News Commentary: Retail sector  May.09, 2012
FEDS valuation attractive following selloff
Primasia Comment
Investor worries over FEDS's potential loss of its stake in Sogo have escalated following an unfavorable government decision. On Friday, the Ministry of Economic Affairs decided to allow interim managers to vote on a new board of directors for Sogo's parent company, driving down FEDS's share price over 10% in the following two days and prompting furious protest from Far Eastern Group Chairman Douglas Hsu. Given this background, we’ve provided a scenario analysis of potential unfavorable legal outcomes on FEDS's sales and valuation.
Although Mr. Hsu announced he would halt all of the Far Eastern Group's ongoing investment projects in Taiwan, we think this move in itself will have little impact on FEDS's sales and profitability outlook given the company's recent launch of three new stores. Furthermore, the court has yet to release its verdict over the legality of three interim managers, and two other pieces of related litigation regarding Sogo's ownership are still ongoing. We advise investors to look beyond short-term share price volatility and focus on fundamental operations. Our analysis is as follows.
Despite the market's fear over the potential loss of Sogo ownership, the parent company has significantly outperformed Sogo operations. Exclusive of its Sogo affiliate, FEDS is now riding the sales momentum of its two newly opened megastores and expects to boost its overall market share to 14% in 2012 from 10% last year. For Sogo's standalone operations, meanwhile, even with an estimated additional 2012 sales contribution of NT$3.6bn from the recently opened Far Eastern Sogo location in Hsinchu, the affiliate's market share is expected to remain flat at 15% due to sluggish growth from its existing stores. As FEDS has strategically focused on expansions in less competitive markets, Sogo's sales and earnings growth have decelerated recently due to its heavy exposure to the ultra-competitive Taipei market. In fact, FEDS boasted a robust CAGR in sales of 7.7% during 2007–2011 while Sogo saw a corresponding growth rate of 5.3% over the same period, and Taiwan's overall department store segment grew 4.7% per annum. FEDS also generates much stronger profitability growth, with net operating income growing an average 15.3% p.a. over this period while Sogo's NOI grew at a mediocre 3.6% pace (Exhibit 1). Therefore, even if FEDS is to lose Sogo ownership under the worst case scenario, FEDS will continue to hold its growth momentum.
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  News Commentary: Primasia Sector Update  May.09, 2012
Apple's next foundry partner
Primasia Comment
Best of ‘frenemies’: Apple has very quietly begun to make the transition to application processors (APUs) manufactured using Samsung's 32nm process technology, focusing attention on the question of what Apple's foundry strategy is likely to be as settlement talks between the two litigants draw near. We believe Apple's move away from package-on-package will make it easier to migrate away from Samsung, while Apple's recent moves to diversify its other suppliers shows the intent to do the same with its foundry business.
Intel offers the dilemma of conversion: Intel's status as the only chipmaker with FinFETs makes it an enticing potential partner for Apple, whose products would gain a battery life edge over rival devices.
However, in order to use Intel's process, Apple would need to make wholesale changes to its iOS in order to accommodate Intel's strict no-ARM policy while maintaining software compatibility. This would be very resource-intensive for Apple, and could alienate both customers and app developers if anything went wrong.
A5 APUs made on 32nm beginning to appear: Certain iPad 2 models have begun to appear equipped with APUs made on Samsung's new 32nm process technology. Look for Apple to expand the use of 32nm process to the rest of its APU line as the year progresses. However, Samsung's 28nm process is not a linear shrink version of 32nm, and thus we doubt that Apple will go through the trouble of re-designing its APUs to use Samsung's 28nm process.
It's a three-horse race: We believe that only Intel, TSMC and Samsung have a viable shot at being selected as Apple's next foundry partners. UMC clearly lacks the scale and leading-edge process level in order to compete in this league, while GlobalFoundries probably still has to prove itself following the public divorce from AMD. TSMC is pulling out all the stops in order to win Apple's business, including hiring teams of IC design and system level engineers, accelerating its 20nm process development and possibly pulling in its FinFET introduction from 14nm to 20nm.
The game is TSMC's to lose…in 2014: Given the competitive conflicts with Samsung and the broader engineering challenges that would be triggered by a move to Intel, it seems most likely that TSMC will have the inside track to become Apple's next foundry partner—once TSMC gets 20nm up and running. The broader question will be whether Apple will prove lucrative enough as a customer to justify all of these efforts.

  EVERLIGHT (2393 )    Apr. 30, 2012
1Q12 op. earings in-line with forecast

• 1Q12 operation result in-line with forecast. Everlight’s 1Q12 op. income was in-line with our forecast by posting GM/OM of 18.3%/4.9%, close to our estimations of 18.8%/4.8%. We attributed the difference to greater-than- expected pricing pressure on CE/handset LEDs and smaller-than-expected decline on costs of lighting chips. Non-op. losses of NT$88m were greater than our forecast of –NT$41m due to forex loss of NT$38m and low/better-than- expected respective results from Epistar/Teckore. Net income of NT$83m was 30% lower than our forecast. EPS was NT$0.20 vs. our forecast of NT$0.28.
• More demand recovery in 2Q12. Everlight is experiencing higher utilization rate of 70-80% vs. 60-70% in 1Q12 and smaller decline of 5% ASPs vs. 5%-10% in 1Q12 thanks to demand improvement. It should book smaller investment loss from Tekcore which has been making significant improvements on yield and broke into Korean TV vendors’ supply chains. We expect Everlight to post 14% q-q top-line growth. However, we cut 2Q12E GM by 0.5 ppt to 19.0% and net income by 2% to NT$281m due to pricing competition on low-end packaged LEDs and firmer ASP on lighting chips
• Concerns for LT growth prospects unchanged. Our concerns about Everlight’s LT growth prospects remain unchanged. 1) It is less-geared to lighting upcycle on low lighting mix (15% of 2012E). 2) Chinese lighting manufacturers seem to favor local packagers. 3) Pricing competition on handset/IT LEDs will pressure its GM which we cut the forecast by 0.5 ppt to 19.6%. 3). Despite its good expenses management which makes us increasing 2012E OM forecast up by 0.1 ppt to 6.0%, the decline is unavoidable on brand building activities. 4) Patent war with Nichia (JP) is heating up. Everlight has five ongoing lawsuits with Nichia including the one filed in US in April. Losing one of these lawsuits may hamper the company's growth in lighting market.
• Reiterate Hold for LT outlook concerns. We lower our 2012E EPS estimate by 1% to reflect worse than expected 1Q12 results and better-than-expected OM. We believe the long-term risks of low exposure to lighting, margin erosion and uncertainties regarding patent lawsuits will be fundamental headwinds for the company. We reiterate our "Hold" rating and adjust our target price to NT$66.5 on 1.5x 2012E based on adjusted post-right-issuance BVPS of NT$44.3

• 1Q12 operation result in-line with forecast. Everlight’s 1Q12 op. income was in-line with our forecast by posting GM/OM of 18.3%/4.9%, close to our estimations of 18.8%/4.8%. We attributed the difference to greater-than- expected pricing pressure on CE/handset LEDs and smaller-than-expected decline on costs of lighting chips. Non-op. losses of NT$88m were greater than our forecast of –NT$41m due to forex loss of NT$38m and low/better-than- expected respective results from Epistar/Teckore. Net income of NT$83m was 30% lower than our forecast. EPS was NT$0.20 vs. our forecast of NT$0.28.
• More demand recovery in 2Q12. Everlight is experiencing higher utilization rate of 70-80% vs. 60-70% in 1Q12 and smaller decline of 5% ASPs vs. 5%-10% in 1Q12 thanks to demand improvement. It should book smaller investment loss from Tekcore which has been making significant improvements on yield and broke into Korean TV vendors’ supply chains. We expect Everlight to post 14% q-q top-line growth. However, we cut 2Q12E GM by 0.5 ppt to 19.0% and net income by 2% to NT$281m due to pricing competition on low-end packaged LEDs and firmer ASP on lighting chips
• Concerns for LT growth prospects unchanged. Our concerns about Everlight’s LT growth prospects remain unchanged. 1) It is less-geared to lighting upcycle on low lighting mix (15% of 2012E). 2) Chinese lighting manufacturers seem to favor local packagers. 3) Pricing competition on handset/IT LEDs will pressure its GM which we cut the forecast by 0.5 ppt to 19.6%. 3). Despite its good expenses management which makes us increasing 2012E OM forecast up by 0.1 ppt to 6.0%, the decline is unavoidable on brand building activities. 4) Patent war with Nichia (JP) is heating up. Everlight has five ongoing lawsuits with Nichia including the one filed in US in April. Losing one of these lawsuits may hamper the company's growth in lighting market.
• Reiterate Hold for LT outlook concerns. We lower our 2012E EPS estimate by 1% to reflect worse than expected 1Q12 results and better-than-expected OM. We believe the long-term risks of low exposure to lighting, margin erosion and uncertainties regarding patent lawsuits will be fundamental headwinds for the company. We reiterate our "Hold" rating and adjust our target price to NT$66.5 on 1.5x 2012E based on adjusted post-right-issuance BVPS of NT$44.3

Source: Primasia Investment Consultancy Co., Ltd.