Silicon Works ( KS)

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1 January 18, 217 (1832 KS) 4Q16 preview: Better than expected BUY (MAINTAIN) Price (Jan. 17) W3,4 Target Price W36, % variance 2.% YoungSik Yoon (82-2) youngsik.yoon@shinhan.com JoonDoo Ha (82-2) [CPA, CFA] jdha117@shinhan.com KOSPI 2,71.87p KOSDAQ 624.p Market Cap. Par Value Outstanding Shares Free Floating Shares 52-Week High/Low 6-Day Avg. Trading Volume 6-Day. Avg. Trading T/O W487.9bn/ US428.mn W5 16.3mn 1.2mn(62.7%) W37,45/W25, 62,291shrs W1,718mn Foreign Ownership 34.81% Major Shareholders LG Corp. and 2 others 37.14% Templeton Asset Management and 2 others 5.68% Absolute Performance 3M 7.5% 6M -1.6% 12M -2.9% Relative performance 3M 13.7% to KOSDAQ 6M.3% 12M 5.6% Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. Please see Analyst certification and important disclosures & disclaimers at the end of this report. 4Q16 operating profit to beat consensus at W13.3bn (+9.2% QoQ, -11.% YoY) 217 sales estimated at W667.7bn (+9.6% YoY), operating profit at W51.5bn (+1.8% YoY) Retain BUY and raise target price to W36, 4Q16 operating profit to beat consensus at W13.3bn (+9.2% QoQ, -11.% YoY) is expected to have posted 4Q16 operating profit of W13.3bn (+9.2% QoQ, -11.% YoY) on sales of W155.1bn (+8.3% QoQ, -6.2% YoY), beating our estimate (W7.6bn) and the consensus (W11.6bn). The main contributors were: 1) ramp-up of large panel shipments to BOE and CSOT; 2) increased OLED driver IC shipments to Xiaomi and Huawei (about 2mn units); and 3) rise in the won/dollar exchange rate (+3% QoQ). 217 sales estimated at W667.7bn (+9.6% YoY), operating profit at W51.5bn (+1.8% YoY) Earnings should receive a boost from exclusive supply of TDDI (touch and display driver integration) for LG Electronics G6 set for launch in March. We need to be conservative as seen with the G5 last year, but we assume shipments to reach 4.5mn units (3mn units for G5) as the parts supplied are usually greater than the actual sales volume. Accordingly, we estimate sales to grow about W25bn in 1H17. In 217, we forecast operating profit to improve.1%p YoY to 7.7% due to increased R&D spending and higher labor costs. However, cost increases should be partially offset by improving product mix. Increased shipments of OLED driver IC to Xiaomi and Huawei and COF driver IC and T-Con to BOE and CSOT should improve the product mix. Sohn Bo-ik, former head of LG Electronics system IC division, was appointed as the new CEO of the company in December 216. T-Con for OLED TVs (currently a unit of LG Electronics) may be acquired in the next one or two years at the earliest. Retain BUY and raise target price to W36, We raise our target price for to W36, to reflect: 1) upward revision of 217 earnings forecasts; 2) increased supply to Chinese companies; and 3) possible acquisition of T-Con for OLED TVs. The share price has climbed 2% since the release of 3Q16 earnings which turned out to be better than expected. However, there is not enough momentum to drive the stock higher amid a steady increase in R&D spending for future growth drivers, such as driver IC for smartphone OLED panels and automotive products. The share price catalyst will likely be shipments of mobile-use OLED driver IC to major clients or expansion of the client base. In the long term, it will be full-fledged sales of automotive sensors. Year to Dec. Sales OP Pre-tax NP EPS Growth BPS PER EV/EBITDA PBR ROE Net Debt (W bn) (W bn) (W bn) (W bn) (Won) (%) (Won) (X) (X) (X) (%) Ratio (%) , , (71.9) , , (66.1) 216F ,826 (5.1) 22, (63.3) 217F , , (64.3) 218F , , (66.7) 1

2 4Q16 preview (bn KRW) 4Q16F 3Q16 % QoQ 4Q15 % YoY Consensus Gap (%) SHIC Gap (%) Sales (6.2) OP (11.) NP (18.4) OPM (%) NPM (%) Quarterly earnings (bn KRW, %) 1Q16 2Q16 3Q16 4Q16F 1Q17F 2Q17F 3Q17F 4Q17F F 217F USD/KRW rate 1,21.4 1, , , ,18. 1,17. 1,14. 1,11. 1,52.8 1,13.9 1,16.9 1,15. Sales COG COF T-Con PMIC Others (% sales mix) COG COF T-Con PMIC Others (% QoQ) Sales (3.9) (4.3) (5.8) COG 8.3 (19.1) (11.7) (7.5) 13.5 (11.) (2.8) 11.6 COF (14.5) 8.7 (2.6) 15. (4.8) T-Con (8.7) (.5) 1.8 PMIC 3.1 (.1) (1.9) (.7) (5.8) (4.9) Others (14.7) 6.1 (23.8) 61.1 (8.3) (6.2) (15.8) 47.1 (% YoY) Sales (1.1) (6.2) (4.7) COG (7.9) (28.5) 13.5 (11.) (2.8) 11.6 (7.2) (7.7) 17. (12.4) COF (18.4) 4.1 (4.8) (11.2) T-Con (.5) 1.8 (15.8) PMIC (5.8) (4.9) (2.6) Others (1.2) 16. (6.) 11.1 (8.3) (6.2) (15.8) OP (% QoQ) (.3) (24.9) (37.5) 9.2 (13.4) (6.1) (% YoY) 51.8 (1.5) (62.1) (11.) (22.7) (1.6) (16.8) 1.8 (% OPM) NP (% QoQ) 1.4 (27.4) (28.6) (11.8) (% YoY) (43.7) (18.4) (26.) (5.1) 5.3 (% NPM)

3 Peer valuation Company Market cap. PER (x) EPS growth (%) PBR (x) ROE (%) EV/EBITDA (x) (bn KRW) F 217F F 217F F 217F F 217F F 217F Fabless Average (4.3) (Korea) (15.8) Qualcomm (U.S.) 115, (27.2) (4.7) Broadcom (U.S.) 84, nvidia (U.S.) 65, Xilinx (U.S.) 17, (12.8) MediaTek (Taiwan) 12, (44.7) (9.1) Marvell Tech (U.S.) 8, (67.8) Novatek (Taiwan) 2, (11.2) (21.8) RealTek (Taiwan) 2, (37.6) Phison (Taiwan) 1, Driver IC Average (Korea) (15.8) Novatek (Taiwan) 2, (11.2) (21.8) Synaptics (Taiwan) 2, (16.3) Himax (Taiwan) 1, (61.5) 12.8 (15.5) Parade Tech (Taiwan) (7.2) Sitronix (Taiwan) Source: Bloomberg, Shinhan Investment Corp. PER valuation (KRW, %, x) F 217F 218F EPS 2,529 1,97 1,979 2,979 2,826 2,977 3,35 YoY (%) 25.1 (22.1) (5.1) BPS 15,725 16,843 18,371 21,371 22,265 24,292 26,592 ROE PER (end) PER (high) PER (low) PER (average) Target PER 12. Target price 35,724 Source: Shinhan Investment Corp. Note: Target multiple of 12x, which is a 1% discount to average PER of major driver IC companies, was applied to 217 EPS. Discount is given due to weaker profitability than peers. 12-month forward PER 12-month forward PBR (KRW) 5, (KRW) 5, 2.3x 2.x 4, 3, 2, 14x 11x 1x 9x 7x 4, 3, 2, 1.8x 1.4x 1.x 1, 1, Source: Bloomberg, Shinhan Investment Corp Source: Bloomberg, Shinhan Investment Corp. 3

4 Earnings forecast revision (bn KRW) 216F 217F Before After Change (%) Before After Change (%) Sales OP NP OPM (%) NPM (%) Source: Shinhan Investment Corp. Flagship products Products Features Display driver IC Driving signals and data converted into electric signals for a display panel to create images on the screen - COF (chip on film) Technology to install driver IC on top of PCB (printed circuit board) films, primarily used for large panels (TV, monitor, etc.) - COG (chip on glass) Technology to install driver IC directly on panel without a film that connects the panel and PCB, mainly applied in relatively small panels (tablet PC, notebook computer, etc.) T-Con (timing controller) Control signals and data created so that source and gate driver IC can operate panel PMIC (power management IC) Power supply to operate system and minimize electricity consumption Source: Shinhan Investment Corp. Note: IC stands for integrated circuit End-user demand and end users TV Monitor Notebook Tablet Smartphone Smartwatch Key clients COG ㅇ ㅇ Apple, LG Electronics COF ㅇ ㅇ ㅇ LG Electronics T-Con ㅇ ㅇ ㅇ LG Electronics PMIC ㅇ ㅇ ㅇ LG Electronics Touch DDI, single-chip mobile ㅇ ㅇ Apple (smartwatch), LG Electronics (smartphone) Note: Touch DDI and single-chip mobile earnings reflected in COG sales Sales by product (bn KRW) COG (LHS) COF (LHS) T-Con (LHS) PMIC (LHS) Others (LHS) OPM (RHS) F 217F 218F Sales breakdown by usage (%) F 15 16F 15 16F 15 16F 15 16F Handset Tablet Notebook Monitor TV 4

5 Balance Sheet Year to Dec. (W bn) F 217F 218F Assets Total Current Assets Cash and Cash Equivalents Accounts Receivables Inventories Non-Current Assets Tangible Assets Intangible Assets Investment Assets Other Financial Institutions Assets..... Liabilities Current Liabilities ST Borrowings..... Account Payables Current Portion of LT Debt..... Non-Current Liabilities Bonds..... LT Borrowings(incl. LT Fin. Liab.)..... Other Financial Institutions Liab Shareholders' Equity Capital Stock Capital Surplus Other Reserves (6.5).... Accu. Other Comp. Income Retained Earnings Owners of Parent Equity Non-Controlling Interests Equity..... *Total Debt..... *Net Debts(Cash) (214.8) (229.6) (229.2) (253.9) (288.3) Profit and Loss Year to Dec. (W bn) F 217F 218F Sales Growth (%) (4.7) COGS Gross Profit Gross margin (%) SG&A Operating Income Growth (%) (17.2) Operating margin (%) Other Net Non-Operating Profits Financial Income(Expenses) Net Other Non-Operating Profits (.2) Net Gains in Asso., Subs., and JVs..... Pre-tax Profit from Cont. Op Income Taxes Profit from Continuing Op Profit from Discontinued Op. (.2).... Net Profit Growth (%) (5.1) Net Profit margin (%) Net Profit of Parent Net Profit to Non-Controlling..... Total Comprehensive Income Total Comp. Income of Parent Total Comp. Income to Non-Cont EBITDA Growth (%) (21.3) EBITDA Margin (%) Note: Operating profit is based on 212 K-IFRS (gross profit - SG&A costs) Cash Flow Year to Dec. (W bn) F 217F 218F Operating Cash Flow Net Profit Depreciation Amortization Losses(Gains) on F/X Translation.1.1 (.1).. Losses(Gains) on Disp. of Assets (.2).... Losses(Gains) in Asso.., Subs.,JVs..... Chg. in A/L from Op. Activities.8 (2.) (36.8) (12.7) (8.) (Payments of Income Taxes) (3.3) (11.9) (13.6) (7.6) (7.8) Others Investing Cash Flow 43.6 (8.1) 1. (1.6) (.6) Incr. in Tangible Assets(CAPEX) (1.6) (2.1) (2.9) (1.) (.3) Decr. in Tangible Assets..... Decr.(Incr.) in Intangible Assets (3.3) (9.5) (.3).. Decr.(Incr.) in Investment Assets (1.8) (.6) (.3) Others (.7) (.). Free Cash Flow Financing Cash Flow (7.7) 3.1 (16.3) (14.6) (15.5) Incr.(Decr.) in Borrowing..... Decr.(Incr.) of Treasury Stock Dividend (9.5) (9.6) (16.3) (14.6) (15.5) Others 1.8 (5.3)... Other Cash Flows... (.). Change of Consolidated Scope..... Difference by Chg. in F/X Rates..1 (.).. Incr.(Decr.) in Cash (.4) Beginning Cash Ending Cash Key Ratios Year to Dec F 217F 218F EPS_C (won) 1,979 2,979 2,826 2,977 3,35 EPS_P (won) 1,979 2,979 2,826 2,977 3,35 BPS_C (won) 18,371 21,371 22,265 24,292 26,592 BPS_P (won) 18,371 21,371 22,265 24,292 26,592 DPS (won) 6 1, ,5 PER_C (x) PER_P (x) PBR_C (x) PBR_P (x) EV/EBITDA (x) Payout Ratio (%) Dividend Yield (%) Profitability EBITDA Margin (%) OP Margin (%) NP Margin (%) ROA (%) ROE (%) ROIC (%) Stability D/E Ratio (%) Net Debt to Equity (%) (71.9) (66.1) (63.3) (64.3) (66.7) Cash Ratio (%) Interest Coverage (x) N/A N/A N/A N/A N/A Activity (%) Working Capital Turnover (t) Inventory Turnover (d) Receivable Turnover (d)

6 (1832 KS) (won) 5, 4, 3, 2, 1, Target Price & Recommendation History BUY Trading BUY HOLD Date Recommendation Target Price (won) BUY 34, BUY 44, BUY 43, BUY 38, BUY 41, BUY 45, BUY 4, BUY 35, BUY 33, BUY 36, Share Price Performance (won) (Indexed,Jan-16=1) 4, 11 KOSDAQ Index = 1 35, 1 3, 9 1/15 1/16 Target Price (LHS) Price (LHS) Recommendation (RHS) REDUCE 25, 8 1/16 5/16 9/16 1/17 Price (LHS) Relative Performance to KOSDAQ (RHS) Compliance Notice Analyst Certification: The following analysts hereby certify the information and material presented in this report are accurate expressions of their views, and that they have not received wrongful pressure to express such views: YoungSik Yoon, JoonDoo Ha. As of the date of this report's publication, Shinhan Investment Corp.'s shareholdings in the company mentioned in this report () do not exceed 1% of outstanding shares of the company. As of this date, Shinhan Investment Corp. has not participated as the lead underwriter or advisor in issuance of the securities of the company during the past 1 year. As of this date, the covering analyst does not possess any financial interest in the securities or debt instruments convertible into such shares of the company, which is required to be disclosed by law, and has not and will not receive any compensation of any kind whatsoever in exchange for expressing specific recommendations. All opinions and estimates regarding the company and its securities are accurate representations of the covering analyst's judgments as of this date, and may differ from actual results. This report is intended to provide information to assist investment decisions only and should not be used or considered an offer or the solicitation of an offer to sell or to buy any securities. Stock selection and final investment decisions should be made at the client's own discretion. This report is distributed to our clients only, and any unauthorized use, duplication, or redistribution of this report is strictly prohibited. Distribution United States: This report is distributed in the U.S. by Shinhan Investment America, Inc., a member of FINRA/SIPC, and is only intended for major U.S. institutional investors as defined in Rule 15a-6(a)(2) under the U.S. Securities Exchange Act of All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Shinhan Investment Corp. or its affiliates. Pursuant to Rule 15a-6(a)(3), any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Shinhan Investment America, Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. person absent registration or an applicable exemption from the registration requirement. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Shinhan or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Shinhan and its affiliates to any registration or licensing requirement within such jurisdiction. SHIC Rating Classifications (As of Jul. 25, 211) Stock BUY: Expected return of over +15% in the next 6 months Trading BUY: Expected return of % ~ +15% in the next 6 months HOLD: Expected return of -15% ~ % in the next 6 months REDUCE: Expected return of below -15% in the next 6 months Sector OVERWEIGHT: Prevalence of BUY rating for stocks in our sector coverage universe based on market cap NEUTRAL: Prevalence of HOLD rating for stocks in our sector coverage universe based on market cap UNDERWEIGHT: Prevalence of REDUCE rating for stocks in our sector coverage universe based on market cap SHIC Universe Rating Classification Ratio (as of Jan. 16, 217) BUY (BUY) 88.46% Trading BUY (HOLD) 4.81% HOLD (HOLD) 6.73% REDUCE (SELL) % 6