PP 7767/09/2010(025354)

7 May 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e

MARKET DATELINE

7 May 2010

Unisem Share Price

Fair Value
:
:
RM3.09
RM4.06
Recom : Outperform
High On Growth
(Maintained)

Table 1 : Investment Statistics (UNISEM; Code: 5005) Bloomberg: UNI MK

FD Core
EPS
Core Net Core Core FD Growth FD Core Net
FYE Revenue Profit EPS# EPS# # PER# P/NTA C.EPS* P/CF Gearing GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (x) (sen) (x) (x) (%)
2009 1,036.3 61.9 11.9 11.5 (17) 28.6 1.8 - 14.8 0.4 0.8
2010f 1,450.6 151.6 29.2 28.0 143 11.6 1.6 27.0 3.8 0.3 1.5
2011f 1,651.4 196.0 37.8 36.1 33 9.0 1.4 31.0 4.8 0.2 1.5
2012f 1,874.3 258.7 49.9 47.6 32 6.8 1.1 37.0 4.1 0.1 1.5
# Adjusted for exceptional items
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ 2QFY12/10. Management expects 2Q revenue to increase by 5-8% qoq Issued Capital (m shares) 518.6
(vs. 3-5% qoq in 1Q10) driven mainly by strong demand for analog, RF Market Cap(RMm) 1,685.5
and mixed signal devices as well as resilient demand for its legacy Daily Trading Vol (m shs) 2.3
52wk Price Range (RM) 0.89-3.53
packages i.e. SOIC, PDIP, and MSOP. We have forecast 20% and 30%
Major Shareholders: (%)
qoq revenue growth for Unisem Chengdu and UAT respectively. We
Bandar Rasah Sdn. Bhd 26.1
highlight that capacity utilisation rates in 2Q10 in Chengdu, Batam, and
Lembaga Tabung Haji 5.42
Ipoh is expected to be 95%, 75%, and 75% respectively (vs. 90%, 70%,
and 70% in 1Q10 respectively) on the back of stronger-than-expected
chips demand stemming from stronger PCs and smartphone sales. FYE Dec FY09 FY10 FY11
EPS chg (%) - - -
♦ Better margins forward. Unisem is expecting better margins going Var to Cons (%) - - -
forward, mainly driven by: 1) higher contribution from ASP packages (i.e.
PE Band Chart
BGA); and 2) higher utilisation rate for QFN capacity given added capacity
of 9m/day by 4Q10. While Unisem Wales’ production volumes for higher-
margin Micro-electro-mechanical-systems (MEMS) packages and System- PER = 17x
in-Package (SiP) are still low, management expects to ramp up the PER = 13x
PER = 9x
production of these packages in Chengdu by end-2Q. Note that Chendu’s
EBITDA margin is circa 35-40% (vs. 25-30% in Ipoh) given lower
overhead costs (labour plus utilities) as well as higher equipment
efficiency (new machines with lower breakdown rates). In addition, we
estimate costs of production to fall stemming from wider usage of copper
Relative Performance To FBM KLCI
wire bonding vs. gold wire bonding.

♦ Risks. 1) Slowing chips demand amid global economic downturn; and 2)

Unisem
Fluctuations in exchange rate.

♦ Forecasts. No change to our forecasts for now. We have introduced our

FY12/12 earnings projection.
FBM KLCI
♦ Maintain Outperform. Going forward, Unisem’s earnings visibility
remains strong given: 1) higher contribution from Unisem Chengdu and
Unisem Ipoh; and 2) stronger demand for its higher-margin QFN and
Wong Chin Wai
module packages; 3) lower operating expenses due to cost-cutting (603) 92802158
measures; and 4) recovering global economic conditions. Hence, against wong.chin.wai@rhb.com.my
the backdrop of improved earnings visibility and stronger-than-expected
chip sales in 1Q10 and extending into 2H2010, we are reiterating our Yap Huey Chiang
(603)92802166
Outperform call on the stock with our fair value of RM4.06/share on yap.huey.chiang@rhb.com.my
unchanged 15x FY10 PER.

Please read important disclosures at the end of this report. Page 1 of 5

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 7 May 2010

Salient points from analyst briefing

♦ 2QFY12/10. Management expects 2Q revenue to increase by 5-8% qoq (vs. 3-5% qoq in 1Q10) driven mainly
by strong demand for analog, RF and mixed signal devices as well as resilient demand for its legacy packages i.e.
SOIC, PDIP, and MSOP. We have forecast 20% and 30% qoq revenue growth for Unisem Chengdu and UAT
respectively. We highlight that capacity utilisation rates in 2Q10 in Chengdu, Batam, and Ipoh are expected to be
95%, 75%, and 75% respectively (vs. 90%, 70%, and 70% in 1Q10 respectively) on the back of stronger-than-
expected chips demand stemming from stronger PC and smartphone sales.

♦ UAT’s revenue set to triple. Unisem expects revenue contribution from UAT to triple by end-FY10 stemming
from the stronger-than-expected demand for its wafer bumping technology i.e. wafer backgrinding and wafer
probe. Note that, UAT’s 1Q10 revenue rose 33% qoq (vs. 43% in 4Q) to US$10m despite the seasonally weaker
quarter. Furthermore, management had noted that it is planning to expand its capacity from 4k wafers/month to
15k wafers/month by end of 3Q10. In addition, we understand from management, demand for wafer bumping is
expected to drive sales for WLCSP packages and flipchip modules.

♦ Capacity expansion. Management has indicated plans to expand capacity with FY10 capex of RM200m (vs.
RM134m in FY09). Note that, Unisem’s 1Q10 capex was RM62m.

♦ Expanding Ipoh’s higher margin capacity. Management is planning to expand capacity for its higher-
margin-margin packages i.e. WLCSP and module packages. Unisem would acquiring new wirebonders (100
units) to replace the aging machinery to improve its efficiency and compatibility. Furthermore, Phase 1 and
Phase 2 consolidation is expected to increase floor space by another 10k sq ft.

♦ To expand the wafer bumping business. Management plans to expand its wafer bumping business
following the potential growth of the market stemming from the increasing usage of bumping technology in
chips. Given that, UAT’s bumping capacity is already running at full capacity, Unisem has highlighted that it
may expand its wafer bumping technology in Chengdu and Batam.

♦ Capacity increase in Chengdu. Management had indicated that capex in FY10 will mainly be used for
capacity expansion in Chengdu by acquiring additional copper wire-bonders. Unisem expects its QFN capacity
in Chengdu to increase to 7m/day by 2Q and 9m/day by 4Q10 (vs. 6m/day in 1Q10). Note that Unisem had
received 75% of the capex in 1Q10 (vs. 49% in 4Q09).

♦ Better margins forward. Unisem is expecting better margins going forward, mainly driven by: 1) higher
contribution from ASP packages (i.e. BGA); and 2) higher utilisation rate for QFN capacity given added capacity of
9m/day by 4Q10. While Unisem Wales’ production volumes for higher-margin Micro-electro-mechanical-systems
(MEMS) packages and System-in-Package (SiP) are still low, management expects to ramp up the production of
these packages in Chengdu by end-2Q. Note that Chendu’s EBITDA margin is circa 35-40% (vs. 25-30% in Ipoh)
given lower overhead costs (labour plus utilities) as well as higher equipment efficiency (new machines with lower
breakdown rates). In addition, we estimate costs of production to fall stemming from wider usage of copper wire
bonding vs. gold wire bonding.

♦ Fine-tuning Batam. Management has indicated plans to restructure Batam’s operations in efforts to make it
more efficient and profitable. Management expects revenue contribution from Batam to grow by 10% in 2Q on
the heels of stronger chips demand stemming from the recovery in the automotive industry. Management also
expects Unisem Mauritius to contribute stronger revenue in 2QFY12/10 given volume loading from Bosch
Futhermore; management had noted that Unisem Mauritius will commence collaborating with QPL Limited (a
global supplier of leadpackages) to develop higher-value packages such as the Tape Ball Grid Array (TBGA).

Risks

♦ Risks to our view. We believe Unisem faces a number of risks which include: 1) Slowing chips demand amid
global economic downturn; and 2) Fluctuations in exchange rate.

♦ Mitigating factors. Mitigating factors include: 1) higher contribution from Unisem Mauritius and Ipoh; and 2)
resilient margin due to cross-selling opportunities and reduction in certain raw material cost and overheads.

Page 2 of 5

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 7 May 2010

Forecasts and Assumptions

♦ Forecasts. No change to our forecasts for now.

♦ Maintain Outperform. Going forward, Unisem’s earnings visibility remains strong given 1) higher contribution
from Unisem Chengdu and Unisem Ipoh; 2) stronger demand for its higher-margin QFN and module packages; 3)
lower operating expenses due to cost-cutting measures; and 4) recovering global economic conditions. Hence,
against the backdrop of improved earnings visibility and stronger-than-expected chip sales in 1Q10 and extending
into 2H2010, we are reiterating our Outperform call on the stock with our fair value of RM4.06/share on
unchanged 15x FY10 PER.

Chart 1: Capacity Utilisation

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
6

0
10

20

30

40

10

20

30

40

10

20

30

40

10

20

30

40

11

21
Q

Q
Capacity Utilisatio n

Source: Company

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 7 May 2010

Chart 2: Revenue Contribution By Packages

QFN
34% Leaded
42%

Test Array
19% 5%

Source: Company

Chart 3: Breakdown Of Chips Based On Application.

Consumer Computer
electronics 21%
35%

Auto
8%

Communication Industrial
23% 13%

Source: Company
Table 5. Earnings Forecasts Table 6. Forecast Assumptions
FYE Dec (RMm) FY09 FY10 FY11F FY12F FYE Dec FY10F FY11F
Capacity utilisation
Turnover 1036.3 1450.6 1651.4 1874.3 Ipoh (%) 90.0 95.0
Turnover growth (%) (16.0) 40.0 13.8 13.5 Chengdu (%) 90.0 95.0
Batam (%) 95.0 90.0
Cost of Sales (259.1) (346.0) (410.7) (470.2)
Gross Profit 576.8 770.0 872.7 999.2

EBITDA 242.3 353.7 410.9 468.1

EBITDA margin (%) 23.5 27.5 28.0 28.0

Depreciation (163.6) (175.0) (180.0) (175.0)

Interest exp (20.3) (15.9) (19.0) (19.0)
Other income 6.0 7.5 8.0 8.5

Pretax Profit 58.4 170.4 219.9 282.6

Tax 2.4 (25.0) (25.0) (25.0)
Net Profit 61.9 146.6 196.0 258.7
Normalised net profit 61.9 146.6 196.0 258.7
Source: Company data, RHBRI estimates

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
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may from time to time have an interest in the securities mentioned by this report.

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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