Visual Photonics Epitaxy : 2023 Annual Reports

Stock code: 2455

Visual Photonics Epitaxy Co., Ltd.

2023

Annual Report

Market Observation Post System: http://mops.twse.com.tw

Company website: http://www.vpec.com.tw Published on April 12, 2024

I. Contact Information of Spokesperson and Deputy Spokesperson:

Spokesperson	Deputy Spokesperson
Name：Chiang,Chih-Ching	Name：Su, Chan-Lu
Title：Head of the Finance Department	Title：Special Assistant to the Chairman
Tel.：[phone]	Tel.：[phone]
Email：[e-mail]	Email：[e-mail]

II. Contact Information of Headquarters, Branches and Plants:

Unit	Address	Tel.:
Headquarters	No. 16, Gongye 1st Road, Pingzhen	[phone]
	District, Taoyuan City
Pingzhen	No. 15 &16, Gongye 1st Road,	[phone]
Plant	Pingzhen District, Taoyuan City

1. Contact Information of Stock Transfer Agency: Stock Transfer Agency Department, Taishin Securities
   Address：B1, No. 96, Section 1, Jianguo N. Road, Taipei City, 10489
   Website：http://www.tssco.com.tw
   Tel.：[phone]

IV. Contact Information of the CPAs for the Latest Financial Statements:

Name：Lin, Se-Kai and Lai, Chung-Hsi

Accounting Firm：PwC Taiwan

Address：27F, No. 333, Section 1, Keelung Road, Xinyi District, Taipei City, 11012

Website：http://www.pwc.tw

Tel.：[phone]

V. Overseas Securities Exchange Where Securities are Listed and Method of Inquiry:

Not applicable

VI. Company website：http://www.vpec.com.tw

Table of Contents
	Page
Chapter I. Letter to Shareholders	1
Chapter II. Company Profile	6
I. Date of Incorporation	6
II. Company History	6
Chapter III. Corporate Governance Report	8
I. Organizational System	8
II. Information on the Company's Directors, President, Vice Presidents, Associate
Managers and the Heads of All the Company's Divisions and Branch Units	11
III. Remuneration Paid to Directors, President and Vice Presidents During the Most
Recent Fiscal Year	18
IV. Implementation of Corporate Governance	23
V. Information on CPA Professional Fees	71
VI. Information on Replacement of CPAs	71
VII. Where Company Chairperson, President or Any Managerial Officer in
Charge of Finances or Accounting Matters in the Most Recent Fiscal Year
Holding a Position at the Company's CPA Accounting Firm or at an
Affiliated Enterprise of Such Accounting Firm, the Name, Job Title, and
Period of Tenure at Such Shall be Disclosed. The Term "Affiliated
Enterprise of CPA Accounting Firm" Refers to an Enterprise Where CPA at
the CPA Accounting Firm Holds At least 50% of the Shares in the Firm or
Has Acquired More Than Half of the Seats of Directors or a Company or
Institution Listed in the Materials Disclosed or Published by the CPA's CPA
Accounting Firm as an Affiliated Enterprise	72
VIII. Any Transfer of Equity Interests and/or Pledge of or Change in Equity
Interests (During the Most Recent Fiscal Year or During the Current Fiscal
Year up to the Date of Publication of the Annual Report) by a Director,
Manager, or Shareholder with a Stake of More than 10 Percent	73
IX. Relationship among the Company's 10 Largest Shareholders as a Related
Party, a Spouse or a Relative Within the Second Degree of Kinship	74
X. Total Number of Shares and Total Equity Stake Held in any Single Enterprise
by the Company, Its Directors, Managers, and Any Companies Controlled
Either Directly or Indirectly by the Company	75
Chapter IV. Capital Overview	76
I. Capital and Shares	76
II. Corporate Bonds	84

III. Preferred Shares	84
IV. Global Depository Shares	84
V. Employee Stock Options	84
VI. Issuance of New Shares in Connection with Mergers or Acquisitions or with
Acquisitions of Shares of Other Companies	84
VII. Implementation of the Company's Capital Allocation Plans	84
Chapter V. Operating Highlights	85
I. Business Activities	85
II. Market as well as Production and Marketing Situation	97
III. Employees	104
IV. Disbursements for Environmental Protection	104
V. Labor-Management Relations	106
VI. Information and Communication Security Management	109
VII. Important Contracts	110
Chapter VI. Financial Information	111
I. Condensed Balance Sheets and Statements of Comprehensive Income for the Past
Five Fiscal Years	111
II. Financial Analyses for the Past Five Fiscal Years	113
III. Audit Committee's Report for the Most Recent Fiscal Year's Financial Statement . 115
IV. Financial Statements for the Most Recent Fiscal Year	116
V. Parent Company-Only Financial Statement for the Most Recent Fiscal Year,
Certified by the CPA	179
VI. In the Most Recent Fiscal Year and Up to the Date of Publication of the
Annual Report, Any Financial Difficulties Experienced by the Company or
Its Affiliates and How Said Difficulties Will Affect the Company's Financial
Situation	179
Chapter VII. Review and Analysis of the Company's Financial Position and Financial
Performance and Listing of Risks	180
I. Financial Position	180
II. Financial Performance	180
III. Cash Flow	181
IV. Effect Upon Financial Operations posed by any major capital expenditures during
the most recent fiscal year	181
V. Reinvestment Policy for the Most Recent Fiscal Year, Main Reasons for
Profits/Losses Generated Thereby, Plan for Improving Re-investment
Profitability and Investment Plans for Coming Year	181
VI. Risk Analysis and Assessment for the Most Recent Fiscal Year and as of the Date
of Publication of the Annual Report	182

VII. Other Important Matters	185
Chapter VIII. Special Disclosure	186
I. Information on the Affiliates	186

1. Private Placement of Securities During the Most Recent Fiscal Year or During the Current Fiscal Year up to the Date of Publication of the Annual Report.
   The Date of Approval and Amount Approved by the Shareholders' Meeting or the Board Of Directors, the Basis and Reasonableness of the Price Set, the Method of Selection of Specific Parties, the Reasons for Necessity for the Private Placement, Parties Targeted by the Private Placement, Criteria, Number of Securities Subscribed for, Relations with the Company, Participation in the Operations of the Company, the Actual Subscription (or

Conversion) Price, the Difference Between the Actual Subscription (or
Conversion) Price and the Reference Price, the Impact of the Private
Placement on Shareholders' Rights and Interests, the Use of Funds from
Private Placement from the Time When Payments of Shares Are Fully
Received Until the Completion of the Fund Use Plan, Plan Execution Progress
and Effect of the Plan Shall be Disclosed	186

1. Holding or Disposal of Shares in the Company by the Company's Subsidiaries During the Most Recent Fiscal Year or During the Current Fiscal Year up to

the Date of Publication of the Annual Report	186
IV. Other Supplementary Information	186
V. Situations Listed in Article 36, Paragraph 3, Sub-paragraph 2 of the Securities
and Exchange Act which Might Materially Affect Shareholders' Equity or the
Price of the Company's Securities Occurring During the Most Recent Fiscal
Year or During the Current Fiscal Year up to the Date of Publication of the
Annual Report	186

Chapter I. Letter to Shareholders

Dear Shareholders,

1. 2023 Business Results

The Company's 2023 net operating revenue was NTD 2.694 billion, an increase by 3.47% from the previous year; net income was NTD 450 million, a decrease by 17.35% from the previous year.

The operating results for 2023 compared with the previous year are as follows:

Unit: NTD thousand

	2023	2022	Increase	Increase
	(decrease)	(decrease) by %
Operating revenue	2,694,104	2,603,629	90,475	3.47%
Operating costs	1,585,190	1,514,622	70,568	4.66%
Gross profit	1,108,914	1,089,007	19,907	1.83%
Operating expenses	566,845	509,057	57,788	11.35%
Operating income	542,069	579,950	(37,881)	-6.53%
Non-operating income	(347)	87,533	(87,880)	-100.40%
and expenses
Net income	450,232	544,728	(94,496)	-17.35%

According to a report by the market research firm IDC, the global shipments of smartphones reached 1.17 billion units in 2023, down 3.2% from 2022, to the lowest level in a decade. The slight increase in the Company's revenue is mainly due to the return of mobile phone inventory to normal and the revenue growth of optical communication of data centers due to the AI business opportunity. Looking ahead to 2024, according to the forecasts of several market research institutions, the global mobile phone shipments will recover in 2024, and are expected to reach 1.20 billion to 1.24 billion units, a year-on-year growth of 3% to 6%. In terms of microelectronic products, the Company's operations will benefit from the replacement wave of AI-based mobile phones in the first year, the continuous growth of penetration rate of 5G smart phones and the commercial use of Wifi 7. Optoelectronic products will benefit from the booming data center industry in recent years, which has attracted various industry players to rush to the construction, the continuing introduction of 3D-sensing & TOF smart phones and consumer head-mounted devices (AR and VR), all contributing to the future revenue growth.

1. Outline of the business plan

1. Marketing plan

1. Improve the strength of the Company's products in technology, quality and mass production; increase the existing customers' procurement from the Company and develop potential high-growth markets and customers at the same time; raise the

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Company's market share and publicity in the industry by thinking about the market trend, satisfying customers' needs and helping customers with differentiation to improve their competitiveness.

1. 1. Participate in the Design-in at the beginning of new product R&D at the customer end pro-actively to become the specifications maker and expand the gap with competitors, strengthen the competitiveness of products with leading technology and thus deepen the relationship with customers.
   2. Deepen the relationship with customers with technical services; adopt the product differentiated orientation policy based on the customers' need for design and process; help customers improve the product differentiation and process stability to form the sound partnership with the customer end.
2. Production and operating plan
3. 1. Cost reduction
      Execute the plan to reduce the procurement cost subject to the suppliers' characteristics; implement the concept about Lean Production to eliminate the waste potentially arising in the procedure; adjust the optimum production scheduling in response to changes in the order placed by customers; continue to analyze various costs, train colleagues to think about how to create the maximum output with limited resources in the routine operating activities to keep improving the work literacy; adjust the factory premises to be the most competitive cost structure transcending competitors, as the threshold that competitors are unlikely to reach.
   2. Quality improvement
      Intensify colleagues' awareness toward quality by virtue of continuing education and training; keep improving the quality level, in order to practice the strategy to develop customers thoroughly with stable quality and build the competitive strengths of products by cutting the costs to be incurred by defective quality.
4. R&D plan
5. 1. Microelectronics products: Low Knee Voltage HBT/GaAs HBT/InP HBT/GaAs PHEMT/GaN on SiC/GaN on Si/GaN on Sapphire PA, Switch, and LNA for 5G mobile phones, Wifi, and infrastructure (base stations and Small Cells).
   2. Photoelectronic products:
   3. 1. PD: 25G APD, 50G PD, 100G PD, 1.9-2.6μm long wavelength PD.
      2. LD: Application of GaAs and InP FP/DFB LD for High Power, High Speed and LiDAR.
      3. VCSEL: iTOF/dTOF, Multi-Junction VCSEL, long wavelength VCSEL, backlight VCSEL, high-speed VCSEL, LiDAR application VCSEL, industrial
         VCSEL.
6. Financial Plan

Continue to improve the cost structure and increase the gross margin; cut various operating expenses; assess the foreign exchange risk; increase the turnover of various assets; strictly

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assess the effect of fund utilization and control cash outflows; accelerate the cash inflows accumulated from operating activities; improve the cash holdings and efficiency of asset utilization; insofar as the Company's normal operations and stable profit policy remain unaffected, cover the capital requirement with the cash inflow from operating activities as much as possible, in order to cut the funding cost and improve the profitability; make good use of the low-interest financial trend; borrow loans adequately; review the adequacy of capital scale; increase the ROE. Strive for the feasibility of various R&D credits pro-actively to reduce tax and increase EPS.

III. Future development strategies

The competition is fierce in each industry. Taking the wireless communication industry in which the Company's microelectronic products are sold as an example, whenever a new flagship model is launched, it is the time to re-set the competition trend in this industry. Therefore, the Company has to join the technology R&D of the next generation product specifications together with customers at the very beginning of the R&D, in order to strive for the chance to be the winner of the terminal product specifications, and ensure that the Company's materials may be applied to each best-selling mobile phone, tablet and wearable device series and various innovative devices and infrastructure. Improving the characteristics of materials and yield rate, ensuring the product quality and keeping cutting costs down would be the key to maintain the long-term competitiveness in the industry. Based on the partnership in R&D, the Company helps customers shorten the time spent in R&D and strive for the opportunity to have the customers' products get the Design-Win from mobile phone manufacturers. Only if the Company becomes the first largest supplier, the Company may disperse the operating risk effectively and stand in the invincible position. In the era of 5G, IoT and Internet of Vehicles, the Company will introduce resources, work with customers to layout for the 5G mobile phones, base stations, small cells and Wifi6/Wifi7-related new products and structures.

The Company will expand the width of optical communication customers, accelerate R&D of the new light sensor products and customers' certification as the development strategy for photoelectronic products. The Company will also increase the photoelectronic products and customer portfolio to drive the growth of operating revenue and profit, cause the product portfolio and customer structure to develop toward a stabler orientation, and thus create more diversified business opportunities. Meanwhile, benefiting from AI business opportunities, data centers have flourished in recent years, attracting various industries to rush to build facilities, and the Company will take the opportunity to develop its business when the penetration rate of sensing elements in electronic consumables and LiDAR is increasing significantly, accelerate the R&D of application, certification and mass production of InP and GaAs new products, improve the yield rate and expand the productivity to raise the market share in a timely manner to block the competitors.

The digital transformation is underway. Various forward-looking technologies are emerging and complementing each other. The new high-tech product innovation speed is

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beyond the ordinary people's imagination. At this moment, many industrial giants and venture capitalists are focusing on the creation of new products which most of people have not yet found are needed by them. In consideration of the excellent characteristics of compound semiconductors, it will inevitably be applied by specific new high-tech products. The Company, as a compound semiconductor epitaxy fab, will act open-mindedly and introduce resources in a timely manner and closely work with the existing and potential customers for early layout arrangement. Meanwhile, the Company will make good use of its experience in the R&D of various microelectronic and photoelectronic products for over two decades, control the characteristics of compound semiconductor materials, 6-inch epitaxy mass production capacity and also ensure the quality to be outstanding and everlasting and have cost awareness to build a threshold that competitors are not likely to reach.

IV. Effect of external competition, laws and regulations and overall business environment

Looking back on 2023, the global economy faces many challenges and changes. With the advent of the post-pandemic era and the relaxation of pandemic control measures in China, the global supply chain is gradually recovering. However, the stalemate of the Russo-Ukrainian war, the escalation of the Israel-Palestinian war, the decision to raise interest rates by various countries to combat inflation, and the AI chip war between the two major powers China and the United States, have caused instability in market supply and demand. In response to the external environment, the Company adheres to the philosophy of enhancing core competitiveness, and will continue to strengthen its advantages in product quality, cost control, delivery efficiency, and new product research and development. Through the continuous cultivation of customer relationships and the R&D strength to enhance the advantages of customer product features, we will become the customer's best partner in the collaborative development of the next generation of products, and by consolidating the position as the customer's preferred supplier, we can then stabilize our No. 1 position among the microwave communication GaAs LED crystal fabs in the world.

During the pandemic, people have developed the habit of using digital tools, which has affected the production and sales activities of enterprises to a certain extent, and the risk of supply chain interruption has increased. The global economy will recover after the pandemic control restrictions are eased. In the process of economic recovery, enterprises will pay more attention to customer needs in order to provide better quality products and services. The Company is located in the upstream of the supply chain, and will pay more attention to supply chain management and take active measures to deal with the new market environment and reduce the risk of supply chain interruption. The Company adheres to the consistent principle of talent retention, and actively operates multiple recruitment channels such as campus recruitment and industry-academia collaboration projects to reduce the impact of talent recruitment difficulty on business development.

With the overwhelming emergence of digital applications such as big data, AI, blockchain and the metaverse, most of the computing, storage and network required are built on the cloud, and the development of data centers has flourished in the past five years. The demand is higher

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than the supply, which attracts various industry players to the building rush of data centers. In addition, with the advent of the AI era, the Internet speed is faster and the computing power is improved, coupled with low-latency transmission technology and the development of virtual reality (VR) and augmented reality (augmented reality), the AI can also be used in educational and academic applications, such as gaming, entertainment, shopping, video, social networking, etc. It can also be used in medical science, simulated surgery, experiments, technical hypotheses, learning and art. The Company is a member of the data center, AR and VR supply chain. Given the increasingly improving technologies and the increasing demand in various fields, the related technologies will be applied in more diverse and in-depth manners.

The "Sustainable Development Roadmap" promulgated by FSC in 2022, and the "Sustainable Development Action Plan" and the "Blueprint for Sustainability Disclosure Standards in Line with IFRS" subsequently released in 2023 are primarily prepared in response to the government's 2050 net-zero target, which sets forth the schedule for disclosure of information about GHG accounting by a TWSE/TPEx-listed company, in order to help enterprises meet and define the carbon reduction targets. Meanwhile, in response to the government's carbon reduction plan, it links the supply chain through TWSE/TPEx-listed companies, in order to achieve the corporate sustainability. The Company, as the upstream dealer in the international leading brands' supply chain, has associated the ESG practices with its internal regulations. The Company completed the 2022 Sustainability Report in September 2023 and posted it on the Company's official website on September 28, 2023.

From different perspectives, 2024 is generally considered to be a turning point in the global economy and emerging technologies, such as AI, 5G and cloud computing, will continue to be the main driving force for the development of the technology industry. The demand for electronics-related products has rebounded and various industries are actively adopting high-tech, such as data analysis and artificial intelligence, to cope with the risks brought about by changes in the overall environment, and high interest rates have limited economic slowdown. The labor market is stable and real income growth is expected. After entering a soft landing, Taiwan's foreign demand and investment are expected to regain their growth momentum, and private consumption will benefit and continue to expand.

Looking forward to the economic prospect in 2024, it seems optimistic, but not without challenges. As an important hub of the global semiconductor industry, Taiwan's economic prospect is closely linked to the global demand for technology. However, in the face of the recent intensification of geopolitical risks, which increase investment volatility and uncertainty, as well as the major challenges such as climate change that cannot be ignored, the Company will closely observe the global situation and market changes, and actively and prudently evaluate such to ensure that it can maintain its competitive advantages and resilience, and become the leader for long-term development and sustainable operation.

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