Sector Report Jan 13, 215 Longer-term approach to smartphone part makers (OVERWEIGHT) Company Rating TP SEC BUY (M) 1,47, (M) SEMCO BUY (M) 69, (M) LGE BUY (M) 85, (M) LG Innotek BUY (M) 128, (M) KH Vatec BUY (M) 55, (M) Partron BUY (M) 15,5 (M) Jahwa Electronics HOLD (M) 12, (M) Iljin Display HOLD (M) 7,5 (M) : 4Q14 preview Samsung Electronics (SEC) likely saw solid 4Q14 earnings, with IM operating profit estimated at W1.8tn (-67% YoY, 3% QoQ, OPM 6.9%), as an increase in blended ASP thanks to the Galaxy Note 4 launch boosted profitability. In line with this, we believe earnings at parts makers for Samsung Electronics continued their uptrend in 4Q14 after bottoming-out in 2Q14. LG Electronics (LGE) earnings were likely weak, with consolidated operating profit estimated at W258.8bn (9% YoY, -44% QoQ, OPM 2%), as fiercer competition to cut TV selling prices and LCD panel price hikes likely undermined profitability of the home appliance (HE) division. LG Innotek likely enjoyed robust earnings, with consolidated operating profit estimated at W53.3bn (84% YoY, -48% QoQ, OPM 3%) thanks to favorable forex and an increase in camera module supply to Apple. Invest in domestic smartphone parts makers from longer-term approach As earnings improvement at smartphone parts makers will likely continue into 3Q15, we believe investors should take a long-term approach to the sector. We expect the sector s earnings uptrend to continue, as: 1) part makers earnings should be boosted by an increase in SEC s A series production volume in 1Q15 and the effect of the Galaxy S6 launch over 2Q15~3Q15; and 2) sales volume of the new S6 will likely be higher than the Galaxy S5, given the severely low sales volume of the S5, which launched in 214, and the replacement cycle of Galaxy users. In particular, SEC has reduced the number of smartphone models to maximize efficiency, which should provide more favorable conditions for parts makers with huge mass-production capabilities. Top picks: KH Vatec (672 KS), Partron (917 KS) We suggest KH Vatec and Partron as our sector top picks despite their recent rallies. KH Vatec (6772 KS): The company should begin mass producing metal cases for three new Chinese smartphone maker clients in 1H15, which should strengthen earnings momentum. Even excluding the three new clients, we expect 215 sales to come to W1.2tn and operating profit W12.bn. Earnings growth at handset parts makers will likely accelerate in 4Q14~3Q15. We maintain BUY and our target price of W55,. Partron (917 KS): Both prices and sales volume of camera modules will likely grow simultaneously, as pixel migration is set to accelerate for smartphone main cameras, the company s key product. We believe smartphone sensor and accessories serve as a premium to valuations. We maintain BUY and our target price of W15,5
Earnings forecast and valuation indicators SEC (Wbn) 212A 213A 214E 215E SEMCO (Wbn) 212A 213A 214E 215E Sales 21,14 228,693 25,758 217,298 Sales 7,913 8,257 7,242 8,243 Sales growth (%) 21.9 13.7-1. 5.6 Sales growth (%) 31.2 4.3-12.3 13.8 Op profit 29,49 36,785 24,926 24,866 Op profit 58 464 1 189 Op margin (%) 14.4 16.1 12.1 11.4 Op margin (%) 7.3 5.6. 2.3 Net profit, CI 23,185 29,821 22,411 21,659 Net profit, CI 441 33-58 41 P/E (x) 8.1 7.1 8.8 9.1 P/E (x) 16.8 2. -67.9 118.5 P/B (x) 1.6 1.5 1.2 1.1 P/B (x) 2. 1.6 1.1 1.2 EV/EBITDA (x) 4.1 3.6 4. 4.2 EV/EBITDA (x) 7.6 7. 6. 1.1 LGE (Wbn) 212A 213A 214E 215E LG Innotek (Wbn) 212A 213A 214E 215E Sales 55,123 58,14 6,463 69,413 Sales 5,316. 6,211.5 6,34. 6,577. Sales growth (%) 1.6 5.5 4. 14.8 Sales growth (%) 16.8 16.8 1.5 4.3 Op profit 1,217 1,285 1,83 1,78 Op profit 77.3 136.2 39.3 331.2 Op margin (%) 2.2 2.2 3. 2.5 Op margin (%) 1.5 2.2 4.9 5 Net profit, CI 92 177 847 933 Net profit, CI -24.9 15.5 135.6 167.4 P/E (x) 136.7 7.7 11.5 1.9 P/E (x) -69.3 11.1 19.6 15.7 P/B (x) 1.1 1.1.9.8 P/B (x) 1.4 1.3 1.6 1.4 EV/EBITDA (x) 6.5 6.2 4.6 4.8 EV/EBITDA (x) 6.4 5.2 4.6 4.1 KH Vatec (Wbn) 212A 213A 214E 215E Partron (Wbn) 212A 213A 214E 215E Sales 355.9 824.2 595.7 1,153.8 Sales 87.3 1,99.5 769.2 87.6 Sales growth (%) 12.7 131.6-27.7 93.7 Sales growth (%) 15 25.9-3 13.2 Op profit 7.7 66.8 38.7 11.9 Op profit 91.2 134.9 71.4 84.2 Op margin (%) 2.2 8.1 6.5 8.8 Op margin (%) 1.4 12.3 9.3 9.7 Net profit, CI -3.2 58.1 31.4 88.8 Net profit, CI 72.2 16. 56. 69. P/E (x) -44.9 6.3 21.4 8.1 P/E (x) 7.4 1.1 11.4 1.5 P/B (x).7 1.5 2.4 2. P/B (x) 2.7 3.7 2. 1.9 EV/EBITDA (x) 8.9 4.2 1.2 4.6 EV/EBITDA (x) 4.6 6. 6.4 6.5 Iljin Display (Wbn) 212A 213A 214E 215E Jahwa Elect (Wbn) 212A 213A 214E 215E Sales 596.5 659.1 49. 514.5 Sales 33.4 468.6 318.4 294.3 Sales growth (%) 83.9 1.5-25.7 5 Sales growth (%) 31.6 41.8-32 -7.6 Op profit 64.6 59.9 26.3 24.7 Op profit 52.4 55.4 26.2 23. Op margin (%) 1.8 9.1 5.4 4.8 Op margin (%) 15.8 11.8 8.2 7.8 Net profit, CI 64.1 48.1 22.8 31.3 Net profit, CI 42.9 42.9 23.1 21.8 P/E (x) 6.6 1.7 8.5 5.9 P/E (x) 5. 9.2 9.6 12. P/B (x) 2.8 3.4 1.2 1. P/B (x) 1. 1.6.8.9 EV/EBITDA (x) 5.4 7.3 5.1 4.1 EV/EBITDA (x) 2.2 4.3 2.6 3.6 2
Sector Report 1. 4Q14 earnings preview 4Q14 preview of firms under our coverage 4Q13 1Q14 2Q14 3Q14 4Q14E % QoQ % YoY 1Q15E 213 214E 215E Sales (Wbn) 33,89 32,44 28,45 24,58 26,34 6-23 23,332 138,823 111,54 15,2 SEC IM OP (Wbn) 5,47 6,43 4,423 1,75 1,85 3-67 1,593 24,929 14,48 8,426 OPM (%) 16 2 16 7 7-9 7 18 13 8 Sales (Wbn) 1,71 1,729 1,861 1,722 1,93 12 13 1,887 8,257 7,242 8,243 SEMCO OP (Wbn) -36 15 21-69 33 TTB TTB 32 464 1 189 OPM (%) -2 1 1-4 2 6 4 2 6 2 Net profit (Wbn) -49 4 17-72 -3-95 -93-2 346-54 5 Sales (Wbn) 14,915 14,275 15,375 14,916 15,897 7 7 15,364 58,14 6,463 69,413 LGE OP (Wbn) 238 54 66 461 259-44 9 298 1,285 1,83 1,78 OPM (%) 2 4 4 3 2-1 2 2 3 2 Net profit (Wbn) -63 93 412 23 278 37-539 158 223 985 1,15 Sales ( mn) 15,44 14,588 15,429 16,493 16,529 7 15,335 62,115 63,4 65,77 LG Innotek OP ( mn) 289 631 899 1,29 533-48 84 438 1,362 3,93 3,312 OPM (%) 2 4 6 6 3-3 1 3 2 5 5 Net profit ( mn) -126 164 436 584 172-7 -237 15 155 1,356 1,674 Sales ( mn) 1,488 1,191 1,17 1,76 2,52 134 69 2,49 8,242 5,957 11,538 KH Vatec OP ( mn) 113 87 57 28 214 654 9 224 668 387 1,19 OPM (%) 8 7 5 3 9 6 1 9 8 7 9 Net profit ( mn) 16 62 23 31 174 461 64 175 572 291 84 Sales ( mn) 944 1,115 822 645 63-7 -36 66 4,686 3,184 2,943 Jahwa Elec OP ( mn) 92 115 59 45 42-6 -54 51 554 262 23 OPM (%) 1 1 7 7 7-3 8 12 8 8 Net profit ( mn) 6 14 35 5 21-58 -65 27 433 29 128 Sales ( mn) 1,26 1,896 84 1,89 1,75-1 -15 1,7 6,591 4,9 5,145 Iljin Display OP ( mn) 13 149 29 4 44 9-57 45 599 263 247 OPM (%) 8 8 4 4 4-4 4 9 5 5 Net profit ( mn) 2 114 32 31 15-5 -25 21 481 228 313 Sales ( mn) 2,533 2,377 1,54 1,733 2,42 18-19 2,8 1,995 7,692 8,76 Patron OP ( mn) 339 282 125 123 184 49-46 187 1,349 714 842 OPM (%) 13 12 8 7 9 2-4 9 12 9 1 Net profit ( mn) 243 264 4 95 134 41-45 136 1,14 533 613 TTB = turn to black, 3
4Q14 earnings by company SEC s 4Q14 IM OP estimated at W1.8tn SEC s IM operating profit for 4Q14 is expected to be decent at W1.8tn (-67% YoY, +3% QoQ, OPM 6.9%) on better-than-expected Galaxy Note 4 sales, which pushed up the blended ASP of its smartphones. IM division OP margin vs SEC smartphone blended ASP 3% 25% 2% 15% 1% 5% % 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15E 3Q15E IM OPM Smartphone ASP ($) 36 33 3 27 24 21 18 15 SEC s smartphone shipments (mn) 1 Smartphone shipments 9 85 84 89 89 94 8 7 77 76 79 77 76 79 6 67 7 5 58 4 51 44 3 2 1 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15E 3Q15E LGE 4Q14 consolidated OP projected at W258.8bn SEMCO to post 4Q14 consolidated OP of W33.bn LG Innotek s 4Q14 consolidated OP to reach W53.3bn KH Vatec s 4Q14 consolidated OP to come to W21.4bn Patron s 4Q14 consolidated OP to come to W18.4bn We project LGE s 4Q14 consolidated operating profit to come in a bit weak at W258.8bn (+9% YoY, -44% QoQ) as: 1) its MC division likely saw a QoQ drop in its operating profit due to the absence of new smartphone releases; and 2) an intensifying TV price war and a rise in LCD panel prices likely hurt its HE division. Samsung Electro-Mechanics (SEMCO) is expected to turn around in 4Q14, posting a consolidated operating profit of W33.bn (tuning to profit YoY and QoQ) since: 1) high-margin OIS camera module sales began being sold in 4Q14; and 2) the growing share of high-end HDI circuit boards should greatly improve its margin. LG Innotek s consolidated 4Q14 operating profit is projected to be sound at 53.3bn (+84% YoY, -48% QoQ) as: 1) demand for its new camera module in North America turned out to be higher than expected in 4Q14; and 2) the won weakened against the dollar. As for KH Vatec, earnings likely showed strong momentum, with consolidated operating income rising 9% YoY (654% QoQ) to W21.4bn, as: 1) its metal smartphone case sales to key clients are growing at full swing now; and 2) manufacturing yields have stabilized earlier than expected. Patron should succeed in turning around in 4Q14, posting a consolidated operating profit of W18.4bn (-46% YoY, +49% QoQ) as: 1) as pixel migration in main cameral modules accelerated in 2H14, improving market conditions for the firm; and 2) facilities utilization rose as SEC expanded its Galaxy Note 4 production. 4
Sector Report 2. Performance of small and mid-sized parts providers and short-term outlook Combined operating profit likely to trend up until 3Q15 Small- and mid-sized smartphone parts providers combined OP trending up The combined operating profit of thirty-three small and mid-sized Korean smartphone parts providers turned positive in 3Q14, climbing to W26.8bn, and we expect strong QoQ growth from 4Q14. They are expected to benefit from the release of SEC s mid-end A and E series in 1Q15 and SEC s strategic high-end model Galaxy S6 in 2Q15, allowing earnings to grow until 3Q15. Combined earnings and monthly avg market cap of 33 small- and mid-sized parts providers (Wbn) 12, 1, 8, 6, 4, 2, Market cap of 33 firms (L) Operating profit of 33 firms (R) 142 159 198 197 144 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 327 269 79 68-23 27 (Wbn) 35 3 25 2 15 1 5-5 Still, we need to bear in mind that performance may vary by company depending on SEC s smartphone business strategies. For instance, acceleration of main camera pixel migration and the addition of the OIS feature to sub-cameras should help improve prices, but market share is very likely to be unevenly distributed among providers. From 211 to 213, when SEC s smartphone shipments rose sharply, the firm saved costs by increasing the number of vendors for each part. However, since 215, when it entered a phase of slow growth, we believe limiting vendors to a capable handful and seeking volume discounts can be a better strategy. 5
Samsung Electro-Mechanics (915 KS) ratings and target price history 16, 14, 12, 1, 8, 6, 4, 2, Date Rating TP 215-1-12 BUY 69, 214-12-22 BUY 69, 214-11-27 BUY 69, 214-11-17 BUY 69, 213-1-28 BUY 1, 213-1-4 BUY 1, 213-8-21 BUY 1, 213-7-26 BUY 1, 213-7-9 BUY 1, LG Electronics Inc. (6657 KS) ratings and target price history 14, 12, 1, 8, 6, 4, 2, Date Rating TP 215-1-12 BUY 85, 214-12-22 BUY 85, 214-11-27 BUY 85, 214-11-17 BUY 85, 214-1-6 BUY 9, 214-9-1 BUY 9, 214-8-4 BUY 9, 214-7-25 BUY 9, 214-7-7 BUY 9, LG Innotek (117 KS) ratings and target price history 16, 14, 12, 1, 8, 6, 4, 2, Date Rating TP 215-1-12 BUY 128, 214-12-22 BUY 128, 214-11-27 BUY 128, 214-11-17 BUY 128, 213-1-25 HOLD 92, 213-1-4 HOLD 92, 213-8-22 HOLD 92, 213-7-25 HOLD 92, 213-7-9 HOLD 92, 6
Sector Report Jahwa Electronics (3324 KS) ratings and target price history 35, 3, 25, 2, 15, 1, 5, Date Rating TP 215-1-12 HOLD 12, 214-12-22 HOLD 12, 214-11-27 HOLD 12, 214-11-17 HOLD 12, 214-2-11 HOLD 2, 213-1-22 BUY 3, 213-7-23 BUY 3, 213-4-23 BUY 33, 213-1-22 BUY 25, Iljin Display (276 KS) ratings and target price history 25, 2, 15, 1, 5, Date Rating TP 215-1-12 HOLD 7,5 214-12-22 HOLD 7,5 214-11-27 HOLD 7,5 214-11-17 HOLD 7,5 214-2-11 BUY 2, 213-1-22 BUY 23, 213-4-23 BUY 23, 213-1-22 BUY 23, Disclosures & disclaimers This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of Yuanta Securities Korea Co., Ltd. As of the publication date of this report, Yuanta Securities Korea Co., Ltd. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Yuanta Securities Korea Co., Ltd. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s) spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report. Stock and sector ratings Stock ratings include an Investment Rating (Strong Buy, Buy, Hold, Sell) based on the expected absolute return of a stock over the next 6-12 months. - Strong Buy: Expected to return 3% or more - Buy: Expected to return between 1% and 3% - Hold: Expected to return between -1 and +1% - Sell: Expected to return -1% or less Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting. - Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting 7
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