Company Note June 8, 2018 12M rating BUY (Maintain) OLED growth starts with Silicon Works 12M TP W56,000 Up/downside +38% from W56,000 2Q18 OP to surge 165% YoY to W8.4bn Despite disappointing 1Q18 results, we forecast 2Q18 earnings will exceed consensus, as: 1) delayed sales of mobile touch display driver IC (TDDI) are recognized, 2) OLED TV driver IC sales increase, and 3) unit price cuts ease. Furthermore, profitability should continue to improve through 2H18 on a growing sales weighting of higher-margin OLED products. Of note, the OLED TV timing controller (T-con) business that management decided to acquire on May 29 should generate sales from July and contribute to better earnings. Accordingly, 2H18 OP is forecast to surge 257% HoH to W41.3bn. To buy LGE s OLED TV T-con business for W48bn On May 29, Silicon Works announced it would acquire LG Electronics (LGE) s OLED TV T-con business for W48bn. And, sales from the division are scheduled to be reflected from July. LGE wholly supplies OLED TV T-cons to LG Display. Of note the sale price equates to 9x 2019 PE. Furthermore, Silicon Works will secure TV system on chip (SoC) technologies through the acquisition. This should open up possibilities of expanding the product portfolio, further enhancing the value of the deal. Maintain TP of W56,000 We maintain BUY with a TP of W56,000 as Silicon Works quickly transitions from small to midsize OLEDs to large OLEDs. Of note, our TP equates to 16x 12MF PE. Earnings momentum should ramp up in 2H18 on better sales of both small to midsize and large OLEDs. In fact, OLED-related products should account for 32% of 2H18 sales. If the next iphone equips Silicon Works products, sales growth and earnings should exceed our current outlook. We are bullish on the company as valuations should re-rate upwards on better earnings momentum and a growing OLED sales weighting in 2H18. Stock Data KOSPI (Jun 7, pt) 2,471 Stock price (Jun 7, KRW) 40,500 Market cap (USD mn) 616 Shares outstanding (mn) 16 52-Week high/low (KRW) 58,800/33,050 6M avg. daily turnover (USD mn) 5.6 Free float / Foreign ownership (%) 66.7/38.6 Major shareholders (%) LG Corp and 2 others 33.2 Templeton Asset Management, Ltd. and 3 others 5.4 Performance 1M 6M 12M Absolute (%) 11.4 (18.8) 22.5 Relative to KOSDAQ (%p) 7.7 (36.6) (10.7) Stock price trend 60,000 52,000 44,000 36,000 28,000 (KRW) 20,000 Jun-16 Jun-17 Jun-18 Source: WISEfn Yr to Sales OP NP EPS % chg EBITDA PE EV/EBITDA PB ROE DY Dec (KRW) (YoY) (x) (x) (x) (%) (%) 2016A 610 51 51 3,116 3.2 60 8.9 3.2 1.2 13.9 3.2 2017A 693 46 47 2,894 (7.1) 51 18.3 11.5 2.1 11.9 1.3 2018F 744 53 49 2,987 3.2 59 13.6 6.0 1.5 11.4 2.5 2019F 932 89 75 4,593 53.8 95 8.8 2.9 1.3 15.9 3.7 2020F 1,119 77 65 3,999 (12.9) 84 10.1 2.7 1.2 12.7 3.7 Jay Yoo jongwoo.yoo@truefriend.com Note: Net profit and EPS are based on figures attributed to controlling interest 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.
Figure 1. Quarterly OP 30 25 Operating profit 20 15 10 5 0 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 Source: Company data, Korea Investment & Securities Table 1. Earnings revisions (W bn, %, %p) 2Q18F 2018F Revised Previous Diff. Revised Previous Diff. Sales 175.2 181.1 (3.2) 743.6 779.6 (4.6) OP 8.4 13.6 (38.1) 52.9 64.8 (18.3) OPM 4.8 7.5 (2.7) 7.1 8.3 (1.2) Controlling-int. NP 7.6 11.1 (31.2) 48.6 52.8 (7.8) NPM 4.4 6.1 (1.8) 6.5 6.8 (0.2) Source: Korea Investment & Securities Table 2. Quarterly earnings estimates (W bn, %) 1Q18 2Q18F 3Q18F 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F 2016 2017 2018F 2019F Sales 162.2 175.2 193.7 212.6 195.0 219.0 255.4 262.8 610.0 692.8 743.6 932.3 Driver IC COG 39.1 41.7 42.2 44.2 36.9 44.0 44.1 43.2 163.9 181.1 167.3 168.2 Notebook 38.2 40.8 41.3 43.3 36.0 43.0 43.2 42.3 158.9 176.9 163.7 164.5 Monitor 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 5.0 4.1 3.6 3.7 Driver IC COF 69.7 73.4 72.1 84.7 77.3 77.2 94.2 99.1 229.6 275.3 299.9 347.7 Notebook 3.0 2.7 2.9 3.0 2.7 2.6 2.8 2.9 22.1 14.1 11.6 11.0 Monitor 1.9 2.0 2.0 2.0 2.0 2.1 2.1 2.0 11.1 9.5 7.8 8.1 LCD TV 40.9 38.6 40.0 45.9 39.7 38.5 38.2 42.0 173.6 172.6 165.4 158.4 AMOLED TV 23.9 30.1 27.2 33.9 32.9 34.1 51.1 52.2 22.7 79.1 115.1 170.2 T-con 10.6 8.5 15.8 17.5 17.8 17.8 22.6 22.6 71.5 43.5 52.3 80.8 PMIC 9.9 9.5 8.7 8.9 8.6 8.6 8.5 8.4 37.2 39.4 37.1 34.1 Mobile DDI 25.5 36.9 50.0 52.5 38.3 55.3 70.0 73.5 76.3 134.2 164.9 237.1 New products/others 5.5 5.2 4.9 4.7 16.1 16.1 16.1 16.1 31.7 19.3 20.3 64.4 Gross profit 37.0 43.4 50.0 56.3 44.2 54.2 64.8 68.3 130.4 152.4 186.8 231.6 GPM 22.8 24.8 25.8 26.5 22.7 24.7 25.4 26.0 21.4 22.0 25.1 24.8 OP 3.2 8.4 19.0 22.3 15.0 21.3 25.2 27.1 50.6 45.5 52.9 88.6 OPM 2.0 4.8 9.8 10.5 7.7 9.7 9.9 10.3 8.3 6.6 7.1 9.5 Controlling-int. NP 6.1 7.6 16.1 18.8 13.1 18.0 21.1 22.6 50.7 47.1 48.6 74.8 NPM 3.8 4.4 8.3 8.8 6.7 8.2 8.3 8.6 8.3 6.8 6.5 8.0 Source: Company data, Korea Investment & Securities 2
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 3
Balance sheet Income statement FY-ending Dec. 2016A 2017A 2018F 2019F 2020F Current assets 440 498 543 681 795 Cash & cash equivalent 263 75 89 112 112 Accounts & other receivables 112 141 152 190 228 Inventory 58 61 65 82 99 Non-current assets 45 47 49 57 66 Investment assets 4 5 5 6 8 Tangible assets 15 15 15 15 15 Intangible assets 17 18 19 24 29 Total assets 486 544 592 738 861 Current liabilities 100 129 146 242 323 Accounts & other payables 88 121 130 163 196 ST debt & bond 0 0 0 0 0 Current portion of LT debt 0 0 0 0 0 Non-current liabilities 5 3 3 4 4 Debentures 0 0 0 0 0 LT debt & financial liabilities 0 0 0 0 0 Total liabilities 105 132 148 245 328 Controlling interest 381 412 444 493 533 Capital stock 8 8 8 8 8 Capital surplus 76 76 76 76 76 Other Reserves 0 0 0 0 0 Retained earnings 295 326 358 409 449 Minority interest 0 0 0 0 0 Shareholders' equity 381 412 444 493 533 FY-ending Dec. 2016A 2017A 2018F 2019F 2020F Sales 610 693 744 932 1,119 COGS 480 540 557 701 873 Gross profit 130 152 187 232 246 SG&A expense 80 107 134 143 169 Operating profit 51 46 53 89 77 Financial income 7 4 5 5 5 Interest income 3 4 5 5 5 Financial expense 0 0 0 0 0 Interest expense 0 0 0 0 0 Other non-operating profit (0) (1) 0 0 (1) Gains (Losses) in associates, subsidiaries and JV 0 0 0 0 0 Earnings before tax 58 48 58 93 81 Income taxes 7 1 9 19 16 Net profit 51 47 49 75 65 Net profit of controlling interest 51 47 49 75 65 Other comprehensive profit (1) (1) (1) (1) (1) Total comprehensive profit 49 46 48 74 64 Total comprehensive profit of controlling interest 49 46 48 74 64 EBITDA 60 51 59 95 84 Cash flow Key financial data FY-ending Dec. 2016A 2017A 2018F 2019F 2020F C/F from operating 49 33 54 115 93 Net profit 51 47 49 75 65 Depreciation 3 3 3 3 3 Amortization 7 3 3 3 4 Net incr. in W/C (17) (15) (1) 33 20 Others 5 (5) 0 1 1 C/F from investing 1 (206) (23) (68) (68) CAPEX (3) (3) (3) (3) (3) Decr. in fixed assets 0 0 0 0 0 Incr. in investment 5 (200) (1) (2) (2) Net incr. in intangible assets (0) (2) (4) (8) (9) Others (1) (1) (15) (55) (54) C/F from financing (16) (15) (16) (24) (24) Incr. in equity 0 0 0 0 0 Incr. in debts 0 0 0 0 0 Dividends (16) (15) (11) (16) (24) Others 0 0 (5) (8) 0 C/F from others (0) (0) 0 0 0 Increase in cash 33 (188) 15 23 0 FY-ending Dec. 2016A 2017A 2018F 2019F 2020F per share data (KRW) EPS 3,116 2,894 2,987 4,593 3,999 BPS 23,406 25,345 27,279 30,317 32,762 DPS 900 700 1,000 1,500 1,500 Growth (%) Sales growth 13.8 13.6 7.3 25.4 20.0 OP growth (9.4) (10.1) 16.2 67.4 (12.8) NP growth 4.6 (7.1) 3.2 53.8 (12.9) EPS growth 3.2 (7.1) 3.2 53.8 (12.9) EBITDA growth (14.3) (15.4) 15.0 62.1 (11.2) Profitability (%) OP margin 8.3 6.6 7.1 9.5 6.9 NP margin 8.3 6.8 6.5 8.0 5.8 EBITDA margin 9.9 7.4 7.9 10.2 7.5 ROA 10.7 9.1 8.6 11.2 8.1 ROE 13.9 11.9 11.4 15.9 12.7 Dividend yield 3.2 1.3 2.5 3.7 3.7 Dividend payout ratio 28.9 24.2 33.5 32.7 37.5 Stability Net debt (263) (275) (304) (381) (435) Int.-bearing debt/equity (%) 0.0 0.0 0.0 0.0 0.0 Valuation (X) PE 8.9 18.3 13.6 8.8 10.1 PB 1.2 2.1 1.5 1.3 1.2 EV/EBITDA 3.2 11.5 6.0 2.9 2.7 Note: Based on K-IFRS (consolidated) 4
Changes to recommendation and price target Company (Code) Date Recommendation Price target % vs. avg. price % vs. high (low) Silicon Works(108320) 26-05-16 BUY W45,000-31.3-16.8 15-11-16 Hold - - - 12-06-17 BUY W50,000-24.1-5.0 19-09-17 BUY W56,000 - - 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 5
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 Mar 31, 2018) BUY Hold Underweight (Sell) 80.3% 19.2% 0.5% 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 June 8, 2018. 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 June 8, 2018. Prepared by: Jay Yoo 6
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