Electronic Components

Transcription

1 Sector Report / Electronic Components April 24, 212 Overweight (Upgrade) Company Rating TP (KRW) Samsung SDI BUY 17, LG Innotek BUY ( ) 11, ( ) SEMCO Hold 93, Simmtech BUY 21, Interflex BUY 72, Daeduck Elec. BUY 14, Daeduck GDS Not rated NA NEPES BUY 26, Signetics BUY 5,4 Handsets offsetting slow PCs and TVs Upgrade to Overweight We upgrade the sector from Neutral to Overweight for the following reasons. 1) Robust global demand for handsets, mainly for smartphones and tablet PCs, are making up for the sluggish PCs and TVs. Accordingly, strong handset parts business is offsetting the PC/TV parts poor operations and many parts makers are delivering stronger-than-expected earnings. 2) The US economy is expected to emerge from a trough (as suggested by manufacturing production and leading economic index) and the OECD s leading index for China has turned upward. 3) Many Korean companies are tackling weak global demand for home appliances including TVs by stepping up competitiveness and expanding market share. 4) Although the KRW/JPY is in their favor, Japanese rivals may find it difficult to restore competitiveness due to insufficient money to fund marketing, capex and R&D activities. Sector performance (12M) Rel.to KOSPI (%p, RHS) Electronic Equipment & Instruments sector index (p, LHS ) Apr-11 Jul-11 Oct-11 Jan-12 Source: WICS provided by WISEfn Kevin Lee kevin.lee@truefriend.com Youngwoo Chung youngwoo.chung@truefriend.com Matthew Yang Matthew.yang@truefriend.com In 1Q12, global demand for PCs was healthier than expected Global demand for PCs is thought to have risen 1.2% YoY in 1Q12, better than our forecast. The supply shortage of hard disk drives (HDD) eased faster than hoped and PC sales rebounded in Europe, which drove the demand up. We slightly raise the YoY growth outlook for PC shipments to 5.5% in 212F. As for TVs, sales were robust in the US but global demand fell 4.5% YoY due to slow sales in Europe and China. But sales of 3D TVs and smart TVs should pick up beginning in 2Q12. Our 5% YoY demand growth for TVs in 212F remains intact. Positive on PCB, conservative approach for LED We are positive about PCB players. Samsung Electronics (SEC) 212F smartphone shipments are pegged at 234mn units, up 138% YoY. However, most PCB makers will complete capacity additions in 2H12, which in turn will keep the current supply shortage in place. Meanwhile, we recommend a conservative investment strategy for LED players based on less-than-expected direct-lit LED TV sales and slow growth of LED for lighting use. Top picks: Samsung SDI (rechargeable batteries), Simmtech (CSP), Daeduck GDS (flexible PCB) and Nepes (WLP) Our favorite pick in the electric and electronics sector is Samsung SDI on stronger competitiveness of rechargeable batteries (TP W17,). We upgrade LG Innotek to BUY on stronger-than-expected earnings from smartphone parts. Small and mid-cap top picks are Simmtech, Daeduck GDS and Nepes. Simmtech has solid earnings momentum for mobile semiconductor PCBs on SEC s aggressive smartphone shipments growth. Daeduck GDS has much room for capex and an attractive valuation. Nepes is a primary beneficiary of SEC s aggressive mobile AP strategy and its display driver IC (DDI) backend profitability is also set to pick up.

2 Sector report focus What is the report about? Reasons for the upgrade to Overweight 212F demand growth for TVs, PCs, handsets and home appliances Investment strategies for the electronic components sector Key assumptions and valuation 212F demand growth (YoY) TV PC Handset Home appliance 5% 5% 13% 5% Key assumptions for SEC s handset business in 212F Total shipment Smartphone shipment OPM ASP 47mn units 234mn units 18.4% USD186 Sensitivity & scenario analysis KRW/USD trend and forecast KRW/USD 1,25 1,2 1,15 1,1 1,5 1, (W/USD) 95 Mar-11 Sep-11 Mar-12 Sep-12 Source: Korea Investment & Securities Risks/opportunities Risks: KRW/USD drops, raw material cost rises, electronic parts ASP cuts, mounting risk of European debt crisis and the real estate market slowdown in China Cons: SEC s handset market share expansion and weakening competitiveness of Japanese rivals Sector highlights 1) Soft demand for TVs and PCs vs. strong demand for handsets Corporate PC replacement has been delayed, hit by the economic slowdown; Global PC and TV sales remain sluggish due mainly to soft demand in Europe and China Some PC and TV consumers are absorbed by smartphones and tablet PCs; Handset demand is strong on rapid penetration of smartphones Global sales of top three electronics products 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 34% 34% 36% 37% 41% 41% 39% 43% 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 Source: Korea Investment & Securities TV PC Handset 2) Robust handset parts offsetting slow PC and TV parts Strong demand for handset parts offsets soft demand for PCs and TVs; Some electronic components makers are reporting stronger-than-expected earnings SEC s handset business is thriving, which justifies a valuation premium to its part suppliers 3) Despite favorable KRW/JPY, Japanese rivals losing competitiveness Japanese rivals are attempting to gain market share in both the electronic parts and set product segments by taking advantage of favorable KRW/JPY But they may not be able to restore competitiveness due to money issues (i.e., insufficient capital to fund marketing, capex and R&D activities) Peer comparison Shares of Korean electronic/handset components makers mostly trade at a higher PE than other sectors, attributed to weakening earnings power, but their PB is largely at record lows See the global peer valuation on page 21-22

3 Contents I. Fresh look at electronic components makers Why we were Neutral 2. Upgrade to Overweight 3. Robust handsets offsetting slow PCs and TVs 4. Signs of economic recovery in the US and China 5. Korean firms continue to gain market share and competitiveness 6. Japanese rivals unlikely to regain market share despite favorable FX conditions II. Positive on PCB, conservative on LED PCB makers steady profit growth expected on stronger demand than supply 2. Mobile semiconductor PCB makers to benefit from SEC s growth 3. LED oversupply to ease in early No signs of better LED earnings yet: Top pick, Lumens III. Investment strategy Large-cap top pick Samsung SDI 2. Upgrade LG Innotek to BUY; Maintain Hold on SEMCO 3. Small and mid-cap top picks: Simmtech, Daeduck GDS, Nepes IV. Company analysis Samsung SDI (64) 2. LG Innotek (117) 3. Samsung Electro-Mechanics (915) 4. Simmtech (3671) 5. Daeduck GDS (413) 6. Nepes (3364) 7. Signetics (3317)

4 I. Fresh look at electronic components makers 1. Why we were Neutral We were Neutral as the global demand outlook was murky for PCs and TVs We previously recommended a conservative approach to the electronic components sector for the following reasons. 1) Global PC demand stayed low. We previously forecast the demand would fall 6.2% YoY in 1Q12 amid the short supply of hard disk drives (HDD). 2) Demand for TVs was expected to remain sluggish globally, mainly in Europe and China, and no signs of recovery were in sight. We forecast global demand for LCD TVs would fall 4.5% YoY in 1Q12. 3) Korean electronic components makers were losing price competitiveness as the KRW/USD, KRW/JPY and KRW/NTD rates dropped. 4) Japanese rivals were seeking opportunities to regain competitiveness via strategic alliances among one another, new product releases and vigorous marketing efforts. 2. Upgrade to Overweight US and Chinese economies show signs of recovery from a bottom But we now upgrade the sector rating from Neutral to Overweight and the reasons are several. 1) Robust global demand for handsets, mainly for smartphones and tablet PCs, are making up for the sluggish PCs and TVs. Accordingly, strong handset parts business is offsetting the PC/TV parts poor operations and many parts makers are delivering stronger-than-expected earnings. 2) The US economy is expected to emerge from a trough (as suggested by manufacturing production and leading economic index) and the OECD s leading index for China has turned upward. 3) Many Korean companies are tackling weak global demand for home appliances including TVs by stepping competitiveness and expanding market share. 4) Although the KRW/JPY is in their favor, Japanese firms may not be able to restore competitiveness due to money issues (i.e., insufficient capital to fund marketing, capex and R&D activities). 3. Robust handsets offsetting slow PCs and TVs Handsets portion in combined sales of top three electronics products rose to 43% in 4Q11 Global handset demand should rise 13.2% YoY to 1.75bn units in 212F. The demand has grown steadily since the beginning of the year, attributed to the following. 1) Various smartphone and tablet PC models are on store shelves, providing more choices to buyers. 2) Some PC and TV consumers are absorbed by smartphones and tablet PCs. 3) Handset prices are more affordable to consumers. 4) Demand for mobile ads, mobile payments and mobile shopping should swell. Backed by strong demand, handsets made up 43% of total sales of the top three electronics products (other two are PCs and TVs) in 4Q11. Accordingly, many electronic components makers in Korea are seeing their slow PC/TV parts businesses being offset by robust handset parts and are even reporting stronger-than-expected earnings. Samsung Electro-Mechanics (SEMCO) and LG Innotek are seeing the portion of handset parts growing in total sales and we expect the two companies will beat expectations with strong earnings in 1Q12, we lift the 212F OP by 2% for SEMCO and by 41% for LG Innotek. 2

5 KRW/USD KRW/JPY KRW/NTD 1,25 (KRW/USD) 1,6 (KRW/JPY1) 4 (KRW/NTD) 1,2 1,5 1,15 1,4 38 1,1 1,3 1,5 1,2 36 1, 1,1 95 Mar-11 Jun-11 Sep-11 Dec-11 1, Mar-11 Jun-11 Sep-11 Dec Mar-11 Jun-11 Sep-11 Dec-11 Source: Bloomberg, Korea Investment & Securities Source: Bloomberg, Korea Investment & Securities Source: Bloomberg, Korea Investment & Securities Quarterly global sales of top three electronics products (chg. YoY) Global sales breakdown by product 5% 4% 3% TV PC Handset 24% 1% 9% 8% 7% 34% 34% 36% 37% 41% 41% 39% 43% 2% 6% 1% -2% 5% 4% % 3% (1%) -4% (2%) (3%) 1Q6 4Q6 3Q7 2Q8 1Q9 4Q9 3Q1 2Q11 2% 1% % 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 TV PC Handset Source: DisplaySearch, Gartner, SA, Korea Investment & Securities Source: DisplaySearch, Gartner, SA, Korea Investment & Securities US manufacturing production growth: Reported vs. adjusted US leading economic index change (MoM) 2.% 1.5% Estimates Revised (% MoM) %.5%.% % JUL AUG SEP OCT NOV DEC JAN FEB Source: FRB, Bloomberg Source: US Conference Board, FRB, Korea Investment & Securities 3

6 OECD s leading economic index of China (trend=1) 14 Apr release Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Thailand s monthly exports of electronics products (USD mn) 9, 25% Export value % YoY 8, 2% 15% 7, 1% 6, 5% 5, % 4, (5%) 3, (1%) (15%) 2, (2%) 1, (25%) (3%) Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Source: OECD, Korea Investment & Securities Source: MOF, Korea Investment & Securities Demand for major IT products (% YoY in 212) Korea and US inventory cycle index trends 8 (%) PC (5%) 8% Korea 7 LCD (5%) 6% US 6 5 Handset (13%) Home Appliances (5%) 4% 4 2% (1) (2) F % Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 (2%) (4%) (6%) (8%) Source: DisplaySearch, Gartner, SA, Korea Investment & Securities Source: CEIC, Korea Investment & Securities 4. Signs of economic recovery in the US and China US manufacturing output is growing and China s OECD leading economic index is improving The US economy is starting to pick up led by the manufacturing sector. Companies are reaching into their deep pockets to expand investment and hire more workers, while consumers are feeling more optimistic about a recovery so they are starting to spend more. The US manufacturing output gained more than 1% for two straight months since Dec 211, showing the US economy is on a rebound led by manufacturing. The Feb leading economic index rose for a fifth straight month since Oct 211, which suggests the economy will recover going forward. In China, the OECD leading economic index has grown for the past four months (as of Feb 212), signaling the economy is ready to pick up as well. We believe Taiwan s electronic components exports rising 1.7% MoM and.2% YoY in Mar is proof that the US and China are on a rebound. Given that the US is the largest market for Korean electric/electronic firms, while China has the biggest growth potential, the improving leading economic indexes in those two countries is definitely a positive sign. 4

7 5. Korean firms continue to gain market share and competitiveness Samsung SDI, SEMCO, LG Innotek, Interflex and Simmtech s market shares are rising Despite the dampened demand for TVs, PCs and home appliances, there are several electronic components makers in Korea who have overcome weakened demand by gaining greater market share and a sharper competitive edge than Japanese and Taiwanese rivals. These companies include Samsung SDI (rechargeable batteries), SEMCO (multi-layer ceramic condenser/flip-chip chipscale package or MLCC/FC-CSP), LGE (3D TV), LG Innotek (camera modules), Interflex (flexible PCB or FPCB) and Simmtech (chip size package or CSP). We believe Samsung SDI will benefit from Apple s large inventory restocking and new supplies for the latest ipad from 1Q12. Accordingly, the company s rechargeable batteries market share should climb to a record high. As for SEMCO, although the growth of the MLCC market has slowed, the company has steadily increased its share backed by superior high-capacity and miniature technologies. SEMCO has also expanded its presence in the FC-CSP arena thanks to the robust growth of SEC s mobile AP and Qualcomm s baseband chips, along with its impressive track record (for reference, Taiwan s Kinsus has been losing market share). Meanwhile, LGE has opted to pre-release its film-type patterned retarder (FPR) 3D TV that offers better pricing and convenience, which is helping the company gain more ground in both the low and high-end markets. In the case of LG Innotek s camera modules business, advanced quality control initiatives and aggressive capex projects are leading it to sell a wider range of products to Apple. SEMCO s handset components sales weighting 42% LG Innotek s handset components sales weighting 42% 4% 4% 4% 4% 38% 38% 36% 36% 34% 34% 32% 32% 3% % Source: Korea Investment & Securities Source: Korea Investment & Securities Samsung SDI s rechargeable batteries market share 3% SEMCO s MLCC market share 25% 25% 2% 2% 15% 15% 1% 1% 5% 5% % 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12F % Source: Korea Investment & Securities Source: Korea Investment & Securities 5

8 LGE s 3D TV market share 18% LG Innotek s handset camera modules market share 1% 15% 8% 12% 6% 9% 4% 6% 3% 2% % 4Q1 1Q11 2Q11 3Q11 4Q11 % 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12F Source: DisplaySearch, Korea Investment & Securities Source: SA, Korea Investment & Securities Kinsus monthly sales Global TV makers OPM 1,8 1,6 1,4 (NTD mn) Sales Chg. MoM (RHS) Chg. YoY (RHS) 8% 6% 1% % 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1,2 4% (1%) 1, 8 2% (2%) % (2%) (3%) (4%) SEC Sony LGE Panasonic (4%) Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 (5%) Sharp Source: Digitimes, Korea Investment & Securities Source: Korea Investment & Securities 6. Japanese rivals unlikely to regain market share despite favorable FX conditions Due to poor earnings, Japanese firms find it hard to finance marketing, capex and R&D We forecast a steady drop in the KRW/JPY that started since Nov 211. A stronger KRW against the JPY clearly has an unfavorable effect on Korean electric/electronics firms that have had a pricing edge over Japanese counterparts. Nevertheless, Japanese firms are unlikely to regain market share as they must first restore their intrinsic competitiveness, which seems to be an elusive goal at present. First, the utilization rate of Japanese electronic components vendors is still less than the pre-earthquake level, although it has improved. Second, Toshiba decided to shut its handset business, while Panasonic and Sony announced plans to reduce their TV production capacity. Such moves confirm Japanese firms are not as competitive as Korean rivals both in components and end-products. Third, prolonged operating losses have made it difficult to secure funds to finance marketing, capex and R&D projects. Fourth, Japan s consumer confidence has fallen since the 211 earthquake. 6

9 II. Positive on PCB, conservative on LED 1. PCB makers steady profit growth expected on stronger demand than supply Flexible PCB makers: Spectacular earnings expected on high utilization rate In 212, the FPCB segment should report spectacular earnings based on our forecast for a high utilization rate, the segment s key factor for profit margins. We expect the supply shortage will continue as most FPCB makers will complete capacity additions by 2H12 while SEC s 212F smartphone shipments are pegged at 234mn units, up 138% YoY. We have a positive view of Interflex and Daeduck. Interflex has completed capacity addition (from 135,m 2 to 185,m 2 ) earlier than the planned 3Q12 deadline. Daeduck GDS finished adding 33% more capacity at end-211 and can afford more addition given its cash assets. 2. Mobile semiconductor PCB makers to benefit from SEC s growth Stable growth of PCBs for mobile semiconductors We are also positive about makers of mobile semiconductor PCBs such as multichip packages (MCP) and FC-CSP. That is because we peg mobile DRAM bit growth to reach 97% in 212F compared to overall DRAM bit growth of 34%. We also expect solid demand for mobile semiconductors considering SEC s aggressive smartphone shipments. The Korean mobile semiconductor market is dominated by SEC, Daeduck Electronics and Simmtech. Barred by enormous initial costs for facilities, no new competitors should appear in the near future. Thus, mobile semiconductor PCB makers should enjoy more stable growth than other smartphone parts manufacturers. 3. LED oversupply to ease in early 212 Sharp drop in MOCVD shipments Since 4Q1, the LED sector has maintained more than 2% oversupply. Recently, DisplaySearch forecast the glut to drop to less than 2% beginning in 1Q12, citing sharply decreased metal-organic chemical vapor deposition (MOCVD) shipments at Veeco and Aixtron and steady demand growth. Interflex: Utilization vs. EBITDA margin FPCB makers monthly capacity 12% 1% 8% 25% 2% 15% 1% 5% 2, 18, 16, 14, 12, (sq.m/mth) FPCB 6% % 1, 4% -5% -1% 8, 6, 2% Utilization (L) EBITDA margin (R) -15% -2% 4, 2, % 1Q7 4Q7 3Q8 2Q9 1Q1 4Q1 3Q11 2Q12F -25% Interflex Flexcom Daeduck GDS SEMCO Newflex Source: Korea Investment & Securities Source: Korea Investment & Securities 7

10 DRAM bit growth by type Mobile semiconductor PCB makers monthly capacity 14% 12% PC Mobile Server Total DRAM 9, 8, (sq.m/mth) MCP,FC-CSP 1% 7, 8% 6, 5, 6% 4, 4% 3, 2, 2% 1, % F SEMCO Daeduk Electronics Simmtech Source: Gartner, Korea Investment & Securities Source: Korea Investment & Securities Japanese electronics sector s utilization Korean LED companies utilization 12 (25=1) (utilization) 1% Seoul Semi Lumens 11 9% LG Innotek LED Seoul Opto 1 9 8% 7% 6% 8 5% 7 4% 6 5 3% 2% 1% 4 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 % 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12F Source: METI, Korea Investment & Securities Source: Korea Investment & Securities 4. No signs of better LED earnings yet: Top pick, Lumens Lumens, top pick among LED players Meanwhile, we have not detected any signs of earnings improvement for LED players. 1) In 4Q11, major the Korean LED makers utilization dropped to an average 57%. Thus, the unit price drop seems difficult to be narrowed unless demand quickly picks up. 2) Some technological issues have delayed the launch of low-price direct-lit LED TVs that are expected to improve LED TV penetration. 3) At present, LED lighting is 65-times pricier than incandescent lamps and 21-times dearer than fluorescent lamps (same lumens, Home Depot prices). Thus, it should take quite a while for LED prices to fall below our expected sweet spot of 1-times higher than fluorescent lamps. Among LED makers, our top pick is Lumens (BUY, TP W9,) as the company should benefit from SEC s aggressive LED TV strategy. Lumens is the only non-sec affiliate vendor that supplies LED to SEC s visual display division. The company s profit margins are more stable than its peers amid the current supply glut. That is because the company outsources production of LED components, which lowers the SG&A burden. 8

11 Lighting price comparison Dec 27, 211 Jan 27, 212 Feb 23, 212 Apr 17, 212 Incandescent bulb Maker Philips Philips Philips Philips Model no Light output (lm) Watt Price (USD) Price chg. % % % % Fluorescent bulb Maker EcoSmart EcoSmart EcoSmart EcoSmart Model no. ES5M8144 ES5M8144 ES5M8144 ES5M8145 Light output (lm) Watt Price (USD) Price chg. % (13%) 14% 13% LED lighting Maker EcoSmart EcoSmart EcoSmart EcoSmart Model no. ECS A19 V2 WW 12 ECS A19 V2 WW 12 ECS A19 V2 WW 12 ECS A19 V2 WW 121 Light output (lm) Watt Price (USD) Price chg. % % % % LED lighting s price premium Over incandescent bulb 65x 65x 65x 65x Over fluorescent bulb 24x 28x 24x 21x Source: Home Depot, Korea Investment & Securities 9

12 III. Investment strategy 1. Large-cap top pick Samsung SDI Samsung SDI is gaining share in rechargeable batteries market We upgrade the investment recommendation for the sector for 2Q12 from Neutral to Overweight. We present Samsung SDI (TP W17,) as a large-cap top pick. Samsung SDI s stock has pulled back on subsidiary risks from Samsung Mobile Display (SMD) and SBLiMotive (SBL). After the retreat, its attractive valuation should draw attention as its polymer-type rechargeable batteries are gaining competitiveness. We expect the stock to begin a full-fledged rally in early May when the SMD and Samsung Display merger winds down and equity-method contributions from the post-merger subsidiary, in which Samsung SDI will have a stake, will be predictable. 2. Upgrade LG Innotek to BUY; Maintain Hold on SEMCO LG Innotek s remarkable market share gains in camera modules We upgrade LG Innotek to BUY as 1) we lift our 212F OP by 41% on better-thanexpected 1Q12 earnings and 2) its camera modules market share is rapidly rising on distinguishable competitiveness compared to rivals. Meanwhile, we remain conservative on SEMCO and maintain Hold. Although its 1Q12 earnings should beat our estimates thanks to robust sales of smartphone-related components, a lack of growth driver in the post-led era leads us to believe the current valuation is somewhat burdensome. 3. Small and mid-cap top picks: Simmtech, Daeduck GDS, Nepes Respective growth drivers: CSP for Simmtech, FPCB for Daeduck GDS and WLP for Nepes Simmtech is rapidly gaining mobile PCB market share on unrivalled competitiveness and SEC s aggressive smartphone shipments growth (vs. sluggish PC PCB growth). As for Daeduck GDS, the strong growth of flexible PCBs used in smartphones is offsetting the slow growth of PCBs for mobile substrates and TVs. The abundant room for capex and low valuation look also attractive. Nepes is a primary beneficiary of Samsung s aggressive mobile AP strategy and its DDI backend profitability is also set to pick up. Signetics has the most well-rounded customer base among the semiconductor package makers in Korea. We believe Signetics will generate a stale revenue stream and profitability thanks to 1) diverse overseas customers, 2) a large portion of package outsourcing from non-memory businesses and 3) a growing sales contribution of high valueadded products. 1

13 Company analysis Samsung SDI (64) LG Innotek (117) Samsung Electro-Mechanics (915) Simmtech (3671) Daeduck GDS (413) Nepes (3364) Signetics (3317)... 31

14 Samsung SDI (64) BUY (Maintain), TP: W17, (Maintain) Stock price (Apr 23, KRW) 14,5 Market cap (USD mn) 5,589 Shares outstanding (mn) 46 52W High/Low (KRW) 21,/1, 6M avg. daily turnover (USD mn) 5.3 Free float (%) 74.5 Foreign ownership (%) 16.3 Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) 21A 5, , A 5, ,341 (1.5) F 5, , F 6, , , F 6, ,573 1,147 25, No more bad news Performance 1M 6M 12M Absolute (%) (27.8) Rel. to Kospi (%p) 4.9 (4.) (17.5) 12MF PER trend (x) (W') 2. 12MF PBR (LHS) price (RHS) Maintain BUY and TP W17,: We maintain BUY on Samsung SDI (SDI) and TP of W17,. Our target is the sum of 1) operating values of SDI s CRT, PDP and rechargeable battery divisions and Samsung Display (SD), based on fair EV/EBITDA and 2) operating values of SDI s solar module division and SBLiMotive (SBL) in the residual income model. We are bullish on the following. 1) The stock has pulled back since peaking on Feb 14 and now trade near PB 1.x, which we consider oversold. 2) 1Q12 earnings will be in line with earlier estimates and fade concern about weakening competitiveness of its polymer-type rechargeable batteries. 3) In the handset components segment, SDI should be the biggest beneficiary of SEC and Apple s growth. 4) Risks related to subsidiaries Samsung Mobile Display (SMD) and SBL are already fully priced in. 1Q12 OP slightly above our estimate on bigger rechargeable battery margins: SDI should post 1Q12 sales of W1.38trn and OP of W67.1bn (including dividend income), slightly beating the previous estimates. By division, CRT and PDP should barely break even but rechargeable battery OP should be slightly more than our upbeat forecast on Apple s inventory restocking and new supplies for the latest ipad. For solar PV modules, the operating loss should narrow sharply QoQ to W15bn on conservative production. Polymer rechargeable battery competitiveness concerns to fade: While 1Q is the low-demand season, we estimate the rechargeable battery division will generate sales of W765bn, up 8% QoQ, and OP of W69.1bn, up 46% QoQ. OPM should approach 9% on a sharp uptick in the sales weighting of high-margin polymer rechargeable batteries. We are bullish on the division due to the following. 1) After Apple concluded an inventory adjustment for SDI s polymer batteries in 4Q11, the smartphone maker appears to be aggressively restocking in 1Q12. 2) SDI has started supplying new polymer batteries for the new ipad. 3) New ipad component supplies should make a larger contribution to sales and margin growth as the model s polymer capacity (11,555mAh) exceeds that of the ipad2 (6,944mAH) by 68%. As such, we believe weakening competitiveness of polymer rechargeable batteries, which had undermined 4Q11 results, is no longer an issue. Kevin Lee kevin.lee@truefriend.com SMD and SBL risks fully priced in: SDI rallied in early 1Q12 before peaking on Feb 14. The stock pulled back on fears that 1) SMD will no longer contribute equitymethod gains following the merger with SD and 2) the automotive rechargeable battery business may slow due to ownership changes at SBL (currently 5:5 between SDI and Bosch). We believe these negatives have been fully reflected and stock should enter a sustainable rally in early May when these uncertainties are resolved. 12

15 SotP and EV/EBITDA valuation (W bn, %, x) 1. Operating value of SDI and SMD EBIT EBITDA Target EV/EBITDA CRT PDP Rechargeable battery Net Debt SDI total ,546 Samsung Display 2,53 6, ,471 Total 7,64 2) Operating value of SBL and solar business Capital base PV of RI (1 yrs) PV of continuing value CoE LT growth SBL % 5% 89 Solar 16 (481) (86) 1% 5% (567) 2. Asset value Value Note Value Note Pro rata to SDI s 2% stake Pro rata to SDI s 5% stake Book value Discount rate Value Available-for-sale securities (listed/unlisted) 2,346 3% 1,642 Subject to equity method 88 3% 62 Sub-total 2,434 1,74 3. Fair value SDI shares ( ) 45,558 Treasury shares ( ) 2,578 Sum of operating and asset values 8,255 Fair value 181,196 Source: Korea Investment & Securities Quarterly earnings estimates (W bn, %) 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F F Display total Sales 6,51 7,9 7,8 8,555 7,96 8,673 8,99 9,248 29,911 29,235 34,871 OP (23) (252) (17) (22) ,993 (89) 2,53 OPM (3.5%) (3.5%) (1.5%) (2.6%) 2.2% 5.3% 7.2% 7.% 6.7% (2.8%) 5.9% SD (LCD) Sales 5,27 5,76 5,42 6,25 5,75 6,95 6,278 6,43 25,451 22,7 24,526 OP (382) (38) (41) (49) (63) ,697 (1,662) 528 OPM (7.2%) (6.6%) (7.6%) (7.8%) (1.4%) 1.2% 3.2% 3.7% 6.7% (7.3%) 2.2% SMD Sales 1,24 1,33 1,66 2,35 2,21 2,578 2,713 2,844 4,319 6,535 1,345 OP ,525 OPM 12.3% 9.7% 18.2% 11.6% 11.9% 15.4% 16.9% 14.7% 7.6% 13.% 14.7% Source: Korea Investment & Securities 13

16 Quarterly earnings estimates (revised) (W bn, %) CRT 1Q11 2Q11 3Q11P 4Q11 1Q12F 2Q12F 3Q12F 4Q12F F Sales OP OPM PDP Sales ,268 2,213 1,918 OP (5) OPM (1.) Rechargeable battery Sales ,281 2,733 3,534 OP OPM Solar Sales OP (28) (28) (15) (15) (15) (15) (56) (6) OPM (87.5) (127.3) (15.) (15.) (15.) (15.) (13.7) (15.) Total sales 1,29 1,349 1,448 1,438 1,377 1,445 1,493 1,478 5,124 5,444 5,793 Total OP Total OPM Note: SMD is excluded from total earnings Source: Company data, Korea Investment & Securities Quarterly earnings estimates (previous) (W bn, %) CRT 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F F Sales OP OPM PDP Sales ,268 2,18 2,16 OP (5) OPM (1.) Rechargeable battery Sales ,281 2,733 3,36 OP OPM Solar Sales OP (28) (28) (15) (15) (15) (15) (56) (6) OPM (87.5) (127.3) (15.) (15.) (15.) (15.) (13.7) (15.) Total sales 1,29 1,349 1,448 1,438 1,364 1,373 1,448 1,434 5,119 5,444 5,619 Total OP Total OPM Note: SMD is excluded from total earnings Source: Company data, Korea Investment & Securities 14

17 Balance sheet FY-ending Dec. (W bn) 21A 211A 212F 213F 214F Current assets 2,451 2,364 2,665 2,931 3,299 Cash & cash equivalents 1, Accounts & other receivables ,58 1,153 Inventory Non-current assets 5,482 6,163 6,562 7,192 7,853 Investment assets 3,457 3,999 4,396 4,955 5,573 Tangible assets 1,727 1,827 1,87 1,81 1,828 Intangible assets Total assets 7,934 8,527 9,227 1,123 11,151 Current liabilities 1,98 1,75 2,9 2,224 2,175 Accounts & other payables ST debt & bonds Current portion of LT debt Non-current liabilities Debentures 2 LT debt & financial liabilities 28 Total liabilities 1,73 2,213 2,328 2,473 2,311 Controlling interest 6,51 6,118 6,645 7,324 8,44 Capital stock Capital surplus 1,256 1,258 1,258 1,258 1,258 Capital adjustments (17) (165) (165) (165) (165) Retained earnings 3,391 3,611 4,138 4,816 5,896 Minority interest Shareholders' equity 6,231 6,315 6,899 7,65 8,841 Income statement FY-ending Dec. (W bn) 21A 211A 212F 213F 214F Sales 5,124 5,444 5,793 6,43 6,46 Gross profit SG&A expenses Other operating gains Operating profit Financial income Interest income Financial expenses Interest expenses Other non-operating profit Gains (Losses) in associates, subsidiaries and JV ,63 Earnings before tax ,23 1,573 Income taxes Net profit ,258 Net profit of controlling interest ,147 Other comprehensive profit 721 (194) Total comprehensive profit 1, ,258 Total comprehensive profit of controlling interest 1, ,147 EBITDA Cash flow FY-ending Dec. (W bn) 21A 211A 212F 213F 214F C/F from operations Net profit ,258 Depreciation Amortization Net incr. in W/C (135) (275) (75) (94) (319) Others (137) (215) (469) (68) (1,59) C/F from investing (252) (879) (414) (58) (88) Capex (399) (436) (44) (454) (465) Decr. in fixed assets Incr. in investment 12 (346) Net incr. in intangible assets (1) (23) (39) (68) (49) Others 84 (13) (38) (66) (49) C/F from financing (623) 269 (12) (2) (163) Incr. in equity 24 6 Incr. in debt (586) 355 (35) 65 (96) Dividends (6) (77) (67) (67) (67) Others (1) (15) C/F from others 19 2 Increase in cash (367) (39) Key financial data FY-ending Dec. 21A 211A 212F 213F 214F Per-share data (KRW) EPS 8,23 7,341 13,236 16,623 25,553 BPS 132,39 133,35 144,47 158, ,752 DPS 1,6 1,5 1,5 1,5 1,5 Growth (%) Sales growth OP growth 6.9 (29.) NP growth 63.6 (1.1) EPS growth 62.1 (1.5) EBITDA growth (11.2) (3.) Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) (78) (25) (143) (176) (394) Debt/equity ratio (%) Valuation (x) PE PB PS EV/EBITDA Note: K-IFRS (consolidated) 15

18 LG Innotek (117) BUY (Upgrade), TP: W11, (Up) Stock price (Apr 23, KRW) 82,9 Market cap (USD mn) 1,46 Shares outstanding (mn) 2 52W High/Low (KRW) 116,/56,2 6M avg. daily turnover (USD mn) 13.4 Free float (%) 52.1 Foreign ownership (%) 15.2 Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) 21A 4, , A 4,553 (67) (174) (145) (7,211) NM 352 NM (1.4) 212F 5, ,771 NM F 6, , F 7, , Note: NP and EPS of controlling interest Strong earnings from smartphone parts offsetting sluggish LED Performance 1M 6M 12M Absolute (%) (19.5) 17.4 (28.5) Rel. to Kospi (%p) (16.8) 1.1 (18.3) 12MF PER trend (x) 12MF PBR (LHS) (KRW) 4. price (RHS) 2, 3. 15, 2. 1, 1. 5, Upgrade to BUY and lift TP to W11,: We upgrade LG Innotek to BUY and lift the TP to W11,. We raise the target PB to 1.5x, its past average (since Jan 27) as it has entered an earnings recovery phase. Investment points include the following. 1) 1Q12 OP should beat our forecast by a large margin thanks to robust sales of smartphone parts. 2) The company s vendor share is growing at a major client as it is rapidly stepping up competitiveness in the camera modules segment. 3) The OP contribution is rising fast from new growth products such as packages, touch panels and auto parts. Risk factors are 1) slow earnings growth with LED parts likely turning to profit in 2H12 and 2) uncertainties about growth of the handset and TV businesses at a captive customer Better-than-expected OP of W22bn in 1Q12F: LG Innotek should post strongerthan-expected earnings in 1Q12F with sales of W1.3trn (+7% QoQ) and OP of W22bn, recovering from losses a quarter ago. The earnings growth drivers would be camera modules and packages. LG Innotek s camera modules have been adopted by tablet PCs as well as smartphones at its major client, which proves its technological prowess. The operating loss from packages, PCB for mobile semiconductor use, should be much narrower than expected in 1Q12 considering the smartphone market s growth and expansion of its vendor share at the major client. Photomask earnings should be stronger than expected, benefitting from more shipments by its customers. OP of TV parts such as tuners and power supply should meet the forecast considering still soft demand for TVs. Meanwhile, LED earnings could fall short because it failed to significantly narrow the operating loss (QoQ) as the release of direct-lit LED modules has been delayed. Significantly lift 212F OP to W244bn: LG Innotek at end-feb announced that it will significantly increase camera modules capex. We believe the move is aimed at responding to growing demand from the major client. The package operation should turn to profit in 3Q12 backed by faster-than-expected improvement in production yield and earnings. As such, we significantly raise the OP estimate to W244bn for 212F. But we reiterate our forecast that the LED business will turn to profit in 4Q12. We set the 212F OPM at 5%. Kevin Lee kevin.lee@truefriend.com Further share upturn hinges on recovery of LED earnings and the captive market s performance: Although LED is suffering substantial losses at present, the business apparently has big growth potential (e.g., full entry to the LED lighting segment). The captive market (LGE s smartphones and LG Display s TV panels) should also recover from the loss-making seen in 211. We believe LG Innotek s share price rise will hinge on how fast the LED earnings and the captive market will recover from the loss. 16

19 Quarterly earnings estimates by division (revised) (W bn %) 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F F Sales 1,99 1,173 1,67 1,25 1,292 1,413 1,583 1,626 4,13 4,567 5,914 LED Display/Network ,13 1,24 1,64 Camera modules/pcb ,226 1,69 2,638 Package substrate Materials Motor/Auto OP (7) 6 (5) (6) (49) 244 LED (33) (27) (25) (9) (28) (2) (5) 8 (11) (176) (45) Display/Network 1 8 (2) Camera modules/pcb Package substrate (1) (11) (1) (2) (33) 17 Materials Motor/Auto (1) () () () 1 OPM (.7).5 (.5) (5.) (1.1) 4.1 LED (16.4) (9.9) (1.2) (49.8) (15.) (9.) (2.) 3. (1.2) (19.4) (4.8) Display/Network (.9) Camera modules/pcb Package substrate (1.1) (11.) (1.7) (2.3) (8.5) 3.9 Materials Motor/Auto (1.1).4.5 (.3) (.) (.1) 2.7 Source: Company data, Korea Investment & Securities Quarterly earnings estimates by division (previous) (W bn %) 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F F Sales 1,99 1,173 1,67 1,25 1,241 1,479 1,59 1,687 4,13 4,567 5,998 LED Display/Network ,13 1,24 1,241 Camera modules/pcb ,226 1,69 2,53 Package substrate Materials Motor/Auto OP (7) 6 (5) (6) (49) 173 LED (33) (27) (25) (9) (33) (22) (5) 7 (11) (176) (52) Display/Network 1 8 (2) Camera modules/pcb Package substrate (1) (11) (1) (2) (3) (2) (33) 5 Materials Motor/Auto (1) () () 14 OPM (.7).5 (.5) (5.) (1.1) 2.9 LED (16.4) (9.9) (1.2) (49.8) (17.) (1.) (2.) 3. (1.2) (19.4) (5.8) Display/Network (.9) Camera modules/pcb Package substrate (1.1) (11.) (1.7) (2.3) (3.5) (1.4) (8.5) 1. Materials Motor/Auto (1.1).4.5 (.3) (.1) 3.5 Source: Company data, Korea Investment & Securities 17

20 Balance sheet FY-ending Dec. (W bn) 21A 211A 212F 213F 214F Current assets 1,53 1,736 2,149 2,435 2,769 Cash & cash equivalents Accounts & other receivables ,64 1,26 1,371 Inventory Non-current assets 2,631 2,674 2,942 3,156 3,34 Investment assets Tangible assets 2,338 2,35 2,463 2,613 2,723 Intangible assets Total assets 4,134 4,41 5,92 5,591 6,19 Current liabilities 1,222 1,474 2,27 2,32 2,547 Accounts & other payables ,26 1,371 ST debt & bonds Current portion of LT debt Non-current liabilities 1,442 1,611 1,619 1,66 1,594 Debentures LT debt & financial liabilities Total liabilities 2,664 3,85 3,646 3,925 4,141 Controlling interest 1,47 1,325 1,445 1,666 1,968 Capital stock Capital surplus Capital adjustments () () () () () Retained earnings ,3 Minority interest Shareholders' equity 1,47 1,325 1,446 1,666 1,969 Income statement FY-ending Dec. (W bn) 21A 211A 212F 213F 214F Sales 4,13 4,553 5,914 6,7 7,618 Gross profit ,23 1,25 SG&A expenses Other operating gains 3 (24) (31) (35) (4) Operating profit 156 (67) Financial income Interest income Financial expenses Interest expenses Other non-operating profit Gains (Losses) in associates, subsidiaries and JV Earnings before tax 19 (174) Income taxes (17) (29) Net profit 196 (145) Net profit of controlling interest 196 (145) Other comprehensive profit (9) Total comprehensive profit 186 (141) Total comprehensive profit of controlling interest 186 (141) EBITDA Cash flow FY-ending Dec. (W bn) 21A 211A 212F 213F 214F C/F from operations Net profit 196 (145) Depreciation Amortization Net incr. in W/C (373) (45) (85) Others (6) C/F from investing (1,132) (68) (598) (577) (551) Capex (1,329) (692) (567) (57) (534) Decr. in fixed assets Incr. in investment (35) Net incr. in intangible assets (53) (5) (67) (55) (63) Others 224 (4) (23) (13) (15) C/F from financing 1, (19) Incr. in equity 334 Incr. in debt (19) Dividends (6) (7) Others (7) 1 C/F from others (4) (2) Increase in cash (64) Key financial data FY-ending Dec. 21A 211A 212F 213F 214F Per-share data (KRW) EPS 1,325 (7,211) 5,771 1,77 14,796 BPS 73,48 65,733 71,688 82,69 97,618 DPS 35 Growth (%) Sales growth OP growth NP growth EPS growth EBITDA growth 135. (2.) Profitability (%) OP margin 3.8 (1.5) NP margin 4.8 (3.2) EBITDA margin ROA 5.6 (3.4) ROE 16.5 (1.4) Dividend yield Stability Net debt (W bn) 1,36 1,778 1,62 1,552 1,471 Debt/equity ratio (%) Valuation (x) PE 13. NM PB PS EV/EBITDA Note: K-IFRS (consolidated) 18

21 Samsung Electro-Mechanics (915) Hold (Maintain), TP: W93, (Maintain) Stock price (Apr 23, KRW) 16, Market cap (USD mn) 6,913 Shares outstanding (mn) 75 52W High/Low (KRW) 115,/59,5 6M avg. daily turnover (USD mn) 55.3 Free float (%) 76.2 Foreign ownership (%) 19.2 Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) 21A 5, , , A 6, ,51 (37.1) F 7, , , F 8, , , F 11, , , Note: NP and EPS of controlling interest Prime beneficiary of smartphone growth vs. burdensome valuation Performance 1M 6M 12M Absolute (%) (7.8) Rel. to Kospi (%p) MF PER trend (x) (W') 5. 12MF PBR (LHS) price (RHS) Maintain BUY and TP W93,: We maintain BUY on Samsung Electro- Mechanics (SEMCO) and TP of W93,. Investment points are as follows. 1) As SEC s smartphone shipments are expected to reach 45mn units in 1Q12 (vs. initial estimate of 42mn), SEMCO s smartphone component earnings (i.e., substrates, camera modules, chip-scale package (CSP), flip-chip CSP (FC-CSP)) should beat expectations as well. 2) Backed by favorable FX conditions, Japanese and Taiwanese rivals have waged a price war but SEMCO is using its technological prowess to gain market share in multi-layer ceramic condenser (MLCC) and FC- CSP. 3) SEMCO is attempting to secure new growth drivers through aggressive buyouts (motors). Given that valuations are relatively high compared to 212F earnings, we recommend investors take a conservative stance at the current price. 1Q12F OP of W97bn to beat our estimate: In 1Q12F, we peg sales of W1.64trn (similar to 4Q11) and OP of W97bn (down 2% QoQ, includes one-off costs) that should exceed our estimate. Almost all smartphone component earnings beat expectations as SEC s smartphones (Galaxy Note, Galaxy S1 and S2, etc.) and Apple s iphone had larger-than-expected shipments. Of note, smartphone shipments showed rapid quarterly growth as inventory adjustment and ASP cuts had less impact than usual, while stabilizing raw material prices eased the cost pressure as well. The 1Q12 OP remained largely unchanged QoQ as the MLCC business saw similar ASP cuts from 4Q11 due to fiercer price competition. 212F OP up 2% to W59bn: We peg 212F sales at W8.3trn and revise up OP 19% to W56bn. With the disposal of subsidiary Samsung LED to SEC, equitymethod contribution from Samsung LED disappeared from 4Q11. However, smartphone component earnings should inevitably rise as SEC and Apple s 212F smartphone shipments have been revised up to 234mn units and 148mn units, respectively. Given the delayed recovery in global PC and TV demand, we expect relatively modest upside for MLCC earnings and we estimate tuner and power module margins in the low single-digit range. Kevin Lee kevin.lee@truefriend.com Alphana buyout to help secure long-term growth driver: SEMCO decided to acquire Alphana Technology (Japan), the world s second-largest motor maker for hard-disk drives (HDD). Through the purchase, SEMCO hopes to materially improve its motor business OPM (a mere 1%) over the short-term by taking advantage of Alphana s patents, manufacturing expertise, facilities and customer base. We believe the benefits will be even bigger over the long-term as the buyout facilitates SEMCO s diversification into vehicle motors (ABS and EPS), EV motors (driving motors) and energy-related motors beyond the current mix of HDD/optical disc drive (ODD)/handset motors. SEMCO is expected to book Alphana Technology s earnings on a consolidated basis beginning in 2Q12. 19

22 SEMCO s quarterly earnings by division (revised) (W bn, %) 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F F Sales 1,714 1,682 1,929 1,664 1,641 1,882 2,98 1,96 6,696 6,988 7,582 ACI ,443 1,61 2,6 LCR ,637 1,691 1,814 OMS ,172 2,57 1,874 CDS ,444 1,64 1,838 OP ,318 1,292 1,632 ACI LCR OMS CDS 9 1 (6) (3) 74 OPM ACI 9 7 (18) (3) (24) (8) (32) 8 LCR OMS CDS Note: LED is included in OMS figures; But LED is excluded from earnings from 4Q11 and onward due to disposal of Samsung LED to SEC Source: Company data, Korea Investment & Securities SEMCO s quarterly earnings by division (previous) (W bn, %) 1Q11 2Q11 3Q11 4Q11 1Q12F 2Q12F 3Q12F 4Q12F F Sales 1,714 1,682 1,929 1,664 1,577 1,827 2,13 1,871 6,969 7,97 7,31 ACI ,443 1,61 1,99 LCR ,637 1,691 1,896 OMS ,172 1,99 1,62 CDS ,717 1,75 1,894 OP ACI LCR OMS CDS OPM ACI LCR OMS CDS Note: LED is included in OMS figures; But LED is excluded from earnings from 4Q11 and onward due to disposal of Samsung LED to SEC Source: Company data, Korea Investment & Securities 2