Executive Summary
Asia Tech Hardware Strategy discusses our views on tech hardware stocks by
sector and country in Asia. This bi-annual issue reviews 1Q07 results, previews
2Q07 earnings, and outlines our outlook and investment ratings for 2H07.
Asia PC/MB/NB/EMS Sector
PC/MB/EMS have been the best sector by far. While 4Q06 results held some
disappointments, a clear recovery was evident in 1Q07, as industry margin
rebounded strongly from the 1H06 level and remained at this high level from
3Q06. Most NB companies reported shipments and sales upside surprises,
raising their 2Q07 and 2007 shipment guidance. However, YoY margins
continue to decline, which is not likely to be reversed soon given Hon Hai's
likely entrance.
Although the OEM Bearlake MB inventory build — rescheduled from 3Q07 to
2Q07 and then back to 3Q07 — has lowered the 2Q07 OEM MB shipment
outlook, all MB companies agreed that it will still happen, and not disappear.
The clone MB segment, which has lean inventory and real-time market demand
indicator, continues to surprise on the upside, so end-market demand should
not be an issue. We maintain our positive view on the PC sector.
Asia Handset/PCB Supply Chain Sector
We predicted regional handset PCB (including Compeq, Unimicron, WUS,
Unitech, Ibiden and SEMCO) to post 2Q07 unit by 2% QoQ increase, after a
sharp 17% QoQ decline in 1Q07. Motorola’s recovery did not happen on further
inventory corrections but other global brands outlook are generally in line. China
handset order remains strong after golden week. We expect moderate sequential
growth on 3Q07 with 10% QoQ growth in units. Compeq, supplying Motorola
mainstream phones, is likely to post a higher growth rate than peers driven by a
new model launch.
Taiwan LED Sector
We turn positive on Taiwan's LED supply chain, seeing a better fundamental
outlook in the next 12 months and fewer execution risks for Epistar. Based on
our view of long-term structural changes in the LED industry, we take the
contrarian stance of preferring upstream Epistar (Buy/Medium Risk) to
downstream Everlight (Hold/Medium Risk). Although we remain conservative on
LED NB and LCD-TV shipments, we now expect a stronger upcycle to 1Q08 than
previously, on i) a demand uptick for small panels (with LED increasingly the
main backlight source) and ii) an enlarged LED base in display /decorative
lighting. LED downstream checks suggest the B/B ratio has firmed above 1.0x
since April 07.
Supply consolidation and disciplined capacity expansion should translate to
pricing power for upstream LED chipmakers, yet the market seems to be
overlooking Epistar’s earnings momentum. Technology upgrades (esp. white
LED), a higher bin rate, and a stable blended ASP should help expand upstream
margins in 2007-08 and justify richer valuations. Competition from Japan and
Korea is intensifying pricing pressure on Taiwan's downstream players. In
previous cycles, the downstream could defend margins, but pricing power is
shifting upstream and to top-tier panel customers, limiting margin upside
despite sales growth.

Taiwan Networking Equipment Sector
We saw increasing 802.11N demand in North America starting 1H07 as the
pricing gap between 11n and 11g has narrowed to about two times. Prices for
pre-N routers are down from US$100-120 in 2H06 to US$80-100 and we expect
this to drop to USD 60-70 to trigger demand and adoption as Intel recently
launched its Santa Rosa platform, embedding 11n as the standard for wireless
transmission. Chipset price declines of 20-25% since 2H06 to around US$15
(50-60% of BOM) provided the main driver for cost down.
Taiwan Optical Disk Drive Sector
We expect ODD shipment to plateau at 300-350 mn units in 07-09E with
mainstream product DVD-RW and new generation of blu-ray/HD DVD replacing
older products. Recent local news Digitimes reported that half-height and slim
type DVD-ROM and DVD-RW are facing under-supply gap of 10-15% due to a
shortage of pick-up heads. As 2Q is usually the slow season for optical disk
drive, price is stable but vendors see possible price hikes if supply shortage
persists into 3Q07. With continued blue laser format battle between blu-ray DVD
and HD DVD, little content is available currently to stimulate adoption. In
addition the high price for blue laser disk drive (more than 10x ASP than that of
DVD RW) will take 2-3 years to reach mass market price and volume, a similar
trend for DVD in 1997 and DVD RW in 2001
Korea Technology
Stripping out Samsung’s semiconductor and Hynix, the aggregated operating
profit for our Korean hardware tech universe will grow 23% QoQ in 2Q07E.
Furthermore, we expect this earnings momentum will last in 2H07E with 43%
HoH growth. Unlike 2006, we see positive YoY earnings growth from 2Q07 for
every quarter in 2007. This is possible because of 1) SEC's and LGE’s ongoing
handset shipment momentum, 2) flat TV’s secular growth and 3) LCD sector’s
anticipated tight supply condition and non-semi IT component names’ solid
volume growth in 2H07, upward quarterly earnings trends for the next three
quarters will materialize in handsets (LGE, Samsung’s handsets), handset
components (P&Tel, Intops), and IT components (SEMCO, Cheil Ind.).
Given earnings momentum should remain solid for the next three quarters until
end-2007E, we see some earnings-leading tech stocks moving into the
“Attractive” quadrant. As sector price performance is most correlated with
earnings growth, we are paying attention to the YoY/QoQ positive earnings
momentum stocks in 2H07; our top picks in the Korea hardware tech universe are
Cheil Industries, SEMCO, LG Electronics, Sodiff and P&Tel for the rest of the year
Taiwan Technology
We have raised our Taiwan index target 13% to 9,550 based on a 21% 12-
month forward EPS growth forecast and a PE rating of 15.5x. From current
levels, this target implies 15% upside plus a 4% dividend yield. Even if we are
in the early stages of a market correction, Taiwan could benefit if a shift from
momentum to value occurs.
We expect an election rally as the government pumps in pension funds before
the elections. Given the 2.3% QFII underweight, this could ignite a surprisingly
strong second half rally. In the past, the banks were the main vehicle but this
time it could be materials stocks – plastics and steel – that now have a larger
market cap than the banks and are the most underweight by QFIIs. They may
also go after story stocks like LED names.

Corporate PC demand is the key driver for earnings growth. We don’t care about
US consumer demand or Vista but rather the four-year global replacement cycle
synchronized since Y2K. Hon Hai is our top pick. In semis, we prefer packagers
and substrate makers such as Kinsus and PPT over foundries. we like the idea of
Ma Ying-jeou picking Jason Lin, CEO of Uni-president as his VP because it should
help capture greater support from south Taiwan where the group is based.
Singapore Technology
The sector has underperformed the STI YTD, and we see an inclination for
investor sentiment to turn positive considering the risk reward, however, we
maintain our earlier view that re-rating for hardware names is likely to remain
challenging. Weaker-than-expected end market demand and margin contraction
has resulted in majority of hardware names underperforming the STI as well as
on an absolute basis. YTD, Creative and JTech have fallen the sharpest while
Hi-P is flat after a +20% rally over the past few months. Venture is up 20% and
remains our sector top pick due to its high margin strategy.
We are close to a bottom and recovery signs are appearing on the back of 2H07
seasonality but we are cautious on recovery strength and may be short-lived
unless end-demand proves stronger than expected. Our discussion with several
suppliers reveals volume growth should rebound in 2H07, after a slower-thanexpect
1H07 on the back of new product launches, and inventory replenishment
but upside to consensus and our estimates are less likely. M&A fever has been
rising particularly for small/mid cap firms and we recognise selected stocks have
qualities as potential LBOs. M&A interest is apparently rising, particularly
among component suppliers across wide ranging sub-sectors (such as plastic,
pcba and metal stamping firms), and OSAT sector. We expect more news flow
on this front.
China Technology
ZTE has won 46% of wireless networking equipment orders from China Mobile,
and we expect ZTE will continue to lead the pack in TD-SCDMA handset
purchasing expected to start in Q307. With an end-to-end solution, ZTE is the
strongest TD player on both of system side and terminal side.
32 million handsets were sold in Q107, 27% higher YoY. Nokia and Motorola
continue to lead the market and enjoy over 50% market share. Local players
including Lenovo, Bird, Amoi and others have seen stabilizing sales, with 30%
aggregated market share. Local IDH include SIM Tech and Longcheer also
indicate strong volume shipments, while margins could be a real concern. Highmargin
products include GPS-enabled PDA phones, analog and Mobile TV phone
only start to see small volume shipment in mid-2Q. TD-SCDMA handset
purchasing about to start in 3Q will be another driver for high profit products, but
volume sales will only come in 4Q07 at the earliest. Order flows from Nokia remain
strong, while component manufacturers with significant Motorola exposure will
continue to suffer in the first half, turning around in 3Q at the earliest.
Small-Mid Cap Technology
Smaller companies in Asia tend to outperform the large caps when interest rates
are benign. The Citigroup Pan Asia Ex EMI outperformed the larger company
index by 9.6% year-to-date. With the exception of China and Taiwan, we expect
interest rates to be flat or falling in Asia Pacific. This should bode well for the
performance of smaller companies in the region. We prefer domestic and
commodity companies with strong economic growth and local currency

Contents
Asia Tech Hardware Strategy: 2H07 Outlook 3
Executive Summary 4
Asia PC/MB/NB/EMS Sector 10
Asia Handset/PCB Supply Chain Sector 18
Taiwan LED Sector 22
Taiwan Optical Disk Drive Sector 27
Taiwan Networking Sector 28
Korean Technology 30
Taiwan Technology 39
Singapore Technology 47
HK/China Technology 52
Small-Mid Cap Technology 54
Companies 57
AAC Acoustic Technologies Holdings (2018.HK) 58
Acer Inc. (2353.TW) 60
Asia Optical (3019.TW) 62
Asustek (2357.TW) 64
BYD (1211.HK) 66
Catcher (2474.TW) 68
Cheil Industries (001300.KS) 70
Cheng Uei Precision Industry (2392.TW) 72
Chicony Electronics (2385.TW) 74
Compal Communications (8078.TW) 76
Compal Electronics (2324.TW) 78
Delta Electronics (2308.TW) 80
D-Link (2332.TW) 82
Elitegroup Computer System (2331.TW) 84
Epistar (2448.TW) 86
Everlight Electronics (2393.TW) 88
Foxconn International Holdings (2038.HK) 90
Foxconn Technology (2354.TW) 92
Gigabyte (2376.TW) 94
High Tech Computer (2498.TW) 96
Hi-P International (HIPI.SI) 98
Hon Hai Precision (2317.TW) 100
Intops (049070.KQ) 102
Johnson Electric (0179.HK) 104
Jurong Tech (JTIL.SI) 106
Kingboard Chemical (0148.HK) 108
Kingboard Laminates Holdings (1888.HK) 110
Largan (3008.TW) 112
Lenovo Group (0992.HK) 114
LG Micron (016990.KQ) 116
LGE (066570.KS) 118
Lite-On IT (8008.TW) 120
Lite-on Tech (2301.TW) 122
Merry Electronics (2439.TW) 124
Micro-Star International (2377.TW) 126
Nan Ya PCB (8046.TW) 128
People & Telecommunication (054340.KQ) 130
Quanta Computer (2382.TW) 132
Samsung Electro-Mechanics (009150.KS) 134
Silitech Technology Corp. (3311.TW) 136
Shin Zu Shing (3376.TWO) 138
Sodiff Advanced Materials (036490.KQ) 140
Techtronic (0669.HK) 142
TPV Technology (0903.HK) 144
Tripod (3044.TW) 146
Unimicron (3037.TW) 148
Venture Corp. (VENM.SI) 150
VTech Holdings (0303.HK) 152
Wistron (3231.TW) 154
Yageo (2327.TW) 156
ZTE Corp. (0763.HK) 158
Appendix A-1 163