MasterLink Securities Equity Research

Nan Ya PCB Corp. (8046 TT) Outperform

PCB / IC Substrate Initiation

MasterLink Research Largest Flip Chip Manufacturer in Taiwan

Equity Analyst
Cathy Chin
Flip Chip is the key source of revenue in 2006: Nan Ya PCB’s (NYPCB)
886.2.2731.3888 ext 635
product mix in 1Q06 is: Flip Chip ( FC, 53% of revenue), Wire Bonding (WB,
cathychin@masterlink.com.tw
20%), conventional PCB and Others (27%). As 1) Intel’s Napa dual core
CPU, Sony’s PS3 and Microsoft’s Vista OS will be launched from 2H06 to
Recommendation 1H07 2) higher gross margin for FC, 3) more new applications, NYPCB will
Outperform remain focused on its FC manufacturing business. We estimate FC wil
Date: April 17, 2006 account for 61.2% of 2006 revenue.
Share Price (NT$): 350.0
Flip Chip market demand value is estimated to reach US$960mn in
Price Target (NT$): 407.0
2006, up 56.4% YoY: With the growing demand in graphic chips, CPU /
Percent Change: 16.3%
MPU chipsets and game consoles in 2006, we estimate the market demand
52-wk range (NT$): 370.0-38.3 value of FC will reach US$960mn in 2006, up 56.4% YoY from US$614mn
TWSE: 6952.54 in 2005, and FC will become the main growth momentum in IC substrate
industry in 2006.
Company Data Revenues are trending up quarterly in 2006: Due to 1) growing demand
Capital Size (NT$): 5.9bn on FC, 2) increasing FC weight in NYPCB’s revenue from 45.6% in 2005 to
Market Cap (NT$): 209.7bn 61.2% in 2006, and 3) cost down competitive advantage in raw material
Market Cap (US$): 6.5bn sourcing, We estimate NYPCB’s consolidated revenue in 2006 will reach
Outstanding Shrs: 599mn NT$44.0bn, up 72.9% YoY, with net profit of NT$12.9bn, up 199.9% YoY,
PER (‘06E): 16.3x and EPS of NT$21.5.
PBR (‘06E): 8.6x
Outperform: we give NYPCB 19x PER for its robust growth momentum and
Foreign Ownership: 2.7%
strong cost down competitive advantage among industry peers, and target
Major Shareholder: Nanya Plastic (68.58%)
price at NT$407.0, implying 16.3% upside potential. We therefore
recommend an Outperform for NYPCB.

Performance 1-m 3-m 6-m

Absolute (%) 17.10 29.15 249.93
Relative to TAIEX 8.81 24.13 200.43
Average daily volume ('000, LHS) and share price (NT$, RHS)
16,000 400

Key Changes Current Prev. 12,000 300

Recommendation Outperform N/A 8,000 200
Price Target (NT$) 407.0 N/A 100
4,000
06E Revenue (NT$bn) 44.0bn N/A
0 0
M-05

M-06
A-05

J-05

J-05

A-05

S-05

O-05

N-05

D-05

J-06

F-06

A-06

06E Gross Margin (%) 35.5 N/A

06E Oper. Margin (%) 30.4 N/A
Relative to TAIEX (%)
06E EPS (NT$) 21.5 N/A

550.0

250.0
Price Catalysts (+,-)
(+) Strong IC substrate industry outlook (50.0)
M-05

M-06
A-05

J-05

J-05

A-05

S-05

O-05

J-06

F-06

A-06
N-05

D-05

(+) Improving demand on Flip Chip

(- ) Possible FC oversupply in 2007

Related Research
Tripod (3044 TT) Apr. 06,06
PPT (2446 TT) Nov 24, 05’

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MasterLink Securities Nan Ya PCB

Investment Keynotes

Company Background

Nan Ya PCB (NYPCB), a subsidiary of Formosa Plastics Group, was established in 1997
NYPCB is currently
and currently is the largest Flip Chip (FC) manufacturer in Taiwan. It currently focuses its
the largest FC
business on conventional PCB and IC substrate: FC (53% of 1Q06 revenue), wire bonding
manufacturer in
(20%), conventional PCB and others (27%). Currently NYPCB has 4 IC substrate factories
Taiwan
in Taiwan, and 2 conventional PCB factories in Kunshan, China. NYPCB’s current FC
capacity is around 25.3mn pcs per month, which is the highest compared with industry
peers in Taiwan.

Table 1: 2Q06 FC Capacity Comparison by Key Manufacturers in Taiwan

FC Key Manufacturers in Taiwan 2Q06 Capacity Main Customers

Intel (INTC US, US$19.5, NR),

23.5 mn / per nVidia (NVDA US, US$29.6, NR),

NYPCB
month ATI (ATY CN, CA$18.9, NR),

Microsoft (MSFT US, US$27.1, NR)

PPT (2446 TT, NT$82.0, NR) 8mn / per month Intel, nVidia, ATI, VIA (2388 TT, NT$28.7, NR)

Amkor (AMKR, US$9.2, NR),

Kinsus (3189 TT, NT$137.0, NR) 2mn / per month Xilinx (XLNX, US$26.4, NR),

Altera (ALTR, US$20.6, NR), TI (TXN, US$32.7, NR)

Motorola (MOT, US$24.0, NR),

BenQ (2352 TT, US$27.2, NR),

Unimicron (3037 TT, NT$55.1, NR) 2.5mn / per month
Nokia (NOK1V FH, €17.4, NR),

Sony Ericsson (237523Z LN)

Source: MasterLink Securities

IC substrate becomes the mainstream of IC packaging technology

IC carrier, which is used to connect ICs to PCBs (Printed Circuits Board), can be divided
into two types: lead frame and IC substrate. IC substrate offers much higher number of
Input/Output (I/Os) than traditional lead frame methods such as DIL (Dual in Line), SoP
(Small Outline Packaging), and QFP (Quad Flat Pack). With increasing demand in higher
IC performance, the higher number of I/Os, and shrinking IC die size despite higher
performance requirements, IC substrate becomes mainstream of IC packaging technology.

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MasterLink Securities Nan Ya PCB

Table 2: IC carrier Progression by Size of Lead Pitch and I/O Count

Lead Pitch (mm)

3 Lead Frame IC Substrate

DIL
BGA
2

SoP CSP

1 Flip Chip

QFP

0
10 50 90 130

Lead Number (I/O count)

Source: MasterLink Securities

IC substrate can be classified into three types by package forms: BGA (Ball Grid Array),
CSP (Chip Scale Package) and FC. BGA uses solder ball instead of traditional lead frame
to connect ICs and substrates. CSP is a single-chip-package technology, and size of CSP is
almost the same or only slightly larger than bare dies. FC is to “flip” the die and use
“bumping” to connect the front side of the die with the substrate. Currently, CSP, FC and
PBGA (Plastic Ball Grid Array, which is one kind of BGA package) are the three most
popular IC substrates.

Table 3: IC Substrate Classification by Package Forms and Interconnections

Classification Types Notes

1) BGA (Ball Grid Array Package)
CBGA (Ceramic BGA)
PBGA (Plastic BGA)
TBGA (Tape BGA)
CDBGA (Cavity Down BGA)
◇ Use solder ball instead of the conventional lead frame as the
interconnection between substrate and IC.
◇ Compared with traditional lead frame, a BGA package allows more I/O
counts and better heat depersion. Suitable for ICs that is running at high
frenquency.

2) ◇ Single chip package technology.

CSP (Chip Scale Package)
◇ Size of the package chip is almost the same or only slightly larger than
Package Forms the bare die.
Substrate CSP ◇ Mostly used in ICs that are running at high frequency but with smaller
numbers of pin counts. Number of pin count is also lower due to the small
Lead frame CSP size of the package IC.

◇ "Flip" the die and use "bumping" to connect the front side of the die
3) FC (Flip Chip Package)
with the substrate

1) Wire Bonding ◇ Use gold wire to connect IC and substrate

◇ TAB involves bonding a gold bumped die to a single layer circuit built
on a flexible material, such as polyimide.
Interconnections 2) TAB (Tape Automated Bonding) ◇ TAB is used primarily in the flat panel display inductry to mount driver
Ics between the glass of the display and the input circuitry behind the
display.

◇ "Flip" the die and use "bumping" to connect the front side of the die
3) FC
with the substrate

Source: IEK-ITIS; MasterLink Securities

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 MasterLink Securities Nan Ya PCB

Table 4: The Applications of Three Most Popular IC Substrates

PBGA Micro-processor, controllers, ASICs, gate arrays, memory, communications, networking, graphics

CSP Memory card, microprocessor, SRAM, DRAM, ASICs

FC Workstations, routers, graphics, CPU, game consoles, set-top-boxes

Source: MasterLink Securities

Table 5: CSP, FC, and PBGA IC Substrate Package

Source: PPT, MasterLink Securities

Global IC substrate market size is US$5.5bn in 2005, and will reach US$6.1bn in 2006,
up 10.9%YoY.
With growth of IC testing and packaging industry and improving IC packaging technology,
x global IC substrate production value has begun to increase since 2003. During 2006 to
2007, higher-performance IC demand from new consumer electronics products, such as
Intel’s Napa dual core CPU and game console, is expected to boost global IC substrate
demand. We estimate global IC substrate market size will reach US$6.1bn in 2006, up
10.9% from US$5.5bn in 2005, and will grow to US$6.8bn in 2007, up 10.3% YoY.

Table 6: 2001~2007 Global IC Substrate Market Size

Higher-performance
9 Global IC Substrate Production Value (LHS, US$: bn ) Growth Y oY (RHS, %)
IC demand from
new applications 20.0% 23.7%
10.3% 20%
will boost global IC 10.9%
13.6%
substrate market 6 14.6%

size to US$6.1bn in
2006, up 10.9% YoY
10%
3

0 0%
2001 2002 2003 2004 2005 2006E 2007E

Source: IEK-ITIS; MasterLink Securities

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MasterLink Securities Nan Ya PCB

Japan, Taiwan and Korea will jointly account for 97.2% of global IC substrate market
in 2006.

Asia is the main IC substrate production base in the world, among which Japan, Korea and
Taiwan accounted for 96.5% of global IC substrate market in 2005. Since IC substrate
manufacturers in Japan will focus their business on other higher profits products, the global
market share of Japanese IC substrate manufacturers is estimated to decrease from
63.4% in 2005 to 59.4% in 2006. Meanwhile, with the capacity expansion of Taiwanese
and Korean IC substrate manufacturers, especially on FC, the IC substrate market shares
of Taiwan and Korea are expected to increase. Taiwan IC substrate production value is
estimated to reach US$1.6bn in 2006, up 30.6% from US$1.2bn in 2005.

Table 7: 2005~2006 Global IC Substrate Market Share % by Country

Taiwan IC substrate
market share is Japan Taiwan Korea

10.6% 11. 3%
estimated to 90%

increase from 22.5% 22.5%

26. 5%

in 2005 to 26.5% in 60%

2006
63.4% 59. 4%
30%

0%
2005 2006E

Source: IEK-ITIS; MasterLink Securities

Table 8: 2001~2007 Taiwan IC Substrate Production Value with YoY and Global Market Share
Taiwan IC substrate
production value TWN IC Substrate Production Value (LHS, US$: bn) Y oY (RHS, %) TWN/WW (RHS, %)
2 60%
19.1%
will grow to
US$1.6bn in 2006, 30.6%
50%
up 30.6% YoY
1.5
43.6%
30.4% 40%

1 30%

25.0%

19.0% 20%

0.5
28.6%
22.5% 26.5% 10%

0 0%
2001 2002 2003 2004 2005 2006E 2007E

Source: IEK-ITIS; MasterLink Securities

April 17, 2006 cathychin@masterlink.com.tw Page 5 of 12

MasterLink Securities Nan Ya PCB

Global FC market demand value is estimated to reach US$960mn in 2006, up 56.4%

from US$614mn in 2005, and FC will become the main growth momentum in IC
substrate industry in 2006.

Due to higher technical entry barrier and huge capax requirement, FC was not the
mainstream of IC substrate before 2004. However, after 2H04, the IC packaging transition
to FC directed by global tier one graphic chip manufacturers, nVidia and ATI began to
boost FC demand tremendously. In 2006, with the growing demand in graphic chips, CPU /
MPU (Micro Processor Unit) chipsets and game consoles, we estimate global demand
value of FC will reach US$960mn in 2006, up 56.4% from US$614mn in 2005, and FC will
become the main growth momentum in IC substrate industry. As currently CSP is broadly
used on slim-type consumer electronics products and memory modules, it still weights
70.6% of total IC substrate products in 2006. However, FC will be used in much more
applications, such as Intel’s Napa dual core CPU and game console. Compared with the
2006 global market demand value growth on CSP and BGA, which is 35.5% and 8.8%
respectively, FC is the segment with the highest potential.

Global market Table 9: 2003~2007 Global IC substrate Market Demand Value by Package Type
demand value of FC Flip Chip CSP BGA ( Market Demand Value: US$ mn)
is expected to be
US$960mn in 2006, 9,000
up 56.4% YoY from 1,380

US$614mn in 2005
1,230

6,000

1,130
6,040
1,050 5,250
3,000 930
3,872

2,766
2,305

960 1,295
194 348 614
0
2003 2004 2005 2006E 2007E

Source: IEK; MasterLink Securities

Table 10: 2004~2007 Global IC Substrate Market Demand Value Growth Rate % by Package Type

Flip Chip CSP BGA

90%
79.4%
76.4%

56.4%
60%

34.9%

30%

0%
2004 2005 2006E 2007E

Source: IEK, MasterLink Securities

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MasterLink Securities Nan Ya PCB

Company Analysis

Flip Chip is the key sources of revenue in 2006

NYPCB’s product mix in 1Q06 is: FC(52~52% of revenue), WB (20%), conventional PCB
and others (27%). Due to 1) Intel’s Napa dual core CPU, Sony’s PS3 and Microsoft’s Vista
OS will be launced from 2H06 to 1H07 2) higher gorss margin for FC, and 3) more new
applications, NYPCB will keep focusing its business on FC manufacturing. We estimate FC
to account for 61.2% of 2006 revenues, and this weighting will keep increasing in 2007.

Table 11: 2004~2006 NYPCB Sales Breakdown

IC substrate,
including FC and Flip Chip Wire Bonding Conv entional PCB
WB, is estimated to 100%

account 81.7% of 18.3%

34.3%
NYPCB’s 2006 80%
46.6%
revenue 20.5%

60%
20.1%

17.9%
40%

61.2%

45.6%
20%
35.5%

0%
2004 2005 2006E

Source: NYPCB; MasterLink Securities

Table 12: NYPCB’s Gross Margin % Breakdown by Main Products

Main Products Revenue % Gorss Margin % Future Gross Margin Trend

FC 53% 50% going up

WB 20% 32% keep flat

Conventional PCB 22% 20%

keep flat

Source: NYPCB, MasterLink Securities

Intel is NYPCB’s main customer

Main clients of NYPCB include Intel, ATI, nVidia and Microsoft. Intel is expected to account
NYPCB is currently for 40% of NYPCB’s 2006 revenue, and therefore is currently the major client of NYPCB.
Intel’s main FC FC is mainly employed on PC/NB’s CPU, north bridge chipsets, graphic chipsets, MPU and
supplier in Taiwan. game console. Since Intel is the global leading supplier of CPU, MPU and north bridge
chipsets, we believe NYPCB will benefit from being Intel’s main supplier on FC in Taiwan,
especially with the launch of Intel’s Napa dual core CPU in 4Q06.

April 17, 2006 cathychin@masterlink.com.tw Page 7 of 12

MasterLink Securities Nan Ya PCB

Table 13: NYPCB’s Customers Breakdown in 2006

Others
Intel
38%
40%

Microsof t
nVidia ATI
4%
9% 9%

Source: NYPCB; MasterLink Securities

FC oversupply would not be a risk concern in 2006

We assume worldwide shipment of PC / NB would be 217.0mn pcs and game console

would be 27.5mn pcs in 2006. Moreover, from our industry research about FC usage ratio in
every kind of chipset, we derive global FC demand to be 798.8mn pcs in 2006. With our FC
supply estimation of 766.4mn pcs, 2006 FC supply / demand ratio is 95.9%. We therefore
believe FC will not face oversupply situation in 2006. However, with large FC capacity
expansion by global main players from 2006 to 2007, we estimate FC supply / demand ratio
will reach 100.9% in 2007.

Table 14: 2006~2007 Flip Chip Supply and Demand Estimation

Flip Chip Supply (mn pcs)

FC supply / demand 2006E 2007E
ratio in 2006 is
Taiwan 437.0 654.0
95.9%, and 100.9%
Japan 318.0 345.1
in 2007
Korea 78.0 129.0

No oversupply risk Total Capacity 833.0 1,128.1

concerns in 2006 ww flip chip supply 766.4 1,094.3

ww flip chip supply YoY 42.8%

Flip Chip Demand (mn pcs)

2006E 2007E

ww PC shipment 217.0 235.8

ww PC flip chip demand 633.7 848.7

ww game console shipment 27.5 39.2

ww game console flip chip demand 165.0 235.4

ww flip chip demand 798.8 1,084.1

ww flip chip demand YoY 35.7%

ww flip chip supply ratio 95.9% 100.9%

Source: MasterLink Securities

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MasterLink Securities Nan Ya PCB

Cost advantage in raw materials drives higher gross margin

As a member of Formosa Plastic Group, NYPCB can get strong internal support for raw
materials, such as CCL and epoxy. Since raw material weights 45% of total IC substrate
production cost, NYPCB has strong competitiveness in IC substrate industry compared with
its main competitors. We thus believe NYPCB’s cost down ability is strong enough to
enhance gross margin. NYPCB’s gross margin is estimated to grow 14.4 ppt. from 21.1% in
2005 to 35.5% in 2006.

Table 15: 2003~2006 NYPCB’s Gross Margin % Trend

NYPCB’s gross
margin is expected Gross Margin %

to be 35.5% in 2006, 40%

up 14.4 ppt. from 35.5%

21.1% in 2005 30%

21.1%
20%

10% 9.5%
6.2%

0%
2003 2004 2005 2006E

Source: NYPCB, MasterLink Securities

Strong cash flow in 2006

According to NYPCB, the CAPEX plan is: NT$6.4bn~NT$6.8bn in 2006, NT$7.1bn in 2007,
NT$6.4bn in 2008. Since NYPCB has NT$20bn cash injection from IPO, we believe
NYPCB has very strong cash flow structure in 2006.

Valuation and Recommendation

Due to 1) growing demand in FC, 2) improving FC weight in NYPCB’s revenue from 45.6%
in 2005 to 61.2% in 2006, and 3) cost down competitive advantage in raw material sourcing,
we believe NYPCB’s revenue will trend up quarterly in 2006. We estimate NYPCB’s
consolidated revenue in 2006 will reach NT$44.0bn in 2006, up 72.9% YoY, with net profit of
NT$12.9bn, up 199.9% YoY, and EPS of NT$21.5.

NYPCB is currently traded at PER 16.3x. We give NYPCB 19x PER for its robust growth
momentum and strong cost down competitive advantage, and target price at NT$407.0,
implying 16.3% upside potential. We therefore recommend an Outperform for NYPCB.

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MasterLink Securities Nan Ya PCB

Table 16: 2003~2006 Revenues and Revenue YoY %

NYPCB’s revenue is
Rev enue (LHS: NT$ bn) Y oY (RHS: %)
estimated to be 50 100%
72.9%
NT$44.0bn in 2006,
up 72.9% YoY 40 80%

30 60%
39.8%

19.0%
20 40%

10 20%

D
0 0%
2003 2004 2005 2006E

Source: NYPCB, MasterLink Securities

Table 17: NYPCB’s PER Band

NT$

17.5x P/E
350
15.3x P/E

280 13.0x P/E

10.8x P/E
210
8.6x P/E

140 6.3x P/E

4.1x P/E
70

0
Apr-05 Jun-05 Aug-05 Nov-05 Jan-06 Apr-06

Source：TEJ, MasterLink Securities

Table 18: NYPCB’s PBR Band

NT$

9.20x P/B
350
7.94x P/B

280 6.68x P/B

5.42x P/B
210

4.17x P/B

140
2.91x P/B

70 1.65x P/B

0
Apr-05 Jun-05 Aug-05 Nov-05 Jan-06 Apr-06

Source：TEJ, MasterLink Securities

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MasterLink Securities Nan Ya PCB

Consolidated Financial Statement

Year ending 31st December 2003 2004 2005E 2006E
NT$m NT$m NT$m NT$m
Income Statements
Revenues 15,319 18,231 25,481 44,048
Revenues YoY% 19.0% 39.8% 72.9%
Cost of goods sold 14,372 16,505 20,103 28,424
Gross profit 947 1,725 5,378 15,624
Operating expenses 759 818 1,183 2,255
Operating profit 188 908 4,195 13,369
Non-operating income 120 152 374 1,179
Non-operating expenses 196 343 149 247
Pre-tax profit 111 717 4,420 14,301
Tax - 92 129 1,430
Net profit 111 625 4,291 12,871
Net profit YoY% 461.9% 587.0% 199.9%
EPS 0.52 1.28 7.75 21.46
Adjusted EPS 0.19 1.04 7.16 21.46

Balance Sheets
Current assets 7,375 8,241 11,196 19,446
Long-term investments 2 2 - 4
Fixed assets 8,658 9,599 13,299 20,223
Other assets 936 852 190 329
Total assets 16,971 18,694 24,685 40,002
Current liabilities 3,823 5,298 7,981 11,132
Long-term liabilities 4,376 4,145 3,581 6,191
Total liabilities 8,199 9,444 11,563 17,323
Common stock & preferred stock 4,826 4,874 5,166 8,931
Retained earnings 3,946 4,376 7,956 13,748
Total shareholders' equity 8,771 9,250 13,122 22,679
Total liabilities & equity 16,971 18,694 24,685 40,002

Cash Flow Statements

Net profit 252 625 4,291 12,871
Depreciation & amortization - - - -
Other non-cash adjustments 177 106 (74) (646)
Change in working capital (169) 1,500 (739) (5,250)
Operating cash flows 260 2,231 3,478 6,975
Cash flows - investing activities (171) (1,053) (3,038) (6,527)
Cash flows - financing activities 281 (693) (739) (81)
Cash flows - other 1,007 (185) (132) (469)
Net change in cash position (636) 671 (166) 836

Key Ratios
Gross margin (%) 6.2 9.5 21.1 35.5
Operating margin (%) 1.2 5.0 16.5 30.4
Net profit margin (%) 0.7 3.4 16.8 29.2
Return on shareholders' equity (%) 1.3 6.9 38.4 71.9
Return on assets (%) 0.7 3.5 19.8 39.8
Current ratio (%) 192.9 155.5 140.3 174.7
Long-term debt/Equity (%) 46.2 39.3 22.4 22.4
Total debt/Equity (X) 0.93 1.02 0.88 0.76
Interest coverage (X) 2.09 6.95 34.82 64.29
Op. cash flow per share (NT$) 0.54 4.58 6.73 7.81

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MasterLink Securities Nan Ya PCB

MasterLink Securities – Stock Rating System

BUY: Total return expected to appreciate 20% or more over a 3-month period.
OUTPERFORM: Total return expected to appreciate more than 10% and less than 20% over a 3-month period.
HOLD: Total return expected to be between 10% to –10% over a 3-month period.
UNDERPERFORM: Total return expected to depreciate more than 10% and less than 20% over a 3-month period.
SELL: Total return expected to depreciate 10% or more over a 3-month period.

Additional Information Available on Request

©2006 MasterLink Securities. All rights reserved.

This information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness or accuracy. It is
not an offer to sell or solicitation of an offer to buy any securities. MasterLink and its affiliates and their officers and employees may or may not have a
position in or with respect to the securities mentioned herein. This firm (or one of its affiliates) may from time to time perform investment banking or other
services or solicit investment banking or other business from, any company mentioned in this report. All opinions and estimates included in this report
constitute our judgment as of this date and are subject to change without notice. MasterLink has produced this report for private circulation to professional
and institutional clients only. All information and advice is given in good faith but without any warranty.

April 17, 2006 cathychin@masterlink.com.tw Page 12 of 12