MasterLink Securities Equity Research April 17, 2006 [email protected]Page 1 of 12 Nan Ya PCB Corp. (8046 TT) Outperform PCB / IC Substrate Initiation MasterLink Research Equity Analyst Cathy Chin 886.2.2731.3888 ext 635 [email protected]Recommendation Outperform Date: April 17, 2006 Share Price (NT$): 350.0 Price Target (NT$): 407.0 Percent Change: 16.3% 52-wk range (NT$): 370.0-38.3 TWSE: 6952.54 Company Data Capital Size (NT$): 5.9bn Market Cap (NT$): 209.7bn Market Cap (US$): 6.5bn Outstanding Shrs: 599mn PER (‘06E): 16.3x PBR (‘06E): 8.6x Foreign Ownership: 2.7% Major Shareholder: Nanya Plastic (68.58%) Performance 1-m 3-m 6-m Absolute (%) 17.10 29.15 249.93 Relative to TAIEX 8.81 24.13 200.43 Key Changes Current Prev. Recommendation Outperform N/A Price Target (NT$) 407.0 N/A 06E Revenue (NT$bn) 44.0bn N/A 06E Gross Margin (%) 35.5 N/A 06E Oper. Margin (%) 30.4 N/A 06E EPS (NT$) 21.5 N/A Price Catalysts (+,-) (+) Strong IC substrate industry outlook (+) Improving demand on Flip Chip (- ) Possible FC oversupply in 2007 Related Research Tripod (3044 TT) Apr. 06,06 PPT (2446 TT) Nov 24, 05’ Largest Flip Chip Manufacturer in Taiwan z Flip Chip is the key source of revenue in 2006: Nan Ya PCB’s (NYPCB) product mix in 1Q06 is: Flip Chip ( FC, 53% of revenue), Wire Bonding (WB, 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 1H07 2) higher gross margin for FC, 3) more new applications, NYPCB will remain focused on its FC manufacturing business. We estimate FC wil account for 61.2% of 2006 revenue. z Flip Chip market demand value is estimated to reach US$960mn in 2006, up 56.4% YoY: With the growing demand in graphic chips, CPU / MPU chipsets and game consoles in 2006, we estimate the market demand value of FC will reach US$960mn in 2006, up 56.4% YoY from US$614mn in 2005, and FC will become the main growth momentum in IC substrate industry in 2006. z Revenues are trending up quarterly in 2006: Due to 1) growing demand on FC, 2) increasing 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 estimate NYPCB’s consolidated revenue in 2006 will reach NT$44.0bn, up 72.9% YoY, with net profit of NT$12.9bn, up 199.9% YoY, and EPS of NT$21.5. z Outperform: we give NYPCB 19x PER for its robust growth momentum and strong cost down competitive advantage among industry peers, and target price at NT$407.0, implying 16.3% upside potential. We therefore recommend an Outperform for NYPCB. Average daily volume ('000, LHS) and share price (NT$, RHS) 0 4,000 8,000 12,000 ,000 A-05 M-05 J-05 J-05 A-05 S-05 O-05 N-05 D-05 J-06 F-06 M-06 A-06 0 100 200 300 400 16 (50.0) 0 0 A-05 M-05 J-05 J-05 A-05 S-05 O-05 N-05 D-05 J-06 F-06 M-06 A-06 Relative to TAIEX (%) 250. 550.
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Key Changes Current Prev. Recommendation Outperform N/A
Price Target (NT$) 407.0 N/A
06E Revenue (NT$bn) 44.0bn N/A
06E Gross Margin (%) 35.5 N/A
06E Oper. Margin (%) 30.4 N/A
06E EPS (NT$) 21.5 N/A
Price Catalysts (+,-) (+) Strong IC substrate industry outlook
(+) Improving demand on Flip Chip
(- ) Possible FC oversupply in 2007
Related Research Tripod (3044 TT) Apr. 06,06
PPT (2446 TT) Nov 24, 05’
Largest Flip Chip Manufacturer in Taiwan Flip Chip is the key source of revenue in 2006: Nan Ya PCB’s (NYPCB)
product mix in 1Q06 is: Flip Chip ( FC, 53% of revenue), Wire Bonding (WB, 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 1H07 2) higher gross margin for FC, 3) more new applications, NYPCB will remain focused on its FC manufacturing business. We estimate FC wil account for 61.2% of 2006 revenue.
Flip Chip market demand value is estimated to reach US$960mn in 2006, up 56.4% YoY: With the growing demand in graphic chips, CPU / MPU chipsets and game consoles in 2006, we estimate the market demand value of FC will reach US$960mn in 2006, up 56.4% YoY from US$614mn in 2005, and FC will become the main growth momentum in IC substrate industry in 2006.
Revenues are trending up quarterly in 2006: Due to 1) growing demand on FC, 2) increasing 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 estimate NYPCB’s consolidated revenue in 2006 will reach NT$44.0bn, up 72.9% YoY, with net profit of NT$12.9bn, up 199.9% YoY, and EPS of NT$21.5.
Outperform: we give NYPCB 19x PER for its robust growth momentum and strong cost down competitive advantage among industry peers, and target price at NT$407.0, implying 16.3% upside potential. We therefore recommend an Outperform for NYPCB.
Average daily volume ('000, LHS) and share price (NT$, RHS)
Nan Ya PCB (NYPCB), a subsidiary of Formosa Plastics Group, was established in 1997 and currently is the largest Flip Chip (FC) manufacturer in Taiwan. It currently focuses its business on conventional PCB and IC substrate: FC (53% of 1Q06 revenue), wire bonding (20%), conventional PCB and others (27%). Currently NYPCB has 4 IC substrate factories 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.
NYPCB is currently the largest FC manufacturer in Taiwan
Table 1: 2Q06 FC Capacity Comparison by Key Manufacturers in Taiwan
FC Key Manufacturers in Taiwan 2Q06 Capacity Main Customers
NYPCB 23.5 mn / per
month
Intel (INTC US, US$19.5, NR),
nVidia (NVDA US, US$29.6, NR),
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)
Kinsus (3189 TT, NT$137.0, NR) 2mn / per month
Amkor (AMKR, US$9.2, NR),
Xilinx (XLNX, US$26.4, NR),
Altera (ALTR, US$20.6, NR), TI (TXN, US$32.7, NR)
Unimicron (3037 TT, NT$55.1, NR) 2.5mn / per month
Motorola (MOT, US$24.0, NR),
BenQ (2352 TT, US$27.2, NR),
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.
Table 2: IC carrier Progression by Size of Lead Pitch and I/O Count
0
1
2
3
10 50 90 130
Lead Number (I/O count)
Lead Pitch (mm)
DIL
SoP
QFP
BGA
CSP
Flip Chip
Lead Frame IC Substrate
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
CBGA (Ceramic BGA)PBGA (Plastic BGA)TBGA (Tape BGA)CDBGA (Cavity Down BGA)
2) CSP (Chip Scale Package)
Substrate CSP
Lead frame CSP
3) FC (Flip Chip Package) ◇ "Flip" the die and use "bumping" to connect the front side of the diewith the substrate
1) Wire Bonding ◇ Use gold wire to connect IC and substrate
2) TAB (Tape Automated Bonding)
◇ TAB involves bonding a gold bumped die to a single layer circuit builton a flexible material, such as polyimide.◇ TAB is used primarily in the flat panel display inductry to mount driverIcs between the glass of the display and the input circuitry behind thedisplay.
3) FC ◇ "Flip" the die and use "bumping" to connect the front side of the diewith the substrate
◇ Use solder ball instead of the conventional lead frame as theinterconnection between substrate and IC.◇ Compared with traditional lead frame, a BGA package allows more I/Ocounts and better heat depersion. Suitable for ICs that is running at highfrenquency.
◇ Single chip package technology.◇ Size of the package chip is almost the same or only slightly larger thanthe bare die.◇ Mostly used in ICs that are running at high frequency but with smallernumbers of pin counts. Number of pin count is also lower due to the smallsize of the package IC.
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, 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.
xx
Table 6: 2001~2007 Global IC Substrate Market Size
Source: IEK-ITIS; MasterLink Securities
Higher-performance IC demand from new applications will boost global IC substrate market size to US$6.1bn in 2006, up 10.9% YoY
10.3%
10.9%13.6%
23.7%20.0%
14.6%
0
3
6
9
2001 2002 2003 2004 2005 2006E 2007E0%
10%
20%
Global IC Substrate Production Value (LHS, US$: bn ) Growth YoY (RHS, %)
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$1.2bn in 2005.
Table 7: 2005~2006 Global IC Substrate Market Share % by Country
63.4% 59.4%
10.6% 11.3%
22.5% 26.5%
0%
30%
60%
90%
2005 2006E
Japan Taiwan Korea
Source: IEK-ITIS; MasterLink Securities
Taiwan IC substrate market share is estimated to increase from 22.5% in 2005 to 26.5% in 2006
Table 8: 2001~2007 Taiwan IC Substrate Production Value with YoY and Global Market Share
19.0%
25.0%
43.6%
19.1%
30.6%
30.4%
28.6%26.5%22.5%
0
0.5
1
1.5
2
2001 2002 2003 2004 2005 2006E 2007E
0%
10%
20%
30%
40%
50%
60%TWN IC Substrate Production Value (LHS, US$: bn) YoY (RHS, %) TWN/WW (RHS, %)
Source: IEK-ITIS; MasterLink Securities
Taiwan IC substrate production value will grow to US$1.6bn in 2006, up 30.6% YoY
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.
Table 9: 2003~2007 Global IC substrate Market Demand Value by Package Type
Global market demand value of FC is expected to be US$960mn in 2006, up 56.4% YoY from US$614mn in 2005
194 348 614 960 1,295
2,3052,766
3,872
5,250
6,040
930
1,050
1,130
1,380
1,230
0
3,000
6,000
9,000
2003 2004 2005 2006E 2007E
Flip Chip CSP BGA ( Market Demand Value: US$ mn)
Source: IEK; MasterLink Securities
Table 10: 2004~2007 Global IC Substrate Market Demand Value Growth Rate % by Package Type
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
Source: NYPCB; MasterLink Securities
IC substrate, including FC and WB, is estimated to account 81.7% of NYPCB’s 2006 revenue
35.5%45.6%
61.2%
17.9%
20.1%
46.6%
34.3%
18.3%
20.5%
0%
20%
40%
60%
80%
100%
2004 2005 2006E
Flip Chip Wire Bonding Conv entional PCB
Table 12: NYPCB’s Gross Margin % Breakdown by Main Products
Intel is NYPCB’s main customer Main clients of NYPCB include Intel, ATI, nVidia and Microsoft. Intel is expected to account for 40% of NYPCB’s 2006 revenue, and therefore is currently the major client of NYPCB. FC is mainly employed on PC/NB’s CPU, north bridge chipsets, graphic chipsets, MPU and 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.
NYPCB is currently Intel’s main FC supplier in Taiwan.
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
2006E 2007E
Taiwan 437.0 654.0
Japan 318.0 345.1
Korea 78.0 129.0
Total Capacity 833.0 1,128.1
ww flip chip supply 766.4 1,094.3
ww flip chip supply YoY 42.8%
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%
Flip Chip Supply (mn pcs)
Flip Chip Demand (mn pcs)
FC supply / demand ratio in 2006 is 95.9%, and 100.9% in 2007 No oversupply risk concerns in 2006
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 to be 35.5% in 2006, up 14.4 ppt. from 21.1% in 2005
6.2%
9.5%
35.5%
21.1%
0%
10%
20%
30%
40%
2003 2004 2005 2006E
Gross Margin %
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.
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.