Equity Research

Cirtek Holdings Philippines Corp.

INVESTMENT HIGHLIGHTS 11.04.11 Summary of the Offer
Common Shares for Public Offering Primary Shares Distribution of offer shares Domestic offering Overallotment Option Share Offer Price Minimum Subscription Total Trading Participant (TP) allocation Allocation per TP 42,163,000 none Php7.00 100 Common Shares, thereafter in increments of 100 Common Shares 8,432,600 common shares 63,400 common shares or up to Php443,800

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Cirtek Holdings Philippines Corp. (CHPC) is a full service provider for subcontract manufacturing of semiconductor devices. It provides turn-key solutions, which includes package design and development, wafer probing, grinding, assembly and packaging, final testing of semiconductor devices and delivery and shipment to its customers end users. CHPC plans to offer up to 42.163 million shares with a price Php7 a share. This is equivalent to a post-offer market capitalization of Php1.14 billion. For the last 3 years, the company has grown its revenues and net profit by 14% and 122% respectively. This is despite the severe down turn of the semiconductor industry in 2008. Moving forward, the company expects to grow its earnings by 19% for the next 2 years. In fact, the proceeds of this initial public offering will be used for expansion. Around Php650 million will be used for acquisition of assembly equipment, facility improvements, and building expansion and improvement. This is in line with the expected outsourcing growth of 10.7% in 2011 and 10.8% in 2012. The exports of electronic products alone accounts for 61% of the countrys exports. At Php7.00 a share, the stock will trade at 6.74 times 2011 earnings and 5.28 times 2012 earnings. Pre-offer 2011 earnings multiple is at only 4.88 times. This is significantly lower than the industrys earnings multiples of 13.21 times. We recommend Subscribe.

42,163,000

Financial Highlights ($mn) FYE 12/31 Revenues EBIT Net Income (Loss) EPS (c) EPS Growth (%) PER (x) P/BV (x) ROA (%) ROE (%) 2008A 30.09 1.72 1.62 0.013 n/m 12.01 1.09 8 8 2009A 23.95 0.99 0.96 0.008 (38.50) 20.16 1.11 5 5 2010A 34.37 3.47 3.60 0.030* 275 5.40 0.96 17 16 2011E 37.18 3.92 3.80 0.247* (18.50) 6.74 0.86 11 10

Source: Cirtek financials, USI estimates *Pre-offer 2010 PE is at 5.75x; 2011 at 4.88x

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Equity Research Report

Cirtek Holdings Philippines Corp. (CHPC)

Business Overview
Cirtek Holdings Philippines Corp. is an independent full service provider of turnkey solutions from package design development, wafer probe, wafer back grinding, assembly and packaging and final testing of semiconductor devices to drop shipments of clients. The company operates out of its plant in Laguna Technopark in Binan, Laguna and its sales office in Menlo Park, California to cater to its North American clients. It started with only 3 clients in 1984 and has grown to the current count of 42. Its main product offerings include protection packages, light sensor packages, real time clock, voltage control oscillators, electronic relays and power management devices. These products have posted double digit growth rates in 2010 and have continued to perform well in the first half of 2011.

Semiconductor industry expected to grow, but major drivers will be Asia Pacific region
Based on the recent World Semiconductor Trade Stats, the global semiconductor is seen to continue growing at a compounded annual growth rate of 8% over the next 10 years. The report also noted that the Asia Pacific region will be the key driver in the coming years. In fact, the region now accounts for more than 50% of the global semiconductor market. Notice the graph below how rapid Asia Pacific grew over the last 10 years. Given the current uncertainties in the market, the need for lower cost will continue. This will ultimately lead to higher revenues for the outsourcing industry. Over the long run, this will be the main driver of future revenue growth of Cirtek.

Chart 3: Global Semiconductor Industry Sales Chart 1: Semiconductor Value Chain

At present, Europe and Asia accounts for 60% of the sales. The plan is to increase Asia Pacific contribution in line with the existing industry trends.

Chart 4: Cirteks sales by geography

Source: CHPC prospectus

Chart 2: Breakdown of revenue product line

Source: CHPC

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Equity Research Report

Cirtek Holdings Philippines Corp. (CHPC)

Historical track record appears good despite inherent cyclicality of the industry..
We conservatively estimate that revenues will grow to $52.30 million next year, suggesting a modest annual revenue growth of 14.76%. This includes a depressed year in FY09. Without the depressed revenues in 2009, the company should be able to post a revenue growth of 20%. The company was able to post a profit in 2009 despite the down turn in the semiconductor industry is its ability to manage costs. We note that net margins were not as depressed as expected and declined to 4% to 5%. We estimate that the normalized earnings per share of Cirtek at Php0.82 a share. In the absence of any prolonged down turn in the industry, the company should be able to post earnings per share in that region.

Taking a cue from expansion: There seems to be no contraction in orders yet

The estimated proceeds from this initial public offering is at Php625 million. This will be used to fund the acquisition of assembly equipment, improvement in the facility, as well as building expansion and equipment. We see this as an indicator that the company does not see any contraction in the industry in the coming months. Our scuttle butt says that the company has been seeing record level orders this year.

With this, we may hit our estimated earnings of $3.80 million this year, or equivalent to Php0.89 earnings per share. This seems to be conservative, as it would only imply a growth of 5.90% earnings per share growth for the year.

Table 1: Key Financial Highlights

For the year ended Dec 31 (in USD'mln, except per share data) Service Revenues - net Gross Profit Operating Income (%) margins Net Profit (%) margins Return on equity EPS (c) EPS (P)
Source: Company financials, USI estimates

FY08A 30.09 2.92 1.17 5.72% 1.62 5.40% 8% 0.013 0.56

FY09A 23.95 2.22 0.99 4.15% 0.99 4.03% 5% 0.008 0.34

FY10A 34.37 5.08 3.47 10.10% 3.6 10.47% 16% 0.030 1.29

FY11E 37.18 5.66 3.92 10.54% 3.80 10.23% 10.52% 0.021 0.90

FY12E 52.30 7.04 4.43 9.87% 4.29 9.56% 11.65% 0.024 1.03

Chart 4: Historical Performance of CHPC

Source: Company financials

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Equity Research Report

Cirtek Holdings Philippines Corp. (CHPC)

Valuations appear prospects for growth

undemanding

despite

Investment merits
Pristine balance sheet. Lots of cash and strong cash flow with no debt. Diverse customer base with long term relationship with majority of its clients. Efficient operations, which results in better margins than its competitors. Favorable long-term economics of outsourcing industry.

At an offer price of Php7.00/share, we estimate that the shares would be trading at 6.74 times 2011 earnings and 5.28 times 2012 earnings This is below the regional earnings multiple of the industry which is at 18.80 times and 13.21 for this year and next year. We estimate that 13 times earnings, CHPC would be valued at Php13 a share, which is 85% higher than the upper end of the offer price. We believe that the near term catalyst would be a higher than expected earnings as it plans to focus on acquiring more clients in Asia Pacific.

Risks and considerations

The following are the key risks and considerations for Cirtek. Volatility in the semiconductor industry Significant competition in the industry Absence of long-term and exclusive purchase contracts

Table 2: Valuations of Global Semiconductor PE(x) Company 2011 Fairchild Semiconductor International 7.83 ON Semiconductor Corp 7.07 National Semiconductor Corp 22.02 Intersil Corp. 17.42 Diodes, Inc. 11.24 Equinix, Inc. 79.27 Microsemi Corp. 8.90 ST Microelectronics NV 8.92 Maxim Integrated Products, Inc. 13.54 Analog Devices, Inc. 11.79 Average 18.80
Source: Bloomberg

2012 7.54 6.06 19.14 13.98 10.20 36.89 6.92 7.58 11.87 11.96 13.21

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Equity Research Report

Cirtek Holdings Philippines Corp. (CHPC)

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Ratings and Recommendations:

USI Research's fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month investment horizon. Buy = More than 10% upside from the current price; Hold = Upside within +/-10% from the current price; Sell = More than 10% downside from the current price. Meanwhile, USI Research's technical comments and recommendations are short-term and trading oriented.

Disclaimer:
Note: In the interest of timeliness, this report has not been edited.

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Sales Team Ma. Concepcion G. Yao- Fernandez mgy@unicapital-inc.com Juan Paolo G. Martirez jgm@unicapital-inc.com Research Team Jan Michael B. Acebo jma@unicapital-inc.com Joanna M. Capiral jmc@unicapital-inc.com

The information provided in this report has been prepared without taking account of your objectives, financial situation or needs. You should, before acting on the advice, consider the appropriateness of the advice having regards to these matters and, if appropriate, seek professional financial, investment and taxation advice. All observations, conclusions and opinions expressed in this report reflect the personal views of USI analysts and are subject to change without notice. The information this report has been obtained from sources USI believes to be reliable. However, USI does not warrant the accuracy, completeness or currency of, and will not be liable for any inaccuracies, omissions or errors in, or for any loss or damage (including any consequential loss) arising from reliance on, the information in this report. USI does not guarantee the performance of any investment discussed or recommended in this report. Any information in this report relating to the distribution history or performance history of any investment should not be taken as indication of the future performance of the relevant investment. In this report, USI may express an expectation or belief as to future events, results or returns generally or in respect of particular investments. USI makes such statements in good faith and believes them to have a reasonable basis, however, such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from such forward-looking statements. No guarantee of future returns is given or implied by USI.

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