Report To Shareholders

Up-to-date facts and figures on our company to you

For future development, we will make continual improvement to pursue sustained operations.

Dear Shareholders:

In 2017, TSRC experienced one of the most challenging periods within the past couple of years with unprecedented butadiene price volatility, softened ESBR/BR demand, and intense pricing pressure. While we delivered a very good first quarter, we took a bad hit financially in the second quarter with a large quantity of high cost inventories. The team worked hard and managed to recover a good part of the financial hit over the third and fourth quarters. Our fundamental business and customer base remained stable. Overall, Synthetic Rubber Division (SRD) business suffered the biggest reduction in operating profit versus prior year while Advanced Materials Division (AMD) did better against the challenges with a smaller operating profit reduction.

In addition to the lower operating profit by the business units, we took an impairment loss of NTD 283 million due to the dissolution of Taiwan Advanced Materials Corporation (TAMC). The decision to dissolve TAMC was not taken lightly. The investment in TAMC was made in 2012 but market conditions changed significantly and the financial returns originally envisaged were no longer attainable. The approval for construction and environment assessment was delayed and no business activities were possible. The Board of Directors made the difficult decision to dissolve TAMC to prevent further and enlarged loss.

Despite the weaker operating profit, we made strong and positive improvements in the financial performance of our joint ventures, Indian Synthetic Rubber Private Limited (ISRPL) and ARLANXEO-TSRC, and achieved non-operating gains from sales of Taiwan High Speed Rail (THSR) shares.

The team made good progress in executing the key initiatives of our five-year growth plan. This included increasing sales of higher margin products (SEBS), gaining approval and beginning supply of Advanced Shoe Materials (ASM) to global brand partner, upgraded our R&D and technology facility in Kaohsiung, successfully converting of Kaohsiung ESBR and BR production lines to the distributed control system (DCS), and making significant progress in the development of SSBR technology, among many other achievements. These key initiatives are a foundation upon which TSRC can leverage to deliver higher profit growth over the next couple of years.

2017 Business Result

Business Performance

As articulated above, TSRC’s operating performance was behind prior year primarily due to poor synthetic rubber performance, TAMC impairment loss, offset by solid improvements at respective joint ventures with Indian Oil Corporation and ARLANXEO, and non-operating gains.

In total, the synthetic rubber and TPE product shipments reached 483 thousand metric tons in 2017, a reduction of 1% versus prior year. Consolidated revenue was NTD 31,766 million, an increase of 18% compared to NTD 26,955 million the previous year. Consolidated gross profit was down by 14% to NTD 3,329 million and margin was 10%, primarily due to rapid and dramatic fluctuation in butadiene price, excess supply of synthetic rubber in China, and continuous pricing pressure caused by market competition. Consolidated operating profit was NTD 1,203 million, a decrease of 32% compared to the previous year. The significant improvement in performance at our joint ventures and gains from the sales of THSR shares, offset the impairment loss of TAMC resulting in a net income of NTD 874 million, a 12% decrease versus prior year, while earnings per share (EPS) fell to NTD 1.06.

R&D Achievements

TSRC is one of the world’s leading providers of specialty materials and solutions in synthetic rubber and TPEs with a strong commitment to innovation, growth and excellence. The newly renovated state-of-the-art Technology Center in Kaohsiung, Taiwan enables the integration of advance product development and characterization facilities into the daily operation of TSRC. At the same time, we also started operation at our newly upgraded Semi-Commercial Plant (SCP) in Kaohsiung to accelerate new product and process development.

The key research projects and progress milestones in 2017 included:
• Development of new modifier and microstructure technology platforms to enable next generation products for superior tire performance.
• Development of unique catalyst system and capability to control microstructure of high-cis BR product for use in multiple industries including tires, shoe soles and plastic modification.
• Commercial scale production of green rubber materials to meet the environment-friendly policies and customer demands.
• Technology development in co-polymerization, hydrogenation catalyst, and product finishing platforms to support development of a new generation of HSBC products which provide excellent mechanical properties and touch feel, and can be applied to films, medical and automotive applications.
• Breakthrough in the development of a novel ultrahigh flow SIS product (patent pending) to meet global adhesive and elastic film markets’ growth and demands.
• Successful development of high vinyl SEBS with in-house structural modification and new process technologies for weather-durable and high transparency thin films for medical applications. This project received partial financial support from Taiwan’s Industrial Development Bureau.
•The Company was granted 8 patents in 2017.

2018 Business Outlook

Most reports hold a cautious optimism regarding global economic growth in 2018 with Europe continuing on a recovery path, stable growth in China (with the Belt and Road Initiative), accelerated growth in India and Southeast Asia, and a stable US economy. However, there are also uncertainties looming on the horizon due to the impact from Brexit, increasing support for economic protectionism, and potential eruptions/disruptions from war, terrorism, and natural disasters.

TSRC will continue to face tough market challenges in 2018 especially in China which is our largest market. Increasing operating cost, environmental compliance cost and risk, and freight & logistic costs coupled with limited pricing power (as a result of overcapacity and increased competition) are expected to add tremendous pressure on TSRC to realize our targeted profitability. Nevertheless, we do not expect, in 2018, to face all of the same negative factors from 2017. We will continue to leverage on the progress we have made on our five-year growth plan initiatives and focus on growing our operating profit and expanding our position in specialty applications and market segments. In addition, we have started the project of constructing a new 20,000 metric tons SEBS line in Nantong, China, scheduled to be operational mid-2019. This new line will incorporate new processes and technologies and enable TSRC to grow and strengthen our market position in TPE via selling into applications which require higher performance and quality materials.

TSRC turns 45 years old in 2018. This is an important milestone for TSRC. We recall the very humble beginnings of TSRC where we didn’t have our own technology, had only one (1) plant in Kaohsiung, and had a very limited number of local customers. Today, TSRC possesses multiple polymer technologies and expertise, ten (10) production plants across Asia and North America, and a worldwide presence and global customer base. This is quite an achievement!

This significant transformation has been possible due to two key factors. Firstly, the spirit of continuous improvement and the can-do attitude embodied in the heart of our founder and passed on through the generations of TSRC employees, and second, the people of TSRC. The many dedicated employees at TSRC, past and present, have made sacrifices and overcome many challenges to lead us to where we are today. For this, we are being deeply grateful. We will continue to work smart and deliver a strong result worthy of our 45th anniversary and the unwavering support from our shareholders.

Shao-Yu, Wang

Chairman Shao-Yu, Wang | TSRC