130408 hsbc flexible display

By Brian Sohn, Ricky Seo and Jerry Tsai

The smartphone and tablet industries are on the verge of another revolution – look out for a

new wave of innovation starting in 2H13

Curved handsets and bendable, stronger tablets will be the next big thing, thanks to new

plastic materials

Korean companies Samsung Electronics (OW) and LG Electronics (OW) stand to gain the most

from flexible display, but the whole supply chain will benefit; we upgrade Cheil Industries and

SFA to OW and Duksan Himetal to N(V)

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Flexible DisplayFantastic plastic – a shape-shifting game changer

Telecoms, Media & Technology

Equity – Asia

April 2013

1

Telecoms, Media & Technology Asia Technology 8 April 2013

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Impact from flexible display

Positive Neutral Negative Reason Impact

Handset makers

SEC Differentiation among smartphone makers Flexible display could help to sustain its dominance in the high-end smartphone segment

LGE Flexible display could be a key differentiating factor in high-end smartphones, and help to improve ASP and margin. Revise up 2013 handset margin assumption from 0.9% to 3.7%

Materials Cheil Industries

New business in plastic substrate and OLED materials to kick in

OLED business drives ECM division growth as it expects to take 23% of ECM revenue in 4Q15 from nothing in 4Q12

LG Chem Contribution from plastic substrate, which accounts for only a small portion of overall earnings

Although the company is a key player in making flexible display feasible, the contribution to earnings is limited

Duksan Himetal

Already a major supplier of OLED materials to Samsung Display

Already a main OLED material supplier for Samsung Display, limited upside from flexible display transition

Glass makers*

Glass substrate to be replaced by plastic in the longer term

Panels Samsung Display

Limited to small-sized displays, insignificant to overall earnings

Substantial potential to become major flexible display makers as its AMOLED line could be converted to flexible display when materials are ready for mass production

LG Display

Although the company should play an important role in commercialising flexible display, expect an insignificant contribution to earnings

Component LG Innotek

Indirect beneficiary if LGE’s smartphone business can turn around

Once LGE smartphone business turns round, it is likely to benefit from the mobile component business with LGE

SEMCO Already a major beneficiary of Samsung’s smartphone success

Handset accounts for 23% of estimated 2013 total revenue

LED makers*

No BLU is required in flexible display (e.g., Seoul Semi)

(Battery) Samsung SDI

Product mix improvement through irregular shaped battery IT battery accounts for 64% of estimated 2013 total revenue

LG Chem Although the company is a key player in making flexible display feasible, the contribution to earnings is limited

Equipment SFA Line conversion to LTPS OLED Additional small panel equipment orders from Samsung Display during 2-3Q13e, given that it has to switch or extend capacity for flexible AMOLED. Galaxy Note 3 likely to adopt flexible OLED (unbreakable).

LTPS equipment*

Line conversion to LTPS OLED from traditional LCD

Source: HSBC estimates *Note: Refer to the table on page 9 for the food chain

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Roadmap for flexible display

Phase Available solution Time frame Product Key benefit Prototype

Plastic substrate LTPS, RGB OLED, Polyimde (not fully transparent)

2Q13e Unbreakable smartphone

Lighter, slimmer, given no substrate glass required, but no change in form factor

Plastic substrate + ultra-thin glass

LTPS, RGB OLED, Polyimde, irregular type Li-Polymer battery

3Q13e Curved screen smartphone

Lighter, slimmer and curved screen design

Plastic substrate + plastic front glass

LTPS, OLED, transparent Polyimde substrate, irregular type Li-Polymer battery, new plastic material

2014e Bendable tablet, notebook

Lighter, expandable screen size

Transparent LTPS, OLED, transparent Polyimde substrate, transparent battery, new plastic material

2015e Transparent, smartphone, tablet, monitor

Transparent, rollable tablet

Source: HSBC estimates

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The next big thing – flexible display. Imagine a screen that is bent around the side of the phone, so you

can see data updates or messages. Then go a stage further and imagine a range of bendable, rollable and

foldable digital devices. Welcome to flexible display, the technology that is about to become commercial

reality. Flexible displays can be bent without being damaged, making it possible to create products that

are ultra-thin, almost unbreakable and flexible. The potential for this technology is substantial as the

ultimate goal is to produce cheap mass-produced digital devices that can be rolled up like paper.

We believe the introduction of flexible display will change the industry landscape. Starting with another

wave of innovation in 2H13, flexible display based on new plastic materials will evolve into bendable and

then transparent products.

This report focuses on Korean companies as they appear better placed to benefit from flexible display

than their global competitors, at least to begin with. They are at an advanced stage of development in

most of the processes needed to make this technology a reality and should also be the first to enjoy the

advantages of a vertically integrated supply chain.

Korean giants LG Electronics (LGE) and Samsung Electronics (SEC) are likely be the main beneficiaries.

The two companies are leading the way in developing this new technology (Samsung gave a sneak

preview at a recent trade show in Las Vegas) and have the capability to manufacture and release

differentiated products that will change the market.

Importantly, both have already commercialised organic light-emitting diode (OLED) technology, the base

technology for flexible display, and have established vertically integrated panel, chemical, and handset

production. LGE and SEC should lead the way in the initial stage when the flexible display technology is

first used in handsets for smartphones. LG Innotek (LGI) should benefit as a component supplier, as

should Cheil Industries and SFA as materials and equipment providers.

Summary

The concept of a digital device that can be rolled up like a piece of paper is no longer science fiction. We believe flexible display technology will be a game changer for smartphones and tablets and the first prototype products should be available in a few months. LG Electronics and Samsung Electronics stand to gain the most, but the whole vertically integrated Korean supply chain will benefit. We upgrade Cheil Industries and SFA to OW from N and Duksan Himetal to N(V) from UW(V). We remain OW on Samsung Electronics (an Asia Super 10 and GEMs Super 15 portfolio stock) and OW (remove the volatility indicator (V)) on LG Electronics and LG Innotek.

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All this is good news for the digital supply chain. For example, the smartphone market, which has grown

at a significant rate since the second half of 2009, is starting to mature. Aggressive new players are trying

to catch up with market leaders. Currently, all smartphones use rectangular touch screens, making it

harder to differentiate between products (see The new three “Cs” – commoditisation, concentration and

cost, 6 December 2012, and Lots of new products, little differentiation. Commoditisation accelerating,

14 January 2013). And with lower entry barriers leading to fierce price competition, sentiment has turned

gloomy as fears about lower profitability grow. Flexible display should help change that.

OLED gives established players an edge. Other than larger screen size and better resolution, there is

little room for improvement in flat display panel, which is based on light-emitting diode (LED)

technology. Top Korean LCD makers have been trying to breathe life into the industry but penetration

levels for LCD TVs are already high. LCD can’t be used in flexible display, which needs self-light

emitting material, such as OLED. Korean companies have led the development of OLED, which is

already being used in some smartphones and TVs. OLED’s faster response time and outstanding colour

definition have given the early entrants an edge as its use in high-end products also generates a margin

premium. OLED is the first step to making the commercialisation of flexible display a reality.

The challenges: 1) Customer satisfaction and good profit margins are the incentives driving the

commercialisation of flexible display. Heavy investments have already been made in LCD facilities,

which will have to be converted to produce flexible display. 2) A substitute for glass: most displays use

glass as it offers better resistance to heat, gas and moisture, and is more transparent than other materials;

but it is not flexible, so new plastic materials are needed. 3) Flexible display products need to show that

they can offer consumers added value. It remains to be seen how much of a premium companies will be

able to charge for these products. The consumer will be the judge of that. What can we expect? We think flexible display will be fully commercialised in 2014, but some products

based on existing technology may be available much earlier. The first thin smartphones and tablet PCs

using plastic substrates could be in stores in just a couple of months, but how much added value these

prototypes will offer consumers remains to be seen. We expect competition to start to hot up in 3Q13

after the release of smartphones with curved screens made of both plastic substrate and thin glass.

Curved design smartphone concept Curved design smartphone concept

Source: HSBC Source: HSBC

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=cwRA7NEd6M&n=352940.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=cwRA7NEd6M&n=352940.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=37X33a3FPX&n=356138.PDF

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LGE and SEC, which have vied with each other since the launch of OLED TV in January 2012, should

also compete fiercely in the flexible display smartphone market. In 2H13, SEC is likely to start offering

flexible display in its Galaxy Note 3 and LG Electronics in its Optimus G2 models, with possible volumes

of 10-15m and 5-10m, respectively. This would mean that by the end of the year flexible display could

represent 5% of the global smartphone market and 15% of high-end smartphones in 2H13. These models

are all high end, so the impact on earnings will be visible at an early stage. The first models will still use

glass in the outer layer of the curved screen, so won’t be completely flexible. However, by 2014 plastic

film will be available and the new products will represent a revolutionary change in the smartphone,

notebook and tablet industry.

Flexible display market forecasts Samsung’s OLED sales and OPM forecasts

0

2,000

4,000

6,000

8,000

10,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

LCD OLED E-ink Others(USDmil)

0

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013e 2014e

0%

5%

10%

15%

20%

25%

OLED rev enue (USDmil) OPM (RHS)

Source: Display Search, HSBC estimates Source: HSBC estimates

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Market prospects. We expect two important technological steps to be taken next year. First, an

evaporation process on top of plastic substrates will simplify the manufacturing process, leading to mass

production. We also expect transparent plastic to replace the frontal glass of curved screens. This will

broaden the scope of flexible display’s applications from pilot products, such as two-inch watches and

five-inch curved screens, to commercial 5-8 inch tablets and 13-15 inch notebooks. When this happens,

the size of the flexible display market size will increase substantially.

Given the scale and pace at which Samsung Display is converting some of its OLED facilities to flexible

lines, we estimate the market could be worth USD6bn by 2015. Much will depend on how fast new

materials and processes can be developed. While demand for prototype flexible display products, such as

watches and small curved screen is likely to be limited, we expect the market to start taking off when SEC

and LGE launch flexible display Galaxy Note 3 and Optimus G smartphones later this year.

Bendable display conceptual picture Bendable display conceptual picture


Development of OLED display vs. flexible display

2011 2012 2013 2014 2015 2016

OLED TV Flex ible display

① Technological

improv ement

② Introduction of

prototy pe through

pilot line

③ Penetration of

new play ers

④ Mass production

for OLED TV

①Technological

improv ement

② Introduction

of prototy pe

③Penetration of

new play ers


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The winners. We believe vertical integration is essential to fully commercialise flexible display for the

following reasons: 1) Although individual panel and materials companies are capable of solving

technological issues, the supply chain needs to be tested by the rigours of mass production; 2) We think

flexibility on pricing throughout the supply chain is also essential, especially in the early stages. TV set

makers have a “40% premium rule” for TV products but set prices lower when they launched LED and

ultra-high definition TV. They will probably have to adopt the same tactics for flexible display as

customers assess these new products. 3) A whole range of new components will be needed to meet the

requirements of flexible display (for example, a completely new shaped battery will have to be designed).

Korean handset makers that stand to benefit most at first as they have an opportunity to grow their market

share on the back of these new and highly differentiated flexible display products. It’s certainly a

substantial opportunity for LGE, which is experiencing a slump in its smartphone business. The

company’s market share is only 5%, but we believe this can rise to 7-8% in 2014. Samsung Electronics,

the leader in the smartphone handset market, can use flexible display to further strengthen its position.

We believe these two companies have a head start on their global handset rivals because they already a

vertically integrated supply chain in place. For example, we think flexible display will be difficult to

commercialise for Apple, given the large size of its orders and a lack of capacity in the industry.

Meanwhile, it may take Nokia and HTC some time to introduce flexible display products as organising

the supply chain is likely to be a lengthy process.

We believe LG Innotek (LGI) will be one the biggest indirect beneficiaries of the flexible display trend.

For example, if LGE’s handset business improves, LGI will supply it with most of the handset

Impact from flexible display

Food chain Name Impact Description

Handset and panel

Samsung Electronics

Handsets account for 51% and 64% of sales and operating profit in 2013e, respectively

Flexible display could help to sustain its dominance in the high-end smartphone segment

Samsung Display

OLED panels account for 6.8% and 9.1% of sales and operating profit in 2013e, respectively

Substantial potential to become a major flexible display maker as its AMOLED line could be converted to flexible display when materials are ready for mass production

Handset makers

LG Electronics Handsets account for 23% and 30% of sales and operating profit in 2013e, respectively

Flexible display could be a key differentiating factor in high-end smartphones and help to improve ASP and margin. Revise up 2013e handset margin assumption from 1% to 3%

Materials LG Chem Plastic substrate and Li-Polymer battery take <1% and 6% of total sales in 2013e

Although the company is a key player in making flexible display feasible, the contribution to earnings is limited

Cheil Industries Electronics Chemical Material (ECM)business accounts for 29% of 2013e sales

OLED business drives ECM division growth as it expects to take 24% of ECM revenue in 4Q15e, up from nothing in 4Q12

Duksan Himetal

OLED materials account for 71% of 2013e sales

Already a main OLED material supplier for Samsung Display, limited upside from flexible display transition

Component LG Innotek Mobile component business accounts for 60% of 2013e sales

Once LGE’s smartphone business turns around, it is likely to benefit from the mobile component business with LGE

SEMCO c50% of sales is from Samsung Electronics

Already a major component supplier to Samsung Electronics, the incremental benefit from flexible display could be limited

Panel LG Display G6 LTPS fab is to be converted to flexible OLED, it accounts for 6% of total output capacity

Although the company will likely play an important role in commercialising flexible display, expect insignificant contribution to earnings

Equipment SFA 57% of 2013e sales is related to OLED manufacturing equipment (back-end and logistics)

Additional small panel equipment orders from Samsung Display during 2-3Q13e, given that it has to switch or extend capacity for flexible AMOLED. Galaxy Note 3 will mostly likely adopt flexible OLED (unbreakable)


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components – touch screen, PCB, and camera modules. LGI also holds the key to developing the required

flexible components (e.g. flexible PCB) when curved design is introduced. This will strengthen the

relationship between LGI and LGE. What’s more, LGI is developing a transparent electrode, essential for

transparent display in the longer term. We also believe Cheil Industries will have the largest upside risk in

the mid to long term as the company can co-operate with Samsung Display to develop core technologies

required for flexible display. This is Cheil’s differentiating factor and is expected to drive revenue growth

at its electronic material division.

It’s also good news for equipment makers. Starting in 3Q13, Samsung Display and LG Display are

expected to expand capacity by converting existing LCD fabs to plastic OLED to maximise investment

efficiency. As a result, SFA, Samsung Display’s equipment makers, is expected to benefit.

Our preferred stocks among handset makers are Samsung Electronics and LG Electronics, while we

prefer Cheil Industries, LG Innotek, and SFA among component, materials and equipment providers. We

upgrade Cheil Industries and SFA to OW from N and Duksan Himetal to N(V) from UW(V). We remain

OW on Samsung Electronics (an Asia Super 10 and GEMs Super 15 portfolio stock) and OW (remove

the volatility indicator (V)) on LG Electronics and LG Innotek.

Summary of ratings and target price changes

LG Electronics Cheil Industries LG Innotek SFA Samsung Electronics

LG Display LG Chem Duksan Himetal

Stock Code 066570 KS 001300 KS 011070 KS 056190 KS 005930 KS 034220 KS 051910 KS 077360 KSMarket Cap (KRWbn) 13,042.7 4,415.3 1,567.3 1,086.2 221,980.1 11,181.7 18,257.7 806.8Rating Reiterate OW Upgrade to OW

from N Reiterate OW Upgrade to OW

from NReiterate OW Reiterate OW(V) Reiterate OW(V) Upgrade to N(V)

from UW(V)Target Price (KRW) 116,000 108,000 108,000 75,000 2,000,000 51,500 365,000 31,700Previous TP (KRW) 104,000 98,000 108,000 56,000 2,000,000 51,500 365,000 17,500Current Price (KRW) 80,000 92,500 85,700 62,400 1,521,000 31,150 251,000 26,850Diff to TP 45.0% 16.8% 26.0% 20.2% 31.5% 65.3% 45.4% 18.1%PE 2012a 215.7x 22.4x -69.1x 14.9x 9.6x 48.5x 11.8x 16.1x 2013e 11.4x 14.3x 36.8x 11.1x 7.1x 5.4x 9.2x 14.2xPB 2012a 1.2x 1.4x 1.4x 2.9x 1.9x 1.1x 1.5x 3.7x 2013e 1.1x 1.3x 1.3x 2.4x 1.5x 0.9x 1.3x 2.9xROE 2012a 0.5% 6.4% -1.9% 19.6% 22.3% 2.3% 14.1% 26.1% 2013e 9.7% 9.6% 3.6% 23.3% 23.9% 18.8% 15.9% 23.1%EPS 2012a 371 4,124 -1,240 4,175 158,228 642 21,281 1,665 2013e 7,044 6,458 2,330 5,611 214,645 5,746 27,138 1,891BVPS 2012a 69,166 64,329 62,895 21,838 806,096 28,619 163,890 7,253 2013e 75,959 70,041 65,226 26,249 1,028,740 34,438 185,941 9,144

Source: Bloomberg, HSBC estimates; Priced as of 3 April 2013

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OLED/Flexible display food chain

Category Component Name Description Suppliers

TFT Glass Mother glass Base glass to apply TFT circuit NEG (NEG US)

Corning (GLW US) Plastic substrate Polyimide film Plastic film to apply on TFT glass LG Chem (051910 KS)

Cheil Industries (001300 KS) Nippon Steel Chemical Corp (5401 JP)

Circuit Surface mount device

Flexible printed circuit board Flexible plastic board with complex of circuit ACT (unlisted)

MLCC Multi-layer ceramic condenser Multiple layer of ceramic condenser to control power between chip on the circuit board

SEMCO (009150 KS) Murata (6981 JP)

OLED Common Layer HIL, HTL, ETL, EIL Layer to transfer electrons UDC (PANL US) Idemitsu Kosan (5019 JP) LG Chem (051910 KS) Cheil Industries (001300 KS) Doosan Electronics (unlisted)

Emission Materials Fluorescence materials, Phosphorescence materials

Self-illuminating material when electric power is applied

UDC (PANL US) Idemitsu Kosan (5019 JP) Kodak (unlisted)

Evaporation RGB LTPS Equipment to use low temperature laser base evaporation process

Tokki (7751 JP) AP System (054620 KS) ULVAC (6728 JP)

White OLED Sputtering equipment AVACO (083930 KS) Encapsulation Sealant Paste to stick upper glass and bottom glass in TFT Three Bond

LG Chem (051910 KS) Cheil Industries (001300 KS)

Frit seal Glass pounder to be used as adhesive paste Yamato (9064 JP) Corning (GLW US)

Face seal Apply adhesive seal in order to bind upper and bottom glass

Three Bond (unlisted) AVACO (083930 KS) LIG ADP (079950 KS)

PECVD chamber Vacuum chamber for face seal process Jusung Eng(036930 KS)

Source: HSBC

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Introduction to flexible display 11 Why flexible display is important 11

Flexible display: market prospects 13

Key success factors 16 1: Re-using LCD fabs 16

2: A substitute for glass 16

3: Plastic to replace frontal glass 18

4: Vertical integration 18

What to expect near term 20

Who benefits from flexible display? 24

Implications for non-Korean players 26

Technology overview 29

Technology overview 30 Introduction 30

Patent trends 36

Company section 39 LG Electronics (066570 KS) 40

Cheil Industries (001300 KS) 43

LG Innotek (011070 KS) 46

Samsung Electronics (005930 KS) 48

LG Display (034220 KS) 50

LG Chem (051910 KS) 52

SFA (056190 KS) 54

Duksan Himetal (077360 KS) 56

Disclosure appendix 69

Disclaimer 72

Contents

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Why flexible display is important

The era of mobile devices began in the second

half of the 1990s. As cell phones became widely

used, the market for mobile equipment grew at a

rapid rate. The main area of competition was in

making devices smaller and improving call

quality. Once the ideal size and call quality was

achieved it became harder to differentiate the

products in the early 2000s.

As a result, companies started competing to

develop simple wireless telecom devices and

added value for customers by offering colour

display, MP3 and camera functions. The

landscape of the market changed quickly as GSM

and CDMA combined to form WCDMA or 3G.

The market became more operator-driven as

telecom companies used a variety of marketing

methods, including providing customers with

subsidies and two-year contracts.

By the second half of 2005, most phones had

similar design and functions (camera, colour

display, 3G) and with differentiation becoming

more difficult, commoditisation started and

competitors focused on lowering production costs.

Introduction to flexible display

Flexible display will improve the user experience for mobile

devices by increasing design options

Materials, evaporation and encapsulation are the key to mass

production

Korean companies are leading the way in technological advances

Brian Sohn* AnalystThe Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 [email protected]

Ricky Seo* AnalystThe Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 [email protected]

Jerry Tsai* AnalystHSBC Securities (Taiwan) Corporation Limited +8862 8725 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

The history of the handset industry

Time frame Technology Key application

1990s 2G Voice quality, ring tone, MP3, slimmer form factor 2000 Colour screen, dual display, longer battery life2002-03 Active matrix colour display, number portability, CDMA 2004-05 3G 3G, operator-driven subsidy programme, data download speed2005-08 Cost competitiveness in commoditised market, design differentiation2008-10 Smartphone, application store, eco-system2010-11 Android smartphone eco-system, multi-core application processor2012-13 LTE LTE, size and resolution of display2013e Design differentiation (flexible display)


mailto:[email protected]

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After 2005, competitors turned their attention to

making cell phones essential in everyday life. As a

result, products with differentiated form factors,

such as casing, keypad and slim form factor, were

designed. The market for high-end phones started

to take off. Consumer interest in design was an

opportunity for Samsung and LG to strengthen

their positions in a market dominated by cost-

efficient companies, such as Nokia.

Then Apple’s iPhone arrived, providing completely

new experiences, such as entertainment features

and a highly distinctive design and customisation

options. The handset market went through rapid

change as Wi-Fi internet revolutionised the data

side of the business. Apple was the dominant force

until the advent of Android-based phones.

Differentiation has become even harder with most

companies using full HD panels, a standardised

quad-core application process, touch screen and

the Android operating system. In a commoditised

market, design is the high-end market’s main

differentiating point. We believe flexible display

will take this to a new level as the new technology

will see hand-held digital devices become lighter,

thinner and more convenient for users.

Display technology is advancing in four

directions: 1) improving the sense of reality

through 3D TV, 2) adopting additional functions,

such as touch and internet connectivity,

3) enabling greater mobility via lighter and

thinner products, such as in smartphones and

tablet PCs, and 4) expanding adaptability for

displays in homes and industries via thinner,

larger products, such as UHD TV.

Until recently, progress on flexible display

technology has been slow. The main reason is that

companies have already made heavy investments

in LCD, the technology used in flat display

panels. Flexible display requires a completely

Display development

Projection 3-D

Glassless 3-DTransparent

3D Glass

Touch Screen

CommunicationLighting

Bendable

Flexible

LCD Monitor

FHD TV, LCD, PDP

OLED TV

Digital signage

Realism

Multifunction

Lightening & Super-thinning

Thinning & Enlarging

2003 2008 2013 2020

Convenience

GlassThin-Large

GlassPlastic

High

Perform

ance

Projection 3-D

Glassless 3-DTransparent

3D Glass

Touch Screen

CommunicationLighting

Bendable

Flexible

LCD Monitor

FHD TV, LCD, PDP

OLED TV

Digital signage

Realism

Multifunction

Lightening & Super-thinning

Thinning & Enlarging

2003 2008 2013 2020

Convenience

GlassThin-Large

GlassPlastic

High

Perform

ance

Source: KEIT, HSBC

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different set of technologies, the first of which is

OLED display, which has a faster response time

and outstanding colour definition.

OLED is the base technology for flexible display

because of its self-illuminating properties that

allows greater design flexibility. Samsung Display

has made rapid progress in OLED technology and

is already using it its smartphones. LG Display

recently commercialised large TV displays using

this technology.

Flexible display uses plates that are pliable and as

thin as paper. They can be bent without being

damaged, making it possible to create products

that are thin, durable and flexible. The potential of

this technology is substantial as the ultimate goal

will be cheap digital devices that can be rolled up

like paper.

In the early stages, flexible display will be used in

small displays, such as watches, which can be

mass produced. Then, depending on how the

technology matures, it will be applied in

smartphones and tablets.

Flexible display: market prospects

We expect the flexible display market to develop

along similar lines as the OLED TV market. As

we explained in our report LG poised to take

lead in AMOLED TVs, January 2012, it is a four-

step process.

Establishing a stable base for the technology

(there was an early dispute between LG and

Samsung over different types of OLED)

Commercialisation based on pilot production

lines and market reaction

Characteristics of flexible display

Information

Technology Thin and light; change of shape and production possible according to need, and unbreakable Variety of organic materials, such as semiconductors and insulators. Low production cost as manufacturing at room temperature and atmospheric pressure is possibleBusiness Instead of simply substituting existing display industry, it has the potential to create market and new application areas Future value-oriented technology. Technology makes low-cost start-up costs possible Technology that is not dominated by any country or company

Source: HSBC

Development of OLED display vs. flexible display

2011 2012 2013 2014 2015 2016

OLED TV Flex ible display

① Technological

improv ement

② Introduction of

prototy pe through

pilot line

③ Penetration of

new play ers

④ Mass production

for OLED TV

①Technological

improv ement

② Introduction

of prototy pe

③Penetration of

new play ers


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Entry of new players, including Japanese and

Taiwanese companies

Capex investment by LG and Samsung to

enable mass production

The commercialisation of flexible display is

expected to proceed in a similar manner. We think

that prototype products will be introduced by

Samsung and LG and the start of mass production

will be dictated by a variety of factors, including

technology, market response and cost. Samsung

Display and LG Display are both expected to start

small-scale flexible display manufacturing in the

next few months.

The debate about which is the best OLED

technology has yet to be resolved. When large-

size OLED panel production started in early 2012

the two companies adopted different strategies

when they set up pilot production lines.

LG Display plans to invest KRW700 billion in a

G8 White OLED facility, while Samsung Display

appears to have a two-track strategy, developing

both White OLED and RGB technology for high-

end products. For more details on OLED

technology, please see LG poised to take lead in

AMOLED TVs, 6 January 2012.

We believe LG Display is contemplating converting

a G6 LTPS line, which currently makes high-

resolution mobile display, to produce plastic display.

Samsung Display has already obtained two OLED

lines and may convert more capacity; it is also

working on a hybrid line that can produce both glass

and plastic OLED. How quickly new lines can be

adapted or expanded will depend how soon the

necessary materials can be developed.

Large-scale production in unlikely in 2H13 as not

all the technical systems are in place (e.g., it is not

yet possible to apply the evaporation process to

plastic substrate). However, we do expect a pilot

facility to produce prototype 2” watch and 5”

curved displays.

Things are moving fast and Samsung and LG are

likely to be able to apply flexible display

technology to their respective Galaxy Note 3 and

Optimus G2 models before the end of the year.

We expect demand in 2H13 to be about 25m and

take up about 5% of the smartphone market. If our

assumptions are correct, flexible display models

could capture 15% of the high-end smartphone

market by the end of the year.

The impact on profitability will depend on

generating decent yield on OLED, which may not

happen until next year at the earliest. At the

moment, because of the additional technical steps

required, production costs are higher than for

LCD. We expect them to fall considerably once

Flexible display market forecasts Samsung’s OLED sales and OPM forecast

0

2,000

4,000

6,000

8,000

10,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

LCD OLED E-ink Others(USDmil)

0

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013e 2014e

0%

5%

10%

15%

20%

25%

OLED rev enue (USDmil) OPM (RHS)

Source: Display Search, HSBC estimates Source: Company data, HSBC estimate

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the evaporation process can be applied to plastic

substrate. This should happen next year, along

with other technical breakthroughs, such as the

development of transparent plastic that can

replace the front glass.

Once these are in place, flexible display will be

expanded from watches and small screens to 5-8

inch tablets and 13-15 inch notebooks. The

market should then really start to take off and we

forecast it will be worth up to USD6bn by 2015

and USD8bn in 2018.

However, it remains to be seen how much of a

premium companies will be able to charge for these

products. The consumer will be the judge of that.

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The commercialisation of flexible display will

depend on technology, mass production and cost.

We identify four key challenges.

1: Re-using LCD fabs

LCD panel businesses already make a wide range

IT products and TVs. Making sizeable new

investments could be a burden as profitability has

been declining due to oversupply. It will make

more sense for these companies to convert

existing LCD business lines to OLED to produce

flexible display.

Samsung Display and LG Display have already

made substantial investments in OLED, giving them

a head start on their Japanese and Taiwanese

competitors in the flexible display market. We

expect the LTPS-based RGB OLED technology –

already being used by Samsung Display in its high-

definition OLED small-size panel production – to

become the industry standard for flexible display.

2: A substitute for glass

Glass is currently used in the upper and lower

layers of LCD and OLED panels. The reason is

simple – it is flat, transparent and resistant to heat

and moisture. However, glass has low levels of

elasticity, making is unsuitable for flexible display.

Key success factors

Companies must convert existing LCD fabs to flexible display for

investment efficiency

Plastic material is needed to replace glass

Vertical integration – from material providers to handset

manufacturers – is important

Comparison of technologies involved in flexible display production

Process Technology Advantages Disadvantages

Backplane a-Si Cost competitiveness is high because most of existing LCD equipment can be re-used

Low mobility

Oxide More advanced than a-Si with the better mobility suitable for OLED, applicable in large-sized OLED panels and high-resolution panels

Applicability is uncertain due to low stability and low yield for mass-production

LTPS Most suitable for flexible display: 1) Sufficient mobility is feasible, 2) plastic can be easily utilised as it can be manufactured in a low-temperature environment

Equipment is expensive

Evaporation / Deposition

LED Backlight

Can’t be applied in flexible display

White OLED Can be applied in large-sized panel production Has limitations to be used in flexible display because it needs other layers, such as colour filters

RGB OLED Safest technology depositioning RGB colour in each cell; colour implementation is excellent on flexible surface

Source: HSBC

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Next-generation plastic looks like the best

substitute. Currently, it can be used in high-

performance thin transistors as its thermal

expansion coefficient is low. However, this is

expensive and not efficient due to its opaqueness.

However, on the plus side a wide range of

materials can be applied in plastic. Research is

being done on materials with high thermal

resistance, such as PET (Polyethylene

Terephthalate), PC (Polycarbonate), PES

(Polyether Sulfone), PI (Polyimide) and how

plastic boards can withstand the process of

thinning (see table on the next page).

We believe polyimide plastic film is most

compatible with flexible display since polyimide

provides the highest thermal resistance. Polyimide

is a transparent polymer material that has a

relatively low degree of crystallisation and an

amorphous structure. Moreover, it is an excellent

mechanical material and provides outstanding

heat and chemical resistance, electric

characteristics and stable size based on a rigid

chain structure. It is widely used in auto, aviation,

aerospace and flexible circuit boards.

Despite its advantages in being applicable in

insulating material, flexible film, and aerospace

aviation, polyimide is partially used in FPCB

(flexible printed circuit board) and costly displays

within aeroplanes due to its unique yellow colour;

efforts are being made to lower this yellow colour

and raise transparency. The result of this work,

polymer, is likely to be in use in 2014.

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3: Plastic to replace frontal glass

Frontal glass needs to be more scratch proof than

the lower glass panel. A plastic substitute would

need to have the same hardness as glass, but this

technology is still at an early stage. Some

Japanese companies are making progress in this

area, but the cost is much higher than tempered

glass, making commercialisation difficult.

4: Vertical integration

Some Japanese companies have already

developed technologies for the commercialisation

of flexible display and have even introduced some

prototypes. However, they are being produced by

a single company, so there is a lack of

competition in cost and mass productivity.

While a number of technological issues still need

to be resolved by individual material and panel

companies, we believe that vertical integration

among material developers, components and

panel producers, and handset makers is essential

for the commercial success of flexible display.

Given the newness and complexity of the

technology, co-operation among the companies in

the supply chain, especially in the early stages of

mass production, will be important.

We think flexibility on pricing is also essential.

Manufacturer info and pros and cons of plastic substrates

Pros Cons Manufacturer

PET (polyethylene terephthalate)

Strong UV resistance Excellent chemical-resistant Low moisture hygroscopicity (over 24h, 0.1%)

MD vs. TD direction optical anisotropy Weak temperature safety Gets murky due to partial recrystallisation after thermal process High CTE (20~80x10-6/K) Production room temperature (~130C)

General Atomics (USA) Mitsubishi Chemical (Japan)

PEN (polyethylene naphthalate )

Chemical-resistant Low CTE (~20x10-6/K) Low cost

Optical anisotropyWeak heat resistance Production room temperature (~130C)

Dupont Teijin Film (Japan)

PC (polycarbonate)

Good optical characteristic Good mechanical characteristic Easy to purchase

Weak chemical-resistanceHigh CTE (60~70x10-6/K) Low production room temperature (~150C) Weak UV resistance

Dupont Teijin Film (Japan) GE (USA) Mitsubishi (Japan)

PES (polyether sulfone)

UV resistance Easy to purchase

High moisture hygroscopicity (over 24h. 0.4~1.0%)High CTE (55x10-6/K) High cost Weak chemical-resistance Production room temperature (~180C)

i-Component (Korea) Sumitomo Bakelite (Japan)

PI (polyimide) Excellent chemical resistanceProduction room temperature (>200C) UV resistance Easy to purchase

High moisture hygroscopicity (over 24. 0.2~2.9%)CTE (50~60x10-6/K) Coloured board (dark yellow) Low transparency

DuPont (USA) Mitsubishi Gas (Japan) LG Chem (Korea) Cheil Industries (Korea)

AryLite Excellent heat-resistance Production room temperature (~200 C) Good optical characteristic Linear CTE change characteristic

Weak UV resistanceHigh (50_60x10-6/K)

Ferrania Image System (Italy)

Source: MOTIE, HSBC estimates

Conditions of plastic substrates vs. physical characters of glass

Plastic substrate

Glass

Glass transition temperature >250˚C Melting point of 1600˚C Heat deflection temperature 20 ppm/C

Gas transmittance <1,000/m2 day O Yellow index <5 O Flexibility O X

Source: MOTIE, HSBC

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Handset makers have a “40% premium rule” for

TV products, but set prices lower when they

launched LED and ultra-high definition TVs.

They will probably have to adopt the same tactics

for flexible display as customers assess these new

product lines.

Components will also have to change to meet the

design requirements of flexible display. For

example, different shaped batteries are being

developed to fit behind curved screens.

All in all, we believe vertically integrated

companies including the Samsung Group

(Samsung Electronics, Samsung Display, Cheil

Industries, SEMCO, Samsung SDI) and LG

Group (LG Electronics, LG Chem, LG Display,

and LG Innotek) are better placed to develop

flexible display than peers in Taiwan and Japan.

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The OLED technology needed to make prototype

flexible display products has already been

developed by Samsung Display and LG Display.

However, given it will be a gradual process – this

is how we see events unfolding.

Phase 1: Unbreakable display for 2Q13

Technology using LTPS, RGB OLED, opaque

PI (Polyimide) substrate LTPS backplane and RGB OLED technology are

suitable for producing flexible products. Many

LCD businesses already produce IT equipment,

such as smartphones, tablet PCs and high-

resolution displays. This will help reduce costs.

PI is already used widely in electronic materials,

so the basic structure of flexible display can be

made by coating the OLED luminous layer on top

of the polyimide-coated lower glass. After this

process is complete, a plastic OLED structure can

be achieved by removing the lower glass.

Although it is not perfectly transparent, the lower

glass will have a plastic finish.

Removing the lower glass can make the display

much slimmer, lighter and durable. However, it

will not be completely unbreakable as the upper

glass would still be used. A thinner display will

mean thinner smartphones and tablets.

We expect further progress to be made on using

polyimide film technology in flexible display

production in the next few months.

What to expect near term

Unbreakable backplane with curved design could be a killer

application in 2H13

Bendable tablets to boost smartphone/notebook demand in 2014

Fully transparent display may take three years

Structure of OLED and unbreakable display

0.7 mm thick glass substrate

5 um polyimide

SiN passivationlayer

TFT ITO Pixel

Back Channel Etch a-Si TFT made on a glass/polyimide

substrate

Lower glassLower glass

plastic display

Glass substrate with spin coated polyimide and SiN

passivation layer.

Upper glassUpper glass

0.7 mm thick glass substrate

5 um polyimide

SiN passivationlayer

TFT ITO Pixel

Back Channel Etch a-Si TFT made on a glass/polyimide

substrate

Lower glassLower glass

plastic display

Glass substrate with spin coated polyimide and SiN

passivation layer.

Upper glassUpper glassUpper glass

Source: HSBC

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Phase 2: Unbreakable backplane with curved design in 3Q13

Technology based on LTPS, RGB OLED, PI

substrate, and thin glass

Curved design is one of the great attractions of

flexible display. We expect the first products to be

small two-inch displays, such as watches and car

instruments, where resolution quality is less

demanding. Larger curved displays will require an

unbreakable backplane and will involve the same

technology as described in phase one.

Phase 3: Bendable, true plastic display in 2014

Technology based on LTPS, RGB OLED, and

translucent PI substrate Once polyimide enters mass production, we

expect flexible display technology to develop

rapidly. An improved polyimide material is likely

to be introduced in 2014, which will lead to the

commercialisation of products with displays of

over five inches, such as tablets and notebooks.

Bendable display requires the following

procedures: 1) coat polyimide film to the upper

and lower glass panels, 2) OLED manufacturing

procedure to build luminous layer; and 3) separate

upper and lower glass panes. Once bendable

display is commercialised, we expect to see

products that can be bent to an angle of less than

90 degrees.

Irregular type Li-polymer battery Stepped Li-polymer battery

Curved display

Irregular type Li-polymer battery

Curved display

Irregular type Li-polymer battery

Stepped Li-polymer battery

Curved display

Stepped Li-polymer battery

Curved display


Curved design smartphone design Curved design smartphone design


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Phase 4: Transparent display in 2015

Technology based on LTPS, RGB OLED, and

transparent PI substrate We believe transparent polyimide will be available

from 2014, but it may take at least a year to enter

commercial production. A lot of technological

challenges remain, including how to make

transparent batteries. We think the first products to

be partially transparent, as progress will depend on

the response from the public. How much demand

will there be for transparent devices?

Phase 5: True flexible display

Current technology does not allow for truly

flexible display products that are totally

transparent and can be rolled up. How quickly the

technology develops remains to be seen – for

example, bendable batteries are needed – and how

much added value will be created for consumers

is also unknown at this stage.

Bendable display conceptual picture Bendable display conceptual picture


Curved design smartphone design Transparent display conceptual picture


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Transparent display concept Transparent display concept


Comparison of TFT backplanes

a-Si Oxide LTPS

Glass Substrate

OvercoatSource

ElectrodeDrain

Electrode

Drive Electrode

a-Si (N+)a-Si

Gate Insulator

Gate Electrode

Glass Substrate

OvercoatSource

ElectrodeDrain

Electrode

Drive Electrode

a-Si (N+)a-Si

Gate Insulator

Gate Electrode

Glass Substrate

a-IGZO

Etching Stopper

Glass Substrate

a-IGZO

Etching Stopper

Glass Substrate

p-Sip-Si (N+)

Glass Substrate

p-Sip-Si (N+)

Mobility Fair Average Very good Scalability G3~G10 G8 or larger Up to G8 Availability Very good Average Good Advantages Low cost Scalability, Good uniformity Superior mobility, stability

Good track record Weakness Low mobility Low cost Low scalability


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We believe flexible display will have a positive

impact on the overall display industry because it

will create a new line of business. We expect new

product shapes and designs to revitalise the slowing

notebook market. Smart watches, previously

considered a niche market, should also benefit.

We are convinced that a vertically integrated

industry structure that includes materials, panels and

handsets is essential to commercialise flexible

display. This involves:

Re-using existing LCD equipment

Co-operation between handset makers and

material providers to obtain a decent yield

from mass production

Set makers fully utilising flexible display to

maximise added value and secure sales capacity

Samsung Electronics and LG Electronics have the

technological advantages to lead industry as both

have already commercialised OLED panels that

are generating stable yields.

We believe it’s the handset makers that stand to

benefit most at first as they have an opportunity to

grow their market share on the back of these new

and highly differentiated flexible display

products. It’s certainly a substantial opportunity

for LGE, which is experiencing a slump in its

smartphone business. The company’s market

share is only 5%, but we believe this can rise to 7-

8% in 2014. Samsung Electronics, the leader in

the smartphone handset market, can use flexible

display to further strengthen its position.

We believe LG Innotek (LGI) will be one the

biggest indirect beneficiaries of the flexible display

trend. For example, if LGE’s handset business

improves, LGI will supply most of handset

components – touch screen, PCB, and camera

modules – to LGE. LGI also holds the key to

developing the required flexible components (e.g.,

flexible PCB) when curved design is introduced.

This will strengthen the relationship between LGI

and LGE. Moreover, LGI is focusing on

developing a transparent electrode, essential for

transparent display in the longer term.

We also believe Cheil Industries will have the

largest upside risk in the mid to long term as the

company can co-operate with Samsung Display to

Who benefits fromflexible display?

LGE and SEC are expected to benefit the most

Their major suppliers, LG Innotek and Cheil Industries, are also

well positioned

SFA has an opportunity to benefit from converting and expanding

Samsung’s production lines

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develop core technologies required for flexible

display. This is Cheil’s differentiating factor and

is expected to drive revenue growth at its

electronic material division.

It’s also good news for equipment makers.

Starting in 3Q13, Samsung Display and LG

Display are expected to expand capacity by

converting existing LCD fab to plastic OLED in

order to maximise investment efficiency. As a

result, SFA, Samsung Display and related

equipment makers are expected to benefit.

Our preferred stocks among handset makers are

Samsung Electronics and LG Electronics, while

we prefer Cheil Industries, LG Innotek, and SFA

among component, materials and equipment

providers. We upgrade Cheil Industries and SFA

to OW from N and Duksan Himetal to N(V) from

UW(V). We remain OW on Samsung Electronics

(an Asia Super 10 and GEMs Super 15 portfolio

stock) and OW (remove the volatility (V)

indicator) on LG Electronics and LG Innotek.

HSBC estimate vs. Consensus

(KRWbn) _________ HSBCe __________ _______ Consensus ________ _______ % Difference _______

2013e 2014e 2013e 2014e 2013e 2014e

LG Electronics Sales 60,769 64,901 54,519 57,862 11.5% 12.2% OP 1,686 1,946 1,483 1,892 13.7% 2.9% OP margin 2.8% 3.0% 2.7% 3.3% 0.1%pt -0.3%pt LG Innotek Sales 5,939 6,598 6,015 6,588 -1.3% 0.2% OP 157 250 128 228 22.0% 9.5% OP margin 2.6% 3.8% 2.1% 3.5% 0.5%pt 0.3%pt Cheil Industries Sales 6,788 7,368 6,789 7,521 0.0% -2.0% OP 415 501 422 512 -1.6% -2.2% OP margin 6.1% 6.8% 6.2% 6.8% -0.1%pt 0.0%pt Samsung Electronics Sales 225,668 245,350 238,686 264,048 -5.5% -7.1% OP 39,182 41,939 39,388 43,038 -0.5% -2.6% OP margin 17.4% 17.1% 16.5% 16.3% 0.9%pt 0.8%pt LG Display Sales 33,560 34,567 31,349 33,274 7.1% 3.9% OP 2,362 2,755 1,384 1,553 70.7% 77.4% OP margin 7.0% 8.0% 4.4% 4.7% 2.6%pt 3.3%pt LG Chem Sales 25,243 28,347 24,791 26,611 1.8% 6.5% OP 2,693 3,213 2,299 2,686 17.1% 19.6% OP margin 10.7% 11.3% 9.3% 10.1% 1.4%pt 1.2%pt SFA Sales 771 979 694 842 11.1% 16.3% OP 109 137 93 116 17.9% 17.3% OP margin 14.1% 14.0% 13.3% 13.8% 0.8%pt 0.1%pt Duksan Himetal Sales 189 251 171 213 10.9% 17.5% OP 47 66 48 61 -2.2% 7.9% OP margin 25.0% 26.2% 28.3% 28.6% -3.4%pt -2.3%pt

Source: Bloomberg , HSBC estimate

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Flexible display uses OLED as its basic

technology, giving companies like Samsung and

LG, which have already commercialised the

process, an early-mover advantage. They probably

have a 2-3 year head start. Taiwanese and

Japanese panel makers believe that OLED

technology is not mature yet, so they have not

invested much in mass production, although they

are investing in R&D.

Two Taiwan companies, AU Optronics and

Innolux, are actually further advanced in one area

of flexible display technology than the Korean

companies – electronic paper (EPD) – which is

commonly used in e-books. For example, they

have made excellent progress in terms of

production yield (see E Ink: Initiate OW(V): The

year of recovery, 18 March 2013).

Implications for non-Korean players

Samsung and LG should enjoy early-mover advantage because of

their advanced technology in flexible display

Taiwan players are already strong in electronic paper and waiting

for OLED technology to stabilise

Apple is behind at the moment, but should catch up by 2015

Comparison between flexible colour EPD and flexible OLED

Flexible colour EPD Flexible OLED

Advantages Similar to a piece of paper

Consumes electricity only when changing page Wide viewing angle Easy to mass produce with simple manufacturing processes

Self-light emitting -> No need of external light source Able to generate natural colour and image Fast reaction speed Wide viewing angle

Disadvantages Mirror reflection type -> requires external light source

Difficult to generate natural colour

Difficult to play movie due to slow reaction speed

High cost from organic EL

Requires high-end TFT

Difficult to mass produce due to complicated manufacturing processes


https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=AJkdgt6Ri6&n=363980.PDF

https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=AJkdgt6Ri6&n=363980.PDF

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The downside is that e-paper does not have self-

illuminating properties and must be viewed under

an external light source. It also uses a colour filter,

so it has limited ability to generate natural colours

and also has a fairly low rate of response, which is

not compatible with showing video clips.

This is why OLED is considered to be the solution

for the next generation of flexible display. Taiwan

panel makers already have a G3.5 pilot production

line to manufacture small-sized OLED panels, and

a conversion from LTPS to OLED line is being

seriously considered. In Japan, Panasonic and

Sony have already displayed ultra-high definition

OLED TV technology this year.

However, generally, non-Korean panel makers

appear reluctant to invest aggressively in OLED

or flexible technology as the start-up costs are

high. The technology will only become profitable

with strong demand for flexible design

smartphones or tablets. At the moment only small

displays are possible, so companies find it hard to

justify the investment needed to set up mass

production of OLED or flexible displays.

There is also the risk that with such a new

technology early entry could result in expensive

failure. It seems that panel makers may be waiting

for a good entry point after the Korean players

make the first move and build up the necessary

supply chain.

Meanwhile, in the US, Apple appears to be

interested and has filed a patent application for a

smartphone that uses flexible display. However,

Apple still has doubts about the ability of these

new products to combine natural-coloured images

and excellent clarity. This is the main reason

why Apple had not been aggressively pursuing

OLED technology.

Apple is considered to be more interested in

applying Retina display to iPhones and looking at

other options for iPads and MacBooks than

moving into something completely new. Apple

emphasises the importance of platform efficiency

in mass producing one innovative product rather

than going into a variety of product line-ups.

Therefore, it may be some time before Apple

commits a lot of resources to flexible display.

Apple’s “wrap-around” display

Source: USPTO

We think the market will take notice once Korean

companies such as Samsung and LG start to

introduce differentiated flexible design products.

As their technology improves, mass production will

kick in, expanding the supply chain for materials

and equipment by 2H 2014. In turn, with

economies of scale we expect production costs to

fall and the number of products to increase; we

believe this will be the catalysts for Taiwanese and

Japanese players to enter the market.

Korean companies are likely to benefit from being

able to introduce high-end products after each

technical improvement. Meanwhile, competition

will increase as products with many different form

factors come on the market as mass production

grows outside Korea.

Although the company has a great record of

innovation (e.g. sophisticated software, in-cell touch,

Retina display and aluminium casing), Apple may

find it increasingly difficult to differentiate its

products using existing technology. Apple is

expected to introduce flexible display in 2H 2014

when the technology platform has stabilised and

mass production improves. Given its outstanding

ability to meet customers’ needs, the company may

start to come up with innovative flexible display

products in 2015.

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Technology overview

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Introduction

The Korean display industry has become an

important driver of the semiconductor and IT sector.

Korea was the leading flat panel display exporter in

2011 (USD157bn), followed by China

(USD739bn) and Japan (USD8bn). We think

flexible display will help maintain this trend.

Technology trends

LCD vs. OLED

There’s a substantial amount of LCD capacity in

place that supports a wide range of commercial

digital manufacturing processes. OLED, which is

needed for flexible display, is much a newer

technology, but is likely to develop rapidly as

demand grows.

Electronic paper

Electronic paper, one of the earliest examples of

flexible display, is most commonly used in e-books.

Other technologies like QR-LPD (Quick Response-

Liquid Powder Display) and Cholesteric LCD are

being developed. The market for electronic paper is

rapidly expanding because of the popularity of e-

books; the product is also eco-friendly.

Market and R&D trends

Flexible display has the potential to create a large

new area of applications for the display industry.

After e-books, the pace at which the market

expands will depend on the development of the

technology. By 2018, we expect the flexible

display market to be worth about USD8.2bn.

Technology overview

Overview of display technology

Manufacturing process of flexible display

Patents in flexible display technology

TV market breakdown by technology

0

60

120

180

240

300

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e

CRT PDP LCD-HD LCD-FHD LED-LCD 3D-LED UHD OLED

PDP TV introduction

Analog to digital

(HD) conv ersion

Full HD introduction

LED introduction

3D TV introductionUD TV introduction

CRT PDP

LCD-HD

LCD-FHD

LED-LCD

3D-LED

(m units)

UHD

OLED TV introduction


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Main players

Samsung Display

Developed OLED based 4.1-inch flexible

display used for stainless steel substrate

2006: developed 5.6-inch Flexible LTPS TFT

AMOLED used by stainless steel substrate

2009: developed 6.5-inch Flexible Oxide TFT

AMOLED applying plastic PI

Successfully developed WVGA(800x480)

flexible AM OLED

LG Display

2009: developed 4.3-inch HVGA Flexible

AMOLED

2010: developed world’s largest 19-inch

bendable electronic paper

E Ink

Leading the electronic paper panel industry

and selected to supply display for Amazon’s

Kindle and Sony’s Librie

Developed new “full” flexible display and

display that can product flash standard of video

SiPix

The company develops e-paper panel

technology and has been acquired by

Taiwan’s AUO. It had developed micro-cup

like electronic paper based on the

electrophoresis method

The company produces products through the

roll-to-roll process

As flexible display gains traction, many countries

are increasing investment in R&D, including

Japan, Taiwan, the US and the EU.

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Manufacturing process

The manufacturing process of flexible display is

similar to that of OLED. For a display panel to be

bendable, it needs to be “self-luminant” without a

BLU (Back Light Unit).

The manufacturing processes for large and small

OLED displays are different. White OLED has

become the standard technology for large displays.

It makes mass production easier as it uses the same

colour filter as the existing LCD manufacturing

process. For small panels, RGB OLED technology

is generally used due to its proven resolution and

mass production yield.

There are three main processes in manufacturing

flexible or OLED display: 1) TFT backplane

manufacturing; 2) the evaporation process to build

an OLED material layer; and 3) the encapsulation

process to produce the display panel.

Process 1: TFT backplane manufacturing

process

To form TFT Backplane, it is important to

consider the molecule’s speed of movement for

each material. For the past versions of LCD

monitors and TVs, molecules forming each cell

were not required to electrically react fast because

the required speed of response and resolution

were low. Therefore, a-Si (amorphous silicon)

was picked as the most compatible material for

the backplane. However, to have high resolution

and fast response speed, an alternative material

was needed, such as Oxide or LTPS (Low

Temperature Poly Silicon). However, compared to

a-Si, they had a smaller user base and needed new

technologies, raising production cost significantly.

Despite having high cost, LTPS became widely

used and prices are rising thanks to a broader user

base (e.g. Samsung Galaxy smartphone and

Apple’s Retina display). As a result, LTPS is the

standard high-resolution technology.

Flexible display manufacturing process

Mother Glass Mother Glass

EvaporationPolyimide coating

LTPS TFT processing


Mother Glass

Mother Glass

Mother Glass

Mother Glass

Encapsulation

Cathode

Glass release Flexible display

Polyimide film

OLED materials

Adhesive film


EvaporationPolyimide coating

LTPS TFT processing


Mother Glass

Mother Glass

Mother Glass

Mother Glass

Encapsulation

Cathode

Glass release Flexible display

Polyimide film

OLED materials

Adhesive film

Source: HSBC

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Producing at a low temperature helps to improve

manufacturing productivity for flexible display

because: 1) it requires flexible materials, such as

plastic film; and 2) organic materials are not stable.

TFT manufacturing process has four steps:

1) abrasion process: clean and grind to smooth out

the rugged surface of the mother glass, specially

made for LCD panel; 2) photo process: put photo

mask on the back of cleaned mother glass and

then shoot a laser at it, so that the circuit can be

reflected on an area where the mask are not

covered; 3) etching process to form circuits; and

4) cut the glass.

The easiest way to understand the photo process is

to imagine shooting a laser at a glass plate to burn

an area where the circuit will be formed. After the

photo process, the circuit bulges through the

etching process. Then the touch screen is put on.

For flexible display, the process of generating

backplane is the same as that of LED or OLED.

LTPS and OLED capacity by companies

Maker Gen. Fab Size Fab Type OLED Size K sheet / month

LGD 2 365*460 Kumi (E1) OLED G2 4 730*920 Paju (E2) OLED G4 1/2 25 4 730*920 Paju (AP2) LTPS LCD - 55 5.5 1300*1500 Paju (E2) OLED G5 1/2 5.5 1300*1500 Paju (AP3) LTPS LCD - G8 2200*2500 Paju (M1) OLED G8 1/2 8 G8 2200*2500 Paju (M2) OLED G8

SDC 4 730*920 Chunahn (A1) OLED G4 1/2 59 4 730*920 Chunahn (L4) LTPS LCD - 20 5.5 1300*1500 Tangjung (A2-1) OLED G5.5 1/4 96 0.5 1300*1500 Tangjung (A2-2) OLED G5.5 27 8 2200*2500 Tangjung (A3) OLED G8 1/6

AUO 3.5 320*750 Linkou (L3D) OLED G3.5 8 3.5 610*750 Hsinchu (L3B) LTPS LCD - 20 4 730*920 AFPD OLED G4 1/2 17 4 730*920 AFPD LTPS LCD - 45 5.5 1300*1500 Xiamen OLED G5.5 6 1500*1850 Lungtan (L6B) OLED G6 or 1/4

CMI 3.5 620*750 CMEL Tainan OLED G3.5 1/2 5 3.5 620*750 TPO Jhunan OLED G3.5 1/2 5 3.5 620*750 TPO Jhunan OLED G3.5 18 3.5 620*750 TPO Jhunan LTPS LCD - 80 5.3 1200*1300 Shenzhen LTPS LCD - 23

Source: Company data, HSBC

Evaporation process chart

SubstrateTFT TFT TFT

HIL


HTL

HBL

HIL


HTL

Red Green Blue

ETL

HBL

HIL


HTL

Red Green Blue

ETL

Cathode(AI/LIF)

Step 1: Cleaning, Baking, Plasma Treatment Step 2: HIL, HTL Step 3: RGB, ETL

Step 4: EIL (LiF), Cathode (AI)


HIL


HTL

HBL

HIL


HTL

Red Green Blue

ETL

HBL

HIL


HTL

Red Green Blue

ETL

Cathode(AI/LIF)




HIL


HIL


HTL

HBL

HIL


HTL

HIL


HIL


HTL

Red Green Blue

ETL

HBL

HIL


HTL

HIL


HIL


HTL

Red Green Blue

ETL

Cathode(AI/LIF)



Source: HSBC

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Process 2: Evaporation process

The evaporation process involves placing several

layers of organics, which emit light on the

backplane in a vacuum. An electrical membrane is

formed through plasma treatment, and with the

help of organics, a cathode is formed.

The important aspect in the evaporation process is

how to pile on the organic layers. There are three

technologies: 1) Embedded Metal Mask (EMM);

2) Laser Induced Thermal Imaging (LITI); and 3)

the printing method, which raises a membrane by

making tiny droplets like an inkjet printer.

Although each method has pros and cons, FMM is

the most widely used for the small panels due to

its high yield from mass production. On the other

hand, FMM’s material efficiency is lower because

it spreads organic materials on the backplane

through the holes in the thin metal mask.

Moreover, it has limits in realising high-definition

displays of over 250ppi. Recently, demand for the

laser printing has been increasing because full HD

panels with over 400ppi are now used in

smartphones. Flexible display has similar issues to the TFT

backplane manufacturing process. It needs

material, which can withstand high temperatures

when using laser technology. FMM technology is

expected to be used until the flexible material,

which can tolerate high temperature, is developed.

Process 3: Encapsulation process

The last major process is encapsulation, which

enhances durability and lengthens useful life by

protecting the panel from water and oxygen

permeation. Encapsulation is considered a

relatively easy process for LCD manufacturing.

However, it also became one of the most

important processes in determining mass

production yield in OLED manufacturing, as

unstable organic materials are used.

Generally, “Frit Seal” and “Face Seal”

technologies are used for the evaporation process.

Frit Seal builds walls between evaporated organic

materials and covers glass over it. It has an

advantage in terms of yield because its process

and structure are simple. In addition, it helps

preserve organic materials as its simple structure

makes it easier to maintain a highly vacuumed

status. On the other hand, its disadvantage stems

from its weakness to physical shock and

overheating problems as melted glass becomes

sticky. Face Seal technology has been developed

to alleviate these problems. It coats adhesive film

on evaporated organic materials, and covers the

upper glass in it. Although the filming process

Encapsulation technology comparison, Frit Seal and Face Seal structure

Frit Seal Face Seal

Structure

TFT (Lower Glass)

OLEDCathode

CPL

Upper Glass

N2Frit

TFT (Lower Glass)

OLEDCathode

CPL

Upper Glass

N2Frit

TFT (Lower Glass)

OLED

Upper Glass

Polymer

Adhesive

1st Passi.

2nd Passi.

TFT (Lower Glass)

OLED

Upper Glass

Polymer

Adhesive

1st Passi.

2nd Passi.

Hardness/slim Bezel limiting value 1.2mm 0.6mm Panel Mo wiring (resistivity 14 Ω) Mo/AI wiring (resistivity 5 Ω) TSP On-Cell Only In-Cell, On-Cell Flexible No Yes

Source: HSBC

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lowers yields for mass production, it still can

maintain the highly vacuumed status and

enhances endurance to the external shock thanks

to the adhesive film.

Face Seal is better suited than Frit Seal for

flexible display. It is easier to use plastic materials,

(Frit Seal uses melted glass for adhesion) because

adhesive film eases the overheating problem.

Moreover, to produce truly flexible display in the

future, the upper glass should be removed and

replaced with film.

Comparison of TFT backplane technology

TFT

Oxide TFT

LTPS

Cost

Performance

Laser processing

Sputtering

TFT

Oxide TFT

LTPS

Cost

Performance

Laser processing

Sputtering

Source: HSBC

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Patent trends

The core technologies of flexible display include

substrate, driver, and display, while each

technology can be broken down into materials and

manufacturing processes.

Display

The US, Japan and Korea account for more than

90% of the global patents for flexible display. In

Korea, Samsung Electronics, LG Electronics and

LG Display have the biggest number of patents.

Canon, Seiko Epson, and Ricoh are the most active

companies in Japan and the US is dominated by E

Ink, SiPix Imaging, and Seiko Epson.

Drivers

The key technology for drivers is the development

of active material for printing or R2R process.

Developing organic semiconductors and organic

insulators are essential, given their advantages for

low temperature and large-sized processes. Also,

TFT technology using inorganic materials, such as

a-Si TFT and Oxide TFT, are still under

development, because they are more stable than

organic materials.

Samsung Electronics is the biggest patent issuer,

followed by Konica Minolta and Merck, while the

US accounts for more than 40% of total driver

patents. Korea seems to relatively strong in

organic semiconductor materials, especially

insulators, while Japanese and US companies are

strong in materials for organic semiconductors.

Major companies include Samsung Electronics,

Konica Minolta and Merck.

Substrates

Substrates require a lot of physical characteristics,

such as high light transmittance, physical strength,

outstanding formability, stability against heat and

chemical solvent, low transmittance of gas and

moisture, low price, etc. Currently, materials that

can completely meet those requirements have not

been developed. Metal foil, ultra-thin glass, paper

sheet, and plastic sheets are under development.

Comparison of thickness between display technologies

TFT-LCD

Liquid crystal

Glass

Polarizer

Backlight unit

Glass

Polarizer

Color Filter

AMOLED Flexible display True flexible display

Glass

Glass

OLED materials

OLED materials

OLED materials

Glass

Polyimide Film

TFT-LCD

Liquid crystal

Glass

Polarizer

Backlight unit

Glass

Polarizer

Color Filter

Liquid crystal

Glass

Polarizer

Backlight unit

Glass

Polarizer

Color Filter

AMOLED Flexible display True flexible display

Glass

Glass

OLED materials

Glass

Glass

OLED materials

OLED materialsOLED materials

OLED materials

Glass

Polyimide Film

OLED materials

Glass

Polyimide Film

Source: HSBC

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OLED / Flexible display food chain

Category Component Name Description Suppliers

TFT Glass Mother glass Base glass to apply TFT circuit NEG (NEG US) Corning (GLW US)

Plastic Substrate Polyimide Film Plastic film to apply on TFT glass LG Chem (051910 KS) Cheil Industries (001300 KS) Nippon Steel Chemical Corp (5401 JP)

Circuit Surface Mount Device

Flexible Printed Circuit Board Flexible plastic board with complex of circuit ACT (unlisted)

MLCC Multi-layer Ceramic Condenser Multiple layer of ceramic condenser to control power between chip on the circuit board

SEMCO (009150 KS) Murata (6981 JP)

OLED Common Layer HIL, HTL, ETL, EIL Layer to transfer electrons UDC (PANL US) Idemitsu Kosan (5019 JP) LG Chem (051910 KS) Cheil Industries (001300 KS) Doosan Electronics (unlisted)

Emission Materials Fluorescence materials, Phosphorescence materials

Self-illuminating material when electric power is applied

UDC (PANL US) Idemitsu Kosan (5019 JP) Kodak (unlisted)

Evaporation RGB LTPS Equipment to use low temperature laser base evaporation process

Tokki (7751 JP) AP System (054620 KS) ULVAC (6728 JP)

White OLED Sputtering equipment AVACO (083930 KS) Encapsulation Sealant Paste to stick upper glass and bottom glass in TFT Three Bond (unlisted)

LG Chem (051910 KS) Cheil Industries (001300 KS)

Frit Seal Glass pounder to be used as adhesive paste Yamato (9064 JP) Corning (GLW US)

Face Seal Apply adhesive seal in order to bind upper and bottom glass

Three Bond (unlisted) AVACO (083930 KS) LIG ADP (079950 KS)

PECVD Chamber Vacuum chamber for face seal process Jusung Eng(036930 KS)

Source: HSBC

4” panel price forecasts

(USD) 2012 2013e 2014e 2015e

Retina 19 17.5 15.8 13 OLED 20.5 18.3 16.5 13 standard 17 15 13.5 10 Flexible 38 23 18


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Company section

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The biggest beneficiary

We expect LGE to be the biggest beneficiary of

the commercialisation of flexible display. LGE’s

handset business has been suffering from low

profitability because the company had to launch

new products at lower prices than competitors.

It struggle to differentiate new products because its

R&D trailed competitors, hence the lower price tags.

However, this is changing and profitability has

improved recently, thanks better technology in its

smartphones, including full HD display, 13M pixel

camera, and the introduction of Qualcomm’s new

application processor, the fastest on the market.

The biggest concern: sustaining the improving profitability in handsets

A long-term concern is that investors are

becoming increasingly worried about the lack of

differentiation among smartphones. For example,

the market feedback after the launch of the iPhone

5 and Galaxy S4 was lukewarm. The worry is that

these phones can’t be taken much further. Even

the Octa-core application processor, display with

over 400ppi or a camera with more than 13M

pixels are not making that much difference. This,

in turn, has raised concerns about a possible

deterioration in profitability for the overall

smartphone industry.

Reaching the limits of innovation in terms of

hardware reduces the technology gap between

first-tier companies and the chasing pack. We

think the biggest issue for LG Electronics is

whether its improving profitability is sustainable.

Flexible display to support the profitability of handset business

Help is at hand. Flexible display, with all the

design and differentiation options that come with

it, should give the company a real advantage over

many competitors.

We expect the company to launch smartphone

models with curved designs in 2H13, although

true flexible display will take more time. The last

time LG Electronics had a real edge was back in

2005 when its “Chocolate” phone was a big hit,

LG Electronics(066570 KS)

LGE should be the biggest beneficiary of flexible display, as it is

expected to lead the commercialisation process

Concerns over profitability of the handset business to ease,

thanks to better position in the smartphone market

Reiterate OW (remove the volatility indicator (V)) and raise target

price to KRW116,000 from KRW104,000

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thanks its advanced design, functions and

hardware specifications.

Flexible display to help in the smartphone and tablet markets

We expect LGE to do a better job of positioning

in the smartphone and tablet PC markets than it

has done in recent years. It can build a premium

image among customers by being first to market

with a curved smartphone and launching a tablet

PC with a bendable display by as early as 2014.

We think that operating profit margin of the

handset business is the biggest swing factor for

the share price. The introduction of flexible

display should increase its market share in the

high-end smartphone market, which can lead to

improved handset margins.

Reiterate OW, raise TP to KRW116,000 from KRW104,000

We raise our 2013 handset operating profit margin

estimate to 3.7% from 0.9% and our 2013

operating profit estimate by 6.8% to reflect

improvements in the handset business. As a result,

we increase our target price to KRW116,000 from

KRW104,000.

We reiterate our OW (remove the volatility

indicator (V)) rating; the company is one of our

preferred stock in the sector because of the

expected benefits of commercialising flexible

display. Our 2013 and 2014 operating profit

estimates are 14% and 3% above consensus. Our

target price of KRW116,000 is based on a sum-of-

the-parts methodology, implying a 1.5x 2013e PB

and a 16.5x 2013e PE, while the stock currently

trades at a 1.1x 2013e PB and an 11.4x 2013e PE.

Valuation and risks

Valuation

We raise our target price to KRW116,000 from

KRW104,000 to factor in our 7% upward

earnings revision in 2013. We use a sum-of-the-

parts methodology for end-2013 to reflect

different characteristics of each business unit and

typical seasonality. For the TV division, we use

an estimated 2013 EV/EBITDA multiple of 5.2x,

which is at a 30% premium to 4.0x, the lowest

EV/EBITDA multiple of its Japanese peers during

the past 10 years.

LGE: Quarterly earnings trend

(KRWbn) 1Q12 2Q12 3Q12 4Q12 1Q13e 2Q13e 3Q13e 4Q13e 2012 2013e 2014e

Sales HE 5,330 5,478 5,486 6,443 5,948 6,280 7,635 8,742 22,738 28,605 30,511 Handset 2,452 2,321 2,448 2,812 3,155 3,394 3,512 3,743 10,032 13,804 14,862 HA 2,536 2,875 2,868 2,942 2,618 2,834 2,730 3,015 11,221 11,197 11,309 AE 1,218 1,475 974 683 1,242 1,637 1,008 686 4,350 4,573 4,619 Others 647 709 600 618 647 647 647 647 2,574 2,590 3,600 Total 12,183 12,859 12,376 13,497 13,610 14,793 15,532 16,834 50,915 60,769 64,901 Operating profits HE 217.1 216.3 88.6 19.2 14.9 157.0 179.4 209.5 541.2 560.8 889.0 Handset 38.9 -56.7 21.5 56.3 119.9 98.4 133.5 157.2 60.0 509.0 501.0 HA 151.6 165.3 128.5 79.9 111.5 150.8 136.5 92.5 525.3 491.2 466.1 AE 81.1 70.1 11.8 -11.1 54.9 83.2 45.3 8.3 151.9 191.8 183.2 Others -40.5 -46.0 -29.9 -37.1 -8.1 -19.4 -19.4 -19.8 -153.5 -66.7 -92.7 Total 448.2 349.0 220.5 107.2 293.1 470.0 475.3 447.8 1,124.9 1,686.1 1,946.5 OP margin HE 4.1% 3.9% 1.6% 0.3% 0.3% 2.5% 2.3% 2.4% 2.4% 2.0% 2.9% Handset 1.6% -2.4% 0.9% 2.0% 3.8% 2.9% 3.8% 4.2% 0.6% 3.7% 3.4% HA 6.0% 5.7% 4.5% 2.7% 4.3% 5.3% 5.0% 3.1% 4.7% 4.4% 4.1% AE 6.7% 4.8% 1.2% -1.6% 4.4% 5.1% 4.5% 1.2% 3.5% 4.2% 4.0% Others -6.3% -6.5% -5.0% -6.0% -1.2% -3.0% -3.0% -3.1% -6.0% -2.6% -2.6% Total 3.7% 2.7% 1.8% 0.8% 2.2% 3.2% 3.1% 2.7% 2.2% 2.8% 3.0%

Source: Company data, HSBC estimate

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We believe a 30% premium is reasonable, given

the differences in margins and high-end product

offerings. In terms of the handset division, we

apply a 10.0x EV/EBITDA multiple, the average

for Motorola and HTC during the past 10 years, as

we expect LGE’s handset business to remain

profitable, given its positive smartphone shipment

outlook for 2013. For the appliance and air-

conditioner divisions, we apply a 4.1x and 6.7x

EV/EBITDA, respectively, which are the average

multiples of its peers.

Under our research model, for stocks without a

volatility indicator, the Neutral band is 5ppts above

and below the hurdle rate for Korea stocks of 10%.

Our target price of KRW116,000 implies a potential

return of 45.6% (including a forecast dividend yield

of 0.6%), above the Neutral band; therefore, we are

reiterating our Overweight rating. Potential return

equals the percentage difference between the current

share price and the target price, including the

forecast dividend yield when indicated.

We remove the volatility indicator (V) as the

stock’s average volatility (defined as the past

month’s average of the daily 365-day moving

average volatilities) is below the 40% volatility

threshold as defined by our research model.

Risks

Downside risks include: delayed launch of flagship

smartphones and TVs, and a slower-than-expected

recovery in demand for consumer electronics.

Summary of the STOP valuation

(KRWbn) 2013e EBITDA

EV/EBITDA (x)

EV Comments

+Total EV 3,261 6.4x 20,945 Home entertainment 1,013 5.2x 5,270 Applying a 30% premium to the lowest 2013e EV/EBITDA multiple of

Japanese peers, given LGE has the second largest market share in the LCD TV market (Sony, Sharp, Panasonic)

Mobile handsets 811 10.0x 8,107 Applying average multiple of peers (Motorola Mobility Holdings and HTC) Appliance 793 4.1x 3,251 Applying average 2013e EV/EBITDA multiple of peers (Electrolux and

Whirlpool) Air conditioner 644 6.7x 4,317 Applying the multiple to Daikan Industries, given LGE's strong

competitiveness in CAC market -Net debt (less) 4,347 +Stake in subsidiaries 4,241 37.9% stake in LG Display 3,578 LGD's market cap of KRW9.9trn with a 15% discount49% stake in LG Innotek 663 LGI's market cap of KRW1.8trn with a 15% discount Target mkt cap 20,839 Total # of shrs (‘000) 180,066 Target price (KRW) 116,000


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Vertical integration at Samsung an upside risk

Although Cheil Industries is a supplier of many

essential materials for Samsung Display, investor

confidence suffered because its polariser and OLED

businesses have slowed due to delayed technological

developments and product launches. However, we

believe that Cheil Industries has the largest upside

risk in the mid to long term. The opportunities to co-

operate with Samsung Display to develop core

technologies for flexible display are expected to lead

revenue growth at the electronic material division.

ECM business, the biggest swing factor, should improve on OLED materials

Cheil Industries has a wide portfolio of businesses,

including fashion, chemical, and electronic

materials. The stock price depends on the

performance of the electronic material division, and

the growth drivers have been sluggish, owing to a

slowdown in the polariser business and delayed sales

of OLED materials.

However, Cheil Industries seems to have made

progress in developing plastic substrate with

polyimide (just as LG Chem has done). It is

expected to play an important role in helping

Samsung Display develop and launch plastic display

products. We expect OLED materials sales to pick

up in 2H13 and to grow significantly from 2014. We

expect 13% and 20% of ECM revenue will come

from OLED in 2013 and 2014, respectively. ECM

(electronic chemical materials) revenue accounts for

about 30% of the company’s total revenue.

Upgrade to OW from N; raise TP to KRW108,000 from KRW98,000

We increase our 2013 sales and operating profit

estimates by 8.8% and 11.2%, respectively, mainly

to reflect improvement in the ECM division, thanks

to flexible display. Our 2013 and 2014 operating

profit estimates are in line with consensus.

Accordingly, we raise our target price to

KRW108,000 as we believe Cheil Industries is a

beneficiary of flexible display.

Cheil Industries(001300 KS)

Samsung Group’s vertical integration in flexible OLED

development represents an opportunity

OLED materials to improve the ECM business, the biggest swing

factor for the share price

Upgrade to OW from N, raise target price to KRW108,000 from

KRW98,000

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Our target price is derived from EV/EBITDA

multiples in our sum-of-the-parts (SOTP) valuation

and implies a 16.7x 2013e PE and a 1.5x 2013e PB

versus a historical average of 16.6x and 1.3x,

respectively. The stock currently trades at a 14.3x

2013e PE and 1.3x 2013e PB.

Valuation and risks

Valuation

We raise our target price to KRW108,000 from

KRW98,000 as we increase our 2013 earnings

estimates by 8.8% to reflect upside opportunities

from flexible OLED display. Our target price

implies a 16.7x 2013e PE and a 1.5x 2013e PB.

We use the target EV/EBITDA multiples in our

SOTP valuation to capture Cheil’s potential as a

pure electric chemical company. In this regard, we

apply a 20% premium to the peer average. For the

chemical and fashion divisions, we apply peer

average valuations.


volatility indicator, the Neutral band is 5ppts

above and below the hurdle rate for Korea stocks

of 10%. Our target price implies a potential return

of 16.8%, above the Neutral band; therefore, we

are upgrading our rating to Overweight from

Neutral. Potential return equals the percentage

difference between the current share price and the

Cheil Industries: Quarterly earnings trend

(KRWbn) 1Q12 2Q12 3Q12 4Q12 1Q13e 2Q13e 3Q13e 4Q13e 1Q14e 2012 2013e 2014e

Sales ECM 375.7 407.3 385.1 400.7 440.9 473.3 511.6 510.1 494.6 1,568.8 1,936.0 2,146.7 Chemical 613.1 675.7 731.7 645.4 639.6 655.0 720.1 817.1 677.6 2,665.9 2,831.7 3,010.8 Fashion 429.3 415.5 357.1 523.2 436.6 438.2 452.1 595.2 475.9 1,725.1 1,922.0 2,111.7 Others 10.4 14.5 25.5 23.3 24.8 24.9 24.6 24.4 24.7 73.7 98.6 98.4 Total 1,428.5 1,513.0 1,487.6 1,580.8 1,541.8 1,591.4 1,708.4 1,946.8 1,672.8 6,009.9 6,788.3 7,367.6 Operating profit ECM 43.5 55.4 36.2 39.3 29.0 33.2 55.5 67.8 57.1 174.4 185.5 260.0 Chemical 25.8 35.8 30.8 5.1 20.4 35.1 40.3 36.9 33.2 97.5 132.7 135.1 Fashion 26.0 11.7 -3.3 30.9 27.1 15.3 13.4 36.7 28.8 65.3 92.5 98.5 Others 0.0 0.8 0.5 -0.5 0.0 1.3 1.4 1.6 2.2 0.8 4.3 7.3 Total 95.3 103.2 81.8 41.4 76.4 85.0 110.6 143.0 121.3 321.7 415.0 500.9 OP margin ECM 11.6% 13.6% 9.4% 9.8% 6.6% 7.0% 10.8% 13.3% 11.5% 11.1% 9.6% 12.1% Chemical 4.2% 5.3% 4.2% 0.8% 3.2% 5.4% 5.6% 4.5% 4.9% 3.7% 4.7% 4.5% Fashion 6.1% 2.8% -0.9% 5.9% 6.2% 3.5% 3.0% 6.2% 6.1% 3.8% 4.8% 4.7% Others 0.0% 5.3% 2.0% -2.1% 0.0% 5.1% 5.7% 6.8% 8.9% 1.1% 4.4% 7.4% Total 6.7% 6.8% 5.5% 2.6% 5.0% 5.3% 6.5% 7.3% 7.3% 5.4% 6.1% 6.8%

Source: Company data, HSBC estimates

Cheil Industry: Historical one-year forward PE trend Cheil Industry: Historical one-year forward PB trend

16.6x

21.2x

12.0x

5

10

15

20

25

30

35

2007 2008 2009 2010 2011 2012

PER 5y r Av g +1SD -1SD(x )

1.3x

1.7x

1.0x

0.5

1.0

1.5

2.0

2.5

2007 2008 2009 2010 2011 2012 2013

P/BV 5y r Av g +1SD -1SD(x )

Source: Bloomberg, HSBC estimates Source: Bloomberg, HSBC estimates

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target price, including the forecast dividend yield

when indicated.

Risks

Downside risks are: 1) narrowing spread in the

chemical business with input price hikes and price

pressure from downstream; and 2) weaker overall

demand for the consumer electronics business.

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LGI, the main vendor for LGE’s smartphone components

Although LG Innotek is not considered to be a

direct beneficiary of flexible display, we believe it

has a lot to gain if LG Electronics’ handset

business improves as it makes most of the

components (touch screen, PCB, and camera

module).

We believe LGI will also be key for the

development of flexible components (e.g. flexible

PCB), so the introduction of curved design will

strengthen the relationship between the

companies. We also see an upside risk as LG

Innotek is focusing on developing a transparent

electrode, which is important for transparent

display in the longer term.

Recovery of profitability in handsets to improve volume and margin

Mobile components account for about 60% of

LGI’s total revenue, but profitability has been low

because of price pressure on LG Electronics’

handset business. However, we expect volume

and profitability to improve through higher ASP

once LG Electronics strengthens its position in

the premium handset segment on the back of

flexible display.

Reiterate OW (remove the volatility indicator (V)) with unchanged TP of KRW108,000

We reiterate our OW rating on the back of the

upside risk of LGE’s handset business. To factor

in a decrease in orders from Apple, we cut our

2013 operating profit estimate by 14%. However,

we maintain our target price at KRW108,000 as

we roll over book value per share to 2013

(KRW65,226) from the 2012-13 average.

Our 2013 operating profit estimate is 22% above

consensus. As LGI underperformed the market

due to concerns about its camera module business

with Apple, its valuation has fallen to an attractive

level. Currently, it is trading at a 1.3x one-year

forward PB, which is a historical trough vs. a

historical average of 1.6x.

LG Innotek (011070 KS)

Both volume and margin are expected to improve as LGE gains

market share in the handset market

Attractive valuation at a 1.3x 2013e PB vs. the historical average

of 1.6x

Reiterate OW (remove the volatility indicator (V)) with an

unchanged TP of KRW108,000 based on historical average one-

year forward PB of 1.6x

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Valuation and risks

Valuation

We lower our 2013 operating profit estimate by

14% to factor in a decrease in orders from Apple.

However, we keep our target price at

KRW108,000 as we roll over our base year of

BVPS to 2013 from the 2012-13 average. We use

a target PB multiple of 1.6x which is the stock’s

five-year historical average, as we believe that it

is more appropriate to reflect the non-LED

businesses, such as camera modules and substrate.





return of 26%, above the Neutral band; therefore,

we are reiterating our Overweight rating. Potential

return equals the percentage difference between the

current share price and the target price, including

the forecast dividend yield when indicated.

We remove the volatility indicator (V) as the

stock’s average volatility (defined as the past

month’s average of the daily 365-day moving

average volatilities) is below the 40% volatility

threshold as defined by our research model.

Risks Downside risks include: 1) a weaker-than-expected

overall TV and handset demand lowers its utilisation

further; 2) raw material prices increase due to tight

supply; and 3) unfavourable FX reducing profit.

LGI: Historical one-year forward PB trend

1.6x

2.0x

1.2x

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012 2013

P/BV 5y r Av g +1SD -1SD(x )

Source: Bloomberg, HSBC estimates

LGI: Quarterly earnings trend

(KRWbn) 1Q12 2Q12 3Q12 4Q12 1Q13e 2Q13e 3Q13e 4Q13e 2012 2013e 2014e

Sales LED 190.4 234.6 296.3 276.9 261.5 264.2 295.8 301.8 998.2 1,123.3 1,268.6DN 270.9 236.3 210.0 187.7 279.4 312.9 338.0 368.4 904.9 1,298.7 1,548.7Camera Module 384.7 328.0 269.1 679.7 407.0 415.2 423.5 431.9 1,661.5 1,677.6 1,815.9PCB 88.3 99.4 112.5 130.2 104.9 106.5 115.0 116.2 430.4 442.6 512.5Package Substrate 105.3 122.4 113.9 89.7 129.2 131.1 132.4 133.7 431.3 526.4 548.4Material 103.2 109.4 131.6 124.0 125.2 127.1 128.4 129.7 468.2 510.4 531.7Automotive 86.7 95.8 79.5 96.7 97.7 99.2 100.2 101.2 358.7 398.2 414.9Total 1,229.5 1,225.9 1,212.9 1,584.9 1,405.0 1,456.1 1,533.2 1,582.8 5,253.2 5,977.2 6,640.8Operating profit LED -22.8 -28.2 -17.8 -30.5 -22.2 -5.3 7.4 9.1 -99.2 -11.1 41.4DN 7.4 8.7 7.5 6.4 6.8 8.5 11.0 13.3 30.0 39.6 48.5Camera Module 19.2 19.4 1.3 16.3 7.3 11.6 11.9 12.1 56.2 42.9 50.8PCB 7.1 8.0 13.5 10.4 8.4 9.6 11.5 12.8 38.9 42.3 52.0Package Substrate -0.3 5.0 5.8 0.6 3.1 4.3 4.8 5.2 11.1 17.4 25.6Material 12.2 11.2 14.0 2.9 7.6 8.5 9.4 7.4 40.3 32.9 36.4Automotive 0.9 -5.0 1.8 4.3 -2.0 -1.9 -1.8 -1.7 2.0 -7.4 -5.2Total 23.6 19.0 26.2 10.6 9.0 35.3 54.2 58.2 79.3 156.7 249.5OP margin LED -12.0% -12.0% -6.0% -11.0% -8.5% -2.0% 2.5% 3.0% -9.9% -1.0% 3.3%DN 2.7% 3.7% 3.6% 3.4% 2.5% 2.7% 3.3% 3.6% 3.3% 3.1% 3.1%Camera Module 5.0% 5.9% 0.5% 2.4% 1.8% 2.8% 2.8% 2.8% 3.4% 2.6% 2.8%PCB 8.0% 8.0% 12.0% 8.0% 8.0% 9.0% 10.0% 11.0% 9.0% 9.5% 10.1%Package Substrate -0.3% 4.1% 5.1% 0.7% 2.4% 3.3% 3.6% 3.9% 2.6% 3.3% 4.7%Material 11.8% 10.2% 10.7% 2.4% 6.0% 6.7% 7.3% 5.7% 8.6% 6.5% 6.9%Automotive 1.0% -5.3% 2.3% 4.5% -2.1% -1.9% -1.8% -1.6% 0.6% -1.9% -1.3%Total 1.9% 1.5% 2.2% 0.7% 0.6% 2.4% 3.5% 3.7% 1.5% 2.6% 3.8%

Source: Company data, HSBC estimate

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Expected to lead flexible display

Samsung Electronics is extremely well placed to

benefit from the flexible display revolution, in our

view. We believe Samsung Display, its flat panel

subsidiary, can lead the flexible display industry,

based on: 1) advantages gained from vertical

integration in materials and equipment; and 2) its

success in glass OLED technology.

Samsung Display has been producing large

quantities of OLED panels for five years, with a

near 100% market share. We think applying this

experience to flexible OLED will be much easier,

even though there are several technological

challenges still to be overcome.

In addition, affiliates, such as Cheil Industries,

SEMCO and Samsung SDI, will support Samsung

Electronics in commercialising flexible display.

Flexible OLED will enable Samsung smartphones

to come up with differentiated designs, supporting

its dominance in the smartphone market.

Galaxy Note 3 could be the first flexible smartphone from Samsung

We think Galaxy Note 3, which is expected to be

introduced in 2H13, will be the first Samsung

smartphone with flexible OLED panels, making it

almost unbreakable. Note 3 will likely be much

slimmer, lighter and stronger than previous ultra-

high end models in the same series. We are

assuming 10-15m units to be shipped in 4Q13.

Near-term catalysts include a positive demand

outlook for Galaxy S4, which should use glass

OLED. We expect 300 global carriers to have

the phone within three months, up from 230 in

six months for S3. We assume 80m S4 units and

total smartphone shipments of 330m in 2013

(54% y-o-y).

Samsung Electronics (005930 KS)

Set to emerge as a leader in flexible display based on vertical

integration and experience in glass OLED

Galaxy Note 3 could be the first flexible OLED (unbreakable)

smartphone from Samsung

Reiterate OW with an unchanged target price of KRW2,000,000;

an Asia Super 10 and GEMs Super 15 portfolio stock

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Curved OLED TV

Source: HSBC

Valuation and risks

Valuation

We reiterate our Overweight rating and our target

price of KRW2,000,000. Our target price is based

on an unchanged target multiple of 1.9x 2013e PB,

which reflects our improving ROE assumption to

our historical 10-year average PB. The stock

currently trades at a 1.5x 2013e PB.




of 10%. Our target price of KRW2,000,000

implies a potential return of 31.5%, above the

Neutral band; therefore, we are reiterating our

Overweight rating. Potential return equals the

percentage difference between the current share

price and the target price, including the forecast

dividend yield when indicated.

Risks

Downside risks include further KRW appreciation,

which may dampen profitability, while JPY

weakness may weaken competitiveness. A

potential demand decrease from the global

economic slowdown is another risk.

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A leader in developing flexible display

LG Display is expected to play a key role, along

with LG Chem, in developing flexible display. Its

advanced technology and potential to recycle

existing LCD fabs will be an important factor in

commercialising flexible display.

LG Display’s technological leadership has been

proved through its success with IPS technology,

retina display and ultra-high definition TV. LG

Display was also the first company to

commercialise the use of White OLED in TVs.

World’s first OLED TV, but…

LG Display has already introduced the world’s first

curved OLED TV, the CES, this year. To us, this

suggests it has made progress in developing the all-

important plastic substrate for small screens.

The problem is that small-size panels produced by

6th-generation LTPS won’t increase sales or

profits significantly. This will have to wait until

the company produces differentiated bendable

tablet PC and laptop products, perhaps as early as

next year.

Curved OLED TV

Source: HSBC

Valuation and risks

Valuation

Our target price of KRW51,500 is based on a 1.5x

PB, which is the mid-cycle multiple, on our

unchanged 2013 book value estimate. Our 2013

earnings estimate is 70% above consensus.

Under our research model, for stocks with a



of 10%. Our target price of KRW51,500 implies a

potential return of 68.2% (including a forecast

dividend yield of 2.8%), above the Neutral band;

therefore, we are reiterating our Overweight (V)

rating. Potential return equals the percentage

LG Display (034220 KS)

Expected to lead the flexible display industry through its advanced

technology and by recycling existing LCD fabs

However, larger flexible display needed to benefit further

Reiterate OW(V) rating with an unchanged target price of

KRW51,500

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difference between the current share price and the

target price, including the forecast dividend yield

when indicated.

Risks

The main industry risk is the lack of promotion of

LCD TVs, which could result in weaker sell-through.

The main company-specific downside risk is its

aggressive investment in OLED, which has yet to be

commercially proven for larger-sized applications.

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Set to support plastic substrate for flexible display LG Chem is expected to play a key role with LG

Display in commercialising flexible display by

developing components and materials. These

include plastic substrate, ultra-thin glass and

irregular shaped batteries. LG Chem has already

selected OLED as the core growth driver and is

known to have already secured the appropriate

technologies. The company is aiming to launch

flexible OLED lighting, the first in the world, in

July 2013. This proves the company has already

developed plastic substrate, which will enable it to

commercialise flexible display.

Advanced technology in battery

The company’s advanced battery technology is

also expected to help develop flexible display

devices. The battery is going to be one of the most

important components in the initial stage of

flexible display. Once flexible display is

introduced, each manufacturer is going to require

batteries to customised for its own products.

We believe this will improve the profitability of

LG Chem by raising ASP. It is already making

innovative batteries for notebooks. We believe the

batteries required for flexible display could offset

the slowdown in its cylindrical battery business.

LG Chem (051910 KS)

Planning to launch world’s first flexible OLED lighting, proving its

advanced plastic substrate technology

Customised batteries for different companies to improve

profitability, offsetting the slowdown in the cylindrical battery

business

Reiterate OW(V) with an unchanged target price of KRW365,000

LGC: 2013e total revenue breakdown LGC: 2013e optical / electronics revenue breakdown

Chemicals

72%

Battery

13%

Optical/Ele

ctronics

15%

LCD Glass

3%

Polarizer

73%

3D

Retarder

21%

ITO film

3%

Source: HSBC estimates Source: HSBC estimates

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Reiterate OW(V) rating with an unchanged TP of KRW365,000

We reiterate our OW(V) rating on LG Chem.

However, we exclude it from our preferred stocks

as we expect the impact of flexible display on

earnings will be limited in the short term. We

expect this new technology will improve the

company’s profitability significantly starting from

2015 when the new market is likely to expand

dramatically. Our 2013 and 2014 operating profit

estimates are 17% and 20% above consensus. Our

target price is based on a 6.5x target EV/EBITDA

multiple to the company’s normalised (2013-14e

average). LGC is currently trading at a 9.2x 2013e

PB and a 1.3x 2013e PE.

Valuation and risks

Valuation

We use sum-of-the-parts to value LG Chem. We

apply a 6.5x target EV/EBITDA multiple to the

company’s normalised (2013-14e average)

petrochemical EBITDA, and a 7.7x EV/EBITDA

multiple to the IT Material business (including the

battery segment). The 6.5x multiple is the sector’s

average historical multiple, and 7.7x is a 20%

premium to the IT material industry average,

considering the company’s leading position. Our

target price implies a 2.0x PB ratio on 2013e

BVPS, which is in line with the historical average

since 2006, while the stock currently trades at a

1.3x 2013e PB.



above and below the hurdle rate for Korean stocks

of 10%. Our target price implies a potential return

of 47.6% (including the forecast dividend yield of

2.2%), above the Neutral band; therefore, we are

reiterating our Overweight (V) rating. Potential

return equals the percentage difference between

the current share price and the target price,

including the prospective dividend yield.

Risks

The key downside risk to our call is delays in the

new projects.

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Flexible AMOLED adoption in Galaxy Note 3

We think SFA will get additional small panel

equipment orders from Samsung Display during

2-3Q13, given that it has to switch or extend

capacity for flexible AMOLED. Galaxy Note 3

will mostly likely adopt flexible OLED

(unbreakable). Overall AMOLED demand will

increase as Samsung is targeting OLED adoption

to mid-tier smartphones this year.

Samsung already made a 27,000-panel per month

order to the supply chain for the A2 extension fab

in late 2012, but flexible AMOLED will require

additional capacity to fully cover Samsung’s

product roadmap from 2014. SFA is guiding

around KRW50bn of orders would generate a

9,000-panel per month capacity addition by SD.

Substantial TV investment not confirmed, but still likely

A key catalyst for the company is OLED TV

investment by Samsung Display. LGE’s

introduction of OLED TV earlier this year will

speed up the development of this technology. We

think there a strong possibility that Samsung will

make significant investments from 2H14.

Samsung seems to have a two-track AMOLED

strategy: 1) White OLED for mainstream use; and

2) better quality RGB technology for the premium

market. We estimate SFA to get nearly

KRW100bn in orders per the 8,000-panel per

month capacity addition by SD. LGE’s aggressive

TV launch will encourage Samsung to launch its

own OLED TV as soon as possible.

Upgrade to OW, raise TP to KRW75,000 from KRW56,000

We raise our TP because of: 1) a 12% earnings

upgrade to factor in a new 2013 order assumption of

KRW742bn (up from KRW677bn); and 2) a change

in the multiple to the top of the three-year band from

the three-year average due to the TV investment. We

think the AMOLED supply chain will be re-rated on

the back of potential AMOLED TV investment by

its key customers. Our target price is based on a

13.3x historical peak one-year forward PE and 2013

EPS estimate of KRW5,611. Our 2013 operating

profit estimate is 18% above consensus.

SFA (056190 KS)

AMOLED adoption in Samsung Galaxy Note 3 should increase

equipment orders

Potential OLED TV investment at Samsung Display is a key

catalyst for the share re-rating

Upgrade to OW (from N) and raise TP to KRW75,000 from

KRW56,000 on earnings upgrade and change in multiple

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Valuation and risks

Valuation

We raise our 2013 earnings estimate by 7% to

factor in: 1) possible new orders for 5.5G fab,

thanks to the introduction of the mid-tier

smartphones with AMOLED panels; and 2)

margin improvement, thanks to material costs

decline along with KRW appreciation. We raise

our target price to KRW75,000 from KRW56,000

to reflect the earnings revision and new target

multiple of a 11.5x one-year forward PE.

We continue to use a three-year historical average

PE as our target multiple as: 1) we believe it

better captures the company’s value since it

started to develop front-end equipment; and 2) it

has become difficult to define a peer group due to

the nature of this business. Our target price

implies a 13.4x 2013e PE and a 2.9x 2013e PB.




Our target price implies a potential return of 22.1%

(including the forecast dividend yield of 1.9%),

above the Neutral band; therefore, we are upgrading

our rating to Overweight from Neutral. Potential

return equals the percentage difference between the

current share price and the target price, including the

forecast dividend yield when indicated.

Risks

Downside risks: 1) further delays in the supply of

front-end equipment to SMD’s AMOLED

manufacturing lines, and Samsung Electronics’

LCD lines disappointing the market; and 2) delays

in Samsung Display’s capacity expansion of 5.5G.

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Panel size matters

Duksan Himetal is an outstanding material

provider that is supplying OLED HIL and HTL to

Samsung Display. The company could secure a

three-year revenue CAGR of 27% and stable

profitability with an operating profit margin of

over 25%. However, it is hard to find a further

growth driver after 2014, given the adoption of

OLED panels is limited to small panels below five

inches. Meanwhile, the recent outperformance of

the company seems to reflect: 1) the better-than-

expected sales of the Galaxy series; and

2) adoption of OLED by mid-end smartphones.

Samsung Display’s investment in OLED TV the major catalyst

The company’s revenue growth prospects have

been improving on Samsung Display’s plans for

OLED TV. Even though Samsung Display has not

decided whether to adopt white OLED or the

existing RGB, we think it will introduce OLED

TV products in 2H13. We believe that this will

increase Duksan’s revenue dramatically. Cheil

Industries, an affiliate of Samsung Group, is the

major risk

Duksan will benefit from the increasing demand

for OLED materials for small-sized display panels

which will be regarded as a new application (or

business opportunity) once flexible display is

introduced. However, we are concerned about

possible competition from Cheil Industries,

which could reduce its share of business with

Samsung Display.

The risk of this happening will increase if Cheil

Industries uses the vertically integrated structure

available through Samsung Display. Cheil

Industries could penetrate the OLED supply chain,

starting with plastic substrate, and further

strengthen its market share in HIL and HTL. We

think this would hurt Duksan’s share price.

Duksan Himetal(077360 KS)

An outstanding material provider, but with limited growth in small-

sized panels

Cheil Industry is likely to take market share from the company

based on vertical integration by the Samsung Group

Upgrade to N(V) from UW(V), raise TP to KRW31,700 from

KRW17,500 based on historical average one-year forward PE

of 16.8x

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Upgrade to N(V) from UW(V), raise target price to KRW31,700

Although Duksan should be one of the

beneficiaries of flexible display, we upgrade it to

N(V) rather than OW(V), given that: 1) small size

display will require only a marginal increase in

the use of materials; 2) Samsung Group’s vertical

integration is likely take market share from

Duksan. We raise our 2013 operating profit

estimate by 52% to reflect the better utilization

ratio of Samsung Display and ramp-up in 8G fab.

Our 2013 OP estimate is 2.2% below consensus,

while our 2014 OP estimate is 8% higher.

Accordingly, raise our target price to KRW31,700.

Our 2013 operating profit estimate is 2.2%

below consensus.

Valuation and risks

Valuation

We raise our 2013 operating profit estimate by

52% to reflect the better utilization ratio of

Samsung Display and ramp-up in 8G fab.

Accordingly, we raise our target price to

KRW31,700 from KRW17,500. We base our

target price on a 16.8x target multiple (its five-

year average one-year forward PE).

We believe a five-year average one-year forward

PE multiple better captures the company’s

specific business momentum compared to a peer

multiple, especially in OLED materials versus

peers, as most electronic chemical companies are

not overly focused on OLED materials. Duksan

was established as a solder ball producer in 1995

and started expanding its business into OLED

materials five years ago. It trades at a 14.2x 2013e

PE and a 2.9x 2013e PB.





return of -18.1%, within the Neutral band; therefore,

we are upgrading our rating to Neutral (V) from

Underweight (V). Potential return equals the

percentage difference between the current share

price and the target price, including the forecast

dividend yield when indicated.

Risks

Upside risks include: 1) an earlier-than-expected

launch of OLED TVs due to competition between

Samsung Electronics and LG Electronics; and

2) resumed investment by Samsung Display due

to stronger-than-expected demand from OLED

TVs and OLED tablets.

Downside risks: 1) Possible market share erosion

by Cheil Industries on the back of Samsung

Group’s vertical integration; and 2) weaker than

expected demand for OLED TV.

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Financials & valuation: LG Electronics Overweight Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e

Profit & loss summary (KRWb)

Revenue 50,960 60,769 64,901 68,428EBITDA 2,448 3,195 3,306 3,357Depreciation & amortisation -1,312 -1,509 -1,359 -1,306Operating profit/EBIT 1,136 1,686 1,946 2,051Net interest -642 -652 -656 -660PBT 524 1,643 2,118 2,246HSBC PBT 524 1,643 2,118 2,246Taxation -433 -329 -424 -449Net profit 67 1,268 1,635 1,734HSBC net profit 67 1,268 1,635 1,734

Cash flow summary (KRWb)

Cash flow from operations 1,537 3,325 3,773 3,846Capex -1,404 -1,200 -1,000 -1,000Cash flow from investment -1,350 -2,289 -2,019 -2,069Dividends -36 -90 -90 -90Change in net debt -449 -582 -1,247 -1,269FCF equity -1,525 638 1,068 1,113

Balance sheet summary (KRWb)

Intangible fixed assets 1,077 1,077 1,077 1,077Tangible fixed assets 10,022 10,206 10,334 10,316Current assets 14,554 17,585 19,863 22,013Cash & others 1,832 2,414 3,661 4,930Total assets 31,457 35,252 38,297 41,130Operating liabilities 12,255 14,826 16,268 17,396Gross debt 6,488 6,488 6,488 6,488Net debt 4,655 4,073 2,826 1,557Shareholders funds 12,454 13,678 15,281 16,987Invested capital 11,567 11,627 11,345 11,080

Ratio, growth and per share analysis

Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue -6.1 19.2 6.8 5.4EBITDA 54.8 30.5 3.5 1.5Operating profit 199.7 48.4 15.4 5.4PBT - 213.4 28.9 6.1HSBC EPS - 1799.4 28.9 6.1

Ratios (%)

Revenue/IC (x) 4.3 5.2 5.7 6.1ROIC 2.2 14.1 16.1 17.2ROE 0.5 9.7 11.3 10.8ROA 0.2 3.8 4.4 4.4EBITDA margin 4.8 5.3 5.1 4.9Operating profit margin 2.2 2.8 3.0 3.0EBITDA/net interest (x) 3.8 4.9 5.0 5.1Net debt/equity 36.6 29.2 18.2 9.0Net debt/EBITDA (x) 1.9 1.3 0.9 0.5CF from operations/net debt 33.0 81.6 133.5 247.0

Per share data (KRW)

EPS Rep (fully diluted) 370.83 7043.52 9079.98 9632.34HSBC EPS (fully diluted) 370.83 7043.52 9079.98 9632.34DPS 200.00 500.00 500.00 500.00Book value 69165.84 75958.82 84861.77 94337.02

Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales 0.2 0.2 0.1 0.1EV/EBITDA 4.9 3.4 2.7 2.1EV/IC 1.0 0.9 0.8 0.6PE* 215.7 11.4 8.8 8.3P/Book value 1.2 1.1 0.9 0.8FCF yield (%) -20.9 9.5 17.6 20.7Dividend yield (%) 0.3 0.6 0.6 0.6

Note: * = Based on HSBC EPS (fully diluted)

Issuer information

Share price (KRW)80000.00 Target price (KRW)116000.00 4

5.0

Reuters (Equity) 066570.KS Bloomberg (Equity) 066570 KSMarket cap (USDm) 11,725 Market cap (KRWb) 13,092Free float (%) 58 Enterprise value (KRWb) 10781Country Korea Sector Electronic EquipmentAnalyst Brian Sohn Contact +822 3706 8765

Price relative

446105461064610746108461094610

104610114610124610134610

2011 2012 2013 2014

446105461064610746108461094610104610114610124610134610

LG Electronics Rel to KOSPI INDEX

Source: HSBC Note: price at close of 03 Apr 2013

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Financials & valuation: Cheil Industries Inc Overweight Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue 6,010 6,788 7,368 7,808EBITDA 530 653 748 765Depreciation & amortisation -209 -238 -247 -237Operating profit/EBIT 322 415 501 528Net interest -95 -95 -95 -95PBT 293 421 531 574HSBC PBT 293 421 531 574Taxation -84 -94 -119 -129Net profit 209 327 411 445HSBC net profit 209 327 411 445


Cash flow from operations 86 534 663 711Capex -412 -300 -300 -300Cash flow from investment -479 -269 -261 -258Dividends -38 -38 -38 -38Change in net debt 400 -179 -317 -368FCF equity -453 27 132 164


Intangible fixed assets 463 463 463 463Tangible fixed assets 1,799 1,979 2,037 2,105Current assets 1,837 2,334 2,911 3,500Cash & others 113 387 799 1,261Total assets 5,418 5,951 6,458 7,001Operating liabilities 697 846 885 926Gross debt 1,269 1,364 1,459 1,553Net debt 1,156 977 660 292Shareholders funds 3,254 3,543 3,917 4,325Invested capital 3,288 3,542 3,727 3,882


Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue 7.7 13.0 8.5 6.0EBITDA 38.1 23.1 14.6 2.3Operating profit 44.6 29.0 20.7 5.5PBT 6.3 43.8 26.0 8.2HSBC EPS -19.5 56.6 26.0 8.2

Ratios (%)




Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e



Issuer information


6.8


Price relative

66000760008600096000

106000116000126000136000146000

2011 2012 2013 2014

66000760008600096000106000116000126000136000146000

Cheil Industries Inc Rel to KOSPI INDEX


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Financials & valuation: LG Innotek Co Overweight Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue 5,316 5,939 6,598 7,086EBITDA 549 643 702 734Depreciation & amortisation -471 -486 -452 -434Operating profit/EBIT 77 157 250 300Net interest -103 -101 -99 -98PBT -18 61 153 203HSBC PBT -18 61 153 203Taxation -7 -14 -34 -45Net profit -25 47 118 157HSBC net profit -25 47 118 157


Cash flow from operations 301 733 768 803Capex -350 -400 -400 -400Cash flow from investment -383 -421 -423 -422Dividends 0 0 0 -4Change in net debt 6 -187 -220 -252FCF equity -14 79 116 153


Intangible fixed assets 145 145 145 145Tangible fixed assets 2,631 2,499 2,451 2,421Current assets 2,073 2,461 2,895 3,304Cash & others 353 540 760 1,012Total assets 4,886 5,149 5,542 5,930Operating liabilities 1,450 1,666 1,940 2,175Gross debt 2,168 2,168 2,168 2,168Net debt 1,815 1,628 1,408 1,156Shareholders funds 1,268 1,315 1,434 1,587Invested capital 3,046 2,899 2,790 2,683


Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue 16.8 11.7 11.1 7.4EBITDA 46.8 17.2 9.2 4.6Operating profit - 102.8 59.3 20.3PBT - - 152.1 32.8HSBC EPS - - 152.1 32.8

Ratios (%)

Revenue/IC (x) 1.7 2.0 2.3 2.6ROIC 4.8 4.8 7.6 9.3ROE -1.9 3.6 8.6 10.4ROA 3.1 2.7 3.9 4.3EBITDA margin 10.3 10.8 10.6 10.4Operating profit margin 1.5 2.6 3.8 4.2EBITDA/net interest (x) 5.3 6.4 7.1 7.5Net debt/equity 143.1 123.8 98.2 72.8Net debt/EBITDA (x) 3.3 2.5 2.0 1.6CF from operations/net debt 16.6 45.0 54.6 69.4


EPS Rep (fully diluted) -1239.94 2330.12 5874.35 7800.07HSBC EPS (fully diluted) -1239.94 2330.12 5874.35 7800.07DPS 0.00 0.00 0.00 200.00Book value 62892.66 65222.86 71097.41 78697.74

Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales 0.7 0.6 0.5 0.4EV/EBITDA 6.4 5.2 4.4 3.8EV/IC 1.2 1.1 1.1 1.1PE* 36.8 14.6 11.0P/Book value 1.4 1.3 1.2 1.1FCF yield (%) -0.9 4.7 6.9 9.1Dividend yield (%) 0.0 0.0 0.0 0.2


Issuer information


6.0


Price relative

45225

65225

85225

105225

125225

145225

2011 2012 2013 2014

45225

65225

85225

105225

125225

145225

LG Innotek Co Rel to KOSPI INDEX


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Financials & valuation: Samsung Electronics Overweight Financial statements

Year to 12/2011a 12/2012e 12/2013e 12/2014e


Revenue 165,002 201,104 225,668 245,350EBITDA 29,236 44,671 56,014 60,100Depreciation & amortisation -13,592 -15,622 -16,833 -18,160Operating profit/EBIT 15,644 29,049 39,182 41,939Net interest 148 -121 295 492PBT 17,192 29,915 40,581 43,669HSBC PBT 0 0 0 0Taxation -3,433 -6,070 -8,234 -8,860Net profit 13,759 23,845 32,347 34,808HSBC net profit 13,759 23,845 32,347 34,808


Cash flow from operations 22,043 36,708 43,993 46,087Capex -21,966 -22,965 -21,000 -23,000Cash flow from investment -21,113 -31,322 -25,909 -28,301Dividends -826 -1,130 -1,130 -1,130Change in net debt -552 -10,301 -14,115 -11,218FCF equity -71 9,737 20,226 20,879


Intangible fixed assets 3,355 3,730 4,096 4,449Tangible fixed assets 62,044 68,485 73,505 79,272Current assets 71,502 87,269 107,130 125,427Cash & others 26,878 37,448 50,056 60,008Total assets 155,800 181,072 211,214 240,636Operating liabilities 39,963 44,798 42,895 41,165Gross debt 14,524 14,793 13,287 12,020Net debt -12,354 -22,655 -36,770 -47,988Shareholders funds 97,090 117,094 150,647 183,065Invested capital 70,061 77,237 91,780 107,975


Year to 12/2011a 12/2012e 12/2013e 12/2014e

Y-o-y % change

Revenue 6.7 21.9 12.2 8.7EBITDA 1.9 52.8 25.4 7.3Operating profit -9.6 85.7 34.9 7.0PBT -11.1 74.0 35.7 7.6HSBC EPS -15.1 72.8 35.7 7.6

Ratios (%)

Revenue/IC (x) 2.5 2.7 2.7 2.5ROIC 19.2 31.4 37.0 33.5ROE 15.1 22.3 24.2 20.9ROA 13.8 17.9 19.4 17.9EBITDA margin 17.7 22.2 24.8 24.5Operating profit margin 9.5 14.4 17.4 17.1EBITDA/net interest (x) - 369.4 - -Net debt/equity -12.2 -18.6 -23.7 -25.6Net debt/EBITDA (x) -0.4 -0.5 -0.7 -0.8CF from operations/net debt - - - -



Valuation data

Year to 12/2011a 12/2012e 12/2013e 12/2014e

EV/sales 1.2 0.9 0.8 0.6EV/EBITDA 6.8 4.2 3.0 2.6EV/IC 2.8 2.4 1.9 1.5PE* 16.6 9.6 7.1 6.6P/Book value 2.3 1.9 1.5 1.2FCF yield (%) 0.0 4.6 9.7 10.2Dividend yield (%) 0.4 0.5 0.5 0.5


Issuer information


1.5

Reuters (Equity) 005930.KS Bloomberg (Equity) 005930 KSMarket cap (USDm) 200,657 Market cap (KRWb) 224,042Free float (%) 75 Enterprise value (KRWb) 187373Country Korea Sector SemiconductorsAnalyst Ricky Seo Contact +822 37068777

Price relative

564219

764219

964219

1164219

1364219

1564219

1764219

2011 2012 2013 2014

564219

764219

964219

1164219

1364219

1564219

1764219

Samsung Electronics Rel to KOSPI INDEX


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Financials & valuation: LG Chemical Limited Overweight Financial statements

Year to 12/2011a 12/2012e 12/2013e 12/2014e


Revenue 22,676 23,263 25,337 28,225EBITDA 3,592 2,786 3,485 4,162Depreciation & amortisation -757 -865 -1,053 -1,279Operating profit/EBIT 2,835 1,921 2,433 2,882Net interest -23 -55 -24 -55PBT 2,797 1,851 2,395 2,815HSBC PBT 2,797 1,851 2,395 2,815Taxation -627 -389 -536 -631Net profit 2,107 1,403 1,789 2,111HSBC net profit 2,107 1,403 1,789 2,111


Cash flow from operations 2,240 2,311 2,526 2,965Capex -2,223 -1,900 -1,950 -1,938Cash flow from investment -2,402 -2,090 -2,141 -2,129Dividends -319 -368 -405 -405Change in net debt 435 147 20 -432FCF equity -25 426 590 1,040


Intangible fixed assets 207 207 207 207Tangible fixed assets 7,494 8,519 9,407 10,056Current assets 7,256 7,372 7,879 8,678Cash & others 1,379 1,350 1,346 1,432Total assets 15,286 16,626 18,222 19,870Operating liabilities 2,908 3,036 3,162 3,376Gross debt 2,670 2,788 2,804 2,459Net debt 1,291 1,438 1,458 1,026Shareholders funds 9,708 10,781 12,207 13,955Invested capital 10,670 11,712 12,986 14,133


Year to 12/2011a 12/2012e 12/2013e 12/2014e

Y-o-y % change

Revenue 16.5 2.6 8.9 11.4EBITDA 2.2 -22.4 25.1 19.4Operating profit 0.5 -32.2 26.6 18.5PBT -0.8 -33.8 29.3 17.6HSBC EPS 8.8 -33.4 27.5 18.0

Ratios (%)




Valuation data

Year to 12/2011a 12/2012e 12/2013e 12/2014e



Issuer information


5.4

Reuters (Equity) 051910.KS Bloomberg (Equity) 051910 KSMarket cap (USDm) 14,898 Market cap (KRWb) 16,634Free float (%) 66 Enterprise value (KRWb) 17565Country Korea Sector ChemicalsAnalyst Brian Sohn Contact +822 3706 8765

Price relative

205312255312305312355312405312455312505312555312605312

2011 2012 2013 2014

205312255312305312355312405312455312505312555312605312

LG Chemical Limited Rel to KOSPI INDEX


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Financials & valuation: LG Display Overweight (V) Financial statements

Year to 12/2011a 12/2012e 12/2013e 12/2014e


Revenue 24,291 29,430 33,560 34,567EBITDA 2,727 4,542 6,512 6,490Depreciation & amortisation -3,651 -3,905 -4,150 -3,735Operating profit/EBIT -924 637 2,362 2,755Net interest -84 -157 -140 0PBT -1,081 459 2,352 2,855HSBC PBT -1,081 459 2,352 2,855Taxation 293 -222 -235 -228Net profit -771 236 2,117 2,626HSBC net profit -771 236 2,117 2,626


Cash flow from operations 3,660 4,240 4,868 6,490Capex -4,063 -4,261 -4,000 -4,000Cash flow from investment -3,494 -4,484 -4,201 -4,181Dividends -179 -35 -34 -308Change in net debt 768 -475 -1,104 -1,996FCF equity -148 -401 493 2,261


Intangible fixed assets 535 498 488 478Tangible fixed assets 14,697 13,108 12,958 13,223Current assets 7,858 8,915 9,930 11,284Cash & others 2,333 2,654 2,758 3,754Total assets 25,163 24,456 25,407 27,119Operating liabilities 10,422 9,759 9,610 9,875Gross debt 4,610 4,456 3,456 2,456Net debt 2,277 1,802 698 -1,298Shareholders funds 10,131 10,240 12,322 14,640Invested capital 10,336 10,107 11,008 11,356


Year to 12/2011a 12/2012e 12/2013e 12/2014e

Y-o-y % change

Revenue -4.8 21.2 14.0 3.0EBITDA -35.6 66.6 43.4 -0.3Operating profit -170.5 - 270.8 16.6PBT -185.4 - 412.9 21.4HSBC EPS -166.4 - 795.5 24.1

Ratios (%)

Revenue/IC (x) 2.3 2.9 3.2 3.1ROIC -4.7 3.2 20.1 22.7ROE -7.3 2.3 18.8 19.5ROA -2.8 1.3 9.4 10.0EBITDA margin 11.2 15.4 19.4 18.8Operating profit margin -3.8 2.2 7.0 8.0EBITDA/net interest (x) 32.3 28.9 46.5 -Net debt/equity 22.5 17.6 5.7 -8.9Net debt/EBITDA (x) 0.8 0.4 0.1 -0.2CF from operations/net debt 160.7 235.3 697.4 -


EPS Rep (fully diluted) -2093.10 641.64 5746.19 7129.79HSBC EPS (fully diluted) -2093.10 641.64 5746.19 7129.79DPS 0.00 99.08 887.30 1100.94Book value 28313.60 28618.66 34437.72 40915.42

Valuation data

Year to 12/2011a 12/2012e 12/2013e 12/2014e

EV/sales 0.9 0.8 0.6 0.5EV/EBITDA 8.2 4.9 3.2 2.9EV/IC 2.2 2.2 1.9 1.7PE* NM 48.5 5.4 4.4P/Book value 1.1 1.1 0.9 0.8FCF yield (%) -0.7 -2.0 2.4 11.3Dividend yield (%) 0.0 0.3 2.8 3.5


Issuer information


5.3

Reuters (Equity) 034220.KS Bloomberg (Equity) 034220 KSMarket cap (USDm) 19,894 Market cap (KRWb) 22,213Free float (%) 45 Enterprise value (KRWb) 22079Country Korea Sector Electronic EquipmentAnalyst Jerry Tsai Contact +8862 6631 2863

Price relative

14568

19568

24568

29568

34568

39568

44568

2011 2012 2013 2014

14568

19568

24568

29568

34568

39568

44568

LG Display Rel to KOSPI INDEX


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Financials & valuation: SFA Engineering Overweight Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue 507 771 979 958EBITDA 79 117 145 140Depreciation & amortisation -9 -8 -8 -7Operating profit/EBIT 70 109 137 133Net interest 10 11 11 11PBT 93 120 147 143HSBC PBT 93 120 147 143Taxation -22 -24 -29 -30Net profit 71 96 118 113HSBC net profit 71 96 118 113


Cash flow from operations 70 125 147 150Capex -6 -5 -5 -5Cash flow from investment -51 51 -53 -2Dividends -17 -20 -26 -31Change in net debt 43 -148 -63 -112FCF equity 54 98 120 116


Intangible fixed assets 14 14 14 14Tangible fixed assets 119 116 112 109Current assets 438 617 796 896Cash & others 40 188 251 363Total assets 578 754 930 1,029Operating liabilities 204 304 388 396Gross debt 0 0 0 0Net debt -40 -188 -251 -363Shareholders funds 373 448 541 631Invested capital 327 255 283 260


Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue -35.1 51.9 26.9 -2.1EBITDA -31.8 49.1 23.1 -3.1Operating profit -35.5 55.7 25.4 -2.9PBT -16.2 29.0 23.1 -2.7HSBC EPS -16.8 34.4 23.1 -4.0

Ratios (%)

Revenue/IC (x) 1.7 2.7 3.6 3.5ROIC 18.1 30.0 40.7 38.6ROE 19.6 23.3 23.9 19.3ROA 12.5 14.4 14.0 11.6EBITDA margin 15.5 15.2 14.8 14.6Operating profit margin 13.8 14.1 14.0 13.8EBITDA/net interest (x) - - - -Net debt/equity -10.7 -41.9 -46.4 -57.5Net debt/EBITDA (x) -0.5 -1.6 -1.7 -2.6CF from operations/net debt - - - -



Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e

EV/sales 2.1 1.2 0.9 0.8EV/EBITDA 13.6 7.9 6.0 5.3EV/IC 3.3 3.6 3.0 2.9PE* 14.9 11.1 9.0 9.4P/Book value 2.9 2.4 2.0 1.7FCF yield (%) 4.9 8.8 10.8 10.4Dividend yield (%) 1.6 1.9 2.4 2.9


Issuer information


0.2

Reuters (Equity) 056190.KQ Bloomberg (Equity) 056190 KSMarket cap (USDm) 1,003 Market cap (KRWb) 1,120Free float (%) 47 Enterprise value (KRWb) 925Country Korea Sector Electronic EquipmentAnalyst Ricky Seo Contact +822 37068777

Price relative

356774067745677506775567760677656777067775677

2011 2012 2013 2014

356774067745677506775567760677656777067775677

SFA Engineering Rel to KOSPI INDEX


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Financials & valuation: Duksan Hi-Metal Neutral (V) Financial statements

Year to 12/2012a 12/2013e 12/2014e 12/2015e


Revenue 144 189 251 295EBITDA 47 53 74 99Depreciation & amortisation -6 -6 -9 -8Operating profit/EBIT 42 47 66 91Net interest 1 -1 -1 -2PBT 43 51 69 94HSBC PBT 43 51 69 94Taxation -1 -3 -4 -18Net profit 42 48 65 77HSBC net profit 42 48 65 77


Cash flow from operations 51 37 53 64Capex -49 -5 -5 -5Cash flow from investment -54 -5 -5 -5Dividends 0 0 0 0Change in net debt 6 -32 -48 -59FCF equity -3 25 41 75


Intangible fixed assets 34 34 34 34Tangible fixed assets 71 116 113 111Current assets 89 158 254 341Cash & others 14 46 94 153Total assets 199 312 407 492Operating liabilities 14 80 109 132Gross debt 2 2 2 2Net debt -12 -45 -93 -151Shareholders funds 183 230 295 358Invested capital 166 181 198 201


Year to 12/2012a 12/2013e 12/2014e 12/2015e

Y-o-y % change

Revenue 11.1 31.5 32.5 17.6EBITDA 10.8 11.4 40.8 33.0Operating profit 5.9 13.5 39.2 37.6PBT 22.5 19.0 35.6 36.3HSBC EPS 21.3 13.6 36.8 18.0

Ratios (%)

Revenue/IC (x) 1.0 1.1 1.3 1.5ROIC 29.5 25.9 33.1 37.3ROE 26.1 23.1 24.8 23.5ROA 24.4 19.4 18.8 17.7EBITDA margin 33.0 28.0 29.7 33.6Operating profit margin 29.0 25.0 26.2 30.7EBITDA/net interest (x) - 101.3 65.5 62.7Net debt/equity -6.8 -19.4 -31.4 -42.3Net debt/EBITDA (x) -0.3 -0.8 -1.2 -1.5CF from operations/net debt - - - -



Valuation data

Year to 12/2012a 12/2013e 12/2014e 12/2015e



Issuer information


8.1

Reuters (Equity) 077360.KQ Bloomberg (Equity) 077360 KSMarket cap (USDm) 707 Market cap (KRWb) 789Free float (%) 48 Enterprise value (KRWb) 740Country Korea Sector Electronic EquipmentAnalyst Brian Sohn Contact +822 3706 8765

Price relative

15131

20131

25131

30131

35131

2011 2012 2013 2014

15131

20131

25131

30131

35131

Duksan Hi-Metal Rel to KOSPI INDEX


66


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Notes

67


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Notes

68


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Notes

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Brian Sohn, Ricky Seo, Jerry Tsai and Hongsik Jo

Important disclosures

Equities: Stock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 05 April 2013, the distribution of all ratings published is as follows: Overweight (Buy) 44% (30% of these provided with Investment Banking Services)

Neutral (Hold) 38% (29% of these provided with Investment Banking Services)

Underweight (Sell) 18% (23% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

LG DISPLAY 034220.KS 30350.00 05-Apr-2013 5LG ELECTRONICS 066570.KS 78200.00 05-Apr-2013 2, 6, 7, 11SAMSUNG ELECTRONICS 005930.KS 1505000.00 05-Apr-2013 2, 5, 6, 7, 11

Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 28 February 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 28 February 2013, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 28 February 2013, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 28 February 2013, this company was a client of HSBC or had during the preceding 12 month period been a client

of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

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Additional disclosures 1 This report is dated as at 08 April 2013. 2 All market data included in this report are dated as at close 03 April 2013, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

4 As of 29 March 2013, HSBC owned a significant interest in the debt securities of the following company(ies) :LG DISPLAY,SAMSUNG ELECTRONICS

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Disclaimer * Legal entities as at 8 August 2012 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

Issuer of report

The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch 7th Floor, HSBC Building

25, 1-ka, Bongrae-dong

Chung-ku, Seoul 100-161, Korea

Telephone: +822 3706 8700/3

Fax: +822 3706 8797

Website: www.research.hsbc.com

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HSBC") for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. It may not be further distributed in whole or in part for any purpose. In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments). © Copyright 2013, The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 110/01/2013

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Global Stephen Howard Analyst, Global Sector Head +44 20 7991 6820 [email protected]

Europe Nicolas Cote-Colisson Analyst +44 20 7991 6826 [email protected]

Antonin Baudry Analyst +33 1 56 52 43 25 [email protected]

Dan Graham Analyst +44 20 7991 6326 [email protected]

Dominik Klarmann, CFA Analyst +49 211 910 2769 [email protected]

Luigi Minerva Analyst +44 20 7991 6928 [email protected]

Olivier Moral Analyst +33 1 5652 4322 [email protected]

Adam Rumley Analyst +44 20 7991 6819 [email protected]

Dhiraj Saraf, CFA Analyst +91 80 3001 3773 [email protected]

Americas Richard Dineen Analyst +1 212 525 6707 [email protected]

Sean Glickenhaus Analyst +1 212 525 4131 [email protected]

Global Emerging Markets (GEMs) Hervé Drouet Analyst +44 20 7991 6827 [email protected]

Jean Kaplan Analyst +44 20 7991 6831 [email protected]

Martin Mabbutt Analyst +44 20 7991 6457 [email protected]

Emerging Europe, Middle East & Africa (EMEA) Franca Di Silvestro Head of Research, SA +27 11 676 4223 [email protected]

Bülent Yurdagül Analyst +90 212 376 46 12 [email protected]

Asia Tucker Grinnan Analyst +852 2822 4686 [email protected]

Yogesh Aggarwal Analyst +91 22 2268 1246 [email protected]

Neale Anderson Analyst +852 2996 6716 [email protected]

Luis Hilado Analyst +65 6658 0607 [email protected]

Rajesh Raman Analyst +65 6658 0608 [email protected]

Jenny Lai Head of Research, Taiwan +8862 6631 2860 [email protected]

Carrie Liu Analyst +8862 6631 2864 [email protected]

Steven C Pelayo Analyst +852 2822 4391 [email protected]

Ricky Seo Analyst +822 37068777 [email protected]

Rajiv Sharma Analyst +91 22 2268 1239 [email protected]

Brian Sohn Analyst +822 3706 8765 [email protected]

Hongsik Jo Analyst +822 3706 8774 [email protected]

Jerry Tsai Analyst +8862 6631 2863 [email protected]

Chi Tsang Analyst +852 2822 2590 [email protected]

Yolanda Wang Analyst +8862 6631 2867 [email protected]

Tse-yong Yao Analyst +8862 6631 2861 [email protected]

Joyce Chen Analyst +8862 6631 2862 [email protected]

Specialist Sales

Tim Maunder-Taylor +44 20 7991 5006 [email protected]

Gareth Hollis +44 20 7991 5124 [email protected]

Myles McMahon +852 2822 4676 [email protected]

Kubilay Yalcin +49 211 9104880 [email protected]

Global Telecoms, Media & Technology Research Team








*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

Brian Sohn*AnalystThe Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch+822 3706 [email protected]

Brian Sohn joined HSBC in April 2010 as Korea Technology analyst, from LG Electronics, where he was Head of Investor Relations.Before joining LG Electronics in 2001, Brian served as a research analyst at the Korea Institute of Public Finance for five years. Brian received an MBA and BS from the University of Akron. He is also a US certified public accountant.

Ricky Seo*AnalystThe Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch+822 3706 [email protected]

Ricky has been covering Korean semi stocks since his first post as an equity analyst at a major investment bank in 2006, following five years as a manager on the Strategic Planning Team of Samsung Electronics’ Semiconductor Division. Prior to joining HSBC in March 2011, he shifted to a domestic equity house in 2009 and was ranked among the top semiconductor analysts by Maekyoung andHankyoung in 2010.

Jerry Tsai*AnalystHSBC Securities (Taiwan) Corporation Limited+8862 6631 [email protected]

Jerry Tsai is an analyst in Taiwan’s Technology research team. Previously, he covered non-tech small cap/material sectors at two majorinvestment banks. Prior to his career in finance, he was a licensed civil/transportation engineer in the US for six years. He receivedhis MBA from Carnegie Mellon and holds a Bachelor’s degree in engineering from UC Berkeley.

Steven PelayoRegional Head of Technology Research, Asia PacificThe Hongkong and Shanghai Banking Corporation Limited+852 2822 [email protected]

Steven Pelayo joined HSBC in June 2006 as a global technology analyst focusing on Asian semiconductor foundries, equipment andpackaging and test services. Currently, Steven is Regional Head of Technology Research for Asia Pacific. In addition to covering thefoundry/semiconductor sector, he develops regional products in conjunction with other HSBC technology analysts and coordinatesviews within the broader technology space in Asia. Prior to joining HSBC, Steven was Managing Director and equity research analystin the US. He has focused on the technology sector on both the buy and sell side for more than a decade, and is a CFA charterholder.

Hongsik Jo*AnalystThe Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch+822 [email protected]

Hongsik Jo joined HSBC as a research associate for Korea technology research in February 2012. Prior to this, he worked at leadingUS and Australian firms where he supported insurance and brokerage sector analysts. Hongsik holds a Bachelor of Economics degreefrom Seoul National University, Korea.

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