(020150 KS) Removal of subsidiary risks brightens outlook Technology Results Comment (Upgrade) Buy Target Price (12M, W) 13,600 Share Price (3/4/16, W) 11,150 Expected Return 22% OP (15, Wbn) -28 Consensus OP (15F, Wbn) -23 EPS Growth (15, %) - Market EPS Growth (15F, %) 20.0 P/E (15, x) - Market P/E (15F, x) 11.5 KOSPI 1,955.63 Market Cap (Wbn) 437 Shares Outstanding (mn) 39 Free Float (%) 36.6 Foreign Ownership (%) 1.6 Beta (12M) 0.16 52-Week Low 5,810 52-Week High 13,800 (%) 1M 6M 12M Absolute -11.5 85.8 23.5 Relative -13.3 79.2 26.2 170 KOSPI 150 130 110 90 70 50 3.15 7.15 11.15 3.16 4Q15 parent revenue falls QoQ due to capacity conversion 4Q15 review: announced 4Q15 consolidated revenue of W127.22bn (+16.7% YoY, +3.9% QoQ) and an operating loss of W11.72bn (remaining in the red YoY and QoQ). On a non-consolidated basis, the company recorded revenue of W62.1bn (+34.4% YoY, -16.3% QoQ) and operating profit of W1.47bn (-17.4% YoY, -45.9% QoQ). The weak performance was attributable to 1) off-season effects and 2) a decline in sales volume at the loss-making ICS (PCB) unit following the partial conversion of capacity to I2B production. Revenue at the I2B unit increased on the back of stronger revenue from Chinese customers and the rapid growth of the medium/large-sized battery segment. We expect I2B revenue to continue to expand going forward, driven by additional customer acquisitions. The company should benefit from the growth of medium/largesized batteries, as it will likely take time for new competition to enter the market given the importance of safety. The LMO unit has seen steady revenue since 2Q15 and should maintain revenue at current levels in the coming quarters. Dissipation of subsidiary risks: 4Q15 net loss of W98.2bn (remaining in the red YoY and QoQ) was larger than the consensus, which we believe was due to 1) the full write-off (W98bn) of its stake in Iljin LED (which has filed for court receivership), and 2) losses from Origin & Co. s discontinuation of the Canadian SPA brand Joe Fresh. Iljin LED had been a major drag on the company, recording more than W20bn in annual operating losses. From 1Q16, consolidated earnings will only include healthy affiliates, such as Iljin Unisco and Samyoung Global. 1Q16 preview: For 1Q16, we forecast to post consolidated revenue of W91.5bn (-11.8% YoY, -28.1% QoQ) and return to operating profit of W3.1bn after 14 quarters of losses. Looking at the parent business, we expect earnings to remain largely flat QoQ due to the continuation of ICS capacity conversion. However, from 2Q16, earnings should meaningfully improve, as I2B capacity is likely to surpass ICS capacity for the first time. Upgrade to Buy on removal of subsidiary risks Upgrade to Buy: We upgrade our rating on to Buy and present a target price of W13,600, which equates to a P/E of 23x, the average multiple of competitor Furukawa during the past three years. One of the few material suppliers to benefit from rechargeable batteries: We believe has strong competitiveness in elecfoils for rechargeable batteries (I2B) and is well positioned to broaden its customer base and stage an earnings turnaround in 2016. Recently, worries have been raised about the rechargeable battery market, but we think the market will continue to grow, benefitting the company. While valuation does not look cheap, we believe additional growth could come from capacity conversions and new customer acquisitions. Daewoo Securities Co., Ltd. [Display/IT Materials] Young Ryu +822-768-4138 young.ryu@dwsec.com Chuljoong Kim +822-768-4162 chuljoong.kim@dwsec.com FY (Dec.) 12/12 12/13 12/14 12/15 12/16F 12/17F Revenue (Wbn) 393 350 415 458 408 428 OP (Wbn) -7-15 -29-28 18 27 OP margin (%) -1.8-4.3-7.0-6.1 4.4 6.3 NP (Wbn) -57-7 3-48 23 30 EPS (W) -1,459-187 86-1,235 590 758 ROE (%) -19.1-2.7 1.2-19.5 9.8 11.3 P/E (x) - - 82.9-18.9 14.7 P/B (x) 1.3 1.6 1.0 2.1 1.8 1.6 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.
Table 1. 4Q15 review 4Q14 3Q15 4Q15 Actual KDB Daewoo Consensus (Wbn, %, %p) Growth YoY QoQ Revenue 109.0 122.4 127.2 115.5 104.3 16.7 3.9 Operating profit -4.2-5.6-11.7-6.1-6.9 RR RR OP margin -3.8-4.6-9.2-5.3-6.6-5.4-4.6 Pretax profit -11.3-6.1-101.7-6.4 0.0 RR RR Net profit -10.9-7.3-98.2-7.5-4.3 RR RR Notes: All figures are based on consolidated K-IFRS Source: Company data, WISEfn, Table 2. Earnings forecast revisions Previous Revised % chg. 2015 2016F 2015 2016F 2015 2016F Revenue 446 521 458.3 407.6 2.8-21.8 Operating profit -23-5 -28.5 18.1 TTR TTB Pre-tax profit 47.4-2.1-47.9 26.1 TTR TTB Net profit 32-6 -48.2 23.1 TTR TTB EPS 806-147 -1,235 590 TTR TTB OP margin -5.2-1.0-6.2 4.4-1.1 5.4 Net margin 7.2-1.2-10.5 5.7-17.7 6.8 Notes: All figures are based on consolidated K-IFRS, net profit refers to net profit attributable to controlling interests (Wbn, W, %, %p) Notes - Reflects subsidiary impairment losses Table 3. Quarterly and annual earnings (Wbn, %) 1Q15 2Q15 3Q15 4Q15 1Q16F 2Q16F 3Q16F 4Q16F 2014 2015 2016F Revenue 103.7 104.9 122.4 127.2 91.5 103.5 107.0 105.6 415.0 458.3 407.6 Elecfoils for PCB (ICS) 36.8 32.4 38.5 28.2 29.0 28.4 27.8 23.2 135.7 135.9 108.4 Elecfoils for LIB (I2B) 21.8 23.1 28.5 29.7 30.3 40.2 41.4 43.1 86.3 103.1 154.9 Elecfoils for FPCB (IHT) 1.3 1.7 4.0 1.3 1.4 1.5 1.5 1.3 5.4 8.3 5.7 Other 1.0 3.2 3.2 2.9 3.2 3.3 3.2 3.3 9.3 10.4 13.0 Consolidated subsidiaries 42.8 44.5 48.2 65.1 27.7 30.1 33.1 34.7 178.3 200.6 125.6 % of revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Elecfoils for PCB (ICS) 35.5 30.9 31.4 22.1 31.7 27.4 26.0 22.0 32.7 29.7 26.6 Elecfoils for LIB (I2B) 21.0 22.0 23.3 23.3 33.1 38.8 38.7 40.8 20.8 22.5 38.0 Elecfoils for FPCB (IHT) 1.2 1.7 3.3 1.0 1.5 1.4 1.4 1.2 1.3 1.8 1.4 Other 1.0 3.0 2.6 2.3 3.5 3.2 3.0 3.1 2.2 2.3 3.2 Consolidated subsidiaries 41.3 42.4 39.4 51.2 30.2 29.1 30.9 32.9 43.0 43.8 30.8 Operating profit -4.1-7.1-5.6-11.7 3.1 5.0 5.2 4.8-28.0-28.5 18.1 1.5 0.6 2.7 1.5 2.0 3.8 3.9 3.1 0.4 6.3 12.7 Consolidated subsidiaries -5.6-7.7-8.3-13.2 1.1 1.2 1.3 1.7-28.4-34.8 5.4 Pretax profit 75.0-15.2-6.1-101.7 2.4 15.0 4.6 4.2 14.1-47.9 26.1 Net profit 57.9-13.0-5.7-88.4 1.9 14.1 3.7 3.5 3.4-48.2 23.1 OP margin -3.9-6.7-4.6-9.2 3.3 4.8 4.9 4.6-6.7-6.2 4.4 Pretax margin 72.3-14.5-4.9-79.9 2.6 14.5 4.3 3.9 3.4-10.5 6.4 Net margin 55.8-12.4-4.7-69.5 2.1 13.6 3.4 3.3 0.8-10.7 5.7 Growth (QoQ/YoY) Revenue -5.0 1.1 16.7 3.9-28.1 13.1 3.4-1.4 18.6 10.4-11.1 Operating profit RR RR RR RR TTB 62.4 5.0-8.0 RR RR TTB Pretax profit TTB TTR RR RR TTB 534.5-69.4-9.1 2,327.6 TTR TTB Net profit TTB TTR RR RR TTB 640.2-73.9-6.1 TTB TTR TTB Notes: All figures are based on consolidated K-IFRS, net profit refers to net profit attributable to controlling interests 2
(020150 KS/Buy/TP: W13,600) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 415 458 408 428 Current Assets 220 220 239 302 Cost of Sales 401 436 365 376 Cash and Cash Equivalents 22 21 73 128 Gross Profit 14 22 42 52 AR & Other Receivables 83 94 78 82 SG&A Expenses 43 50 24 25 Inventories 88 80 67 70 Operating Profit (Adj) -29-28 18 27 Other Current Assets 26 25 20 21 Operating Profit -29-28 18 27 Non-Current Assets 376 237 225 226 Non-Operating Profit 42-19 8 8 Investments in Associates 0 0 0 0 Net Financial Income -4-3 -2-2 Property, Plant and Equipment 267 142 142 142 Net Gain from Inv in Associates 0 8 0 0 Intangible Assets 26 24 22 20 Pretax Profit 14-47 26 35 Total Assets 596 457 464 528 Income Tax 15 15 3 5 Current Liabilities 265 186 174 207 Profit from Continuing Operations -2-62 23 30 AP & Other Payables 59 50 42 44 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 184 116 115 146 Net Profit -2-62 23 30 Other Current Liabilities 22 20 17 17 Controlling Interests 3-48 23 30 Non-Current Liabilities 39 39 35 36 Non-Controlling Interests -5-14 0 0 Long-Term Financial Liabilities 15 17 17 17 Total Comprehensive Profit -4-61 23 30 Other Non-Current Liabilities 24 22 18 19 Controlling Interests 2-30 17 22 Total Liabilities 303 225 209 243 Non-Controlling Interests -5-31 6 8 Controlling Interests 271 225 248 277 EBITDA 6 1 20 29 Capital Stock 20 20 20 20 FCF (Free Cash Flow) -78-111 43 28 Capital Surplus 193 193 193 193 EBITDA Margin (%) 1.4 0.2 5.0 6.7 Retained Earnings 54 6 29 59 Operating Profit Margin (%) -6.9-6.0 4.4 6.3 Non-Controlling Interests 21 7 7 7 Net Profit Margin (%) 0.8-10.6 5.7 6.9 Stockholders' Equity 293 232 255 285 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities -55-101 43 28 P/E (x) 82.9-18.9 14.7 Net Profit -2-62 23 30 P/CF (x) 4.5-14.4 11.2 Non-Cash Income and Expense 64-18 7 9 P/B (x) 1.0 2.1 1.8 1.6 Depreciation 32 26 0 0 EV/EBITDA (x) 81.6 620.6 24.6 16.5 Amortization 2 2 2 2 EPS (W) 86-1,235 590 758 Others 30-46 5 7 CFPS (W) 1,590-2,039 774 1,000 Chg in Working Capital -80-22 17-4 BPS (W) 6,921 5,728 6,318 7,076 Chg in AR & Other Receivables -15-7 15-4 DPS (W) 0 0 0 0 Chg in Inventories -8 5 14-3 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -3-7 -5 1 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -35 3-3 -5 Revenue Growth (%) 18.5 10.4-11.0 5.0 Cash Flows from Inv Activities -20 167 10-3 EBITDA Growth (%) -60.8-83.8 2,058.5 41.8 Chg in PP&E -21 98 0 0 Operating Profit Growth (%) - - - 48.1 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) - - - 28.5 Chg in Financial Assets 13-9 10-3 Accounts Receivable Turnover (x) 5.8 5.3 4.9 5.5 Others -11 77 0 0 Inventory Turnover (x) 4.9 5.4 5.6 6.3 Cash Flows from Fin Activities 90-67 0 30 Accounts Payable Turnover (x) 10.7 14.6 14.1 15.6 Chg in Financial Liabilities 82-66 0 30 ROA (%) -0.3-11.9 5.0 6.0 Chg in Equity 0 0 0 0 ROE (%) 1.2-19.5 9.8 11.3 Dividends Paid 0 0 0 0 ROIC (%) 1.1-10.3 5.6 8.2 Others 8-1 0 0 Liability to Equity Ratio (%) 103.7 97.0 82.0 85.4 Increase (Decrease) in Cash 16-2 53 55 Current Ratio (%) 83.0 118.1 137.3 146.0 Beginning Balance 7 22 21 73 Net Debt to Equity Ratio (%) 58.7 46.0 21.4 10.3 Ending Balance 22 21 73 128 Interest Coverage Ratio (x) -5.2-9.2 6.4 7.9 3
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (020150) 03/07/2016 Buy 13,600 01/23/2015 Hold - No Coverage 11/29/2013 Hold - (W) 15,000 10,000 5,000 0 Mar 14 Mar 15 Mar 16 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% 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. Equity Ratings Distribution Buy Trading Buy 71.08% 11.76% 17.16% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2015) 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 Hold Sell 4
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 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 2000 (Financial Promotion) Order 2005 (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 150-716 Korea Two International Finance Centre Suites 2005-2012 8 Finance Street, Central Hong Kong, 320 Park Avenue 31st Floor New York, NY 10022 United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 25 Old Broad St. London EC2N 1HQ United Kingdom Six Battery Road #11-01 Singapore, 049909 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 100-0005 Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue Chaoyang District, Beijing 100022 Room 38T31, 38F SWFC 100 Century Avenue Pudong New Area, Shanghai 200120 Suite 2103, Saigon Trade Center 37 Ton Duc Thang St, Dist. 1, Ho Chi Minh City, Vietnam Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. 2401B, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue, Chaoyang District, Beijing 100022 Daewoo Securities (Mongolia) LLC #406, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar 14240 Mongolia PT. Daewoo Securities Indonesia Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140 Equity Tower Building Lt.50 Sudirman Central Business District Jl. Jendral Sudirman Kav. 52-53, Jakarta Selatan Indonesia 12190 5