initiation: catch the next wave in oled displays positive...

See important disclosures, including any required research certifications, beginning on page 72

29 August 2013

Initiation: catch the next wave in OLED displays

• We expect fast-evolving OLED-display technology to pave the way for game-changing mobile devices and TVs

• Amid ongoing capacity expansion and rising market adoption, equipment makers should benefit first, then material companies

• Our picks: SEC, SFA Eng, Wonik IPS, and Duksan Hi-Metal

Korea OLED-display Sector

Information Technology / Korea

Positive (initiation)

Neutral

Negative

How do we justify our view?How do we justify our view?

Korea OLED-display Sector 29 August 2013

Catch the next wave in OLED displays ....................................................................................... 4 What’s new in the OLED industry ........................................................................................... 4 Overview of OLED technology ................................................................................................. 4 Why we think OLED will be a game changer ........................................................................... 5

Playing the OLED theme in Korea ............................................................................................. 12 Initiating coverage of four OLED-display equipment/materials companies ........................ 12 Key OLED players in Korea .................................................................................................... 13 Equipment companies should be the first to benefit ............................................................. 17 Materials companies should catch up with rising production volume ................................. 20 OLED market should expand with new entrants .................................................................. 23

Company Section

Samsung Electronics ............................................................................................................... 25 SFA Engineering .................................................................................................................... 28 Wonik IPS ............................................................................................................................... 31 Duksan Hi-Metal .................................................................................................................... 39 Advanced Process Systems ..................................................................................................... 47 Soulbrain ................................................................................................................................. 55 LG Display .............................................................................................................................. 63

Please also see:

OLED Display Made Easy: Get ahead of the curve

29 August 2013

Jae H Lee(82) 2 787 9173 ([email protected]) Joshua Oh (82) 2 787 9176 ([email protected])

Contents

http://asiaresearch.daiwacm.com/eg/cgi-bin/files/OLED_Displays_MadeEasy_130829.pdf#page=1


■ Investment case We see organic light-emitting diode (OLED) as a transformational technology for the display market, as it has superior quality and the potential to be cheaper than LCDs. We forecast the OLED market to expand to USD24.0bn by 2015, from USD6.8bn in 2012 (vs. USD106bn for the LCD market in 2012). From smartphones to TVs, makers of electronics products are facing slowing demand and falling product prices, and hence are keen to differentiate their gadgets. The current generation of OLED displays is already a differentiating factor for some applications. Pending the resolution of a few technical hurdles, we believe that future OLED displays will lead to a wave of devices with flexible and even transparent displays. The OLED supply chain is dominated by Korea companies, with Samsung Display (Not listed) accounting for more than 96% of global OLED production capacity for

2012. Investment in OLED technology is just taking off, and we believe the main beneficiaries will be related equipment companies, followed by the material companies. ■ Catalysts Mobile displays look set to account for the majority of OLED shipments this year, and we forecast small and medium-sized OLED display shipments to grow by 80% YoY to 252m units for 2013. Although only a handful of smartphone makers have so far adopted OLED displays, we expect more to do so once the first generation of flexible displays hit the market in 4Q13. Given our view that OLED offers higher sales-growth potential and better profitability, we expect some LCD panel makers to shift to producing OLED displays. Although there are technological and financial entry barriers, we see the 20%-plus operating-profit margin of Samsung Display’s OLED business being a powerful lure for new entrants. ■ Valuation Based on our and the Bloomberg-consensus forecasts, the Korea OLED-display Sector is trading at 11.2x 2013E PER. On PBR, it is trading at 1.8x for 2013E (1.9x excluding the large-cap stocks). Relative to its average PBR during the past three years of 2.3x (2.8x excluding large-caps), we consider the sector to be attractively valued. Our top pick is Samsung Electronics (SEC; 005930 KS,

KRW1,309,000, Buy [1]), as it is the largest user of OLED displays and holds 84.8% of Samsung Display. Among the equipment plays, we like SFA Engineering (SFA; 056190 KS, KRW50,700, Buy [1]), which we see as an all-round player. We initiate on Wonik IPS (Wonik; 030530 KS, KRW6,570) with a Buy (1) rating, as we expect an increase in new orders for its OLED and NAND-flash equipment in 2H13. In the materials segment, we initiate on Duksan Hi-Metal (Duksan; 077360 KS, KRW23,450) with a Buy (1) call, as we expect it to benefit from a sustainable increase in demand for OLED materials. ■ Risks Weaker-than-expected demand for smart devices and TVs would be a risk to our sector view.

29 August 2013


• We expect fast-evolving OLED-display technology to pave the way for game-changing mobile devices and TVs

• Amid ongoing capacity expansion and rising market adoption, equipment makers should benefit first, then material companies

• Our picks: SEC, SFA Eng, Wonik IPS, and Duksan Hi-Metal

Korea OLED-display Sector

Key stock calls

Source: Daiwa forecasts.



Neutral

Negative

Jae H. Lee(82) 2 787 9173

[email protected]

Joshua Oh, CFA(82) 2 787 [email protected]

New Prev.Samsung Electronics (005930 KS)Rating Buy BuyTarget 1,800,000 1,800,000Upside 37.5%

SFA Engineering (056190 KS)Rating Buy BuyTarget 72,000 72,000Upside 42%

Wonik IPS (030530 KS)Rating BuyTarget 10,000Upside 52.2%

Duksan Hi-Metal (077360 KS)Rating BuyTarget 31,000Upside 32.2%



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How do we justify our view?

Growth outlook

Valuation

Earnings revisions

Growth outlook Global OLED market revenue

Although the global OLED market was relatively small at USD500m in 2009, it had expanded to USD6.8bn by 2012, fuelled by the proliferation of OLED displays in mobile devices. Over the next three years, we expect new OLED products, such as TVs and flexible displays, to see global OLED market revenue expand to USD24bn in 2015.

Source: Daiwa forecasts

Valuation Korea OLED-display Sector: PBR band

Based on our and the Bloomberg-consensus earnings forecasts, the Korea OLED-display Sector is trading at a 2013E PER of 11.2x. In PBR terms, the sector is trading at 1.8x (simple average) for 2013, and 1.9x if we exclude the large-cap companies. Relative to its average PBR during the past three years of 2.3x (weighted average of 2.8x excluding the large-cap companies), we believe the Korea OLED-display Sector is attractively valued.

Source: Companies, FnData, Bloomberg, Daiwa forecasts

Earnings revisions Global OLED capex

Since OLED-related companies’ top-line growth is driven mainly by their investment in new production lines, we believe there is upside to our earnings forecasts as OLED display makers increase their capex. Although most of the capex is currently done by Samsung Display and LG Display, we think it is likely that other LCD panel makers will increase their spending on OLED.

Source: Companies, Daiwa forecast


Neutral

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Source: Daiwa forecasts; note: prices as of close on 28 August 2013

Executive summary


With devices sporting the next generation of OLED displays set to surface shortly, we see the Korea OLED-display sector as poised for take-off.

Investment thesis OLED displays have been in commercial use since 2007, when SEC started using them in its mobile phones. In comparison with LCDs, OLED displays offer better picture quality in many respects and weigh less, as they have fewer components.

We expect OLED displays to enter the mainstream as they offer new features that allow device makers to differentiate their products. Look for end-products with foldable and rollable displays in the next few years.

While they did not develop the technology, Korea companies have successfully commercialised it. Refining the manufacturing process has proved difficult, and it has taken Samsung Display nearly three years to realise production yields of 80% for OLED displays for mobile devices.

As OLED displays do not need backlights or optical films, the supply chain mainly comprises processing-equipment and materials companies. Most related companies in Korea supply Samsung Display and LGD, the sole manufacturers of OLED displays.

Valuation and stock picks The Korea OLED-display Sector is trading at 2013E PBR of 1.8x (simple average), and 1.9x if we exclude large-caps such as SEC and LGD. Relative to the sector’s past-three-year average PBR of 2.3x (2.8x weighted average excluding SEC and LGD), we see current valuations as appealing.

Share prices in the OLED-display sector have tended to move in unison, but we expect the sector to become more cyclical as new entrants arrive. Our top pick is SEC, which is the largest user of OLED displays in customer devices and the majority shareholder in Samsung Display.

Among the equipment companies, we highlight SFA Engineering. It has mainly supplied logistics systems for Samsung Display’s OLED-display production line, and we think it is likely to provide core-deposition equipment for OLED-TV lines going forward.

Among our newly initiated coverage, our picks are Wonik IPS, for its growing exposure to OLED-display equipment and opportunities in NAND-flash, and Duksan Hi-Metal, for its potential revenue growth in organic materials for OLED-TVs.

Korea companies are dominant players in the OLED-display segment. Samsung Display and LGD are for now the sole manufacturers of OLED displays. Korea processing-equipment and materials companies are also exposed to growth in the segment. Valuations look appealing relative to historical levels. Our top pick is SEC, the biggest user of OLED displays and the major shareholder of Samsung Display. We also like SFA Engineering, Wonik IPS, and Duksan Hi-Metal.

Sector stocks: key indicators

Share

Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg

Advanced Process Systems 054620 KS 10,600 Buy 13,500 955 1,167

Duksan Hi-Metal 077360 KS 23,450 Buy 31,000 1,408 1,929

LG Display 034220 KS 29,350 Hold Hold 30,000 30,000 0.0% 1,867 2,462 (24.2%) 2,449 2,853 (14.2%)

Samsung Electronics 005930 KS 1,309,000 Buy Buy 1,800,000 1,800,000 0.0% 208,771 206,746 1.0% 228,467 227,390 0.5%

SFA Engineering 056190 KS 50,700 Buy Buy 72,000 72,000 0.0% 4,927 4,998 (1.4%) 6,182 6,346 (2.6%)

Soulbrain 036830 KS 43,450 Outperform 50,000 5,532 6,436

Wonik IPS 030530 KS 6,570 Buy 10,000 329 582

Rating Target price (local curr.) FY1

EPS (local curr.)

FY2


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Catch the next wave in OLED displays

We forecast the global OLED market to expand to USD24.0bn for 2015, from USD6.8bn for 2012, as the technology’s superior quality and potential to be cheaper than LCDs come to the fore.

What’s new in the OLED industry

Electronic devices sporting OLED displays have been widely discussed in the market for some time, as have the sales-growth prospects of OLED displays. Although some investors seem concerned that the OLED-display market is in its early stages and one company dominates production, others may contend that OLED displays will eventually replace almost all of today’s conventional displays. In this report, we discuss the potential applications for OLED displays, quantify the sales outlook for the coming years, and assess the supply chain to see which companies are best placed to ride the next wave of display technology. Samsung Display’s A3 line In late July, the Korea Economic Daily reported that Samsung Display had indefinitely delayed the planned ramp-up of its Gen6 OLED line, which is known as the A3 line. The newspaper also stated that the weaker-than-expected sales of SEC’s flagship Galaxy S4 smartphone had resulted in lower-than-expected demand for OLED displays. The share prices of OLED-related companies declined sharply as the market digested the implications of this apparently more subdued market outlook. However, our checks with various equipment and materials companies indicate that the A3 line is still scheduled to commence volume production in mid-2014, and that related equipment orders are likely to materialise at the end of 2013. Moreover, SEC has confirmed publicly that its OLED investment plans are intact and it expects robust demand for OLED displays in 2H13 and 2014.

Flexible displays Both SEC and LG Display (LGD) (034220 KS, KRW29,350, Hold [3]) announced earlier this year that they intend to launch flexible displays using OLED technology in 2H13. We understand that the encapsulation process, which seals the flexible display in order to protect it from oxygen and moisture, has proved problematic. Still, our research in the market suggests that Samsung Display’s production yield for flexible displays has improved to around 80% and a smartphone featuring a flexible display is likely to debut in 4Q13. Acquisition of Novaled In early August, Cheil Industries (Not rated) and SEC respectively took 50% and 40% stakes in Germany-based OLED materials maker Novaled (Not listed). As Samsung Venture Investment Corp already had a 10% holding in Novaled, the company is now 100%-owned by affiliates of the Samsung Group. Novaled specialises in PIN technology, a collective term for an OLED display’s p-doped transport layer, intrinsic light-emitting layers, and n-doped transport layer. Simply put, PIN technology is akin to an additive that helps to make electrons within a display move faster. We believe that the Samsung Group is strongly committed to OLED production judging by this acquisition, which also boosts the group’s intellectual property (IP) portfolio by more than 500 patents. We understand that Cheil Industries, which already supplies electron transport layers to Samsung Display, will take the lead role in the group’s vertical-integration efforts in organic materials.

Overview of OLED technology

In our accompanying MadeEasy report on OLED Displays, we explain OLED technology in layman’s terms. Below we include some extracts from that report in order to compare OLED displays with LCDs. What are OLEDs? OLED is a display technology in which organic materials are placed between two pieces of glass. When an electrical current is applied, a bright light is emitted from the display. The structure is somewhat similar to that of a conventional LCD, which has liquid crystals between two glass substrates. However, the structure of an OLED is simpler than the structure of LCD because, unlike LCD, OLED does not require backlighting and colour filters in order to emit light.


- 5 -

Comparison of the structure of OLED display and LCDs

Source: Companies, Daiwa

How do OLED displays compare with LCDs? OLED displays consume less power and have a higher contrast ratio (the blacks are really dark and whites are really bright) than LCDs, as OLEDs emit their own light. Therefore, they can simply turn pixels off and on, whereas with an LCD, the backlight is constantly turned on and the liquid crystals are used to block or emit light. In addition, OLED displays have a broader colour spectrum, faster response time, and lighter weight (as they have fewer components) than LCDs. However, OLED displays are not perfect. A major disadvantage at present is that they are more expensive than LCDs. In the TV segment, OLED-TVs retail for 5-6x the price of an LCD set. When OLED displays were first commercialised in 2007, their short lifespans and limited visibility in sunlight were also disadvantages. However, over the past few years, we have seen steady improvements made in both aspects. Comparison of OLED displays and LCDs OLED LCD Power consumption Lower than LCD Lower than plasma but higher than

OLED Backlight No Yes Viewing angle 170 degrees 160 degrees (colours shift from the

side) Contrast ratio 65,000:1 – 1,000,000:1 15,000:1 Production cost High Low Flexible display Yes No Lifetime Up to 50,000 hours 50,000-100,000 hours Thickness 4mm for OLED-TVs 8-15mm for LCD-TVs (with LED

backlight)


Why we think OLED will be a game changer

From smartphones to TVs, many makers of electronics products globally are facing slowing market demand and falling product prices.

Keen to avoid ceding market share to their rivals, these companies are actively seeking ways to differentiate their products. We believe that OLED will emerge as a mainstream display technology, as it promises a range of features that should appeal to manufacturers seeking to differentiate their products. Once a few technical hurdles have been overcome, we should see products sporting flexible and even transparent OLED displays. Concerns over slowing growth in the smartphone market In recent months there has been widespread concern among investors at the slowdown in sales growth in the global smartphone market. Both SEC and HTC have experienced dwindling sales of the flagship smartphones, the Galaxy S4 and HTC One. Although we believe that the global smartphone market will continue to see double-digit percentage sales growth YoY in the next few years, we expect ASPs and profitability to come under pressure as competition intensifies. Global smartphone market forecast


In addition, since we expect the bulk of the sales growth in the coming years to come from emerging markets, we believe the driver of growth will shift from high-end smartphones to the low-end and mid-range segments. On our forecasts, high-end handsets will account for 40% of smartphone shipments in 2013 (down from 50% for 2010) while low-end products will account for 30% (up from 15% in 2010).

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Breakdown of global smartphone shipments


Despite the slowdown in sales growth in the high-end segment, most handset makers are still focusing on winning market share with premium products because these tend to be the most profitable. Apple and SEC, the big two players in the high-end market, accounted for more than 100% of the operating profit of the global smartphone industry as a whole in 2Q13, as several other companies posted operating losses. Our bill-of-material (BOM) cost analysis for the Galaxy S4 and a typical low-end smartphone made in China indicates there is a large difference between the two in total cost and shipment price. However, for premium models, marketing costs could be much higher, since companies need to invest in order to build the brand equity needed in the high-end segment. Smartphone manufacturing cost comparison

Galaxy S4 China smartphoneProcessor 20 0Display 75 15Memory 28 additionalMechanical 22 8Battery 5 3Bluetooth / WLAN 6 8Camera 18 5Baseband / RF / PA 22 12User interface 18 3Power management 9 4Others 6 6Total materials 229 64Manufacturing cost 9 7Total cost 237 71Shipment price 600 80

Source: HIS iSuppli, Companies, Daiwa

Smartphone specs continue to evolve, but the ‘wow’ factor is lacking The top-tier smartphone makers continue to focus on improving the functionality of their products (mainly on the hardware side) while offering a variety of new models targeting different market segments. However, smartphone users have rising expectations of what their devices should do, and it will be difficult for the

major players to meet these expectations in the absence of a ‘wow’ factor, in our view. At the same time, most smartphone makers are pursuing similar strategies, whereby they adopt advanced hardware and then incrementally add features with each new model. In such circumstances, standing out from the crowd is far from easy. When LG Electronics (LGE) (066570 KS, KRW71,900, Hold [3]) unveiled its new flagship smartphone, the G2, in New York on 7 August, the ensuing headlines highlighted the device’s “killer hardware” and “zippy processor”. Although sales of the G2 may exceed those of its predecessors, we believe there is no longer anything extraordinary about an Android phone with cutting-edge hardware. In other words, while the G2 may meet the needs of those looking for the latest and greatest smartphone, it is questionable whether it will draw new consumers to the smartphone segment, in our view. Flagship smartphones: spec comparison

Galaxy S4 Moto X G2Size (mm) 136.6 x 69.8 x 7.9 123.8 x 58.6 x 7.6 127.0 x 71.0 x 8.9Weight (g) 130 130 140Screen 5.0-inch OLED 4.7-inch OLED 5.2-inch LCDResolution 1,920 x 1,080 1,280 x 720 1,920 x 1,080OS Android 4.2.2 Android 4.2.2 Android 4.2.2

Processor Snapdragon 600

(1.9GHz)Snapdragon S4 Pro

(1.7GHz) Snapdragon 800

(2.26GHz)RAM 2GB 2GB 2GBStorage 16/32/64 GB 16/32 GB 16/32 GBSD card slot Yes Yes NoCamera 13 megapixel 10 megapixel 13 megapixelBattery 2,600mAh 2,200mAh 3,000mAh

Source: Companies

Note: smartphone specs are based on the US model

Daiwa’s recent survey of off-line distributors in Seoul showed that smartphone users primarily choose their handsets based on the brand (25%) and price (21%). To a lesser extent, would-be purchasers also take into account a device’s display (20%) and features (18%). Therefore, consumers still focus on a device’s hardware, with battery life, processing power and the pixel count of the camera among the most important considerations.

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Top reasons for choosing a smartphone (%)

Source: Daiwa

Note: A/S – after service

While long battery life and large displays are important marketing “bullet points” for the current generation of smartphones, we are not convinced that either is a game-changer. It is hard to imagine a smartphone user replacing his or her current handset solely on account of a new model’s larger display or longer battery life. By the same token, we doubt that the inclusion of a fingerprint scanner or adoption of a scratch-proof casing would compel consumers to pay a large price premium for a brand-new smartphone. OLED displays are likely to change the way people use smartphones In terms of the smartphone display, handset makers increase the screen size, narrow the bezel, and improve the resolution with nearly every new model launch. These are incremental improvements. We believe OLEDs, when used as flexible displays, could change the way users look at displays and the way they use smartphones. Imagine having a smartphone with a foldable display that, when the screen is unfolded, can double as a tablet PC. We do not think transparent and rollable phones will remain confined to concept products forever. Samsung Display and other OLED makers have been working on developing flexible displays for some time, and they appear to be ready to enter production shortly. However, before flexible displays can be adopted in new applications, the other components, such as batteries, PCBs and casing, would also need to be flexible.

Design concepts for phones with OLED displays

Source: Companies

Although one variation on a flexible display is currently in use in Amazon’s e-book reader, flexible displays have not yet been commercialised in the smartphone and tablet-PC markets, as these devices require higher resolutions and faster response times than are needed for e-ink technology, which is suitable for displaying only the written word. Until now, the challenge of launching flexible displays has been its extremely low production yield due to difficulties in encapsulating OLED displays, since organic materials need to be protected from air and moisture. Samsung Display decided to use film-type encapsulation, in which several layers of organic and inorganic materials are stacked together using an atomic layer deposition system. Although it is not impossible to make a flexible display with LCD technology, OLED is preferred since it does not require any backlights. Both SEC and LGE plan to launch new smartphones with flexible displays (based on OLED technology) in 2H13. However, rather than being a bending or rolling-up type (due to the limitation of other hardware components), the first generation of flexible displays is likely to be an unbreakable type, which is thinner, lighter and sturdier than the current glass-based OLED. Although an unbreakable display may not have the ‘wow’ factor yet, given that many handset repair jobs are done on the broken cover glass, an unbreakable display would certainly offer some comfort to smartphone users, in our view. In late-July, SEC filed for a trademark for the term ‘Samsung Galaxy Gear’ (in Korea and in the US), and its applications featured a drawing of its smartwatch. We expect the company to unveil this product and launch the Galaxy Note 3 in September, and these could be the company’s first flexible (more accurately unbreakable) product and wearable gadget.

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SEC’s trademark filing for a Galaxy Gear smartwatch

Source: Company

As SEC and LGE begin to roll out their flexible displays from 2H13, we expect the market to expand quickly as the applications widen. We also think a bendable and rollable display will be launched within the next few years as technical hurdles are overcome, and this would certainly have the ‘wow’ factor, in our view. According to market research firm IHS iSuppli, global shipments of flexible displays should increase to 792.0m units in 2020 from 3.2m units in 2013, while market revenue should also expand to USD41.3bn in 2020 from just USD100,000 in 2013. Global flexible display market forecasts

Source: IHS iSuppli, May 2013

The LCD-TV market has matured LCD-TVs, on the other hand, have already reached maturity and sales-volume growth has stagnated. Global LCD-TV shipments fell for the first time ever in 2012, down 1% YoY. For 2013, we forecast global LCD-T V shipments to increase by 2% YoY but expect overall shipment volumes to remain at about 200m units per year over the next few years. LCD-TV demand from developed regions continues to be weak, while demand from China is decelerating due to the end of the energy-saving subsidy programme for LCD-TVs as of 31 May 2013.

Global LCD-TV shipments


Given a steady decline in LCD-TV prices of about 15% YoY per year over the past five years, TV makers are focused on adding new features to improve their product mixes and gain a competitive edge. In 2009, the LED-TV was first introduced; in 2010, 3D-TVs were launched; and in 2013, TV makers have begun to introduce UHD-TVs. LCD-TV panel price trend (blended)

Source: DisplaySearch, Witsview, Daiwa forecasts

LED-TVs have added value for TV makers SEC launched an LCD-TV with edge-type LED backlights in 2009, aggressively promoting the new generation of TVs with an ultra-slim form factor, a sharper and brighter image, and reduced power consumption (40% lower than an LCD-TV with cold-cathode fluorescent-lamp [CCFL] backlights). SEC also priced its edge-lit LED-TV at a 50-100% premium (depending on various TV sizes) over its conventional LCD-TVs (with CCFL backlights). Despite the high retail price, SEC sold over 1m LED-TVs in the first six months after launch. As a result, the gap between SEC’s revenue-based and unit-based market shares started to expand from 2Q09 as the company focused more on premium products.

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SEC: global LCD-TV market-share trend

Source: DisplaySearch

As edge-lit LED-TVs gained popularity among consumers, other TV makers quickly followed suit. With an increased number of players in the market, core component prices have come down and the price premium for edge-lit LED-TVs has narrowed. Even today, however, edge-lit LED-TVs retail at a price premium of 20-30% over conventional LCD-TVs, owing in part to the higher cost of using optical film. In an effort to bridge the price gap between edge-lit LED-TVs and LCD-TV with CCFL backlights, SEC launched low-cost direct LED-TVs in 2012. Rather than having an array of LED chips on the side of the TV panel, direct-lit LEDs are placed at the back of the panel. This approach uses fewer LED chips and obviates the need for expensive films such as a light-guide plate. Although low-cost direct LED-TVs consume less power than even edge-lit LED-TVs, they do have a drawback: their form factor is much thicker than for LED-TVs. The initial low-cost direct LED model was 95mm thick, compared with 10-20mm for edge-lit LED-TVs. However, in 2013, SEC launched a second generation of low-cost direct LED-TVs with a thickness of only 50mm. Low-cost direct and edge-lit LED-TVs

Source: Companies

With the combination of edge-type and low-cost direct LED-TVs essentially replacing sets with CCFL backlights, we forecast the penetration rate of LED backlights to reach 98% of total LCD-TVs in 4Q13, from 31% for 4Q10. Meanwhile, these product-mix improvements have led to better top-line growth and profitability for TV makers. LCD-TV shipments by backlight source

Source: DisplaySearch, Daiwa forecasts

3D-TV has not taken off Following the success of the blockbuster movie Avatar, TV makers rushed to roll out 3D-TVs in 2010. At the time, LED-TVs were growing in popularity and TV makers saw 3D-TV functionality as a way to add value to their product lines. But there were issues almost straight away: there was little 3D programming available, and viewers did not find it convenient to wear the required 3D glasses. As of 2Q13, 3D-TVs accounted for about 20% of LCD-TVs sold globally, which is little changed since 2Q12. Consumers have not embraced the format in large numbers, and some broadcasters have stopped broadcasting 3D content altogether. In June, US sports network ESPN announced plans to close its 3D channel by year-end, citing a lack of viewers. In July, the BBC too decided to halt its 3D broadcasts. 3D-TV shipments and penetration rate


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1Q12

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- 10 -

UHD-TV may be the next big thing for LCD-TV makers LCD-TV makers are now hoping that ultra high-definition (UHD) TVs, also known as 4K-TVs, could be the catalyst to spur replacement demand. Simply put, UHD-TVs have four times the resolution of full HD-TVs (3,840 x 2,160 pixels vs. 1,920 x 1,080 pixels). On large-sized screens (84/85-inch models), the greater number of pixels translates to a much sharper picture (provided the content itself is in the UHD format). These sets are far from cheap. LGE’s 84-inch UHD-TV retails for USD17,000, while SEC’s 85-inch model goes for USD40,000. But LCD-panel makers are now launching UHD-TVs with smaller screen sizes and prices are falling quickly. In May, Sony rolled out 55-inch and 65-inch UHD-TVs with retail prices of USD4,999 and USD6,999, respectively. In China, meanwhile, 55-inch and 65-inch UHD-TVs are being sold for less than USD2,000 and around USD4,000, respectively. The main reason for the large price disparity between China and other markets is that leading brands’ UHD-TVs feature an embedded processor that ‘upscales’ full-HD or 1,080p video in order to improve the picture quality of non-UHD content, whereas the Mainland China brands use plain 4K panels without additional signal processing. LCD panel makers’ UHD-TV panel roadmap

Samsung Display LGD AUO Innolux CSOT BOE Sharp

39" 1Q13 42" 3Q13 49" 1Q14 1Q14 2Q1450" 1Q13 55" 3Q13 2Q13 1Q13 3Q13 2Q1358" 2Q13 60" 1Q1365" 3Q13 2Q13 1Q13 1Q13 70" 2Q1375" 2Q13 79" 1Q14 84" 3Q12 85" 1Q13 2H13 98" 3Q13

Source: Companies, DisplaySearch

TV makers claim that there are many potential benefits to UHD-TV such as better picture quality and the fact that viewers can also sit close to the TV without ever noticing pixels on the screen. However, some engineers question whether viewers can actually notice the difference between full-HD and UHD-TV on screen size of less than 50 or even 60 inches, as they are based on the same LCD technology. In addition, 32-inch and 40/42-inch LCD-TVs are currently the mainstream TV sizes, making up 50% of total LCD-TV shipments.

It is early days for UHD-TVs, but some TV retailers are concerned that this new segment will meet the same fate as 3D-TVs, given a dearth of content and the sets’ high price premium. Formal standards for UHD-TV compression (high efficiency video coding using the H.265 codec) and connectivity (HDMI 2.0) are still being drafted, and there is very little native 4K content available. Moreover, there is a possibility that today’s UHD-TVs may not be compatible with the eventual 4K standard once it is ratified. Granted, there are hurdles to UHD-TVs’ adoption. But we forecast UHD-TV sales of nearly 1m units for 2013, driven by TV makers’ widespread marketing and aggressive price-cutting. Such sales would be equivalent to only about 0.5% of LCD-TV demand for 2013, on our forecasts. Another potential cap on growth in the segment is that most 4K-TVs will have screens of more than 50 inches in size, as the benefits of UHD content are not readily apparent on smaller screens. Over the next three to four years, we forecast UHD-TVs to account for a mid-single-digit percentage of LCD-TV shipments. Global UHD-TV shipment and penetration rate


Where do OLED-TVs fit in? OLED-TVs use completely different technology from LCD-TVs. Because OLED-TVs do not require backlights, they offer significantly better picture quality and higher contrast ratios than LCD-TVs while consuming less power. Arguably the only downside to OLED-TVs currently is their price premium over LCD-TV sets, and we expect prices to decline sharply as production efficiency improves. According to our cost analysis, the manufacturing cost for a 55-inch OLED-TV module is around USD2,500, which is more than six times that for 55-inch LCD-TV module (full HD at USD400). However, given that the production yield exceeds 90% for LCD panels but is currently less than 50% for OLED-TVs, we expect the cost gap to narrow greatly over the next few years.

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E

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1Q14

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2Q14

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1Q15

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UHD-TV UHD-TV penetration (RHS)

(m units) (% )


- 11 -

Cost comparison of OLED-TV and LCD-TV modules

Source: Daiwa estimates

Due to slower-than-expected improvements in production yields and delays in the commercialisation of OLED-TVs, LCD-TV makers focused instead on the UHD-TV market, as they believed associated costs would fall more quickly than for OLED-TVs. At the same time, the shift to manufacturing UHD-TVs did not require heavy investment. Given that we forecast only a few thousand OLED-TVs will be sold in 2013, compared with 1m 4K-TVs (based on LCD technology), it could be inferred that UHD-TVs have taken an early lead in the premium TV segment. In terms of their respective merits, we believe OLED-TVs have the edge on colour contrast, screen uniformity, viewing angle, and colour rendition (richness), since each pixel contains red, green and blue (RGB) elements. However, 4K-TVs excel in resolution, image clarity, and brightness. We believe that price will be a key determinant of whether OLED-TVs and 4K-TVs take off in the market place. Consumers will ultimately consider the value proposition of any new technology, particularly for big-ticket items. In this regard, we are positive on the outlook for the OLED-TV market, as there is ample scope to cut costs as production efficiency improves. From an admittedly slow start this year, we forecast the OLED-TV market to expand to 1.6m units in 2015 and 9.0m units in 2017.

Global OLED-TV shipment forecast


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- 12 -

Playing the OLED theme in Korea

Korea companies are on the front foot in the global OLED display market. We have spoken with more than a dozen related companies to get their views on the outlook for the market, technology, and production process.

Initiating coverage of four OLED-display equipment/materials companies

We visited over a dozen OLED-related companies in Korea in the past two months. After experiencing a poor 2012 due to delays in new capacity investments by Samsung Display and LGD, most of the companies we met were positive on the outlook for 2013 and 2014, citing increased visibility on capacity expansion. OLED market developments SEC is by far the most important company in the global OLED space, accounting for 96% of OLED production capacity in 2012. SEC selectively adopted AMOLED displays in some of its mobile phones in 2007 and now uses them in its range of premium smartphones. Although neither SEC nor Samsung Display was the first to develop OLED technology, both have successfully commercialised the technology. SEC’s AMOLED phones: first (W2400) to latest (Galaxy S4)

Source: Company

In January 2013, LGE was the first company to launch OLED-TVs using the company’s preferred white-OLED technology. Compared with conventional LCD-TVs, OLED-TVs have superior picture quality and consume less power. The sets also have thin form factors, with some just 4mm thick. LGE’s first 55-inch OLED-TV

Source: Company

Although LGE’s OLED-TV has a price tag of US10,000, we expect the retail price to come down significantly as production yields improve. LGD, LGE’s OLED panel supplier, recently decided to expand its OLED production capacity by 26,000 substrates per month, from 8,000 substrates per month currently. The new capacity should come on stream in mid-2014, according to the company. SEC was late in entering the OLED-TV market, rolling out a curved set in June 2013. We also expect SEC to increase its production capacity in the future. According to our research in the market, including discussions with several equipment companies, Samsung Display’s production yield on flexible displays has reached 80%. As a result, we are likely to see an increase in investment in Samsung Display’s flexible display production line. OLED display market projection Although the global OLED display market was relatively small, at USD500m in 2009, it had expanded to USD6.8bn by 2012 (compared with USD106bn for the LCD-panel market), driven by the proliferation of OLED displays in mobile devices. Over the next three years, we expect new OLED products, such as TVs and flexible displays, to underpin further growth in the OLED market. By 2015, we forecast the global OLED market to be worth USD24bn. Although only few hundred OLED-TVs are being sold per quarter currently, we look for the cost curve to decline quickly and the addressable market to expand significantly. For 2015, we forecast OLED-TV shipments to total 1.6m units.


- 13 -

Global OLED market revenue


As the OLED display market continues to grow, we also expect OLED-panel makers to step up their investments. We forecast global OLED capex to increase to USD5.6bn for 2013 and to USD9.6bn for 2015 as new capacity is brought on stream. In our view, the processing equipment and materials companies will be front-line beneficiaries of this spending. Global OLED capex

Source: Companies, Daiwa forecasts

Key OLED players in Korea

At Samsung Display, the largest OLED maker globally, revenue from small displays (including OLED) totalled KRW10.7tn in 2012. The company currently realises an operating-profit margin of over 20% for its OLED business, compared with a low- to mid-single-digit operating margin for its LCD business. Samsung Display is consolidated under SEC, which is its core customer and major shareholder (84.8% stake).

Samsung Display: small display revenue and OP margin

Source: Company

The other major OLED panel maker in Korea is LGD, which has focused mainly on large-size displays such as TVs. For small displays, LGD only has a pilot line for OLED, since the company believes that its in-plane switching (IPS) LCD, referred to in Apple’s marketing as Retina Display, is more optimised for mobile devices. However, LGD has adopted OLED technology for flexible displays and is preparing to launch related products in 4Q13. Since OLED does not require backlights or optical films, unlike LCDs, the supply chain mainly comprises processing-equipment and materials companies. As Samsung Display and LGD are the only two companies offering OLED displays, most of the smaller equipment and materials companies in Korea supply the two OLED makers exclusively. The OLED business contributes a relatively small portion of revenue for both SEC and LGD compared with the companies’ other divisions, such as smartphones and LCD panels. But for the Korea equipment and materials companies, OLED is big business, contributing as much as 90% of these companies’ revenues. Korea OLED companies: revenue contribution from OLED

Market cap 2012 OLED 2013E OLED Company Ticker (KRWbn) revenue (%) revenue (%)Samsung Electronics 005930 KS 192,815 5.3 6.7LG Display 034220 KS 10,502 0.0 0.1SFA Engineering 056190 KS 910 40.8 59.8Soulbrain 036830 KS 704 26.8 34.4Duksan Hi-Metal* 077360 KS 689 54.9 51.7Wonik IPS* 030530 KS 481 6.3 17.4AP System 054620 KS 242 88.1 89.9ICD 040910 KS 194 76.7 74.5SNU 080000 KS 173 76.0 60.0Tera Semicon 123100 KS 161 30.0 55.0Viatron 141000 KS 140 14.0 55.0LIG ADP 079950 KS 115 0.0 30.0Avaco 083930 KS 80 10.0 26.7LTS 138690 KS 68 5.0 30.0


* Parent-company basis

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- 14 -

Valuations look attractive Based on our and the Bloomberg-consensus earnings forecasts, the Korea OLED-display Sector is trading at a 2013E PER of 11.2x. On PBR, the sector is trading at 1.8x (simple average) our 2013E BVPS forecast and 1.9x if we exclude large-cap companies such as SEC and LGD. Since the sector’s average PBR multiple during the past three years is 2.3x (2.8x weighted average excluding SEC and LGD), we see prevailing valuations as appealing.

Korea OLED-display Sector: PBR

Source: Companies, FnData, Bloomberg, Daiwa forecasts

Comparing their PBR multiples and ROE for 2013E, most of the OLED companies under our coverage have ROEs of above 20%, with the exception of LGD and Wonik. LGD’s LCD-panel business is not highly profitable, while Wonik’s equipment business posted an operating loss for 1H13. Although we forecast LGD’s ROE to remain at a mid- to high-single-digit percentage for the next three years, we expect Wonik’s to improve to a mid-teen percentage in 2014. OLED companies: PBR and ROE comparison

Source: FnData, Bloomberg, Daiwa forecasts

The equipment companies’ share prices tend to move in tandem with their new orders and order backlogs, and we believe that investments in capacity by Samsung Display and LGD are key share-price catalysts. For materials companies, investments by

display makers may not immediately translate to revenue, but as the capacity ramps up over time the materials companies are likely to reap the full benefits, in our opinion. In the past, whenever the display companies have announced capacity-expansion plans or upward revisions to their capex, the Korea equipment companies’ shares have rallied. Sometimes, however, the equipment companies do not reveal the size of their equipment orders at the request of their customers. In addition, as lead times vary from three to six months depending on the type of equipment, it can be some time before orders starts to generate revenue. Therefore, we recommend tracking the display companies’ current capacity, as well as the demand outlook for existing and new applications. Four OLED-display equipment/materials companies to watch We initiate coverage of four OLED-display equipment and materials companies that can benefit from rising OLED investments by Samsung Display and LGD, the two major companies with commercial OLED-display products. We are positive on Wonik IPS’s equipment-order momentum for 2H13 on the back of an increase in capital spending at SEC’s semiconductor and OLED-display businesses. The company recently supplied to Samsung Display dry etchers, which are used in the OLED-display production lines, as well as encapsulation system for the flexible displays. In addition, with 3D vertical NAND-flash chips due to be used by the memory-chip makers from 2H13, we expect rising sales of deposition equipment. We initiate coverage of Wonik with a Buy (1) rating and six-month target price of KRW10,000. We also like AP Systems, which is sole supplier of laser-applied OLED-display equipment to Samsung Display. As Samsung Display continues to use LTPS backplanes for its mobile display production line, we expect sales to pick up of AP Systems’ laser-annealing systems, which currently make up more than 50% of its OLED-display equipment revenue. Although the company’s glass-encapsulation systems sales could be adversely affected by the industry’s shift to flexible displays, it also makes laser lift-off devices, which are used to manufacture flexible displays. We initiate coverage with a Buy (1) rating and six-month target price of KRW13,500.

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1

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-11

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Simple average Weighted average excluding SEC, LGD

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SFA

Soulbrain

Duksan

Wonik IPS

AP Systems

ICDLTS

Viatron

Tera Semicon

Avaco

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- 15 -

Duksan Hi-Metal mainly supplies OLED-display materials to Samsung Display. Although the company was affected by pricing pressure in 1H13, we expect it revenue to expand for 2H13 on the back of rising capacity at Samsung Display. The company also makes the organic materials for OLED-TV production, and we believe this will be a key revenue driver once Samsung Display finalises its OLED-TV line investments in the future, as TVs consume larger amounts of organic materials than smartphones. We initiate coverage with a Buy (1) rating and six-month target price of KRW31,000. Soulbrain, meanwhile, does not have direct exposure to OLED-display materials. The company mainly manufactures process chemicals and materials used in semiconductor and LCD production lines, while for OLED displays it makes thin-glass chemicals, which are used after an OLED display has been modularised. As the displays in mobile devices are becoming slimmer, we expect demand for Soulbrain’s etchant chemicals to increase robustly. We initiate coverage with an Outperform (2) rating and six-month target price of KRW50,000. Our stock picks in the Korea OLED-display space Although the share prices of the companies in the OLED-display Sector tend to move in unison, our picks are based on the competitiveness of their products and their relatively sound financials, as we think the sector could become more cyclical as new entrants arrive. Our top pick in the Korea OLED-display Sector is SEC, as the company is the largest user of OLED displays in its consumer devices, and also has a major stake (84.8%) in Samsung Display. We also believe that SEC will continue to commit to OLED-display production in an effort to differentiate its products. Among the equipment companies, we like SFA Engineering, as it is an all-around equipment player. Although the company has mainly supplied logistics

systems for Samsung Display’s OLED-display production line, there is high likelihood it will provide the core deposition equipment for OLED-TV lines going forward. Among the companies on which we initiate coverage, our top picks are Wonik IPS, for its growing exposure to OLED-display equipment as well as its opportunity in NAND-flash, and Duksan Hi-Metal, on the back of the potential revenue growth in organic materials for OLED-TVs.


- 16 -

Global OLED companies: valuation comparison

2013E revenue2013E

operating profit2013E operating-profit

margin PER PBR

Company BBG code Main OLED-display products (USDm) (USDm) (%) 2013E 2014E 2013E 2014EKorea Samsung Electronics* 005930 KS Display 210,630 35,249 16.7 6.3 5.7 1.3 1.1LG Display* 034220 KS Display 25,332 1,192 4.7 15.7 12.0 1.0 0.9SFA Engineering* 056190 KS Logistics equipment 604 92 15.3 10.3 8.2 2.1 1.8Soulbrain* 036830 KS Thin glass solution 645 113 17.5 7.9 6.8 1.7 1.4Duksan Hi-Metal* 077360 KS OLED materials 123 37 30.0 16.7 12.2 3.1 2.5Wonik IPS* 030530 KS Dry etchers and film encapsulation 350 26 7.4 18.2 10.3 1.6 1.4AP System* 054620 KS ELA and glass encapsulation 294 29 9.7 8.7 7.1 2.1 1.6ICD 040910 KS Dry etchers 86 17 20.3 11.9 8.6 1.7 1.5Viatron 141000 KS LTPS processing equipment 88 21 23.5 6.4 4.7 1.9 1.4Tera Semicon 123100 KS Polyimide curing 92 13 14.3 12.9 8.1 2.2 1.7Avaco 083930 KS Glass encapsulation 204 9 4.6 11.3 8.7 1.0 1.0LTS 138690 KS Glass encapsulation (cell sealing) 72 11 15.0 8.5 n.a. 2.0 n.a. Japan Panasonic* 6752 JP Display 75,195 2,770 3.7 34.3 29.9 1.5 1.4Sony* 6758 JP Display 79,093 2,513 3.2 34.9 24.9 0.9 0.8Hitachi Hi-Tec* 8036 JP Deposition equipment 6,535 236 3.6 16.5 12.8 1.0 0.9Canon (Tokki) 8035 JP Photo lithography and deposition 5,708 220 3.9 43.9 17.4 1.2 1.2Ulvac 6728 JP Sputter 1,823 88 4.8 10.6 7.5 0.9 0.8Ube Industries 4208 JP Plastic substrate 6,758 296 4.4 13.4 10.7 0.8 0.8Idemitsu Kosan* 5019 JP OLED materials 47,300 800 1.7 6.4 8.1 0.5 0.4Toray 3402 JP OLED materials 18,231 1,139 6.2 15.3 12.9 1.3 1.2 Other regions AU Optronics 2409 TW Display 14,202 371 2.6 22.8 14.3 0.6 0.6Innolux 3481 TW Display 15,356 812 5.3 9.3 8.2 0.7 0.6Dow Chemical DOW US OLED materials 57,266 5,334 9.3 15.8 13.0 2.1 1.9Universal Display OLED US OLED materials 127 29 22.8 69.2 28.5 4.3 3.8Merck MRK GR OLED materials 15,036 2,264 15.1 13.3 12.7 2.3 2.1BOE 200725 SZ Display 5,474 327 6.0 14.0 10.5 0.8 0.7Tianma 000050 SZ Display 793 53 6.7 36.9 27.9 4.8 4.1 Average 21,756 2,002 10.3 18.2 12.8 1.7 1.4

Source: Companies, Bloomberg, *Daiwa forecasts

Note: prices as of close on 28 August 2013


- 17 -

Equipment companies should be the first to benefit

In this section, we discuss how the expansion of the OLED-display market can benefit the equipment companies, particularly those in Korea. As most of the R&D on OLED technology was done in Japan from the late 1990s, the OLED-display processing system market was dominated by Japan equipment companies prior to the introduction of Gen5.5 lines (glass substrate size of 1,300 x 1,500mm) in 2011. However, as the manufacturing process turned out to be even more difficult than the development of OLED-display technology, Samsung Display has had to spend a lot of time and effort to modify existing equipment to optimise the process and improve the production yield. The Korea equipment companies have gained access to the development of OLED processing systems from Gen5.5 lines, as since they were quick to adapt to changes in the equipment’s specifications. Rising smartphone shipments and increasing display sizes to drive demand for OLEDs We expect mobile displays to account for the majority of OLED-display shipments this year, and forecast shipments of small and medium-sized OLED displays to increase by 80% YoY to 252m units for 2013. As an increasing number of SEC’s mid-range smartphones, in addition to its high-end models, use OLED displays, market growth should remain robust over the next few years. Although some OLED displays are used in digital still cameras, most are used in smart devices. We forecast smartphones to account for 96% of small and medium-sized OLED-display shipments for 2013. Meanwhile, we forecast global smartphone shipments of 980m units for 2013, and expect OLED displays to be used in 25%. Small and medium-sized OLED-display shipments


There are only a few smartphone makers using OLED displays currently, but with Samsung Display and LGD planning to launch flexible displays in 2H13, we expect the number of smartphone makers adopting OLED displays to expand. Besides SEC, Nokia has been using OLED displays in its smartphones, while recently Motorola Mobility used OLED displays in its Moto X smartphone. Apple, meanwhile, has been a big proponent of IPS LCDs in its smart devices, but the company appears to have a growing interest in flexible displays, as it has applied for a number of patents for flexible-display applications. In addition to rising OLED-display demand from its growing use in smartphones, we believe the increasing size of handset displays will augment the need for additional OLED-display capacity. As many smartphone makers continue to believe that bigger display sizes are better, the average size of a smartphone display has almost doubled since 2008. Smartphone display size


Most new smartphones (using the Android operating system) have display sizes of about five inches, compared with less than three inches five years ago. However, we do not believe the size of smartphone displays will increase much more, since larger devices would be difficult to carry, much less hold up while taking a phone call. Indeed, we regard a device with a screen of more than 6-7 inches as a tablet. As the average diagonal size of smartphones increases, existing OLED-display capacity is absorbed, because the larger the display, the fewer the cuts on a given glass substrate. For Gen5.5 glass, for example, an OLED-display maker can cut 323 4-inch displays but only 198 5-inch displays. Samsung Display plans to market OLED displays for tablet PCs in 2014, and we believe this will reduce its output capacity for smartphones.

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2008 2009 2010 2011 2012 2013E 2014E 2015E

Small and medium size shipments Mobile phone portion (RHS)

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- 18 -

Display cuts per glass substrate Gen5.5

(1,300x1,500) Gen6 (1,500x1,850) Gen8 (2,200x2,500)Small- and mid-sized: 4.0-inch 323 468 9254.5-inch 255 360 7264.7-inch 228 342 6725.0-inch 198 306 6005.2-inch 195 273 5515.7-inch 160 240 4607.9-inch 80 112 2479.7-inch 56 72 15015.6-inch 24 36 66Large: 42-inch TV 2 3 1055-inch TV 2 3 665-inch TV 1 2 3


Growing need for new capacity We estimate that the current monthly substrate capacity for Samsung Display’s is 50,000 for the A1 line (Gen4) and 100,000 for the A2 line (Gen5.5). In terms of 5-inch mobile displays, Samsung Display can effectively churn out 24m units/month, assuming a production yield of 100%. Meanwhile, LG Display has one Gen4 line producing flexible displays. However, the glass capacity of this line is only 9,000 substrates/month, implying that it can produce 66 5-inch displays per substrate or 0.6m units/month, assuming a 100% production yield. As production yields for OLED lines currently are 80-90% and given our OLED-display market (small and medium-sized) demand forecast of 252m units for 2013, we believe that Samsung Display’s OLED-display capacity is quite tight. As a result, we expect Samsung Display to ramp up the phase 5 expansion of the A2 line in 4Q13 and possibly phase 1 of the A3 line from the middle of 2014. Samsung Display: OLED display fab ramp-up forecast

Source: Company, Daiwa forecasts

How much does it cost to build an OLED-display production line? In May 2010, Samsung Display announced it was going to invest KRW2.5tn to build its A2 line or Gen5.5 OLED-display production line in Asan (100km south of Seoul), Korea. Given that phase 1 of the A2 line was ramped up to 64,000 substrates/month at the end of 2011, we estimate that each sub-line (8,000 substrates) costs about KRW300bn. Samsung Display: LCD and OLED production lines in Asan

Source: Naver.com, Daiwa

As for LCD-production lines, Beijing-based BOE’s Gen6 TFT-LCD line in Hefei, China, with a designed monthly capacity of 90,000 substrates in 2010, cost CNY17.5bn. In June 2013, Japan Display started mass production of a Gen6 LCD (low-temperature poly-silicon [LTPS]) line in Mobara, Japan, with an initial capacity of 24,000 substrates/month, eventually ramping up to 50,000 sheets /month. Japan Display estimated the total capex for the line at JPY200bn. As each production line has a different glass capacity, we calculate the cost of building each production line for 10,000 substrates/month. It appears that LCDs based on amorphous silicon (a-Si) backplane technology are the cheapest, with an investment per 10,000 sheets of USD318m, followed by OLED displays at USD351m, and LCD based on LTPS-backplane technology at USD416m. However, as OLED displays are based on Gen5.5 glass substrates, which are 30% smaller (in terms of display area) than those of Gen6, if we adjust for the glass area, an OLED-display production line costs USD500m on a Gen6 line equivalent basis. Therefore, an OLED display line requires an investment of about 20% more than an LCD line based on LTPS technology.

2010 2011 2012 2013E 2014E

A2 phase1 mass production (64K)install

A2 phase2 conversion to flexibleinstall (flexible / glass)

A2 phase4 mass production (27K)install

A2 phase5 mass production (27K)

install

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install

A2 phase3 mass production (8K)install (flexible - LITI) modified to FMM

mass production (16K)

A3 A2


- 19 -

Cost comparison of building OLED-display and LCD fabs

Source: Companies, Daiwa estimates

Note: Cost comparison based on 10,000 substrates/month

Although the higher investment required for an OLED-display production line may imply that the manufacturing costs are also higher, OLED displays use a fewer number of components, such as glass and organic materials, while LCDs use various optical films as well as backlights. Therefore, once production efficiency improves through economies of scale and better production yields, we believe that the production costs for OLED displays could be cheaper than for LCDs. Core equipment for OLED production Generally, OLED manufacturing can be classified into four major processes: backplane, deposition, encapsulation, and module. The backplane process involves creating the switches and driving mechanism for OLED displays and deposition process is responsible for patterning sup-pixels and depositing organic materials on the glass substrate. Encapsulation means protecting the OLED display from water vapour and oxygen by attaching a layer of glass or films. The module process involves cutting substrates to small sizes, etching the glass to make it thinner, attaching circuitry, and testing for any defects. OLED manufacturing process


For each manufacturing process, we analyse the equipment requirements as well as the costs of these systems. It appears that backplane is the most expensive process (56% of OLED-display equipment costs) due to the use of LTPS technology. It takes longer to process an LTPS backplane than an amorphous-silicon based (a-Si) backplane, as extra masking steps are required and an additional laser-annealing process is needed to crystallise the silicon. As a result, LTPS has better electron mobility (100x greater than for a-Si backplane) and a faster response time when used for a display. In our analysis, the deposition system or evaporator constitutes 26% of the OLED-display equipment cost, while the encapsulation and module process equipment account for 13% and 5%, respectively. In between these processes, logistics systems are used to transport the glass substrates as well as to attach protection films. Although logistics systems are broken up into the four major processes listed above, if we calculate the logistic systems separately in the OLED-display production line, they are 15-20% of total OLED-display equipment costs. OLED-display investment breakdown by major process


Who are the major players and what are the opportunities/risks in OLED equipment? The thermal processing equipment use by Samsung Display in the backplane process is provided by Tera Semicon and Viatron, and the laser-annealing system is supplied by AP Systems. Thin-film transistors act as switches in the backplane to turn individual pixels on and off, and these transistors are created using photo-lithography machines from Nikon and Canon and PE-CVD and sputters machines from SFA and Ulvac. In addition, etchers have been provided solely by ICD for the first three expansion phases of the A2 line. However, Wonik IPS became the second vendor in phase 4 of the A2 line.

0

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LCD (a-Si) LCD (LTPS) OLED OLED (adjusted for glass area)

(USDm)

Semiconductor LayerPatteringGate ElectrodePatteringSource Drain ElectrodePatteringPassivationPatteringPixel ElectrodePatterning- Cleaning- PR Coating- Exposure- Develop- Etch- PR Remove- Inspection

TFT Fabrication

Plasma/ UV treatmentHIL DepositionHTL DepostionBlue Layer DepositionGreen Layer DepositionRed Layer DepostionETL DepositionEIL DepostionMetal Electrode Deposition- Alignment- Evaporation Source- Glass Handling

OLED Fabrication

Canister/ Cover glassCleaningAttach GetterSealent DispensingSealing (UV)

Encapsulation

AgingCell CuttingProbe TestingPol. LaminationCOF Bond

Module Process

Backplane56.3%Deposition

25.6%

Encapsulation12.8%

Module5.3%


- 20 -

Canon Tokki is the main supplier of evaporators, used for organic material deposition on glass substrates, for both Samsung Display and LGD. However, Samsung Display added a second vendor (Hitachi Hi-Tech) for its Gen5.5 line and is working with SFA on deposition equipment based on a small-mask system (SMS) for its Gen8 line. LGD, meanwhile, uses evaporator from Canon Tokki with key components supplied by the Korea equipment company YAS. In order to improve the resolution of OLED displays, the laser-induced thermal-imaging (LITI) system was once considered by Samsung Display. However, we believe the project was halted due to low production yields. AP Systems provides glass-based encapsulation systems to Samsung Display. LTS supplies laser-sealing machines to melt the frit powder to form a hermetic seal between the two glass plates to enable the cutting of small displays (ie, for smartphones) from large glass substrates. For flexible displays, several layers of film are used as protection cover. Organic layers are deposited with equipment from SNU, while inorganic layers are placed with atomic layer deposition systems from Wonik IPS. OLED equipment supply chain by process

Samsung Display LGD

Backplane process: Cleansing / wet processing Semes (Not listed)

DMS (068790 KS) DMS (068790 KS) KC Tech (029460 KS)

Crystallisation AP System (054620 KS) Tera Semicon (123100 KS) Viatron (141000 KS)

Unlisted local companies

Deposition (PE-CVD / sputter)

Ulvac (6728 JP) SFA (056190 KS) Applied Materials (AMAT US)

Ulvac (6728 JP) Jusung Engineering (036930 KS)

Photo lithography Nikon (7731 JP) Canon (7751 JP)

Nikon (7731 JP) Canon (7751 JP)

Etching ICD (040910 KS) Wonik IPS (030530 KS)

LIG ADP (079950 KS)

Deposition process: Evaporator Canon Tokki (Not listed)

Hitachi Hi-tech (8036 JP) SFA (056190 KS)

Canon Tokki (Not listed) YAS (Not listed)

Encapsulation process: Encapsulation system AP System (054620 KS)

LTS (138690 KS) SNU (080000 KS) Wonik IPS (030530 KS)

Avaco (083930 KS) Jusung Engineering (036930 KS)

Module process: Scriber/grinder SFA (056190 KS) Top Engineering (065130 KS) Bonder SFA (056190 KS)


As OLED displays are still at an early stage of growth, we believe the core technology has scope for improvement. Given that OLED-display makers will reward with large orders equipment companies that can improve production efficiencies and reduce costs, we believe there are opportunities as well as risks for the equipment companies.

• Backplane process – Although LTPS is the most widely used backplane technology for OLED displays, it is expensive. Metal oxide may become an alternative solution, particularly for large displays. A metal-oxide backplane is easier to manufacture than an LTPS backplane as it can be made in an existing a-Si facility on an LCD production line, and fewer mask steps are required to create the transistors. As a result, a transition to metal-oxide backplanes could be a risk to equipment suppliers for the LTPS process.

• Deposition process – Due to the chamber-size limitations of evaporators, glass substrate is normally cut into four or two pieces prior to the deposition process. Therefore, evaporators that can handle the full-size Gen5.5 or Gen8 glass would be of great interest to OLED-display makers. For OLED-TV, Samsung Display currently uses SMS type evaporators supplied by SFA. If this method is chosen for future production lines, SFA would be a key beneficiary, in our opinion.

• Encapsulation process – Glass-type encapsulation is the most common one in use currently for OLED displays. However, if the industry moves to flexible displays, the film-type encapsulation process is likely to be the most widely used process. In Samsung Display’s supply chain, SNU and Wonik IPS are likely to benefit from a transition to flexible displays. As an OLED display’s lifespan can be affected by a decrease in electroluminescence, effective encapsulation methods will need to be developed going forward.

Materials companies should catch up with rising production volume

As already discussed, we expect Samsung Display’s production capacity for OLED displays to expand, as it is likely to ramp up phase 5 of its A2 line in 4Q13 and possibly phase 1 of its A3 line from the middle of 2014. We therefore forecast the company’s production capacity (in terms of area) for OLED displays to increase to 380,000 sq m/month for 2Q14 from 280,000 sq m/month for 2Q13, and expect orders for OLED materials to strengthen accordingly. Core materials for OLED production In a typical OLED display structure for mobile devices, an electrical current flows from a cathode to an anode through hole transport layers (HTL), emission layers (EML), and electron transport layer (ETL). When a current flows through the device, the cathode injects electrons through the HTL and the anode removes


- 21 -

electrons, thereby creating electron-holes. Then, electrons and electron-holes are recombined in the EMLs and create photon of light in the process. EMLs consist of red, green, and blue layers, and each colour layer is composed of a host and a dopant. In OLED displays for TVs, the hole injection layers (HIL) and electron injection layers (EIL) are used in addition to the layers used in mobile devices. OLED: how light is created

Source: HowStuffWorks, Daiwa

As for the cost breakdown of OLED displays in mobile devices, OLED materials account for 30% of the total display cost. Of this 30%, EMLs account for the largest portion, of 16%, followed by HTLs (8%) and ETLs (6%). However, if fluorescent blue is replaced with phosphorescent blue, the cost of the EMLs increases, as phosphorescent layers are more expensive than fluorescent ones. Meanwhile, all OLED displays already use phosphorescent red, and Samsung Display recently started using phosphorescent green on OLED displays for the Galaxy S4.

Cost structure of an OLED display for the Galaxy S4


By comparison, the costs of the OLED display materials used in TVs are higher than those used in mobile devices, assuming the same display area. For example, 1 sq m of substrate requires 12g of HTLs to make an OLED display for a mobile device, but for a TV 25-50g is needed for a 1 sq m substrate, as a TV needs to have a longer lifespan than that of a mobile device. Typically, consumers replace their handsets every 2-3 years: for TVs this is about every 10 years. In addition, TVs require additional organic materials, such as HILs and EILs. Structure of an OLED display for Galaxy S4 (chart is replaced)

Source: HowStuffWorks, Daiwa

Phosphorescent vs. fluorescent emission layers EMLs are categorised as either phosphorescent or fluorescent depending on the type of emission, and mobile displays increasingly use phosphorescent EMLs, as battery life is important, especially when the sizes of displays are getting larger in smartphones. Phosphorescent EMLs consume less power than fluorescent EMLs, as their theoretical luminous efficiency ranges from 75-100% compared with 25% for fluorescent EMLs. However, a shorter lifespan is a major hurdle to the wider adoption of phosphorescent EMLs, especially for the colour blue. Due to the lifespan and power-consumption issues, Samsung Display previously used a mixture of various emission layers – phosphorescent red (which has a relatively long lifespan, and thus can be used more

OLED Creating Light

3

Electron

Electron-holes are created and these are injected through HTL

2

1

Cathode

Emissive Layer

Conductive Layer

Cathode

Cathode injects electrons through ETL and anode removes electrons

Electron and electron-holes are are recombined in EML and create photon of light

Light photon

Cathode

Anode

HTL8.1%

Red host4.7% Red dopant

1.1%

Green host4.7%

Green dopant1.1%

Blue host3.6%

Blue dopant0.9%

ETL6.1%

Others69.6%

OLED Structure

Cathode

Emissive layer(Organic molecules or polymers)

Conductive layer (Organic molecules or polymers)

Anode

Substrate Substrate

Anode

Hole Transport Layer (HIL)

Emission Layer (EML)

Electron Transport Layer (ETL)

Cathode


- 22 -

easily to replace fluorescent red), and fluorescent green and blue – up until 2012. However, for the Galaxy S4, Samsung Display used an upgraded mixture of phosphorescent red/green layer and fluorescent blue, which reduces the power consumption of the display by 25% compared with its predecessor. Although Samsung Display plans to replace all three emission layers with phosphorescent layers, this could take a long time due to limited lifespan of phosphorescent blue. Power consumption of PHOLED panels

Source: Daiwa estimates

Note: Based on a 4-inch diagonal display, operating at 300 cd/sq m

PHOLED R: uses phosphorescent red and fluorescent green/blue

PHOLED RG: uses phosphorescent red/green and fluorescent blue

PHOLED RG: uses phosphorescent red, green and blue

Major players and potential opportunities/risks in OLED materials As Samsung Display accounted for 96% of global OLED-display production capacity for 2012, we focus our discussion mainly on the company’s supply chain, and touch briefly on that of LGD at the end. Duksan is the main supplier to Samsung Display of the HTLs used in the OLED displays of mobile devices, with a 90% share of its business, and the remainder being supplied by CS Elsolar. Although there are few

domestic and overseas companies looking to enter this market, these companies are affected by low production yields. As for OLED-TVs, Duksan is currently the sole supplier of HTLs and HILs, and should benefit once the OLED-TV market takes off. Cheil Industries and LG Chemical are the main suppliers of ETLs to Samsung Display, with Cheil Industries is the sole ETL supplier for the Galaxy S4. Cheil Industries recently acquired Novaled, which specialises in manufacturing the additives for charged layers, including HTLs and ETLs, and this is likely to strengthen its ETL business. LG Chemical is the dominant EIL supplier for OLED-TVs. As for EMLs, although Dow Chemical is the only supplier for the phosphorescent red host for Samsung Display, the phosphorescent red dopant and green host/dopant are supplied solely by Universal Display. Although Duksan, Cheil Industries, and CS Elsolar are currently working with Samsung Display to develop a phosphorescent green host, we expect these companies to start shipping from 2014 at the earliest. However, among these three companies, we believe Duksan is slightly ahead in terms of technology as it provides refinement services for the phosphorescent green host for Universal Display. As for the blue host and dopant, Samsung Display continues to use fluorescent blue, and SFC is currently the sole supplier. In LGD’s supply chain, Universal Display is the dominant supplier of phosphorescent EMLs, and there are multiple suppliers of other OLED-display materials. Orders from LGD should be small for now, and some of these companies may have production-yield issues in mass production if orders from LGD’s production lines strengthen.

OLED supply chain for materials

Samsung Display LG Display

Charged layer HTL Duksan Hi-Metal (077360 KS), CS Elsolar (159910 KS) Idemitsu Kosan (5019 JP), Merck (MRK GR), Hodogaya (4112 JP) HIL Duksan Hi-Metal (077360 KS) Idemitsu Kosan (5019 JP), Merck (MRK GR), Hodogaya (4112 JP) ETL LG Chemical (051910 KS), Cheil Industries (001300 KS) LG Chemical (051910 KS), Idemitsu Kosan (5019 JP) ,Merck (MRK GR), Toray (3402 JP) EIL LG Chemical (051910 KS) LG Chemical (051910 KS), Idemitsu Kosan (5019 JP), Merck (MRK GR), Toray (3402 JP) Emissive layer Red phosphorescent Host Dow Chemical (DOW US) Dow Chemical (DOW US), Idemitsu Kosan (5019 JP)

Dopant Universal Display (OLED US) Universal Display (OLED US) Green phosphorescent Host Universal Display (OLED US) Universal Display (OLED US)

Dopant Universal Display (OLED US) Universal DIsplay (OLED US) Green fluorescent Host CS Elsolar (159910 KS) Universal Display (OLED US), Idemitsu Kosan (5019 JP)

Dopant Universal Display (OLED US) Universal DIsplay (OLED US) Blue fluorescent Host SFC (Not listed) Idemitsu Kosan (5019 JP), Hodogaya (4112 JP)

Dopant SFC (Not listed) Idemitsu Kosan (5019 JP), Hodogaya (4112 JP)


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(mW)


- 23 -

OLED market should expand with new entrants

We believe that one of the core reasons for the high cost of producing OLED displays is that there are very few players. Samsung Display was the only OLED display maker with a commercial product globally until the end of 2012. Although LGD started to manufacture OLED-TV panels from early 2013, the production volume remains quite small due to a low yield and high manufacturing costs. At the 2013 CES trade show in Las Vegas, Sony announced the first 4K OLED-TV, produced on an oxide backplane, but no price or release dates were provided. Meanwhile, Panasonic claimed to have built the world’s largest OLED-TV with a 56-inch screen. As Taiwan and China display companies are spurring on developments in OLED displays, we are likely to see more OLED-display production lines ramp up over the next 2-3 years. Therefore, we expect the costs of equipment and materials to decline, and the OLED-display market to expand as well. Future looks bleak for LCD market with continuous capacity ramp-up in China Although panel makers in Japan once dominated the global LCD market, Korea LCD manufacturers overtook them in the early 2000s and expanded their market shares with aggressive investments in Gen5 lines. By the mid-2000s, the Taiwan panel makers, with strategic support from its government, had increased their presence in the global LCD market and accounted for the largest share of production globally in 1Q05. However, following the global economic slowdown in 2008, market-share gains by Taiwan panel makers lost momentum, as they were faced with sharp declines in fab utilisation rates and recorded huge losses. Global LCD-panel shipment share by region


China panel makers, meanwhile, have steadily expanded their production capacity. They have been focused on gaining the largest share of the LCD market, as they have a huge domestic TV market that can absorb excess panel output. Although China panel makers accounted for about 13% of LCD-panel (notebooks, monitors, and TV panels combined) market in 2Q13, their market share for TV panels was about 17% for 2Q13, and we expect this to continue to rise in the future. Global LCD-TV panel shipment share by region


Meanwhile, the global LCD market is facing chronic overcapacity due to slowing demand and a continuous ramp-up in new capacity. The utilisation rate for global LCD production lines has never exceeded 90% over the past five years: the highest level achieved in the past three years was 81% for 2Q13. Utilisation rates for global LCD production lines


Despite low utilisation rates, the construction of new fabs in China is continuing. BOE is the most aggressive company, with two new fabs due to ramp up production over 2014-15. Samsung Display and LGD are building their new LCD-production lines in China to avoid potential tariff increases, currently 5%, for LCD panels imported to China.

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- 24 -

New Gen8 LCD production lines being ramped up in China

Company Fab Phase Capacity

(per month) Mass

productionBOE Beijing B4 1 50,000 3Q11

2 50,000 2Q123 30,000 3Q13

Hefei B5 1 30,000 1Q142 30,000 4Q14

Chongqing B8 1 45,000 2Q152 45,000 3Q15

CEC Panda Nanjing G8 1 45,000 1Q15 China Star Shenzen 2 1 45,000 2Q15 LG Display Guangzhou 1 1 70,000 3Q14 Samsung Display Suzhou 1 30,000 4Q13

2 25,000 2Q143 30,000 3Q15

Source: Companies, DisplaySearch

Due to several new fab additions in China over the next couple of years, we forecast global LCD-panel capacity to increase by about 2% YoY for 2013 and 5% YoY for 2014. Therefore, with muted growth in panel demand, we expect panel makers’ profitability to depend largely on their adjustments to fab utilisation rates due to inherent overcapacity. We believe the panel-makers’ operating-profit margins will continue to be low- to mid-single digit percentages over the next few years. LCD panel makers: operating-profit margin

Source: Companies

LCD-panel makers eventually should shift to the OLED-display market As the OLED-display market offers higher growth potential and better profitability than that of LCDs, we expect an increasing number of LCD panel makers to shift to OLED-display production. However, we do not think that will happen immediately, given production-yield issues and the large investment required to build OLED-display fabs. But Samsung Display’s current operating-profit margin of more than 20% on its OLED-display business is certain to attract new entrants, in our view.

With OLED displays poised to replace LCDs in the future, Samsung Display and LGD are committed in building additional OLED- display lines as production efficiency improves. However, other than these two Korea companies, no other OLED-display makers have confirmed that mass production is under way. Although several companies have R&D or pilot lines in place, production yield is a major hurdle: once it stabilises, we expect these companies to start volume production. The fab activity by other OLED-display companies is as follows:

• AU Optronics – For small panels, currently has Gen3.5 line in Taiwan and a Gen4 line in Singapore, but it remains uncertain when the company will start the volume production as it is having difficulty in raising the production yield. In 2012, the company teamed up with Idemitsu Kosan to access organic materials as well as OLED-display technology. AU Optronics is developing oxide-based white-OLED displays for TVs and it may build a Gen6 or Gen8 fab in Taiwan with technology from Sony and Panasonic.

• Innolux – Likely to delay ramping up its Gen3.5 line in Hsinchu until early or mid-2014. The Taiwan company’s OLED-display development appears to be tracking much slower than it expected, and so far it has no plans for an OLED-TV production line as the company is focused on selling UHD-TV panels based on LCD technology.

• BOE – This China-based company has started construction of a Gen5.5 OLED line in Ordos, Mongolia. We estimate the investment cost will be more than USD3bn and production at the facility may start to be ramped up from the end of 2013. However, it would first produce LCDs on LTPS backplanes and it to OLED displays later. There have been media reports that BOE has encountered production issues and recently placed an order for deposition equipment with a Korea company.

• Tianma – Operates a Gen4.5 pilot line in Shanghai. This China-based company aims to build a Gen5.5 line to produce small-size OLED panels. However, we expect mass production for this fab to start from early 2015.

• Visionox – Plans to ramp up production of a Gen5.5 OLED-display line in Kunshan, China with a capacity of 15,000 substrates/month. We expect equipment to be moved in for 1H14, and mass production to begin from late-2014 for this China-based company.

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■ What's new In an effort to differentiate its consumer devices, we expect SEC to expand the uses for OLED displays to TVs and tablets, as well as to adopt OLED-based flexible displays for its flagship smartphones. ■ What's the impact SEC, through 84.5%-owned affiliate Samsung Display, accounted for 96% of OLED-display production capacity globally for 2012. Although SEC has used OLED displays in mobile handsets since 2007, it is now using them as the main display for all of its premium smartphones and for a new 55-inch OLED-TV. In the next few years, we expect the company to utilise fully OLEDs’ inherent advantages in product differentiation and offer flexible and transparent displays. Until now, the challenge of launching flexible displays has been difficulties with the encapsulation process. However, as we believe the production yield

has now improved to 80%, the company is likely to launch its first flexible-display product in 2H13. Although the first generation of flexible displays will be unbreakable, which are thinner, lighter, and sturdier than the current glass-based OLED, as other hardware components have flexible properties, we believe the launch of foldable and rollable displays will take place in the not-too-distant future. While several billion dollars of investment is needed to build a new OLED-display production line, we expect Samsung Display to fund most of this through internally generated cash flow, as its operating-profit margin in the OLED business is currently more than 20%. As OLED-display shipments should be strong for 3Q13, we are raising slightly our 2013-14 EPS forecasts. ■ What we recommend We reaffirm our SOTP-based six-month target price of KRW1.8m and Buy (1) rating. The key risks are weaker-than-expected sales of PCs, mobile handsets, and flat-panel TVs. ■ How we differ We are more positive on SEC’s OLED-display business than the

market as we expect OLED to emerge as a game-changing feature in its product-differentiation strategy.

Information Technology / Korea005930 KS

29 August 2013

Samsung Electronics

At the centre of OLED-market expansion

• SEC will use OLEDs as a key display technology for mobile devices and TVs in an effort to differentiate its products

• We expect it to launch its first flexible-display product in 2H13, followed by foldable and rollable displays in the future

• It will fund most of its OLED-display investment with internal cash flow as this business is highly profitable


Source: FactSet, Daiwa forecasts


Samsung Electronics005930 KS

Target (KRW): 1,800,000 1,800,000Upside: 37.5%28 Aug price (KRW): 1,309,000

Buy (unchanged)

OutperformHoldUnderperformSell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (0.7) (0.9) (1.4)Net profit change 1.0 0.5 (1.9)Core EPS (FD) change 1.0 0.5 (1.9)

95

104

113

121

130

1,150,000

1,262,500

1,375,000

1,487,500

1,600,000

Aug-12 Nov-12 Feb-13 May-13

Share price performance

Samsng Ele (LHS)Relative to KOSPI (RHS)

(KRW) (%)

12-month range 1,189,000-1,576,000Market cap (USDbn) 172.723m avg daily turnover (USDm) 380.48Shares outstanding (m) 147Major shareholder Samsung Life (7.6%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 233,442 251,553 267,268Operating profit (bn) 39,067 42,788 44,536Net profit (bn) 30,752 33,653 35,156Core EPS (fully-diluted) 208,771 228,467 238,668EPS change (%) 29.0 9.4 4.5Daiwa vs Cons. EPS (%) 3.6 5.1 4.4PER (x) 6.3 5.7 5.5Dividend yield (%) 0.8 0.8 0.9DPS 10,000 11,000 12,000PBR (x) 1.3 1.1 0.9EV/EBITDA (x) 2.9 2.4 1.9ROE (%) 23.4 20.8 18.1

Jae H. Lee(82) 2 787 9173

[email protected]


- 26 -

Key assumptions

Profit and loss (KRWbn)

Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EDRAM shipment (m 1Gb equiv.) 2,312.5 3,260.0 5,470.0 8,245.0 10,640.0 13,020.0 17,200.0 22,640.0NAND shipment (m 8Gb equiv.) 1,625.0 2,180.0 3,600.0 6,480.0 9,780.0 15,500.0 24,880.0 39,160.0Handset shipment (m) 196.7 227.1 280.2 332.0 409.0 440.0 485.0 525.0

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESemiconductor 22,353 26,808 37,639 36,990 34,887 37,724 42,101 44,811Display 21,518 25,837 29,920 29,243 32,999 32,773 35,254 37,844Other Revenue 77,423 83,679 87,072 98,769 133,218 162,944 174,199 184,613Total Revenue 121,294 136,324 154,630 165,002 201,104 233,442 251,553 267,268Other income 0 0 0 0 0 0 0 0COGS (89,762) (94,595) (102,667) (112,145) (126,652) (141,241) (151,953) (162,792)SG&A (25,500) (30,749) (35,207) (37,212) (45,402) (53,134) (56,812) (59,940)Other op.expenses 612 (55) 0 0 0 0 0 0Operating profit 6,644 10,925 16,757 15,644 29,049 39,067 42,788 44,536Net-interest inc./(exp.) (56) (174) (23) 62 246 321 596 850Assoc/forex/extraord./others (10) 1,441 2,642 1,486 619 37 39 (23)Pre-tax profit 6,578 12,192 19,376 17,192 29,915 39,425 43,423 45,362Tax (688) (2,431) (3,193) (3,433) (6,070) (8,674) (9,770) (10,206)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 5,890 9,761 16,182 13,759 23,845 30,752 33,653 35,156Net profit (adjusted) 5,890 9,761 16,182 13,759 23,845 30,752 33,653 35,156EPS (reported)(KRW) 39,988 66,263 109,860 93,409 161,883 208,771 228,467 238,668EPS (adjusted)(KRW) 39,988 66,263 109,860 93,409 161,883 208,771 228,467 238,668EPS (adjusted fully-diluted)(KRW) 39,988 66,263 109,860 93,409 161,883 208,771 228,467 238,668DPS (KRW) 5,500 8,000 10,000 5,500 8,000 10,000 11,000 12,000EBIT 6,644 10,925 16,757 15,644 29,049 39,067 42,788 44,536EBITDA 16,739 22,063 28,150 29,236 44,671 56,263 61,789 65,945

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 6,578 12,192 19,376 17,192 29,915 39,425 43,423 45,362Depreciation and amortisation 10,095 11,138 11,394 13,592 15,622 17,197 19,001 21,409Tax paid (688) (2,431) (3,193) (3,433) (6,070) (8,674) (9,770) (10,206)Change in working capital (4,526) (6,599) (11,094) (7,292) (8,632) (2,608) (2,374) (2,421)Other operational CF items 1,900 4,223 7,345 2,859 7,138 (782) (948) (1,100)Cash flow from operations 13,360 18,522 23,827 22,918 37,973 44,558 49,331 53,043Capex (13,793) (7,971) (20,391) (21,586) (22,321) (23,000) (24,000) (25,000)Net (acquisitions)/disposals (13) (84) (406) (137) (799) (11,890) (11,624) (15,438)Other investing CF items 677 (6,122) (3,188) 610 (8,202) (4,601) (3,905) (4,442)Cash flow from investing (13,128) (14,177) (23,985) (21,113) (31,322) (39,491) (39,529) (44,880)Change in debt 2,773 (622) 1,702 3,758 539 (1,366) (2,405) (334)Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (1,098) (824) (1,918) (875) (1,265) (1,362) (1,702) (1,873)Other financing CF items 260 82 64 227 (1,138) (340) (170) (169)Cash flow from financing 1,934 (1,364) (152) 3,110 (1,865) (3,068) (4,277) (2,376)Forex effect/others 817 (1,646) (48) (15) (687) 0 0 0Change in cash 2,983 1,335 (359) 4,900 4,100 1,999 5,526 5,787Free cash flow (433) 10,551 3,436 1,332 15,652 21,558 25,331 28,043

Financial summary


- 27 -

Balance sheet (KRWbn)

Key ratios (%)


Company profile

Samsung Electronics is the world's largest manufacturer of memory chips and flat-panel TVs and the largest supplier of smartphones. The company has core production facilities in Korea and four business divisions – semiconductor, display, IT & mobile, and consumer electronics.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 13,388 20,883 22,480 26,878 37,448 49,312 64,765 84,148Inventory 9,493 9,839 13,365 15,717 17,747 19,963 21,705 23,268Accounts receivable 12,044 17,819 19,153 21,882 23,861 27,061 28,811 30,243Other current assets 14,044 5,670 6,405 7,026 8,212 9,771 10,476 11,075Total current assets 48,969 54,211 61,403 71,502 87,269 106,107 125,757 148,735Fixed assets 42,496 43,560 52,965 62,044 68,485 74,288 79,287 82,878Goodwill & intangibles 787 1,256 2,779 3,355 3,730 4,607 5,287 5,982Other non-current assets 13,049 13,152 17,162 18,899 21,588 28,589 34,911 42,053Total assets 105,301 112,180 134,309 155,800 181,072 213,591 245,242 279,648Short-term debt 11,290 8,014 9,554 9,684 9,443 10,266 7,348 7,393Accounts payable 5,587 8,235 9,149 10,277 9,489 10,629 11,168 11,569Other current liabilities 15,330 17,955 21,242 24,358 28,001 31,041 32,279 33,095Total current liabilities 32,207 34,204 39,945 44,319 46,933 51,937 50,794 52,056Long-term debt 6,165 1,380 1,222 4,963 5,452 3,263 3,777 3,398Other non-current liabilities 4,005 3,550 3,965 5,205 7,206 7,861 8,360 8,770Total liabilities 42,377 39,135 45,131 54,487 59,591 63,061 62,932 64,224Share capital 898 898 898 898 898 898 898 898Reserves/R.E./others 57,219 68,668 84,544 96,193 116,197 145,246 177,026 210,140Shareholders' equity 58,117 69,565 85,442 97,090 117,094 146,143 177,924 211,038Minority interests 4,807 3,480 3,736 4,223 4,386 4,386 4,386 4,386Total equity & liabilities 105,301 112,180 134,309 155,800 181,072 213,591 245,242 279,648EV 206,495 188,286 188,582 189,030 179,034 165,804 147,947 128,230Net debt/(cash) 4,067 (11,489) (11,705) (12,231) (22,553) (35,783) (53,640) (73,357)BVPS (KRW) 394,550 472,270 580,054 659,137 794,939 992,152 1,207,906 1,432,713

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 23.1 12.4 13.4 6.7 21.9 16.1 7.8 6.2EBITDA (YoY) (4.8) 31.8 27.6 3.9 52.8 25.9 9.8 6.7Operating profit (YoY) (26.9) 64.4 53.4 (6.6) 85.7 34.5 9.5 4.1Net profit (YoY) (25.7) 65.7 65.8 (15.0) 73.3 29.0 9.4 4.5Core EPS (fully-diluted) (YoY) (25.7) 65.7 65.8 (15.0) 73.3 29.0 9.4 4.5Gross-profit margin 26.0 30.6 33.6 32.0 37.0 39.5 39.6 39.1EBITDA margin 13.8 16.2 18.2 17.7 22.2 24.1 24.6 24.7Operating-profit margin 5.5 8.0 10.8 9.5 14.4 16.7 17.0 16.7Net profit margin 4.9 7.2 10.5 8.3 11.9 13.2 13.4 13.2ROAE 10.7 15.3 20.9 15.1 22.3 23.4 20.8 18.1ROAA 5.9 9.0 13.1 9.5 14.2 15.6 14.7 13.4ROCE 8.8 13.4 18.4 14.5 23.0 26.0 23.9 21.2ROIC 9.5 13.6 20.1 15.0 24.6 28.5 27.2 25.5Net debt to equity 7.0 net cash net cash net cash net cash net cash net cash net cashEffective tax rate 10.5 19.9 16.5 20.0 20.3 22.0 22.5 22.5Accounts receivable (days) 34.9 40.0 43.6 45.4 41.5 39.8 40.5 40.3Current ratio (x) 1.5 1.6 1.5 1.6 1.9 2.0 2.5 2.9Net interest cover (x) 118.5 62.7 729.2 n.a. n.a. n.a. n.a. n.a.Net dividend payout 13.8 12.1 9.1 5.9 4.9 4.8 4.8 5.0Free cash flow yield n.a. 5.5 1.8 0.7 8.1 11.2 13.1 14.5

Financial summary continued …


■ What's new Despite moderate delays in new equipment orders in 1H13, we expect SFA Engineering’s (SFA) order intake to improve for 2H13 as investments in new OLED-display production lines are finalised towards the year-end. ■ What's the impact For 1H13, the company’s new equipment orders amounted to KRW267bn (a 14% YoY rise). However, we forecast its new-order intake to increase to KRW436bn for 2H13 as Samsung Display will ramp up its phase5 expansion of A2 line from 4Q13 and the new A3 line from the middle of 2014. Although SFA has so far provided mainly logistics equipment for OLED production lines, it has developed front-end equipment, such as a deposition system for OLED-TV production lines and that is being used in Samsung Display’s Gen8 pilot line. Therefore, should

Samsung Display invest in a new mass-production line for OLED-TV (possibly in 2014), SFA is likely to supply the deposition equipment. For 2013, we forecast SFA to post revenue of KRW669bn (up 39% YoY) and an operating profit of KRW102bn (up 58% YoY). We expect an operating-profit margin of a mid-teen percentage (compared with a low-teen percentage in 2010-12) as a result of effective cost reductions and the shortening of the lead time for equipment delivery. Following the 2Q13 results (21 August), we are making small cuts to our 2013-15 earnings forecasts. ■ What we recommend We maintain our six-month target price of KRW72,000, based on a 2013E PBR of 3.0x, corresponding to the stock’s mid- to peak-cycle PBR over the past three years. As we expect order visibility for display equipment to improve in 2H13, we reaffirm our Buy (1) rating. Risks to our call include delays in investments at Samsung Display’s new LCD and OLED production lines. ■ How we differ Our 2013E and 2014E EPS are respectively 7.0% and 10.8% higher than those of the Bloomberg

consensus as we are more positive on potential new-equipment orders from its customers.


29 August 2013

SFA Engineering

A multi-purpose player in OLED equipment

• Order momentum for 2H13 is improving on the back of new OLED-display line investments

• Potential supply of deposition system for OLED-TV production line could boost revenue further

• We expect SFA to sustain an operating-profit margin of a mid-teen percentage on the back of effective cost control




SFA Engineering056190 KS

Target (KRW): 72,000 72,000Upside: 42.0%28 Aug price (KRW): 50,700

Buy (unchanged)


1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (0.9) (1.1) (1.0)Net profit change (1.4) (2.6) (2.6)Core EPS (FD) change (1.4) (2.6) (2.6)

80

95

110

125

140

35,000

43,750

52,500

61,250

70,000



SFA Eng (LHS) Relative to KOSPI (RHS)

(KRW) (%)

12-month range 40,000-67,700Market cap (USDbn) 0.823m avg daily turnover (USDm) 3.20Shares outstanding (m) 18Major shareholder DY Asset (33.3%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 669 864 977Operating profit (bn) 102 131 145Net profit (bn) 88 111 122Core EPS (fully-diluted) 4,927 6,182 6,813EPS change (%) 29.4 25.5 10.2Daiwa vs Cons. EPS (%) 7.0 10.8 10.1PER (x) 10.3 8.2 7.4Dividend yield (%) 2.4 2.8 3.0DPS 1,200 1,400 1,500PBR (x) 2.1 1.8 1.4EV/EBITDA (x) 5.8 4.1 3.5ROE (%) 22.6 23.7 21.9

Jae H. Lee(82) 2 787 9173

[email protected]


- 29 -

Key assumptions


Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EGlobal semiconductor capex (USDbn) 33.3 19.9 43.3 56.4 49.8 50.9 52.2 53.8Global LCD capex (USDbn) 24.1 15.9 25.3 17.3 13.4 14.6 15.2 15.7New order intake (KRWbn) 409.6 261.3 739.1 773.4 620.0 703.3 900.0 980.0

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ELogistic system 357 254 361 618 390 509 673 723Processing equipment 74 53 62 136 91 160 191 253Other Revenue 0 0 209 0 0 (0) 0 0Total Revenue 431 307 632 753 481 669 864 977Other income 0 0 0 0 0 0 0 0COGS (355) (270) (529) (610) (354) (502) (650) (737)SG&A (22) (22) (38) (48) (63) (65) (82) (95)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 54 15 66 95 64 102 131 145Net-interest inc./(exp.) 8 5 4 4 10 9 10 11Assoc/forex/extraord./others 7 5 5 (3) 14 6 6 7Pre-tax profit 69 25 75 96 88 117 147 162Tax (19) (7) (18) (20) (20) (29) (36) (40)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 50 18 56 76 68 88 111 122Net profit (adjusted) 50 18 56 76 68 88 111 122EPS (reported)(KRW) 2,773 1,004 3,138 4,212 3,806 4,927 6,182 6,813EPS (adjusted)(KRW) 2,773 1,004 3,138 4,212 3,806 4,927 6,182 6,813EPS (adjusted fully-diluted)(KRW) 2,773 1,004 3,138 4,212 3,806 4,927 6,182 6,813DPS (KRW) 700 200 500 1,280 1,000 1,200 1,400 1,500EBIT 54 15 66 95 64 102 131 145EBITDA 58 20 71 101 73 111 142 158

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 69 25 75 96 88 117 147 162Depreciation and amortisation 4 5 5 6 8 9 11 13Tax paid (19) (7) (18) (20) (20) (29) (36) (40)Change in working capital (25) (26) 33 (1) (18) (14) (4) (17)Other operational CF items 1 0 (3) 32 (13) (2) (3) (3)Cash flow from operations 31 (3) 91 112 45 81 115 116Capex (12) (5) (8) (24) (5) (25) (25) (30)Net (acquisitions)/disposals (3) 1 (2) 0 (0) (3) (9) (6)Other investing CF items 42 10 (38) (73) (34) 1 (37) (43)Cash flow from investing 27 6 (48) (96) (39) (27) (71) (79)Change in debt 0 0 0 0 0 0 0 0Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (13) (12) (4) (9) (23) (18) (22) (25)Other financing CF items (17) 0 (0) 0 (31) (8) (3) (5)Cash flow from financing (30) (12) (4) (9) (54) (26) (25) (30)Forex effect/others 0 0 0 0 0 0 0 0Change in cash 28 (10) 40 7 (48) 29 19 7Free cash flow 18 (8) 83 89 41 56 90 86

Financial summary


- 30 -


Key ratios (%)


Company profile

SFA Engineering (SFA) was spun off from Samsung Techwin in December 1998 and supplies primarily advanced equipment for factory automation and logistics. Since 2001, the company has expanded its business into FPDs, solar cells, and semiconductor equipment. In 2012, logistic systems accounted for 81% of revenues, while processing equipments accounted for 19%.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 110 91 181 248 241 267 320 360Inventory 109 27 6 7 3 4 4 4Accounts receivable 46 38 142 78 98 99 116 128Other current assets 8 10 52 67 66 70 82 91Total current assets 274 167 380 400 408 439 522 583Fixed assets 90 91 94 107 105 122 137 156Goodwill & intangibles 0 0 4 10 14 17 19 31Other non-current assets 52 52 36 42 34 42 58 70Total assets 417 310 514 559 561 621 737 839Short-term debt 0 0 0 0 0 0 0 0Accounts payable 41 30 115 107 107 98 115 123Other current liabilities 137 39 101 87 72 74 81 78Total current liabilities 178 69 216 194 179 171 197 202Long-term debt 0 0 0 0 0 0 0 0Other non-current liabilities 16 12 18 20 23 24 29 31Total liabilities 194 81 234 214 202 195 226 233Share capital 5 5 9 9 9 9 9 9Reserves/R.E./others 218 224 271 336 349 416 502 598Shareholders' equity 223 228 280 345 358 425 511 607Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 417 310 514 559 561 621 737 839EV 800 819 729 662 669 644 590 551Net debt/(cash) (110) (91) (181) (248) (241) (267) (320) (360)BVPS (KRW) 12,404 12,715 15,588 19,196 19,962 23,689 28,471 35,777

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 40.4 (28.7) 106.0 19.1 (36.2) 39.2 29.0 13.1EBITDA (YoY) 21.0 (65.9) 259.1 42.4 (28.2) 52.9 28.3 11.2Operating profit (YoY) 21.4 (71.6) 335.7 43.1 (31.9) 58.4 28.4 10.4Net profit (YoY) 18.4 (63.8) 212.5 34.2 (9.6) 29.4 25.5 10.2Core EPS (fully-diluted) (YoY) 18.4 (63.8) 212.5 34.2 (9.6) 29.4 25.5 10.2Gross-profit margin 17.6 12.0 16.4 19.0 26.5 25.0 24.7 24.6EBITDA margin 13.5 6.4 11.2 13.4 15.1 16.6 16.5 16.2Operating-profit margin 12.4 4.9 10.5 12.6 13.4 15.3 15.2 14.8Net profit margin 11.6 5.9 8.9 10.0 14.2 13.2 12.9 12.5ROAE 23.4 8.0 22.2 24.2 19.4 22.6 23.7 21.9ROAA 12.5 5.0 13.7 14.1 12.2 15.0 16.4 15.5ROCE 25.2 6.7 26.0 30.3 18.3 26.1 28.0 25.9ROIC 41.7 8.8 42.2 76.5 46.8 55.9 56.6 49.9Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cashEffective tax rate 27.3 28.1 24.7 21.1 22.6 24.5 24.5 24.5Accounts receivable (days) 45.8 50.5 52.0 53.2 66.6 53.8 45.6 45.6Current ratio (x) 1.5 2.4 1.8 2.1 2.3 2.6 2.7 2.9Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Net dividend payout 25.2 19.9 15.9 30.4 26.3 24.4 22.6 22.0Free cash flow yield 2.0 n.a. 9.1 9.7 4.5 6.2 9.9 9.5



■ Investment case We initiate coverage of Wonik IPS (Wonik), a maker of semiconductor and display-processing equipment, with a Buy (1) rating. Despite a weak order intake over 4Q12-1Q13, equipment-order momentum began to pick up from late-2Q13, and we forecast revenue growth of 78% HoH for 2H13. ■ Catalysts We are positive on the outlook for the company’s equipment-order momentum in 2H13 due to rises in capital spending for SEC’s semiconductor and OLED businesses. In the OLED business, we expect Samsung Display to start the phase 5 expansion of its A2 line from 4Q13 and begin production on a new A3 line from the middle of 2014. As a result, Wonik’s sales of dry etchers and encapsulation systems (for flexible displays) are likely to pick up from 3Q13.

In semiconductor equipment, we believe the memory-chip makers’ shift to advanced-process technologies as well as the adoption of new technology for NAND-flash (3D NAND) is positive for Wonik, as this will require large quantities of deposition equipment. Although Wonik has a 10-15% share of the domestic deposition-system market, it expects its share to rise to 15-20% over the next 1-2 years on new fab additions by memory-chip makers. For 2013, we forecast consolidated revenue of KRW388bn (up 11% YoY) and an operating profit of KRW29bn (up 8% YoY). We expect stronger revenue and earnings growth for 2014, due to a rise in investments for flexible-display production lines and capacity rises for SEC’s NAND-flash capacity in China. We also expect a steady earnings contribution from 47%-owned affiliate Wonik Materials to consolidated financials on rising sales of specialty gas. ■ Valuation On our respective 2013 and 2014 forecasts, the stock is trading currently at PERs of 20.0x and 11.3x and at PBRs of 1.6x and 1.4x. We initiate coverage of the stock with a six-month target price of KRW10,000, based on a mid- to peak-cycle PBR of 2.3x on the average of our 2013-14E BVPS.

■ Risks The key risks to our view include weaker-than-expected demand for new products, such as flexible displays, and delays in the ramp-up of semiconductor and display production lines.


29 August 2013

Wonik IPS

Initiation: OLED and NAND should drive top-line growth

• We initiate coverage of Wonik IPS with a Buy (1) rating and six-month target price of KRW10,000

• Its OLED-display equipment exposure is rising as it makes dry etchers and encapsulation systems (for flexible displays)

• There could be upside to sales of semiconductor-deposition equipment on the back of new NAND-flash production lines



Wonik IPS030530 KS

Target (KRW): 10,000Upside: 52.2%28 Aug price (KRW): 6,570

Buy (initiation)


1

2

3

4

5

70

89

108

126

145

4,000

5,000

6,000

7,000

8,000



Wonik IPS (LHS) Relative to KOSPI (RHS)

(KRW) (%)

12-month range 4,130-7,700Market cap (USDbn) 0.433m avg daily turnover (USDm) 8.75Shares outstanding (m) 73Major shareholder Wonik Corp (11.2%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 388 529 585Operating profit (bn) 29 56 63Net profit (bn) 26 47 53Core EPS (fully-diluted) 329 582 664EPS change (%) (10.4) 76.7 14.2Daiwa vs Cons. EPS (%) n.a. n.a. n.a.PER (x) 20.0 11.3 9.9Dividend yield (%) 0.0 0.0 0.0DPS 0 0 0PBR (x) 1.6 1.4 1.2EV/EBITDA (x) 9.9 4.6 3.7ROE (%) 9.4 14.7 14.5

Jae H. Lee(82) 2 787 9173

[email protected]



- 32 -

Growth outlook Wonik: revenue and operating-profit margin forecasts

We expect Wonik’s revenue to expand from 2H13 on the back of a rise in new-equipment orders. For 2014, we forecast the company’s revenue to increase by 36% YoY to KRW529bn and operating profit to almost double to KRW56bn.


Valuation Wonik: PBR bands

The stock is trading currently at PERs of 20.0x and 11.3x on our 2013 and 2014 EPS forecasts, respectively. It is also trading at respective PBRs of 1.6x and 1.4x on our 2013 and 2014 BVPS forecasts, compared with a past-three-year trading range of 1.1-3.2x. Given the volatile nature of the company’s earnings, we prefer to base our valuation for the stock on a PBR multiple rather than a PER. We use a mid-cycle PBR to value it due to the risk of delays in equipment orders.

Source: Company, Bloomberg, Daiwa forecasts

Earnings revisions Global OLED capex

As the company started to report its financials on a consolidated basis since 1Q13, there are no consensus earnings (consolidated) forecasts available. However, there could be upside to our earnings forecasts on the back of a rise in investment in OLED production lines. Samsung Display is one of Wonik’s key customers and an increase in its new capacity should lead to rising orders for Wonik’s equipment.



Growth outlook

Valuation

Earnings revisions

0

2

4

6

8

10

12

0

100

200

300

400

500

600

700

2011 2012 2013E 2014E 2015E

Semiconductor Display Others OP margin (RHS)

(KRWbn) (%)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

(KRW)

3.9x

3.4x

2.9x

2.2x

1.7x

1.2x

0

2

4

6

8

10

12

2009 2010 2011 2012 2013E 2014E 2015E

Samsung LG Others

(USDbn)

Buy (initiation)


1

2

3

4

5


- 33 -

Key assumptions


Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EGlobal semicon capex (USDbn) 33.3 19.9 43.3 56.4 49.8 50.9 52.2 53.8Global LCD capex (USDbn) 24.1 15.9 25.3 17.3 13.4 14.6 15.2 15.7Global OLED capex (USDbn) 0.0 0.5 2.0 5.0 4.6 5.4 7.2 9.6

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESemiconductor 44 77 131 163 140 130 172 180Display 0 0 0 33 31 74 99 123Other Revenue 78 73 110 144 177 184 258 282Total Revenue 123 150 241 340 349 388 529 585Other income 0 0 0 0 0 0 0 0COGS (78) (104) (163) (237) (239) (265) (342) (375)SG&A (25) (29) (43) (74) (83) (94) (131) (147)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 19 17 35 29 26 29 56 63Net-interest inc./(exp.) 1 0 1 (3) 1 2 4 5Assoc/forex/extraord./others (1) 0 1 9 4 3 (1) (1)Pre-tax profit 19 18 37 36 32 34 59 68Tax (5) (6) (9) (10) (5) (7) (12) (14)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 14 12 28 25 27 26 47 53Net profit (adjusted) 14 12 28 25 27 26 47 53EPS (reported)(KRW) 424 373 404 350 367 361 639 730EPS (adjusted)(KRW) 424 373 404 350 367 361 639 730EPS (adjusted fully-diluted)(KRW) 424 373 404 350 367 329 582 664DPS (KRW) 0 0 0 0 0 0 0 0EBIT 19 17 35 29 26 29 56 63EBITDA 24 23 41 40 39 52 81 89

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 19 18 37 36 32 34 59 68Depreciation and amortisation 5 6 6 11 12 23 24 26Tax paid (5) (6) (9) (10) (5) (7) (12) (14)Change in working capital (7) 13 (18) (47) 6 (35) (47) (42)Other operational CF items 6 4 7 5 (1) 0 (4) (10)Cash flow from operations 18 35 24 (7) 44 16 20 27Capex (6) (6) (18) (57) (47) (10) (15) (20)Net (acquisitions)/disposals 2 (5) 105 130 344 (7) (10) (8)Other investing CF items (7) (18) (84) (120) (358) (5) (7) (7)Cash flow from investing (11) (28) 3 (48) (62) (22) (31) (35)Change in debt (2) (2) (2) 12 2 2 (6) (5)Net share issues/(repurchases) 0 0 1 75 3 0 0 0Dividends paid 0 0 0 0 0 0 0 0Other financing CF items 3 (1) (0) (4) (1) 2 2 2Cash flow from financing 1 (3) (1) 82 3 4 (4) (3)Forex effect/others 0 0 (0) 0 (0) 0 0 0Change in cash 8 3 25 28 (15) (3) (16) (11)Free cash flow 12 29 5 (64) (3) 6 5 7

Financial summary


- 34 -


Key ratios (%)


Company profile

Wonik IPS specialises in manufacture of chemical vapour deposition equipment for the semiconductor production lines and dry etchers for display processing equipments. The company was established in 1991 and merged with IPS in December 2010. For FY12, semiconductor equipments accounted for 34% of revenue, display equipments for 19%, gas supply system for 14% and contribution from Wonik Materials (47% owned affiliate) for 33%.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 29 45 77 133 122 149 182 221Inventory 17 23 56 82 67 71 85 93Accounts receivable 9 14 27 52 21 29 36 39Other current assets 4 3 7 12 7 8 9 10Total current assets 60 85 167 279 217 257 312 363Fixed assets 39 41 111 139 151 139 131 126Goodwill & intangibles 6 3 17 20 27 31 34 38Other non-current assets 10 21 46 55 83 93 105 115Total assets 114 149 341 493 478 519 581 643Short-term debt 4 4 11 10 4 16 15 16Accounts payable 13 39 49 61 24 27 31 33Other current liabilities 14 9 37 57 59 64 72 76Total current liabilities 32 52 98 128 87 106 118 125Long-term debt 4 2 41 38 37 28 24 20Other non-current liabilities 2 6 16 18 19 22 28 31Total liabilities 38 60 154 184 143 156 169 175Share capital 17 17 34 36 37 37 37 37Reserves/R.E./others 59 72 151 218 232 258 305 358Shareholders' equity 76 88 185 254 268 295 341 395Minority interests 1 1 2 55 67 69 71 73Total equity & liabilities 114 149 341 493 478 519 581 643EV 462 444 460 506 534 513 373 330Net debt/(cash) (21) (39) (25) (85) (81) (106) (144) (185)BVPS (KRW) 2,280 2,672 2,696 3,515 3,666 4,023 4,662 5,392

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 9.9 22.1 60.9 41.2 2.5 11.4 36.3 10.5EBITDA (YoY) 5.7 (3.8) 77.0 (3.4) (2.0) 34.0 54.7 10.3Operating profit (YoY) 6.0 (9.8) 101.0 (16.5) (8.8) 8.2 96.7 12.2Net profit (YoY) (3.8) (12.0) 124.3 (8.7) 6.1 (1.5) 76.7 14.2Core EPS (fully-diluted) (YoY) (3.8) (12.0) 8.2 (13.3) 4.9 (10.4) 76.7 14.2Gross-profit margin 36.1 30.6 32.5 30.3 31.5 31.7 35.4 35.9EBITDA margin 19.6 15.5 17.0 11.7 11.2 13.4 15.2 15.2Operating-profit margin 15.6 11.5 14.4 8.5 7.6 7.4 10.6 10.8Net profit margin 11.4 8.3 11.5 7.4 7.7 6.8 8.8 9.1ROAE 20.4 15.1 20.3 11.5 10.3 9.4 14.7 14.5ROAA 13.2 9.4 11.3 6.1 5.5 5.3 8.5 8.7ROCE 24.8 19.2 20.8 9.7 7.2 7.3 13.1 13.2ROIC 27.1 22.4 24.7 10.7 9.4 8.8 16.9 18.1Net debt to equity net cash net cash net cash net cash net cash net cash net cash net cashEffective tax rate 25.3 31.4 24.4 28.9 15.2 21.0 21.0 21.0Accounts receivable (days) 30.2 28.9 31.4 42.3 38.3 23.7 22.5 23.5Current ratio (x) 1.9 1.6 1.7 2.2 2.5 2.4 2.7 2.9Net interest cover (x) n.a. n.a. n.a. 10.5 n.a. n.a. n.a. n.a.Net dividend payout 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free cash flow yield 2.4 6.0 1.1 n.a. n.a. 1.2 1.0 1.5



- 35 -

Positive surprises should come from OLED and NAND

Wonik’s equipment-order momentum is likely to pick up from 2H13 on the back of increases in capital spending for SEC’s semiconductor and OLED businesses.

Investment summary

We initiate coverage of Wonik with a Buy (1) rating and six-month target price of KRW10,000. Despite a weak order intake from 4Q12-1Q13, the company’s equipment-order momentum started to pick up from late-2Q13. Benefiting from capacity increases in Samsung Display’s OLED production lines and a potential ramp-up of SEC’s NAND-flash fab in China in 1Q14, we expect new-equipment orders to expand for 2H13, and forecast the company’s consolidated revenue to rise by 78% HoH to KRW248bn for 2H13 from KRW140bn for 1H13. Wonik has diverse revenue sources, with semiconductor equipment, display equipment, and gas-supply systems accounting respectively for 59%, 13%, and 27% of revenue for 2012 on a standalone basis. The company’s main customer is SEC, which accounted for more than 80% of semiconductor equipment and 100% of its display-equipment sales for 2012. SEC also owns convertible bonds in Wonik, equivalent to a 9.9% stake when fully converted. Wonik is keen to expand its semiconductor-equipment business overseas on the back of its ties with US-based Applied Materials (Not rated). Since 1Q13, Wonik has reported its financials on a consolidated basis, including the results from 46.9%-owned Wonik Materials, which supplies specialty gases to semiconductor and LCD-panel makers globally. For 4Q12 and 1Q13, Wonik recorded operating losses due to weak equipment revenue. Although we forecast the company to post a KRW2bn operating loss for the equipment business for 2Q13, we expect the company to turn profitable from 3Q13 due to rising equipment orders.

Wonik’s share price dropped sharply (57%) from late-February to mid-November 2012 due to a slowdown in new orders. However, the share price has rebounded by more than 70% since mid-November 2012 as order-momentum has improved. Despite continued losses for its equipment business, we believe an earnings turnaround from 3Q13 and rising equipment investment by its captive customer will be the key share-price catalysts over the next six months. Based on our respective 2013 and 2014 forecasts, the stock is trading currently at PERs of 20.0x and 11.3x and PBRs of 1.6x and 1.4x (compared with its past-three-year trading range of 1.1-3.2x). Given the robust revenue and earnings growth we expect for 2H13 and 2014, we set our six-month target price at KRW10,000, based on a mid- to peak-cycle PBR of 2.3x on the average of our 2013 and 2014 BVPS forecasts. Wonik: PBR bands

Source: Bloomberg, Daiwa forecasts

Revenue-growth prospects

Although Wonik has been selling dry etchers (used for the removal of selective materials from glass substrate) to Samsung Display’s TFT-LCD production line since 2006, the company did not supply the dry etchers for Samsung Display’s OLED-display production line as its domestic competitor dominates the OLED-display etcher market. However, Wonik became the second vendor of dry etchers for Samsung Display in 2012. We estimate that the company has secured about 20% of dry-etcher orders for the phase 4 expansion of Samsung Display’s A2 line. However, for the phase5 expansion (possibly in 4Q13) and for the new A3 production line, due to ramp up from the middle of 2014, we expect the company’s market share to increase to 30-40%, due to improved equipment quality as well as throughput.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


(KRW)

3.9x

3.4x

2.9x

2.2x

1.7x

1.2x


- 36 -

Meanwhile, Wonik has been qualified by Samsung Display to supply the encapsulation systems for forming a non-organic layer on the plastic substrate of flexible display. The encapsulation system for forming an organic layer is provided by another Korea equipment company, SNU Precision (Not rated). Wonik shipped its first batch of encapsulation systems to Samsung Display for testing in 2Q13 and as the production yield on flexible display improves from the current level of 80%, we expect additional orders. As new smartphones using flexible display are likely to be launched by SEC in 4Q13, we expect more smartphone makers to use flexible displays to differentiate their handsets. As a result, demand for Wonik’s encapsulation systems should rise strongly over the next few years. Film encapsulation

Source: Daiwa

Prior to the merger with IPS at the end of 2010, Wonik specialised in producing semiconductor equipment. The company has supplied various types of deposition equipment, such as chemical-vapour deposition (CVD), atomic-layer deposition (ALD), and plasma-enhanced (PE) CVD systems, which are used primarily to place thin films of materials (metal and oxides) on the wafer surface during the semiconductor-manufacturing process. Wonik: deposition equipment

Source: Company

As memory chip companies are continuing to adopt finer process technology to reduce production costs, the demand for CVD and ALD systems is rising. Wonik provides most of its deposition equipment to domestic memory-chip companies such as SEC and SK Hynix (Hynix). Memory chips: process technology roadmap

3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13EDRAM SEC 28nm 25nm 22nmHynix 38nm 29nm 25nmMicron 30nm 25nm Elpida 35nm 25nm NAND SEC 27nm 21nm 19nm V-NAND Toshiba 24nm 19nm 15nm Micron 25nm 20nm 16nm Hynix 26nm 20nm 16nm


Although the sales of semiconductor equipment has been tracking in line with memory-chip companies’ migration to new process technology, we see upside to Wonik’s equipment orders as SEC plans to ramp up a new NAND-flash fab in Xian, China, in 1Q14. We expect an initial ramp-up of 50,000 wafers/month, with the equipment orders likely to materialise from 3Q13. In addition, as SEC plans to produce V-NAND from the Xian fab, we believe it will require 30% more deposition equipment systems than the line producing conventional planar NAND. SEC’s new V-NAND is a 3D vertical NAND-flash chip that is constructed in layers, stacking up to 24 individual NAND cells on top of one other. This will allow the company to scale up the chip’s capacity without taking additional space on the wafer (expanding vertically, rather than in planar). The stacking of layers requires more deposition systems. SEC’s V-NAND

Source: MoneyToday, Daiwa

OLED

[Film encapsulation]

Coating layer foravoiding moisture

Thin film encapsulation (TFE) Emitting layer (EL)

TFT array

ALD PE-CVDCVD

30nm

20nm

10nm

Planar NAND Vertical NAND


- 37 -

In deposition systems, Wonik competes with other international equipment companies, such as Applied Materials and Tokyo Electron. However, in Korea, the company supplies different lines of deposition equipment to its peer, Eugene Tech, which also supplies CVD and ALD systems to SEC. Wonik claims to have a 10-15% share of the domestic-deposition system (for semiconductors) market currently, but expects this to rise to 15-20% over the next 1-2 years on the back of new fab additions by SEC and Hynix. Meanwhile, affiliate Wonik Materials provides about 100 different types of specialty gases to various semiconductor and display makers. SEC is its largest customer, accounting for 73% of 2012 revenue. The major gas products are nitrogen monoxide (NO) nitrous oxide (N2O), and disilane (Si2H6), which are used for the annealing and deposition process in semiconductor manufacturing. Wonik Material’s revenue and earnings have increased strongly over the past five years, and with the capacity ramp-ups planned over the next few years, we expect it to contribute steady earnings to its parent. Wonik Materials: revenue and operating-profit margin


Earnings outlook

Wonik plans to disclose its 2Q13 results in late August. We forecast consolidated revenue of KRW79.7bn (up 32% QoQ) and an operating profit of KRW3.6bn (turning into the black QoQ). However, on a standalone basis, we forecast an operating loss of KRW1.8bn, as we believe that the equipment business only turned profitable in later part of the quarter on the back of rising new-order momentum. For 3Q13, as equipment-order intake remains robust, we forecast consolidated revenue of KRW120.3bn and an operating profit of KRW12.4bn.

For 2013, we forecast Wonik to post consolidated revenue of KRW388.4bn (up 11% YoY) and an operating profit of KRW28.6bn (up 8% YoY). Although the growth rates for revenue and operating profit are not particularly strong as we expect the 1H13 results to be weak, we are positive on 2014 growth rates as Samsung Display plans to increase its investment in flexible-display capacity and as SEC’s should increase capacity for its NAND-flash fab in China. For 2014, we forecast robust revenue growth of 36% YoY to W529.4bn and operating profit to almost double to KRW56.3bn. Wonik: quarterly earnings forecasts (KRWbn)

1Q13 2Q13E 3Q13E 4Q13E 2013ERevenue: Semiconductor 12.5 23.1 39.0 55.1 129.7 Display 10.7 18.4 22.1 23.2 74.3 Solar 0.1 0.1 0.1 0.2 0.4 Gas-supply systems 8.5 8.5 24.5 12.2 53.8 Wonik Materials 28.6 29.5 34.6 37.5 130.2 Total 60.3 79.7 120.3 128.1 388.4 Operating profit (2.2) 3.6 12.4 14.8 28.6 Operating-profit margin (%) (3.6) 4.5 10.3 11.6 7.4

1Q14 2Q14E 3Q14E 4Q14E 2014ERevenue: Semiconductor 43.5 40.5 39.8 48.5 172.3 Display 16.5 20.4 31.3 31.1 99.3 Solar 0.2 0.3 0.2 0.2 0.8 Gas-supply systems 57.4 12.5 17.8 16.1 103.7 Wonik Materials 33.1 34.5 41.0 44.8 153.3 Total 150.7 108.1 130.0 140.6 529.4 Operating profit 13.6 11.3 14.9 16.5 56.3 Operating-profit margin (%) 9.0 10.4 11.4 11.7 10.6 Source: Company, Daiwa forecasts

Wonik has a healthy balance sheet, as it held KRW80.0bn in cash equivalents and borrowing of KRW55.9bn at the end of 1Q13. The company has not paid any dividend in the past and has no plans to do so over the near term. Meanwhile, its capex will be maintained at KRW10-20bn annually, as its current equipment-production capacity cover annual revenue of KRW1tn.

Risk factors

The risks to our earnings forecasts and target price include a sharp decline in component prices, such as memory chips and LCD panels. As Wonik’s revenue depends mostly on the capex for semiconductor- and display-production lines, potential component-price erosion could adversely affect its customers’ cash flow and capital-investment plans. In addition, any delays in the ramp up of new production lines could adversely affect its top-line growth.

17

18

19

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23

24

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2007 2008 2009 2010 2011 2012 2013E 2014E 2015ERevenue (LHS) OP margin (RHS)

(KRWbn) (%)


- 38 -

Company description

Wonik was created from the merger between Atto and IPS in December 2010. Atto specialised in the manufacture of semiconductor-processing equipment and IPS produced display-manufacturing systems. As a result of the merger, the company diversified its product portfolio to cover both semiconductor and display equipment. Wonik is competitive in deposition equipment and etchers. Although the company has developed solar-cell equipment, the revenue contribution from this has been quite small over the past three years. The company’s head office is in Pyeongtaek, Gyeonggi Province, and it also has production facilities in the Pyeongtaek area. It supplies semiconductor equipment to SEC and Hynix and display equipment to Samsung Display. At the end of 1Q13, the company had 581 employees. Wonik’s affiliate companies have an 18.5% stake in the company, and the chairman of Wonik group, Yong Han Lee, holds 7.5% stake. The company’s CEO, Moon Yong Lee, joined the company in 2010 from Cheil Industries. Wonik: shareholder structure

Source: Company

Note: as at 31 March 2013

Wonik: consolidated revenue by product (2013E)


Wonik: consolidated operating profit by product (2013E)


Wonik affiliates18.5%

Yong Han Lee7.5%

Company executives

1.7%

Treasury stock7.0%

Others65.3%

Semiconductor33.4%

Display19.1%Solar

0.1%

Gas supply system13.8%

Wonik Materials33.5%

Semiconductor-2.6%

Display13.3%

Solar-0.2%

Gas supply system4.2%

Wonik Materials79.7%


■ Investment case We initiate coverage of Duksan Hi-Metal (Duksan), a major supplier of OLED materials to Samsung Display, with a Buy (1) rating. Due to rising orders for the company’s OLED-display materials, such as hole transport layers (HTL), for Samsung Display’s new production lines, we expect its revenue and earnings to pick up from 2H13 and continue to be strong in 2014. ■ Catalysts With SEC increasingly using OLED displays in its mid-range smartphones, as well as in its high-end ones, Samsung Display is expanding its production capacity for OLED displays. We forecast Samsung Display’s production capacity (in terms of area) for OLED displays to expand to 380,000 sq m/month for 2Q14 from 280,000 sq m/month for 2Q13, with Duksan

well-placed to benefit as it accounts for 80-90% of the orders from Samsung Display for the HTLs used in smartphones OLED displays. In terms of OLED materials for TVs, we expect the revenue and earnings contribution to be small for 2013 as we forecast SEC to sell only 4,000 OLED-TVs this year. However, we believe the addressable market for Duksan’s OLED materials will expand exponentially once the OLED-TV market takes off, as (in terms of the dollar amount) these TVs require more than 100x more OLED materials than a smartphone. As for new products, Duksan started providing refinement services for the green host used to make emission layers (EML) for Universal Display from 1Q13. Although we forecast this segment to account for less than 5% of its OLED materials revenue for 2013, the operating-profit margin for this business is much higher, at about 50% compared with 20-30% for its other OLED-material products. The company is also working with Samsung Display to develop EMLs for OLED displays. ■ Valuation We have a six-month target price at KRW31,000, based on a mid-cycle PBR of 4.1x on 2013E BVPS.

■ Risks The main risks to our earnings forecasts and target price would be slower-than-expected sales of end applications, including OLED-display smartphones and TVs.


29 August 2013

Duksan Hi-Metal

Initiation: riding on robust OLED-display shipments

• The company is the main beneficiary of Samsung Display’s ramp-up of OLED display production lines

• Revenue and earnings should pick up from 2H13, and should continue to be strong for 2014

• Initiating coverage with a Buy (1) rating and six-month target price of KRW31,000



Duksan Hi-Metal077360 KS


Buy (initiation)


1

2

3

4

5

80

94

108

121

135

16,000

19,375

22,750

26,125

29,500



Duksan Hi (LHS) Relative to KOSPI (RHS)

(KRW) (% )

12-month range 17,200-29,200Market cap (USDbn) 0.623m avg daily turnover (USDm) 4.86Shares outstanding (m) 29Major shareholder Joon-Ho Lee (20.0%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 136 175 205Operating profit (bn) 41 56 67Net profit (bn) 41 57 68Core EPS (fully-diluted) 1,408 1,929 2,311EPS change (%) (1.3) 37.0 19.8Daiwa vs Cons. EPS (%) 2.2 8.4 18.0PER (x) 16.7 12.2 10.1Dividend yield (%) 0.0 0.0 0.0DPS 0 0 0PBR (x) 3.1 2.5 2.0EV/EBITDA (x) 12.4 8.6 6.6ROE (%) 20.4 22.5 21.6


Jae H. Lee(82) 2 787 [email protected]



- 40 -

Growth outlook Duksan: revenue and operating-profit margin

For 2013, we forecast a slight decline in Duksan’s revenue and earnings due to slow order momentum for its OLED-display materials in 1H13. However, for 2014, we forecast the company’s revenue to rise by 29% YoY to KRW175bn and its operating profit to increase by 37% YoY to KRW56bn on the back of rising orders for Samsung Display’s new production lines.


Valuation Duksan: PBR bands

The stock is trading currently at a PER of 16.7x on our 2013 EPS forecast, and a PBR of 3.1x on our 2013 BVPS forecast (past-three-year range of 2.8-6.4x). We believe the stock is attractive, trading close its downcycle average PBR of 3.0x over the past three years. Given the volatile nature of the company’s earnings, we prefer to base our valuation for the stock on a PBR multiple rather than a PER. We use a mid-cycle PBR to value it because while the stock is trading currently at the low end of its past-three-year PBR, we expect it to be rerated.

Source: Company, FnGuide, Daiwa forecasts

Earnings revisions Duksan: Daiwa vs. consensus EPS forecasts (2013-15E)

Our EPS forecasts are above those of the FnGuide consensus by 2.2% for 2013, 8.4% for 2014, and 18.0% for 2015. This is because we are more positive than the market on the company’s revenue and earnings growth outlook for its OLED material business. We are one of only six brokers actively covering the stock.



Growth outlook

Valuation

Earnings revisions

15.0

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2011 2012 2013E 2014E 2015E

OLED material (LHS) Solder ball (LHS) OP margin (RHS)

(KRWbn) (%)

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20,000

30,000

40,000

50,000

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10

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10

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-11

Aug-

11

Nov-

11

Feb-

12

May

-12

Aug-

12

Nov-

12

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(KRW)7.2x

5.1x

6.2x

4.1x

3.0x

0

500

1,000

1,500

2,000

2,500

2013E 2014E 2015E

Daiwa Consensus

(KRW)

Buy (initiation)


1

2

3

4

5


- 41 -

Key assumptions


Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESEC's smartphone shipment (m 0.0 0.0 25.0 97.9 213.0 310.0 400.0 480.0SEC's tablet PC shipment (m units) 0.0 0.0 1.5 5.9 16.9 41.0 50.0 62.0SEC's OLED-TV shipment (K units) 0.0 0.0 0.0 0.0 0.0 4.3 243.0 1,370.0

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESolder ball 23 26 39 59 64 65 65 64OLED material 0 6 34 70 79 72 110 141Other Revenue 0 0 0 0 0 0 0 0Total Revenue 23 32 72 129 144 136 175 205Other income 0 0 0 0 0 0 0 0COGS (14) (20) (42) (76) (84) (76) (95) (109)SG&A (4) (8) (11) (14) (18) (19) (24) (28)Other op.expenses (7) 1 0 0 0 0 0 0Operating profit (2) 6 20 39 42 41 56 67Net-interest inc./(exp.) (0) (1) (0) 0 1 1 2 2Assoc/forex/extraord./others 0 0 (0) (5) (0) 0 0 0Pre-tax profit (2) 5 19 35 43 42 58 69Tax 0 (1) (3) (0) (1) (1) (1) (1)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) (2) 4 16 35 42 41 57 68Net profit (adjusted) (2) 4 16 35 42 41 57 68EPS (reported)(KRW) (122) 169 552 1,176 1,426 1,408 1,929 2,311EPS (adjusted)(KRW) (122) 169 552 1,176 1,426 1,408 1,929 2,311EPS (adjusted fully-diluted)(KRW) (122) 169 552 1,176 1,426 1,408 1,929 2,311DPS (KRW) 0 0 0 0 0 0 0 0EBIT (2) 6 20 39 42 41 56 67EBITDA (1) 9 22 43 47 47 63 74

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax (2) 5 19 35 43 42 58 69Depreciation and amortisation 1 4 2 3 6 6 7 8Tax paid 0 0 (8) (2) 1 (1) (1) (1)Change in working capital (3) 4 (6) (6) (3) (21) (34) (44)Other operational CF items 8 (3) 3 7 5 3 3 4Cash flow from operations 3 10 10 37 51 30 32 35Capex (4) (7) (28) (22) (4) (7) (7) (7)Net (acquisitions)/disposals (16) 1 1 8 (0) (0) (1) (1)Other investing CF items (1) (4) (1) (1) (49) 2 (12) (10)Cash flow from investing (21) (10) (28) (16) (54) (5) (21) (18)Change in debt 22 (12) 2 (8) (0) (0) (0) (0)Net share issues/(repurchases) (0) 12 6 1 0 0 0 0Dividends paid (4) 0 0 0 0 0 0 0Other financing CF items 0 1 0 1 (3) 0 0 0Cash flow from financing 18 0 9 (6) (3) (0) (0) (0)Forex effect/others 0 0 (0) 0 (0) 0 0 0Change in cash 0 0 (9) 15 (7) 24 11 18Free cash flow (1) 3 (18) 15 47 23 25 28

Financial summary


- 42 -


Key ratios (%)


Company profile

Duksan Hi-Metal is a core supplier of OLED materials including hole transport layers (HTL) to Samsung Display. The company also makes solder balls used in semiconductor packaging and currently has 30% market share globally.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 15 19 5 21 63 106 146 200Inventory 2 4 7 13 12 12 16 18Accounts receivable 2 4 7 9 12 12 16 20Other current assets 1 0 2 4 2 2 3 3Total current assets 20 26 21 46 89 132 181 242Fixed assets 11 18 46 65 65 67 68 69Goodwill & intangibles 1 30 34 35 34 32 40 47Other non-current assets 31 18 17 6 10 10 14 16Total assets 63 92 119 152 199 241 303 374Short-term debt 15 6 2 0 2 1 1 1Accounts payable 1 1 3 5 3 5 7 8Other current liabilities 6 8 7 7 9 8 11 14Total current liabilities 22 16 11 11 14 15 19 23Long-term debt 3 5 7 0 0 0 0 0Other non-current liabilities 0 0 1 2 2 2 3 3Total liabilities 25 21 19 13 16 17 22 26Share capital 4 5 6 6 6 6 6 6Reserves/R.E./others 34 66 94 133 177 218 275 343Shareholders' equity 38 70 100 139 183 224 281 349Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 63 92 119 152 199 241 303 374EV 691 682 692 669 628 585 544 490Net debt/(cash) 2 (7) 3 (21) (61) (104) (145) (199)BVPS (KRW) 1,961 2,882 3,465 4,713 6,212 7,620 9,549 11,860

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 24.1 41.8 125.5 78.6 11.1 (5.3) 28.5 16.8EBITDA (YoY) n.a. n.a. 135.3 97.8 10.8 (0.5) 33.4 18.2Operating profit (YoY) n.a. n.a. 249.5 97.5 5.9 (2.0) 37.2 19.4Net profit (YoY) n.a. n.a. 286.0 116.9 21.3 (1.3) 37.0 19.8Core EPS (fully-diluted) (YoY) n.a. n.a. 226.8 113.2 21.3 (1.3) 37.0 19.8Gross-profit margin 40.1 38.7 42.2 41.1 41.4 44.0 45.9 46.5EBITDA margin n.a. 28.6 29.9 33.1 33.0 34.7 36.0 36.4Operating-profit margin n.a. 17.7 27.5 30.4 29.0 30.0 32.0 32.7Net profit margin (10.5) 12.8 22.0 26.7 29.1 30.4 32.4 33.2ROAE n.a. 7.6 18.7 29.0 26.1 20.4 22.5 21.6ROAA n.a. 5.3 15.1 25.5 23.9 18.8 20.9 20.1ROCE n.a. 8.3 20.9 31.8 25.8 19.9 22.1 21.2ROIC (5.7) 8.9 19.7 35.1 34.0 33.2 43.0 45.9Net debt to equity 5.9 net cash 3.1 net cash net cash net cash net cash net cashEffective tax rate n.a. 18.9 17.7 1.4 2.4 2.0 2.0 2.0Accounts receivable (days) 37.0 34.3 27.5 22.6 26.5 32.5 29.1 32.3Current ratio (x) 0.9 1.7 1.9 4.0 6.5 8.7 9.3 10.7Net interest cover (x) n.a. 9.3 67.4 n.a. n.a. n.a. n.a. n.a.Net dividend payout n.a. 0.0 0.0 0.0 0.0 0.0 0.0 0.0Free cash flow yield n.a. 0.5 n.a. 2.2 6.8 3.3 3.7 4.1



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Riding on the robust OLED-display shipments of Samsung Display

Core beneficiary of Samsung Display’s ramp up in OLED production lines

Although demand for Duksan’s OLED materials was low for 1H13, we expect it to pick up strongly from 2H13 due to rising orders from Samsung Display for its new production lines, and we expect this demand to extend into 2014. We initiate coverage of Duksan with a Buy (1) rating and six-month target price of KRW31,000. Despite market concerns about a potential slowdown in smartphone shipments globally this year, we believe the demand for OLED displays will be strong as SEC is increasingly using OLED displays in its mid-range smartphones, including the Galaxy S4 Mini, along with its use in its high-end ones. Accordingly, we forecast Samsung Display to expand its production capacity (in terms of area) for OLED displays to 380,000 sq m/month for 2Q14 from 280,000 sq m/month for 2Q13. We believe Duksan is well-placed to benefit from this as it accounts for 80-90% of HTL orders from Samsung Display for use in the OLED displays of smartphones. The recent launch of an OLED-TV by SEC also bodes well for Duksan’s revenue and earnings growth, as the company is the sole HTL and hole injection layer (HIL) supplier for SEC’s OLED-TVs. We believe the addressable market for its OLED-display materials will expand exponentially once the market for OLED-TVs takes off, as the value of OLED-display materials, in dollar terms, in a 55-inch OLED-TV is 100x greater than that for a 5-inch smartphone display. For 2013, we forecast a slight decline in Duksan’s revenue and earnings due to slow order momentum for its OLED-display materials in 1H13. However, for 2014, we forecast the company’s revenue to rise by 29% YoY to KRW175bn and its operating profit to increase by 37% YoY to KRW56bn on the back of rising orders for Samsung Display’s new production lines.

Valuation at low end of past-three-year range

Duksan’s share price has been quite volatile this year, rising by 32% from January to early May, and then falling by 23% up until late July due to market concerns about a potential slowdown in shipments of SEC’s Galaxy S4, which uses an OLED display. However, the share price has picked up recently as orders for the company’s OLED materials from Samsung Display’s new production lines have strengthened. The stock is trading currently at 2013E PER of 16.7x, which is slightly higher than its peers’ average of 15.5x (based on the Bloomberg-consensus 2013 forecasts), while the 2014E PER of 12.2x is lower. Meanwhile, although its 2013E and 2014E PBRs are both higher than the averages of its peer, the company’s ROEs for both years are also higher. Duksan: peer-group valuation comparison

PER PBR

Company Bloomberg code 2013E 2014E 2013E 2014EDuksan Hi-Metal* 077360 KS 16.7 12.2 3.1 2.5Cheil Industries 001300 KS 17.8 13.4 1.4 1.3Mitsubishi Chemical 4188 JP 13.7 12.1 0.8 0.8Toray Industries 3402 JP 15.6 13.2 1.3 1.2Dow Chem DOW US 15.7 12.7 2.0 1.7Dupont DD US 14.9 12.9 4.7 n.a.UDC OLED US 75.3 31.2 4.3 3.8Average 15.5 12.8 2.0 1.2


Note: Based on share prices as at 28 August 2013. Average excludes UDC, which we regard as an outlier.

The stock is trading at a PBR of 3.1x on our 2013 BVPS forecast, compared with its past-three-year trading range of 2.8-6.4x. Our six-month target price of KRW31,000 is based on a mid-cycle PBR of 4.1x on our 2013 BVPS forecast. Duksan: PBR bands


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Duksan has two business divisions. The OLED material division is engaged in the production of HTLs for OLED displays, and this product accounted for more than 90% of the division’s revenue for 2012, with the remainder coming from HILs. Meanwhile, the semiconductor material division is involved in the production of solder balls, which are used in semiconductor packaging. For 2012, the OLED and semiconductor material divisions respectively accounted for 55% and 45% of the company’s total revenue.

OLED materials With SEC increasingly using OLED displays in its mid-range smartphones, including the Galaxy S4 Mini, as well as in its high-end ones, and other smartphone makers increasingly using OLED displays, we believe Samsung Display will continue to add production capacity for OLED displays in its A2 and A3 lines going forward. Up until 1H14, we forecast Samsung Display’s production capacity for OLED displays to expand robustly to 210,000 substrates/month from 150,000 currently, and believe Duksan is well-placed to benefit given the high proportion of HTL orders it accounts for with Samsung Display. Accordingly, we forecast the company’s revenue for OLED-display materials to rise to KRW40bn for 2H13 from KRW30bn for 1H13, as it started shipping HTLs to Samsung Display’s new production lines from June. For 2014, we forecast the revenue for OLED-display materials to expand by 59% YoY to KRW110bn, as we expect continued robust orders from Samsung Display. As for the OLED-display materials for TVs, although the company is the sole HTL and HIL supplier to Samsung Display (which is the supplier for SEC), the contribution to Duksan’s revenue and earnings should be small this year as we forecast SEC to sell only 4,000 OLED-TVs for 2013. However, we believe the addressable market for its OLED-display materials will expand exponentially once the OLED-TV market takes off, as the value of OLED-display materials in a 55-inch OLED-TV is 100x greater than that for a 5-inch smartphone in terms of dollar amount. As for new products, Duksan started providing refinement services for the green host used to make the EMLs for Universal Display from 1Q13. Although we expect this business to account for less than 5% of its revenue for OLED-display materials for 2013, the operating-profit margin of this business is about 50%, much higher than the 20-30% for its other OLED-display material products.

Duksan: business with Samsung Display

Source: Company, Daiwa estimates

Duksan: OLED material products

Source: Company

Semiconductor materials Duksan is currently the second-largest solder-ball maker globally, with a 30% market share. Its customers include SEC, SK Hynix, Advanced Semiconductor Engineering, Statschippac, and Amkor. Solder balls are micro-sized metal balls that are used to connect a package substrate and a printed circuit board. Although lead frames were used in legacy semiconductor packaging, these are being replaced increasingly with solder balls, which enable slimmer form factors and faster data processing speeds for semiconductor chips. We forecast the division’s revenue to expand by 3% YoY to KRW67bn for 2013 due to an increase in orders from SEC’s application processors from 3Q13. As both SEC and Apple are likely to launch new flagship smartphones in September and application processors for these smartphones use the company’s solder balls, orders for Duksan’s solder balls should rise from 3Q13. We forecast solder balls for application processors to account for 40% of the division’s revenue for 2013, up from 30% for 2012. Although solder balls for application processors are cheaper to make than those

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Dukan Others

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for DRAMs, as the size is much smaller (200µm compared with 450µm), both the ASP and the operating-profit margin are higher. Duksan: revenue and operating-profit margin forecasts


Earnings outlook

We forecast Duksan’s 2Q13 revenue to contract by 8% QoQ to KRW30bn and its operating profit to decline by 13% QoQ to KRW8bn, due to an increase in pricing pressure for its OLED-display materials and weak orders for solder balls. However, we expect the operating-profit margin for OLED-display materials to improve QoQ on the back of cost-reduction efforts. For 2H13, although we still expect prices to decline by 5-6% each quarter for its OLED-display materials, we forecast the company’s quarterly revenue to expand to KRW35bn for 3Q13 and KRW40bn for 4Q13, due to a rise in orders for its OLED-display materials from Samsung Display’s new production lines. Accordingly, we also forecast the company’s operating-profit margin to improve to 31% for 3Q13 and 33% for 4Q13, from 27% for 2Q13, due to improved economies of scale and a better product mix. We are positive on Duksan’s earnings outlook for 2014 as the company should continue to benefit from robust orders from Samsung Display and a better product mix. For 2014, we forecast revenue to expand by 29% YoY to KRW175bn and operating profit to increase by 37% YoY to KRW56bn.

Duksan: quarterly earnings (KRWbn) 1Q13 2Q13E 3Q13E 4Q13E 2013ERevenue: OLED-display materials 15.9 13.7 17.9 22.2 69.6 Solder balls 16.3 15.8 16.6 17.8 66.6 Total 32.2 29.5 34.5 40.0 136.2 Operating profit 9.2 8.0 10.6 13.1 40.8 Operating-profit margin (%) 28.5 27.0 30.7 32.7 30.0 1Q14E 2Q14E 3Q14E 4Q14E 2014ERevenue: OLED-display materials 24.1 25.9 28.9 31.6 110.5 Solder balls 15.0 15.8 17.3 16.5 64.6 Total 39.1 41.7 46.2 48.0 175.1 Operating profit 12.0 13.3 15.2 15.5 56.0 Operating-profit margin (%) 30.8 31.8 32.9 32.2 32.0 Source: Company, Daiwa forecasts

The company has a healthy balance sheet, and was in a net-cash position at the end of 1Q13. As the company held cash of KRW10bn at the end of 1Q13 and we forecast capex of KRW7bn for 2013, it is likely to maintain its net cash position at the end of this year. Duksan hedges its exposure to forex risk, as 20-25% of its revenue is based in US Dollars, while about 20-25% of its COGS is based in US Dollars.

Risk factors

The main risks to our earnings forecasts and target price would be slower-than-expected sales of end applications, including smartphones and TVs with OLED displays. In addition, increased pricing pressure and fierce competition would adversely affect its earnings.

Company background

Duksan was founded in 1999 and was listed on the Kosdaq in 2007. Although the mainstay of its business in its early days was solder balls, the company moved into the OLED-display materials business by acquiring Ludis, an HTL manufacturer, in 2009. Duksan currently has an 80-90% share of Samsung Display’s orders for HTLs, which are used for the OLED displays in smartphones, and is working to develop EMLs with Samsung Display. The company has two plants in Korea. At its Ulsan plant, it makes solder balls, and currently has a monthly production capacity of 250bn solder balls. Meanwhile, its Cheonan plant is engaged in the production of OLED-display materials, and has a production capacity of 1,000kg/month. While Samsung Display is Duksan’s only customer for OLED-display material products, the company’s

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customer base for solder balls is more diverse, as it supplies to SEC, SK Hynix, and domestic/overseas backend companies. The founder of Duksan, Joon-Ho Lee, is the largest shareholder in the company with a 20% stake. Duksan: shareholder structure

Source: Bloomberg

Note: As at 20 August 2013

Duksan: revenue forecast by division (2013E)


Duksan: operating-profit forecast by division (2013E)


Joon-Ho Lee20.0%

Duksan Industry17.3%

Duksan Hi-Metal14.4%

Korea Investment Trust

5.6%

Morgan Stanley4.3%

FIL Limited4.0%

National Pension Service

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Others30.5%

OLED material51.1%

Solder ball48.9%

OLED material60.8%

Solder ball39.2%


■ Investment case We initiate coverage of Advanced Process Systems (AP Systems), which specialises in the manufacture of laser-applied OLED-display equipment, with a Buy (1) rating. We forecast the company’s consolidated revenue and operating profit to increase by 50% YoY and 142% YoY, respectively, for 2013 on the back of new-equipment orders from its main customer. ■ Catalysts We expect the company to remain the sole supplier of laser-applied OLED-display equipment for Samsung Display due to its proven track record and its attractive cost of ownership of equipment. As Samsung Display continues to use LTPS backplanes for its mobile-display production lines, we expect sales to pick up for AP Systems’ laser-annealing systems, which currently make up more than 50% of its OLED-equipment revenue.

Despite concerns in the market that a shift to flexible displays could lead to weak demand for glass-encapsulation systems, we expect glass-based OLED capacity to increase due to rising demand for OLED displays for mid-range smartphones. In addition, as there are technological hurdles to overcome in flexible displays, glass-encapsulation demand should be stable for at least the next 1-2 years. For 2013, we forecast record revenue of KRW326bn for AP Systems, driven by OLED-display equipment. We forecast the operating-profit margin to expand to 10% for 2013 from 6% for 2012 and remain at this level of profitability for the next two years, as high revenue should offset rising fixed costs. For 2014, a ramp-up in Samsung Display’s Gen6 line and potential investments in OLED-TV production could result in upside to the company’s revenue. ■ Valuation The stock is trading currently at PERs of 11.1x and 9.1x on our respective 2013 and 2014 EPS forecasts. In terms of PBR it is trading at 2.1x and 1.6x on our respective 2013 and 2014 BVPS forecasts, compared with its past three-year trading range of 1.5-4.5x. We initiate coverage with a six-month target price of KRW13,500,

based on a mid-cycle PBR of 2.7x on our 2013 BVPS forecast. ■ Risks The key risks to our view are delays in new-equipment orders and changes in OLED-production technology that could affect sales of the company’s existing equipment.


29 August 2013

Advanced Process Systems

Initiation: the sole supplier of laser-applied OLED equipment

• Initiating coverage with a Buy (1) rating and six-month target price of KRW13,500

• Likely to maintain its sole-supplier position for laser-applied OLED equipment

• Bright equipment-order outlook for 2013: we forecast revenue to rise by 50% YoY



Advanced Process Systems054620 KS


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12-month range 6,370-13,600Market cap (USDbn) 0.213m avg daily turnover (USDm) 8.51Shares outstanding (m) 22Major shareholder Kiro Jung (9.1%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 326 363 395Operating profit (bn) 32 38 40Net profit (bn) 27 33 36Core EPS (fully-diluted) 955 1,167 1,271EPS change (%) 65.9 22.3 8.8Daiwa vs Cons. EPS (%) 6.6 1.2 3.3PER (x) 11.1 9.1 8.3Dividend yield (%) 0.0 0.0 0.0DPS 0 0 0PBR (x) 2.1 1.6 1.3EV/EBITDA (x) 5.8 3.9 3.1ROE (%) 27.4 25.7 22.0




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Growth outlook AP Systems: revenue and operating-profit margin

AP Systems’ quarterly revenue improved from 1Q13 on the back of new-equipment orders from Samsung Display that started in December 2012. Given the order momentum, we forecast revenue to increase by 50% YoY to KRW326bn and operating profit to expand by 142% YoY to KRW32bn for 2013.


Valuation AP Systems: PBR bands

The stock is trading currently at respective PERs of 11.1x and 9.1x on our 2013 and 2014 EPS forecasts. In terms of PBR, it is trading at 2.1x and 1.6x on our respective 2013 and 2014 BVPS forecasts, compared with its past-three-year trading range of 1.5-4.5x. Given the volatile nature of the company’s earnings, we prefer to base our valuation for the stock on a PBR multiple rather than a PER. We use a mid-cycle PBR to value it because while the revenue growth for 2013 is strong, we do not expect it to be as high as that for 2014.


Earnings revisions AP Systems: Daiwa vs. consensus EPS forecasts (2013-15E)

Our 2013 and 2014 EPS forecasts are respectively 6.6% and 1.2% higher than those of the Bloomberg consensus. We expect the consensus forecasts to be raised should AP Systems win additional orders from new OLED-display production lines.



Growth outlook

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Key assumptions


Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EGlobal semicon capex (USDbn) 33.3 19.9 43.3 56.4 49.8 50.9 52.2 53.8Global LCD capex (USDbn) 24.1 15.9 25.3 17.3 13.4 14.6 15.2 15.7Global OLED capex (USDbn) 0.0 0.5 2.0 5.0 4.6 5.4 7.2 9.6

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EOLED n.a. n.a. 66 169 192 293 330 358LCD n.a. n.a. 41 12 10 11 12 13Other Revenue n.a. n.a. 28 44 16 22 21 24Total Revenue n.a. n.a. 134 225 217 326 363 395Other income n.a. n.a. 0 0 0 0 0 0COGS n.a. n.a. (115) (177) (180) (266) (296) (324)SG&A n.a. n.a. (8) (20) (25) (28) (29) (31)Other op.expenses n.a. n.a. 0 0 0 0 0 0Operating profit n.a. n.a. 11 27 13 32 38 40Net-interest inc./(exp.) n.a. n.a. 0 (1) 1 2 3 4Assoc/forex/extraord./others n.a. n.a. (12) (9) 1 0 0 0Pre-tax profit n.a. n.a. (1) 17 16 33 41 44Tax n.a. n.a. 0 (3) (3) (6) (8) (8)Min. int./pref. div./others n.a. n.a. (12) (3) 0 0 0 0Net profit (reported) n.a. n.a. (12) 11 12 27 33 36Net profit (adjusted) n.a. n.a. (12) 11 12 27 33 36EPS (reported)(KRW) n.a. n.a. (568) 520 576 1,213 1,483 1,614EPS (adjusted)(KRW) n.a. n.a. (568) 520 576 1,213 1,483 1,614EPS (adjusted fully-diluted)(KRW) n.a. n.a. (568) 520 576 955 1,167 1,271DPS (KRW) n.a. n.a. 0 0 0 0 0 0EBIT n.a. n.a. 11 27 13 32 38 40EBITDA n.a. n.a. 17 31 18 37 45 49

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax n.a. n.a. (1) 17 16 33 41 44Depreciation and amortisation n.a. n.a. 5 4 5 6 7 9Tax paid n.a. n.a. 0 (3) (3) (6) (8) (8)Change in working capital n.a. n.a. (26) (12) 4 (43) (19) (16)Other operational CF items n.a. n.a. 16 21 9 16 18 (3)Cash flow from operations n.a. n.a. (6) 27 31 5 40 26Capex n.a. n.a. (5) (22) (28) (15) (15) (15)Net (acquisitions)/disposals n.a. n.a. 15 17 31 (2) (1) (2)Other investing CF items n.a. n.a. (11) (33) (11) (4) (4) (5)Cash flow from investing n.a. n.a. (2) (37) (8) (21) (20) (21)Change in debt n.a. n.a. 5 46 (31) 1 (5) (5)Net share issues/(repurchases) n.a. n.a. 2 0 (7) 0 0 0Dividends paid n.a. n.a. 0 0 0 0 0 0Other financing CF items n.a. n.a. 3 5 0 0 0 0Cash flow from financing n.a. n.a. 11 51 (38) 1 (5) (5)Forex effect/others n.a. n.a. (0) 0 (0) 0 0 0Change in cash n.a. n.a. 3 41 (15) (14) 15 (0)Free cash flow n.a. n.a. (11) 5 3 (10) 25 11

Financial summary


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Key ratios (%)


Company profile

AP System is a leading OLED equipment maker supplying excimer laser annealing (ELA) devices for OLED backplane process and encapsulation systems. The company was established in October 1994 and was listed on the KOSDAQ in December 2001. In 2012, OLED equipments accounted for 88% of its revenue, LCD equipment 5%, semiconductor processing systems and others 7%.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment n.a. n.a. 15 65 43 64 82 100Inventory n.a. n.a. 12 13 20 18 20 21Accounts receivable n.a. n.a. 37 57 55 60 62 66Other current assets n.a. n.a. 24 84 10 13 14 15Total current assets n.a. n.a. 89 218 128 155 177 202Fixed assets n.a. n.a. 24 40 52 62 70 76Goodwill & intangibles n.a. n.a. 3 3 6 6 7 7Other non-current assets n.a. n.a. 11 17 19 21 23 25Total assets n.a. n.a. 127 277 206 244 277 311Short-term debt n.a. n.a. 21 42 27 31 28 26Accounts payable n.a. n.a. 14 23 10 10 10 11Other current liabilities n.a. n.a. 23 101 65 76 81 84Total current liabilities n.a. n.a. 58 166 101 116 119 121Long-term debt n.a. n.a. 0 26 13 9 5 1Other non-current liabilities n.a. n.a. 2 2 4 4 4 4Total liabilities n.a. n.a. 60 194 118 130 129 127Share capital n.a. n.a. 11 11 11 11 11 11Reserves/R.E./others n.a. n.a. 55 70 75 102 135 171Shareholders' equity n.a. n.a. 66 81 86 113 146 182Minority interests n.a. n.a. 2 2 2 2 2 2Total equity & liabilities n.a. n.a. 127 277 206 244 277 311EV n.a. n.a. 246 245 239 218 177 151Net debt/(cash) n.a. n.a. 5 3 (2) (24) (48) (72)BVPS (KRW) n.a. n.a. 3,057 3,763 3,957 5,033 6,516 8,131

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) n.a. n.a. n.a. 67.1 (3.2) 49.8 11.4 8.7EBITDA (YoY) n.a. n.a. n.a. 89.0 (43.5) 111.8 19.8 9.6Operating profit (YoY) n.a. n.a. n.a. 136.5 (51.4) 142.4 18.8 7.3Net profit (YoY) n.a. n.a. n.a. n.a. 11.2 118.3 22.3 8.8Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. 10.7 65.9 22.3 8.8Gross-profit margin n.a. n.a. 14.4 21.0 17.4 18.4 18.4 18.0EBITDA margin n.a. n.a. 12.3 13.9 8.1 11.5 12.3 12.4Operating-profit margin n.a. n.a. 8.4 12.0 6.0 9.7 10.4 10.2Net profit margin n.a. n.a. (9.1) 5.0 5.7 8.3 9.1 9.2ROAE n.a. n.a. n.a. 15.3 14.9 27.4 25.7 22.0ROAA n.a. n.a. n.a. 5.5 5.2 12.1 12.7 12.3ROCE n.a. n.a. 25.9 22.5 9.4 22.4 22.3 20.5ROIC n.a. n.a. 15.7 28.2 12.1 29.3 32.1 31.0Net debt to equity net cash net cash 7.8 3.3 net cash net cash net cash net cashEffective tax rate n.a. n.a. n.a. 16.8 20.9 18.5 18.5 18.5Accounts receivable (days) n.a. n.a. 50.9 76.5 93.7 64.2 61.2 59.4Current ratio (x) n.a. n.a. 1.5 1.3 1.3 1.3 1.5 1.7Net interest cover (x) n.a. n.a. n.a. 26.3 n.a. n.a. n.a. n.a.Net dividend payout n.a. n.a. n.a. 0.0 0.0 0.0 0.0 0.0Free cash flow yield n.a. n.a. n.a. 2.2 1.2 n.a. 10.6 4.6



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Steady revenue growth from laser-applied equipment

With an increase in the revenue contribution from OLED equipment, we forecast AP Systems to have an operating-profit margin of 10% for 2013

Investment summary

We initiate coverage of AP Systems with a Buy (1) rating and six-month target price of KRW13,500. Following the sharp rise in mobile-display investment by Samsung Display since late-2012, AP Systems’ quarterly revenue increased to about KRW80bn in 1H13, compared with KRW40-60bn in 2012. As a result, we forecast the company’s operating profit margin to be 10% for 2013, up from 6% for 2012, as it can cover its fixed costs with a rise in revenue. AP Systems specialises in the manufacture of laser-applied OLED-display equipment, such as excimer laser-annealing (ELA) devices, laser lift-off (LLO) machines, and glass-encapsulation systems. The company provides equipment for placing liquid crystals on glass substrates for LCD production lines, and rapid thermal process (RTP) systems for semiconductor manufacturing. The company’s main customer is Samsung Display, which accounted for 85% of 2012 revenue. Samsung Display owns 3.6m shares in AP Systems (22.8m shares outstanding) through convertible bonds. For 2012, equipment for OLED, LCD, and semiconductor and other system components respectively accounted for 88%, 5%, and 7% of consolidated revenue. AP Systems started to disclose its financial results on a consolidated basis from 1Q13. However, the consolidated results include only one of its affiliates, Kornic Automation (60% stake), which develops the control software for semiconductor and display equipment. AP Systems currently has the highest revenue exposure to the OLED business among the Korea equipment and material companies at 90% for 2013 (based on our forecast).

AP Systems’ share price fell by 44% from the start to the end of 2012 due to weak order momentum. However, it has risen by 46% YTD, reflecting the strong revenue growth from OLED equipment for 1H13. In addition, AP Systems was investigated by the Gyeonggi Provincial Police Agency from October 2012 for allegedly leaking OLED technology to an overseas company, but in March 2013 there was found to be no case to answer, and its share price has recovered further since then. The stock is trading currently at PERs of 11.1x and 9.1x on our respective 2013 and 2014 EPS forecasts. In terms of PBR, it is trading at 2.1x and 1.6x on our respective 2013 and 2014 BVPS forecasts, compared with its past-three-year trading range of 1.5-4.5x. Given the robust growth in revenue for 1H13 (a 41% HoH increase), we forecast 2H13 revenue to increase by 6% HoH. However, as the company looks on track to post record revenue for 2013, we set our six-month target price at KRW13,500, based on a mid-cycle PBR of 2.7x on our 2013 BVPS forecast. AP Systems: PBR bands



In OLED-display equipment, AP Systems is the sole supplier to Samsung Display of ELA, LLO, and glass-encapsulation systems. Most OLED-display makers use LTPS backplanes to produce mobile displays, and ELA is a core process to change amorphous silicon (a-Si) to poly-crystalline silicon (p-Si), as it provides higher carrier mobility of electrons than conventional LCDs. As a result of the use of LTPS backplanes, users of OLED screens do not notice any ghosting on the display or become dizzy when viewing high-speed animation.

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- 52 -

Laser-annealing process for LTPS backplanes

Source: Daiwa

As Samsung Display is using LTPS backplanes for all of its Gen4 and Gen5.5 fabs and is likely to use it for the Gen6 line due to be ramped up in the middle of 2014, we expect a steady revenue contribution for AP Systems from ELA equipment over the next few years. We forecast ELA revenue to account for over 50% of the company’s OLED-equipment revenue for 2013. AP Systems also provides glass-encapsulation systems to Samsung Display, and these accounted for less than 30% of its OLED-equipment revenue for 2012. As moisture and oxygen may cause organic material to degrade and dark-spot problems may occur on OLED displays, effective sealing, or encapsulation, is required. AP Systems’ encapsulation systems use frit, or glass powder, to form a tight seal between the top and the bottom glass panels of OLED displays. Glass encapsulation

Source: Daiwa

Although sales of the company’s encapsulation system have picked up in line with the expansion of Samsung Display’s OLED-production line over the past few quarters, should flexible displays become more popular, we believe that film-type encapsulation systems would be more viable due to the flexibility of their design. However, given the current hurdles to producing flexible displays, we expect glass-encapsulation demand to remain stable, at least for the next 1-2 years.

For the next generation of OLED displays, AP Systems developed a laser-induced thermal imaging (LITI) deposition system and provided a prototype model to Samsung Display in 2012. Instead of evaporating the organic materials through fine masks to deposit them on the substrate (either glass or plastic) as in the traditional method, LITI uses a laser to place the organic materials in a film on the substrate. The resolution of OLED displays using the LITI process improves substantially, according to the company. However, we believe the project has been put on a hold, as there have been issues with particles (fine dust) when the laser is scanning the film. Laser-annealing process for LTPS backplane

Source: Daiwa

For flexible displays, AP Systems supplies the LLO equipment that is used in the last stage of front-end process. A plastic film is first laminated on the glass so that the substrate follows the backplane, deposition, and encapsulation processes without being deformed. However, the processed film needs to be separated from the bottom glass so that it can be used as a flexible display, and LLO equipment separates them or lifts off the film from the bottom glass. As Samsung Display is increasing its investment in flexible-display production, we forecast LLO equipment to account for about 10-15% of AP Systems’ OLED-equipment revenue for 2013 and 2014. In LCD equipments, the company supplies one-drop fill (ODF) systems to Samsung Display and overseas LCD-panel makers. In the cell-assembly process in LCD manufacturing, liquid crystals are used to fill some of the space between the two glass substrates (a backplane with thin-film transistors and a colour filter substrate for displaying the colour). In the traditional method, liquid crystals are injected from the edge of the display, which takes a long time, especially for large substrates.

p-Sia-Si

Laser anneal

Crystalline

Glass

Frit

OLED

Laser beam

Donorfilm

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EML

(Correction)

(Scan)

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AOD

Laser beam

Scan lens

Cylindrical lens

Substrate

Stage moving


- 53 -

AP Systems: ODF system

Source: Korea Semiconductor Industry Association

However, ODF systems drop liquid crystals directly on to one of the substrates and this is then aligned with the other substrate. This makes the process time much faster. As there have been no major LCD line investments by LCD-panel makers since 2010, sales of AP Systems’ LCD equipment have been declining since then. For 2013, we forecast LCD-equipment revenue to account for 3% of AP Systems’ consolidated revenue. In the semiconductor business, AP Systems’ supplies RTP equipment to SEC. RTP is used to heat wafers at high temperatures (450-1,200°C) in a short period of time. Although semiconductor equipment currently makes up less than 5% of the company’s consolidated revenue, it plans to expand this business by applying its expertise in display equipment, such as laser annealing machines and LLO equipment in the LED chip-manufacturing process.

Earnings outlook

AP Systems’ quarterly revenue improved from 1Q13, on the back of new-equipment orders from Samsung Display that started in December 2012. As the company recognises equipment revenue on a progressive basis, we forecast its 2013 revenue to be more or less evenly distributed over 1Q-4Q13. However, compared with 2012, we forecast 2013 revenue to increase by 50% YoY to KRW326bn and operating profit to rise by 142% YoY to KRW32bn. For 2012, AP Systems posted an operating-profit margin (consolidated) of 6%, but we forecast this to expand to 10% for 2013 and remain at this level for 2014, as we expect the rise in revenue to cover its fixed costs. Although equipment prices normally decline by about 5% each year, due to cost reductions and upgrades in specifications, we forecast the company to maintain its operating profit of about 10% for next two years.

AP Systems: quarterly earnings forecasts (KRWbn) 1Q13 2Q13 3Q13E 4Q13E 2013E

Revenue: OLED 78.6 68.3 70.6 75.5 293.0 LCD 1.7 3.2 3.1 2.8 10.8 Semiconductor 0.4 2.2 4.3 7.1 14.1 Others 1.2 2.7 2.2 1.8 8.0Total 81.9 76.3 80.3 87.3 325.8 Operating profit 8.2 7.2 7.9 8.4 31.6 Operating-profit margin (%) 10.0 9.5 9.8 9.6 9.7

1Q14E 2Q14E 3Q14E 4Q14E 2014ERevenue: OLED 71.4 81.9 93.3 83.2 329.8 LCD 2.2 3.2 3.6 3.1 12.1 Semiconductor 6.2 4.2 2.3 1.2 13.9 Others 1.0 2.5 1.4 2.4 7.3 Total 80.8 91.8 100.6 89.8 363.1 Operating profit 7.8 9.7 11.2 8.9 37.6 Operating-profit margin (%) 9.6 10.6 11.2 9.9 10.4 Source: Company, Daiwa forecasts

At the end of 1Q13, AP Systems had KRW56bn in cash, and borrowings amounted to KRW42bn. The company has not paid a dividend for five years and has no plans to do so in the future. Like other equipment companies, its capex requirement is relatively small, at about KRW15bn/year, as AP Systems mainly invests in tools and equipment. As at 23 May (the filing date for its 1Q13 financial statements), the company had 22.4m shares outstanding, but there are potential dilution risks from convertible bonds (held by Samsung Display) equivalent to 3.6m shares and bonds with warrants (held by the CEO and strategic investors) equivalent to 2.4m shares.

Risk factors

The key risks to our view are potential delays in the ramp-up of new production lines by its main customer. In addition, changes in technology, such as glass-based OLEDs for flexible displays (film-based), could result in weak orders for the company’s glass-based encapsulation systems. In addition, advancements in backplane technology through the use of metal oxide could pose a risk to sales of its ELA systems, which are the core piece of equipment used in the LTPS process.


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Company description

AP Systems was established in October 1994 and was listed on the KOSDAQ in December 2001. The company is engaged in the manufacture of laser-applied front-end equipment for OLED-display production lines. The CEO, Kiro Jung, was a founding member of the company, and worked as a researcher at the government funded Electronics and Telecommunications Research Institute before establishing the company in 1994. AP Systems’ head office is in Hwasung, Gyeonggi Province, and it has manufacturing facilities nearby. The company’s main customer is Samsung Display, which accounted for 85% of 2012 revenue. Overseas revenue made up 8% of the total for 2012. At the end of 1Q13, AP Systems had 314 employees. At the same time, the CEO and other executives held a 9.9% stake and treasury stocks amounted to 3.8% of the total. AP Systems: shareholder structure

Source: Company

AP Systems: consolidated revenue by product (2013E)


AP Systems: consolidated operating profit by product (2013E)


Kiro Jung9.1%

Treasury stock3.8%

Others87.1%

OLED89.9%

LCD3.3%

Semiconductor4.3%

Others2.4%

OLED94.2%

LCD2.4%

Semiconductor3.1% Others

0.3%


■ Investment case We initiate coverage of Soulbrain, a major thin-glass and process-chemical maker in Korea, with a Buy (1) rating. We expect the company to see record revenue and earnings for 2013, on the back of rising orders for its thin-glass services for OLED displays. We are also positive on the company’s semiconductor materials business due to continued investment in tech migrations by the memory-chip makers. ■ Catalysts With mobile devices becoming slimmer, the demand for displays using thin glass is rising. This, combined with the increasing adoption of OLED displays in mobile devices and the continued increase in smartphone display sizes, is likely to be the key revenue driver for its thin-glass service business. Despite investor concerns about a potential

slowdown in the global smartphone market, we expect robust shipments of OLED displays, as SEC is increasingly using these in its mid-range phones along with its high-end models, and may use them in a tablet PC in 2014. In our view, Soulbrain has a well-balanced portfolio of process chemicals for the semiconductor, display, and electronics industries. In the semiconductor business, the company provides etchants for photolithography and the chemical vapour-deposition (CVD) process. We expect demand for etchants to increase with the shift to advanced-process technology and the use of 3D cell structures for NAND flash. In electronic materials, Soulbrain supplies the electrolytes for rechargeable batteries. Although most of its electrolytes are for use in the batteries of IT devices, as demand for electric vehicles rises, we expect it to expand its electrolyte exposure to large batteries. ■ Valuation The stock is trading currently at a 2013E PBR of 1.7x compared with a past-three-year trading range of 1.6-2.5x. We have a six-month target price of KRW50,000, based on a mid-cycle 2013E PBR of 2.0x.

■ Risks The main risks to our view would be slower-than-expected sales of end applications, including OLED-display smartphones, LCD-TVs, and PCs.

Materials / Korea036830 KS

29 August 2013

Soulbrain

Initiation: an all-round player in materials

• Thin-glass revenue should expand by 38% YoY for 2013E on rising adoption of OLED as well as increase in display sizes

• Investment in tech migration and 3D cell structure by core customers should benefit its semiconductor materials business

• Initiating coverage with an Outperform (2) rating and six-month target price of KRW50,000


Materials / Korea

Soulbrain036830 KS


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Soulbrain (LHS) Relative to KOSPI (RHS)

(KRW) (% )

12-month range 37,000-50,400Market cap (USDbn) 0.643m avg daily turnover (USDm) 3.03Shares outstanding (m) 17Major shareholder Ji-Wan Chung (34.3%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 715 812 916Operating profit (bn) 125 142 161Net profit (bn) 92 107 119Core EPS (fully-diluted) 5,532 6,436 7,194EPS change (%) 20.9 16.4 11.8Daiwa vs Cons. EPS (%) 4.6 4.7 4.9PER (x) 7.9 6.8 6.0Dividend yield (%) 0.9 0.9 0.9DPS 400 400 400PBR (x) 1.7 1.4 1.1EV/EBITDA (x) 4.6 3.5 2.8ROE (%) 24.1 22.3 20.4





- 56 -

Growth outlook Soulbrain: revenue and operating-profit margin

We believe Soulbrain is on track to post record revenue and earnings for 2013 as the company’s thin-glass business continues to benefit from strong orders from Samsung Display. We forecast the company’s revenue from thin glass to expand by 38% YoY to KRW246bn for 2013 and 23% YoY to KRW303bn for 2014.


Valuation Soulbrain: PBR bands

Based on our 2013 forecasts, the stock is trading currently at a PER of 7.9x and a PBR of 1.7x. In comparison with other process-chemical companies, the valuation is attractive as the stock is trading at discounts in both PER and PBR terms. The ROEs we forecast for the company, of 24% for 2013 and 22% for 2014, are higher than those of its peers. Given the volatile nature of the company’s earnings, we prefer to base our valuation for the stock on a PBR multiple rather than a PER. We use a mid-cycle PBR to value it given the strong earnings growth we expect for the thin-glass services business this year. Source: Company, FnGuide, Daiwa forecasts

Earnings revisions Soulbrain: Daiwa vs. consensus EPS forecasts (2013-15E)

Our EPS forecasts are higher those of the Bloomberg consensus by 4.6% for 2013, 4.7% for 2014, and 4.9% for 2015. We are more positive than the market on the company’s revenue and earnings-growth outlook on the back of its thin-glass business. We are one of only six brokers actively covering the stock.



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Key assumptions


Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESEC smartphone shipments (m) 0.0 0.0 25.0 97.9 213.0 310.0 400.0 480.0SEC tablet PC shipments (m) 0.0 0.0 1.5 5.9 16.9 41.0 50.0 62.0Global smartphone shipments (m) n.a. 172.4 298.2 472.9 680.1 980.1 1,187.6 1,380.0

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EThin Glass 80 131 165 181 302 376 436 492Etchant (display) 126 124 134 197 240 243 277 314Other Revenue 28 48 60 103 121 96 99 110Total Revenue 234 303 359 481 664 715 812 916Other income 0 0 0 0 0 0 0 0COGS (181) (242) (282) (376) (508) (537) (609) (685)SG&A (21) (24) (31) (47) (48) (53) (61) (70)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 31 37 46 59 107 125 142 161Net-interest inc./(exp.) (1) (1) (2) (7) (6) (3) (2) (1)Assoc/forex/extraord./others (3) (0) (1) (33) (5) (3) (2) (5)Pre-tax profit 27 35 43 19 96 119 138 155Tax (8) (9) (11) (12) (22) (27) (32) (36)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 19 26 32 7 74 92 107 119Net profit (adjusted) 19 26 32 7 74 92 107 119EPS (reported)(KRW) 1,301 1,765 2,204 475 4,577 5,532 6,436 7,194EPS (adjusted)(KRW) 1,301 1,765 2,204 475 4,577 5,532 6,436 7,194EPS (adjusted fully-diluted)(KRW) 1,301 1,765 2,204 475 4,577 5,532 6,436 7,194DPS (KRW) 200 250 300 350 375 400 400 400EBIT 31 37 46 59 107 125 142 161EBITDA 44 51 61 79 137 166 191 217

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 27 35 43 19 96 119 138 155Depreciation and amortisation 13 14 15 20 30 42 49 56Tax paid (8) (9) (11) (12) (22) (27) (32) (36)Change in working capital 0 5 (18) (48) 6 13 (5) (20)Other operational CF items 8 1 5 38 13 (91) (107) (120)Cash flow from operations 40 46 34 17 123 55 43 36Capex (24) (14) (76) (118) (59) (70) (70) (70)Net (acquisitions)/disposals (4) (37) 6 3 (0) (18) (13) (14)Other investing CF items 9 9 (5) (15) (7) (5) (6) (6)Cash flow from investing (19) (42) (74) (130) (67) (93) (89) (90)Change in debt 3 14 34 123 (28) (41) (29) (27)Net share issues/(repurchases) (1) 0 0 0 0 10 0 0Dividends paid (3) (3) (4) (4) (5) (6) (7) (7)Other financing CF items 0 0 5 1 0 79 93 106Cash flow from financing (1) 11 35 120 (33) 42 58 72Forex effect/others (0) 0 (1) (0) (0) 0 0 0Change in cash 20 16 (6) 8 23 4 13 19Free cash flow 17 33 (42) (101) 64 (15) (27) (34)

Financial summary


- 58 -


Key ratios (%)


Company profile

Soulbrain is the main thin-glass supplier for Samsung Display's OLED displays. The company is also a manufacturer of process chemicals and materials for the semiconductor and TFT-LCD industries. Its customers include Samsung Electronics, SK Hynix, and LG Display.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 35 47 21 26 49 37 44 66Inventory 25 18 28 61 46 64 81 101Accounts receivable 17 28 48 62 70 79 97 119Other current assets 41 54 1 8 7 11 13 15Total current assets 118 146 98 158 173 191 236 301Fixed assets 87 86 141 234 253 282 305 320Goodwill & intangibles 2 2 13 13 24 26 30 35Other non-current assets 68 96 85 71 78 88 100 112Total assets 276 330 337 475 527 587 670 768Short-term debt 15 34 82 120 93 58 36 13Accounts payable 13 17 23 25 24 25 28 31Other current liabilities 72 84 19 26 38 38 41 44Total current liabilities 100 135 124 171 155 121 105 89Long-term debt 11 2 2 72 32 30 28 28Other non-current liabilities 4 6 2 7 7 8 9 10Total liabilities 115 143 128 250 194 159 142 127Share capital 7 7 7 7 8 8 8 8Reserves/R.E./others 149 175 203 218 325 420 520 632Shareholders' equity 157 182 210 226 333 428 528 640Minority interests 4 5 (0) (1) 0 0 0 0Total equity & liabilities 276 330 337 475 527 587 670 768EV 718 718 781 884 796 770 666 612Net debt/(cash) (10) (11) 62 166 76 50 19 (25)BVPS (KRW) 10,664 12,392 14,304 15,375 20,547 25,858 31,894 38,688

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 28.6 29.6 18.7 33.9 37.9 7.7 13.7 12.8EBITDA (YoY) (0.1) 13.8 20.5 29.6 73.7 21.4 15.0 13.5Operating profit (YoY) (8.1) 17.1 24.2 28.6 82.5 16.6 14.2 12.9Net profit (YoY) (30.6) 35.6 24.9 (78.5) 964.2 23.4 16.4 11.8Core EPS (fully-diluted) (YoY) (30.6) 35.6 24.9 (78.5) 864.4 20.9 16.4 11.8Gross-profit margin 22.5 20.0 21.4 21.9 23.4 24.9 25.1 25.2EBITDA margin 19.0 16.7 16.9 16.4 20.6 23.3 23.5 23.7Operating-profit margin 13.4 12.1 12.7 12.2 16.1 17.5 17.5 17.6Net profit margin 8.2 8.6 9.0 1.4 11.2 12.8 13.1 13.0ROAE 12.7 15.3 16.5 3.2 26.5 24.1 22.3 20.4ROAA 7.5 8.6 9.7 1.7 14.8 16.4 16.9 16.6ROCE 17.2 17.9 17.7 16.5 24.4 25.6 25.7 25.3ROIC 14.3 16.6 15.3 6.6 20.7 21.6 21.4 21.3Net debt to equity net cash net cash 29.6 73.4 22.8 11.8 3.7 net cashEffective tax rate 30.4 26.0 24.7 62.7 22.7 23.0 23.0 23.0Accounts receivable (days) 25.2 26.8 38.7 42.0 36.5 38.0 39.6 43.1Current ratio (x) 1.2 1.1 0.8 0.9 1.1 1.6 2.2 3.4Net interest cover (x) 25.6 29.1 28.4 8.6 19.1 41.0 85.8 187.9Net dividend payout 15.4 14.2 13.6 73.7 8.2 7.2 6.2 5.6Free cash flow yield 2.3 4.5 n.a. n.a. 8.9 n.a. n.a. n.a.



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An all-round player in materials

Poised to benefit from investment by its core customers

We expect Soulbrain to post record revenue and earnings for 2013 on the back of rising orders for thin-glass service from Samsung Display. As mobile devices are becoming slimmer, the demand for displays using thin glass is rising. This, combined with the increasing adoption of OLED displays in mobile devices and the continued increase in smartphone display sizes, is likely to be the key revenue driver for its thin-glass service business. As we regard Soulbrain as having a well-balanced portfolio of process chemicals for the semiconductor and display industries, we initiate coverage with an Outperform (2) rating and six-month target price of KRW50,000. For 2012, semiconductor, display, and electronics materials respectively accounted for 41%, 38%, and 21% of consolidated revenue. In the semiconductor business, the company specialises in providing etchants to both SEC and SK Hynix. Etchants are used to remove unnecessary materials on a wafer’s surface, following the photolithography and CVD processes. As memory-chip companies continue to adopt advanced-process technology to reduce production costs and also shift to 3D cell structures for NAND-flash, we expect an increase in the use of etchants, which bodes well for Soulbrain’s semiconductor-material revenue. In electronic materials, the company manufactures electrolytes to several rechargeable battery makers, including Samsung SDI (SDI), as well as neodymium (ND) magnets for the motors used in home appliances and automobiles. In the electrolyte business, Soulbrain competes with Japanese chemical companies and accounted for a 10% share of the global electrolyte market for 2012. The company’s core customers for ND magnets are LGE and Hyundai Motor. Based on our 2013 forecasts, the stock is trading currently at a PER of 7.9x and a PBR of 1.7x. On a PER basis, it is trading slightly higher than the average of competing thin-glass companies (based on the Bloomberg-consensus forecasts), as it has the largest

share of business (60%) in Samsung Display’s OLED displays and a more diversified product mix. Meanwhile, the stock is trading at discounts in both PER and PBR terms to other process-chemical companies, while its ROEs of 24% for 2013E and 22% for 2014E are both higher than those of its peers. Soulbrain: peer-group valuation comparison

PER PBR

Company BBG code 2013E 2014E 2013E 2014E Thin-glass companies Soulbrain* 036830 KS 7.9 6.8 1.7 1.4 GD 155960 KS 6.0 4.6 1.9 1.4 Chemtronics 089010 KS 7.3 5.9 1.5 1.2 Avatec 149950 KS 6.3 5.1 1.6 1.2 Average 6.5 5.2 1.7 1.3 Process-chemical companies KC Tech 029460 KS 10.7 8.8 0.8 0.7 ENF Technology 102710 KS 9.2 8.2 1.4 1.2 Average 10.0 8.5 1.1 1.0


Note: Based on share prices as at 28 August 2013

Although Soulbrain’s share price rose by 28% between late January and late May on the back of market expectations of revenue and earnings expansion, investor concerns about a potential slowdown in Galaxy S4 shipments has led to weaker share prices since then. The stock has traded in a range of KRW38,750-45,700 since early June. As Soulbrain’s current PBR of 1.7x (on our 2013E BVPS) is at the low end of its past three-year trading range of 1.6-2.5x, we set our six-month target price at KRW50,000, based on a mid-cycle PBR of 2.0x on our 2013 BVPS forecast. Soulbrain: PBR bands


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Display materials Soulbrain makes three key materials for displays, including a thin-glass solution for OLED displays, display etchants, and the organic materials used in LCD fabrication. While we expect flat YoY revenue growth for display etchants and organic materials for 2013, we forecast thin-glass revenue to expand by 38% YoY due to a rise in orders from Samsung Display for OLED displays for smartphones. On the back of this, we forecast revenue for display-material division to rise by 24% YoY to KRW376bn. Soulbrain: thin-glass fabrication process

Source: Daiwa

Thin-glass service is used to make both OLED (one for encapsulation and another for TFT backplanes) and LCD displays (one for colour filters and another for TFT backplanes) to achieve slim form factors and good optical quality. Soulbrain specialises in providing thin-glass services for OLED displays, and reduces the thickness of mother-glass substrates to as little as 0.2-0.3mm from 1.0mm by spraying etchants on to the glass. Once the displays become thinner, these glass substrates are sent to its 100%-owned subsidiary, Soulbrain SLD, and cut to size for mobile displays. Although there are market concerns about a potential slowdown this year in smartphone shipments globally, we expect robust demand for OLED displays to continue and this, in turn, should lead to a rise in demand for Soulbrain’s thin glass. SEC is increasingly using OLED displays in its mid-range smartphones, including the Galaxy S4 Mini, as well as in its high-end ones, while other smartphone makers, including Motorola, have been using OLED displays in their newly launched smartphones. On the back of this, we forecast Samsung Display’s production capacity (in terms of area) for OLED displays to expand robustly to 380,000 sq m/month for 2Q14 from 280,000 sq m/month for 2Q13, and believe Soulbrain is well-placed to benefit as it currently accounts for a 60% share of the thin-glass business in Samsung Display’s OLED displays. In addition, Soulbrain recently started to provide thin-glass service for the Galaxy Note 3: this should see its blended ASP for the thin-glass business improve, as the Galaxy Note 3 has a 5.7-inch display

compared with screen sizes of 5.5 inches for the Galaxy Note 2 and 5.0 inches for the Galaxy S4. To meet the rising demand for its thin-glass services, the company recently increased production capacity by 10%, replacing its existing manual equipment with automatic equipment, and may expand production capacity further depending on the orders from Samsung Display. Semiconductor materials Semiconductor etchants accounted for 81% of total semiconductor division revenue for 2012, with the remainder coming from precursors (10%) and slurries (9%). For 2013, we forecast the revenue for the division to decline slightly YoY due to unfavourable forex rates. However, we are positive on the earnings growth outlook for the company’s slurry, high selectivity nitride (HSN) etchant, and electrolysed water-system businesses, which benefit from investment in tech migration and 3D cell structure development at its customers. Slurries are used mainly in the chemical mechanical polishing (CMP) process in semiconductor fabrication, and Soulbrain only supplied to SK Hynix until 1Q13. However, the company started shipping slurries to SEC from 2Q13, and shipments should increase for 2H13. We also expect this business to benefit from investments in tech migration and 3D cell structures at SEC and SK Hynix, as new semiconductor fabrication processes use more slurries. We forecast the company’s revenue from slurries to expand by 61% YoY to KRW32bn for 2013. Meanwhile, we expect its HSN etchants and electrolysed water-system businesses to benefit from tech migration by semiconductor companies. HSN etchants allow more precise etching of semiconductor wafers when fabricating chips under the 20nm process node, and electrolysed water systems enhance production yields by reducing the number of particles in the semiconductor fabrication process by 30% compared with conventional equipment, which uses pure water and hydrogen peroxide.

Input Etching Rinsing Drying Output

1.0mm 0.2-0.3mm


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Soulbrain: CMP slurry

Source: Daiwa

Electronic materials In the electronic materials division, electrolytes for lithium-ion batteries account for the largest proportion of revenue, followed by ND magnets for automobiles/home appliances and lead tabs for rechargeable batteries. Electrolytes act as carrier between the cathodes and the anodes in rechargeable batteries, and the company currently has a 40% share of SDI’s business in this area. For 2013, despite the likelihood of strong orders for its electrolytes from Samsung SDI, we forecast revenue for the division to decline by 21% YoY due to a sharp increase in pricing pressure since the start of the year. Soulbrain: revenue and operating-profit margin


Earnings outlook

For 2012, Soulbrain reported record revenue and operating profit, while for 3Q12 its operating-profit margin topped 20%, driven by pick-ups in the utilisation rates in its core businesses and favourable forex rates. Although the company’s profitability was negatively affected by unfavourable forex rates for 1Q13, we forecast its operating-profit margin to improve to 17.9% for 2Q13 (1Q13: 16.8%) due to strong thin-glass

orders for the Galaxy S4. For 2Q13, we forecast Soulbrain’s revenue to expand by 6% QoQ to KRW169bn and its operating-profit to increase by 11% QoQ to KRW30bn. We are positive on the company’s 2013 revenue and earnings outlook as it continues to benefit from strong thin-glass orders from Samsung Display and a product mix improvement. For 2013, we forecast Soulbrain to post record revenue and operating profit levels of KRW715bn and KRW125bn, respectively. Soulbrain: quarterly earnings (KRWbn) 1Q13 2Q13E 3Q13E 4Q13E 2013ERevenue: Displays 84 89 102 102 376Semiconductors 53 57 64 68 243Electronic materials 22 24 26 25 96Total 159 169 192 194 715 Operating profit 27 30 35 33 125Operating-profit margin (%) 16.8 17.9 18.1 17.0 17.5 1Q14E 2Q14E 3Q14E 4Q14E 2014ERevenue: Displays 104 106 111 114 436Semiconductors 66 68 73 71 277Electronic materials 24 25 26 25 99Total 193 200 210 210 812 Operating profit 34 35 37 36 142Operating-profit margin (%) 17.6 17.6 17.7 17.3 17.5 Source: Company, Daiwa forecasts

The company has a fairly healthy balance sheet, with a net debt-to-equity ratio of 20.1% at the end of 1Q13. In 2012, the company paid a cash dividend of KRW375/share, representing a payout ratio of 10.2%. Soulbrain hedges its exposure to forex risk, as 25% of its revenue is based in US Dollars and another 25% is denominated in Yen, while about 25% of its COGS is in US Dollars and another 25% in Yen.

Risk factors

The main risks to our earnings forecasts and target price would be slower-than-expected sales of end applications, including OLED-display smartphones and LCD-TVs, and PCs. In addition, increasing pricing pressure and intensifying competition would adversely affect its earnings.

CMP pad

CMP slurry

CMP head

Wafer

0

5

10

15

20

0

200

400

600

800

1,000

2011 2012 2013E 2014E 2015E

Display (LHS) Semiconductor (LHS)

Electronic material (LHS) OP margin (RHS)

(KRWbn) (%)


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Company background

Soulbrain was established in 1986 as Techno Trading, and its mainstay business was chemical and semiconductor equipment trading in its early days. It moved into the material business by establishing a display etchant plant in 1998 and changed its name to Techno Semichem in 1999. The company was listed on the Kosdaq in 2000 and was renamed Soulbrain in 2011. Soulbrain has three business divisions – display, semiconductor, and electronic materials – in which its products are categorised depending on the end application. The company’s key products are etchants and thin glass, which respectively accounted for 47% and 17% of the company’s total revenue for 2012. The founder of the company, Ji-Wan Chung, is also the largest shareholder in the company, with a 34% stake. At the end of 1Q13, the company had several affiliates, including Soulbrain SLD, Soulbrain ENG, and Soulbrain Savings Bank. Soulbrain: shareholder structure

Source: Company

Note: as at 20 August 2013

Soulbrain: revenue forecast by division (2013E)


Soulbrain: operating-profit forecast by division (2013)


Despite market concerns about slowing smartphone shipments globally this year (OLED displays are used mostly in smartphones at present), we expect the demand for OLED displays to remain robust. SEC is increasingly using such displays in its mid-range smartphones as well as in its high-end ones, while other smartphone makers, including Motorola, have used OLED displays in newly launched smartphones. On the back of this, we forecast Samsung Display to expand its production capacity for OLED displays to 210,000 substrates/month until 1H14 from the current 150,000 substrates/month. Soulbrain should benefit as it currently accounts for 60% of Samsung Display’s thin-glass business for OLED displays. In addition, Soulbrain recently started to provide thin-glass for the Galaxy Note 3: this should see its blended ASP for the thin glass improve, as the Galaxy Note 3 has a 5.7-inch display compared with screen sizes of 5.5 inches for the Galaxy Note 2 and 5.0 inches for the Galaxy S4. Meanwhile, as SEC and SK Hynix focus on investing in tech migration and 3D cell structures over wafer capacity increases, this should lead to a rise in orders for Soulbrain’s slurries, HSN etchants, and electrolysed water systems.

Ji-Wan Chung34.3%

Allianz Global Investors

9.9%National Pension Service

9.3%

He-Ok Yim6.6%

Stic Investment4.3%

Norges Bank2.9%

Others32.8%

Display52.6%

Semiconductor34.0%

Display materials

13.5%

Display56.5%

Semiconductor36.4%

Display materials

7.1%


■ What's new Given that the LCD-TV market has past its prime time, LGD is looking to boost top-line growth with OLED displays. However, we think it will be challenging to make money from the OLED business in the near future due to low production yields. ■ What's the impact In January 2013, LG Electronics became the first company to commercialise OLED-TVs globally, using white-OLED panels supplied by LGD. LG Electronics’ OLED-TVs have better picture quality than LCD-TVs, consume less power, and are only 4mm thick. However, as the retail price of OLED-TVs is high, at USD10,000, shipment volume is quite small, at about a few hundred units per quarter. In addition, due to a current production yield of well under 50%, we believe the earnings contribution from OLED displays will take quite a long time to come through.

LGD plans to launch a flexible display for use in mobile devices in 4Q13. However, we understand the company is facing difficulties with the encapsulation process. Also, we believe the volume of flexible displays will be small, as LGD only has a pilot line using Gen4 substrates (730x920mm substrate). Unlike Samsung Display, LGD only has commercial products for OLED-TVs, which are losing money currently. The company has limited capital resources to invest heavily in OLED technology, as its core business (LCD panels) has an operating-profit margin of a low-to mid-single digit percentage. As LCD-panel prices continue to soften on weak demand, we cut our 2013-15 EPS forecasts by 12-24%. ■ What we recommend We maintain our six-month target price of KRW30,000, based on the stock’s mid-cycle PBR, of 1.0x, applied to our 2013E BVPS, and Hold (3) rating. Upside risks to our view include a strong panel-price recovery on improving product demand; downside risks include further panel-price erosion and increased competition. ■ How we differ Our EPS forecasts are below those of the Bloomberg consensus due to

lower panel-demand and pricing assumptions.


29 August 2013

LG Display

Don’t expect OLED-display earnings over the near term

• In January this year, LGD became the first company worldwide to supply OLED-TV panels

• However, the volume shipments of OLED displays are quite small and loss-making due to low production yields

• With the LCD market ailing, the company has limited capital resources to invest heavily in OLED-display technology




LG Display034220 KS

Target (KRW): 30,000 30,000Upside: 2.2%28 Aug price (KRW): 29,350

BuyOutperformHold (unchanged)

UnderperformSell

1

2

3

4

5

Forecast revisions (%)Year to 31 Dec 13E 14E 15ERevenue change (6.1) (4.9) (4.3)Net profit change (24.2) (14.2) (12.4)Core EPS (FD) change (24.2) (14.2) (12.4)

95

106

118

129

140

24,000

27,125

30,250

33,375

36,500



LG Display (LHS) Relative to KOSPI (RHS)

(KRW) (%)

12-month range 25,950-36,200Market cap (USDbn) 9.413m avg daily turnover (USDm) 48.75Shares outstanding (m) 358Major shareholder LG Electronics (37.9%)

Financial summary (KRW)Year to 31 Dec 13E 14E 15ERevenue (bn) 28,076 29,181 31,280Operating profit (bn) 1,321 1,380 1,523Net profit (bn) 668 876 982Core EPS (fully-diluted) 1,867 2,449 2,744EPS change (%) 182.6 31.2 12.1Daiwa vs Cons. EPS (%) (0.3) (1.5) (5.5)PER (x) 15.7 12.0 10.7Dividend yield (%) 1.0 1.4 1.5DPS 300 400 450PBR (x) 1.0 0.9 0.9EV/EBITDA (x) 2.3 2.1 1.9ROE (%) 6.4 7.9 8.3



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Key assumptions


Cash flow (KRWbn)


Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EPanel shipment (m square meter) 14.0 20.6 27.7 30.7 35.9 36.1 38.5 40.4Panel ASP (US$ per square meter) 1,092.8 762.5 793.5 711.0 726.3 703.5 685.2 659.9Global LCD capex (US$bn) 24.1 15.9 23.6 15.4 12.2 11.8 12.5 13.1

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ETV Panel 7,807 11,115 14,109 11,531 13,620 13,087 12,905 12,766IT Panel 7,485 8,038 9,855 10,505 12,469 11,687 11,917 11,501Other Revenue 972 885 1,547 2,255 3,340 3,302 4,359 7,013Total Revenue 16,264 20,038 25,512 24,291 29,430 28,076 29,181 31,280Other income 2,894 1,366 0 0 0 0 0 0COGS (13,617) (17,477) (21,781) (23,081) (26,425) (24,441) (25,419) (27,221)SG&A (912) (1,446) (2,042) (1,974) (2,093) (2,314) (2,381) (2,535)Other op.expenses (3,162) (1,470) 0 0 0 0 0 0Operating profit 1,467 1,010 1,689 (764) 912 1,321 1,380 1,523Net-interest inc./(exp.) 56 10 (8) (86) (159) (123) (110) (99)Assoc/forex/extraord./others (211) (8) (415) (231) (295) (325) (221) (249)Pre-tax profit 1,311 1,013 1,266 (1,081) 459 873 1,049 1,176Tax (225) 105 (106) 293 (222) (205) (173) (194)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 1,087 1,118 1,159 (788) 236 668 876 982Net profit (adjusted) 1,087 1,118 1,159 (788) 236 668 876 982EPS (reported)(KRW) 3,037 3,124 3,240 (2,202) 661 1,867 2,449 2,744EPS (adjusted)(KRW) 3,037 3,124 3,240 (2,202) 661 1,867 2,449 2,744EPS (adjusted fully-diluted)(KRW) 3,037 3,124 3,240 (2,202) 661 1,867 2,449 2,744DPS (KRW) 500 500 500 0 0 300 400 450EBIT 1,467 1,010 1,689 (764) 912 1,321 1,380 1,523EBITDA 4,008 3,852 4,614 2,888 5,382 5,286 5,510 5,798

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015EProfit before tax 1,311 1,013 1,266 (1,081) 459 873 1,049 1,176Depreciation and amortisation 2,541 2,842 2,925 3,651 4,469 3,965 4,130 4,275Tax paid (225) 105 (106) 293 (222) (205) (173) (194)Change in working capital 114 275 303 819 (959) (216) (243) (62)Other operational CF items 859 (81) 496 (16) 823 49 42 35Cash flow from operations 4,601 4,153 4,884 3,666 4,570 4,465 4,805 5,230Capex (2,773) (3,754) (4,940) (4,062) (3,914) (4,000) (4,250) (4,500)Net (acquisitions)/disposals (130) (445) 997 688 500 (7) (16) (51)Other investing CF items (1,402) (366) (572) (120) (275) 30 (19) (68)Cash flow from investing (4,305) (4,564) (4,515) (3,494) (3,688) (3,977) (4,286) (4,618)Change in debt 116 62 565 (105) (61) (441) (209) (252)Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (268) (179) (179) (179) 0 0 (107) (143)Other financing CF items 27 0 22 6 13 (129) (58) (39)Cash flow from financing (125) (117) 408 (278) (48) (570) (374) (435)Forex effect/others 0 (22) 37 (6) (13) 0 0 0Change in cash 171 (550) 813 (113) 821 (82) 146 177Free cash flow 1,828 400 (57) (397) 656 465 555 730

Financial summary


- 65 -


Key ratios (%)


Company profile

LG Display (LGD), formerly LG.Philips LCD, is the largest TFT-LCD panel maker globally, with a 28% market share (in terms of revenue) in 2012. The company provides LCD panels for TVs, monitors, notebook PCs, and mobile devices. It was established through a 50:50 joint venture with LG Electronics and Philips Electronics in September 1999, and was listed on the Korea Stock Exchange and New York Stock Exchange in July 2004.

As at 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ECash & short-term investment 3,423 3,318 3,134 2,333 2,654 2,581 2,738 2,957Inventory 1,137 1,668 2,215 2,317 2,390 2,323 2,473 2,637Accounts receivable 2,005 2,950 3,001 2,740 3,334 3,089 3,281 3,510Other current assets 454 290 491 468 537 509 543 596Total current assets 7,018 8,226 8,840 7,858 8,915 8,503 9,034 9,701Fixed assets 9,270 9,596 12,815 14,697 13,108 13,143 13,263 13,488Goodwill & intangibles 200 352 540 535 498 477 503 553Other non-current assets 900 1,528 1,662 2,073 1,936 1,894 1,969 2,121Total assets 17,388 19,703 23,858 25,163 24,456 24,016 24,770 25,863Short-term debt 1,154 2,007 2,101 895 1,015 856 1,123 896Accounts payable 3,632 2,031 2,962 3,783 4,147 3,897 3,969 4,148Other current liabilities 0 2,456 3,819 5,234 4,044 3,800 3,874 4,074Total current liabilities 4,786 6,495 8,882 9,911 9,206 8,553 8,967 9,119Long-term debt 2,733 2,076 2,543 3,722 3,441 3,186 2,736 2,735Other non-current liabilities 581 1,092 1,372 1,398 1,569 1,498 1,577 1,720Total liabilities 8,100 9,664 12,797 15,032 14,215 13,238 13,280 13,574Share capital 1,789 1,789 1,789 1,789 1,789 1,789 1,789 1,789Reserves/R.E./others 7,487 8,251 9,247 8,327 8,421 8,956 9,664 10,460Shareholders' equity 9,276 10,040 11,036 10,116 10,210 10,745 11,453 12,249Minority interests 13 0 25 15 30 33 37 40Total equity & liabilities 17,388 19,703 23,858 25,163 24,456 24,016 24,770 25,863EV 10,992 11,267 12,062 12,817 12,365 12,030 11,696 11,256Net debt/(cash) 465 766 1,510 2,284 1,802 1,461 1,121 674BVPS (KRW) 25,924 28,058 30,843 28,271 28,534 30,031 32,009 34,233

Year to 31 Dec 2008 2009 2010 2011 2012 2013E 2014E 2015ESales (YoY) 13.3 23.2 27.3 (4.8) 21.2 (4.6) 3.9 7.2EBITDA (YoY) (10.9) (3.9) 19.8 (37.4) 86.4 (1.8) 4.2 5.2Operating profit (YoY) (12.1) (31.1) 67.1 n.a. n.a. 44.8 4.5 10.4Net profit (YoY) (19.1) 2.9 3.7 n.a. n.a. 182.6 31.2 12.1Core EPS (fully-diluted) (YoY) (19.1) 2.9 3.7 n.a. n.a. 182.6 31.2 12.1Gross-profit margin 16.3 12.8 14.6 5.0 10.2 12.9 12.9 13.0EBITDA margin 24.6 19.2 18.1 11.9 18.3 18.8 18.9 18.5Operating-profit margin 9.0 5.0 6.6 n.a. 3.1 4.7 4.7 4.9Net profit margin 6.7 5.6 4.5 (3.2) 0.8 2.4 3.0 3.1ROAE 12.4 11.6 11.0 n.a. 2.3 6.4 7.9 8.3ROAA 7.0 6.0 5.3 n.a. 1.0 2.8 3.6 3.9ROCE 11.8 7.4 11.3 n.a. 6.2 8.9 9.1 9.7ROIC 12.5 9.8 13.2 (6.1) 3.8 8.3 9.3 9.9Net debt to equity 5.0 7.6 13.7 22.6 17.7 13.6 9.8 5.5Effective tax rate 17.1 n.a. 8.4 n.a. 48.5 23.5 16.5 16.5Accounts receivable (days) 48.8 45.1 42.6 43.1 37.7 41.8 39.8 39.6Current ratio (x) 1.5 1.3 1.0 0.8 1.0 1.0 1.0 1.1Net interest cover (x) n.a. n.a. 199.7 n.a. 5.7 10.8 12.5 15.5Net dividend payout 16.5 16.0 15.4 n.a. 0.0 16.1 16.3 16.4Free cash flow yield 17.4 3.8 n.a. n.a. 6.2 4.4 5.3 6.9



- 66 -

Daiwa’s Asia Pacific Research Directory

Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research; Regional Head of Product Management

Pranab Kumar SARMAH (852) 2848 4441 [email protected] Regional Head of Research Promotion

Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Taiwan)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Property Coordinator; Property Developers (Hong Kong)

Jeff CHUNG (852) 2773 8783 [email protected] Automobiles and Components (China)

Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China)

Jerry YANG (852) 2773 8842 [email protected] Banking (Taiwan)/Diversified Financials (Taiwan and China)

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China)

Joseph HO (852) 2848 4443 [email protected] Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China)

Winston CAO (852) 2848 4469 [email protected] Capital Goods – Machinery (China)

Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)

John CHOI (852) 2773 8730 [email protected] Regional Head of Small/Medium Cap; Small/Mid Cap (Regional); Head of Multi-Industries (Hong Kong, China); Internet (China)

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Rommel RODRIGO (63) 2 813 7344 ext 302

[email protected]

Head of Philippines Research; Strategy; Capital Goods; Materials

SOUTH KOREA

Chang H LEE (82) 2 787 9177 [email protected] Head of Korea Research; Strategy

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Jun Yong BANG (82) 2 787 9168 [email protected] Tyres; Chemicals

Anderson CHA (82) 2 787 9185 [email protected] Banking/Finance

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics (Tech Hardware and Memory Chips)

Joshua OH (82) 2 787 9176 [email protected] IT/Electronics (Handset Components)

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game

SoYoung WANG (82) 2 787 9133 [email protected] Transportation/Logistics

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Research

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Cement; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Lynn CHENG (886) 2 8758 6253 [email protected] IT/Electronics (Semiconductor)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Research; Strategy; Banking/Finance

Navin MATTA (91) 22 6622 8411 [email protected] Automobiles and Components

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer

Deepak PODDAR (91) 22 6622 1016 [email protected]

Materials

Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities

SINGAPORE

Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

David LUM (65) 6329 2102 [email protected] Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)


- 67 -

Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

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(49) 69 717 080 (49) 69 723 340

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Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

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(65) 6220 3666 (65) 6223 6198

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(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai 200120, People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office

18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

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- 68 -

LG Display: share price and Daiwa recommendation trend

Date Target price Rating Date Target price Rating Date Target price Rating13/04/11 44,000 Outperform 28/09/11 19,000 Hold 08/06/12 23,000 Hold15/06/11 38,000 Outperform 20/10/11 21,000 Hold 27/10/12 30,000 Hold21/07/11 36,000 Outperform 30/01/12 27,000 Hold

38,000

47,000

44,000

38,00036,000

19,00021,000

27,000

23,000

30,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Target price (KRW) Closing Price (KRW)

Source: Daiwa

Samsung Electronics: share price and Daiwa recommendation trend

Date Target price Rating Date Target price Rating Date Target price Rating22/12/10 1,100,000 Outperform 28/10/11 1,100,000 Outperform 10/04/12 1,700,000 Buy28/01/11 1,200,000 Outperform 06/12/11 1,200,000 Outperform 27/04/12 1,800,000 Buy07/07/11 1,100,000 Outperform 27/01/12 1,300,000 Outperform 08/01/13 2,000,000 Buy27/09/11 1,000,000 Outperform 21/03/12 1,600,000 Buy 05/07/13 1,800,000 Buy

1,080,000

970,000

1,100,0001,200,000

1,100,0001,000,000

1,100,0001,200,000

1,300,000

1,600,0001,700,000

1,800,000

2,000,000

1,800,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3


Source: Daiwa

Share price and Daiwa recommendation trend


- 69 -

SFA Engineering: share price and Daiwa recommendation trend

Date Target price Rating Date Target price Rating Date Target price Rating30/09/10 47,000 Outperform 08/11/11 72,000 Outperform 13/11/12 48,000 Outperform11/11/10 52,000 Outperform 20/01/12 68,000 Outperform 05/12/12 57,000 Buy06/01/11 62,000 Outperform 09/02/12 65,000 Outperform 14/02/13 65,000 Buy14/02/11 70,000 Outperform 28/06/12 62,000 Outperform 08/05/13 80,000 Buy08/04/11 75,000 Outperform 10/08/12 52,000 Outperform 06/08/13 72,000 Buy

75,000

43,000

47,000

52,000

62,000

70,000

75,00072,000

68,00065,000

62,000

52,000

48,000

57,000

65,000

80,000

72,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

80,000

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3


Source: Daiwa

Advanced Process Systems: share price and Daiwa recommendation trend

Date Target price Rating Date Target price Rating Date Target price Rating

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3


Source: Daiwa


- 70 -

Duksan Hi-Metal: share price and Daiwa recommendation trend


16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3


Source: Daiwa

Soulbrain: share price and Daiwa recommendation trend


20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3


Source: Daiwa


- 71 -

Wonik IPS: share price and Daiwa recommendation trend


4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3


Source: Daiwa

LG Electronics: share price and Daiwa recommendation trend

Date Target price Rating Date Target price Rating Date Target price Rating07/01/11 130,000 Outperform 10/09/12 72,000 Hold 18/04/13 82,000 Hold27/04/11 120,000 Outperform 11/10/12 70,000 Hold 12/06/13 78,000 Hold04/07/11 90,000 Hold 20/02/13 75,000 Hold 24/07/13 75,000 Hold

125,000

110,000

130,000

120,000

90,000

72,00070,00075,000

82,00078,000

75,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3


Source: Daiwa


- 72 -

Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: REXLot Holdings Limited (555 HK); Huadian Fuxin Energy Corporation Limited (816 HK); Chaowei Power Holdings Limited (951 HK); CITIC Securities Company Limited (6030 HK); China Outfitters Holdings Limited (1146 HK); The People's Insurance Company (Group) of China Limited (1339 HK); China Precious Metal Resources Holdings Company Limited (1194 HK); Jiangnan Group Limited (1366 HK); Blackgold International Holdings Ltd (BGG AU); Tosei Corporation (8923 JP); Modern Land (China) Co. Ltd (1107 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research. Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst : Jae H. Lee / Joshua Oh

Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets. Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity. Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next six months. "2": the security is expected to outperform the KOSPI by 5-15% over the next six months. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months. "4": the security is expected to underperform the KOSPI by 5-15% over the next six months. "5": the security could underperform the KOSPI by more than 15% over the next six months. “Positive” means that the analyst expects the sector to outperform the KOSPI over the next six months. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next six months “Negative” means that the analyst expects the sector to underperform the KOSPI over the next six months Additional information may be available upon request.


- 73 -

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This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.


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Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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