摩根士丹利-亚太地区-半导体行业-大中华区半导体行业：铸造厂产能即将售罄-2019.12.3.pdf 37页

'December3,201908:00PMGMTGreaterChinaTechnologySemiconductors|AsiaMORGANSTANLEYTAIWANLIMITED+CharlieChanEQUITYANALYSTPacificCharlie.Chan@morganstanley.com+88622730-1725DanielYen,CFAEQUITYANALYSTFoundryCapacityGettingSoldDaniel.Yen@morganstanley.com+88622730-2863JeffHsuRESEARCHASSOCIATEOut;UpgradeIndustryViewtoJeff.Hsu@morganstanley.com+88622730-2864AttractiveWe"vestartedtoseeorderoverflowsfromTSMCtosecond-tierfoundriesgiventhestronglogicsemidemand.WedoubleupgradeUMCandVanguardtoOW,andreiterateOWonGreaterChinaTechnologySemiconductorsAsiaPacificChipbondgivenattractivevaluation.IndustryViewAttractiveUpgradeindustryviewanothernotchtoAttractiveheadinginto2020:China"sWhat"sChangedFROMTOsemilocalizationwasthemainreasonweupgradedtheindustrytoIn-LinebackGreaterChinaTechnologySemiconductorsinearlySeptember.Sincethen,we"vealsoseenmoreupsideinsmartphonesemis,IndustryViewIn-LineAttractivedrivenbyAppleiPhone"sincreasedordersandMediaTek"ssharegainin5GSOC.Previously,ourfocusstockswereindustryleaderssuchasTSMC.However,recentlywe"vestartedtoseegrowingdemandintrailing-edgesemiconductors,Exhibit1:CompaniesFeaturedTableWhat"sChangedSummaryandbelieveitistimetodiversifyintosomesecond-tierfoundries,suchasUMC,TickerCompanyRatingPriceTargetRevisionEPSChangeNewOldNewOld%19E20E21EVanguard,andChipbond.Webelievethelogicsemiupcyclewillcontinueinto2303.TWUMCOU18.011.557%12%38%50%5347.TWOVanguardOU825549%1%13%24%6147.TWOChipbondOO777010%1%16%11%2020,assemifoundriesinAsiaaregettingfull.3034.TWNovatekOO2722605%0%4%4%CompaniesFeaturedNov-29PriceUpside/TickerCompanyRatingWhathastriggeredtherecent8-inchfoundrydemandsurge?CouldtherebeaPriceTargetDownside6147.TWOChipbondOW62.87723%3034.TWNovatekOW223.527222%waferpricehike?InDanielYen"sdisplaysemisreport,weprojectedsecular2303.TWUMCOW14.951820%6488.TWOGlobalWafersOW33138918%2454.TWMediaTekOW421.549016%growthofTDDI,AMOLED,andsuper-slimfingerprintsensors.Thetrendsinthese5347.TWOVanguardOW71.68215%2330.TWTSMCOW305.033911%newproducts–inparticular,super-slimfingerprintsensors–haveledtotight0981.HKSMICEW9.988.90-11%2408.TWNanyaTechUW71.263-12%5269.TWASMediaUW567399-30%capacityfor8-inchfoundryatTSMC,given4xlargerdiesize.Other8-inchorders,Source:Refinitiv,MorganStanleyResearchestimatessuchasLCDdriverICs,haveoverflowedtoUMC(secondsource)andthentoVanguard(thirdsource).Giventhe8-inchfoundrycapacityshortage,weexpectUMCtohikefoundrypricesin1Q20.12-inchtrailing-edgefoundrygettingfulltoo:ThestrongTDDIandAMOLEDdriverICdemandhasfilledTSMCandUMC’s80nmand28nmnodes.Amongall,Novatekhasreceivedthebestfoundrycapacityandpricesupport;hence,weraiseourpricetargettoNT$272.ChipbondisourcontrarianOWidea.WebelieveMorganStanleydoesandseekstodobusinesswiththatnextyeariPhoneSE2willcontinuetouseanLCDdisplay.WeforecastcompaniescoveredinMorganStanleyResearch.Asaresult,investorsshouldbeawarethatthefirmmayhaveaChipbond"sEPStogrowin2020vs.theStreet"sforecastofaY/Ydecline.WeconflictofinterestthatcouldaffecttheobjectivityofremainEWonSMICat1.4x2020eP/Bvs.3.7%ROE,whichisnotasattractiveasMorganStanleyResearch.InvestorsshouldconsiderMorganStanleyResearchasonlyasinglefactorinmakingUMC’s0.8xP/Bvs.8.8%ROE.theirinvestmentdecision.Foranalystcertificationandotherimportantdisclosures,Wherearerisks?Inventorypre-build,tradeuncertainty:However,wealsofindrefertotheDisclosureSection,locatedattheendofthisenddemandhealthyoverall.It"shardtopredictwhether/whenHuaweiwouldreport.+=Analystsemployedbynon-U.S.affiliatesarenotregisteredwithcutforecasts,givenweakoverseassmartphonesales,butthatcouldbeanentryFINRA,maynotbeassociatedpersonsofthememberandmaynotpoint.OurkeyUWsarestockswithstructuralissues:NanyaTech(ChineseDRAMbesubjecttoNASD/NYSErestrictionsoncommunicationswithasubjectcompany,publicappearancesandtradingsecuritiesheldbycompetition)andASMedia(AMDin-sourcingchipset).aresearchanalystaccount.1 InvestmentCase:DemandFlowingOuttoSecond-tierWaferFoundriesasLogicSemiCycleBoomContinuesUpgradingourGreaterChinaSemisindustryviewtoAttractive;timetodiversifytolaggardsWethinksecond-tierstocksshouldhavepricedinthetrendofChina"ssemilocalization–inparticularSMIC.RecentlyVanguardandUMCstockshavestartedtomove,givenmarketexpectationsregardingLCDdriverICdemandrecovery.However,wethinkthisisstillearlyinningsifwecomparetheirvaluationandsharepriceperformancetoindustryleaders.Let"stakealookatthetwo-yearsharepriceperformance(thepreviousupcyclewasaround2018):TSMCsignificantlyoutperformedsecond-tierstockssuchasUMC,SMIC,andVanguardinthepastcycle.Inthedisplaysemissupplychain,Novatek(theleader)outperformedChipbondandVanguard(foundrysubcontractors).Exhibit2:Semifoundrycyclesharepriceperformancecomparison;Exhibit3:Displaysemiscyclesharepriceperformancecomparison;TSMCoutperformedUMC,SMIC,andVanguardNovatekoutperformedChipbondandVanguard1402101301901201701101501001309011080709060705050Dec-17Feb-18Apr-18Jun-18Aug-18Oct-18Dec-18Feb-19Apr-19Jun-19Aug-19Oct-19Dec-17Feb-18Apr-18Jun-18Aug-18Oct-18Dec-18Feb-19Apr-19Jun-19Aug-19Oct-19TSMCUMCSMICVanguardVanguardChipbondNovatekSource:Refinitiv,MorganStanleyResearchSource:Refinitiv,MorganStanleyResearchAtpresent,wethinksomesecond-tierfoundrystocksareofferingevenmoreattractivetotalreturnpotentialthanindustryleaders.Ingeneral,Taiwanesestocksareofferingbetterdividendyieldsaswell–e.g.,GlobalWafers,WPG,andChipbond.UMC(doubleupgradetoOW,raisingpricetarget57%):Forexample,UMCistradingatonly0.8x2020eP/Bandoffering4.1%dividendyield.Weexpectapricehiketobethekeyre-ratingcatalyst.Vanguard(doubleupgradetoOW,raisingpricetarget49%):Structural8-inchwaferdemandispromptingcapacitytightnessacrosstheboard,andsemiinventoryisstabilizing.Vanguardistradingat3.8xour2020eP/Bwitha21%ROE,andweseemoreupsidesinceithaspreviouslytradedatwellabove4xforwardP/BwhenROEhasbeensustainedabove20%.2 Chipbond(OW,raisingpricetarget10%):Wealsothinkthere"samisconceptionfromtheStreetaboutChipbondstock.BearsarearguingforarevenueshortfallfromLCDiPhonesin2020,andsometechnologymigrationhiccupsfromChiponFilm(COF)migratingtoChiponPlastic(COP).Forourcontrarianview,pleaseseeChipbond:OLEDiPhoneLossshouldnotShadowOverallBusinessStrength;OW.Therecentcorrectionmakesthestockattractive,witha2020eP/Eofjust9.5xatourStreet-highEPSforecastofNT$6.57.Novatek(OW,raisingpricetarget5%):WebelievethefoundrytightnesswillhelpNovatektoexpanditsmarketshareandGMprofileforTDDIin2020.WethusraiseourpricetargettoaStreet-highNT$272,implying>20%upsidepotential.Ourearningsestimatesare15%higherthanconsensusfor2020and2021.OurbullcasevalueofNT$306bakesinhigherOLEDshipmentsfromanAppleprojectorderwinorlowerOLEDpanelmoduleyieldfromCOPmigration.TSMC(OW):Weseeupsidetoour1H20revenueforecast.Besidesfull7nmcapacity,trailingedgedemandisalsorecovering.2020eP/Bis4.8xwith24%ROE,andwefindthepremiumjustifiedgivenitsdominantpositioninlogicfoundries.GlobalWafers(OW):Spotpricesforwafersarestillata10%-15%discounttolong-termagreement(LTA)prices.However,wehavestartedtoseerecoveryforrawwaferdemandinboth8-inchand12-inch.Webelievethe12-inchrawwaferinventorywillreturntohealthylevelsin1Q20,and8-inchshouldfollowaround2Q20.Inaddition,GlobalWafersoffers>8%dividendyield.SMIC(maintainEW):SMIC"scapacityshouldalsobenefitfromthedemandrecoverythankstoemergingapplications.However,wefindvaluationlessattractive–2020eP/Bisalready1.4xvs.3.7%ROE.ThisisnotasattractiveasUMC’s0.8xP/Bvs.8.8%ROE.3 Exhibit4:P/Bvs.ROE:semifoundries5.0TSMC4.5WinSemi4.0Vanguard3.53.0ASMPacific2.52022.00MacronixEP/B1.5NanyaTechWinbondChipbondSMICASE1.0UMC0.50.00%5%10%15%20%25%30%2020EROAETaiwanDRAMCompaniesFoundryBackendCompanySource:CompanyData,MorganStanleyResearch(E)estimatesChina"ssemilocalizationand5GSoCtriggeredthelogicsemicycleturnChina"ssemilocalizationremainsthemaingrowthdriverofGreaterChinasemis.ThisseculartrendpromptedustoupgradeourindustryviewtoIn-LineinSeptember,althoughweviewedthetimingofarecoveryinthelogicsemicycleasunclear.GreaterChinaTechnologySemiconductors:Trendtowardslocalizationcreatesnewopportunities;upgradeTSMCtoOW(4Sep2019).Then,China"s5Ginfrastructurechipdesignshoweditselftobemoreviablethanexpected,thankstoitscollaborationwithTaiwanesefoundries.InSeptember,weinitiatedcoverageofKYECatOW:KingYuanElectronicsCoLtd:BeneficiaryofChinasemilocalizationin5Ginfra;OW(23Sep2019)Inanaccompanyingreport,wereiteratedourOWratingsonTSMCandWINSemi:China"sIndustrialEvolution:HowChinawillChipIn–SemiLocalizationfor5GInfrastructure(23Sep2019)WeagainreiteratethoseOWratings.Morerecently,wesingledoutAlchip,TSMCandKYECasthebestwaystoplayChina’slocalizationofCPUsandAIchipsinto2020.China"sLocalization:HowwillChinachipin?DevelopingCPUandAIsemidesignsforthelocalmarket(8Nov2019)4 Inthisreport,wepresentourcaseforupgradingourindustryviewanothernotch,toAttractive.Wearestillinthemiddleofalogicsemiupcycle5GsmartphoneSoCsareanotherkeylegforustoremainbullishonTSMCandMediaTek.Meanwhile,AppleiPhonesell-throughappearstobebetterthanexpected–Y/YgrowthiniPhoneshipmentshaveturnedpositivein4Q19.OurUSsemianalyst,JoeMoore,alsoturnedmorebullishrecentlyonNVIDIA.Ingeneral,wearestillpositiveonthemainlogicsemis(smartphonechipsets,CPUs,GPUs),whichhavefilledTSMC’s7nmand5nmleading-edgecapacity.Meanwhile,logicsemiinventorieshavegonedownfurtherafter3Q19results,andsohaveanalogIDMinventories.Exhibit5:Logicfabless–averageinventorydaystrendExhibit6:AnalogIDM–averageinventorydaystrend120.0140.0118117100.09398120.01091119182100.080.080.060.060.040.040.020.020.00.00.01Q133Q131Q143Q141Q153Q151Q163Q161Q173Q171Q183Q181Q193Q191Q133Q131Q143Q141Q153Q151Q163Q161Q173Q171Q183Q181Q19AnalogIDMaverageinventorydaysLogicFablessAverageinventorydaysSource:Refinitiv,MorganStanleyResearchSource:Refinitiv,MorganStanleyResearchExhibit7:LogicfoundryfabutilizationratehasbeenrecoveringExhibit8:iPhoneshipmentsY/Ytrend10%5%0%-5%-10%-15%-20%-25%Mar-16Sep-16Mar-17Sep-17Mar-18Sep-18Mar-19Sep-19Mar-20Source:Companydata,MorganStanleyResearchestimatesiPhoneshipmentsY/YSource:Companydata,MorganStanleyResearchestimates5 Now,trailingedgefoundrydemandisalsosurgingWeareseeingdemandimprovementandsomestructuralcontentincreasefortrailing-edgelogicsemis.Thetrendsinthesenewproducts–inparticularsuper-slimfingerprintsensors–haveledtotightcapacityfor8-inchfoundryatTSMC,given4xlargerdiesize.OthercommoditiessuchasLCDdriverICshavefinishedtheirinventorycorrection;CMOSimagesensorsbenefitfromphonecameraresolutionupgrades.Weexpect8-inchfoundryutilizationratestobehighin1H20(90%),andtheremaybeashortagein2H20.12-inchfabutilizationshouldremainabove90%through2020.Intermsofprofitability,trailing-edgefoundries"marginsarestillnotattheirpeaklevels,suggestingthatthereismoreupsidetocomeifdemandsurges.8-inchfabdynamicsSuper-slimfingerprintsensorsconsume4xlargerdiesize(meaning4xwaferconsumptionassumingthesamevolume).LargepanelLCDdriverICinventoryreplenishmenthasstartedin4Q19.AccordingtoChipbond,tTVdriverICfoundryordersdropped15%-20%Q/Qin3Q19giventhepessimisticmacrodemandoutlook.ThedriverICinventorymayhavereachedaninsufficientlevel,andthereforeNovatekhasstartedtoincreaseordersat8-inchfoundriesrecently.12-inchtrailingedgedynamicsAMOLEDdriverICsarethekeygrowthenginefor28nm.Samsung’s28nmfoundrycapacityisalreadyfull,soUMCbecomesthemajoroutsourcingfoundrysourceforAMOLEDdriverICs.NORFlashhasfilled55nmcapacityatUMCandSMIC.Wehaveseenpricehikesfor55nmfromSMIC.CMOSimagesensorsareabigfabfiller.Smartphonecameraresolutionupgradestriggerstrongdemandfor40nm-65nmnodes.Sony’sISPhasalsofilledTSMC’s22nmcapacity.TWScontrollerICs(28nm-40nm):TWSisprobablythefastest-growingendmarketin2019.ThecontrollerICsinsidealsoabsorbadditional28nm/40nmcapacityatTSMC,andwemaystarttoseethissemichipmigratingto12nmin2020.Exhibit9:TrailingedgewaferdemandbyapplicationandnodesFoundrynodeLegacydemandNewdemanddriverCapacitysituationPricehike?0.18um/0.13umlargerpanelDDI,opticalfingerprintsensorsuper-slimfingerprintsensorfullYes90nm/80nmdiscetesmarpthoheDDITDDIgettingfullhigherresolutionCIS,NORFlashin65nm/55nmNORFlash,CISsensorshortageYesTWShigherresolutionCIS,TWS40nmCIS90%utilizationcontroller28nm/22nmTVSoC,SSDcontrollerICAMOLED,ISP80%utilization16nm/12nm4Gsmartphone,networkingchip,BitcoinASIC5Gtransceiver90%utilizationSource:MorganStanleyResearchestimates6 Exhibit10:TSMC,UMC,SMIC:12-inchutilizationratetrendsExhibit11:TSMC,UMC,Vanguard:8-inchutilizationratetrends110%120%100%110%100%90%90%80%80%70%70%60%60%50%50%201420152016201720182019e2020e2021e201420152016201720182019e2020e2021eTSMCUMCSMICTSMCUMCVanguardSource:CompanyData,MorganStanleyResearchestimatesSource:CompanyData,MorganStanleyResearchestimatesExhibit12:Foundriesgrossmargincomparison60.0%50.0%40.0%30.0%20.0%10.0%0.0%1Q134Q133Q142Q151Q164Q163Q172Q181Q194Q19e3Q20eTSMCUMCVanguardSMICSource:CompanyData,MorganStanleyResearchestimates7 Globally,wehaven’tseenMCUandpowersemirecoveryyetOngeneralpurposeMCUs,MorganStanleyanalystCraigHettenbachpointedoutinhisMicrochipreportthattheDecemberquarterwasmuchworsethanStreetestimates,aswellasprevailingsentimentthatbusinessisstabilizing.Evenmanagementcommentedontheearningscallthatitwasa“false”bottomearlierintheyear,asfurtherdeteriorationindemandtakesatollintoyear-end.AccordingtoourEuropeansemiconductoranalyst,DominikOlszewski,Infineon’srevenueoutlookisfor5%growthin2020vs.2019(Septemberyear-end)comparedtoc.8-9%through-cyclegrowth.Infineonismorecautiousonindustrialendmarkets(e.g.,seeAsianmachinetoolorderweakness).Atpresentitisunclearwhetherthatguidanceisbasedonstructuralfactors/datapointsitcanseevs.expectationsofcyclicalrecovery.InfineonguideddownfortheDecemberquarterandF20guidanceimpliessupra-seasonal2Hsnapback.RecentlyforInfineon,c.30%ofEV-relatedproductsaleshavebeentoChina;itremainscautiousaboutashort-termrecoveryinChineseEVs.ChineseEVsubsidieshavebeencut,affectingrecentdemand.Exhibit13:GreaterChinasemis:dividendyieldrankingGlobalWafersCoLtd8.6%WPGHoldings7.2%ChipbondTechnologyCorp7.0%EgisTechnologyInc5.6%Novatek5.0%RealtekSemiconductor4.5%VanguardInternationalSemiconductor4.4%PhisonElectronicsCorp4.2%MacronixInternationalCoLtd3.6%TSMC3.3%UMC3.3%SiliconMotion3.1%NanyaTechnologyCorp.3.0%MediaTek2.6%ParadeTechnologiesLtd2.5%AspeedTechnology2.5%ASEIndustrialHolding2.4%ASMediaTechnologyInc2.4%ASMPacific1.8%WinbondElectronicsCorp1.5%WINSemiconductorsCorp1.5%ChunghwaPrecisionTestTech1.1%SilergyCorp.1.1%GlobalUnichipCorp1.1%SMIC0.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%2019DividendYield(%)Source:Refinitiv,MorganStanleyResearchestimates8 Exhibit14:GreaterChinasemis:Valuationcomptable3MAvg.MarketEnterpriseP/ERatio(x)EPSGrowthPEG(x)ROAEP/BRatio(x)EV/Sales(x)DailyPriceCurrPriceCap.ValueTradingTickerCompany11/28/2019encyTargetRating(US$M)(US$M)(US$M)20182019e2020e20182019e2020e20182019e2020e20182019e2020e20182019e2020e20182019e2020eFoundry2330.TWTSMC309.5TWD339.0O263,130245,340305.022.923.619.62%-3%21%9.8(7.7)1.022%21%26%4.85.34.87.37.06.15347.TWOVanguard71.1TWD82.0O3,8213,2138.819.020.420.837%-7%-2%0.5(3.0)(13.3)22%19%19%4.03.93.83.43.53.12303.TWUMC15.1TWD18.0O5,7975,15918.528.827.718.7-27%4%48%(1.1)6.90.43%3%5%0.90.90.91.01.11.03105.TWOWINSemi315.0TWD355.0O4,3804,04580.142.630.020.8-21%42%44%(2.0)0.70.512%17%22%5.34.94.37.15.84.80981.HKSMIC10.3HKD8.9E6,6791,54635.348.366.731.9-24%-27%109%(2.0)(2.4)0.33%2%4%1.21.21.23.63.83.3Mean:32.333.722.3-7%2%44%1.0(1.1)(2.2)12%13%15%3.23.23.04.54.23.7Median:28.827.720.8-21%-3%44%(1.1)(2.4)0.412%17%19%4.03.93.83.63.83.3Memory2408.TWNanyaTech71.7TWD63.0U7,1775,26440.55.618.015.9-4%-69%13%(1.6)(0.3)1.227%8%9%1.31.41.31.93.02.62344.TWWinbond17.8TWD19.5O2,3162,37713.59.434.824.622%-73%42%0.4(0.5)0.612%3%5%1.11.21.11.41.51.32337.TWMacronix33.6TWD38.0O2,0221,75863.16.816.912.961%-60%31%0.1(0.3)0.432%11%14%2.01.91.71.51.51.48299.TWOPhison292.0TWD359.0O1,8871,19312.813.314.612.9-25%-9%13%(0.5)(1.7)1.016%14%15%2.12.01.90.90.90.9SIMO.OSiliconMotionNULLUSD34.0U01,2559.90.00.00.039%-36%25%---22%12%15%2.42.92.72.43.02.5603986.SSGigaDevice166.8CNY208.0O6,6796,719190.4116.981.446.1-28%44%76%(4.2)1.90.621%26%36%22.518.213.621.015.010.1Mean:25.327.618.711%-34%33%(1.0)(0.1)0.622%12%15%5.34.63.74.84.13.1Median:8.117.414.49%-48%28%(0.3)(0.3)0.621%12%14%2.12.01.81.72.32.0Fabless2379.TWRealtek239.0TWD260.0O3,9812,92132.827.918.617.428%50%7%1.00.42.519%25%25%4.94.44.11.91.51.45269.TWASMedia581.0TWD399.0U1,1441,06511.136.532.025.5118%14%25%0.32.31.047%43%46%15.012.910.78.78.26.92454.TWMediaTek431.5TWD490.0O22,40618,099115.032.729.417.3-15%11%70%(2.2)2.60.28%8%13%2.52.32.12.32.21.9603160.SSGoodix195.6CNY240.0O12,45512,411127.6120.842.739.9-17%183%7%(6.9)0.25.720%41%34%21.314.912.523.414.011.23034.TWNovatek223.5TWD272.0O4,4593,81957.421.316.913.627%26%25%0.80.70.522%25%29%4.54.13.72.11.81.65274.TWOAspeed877.0TWD699.0E9809108.743.436.530.522%19%20%1.91.91.531%34%37%12.811.810.712.911.49.84966.TWOParade608.0TWD688.0O1,5651,3759.924.620.618.1-1%19%14%(29.4)1.11.322%22%22%4.94.33.84.03.63.23443.TWGUC267.5TWD265.0E1,1751,09117.536.352.731.816%-31%66%2.3(1.7)0.523%15%23%8.27.86.82.53.12.56415.TWSilergy902.0TWD470.0U2,6692,44719.545.237.736.20%20%4%NM1.99.116%16%15%6.35.65.17.97.36.56462.TWOEgis238.5TWD250.0E53549042.325.115.712.112%59%30%2.00.30.429%40%44%6.85.74.92.52.01.8603501.SSWillSemi125.9CNY109.0O8,1718,20578.6413.3133.848.1-10%209%178%(39.5)0.60.310%8%16%34.94.33.714.56.82.93661.TWAlchip222.0TWD269.0O43535342.652.733.222.6-17%59%47%(3.1)0.60.59%13%17%4.54.13.63.12.72.1Mean:73.339.226.114%53%41%(6.6)0.92.021%24%27%10.66.96.07.25.44.3Median:36.432.624.06%23%25%0.30.60.821%24%24%6.65.04.53.63.32.7Backend3711.TWASE77.0TWD79.0E10,71914,72519.313.019.012.5120%-32%52%0.1(0.6)0.212%8%11%1.51.41.31.21.11.0601231.SSUSI15.8CNY16.0O4,9094,36247.429.223.817.3-10%23%37%(2.9)1.10.513%15%18%3.73.32.90.90.80.76147.TWOChipbond62.6TWD77.0O1,3431,12912.39.09.911.0120%-9%-10%0.1(1.1)(1.1)17%14%13%1.51.41.41.81.71.7600584.SSJCET21.0CNY14.9U4,7995,725155.6NMNM51.3NMNMNMNMNMNM-9%-3%5%2.72.82.71.71.91.50522.HKASMPacific103.4HKD105.0O5,3744,79717.320.139.516.0-13%-49%146%(1.6)(0.8)0.118%9%20%3.53.43.21.92.21.96510.TWOCHPT918.0TWD890.0E98777730.642.047.534.2-8%-11%39%(5.1)(4.2)0.912%10%13%4.94.74.57.27.05.22449.TWKYEC37.5TWD43.0O1,5031,82217.225.615.811.3-22%62%40%(1.2)0.30.37%12%15%1.91.81.72.72.21.9Mean:23.125.922.031%-3%51%(1.8)(0.9)0.110%9%14%2.82.72.52.52.42.0Median:22.821.416.0-9%-10%39%(1.4)(0.7)0.312%10%13%2.72.82.71.81.91.7Others3702.TWWPG37.9TWD47.0O2,0864,0634.68.810.18.4-3%-13%20%(2.8)(0.8)0.414%11%13%1.21.11.10.20.20.26488.TWOGlobalWafers341.0TWD389.0O4,8663,76457.110.910.811.2146%1%-4%0.17.2(2.7)35%35%36%3.44.23.91.92.02.0Mean:9.910.49.871%-6%8%(1.3)3.2(1.1)25%23%24%2.32.62.51.11.11.1Median:9.910.49.871%-6%8%(1.3)3.2(1.1)25%23%24%2.32.62.51.11.11.1Source:Refinitiv,MorganStanleyResearchestimates9 StockstoavoidChina’smemorylocalizationalsoresultsinsomenegativeimpactonstockssuchasNanyaTech.ChinahasfurtherdevelopedDRAM/NANDtechnologybasedonpreviouslyacquiredforeigntechnologies.WethinkinvestorsmayunderestimateChina’scapabilityinmemoryproduction.CXMThassourceditsDRAMtechnologyfromQimonda.Thecompanymayimproveits19nmDRAMproductionyieldto60%in1H20,andaddmorecapacity.SpecialtyDRAMmarketplayerslikeNanyaTechfacetheearlyimpact.OnASMedia,weremaincautiousinviewofAMD’sin-housethreatin2020.Thecompanyhascontinuedtomissonearningsthisyear,yetitssharepricehasstillheldupquitewell,givenexpectationsthatthe500serieschipsetwouldrampupin4Q,aswellastheshortageofIntelCPUsrecently.Butwedon’tthinkthisissustainable–2020eP/Eisnow26x,andweviewAMD’sin-housethreatagreaterriskin2020.TheCPUshortagegapisaround5%forPCscurrently,butshouldeaseheadingintotheslowseasonin1Q20.Wherewecouldbewrong1.Smartphonesemisremainabigchunkofdemand.Risksincludedisappointing5Gsmartphonesell-throughand/orHuaweiordercutsgivenoverseassmartphonedemandweakness.2.China’slocalizationislesssuccessful.Forexample,deficiencyoflocallydesigned/madesemicomponentsresultsinmarketsharelossofChinesesystemcompanies.3.Inventorypre-buildfor5Gsmartphones,butsell-throughremainsuncertain.4.Prolongeddowncycleofautomobileandindustrialdemand,whicharealsomajorendmarketsfortrailingedgefoundrydemand(MCUsandpowersemis.)10 Backgroundcharts:foundryprocessroadmapTrailing-edgeprocessrefersto28nmandabovenodes.Currently,90nmnodesorbelowarefabricatedby12-inchwafers,with0.13umnodesoraboveby8-inchwafers.Exhibit15:Leading-edgefoundryprocessroadmapAdvancedLogic/FoundryCY201120122013201420152016201720182019e2020e2021OnwardIntel22nm14nm10nm7nmFinFETFinFETFinFET28nm20nm16nm10nm7nm7nm+5nm3nmFinFETFinFETTSMC16nm+12nm6nmFinFET22nm14nm10nm8nm7nm3nm32nm28nm5nmFinFETFinFETLPPLPPGAASamsung14nmLPU28FDS28FDS-RF28FDS-eMRAM18FDSSource:CompanyDate,MorganStanleyResearch(e)estimatesExhibit16:Trailing-edgefoundryprocessroadmapLegacyLogic/FoundryCY201120122013201420152016201720182019e2020e2021Onward7nmSMIC28nmFinFET14nm28nmHKC+FinFET40nm28nmHKC14LPP12LPGF22FDX12FDX28nm28nm14nmHLPHPC+FinFEUMC28nmHPCSource:CompanyDate,MorganStanleyResearch(e)estimatesExhibit17:TSMCcapacitybreakdownSource:CompanyDate,MorganStanleyResearch(E)estimates11 Exhibit18:TSMClogicseminodemigrationhistorySource:CompanyDate,MorganStanleyResearchestimates12 UMC:Trailing-edgeCapacityTightnessInSight;DoubleUpgradetoOWTrailing-edge12-inchwafercapacitygettingbusy,and28nmcouldbefullsoon:Logicwaferfoundrieshavestartedtorecoversincelate2QinresponsetoChina"ssemiconductorlocalizationefforts,andnowweseethisdemandflowingintoUMC.Inaddition,keycompetitorSamsung"s28nmcapacityhasstartedtobefilledbyitsin-housedemandforOLEDdriverICsandimagesensorISPs,causing28nmdemandoutflowintoUMC"sfab.Webelievethefaster-than-expectedrecoveryinUMC"sutilizationratesisstructural,drivenbyapplicationssuchasTDDIandOLEDdriverICsforNovatek,higherresolutionimagesensors,andincreasingshipmentofTWSearbudsforRealtek.WenowforecastthatUMC"sutilizationratecanreachnearly90%,anditsrevenuegrowthcouldexceed15%in2020.8-inchwaferpricehikeamidcapacityshortage:SimilartoVanguard,wearealsoseeingcapacitytightnessinUMC"s8-inchfabsafterTSMC"s8-inchfabturnedbusyaquarterago.Withlimitedsupplyincreasein8-inchcapacity,webelieveUMCwillbeabletohikeitswaferpricesgiventhecapacitytightnessforcustomerswithsmallervolume.Alongwiththehigherutilizationratein12-inchtrailingedge,thispricehikeshouldhelpimprovethecompany"smarginprofileandhenceitsearningsoutlook.AcquisitionofUSJCcouldallowUMCtocapturedemandupside:WehaveviewedUMC"sacquisitionofUSJCasapositive,andwenowturnevenmorepositiveastrailingedge12-inchcapacityturnstight.Eventhoughthefabiscurrentlyrunningatbelowcorporateaverageutilizationratesandonlyatbreak-evenlevels,webelievesynergieswillstarttomaterializeifautomotivedemandstabilizes.WethinkthatUMCwillgraduallybeabletotransfersomeofitsexcessorderstotheUSJCfab,thusbringingupthefab"sutilizationratesandprofitability.LawsuitagainstMicronthekeydownsiderisk:DespiteUMC"shealthyfundamentals,uncertaintiesaroundchargesfromtheUSDepartmentofJusticeoverhangtheshareprice.WeviewpotentialfinesasthekeyreasonwhyUMC"sstocktradesatjust0.8xP/Btoday.ThelawsuitcouldtaketimetofinalizeandUMChasnotissuedanycommentonthesituation.RaisingpricetargettoNT$18.0andupgradingtoOW:Inviewofahealthierdemandoutlookfrom2020,webelieveUMC"sP/Bshouldre-ratetoatleast1x,whichiswhatourpricetargetimplies.Webelievethecurrentvaluationisattractivegiventhesteadyoutlookforearningsandthusdividendpayout.13 UMC:EarningsEstimateRevisionsWeraiseour2019,2020,and2021EPSestimates11.9%,38.1%and49.7%,respectively:WeseeamassrecoveryinUMC"swaferdemand,mainlydrivenbyrisingdemandfordisplaysemisandopticalfingerprintsensors.Inaddition,theimprovedbusinessoutlookshouldallowUMCtoraiseitswaferpricingtoenhanceitsprofitability,andhelpfillthenewcapacityfromthenewlyacquiredJapanesefab,USJC,tohelpmakeitprofitableratherthanaburden.Wethereforeraiseourrevenueestimates11.0%for2020and15.6%for2021.Withhigherrevenuescale,wealsoraiseourgrossmarginandoperatingmarginassumptions.Exhibit19:UMC:Earningsestimaterevisions(NT$mn)New2019eOld2019eDiff.%New2020eOld2020eDiff.%New2021Old2021eDiff.%Netsales147,170144,1292.1%173,225156,07011.0%181,607157,10315.6%Grossprofit20,27619,6273.3%30,19724,79321.8%33,23325,23731.7%Operatingprofit4,5974,16210.5%13,6529,42744.8%16,04010,24356.6%Pretaxincome4,2403,79811.6%12,3308,23949.7%14,5378,90763.2%Netincome8,0077,15611.9%14,54910,53638.1%16,70111,15949.7%BasicEPS0.680.6011.7%1.230.8937.9%1.410.9449.7%DilutedEPS0.610.5511.9%1.110.8138.1%1.280.8549.7%MarginsGrossmargin13.8%12.8%17.4%17.2%18.3%16.5%Operatingmargin3.1%1.2%7.9%5.7%8.8%5.4%Pretaxmargin2.9%1.0%7.1%5.7%8.0%5.2%Netmargin5.4%3.6%8.4%7.0%9.2%6.4%Source:CompanyData,MorganStanleyResearch(e)estimatesExhibit20:UMC:Quarterlyfinancials(NT$mn)1Q192Q193Q194Q19e1Q20e2Q20e3Q20e4Q20e20182019e2020e2021eTotalRevenues32,58336,03137,73840,81839,21642,35746,26645,386151,253147,170173,225181,607SequentialChange-8.3%10.6%4.7%8.2%-3.9%8.0%9.2%-1.9%ChangevsYearAgo-13.1%-7.3%-4.2%14.9%20.4%17.6%22.6%11.2%1.3%-2.7%17.7%4.8%CostofSales(30,321)(30,379)(31,306)(34,888)(33,875)(35,246)(37,447)(36,461)(128,413)(126,894)(143,028)(148,375)GrossProfit2,2625,6526,4335,9305,3417,1128,8198,92522,84020,27630,19733,233GrossMargin6.9%15.7%17.0%14.5%13.6%16.8%19.1%19.7%15.1%13.8%17.4%18.3%TotalOpex(3,860)(3,891)(3,924)(4,005)(3,991)(4,098)(4,226)(4,230)(17,043)(15,679)(16,545)(17,193)PercentofRevenues11.8%10.8%10.4%9.8%10.2%9.7%9.1%9.3%11.3%10.7%9.6%9.5%R&D(2,807)(2,787)(2,813)(2,813)(2,838)(2,863)(2,888)(2,913)(13,025)(11,220)(11,502)(11,902)PercentofRevenues8.6%7.7%7.5%6.9%7.2%6.8%6.2%6.4%8.6%7.6%6.6%6.6%SalesandMarketing(889)(953)(970)(1,049)(1,008)(1,088)(1,189)(1,166)(3,902)(3,860)(4,451)(4,667)PercentofRevenues2.7%2.6%2.6%2.6%2.6%2.6%2.6%2.6%2.6%2.6%2.6%2.6%GeneralandAdmin(164)(151)(141)(143)(145)(147)(149)(151)(116)(599)(592)(624)PercentofRevenues0.5%0.4%0.4%0.4%0.4%0.3%0.3%0.3%0.1%0.4%0.3%0.3%OperatingIncome(1,597)1,7612,5091,9251,3503,0134,5934,6955,7974,59713,65216,040PercentofRevenues-4.9%4.9%6.6%4.7%3.4%7.1%9.9%10.3%3.8%3.1%7.9%8.8%TotalNon-operatingIncome(Loss)1,247(617)(531)(456)(331)(331)(331)(331)(3,613)(357)(1,322)(1,503)ProfitBeforeTaxes(350)1,1441,9771,4691,0202,6834,2634,3642,1844,24012,33014,537PercentofRevenues-1.1%3.2%5.2%3.6%2.6%6.3%9.2%9.6%1.4%2.9%7.1%8.0%ChangevsYearAgo-118.9%-45.2%138.7%-156.8%-391.3%134.5%115.6%197.2%Taxes443(202)(39)(148)(103)(271)(431)(441)45954(1,245)(1,468)TaxRate126.5%17.6%2.0%10.1%10.1%10.1%10.1%10.1%-21.0%-1.3%10.1%10.1%NetIncome,ContOps939421,9381,3209172,4123,8323,9242,6434,29411,08413,068PercentofRevenues0.3%2.6%5.1%3.2%2.3%5.7%8.3%8.6%1.7%2.9%6.4%7.2%MinorityInterest1,1097989908167848479259084,4303,7143,4653,632ReportedIncome(TWGAAP)1,2011,7402,9292,1371,7013,2594,7574,8317,0738,00714,54916,701PercentofRevenues3.7%4.8%7.8%5.2%4.3%7.7%10.3%10.6%4.7%5.4%8.4%9.2%ChangevsYearAgo-64.7%-52.4%70.2%-225.2%41.6%87.2%62.4%126.1%-26.5%13.2%81.7%14.8%ReporteddilutedEPS(NT$,TWGAAP)0.090.130.220.160.130.250.360.370.520.611.111.28ReportedBasicEPS(NT$,GAAP)0.100.150.250.180.140.280.400.410.580.681.231.41Source:CompanyData,MorganStanleyResearch(e)estimates14 UMC:ValuationMethodologyWeraiseourpricetargettoNT$18.0fromNT$11.5:Thismainlyreflectsourhigherearningsestimatesthankstothestrongeroutlookgivendemandintrailingedge.Wecontinuetoderiveourpricetargetfromourresidualincomemodelframework,wherewekeepallofourleyassumptionsunchanged,includingacostofequityof9.2%,anintermediategrowthrateof6.0%,aterminalgrowthrateof3.0%,andacashdividendpayoutratioof90%.Exhibit21:UMC:RImodel(NT$mn)2019e2020e2021e2022e2023e2024e2025e2026e2027e2028e2029e2030eTotalEquity206,597210,266210,240213,602217,164220,938224,936229,172233,661238,416243,455248,793NetProfit8,23914,54916,70117,69418,74719,86221,04422,29623,62325,02926,51828,096ROAE4.0%7.0%7.9%8.3%8.7%9.1%9.4%9.8%10.2%10.6%11.0%11.4%ResidualIncome(10,825)(4,648)(2,706)(1,851)(1,123)(353)4631,3272,2413,2104,2355,320Spread-5.2%-2.2%-1.3%-0.9%-0.5%-0.2%0.2%0.6%1.0%1.4%1.8%2.2%EndingEquityCapital206,597PVofForecastPeriod(3,665)PVofContinuingValue33,023EquityValue235,955No.ofShares13,119ProjectedPrice(NT$)18.0Source:CompanyData,MorganStanleyResearchestimatesIntermsofrelativevaluation,weprefertousepricetobookratiogivenitshigherearningsvolatility.UMCistradingat0.8xone-yearforwardP/B,roughlyinlinewithits10-yearhistoricalaverage,andatadiscountwhencomparedtopeerslikeSMIC(1.4xP/B).Inaddition,UMCcouldtradewellabove1.0xP/Bwhentrailing-edgedemandisstrong.Ourpricetargetimplies1.0x2020eP/B.Exhibit22:UMCone-yearforwardP/B1.41.31.21.11.0PlusoneSD:1.0x0.9Avg:0.8x0.80.70.6MinusoneSD:0.6x0.50.4200820092010201120122013201420152016201720182019Source:TEJ,MorganStanleyResearchestimates15 UMC:FinancialSummaryIncomeStatement,2015-2018e,YearEndDecBalancesheet(NT$mn)20182019e2020e2021e(NT$mn)20182019e2020e2021eTurnover151,253147,170173,225181,607AssetsYoYGrowth1.3%-2.7%17.7%4.8%Cash&Equivalent83,66287,60384,093107,722MarketableSecurity528634634634Less:COGS(128,413)(126,894)(143,028)(148,375)A/R&N/R23,87527,43830,50931,301Variablecosts(82,682)(82,877)(99,468)(104,814)Inventories18,29520,64621,57622,169Depreciation&amort(45,731)(44,017)(43,561)(43,561)OtherCurrentAss.3,60819,27919,27919,279Grossprofit22,84020,27630,19733,233Totalcurrentassets141,193168,907169,399194,413YoYGrowth-15.6%-11.2%48.9%10.1%LTInvestment33,50540,33840,33840,338%margin15.1%13.8%17.4%18.3%TotalFixedAssets172,847145,877143,608118,789TotalOtherAssets17,06021,27021,27021,270OperatingExpenses:(17,043)(15,679)(16,545)(17,193)TotalAssets364,605376,392374,615374,809R&D(13,025)(11,220)(11,502)(11,902)SalesandMarketing(3,902)(3,860)(4,451)(4,667)GeneralandAdmin(116)(599)(592)(624)A/P&N/P6,8027,6558,0008,219OperatingProfit5,7974,59713,65216,040AccruedExpenses0000YoYGrowth-11.7%-20.7%197.0%17.5%OtherPayable16,46415,03315,03315,033%margin3.8%3.1%7.9%8.8%TotalCurrentLiab.49,89971,35265,69765,917L-TLiabilities67,08355,22955,22955,229TotalNon-op(3,613)(357)(1,322)(1,503)TotalOtherL-TLiab41,08643,44643,44643,446TotalLiabilities158,068170,027164,372164,592CommonStocks124,243117,243117,243117,243PretaxProfit2,1844,24012,33014,537PreferredStocksYoYGrowth-72.0%94.1%190.8%17.9%CapitalReserve40,39939,36039,36039,360%margin1.4%2.9%7.1%8.0%Retainedearnings47,07549,47653,35453,328TreasuryStock(5,647)(120)(120)(120)Tax45954(1,245)(1,468)TotalEquity206,536206,365210,242210,217ReportedNetIncome7,0738,00714,54916,701ModelWareEPS(NT$)0.520.611.111.28CashFlowStatement(NT$mn)20182019e2020e2021eKeyRatiosNetIncome2,6434,29411,08413,06820182019e2020e2021eDepreciation52,04948,58247,34847,348Return(%)NetInvestmentLosses(Gains)(137)1000ROAA1.9%2.2%3.9%4.5%Others(5,775)(25,758)(3,656)(1,166)ROAE3.4%3.9%7.0%7.9%CashFlow-Operating50,93527,11754,77759,251OP.ATO58.4%55.9%63.1%72.1%(Purchase)ofFA(19,590)(21,915)(45,079)(22,529)Gearing(x)SaleofFixAsset2012300NetDebt/Equity(0.1x)(0.2x)(0.1x)#DIV/0!(Purchase)L-TInv.(843)(15)00CurrentRatio2.8x2.4x2.6x#DIV/0!SaleofL-TInv.62200QuickRatio2.2x1.6x1.7x#DIV/0!Sale(Pur.)S-TInv.(593)3100CashFlow-Investing(15,500)(22,736)(45,079)(22,529)OperatingCycleAR/NRTurnover(days)53636061Inc(Dec)-S-TDebt(1,339)8,85000InventoryTurnover(days)51555353DividendPaid(8,558)(6,914)(7,206)(13,094)APTurnover(days)19212020Dir.&Emp.Bonus0000CashConversion(days)86979495ProceedfromNewIssue0000Dec/Inc-TreasureSt(3,944)(2,972)00Others(19,644)885(6,000)0CashFlow-Financing(33,485)(151)(13,206)(13,094)e=MorganStanleyResearchEstimatesChangeinCash1,9873,941(3,509)23,628Source:CompanyData,MorganStanleyResearchNetcash/(debt),b/f81,67483,66187,60284,093Netcash/(debt),c/f83,66187,60284,093107,72116 UMC:Risk-RewardHealthy12-inchand8-inchdemand;OWWhyOverweightWeexpectUMCwillbenefitfromthegrowingdemandinlegacyfoundrynodes,includingtrailing-edge12-inchand8-inch.UMC"sprofitabilityiscurrentlyconstrainedbytheacquisitionofUSJC,butmoresynergieswillcomeasweexpectahealthydemandenvironmentin2020.CompetitionfromChinesefabsandTSMC,shouldalsoease.UMC"scapexhasbecomemorestrategic,withsoliddemandfromhigher-margin8"business.Valuationlooksattractiveat0.8x2020eBVPSgiventhecompany"ssteadyearningsSource:Refinitiv,MorganStanleyResearchestimatesoutlook.PriceTargetNT$18Basecase,residualincomemodel.KeyValueDriversBullNT$22.40Globalsemiconductorgrowth.1.2x2020eBVPS8-inchdemand.Healthysemigrowth;better-than-expected8-inchandtrailing-edge12-inch28nmdesignwinscoupledwithyieldratedemand:1)Globalsemisalesgrowstronglyin2020,andfoundryindustryimprovement.growthis>15%;2)strong8-inchdemandand12-inchdemandthankstobetter-Capacitydiscipline,hence,highutilizationthan-expectedadoptionofnewdisplaysemis;3)USJCfabturnsprofitablerate/sustainablemargin.faster-than-expectedaftersynergiesarerealized.BaseNT$18.00PotentialCatalysts1.0x2020eBVPSWaferpricehikes.Healthysemigrowth;solid8-inchdemand;increaseddemandfortrailing-edge12-inch:1)Globalsemisalesgrowsteadilyin2020andfoundryindustrygrowthStrongmonthlysales.reachesdoubledigits;2)robust8-inchdemandand12-inchdemandthankstoRushordersfromkeycustomers.displaysemis;3)USJCfabslowlyturnsprofitableaftersynergiesarerealized.RiskstoAchievingPriceTargetBearNT$9.900.6x2020eBVPSDownside:Stagnantsemigrowth;8-inchandtrailing-edge12-inchfaceweakeningdemand:Softer-than-expectedglobaleconomicand1)Globalsemisalesstayflattishin2020,andfoundryindustrygrowthisinlowsemiconductorgrowth.singledigits;2)displaysemisadoptionslowsdown,hurtingUMC"sdemand;3)IncreasingpricingcompetitioncouldreduceUSJCfabturnsloss-makinggivenlackofrealizedsynergies.themarginandutilizationrate.Unfavorablecustomermixchanges.17 Vanguard:ABetter2020Outlook;DoubleUpgradetoOWStructural8-inchwaferdemandpromptscapacitytightnessacrosstheboard:AfterindustrybellwetherTSMCsignaledarecoveryinfoundrydemandduringits2Qearningscall,wenowseesignsofstrongerwaferdemandfor8-inchfoundries.Customers"inventorydayscontinuedtofallafterthreequartersofdepletion,andinventoryreplenishment–especiallyforlargedisplaydriverICs–shouldhelpdriveademandupturnfrom1H20.Meanwhile,increased8-inchwaferdemandfromemergingapplicationssuchasfingerprintsensorsandpowersemisfor5Gcontinuestoeatup8-inchwafersupply.Withindustrysupplygrowingonlyat2-3%nextyear,wethusbelieve8-inchfoundrycapacityshouldresultinashortageonceagainin2H20.Singaporefabstillakeyswingfactor,butwethinkVanguardcanfillthefabthankstoincreasedoutsourcing:OurUWthesiswasmainlybasedontheadditionaldepreciationburdenfromtheSingaporefabthatVanguardhastobearfrom2020.Ourproprietaryanalysisalsosuggestsabreak-evenutilizationrateashighas82%fortheSGfab.Yet,sinceVanguardcanbenefitdirectlyfromtheincreasedoutsourcingfromTSMCandthehealthierindustryoutlook,wethinkitcansurpassthatthresholdandgenerate2020EPSgrowthof11%.Powersemidemandstillslowinthenearterm,butstabilizing:VanguardhasguidedforrevenuefrompowersemistodeclineQ/Qin4Q19,andkeycustomerInfineon(coveredbyDominikOlszewski)continuestosoundwaryontheoutlookgivenitscautiousviewonindustrialendmarketsandrecoveryinChineseEVsinthenearterm.However,averageinventoryofanalogIDMsalsofellanothersixdaysin3Q19,sowethinkdemandforVanguardcouldstabilizefromhere.Ifautoandindustrialdemandweretorecoveralso,outsourcingfromkeycustomersshouldresume,andVanguard"spowerbusinesscouldgrowstronglyoffalowbasein2019.DoubleupgradetoOW:WiththehealthierdemandoutlookandtheSingaporefabnolongeradrag,weexpectthecompanywillachieveanearningsCAGRofover20%inthenextfewyearswithhealthyfreecashflow.WeraiseourpricetargettoNT$82.18 Exhibit23:AnalogIDMaverageinventorydeclinedanother6daysinExhibit24:Vanguard"sFab3Ebreakevenutilizationrate3QFixedCost(US$mn)140.0Fab3EAcquisitionCost236118117120.0109111Depreciableassets236100.0Dereciationyear680.0Depreciationperyear(US$mn)39.360.0VariableCost40.0BlendedwaferASP(US$k)0.620.0Revenueperyear(US$mn)2520.01Q133Q131Q143Q141Q153Q151Q163Q161Q173Q171Q183Q181Q193Q19Utilizationrate81.9%AnalogIDMaverageinventorydaysVariableCost(%)62%Source:Refinitiv,MorganStanleyResearchVariableCost(US$mn)128.0OthersOPEXratio15.5%OPEX(US$mn)39.1BreakevenUTrateTotalCost(US$mn)206BreakevenUTrate81.9%Source:CompanyData,MorganStanleyResearchestimates19 Vanguard:EarningsEstimateRevisionsWeraiseour2019,2020,and2021EPSestimates1%,13%,and24%,respectively:Asoneofthekeyoutsourcingpartnersfor8-inchwaferfoundries,wethinkVanguardwillenjoysomeshorttermtailwindsinviewoftheinventoryreplenishment.Inaddition,theimprovingbusinessoutlookshouldalso1)increasethepaceofIDMoutsourcing,and2)increaseorderstransferredfromkeypartnerTSMC.ThisshouldhelpVanguardfillitsnewcapacityfromtheSingaporefabandmakeitprofitableratherthanaburden.Wethereforeraiseourrevenueestimates7%for2020and12%for2021.WithhigherrevenuescaletohelpoffsetthemargindilutionfromthenewSingaporefab,wealsoraiseourgrossmarginandoperatingmarginassumptions.Exhibit25:Vanguard:Earningsestimaterevisions(NT$mn)New2019eOld2019eDiff.%New2020eOld2020eDiff.%New2021eOld2021eDiff.%Netsales27,95327,9120%34,19531,8797%38,65034,61812%Grossprofit10,22010,2030%11,38810,4319%13,12111,34316%Operatingprofit6,7996,7660%7,6486,71714%9,1227,30725%Pretaxincome7,2777,2440%7,9607,03313%9,4447,62724%Netincome5,7705,7440%6,4085,66213%7,6036,14024%EPS(NT$)3.503.481%3.893.4213%4.613.7124%MarginsGrossmargin36.6%36.6%33.3%32.7%33.9%32.8%Operatingmargin24.3%24.2%22.4%21.1%23.6%21.1%Pretaxmargin26.0%26.0%23.3%22.1%24.4%22.0%Netmargin20.6%20.6%18.7%17.8%19.7%17.7%Source:CompanyData,MorganStanleyResearch(e)estimatesExhibit26:Vanguard:Quarterlyfinancials(NT$mn)1Q192Q193Q19p4Q19e1Q20e2Q20e3Q20e4Q20e20182019e2020e2021eTotalRevenues6,9076,9187,1277,0017,6478,5239,1648,86028,92827,95334,19538,650SequentialChange-10.4%0.2%3.0%-1.8%9.2%11.5%7.5%-3.3%ChangevsYearAgo7.5%-1.9%-8.0%-9.1%10.7%23.2%28.6%26.5%16.1%-3.4%22.3%13.0%CostofSales(4,417)(4,359)(4,489)(4,469)(5,203)(5,678)(6,049)(5,877)(18,760)(17,733)(22,806)(25,529)PercentofRevenues63.9%63.0%63.0%63.8%68.0%66.6%66.0%66.3%64.8%63.4%66.7%66.1%GrossProfit2,4902,5592,6382,5332,4432,8463,1162,98310,16810,22011,38813,121PercentofRevenues36.1%37.0%37.0%36.2%32.0%33.4%34.0%33.7%35.2%36.6%33.3%33.9%TotalOpex(832)(882)(849)(857)(901)(926)(949)(965)(3,014)(3,421)(3,740)(3,999)PercentofRevenues12.1%12.8%11.9%12.2%11.8%10.9%10.4%10.9%10.4%12.2%10.9%10.3%R&D(424)(474)(420)(425)(450)(460)(470)(480)(1,494)(1,742)(1,860)(1,990)PercentofRevenues6.1%6.9%5.9%6.1%5.9%5.4%5.1%5.4%5.2%6.2%5.4%5.1%SalesandMarketing(82)(88)(75)(74)(92)(102)(110)(106)(341)(318)(410)(464)PercentofRevenues1.2%1.3%1.1%1.1%1.2%1.2%1.2%1.2%1.2%1.1%1.2%1.2%GeneralandAdmin(327)(320)(355)(359)(359)(364)(369)(379)(1,179)(1,361)(1,470)(1,545)PercentofRevenues4.7%4.6%5.0%5.1%4.7%4.3%4.0%4.3%4.1%4.9%4.3%4.0%OperatingIncome1,6581,6771,7891,6761,5431,9192,1672,0187,1556,7997,6489,122PercentofRevenues24.0%24.2%25.1%23.9%20.2%22.5%23.6%22.8%24.7%24.3%22.4%23.6%TotalNon-operatingIncome(Loss)92216987175797781317478312322ProfitBeforeTaxes1,7491,8931,8871,7471,6181,9982,2442,0997,4727,2777,9609,444PercentofRevenues25.3%27.4%26.5%25.0%21.2%23.4%24.5%23.7%25.8%26.0%23.3%24.4%ChangevsYearAgo21.1%7.2%-9.0%-20.2%-7.5%5.5%18.9%20.1%Taxes(362)(413)(391)(341)(315)(390)(438)(409)(1,306)(1,507)(1,552)(1,841)TaxRate20.7%21.8%20.7%19.5%19.5%19.5%19.5%19.5%17.5%20.7%19.5%19.5%ReportedIncome(TWGAAP)1,3881,4801,4961,4061,3031,6081,8071,6906,1665,7706,4087,603PercentofRevenues20.1%21.4%21.0%20.1%17.0%18.9%19.7%19.1%21.3%20.6%18.7%19.7%ChangevsYearAgo20.9%4.1%-10.4%-27.1%-6.1%8.7%20.8%20.1%36.9%-6.4%11.1%18.6%EPS(NT$)0.840.900.910.850.790.981.101.023.733.503.894.61ChangevsYearAgo20.9%4.1%-10.3%-26.6%-6.1%8.7%20.8%20.1%36.6%-6.3%11.1%18.6%Source:CompanyData,MorganStanleyResearch(e)estimates20 Vanguard:ValuationMethodologyWeraiseourpricetargettoNT$82fromNT$55:Inadditiontoourhigherearningsestimatesfor2019-21,weliftourintermediategrowthratefrom5.0%to7.5%giventhebetterbusinessoutlookresultingfromemergingapplicationsin8-inchwaferfoundries.Wecontinuetoderiveourpricetargetfromourresidualincomemodelframework,wherewekeepallotherassumptionsunchanged,includingacostofequityof9.0%,aterminalgrowthrateof4.0%,andacashdividendpayoutratioof75%.Exhibit27:Vanguard:RImodel(NT$mn)2019e2020e2021e2022e2023e2024e2025e2026e2027e2028e2029e2030eTotalEquity29,96431,12733,48536,14239,00042,07345,37848,93152,75356,86361,28366,037NetProfit5,7706,4087,6038,1768,7939,45510,16810,93511,76012,64613,60014,625ROAE19.4%21.0%23.5%23.5%23.4%23.3%23.3%23.2%23.1%23.1%23.0%23.0%ResidualIncome3,0703,5904,5254,8525,2075,5895,9996,4416,9167,4267,9768,566Spread10.4%12.0%14.5%14.5%14.4%14.3%14.3%14.2%14.1%14.1%14.0%14.0%EndingEquityCapital29,964PVofForecastPeriod35,536PVofContinuingValue69,132EquityValue134,633No.ofShares1,649ProjectedPrice(NT$)82Source:CompanyData,MorganStanleyResearch(e)estimatesIntermsofrelativevaluation,despiteVanguard"sP/Bratioof3.8xlookingfairlyexpensivecomparedtoitshistoricalaverage,wedon"tfinditparticularlystretchedgivenits20%2020eROE.Thestockwasabletotradeabove4xforwardP/Bin2018whenthecompanybenefitedfromstrong8-inchdemandandcapacitytightness,andwebelievethistimearoundVanguard"ssharepricecouldreachthatvaluationlevelagain.Exhibit28:Vanguardone-yearforwardP/B(x)5.04.0Plusonestandarddeviation:3.3x3.02.0Avg:2.2x1.0Minusonestandarddeviation:1.1x-2001200220032004200520062007200820092010201120122013201420152016201720182019One-yearForwardPBROneStdDevAverageOneStdDevSource:TEJ,MorganStanleyResearchestimates21 Vanguard:FinancialSummaryIncomeStatementCashFlowStatementNT$mn(YearsEndDec)20182019e2020e2021eNT$mn(YearsEndDec)20182019e2020e2021eNetsales28,92827,95334,19538,650CashflowfromOperations7,4609,2588,80910,564COGS(18,760)(17,733)(22,806)(25,529)Netprofits6,1665,7706,4087,603Grossprofit10,16810,22011,38813,121Depreciation1,8232,1473,5943,789Operatingexpenses(3,014)(3,421)(3,740)(3,999)Equityinvestmentlosses(income)24000R&D(1,494)(1,742)(1,860)(1,990)Otheradjustments(553)1,341(1,193)(828)SG&A(1,519)(1,679)(1,880)(2,009)CashflowfromInvesting(3,903)(10,687)(2,905)(3,491)Operatingincome7,1556,7997,6489,122Capex(1,919)(10,687)(2,905)(3,491)Non-operatingincome317478312322ChangeofLTInvestment(1,871)000Pre-taxincome7,4727,2777,9609,444ChangeofSTInvestment(105)000Incometax(1,306)(1,507)(1,552)(1,841)Otheradjustments(8)000Netincome6,1665,7706,4087,603Cashflowfromfinancing(4,903)(5,245)(5,245)(5,245)Adj.wtd.avg.shrs(mn)1,6521,6491,6491,649IncreaseinL/Tdebt0000ReportedEPS(NT$)3.733.503.894.61IncreaseinS/Tdebt0000ModelwareEPS(NT$)3.733.503.894.61CashDividendPaid(4,917)(5,245)(5,245)(5,245)Dir&EmpBonusPaid0000Issuanceofstock0000Dec/Inc-TreasureSt0000OtherAdjustments14000Netchangeincash(1,346)(6,673)6591,828BalanceSheetFinancialRatiosNT$mn(YearsEndDec)20182019e2020e2021e20182019e2020e2021eCash14,6077,9348,59310,421Growth(%)MktSecurities1,6021,6021,6021,602Turnover16.1(3.4)22.313.0AR/NR5,7284,7365,7936,548Operatingprofits36.8(5.0)12.519.3Inventory3,4162,9333,7734,223Pretaxprofits41.5(2.6)9.418.6Other450450450450Netprofits36.9(6.4)11.118.6CurrentAssets25,80317,65520,21123,244EPS36.6(6.3)11.118.6Long-terminvestments4,7474,7474,7474,747Margins(%)Fixedassets6,44414,98314,29413,996GrossMargin35.236.633.333.9Otherassets659659659659OperatingMargin24.724.322.423.6TotalAssets37,65338,04439,91142,646PretaxMargin25.826.023.324.4S/Tborrowings0000NetProfit21.320.618.719.7AP/NP1,2931,2301,5821,771Return(%)OtherSTliabilities5,8975,8256,1776,365ROAA17.315.216.418.4LTdebt0000ROAE21.719.421.023.5OtherLTliabilities1,0251,0251,0251,025Gearing(%)TotalLiabilities8,2148,0808,7849,161NetDebt/Equity(49.6)(26.5)(27.6)(31.1)Commonshares16,39016,39016,39016,390Liabilities/Equity27.927.028.227.4Retainedearning12,19312,71813,88116,239Ratios(X)Othershareholders"equity857857857857Currentratio3.62.52.62.9TotalEquity29,43929,96431,12733,485Quickratio3.12.02.12.3TotalLiab.&Shrhldr"sEquity37,65338,04439,91142,646OthersAR/NRTurnover(days)61.861.861.861.8InventoryTurnover(days)60.460.460.460.4E=MorganStanleyResearchEstimatesAPTurnover(days)25.325.325.325.3Source:MorganStanleyResearch,CompanyDataCashConversion(days)96.996.996.996.922 Vanguard:Risk-Reward8"waferdemandrecovering,whilepowersemiscouldprovidemoreupsideifauto/industrialdemandreboundsWhyOverweightVanguard"sexposuretopowercomponentsshouldmakeitakeybeneficiaryofstructuraltrendssuchasEVand5G,anditsnewSingaporefabacquisitioncouldallowittocapturemoregrowthamidahealthydemandenvironment8"waferdemandalongwithstrongdemandinautoforlegacynodeshasheldupitsblendedwaferASPwell,thusmarginsandearnings.Inventorycorrectionissueappearstobecomingtoanend,whilecompetitionfromother8-inchvendorsshouldeasegivenSource:Refinitiv,MorganStanleyResearchestimatesoverallstrengthindemand.Vanguardistradingat3.8x2020eBVPSPriceTargetNT$82with20%ROE,andwefinditinexpensiveBasecase,residualincomemodel.comparedtothestock"sprevioustradingrecordwhenfundamentalswerehealthy.BullNT$1065.6xbasecase2020eBVPSHealthysemidemand:Powerandautosemidemandareexceptionallystrong;KeyValueDriversinventorylevelisdigestedquicklyandDDIforsmartphonesandlargepanelsGlobalsemiconductorgrowth.showsgrowth.Easingcompetitionfrompeers.Weassume(1)globalsemisalesFoundrydemandfromdisplaydriverICsgrowthof>10%in2020andfoundryindustrygrowthofhighsingledigits;(2)better-than-expecteddemandfor8”capacity;(3)powerdemandfor5GtracksandpowermanagementICs.aheadofschedule.Healthyglobal8-inchfoundrydemand.8-inchexpansionplantocaptureindustryBaseNT$82growth.4.3xbasecase2020eBVPSHealthysemidemandwithsomecompetition:PowerandautosemidemandPotentialCatalystsgrowssteadily,andinventorylevelstabilizing.8-inchwaferdemandincreasingfrom5Gandopticalfingerprint,helpingVanguard"snewSingaporefabrampup.Strongersmartphone/TVdemandWeassume:(1)globalsemisalesreboundtogrowthin2020of5-10%;(2)AnalogIDMs"inventorycontinuestofallstrongfoundryindustrygrowthin2020.Easingcompetitionin8-inchfoundryBearNT$51businesswithpricingrebound3.8xbasecase2020eBVPSSemigrowthslowdown:Semigrowthslowdown;powerandautosemidemandRiskstoAchievingPriceTargetweakens;elevatedpowersemiinventorylevel.SmartphoneDDIshowsaworse-Downside:than-expecteddecline.IntensifiedcompetitionandnewChinesecapacitydampentheoverallpricingenvironment.Weassume:(1)overallsemiindustryWeaker-than-expectedLCDdriverICfallsin2020andfoundrygrowthisalsostagnant;(2)weaker-than-expecteddemand.demandfor8”capacityduetofasterproductmigrationin2020.Intensifiedcompetitioninpowersemibusiness.SlowerthanexpectedEVpenetration.IDMscustomersstartingtomoveproductionin-house23 Chipbond:OLEDiPhoneLossshouldnotOvershadowOverallBusinessStrength;OWNegativesfromiPhoneandCOPimpactoverstated:Chipbond"ssharepricehasbeenalaggardYTD(+7.7%vs.TAIEX+20.3%).ThekeyconcernhasbeenthattheiPhonewoulddropallLCDmodelsin2020,andthatChipbondwouldhaveadifficulttimefillingtherevenueshortfall.Wedisagree,andthinkthisnegativeisoverstated.NewiPhonesaccountforonly4-5%ofChipbond"srevenuethisyear,soithasalreadyde-riskedthepotentialhitfromiPhone"sdecisiononswitchingtoOLED.Meanwhile,ChipbondcouldstillprovidetestingservicesfortheiPhoneSE2modelin1H20,andwebelievecomponentvolumecouldreachashighas30mnunits.Last,ChipbondcouldstillstayintheOLEDiPhonesupplychainevenifLGDisplayandBOEweretogainsomeshareinthe2H20iPhones,nottomentionthepossibilitythattherecouldbeanotherLCDiPhonemodelin2H20.COFcapacitystilltight:AnotherkeyinvestorconcernisthatrisingadoptionfromCOPwouldcannibalizethemarketforCOFandhenceChipbond"searnings.ForCOP,weremindinvestorsthatitcouldbeadoptedonlyinflexibleOLED,notrigidOLEDorLCDpanels.Thatsaid,Chipbond"sCOFdemandshouldnotdisappear,andCOFcouldstillmakeupalargeportionofthedisplaymarket,mainlythankstoincreasedTDDIoutsourcingfromdriverICplayers.KeycustomerNovatek"sOLEDdriverICshipmentsshouldalsotakeoffin2020,andChipbond,asthemajorback-endpartner,shouldthereforebenefitfromtheincreasedshipments.RFsharegainprovidesfurtherupside:Accordingtothecompany,Chipbondhasgainedsharewithonekeyvendorradiofrequency(RF)components,thusmakingitmoreabeneficiaryof5G.WithcontributionsfromthisnewclientandadditionalRFcontentfor5Gsmartphones,webelieveChipbondcouldgenerateRFrevenuegrowthof30-40%in2020.CoupledwithstrengthfromdisplaydriverICs,weareforecastingtop-linegrowthof7.1%,andEPScouldexceedNT$6.5in2020.Near-termoutlookbetterthanfeared:Thecompanyguidedfor4Q19revenuetodecline5-10%amidseasonality,butthatshouldbefollowedbya5-10%Q/Qincreasein1Q20(vs.thecurrentStreetexpectationof+2.2%Q/Q).That"sthankstoinventoryreplenishment,mainlyoflargedisplaydriverICs.RaisingpricetargettoNT$77:WebelieveChipbond"sfundamentalsremainintact,andthestockhasbeenoverlookedgivenexaggeratedconcerns.P/Eisjust9.6xonourincreased2020EPSforecast(vs.the10-yearhistoricalaverageof11.7x),anditshealthyfreecashflowinthenextfewyearsshouldsustaintisdividendyieldatabove6.5%.Webelievethestockshouldperformbetterfromhere.Thus,wekeepourOWrating.24 Chipbond:EarningsEstimateRevisionsWeraiseourEPSestimates1%for2019,16%for2020,and11%for2021:Ourhigherrevenueassumptionsaremainlybasedonbetter-thanexpectedCOFdemand,sharegainsatanewRFcustomer,andincrementalordersfromiPhoneSE2model.Furthermore,wethinkkeycustomerNovatek"sincreasedOLEDdriverICpenetrationshouldalsobenefitChipbond,offsettingthepotentialcontentlossonCOP.Withlargerrevenuescale,wealsoraiseourgrossmarginandoperatingmarginassumptions.Exhibit29:Chipbond:Earningsestimaterevisionsummary(NT$mn)New"19EOld"19EDiff.New"20EOld"20EDiff.New"21EOld"21EDiff.Netsales20,17620,467-1%21,61320,0518%22,84921,5656%Grossprofit6,6096,5571%6,7996,03213%7,1026,5449%Operatingprofit5,2605,0664%5,4814,46523%5,7884,97816%PretaxIncome5,3675,3420%5,4794,76415%5,7865,27810%Netincome4,1474,0941%4,2663,68116%4,5464,11311%ReportedEPS6.396.311%6.575.6716%7.006.3311%MarginsGrossmargin32.8%32.0%31.5%30.1%31.1%30.3%Operatingmargin26.1%24.8%25.4%22.3%25.3%23.1%Pretaxmargin26.6%26.1%25.3%23.8%25.3%24.5%Netmargin20.6%20.0%19.7%18.4%19.9%19.1%Source:MorganStanleyResearch(E)estimatesExhibit30:Chipbond:QuarterlyfinancialstatementNT$inmillion1Q192Q193Q194Q19E1Q20E2Q20E3Q20E4Q20E20182019E2020E2021ETotalRevenues4,6715,0435,4495,0135,0465,3145,5755,67818,72520,17621,61322,849SequentialChange-12.0%8.0%8.0%-8.0%0.7%5.3%4.9%1.8%ChangevsYearAgo21.3%18.6%2.5%-5.5%8.0%5.4%2.3%13.3%1.6%7.7%7.1%5.7%CostofSales3,1743,4113,5193,4653,5343,6613,7793,84113,36013,56814,81515,747PercentofRevenues680%%680%%650%%690%%700%%690%%680%%680%%710%%670%%690%%690%%Variablecosts2,5022,7332,8402,7822,8512,9763,0943,15110,70210,85712,07212,963asa%ofrevenue54%54%52%56%57%56%56%56%57%54%56%57%Depreciation&Amortizationexpense6726786786836836856856892,6582,7112,7422,784asa%ofCOGS21%20%19%20%19%19%18%18%20%20%19%18%asa%ofrevenue14%13%12%14%14%13%12%12%14%13%13%12%GrossMargin1,4981,6331,9301,5481,5121,6531,7961,8375,3656,6096,7997,102PercentofRevenues32.1%32.4%35.4%30.9%30.0%31.1%32.2%32.4%28.7%32.8%31.5%31.1%IncrementalMarginNM36%73%NM-111%53%55%40%337%86%13%25%TotalOpex3163343693302693293733461,4661,3491,3181,313PercentofRevenues6.8%6.6%6.8%6.6%5.3%6.2%6.7%6.1%7.8%6.7%6.1%5.7%R&D117121132136136156158160440506610612PercentofRevenues2.5%2.4%2.4%2.7%2.7%2.9%2.8%2.8%2.4%2.5%2.8%2.7%General&administrative16417519815888128168138869693520510PercentofRevenues3.5%3.5%3.6%3.1%1.7%2.4%3.0%2.4%4.6%3.4%2.4%2.2%Seling&marketing3638393645464849156149188192PercentofRevenues0.8%0.7%0.7%0.7%0.9%0.9%0.9%0.9%0.8%0.7%0.9%0.8%OperatingIncome1,1821,2981,5611,2181,2431,3241,4231,4913,9005,2605,4815,788PercentofRevenues25.3%25.7%28.7%24.3%24.6%24.9%25.5%26.3%20.8%26.1%25.4%25.3%ChangevsYearAgo110.9%95.9%23.4%-13.6%5.2%2.0%-8.9%22.4%28%35%4%6%EBITDA1,8541,9762,2391,9011,9262,0092,1082,1816,5587,9708,2238,573EBITDAmargin39.7%39.2%41.1%37.9%38.2%37.8%37.8%38.4%35.0%39.5%38.0%37.5%TotalNon-operatingIncome(Loss)5473(19)(0)(0)(0)(0)(0)(334)107(2)(2)ProfitBeforeTaxes1,2351,3721,5421,2181,2421,3241,4221,4913,5665,3675,4795,786PercentofRevenues26%27%28%24%25%25%26%26%19%27%25%25%Taxes2603683422502593293043218791,2201,2131,241TaxRate21.0%26.8%22.2%20.5%20.8%24.8%21.4%21.5%25%23%22%21%ReportedIncome(TWGAAP)9751,0041,2009689839951,1181,1704,5154,1474,2664,546PercentofRevenues21%20%22%19%19%19%20%21%24%21%20%20%ChangevsYearAgo0%0%0%0%0%0%0%0%120%-8%3%7%ReportedEPS(NT$,TWGAAP)1.501.551.851.491.511.531.721.806.956.396.577.00ChangevsYearAgo160%34%-56%42%1%-1%-7%21%120%-8%3%7%Source:Companydata,MorganStanleyResearch(E)estimates25 Chipbond:ValuationMethodologyWeraiseourpricetargetfromNT$70toNT$77:Theraisedpricetargetismainlytoreflectourraisedearningsestimates.Ourpricetargetisourbasecasescenariovalue,derivedfromaresidualincomemodel.Ourkeyassumptions(allunchanged)areacostofequityof9.8%(2.0%risk-freerate,6%riskpremium,betaof1.3);amedium-termgrowthrateof5.0%,andalong-termgrowthrateof3.0%.Exhibit31:Chipbond:RImodel(NT$mn)2019E2020E2021E2022E2023E2024E2025E2026E2027E2028E2029E2030ETotalEquity28,83530,17631,71233,47835,33337,28039,32441,47043,72446,09148,57651,185NetProfit4,1474,2664,5464,7735,0125,2625,5255,8016,0926,3966,7167,052ROAE14.6%14.5%14.7%14.6%14.6%14.5%14.4%14.4%14.3%14.2%14.2%14.1%ResidualIncome1,3451,3431,4761,5361,5961,6581,7241,7941,8661,9432,0232,107Spread4.8%4.7%4.9%4.8%4.8%4.7%4.6%4.6%4.5%4.4%4.4%4.3%EndingEquityCapital28,835PVofForecastPeriod10,176PVofContinuingValue11,411EquityValue50,422No.ofShares651ProjectedPrice(NT$)77Source:MorganStanleyResearch(E)estimatesOnrelativevaluation,Chipbond"sone-yearforwardP/Eisclosetoonestandarddeviationbelowhistoricalaveragelevels.Coupledwithdividendyieldof7%,wefindthisvaluationattractiveinviewofthesteadyrevenueandearningsgrowthweprojectinthenexttwoyears.WebelieveChipbonddeservesavaluationatleastsimilartothehistoricalaverageof11.7x,asimpliedbyourpricetargetofNT$77.Exhibit32:Chipbond:one-yearforwardP/Eband2218PlusoneSD:15.0x14Avg:11.7xP/E10(x)MinusoneSD:8.4x6220092010201120122013201420152016201720182019Source:TEJ,companydata,MorganStanleyResearchestimate26 Chipbond:FinancialSummaryIncomeStatementCashFlowStatementNT$mn(YearsEndDec)20182019E2020E2021ENT$mn(YearsEndDec)20182019E2020E2021ENetsales18,72520,17621,61322,849CashflowfromOperations6,1267,2926,6367,012COGS(13,360)(13,568)(14,815)(15,747)Reportednetprofits4,5154,1474,2664,546Grossprofit5,3656,6096,7997,102Depreciation2,5102,7112,7422,784Operatingexpenses(1,466)(1,349)(1,318)(1,313)WorkingCapitalChange(329)434(372)(318)Operatingincome3,9005,2605,4815,788Otheradjustments(570)000Non-operatingincome(334)107(2)(2)CashflowfromInvesting(4,771)(2,500)(2,500)(2,500)Pre-taxincome3,5665,3675,4795,786Capex(6,510)(2,500)(2,500)(2,500)Incometax8791,2201,2131,241ChangeofLTInvestment1,063000MinorityInterest(1,828)000ChangeofSTInvestment0000MWNetIncome4,5154,1474,2664,546Otheradjustments676000Adj.wtd.avg.shrs(m)649651651651Cashflowfromfinancing(1,378)(4,384)(3,425)(3,509)ReportedEPS(NT$)6.956.396.577.00IncreaseinL/Tdebt450(1,000)(300)(300)ModelwareEPS(NT$)6.956.396.577.00IncreaseinS/Tdebt(1,146)(200)(200)(200)CashDividendPaid(1,855)(3,184)(2,925)(3,009)Dir&EmpBonusPaid0000Issuanceofstock0000Otheradjustments1,173000BalanceSheetExchangerateadjustment13000NT$mn(YearsEndDec)20182019E2020E2021ENetchangeincash-114077111,003Cash6,0586,4657,1778,179MktSecurities0000AR/NR5,6644,9475,2995,602FinancialRatiosInventory7509681,0571,12420182019E2020E2021EOther664664664664Growth(%)CurrentAssets13,13713,04414,19715,569Turnover1.67.77.15.7Long-terminvestments4,7234,7234,7234,723Operatingprofits28.134.94.25.6Fixedassets16,18815,97715,73515,450Pretaxprofits29.950.52.15.6Deferredassets182182182182Netprofits119.7-8.12.96.5Otherassets5,3795,3795,3795,379EPS119.7-8.12.96.5TotalAssets39,60939,30640,21641,304Margins(%)S/Tborrowings1,5761,3761,176976GrossMargin28.732.831.531.1AP/NP815750819870OperatingMargin20.826.125.425.3OtherSTliabilities5,8975,8975,8975,897PretaxMargin19.026.625.325.3LTdebt2,6501,6501,3501,050NetProfit24.120.619.719.9OtherLTliabilities798798798798Return(%)Commonshares6,5436,5436,5436,543ROAE17.014.614.514.7TotalLiabilities11,73610,47110,0409,592ROAA12.010.510.711.2Additionalcapital9,4409,4409,4409,440Gearing(%)Retainedearning4351,3972,7384,275NetDebt/Equity(5.9)(11.9)(15.4)(19.4)Othershareholders"equity11,45511,45511,45511,455Liabilities/Equity42.136.333.330.2TotalEquity27,87328,83530,17631,712Ratios(X)TotalLiab.&Shrhldr"sEquity39,60939,30640,21641,304Currentratio1.61.61.82.0Quickratio1.41.41.61.8OthersAR/NRTurnover(days)89898989InventoryTurnover(days)26262626E=MorganStanleyResearchEstimatesAPTurnover(days)20202020Source:MorganStanleyResearch,CompanyDataCashConversion(days)9595959527 Chipbond:Risk-RewardHealthy12-inchbumpingmarketdemandwithattractivevaluation;OWNT$100WhyOverweight90NT$88.00(+39%)Chipbond"sCOFcapacityremainshealthy,80NT$77.00(+21%)asiPhoneSE2andTDDIwilljointlyhelpfill70NT$63.40thecapacityshortfallfromtransitioninto60flexibleOLED.50NT$49.00(-23%)Thehealthyfilmcapacityinlate2019and402020couldleadtomoreaggressiveCOF30adoption.20ChipbondhasgainedsharewithRF10customers,givingithigherexposuretobenefit0from5GNov-17May-18Nov-18May-19Nov-19May-20Nov-20WeviewP/Eat9.6xrevised2020eEPSasPriceTarget(Nov-20)HistoricalStockPerformanceCurrentStockPriceWARNINGDONOTEDIT_RRS4RL~6147.TWO~undemanding,stillatadiscounttotheSource:Refinitiv,MorganStanleyResearchestimateshistoricalaverage.Wethinkrisk-rewardstillPriceTargetNT$77looksfavorable.Basecase,residualincomemodel.BullNT$88KeyValueDrivers13.3x2020eEPSFull-screenLCDdisplaypenetrationrate.Stronger-than-expected4K2Kand8K4KTV;AndroiddriverICbusinessSmartphonesell-through.continuestoexpand;stronger-than-expectedTDDIdemand:1)4K2KTVGoldbumpingmarketsharegains.penetrationraterisessignificantlyin2020,thankstopriceelasticity;2)pricehikescontinueforLCDdriverICbackendin2020,givenlimitedsupply;3)COFTDDIpenetration.contributes>40%ofsalesin2020;and(4)RFbusinesscontinuestogrowsubstantially.PotentialCatalystsBaseNT$77Furtherpricehikesontheentireprocess11.7x2020eEPSgiventightnessintesters.4K2KTVdemandincreasesgradually;healthy12-inchbumpingmarket;TDDIChinesesmartphonemakersadoptingCOFdemandremainshealthy:1)4K2KTVdemandgrowsgraduallyin2020inviewtoenabletruefullscreens.oftheSummerOlympics;2)COFcontributes30%ofsalesin2020;and3)RFRushordersororderwinsfromPAbusinesscontributes~20%revenuebyend-2020thankstocustomer"ssharecustomers.gain.BearNT$49RiskstoAchievingPriceTarget7.5x2020eEPSDownside:Disappointing4K2KTVsell-through;largemarketsharelossgivencompetition;SmartphonescouldmovetoKoreanOLEDTDDIdemandremainssluggish:1)4K2Kpenetrationratestagnantin2020;2)aggressivelywithbundlesalesofdisplayICs,Chipbond"smarketsharefallstobelow60%in2020amidstiffcompetitionfromChipMOSandLBSemicon;and3)lackofCOFdemandin2020givenshrinkingtheTAMforChipbond.acceleratedadoptionofflexibleOLED.Weaker-than-expected4K2KTVdemand.MorelossesfromCOFsubstratebusiness.Industrypeersannouncesignificantcapacityexpansion.28 Novatek:EarningsGrowthCouldAccelerateFurtherin2020;RaisingPriceTargettoNT$272ReiterateOW–weseefurthersharepriceupside:Novatek"ssharepricehasappreciated18.9%vs.theTaiexup5.1%sinceOctober1.Thestrongsharepriceperformancewasdrivenbythecompany"sbrighteroutlookin2020,mainlyfromTDDIandAMOLEDDDIgrowthopportunities.Now,investors"questionsregardhowmuchupsidethestockhasleft.WeexpectthecompetitivelandscapetobemorefavorableforNovatek,givenitssuperiorchipdesigncapabilityandfurtherfoundryconstraintforpeersonTDDI.WethusraiseourTDDIASPandGMassumptions.Ourearningsforecastsare13%and15%higherthanconsensusfor2020and2021.Basedonournewestimates,2020eP/Eis13x.Thestockalsooffers6-7%dividendyield.TDDI–gettingeventighteronfoundrycapacity...Webelievethelegacy12-inchfoundrycapacityisgettingeventighterintotheendof2019,whichhascausedfoundrycapacityconstraintsfortheTDDIdesignhouses.Amidthisconstraint,webelievethefoundrieswillbeselectiveoncustomersandwillonlysupportthosewithlargerorderwinsorlongervisibility.Forthelow-tier/smallcustomers,therecouldbepricenegotiations,implyingpotentialpricehikesfromfoundriesinto2020.Judgingfromtheprojectpipeline,NovatekremainstheonlyvendorthatcouldsecuresufficientsupportfromUMC,sinceithasalreadyobtainedlargeordersfromtheendcustomersthankstoitssuperiorchipdesign.Wethusdon"tthinkthecosthikewillbesignificantforNovatek,butotherTDDIvendorscouldfacegreatercostadjustment.…whichcoulddriveGMrecovery:OneofthekeydownsidefactorsforNovatekin3Q19wasthepriceerosioninTDDI.Thiscausedthecompany"sgrossmargintoerodein3Q.However,ifpeers"capacityisfacinggreaterconstraint,webelievepeerswillalsoneedtohikepricesbythesamemagnitudetoreflectthecosthike.ForNovatek,weexpectthecompanycouldalsotakethechancetoadjustpricingbackinlinewiththatofpeers.Butitscostsarenotrisingthatmuchfromthefoundryside,soNovatek"sGMforTDDIcouldfurtherexpandontopofthelargerscale.ThebullcaseisgreaterAMOLEDDDIshipments:Novatekmentionedduringits3Q19earningscallthatChinesepanelcustomerscouldswitchDDIpackagingtoCOPfromCOF.ThiscouldincreasethedriverICvolumeforNovatekiftheChinesepanelmakers"moduleyieldisnothigh.Thus,thebullcasescenarioisthatChinesepanelmakersexperienceloweryieldsafterswitchingtoCOPfromCOF.AnotherscenarioisthatBOEsuccessfullypenetratestheiPhonesupplychainin2020andswitchestheDDIvendortoNovatekfromSiliconworks.WeestimatethiswouldcauseDDIshipmentstobegreaterthan100mnvs.ourcurrentforecastof80mn.29 Novatek:EarningsEstimateRevisionsWeraiseour2020and2021earningsforecasts4%each:ThebetterpricingforTDDIhaspromptedustoraisesalesandGMassumptions.Exhibit33:Novatek:EarningsestimaterevisionsCurrentPreviousCurrentPreviousCurrentPreviousNT$mn2019E2019EDiff.2020E2020EDiff.2021E2021EDiff.Netsales63,92163,9210%73,83672,7152%79,52478,1342%COGS43,59743,59749,53948,94053,15452,461Grossprofit20,32420,3240%24,29623,7762%26,37025,6733%Operatingexpenses10,56610,56611,26711,26111,94511,798Operatingprofit9,7589,7580%13,03012,5154%14,42513,8754%Non-op.income(exp.)21921943434343PretaxIncome9,9779,9770%13,07212,5584%14,46713,9174%Taxes1,9371,9372,6302,5262,9112,800Netincome8,0408,0400%10,44310,0324%11,55711,1174%ReportedEPS(NT$)13.2113.210%17.1616.494%18.9918.274%MarginsGrossmargin31.8%31.8%0ppt32.9%32.7%0ppt33.2%32.9%0pptOperatingmargin15.3%15.3%0ppt17.6%17.2%0ppt18.1%17.8%0pptPretaxmargin15.6%15.6%0ppt17.7%17.3%0ppt18.2%17.8%0pptNetmargin12.6%12.6%0ppt14.1%13.8%0ppt14.5%14.2%0pptSource:MorganStanleyResearch(E)estimatesExhibit34:Novatek:QuarterlyfinancialstatementsNT$inmillion1Q182Q183Q184Q181Q192Q193Q194Q19E2016201720182019E2020E2021ETotalRevenues10,46613,26515,75715,34614,94616,30516,59516,07445,65147,07454,83463,92173,83679,524SequentialChange-12.4%26.7%18.8%-2.6%-2.6%9.1%1.8%-3.1%ChangevsYearAgo-4.1%12.4%27.1%28.4%42.8%22.9%5.3%4.7%-10.3%3.1%16.5%16.6%15.5%7.7%CostofSales7,3859,25810,84610,33010,04311,07911,43911,03532,70533,51837,81843,59749,53953,154PercentofRevenues71%70%69%67%67%68%69%69%72%71%69%68%67%67%GrossMargin3,0814,0074,9115,0174,9035,2265,1565,03912,94613,55517,01520,32424,29626,370PercentofRevenues29.4%30.2%31.2%32.7%32.8%32.1%31.1%31.3%28.4%28.8%31.0%31.8%32.9%33.2%IncrementalMarginNM33%36%NMNM24%-24%NMNM43%45%36%40%36%TotalOpex1,9262,2532,6382,5832,4982,6632,7092,6967,3027,8009,40010,56611,26711,945PercentofRevenues18.4%17.0%16.7%16.8%16.7%16.3%16.3%16.8%16.0%16.6%17.1%16.5%15.3%15.0%R&D1,5801,8382,1822,1412,0502,1942,2322,2326,0206,4597,7418,7089,33810,019PercentofRevenues15.1%13.9%13.8%14.0%13.7%13.5%13.4%13.9%13.2%13.7%14.1%13.6%12.6%12.6%General&administrative2883363653603723903833731,0631,1461,3491,5171,5121,528PercentofRevenues2.8%2.5%2.3%2.3%2.5%2.4%2.3%2.3%2.3%2.4%2.5%2.4%2.0%1.9%Selling&marketing5879918276809491219195310341417398PercentofRevenues0.6%0.6%0.6%0.5%0.5%0.5%0.6%0.6%0.5%0.4%0.6%0.5%0.6%0.5%OperatingIncome1,1561,7542,2722,4332,4052,5622,4482,3435,6445,7557,6159,75813,03014,425PercentofRevenues11.0%13.2%14.4%15.9%16.1%15.7%14.7%14.6%12.4%12.2%13.9%15.3%17.6%18.1%ChangevsYearAgo-4.2%26.7%42.4%55.1%108.1%46.1%7.7%-3.7%-19%2%32%28%34%11%TotalNon-operatingIncome(Loss)(44)2237103316671511411822902194343ProfitBeforeTaxes1,1121,9772,2802,5362,4362,6282,5182,3945,7855,9377,9069,97713,07214,467PercentofRevenues11%15%14%17%16%16%15%15%13%13%14%16%18%18%Taxes1953954414834695014884797819131,5151,9372,6302,911TaxRate17.6%20.0%19.3%19.1%19.2%19.1%19.4%20.0%13.5%15.4%19.2%19.4%20.1%20.1%ReportedIncome(TWGAAP)9171,5821,8392,0531,9682,1272,0311,9155,0045,0246,3918,04010,44311,557PercentofRevenues9%12%12%13%13%13%12%12%11%11%12%13%14%15%ChangevsYearAgo0%0%0%0%0%0%0%0%-22%0%27%26%30%11%ReportedEPS(NT$,TWGAAP)1.512.603.023.373.233.503.343.158.228.2610.5013.2117.1618.99ChangevsYearAgo-1%29%18%56%115%34%10%-7%-22%0%27%26%30%11%Source:Companydata,MorganStanleyResearch(E)estimates30 Novatek:ValuationMethodologyOurpricetargetofNT$272(upfromNT$260)isbasedonaresidualincomemodelusingourbasecaseforecasts.Weraiseourpricetargettoreflecttheriseinourearningsestimatesandmedium-termgrowthrate.Wecontinuetoassumethatcostofequityisconstantat9.8%(2.0%risk-freerate,6%riskpremium,1.30beta).Ourmedium-termgrowthrateassumptionrisesto6.0%from5.7%.Ourterminalgrowthrateremains3.2%.Ourpricetargetimplies15-16x2020eEPS,atthehighendofthehistoricalrange(10-15x)since2005.Exhibit35:Novatek:RImodelNT$million2020E2021E2022E2023E2024E2025E2026E2027E2028E2029E2030E2031ETotalEquity36,67839,46342,51945,75749,19052,82956,68660,77465,10869,70274,57179,733NetProfit10,44311,55712,25012,98513,76414,59015,46516,39317,37718,42019,52520,696ROAE30.0%30.4%29.9%29.4%29.0%28.6%28.2%27.9%27.6%27.3%27.1%26.8%ResidualIncome6,6637,5467,9348,3508,7919,2589,75310,27810,83411,42312,04812,710Spread20.2%20.6%20.1%19.6%19.2%18.8%18.5%18.1%17.8%17.5%17.3%17.0%EndingEquityCapital36,678PVofForecastPeriod57,352PVofContinuingValue71,398EquityValue165,428No.ofShares609ProjectedPrice(NT$)272Source:MorganStanleyResearchestimatesExhibit36:Novatek:P/Eband2016+OneStandardDeviation12AverageP/E-OneStandard(x8Deviation)4020052007200920112013201520172019Source:Companydata31 Novatek:FinancialSummaryIncomeStatementCashFlowStatementNT$mn(YearsEndDec)20182019E2020E2021ENT$mn(YearsEndDec)20182019E2020E2021ENetsales54,83463,92173,83679,524CashflowfromOperations8,0116,9168,98310,891COGS(37,818)(43,597)(49,539)(53,154)Netprofits7,8298,04010,44311,557Grossprofit17,01520,32424,29626,370Depreciation317348355362Operatingexpenses(9,400)(10,566)(11,267)(11,945)WorkingCapitalChange(90)(1,473)(1,815)(1,028)Operatingincome7,6159,75813,03014,425Otheradjustments(44)000Non-operatingincome2902194343CashflowfromInvesting(1,371)(548)(555)(562)Pre-taxincome7,9069,97713,07214,467Capex(1,027)(548)(555)(562)Incometax1,5151,9372,6302,911ChangeofLTInvestment0000ReportednetIncome6,3918,04010,44311,557ChangeofSTInvestment(129)000Adj.wtd.avg.shrs(m)609609609609Otheradjustments(215)000ReportedEPS(NT$)10.5013.2117.1618.99Cashflowfromfinancing(4,255)(5,368)(6,754)(8,772)IncreaseinL/Tdebt0000IncreaseinS/Tdebt(170)000CashDividendPaid(4,320)(5,368)(6,754)(8,772)Dir&EmpBonusPaid0000Issuanceofstock0000BalanceSheetOtheradjustments235000NT$mn(YearsEndDec)20182019E2020E2021EExchangerateadjustment1000Cash20,49821,49723,17124,728Netchangeincash2,3861,0001,6741,556MktSecurities0000AR/NR13,17214,08016,26417,517Inventory6,9486,8967,8368,407FinancialRatiosOther41441441441420182019E2020E2021ECurrentAssets41,03142,88747,68551,066Growth(%)Long-terminvestments1,1961,1961,1961,196Turnover16.516.615.57.7Fixedassets2,6112,8113,0113,211Operatingprofits32.328.133.510.7Deferredassets469469469469EPS27.225.829.910.7Otherassets2,7622,7622,7622,762Margins(%)TotalAssets48,07050,12555,12358,704GrossMargin31.031.832.933.2S/Tborrowings2,1812,1812,1812,181OperatingMargin13.915.317.618.1AP/NP10,2209,60310,91311,709PretaxMargin14.415.617.718.2OtherSTliabilities4,5644,5644,5644,564NetMargin11.712.614.114.5LTdebt0000Return(%)OtherLTliabilities787787787787ROAE21.725.430.030.4Commonshares6,0856,0856,0856,085ROAA14.416.419.820.3TotalLiabilities17,75217,13618,44519,241Gearing(%)Additionalcapital11,08411,08411,08411,084NetDebt/Equity(59.9)(58.6)(57.2)(57.1)Retainedearning13,61316,28519,97322,758Liabilities/Equity58.651.950.348.8Othershareholders"equity(464)(464)(464)(464)Ratios(X)TotalEquity30,31832,99036,67839,463Currentratio2.42.62.72.8TotalLiab.&Shrhldr"sEquity48,07050,12555,12358,704Quickratio2.02.22.22.3OthersE=MorganStanleyResearchEstimatesAR/NRTurnover(days)80808080Source:MorganStanleyResearch,CompanyDataInventoryTurnover(days)58585858APTurnover(days)80808080CashConversion(days)5858585832 Novatek:Risk-RewardStrongergrowthfromTDDIandAMOLEDDDIin2020WhyOverweightDespitetheslowdowninsmartphonesemis,webelievethatNovatek"searningscanstillincreaseover25%in2020,thankstostronggrowthinTDDIandAMOLED.WebelieveanaccelerationofAMOLEDadoptionwilldriveupthecompany"sbusinessfrom2021onward.Thecompanyistradingat13xour2020EPS.Cashyieldisahealthy6-7%.KeyValueDriversSource:Refinitiv,MorganStanleyResearchestimatesGlobal4K2KTVpenetrationrate.PriceTargetNT$272Smartphoneresolutionpanelupgrades.Basecase,residualincome(RI)model.TVSoCprofitability.AMOLEDdriverICshipments.BullNT$30618x2020eEPS4K2KTVpenetrationrises;fastersmartphoneresolutionupgrade;newproductPotentialCatalystsrampsup;marginsimprove:1)Worldwide4K2KTVpenetrationreaches70%inFaster-than-expectedproliferationof4K2K2020becauseofincreasedavailabilityof4K2Kcontent.2)SmartphoneTVsworldwide.resolutionupgradeacceleratesgivenlaunchoffasterandmoremobileVR-Easingcompetitioninsmartphonedriverrelateddevicesin2020.3)NovatekrampsupCMOSimagesensorbusinessin2020.4)TVSoCmarginimprovesto40%withlargerscalein2020.ICs.HigherearningscontributionfromTDDI.BaseNT$272Faster-than-expectedprogressinAMOLED16x2020eEPSLCDdriverIC.4K2KTVreceivespositiveconsumerfeedback;high-endsmartphoneresolutionupgradebegins:1)4K2KTVpenetrationreaches60%in2020,thankstopriceRiskstoAchievingPriceTargetelasticity.2)Smartphoneresolutionupgradescontinuein2020,givenhigherrequirementsforbetteruserexperienceinVR.3)OverallgrossmarginisDownside:1)CompetitioninTDDI–pricemaintainedataround32%in2020.competitioncouldintensifyanddriveNovatek"sgrossmarginbelowitscorporateBearNT$142average;2)4K2KTVgrowthcouldbeslower8x2020eEPSthanweexpectamidinternationalsports4K2KTVremainsanichemarket;smartphonedriverICfacespricecompetition:events.1)Consumersoptforless-expensiveTVsgivenaweakereconomyand4K2KTVpenetrationstaysflattishat50%in2020.2)SmartphonedriverICpricecompetitionintensifiesgloballyin2020,givensaturatedsmartphonemarkets.3)Novatek"sgrossmargindeclinesto26%in2020.33 DisclosureSectionTheinformationandopinionsinMorganStanleyResearchwerepreparedoraredisseminatedbyMorganStanleyAsiaLimited(whichacceptstheresponsibilityforitscontents)and/orMorganStanleyAsia(Singapore)Pte.(Registrationnumber199206298Z)and/orMorganStanleyAsia(Singapore)SecuritiesPteLtd(Registrationnumber200008434H),regulatedbytheMonetaryAuthorityofSingapore(whichacceptslegalresponsibilityforitscontentsandshouldbecontactedwithrespecttoanymattersarisingfrom,orinconnectionwith,MorganStanleyResearch),and/orMorganStanleyTaiwanLimitedand/orMorganStanley&CoInternationalplc,SeoulBranch,and/orMorganStanleyAustraliaLimited(A.B.N.67003734576,holderofAustralianfinancialserviceslicenseNo.233742,whichacceptsresponsibilityforitscontents),and/orMorganStanleyWealthManagementAustraliaPtyLtd(A.B.N.19009145555,holderofAustralianfinancialserviceslicenseNo.240813,whichacceptsresponsibilityforitscontents),and/orMorganStanleyIndiaCompanyPrivateLimited,regulatedbytheSecuritiesandExchangeBoardofIndia(“SEBI”)andholderoflicensesasaResearchAnalyst(SEBIRegistrationNo.INH000001105);StockBroker(BSERegistrationNo.INB011054237andNSERegistrationNo.INB/INF231054231),MerchantBanker(SEBIRegistrationNo.INM000011203),anddepositoryparticipantwithNationalSecuritiesDepositoryLimited(SEBIRegistrationNo.IN-DP-NSDL-372-2014)whichacceptstheresponsibilityforitscontentsandshouldbecontactedwithrespecttoanymattersarisingfrom,orinconnectionwith,MorganStanleyResearch,and/orPT.MorganStanleySekuritasIndonesiaandtheiraffiliates(collectively,"MorganStanley").Forimportantdisclosures,stockpricechartsandequityratinghistoriesregardingcompaniesthatarethesubjectofthisreport,pleaseseetheMorganStanleyResearchDisclosureWebsiteatwww.morganstanley.com/researchdisclosures,orcontactyourinvestmentrepresentativeorMorganStanleyResearchat1585Broadway,(Attention:ResearchManagement),NewYork,NY,10036USA.Forvaluationmethodologyandrisksassociatedwithanyrecommendation,ratingorpricetargetreferencedinthisresearchreport,pleasecontacttheClientSupportTeamasfollows:US/Canada+1800303-2495;HongKong+8522848-5999;LatinAmerica+1718754-5444(U.S.);London+44(0)20-7425-8169;Singapore+656834-6860;Sydney+61(0)2-9770-1505;Tokyo+81(0)3-6836-9000.AlternativelyyoumaycontactyourinvestmentrepresentativeorMorganStanleyResearchat1585Broadway,(Attention:ResearchManagement),NewYork,NY10036USA.AnalystCertificationThefollowinganalystsherebycertifythattheirviewsaboutthecompaniesandtheirsecuritiesdiscussedinthisreportareaccuratelyexpressedandthattheyhavenotreceivedandwillnotreceivedirectorindirectcompensationinexchangeforexpressingspecificrecommendationsorviewsinthisreport:CharlieChan;JeffHsu;DanielYen,CFA.Unlessotherwisestated,theindividualslistedonthecoverpageofthisreportareresearchanalysts.GlobalResearchConflictManagementPolicyMorganStanleyResearchhasbeenpublishedinaccordancewithourconflictmanagementpolicy,whichisavailableatwww.morganstanley.com/institutional/research/conflictpolicies.APortugueseversionofthepolicycanbefoundatwww.morganstanley.com.brImportantUSRegulatoryDisclosuresonSubjectCompaniesAsofOctober31,2019,MorganStanleybeneficiallyowned1%ormoreofaclassofcommonequitysecuritiesofthefollowingcompaniescoveredinMorganStanleyResearch:AlchipTechnologiesLtd,ASETechnologyHoldingCo.Ltd.,ChipbondTechnologyCorp,EgisTechnologyInc,KingYuanElectronicsCoLtd,MacronixInternationalCoLtd,MediaTek,Novatek,ParadeTechnologiesLtd,RealtekSemiconductor,SilergyCorp.,UMC,UniversalScientificInd.(Shanghai),VanguardInternationalSemiconductor,WINSemiconductorsCorp.Withinthelast12months,MorganStanleyhasreceivedcompensationforinvestmentbankingservicesfromNVIDIACorp..Inthenext3months,MorganStanleyexpectstoreceiveorintendstoseekcompensationforinvestmentbankingservicesfromASETechnologyHoldingCo.Ltd.,MediaTek,NanyaTechnologyCorp.,NVIDIACorp.,ShenzhenGoodixTechnologyCoLtd,SiliconMotion,SMIC,UMC,UniversalScientificInd.(Shanghai).Withinthelast12months,MorganStanleyhasreceivedcompensationforproductsandservicesotherthaninvestmentbankingservicesfromASETechnologyHoldingCo.Ltd.,KingYuanElectronicsCoLtd,MediaTek,NanyaTechnologyCorp.,Novatek,NVIDIACorp.,RealtekSemiconductor,SiliconMotion,SMIC,UMC,UniversalScientificInd.(Shanghai),WinbondElectronicsCorp.Withinthelast12months,MorganStanleyhasprovidedorisprovidinginvestmentbankingservicesto,orhasaninvestmentbankingclientrelationshipwith,thefollowingcompany:ASETechnologyHoldingCo.Ltd.,MediaTek,NanyaTechnologyCorp.,NVIDIACorp.,ShenzhenGoodixTechnologyCoLtd,SiliconMotion,SMIC,UMC,UniversalScientificInd.(Shanghai).Withinthelast12months,MorganStanleyhaseitherprovidedorisprovidingnon-investmentbanking,securities-relatedservicestoand/orinthepasthasenteredintoanagreementtoprovideservicesorhasaclientrelationshipwiththefollowingcompany:ASETechnologyHoldingCo.Ltd.,KingYuanElectronicsCoLtd,MacronixInternationalCoLtd,MediaTek,NanyaTechnologyCorp.,Novatek,NVIDIACorp.,RealtekSemiconductor,SiliconMotion,SMIC,TSMC,UMC,UniversalScientificInd.(Shanghai),WinbondElectronicsCorp.MorganStanley&Co.LLCmakesamarketinthesecuritiesofASETechnologyHoldingCo.Ltd.,NVIDIACorp.,SiliconMotion,TSMC,UMC.TheequityresearchanalystsorstrategistsprincipallyresponsibleforthepreparationofMorganStanleyResearchhavereceivedcompensationbaseduponvariousfactors,includingqualityofresearch,investorclientfeedback,stockpicking,competitivefactors,firmrevenuesandoverallinvestmentbankingrevenues.EquityResearchanalysts"orstrategists"compensationisnotlinkedtoinvestmentbankingorcapitalmarketstransactionsperformedbyMorganStanleyortheprofitabilityorrevenuesofparticulartradingdesks.MorganStanleyanditsaffiliatesdobusinessthatrelatestocompanies/instrumentscoveredinMorganStanleyResearch,includingmarketmaking,providingliquidity,fundmanagement,commercialbanking,extensionofcredit,investmentservicesandinvestmentbanking.MorganStanleysellstoandbuysfromcustomersthesecurities/instrumentsofcompaniescoveredinMorganStanleyResearchonaprincipalbasis.MorganStanleymayhaveapositioninthedebtoftheCompanyorinstrumentsdiscussedinthisreport.MorganStanleytradesormaytradeasprincipalinthedebtsecurities(orinrelatedderivatives)thatarethesubjectofthedebtresearchreport.Certaindisclosureslistedabovearealsoforcompliancewithapplicableregulationsinnon-USjurisdictions.STOCKRATINGSMorganStanleyusesarelativeratingsystemusingtermssuchasOverweight,Equal-weight,Not-RatedorUnderweight(seedefinitionsbelow).MorganStanleydoesnotassignratingsofBuy,HoldorSelltothestockswecover.Overweight,Equal-weight,Not-RatedandUnderweightarenottheequivalentofbuy,holdandsell.InvestorsshouldcarefullyreadthedefinitionsofallratingsusedinMorganStanleyResearch.Inaddition,sinceMorganStanleyResearchcontainsmorecompleteinformationconcerningtheanalyst"sviews,investorsshouldcarefullyreadMorganStanleyResearch,initsentirety,andnotinferthecontentsfromtheratingalone.Inanycase,ratings(orresearch)shouldnotbeusedorrelieduponasinvestmentadvice.Aninvestor"sdecisiontobuyorsellastockshoulddependonindividualcircumstances(suchastheinvestor"sexistingholdings)andotherconsiderations.GlobalStockRatingsDistribution(asofNovember30,2019)TheStockRatingsdescribedbelowapplytoMorganStanley"sFundamentalEquityResearchanddonotapplytoDebtResearchproducedbytheFirm.Fordisclosurepurposesonly(inaccordancewithNASDandNYSErequirements),weincludethecategoryheadingsofBuy,Hold,andSellalongsideourratingsofOverweight,Equal-weight,Not-RatedandUnderweight.MorganStanleydoesnotassignratingsofBuy,HoldorSelltothestockswecover.34 Overweight,Equal-weight,Not-RatedandUnderweightarenottheequivalentofbuy,hold,andsellbutrepresentrecommendedrelativeweightings(seedefinitionsbelow).Tosatisfyregulatoryrequirements,wecorrespondOverweight,ourmostpositivestockrating,withabuyrecommendation;wecorrespondEqual-weightandNot-RatedtoholdandUnderweighttosellrecommendations,respectively.COVERAGEUNIVERSEINVESTMENTBANKINGCLIENTS(IBC)OTHERMATERIALINVESTMENTSERVICESCLIENTS(MISC)STOCKRATINGCOUNT%OFCOUNT%OF%OFCOUNT%OFCATEGORYTOTALTOTALIBCRATINGTOTALCATEGORYOTHERMISCOverweight/Buy115036%28742%25%51536%Equal-weight/Hold145246%31747%22%69248%Not-Rated/Hold10%00%0%10%Underweight/Sell56318%7311%13%22216%TOTAL3,1666771430DataincludecommonstockandADRscurrentlyassignedratings.InvestmentBankingClientsarecompaniesfromwhomMorganStanleyreceivedinvestmentbankingcompensationinthelast12months.Duetoroundingoffofdecimals,thepercentagesprovidedinthe"%oftotal"columnmaynotadduptoexactly100percent.AnalystStockRatingsOverweight(O).Thestock"stotalreturnisexpectedtoexceedtheaveragetotalreturnoftheanalyst"sindustry(orindustryteam"s)coverageuniverse,onarisk-adjustedbasis,overthenext12-18months.Equal-weight(E).Thestock"stotalreturnisexpectedtobeinlinewiththeaveragetotalreturnoftheanalyst"sindustry(orindustryteam"s)coverageuniverse,onarisk-adjustedbasis,overthenext12-18months.Not-Rated(NR).Currentlytheanalystdoesnothaveadequateconvictionaboutthestock"stotalreturnrelativetotheaveragetotalreturnoftheanalyst"sindustry(orindustryteam"s)coverageuniverse,onarisk-adjustedbasis,overthenext12-18months.Underweight(U).Thestock"stotalreturnisexpectedtobebelowtheaveragetotalreturnoftheanalyst"sindustry(orindustryteam"s)coverageuniverse,onarisk-adjustedbasis,overthenext12-18months.Unlessotherwisespecified,thetimeframeforpricetargetsincludedinMorganStanleyResearchis12to18months.AnalystIndustryViewsAttractive(A):Theanalystexpectstheperformanceofhisorherindustrycoverageuniverseoverthenext12-18monthstobeattractivevs.therelevantbroadmarketbenchmark,asindicatedbelow.In-Line(I):Theanalystexpectstheperformanceofhisorherindustrycoverageuniverseoverthenext12-18monthstobeinlinewiththerelevantbroadmarketbenchmark,asindicatedbelow.Cautious(C):Theanalystviewstheperformanceofhisorherindustrycoverageuniverseoverthenext12-18monthswithcautionvs.therelevantbroadmarketbenchmark,asindicatedbelow.Benchmarksforeachregionareasfollows:NorthAmerica-S&P500;LatinAmerica-relevantMSCIcountryindexorMSCILatinAmericaIndex;Europe-MSCIEurope;Japan-TOPIX;Asia-relevantMSCIcountryindexorMSCIsub-regionalindexorMSCIACAsiaPacificexJapanIndex.ImportantDisclosuresforMorganStanleySmithBarneyLLCCustomersImportantdisclosuresregardingtherelationshipbetweenthecompaniesthatarethesubjectofMorganStanleyResearchandMorganStanleySmithBarneyLLCorMorganStanleyoranyoftheiraffiliates,areavailableontheMorganStanleyWealthManagementdisclosurewebsiteatwww.morganstanley.com/online/researchdisclosures.ForMorganStanleyspecificdisclosures,youmayrefertowww.morganstanley.com/researchdisclosures.EachMorganStanleyEquityResearchreportisreviewedandapprovedonbehalfofMorganStanleySmithBarneyLLC.ThisreviewandapprovalisconductedbythesamepersonwhoreviewstheEquityResearchreportonbehalfofMorganStanley.Thiscouldcreateaconflictofinterest.OtherImportantDisclosuresMorganStanley&Co.InternationalPLCanditsaffiliateshaveasignificantfinancialinterestinthedebtsecuritiesofNVIDIACorp.,SMIC,UMC.MorganStanleyResearchpolicyistoupdateresearchreportsasandwhentheResearchAnalystandResearchManagementdeemappropriate,basedondevelopmentswiththeissuer,thesector,orthemarketthatmayhaveamaterialimpactontheresearchviewsoropinionsstatedtherein.Inaddition,certainResearchpublicationsareintendedtobeupdatedonaregularperiodicbasis(weekly/monthly/quarterly/annual)andwillordinarilybeupdatedwiththatfrequency,unlesstheResearchAnalystandResearchManagementdeterminethatadifferentpublicationscheduleisappropriatebasedoncurrentconditions.MorganStanleyisnotactingasamunicipaladvisorandtheopinionsorviewscontainedhereinarenotintendedtobe,anddonotconstitute,advicewithinthemeaningofSection975oftheDodd-FrankWallStreetReformandConsumerProtectionAct.MorganStanleyproducesanequityresearchproductcalleda"TacticalIdea."Viewscontainedina"TacticalIdea"onaparticularstockmaybecontrarytotherecommendationsorviewsexpressedinresearchonthesamestock.Thismaybetheresultofdifferingtimehorizons,methodologies,marketevents,orotherfactors.Forallresearchavailableonaparticularstock,pleasecontactyoursalesrepresentativeorgotoMatrixathttp://www.morganstanley.com/matrix.MorganStanleyResearchisprovidedtoourclientsthroughourproprietaryresearchportalonMatrixandalsodistributedelectronicallybyMorganStanleytoclients.Certain,butnotall,MorganStanleyResearchproductsarealsomadeavailabletoclientsthroughthird-partyvendorsorredistributedtoclientsthroughalternateelectronicmeansasaconvenience.ForaccesstoallavailableMorganStanleyResearch,pleasecontactyoursalesrepresentativeorgotoMatrixathttp://www.morganstanley.com/matrix.Anyaccessand/oruseofMorganStanleyResearchissubjecttoMorganStanley"sTermsofUse(http://www.morganstanley.com/terms.html).Byaccessingand/orusingMorganStanleyResearch,youareindicatingthatyouhavereadandagreetobeboundbyourTermsofUse(http://www.morganstanley.com/terms.html).InadditionyouconsenttoMorganStanleyprocessingyourpersonaldataandusingcookiesinaccordancewithourPrivacyPolicyandourGlobalCookiesPolicy(http://www.morganstanley.com/privacy_pledge.html),includingforthepurposesofsettingyourpreferencesandtocollectreadershipdatasothatwecandeliverbetterandmorepersonalizedserviceandproductstoyou.TofindoutmoreinformationabouthowMorganStanleyprocessespersonaldata,howweusecookiesandhowtorejectcookiesseeourPrivacyPolicyandourGlobalCookiesPolicy35 (http://www.morganstanley.com/privacy_pledge.html).IfyoudonotagreetoourTermsofUseand/orifyoudonotwishtoprovideyourconsenttoMorganStanleyprocessingyourpersonaldataorusingcookiespleasedonotaccessourresearch.MorganStanleyResearchdoesnotprovideindividuallytailoredinvestmentadvice.MorganStanleyResearchhasbeenpreparedwithoutregardtothecircumstancesandobjectivesofthosewhoreceiveit.MorganStanleyrecommendsthatinvestorsindependentlyevaluateparticularinvestmentsandstrategies,andencouragesinvestorstoseektheadviceofafinancialadviser.Theappropriatenessofaninvestmentorstrategywilldependonaninvestor"scircumstancesandobjectives.Thesecurities,instruments,orstrategiesdiscussedinMorganStanleyResearchmaynotbesuitableforallinvestors,andcertaininvestorsmaynotbeeligibletopurchaseorparticipateinsomeorallofthem.MorganStanleyResearchisnotanoffertobuyorsellorthesolicitationofanoffertobuyorsellanysecurity/instrumentortoparticipateinanyparticulartradingstrategy.Thevalueofandincomefromyourinvestmentsmayvarybecauseofchangesininterestrates,foreignexchangerates,defaultrates,prepaymentrates,securities/instrumentsprices,marketindexes,operationalorfinancialconditionsofcompaniesorotherfactors.Theremaybetimelimitationsontheexerciseofoptionsorotherrightsinsecurities/instrumentstransactions.Pastperformanceisnotnecessarilyaguidetofutureperformance.Estimatesoffutureperformancearebasedonassumptionsthatmaynotberealized.Ifprovided,andunlessotherwisestated,theclosingpriceonthecoverpageisthatoftheprimaryexchangeforthesubjectcompany"ssecurities/instruments.Thefixedincomeresearchanalysts,strategistsoreconomistsprincipallyresponsibleforthepreparationofMorganStanleyResearchhavereceivedcompensationbaseduponvariousfactors,includingquality,accuracyandvalueofresearch,firmprofitabilityorrevenues(whichincludefixedincometradingandcapitalmarketsprofitabilityorrevenues),clientfeedbackandcompetitivefactors.FixedIncomeResearchanalysts",strategists"oreconomists"compensationisnotlinkedtoinvestmentbankingorcapitalmarketstransactionsperformedbyMorganStanleyortheprofitabilityorrevenuesofparticulartradingdesks.The"ImportantUSRegulatoryDisclosuresonSubjectCompanies"sectioninMorganStanleyResearchlistsallcompaniesmentionedwhereMorganStanleyowns1%ormoreofaclassofcommonequitysecuritiesofthecompanies.ForallothercompaniesmentionedinMorganStanleyResearch,MorganStanleymayhaveaninvestmentoflessthan1%insecurities/instrumentsorderivativesofsecurities/instrumentsofcompaniesandmaytradetheminwaysdifferentfromthosediscussedinMorganStanleyResearch.EmployeesofMorganStanleynotinvolvedinthepreparationofMorganStanleyResearchmayhaveinvestmentsinsecurities/instrumentsorderivativesofsecurities/instrumentsofcompaniesmentionedandmaytradetheminwaysdifferentfromthosediscussedinMorganStanleyResearch.DerivativesmaybeissuedbyMorganStanleyorassociatedpersons.WiththeexceptionofinformationregardingMorganStanley,MorganStanleyResearchisbasedonpublicinformation.MorganStanleymakeseveryefforttousereliable,comprehensiveinformation,butwemakenorepresentationthatitisaccurateorcomplete.WehavenoobligationtotellyouwhenopinionsorinformationinMorganStanleyResearchchangeapartfromwhenweintendtodiscontinueequityresearchcoverageofasubjectcompany.FactsandviewspresentedinMorganStanleyResearchhavenotbeenreviewedby,andmaynotreflectinformationknownto,professionalsinotherMorganStanleybusinessareas,includinginvestmentbankingpersonnel.MorganStanleyResearchpersonnelmayparticipateincompanyeventssuchassitevisitsandaregenerallyprohibitedfromacceptingpaymentbythecompanyofassociatedexpensesunlesspre-approvedbyauthorizedmembersofResearchmanagement.MorganStanleymaymakeinvestmentdecisionsthatareinconsistentwiththerecommendationsorviewsinthisreport.ToourreadersbasedinTaiwanortradinginTaiwansecurities/instruments:Informationonsecurities/instrumentsthattradeinTaiwanisdistributedbyMorganStanleyTaiwanLimited("MSTL").Suchinformationisforyourreferenceonly.Thereadershouldindependentlyevaluatetheinvestmentrisksandissolelyresponsiblefortheirinvestmentdecisions.MorganStanleyResearchmaynotbedistributedtothepublicmediaorquotedorusedbythepublicmediawithouttheexpresswrittenconsentofMorganStanley.Anynon-customerreaderwithinthescopeofArticle7-1oftheTaiwanStockExchangeRecommendationRegulationsaccessingand/orreceivingMorganStanleyResearchisnotpermittedtoprovideMorganStanleyResearchtoanythirdparty(includingbutnotlimitedtorelatedparties,affiliatedcompaniesandanyotherthirdparties)orengageinanyactivitiesregardingMorganStanleyResearchwhichmaycreateorgivetheappearanceofcreatingaconflictofinterest.Informationonsecurities/instrumentsthatdonottradeinTaiwanisforinformationalpurposesonlyandisnottobeconstruedasarecommendationorasolicitationtotradeinsuchsecurities/instruments.MSTLmaynotexecutetransactionsforclientsinthesesecurities/instruments.CertaininformationinMorganStanleyResearchwassourcedbyemployeesoftheShanghaiRepresentativeOfficeofMorganStanleyAsiaLimitedfortheuseofMorganStanleyAsiaLimited.MorganStanleyisnotincorporatedunderPRClawandtheresearchinrelationtothisreportisconductedoutsidethePRC.MorganStanleyResearchdoesnotconstituteanoffertosellorthesolicitationofanoffertobuyanysecuritiesinthePRC.PRCinvestorsshallhavetherelevantqualificationstoinvestinsuchsecuritiesandshallberesponsibleforobtainingallrelevantapprovals,licenses,verificationsand/orregistrationsfromtherelevantgovernmentalauthoritiesthemselves.Neitherthisreportnoranypartofitisintendedas,orshallconstitute,provisionofanyconsultancyoradvisoryserviceofsecuritiesinvestmentasdefinedunderPRClaw.Suchinformationisprovidedforyourreferenceonly.MorganStanleyResearchisdisseminatedinBrazilbyMorganStanleyC.T.V.M.S.A.locatedatAv.BrigadeiroFariaLima,3600,6thfloor,SãoPaulo-SP,Brazil;andisregulatedbytheComissãodeValoresMobiliários;inMexicobyMorganStanleyMéxico,CasadeBolsa,S.A.deC.VwhichisregulatedbyComisionNacionalBancariaydeValores.PaseodelosTamarindos90,Torre1,Col.BosquesdelasLomasFloor29,05120MexicoCity;inJapanbyMorganStanleyMUFGSecuritiesCo.,Ltd.and,forCommoditiesrelatedresearchreportsonly,MorganStanleyCapitalGroupJapanCo.,Ltd;inHongKongbyMorganStanleyAsiaLimited(whichacceptsresponsibilityforitscontents)andbyMorganStanleyAsiaInternationalLimited,HongKongBranch;inSingaporebyMorganStanleyAsia(Singapore)Pte.(Registrationnumber199206298Z)and/orMorganStanleyAsia(Singapore)SecuritiesPteLtd(Registrationnumber200008434H),regulatedbytheMonetaryAuthorityofSingapore(whichacceptslegalresponsibilityforitscontentsandshouldbecontactedwithrespecttoanymattersarisingfrom,orinconnectionwith,MorganStanleyResearch)andbyMorganStanleyAsiaInternationalLimited,SingaporeBranch(RegistrationnumberT11FC0207F);inAustraliato"wholesaleclients"withinthemeaningoftheAustralianCorporationsActbyMorganStanleyAustraliaLimitedA.B.N.67003734576,holderofAustralianfinancialserviceslicenseNo.233742,whichacceptsresponsibilityforitscontents;inAustraliato"wholesaleclients"and"retailclients"withinthemeaningoftheAustralianCorporationsActbyMorganStanleyWealthManagementAustraliaPtyLtd(A.B.N.19009145555,holderofAustralianfinancialserviceslicenseNo.240813,whichacceptsresponsibilityforitscontents;inKoreabyMorganStanley&CoInternationalplc,SeoulBranch;inIndiabyMorganStanleyIndiaCompanyPrivateLimited;inIndonesiabyPT.MorganStanleySekuritasIndonesia;inCanadabyMorganStanleyCanadaLimited,whichhasapprovedofandtakesresponsibilityforitscontentsinCanada;inGermanyandtheEuropeanEconomicAreawhererequiredbyMorganStanleyEuropeS.E.,regulatedbyBundesanstaltfuerFinanzdienstleistungsaufsicht(BaFin);inSpainbyMorganStanley,S.V.,S.A.,aMorganStanleygroupcompany,whichissupervisedbytheSpanishSecuritiesMarketsCommission(CNMV)andstatesthatMorganStanleyResearchhasbeenwrittenanddistributedinaccordancewiththerulesofconductapplicabletofinancialresearchasestablishedunderSpanishregulations;intheUSbyMorganStanley&Co.LLC,whichacceptsresponsibilityforitscontents.MorganStanley&Co.Internationalplc,authorizedbythePrudentialRegulatoryAuthorityandregulatedbytheFinancialConductAuthorityandthePrudentialRegulatoryAuthority,disseminatesintheUKresearchthatithasprepared,andapprovessolelyforthepurposesofsection21oftheFinancialServicesandMarketsAct2000,researchwhichhasbeenpreparedbyanyofitsaffiliates.RMBMorganStanleyProprietaryLimitedisamemberoftheJSELimitedandA2X(Pty)Ltd.RMBMorganStanleyProprietaryLimitedisajointventureownedequallybyMorganStanleyInternationalHoldingsInc.andRMBInvestmentAdvisory(Proprietary)Limited,whichiswhollyownedbyFirstRandLimited.TheinformationinMorganStanleyResearchisbeingdisseminatedbyMorganStanleySaudiArabia,regulatedbytheCapitalMarketAuthorityintheKingdomofSaudiArabia,andisdirectedatSophisticatedinvestorsonly.TheinformationinMorganStanleyResearchisbeingcommunicatedbyMorganStanley&Co.Internationalplc(DIFCBranch),regulatedbytheDubaiFinancialServicesAuthority(theDFSA),andisdirectedatProfessionalClientsonly,asdefinedbytheDFSA.Thefinancialproductsorfinancialservicesto36 whichthisresearchrelateswillonlybemadeavailabletoacustomerwhowearesatisfiedmeetstheregulatorycriteriatobeaProfessionalClient.TheinformationinMorganStanleyResearchisbeingcommunicatedbyMorganStanley&Co.Internationalplc(QFCBranch),regulatedbytheQatarFinancialCentreRegulatoryAuthority(theQFCRA),andisdirectedatbusinesscustomersandmarketcounterpartiesonlyandisnotintendedforRetailCustomersasdefinedbytheQFCRA.AsrequiredbytheCapitalMarketsBoardofTurkey,investmentinformation,commentsandrecommendationsstatedhere,arenotwithinthescopeofinvestmentadvisoryactivity.Investmentadvisoryserviceisprovidedexclusivelytopersonsbasedontheirriskandincomepreferencesbytheauthorizedfirms.Commentsandrecommendationsstatedherearegeneralinnature.Theseopinionsmaynotfittoyourfinancialstatus,riskandreturnpreferences.Forthisreason,tomakeaninvestmentdecisionbyrelyingsolelytothisinformationstatedheremaynotbringaboutoutcomesthatfityourexpectations.ThetrademarksandservicemarkscontainedinMorganStanleyResearcharethepropertyoftheirrespectiveowners.Third-partydataprovidersmakenowarrantiesorrepresentationsrelatingtotheaccuracy,completeness,ortimelinessofthedatatheyprovideandshallnothaveliabilityforanydamagesrelatingtosuchdata.TheGlobalIndustryClassificationStandard(GICS)wasdevelopedbyandistheexclusivepropertyofMSCIandS&P.MorganStanleyResearch,oranyportionthereofmaynotbereprinted,soldorredistributedwithoutthewrittenconsentofMorganStanley.IndicatorsandtrackersreferencedinMorganStanleyResearchmaynotbeusedas,ortreatedas,abenchmarkunderRegulationEU2016/1011,oranyothersimilarframework.INDUSTRYCOVERAGE:GreaterChinaTechnologySemiconductorsCOMPANY(TICKER)RATING(ASOF)PRICE*(12/03/2019)CharlieChanAlchipTechnologiesLtd(3661.TW)O(11/08/2019)NT$214.00ASETechnologyHoldingCo.Ltd.(3711.TW)E(09/24/2019)NT$75.50ASMPacific(0522.HK)O(09/05/2019)HK$101.90ChipbondTechnologyCorp(6147.TWO)O(04/24/2019)NT$62.50ChunghwaPrecisionTestTech(6510.TWO)E(11/08/2019)NT$900.00GlobalUnichipCorp(3443.TW)E(11/08/2019)NT$260.50GlobalWafersCoLtd(6488.TWO)O(08/16/2019)NT$341.00JiangsuChangjiangElectronicsTech(600584.SS)U(09/22/2015)Rmb21.83KingYuanElectronicsCoLtd(2449.TW)O(09/24/2019)NT$36.05MediaTek(2454.TW)O(09/12/2019)NT$418.00NanyaTechnologyCorp.(2408.TW)U(10/08/2019)NT$73.30PhisonElectronicsCorp(8299.TWO)O(05/21/2019)NT$287.00SilergyCorp.(6415.TW)U(08/16/2018)NT$893.00SiliconMotion(SIMO.O)U(04/23/2019)US$43.98SMIC(0981.HK)E(09/05/2019)HK$10.10TSMC(2330.TW)O(09/05/2019)NT$307.00UMC(2303.TW)O(12/03/2019)NT$15.35UniversalScientificInd.(Shanghai)(601231.SS)O(08/04/2015)Rmb16.59VanguardInternationalSemiconductor(5347.TWO)O(12/03/2019)NT$73.10WillSemiconductorCoLtdShanghai(603501.SS)O(09/01/2019)Rmb146.00WINSemiconductorsCorp(3105.TWO)O(04/18/2019)NT$291.00DanielYen,CFAASMediaTechnologyInc(5269.TW)U(02/25/2019)NT$606.00AspeedTechnology(5274.TWO)E(07/05/2019)NT$878.00EgisTechnologyInc(6462.TWO)E(11/07/2019)NT$232.00GigaDeviceSemiconductorBeijingInc(603986.SS)O(04/24/2019)Rmb179.55MacronixInternationalCoLtd(2337.TW)O(04/24/2019)NT$35.75Novatek(3034.TW)O(09/06/2019)NT$219.50ParadeTechnologiesLtd(4966.TWO)O(03/03/2019)NT$592.00RealtekSemiconductor(2379.TW)O(08/03/2018)NT$227.00ShenzhenGoodixTechnologyCoLtd(603160.SS)O(09/06/2019)Rmb200.91WinbondElectronicsCorp(2344.TW)O(07/26/2019)NT$17.70WPGHoldings(3702.TW)O(07/31/2017)NT$37.75StockRatingsaresubjecttochange.Pleaseseelatestresearchforeachcompany.*Historicalpricesarenotsplitadjusted.©2019MorganStanley37'