Asia Pacific Equity Research

Nick LaiAC
Taiwan Daily Views (886-2) 2725-9864
nick.yc.lai@jpmorgan.com
May 04, 2011 J.P. Morgan Securities (Taiwan) Limited.

J.P. Morgan Daily Valuations

Recommendation/Forecast Changes
Hiwin (Overweight)
We upgrade to OW with 40% upside potential
William Chen, (886-2) 2725-9871

Results and Company Views

Chimei Innolux Corporation (Neutral)
Uncertainties cloud the near-term outlook - ALERT
JJ Park, (822) 758-5717
Quanta Computer Inc. (Overweight)
Strong 1Q11 beat. Cloud computing/ server the focus. - ALERT
Alvin Kwock, (852) 2800-8533 / Gokul Hariharan, (852) 2800-8564

Sector Research
Automobile Manufacture, Cement, Conglomerates & Multi-industry, Construction, Food Retailing, Tires
What do 1Q results say about 2H?: Think big and buy small: Taiwan SMCap strategy
Nick Lai, (886-2) 2725-9864 / Caren Huang, (886-2) 2725-9872
Shipping
Baltic Freight Indices: Week to 29th April
Corrine Png, (65) 6882-1514

Recommendation/Forecast Changes

Hiwin (Overweight)
We upgrade to OW with 40% upside potential
William Chen, (886-2) 2725-9871
• We upgrade to OW and raise our PT to NT$400, implying 40% upside potential: We expect earnings to rise by
125%Y/Y in 2011 and 47%Y/Y in 2012 due to aggressive capacity expansion and further market share gains. ROE could
reach around 50% in 2011-12 (v.s. 30% in 2010) due to margin improvement. We raise our PT to NT$400 (now Jun-12),
which is based on 20x forward EPS.
• Strong automation demand and market share gains could drive revenue growth by 70% Y/Y: We estimate Hiwin’s
2011 CAPEX will be NT$7B, double our previous estimate. We expect capacity to rise by 50- 60%Y/Y (back-end
loaded). In addition to solid China automation demand, we see further order transferring due to tight supply and power
outage concerns over Japanese competitors. We expect more to come when supply contracts (usually for one year)
between Japanese vendors and customers close one after another in coming quarters.
• ROE likely to hit 50% due to improving margins: We think ASP hike and better economies of scale will boost Hiwin’s
margins in coming years. From April 2011, Hiwin has raised product ASP back to the pre-financial crisis level and GPM
could reach 41%-42% in 2011 vs. 38% in 2010. On the other hand, Hiwin has shown good cost control capability in the
past decade, even during the financial crisis (Figure 1). We expect OPM to improve further by leveraging better
economies of scale. We forecast ROE to reach ~50% in the next two years, if there are no rights issues (Figure 2).
• EPS at NT$3.4 in 1Q11, improving Q/Q in 2011: Earnings were 50% higher than our expectation (Table 1). The
upside surprise mainly came from better capacity expansion and economies of scale. Operating income was at
NT$857MM, up 10%Q/Q and 185%Y/Y. Chairman guides revenue and earnings to improve quarter by quarter this year.
• Risks to our call: (1) Profit-taking could cause some short-term price correction. However, we will consider that as a
 buying opportunity given the strong growth outlook. (2) If supply chain disruption continues, it might delay customer
orders or Hiwin’s capacity expansion. We think this could be a short-term swing factor, if any, but should have limited
impact in the long term, given the solid capex demand.

Results and Company Views

Chimei Innolux Corporation (Neutral)

Uncertainties cloud the near-term outlook - ALERT
JJ Park, (822) 758-5717
• 1Q11 miss is largely expected: 1Q11 net loss is larger than our previous estimate and the street consensus, but one
noticeable takeaway is that CMI witnessed the first unit ASP increase in four quarters. This is in line with our view that
panel prices have started to recover on the back of improved supply/demand balance.
• 2Q11 margin turnaround could be slower than the industry average: CMI management expressed that 2Q11
should see double-digit shipment growth and slight UTR increase from 80-85% to high 80’s due to the seasonal
demand. On the flip side, CMI’s IT and TV ASP could remain flat Q/Q given the soft end-demand outlook. Per our check,
Samsung, LGD and AUO are all expecting the panel prices to improve in mid- 2Q11, but CMI might try to keep flat panel
pricing in order to gain customer orders. Cost reduction is also limited at 3%/quarter in 2Q11.
• Order transfers from Sharp may be limited: Contrary to market speculation, the Company also indicated that the
positive impact from Sharp production cut may still be limited at present given that it seems to be a demand-side issue
due to the Japan earthquake rather than supplyside issue due to component shortages. CMI may also take longer to see
any meaningful impact from its agreement with Sharp with regards to acquiring photo-alignment technology.
• Uncertainties regarding its touch panel business: CMI is still attempting to reach consensus among its Board
members to finalize the plan for the contemplated spin-off of its mobile business including touch panel operation. In
addition, the shipments for iPad 2 touch panels could be pushed back to 3Q11, hence CMI may only start to ship LCD
panels for iPad 2 in 2Q11. We believe the share price may not react to the strong demand for Apple products until these
uncertainties are resolved.
• Prefer AUO over CMI – We continue to prefer AUO over CMI given AUO’s better execution and stronger balance
sheet. As we indicated in our note “New share issuance to be negative catalyst” dated April 13, 2011, we believe the
high gearing ratio and GDR issuance could provide further risk to CMI in the near term.

Quanta Computer Inc. (Overweight)

Strong 1Q11 beat. Cloud computing/ server the focus. - ALERT
Alvin Kwock, (852) 2800-8533 / Gokul Hariharan, (852) 2800-8564
• Strong upside to consensus: We maintain our non-consensus OW on Quanta, and we believe street consensus is
subject to at least 10-15% upward revision post today’s earnings call, as a) notebook growth slows but margin
improvement is now clear; b) Quanta’s tablet shipment should top the other ODMs; c) data center opportunity is now
clear, and in fact mentioned in the earnings presentation for the first time.
• 2010 DPS/ 1Q11 EPS beats: 1Q11 net income is 48% ahead of our numbers. Even if we strip out Simplo disposal gain
(post tax NT$860mn), it still beat our number by 25%. 2010 net income is a miss, but what probably still matters by now
is cash dividend which is NT$3.6 (73% payout ratio, higher than our forecast at NT$3.4).
• Margin trend looks promising: GM/ OPM sharply expanded from 2.8%/ 0.7% in 4Q10 to 3.6%/ 1.5% in 1Q11. As price
hike was only effective from Mar onwards, we think Mar GM should easily go above 4%. Concurring Compal/ Wistron,
Quanta also says there is no more cut-throat competition in notebook.
• Lots of focus on cloud: Half of the questions during Q&A were centered on server business – understandably after the
Facebook announcement. Few things they say: a) current top line contribution is 3-5%, and will at least double this year,
this business comes with substantially better margin than corporate average; b) they have service/ consulting contracts,
and some also come with storage/ networking; c) they have a very long list of customers in this business already –
focusing on Internet/ Telecom globally, and enterprise datacenter in China

Sector Research

Automobile Manufacture, Cement, Conglomerates & Multi-industry, Construction, Food Retailing, Tires
What do 1Q results say about 2H?: Think big and buy small: Taiwan SMCap strategy
Nick Lai, (886-2) 2725-9864 / Caren Huang, (886-2) 2725-9872
• Tech vs. Non-tech: Analysis of all listed companies’ 1Q11 results in TWSE suggests that SMCap non-tech’s earnings
collectively have outperformed the tech sector massively. Of which, commodity (cement, rubber and petrochemical) and
consumer discretionary (retail, auto and tourism) recorded strongest YoY growth and most also outperformed the market
 YTD. This confirms our strategy view of OW consumer discretionary, petrochemical, financial and high-yield stocks but
avoid tech. Within our SMCap coverage, our expectations in 2H11 are:
1. Cement: Prices in the domestic market should increase gradually with improved demand (10% growth) while export
prices will sustain. In China, we are rather bullish and expect the sector to enjoy a multi-year re-rating. The sector
reached 66% YoY earnings growth in 1Q11. We like both TCC and ACC for their 5% yield.
2. Auto: Nearly 60% YoY sales volume growth in 1Q11 surprised the market and we believe this is a result of robust
discretionary spending and improving economy. We believe auto is undergoing a 4-5 years of secular growth trend
in 2008-2013 and expect overall sales volume to exceed 400k units again in 2012. Our top pick in the sector is
Yulon Motor.
3. Consumer: The sector’s earnings grew by 11% YoY in 1Q11 but with diversified performance between companies.
PCS, the leader in CVS business, attained 8% YoY growth while FEDS, the department store operator, delivered
28%, boosted by non-Opt items. Our economist recently raised Taiwan's GDP growth to 5.6% in 2011, citing solid
domestic demand and export growth. Our preferred pick is PCS.
4. Property: We recently downgraded the sector’s earnings and rating in strategy model portfolio. We forecast total
transaction volume will slip by 18% in 2011 simply due to prolonged negotiation and no consensus between buyers
and sellers -- buyers expect housing prices to fall while sellers still insist on price points. Both developers and real
estate agents could suffer from a declined sales-through or volume.
5. Industrial/ Conglomerate: We believe investors need to be selective given diversified earnings outlook. Here we
like Teco for its solid electric motor business and turning around in home appliance division.

Shipping
Baltic Freight Indices: Week to 29th April
Corrine Png, (65) 6882-1514
• The BDI rose marginally by 1% w/w, driven by stronger demand in the Pacific. Capesize and Panamax freight
rates strengthened but this was offset by slightly weaker Supramax and Handysize rates. Average daily earnings for
Capesizes rose another 16% w/w to c.$5.3K/day, still 84% below their 20-year average. Panamax earnings rose 3% w/w
to c.$9.4K/day, 43% below their 20- year average. However, Supramax and Handysize rates softened slightly, with both
indices down <1%. One 4-6M Capesize period fixtures was concluded at $12.0K/day, down 2% w/w vs. three done last
week. Meanwhile, the 1Y timecharter rate for Capesize fell 8% to $12,250/day w/w (source: Clarksons).
• Capesize ship chartering activity fell during the week which was flanked by two holidays: 21 Capesize vessels
were chartered in the spot market during the week (from 26 a week ago), down 19% w/w and 22% y/y. 95% will carry
iron ore (from 58% last week) and only 5% coal (from 38%). In Jan-Dec 2010, the cargo split was iron ore 75%, coal
20% and other 5%.
• China would be the dominant destination of these scheduled cargo shipments: 95% of the Capesizes were
chartered to ship these cargoes to China (vs. last week’s 62%), with the remaining 5% to Asia ex-China (from 23%) and
none to Europe (from 15%). In 2010, the split was China 67%, Asia 19%, Europe 11%, other 2%. Meanwhile, China’s
iron ore inventories fell 1% w/w but rose 1% m/m to 82.6MT, up 20% y/y.
• Aus-China’s share of shipping demand surged, accounting for 71% of the Capesizes chartered vs. 35% last week
and 40% in Jan-Dec 2010. Fourteen vessels were chartered to carry iron ore plus one for coal. Rio Tinto accounted for
57% (8 vessels) of the total, followed by BHP Billiton 13% (2 vessels). The average rate was c.US$8.2/ton, down 1%
w/w.
• Brazil-China’s share also picked up, accounting for only 19% of Capesizes chartered (from 8% a week ago). Rates
rose 3% w/w to $19.5/ton. In Jan-Dec 2010, the split was Aus-China 40%, Brazil-China 15%, other 45%.
• Port congestion eased: The number of Capesize vessels at anchorage fell 26% w/w to 90 vessels or c.7% of the
global existing Capesize fleet. Around 4% of the global dry bulk shipping fleet is at anchorage. Congestion details: 1)
Australia’s main coal/ore ports - 60 vessels (from 61 in the previous week) with another 107 vessels (from 111) expected
to arrive in the next 14 days. Waiting time: Dalrymple Bay 5-35 days with 18 vessels at anchorage (flat w/w); Newcastle
0-6 days with 7 vessels (flat w/w). 2) China’s major ore and coal berths – 24 vessels are at anchorage (from 31) with
another 80 vessels (from 50) expected to arrive in the next 14 days (source: Global Ports).
• More vessels are being scrapped: Year to date, 6.7MM dwt, or c.1.2% of the global bulk shipping capacity has been
scrapped. This is 253% higher y/y (based on the annualized 2011 number vs. 2010) and already exceeds the shipping
capacity scrapped in the whole of 2010 by 16%. Specifically, Capesize demolition amounted to 3.8MM dwt (+351% y/y
annualized), Panamax 1.2MM dwt (+429%), Handymax 0.6MM dwt (+379%), Handysize 1.1MM dwt (+58%). Demolition
prices are attractive vis a vis the current weak freight rate environment, up 21% y/y to $9.9MM, $6.4MM, $4.0MM for a
Capesize, Panamax, Handysize vessel respectively (source: Clarksons).
See the end pages of each individual note for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan 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.

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