Taiwan Strategy:Holding on at top of range

Tech: We continue to expect Taiwan tech to outperform again in 2017drivenby: 1) 12% semiconductor growth (after 2flat years – biggest upside frommemory prices), 2) good iPhone cycle (that should last into 2018), and 3)continued spending and growth in the automation and auto electronics sectors(Taiwan tech up 10.4% YTD vs TAIEX up 6.7%). We maintain our negativeoutlook on the LCD industry. Top tech longs: TSMC, Hon Hai, Powertech,Global Wafers, Ennoconn, CHPT, Inventec, Chroma and CUB. Top techshorts: Largan, Advantech, AUO, TPK, Bizlink, Epistart, HTC and Acer.

Non-tech: We saw more results misses from US apparel/sportswear brands/retailers, supporting our negative view on the Taiwan textile & footwearsector. Chemical product price declines since March also support ourunderweight view on the Taiwan petrochem sector (earnings cycle peaked in2016). On the contrary, strong results of Home Depot and Stanley Black &Decker as well as housing prices have positive implications to our top pick,Basso. In 2017, we continue to suggest staying defensive in Taiwan non-tech,preferring companies with quality growth stories, lower valuations and gooddividend yields. Top non-tech longs: Basso, PChome, Giant, Uni-Presidentand Poya. Top non-tech shorts: Eclat, Feng Tay, and FPCC.

Financials/economy/funds flow. The NT$ continued to strengthen due tocapital inflow, and the FX reserve stayed flattish at US$437.5bn in March,suggesting little FX intervention by the Central Bank (CB). Meanwhile, the CBhas been increasing the issuance of NCDs to absorb the excessive liquiditywhich is similar to what the other CBs in the US and China have done. On thebrighter side, domestic credit demand started to pick up (+4.2% YoY in thefirst two months) though demand for foreign currency loans remainedsluggish. Despite the muted CPI inflation (+0.18% YoY) in March, the coreinflation rose to 0.95% YoY (vs. 0.84% in FY15). WPI weakened slightly inMarch (1.84% YoY) but still higher than the level in 2016. In the insurancespace, fluctuations in FX and interest rates pushed hedging costs higher,which hurt operating profits. Sales growth is also challenging (except forCathay) due to higher prices this year. We reiterate our preference for privatebanks like E.Sun and CTBC while we prefer Cathay in the life insuranceuniverse. Top financials shorts: Mega and Chailease.