(117 KS) LED earnings to improve in 4Q14 Technology Results Comment (Maintain) Buy Target Price (12M, W) 114, Share Price (1/27/14, W) 86, Expected Return 33% OP (13P, Wbn) 136 Consensus OP (13F, Wbn) 142 EPS Growth (13P, %) - Market EPS Growth (13F, %) 4.2 P/E (13P, x) 18.6 Market P/E (13F, x) 12.1 KOSPI 1,91.34 Market Cap (Wbn) 1,735 Shares Outstanding (mn) 2 Free Float (%) 52.1 Foreign Ownership (%) 3.5 Beta (12M).84 52-Week Low 7, 52-Week High 15,5 (%) 1M 6M 12M Absolute 4.4-6.8 11.3 Relative 9.4-6.8 13.4 15 KOSPI 14 13 12 11 1 9 8 1.13 5.13 9.13 1.14 4Q13 review: OP of W28.9bn (+358.6% YoY, -48.2% QoQ) s 4Q13 revenue and operating profit came in at W1.54tr (+5.1% YoY, +3.3% QoQ) and W28.9bn (+358.6% YoY, -48.2% QoQ), respectively, broadly in line with our estimates (W1.56tr and W28.8bn, respectively). Overall, the company s 4Q earnings showed a mix of positives and negatives. 1) Camera module sales hit a record high of W75.1bn (+13.8% QoQ) in 4Q13, aided by the positive effects of the launch of a new model by a major US smartphone maker. Also, camera module ASP was boosted by LG Electronics (LGE) adoption of a 13- megapixel camera in its G2 smartphone, as well as the US smartphone maker s use of optical image stabilizer (OIS) technology. OP margin remained above 4%. 2) The TV parts business, including tuners and power modules, was negatively affected by the slump in downstream industries. We do not expect any sharp improvement in the foreseeable future. Touchscreen sales contracted to less than W1bn for the first time in five quarters due to weaker-than-expected smartphone sales at LGE. Growth of the automotive components business is also slowing amid a lack of a clear sense of direction. 3) More concerning is the LED business, where revenue fell to W244.2bn in 4Q13 after rising to W315.7bn in 2Q13. The increasing mix of lighting revenue (28%) is encouraging, but margins remain tepid, as the TV market slump has put continued pressure on the prices of LED backlight units (BLU). The company recorded a pretax loss of W4bn in 4Q13, hurt by W22.4bn in interest expenses and W8.8bn in idle asset depreciation. For 1Q14, we forecast revenue of W1.44tr and operating profit of W22.7bn. LED earnings to start improving in 4Q14 on declining depreciation expenses The key to s earnings growth lies in the pace of the recovery of its LED business. The problem is the company s outsized LED depreciation costs. In 21, LG Innotek made LED investments of W1.27tr, which are equivalent to roughly W23bn in annual depreciation expenses. We expect LED depreciation expenses to begin declining in 4Q14, and then fall more meaningfully in 215. Once the LED business gets back on track (213 LED operating loss estimated at W145bn), the company s overall operating profit should recover to around W3bn in 215. Maintain Buy and TP of W114, We retain our Buy call on with a target price of W114,. We arrived at our target price by applying a P/B of 1.84x (vs. the four-year average of 1.86x) to our 214F BPS of W61,959 (vs. W64,74 previously). Daewoo Securities Co., Ltd. [Telecom equipment/electronic components] Wonjae Park +822-768-3372 william.park@dwsec.com FY (Dec.) 12/1 12/11 12/12 12/13P 12/14F 12/15F Revenue (Wbn) 4,13 4,553 5,316 6,212 6,359 6,869 OP (Wbn) 156-45 77 136 192 39 OP margin (%) 3.8-1. 1.4 2.2 3. 4.5 NP (Wbn) 196-145 -25 16 135 233 EPS (W) 1,24-7,211-1,24 771 6,68 11,565 ROE (%) 16.5-1.4-1.9 1.2 9.9 15.2 P/E (x) 13.1 - - 18.6 12.9 7.4 P/B (x) 2. 1.1 1.5 1.5 1.4 1.2 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the t U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Key charts Figure 1. Share price trend Figure 2. Quarterly earnings (Wbn) (%) Camera module revenue hit a quarterly high 2,1 LED OP margin reamained negative Revenue (L) 1 Profitability, while still low, is improving OP margin (R) 1,4 5 7 1Q5 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 1Q12 1Q13 1Q14F 1Q15F -5 Figure 3. 12-month forward P/B band chart (W) 2, 3.x 2.5x 15, 2.x 1, 5, 1.5x 1.x 28-12 12/8 21-12 12/1 212-12 12/12 214-12 12/14 2
Figure 4. Quarterly capex (Wbn) 6 4 2 1Q9 1Q1 1Q11 1Q12 1Q13 1Q14 Figure 5. Quarterly depreciation (Wbn) 16 12 8 4 1Q9 1Q1 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 3
Earnings results and forecasts Table 2. Quarterly and annual earnings 1Q Table 1. 4Q13P results 4Q12 3Q1 Q13 Actual 4Q1 Q13P KDB Daewoo Consensus (Wbn, %, %p) Growth Revenue 1626.3 1595.5 1544. 156.2 1561.5-5.1-3.2 OP 6.3 55.7 28.9 28.8 34.3 355.8-48.2 OP margin.4 3.5 1.9 1.8 2.2 1.5-1.6 Pretax profit -13.3 28.9-4. 13.4 12.8 RR TTR Net profit -3.6 27.7-12.6 12.8 11.8 RR TTR Source: WISEfn, Company data, estimates 2Q 213P 214F 3Q 4QP FY 1QF 2QF 3QF 4QF FY YoY YoY 4Q13P QoQ (Wbn, %, %p) QoQ Previous Diff. Tuner 65.5 59.3 61.7 56.6 243.1 58. 65.7 7.7 65.5 259.9-1. -8.3 53.6 5.7 PM 73.4 7.3 7.6 72. 286.3 64.1 75. 76.3 76. 291.3-18. 2. 74.6-3.5 CM 641.1 557.4 619.5 75.1 2,523.1 622. 573.6 698.2 794.6 2,688.4 3.7 13.8 725.2-2.8 LED 256.8 315.7 286.2 244.2 1,12.9 249.6 285.2 337.6 281. 1,153.4-11.8-14.7 213.1 14.6 Wireless telecom 38.8 44.3 45.2 44.5 172.8 45.8 52.1 53.6 52.8 24.3 2.3-1.5 39.7 12.1 Motor 18.4 22.1 22. 18.1 8.6 19.2 23.1 24.1 19.8 86.3-22.3-17.7 17.1 5.9 Automotive 68.9 67.3 63.9 67.8 267.9 7.2 71.8 74.4 78.9 295.3 -.7 6.1 64.9 4.5 Revenue Photomask 42.9 47.5 43.5 42.4 176.3 42.8 47.4 43.4 42.3 175.9 5.7-2.5 4.7 4.1 Lead frame 16.6 19.8 2.6 12.3 69.3 12.5 14.9 15.5 9.2 52.1-2.6-4.3 15.2-19.3 Tape substrate 5.5 48.4 47. 36.5 182.4 38.4 41.4 4.2 31.2 151.2-29.9-22.3 38.6-5.5 PCB 12.8 75.5 82.4 83.7 344.4 75.3 77.5 8.3 8.1 313.2-35.7 1.6 79.4 5.4 Package 41.1 57.3 72.5 65.2 236.1 54.9 61.3 77.1 69.1 262.4 195. -1.1 64.5 1.2 Touch window 134.2 139.1 162.4 92.4 528.1 91.6 123.6 115.4 94.9 425.5-24. -43.1 132.4-3.2 Other -.1-2.9-1.6 3.2-1.4 -.4 -.4.2.7.1 - - 1.1 - Total 1,55.9 1,521.1 1,595.9 1,544. 6,211.9 1,444. 1,512.2 1,77. 1,696.2 6,359.3-5.1-3.3 1,56.2-1. Operating profit 15.8 35.7 55.7 28.9 136.1 22.7 4.6 67.7 61.2 192.1 358.6-48.2 28.8.4 OP margin 1. 2.3 3.5 1.9 2.2 1.6 2.7 4. 3.6 3. 1.5-1.6 1.8. Pretax profit -9.8 6.8 28.9-4. 22. 11.8 29.6 56.6 48.5 146.5-7.2 TTR 13.4 TTR Net profit -6.5 6.9 27.7-12.6 15.5 1.8 27.3 52. 44.6 134.8-59. TTR 12.8 TTR Pretax margin -.6.4 1.8 -.3.4.8 2. 3.3 2.9 2.3.6-2.1.9-1.1 Net margin -.4.5 1.7 -.8.3.8 1.8 3. 2.6 2.1 1.1-2.6.8-1.6 Notes: TTR and RR stand for Turning To Red and Remaining in Red Table 3. 214-15 15 earnings forecast revisions 13P Previous 14F 15F 13P Revised 14F 15F 13P % chg. 14F 15F (Wbn, W, %, %p) Revenue 6,228 6,598 7,64 6,212 6,359 6,869 -.3-3.6-2.8 136 239 355 136 192 39.1-19.6-12.7 - Conservative LED Operating profit profitability estimates Pretax profit 39 165 287 22 146 259-44.1-11.3-9.5 Net profit 41 152 258 16 135 233-62. -11.3-9.5 EPS (W) 2,31 7,536 12,783 771 6,68 11,565-62. -11.3-9.5 OP margin 2.2 3.6 5. 2.2 3. 4.5. -.6 -.5 Pretax margin.6 2.5 4.1.4 2.3 3.8 -.3 -.2 -.3 Net margin.7 2.3 3.7.3 2.1 3.4 -.4 -.2 -.3 Notes 4
(117 KS/Buy/TP: W114,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F Revenue 5,316 6,212 6,359 6,869 Current Assets 2,73 2,938 2,957 2,959 Cost of Sales 4,754 5,543 5,624 5,973 Cash and Cash Equivalents 353 1,23 1,51 883 Gross Profit 562 669 735 896 AR & Other Receivables 1,145 1,194 1,312 1,43 SG&A Expenses 485 532 543 587 Inventories 478 454 499 543 Operating Profit (Adj) 77 136 192 39 Other Current Assets 97 87 95 13 Operating Profit 77 136 192 39 Non-Current Assets 2,813 2,316 2,42 2,559 Non-Operating Profit -95-114 -46-5 Investments in Associates Net Financial Income -94-92 -54-5 Property, Plant and Equipment 2,375 1,866 1,924 2,59 Net Gain from Inv in Associates Intangible Assets 145 151 17 186 Pretax Profit -18 22 146 259 Total Assets 4,886 5,254 5,358 5,518 Income Tax 7 6 12 26 Current Liabilities 2,9 1,694 1,669 1,695 Profit from Continuing Operations -25 16 135 233 AP & Other Payables 1,118 1,61 1,166 1,27 Profit from Discontinued Operations Short-Term Financial Liabilities 67 423 273 173 Net Profit -25 16 135 233 Other Current Liabilities 221 21 23 252 Controlling Interests -25 16 135 233 Non-Current Liabilities 1,69 2,264 2,269 2,182 Non-Controlling Interests Long-Term Financial Liabilities 1,498 2,73 2,23 1,873 Total Comprehensive Profit -58 5 124 223 Other Non-Current Liabilities 111 191 246 39 Controlling Interests -58 5 124 223 Total Liabilities 3,618 3,958 3,938 3,877 Non-Controlling Interests Controlling Interests 1,268 1,296 1,42 1,641 EBITDA 549 555 518 579 Capital Stock 11 11 11 11 FCF (Free Cash Flow) 265 57 46 76 Capital Surplus 849 872 872 872 EBITDA Margin (%) 1.3 8.9 8.1 8.4 Retained Earnings 33 347 482 714 Operating Profit Margin (%) 1.4 2.2 3. 4.5 Non-Controlling Interests Net Profit Margin (%) -.5.3 2.1 3.4 Stockholders' Equity 1,268 1,296 1,42 1,641 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F Cash Flows from Op Activities 46 1,36 488 535 P/E (x) - 18.6 12.9 7.4 Net Profit -18 16 135 233 P/CF (x) 3.7 3.9 3.8 3.4 Non-Cash Income and Expense 66 778 384 346 P/B (x) 1.5 1.5 1.4 1.2 Depreciation 444 385 286 225 EV/EBITDA (x) 6.3 5.4 5.7 5. Amortization 27 34 4 45 EPS (W) -1,24 771 6,68 11,565 Others 135 359 58 76 CFPS (W) 22,137 21,553 22,854 24,935 Chg in Working Capital -13 271-19 -19 BPS (W) 55,71 56,785 61,959 72,185 Chg in AR & Other Receivables -315 84-118 -118 DPS (W) 5 1 Chg in Inventories -14 31-45 -45 Payout ratio (%)...8.9 Chg in AP & Other Payables 316 57 15 15 Dividend Yield (%)...1.1 Income Tax Paid -26-29 -12-26 Revenue Growth (%) 16.8 16.9 2.4 8. Cash Flows from Inv Activities -366-462 -378-396 EBITDA Growth (%) 46.8 1.1-6.7 11.8 Chg in PP&E -327-416 -344-359 Operating Profit Growth (%) - 76.6 41.2 6.9 Chg in Intangible Assets -38-6 -6-6 EPS Growth (%) - - 766.4 73.1 Chg in Financial Assets 19 1 Accounts Receivable Turnover (x) 5.5 5.4 5.2 5.1 Others -2 13 26 23 Inventory Turnover (x) 12.5 13.3 13.4 13.2 Cash Flows from Fin Activities -175 276-262 -37 Accounts Payable Turnover (x) 8.6 8.6 8.6 8.5 Chg in Financial Liabilities -79 61-2 -25 ROA (%) -.5.3 2.5 4.3 Chg in Equity 297 ROE (%) -1.9 1.2 9.9 15.2 Dividends Paid -1 ROIC (%) 2.6 7.1 6.7 1. Others -96-82 -62-56 Liability to Equity Ratio (%) 285.3 35.4 277.4 236.2 Increase (Decrease) in Cash -83 851-152 -168 Current Ratio (%) 13.2 173.4 177.1 174.6 Beginning Balance 436 353 1,23 1,51 Net Debt to Equity Ratio (%) 142.6 99.7 87.6 7.8 Ending Balance 353 1,23 1,51 883 Interest Coverage Ratio (x).7 1.3 2.4 4.2 5
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (117) 7/24/213 Buy 114, 4/25/213 Buy 17, 3/31/213 Buy 97,7 2/1/213 Buy 93, 1/26/212 Buy 13, 1/19/212 Buy 18, 1/19/212 Buy 13, 7/27/212 Buy 18, 5/1/212 Buy 118, 3/15/212 Buy 13, 1/3/212 Buy 111, 11/1/211 Trading Buy 89, (W) 14, 12, 1, 8, 6, 4, 2, Jan 12 Jan 13 Jan 14 Stock Ratings Industry Ratings Buy : Relative performance of 2% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 1% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -1% and 1% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -1% Ratings and Target Price History (Share price ( ), Target price ( ), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to 6
future performance. Future returns are not guaranteed, and a loss of original capital may occur. Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (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. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo 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 Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 15-716 Korea Two International Finance Centre Suites 25-212 8 Finance Street, Central Hong Kong 32 Park Avenue, 31st Fl. New York, NY 122 United States Tel: 82-2-768-326 Tel: 85-2-2514-134 Tel: 1-212-47-1 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Representative Office Tower 42, Level 41 25 Old Broad Street London EC2N 1HQ United Kingdom 6 Battery Road, #11-1 Singapore, 4999 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 1-5 Japan Tel: 44-2-7982-816 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office Suite 262, Twin Towers (East) B-12 Jianguomenwai Avenue Chaoyang District, Beijing 122 China Unit 13, 28 th Floor, Hang Seng Bank Tower 1 Lujiazui Ring Road Pudong New Area, Shanghai 212 China Centec Tower 72-74 Nguyen Thi Minh Khai Street Ward 6, District 3, Ho Chi Minh City Vietnam Tel: 86-1-6567-9699 Tel: 86-21-513-6392 Tel: 84-8-391-6 7