Company Note February 22, 2011 CrucialTec (114120) BUY (Maintain) TP: W70,000 (Up) KOSPI (Feb 21) 2,005 Stock price (Feb 21) 46,300 Shares outstanding (mn) 8.4 Market cap (USD mn) 349 52-Week Low/High (won) 19,400/50,500 6M avg. daily turnover (USD mn) 6.9 Free float (%) 63.8 Dividend yield (2010F, %) 0.0 Foreign ownership (%) 31.2 Major shareholders (%) Goen-Jun Ahn 26.0 Yeong-Seon Yoo 5.6 Stock performance 1M 6M 12M Absolute (%) 2.9 116.9 0.0 Relative to KOSPI (%p) 6.0 103.9 0.0 Price chart 190 170 150 130 110 90 70 50 (2010.07.21=100) Crucialtec KOSPI Jul-10 Oct-10 Jan-11 Robust growth to continue Revising up price target We are revising up our price target from W56,000 to W70,000 reflecting our upward revision in earnings. We have revised up our 2011 revenue, operating profit and net profit estimates by 35%, 25% and 26% respectively reflecting 1) 29% increase in OTP revenue estimates, 2) 175% increase in LED flash module revenue estimates and 3) lower income tax rate due to ramp up of their production site in Vietnam. OTP shipments to grow 121% YoY in 2011 We expect OTP shipments to grow 121% YoY in 2011 due to 1) strong shipment outlook for existing key customers (RIM and HTC), and 2) rapidly increasing orders from Samsung Electronics. We expect OTP shipments to Samsung will increase from 2.5mn in 2010 to 20mn in 2011 thanks to robust sales of Samsung phones, e.g. Chat 322, Chat 335, which are adopting OTPs. LED flash module reaping benefits from diversified customer base We expect LED flash module sales to increase from W12bn in 2010 to W33bn in 2011 as CrucialTec diversifies their customer base from Samsung Electronics to RIM, HTC and Motorola. According to the company, their LED flash module is 2 times brighter than competing products with only a 20% price premium. 4Q operating profit pull back, temporary CrucialTec posted W7.3bn operating profit in 4Q10, falling W2bn short of our W9.4bn estimates. However we see this more as temporary pull back. We note that the company spent W1bn for 1) year end bonus and 2) transition costs related to IFRS based accounting. The other W1bn is due to forex fluctuation, i.e. stronger won, which magnitude is expected to be weaker in 1Q11. Our top pick in the handset sector Crucialtec remains as our top pick within the Korean handset sector. Our price target of W70,000 is based on 13.4x 2011E P/E (the average of touch screen makers during 2010) and has a 51% upside. We continue to prefer small caps, i.e. Crucialtec and Melfas, over large caps, i.e. LGE, as we believe LGE will continue to face headwinds due to intensified competition in the smart phone market. YS Chang 822-3276-4589 ys.chang@truefriend.com Heonyoung Lee 822-3276-6279 lee.heonyoung@truefriend.com Yr to Sales OP EBT NP EPS % chg EBITDA P/E EV/EBITDA P/B ROE Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%) 2008A 43 6 4 4 1,428 NM 6 NM NM NM 85.4 2009A 62 7 8 8 1,368 (4.2) 9 NM NM NM 66.8 2010P 208 23 24 20 2,334 70.6 26 20.4 14.6 6.6 50.6 2011F 376 54 52 46 5,257 125.2 58 8.8 6.3 3.7 52.6 2012F 452 72 70 56 6,384 21.5 77 7.3 4.2 2.5 40.4
<Table 1> Earnings revision (W bn) 1Q11F 2011F Old New chg(%) Old New chg(%) Total Sales 59.2 73.9 25% 279.2 376.4 35% Optical track pad 54.7 69.2 26% 261.2 338.2 29% LED flash 3.0 3.7 23% 12.0 33.0 175% Others 1.5 1.0-33% 6.0 5.2-13% Operating profit 8.9 10.0 12% 43.4 54.4 25% Operating profit margin 15.0% 13.5% 15.5% 14.4% Pretax profit 8.8 9.5 8% 42.9 52.3 22% Tax 1.3 1.4 6.4 6.4 Net profit 7.4 8.0 8% 36.5 46.0 26% Minority Interest 0.0 0.0 0.0 0.0 Net profit ex minority 7.4 8.0 8% 36.5 46.0 26% Source: CrucialTec, Korea Investment & Securities <Table 2> Earnings forecast (W bn) 1Q10 2Q10 3Q10 4Q10P 2010P 1Q11F 2Q11F 3Q11F 4Q11F 2011F Total 29.8 44.2 66.9 67.3 208.1 73.9 93.0 109.4 100.1 376.4 Optical track pad 25.9 40.0 62.0 63.3 191.3 69.2 86.2 98.2 84.6 338.2 LED flash 2.4 2.1 4.1 3.1 11.7 3.7 5.6 9.7 14.0 33.0 Others 1.4 2.2 0.7 0.8 5.2 1.0 1.2 1.5 1.5 5.2 Operating profit 2.7 4.2 9.1 7.3 23.4 10.0 13.5 16.4 14.5 54.4 OP margin 9.2% 9.6% 13.6% 10.9% 11.3% 13.5% 14.5% 15.0% 14.5% 14.4% Pretax profit 2.8 4.3 9.0 8.0 24.0 9.5 13.0 15.9 14.0 52.3 Tax 0.3 0.4 1.3 1.5 3.6 1.4 1.9 1.6 1.4 6.4 Net profit 2.5 3.8 7.7 6.5 20.4 8.0 11.0 14.3 12.6 46.0 Minority Interest 0 0 0 0 0 0 0 0 0 0 Net profit ex minority 2.5 3.8 7.7 6.5 20.4 8.0 11.0 14.3 12.6 46.0 Source: CrucialTec, Korea Investment & Securities [Figure 1] OTP adopted Smasung feature phone Source: CrucialTec, Samsung, Korea Investment & Securities 2
Balance sheet Current assets 14 33 115 189 236 Cash & cash equivalents 1 1 18 31 35 Accounts receivable 3 16 40 72 87 Inventory 4 10 32 59 70 Non-current assets 4 8 21 30 38 Investments 0 0 0 0 0 Tangible assets 2 5 22 34 46 Intangible assets 2 1 1 1 1 Total assets 18 41 136 220 274 Current liabilities 9 21 65 102 103 Accounts payable 4 7 34 61 73 Short-term debt and bond 3 9 20 20 5 Current portion of LT debt 0 1 1 1 1 Non-current liabilities 3 4 6 8 5 Debentures 2 0 0 0 0 LT debt and lease 0 3 3 3 0 Total liabilities 11 25 71 110 108 Paid-in capital 2 4 4 4 4 Capital surplus 4 4 32 32 32 Capital adjustments 0 0 0 0 0 Retained earnings 1 8 29 75 131 Shareholders' equity 7 16 64 110 166 Cash flow C/F from operations 4 (6) 7 22 51 Net profit 4 8 20 46 56 Depreciation 0 1 2 3 4 Amortization 0 1 1 1 1 Net incr. in W/C (3) (16) (17) (29) (11) Others 2 1 1 1 1 C/F from investing (6) (5) (28) (8) (23) Capex (2) (4) (10) (7) (7) Decr. in fixed assets 0 0 0 0 0 Net incr. in current assets (4) 1 1 1 1 Incr. in investment (0) 0 (17) 0 (15) Others (1) (2) (2) (2) (2) C/F from financing 3 10 38 (0) (23) Incr. in equity 0 3 28 0 0 Incr. in debt 3 10 10 0 (18) Dividends 0 0 0 0 0 Others 0 (2) 1 (0) (5) Increase in cash 0 (1) 17 13 4 Income statement Sales 43 62 208 376 452 Gross profit 9 15 35 73 154 SG&A expenses 4 7 11 19 81 Operating profit 6 7 23 54 72 Non-operating profit 1 3 7 7 9 Interest income 0 0 1 3 4 FX gains 1 2 5 0 0 Equity gains 0 0 0 0 0 Non-operating expenses 3 2 6 9 11 Interest expenses 0 1 1 1 1 FX losses 1 2 5 4 5 Equity losses 0 0 0 0 0 Earnings before tax 4 8 24 52 70 Income taxes 0 0 4 6 14 Profit from discontinued 0 0 0 0 0 Net profit 4 8 20 46 56 EBITDA 6 9 26 58 77 Key financial data Fiscal year ending Dec. 2008A 2009A 2010P 2011F 2012F Per-share data (won) EPS 1,428 1,368 2,334 5,257 6,384 BPS 1,221 2,031 7,204 12,461 18,846 DPS 0 0 0 0 0 SPS 14,438 10,945 25,869 43,155 51,786 Growth (%) Sales growth 715.1 46.1 234.8 80.8 20.0 OP growth NM 31.2 221.3 132.3 32.9 NP growth NM 90.9 165.8 125.2 21.5 EPS growth NM (4.2) 70.6 125.2 21.5 EBITDA growth NM 39.6 201.8 122.5 32.5 Profitability (%) OP margin 13.1 11.7 11.3 14.4 16.0 NP margin 9.5 12.4 9.8 12.2 12.4 EBITDA margin 14.5 13.9 12.5 15.4 17.0 ROA 32.5 26.1 23.1 25.9 22.6 ROE 85.4 66.8 50.6 52.6 40.4 Dividend yield NM NM 0.0 0.0 0.0 Stability Net debt (W bn) (0) 9 (14) (27) (64) Int. coverage (x) 22.6 14.5 20.3 47.1 52.1 D/E ratio (%) 78.6 81.1 36.8 21.5 3.4 Valuations (x) PER NM NM 20.4 8.8 7.3 PBR NM NM 6.6 3.7 2.5 PSR NM NM 1.8 1.1 0.9 EV/EBITDA NM NM 14.6 6.3 4.2 3
Changes to recommendation and price target Company (Code) Date Recommendation Price target Crucialtec (114120) 11-04-10 BUY W56,000 02-21-11 BUY W70,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Feb -09 Ju n -09 O ct-09 Feb -10 Ju n -10 O ct-10 Feb-11 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 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 Crucialtec. 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 Crucialtec in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from Crucialtec 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 Crucialtec in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in Crucialtec s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Crucialtec shares as of February 21, 2011. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of February 21, 2011. Prepared by: YS Chang, Heonyoung Lee 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