MasterLink Securities Nan Ya PCB


Investment Keynotes

Company Background

Nan Ya PCB (NYPCB), a subsidiary of Formosa Plastics Group, was established in 1997 and currently is the largest Flip Chip (FC) manufacturer in Taiwan. It currently focuses its business on conventional PCB and IC substrate: FC (53% of 1Q06 revenue), wire bonding (20%), conventional PCB and others (27%). Currently NYPCB has 4 IC substrate factories in Taiwan, and 2 conventional PCB factories in Kunshan, China. NYPCB’s current FC capacity is around 25.3mn pcs per month, which is the highest compared with industry peers in Taiwan.

NYPCB is currently the largest FC manufacturer in Taiwan

Table 1: 2Q06 FC Capacity Comparison by Key Manufacturers in Taiwan

FC Key Manufacturers in Taiwan 2Q06 Capacity Main Customers

NYPCB 23.5 mn / per

month

Intel (INTC US, US$19.5, NR),

nVidia (NVDA US, US$29.6, NR),

ATI (ATY CN, CA$18.9, NR),

Microsoft (MSFT US, US$27.1, NR)

PPT (2446 TT, NT$82.0, NR) 8mn / per month Intel, nVidia, ATI, VIA (2388 TT, NT$28.7, NR)

Kinsus (3189 TT, NT$137.0, NR) 2mn / per month

Amkor (AMKR, US$9.2, NR),

Xilinx (XLNX, US$26.4, NR),

Altera (ALTR, US$20.6, NR), TI (TXN, US$32.7, NR)

Unimicron (3037 TT, NT$55.1, NR) 2.5mn / per month

Motorola (MOT, US$24.0, NR),

BenQ (2352 TT, US$27.2, NR),

Nokia (NOK1V FH, €17.4, NR),

Sony Ericsson (237523Z LN) Source: MasterLink Securities

IC substrate becomes the mainstream of IC packaging technology IC carrier, which is used to connect ICs to PCBs (Printed Circuits Board), can be divided into two types: lead frame and IC substrate. IC substrate offers much higher number of Input/Output (I/Os) than traditional lead frame methods such as DIL (Dual in Line), SoP (Small Outline Packaging), and QFP (Quad Flat Pack). With increasing demand in higher IC performance, the higher number of I/Os, and shrinking IC die size despite higher performance requirements, IC substrate becomes mainstream of IC packaging technology.



Table 2: IC carrier Progression by Size of Lead Pitch and I/O Count

0

1

2

3

10 50 90 130

Lead Number (I/O count)

Lead Pitch (mm)

DIL

SoP

QFP

BGA

CSP

Flip Chip

Lead Frame IC Substrate

Source: MasterLink Securities

IC substrate can be classified into three types by package forms: BGA (Ball Grid Array), CSP (Chip Scale Package) and FC. BGA uses solder ball instead of traditional lead frame to connect ICs and substrates. CSP is a single-chip-package technology, and size of CSP is almost the same or only slightly larger than bare dies. FC is to “flip” the die and use “bumping” to connect the front side of the die with the substrate. Currently, CSP, FC and PBGA (Plastic Ball Grid Array, which is one kind of BGA package) are the three most popular IC substrates.

Table 3: IC Substrate Classification by Package Forms and Interconnections

Source: IEK-ITIS; MasterLink Securities

Classification Types Notes1) BGA (Ball Grid Array Package)

CBGA (Ceramic BGA)PBGA (Plastic BGA)TBGA (Tape BGA)CDBGA (Cavity Down BGA)

2) CSP (Chip Scale Package)

Substrate CSP

Lead frame CSP

3) FC (Flip Chip Package) ◇ "Flip" the die and use "bumping" to connect the front side of the diewith the substrate

1) Wire Bonding ◇ Use gold wire to connect IC and substrate

2) TAB (Tape Automated Bonding)

◇ TAB involves bonding a gold bumped die to a single layer circuit builton a flexible material, such as polyimide.◇ TAB is used primarily in the flat panel display inductry to mount driverIcs between the glass of the display and the input circuitry behind thedisplay.

3) FC ◇ "Flip" the die and use "bumping" to connect the front side of the diewith the substrate

◇ Use solder ball instead of the conventional lead frame as theinterconnection between substrate and IC.◇ Compared with traditional lead frame, a BGA package allows more I/Ocounts and better heat depersion. Suitable for ICs that is running at highfrenquency.

◇ Single chip package technology.◇ Size of the package chip is almost the same or only slightly larger thanthe bare die.◇ Mostly used in ICs that are running at high frequency but with smallernumbers of pin counts. Number of pin count is also lower due to the smallsize of the package IC.

Package Forms

Interconnections



Table 4: The Applications of Three Most Popular IC Substrates

PBGA Micro-processor, controllers, ASICs, gate arrays, memory, communications, networking, graphics

CSP Memory card, microprocessor, SRAM, DRAM, ASICs

FC Workstations, routers, graphics, CPU, game consoles, set-top-boxes Source: MasterLink Securities

Table 5: CSP, FC, and PBGA IC Substrate Package

Source: PPT, MasterLink Securities

Global IC substrate market size is US$5.5bn in 2005, and will reach US$6.1bn in 2006, up 10.9%YoY.

With growth of IC testing and packaging industry and improving IC packaging technology, global IC substrate production value has begun to increase since 2003. During 2006 to 2007, higher-performance IC demand from new consumer electronics products, such as Intel’s Napa dual core CPU and game console, is expected to boost global IC substrate demand. We estimate global IC substrate market size will reach US$6.1bn in 2006, up 10.9% from US$5.5bn in 2005, and will grow to US$6.8bn in 2007, up 10.3% YoY.

xx

Table 6: 2001~2007 Global IC Substrate Market Size


Higher-performance IC demand from new applications will boost global IC substrate market size to US$6.1bn in 2006, up 10.9% YoY

10.3%

10.9%13.6%

23.7%20.0%

14.6%

0

3

6

9

2001 2002 2003 2004 2005 2006E 2007E0%

10%

20%

Global IC Substrate Production Value (LHS, US$: bn ) Growth YoY (RHS, %)



Japan, Taiwan and Korea will jointly account for 97.2% of global IC substrate market in 2006. Asia is the main IC substrate production base in the world, among which Japan, Korea and Taiwan accounted for 96.5% of global IC substrate market in 2005. Since IC substrate manufacturers in Japan will focus their business on other higher profits products, the global market share of Japanese IC substrate manufacturers is estimated to decrease from 63.4% in 2005 to 59.4% in 2006. Meanwhile, with the capacity expansion of Taiwanese and Korean IC substrate manufacturers, especially on FC, the IC substrate market shares of Taiwan and Korea are expected to increase. Taiwan IC substrate production value is estimated to reach US$1.6bn in 2006, up 30.6% from US$1.2bn in 2005.

Table 7: 2005~2006 Global IC Substrate Market Share % by Country

63.4% 59.4%

10.6% 11.3%

22.5% 26.5%

0%

30%

60%

90%

2005 2006E

Japan Taiwan Korea


Taiwan IC substrate market share is estimated to increase from 22.5% in 2005 to 26.5% in 2006

Table 8: 2001~2007 Taiwan IC Substrate Production Value with YoY and Global Market Share

19.0%

25.0%

43.6%

19.1%

30.6%

30.4%

28.6%26.5%22.5%

0

0.5

1

1.5

2

2001 2002 2003 2004 2005 2006E 2007E

0%

10%

20%

30%

40%

50%

60%TWN IC Substrate Production Value (LHS, US$: bn) YoY (RHS, %) TWN/WW (RHS, %)


Taiwan IC substrate production value will grow to US$1.6bn in 2006, up 30.6% YoY



Global FC market demand value is estimated to reach US$960mn in 2006, up 56.4% from US$614mn in 2005, and FC will become the main growth momentum in IC substrate industry in 2006.

Due to higher technical entry barrier and huge capax requirement, FC was not the mainstream of IC substrate before 2004. However, after 2H04, the IC packaging transition to FC directed by global tier one graphic chip manufacturers, nVidia and ATI began to boost FC demand tremendously. In 2006, with the growing demand in graphic chips, CPU / MPU (Micro Processor Unit) chipsets and game consoles, we estimate global demand value of FC will reach US$960mn in 2006, up 56.4% from US$614mn in 2005, and FC will become the main growth momentum in IC substrate industry. As currently CSP is broadly used on slim-type consumer electronics products and memory modules, it still weights 70.6% of total IC substrate products in 2006. However, FC will be used in much more applications, such as Intel’s Napa dual core CPU and game console. Compared with the 2006 global market demand value growth on CSP and BGA, which is 35.5% and 8.8% respectively, FC is the segment with the highest potential.

Table 9: 2003~2007 Global IC substrate Market Demand Value by Package Type

Global market demand value of FC is expected to be US$960mn in 2006, up 56.4% YoY from US$614mn in 2005

194 348 614 960 1,295

2,3052,766

3,872

5,250

6,040

930

1,050

1,130

1,380

1,230

0

3,000

6,000

9,000

2003 2004 2005 2006E 2007E

Flip Chip CSP BGA ( Market Demand Value: US$ mn)

Source: IEK; MasterLink Securities

Table 10: 2004~2007 Global IC Substrate Market Demand Value Growth Rate % by Package Type

79.4% 76.4%

34.9%

56.4%

0%

30%

60%

90%

2004 2005 2006E 2007E

Flip Chip CSP BGA

Source: IEK, MasterLink Securities



Company Analysis

Flip Chip is the key sources of revenue in 2006

NYPCB’s product mix in 1Q06 is: FC(52~52% of revenue), WB (20%), conventional PCB and others (27%). Due to 1) Intel’s Napa dual core CPU, Sony’s PS3 and Microsoft’s Vista OS will be launced from 2H06 to 1H07 2) higher gorss margin for FC, and 3) more new applications, NYPCB will keep focusing its business on FC manufacturing. We estimate FC to account for 61.2% of 2006 revenues, and this weighting will keep increasing in 2007.

Table 11: 2004~2006 NYPCB Sales Breakdown

Source: NYPCB; MasterLink Securities

IC substrate, including FC and WB, is estimated to account 81.7% of NYPCB’s 2006 revenue

35.5%45.6%

61.2%

17.9%

20.1%

46.6%

34.3%

18.3%

20.5%

0%

20%

40%

60%

80%

100%

2004 2005 2006E

Flip Chip Wire Bonding Conv entional PCB

Table 12: NYPCB’s Gross Margin % Breakdown by Main Products

Main Products Revenue % Gorss Margin % Future Gross Margin Trend

FC 53% 50% going up

WB 20% 32% keep flat

Conventional PCB 22% 20% keep flat

Source: NYPCB, MasterLink Securities

Intel is NYPCB’s main customer Main clients of NYPCB include Intel, ATI, nVidia and Microsoft. Intel is expected to account for 40% of NYPCB’s 2006 revenue, and therefore is currently the major client of NYPCB. FC is mainly employed on PC/NB’s CPU, north bridge chipsets, graphic chipsets, MPU and game console. Since Intel is the global leading supplier of CPU, MPU and north bridge chipsets, we believe NYPCB will benefit from being Intel’s main supplier on FC in Taiwan, especially with the launch of Intel’s Napa dual core CPU in 4Q06.

NYPCB is currently Intel’s main FC supplier in Taiwan.



Table 13: NYPCB’s Customers Breakdown in 2006

Source: NYPCB; MasterLink Securities

Intel40%

ATI9%

nVidia9%

Microsof t4%

Others38%

FC oversupply would not be a risk concern in 2006 We assume worldwide shipment of PC / NB would be 217.0mn pcs and game console would be 27.5mn pcs in 2006. Moreover, from our industry research about FC usage ratio in every kind of chipset, we derive global FC demand to be 798.8mn pcs in 2006. With our FC supply estimation of 766.4mn pcs, 2006 FC supply / demand ratio is 95.9%. We therefore believe FC will not face oversupply situation in 2006. However, with large FC capacity expansion by global main players from 2006 to 2007, we estimate FC supply / demand ratio will reach 100.9% in 2007.

Table 14: 2006~2007 Flip Chip Supply and Demand Estimation

2006E 2007E

Taiwan 437.0 654.0

Japan 318.0 345.1

Korea 78.0 129.0

Total Capacity 833.0 1,128.1

ww flip chip supply 766.4 1,094.3

ww flip chip supply YoY 42.8%

2006E 2007E

ww PC shipment 217.0 235.8

ww PC flip chip demand 633.7 848.7

ww game console shipment 27.5 39.2

ww game console flip chip demand 165.0 235.4

ww flip chip demand 798.8 1,084.1

ww flip chip demand YoY 35.7%

ww flip chip supply ratio 95.9% 100.9%

Flip Chip Supply (mn pcs)

Flip Chip Demand (mn pcs)

FC supply / demand ratio in 2006 is 95.9%, and 100.9% in 2007 No oversupply risk concerns in 2006

Source: MasterLink Securities



Cost advantage in raw materials drives higher gross margin As a member of Formosa Plastic Group, NYPCB can get strong internal support for raw materials, such as CCL and epoxy. Since raw material weights 45% of total IC substrate production cost, NYPCB has strong competitiveness in IC substrate industry compared with its main competitors. We thus believe NYPCB’s cost down ability is strong enough to enhance gross margin. NYPCB’s gross margin is estimated to grow 14.4 ppt. from 21.1% in 2005 to 35.5% in 2006. Table 15: 2003~2006 NYPCB’s Gross Margin % Trend

NYPCB’s gross margin is expected to be 35.5% in 2006, up 14.4 ppt. from 21.1% in 2005

6.2%

9.5%

35.5%

21.1%

0%

10%

20%

30%

40%

2003 2004 2005 2006E

Gross Margin %


Strong cash flow in 2006

According to NYPCB, the CAPEX plan is: NT$6.4bn~NT$6.8bn in 2006, NT$7.1bn in 2007, NT$6.4bn in 2008. Since NYPCB has NT$20bn cash injection from IPO, we believe NYPCB has very strong cash flow structure in 2006.

Valuation and Recommendation Due to 1) growing demand in FC, 2) improving FC weight in NYPCB’s revenue from 45.6% in 2005 to 61.2% in 2006, and 3) cost down competitive advantage in raw material sourcing, we believe NYPCB’s revenue will trend up quarterly in 2006. We estimate NYPCB’s consolidated revenue in 2006 will reach NT$44.0bn in 2006, up 72.9% YoY, with net profit of NT$12.9bn, up 199.9% YoY, and EPS of NT$21.5. NYPCB is currently traded at PER 16.3x. We give NYPCB 19x PER for its robust growth momentum and strong cost down competitive advantage, and target price at NT$407.0, implying 16.3% upside potential. We therefore recommend an Outperform for NYPCB.



Table 16: 2003~2006 Revenues and Revenue YoY %

D

19.0%

39.8%

72.9%

10

20

30

40

50

2003 2004 2005 2006E0%

20%

40%

60%

80%

100%Rev enue (LHS: NT$ bn) YoY (RHS: %)

NYPCB’s revenue is estimated to be NT$44.0bn in 2006, up 72.9% YoY

0


Table 17: NYPCB’s PER Band

0

70

140

210

280

0

Apr-05 Jun-05 Aug-05 Nov-05 Jan-06 Apr-06

4.1x P/E

6.3x P/E

8.6x P/E

10.8x P/E

13.0x P/E

15.3x P/E

17.5x P/E35

NT$

Source：TEJ, MasterLink Securities

Table 18: NYPCB’s PBR Band

Source：TEJ, MasterLink Securities

0

70

140

210

280

350

Apr-05 Jun-05 Aug-05 Nov-05 Jan-06 Apr-06

NT$

9.20x P/B

2.91x P/B

4.17x P/B

5.42x P/B

6.68x P/B

7.94x P/B

1.65x P/B


Consolidated Financial Statement


Year ending 31st December 2003 2004 2005E 2006ENT$m NT$m NT$m NT$m

Income StatementsRevenues 15,319 18,231 25,481 44,048 Revenues YoY% 19.0% 39.8% 72.9%Cost of goods sold 14,372 16,505 20,103 28,424 Gross profit 947 1,725 5,378 15,624 Operating expenses 759 818 1,183 2,255 Operating profit 188 908 4,195 13,369 Non-operating income 120 152 374 1,179 Non-operating expenses 196 343 149 247 Pre-tax profit 111 717 4,420 14,301 Tax - 92 129 1,430 Net profit 111 625 4,291 12,871 Net profit YoY% 461.9% 587.0% 199.9%EPS 0.52 1.28 7.75 21.46Adjusted EPS 0.19 1.04 7.16 21.46

Balance SheetsCurrent assets 7,375 8,241 11,196 19,446 Long-term investments 2 2 - 4 Fixed assets 8,658 9,599 13,299 20,223 Other assets 936 852 190 329 Total assets 16,971 18,694 24,685 40,002 Current liabilities 3,823 5,298 7,981 11,132 Long-term liabilities 4,376 4,145 3,581 6,191 Total liabilities 8,199 9,444 11,563 17,323 Common stock & preferred stock 4,826 4,874 5,166 8,931 Retained earnings 3,946 4,376 7,956 13,748 Total shareholders' equity 8,771 9,250 13,122 22,679 Total liabilities & equity 16,971 18,694 24,685 40,002

Cash Flow StatementsNet profit 252 625 4,291 12,871 Depreciation & amortization - - - - Other non-cash adjustments 177 106 (74) (646) Change in working capital (169) 1,500 (739) (5,250) Operating cash flows 260 2,231 3,478 6,975 Cash flows - investing activities (171) (1,053) (3,038) (6,527) Cash flows - financing activities 281 (693) (739) (81) Cash flows - other 1,007 (185) (132) (469) Net change in cash position (636) 671 (166) 836

Key RatiosGross margin (%) 6.2 9.5 21.1 35.5Operating margin (%) 1.2 5.0 16.5 30.4Net profit margin (%) 0.7 3.4 16.8 29.2Return on shareholders' equity (%) 1.3 6.9 38.4 71.9Return on assets (%) 0.7 3.5 19.8 39.8Current ratio (%) 192.9 155.5 140.3 174.7Long-term debt/Equity (%) 46.2 39.3 22.4 22.4Total debt/Equity (X) 0.93 1.02 0.88 0.76Interest coverage (X) 2.09 6.95 34.82 64.29Op. cash flow per share (NT$) 0.54 4.58 6.73 7.81



MasterLink Securities – Stock Rating System BUY: Total return expected to appreciate 20% or more over a 3-month period. OUTPERFORM: Total return expected to appreciate more than 10% and less than 20% over a 3-month period. HOLD: Total return expected to be between 10% to –10% over a 3-month period. UNDERPERFORM: Total return expected to depreciate more than 10% and less than 20% over a 3-month period. SELL: Total return expected to depreciate 10% or more over a 3-month period.

Additional Information Available on Request ©2006 MasterLink Securities. All rights reserved. This information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. It is not an offer to sell or solicitation of an offer to buy any securities. MasterLink and its affiliates and their officers and employees may or may not have a position in or with respect to the securities mentioned herein. This firm (or one of its affiliates) may from time to time perform investment banking or other services or solicit investment banking or other business from, any company mentioned in this report. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. MasterLink has produced this report for private circulation to professional and institutional clients only. All information and advice is given in good faith but without any warranty.

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