silicon Optix, Sunplus, Trident, Zoran) have struggled to maintain their development cost and a competitive cost structure with larger or Asia-based fabless companies coming closer to OEMs.

We now believe that MediaTek and MStar together are approaching an 80% market share, allowing the landscape to grow into a more mature and stable phase. MStar generates about 40-45% of its TV sales from Korean brands (Samsung and LG) and about 35-40%

Smart TV raises barriers and ASPs for the DTV controller maker by increasing value-added software and connectivity

MStar has about 60% market share in DTV controller ICs

17 November 2011


from Chinese brands (Hisense, Skyworth, TCL, Konka, Changhong) and growing share in Japanese brands including Sony and Toshiba.

For MStar, we project market share in DTV controllers remaining close to 60% but dropping from a peak of 75% of sales in 2009 to 45% of sales by 2015 as newer product categories grow. Revenue should hold stable near 2011 levels in the next few years as modest unit growth offsets price erosion.

Figure 20: LCD TV unit growth slowing Figure 21: LCD controller falling as a % of MStar�s sale

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MStar�s earnings are still sensitive to the DTV market. We estimate each incremental 5 mn units for the market will drive NT$0.40 potential upside for MStar�s earnings, given its high market share and each 1% higher market share above our 58% base case should be an additional NT$0.31 EPS.

Figure 22: MStar�earnings sensitivity to DTV industry growth and market share (NT$) 2012 Sensitivity DTV market size and (YoY)DTV market size / share 6% 9% 11% 14% 16% 19%

YoY $15 217 222 227 232 237 242-5.0% 55% $13.16 $13.54 $13.92 $14.30 $14.68 $15.06-4.0% 56% $13.46 $13.84 $14.23 $14.62 $15.00 $15.39-3.0% 57% $13.76 $14.15 $14.54 $14.93 $15.33 $15.72-2.0% 58% $14.05 $14.45 $14.85 $15.25 $15.65 $16.05-1.0% 59% $14.35 $14.76 $15.16 $15.57 $15.98 $16.380.0% 60% $14.65 $15.06 $15.48 $15.89 $16.30 $16.721.0% 61% $14.95 $15.37 $15.79 $16.21 $16.63 $17.05

DTV market size: 5mn units = NT$0.40. 1% MStar share = NT$0.31

Mst

ar s

hare

Source: Company data, Credit Suisse estimates

17 November 2011


Handsets open up new opportunities MStar has been building its handset offering for the past few years, acquiring a series of design teams and IP blocks to assemble its solution. The company acquired several experienced design teams and IP blocks including:

■ Wavecom IPs, a wireless module developer with over 10 years of experience designing complete solutions for GSM;

■ TTP Com, which had developed software protocol stacks for handsets and had a team disbanded when Motorola exited the business; and

■ Digimoc, which was part of one of the original TD-SCDMA chipset developers known as Commit which was split and sold off to MStar.

MStar has pushed a differentiated strategy relative to MediaTek and Spreadtrum, looking to use its multimedia capability from its digital TV experience to offer a more advanced graphic user interface (GUI) and a more powerful Arm 9 core (versus Arm 7 for MediaTek and Spreadtrum�s low-end platforms). Through this processor, the company markets �KingMovie�, a high-quality video playback (720x480 resolution) with its proprietary video codec and a 3D mobile user interface. MStar started its initial push with feature phone platforms ranging from US$2.50 to US$4.00 to support up to 5 MP capabilities. The company is now just starting to integrate the RF transceiver with the MSW8532.

Figure 23: MStar�product roadmap Chipset Key Features 1H09 2H09 1H10 2H10 1H11 2H11 1H12

HSDPA Smartphone Cortex A, 800MHz-1GHz, Android 2.2 MSW8675

TD-SCDMA Smartphone Cortex A, 800MHz-1GHz, Android 2.2 MSW8675

Smart feature phone ARM9 286MHz, BB, PMU, 5 MP, RFID, Wifi/GPS MSW8535N MSW8538H

Mid-range feature phone ARM9 208MHz, BB, PMU, 3MP cam MSW8535 MSW8533 MSW8533N

Low-end feature phone ARM9 156MHz, BB, PMU, 2MP cam MSW8533C MSW8532

Source: Company data.

The company has design wins with a number of mid-tier Chinese and Asian brands and design houses including K Touch, Wingtech, Longcheer, Micromax, Spice, Karbonn, Videocon, IMO, Venera, Smart and Zen. The handsets to date are feature phones running on GSM with 2.4-3.2" screens, Bluetooth and proprietary operating systems.

Figure 24: MStar�2.5G feature phone design wins Micromax X550 Videocon V1531 IMO G11 Karbonn K9

ImageTechnology GSM GSM GSM GSMHSDPA No Yes Yes YesBand 900/1800MHz 900/1800MHz 900/1800 MHz 900/1800 MHzOperating System Proprietary Proprietary Proprietary ProprietaryPixels 240x400 240x320 240x320 240x320Connectivity Bluetooth Bluetooth Bluetooth, FM, ATV BluetoothCamera 2 MP 1.3 MP 1.3 MP 1.3 MHzProcessor 208 MHz 208 MHz 208 MHz 208 MHzDisplay 3.2" 2.4" 3.2" 2.4" Source: Company data.

MStar has the assembled key IPs for its handset baseband platform

17 November 2011


On top of its platform, the company markets its King Smart platform for mobile downloads from an applications store. MStar has partnered with China Mobile Games and Entertainment (CMGE) to run CMGE games on top of the MStar baseband platform. CMGE has 27 mn paying users per year for its mobile games. MStar also partnered with GAIA Holdings, the parent company of iaSolution, which will integrate Java engine functionalities (stock monitoring, email exchange, web browsing, online applications) on MStar�s smart feature phone chipset platform.

MStar is also assembling the connectivity building blocks. The company is an early supplier of near field communications (NFC) chipsets, a technology that allows data connections between two devices close together without pairing and at much lower power. MStar is also developing a supply agreement with Tianyu for an Android NFC smartphone to assist China UnionPay in promoting NFC mobile payments.

Feature phones growing off a low base After two years of limited success in 2008-09, MStar has seen a good volume ramp up in the past four quarters, growing its volume from 10 mn units in 2010 to 50 mn units in 2011. The ramp up has been steady through the year, with 7 mn in 1Q11, 10.5 mn in 2Q11, 14.5 mn in 3Q11 and has potential to reach 20 mn units in 4Q11. At this run rate, the company will still be just shy of a 10% market share of emerging market platforms.

Figure 25: MStar�just starting to penetrate emerging market handsets

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Our base case for 2012 assumes a 7% industry share in feature phones and a 15% price erosion. We estimate each additional 1% industry share of 12 mn units will result in an additional NT$0.61 EPS and each 5% swing in pricing will have a NT$0.24 impact.

MStar is one of the first Asian vendors with an NFC connectivity chipset

MStar�s feature phone units have expanded from 10 mn in 2010 to 50 mn in 2011

17 November 2011


Figure 26: MStar�earnings sensitivity to feature phone units and pricing (NT$) 2012 Sensitivity Feature Phone units and shareFeat. Ph and smartphone units 57 69 81 93 104

$15 5% 6% 7% 8% 9%0 0% $12.01 $12.62 $13.23 $13.84 $14.459 1% $13.64 $14.24 $14.85 $15.46 $16.07

15 2% $14.77 $15.38 $15.99 $16.59 $17.2021 3% $15.90 $16.51 $17.12 $17.73 $18.3428 4% $17.04 $17.64 $18.25 $18.86 $19.4734 5% $18.17 $18.78 $19.39 $19.99 $20.6040 6% $19.30 $19.91 $20.52 $21.13 $21.74

YoY growth 10% 32% 55% 78% 101%Feature phone share: +1% or 12mn units: +NT$0.61 EPS / +1% smartphone share: +NT$1.14 EPS

Smar

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Android smartphones starting in 2012 MStar now has two 40nm 3.75G smartphone basebands (one with HSPA+ / WCDMA, another with TD-SCDMA/TD-HSPA) with an integrated 1GHz ARM Cortex A9 sampling with customers. We expect the company to ramp up these in 2Q12 at the earliest, given it takes two quarters to develop a mid-end smartphone). The company will be attempting to start at 1 GHz, as MediaTek is starting to sample on its third-generation Android chipset at 1 GHz in late 4Q11 and Spreadtrum will be on its second-generation Android chipset by the end of 1Q12.

MStar�s market opportunity in smartphones is largely tied to penetration of emerging markets. A look at feature phone penetration from 1996 to 2001 shows feature phones took five years to grow from 31 mn units to 216 mn units�similar to smartphones taking 5 years from 2006 to 2011 to grow from 37 mn units to 234 mn units. Feature phones did have a brief dip in 2001/02 (post tech bubble, pause before colour screens/cameras). Tracing this penetration forward, we could see 500-600 mn units by 2015, with a global recession being a swing factor.

To better gauge the smartphone potential for the Asian chipset vendors, we look at their share penetration history in feature phones. If penetration matches feature phones, the Asian vendors would reach 100 mn shipments per quarter in 1Q15, 3 ½ years into the ramp up at a 40% industry share.

Figure 27: Emerging market FF ramp up vs smartphones (mn)

Figure 28: Modelling slightly faster penetration for smartphones for the Asian chipset vendors

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As MStar will see some penetration into developed market carriers, we also show a cross section of low-cost sub-US$200 smartphones as MStar�s potential market. In our global smartphone model, this category grows from 115 mn units in 2011 to 175 mn in 2012 and 480 mn in 2015.

Android EDGE smartphones start to sample in 1Q12 for 2H12 volume

17 November 2011


Figure 29: Sub-US$200 smartphone ramp up Figure 30: Emerging market smartphone market ramp up

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Small feature phone business means smartphones can have an impact quickly MStar was a much later entrant to feature phones than Spreadtrum and MediaTek were; so it has much smaller legacy handset revenue streams. We project feature phone share could level out around 10% with MediaTek keeping 65-70% and Spreadtrum taking 25%. Even if the larger players lose share, Coolsand would also enter the picture in 2012 and could capture some low-end volumes.

For smartphones, we model a ramp up to 9 mn smartphone units in 2012 (out of 90 mn) and 24 mn in 2013 (out of 123 mn). By 2015, we project the company passing its feature phone share, modelling about 15% based on 94 mn smartphone units.

Figure 31: MStar may succeed more on smartphones due to its late feature phone entry

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Due to blended pricing running at US$8-10 versus US$2.50-$3.00 for a feature phone platform, the company could achieve cross-over to over 50% of handset sales from smartphones by 4Q13.

Factoring in 24 mn smartphone units in 2013

17 November 2011


Figure 32: MStar�smartphone ramp up starts from 2012E Figure 33: 3G will quickly be the driver of handset sales

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Modest smartphone success has a notable impact We factor in MStar only gaining modest traction in a competitive space but even at that level having a sizeable impact. A 14% share of the Asian chipset market would scale handsets to 35% of MStar�s total sales by 2015, up from only 12% of sales in 2011.

Figure 34: Factoring only 13% Asian share by 2015E Figure 35: Handsets could still reach 30% of sales

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We estimate each additional 1% share in smartphones or 6 mn units will drive NT$1.14 incremental EPS for MStar.

Figure 36: MStar�earnings sensitivity to smartphone units and pricing (NT$) 2012 Sensitivity Smartphone units and EM shareSmartphone units/pricing 0 3 9 15 21

YoY $15 0% 0% 1% 2% 3%-27.0% $6.9 $13.23 $13.64 $14.58 $15.52 $16.46-22.0% $7.4 $13.23 $13.66 $14.67 $15.67 $16.68-17.0% $7.9 $13.23 $13.69 $14.76 $15.83 $16.90-12.0% $8.4 $13.23 $13.72 $14.85 $15.99 $17.12-7.0% $8.8 $13.23 $13.75 $14.95 $16.14 $17.34-2.0% $9.3 $13.23 $13.78 $15.04 $16.30 $17.563.0% $9.8 $13.23 $13.80 $15.13 $16.46 $17.78

EM Share: 0% 1% 3% 6% 8%Smartphone Units: 6mn = NT$1.14 EPS. Smartphone ASPs. 5% = NT$0.10 EPS

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About 13% chipset share in Asia would be 35% of sales for MStar

17 November 2011


Set-tops add a growth driver MStar provides single chips, demodulators and the set-top back-end across standard and high definition set-tops for free-to-air, payTV and operator businesses in cable, satellite and terrestrial. The company is a recent entrant (over the past two years) but is gaining good traction by porting its field-tested DTV stack. The company has enabled its technology for main regional standards including DVB-T, DVB-S2 and ISDB-T.

In the first phase of the company�s history, MStar was selling its HD solution into retail channels for free-to-air set-tops with price points under US$5. In the past year, the company has been integrating conditional access security algorithms into its firmware to penetrate HD cable operators at price points in the US$10-15 range. MStar now has integrated in five of the six CA vendors encryption algorithms. The company has been qualified in several China cable operators, a SouthEast Asia operator and Taiwan Broadband Corporation.

The set-top business is split between Broadcom and STM which have high market share at the cable vendors and emerging market suppliers, including Hi Silicon, ALi and SunPlus in addition to MStar. MStar is a new entrant, so it has a small market share in this category.

The set-top business is on track to almost double from NT$800 mn in 2010 to NT$1.5 bn in 2011 and we project sales to again double in 2012, modelling NT$3.4 bn in sales. The company should have an added boost by starting shipments into the cable space at higher ASPs. We factor in market share expanding to 25% of the industry by 2015, a level that would take set-tops to 15% of sales.

Figure 37: Set-top market penetration emerging Figure 38: Set-tops could approach 15% of sales

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MStar is growing its set-top business off a low base

CA set-tops started to ship at the end of 2Q11 at a higher ASP

17 November 2011


Solid growth and profitability outlook MStar has had mild growth and good control on its cost structure over the past few years. The company�s sales growth has entered a slower growth phase with mature TVs and monitors dominating revenues until handsets and set-tops grow bigger. At the same time, GMs have remained in the low-40% range and operating margins near 20%.

Figure 39: MStar�margins have remained stable

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The company is engaging in steady growth of its headcount to diversify into additional product areas including the engineering and support-intensive baseband category. Sales per employee have dipped from US$650,000 to US$600,000, as the company invests in new product areas, spending 15% of sales or about US$100,000 per R&D employee to grow the business.

Figure 40: MStar�sales efficiency dipping slightly to invest in new product areas

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MStar has maintained GMs in the low-40% range and operating margins near 20% since 2009

MStar has seen a slight dip in sales per headcount as it invests more in new product development

17 November 2011


MStar�s human resources concentrated in engineering. The company had 2,534 employees as of the end of 2Q11, with 66% from R&D and of that 80% with a Master�s or a PhD degree.

Figure 41: MStar�employee mix weighs towards R&D Figure 42: MStar�R&D engineers possess advanced degrees

R&D Staff66%

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Source: Company data Source: Company data

MStar: 3Q11 delivered upside; 4Q11 guided flat MStar�s 3Q11 results had slight upside, and on 8 November, management guided for in-line 4Q11 results. The company�s 3Q11 sales grew 12% QoQ to NT$9.3 bn, GMs were at the high-end of 40-42% guidance at 42.1%, driving EPS to NT$3.06. Management has guided for in-line 4Q11 results: -3% to +3% QoQ revenue growth with GM guidance remaining 40-42% as low-margin handsets should grow fasters than overall sales.

Figure 43: MStar�summary of CS� 3Q/4Q11 and 2011-13 estimates 3Q11 4Q11 1Q12 2011 2012 2013

(NT$ mn) Actual Guidance CS Street Guidance CS Street CS Street CS Street CS StreetNet sales $9,327 NT$8.8-$9.2bn $9,590 $9,332 NT$9.3-$9.9bn $9,089 $8,905 $35,474 $35,455 $41,880 $40,929 $47,989 $47,367Chg 11.7% +5-10% 2.8% 1.6% -3% to +3% -5.2% -4.6% 5.6% 4.7% 18.1% 15.4% 14.6% 15.7%GM (%) 42.1% 40-42% 41.9% 40-42% 41.8% 41.9% 41.6% 41.5%R&D 1,247 1,259 1,247 4,961 5,233 5,719 SG&A 973 23-25% 978 23-25% 968 3,445 4,061 4,458 Op. M (%) 18.3% 15-19% 18.6% 18.2% 15-19% 17.5% 20.0% 18.2% 18.5% 19.4% 19.0% 20.3% 19.2%Net income 1,618 1,731 1,619 1,554 1,558 6,291 6,180 7,853 7,506 9,327 8,652

EPS (NT$) $3.06 $3.27 $3.09 $2.94 $2.96 $11.89 $11.99 $14.85 $14.26 $17.64 $16.92

P/E Multiple 15.0 14.8 12.0 12.5 10.1 10.5

Source: Company data, Credit Suisse estimates, Bloomberg consensus

Growth in 3Q11 was led by newer product areas. We believe wireless sales grew about 30% QoQ as units grew to 14.5 mn. Set-tops also grew about 20% QoQ to NT$352 mn or 4% of sales as the company�s conditional access HD set-tops began to ship into a European and Latin American cable operator. The mature business also saw seasonal growth, with LCD TV +11% QoQ while monitors were flat.

Engineers represent 66% of the company�s workforce

3Q11 results had slight upside; 4Q11 has been guided (8 November) for in-line results

Growth is being driven by the newer product segmentshandsets and set-tops

17 November 2011


Figure 44: MStar�unit assumptions for 3Q11/4Q11 Sales by product 3Q11 4Q11E 1Q12E 2011F 2012FNT$mn Actual New New New New CommentsHandset units (mn) 14.5 19.9 19.0 52.0 89.7 Market share growing off a low baseHandset ASPs (US$) $2.76 $2.62 $2.55 $2.79 $2.96 ASPs up in 2012 from smartphonesWireless 1,155 1,560 1,450 4,254 7,962 Strong growth penetrating the market QoQ and YoY 29% 35% -7% 270% 87%LCD TV 6,430 6,149 5,754 24,255 25,064 Unit growth is modest QoQ and YoY 11% -4% -6% -3% 3%Monitors 1,090 1,026 970 4,392 4,174 Mature units and stable share QoQ and YoY 0% -6% -5% -17% -5%Set-tops 352 571 628 1,479 3,352 Designs wins at cable operators QoQ and YoY 21% 62% 10% 76% 127%Other 300 285 288 1,094 1,328CS Total Revenue 9,327 9,590 9,089 35,474 41,880 QoQ and YoY 12% 3% -5% 6% 18%


For 4Q11, guidance is overall flat QoQ, with LCD TV and monitors down mildly and set-tops and handsets continuing to see solid growth off a lower base. We project handset sales rising another 35% QoQ and units rising to 20 mn units or 3% of the industry and 7% of the Asian brand share.

MStar results and guidance in line with its peers MStar�s sales growth in 3Q11 was 12% QoQ, near MediaTek�s +11% QoQ but lagged Spreadtrum, which grew 15% QoQ due to its concentrated revenue in wireless. MStar�s baseband shipments are more dependent on its own share than the market at this stage, with unit growth at 38% QoQ versus MediaTek at 21% and Spreadtrum at 19%. We believe ASPs for MStar still lag due to less 3G or smartphone business. Forward guidance was between peers at -3% to +3% QoQ versus MediaTek�s -2% to +5% QoQ and Spreadtrum�s +2 to +5% QoQ. MediaTek still retains 300 bp higher GMs than MStar although due to higher opex intensity it has 350 bp lower operating margins than MStar.

Figure 45: MStar�3Q11 comparisons with MediaTek and Spreadtrum (US$ mn)

P&L Metrics MStar Mediatek SpreadtrumTotal Sales $322.7 $808.9 $184.8 QoQ change 11.7% 11.4% 15.4% YoY change -0.9% -17.1% 92.0%Forward Sales (QoQ) -3% to +3% -2% to +5% +2% to +5%Gross Margin % 42.1% 45.1% 41.8%Op Margin % 18.3% 15.8% 21.4%Baseband metrics MStar Mediatek SpreadtrumBaseband Units 14.5 153.6 56.8 QoQ Change 38% 21% 19% YoY Change 383% 15% 119%Baseband ASPs $2.8 $3.8 $3.3 QoQ Change -6% -4% -3% YoY Change -28% -23% -12%Baseband Revenue $40.0 $582.2 $184.8


For the 2012-15 period, we believe TVs and monitors will see flat to slightly down revenue streams. The growth engine will increasingly come from handsets due to the much larger size from that end-market, with set-tops also driving incremental growth.

MStar growing in line with its peers in 2H11

17 November 2011


Figure 46: MStar�sales growth led by handsets and set-tops through 2015E NT$mn unless noted 2009 2010 2011F 2012F 2013F 2014F 2015FFeature phones (mn) 0.0 10.1 52.0 80.7 99.2 97.4 88.8ASPs (US$) $0.00 $3.62 $2.79 $2.36 $2.00 $1.71 $1.45Smartphones (mn) 0.0 0.0 0.0 8.9 24.2 50.8 94.0ASPs (US$) $0.00 $0.00 $0.00 $8.36 $7.58 $6.68 $5.93Handset Revenue 0 1,151 4,254 7,962 11,476 15,171 20,595LCD TV 21,507 25,118 24,255 25,064 24,988 24,851 24,202LCD Monitor 5,250 5,301 4,392 4,174 4,050 3,833 3,628STB 111 839 1,479 3,352 6,257 7,153 7,296Other (GPS, RFID) 844 1,187 1,094 1,328 1,218 992 808Total Revenue 27,712 33,595 35,474 41,880 47,989 52,001 56,529GM % 42.9% 42.3% 41.9% 41.6% 41.5% 41.3% 40.9%Op M% 20.2% 20.7% 18.2% 19.4% 20.3% 19.9% 19.2%EPS $12.98 $13.40 $11.89 $14.85 $17.64 $18.67 $19.63


Strong balance sheet MStar�s fabless model, strong display share and profitability have lifted its balance sheet.

Figure 47: MStar�balance sheet summary Balance Sheet (NT$ mn) 3Q11A 2Q11 Diff % 3 Yr Avg +/- Avg

Cash and Investments 24,854 26,485 -6% 18,338 6,517Total Debt 868 868 0% 1,276 -408Net Cash 23,986 25,617 -6% 17,061 6,925Net Cash/Share 45.37 48.45 -3.08 34.27 11.10

Accts. Receivable 5,408 4,331 25% 4,653 755Receivable Days 53 47 6 52 1

Inventory 4,052 3,906 4% 3,893 159Inventory Days 68 74 -6 75 -6

Accounts Payable Days 50 40 10 53 -3Cash Conversion Cycle 71 82 -10 74 -2

SH Equity 30,978 27,873 11% 23,547 7,431Book Value / Share 58.59 52.72 5.87 47.56 11.04


The company exited 3Q11 with NT$24 bn net cash and investments or NT$45 cash per share (about 25% of market cap). Inventory dropped from 74 days to 68 days, below its long-term target levels. Overall cash conversion cycle was in line with history at 71 days.

Figure 48: MStar�historical inventory days Figure 49: MStar�historical accounts receivable

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MStar has 25% of its market cap in cash

17 November 2011


Free cash flow solid The company has also generated consistent positive free cash flow due to its good profitability and small requirements for capex only on buildings and engineering tools. We estimate the company will generate NT$9-11 bn free cash flow or NT$16-20 in FCF/share over 2011-13, reflecting a 12-15% FCF yield. The company targets a 75% payout rate, which should also place its dividend yield at 5% in 2012 and 6% in 2013. We expect the company to also use its balance sheet to invest in additional IP and design teams and support the share price with buybacks.

Figure 50: MStar�generates solid positive FCF: A 13-15% FCF yield Annual (NT$mn) CY07 CY08 CY09 CY10E CY11E CY12E CY13E CY07-13E AvgRevenue 12,563 15,177 27,712 33,594 35,474 41,880 47,989 24,904Capital spending -285 -681 -1,113 -156 -236 -419 -480 -494Capex/Revenue (%) 2.3% 4.5% 4.0% 0.5% 0.7% 1.0% 1.0% 2.4%Dep and amort 391 669 890 1,077 1,291 1,282 1,281 864Depr/Revenue (%) 3% 4% 3% 3% 4% 3% 3% 3.5%Operating cash flow 3,220 3,310 7,662 5,196 8,905 8,178 10,257 5,659Free cash flow 3,504 3,991 8,775 5,352 9,142 8,597 10,737 6,153

FCF and Dividend Yields CY07 CY08 CY09 CY10E CY11E CY12E CY13E CY07-13E AvgFCF / Share (NT$) 12.44 13.32 19.34 10.97 17.28 16.26 20.31 15.70FCF Yield (%) 7.0 7.5 10.9 6.2 9.7 9.1 11.4 8.8FCF / EV (%) 5.0 5.7 12.5 7.6 13.0 12.3 15.3 10.2Dividend per share (NT$) 2.83 10.00 8.92 11.14 8.22Pre-Dividend close (NT$) 146.50 178.00 178.00 167.50Dividend Yield (%) 1.6% 6.8% 5.0% 6.3% 4.9% Source: Company data, Credit Suisse estimates

Free cash-to-enterprise value is 12-15% from 2010 to 2012E allowing a solid 6% dividend yield

17 November 2011


Valuation remains reasonable We initiate coverage on MStar with an OUTPERFORM rating and NT$223 target price, based on 15x 2012E EPS of NT$14.85, in line with its Asian and overseas peer average. We believe MStar is an attractive investment due to its potential upside to grow handsets and set-tops, stable and profitable margin profile and cash flow and valuation support.

Figure 51: MStar�valuation versus its Taiwanese peers Stock prices in local currency (NT$/US$)

Price Mkt Cap EV/Sales (x) P/E Multiple (x) P/B Multiple (x)Company Ticker 11/16/2011 (US$mn) 2010 2011 2012 2010 2011 2012 2010 2011 2012

Select Asian fabless semiconductorsMStar 3697.TW 175 3,123 2.1 1.9 1.6 13.1 14.7 11.8 2.8 2.8 2.6MediaTek 2454.TW 306 11,886 2.3 3.2 2.7 10.8 23.4 20.0 3.0 3.2 3.2Spreadtrum SPRD 28.96 1,386 3.5 1.7 1.3 23.1 11.3 9.7 n.a. 5.0 3.4Realtek 2379.TW 49 795 0.9 0.9 0.8 14.2 14.3 12.7 1.4 1.5 1.4Median 2.2 1.8 1.4 13.6 14.5 12.3 2.8 3.0 2.9Mean 2.3 1.9 1.6 16.0 16.4 14.1 2.2 3.2 2.7High-growth semiconductorsBroadcom BRCM 34.99 17,166 2.4 2.1 1.8 13.0 12.4 12.7 3.3 3.4 2.6Marvell MRVL 14.68 9,037 2.8 1.9 2.1 14.9 9.0 10.3 2.2 1.8 1.9Silicon Labs SLAB 43.75 1,804 3.4 3.5 3.2 18.8 25.2 21.8 3.1 3.2 3.0Median 2.8 2.1 2.1 14.9 12.4 12.7 3.1 3.2 2.6Mean 2.9 2.5 2.4 15.6 15.5 14.9 2.8 2.8 2.5


CS HOLT® arrives at an even higher valuation We use CS HOLT, a CS valuation tool that derives the stock price based on a company�s cash flow return on investment (CFROI®) and asset growth. The default setting, which fades away high return companies long-term towards an average return warrants a NT$186 stock price based on consensus EPS and NT$293 based on IBES sales and EBITDA expectations. Based on our modelled sales growth, EBITDA and investment plans through 2015E, CS HOLT yields a valuation of US$238. See figure 52.

Figure 52: CS HOLT valuation supports further upside for MStar to NT$238 Semiconduc tors Price: 176.00 (Nov em ber 11, 2011)

Warranted P ri ce : 238.42 TWD (35%)Market Cap : 93.853 TWD

Source: Company data, Credit Suisse HOLT®

Initiate with an OUTPERFORM and a NT$223 target price

CS HOLT suggests a slightly higher valuation of US$238, based on our growth and profitability assumptions

17 November 2011


Investment risks MStar is subject to several risks that could meaningfully impact the business outlook and share price.

A more complete financial release would improve MStar�s financial reporting MStar�s results release at its investor conference includes four headline income statement numbers and two balance sheet items�inventory and receivables. The company later releases full financials to the Taiwan electronic reporting system. We would encourage management to release the full unaudited income statement and balance sheet at the investor conference consistent with disclosure from the Asian foundry and back-end companies and overseas peers. The initial statement release now requires investors to make assumptions about financial items including R&D, SG&A, tax rate, total assets, liabilities and shareholders equity, lowering the accuracy of future financial modelling.

Revenue concentration on display segment and a small group of customers MStar generates 80% of sales from display controllers for TVs and monitors, making it highly sensitive to a small group of customers from this end market. With 46% of its sales from its two largest customers in 2010 (we believe the Korean TV set makers), the company would face risk if it lost meaningful share at either of these customers. The company should diversify its sales as it grows handsets, although we note that this customer base also has volatile order patterns and can be highly price sensitive.

Figure 53: MStar has a high degree of revenue contribution (NT$)

NT$k 2007 2008 2009 2010 1-3QCompany Amount % of sales Amount % of sales Amount % of sales Amount % of sales

A 1,843,926 14.7 3,883,481 25.6 6,143,605 22.2 4,946,410 19.4B 1,306,831 10.4 1,014,281 6.7 2,905,906 10.5 2,290,185 9.0UL TRA 1,240,807 9.9 968,630 6.4D 1,217,582 9.7 2,448,016 16.1 5,346,346 19.3 6,794,572 26.7E 1,145,875 9.1 1,121,745 7.4 1,032,369 3.7 969,740 3.8F 1,090,836 8.7 1,123,421 7.4 2,849,162 10.3 2,013,078 7.9G 727,630 5.8 590,374 3.9 1,566,459 5.7 1,042,971 4.1H 665,146 5.3 345,153 2.3TITANIC 360,697 2.9 348,223 2.3J 288,779 2.3 461,827 3.0 951,171 3.4 1,052,270 4.1K 1,424,990 5.1 976,083 3.8L 1,098,476 4.0 769,895 3.0M 903,519 3.3 615,203 2.4Others 2,675,340 21.3 2,871,512 18.9 3,489,532 12.6 3,996,016 15.7Total sales 12,563,449 100.0 15,176,663 100.0 24,222,003 87.4 21,470,407 84.3


Inventory cycle risk Semiconductor suppliers face risk inherent to their position at the bottom of the supply chain. While they must be prepared to supply into the seasonally strong end of the year, they also are prone to sales slowdowns when channel inventories build to abnormally high levels. The Chinese handset and display customer base in particular could have growth spurts before the February, May and October holidays that can lead to an inventory correction in the aftermath.

Foundry manufacturing risk MStar outsources all of its manufacturing to foundry partners including TSMC for its advanced products and GlobalFoundries Singapore for its mature products and also outsources its back-end assembly and test to ASE and SPIL. The company is reliant on its partners for capacity availability and manufacturing execution and could face hardship in a severe earthquake in Taiwan.

MStar�s local customer base creates a high degree of sales volatility

MStar is subject to risks from inventory cycle, foundry execution issues and pricing pressure

17 November 2011


Pricing pressure The intense competitive environment, combined with (and, in some instances, stemming from) overcapacity in the semiconductor sector, could lead to significant pricing pressure in handset and display components and cause a sudden and sharp downward surprise to sales or margins.

Ownership structure MStar�s ownership is fragmented, with only 1% in direct management and director names. The other ownership is split between major funds (18%), Taipei Fubon (9%) and QFII ownership which has increased from 34% to 46% since the December 2010 IPO.

Figure 54: MStar�small management and director holdings

Figure 55: MStar�foreign ownership is now about 47%

Taipei Fubon Bank8.75%

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Financial summary Figure 56: MStar�income statement, 2009-13E (NT$ mn)

Summary Income Statement 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2009 2010F 2011F 2012F 2013F

Net Sales 8,207 8,351 9,327 9,590 9,089 10,068 11,380 11,343 27,712 33,594 35,474 41,880 47,989 Sequential Change 1.0% 1.8% 11.7% 2.8% -5.2% 10.8% 13.0% -0.3% Y/Y Change -2.1% 8.9% -0.9% 18.0% 10.7% 20.6% 22.0% 18.3% 82.6% 21.2% 5.6% 18.1% 14.6%Cost of Goods Sold 4,818 4,803 5,401 5,572 5,286 5,869 6,649 6,649 15,825 19,394 20,595 24,452 28,077 Gross Profits 3,388 3,548 3,925 4,018 3,803 4,199 4,732 4,694 11,886 14,200 14,880 17,428 19,912 Gross Margin 41.3% 42.5% 42.1% 41.9% 41.8% 41.7% 41.6% 41.4% 42.9% 42.3% 41.9% 41.6% 41.5% Operating Exp. Promotion 396 390 518 520 515 525 568 562 899 998 1,824 2,170 2,413 % of Sales 4.8% 4.7% 5.6% 5.4% 5.7% 5.2% 5.0% 5.0% 3.2% 3.0% 5.1% 5.2% 5.0% Operating Exp. Administrative 326 381 456 458 453 462 490 485 1,088 1,517 1,621 1,891 2,044 % of Sales 4.0% 4.6% 4.9% 4.8% 5.0% 4.6% 4.3% 4.3% 3.9% 4.5% 4.6% 4.5% 4.3% Operating Expense R&D 1,218 1,238 1,247 1,259 1,247 1,272 1,364 1,351 4,313 4,715 4,961 5,233 5,719 % of Sales 14.8% 14.8% 13.4% 13.1% 13.7% 12.6% 12.0% 11.9% 15.6% 14.0% 14.0% 12.5% 11.9%

Total Operating Exp 1,939 2,009 2,220 2,237 2,215 2,259 2,422 2,398 6,300 7,230 8,406 9,294 10,176 Income from Operations 1,449 1,539 1,705 1,781 1,588 1,939 2,310 2,296 5,586 6,970 6,474 8,134 9,736 % of Sales 17.7% 18.4% 18.3% 18.6% 17.5% 19.3% 20.3% 20.2% 20.2% 20.7% 18.2% 19.4% 20.3%Non Operating Income 98 125 33 100 100 100 100 100 (408) 184 356 400 400 Net Investment Income/ (Loss) - - 2 1 1 1 1 1 4 3 3 3 Pretax Income 1,547 1,664 1,740 1,882 1,689 2,040 2,410 2,397 5,177 7,158 6,832 8,537 10,139 % of Sales 18.8% 19.9% 18.7% 19.6% 18.6% 20.3% 21.2% 21.1% 18.7% 21.3% 19.3% 20.4% 21.1%Income Taxes Exp. /(Gains) 115 154 121 151 135 163 193 192 362 620 541 683 811 Tax Rate 7.4% 9.2% 7.0% 8.0% 8.0% 8.0% 8.0% 8.0% 3.0% 8.7% 7.9% 8.0% 8.0%Net Income before Extraordinaries 1,432 1,510 1,619 1,731 1,554 1,877 2,218 2,205 4,815 6,537 6,292 7,854 9,328 Minority Interest (0) 0 0 0 0 0 0 0 - (0) 1 1 1 Extraordinaries - - - - - - - - - - - - - Net Income after Extraordinaries 1,432 1,510 1,618 1,731 1,554 1,877 2,217 2,205 4,815 6,537 6,291 7,853 9,327 % of Sales 17.4% 18.1% 17.4% 18.0% 17.1% 18.6% 19.5% 19.4% 17.4% 19.5% 17.7% 18.8% 19.4%Dividend to Common Share Holders - - 4,804 - - - 4,718 - 1,057 4,804 4,718 5,890 Net EPS (diluted) 2.70 2.86 3.06 3.27 2.94 3.55 4.19 4.17 12.98 13.40 11.89 14.85 17.64Share Count 529 529 529 529 529 529 529 529 454 488 529 529 529

Bonus expense 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E M 2009 2010F 2011F 2012F 2013FCOGS 54 57 62 66 59 71 84 84 154 248 239 298 354Sales and marketing 46 48 52 55 50 60 71 71 130 209 201 251 298G&A 14 15 16 17 16 19 22 22 41 65 63 79 93R&D 172 181 194 208 186 225 266 265 487 784 755 942 1,119

Total bonus expense 286 302 324 346 311 375 443 441 812 1,307 1,258 1,571 1,865


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Figure 57: MStar�balance sheet, 2009-13E NT$ mn 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2009 2010 2011 2012 2013

Cash, Cash Equivalent 14,604 15,606 15,918 25,212 25,566 26,485 24,591 26,080 27,741 28,907 25,487 27,985 13,896 25,212 26,080 27,985 30,738 Inventories 3,727 5,209 5,610 4,381 4,283 3,906 4,052 3,969 3,765 4,502 5,465 5,101 3,077 4,381 3,969 5,101 5,530 Account receivables 4,830 4,804 5,221 4,109 4,950 4,331 5,408 5,255 4,980 5,517 6,236 6,215 3,873 4,109 5,255 6,215 6,750 Other current assets 744 2,531 2,637 605 624 557 733 754 715 791 895 892 785 605 754 892 968 Total current asset 23,904 28,149 29,385 34,307 35,422 35,278 34,785 36,057 37,201 39,717 38,082 40,193 21,631 34,307 36,057 40,193 43,986

LT investment - - - - - - 264 264 264 264 264 264 - - 264 264 264 Fixed Assets 2,183 2,213 2,241 1,966 1,976 1,960 2,095 2,155 2,211 2,276 2,354 2,431 2,211 1,966 2,155 2,431 2,769 Intangible Assets - 1,090 - - - 1,077 1,410 1,410 1,410 1,410 1,410 1,410 - - 1,410 1,410 1,410 Other Assets 1,581 477 1,452 1,467 1,561 574 537 537 537 537 537 537 1,414 1,467 537 537 537 Total Non-Current Assets 3,764 3,780 3,693 3,433 3,537 3,610 4,306 4,366 4,421 4,486 4,564 4,642 3,626 3,433 4,366 4,642 4,979

Total assets 27,668 31,929 33,078 37,741 38,960 38,889 39,090 40,423 41,622 44,203 42,646 44,834 25,257 37,741 40,423 44,834 48,965

Accounts payable 3,097 3,563 3,221 2,194 2,336 2,090 2,961 2,442 2,317 2,573 2,914 2,915 2,758 2,194 2,442 2,915 3,160 ST interest bearing Liabilities 69 2,001 1,946 67 - 87 87 87 87 87 87 87 - 67 87 87 87 Other current liabilities 3,773 3,696 3,426 3,807 4,191 8,055 4,279 4,400 4,170 4,619 5,221 5,204 3,915 3,807 4,400 5,204 5,652 Total current liabilities 6,939 9,259 8,593 6,068 6,527 10,231 7,327 6,929 6,574 7,279 8,222 8,206 6,674 6,068 6,929 8,206 8,898

LT liabilities 868 868 868 868 868 781 781 781 781 781 781 781 868 868 781 781 781 Other LT liabilities 38 10 - - - - - - - - - - - - - - - Total Long Term liabilities 906 878 868 868 868 781 781 781 781 781 781 781 868 868 781 781 781

Total Liabilities 7,846 10,137 9,461 6,936 7,395 11,013 8,108 7,710 7,355 8,060 9,004 8,987 7,542 6,936 7,710 8,987 9,680 Share Capital 4,736 3,559 4,564 4,844 4,844 4,804 5,294 5,294 5,294 5,294 5,294 5,294 4,594 4,844 5,294 5,294 5,294 Share Premium & Other Reserves 6,903 10,595 9,595 16,844 16,844 18,411 17,638 17,638 17,638 17,638 17,638 17,638 6,431 16,844 17,638 17,638 17,638 Retained earnings 9,106 8,783 10,495 12,065 13,497 8,939 9,798 11,529 13,083 14,960 12,459 14,664 7,308 12,065 11,529 14,664 18,101 Treasury Stock 0 0 0 0 -961 -733 0 0 0 0 0 0 0 - - - - Other Equity -926 -1,150 -1,040 -2,951 -2,662 -3,547 -1,752 -1,752 -1,752 -1,752 -1,752 -1,752 -617 (2,951) (1,752) (1,752) (1,752) Total Equity 19,819 21,787 23,614 30,802 31,562 27,873 30,978 32,709 34,263 36,140 33,639 35,844 17,715 30,802 32,709 35,844 39,282 Minority Interest 3 5 3 3 3 3 4 4 4 4 4 4 5 3 4 4 4

Total Liabilities & Equity 27,668 31,929 33,078 37,741 38,960 38,889 39,090 40,423 41,622 44,203 42,646 44,834 25,257 37,741 40,423 44,834 48,965 Profitability RatiosReturn on Equity (ROE) 9.1% 6.7% 7.2% 5.1% 4.5% 5.4% 5.2% 5.3% 4.5% 5.2% 6.6% 6.2% 27.2% 21.2% 19.2% 21.9% 23.7%Return on Assets (ROA) 6.5% 4.6% 5.2% 4.2% 3.7% 3.9% 4.1% 4.3% 3.7% 4.2% 5.2% 4.9% 19.1% 17.3% 15.6% 17.5% 19.0%Return on Net Assets (RONA) 13.8% 8.9% 10.0% 12.5% 10.7% 12.2% 11.2% 12.1% 11.2% 12.3% 12.9% 13.1% 42.4% 52.2% 43.9% 46.6% 51.2%Return on Sales 21.4% 19.0% 18.2% 19.3% 17.4% 18.1% 17.4% 18.0% 17.1% 18.6% 19.5% 19.4% 17.4% 19.5% 17.7% 18.8% 19.4%

Efficiency RatiosAsset Turns (Annualized Sales / Assets) 1.2 1.0 1.1 0.9 0.8 0.9 1.0 0.9 0.9 0.9 1.1 1.0 1.1 0.9 0.9 0.9 1.0Days sales outstanding (DSO) 52.5 57.2 50.6 46.1 55.0 47.3 52.9 50.0 50.0 50.0 50.0 50.0 51.0 44.6 54.1 54.2 51.3Days of inventory 70.0 110.1 93.8 84.0 81.1 74.2 68.5 65.0 65.0 70.0 75.0 70.0 71.0 82.4 70.3 76.1 71.9Days of Payables 58.2 75.3 53.8 42.1 44.2 39.7 50.0 40.0 40.0 40.0 40.0 40.0 63.6 41.3 43.3 43.5 41.1Cash conversion cycle 64.4 92.0 90.5 88.1 91.9 81.8 71.3 75.0 75.0 80.0 85.0 80.0 58.4 85.8 81.1 86.8 82.1Working Capital $2,360 $3,284 $4,874 $3,028 $3,330 -$1,438 $2,867 $3,049 $2,886 $3,532 $4,373 $4,002 $1,062 $3,028 $3,049 $4,002 $4,350(Increase)/Decrease in working capital (1,596) (923) (1,590) 1,846 (302) 4,768 (4,305) (182) 163 (646) (841) 370 2,517 (1,966) (21) (954) (348)

Per Share ValuesBook Value per common share $40.61 $44.65 $48.39 $63.12 $59.62 $52.72 $58.59 $61.87 $64.81 $68.36 $63.63 $67.80 $39.04 $63.12 $61.85 $67.80 $74.30Cash per common share $29.93 $31.98 $32.62 $51.66 $48.29 $50.09 $47.01 $49.83 $52.97 $55.17 $48.71 $53.43 $30.63 $51.66 $49.81 $53.43 $58.64Net Cash per common share $28.01 $26.10 $26.85 $49.75 $46.65 $48.45 $45.37 $48.19 $51.33 $53.53 $47.06 $51.79 $28.71 $49.75 $48.17 $51.79 $57.00


17 Novem

ber 2011

MStar Sem

iconductor (3697.TW

/ 3697 TT) 26

Figure 58: MStar�cash flow statement, 2009-13E (NT$ mn) 1Q11 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2009 2010 2011 2012 2013Net income 1,432 1,510 1,618 1,731 1,554 1,877 2,217 2,205 4,815 6,537 6,291 7,853 9,327

Depreciation & Amortization 305 330 345 310 314 321 324 323 890 1,077 1,291 1,282 1,281 Dec (inc)-A/R (840) 619 (1,078) 153 275 (536) (719) 20 (1,930) (237) (1,146) (961) (535) Dec (inc)-Inventory 98 377 (147) 83 204 (737) (962) 364 (1,355) (1,303) 412 (1,132) (429) Inc (Dec)-A/P 141 (246) 871 (519) (126) 256 342 0 2,372 (568) 248 472 245 LT investment loss (gain) - - - (1) (1) (1) (1) (1) (42) - (1) (3) (3) Investment disposal loss (gain) 25 13 36 - - - - - 13 (93) 73 - - Others 387 399 851 100 (191) 372 499 (14) 2,899 (217) 1,738 666 371 Operating Cash Flow 1,548 3,002 2,497 1,859 2,029 1,551 1,700 2,897 7,662 5,196 8,905 8,178 10,257

Sale(Pur) of ST Inv. - - - 632 - - - - Sale(Pur) of LT Inv. - - (264) (1) (1) (1) (1) (1) - - (265) (3) (3) Sale of FA - - 0 7 0 0 - - Capital Spending (25) (62) (53) (96) (91) (101) (114) (113) (1,113) (156) (236) (419) (480) Others (276) (401) (558) (275) (278) (285) (289) (287) (741) (1,134) (1,510) (1,139) (1,138) Investing Cash Flow (302) (463) (875) (371) (370) (387) (403) (401) (1,215) (1,291) (2,011) (1,561) (1,622)

Inc (Dec) of Debt (67) - - - - - - - 868 67 (67) - - Bonds Issued (Redeemed) - - - - - - - - - - - - - Treasury Stock Dec(Inc) (961) (733) (309) - - - - - - - (2,004) - - Proceed from new issue - - - - - - - - - 8,185 - - - Dividend paid - - (4,804) - - - (4,718) - - (1,057) (4,804) (4,718) (5,890) Others - - - 0 (0) - - - - (0) 0 (0) - Financing Cash Flow (1,028) (733) (5,113) 0 (0) - (4,718) - 868 7,194 (6,874) (4,718) (5,890)

Exchange influence 260 (813) 1,631 - - - - - 255 (192) 1,078 - -

Change in Cash Flow 478 993 (1,860) 1,487 1,660 1,164 (3,421) 2,496 7,570 10,908 1,098 1,899 2,746 Cash equivalent - beginning 24,804 25,282 26,275 24,415 26,080 27,741 28,907 25,487 7,082 13,896 24,804 26,080 27,985Cash equivalent - end 25,282 26,275 24,415 26,080 27,741 28,907 25,487 27,985 13,896 24,804 26,080 27,985 30,738

Operating cash per share $2.92 $5.68 $4.72 $3.52 $3.84 $2.93 $3.22 $5.48 $16.89 $10.65 $16.84 $15.47 $19.40

FCF per share $2.88 $5.56 $4.62 $3.33 $3.67 $2.74 $3.00 $5.27 $14.43 $10.33 $16.39 $14.68 $18.49


17 November 2011

MStar Semiconductor

(3697.TW / 3697 TT) 27

Companies Mentioned (Price as of 16 Nov 11) Advanced Semicon. Engr. (2311.TW, NT$27.80, OUTPERFORM, TP NT$34.00) Ali Corp (3041.TW, NT$31.80) Atmel Corporation (ATML, $10.31) Broadcom Corp. (BRCM, $35.95, OUTPERFORM, TP $45.00) CSR (CSR.L, 182 p) Cypress Semiconductor Corp. (CY, $19.47, NEUTRAL, TP $24.00) Dell Inc. (DELL, $15.63, UNDERPERFORM, TP $16.00) Freescale Semiconductor Inc. (FSL, $13.36, RESTRICTED) Hewlett-Packard (HPQ, $28.24, NEUTRAL, TP $30.00) Hisense Kelon H (0921.HK, HK$1.52) Intel Corp. (INTC, $25.34, OUTPERFORM, TP $32.00) Konka (200016.CH, Rmb2.04, NOT RATED) Lenovo Group Ltd (0992.HK, HK$5.42, OUTPERFORM, TP HK$6.30) LG Electronics Inc (066570.KS, W66,000, NEUTRAL, TP W70,900) Marvell Technology Group Ltd. (MRVL, $15.08, OUTPERFORM, TP $22.00) MediaTek Inc. (2454.TW, NT$306.00, UNDERPERFORM, TP NT$306.00) Mstar Semiconductor (3697.TW, NT$175.00, OUTPERFORM, TP NT$223) Novatek Microelectronics Corp Ltd (3034.TW, NT$77.00, OUTPERFORM, TP NT$90.00) ON Semiconductor Corp. (ONNN, $7.98, NEUTRAL, TP $8.50) Panasonic Corporation (6752, ¥684, OUTPERFORM, TP ¥950, MARKET WEIGHT) Philips (PHG.AS, Eu14.16, OUTPERFORM, TP Eu16.00) Pixelworks, Inc. (PXLW, $2.07) QUALCOMM Inc. (QCOM, $57.40, OUTPERFORM, TP $70.00) Realtek Semiconductor (2379.TW, NT$49.00, UNDERPERFORM, TP NT$50.00) Samsung Electronics (005930.KS, W975,000, OUTPERFORM, TP W1,100,000) Sichuan Changhong (600839.CH, Rmb2.65, NOT RATED) Silicon Laboratories Inc. (SLAB, $43.75) Siliconware Precision (2325.TW, NT$28.35, OUTPERFORM, TP NT$36.00) Skyworth Digital (0751.HK, HK$4.24, OUTPERFORM [V], TP HK$7.00) Sony (6758, ¥1,308, RESTRICTED, MARKET WEIGHT) Spreadtrum Communication (SPRD.OQ, $29.29, OUTPERFORM, TP $39) STMicroelectronics (STM, $7.15) Sunplus Technology (2401.TW, NT$11.50) Taiwan Semiconductor Manufacturing (2330.TW, NT$75.40, OUTPERFORM, TP NT$79.00) TCL Communication (2618.HK, HK$4.54, NOT RATED) Texas Instruments Inc. (TXN, $31.15, OUTPERFORM, TP $40.00) Toshiba (6502, ¥313, RESTRICTED) Trident Microsystems Inc. (TRID, $0.22) TriQuint Semiconductor (TQNT, $5.01) United Microelectronics (2303.TW, NT$13.00, NEUTRAL, TP NT$12.60) Zoran Corp (ZRAN, $8.10)

Disclosure Appendix Important Global Disclosures Randy Abrams, CFA & Kevin Chen each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names.

17 November 2011

MStar Semiconductor

(3697.TW / 3697 TT) 28

3-Year Price, Target Price and Rating Change History Chart for 3697.TW 3697.TW Closing

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Closing Price Target Price Init iation/Assumption Rating

NT$

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

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17 November 2011

MStar Semiconductor

(3697.TW / 3697 TT) 29

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17 November 2011Asia Pacific/Taiwan

Equity Research

TC1583-new

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