15 June 2022

Equities
Asia Technology Electronic Equipment &
Instruments

Initiate on ABF substrate sector: As good as it gets Taiwan

 Supply constraints may ease faster than expected as end Ted Lin*
Associate
demand falls for PCs/servers and on slower chiplet adoption HSBC Securities (Taiwan) Corporation Limited
ted.ht.lin@hsbc.com.tw
 Our average FY23e EPS is 19% lower than consensus due +886 2 6631 2870

to less favourable product mix, prices, and margins Frank Lee*

Head of Technology Research, Asia
The Hongkong and Shanghai Banking Corporation Limited
 Initiate on three leading Taiwanese ABF substrate makers: frank.lee@hsbc.com.hk
+852 2996 6916
Unimicron and Kinsus at Hold, and Nanya PCB at Reduce
Pulkit Aggarwal*
Associate
Bangalore
We do not expect ABF substrate to be bullet proof from weaker end demand
In the niche industry of integrated circuit substrate – which connects chips to a * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is
not registered/ qualified pursuant to FINRA regulations
printed circuit board – it is ABF substrate where investors have been most positive on
driven by a belief of an ongoing supply shortage to FY24-25. While we agree on the
subsector being a long-term structural story as ABF substrate is required to build
more powerful chips, especially for servers, we do not believe that the sector can
stay totally immune to weakening demand for PCs and graphic processing units
(GPUs). Demand currently far outweighs supply but this gap should shrink and cause
a less favourable product mix and hurt gross margins more than the market expects.

Why are we cautious on the ABF substrate industry?

We still expect most Taiwanese ABF substrate makers to post strong 2Q22e
earnings and may even surprise on margins. Still, we expect less upside to earnings
than before as we believe the supply-demand gap could potentially narrow to -1%/-
1% in FY22e/FY23e as demand for PCs is set to drop 15% in FY22e and stay flat in
FY23e along with slower Intel chiplet adoption. By contrast, consensus believes ABF
substrate will be in under supply by more than -5% to -15% throughout FY21-25e.
Given the bullish market view, most ABF names have seen significant re-ratings over
the past two years, but we expect valuations have peaked for the overall sector with
a potential de-rating risk going into FY23e from the risk of earnings missing
consensus estimates, especially as ABF shortage begins to ease.

Initiate on Unimicron and Kinsus at Hold, and Nanya PCB at Reduce

We initiate on Unimicron (TP TWD170) and Kinsus (TP TWD145) at Hold as we see
prices and gross margins peaking in 2H22e vs consensus which sees an improvement.
We initiate on Nanya PCB (TP TWD280) at Reduce as it should suffer most from a
decline in pricing power on exposure to non-Intel, smaller customers in the near term. Our
average FY23e earnings are -19% vs. consensus. Our scenario analysis sees a further
maximum downside of 38% vs consensus on weaker price assumptions. See the
accompanying initiation reports on Unimicron, Kinsus and Nanya PCB for more details. Asiamoney Brokers Poll 2022
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Disclosures & Disclaimer Issuer of report: HSBC Securities (Taiwan)

Corporation Limited
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at:
https://www.research.hsbc.com
 Equities ● Electronic Equipment & Instruments
15 June 2022

Key charts for the ABF substrate industry

Exhibit 1: ABF supply-demand gap to Exhibit 2: PCs the biggest users of ABF
close, be about balanced in FY22e/FY23e substrate
2.20
2.00 PC
5%
12%
1.80 Server
1.60 21%
1.40
GPU 62%

1.20 Others
1.00
0.80
2021 2022e 2023e 2024e 2025e
Supply Demand
Source: HSBC estimates Source: Company data, HSBC estimates

Exhibit 3: We expect weaker-than- Exhibit 4: Slower adoption of Intel’s new

consensus PC demand in FY22e server CPU platform, called Eagle Stream,
will have an impact on ABF substrate too

Source: HSBC estimates Source: HSBC estimates

Exhibit 5: Our FY23e EPS is on average Exhibit 6: We expect ASP to decline in

19% lower than consensus forecasts 2023e

0% 40.0%
30.0%
-10%
20.0%

-20% 10.0%
0.0%
-30%
Unimicron Kinsus Nanya PCB -10.0%

HSBC vs consensus on FY23EPS -20.0%

2020 2021 2022e 2023e
Unimicron Kinsus Nanya PCB
Source: HSBC estimates Source: HSBC estimates

Summary of ratings and estimates

Current _______TP ____ ___ Rating ____ Upside/ Market cap 3m ADTV FY22e EPS FY23e EPS
Company Ticker Currency price Old New Old New downside (USDm) (USDm) growth growth
Unimicron 3037 TT TWD 206.5 NA 170.0 NA Hold -18% 10,313 198 85% 2%
Kinsus 3189 TT TWD 167.5 NA 145.0 NA Hold -13% 2,556 79 74% 0%
Nanya PCB 8046 TT TWD 372.0 NA 280.0 NA Reduce -25% 8,137 64 71% 2%
Source: Bloomberg, HSBC estimates. Priced as of close at 09 June 2022

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Contents

Key charts for the ABF substrate

industry 2
Investment summary 4
Structural increase in ABF
substrate consumption on track 7
We expect the ABF supply-demand
gap to be closer to balance than
consensus 11
Narrowing supply deficit leads to
less favourable product mix, GM 14
Where we can be wrong 16
Initiate on Unimicron, Kinsus at
Hold; Nanya PCB at Reduce 17
Appendix 20
Valuation and risks 23

Disclosure appendix 24

Disclaimer 28

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15 June 2022

Investment summary

We expect supply constraints to ease faster than expected in FY22e/FY23e

Of all the different types of integrated circuit substrates – a niche but vital product used to
connect chips to the printed circuit board – it is ABF substrate that’s the area where investors
have been most positive on given expectations that the supply shortage will last through to
FY25e. And the reason for the shortage is the expectation that chiplet design – which is used to
create more powerful chips and specifically needs ABF substrate to connect up the components
– will be increasingly used as demand grows for better PCs and servers. Chiplet design also
increases chip manufacturing yields and brings down manufacturing costs.

To get more technical, chiplet design combines smaller dies into one package, has a higher
layer count to improve connection efficiency and helps with the migration to more advanced
technology nodes.

We acknowledge that the ABF substrate industry can benefit from wider chiplet design adoption
and that this will boost the consumption of it in the long term. But we believe that with
weakening end demand for PCs – currently the biggest end application for ABF substrate – as
well as lower chiplet design adoption due to a delay in Intel’s new server central processing
units (CPUs) which use ABF substrate, the ABF substrate’s undersupply could ease in
FY22e/FY23e, from current consensus expectations of at least 5-15% to only 1% based our
supply and demand model.

Narrowing supply-demand gap to lead to less favourable product mix, prices + margins

We saw significant gross margins and operating margins growth for ABF substrate suppliers in
FY20 and FY21 due to improvements in product mix and ASPs, driven by the severe ABF
substrate supply constraint during the period. However, based on our expectations for a much
lower supply deficit in FY22e/FY23e, we believe it is reasonable to be cautious on ABF
substrate companies’ ability to continue raising their ASPs as well as improving their gross
margins. We expect that with significant improvements to supply, this will have a negative
impact on lower-end PC products’ ASPs and margins, due to ABF substrate companies’
incentive to maintain production at full utilization rates, as well as decreasing incentive for
customers to pay such high price premiums vs FY20 and FY21.

Initiate on Unimicron/Kinsus (Hold), Nanya (Reduce); show bear-case scenario analysis

We initiate on Unimicron and Kinsus with Hold ratings as we expect ASPs and gross margins to
potentially peak in 2H22e vs consensus expectations for ongoing improvements. We do not rate
Unimicron a Reduce given that Unimicron’s ABF substrate customer portfolio is more diverse
than its peers, with most of the capacities taken by top IC designers, while for Kinsus, we believe
a Hold rating is reasonable given that the smaller ABF substrate capacity compared to its peers
should be easier to manage during a down cycle. We initiate on Nanya PCB with a Reduce rating
as we expect it to see the biggest negative impact from a decline in pricing power given its
exposure to non-Intel, smaller customers in the near term. Our average FY23e base case
earnings for all three stocks are already 19% below consensus estimates; however, our scenario
analysis suggests that on average, there’s further maximum downside of 38% against consensus
based on weaker ASP assumptions. Currently, there is close to no earnings downward revisions
by consensus for all three companies as shown in exhibit 7, but we believe that once investors
realize that the potential ASP and gross margin peak could arrive in 2H22e, there could be
multiple de-ratings as well as a series of earnings revisions by consensus in this space.

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15 June 2022

Exhibit 7: Limited consensus downward revisions to earnings of ABF substrate makers

EPS Gwth EPS Gwth EPS Gwth C22e Earnings C22e Earnings C22e Earnings C22e Earnings
BBG code Company C21a C22e C23e Revision (1M) Revision (3M) Revision (6M) Revision (12M)
Substrate
3037 TT Unimcron 155% 83% 23% 6% 11% 48% 154%
3189 TT Kinsus 651% 60% 23% 2% 3% 4% 114%
8046 TT Nanya PCB 204% 72% 32% 3% 4% 8% 52%
4062 JP Ibiden 133% 51% 12% -1% -10% -6% 6%
6967 JP Shinko 2% 0% 19% 74%
ATS AV AT&S 257% 96% 35% 17% -11% -13% -9%
Average 280% 72% 25% 5% -1% 10% 65%
Source: Bloomberg

Exhibit 8: Summary table of HSBC vs consensus

__________ HSBC ___________ ________Consensus _________ ____ HSBC vs consensus _____
EPS TWD FY22e FY23e FY22e FY23e FY22e FY23e
Unimicron 16.61 16.93 15.62 20.20 6% -16%
Kinsus 14.86 14.83 14.18 17.64 5% -16%
Nanya PCB 27.95 28.47 28.99 37.84 -4% -25%
Average 2% -19%
Source: HSBC estimates, Bloomberg consensus forecasts

Exhibit 9: ABF substrate comp table – 1

Companies Rating TP CMP Mkt cap ___ PE(x) ____ ____ ROE ____ ____ PB(x) _____ Price/Sales (x) EV/EBITDA (x)
(LC) (LC) (USD) 2022e 2023e 2022e 2023e 2022e 2023e 2022e 2023e 2022e 2023e
Unimicron 3037 TT Hold 170 206.5 10,229 12.3 12.0 31% 24% 3.3 2.6 2.3 2.1 7.2 5.6
Kinsus 3189 TT Hold 145 167.5 2,573 11.3 11.3 18% 14% 1.8 1.5 1.7 1.6 5.9 5.0
Nan Ya PCB 8046 TT Reduce 280 372 8,190 13.3 13.1 37% 28% 4.2 3.2 3.6 3.4 8.5 6.2
Ibiden 4062 JP NR NR 4515 4,900 13.4 12.4 14% 13% 1.8 1.6 1.6 1.5 5.5 5.0
Shinko 6967 JP NR NR 4640 4,833 12.2 10.6 27% 25% 3.2 2.5 2.3 2.1 5.9 4.6
AT&S ATS AV NR NR 55.1 2,300 25.5 18.6 9% 10% 2.4 2.2 1.4 1.1 8.4 7.3
SEMCO 009150 KS Buy 230000 149000 8,964 9.8 8.5 16% 16% 1.5 1.3 1.1 1.0 4.1 3.5
LG Innotek 011070 KS Buy 480000 389000 7,415 8.7 8.0 27% 23% 2.2 1.8 0.6 0.5 4.3 3.7
SCC 002916 CH Hold 94.3 93.46 7,197 25.7 21.4 18% 18% 4.1 3.6 2.9 2.5 15.4 12.4
Average 14.7 12.9 22% 19% 2.7 2.3 1.9 1.7 7.1 5.9
Source: Bloomberg, HSBC estimates and HSBC Qianhai Securities estimates for rated companies. Pricing date as of 09 June 2022

Exhibit 10: ABF substrate comp table – 2

Companies _____ Revenue growth _____ _________ EPS __________ _____ EPS growth _______ _____ Gross margin ______
2022e 2023e 2022e 2023e 2022e 2023e 2022e 2023e
Unimicron 3037 TT 27% 9% 16.61 16.93 85% 2% 33% 31%
Kinsus 3189 TT 24% 11% 14.86 14.83 74% 0% 36% 35%
Nan Ya PCB 8046 TT 26% 6% 27.95 28.47 71% 2% 37% 35%
Ibiden 4062 JP 25% 6% 338.30 372.40 79% 10% 30% 29%
Shinko 6967 JP 47% 12% 369.90 423.78 212% 15% 32% 34%
AT&S ATS AV 31% 28% 2.12 2.90 76% 37% 16% 17%
SEMCO 009150 KS 4% 9% 15,601 17,817 10% 14% 27% 27%
LG Innotek 011070 KS 17% 6% 43,163.79 47,155.28 14% 9% 14% 15%
SCC 002916 CH 22% 18% 3.64 4.38 24% 20% 25% 25%
Average 25% 12% 72% 12% 28% 27%
Source: Bloomberg for non-rated companies 09 June 2022. HSBC estimates and HSBC Qianhai Securities estimates for rated companies.

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Exhibit 11: Unimicron forward PE Exhibit 12: Unimicron forward PB

30 6 40%
25
31% 30%
20 4
22%
15 20%

10 2
11% 10%
5 7%
4%
0 0 1% 0%
Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 May-17 May-18 May-19 May-20 May-21
PE average (18x) PB average (2x)
+1std (21x) -1std (14x)

Source: Bloomberg Source: Bloomberg

Exhibit 13: Kinsus forward PE Exhibit 14: Kinsus forward PB

60 4 20%
18%
50
3 12%
40 10%

30 2
2% 1% 2%
20 0%
1
10
-7%
0 0 -10%
Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21
PE average (23x) PB average (1.3x)
+1std (30x) -1std (14x)
Source: Bloomberg Source: Bloomberg

Exhibit 15: Nanya PCB forward PE Exhibit 16: Nanya PCB forward PB

40 10 40%
37%
30 8 29% 30%

6 20%
20
4 12% 10%
10 2 1% 0%
-2%
-6%
0 0 -10%
Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21
PE average (24x) PB average (2.3x)
+1std (29x) -1std (19x)

Source: Bloomberg Source: Bloomberg

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15 June 2022

Structural increase in ABF substrate consumption on track

ABF substrate demand to gradually increase on need for larger and more powerful chips
With ABF substrate widely used in computers, servers, IoT devices and cars, we expect global
demand to see a 20% CAGR from FY21 to FY25e, driven by an increase in consumption for
larger and more powerful chips which use more advanced packaging techniques. On top of that,
the adoption of chiplet design in advanced node chips for CPUs and graphics processing unit
(GPUs) will also help increase consumption of ABF substrate.

Exhibit 17: 2021 ABF substrate market share by revenue

Unimicron
8%
Kinsus 8% 27%
Nanya PCB
13%
Ibiden
Shinko 7%

SEMCO 21%
16%
AT&S

Source: Company data

Exhibit 18: 2021 ABF substrate consumption breakdown by end application

5%
12%
PC
Server
GPU 21%
62%
Others

Source: HSBC estimates

Chiplet design to improve manufacturing yield and cost for chips with advanced nodes
Moore’s Law, a key observation and projection used in semiconductor manufacturing states that
the number of transistors in a dense integrated circuit doubles about every two years. While this
has largely held true for the past several decades, it has started to run out of steam.

Doubling transistor density has started taking three or four years instead of two. Each increase
in density comes with a corresponding rise in wafer cost, producing little or no reductions in cost
per transistor, a key aspect of Moore’s Law. Power and speed gains have also diminished with
each new transistor node. In short, moving to the next node has become much more expensive
while offering less benefit. In general, cost increases as chips move into more advanced nodes

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 Equities ● Electronic Equipment & Instruments
15 June 2022

for a die of unchanged size, assuming the same yield. For example, the manufacturing cost
increases by 66% when we move from 7nm to 5nm.

An alternative way to create more advanced designs is using a chiplet. A chiplet is designed to be
combined with other chiplets on an interposer (used as a bridge on which different chiplets can be
put) in a single package. A set of chiplets can be implemented in a mix-and-match "LEGO-like"
assembly. By using two or more chips, a company can increase the integrated circuit design’s
transistor count beyond what a single chip can hold. A maker of chips can use an older node for
some of the chiplets to save costs while employing leading-edge nodes where needed for optimal
performance. For complex designs, this approach can reduce manufacturing costs.

Dividing a large chip into smaller chips will also reduce the manufacturing cost by improving
yield. A traditional yield model assumes that defects scatter randomly across a wafer, and that a
defect anywhere on the die renders it unusable. Therefore, a large die is much more likely to
contain a defect than a small die. For example, moving into chiplet design from monolithic
design (a single large chip) in 7nm with an 80% effective area rate could save 10-15% of costs,
offsetting the increasing costs from the migration from 14nm to more advanced 7nm technology.

With the cost savings and more silicon content in transistors compared to a monolithic design,
chiplets could be the solution to sustaining the Moore’s law, allowing a return to a two-year
doubling cycle that has underpinned the economics of the semiconductor business.

Exhibit 19: Cost comparison between monolithic and chiplet design

Monolithic Difference Chiplet
Wafer cost (7nm) $ 9,350 1x $ 9,350
Total die size 600mm2 1.1x 660mm2
Single die size 600mm2 0.28x 165mm2
Gross die per wafer 96 4x 387
Defect Rate (per cm2) 0.2 1x 0.2
Effective area 80% 1x 80%
Estimated Yield 43% 1.8x 78%
Net die per wafer 42 7.1x 300
Single die cost $ 224 0.14x $ 31
Total die cost $ 224 0.55x $ 124
Total test cost $ 10 1.2x $ 12
Package and packaging cost $ 160 1.25x $ 200
Packaging loss 1% 4x 4%
Total manufacturing cost $ 398 0.87x $ 347
Source: Company data

Exhibit 20: Cost increases per yielded mm2 for a 250mm2 as technology node advances

6
Normalized cost per yielded mm2

5
4

2
1

0
45nm 32nm 28n 20nm 14nm 10nm 7nm 5nm

technology node
Source: Company data

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15 June 2022

Exhibit 21: Chiplet cost scenarios at 7nm and 5nm (assuming 100% effective area)
____________ Chiplet cost savings at 7nm _____________ ____________ Chiplet cost savings at 5nm _____________
Die Area (mm2) Cost savings % Die Area (mm2) Cost savings %
200 -5% 200 4%
300 4% 300 12%
400 10% 400 20%
500 15% 500 25%
600 20% 600 30%
700 25% 700 35%
Source: Company data

ABF substrate a direct beneficiary of chiplet design given increase in total consumption
We expect the ABF substrate industry to be a direct beneficiary of the adoption of chiplet design
by more and more companies. As chiplet design merges together multiple chips on an
interposer as compared to a monolithic design, the consumption of ABF substrate will increase.
As we see from Exhibit 21, the cost savings are at a maximum when the effective die area is
maximized. Compared to a monolithic design, the die area in a chiplet is at least 1.1 times more.
In addition to that, there will also be an increase in the layer count of ABF substrates to enable
better data transmission efficiency with an increase in Input/Output (I/O) counts and the
complexity of the interconnections.

Exhibit 22: Change in required capacity and area for server IC

Server IC Required Capacity Net sqm. Comment
in 2019 1x 1x Mostly single chip
in 2025 8x 4x Instead of using monolithic designs, various chip elements are integrated as
one device
Source: Company data

AMD has been the pioneer in chiplet adoption; Intel and the rest ready to follow suit
AMD has been the pioneer of chiplet adoption, starting its journey with the idea of multi-chip modules
(MCM), an early concept in chiplet design, with its first generation AMD EPYC server CPU (code
name Naples) back in 2017. For this particular CPU, AMD was able to enable up to 32 CPU cores
(small processors inside a CPU) with four identical chips in a single package, and was able to bring
down manufacturing cost by 0.59x while only increasing the silicon area by 10%.

As AMD moved on to the second generation AMD EPYC server CPU (code name Rome) in
2019, the company was able to add a chiplet whose purpose was to centralize all the DRAM
and Input/Output circuitry, which held a different set of functions from the other eight chiplets.
By doing so, AMD was able to bring down its cost by using less expensive 14nm on this
particular die while using 7nm on the other eight chiplets.

AMD continued to adopt chiplet design in its third AMD EPYC server CPU (code name Milan) in
2021, and it announced that it will be adopting 3D chiplet technology on an advanced version,
Milan-X. 3D chiplet technology allows the dies to be stacked vertically, whereas traditionally,
with 2D, dies are laid on the same surface next to one another.

AMD will be launching its fourth generation AMD EPYC server CPU (code name Genoa) this
year, and as it moves from 7nm to 5nm, and we assume this could increase the ABF substrate
consumption once more.

Other than AMD, other CPU manufacturers are also diving into chiplet design. Intel previously
introduced its embedded multi-die interconnect bridge (EMIB) technology in 2014. With EMIB,
there can be many embedded bridges in a single substrate, provided a high I/O and well
connected paths between multiple dies. A silicon bridge in this case is a small piece of silicon

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embedded only under the edges of two interconnecting dies, whereas the traditional silicon
interposer is a piece of silicon larger-than-all interconnecting dies. Intel has adopted EMIB in the
past year, but it will first adopt the technology to its server CPU, Sapphire Rapids (under its
Eagle Stream platform) in FY22e/FY23e, where its CPU will have four identical and
interconnected dies.

Apple also announced in March this year that it will adopt a similar approach of chiplet design with
its UltraFusion architecture on its new M1 Ultra CPU which will be first used on its Mac Studio
product. UltraFusion allows Apple to interconnect two M1 Max chips on a silicon interposer, to
form a 20 core CPU with 14bn transistors. Last but not least, Amazon’s Graviton 3, an example of
an ARM-based processor, is also adopting chiplet design to support its AWS servers.

Exhibit 23: AMD server CPU roadmap

Platform EPYC Zen 1 EPYC Zen 2 EPYC Zen 3 EPYC Zen 4
Microarchitecture Naples Rome Milan Genoa
Launch time 2017 2019 1Q21 2H22
CPU cores Up to 32 Up to 64 Up to 64 Up to 96
Process 14 nm 7 nm 7 nm+ 5 nm
I/O PCIe 3.0 PCIe 4.0 PCIe 4.0 PCIe 5.0
Channel 8 DDR4 8 DDR4 8 DDR4 8 DDR5
CPU TDP (W) 120~180 120~280 155~280 up to 400
Source: Company data, HSBC

Exhibit 24: Intel’s server CPU specifications

Mountain
Cedar Stream/Birch
Platform Purley island Whitley Eagle Stream Stream
Cascade Cascade Cooper Ice Lake - Sapphire Emerald
Microarchitecture Skylake-SP Granite Rapids
Lake - SP Lake - AP Lake - AP SP Rapids Rapids
Launch time 3Q17 2018 2019 2Q20 1H21 2Q22 2023 2024
CPU cores Up to 28 Up to 28 Up to 48 Up to 56 Up to 40 Up to 56 Up to 64 Up to 120
10 nm + 10 nm ++ 5 nm
Process 14 mn + 14 mn ++ 14 mn ++ 14 mn +++ 10 nm
(Intel 7) (Intel 7) (Intel 3)
Scalability 2,4,8s 2,4,8s 4,8s 4,8s 2-8s 2,4,8s TBC TBC
48 PCIe 48 PCIe 48 PCIe 48 PCIe 64 PCIe
I/O 80 PCIe 5.0 80 PCIe 5.0 128 PCIe 6.0
3.0 3.0 3.0 3.0 4.0
Channel 6 DDR4 6 DDR4 6 DDR4 8 DDR4 8 DDR4 8 DDR5 8 DDR 5 DDR 5
Socket LGA 3647 LGA 3647 BGA 5903 LGA 4189 LGA 4189 LGA 4677 LGA 4677 TBC
Up to 250 Up to 270
CPU TDP 45~160 W 165~205 W 165~205W Up to 350 W Up to 370 W TBC
W W
AMD AMD
AMD AMD AMD AMD EPYC
EPYC EPYC AMD EPYC AMD EPYC Next-
Competitor EPYC EPYC EPYC Next-
Naples 14 Milan 7 Genoa 5 nm generation
Rome 7 nm Rome 7 nm Rome 7 nm generation
nm nm+
Source: Company data, HSBC

Exhibit 25: CPU chiplet adoption roadmap

2017 2018 2019 2020 2021 2022e 2023e 2024e
AMD server CPU Naples Rome Milan Genoa
AMD PC CPU Ryzen 3000 Ryzen 5000 Ryzen 7000 Ryzen 8000
Intel server CPU Sapphire Rapids Emerald Gramote
Rapids Rapids
Intel PC PCU Meteor Lake Arrow Lake
AWS CPU Graviton 3
Apple M1 series M1 Ultra
Source: Company data, HSBC estimates

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We expect the ABF supply-demand gap to be closer to balance

than consensus

We expect ABF capacity in FY25e to be 2.05x FY20’s

We expect global ABF capacity expansion to increase at a CAGR of 17% during FY21-FY25e,
faster than the 5-15% during FY19-FY21. One of the reasons for the increase in the expansion
rate is ABF substrate suppliers mainly expand their capacities by 1) setting up new plants, 2)
reallocating internal facilities to manufacturing ABF substrates; and 3) debottlenecking, which
usually takes one to three years.

Among the suppliers, Kinsus and AT&S have relatively more aggressive expansion plans, with
each expected to see a 36% and 43% CAGR in capacity during FY21 and FY25e.

Exhibit 26: ABF capacity growth

2.50 25%
24%
2.00 20%
17%
1.50 15%
14%
13%
1.00 11% 10%

6%
0.50 5%

0.00 0%
2020 2021 2022e 2023e 2024e 2025e
Unimicon Kinsus Nanya PCB Ibiden
Shinko AT&S others Total increase %
Source: Company data
Note: use total 2020 capacity as base 1

Exhibit 27: ABF substrate capacity expansion plan by suppliers

Company Expansion plant Capex Schedule Capacity expansion
Unimicron S1 TWD10bn 2H22 +30% vs 2020 capacity
Yangmei TWD30bn MP in 1H22, fully +35% vs 2020 capacity
utilized in 1H23
KF TWD5bn for phase 1 2025 N/A
Kinsus Xinfeng TWD6bn 2020/2021/1H22 +80% vs 2020 capacity
Yangmei TWD8bn 2023 +93% vs 2020 capacity
Nanya PCB Taoyuan TWD8bn 1Q22 +10% vs 2020 capacity
Shulin TWD8bn 1Q23 +10% vs 2020 capacity
Ibiden Phase I JPY70bn 1H21 +27% vs. 1Q20 capacity
Phase II JPY60bn 1Q22 +23% vs. 1Q20 capacity
Phase III JPY180bn 2H23-2024 +30% vs total capacity post phase II available
Shinko Kohoku & Total to be JPY140bn 2024 +50% in total vs 3Q21 capacity
Wakaho from FY3/23 to FY3/26
Chikuma 2025 see above
AT&S CHQ III EUR1.2bn 2022-2024 +390% vs 2019 capacity
Malaysia EUR1.7bn 2024-2026 420% vs 2019 capacity
SEMCO Vietnam KRW1.3trn Ramp up in 2H23,
>25k sqm per month (vs. current 20k)
contribution from 2024
Korea KRW300bn
ZDT Shenzhen N/A Ramp start in 1Q23 N/A
LG Innotek Korea KRW413bn 1H24 <10k sqm per month
capacity of 3m units in 2023, 6m in 2024,
Fastprint Guangzhou RMB3bn Ramp up in 2023 10m in 2025
SCC Guangzhou <=RMB6bn 1H23-2H25 16m unit per month
Source: Company data

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We expect the supply-demand gap to ease to -1%-1% in FY22e/FY23e

According to our ABF supply-demand model, we expect ABF substrate supply to see a 17%
CAGR in FY21-FY25e, while ABF demand should see a 20% CAGR. While the demand CAGR
seems to support the supply constraint, we estimate that in FY22e and FY23e the gap could
potentially narrow to 1%/1%, much lower than current consensus expectation of at least 5-15%.

One of the main reasons that we see the gap narrowing includes weakening PC demand, since
PCs still account for more than 50% of ABF substrate consumption, based on our estimates.
We currently expect overall PC demand to be down 15% YoY in FY22e, lower than consensus
expectations of being down just 8-10% only. We further conduct a scenario analysis on our
supply and demand model, and conclude that an additional drop of 5% to 15% in PC units could
potentially lead to 2-10% ABF substrate oversupply.

In addition to weaker PC demand, we expect the delay in Intel’s server CPU, known as
Sapphire Rapids (under its Eagle Stream platform) could lead to a slower adoption of chiplet
architecture, causing less growth in the content increase. We currently estimate the Eagle
Stream’s adoption rate to only reach 31% by 2Q23e, lower than previous expectations of 43%.
A lower increase in ABF substrate content consumption from server CPUs due to a slow
adoption of chiplet design should amplify the impact from lower PC unit demand, as the
increase in the server mix would be capped by the overall ABF substrate consumption.

Exhibit 28: HSBC’s ABF supply and demand expectation

Base
ABF substrate 2021 2022e 2023e 2024e 2025e CAGR
Supply 0.85 1.05 1.23 1.40 1.57
Supply YoY growth 24% 17% 14% 13% 17%
Demand 1.00 1.06 1.25 1.55 1.99
Demand YoY growth 6% 17% 24% 29% 20%
supply surplus (deficit) -15% -1% -1% -10% -21%
Source: HSBC estimates

Exhibit 29: PC CPU shipment YoY forecast

20%
15%
10%
5%
0%
-5% 2019 2020 2021 2022 2023 2024 2025

-10%
-15%
-20%

PC CPU shipment YoY

Source: HSBC estimates, IDC

Exhibit 30: ABF substrate supply and demand scenario analysis

Base
PC unit YoY in FY22e -10% -15% -20% -25% -30%
ABF substrate oversupply (undersupply) -4% -1% 2% 6% 10%
Source: HSBC estimate

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Exhibit 31: X86 chiplet adoption rate

70%
60%
50%
40%
30%
20%
10%
0%
2022e 2023e 2024e 2025e

Source: HSBC estimates

Exhibit 32: HSBC estimate on Eagle Stream adoption rate

50%
43%
45%
40%
35%
30%
30% 26% 31%

25%
20% 20%
15% 11%
13%
10%
3%
5% 1% 4%
0% 0% 1%
1Q22e 2Q22e 3Q22e 4Q22e 1Q23e 2Q23e

HSBC forecast in 4Q21 HSBC forecast - current

Source: HSBC estimate

Exhibit 33: ABF substrate consumption mix by application

100% 5% 5% 5% 5% 5% 4% 3%
90% 12% 14% 12% 13% 13% 12% 11%
80%
17% 21%
70% 21% 23% 26% 30% 34%
60%
50%
40%
30% 66% 60% 62% 58% 56% 53% 51%
20%
10%
0%
2019 2020 2021 2022e 2023e 2024e 2025e
PC Server GPU Others

Source: HSBC estimates

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Exhibit 34: Server ABF substrate demand change post Eagle Stream delay
FY22e FY23e FY24e FY25e
After Eagle Stream delay
Server area growth 8% 10% 14% 15%
Server demand growth 16% 33% 45% 43%
Mix of total ABF substrate demand 23% 26% 30% 34%
Before Eagle Stream delay
Server area growth 12% 16% 17% 18%
Server demand growth 22% 39% 48% 47%
Mix of total ABF substrate demand 24% 28% 33% 37%
Source: HSBC estimates

Narrowing supply deficit leads to less favourable product mix, GM

ABF substrate makers benefited from better product mix and ASP due to supply constraints
ABF substrate went into a supply deficit in FY20 (6%) and maintained a shortage in FY21 (15%
supply deficit) due to a limited supply increase in previous years as well as poor yields on new
products for CPUs and GPUs. As a result, many ABF substrate companies were able to choose
products with better margins to produce. In addition to that, many of the customers were willing
to pay a premium on their orders in order to persuade ABF substrate companies to take their
orders. As a result, products that were lower end with lower layer specifications also ended up
with much higher margins for these ABF substrate suppliers.

Such a phenomenon helped ABF companies see a significant improvement in gross margin and
operating margin as both the ASP and utilization rate increased. On average, ABF substrate
companies in Taiwan have seen a 6% QoQ increase in ASP each quarter from 1Q20 all the
way to 4Q21. This resulted in a tremendous improvement in margins as well, driving the
average Taiwan ABF substrate companies’ OPM to reach a >20% level by 4Q21 vs. prior to
FY20 when companies were even struggling to break even at the OPM level.

Exhibit 35: ABF substrate ASP Exhibit 36: ABF substrate ASP QoQ

70
15.0%

60 10.0%

5.0%
50
0.0%
40 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21
-5.0%
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21
ABF substrate ASP (USD) ABF substrate ASP growth QoQ

Source: HSBC Source: HSBC

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Exhibit 37: ABF substrate companies’ GM Exhibit 38: ABF substrate OPM
improvement improvement

40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0% 0.0%
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21
Unimicron Kinsus Nanya PCB Unimicron Kinsus Nanya PCB

Source: Company data Source: Company data

However, we are cautious on the ability to keep raising the ASP and GM going forward
Consensus currently believes that ABF substrate’s ASP and margin are still on an upward trend
due to the expected continued supply shortage of more than 15%. However, based on our
supply and demand model, we believe the supply and demand gap will ease to close the
balance in the near term in FY22e/FY23e, mainly due to weaker-than-expected PC demand.

While our model still suggests a small supply deficit, we believe such a significant improvement
will lead to the easing of customers’ fears of not being able to secure enough ABF substrate
capacity. It could encourage ABF substrate suppliers to start lowering their pricing on specific
products to ensure they can stay at full utilization. We expect some lower-end PC-related
products, which enjoyed tremendous ASP hike during FY20/FY21, to be the first to see the impact
from a lower ASP. As a result, we expect it might be difficult for ABF substrate companies to
continue beating consensus expectations on margin in the near future, and expect that on
average, these major ABF substrate companies would see a -5% to -10% ASP decline in FY23e,
much weaker than 15-30% YoY growth in FY21. In terms of overall monthly sales momentum, we
expect that ABF substrate companies, although still seeing a positive YoY trend, should see a
peak in improvement in coming months, which could be a signal for a potential slowdown.

Exhibit 39: Average monthly sales YoY % for Taiwanese substrate companies

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5% Apr-18 Aug-18 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 Apr-21 Aug-21 Dec-21 Apr-22
Substrate monthly sales YoY%
Source: TEJ

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Exhibit 40: Taiwan ABF substrate companies’ ABF substrate ASP YoY

35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
2020 2021 2022e 2023e
Unimicron Kinsus Nanya PCB
Source: Company data, HSBC estimates

Where we can be wrong

Long lead time for equipment could potentially slow down the expansion schedule
With the current ABF substrate expansion plan, we think the likelihood that the expansion in
capacity is earlier is low given that the supply of related equipment required to manufacture ABF
substrate, include laser drilling, testing, and copper plating, remains tight. Based on our checks,
average lead time for this crucial equipment could be up to one year, and a few needing up to
30 months of lead time.

Several reasons cause such a long lead time including: 1) Only a limited number of suppliers
manufacture such crucial equipment. For example, most of the ABF suppliers source their laser
drilling equipment from Mitsubishi Electric. 2) These equipment suppliers do not have plans to
expand capacity for their ABF substrate-related machine products. As a result, if equipment lead
time continues to increase, there could be risk over whether ABF substrates companies can
fulfil their expansion targets on time. However, as we are cautious in the near term
(FY22e/FY23e), we think this factor would have less of an impact on our cautious view, and we
believe the weakening demand in consumer electronics would play a larger role in our thesis.

Could ABF substrate stay very undersupplied with most capacity going to big customers
With the current ABF substrate tightness, the bull camp believes that those major customers will
hold on to the capacity they have secured due to the fear of not having enough orders as they
start to ship new products, which would result in another round of price hikes from smaller
customers fighting for any capacity they can get their hands on. However, we believe the
opposite situation is likely to happen and that as overall demand for PCs (potentially servers
too) weakens, major customers might release some of their capacity given that ABF substrate
inventory is usually kept at a low level to avoid the risk of oxidization. As a result, with released
capacity, ABF substrate suppliers might see some pricing pressure as they try to fulfil capacity
by attracting smaller customers.

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Initiate on Unimicron, Kinsus at Hold; Nanya PCB at Reduce

Unimicron (3037 TT, Hold, TP TWD170, 17.7% downside)

Unimicron is one of the largest ABF substrate suppliers in the world, and has one of the most
diversified customer portfolios, including Intel, AMD, Nvidia, Xilinx and Apple (vs. the top
Japanese players who mostly focus on Intel). With a partnership with Intel, Unmicron will
increase its exposure to higher-end server CPUs when Intel launches its new server CPU,
Sapphire Rapids, which uses a chiplet design. We expect Unimicron’s ABF substrate revenue to
grow at a 24% CAGR from FY21 to FY24e, and estimate the ABF substrate contribution will
improve from 41% in FY21 to 54% in FY24e.

However, we believe Unimicron will be affected in the near term due to weakening PC demand
given the majority of its Intel exposure now is still more related to substrate for PCs. As a result, we
expect both its ASP and GM to likely reach a peak in 3Q22e vs. consensus estimates of ongoing
improvements. Our scenario analysis suggests that Unimicron might potentially see earnings that
are 16% to 36% below consensus in FY23e based on a ASP YoY decline of 5% to 15%.

Exhibit 41: Unimicron – HSBC vs consensus

______________ HSBCe _______________ ______ Consensus ______ __ HSBC vs consensus ___
(TWDm) 2022e 2023e 2024e 2022e 2023e 2022e 2023e
Sales 133,221 144,853 150,795 132,007 156,399 1% -7%
- y-o-y 27% 9% 4% 26% 18%
Gross profits 44,385 45,210 47,921 40,842 51,221 9% -12%
GM 33.3% 31.2% 31.8% 30.9% 32.8%
Op profit 32,262 31,943 34,110 28,882 37,411 12% -15%
OPM 24.2% 22.1% 22.6% 21.9% 23.9%
Net income 24,499 24,970 26,736 23,153 29,818 6% -16%
EPS (TWD) 16.61 16.93 18.12 15.62 20.20 6% -16%
- y-o-y 85% 2% 7% 74% 29%
Source: HSBC estimates, Bloomberg consensus forecasts

Exhibit 42: Unimicron scenario analysis on ASP YoY in FY23e

Base
FY23e ASP YoY -15% -10% -5% 0% 5% Consensus
Sales 136,492 140,391 144,853 148,908 152,296 156,399
GM 27.0% 29.0% 31.2% 33.1% 34.6% 32.8%
OPM 18.0% 20.0% 22.1% 23.9% 25.4% 23.9%
Net income 18,951 21,758 24,970 27,889 30,328 29,818
EPS (TWD) 12.85 14.75 16.93 18.91 20.56 20.20
EPS upside/downside -24% -13% 0% 12% 21%
to base case

EPS upside/downside -36% -27% -16% -6% 2%

to consensus
Source: HSBC estimates, Bloomberg consensus forecasts

Kinsus (3189 TT, Hold, TP TWD145, 13.4% downside)

Kinsus is the smallest ABF substrate supplier among the names we initiate on, but has the most
aggressive expansion plan through FY25e which is estimated to increase its ABF substrate
capacity by 3.4x from 2021 to 2025e. Previously its major customers include Nvidia and Xilinx,
but starting from 2021 it penetrated into AMD, expanding its customer portfolio.

We expect Kinsus’s ABF substrate revenue to grow at a 34% CAGR from FY21 to FY24e, and
estimate its ABF substrate contribution to increase from 31% in FY21 to 50% by FY24e.
However, we believe in the near term, Kinsus’s gross margin will likely peak in 3Q22e vs.

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consensus expectations of an ongoing improvement, based on our thesis of 1) an easing supply

constraint leading to weakening pricing power for smaller customers and 2) a less favourable
product mix given weaker demand as well as a low adoption rate of chiplet design.

Our scenario analysis suggests that Kinsus might potentially see FY23e earnings that are 16%
to 37% below consensus estimates based on a ASP YoY decline of 5% to 15%.

Exhibit 43: Kinsus – HSBC vs consensus

______________ HSBCe _______________ ______ Consensus ______ __ HSBC vs consensus ___
(TWDm) 2022e 2023e 2024e 2022e 2023e 2022e 2023e
Sales 44,046 48,689 53,820 43,410 51,468 1% -5%
- y-o-y 23% 11% 11% 22% 19%
Gross profits 15,827 16,789 18,610 15,041 17,908 5% -6%
GM 35.9% 34.5% 34.6% 34.6% 34.8%
Op profit 9,164 9,201 10,363 8,565 10,681 7% -14%
OPM 20.8% 18.9% 19.3% 19.7% 20.8%
Net income 6,700 6,684 7,632 6,391 7,981 5% -16%
EPS (TWD) 14.86 14.83 16.93 14.18 17.64 5% -16%
- y-o-y 74% 0% 14% 66% 24%
Source: HSBC estimates, Bloomberg consensus forecasts

Exhibit 44: Kinsus scenario analysis on ASP YoY in FY23e

Base
FY23e ASP YoY -15% -10% -5% 0% 5% Consensus
Sales 46,310 47,472 48,689 49,899 50,821 51,468
GM 31.1% 32.8% 34.5% 36.1% 35.8% 34.8%
OPM 15.5% 17.2% 18.9% 20.5% 20.3% 22.9%
Net income 5,037 5,841 6,684 7,521 7,581 7,981
EPS (TWD) 11.17 12.96 14.83 16.68 16.82 17.64
EPS upside/downside -25% -13% 0% 12% 13%
to base case

EPS upside/downside -37% -27% -16% -5% -5%

to consensus
Source: HSBC estimates, Bloomberg consensus forecasts

Nanya PCB (8046 TT, Reduce, TP TWD280, 24.7% downside)

Nanya PCB is the third-largest ABF substrate supplier globally. It supplies mainly to non-Intel
customers (AMD, Broadcom, but not Apple). We also believe Nanya PCB has benefited the
most from ASP hikes among these three companies during the supply constraints in
FY20/FY21, with the company seeing a 30% ASP increase in FY21 due to the ability to raise
prices on lower-end products from non-Intel customers.

However, we expect that as supply tightness significantly eases in FY22e/FY23e, Nanya PCB would
be negatively affected the most given the decline in pricing power against its non-Intel, smaller
customers. Our scenario analysis suggests that Nanya PCB might potentially see FY23e earnings
that are 25% to 40% below consensus estimates based on a ASP YoY decline of 10% to 20%.

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Exhibit 45: Nanya PCB – HSBC vs consensus

______________ HSBCe _______________ ______ Consensus ______ __ HSBC vs consensus ___
(TWDm) 2022e 2023e 2024e 2022e 2023e 2022e 2023e
Sales 65,930 69,751 74,474 67,769 83,667 -3% -17%
- y-o-y 26% 6% 7% 30% 23%
Gross profits 24,178 24,421 25,611 25,409 33,440 -5% -27%
GM 36.7% 35.0% 34.4% 37.5% 40.0%
Op profit 21,477 21,633 22,635 23,210 31,230 -7% -31%
OPM 32.6% 31.0% 30.4% 34.2% 37.3%
Net income 18,062 18,397 19,315 18,777 24,965 -4% -26%
EPS (TWD) 27.95 28.47 29.89 28.99 37.84 -4% -25%
- y-o-y 71% 2% 5% 77% 31%
Source: HSBC estimates, Bloomberg consensus forecasts

Exhibit 46: Nanya PCB scenario analysis on ASP YoY in FY23e

Base
FY23e ASP YoY -20% -15% -10% -5% 0% Consensus
Sales 6,528 67,223 69,751 71,706 73,856 83,667
GM 30.6% 32.6% 35.0% 36.8% 38.6% 40.0%
OPM 26.6% 28.6% 31.0% 32.8% 34.6% 37.3%
Net income 14,701 16,302 18,397 20,016 21,797 24,965
EPS (TWD) 22.75 25.23 28.47 30.98 33.73 37.84
EPS upside/downside -11% 0% 9% 18%
to base case -20%

EPS upside/downside -33% -25% -18% -11%

to consensus -40%
Source: HSBC estimates, Bloomberg consensus forecasts

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Appendix

An overview of substrate
Substrate is important as it connects chips to a circuit board. IC substrate is a baseboard type
utilized in the packaging of bare integrated circuit chips. Integrated circuits fall under a
transitional product that serves to capture a semiconductor integrated circuit chip, routing to link
the chip with the printed circuit board (PCB), and safeguarding, supporting, and reinforcing the
IC chip, and thereby giving it a thermal dissipation tunnel.

The main materials used for substrate are:

 Bismaleimide Triazine (BT): BT resin has many advantages as it has high heat
resistance, moisture resistance and a low dissipation factor but due to its glass fibre layer, it
is harder than substrate made from ABF (see below). BT substrate is mostly used in
products such as mobile phone micro-electromechanical system (MEMS) chips,
communication chips, and memory chips.
 ABF (Ajinomoto Build-up Film): Compared to using BT as the base material, ABF can be
used on ICs with thinner circuits, can handle high pin counts and a high transmission, and
is mostly used for large high-end chips such as CPUs, GPUs and chipsets.

IC substrate market can be broken down by different packaging types. The major ones are:
 FC-BGA (Flip-Chip-Ball-Grid-Array): This is a high-performance, semiconductor
packaging solution that utilizes controlled collapse chip connection technology, also known
as flip chip, for its die-to-substrate interconnection. FC-BGA provides design flexibility for a
much higher signal density and functionality in a smaller die and packaging footprint. This
packaging type mainly uses ABF as its substrate material.
 FC-CSP (Flip-Chip Chip-Scale-Package): This is where semiconductor chips are
upturned and connected to a circuit board through a bump rather than using wire bonding. It
is mainly used for the application processor (AP) chips used in mobile IT devices.
Compared to WB-CSP which uses gold wire (see below), FC-CSP can be applied to high-
density semiconductors because the route used by electrical signals is shorter, and a larger
input and output can be accommodated. This packaging type mainly uses BT as its
substrate material.
 WB-CSP (Wire-Bond Chip-Scale-Package): This uses a gold wire bonding method
which connects a semiconductor chip to the PCB. Multi-packaging is possible which makes
this packaging product mainly applicable to memory chips. This also uses BT as the
substrate material.

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Exhibit 47- Cross-section of ABF substrate

Solder bumps on chip

3 layers ABF

Woven glass BT core

3 layers ABF

Solder bumps to circuit board

Source: Kinsus

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Exhibit 48: IC substrate (including ABF substrate) value chain

IC Design (Fabless)
MediaTek, Qualcomm, AMD, Nvidia, Broadcom

Packaging (OSAT)
ASE Technologies, ASM Pacific Technologies, Amkor, JCET

Foundry IC substrates
TSMC, UMC, SMIC, GlobalFoundries, Unimicron, Nanya PCB, Kinsus, Ibiden,
Vanguard Shinko, SEMCO

Source: HSBC

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Valuation and risks

Valuation Risks
Current price: We initiate on Unimicron with a Hold rating and a TP of TWD170, Upside risks: 1) Slower-than-expected capacity expansion
Unimicron
TWD206.50 based on a 10x PE multiple applied to our FY23e EPS of from competitors due to equipment delays, 2) better-than-
3037 TT TWD16.93. We believe a 10x PE multiple, which was the previous expected PC, server, and GPU demand; and 3) better-than-
Target price:
TWD170.00 trough level PE valuation after FY19 when investors started using expected ability to continue to raise prices.
PE instead of PB method to value the stock due to improvement in Downside risks: 1) Further delay in new Intel sever and PC
Hold Up/downside: earnings stability, is reasonable given that the stock faces a risk of CPUs, 2) delay in its internal expansion plan; and 3) a
-17.7% potential ASP fall and margin mix deterioration in the near term. We further impact from COVID-19.
suggest investors wait for signs of PC demand recovering as well
as an improving chiplet adoption rate before accumulating the
stock. However, we do not rate the stock Reduce given that
Unimicron’s ABF substrate customer portfolio is more diverse than
peers, with most of the capacity taken by top IC designers.

Ted Lin | ted.ht.lin@hsbc.com.tw | +886 2 6631 2870

Current price: We initiate on Kinsus with a Hold rating and TP of TWD145, based Upside risks: 1) Slower-than-expected capacity expansion
Kinsus
TWD167.50 on a 10x PE multiple applied to our FY23e EPS of TWD14.83. We from competitors due to equipment delays, 2) better-than-
3189 TT believe a 10x PE multiple, which is below the one standard expected PC, server, and GPU demand; and 3) market
Target price:
TWD145.00 deviation below the average of 14x. We believe a lower PE is share gains from new customer AMD.
reasonable given that the stock has been re-rated based on a Downside risks: 1) Lower new AMD server CPU adoption
Hold Up/downside: significant improvement in ASP and GM since FY20. With the stock rate, 2) ramp up issues with new capacity; and 3) a further
-13.4% facing the potential risk of an ASP fall, starting with smaller impact from COVID-19.
customer orders (non-AMD/NVDA customers) in the near term, we
expect Kinsus to face a de-rating risk. We suggest investors wait
for signs of PC demand recovering and better-than-expected
AMD/NVDA sell-through before accumulating the stock. However,
we do not rate Kinsus Reduce given that it has smaller ABF
substrate capacity compared to its Taiwanese peers, so we believe
it would be relatively easier to manage idle capacity.

Ted Lin | ted.ht.lin@hsbc.com.tw | +886 2 6631 2870

Current price: We initiate on Nanya PCB with a Reduce rating and a TP of Upside risks: 1) Slower-than-expected capacity expansion
Nanya PCB
TWD372.00 TWD280, based on a 10x of PE multiple applied to our FY23e EPS from competitors due to equipment delays, 2) better-than-
8046 TT of TWD28.47. We believe a 10x PE multiple, which is below the expected PC, server, and GPU demand; and 3) better-than-
Target price:
TWD280.00 one standard deviation below average (19x), is reasonable given expected ability to continue to raise prices.
our expectation that the stock is likely to face the most risk from a
Reduce Up/downside: potential ASP fall and margin mix deterioration in the near term,
-24.7% given its inferior customer/product portfolio with higher volatility on
pricing. Given the higher risk related to ASP and margins, we
expect Nanya PCB’s earnings to see more downside against
consensus in FY23e. As a result, we initiate with a Reduce rating.

Ted Lin | ted.ht.lin@hsbc.com.tw | +886 2 6631 2870

Priced at 09 Jun 2022

Source: HSBC estimates

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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or
issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Ted Lin and Frank Lee

Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should
depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that
investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or
relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in
each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating
because research reports contain more complete information concerning the analysts' views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
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Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change
in target price or estimates).

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Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
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expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage
points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months
(unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which
we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's
average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however,
volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

24
 Equities ● Electronic Equipment & Instruments
15 June 2022

Rating distribution for long-term investment opportunities

As of 31 March 2022, the distribution of all independent ratings published by HSBC is as follows:
Buy 62% (17% of these provided with Investment Banking Services in the past 12 months)
Hold 33% (16% of these provided with Investment Banking Services in the past 12 months)
Sell 6% (14% of these provided with Investment Banking Services in the past 12 months)
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current
rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy
= Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial
analysis” above.

For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.

Share price and rating changes for long-term investment opportunities

Kinsus Interconnect (3189.TW) share price performance Rating & target price history
TWD Vs HSBC rating history
From To Date Analyst
Reduce Hold 20 Feb 2020 Samson Hung
Hold N/A 08 Apr 2020
229 Target price Value Date Analyst
Price 1 29.10 29 Jul 2019 Samson Hung
179 Price 2 34.00 28 Oct 2019 Samson Hung
Price 3 57.00 20 Feb 2020 Samson Hung
Price 4 N/A 08 Apr 2020
129 Source: HSBC

79

29
Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Source: HSBC

Nan Ya PCB (8046.TW) share price performance TWD Vs Rating & target price history
HSBC rating history
From To Date Analyst
Hold N/A 09 Sep 2015
Target price Value Date Analyst
600
Price 1 N/A 09 Sep 2015
500 Source: HSBC

400
300
200
100
0
Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Source: HSBC

To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please
use the following links to access the disclosure page:

Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures

Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures

25
 Equities ● Electronic Equipment & Instruments
15 June 2022

HSBC & Analyst disclosures

Disclosure checklist

Company Ticker Recent price Price date Disclosure

KINSUS INTERCONNECT 3189.TW 161.00 13 Jun 2022 7
UNIMICRON TECHNOLOGY CORP 3037.TW 200.00 13 Jun 2022 4, 7
Source: HSBC

1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3
months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 31 May 2022, HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 April 2022, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
6 As of 30 April 2022, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 30 April 2022, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
12 As of 09 June 2022, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
13 As of 08 June 2022, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt
(including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or
liquidity provider in the securities/instruments mentioned in this report.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking,
sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

Non-U.S. analysts may not be associated persons of HSBC Securities (USA) Inc, and therefore may not be subject to FINRA
Rule 2241 or FINRA Rule 2242 restrictions on communications with the subject company, public appearances and trading
securities held by the analysts.

Economic sanctions imposed by the EU, the UK, the USA and certain other jurisdictions generally prohibit transacting or dealing
in any debt or equity issued by Russian SSI entities on or after 16 July 2014 (Restricted SSI Securities). Economic sanctions
imposed by the USA also generally prohibit US persons from purchasing or selling publicly traded securities issued by companies
designated by the US Government as “Chinese Military-Industrial Complex Companies” (CMICs) or any publicly traded securities
that are derivative of, or designed to provide investment exposure to, the targeted CMIC securities (collectively, Restricted CMIC
Securities). This report does not constitute advice in relation to any Restricted SSI Securities or Restricted CMIC Securities, and
as such, this report should not be construed as an inducement to transact in any Restricted SSI Securities or Restricted CMIC
Securities.

26
 Equities ● Electronic Equipment & Instruments
15 June 2022

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company
available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for queries
regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact
the authoring analyst.

Additional disclosures
1 This report is dated as at 15 June 2022.
2 All market data included in this report are dated as at close 09 June 2022, unless a different date and/or a specific time of
day is indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of
Research operate and have a management reporting line independent of HSBC's Investment Banking business.
Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses
to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest
payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the
price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument,
and/or (iii) measuring the performance of a financial instrument or of an investment fund.

Production & distribution disclosures

1. This report was produced and signed off by the author on 14 Jun 2022 07:23 GMT.

2. In order to see when this report was first disseminated please see the disclosure page available at
https://www.research.hsbc.com/R/34/nCffvWs

27
 Equities ● Electronic Equipment & Instruments
15 June 2022

Disclaimer
Legal entities as at 25 May 2022 Issuer of report
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Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities 13th Floor, 333 Keelung Road, Sec. 1,
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MCI (P) 017/10/2021

[1194326]

28
Global Telecoms, Media & Technology
Research Team
Europe Asia Americas

Analyst Head of Telecoms Research, Asia Pacific Analyst

Nicolas Cote-Colisson +44 20 7991 6826 Neale Anderson +852 2996 6716 Phani Kanumuri +52 55 855 1235
nicolas.cote-colisson@hsbcib.com neale.anderson@hsbc.com.hk phani.kanumuri@hsbc.com.mx
Head of Technology Research, Asia Pacific
Analyst Frank Lee +852 2996 6916
Antonin Baudry +33 1 56 52 43 25 frank.lee@hsbc.com.hk Specialist Sales
antonin.baudry@hsbc.com
Head of Internet and Gaming Research, Asia
Senior Analyst, Telecoms Services & Pacific James Britton +44 207 991 5503
james1.britton@hsbc.com
Infrastructure Charlene Liu +65 6658 0615
Luigi Minerva +44 20 7991 6928 charlene.r.liu@hsbc.com.sg
luigi.minerva@hsbcib.com
Head of Research, India
Analyst Yogesh Aggarwal +91 22 2268 1246
Adam Fox-Rumley, CFA +44 20 7991 6819 yogeshaggarwal@hsbc.co.in
adam.fox-rumley@hsbcib.com Head of Research, Korea
Ricky Seo +822 37068777
Analyst rickyjuilseo@kr.hsbc.com
Christopher Johnen +49 211 910 2949
christopher.johnen@hsbc.de Analyst
Abhishek Pathak +91 22 6164 0690
abhishek.pathak@hsbc.co.in
EEMEA & LatAm
Analyst Analyst
Madhvendra Singh, CFA +971 4 509 3348 Piyush Choudhary, CFA +65 6658 0607
madhvendra.singh@hsbc.com piyush.choudhary@hsbc.com.sg
Analyst
Analyst Will Cho +822 3706 8765
Ankur P Agarwal, CFA +971 4 423 6558 will.cho@kr.hsbc.com
ankurpagarwal@hsbc.com
Analyst
Carol Juan +886 2 6631 2862
carol.cc.juan@hsbc.com.tw
Analyst
Rishabh Dhancholia +91 80 3001 2841
rishabh.dhancholia@hsbc.co.in
Analyst, Internet Research
Carson Lo, CFA +852 2822 4337
carson.lo@hsbc.com.hk
Analyst
Junhyun Kim +822 3706 8763
junhyun.kim@kr.hsbc.com

Analyst
Wern Juan CHNG +65 6658 0614
wernjuan.chng@hsbc.com.sg

Analyst
Charlotte Wei +852 2996 6539
charlotte.wei@hsbc.com.hk
Analyst
Ritchie Sun, CFA +852 28224392
ritchie.k.h.sun@hsbc.com.hk
Analyst
Peishan Wang +852 3941 7008
peishan.wang@hsbc.com.hk
Analyst
Christina Chen, CFA +852 2822 2912
christina.z.chen@hsbc.com.hk

Associate
Jacky Chen +8862 6631 2865
jacky.ky.chen@hsbc.com.tw
Associate
Ted Lin +8862 6631 2870
ted.ht.lin@hsbc.com.tw