Sector Note February 18, 214 Semiconductor equipment Overweight Objective view on 3D NAND investment Company Rating TP (KRW) Eugene Technology BUY 28, Wonik IPS BUY 11,5 Semiconductor equipment shares fall on news that Samsung delays Xian NAND fab investment On February 17, Korean ET News reported that Samsung Electronics (Samsung) would postpone phase 2 investments in the V-NAND line at the Xian fab, as Samsung s V-NAND technology was underdeveloped. Fueled by concerns over Samsung s delay and reduced investments at the Xian fab, shares of semiconductor equipment players pulled back, including Wonik IPS (Wonik, 6.%) and Eugene Technology (Eugene, 1.3%). No change in Samsung s V-NAND schedule, investment to proceed as scheduled Samsung plans to launch mass production of V-NAND (3D NAND) in late-february. Yield may be a problem in the early stages, but we do not anticipate any quality issues. V-NAND sales should be focused on SSDs for servers from data centers, and customer qualification tests have already been mostly completed. Following 24-stack V-NAND, Samsung plans to expand into 32-stack V-NAND mass production. And given the limits in tech migration for 2D planar NAND, Samsung should maintain superior NAND competitiveness as V-NAND offers improved performance, increased storage space and lower costs. V-NAND phase 1 almost complete, concerns over 2Q14-3Q14 orders We forecast Samsung phase 1 mass production (scheduled 4kwpm) should be ready by end-214, and phase 2 output should begin in 215. And, phase 1 investments should be completed by 1Q14, and phase 2 spending should begin in 4Q14. As such, equipment investments at the Xian fab should fall in 2Q14-3Q14. Accordingly, sales at Wonik should reach W18bn (+7% QoQ) in 4Q13 and W148bn in 1Q14, backed by the Xian fab V-NAND equipment orders. However, sales should fall to W18bn in 2Q14 and W137bn in 3Q14, despite higher display equipment sales, due to the reduced semiconductor orders. Overall, shares may adjust downward due to the choppy earnings trend. Won Seo 822--3276-6162 wonseo@truefriend.com NAND tech migration investments to gain traction, maintain Eugene Technology as top pick in semiconductor equipment sector Eugene should benefit from CVD equipment demand from Samsung and SK Hynix s NAND migration rather than V-NAND orders. As such, Eugene should post differentiated quarterly earnings growth, and shares should pick up as momentum slows for Xian-related orders. As both Samsung and SK Hynix are ramping up investments, company-wide sales may reach as high as W2bn fueled by core LP CVD sales. Compared to the solid earnings (214 EPS growth 52%, ROE 32%), shares are undervalued, trading at only 6.9x 214 PE and 1.9x PB. As such, we maintain Eugene as our top semiconductor equipment pick.
Table 1. Eugene Technology earnings Sales 25.3 24.8 2.2 36.1 43. 44. 6.1 55.7 168.3 16.4 22.8 LPCVD 15.7 19.8 1.7 7.2 22.4 18.5 3.1 22.3 112.7 53.4 93.2 Plasma - - 7.4 24.5 9.9 8.8 12. 9.5 2.8 31.9 4.2 Cyclic CVD 7.6 2.6.2 3.6 9. 9.2 16.2 15. 26.7 14. 49.5 Others(SEG) 2. 2.4 1.9.7 1.7 7.7 2. 8.9 8.1 7. 2.3 Operating profit 6.8 8.9 4.7 1.1 13.7 13.8 22. 19.1 52.8 3.5 68.5 OP margin 26.7% 35.9% 23.3% 28.1% 31.9% 31.3% 36.5% 34.3% 31.4% 28.7% 33.8% Net profit 6. 15.8 4.1 13.8 11.7 12.1 18.6 18. 5.5 39.7 6.4 NP margin 23.8% 63.6% 2.4% 38.2% 27.2% 27.5% 31.% 32.3% 3.% 37.3% 29.8% Note: IFRS consolidate base; NP attributable to controlling shareholders Source: Company data, Korea Investment & Securities Table 2. Wonik IPS earnings (IFRS consolidated) Sales 6.3 79.3 16.5 18.7 147.7 18.1 136.5 156.4 348.7 426.7 548.8 Semiconductor 12.2 15.5 26. 94.7 77. 32.5 41. 63. 14.9 148.4 213.5 Display 12.3 2.3 26. 13.5 2.3 25.2 28.6 28. 3.3 72.1 12.1 Solar.2.6 5. 1.3.8 1.5 2. 4. 4. 7.1 8.3 Gas solutions 7. 13.2 15.3 32.8 18.5 14.5 26.2 17.1 63.1 68.3 76.3 Wonik Materials 28.8 29.5 34.2 38.4 31.1 34.4 38.7 44.3 11.1 13.9 148.6 Operating profit (2.2) 3.1 12.6 33.2 21.7 9.7 2.5 27.5 26.5 46.6 79.4 OP margin (3.6%) 3.9% 11.8% 18.4% 14.7% 8.9% 15.% 17.6% 7.6% 1.9% 14.5% Net profit (4.2) (3.2) 5.8 24.7 15.6 4.1 12.1 16.3 7.1 23. 48.2 Net margin (7.%) (4.1%) 5.4% 13.7% 1.6% 3.8% 8.9% 1.4% 2.% 5.4% 8.8% Note: IFRS consolidated; NP attributable to controlling shareholders. Source: Company data, Korea Investment & Securities. Table 3. Wonik IPS earnings (IFRS parents) Sales 31.7 49.8 72.3 142.3 116.6 73.7 97.8 112.1 238.8 296.1 4.2 Semiconductor 12.2 15.5 26. 94.7 77. 32.5 41. 63. 14.9 148.4 213.5 Display 12.3 2.3 26. 13.5 2.3 25.2 28.6 28. 3.3 72.1 12.1 Solar.2.6 5. 1.3.8 1.5 2. 4. 4. 7.1 8.3 Gas solutions 7. 13.2 15.3 32.8 18.5 14.5 26.2 17.1 63.1 68.3 76.3 Operating profit (6.9) (2.5) 4.8 24.9 17.5 2.2 11. 15.4 3.3 2.3 46.1 OP margin (21.8%) (5.%) 6.6% 17.5% 15.% 2.9% 11.3% 13.8% 1.4% 6.9% 11.5% Net profit (5.2) (4.8) 3.7 21.6 14. 1.3 8.6 11.8 4.5 15.3 35.7 Net margin (16.4%) (9.6%) 5.1% 15.2% 12.% 1.8% 8.8% 1.5% 1.9% 5.2% 8.9% Note: IFRS parents Source: Company data, Korea Investment & Securities. 2
Figure 1. NAND tech migration roadmap 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14F 2Q14F 3Q14F 4Q14F 21nm 19nm V-NAND 19Xnm 19Ynm 2nm 2nm 26nm 2nm Source: Company data, Korea Investment & Securities Table 4. Samsung NAND capacity (kwpm) Line Wafer 213 214 212 213F 214F 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Line 12 12 12 12 12 12 12 12 115 115 12 12 118 SAS1 (US) 12 - - - - - - - - 33 - - Line 16 12 2 22 22 22 21 2 2 2 12 215 23 Xian 12 - - - - - 1 2 35 - - 16 12 Total 32 34 34 34 33 33 335 35 273 335 336 Source: Korea Investment & Securities Table 5. SK Hynix NAND capacity (kwpm) Line Wafer 213 214 212 213F 214F 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 M11 12 13 13 13 13 13 125 125 125 13 13 126 M12 12 2 2 3 - - 1 4 5 1 18 25 12 Total 15 15 16 13 13 135 165 175 156 148 151 Source: Korea Investment & Securities Figure 2. Total NAND capex trend and outlook 14 12 1 8 6 4 2 (USD bn) NAND capex (L) (%) NAND capex growth (R) 27 28 29 21 211 212 213 214F 25 2 15 1 5 (5) (1) Source: Garner, Korea Investment & Securities 3
Table 6. Coverage valuation Recommendation & TP Earnings & Valuation Company Sales OP NP EPS BPS PE PB ROE EV/EBITDA (KRW) (KRW) (X) (X) (%) (X) Eugene Technology Recommendation BUY 211A 131 38 26 1,957 5,721 7.5 2.6 4.8 6.1 (8437) TP (KRW) 28, 212A 168 53 5 2,429 6,214 5.6 2.2 5.7 2.9 Price (Feb 17, KRW) 19,25 213F 16 3 4 1,84 7,764 1.5 2.5 27.8 6.9 Market cap. 418 214F 23 69 6 2,796 1,163 6.9 1.9 31.8 3.2 215F 228 71 63 2,91 12,899 6.6 1.5 25.3 2.5 Wonik IPS Recommendation BUY 211A 34 29 18 279 3,818 34.5 2.5 8.1 16.8 (353) TP (KRW) 11,5 212A 349 26 8 116 3,966 4.2 1.2 3. 8.8 Price (Feb 17, KRW) 9,11 213F 427 47 23 337 3,889 27. 2.3 8.2 1.4 Market cap. 733 214F 549 79 48 639 4,76 14.3 1.9 14.8 7.3 215F 676 12 79 1,48 5,741 8.7 1.6 19.7 4.8 Source : Korea Investment & Securities Changes to recommendation and price target Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target Eugene Technology 3-15-12 BUY W47, Wonik IPS (353) 3-15-12 BUY W11,5 (8437) 5-16-12 BUY W31,3 7-22-12 BUY W7,2 7-22-12 BUY W27, 1-7-12 BUY W6,6 1-7-12 BUY W16,4 2-27-13 Hold - 2-27-13 BUY W24, 8-27-13 BUY W9,2 5-14-13 BUY W28, 1-14-13 BUY W11,5 8-27-13 BUY W24, 2-5-14 BUY W28, Eugene Technology(8437) Wonik IPS(353) Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, 14, 12, 1, 8, 6, 4, 2, Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 4
Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and +15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. 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 Disclosures 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 1 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 Wonik IPS. 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 Wonik IPS in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Wonik IPS in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from Wonik IPS in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Wonik IPS s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Wonik IPS,Eugene Technology shares as of February 17, 214. Korea Investment & Securities Co., Ltd. has provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of February 17, 214. Prepared by: Won Seo This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 5