Summary
After several years of rapid expansion, we expect leading PCB and
substrate manufacturers to slam on the brakes as end market
demand declines dramatically. We prefer Meadville and Tripod as
favourable end market exposures are likely to result in a more
resilient revenue line. Potential negative catalysts leave us neutral
on Nanya PCB though high dividend return potentially interests
income investors. We have a negative outlook on Unimicron as the
company is exposed to the wrong end market

Hitting the brakes and looking for survivors
We are initiating coverage on Asian PCB and substrate manufacturers. Our initial coverage list includes
Meadville, Nanya PCB, Tripod and Unimicron. While Meadville and Tripod focus primarily on PCBs
only, Nanya PCB generates approximately 70% of revenue from IC substrates. Unimicron generates most
of its revenue from PCBs but also has a sizeable (20%) contribution from IC substrates.
The past several years have seen an aggressive pursuit of revenue growth, with the more successful PCB
manufacturers boasting greater than 25% revenue CAGR between 2003 and 2007, compared to average
industry growth of 8.5%. Balance sheets have been stretched to accomplish this growth rate though as
capital spending has averaged 15-25% of revenue and gearing ratios have ranged from 30% to 80%. We
expect this to reverse dramatically in 2009 with less profitable and more highly geared companies to
suffer from a cash flow squeeze.
Near term, we focus on “survivability”, looking for pockets of revenue resiliency, robust operating and
cash flow models, and strength of balance sheet. We forecast revenue declines of 3% to 13% and EPS
declines of 25% to 40% in 2009. With our revenue estimates as much as 10% below consensus and our
EPS estimates as much as 45% below consensus – we believe that official consensus estimates
underestimate the magnitude of the pending downturn. With shares trading at historically low valuation
levels though, share prices imply an earnings crater even below our expectation for a 25-40% EPS
decline. As the recent share sell-off was indiscriminate, with good and bad companies declining in equal
measure, we view this as a good opportunity to pick up high quality names at attractive prices. We
recommend Meadville and Tripod.
Longer term, we view all four companies favourably given strong track records of better than industry
average revenue growth and profitability. We believe that the combination of declining revenue and
tightening credit will more dramatically impact weaker, less profitable players, and that the stronger
players will become stronger.

Meadville – 3313.HK, OW, Target price HKD1.05
Investment thesis: We see aggressive telecom equipment capital spending in China as a pocket of
revenue resiliency for Meadville. The company generates 30% of revenue from telecom infrastructure
and with China telecom equipment capital spending set to increase 16% in 2009, we believe that
Meadville can limit its revenue decline to only 5% y-o-y.
Where we are different: Meadville has limited analyst coverage. Consensus expectations for 20% y-o-y
revenue and EPS growth in 2009 are unrealistic and likely due to inactive coverage.
Tripod – 3044.TW, OW(V), Target price TWD38
Investment thesis: With a diversified revenue stream, we believe that Tripod’s revenue stream will
remain relatively resilient in 2009, declining by only 3% y-o-y. Although flat panel makers continue to
struggle with profitability, we expect flat panel units to continue growing in 2009 given still low 50%
penetration rates in the TV market. We also believe that the company can grow revenue in HDI and
notebooks given currently low market shares.
Where we are different: We believe that the Street places too much focus on “headline catalysts”.
While true that Tripod typically lags its peers from a technology perspective, the company’s ability to
grow market share and maintain healthy profitability in mature industry segments is underappreciated.
Nanya PCB – 8046.TW, N(V), Target price TWD70
Investment thesis: We see potential for two consecutive years of double-digit dividend yields but remain
concerned about the impact of architecture and product mix transitions at Intel. Accelerated uptake of
Atom processors likely shrinks Nanya PCB’s overall revenue opportunity and the migration to Nehalem
with its radical change to the number and type of substrates required, introduces market share risk.
Where we are different: Consensus is mostly bullish (six Buys, three Holds and one Sell), based on the
company’s solid balance sheet and high dividend. While we agree that these provide strong defensive
qualities for the stock (the company is now the highest market cap name in the PCB space), we believe
that potential negative catalysts limit upside to the share price.
Unimicron – 3037.TW, UW(V), Target price TWD9.6
Investment thesis: Unimicron has become the largest PCB supplier in Taiwan as global handset
shipments exceed 1.2 billion units in 2008 (50% higher than 2005). Given our expectations for the
handset market to decline by 3% y-o-y in 2009 we see a difficult year ahead. Compounding the weaker
global handset outlook, we see relatively weaker shipments from the top five international handset
makers and excess inventories in 2H08 to further weigh on Unimicron’s 2009 revenue.
Where we are different: We believe that the consensus significantly underestimates the magnitude of
Unimicron’s potential revenue and earnings decline in 2009. While the company potentially benefits from
share gains in notebook PCBs and rigid-flex PCB uptake in smartphones, we don’t believe these will be
sufficient to offset weakness from Tier 1 handset makers.

目录

Near term contraction 4
Preparing for contraction 4
Pockets of resiliency 5
A new playbook – shaking up the business model 6
Survival of the fittest 8
Longer term industry outlook 10
PCBs in the electronics food chain 10
Low entry barriers, attractive returns 10
Fragmented PCB landscape, little leverage 11
Operating models 12
Best in class 14
Valuation 16
Our primary valuation methods 16
Company profiles 21
Meadville 22
Tripod 29
Nanya PCB 36
Unimicron 43
Disclosure appendix 49
Disclaimer 52