Asia Pacific Equity Research 31 August 2006 Globe Union Industrial Corp Overweight 1H06 net profit up 313%; reiterate Overweight NT$27.20 31 August 2006 Price Target: NT$33.00 • Strong earnings recovery on track: Globe Union (GUIC) reported 1H06 net profit of NT$292 million or EPS of NT$1.26, up significantly by 313% Y/Y. This is in line with our expectation and we reiterate our Overweight rating. • ODM and OBM show robust growth in 1H06: Revenues from the ODM business increased by 50% Y/Y while OBM revenues grew by 20% Y/Y in 1H06. Robust revenue growth is the key driver for a strong bottom-line recovery this year. • Margins hold up well despite rising material prices: Margins (on a consolidated basis) held up quite well in 1H06 despite raw material price hikes, supported by strong growth of its high-margin OBM business. • Ex-dividend new price target of NT$33: We are not changing our earnings estimates for GUIC as the results are in line with our expectations. However, we have adjusted our price target to NT$33 from NT$35 mainly on the back of new shares issued in early August as dividends. Our August 2007 DCF-based price target equates to 11x 2007E P/E and implies 21% potential upside from the current level. • Key risks to our view and price target: (1) potential raw material price hikes; and (2) buoyancy of the US housing market. Taiwan Household Products John ChungAC (886-2) 2725-9874 john.ca.chung@jpmorgan.com Nick Lai (886-2) 2725-9864 nick.yc.lai@jpmorgan.com Five-year share price performance NT$ 40 35 30 25 20 15 10 5 0 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Source: Datastream. Share price performance analysis Absolute Relative 1M 2% 0% 3M -9% -5% 12M -2% -10% Source: Datastream. Reuters code: 9934.TW; Bloomberg code: 9934 TT Company data NT$ in millions, year-end December Sales EBITDA Net profit EPS (NT$) Net debt (cash) to equity P/E (x) P/B (x) ROE (%) Dividend yield (%) Sales growth PAT growth EPS growth Gross margin Net margin FY05 9,720 653 218 0.92 -18% 29.6 1.1 4.6% 7.0% -4% -54% -54% 34% 2% FY06E 11,887 1,018 580 2.50 -20% 10.9 1.1 10.6% 3.8% 22% 166% 173% 33% 5% FY07E 12,906 1,138 692 2.98 -21% 9.1 1.0 12.3% 7.4% 9% 19% 19% 33% 5% FY08E 14,033 1,296 818 3.53 -21% 7.7 1.0 14.1% 8.8% 9% 18% 18% 34% 6% 52-wk range (NT$) Mkt cap. (NT$B) Mkt cap. (US$MM) Shares O/S (MM) Free float (%) Avg. daily volume Liquidity (US$MM) Exchange rate (NT$/US$1) Index (TWSE) Year-end 20.0 - 31.2 6.4 196 237 *50 0.4M 0.3 32.9 6587.12 December Source: Datastream, JPMorgan estimates. Note: *Including foreign holding of 29%. Source: Company, Bloomberg, JPMorgan estimates. J.P. Morgan Securities (Taiwan) Limited. See page 4 for analyst certification and important disclosures, including investment banking relationships. JPMorgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. John Chung (886-2) 2725-9874 john.ca.chung@jpmorgan.com Asia Pacific Equity Research 31 August 2006 1H06 results summary Globe Union (GUIC) reported 1H06 EPS of NT$1.26 or net profit of NT$292 million, up significantly by 313% Y/Y. This is in line with our expectation and we are not changing our earnings estimates for the company. GUIC is due to report the consolidated numbers on September 13, 2006. Nonetheless, our discussions with management about the company’s 1H06 preliminary consolidated numbers support our positive view of a strong fundamental recovery. Consolidated sales grew by 37% Y/Y in 1H06, with the gross margin remaining steady at 32% despite raw material price hikes. Strong growth of its high-margin OBM business was the major support for GUIC’s margin level; revenues from the business grew by 20% Y/Y in 1H06. Table 1: Globe Union—1H06 preliminary consolidated result NT$ in millions 1H05 4,466 NA 1,491 NA 33% 142 NA 3% 93 71 -78% 2% Net sales Y/Y % growth Gross profit Y/Y % growth Gross margin Operating income Y/Y % growth Operating margin Pre-tax income Net income Y/Y % growth Net margin 1H06 6,135 37% 1,972 32% 32% 456 222% 7% 464 292 313% 5% % of 2006E 52% 51% 61% 58% 50% 2006E 11,887 22% 3,892 19% 33% 753 69% 6% 795 580 166% 5% Source: Company, JPMorgan estimates. Valuation and recommendation GUIC’s stock has outperformed the market by 7% YTD and is now trading at 11x 2006E or 9x 2007E P/E. We have not changed our earnings estimates as the company is on track to reach our full-year estimate. However, we have adjusted our EPS and price target to NT$33 from NT$35 mainly to reflect the changes in the number of shares after the stock dividends were paid in early August. We reiterate our Overweight rating on GUIC. Our DCF-based August 2007 price target equates to 11x 2007E P/E and implies 21% potential upside from current level. Figure 1: Globe Union—P/B band Figure 2: Globe Union—One-year forward P/E band NT$ NT$ 50 80 1.6 x 1.4 x 1.2 x 1.0 x 0.8 x 0.6 x 0.4 x 40 30 20 10 Jan-02 Jan-03 Source: TEJ, JPMorgan estimates. 2 50 40 30 20 10 0 0 Jan-01 25 x 22 x 19 x 16 x 13 x 10 x 7x 4x 70 60 Jan-04 Jan-05 Jan-06 Jan-01 Jan-02 Jan-03 Source: TEJ, JPMorgan estimates. Jan-04 Jan-05 Jan-06 John Chung (886-2) 2725-9874 john.ca.chung@jpmorgan.com Asia Pacific Equity Research 31 August 2006 Company profile Globe Union Industrial Corp. (GUIC) is the largest faucet and bathroom accessories manufacturer in Asia. With its headquarters and R&D center in Taiwan and manufacturing plants in China, the company exports most of its products to the North American market, which accounted for 85% of the consolidated revenue in FY05. Established in 1979, GUIC has ODM and OBM business lines, which accounted for 56% and 44% of consolidated revenues in FY05, respectively. For its ODM business, Home Depot is a major customer, accounting for 22% of consolidated revenues. For its OBM business, GUIC has four major brands in different regions: Gerber and Danze in the US, Gobo in China, and Lenz in Germany. We believe the OBM business in the US and ODM business in Europe should be the major growth drivers in the near-to-mid term, while the Chinese market offers strong growth potential for the OBM business in the long term. Figure 3: Globe Union—2005 consolidated revenues breakdown by product Accessory Others 8% 1% Figure 4: Globe Union—2005 consolidated revenues breakdown by region Europe Show erheads China Other 2% 7% 6% 9% Vitreous China 18% Source: Company. Faucets North America 64% 85% Source: Company. 3 John Chung (886-2) 2725-9874 john.ca.chung@jpmorgan.com Asia Pacific Equity Research 31 August 2006 Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures • • Client of the Firm: Globe Union Industrial Corp is or was in the past 12 months a client of JPMSI. Non-Investment Banking Compensation: An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Globe Union Industrial Corp. Globe Union Industrial Corp (9934.TW) Price Chart Date 60 20-Jan-06 OW 50 40 Price(NT$) Rating Share Price (NT$) 26.17 Price Target (NT$) 38.00 OW NT$38 OW NT$35 30 20 10 0 Aug 03 Nov 03 Feb 04 May 04 Aug 04 Nov 04 Feb 05 May 05 Aug 05 Nov 05 Feb 06 May 06 Aug 06 Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends. Initiated coverage Jan 18, 2006. This chart shows JPMorgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. As of Aug. 30, 2002, the firm discontinued price targets in all markets where they were used. They were reinstated at JPMSI as of May 19th, 2003, for Focus List (FL) and selected Latin stocks. For non-JPMSI covered stocks, price targets are required for regional FL stocks and may be set for other stocks at analysts' discretion. JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight. Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: JPMorgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: John Chung: Basso Industry Corp (1527.TW), Formosa International Hotel (2707.TW), Giant Manufacturing (9921.TW), Globe Union Industrial Corp (9934.TW), Makalot Industrial Co. Ltd. (1477.TW), Nien Made Enterprise (9915.TW), St. Shine Optical Co., Ltd. (1565.TWO) 4 John Chung (886-2) 2725-9874 john.ca.chung@jpmorgan.com Asia Pacific Equity Research 31 August 2006 JPMorgan Equity Research Ratings Distribution, as of July 3, 2006 JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients* Overweight (buy) 42% 44% 38% 62% Neutral (hold) 40% 47% 47% 57% Underweight (sell) 18% 37% 15% 47% *Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. 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All rights reserved. 6 John Chung (886-2) 2725-9874 john.ca.chung@jpmorgan.com Asia Pacific Equity Research 01 August 2006 Globe Union Industrial Corp: Summary of financials (consolidated) Profit and loss statement Cash flow statement NT$ in millions, year-end December Net sales Gross profit Operating income Interest income Investment income Total non-op. income Interest expenses Total non-op. exp. Pre-tax income Income tax expense Net income EBIT EBITDA EPS (NT$) Growth (%) Sales PBT PAT EPS NT$ in millions, year-end December FY05 9,720 3,265 447 32 0 111 80 195 363 103 218 442 653 0.92 FY06E 11,887 3,892 753 47 0 131 67 89 795 199 580 862 1,018 2.50 FY07E 12,906 4,301 879 50 0 138 70 95 923 231 692 993 1,138 2.98 FY08E 14,033 4,778 1,043 69 0 140 71 92 1,091 273 818 1,162 1,296 3.53 -4% -59% -54% -54% 22% 119% 166% 173% 9% 16% 19% 19% 9% 18% 18% 18% Net income Depreciation Amortization Dec(inc)-A/R Dec(inc)-Inventory Inc(dec)-A/P Other adj. Cash flow - operating Sales (purchase) LT invest Sales (purchase) of FA Others Cash flow - inv. Free cash flow (opt + invt CF) Dividend paid Inc(dec) - S-T debt Inc(dec) - L-T debt Others Cash flow - financing Cash equiv. - begin Cash equiv. - end Balance sheet Ratio analysis NT$ in millions, year-end December Year-end December Cash and equivalent Marketable security A/R and N/R Inventories Total current assets Long-term investment Total fixed assets Total other assets Total assets Short-term borrow. Bills issued A/P and N/P Total current liab. LT liabilities Total other LT liab Total liabilities Common stocks Total equity Total liab and equity FY05 3,029 141 2,198 1,964 7,586 478 1,405 565 10,034 1,094 0 1,382 3,407 1,102 158 4,668 2,152 5,366 10,034 Source: Company, JPMorgan estimates. Note: * Dividends paid for last year’s earnings. FY06E 3,283 141 1,971 1,971 7,621 483 1,329 552 9,986 1,194 0 1,162 3,234 1,092 127 4,454 2,152 5,532 9,986 FY07E 3,418 141 2,061 2,122 7,996 488 1,264 539 10,287 1,294 0 1,218 3,378 1,082 117 4,577 2,152 5,710 10,287 FY08E 3,456 141 2,226 2,282 8,359 493 1,170 534 10,557 1,294 0 1,307 3,447 1,072 117 4,636 2,152 5,921 10,557 Financial structure Total debt/total asset Net debt to equity Liquidity Current ratio (x) Quick ratio (x) Interest cover (x) Margins Gross margin Operating margin Net margin Profitability ROE ROA ROCE Others BV per share (NT$) Cash dividend (NT$) * Dividend yield FY05 218 178 33 (708) (276) 477 175 96 (466) (115) 286 (296) (201) (378) (116) (32) 2,195 1,669 1,474 3,029 FY06E 580 136 20 227 (8) (220) 4 739 (5) (60) (79) (144) 595 (431) 100 (10) 0 (341) 3,029 3,283 FY07E 692 125 20 (90) (151) 56 4 657 (5) (60) (34) (99) 558 (514) 100 (10) 0 (424) 3,283 3,418 FY08E 818 113 20 (164) (160) 89 4 720 (5) (20) (39) (64) 656 (608) 0 (10) 0 (618) 3,418 3,456 FY05 22% -18% FY06E 23% -20% FY07E 23% -21% FY08E 23% -21% 2.2 1.6 5.6 2.4 1.7 12.8 2.4 1.7 14.2 2.4 1.7 16.3 34% 5% 2% 33% 6% 5% 33% 7% 5% 34% 7% 6% 5% 2% 4% 11% 6% 10% 12% 7% 12% 14% 8% 13% 24.93 1.90 7% 25.70 1.03 4% 26.53 2.00 7% 27.51 2.39 9%