Automation - Mirae Asset

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

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Automation An inevitable paradigm shift in manufacturing

A potential breakthrough for manufacturing

While the global economy has recovered to some extent from the 2008 crisis, we have not yet witnessed a broad-based recovery in demand, raising concerns that the worldwide economic situation could become reminiscent of the conditions seen in Japan during its lost decade (1991-2000).

Of note, many businesses moved their production plants to China to save costs, but the so-called world’s factory has been losing its appeal amid an uptrend in wages. Indeed, a massive exodus from China is taking place, with many manufacturers either relocating to Southeast Asia, where labor is cheaper, or reshoring production. However, wages are rising quickly in Southeast Asia as well, suggesting that moving to emerging markets may no longer be the answer to rising costs. And, in our view reshoring to developed countries is unlikely to prove effective without higher penetration of automation architecture.

We believe that automation is a means for the manufacturing industry to overcome the current low-growth environment. In our view, a shift toward automation is inevitable.

Robo-Stox index has far outperformed major indices

S&P’s Robo-Stox index tracks the performance of 85 robotics- and automation-related companies based in 16 countries. Manufacturing powerhouses like the US, Japan, and Germany constitute more than 70% of the index. By sector, industrials comprise 50%, IT 30%, and healthcare 11%.

Notably, the Robo-Stox index has significantly outperformed major domestic and global indices, including the KOSPI, S&P 500, and MSCI World, reflecting the differentiated growth of robotics and automation companies. And we believe that domestic companies, although latecomers, are on the fast track to growth. In Korea, automation has been widely adopted by the auto industry, but its penetration has been slower in other sectors. We are particularly bullish on companies related to industrial robotics (e.g., logistics automation) and IT automation, two of the fastest-growing segments in the global automation industry.

Key beneficiaries include Koh Young Technology and SFA Engineering

We recommend Koh Young Technology (098460 KQ/Buy) and SFA Engineering (056190 KQ/Buy) as our top picks in automation. Koh Young Technology has the most globally advanced technology in the 3D automated optical inspection (AOI) field, while SFA Engineering has recently been seeing a pickup in new orders, driven by logistics automation equipment. We also advise watching: 1) HyVISION System (126700 KQ/Not Rated), which produces automated inspection equipment for smartphone camera modules, 2) Shin-Heung Machine (007820 KQ/Not Rated), which stands to benefit from the expansion of the logistics automation market, and 3) YoungWoo DSP (143540 KQ/Not Rated), which manufactures automated inspection, measurement, and repair equipment for displays.

Overweight (Initiate)

Initiation Report

December 3, 2014

Daewoo Securities Co., Ltd.

[Small Cap]

Will Lee +822-768-4168 [email protected]

Jonathan Hwang +822-768-4140 [email protected]

Robo-Stox index vs. key indices

Source: Bloomberg, KDB Daewoo Securities Research

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1/08 1/09 1/10 1/11 1/12 1/13 1/14

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KDB Daewoo Securities Research

C O N T E N T S

I. The rise of robots: Competition or coexistence? 3 Competition between humans and robots 3

II. Overview of automation 4 What is automation? 4 Example of early automation: Ford’s conveyor-belt assembly lines 4

III. An inevitable paradigm shift 5 Key theme for manufacturers: Automation 5 The “China exodus” 6 Industry 4.0, the next industrial revolution 8 Market size 10 Industrial robotics market holds robust growth potential 11 Robo-Stox index has far outperformed major stock indices 13

IV. Case studies 15 1. Nobilia 15 2. Siemens 16 3. Amazon 17 4. Google 18

V. Investment ideas 19 Beneficiaries of automation 19

Koh Young Technology (098460 KQ) 21 SFA Engineering (056190 KQ) 32

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I. The rise of robots: Competition or coexistence?

Competition between humans and robots

In Makers: The New Revolution, Chris Anderson, CEO of 3D Robotics and former editor in chief of Wired, writes:

“The move from hard labor to machine labor freed up people to do something else….Writer Venkatesh Rao argues that the main effect of this was on time. Machines allow us to work faster, doing more in less time. That liberates those hours for other activities, whether productive or leisure. What the First Industrial Revolution did create, more than anything else, was a vast surplus of time.”

According to Anderson, these time savings enabled humans to turn to innovation, creating a virtuous cycle of growth.

Erik Brynjolfsson, a professor at MIT Sloan School of Management and the director of the MIT Center for Digital Business, observed in his 2013 book Race Against the Machine that humans were incapable of beating computers in easily automatable processes such as performing calculations. In his view, the key to success going forward lies in joining forces with machines, not competing with them.

Robots can perform simple, repetitive tasks (e.g., calculation, inspection, transportation) more quickly and accurately than humans. And they are able to carry out complex tasks under harsh conditions, making them well-suited to exploring the Arctic, fighting fires, and defusing bombs. Moreover, they are capable of performing procedures during surgery.

We believe that the manufacturing industry can be a space in which robots coexist with humans and help improve productivity and efficiency. Many manufacturers are beginning to realize that robotics and automation are critical to their survival.

Figure 1. Competition with robots Figure 2. Coexistence with robots

Source: Business2Community , KDB Daewoo Securities Research Source: Business2Community , KDB Daewoo Securities Research

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II. Overview of automation

What is automation?

Automation is the use of various control systems to operate machines, computers, or processes with minimal or reduced human intervention. Broadly speaking, automation can encompass conveyor belts, industrial robotics, quality control systems, automated logistics/warehouse facilities, unmanned transport vehicles, precision measurement equipment, and automated machine tools.

Example of early automation: Ford’s conveyor-belt assembly lines

In October 1908, Ford began using conveyor-belt assembly lines to produce the Model T. This simple automation yielded high productivity and opened a gateway for mass production. Before the rollout of the Model T, automobiles were considered luxury goods. However, Ford managed to revolutionize production processes and churn out vehicles. Indeed, the use of conveyor belts was a harbinger for the rise of automation.

Automation has been diversified to include transport robots for use in the production of fragile and heavy LCD plates and semiconductors, machine vision technologies for carrying out precision measurement and defect screening operations, and customized industrial computers designed to endure harsh conditions.

Also, automation includes sensors that translate information (e.g., temperature, humidity, speed) into interpretable signals as well as programmable logic controllers (PLC) that control machines and processors with the use of programmable memory.

Figure 3. Henry Ford’s conveyor-belt assembly line Figure 4. Robotic arms, which are widely used in factories

Source: Wikimedia Commons, KDB Daewoo Securities Research Source: KUKA, KDB Daewoo Securities Research

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III. An inevitable paradigm shift

Key theme for manufacturers: Automation

While the global economy has recovered to some extent from the 2008 crisis, we have yet to witness a broad-based recovery in demand, raising concerns that the worldwide economic situation could become reminiscent of the conditions seen in Japan during its lost decade. The Japanese slowdown was caused by a complex set of issues, including weakened export competitiveness (amid yen strength), tepid domestic consumption, population aging, and insufficient corporate innovation.

Currently, global demand remains stagnant, while price competition between manufacturers is becoming increasingly intense. Furthermore, rising wages in China and other emerging nations have dragged down the profitability of manufacturing firms. Given that the global economy is slumping, innovation seems to be the only way to avoid following in the footsteps of Japan.

Global manufacturers are seeing automation as a key way to overcome the economic slowdown. Korea is currently struggling with the issues that have been weighing on Japan for decades (e.g., slow growth and population aging). However, considering that exports account for more than 50% of Korea’s overall GDP, the country’s economic structure might become closer to Germany’s than Japan’s (exports: only 15% of GDP) if manufacturing competitiveness improves on the back of a fourth industrial revolution—Industry 4.0.

Figure 5. Global demand experiencing stagnation Figure 6. Population aging in Korea is mirroring the trend in

Japan with a 20-year lag

Source: IMF, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

Figure 7. Korea’s exports as a % of GDP: Similar to the German

level

Figure 8. McKinsey’s disruptive technologies are mostly related

to automation

Source: CEIC, KDB Daewoo Securities Research Source: McKinsey Global Institute, KDB Daewoo Securities Research

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Global imports relative to GDPAsia ex-Japan exports

(%, relative to GDP )

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1950 1975 2000 2025 2050 2075 2100

Japanese population aged 65 or older

Korean population aged 65 or older

(%)

Aging

Japna1994 Korea 2017

Japan 2005 Korea 2025

Aged

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80 85 90 95 00 05 10

US ItalyJapan KoreaGermany

(%, relative to GDP)Economic value Detai ls

Mobi le internet US$1.7tr GDP related to the internet

US$25trInteraction and transaction worker employment costs (70% ofglobalemployment costs)

Automationof knowledgework

US$9tr+Knowledge worker employment costs(27% of global employment costs)

IoT US$36trOperating costs of key affected industries (manufacturing,healthcare, and mining)

Cloudtechnology

US$1.7tr GDP related to the internet

US$3tr Enterprise IT spend

Advanced robotics US$6trManufacturing worker employment costs(19% of global employment costs)

US$2-3tr Cost of major surgeriesAutonomousand near-autonomousvehicles

US$4tr Automobile industry revenue

US$155bnRevenue from sales of civilian, military,and general aviation aircraft

Next-generationgenomics

US$6.5tr Global healthcare costs

US$1.1trGlobal value of wheat, rice, maize, soy,and barley

Energystorage

US$2.5trRevenue from global consumption ofgasoline and diesel

3D printing US$11tr Global manufacturing GDP

US$85 trillion Revenue from global toy salesAdvancedmaterials

US$1.2trRevenue from global semiconductorsales

US$4bn Revenue from global carbon fiber sales

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The “China exodus”

A massive exodus from China is taking place, with many manufacturers either relocating to Southeast Asia, where labor is cheaper, or reshoring production. However, wages are rising quickly in Southeast Asia, suggesting that the move to emerging markets may no longer be an answer. And reshoring to developed countries is unlikely to prove efficient without the use of automation.

According to the Korea Trade-Investment Promotion Agency (KOTRA), the number of Korean firms establishing new subsidiaries in China plummeted from 2,300 in 2006 to 800 in 2013. In particular, the number of Korean firms operating in Shandong has plunged to 4,800 (from 10,000), and is decreasing by 500 per year on average.

Non-Korean firms are also moving out of the country. The number of Japanese firms in Shandong decreased from 2,000 in 2005 to 1,000, with major firms (e.g., Panasonic, Fuji Xerox, Uniqlo) making their exits. Western firms such as Nike, Whirpool, Best Buy, Adidas, and Media Markt have also closed or plan to close operations in China.

In fact, foreign direct investment (FDI) into China has been on the downswing since 2012, partially because of changes in benefits for foreign firms. The Chinese government abolished tax, employment, and location benefits for foreign firms in 2010, and the social security tax exemption in 2011.

Table 1. Chinese facility closures

Company Sector Details

Intel IT Shut down airtight packaging testing factory in Pudong (integration with Chengdu

facility)

Panasonic IT Planning to shut down a plasma panel factory in Shanghai

GE IT Relocated a water heater production line from China to Kentucky; planning to move

facilities for washing/drying machines

NCR IT Relocated ATM production lines in China, India, and Hungary to Georgia, US

Fuji Xerox IT Moved digital printer production lines (along with lens facilities) to Nakata

HP (Japan) IT Moved laptop lines from China to near Tokyo

Ford Auto Planning to move some production lines from China and Mexico to US

Whirlpool Consumer

goods Relocated a small mixer production line from Guangzhou to Greenville, Ohio

Coleman Consumer

goods Relocated plastic cooler production from China to Kansas, US

Sleek Audio Consumer

goods Relocated a top-tier headphone factory from China to Florida

Nike Apparel Shut down a shoe factory in China and moved into Southeast Asian countries (e.g.,

Vietnam, Malaysia, and Sri Lanka)

Uniqlo Apparel Relocated production base from China to Southeast Asia

Adidas Apparel Planning to shut down a factory in Suzhou and move into Southeast Asia

Source: Media reports, KDB Daewoo Securities Research

Figure 9. Decreasing FDI in China Figure 10. Key factors driving factory relocation

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

-40

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10.1 10.7 11.1 11.7 12.1 12.7 13.1 13.7 14.1 14.7

FDIChina FDI

(%,YoY)

0% 20% 40% 60%

Proximity to customers

Ease of doingbusiness

Product quality

Labor costs

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In recent years, the so-called world’s factory has been losing its appeal as a cheap production base due to rising wages. Indeed, minimum monthly income levels in Beijing (based on full-time employment) have doubled in just five years from RMB800 in 2009 to RMB1,560 in 2014

As reported, the Chinese government plans to raise minimum income levels by more than 13% on average in order to stabilize consumer sentiment. Therefore, many firms are moving away from China to cheaper Asian emerging nations (e.g., Vietnam, the Philippines, and Malaysia). However, wages are rising quickly in Southeast Asia as well, suggesting that this approach will not be viable in the long term.

And North American and European firms are returning home—so-called reshoring. Apple plans to relocate part of its production base back to the US with an investment of US$100mn. Whirlpool is also planning to relocate a small mixer production line from Guangzhou to Ohio.

In our view, the reshoring in developed countries is unlikely to work without the use of automation. Considering still-high income levels and low flexibility in the job market, we believe these companies will need to rely heavily on the use of automation systems. Against this backdrop, we believe that the manufacturing industry is in dire need of Industry 4.0.

Figure 11. Chinese minimum wage trending up Figure 12. China’s minimum wage growth by region

Source: Industry data, KDB Daewoo Securities Research Source: KITA, KDB Daewoo Securities Research

Figure 13. The China exodus Figure 14. The iPhone: Designed in California, manufactured in

China + California

Source: Business2Community Source: Press materials

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(RMB)BeijingTianjinShanghaiShandongGuangdong

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15601680

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1280

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Beijing Tianjin Shandong Shenzhen Shaanxi

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2009 2014

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Industry 4.0, the next industrial revolution

1) Definition

Industry 4.0 is a project initiated by the German government as part of its high-tech strategy, which promotes the computerization of the manufacturing industry. Germany is the world’s second-largest exporter, and is home to over 1,300 top-tier manufacturers.

For Germany, the rapid growth of emerging economies serves as both an opportunity and a challenge. Industry 4.0 was born out of the realization that the traditional approach to developing innovative production technologies cannot help the country defend its position as the world’s leading manufacturer.

The first industrial revolution was the shift from hand production methods to machines (steam engines). The second revolution was marked by the rise of mass production (electricity), and the third by partial automation (electronic technologies and IT). Now, the fourth industrial revolution will involve the complete automation of manufacturing processes (convergence between ICT and manufacturing).

Following the 2008 global financial crisis, countries with strong manufacturing bases have recovered more quickly than others. Germany’s Industry 4.0 initiative aims to secure future competitiveness. To this end, the country will invest EUR200mn over the long term.

Figure 15. Four industrial revolutions

Source: DFKI, KDB Daewoo Securities Research

Figure 16. Proportion of economically-active people by

country Figure 17. End-to-end engineering

Source: CEIC, KDB Daewoo Securities Research Source: POSRI, KDB Daewoo Securities Research

50

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1990 2000 2010 2020F 2030F 2040F

US JapanGermany KoreaChina

(%)

Automation

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2) Why Industry 4.0 is necessary

Birth rates are declining, nations are experiencing population aging, wages are rising, and the proportion of economically-active individuals in manufacturing countries is falling quickly. As such, countries need to find innovative ways to boost production efficiency, and Industry 4.0 can be the answer.

Industry 4.0 aims to establish smart factories in which ICT controls every step of manufacturing, from order-taking to production, logistics, and services. To this end, all production facilities and processes will need to be connected through networks. Furthermore, various technologies will be required to enable real-time information sharing, including the Internet of Things (IoT), cloud computing, cyber-physical systems (CPS) and sensors, and Big Data.

By transitioning from partial (3.0) to complete automation (4.0), factories will be able to mass-produce a diverse array of products.

We believe that Industry 4.0 will arrive in the near future, much sooner than many anticipate. According to the International Federation of Robotics (IFR), industrial robotics is the fastest growing segment in industrial automation. The number of industrial robots exceeded 1mn units in 2008 (cumulative), and the figure will likely double by 2017. Given the rapidly narrowing gap between the average industrial robot cost and the two-year average salary of Foxconn workers, China is expected to join the global automation drive.

Figure 18. Environmental factors promoting Industry 4.0 Figure 19. Industry 4.0: Smart factory concept

Source: IDA, KDB Daewoo Securities Research Source: DFKI, KDB Daewoo Securities Research

Figure 20. Industry 3.0 vs. Industry 4.0 Figure 21. Rapidly narrowing gap between robot expenses and

wages

Source: POSRI, KDB Daewoo Securities Research Note: Labor costs based on two-year salary

Source: IFR, KDB Daewoo Securities Research

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99 00 01 02 03 04 05 06 07 08 09 10

Industrial robot costs per unit

Foxconn labor costs per capita

(US$'000)

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Market size

Due to the broad definition of industrial automation, it is hard to estimate the exact size of the market. In this report, we used the Ministry of Trade, Industry and Energy’s (MOTIE) definition of the sector, which includes industrial robotics, machine vision, sensors, industrial PCs, and PLC. Since 2000, the global industrial automation market is estimated to have grown by 7% per year (US$81.7bn in 2000 to US$235.2bn in 2015). The industrial robotics segment seems to be growing at a much faster pace, at a yearly average of 16% (US$6.3bn in 2000 to US$55.1bn in 2015).

The Korean industrial automation market is estimated to be expanding at a CAGR of 10% (W1.2tr in 2000 to W5.3tr in 2015). The most rapidly growing part of the domestic market is also the industrial robotics segment, which is growing at a CAGR of 20% (W120bn in 2000 to W1.9tr in 2015).

Although many aspects of industrial automation are still in the fledgling stages of development, numerous potential applications have already become visible. We advise investors to pay close attention to machine vision, which currently accounts for the largest share of the domestic industrial automation industry, and the rapidly growing industrial robot segment.

According to MOTIE, the latest trends in industrial automation can be summarized as: 1) convergence with IT technologies, 2) the robotization of industrial facilities, 3) increased flexibility of production, and 4) sensing and miniaturization. In our view, the emergence of these trends signals strong growth for IT and industrial robots.

Figure 22. Global automation market trend Figure 23. Domestic automation market trend

Source: MOTIE, KDB Daewoo Securities Research Source: MOTIE, KDB Daewoo Securities Research

Figure 24. Global machine vision market trend Figure 25. Global industrial robot market trend

Source: : American Imaging Association, KDB Daewoo Securities Research Source: IFR, KDB Daewoo Securities Research

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(US$bn)

SensorPLCIndustrial PCIndustrial robotMachine vision

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Industrial robotics market holds robust growth potential

According to the International Federation of Robotics (IFR), global industrial robot shipments exceeded 170,000 units last year, the highest level in history. On a cumulative basis, the number of industrial units (based on cumulative shipments) is anticipated to grow at a CAGR of 10% from 1.24mn in 2012 to over 14.6mn in 2014, and to 19.5mn in 2017.

In the global industrial automation market, industrial robotics is the fastest-growing segment. We believe the segment will maintain strong growth in the medium to long term, given that the IT and auto industries are anticipated to increasingly adopt robotics in manufacturing. As the steel, chemical, and F&B industries are still in the early stages of automation, industrial robots also hold strong growth potential in those areas.

The US, China, Japan, Korea, and Germany accounted for 70% of global robot shipments last year. On a cumulative basis, Japan is the largest producer, supplying over 300,000 robots so far, followed by the US, Germany, Korea and China.

While the industrial robotics markets in the US, Germany, Japan, and Korea are projected to display CAGRs of 5% during 2014-17, China is expected to see annual growth of 26%. Accordingly, China is anticipated to have over 400,000 industrial robots in the country’s production sites by 2017.

Figure 26. 170,000 industrial robots were shipped last year, a

new record

Figure 27. Industrial robots are most widely used in the auto

sector

Source: IFR, KDB Daewoo Securities Research Source: IFR, KDB Daewoo Securities Research

Figure 28. Annual supply of industrial robots Figure 29. Operational inventory of industrial robots

Source: IFR, KDB Daewoo Securities Research Source: IFR, KDB Daewoo Securities Research

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95 97 99 01 03 05 07 09 11 13

('000 units)

0 20 40 60 80

Unspecified

Other

Food

Chemicals/rubber/plastics

Metals

Electric/electronics

Automotive

('000 units)

2013

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2011

2628 31

36

22

36

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28 25 2832

19 21 23 2617 18 19 21

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('000 units)

North AmericaChinaJapanKoreaGermany

197215

237

291

96

132

182.3

427

310 304 306287

138156

175

227

161 167 175199

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('000 units)

North AmericaChinaJapanKorea

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Table 2. Annual production of industrial robots by nation/region (‘000 units)

Nation 2012 2013 2014F 1017F

North/Central America 28,137 30,317 33,700 40,000

Brazil 1,645 1,398 2,000 3,500

North America 26,269 28,668 31,500 36,000

South America ex-Brazil 223 251 200 500

Asia/Australia 84,645 98,807 120,000 186,000

China 22,987 36,560 50,000 100,000

India 1,508 1,917 2,500 5,000

Japan 28,680 25,110 28,000 32,000

Korea 19,424 21,307 23,500 26,000

Taiwan 3,368 5,457 6,000 9,000

Thailand 4,028 3,221 4,200 7,000

Other Asia 4,650 5,235 5,800 7,000

Europe 41,218 43,285 46,000 55,000

Czech Republic 1,040 1,337 1,800 2,600

France 2,956 2,161 2,300 2,800

Germany 17,528 18,297 19,500 21,000

Italy 4,402 4,701 4,800 5,500

Spain 2,005 2,765 3,000 3,800

UK 2,943 2,486 2,500 3,500

Other 10,344 11,538 12,100 15,800

Africa 393 733 800 1,000

Other 4,953 4,991 4,500 6,000

Total 159,346 178,132 205,000 288,000


Table 3. Cumulative production of industrial robots by nation/region (‘000 units)

Nation 2012 2013 2014F 2017F

North/Central America 207,017 226,071 249,500 313,200

Brazil 7,576 8,564 10,300 18,300

North America 197,962 215,817 237,400 291,900

South America ex-Brazil 1,479 1,690 1,800 3,000

Asia/Australia 628,889 689,349 777,100 1,107,600

China 96,924 132,784 182,300 427,900

India 7,840 9,677 12,100 23,300

Japan 310,508 304,001 306,700 287,000

Korea 138,883 156,110 175,600 227,500

Taiwan 32,445 37,252 42,600 56,300

Thailand 17,116 20,337 24,400 40,100

Other Asia 25,163 29,188 33,400 45,500

Europe 380,546 392,227 411,500 476,800

Czech Republic 6,830 8,097 9,800 15,500

France 33,624 32,301 31,600 30,200

Germany 161,988 167,579 175,200 199,200

Italy 60,750 59,078 58,400 57,800

Spain 28,911 28,091 28,700 32,000

UK 15,046 15,591 17,300 23,800

Other 73,397 81,490 90,500 118,300

Africa 2,858 3,501 4,200 6,600

Other 16,079 21,070 25,600 41,800

Total 1,235,389 1,332,218 1,467,900 1,946,000


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Robo-Stox index has far outperformed major stock indices

S&P’s Robo-Stox index measures the performance of 85 robotics- and automation-related companies located in 16 countries. Manufacturing powerhouses like the US, Japan and Germany constitute more than 70% of the index. By sector, industrials comprise 50%, IT 30%, and healthcare 11%.

The Robo-Stox index has advanced 119% since early 2008, significantly outperforming major domestic and global indices, including the S&P 500 (42%) and MSCI World (9%). We believe that this outperformance reflects the differentiated growth of robotics and automation companies.

Shares of the top 20 companies (by weight) in the index have climbed by145%, while those of the bottom 65 companies have risen 95%. Among the top 20 companies, industrial robotics companies account for 50%, and IT automation over 30%.

We believe domestic companies, although latecomers, are on the fast track to growth. We are particularly bullish on companies related to industrial robotics (including logistics automation) and IT automation, two of the fastest-growing segments in the global automation industry.

Figure 30. Robo-Stox outperforms S&P 500 and MSCI World Figure 31. Robo-Stox mainly consists of industrial robot

companies

Source: Bloomberg, KDB Daewoo Securities Research Source: Robo-Stox, KDB Daewoo Securities Research

Figure 32. Robo-Stox mainly consists of North American

companies

Figure 33. 20 most heavily-weighted Robo-Stox firms

outperforming lower-ranking names

Source: Bloomberg, KDB Daewoo Securities Research Source: Robo-Stox, KDB Daewoo Securities Research

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(1/2/08=100)Robo-StoxS&P 500MSCI World

Industrials50%

IT30%

Consumerdiscretionary

4%

Energy5%

Healthcare11%

North America42%

Europe23%

Asia32%

Middle East (other)3%

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BellwetherNon-bellwether

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Figure 34. Robo-Stox breakdown by sector Figure 35. Robo-Stox breakdown by nation

Source: Robo-Stox, KDB Daewoo Securities Research Source: Robo-Stox, KDB Daewoo Securities Research

Table 4. 20 most heavily-weighted companies in the Robo-Stox index

Name Sector Country Index weight

3D Systems IT US 2.0%

ABB Industrials Switzerland 2.0%

Accuray Healthcare US 2.0%

AeroVironment Industrials US 2.0%

Cognex IT US 2.0%

Cyberdyne Healthcare Japan 2.0%

Fanuc Industrials Japan 2.0%

FARO IT US 2.0%

Hiwin Industrials Taiwan 2.0%

Intuitive Surgical Healthcare US 2.0%

iRobot Consumer discretionary US 2.0%

Keyence IT Japan 2.0%

Krones Industrials Germany 2.0%

KUKA Industrials Germany 2.0%

Lincoln Electric Industrials US 2.0%

Oceaneering International Energy US 2.0%

Omron IT Japan 2.0%

Rockwell Automation Industrials US 2.0%

Yaskawa IT Japan 2.0%

Yushin Precision Industrials Japan 2.0%

Total 40.0%

Source: Robo-Stox, KDB Daewoo Securities Research

Table 5. Breakdown of index by market cap group

Index weight

Large cap 18%

Mid-cap 45%

Small cap 37%

Source: Robo-Stox ,KDB Daewoo Securities Research

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December 3, 2014


IV. Case studies

1. Nobilia

Nobilia is the leading fitted kitchen manufacturer in Germany. The company supplies 580,000 complete kitchens annually (2,600 on a daily basis) to over 70 countries in the world. To maintain competitiveness despite high labor costs in Germany, the company has automated a significant portion of its production processes. Currently, 2,500 workers at two plants generate W1.3tr in daily revenue, with automated production processes helping to manage product quality.

The company has applied ICT to both its front- and back-end production processes, using “manufacturing by wire.” At the front end, information on parts and various assembly processes are controlled by Oracle’s Data Warehouse platform. At the back end, the necessary parts are selected by the ERP or MES system and packaged with RFID tags or bar codes for identification.

In short, information on part selection and finished product delivery is managed automatically. This system has improved the efficiency of assembly processes and made it easy for the company to find necessary parts for maintenance services.

Meanwhile, Nobilia’s production facilities are controlled by 540 PC controller units that run on Beckhoff’s PLC and NC automation software. The number of daily data processes at the company exceeds a million, with each process taking only 100 milliseconds.

Figure 36. Nobilia’s fitted kitchens Figure 37. Nobilia’s warehouse

Source: Company materials, KDB Daewoo Securities Research Source: Company materials , KDB Daewoo Securities Research

Automation

16

December 3, 2014


2. Siemens

Siemens’s factory in Amberg is often cited as one of the smartest factories in the world. The facility has aggressively adopted automation to reduce product defects.

The Amberg factory displays a defect rate of only 0.0011% (11.5 defects out of 1mn products). This low defect rate is one of the main reasons why customers are drawn to Siemens’s products. The company is currently striving to achieve a defect rate of 0%.

All of the products manufactured at the Amberg plant have bar codes. Thus, information on any product defect is sent to employees in charge of production and design. The accumulated data on product defects is then analyzed (Big Data), helping the company resolve relevant problems in a short period of time.

At the Amberg factory, tens of thousands of sensors give orders based on real-time information (50,000 data processes per day, up from 5,000 in 1995). The average number of working hours per employee is only 35 hours per week, but thanks to automation, the factory’s production yield and productivity remain extremely high.

Figure 38. Process automation via robotics Figure 39. Siemens’s Amberg factory

Source: Company materials, KDB Daewoo Securities Research Source: Company materials, KDB Daewoo Securities Research

Figure 40. Amberg factory’s error rate is 0.0011% Figure 41. Data processes per day at the Amberg factory:

5,000 in 1995 → 10mn in 2012

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

19.0 17.0 16.0 14.0 12.5 11.5

0

20

40

60

80

100

09 10 11 12 13 14F

Defects per mn units

(cases)

Automation

17

December 3, 2014


3. Amazon

Amazon has already established automated systems for ordering, payment, logistics, and delivery processes. When a customer’s order and payment information is sent to the company’s data center, robots locate the ordered items, move them around the warehouse, and transport them to a loading dock. Once the items are transported to a distribution center, they are also automatically classified by shipping distance (within 200 miles: by truck; 200 miles or over: by air).

In March 2012, Amazon acquired Kiva Systems, a warehouse automation company, for US$770mn. By utilizing robots that are controlled via wireless communication or bar codes, the company has improved productivity and accuracy in logistics and sharply shortened delivery times (same- or next-day delivery). In December 2013, the company unveiled Amazon Prime Air, a delivery service using unmanned air vehicles (UAV) based on GPS and the company’ advanced software and hardware technology. The company has successfully completed test operations in the US, Australia, India, and the UK.

Amazon had originally planned to provide the service starting in 2015. However, the company’s plans hit a snag, as they were not in compliance with Federal Aviation Administration (FAA) rules. If implemented, Amazon Prime Air would enable the delivery of packages weighing up to five pounds in less than half an hour.

Meanwhile, Amazon has reduced annual costs by US$916mn through process automation.

Figure 42. Amazon’s warehouse automation system: Kiva

Systems Figure 43. Amazon’s UAV delivery system: Prime Air

Source: Company materials, Journal of Commerce, KDB Daewoo Securities

Research

Source: Company materials, KDB Daewoo Securities Research

Figure 44. Amazon: Comprehensive process automation from order-taking to shipping

2

Source: Company materials, KDB Daewoo Securities Research

Automation

18

December 3, 2014


4. Google

In December 2013 alone, Google acquired eight robotics companies, including Schaft (humanoid robots), Meka Robotics (mobile robotic systems), Boston Dynamics (military robots), and Titan Aerospace (solar-powered UAVs).

Google is expected to eventually see a boost in revenue from its robotics business, which should be able to: 1) help companies improve their manufacturing operations as well as 2) invigorate the robot app ecosystem. Furthermore, the company is striving to make robotics hardware technologies more open in order to encourage a variety of players to advance into the robotics market and reduce development costs and periods. In addition, the company has been working on an unmanned delivery service while conducting Project Wing, an R&D project with the mission of providing internet access to rural and remote areas.

Google’s push has significant implications for other companies. The robotics ecosystem is moving toward the opening of both hardware and software technologies. If an open platform takes root in the robotics industry, integration with other platforms will likely occur, benefitting companies with open OS and app stores.

If robots become widely used, artificial intelligence algorithms will likely evolve, bringing software capabilities to the forefront. In addition, regulatory issues, including safety assurance, should arise. We think that companies need to prepare for the changes that the Google-driven robotics era will bring.

Table 6. Robotics companies acquired by Google

Time Company Business areas Flagship products

12/2/13 Schaft Humanoid robots S-One

12/3/13 Industrial Perception 3D logistics processes

12/4/13 Redwood Robotics Production of robotic arms

12/5/13 Meka Robotics Mobile robotic systems M1

12/6/13 Holomni Four-wheeled robots

12/7/13 Bot & Dolly Remote camera control automation Iris, Scout

12/8/13 Autofuss Ad and video content production using robots

12/10/13 Boston Dynamics Military robots BigDog, Petman

4/14/14 Titan Aerospace Solar PV-based UAVs

Source: Google, WSJ, KDB Daewoo Securities Research

Figure 45 Expansion of Google’s OS Figure 46 3D vision-guided

picking/packaging Figure 47 Defense robot

Source: MIT Technology Review, KDB Daewoo

Securities Research

Source: The Wall Street Journal, KDB Daewoo

Securities Research

Source: The Wall Street Journal , KDB Daewoo

Securities Research

Automation

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December 3, 2014


V. Investment ideas

Beneficiaries of automation

The global automation trend, which is just now lifting off, will likely persist for some time. We expect automation to first become widespread in the IT precision inspection, automotive electronic components inspection, and warehouse logistics system areas.

We recommend Koh Young Technology (098460 KQ/Buy) and SFA Engineering (056190 KQ/Buy) as our top picks in automation. Koh Young Technology has the most globally advanced technology in the 3D AOI field, while SFA Engineering has recently been seeing a pickup in new orders, driven by logistics automation equipment.

We also advise watching: 1) HyVISION System (126700 KQ/Not Rated), which produces automated inspection equipment for smartphone camera modules, 2) Shin-Heung Machine (007820 KQ/Not Rated), which stands to benefit from the expansion of the logistics automation market, and 3) YoungWoo DSP (143540 KQ/Not Rated), which manufactures automated inspection, measurement, and repair equipment for displays.

Table 7. Beneficiaries of automation

Category Stock Ticker Market cap

(Wbn) Key details

IT

inspection

equipment

Koh Young 098460 KQ 514.6 Holder of the most globally advanced technologies in the 3D solder paste inspection (SPI)

and 3D AOI fields; surgical robots to start to contribute to revenue in 2016

HyVISION 126700 KQ 117.4 Manufactures inspection equipment for cellphone-use camera modules; sells in-house

developed low-end 3D printers

Nexteye 137940 KQ 39.1 Manufactures inspection equipment for display parts (machine vision technology)

Intekplus 064290 KQ 25.5 Manufactures inspection equipment for semiconductor, display, solar PV, and LED sectors

YoungWoo 143540 KQ 32.5 Manufactures equipment for OLED, LCD, semiconductor, solar PV, and LED sectors

Logistics

automation

SFA 056190 KQ 871 Manufactures automation equipment and systems for display and logistics;

New orders for logistics automaton equipment have been increasing recently

Shin-Heung 007820 KQ 88.7

Supplies a variety of customized automation equipment, automatic return systems, robots,

and application equipment for companies related to the auto, chemical, pharmaceutical, and

food sectors

JVM 054950 KQ 377.3 Supplies devices, systems, and software for automated drug dispensing units at hospitals and

pharmacies

Hyundai

Elevator 017800 KS 1,189.7

Engages in the production/installation/maintenance of elevators, escalators, moving

walkways, logistics automation equipment, subway doors, and parking facilities

Note: Market cap data based on December 1, 2014 closing prices

Source: Company data, KDB Daewoo Securities Research

Automation

20

December 3, 2014


Table 8. Top 20 Robo-Stox index companies

Company Ticker Market cap

(US$mn) Nation Key details

ABB ABBN 52,958 Switzer-

land

- Founded via merger between ASEA and BBC in 1988; specializes in automation technologies

- Smart grid and robot automation technologies

Fanuc 6954 40,624 Japan - Established in 1956; produces drilling and cutting robots as well as humanoid robots

- Automation technologies such as robots, super-nano machines, laser systems, and motors

Keyence 6861 28,654 Japan - Established in 1972; specialized in sensors for use in automation

- Automation quality control technologies

Intuitive Surgical ISRG 18,813 US - Established in 1972 in California; develops and produces medical robot systems

- Precision surgical technologies (incisions/sutures) for vital organs

Rockwell Automation ROK 15,513 US

- Established in 1972 in Wisconsin; specializes in automation solutions; the largest PLC

software firm

- Robotic automation technologies

Omron 6645 10,501 Japan

- Established in 1990; specializes in manufacturing automation components/equipment/

sensors/ controllers

-Sensor technologies aimed at monitoring production progress and prevent accidents

Oceaneering Int’l OII 7,415 US - Established in Texas in 1965; specializes in manufacturing underwater remotely operated

vehicles (ROV), which are used for drilling and plant construction/maintenance

Lincoln Electric LECO 5,778 US - Established in Ohio in 1985; specializes in the processing and cutting of industrial materials

- Precision processing using robots and lasers

3D Systems DDD 4,170 US - Established in California in 1986; specializes in 3D printing solutions and imaging software

Cognex CGNX 3,581 US

- Established in Massachusetts in 1981; boasts vision sensor technology for analyzing visual

information

- Allows manufacturers to respond flexibly via vision modules and surface inspection systems

Yaskawa 6506 3,275 Japan

- Established in 1915; specializes in behavioral control systems, robotics, and system

engineering

- Produces arc welding and painting robots, and parts for personal robots

Krones KRN 3,143 Germany

- Established in 1951; specializes in plant engineering solutions

- Well-known for automation system technology and as an industrial robot and equipment

producer

KUKA KU2 2,795 Germany

- Established in 1989; specializes in automation systems for automobile production

- Produces various kinds of robots necessary for automation based on robot control system

and controller technologies

Hiwin 2049 2,213 Taiwan

- Established in 1989; produces motion control machines

- Technologies aimed at boosting superior production speed and accuracy via comprehensive

automation

Cyberdyne 7779 1,626 Japan - Established in 2004 in Japan; specializes in research, production, sale, and leasing of robots

- Produces mobility aid and disaster rescue robots

IRobot IRBT 1,051 US - Provider of robots for household cleaning, defense, and security; founded in 1990

- Manufacturer of the reconnaissance and bomb-disposal robot PackBot®

FARO FARO 976 US -3D imaging software company; founded in 1981

- Faster and more accurate inspection of 3D and complex objects,

AeroVironment AVAV 700 US - Founded in 1971; producer of UAVs and efficient energy systems

- Winner of every US Department of Defense competition of record involving small UAVs

Accuray ARAY 564 US - Founded as Cyberknife in 1992; FDA approval of Cyberknife system in 2001

- Radiation therapy system used in the treatment of cancer and tumors

Yushin Precision 6482 367 Japan - Supplier of automated managing inventory systems; founded in 1971

Note: Market cap data based on December 1, 2014 closing prices


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December 3, 2014


Top global manufacturer of 3D automated inspection equipment

Established in 2002, Koh Young Technology manufactures 3D precision measurement and inspection equipment for use in the production of printed circuit boards (PCB). Its key products are: 1) 3D solder paste inspection (SPI) equipment, which accounts for 62% of revenue and 2) 3D automated optical inspection (AOI) equipment, which comprises 35% of revenue (based on 2014 data).

Koh Young was the first company to introduce 3D SPI equipment and currently holds the largest share (42%) of the global 3D SPI equipment market. The company has a diverse customer base consisting of over 1,300 companies in the smartphone, automotive electronics, consumer appliance, and electronic manufacturing service (EMS) sectors.

Expansion of the 3D AOI business and new growth engines

3D AOI equipment, which is used before and after the reflow process (the final stage of surface mounting), is becoming increasingly recognized as essential for PCB inspection due to its cost saving benefits and greater accuracy (vs. 2D equipment). As such, demand for 3D AOI equipment has been rapidly growing, particularly in the automotive electronics and smartphone industries. Looking forward, we expect Koh Young’s 3D AOI equipment business to mirror the high growth of its 3D SPI equipment business, with revenue expanding to nearly W80bn in 2015.

We believe Koh Young’s biggest appeal lies in its new growth engines. 3D AOI equipment should replace 3D SPI as the company’s major growth driver going forward. Furthermore, 3D semiconductor packaging inspection equipment and surgical robots should start to contribute to revenue in 2015 and 2016, respectively. What is more encouraging is that these new businesses have bigger markets and higher profitability. We estimate the 3D AOI market to be W500-600bn (double or triple the size of the 3D SPI market), and the surgical robotics market to be in the trillions. As such, we see substantial growth potential over the medium and long term.

Initiate coverage with Buy and TP of W53,000

We initiate our coverage on Koh Young Technology with a Buy rating and target price of W53,000. Our target price implies a P/E of 22.4x, the average 2015F multiple of leading names in the Robo-Stox index. We believe Koh Young deserves to trade at least in line with its global peers, given: 1) its superior technologies, 2) sustainable long-term growth potential, and 3) stable profitability.

FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F

Revenue (Wbn) 86 108 112 140 181 238

OP (Wbn) 18 21 17 27 39 52

OP margin (%) 20.9 19.4 15.2 19.3 21.5 21.8

NP (Wbn) 16 15 14 20 32 42

EPS (W) 1,204 1,130 1,036 1,517 2,355 3,122

ROE (%) 25.1 19.9 15.4 19.1 24.6 26.2

P/E (x) 17.1 16.6 18.0 25.3 16.3 12.3

P/B (x) 3.8 3.0 2.6 4.5 3.6 2.9

Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests

Source: Company data, KDB Daewoo Securities Research estimates

Technology

(Initiate) Buy

Target Price (12M, W) 53,000

Share Price (12/2/14, W) 38,350

Expected Return 38%

OP (14F, Wbn) 27

Consensus OP (14F, Wbn) 27

EPS Growth (14F, %) 46.5

Market EPS Growth (14F, %) 1.1

P/E (14F, x) 25.3

Market P/E (14F, x) 13.1

KOSDAQ 541.53

Market Cap (Wbn) 515

Shares Outstanding (mn) 13

Free Float (%) 80.1

Foreign Ownership (%) 39.9

Beta (12M) 0.59

52-Week Low 17,614

52-Week High 38,450

(%) 1M 6M 12M

Absolute 16.2 63.2 116.1

Relative 19.9 61.3 104.6

Koh Young Technology (098460 KQ) Largest beneficiary of automation expansion

80

130

180

230

11.13 3.14 7.14 11.14

Koh Young KOSDAQ

Automation

22

December 3, 2014


Company overview

Established in April 2002, Koh Young Technology mainly manufactures 3D precision measurement and inspection equipment. By product, 3D SPI equipment accounts for the largest percentage of revenue at 62%, followed by 3D AOI equipment at 35% and semiconductor inspection equipment at 1% (as of 2014).

3D SPI equipment is used to detect defects in solder paste printing during the surface mounting process of PCB manufacturing. The company currently holds the largest share (42%) of the global 3D SPI equipment market.

The company’s customer base consists of over 1,300 companies in the smartphone, automotive electronics, consumer appliance, and EMS sectors. The company’s downstream industries are also diversified across handsets, PCs, auto, electronic devices, semiconductor, and display.

Figure 48. Product lineup


Table 9. Company history

Phase Time Details

Early stages

4/02 Established as Koh Young Technology

4/03 Initial sales of 3D SPI system

9/04 Selected as a blue chip technology firm by KIBO

“Bowling alley” growth

(3D SPI global M/S leader )

1/05 Established service networks in Europe, the US, China, and

Southeast Asia

4/05 Supply of products to top three global EMS firms

2/06 Developed 3D inspection equipment for semiconductors

12/06 Ranked no. 1 in 3D SPI market share

“Tornado” growth

(3D AOI global leader)

12/07 3D AOI system was named a “global no. 1 product”

3/08 Establishment of a subsidiary in Japan

6/08 Listed on the KOSDAQ

12/08 US$20mn in exports

5/09 Establishment of a subsidiary in Europe

9/09 Shipment of1,000th inline AOI system

4/10 Establishment of a subsidiary in Europe

10/10 Named a “hidden winner” by the KRX

5/11 Expanded into medical equipment

1/14 Established Koh Young SEA in Singapore

3/14 Shipment of 5,000th inline AOI systems

6/14 Plans to establish a subsidiary in China


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December 3, 2014


Outlook by business

1. 3D SPI equipment

3D SPI equipment inspects whether solder paste is properly printed and therefore helps improve PCB production yields. According to the Surface Mount Technology Association (SMTA), the solder paste printing process is responsible for more than 70% of all surface mounting defects. As components become smaller and lighter, the need for better inspection equipment is also increasing.

We estimate the global 3D SPI equipment market is worth roughly W200bn and has the potential to grow further to the mid-W200bn level. Koh Young currently holds the largest share of the global 3D SPI equipment market at 42%. Major competitors include Cyberoptics (US), CKD (Japan) and TRI (Taiwan), but most of them are focused on low- to mid-end products, whereas Koh Young mainly supplies mid- to high-end products.

We believe Koh Young’s 3D SPI equipment sales could grow to up to the low-W100bn level. That said, growth is anticipated to slow to around 5% due to market saturation. For now, 3D SPI equipment should serve as a stable source of cash flow for the company. We expect 3D SPI revenue to rise to W88.2bn in 2015 from W84bn in 2014.

Figure 49. Surface mounting defect breakdown Figure 50. Koh Young’s 3D SPI equipment revenue

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

Figure 51. 3D SPI equipment market size Figure 52. Koh Young’s 3D SPI equipment market share

Source: SMTA, KDB Daewoo Securities Research Source: SMTA KDB Daewoo Securities Research

Bridge28%

Insufficient application

23%Opens18%

MSC solder5%

Misplaced part9%

Missing part7%

Lifted leads4%

Wrong part4%

Polarity2%

Solder paste-related error

66.8 73.4

84.7 77.5

84.0 88.2

91.3

0

20

40

60

80

100

10 11 12 13 14F 15F 16F

3D SPI equipment revenue

(Wbn)

0

50

100

150

200

250

10 11 12 13 14F 15F 16F

3D SPI equipment market

(US$mn)

40.4

37.4

38.6

41.2

42.0

35

37

39

41

43

10 11 12 13 14F

3D SPI equipment M/S(US$mn)

Automation

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December 3, 2014


2. 3D AOI equipment

Many companies still use 2D AOI equipment, which tends to be less accurate because of its reliance on the human eye. 3D AOI equipment, on the other hand, allows even unskilled technicians to conduct thorough inspections. As such, demand has been rapidly increasing, particularly in the automotive electronics and smartphone industries. Demand for high-end inspection equipment is especially strong in the auto industry, where quality is directly tied to the safety of human lives.

Generally speaking, it took more than two years for latecomers to catch up to Koh Young’s 3D SPI technology. We believe it will take even more time before late entrants produce products to rival Koh Young’s 3D AOI technology, which is much more complex than 3D SPI.

We estimate the 3D AOI equipment market to be W400-500bn, which is double or triple the size of the 3D SPI equipment market. Furthermore, because both markets share the same customer base, the company can leverage its existing relationships. We forecast Koh Young’s 3D AOI equipment revenue to reach W48bn in 2014 and expand to around W80bn (similar to the level of 3D SPI equipment) in 2015. We expect the company’s 3D AOI equipment business to mirror the high growth of its 3D SPI equipment business. As revenue growth picks up, margins should also improve rapidly.

Figure 53. Assembly-line production of PCBs


Figure 54. Contribution of 3D AOI equipment is growing Figure 55. Koh Young’s 3D AOI sales trend and forecasts


0.0 0.0 0.0 0.0 2.2 3.3 11.4

22.5

48.0

79.8

125.8

0

30

60

90

120

150

05 06 07 08 09 10 11 12 13 14F 15F 16F

3D AOI equipment revenue

(Wbn)

3D SPI49%3D AOI

45%

Other2%

2015F

3D SPI75%

3D AOI22%

Other2%

2013

Semiconductorinspection

1%

Semiconductorinspection

4%

Automation

25

December 3, 2014


3. New drivers: 3D semiconductor package inspection equipment, surgical robots

3D semiconductor packaging inspection equipment is used to inspect wafer bumps in the flip chip packaging process. Previously, wire bonding was more widely used for packaging, but the use of flip chip packaging (which connects chips and substrates) has been increasing as semiconductor chips become more advanced.

Koh Young gained approval for its 3D semiconductor packaging inspection equipment from the world’s largest chip maker several years ago and is now waiting for the customer’s investment to begin. Given that the customer is expected to meaningfully expand production of 14nm chips in 2015, Koh Young should start to begin supplying 3D semiconductor packaging inspection equipment next year. Furthermore, once through-silicon via (TSV), the next-generation packaging technology, takes off, we believe demand for Koh Young’s 3D inspection equipment will expand further, as TSV involves creating interconnections through hundreds of holes, instead of wires or bumps.

The most well-known surgical robot is probably Intuitive Surgical’s da Vinci Surgical System, which allows surgeons to perform minimally invasive procedures.

Koh Young is currently developing a neurosurgical robot jointly with Harvard Medical School. If the company succeeds in developing a surgical robot using its 3D vision technology, it would open the doors to a massive new market.

The company will initially begin with surgical instruments and sensors before developing a complete surgical robot. The company plans to conclude a pilot test in 2015 and hopes to generate sales (albeit small in scale) in 2016.

Although we have not reflected any surgical robot revenue in our forecasts, the business would boost overall earnings if sales were to begin earlier than expected. And given the typically high valuations of medical device makers, surgical robots could serve as a major re-rating catalyst.

All in all, we see strong room for growth in 3D semiconductor packaging inspection equipment and surgical robots over the medium to long term.

Figure 56. Semiconductor surface and wafer inspector Figure 57. Intuitive Surgical’s da Vinci Surgical System

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

Automation

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December 3, 2014


Earnings forecasts and valuation

For 4Q14, we forecast non-consolidated revenue and operating profit to grow to W35.5bn (+40% YoY, +5% QoQ) and W7.3bn (+53% YoY, +5% QoQ), respectively. SPI equipment revenue should seasonally decline in the quarter, but 3D AOI equipment revenue should sharply increase, driving overall earnings growth.

For 2014, we expect revenue to climb 30.6% and OP margin to exceed 20% in non-consolidated terms. In 2015 and 2016, revenue should continue to grow more than 30% annually, supported by 3D AOI equipment and (to a lesser extent) semiconductor inspection equipment. Increased sales of AOI equipment should also boost overall margins, given their high profitability.

Table 10. Quarterly and annual earnings (non-consolidated) (Wbn, %)

2014F 2015F 2013 2014F 2015F

1Q 2Q 3Q 4QF 1QF 2QF 3QF 4QF

Revenue 31.6 34.7 33.9 35.5 35.2 47.3 46.6 48.6 103.9 135.7 177.7

3D SPI 16.0 24.7 22.5 20.7 17.1 25.8 23.4 21.8 77.5 84.0 88.2

3D AOI 15.2 9.4 9.8 13.6 16.8 19.8 20.1 23.1 22.5 48.0 79.8

Semiconductor

inspection - - 0.7 0.3 0.7 1.1 2.0 2.8 1.4 1.0 6.6

Other 0.5 0.5 0.9 0.8 0.6 0.6 1.0 0.9 2.5 2.8 3.2

Operating profit 5.5 7.8 7.0 7.3 7.2 10.7 10.3 10.4 17.8 27.6 38.6

OP margin 17.5 22.6 20.5 20.6 20.4 22.7 22.1 21.4 17.1 20.4 21.7

Net profit 4.9 4.8 6.1 5.7 6.3 8.9 8.5 8.3 14.8 21.4 32.0

Net margin 15.4 13.9 17.9 15.9 17.8 18.9 18.3 17.0 14.2 15.8 18.0

Growth (YoY)

Revenue 51.9 13.9 24.3 39.7 11.3 36.6 37.4 37.0 3.1 30.6 31.0

3D SPI 7.0 3.8 11.5 11.5 7.4 4.4 4.1 4.9 -8.4 8.3 5.0

3D AOI 213.2 78.3 57.2 123.2 10.4 111.0 105.0 70.0 96.9 113.8 66.3

Semiconductor

inspection - - 318.4 - - - 202.6 865.5 -45.6 -32.5 594.0

Other 14.6 -22.3 30.3 19.3 20.0 17.0 10.0 11.0 18.3 10.1 13.4

Operating profit 125.3 32.9 50.0 52.6 30.0 37.0 47.9 42.4 -12.7 55.4 39.8

Net profit 65.6 -18.1 116.5 76.1 28.5 86.3 40.4 46.2 -0.3 44.6 49.6

Revenue proportion

3D SPI 50.5 71.4 66.4 58.5 48.7 54.6 50.3 44.7 74.6 61.9 49.6

3D AOI 48.0 27.0 29.0 38.4 47.6 41.8 43.2 47.6 21.6 35.4 44.9

Semiconductor

inspection - - 1.9 0.8 2.0 2.3 4.3 5.8 1.4 0.7 3.7

Other 1.5 1.5 2.7 2.4 1.7 1.3 2.2 1.9 2.4 2.1 1.8


Table 11. Quarterly and annual earnings (consolidated) (Wbn, %)

2014F 2015F 2013 2014F 2015F

1Q 2Q 3Q 4QF 1QF 2QF 3QF 4QF

Revenue 33.7 36.8 33.6 35.7 36.2 48.1 47.0 49.3 111.9 139.8 180.6

Growth (YoY) 54.5 13.0 15.7 25.3 7.5 30.8 39.9 37.9 3.8 24.9 29.2

Growth (QoQ) 18.2 9.2 -8.6 6.3 1.4 32.8 -2.2 4.8 - - -


Growth (YoY) 222.0 34.9 28.9 64.7 13.0 33.7 83.3 46.7 -21.8 63.4 42.5

Growth (QoQ) 47.7 25.9 -30.1 26.6 1.4 49.0 -4.1 1.3 - - -

Pretax profit 6.6 6.0 6.1 6.6 7.2 10.6 10.5 10.0 15.9 25.3 38.4

Net profit 5.4 4.7 4.8 5.5 6.0 9.0 8.5 8.1 13.9 20.4 31.6

Growth (YoY) 123.9 -17.5 95.1 65.5 10.9 91.2 77.5 47.2 -8.4 46.8 54.8

Growth (QoQ) 64.4 -13.1 1.1 14.6 10.1 50.0 -6.2 -5.0 - - -


Net margin 16.1 12.9 14.2 15.3 16.7 18.8 18.0 16.4 14.6 17.5 17.6


Automation

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December 3, 2014


Initiate coverage with Buy rating and TP of W53,000

We initiate our coverage on Koh Young Technology with a Buy rating and target price of W53,000. We derived our target price by applying to our 2015F EPS of W2,355 a P/E of 22.4x, the average 2015F multiple of the top 20 names in the Robo-Stox Index (excluding those that recorded losses in the most recent year or are expected to do so).

We believe Koh Young deserves to trade at least in line with its global peers, given: 1) its superior technology, 2) long-term growth potential, 3) stable profitability, and 4) well-diversified customer base.

In our view, a key upside catalyst could be the company’s potential inclusion into the Robo-Stox index. Furthermore, as the surgical robot business becomes more visible in 2H16 or 2017, we could see a potential re-rating.

Table 12. Target price calculation

Notes

2015F EPS (W) 2,355 Based on 2015F data

Target P/E (x) 22.4Average 2015F multiple of top 20 Robo-Stox firms (excluding loss-

making players)

Fair price (W) 52,849

Target price (W) 53,000

Share price (W) 38,300 Based on 12/1/14 closing price

Expected return (%) 38.4

Source: KDB Daewoo Securities Research

Figure 58. 12-month forward P/E band Figure 59. P/E-EPS growth: Robo-Stox bellwethers


ABB

Keyence

IntuitiveSurgical

Omron

3D Systems

KUKAiRobot

Koh YoungYushin

Precision

0

10

20

30

40

0 10 20 30 40 50 60

(P/E, x)

(EPS growth, %)0

1

2

3

4

5

6

09 10 11 12 13 14 15

(만원)

3.0x

8.0x

12.0x

16.0x

20.0x

(W'000)

60

50

40

30

20

10

Automation

28

December 3, 2014


Table 13. Earnings of bellwether Robo-Stox names (Wbn, %)

Company Market cap Revenue Operating profit OP margin Net profit

13 14F 15F 13 14F 15F 13 14F 15F 13 14F 15F

Koh Young 515 112 140 181 17 27 39 15.2 19.3 21.5 14 20 32

ABB 58,987 45,815 45,058 45,882 4,803 4,840 5,491 10.5 10.7 12.0 3,051 2,930 3,434

Fanuc 45,104 4,914 6,471 6,073 1,789 2,585 2,425 36.4 39.9 39.9 1,209 1,772 1,671

Keyence 31,802 2,897 2,995 3,319 1,429 1,540 1,716 49.3 51.4 51.7 939 1,019 1,134

Intuitive Surgical 20,789 2,480 2,355 2,614 933 794 951 37.6 33.7 36.4 735 460 597

Rockwell Automation 17,307 6,934 7,556 7,916 1,239 1,455 1,567 17.9 19.3 19.8 866 999 1,091

Omron 11,657 8,423 7,876 8,249 742 812 872 8.8 10.3 10.6 503 575 606

Oceaneering Int’l 8,112 3,599 4,064 4,346 597 692 756 16.6 17.0 17.4 407 469 509

Lincoln Electric 6,397 3,123 3,125 3,299 446 458 505 14.3 14.7 15.3 322 276 -

3D Systems 4,553 562 748 971 89 135 205 15.8 18.1 21.1 48 32 100

Cognex 3,967 387 537 551 95 155 157 24.4 28.8 28.5 81 129 131

Yaskawa 3,635 3,975 3,727 3,888 281 291 321 7.1 7.8 8.3 185 202 212

Krones 3,478 4,093 4,052 4,241 251 259 293 6.1 6.4 6.9 174 183 205

KUKA 2,985 2,580 2,781 3,052 188 183 202 7.3 6.6 6.6 85 90 121

Hiwin 2,455 459 547 640 87 109 137 19.0 19.9 21.5 75 86 108

IRobot 1,199 534 623 712 36 68 85 6.7 10.8 11.9 30 41 48

FARO 1,088 319 375 422 33 43 55 10.3 11.5 13.1 24 37 41

Yushin Precision 408 195 185 203 30 31 34 15.6 16.7 16.8 21 21 23

Average 17.7 19.0 20.0


Table 14. Valuations of bellwether Robo-Stox names (Wbn, %)

Company Market caps ROE P/E P/B EV/EBITA

13 14F 15F 13 14F 15F 13 14F 15F 13 14F 15F

Koh Young 515 15.4 19.1 24.6 18.0 25.2 16.3 2.6 4.5 3.6 11.1 15.6 10.9

ABB 58,987 14.0 14.4 16.2 21.2 18.7 16.0 3.0 2.8 2.7 9.8 9.9 9.0

Fanuc 45,104 12.8 14.8 12.7 25.2 21.0 22.1 3.1 2.9 2.7 12.1 13.3 14.3

Keyence 31,802 12.3 12.8 12.7 33.8 31.0 27.8 3.9 3.7 3.4 14.7 17.0 15.3

Intuitive Surgical 20,789 13.8 14.1 17.4 39.4 34.0 29.1 6.1 5.7 4.8 24.6 24.6 20.6

Rockwell Automation 17,307 31.5 32.7 32.7 19.4 17.0 15.5 5.9 5.5 4.8 10.8 10.3 9.6

Omron 11,657 13.6 13.3 12.6 20.4 19.5 18.4 2.6 2.5 2.3 9.3 10.0 9.3

Oceaneering Int’l 8,112 21.0 20.7 20.4 17.9 17.4 15.9 3.6 3.5 3.0 8.4 8.7 8.0

Lincoln Electric 6,397 19.2 20.5 20.8 19.0 19.7 17.7 4.2 4.3 3.5 10.6 11.3 10.4

3D systems 4,553 1.9 5.2 7.1 140.5 50.4 35.8 3.1 3.2 3.0 54.5 23.3 16.2

Cognex 3,967 16.8 17.3 15.9 42.7 31.0 31.2 4.9 5.0 4.6 23.6 21.7 21.2

Yaskawa 3,635 15.7 14.6 13.8 18.0 18.1 17.1 2.6 2.5 2.3 11.1 9.9 9.1

Krones 3,478 14.3 13.5 14.1 18.9 18.7 16.6 2.6 2.5 2.2 7.1 8.5 7.7

KUKA 2,985 16.0 16.1 18.4 33.2 31.2 23.3 4.9 4.5 3.9 7.9 11.3 10.1

Hiwin 2,455 21.0 19.4 21.1 28.8 28.5 22.5 5.6 5.2 4.4 20.2 19.4 15.5

IRobot 1,199 8.9 11.4 12.0 31.9 23.8 22.9 2.9 - - 12.9 11.1 9.7

FARO 1,088 9.6 10.2 10.1 32.5 33.0 28.6 2.9 2.8 2.6 17.0 17.5 14.6

Yushin Precision 408 8.9 9.0 - 22.2 19.6 17.9 1.9 - - - - -

Average 14.8 15.3 16.1 33.2 25.4 22.4 3.8 3.8 3.3 15.9 14.2 12.5


Automation

29

December 3, 2014


Figure 60. Relative performances of Koh Young and bellwether

Robo-Stox names

Figure 61. P/E-EPS growth: Global semiconductor equipment

peers

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

Figure 62. Relative performances of global semiconductor

equipment and surface mount assembly stocks

Figure 63. Relative performances of domestic semiconductor

equipment and surface mount assembly stocks


Figure 64. P/E EPS growth: Domestic automation peers Figure 65. Relative performances of domestic automation

stocks


HyundaiElevator SFA

Engineering

Koh Young

ZeusHyVISION

System

Shin-HeungYoungWoo

DSP

0

20

-50 0 50 100 150 200 250 300 350

(P/E, x)

(EPS growth, %)

80

100

120

140

160

180

200

220

1/14 3/14 5/14 7/14 9/14 11/14

Koh YoungHanmi SemiconductorEO Technics

(1/14=100)

70

85

100

115

130

145

160

1/14 3/14 5/14 7/14 9/14 11/14

Koh Young OmronViscom AdvantestTeradyne DiscoCKD Furukawa

(1/2/14=100)

40

60

80

100

120

140

160

180

200

220

1/14 3/14 5/14 7/14 9/14 11/14

Nexteye Hyundai ElevatorHyVISION System NexteyeYoungWoo DSP IntekplusJVM SFA EngineeringShin-Heung

(1/14=100)

70

85

100

115

130

145

160

1/14 3/14 5/14 7/14 9/14 11/14

KUKA 3D SystemsKoh Young Intuitive SurgicalKeyence iRobotOmron ABBYushin Precision

(1/1/14=100)

Omron

Teradyne

Disco

Advantest

CKD

Koh YoungEO Technics

Viscom

0

10

20

30

40

0 10 20 30 40 50 60 70

(P/E, x)

(EPS growth, %)

HanmiSemicondutor

Automation

30

December 3, 2014


Figure 66. Quarterly revenue by downstream segment Figure 67. Quarterly revenue breakdown by downstream

segment


Figure 68. Quarterly revenue by region Figure 69. Quarterly revenue breakdown by region

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

Figure 70. Annual revenue breakdown by downstream

segment Figure 71. Annual revenue breakdown by region


0

10

20

30

40

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14

Other Logistics/medical Semiconductor Telecom

Display PC Auto Mobile

(Wbn)

0%

20%

40%

60%

80%

100%

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14

Other Semiconductor Logistics/medical Telecom

Display PC Other Mobile

0

10

20

30

40

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14

China Japan Southeast Asia Europe US Domestic(Wbn)

0%

20%

40%

60%

80%

100%

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14

China Japan Southeast Asia Europe US Domestic

0%

20%

40%

60%

80%

100%

09 10 11 12 13

Other Semiconductor Logistics/medical Telecom

Display PC Auto Mobile

0%

20%

40%

60%

80%

100%

09 10 11 12 13

China Japan Southeast Asia Europe US Domestic

Automation

31

December 3, 2014


Koh Young Technology (098460 KQ/Buy/TP: W53,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F

Revenue 112 140 181 238 Current Assets 95 117 149 194

Cost of Sales 50 61 79 103 Cash and Cash Equivalents 15 19 24 29

Gross Profit 62 79 102 135 AR & Other Receivables 32 39 52 71

SG&A Expenses 45 51 62 83 Inventories 21 25 32 43

Operating Profit (Adj) 17 27 39 52 Other Current Assets 27 34 41 51

Operating Profit 17 27 39 52 Non-Current Assets 26 26 29 33

Non-Operating Profit -1 -2 -1 -1 Investments in Associates 0 0 0 0

Net Financial Income 1 1 1 1 Property, Plant and Equipment 15 16 19 23

Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 7 6 5 3

Pretax Profit 16 25 38 51 Total Assets 121 144 179 227

Income Tax 2 5 7 9 Current Liabilities 18 22 29 38

Profit from Continuing Operations 14 20 32 42 AP & Other Payables 14 17 22 30

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0

Net Profit 14 20 32 42 Other Current Liabilities 4 5 7 8

Controlling Interests 14 20 32 42 Non-Current Liabilities 5 6 8 10

Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0

Total Comprehensive Profit 13 20 32 42 Other Non-Current Liabilities 5 6 8 10

Controlling Interests 13 20 32 42 Total Liabilities 23 28 37 48

Non-Controlling Interests 0 0 0 0 Controlling Interests 98 116 142 179

EBITDA 19 30 41 54 Capital Stock 4 4 4 4

FCF (Free Cash Flow) 13 16 18 21 Capital Surplus 20 20 20 20

EBITDA Margin (%) 17.0 21.4 22.7 22.7 Retained Earnings 72 89 115 152

Operating Profit Margin (%) 15.2 19.3 21.5 21.8 Non-Controlling Interests 0 0 0 0

Net Profit Margin (%) 12.5 14.3 17.7 17.6 Stockholders' Equity 98 116 142 179

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F 12/13 12/14F 12/15F 12/16F

Cash Flows from Op Activities 13 18 22 26 P/E (x) 18.0 25.3 16.3 12.3

Net Profit 14 20 32 42 P/CF (x) 11.2 18.1 12.5 9.5

Non-Cash Income and Expense 9 8 10 12 P/B (x) 2.6 4.5 3.6 2.9

Depreciation 1 1 1 1 EV/EBITDA (x) 11.1 15.7 11.0 8.0

Amortization 1 1 1 1 EPS (W) 1,036 1,517 2,355 3,122

Others 7 6 8 10 CFPS (W) 1,671 2,121 3,069 4,025

Chg in Working Capital -6 -6 -13 -20 BPS (W) 7,303 8,585 10,544 13,271

Chg in AR & Other Receivables -3 -7 -12 -18 DPS (W) 350 400 400 400

Chg in Inventories -3 -4 -7 -11 Payout ratio (%) 22.5 26.0 16.8 12.7

Chg in AP & Other Payables 3 3 4 6 Dividend Yield (%) 1.9 1.0 1.0 1.0

Income Tax Paid -4 -5 -7 -9 Revenue Growth (%) 3.7 25.0 29.3 31.5

Cash Flows from Inv Activities -7 -11 -13 -17 EBITDA Growth (%) -17.4 57.9 36.7 31.7

Chg in PP&E -1 -2 -4 -5 Operating Profit Growth (%) -19.0 58.8 44.4 33.3

Chg in Intangible Assets -2 0 0 0 EPS Growth (%) -8.3 46.4 55.2 32.6

Chg in Financial Assets -4 -8 -8 -10 Accounts Receivable Turnover (x) 3.8 4.1 4.1 4.0

Others 0 -1 -1 -2 Inventory Turnover (x) 5.8 6.2 6.4 6.4

Cash Flows from Fin Activities 1 -3 -5 -5 Accounts Payable Turnover (x) 5.6 5.1 5.2 5.1

Chg in Financial Liabilities - - - - ROA (%) 12.4 15.4 19.7 20.7

Chg in Equity 0 0 0 0 ROE (%) 15.4 19.1 24.6 26.2

Dividends Paid -2 -3 -5 -5 ROIC (%) 25.4 35.0 43.4 45.7

Others - - - - Liability to Equity Ratio (%) 23.0 24.5 25.7 27.1

Increase (Decrease) in Cash 7 4 5 6 Current Ratio (%) 532.2 526.9 518.8 506.9

Beginning Balance 8 15 19 24 Net Debt to Equity Ratio (%) -41.4 -45.1 -44.8 -43.8

Ending Balance 15 19 24 29 Interest Coverage Ratio (x) 444.0 0.0 0.0 0.0


Automation

32

December 3, 2014


Logistics automation to serve as an additional growth driver

SFA Engineering has been focusing mostly on its OLED equipment business since 2010, deriving 70% of its revenue from OLED and other display equipment in 2013. However, delays to OLED spending by its key customer took a direct toll on the company’s orders and earnings last year, underscoring the dire need for business diversification. In response, the company has been: 1) seeking customers overseas and 2) expanding its general distribution business. Encouragingly, such efforts started to yield visible results in 2H14. Going forward, we believe logistics automation will serve as one of the company’s major growth drivers alongside OLED equipment.

While fulfillment centers specifically for orders taken online are already common among global retailers, they were only first introduced in Korea this year (by the retailer Emart). Lotte Mart, which is currently building a distribution center, placed an equipment order with SFA Engineering in October. The company also won a logistics automation equipment contract from the bakery chain Paris Baguette, and is currently in talks with a domestic tire maker for a major deal (the outlook for which is positive).

The IPO of Alibaba and the company’s plans to build a global distribution network have sparked increasing interest in automated logistics centers, specifically B2C distribution centers designed to directly fulfill customers’ e-commerce orders. Whereas B2B distribution centers handle bulk volume, B2C distribution centers process shipments individually, which is why having an advanced order-picking system is so important.

4Q14 preview: Revenue of W214.4bn and OP of W25.9bn

In 4Q, we forecast orders to grow to W205bn (+22% QoQ, +199% YoY). We do not anticipate any new OLED investments by the company’s key customer, but we do expect a strong rise in orders from Chinese display makers as well as a sharp increase in general distribution orders. In particular, logistics automation orders should exceed W100bn. For 4Q, we project revenue and operating profit of W214.4bn (+74% QoQ, +125% YoY) and W25.9bn (+110% QoQ, +266% YoY), respectively. We see 2014 new orders rising 26% YoY to W522.2bn.

Maintain Buy and TP of W60,000

We reiterate Buy on SFA Engineering with a target price of W60,000. The current valuation may look a bit demanding at a 12-month forward P/E of 13.4x, but on an ex-cash basis (minus W312bn in cash and W9.5bn in annual interest income), the stock is trading at 8.6x (vs. the global automation average of 17.3x).

SFA Engineering (056190 KQ) At the forefront of the robotics revolution

FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F

Revenue (Wbn) 781 507 479 465 591 695

OP (Wbn) 108 70 65 45 74 89

OP margin (%) 13.8 13.8 13.6 9.7 12.5 12.8

NP (Wbn) 89 71 63 44 67 79

EPS (W) 4,943 3,972 3,514 2,459 3,748 4,389

ROE (%) 28.6 19.6 15.1 9.3 13.3 14.1

P/E (x) 12.3 11.9 11.7 19.7 12.9 11.1

P/B (x) 2.9 2.0 1.6 1.7 1.6 1.4

Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests


Technology

(Maintain) Buy

Target Price (12M, W) 60,000

Share Price (12/1/14, W) 48,500

Expected Return 24%

OP (14F, Wbn) 45

Consensus OP (14F, Wbn) 42

EPS Growth (14F, %) -30.0

Market EPS Growth (14F, %) 1.1

P/E (14F, x) 19.7

Market P/E (14F, x) 13.1

KOSDAQ 539.45

Market Cap (Wbn) 871

Shares Outstanding (mn) 18

Free Float (%) 50.7

Foreign Ownership (%) 13.4

Beta (12M) 0.74

52-Week Low 37,000

52-Week High 50,400

(%) 1M 6M 12M

Absolute 6.7 16.9 17.6

Relative 10.5 18.4 12.7

80

90

100

110

120

130

11.13 3.14 7.14 11.14

SFA Engineering KOSDAQ

Automation

33

December 3, 2014


The only Korean company included in the Robo-Stox index

S&P’s Robo-Stox index measures the performance of 85 robotics- and automation-related companies located in 16 countries. Manufacturing powerhouses like the US, Japan, and Germany constitute more than 70% (40% for the US, 24% for Japan, 8% for Germany, and 5% for Taiwan) of the index. By sector, industrials comprise 50%, IT 30%, and healthcare 11%. SFA Engineering is the only Korean company that is included in the index.

Of note, the Robo-Stox index has surged by 728% since 2003, while the S&P 500 has risen by 128%. Major automation equipment makers, including Daifuku, Yaskawa, ABB, and Fanuc, have shown robust share performances since 2012, aided by increased investments in automation facilities. Demand for automated facilities is estimated to climb at a CAGR of 8% on the back of Chinese wage hikes and US manufacturers’ reshoring.

SFA Engineering has been focusing mostly on its OLED equipment business since 2010, deriving 70% of its revenue from OLED and other display equipment in 2013. However, delays to OLED spending by its key customer took a direct toll on the company’s orders and earnings last year, underscoring the dire need for business diversification. In response, the company has been: 1) seeking customers overseas and 2) expanding its general distribution business. Encouragingly, such efforts have started to yield visible results in 2H14. Going forward, we believe logistics automation will serve as one of the company’s major growth drivers alongside OLED.

Figure 72. SFA’s display equipment product lineup Figure 73. SFA’s logistics automation product lineup

Source: Company materials, KDB Daewoo Securities Research Source: Company materials. KDB Daewoo Securities Research

Figure 74. Robo-Stox performance Figure 75. Global automation equipment supply trend


0

200

400

600

800

1000

03 04 05 06 07 08 09 10 11 12 13 14

S&P 500 Robo-Stox(1/1/03=100)

10

11

12

13

14

15

16

17

18

19

20

0

20

40

60

80

100

120

140

160

180

200

94 96 98 00 02 04 06 08 10 12 14F 16F

Automation equipment shipments (L)

US manufacturing employees (R)

('000 units)

2012-2016FCAGR: 8%

(mn persons)

Automation

34

December 3, 2014


2015F earnings: Revenue of W591.3bn and OP of W74.3bn (+64% YoY)

For 2015, we expect SFA Engineering’s new orders to increase by 17% YoY to W572.8bn. The company’s orders fell after peaking in 2011. However, orders switched to an uptrend after bottoming in 1H14. The previous order cycle was driven by OLED. In comparison, the current order cycle will likely be driven by Chinese display makers and automation companies. In addition, flexible OLED investments at the company’s customers will likely contribute to order growth.

For 4Q, we forecast orders to grow to W205bn (+22% QoQ, +199% YoY). We do not anticipate any new OLED investments by the company’s key customer, but we do expect a strong rise in orders from Chinese display makers, as well as a sharp increase in general logistics orders. In particular, logistics automation orders should exceed W100bn. For 4Q, we project revenue and operating profit of W214.4bn (+74% QoQ, +125% YoY) and W25.9bn (+110% QoQ, +266% YoY), respectively. We see 2014 new orders rising 26% YoY to W522.2bn.

Table 15. Quarterly and annual earnings (Wbn, %)

1Q14 2Q14 3Q14 4Q14F 1Q15F 2Q15F 3Q15F 4Q15F 2013 2014F 2015F

New orders 32 104 148 205 125 131 140 177 383 488 573

Revenue 57 70 124 214 98 129 189 175 479 465 591

Process

equipment 11 17 11 77 34 48 71 75 185 116 228

Logistics

systems 41 44 102 130 57 72 110 92 266 317 330

% of revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Process

equipment 19.1 25.1 8.7 35.7 34.2 37.5 37.5 43.1 38.6 24.9 38.6

Logistics

systems 71.8 63.3 82.5 60.8 57.7 55.8 57.8 52.4 55.6 68.3 55.8


OP margin 4.8 6.4 10.0 12.1 8.1 11.2 14.3 14.1 13.5 9.8 12.6

Net profit 4.7 6.9 10.4 22.1 8.5 13.7 23.5 21.6 63.1 44.2 67.3

Net margin 8.3 9.9 8.4 10.3 8.7 10.6 12.4 12.3 13.2 9.5 11.4

Source: KDB Daewoo Securities Research

Figure 76. Quarterly revenue and OP margin Figure 77. New orders and OP margin


-5

0

5

10

15

20

0

50

100

150

200

250

300

08 09 10 11 12 13 14F 15F

Revenue (L)

OP margin (R)

(Wbn) (%)

0

20

40

60

80

0

50

100

150

200

250

300

350

07 08 09 10 11 12 13 14F

New orders (L) Share price (R)

(Wbn) (W'000)

Automation

35

December 3, 2014


Table 16. Global peer group valuations (Wbn, %, x)

Mkt. cap Revenue Operating profit Net profit ROE P/E P/B EV/EBITDA

14F 15F 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F

SFA Engineering 871 465 591 45 74 44 67 9.3 13.3 19.6 12.9 1.7 1.6 7.5 4.5

Wonik IPS 1,135 537 654 95 132 62 90 17.8 21.3 17.9 12.3 3.0 2.4 10.6 7.8

AP Systems 143 177 247 6 16 4 14 3.9 12.3 34.9 10.3 1.4 1.2 8.5 5.4

KC Tech 274 313 335 25 29 18 21 8.1 8.6 14.0 12.4 1.1 1.0 5.0 4.1

Avaco 60 149 171 5 8 4 7 4.7 8.5 16.3 8.5 0.7 0.7 3.1 1.5

AMAT 32,069 11,365 12,250 2,376 2,813 1,717 2,049 16.9 15.4 18.1 15.6 3.3 2.9 11.2 9.6

TEL 14,049 5,651 5,986 702 929 468 634 8.6 11.2 30.2 22.1 2.5 2.2 12.6 9.7

Lam Research 14,412 5,555 5,919 1,085 1,223 772 846 14.0 16.1 17.3 15.0 2.6 2.5 9.4 8.6

Dainippon 1,901 2,264 2,381 133 165 98 115 11.4 12.5 18.2 15.6 2.0 1.7 11.9 10.0

Ulvac 758 1,684 1,758 100 122 69 85 9.6 11.4 12.0 9.6 1.3 1.2 7.3 6.5

Daifuku 1,377 2,565 2,687 140 163 88 102 9.4 10.1 15.4 13.4 1.4 1.3 8.5 7.5

Average 10.3 12.8 19.4 13.4 1.9 1.7 8.7 6.8


Figure 78. Global display equipment market Figure 79. New orders of global display equipment firms


Figure 80. Relative performances of global display equipment

stocks Figure 81. P/B-ROE: Global peers


0

2

4

6

8

10

12

14

16

00 02 04 06 08 10 12 14F 16F

Front-end Back-end/automation OLED

(US$bn)

0

500

1,000

1,500

2,000

2,500

1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14

AMAT TEL DNS Ulvac

(US$bn)

SFA

Wonik IPS

AP Systems

KCTech

Avaco

AMAT

TELLam Research

Dainippon Screen

Ulvac

Daifuku

0

1

2

3

4

0 5 10 15 20 25

(ROE, %)

(P/B, x)

0

50

100

150

200

12/12 3/13 6/13 9/13 12/13 3/14 6/14 9/14 12/1

SFA Engineering TELAMAT DaifukuUlvac Screen Holdings

(-1Y=100)

Automation

36

December 3, 2014


SFA Engineering (056190 KQ/Buy/TP: W60,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F (Wbn) 12/13 12/14F 12/15F 12/16F

Revenue 479 465 591 695 Current Assets 449 626 622 722

Cost of Sales 353 379 472 557 Cash and Cash Equivalents 103 271 333 381

Gross Profit 126 86 119 138 AR & Other Receivables 37 84 68 81

SG&A Expenses 61 41 45 49 Inventories 6 14 11 13

Operating Profit (Adj) 65 45 74 89 Other Current Assets 303 257 210 247

Operating Profit 65 45 74 89 Non-Current Assets 139 143 140 139

Non-Operating Profit 15 10 12 12 Investments in Associates 0 0 0 0

Net Financial Income 9 9 11 12 Property, Plant and Equipment 111 107 106 104

Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 19 23 23 23

Pretax Profit 80 55 86 101 Total Assets 589 769 763 861

Income Tax 17 11 19 22 Current Liabilities 107 242 197 232

Profit from Continuing Operations 63 44 67 79 AP & Other Payables 47 106 87 102

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1 1 1 1

Net Profit 63 44 67 79 Other Current Liabilities 59 135 109 129

Controlling Interests 63 44 67 79 Non-Current Liabilities 20 45 36 43

Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0

Total Comprehensive Profit 64 44 67 79 Other Non-Current Liabilities 20 45 36 43

Controlling Interests 64 44 67 79 Total Liabilities 127 286 233 274

Non-Controlling Interests 0 0 0 0 Controlling Interests 462 483 529 587

EBITDA 73 55 85 101 Capital Stock 9 9 9 9

FCF (Free Cash Flow) 68 105 48 96 Capital Surplus 27 27 27 27

EBITDA Margin (%) 15.2 11.8 14.4 14.5 Retained Earnings 439 465 511 569

Operating Profit Margin (%) 13.6 9.7 12.5 12.8 Non-Controlling Interests 0 0 0 0

Net Profit Margin (%) 13.2 9.5 11.3 11.4 Stockholders' Equity 462 483 529 587

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/13 12/14F 12/15F 12/16F 12/13 12/14F 12/15F 12/16F

Cash Flows from Op Activities 74 112 58 106 P/E (x) 11.7 19.7 12.9 11.1

Net Profit 63 44 67 79 P/CF (x) 8.7 17.8 10.0 8.6

Non-Cash Income and Expense 22 5 20 23 P/B (x) 1.6 1.7 1.6 1.4

Depreciation 9 10 11 12 EV/EBITDA (x) 5.0 7.6 4.6 3.2

Amortization 0 0 0 0 EPS (W) 3,514 2,459 3,748 4,389

Others 13 -5 9 11 CFPS (W) 4,732 2,719 4,838 5,656

Chg in Working Capital 2 70 -20 15 BPS (W) 26,473 27,919 30,501 33,723

Chg in AR & Other Receivables 91 -42 15 -12 DPS (W) 1,015 1,200 1,200 1,500

Chg in Inventories -1 -8 2 -2 Payout ratio (%) 28.4 47.4 31.1 33.2

Chg in AP & Other Payables -57 33 -14 11 Dividend Yield (%) 2.5 2.5 2.5 3.1

Income Tax Paid -22 -16 -19 -22 Revenue Growth (%) -5.5 -2.9 27.1 17.6

Cash Flows from Inv Activities -38 78 25 -37 EBITDA Growth (%) -7.6 -24.7 54.5 18.8

Chg in PP&E -4 -7 -10 -10 Operating Profit Growth (%) -7.1 -30.8 64.4 20.3

Chg in Intangible Assets -6 0 0 0 EPS Growth (%) -11.5 -30.0 52.4 17.1

Chg in Financial Assets -36 84 35 -27 Accounts Receivable Turnover (x) 7.0 8.0 8.1 9.7

Others 8 1 0 0 Inventory Turnover (x) 85.9 47.7 48.2 58.0

Cash Flows from Fin Activities 27 -22 -21 -21 Accounts Payable Turnover (x) 5.8 7.1 7.1 8.5

Chg in Financial Liabilities 0 1 0 0 ROA (%) 10.8 6.5 8.8 9.7

Chg in Equity 7 0 0 0 ROE (%) 15.1 9.3 13.3 14.1

Dividends Paid -17 -18 -21 -21 ROIC (%) 45.2 41.6 78.2 94.0

Others 37 -5 0 0 Liability to Equity Ratio (%) 27.5 59.3 44.1 46.8

Increase (Decrease) in Cash 63 168 62 48 Current Ratio (%) 419.1 259.0 315.8 311.7

Beginning Balance 40 103 271 333 Net Debt to Equity Ratio (%) -80.3 -92.8 -90.2 -93.9

Ending Balance 103 271 333 381 Interest Coverage Ratio (x) 0.0 0.0 0.0 0.0

Source: Company data, KDB Daewoo Securities Research estimate

Automation

37

December 3, 2014


APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price

Koh Young (098460) 12/02/2014 Buy 53,000 05/19/2013 Buy 80,000

No Coverage 04/08/2013 Buy 75,000

SFA Engineering (056190) 02/14/2014 Buy 60,000 02/13/2013 Buy 65,000

11/20/2013 Buy 65,000 12/03/2012 Buy 55,000

Analyst Certification

The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean

securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions

expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this

report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s

area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified

herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been

promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific

recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by

overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and

private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of

the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers

This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.

Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been

independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or

correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English

translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this

report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This

report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any

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Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or

form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers,

employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a

purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or

agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment

banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to

in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to

future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Stock Ratings Industry Ratings

Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving

Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes

Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening

Sell : Relative performance of -10%

Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))

* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.

* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material

development.

* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of

future earnings.

* The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic

conditions.

Disclosures

As of the publication date, Daewoo Securities Co., Ltd. has been acting as a financial advisor to SFA Engineering for its treasury stock trust, and other than

this, Daewoo Securities has no other special interests in the companies covered in this report.

0

10,000

20,000

30,000

40,000

50,000

Dec 12 Dec 13 Dec 14

(W) Koh Young

0

20,000

40,000

60,000

80,000

100,000

Dec 12 Dec 13 Dec 14

(W) SFA Engineering

Automation

38

December 3, 2014


Distribution

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KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc.

Head Office

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Seoul 150-716

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Suites 2005-2012

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