Taiwan Information Technology 27 October 2022

Global Unichip (3443 TT)

Target price: TWD680.00 (from TWD680.00)

Share price (27 Oct): TWD428.00 | Up/downside: +58.9%

Upgrading: even stronger business performance

Elina Lin
 Seeing a brighter 4Q22E on strong growth in NRE revenue (886) 2 8758 6262
elina.lin@daiwacm-cathay.com.tw

 2022E EPS to more than double YoY with a growing 2023E Rick Hsu
(886) 2 8758 6261
 Upgrading our rating to Buy (1); reaffirming 12-month TP at TWD680 rick.hsu@daiwacm-cathay.com.tw

What’s new: Global Unichip (GUC) reported its 3Q22 results on 27 Forecast revisions (%)
October and provided a positive 4Q22 outlook. We believe its 4Q22E Year to 31 Dec 22E 23E 24E
Revenue change 5.0 8.8 8.4
revenue and earnings will beat market expectations on strong non- Net profit change 24.3 26.2 14.7
recurring engineering (NRE) growth with advanced-node design projects, Core EPS (FD) change 24.3 26.2 14.7
likely leading to rising profit margins in QoQ terms. Despite an exceptional Source: Daiwa forecasts
high base in 2022E, we believe its 2023E will still be a growth year thanks
to growth from both NRE and turnkey businesses. We see the recent
share-price correction on the US ban as overdone, as we believe the
impact is manageable. We upgrade GUC to Buy (1) and suggest investors
take advantage of the recent sell-off to accumulate the stock.

What’s the impact: Stronger 4Q22E outlook. After the release of its
upbeat preliminary results, GUC reported the full set of 3Q22 results on 27
October, where its 3Q22 gross margin (GM) came in at 35%, 1pp above
our estimate on better GM of the NRE business given the GM volatilities in
different milestones and better turnkey GM. Looking into 4Q22, GUC is 12-month range 383.00-661.00
Market cap (USDbn) 1.78
positive on its outlook and expects a strong QoQ growth in NRE. We now 3m avg daily turnover (USDm) 108.44
forecast its 4Q22 revenue to grow by 23% QoQ (vs. consensus forecast: Shares outstanding (m) 134
flat QoQ growth) to TWD7.4bn (+52% YoY), with NRE revenue more than Major shareholder TSMC (34.8%)
doubling QoQ driven by 5nm and 7nm projects mainly related to non-China
AI. For its turnkey business, we expect the ramp-up momentum of the new Financial summary (TWD)
Year to 31 Dec 22E 23E 24E
SSD and networking projects to continue into 4Q22E; however, due to a
Revenue (m) 23,406 27,277 31,910
high base in 3Q22, we forecast turnkey revenue to grow by a single-digit Operating profit (m) 4,131 4,650 5,420
QoQ. Given a better product mix towards NRE, we expect its GM to rise Net profit (m) 3,669 4,018 4,678
c.1pp QoQ to 36% in 4Q22E. This coupled with operating leverage, will Core EPS (fully-diluted) 27.276 29.872 34.777
EPS change (%) 151.2 9.5 16.4
lead to an EPS of TWD9.7 (+23% QoQ, +153% YoY) in 4Q22E, in our view. Daiwa vs Cons. EPS (%) 36.1 31.6 45.2
PER (x) 15.7 14.3 12.3
2023E likely to be another bright year. After a strong 2022 with earnings Dividend yield (%) 1.6 3.0 3.5
DPS 7.0 13.0 15.0
likely more than doubling YoY, we expect 2023E to be another growing year
PBR (x) 7.2 5.6 4.4
with drivers from both NRE and turnkey businesses. Given GUC’s EV/EBITDA (x) 9.9 8.3 7.0
expertise in advanced nodes, we expect AI, networking and SSD projects ROE (%) 55.4 44.0 40.3
in <=12/16nm to continue to drive its NRE business. Also, we believe the Source: FactSet, Daiwa forecasts
SSD and networking projects that entered mass production in 2022 will
likely see robust YoY growth to drive turnkey revenue despite a high base.
We expect GUC’s revenue to grow by a double digit YoY in 2023E.

What we recommend: With GUC’s stronger business momentum, we lift

our 2022-24E EPS by 15-26% and upgrade our rating to Buy (1). We keep
our 12-month TP at TWD680 despite our upward earnings revision, based
on lowered 4-quarter forward PER of 23x (from 30x) on the macro issues of
rate hikes. Key downside risk: weaker-than-expected turnkey demand.

How we differ: Our 2022-24E EPS are 32-45% above the consensus,
likely on our more positive view of its new project ramp up.

See important disclosures, including any required research certifications, beginning on page 6
 Global Unichip (3443 TT): 27 October 2022

GUC: quarterly profit and loss summary

TWDm 1Q22 2Q22 3Q22 4Q22E 1Q23E 2Q23E 3Q23E 4Q23E 2021 2022E 2023E 2024E
Revenue 4,514 5,381 6,062 7,449 6,835 6,698 6,837 6,907 15,108 23,406 27,277 31,910
NRE 1,272 1,513 1,158 2,481 1,852 1,679 1,933 2,127 4,668 6,424 7,591 9,132
Turkey 3,116 3,729 4,706 4,810 4,824 4,845 4,712 4,580 10,086 16,360 18,961 21,918
Others 126 139 198 158 158 174 192 201 353 622 725 860
COGS -2,886 -3,488 -3,948 -4,781 -4,512 -4,363 -4,525 -4,511 -9,878 -15,103 -17,912 -21,027
Gross profit 1,628 1,893 2,114 2,668 2,322 2,335 2,312 2,396 5,230 8,303 9,366 10,883
Opex 995 1,062 968 1,147 1,182 1,162 1,183 1,188 3,556 4,172 4,715 5,463
Operating profit 633 831 1,146 1,521 1,140 1,173 1,129 1,208 1,674 4,131 4,650 5,420
Pretax profit 643 896 1,230 1,535 1,171 1,224 1,141 1,220 1,741 4,304 4,756 5,536
Income taxes -97 -136 -171 -230 -176 -208 -171 -183 -281 -635 -738 -858
Net profit 545 760 1,058 1,305 995 1,016 970 1,037 1,460 3,669 4,018 4,678
EPS (TWD, basic) 4.07 5.67 7.90 9.74 7.43 7.58 7.24 7.74 10.90 27.38 29.98 34.91
EPS (TWD, fully diluted) 4.06 5.65 7.87 9.70 7.40 7.55 7.21 7.71 10.87 27.28 29.87 34.78
Margin
Gross 36% 35% 35% 36% 34% 35% 34% 35% 35% 35% 34% 34%
Operating 14% 15% 19% 20% 17% 18% 17% 17% 11% 18% 17% 17%
Pretax 14% 17% 20% 21% 17% 18% 17% 18% 12% 18% 17% 17%
Net 12% 14% 17% 18% 15% 15% 14% 15% 10% 16% 15% 15%
Growth (QoQ)
Revenue -8% 19% 13% 23% -8% -2% 2% 1%
Gross profit 1% 16% 12% 26% -13% 1% -1% 4%
Operating profit 5% 31% 38% 33% -25% 3% -4% 7%
Net profit 6% 39% 39% 23% -24% 2% -4% 7%
EPS (basic) 6% 39% 39% 23% -24% 2% -4% 7%
EPS (FD) 6% 39% 39% 23% -24% 2% -4% 7%
Growth (YoY)
Revenue 36% 63% 69% 52% 51% 24% 13% -7% 11% 55% 17% 17%
Gross profit 42% 80% 49% 65% 43% 23% 9% -10% 28% 59% 13% 16%
Operating profit 79% 256% 136% 153% 80% 41% -1% -21% 74% 147% 13% 17%
Net profit 77% 246% 153% 153% 82% 34% -8% -21% 72% 151% 10% 16%
EPS (basic) 77% 246% 153% 153% 82% 34% -8% -21% 72% 151% 10% 16%
EPS (FD) 77% 245% 153% 153% 82% 34% -8% -21% 72% 151% 10% 16%
Source: Company, Daiwa estimates and forecasts

GUC: 3Q22 earnings review and 4Q22 outlook

3Q22 Variance Growth 4Q22E
TWDm Actual Daiwa Consensus Daiwa Consensus QoQ YoY Guidance Daiwa (previous)
Revenue 6,062 6,062 5,694 0% 6% 13% 69% Positive 4Q22 with strong NRE QoQ growth up 5% QoQ
Gross profit 2,114 2,054 1,954 3% 8% 12% 49% GM: better product mix vs. 3Q22 33%
Operating profit 1,146 963 806 19% 42% 38% 136%
Pretax profit 1,230 968 842 27% 46% 37% 150%
Net profit 1,058 822 706 29% 50% 39% 153%
FD EPS (TWD) 7.90 6.11 5.25 29% 51% 40% 154%
Margin
Gross 34.9% 33.9% 34.3% 1.0% 0.6%
Operating 18.9% 15.9% 14.2% 3.0% 4.8%
Net 17.5% 13.6% 12.4% 3.9% 5.1%
Source: Company, Daiwa estimates and forecasts

GUC: revenue breakdown by application GUC: 4-quarter forward PER bands

(TWD)
100%
1,000

80% 800

600
60%
400
40% 200

20% 0
Nov-06

Nov-08

Nov-10

Nov-12

Nov-18

Nov-20

Nov-22
Nov-14

Nov-16
Mar-08

Mar-10

Mar-12

Mar-14

Mar-16

Mar-18

Mar-20

Mar-22
Jul-07

Jul-09

Jul-11

Jul-13

Jul-15

Jul-17

Jul-19

Jul-21

0%
1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 Share price 10x 20x
30x 40x 50x
Networking Digital Consumer Industry AI/ML Others 60x
Source: Company, Daiwa estimates Source: TEJ, Daiwa forecasts

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 Global Unichip (3443 TT): 27 October 2022

Financial summary
Key assumptions
Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
Non-recurring engineering revenue
4.5 54.4 (21.4) 43.9 1.2 37.6 18.2 20.3
growth (%)
Mass production (turnkey) revenue
41.2 (1.1) (21.6) 18.6 18.3 62.2 15.9 15.6
growth (%)
Others revenue growth (%) 28.4 (15.8) 47.9 36.5 (17.8) 76.0 16.6 18.5

Profit and loss (TWDm)

Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
NRE 2,642 4,079 3,206 4,614 4,668 6,424 7,591 9,132
MP (Turnkey) 9,266 9,168 7,189 8,525 10,086 16,360 18,961 21,918
Other Revenue 253 213 315 430 353 622 725 860
Total Revenue 12,161 13,460 10,710 13,569 15,108 23,406 27,277 31,910
Other income 0 0 0 0 0 0 0 0
COGS (8,996) (9,443) (7,180) (9,499) (9,878) (15,103) (17,912) (21,027)
SG&A (606) (647) (593) (603) (758) (910) (1,026) (1,154)
Other op.expenses (1,628) (2,274) (2,239) (2,504) (2,798) (3,261) (3,689) (4,309)
Operating profit 931 1,096 697 964 1,674 4,131 4,650 5,420
Net-interest inc./(exp.) 17 27 22 9 9 36 46 56
Assoc/forex/extraord./others 41 13 64 29 58 136 60 60
Pre-tax profit 989 1,135 783 1,002 1,741 4,304 4,756 5,536
Tax (134) (147) (150) (152) (281) (635) (738) (858)
Min. int./pref. div./others 0 0 0 0 0 0 0 0
Net profit (reported) 855 988 633 850 1,460 3,669 4,018 4,678
Net profit (adjusted) 855 988 633 850 1,460 3,669 4,018 4,678
EPS (reported)(TWD) 6.379 7.374 4.727 6.343 10.896 27.379 29.985 34.908
EPS (adjusted)(TWD) 6.379 7.374 4.727 6.343 10.896 27.379 29.985 34.908
EPS (adjusted fully-diluted)(TWD) 6.350 7.331 4.714 6.323 10.856 27.276 29.872 34.777
DPS (TWD) 3.500 5.000 5.000 5.000 5.000 7.000 13.000 15.000
EBIT 931 1,096 697 964 1,674 4,131 4,650 5,420
EBITDA 1,187 1,510 1,295 1,642 2,345 4,908 5,469 6,371

Cash flow (TWDm)

Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
Profit before tax 989 1,135 783 1,002 1,741 4,304 4,756 5,536
Depreciation and amortisation 256 413 598 678 672 776 819 951
Tax paid (134) (147) (150) (152) (281) (635) (738) (858)
Change in working capital (312) (721) (754) (154) (813) (1,517) 1,094 (2,265)
Other operational CF items 1,129 (453) (370) 1,916 2,912 (400) (300) (300)
Cash flow from operations 1,928 227 108 3,290 4,231 2,528 5,632 3,064
Capex (143) (529) (490) (161) (92) (187) (218) (255)
Net (acquisitions)/disposals 0 0 0 0 0 0 0 0
Other investing CF items (170) (214) (245) (1,041) (1,700) (350) (350) (350)
Cash flow from investing (313) (743) (735) (1,202) (1,792) (537) (568) (605)
Change in debt 0 0 0 0 0 0 0 0
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (469) (670) (670) (670) (670) (938) (1,742) (2,010)
Other financing CF items 3 0 (57) (61) (64) 0 0 0
Cash flow from financing (466) (670) (727) (731) (734) (938) (1,742) (2,010)
Forex effect/others (9) 2 (11) (1) (15) 0 0 0
Change in cash 1,140 (1,184) (1,365) 1,355 1,690 1,053 3,321 449
Free cash flow 1,784 (302) (382) 3,129 4,139 2,341 5,413 2,809
Source: FactSet, Daiwa forecasts

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 Global Unichip (3443 TT): 27 October 2022

Financial summary continued …

Balance sheet (TWDm)
Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
Cash & short-term investment 5,090 3,963 2,867 4,627 7,717 8,770 12,091 12,540
Inventory 1,153 1,275 1,778 1,674 2,789 3,997 3,364 5,277
Accounts receivable 917 910 1,418 1,174 1,513 2,591 2,192 3,403
Other current assets 265 480 553 742 1,609 1,609 1,609 1,609
Total current assets 7,425 6,629 6,616 8,218 13,628 16,967 19,256 22,830
Fixed assets 547 1,192 1,313 1,084 912 750 600 427
Goodwill & intangibles 324 288 412 444 318 241 140 (33)
Other non-current assets 0 0 0 0 0 0 0 0
Total assets 8,295 8,109 8,341 9,746 14,858 17,958 19,996 23,224
Short-term debt 0 0 0 0 0 0 0 0
Accounts payable 1,626 1,228 1,535 1,061 1,850 2,619 2,681 3,541
Other current liabilities 2,520 2,407 2,104 3,831 7,353 6,953 6,653 6,353
Total current liabilities 4,146 3,635 3,638 4,892 9,203 9,572 9,334 9,894
Long-term debt 64 53 0 0 0 0 0 0
Other non-current liabilities 38 55 390 367 392 392 392 392
Total liabilities 4,248 3,743 4,028 5,259 9,594 9,964 9,726 10,285
Share capital 1,340 1,340 1,340 1,340 1,340 1,340 1,340 1,340
Reserves/R.E./others 2,707 3,026 2,973 3,147 3,923 6,654 8,930 11,598
Shareholders' equity 4,047 4,366 4,313 4,487 5,263 7,994 10,270 12,938
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 8,295 8,109 8,341 9,746 14,858 17,958 19,996 23,224
EV 52,331 53,447 54,490 52,730 49,639 48,586 45,265 44,817
Net debt/(cash) (5,026) (3,910) (2,867) (4,627) (7,717) (8,770) (12,091) (12,540)
BVPS (TWD) 30.201 32.579 32.184 33.482 39.275 59.654 76.639 96.547

Key ratios (%)

Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
Sales (YoY) 30.9 10.7 (20.4) 26.7 11.3 54.9 16.5 17.0
EBITDA (YoY) 38.1 27.2 (14.2) 26.7 42.9 109.3 11.4 16.5
Operating profit (YoY) 49.5 17.8 (36.4) 38.3 73.7 146.8 12.6 16.5
Net profit (YoY) 55.1 15.6 (35.9) 34.2 71.8 151.3 9.5 16.4
Core EPS (fully-diluted) (YoY) 55.4 15.5 (35.7) 34.1 71.7 151.2 9.5 16.4
Gross-profit margin 26.0 29.8 33.0 30.0 34.6 35.5 34.3 34.1
EBITDA margin 9.8 11.2 12.1 12.1 15.5 21.0 20.1 20.0
Operating-profit margin 7.7 8.1 6.5 7.1 11.1 17.7 17.0 17.0
Net profit margin 7.0 7.3 5.9 6.3 9.7 15.7 14.7 14.7
ROAE 22.1 23.5 14.6 19.3 30.0 55.4 44.0 40.3
ROAA 11.5 12.0 7.7 9.4 11.9 22.4 21.2 21.6
ROCE 23.7 25.7 16.0 21.9 34.3 62.3 50.9 46.7
ROIC (137.1) (365.0) 59.3 125.2 (108.2) (218.1) (302.6) (643.8)
Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cash
Effective tax rate 13.5 13.0 19.1 15.1 16.1 14.7 15.5 15.5
Accounts receivable (days) 25.5 24.8 39.7 34.9 32.5 32.0 32.0 32.0
Current ratio (x) 1.8 1.8 1.8 1.7 1.5 1.8 2.1 2.3
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 85.1 78.4 67.8 105.8 78.8 64.2 47.5 50.0
Free cash flow yield 3.1 n.a. n.a. 5.5 7.2 4.1 9.4 4.9
Source: FactSet, Daiwa forecasts

Company profile

Founded in 1998, GUC is an IC design service provider focusing on AI/HPC, networking, consumer and
industrial applications.

4
 Global Unichip (3443 TT): 27 October 2022

ESG analysis
ESG risks
Risks Management Analyst comments
GUC's Board of Directors (BoD) has 9 members, including 5 independent directors, representing
over 50% of total directors, much higher than the regulatory requirement of at least 20%.
Executive/board Although all non-independent directors are the representatives of TSMC (2330 TT, GUC's
1
quality largest shareholder), the high percentage of independent directors could help diversify the
background of the BoD. Its Chairman and President are not the same person but both are
representatives of TSMC.
Over the past 10 years, GUC's dividend payout ratio has remained above 60% and at above
G
80% for the majority of the period. Also, its dividend policy is to maintain the dollar amount of
Capital management 1 cash dividend if not increase it, as evidenced by its cash dividend pattern over the past 10 years.
Since GUC is an IC design service company without the need for capex investment for onsite
production, we see its high dividend payout ratio as appropriate.
GUC's sole foundry supplier is TSMC, who is also GUC's largest shareholder. As an IC design
Related party &
1 service company without onsite production, GUC's relationship with the leading foundry of
transaction
advanced process nodes provides it a key competitive advantage, in our view.
GUC is committed to maintaining long-term partnerships with suppliers and establishing a
sustainable supply chain through measures such as promoting its green action policy and
Supply chain concept to the entire supply chain, where all its suppliers are required to follow its Responsible
S 2
management Business Alliance (RBA) regulation. It also periodically conducts supplier audits to ensure the
quality of suppliers.
In 2020, GUC had 53 suppliers, with 94% of them receiving the ISO14001 certification.
GUC has initiated its green living project to reduce water consumption, where it has reduced its
Water & wastewater wafer intensity (water consumption/yearly revenue) to 0.12% in 2020 from 0.18% in 2016 with
E 1
management measures such as using rainwater recycling systems/automatic faucets, regular inspection of
water equipment and promoting water conservation measures.
As an IC design service provider, GUC does not have in-house manufacturing facilities. It
Waste & hazardous
requires its suppliers to use recycled materials for on-site operation and transportation, and
E materials 1
reduce the amount of expendable resources being used. In order to promote a paperless office,
management
GUC has established a cloud operating system to reduce the use of paper-based documents.

In 2020, GUC reduced its electricity consumption by 5% YoY. GUC also adopts energy saving
methods to reduce GHG emissions with a long-term goal of 1% electricity conservation per year
E GHG emissions 1
on its 5-year energy-saving plan. In addition, GUC is committed to developing low-power IP or
new IP with improved efficiency to reduce the impact to environment.

Note: Management score represents a company's ability to manage/benefit from certain ESG topics. The scores range from 1 to 3, with 1 being the strongest.
Source: Daiwa

5
 Global Unichip (3443 TT): 27 October 2022

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There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited and Associates of Daiwa India
having office in India but not registered with any Indian regulators include Daiwa Corporate Advisory India Private Limited.
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This research is solely for reference and not intended to provide tailored investment recommendations. This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd. and it
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affiliates, nor any of the foregoing entities’ respective directors, officers, servants and employees make any representation or warranty, express or implied, as to their accuracy or completeness.

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Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
Daiwa Securities Group Inc., its subsidiaries and affiliates and their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this
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The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months.
"2": the security is expected to outperform the local index by 5-15% over the next 12 months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months.
"4": the security is expected to underperform the local index by 5-15% over the next 12 months.
"5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings

Rating Percentage of total
Buy* 80.62%
Hold** 16.42%
Sell*** 2.96%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2022.
* comprised of Daiwa’s Buy and Outperform ratings.
** comprised of Daiwa’s Hold ratings.
*** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following
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 In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the
purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
 In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
 For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount
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real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
 There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
 Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of
each transaction etc.

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When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding
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