Company Note March 14, 2014 Duksan Hi-Metal (077360) 12M rating BUY (Maintain) 12M TP W24,000 from W24,000 Up/downside +32% Stock Data KOSPI (Mar 13, pt) 1,934 Stock price (Mar 13, KRW) 18,250 Market cap (USD mn) 502 Shares outstanding (mn) 29 52-Week high/low (KRW) 29,200/16,050 6M avg. daily turnover (USD mn) 3.8 Free float / Foreign ownership (%) 44.0/11.9 Major shareholders (%) Jun-Ho Lee and 11 others 41.6 Performance 1M 6M 12M Absolute (%) (0.8) (14.9) (31.4) Relative to KOSPI (%p) (1.2) (11.9) (28.1) 12MF PE trend (X) 12MF PER (LHS) (KRW) 60.0 price (RHS) 35,000 50.0 30,000 40.0 25,000 20,000 30.0 15,000 20.0 10,000 10.0 5,000 0.0 0 Apr-09 Apr-11 Apr-13 Source: WISEfn consensus Product lineup expansion to fuel growth Maintain BUY with TP of W24,000 We maintain BUY and a TP of W24,000 as Duksan Hi-Metal (Duksan) diversifies its product lineup away from solder balls and HTLs, which have been the key growth drivers. Of note, our TP equates to a target 2014 PE of 18x. Despite the uncertainty related to Samsung Display s OLED equipment investment plans, Duksan should secure growth by expanding into new OLED-related products and the semiconductor front-end process. Furthermore, we believe it is positive that management is actively pursuing potential M&As to further diverse the product lineup. Meanwhile, we believe an earnings recovery is unlikely in 1Q14 given the lower utilization at Samsung Display s OLED line. However, we expect earnings growth (QoQ and YoY basis) from 2Q14. And, we forecast 2014 sales will grow 19% YoY and OP 16% YoY. Product diversification to offset weak OLED equipment investments As Samsung Display slows investments in OLED equipment, Duksan s focus on HTL has undermined growth. However, Duksan should sustain growth, by: 1) advancing into the market for phosphorescent red host materials, which has been under development, and 2) generating sales from the production of green host materials outsourced by Universal Display Corp (UHD). In fact, the size of the red host market is estimated to be equal to that of the HTL market (W80bn). As such, if Duksan can successfully penetrate the market, it would lift sales and ease the dependency risks on HTL, which should have a positive effect on earnings and shares. UMT purchase to facilitate entry into semiconductor front-end process materials market As for the semiconductor business, sales at UMT, which was acquired in 2H13, should grow led by front-end process materials. UMT products are used mainly for gate dielectric formation, which should benefit from Samsung Electronics vnand production. Of note, UMT s sales are estimated at W7.8bn after being acquired by Duksan, and 2014 sales should reach W19.1bn. Backed by UMT, Duksan should bolster its position as a materials maker as its product line covers both back-end and front-end process materials. Successful entry into conductive particles for displays Conductive particles are additives in glue for anisotropic conductive film (ACF), used mainly in LCD and OLED modules and touch modules. Duksan has begun Jay Yoo, CFA 822-3276-6178 jongwoo.yoo@truefriend.com Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 2011A 129 39 35 35 1,181 53.8 43 21.5 16.4 4.7 29.0 2012A 144 42 43 42 1,426 20.7 47 14.9 11.6 3.1 26.1 2013F 124 32 35 31 1,057 (25.9) 40 18.0 12.1 2.4 15.7 2014F 148 38 40 38 1,284 21.4 47 14.2 9.5 2.0 16.3 2015F 200 50 52 49 1,681 31.0 63 10.9 6.8 1.7 18.0
providing conductive particles on a small scale after being approved by both domestic and overseas ACF makers. As major ACF suppliers are Japanese, Duksan is attempting to first penetrate the domestic market. And, this should help further diversify the product lineup, despite the limited sales growth. Table 1. Earnings estimate revisions (W bn, %) 1Q14F 2014F Previous Revised Chg. % chg. Previous Revised Chg. % chg. Sales 32.2 28.8 (3.5) (10.7%) 150.2 148.1 (2.1) (1.4%) OLED 13.4 10.0 (3.4) (25.5%) 60.5 60.8 0.3 0.5% Semiconductor 14.8 14.8 0.0 0.0% 68.2 68.2 0.0 0.0% COGS 20.5 18.3 (2.1) (10.4%) 94.1 92.3 (1.8) (1.9%) COGS-to-sales (%) 63.5% 63.7% 0.2pp 62.6% 62.3% (0.3pp) OP 7.6 6.4 (1.2) (15.3%) 38.0 37.7 (0.3) (0.8%) OPM (%) 23.5% 22.3% (1.2pp) 25.3% 25.4% 0.1pp EBT 8.0 6.9-1.1 (13.5%) 39.7 39.7 0.0 0.1% EBT margin (%) 24.8% 24.1% (0.8pp) 26.4% 26.8% 0.4pp NP 7.9 6.6 (1.3) (16.5%) 39.1 37.7 (1.3) (3.4%) NPM (%) 24.4% 22.9% (1.6pp) (6.4%) 26.0% 25.5% (0.5pp) (2.1%) Source: Company data, Korea Investment & Securities Table 2. Quarterly and annual earnings estimate (W bn, %) 1Q13 2Q13 3Q13 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2011 2012 2013F 2014F Sales 32.2 29.5 34.2 28.5 28.8 34.1 40.3 44.9 129.4 143.8 124.4 148.1 OLED 15.9 14.5 15.3 10.9 10.0 13.6 17.4 19.8 70.1 79.4 56.7 60.8 Semiconductor 16.3 15.0 14.9 13.8 14.8 16.1 17.8 19.4 59.4 64.4 60.0 68.2 UMT - - 4.0 3.8 4.0 4.3 5.0 5.8 - - 7.8 19.1 COGS 19.5 17.9 21.0 17.0 18.3 21.1 25.0 27.8 76.3 84.2 75.3 92.3 (% of sales) 60.4% 60.6% 61.3% 59.7% 63.7% 62.0% 62.0% 61.9% 58.9% 58.6% 60.6% 62.3% OP 9.2 7.5 8.9 6.8 6.4 8.9 10.7 11.7 34.7 41.7 32.4 37.7 OPM 28.5% 25.5% 26.1% 23.7% 22.3% 26.0% 26.5% 26.1% 26.8% 29.0% 26.0% 25.4% EBT 10.4 8.0 9.1 7.2 6.9 9.4 11.2 12.2 35.1 42.9 34.7 39.7 EBT margin (%) 32.2% 27.2% 26.6% 25.3% 24.1% 27.6% 27.8% 27.2% 27.1% 29.9% 27.9% 26.8% NP 10.0 8.2 9.0 3.9 6.6 8.9 10.6 11.6 34.6 41.9 31.1 37.7 NPM (%) 31.0% 27.8% 26.2% 13.8% 22.9% 26.2% 26.4% 25.9% 26.7% 29.1% 25.0% 25.5% Note: K-GAAP until 2010, K-IFRS from 2011 Source: Company data, Korea Investment & Securities Company overview & Glossary Duksan Hi-Metal was established in May 1999 as a maker of solder ball used in the semiconductor manufacturing process. Duksan Hi-Metal merged Ludis, a OLED material maker, in 2009 and started its OLED business. The company operates a semiconductor material fab in Ulsan and OLED material fab in Chonan. HTL (Hole Transport Layer) : A layer(material) to deliver transport to organic emitting layer in OLED forming accumulated materials Solder ball : Packaging material to connect silicon die and substrate electronically 2
Balance sheet FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F Current assets 46 89 79 100 143 Cash & cash equivalent 21 14 25 30 40 Accounts & other receivables 10 13 11 15 30 Inventory 13 12 10 15 20 Non-current assets 106 109 152 187 251 Investment assets 4 4 4 4 7 Tangible assets 65 65 75 95 125 Intangible assets 35 34 68 81 110 Total assets 152 199 231 287 394 Current liabilities 11 14 16 34 91 Accounts & other payables 8 11 7 8 11 ST debt & bond 0 2 0 1 1 Current portion of LT debt 2 0 0 0 0 Non-current liabilities 2 2 2 2 3 Debentures 0 0 0 0 0 LT debt & financial liabilities 0 0 0 0 0 Total liabilities 13 16 18 36 94 Paid-in capital 6 6 6 6 6 Capital surplus 82 82 82 82 82 Capital adjustments (20) (17) (17) (17) (17) Retained earnings 72 113 144 182 231 Shareholders' Equity 139 183 213 251 300 Income statement FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F Sales 129 144 124 148 200 COGS 76 84 75 92 125 Gross profit 53 60 49 56 75 SG&A expense 14 18 17 18 24 Operating profit 39 42 32 38 50 Financial income 1 2 3 2 3 Interest income 0 1 3 2 3 Financial expense 0 0 1 1 1 Interest expense 0 0 1 1 1 Other non-operating profit (5) (0) 0 0 0 Gains (Losses) in associates, subsidiaries and JV 0 0 0 1 0 Earnings before tax 35 43 35 40 52 Income taxes 0 1 4 2 3 Net profit 35 42 31 38 49 Other comprehensive profit 0 (0) (0) (0) (0) Total comprehensive profit 35 41 31 37 49 EBITDA 43 47 40 47 63 Cash flow FY-ending Dec. (W bn) 2011A 2012A 2013F 2014F 2015F C/F from operating 37 51 45 54 95 Net profit 35 42 31 38 49 Depreciation 3 5 5 7 9 Amortization 1 1 3 3 4 Net incr. in W/C (6) (3) 7 8 33 Others 4 6 (1) (2) 0 C/F from investing (16) (54) (33) (50) (85) CAPEX (22) (4) (15) (27) (39) Decr. in fixed assets 0 0 0 0 0 Incr. in investment 7 (49) 1 (0) (3) Net incr. in intangible assets (3) (1) (37) (16) (33) Others 2 0 18 (7) (10) C/F from financing (6) (3) (1) 0 0 Incr. in equity 1 0 0 0 0 Incr. in debts (8) (0) (1) 0 0 Dividends 0 0 0 0 0 Others 1 (3) 0 0 0 C/F from others 0 (0) 0 0 0 Increase in cash 15 (7) 11 5 10 Key financial data FY-ending Dec. 2011A 2012A 2013F 2014F 2015F per share data (KRW) EPS 1,181 1,426 1,057 1,284 1,681 BPS 5,457 6,956 7,999 9,268 10,934 DPS 0 0 0 0 0 Growth (%) Sales growth 78.6 11.1 (13.5) 19.1 35.0 OP growth 96.0 5.9 (22.2) 16.2 33.9 NP growth 116.9 21.3 (25.9) 21.4 31.0 EPS growth 53.8 20.7 (25.9) 21.4 31.0 EBITDA growth 96.5 10.8 (15.5) 17.8 33.7 Profitability (%) OP margin 30.4 29.0 26.0 25.4 25.2 NP margin 26.7 29.1 25.0 25.5 24.7 EBITDA margin 33.1 33.0 32.3 31.9 31.6 ROA 25.5 23.9 14.5 14.6 14.5 ROE 29.0 26.1 15.7 16.3 18.0 Dividend yield 0.0 0.0 0.0 0.0 0.0 Stability Net debt (W bn) (18) (61) (54) (66) (87) Debt/equity ratio (%) 2.0 1.0 0.2 0.3 0.4 Valuation (X) PE 21.5 14.9 18.0 14.2 10.9 PB 4.7 3.1 2.4 2.0 1.7 PS 5.7 4.4 4.5 3.6 2.7 EV/EBITDA 16.4 11.6 12.1 9.5 6.8 Note: Based on K-IFRS (non-consolidated) 3
Changes to recommendation and price target Company (Code) Date Recommendation Price target Duk San Hi Metal (077360) 03-22-12 BUY W30,000 09-28-12 Hold - 02-05-14 BUY W24,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 0 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 10 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 Duk San Hi Metal. 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 Duk San Hi Metal in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Duk San Hi Metal in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from Duk San Hi Metal in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Duk San Hi Metal s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Duk San Hi Metal shares as of March 13, 2014. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of March 13, 2014. Prepared by: Jay Yoo 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