Korea Tech Strategy

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.

Korea Tech Strategy

November 13, 2012The Age of Transition

The outlook for IT from a “disruptive innovation” perspective

Mobile revolution: From revolution to evolution

The mobile revolution has been a history of „disruptive innovation.‰ And at the heart of

this remarkable shake-up lie Apple, Samsung Electronics (SEC), Google, and Amazon.

Notably, the global IT industry is currently facing several major shifts and issues,

including: 1) AppleÊs „innovatorÊs dilemma‰; 2) a reshuffling of global supply chains; 3)

the return of Microsoft; and 4) the zero growth of the PC industry. How Korean IT

players approach these issues will create significant implications for the memory,

display, components, and electronic materialsÊ markets in 2013 onwards.

“Apple without SEC” vs. “SEC without Apple”

Apple is now one of the most valuable corporations in the world. However, SEC sells

more smartphones than Apple does. Unsurprisingly, global investors are paying keen

attention to the competition between Apple and SEC, their innovations, and their

potential breakup. Our analysis suggests Apple is increasingly leaning toward

„sustaining innovation‰ while SEC pursues a strategy of differentiation. At the same

time, in reshuffling the global supply chain, we expect Apple could have difficulty

procuring parts supply without SECÊs contributions, while the Korean giant is likely to

see very limited impacts from the absence of demand from Apple.

SEC: Disruptive innovation and strategic decisions

In the late 1990s, Nokia focused on disruptive innovation on its way to achieving

massive global expansion. In the 1980s, Intel made a key strategic decision to move

from the memory sector into the CPU sector, a shift that led the company to become

the global CPU leader.

This year, SEC has followed in the footsteps of both Nokia and Intel. SECÊs mass

customization of smartphones reminds us of NokiaÊs expansion strategy, which enabled

Nokia to obtain a global handset market share of more than 40%. And, just as Intel did

in the 1980s, SECÊs semiconductor division is shifting its focus from the memory unit to

the System LSI unit. In 2013, we believe SEC is likely to face a key strategic decision in

its pursuit of fresh disruptive innovation.

Daewoo Securities Co., Ltd.

James Song +822-768-3722

[email protected]

Wonjae Park +822-768-3372

[email protected]

Jonathan Hwang +822-768-4140

[email protected]

Will Cho +822-768-4306

[email protected]

Young Ryu +822-768-4138

[email protected]

Brian Oh +822-768-4135

[email protected]

Disruptive and sustaining innovation in the mobile industry

Strategic decision(e.g., entering into a new market)

Sustaining innovation:Evolution


Innovation

2000 201020051995

iPad

iPhone

Nokia 9000

StarTAC

?

2015

Time

Disruptive innovation: Revolution

Strategic decision(e.g., entering into a new market)



Innovation

2000 201020051995

iPad

iPhone

Nokia 9000

StarTAC

?

2015

Time

Disruptive innovation: Revolution

Source: KDB Daewoo Securities Research

2

[Prologue] Moving from revolution to evolution .........................................................................4

Mobile market: From revolution to evolution.................................................................................4

Mobile revolution: A story of disruptive innovation........................................................................5

Strategic decisions: Lessons from Intel of the 1980s ...................................................................6

Gearing up for the next disruptive innovation ...............................................................................7

IT sector investment strategy for 2013..........................................................................................8

I. Apple: “The innovator’s dilemma”...........................................................................................12

Why the “innovator’s dilemma?”..................................................................................................12

Two issues facing Apple..............................................................................................................13

Growth of new smart devices......................................................................................................14

SEC’s differentiated smartphone lineup......................................................................................15

SEC: “It doesn’t take a genius” ...................................................................................................17

Innovation from content producers .............................................................................................18

II. Global supply chain reshuffle..................................................................................................21

Implications of Apple’s supply chain change ..............................................................................21

Apple without SEC Greater supply chain risk ........................................................................22

Exclusion of SEC from Apple’s supply chain would have a limited impact ................................24

Exclusion from Apple’s AP supplier list to have minimal impact on SEC...................................25

TSMC could begin supplying APs to Apple from late 2013 ........................................................26

Risks and opportunities for SEC’s System LSI unit ....................................................................27

III. Losers’ league: Competition among second-tier makers to intensify...............................29

Second-tiers to continue the fight for survival.............................................................................29

Who will exceed the 40mn threshold? ........................................................................................30

Nokia: Windows 8 may be the company’s last shot in smartphones..........................................33

HTC: Standing out in the low- to mid-end market.......................................................................34

Leaders in the Chinese smartphone market: Huawei vs. ZTE ...................................................35

LGE: LTE + vertical integration ...................................................................................................36

IV. Return of Microsoft: Windows 8 and tablet market growth..................................................................38

iOS 6 vs. Jelly Bean ....................................................................................................................38

Differentiating features of Windows 8: New user experience + productivity ..............................39

Windows 8: New growth driver for the tablet PC market ............................................................40

Tablet market to expand by 64% YoY in 2013 ...........................................................................42

Medium- to long-term change in OS market competition ...........................................................43

Beneficiaries of tablet PC market expansion ..............................................................................44

V. Farewell to the PC era!: Zero PC growth and its implications for the memory industry .47

PC industry headed for zero growth ...........................................................................................47

Memory industry’s dynamics have completely changed ............................................................48

The Micron-Elpida merger: Bang for the buck? ..........................................................................49

The age of mobile memory: Competitiveness & growth hinge on product mix ..........................50

[DRAM market issue] Will a mobile DRAM supply shortage occur? ..........................................52

[NAND market issue] Will prices rise further given limited supply growth?................................53

3 KDB Daewoo Securities Research

VI. Best tech migration play: Semiconductor materials ...........................................................57

Delays to EUV development to slow tech migration ...................................................................57

Materials offer solution to limitations of lithography ....................................................................58

Core material 1: Spin-on hardmask (SOH) .................................................................................59

Core material 2: Spin-on dielectrics (SOD).................................................................................60

Core material 3: High-k/metal gate (HKMG)...............................................................................61

Core material 4: Double patterning technology (DPT)................................................................62

VII. The ongoing innovation of displays: AMOLED vs. Retina display ...................................64

Proliferation of high-resolution displays: Form factor counts!.....................................................64

Apple: Retina displays to be adopted across Apple’s product lineup.........................................65

Apple: Form factor differentiation via in-cell touch displays........................................................66

SEC: Improved resolution of OLED displays ..............................................................................67

SEC: Differentiating itself with flexible OLED technology...........................................................68

[Supply and demand] Limited supply in 2013 to drive gradual recovery....................................69

VIII. IT sector investment strategy for 2013................................................................................71

[Macroeconomic view] The IT sector in context..........................................................................71

[Global view] Apple vs. SEC .......................................................................................................72

[2013 investment strategy] Weak in 1H, but strong in 2H ..........................................................73

SEC’s supply chain vs. Apple’s supply chain [Top 11 IT stocks] ...............................................74

Semiconductor.............................................................................................................................77

Display .........................................................................................................................................78

Telecom equipment/electronic components ...............................................................................79

IX. Top picks ................................................................................................................................. 80

Samsung Electronics (005930 KS/Buy)......................................................................................80

SK Hynix (000660 KS/Buy) .........................................................................................................83

LG Electronics (066570 KS/Buy) ................................................................................................86

Samsung Electro-Mechanics (009150 KS/Buy)..........................................................................89

Samsung SDI (006400 KS/Buy)..................................................................................................92

SFA Engineering (056190 KQ/Buy) ............................................................................................95

Soulbrain (036830 KQ/Buy) ........................................................................................................98

Duksan Hi-Metal (077360 KQ/Buy)...........................................................................................101

Partron (091700 KQ/Buy)..........................................................................................................104

Nepes (033640 KQ/Buy) ...........................................................................................................106

Simmtech (036710 KQ/Buy) .....................................................................................................109

November 13, 2012 The Age of Transition


[Prologue] Moving from revolution to evolution

Mobile market: From revolution to evolution

The mobile revolution triggered by AppleÊs iPhone and iPad has become so deeply

entrenched in our everyday lives that it is now hard to find a single person who does not

own a smartphone. As of 2012, there are more than 2bn smartphone users worldwide,

according to the market research firm Gartner.

Since 2010, we have closely followed the changes and innovations that have unfolded in the

IT industry in the context of the mobile revolution, as highlighted in our reports „Tablet PC –

Another megatrend‰ (February 4, 2010), „2011 Outlook: Mobile revolution to prompt

valuation re-rating‰ (December 2, 2010), and „Mobile revolution to bring about a paradigm

shift‰ (December 30, 2011).

The mobile game players we underscored in our 2010 tablet report have already seen their

share prices soar 400~500% in less than two years. However, AppleÊs new iPhone 5 has

been met with criticism for lacking the breakthrough innovation that many had expected.

Without Steve Jobs, will the mobile revolution no longer be what it used to be?

On the contrary, we believe the mobile revolution has entered an evolutionary phase. The

global popularity of PsyÊs „Gangnam Style‰ has been in large part powered by the

widespread use of smartphones and social network services (SNS) (on top of the songÊs

catchy hook). This phenomenon shows how, nowadays, new changes, innovations, content,

and trends resonate on a global scale.

In 2013, we expect the smartphone market to grow to 780mn units (up 25% YoY) and the

tablet market to expand to 180mn units (up 64% YoY) in terms of shipments. Hence, the

overall smart device market (smartphones and tablets combined) is projected to increase to

960mn units (up 31% YoY). What these numbers show is that new innovations can expand

the growth pie, which is why we need to keep a close eye on new changes and innovations

as the evolutionary phase of the mobile revolution unfolds.

Figure 1. Paradigm shift in the mobile and semiconductor industries

Source: WSTS, KDB Daewoo Securities Research

Is this the end of the

mobile revolution?

New innovations have

helped increase the

growth pie

0

1,500

3,000

4,500

6,000

7,500

9,000

91 93 95 97 99 01 03 05 07 09 11 13F 15F

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

Global DRAM revenues (L) Global NAND revenues (L)

SEC share price (R)

(US$mn) (W'000)

SDRAMDDR

DDR2DDR3

PC eraMobile phone era

Smart device era → Cloud environment

Apple, Google, SEC IBM, Microsoft, Intel Nokia, SEC, Intel, Cisco, Qualcomm

SSD

AP + mobile DRAM +NAND demand

explodes with mobilerevolution

DDR4



Mobile revolution: A story of disruptive innovation

The Apple-led mobile revolution could be summed up as a story of disruptive innovation – a

process that is still ongoing. This story is not just a linear narrative about growth; it is also a

story about the struggle to survive amid radical changes. Indeed, a disruptive innovator of

the current generation can easily become the one facing disruption in the next. A prime

example of this is the downfall of Nokia brought about by AppleÊs disruptive innovation.

Examples of disruptive innovation can be found throughout history in many industries, with

the first significant case tracing back to 1876, when the worldÊs largest communications firm

at the time, Western Union, learned of an invention by Alexander Graham Bell that allowed

for the transmission of the human voice via telegraph wires. Bell made an offer to sell his

patent to the company for US$100,000, but Western Union declined, writing the device off

as nothing more than a toy.

More than two decades later, BellÊs company AT&T grew into an industry leader with annual

profits of US$13mn in 1900; meanwhile, Western UnionÊs annual net profit was merely half

of that figure. And, in 1910, Western Union eventually handed over its ownership to AT&T.

Figure 2. Companies and products based on disruptive innovation (1870~2000)

Source: Clayton M. Christensen,「The InnovatorÊs Solution」

Figure 3. Smartphone companiesÊ share price trends since 2010 Figure 4. Smartphone parts companiesÊ share price trends since 2010

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research

Disruptive innovation of

the mobile revolution –

growth or survival?

The history of disruptive

innovation

0

50

100

150

200

250

300

350

400

1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/12 4/12 7/12 10/12

Apple SEC Nokia LGE

HTC Motorola RIM

(1/1/10 = 100)

0

20

40

60

80

100

120

140

160

180

1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/12 4/12 7/12 10/12

SEC LGD SK Hynix

TSMC Intel Qualcomm

(1/1/10 = 100)

Kodak Beef processing Department storesBell (Swift, Armour) (Marshall FieldÊs, Macy's)

Merrill Lynch Ford Catalog retail(Sears, JCPenney, Montgomery Ward)

Plastic (DuPont, Dow)

Sony Honda Motorcycles

Minicomputer McDonaldÊs (DEC, Nixdorf) Xerox Discount stores (Kmart, Walmart, Target)

Toyota, Nissan Black & Decker(consumer tools)

Ultrasound Japanese steel companiesIntel Minimills

Endoscope Southwest Airlines Credit rating agencies Flat panel display Fidelity Charles Schwab Packaged beef

VanguardPC Community colleges Seiko Synthetic plastic GE Capital

(Digital watches) (HiMent) Barnes & NoblePortable blood sugar Toys „R‰ Us

Kodak Fun Saver level measuring device University of Phoenix MCI, SpiritEmbraer, Circuit City

Microsoft Bloomberg Canadair Sun Microsystems Home DepotMobile phones Oracle Canon Dell Staples,Cisco Intuit QuickBooks Best Buy

Inkjet printers TurboTax MBNAVeritas, N.Y Appliance Galanz Digital animation (Pixar) HMC, Kia

E-mail

eBay Military aircraft Microsoft SQL ECNsPalm, Blackberry Concord Law School Google Linux Amazon

SonoSite Digital printing Online OnlineSalesforce.com 802.11 brokerages travel agencies

New market Low-end

∼1870

∼1950

∼1960

∼1980

∼2000

Kodak Beef processing Department storesBell (Swift, Armour) (Marshall FieldÊs, Macy's)

Merrill Lynch Ford Catalog retail(Sears, JCPenney, Montgomery Ward)

Plastic (DuPont, Dow)

Sony Honda Motorcycles

Minicomputer McDonaldÊs (DEC, Nixdorf) Xerox Discount stores (Kmart, Walmart, Target)

Toyota, Nissan Black & Decker(consumer tools)

Ultrasound Japanese steel companiesIntel Minimills

Endoscope Southwest Airlines Credit rating agencies Flat panel display Fidelity Charles Schwab Packaged beef

VanguardPC Community colleges Seiko Synthetic plastic GE Capital

(Digital watches) (HiMent) Barnes & NoblePortable blood sugar Toys „R‰ Us

Kodak Fun Saver level measuring device University of Phoenix MCI, SpiritEmbraer, Circuit City

Microsoft Bloomberg Canadair Sun Microsystems Home DepotMobile phones Oracle Canon Dell Staples,Cisco Intuit QuickBooks Best Buy

Inkjet printers TurboTax MBNAVeritas, N.Y Appliance Galanz Digital animation (Pixar) HMC, Kia

E-mail

eBay Military aircraft Microsoft SQL ECNsPalm, Blackberry Concord Law School Google Linux Amazon

SonoSite Digital printing Online OnlineSalesforce.com 802.11 brokerages travel agencies

New market Low-end

∼1870

∼1950

∼1960

∼1980

∼2000



Strategic decisions: Lessons from Intel of the 1980s

For disruptive innovation to be successful, it must be supported by strategic decision-making.

Here, we look at the key takeaways that SEC can learn from: 1) the disruptive innovation

that triggered the collapse of Nokia, which had ruled the global handset market from the late

1990s to the early 21st century; and 2) the strategic decision of Intel to move away from

memory products and into CPUs in the 1980s. We think the situation facing present-day SEC

share similarities to what Nokia went through in 1999 and Intel in 1980.

1) In 1999, Nokia overtook Motorola as the largest global handset supplier in the world. The Nokia

7110 was the first sliding phone the world had ever seen, the 3210 was the first mobile phone

equipped with an antenna, and the 8810 gained wide popularity among celebrities in the fashion

world. Compared to todayÊs smartphones, these models may appear outdated and archaic, but

they were nonetheless considered examples of disruptive innovation during their time.

In order to meet the diverse demand in the handset market, Nokia took both a tailored and

integrated approach, which allowed it to solidify its global expansion strategy. NokiaÊs past approach

has a lot in common with SECÊs present mass customization strategy. We highlight two points with

regard to NokiaÊs story: First, how did it manage to establish a dominant position in the handset

market? And, second, how was AppleÊs disruptive innovation able to bring down the company?

2) IntelÊs entry into the CPU market was a matter of coincidence. In 1970, a Japanese

electronics maker commissioned Intel to build a calculator chip, which eventually led to the

development of the 8080 processor in 1974. Then, IBM decided to outsource its CPU

production to Intel, deeming chip-making a non-core operation. This confluence of events

changed the course of IntelÊs future, as it led the company to decide to focus on CPUs. And

the stage was set for IntelÊs phenomenal growth in the CPU market.

SECÊs story is a lot like IntelÊs. In 1996, SEC embarked on a project with Digital Equipment

Corporation (DEC) to develop a 64bit Alpha chip. But when DEC, which had been bought by

Compaq, was sold again to Intel, the Alpha chip project was at risk of being shut down. In

the end, the technology SEC accumulated from the project made it possible for the company

to design and manufacture the AP for iPhones in 2007, thus setting the stage for its

remarkable success in the AP market.

Strategic decisions are what drive the dynamic evolution of a company. Professor Robert A.

Burgelman of Stanford University, a renowned expert in business strategy, stresses in his book

Strategy is Destiny that IntelÊs strategic decision was not made overnight and was rather the result

of its ability to co-evolve with the changing business environment. This co-evolution enabled Intel to

make the successful strategic decision to shift its business focus from memory to CPUs.

Figure 5. NokiaÊs innovative handset models released in 1999 Figure 6. Intel: Transition from memory to CPU

Source: Nokia Source: Robert A. Burgelman,「Strategy is Destiny」

Nokia became the top

global handset maker on

the back of disruptive

innovation

Intel grew into the

largest global CPU

maker on the back of

strategic decision-

making (and

coincidence)

Strategic decisions are

what drive dynamic

evolution: Now is the

time!

72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

100

80

60

40

20

% of revenues

Microprocessor makerMemory chip maker

Microprocessor

Memory chips

Memory chip maker Microprocessor maker72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

100

80

60

40

20

% of revenues

Microprocessor makerMemory chip maker

Microprocessor

Memory chips

Memory chip maker Microprocessor maker



Gearing up for the next disruptive innovation

Then what will the next disruptive innovation look like? The mobile revolution triggered by

AppleÊs disruptive innovation continues to evolve into more advanced technologies. We

believe the immense potential of the disruptive innovation we witnessed in the mobile

market will once again prove itself in the smart TV market. The growth of smart TVs should

help create a stronger cloud environment, heralding the arrival of the age of big data. At this

very moment, all of the data and traces we leave on our smartphones are piling up at Apple

and Google data centers located throughout the world. We believe all of this marks a

tentative step towards the next big disruptive innovation.

Unless Apple and SEC fully prepare themselves for the forthcoming disruptive innovation,

there is no way to tell whether they will avoid the same kind of fate that befell Nokia and

Sony. In particular, leading firms in the software space, such as Google, Amazon, and

Microsoft, may be partners today but foes tomorrow. Therefore, for a hardware-oriented

company like SEC, it is important to get ready for the upcoming disruptive innovation, by: 1)

forming strategic alliances with software providers, 2) strengthening internal capabilities, and

3) pursuing mergers and acquisitions in its core areas.

Disruptive innovation is neither limited to the mobile market nor the software space. Just as Apple

took the smartphone market by storm with its iPhone, SEC created its own disruptive innovation in

the ARM application processor market, which had been largely ignored by Intel. In the memory

segment, SEC has developed a graphene-based transistor that is 100 times faster than silicon-

based ones and expects to commercialize it by 2017. Even in the commodity-like hardware,

component, material, and equipment segments, there is always the potential for innovative

disruption. This is where we believe the Korean IT industry will find its next growth story.

Figure 7. SECÊs & 4 major Japanese IT firmsÊ market cap trends

Source: Bloomberg, KDB Daewoo Securities Research

Figure 8. GoogleÊs data center Figure 9. SEC ExynosÊ continuous innovation

Source: World Wide Web Source: SEC

From mobile revolution

to the age of cloud and

big data

To ride the wave of

innovation, SEC needs

to boost its software

capabilities

The hardware segment

also holds potential for

disruptive innovation

0

50

100

150

200

250

90 92 94 96 98 00 02 04 06 08 10 12

SEC Sony Sum of 4 major Japanese IT companies

SEC's market cap

exceeds Sony's

SEC's market cap

exceeds sum of 4 major

Japanese IT players'

(US$bn)



IT sector investment strategy for 2013

1. [Macroeconomic view] The IT sector in context

We expect macroeconomic factors to have only a minimal impact on the IT sector in 2013.

GDP growth is projected at slightly over 3%, and the won is projected to appreciate to

W1,060/US$ at end-2013. In 2013, earnings stability and re-rating should be the keywords

for SEC. The market still considers SEC a cyclical stock. If the company maintains stable

earnings in 2013, however, its valuation could improve, in our view.

2. [Global view] Apple vs. SEC

Apple is increasingly leaning toward „sustaining innovations,‰ although it created new

markets through disruptive innovation. In our view, a company with strong shipment growth

is more likely to maintain its earnings in an increasingly competitive smartphone market. If

SECÊs smartphone market share reaches 40%, risks (i.e., stagnation in shipments, margin

deterioration) and negative biases facing the company would subside.

„Apple without SEC‰ is likely to experience disruptions in its supply of major parts, including

in-cell displays, mobile DRAM, and APs. In contrast, „SEC without Apple‰ should remain

unscathed. Even if Apple switches its AP supplier to TSMC in 2H13, SECÊs semiconductor

unitÊs operating profit is projected to decline just 7%, with total 2013 operating profit sliding

less than 2% (W520bn).

3. [2013 investment strategy] Weak in 1H, but strong in 2H

The biggest risk for SEC is the possibility of a decline in smartphone margins. In 3Q12, the

telecom division generated 70% of SECÊs total operating profit. Next year, SECÊs operating

profit growth is projected to significantly slow to 16.7%. In particular, earnings momentum is

expected to be weak in 1Q13 due to the absence of new model launches.

We project the performances of SEC and IT shares to be weak in 1H but to strengthen in 2H.

We advise investors to take the most conservative approach possible in accumulating IT

shares. But, in 4Q12 and 1Q13, the low valuations of large-cap IT stocks should offer

investors opportunities to expand the weight of the stocks.

Table 1. Earnings and valuations of top 11 Korean IT companies (Wbn, %, x)

Revenues OP OP margin Net profit P/E P/B ROE

Market

cap. 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F

SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6

SK Hynix 17,561 10,094 12,291 -131 1,202 -1.3 9.8 -201 938 - 18.7 1.9 1.7 -2.3 9.0

LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2

SEMCO 7,044 7,924 8,585 645 723 8.1 8.4 473 546 15.5 13.4 2.0 1.8 12.9 13.5

Samsung SDI 6,811 5,827 5,990 297 341 5.1 5.7 1,546 583 4.6 12.1 1.0 0.9 23.1 7.9

SFA Engineering 736 583 850 82 105 14.0 12.4 72 88 10.2 8.4 2.0 1.8 19.5 20.8

Soulbrain 745 583 665 98 115 16.9 17.4 65 79 11.4 9.3 2.2 1.8 22.8 21.3

Duksan Hi-Metal 548 153 202 44 56 28.7 27.9 44 55 12.5 9.9 3.7 2.7 27.4 26.2

Partron 700 767 934 75 92 9.8 9.8 57 75 12.3 9.3 3.4 2.6 32.0 32.0

Nepes 286 275 335 40 56 14.5 16.8 26 44 11.0 6.5 1.6 1.3 15.1 21.1

Simmtech 340 655 757 53 67 8.2 8.9 35 52 9.3 6.4 1.6 1.3 18.3 22.0


Earnings stability to be

important for SEC next

year

Apple is facing the

innovatorÊs dilemma

Apple without SEC vs.

SEC without Apple

2013 outlook for SEC

and IT stocks: weak in

1H; stronger in 2H



Figure 10. AppleÊs 30-year history of disruptive/sustaining innovation (1976~2007): PC smartphone

Source: Edwin Tofslie, World Wide Web



Figure 11. Disruptive/sustaining innovation in mobile industry: cell phone → smartphone


Strategic decision

(e.g., entering into a new m

arket)

Sustaining innovation:

Evolution


Evolution

Innovation

20002010

20051995

iPad

iPhone

Nokia 9000

StarT

AC

?

2015

Time

Disruptive innovation: R

evolution

Strategic decision

(e.g., entering into a new m

arket)


Evolution


Evolution

Innovation

20002010

20051995

iPad

iPhone

Nokia 9000

StarT

AC

?

2015

Time

Disruptive innovation: R

evolution


I Apple: The Innovator’s Dilemma

While Apple has been preoccupied with „sustaining innovations,‰ other new markets have

been gaining ground in the smart device world: namely: 1) 5~7-inch smart devices called

„phablets‰ and 2) smart PCs, otherwise referred to as hybrid PCs. Amazon and Google are

already making their mark in the 7-inch phablet market with the releases of the Kindle Fire

and the Nexus 7. In particular, AmazonÊs robust content offerings have made the company a

serious competitive threat.

While Amazon, Google, and Microsoft are sweeping into the tablet PC market, the new iPad

is increasingly losing its appeal to consumers. Will the iPad Mini be received differently, or

will it just signal AppleÊs fall from market visionary to copycat and/or follower? Although we

do not yet have an answer, one thing seems clear: Apple is facing the innovatorÊs dilemma.



I. Apple: “The innovator’s dilemma”

Why the “innovator’s dilemma?”

Apple created a new ecosystem through iTunes and introduced innovative hardware (e.g.,

the iPod, the iPhone, the iPad), opening new markets for smartphones and tablet PCs. We

call this the „mobile revolution.‰ According to Clayton M. ChristensenÊs book The

InnovatorÊs Dilemma, this sort of phenomenon qualifies as a disruptive innovation.

However, in 2012, Apple has been neither revolutionary nor innovative. Though the company

has introduced new technologies during the past several years, including iCloud, Siri, and in-

cell touch displays, these technologies were originally conceived by the late Steve Jobs. This

suggests that these technologies are examples of sustaining innovations (according to

ChristensenÊs definition), which appear to be AppleÊs main points of focus.

Many analysts are still optimistic about Apple. However, we believe AppleÊs shares might

have already peaked this year (above US$700), and will likely undergo corrections for some

time. Our projection is based on our belief that Apple is facing the „innovatorÊs dilemma.‰

Figure 12. Disruptive innovation and sustaining innovation

Source: Clayton M. Christensen,「The InnovatorÊs Dilemma」

Apple is facing

the„innovatorÊs

dilemma.‰

Clayton M. Christensen, a professor at Harvard Business School who is widely

regarded as the Einstein of the business management world, popularized the theory of

disruptive innovation in his 1997 book The InnovatorÊs Dilemma. In it, Christensen

argues that established industry leaders tend to use „sustaining innovations‰ to

maintain their market dominance. However, this approach can lead to a loss of

leadership when a new innovative technology, or so-called „disruptive innovation,‰

emerges. Christensen has laid out corporate strategies related to disruptive innovation

in his subsequent books: The InnovatorÊs Solution (2003) and Seeing WhatÊs Next

(2004).

Disruptive innovation

Creating brand new markets in unexplored areas

e.g., Electric vehicles

Unexplored markets

Per

form

ance

in e

xist

ing

mar

ket

e.g., Toyota

e.g., HMC


in the low-end market

Time

Time

Sustaining innovation

Introducing upgraded products in existing markets


Creating brand new markets in unexplored areas

e.g., Electric vehicles

Unexplored markets

Per

form

ance

in e

xist

ing

mar

ket

e.g., Toyota

e.g., HMC


in the low-end market

Time

Time

Sustaining innovation

Introducing upgraded products in existing markets



Two issues facing Apple

Apple is one of the most valuable corporations in the world. But expectations for the

company have increased. Consumers now need Apple to: 1) deliver outstanding innovations;

2) continue to develop its Siri technology, which acts as an intelligent, personal secretary;

and 3) introduce its smart TV, which features an innovative user interface.

In other words, AppleÊs shares should only rise if the companyÊs smartphones undeniably

outperform competitorsÊ products. However, AppleÊs new technologies, such as in-cell

touch displays and Apple Maps, have many problems. No wonder the companyÊs shares are

falling.

Figure 13. AppleÊs share price and market cap trends Figure 14. Apple Maps have many inaccuracies

Source: Bloomberg, KDB Daewoo Securities Research Source: World Wide Web

We believe Apple is faced with two fundamental issues:

1) Apple has grown through innovations that have disrupted its competitorsÊ established

products. But Apple is facing a brand new issue: its own innovations are becoming

destructive to the company. According to Professor Christensen, Apple has never

experienced this sort of destructive innovation, and thus might have no idea what will

happen next. For example, AppleÊs new product, the iPad Mini, is likely to cannibalize iPad

demand. Also, how can Apple differentiate its iPad Mini from the Kindle Fire and Nexus 7?

2) We believe AppleÊs increasingly closed-minded approach will hinder the companyÊs

growth. We do not understand why Apple removed the YouTube and Google Map apps from

its devices. In addition, the iPhone 5 does not support near-field communication (NFC)

technology. In the US, iPhone users cannot utilize LTE data transmission while talking on the

phone. In Korea, iPhone users cannot use VoLTE (voice calls with LTE technology). These

services require an additional antenna on the iPhone.

Apple could stumble again, unless it realizes the seriousness of these issues. Christensen

writes: „Closed architectures eventually gave rise to open structures. PCs were not an

exception. Apple fell once, and, given that Android phones are growing faster than iPhones,

it could fall again.‰

Expectations for Apple

have increased

1) Apple is faced with

the problem of self-

destructive innovation

2) AppleÊs closed-

minded approach

0

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Growth of new smart devices

While Apple has been preoccupied with sustaining innovations, other new markets have

been gaining ground in the smart device world: namely 1) 5~7-inch smart devices called

phablets and 2) smart PCs, otherwise referred to as hybrid PCs. Amazon and Google are

already making their mark in the 7-inch market with the release of their respective products,

the Kindle Fire and the Nexus 7. In particular, AmazonÊs robust content offerings have made

the company a serious competitive threat.

What is worth noting is that both of the aforementioned markets have effectively

incorporated features that have been largely ignored by Apple: For example, SECÊs

introduction of stylus functionality in its Galaxy Note phablet, and the integration of

keyboards in MicrosoftÊs Surface and SECÊs ATIV hybrid PCs. And, as for operating systems,

Microsoft has been pushing Windows 8 in both markets.

It seems almost as if Apple was predestined to strip away the stylus and the keyboard from its

smart devices in order to launch the multi-touch market. In the words of Steve Jobs, „We have

been very lucky to have brought a few revolutionary user interfaces to the market in our time.

First was the mouse. The second was the click wheel. And, now, we're going to bring multi-

touch to the market. And each of these revolutionary interfaces has made possible a

revolutionary product: the Mac, the iPod and now the iPhone‰

But arenÊt the stylus and the keyboard indispensable parts of our history? In fact, they may

have been more groundbreaking than the multi-touch panel.

Figure 15. The creation of the phablet and smart PC markets


Figure 16. Content driving AmazonÊs tablet market share expansion Figure 17. SECÊs ATIV series

Source: World Wide Web Source: World Wide Web

Phablets and smart PCs:

Newly emerging

markets

The stylus and keyboard,

features largely

bypassed by Apple, have

been successfully

introduced

Smartphone3.0~5.0‰

Tablet PC7.0~10.0‰

Notebook PC10.0~15.0‰

Smart/hybrid PC(keyboard)

Phablet5.0~7.0‰(stylus)

Smartphone3.0~5.0‰

Tablet PC7.0~10.0‰

Notebook PC10.0~15.0‰

Smart/hybrid PC(keyboard)

Phablet5.0~7.0‰(stylus)



SEC’s differentiated smartphone lineup

The strategic differences between SEC and Apple have become pronounced in 2012. Given

that smartphone demand is projected to increase by 33% YoY this year, SECÊs differentiated

strategy of diversification will likely stand out.

Early this year, we believed that competition between SEC and Apple would be

characterized simply by a battle between the Galaxy S III and the iPhone 5. However, SEC

has moved more quickly than expected following its launch of the Galaxy Note, establishing

a high-end smartphone lineup of the Galaxy Note, Galaxy S III, and Galaxy Note II. If SEC

releases the Galaxy S IV early next year, the company will establish a track record of rolling

out new models every one or two quarters.

In comparison, AppleÊs strategy of launching a new model only once a year seems to be

causing the company to lag behind smartphone demand growth. The launch of the iPhone 5

should be too late despite consumersÊ desire to see a new iPhone model as soon as

possible. This strategic difference has led to SECÊs recent overwhelming edge in

smartphone shipments.

Some Investors believe that the launch of the iPhone 5 will dent Galaxy S III sales. However,

we believe that the sales volume of the Galaxy S III will not plunge on the rollout of the new

iPhone model, as the innovations that the Galaxy S III features are different from those of

the iPhone 5. Consumers who think that a four-inch screen is the greatest downside to the

iPhone are unlikely to buy the iPhone 5.

Diversification: SECÊs

strategic differentiation

AppleÊs new product

launch strategy is not

keeping up with

smartphone demand

growth

The innovations that the

Galaxy S III features are

different from those of

the iPhone 5



Figure 18. Quarterly smartphone shipment trends of SEC and Apple Figure 19. Global smartphone shipments; SEC & AppleÊs M/S trends

Source: Gartner, IDC, KDB Daewoo Securities Research estimates Source: Gartner, IDC, KDB Daewoo Securities Research estimates

Figure 20. SECÊs quarterly operating profit trends by division Figure 21. SECÊs flagship modelsÊ quarterly shipment trends

Source: Company data, IDC, KDB Daewoo Securities Research estimates Source: Company data, KDB Daewoo Securities Research estimates

0

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Galaxy Note II

Galaxy S IV

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(mn units)

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(mn units) (%)

SEC's smartphone market share

expected to exceed 30% in 2012

-2

-1

0

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4

5

6

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(Wtr)

Semiconductor

Display

IM

CE



SEC: “It doesn’t take a genius”

The patent lawsuit between Apple and SEC resulted in a landslide victory for Apple in San

Jose. The final ruling is expected to be handed down in 4Q, and the fight is likely to continue

in the US Court of Appeals for the Federal Circuit. So, does this mean that SEC will never be

able to catch up to their Cupertino-based rival? Will consumers think that SECÊs products are

copycats and become unwilling to buy them?

This type of lawsuit surely presents a risk for SEC. Still, we need to take a look at the flip

side of the coin, especially in terms of marketing. Furthermore, we could raise the question:

„Is it better to be a copycat or Nokia?‰

In the face of disruptive innovation (driven by Apple), Nokia lost its long-held global

dominance of the handset market to Apple and SEC. Furthermore, SEC not only overtook

Nokia, but also surpassed Apple in terms of shipments. This success proves that SEC made

the right strategic choices, despite risking being called a copycat.

Although Apple won its US patent lawsuit against SEC, its new iPhone model appears to

have fallen short of customer expectations in terms of innovation. So, does this mean that

Apple is doomed without Steve Jobs? Or that a genius has been surpassed by a copycat?

Although SEC lost the patent suit, we believe that the company is turning lemons into

lemonade (in terms of marketing).

Going forward, SEC will be able to use Windows 8 to strengthen its case that it is not a

copycat and use LTE technology to attack Apple.

“It doesn’t take a genius.

The Next Big Thing Is Already Here”

The advertisement to the right, which

SEC started to run in the US market

immediately after losing the

aforementioned patent lawsuit, created a

huge sensation. By emphasizing the

innovative features of the Galaxy S III, the

company is making a strong appeal to

non-Apple users.

Thus, the unfavorable ruling may have a

silver lining, especially with regard to

marketing. By paying W1tr in damages

now, the company may have a chance to

earn W10tr in the future.

Copycat or Nokia?

SEC will use LTE

technology as a weapon

against Apple



Innovation from content producers

„Demand is an unusual form of energy that turns many wheels from big to small, from

economies to markets to organizations to our paychecks, here and around the world.

Everything depends on it. Without it, growth slows, economies falter, progress stops.‰

--Adrian J. Slyworzky, Demand

In his book Demand, Adrian J. Slyworzky examined six factors that lead to the creation of

demand: 1) magnetic offers, 2) a hassle map (and its resolution), 3) a back story, 4) a trigger,

5) a trajectory, and 6) variation.

Take Apple, for example. The tablet PC market was spawned by AppleÊs disruptive

innovation, the iPad. Although several tablet PC models had preceded the iPad, it was not

until the release of AppleÊs version that the market, and an accompanying ecosystem,

actually emerged. Based on its ecosystem, Apple could build a differentiated user interface

and hardware. And, importantly, all of the six aforementioned factors necessary for demand

creation were present during the iPadÊs rise.

However, while Apple was resting on its laurels, content providers stepped in and started to

drive innovation.

Jeff Bezos claims that AmazonÊs new Kindle Fire, priced at US$119, is a service, not a

product. AmazonÊs Kindle and GoogleÊs Nexus 7 have: 1) magnetic offers and backstories

(rich content), 2) triggers (reasonable prices), and 3) variation (7-inch screens). MicrosoftÊs

Surface resolved a hassle map problem (e.g., inconveniences arising from the lack of a

keyboard) and also has a trigger (Windows 8) and a backstory (Microsoft Office).

As mentioned earlier, Clayton Christensen warned of the risk of the innovatorÊs dilemma,

saying that a disruptor of one decade could become a disruptee in the following one. Steve

Jobs also emphasized the need to constantly innovate to tackle this issue.

Indeed, while Amazon, Google, and Microsoft are sweeping into the tablet PC market, the

new iPad is increasingly losing its appeal to consumers. Will the iPad Mini become a

variation, or just signal AppleÊs fall from market visionary to copycat and/or follower?

Although we do not yet have an answer, one thing seems clear: Apple is facing the

innovatorÊs dilemma.

Where does demand

come from?

Creating a legend

through disruptive

innovation

Content makers have

emerged as new

innovation drivers



Figure 22. How does the creation of new demand begin?

Source: Adrian J. Slyworzky「Demand」

Figure 23. Demand creation by content companies


Content provider Google Amazon Microsoft

Product Nexus 7 Kindle Fire Surface

Magnetic: Sensitivity, performance v v v

Hassle map: Solutions for problems v

Backstory: Infrastructure, ecosystem v v v

Trigger: Creation of demand v

Trajectory: Quality improvement v v

Variation: Various needs v v v

DemandDemand

MagneticMagnetic

Hassle mapHassle map

BackstoryBackstory

VariationVariation

TrajectoryTrajectory

TriggerTrigger

Combination of strong performance and sensitivity

CustomerÊs troubles can present attractive opportunities to those who create new demand

External factors that make a product more attractive(e.g., Infrastructure, ecosystem)

Something that turns spectators into customers

(e.g., personal experience, quick delivery)

How quickly the attractiveness of a product improves(e.g., via ontinuous quality improvement)

Breaking the illusion of „the average customer‰ with products that can meet customersÊ needs exactly


II Global Supply Chain Reshuffle

Although Apple and SEC had been widely anticipated to remain business partners despite

their court battles, the latest change in AppleÊs supply chain (for the iPhone 5) suggests

otherwise. Given their interdependence up to this point, it will be interesting to see how

Apple and SEC operate without the help of one another going forward.

How will this change affect SEC next year? SECÊs semiconductor operating profit is forecast

to expand to W7.8tr in 2013, from W4.5tr in 2012. However, if SEC does not supply APs to

Apple (from 2H13) and fails to find new customers, the 2013 revenues and operating profit

of the System LSI segment should decline 15% YoY and 20% YoY, respectively. Even so, a

20% contraction (W520bn) corresponds to only 7% of the semiconductor divisionÊs 2013

operating profit estimate, and just 1.6% of the companyÊs total operating profit projection of

W33tr.



II. Global supply chain reshuffle

Implications of Apple’s supply chain change

Unlike AppleÊs previous smartphone models, the iPhone 5 does not feature SECÊs memory

chips. Given that SEC is the worldÊs largest memory maker, AppleÊs decision not to use

SECÊs chips has given rise to much speculation about the souring relationship between the

two companies. This change in AppleÊs supply chain has caught the attention of global parts

makers as well as investors.

The huge success of AppleÊs iPod, iPhone, and iPad has considerably increased the

companyÊs influence on the global memory market. Indeed, Apple consumes about 30% of

global NAND production, and ToshibaÊs and ElpidaÊs shares of the memory market have

fluctuated widely depending on AppleÊs order volume.

However, AppleÊs large order volume does not appear to have improved the earnings of

memory makers, such as Toshiba, SK Hynix and Elpida, due to low supply prices. Apple

even caused a supply glut in the NAND market after cancelling a large number of orders.

Some memory makers that expanded capacity to supply to Apple suffered severe inventory

buildup.

It is not clear whether it was Apple or SEC that caused the exclusion of SECÊs memory chips

from the iPhone 5. SECÊs basic guideline is that it supplies parts only if a reasonable margin

is guaranteed. Thus, we believe that SEC refused to supply its products to Apple.

Table 2. AppleÊs major products

Product iPhone 4S iPhone 5 iPad Mini New iPad

Processor 1GHz Apple A5 1.2GHz Dual-Core Apple A6 Dual-core A5X 1GHz Dual-Core Apple A6X

OS iOS 5 iOS 6 iOS 6 iOS 6

Display 3.5" Retina display 4.0" Retina display 7.85" 9.7" Retina display

Resolution 960 x 640 1136 x 640 1024 x 768 (~163ppi) 2048 x 1536 (~264ppi)

RAM 512MB 1GB 512MB 1GB

Storage 16GB/32GB/64GB 16GB/32GB/64GB 8GB/16GB/32GB/64GB 16/32/64GB

External memory No No No No

Wireless 3G, WiFi, Bluetooth v4.0 4G LTE, WiFi, Bluetooth v4.0 Wi-Fi, 4G LTE Wi-Fi, LTE/3G

Camera Front: VGA

Back: 8MP

Front: 1.2MP

Back: 8MP

Front: 1.2MP

Back: 5MP

Front: 5MP

Back: VGA

Battery 1,432mAh 1,440mAh 4,400mAh 11,560mAh

Size (H x W x D) 115.2 x 58.6 x 9.3mm 123.8x58.6x7.6mm 200x134.7x7.2mm 241.2x185.7x9.4mm

Weight 140g 112g 308g 652g

Price 16GB: US$199/32GB: US$299 16GB: US$199/32GB: US$299 16GB: US$329/32GB: US$429 16GB: US$499/32GB: US$599

Release date October 2011 September 2012 November 2012 November 2012

Source: Company data, KDB Daewoo Securities Research

iPhone 5 production

marks a change in

AppleÊs supply chain

Apple exerts significant

influence over global

memory makers



Apple without SEC Greater supply chain risk

Although Apple and SEC had been widely anticipated to remain business partners despite

their court battles, the latest change in AppleÊs supply chain (for the iPhone 5) suggests

otherwise. Given their interdependence up to this point, it will be interesting to see how

Apple and SEC operate without the help of one another going forward.

Apple has already started to source essential parts from suppliers other than SEC. LG

Display (LGD), Japan Display, and Sharp now supply display panels, and Toshiba, SK Hynix,

and Micron provide NAND to Apple. Mobile DRAM is supplied by SK Hynix and Elpida, and

batteries are sourced from ATL and Sanyo. Only APs are purchased from SEC now.

Table 3. iPhone 5 supply chain

Components Price (US$, 16GB) Specifics Manufacturers

AP 17.50 SEC

Memory 20.85 DRAM SEC SK Hynix Micron (Elpida)

NAND SEC SK Hynix Toshiba SanDisk

Radio frequency 34.00 Baseband/transceiver Qualcomm

RF memory Intel

PAM Avago Skyworks Triquint

SAW module SEMCO Murata TDK

PMIC 8.50 AP Dialog

Baseband Qualcomm

Connectivity 5.00 WiFi/GPS/Bluetooth Murata Broadcom

UI & sensor 6.50 Audio codec Cirrus Logic

Audio IC Cirrus Logic

E-Compass AKM Semiconductor

Accelerometer STMicroelectronics

Gyroscope STMicroelectronics

Display 44.00 TFT Panel LGD Japan Display Sharp

Cover glass Corning

Touch screen TPK Wintek CMI

Touch controller Texas Instruments Broadcom

Camera 18.00 Lens Largan Precision Genius Electric

Module LG Innotek Sony Qualcomm

Image sensor IC OmniVision (front) Sony (back)

Battery 4.50 Pack Dynapack Simplo

Cell Sony ATL Lishen

Casing 7.00 Foxconn

PCB and other 33.00 FPCB Interflex Nippon Mektron Fujikura FLEXium

HDI Ibiden Nanya PCB

Source: IHS iSupply Research, ifixit, KDB Daewoo Securities Research

Will SEC and Apple end

their business

relationship?

Apple without SEC: The

scenario has already

started to unfold



On the surface, the „Apple without SEC‰ scenario seems perfectly viable, given AppleÊs

strong market power. However, problems have already begun to emerge on three fronts.

In-cell display: The in-cell display significantly improved iPhone 5Ês form factor, but some

users are experiencing screen-related problems. Moreover, insufficient supply is limiting

production. LGD and Japan Display, which each satisfy 50% of AppleÊs in-cell display

needs, can each produce up to 7mn displays per month. This means that 4Q iPhone 5

shipments are likely to fall short of 45mn units.

Mobile DRAM: Apple consumes around 30% of global mobile DRAM production, and SEC

produces 60% of global mobile DRAM. Without SEC, Apple has to fully rely on SK Hynix and

Elpida, which produce the remaining 40% of the global supply. This means a greater risk for

Apple in case of any disruption in mobile DRAM production, especially at Elpida.

AP: SEC is currently AppleÊs exclusive AP supplier. Apple is estimated to need 70mn APs

per quarter, or 50,000 wafers/month based on SECÊs dual-core AP production capacity. SEC

started to produce 28nm chips in 2H, and its customer base (Qualcomm) and product

portfolio (baseband) have begun to diversify. Next year, if SEC cuts its AP production for

Apple to the 30~40,000 wafer/month level, Apple may face a huge problem in making its

products.

Figure 24. iPhone 5 parts (front)

Source: ifixit, KDB Daewoo Securities Research

Figure 25. iPhone 5 parts (back)

Source: ifixit, KDB Daewoo Securities Research

Insufficient in-cell display

supply limits production

Mobile DRAM

production yield

decrease to be a risk

What if SEC cuts AP

production?

GSM PAM

RF antenna switch module

Dual-band LTE PAM

WCDMA PAM

LTE PAMCDMA PAM Baseband

PMIC

AP PMICNAND WiFi module

Gyroscope

Memory

MCP for LTE

Application processor (AP) LTE Baseband RF transceiver

Touch screen

controller

Accelerometer

Touch screen

controller



Exclusion of SEC from Apple’s supply chain would have a limited impact

The likelihood of Apple diversifying its parts suppliers has been seen as the biggest risk

factor for SEC due to AppleÊs firm dominance in the smart device market. If Apple excludes

SEC completely from its supply chain, how much of an impact would it have on SEC?

SEC has steadily increased its presence in the smartphone market. AppleÊs smartphone

market share increased from 15% in 2009 to 16% in 2010 and 20% in 2011. The companyÊs

market share is forecast at 21% in 2012 and 19% in 2013. Meanwhile, SECÊs market share

has expanded more sharply, from 4% in 2009 to 8% in 2010 and 20% in 2011. SECÊs share

is projected to reach 32% in 2012 and 34% in 2013.

As such, SECÊs market status has strengthened incredibly since 2009. In particular, SECÊs

standing as a supplier for Apple is completely different from that of other suppliers.

Figure 26. Smartphone shipments and global M/S trends and forecasts for SEC and Apple

Source: Gartner, KDB Daewoo Securities Research

1) Impact on the memory business unit: Although SEC has been excluded from AppleÊs list

of iPhone 5 memory suppliers, SEC had already reduced the memory sales contribution from

Apple. As of 2Q12, AppleÊs contribution to SECÊs DRAM sales is estimated at 5%, while

NAND sales to Apple appear to have accounted for 15% of SECÊs total NAND sales. As such,

AppleÊs contribution to operating profit at SECÊs memory business unit stood at the low 10%

level.

2) Impact on the System LSI business unit: More than 60% of SECÊs System LSI sales

come from application processors (AP), and more than 50% of the companyÊs AP sales are

attributable to Apple. As such, AppleÊs contribution to SECÊs System LSI sales appears to be

at least 30%. Given that APs are much more profitable than driver ICs and CMOS imaging

sensors, we believe that Apple contributes more than 40% to operating profit at SECÊs

System LSI unit.

3) Impact on the overall semiconductor business: AppleÊs contribution to operating profit of

SECÊs overall semiconductor business is estimated at 20~25%. In 3Q, since operating profit

at the semiconductor business reached W1.2tr, AppleÊs contribution (25%) is estimated at

W300bn, which accounted for a mere 4% of the companyÊs total operating profit (W8.1tr)

during the quarter. As such, the exclusion of SEC from AppleÊs supply chain is unlikely to

have a significant impact on SECÊs earnings.

Impact of the potential

exclusion of SEC from

AppleÊs supply chain?

In 3Q, AppleÊs

contribution to operating

profit at SECÊs

semiconductor division

amounted to W300bn

(25%), which accounted

for a mere 4% of the

companyÊs total

operating profit

723

95

217

274

420

93

130155

216

350

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Apple smartphone shipments (L)

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Apple M/S (R)

(mn units) (%)

SEC and Apple's M/S gap

expected to expand



Exclusion from Apple’s AP supplier list to have minimal impact on SEC

SECÊs semiconductor operating profit is forecast to expand to W7.8tr in 2013, from W4.5tr

in 2012. Assuming that 25% of the semiconductor unitÊs operating profit, or W1.95tr, is

generated via Apple, this figure corresponds to only 6% of the companyÊs 2013 total

operating profit projection of W33tr.

To assess the impact of Apple on SECÊs earnings, we have reviewed the following two

scenarios:

▶ Scenario 1. If SEC does not supply APs to Apple (from 2H13) and fails to find new

customers, the 2013 revenues and operating profit of the System LSI segment should

decline 15% YoY and 20% YoY, respectively. Even so, a 20% contraction (W520bn)

corresponds to only 7% of the semiconductor divisionÊs 2013 operating profit estimate

(W7.3tr), and just 1.6% of the companyÊs total operating profit projection of W33tr.

▶ Scenario 2. If SEC does not supply APs to Apple, but find new customers to replace half

of AppleÊs order volume, the revenues and operating profit of the System LSI segment

should decline 7% YoY and 10% YoY, respectively. Even so, a 10% contraction (W260bn)

corresponds to only 3.5% of the semiconductor divisionÊs 2013 operating profit estimate

(W7.54tr), and just 0.8% of the companyÊs total operating profit projection of W33tr.

Given the diversification of SECÊs customer base (Qualcomm) and product portfolio

(baseband) that began in 2H, scenario 2 seems more likely. Thus, the exclusion of SECÊs AP

from AppleÊs products should have only a negligible impact on SECÊs earnings.

Table 4. AppleÊs effect on SECÊs earnings

2012F 2013F

SEC semiconductor divisionÊs revenues

DRAM 16,283 17,254

NAND 10,243 14,726

System LSI 13,988 20,616

Total 36,096 49,398

AppleÊs contribution to SECÊs revenues

DRAM (5%) 814 863

NAND (15%) 1,536 2,209

System LSI (30%) 4,196 6,185

Total 6,547 9,256

SEC semiconductor divisionÊs OP

DRAM 2,504 2,873

NAND 1,979 3,794

System LSI 1,179 2,553

Total 4,502 7,781

AppleÊs contribution to SECÊs OP

DRAM (5%) 125 144

NAND (15%) 297 569

System LSI (maximum assumption of 45%) 531 1,149

Total 953 1,862

AppleÊs effect on semiconductor division 21% 24%

AppleÊs effect on total operating profit 3% 6%


SEC without Apple



TSMC could begin supplying APs to Apple from late 2013

Why has Apple kept SEC as an AP supplier while removing it from its list of memory

suppliers? Probably because it has no other viable options. For now, it is next to impossible

for Apple to make its tablets and smartphones without SECÊs AP supply. The most viable

alternative would be the Taiwanese firm TSMC, but we believe the company does not yet

have the production yield and capacity to meet AppleÊs needs.

Then, at what point will TSMC have the yield and capacity to begin supplying Apple?

The A6 chip that powers the new iPhone 5 is a dual-core processor manufactured on a 32nm

high-k metal gate (HKMG) process. Even though TSMC was one step ahead of SEC in

offering a 28nm HKMG process (SEC followed after 3Q12), the fact that Apple still relies on

SECÊs 32nm process instead indicates that TSMCÊs 28nm process lags behind in terms of

both capacity and efficiency.

TSMC is the worldÊs largest foundry, and its fabs and processes are as diverse as its client

base. The company owns 15 fabs, of which only three are 12 inch-based. In 2Q12, 65nm or

larger processes accounted for 65% of its revenues, while production on the 28nm process

made up only 7% (estimated at around 20,000 wafers per month). Therefore, it would be

natural to assume that SEC has a much larger capacity than TSMC for APs using 30nm or

finer processes.

TSMC already has a number of clients that opt for the 28nm process, including Qualcomm,

AMD, and Nvidia. Recently, TSMC has been experiencing yield problems on its 28nm

process node, causing a production shortage for QualcommÊs MSM 8960 (one-chip solution).

The situation is not that different for Nvidia and AMD, suggesting manufacturing is having

difficulty keeping up with design. Thus, although Apple represents an enormous opportunity

for TSMC, prioritizing Apple over its existing clients may be a risky move for the foundry

given its limited capacity.

Assuming AppleÊs 4Q12 shipments of smartphones and tablets at around 70mn units, its AP

requirements would be roughly 23mn units per month, or based on dual-core capacity, a

monthly supply of 48,000 wafers (23mn/480 per month). This means TSMC would have to

ramp up its 28nm capacity to 100,000 wafers per month in order to meet AppleÊs demand.

Thus, while we do see risks of TSMC supplying APs to Apple as early as 2H13, we do not

expect any meaningful supply before 2014.

Figure 27. TSMCÊs process breakdown in 2Q12 Figure 28. TSMCÊs sub-65nm revenue trend

Source: TSMC Source: TSMC

Apple still faces

limitations in diversifying

its AP supplier base

TSMC lags behind SEC

in terms of both yield

and capacity

Full-fledged supply could

become possible from

2014

0.15/0.18um, 15%

90nm, 10%

28nm, 7%40/45nm, 28%

65nm, 26%

025/0.35um, 6%

0.5um+, 2%

0.11/0.13um, 6%



Risks and opportunities for SEC’s System LSI unit

If Apple replaces Samsung with other vendors, including TSMC, for AP production in the

medium- to long-term, SEC will be required to formulate new growth strategies, such as 1)

business portfolio diversification, including the expansion of foundry production, 2) the

diversification of value-added products from APs to include baseband processors (BP), and 3)

a steady increase in sales contributions from customers other than Apple (including

Qualcomm).

SEC appears to have been requested to produce MSM 8960, a one-chip solution (AP + BP)

product, for Qualcomm (after migration to a 28nm process). As such, the proportion of

foundry production out of SECÊs total production is expected to climb from 15% to more

than 30% in the medium- to long-term. For MDM 9615 (QualcommÊs BP that supports both

3G and LTE technologies), TSMCÊs production is unlikely to meet QualcommÊs demand.

SEC has already adopted its in-house produced BPs in the 3G Galaxy S III model. As such,

SEC will diversify its value-added product portfolio from APs to include BPs. Furthermore,

SEC is projected to bolster its product competiveness by developing an integrated chip that

incorporates AP, BP, and connectivity (Wifi, Bluetooth, GPS, etc.) In addition, given its

superior mobile DRAM and NAND technologies, SEC is likely to emerge as a total mobile

platform provider for smart devices.

We project operating profit at SECÊs semiconductor division to increase from W4.5tr in 2012 to

W7.8tr in 2013. Profitability at the memory business unit is expected to improve on a recovery

in overall memory prices. The System LSI business unit is expected to see its earnings

improve thanks to capacity expansion (to 150,000 wafers (12-inch) per month). Operating profit

at the System LSI unit is forecast at W1.4tr in 2012 and W2.6tr in 2013. The System LSI unit is

likely to become a highest-margin growth driver in SECÊs semiconductor business after 2014.

The fact that SEC, which had focused on memory semiconductors, has recently expanded

into the AP business is reminiscent of the 1980s, when Intel shifted its focus from memory

to CPUs. The strategic decision that Intel made during that time has allowed the chipmaker

to dominate the CPU market since 1990.

Going forward, SEC is expected to be in intense competition with Intel, Qualcomm, and TSMC

in the system semiconductor market. However, SEC is best positioned to seize opportunities,

as the company has secured a dominant position in the smartphone market. Furthermore, SEC

has higher growth potential than its competitors, as it produces APs, BPs, and memory chips.

Figure 29. Revenues and OP of SECÊs semiconductor division Figure 30. SEC Âs semiconductor unitÊs OP trends and forecasts by

segment

Source: Company data, KDB Daewoo Securities Research estimates Source: Company data, KDB Daewoo Securities Research estimates

SEC to be required to

formulate new growth

strategies

SEC to see foundry

production rise

Competitiveness for

non-memory products,

including BPs, to rise

further

Earnings at the System

LSI unit to continue to

rise

Time to make a strategic

decision, as Intel did in

the 1980s

-2.0

0.0

2.0

4.0

6.0

8.0

2008 2010 2012F 2014F

(Wtr)

DRAM

NAND

System LSI Biggest growth driver

to be System LSIHDD sell-off profit

0

20

40

60

80

2008 2010 2012F 2014F

(Wtr)

0

3

6

9

12

15

18SEC semiconductor division's revenues (L)

SEC semiconductor division's OP (R)

(Wtr)


III Losers’ League

With the global smartphone market being dominated by only two makers, we do not expect

a third player (that is able to churn out over 50mn smartphones per year) to join the

competition anytime soon. Second-tier smartphone makers have yet to differentiate

themselves in terms of: 1) hardware, 2) software/content, and 3) marketing strategies.

In 2013, we expect second-tier smartphone makers to compete within their own league.

Among the eight second-tier makers, we believe that four (Nokia, HTC, LG Electronics (LGE)

and Huawei) will take loftier positions (40mn shipments per year). The rest are anticipated to

ship around 20~30mn smartphones per year.



III. Losers’ league: Competition among second-tier makers to intensify

Second-tiers to continue the fight for survival

In 2012, top-tier smartphone makers further widened the gap with their second-tier

competitors. Their combined market share is forecast to increase to 54% in 2012, up from

23% in 2010 and 40% in 2011, while second-tier makers, including Nokia, are expected to

ship only 25~45mn smartphones. So, does this mean that there will remain only two

dominant players, while the rest struggle to stay afloat?

Among the eight second-tier makers, Motorola was acquired by Google. NokiaÊs quarterly

smartphone shipments have continued to decline, to around 10mn. RIM performed even

worse, reporting quarterly smartphone shipments of less than 8mn units. Will second-tier

makers ever be able to turn around?

This year, our forecast for second-tiersÊ smartphone shipments is: 42mn smartphones by

Nokia, 36mn by HTC, 32mn by RIM, 29mn by Huawei, 26mn by LGE, 25mn by ZTE, 24mn

by Sony, and 22mn by Motorola. Among these eight second-tier smartphone makers, Nokia

(down 51% YoY) and RIM (down 40% YoY) are likely to suffer the biggest declines in

shipments.

RIM established a strong foothold with Blackberry in the early stages of the smartphone

revolution. However, the company failed to properly adapt to rapid changes in the market,

virtually losing all corporate smartphone demand in North America to Apple.

RIM recently postponed its new model release to early next year. Reflecting the companyÊs

sluggish performance, its share price nosedived from over US$60 in early 2011 to US$8 now.

It is not even clear whether the company will manage to survive the competition next year.

However, if RIM is forced out of the market, this would send a positive signal to the second-

tier peers, suggesting that market restructuring is coming to an end.

Figure 31. RIMÊs quarterly revenues and OP trends Figure 32. RIMÊs market cap trends

Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research

Smartphone shipments

by second-tier firms

trended down in 2012

Eight second-tiers

remain in operation

RIMÊs potential exit from

the market likely to

signal an upturn for

surviving second-tiers

-1

0

1

2

3

4

5

6

7

8

1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

(US$bn)

-0.5

0.0

0.5

1.0

1.5Revenues (L)

Operating profit (R)

(US$bn)

0

10

20

30

40

50

1/10 7/10 1/11 7/11 1/12 7/12

(US$tr)

Market cap



Who will exceed the 40mn threshold?

With the global smartphone market being dominated by only two makers, we do not expect

a third player (that is able to churn out over 50mn smartphones per year) to join the

competition anytime soon. Second-tier smartphone makers have yet to differentiate

themselves in terms of hardware, software/content, and marketing strategies.

In 2013, we expect second-tier smartphone makers to compete within their own league.

Among the eight second-tier makers, we believe that around four (Nokia, HTC, LGE, and

Huawei) will take the higher spots (40mn shipments per year). The rest are anticipated to

ship around 20~30mn smartphones per year. Key points for each company include:

Nokia. Our bright outlook for Nokia is based on the companyÊs excellent track record in the

handset market. Its global marketing prowess, combined with the Windows mobile OS,

might give the company another opportunity to establish a new ecosystem.

HTC. HTC has a strong presence in the mid- to low-priced smartphone market segment.

Despite a lack of flagship models, the company has delivered consistent margins. In fact,

restraining from aggressive business expansion might be the key to the companyÊs stable

single-digit OP margins.

LGE. LGE is looking for a growth opportunity in the LTE segment, which is forecast to

expand next year. The companyÊs strength in vertical integration (LGD and LG Chem) should

help improve its high-end product competitiveness.

Huawei. Huawei is the leading smartphone maker in China. The vast market of China is the

companyÊs strongest asset and compensates for its relatively weak competitiveness. ZTE

also has similar advantages, but Huawei is believed to have a higher level of economies of

scale.

Table 5. Annual shipment trends and forecasts by major smartphone companies (mn units)

09 10 11 12F 13F 14F 15F

Samsung 6.8 22.9 94.5 212.5 273.0 350.0 420.0

Apple 25.1 47.5 93.0 131.0 155.0 182.9 215.8

Nokia 67.8 100.3 84.6 41.5 44.0 49.3 53.2

HTC 11.7 21.7 43.0 35.6 44.0 49.3 53.2

LGE 0.6 6.4 19.0 26.0 40.0 44.8 48.4

RIM 34.0 48.3 52.8 31.7 29.0 27.6 28.9

Motorola 3.6 14.0 17.4 20.7 28.0 30.2 32.7

Huawei - 0.8 20.0 29.3 42.0 50.4 59.5

ZTE - 0.3 12.0 24.5 34.0 40.1 46.1

Sony 1.7 10.6 17.5 24.4 30.0 33.0 35.6

Other 21.8 31.7 23.8 48.1 61.0 73.2 84.2

Total 173.1 304.6 471.7 625.3 780.0 930.8 1,077.7

Source: Gartner, KDB Daewoo Securities Research estimates

Smartphone market to

remain divided by SEC

and Apple

Competition among

second-tiers to intensify

Top four second-tier

makers: Nokia, HTC,

LGE, Huawei



Figure 33. Global smartphone shipment trends and forecasts


Figure 34. Shipment trends and forecasts of first-tier and second-tier smartphone companies


Figure 35. Smartphone shipment trends and forecasts in 2012 and 2013


173

305

472

624

780

930

1,077

28.9

76.0

54.9

15.8

32.2

25.119.2

0

250

500

750

1,000

1,250

09 10 11 12F 13F 14F 15F

0

20

40

60

80

100Smartphone shipments (L)

% YoY (R)

(mn units) (%)

1823

40

56 55 57 59

0

250

500

750

09 10 11 12F 13F 14F 15F

0

20

40

60

80

1001st-tier smartphone shipments (L) 2nd-tier smartphone shipments (L)

1st-tier M/S (R) 2nd-tier M/S (R)

(mn units) (%)

0 50 100 150 200 250 300

Samsung

Apple

Nokia

HTC

LGE

RIM

Motorola

Huawei

ZTE

Sony

Other2012F 2013F

(mn units)

SEC and Apple's shipment gap

expected to expand in 2013

Nokia, HTC, LGE, and Huawei

expected to become top 4 in 2nd tier



Table 6. SECÊs and AppleÊs smartphones

Manufacturer SEC Apple

Product Galaxy S3 Galaxy Note2 iPhone 4S iPhone 5

Processor 1.4GHz Quad-core Exynos 4212 1.6GHz Quad-core Exyno s4412 1GHz Apple A5 1.2GHz Dual-core Apple A6

OS Android 4.0 ICS Android 4.1 Jelly Bean iOS 5.0 iOS 6

Display 4.8" S-AMOLED capacitive 5.5" S-AMOLED capacitive 3.5" Retina display 4.0" Retina display

Resolution 1280 x 720 1280 x 720 960 x 640 1136 x 640

RAM 1GB (3G model)/2GB (LTE

model) 2GB 512MB 1GB

Storage 16GB/32GB 16GB/32GB/64GB 16GB/32GB/64GB 16GB/32GB/64GB

External memory Micro SD card (up to 64GB) Micro SD card (up to 32GB) No No

Wireless 4G LTE, 3G, WiFi, Bluetooth 4G LTE, WiFi, Bluetooth 3G, WiFi, Bluetooth 4G LTE, WiFi, Bluetooth

Camera Front: 1.9MP/Back: 8MP Front: 1.9MP/Back: 8MP Front: VGA/Back: 8MP Front: 1.2MP/Back: 8MP


Size (H x W x D) 136.6 x 70.6 x 8.6mm 151.1 x 80.5 x 9.4mm 115.2 x 58.6 x 9.3mm 123.8 x 58.6 x 7.6mm

Weight 133g 180g 140g 112g

Price High W900,000 level Low W1,000,000 level 16GB: US$199

32GB: US$299

64GB: US$399

16GB: US$199

32GB: US$299

64GB: US$399

Release date July 2012 October 2012 October 2012 September 2012


Table 7. LGE, HTC, Nokia, and HuaweiÊs smartphones

Manufacturer LGE HTC Nokia Huawei

Product Optimus G One X+ Lumia 920 ASCEND P1 LTE

Processor 1.5GHz Quad-core Krait 1.7GHz Quad-core Tegra3 1.5GHz Dual-Core Krait 1.5GHz Dual-Core OMAP 4460

OS Android 4.0 ICS Android 4.1 Jelly Bean Windows8 Android 4.0 ICS

Display 4.7" HD-IPS LCD 4.7" Super LCD2 4.5" IPS TFT 4.3" Super AMOLED

Resolution 1280 x 768 1280 x 720 1280 x 768 960x 5 40

RAM 2GB 1GB 1GB 1GB

Storage 32GB 32GB/64GB 32GB 4GB

External memory No No No MicroSD card (up to 32GB)

Wireless 4G, WiFi, Bluetooth 3G, WiFi, Bluetooth 4G LTE, 3G, WiFi, Bluetooth 4G LTE, 3G, WiFi, Bluetooth

Camera Front: 1.3MP/Back: 13MP Front: 1.6MP/Back: 8MP Front: 1.3MP/Back: 8MP Front: 1.3MP/Back: 8MP


Size (H x W x D) 131.9 x 68.9 x 8.5mm 134.4 x 69.9 x 8.9mm 130.3 x 70.8 x 107.7mm 132.5 x 65.4 x 9.9mm

Weight 145g 135g 185g 135g

Price W1,000,000 Low W700,000 level TBA Around W500,000

Release date October 2012 October 2012 November 2012 October 2012




Nokia: Windows 8 may be the company’s last shot in smartphones

In 1Q12, after 14 years on top, Nokia was dethroned by SEC as the worldÊs largest handset

maker. After accumulating losses of more than EUR3bn over the last six quarters, the

mobile phone giant is now considering selling some of its non-core assets, including its

headquarters in Espoo, Finland, and has announced plans to cut its headcount by 20% by

the end of next year.

In 3Q12, NokiaÊs Devices & Services unit posted revenues of EUR3.6bn (down 33.9% YoY

and 11.4% QoQ), even lower than the 2004 level (EUR4.08bn). The division posted another

operating loss (EUR680mn) and saw its OP margin plunge by 22.3%p YoY and 7.4%p QoQ

to -9.2%, one of the worst levels on record.

Handset sales fell 22.2% YoY and 1.0% QoQ to 82.9mn in the quarter. Smartphone sales

tumbled 62.5% YoY and 38.2% QoQ to 6.3mn units, while feature phone sales were down

14.7% YoY but up 4.2% QoQ to 76.6mn units.

Although the Devices & Services division is likely to remain in the red in 4Q12, its operating

losses should slowly narrow with the release of Lumia 920 and Lumia 820, both of which

run on Windows 8. Nokia has already gained some ground in the Windows-based

smartphone market following its rollouts of low-end products in 2Q and 3Q. Looking ahead,

we think Windows 8, which allows consumers to use the same operating system on their

PCs and smartphones, will provide a significant boost to Nokia.

With the current smartphone market dominated by SEC and Apple, it will be challenging for

Nokia to restore its market position given its lack of apps and tarnished brand reputation.

Thus, 4Q will be a critical quarter for Nokia, with much of its survival depending on the

expected release of its new Lumia series and corporate restructuring efforts led by its

current boss Stephen Elop.

We believe NokiaÊs best chance of survival lies in differentiating its smartphones with the

Windows 8 operating system. While it remains to be seen whether the company made the

right decision in abandoning its Symbian OS and forming a strategic alliance with Microsoft,

we believe the Windows-based differentiation and the commoditization of smartphones will

present a new opportunity for Nokia.

Figure 36. NokiaÊs quarterly earnings trend Figure 37. NokiaÊs smartphone lineup

Source: Company data, KDB Daewoo Securities Research Source: GS Marena, KDB Daewoo Securities Research

3Q12 was another

disappointing quarter for

Nokia

Watch for the release of

Lumia smartphones and

restructuring efforts in

4Q12

-4

0

4

8

12

1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

-30

-20

-10

0

10

20

30Sales (L)

Operating profit (L)

OPM (R)

(EURbn) (%)

Cont inuing losses

Specifications

Size:127.8 x 68.4 x 10.9mm

Weight: 145g

Display:480 x 800 pixels

(AMOLED capacitive

touchscreen)

Camera:8MP, LED flash

OS: Windows Phone 8

CPU: -

Size: 130.3 x 70.8 x 10.7mm

Weight: 185g

Display: 768 x 1280 pixels

(TIPS TFT capacitive

touchscreen)

Camera: 8MP, LED flash

OS: Windows Phone 8

CPU: Dual-core 1.5 GHz

Size:123.8 x 68.5 x 9.9mm

Weight: 160g


(AMOLED capacitive

touchscreen)


OS: Android OS, v4.0


Released

date4Q12F September 2012F 4Q12F

Lumia 920 Lumia 820Name Lumia 810



HTC: Standing out in the low- to mid-end market

From the early years of the smartphone market, HTC was very quick to respond to new

changes and opportunities. The initial growth of the smartphone industry was driven by the

alignment of market participantsÊ interests. Indeed, 1) handset makers were eager to expand

their smartphone sales, 2) consumer demand for access to wireless internet was growing,

and 3) mobile operators were intent on raising their ARPU. Of all the market players, Apple

and HTC were the ones who made the most of opportunities in the incipient stages of the

smartphone industry.

Even as the traditional handset market crumbled, HTC maintained resilient growth through a

strategy of selection and concentration. The companyÊs focus on the B2C market especially

paid off, in contrast to RIM which was more geared towards the B2B market. More recently,

however, the intensifying competition between traditional handset suppliers and

smartphone makers has significantly eroded HTCÊs market position. Despite making a

successful early entry into the smartphone market, the company today has become just

another second-tier smartphone maker.

HTCÊs 3Q earnings also considerably missed the market consensus. 3Q revenues were down 48%

YoY to NT$70.2bn, while net profit was down 79% YoY to NT$3.9bn. In our view, such dismal

earnings are due to the companyÊs more recent failure to maintain its hold on the US market.

During the past couple of years, HTC generated more than half of its revenues from the US. And, in

3Q11, the firm overtook both Apple and SEC to claim the largest share (24%) of the US smartphone

market. But its glory days were brief, and the company soon suffered huge setbacks, including a US

customs blockade caused by product defects and a lawsuit with Apple that restricted exports to the

US. As of 2Q12, HTCÊs market share in the US was down to 9.5%.

Recently, HTC has been diversifying its presence into Europe and Asia and reducing its

dependency on the US. The market on which the firm is pinning their highest hopes is surely

China. Despite the dominating positions of local players like Huawei and ZTE, HTC expanded

its smartphone market share in China to roughly 5% in 2Q12. Looking forward, we still see

more room for HTC to grow in the rapidly expanding Chinese market.

We believe it would be smarter for HTC to take on the low- to mid-end market on the back

of its design and hardware capabilities accumulated over the years, than to target the highly

competitive high-end smartphone market. One of HTCÊs key strengths is its profitability,

which is more stable compared to that of other second-tier smartphone players. If the

company focuses on low- to mid-end smartphones (as it had done with its selection and

concentration strategy in the initial stages of the smartphone market), we believe it has the

potential to stand out among the second-tier group.

Figure 38. HTCÊs quarterly earnings trends Figure 39. HTCÊs smartphone line-up


HTC quickly responded

to changes and

opportunities in the early

smartphone years

HTCÊs earnings

weakness is due to its

poor performance in the

US

ChinaÊs low- to mid-end

smartphone market

presents new

opportunities for HTC

0

4

8

12

16

1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

0

5

10

15

20Sales volume (L)

OP margin (R)

(mn units) (NT$) Name J Butterfly Windows Phone 8S One X+

November 2012F October 2012

Specifications

Size:143 x 71 x 9.1mm

Weight: 140g

Display: 1920 x 1080 pixels(Super LCD 3 Capacitive

touchscreen)



CPU: 1.5GHz quad-core

Size: 120.5 x 63 x 10.3mm

Weight: 113g


(S-LCD capacitive

touchscreen)

Camera: 5MP, LED flashOS: Windows Phone 8

CPU: Dual-core 1 GHz Krait

Size: 134.4 x 69.9 x 8.9mm

Weight: 135g

Display: 720 x 1280 pixels(Super LCD2 capacitive

touchscreen)


OS: Android OS, v 4.1.1

CPU: Quad-core 1.7 GHz

Released

date4Q12F



Leaders in the Chinese smartphone market: Huawei vs. ZTE

China has already replaced the US as the largest smartphone market in the world. In March

2012, the number of mobile telecom subscribers in the country exceeded 1bn, and the size

of Chinese smartphone market doubled YoY in 2Q12. Growth is expected to continue in light

of the low penetration rate of smartphones in the country. Chinese smartphone makers are

growing rapidly on the back of their large domestic market.

ZTE already passed LGE to become the fourth-largest handset maker in the world in 4Q11.

Huawei Technology has grown into worldÊs sixth-largest handset company. While Apple and

SEC still dominate the high-end smartphone segment, Chinese players (e.g., ZTE, Huawei,

Xiaomi, Coolpad) are solidifying their footholds in the mid- to low-priced global smartphone

segment.

Going forward, ZTE and Huawei are expected to continue to grow in the global market. In

particular, we believe Huawei holds strong growth potential in light of the companyÊs steady

R&D investments and its competitiveness in the telecom network market.

Noteworthy is that over 40% of the workforce at Huawei consists of R&D personnel.

Huawei operates over 20 R&D centers in the US, Germany, Sweden, Russia, and China.

Based on its R&D efforts, the company is acquiring about 50,000 patents and developing

proprietary technology every year. At the Mobile World Congress 2012, Huawei made a big

splash by unveiling the AP-mounted Ascend D Quad, which the company claims to be the

thinnest smartphone in the world.

Furthermore, Huawei is the second-largest telecom network company in the world. On the

back of its price competitiveness (due to its economies of scale), the company is expanding

its global outreach. It has forged strategic alliances with global players, based on which

Huawei should grow rapidly going forward.

We forecast the low- to mid-priced smartphone market to expand sharply, driven by China.

In particular, Huawei is expected to rapidly outpace its competitors on the back of: 1) R&D

investments, 2) advanced technology, 3) strong patents, and 4) strategic alliances with global

companies. In addition, the sheer enormity of its domestic market should help Huawei take

the lead in the competition among second-tier smartphone makers.

Figure 40. HuaweiÊs smartphone lineup Figure 41. ZTEÊs smartphone lineup

Source: GS Marena, KDB Daewoo Securities Research Source: GS Marena, KDB Daewoo Securities Research

Rapid growth of Chinese

smartphone market and

smartphone makers

Huawei: 1) steady R&D

investments and 2)

leading player in the

global network market

Name Ascend P1 LTE Fusion 2 U8665 Ascend G600

Released

dateOctober 2012 October 2012 September 2012

Specifications

Size:132.5 x 65.4 x 9.9mm

Weight: 135g


(Super AMOLED capacitive

touchscreen)



CPU:Dual-core 1.5 GHz

Size: 115.8 x 61 x 11.7mm

Weight: 124.2g


(TFT capacitive touchscreen)

Camera: 3.15MP, LED flash


CPU: 800 MHz Cortex-A5

Size: -

Weight: -


(IPS LCD capacitive

touchscreen)


OS: Android OS, v4.0.4


Size:123 x 63.5 x 10mm

Weight: 130g


(TFT capacitive touchscreen,

256K colors)




Released

dateSeptember 2012 September 2012 September 2012

Specifications

Size:127 x 64.8 x 9.9mm

Weight: 129.8g


(TFT capacitive touchscreen,

256K colors)

Camera: MP, LED flash

OS: Android OS, v4.0.4

CPU: 1.4 GHz Scorpion

Size: - x - x 7.9mm

Weight: 110 g


(Capacitive touchscreen, 16M

colors)



CPU: Nvidia Tegra 3

Blade IIIName Warp Sequent Grand Era U895



LGE: LTE + vertical integration

When the smartphone market was in its early stages, LGE mistakenly forecast demand for

feature phones to remain stable. Thus, the company kept its primary focus on the feature phone

market. However, handset demand has shifted to smartphones at a faster-than-expected pace.

On the other hand, SEC recognized, albeit a bit belatedly, the growth potential of the smartphone

market, and introduced its first smartphone, the Omnia, in 2008. Although the Omnia was not

successful, the failure served as a stepping stone for the company on its way to developing the

Galaxy S series and growing into the leading smartphone producer in the world.

Left out of the smartphone competition, LGEÊs earnings nosedived. The MC division

reported losses and carried out restructuring. The company launched its Optimus

smartphone model in 2011, but it failed to attract the marketÊs attention. Although the

company introduced various high-end models at CES and MWC, their launches always

proved to be tardy. LGEÊs slow responses to the fast-changing smartphone market has

further widened the companyÊs gap with leading players.

However, the emergence of the LTE services market in 2012 presented new opportunities

to LGE. The company has made enormous investments into the development of LTE

technology and holds over 1,400 LTE-related patents, the largest number among the worldÊs

smartphone producers. Aiming for LTE-driven growth, LGE launched the Optimus G in 2H12.

The new model is considered to have much-improved hardware compared to its

predecessors thanks to stronger synergies from LGEÊs subsidiaries.

Indeed, the Optimus G confirmed the strength of LGEÊs supply chain. As it is becoming

increasingly difficult for smartphone makers to differentiate themselves with hardware,

companies that can supply products in a fast and stable manner should have competitive

edges going forward. For LGE, LG Innotek and LGD produce components, and LG Chem

supplies electronic materials. This strong supply chain should help LGE enhance its global

prominence in line with the growth of the smartphone market.

It is premature to forecast that LGE will grow into worldÊs third-largest smartphone marker

(annual shipments of 50mn~100mn units) in 2013. However, we believe that LGE will at

least grow into a top-four second-tier player with shipments exceeding 40mn units in 2013.

As for profitability, the company is expected to generate stable margins of over 1%.

Figure 42. LGEÊs MC divisionÊs quarterly earnings trend Figure 43. LGEÊs smartphone lineup


LGE underestimated the

pace of smartphone

penetration

LGEÊs earnings

deteriorated sharply as it

missed the boat on

smartphones

Growth of the

smartphone market to

present opportunities for

LGE

In 2013, LGE to grow

into a leader among

second-tier players

May 2012September 2012Released

dateJune 2012

Specifications

Size: - x - x 8.9mm

Weight: - g


(HD-IPS TFT capacitive

touchscreen)




Optimus LTE2

Size: 134.7 x 69.5 x 8.9mm

Weight: 145 g


pixels (True HD-IPS LCD

capacitive touchscreen)




Name Optimus 4X HD

Size: 131.9 x 68.9 x 8.5mm

Weight: 145g


(True HD-IPS + LCD TFT

capacitive touchscreen)




Optimus G

0

1,500

3,000

4,500

6,000

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

-14

-7

0

7

14

Handset (L) OP margin (R)(Wbn) (%)

Expect gradual earnings growth

based on conservative assumptions

Rock bottom: sales & shipments in 2Q12


IV The Return of Microsoft

Will Windows 8 boost demand for traditional PCs? We do not believe so. The era of

operating system and CPU upgrades boosting PC demand appears to be over. Now, demand

is being driven by innovation. Therefore, the effect of the Windows 8 launch should be

examined through the lens of mobile revolution-driven innovation.

The tablet market is steadily evolving. Newly growing segments are the 5- and 7-inch

phablet markets and the hybrid PC (i.e., a tablet with a keyboard) market. In particular, the

markets for 7-inch phablets and hybrid PCs running Windows RT (a version of Windows 8)

are expected to expand rapidly.

Tablet shipments are projected to surge by 64% YoY to 180mn units in 2013, boosted by

the market expansion of 7-inch tablets, including the iPad Mini, and Windows 8-based

tablets (including the Surface).

.



IV. Return of Microsoft: Windows 8 and tablet market growth

iOS 6 vs. Jelly Bean

Smartphone software and operating platforms heavily influence consumer choices. In our

view, Android is becoming more open to forming alliances, while AppleÊs iOS is becoming

less innovative and increasingly closed off. Software differentiation now seems more

challenging than ever for Apple.

Major changes in iOS 6 include: 1) reinforcement of Siri features (available in ten languages),

2) Passbook (which collects ticket information and coupons), 3) Facebook integration, 4)

FaceTime on telecom networks, 5) AppleÊs own maps (vs. Google Maps), and 6) improved

Chinese language services.

The exclusion of Google services such as Google Maps has given rise to software-related

problems. In particular, complaints about AppleÊs new map application are negatively

affecting the brandÊs reputation for reliability. Going forward, driving innovation on a closed

platform should become a challenge for the company.

Major improvements in Android 4.1 include: 1) Project Butter (a much smoother user

interface, which features technologies such as triple buffering and extended VSync timing);

2) Google Now (a personalized mobile search application using voice recognition

technology); 3) expandable notifications; 4) the adoption of Chrome as the default browser;

5) improved Google Play content; and 6) Google Wallet (using NFC technology).

Most notably, the touch lag issue, which has been considered a major weakness of Android,

appears nearly resolved. Google Now, a voice-activated app (available in more than 40

languages), performs instructions by recognizing repeated actions (e.g., search queries,

locations, and calendar appointments). Since Google Now is based on GoogleÊs extensive

search database, we think this feature could be a potential threat to Apple.

Figure 44. iOS vs Jelly Bean maps Figure 45. WhatÊs the weather? Faster response from Jelly Bean

Source: World Wide Web Source: World Wide Web

Achieving software

differentiation has

become more difficult

AppleÊs iOS becomes

more closed off⁄

⁄ while Jelly Bean

becomes more open



Differentiating features of Windows 8: New user experience + productivity

While iOS 6 and Jelly Bean now have similar features, MicrosoftÊs Metro UI interface

appears set to deliver a unique user experience. iOS allows users to organize icons into

folders, but Windows 8 offers a tile-based interface (organized by app category) that aims to

increase user convenience and scalability.

AppleÊs iPad, which practically created the tablet PC segment, greatly improved information

consumption. However, there is a long way to go in terms of productivity, although the iPad

allows users to record information using a virtual keyboard.

Many tablet PC users utilize various forms of keyboards, suggesting persistent demand for

output. Thus, Windows 8-based tablet PCs or hybrid PCs equipped with Microsoft Office will

be a good alternative for users in need of greater productivity.

Using Microsoft Office on a tablet PC can further enhance the cloud computing experience.

Microsoft Office 2013 allows users to edit PDF files in Word and then, save the Word file as

PDF. Adding and editing pictures or moving clips on a Word file have also become easier.

Thus, the differentiated features of Windows 8 are anticipated to provide a big boost to

tablet PC market growth. The touchscreen feature of the new Microsoft Office proves that

the software has started to accommodate the needs of mobile users. Going forward,

corporate and e-learning segments will likely offer new growth opportunities for tablet PCs

equipped with the Microsoft Office software.

Figure 46. Windows 8 Metro UI Figure 47. Improved touch features of MicrosoftÊs Office 2013

Source: Microsoft Source: CNET

Metro UI offers a unique

user experience

Microsoft Office

+ cloud computing

present growth

opportunities for tablet

PCs in corporate and e-

learning environments



Windows 8: New growth driver for the tablet PC market

Will Windows 8 boost demand for traditional PCs? We do not believe so. The era of

operating system and CPU upgrades boosting PC demand appears to be over. Now, demand

is being driven by innovation. Therefore, the effect of the Windows 8 launch should be

examined through the lens of mobile revolution-driven innovation.

MicrosoftÊs new operating system is projected to contribute to mobile demand growth. In

particular, Windows 8 will likely boost demand for tablets more sharply than smartphones, as:

1) Windows-based smartphones remain inferior to iOS- and Android-based ones in terms of

applications. There are 600,000~700,000 iOS and Android applications (each), while the

number of Windows applications has just hit the 100,000 mark.

2) Office programs are much less useful on smartphones than on tablet PCs. Thus, taking

into account corporate and educational demand, Windows 8 should provide a bigger boost to

tablets than to smartphones.

Meanwhile, the tablet market is steadily evolving. Newly growing segments are the 5- and 7-

inch phablet markets and the hybrid PC (i.e., a tablet with a keyboard) market. In particular,

the 7-inch phablet and Windows RT-based hybrid PC markets are expected to expand rapidly.

There are clear distinctions between the 5- and 7-inch phablet markets. Since 5-inch

phablets are part of the smartphone market, they allow their manufacturers to do business

with mobile carriers. Therefore, for hardware makers like SEC, the 5-inch phablet market is

more profitable than the 7-inch market.

In contrast, the 7-inch phablet market was created by Amazon. However, although Google

entered the market later than Amazon, its phablet model Nexus 7 has gained explosive

popularity. Now, Apple is also attempting to advance into the market. Although competition

among Amazon, Google, and Apple is expected to intensify in the 7-inch phablet market, we

believe that this market has high growth potential in light of the attractive size and affordable

price of 7-inch phablets.

In the hybrid PC market, the features of conventional PCs and tablets coexist. Hybrid PCs

combine the convenience of tablet PCs and the utility of keyboards. Some hybrid PC models

adopt x86 CPUs, while others use ARM APs. In this market, the most important factor is

price. An expensive hybrid PC could be forced out the market immediately after its launch.

Therefore, ARM AP-based models (Windows RT version), rather than Intel CPU-based

models (Windows 8 Pro version), are likely to become dominant in the hybrid PC market.

This competition between Intel and ARM in this market deserves attention.

Figure 48. Application market share by OS (as of June 2012) Figure 49. Windows 8 on MicrosoftÊs Surface

Source: Gartner, KDB Daewoo Securities Research Source: Microsoft

OS and CPU

improvements unlikely

to boost PC demand

Windows 8 will likely

boost demand for tablet

PCs more sharply than

for smartphones

Emergence of the 5~7-

inch phablet and hybrid

PC markets

iOS

Google Play

Windows PhoneBlackberryNokiaAmazon

Web app stores

CSP

Chinese third-party

Other



Table 8. Major Hybrid PCs

Manufacturer SEC Microsoft

Product ATIV Smart PC ATIV Smart PC Pro Surface with Windows RT Surface with Windows 8 Pro

Processor 1.5GHz Dual-core Intel Atom 1.7GHz Quad-core Intel Core i51.5GHz Quad-core NVIDIA Tegra

3 1.7GHz Dual-core Intel Core i5

OS Windows 8 RT Windows 8 Windows 8 RT Windows 8

Display 11.6" Super PLS 11.6" Super PLS 10.6" HD LCD 10.6" FHD LCD

Resolution 1366 x 768 (135ppi) 1920 x 1080 (190ppi) 1366 x 768 1920 x 1080

RAM 2GB 4GB 2GB 4GB

Storage 64GB SSD 128GB SSD 32/64GB 64/128GB

External memory 3G, 4G LTE, Wi-Fi, Bluetooth 3G, 4G LTE, Wi-Fi, Bluetooth Wi-Fi Wi-Fi

Wireless Front: 2MP

Rear: 8MP

Front: 2MP

Rear: 5MP Front & rear: 720p HD Front & rear: 720p HD

Camera 8,200mAh 8,200mAh - -

Battery 13.5hr 8hr 8hr -

Size (H x W x D) 304 x 189.4 x 9.9mm 304 x 189.4 x 11.9mm 275 x 172 x 9.4mm 275 x 173 x 13.5mm

Weight 0.744Kg 0.888kg 676g 903g

Price $750 $1,199 32GB: US$499 32GB+Touch cover: US$599

-

Release date 4Q12 4Q12 October 2012 -


Table 9. Major Hybrid PCs

Manufacturer LG Acer Lenovo MSI

Product H160 Aspire S7 IdeaPad Yoga 11 Slider S20

Processor 1.8GHz Dual-core Intel Atom 1.7GHz Quad-core Intel Core i5 Nvidia Tegra 3 Dual-core Intel Core i5

OS Windows 8 Windows 8 Windows RT Windows 8

Display 11.6" IPS LCD 11.6" IPS LCD 11.6" LCD 11.6" IPS LCD

Resolution 1366 x 768 (135ppi) 1920 x 1080 (190ppi) 1366 x 768 1920 x 1080 (190ppi)

RAM 2GB 4GB 2GB 4GB

Storage - 128GB SSD 64GB SSD 128GB SSD

External memory - Wi-Fi, Bluetooth 4.0 Wi-Fi, Bluetooth 4.0 Wi-Fi, Bluetooth 4.0

Wireless - Front: 1.3MP Front: 1MP -

Camera - 3790mAh - 3900mAh

Battery 9hr 6hr 13hr 7hr

Size (H x W x D) 286 x 192 x 15.9mm 279 x 193 x 12.1mm - -

Weight 1.05kg 1.04kg 1.26kg 1kg

Price W1.18mn level US$1,199 US$799 US$1,099

Release date 4Q12 October 2012 December 2012 4Q12




Tablet market to expand by 64% YoY in 2013

In 2012, tablet shipments are forecast at 110mn units. Tablet shipments are projected to

surge by 64% YoY to 180mn units in 2013, boosted by the market expansion of 7-inch

tablets, including the iPad Mini, and Windows 8-based tablets (including the Surface).

Although some analysts recently raised their 2013 tablet PC shipment forecasts to more

than 200mn units, we present a relatively conservative projection, given that the iPad Mini

could partially cannibalize the full-sized iPad market. However, even our conservative

projection suggests that this market is likely to grow rapidly.

In the tablet market, Apple remains dominant, controlling 60% of the market. However, the

big question is whether tablet market growth will continue to be driven by the Cupertino-

based giant. We expect AppleÊs tablet market share to fall to 49% in 2013, while the

combined share of non-Apple companies should exceed 50% for the first time.

As for the 7-inch tablet market, which is likely to expand rapidly next year, Apple is lagging

behind its competitors. In this market, Apple is competing with not only SEC but also

Amazon, Google, and Microsoft. Worse, as mentioned above, the iPad Mini is likely to

cannibalize demand for the full-size iPad.

Figure 50. Global tablet shipments; Proportions of Apple and non-Apple tablet shipments


Figure 51. Major tablet firmsÊ annual shipment trends & forecasts Figure 52. Major tablet firmsÊ quarterly shipment trends & forecasts

Source: Gartner, KDB Daewoo Securities Research Source: Gartner, KDB Daewoo Securities Research

Tablet shipments to

surge by 64% YoY to

180mn units in 2013

The combined share of

non-Apple companies to

exceed 50% in 2013

17

60

110

180

240

285

0

50

100

150

200

250

300

10 11 12F 13F 14F 15F

0

20

40

60

80

100Global tablet shipments (L) % of Apple (R) % of Non-Apple (R)

(mn units) (%)

0

10

20

30

40

50

60

1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F

Microsoft

Google

Amazon

SEC

Apple

Others

(mn units)

0

50

100

150

200

250

300

10 11 12F 13F 14F 15F

Microsoft

Google

Amazon

SEC

Apple

Others

(mn units)



Medium- to long-term change in OS market competition

Recently, MicrosoftÊs Surface with Windows RT was completely sold out upon its release

(3~5mn). Before this event, Apple had been the only tablet PC maker to achieve quarterly

sales of over 5mn. We believe that the Surface, which is categorized as a hybrid PC due to

its keyboard, signals an upcoming change in the smart device operating system market.

Microsoft, along with Intel, created the golden age of personal computers. However, while

Apple drove the mobile revolution and Google emerged as a mobile powerhouse with its

Android OS, Microsoft struggled to revive PC demand. Moreover, Windows-based

smartphones (mainly produced by Nokia) have failed to take off in the market.

The Surface is Microsoft's ambitious attempt to crack the tablet PC market. Its Windows 8

OS and Microsoft Office software will likely attract corporate demand. By 2015, we expect

Microsoft to command a mobile OS market share of 15~20%. Hardware-oriented

companies such as SEC should welcome the return of Microsoft, as the rapid growth of

Google, which has strong software lineups, could become a new threat in the future. Indeed,

software competitiveness has become more important than ever.

Figure 53. Media tablet market share trends and forecasts by OS


Figure 54. Smartphone market share trends and forecasts by OS


MicrosoftÊs Surface to

mark a change in smart

device OS

Microsoft to gain market

share in mobile OS

16

3541 41 46 49

83

63 5344 37 33

- 313 15 15

0

20

40

60

80

100

10 2011 2012 2013 2014 2015

Android iOS/Mac OS QNX Windows Other(%)

22

47

60 58 53 5116

19

22 2323 22

4

24 10 17 21

0

20

40

60

80

100

2010 2011 2012F 2013F 2014F 2015F

Android iOS Symbian Windows RIM Bada Other(%)



Beneficiaries of tablet PC market expansion

The biggest beneficiaries of the tablet PC market expansion will be display parts makers and

developers of related technology, including touchscreens, ITO coating, and glass slimming.

1. Touchscreen panel (TSP)

Add-on type touchscreen demand has declined in the smartphone market due to the

growing popularity of on-cell and in-cell technologies. In the tablet PC market, however, add-

on type will likely remain in high demand, as on-cell displays (used in OLED) are more

expensive and less productive, and in-cell displays (LCD) have production yield issues. Going

forward, the expansion of the mid- to low-priced tablet PC market should boost demand for

existing add-on touchscreens.

The large screen size of tablet PCs presents growth opportunities to touch panel makers.

Although the average screen size (7-inch) is getting smaller, it is still three times larger than a

4-inch handset screen in terms of area. We expect 7-inch mid- to low-priced tablet PCs,

including AppleÊs iPad Mini, the Google Nexus 7 and AmazonÊs Kindle Fire, to drive the

expansion of the touchscreen panel market next year.

In terms of area, the tablet PC-use touchscreen market is projected to expand 55% in 2013.

Although the average tablet PC size will likely decrease by roughly 8.6% due to the spread

of 7-inch models, a greater sales volume (up 64% YoY) should offset the trend toward

smaller screen sizes.

Table 10. Tablet PC parts/materials companies

Parts/materials Related companies Comments

TSP On-cell/in-cell → Add-on Iljin Display Largest touchscreen supplier for SECÊs tablet PCs

Larger area and higher ASP SMAC Broad applications ranging from SECÊs smartphones to tablet PCs

ELK Customer base (domestic and overseas) to broaden from current LGE and Motorola

Melfas Supplier of touch IC for Galaxy Note II (tablet PC-use ICs under development)

MNtech Entering large-sized touchscreen business based on metal mesh

ITO coating IPS, PLS panel expansion UID SEC: PLS panel ITO coating

Avatec LGD: IPS panel ITO coating

Glass slimming Slimmer and lighter devices Avatec Tablet PC-use panel slimming for LGD

Global Display

(unlisted) Tablet PC-use panel slimming for SEC


Figure 55. Comparison of TSP structures Figure 56. TSP market trends and forecasts by area

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

1) Touchscreen panel

2) ITO coating

3) Glass slimming

Touchscreen panels

1) Add-on technology

2) Large screen size

0

2

4

6

8

10

12

14

08 09 10 11 12F 13F 14F 15F

0

10

20

30

40

50

60Tablet PCs (L)

Handsets (L)

% of tablet PCs (R)

(mn m2) (%)



2. ITO coating companies

ITO coating companies are expected to benefit from the increasing use of LGDÊs in-plane

switching (IPS) or Samsung DisplayÊs plane–to-line switching (PLS) panels in tablet PCs.

Models using IPS or PLS panels, including AppleÊs iPad and iPad Mini, SECÊs Galaxy Note

10.1 and Galaxy Tab, AmazonÊs Kindle Fire, and MicrosoftÊs Surface, are forecast to drive up

the tablet PC market in 2013.

IPS and PLS technologies feature an electrode pair at the bottom panel (TFT), while the

upper panel (color filter) does not have a conductive layer in which electrodes can move.

Thus, static electricity resulting from the contact of IPS or PLS panels with other objects

could cause electrical damage. Accordingly, an upper panel needs to undergo the ITO

coating process to prevent the generation of static electricity.

LGD and Samsung Display carry out some ITO coating in-house, but they also outsource to

specialized ITO coating companies: Avatec (149950 KQ) and U.I.D. (069330 KQ). Recently,

panel makers are increasing outsourcing to meet increasing demand for tablet PC-use panels.

3. Glass slimming

The expansion of the tablet PC market is also spurring the growth of the glass slimming

industry. Glass slimming is the process of reducing the thickness of panels (TFT + color

filter) using chemical etching technology.

State-of-the-art glass slimming technology can reduce the thickness of a panel from 1mm to

0.5mm. Using 0.25mm-thick LCD glass in the first place could eliminate the need for the

glass slimming process. However, ultra-thin glass cannot withstand high-temperature TFT

and color filter processes. Thus, the process of combining TFT and color filter panels should

precede the glass slimming process.

The expansion of tablet PC sales volume since 1H12 is boosting earnings at Avatec and

Global Display (unlisted), which are carrying out glass slimming for LGD and Samsung

Display, respectively. Avatec and Global Display saw their 1H12 operating profits exceed

their 2011 full-year operating profits. The glass slimming process should gain a higher profile

going forward due to growing demand for slimmer tablet PCs and smartphones.

Figure 57. ITO coating process on IPS panel Figure 58. Glass slimming technology

Source: Industry data Source: Avatec

ITO coating companies

to benefit from

increasing use of

IPS/PLS panels in tablet

PCs

Market demand for

thinner tablet PCs to

boost the importance of

the glass slimming

process

0.5mm

0.25mm

0.25mm0.5mm


V Farewell to the PC Era!

This year, we estimate tablet shipments to grow to around 100mn units. Assuming that a

third of this figure displaces traditional PC demand, this would essentially mean the PC

market will remain stagnant or modestly contract this year. Looking ahead into 2013, while

the market consensus expects the PC market to grow by around 4~6%, we project virtually

zero growth next year, based on the assumption that tablet shipments will expand to

150~200mn units in 2013 and cannibalize a portion of traditional PC demand.

In a broad sense, the mobile revolution has given rise to demand for different types of

memory, from mobile DRAM to embedded NAND, embedded multimedia cards (eMMC),

and embedded multi-chip packages (eMCP). And, as more smart devices make their way

into the market, a more diverse range of mobile memory solutions is being adopted. This

suggests that, in the current age of mobile memory, product mix, not market share, is what

drives the growth, profitability, and competitiveness of memory chip makers.



V. Farewell to the PC era!: Zero PC growth and its implications for the memory industry

PC industry headed for zero growth

2012 has been a weaker-than-expected year for the PC industry. Amid a slumping global

economy, overall IT demand has virtually come to a standstill. Despite the impressive

growth of smartphones, the broader handset market has remained stagnant and the

situation is not much different for TVs and PCs. The only segments in which IT demand

remains buoyant are those that are seeing innovation.

This year, we estimate tablet shipments to grow to around 100mn units. Assuming that a

third of this figure displaces traditional PC demand, this would essentially mean the PC

market will remain stagnant or modestly contract this year. Looking ahead into 2013, while

the market consensus expects the PC market to grow by around 4~6%, we project virtually

zero growth for next year, based on the assumption that tablet shipments will expand to

150~200mn units in 2013 and cannibalize a portion of traditional PC demand.

Thus, our outlook for the memory market rests on a base assumption of zero growth in the

PC industry. In other words, gone are the days of traditional PC demand driven by operating

systems and CPUs - a new age has dawned!

Figure 59. Evolution of computing demand to tablets and hybrid PCs

Source: Gartner, „Convergence of media tablet, ultramobile notebooks, and even smartphones‰

Figure 60. Platforms: OS/CPU ecosystem competition

Source: Gartner, „Convergence of media tablet, ultramobile notebooks, and even smartphones‰

IT demand can be found

in segments in which

innovation is taking place

Our 2013 base call is

zero growth for the PC

industry



Memory industry’s dynamics have completely changed

The memory market has been experiencing structural changes the likes of which have not

been witnessed in the past 10 years. The transition from PC to mobile is the overriding trend

in the memory market. And the two trends explained below signal major shifts in the

dynamics of the memory industry.

1. Bankruptcy of Elpida failed to reverse the DRAM market trend

The global memory industry has long been involved in a game of chicken. The sequential

cycle of the memory market is as follows: 1) robust capex is pursued to achieve market

dominance ahead of rivals and expand market share; 2) competition rises related to

technology migration; 3) prices plunge due to oversupply; 4) the game of chicken and

capacity utilization declines; and 5) prices surge and corporate earning grow.

Meaningful changes on the supply side, such as production cuts and restructuring, have

traditionally stopped memory market downtrends. In particular, bankruptcies were the

strongest signals for the bottoming-out of the memory market.

Earlier this year, Elpida went bankrupt, which was anticipated to have a greater impact on

the market than the collapse of Qimonda. However, commodity DRAM prices turned

downward less than six months after the bankruptcy. Currently, the 2Gb DDR3 price stands

at just US$0.84 although DRAM producers have not increased supply after ElpidaÊs

bankruptcy. Investors are wondering whether weak PC demand has driven down DRAM

prices. They are also uncertain about the direction of DRAM prices next year.

2. Top-tier NAND producers’ capacity and production cuts

When the market nears bottom, second-tier players typically see their EBITDA turn negative

and their cash become depleted. However, top-tier companies are able to survive their

operating losses. As such, because their market shares inevitably increase during the course

of this game of chicken, top-tier companies do not have to consider capacity reductions or

production cuts. Indeed, in the aforementioned cycle, top-tier companiesÊ production cuts

have traditionally been nothing more than empty gestures.

Since 2Q12, however, top-tier NAND producers have made some unprecedented moves.

SEC converted all of its production lines in Austin, Texas to System LSI lines. In addition,

Toshiba slashed its production by 30%. Nevertheless, NAND prices remained on the decline

until June. Although SEC needed to expand its System LSI capacity, the fact that it

converted entire NAND lines indicates that NAND producersÊ market outlook has changed.

Figure 61. Global DRAM and NAND capacity trends and forecasts


ElpidaÊs bankruptcy

Unprecedented moves

by top-tier NAND

producers

0.3

0.5

0.7

0.9

1.1

1.3

1.5

06 07 08 09 10 11F 12F 13F

Global NAND Capacity

Global DRAM Capacity

(12-inch eq. mn wafers/month)

Bankruptcy of QimondaBankruptcy of Elpida

Stagnant memory capacity expansion



The Micron-Elpida merger: Bang for the buck?

The prevailing wisdom among market watchers is that mergers between memory suppliers typically

fail to create synergy. In other words, „one plus one equals two‰ is more often the exception rather

than the rule. Then, what about the merger between Micron and Elpida? Is MicronÊs acquisition of

Elpida doomed to lead to failure? Or will it turn Micron into the second-largest chip maker in the

world? If so, how will this affect SK HynixÊs position in the memory market?

For mergers and acquisitions, a dealÊs value is a critical factor. Micron bought Elpida for an

estimated US$2.5bn (US$2.8bn after including a 24% stake in Rexchip (US$330mn)), of which

only US$750mn was paid in cash. The deal has given Micron ownership of ElpidaÊs Hiroshima fab

(capacity of 120,000 wafers per month) and a 65% stake in Rexchip (ElpidaÊs subsidiary with

capacity of 80,000 wafers per month). The company also plans to pay US$1.75bn in installments

to cover a portion of ElpidaÊs US$4.8bn debt over the next seven years.

In effect, Micron has acquired DRAM capacity of 200,000 wafers per month and a long-term debt

of W1.9tr in exchange for just W1.2tr in cash. This seems to be a lucrative trade-off.

What does the deal imply in terms of market share? According to IDC, SEC held the largest

share (40.5%) of the global DRAM market in 2Q12, followed by SK Hynix (25.4%), Micron

(12.4%), Elpida (11.7%), and Nanya Technology (4.9%). This indicates that the combined market

share (29%) of Micron, Elpida, and Nanya is larger than that of SK Hynix. In the NAND category,

SEC accounted for 45.4% of the global market in 2Q12, a sharp gain from 36.5% in 1Q12.

During that same period, Toshiba saw its market share plunge from 32.8% to 22.7%. As of 2Q,

Micron represented 16.4% of the market, SK Hynix 11.4%, and Intel 4.1%. Interestingly, this

puts the combined market share (15.5%) of Micron and Intel above that of SK Hynix.

Thus, although market share rankings could shift over the course of 2H, following the acquisition,

Micron stands as the worldÊs second-largest DRAM supplier and the third-largest NAND

manufacturer. Going forward, however, market shares may no longer carry as much weight as

before, given that SK Hynix is deemed to be one step ahead of Micron and Elpida as far as the

manufacturing process is concerned.

It should be noted that the takeover of Elpida has enabled Micron to fill in a missing piece

(mobile DRAM) of its memory business. As such, we believe the merger could generate a

larger-than-expected synergy, especially considering that Micron is believed to be more

competitive than SK Hynix in terms of solid-state drives (SSD) and the takeover is likely to help

ensure effective supply of mobile memory chips to Apple.

All in all, we believe MicronÊs acquisition of Elpida could offer a big bang for the buck, posing a

potential threat to SK Hynix, which is slated to become the third-largest global chipmaker.

Figure 62. 2Q12 DRAM market share breakdown Figure 63. 2Q12 NAND market share breakdown

Source: IDC Source: IDC

M&As between memory

chip makers: one plus

one does not often equal

two

The Micron-Elpida deal

looks lucrative on a

numbers basis

Post-merger, Micron will

become the second-

largest memory maker in

terms of market share

MicronÊs takeover of

Elpida could offer

bang for the buck

SEC, 40.5%

SK Hynix, 25.4%

Micron, 12.4%

Elpida, 11.7%

Nanya, 4.9%

Winbond, 1.7%

Powerchip, 1.6% Other, 1.4%

SEC, 45.4%

Toshiba, 22.7%

Micron, 16.4%

SK Hynix, 11.4%

Intel, 4.1%



The age of mobile memory: Competitiveness & growth hinge on product mix

In a broad sense, the mobile revolution has given rise to demand for different types of memory,

from mobile DRAM to embedded NAND, eMMC, and eMCP. And, as more smart devices make

their way into the market, a more diverse range of mobile memory solutions is being adopted. This

suggests that, in the current age of mobile memory, product mix, not market share, is what drives

the growth, profitability and competitiveness of memory chip makers.

In the mobile DRAM market, we expect the memory standard to gradually shift from LPDDR2 to

LPDDR3 in 2013 before transitioning to the Wide I/O interface. The power consumption per

bandwidth for LPDDR2 is 80mW/GB/sec. Consumption should fall to 70mW/GB/sec with the

transition to LPDDR3 and fall further to 40mW/GB/sec when the Wide I/O standard is adopted. For

mobile-oriented PCs such as Ultrabooks and hybrid PCs, we expect ultra slim products to adopt the

LPDDR3 standard and others to use the more power-efficient DDR3L.

In the embedded NAND segment, demand for eMMC (which combines NAND and logic) and

eMCP (which integrates NAND, DRAM, and logic) has started to grow. After 2013, we expect

universal flash storage (UFS), which features the advantages of both eMMC and SSD, to see

meaningful growth. According to JEDEC (a US semiconductor standardization organization), UFS,

like eMMC, consumes low amounts power but still transmits data at rates of 6.0Gbps (UFS 2.0) and

12.0Gbps (UFS 3.0) -- faster than eMMC and even SSDs.

Figure 64. Mobile DRAM market evolution: From LPDDR2 to LPDDR3 and Wide I/O

Source: JEDEC

Figure 65. LPDDR3: Lower power consumption, faster than LPDDR2 Figure 66. Power consumption of DDR3L, DDR3L-RS, LPDDR3

Source: JEDEC Source: Intel Developer Forum

Product mix is key to the

competitiveness and

growth of chip makers

Demand for power-

efficient mobile DRAM,

such as LPDDR3 and

DDR3L, to rise

UFS market to take

shape



Figure 67. Mobile-related NAND demand

Source: JEDEC, Mobile Memory Forum 2012

Figure 68. Evolution of eMMc to UFS Figure 69. Major components of smart devices

Source: JEDEC, Mobile Memory Forum 2012 Source: JEDEC, Mobile Memory Forum 2012

Figure 70. Speed comparison of UFS, eMMC, and SSD (SATA) Figure 71. UFS highly reduces information process speed vs. eMMC

Source: JEDEC, Mobile Memory Forum 2012 Source: JEDEC, Mobile Memory Forum 2012



[DRAM market issue] Will a mobile DRAM supply shortage occur?

Given rising mobile DRAM demand, will the DRAM market pick up full swing? We believe that it

is too premature to conclude so, considering that demand for commodity DRAM is falling more

sharply than supply; and supply growth of mobile DRAM could exceed demand growth. Indeed,

both PC and mobile DRAM prices dropped in 3Q. The proportion of commodity DRAM remains

at more than 30%, while that of mobile DRAM stands at the low 20% level.

From a DRAM supply perspective, low supply bit growth is a positive factor. In particular,

next-generation extreme ultraviolet (EUV) lithography equipment has not yet been

introduced for commercial production due to productivity issues. Furthermore, migration to

20nm (or finer) process has caused yield problems and issues related to the implementation

of HKMG dielectrics. Therefore, DRAM supply bit growth is estimated at the mid-to-high

level of 20% next year.

However, the problem is that DRAM demand bit growth could also remain low, assuming

zero growth of PC DRAM demand. PC DRAM content per system has stagnated at 4GB. If

PC shipments are stagnant and the growth of DRAM content per system (in GB) stands at

only 15~20% next year, DRAM demand bit growth will likely fall below 20%. As such,

oversupply of commodity DRAM is unlikely to ease next year.

Then, will the DRAM market see a supply shortage of mobile DRAM in 2013?

A positive scenario for the DRAM market next year could unfold as follows: 1) production

cuts at Taiwanese chipmakers ease PC DRAM oversupply and stabilize prices; 2)

smartphone shipment growth drives up mobile DRAM demand; 3) Apple excludes SEC from

its supply chain, benefitting SK Hynix and Elpida; and 4) the mobile DRAM market

experiences tight supply or a supply shortage.

However, things could develop differently: 1) production cuts at Taiwanese chip makers

stabilize PC DRAM prices; 2) mobile DRAM supply increases on expectations for

smartphone shipment growth; 3) Apple asks for higher-than-expected DRAM supply, raising

the need for DRAM makers to increase the proportion of mobile DRAM production; and 4)

mobile DRAM prices fall on supply growth.

Assuming that PC demand stagnates in 1H13, we believe that production cuts at Taiwanese

chip makers will only deplete existing PC DRAM inventories; and SEC, SK Hynix, Micron,

and Elpida will expand their mobile DRAM productions in anticipation of an increase in

demand for smart devices.

Therefore, we do not expect the DRAM market to see a mobile DRAM supply shortage next year.

Figure 72. Annual DRAM supply/demand bit growth trends Figure 73. DRAM price trends and forecasts (2Gb DDR3)

Source: Gartner, KDB Daewoo Securities Research estimates Source: DRAMeXchange, KDB Daewoo Securities Research estimates

The DRAM market will

recover, but the pace of

recovery should be only

modest

DRAM supply bit growth

is estimated at a low

level next year

DRAM demand bit

growth could also

remain low

The DRAM market is

unlikely to see a mobile

DRAM supply shortage

next year.

86

46

31

46

38

2529

95

43

27

48

39

26 28

0

25

50

75

100

07 08 09 10 11 12F 13F

(%) DRAM demand Bit growth

DRAM supply bit growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1/11 7/11 1/12 7/12 1/13 7/13

DDR3 2Gb spot price

DDR3 2Gb contract price

(US$)KDB Daewoo forecasts

Bankruptcy of Elpida Taiwanese DRAM makers'

production cuts

1/13F 7/13F



[NAND market issue] Will prices rise further given limited supply growth?

NAND prices are on the rise. The price of 32Gb MLC rose by 8.6% in the second half of

September and by 7.5% in the first half of October. The price of 64Gb MLC surged 9% in

the second half of September and 17.1% in the first half of October. On the supply side,

strong NAND prices are attributable to the phase-out of NAND lines at SECÊs Austin fab and

a 30% production cut at Toshiba in 2Q. On the demand side, smartphone shipment growth

at SEC and Apple are leading to solid NAND prices.

Then, how long will the rise in NAND prices continue? To answer this question, we need to

take a look at NAND demand and supply bit growth for 2013.

From a demand perspective, the smart device market is the most important variable for

mobile DRAM and NAND demand. Shipments of smart devices are forecast to increase by

30% from 740mn units (630mn smartphones and 110mn tablets) in 2012 to 960mn units

(780mn smartphones and 180mn tablets) in 2013. Assuming the growth of NAND content

per system (in GB) will increase by 25%, NAND bit growth arising from smart devices will

likely reach 63%(1.3 x 1.25 = 1.63). Considering a decline in demand from memory cards,

overall NAND demand bit growth is projected at around 60% next year.

On the supply side, all NAND makers are expected to embark on capacity expansion next

year, including SECÊs Chinese line, ToshibaÊs Fab 5, SK HynixÊs M12, and MicronÊs IMFS.

Major NAND makers addressed the burden of excessive inventories through production cuts

in 1H, and we believe that they now feel the need for capacity expansion. Assuming NAND

capacity growth of 15% and an efficiency increase of 40% in 2013, supply bit growth is also

forecast at around 60% (1.15 x 1.3 = 1.6).

Therefore, NAND prices are likely to continue to rise until year-end but move sideways

thereafter due to capacity expansion at NAND makers. Although NAND makers are currently

taking drastic actions (e.g., capacity reductions) for the first time in a decade, they are

unlikely to maintain a conservative strategy in the event of rises in prices and demand.

In particular, SECÊs strategic decision-making will likely be the most important factor. If SEC

converts an existing NAND line into a System LSI line in China, rather than embarking on

capacity expansion, the burden of supply growth will be lower than expected. In this case,

NAND prices are likely to continue to rise through 2H13.

Figure 74. Annual NAND supply/demand bit growth trends Figure 75. NAND price trends and forecasts (64Gb MLC)

Source: Gartner, KDB Daewoo Securities Research estimates Source: DRAMeXchange, KDB Daewoo Securities Research estimates

NAND prices are on the

rise, backed by supply

reductions and

smartphone shipment

growth

Both supply and demand

bit growth for NAND to

reach 60%in 2013

NAND prices are likely to

continue to rise until

year-end but move

sideways thereafter due

to capacity expansion

118

5965

73

5761

131

42

65

79

57 60

0

50

100

150

08 09 10 11 12F 13F

NAND demand bit growth

NAND supply bit growth

(%)

0

2

4

6

8

10

12

14

16

1/11 7/11 1/12 7/12 1/13 7/13

NAND 64Gb MLC spot price

NAND 64Gb MLC contract price

(US$)KDB Daewoo forecasts

1/13F 7/13F

SEC: Reduced capacity

Toshiba: Reduced capacity (30%)



Table 11. Global DRAM supply/demand model (1Gb eq. mn units, %, US$bn, US$)

1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F

Supply/demand (oversupply) 103% 106% 104% 105% 106% 105% 102% 103% 102% 103% 104% 104%

DRAM demand (1Gb mn) 5,861 6,078 6,619 7,206 7,120 7,873 8,769 9,422 14,944 20,614 25,764 33,185

% QoQ, % YoY 5% 4% 9% 9% -1% 11% 11% 7% 46% 38% 25% 29%

DRAM supply (1Gb mn) 6,021 6,436 6,859 7,565 7,533 8,254 8,953 9,742 15,288 21,280 26,880 34,483

% QoQ, % YoY 4% 7% 7% 10% 0% 10% 8% 9% 48% 39% 26% 28%

ASP(US$) 1.1 1.2 1.1 0.9 0.9 1.0 0.9 0.8 2.6 1.4 1.1 0.9

% QoQ, % YoY 15.8% 4.5% -4.3% -18.2% 0.0% 11.1% -10.0% -12.2% 19% -46% -23% -16%

Revenues (US$bn) 6.6 7.4 7.5 6.8 6.8 8.3 8.1 7.7 39.2 29.4 28.4 30.8

% QoQ, % YoY 20.7% 11.7% 1.9% -9.8% -0.4% 21.7% -2.4% -4.5% 72.1% -24.8% -3.6% 8.5%

Major DRAM demand (1Gb mn)

PC 2,963 3,000 3,182 3,224 3,091 3,295 3,651 3,884 8,407 11,348 12,369 13,921

Server 899 944 992 1,041 989 1,039 1,091 1,145 1,494 3,008 3,877 4,264

Module 404 425 425 467 420 462 486 437 1,034 1,404 1,721 1,806

Mobile 1,076 1,323 1,566 1,998 2,094 2,431 2,923 3,363 1,500 3,178 5,963 10,811

Consumer 368 386 405 426 426 447 469 493 1,185 1,401 1,584 1,834

Other (including inventories) 150 - 50 50 100 200 150 100 1,325 276 250 500

DRAM demand proportion (%)

PC 50.6% 49.4% 48.1% 44.7% 43.4% 41.8% 41.6% 41.2% 56.3% 55.0% 48.0% 42.0%

Server 15.3% 15.5% 15.0% 14.4% 13.9% 13.2% 12.4% 12.2% 10.0% 14.6% 15.0% 12.8%

Module 6.9% 7.0% 6.4% 6.5% 5.9% 5.9% 5.5% 4.6% 6.9% 6.8% 6.7% 5.4%

Mobile 18.4% 21.8% 23.7% 27.7% 29.4% 30.9% 33.3% 35.7% 10.0% 15.4% 23.1% 32.6%

Consumer 6.3% 6.4% 6.1% 5.9% 6.0% 5.7% 5.3% 5.2% 7.9% 6.8% 6.1% 5.5%

Other (including inventories) 2.6% 0.0% 0.8% 0.7% 1.4% 2.5% 1.7% 1.1% 8.9% 1.3% 1.0% 1.5%

Supply by company (1Gb mn)

SEC 2,134 2,303 2,462 2,807 2,729 2,970 3,346 3,632 5,805 8,111 9,706 12,677

SK Hynix 1,816 1,943 2,020 2,261 2,391 2,626 2,738 3,024 3,494 5,285 8,039 10,779

Micron 689 744 818 875 875 963 1,040 1,123 1,718 2,289 3,126 4,001

Elpida 1,002 1,083 1,169 1,216 1,216 1,313 1,418 1,532 2,503 3,714 4,470 5,479

Powerchip 97 108 117 123 110 132 143 150 574 545 444 536

Nanya 160 184 203 213 191 230 248 260 512 815 760 930

Bit growth (%)

SEC 8% 8% 7% 14% -3% 9% 13% 9% 71% 40% 20% 31%

SK Hynix 9% 7% 4% 12% 6% 10% 4% 10% 38% 51% 52% 34%

Micron 5% 8% 10% 7% 0% 10% 8% 8% 38% 33% 37% 28%

Elpida -5% 8% 8% 4% 0% 8% 8% 8% 35% 48% 20% 23%

Powerchip -15% 12% 8% 5% -10% 20% 8% 5% 112% -5% -19% 21%

Nanya -15% 15% 10% 5% -10% 20% 8% 5% 30% 59% -7% 22%

Source: KDB Daewoo Securities Research estimates



Table 12. Global NAND supply/demand model (1GB eq. mn units, %, US$bn, US$)


Supply/demand (oversupply) 107% 115% 106% 90% 97% 102% 103% 105% 99% 103% 103% 102%

DRAM demand (1Gb mn) 5,725 6,320 7,438 9,275 9,557 10,513 12,394 13,946 10,575 18,304 28,757 46,410

% QoQ, % YoY 6% 10% 18% 25% 3% 10% 18% 13% 65% 73% 57% 61%

DRAM supply (1Gb mn) 6,139 7,255 7,876 8,394 9,272 10,718 12,784 14,633 10,508 18,840 29,664 47,407

% QoQ, % YoY 8% 18% 9% 7% 10% 16% 19% 14% 65% 79% 57% 60%

ASP(US$) 0.9 0.7 0.6 0.8 0.8 0.7 0.8 0.7 2.0 1.3 0.7 0.8

% QoQ, % YoY -16.0% -22.0% -5.0% 25.0% -2.0% -10.0% 13.0% -8.0% -20% -34% -42% 2%

Revenues (US$bn) 5.4 4.9 5.1 6.8 7.4 7.6 10.3 10.9 20.7 24.4 22.2 36.2

% QoQ, % YoY -9.1% -7.8% 3.1% 33.2% 8.3% 4.0% 34.8% 5.3% 31.8% 18.0% -9.1% 62.9%

Major NAND demand (1GB mn)

Cell phone 2,941 3,073 3,707 4,648 4,694 4,812 5,581 6,214 3,993 8,994 14,369 21,300

SSD 798 895 1,176 1,731 2,065 2,458 3,361 3,995 867 2,077 4,600 11,879

Tablet 445 634 724 1,225 1,065 1,230 1,552 1,877 259 1,441 3,027 5,724

Memory card 240 260 280 300 280 320 300 280 890 960 1,080 1,180

Digital camera 450 480 448 448 448 476 510 540 1,502 1,688 1,826 1,974

MP3 336 364 405 420 384 384 468 468 1,548 1,472 1,525 1,704

USB 360 384 403 403 441 434 473 473 1,060 1,369 1,550 1,820

Other 155 230 295 100 180 400 150 100 456 303 780 830

NAND demand proportion (%)

Cell phone 51.4% 48.6% 49.8% 50.1% 49.1% 45.8% 45.0% 44.6% 37.8% 49.1% 50.0% 45.9%

SSD 13.9% 14.2% 15.8% 18.7% 21.6% 23.4% 27.1% 28.6% 8.2% 11.3% 16.0% 25.6%

Tablet 7.8% 10.0% 9.7% 13.2% 11.1% 11.7% 12.5% 13.5% 2.4% 7.9% 10.5% 12.3%

Memory card 4.2% 4.1% 3.8% 3.2% 2.9% 3.0% 2.4% 2.0% 8.4% 5.2% 3.8% 2.5%

Digital camera 7.9% 7.6% 6.0% 4.8% 4.7% 4.5% 4.1% 3.9% 14.2% 9.2% 6.3% 4.3%

MP3 5.9% 5.8% 5.4% 4.5% 4.0% 3.7% 3.8% 3.4% 14.6% 8.0% 5.3% 3.7%

USB 6.3% 6.1% 5.4% 4.3% 4.6% 4.1% 3.8% 3.4% 10.0% 7.5% 5.4% 3.9%

Other 2.7% 3.6% 4.0% 1.1% 1.9% 3.8% 1.2% 0.7% 4.3% 1.7% 2.7% 1.8%

Supply by company (1GB mn)

SEC 1,903 2,554 2,704 2,718 2,939 3,555 4,357 4,958 4,004 7,233 9,880 15,809

Toshiba + SanDisk 2,427 2,719 2,936 3,142 3,519 3,976 4,692 5,489 3,721 6,553 11,223 17,675

Micron (IMFT) 1,057 1,174 1,362 1,566 1,738 1,947 2,239 2,597 1,593 2,640 5,159 8,520

SK Hynix 651 709 774 868 976 1,115 1,372 1,489 1,052 2,039 3,002 4,952

Bit growth (%)

SEC 0% 34% 6% 1% 8% 21% 23% 14% 70% 81% 37% 60%

Toshiba + SanDisk 12% 12% 8% 7% 12% 13% 18% 17% 60% 76% 71% 57%

Micron (IMFT) 24% 11% 16% 15% 11% 12% 15% 16% 51% 66% 95% 65%

SK Hynix 2% 9% 9% 12% 12% 14% 23% 9% 114% 94% 47% 65%

Source: KDB Daewoo Securities Research estimates


VI Best Tech Migration Play:

Semiconductor Materials

EUV machines, the development of which is being led by the Dutch company ASML in

partnership with major chip makers including Intel and SEC, are not yet sufficiently efficient

for mass production. The delay in the development of EUV machines has underscored the

importance of materials related to microfabrication; as a result, additional processes like

double patterning technology (DPT) are emerging, and related materials are becoming

increasingly sophisticated.

Among the key materials used in sub-30nm processes, we highlight 1) spin-on hardmasks

(SOH), 2) spin-on dielectrics (SOD), 3) CVD precursors, 4) high-K materials, 5) DPT materials,

and 6) disilane (Si2H6). Major material manufacturers include Cheil Industries, Soulbrain,

DNF, Hansol Chemical, Wonik Materials, OCI Materials, and UP Chemical (unlisted).



VI. Best tech migration play: Semiconductor materials

Delays to EUV development to slow tech migration

One of the biggest changes to 10nm and finer process technologies is the introduction of

new optical equipment. As semiconductor manufacturing processes become more

miniaturized, they require lithography techniques that use light sources with shorter

wavelengths. At present, the most commonly used lithography is ArF immersion.

Theoretically, ArF immersion tools have a resolution of 35.7nm. This means that, even if DPT

or other processes are adopted, the introduction of EUV machines with a 13.5nm

wavelength light is crucial for sub-10nm DRAM processes.

EUV machines, the development of which is being led by the Dutch company ASML in

partnership with major chipmakers including Intel and SEC, are not yet sufficiently efficient

for mass production. This has caused major DRAM and NAND chipmakers like SEC, Toshiba,

and SK Hynix to push back their plans for 10nm mass production. Thus, the slow

introduction of EUV equipment is posing a hurdle to technology migration and could become

a surprise factor in the industryÊs restructuring.

Figure 76. SECÊs DRAM tech migration trends and forecasts Figure 77. SECÊs NAND tech migration trends and forecasts

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

Figure 78. Number of layers and light sources by process Figure 79. Lithography technology development

Source: Chemical Journal Source: Industry data, KDB Daewoo Securities Research

The slow development

of EUV tools poses a

hurdle to technology

migration

0%

25%

50%

75%

100%

1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

90nm 80nm 68nm 56nm 46nm 36nm 28nm 22nm

0%

25%

50%

75%

100%

1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

60nm 50nm 40nm 30nm 22nm 18nm 12nm

10 1014 14

62

12 149 9

14

15

5 68

11

7 7

0

5

10

15

20

25

30

35

40

180nm 130nm 90nm 65nm 45nm 32nm

ArF Immersion

ArF Dry

KrF

I-Line

(units)



Materials offer solution to limitations of lithography

The delay in EUV machine development has underscored the importance of materials related

to microfabrication. As the number of components on semiconductor chips increases, the

requirements for related materials, such as electrodes, dielectrics, and wires, have also

grown increasingly sophisticated, especially for additional processes like DPT and related

materials. Going forward, if the introduction of EUV machines continues to be delayed, this

will naturally slow down the technology migration of chip makers compared to in previous

generations. If so, the performance of the materials used will become a key determinant in

the production yield for sub-30nm processes, which have been quickly gaining ground more

recently.

Among the key materials used in sub-30 nm processes, we highlight SOH, SOD, CVD

precursors, high-K materials, DPT materials, and disilane (Si2H6). Major material

manufacturers include Cheil Industries, Soulbrain, DNF, Hansol Chemical, Wonik Materials,

OCI Materials, and UP Chemical.

Table 13. Semiconductor materials development road map

Major field Current Future Necessary characteristics and technology

Gate electrode W6/Poly-Si TiSiN, TiAlN, TaN, TaSiN Metal gate

Gate dielectric SiO2, SiON HfO2, HfSiO, HfSiON High-K

Capacitor electrode Poly-Si, TiN, TiN/Ti TiN, Ti/TiN, Ru

Capacitor dielectric SiO2, Al2O, ZrO2 ZrO2, BST, STO, PZT High-K

Wire Al (memory)/Cu(non-

memory) Cu Cu precursor/Cu slurry/ Low-K (IMD)

Via/Inter-connect Poly-Si, W, Al Al, Cu PMD (preferential metal deposition) Al

STI/PMD/IMD SiO2 SiO2 SOD

Barrier metal SiN, Ti/TiN TiN, Ti/TiN


Table 14. Materials related to semiconductor tech migration

Major materials Domestic companies Foreign companies

SOH Cheil Industries

SOD Cheil Industries, DNF, UP Chemical (unlisted) AZEM

CVD dielectric (HCDS → TSA) Hansol Chemical Air Liquide

High-K DNF, Hansol Chemical, Soulbrain, UP Chemical (unlisted) Adeka, Air Liquide

DPT DNF, Hansol Chemical, UP Chemical (unlisted) Air Product, Air Liquide

Disilane (Si2H6) Wonik Materials, OCI Materials Voltaix, Mitsui Chem.


Figure 80. Global foundry capacity trend & forecasts by process Figure 81. Global foundry capacity trend & forecasts under 100nm


Materials are a key

determinant in the

production yields for

sub-30nm processes

Key materials to watch

in sub-30nm processes

0

10,000

20,000

30,000

40,000

50,000

60,000

06 08 10 12F 14F 16F

Above 130nm 90nm 65nm

45nm/40nm 32nm/28nm 20nm

(8-inch eq. '000 wafers/year)

0

2,000

4,000

6,000

8,000

10,000

06 08 10 12F 14F 16F

20nm

32nm/28nm

45nm/40nm

65nm

90nm

(8-inch eq. '000 wafers/year)



Core material 1: Spin-on hardmask (SOH)

Hardmask materials are used in semiconductor fabrication to prevent patterns from

collapsing. A photoresist that is too thick can cause a pattern to break down, but one that is

too thin is unable to sufficiently protect the substrate. Thus, a hardmask is needed to

transfer photomask patterns.

Previously, hardmasks were based on the CVD process, but, recently, the spin-on approach

(a liquid-type coating) has been gaining ground. CVD hardmasks can cause defects when

particles from the chemical vapor form inside of the hardmask. Also, because CVD machines

are expensive, the process involves heavy initial investments and maintenance costs.

On the other hand, SOHs offer several advantages: 1) Since they can be formed using

traditional coating equipment, they do not require additional facility investments. 2) Because

SOHs are in liquid form during the coating process, they yield more even surfaces. 3) SOHs

are relatively easy to manipulate and thus can quickly adjust to process changes.

In Korea, Cheil Industries was the first to develop SOH technology and is currently the

exclusive supplier to SEC. We believe SEC has replaced its CVD hardmasks with SOH, while

SK Hynix and Taiwanese foundries still rely more on CVD hardmasks.

Figure 82. Cheil IndustriesÊ SOH revenue trends and forecasts


Figure 83. Pattern collapse from tech migration Figure 84. SOH function in patterning process


Hardmask materials are

used to prevent pattern

collapse

0

50

100

150

200

250

300

07 08 09 10 11 12F 13F 14F

(Wbn)

(A)

Low aspect ratio

(Pattern is maintained)

(B)

High aspect ratio

(Pattern collapses)

(C)

Aspect ratio low but unable to

protect substrate during etching

PR

SubstratePattern

substrate

C-SOH

Si-SOH

PR

Evaporation

(coating)

PR patterning

Si-SOH etching

C-SOH etching

C-SOH removal



Core material 2: Spin-on dielectrics (SOD)

Spin-on dielectric (SOD) films are insulating materials that lie between metal wires or

between transistors and capacitors. As the gap between wires becomes narrower at below-

70nm processes, CVD-based insulator films lose their insulating quality, resulting in leakage

current. To prevent this, spin-on technology has been introduced to fill in the space between

wires or between gates with liquid-type insulators.

SOD is an optimal dielectric for the application of the spin-on technology. SOD is more

effective in filling gaps, requires less capex, and is easier to produce than existing CVD-type

materials.

EU-based AZ Electronic Materials (AZEM) was the exclusive producer of SOD until Cheil

Industries (001300 KS) and DNF (092070 KQ) joined the market in 2011. The Korean

producersÊ domestic market shares are on the rise

As of 2012, the global SOD market is estimated at W250bn. SEC currently consumes roughly

W80bn worth of SOD per year, but the number is likely to exceed W100bn if the companyÊs

SOD applications broaden from DRAM to NAND and non-memory production. Cheil Industries

is forecast to satisfy 50% of SECÊs SOD needs in 2013, up from 30% in 2012.

Figure 85. Global SOD market scale and market share


Figure 86. Spin-on process Figure 87. SOD process (before and after)

Source: Dow Coming Source: Cheil Industries

Korean SOD makers

gain market share

AZEM

96%

Other

4%

2011

AZEM

86%

Cheil

Industries

10%

DNF

3%

Other

1%

2012F

Wafer

Plate

Dielectric

Before After



Core material 3: High-k/metal gate (HKMG)

A transistor acts as a switch that sends a current from the source to the drain when voltage

is applied to a gate. As tech migration progresses to finer processes, the space between the

source and the drain narrows, allowing the current to flow at a lower voltage and reducing

power consumption. However, if the space narrows up to a certain point, leakage current

occurs. To combat this issue, High permittivity dielectric (high-k) materials and metal gates

were introduced.

High-k materials include HfO2, ZrO2, and TiO2, which were developed by Intel. Compared to

existing SiO2 insulators, high-k materials boast ultra-low leakage current (100 times lower),

which allows transistor capacity to expand up to 60%. Switching from SiO2 to high-k

materials was not easy, though, as erratic voltage spikes and a slower switching speed were

problematic. However, these issues were solved when metal gates were installed, replacing

polysilicon electrodes with metal electrodes (TiSiN, TiAlN, TaN and TaSiN).

There are two different ways to establish the high-k/metal gate (HKMG) system (depending

on when the HKMG is formed): the gate first and the gate last methods. Although both of

these methods have their pros and cons, the gate first method seems more effective in

producing mobile-use semiconductors, as it allows for smaller chips and a simpler

production process. SEC and GlobalFoundries currently use the gate first method, while

TSMC and Intel adopted the gate last method to produce APs.

JapanÊs Adeka is the exclusive supplier of high-k materials to SEC, but DNF is also likely to

supply materials going forward. SK Hynix sources the material from UP Chemical and

Soulbrain.

Table 15. Gate first vs gate last

Gate first Gate last

Companies IBM, SEC, GlobalFoundries, TI, etc. Intel, TSMC, etc.

Production process Relatively simple Relatively complex

Production cost Relatively low Relatively high

Speed Low High

Chip size Relatively small Relatively large

Strengths Simple production process Thermally stable

Weaknesses Thermally unstable (changes input voltage) Process complexity; high production cost


Figure 88. High-K metal gate (HKMG) Figure 89. Gate first vs. gate last

Source: KDB Daewoo Securities Research Source: TSMC

Tech migration gave rise

to leakage current

HKMG

Gate first vs. gate last

Silicon-based HK MG

Low resistance layer

Metal gate

High-K

Silicon substrateSilicon substrate

Source Drain Source Drain

Poly-Si

SiO2

Gate electrode

Gate dielectric



Core material 4: Double patterning technology (DPT)

Double patterning technology (DPT) is regarded as the most practical solution for sub-30nm

lithography, given the technological limits of ArF immersion lithography and delays to the

introduction of EUV lithography. DPT allows for the decomposition of a single layout into two

masks to simplify the patterning process. By creating another pattern between two existing

patterns, the space between patterns is minimized, which should help overcome the

technological limitations of semiconductor equipment.

In the past, the litho-etch-litho-etch (LELE) method (which requires two etch steps) and the litho-

freeze method were most prevalent. The problem with these methods was that, if the first

patterning had defects, the second patterning could not be properly executed. Moreover, the

use of two photomasks in each process pushed production costs higher and productivity lower.

To resolve these problems, self-aligned DPT (SaDPT) was introduced. Due to the

technologyÊs utilization of a sacrificial layer, only one etch step is required. As a result,

production costs have been reduced, and overlay errors between first and second patterns

can be prevented. Air Products is the exclusive supplier of SaDPT sacrificial layers to SEC,

but DNF is anticipated to join the supplier list going forward. SK Hynix sourced the material

exclusively from Air Liquide, but Hansol Chemical and UP Chemical are believed to have

recently begun supplying layers, too.

Figure 90. Basic principles of DPT

Source: The University of Texas

Figure 91. LELE patterning vs. litho-freeze patterning Figure 92. Self-aligned DPT (SaDPT)

Source: SPIE Source: SPIE

DPT enhances the

performance of

semiconductor

equipment

Problems of older DPT

SaDPT resolved the

problems of existing

technology

LELE (litho-etch, litho-etch)

Litho-freeze process

Spacer: DPT sacrificial layer


VII The Ongoing Innovation of Displays

Going forward, form factor (e.g., thickness, weight) and electrical efficiency are expected to

differentiate displays. The best way to enhance form factor is to reduce the amount of glass

(which is thick and heavy) used in displays. As such, manufacturers are developing in-cell

touch panel, G2, and one-glass solution (OGS) technologies as well as new materials that

can replace cover glass.

Flexible OLED panels use plastic (polyimide) substrates rather than glass substrates. We

project the development path for flexible OLED as follows: unbreakable panels (UBP)

unbreakable and bendable (UBB) unbreakable and rollable (UBR) unbreakable and

foldable (UBF) panels.



VII. The ongoing innovation of displays: AMOLED vs. Retina display

Proliferation of high-resolution displays: Form factor counts!

In terms of display technologies, Apple has shown a differentiated strategy by expanding the

application of its high-resolution Retina display to the MacBook Air and creating slim, light in-

cell touch panels. In comparison, SEC, which has overcome most technical issues related to

high-resolution OLED production, is expected to differentiate itself by producing a slim and

light display via the use of unbreakable panels (UBP).

Display attributes include: 1) color reproduction (brightness, contrast, etc.), 2) resolution, 3)

response time, 4) viewing angle, 5) power consumption, 6) lifespan, and 7) form factor

(physical thickness and weight). With the advancement of display technologies, most of

these display attributes are largely uniform among panels. However, resolution and form

factor can still be significant differentiating factors for displays.

In terms of resolution, given that most companies, including Apple and SEC, are expected to

roll out products with high-resolution displays in 2013, the differentiation between top-tier

firms is likely to be diluted somewhat. However, those with stable supply channels for in-cell

touch panels and UBPs will likely continue to gain the upper hand. As for form factor, a

variety of new technologies have steadily been introduced to produce slimmer and lighter

products despite increased battery capacity.

Table 16. Display characteristics comparison

Display characteristics LCD Comparison OLED

Resolution Mass-production capable over 400ppi > Mass-production capable over 300ppi (PenTile) Mass-production capable over 267ppi (RGB)

Brightness 500 nit (cd/m2) > 300 nit (cd/m2)

Contrast ratio 1,000:1 < 1,000,000 : 1

Response time 3,000~30,000 μs < Under 50 μs

Viewing angle 160 degree < 180 degree

Power consumption

(2.4‰ basis) 0.23W (fixed) ≈

0.74W (white screen)

0.15W (average screen)

Lifespan 40,000 hrs > 10,000 hrs

Thickness 3mm < 1.5mm (glass)

0.5mm (flexible)


Figure 93. AppleÊs Retina display Figure 94. SECÊs HD Super AMOLED

Source: Apple Source: SEC

Apple vs. SEC

Resolution and form

factor can still make

significant differences

for displays

Form factor is the key

differentiating factor



Apple: Retina displays to be adopted across Apple’s product lineup

Apple claims that Retina, its proprietary high-end LCD technology, has a pixel density so high

that the human eye is unable to notice pixelation at a typical viewing distance. The display is

used in several Apple products, including the iPhone 4/4S/5, the iPod Touch, the iPad, and

the MacBook Pro.

As display quality has become a major determinant for consumersÊ mobile device purchases,

Retina display is now seen as a core differentiating factor for Apple products. Retina display

technology is expected to be adopted across AppleÊs product lineup, promoting the

proliferation of high-resolution display.

Table 17. Retina display adoption model

Model Display size Resolution PPI Usable distance

iPhone 4/4S,4G iPod Touch 3.5‰ 960 x 640 326 25cm (10‰)

iPhone 5, 5G iPod Touch 4.0‰ 1136 x 640 326 25cm (10‰)

New iPad 9.7‰ 2048 x 1536 264 38cm (15‰)

Macbook Pro with Retina display 15.4‰ 2880 x 1800 220 51cm (20‰)

Source: Apple, KDB Daewoo Securities Research

Figure 95. PPI calculation formula

Source: Google, KDB Daewoo Securities Research

Figure 96. Retina display (4x more pixels than existing displays) Figure 97. MacBook ProÊs Retina display (more pixels than HDTV)

Source: Apple Source: Apple

Retina displays to see

wider adoption in Apple

products,

No. of pixels (No. of pixels)^2

Width 1,136 1,290,496

Height 640 409,600

Diagonal 1,304 1,700,096

Diagonal inches 4‰

PPI 326

No. of pixels (No. of pixels)^2

Width 1,136 1,290,496

Height 640 409,600

Diagonal 1,304 1,700,096

Diagonal inches 4‰

PPI 326

÷

=

√

=

+

4‰

640

1136

Processor

Display

Resolution

iPhone 5 iPhone 4S Change

4‰ Retina display 3.5‰ Retina display 0.5‰ ↑

4:3 → 16:9

2x speedA6

1136X640(326ppi) 960X640(326ppi)

A5

4‰

640

1136

Processor

Display

Resolution

iPhone 5 iPhone 4S Change

4‰ Retina display 3.5‰ Retina display 0.5‰ ↑

4:3 → 16:9

2x speedA6

1136X640(326ppi) 960X640(326ppi)

A5



Apple: Form factor differentiation via in-cell touch displays

If high-resolution panels are widely used, display manufacturers should face increasing

difficulties in differentiating themselves. In particular, high-resolution displays require more BLU

lamps due to their lower aperture ratios and greater power consumption to process more

image data. To maintain the same battery duration while using high-resolution panels, the

thickness and weight of a device should increase to adopt batteries of larger capacities.

For example, the new iPad with Retina has 67% more battery capacity than the iPad 2, but

is 9% thicker and 8% heavier than its predecessor. This is one of the reasons behind the

sluggish sales of the new iPad and the relatively solid sales of iPad 2, in our view.

Going forward, form factor and electrical efficiency are expected to differentiate displays.

The best way to enhance form factor is to reduce the amount of glass used in displays. As

such, manufacturers are developing in-cell touch panel, G2, and one-glass solution (OGS)

technologies as well as new materials that can replace cover glass.

Meanwhile, Apple succeeded in reducing the thickness and weight of the iPhone 5 by 18%

and 20%, respectively (vs. the iPhone 4SÊ specifications), by adopting in-cell touch panels

and removing back cover glass. Currently, the mass production of large in-cell touch panels

(over four inches) is technically challenging. However, the technology should play a key role

in improving the form factor of the iPad.

Figure 98. Form factors (thicknesses and weights) of the iPhone 4S and the iPhone 5

Source: Apple

Figure 99. Structures of the iPhone 4S and the iPhone 5


Higher resolution of

panels requires larger

battery capacities

Apple adopted in-cell

touch panels and

removed back cover

glass to secure more

battery space while

reducing thickness

Gap (0.5 mm)

Gap (0.5 mm)

Gap (0.5 mm)

Gap (0.5 mm)

Battery (4.3mm)

Glass back cover (1.0mm)

LCD panel (1.5mm)

Touch panel (0.5mm)

Glass front cover (1.0mm)

Battery (4.0mm)

Glass back cover (0.5mm)

In-cell touch LCD (1.5mm)

Glass front cover (0.9mm)

iPhone 4S

Thickness: 9.3mm

iPhone 5

Thickness: 7.9mm



SEC: Improved resolution of OLED displays

Resolution is an AchillesÊ heel for OLED displays. Producing high-resolution OLED is

challenging due to difficulties in the deposition of organic materials. Furthermore, OLED

requires a significantly larger number of transistors to produce the same-pixel display as LCD,

since the technology requires a fairly high, continuous current running through electrodes.

However, SEC has gotten around these deficiencies to mass-produce high-resolution OLED

displays for the Galaxy Note II.

To improve the resolution of OLED panels, SEC has resorted to the PenTile method (a

method in which some subpixels are shared in larger pixels). While RGB LCD displays have

three subpixels per pixel, PenTile displays use only two subpixels (CRG or BG) per pixel.

Thus, PenTile displays use one-third fewer subpixels than RGB displays to achieve the same

pixels per inch (PPI) as LCD. Although the Galaxy S III features resolution of 306ppi, close to

the iPhone 4Ês (326ppi), its display is not considered to meet Retina display standards, as

SEC used the PenTile method.

The Galaxy Note II has a resolution of 1,280 x 720 and a screen size of 5.5 inches at a ppi of

267. The ppi of the Galaxy Note II is lower than those of the Galaxy S III (306ppi) and the

Galaxy Note (285ppi). However, definition is higher for the Note II, as the device uses an

RGB display. Furthermore, the model’s display is manufactured based on the traditional fine

metal mask (FMM) production method rather than the laser-induced thermal imaging (LITI)

method, which requires high-priced equipment. Thus, SEC improved the quality of displays

without a marked increase in production costs.

As the FMM method has limited success in the deposition of organic materials, it is difficult

to achieve high resolutions with the method. To improve the resolution of OLED panels, the

adoption of a new deposition process (LITI) was considered necessary. However, the LITI

process requires additional equipment such as donor film handlers and laser patterning

machines. Thus, using the existing FMM method is more cost effective for SEC.

Table 18. SECÊs OLED marketing

Name Sub-pixel Touch type Resolution Adapted model

AMOLED RGBG PenTile Add-on type Low-definition Omnia series

Super AMOLED RGBG PenTile On-cell type Low-definition Galaxy S (4‰, 800 x 480, 233ppi)

Super AMOLED Plus Real RGB On-cell type Low-definition Galaxy S II (4.3‰, 800 x 480, 218ppi)

RGBG PenTile On-cell type High-definition Galaxy S III (4.8‰, 1280 x 720, 306ppi)

Galaxy Note (5.3‰, 1280 x 800, 285ppi) HD Super AMOLED

S-Stripe (RGB) On-cell type High-definition Galaxy Note II (5.5‰, 1280 x 720, 267ppi)


Figure 100. Galaxy NoteÊs PenTile display (RGBG) Figure 101. Galaxy Note IIÊs S-Stripe display (RGB)

Source: GSMArena, KDB Daewoo Securities Research Source: GSMArena, KDB Daewoo Securities Research

The PenTile method is

not a fundamental

solution to improve

OLEDÊs resolution

SEC improved definition

through the FMM

method



SEC: Differentiating itself with flexible OLED technology

Flexible OLED panels use plastic (polyimide) substrates rather than glass substrates. We

project the development path for flexible OLED as follows: unbreakable panels (UBP)

unbreakable and bendable (UBB) unbreakable and rollable (UBR) unbreakable and

foldable (UBF) panels.

Replacing glass substrates with plastic substrates enables the production of unbreakable,

thinner, and lighter devices with more space for batteries. Flexible displays should put

manufacturers far ahead of others. If TFT glass substrates are replaced with polyimide

substrates, and glass encapsulation is replaced with film encapsulation, the thickness and

weight of OLED panels would be reduced to one-sixth and a third of those of LCD panels,

respectively.

Figure 102. The evolution of flexible OLED

Source: Displaybank, KDB Daewoo Securities Research

Currently, Samsung Display can produce 4mn UBP units per quarter (at a yield of 70%). Its

capacity significantly lags behind projected demand for key smartphone models. As Apple

has already reduced the thicknesses and weights of its devices sharply by using in-cell touch

screen technology, SEC should speed up the application of UBP to its products. If SEC plans

to launch its strategic models in 2H13, it should swiftly expand flexible OLED capacity.

Figure 103. Thickness and weight comparison of LCD, OLED, and UBP OLED


SEC is differentiating

itself with flexible OLED

SEC should swiftly

expand its flexible OLED

technology and capacity

1단계Unbreakable

2단계Bendable

3단계Rollable

4단계Disposable

1단계Unbreakable

2단계Bendable

3단계Rollable

4단계Disposable

Step 1Unbreakable

Step 2Bendable

Step 3Rollable

Step 4Disposable

LCD

3.2mm

Color filter glass

Polarizer

Liquid crystal

TFT glass

Polarizer

Backlight unit

Encap glass

Polarizer

Organic materials

TFT glass

Polarizer

Thin film encap

Organic materials

Polyimide (PI)1.5mm

0.5mm

OLED UBP OLED160g 100g 50g

More space for battery

More spacefor battery



[Supply and demand] Limited supply in 2013 to drive gradual recovery

Although a seasonal dip in demand is likely to cause a temporary uptick in industry overcapacity

in 1Q13, we believe limited capacity expansion by global LCD panel makers (forecast at just

4% YoY in 2013 in terms of input glass area) will drive a gradual improvement in supply and

demand conditions. Furthermore, top-tier producers are converting their existing lines to

produce higher-end products, drawing down production capacity for existing products.

The protracted weakness in commodity panel margins has prompted global panel makers to

shift their existing a-Si facilities to facilities for high-end specialty panels, such as low-

temperature polysilicon (LTPS), in-plane switching (IPS)/ fringe-field-switching (FFS) and

Oxide-TFT. In particular, LG Display has spent W1.2tr since 2H on converting 40% (80,000

substrates/month) of its current 6G capacity (210,000 substrates/month) into LTPS facilities.

LTPS manufacturing involves additional processing, and, as such, the conversion would

create LTPS capacity of 20,000 substrates/month.

Looking ahead, we expect panel demand to increase 7% YoY in 2013 (in terms of glass area),

on the back of: 1) an increase in the average screen size for LCD TVs; 2) the proliferation of

low-end tablet PCs; and 3) the expansion of hybrid PC sales prompted by the launch of

Windows 8. While we still do not foresee a margin pickup for commodity TV panels, we

expect domestic panel makers to gain market share thanks to the increasing adoption of

IPS/FFS panels supported by the growth of tablets and hybrid PCs.

Figure 104. Global panel makersÊ capacity forecasts (based on input glass area)


Figure 105. Global LCD panel supply/demand trends and forecasts


2013 global capacity to

expand just 4%

Process conversion to

help bring down capacity

Panel demand to grow

7% in 2013 based on

glass area

0

10

20

30

40

50

60

12F 13F 14F 12F 13F 14F 12F 13F 14F 12F 13F 14F 12F 13F 14F 12F 13F 14F

-20

0

20

40

60Capacity (L) YoY growth (R)

(mn ㎡) (%)

S E C LG D CMI A UO S harp B O E

0

10

20

30

40

50

1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F

0

10

20

30

40

50

60Demand (L) Supply (L) Glut (R)

(mn m2) (%)


VIII IT Sector Investment Strategy for 2013

We project the performances of SEC and IT shares to be weak in 1H but to strengthen in

2H. We advise investors to take the most conservative approach possible in accumulating IT

shares. As the global economic outlook remains uncertain, there is no reason for investors to

hastily purchase IT shares. In early 2013, SEC is not expected to serve as more than a risk

hedging instrument. Still, in 1H13, the low valuations of large-cap IT stocks should offer

investors opportunities to expand the weight of the stocks.

We recommend 11 stocks in 2013: Among large-cap plays, we recommend SEC (005930

KS), SK Hynix (000660 KS), LGE (066570 KS), Samsung Electro-Mechanics (009150 KS), and

Samsung SDI (006400 KS). Among small- to mid-cap plays, we recommend SFA Engineering

(056190 KQ), Duksan Hi-Metal (077360 KQ), Soulbrain (036830 KQ), Partron (091700 KQ),

Nepes (033640 KQ), and Simmtech (036710 KQ).



VIII. IT sector investment strategy for 2013

[Macroeconomic view] The IT sector in context

We expect macroeconomic factors to have only a minimal impact on the IT sector in 2013.

The economy is projected to improve, but the recovery should be largely based on low base

effects. Although KoreaÊs GDP growth is projected to rebound to over 3%, the estimated

growth is still below KoreaÊs potential growth rate. ChinaÊs economic recovery is also

expected to be slow, and European and American economies are forecast to stagnate due to

their fiscal austerity efforts. Furthermore, stronger trade protectionism across the globe, and

prospective won appreciation (an estimated W1,060/US$ at end-2013) are likely to weigh on

IT shares.

Table 19. GDP growth rate forecasts

Korea China US Euro

GDP growth rate forecasts (2012→2018) 2.4→3.1% 7.7→8.0% 2.1→2.1% -0.5→0.1%


Traditional cyclical IT stocks are likely to trade at discounts, as, from a macroeconomic

perspective, they lack drivers of aggregate demand. Thus, we advise investors to buy the

stocks at low valuations and sell them when valuations recover.

Meanwhile, earnings stability and re-rating should be the keywords for leading IT stocks in

2013. SEC is a case in point. Despite stellar earnings this year, the stock has not been

properly valued. Although the company is outperforming the KOSPI, its undervaluation

compared to global peers has not significantly improved. The market still considers SEC a

cyclical stock. If the company maintains stable earnings in 2013, however, its valuation could

improve.

We witnessed a similar pattern in the Korean stock market during 2005~2006. Earnings at

KoreaÊs listed companies leveled up in 2004. However, the KOSPI remained undervalued

that year as the market doubted the sustainability of earnings levels. During 2005~2006,

Korean companies maintained the higher levels of earnings, although growth stagnated,

which eventually led to the re-ratings of their shares. If SEC can maintain its earnings at this

yearÊs levels next year, its valuation is likely to improve.

Figure 106. Listed companiesÊ quarterly net profits and P/Es Figure 107. SECÊs quarterly OP trend

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

Strong economic

recovery not expected in

2013

Earnings stability to be

important for SEC next

year

If SEC maintains

earnings at this yearÊs

levels, its shares could

see a re-rating

-10

0

10

20

30

40

00 01 02 03 04 05 06 07 08 09 10 11 12

(Wtr)

0

3

6

9

12

15(x)

Listed companies' quarterly NP (L)

Korean stock market's P/E (R)

High profit level leads to

re-rating

-2,000

0

2,000

4,000

6,000

8,000

10,000

00 02 04 06 08 10 12

(Wbn)



[Global view] Apple vs. SEC

In this report, we forecast the changes, growth, competition, and opportunities for the global IT

industry through the frame of disruptive innovation. By necessity, our endeavor has had a

special focus on SEC and Apple, the two titans of IT.

SEC and Apple are inextricably linked in the minds of global investors when it comes to

forecasting SECÊs future path (i.e., competition, growth, risks). Notably, Apple is facing several

risks. First, Apple is increasingly leaning toward sustaining innovations although it has created

new markets through disruptive innovation. Second, SEC is differentiating itself from Apple in

the smartphone market and utilizing the legal battle with Apple for marketing purposes. Third,

Apple is lagging behind its peers in new markets (e.g., phablets, hybrid PCs). Fourth, companies

that can introduce competitive content into the market, namely Amazon, Google, Microsoft, are

expected to strengthen their market dominance going forward.

In terms of smartphone shipments, SEC is outpacing Apple. However, Apple is still ahead of SEC

in terms of margins. However, if competition continues to intensify in the smartphone market,

we question whether Apple will be able to maintain its OP margin at the current level of over

30%. Notably, if the iPad Mini cannibalizes the iPad market, AppleÊs margins are highly likely to

decline. In our view, a company with strong shipment growth is more likely to maintain its

earnings in an increasingly competitive smartphone market. If SECÊs smartphone market share

reaches 40%, risks (i.e., stagnation in shipments, margin deterioration) and negative biases facing

the company should subside.

A second issue is the impact of Apple's move to reduce SECÊs role in its supply chain as well as

AppleÊs closed-off nature and its implications. First, „Apple without SEC‰ is likely to experiences

disruptions in its supply of major parts, including in-cell displays, mobile DRAM, and APs. In

contrast, „SEC without Apple‰ should remain unscathed, as the percentage of the companyÊs

Apple-related operating profit is estimated at just 4% (W1.1tr) in 2012 and 6% (W1.9tr) in 2013.

Third, even if Apple switches its AP supplier to TSMC in 2H13, SECÊs semiconductor unitÊs 2013

operating profit is projected to decline just 7% with total operating profit sliding less than 2%

(W520bn).

In summary, SEC has already reduced risks related to being left out of AppleÊs supply chain. Still,

the company has to diversify its customer base, so that it does not have to be dependent on

Apple in the semiconductor market. When the market becomes confident about SECÊs

smartphone business as the companyÊs cash cow and the growth potential of its semiconductor

business, its shares should see a re-rating in 2H13.

Figure 108. Apple without SEC: Supply chain risks to increase Figure 109. SEC without Apple: Impact on earnings to be limited


Apple is facing the

innovatorÊs dilemma

„Apple without SEC‰ vs.

„SEC without Apple‰

No

Yes

In-cell touchIn-cell touch Mobile DRAMMobile DRAM APAP

Substitutes

LGD, JPD, SharpLGD, JPD, Sharp

Toshiba, SK HynixMicron, Elpida

Toshiba, SK HynixMicron, Elpida

TSMCTSMC

Apple without SamsungApple without Samsung

Rising risks in supply chain

W260bn operating profit decrease in 20133.5% decrease in 2013 semiconductor OP (W7.8tr)0.8% decrease in 2013 total OP (W3.3tr)

W260bn operating profit decrease in 20133.5% decrease in 2013 semiconductor OP (W7.8tr)0.8% decrease in 2013 total OP (W3.3tr)

Effect on earnings when Apple diversifies50% of its AP supply in 2H13

Customers: Qualcomm, Nvidia, etc.

Customers: Qualcomm, Nvidia, etc.

Products:Baseband, etc.

Products:Baseband, etc.

Samsung without AppleSamsung without Apple

Apple to expand AP supplier list to Include TSMC (2H13)

Apple to expand AP supplier list to Include TSMC (2H13)

SEC expanded customer baseand product portfolio



[2013 investment strategy] Weak in 1H, but strong in 2H

We project the performances of SEC and IT shares to be weak in 1H but to strengthen in 2H.

Hence, we advise investors to take the most conservative approach possible in

accumulating IT shares. As the global economic outlook remains uncertain, there is no

reason for investors to hastily purchase IT shares. Notably, in early 2013, SEC is not

expected to serve as more than a risk hedging instrument. Still, in 1H13, the low valuations

of large-cap IT stocks like SEC should offer investors opportunities to expand their positions.

Particularly, our strategy for SEC is as follows. Despite its stellar performance in 1H12,

global uncertainties, the legal battle with Apple, and launch of the iPhone 5 weighed on

shares starting in May 2012.

However, despite the marketÊs concerns, SEC is posting solid earnings this year. Its 3Q12

operating profit exceeded the market consensus of W7.6tr, coming in at over W8tr. We

expect the companyÊs earnings to grow further in 4Q, giving rise to expectations that SECÊs

share price might beat its previous high sometime before the end of this year.

However, the market is not fully confident in SEC. Hence, its share price remains highly

volatile despite a sharp improvement in fundamentals. Risks for SEC include: the possibility

of SEC failing to maintain this yearÊs growth pace, a possible decline in smartphone margins

amid intensifying competition, and excessive dependence on the telecom business in total

operating profit.

In this regard, SECÊs 1H13 earnings are worth keeping a close eye on. If growth in high-end

smartphone shipments stagnates, 1Q13 earnings are unlikely to significantly improve from

the 4Q12 levels. In addition, the launch of new flagship models will be slow until the

introduction of the Galaxy S IV. However, even if earnings at SECÊs telecom business

decrease steadily, the companyÊs other businesses should be able to offset the declines.

Notably, if the semiconductor unit can generate over W2tr in operating profit, the company

should be able to maintain its overall operating profit in excess of W8tr, even if the telecom

unitÊs operating profit slides to around W4.5tr.

Figure 110. SEC: Robust earnings but share volatility Figure 111. SECÊs smartphone shipments and IM divisionÊs OP

Source: Company data, KDB Daewoo Securities Research Source: Company date, KDB Daewoo Securities Research

2013 outlook for SEC

and IT stocks: weak in

1H; stronger in 2H

Why did SEC shares

correct in 2Q12?

Solid fundamentals, but

weak sentiment

share price volatility

Pay attention to 1Q13

earnings

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

05 06 07 08 09 10 11 12 13

-1.0

1.0

3.0

5.0

7.0

9.0SEC's quarterly OP (R)

SEC's share price (L)

(W) (Wtr)

0

20

40

60

80

100

1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

(mn units)

0

1

2

3

4

5

6SEC's smartphone shipments (L)

IM division's OP (R)

(Wtr)



SEC’s supply chain vs. Apple’s supply chain [Top 11 IT stocks]

This year, many analystsÊ IT investment strategies have focused on the beneficiaries of SEC

and Apple – the links in their supply chains. However, among those in their supply chains,

only Interflex (051370 KQ) displayed a notable re-rating. In particular, due to the delayed

launch of the iPhone 5, AppleÊs suppliers exhibited weak share performance, with the

exception of LGD, which has seen its stock rise in 2H.

For large-cap IT shares, AppleÊs supply chain includes SK Hynix, LGD and LG Innotek, while

SECÊs supply chain includes Samsung Electro-Mechanics (SEMCO), Samsung SDI, and Cheil

Industries. So, which stocks should investors select for next year? We have selected five

large caps and six small caps as our top 11 IT stock picks.

Among suppliers of Apple, we select SK Hynix (000660 KS/Buy/TP: W31,000). In 2013,

earnings at SK Hynix are expected to turn around, and its mobile memory sales are likely to

expand. In addition, PC DRAM market conditions are improving, NAND prices are strong,

and revenue contributions of mobile DRAM (out of overall DRAM revenues) are climbing.

Shares of LGD (034220/Buy/TP: W36,000) have recently advanced markedly, and could rise

further on the back of rising panel prices. However, even in this case, we recommend

investors switch from LGD to SK Hynix.

We expect LGE (066570 KS/Buy/TP: W101,000) to become one of the top second-tier

smartphone makers, shipping more than W40mn units in 2013. The company should

continue to increase its presence in the high-end market, capitalizing on its advanced LTE

technology. Moreover, we expect the company to post robust earnings in 1H13.

With regard to SECÊs supply chain, we pick SEMCO (009150 KS/Buy/TP: W130,000) and

Samsung SDI (006400 KS/Buy/TP: W190,000), in addition to SEC itself (005930 KS/Buy/TP:

W1,650,000). Due to recent market corrections, SEMCO shares have fallen to a 2013F P/E

of 14x, and Samsung SDI shares have declined to a 2013F P/E of 12x. These valuations

appear undemanding relative to their historical ranges. If their shares fall further in end-

2012~early 2013, these pullbacks are expected to present investors with buying

opportunities.

Among mid- to small-cap stocks, we like: 1) SFA Engineering (0056190 KQ/Buy/TP:

W60,000); 2) Soulbrain (008060 KQ/Buy/TP: W53,000); 3) Duksan Hi-Metal (077360

KQ/Buy/TP: W35,000); 4) Partron (091700 KQ/Buy/TP: W19,400); 5) Nepes (033640

KQ/Buy/TP: W24,000); and 6) Simmtech KQ(036710 KQ/Buy/TP: W17,000). These

companies are mostly included in SECÊs supply chain, and they engage in different sectors,

including the semiconductor, AMOLED equipment/parts, telecom component, and electronic

parts sectors.

Table 20. Earnings and valuations of top 11 Korean IT companies (Wbn, %, x)

Revenues OP OP margin Net profit P/E P/B ROE

Market

cap. 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F

SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6

SK Hynix 17,561 10,094 12,291 -131 1,202 -1.3 9.8 -201 938 - 18.7 1.9 1.7 -2.3 9.0

LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2

SEMCO 7,044 7,924 8,585 645 723 8.1 8.4 473 546 15.5 13.4 2.0 1.8 12.9 13.5

Samsung SDI 6,811 5,827 5,990 297 341 5.1 5.7 1,546 583 4.6 12.1 1.0 0.9 23.1 7.9

SFA Engineering 736 583 850 82 105 14.0 12.4 72 88 10.2 8.4 2.0 1.8 19.5 20.8

Soulbrain 745 583 665 98 115 16.9 17.4 65 79 11.4 9.3 2.2 1.8 22.8 21.3

Duksan Hi-Metal 548 153 202 44 56 28.7 27.9 44 55 12.5 9.9 3.7 2.7 27.4 26.2

Partron 700 767 934 75 92 9.8 9.8 57 75 12.3 9.3 3.4 2.6 32.0 32.0

Nepes 286 275 335 40 56 14.5 16.8 26 44 11.0 6.5 1.6 1.3 15.1 21.1

Simmtech 340 655 757 53 67 8.2 8.9 35 52 9.3 6.4 1.6 1.3 18.3 22.0


Large-caps : 1) SEC,

2) SK Hynix, 3) LGE, 4)

SEMCO, 5) Samsung

SDI

Mid- and small-caps: 1)

SFA Engineering, 2)

Soulbrain , 3) Duksan Hi-

Metal, 4) Partron, 5)

Nepes, 6) Simmtech



Peer valuations of global IT companies

Table 21. Valuations of global IT companies (Wbn, %, x)

Revenues OP OP margin NP P/E P/B ROE

Market cap

12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F

SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6

SK Hynix 17,561 10,094 12,291 -131 1,202 -1.3 9.8 -201 938 - 18.7 1.9 1.7 -2.3 9.0

LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2

LG Display 12,649 28,461 29,108 425 1,063 1.5 3.7 256 836 49.4 15.1 1.3 1.2 2.5 7.7

Samsung SDI 6,811 5,827 5,990 297 341 5.1 5.7 1,546 583 4.6 12.1 1.0 0.9 23.1 7.9

SEMCO 7,044 7,924 8,585 645 723 8.1 8.4 473 546 15.5 13.4 2.0 1.8 12.9 13.5

LG Innotek 1,591 5,113 6,104 99 206 1.9 3.4 12 102 131.8 15.7 1.3 1.2 0.9 7.2

Apple 560,261 208,937 241,042 67,881 80,568 32.5 33.4 51,626 61,250 11.0 9.3 3.6 2.7 33.2 31.6

Hitachi 26,283 124,430 127,919 6,614 7,368 5.3 5.8 2,879 3,494 9.1 7.4 1.0 0.9 10.6 11.8

Panasonic 13,116 103,310 104,066 2,589 3,515 2.5 3.4 -4,923 1,292 - 9.2 0.6 0.5 -12.9 5.4

Toshiba 15,802 82,776 87,544 3,467 4,221 4.2 4.8 1,467 2,067 10.7 7.6 1.2 1.1 11.3 15.0

Sony 11,790 91,891 93,095 1,501 2,308 1.6 2.5 97 646 175.0 18.2 0.4 0.4 0.9 2.7

Murata 12,153 9,086 9,698 736 985 8.1 10.2 518 701 21.7 16.1 1.0 1.0 4.8 6.0

Nokia 10,978 41,840 40,850 -3,087 -228 -7.4 -0.6 -2,072 -382 - - 1.0 1.1 -26.7 -8.8

HTC 7,725 11,033 10,241 789 596 7.2 5.8 671 497 11.3 14.2 2.3 2.3 19.1 15.6

Micron 6,226 9,337 10,758 55 954 0.6 8.9 -297 485 - 12.3 0.8 0.7 -4.4 5.9

TDK 4,918 11,798 12,281 628 799 5.3 6.5 396 539 12.2 9.0 0.7 0.7 5.5 7.1

RIM 4,873 12,035 12,143 -1,299 -498 -10.8 -4.1 -747 -309 - - 0.5 0.5 -9.0 -3.5

AUO 3,993 14,198 15,322 -1,423 -176 -10.0 -1.1 -1,746 -277 - - 0.7 0.7 -25.6 -3.5

CMI 3,416 18,007 18,915 -836 209 -4.6 1.1 -1,031 -30 - - 0.5 0.5 -14.9 0.7

Sharp 2,345 32,338 34,073 -2,083 497 -6.4 1.5 -5,034 -96 - - 0.6 0.6 -87.1 -2.4

Average 2.8 6.0 37.1 12.5 1.2 1.1 -1.5 7.5


Table 22. Valuations of global semiconductor companies (Wbn, %, x)


Market cap

12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F

SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6

SK Hynix 17,561 10,094 12,291 -131 1,202 -1.3 9.8 -201 938 - 18.7 1.9 1.7 -2.3 9.0

Qualcomm 114,316 25,602 28,287 9,126 10,423 35.6 36.8 8,163 9,136 14.4 13.0 2.8 2.5 18.6 18.4

Intel 112,681 58,393 59,659 16,040 14,991 27.5 25.1 12,417 11,567 9.6 10.3 2.1 1.9 22.8 18.3

TSMC 88,826 18,930 21,237 6,693 7,250 35.4 34.1 6,190 6,609 14.3 13.5 3.3 2.9 24.4 22.9

Micron 6,226 9,337 10,758 55 954 0.6 8.9 -297 485 - 12.3 0.8 0.7 -4.4 5.9

Nanya 831 1,327 1,469 -1,123 -967 -84.6 -65.9 -1,159 -847 - - - 10.5 -381.2 -405.8

Inotera 599 1,415 1,577 -453 -199 -32.0 -12.6 -534 -287 - - 0.5 0.8 -59.0 -46.8

Powerchip 21 1,072 1,117 -427 -207 -39.9 -18.5 -526 -281 - - - - -235.5 -

Toshiba 15,802 82,776 87,544 3,467 4,221 4.2 4.8 1,467 2,067 10.7 7.6 1.2 1.1 11.3 15.0

SanDisk 10,851 5,488 6,505 714 1,288 13.0 19.8 530 906 20.1 12.0 1.4 1.3 5.6 8.9

ASML 31,224 6,604 7,378 1,705 1,962 25.8 26.6 1,465 1,654 17.2 14.9 4.4 3.7 26.8 25.0

AMAT 14,375 9,425 9,079 1,357 1,337 14.4 14.7 1,006 989 14.7 14.9 1.7 1.6 8.8 9.4

TEL 8,369 6,882 7,564 146 401 2.1 5.3 96 269 78.7 29.4 1.0 1.0 1.0 3.6

Advantest 2,583 1,994 2,196 136 221 6.8 10.0 85 143 26.5 15.7 1.2 1.2 4.5 7.9

Average 1.4 7.5 21.6 14.2 1.9 2.3 -35.8 -20.5




Table 23. Valuations of global display companies (Wbn, %, x)


Market cap

12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F

LG Display 12,649 28,461 29,108 425 1,063 1.5 3.7 256 836 49.4 15.1 1.3 1.2 2.5 7.7

AUO 3,993 14,198 15,322 -1,423 -176 -10.0 -1.1 -1,746 -277 - - 0.7 0.7 -25.6 -3.5

CMI 3,416 18,007 18,915 -836 209 -4.6 1.1 -1,031 -30 - - 0.5 0.5 -14.9 0.7

Sharp 2,345 32,338 34,073 -2,083 497 -6.4 1.5 -5,034 -96 - - 0.6 0.6 -87.1 -2.4

LCD average -4.9 1.3 49.4 15.1 0.8 0.8 -31.3 0.6

LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2

Samsung SDI 6,811 5,827 5,990 297 341 5.1 5.7 1,546 583 4.6 12.1 1.0 0.9 23.1 7.9

Panasonic 13,116 103,310 104,066 2,589 3,515 2.5 3.4 -4,923 1,292 - 9.2 0.6 0.5 -12.9 5.4

Pioneer 729 6,433 6,707 221 276 3.4 4.1 16 136 41.6 5.3 0.6 0.6 2.6 11.7

Sony 11,790 91,891 93,095 1,501 2,308 1.6 2.5 97 646 175.0 18.2 0.4 0.4 0.9 2.7

Hitachi 26,283 124,430 127,919 6,614 7,368 5.3 5.8 2,879 3,494 9.1 7.4 1.0 0.9 10.6 11.8

PDP average 3.4 4.1 50.1 11.1 0.8 0.7 4.9 7.8


Table 24. Valuations of global handset companies (Wbn, %, x)


Market cap

12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F

SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6

LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2

Apple 560,261 208,937 241,042 67,881 80,568 32.5 33.4 51,626 61,250 11.0 9.3 3.6 2.7 33.2 31.6

Nokia 10,978 41,840 40,850 -3,087 -228 -7.4 -0.6 -2,072 -382 - - 1.0 1.1 -26.7 -8.8

HTC 7,725 11,033 10,241 789 596 7.2 5.8 671 497 11.3 14.2 2.3 2.3 19.1 15.6

RIM 4,873 12,035 12,143 -1,299 -498 -10.8 -4.1 -747 -309 - - 0.5 0.5 -9.0 -3.5

Average 6.3 8.6 13.1 11.5 1.7 1.5 7.2 10.5


Table 25. Valuations of global IT materials companies (Wbn, %, x)


Market cap

12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F

SEMCO 7,044 7,924 8,585 645 723 8.1 8.4 473 546 15.5 13.4 2.0 1.8 12.9 13.5

LG Innotek 1,591 5,113 6,104 99 206 1.9 3.4 12 102 131.8 15.7 1.3 1.2 0.9 7.2

TDK 4,918 11,798 12,281 628 799 5.3 6.5 396 539 12.2 9.0 0.7 0.7 5.5 7.1

Murata 12,153 9,086 9,698 736 985 8.1 10.2 518 701 21.7 16.1 1.0 1.0 4.8 6.0

Taiyo Yuden 999 2,705 2,822 84 128 3.1 4.5 26 70 36.9 13.4 0.7 0.7 1.8 4.7

Ibiden 1,986 3,996 4,164 185 247 4.6 5.9 82 162 22.9 11.6 0.5 0.5 2.2 4.2

Shinko 858 1,789 1,835 62 73 3.5 4.0 41 46 21.0 18.9 0.5 0.5 2.4 2.5

NGK Spark 2,682 3,673 3,793 285 346 7.7 9.1 209 244 12.4 10.7 0.8 0.8 6.3 7.0

Nanya PCB 831 1,327 1,469 -1,123 -967 -84.6 -65.9 -1,159 -847 - - - 10.5 -381.2 -405.8

Unomicron 1,689 2,540 2,700 184 209 7.2 7.7 144 177 11.7 9.4 1.0 0.9 8.0 9.4

Tripod 1,087 1,460 1,549 119 126 8.2 8.1 115 116 9.3 9.0 1.2 1.1 12.2 11.8

Seoul

Semiconductor 1,254 856 1,093 22 60 2.6 5.5 16 55 81.0 22.7 2.1 2.0 2.5 8.7

CREE 3,947 1,446 1,697 133 221 9.2 13.0 142 205 26.4 19.1 1.4 1.3 4.7 6.1

Toyoda Gosei 2,818 7,994 8,320 513 569 6.4 6.8 303 339 9.3 8.3 0.9 0.8 9.7 10.0

Stanley 2,614 3,677 3,893 458 503 12.4 12.9 288 318 8.6 7.8 0.8 0.7 9.8 9.5

Citizen 1,715 3,892 4,050 243 290 6.2 7.2 141 172 11.2 9.2 0.6 0.6 5.5 6.2

Epistar 1,577 773 863 -6 69 -0.8 8.0 17 67 94.2 23.2 0.9 0.9 0.8 3.5

Lite-On 3,179 4,608 4,865 282 300 6.1 6.2 274 313 11.5 10.4 1.1 1.1 10.8 11.8

Aixtron 1,369 317 507 -105 47 -33.2 9.3 -91 36 - 38.2 1.9 1.8 -15.8 3.4

Veeco 1,286 556 573 62 65 11.2 11.4 53 53 23.3 23.2 1.4 1.3 5.6 5.9

Average -0.3 4.1 31.2 15.2 1.1 1.5 -14.5 -13.4




IT industry key data

Semiconductor

Figure 112. Global annual PC shipment trends and forecasts Figure 113. Global smartphone shipment trends and forecasts

Source: Gartner, KDB Daewoo Securities Research estimates Source: Gartner, KDB Daewoo Securities Research estimates

Figure 114. DRAM quarterly supply/demand trends and forecasts Figure 115. NAND quarterly supply/demand trends and forecasts

Source: KDB Daewoo Securities Research estimates Source: KDB Daewoo Securities Research estimates

Figure 116. Global semiconductor firmsÊ relative share price trends Figure 117. P/B-ROEs of global semiconductor companies (2013F)

Source: Bloomberg, KDB Daewoo Securities Research estimates Source: Bloomberg, KDB Daewoo Securities Research estimates

302

348 353339 335

356

371

0

100

200

300

400

00 02 04 06 08 10 12F 14F

-5

0

5

10

15

20

Global PC shipments (L, excl. tablet PCs)

YoY global PC shipment growth (R)

(mn units) (%)

36 40 4454 55

64

83

102 100108

115

149 146 143154

180

0

20

40

60

80

100

120

140

160

180

200

1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F

(mn units)

0

2

4

6

8

10

12

06 07 08 09 10 11 12F 13F

-10

-5

0

5

10

15

DRAM demand (L) DRAM supply (L)

Oversupply (R)

(%)(1Gb eq.bn units)

Reduction of PC DRAM will be important in 2H

0

2

4

6

8

06 07 08 09 10F 11F 12F 13F

-10

-5

0

5

10

15

NAND supply (L) NAND demand (L)

Oversupply(R)

(%)(16Gb eq. bn units)

NAND supply/demand

will be tighter than expected at year-end

10

40

70

100

130

160

190

11/11 1/12 3/12 5/12 7/12 9/12

SEC Micron SK Hynix

Nanya SanDisk Toshiba

S E C

S K Hynix

Micron

InoteraToshiba

SanDisk

ASML

AMAT

TEL

Advantest

y = 0.0096x + 1.4923

0.0

1.0

2.0

3.0

4.0

-60 -40 -20 0 20 40

(P/B, x)

(ROE, %)



Display

Figure 118. LCD panel price change rate (biweekly) Figure 119. Panel price change rate by model

Source: WitsView Source: WitsView

Figure 120. Global LCD panel shipment trends and forecasts Figure 121. Global LCD TV shipment trends and forecasts

Source: DisplaySearch, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research

Figure 122. Relative share price trends of global display companies Figure 123. P/B-ROEs of global display companies (2013F)

Source: Bloomberg Source: Bloomberg, KDB Daewoo Securities Research

-12

-8

-4

0

4

8

12

05 06 07 08 09 10 11 12

Notebook

Monitor

TV

(%)

60

70

80

90

100

110

120

130

140

4/09 10/09 4/10 10/10 4/11 10/11 4/12 10/12

Notebook 15.6" Monitor 22"

TV 32" TV 42"

TV 47"

(4/09 = 100)

0

50

100

150

200

250

04 05 06 07 08 09 10 11 12 13F

-40

-20

0

20

40

60

80

100

SEC LGD

AUO CMI

Other YoY growth (R)

(mn units) (%)

0

20

40

60

80

04 05 06 07 08 09 10 11 12F 13F

0

20

40

60

80

100 LED-backlit LCD TV

CCFL-backlit LCD TV

LED penetration rate (R)

(mn units) (%)

0

20

40

60

80

100

120

140

160

11/11 2/12 5/12 8/12

(-1Y = 100)

LGD Samsung SDIAUO CMISharp

S amsung S DI

Sharp

Sony

Panasonic

Hitachi

AUO

CMI

0.2

0.4

0.6

0.8

1.0

1.2

-6 -4 -2 0 2 4 6 8 10 12 14

(PBR, x)

(ROE,%)

LGD



Telecom equipment/electronic components

Figure 124. Global quarterly handset market share trends Figure 125. Global quarterly smartphone market share trends


Figure 126. OS market share (as of June 2012) Figure 127. Handset market outlook

Source: Gartner, KDB Daewoo Securities Research Source: IDC, KDB Daewoo Securities Research

Figure 128. Handset/components sectorÊs relative share price trend Figure 129. Relative share price trend of large LED companies

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research

0

10

20

30

40

50

1Q08 1Q09 1Q10 1Q11 1Q12

Apple SEC Nokia

RIM HTC LGE

(%)

0

10

20

30

40

50

1Q08 1Q09 1Q10 1Q11 1Q12

Nokia SEC Apple

ZTE LGE

(%)

iOS

Google Play

Windows PhoneBlackberry

NokiaAmazon

Web app stores

CSP

Chinese third-party

Other

0

500

1,000

1,500

2,000

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F

-10

0

10

20

30

40

Smartphone (L)Non-smartphone (L)Smartphone proportion (R)Handset market growth rate YoY (R)

(%)(mn units)

Indian smartphone

users each 100mn;

Global crisisChinese smartphone users

reach 100mn; Internet bubble

90

110

130

150

10/11 1/12 4/12 7/12 10/12

Handset/component companies

KOSDAQKOSPI

129.0

119.3

111.1

70

100

130

160

10/11 12/11 2/12 4/12 6/12 8/12 10/12

LED companiesKOSPIKOSDAQ

106.3

109.9

104.7


Daewoo Securities Research 80

Samsung Electronics (005930 KS)

Reminiscent of Nokia and Intel in their heydays

2013 outlook: Revenues of W240.1tr (up 18.0%); OP of W33.0tr (up 17.0%)

Semiconductor OP to soar to W7.8tr next year

Shares seem undervalued at 2012F and 2013F P/Bs of 1.8x and 1.5x

2013 earnings: In 2013, we expect Samsung Electronics (SEC) to post revenues of

W240.1tr (up 18.0% YoY) and an operating profit of W33.0tr (up 17.0% YoY). The

companyÊs semiconductor division is projected to show notable growth, with an

operating profit of W7.8tr (up 73% YoY). As for the telecom division, we

conservatively forecast its operating profit at W18.5tr, but, if the unitÊs profitability

remains high, the companyÊs growth should beat our forecast.

Growth theme: SEC in 2012 reminds us of Nokia back in 1999 and Intel in the

1980s. The companyÊs global market share in smartphones is now approaching

40%, and its semiconductor unitÊs growth driver is shifting from memory to

System LSI (Intel achieved strong growth after its transition from memory maker

to CPU producer).

The large contribution of the IM (telecom) division to SECÊs total profit is not a risk.

Unlike Apple, SEC has achieved a high level of vertical integration, including supply

of core parts. Thus, if the company can maximize its market share, risks associated

with competition and the end of its partnership with Apple are likely to decrease.

Catalysts: SECÊs key share price catalyst next year will be its ability to maintain

quarterly operating profits of at least W8tr. Moreover, the Galaxy S IV (expected to

be released in 2Q13) is likely to make history in the smartphone industry. In

addition, the semiconductor division should regain its standing as the companyÊs

engine, delivering quarterly operating profits of more than W2tr after 2Q13.

Risks: Risks include stiffer competition with Apple and smartphone margin cuts.

However, if the company can boost its market share above 40%, profits will likely

fall slower than margins. The addition of new AP makers to AppleÊs supply chain

may also pose a risk, but even if we assume that Apple starts to purchase APs

from TSMC, it will dent SECÊs annual operating profit by less than 2%.

Valuation: We maintain our Buy call on SEC with a target price of W1,650,000.

Next year, we expect SEC shares to remain sluggish in 1H before recovering in 2H.

The stockÊs weak performance in 1Q12 should present a buying opportunity. The

stock is currently trading at 2012F and 2013F P/Bs of 1.8x and 1.5x, respectively

James Song +822-768-3722

james.song @dwsec.com

Buy (Maintain)

Target Price (12M, W) 1,650,000

Share Price (11/12/12, W) 1,345,000

Expected Return (%) 22.7

EPS Growth (12F, %) 73.8

Market EPS Growth (12F, %) 8.9

P/E (12F, x) 9.9

Market P/E (12F, x) 10.2

KOSPI 1,900.87

Market Cap (Wbn) 198,118

Shares Outstanding (mn) 170

Avg Trading Volume (60D, '000) 309

Avg Trading Value (60D, Wbn) 398

Dividend Yield (12F, %) 0.6

Free Float (%) 70.8

52-Week Low (W) 921,000

52-Week High (W) 1,418,000

Beta (12M, Daily Rate of Return) 1.42

Price Return Volatility (12M Daily, %, SD) 2.0

Foreign Ownership (%) 43.7

Major Shareholder(s)

K.H. Lee et al. (17.63%)

Treasury stocks (11.55%)

National Pension Service (6%)

Price Performance

(%) 1M 6M 12M

Absolute 3.8 3.2 36.8

Relative 5.5 4.1 34.8

80

90

100

110

120

130

140

150

11/11 3/12 7/12 11/12

Share price

KOSPI

§ Earnings & Valuation Metrics

FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA

(Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x)

12/10 154,630 17,29 11.2 15,799 92,863 28,015 907 20.4 10.2 1.8 5.3

12/11 165,002 16,25 9.9 13,359 78,522 29,047 2,497 14.6 13.5 1.8 5.7

12/12F 203,521 28,24 13.9 23,213 136,443 44,266 9,419 21.2 9.9 1.8 4.6

12/13F 240,089 33,04 13.8 27,743 163,067 49,386 18,119 20.6 8.3 1.5 3.9

12/14F 272,649 39,48 14.5 32,720 192,320 53,160 42,456 20.0 7.0 1.3 2.8

Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests

Source: Company data, KDB Daewoo Securities Research estimates



Table 1. Quarterly and annual earnings (Wbn, %)

1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F

Revenues 45,271 47,597 52,177 58,477 55,611 57,963 62,284 64,231 154,630 165,002 203,521 240,089

% QoQ -4.3 5.1 9.6 12.1 -4.9 4.2 7.5 3.1

% YoY 22.4 20.7 26.4 23.6 22.8 21.8 19.4 9.8 13.4 6.7 23.3 18

IM 23,220 24,040 29,920 32,460 30,337 31,249 33,693 34,628 41,190 67,440 109,640 129,907

CE 10,670 12,150 11,600 14,395 12,275 12,813 14,362 15,599 57,250 47,020 48,815 55,048

Semiconductor 7,980 8,600 8,712 10,804 11,562 12,407 12,857 12,572 37,640 36,990 36,096 49,398

- Memory 4,890 5,420 5,220 6,578 6,852 7,385 7,518 7,028 25,830 22,710 22,108 28,782

DRAM 3,858 4,309 4,061 4,055 4,102 4,322 4,467 4,363 19,441 16,522 16,283 17,254

NAND 2,147 2,440 2,403 3,254 3,511 3,883 3,886 3,446 9,452 10,270 10,243 14,726

- Non-memory 3,090 3,180 3,492 4,226 4,710 5,023 5,340 5,544 11,810 14,280 13,988 20,616

DP 8,540 8,250 8,460 8,943 9,165 9,547 10,027 10,357 29,910 29,230 34,193 39,097

Operating profit 5,850 6,724 8,120 7,553 8,142 8,331 8,819 7,756 17,297 16,250 28,247 33,048

% QoQ 10.5 14.9 20.8 -7 7.8 2.3 5.9 -12.1

% YoY 98.4 79.2 90.9 42.6 39.2 23.9 8.6 2.7 58.3 -6.1 73.8 17

IM 4,270 4,190 5,630 5,312 4,871 4,656 4,692 4,247 4,300 8,130 19,402 18,466

CE 530 760 430 417 333 442 499 349 450 1,550 2,137 1,623

Semiconductor 760 1,110 1,150 1,482 1,775 2,020 2,136 1,851 10,120 7,330 4,502 7,781

- Memory 594 996 862 1,125 1,342 1,528 1,533 1,264 8,662 4,218 3,576 5,667

DRAM 657 796 556 494 598 717 849 709 6,645 3,522 2,504 2,873

NAND 316 376 457 829 980 1,081 954 778 3,085 1,946 1,979 3,794

- Non-memory 166 114 394 504 548 587 699 719 1,458 3,112 1,179 2,553

DP 280 750 1,090 1,192 1,163 1,213 1,392 1,310 1,990 -750 3,312 5,077

OP margin 12.9 14.1 15.6 12.9 14.6 14.4 14.2 12.1 11.2 9.8 13.9 13.8

IM 18.4 17.4 18.8 16.4 16.1 14.9 13.9 12.3 10.4 12.1 17.7 14.2

CE 5 6.3 3.7 2.9 2.7 3.4 3.5 2.2 0.8 3.3 4.4 2.9

Semiconductor 9.5 12.9 13.2 13.7 15.3 16.3 16.6 14.7 26.9 19.8 12.5 15.8

- Memory 12.1 18.4 16.5 17.1 19.6 20.7 20.4 18 33.5 18.6 16.2 19.7

DRAM 17 18.5 13.7 12.2 14.6 16.6 19 16.2 34.2 21.3 15.4 16.7

NAND 14.7 15.4 19 25.5 27.9 27.8 24.6 22.6 32.6 19 19.3 25.8

- Non-memory 5.4 3.6 11.3 11.9 11.6 11.7 13.1 13 12.3 21.8 8.4 12.4

DP 3.3 9.1 12.9 13.3 12.7 12.7 13.9 12.6 6.7 -2.6 9.7 13

Net profit 5,049 5,193 6,562 6,741 5,752 6,296 7,817 7,877 15,799 13,359 23,213 27,743

% QoQ 29.9 2.9 26.4 2.7 -14.7 9.4 24.2 0.8

% YoY 86 50.2 98.8 73.4 13.9 21.2 19.1 16.9 70.1 -15.4 73.8 19.5

Note: Under consolidated K-IFRS; Source: KDB Daewoo Securities Research estimates

Figure 1. Quarterly operating profit and OP margin trends Figure 2. Annual operating profit trend


4.0

9.16.3 7.6

9.0 9.06.0

10.9

17.3 16.2

33.0

39.541.4

28.2

9.1

11.8

0

10

20

30

40

50

00 02 04 06 08 10 12F 14F

(Wtr)

-100

-50

0

50

100

150Annual operating profit (L) YoY growth (R)

(%)

2.6 2.4

1.4

-0.7

0.6

2.7

4.23.4

4.45.0 4.9

3.0 2.93.8

4.3

5.35.9

8.17.6

8.1 8.38.8

7.86.7

-2.5

0.0

2.5

5.0

7.5

10.0

1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

(Wtr)

-10

0

10

20Quarterly operating profit (L)

OP margin (R)

(%)



Samsung Electronics (005930 KS/Buy/TP: W1,650,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)

(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F

Revenues 165,002 203,521 240,089 272,649 Current Assets 71,502 88,936 104,847 155,474

Cost of Sales 112,145 128,355 150,377 177,222 Cash and Cash Equivalents 14,692 22,848 33,395 75,455

Gross Profit 52,857 75,167 89,712 95,427 AR & Other Receivables 24,153 30,876 31,402 35,661

SG&A Expenses 37,402 46,434 56,765 56,094 Inventories 15,717 21,052 24,834 28,202

Operating Profit (Adj) 15,455 28,733 32,948 39,333 Other Current Assets 4,755 5,878 6,934 7,874

Operating Profit 16,250 28,247 33,048 39,483 Non-Current Assets 84,129 98,764 116,914 106,678

Non-Operating Profit 909 1,775 1,278 1,001 Investments in Associates 9,204 9,610 11,510 13,410

Net Financial Income -62 -82 -214 -607 Property, Plant and Equipment 62,044 70,296 79,572 66,443

Net Gain from Inv in Associates 1,399 2,279 1,800 1,750 Intangible Assets 3,355 3,608 3,519 3,448

Pretax Profit 17,159 30,023 34,326 40,483 Total Assets 155,631 187,700 221,761 262,152

Income Tax 3,425 6,477 6,583 7,763 Current Liabilities 44,319 51,911 58,696 65,627

Profit from Continuing Operations 13,734 23,545 27,743 32,720 AP & Other Payables 18,510 23,391 27,593 31,335

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 9,684 8,586 7,586 7,586

Net Profit 13,734 23,545 27,743 32,720 Other Current Liabilities 16,126 19,934 23,516 26,705

Controlling Interests 13,359 23,213 27,743 32,720 Non-Current Liabilities 9,467 12,221 12,797 14,319

Non-Controlling Interests 375 332 0 0 Long-Term Financial Liabilities 4,963 5,885 5,385 5,385

Total Comprehensive Profit 13,232 23,551 27,743 32,720 Other Non-Current Liabilities 4,086 5,576 6,652 8,173

Controlling Interests 12,802 23,231 27,743 32,720 Total Liabilities 53,786 64,132 71,493 79,946

Non-Controlling Interests 430 320 0 0 Controlling Interests 97,600 121,093 147,794 179,732

EBITDA 29,047 44,266 49,386 53,160 Capital Stock 898 898 898 898

FCF (Free Cash Flow) 2,497 9,419 18,119 42,456 Capital Surplus 4,404 4,404 4,404 4,404

EBITDA Margin (%) 17.6 21.8 20.6 19.5 Retained Earnings 97,543 120,009 146,710 178,648

Operating Profit Margin (%) 9.9 13.9 13.8 14.5 Non-Controlling Interests 4,246 2,475 2,475 2,475

Net Profit Margin (%) 8.1 11.4 11.6 12.0 Stockholders' Equity 101,845 123,568 150,268 182,207

Cash Flows (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F

Cash Flows from Op Activities 22,175 33,137 43,482 42,861 P/E (x) 13.5 9.9 8.3 7.0

Net Profit 13,734 23,545 27,743 32,720 P/CF (x) 6.7 5.9 5.2 4.9

Non-Cash Income and Expense 16,476 22,446 41,446 20,441 P/B (x) 1.8 1.8 1.5 1.3

Depreciation 12,934 14,775 15,724 13,129 EV/EBITDA (x) 5.7 4.6 3.9 2.8

Amortization 658 757 715 698 EPS (W) 78,522 136,443 163,067 192,320

Others -858 -1,501 400 400 CFPS (W) 158,413 227,740 259,689 273,595

Chg in Working Capital -4,057 -7,190 678 -2,536 BPS (W) 598,263 733,969 891,429 1,079,577

Chg in AR & Other Receivables -2,197 -6,181 -526 -4,259 DPS (W) 5,500 8,000 5,500 8,000

Chg in Inventories -3,920 -6,043 -3,783 -3,368 Payout ratio (%) 6.2 4.2 2.6 3.2

Chg in AP & Other Payables 1,126 3,967 4,203 3,742 Dividend Yield (%) 0.5 0.6 0.4 0.6

Income Tax Paid -3,977 -5,664 -6,583 -7,763 Revenue Growth (%) 6.7 23.3 18.0 13.6

Cash Flows from Inv Activities -19,728 -21,451 -29,669 629 EBITDA Growth (%) 3.7 52.4 11.6 7.6

Chg in PP&E -21,586 -22,592 -25,000 0 Operating Profit Growth (%) -6.1 73.8 17.0 19.5

Chg in Intangible Assets -654 -626 -626 -626 EPS Growth (%) -15.4 73.8 19.5 17.9

Chg in Financial Assets 590 933 -5,000 0 Accounts Receivable Turnover (x) 8.0 8.2 8.6 9.1

Others 1,922 834 958 1,255 Inventory Turnover (x) 11.4 11.1 10.5 10.3

Cash Flows from Fin Activities 2,468 -3,369 -3,266 -1,430 Accounts Payable Turnover (x) 17.0 17.6 17.1 16.8

Chg in Financial Liabilities 3,758 -468 -1,500 0 ROA (%) 9.5 13.7 13.6 13.5

Chg in Equity 161 44 0 0 ROE (%) 14.6 21.2 20.6 20.0

Dividends Paid -875 -827 -1,042 -782 ROIC (%) 16.7 26.1 27.3 33.0

Others -576 -1,804 -724 -649 Liability to Equity Ratio (%) 52.8 51.9 47.6 43.9

Increase (Decrease) in Cash 4,900 8,157 10,547 42,060 Current Ratio (%) 161.3 171.3 178.6 236.9

Beginning Balance 9,791 14,692 22,848 33,395 Net Debt to Equity Ratio (%) -12.0 -13.5 -19.1 -38.8

Ending Balance 14,692 22,848 33,395 75,455 Interest Coverage Ratio (x) 25.2 38.8 45.7 60.9




SK Hynix (000660 KS)

Beneficiary of mobile memory market growth

2013 outlook; Turnaround expected, Revenues of W12.3tr and OP of W1.2tr

To benefit from mobile memory demand growth

To receive premium for memory price increases and earnings turnaround

2013 earnings: Next year, SK Hynix is expected to turn around, reporting revenues

of W12.3tr (up 21.8% YoY) and an operating profit of W1.2tr (swinging to positive

YoY). The DRAM division is projected to post W778bn in operating profit (OP

margin of 9.8%), while the NAND divisionÊs operating profit is estimated at

W353bn (OP margin of 8.1%). We forecast the companyÊs earnings to continue to

improve until end-2014 on capacity expansion at the M12 line.

Growth theme: 1) SK HynixÊs growth should be dependent on the growth of the

mobile memory business. The increasing earnings contribution of high-margin

mobile DRAM and embedded NAND sales growth are expected to drive up the

companyÊs earnings. Although the PC market is forecast to remain stagnant next

year, weighing on the commodity DRAM market, the company is likely to offset

this negative by reshuffling its product mix.

2) Apple is scaling down its dependence on SEC in memory supply (currently 30%).

SEC accounts for over 60% of the global mobile DRAM market. Thus, Apple

should turn to other DRAM makers, which account for 40% of the global market,

to meet its memory needs. Thus, SK Hynix could benefit from AppleÊs efforts to

diversify its supply lines.

Catalysts: 1) Declines in DRAM prices are slowing in 4Q12, and NAND prices are

rising steeply. Positive price trends should be a strong catalyst for the companyÊs

share price. 2) Growing demand for MCP driven by mobile device demand could

boost sales prices. 3) Smooth migrations to 30nm DRAM and 20nm NAND

processes are also positive for the company.

Risks: 1) For parts producers, Apple presents both opportunities and risks. Price

cut pressure from Apple is a major risk for SK Hynix. 2) In 1Q13, major

smartphone producersÊ new model launches are expected to slow down. Thus,

mobile DRAM prices are projected to slide after early 2013.

Valuation: We maintain our Buy recommendation on SK Hynix and raise our target

price from W28,000 to W31,000. Earnings momentum has been strengthening

recently in line with rising NAND prices and a slowdown in the DRAM price

downtrend. The companyÊs valuation has risen to a 2013F P/B of 1.7x. But SK

HynixÊs share price is expected to rise further, as it is likely to receive a premium

for its anticipated medium- to long-term earnings growth after 4Q12.

James Song +822-768-3722

[email protected]

Buy (Maintain)

Target Price (12M, W) 31,000

Share Price (11/12/12, W) 25,300


EPS Growth (12F, %) RR


P/E (12F, x) -


KOSPI 1,900.87



Avg Trading Volume (60D, '000) 5,043



Free Float (%) 74.2

52-Week Low (W) 19,750

52-Week High (W) 30,950





SK Telecom (25.82%)

National Pension Service (8.08%)

Price Performance

(%) 1M 6M 12M

Absolute 12.2 -0.4 17.4

Relative 13.9 0.5 15.4

70

80

90

100

110

120

130

11/11 3/12 7/12 11/12

Share price

KOSPI




12/10 12,106 2,975 24.6 2,621 4,440 6,151 2,749 39.2 5.4 1.9 3.0

12/11 10,396 326 3.1 -57 -96 3,572 -1,126 -0.7 - 1.8 5.2

12/12F 10,094 -131 -1.3 -201 -289 3,116 472 -2.3 - 1.9 6.8

12/13F 12,291 1,202 9.8 938 1,351 4,735 1,022 9.0 18.7 1.7 4.3

12/14F 14,178 1,971 13.9 1,790 2,579 5,609 1,074 15.2 9.8 1.5 3.4





Table 1. Quarterly and annual earnings trends and forecasts (Wbn, %)


Revenue 2,388 2,632 2,423 2,651 2,656 2,953 3,381 3,301 12,106 10,396 10,094 12,291

% QoQ -6.5 10.2 -7.9 9.4 0.2 11.1 14.5 -2.4

% YoY -14.5 -4.6 5.8 3.8 11.2 12.2 39.5 24.5 53.1 -14.1 -2.9 21.8

DRAM 1,695 1,974 1,696 1,747 1,661 1,910 2,163 2,171 9,554 7,418 7,112 7,906

NAND 693 658 703 904 995 1,043 1,218 1,130 2,552 2,978 2,981 4,385

COGS 2,182 2,159 2,021 2,029 2,026 2,199 2,483 2,462 7,644 8,721 8,351 9,359

Gross profit 206 473 402 622 631 754 898 839 4,462 1,675 1,743 2,932

SG&A 473 472 381 470 470 480 500 540 1,491 1,570 1,837 1,800

Operating profit -260 23 -15 122 161 324 418 299 2,975 326 -130 1,202

% QoQ RR TTB TTR RR TTB 70.3 45.3 -24.8

% YoY TTR -94.9 TTB RR TTB TTB TTB TTB 1454.5 -89 TTR TTB

DRAM -286 98 40 74 102 190 268 218 2,792 -284 -74 778

NAND 19 -123 -19 77 58 84 130 81 179 389 -45 353

EBITDA 572 771 792 891 1,033 1,241 1,293 1,175 6,100 3,572 3,055 4,742

Net profit -271 -53 2 122 146 261 275 255 2,621 -57 -201 938

GP margin 8.6 18 16.6 23.5 23.7 25.5 26.6 25.4 36.9 16.1 17.3 23.9

OP margin -10.9 0.9 -0.6 4.6 6.1 11 12.4 9.1 24.6 3.1 -1.3 9.8

DRAM -16.9 5 2.3 4.3 6.2 10 12.4 10 29.2 -3.8 -1 9.8

NAND 2.7 -18.6 -2.6 8.6 5.9 8 10.6 7.2 7 13.1 -1.5 8.1

EBITDA margin 23.9 29.3 32.7 33.6 38.9 42 38.3 35.6 50.4 34.4 30.3 38.6

NP margin -11.4 -2 0.1 4.6 5.5 8.9 8.1 7.7 21.6 -0.5 -2 7.6

Notes: Under consolidated K-IFRS; TTR refers to „turning to red„; TTB refers to turning to black‰; RR refers to ‰remaining red‰


Figure 1. Annual operating profit trend and outlook Figure 2. Quarterly operating profit trend and outlook


3.0

0.3

-0.1

1.2

2.02.1

0.5

-1.9

0.2

-4

-2

0

2

4

06 07 08 09 10 11 12F 13F 14F

(Wtr)

-40

-20

0

20

40

Annual operating profit (L)

OP margin (R)

(%)

-465

-802

-515

-211

209

1016

-277 -260

23-15161

324418

858

446

254109

387453

360 299

122

924

708742

294323447

-172

-482

-318-167

-1,200

-800

-400

0

400

800

1,200

06 07 08 09 10 11 12F 13F

(Wbn)

-60

-40

-20

0

20

40

60

Quarterly operating profit (L)

OP margin (R)

(%)



SK Hynix (000660 KS/Buy/TP: W31,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F





Operating Profit (Adj) 105 -94 1,132 1,921 Other Current Assets 124 127 149 167

Operating Profit 326 -131 1,202 1,971 Non-Current Assets 12,301 13,136 13,375 14,168

Non-Operating Profit -280 -28 -125 114 Investments in Associates 104 96 97 98

Net Financial Income 254 214 126 87 Property, Plant and Equipment 10,899 11,571 11,680 12,183

Net Gain from Inv in Associates 3 1 1 1 Intangible Assets 708 787 786 786

Pretax Profit 45 -159 1,077 2,085 Total Assets 17,238 18,783 19,292 21,213

Income Tax 101 43 139 295 Current Liabilities 4,817 4,688 5,137 5,553

Profit from Continuing Operations -56 -201 938 1,790 AP & Other Payables 1,195 1,378 1,758 2,028


Net Profit -56 -201 938 1,790 Other Current Liabilities 753 782 952 1,098

Controlling Interests -57 -201 938 1,790 Non-Current Liabilities 4,546 4,112 3,234 2,949


Total Comprehensive Profit 13 -221 938 1,790 Other Non-Current Liabilities 133 84 106 120

Controlling Interests 13 -223 935 1,787 Total Liabilities 9,363 8,800 8,372 8,502


EBITDA 3,572 3,116 4,735 5,609 Capital Stock 2,979 3,488 3,488 3,488

FCF (Free Cash Flow) -1,126 472 1,022 1,074 Capital Surplus 1,229 3,049 3,049 3,049


Operating Profit Margin (%) 3.1 -1.3 9.8 13.9 Non-Controlling Interests -1 2 5 8

Net Profit Margin (%) -0.5 -2.0 7.6 12.6 Stockholders' Equity 7,875 9,983 10,921 12,711


(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F

Cash Flows from Op Activities 3,055 3,305 4,666 5,192 P/E (x) - - 18.7 9.8

Net Profit 45 -192 938 1,790 P/CF (x) 3.8 5.8 3.9 3.2


Depreciation 3,401 3,189 3,391 3,497 EV/EBITDA (x) 5.2 6.8 4.3 3.4

Amortization 66 58 142 142 EPS (W) -96 -289 1,351 2,579

Others -89 -42 50 50 CFPS (W) 5,759 4,388 6,441 7,821

Chg in Working Capital -813 76 140 -72 BPS (W) 12,105 13,246 14,594 17,169

Chg in AR & Other Receivables 138 346 -97 -226 DPS (W) 0 0 0 0

Chg in Inventories 100 27 -254 -218 Payout ratio (%) 0.0 0.0 0.0 0.0

Chg in AP & Other Payables -230 -338 380 270 Dividend Yield (%) 0.0 0.0 0.0 0.0

Income Tax Paid -24 -45 -139 -295 Revenue Growth (%) -14.1 -2.9 21.8 15.4

Cash Flows from Inv Activities -3,312 -3,860 -3,499 -4,004 EBITDA Growth (%) -41.9 -12.8 51.9 18.5

Chg in PP&E -3,554 -3,094 -3,500 -4,000 Operating Profit Growth (%) -89.1 TTR TTB 64.0

Chg in Intangible Assets -162 -141 -141 -141 EPS Growth (%) TTR RR TTB 90.8

Chg in Financial Assets 322 -694 0 0 Accounts Receivable Turnover (x) 5.9 6.5 8.6 8.9

Others 82 69 143 138 Inventory Turnover (x) 8.4 8.6 9.5 9.3

Cash Flows from Fin Activities 244 1,011 -1,269 -525 Accounts Payable Turnover (x) 13.4 14.2 14.3 13.4

Chg in Financial Liabilities 608 -992 -1,000 -300 ROA (%) -0.3 -1.1 4.9 8.8

Chg in Equity 0 2,328 0 0 ROE (%) -0.7 -2.3 9.0 15.2

Dividends Paid -89 0 0 0 ROIC (%) -1.1 -1.1 7.6 12.5

Others -276 -326 -269 -225 Liability to Equity Ratio (%) 118.9 88.2 76.7 66.9

Increase (Decrease) in Cash -9 454 -102 664 Current Ratio (%) 102.5 120.5 115.2 126.9

Beginning Balance 1,253 1,244 1,698 1,596 Net Debt to Equity Ratio (%) 62.8 30.7 19.9 9.5

Ending Balance 1,244 1,698 1,596 2,260 Interest Coverage Ratio (x) 1.0 -0.4 4.5 8.8




LG Electronics (066570 KS)

Still undervalued

The smartphone market to be favorable for LGE

Earnings at the HE, HA, and air conditioning divisions are improving; Smartphone sales are picking up

Maintain Buy with TP of W101,000

Earnings: We forecast revenues at LG Electronics (LGE), which fell by 2.7% in

2011, to drop by 6.2% in 2012. The companyÊs operating profit, which reached as

high as W2.68tr in 2009, declined to W176.4bn in 2010 and W280.3bn in 2011.

Although LGEÊs poor results are attributable partially to the global economic

recession, the main reason behind them is the companyÊs disappointing

performance in the smartphone market.

LGEÊs earnings are improving full swing, with operating profit forecast at W1.21tr in

2012. OP margin at the home entertainment division (HE; includes TVs), which stood

at only 0.6% in 2010, is expected to climb to 2.9% in 2012 and 3.3% in 2013,

backed by rising revenue contributions from high-end products, including 3D TVs.

Growth theme: The home appliance (HA) and air conditioning divisions, which had

poor performances in 2011 because of a surge in raw material costs, are stabilizing.

The HA and air conditioning divisions generated respective operating profits of

W128.5bn and W11.8bn in 3Q, despite sluggish demand. In 4Q, we forecast the

air conditioning division, which is highly sensitive to seasonal changes, to record

an operating loss of W3.3bn. However, we estimate operating profit at the HA

division to reach W93.8bn. The HA and air conditioning divisions are expected to

post a full-year operating profit of W550bn and W150bn, respectively, in 2012.

Catalysts & risks: The most notable development at LGE is the likelihood of an

uptick in earnings at the mobile communications (MC) division. The MC division

already swung to an operating profit of W21.5bn in 3Q, aided by the recent launch

of the Optimus G, on which LG Group has focused its energy. The Optimus G is

being offered by three telecoms in Korea, two in the US, and three in Japan. We

estimate sales of the Optimus G reached 480,000 units in October, and project the

model to sell 1mn units in 4Q. Furthermore, the smartphone market will likely be

favorable for LGE going forward. As smartphone specifications are becoming less

differentiated, the company will likely benefit from LG GroupÊs solid supply chain.


[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 76,400


EPS Growth (12F, %) TTB


P/E (12F, x) 20.2


KOSPI 1,900.87



Avg Trading Volume (60D, '000) 1,533



Free Float (%) 65.9

52-Week Low (W) 55,800

52-Week High (W) 94,300





LG et al. (33.67%)


Trident Securities Limited et al. (6.15%)

Price Performance

(%) 1M 6M 12M

Absolute 12.0 6.7 21.0

Relative 13.7 7.6 19.0

80

90

100

110

120

130

140

150

160

11/11 3/12 7/12 11/12

Share price

KOSPI


FY Revenu OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA


12/10 55,754 177 0.3 1,227 7,345 1,378 -1,019 10.0 15.7 1.6 17.1

12/11 54,257 280 0.5 -470 -2,809 1,546 366 -3.7 - 1.1 11.8

12/12F 50,906 1,210 2.4 683 3,776 2,578 1,031 5.2 20.2 1.1 6.8

12/13F 52,760 1,588 3.0 983 5,435 2,877 1,519 7.2 14.1 1.1 5.6

12/14F 58,370 2,132 3.7 1,345 7,437 3,401 1,464 9.2 10.3 1.0 4.4





Valuation: We forecast the combined 2012 operating profit of the HE, HA, and air

conditioning divisions to be W1.35tr. LGEÊs market cap stands at W12.1tr, compared to

W10.9tr for Nokia, and W8.5tr for HTC. Given these factors, we believe LGEÊs smartphone

business is deeply undervalued. We maintain our Buy call on LGE with a target price of

W101,000. We derived our target price by applying a P/B of 1.4x (up from 1.3x; compared to

LGEÊs five-year average of 1.8x) to our 2013F BPS of W72,601 (under consolidated K-IFRS).

Our target price implies an upside of 29.2% from the current price.

Table 1. Quarterly earnings trends (Wbn, %p, Ê000 units)

2011 2012F 3Q12P

1Q 2Q 3Q 4Q Annual 1Q 2Q 3QP 4QF Annual YoY QoQ Previous Chg

Mobile Revenues 2909.1 3245.9 2762.4 2775.1 11692.5 2497.2 2321.2 2,447.5 2,678.2 9,944.1 -11.4 5.4 2,480.3 -1.3

communications Operating profit -100.5 -53.9 -138.8 12.0 -281.2 38.9 -56.7 21.5 16.3 20.0 TTB TTB -2.5 TTB

(MC) OP margin (%) -3.5 -1.7 -5.0 0.4 -2.4 1.6 -2.4 0.9 0.6 0.2 5.9 3.3 -0.1 1.0

(Handsets) Revenues 2851.7 3200.1 2689.2 2695.3 11436.3 2452.1 2286.3 2,423.1 2,598.4 9,759.9 -9.9 6.0 2,407.1 0.7

Operating profit -101.1 -54.7 -139.9 9.9 -285.8 35.2 -58.9 20.5 13.0 9.8 TTB TTB -7.2 TTB

OP margin (%) -3.5 -1.7 -5.2 0.4 -2.5 1.4 -2.6 0.8 0.5 0.1 6.0 3.4 -0.3 1.1

Revenues 5718.5 5818.5 5740.0 6625.5 23902.5 5330.2 5478.4 5,486.4 6,303.6 22,598.6 -4.4 0.1 5,678.9 -3.4 Home entertainment

Operating profit 113.1 97.8 88.6 122.2 421.7 217.1 216.3 88.6 132.4 654.4 0.0 -59.0 133.1 -33.4

(HE) OP margin (%) 2.0 1.7 1.5 1.8 1.8 4.1 3.9 1.6 2.1 2.9 0.1 -2.3 2.3 -0.7

Home appliances Revenues 2607.1 2801.1 2694.8 2978.4 11081.4 2535.7 2875.3 2,867.5 3,127.3 11,405.8 6.4 -0.3 2,762.6 3.8

Operating profit 102.1 58.7 74.3 70.8 305.9 151.6 165.3 128.5 93.8 539.2 72.9 -22.3 106.6 20.6

OP margin (%) 3.9 2.1 2.8 2.4 2.8 6.0 5.7 4.5 3.0 4.7 1.7 -1.3 3.9 0.6

Air conditioning Revenues 1232.8 1659.6 1005.9 686.6 4584.9 1217.9 1474.9 974.3 660.5 4,327.6 -3.1 -33.9 949.8 2.6

& energy solutions (AE) Operating profit 34.1 59.5 1.7 -38.3 57.0 81.1 70.1 11.8 -3.3 159.7 594.1 -83.2 10.2 16.2

OP margin (%) 2.8 3.6 0.2 -5.6 1.2 6.7 4.8 1.2 -0.5 3.7 1.0 -3.5 1.1 0.1

Internal & others Revenues 692.4 860.1 694.1 748.7 2995.3 646.9 709.2 600.1 673.8 2,630.0 -13.5 -15.4 694.1 -13.5

Operating profit -18.0 -3.8 -57.7 -143.6 -223.1 -40.5 -46.0 -29.9 -47.2 -163.6 RR RR -41.6 -28.2

OP margin (%) -2.6 -0.4 -8.3 -19.2 -7.4 -6.3 -6.5 -5.0 -7.0 -6.2 3.3 1.5 -6.0 1.0

Revenues 13159.9 14385.2 12897.2 13814.3 54256.6 12227.9 12859.0 12,375.8 13,443.4 50,906.1 -4.0 -3.8 12,565.7 -1.5

Operating profit 130.8 158.3 -31.9 23.1 280.3 448.2 349.0 220.5 192.1 1,209.8 TTB -36.8 205.6 7.2

OP margin (%) 1.0 1.1 -0.2 0.2 0.5 3.7 2.7 1.8 1.4 2.4 2.0 -0.9 1.6 0.1

Pretax profit 38.5 149.7 -530.9 -56.6 -399.3 449.8 236.1 178.7 176.1 1,040.6 TTB -24.3 141.8 26.0

Pretax margin (%) 0.3 1.0 -4.1 -0.4 -0.7 3.7 1.8 1.4 1.3 2.0 5.6 -0.4 1.1 0.3

Net profit -30.1 97.8 -424.2 -113.2 -469.6 235.7 156.5 151.4 139.3 682.9 TTB -3.2 85.3 77.6

Net margin (%) -0.2 0.7 -3.3 -0.8 -0.9 1.9 1.2 1.2 1.0 1.3 4.5 0.0 0.7 0.5

Handset sales volume 24,451 24,786 21,098 17,685 88,020 13,722 12,998 14,361 15,363 56,444 -31.9 10.5 14,446 -0.6

Smartphone sales volume 4,100 6,200 4,400 5,500 20,200 4,900 5,700 7,000 8,250 25,850 59.1 22.8 6,960 0.6

LCD TV sales volume 9,359 9,113 9,194 10,642 38,308 8,375 8,409 8,649 10,211 35,644 -5.9 2.9 8,784 -1.5

TV sales volume 5,783 5,701 5,679 7,562 24,725 5,819 5,990 6,493 8,325 26,627 14.3 8.4 6,295 3.1

Note: Based on K-IFRS




LG Electronics (066570 KS/Buy/TP: W101,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F





Operating Profit (Adj) 343 1,282 1,588 2,132 Other Current Assets 1,250 1,216 1,314 1,478

Operating Profit 280 1,210 1,588 2,132 Non-Current Assets 16,875 16,366 16,340 16,438

Non-Operating Profit -680 -169 -149 -106 Investments in Associates 5,603 5,421 5,421 5,421


Net Gain from Inv in Associates -331 39 0 0 Intangible Assets 1,036 1,022 980 950

Pretax Profit -399 1,041 1,438 2,026 Total Assets 32,659 32,003 33,546 35,937


Profit from Continuing Operations -433 700 1,007 1,378 AP & Other Payables 7,360 7,162 7,740 8,710


Net Profit -433 700 1,007 1,378 Other Current Liabilities 3,663 3,564 3,852 4,334

Controlling Interests -470 683 983 1,345 Non-Current Liabilities 5,296 4,966 5,093 5,201


Total Comprehensive Profit -642 535 842 1,213 Other Non-Current Liabilities 615 598 784 1,001

Controlling Interests -692 499 799 1,161 Total Liabilities 19,510 18,367 19,159 20,518


EBITDA 1,546 2,578 2,877 3,401 Capital Stock 904 904 904 904

FCF (Free Cash Flow) 366 1,031 1,519 1,464 Capital Surplus 2,862 3,100 3,100 3,100


Operating Profit Margin (%) 0.5 2.4 3.0 3.7 Non-Controlling Interests 254 280 324 376

Net Profit Margin (%) -0.9 1.3 1.9 2.3 Stockholders' Equity 13,148 13,636 14,387 15,418


(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F

Cash Flows from Op Activities 1,881 2,518 2,922 2,892 P/E (x) - 20.2 14.1 10.3

Net Profit -433 700 1,007 1,378 P/CF (x) 17.0 7.0 6.1 5.3


Depreciation 896 948 948 941 EV/EBITDA (x) 11.8 6.8 5.6 4.4

Amortization 306 348 342 329 EPS (W) -2,809 3,776 5,435 7,437

Others -1,843 -828 27 27 CFPS (W) 4,383 10,942 12,565 14,456

Chg in Working Capital -1,060 -626 476 139 BPS (W) 65,823 68,455 72,601 78,176

Chg in AR & Other Receivables 230 -205 -200 -734 DPS (W) 200 500 1,000 1,500

Chg in Inventories 769 47 -232 -519 Payout ratio (%) -7.9 13.3 18.5 20.2

Chg in AP & Other Payables -345 1,654 578 969 Dividend Yield (%) 0.3 0.7 1.3 2.0

Income Tax Paid -359 -237 -431 -648 Revenue Growth (%) -2.7 -6.2 3.6 10.6

Cash Flows from Inv Activities -2,293 -801 -1,055 -1,068 EBITDA Growth (%) 12.2 66.8 11.6 18.2

Chg in PP&E -1,752 -929 -865 -901 Operating Profit Growth (%) 58.8 331.6 31.2 34.3

Chg in Intangible Assets -304 -299 -299 -299 EPS Growth (%) TTR TTB 43.9 36.8

Chg in Financial Assets -131 113 0 0 Accounts Receivable Turnover (x) 7.9 7.6 7.9 8.2

Others -106 314 110 133 Inventory Turnover (x) 10.0 10.4 10.7 11.0

Cash Flows from Fin Activities 850 -1,335 -828 -949 Accounts Payable Turnover (x) 9.6 9.4 9.5 9.5

Chg in Financial Liabilities 228 -981 -450 -500 ROA (%) -1.3 2.2 3.1 4.0

Chg in Equity 976 9 0 0 ROE (%) -3.7 5.2 7.2 9.2

Dividends Paid -43 -37 -91 -182 ROIC (%) 3.1 7.9 10.2 13.6


Increase (Decrease) in Cash 401 335 1,039 876 Current Ratio (%) 111.0 116.7 122.3 127.3

Beginning Balance 1,944 2,346 2,681 3,719 Net Debt to Equity Ratio (%) 37.5 27.1 15.3 5.4

Ending Balance 2,346 2,681 3,719 4,595 Interest Coverage Ratio (x) 0.9 3.8 5.5 8.0




Samsung Electro-Mechanics (009150 KS)

Premium to valuation justified

2013 outlook: Revenues and operating profit expected to hit record highs

Valuation premium justified in light of stable profitability, growth potential

We maintain our Buy call with TP of W130,000

Earnings: After showing robust revenue growth of more than 20% since 2008,

Samsung Electro-Mechanics (SEMCO) stagnated in 2011 with revenue growth of

only 0.3%. This stagnation was related to weak earnings at the LED unit, and the

companyÊs sale of that unit. However, we forecast SEMCOÊs 2012 revenues to

expand 13.4% to W7.92tr on the back of Samsung ElectronicsÊ (SEC) strong

smartphone sales. The outlook for SEMCOÊs profitability is also bright. The

companyÊs operating profit declined 55.4% to W347.1bn in 2011, from the 2010

level of W779bn. But we forecast SEMCOÊs 2012 operating profit to jump 85.8%

to W645bn. Stripping away the previous high set in 2010 (caused by its strong

LED business), this figure should represent the companyÊs historic yearly high.

Growth theme: SEMCOÊs 3Q12 revenues came in at W2.18tr (up 39% YoY),

exceeding W2tr for the first time in its history. We anticipate SEMCOÊs earnings to

stay strong through 2013; for the year, we forecast the companyÊs revenues and

operating profit to reach W8.58tr and W723.1bn (up 12.1% YoY), respectively. In

particular, revenues should reach W8tr for the first time in SEMCOÊs history.

Catalyst: We expect SEMCOÊs strong earnings to be driven by its robust substrate

business at the ACI division. SECÊs strong smartphone sales are positively

affecting the HDI substrate division, and the FC-CSP division is showing top-line

growth from the expansion of the smartphone market. We estimate the 3Q OP

margin at the ACI division at 15.2%. The camera-module business at the OMS

division also remained robust. This divisionÊs quarterly revenues have improved to

W500bn (vs. W100bn seen in the past) largely from SECÊs robust smartphone

sales. We estimate the OMS divisionÊs OP margin has improved to 6%.

Risks: One concern about SEMCO is that the companyÊs current earnings are too

good. Investors are worrying that the companyÊs earnings might have peaked, and

thus could deteriorate going forward. However, we believe downward pricing

pressures could be offset by fixed-cost savings from top-line growth. We also

expect SEMCOÊs MLCC division to expand into the non-IT market and increase

exports to Chinese companies. We advise investors to focus more on SEMCOÊs

improved profit structure rather than on overblown concerns.


[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 94,300




P/E (12F, x) 15.5


KOSPI 1,900.87






Free Float (%) 76.2

52-Week Low (W) 68,100

52-Week High (W) 112,500





SEC et al. (23.71%)

Capital Research and Management Company(CRMC) et al. (11.46%)

National Pension Service(6.07%)

Price Performance

(%) 1M 6M 12M

Absolute 7.2 -11.9 20.6

Relative 8.8 -11.0 18.6

70

80

90

100

110

120

130

140

11/11 3/12 7/12 11/12

Share price

KOSPI




12/10 5,651 498 8.8 555 7,148 985 -439 18.3 17.4 2.8 10.8

12/11 6,032 321 5.3 350 4,504 942 -504 10.0 17.3 1.7 7.8

12/12F 7,924 645 8.1 473 6,101 1,179 -186 12.9 15.5 2.0 7.2

12/13F 8,585 723 8.4 546 7,033 1,355 30 13.5 13.4 1.8 6.3

12/14F 9,316 837 9.0 621 7,997 1,556 1 13.9 11.8 1.6 5.6





Valuation: We maintain our Buy call on SEMCO with a 12-month target price of

W130,000. We arrived at our target price by applying a P/B of 2.52x to our 2013F

BPS of W51,483 (under consolidated K-IFRS). Our target P/B might not appear

undemanding. However, we believe our multiple is justified, given: 1) SEMCOÊs

earnings are likely to continue to grow, thanks to SECÊs robust smartphone sales;

and 2) the companyÊs quarterly operating profit has stabilized at more than

W150bn, largely from margin expansion at the MLCC capacitor and HDI substrate

divisions.

Table 1. Quarterly earnings (Wbn, W, %p)

2011 2012F 3Q12P

1Q 2Q 3Q 4Q Annual 1Q 2Q 3QP 4QF Annual YoY QoQ Previous chg

Revenues ACI 351.2 376.6 414.8 459.4 1,602.0 500.7 555.3 530.0 518.7 2,104.7 27.8 -4.5 569.4 -6.9

LCR 429.6 433.1 427.5 399.0 1,689.2 440.5 473.3 512.2 455.6 1,881.6 19.8 8.2 511.7 0.1

CDS 440.0 381.6 391.7 426.4 1,639.7 382.5 393.7 477.8 476.0 1,730.0 22.0 21.4 400.3 19.4

OMS 177.3 209.0 336.8 378.8 1,101.9 424.0 485.7 663.1 635.2 2,208.0 96.9 36.5 546.1 21.4

Total 1,398.1 1,400.3 1,570.8 1,663.6 6,032.8 1,747.7 1,907.9 2,183.1 2,085.5 7,924.3 39.0 14.4 2,027.5 7.7

Operating profit ACI 16.5 18.5 21.6 44.6 101.1 53.6 78.3 80.6 75.2 287.6 273.5 2.9 84.7 -4.9

LCR 64.0 58.5 41.5 23.5 187.5 28.6 43.1 50.2 41.0 162.9 21.0 16.6 62.7 -20.0

CDS 4.7 -14.8 9.3 11.2 10.4 5.0 11.5 27.9 26.2 70.5 198.3 142.5 12.9 116.2

OMS -12.4 6.4 8.2 19.7 21.9 19.5 23.3 41.8 39.4 124.0 408.6 79.2 27.3 53.0

Total 72.8 68.5 80.6 99.0 320.9 106.7 156.2 200.4 181.8 645.0 148.7 28.3 187.6 6.8

OP margin ACI 4.7 4.9 5.2 9.7 6.3 10.7 14.1 15.2 14.5 13.7 10.0 1.1 14.9 0.3

LCR 14.9 13.5 9.7 5.9 11.1 6.5 9.1 9.8 9.0 8.7 0.1 0.7 12.3 -2.5

CDS 1.1 -3.9 2.4 2.6 0.6 1.3 2.9 5.8 5.5 4.1 3.4 2.9 3.2 2.6

OMS -7.0 3.1 2.4 5.2 2.0 4.6 4.8 6.3 6.2 5.6 3.9 1.5 5.0 1.3

Total 5.2 4.9 5.1 6.0 5.3 6.1 8.2 9.2 8.7 8.1 4.0 1.0 9.3 -0.1

Pretax profit 90.1 61.1 51.4 175.4 378.0 98.8 144.7 190.9 177.8 612.2 271.3 31.9 176.6 8.1

Net profit 85.6 54.1 64.9 144.9 349.5 69.5 135.2 139.1 129.7 473.4 149.7 94.5 119.7 16.2

Pretax margin 6.4 4.4 3.3 10.5 6.3 5.7 7.6 8.7 8.5 7.7 5.5 1.2 8.7 0.0

Net margin 6.1 3.9 4.1 8.7 5.8 4.0 7.1 6.4 6.2 6.0 2.2 -0.7 5.9 0.5

Note: Based on K-IFRS




Samsung Electro-Mechanics (009150 KS/Buy/TP: W130,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F


Cost of Sales 5,050 6,444 6,944 7,484 Cash and Cash Equivalents 526 620 677 744

Gross Profit 981 1,480 1,641 1,833 AR & Other Receivables 882 1,144 1,189 1,335

SG&A Expenses 704 846 917 996 Inventories 761 972 1,010 1,134

Operating Profit (Adj) 278 634 723 837 Other Current Assets 1,502 91 94 106

Operating Profit 321 645 723 837 Non-Current Assets 3,632 4,366 4,824 5,292

Non-Operating Profit 43 -33 -12 -12 Investments in Associates 41 38 38 38


Net Gain from Inv in Associates -1 -4 0 0 Intangible Assets 56 259 237 219

Pretax Profit 364 612 711 825 Total Assets 7,329 7,220 7,820 8,637


Profit from Continuing Operations 309 448 521 596 AP & Other Payables 605 839 872 979

Profit from Discontinued Operations 84 27 27 27 Short-Term Financial Liabilities 1,096 973 973 973

Net Profit 392 475 548 623 Other Current Liabilities 1,011 292 303 340

Controlling Interests 350 473 546 621 Non-Current Liabilities 742 1,206 1,358 1,568

Non-Controlling Interests 43 2 2 2 Long-Term Financial Liabilities 495 752 752 808

Total Comprehensive Profit 155 393 466 541 Other Non-Current Liabilities 171 292 359 428

Controlling Interests 108 384 456 531 Total Liabilities 3,453 3,310 3,506 3,860


EBITDA 942 1,179 1,355 1,556 Capital Stock 388 388 388 388

FCF (Free Cash Flow) -504 -186 30 1 Capital Surplus 1,046 1,045 1,045 1,045





(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F

Cash Flows from Op Activities 459 1,035 1,233 1,296 P/E (x) 17.3 15.5 13.4 11.8

Net Profit 392 475 548 623 P/CF (x) 6.0 7.2 6.2 5.5

Non-Cash Income and Expense 842 729 835 961 P/B (x) 1.7 2.0 1.8 1.6



Others -102 26 34 34 CFPS (W) 13,055 13,129 15,180 17,269

Chg in Working Capital -691 -22 41 -58 BPS (W) 44,570 46,134 51,483 57,558

Chg in AR & Other Receivables -272 -295 -45 -146 DPS (W) 750 800 1,000 1,300

Chg in Inventories -263 -16 -38 -124 Payout ratio (%) 16.7 13.2 14.3 16.3

Chg in AP & Other Payables 72 204 33 107 Dividend Yield (%) 1.0 0.9 1.1 1.4

Income Tax Paid -84 -146 -191 -230 Revenue Growth (%) 6.7 31.4 8.3 8.5

Cash Flows from Inv Activities -959 -739 -1,076 -1,168 EBITDA Growth (%) -4.4 25.2 15.0 14.8

Chg in PP&E -1,070 -1,006 -1,080 -1,172 Operating Profit Growth (%) -35.6 101.0 12.1 15.7

Chg in Intangible Assets -6 -8 -8 -8 EPS Growth (%) -37.0 35.5 15.3 13.7

Chg in Financial Assets 142 375 0 0 Accounts Receivable Turnover (x) 7.7 8.4 8.0 8.0

Others -25 -100 12 12 Inventory Turnover (x) 8.0 9.2 8.7 8.7

Cash Flows from Fin Activities 315 -225 -101 -61 Accounts Payable Turnover (x) 15.6 17.5 16.6 16.7

Chg in Financial Liabilities 471 -84 0 0 ROA (%) 5.5 6.5 7.3 7.6

Chg in Equity 4 4 0 0 ROE (%) 10.0 12.9 13.5 13.9



Increase (Decrease) in Cash -170 94 56 68 Current Ratio (%) 136.4 135.6 139.5 145.9

Beginning Balance 695 526 620 677 Net Debt to Equity Ratio (%) 26.8 27.6 23.7 21.2

Ending Balance 526 620 677 744 Interest Coverage Ratio (x) 7.0 9.0 10.1 11.6




Samsung SDI (006400 KS)

Momentum from tablet PCs and polymer batteries

2013 outlook: Revenues and OP to grow to W6.0tr (up 3%) and W341bn (up 15%)

Reducing dependence on Apple; Customer base being diversified

We maintain our Buy call with TP of W190,000

2013 earnings: For 2013, we forecast Samsung SDIÊs rechargeable battery

revenues to hit W3.7tr because, thanks to growing demand for polymer batteries,

we project: 1) shipments to expand 13% and 2) blended ASP to rise 2%. On the

other hand, revenues at the PDP and CRT units are forecast to decrease 13% to

W1.7tr and 15% to W292bn, respectively. Although the average US$/W rate is

likely to decline 6%, we expect the companyÊs 2013 earnings to improve, with

revenues of W6.0tr (up 3% YoY) and an operating profit of W341bn (up 15% YoY).

Growth theme: With the launch of Windows 8, PC makers are likely to roll out

hybrid PCs and smart PCs. As such, we forecast shipments of tablet PCs to surge

64% YoY to 180mn units in 2013. Since polymer batteries used in tablet PCs

require customized production, their replacement costs are high. Thus,

manufacturers tend to turn to existing suppliers. Samsung SDI has the largest

global rechargeable battery market share, at 27%. In the polymer battery sector,

the companyÊs market share is even higher (45%).

Catalysts: Some market watchers are worried about the decline in the companyÊs

supply to Apple. However, it should be noted that polymer battery demand is likely to

be driven by Android-powered and Microsoft-powered tablet PCs next year. As such,

the companyÊs efforts to reduce dependence on Apple and diversify its customer base

should enable it to show stable earnings growth. In addition, higher-definition displays

should lead to an increase in power consumption. To maintain the same battery life,

manufacturers need to improve battery capacity. Their adoption of higher-capacity

batteries should lead to improvements in Samsung SDIÊs ASP and margins.

Risks: Nevertheless, we believe Samsung SDI may experience a steady decline in

cylinder-type battery shipments in light of sluggish laptop sales. We believe the

company needs to secure orders from electronic tool manufacturers and e-bike

manufacturers. As for the companyÊs loss-incurring businesses, the solar cell,

energy storage system, and EV battery units are likely to remain in the red through

2013, but their losses are also likely to decline YoY.

Valuation: We maintain our Buy call on Samsung SDI, with a target price of W190,000.

Thanks to gains (W1.4tr) from the sale of Samsung Mobile Display (SMD) shares, the

companyÊs BPS expanded 20% from W137,753 to W165,397. Taking into account this

BPS increase, the companyÊs share price would correspond to a P/B of only 0.8x.


[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 149,500




P/E (12F, x) 4.6


KOSPI 1,900.87






Free Float (%) 74.5

52-Week Low (W) 115,500

52-Week High (W) 171,500





Samsung Electronics et al. (20.55%)


Korea Investment Trust Management

(8.03%)

Price Performance

(%) 1M 6M 12M

Absolute 1.0 -9.7 15.0

Relative 2.7 -8.8 13.0

70

80

90

100

110

120

130

11/11 3/12 7/12 11/12

Share price

KOSPI


FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA


12/10 5,124 287 5.6 356 7,548 610 100 6.5 22.3 1.3 11.8

12/11 5,444 204 3.7 320 6,785 549 -130 5.3 19.7 1.0 11.6

12/12F 5,827 297 5.1 1,546 32,771 722 266 23.1 4.6 1.0 10.2

12/13F 5,990 341 5.7 583 12,351 796 196 7.9 12.1 0.9 9.3

12/14F 6,488 527 8.1 697 14,776 973 192 9.1 10.1 0.9 7.7





Table 1. Consolidated earnings forecasts (under K-IFRS) (Wbn, %)

1Q12 2Q12 3Q12P 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2012F 2013F 2014F

Shipments (mn units)

CRT 3.0 3.0 2.1 2.6 2.7 2.7 1.9 2.3 10.8 9.8 9.0 PDP 1.7 1.6 1.8 1.8 1.7 1.7 1.8 1.8 6.9 7.0 6.7

Rechargeable batteries 254 293 294 297 293 312 344 337 1,139 1,287 1,519

ASP (US$)

CRT 28 27 31 27 28 27 31 27 28 28 29 PDP 275 260 245 241 236 234 232 229 255 233 221

Rechargeable batteries 2.6 2.6 2.7 2.8 2.7 2.7 2.7 2.7 2.7 2.7 2.6

Revenues (Wbn) 1,377 1,477 1,503 1,470 1,446 1,484 1,554 1,505 5,827 5,990 6,488

CRT 95 96 76 77 82 81 63 66 344 292 271 PDP 520 494 499 470 436 418 441 430 1,983 1,726 1,548

Rechargeable batteries 743 873 904 896 871 920 981 935 3,416 3,707 4,174

Other/PV 18 14 24 28 57 65 70 73 84 265 495

Operating profit (Wbn) 67 84 86 60 49 85 111 97 296 341 527

CRT 1 1 -3 0 0 0 0 0 -1 1 -1

PDP 0 11 5 3 0 1 6 7 19 15 22

Rechargeable batteries 68 92 104 99 83 113 135 114 363 445 445Other/PV -2 -20 -20 -42 -35 -30 -30 -25 -84 -120 60

OP margin (%) 4.9 5.7 5.7 4.1 3.4 5.7 7.1 6.4 5.1 5.7 8.1

CRT 1.0 1.0 -3.7 0.0 0.5 0.5 0.5 0.5 -0.3 0.5 -0.3

PDP 0.0 2.2 1.0 0.7 0.1 0.3 1.3 1.7 0.9 0.9 1.5 Rechargeable batteries 9.2 10.5 11.5 11.0 9.5 12.3 13.8 12.2 10.6 12.0 10.7

Net profit (Wbn) 112 105 1,199 130 113 142 169 159 1,546 583 697

SMD equity-method gains 103 90 131 119 107 110 121 123 442 462 434

Net margin (%) 8.1 7.1 79.8 8.8 7.8 9.5 10.8 10.6 26.5 9.7 10.7

EBITDA (Wbn) 138 213 210 182 138 213 210 182 744 744 744

EBITDA margin (%) 10.0 14.4 14.0 12.4 9.5 14.4 13.5 12.1 12.8 12.4 11.5

% growth (QoQ/YoY)

Shipments

CRT 5.4 0.0 -29.4 21.0 5.4 0.0 -29.4 21.0 -7.7 -10.0 -7.7 PDP -9.1 -1.8 9.4 -0.7 -4.8 -2.2 9.1 -1.0 1.1 1.0 -3.9

Rechargeable batteries 6.0 15.3 0.3 1.0 -1.3 6.6 10.3 -2.2 12.3 13.0 18.0

ASP

CRT 2.2 -0.6 12.8 -12.7 2.2 -0.6 12.8 -12.7 2.5 0.0 2.5 PDP -6.9 -5.2 -6.0 -1.5 -2.0 -1.0 -1.0 -1.0 -12.6 -8.8 -5.0

Rechargeable batteries 3.1 0.0 5.0 2.0 -1.0 0.0 -1.0 -2.0 8.9 1.9 -3.0

Revenues -4.2 7.3 1.8 -2.2 -1.6 2.6 4.8 -3.2 7.0 2.8 8.3

CRT 6.4 1.2 -21.7 1.6 7.2 -1.6 -22.2 5.1 -3.7 -15.0 -7.2 PDP -16.4 -5.1 1.1 -5.9 -7.1 -4.1 5.5 -2.4 -10.4 -13.0 -10.3

Rechargeable batteries 8.0 17.5 3.5 -0.9 -2.8 5.6 6.6 -4.6 24.4 8.5 12.6

Other/PV -52.1 -23.6 75.3 15.4 103.6 13.9 7.4 4.5 -34.7 214.4 87.0

Operating profit 503.4 24.8 2.3 -29.4 -19.6 74.7 31.0 -13.1 45.5 15.0 54.5

CRT 112.7 1.2 TTR TTB - -1.6 -22.2 5.1 TTR TTB TTR

PDP TTR TTB -55.2 -28.3 -85.9 180.8 307.4 31.2 111.5 -21.6 52.4

Rechargeable batteries 56.5 34.7 12.7 -4.5 -16.4 36.8 19.6 -15.8 38.9 22.7 0.1Other/PV RR RR RR RR RR RR RR RR RR RR TTB

Net profit 103.9 -6.0 1,038.7 -89.2 -12.8 25.1 19.0 -5.5 382.6 -62.3 19.6

SMD equity-method gains 22.1 -12.4 46.4 -9.8 -9.4 2.7 9.8 1.6 54.1 4.4 -6.1

EBITDA 0.2 54.4 -1.3 -13.4 -24.2 54.4 -1.3 -13.4 35.5 0.0 0.0

Notes: RR, TTR, and TTB refer to „remaining red,‰ ‰turning to red,‰ and ‰turning to black,‰ respectively. 3Q12P operating profit figures exclude one-off profits.




Samsung SDI (006400 KS/Buy/TP: W190,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F


Cost of Sales 4,761 4,997 5,109 5,367 Cash and Cash Equivalents 758 750 1,541 1,539

Gross Profit 683 830 881 1,121 AR & Other Receivables 844 863 884 957

SG&A Expenses 573 585 540 594 Inventories 584 597 611 662

Operating Profit (Adj) 110 245 341 527 Other Current Assets 150 153 157 170

Operating Profit 204 297 341 527 Non-Current Assets 6,163 7,617 7,848 8,180

Non-Operating Profit 274 1,856 462 434 Investments in Associates 1,899 2,333 2,795 3,228

Net Financial Income 0 -5 4 9 Property, Plant and Equipment 1,827 1,731 1,807 1,987


Pretax Profit 478 2,153 803 961 Total Assets 8,527 10,006 11,066 11,534


Profit from Continuing Operations 351 1,584 642 769 AP & Other Payables 524 536 548 594

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 761 695 695 695

Net Profit 351 1,584 642 769 Other Current Liabilities 465 475 487 527

Controlling Interests 320 1,546 583 697 Non-Current Liabilities 463 766 1,537 1,540

Non-Controlling Interests 31 38 60 72 Long-Term Financial Liabilities 0 260 1,023 1,023

Total Comprehensive Profit 157 1,293 351 477 Other Non-Current Liabilities 431 467 468 470

Controlling Interests 125 1,243 280 394 Total Liabilities 2,213 2,472 3,267 3,356


EBITDA 549 722 796 973 Capital Stock 241 241 241 241

FCF (Free Cash Flow) -130 266 196 192 Capital Surplus 1,258 1,258 1,258 1,258





(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F

Cash Flows from Op Activities 279 213 625 720 P/E (x) 19.7 4.6 12.1 10.1

Net Profit 351 1,584 642 769 P/CF (x) 8.3 3.5 6.8 6.2

Non-Cash Income and Expense 221 -826 153 204 P/B (x) 1.0 1.0 0.9 0.9



Others -94 1,410 4 9 CFPS (W) 16,083 42,872 21,984 24,228

Chg in Working Capital -275 -31 -10 -61 BPS (W) 130,331 155,387 159,828 166,365

Chg in AR & Other Receivables -72 -90 -20 -74 DPS (W) 1,500 2,000 2,250 0

Chg in Inventories 0 -21 -14 -51 Payout ratio (%) 21.0 5.6 16.7 0.0

Chg in AP & Other Payables -51 49 13 46 Dividend Yield (%) 1.1 1.3 1.5 0.0


Cash Flows from Inv Activities -840 -352 -514 -627 EBITDA Growth (%) -10.0 31.6 10.2 22.3

Chg in PP&E -407 -361 -500 -600 Operating Profit Growth (%) -29.0 45.8 14.8 54.5

Chg in Intangible Assets -23 -14 -14 -14 EPS Growth (%) -10.1 383.0 -62.3 19.6


Others -411 24 0 -12 Inventory Turnover (x) 10.2 9.9 9.9 10.2

Cash Flows from Fin Activities 251 128 679 -94 Accounts Payable Turnover (x) 14.2 15.2 15.3 15.7

Chg in Financial Liabilities 355 136 400 0 ROA (%) 4.3 17.1 6.1 6.8

Chg in Equity 6 2 0 0 ROE (%) 5.3 23.1 7.9 9.1


Others -34 -1 2 3 Liability to Equity Ratio (%) 35.0 32.8 41.9 41.0

Increase (Decrease) in Cash -309 -8 791 -1 Current Ratio (%) 135.1 140.0 186.0 184.7

Beginning Balance 1,066 758 750 1,541 Net Debt to Equity Ratio (%) -0.4 2.4 2.0 1.9

Ending Balance 758 750 1,541 1,539 Interest Coverage Ratio (x) 176.9 180.2 154.7




SFA Engineering (056190 KQ)

A step backward for a giant leap forward next year

2013 outlook: Revenues of W849.9bn (up 46%); OP of W105.4bn (up 29%)

Orders for front-end process equipment to come in starting in 2013

Maintain Buy with TP of W60,000

2013 earnings: SFA EngineeringÊs orders are forecast to fall by 17% YoY in 2012, as

its major customers have been focusing on pilot lines and the development of

flexible and large-area OLEDs, rather than capacity expansion. However, the

companyÊs orders are expected to increase by 23% to W784bn in 2013, as a

customer should start commercial production of flexible OLEDs (UBP) and OLED

TVs. In particular, front-end process equipment orders are anticipated to soar by

89% YoY to W267bn.

Growth theme: With the spread of high-resolution smartphones and tablets,

hardware differentiation is being increasingly diluted. Given that further

enhancement in display resolution will no longer provide notable benefits to the

human eye, form factor is expected to become a major differentiating factor for

displays. In particular, the thickness and weight of flexible OLEDs, which use

polyimide substrate (vs. glass) and film encapsulation (vs. glass encapsulation), can

be reduced to one-sixth and one-third of those of LCDs, respectively.

Catalysts: 1) SFAÊs OLED equipment lineup is expected to expand full swing.

Although the company has won orders mainly for logistical equipment so far, it is

expected to receive orders for front-end process (e.g., deposition, PE-CVD, etc.)

equipment starting in 2013. As such, the company is projected to be re-evaluated

as a global OLED equipment maker.

2) Since Apple has significantly reduced the thickness and weight of the iPhone 5

through in-cell touch panels, we believe that it is urgent for SEC to apply UBPs to its

products. In order to do so next year, SEC needs to embark on capacity expansion

immediately.

Risks: With the commercial production of flexible OLEDs and large-area OLED TVs

being delayed, orders at SFA Engineering declined markedly this year. As for

flexible OLEDs, the yields of organic material deposition on polyimide substrate

and film encapsulation appear low. If these technological issues are not addressed,

OLED equipment orders could be further delayed.


[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 41,000


EPS Growth (12F, %) -4.8


P/E (12F, x) 10.2


KOSDAQ 521.43

Market Cap (Wbn) 736





Free Float (%) 48.2

52-Week Low (W) 39,750

52-Week High (W) 67,500





DY Asset et al. (46.97%)

Korea Investment Trust Management (14.71%)

Price Performance

(%) 1M 6M 12M

Absolute -10.5 -27.9 -34.9

Relative -8.8 -27.1 -36.9

50

60

70

80

90

100

110

120

11/11 3/12 7/12 11/12

Share price

KOSDAQ




12/10 632 71 11.1 56 3,138 71 67 22.2 15.6 3.0 9.9

12/11 753 92 12.2 76 4,212 101 86 24.2 14.5 3.1 8.4

12/12F 583 82 14.0 72 4,010 75 20 19.5 10.2 2.0 6.0

12/13F 850 105 12.4 88 4,907 111 64 20.8 8.4 1.8 3.4

12/14F 916 122 13.3 101 5,600 128 85 20.6 7.3 1.6 2.3

Note: All figures are based on non-consolidated K-IFRS




Valuation: We maintain our Buy call on SFA Engineering with a target price of W60,000. The

shares are being traded at a 12-month forward P/E of 9.4x, lower than the average P/E of

global equipment makers. We believe that this is an opportune time to buy the shares, given

that the company is repurchasing its shares to stabilize its share price and utilize its free

cash flow.

Table 1. Quarterly earnings trends and forecasts (under non-consolidated K-IFRS) (Wbn, %)

1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2012F 2013F 2014F

New orders 113 120 122 284 155 184 213 233 639 784 955

Revenues 100 101 110 271 163 177 244 266 583 850 916

Process & precision 17 23 32 58 43 50 73 86 129 252 334

Material handling systems 83 78 79 213 120 127 171 180 454 598 581

Proportion of revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Process & precision 17.0 22.8 28.6 21.2 26.2 28.3 30.0 32.3 22.2 29.6 36.5

Material handling systems 83.0 77.2 71.4 78.8 73.8 71.7 70.0 67.7 77.8 70.4 63.5

Operating profit 19.7 12.0 14.0 36.0 20.0 20.1 31.1 34.2 81.7 105.4 121.7

OP margin 19.7 11.8 12.7 13.3 12.3 11.3 12.7 12.9 14.0 12.4 13.3

Net profit 17.2 11.8 12.9 30.1 17.0 17.1 25.7 28.2 72.0 88.1 100.5

NP margin 17.1 11.7 11.7 11.1 10.4 9.7 10.5 10.6 12.4 10.4 11.0


Table 2. Earnings forecast revisions (under non-consolidated K-IFRS) (Wbn, %, %p)

Previous Revised % change

12F 13F 14F 12F 13F 14F 12F 13F 14F

Revenues 689 890 1,004 583 850 916 -15.4 -4.5 -8.8

Operating profit 90 108 131 82 105 122 -9.1 -2.2 -7.5

Net profit 77 89 107 72 88 101 -6.2 -1.0 -6.3

EPS 4,275 4,954 5,977 4,010 4,907 5,600 -6.2 -1.0 -6.3

OP margin 13.1 12.1 13.1 14.0 12.4 13.3 1.0 0.3 0.2

Net margin 11.1 10.0 10.7 12.4 10.4 11.0 1.2 0.4 0.3

Avg. F/X rate (W/US$) 1,126 1,064 1,045 1,126 1,064 1,045 0.0 0.0 0.0


Figure 1. Quarterly earnings trend and forecasts Figure 2. Annual earnings trend and forecasts

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

0

50

100

150

200

250

300

1Q07 1Q08 1Q09 1Q10 1Q11 1Q12F 1Q13F

-5

0

5

10

15

20

25

Process & Precision (L) Material handling systems (L)

OP margin (R)

(Wbn) (%)

2010: K-GAAP (completed-contract basis)2011~2: K-IFRS (percentage -of-completion basis)

0

200

400

600

800

1,000

2004 2006 2008 2010 2012F 2014F

0

4

8

12

16

20

Material handling systems (L)

Process & Precision (L)OP margin (R)

(Wbn) (%)

2010: K-GAAP (completed-contract basis)2011~12: K-IFRS (percentage-of-completion basis)



SFA Engineering (056190 KQ/Buy/TP: W60,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F

Revenues 753 583 850 916 Current Assets 400 438 506 604

Cost of Sales 610 459 678 724 Cash and Cash Equivalents 75 89 159 246

Gross Profit 143 124 172 192 AR & Other Receivables 134 130 127 137



Operating Profit 92 82 105 122 Non-Current Assets 159 146 140 136

Non-Operating Profit 4 10 8 7 Investments in Associates 22 23 23 23

Net Financial Income -4 -8 -10 -12 Property, Plant and Equipment 107 108 113 116


Pretax Profit 96 91 113 129 Total Assets 559 584 646 739

Income Tax 20 19 25 28 Current Liabilities 194 170 167 179



Net Profit 76 72 88 101 Other Current Liabilities 89 76 74 80

Controlling Interests 76 72 88 101 Non-Current Liabilities 20 22 26 39



Controlling Interests 74 71 87 99 Total Liabilities 214 192 192 218

Non-Controlling Interests 0 0 0 0 Controlling Interests 345 393 453 521


FCF (Free Cash Flow) 86 20 64 85 Capital Surplus 20 20 20 20

EBITDA Margin (%) 13.4 12.8 13.1 14.0 Retained Earnings 332 382 444 514


Net Profit Margin (%) 10.0 12.4 10.4 11.0 Stockholders' Equity 345 393 453 521


(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F


Net Profit 76 72 88 101 P/CF (x) 13.4 9.4 7.9 6.9




Others -22 8 -2 -5 CFPS (W) 4,566 4,373 5,220 5,972

Chg in Working Capital -1 1 0 6 BPS (W) 19,596 20,631 23,310 26,394

Chg in AR & Other Receivables 46 6 3 -10 DPS (W) 1,280 1,500 1,800 2,000

Chg in Inventories -1 -2 0 -1 Payout ratio (%) 29.9 35.8 35.1 34.2

Chg in AP & Other Payables -9 -10 -2 7 Dividend Yield (%) 2.1 3.7 4.4 4.9

Income Tax Paid -13 -38 -25 -28 Revenue Growth (%) 19.1 -22.6 45.8 7.7

Cash Flows from Inv Activities -90 -8 10 12 EBITDA Growth (%) 42.4 -26.3 49.1 15.6

Chg in PP&E -24 -7 -10 -10 Operating Profit Growth (%) 30.8 -11.3 29.0 15.4

Chg in Intangible Assets -9 -13 -13 -13 EPS Growth (%) 34.2 -4.8 22.4 14.1

Chg in Financial Assets -60 -31 0 0 Accounts Receivable Turnover (x) 4.8 4.4 6.6 6.9


Cash Flows from Fin Activities -9 -23 -26 -31 Accounts Payable Turnover (x) 8.0 7.4 11.7 12.2


Chg in Equity 0 0 0 0 ROE (%) 24.2 19.5 20.8 20.6


Others 0 0 0 0 Liability to Equity Ratio (%) 62.1 48.9 42.4 41.8

Increase (Decrease) in Cash 7 14 70 87 Current Ratio (%) 206.1 257.9 303.6 336.5

Beginning Balance 68 75 89 159 Net Debt to Equity Ratio (%) -71.5 -74.3 -79.8 -86.1

Ending Balance 75 89 159 246 Interest Coverage Ratio (x) 4,561.0




Soulbrain (036830 KQ)

Ability to grow despite slowing downstream industries

Margins to level up on operating leverage effect

Thin glass to drive growth momentum in 2013 aided by strong SEC smartphone sales

Raise TP to W53,000 in light of increased proportion of high-value products and improved margins

2013 earnings: We expect Soulbrain to deliver solid earnings growth in 2013 even

amid the overall weakness of downstream industries (e.g., semiconductors, LCDs,

etc.), with full-year revenues of 664.9bn (up 14.2% YoY) and an operating profit of

W115.4bn (up 17.3% YoY; OP margin of 17.4%). We believe the companyÊs

margins have stabilized to higher levels on the back of product mix improvement

and high operating leverage resulting from top-line growth. Looking forward, we

forecast OP margin to level up from 12~14% to around 16%.

Growth theme: 1) Aided by SECÊs robust smartphone sales, the thin glass (TG;

etching of display panels) unit should continue to drive the companyÊs growth

momentum into 2013. SoulbrainÊs TG business meets over 90% of SECÊs OLED

needs. Given that sales of SECÊs OLED smartphones (including the Galaxy S series)

are rising, we expect TG revenues to grow 32.8% YoY to W122.4bn in 2013.

2) SoulbrainÊs margins have been improving in line with its increasing revenues.

We attribute this to the companyÊs diversified business portfolio, which is the

result of its continued investments in growth drivers such as TG, high-margin

precursors for semiconductors, and rechargeable battery electrolytes. Looking

ahead, we expect bottom-line growth to outpace top-line growth in 2013 on

operating leverage effects.

Catalysts: 1) SECÊs rising dominance in the smartphone market, especially in the

OLED smartphone category, should directly benefit SoulbrainÊs TG unit. 2)

Samsung SDIÊs large capacity ramp-ups for prismatic and polymer batteries slated

for 2013 should prove positive to the electrolyte division. 3) The accelerated

transfer of SECÊs semiconductor manufacturing process and non-memory capacity

expansion are likely to provide a boost to SoulbrainÊs semiconductor etchants and

CVD precursors.

Risks: 1) We believe the biggest risk to the stock is that the spread of flexible

displays could drag down the companyÊs TG sales. 2) The maturation of

downstream industries could weaken growth, potentially leading to a valuation

discount. 3) The overhang issue (a non-fundamental risk) related to the companyÊs

issuance of convertible bonds and bonds with warrants is also a drag on the stock.

Will Cho 02-768-+822-768-4306

[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 45,950




P/E (12F, x) 11.4


KOSDAQ 521.43






Free Float (%) 51.7

52-Week Low (W) 25,650

52-Week High (W) 46,950





Chang, Ji-wan et al. (47.23%)

Allianz Global Investors (9.55%)


Price Performance

(%) 1M 6M 12M

Absolute 11.1 48.2 11.5

Relative 12.8 49.1 9.5

50

60

70

80

90

100

110

120

11/11 3/12 7/12 11/12

Share price

KOSDAQ




12/10 349 50 14.3 40 2,708 63 -3 20.4 11.3 2.2 8.1

12/11 458 63 13.6 17 1,168 82 -74 7.8 33.1 2.4 8.6

12/12F 583 98 16.9 65 4,039 117 16 22.8 11.4 2.2 7.2

12/13F 665 115 17.4 79 4,943 137 39 21.3 9.3 1.8 6.0

12/14F 753 123 16.3 84 5,278 145 42 18.9 8.7 1.5 5.6





Valuation: We reiterate our Buy call on Soulbrain and raise our target price by 8.2% to

W53,000 from W49,000, as we revised up our 2013F EPS by 6.6% to reflect the increased

contribution of the high-value TG business and improved margins resulting from reduced

fixed cost burdens. Despite recent share appreciation, the stock is currently trading at a 12-

month forward P/E of 9.2x, below the industry peer average of 11.2x and the stockÊs five-

year average multiple of 11.0x.

Table 1. Calculation of target price

Comments

EPS (W) 4,867 12-month forward estimate

Fair P/E (x) 11.0 Average of 12-month forward P/E since 2006

Fair price (W) 53,406

Target price (W) 53,000

Current price (W) 44,000 As of November 3, 2012

Upside potential (%) 20.5


Table 2. Earnings forecast revisions (non-consolidated K-IFRS) (Wbn, %)

Previous Revised % change

12F 13F 14F 12F 13F 14F 12F 13F 14FComments

Revenues 582 660 742 582 665 752 0.1 0.7 1.4 - Upside revision to TG sales

Operating Profit 98 109 119 98 115 123 0.2 6.2 3.1 - Reflect profitability improvement on richer product mix

Pretax profit 90 102 112 90 109 116 0.2 6.6 3.2 Net profit 64 74 82 65 79 84 0.2 6.6 3.2

EPS (W) 4,030 4,637 5,112 4,039 4,943 5,278 0.2 6.6 3.2

OP margin 16.9 16.5 16.0 16.9 17.4 16.3 - - -

Net margin 11.1 11.2 11.0 11.1 11.9 11.2 - - -


Table 3. Quarterly earnings forecasts (non-consolidated K-IFRS) (Wbn, %)

1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 11 12F 13F 14F

Revenues 131.7 143.3 152.3 155.2 150.8 163.0 171.9 179.2 458.1 582.5 664.9 752.5

Display 44.9 52.6 57.7 59.8 56.5 61.9 63.4 69.0 158.2 215.1 250.9 268.4

Semiconductor 56.9 59.1 61.1 62.6 63.8 69.4 75.3 77.8 197.3 239.7 286.2 344.4

Electronic materials 29.8 31.7 33.5 32.8 30.5 31.7 33.2 32.4 102.5 127.7 127.9 139.6

Revenues portion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Display 34.1 36.7 37.9 38.6 37.5 38.0 36.9 38.5 34.5 36.9 37.7 35.7

Semiconductor 43.2 41.2 40.1 40.3 42.3 42.5 43.8 43.4 43.1 41.2 43.0 45.8

Electronic materials 22.7 22.1 22.0 21.1 20.2 19.5 19.3 18.1 22.4 21.9 19.2 18.6

Operating profit 22.3 25.7 27.4 23.0 25.3 30.1 31.1 29.0 62.5 98.4 115.4 122.7

Pretax profit 20.7 24.9 25.8 18.4 23.9 28.8 29.7 26.5 28.7 89.9 108.8 116.0

Net profit 15.7 16.2 18.9 13.8 17.4 20.6 21.7 19.4 17.2 64.6 79.1 84.4

OP margin 16.9 18.0 18.0 14.8 16.8 18.5 18.1 16.2 13.6 16.9 17.4 16.3

Net margin 11.9 11.3 12.4 8.9 11.6 12.6 12.6 10.8 3.7 11.1 11.9 11.2

Growth (QoQ/YoY)

Revenues -2.2 8.8 6.3 1.9 -2.8 8.1 5.5 4.2 31.4 27.2 14.2 13.2

Display -3.3 17.0 9.8 3.6 -5.6 9.6 2.5 8.8 2.5 35.9 16.6 7.0

Semiconductor 3.6 3.8 3.5 2.3 1.9 8.7 8.5 3.3 47.1 21.5 19.4 20.4

Electronic materials -10.1 6.1 5.7 -2.1 -6.8 4.0 4.7 -2.5 70.7 24.6 0.2 9.2

Operating profit 29.0 15.5 6.4 -15.9 9.7 19.1 3.4 -7.0 27.1 57.5 17.3 6.3

Pretax profit TB 20.7 3.7 -28.7 29.6 20.4 3.1 -10.6 -32.0 213.0 21.1 6.6

Net profit TB 3.2 16.4 -26.7 26.1 17.9 5.4 -10.6 -47.9 276.3 22.4 6.8




Soulbrain (036830 KQ/Buy/TP: W53,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F







Non-Operating Profit -34 -9 -7 -7 Investments in Associates 49 49 49 49

Net Financial Income 6 5 5 5 Property, Plant and Equipment 182 219 245 276

Net Gain from Inv in Associates -28 0 0 0 Intangible Assets 4 4 5 5












FCF (Free Cash Flow) -74 16 39 42 Capital Surplus 33 74 74 74





(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F


Net Profit 17 78 79 84 P/CF (x) 17.1 8.4 7.0 6.6




Others -5 1 3 3 CFPS (W) 2,255 5,487 6,546 6,926


Chg in AR & Other Receivables -23 -19 -13 -11 DPS (W) 350 350 350 350




Cash Flows from Inv Activities -108 -73 -61 -65 EBITDA Growth (%) 29.9 44.1 16.6 5.9

Chg in PP&E -87 -60 -52 -57 Operating Profit Growth (%) 25.1 57.6 17.3 6.3

Chg in Intangible Assets 0 -1 -1 -1 EPS Growth (%) -56.9 245.8 22.4 6.8


Others -16 -12 -9 -7 Inventory Turnover (x) 10.7 9.1 8.9 8.9

Cash Flows from Fin Activities 90 13 23 13 Accounts Payable Turnover (x) 19.5 21.5 21.1 21.1


Chg in Equity 0 0 0 0 ROE (%) 7.8 22.8 21.3 18.9









Duksan Hi-Metal (077360 KQ)

Deeply undervalued

Samsung Display likely to resume OLED investments in 2013

Dominance in the OLED market to strengthen

Deeply undervalued at 12-month forward P/E of 11x

2013 earnings: Next year, we expect Duksan Hi-Metal to post revenues of

W201.6bn (up 31.8% YoY) and an operating profit of W56.3bn (up 28.8% YoY; OP

margin of 27.9%). Even if we assume that Samsung Display delays production of

new small- to mid-sized OLEDs until 2Q13 or beyond, and the operation of a large-

OLED line to 2014 or beyond, Duksan Hi-MetalÊs EPS is likely to show a CAGR of

more than 25% until end-2014.

Growth theme: 1) While there is no clear vision of the next paradigm in the IT

industry (after smartphones), we believe OLED will likely drive the next big

industry expansion. Although the OLED market is in its fledgling stages compared

to the LCD market, the spread of OLED screen smartphones and the release of

OLED TVs should drive market growth.

2) Duksan Hi-Metal is anticipated to cement its dominance of the OLED market.

Given growing concerns of technology leaks, and the further sophistication of

OLED technology, Samsung is likely to select and manage its supply chain

carefully. DuksanÊs share of the mobile OLED segment once again stands at over

90%, while its competitors are delaying their entry into the space.

Catalysts: 1) Mid- to small-sized OLED is currently in tight supply due to the robust

sales of SECÊs OLED smartphones. Despite delays in the rollout of flexible OLED

displays by Samsung Display, the company is likely to resume OLED investments

next year given the tight supply. 2) The expansion of the tablet PC market is

forecast to drive solder ball demand. Increased sales of high-end fine solder balls

should boost DuksanÊs profitability.

Risks: 1) Delays to Samsung DisplayÊs OLED investments remain the biggest risk.

2) The releases of ultra=definition LCD TVs present a threat to OLED screen TVs.

3) Entries of new players into the OLED market are a valuation discount factor.

Will Cho +02-768-3372

[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 18,650




P/E (12F, x) 12.5


KOSDAQ 521.43






Free Float (%) 43.8

52-Week Low (W) 18,400

52-Week High (W) 30,700





Lee, Jun-Ho et al. (41.9%)

Treasury shares (14.35%)

Korea Investment Management (6.23%)

Price Performance

(%) 1M 6M 12M

Absolute -14.7 -29.4 -34.9

Relative -13.0 -28.5 -36.9

50

60

70

80

90

100

110

11/11 3/12 7/12 11/12

Share price

KOSDAQ




12/10 73 20 27.7 16 638 22 -30 18.7 31.8 6.6 23.8

12/11 129 35 26.8 35 1,181 43 11 29.0 21.5 6.0 17.1

12/12F 153 44 28.7 44 1,498 50 26 27.4 12.5 3.7 10.1

12/13F 202 56 27.9 55 1,877 66 23 26.2 9.9 2.7 7.2

12/14F 274 74 27.1 72 2,442 86 46 26.3 7.6 2.0 5.0





Valuation: We maintain our Buy call on Duksan Hi-Metal with a target price of W35,000.

Even if we assume that Samsung Display delays the production of new mid- to small-sized

OLEDs to 2Q13 or beyond, and operation of a large OLED line to 2014 or beyond, Duksan

Hi-MetalÊs EPS is likely to show a CAGR of more than 25% until end-2014. Although we

assumed that DuksanÊs supply would meet a mere 50% of Samsung DisplayÊs needs in

2014, we have recently seen delays in competitorsÊ supply to Samsung Display. Duksan Hi-

MetalÊs shares are deeply undervalued, trading at a 12-month forward P/E of 11x (vs. the

companyÊs three-year average of 22x).

Table 1. OLED capacity trends and forecasts of Samsung Display

2011 2012F 2013F 2014F

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

A1 (4G, 730 x 920) Half 53 53 53 53 53 53 53 53 53 53 53 53 53 53 53 53

A2 (5.5G, 1300 x 1500) Quarter 8 24 50 56 72 72 88 88 88 88 88 88 88 88 88

Phase 1 (32k/month) 8 16 32 32 32 32 32 32 32 32 32 32 32 32 32

Phase 2 (32k/month) 8 18 24 32 32 32 32 32 32 32 32 32 32 32

Phase 3 (incl. flexible) (24k/month) 8 8 24 24 24 24 24 24 24 24 24

A2E (5.5G, 1300 x 1500) Quarter 8 20 36 64 76 88 96

Phase 1 (32k/month) 8 12 24 32 32 32 32

Phase 2 (32k/month) 8 12 24 32 32 32

Phase 2 (32k/month) 8 12 24 32

V1 (8G, 2200 x 2500) 6th 3 6 6 6 12 12 16 24 24 24 24

V2 (8G, 2200 x 2500) Half 8 32 48 48

Phase 1 (30k/month) 8 24 24 24

Phase 2 (30k/month) 8 24 24

Total capacity on a real basis (k m2/month) 107 154 247 399 434 577 627 721 721 866 937 1,096 1,524 1,990 2,324 2,371

YoY growth (%) 1.9 43.8 60.9 61.5 8.8 32.9 8.6 14.9 0.0 20.2 8.1 17.0 39.0 30.6 16.8 2.0

Duksan's M/S within SD (%) 100.0 100.0 95.0 95.0 85.0 90.0 90.0 90.0 85.0 85.0 80.0 75.0 70.0 50.0 45.0 40.0


Table 2. Earnings trends and forecasts (non-consolidated K-IFRS) (Wbn, %)

1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2011 2012F 2013F 2014F

Revenues 32.5 37.0 39.5 44.0 40.3 48.1 52.9 60.3 129.4 152.9 201.6 274.4

OLED 17.7 21.7 22.1 25.7 24.6 30.0 32.0 37.8 70.1 87.2 124.3 180.3

Semiconductor 14.8 15.3 17.4 18.3 15.7 18.1 20.9 22.6 59.4 65.7 77.3 94.2

Revenue proportion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

OLED 54.5 58.7 56.0 58.5 61.0 62.3 60.5 62.6 54.1 57.0 61.7 65.7

Semiconductor 45.6 41.3 44.0 41.5 39.0 37.7 39.5 37.4 45.9 43.0 38.3 34.3

Operating profit 9.2 10.5 11.4 12.9 11.3 13.7 14.6 16.7 34.7 43.9 56.3 74.4

Pretax profit 9.5 10.8 11.6 13.2 11.6 14.0 14.9 16.9 35.1 45.2 57.5 75.5

Net profit 9.3 10.9 11.1 12.7 11.1 13.4 14.3 16.3 34.6 44.0 55.2 71.8

OP margin 28.2 28.4 28.8 29.4 28.1 28.5 27.6 27.6 26.8 28.7 27.9 27.1

Net margin 28.7 29.4 28.1 28.9 27.7 27.9 27.1 27.0 26.7 28.8 27.4 26.2

Growth (QoQ/YoY)

Revenues -12.2 13.9 7.0 11.3 -8.4 19.5 9.9 13.9 78.6 18.2 31.8 36.1

OLED -17.8 22.8 2.0 16.2 -4.5 22.1 6.8 17.8 106.7 24.5 42.5 45.0

Semiconductor -4.3 3.2 14.1 4.9 -14.0 15.6 15.1 8.0 53.9 10.7 17.6 21.8

Operating profit -15.9 14.4 8.5 13.8 -12.5 21.1 6.7 13.8 164.4 26.6 28.2 32.1

Pretax profit -12.2 13.5 7.0 14.4 -12.3 20.4 6.7 13.5 179.7 28.9 27.2 31.5

Net profit -14.0 16.6 2.4 14.4 -12.3 20.4 6.7 13.5 240.7 27.4 25.4 30.1




Duksan Hi-Metal (077360 KQ/Buy/TP: W35,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F







Non-Operating Profit 0 1 1 1 Investments in Associates 0 0 0 1

Net Financial Income 0 -2 -2 -4 Property, Plant and Equipment 65 77 100 121


















(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F


Net Profit 35 44 55 72 P/CF (x) 19.5 11.6 8.8 6.8




Others -8 -9 -4 -6 CFPS (W) 1,300 1,615 2,118 2,732





Income Tax Paid -2 0 -2 -4 Revenue Growth (%) 78.6 18.2 31.8 36.1


Chg in PP&E -22 -17 -30 -30 Operating Profit Growth (%) 73.0 26.6 28.2 32.1

Chg in Intangible Assets -3 -2 -2 -2 EPS Growth (%) 85.0 26.9 25.3 30.1

Chg in Financial Assets 8 -28 0 0 Accounts Receivable Turnover (x) 14.7 14.3 14.6 16.2


Cash Flows from Fin Activities -6 0 0 0 Accounts Payable Turnover (x) 36.3 30.5 31.2 34.7

Chg in Financial Liabilities -6 0 0 0 ROA (%) 25.5 24.9 23.7 23.6

Chg in Equity 1 0 0 0 ROE (%) 29.0 27.4 26.2 26.3

Dividends Paid 0 0 0 0 ROIC (%) 35.6 34.5 36.5 39.4

Others 0 0 0 0 Liability to Equity Ratio (%) 9.6 10.1 11.3 11.5

Increase (Decrease) in Cash 15 4 26 51 Current Ratio (%) 403.9 716.9 871.3 1,191.6

Beginning Balance 5 21 25 51 Net Debt to Equity Ratio (%) -10.3 -25.8 -30.9 -40.4





Partron (091700 KQ)

Just stellar

Impressive top-line growth likely: Up 113.1% in 2012 and 21.8% in 2013

Antenna revenues expected to become a new growth engine

Maintain Buy call with TP of W19,400

Earnings: Partron has shown impressive earnings improvement. We forecast the

companyÊs revenues to leap 113.1% YoY to W767bn in 2012 (from W233bn in

2010 and W360bn in 2011). The companyÊs revenues are likely to grow further to

W934bn (up 21.8% YoY) in 2013.

Growth theme & catalysts: This stellar performance has largely been the result of the

sustained growth of the companyÊs largest customerÊs smartphone sales, which has

led to a considerable jump in camera module and antenna sales (Partron meets the

bulk of its largest customerÊs camera-module needs). While most rivals are focusing on

modules above 8 megapixels, in line with the increasing adoption of high-megapixel

camera modules, Partron still maintains a dominant position in the 3-megapixel market.

And the firmÊs superior mass-production capabilities have allowed it to generate higher

margins compared to its competitors, despite its reliance on 3-megapixel products.

Another positive growth driver has been the companyÊs strong antenna revenues,

supported by the increasing number of antennae used in smartphones. In

particular, PartronÊs proprietary laser technology has helped improve production

yields, contributing to both top-line and bottom-line growth.

An increasing number of PartronÊs parts are being used in the production of its largest

customerÊs flagship products. Also, going forward, we expect additional growth from

crystal oscillators and vibration motors. In particular, the outlook for crystal oscillators

looks rosy given the ongoing, steady growth of sales to Chinese clients.

Along with this top-line growth, Partron is also showing strong margins. The companyÊs

OP margin has stabilized at 10%. We estimate its operating profit to soar 100.6% YoY to

W75bn in 2012. OP margin is likely to reach 9.8% in both 2012 and 2013.

Risks: Over-reliance on a single client is sa common risk among component

suppliers. But, given that the smartphone market is dominated by SEC and Apple,

PartronÊs heavy dependence on a single customer seems unavoidable. We believe

investors need to focus on the fact that Partron is a major beneficiary of the

growth of the smartphone market.

Valuation: We maintain our Buy call on Partron with a target price of W19,400. We

derived our target price by applying a P/E of 10x to our 2013F EPS of W1,946. This

price implies an upside of 16.2% from the current share price.


[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 18,050




P/E (12F, x) 12.3


KOSDAQ 521.43






Free Float (%) 73.9

52-Week Low (W) 10,150

52-Week High (W) 18,150





Jong Ku Kim et al. (25.45%)

Price Performance

(%) 1M 6M 12M

Absolute 22.4 66.2 78.9

Relative 24.1 67.0 76.9

70

90

110

130

150

170

190

11/11 3/12 7/12 11/12

Share price

KOSDAQ




12/10 233 38 16.3 32 825 39 6 29.8 13.7 3.5 10.9

12/11 360 38 10.4 32 833 41 -15 23.3 13.4 2.8 11.3

12/12F 767 75 9.8 57 1,469 80 23 32.0 12.3 3.4 9.5

12/13F 934 92 9.8 75 1,946 100 53 32.0 9.3 2.6 7.6

12/14F 1,042 104 10.0 86 2,207 114 61 28.0 8.2 2.0 6.7

Notes: All figures are based on Non- consolidated K-IFRS




Partron (091700 KQ/Buy/TP: W19,400)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F

Revenues 360 767 934 1,042 Current Assets 116 193 231 270






Non-Operating Profit 0 -7 -1 -1 Investments in Associates 2 3 3 3


Net Gain from Inv in Associates 0 -2 0 0 Intangible Assets 2 2 1 1












FCF (Free Cash Flow) -15 23 53 61 Capital Surplus 22 12 12 12





(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F


Net Profit 32 57 75 86 P/CF (x) 12.1 11.2 8.4 7.4



Amortization 0 0 0 0 EPS (W) 833 1,469 1,946 2,207

Others 0 -1 0 0 CFPS (W) 1,202 1,616 2,144 2,457








Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 1.0 76.3 32.5 13.4


Others -18 -33 -46 -46 Inventory Turnover (x) 13.4 17.0 14.8 14.3

Cash Flows from Fin Activities 19 1 -2 -3 Accounts Payable Turnover (x) 9.5 10.3 9.0 8.7


Chg in Equity 0 0 0 0 ROE (%) 23.3 32.0 32.0 28.0



Increase (Decrease) in Cash -8 -2 5 13 Current Ratio (%) 112.8 105.8 112.6 121.1






Nepes (033640 KQ)

A beneficiary of mobile AP market growth

2013 outlook: Earnings expected to grow, with revenues of W335.1bn (up 21.8%) and OP of W56.4bn (up 41.7%)

Growing AP demand should boost the company’s 12-inch WLP service revenues

Subsidiary-related risks have already been priced in; Currently undervalued

2013 earnings: We project Nepes to generate revenues of W335.1bn (up 21.8%

YoY) and an operating profit of W56.4bn (up 41.7% YoY) in 2013. Although the

companyÊs 1H margins were weaker than expected, its earnings began to pick up

in 3Q on the back of growing revenues related to 12-inch wafer-level packaging

(WLP) services. We project NepesÊ 3Q operating profit to improve to W12bn.

Growth theme: In our view, NepesÊ 2013 earnings will be driven by the growth of

the smartphone and tablet PC markets, as the company is the sole application

processor (AP) WLP service provider for Samsung Electronics (SEC). Nepes began

offering domestic 12-inch WLP services in 2H11. We estimate the companyÊs

monthly 12-inch WLP service capacity to reach 30,000 wafers in 4Q, and expand

to 40,000~50,000 wafers in 2H13.

We forecast revenue contributions from 12-inch WLP services to increase from

27% in 2012 to 43% in 2013. Most positively, this business is more profitable than

the companyÊs established divisions. We believe full-swing growth of 12-inch WLP

revenues will lead the company to deliver stable earnings growth. However, it

should be noted that LCD driver IC bumping services show significant profit

fluctuations depending on capacity utilization ratios.

Catalysts: In 2013, we anticipate global shipments of smartphones and tablet PCs

to reach 780mn units (up 24% YoY) and 180mn units (up 64% YoY), respectively.

This should lead to the robust growth of the AP market. As such, we expect

Nepes to see a surge in demand for WLP services from its top customer. Its

Singaporean subsidiary, Nepes Pte, has a monthly WLP capacity of 30,000 wafers.

However, we expect Nepes to increase its dependence on its domestic capacity.

Risks: The biggest risk facing Nepes is the sluggishness of some subsidiaries (e.g.,

Nepes Display, Nepes LED, Nepes Rigma). We attribute NepesÊ recent share

pullbacks to this subsidiary risk. However, we estimate overall losses from

subsidiaries to significantly decline YoY to W4.5bn in 2012. In particular, Nepes

Display, the biggest loss contributor amongst subsidiaries, is showing signs of

recovery.

James Song +822-768-3722

[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 13,100




P/E (12F, x) 11.0


KOSDAQ 521.43






Free Float (%) 72.1

52-Week Low (W) 12,050

52-Week High (W) 21,650





B.K. Lee et al. (27.83%)

Allianz Global Investors (11.59%)


Price Performance

(%) 1M 6M 12M

Absolute -18.4 -37.6 -19.1

Relative -16.7 -36.8 -21.2

60

70

80

90

100

110

120

130

11/11 3/12 7/12 11/12

Share price

KOSDAQ




12/10 239 26 11.0 17 831 45 -7 13.6 19.8 2.5 8.8

12/11 216 22 10.3 15 702 41 -11 10.1 23.5 2.3 9.9

12/12F 275 40 14.5 26 1,194 59 -15 15.1 11.0 1.6 5.8

12/13F 335 56 16.8 44 2,015 78 12 21.1 6.5 1.3 4.3

12/14F 366 70 19.3 57 2,609 102 28 22.2 5.0 1.0 3.1

Notes: Based on non-consolidated K-IFRS




Valuation: We maintain our Buy call with a target price of W24,000 (a 2013F P/E of 12.0x). In

particular, expansion of 12-inch WLP capacities and the resulting revenues should boost top-

line and bottom-line growth starting in 2013. Following a recent share pullback, the

companyÊs shares are trading at a 2013F P/E of only 6.5x.

Table 1. Earnings forecasts (Wbn, W, %)


Revenues 58.5 65.1 74.5 77 76.1 81.9 86.7 90.3 238.5 215.8 275 335.1

% QoQ 7.3 11.4 14.3 3.4 -1.1 7.6 5.8 4.2

% YoY 12.4 14.6 41.9 41.3 30.2 25.8 16.4 17.4 8.1 -9.5 27.5 21.8

Semiconductor 24.8 29.3 32.3 28.2 24.9 27.5 27.6 27 126.1 100.4 114.6 107

12‰ WLP 12.1 15.1 20.2 27.7 29.7 32.9 37.6 42.3 14.2 75.1 142.6

Chemical 21.5 20.7 22 21 21.5 21.5 21.5 21 112.4 101.2 85.2 85.5

Gross profit 13.8 17.3 19.3 21.1 19.8 22.5 24.4 24.6 44.7 43 71.6 91.3

SG&A 5.7 9.7 7.3 9 8.5 8.7 8.7 9 18.6 20.9 31.7 34.9

Operating profit 8.1 7.5 12.0 12.1 11.3 13.8 15.7 15.6 26 22.1 39.8 56.4

% QoQ 39.7 -7.3 59.9 0.8 -7 22.4 13.6 -0.4

% YoY 48.6 37.7 123.9 108.5 38.9 83.5 30.3 28.8 4.5 -14.8 80 41.7

Pretax profit 8.5 5 10.5 9.3 11.7 12.3 16.2 17.2 18.2 19.8 33.3 57.4

Net profit 7.0 3.8 8.0 7.2 8.9 9.4 12.3 13.4 16.9 15.3 26.1 44

% QoQ 8.9 -45 107.7 -9.5 23.3 5.2 31.3 8.8

% YoY 86.4 24.3 289.6 12.6 27.5 143.6 54 85.2 -14.6 -9.6 70.2 68.8

GP margin 23.7 26.5 26 27.5 26 27.5 28.1 27.3 18.8 19.9 26 27.3

OP margin 13.9 11.6 16.2 15.8 14.8 16.9 18.1 17.3 10.9 10.3 14.5 16.8

Net margin 12 5.9 10.7 9.4 11.7 11.4 14.2 14.8 7.1 7.1 9.5 13.1

Note: Non-consolidated K-IFRS basis


Figure 1. Annual revenues and OP trends and forecasts Figure 2. Quarterly revenues and OP trends and forecasts


0

100

200

300

400

06 08 10 12F 14F

0

20

40

60

80Revenues (L)


(Wbn) (Wbn)

0

20

40

60

80

100

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

0

5

10

15

20Revenues (L)


(Wbn) (Wbn)



Nepes (033640 KS or KQ/Buy/TP: W24,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F







Non-Operating Profit -2 -7 1 4 Investments in Associates 16 16 16 16














FCF (Free Cash Flow) -11 -15 12 28 Capital Surplus 73 76 76 76





(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F


Net Profit 15 26 44 57 P/CF (x) 10.6 6.3 4.4 3.2



Amortization 0 0 0 0 EPS (W) 702 1,194 2,015 2,609

Others -3 -8 4 6 CFPS (W) 1,557 2,074 2,980 4,072




Chg in AP & Other Payables -10 12 8 3 Dividend Yield (%) 0.3 0.4 0.4 0.4

Income Tax Paid -5 -7 -13 -17 Revenue Growth (%) -9.5 27.5 21.8 9.1

Cash Flows from Inv Activities -27 -47 -43 -53 EBITDA Growth (%) -8.8 44.7 31.3 32.1


Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -15.6 70.2 68.8 29.5


Others 1 2 2 -8 Inventory Turnover (x) 17.9 17.8 17.1 16.5

Cash Flows from Fin Activities -26 18 -8 -9 Accounts Payable Turnover (x) 14.7 15.3 14.0 13.6

Chg in Financial Liabilities -8 21 -4 -4 ROA (%) 5.5 8.7 12.5 14.2

Chg in Equity 0 6 0 0 ROE (%) 10.1 15.1 21.1 22.2



Increase (Decrease) in Cash -32 -4 6 10 Current Ratio (%) 180.0 179.0 183.5 207.7






Simmtech (036710 KQ)

Mobile PCB revenues on the rise

2013 outlook: Revenues up 15.6%; OP up 25.7%

Mobile-related revenues to soar to roughly 40% of total revenues next year

Undervalued at a 2013F P/E of 6.5x

2013 earnings: In 2013, we project Simmtech to post revenues of W756.5bn (up

15.6% YoY) and an operating profit of W67bn (up 25.7% YoY). Despite a

disappointing performance in 2H12, due to 1) weakening PC memory module

demand, 2) falling F/X rates, and 3) rising gold prices, revenues from mobile

substrates including multi-chip packaging (MCP) are steadily on the rise.

Growth theme: SimmtechÊs growth next year should hinge on mobile printed-

circuit boards (PCB). Mobile PCB revenues, which started to pick up full swing in

2H12, are anticipated to surge 64% (to W163.8bn) this year, contributing to 25%

of the companyÊs total revenues. In 2013, mobile device-related revenues are

forecast to soar 86.9%, to W306bn, accounting for 40% of total revenues.

This year, mobile substrate revenues are estimated at: W113bn from MCP,

W46.1bn from chip-scale packages (CSP), and W4.7bn from flip-chip CSP (FC-CSP).

MCP revenues have started to expand in earnest recently, and FC-CSP sales

began in 2H. Next year, Simmtech is anticipated to generate revenues of W225bn

from MCP (30% of total revenues), W5.2bn from CSP, and W29bn from FC-CSP.

Catalysts: 1) In 2013, we forecast the smartphone and tablet PC markets to

respectively grow to 780mn units (up 24% YoY) and 180mn units (up 64% YoY).

As such, mobile memory sales by SimmtechÊs customers are likely to grow. 2)

Simmtech decided to switch part of its PC memory module production to

manufacture MCP (15,000m2 per month) by 1Q to satisfy rising MCP demand.

Risks: 1) 95% of SimmtechÊs revenues are based on the US dollar, and payments

made in dollars (for raw material purchases, etc.) account for 35% of total revenues.

Thus, a 10% fall in the US$/W rate is estimated to dent the companyÊs OP margin by

2%p. The US$/W rate is forecast to average W1,064 next year. 2) The cost of gold

(raw material) is equivalent to 20% of the companyÊs revenues. If gold prices rise

10% (from around W1,700), the companyÊs OP margin may decline by 2%p.

Valuation: We maintain our Buy rating on Simmtech, but cut our target price from

W20,000 to W17,000 (2013F P/E of 10.0x). We revised down our 2013 operating

profit projection for the company by 16% from W80bn to W67bn to reflect the

unfavorable movements of external factors such F/X rates and gold prices, which

have weighed on the companyÊs earnings since September. However, the stock

appears undervalued, currently trading at a 2013F P/E of 6.4x.

James Song +822-768-3722

[email protected]

Buy (Maintain)


Share Price (11/12/12, W) 10,600


EPS Growth (12F, %) -20.5


P/E (12F, x) 9.3


KOSDAQ 521.43






Free Float (%) 73.6

52-Week Low (W) 9,700

52-Week High (W) 15,600





S.H. Jeon (25.82%)

M.J. Lee (9.46%)


Price Performance

(%) 1M 6M 12M

Absolute -9.4 -14.9 -17.5

Relative -7.7 -14.0 -19.5

60

70

80

90

100

110

120

130

11/11 3/12 7/12 11/12

Share price

KOSDAQ




12/10 577 85 14.7 71 2,590 111 124 93.2 5.5 3.0 5.2

12/11 612 61 10.0 42 1,435 94 56 27.0 8.5 2.1 5.5

12/12F 655 53 8.2 35 1,140 89 52 18.3 9.3 1.6 5.1

12/13F 757 67 8.9 52 1,669 104 53 22.0 6.4 1.3 3.9

12/14F 852 81 9.5 63 2,035 115 63 22.2 5.2 1.1 3.1

Notes: Based on non-consolidated K-IFRS




Table 1. Quarterly and annual earnings forecasts (Wbn, %)

1Q12 2Q12 3Q12P 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F

Revenues 158.3 162.4 166.3 167.6 170.3 184.5 200 201.7 576.6 612.3 654.5 756.5

% QoQ -4.5 2.6 2.4 6.5 1.6 8.3 8.4 15.3

% YoY 6.8 5 15.7 1.1 7.6 13.6 20.3 20.3 16.1 6.2 6.9 15.6

Memory module/BOC 104.7 91.6 86.6 75.7 74 80 86 87 344 383 359 335

Mobile (CSP, MCP, FC-CSP) 20 35 47 63 67 74 82 83 74 100 164 306

Flash memory card 16 14 12 15 16 16 18 18 61 66 57 68

Gross profit 24 25 24 23 25 27 30 31 117 98 97 112

% of Revenues 15.1 15.7 14.5 14 14.4 14.5 14.8 15.2 20.3 16.1 14.8 14.7

SG&A 10 10 10 10 11 10 10 12 32 36 41 43

% of Revenues 6.5 6.4 6 6 6.2 5.4 5 5.9 5.5 5.9 6.2 5.6

Operating profit 12.8 14.1 13.6 13 13.5 16.3 19.1 18.2 85.1 61.1 53.3 67

% QoQ -17.7 10.1 -3.5 -4.4 4.3 20.2 17.5 -4.9

% YoY -23.5 -22 24.7 -16.4 6 15.7 40.9 40.1 66.1 -28.2 -12.7 25.7

Net profit 9.2 9.9 6.9 9.4 9.9 11.9 14.1 15.8 70.7 41.9 35.3 51.7

% QoQ -20.7 7.6 -29.9 35.8 5.2 20.7 17.9 12.7

%YoY -16.7 -15.3 -11.1 -18.7 7.8 21 103.5 68.8 43.3 -40.7 -15.8 46.4

Gross margin 15.1 15.7 14.5 14 14.4 14.5 14.8 15.2 20.3 16.1 14.8 14.7

OP margin 8.1 8.7 8.2 7.7 7.9 8.8 9.6 9 14.8 10 8.1 8.9

Net margin 5.8 6.1 4.2 5.6 5.8 6.5 7 7.9 12.3 6.8 5.4 6.8

Note: Non-consolidated K-IFRS basis


Figure 1. Annual revenue and operating profit trends and outlook Figure 2. Quarterly sales trend and forecasts by product


0

25

50

75

100

125

150

07 08 09 10 11 12F 13F

0

10

20

30

40

PC-related revenues (L)Mobile-related revenues (L)

Other revenues (L)% of mobile-related revenues (R)

(Wbn) (%)Mobile-related products'revenue contribution expands

0

200

400

600

800

05 07 09 11 13F

0

25

50

75

100Revenues (L)


(Wbn) (Wbn)

Expansion of mobile-related products improvesgrowth and earnings



Simmtech (036710 KQ/Buy/TP: W17,000)


(Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F







Non-Operating Profit -10 -9 -1 1 Investments in Associates 14 14 14 14



















(Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F


Net Profit 42 35 52 63 P/CF (x) 4.9 4.8 3.8 3.4




Others -8 -5 0 1 CFPS (W) 2,527 2,200 2,806 3,142



Chg in Inventories -17 6 -12 -9 Payout ratio (%) 13.7 18.1 12.4 10.1

Chg in AP & Other Payables -7 -5 17 14 Dividend Yield (%) 1.6 1.9 1.9 1.9

Income Tax Paid 0 -6 -14 -17 Revenue Growth (%) 6.2 6.9 15.6 12.6

Cash Flows from Inv Activities -15 -36 -35 -30 EBITDA Growth (%) -14.6 -5.8 17.2 10.7

Chg in PP&E -20 -31 -25 -30 Operating Profit Growth (%) -28.0 -12.7 25.7 21.0

Chg in Intangible Assets 1 0 0 0 EPS Growth (%) -44.6 -20.5 46.4 22.0

Chg in Financial Assets 5 -4 -10 0 Accounts Receivable Turnover (x) 9.8 11.3 11.1 10.6

Others -1 -1 0 0 Inventory Turnover (x) 10.7 10.4 11.4 11.2

Cash Flows from Fin Activities -54 -38 -42 -30 Accounts Payable Turnover (x) 15.5 16.7 17.5 17.2

Chg in Financial Liabilities -40 -77 -50 -20 ROA (%) 9.5 7.8 10.9 12.2

Chg in Equity 0 12 0 0 ROE (%) 27.0 18.3 22.0 22.2




Beginning Balance 14 16 28 31 Net Debt to Equity Ratio (%) 83.8 43.6 19.2 -1.4



November 13, 2012 Korea Tech Strategy

112KDB Daewoo Securities Research

Disclosures

As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of SK Hynix, Samsung Electronics,

Samsung SDI, Samsung Electro-Mechanics and LG Electronics as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered

companies.

As of the publication date, Daewoo Securities Co., Ltd. has been acting as a financial advisor to SFA Engineering for its treasury stock trust, and other than this, Daewoo

Securities has no other special interests in the companies covered in this report.

As of the publication date, Daewoo Securities Co., Ltd. has interest in LG Electronics in accordance with a subscription agreement, etc.

As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with SK Hynix, Samsung Electronics, Samsung SDI, Samsung Electro-Mechanics and LG

Electronics as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.

Stock Ratings Industry Ratings

Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving

Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes

Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening

Sell Relative performance of -10%

* 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.

* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystÊs estimate of future earnings.

The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Analyst Certification

The research analysts who prepared this report (the „Analysts‰) are registered with the Korea Financial Investment Association and are subject to Korean securities

regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication

about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy

prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer,

director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits

from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is,

or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive

compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking,

proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of

interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Important Disclosures & Disclaimers

0

500,000

1,000,000

1,500,000

2,000,000

11/10 5/11 11/11 5/12 11/12

(W) Samsung Electronics

0

10,000

20,000

30,000

40,000

50,000

11/10 5/11 11/11 5/12 11/12

(W) SK Hynix

0

50,000

100,000

150,000

200,000

11/10 5/11 11/11 5/12 11/12

(W) LG Electronics

0

50,000

100,000

150,000

200,000

11/10 5/11 11/11 5/12 11/12

(W) Samsung Electro-Mechanics

0

50,000

100,000

150,000

200,000

250,000

11/10 5/11 11/11 5/12 11/12

(W)Samsung SDI

0

20,000

40,000

60,000

80,000

100,000

11/10 5/11 11/11 5/12 11/12

(W) SFA Engineering

0

10,000

20,000

30,000

40,000

50,000

60,000

11/10 5/11 11/11 5/12 11/12

(W) Soulbrain

0

10,000

20,000

30,000

40,000

50,000

11/10 5/11 11/11 5/12 11/12

(W) Duksan Hi-Metal

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

11/10 5/11 11/11 5/12 11/12

(W) Partron

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

11/10 5/11 11/11 5/12 11/12

(W) Nepes

0

5,000

10,000

15,000

20,000

25,000

11/10 5/11 11/11 5/12 11/12

(W) Simmtech

November 13, 2012 Korea Tech Strategy

113KDB Daewoo Securities Research

Disclaimers

This report is published by Daewoo Securities Co., Ltd. („Daewoo‰), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information

and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and

Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions

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