Back to the Basics
The recovery camp has reason for hope: There is some foundation
behind the views of those in the ‘recovery’ camp. The TED spread has
fallen to its lowest level since July of 2008, indicating that banks are
starting to feel more comfortable about lending to each other. Yields
on US investment grade corporate bonds have fallen, and loan activity
in China picked up substantially in December after contracting sharply
in the first two months after Lehman’s failure.
But, it can still get worse from here: While these figures may be cause
for optimism, there is still ample reason to believe that ‘it still can get
worse’. The initial slope of job losses in this downturn surpasses that
of all post-war recessions. Furthermore, one has to go back to the
1974 recession to find a slope that is steeper and longer than the
current one. It is possible that the next five years could look like the
early 1970s or the early 1980s, with not one, but two recessions, and
a sustained period of high unemployment.
We present our outlook for the Year of the Ox: It is with these cheerful
thoughts in mind that we turn to the outlook for Taiwan stocks in the
year of the Ox (late Jan 2009-Feb 2010). On November 24th 2008, we
projected a 12-month trading range for the index of 3,000 on the low
side and 5,300 on the high side. Our view has not changed since we
originally set this target range.
This report includes a back-to-the-basics analysis of management
quality: In this report, we have taken an in depth look at the long-term
free cash flow performance of a broad population of TWSE-listed
stocks across industry sectors. Historical cashflows are compared with
current valuations to shed light on which stocks in Taiwan are the
most attractive. We have also taken pains to thoroughly communicate
the catalysts that will help to shape the investing landscape this year.
We are adding Beta to the portfolio: To kick off the year of the Ox, we
have made the biggest changes to our portfolio for a long time. The
portfolio is still defensive in nature, but we have made a conscious
effort to increase the portfolio’s Beta. Now that the index has fallen
51% from its high on May 20, 2008, we believe it makes sense to gear
the portfolio more towards recovery. Stocks that we are increasing
exposure to include: Foxconn Tech (2354 TT; BUY), Wistron (3231 TT;
BUY), Delta Electronics (2308 TT; SELL), Acer (2353 TT; BUY), Formosa
Plastics (1301 TT; not rated) and Taiwan Fertilizer (1722 TT; BUY).
Stocks that we are reducing exposure to include Chunghwa Telecom
(2412 TT; BUY) and Taiwan Mobile ( 3045 TT; BUY) (though we are still
strongly overweight the telecom sector). We also recommend taking
profit on Inotera (3474 TT; HOLD). The stock rose 136% between
November 24th, 2008 and February 11th, 2009.

Table of Contents
Back to the Basics.......................................................... 3
2009-2010 catalysts...................................................... 15
Long only model portfolio ............................................. 22
Long-short hedge portfolio............................................ 25
FCF analysis.................................................................. 27
FCF ROE rankings ......................................................... 29
FCF yield rankings ........................................................ 31
Cash dividend analysis ................................................. 33
Cash dividend yield....................................................... 35
Net cash % of market cap ............................................37
Trends in FINI holdings................................................. 40
Cash dividend payout.................................................... 45
Tax reforms are coming in 2010................................... 51
Appendix 1: Methodology..............................................56
Appendix 2: Stock population....................................... 58
Appendix 3: stock performance by sector ................... 60
Appendix 4: Model portfolio performance .................... 62
Important Disclosures................................................... 64

Back to the Basics
The recovery camp has reason for hope: There is some foundation
behind the views of those in the ‘recovery’ camp. The TED spread has
fallen to its lowest level since July of 2008, indicating that banks are
starting to feel more comfortable about lending to each other. Yields
on US investment grade corporate bonds have fallen, and loan activity
in China picked up substantially in December after contracting sharply
in the first two months after Lehman’s failure.
But, it can still get worse from here: While these figures may be cause
for optimism, there is still ample reason to believe that ‘it still can get
worse’. The initial slope of job losses in this downturn surpasses that
of all post-war recessions. Furthermore, one has to go back to the
1974 recession to find a slope that is steeper and longer than the
current one. It is possible that the next five years could look like the
early 1970s or the early 1980s, with not one, but two recessions, and
a sustained period of high unemployment.
We present our outlook for the Year of the Ox: It is with these cheerful
thoughts in mind that we turn to the outlook for Taiwan stocks in the
year of the Ox (late Jan 2009-Feb 2010). On November 24th 2008, we
projected a 12-month trading range for the index of 3,000 on the low
side and 5,300 on the high side. Our view has not changed since we
originally set this target range.
This report includes a back-to-the-basics analysis of management
quality: In this report, we have taken an in depth look at the long-term
free cash flow performance of a broad population of TWSE-listed
stocks across industry sectors. Historical cashflows are compared with
current valuations to shed light on which stocks in Taiwan are the
most attractive. We have also taken pains to thoroughly communicate
the catalysts that will help to shape the investing landscape this year.
We are adding Beta to the portfolio: To kick off the year of the Ox, we
have made the biggest changes to our portfolio for a long time. The
portfolio is still defensive in nature, but we have made a conscious
effort to increase the portfolio’s Beta. Now that the index has fallen
51% from its high on May 20, 2008, we believe it makes sense to gear
the portfolio more towards recovery. Stocks that we are increasing
exposure to include: Foxconn Tech (2354 TT; BUY), Wistron (3231 TT;
BUY), Delta Electronics (2308 TT; SELL), Acer (2353 TT; BUY), Formosa
Plastics (1301 TT; not rated) and Taiwan Fertilizer (1722 TT; BUY).
Stocks that we are reducing exposure to include Chunghwa Telecom
(2412 TT; BUY) and Taiwan Mobile ( 3045 TT; BUY) (though we are still
strongly overweight the telecom sector). We also recommend taking
profit on Inotera (3474 TT; HOLD). The stock rose 136% between
November 24th, 2008 and February 11th, 2009.

Table of Contents
Back to the Basics .............................................3
Long only model portfolio ............................................................... 22
Long-short hedge portfolio.............................................................. 25
Upstream Tech .................................................63
Foundry............................................................................................ 65
SATS and substrate industries .......................................................76
IC Design .........................................................................................90
DRAM.............................................................................................103
TFT-LCD.........................................................................................120
Solar ..............................................................................................140
Downstream Tech ..........................................152
PC sector.......................................................................................154
PC Components.............................................................................168
Handsets and Handset Components ............................................191
Networking....................................................................................216
Telecoms.......................................................................................228
Financials .......................................................243
Non-Tech ........................................................258
Basic Materials .............................................................................263
Asset Plays and Developers .........................................................299
Transportation ..............................................................................318
Taiwan Consumption ....................................................................338