ASX

ASE Technology Holding Co., Ltd. - 2003 Annual Report (Form 20-F) Summary

Business Context and Reporting Period

Company: Advanced Semiconductor Engineering, Inc. (ASE Technology Holding Co., Ltd.)
Reporting Period: Fiscal year ended December 31, 2003
Business Overview: ASE is the world's largest independent provider of semiconductor packaging and testing services. The company operates globally with significant facilities in Taiwan, Malaysia, Korea, the United States, and Japan. Its services include turnkey packaging, testing, and the design/production of interconnect materials (substrates and leadframes).
Accounting Basis: Financial statements are prepared under ROC GAAP, with reconciliations provided for U.S. GAAP.

Key Financial Metrics (Year Ended Dec 31, 2003)

Note: Exchange rate used for conversion: NT$33.99 = US$1.00 (Dec 31, 2003).

Material Changes vs. Prior Period (2002)

• Revenue Growth: Net revenues increased 25.7% to NT$57.3 billion, driven by a recovery in the semiconductor industry and increased outsourcing of advanced packaging (BGA) and testing services.
• Profitability Improvement: The company returned to profitability with a net income of NT$2.7 billion (ROC GAAP), a significant turnaround from the NT$129 million net income in 2002. Operating margin improved to 5.7% from a loss of 1.5% in 2002.
• Margin Expansion: Gross margin increased to 18.9% from 15.6%. Testing gross margin saw a dramatic improvement to 23.5% from 8.4%, attributed to higher capacity utilization rates.
• Cost Management: Depreciation expense as a percentage of revenue decreased to 20.1% from 24.9% due to higher equipment utilization. General and administrative expenses decreased 20.2% (excluding goodwill amortization) primarily because the 2002 results included a one-time asset impairment charge of NT$1.2 billion.
• Foreign Exchange: The company incurred a net foreign exchange loss of NT$386.8 million in 2003, compared to NT$397.9 million in 2002.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Management expects the modest recovery in the semiconductor industry to continue in 2004.
• Capital expenditures for 2004 are budgeted at approximately NT$23.8 billion (US$700 million) to expand packaging, testing, and interconnect materials capacity.
• The company is focusing on advanced packaging technologies (flip-chip BGA) and increasing in-house production of interconnect materials to capture more value.

• Industry Cyclicality: Revenues are highly dependent on the cyclical semiconductor industry; downturns lead to price declines and reduced demand.
• Customer Concentration: The five largest customers accounted for 34.8% of net revenues in 2003. Loss of a major customer could materially impact results.
• Geopolitical Risk: Approximately 77% of revenues are derived from operations in Taiwan. Strained relations between the ROC and the PRC, as well as natural disasters (earthquakes, typhoons), pose significant risks.
• Debt Covenants: The company has a history of failing to comply with certain financial covenants due to industry downturns, requiring waivers from lenders. Cross-default provisions exist.
• Acquisition Integration: Risks associated with integrating the recently acquired NEC Yamagata packaging business (completed May 2004) and the pending merger with ASE Chung Li and ASE Material (expected August 2004).

• Goodwill Accounting: Under U.S. GAAP, goodwill is not amortized but tested for impairment. A NT$2.2 billion impairment charge was recorded in 2002 for ASE Test goodwill. No impairment was recorded in 2003.
• Stock Bonuses: Under U.S. GAAP, employee stock bonuses are expensed at fair market value, whereas ROC GAAP charges them to retained earnings at par value. This creates a significant difference in reported net income.

Key Facts for Investor Verification

• Revenue Mix: Verify the continued shift toward higher-margin advanced packaging (BGA/Flip-Chip) and testing services, which drove the margin expansion in 2003.
• Capacity Utilization: Confirm that capacity utilization rates remain high enough to sustain the improved gross margins, particularly in the testing segment which has high fixed costs.
• Debt Compliance: Monitor compliance with financial covenants in loan agreements, given the company's history of requiring waivers during downturns.
• Merger Completion: Verify the successful completion and integration of the mergers with ASE Chung Li and ASE Material, expected in August 2004, and the acquisition of NEC's business.
• Customer Concentration: Track the revenue contribution of the top five customers to assess exposure to demand fluctuations from specific clients.
• U.S. GAAP Reconciliation: Investors should pay close attention to the U.S. GAAP net income (NT$2.35 billion) versus ROC GAAP net income (NT$2.74 billion) due to differences in accounting for stock bonuses and goodwill.