Tech Hardware Supply Chain - Gazhoo

Bhavin Shah
(852) 2800-8538
bhavin.a.shah@jpmorgan.com
Asia Pacific Equity Research
20 April 2009
Table 5: Cost reduction impact of top backend companies’ plans in 2009
Eliminate
Working day reduction Headcount
Cost reduction
overtime Salary cut (per week)
reduction
(FY09E sales, %)
ASE Yes Plan (15%) 1-2 day off Plan (15%) 10
SPIL Yes Plan (15%) 1-2 day off NA 9
Source: Company reports and J.P. Morgan estimates.
Low- to mid-double-digit gross margin for most top IC backend companies, and
SPIL should be able to outperform with concentrated client support, in our
view: Except for Powertech and Greatek (based on Bloomberg consensus for
Greatek), which had higher operating margins, most top IC backend companies
delivered low- to mid-double-digit gross margins in FY08. Powertech (6239 TT)
started logic assembly in 2007, with better cost structures to support its marginality.
Given the potential recession scenario ahead in 2009, we expect SPIL to make a
profit next year and outperform among top backend companies. Main reasons for
which we expect SPIL to outperform are better top clients support and less IDM
order exposure, which we believe will be pulled back during the recession.
Figure 3: Known eight backend companies’ FY08 operating margin
2008E Sales (LHS)
US$B
3.5
2008E Op Margin (RHS)
3.0
2.5
2.0
1.5
1.0
13%
15%
6%
23%
12%
9%
19%
-5.2%
0.5
0.0
-16%
ASE Amkor SPIL STATS Pow ertech KYEC Unisem Greatek Foundries
ChipPAC
ex TSMC
Source: Companies, Bloomberg and J.P. Morgan estimates. Note: The operating margins for Greatek and KYEC are based on
Bloomberg consensus as the two companies have not reported their 4Q08 results.
ASE and SPIL are targeting 10% revenue contribution from
China in 2009E
We add the weight of the China capacity into ASE and SPIL given the localized
manufacturing advantages; especially material and labor cost could sum up to more
than 20% cost-saving. Both ASE and SPIL are targeting to increase the revenue
contribution from the China portion from about 4% to 10% in 2009E. The
differentiated strategies of ASE and SPIL are as below:
� ASE will focus on inorganic growth opportunities of a merger or a joint
venture, and focus more on low-entry level products, such as QFN, QFP and
some low pin-count BGA, in our view.
� SPIL will work with strategic clients, who are expected to come from the
handset and PC spaces, and put effort on relatively higher-end products, such
as BGA package. Given the recession which started in 4Q08, we believe
ASE’s strategy could be more feasible to cope with the product-mix in China
30%
20%
10%
0%
-10%
-20%
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