Taiwan Hardware
Technology
IC Substrates Reshuffle to
Benefit Kinsus, Nan Ya PCB
We are buyers of Kinsus as a smartphone play and
Nan Ya PCB as a PC/Intel proxy: We expect the recent
IC substrates industry reshuffle, better price discipline,
and tech migration from late 2009 to offer opportunities
for firms with the right product leadership (FC-CSP, FC
BGA), clear earnings drivers, and solid B/S. Kinsus fits
our criteria, and we initiate coverage with an OW rating
and PT of NT$72. We upgrade Nan Ya PCB to OW with
a new PT of NT$112, as we think the benefits of the PC
replacement and new product cycles could outweigh the
market share loss caused by its strategic partner, NGK.
We remain EW on Unimicron, given earnings dilution
risks post PPT merger, balanced by 1x P/B valuation.
Expect an industry reshuffle: Kinsus was the only IC
substrates maker not to report an operating loss in 1Q09.
The strategic response in the industry to the losses
suggests potential for further industry consolidation and
a market share reshuffle, e.g., Unimicron targeted a
merger with PPT for December 2009. NGK wrote off
assets of ¥33bn in its FC business in March 2009.
Technology roadmap favors Kinsus and NanYa PCB:
We see FC-CSP as the most promising product, driven
by strong smartphone growth. This should benefit
product leaders such as Kinsus. High-end FC BGA will
be underpinned by Intel’s MPU migration to 32nm
Westmere platform in late 2009, while the southbridge
chipset package is to be upgraded to FC from PBGA.
Such product shifts imply FC will take market share from
PBGA, favoring Nan Ya PCB as Taiwan’s only Intel FC
supplier. Unimicron will likely face challenges at its
acquired PBGA business via the PPT merger.
Where we differ: 1) Our earnings estimates for Kinsus
are 8-19% ahead of consensus, as we are more
optimistic on smartphone volume growth and rising
FC-CSP penetration. 2) We expect Unimicron’s EPS to
be diluted 16-17% in 2010-11 after the PPT acquisition.
Contents
Investment Case............................................................................................................................................................. 3
We Prefer Kinsus and Nan Ya PCB within the IC Substrates Sector ...................................................................................................3
IC Substrates: Anticipate FC-CSP & FC BGA Technology Migration........................................................................ 4
IC Substrates: Economic Downturn Drives Industry Reshuffle................................................................................. 7
Kinsus and Nan Ya PCB: Exposed to High-Growth Subsectors… ............................................................................ 8
Kinsus Interconnect Tech. .......................................................................................................................................... 11
Investment Positives ...................................................................................................................................................... 14
Investment Concerns ..................................................................................................................................................... 14
Business Outlook ........................................................................................................................................................... 17
Earnings Outlook: Recovering Faster Than Peers’......................................................................................................... 21
Nan Ya PCB................................................................................................................................................................... 25
Raising Earnings Estimates ..............................................................................................................................................................29
Price Target and Valuation Methodology ..........................................................................................................................................29
Scenario Analysis..............................................................................................................................................................................29
Unimicron...................................................................................................................................................................... 33
Earnings Estimate Revisions.............................................................................................................................................................38
Price Target and Valuation Methodology ..........................................................................................................................................38