March 21, 211 (2946 KS) Korea-Equity Research Display Jonathan Hwang +822-768-414 j.hwang@dwsec.com Brian Oh +822-768-4135 brian.oh@dwsec.com CMP slurry market share to increase Raise TP by 9% to W12, (vs. current share price of W7,56) We raise our target price for by 9% to W12, (from W11,), as we revised up our 211 and 212 forecast EPS for the company by 7% and 12%, respectively. Hitachi Chemical, which accounts for 8% of the global chemical mechanical polishing (CMP) slurry supply, is likely to experience production disruptions for an extended period of time, which should be beneficial to. We maintain our Buy call on the company. Raise 211F CMP slurry sales by 33% to W4bn (up 123% YoY) Considering that Hitachi Chemical s CMP slurry factory is projected to remain closed for more than one month in the aftermath of the earthquake in Japan, we revised up our estimate for the company s 211 CMP slurry sales by 33% to W4bn (from W3bn), which is equivalent to 15.6% of the company s 211F sales. Last year, the company s CMP slurry sales came in at W17.9bn, accounting for a mere 7.8% of total sales. Given that the materials business generates higher value added than the equipment business, the profit contribution of CMP slurry is projected to increase to 3% this year. The domestic CMP slurry market is forecast to reach W12bn in 211. The Japanese earthquake should prompt Korean semiconductor makers to reduce their dependence on Japanese materials and increase their usage of domestic materials. Thus, Hitachi is likely to see its CMP slurry market share decline even after Hitachi s factory returns to normal operations. 1Q11 Preview: Sales of W54.5bn (up 6% YoY); OP of W4.2bn (down 14% YoY) In 1Q11, s sales are expected to expand to W54.5bn. However, the company s operating profit is projected to slightly decline to W4.2bn, as its OP margin is likely to deteriorate due to low-margin BOE equipment orders (which the company took in 2H1). New orders are likely to remain flat QoQ at W47bn. s shares will likely be re-rated this year, driven by the rapid growth of the company s semiconductor equipment and materials business and the rising value of its subsidiaries. In addition, Samsung Electronics non-memory investments should also benefit, in light of the growing need for CMP from non-memory producers. FY Sales OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA (Wbn) (Wbn) (%) (Wbn) (W) (Wbn) (Wbn) (%) (x) (x) (x) 12/8 186 23 12.5 11 359 28-22 8.9 6.1.5 2.3 12/9 96 1 1.2 1 322 13 41 7.4 17.5 1.3 1.2 12/1P 23 23 1. 25 775 28-47 16.1 8.2 1.3 7.2 12/11F 256 3 11.6 33 1,31 34 4 17.8 7.3 1.2 5.8 12/12F 33 39 11.9 4 1,223 44 17 17.8 6.2 1. 4.3 Source: Company data, estimates Buy (Maintain) Bloomberg: 2946 KS Target Price (12M, W): 12, Share Price (3/18/11, W): 7,56 Expected Return (%): 58.7 Sector: LCD and Semiconductor Equipment Sector Rating: Overweight EPS Growth (11F, %): 33. Market EPS Growth (11F, %): 22.3 P/E (X): 7.3 Market P/E (3/18/11F, x): 9.8 Market Cap (Wbn): 245 Shares Outstanding (mn): 32 Avg Trading Volume (6D, '): 589 Avg Trading Value (6D, Wbn): 4 Margin Balance (' sh): 1,14 Dividend Yield (11F, %): 1. Free Float (%): 56.6 52-Week Low/High: 5,2/7,76 Beta (12M, Daily Rate of Return): 1. Price Return Volatility (12M Daily,%,SD): 2.8 Foreign Ownership (%): 13.8 Major Shareholder(s): Tae-seok Ko et al. (43.44%) FID Pacific Basin Fund et al. (7.1%) National Pension Fund (5.5%) Price Performance (%) 1M 6M 12M Absolute 12.8 39.2 44.1 Relative 14.4 3.8 25.9 Share price 16 KOSPI 14 12 1 8 6 4 3/1 7/1 11/1 3/11 Please read carefully important notices at the end of this report.
March 21, 211 expected to increase CMP slurry supply through capacity expansion supplies both CMP equipment and slurries aims to achieve: domestic market share of 5% and global market share of 3% by 213 CMP slurry is a chemical abrasive used in the CMP process for semiconductor wafers. Among a variety of slurries, ceria slurry, produced by boasts high margins. Last year, the domestic CMP ceria slurry market was dominated by Hitachi Chemical (market share of 73%). However, Hitachi s Ibaraki plant was devastated by the recent earthquake in Japan. Accordingly, the operation of the plant is unlikely to be normalized within one month due to power supply disruption. Even if Hitachi s plant resumes operation, the company s CMP ceria slurry market share should fall. began local production of CMP ceria slurry in 27, for the first time as a Korean company. The company s CMP ceria slurry sales reached W17.9bn last year with a domestic market share of 15%. We expect s CMP ceria slurry sales to grow to W4bn with its market share expanding to 3% in 211 based on improved production capacity (W3.5bn/month). The earthquake in Japan will likely accelerate Korean companies efforts to localize parts production. Figure 1. Location of Hitachi ChemicalÊs Ibaraki Plant Figure 2. Domestic CMP ceria slurry market share (21F) Techno Semichem, 9% Others, 3%, 15% Hitachi Chemical, 73% Source: Japan Meteorological Agency, Source: Figure 3. Various slurries for each process Figure 4. Global CMP slurry market trend and forecasts HIGH Technical importance Poly W Slurry Lapping Slurry Si Slurry Cu Slurry ILD-use Silica Slurry STI-use Ceria Slurry ILD-use Ceria Slurry Final Touch Polishing Slurry Stock Removal Slurry (US$ mn) (%) 25 Global CMP Ceria slurry market 5 YoY growth 2 4 15 3 1 2 5 1 LOW Attractiveness HIGH 8 9 1 11F 12F Source: Company data, Source: 2
March 21, 211 Raise 211~212F EPS by 7% and 12%, respectively Sales and EPS expected to rise 11% and 33%, respectively We project s semiconductor equipment and CMP slurry sales will exceed W1bn in 211, which should improve the company s profitability significantly. In addition, equity-method gains are forecast to grow steadily to W8.1bn thanks to robust performance of subsidiaries. Table 1. 's earnings trend and forecasts (Wbn, %) 1Q1 2Q1 3Q1 4Q1P 1Q11F 2Q11F 3Q11F 4Q11F 21P 211F 211F Sales 51.2 52.2 76.3 5.6 54.4 6.5 7.6 7.6 23.3 256.1 33.4 Display 34.2 33.4 5.1 35.8 25.9 29.1 33. 32.3 153.5 12.3 148.1 Wet Station 3.3 28.9 43.3 3.3 2.4 23.4 27.3 26.4 132.8 97.4 121.8 Spinless Coater 3.9 4.4 6.8 5.5 5.5 5.7 5.8 5.9 2.7 22.9 26.3 Semiconductor 4.7 5.5 8.3 1.6 14.6 15.4 16.8 18.3 2.1 65.1 92.3 Wet Station 4.6 5.4 8.2 1.6 8.8 9.2 9.6 1.1 19.8 37.7 47.2 CMP.1.1.1. 5.9 6.2 7.1 8.2.3 27.4 45.1 Others 12.2 13.3 17.9 13.2 13.9 16. 2.8 2. 56.7 7.7 9. Slurry 3.9 4.4 5.1 4.5 6. 8.8 13.2 12.1 17.9 4. 75. Sales portion (%) 1. 1. 1. 1. 1. 1. 1. 1. 1. 1. 1. Display 66.9 63.9 65.6 7.8 47.6 48.1 46.8 45.7 66.6 47. 44.8 Semiconductor 9.2 1.6 1.9 3.2 26.9 25.4 23.8 25.9 8.7 25.4 27.9 Others 23.9 25.5 23.5 26.1 25.5 26.5 29.4 28.4 24.6 27.6 27.2 Operating profit 4.8 5.7 7.9 4.5 4.2 7.8 9. 8.7 22.9 29.7 39.3 OP margin 9.5 11. 1.3 8.9 7.6 12.8 12.8 12.4 1. 11.6 11.9 Net profit 4.5 5.5 8.7 6.4 4. 8.8 1.8 9.8 25. 33.4 39.7 Net margin 8.8 1.6 11.4 12.6 7.3 14.5 15.3 13.9 1.9 13.1 12. Source: Company data, Table 2. 's earnings forecast revisions (Wbn, %) Previous Revised % change 1P 11F 12F 1P 11F 12F 1P 11F 12F Sales 23 245 38 23 256 33. 4.5 7.3 Operating profit 23 27 34 23 3 39. 1.7 16. Net profit 25 31 35 25 33 4. 7.3 12.2 EPS 775 961 1,91 775 1,31 1,223. 7.3 12.2 OP margin 1. 1.9 11. 1. 11.6 11.9..7.9 Net margin 1.9 12.7 11.5 1.9 13.1 12...3.5 Avg. FX rate (W/US$) 1,153 1,33 98 1,153 1,33 98... Source: Figure 5. Quarterly sales and OP margin trend and outlook Figure 6. Annual sales trend and outlook by product (Wbn) Display (L) Semiconductor (L) (%) 9 Others (L) OP margin (R) 2 (Wbn) 35 Others Semiconductor-related equipment and materials to drive growth 8 7 6 5 16 12 3 25 2 Semiconductor Display 4 3 2 1 8 4 15 1 5 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1F 1Q11F 3Q11F 6 7 8 9 1 11F 12F Source: Company data, Source: Company data, 3
March 21, 211 Valuation comparison of global peers Table 3. Global peer group valuation (Wbn, %, x) Mkt cap OP margin P/E P/B EV/EBITDA ROE 9 1F 11F 9 1F 11F 9 1F 11F 9 1F 11F 9 1F 11F 245 1. 11.6 11.9 8.2 7.3 6.2 1.3 1.2 1. 7.2 5.8 4.3 16.1 17.8 17.8 SFA Engineering 1,142 8.9 13.1 14.1 22.4 11.6 9.7 3.4 3.3 2.5 18.1 7.9 5.9 16.1 32.2 29.2 DMS 179 11.4 13.4 13.9 11.2 6. 5.9 1.3 1..8 7.2 5.1 4.2 11.7 16.3 14.2 Avaco 164 8.1 9.2 1.6 11.2 8.5 5.8 2.7 2. 1.5 8.1 5.5 3.4 26.8 26.6 29.6 Top Engineering 122 12.5 13.9 15.5 15.2 5.5 4.3 1..9.8 7.7 5.6 3.9 6.7 17.5 18.7 Applied Materials 22,6 17.1 24.8 24.2 13.5 9.8 9.5 2.5 2.2 1.9 7.8 5.5 5.8 12.8 24.4 23.2 TEL 1,946 14.2 15.5 15.3 11.3 1.4 1.4 1.3 1.2 1.1 4.7 4.1 4.2 12.6 12.2 12.1 Lam Research 7,73 2.9 25.7 25. 9.4 8.5 8.8 3. 2.7 2.3 6.3 5.7 5.8 21.5 34.2 28.9 Dainippon Screen 2,663 1.1 11.1 1.1 7.7 8.3 1.2 2.1 1.7 1.5 6.6 5.7 6.1 3.4 21.4 15.3 Ulvac 1,145 2.6 4.6 5.3 12.3 14.7 11.5.8.8.7 9.2 6.9 6.3.9 5.3 6.1 Daifuku 88.6 2.1 2.5 262.6 3.7 26.8.8.8.8 15.3 11.6 9.2.7 1.6 3. Avg. 1.6 13.2 13.5 43.2 11. 9.9 1.8 1.6 1.4 8.9 6.3 5.4 14.2 19. 18. Source: Bloomberg, Figure 7. Share performance of global peers (1/5/9=1) 45 4 35 3 25 2 15 1 5 SFA Engineering Top Engineering TEL Ulvac 1/9 4/9 7/9 1/9 1/1 4/1 7/1 1/1 1/11 Source: Thomson Reuters, Figure 8. P/B-ROE comparison of global peers (211F) (P/B,x) 3.5 SFA Engineering 3. Lam Research 2.5 Applied Materials 2. Avaco 1.5 Dainippon Screen TEL 1. Daifuku DMS Ulvac Top Engineering.5 (ROE,%). 5 1 15 2 25 3 35 4 Source: Bloomberg, Figure 9. Ês P/E band Figure 1. Ês P/B band (Mkt cap,wbn) 3 25 12.x 1.x 8.x 6.x (Mkt cap,wbn) 3 25 1.6x 1.3x 1.x 2 15 4.x 2 15.7x 1 1.4x 5 5 98 2 4 6 8 1 12FF Source: 98 2 4 6 8 1 12F Source: 4
March 21, 211 (2946 KS/Buy/TP: W12,) Income Statement (Summarized) Balance Sheet (Summarized) (Wbn) 12/9 12/1P 12/11F 12/12F (Wbn) 12/9 12/1P 12/11F 12/12F Sales 96 23 256 33 Current Assets 87 113 142 184 Cost of Goods Sold 71 187 26 271 Cash and Cash Equivalents 6 2 39 51 Gross Profit 25 44 5 6 Accounts Receivable 23 82 73 94 SG&A 15 21 2 2 Inventories 9 18 16 21 Operating Profit 1 23 3 39 Other Current Assets 5 11 14 17 Non-Operating Income 2 9 13 11 Non-Current Assets 96 12 17 115 Interest Income/Expense 2 4 Investment Assets 43 49 56 66 F/X-Related Gain/Loss -2-3 Property, Plant and Equipment 46 46 45 45 Equity Method Gain/Loss 3 7 8 8 Intangible Assets 8 7 6 4 Asset Disposal Gain/Loss 1 Total Assets 183 214 249 299 Other Non-Operating Profit/Loss 6-1 Current Liabilities 35 38 39 51 Pretax Profit 12 32 42 5 Accounts Payable 24 23 23 29 Tax 1 7 9 1 Short-Term Debt Profit from Continuing Operation 1 25 33 4 Current Long-Term Debt Profit from Discontinued Operation Other Current Liabilities 11 15 17 22 Tax Effect Non-Current Liabilities 7 6 5 7 Net Profit 1 25 33 4 Bonds Residual Income 1 25 33 4 Long-Term Debt 5 EBITDA 13 28 34 44 Other Non-Current Liabilities 2 6 5 7 Free Cash Flow 41-47 4 17 Total Liabilities 42 43 45 57 Gross Profit Margin (%) 25.9 18.9 19.5 18.1 Paid-In Capital 15 16 16 16 EBITDA Margin (%) 13.8 12. 13.3 13.2 Capital Surplus 47 49 49 49 Operating Margin (%) 1.2 1. 11.6 11.9 Retained Earnings 81 15 138 176 Net Margin (%) 1.5 1.9 13.1 12. Stockholders' Equity 141 171 24 242 Cash Flow (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/9 12/1P 12/11F 12/12F 12/9 12/1P 12/11F 12/12F Cash Flow from Operating Activities 51-43 42 19 P/E (x) 17.5 8.2 7.3 6.2 Net Profit 1 25 33 4 P/CF (x) 13.9 7.3 6.7 5.7 Non-Cash Income and Expense 2-3 -3 P/B (x) 1.3 1.3 1.2 1. Tangible Assets Depreciation 3 3 3 3 EV/EBITDA (x) 1.2 7.2 5.8 4.3 Intangible Assets Depreciation 1 2 1 1 EPS (W) 322 775 1,31 1,223 Others -1-8 -4-7 CFPS (W) 45 873 1,128 1,319 Chg in Working Capital 38-64 9-18 BPS (W) 4,265 5,62 6,135 7,317 Chg in Accounts Receivable 4-59 8-22 DPS (W) 3 6 75 1 Chg in Inventories 1-1 2-5 Payout Ratio (%) 8.8 7.5 7.3 8.2 Chg in Accounts Payable 7-1 7 Dividend Yield (%).5.8 1. 1.3 Others -9 6-2 3 Sales Growth (%) -48.6 141.1 11.2 29. Cash Flow from Investment Activities -46 38-5 -7 EBITDA Growth (%) -52.1 19.6 23.7 27.4 Chg in Tangible Assets -9-4 -3-3 Operating Profit Growth (%) -58. 135.7 29.3 32.6 Chg in Intangible Assets -1-1 EPS Growth (%) -1.4 14.6 33. 18.7 Chg in Investment Assets 3 1-2 Accounts Receivable Turnover (x) 2.2 4.4 3.3 4. Others -35 4-3 -2 Inventory Turnover (x) 1.6 17. 14.7 17.6 Cash Flow from Financing Acitivities 2 1-2 -1 Accounts Payable Turnover (x) 4.7 1. 11.3 12.8 Chg in Borrowings -5-1 1 ROA (%) 5.6 12.6 14.4 14.5 Chg in Equity -1 4-2 ROE (%) 7.4 16.1 17.8 17.8 Dividends -1-1 -2 ROIC (%) 9.6 18.9 2.1 26.5 Others 2 2-1 Liability to Equity Ratio (%) 29.9 25.4 21.8 23.8 Chg in Cash 6-4 36 12 Current Ratio (%) 251.2 299.6 36.6 361.6 Beginning Cash Balance 2 8 2 39 Net Debt to Equity Ratio (%) -32.5-3.8-22.1-24.4 Ending Cash Balance 8 4 38 51 Interest Coverage Ratio (x) 23.9 91.5 - - Source: Company data, estimates 5
March 21, 211 Important Notices 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 of the subject company or member of the analyst's household does not have any financial interest in the securities of the subject company and the nature of the financial interest (including without limitation, whether it consists of any option, right, warrant, future, long or short position). This report reflects the sole opinion of the analyst without any external influences by third parties. Stock Ratings Buy Trading Buy Relative performance of +2% or greater Relative performance of +1% or greater, but with volatility Hold Relative performance of -1% and +1% Sell Relative performance of -1% Industry Ratings Overweight Neutral Underweight Fundamentals are favorable or improving Fundamentals are steady without any material changes Fundamentals are unfavorable or worsening * 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. This report has been provided by the research division of Daewoo Securities Co., Ltd. The stock ratings, target prices, estimates and overall viewpoints are from the research division of Daewoo Securities. Investors can access Daewoo SecuritiesÊ research through Daewoo research direct (www.bestez.com), FirstCall Research, Reuters, FnGuide, WiseFn, FactSet and Bloomberg (DWIR). This document was prepared by Daewoo Securities Co., Ltd. ( Daewoo ). Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith. The information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for information purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Daewoo and/or other affiliate companies, their directors, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this document or of issuers described herein and may purchase and/or sale, or offer to purchase and/or sale, at any time, such securities or other financial instruments in the open market or otherwise, as either a principal or agent. This document is for distribution within the United Kingdom to persons authorized under the Financial Services Act 1986. Daewoo Securities is the sole provider of information contained in this document. DaewooÊs U.S. affiliate, Daewoo Securities (America) Inc., a member of FINRA/SIPC, is the sole distributor of this document within the U.S. This document may be distributed in the U.S. only to major U.S. institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934. Any U.S. recipient of this document wishing to effect any transactions in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc. (W) 14, 12, 1, 8, 6, 4, 2, KCTech 3/9 9/9 3/1 9/1 3/11 Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities Co. Ltd. (Europe) Tel: 82-2-768-326 Fax: 82-2-768-2863 Tel: 44-2-7982-816 Fax: 44-2-7982-84 Jin Song jin.song@dwsec.com Sean Kang sean.kang@dwse.com Chris Park chris.park@dwsec.com Daewoo Securities Inc. (Americas) Tokyo Representative Office Tel: 1-212-47-122 Fax: 1-212-47-11 Tel: 81-3- 3211-5511 Fax : 81-3- 3211-5544 Jean-Louis Lee jlee@dwsusa.com John (Sejung) Oh sejung.oh@dwsec.com Beijing Representative Office Daewoo Securities Ltd. (Hong Kong) Tel: 86-1-6567-9699 Fax: 86-1-6568-7899 Tel :85-2-2514-134 Fax : 85-2-2514-1372 Kang-Won Choe kangwon.choe@dwsec.com Stacey Park stacey@dws.com.hk Ho Chi Minh Representative Office Tel: 84-8-391-6 Fax: 84-8-391-7716 Il-Yong Seo ilyong.seo@dwsec.com 6