Bumpy Road Ahead For Taiwan's TFT-LCD Manufacturers

1. Bumpy Road Ahead For Taiwan's TFT-LCD Manufacturers By Raymond Hsu Sep. 2005

2. Methodology • Industry Analysis • Identify opportunities and risks in the industry • Identify key success factors • Market position/market share • Low cost position • Diverse product and application mix • Technology leadership • Business Profile Comparison • Financial Profile Comparison • Profitability • Cash flow protection measures • Liquidity • Capital Structure & Financial flexibility • Conclusion

3. TFT-LCD Industry Overview • Growing Market Size • Volume growth was more than enough to offset fast price erosion, resulting in fast growth in market size, despite high cyclicality

4. TFT-LCD Industry Overview • High Growth Potential • Penetration in 2004 : Monitors, 52%; TVs, 5%; Notebook PC, 27% • Desktop PC for notebook PC substitution trend continues • LCD monitors continue to rapidly replace CRTs • TVs will be the major growth driver due to large-area panel size

5. TFT-LCD Industry Overview • Market Structure • Taiwan exceeds Korea in terms of capacity in 2005 • Taiwan's infrastructure improving • Japan gradually retreats from standardized large-area TFT-LCD panel production • China is not a threat in the medium term TFT-LCD Capacity Breakdown By Region Unit: % 2000 2001 2002 2003 2004 2005* Taiwan 17.1 29.5 35.4 34.2 38.8 40.3 Korea 32.6 35.3 34.2 39.9 40.1 39.6 Japan 50.3 35.1 30.4 26.0 21.1 17.2 China 0.0 0.0 0.0 0.0 0.0 2.8 Total 100 100 100 100 100 100 * Taiwan Ratings estimates

6. TFT-LCD Industry Overview • Major Risk Sources • Unpredictable market demand • Capital intensity and long lead time for fabrication plant construction • Limited product differentiation • High Industry Risk: high cyclicality, intense price competition • Standard & Poor's views the TFT LCD industry as relatively risky

7. TFT-LCD Industry Overview • Aggressive Pricing • TV panel prices are currently under the most pressure

8. TFT-LCD Industry Overview • Volatile Profitability • High volatility in EBITDA margin reflects the cyclical nature • Average EBITDA margin ranged between 3.7% and 38.6% since 2002

9. TFT-LCD Industry Overview • Key Success Factors • ·Market position, which is primarily measured by market share, determines scale benefits and the level of buyer and supplier bargaining power • ·Low cost position, which is achieved through economies of scale, advanced production facilities, and vertical integration. A low cost position is a critical competitive advantage given the increasing standardization of TFT-LCD products • ·Diverse product and application mix, which helps reduce business volatility • ·Technology leadership, which is important for entering rapidly evolving markets, but is dependent on the company's ability to support ever increasing capital requirements

10. Business Profile Comparison • Conclusion

11. Business Profile Comparison • Market Position • Samsung and LG remain the industry leaders • Taiwan panel makers continue to gain market shares • Taiwan's large-area TFT LCD makers are benefiting from improving infrastructure

12. Business Profile Comparison • Market Position • Revenue trend reflects the widening gap

13. Business Profile Comparison • Low Cost Position & Technology Leadership • Scale economies are important due to a higher percentage of material costs for new production technology • AUO has better scale economies and the first mover advantage in new technology • CMO has better integration into in-house component production, but slower in ramping advanced facilities, including its 5G and 5.5G fabs • CPT operates 3G and 4.5G fabs, resulting in less favorable cost structure • QDI currently operates one 3.5G fab and one 5G fab and will commission its first 6G fab in 1H06 • HannStar was the slowest to ramp 5G technology. Its cost position could deteriorate without a clear 6G plan

14. Business Profile Comparison • Low Cost Position & Technology Leadership • Korean players still have advantage in production technology, but AUO and CMO are catching up

15. Business Profile Comparison • Product and application mix • All are single product companies, representing high product concentration risk • AUO has a better product and application mix because of its good position in the small- to mid-size TFT-LCD sector • CMO occupies good position in the LCD TV segment: 20% global market share and 38% of its revenue in 1H05 • CPT, QDI, and HannStar all continue to focus on notebook PCs and PC monitors • CPT’s legacy CRT business and PDP investment are not considered as meaningful product diversification

16. Business Profile Comparison • Product and application mix • AUO has a good position in the small-size panel segment • AUO can better use its 3.5G capacity, which is not cost effective for large-area panel production

17. Financial Profile Comparison • Conclusion

18. Financial Profile Comparison • Profitability • AUO and CMO enhanced their leading profitability positions relative to CPT, QDI and HannStar, reflecting their stronger business profiles

19. Financial Profile Comparison • Profitability • The gap between industry leaders and laggards expanded during the recent business cycle • Margin gap widens during down cycles as a result of differences in production technology and product mix

20. Financial Profile Comparison • Profitability • Volatility in profitability will continue • The industry generated low returns on capital during the recent business cycle

21. Financial Profile Comparison • Cash Flow Protection Measures • Volatile cash flow protection measures due to volatile profitability • Average FFO to total debt was 47.2% in 2004 • The ratio will fall below 20% in 2005 • Widening gap between leaders and laggards • AUO has the best cash flow protection measures • Constant negative free operating cash flow because of high expenditure needs • Total expenditure topped NT$230 bn in 2004. Further increase to NT$250 billion is expected in 2005

22. Financial Profile Comparison • Cash Flow Protection Measures • Volatile cash flow protection measures due to volatile profitability

23. Financial Profile Comparison • Liquidity • Taiwan's five TFT-LCD manufacturers all have sufficient liquidity to meet term debt repayments in 2005

24. Financial Profile Comparison • Liquidity • Significant external funding is needed to support capital expenditures

25. Financial Profile Comparison • Capital Structure & Financial Flexibility • Higher leverage in 1H05 due to lower profit and high capex • Total debt/EBITDA improved in 1H05, compared with 2001 • The banking sector's appetite for new exposure to the industry becomes more limited

26. Conclusion • Diverging credit quality among Taiwan's panel makers • Reasons behind: better scale economies, product diversification and technology lead to better profitability and cash flows • This in turn expands the gap between leaders and laggards because of leaders' more aggressive expenditures • AUO has a clear-cut leading position among Taiwan's panel makers in terms of credit quality • CMO follows closely, but needs to enhance its execution and product strategy • M&A may not happen soon because of continued access to loan and equity markets • Local banks' decreasing appetite has a negative implication, particularly for smaller players