100510 韓國半導體及lcd設備產業報告

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT. Global Equity Research

Industry Report

7 May 2010 (No. of pages: 48)

Korea Semiconductor and LCD Equipment Sector

Electronics: Korea

PositiveJae H. Lee(82) 2 787 9173

[email protected]

Initiation of coverage: benefitting from a capital-spending bonanza

Summary We initiate coverage of three semiconductor and LCD-equipment companies in Korea: Jusung

Engineering (Jusung) and KC Tech with 1 (Buy) ratings, and SFA Engineering (SFA) with a 2 (Outperform) rating.

In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both semiconductor and LCD-panel makers are now trying to add capacity as fast as they can and are competing for the equipment that would enable them to do so. As we forecast capex increases for 2010 of 63% YoY for the global semiconductor industry and 53% YoY for the LCD industry, we expect Korean equipment-making companies to benefit from rising order intakes throughout this year.

Since the semiconductor and LCD industries are highly cyclical in nature, we believe that the equipment companies face significant challenges maintaining their profitability, especially during industry downturns. However, over the past few years, Korean equipment companies have started to explore new markets, such as solar-cell, LED, and AMOLED equipment. As end-product demand expands further for these markets, we expect the opportunities for Korean equipment companies to increase.

Following the drastic cutbacks on spending in 2009, Korean semiconductor and LCD-panel makers have been adding new capacity aggressively. We forecast a 96% YoY increase in domestic semiconductor capex and a 61% YoY rise in domestic LCD capex for 2010. While there are more than 20 listed equipment manufacturers in Korea, we like Jusung, KC Tech, and SFA, due mainly to their diversified product mixes and customer bases, which we believe would bolster their revenue and earnings over the next three years.

Korea Semiconductor and LCD Equipment Sector: valuation summary

PER (x)

EV/EBITDA (x)

Dividend yield (%) Company

name Bloomberg code

Share price 3-May-10

(local curr.) Rating Target price (local curr.)

+/- (%)

Year end 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E

Jusung Engineering 036930 KS 20,500 1 28,000 36.6 Dec n.m. 15.5 11.7 10.6 38.3 10.3 8.2 7.4 0.0 0.0 0.0 0.0 KC Tech 029460 KS 7,010 1 9,200 31.2 Dec 21.1 9.7 7.5 6.6 12.6 6.7 4.8 3.9 0.4 0.7 1.1 1.1 SFA Engineering 056190 KS 58,800 2 75,000 27.6 Dec 29.7 16.3 12.7 12.0 22.5 11.2 8.3 7.5 0.7 1.3 1.4 1.5 Source: Companies, Daiwa forecasts

Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 2

Contents

The three most important charts in this report ... ..............................................................3

Executive summary...........................................................................................................4

Increasing opportunities for equipment makers................................................................5

Increasing presence in ‘clean’ tech .................................................................................10

Our focus on diversified players .....................................................................................16

Appendix.........................................................................................................................22

Company section

Jusung Engineering..................................................................................................23

KC Tech...................................................................................................................29

SFA Engineering .....................................................................................................35


The three most important charts in this report ... Shipment volume for key IT and consumer products

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Global LCD-equipment market

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Executive summary Increasing opportunities for Korean equipment companies

Since 2Q09, end-product demand has continued to provide upside surprises. The introduction of various stimulus packages in early 2009, followed by an economic recovery from late 2009, have resulted in upward revisions to demand forecasts by Daiwa and market-research firms for key electronics products. In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both semiconductor and LCD-panel makers are now trying to add capacity as fast as they can, and are competing for the equipment that would enable them to do so. As we forecast capex increases for 2010 of 63% YoY for the global semiconductor industry and 53% YoY for the LCD industry, we expect Korean equipment-making companies to benefit from rising order intakes throughout this year. Increasing exposure to new products

Since the semiconductor and LCD industries are highly cyclical in nature, we believe that the equipment companies face significant challenges maintaining their profitability, especially during industry downturns. In addition, equipment companies need to continually enhance their existing products and create new markets with new products to sustain or gain market share. Over the past few years, Korean equipment companies have started to explore new markets, such as solar-cell, LED, and AMOLED equipment. As end-product demand expands further for these markets, we would expect opportunities for Korean equipment companies to increase. We are positive on the earnings outlook for Korean equipment companies

Following the drastic cutbacks on spending in 2009, we forecast a 96% YoY increase in domestic semiconductor capex and a 61% YoY rise in domestic LCD capex for 2010. Among LCD companies, LG Display (LGD) (034220 KS, W46,700, 3) is the most aggressive in terms of its planned capacity expansion, with a capex budget of over W5.5tn for FY10. Meanwhile, we forecast a substantial increase in Samsung Electronics’ (SEC) (005930 KS, W832,000, 2) capex for FY10, as we expect SEC to build new capacity for memory chips and a new LCD production line. While there are more than 20 listed equipment manufacturers in Korea, we initiate coverage on just three companies (Jusung, KC Tech, and SFA), due mainly to their diversified product mixes and customer bases. Jusung Engineering: We initiate coverage with a 1 (Buy) rating and a six-month target price of W28,000. Jusung is our top pick among Korean equipment companies, and we expect it to record robust revenue growth for FY10 on the back of a large order intake for solar-cell equipment. Jusung is testing metal-oxide chemical vapour deposition (MOCVD) reactors currently for mass production, and could receive orders from domestic LED-chip companies from 2Q FY10. KC Tech: We initiate coverage with a 1 (Buy) rating and a six-month target price of W9,200. We forecast KC Tech to announce record-high revenue for FY10 due to its rising exposure to semiconductor materials, as well as increasing orders from semiconductor and LCD-panel makers. KC Tech is one of the few domestic equipment companies that supply the same product to multiple customers, since the company has accumulated the necessary experience and technology. SFA Engineering: We initiate coverage with 2 (Outperform) rating and a six-month target price of W75,000. We believe that SFA would be a key beneficiary of SEC’s LCD-capacity expansion and, with the recent equity participation of SEC, the company is a strong contender to supply plasma-enhanced (PE) CVD equipment to SEC for the first time this year. SFA is also developing AMOLED equipment, which we believe has huge growth potential over the longer term.

We believe Korean equipment companies are likely to benefit from rising capex

Potential new opportunities in solar-cell, LED, and AMOLED equipment

We focus on firms with diversified products and customer bases


Increasing opportunities for equipment makers Since 2Q09, end-product demand has continued to provide upside surprises. The introduction of various stimulus packages in early 2009, followed by an economic recovery from late 2009, have resulted in upward revisions to demand forecasts by Daiwa and market-research firms for key electronics products. Our latest forecast for global PC shipments is for a 15.1% YoY increase for 2010, compared with a 4.7% YoY rise for 2009. Driven by strong consumer demand, PC shipments have recovered fully after a weak start in 1Q09. However, as we expect the corporate replacement cycle to accelerate in 2H10, we believe there could be further upside to our PC shipment forecasts. As for mobile handsets, we forecast increasing demand for smartphones to lead to healthy handset-volume growth of 11.3% YoY for 2010, compared with a 0.9% YoY decline for 2009. We have also revised up our forecast for 2010 LCD-TV shipment volume to 190m units from 169m units previously. Although we forecast the volume growth rate to slow going forward, due to the high penetration rate for flat-panel TVs in developed markets, we expect demand in China and other emerging markets to support double-digit percentage growth annually for the next couple of years. On a quarterly basis, the shipment volume of core IT and consumer products at the end of 2009 surpassed the peak level recorded in 2008, and we expect this to continue to expand throughout 2011.

Shipment volume for key IT and consumer products

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Daiwa shipment-growth forecasts (YoY %) PC Handset Total TV Semiconductor2008 +10.4 +6 +4.1 -3.52009 +4.7 -0.9 +1.7 -5.62010E +15.1 +11.3 +11.5 +15.0-17.02011E +10.3 +10.1 +4.3 +7.0-9.0Source: Daiwa In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both semiconductor and LCD-panel makers have been increasing their capital spending aggressively in 2010. Although capital spending by semiconductor and LCD-panel makers hit a past-five-year low in 2009, we forecast capex increases for 2010 of 63% YoY for the global semiconductor industry and 53% YoY for the LCD industry, driven by the expansion of new production capacity and migration to finer process technology.

Due to strong end-product demand, semiconductor and LCD-panel makers are increasing their capex aggressively


Semiconductor capex likely to rise strongly for 2010 The leading indicators show that the semiconductor cycle is in the midst of a cyclical uptrend, and we expect industry-wide shipments and utilisation rates to continue to improve throughout 2010, providing greater opportunities for semiconductor equipment companies.

ISM index and semiconductor cycle

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Source: US Department of Commerce Following one of its worst-ever downturns, the DRAM industry continues to recover on the back of muted supply growth amid robust PC demand. We forecast the DRAM industry’s capex to increase 109% YoY to US$10.3bn for 2010, due to improving profitability and cash flow. Meanwhile, we also forecast foundry capex to increase by 123% YoY to US$9.2bn for 2010, due to rising utilisation rates and increasing outsourcing to the foundry industry as many integrated device manufacturers are losing market share to fabless companies. Given the strong capex increases for memory chips and the foundry sector, we forecast global semiconductor capex to increase to US$33.9bn for 2010 from US$20.8bn for 2009. While the sharp increase in capital spending may raise some concerns in the market about the potential for excess capacity beyond 2010, we do not believe that capital intensity (capex/sales) for the industry is running high. We forecast the capital intensity for the global semiconductor industry to reach 12.1% for 2010, compared with a range of 9.2-20.8% (average of 14.4%) over the past three years.

We forecast global semiconductor capex to increase by 63% YoY for 2010


Global semiconductor capex and capital intensity trend

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Source: Companies, WSTS, Daiwa forecasts Although Korea has accounted for 18-24% of the global semiconductor equipment market over the past five years, the exposure of domestic equipment companies is relatively small, since just a few players specialise in front-end semiconductor equipment due to technological and intellectual-property barriers. Among the most expensive tools, lithography machines are purchased mainly from ASML Holding (Not rated), while other front-end equipment is procured through Applied Materials (Not rated) and Tokyo Electron (8035 JP, ¥6,210, 1). According to the Korea Semiconductor Industry Association (KSIA), equipment purchases by Korean chip makers through domestic companies have accounted for an average of 20% (10% for front-end and 30-40% for back-end) of total purchases over the past five years. However, as Korean memory-chip makers are planning to incur over W10tn of capex for 2010, compared with W5tn for 2009, we expect equipment makers to benefit despite the low domestic equipment sourcing rate.

Korea’s semiconductor equipment market

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Source: KSIA, Daiwa forecasts Pending China project could provide further upside to LCD capex Emerging markets (particularly China) remain the key driver of LCD-TV demand, and defied the historical seasonal patterns between 4Q09 and 1Q10. Although weaker-than-expected TV sell-through during the Lunar New Year resulted in higher inventory levels (two-to-three weeks higher than normal levels) in the channel, we do not foresee a sharp inventory correction in the near term, as we believe lower panel prices are likely to lead to inventory rebuilding in 2H10.

We forecast global LCD capex to increase by 53% YoY for 2010


Given what we see as the healthy outlook for the LCD-panel market in 2010, we expect the earnings volatility of the panel makers to decrease and, as a result, spending on equipment to rise going forward. Many of the leading panel makers are scrambling to add capacity, as their utilisation rates are running at close to 100% currently. According to DisplaySearch, 2008 was the biggest year ever for capital spending on LCD equipment, while spending dipped substantially for 2009, due to sharp panel-price declines during 3Q08-1Q09. However, DisplaySearch expects global spending on LCD equipment in 2010 to return to near the 2008 level, at US$13.2bn.

Global LCD-equipment market

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Source: DisplaySearch Meanwhile, Korean panel makers are becoming more aggressive about adding capacity. LGD has announced that it will build an extension to its second Gen8 line (Line P8E+), taking its total Gen8 line capacity to more than 300,000 substrates a month by mid-2011, from 120,000 substrates a month currently, and has also decided to incur over W5.5tn of capex for FY10. We also expect SEC to equip its fourth Gen8 production line by the end of this year, and now forecast its FY10 LCD capex to rise to W4.5tn, from W3.0tn previously. Given that the two Korean panel makers’ capex may rise to W10tn for 2010, we forecast global LCD capital spending to increase by 53% YoY to US$19.6bn, which would represent a past-10-year high. With respect to the capital intensity of the LCD market, we forecast a capex-to-revenue ratio of 23% for 2010, which is near the high end of the past-three-year range of 16-25%.

Global LCD capex and capital intensity

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We believe LCD-TV demand in China will remain strong for the next three years, and panel makers are rushing to build new production lines there. Combined with the CRT-TV replacement trend and the government’s stimulus package, we forecast LCD-TV demand in China to increase by 45% YoY to 42.6m units for 2010, from 29.3m units for 2009. The leading panel makers globally plan to set up new lines in China, since local TV manufacturers have the lion’s share of China’s LCD-TV market and the PRC Government may impose a higher import duty on LCD panels (from 3% currently to 5% or higher in the future). Although there are several Gen5 lines running already in China, the PRC Government has approved the construction of three new Gen8 lines by local panel makers. BOE’s (Not rated) Gen8 line in Beijing (capacity of 90,000 substrates per month), IVO’s (Not listed) Gen8 line in Kunshan (capacity of 90,000 substrates per month), and TCL’s (Not rated) Gen8 line in Shenzhen (capacity of 60,000 substrates per month) are confirmed for mass production starting from the middle to end of 2011. Other potential projects pending the PRC Government’s approval include SEC’s Gen7.5 line in Suzhou, LGD’s Gen8 line in Guangzhou, AU Optronics’ (Not rated) Gen7.5 line in Suzhou, Chimei Innolux’s (Not rated) Gen7.5 line in Chengdu, and CEC-Panda and Sharp’s (6753 JP, ¥1,226, 3) Gen8 line in Nanjing. The PRC Government could grant approvals for two-to-three additional new production lines in China. Should Korean panel makers win such approval, we believe this could provide further upside for orders for Korean equipment makers. Unlike for semiconductor equipment, the local sourcing ratio for LCD equipment is much higher, at 50-60%. Since two Korean panel makers have the largest market shares globally, they have been setting industry standards, such as glass substrate sizes, and local equipment companies have worked closely with them from the early stages of development while offering competitive prices for their equipment.

New LCD production-line projects in China Company Location Investment Production startGen6 BOE Heifei US$2.5bn 4Q10CEC Nanjing US$2.0bn 1Q11Gen7.5 Samsung Electronics Suzhou US$2.4bn 4Q11AU Optronics Suzhou US$3.0bn 1Q12Chimei Innolux Chengdu TBD 2Q12Gen8 BOE Beijing US$4.0bn 3Q11CEC (Sharp) Nanjing US$4.0bn 4Q11IVO Kunshan US$4.0bn 4Q11TCL Shenzen US$3.6bn 4Q11LG Display Guangzhou US$4.0bn 2Q12 Source: Companies, Daiwa


Increasing presence in ‘clean’ tech Since the semiconductor (particularly memory chips) and LCD industries are highly cyclical in nature, we believe that equipment companies face significant challenges maintaining their profitability, especially during industry downturns. In addition, equipment makers need to continually enhance their existing products and create new markets with new products to sustain or gain market share. Over the past few years, Korean semiconductor and LCD-equipment companies have started to explore new markets, such as solar-cell, LED, and AMOLED equipment. Among the top-15 listed Korean equipment companies, Jusung and IPS (Not rated) have made the biggest progress in solar-cell equipment, as their proportions of solar-cell equipment sales increased to 39% and 43% for 2009 from 11% and 3% for 2007, respectively. Meanwhile, a handful of other equipment companies are preparing to enter the solar-cell equipment market in anticipation of supplying systems to SEC and LG Electronics (LGE) (066570 KS, W119,500, 2), since both companies plan to expand their solar-cell businesses over the next few years.

Korean equipment companies’ segment revenue breakdown Bloomberg Mkt cap 2009 rev. 2009 revenue breakdown (%)

Company code (Wbn) (Wbn) Semi LCD Solar OthersSemes Not listed n.a. 316 70 23 0 7Jusung Eng 036930 KS 673 170 28 33 39 0SFA 056190 KS 536 307 0 50 0 50EO Technics 039030 KS 306 81 63 28 0 10DMS 068790 KS 276 153 11 84 0 5Atto 030530 KS 273 91 100 0 0 0IPS 051820 KS 236 50 26 17 43 14KC Tech 029460 KS 219 96 7 67 0 25Hanmi Semi 042700 KS 214 75 78 0 6 16PSK 031980 KS 186 33 81 0 0 19Eugenetech 084370 KS 187 49 97 0 0 3LIG ADP 079950 KS 164 86 0 98 0 2Hanyang Eng 045100 KS 147 121 15 30 0 55Osung LST 052420 KS 127 127 11 30 1 58Top Eng 065130 KS 115 101 0 89 0 11SNU 080000 KS 111 34 0 77 23 0 Source: Companies, Bloomberg, Daiwa

Note: share prices as at the close on 3 May Meanwhile, as we forecast a strong increase in demand for LED chips for 2010, due to proliferation of LED TVs, we expect two largest LED-chip makers globally, Samsung LED (Not listed) and LG Innotek (011070 KS, W170,000, 2), to work more closely in developing MOCVD reactors with domestic equipment companies. Until now, Samsung LED and LG Innotek have purchased MOCVD reactors primarily from Aixtron (Not rated) and Veeco (Not rated), but as core equipment has been a bottleneck in LED-chip production due to tight supply, they have formed tie-ups with Korean equipment companies. In AMOLED, the core processing equipment market is dominated mainly by Japanese manufacturers, such as Tokki (Not rated) and Ulvac (Not rated). Although Samsung Mobile Display (SMD) (Not listed) is the undisputed leader in AMOLED, with a 98% share of the global market for 2009, SMD has not purchased any AMOLED equipment from Korean equipment companies in the past. However, as SMD’s current Gen4 (730mmx460mm) line will reach full capacity of 50,000 substrates per month by the end of 2010, we expect the company to add a Gen5.5 (1,500mmx1,350mm) in 2011, which we believe would give Korean equipment companies the opportunity to provide AMOLED equipment to SMD.

Korean equipment makers have started to explore solar-cell, LED and AMOLED equipment


Solar: industry’s revenue growth should resume from 2010 Following the exponential growth between 2004 and 2008, revenue for the photovoltaic (PV) system market declined by 37% YoY to US$23.4bn for 2009 due to weak demand at the start of the year and high inventory levels in the value chain. In 2010, overcapacity remains an issue for the solar industry, and we believe this is likely to continue throughout 2010, due to the further ramp-up of new production capacity. In addition, a reduction in Germany’s feed-in tariff from July has raised some concerns in the market about a potential decline in shipments. However, as we expect Italy, France, the Czech Republic and Benelux countries to account for about 2GW of demand, we forecast capacity additions to total 9.5GW for the industry in 2010.

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Source: Daiwa forecasts On the supply side, we forecast the capacity of the top-14 solar-cell companies to increase to about 12GW for 2010. Notably, PRC solar-cell companies are taking the most aggressive approach to gaining market share. In Korea, Hyundai Heavy Industries (009540 KS, W251,000, 3) is the largest solar-cell producer, with a current capacity of 330MW, but plans to raise this to 1GW by end of 2012. Meanwhile, LGE started a 120MW production line in early 2010, and plans to double its capacity in 2011. SEC is a relative latecomer to the market and currently has an R&D line with a capacity of 30MW, but the company plans to increase this to 130MW by the end of 2010. As Korean solar-cell companies plan to continue to increase their capacity over the next few years, we would expect equipment companies to benefit.

Capacity of the top-14 solar-cell companies (MW) 2007 2008 2009E 2010EFirst Solar 308 716 1,189 1,241Suntech 480 1,000 1,000 1,200Sharp 710 710 900 1,180Q-Cells 645 760 800 950JA Solar 175 600 875 950SolarWorld 250 400 750 900Yingli 200 400 600 800Trina 150 350 600 800Motech 240 450 600 700Solarfun 240 360 510 700Sunpower 214 414 574 650Kyocera 220 360 450 600Sanyo 350 340 340 565Gintech 180 460 500 550Total 4,362 7,320 9,688 11,786 Source: Companies, Daiwa forecasts

Potentially more opportunities for equipment companies as SEC and LGE expand their solar-cell businesses


Jusung has been one of the more active players in the solar-cell equipment market over the past three years. The company won four thin-film turnkey projects in 2009 worth a total of more than W150bn, with three of these from solar companies in the PRC. Jusung is also working closely with LGE and one large US solar-cell company to supply core equipment in FY10. Although 80% of the solar-cell equipment orders received by Jusung during FY09 were based on thin-film technology, Jusung is expanding rapidly, using discrete equipment for silicon-based solar cells, as well as a hybrid system that the company believes will bolster its market exposure in the future. Jusung focuses primarily on supporting its customers to reach grid parity, rather than just selling equipment, which has resulted in several turnkey projects. IPS supplies CVD equipment to a few solar-cell companies in Japan and Korea, and we expect the company to work more closely with SEC as a result of the recent cash injection. In March, IPS issued W22bn worth of convertible bonds to SEC, effectively placing a 17.5% stake at the time of issue. We also believe Semes (Not listed) could become one of the major players in domestic solar-cell equipment market, as the company already supplies core semiconductor and LCD equipment to SEC. Semes was formed in 1992 as a joint-venture between SEC and Dainippon Screen Mfg. (7735 JP, ¥535, 2), and these two companies hold 64% and 22% stakes, respectively, in Semes. LED: everyone’s thinking big in LED TVs We believe 2010 will be a breakthrough year for LED TVs, as we forecast LED-TV shipments to increase to 38.5m units for 2010 from 4.2m units for 2009. Since SEC has been marketing LED TVs successfully (focusing on the benefits of thinner design, improved colour gamut, and brightness) and had a lion’s share of the market in 2009, we expect other TV-set makers to become more aggressive about rolling out LED TVs in 2010. Our recent channel checks indicate that the major TV makers are revising up their LED-TV shipment targets for 2010 due to better-than-expected sell-through, and we believe that there could be further upside to our LED-TV shipment forecasts.

LED-TV shipment target for key brands LED-TV shipments ('000) TV brand 2009 2010E Focus inch sizeSamsung Electronics 2,600 15,000 19-65"LG Electronics 300 8,000 19-60"Sharp 500 6,000 19-68"Sony 200 5,000 32-60"Vizio 100 2,500 16-72"Skyworth 10 2,000 26-47"TCL 0 2,000 40-55"Funai 0 2,000 19"Panasonic 0 1,000 26"Toshiba 100 1,000 46-55"Total 3,810 44,500 Source: Companies, Daiwa forecasts We expect the cost reductions for backlight units to accelerate due to declines in the prices of components, including LED chips, and for this to boost the adoption rate for LEDs as a backlight source for LCD TVs and monitors. We forecast the price gap between LED TVs and conventional LCD TVs (with CCFL backlights) to narrow to 10-20% for 2010, from the 30-50% in 2009. As a result, we forecast adoption rates of LED backlights for LCD-TV to increase from 19% for 2010 to 54% for 2011 and 78% for 2012, and for those for monitors to rise from 17% for 2010 to 51% for 2011 and 78% for 2012.

Due to a sharp pick-up in demand for LED chips, orders for MOCVD reactors also rose strongly


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Source: DisplaySearch, Daiwa forecasts Due to the sharp increase in demand for LED chips, orders for MOCVD reactors also rose strongly during 2009. However, equipment vendors were not able to supply a sufficient number of reactors in time. At one point, the lead time for MOCVD tools increased to as much as 10 months. However, both Aixtron and Veeco have announced expansion plans to manage the record level of rising orders. Aixtron plans to expand its capacity to 150 MOCVD reactors per quarter by the end of 2010, up from 100 MOCVD reactors per quarter at the end of 2009. Meanwhile, Veeco plans to raise its overall MOCVD output capacity to 90 units per quarter by mid-2010. We forecast global MOCVD reactor shipments to increase to 720 units for 2010, from 246 units for 2009. We expect Aixtron to secure a 55-60% market share, Veeco 35-40%, and the rest to go to Taiyo Nippon Sanso (Not rated) and other small players. Although Applied Materials has announced that it plans to enter the MOCVD market, it has not delivered an effective product so far. Meanwhile, Korean equipment companies are co-operating closely with domestic LED-chip producers. LIG ADP (Not rated) is testing an MOCVD reactor currently with LG Innotek, and the company expects to start shipments from 4Q10. IPS is also developing MOCVD reactors with Samsung LED. Jusung delivered a test unit to a small LED-chip company in January, and plans to complete reliability tests by June. Jusung said it is currently discussing potential order contracts with a few LED-chip makers, as its reactors are more productive than those of its peers.

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Net installed base Shipments

(units)

Source: Daiwa


AMOLED: market appears set for strong growth The global AMOLED market increased to US$526m for 2009 from US$232m for 2008, surpassing the size of the passive matrix OLED (PMOLED) market for the first time since 1Q09. Due to SEC’s aggressive marketing push for its premium handsets with new display technology, SMD’s AMOLED shipments increased to 21m units for 2009 from 7m units for 2008. For 2010, SMD plans to expand its customer base to several major handset and digital-camera makers, and expects to ship over 40m AMOLEDs. As a few display companies have scrapped AMOLED projects over the past three years, SMD dominates the AMOLED market with a 98% share in terms of revenue for 2009.

Global OLED market (US$m)

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AMOLED PMOLED


Global OLED (AM and PM combined) market share Company Region 2009 revenue (US$m) YoY (%) M/S (%)Samsung Mobile Display Korea 566 90 69RiTdisplay Taiwan 106 (18) 13Pioneer Japan 60 (15) 7TDK Japan 42 15 5Visionox China 15 n.m. 2Others 28 (50) 3Total 816 37 100 Source: DisplaySearch Although we have little doubt that the AMOLED market will record strong shipment growth over the next five years, due to the superior image quality, faster response times, lower power consumption, and thinner form factor offered by AMOLED panels compared with conventional LCD panels, we believe that the core applications will be limited to mobile displays in the near future due to high production costs. In order for AMOLEDs to have an impact on the TV market, we believe that the glass substrate size for AMOLEDs would have to increase to that of LCDs, and be able to sustain similar production yields so that the companies can produce TV modules at commercially-viable costs. However, for mobile displays, the cost premium of AMOLED over LCD modules has narrowed. According to a recent cost-breakdown analysis by market research firm, iSuppli, the 3.7-inch AMOLED used in Google’s (Not rated) Nexus One model costs US$23.50, compared with US$19.25 for the 3.5-inch LCD module used in Apple’s (Not rated) iPhone 3GS and US$17.75 for the 3.7-inch LCD module used in Motorola’s (Not rated) Droid. As we expect AMOLEDs to be used mainly for displays in smartphones and many digital SLR cameras, we forecast the addressable market to increase at a CAGR of 44% over the next three years.

We believe Gen5.5 line investment will be the turning point for domestic equipment companies


Addressable market for AMOLED (m units) Smartphone SLR camera Total YoY (%)2006 80 5 85 47.72007 122 7 129 51.82008 139 10 149 14.82009 172 10 182 22.32010E 280 11 291 60.22011E 385 13 398 36.52012E 490 14 504 26.7 Source: CIPA, Daiwa forecasts In order for AMOLED to be adopted by the mass market, we believe that the number of AMOLED manufacturers would have to increase, as many set makers require multiple sources able to provide sufficient volume. SMD had one Gen4 (730mmx460mm) line with a capacity of 22,000 substrates per month at the end of 2009, but plans to ramp this up to 50,000 substrates per month by the end of 2010. Although SMD has not announced plans for a new production line, we expect the company to ramp up its Gen5.5 line (1,500mmx1,350mm) some time in 2011. LGD is a relative newcomer to the AMOLED market. Both LGD and LGE had worked on AMOLED separately before the consolidation of their AMOLED businesses into LGD in early 2008. LGD is building a Gen4 (730mmx460mm) line currently, and plans to start volume production from 3Q10 with an initial capacity of 8,000 substrates per month. However, as LGD and its affiliate companies purchased AMOLED-related assets from Eastman Kodak (Not rated) in December 2009, we believe this would help LGD’s ascent up the learning curve. OLED technology was invented by Kodak in the early 1980s, and a number of Japanese display makers initiated R&D in the early 1990s. Currently, most OLED equipment is supplied by Japanese companies. However, since SMD and LGD plan to expand their capacity beyond Gen4 lines, they have started to develop core AMOLED equipment with local companies. SMD has appointed SFA as project leader for the development of AMOLED equipment, and is working with SNU Precision on organic material deposition and encapsulation process systems. LGD is also developing deposition equipment for a Gen5.5 line with Jusung. Although we do not expect AMOLED to make a material contribution to revenue in the near term, given that the localisation of LCD equipment has gained momentum from Gen5 investments, we expect the Gen5.5 line investment to be the turning point for domestic equipment companies.

OLED equipment manufacturers in Japan Company Ticker Equipment Tazmo 6266 JP Supplier of coaters Mitsubishi Electric 6503 JP Solid state laser (green) for laser annealers Shibaura Mechatronics 6590 JP OLED vacuum bonding equipment Nissin Electric 6641 JP Ion implantation systems for LTPS Ulvac 6728 JP CVD for material deposition Hitachi Zosen 7004 JP Deposition equipment using planar evaporation source Mitsubishi Heavy Ind 7011 JP Deposition equipment using linear evaporation source IHI 7013 JP Laser annealers Dainippon Screen Mfg 7735 JP Co-developed nozzle printing tech with DuPont Nikon 7731 JP Exposure systems for LTPS Hitachi High-Tech 8036 JP Makes and sells manufacturing equipment Tokki 9813 JP Systems for electrode, organic material deposition, and

encapsulation processes Source: Companies, Daiwa


Our focus on diversified players Although the semiconductor- and LCD-capex cycles have not necessarily moved in tandem over the past 10 years, we expect both segments to record strong capex growth for 2010, following the drastic cutbacks in spending in 2009. We forecast a 96% YoY increase in domestic semiconductor capex and a 61% YoY rise in domestic LCD capex for 2010, concentrated on technology upgrades and new capacity additions, respectively, and we expect local equipment companies to benefit from rising orders throughout this year.

Korea semiconductor and LCD capex vs. equipment makers’ revenue

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Source: Companies, Daiwa While there are more than 20 listed equipment manufacturers in Korea, we initiate coverage of just three companies (Jusung, KC Tech, and SFA), due mainly to their increasing exposure to new businesses, such as solar-cell equipment, factory automation systems, and semiconductor materials. We believe diverse revenue sources would help to reduce the volatility of earnings streams, since both the LCD and memory-chip industries are highly cyclical. In addition, these companies have diversified customer bases, which could boost their pricing power, in our view. In Korea, it is common for equipment companies to supply one customer but not necessarily its competitors. This is because some equipment is developed to meet customers’ specific needs, and customers may have concerns about potential leakages of its technology and manufacturing processes.

Korean equipment companies: revenue breakdown by customer Bloomberg Mkt cap 2009 rev. 2009 revenue breakdown (%) Company code (Wbn) (Wbn) SEC HYN LGD OthersSemes Not listed n.a. 316 81 0 0 19Jusung Eng 036930 KS 673 170 0 18 32 50SFA 056190 KS 536 307 20 0 0 80EO Technics 039030 KS 306 81 5 5 0 90DMS 068790 KS 276 153 6 4 80 10Atto 030530 KS 273 91 80 20 0 0IPS 051820 KS 236 50 60 2 0 38KC Tech 029460 KS 219 96 20 10 45 25Hanmi Semi 042700 KS 214 75 3 2 0 95PSK 031980 KS 186 33 25 15 0 60Eugenetech 084370 KS 187 49 80 20 0 0LIG ADP 079950 KS 164 86 0 0 92 8Hanyang Eng 045100 KS 147 121 34 0 11 55Osung LST 052420 KS 127 127 20 0 0 80Top Eng 065130 KS 115 101 0 0 60 40SNU 080000 KS 111 34 0 0 20 80 Source: Companies, Bloomberg, Daiwa Note: share prices as at the close on 3 May

We like the companies with diversified products and customer bases


As a result, companies like Semes supply semiconductor and LCD equipment primarily to SEC, while LCD equipment accounts for 98% of LIG ADP’s revenue, and most of these orders come from LGD. Meanwhile, Jusung supplies LCD equipment to LGD and BOE, and sells semiconductor equipment to Hynix Semiconductor (000660 KS, W27,600, 2), as well as to a few chip makers in Taiwan. SFA also provides display equipment to SEC, BOE and some panel makers in Taiwan. SFA has more diverse range of customers for its factory automation and logistics systems, from chemical companies to dairy producers. KC Tech supplies its display and semiconductor equipment to all of the Korean LCD and memory-chip makers. Although equipment companies are under constant pressure to cut costs, Korean equipment companies have spent an average of 5-10% of revenue on R&D annually over the past three years. In terms of average R&D spending, these firms expensed W8-10bn each year, which is tiny compared with that of the larger global equipment firms, like Applied Materials, which spends about US$1bn annually on R&D and Tokyo Electron, which spends about ¥60bn. However, among the domestic equipment makers, Jusung has been the top spender on R&D over the past three years, as the company is actively expanding into new markets, including solar-cell and LED equipment.

Korean equipment companies’ R&D spending trend R&D expenses (Wbn) R&D as a % of revenue Company Ticker 2007 2008 2009 2007 2008 2009Semes Not listed 17.6 30.2 19.8 5.8 7.4 6.3Jusung Eng 036930 KS 36.6 44.4 28.2 17.3 29.2 16.6SFA 056190 KS 9.2 13.5 11.5 3.0 3.1 3.7EO Technics 039030 KS 6.0 10.4 8.1 7.4 10.4 10.0DMS 068790 KS 10.6 12.5 8.7 12.0 4.5 5.7Atto 030530 KS 4.6 2.6 3.4 5.7 3.5 3.8IPS 051820 KS 11.9 11.0 5.5 15.7 3.5 11.0KC Tech 029460 KS 8.9 9.1 4.4 6.8 4.9 4.6Hanmi Semi 042700 KS 8.3 8.1 8.7 7.2 11.4 11.5PSK 031980 KS 8.3 7.1 4.6 7.2 12.9 14.2Eugenetech 084370 KS 5.1 7.5 3.9 22.0 79.1 8.1LIG ADP 079950 KS 4.9 5.5 6.4 3.5 5.2 7.5Hanyang Eng 045100 KS 1.1 1.5 1.1 0.6 0.8 0.9Osung LST 052420 KS 1.1 1.4 1.8 4.3 2.1 1.4Top Eng 065130 KS 3.3 3.9 1.0 17.1 9.7 11.8SNU 080000 KS 6.5 4.7 11.6 35.2 6.5 34.2 Source: Companies, Daiwa What drives the share price? For many equipment companies, we believe that the new order intake and order backlog are the key share-price drivers, since semiconductor and LCD-panel companies normally give large purchasing orders coinciding with their capacity-expansion plans. In the past, whenever these companies announced new capacity expansion or upward revisions to capex, the local equipment companies’ shares have rallied. For companies like SFA, there is a strong correlation between its average share price (for each quarter) versus the new order intake and the order backlog over the past three years.

We see the new order intake and order backlogs as the key share-price drivers


SFA: new orders and order backlog versus average share price

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Source: Companies, FnData Although equipment companies normally disclose large order intakes, quite often, some sizeable orders are not revealed at the request of their customers. In addition, as lead times vary for different types of equipment (between three and nine months), the actual order intake may take longer to turn into revenue. Therefore, we believe that the capex trend of their key customers is also an important driver of equipment companies’ share prices. LGD revised up its FY10 capex plan recently to over W5.5tn from over W4.0tn. However, we believe there could be further upside for this, should LGD get approval from the PRC Government to build a Gen8 line in China. LGD plans to ramp its P8E line in May, and we expect the P8E+ line to start ramping up from 1H11. Therefore, we believe local equipment companies are likely to receive purchasing orders for the P8E+ line starting from 2Q10, and possibly orders for the China fab in 1H11. Meanwhile, SEC still has not confirmed its FY10 capex (from an initial plan of W5.5tn for memory chips and W3.0tn for LCDs), but several local equipment companies have told us that there could be substantial upside for its semiconductor capex, given that its competitors are investing aggressively. The Korea Economic Daily reported recently that SEC’s semiconductor capex may rise to W8.3tn for FY10, and increase further to W11.0tn for 2011, as SEC equips Line16 during 2H10 and builds the new Line17 next year, which could lead to further upward revisions to our global semiconductor capex forecasts.

Korea semiconductor and LCD capex vs. equipment company index

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Valuation comparison The share prices of Korean equipment companies have rallied since early-March due, we believe, to expectations in the market of potential capex increases by SEC and LGD, since the prices of core components, such as DRAM and LCD panels, have continued to trend better than the market’s expectations. Our share-price index, comprised of 15 equipment companies, has outperformed the KOSPI by 38% YTD.

Korea equipment company index versus KOSPI

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Source: Bloomberg, FnData Based on our earnings forecasts (for the companies that we cover) and the Bloomberg-consensus forecasts, the shares of Korean equipment companies are trading currently at a 2010 PER of 11.2x and a 2010 PBR of 2.1x. Meanwhile, global equipment companies’ shares are trading currently at a 2010E PER of 20.5x and a 2010E PBR of 2.8x. Although Korean equipment makers’ revenue is much smaller than that of their global peers, their average ROE is higher than that of the global equipment makers despite their FY10 operating-profit margin being at a similar level of 15%. As we forecast further upside for equipment orders from Korean semiconductor and LCD-panel makers for 2010, we are positive about the earnings outlook for the domestic equipment companies. Our top picks among the equipment makers are Jusung, KC Tech, and SFA, due to their ongoing expansion into new businesses.

Korea equipment companies: PBR and ROE comparison

TOP Eng

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0

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We believe Gen5.5 line investment could be the turning point for domestic equipment companies


Korean equipment companies: earnings and valuation comparison Revenue OP OPM NP NPM PER PBR ROE (Wbn) (Wbn) (%) (Wbn) (%) (x) (x) (%)Jusung Eng* 2008 152.2 (18.3) (12.0) (29.5) (19.4) n.a. 4.2 n.a. 2009 170.1 14.4 8.5 2.0 1.2 n.m. 4.0 1.3 2010E 430.7 61.5 14.3 43.4 10.1 15.5 3.1 22.6 SFA* 2008 430.8 53.5 12.4 49.8 11.6 10.8 2.4 23.4 2009 307.1 15.2 4.9 18.0 5.9 29.7 2.3 8.0 2010E 371.0 32.9 8.9 32.9 8.9 16.3 2.1 13.6 EO Technics 2008 100.1 9.0 8.9 9.7 9.6 26.5 3.0 11.1 2009 81.0 6.8 8.4 5.2 6.5 49.6 2.8 5.5 2010E 170.3 32.5 19.1 27.9 16.4 9.5 2.2 25.0 DMS 2008 279.4 69.4 24.8 19.9 7.1 11.1 2.1 16.1 2009 153.1 9.3 6.0 3.0 2.0 72.5 1.6 2.3 2010E 231.0 35.0 15.1 22.0 9.5 10.6 1.5 12.4 Atto 2008 75.6 9.9 13.1 12.5 16.5 16.3 2.9 18.1 2009 91.1 5.7 6.3 12.0 13.2 16.9 2.4 14.6 2010E 176.6 24.2 13.7 25.5 14.5 7.9 1.7 27.4 IPS 2008 80.2 3.8 4.8 5.2 6.4 37.2 4.7 12.2 2009 50.1 1.8 3.5 2.3 4.7 81.9 4.4 5.0 2010E 143.8 23.5 16.3 21.2 14.7 9.2 2.9 44.3 KC Tech* 2008 186.0 23.2 12.5 11.2 6.0 18.4 1.6 8.9 2009 95.5 9.7 10.2 10.1 10.5 21.1 1.5 7.4 2010E 192.2 22.0 11.5 22.6 11.8 9.7 1.4 15.0 Hanmi Semi 2008 71.4 5.0 6.9 7.3 10.3 25.3 1.6 6.3 2009 75.2 8.1 10.7 7.0 9.3 25.5 1.4 5.8 2010E 98.5 16.1 16.3 13.6 13.8 14.0 1.4 10.6 PSK 2008 55.0 (3.3) (6.0) (4.9) (9.0) n.a. 1.5 n.a. 2009 32.7 (0.1) (0.4) 4.5 13.7 37.2 1.5 4.0 2010E 81.7 16.0 19.6 15.0 18.3 11.1 1.3 12.7 Eugenetech 2008 9.5 (2.2) (23.6) (1.2) (12.9) n.a. 5.4 n.a. 2009 48.8 7.6 15.6 6.1 12.6 23.4 5.8 21.6 2010E 95.0 19.3 20.3 14.8 15.5 8.6 3.2 40.6 LIG ADP 2008 104.7 12.8 12.2 10.2 9.7 11.5 3.8 24.9 2009 86.0 (9.2) (10.7) (15.3) (17.8) n.a. 5.1 n.a. 2010E 185.0 20.2 10.9 17.8 9.6 8.0 3.5 39.6 Hanyang Eng 2008 196.6 2.1 1.1 5.4 2.8 23.6 1.9 8.4 2009 121.1 (18.7) (15.4) (15.1) (12.5) n.a. 2.4 n.a. 2010E Osung LST 2008 68.1 5.2 7.6 0.6 0.8 174.3 2.0 0.9 2009 127.2 10.8 8.5 4.2 3.3 25.4 1.7 5.8 2010E Top Eng 2008 118.0 24.3 20.6 5.2 4.4 18.3 1.2 6.4 2009 100.9 20.9 20.8 13.1 13.0 7.3 1.0 13.7 2010E 118.3 22.3 18.9 19.3 16.4 5.4 0.8 16.0 SNU 2008 71.8 9.2 12.8 9.3 12.9 8.9 1.5 14.9 2009 34.0 (3.6) (10.7) (7.2) (21.2) n.a. 1.9 n.a. 2010E 73.3 9.4 12.8 4.9 6.7 19.5 1.7 7.2 Average 2008 6.4 3.8 31.9 2.6 12.6 2009 4.4 2.9 59.8 2.7 7.9 2010E 15.2 12.8 11.2 2.1 22.1 Source: Companies, Bloomberg, FnData, *Daiwa forecasts Note: share prices as at the close on 3 May


Global equipment companies: earnings and valuation comparison Revenue OP OPM NP NPM PER PBR ROE (US$m) (US$m) (%) (US$m) (%) (x) (x) (%)Applied 2008 8,129 1,374 16.9 961 11.8 17.9 2.5 12.5 Materials 2009 5,014 (238) (4.7) (305) (6.1) n.a. 2.6 n.a. 2010E 8,477 1,438 17.0 994 11.7 18.3 2.5 12.3 Tokyo 2008 5,077 147 2.9 75 1.5 155.7 2.2 1.4 Electron 2009 4,417 (72) (1.6) (123) (2.8) n.a. 2.2 n.a. 2010E 6,560 845 12.9 551 8.4 22.0 2.0 9.5 ASML 2008 4,345 422 9.7 474 10.9 29.9 5.1 16.5 2009 2,226 (230) (10.3) (210) (9.5) n.a. 5.6 n.a. 2010E 5,144 1,310 25.5 1,004 19.5 14.3 4.5 30.1 KLA-Tencor 2008 2,522 512 20.3 359 14.2 12.7 2.1 11.0 2009 1,520 (131) (8.6) (523) (34.4) n.a. 2.8 n.a. 2010E 1,819 354 19.5 241 13.2 25.0 2.6 13.6 Lam Research 2008 2,475 562 22.7 439 17.8 15.0 2.4 11.0 2009 1,116 (133) (11.9) (302) (27.1) n.a. 3.3 n.a. 2010E 2,094 389 18.6 312 14.9 17.3 3.2 18.0 Nikon 2008 8,790 481 5.5 280 3.2 32.2 2.4 7.3 2009 8,214 (146) (1.8) (163) (2.0) n.a. 2.3 n.a. 2010E 8,954 618 6.9 346 3.9 25.8 2.2 8.9 Dainippon 2008 2,189 (45) (2.1) (382) (17.4) n.a. 1.9 n.a. Screen 2009 1,728 (167) (9.7) (115) (6.6) n.a. 2.1 n.a. 2010E 2,229 115 5.1 63 2.8 21.2 1.8 8.8 ASM 2008 1,099 100 9.1 27 2.5 50.3 3.0 5.8 International 2009 824 15 1.8 (149) (18.0) n.a. 3.9 n.a. 2010E 1,316 232 17.6 109 8.3 11.8 7.0 26.7 Novellus 2008 1,011 562 55.6 439 43.5 7.0 1.9 29.7 Systems 2009 639 (133) (20.7) (302) (47.3) n.a. 2.3 n.a. 2010E 1,215 261 21.5 215 17.7 11.8 1.9 16.7 Teradyne 2008 1,107 45 4.1 (394) (35.6) n.a. 3.1 n.a. 2009 819 (41) (5.0) (134) (16.3) n.a. 3.4 n.a. 2010E 1,514 345 22.8 301 19.9 8.8 2.7 23.0 Aixtron 2008 404 51 12.7 34 8.4 87.3 10.1 11.2 2009 422 88 20.8 62 14.8 48.9 5.6 14.3 2010E 872 266 30.4 183 21.0 18.4 4.8 25.2 Veeco 2008 443 13 2.9 (75) (17.0) n.a. 7.0 n.a. 2009 380 1 0.4 (16) (4.1) n.a. 5.3 n.a. 2010E 981 236 24.0 173 17.6 13.2 3.0 30.0 Centrotherm 2008 551 64 11.5 51 9.2 13.7 2.0 14.4 2009 710 52 7.3 40 5.6 22.1 1.8 8.6 2010E 760 69 9.1 53 6.9 16.5 1.7 10.9 Roth & Rau 2008 400 44 11.0 34 8.5 12.6 1.6 16.0 2009 276 23 8.4 18 6.5 25.8 1.5 6.1 2010E 370 31 8.5 24 6.5 21.0 1.5 6.7 Ulvac 2008 2,195 83 3.8 33 1.5 30.7 1.2 4.0 2009 2,276 35 1.6 8 0.4 122.2 1.2 0.9 2010E 2,569 61 2.4 15 0.6 62.7 1.1 1.6 Average 2008 12.4 4.2 38.8 3.2 11.7 2009 (2.3) (9.8) 54.7 3.1 7.5 2010E 16.1 11.5 20.5 2.8 16.1 Source: Companies, Bloomberg Note: share prices as at the close on 3 May


Appendix Semiconductor equipments and equipment makers by process

Equipment Global equipment company Domestic equipment company Front-end: Photo lithography ASML, Nikon, Canon Etcher / asher Lam Research, Tokyo Electron, Applied Materials PSK (031980) Wet station / scrubber Lam Research KC Tech (029460), DMS (068790), Semes (Not listed) Furnace / annealing / RTP Applied Materials, Tokyo Electron, Varian, Mattson Kookje Electric Korea (053740), AP system (054620) Ion implanter Applied Materials, Varian, Axcelis CVD / ALD Applied Materials, Novellus, Ulvac, Tokyo Electron Jusung (036930), IPS (051820), Atto (030530), Eugenetech (084370) CMP Applied Materials, Ebara KC Tech (029460) Inspection KLA-Tencore Back-end: Dicer ASM International Hanmi Semi (042700), EO Technics (039030) Die bonder / wire bonder ASM International Samsung Techwin (012450) Molding / marking Disco Hanmi Semi (042700), KOSES (089890), EO Technics (039030) Prober Tokyo Electron TSC Memsys (039230), Ubprecision (053810) Test handler Advantest, Delta Design Mirae (025560) Tester Advantest, Yokogawa, Teradyne DI (003160), From30 (073570), UniTest (086390) Source: Companies, KSIA, Daiwa

TFT-LCD equipments and equipment makers by process

Equipment Global equipment company Domestic equipment company TFT-LCD array: PE-CVD Applied Materials Jusung Engineering (036930), SFA Engineering (056190) Sputter Ulvac Avaco (083930) Photo lithography Nikon, Canon Coater / developer Tokyo Electron, Dainippon Screen KC Tech (029460), DMS (068790) Wet process Shibaura, Dainippon Screen KC Tech (029460), STI (039440), DMS (068790), Semes (Not listed) Etcher / stripper Tokyo Electron, YAC IPS (051820), LIG ADP (079950), Semes (Not listed) Automated optical inspection Orbotech, OHT SNU (080000) Open repair Omron Charm & Ci (009310) Array tester Micronics Japan, Applied Materials, Orbotech Top Eng (065130) TFT-LCD cell and module: PI coater Nakan, Shibaura Rubbing machine Iinuma, Joyo Kogaku Meere (049950) One drop filling Ulvac, Shibaura, Shin-Etsu Top Eng (065130), AP System (056190) Glass cutting system MDI Top Eng (065130) Polariser attaching system Yodogawa SFA (056190) TAB / PCB bonding Osaki Engineering, Shibaura DSK (109740) Color filter process: ITO sputtering Ulvac, Applied Materials Avaco (083930) Coater Toray, Tokyo Ohka KC Tech (029460), DMS (068790) Resin BM exposure Nikon, Canon Proximity exposure NSK, Hitachi Hi-Tech, DNS Automated optical inspection V-Technology, Takano SNU (080000) Color filter repair NTN, V-Technology Source: Companies, DisplayBank, Daiwa


Jusung Engineering (036930 KS) Electronics: Korea

6-mth rating: 1Target price: W28,000

Share price: W20,500 (3 May)

Jae H. Lee(82) 2 787 9173

[email protected]

Initiation of coverage: our top pick among the equipment companies

Buy rating with a target price of W28,000 We initiate coverage of Jusung with a 1 (Buy) rating and six-month target price of W28,000. We expect robust revenue growth for FY10 on the back of large orders for solar-cell equipment and as the capex of domestic memory-chip and LCD-panel makers continues to rise.

Ongoing expansion of diversified product mix Although the company had virtually no revenue exposure tosolar-cell equipment prior to 2007, this segment has become the most important driver of its revenue, accounting for 39% of the total for FY09.

Currently, Jusung is testing its MOCVD reactor for mass production and expects to receive orders starting from 2Q FY10,as its equipment offers a substantially higher throughput levelcompared with those of its competitors.

Attractive valuation despite the recent rally The stock is trading currently at a PER of 15.5x on our FY10 EPS forecast and a PBR of 3.1x on our FY10 BVPS forecast, compared with a five-year PBR trading range of 1.1-4.8x. Despite the recent rally in the share price, we believe the stock is attractively valued given the record revenue level we expect for FY10.

Our six-month target price of W28,000 is based on a PBR of 4.3x, which is an average of the stock’s peak PBRs over the past three years.

Reuters code 036930.KS

Market data KOSPI 1,721.21 Market cap (US$m) 601.61 EV (US$m; 10E) 595.73 3-mth avg daily T/O (US$m) 9.35 Shares outstanding (m) 33 Free float (%) 66.2 Major shareholder Chul-joo Hwang (31.1%) Exchange rate W/US$ 1,118 Performance (%)* 1M 3M 6M Absolute 3.8 25.8 43.4 Relative 3.9 18.0 29.1 Source: Daiwa Note: *Relative to KOSPI

Investment indicators 2010E 2011E 2012E PER (x) 15.5 11.7 10.6 PCFR (x) 9.3 10.2 11.0 EV/EBITDA (x) 10.3 8.2 7.4 PBR (x) 3.1 2.5 2.0 Dividend yield (%) 0.0 0.0 0.0 ROE (%) 22.6 23.5 20.9 ROA (%) 10.5 11.6 11.2 Net debt equity (%) net cash net cash net cash Source: Daiwa forecasts

Price and relative performance

5,20011,47517,75024,02530,300

07/5 07/11 08/5 08/11 09/5 09/11 10/5

(W)

5088125163200

Rel to KOSPI

Source: Bloomberg, Daiwa

Income summary

Revenue EBITDA Net profit EPS CFPS DPS Year to 31 Dec (Wbn) (%) (Wbn) (%) (Wbn) (%) (W) (%) (W) (W) 2008 152 (28.2) (15) n.a. (29) n.a. (907) n.a. (1,053) 0.000 2009 170 11.8 18 n.a. 2 n.a. 62.647 n.a. 762 0.000 2010E 431 153.2 65 266.3 43 n.m. 1,321 n.m. 2,195 0.000 2011E 508 17.9 79 21.9 57 32.2 1,746 32.2 2,008 0.000 2012E 548 7.9 85 7.1 64 11.0 1,937 11.0 1,861 0.000 Source: Company, Daiwa forecasts


Company background Jusung is a leading semiconductor- and LCD-equipment manufacturer in Korea. The company was established in June 1993 and specialises in CVD equipment. For FY09, solar-cell equipment accounted for 39% of revenue, semiconductor equipment for 28%, and flat-panel-display (FPD) equipment for 33%.

Jusung Engineering – financial summary Profit and loss (Wbn) Balance sheet (Wbn)

Year to 31 Dec 2008 2009 2010E 2011E 2012E Semiconductor 38 48 63 81 89 FPD equipment 59 55 121 101 96 Other revenue 55 67 247 326 363 Total revenue 152 170 431 508 548 Other income 0 0 0 0 0 COGS (106) (106) (285) (339) (368) SG&A (64) (50) (84) (93) (99) Other op. expenses 0 0 0 0 0 EBIT (18) 14 62 75 81 Net-interest inc./(exp.) (2) (5) (5) (5) (4) Assoc/forex/extraord./others (10) (7) (5) (3) (2) Pre-tax profit (30) 2 51 67 75 Tax 1 0 (8) (10) (11) Min. int./pref. div./others 0 0 0 0 0 Net profit (reported) (29) 2 43 57 64 Net profit (adj.) (29) 2 43 57 64 EPS (reported) (W) (907) 62.647 1,321 1,746 1,937 EPS (adj.) (W) (907) 62.647 1,321 1,746 1,937 DPS (W) 0.000 0.000 0.000 0.000 0.000 EBIT (adj.) (18) 14 62 75 81 EBITDA (adj.) (15) 18 65 79 85

As at 31 Dec 2008 2009 2010E 2011E 2012E Cash & short-term investment 21 71 67 81 96 Inventory 46 34 48 58 64 Accounts receivable 125 130 153 165 178 Other current assets 35 26 23 28 31 Total current assets 227 262 291 331 369 Fixed assets 39 51 83 99 115 Goodwill & intangibles 1 2 3 9 15 Other non-current assets 42 53 80 95 102 Total assets 309 368 457 533 600 Short-term debt 19 61 15 5 5 Accounts payable 50 53 81 94 100 Other current liabilities 28 62 95 107 111 Total current liabilities 97 175 191 206 215 Long-term debt 51 21 45 50 45 Other non-current liabilities 3 4 5 4 3 Total liabilities 151 200 242 261 264 Share capital 16 16 16 16 16 Reserves/R.E./others 142 152 199 257 320 Shareholders' equity 158 168 216 273 337 Minority interests 0 0 0 0 0 Total equity & liabilities 309 368 457 533 600 Net debt/(cash) 50 11 (7) (25) (46)

Cash flow (Wbn)

Year to 31 Dec 2008 2009 2010E 2011E 2012E Profit before tax (30) 2 51 67 75 Depreciation and amortisation 4 3 3 4 4 Tax paid 1 0 (8) (10) (11) Change in working capital (28) 9 18 (1) (13) Other operational CF items 19 11 7 6 6 Cash flow from operations (34) 25 72 66 61 Capex (7) (2) (35) (20) (20) Net (acquisitions)/disposal (1) (9) (5) (5) (3) Other investing CF items (28) (30) (13) (21) (12) Cash flow from investing (36) (41) (53) (46) (35) Change in debt 39 50 (26) (11) (11) Net share issues/(repurchases) 0 0 4 0 0 Dividends paid 0 0 0 0 0 Other financing CF items (2) 2 (1) (3) (3) Cash flow from financing 37 53 (23) (14) (14) Forex effect/others 0 0 0 0 0 Change in cash (33) 36 (4) 5 12

Key ratios Year to 31 Dec 2008 2009 2010E 2011E 2012E Sales – YoY % (28.2) 11.8 153.2 17.9 7.9 EBITDA (adj.) – YoY % n.a. n.a. 266.3 21.9 7.1 Net profit (adj.) – YoY % n.a. n.a. n.m. 32.2 11.0 EPS (adj.) – YoY % n.a. n.a. n.m. 32.2 11.0 EBITDA margin % (adj.) n.a. 10.4 15.1 15.6 15.5 EBIT margin % (adj.) n.a. 8.5 14.3 14.9 14.8 Net-profit margin % (adj.) n.a. 1.2 10.1 11.3 11.6 ROAE (%) n.a. 1.3 22.6 23.5 20.9 ROAA (%) n.a. 0.6 10.5 11.6 11.2 ROCE (%) n.a. 6.0 23.4 24.9 22.6 ROIC (%) n.a. 6.3 27.0 28.1 25.5 Net debt to equity (%) 31.6 6.4 net cash net cash net cash Effective tax rate (%) n.a. 15.3 15.0 15.0 15.0 Accounts receivable (days) 271.2 274.3 120.1 114.5 114.4 Payables (days) 95.4 109.8 56.6 62.8 64.5 Net interest cover (x) n.a. 3.0 11.6 16.2 22.4 Net dividend payout (%) n.a. 0.0 0.0 0.0 0.0

Key assumptions

Year to 31 Dec 2008 2009 2010E 2011E 2012E Global semiconductor capex (US$bn) 33.2 20.8 33.9 33.4 30.9 Global LCD capex (US$bn) 18.2 12.9 19.6 18.0 17.2

PBR bands

5.7x4.5x3.4x2.2x1.0x3,361

13,361

23,361

33,361

Jan-06 Dec-06 Dec-07 Dec-08 Dec-09

(W)

Source: Company, Daiwa forecasts


Investment summary We initiate coverage of Jusung with a 1 rating and six-month target price of W28,000. We expect strong revenue growth for FY10 on the back of increased capital spending from domestic memory-chip and LCD-panel makers. We expect the company’s share of plasma-enhanced (PE) CVD equipment in LGD’s supply chain to rise and shipments of its atomic layer-deposition (ALD) system to increase as a result of Hynix’s aggressive migration to advanced-process technology. It recently won a large solar-cell equipment contract from a PRC customer and is conducting final testing of its MOCVD reactors, which we believe will be the key revenue-growth drivers for FY10. Following weak FY09 revenue due to subdued semiconductor and LCD spending, we forecast FY10 revenue to increase by 153% YoY to W431bn. The stock is trading currently at a PER of 15.5x on our FY10 EPS forecast, which represents a premium to that of its domestic peers but a discount to its global peers. In terms of PBR, the stock is trading at 3.1x on our FY10 BVPS forecast, compared with a past five-year trading range of 1.1-4.8x. Our six-month target price of W28,000 is based on a PBR of 4.3x (the average of the peak PBR multiples over the past three years) on our FY10 BVPS forecast. Given the company’s increasing exposure to solar-cell equipment and the record level of revenue we expect for FY10, we believe the stock is attractive at the current valuation levels.

Jusung: share price and PBR

0

5,000

10,000

15,000

20,000

25,000

30,000

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Jul-0

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8

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9

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1

2

3

4

5

6

Share price (LHS) PBR (RHS)

(W) (x)

Source: Company, FnData, Daiwa forecasts Note: PBR is based on incremental BVPS Revenue-growth prospects During the 1Q FY10 earnings conference on 26 April, Jusung raised its FY10 revenue guidance by about 30% to the high-W300bn level on the back of large orders placed for solar-cell production equipment in early April. Prior to 2007, the company had no exposure to solar-cell equipment. However, following a substantial investment in R&D, solar-cell equipment is now the most important driver of its revenue. Jusung won four thin-film projects in 2009 worth a total of more than W150bn, with three of the projects from PRC solar companies. As a result, solar-cell equipment accounted for 39% of total FY09 revenue. The company offers one of the highest conversion-efficiency rates for thin-film technology: 7.5% for single-junction and 10.2% for tandem solar cells. In addition, by improving cell efficiency and line throughput, its turnkey line is capable of producing modules below US$1.0/W, compared with US$1.2/W or higher for its competitors.

Our target price of W28,000 is based on an FY10 PBR of 4.3x

We expect solar-cell equipment to be a key driver of FY10 revenue


Jusung: revenue and operating-profit margin forecast

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010E 2011E 2012E(15)

(10)

(5)

0

5

10

15

20

Semiconductor (LHS) FPD (LHS) Solar cell (LHS)Others (LHS) OP margin (RHS)

(Wbn) (%)

Source: Company, Daiwa forecasts Although the rapid decline in polysilicon prices may raise some concerns among investors about the competitiveness of thin-film technology against silicon-based solar cells, Jusung believes its tandem-junction system will be able to compete as cost and efficiency targets will become more aggressive for 2010 and beyond. In FY09, about 80% of the company’s solar-cell equipment orders were based on thin-film technology, but it expects this proportion to decline as it shifts to silicon-based systems and hybrid systems. In terms of FPD equipment, Jusung mainly supplies PECVD equipment to LCD-panel makers such as LGD and BOE. The company’s main competitor is Applied Materials, which controls 80% of the global PECVD market. However, Jusung’s share of PECVD equipment in LGD’s supply-chain rose to 55% for the P8E line from 25% for the P8 line. The company gained share as it offered competitive prices, high throughput and, more importantly, because the delivery and equipment set-up time was shorter than that of its competitor. It expects to gain a higher share of LGD’s P8E+ line and the potential Gen8 line in China. In regard to its MOCVD equipment for LED-chip production, Jusung delivered a test unit to a domestic LED-chip producer in January and is now testing it for mass production. The company announced it was also discussing a potential order contract with several LED-chip makers. It claimed its MOCVD could process a single batch in nine hours, and had the capacity for 124 two-inch wafers or 30 four-inch wafers, compared with a capacity of 45 two-inch wafers for a competing model. The company also said its equipment had a 20% smaller footprint than those of its competitors despite the higher productivity.

Comparison of MOCVD reactors Year of production Platform Technology Chambers 2002 Aixtron Standalone - G3 Planetary -24x2", 8x4" - 19x2" CCS - 19x2" 2006 Aixtron IC - G4 HT Planetary - 42x2", 11x4", 6x6" - Cirus CCS - 31x2", 12x3", 7x4", 3x6", 1x12" 2010 Aixtron IC 2 - G5 HT Planetary - 56x2", 14x4", 8x6", 5X8" - Cirus II CCS - 55x2", 13x4", 7x6", 3X8", 1X12" 2005 Veeco K300 - TurboDisc K-series - 27x2", etc. 2008 Veeco K465 - TurboDisc K-series - 45x2", 13x4", 7x6", 4x8", etc. 2010 Veeco K465i - TurboDisc K-series - 50x2", etc. 2010 Jusung - 124x2", 30x4", etc. Source: Companies, Daiwa


Earnings outlook Jusung’s 1Q FY10 revenue of W50.1bn and operating profit of W4.3bn were lower than the Bloomberg-consensus forecasts of W58.8bn and W6.4bn, respectively, due to the smaller-than-expected revenue contribution from the solar-cell equipment business. However, as the company received large orders for solar-cell equipment in early-April and it plans to complete the deliveries by October 2010, we forecast a sharp increase in revenue for 2Q FY10 and 3Q FY10. Jusung has recorded an average gross-profit margin of 37% over the past three years. We estimate that semiconductor equipment is the most profitable segment, with a gross-profit margin of 45-50%, and LCD equipment is the least profitable, with a gross-profit margin of 30-40%. However, the substantial R&D cost burden (an average of 21% of its revenue over the past three years) has led to operating profit falling considerably. For FY10, the company expects to keep its R&D budget at less than 10% of revenue as some of the R&D projects on solar-cell equipment have been completed and due to an increase in its revenue. Given Jusung’s large exposure to exports, particularly for solar-cell equipment, the appreciation of the Won against the US dollar has led to large foreign-exchange-related losses. The company hedged about 25% of its receivables in FY09, resulting in a net foreign-exchange loss of W8.7bn. However, it expects the foreign-exchange loss to narrow as the portion of the hedging amount increases to about 50% by end of FY10.

Jusung: quarterly earnings forecasts (Wbn) 1Q09 2Q09 3Q09 4Q09 2009Revenue: Semiconductor 7.3 5.4 16.9 18.0 47.6 FPD 10.2 4.5 16.7 24.0 55.3 Solar cell 2.6 29.3 16.7 18.6 67.2 Others Total 20.1 39.1 50.3 60.5 170.1 Operating profit (4.4) 6.5 5.3 7.1 14.4 Operating-profit margin (%) (21.9) 16.6 10.5 11.7 8.5 Net profit (0.9) 1.9 0.6 0.5 2.0 Net-profit margin (%) (4.5) 4.8 1.1 0.8 1.2 1Q10 2Q10E 3Q10E 4Q10E 2010ERevenue: Semiconductor 11.9 15.4 19.1 16.5 63.0 FPD 35.1 26.4 32.4 26.9 120.9 Solar cell 3.1 61.7 128.4 34.5 227.6 Others 0.0 3.9 7.7 7.6 19.2 Total 50.1 107.4 187.6 85.5 430.7 Operating profit 4.3 14.2 30.3 12.8 61.5 Operating-profit margin (%) 8.5 13.2 16.1 14.9 14.3 Net profit 1.5 9.5 24.8 7.5 43.4 Net-profit margin (%) 3.1 8.9 13.2 8.8 10.1 Source: Company, Daiwa forecasts Risk factors Risks to our earnings forecasts and target price are a sharp decline in component prices, such as memory chips and LCD panels, an overcapacity of solar-cell production, and macroeconomic issues. As Jusung’s revenue depends mostly on the capital expenditure of semiconductor and LCD-panel makers, potential component price erosion could affect its cash flow and capital-investment plans. In addition, as the company’s products are priced more competitively than those of other equipment makers globally, its earnings might be affected if its competitors adopt more aggressive pricing strategies.

Solar-cell equipment expected to lead the way in terms of FY10 revenue


Company description Jusung is a leading semiconductor- and LCD-equipment manufacturer in Korea. The company specialises in producing CVD equipment, which is the system used for depositing uniform layers of materials on the surface of substrate (silicon wafer or glass). It was established in June 1993 and was listed on the KOSDAQ in December 1999. Jusung’s headquarters and production facility are located in Gwangju City, Gyeonggi Province. At the end of 2009, the company had 463 employees and Chul-joo Hwang, the CEO and president, was the major shareholder with a 31.1% stake.

Jusung: shareholder structure

Chul-joo Hwang31.1%

Jae-ran Kim1.7%

Others58.6% Fidelity Funds

8.6%

Source: Company Note: as at 31 March 2010 Jusung has three major business divisions: 1) semiconductor equipment, with FY09 revenue of W48bn (28% of the total), 2) FPD equipment, with FY09 revenue of W55bn (33%), and 3) solar-cell equipment, with FY09 revenue of W67bn (39%). The company’s main customers for LCD equipment are LGD and BOE, and for semiconductor equipment are Hynix and Taiwan Semiconductor Manufacturing (2330 TT, NT$61.6, 2). In solar-cell equipment, it received thin-film turnkey equipment orders from one domestic and three PRC solar-cell companies in FY09. At the end of 1Q FY10, interest-bearing liabilities accounted for W121bn, 50% of which were short-term, and Jusung held W44bn in cash and equivalent. The company’s order backlog as at 26 April 2010 was W283bn, compared with W119bn at the end of FY09.

Jusung: order backlog (as at 26 April 2010) (Wbn) Jusung: FY10 revenue forecast by product

FPD54.8

Solar cell207.2

Semicon20.9

FPD32.5%

Solar cell52.5%

Semicon15.0%

Source: Company Source: Company guidance


KC Tech (029460 KS) Electronics: Korea



Jae H. Lee(82) 2 787 9173

[email protected]

Initiation of coverage: we expect a pick-up in the bottom line

Buy rating and six-month target price of W9,200 We initiate coverage of KC Tech with a 1 (Buy) rating and six-month target price of W9,200. We forecast record revenue for FY10, on the back of the company’s increasing exposure tosemiconductor materials (cerium-oxide [ceria] slurry) as well as rising orders from semiconductor and LCD-panel makers.

Ceria slurry to boost overall profitability Demand for ceria slurry is picking up as chipmakers are aggressively scaling down their process technologies, and we expect KC Tech to gain a larger share of the domestic ceria slurry market due to its cost competitiveness.

As the profitability of semiconductor materials is much higher than that of equipment, we forecast the operating-profit margin to improve to a mid-teen percentage for FY12.

At an FY10E PBR of 1.4x, the valuation looks attractive The stock is trading currently at a PBR of 1.4x on our FY10 BVPS forecast, compared with a past five-year trading range of 0.4-1.6x. We have used a target PBR of 1.8x to derive our six-month target price of W9,200.

As the company’s product mix is changing with new semiconductor equipment and materials, we believe the historical multiples are not an appropriate measure by which to value the company, and have assumed a long-term ROE of 16% and a cost of equity of 10.4% to derive our target PBR.


Market data KOSPI 1,721.21 Market cap (US$m) 195.60 EV (US$m; 10E) 148.61 3-mth avg daily T/O (US$m) 1.76 Shares outstanding (m) 31 Free float (%) 56.3 Major shareholder ST Koh (35.0%) Exchange rate W/US$ 1,118 Performance (%)* 1M 3M 6M Absolute 22.1 49.2 59.0 Relative 22.3 40.0 43.2 Source: Daiwa Note: *Relative to KOSPI



1,7003,1254,5505,9757,400

07/5 07/11 08/5 08/11 09/5 09/11 10/5

(W)

75106138169200

Rel to KOSPI


Income summary

Revenue EBITDA Net profit EPS CFPS DPS Year to 31 Dec (Wbn) (%) (Wbn) (%) (Wbn) (%) (W) (%) (W) (W) 2008 186 43.0 28 100.1 11 (8.3) 381 (10.9) 108 20.000 2009 96 (48.6) 13 (52.1) 10 (10.4) 332 (12.9) 1,666 30.000 2010E 192 101.2 25 88.7 23 125.1 725 118.7 773 50.000 2011E 225 17.2 33 30.7 29 29.4 938 29.4 878 75.000 2012E 237 5.1 36 11.9 33 12.8 1,058 12.8 943 80.000 Source: Company, Daiwa forecasts


Company background KC Tech specialises in wet processing and cleaning workstations for semiconductor- and LCD-production lines. The company was established in February 1987 and has expanded its products to semiconductor materials. For FY09, FPD equipment accounted for 68% of revenue, semiconductor equipment for 7%, semiconductor materials for 7%, and others for 18%.

KC Tech – financial summary Profit and loss (Wbn) Balance sheet (Wbn)

Year to 31 Dec 2008 2009 2010E 2011E 2012E Display equipment 138 65 117 130 124 Semicon equipment 15 7 34 47 54 Other revenue 32 24 41 48 59 Total revenue 186 96 192 225 237 Other income 0 0 0 0 0 COGS (145) (71) (150) (173) (179) SG&A (18) (15) (20) (23) (24) Other op. expenses 0 0 0 0 0 EBIT 23 10 22 29 33 Net-interest inc./(exp.) 1 0 0 0 0 Assoc/forex/extraord./others (7) 2 4 5 5 Pre-tax profit 17 12 26 34 38 Tax (5) (1) (4) (5) (5) Min. int./pref. div./others 0 0 0 0 0 Net profit (reported) 11 10 23 29 33 Net profit (adj.) 11 10 23 29 33 EPS (reported) (W) 381 332 725 938 1,058 EPS (adj.) (W) 381 332 725 938 1,058 DPS (W) 20.000 30.000 50.000 75.000 80.000 EBIT (adj.) 23 10 22 29 33 EBITDA (adj.) 28 13 25 33 36

As at 31 Dec 2008 2009 2010E 2011E 2012E Cash & short-term investment 11 51 58 68 76 Inventory 9 9 11 13 14 Accounts receivable 64 23 37 42 45 Other current assets 5 5 5 7 7 Total current assets 89 87 110 129 142 Fixed assets 44 46 49 51 53 Goodwill & intangibles 2 8 9 10 10 Other non-current assets 40 43 54 65 75 Total assets 175 183 222 255 281 Short-term debt 5 0 0 5 0 Accounts payable 17 24 37 42 41 Other current liabilities 19 11 14 16 16 Total current liabilities 41 35 51 63 58 Long-term debt 0 5 5 0 0 Other non-current liabilities 3 2 4 3 3 Total liabilities 44 42 60 66 61 Share capital 15 15 15 15 15 Reserves/R.E./others 117 126 146 173 205 Shareholders' equity 131 141 162 188 220 Minority interests 0 0 0 0 0 Total equity & liabilities 175 183 222 255 281 Net debt/(cash) (6) (46) (53) (63) (76)

Cash flow (Wbn)

Year to 31 Dec 2008 2009 2010E 2011E 2012E Profit before tax 17 12 26 34 38 Depreciation and amortisation 4 3 3 3 4 Tax paid (5) (1) (4) (5) (5) Change in working capital (19) 38 0 (3) (6) Other operational CF items 6 (1) (2) (2) (1) Cash flow from operations 3 51 24 27 29 Capex (25) (9) (6) (6) (6) Net (acquisitions)/disposal 0 (1) (9) (9) (10) Other investing CF items 15 (35) (8) (7) (7) Cash flow from investing (9) (46) (24) (22) (22) Change in debt (2) 0 (1) (1) (6) Net share issues/(repurchases) 0 0 0 0 0 Dividends paid (1) (1) (1) (2) (2) Other financing CF items 0 2 3 2 3 Cash flow from financing (4) 2 1 0 (5) Forex effect/others 0 0 0 0 0 Change in cash (10) 6 1 5 2

Key ratios Year to 31 Dec 2008 2009 2010E 2011E 2012E Sales – YoY % 43.0 (48.6) 101.2 17.2 5.1 EBITDA (adj.) – YoY % 100.1 (52.1) 88.7 30.7 11.9 Net profit (adj.) – YoY % (8.3) (10.4) 125.1 29.4 12.8 EPS (adj.) – YoY % (10.9) (12.9) 118.7 29.4 12.8 EBITDA margin % (adj.) 14.8 13.8 12.9 14.4 15.4 EBIT margin % (adj.) 12.5 10.2 11.5 13.0 13.9 Net-profit margin % (adj.) 6.0 10.5 11.8 13.0 14.0 ROAE (%) 8.9 7.4 15.0 16.7 16.2 ROAA (%) 6.7 5.6 11.2 12.3 12.3 ROCE (%) 17.6 6.9 14.1 16.3 15.9 ROIC (%) 14.5 7.7 18.6 21.5 20.9 Net debt to equity (%) net cash net cash net cash net cash net cash Effective tax rate (%) 32.7 12.6 14.0 14.0 14.0 Accounts receivable (days) 98.9 165.5 56.4 63.8 67.6 Payables (days) 30.9 77.3 57.7 63.8 63.9 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. Net dividend payout (%) 5.3 9.0 6.9 8.0 7.6

Key assumptions


PBR bands

1.8x1.5x1.1x0.8x0.4x

1,176

3,176

5,176

7,176

9,176


(W)



Investment summary We initiate coverage of KC Tech with a 1 rating and six-month target price of W9,200. We forecast record revenue for FY10, on the back of the company’s increasing exposure to the semiconductor materials (ceria slurry) market and the rising capex of the domestic semiconductor manufacturers and LCD companies. KC Tech is one of the few domestic equipment companies that is supplying the same product to multiple customers as it has technological knowhow in wet-processing stations for both LCD- and semiconductor-production lines. As we forecast a 96% YoY rise in domestic semiconductor capex and a 61% YoY increase in domestic LCD capex for 2010, we forecast KC Tech’s order intake to remain firm throughout FY10. The company acquired a chemical mechanical-polishing (CMP) equipment unit from Doosan Mecatec (Not listed) in June 2009 and we expect this acquisition to fuel semiconductor-equipment revenue for FY10. As a result, we forecast FY10 revenue to increase by 101% YoY to W192bn. Due to the continued upward revisions of its customers capex budgets for 2010, KC Tech’s share price has risen by 21% YTD and is trading currently at a PBR of 1.4x on our FY10 BVPS forecast, compared with a past five-year trading range of 0.4-1.6x. We have used a target PBR multiple of 1.8x to derive our six-month target price of W9,200. As the company’s product mix is changing rapidly with new semiconductor equipment and materials, we believe the historical multiples are not an appropriate measure by which to value the company. Therefore, assuming a long-term ROE of 16%, and a cost of equity of 10.4%, we have used a target PBR multiple of 1.8x. Our target price is equivalent to an FY10E PER of 12.7x, which is slightly higher than the current average of the domestic equipment companies.

KC Tech: share price and PBR

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-1000011111222


(W) (x)

Source: Company, FnData, Daiwa forecasts Note: PBR is based on incremental BVPS Revenue-growth prospects Most of leading LCD-panel makers are trying to add capacity as fast as they can and are competing for equipment. We expect additional purchasing orders from LGD and SEC to materialise over the next six months due to the ramp-up of their Gen8 line capacity for 1H11. As wet-processing stations are still the key revenue driver, we forecast an 82% YoY increase in the company’s display-equipment revenue for FY10. However, apart from existing products, we expect substantial revenue contributions from CMP equipment and semiconductor materials. As memory-chip makers continue to migrate to finer-process technology, the demand for CMP equipment is likely to rise, and for 2010 KC Tech forecasts the value of the global market for CMP equipment to be W1tn and for the domestic market to be W200bn.

We initiate coverage with a six-month target price of W9,200, based on an FY10 PBR of 1.8x

We expect CMP equipment and materials to fuel revenue growth for FY10 and beyond


KC Tech: revenue and operating-profit margin forecast

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010E 2011E 2012E0246810121416

Display (LHS) Semiconductor (LHS) Materials (LHS)Others (LHS) OP margin (RHS)

(Wbn) (%)

Source: Company, Daiwa forecasts In terms of semiconductor materials, KC Tech focuses mainly on the ceria-based slurries used in the CMP process. Slurry is used to polish and smooth out the unevenness of interlayer dielectrics and in the metal lines formed on the wafer when integrated circuitry is built. By using the CMP process, the chipmakers can produce chips on a much smaller scale. There are three major types of slurries, silica, metal (tungsten, copper, etc.), and ceria based. We forecast the global slurry market will be worth US$1.1-1.2bn for 2010 and that metal slurry will account for about 50%, silica slurry 30%, and ceria slurry 20%. Silica-based slurry was the mainstream CMP material on the processes above 65nm, but as the chipmakers are scaling down their process technologies to the 50nm and 40nm nodes, the demand for ceria slurry is picking up as these types of slurry can achieve higher removal rates than silica slurries. In addition, the demand for copper slurry is increasing among the metal-based slurries due to the migration to copper interconnects. KC Tech is also developing copper slurry with one of the major university in Korea. The company estimates the domestic ceria-slurry market to be worth W90-100bn annually and is keen on increasing its share against companies such as Hitachi Chemical (4217 JP, ¥2,047, 3). KC Tech claims its products are 20-30% cheaper than those of its competitors and that the profitability for materials is much higher than that of equipment. Therefore, the company expects its increasing exposure to semiconductor materials to boost overall profitability.

CMP process Global ceria-slurry market share 2009

DA Nano6.0%

Others10.0%Cabot

4.0%RHEM4.0%

Hitachi76.0%

Source: Hitachi Chemical Source: Companies, Daiwa


Earnings outlook KC Tech plans to announce its 1Q FY10 results on 14 May. We forecast revenue of W50.5bn and an operating profit of W4.8bn, compared with W32.6bn and W2.0bn, respectively, for 4Q FY09. Due to an increase in new-fab activity by the domestic semiconductor and LCD makers, KC Tech expects orders to remain strong for the remainder of the year. We forecast quarterly revenue of W45-50bn for FY10. The company’s average operating-profit margin over the past five years has been about 10%. Although revenue slumped in FY09, the company maintained its operating-profit margin at a double-digit percentage due to its exposure to semiconductor materials. While we estimate the operating-profit margin on LCD equipment to be a high-single-digit percentage and on semiconductor equipment to be a low-teens percentage, we believe the operating-profit margin for semiconductor materials is much higher, at 30%. As a result, we forecast the company’s overall operating-profit margin to rise to a mid-teens percentage by FY12 due to the increasing revenue contribution from semiconductor materials. KC Tech has a healthy financial position, given its net cash position of W46bn at the end of FY09. For the past five years, the average dividend-payout ratio was 9.5%. As exports accounted for 22% of FY09 revenue, the sharp appreciation of the Won against the US dollar led to a net foreign-exchange loss of W1.6bn for FY09. However, the company realised a net equity-method gain of W2.9bn for FY09 as most of its affiliate companies were profitable.

KC Tech: quarterly earnings forecasts (Wbn) 1Q09 2Q09 3Q09 4Q09 2009Revenue: Display 16.6 16.3 11.7 19.9 64.5 Semiconductor 0.1 0.1 3.5 3.2 6.9 Materials 0.2 1.1 2.0 3.5 6.8 Others 3.4 4.2 3.7 6.0 17.3 Total 20.3 21.7 20.9 32.6 95.5 Operating profit 1.5 3.8 2.3 2.0 9.7 Operating-profit margin (%) 7.5 17.6 11.2 6.3 10.2 Net profit 1.6 3.3 2.7 2.4 10.1 Net-profit margin (%) 7.8 15.4 12.9 7.4 10.5 1Q10E 2Q10E 3Q10E 4Q10E 2010ERevenue: Display 33.9 30.6 26.7 26.1 117.3 Semiconductor 7.2 7.9 8.9 9.8 33.7 Materials 4.7 5.2 5.9 6.1 21.9 Others 4.7 4.6 4.8 5.1 19.2 Total 50.5 48.3 46.3 47.1 192.2 Operating profit 4.8 5.7 5.8 5.6 22.0 Operating-profit margin (%) 9.6 11.9 12.6 11.9 11.5 Net profit 4.7 5.8 6.3 5.8 22.6 Net-profit margin (%) 9.3 12.1 13.7 12.3 11.8 Source: Company, Daiwa forecasts Risk factors We see risks to our earnings forecasts and target price as intense competition in the equipment business and macroeconomic issues. As KC Tech’s revenue depends heavily on the capex of the LCD-panel makers and semiconductor manufacturers, should component prices drop unexpectedly, this might affect the cash flows of the semiconductor and LCD firms and they might defer their capital-investment spending.

We forecast improving profitability due to its rising exposure to semiconductor materials


Company description KC Tech specialises in wet-processing and cleaning workstations for semiconductor and LCD production lines. Although this can be considered as relatively simple equipment, the cleaning patterns are complex and differ for each process and KC Tech has considerable experience and technology in this area. The company was established in February 1987 and was listed on the KOSPI in November 1997. The company’s headquarter and factories are located in Anseong City, Gyeonggi province. At the end of 2009, KC Tech had 371 employees and Suk Tae Koh, the CEO and president, was KC Tech’s major shareholder with a 35.0% stake.

KC Tech: shareholder structure

ST Koh35.0%

NPS5.1%

Others52.1%

HB Oh7.8%

Source: Company Note: as at 31 March 2010 KC Tech has three major business divisions: 1) display equipment, with FY09 revenue of W65bn (68% of the total), 2) semiconductor equipment, with FY09 revenue of W7bn (7%), and 3) semiconductor materials, with FY09 revenue of W7bn (7% of total), and others including gas cabinets and service revenue. The company’s main customers for display equipment are SEC, LGD, and the Taiwanese panel makers, and SEC and Hynix for semiconductor equipment and materials. KC Tech also supplies semiconductor materials to the domestic memory-chip makers. The company’s order backlog at the end of FY09 was W49bn, compared with W38bn at the end of FY08.

KC Tech: FY10 revenue forecast by product KC Tech: FY10 gross profit forecast by product

Display61.1%

Materials11.4%

Others10.0%

Semicon17.6%

Semicon19.6%

Others6.9%

Materials20.4%

Display53.1%

Source: Daiwa forecasts Source: Daiwa forecasts


SFA Engineering (056190 KS) Electronics: Korea



Jae H. Lee(82) 2 787 9173

[email protected]

Initiation of coverage: a strong contender in the PECVD field

Outperform rating with a target price of W75,000 We initiate coverage of SFA with a 2 (Outperform) rating and six-month target price of W75,000. We believe the company is a key beneficiary of SEC’s LCD capacity expansion as the FPD-equipment business has been the major source of its revenue.

Potential supplier of PECVD and AMOLED equipment SFA primarily supplies the supplementary equipment for LCD production lines, but successfully developed PECVD equipment in 2008. We believe it is a strong contender to supply PECVD, given SEC’s recent equity participation of 10% in SFA.

In AMOLED, SFA is currently a project leader in developing equipment for SMD. As the company plans to complete the project by the middle of 2012, we expect SFA to benefit from ongoing expansion of SMD’s production lines.

Current valuation is not demanding SFA’s share price has rallied by 67% YTD, due to what we believe is the market’s expectation of PECVD materialising into revenue in FY10. The stock is trading at a PER of 16.3x on our FY10 EPS forecast, compared with an average 2010 PER for itsglobal peers of 20.5x, based on the Bloomberg-consensus forecasts.

Our six-month target price of W75,000 is based on a PBR of 2.8x, the average of its peak PBRs over the past three years.


Market data KOSPI 1,721.21 Market cap (US$m) 478.96 EV (US$m; 10E) 382.00 3-mth avg daily T/O (US$m) 3.77 Shares outstanding (m) 9 Free float (%) 51.3 Major shareholder DY Asset (31.8%) Exchange rate W/US$ 1,118 Performance (%)* 1M 3M 6M Absolute 18.2 76.3 54.1 Relative 18.4 65.4 38.8 Source: Daiwa Note: *Relative to KOSPI



19,20034,37549,55064,72579,900

07/5 07/11 08/5 08/11 09/5 09/11 10/5

(W)

5081113144175

Rel to KOSPI


Income summary

Revenue EBITDA Net profit EPS CFPS DPS Year to 31 Dec (Wbn) (%) (Wbn) (%) (Wbn) (%) (W) (%) (W) (W) 2008 431 40.4 58 21.0 50 18.4 5,465 18.4 3,350 1,400 2009 307 (28.7) 20 (65.9) 18 (63.8) 1,979 (63.8) (360) 400 2010E 371 20.8 38 92.5 33 82.6 3,614 82.6 4,306 750 2011E 472 27.1 50 32.6 42 28.1 4,629 28.1 4,076 800 2012E 502 6.5 53 5.1 45 5.8 4,899 5.8 4,825 900 Source: Company, Daiwa forecasts


Company background SFA was spun off from Samsung Techwin in December 1998 and primarily supplies advanced equipment for factory automation and logistics. Since 2001, the company has expanded its business into FPDs, solar cells, and semiconductor equipment. In FY09, display equipment accounted for 50% of revenue, while factory automation and logistics systems accounted for 24% and 26%, respectively.

SFA Engineering – financial summary Profit and loss (Wbn) Balance sheet (Wbn)

Year to 31 Dec 2008 2009 2010E 2011E 2012E FPD 263 152 175 247 256 FA 54 73 83 95 105 Other revenue 114 81 113 130 142 Total revenue 431 307 371 472 502 Other income 0 0 0 0 0 COGS (355) (270) (314) (401) (428) SG&A (22) (22) (24) (26) (27) Other op. expenses 0 0 0 0 0 EBIT 54 15 33 45 47 Net-interest inc./(exp.) 8 5 5 5 6 Assoc/forex/extraord./others 7 5 8 8 9 Pre-tax profit 69 25 45 58 61 Tax (19) (7) (12) (16) (17) Min. int./pref. div./others 0 0 0 0 0 Net profit (reported) 50 18 33 42 45 Net profit (adj.) 50 18 33 42 45 EPS (reported) (W) 5,465 1,979 3,614 4,629 4,899 EPS (adj.) (W) 5,465 1,979 3,614 4,629 4,899 DPS (W) 1,400 400 750 800 900 EBIT (adj.) 54 15 33 45 47 EBITDA (adj.) 58 20 38 50 53

As at 31 Dec 2008 2009 2010E 2011E 2012E Cash & short-term investment 110 91 108 118 138 Inventory 109 27 29 34 38 Accounts receivable 46 38 44 58 64 Other current assets 8 10 12 16 17 Total current assets 274 167 194 227 257 Fixed assets 90 91 96 102 107 Goodwill & intangibles 0 0 0 0 0 Other non-current assets 52 52 58 68 72 Total assets 417 310 348 396 436 Short-term debt 0 0 0 0 0 Accounts payable 41 30 35 41 43 Other current liabilities 137 39 45 50 51 Total current liabilities 178 69 80 91 94 Long-term debt 0 0 0 0 0 Other non-current liabilities 16 12 14 16 17 Total liabilities 194 81 94 107 111 Share capital 5 5 5 5 5 Reserves/R.E./others 218 224 250 285 321 Shareholders' equity 223 228 254 289 326 Minority interests 0 0 0 0 0 Total equity & liabilities 417 310 348 396 436 Net debt/(cash) (110) (91) (108) (118) (138)

Cash flow (Wbn)

Year to 31 Dec 2008 2009 2010E 2011E 2012E Profit before tax 69 25 45 58 61 Depreciation and amortisation 4 5 5 6 6 Tax paid (19) (7) (12) (16) (17) Change in working capital (25) (26) 0 (12) (9) Other operational CF items 1 0 1 1 2 Cash flow from operations 31 (3) 39 37 44 Capex (12) (5) (10) (12) (12) Net (acquisitions)/disposal (3) 1 (2) (3) (1) Other investing CF items 42 10 (7) (12) (12) Cash flow from investing 27 6 (19) (26) (25) Change in debt 0 0 (1) (1) (1) Net share issues/(repurchases) 0 0 0 0 0 Dividends paid (13) (12) (4) (7) (7) Other financing CF items (17) 0 (3) 1 (1) Cash flow from financing (30) (12) (7) (7) (10) Forex effect/others 0 0 0 0 0 Change in cash 28 (10) 13 4 9

Key ratios Year to 31 Dec 2008 2009 2010E 2011E 2012E Sales – YoY % 40.4 (28.7) 20.8 27.1 6.5 EBITDA (adj.) – YoY % 21.0 (65.9) 92.5 32.6 5.1 Net profit (adj.) – YoY % 18.4 (63.8) 82.6 28.1 5.8 EPS (adj.) – YoY % 18.4 (63.8) 82.6 28.1 5.8 EBITDA margin % (adj.) 13.5 6.4 10.3 10.7 10.6 EBIT margin % (adj.) 12.4 4.9 8.9 9.4 9.3 Net-profit margin % (adj.) 11.6 5.9 8.9 8.9 8.9 ROAE (%) 23.4 8.0 13.6 15.5 14.5 ROAA (%) 12.5 5.0 10.0 11.3 10.7 ROCE (%) 25.2 6.7 13.6 16.4 15.2 ROIC (%) 41.7 8.8 16.9 20.5 19.0 Net debt to equity (%) net cash net cash net cash net cash net cash Effective tax rate (%) 27.3 28.1 27.0 27.0 27.0 Accounts receivable (days) 45.8 50.5 40.8 39.8 44.6 Payables (days) 37.5 42.4 32.2 29.3 30.2 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. Net dividend payout (%) 25.6 20.2 20.8 17.3 18.4

Key assumptions


PBR bands

3.5x2.8x2.1x1.4x0.7x

7,943

27,943

47,943

67,943

87,943


(W)



Investment summary We initiate coverage of SFA with a 2 rating and six-month target price of W75,000. We believe the company is a key beneficiary of SEC’s LCD capacity expansion, as the FPD equipment business has been the major source of its revenue growth over the past five years. Although SFA primarily supplies the supplementary equipment for LCD production lines, such as polariser attachers, in-line systems, and testing equipment, the company developed PECVD equipment in 2008. SFA has not delivered any PECVD equipment so far, but as SEC plans to expand its Gen8 capacity later this year, we believe that there is a high possibility of the company providing the core front-end equipment for the first time, especially with recent equity participation from SEC. For factory-automation and logistics systems, the addressable market is expanding steadily on the back of corporate measures to reduce costs and effectively manage their supply chains. Although SFA’s revenue declined by 29% YoY for FY09 as a result of reduced capital spending by its core customers, we forecast revenue to increase by 21% YoY to W371bn for FY10. SFA’s share price has rallied by 67% YTD, outperforming the KOSPI and Daiwa’s Korean equipment company index by 65% and 27%, respectively, due to what we believe as the market’s expectation of PECVD materialising into revenue in FY10 and the company’s rising exposure in AMOLED equipment. The stock is trading at a PBR of 2.1x on our FY10 BVPS forecast, and has traded within a range of 0.8-3.2x over the past five years. We have assigned an average peak PBR multiple of 2.8x on our FY10 BVPS forecast to derive our target price of W75,000. Meanwhile, the stock is trading at a PER of 16.3x on our FY10 EPS forecast, and our target price is equivalent to an FY10 PER of 20.8x. Given that the average 2010 PER for its global peers is around 20.5x, based on the Bloomberg-consensus forecasts, we do not believe the current valuation is demanding.

SFA: share price and PBR

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-100

1

2

3

4

5


(W) (x)

Source: Company, FnData, Daiwa forecasts Note: PBR based on incremental BVPS Revenue-growth prospects For FY10, SFA guides for its revenue to rise by a high-single digit percentage year-on-year to W330bn. However, we believe there is further upside to FY10 revenue given that SEC is likely to expand its LCD production line capacity. SEC currently has three Gen8 lines with a capacity of 70,000 substrates per month each, and we expect the capacity for one of these lines to be raised to 100,000 substrates per month by the end of 2Q FY10, resulting in a total Gen8 capacity of 240,000 substrates per month. However, as LGD plans to raise its Gen8 line capacity to over 300,000 substrates per month by the middle of FY11, we expect SEC to install a new Gen8 line (Line8-2-2) to match LGD’s capacity.

Our six-month target price of W75,000 is equivalent to an FY10 PER of 20.8x

Potential increase in SEC’s LCD line capacity could lead to additional order intakes


Since SEC’s latest ramp-up of a new LCD production line (Line8-2-1) was back in 2Q09 and the purchasing orders for equipping this line were given out to domestic equipment companies during 2H08, SEC has not placed any new LCD equipment orders (for a new fab) over the past 18 months. However, as we expect SEC to make the decision to build a new LCD line over the next few months, we expect additional order intakes for SFA. In addition, we believe that SFA is a strong contender to supply PECVD equipment to SEC’s new line for the first time. In the past, SEC has primarily purchased PECVD equipment from Applied Materials. However, we believe that SEC will be keen to reduce equipment costs by having more than one vendor for procuring PECVD equipment. For FY10, we forecast SFA’s FPD equipment revenue to rise by 15% YoY due to a sharp recovery in capital spending by SEC, accounting for 47% of total revenue.

SFA: revenue and operating-profit margin forecasts

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010E 2011E 2012E024681012141618

FPD (LHS) FA (LHS) Logistics (LHS) OP margin (RHS)

(Wbn) (%)

Source: Company, Daiwa forecasts In AMOLED equipment, SFA is currently a project leader in developing equipment for SMD. Since most of the OLED equipment is supplied by Japanese companies, SMD and LGD each formed a consortium with W18bn in funding from the Korean Government in 2009. As SFA plans to complete the project by the middle of 2012, we do not expect a material contribution from AMOLED equipment in the near term. However, as the global AMOLED market continues to expand at a healthy rate and SMD remains the most aggressive company, we expect SFA to benefit.

Global AMOLED demand

0

20

40

60

80

100

120

140

1Q09

2Q09

3Q09

4Q09

1Q10

E

2Q10

E

3Q10

E

4Q10

E

1Q11

E

2Q11

E

3Q11

E

4Q11

E

1Q12

E

2Q12

E

3Q12

E

4Q12

E

(20)(10)0102030405060

Demand (LHS) QoQ growth (RHS)

(1,000 sq m) (%)



Earnings outlook SFA plans to announce its 1Q FY10 results on 12 May. We forecast revenue of W51.8bn and an operating profit of W0.6bn, compared with 1Q FY09 revenue of W47.0bn and an operating loss of W0.8bn. Since 1Q is normally a slow quarter for the company, we forecast weak year-on-year revenue growth for 1Q FY10. However, as we expect the company to receive additional orders for LCD equipment over the next six months, we expect a robust year-on-year increase in its FY10 revenue. Over the past five years, SFA’s average operating-profit margin has been over 12%, but combined with an overall slump in revenue and more aggressive pricing strategies deployed by its competitors, the company’s operating-profit margin declined to 5% for FY09. For FY10, we expect the operating-profit margin to recover to a high-single digit percentage as we expect stronger revenue to offset some of the fixed-cost burden. We believe that the upside potential to our operating-profit margin assumption lies with PECVD equipment, since the profitability is much higher than that of supplementary systems. SFA runs a healthy balance sheet, as it has no interest-bearing debt while holding over W91bn in its cash reserves at the end of 4Q FY09. Since exports accounted for 12% of its revenue for FY09, the company’s foreign-exchange-related gains and losses are relatively small compared with those of other domestic equipment companies. During the past five years, SFA’s average dividend-payout ratio has been 24% as the company was capable of covering its annual capex requirements (W10bn) and R&D expenses (3% of revenue) with its internally generated cash flow.

SFA: quarterly earnings forecasts (Wbn) 1Q09 2Q09 3Q09 4Q09 2009Revenue: FPD 29.3 35.3 36.9 51.0 152.5 Factory automation 8.2 17.4 22.3 25.4 73.3 Logistics 9.5 10.3 15.4 46.1 81.3 Total 47.0 63.0 74.6 122.5 307.1 Operating profit (0.8) 2.4 4.5 9.2 15.2 Operating-profit margin (%) (1.7) 3.8 6.0 7.5 4.9 Net profit 0.1 4.8 3.7 9.4 18.0 Net-profit margin (%) 0.3 7.6 4.9 7.7 5.9 1Q10E 2Q10E 3Q10E 4Q10E 2010ERevenue: FPD 23.3 37.4 44.2 70.1 175.1 Factory automation 11.0 20.9 24.3 26.7 82.9 Logistics 17.4 20.9 32.4 42.3 113.0 Total 51.8 79.2 101.0 139.1 371.0 Operating profit 0.6 6.2 9.9 16.2 32.9 Operating-profit margin (%) 1.1 7.8 9.8 11.6 8.9 Net profit 1.5 6.3 10.0 15.1 32.9 Net-profit margin (%) 2.9 8.0 9.9 10.8 8.9 Source: Company, Daiwa forecasts Risk factors Risks to our earnings forecasts and target price are: 1) LCD demand failing to meet supply, resulting in overcapacity and leading to capex cuts by LCD-panel makers, 2) market conditions leading to a slowdown in the economy, which could adversely affect corporate investment in factory-automation and logistics systems, and 3) an increase in competitive pressure on equipment prices, which could affect the profit margin.

We forecast operating-profit margin to improve to high-single digit percentage for FY10


Company description SFA specialises in providing various equipment for producing FPDs, factory-automation equipment and logistics systems. The company was spun off from Samsung Techwin in December 1998 and listed on the KOSDAQ market in December 2001. The company’s headquarters is located in Hwaseong City, Gyeonggi Province, and has production facilities in Hwaseong, Changwon and Asan. At the end of 2009, SFA had 642 employees with Mr. Hyo-Jum Bae as CEO. The current major shareholders are DY Assets with a 41.8% stake and National Pension Service with a 5.6% stake as at 31 March 2010.

SFA: shareholder structure

NPS5.6%

Treasury stock2.9%

Others44.6%

SEC10.0%

Sky Lake5.0%

DY Assets31.8%

Source: Company Note: as at 3 May 2010 SFA has three major business units: 1) FPD equipment, with FY09 revenue of W152bn (50% of total), 2) factory-automation equipment, with FY09 revenue of W73bn (24% of total), and 3) logistics systems, with FY09 revenue of W81bn (26% of total). SFA’s major customers in FPD equipment are SEC, Samsung Corning Precision Glass (Not listed), and S-LCD (Not listed). In factory-automation equipment, its major customers include domestic shipbuilders and chemical companies, and in logistics systems, the main customers are discount stores, cosmetics and pharmaceutical companies, and dairy producers. The company’s order backlog as at the end of FY09 was W183bn, compared with W228bn at the end of FY08.

SFA: order backlog (as at 31 Dec 2009) (Wbn) SFA: FY10 revenue forecast by product

FA46

Logistics43.3

FPD93.3

FA22.0%

Logistics30.6%

FPD47.4%

Source: Company Source: Daiwa forecasts


Jusung Engineering: share price and Daiwa recommendation trends Date 2010-05-03 Target price (W) 28,000 Rating 1

28,000

0

5,000

10,000

15,000

20,000

25,000

30,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0

Target price (W) Closing price (W)

Source: Daiwa

KC Tech: share price and Daiwa recommendation trends Date 2010-05-03 Target price (W) 9,200 Rating 1

9,200

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0Target price (W) Closing price (W)

Source: Daiwa

SFA Engineering: share price and Daiwa recommendation trends Date 2010-05-03 Target price (W) 75,000 Rating 2

75,000

010,00020,00030,00040,00050,00060,00070,00080,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0


Source: Daiwa


LG Display: share price and Daiwa recommendation trends Date 2010-04-14 2010-01-21 2009-10-15 2009-07-09 2009-04-17 2009-04-03 2009-01-19 2008-11-14Target price (W) 43,000 40,000 35,000 42,000 38,000 36,000 32,000 22,000 Rating 3 3 3 2 2 2 2 3 Date 2008-10-15 2008-07-10 Target price (W) 30,000 45,000 Rating 3 2

43,00042,00038,00036,000

32,00030,000

45,00035,000

22,000

40,000

0

10,000

20,000

30,000

40,000

50,000

60,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0


Source: Daiwa

Samsung Electronics: share price and Daiwa recommendation trends Date 2010-04-30 2010-04-07 2010-01-29 2009-10-30 2009-09-29 2009-09-02 2009-07-24 2009-07-03Target price (W) 1,080,000 1,040,000 970,000 920,000 960,000 940,000 800,000 720,000Rating 2 2 2 2 2 2 2 2 Date 2009-04-24 2009-01-29 2009-01-16 2008-12-04 2008-10-27 2008-08-27 2008-07-28 2008-06-13Target price (W) 560,000 480,000 500,000 520,000 540,000 670,000 740,000 820,000Rating 3 3 2 2 2 2 2 2

480,000

560,000720,000

940,000 960,000

520,000

1,080,000

820,000

670,000800,000740,000

920,000

540,000 500,000

1,040,000970,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0


Source: Daiwa


LG Electronics: share price and Daiwa recommendation trends Date 2010-04-28 2010-04-21 2010-03-08 2010-01-27 2009-12-04 2009-10-21 2009-07-22 2009-06-10Target price (W) 135,000 135,000 135,000 140,000 145,000 150,000 160,000 145,000Rating 2 2 2 2 2 2 2 2 Date 2009-05-14 2009-04-22 2009-03-16 2009-01-23 2009-01-07 2008-11-12 2008-10-21 2008-07-22Target price (W) 130,000 125,000 98,000 70,000 86,000 95,000 105,000 118,000Rating 2 2 2 3 3 3 3 3

130,000140,000

95,000105,000118,000

86,000

70,000

125,000140,000135,000

160,000 150,000145,000

98,000

145,000

020,00040,00060,00080,000

100,000120,000140,000160,000180,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0


Source: Daiwa

LG Innotek: share price and Daiwa recommendation trends Date 2010-04-27 2010-04-08 Target price (W) 180,000 145,000 Rating 2 2

145,000

180,000

020,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0


Source: Daiwa


Hyundai Heavy Industries: share price and Daiwa recommendation trends Date 2010-04-23 2010-04-14 2010-01-28 2009-07-20 2009-05-04 2009-01-30 2008-10-31 2008-09-22Target price (W) 260,000 240,000 170,000 180,000 190,000 160,000 140,000 400,000 Rating 3 3 4 4 4 4 4 1 Date 2008-07-30 2008-06-20 Target price (W) 470,000 490,000 Rating 1 1

180,000

160,000

190,000140,000

400,000470,000

170,000 240,000260,000

050,000

100,000150,000200,000250,000300,000350,000400,000450,000500,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0


Source: Daiwa

Hynix Semiconductor: share price and Daiwa recommendation trends Date 2010-04-22 2010-03-31 2010-01-21 2009-09-23 2009-08-20 2009-07-27 2009-04-27 2009-02-06Target price (W) 35,000 32,000 30,000 26,000 24,000 20,000 10,000 8,000Rating 2 2 2 2 2 2 4 4 Date 2008-12-04 2008-10-31 2008-10-08 2008-08-01 Target price (W) 6,800 10,000 20,000 24,000 Rating 4 4 3 3

10,000

30,00026,000

20,000

6,80010,000

20,00024,000

35,000

8,000

32,000

24,000

05,000

10,00015,00020,00025,00030,00035,00040,000

May-0

8

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-0

8

Dec-0

8

Jan-

09

Feb-

09

Mar-0

9

Apr-0

9

May-0

9

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct-0

9

Nov-0

9

Dec-0

9

Jan-

10

Feb-

10

Mar-1

0

Apr-1

0


Source: Daiwa


DAIWA’S ASIA PACIFIC RESEARCH DIRECTORY

Hong Kong Regional Research Head, Pan Asia Research Nagahisa MIYABE (852) 2848 4971 [email protected] Regional Research Co-head Craig IRVINE (852) 2848 4485 [email protected] Macro Economy (Hong Kong, China) Kevin LAI (852) 2848 4926 [email protected] Strategy (Regional) Mun Hon THAM (852) 2848 4426 [email protected] All Industries (China), Pan Asia Research Hongxia ZHU (852) 2848 4460 [email protected] Automobiles (China) Ricon XIA (852) 2848 4923 [email protected] Consumer/Retail (Hong Kong, China) Peter CHU (852) 2848 4430 [email protected] Consumer/Retail (China) Nicolas WANG (852) 2848 4963 [email protected] IT/Electronics – Semiconductor and Solar (Regional, Taiwan, Singapore, Hong Kong and China)

Pranab Kumar SARMAH (Regional Head of IT/Electronics)

(852) 2848 4441 [email protected]

IT/Electronics – Tech IT Services (Hong Kong, China) Joseph HO (852) 2848 4443 [email protected] Materials/Energy (Regional) Alexander LATZER

(Regional Head of Materials) (852) 2848 4463 [email protected]

Oil & Gas (China, Korea) Andrew CHAN (852) 2848 4964 [email protected] Property Developers (Hong Kong) Jonas KAN (Head of Hong Kong Research) (852) 2848 4439 [email protected] Property Developers (China), Small/Medium Caps (Hong Kong, China)

Kevin LEUNG (852) 2848 4489 [email protected]

Telecommunication (Regional, Greater China and Singapore)

Marvin LO (852) 2848 4465 [email protected]

Transportation – Marine, Capital Goods – Infrastructure Construction (Hong Kong, China)

Geoffrey CHENG (852) 2848 4024 [email protected]

Transportation – Aviation and Expressway (Hong Kong, China, Singapore)

Kelvin LAU (852) 2848 4467 [email protected]

South Korea Banking/Finance Chang H LEE (Head of Research) (82) 2 787 9177 [email protected] Automobiles, Shipbuilding, Steel Sung Yop CHUNG (82) 2 787 9157 [email protected] Capital Goods (Construction and Machinery) Mike OH (82) 2 787 9179 [email protected] Consumer/Retail Sang Hee PARK (82) 2 787 9165 [email protected] Industrials, Pan Asia Research Naoki IEIRI (82) 2 787 9184 [email protected] IT/Electronics (Tech Hardware and Memory) Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics Steve OH (82) 2 787 9195 [email protected] IT/Electronics, Software (Internet/On-line Game), Telecommunication

Thomas Y KWON (82) 2 787 9181 [email protected]

Materials (Chemicals) Daniel LEE (82) 2 787 9121 [email protected] Taiwan Head of Research, Pan Asia Research Hirokazu MITSUDA (886) 2 2758 8754 [email protected] Co-head of Research, Strategy Alex YANG (886) 2 2345 3660 [email protected] Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8780 5987 [email protected] IT/Technology Hardware (PC) Calvin HUANG (886) 2 2758 8805 [email protected] IT/Technology Hardware (Handsets and Components) Andrew CHANG (886) 2 8789 5341 [email protected] IT/Technology Hardware (Panels) Chris LIN (886) 2 8788 1614 [email protected] IT/Technology (Small/Medium Caps) Jamie YEH (886) 2 8788 1696 [email protected] IT/Technology Hardware, Pan Asia Research Mitsuharu WATANABE (886) 2 2758 9437 [email protected] Materials, Small/Medium Caps Albert HSU (886) 2 8786 2212 [email protected] India Strategy/Capital Goods/Industrials/Utilities Jaideep GOSWAMI (Head of Research) (91) 22 6622 1010 [email protected] Automobiles Hitesh GOEL (91) 22 6622 1060 [email protected] Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Materials Vishal CHANDAK (91) 22 6622 1006 [email protected] Oil & Gas, Construction, Small/Medium Caps Atul RASTOGI (91) 22 6622 1020 [email protected] Pharmaceuticals and Healthcare, Consumer Kartik A. MEHTA (91) 22 6622 1012 [email protected] Real Estate Amit AGARWAL (91) 22 6622 1063 [email protected] Software (Tech IT Services), Telecommunications R. RAVI (91) 22 6622 1014 [email protected] Singapore Head of Research, Pan Asia Research Tatsuya TORIKOSHI (65) 6321 3050 [email protected] Macro Economy (Regional) Prasenjit K BASU

(Chief Economist, Asia Ex-Japan) (65) 6321 3069 [email protected]

Banking, Property and REITs (Singapore) David LUM (Regional Head of Banking/Finance)

(65) 6329 2102 [email protected]

Conglomerates, Soft Commodities, Energy and Small/Medium Caps (Singapore)

Chris SANDA (65) 6321 3085 [email protected]

Australia Banking/Insurance Johan VANDERLUGT (61) 3 9916 1335 [email protected] Resources/Mining/Petroleum David BRENNAN (61) 3 9916 1323 [email protected] Japan Industrials (Regional), Pan Asia Research Taiki KAJI (81) 3 5555 7174 [email protected] Industrials (Regional), Pan Asia Research Daijiro HATA (81) 3 5555 7178 [email protected]


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