Earnings Review August 14, 2017 12M rating BUY (Maintain) 12M TP W50,000 from W50,000 Up/downside +44% Stock Data KOSPI (Aug 11, pt) 2,320 Stock price (Aug 11, KRW) 34,700 Market cap (USD mn) 494 Shares outstanding (mn) 16 52-Week high/low (KRW) 39,400/25,000 6M avg. daily turnover (USD mn) 3.5 Free float / Foreign ownership (%) 66.7/37.6 Major shareholders (%) LG Corp and 2 others 33.2 Templeton Asset Management, Ltd. and 3 others 5.4 Valuation 2016A 2017F 2018F PE (x) 8.9 16.3 9.6 PB (x) 1.2 1.4 1.3 ROE (%) 13.9 8.9 13.9 DY (%) 3.2 2.6 2.6 EV/EBITDA (x) 3.2 5.8 3.1 EPS (KRW) 3,116 2,134 3,605 BPS (KRW) 23,406 24,559 27,184 Performance 1M 6M 12M Absolute (%) (0.1) 16.1 10.3 Relative to KOSPI (%p) 3.0 4.3 (2.9) 12MF PE trend 16 14 12 10 8 6 4 2 (X) 12MF PER (LHS) price (RHS) 0 Sep-14 Sep-15 Sep-16 Source: WISEfn consensus (KRW) 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Turnaround underway Above In line Below What s new: OPM up slightly despite higher R&D personnel costs 2Q17 sales edged down to W154.2bn, down 3% QoQ, while OP rebound sharply to W6.5bn, up 20% QoQ. We attribute the earnings growth to a higher sales weighting of high-margin products (ipad and OLED TV panels), despite the top-line erosion. R&D hirings and a poor LCD panel sales mix have slowed margin growth. However, earnings began improving on a better product mix in 2Q17, and this trend should continue into 2018. Pros: Mobile DDI sales for flexible OLED panels from 2H17 Sales of mobile display driver IC (DDI) for smartphones reached W24.6bn in 2Q17, down 33% QoQ on lower volume for LG Electronics flagship model due to seasonal factors, but still up a robust 32% YoY. In 2H17, sales of mobile DDI for flexible OLED panels should begin, which should fuel top-line growth. As LG Display (LGD) s first 6G flexible OLED panel line (E5 line) begins operations, sales should increase at Silicon Works. Of note, LGD plans to add 15K capacity to the E6 line in 2018 and another 30K in 2019. And, this should contribute significantly to lifting flexible OLED panel sales at Silicon Works. Cons: R&D costs continue to increase 2Q17 R&D costs reached W16.8bn, up 6% QoQ. As the company continues to hire more R&D personnel, costs are growing steadily despite the sales deterioration. In fact, the R&D cost-to-sales ratio increased 0.9%p QoQ, or 2.2%p YoY, due to the sales contraction. But, we believe this trend will ease from 2H17. Sales should grow on seasonal factors, and R&D hirings should slow from yearend. As such, we forecast OPM will climb to 8.1% in 2H17 and 9.5% in 2018. Conclusion: Maintain TP of W50,000 On July 25, LGD announced a major OLED capex plan, including investments in small/mid-size flexible OLED production and large 8.5G and 10.5G lines. As such, the competitiveness of mobile-bound products should grow, while there is still more growth potential for Apple-bound shipments. Accordingly, we maintain BUY as Silicon Works should be the biggest beneficiary of LGD s OLED capex. Of note, our TP equates to 15x 2018 PE. (W bn, %, %p) Jay Yoo 822-3276-6178 jongwoo.yoo@truefriend.com Junghwan Kim 822-3276-6820 junghwan.kim@truefriend.com 2Q17 Change 0000F KIS est. Actual Diff. Consensus QoQ YoY KIS Consensus Sales 148 154 4.1 152 (2.6) 2.2 649 643 OP 7 7 (11.5) 7 19.9 (40.9) 40 34 OP margin 5.0 4.2 (0.7) 4.4 0.8 (3.1) 6.2 5.3 EBT 9 6 (29.1) 8 (8.3) (57.7) 45 39 NP 6 5 (20.3) 6 (13.9) (57.6) 35 33 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 CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS AT THE END OF THIS REPORT.
Table 1. Earnings revisions (W bn, %, %p) 2Q17 2017F Revised Previous Diff. Revised Previous Diff. Sales 154.2 148.2 4.1 668.7 648.7 3.1 OP 6.5 7.4 (11.5) 40.7 40.3 1.0 OPM 4.2 5.0 (0.7) 6.1 6.2 (0.1) Controlling int. NP 4.7 6.0 (29.1) 34.7 34.9 (0.5) NPM 3.1 4.0 (0.9) 5.2 5.4 (0.2) Source: Korea Investment & Securities Table 2. Quarterly earnings estimates (W bn, %) 1Q17 2Q17 3Q17F 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F 2015 2016 2017F 2018F Sales 158.3 154.2 169.5 186.7 189.9 180.1 190.5 215.4 535.8 610.0 668.7 775.9 Driver IC COG 41.0 44.1 47.1 49.8 41.6 43.5 44.1 43.7 170.4 163.9 182.0 173.0 Notebook 39.9 43.0 46.0 48.7 40.5 42.5 43.0 42.7 167.6 158.9 177.6 168.7 Monitor 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.0 2.8 5.0 4.4 4.2 Driver IC COF 55.0 59.9 75.0 82.2 75.2 76.4 87.9 100.2 216.1 229.6 272.1 339.8 Notebook 3.9 3.3 3.6 3.9 3.4 3.0 3.2 3.3 21.0 22.1 14.6 12.9 Monitor 2.5 2.5 2.5 2.5 2.4 2.3 2.4 2.1 7.7 11.1 10.0 9.3 TV 33.1 33.9 37.9 35.9 34.1 33.5 33.8 33.5 171.9 173.6 140.9 134.9 AMOLED TV 15.5 20.2 31.0 39.9 35.4 37.5 48.5 61.3 15.6 22.7 106.6 182.8 T-con 12.2 10.5 12.1 11.9 18.8 18.7 21.0 23.3 67.3 71.5 46.7 81.8 PMIC 7.6 9.5 9.2 9.1 8.5 8.1 8.0 7.6 33.6 37.2 35.4 32.2 New products/others 42.0 30.8 26.1 33.8 45.8 33.4 29.5 40.5 53.9 107.9 132.7 149.2 Gross profit 28.0 30.6 40.2 44.6 45.0 44.0 50.1 56.9 112.3 130.4 143.4 196.0 GP margin (%) 17.7 19.8 23.7 23.9 23.7 24.4 26.3 26.4 21.0 21.4 21.4 25.3 Operating profit 5.4 6.5 13.0 15.7 14.6 15.2 19.6 24.6 55.8 50.6 40.7 74.0 OP margin (%) 3.4 4.2 7.7 8.4 7.7 8.4 10.3 11.4 10.4 8.3 6.1 9.5 Controlling int. NP 5.5 4.7 12.2 11.3 13.1 10.6 17.7 17.2 48.5 50.7 33.8 58.6 NP margin (%) 3.5 3.1 7.2 6.1 6.9 5.9 9.3 8.0 9.1 8.3 5.1 7.6 Source: Company data, Korea Investment & Securities Company overview & Glossary Silicon Works (Silicon) was established in Nov 1999. Silicon, as a fables entity, operates business to design and sell components adopted in display panels. Its main products are driver IC, T-con, PMIC, and etc. Notably, Silicon supplies components for Apple products (ipad and Macbook series) via LG Display. Silicon s major customer is LG Display. Silicon also started to ship its components to Samsung Display from 2011. Driver IC : Integrated circuit to change digital video data and control signal, delivered from T-con, to analog signals T-con (timing controller) : Controller to process digital video data to fit the characteristics of panel and make control signals PMIC (power management IC) : Integrated circuit to make appropriate voltage and control signals for Driver IC and T-con 2
Balance sheet FY-ending Dec. (W bn) 2015A 2016A 2017F 2018F 2019F Current assets 413 440 469 528 590 Cash & cash equivalent 229 263 274 303 330 Accounts & other receivables 113 112 122 142 163 Inventory 60 58 64 74 85 Non-current assets 50 45 49 54 60 Investment assets 6 4 4 5 5 Tangible assets 15 15 15 16 16 Intangible assets 23 17 19 22 25 Total assets 463 486 518 583 650 Current liabilities 110 100 113 134 143 Accounts & other payables 100 88 96 111 128 ST debt & bond 0 0 0 0 0 Current portion of LT debt 0 0 0 0 0 Non-current liabilities 6 5 6 6 7 Debentures 0 0 0 0 0 LT debt & financial liabilities 0 0 0 0 0 Total liabilities 115 105 118 141 150 Controlling interest 348 381 399 442 500 Capital stock 8 8 8 8 8 Capital surplus 76 76 76 76 76 Other Reserves 0 0 0 0 0 Retained earnings 261 295 315 359 418 Minority interest 0 0 0 0 0 Shareholders' equity 348 381 399 442 500 Income statement FY-ending Dec. (W bn) 2015A 2016A 2017F 2018F 2019F Sales 536 610 669 776 892 COGS 423 480 525 580 702 Gross profit 113 130 143 196 191 SG&A expense 57 80 103 122 98 Operating profit 56 51 41 74 93 Financial income 4 7 4 0 0 Interest income 4 3 4 0 0 Financial expense 0 0 0 0 0 Interest expense 0 0 0 0 0 Other non-operating profit 0 (0) (1) 0 (0) Gains (Losses) in associates, subsidiaries and JV 0 0 0 0 0 Earnings before tax 60 58 44 74 93 Income taxes 12 7 9 15 19 Net profit 48 51 35 59 74 Net profit of controlling interest 48 51 35 59 74 Other comprehensive profit (1) (1) (1) (1) (1) Total comprehensive profit 47 49 33 57 72 Total comprehensive profit of controlling interest 47 49 33 57 72 EBITDA 70 60 50 84 104 Cash flow FY-ending Dec. (W bn) 2015A 2016A 2017F 2018F 2019F C/F from operating 45 49 39 59 59 Net profit 48 51 35 59 74 Depreciation 3 3 3 3 3 Amortization 11 7 6 7 9 Net incr. in W/C (20) (17) (6) (11) (27) Others 3 5 1 1 0 C/F from investing (8) 1 (13) (16) (17) CAPEX (2) (3) (3) (3) (3) Decr. in fixed assets 0 0 0 0 0 Incr. in investment 32 5 (2) (2) (2) Net incr. in intangible assets (9) (0) (8) (10) (12) Others (29) (1) 0 (1) 0 C/F from financing 3 (16) (15) (15) (15) Incr. in equity 15 0 0 0 0 Incr. in debts 0 0 0 0 0 Dividends (10) (16) (15) (15) (15) Others (2) 0 0 0 0 C/F from others 0 (0) 0 0 0 Increase in cash 40 33 11 28 28 Key financial data FY-ending Dec. 2015A 2016A 2017F 2018F 2019F per share data (KRW) EPS 3,018 3,116 2,134 3,605 4,534 BPS 21,371 23,406 24,559 27,184 30,737 DPS 1,000 900 900 900 900 Growth (%) Sales growth 37.1 13.8 9.6 16.0 15.0 OP growth 56.6 (9.4) (19.7) 82.0 25.8 NP growth 50.6 4.6 (31.5) 68.9 25.8 EPS growth 48.5 3.2 (31.5) 68.9 25.8 EBITDA growth 71.8 (14.3) (17.4) 69.0 24.0 Profitability (%) OP margin 10.4 8.3 6.1 9.5 10.4 NP margin 9.0 8.3 5.2 7.6 8.3 EBITDA margin 13.1 9.9 7.4 10.8 11.7 ROA 11.5 10.7 6.9 10.7 12.0 ROE 15.0 13.9 8.9 13.9 15.7 Dividend yield 2.6 3.2 2.6 2.6 2.6 Dividend payout ratio 33.6 28.9 42.2 25.0 19.9 Stability Net debt (W bn) (230) (263) (274) (303) (330) Int.-bearing debt/equity (%) 0.0 0.0 0.0 0.0 0.0 Valuation (X) PE 12.8 8.9 16.3 9.6 7.7 PB 1.8 1.2 1.4 1.3 1.1 EV/EBITDA 5.7 3.2 5.8 3.1 2.3 Note: Based on K-IFRS (consolidated) 3
Changes to recommendation and price target Company (Code) Date Recommendation Price target 11-09-15 BUY W50,000 02-16-16 BUY W38,000 03-31-16 BUY W45,000 11-15-16 Hold - 06-12-17 BUY W50,000 60,000 50,000 40,000 30,000 20,000 10,000 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 0 4
Guide to Korea Investment & Securities Co., Ltd. stock ratings based on 12-month forward share price performance relative to the market index BUY: Expected to outperform the market index by 15%p or more Hold: Expected to underperform or outperform the market index by less than 15%p Underweight: Expected to underperform the market index by 15%p or more Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. stock rating allocation (as of Jun 30, 2017) BUY Hold Underweight (Sell) 78.9% 20.3% 0.9% Note: % of companies under coverage with this rating Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important compliance notice As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of Silicon Works. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for Silicon Works in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Silicon Works in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from Silicon Works in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Silicon Works s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of shares of the companies mentioned in this report as of August 14, 2017. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies mentioned in this report as of August 14, 2017. Prepared by: Jay Yoo 5
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