Semiconductors. Driven by threefold growth drivers. Overweight (Maintain) March 15, 2012

Transcription

1 Sector Report / March 15, 212 Overweight (Maintain) Company Rating TP (KRW) Wonik Materials(1483) Buy (Initiate) 62, Signetics (3317) Buy (Initiate) 5,4 STS Semi (3654) Buy (Initiate) 13,1 Eugene Tech (8437) Buy 47, ( ) Nepes (3364) Buy 22,3 Wonik IPS(353) Buy 11,5 Kook Je Electic (5374) NR NA Hana Micron (6731) NR NA Korea Semiconductor System (8989) NR Sector performance (12M) 3, 2,5 2, 1,5 1, 5 Rel.to KOSPI (%p, RHS) Mar-11 Jun-11 Sep-11 Dec-11 Source: WICS provided by WISEfn & Semiconductor Equipment sector index (p, LHS ) Youngwoo Chung youngwoo.chung@truefriend.com Kevin Lee kevin.lee@truefriend.com Won Seo NA Driven by threefold growth drivers We focus on names with favorable mid to long-term outlook We maintain our positive view on the semiconductor equipment and components industry in 212. We believe equipment names will benefit from 1) strong near-term NAND capex, 2) Samsung s aggressive system LSI strategy and 3) ongoing investment in tech migration. We also expect packaging companies to benefit on increasing backend outsourcing and bigger demand for advanced (i.e., more profitable) packages driven by rising mobile adoption and chip integrations. NAND and system LSI to drive 212 demand We expect solid NAND capex in 212 on the back of strong smartphone demand and HDD shortage impacts. Samsung plans to invest aggressively on system LSI, with its allocated capex surpassing memory for the first time in 212. We believe investment in tech migration will also remain stable, which all lead to our positive overall view on the equipment sector. We expect system LSI and tech migration capex to be the sustainable growth drivers in the mid to long-term. Utilization recovery to drive up packaging names in 2Q12 We expect packaging names to deliver solid earnings momentum from 2Q12 on higher utilization, which we believe has gradually recovered since mid-feb 212. We believe growing multi-functional, integrated packaging demand will lead to more advanced package (e.g., MCP, flip chip) production that will translate to solid revenue growth and improved profitability for major packaging companies. Top pick: Wonik Materials, Signetics, STS Semi Our current top picks are 1) Wonik Materials (BUY, TP W62,), which we expect to show stable top-line growth and gradual improvement in profitability, 2) Signetics (BUY, TP W5,4) and 3) STS Semi (BUY, TP W13,1), both of which should pick up solid earnings momentum from 2Q12 on utilization recovery. From a longer-term perspective, we continue to like Eugene Tech (BUY, TP W47,) which will benefit from tech migration/system LSI capex, and Nepes (BUY, TP W22,3) which should continue to deliver solid sequential earnings momentum with growing WLP business. We are long-term positive on Wonik IPS (BUY, TP W11,5) from a Samsung capex play perspective, although its potential entry to Samsung s AMOLED projects warrants further observation. Hana Micron (not rated) is another packaging name we believe has a solid growth potential, while Kook Je Electric (not rated) could also gain from tech migration/system LSI capex à la Eugene Tech. We view Korea Semiconductor System (not rated) as one of the top names in the backend equipment space, with a favorable mid to long-term growth outlook.

2 Sector report focus What is the report about? Highlight mid to long term beneficiaries of tech migration and system LSI capex Analyze system LSI as the mid to long term growth driver Highlight beneficiaries of growing demand for advanced packaging Top pick: Wonik Materials, Signetics, STS Semi Key assumptions and valuation Samsung s aggressive system LSI capex strategy Samsung capex: Memory vs. system LSI Capex (W trn) 12 System LSI Memory Risks/opportunities Risks: Slower than expected macro recovery / weaker than expected demand Opportunities: Further market share gain by Korean chipmakers / better than expected demand for Winodws 8- based tablets Sector highlights 1) System LSI is the mid to long term growth driver Investment on tech migration remains stable NAND and system LSI capex are the major growth drivers in 212F We expect Samsung to spend heavy on system LSI division on the back of stable handset profitability and aggressive expansion of mobile AP capacity We prefer pure semiconductor capex plays Samsung system LSI revenue and operating income F Source: Samsung, KIS Research Sensitivity & scenario analysis System LSI earnings to show sequential growth on the back of strong mobile AP business Samsung semiconductor revenue: Memory vs. system LSI 5, Revenue 4,5 4, Operating margin (RHS) 3,5 3, 2,5 2, 1,5 1, 5 1Q9 1Q1 1Q11 1Q12F Source: Samsung, KIS Research 25% 2% 15% 1% 5% % -5% -1% 7, 6, DRAM NAND System LSI 5, 4, 3, 2, 1, 1Q9 1Q1 1Q11 1Q12F 1Q13F Source: Samsung, KIS Research 2) Semiconductor backend industry to show stable growth Backend industry to show stable growth on 1) increasing outsourcing and 2) product mix shift to more advanced packages Higher value added packages (e.g. MCP, PoP) to grow in revenue due to increasing mobile adoption and integration demand We expect package names to improve profitability on higher demand for mobile memory and non-memory packages Peer comparison Peer valuation comparison table: Figure 1 (p3)

3 Contents I. Investment strategy & valuation Focus on the potential beneficiaries of tech migration and system LSI capex 2. Profitability of semiconductor backend is improving with growing mobile demand 3. Top pick: Wonik Materials, Signetics, STS Semi II. Aggressive system LSI capex as the major long term growth driver In 212 Samsung will spend more on system LSI vs. memory 2. Samsung to maintain more aggressive capex strategy vs. peers 3. Successful smartphone strategy to support system LSI growth 4. Major equipment and backend names to benefit from Samsung s aggressive capex strategy III. Mobile AP at the center of Samsung s system LSI strategy to be the major growth driver Rising smartphone penetration to drive mobile AP market growth 2. Samsung Electronics: Global leader in mobile AP market 3. Windows 8 may become another growth driver IV. Investment in tech migration to continue in 212F Successful tech migration is the key to productivity gain 2. Tech migration efforts to continue in Equipment names to benefit from tech migration capex V. Semiconductor backed to enjoy stable growth outlook Backend outsourcing is a growing trend 2. Bigger demand for advanced packaging on tech migration and risign mobile adoptions VI. Company...21 Wonik Materials (1483, TP: 62,) Signetics (3317, TP:5,4) STS Semi (3654, TP:13,1) Eugene Tech (8437, TP: 47,) Nepes (3364, TP: 22,3) Wonik IPS(353, TP: 11,5) Kook Je Electric Korea (5374, TP: NA) Hana Micron Inc. (6731, TP: NA) Korea Semiconductor System (8989, TP: NA)

4 I. Investment strategy & valuation 1. Focus on the potential beneficiaries of tech migration and system LSI capex Tech migration and system LSI capex are the most sustainable growth drivers We recommend investors focus on the names that are likely to benefit from 1) NAND capacity addition in 212F, 2) Samsung s aggressive system LSI capex and 3) ongoing investment in tech migration. We believe semiconductor capex will continue to drive the majority of earnings for equipment makers in 212, as investments in the display and renewable energy (i.e., solar) sectors remain weak (we expect Samsung to spend W8tn on system LSI in 212F, a 9% increase from last year). In the mid to long-term, we expect investments in ongoing tech migration and Samsung s aggressive system LSI strategy to be the major growth drivers for the equipment makers in Korea. 2. Profitability of semiconductor backend is improving with growing mobile demand Growing demand for advanced packaging is a positive for Korean backend names We expect major semiconductor backend (packaging) names in Korea to benefit from the growing market share of Korean handset makers (e.g., Samsung) in the current smartphone and tablet boom. Due to growing demand for reduced size and integrated packaging triggered by increasing adoption in the mobile devices (led by mobile AP, mobile DRAM, embedded NAND, LTE chips, etc.), the general product mix has gradually shifted toward more advanced packages, e.g., MCP. With falling revenue for traditional lower-margin memory packaging, the rise of advanced packaging sales would help improve the top line and overall profitability of backend companies. 3. Top pick: Wonik Materials, Signetics, STS Semi Wonik Materials, Signetics, STS Semi are the top picks Our current top picks are 1) Wonik Materials (BUY, TP W62,), which we expect to show stable top-line growth and gradual profitability improvement, 2) Signetics (BUY, TP W5,4) and 3) STS Semi (BUY, TP W13,1), both of which should pick up solid earnings momentum from 2Q12 on utilization recovery. From a longerterm perspective, we continue to like Eugene Tech (BUY, TP W47,), which is a beneficiary of tech migration/system LSI capex, and Nepes (BUY, TP W22,3), which should continue to show solid sequential earnings momentum with growing WLP business. We are long-term positive on Wonik IPS (BUY, TP W11,5) from a Samsung capex play perspective, although its potential entry to Samsung s AMOLED projects warrants further observation. Hana Micron (not rated) is another packaging name we believe has a solid growth potential, while Kook Je Electric (not rated) could also benefit from tech migration/system LSI capex à la Eugene Tech. We view Korea Semiconductor System (not rated) as one of the top names in the backend equipment space with a favorable mid to long-term growth outlook. 2

5 <Figure 1> Company snapshot (KRW) Market Turnover PER PBR EPS growth ROE cap (6M avg., W bn) FY12F FY13F FY12F FY13F FY12F FY13F FY12F FY13F Wonik Materials 1483 KS BUY 62, 32% % 36% 17% 19% Signetics 3317 KS BUY 5,4 33% % 58% 17% 21% STS Semi 3654 KS BUY 13,1 38% % 68% 14% 19% Nepes 3364 KS BUY 22,3 22% % 45% 18% 22% Eugene Tech 8437 KS BUY 47, 32% % 43% 65% 57% Wonik IPS 353 KS BUY 11,5 26% % 35% 23% 25% Kook Je Electric 5374 KS Not rated NA % 12% 32% 39% Korea Semiconductor System Ticker Rating TP (12MF) Upside 8989 KS Not rated NA % 22% 45% 35% Hana Micron Not rated NA % 3% 17% 19% Investment points (3 pts) - Stable revenue and profitability - Beneficiary of NAND and AMOLED capex expansion in 212F - High entry barrier and long term relationship with customers - Stable earnings on the back of diversified customer base - Beneficiary of Samsung and Hynix investment, particularly on NAND and system LSI - Increasing high value-added packages to add to profitability - Major beneficiary of Samsung's packaging outsourcing increase - Improving profitability on the back of revenue mix shift to more value added package products - Overseas subsidiaries to turn in meaningful earnings from 212F - Samsung's mobile AP business expansion to benefit WLP profitability - DDI backend profitability to rebound in 212F on improving panel demand and smartphone market growth - Touch panel profitability to improve on growing sales - Beneficiary of tech migration and system LSI capex - New equipment launch and new overseas customers to add to 212F growth - Potential beneficiary of 18" wafer transition in the long run - Major beneficiary of Samsung's semiconductor and display capex - Beneficiary of Samsung's tech migration and NAND capex - Potential beneficiary of Samsung's AMOLED capex - Beneficiary of tech migration and system LSI capex - Strong relationship with Samsung and Hitachi Kokusai - Attractive valuation relative to peers - Beneficiary of increasing demand for BGA packages - Beneficiary of Samsung's aggressive semiconductor capex plan - New laser applications (PoP driller) to be a new growth driver - Mix shift to more value added packages (e.g. MCP) to improve profitability - Start of hightly profitable semiconductor testing may offer another growth opportunity - Overaseas subsidiaries to show meaningful earnings contribution from 212F Source: Company data, Datastream, Korea Investment & Securities [Figure 2] Specialty gas PER vs. EPS growth (212F) [Figure 3] Specialty gas PBR vs. ROE (212F) 18 PER (212F) 3. PBR (212F) Air Products Air Products 2.5 Wonik Materials OCI Materials Wonik Materials OCI Materials EPS growth (212F) % 5% 1% 15% 2% 25% 3% 35% 4% 45%.5 ROE (212F). % 5% 1% 15% 2% 25% Source: Company data, Datastream, Bloomberg, Korea Investment & Securities Source: Company data, Datastream, Bloomberg, Korea Investment & Securities 3

6 [Figure 4] Semiconductor backend PBR vs. ROE (212F) [Figure 5] Semiconductor backend PER vs. EPS growth (212F) PBR (212F) Signetics STS Semi Nepes 2 18 PER (212F) SPIL 1.8 SPIL LB Semicon ASE 16 STS Semi LB Semicon ASE Signetics 1.4 Hana Micron Chipbond Amkor 1.2 ROE (212F) 1. 8% 1% 12% 14% 16% 18% 2% 22% 24% 12 Nepes StatChipPAC Amkor 1 Hana Micron EPS growth (212F) 8 % 5% 1% 15% 2% 25% 3% 35% Source: Company data, Datastream, Bloomberg, Korea Investment & Securities Source: Company data, Datastream, Bloomberg, Korea Investment & Securities [Figure 6] Semiconductor equipment PBR vs. ROE (212F) PBR (212F) Novellus Wonik IPS LAM Research ASMI Jusung TEL Hitachi Kokusai Applied Materials ASML Kook Je Electric Eugene Tech Korea Semiconductor System ROE (212F). % 5% 1% 15% 2% 25% 3% 35% 4% 45% 5% [Figure 7] Semiconductor equipment PER vs. EPS growth (212F) PER (212F) Hitachi Kokusai Kook Je Electric Wonik IPS Korea Semiconductor System Eugene Tech EPS growth (212F) % 1% 2% 3% 4% 5% 6% 7% 8% 9% Source: Company data, Datastream, Bloomberg, Korea Investment & Securities Source: Company data, Datastream, Bloomberg, Korea Investment & Securities 4

7 < Figure 8> Peer valuation comp Ticker Rating Market PER PBR EV/EBITDA EPS growth ROE Price performance (USD mn) Cap FY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F FY11F FY12F FY13F 1M 3M YTD Equipment Korea Wonik IPS 353 KS Buy % 58% 35% 15% 18% 2% -2% -7% -5% Jusung 3693 KS Hold % 592% 179% 1% 6% 13% -13% -5% 2% Eugene Tech 8437 KS Buy % 84% 43% 35% 4% 37% 27% 69% 52% Kook Je Electric 5374 KS Not Rated % 46% 12% 37% 32% 39% 12% 13% 19% Korea Semiconductor System KS Not Rated % 22% 43% 45% 35% 89% 111% 8% Global Applied Materials AMAT US Not Rated 16, % -26% 17% 19% 13% 14% -3% 19% 17% ASML ASML NA Not Rated 19, % -23% 2% 45% 28% 28% 6% 19% 11% TEL 835 JP Not Rated 9, % -3% 52% 12% 7% 7% 9% 11% 14% LAM Research LRCX US Not Rated 5, % -65% 77% 33% 1% 12% 1% 7% 16% Novellus NVLS US Not Rated 3, % -12% 6% 22% 18% 18% 2% 36% 16% ASMI ASMI US Not Rated 1, % -25% 35% 32% 16% 2% % 34% 2% Hitachi Kokusai 6756 JP Not Rated % 22% 32% 1% 6% 7% -1% 3% 8% Backend Korea Nepes 3364 KS Buy % 216% 45% 7% 18% 22% 4% 11% 11% Signetics 3317 KS Buy % 69% 58% 12% 17% 21% 6% % 1% STS Semi 3654 KS Buy % 193% 68% 5% 14% 19% -1% -5% 3% LB Semicon 6197 KS Buy % 36% -13% 5% 13% 1% 24% 49% 5% Hana Micron 6731 KS Not Rated % 81% 3% 13% 17% 19% 1% % 4% Global ASE 2311 TT Not Rated 6, % 3% 3% - 14% 14% % 7% 1% SPIL SPIL US Not Rated 3, % 28% 8% 9% 9% 1% 31% 27% Amkor AMKR US Not Rated 1, % 63% 3% 13% 22% N/A 1% 52% 45% StatChipPAC 3265 TT Not Rated % N/A 2% 56% 64% Chipbond 6147 TT Not Rated % 11% 22% 11% 12% -12% 1% 15% Specialty gas Korea Wonik Materials 1483 KS Buy % 42% 36% 15% 17% 19% OCI Materials 3649 KS Buy % 13% 22% 22% 21% 21% -17% -13% -8% Global Air Products APD US Not Rated 19, % 1% 13% 21% 19% 2% % 12% 7% Kanto Denka 447 JP Not Rated % -245% 17% 11% -5% 4% -3% -4% 5% Source: Company data, Bloomberg, Korea Investment & Securities 5

8 II. Aggressive system LSI capex as the major long term growth driver 1. In 212 Samsung will spend more on system LSI vs. memory Samsung will invest aggressively on system LSI business We believe the most important long-term growth driver for equipment and component makers in the semiconductor supply chain will be Samsung s system LSI business. Samsung s aggressive capex plan for 212 supports our view. With memory, a traditional cash cow, currently in relative weakness due to HDD shortages, sluggish PC demand and weak DRAM pricing, we expect system LSI to flourish on the back of Samsung s successful smartphone strategy. In the mid to long-term view, we believe Samsung will keep up its aggressive investment plan for the system LSI division in order to 1) grow its presence in the relatively more profitable non-memory market and 2) maximize synergy with its own mobile and PC business. [Figure 9] Samsung revenue by division: memory vs. system LSI [Figure 1] Samsung operating profit by division: memory vs. system LSI 7, 6, DRAM NAND System LSI 3, 2,5 DRAM NAND System LSI 5, 2, 4, 3, 1,5 1, 5 2, 1, -5 1Q9 1Q1 1Q11 1Q12F 1Q13F -1, 1Q9 1Q1 1Q11 1Q12F 1Q13F Source: SEC, Korea Investment & Securities Source: SEC, Korea Investment & Securities [Figure 11] Samsung operating margin trend by division: memory vs. system LSI [Figure 12] Samsung capex comparison: memory vs. system LSI (OP margin) 6% DRAM NAND System LSI 5% 4% 3% 2% 1% % -1% -2% -3% -4% -5% 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12F Capex (W trn) System LSI Memory F Source: SEC, Korea Investment & Securities Source: SEC, Korea Investment & Securities 6

9 [Figure 13] Samsung System LSI overview Samsung System LSI System Logic Application Processor CMOS Image Sensor Foundry Solutions Display driver IC (DDI) The core component that sends electrical signals to display panel to make image appear on the screen. Application: TV, notebook, mobile phone, navigation Application processor (AP) A SOC (System On a Chip) that combines CPU, memory, Multimedia codec, Display system etc. Application: Smart phone, tablet, navigation CMOS image sensor A device for the movement of electrical charge, usually from within the device to an area where the charge can be converted into a digital value. Application: Webcam, Digital camera, automotive, mobile phone CMOS image sensor To support fabless and IDM semiconductor companies offering full service solutions encompassing design kits and proven IP to fully turnkey manufacturing to achieve market success with advanced IC designs by Foundry, ASIC and COT engagement. Client: Ambarella, Apple, Toshiba, Qualcomm, Xilinx Security solution Secures information on financial transactions, mobile payments and cloud computing. Application: SIM, NFC, USB token Microcontroller Controls a process or an operation with precision. Application: Automotive, home appliance, industrial PMIC An integrated circuit for power management. Application: Mobile phone, tablet, MP3 player Source: SEC, Korea Investment & Securities 2. Samsung to maintain more aggressive capex strategy vs. peers Samsung will spend aggressively on system LSI to expand the mobile AP business We expect overall semiconductor capex to shrink in 212F, mostly on our view of generally conservative IT demand. Overall DRAM capex is expected to fall 23% YoY in 212F, while more favorable NAND and non-memory capex are also expected to remain flattish and drop 22% respectively from last year. However, we think Samsung will stay aggressive with its capex strategy by spending W8tn (+9% YoY) on system LSI alone, mainly to strengthen its emerging mobile AP (application processor) business. We believe Samsung will allocate the majority of its capex to expand the mobile AP capacity, which is currently supplied to Apple (iphone & ipad) and Samsung s own smartphone/tablet lineup (Galaxy franchise). 7

10 [Figure 14] Global capex: DRAM vs. NAND vs. Nonmemory [Figure 15] Combined capex of 5 top non-memory names (USD bn) DRAM NAND Non-Memory 35, 3, (USD mn) Samsung Intel UMC TSMC Global foundries 35 25, , 15, 15 1, 1 5 5, F 212F F Source: Gartner, Korea Investment & Securities Source: Company data, Gartner, Korea Investment & Securities [Figure 16] Samsung system LSI wafer capacity [Figure 17] Samsung system LSI revenue breakdown (211F) (' WPM, 12" equiv) 5 12" 8" Others 3% Foundry 18% DDI 15% SOC (incl. mobile AP) 52% CMOS 9% 4Q9 2Q1 4Q1 2Q11 4Q11 2Q12F 4Q12F Smart card 3% Source: SEC, Korea Investment & Securities Source: SEC, Korea Investment & Securities 3. Successful smartphone strategy to support system LSI growth Samsung may seek to maximize synergy between system LSI and smartphone business Samsung s handset division has emerged as the most consistent cash cow as earnings visibility for component segments (memory and display panels) has remained generally low due to the sluggish demand recovery and big earnings volatility. Based on Samsung s growing presence in the global smartphone market and its growth outlook, we constant improvement for its competitiveness and profitability in the mid to long-term. In that regard, we believe Samsung will stay with its aggressive investment plan for system LSI to maximize synergy with its handset business by gradually expanding the internalization (i.e., in-house production) of the related components, e.g., mobile AP, PMIC, LTE chips, etc. 8

11 [Figure 18] Samsung smart phone market share [Figure 19] Samsung operating income comparison: Handset vs. Semiconductor vs. LCD (mn) Samsung Apple Samsung M/S (RHS) LGE Others 35% 3% (W tn) Wireless Semiconductor LCD (ex. SMD) 14 25% % 15% % % Q8 1Q9 1Q1 1Q11 1Q12F % -1. 1Q1 3Q1 1Q11 3Q11 1Q12F 3Q12F Source: Company data, SA, Korea Investment & Securities Source: SEC, Korea Investment & Securities [Figure 2] Samsung handset profitability trend [Figure 21] Samsung system LSI revenue and margin (W tn) Revenue OP margin (RHS) 18% 16% 14% 12% 1% 8% 6% 4% 2% 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 Revenue Operating margin (RHS) 25% 2% 15% 1% 5% % -5% % 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12F 1Q9 1Q1 1Q11 1Q12F -1% Source: SEC, Korea Investment & Securities Source: SEC, Korea Investment & Securities 4. Major equipment and backend names to benefit from Samsung s aggressive capex strategy We prefer beneficiaries of Samsung s aggressive capex strategy We expect Samsung s aggressive capex strategy to benefit major equipment and backend names in Korea. Among the equipment names, we prefer Eugene Tech (BUY, TP W47,), followed by Wonik IPS (BUY, TP W11,5), Kook Je Electric (not rated) and Korea Semiconductor System (KOSES, not rated). Preferred backend names are Signetics (BUY, TP W5,4), STS Semi (BUY, TP: W13,1), Nepes (BUY, TP W22,3) and Hana Micron (not rated). Among the other niche market companies, we like Wonik Materials (BUY, TP W62,) which supplies specialty gases for semiconductor and AMOLED lines. 9

12 <Figure 22> Beneficiaries of Samsung s aggressive capex strategy (KRW) Market Turnover PER PBR EPS growth ROE cap (6M avg., W bn) FY12F FY13F FY12F FY13F FY12F FY13F FY12F FY13F Wonik Materials 1483 KS BUY 62, 32% % 36% 17% 19% Signetics 3317 KS BUY 5,4 33% % 58% 17% 21% STS Semi 3654 KS BUY 13,1 38% % 68% 14% 19% Nepes 3364 KS BUY 22,3 22% % 45% 18% 22% Eugene Tech 8437 KS BUY 47, 32% % 43% 65% 57% Wonik IPS 353 KS BUY 11,5 26% % 35% 23% 25% Kook Je Electric 5374 KS Not rated NA % 12% 32% 39% Korea Semiconductor System Ticker Rating TP (12MF) Upside 8989 KS Not rated NA % 22% 45% 35% Hana Micron Not rated NA % 3% 17% 19% Investment points (3 pts) - Stable revenue and profitability - Beneficiary of NAND and AMOLED capex expansion in 212F - High entry barrier and long term relationship with customers - Stable earnings on the back of diversified customer base - Beneficiary of Samsung and Hynix investment, particularly on NAND and system LSI - Increasing high value-added packages to add to profitability - Major beneficiary of Samsung's packaging outsourcing increase - Improving profitability on the back of revenue mix shift to more value added package products - Overseas subsidiaries to turn in meaningful earnings from 212F - Samsung's mobile AP business expansion to benefit WLP profitability - DDI backend profitability to rebound in 212F on improving panel demand and smartphone market growth - Touch panel profitability to improve on growing sales - Beneficiary of tech migration and system LSI capex - New equipment launch and new overseas customers to add to 212F growth - Potential beneficiary of 18" wafer transition in the long run - Major beneficiary of Samsung's semiconductor and display capex - Beneficiary of Samsung's tech migration and NAND capex - Potential beneficiary of Samsung's AMOLED capex - Beneficiary of tech migration and system LSI capex - Strong relationship with Samsung and Hitachi Kokusai - Attractive valuation relative to peers - Beneficiary of increasing demand for BGA packages - Beneficiary of Samsung's aggressive semiconductor capex plan - New laser applications (PoP driller) to be a new growth driver - Mix shift to more value added packages (e.g. MCP) to improve profitability - Start of hightly profitable semiconductor testing may offer another growth opportunity - Overaseas subsidiaries to show meaningful earnings contribution from 212F Source: Company data, Datastream, Korea Investment & Securities 1

13 III. Mobile AP at the center of Samsung s system LSI strategy to be the major growth driver 1. Rising smartphone penetration to drive mobile AP market growth Rising smartphone penetration to trigger mobile AP market growth We expect the smartphone and tablet markets to maintain solid growth in 212, which should also propel the mobile AP market. Mobile AP is a central chip unit that runs a smartphone or tablet, and is based on a SoC (system-on-chip) structure in order to run several tasks simultaneously including running the operating system on the mobile device. [Figure 23] Global smartphone penetration [Figure 24] Mobile processor market (mn) Total smartphones Smartphone penetration (RHS) 4% 35% 3% 25% 2% 15% 1% 5% 18, 16, 14, 12, 1, 8, 6, 4, 2, (USD mn) Tablet processor Smartphone processor 1Q8 1Q9 1Q1 1Q11 1Q12F % F 212F 213F 214F 215F Source: Company data, SA, Korea Investment & Securities Source: Gartner, Korea Investment & Securities [Figure 25] Smartphones and tablets are driving the semiconductor market growth [Figure 26] Mobile semiconductor revenue growth by product (21) Smartphone Media Tablet SSD 21.1% 11.2% 52.9% (%) Application Processors Wireless Connectivity Server PC Comm.Infra/Broadband 7.2% 6.9% 5.3% Cellular Baseband Processors RF Devices Others Automotive 3.9% LCD TV 1.5% Other 212F growth (USD13.8bn) contribution -1.% -2% -1% % 1% 2% 3% 4% 5% 6% Multimedia Processors Source: Gartner, Korea Investment & Securities Source: Gartner, Korea Investment & Securities 11

14 2. Samsung Electronics: Global leader in mobile AP market Samsung to maintain its leadership in the global AP market Samsung is a global leader in mobile AP with a 63% market share. Although competition has been heating up with the emergence of relatively new entrants, e.g., Qualcomm, Nvidia, in addition to the incumbent household names, e.g., Texas Instruments, Samsung has maintained leadership with its exclusive coverage of Apple (Samsung supplies AP for the iphone and ipad) and its own smartphone and tablet lineups. We believe Samsung will maintain the dominant position with its Apple business in the long-term, and to increase the adoption of its mobile AP in in-house mobile devices going forward. [Figure 27] Samsung Exynos 525: The world s first 2.GHz mobile AP [Figure 28] Global mobile AP market share (21) Renesas Electronics 7% Marvel 7% STMicro 8% Texas Instruments 15% Samsung 63% Source: SEC Source: Gartner, Korea Investment & Securities 3. Windows 8 may potentially become another growth driver Windows 8 launch is a potential opportunity for Samsung s mobile AP business Although no details are known regarding the timing of release (we assume 2H12), we believe Microsoft s Windows 8 could become another solid growth driver for the mobile AP market. Windows 8 is currently in development for both Intel s x86 platform (PC) and ARM architecture (mobile devices), with an eye toward full adoption from PC to smartphones and tablets. The progress reported by various media sources suggests a dual-platform launch is very likely. If Windows 8 gets a favorable reception among tablet makers and users, we believe Samsung s system LSI business will be in a prime position to benefit. Furthermore, the potential adoption of Windows 8 ARM version, which will likely have better power consumption vs. Intel platform, by notebook makers may open another big opportunity for Samsung s mobile AP business (i.e., Samsung s mobile AP replacing Intel CPU in a Samsung notebook). 12

15 [Figure 29] Windows 8 OS to cover both PC and mobile applications Source: Gartner, Korea Investment & Securities [Figure 3] Operating system comparison & analysis Source: Gartner, Korea Investment & Securities <Figure 31> Tablet operating system market share Market Share Android 14% 17% 22% 28% 32% ios 83% 73% 67% 57% 51% MeeGo 1% 1% % % % Microsoft % % 4% 8% 1% QNX % 5% 6% 7% 7% WebOS % 3% % % % Others 1% 1% % % % Total 1% 1% 1% 1% 1% Source: Gartner 13

16 IV. Investment in tech migration to continue in 212F 1. Successful tech migration is the key to productivity gain Successful tech migration is essential for productivity gain We continue to believe tech migration will be the most important determinant of productivity gain for chipmakers. In the case of the DRAM industry, physical wafer capacity addition since 28 has been limited or negative. But we still expect bit shipments to increase 33% YoY in 212F. This suggests any major productivity gain will now be driven primarily by tech migration and such efforts should also lead to a better cost structure for chipmakers. [Figure 32] Die shrink is the most important determinant of DRAM productivity gain [Figure 33] Die cost comparison between different process nodes (Growth YoY) 1% 8% 6% Wafers Die shrink Bit shipment 14% 12% 1% Samsung 35nm Hynix 38nm Micron 42nm Micron 37nm Elpida 4nm Elpida 3nm 4% 2% 8% 6% Samsung 28nm Hynix 28nm % 4% -2% -4% F 2% % Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities < Figure 34> DRAM cost comparison Samsung Hynix Micron Elpida Process node 35nm 28nm 38nm 29nm 42nm 37nm 4nm 3nm Mass production 1.4Q 12.1Q 11.2Q 12.3Q 11.1Q 12.1Q 11.1Q 12.1Q Density 2Gb 2Gb 2Gb 2Gb 2Gb 2Gb 2Gb 2Gb Net die # 1,5 2,4 1,5 2,4 1,1 1,6 1,1 1,8 Cost comp. 1% 6% 1% 6% 12% 9% 12% 9% Note: Relative % vs. Samsung s 35nm product (1%) Source: Korea Investment & Securities 2. Tech migration efforts to continue in 212 Investments on tech migration to continue We expect Samsung and Hynix to put in aggressive efforts to migrate their production to advanced process nodes. In terms of the overall industry, we believe Korean chipmakers will maintain leadership in the DRAM market, while competition in NAND could heat up as leading names plan to invest aggressively to improve their productivity and market share. Tech migration will be a common goal for both DRAM and NAND makers in 212. We also expect Samsung s system LSI division to ramp up its 32nm/28nm processes along with capacity expansion. 14

17 [Figure 35] DRAM tech migration roadmap Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 35nm 28nm 2ynm 44nm 38nm 29nm 5nm 42nm 35nm 4nm 3nm 25nm Source: Company data, Korea Investment & Securities [Figure 36] NAND tech migration roadmap Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Samsung 27nm 21nm 16nm Toshiba 24nm 19nm 15nm IMFT 25nm 2nm 15nm Hynix 26nm 2nm 15nm Source: Company data, Korea Investment & Securities [Figure 37] Samsung system LSI tech migration roadmap F 9nm 65nm 45nm 32nm/28nm m Source: Company data, Korea Investment & Securities 15

18 3. Equipment names to benefit from tech migration capex We prefer pure semiconductor equipment names We believe major equipment names, e.g., Wonik IPS, Eugene Tech, Kook Je Electric, Jusung Engineering, are likely to benefit most. With current weakness in the LCD and solar markets, we prefer pure semiconductor capex plays in Eugene Tech and Kook Je Electric. [Figure 38] Samsung LCD & LG Display capex [Figure 39] Global solar capacity growth 1, 9, 8, 7, 6, 5, 4, (USD mn) LG Display Samsung LCD (GW) Module shipment (%) Photovoltaic installment 16 Module shipment growth (RHS) Installment growth (RHS) , 2, 1, F Source: Company data, Korea Investment & Securities Source: Korea Investment & Securities [Figure 4] Eugene Tech revenue and margin [Figure 41] Kook Je Electric revenue and margin 25 2 Sales OP margin (RHS) 4% 3% 25 2 Revenue Operating margin (GAAP, RHS) 2% 15% 2% 15 1% 15 1% 1 % 1 5% -1% 5-2% 5 % F -3% -5% FY2 FY22 FY24 FY26 FY28 FY21 FY212F Source: Eugene Technology, Korea Investment & Securities Source: Kook Je Electric, Korea Investment & Securities 16

19 V. Semiconductor backend to enjoy stable growth outlook 1. Backend outsourcing is a growing trend Major backend names to show stable growth in 212F We expect Korea semiconductor packaging industry to grow in line with increasing backend outsourcing by chipmakers. Based on our expectation of higher capex allocation to frontend processes by chipmakers, we believe major backend names e.g. Signetics, STS Semi, Nepes, Hana Micron should continue to show solid top line growth in 212F. [Figure 42] Backend outsourcing to grow steadily [Figure 43] Packaging names to show better combined growth vs. equipment makers 3, 25, (USD mn) SATS (Semiconductor assembly & testing services) 1,4 1,2 Back-end Semiconductor equipment 2, 15, 1, 8 6 1, 4 5, F 212F F Source: Gartner, Korea Investment & Securities Note: Includes Nepes, STS Semi, Hana Micron, Signetics, Wonik IPS, Eugene Tech, Kook Je Electric, Jusung Engineering s revenue Source: Company data, Korea Investment & Securities <Figure 44> Semiconductor package target market Target segment Major companies Characteristic Design,wafer manufacturing, assembly and marketing IDM (Integrated device SEC, Hynix, Intel, NEC, Sharp, manufacturers) Toshiba, Micron etc Need significant investment on R&D and equipments Fabless Core logic, MtekVision, EMLSI,Qualcomm, Xilinx etc Consign to packaging outsourcing to increase efficiency IC design companies without production line Need creativity and technical skills Manufacture through packaging companies Korea: Dongbu hightech Manufacture wafers and chips Foundry Taiwan: TSMC,UMC Needs large scale investments in earlier stage, hence requires maintaining utilization China: SMIC etc Manufacture through packaging companies Source: Hana Micron, Korea Investment & Securities 2. Bigger demand for advanced packaging on tech migration and rising mobile adoptions Growing demand for advanced packaging a long term positive for Korean packaging names Due to growing demand for mobile adoption and more functionality, the need for advanced packages is gathering pace; BGA (ball-grid array) for fine-pitch and multi-pin packaging, CSP (chip-scale package) for semiconductor chip-sized packaging, MCP (multi-chip package) for integration of multiple chips and SoC (system-on-chip) / PoP (package-on-package) for a fully functioning system on integrated chips. We believe rising demand for smaller but sophisticated packaging due to tech migration and growing adoption by mobile devices will be a long-term positive for the major packaging companies in Korea (e.g., Signetics, STS Semi, Hana Micron). 17

20 [Figure 45] Global semiconductor packaging market [Figure 46] Global packaging market by product (mn units) 25, 2, 15, 1, 5, Global semiconductor IC packaging 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% F 212F 213F % F 212F 213F BGA Bare chip Leadless QFP Plastic DIP SOIC Others Source: Gartner, Korea Investment & Securities Source: Gartner, Korea Investment & Securities [Figure 47] Semiconductor packaging roadmap Source: STS Semi, Korea Investment & Securities [Figure 48] Mobile AP applies PoP(package on package) method Source: SEC, Korea Investment & Securities 18

21 [Figure 49] Signetics revenue trend: BGA vs. Non-BGA [Figure 5] STS Semi revenue by product BGA revenue Non-BGA revenue 3 Operating profit (IFRS, RHS) Others Non-memory NAND DRAM substrate (incl. MCP) DRAM lead Operating profit (RHS) F Source: Signetics, Korea Investment & Securities Source: STS Semi, Korea Investment & Securities <Figure 51> Surface mount type package by product Type Method Structure Feature & Application Leaded Type Ball Type LGA Waffer Array Type QFP (Quad Flat Package) T(L)QFP (Thin(Low profile) QFP) ELP (Exposed Leadframe Package) PBGA (Plastic Ball Grid Array) FBGA (Fine pitch Ball Grid Array) LGA (Land Grid Array) Fan-in WLP (Wafer Level Package) Fan-out WLP (Wafer Level Package) Ease of mass production Wide range of available body sizes Microprocessors/microcontrollers Memory devices Special versions of QFP Smaller heights and thinner structures Laptop, tablet computers Digital camera Reduced mounting space Improves ground line connection Microcontrollers DRAM, flash memory One of the most popular method High speed and high power Digital TV DRAM, flash memory Reduced physical outline and thickness Low cost, high speed Digital TV DRAM, flash memory Much lower height than PBGAs and FBGAs Mobile handsets/computers DRAM, flash memory Incorporate the most advanced APs Cost can be very low, provide the smallest form factor Limited infrastructure, high entry cost Digital AMP and power device for mobile Flash, DDR memory Higher performance Ultra-thin profile Media tablets, smartphones clouding computer-based applications Source: SEC, Korea Investment & Securities 19

22 This page is left blank intentionally

23 Company analysis Wonik Materials (1483)...22 Signetics (3317)...27 STS Semi (3654)...31 Eugene Technology (8437)...35 NEPES (3364)...4 Wonik IPS (353)...44 Kook Je Electric Korea (5374)...48 Hana Micron Inc. (6731)...52 Korea Semiconductor System (8989)...56

24 Wonik Materials (1483) BUY (Initiate), TP: W62, Stock price (Mar 14, KRW) 45,65 Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Market cap (USD mn) 231 Dec (KRW) (YoY) (x) (x) (x) (%) Shares outstanding (mn) 6 29A , NM (.1) W High/Low (KRW) 48,/35,5 21A , NM (.2) M avg. daily turnover (USD mn) P , Free float (%) F , Foreign ownership (%) F , Specialty gas supplier with attractive growth and profitability profile Performance 1M 6M 12M Absolute (%) Rel. to Kospi (%p) MF PER trend (x) (KRW) MF PBR (LHS) 6, 12. price (RHS) 5, 1. 4, 8. 3, , 2. 1, Initiate with BUY and 12MF TP of W62,: We initiate coverage on Wonik Materials with a BUY rating and 12M TP of W62,, based on 15x 12MF PE. We view the company as a: 1) beneficiary of tech migration and NAND capex, 2) beneficiary of AMOLED capex, and 3) established player in a market with high entry barriers and stable margins. Shares have rallied 11.6% over the past 1 month on a solid growth outlook (212F EPS to grow 2.3% YoY, % YoY) and stable margins (five-year trailing average OPM 22%), but we believe further upside remains. Potential risk factors are: 1) semiconductor capex cutbacks, and 2) slower-than-expected AMOLED investments. Specialty gas supplier for semiconductor and display frontend processes: Wonik Materials spun off from Atto (currently Wonik IPS, the major shareholder) in Dec 26, and has since been supplying almost 1 different specialty gas products (CVD, etching, etc.) to major semiconductor and display manufacturers in both Korea and overseas (Samsung Electronics, SMD, Hynix, etc.). Wonik Materials has been employing a multi-product, small-lot-sized production strategy to target customers, successfully finding a niche to grow the revenue base and maintain high profitability. In 212F, we expect the company to benefit from the increase in NAND and AMOLED capex which should translate to solid revenue momentum (+28% YoY) throughout the year. NAND and AMOLED capex to drive 212F growth: We believe growth in 212F will be driven mostly by: 1) continued investments in tech migration, 2) NAND capacity expansion, and 3) increased AMOLED capex. We expect the demand for core products (e.g. GeH4, NO, C3H6, etc.) to increase on tech migration and NAND investments. Also, Wonik Materials is the sole supplier for 8% of the required gas products used in AMOLED production. On the margin side, we expect overall profitability to improve gradually as company starts to internalize the production of some major products (e.g. GeH4) that have previously been sold on imports. Youngwoo Chung youngwoo.chung@truefriend.com Stable profitability on high entry barrier and secure demand: The specialty gas market has high entry barriers due to the critical role in determining production quality and yield, which translates to longevity and stable profitability for established vendors. We believe Wonik Materials will remain the primary vendor for many of its major customers (Samsung Electronics, Hynix, SMD, etc.), ensuring stable long-term demand and profitability. Won Seo won.seo@truefriend.com 22

25 <Figure 52> Earnings forecast summary 21 1Q11 2Q11 3Q11 4Q Q12F 2Q12F 3Q12F 4Q12F 212F 213F Total sales QoQ, YoY (%) 12% 1% 38% -8% 1% 35% 2% 1% 1% 3% 28% 33% Products 34.6 NA NA NA Merchandise 3.3 NA NA NA Others 1.7 NA NA NA OP QoQ, YoY (%) 25% NA 23% 6% 4% 31% 5% 1% 1% 3% 33% 37% Products NA NA NA NA NA Merchandise NA NA NA NA NA Others NA NA NA NA NA OP margin 23% 22% 2% 23% 22% 22% 23% 23% 23% 23% 23% 23% Products NA NA NA NA NA 33% 33% 33% 33% 33% 33% 34% Merchandise NA NA NA NA NA 14% 14% 14% 14% 14% 14% 15% Others NA NA NA NA NA 1% 1% 1% 1% 1% 1% 1% Pretax income Pretax margin 21.6% 23.7% 2.6% 2.8% 23.4% 22.% 24.8% 24.7% 24.6% 24.5% 24.7% 25.2% Net income Net margin 17.1% 18.9% 16.4% 16.1% 18.7% 17.5% 19.7% 19.7% 19.6% 19.5% 19.6% 2.% Source: Wonik Materials, Korea Investment & Securities [Figure 53] Wonik Materials supplies specialty gas for semiconductor and display frontend manufacturing process Cleansing Deposition (Evaporation) Photo-resist coating Exposure Development Etching Ashing Note: Highlighted indicates Wonik Materials coverage Source: Wonik Materials, Korea Investment & Securities [Figure 54] Wonik Materials has diversified product mix Source: Wonik Materials, Korea Investment & Securities 23

26 [Figure 55] Revenue and profitability trend [Figure 56] Specialty gas market forecast 35 Sales OP margin (RHS) 24% 3.5 (USD bn) 3 23% % % % %.5 1Q11 2Q11 3Q11 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 18% F 212F Source: Wonik Materials, Korea Investment & Securities Source: Wonik Materials, Korea Investment & Securities [Figure 57] Revenue breakdown by customer (3Q11) [Figure 58] Revenue breakdown by application (212F) LED, 6% Others, 2% LED, 1% Others, 5% Display, 27% Display, 6% Semiconductor, 65% Semiconductor, 79% Source: Wonik Materials, Korea Investment & Securities Source: Wonik Materials, Korea Investment & Securities [Figure 59] AMOLED capacity roadmap 3Q7 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 1H14 2H14 SMD 4.5G mass-production(7capex(18k) capex (5K) A2 5.5G phase1 equipment order & installation mass-production (24K) A2 5.5G phase2 A2 5.5G phase3 A3 5.5G phase1 A3 5.5G phase1-2 equipment order & installation mass-production (4K) equipment order & installationmass-production (18K) equipment order & installation mass-production (48K) Capital investment & mass-production 8G pilot v1 equipment order & installation ramp-up(8k) 8G v2 equipment order & installation mass-production(24k) LG Display 8G pilot equipment order & installation ramp-up(8k) 8G phase 1 equipment order & installation mass-production(64k) Source: Company data, Korea Investment & Securities 24

27 [Figure 6] AMOLED related revenue trend [Figure 61] Shareholder structure 35 AMOLED related sales 3% 3 % of total sales (RHS) 25% Others 29% 25 2% % Wonik IPS 5% 1 1% Employees 2% F 212F 5% % Venture capital investments 19% Source: Wonik Materials, Korea Investment & Securities Source: Wonik Materials, Korea Investment & Securities [Figure 62] Current share lockup status [Figure 63] PER trend (Wonik Materials was listed on Dec ) Free floats 31% 15.x Quarterly OP (RHS) P/E (12MF) x 13.x x 11.x 6. Lockup: 1 yr (Wonik IPS, venture capital investments) 69% 1.x 9.x Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec Source: Wonik Materials, Korea Investment & Securities Source: Wonik Materials, Datastream, Korea Investment & Securities 25

28 Balance sheet FY-ending Dec. 29A 21A 211P 212F 213F Current assets Cash & cash equivalent Accounts & other receivables Inventory Non-current assets Investment assets Tangible assets Intangible assets Total assets Current liabilities Accounts & other payables ST debt & bond Current portion of LT debt 2 3 Non-current liabilities Debentures LT debt & financial liabilities Total liabilities Paid-in capital Capital surplus Capital adjustments Retained earnings Shareholders' Equity Income statement FY-ending Dec. 29A 21A 211P 212F 213F Sales Gross profit SG&A expense Other operating gains () Operating profit Financial income Interest income Financial expense 1 Interest expense 1 Other non-operating profit 1 (1) (1) Gains (Losses) in associates, subsidiaries and JV Earnings before tax Income taxes Net profit Other comprehensive profit Total comprehensive profit EBITDA Cash flow FY-ending Dec. 29A 21A 211P 212F 213F C/F from operating Net profit Depreciation Amortization Net incr. in W/C (1) (2) 1 (2) (3) Others 1 3 (1) (2) (2) C/F from investing (11) (9) (22) (35) (15) CAPEX (5) (12) (2) (35) (15) Decr. in fixed assets Incr. in investment (4) 2 () Net incr. in intangible assets () () Others (2) 1 (2) C/F from financing (2) (2) Incr. in equity 46 Incr. in debts (2) (2) (3) Dividends Others C/F from others Increase in cash (1) 5 46 (1) 32 Key financial data FY-ending Dec. 29A 21A 211P 212F 213F per share data (KRW) EPS 2,521 2,758 3,87 3,893 5,297 BPS 8,894 11,91 18,757 22,65 27,947 DPS Growth (%) Sales growth OP growth NP growth EPS growth EBITDA growth Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield..... Stability Net debt (2) (4) (49) (47) (75) Debt/equity ratio (%) Valuation (X) PER NM NM PBR PSR EV/EBITDA (.1) (.2) Note: Based on K-IFRS (non-consolidated) 26

29 Signetics (3317) BUY (Initiate), TP: W5,4 Stock price(3/14, KRW) 3,985 Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Market cap (USD mn) 34 Dec (KRW) (YoY) (x) (x) (x) (%) Shares outstanding (mn) 86 29A NM W High/Low (KRW) 5,22/2,66 21A M avg. daily turnover (USD mn) 9,54 211P (2.6) Free float (%) F Foreign ownership (%) F Pure packaging play with the most favorable long-term outlook Performance 1M 6M 12M Absolute (%) (9.4) Rel. to Kospi (%p) 1.5 (2.1) (13.2) 12MF PER trend (x) (KRW) MF PBR (LHS) 5, price (RHS) 4, 1. 3, 2, 5. 1, Initiate with BUY and 12MF TP of W5,4: We initiate coverage on Signetics with a BUY rating and 12M TP of W5,4, based on 13x 12MF PE. We believe the company is best positioned among peers to post stable long-term profitability as it has a well-diversified customer base globally. Accordingly, Signetics is our top pick in the packaging sector (with STS Semi and Hana Micron). Investment points are: 1) increasing packaging outsourcing from Samsung s non-memory business, 2) stable revenue streams and profitability from diverse overseas customers, and 3) increasing revenue contribution from higher value added products (e.g. MCP, flip chip, test, etc.). Higher profitability among peers: Signetics has a well-diversified customer base both domestically (e.g. Samsung, Hynix) and globally, which should translate to stable long-term profitability. Total overseas revenue during the past three years accounted for 29% of total sales on average, with the addition of prominent overseas customers (e.g. Broadcom and Audience). We believe the customer diversification efforts have led to: 1) better protection against local pricing pressure, and 2) an improving global brand, which should facilitate new overseas customers going forward. Beneficiary of Samsung and Hynix capex: We expect Signetics to benefit from Samsung s aggressive investments in system LSI and the high utilization. Of note, Signetics currently provides backend services for Samsung s display ICs. We believe Signetics is also positioned to benefit from Hynix s plan to increase NAND capex following the SKT takeover, which should add to the positive impact of growing demand for mobile DRAM (i.e. MCP). Product mix to improve on stronger demand for higher-end packages: Signetics BGA (ball grid array) revenue weighting reached 78% in 211, indicating growing demand for advanced (i.e. higher value added) package products. The company s DRAM package mix has also been improving as MCP (multichip package) revenue weighting has grown from 7% in YE1 to 17% by YE11, due to strong smartphone and tablet growth. We expect MCP revenue to continue to expand in 212F, in addition to growing demand for several other advanced package products, which should translate to rapid profitability growth. Youngwoo Chung youngwoo.chung@truefriend.com Won Seo won.seo@truefriend.com 27

30 <Figure 64> Earnings forecast summary 21 1Q11 2Q11 3Q11 4Q Q12F 2Q12F 3Q12F 4Q12F 212F 213F Total sales QoQ, YoY (%) 22% 1% 24% 5% -13% 16% -12% 41% 23% -9% 22% 32% Memory NA NA NA NA Non-memory NA NA NA NA OP QoQ, YoY (%) 45% 141% 68% -49% -72% -12% 164% 111% 64% -24% 54% 51% OP margin 1% 9% 13% 6% 2% 8% 6% 9% 12% 1% 1% 11% Pretax income Pretax margin 8.6% 8.7% 11.7% 5.6% 1.4% 6.9% 5.4% 8.6% 11.6% 9.6% 9.2% 11.% Net income Net margin 8.2% 7.9% 1.3% 4.1% 1.3% 5.9% 4.8% 7.6% 1.4% 8.5% 8.2% 9.8% Source: Signetics, Korea Investment & Securities [Figure 65] Utilization vs. profitability [Figure 66] Revenue breakdown by memory vs. nonmemory (211) 12% 16% 1% 14% 12% 8% 6% 4% 1% 8% 6% Non-memory 49% Memory 51% 2% Package utilization Operating margin (RHS) 4% 2% % 1Q1 3Q1 1Q11 3Q11 1Q12F 3Q12F % Source: Signetics, Korea Investment & Securities Source: Signetics, Korea Investment & Securities [Figure 67] Revenue breakdown by product (211) [Figure 68] Revenue breakdown by customer (211) MCP (memory) 17% TEST (NAND) 4% Others 2% TSOP (NAND) 19% AUDIENCE 5% Atheros 3% PMC 3% Others 7% Flip Chip 2% BROADCOM 1% ANAPASS 2% Samsung 56% FBGA 56% Hynix 14% Source: Signetics, Korea Investment & Securities Source: Signetics, Korea Investment & Securities 28

31 [Figure 69] Shareholder structure (3Q11) [Figure 7] PER trend Others 34% Young Poong Corp 23% 2x 18x Quarterly OP (RHS) P/E (12MF) x 1 Terranix 1% Young Poong electronics 12% 14x 12x 1x Hyungjin-jang 8% Young Poong books 3% Interflex 19% 8x Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Source: Signetics, Korea Investment & Securities Source: Signetics, Datastream, Korea Investment & Securities [Figure 71] Share price vs. Quarterly revenue 8, 7, (KRW) Quarterly sales (RHS) Signetics share price , 5, 4, 3, , 2 1, Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Source: Signetics, Datastream, Korea Investment & Securities 29

32 Balance sheet FY-ending Dec. 29A 21A 211P 212F 213F Current assets Cash & cash equivalent Accounts & other receivables Inventory Non-current assets Investment assets Tangible assets Intangible assets Total assets Current liabilities Accounts & other payables ST debt & bond Current portion of LT debt 7 22 Non-current liabilities Debentures LT debt & financial liabilities Total liabilities Paid-in capital Capital surplus Capital adjustments Retained earnings Shareholders' Equity Income statement FY-ending Dec. 29A 21A 211P 212F 213F Sales Gross profit SG&A expense Other operating gains () Operating profit Financial income 1 2 Interest income 2 Financial expense Interest expense Other non-operating profit 1 () Gains (Losses) in associates, subsidiaries and JV Earnings before tax Income taxes Net profit Other comprehensive profit Total comprehensive profit EBITDA Cash flow FY-ending Dec. 29A 21A 211P 212F 213F C/F from operating Net profit Depreciation Amortization Net incr. in W/C Others 2 1 C/F from investing (21) (54) (57) (5) (36) CAPEX (21) (54) Decr. in fixed assets 1 Incr. in investment (8) Net incr. in intangible assets Others (1) (49) (5) (36) C/F from financing (1) 12 (17) 1 2 Incr. in equity (6) Incr. in debts (29) (8) 7 Dividends Others 1 (18) 1 2 C/F from others Increase in cash 2 16 (18) Key financial data FY-ending Dec. 29A 21A 211P 212F 213F per share data (KRW) EPS BPS 1,61 1,689 1,573 1,896 2,46 DPS Growth (%) Sales growth OP growth (11.7) NP growth (16.7) EPS growth (2.6) EBITDA growth Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield..... Stability Net debt (1) Debt/equity ratio (%) Valuation (X) PER NM PBR PSR EV/EBITDA Note: Based on K-IFRS (non-consolidated) 3

33 STS Semi (3654) BUY (Initiate), TP: W13,1 Stock price (Mar 14, KRW) 9,37 Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Market cap (USD mn) 354 Dec (KRW) (YoY) (x) (x) (x) (%) Shares outstanding (mn) 43 29A (18) (19) (1,28). 23 NM (24.2) 52W High/Low (KRW) 11,45/4,67 21A M avg. daily turnover (USD mn) P (34.6) Free float (%) F Foreign ownership (%) F , Positioned to become largest packaging name in Korea Performance 1M 6M 12M Absolute (%) (2.1) 67.3 (5.1) Rel. to Kospi (%p) (4.2) 5.4 (22.9) 12MF PER trend (x) 12MF PBR (LHS) price (RHS) (KRW) 12, 1, 8, 6, 4, 2, Initiate with BUY and 12MF TP of W13,1: We initiate coverage on STS Semi (STS) with a BUY rating and 12M TP of W13,1, based on 13x 12MF PE. Our investment points are: 1) STS is the major beneficiary of Samsung s backend outsourcing policy (supported by its high revenue exposure to Samsung orders), 2) its product mix is becoming more profitable with mobile DRAM, NAND and nonmemory packages, and 3) we expect overseas packaging subsidiaries (PSPC in Philippines, Bonghwang Semi in China) to make meaningful earnings contributions from 212F on capacity ramp up. Major beneficiary of Samsung s backend outsourcing: We expect Samsung s semiconductor business growth to bolster STS earnings given the high revenue exposure to Samsung orders (Samsung accounted for 55% of total revenue in 211; more if Fujitsu revenue is factored as Samsung is the end customer for some of the Fujitsu business). We believe STS and Samsung have a strategic partnership in semiconductor backend business given their history (STS originally spun off from Samsung Electronics in 1998), and the close collaboration with Samsung in setting up the overseas DRAM packaging lines in Philippines, which was aided by Samsung. As such, we consider STS as the mid- to long-term beneficiary of Samsung s expanding backend outsourcing policy. Product mix to improve with more value added packages: STS has been actively transitioning its product portfolio from low-margin DRAM packaging (transferred to PSPC) to more profitable NAND, system LSI and MCP products. Accordingly, DRAM lead frame (lower end) revenue weighting has declined from 13% in 21 to 7% in 211. We believe profitability will gradually improve as demand for higher end packages (e.g. MCP, embedded NAND) increase due to the rapidly growing smartphone and tablet markets. Youngwoo Chung youngwoo.chung@truefriend.com Overseas subsidiaries to make meaningful contribution from 212F: STS two major overseas subsidiaries, PSPC (DRAM-dedicated backend line, wholly owned by STS) and Bonghwang Semi (dedicated to display ICs e.g. T-con, PMIC, etc., 51% owned by STS) are expected to make meaningful earnings contributions from 212F on capacity ramp ups, after turning around in 2H11. Specifically, the improved profitability at overseas subsidiaries should make a positive contribution (23% of 212F pretax income) to STS bottom line from 212F. Won Seo won.seo@truefriend.com 31

34 <Figure 72> Earnings forecast summary 21 1Q11 2Q11 3Q11 4Q Q12F 2Q12F 3Q12F 4Q12F 212F 213F Total sales QoQ, YoY (%) 62% -19% 34% -7% 2% 13% -18% 31% 28% -6% 19% 19% Package DRAM NAND flash Non-memory Merchandise & others Flash cards Storage OP QoQ, YoY (%) 388% 9% 32% 25% -56% 1% 21% 55% 68% -17% 37% 4% OP margin 6% 7% 6% 9% 4% 6% 5% 6% 8% 7% 7% 8% Pretax income (1.8) Pretax margin 1.1% 3.3% 3.9% 6.1% -1.6% 2.9% 3.% 4.6% 7.% 5.9% 5.4% 9.9% Net income (1.8) Net margin 3.4% 3.% 3.6% 5.8% -1.6% 2.7% 2.8% 4.3% 6.5% 5.5% 5.1% 9.3% Source: STS Semi, Korea Investment & Securities [Figure 73] Utilization and operating profit trend [Figure 74] Revenue breakdown by product (211) 11% 1% 9% Operating income (RHS) Package utilization Others 16% DRAM lead 7% DRAM substrate (incl. MCP) 18% 8% % 5. 6% 5% Non-memory 33% NAND 26% 4% 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12F 2. Source: STS Semi, Korea Investment & Securities Source: STS Semi, Korea Investment & Securities [Figure 75] Revenue breakdown by customer (211) [Figure 76] Revenue mix improvement (29~211) PSPC (Subsidiary) 14% Others 4% Others 3 Non-memory NAND DRAM substrate (incl. MCP) DRAM lead Operating profit (RHS) 25 2 Hynix 8% Samsung 55% Fujitsu 19% Source: STS Semi, Korea Investment & Securities Source: STS Semi, Korea Investment & Securities 32

35 [Figure 77] Shareholder structure [Figure 78] PER trend Others 63% BK LCD co.,limited 15% Korea culture promotion Inc. 6% National pension service 4% Employee stock ownership 1% Mutual funds 8% 26x 24x 22x 2x 18x 16x 14x 12x 1x Quarterly OP (RHS) P/E (12MF) Investment advisers 3% 8x Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Source: Bloomberg, Korea Investment & Securities Source: STS Semi, Datastream, Korea Investment & Securities [Figure 79] Share price vs. Quarterly revenue 16, 14, (KRW) Quarterly sales (RHS) STS semi price , 12 1, 1 8, 8 6, 6 4, 4 2, 2 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Source: STS Semi, Datastream, Korea Investment & Securities 33

36 Balance sheet FY-ending Dec. 29A 21A 211P 212F 213F Current assets Cash & cash equivalent Accounts & other receivables Inventory Non-current assets Investment assets Tangible assets Intangible assets Total assets Current liabilities Accounts & other payables ST debt & bond Current portion of LT debt 32 2 Non-current liabilities Debentures LT debt & financial liabilities Total liabilities Paid-in capital Capital surplus Capital adjustments (4) (4) (1) (1) (1) Retained earnings (13) () Shareholders' Equity Income statement FY-ending Dec. 29A 21A 211P 212F 213F Sales Gross profit SG&A expense Other operating gains 4 Operating profit Financial income Interest income Financial expense Interest expense Other non-operating profit Gains (Losses) in associates, subsidiaries and JV (11) (9) 8 18 Earnings before tax (18) Income taxes 1 (9) Net profit (19) Other comprehensive profit Total comprehensive profit (19) EBITDA Cash flow FY-ending Dec. 29A 21A 211P 212F 213F C/F from operating Net profit (19) Depreciation Amortization 3 3 Net incr. in W/C 7 (34) (11) (7) (9) Others C/F from investing (17) (77) (139) (24) (78) CAPEX (9) (39) (2) (2) Decr. in fixed assets 3 2 Incr. in investment (11) (39) (9) (8) (18) Net incr. in intangible assets () () Others (1) (13) (14) (58) C/F from financing (5) Incr. in equity Incr. in debts (19) Dividends (2) (2) Others C/F from others Increase in cash 2 (2) Key financial data FY-ending Dec. 29A 21A 211P 212F 213F per share data (KRW) EPS (1,28) ,33 BPS 3,495 3,994 4,898 5,612 6,843 DPS Growth (%) Sales growth OP growth NP growth.. (1.1) EPS growth.. (34.6) EBITDA growth (11.1) 97.7 (33.9) Profitability (%) OP margin NP margin (8.1) EBITDA margin ROA (7.2) ROE (24.2) Dividend yield..... Stability Net debt Debt/equity ratio (%) Valuation (X) PER NM PBR PSR EV/EBITDA Note: Based on K-IFRS (non-consolidated) 34

37 Eugene Technology (8437) BUY (Maintain), TP: W47, (Up) Stock price (Mar 14, KRW) 47, Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Market cap (USD mn) 428 Dec (KRW) (YoY) (x) (x) (x) (%) Shares outstanding (mn) 14 29A NM W High/Low (KRW) 36,55/12,6 21A , M avg. daily turnover (USD mn) P , Free float (%) F , Foreign ownership (%) F , Top name in equipment sector Performance 1M 6M 12M Absolute (%) Rel. to Kospi (%p) MF PER trend (x) MF PBR (LHS) price (RHS) (KRW) 4, 3, 2, 1, Top pick given tech migration and system LSI capex: We raise our 12M TP to W47, (from W25,), based on 12x 12MF PE, as we revise up our 212F and 213F NP estimates by 77% and 95% respectively, to reflect estimate-beating near- and long-term earnings momentum. As such, we maintain a BUY rating. While shares have outperformed KOSPI 36% YTD, we believe substantial upside remains as Eugene Technology (Eugene) should post the highest earnings momentum among peers in 212, and given its position as a pure semiconductor capex play amid the favorable capex cycle. Tech migration and system LSI capex to drive 212F growth: Continued investments in tech migration, NAND capacity addition and Samsung s aggressive system LSI investment should extend the strong order momentum for LPCVD and plasma treatment tools, in our view. Eugene currently has a total backlog of W53.2bn YTD (disclosed deals only) already, and given our expectations for strong 1H12F order momentum, we forecast 1Q12F sales and OP will grow 61% QoQ and 81% QoQ, respectively, setting fresh record highs after last quarter. New equipment and overseas entry bolster long-term growth outlook: We expect Eugene s latest new equipment (cyclic CVD) to generate meaningful demand in its first full year after launch. Cyclic CVD carries out fine CVD processes at a lower temperature band of 5~45, and may potentially replace traditional ALD devices in the long run. We believe demand for cyclic CVD will continue to grow in line with tech migration. Also, we expect the company s overseas expansion will lead to new customers, after securing orders from Macronix and Winbond in 211. Potential beneficiary of 18-inch wafer migration: We believe Eugene is in a favorable position to be the first entry in the 18-inch LPCVD market after exclusively supplying tools to SEMATECH, a prominent 18-inch wafer R&D consortium led by Samsung, Intel and TSMC, in 211. Although chipmakers have not released detailed plans for 18-inch migration, various media sources indicate that Intel and TSMC may commence with pilot production as early as 213. We believe capex for the 18-inch transition should be a long term catalyst for Eugene. Youngwoo Chung youngwoo.chung@truefriend.com Won Seo won.seo@truefriend.com 35

38 <Figure 8> Earnings revision summary 1Q12F 212F 213F Old New Change % change Old New Change % change Old New Change % change Sales NA 65.3 NA NA % % LPCVD / Plasma systems NA 62.8 NA NA % % Others NA 2.5 NA NA % % Operating profit NA 16.6 NA NA % % Operating margin 25% 22% 25% 3pp 22% 25% 3pp Pretax income NA 17.1 NA NA % % Pretax margin 26% 23% 26% 3pp 23% 26% pp Net profit NA 13.7 NA NA % % Net margin 21% 18% 21% 2pp 19% 21% 3pp Source: Eugene Technology, Korea Investment & Securities <Figure 81> Earnings forecast summary 21 1Q11 2Q11 3Q11 4Q11F 211P 1Q12F 2Q12F 3Q12F 4Q12F 212F 213F Total sales QoQ, YoY (%) 92% 67% -17% 35% 18% 39% 113% 144% 62% 29% 8% 41% LPCVD / Plasma systems Others OP OP margin 2.9% 2.2% 33.6% 24.1% 22.6% 24.6% 25.4% 25.3% 25.2% 25.1% 25.3% 25.4% Pretax income Pretax margin 2.3% 21.3% 27.2% 23.8% 29.6% 25.6% 26.1% 26.1% 26.1% 26.% 26.1% 26.3% Net income Net margin 19.1% 16.8% 21.9% 19.% 2.9% 19.6% 2.9% 2.9% 2.8% 2.8% 2.9% 21.1% Source: Eugene Technology, Korea Investment & Securities [Figure 82] Annual revenue and profitability (1Q11~4Q12F) [Figure 83] 212F revenue breakdown by application 25 Sales OP margin (RHS) 4% System LSI, 2% 2 3% 2% 15 1% 1 % -1% DRAM, 2% NAND, 6% 5-2% F -3% Source: Eugene Technology, Korea Investment & Securities Source: Eugene Technology, Korea Investment & Securities 36

39 [Figure 84] Order breakdown by customers (based on disclosed contracts in 211) [Figure 85] New order trends (disclosed deal only) Overseas 1% 14. Rev Hynix 27% Samsung 63% YTD Source: Eugene Technology, Korea Investment & Securities Source: Eugene Technology, Korea Investment & Securities [Figure 86] # of layer increases as tech migration reaches advanced stage [Figure 87] Die cost comparison with Samsung s 35nm node 7x nm 6x 5x nm 4x nm 3x 2x nm 75 layers 1+ layers 14% 12% Samsung 35nm 1% Hynix 38nm Micron 42nm Micron 37nm Elpida 4nm Elpida 3nm 45 layers 8% 6% Samsung 28nm Hynix 28nm 23 layers 4% 1 layers 2 layers 6 layers 12 layers 2% % Source: Eugene Technology Source: Company data, Korea Investment & Securities [Figure 88] Cyclic CVD New revenue driver for 212F [Figure 89] Shareholders Others 29% Pyung-Yong Um 35% Investment advisers 28% Mutual funds 8% Source: Eugene Technology Source: Bloomberg, Korea Investment & Securities 37