Korea OLED Display Sector

Information Technology / Korea 29 August 2013
Initiation: catch the next wave in OLED displays

We expect fast-evolving OLED-display technology to pave the way for game-changing mobile devices and TVs Amid ongoing capacity expansion and rising market adoption, equipment makers should benefit first, then material companies Our picks: SEC, SFA Eng, Wonik IPS, and Duksan Hi-Metal
Korea OLED-display Sector

Positive (initiation) Neutral Negative
How do we justify our view?
See important disclosures, including any required research certifications, beginning on page 72

29 August 2013
Contents Catch the next wave in OLED displays ....................................................................................... 4 Whats new in the OLED industry ........................................................................................... 4 Overview of OLED technology ................................................................................................. 4 Why we think OLED will be a game changer ...........................................................................5 Playing the OLED theme in Korea ............................................................................................. 12 Initiating coverage of four OLED-display equipment/materials companies ........................ 12 Key OLED players in Korea .................................................................................................... 13 Equipment companies should be the first to benefit ............................................................. 17 Materials companies should catch up with rising production volume ................................. 20 OLED market should expand with new entrants .................................................................. 23 Company Section Samsung Electronics ...............................................................................................................25 SFA Engineering .................................................................................................................... 28 Wonik IPS ............................................................................................................................... 31 Duksan Hi-Metal .................................................................................................................... 39 Advanced Process Systems .....................................................................................................47 Soulbrain ................................................................................................................................. 55 LG Display .............................................................................................................................. 63
Please also see:

OLED Display Made Easy: Get ahead of the curve
29 August 2013
Jae H Lee(82) 2 787 9173 (jhlee@kr.daiwacm.com) Joshua Oh (82) 2 787 9176 (joshua.oh@kr.daiwacm.com)

We expect fast-evolving OLED-display technology to pave the way for game-changing mobile devices and TVs Amid ongoing capacity expansion and rising market adoption, equipment makers should benefit first, then material companies Our picks: SEC, SFA Eng, Wonik IPS, and Duksan Hi-Metal

2012. Investment in OLED technology is just taking off, and we believe the main beneficiaries will be related equipment companies, followed by the material companies.
Jae H. Lee
(82) 2 787 9173 jhlee@kr.daiwacm.com
KRW1,309,000, Buy [1]), as it is the largest user of OLED displays and holds 84.8% of Samsung Display. Among the equipment plays, we like SFA Engineering (SFA; 056190 KS, KRW50,700, Buy [1]), which we see as an all-round player. We initiate on Wonik IPS (Wonik; 030530 KS, KRW6,570) with a Buy (1) rating, as we expect an increase in new orders for its OLED and NAND-flash equipment in 2H13. In the materials segment, we initiate on Duksan Hi-Metal (Duksan; 077360 KS, KRW23,450) with a Buy (1) call, as we expect it to benefit from a sustainable increase in demand for OLED materials.
Risks
Catalysts
Joshua Oh, CFA

(82) 2 787 9176 joshua.oh@kr.daiwacm.com
Investment case
We see organic light-emitting diode (OLED) as a transformational technology for the display market, as it has superior quality and the potential to be cheaper than LCDs. We forecast the OLED market to expand to USD24.0bn by 2015, from USD6.8bn in 2012 (vs. USD106bn for the LCD market in 2012). From smartphones to TVs, makers of electronics products are facing slowing demand and falling product prices, and hence are keen to differentiate their gadgets. The current generation of OLED displays is already a differentiating factor for some applications. Pending the resolution of a few technical hurdles, we believe that future OLED displays will lead to a wave of devices with flexible and even transparent displays. The OLED supply chain is dominated by Korea companies, with Samsung Display (Not listed) accounting for more than 96% of global OLED production capacity for
Mobile displays look set to account for the majority of OLED shipments this year, and we forecast small and medium-sized OLED display shipments to grow by 80% YoY to 252m units for 2013. Although only a handful of smartphone makers have so far adopted OLED displays, we expect more to do so once the first generation of flexible displays hit the market in 4Q13. Given our view that OLED offers higher sales-growth potential and better profitability, we expect some LCD panel makers to shift to producing OLED displays. Although there are technological and financial entry barriers, we see the 20%-plus operating-profit margin of Samsung Displays OLED business being a powerful lure for new entrants.
Valuation
Weaker-than-expected demand for smart devices and TVs would be a risk to our sector view.
Key stock calls
New Samsung Electronics (005930 KS) Rating Buy Target 1,800,000 37.5% Upside SFA Engineering (056190 KS) Rating Buy 72,000 Target 42% Upside Wonik IPS (030530 KS) Rating Buy 10,000 Target 52.2% Upside Duksan Hi-Metal (077360 KS) Rating Buy Target 31,000 32.2% Upside
Source: Daiwa forecasts.
Prev. Buy 1,800,000
Based on our and the Bloombergconsensus forecasts, the Korea OLED-display Sector is trading at 11.2x 2013E PER. On PBR, it is trading at 1.8x for 2013E (1.9x excluding the large-cap stocks). Relative to its average PBR during the past three years of 2.3x (2.8x excluding large-caps), we consider the sector to be attractively valued. Our top pick is Samsung Electronics (SEC; 005930 KS,
Buy 72,000

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Growth outlook Valuation Earnings revisions
Growth outlook
Although the global OLED market was relatively small at USD500m in 2009, it had expanded to USD6.8bn by 2012, fuelled by the proliferation of OLED displays in mobile devices. Over the next three years, we expect new OLED products, such as TVs and flexible displays, to see global OLED market revenue expand to USD24bn in 2015.
Global OLED market revenue
(USDbn)
25 20 15
(% ) 200 150 100
10 5 0 2009 2010 2011 Revenue

Source: Daiwa forecasts
50 0 2012 2013E 2014E 2015E YoY growth (RHS)
Valuation
Based on our and the Bloomberg-consensus earnings forecasts, the Korea OLED-display Sector is trading at a 2013E PER of 11.2x. In PBR terms, the sector is trading at 1.8x (simple average) for 2013, and 1.9x if we exclude the large-cap companies. Relative to its average PBR during the past three years of 2.3x (weighted average of 2.8x excluding the largecap companies), we believe the Korea OLED-display Sector is attractively valued.
Korea OLED-display Sector: PBR band

(x) 5 4 3 2 1 0
Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Jan-10 Mar-10 May-10 Jul-10 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12
Simple average
Weighted average excluding SEC, LGD
Source: Companies, FnData, Bloomberg, Daiwa forecasts
Earnings revisions
Since OLED-related companies top-line growth is driven mainly by their investment in new production lines, we believe there is upside to our earnings forecasts as OLED display makers increase their capex. Although most of the capex is currently done by Samsung Display and LG Display, we think it is likely that other LCD panel makers will increase their spending on OLED.
Global OLED capex

(USDbn) 12 10 8 6 4 2 0 2009 2010 2011 Samsung
Source: Companies, Daiwa forecast
2012 LG
2013E Others
2014E
2015E
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Executive summary

With devices sporting the next generation of OLED displays set to surface shortly, we see the Korea OLED-display sector as poised for take-off.
Investment thesis
OLED displays have been in commercial use since 2007, when SEC started using them in its mobile phones. In comparison with LCDs, OLED displays offer better picture quality in many respects and weigh less, as they have fewer components. We expect OLED displays to enter the mainstream as they offer new features that allow device makers to differentiate their products. Look for end-products with foldable and rollable displays in the next few years. While they did not develop the technology, Korea companies have successfully commercialised it. Refining the manufacturing process has proved difficult, and it has taken Samsung Display nearly three years to realise production yields of 80% for OLED displays for mobile devices. As OLED displays do not need backlights or optical films, the supply chain mainly comprises processing-equipment and materials companies. Most related companies in Korea supply Samsung Display and LGD, the sole manufacturers of OLED displays.
Korea companies are dominant players in the OLED-display segment. Samsung Display and LGD are for now the sole manufacturers of OLED displays. Korea processing-equipment and materials companies are also exposed to growth in the segment. Valuations look appealing relative to historical levels. Our top pick is SEC, the biggest user of OLED displays and the major shareholder of Samsung Display. We also like SFA Engineering, Wonik IPS, and Duksan Hi-Metal.
Valuation and stock picks

The Korea OLED-display Sector is trading at 2013E PBR of 1.8x (simple average), and 1.9x if we exclude large-caps such as SEC and LGD. Relative to the sectors past-three-year average PBR of 2.3x (2.8x weighted average excluding SEC and LGD), we see current valuations as appealing. Share prices in the OLED-display sector have tended to move in unison, but we expect the sector to become more cyclical as new entrants arrive. Our top pick is SEC, which is the largest user of OLED displays in customer devices and the majority shareholder in Samsung Display. Among the equipment companies, we highlight SFA Engineering. It has mainly supplied logistics systems for Samsung Displays OLED-display production line, and we think it is likely to provide core-deposition equipment for OLED-TV lines going forward. Among our newly initiated coverage, our picks are Wonik IPS, for its growing exposure to OLED-display equipment and opportunities in NAND-flash, and Duksan Hi-Metal, for its potential revenue growth in organic materials for OLED-TVs.
Sector stocks: key indicators

EPS (local curr.) Company Name Advanced Process Systems Duksan Hi-Metal LG Display Samsung Electronics SFA Engineering Soulbrain Wonik IPS Stock code 054620 KS 077360 KS 034220 KS 005930 KS 056190 KS 036830 KS 030530 KS Share Price 10,600 23,450 29,350 1,309,000 50,700 43,450 6,570 Rating New Buy Buy Hold Buy Buy Outperform Buy Hold Buy Prev. Target price (local curr.) New 13,500 31,000 30,000 72,000 50,000 10,000 30,000 72,000 0.0% 0.0% 0.0% Buy 1,800,000 1,800,000 Prev. % chg New 955 1,408 1,867 208,771 4,927 5,532 329 2,462 (24.2%) 206,746 1.0% 4,998 (1.4%) FY1 Prev. % chg New 1,167 1,929 2,449 228,467 6,182 6,436 582 2,853 (14.2%) 227,390 0.5% 6,346 (2.6%) FY2 Prev. % chg
Source: Daiwa forecasts; note: prices as of close on 28 August 2013
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Flexible displays
Both SEC and LG Display (LGD) (034220 KS, KRW29,350, Hold [3]) announced earlier this year that they intend to launch flexible displays using OLED technology in 2H13. We understand that the encapsulation process, which seals the flexible display in order to protect it from oxygen and moisture, has proved problematic. Still, our research in the market suggests that Samsung Displays production yield for flexible displays has improved to around 80% and a smartphone featuring a flexible display is likely to debut in 4Q13.
Catch the next wave in OLED displays

We forecast the global OLED market to expand to USD24.0bn for 2015, from USD6.8bn for 2012, as the technologys superior quality and potential to be cheaper than LCDs come to the fore.
Acquisition of Novaled
In early August, Cheil Industries (Not rated) and SEC respectively took 50% and 40% stakes in Germanybased OLED materials maker Novaled (Not listed). As Samsung Venture Investment Corp already had a 10% holding in Novaled, the company is now 100%owned by affiliates of the Samsung Group. Novaled specialises in PIN technology, a collective term for an OLED displays p-doped transport layer, intrinsic light-emitting layers, and n-doped transport layer. Simply put, PIN technology is akin to an additive that helps to make electrons within a display move faster. We believe that the Samsung Group is strongly committed to OLED production judging by this acquisition, which also boosts the groups intellectual property (IP) portfolio by more than 500 patents. We understand that Cheil Industries, which already supplies electron transport layers to Samsung Display, will take the lead role in the groups vertical-integration efforts in organic materials.
Whats new in the OLED industry

Electronic devices sporting OLED displays have been widely discussed in the market for some time, as have the sales-growth prospects of OLED displays. Although some investors seem concerned that the OLED-display market is in its early stages and one company dominates production, others may contend that OLED displays will eventually replace almost all of todays conventional displays. In this report, we discuss the potential applications for OLED displays, quantify the sales outlook for the coming years, and assess the supply chain to see which companies are best placed to ride the next wave of display technology.
Samsung Displays A3 line

In late July, the Korea Economic Daily reported that Samsung Display had indefinitely delayed the planned ramp-up of its Gen6 OLED line, which is known as the A3 line. The newspaper also stated that the weakerthan-expected sales of SECs flagship Galaxy S4 smartphone had resulted in lower-than-expected demand for OLED displays. The share prices of OLEDrelated companies declined sharply as the market digested the implications of this apparently more subdued market outlook. However, our checks with various equipment and materials companies indicate that the A3 line is still scheduled to commence volume production in mid2014, and that related equipment orders are likely to materialise at the end of 2013. Moreover, SEC has confirmed publicly that its OLED investment plans are intact and it expects robust demand for OLED displays in 2H13 and 2014.
Overview of OLED technology

In our accompanying MadeEasy report on OLED Displays, we explain OLED technology in laymans terms. Below we include some extracts from that report in order to compare OLED displays with LCDs.
What are OLEDs?

OLED is a display technology in which organic materials are placed between two pieces of glass. When an electrical current is applied, a bright light is emitted from the display. The structure is somewhat similar to that of a conventional LCD, which has liquid crystals between two glass substrates. However, the structure of an OLED is simpler than the structure of LCD because, unlike LCD, OLED does not require backlighting and colour filters in order to emit light.
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Comparison of the structure of OLED display and LCDs

OLED
Polariser Glass
TFT-LCD
Polariser Glass
Keen to avoid ceding market share to their rivals, these companies are actively seeking ways to differentiate their products. We believe that OLED will emerge as a mainstream display technology, as it promises a range of features that should appeal to manufacturers seeking to differentiate their products. Once a few technical hurdles have been overcome, we should see products sporting flexible and even transparent OLED displays.
Layers of organic materials
Colour filter Liquid crystals
Glass OLED has simpler structure, not requiring many LCD components Glass Polariser
Backlight unit
Source: Companies, Daiwa
How do OLED displays compare with LCDs?

OLED displays consume less power and have a higher contrast ratio (the blacks are really dark and whites are really bright) than LCDs, as OLEDs emit their own light. Therefore, they can simply turn pixels off and on, whereas with an LCD, the backlight is constantly turned on and the liquid crystals are used to block or emit light. In addition, OLED displays have a broader colour spectrum, faster response time, and lighter weight (as they have fewer components) than LCDs. However, OLED displays are not perfect. A major disadvantage at present is that they are more expensive than LCDs. In the TV segment, OLED-TVs retail for 56x the price of an LCD set. When OLED displays were first commercialised in 2007, their short lifespans and limited visibility in sunlight were also disadvantages. However, over the past few years, we have seen steady improvements made in both aspects.
Comparison of OLED displays and LCDs
OLED Power consumption Lower than LCD Backlight Viewing angle Contrast ratio Production cost Flexible display Lifetime Thickness No 170 degrees 65,000:1 1,000,000:1 High Yes Up to 50,000 hours 4mm for OLED-TVs LCD Lower than plasma but higher than OLED Yes 160 degrees (colours shift from the side) 15,000:1 Low No 50,000-100,000 hours 8-15mm for LCD-TVs (with LED backlight)
Concerns over slowing growth in the smartphone market

In recent months there has been widespread concern among investors at the slowdown in sales growth in the global smartphone market. Both SEC and HTC have experienced dwindling sales of the flagship smartphones, the Galaxy S4 and HTC One. Although we believe that the global smartphone market will continue to see double-digit percentage sales growth YoY in the next few years, we expect ASPs and profitability to come under pressure as competition intensifies.
Global smartphone market forecast
(m units) 1,600 1,400 1,200 1,000 800 600 400 200 0 2009 2010 2011 Shipments
(% ) 80 70 60 50 40 30 20 10 0 2012 2013E 2014E 2015E YoY growth (RHS)
In addition, since we expect the bulk of the sales growth in the coming years to come from emerging markets, we believe the driver of growth will shift from high-end smartphones to the low-end and mid-range segments. On our forecasts, high-end handsets will account for 40% of smartphone shipments in 2013 (down from 50% for 2010) while low-end products will account for 30% (up from 15% in 2010).
Why we think OLED will be a game changer

From smartphones to TVs, many makers of electronics products globally are facing slowing market demand and falling product prices.
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Breakdown of global smartphone shipments

(m units) 600 500 400 300 200 100 0 2009 2010 2011 High-end
major players to meet these expectations in the absence of a wow factor, in our view. At the same time, most smartphone makers are pursuing similar strategies, whereby they adopt advanced hardware and then incrementally add features with each new model. In such circumstances, standing out from the crowd is far from easy. When LG Electronics (LGE) (066570 KS, KRW71,900, Hold [3]) unveiled its new flagship smartphone, the G2, in New York on 7 August, the ensuing headlines highlighted the devices killer hardware and zippy processor. Although sales of the G2 may exceed those of its predecessors, we believe there is no longer anything extraordinary about an Android phone with cuttingedge hardware. In other words, while the G2 may meet the needs of those looking for the latest and greatest smartphone, it is questionable whether it will draw new consumers to the smartphone segment, in our view.
Flagship smartphones: spec comparison
Size (mm) Weight (g) Screen Resolution OS Processor RAM Storage SD card slot Camera Battery Galaxy S4 136.6 x 69.8 x 7.9 130 5.0-inch OLED 1,920 x 1,080 Android 4.2.2 Snapdragon 600 (1.9GHz) 2GB 16/32/64 GB Yes 13 megapixel 2,600mAh Moto X 123.8 x 58.6 x 7.6 130 4.7-inch OLED 1,280 x 720 Android 4.2.2 Snapdragon S4 Pro (1.7GHz) 2GB 16/32 GB Yes 10 megapixel 2,200mAh G2 127.0 x 71.0 x 8.9 140 5.2-inch LCD 1,920 x 1,080 Android 4.2.2 Snapdragon 800 (2.26GHz) 2GB 16/32 GB No 13 megapixel 3,000mAh
2012 Mid-end
2013E Low-end
2014E
2015E
Despite the slowdown in sales growth in the high-end segment, most handset makers are still focusing on winning market share with premium products because these tend to be the most profitable. Apple and SEC, the big two players in the high-end market, accounted for more than 100% of the operating profit of the global smartphone industry as a whole in 2Q13, as several other companies posted operating losses. Our bill-of-material (BOM) cost analysis for the Galaxy S4 and a typical low-end smartphone made in China indicates there is a large difference between the two in total cost and shipment price. However, for premium models, marketing costs could be much higher, since companies need to invest in order to build the brand equity needed in the high-end segment.
Smartphone manufacturing cost comparison
Processor Display Memory Mechanical Battery Bluetooth / WLAN Camera Baseband / RF / PA User interface Power management Others Total materials Manufacturing cost Total cost Shipment price
Source: HIS iSuppli, Companies, Daiwa
Galaxy S4 20 75 28 22 5 6 18 22 18 9 6 229 9 237 600
China smartphone 0 15 additional 8 3 8 5 12 3 4 6 64 7 71 80
Source: Companies Note: smartphone specs are based on the US model
Daiwas recent survey of off-line distributors in Seoul showed that smartphone users primarily choose their handsets based on the brand (25%) and price (21%). To a lesser extent, would-be purchasers also take into account a devices display (20%) and features (18%). Therefore, consumers still focus on a devices hardware, with battery life, processing power and the pixel count of the camera among the most important considerations.
Smartphone specs continue to evolve, but the wow factor is lacking

The top-tier smartphone makers continue to focus on improving the functionality of their products (mainly on the hardware side) while offering a variety of new models targeting different market segments. However, smartphone users have rising expectations of what their devices should do, and it will be difficult for the -6-

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Top reasons for choosing a smartphone (%)

Brand Price Display Feature Design Advertising Quality A/S 0
Source: Daiwa Note: A/S after service
Design concepts for phones with OLED displays
10
15
20
25
30
Source: Companies
While long battery life and large displays are important marketing bullet points for the current generation of smartphones, we are not convinced that either is a game-changer. It is hard to imagine a smartphone user replacing his or her current handset solely on account of a new models larger display or longer battery life. By the same token, we doubt that the inclusion of a fingerprint scanner or adoption of a scratch-proof casing would compel consumers to pay a large price premium for a brand-new smartphone.
Although one variation on a flexible display is currently in use in Amazons e-book reader, flexible displays have not yet been commercialised in the smartphone and tablet-PC markets, as these devices require higher resolutions and faster response times than are needed for e-ink technology, which is suitable for displaying only the written word. Until now, the challenge of launching flexible displays has been its extremely low production yield due to difficulties in encapsulating OLED displays, since organic materials need to be protected from air and moisture. Samsung Display decided to use film-type encapsulation, in which several layers of organic and inorganic materials are stacked together using an atomic layer deposition system. Although it is not impossible to make a flexible display with LCD technology, OLED is preferred since it does not require any backlights. Both SEC and LGE plan to launch new smartphones with flexible displays (based on OLED technology) in 2H13. However, rather than being a bending or rollingup type (due to the limitation of other hardware components), the first generation of flexible displays is likely to be an unbreakable type, which is thinner, lighter and sturdier than the current glass-based OLED. Although an unbreakable display may not have the wow factor yet, given that many handset repair jobs are done on the broken cover glass, an unbreakable display would certainly offer some comfort to smartphone users, in our view. In late-July, SEC filed for a trademark for the term Samsung Galaxy Gear (in Korea and in the US), and its applications featured a drawing of its smartwatch. We expect the company to unveil this product and launch the Galaxy Note 3 in September, and these could be the companys first flexible (more accurately unbreakable) product and wearable gadget. -7-
OLED displays are likely to change the way people use smartphones
In terms of the smartphone display, handset makers increase the screen size, narrow the bezel, and improve the resolution with nearly every new model launch. These are incremental improvements. We believe OLEDs, when used as flexible displays, could change the way users look at displays and the way they use smartphones. Imagine having a smartphone with a foldable display that, when the screen is unfolded, can double as a tablet PC. We do not think transparent and rollable phones will remain confined to concept products forever. Samsung Display and other OLED makers have been working on developing flexible displays for some time, and they appear to be ready to enter production shortly. However, before flexible displays can be adopted in new applications, the other components, such as batteries, PCBs and casing, would also need to be flexible.

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SECs trademark filing for a Galaxy Gear smartwatch
Global LCD-TV shipments

(m units) 250 200 150 100 50 (% ) 140 120 100 80 60 40 20 0 (20) 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E YoY growth (RHS) Shipments
Source: Company
As SEC and LGE begin to roll out their flexible displays from 2H13, we expect the market to expand quickly as the applications widen. We also think a bendable and rollable display will be launched within the next few years as technical hurdles are overcome, and this would certainly have the wow factor, in our view. According to market research firm IHS iSuppli, global shipments of flexible displays should increase to 792.0m units in 2020 from 3.2m units in 2013, while market revenue should also expand to USD41.3bn in 2020 from just USD100,000 in 2013.
Global flexible display market forecasts
(m units) 900 800 700 600 500 400 300 200 100 0 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Shipment (LHS)
Source: IHS iSuppli, May 2013
Given a steady decline in LCD-TV prices of about 15% YoY per year over the past five years, TV makers are focused on adding new features to improve their product mixes and gain a competitive edge. In 2009, the LED-TV was first introduced; in 2010, 3D-TVs were launched; and in 2013, TV makers have begun to introduce UHD-TVs.
LCD-TV panel price trend (blended)
(USD) 2,000
(USDbn) 45 40 35 30 25 20 15 10 5 0 Revenue (RHS)

1,500 1,000 500 0
Source: DisplaySearch, Witsview, Daiwa forecasts
LED-TVs have added value for TV makers

SEC launched an LCD-TV with edge-type LED backlights in 2009, aggressively promoting the new generation of TVs with an ultra-slim form factor, a sharper and brighter image, and reduced power consumption (40% lower than an LCD-TV with coldcathode fluorescent-lamp [CCFL] backlights). SEC also priced its edge-lit LED-TV at a 50-100% premium (depending on various TV sizes) over its conventional LCD-TVs (with CCFL backlights). Despite the high retail price, SEC sold over 1m LED-TVs in the first six months after launch. As a result, the gap between SECs revenue-based and unit-based market shares started to expand from 2Q09 as the company focused more on premium products.
The LCD-TV market has matured

LCD-TVs, on the other hand, have already reached maturity and sales-volume growth has stagnated. Global LCD-TV shipments fell for the first time ever in 2012, down 1% YoY. For 2013, we forecast global LCDT V shipments to increase by 2% YoY but expect overall shipment volumes to remain at about 200m units per year over the next few years. LCD-TV demand from developed regions continues to be weak, while demand from China is decelerating due to the end of the energy-saving subsidy programme for LCD-TVs as of 31 May 2013.
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1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
32" HD 32" full HD 42" HD 42" full HD

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SEC: global LCD-TV market-share trend

(% ) 30 25 20 15 10 5 0
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
With the combination of edge-type and low-cost direct LED-TVs essentially replacing sets with CCFL backlights, we forecast the penetration rate of LED backlights to reach 98% of total LCD-TVs in 4Q13, from 31% for 4Q10. Meanwhile, these product-mix improvements have led to better top-line growth and profitability for TV makers.
LCD-TV shipments by backlight source
(m units) 60 50 40 30 (% ) 100 80 60 40 20 0
Unit share
Source: DisplaySearch
Revenue share
As edge-lit LED-TVs gained popularity among consumers, other TV makers quickly followed suit. With an increased number of players in the market, core component prices have come down and the price premium for edge-lit LED-TVs has narrowed. Even today, however, edge-lit LED-TVs retail at a price premium of 20-30% over conventional LCD-TVs, owing in part to the higher cost of using optical film. In an effort to bridge the price gap between edge-lit LED-TVs and LCD-TV with CCFL backlights, SEC launched low-cost direct LED-TVs in 2012. Rather than having an array of LED chips on the side of the TV panel, direct-lit LEDs are placed at the back of the panel. This approach uses fewer LED chips and obviates the need for expensive films such as a lightguide plate. Although low-cost direct LED-TVs consume less power than even edge-lit LED-TVs, they do have a drawback: their form factor is much thicker than for LED-TVs. The initial low-cost direct LED model was 95mm thick, compared with 10-20mm for edge-lit LED-TVs. However, in 2013, SEC launched a second generation of low-cost direct LED-TVs with a thickness of only 50mm.
Low-cost direct and edge-lit LED-TVs
Low-cost direct (2012) Low-cost direct (2013) Edge-lit
20 10 0
3Q13E
LED (edge type)
LED (low-cost direct)
LED penetration (RHS)
Source: DisplaySearch, Daiwa forecasts
3D-TV has not taken off

Following the success of the blockbuster movie Avatar, TV makers rushed to roll out 3D-TVs in 2010. At the time, LED-TVs were growing in popularity and TV makers saw 3D-TV functionality as a way to add value to their product lines. But there were issues almost straight away: there was little 3D programming available, and viewers did not find it convenient to wear the required 3D glasses. As of 2Q13, 3D-TVs accounted for about 20% of LCDTVs sold globally, which is little changed since 2Q12. Consumers have not embraced the format in large numbers, and some broadcasters have stopped broadcasting 3D content altogether. In June, US sports network ESPN announced plans to close its 3D channel by year-end, citing a lack of viewers. In July, the BBC too decided to halt its 3D broadcasts.
3D-TV shipments and penetration rate
(m units) 16 14 12 10 8 6 4 2 0
4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E
4Q13E
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
(% ) 25 20 15 10 5 0
3D-TV shipment
Source: Companies Source: DisplaySearch, Daiwa forecasts
Penetration rate (RHS)
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29 August 2013
UHD-TV may be the next big thing for LCDTV makers

LCD-TV makers are now hoping that ultra highdefinition (UHD) TVs, also known as 4K-TVs, could be the catalyst to spur replacement demand. Simply put, UHD-TVs have four times the resolution of full HDTVs (3,840 x 2,160 pixels vs. 1,920 x 1,080 pixels). On large-sized screens (84/85-inch models), the greater number of pixels translates to a much sharper picture (provided the content itself is in the UHD format). These sets are far from cheap. LGEs 84-inch UHD-TV retails for USD17,000, while SECs 85-inch model goes for USD40,000. But LCD-panel makers are now launching UHD-TVs with smaller screen sizes and prices are falling quickly. In May, Sony rolled out 55inch and 65-inch UHD-TVs with retail prices of USD4,999 and USD6,999, respectively. In China, meanwhile, 55-inch and 65-inch UHD-TVs are being sold for less than USD2,000 and around USD4,000, respectively. The main reason for the large price disparity between China and other markets is that leading brands UHD-TVs feature an embedded processor that upscales full-HD or 1,080p video in order to improve the picture quality of non-UHD content, whereas the Mainland China brands use plain 4K panels without additional signal processing.
LCD panel makers UHD-TV panel roadmap
Samsung Display 39" 42" 49" 50" 55" 58" 60" 65" 70" 75" 79" 84" 85" 98" LGD AUO Innolux 1Q13 3Q13 1Q13 3Q13 2Q13 1Q13 2Q13 1Q13 3Q13 2Q13 1Q14 3Q12 1Q13 3Q13 2H13 2Q13 1Q13 1Q13 2Q13 3Q13 2Q13 CSOT BOE Sharp
It is early days for UHD-TVs, but some TV retailers are concerned that this new segment will meet the same fate as 3D-TVs, given a dearth of content and the sets high price premium. Formal standards for UHD-TV compression (high efficiency video coding using the H.265 codec) and connectivity (HDMI 2.0) are still being drafted, and there is very little native 4K content available. Moreover, there is a possibility that todays UHD-TVs may not be compatible with the eventual 4K standard once it is ratified. Granted, there are hurdles to UHD-TVs adoption. But we forecast UHD-TV sales of nearly 1m units for 2013, driven by TV makers widespread marketing and aggressive price-cutting. Such sales would be equivalent to only about 0.5% of LCD-TV demand for 2013, on our forecasts. Another potential cap on growth in the segment is that most 4K-TVs will have screens of more than 50 inches in size, as the benefits of UHD content are not readily apparent on smaller screens. Over the next three to four years, we forecast UHD-TVs to account for a mid-single-digit percentage of LCD-TV shipments.
Global UHD-TV shipment and penetration rate
(m units) 3.0 2.5 2.0 1.5 1.0 0.5 (% ) 4 3 2 1 0
3Q13E
4Q13E
1Q14E
2Q14E
3Q14E
4Q14E
1Q15E
2Q15E
3Q15E
UHD-TV
UHD-TV penetration (RHS)
Where do OLED-TVs fit in?

OLED-TVs use completely different technology from LCD-TVs. Because OLED-TVs do not require backlights, they offer significantly better picture quality and higher contrast ratios than LCD-TVs while consuming less power. Arguably the only downside to OLED-TVs currently is their price premium over LCDTV sets, and we expect prices to decline sharply as production efficiency improves. According to our cost analysis, the manufacturing cost for a 55-inch OLED-TV module is around USD2,500, which is more than six times that for 55-inch LCD-TV module (full HD at USD400). However, given that the production yield exceeds 90% for LCD panels but is currently less than 50% for OLED-TVs, we expect the cost gap to narrow greatly over the next few years.
Source: Companies, DisplaySearch
TV makers claim that there are many potential benefits to UHD-TV such as better picture quality and the fact that viewers can also sit close to the TV without ever noticing pixels on the screen. However, some engineers question whether viewers can actually notice the difference between full-HD and UHD-TV on screen size of less than 50 or even 60 inches, as they are based on the same LCD technology. In addition, 32-inch and 40/42-inch LCD-TVs are currently the mainstream TV sizes, making up 50% of total LCD-TV shipments.
- 10 -
4Q15E
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
1Q14
1Q14
2Q14
0.0

29 August 2013
Cost comparison of OLED-TV and LCD-TV modules

(USD) 3,000 2,500 2,000 1,500 1,000 500 0 LCD Panel materials Module materials Personnel OLED Depreciation Production costs
Global OLED-TV shipment forecast

(m units) 10 9 8 7 6 5 4 3 2 1 0 2013E
2014E
2015E
2016E
2017E
Source: Daiwa estimates
Due to slower-than-expected improvements in production yields and delays in the commercialisation of OLED-TVs, LCD-TV makers focused instead on the UHD-TV market, as they believed associated costs would fall more quickly than for OLED-TVs. At the same time, the shift to manufacturing UHD-TVs did not require heavy investment. Given that we forecast only a few thousand OLED-TVs will be sold in 2013, compared with 1m 4K-TVs (based on LCD technology), it could be inferred that UHD-TVs have taken an early lead in the premium TV segment. In terms of their respective merits, we believe OLEDTVs have the edge on colour contrast, screen uniformity, viewing angle, and colour rendition (richness), since each pixel contains red, green and blue (RGB) elements. However, 4K-TVs excel in resolution, image clarity, and brightness. We believe that price will be a key determinant of whether OLED-TVs and 4K-TVs take off in the market place. Consumers will ultimately consider the value proposition of any new technology, particularly for bigticket items. In this regard, we are positive on the outlook for the OLED-TV market, as there is ample scope to cut costs as production efficiency improves. From an admittedly slow start this year, we forecast the OLED-TV market to expand to 1.6m units in 2015 and 9.0m units in 2017.
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29 August 2013
Playing the OLED theme in Korea

Korea companies are on the front foot in the global OLED display market. We have spoken with more than a dozen related companies to get their views on the outlook for the market, technology, and production process.
In January 2013, LGE was the first company to launch OLED-TVs using the companys preferred white-OLED technology. Compared with conventional LCD-TVs, OLED-TVs have superior picture quality and consume less power. The sets also have thin form factors, with some just 4mm thick.
LGEs first 55-inch OLED-TV
Initiating coverage of four OLEDdisplay equipment/materials companies

We visited over a dozen OLED-related companies in Korea in the past two months. After experiencing a poor 2012 due to delays in new capacity investments by Samsung Display and LGD, most of the companies we met were positive on the outlook for 2013 and 2014, citing increased visibility on capacity expansion.
Source: Company
Although LGEs OLED-TV has a price tag of US10,000, we expect the retail price to come down significantly as production yields improve. LGD, LGEs OLED panel supplier, recently decided to expand its OLED production capacity by 26,000 substrates per month, from 8,000 substrates per month currently. The new capacity should come on stream in mid-2014, according to the company. SEC was late in entering the OLED-TV market, rolling out a curved set in June 2013. We also expect SEC to increase its production capacity in the future. According to our research in the market, including discussions with several equipment companies, Samsung Displays production yield on flexible displays has reached 80%. As a result, we are likely to see an increase in investment in Samsung Displays flexible display production line.
OLED market developments

SEC is by far the most important company in the global OLED space, accounting for 96% of OLED production capacity in 2012. SEC selectively adopted AMOLED displays in some of its mobile phones in 2007 and now uses them in its range of premium smartphones. Although neither SEC nor Samsung Display was the first to develop OLED technology, both have successfully commercialised the technology.
SECs AMOLED phones: first (W2400) to latest (Galaxy S4)
OLED display market projection

Although the global OLED display market was relatively small, at USD500m in 2009, it had expanded to USD6.8bn by 2012 (compared with USD106bn for the LCD-panel market), driven by the proliferation of OLED displays in mobile devices. Over the next three years, we expect new OLED products, such as TVs and flexible displays, to underpin further growth in the OLED market. By 2015, we forecast the global OLED market to be worth USD24bn. Although only few hundred OLED-TVs are being sold per quarter currently, we look for the cost curve to decline quickly and the addressable market to expand significantly. For 2015, we forecast OLED-TV shipments to total 1.6m units. - 12 -
Source: Company

29 August 2013
Global OLED market revenue
Samsung Display: small display revenue and OP margin

(% ) 200 150 100
(USDbn)
25 20 15 10 5 0 2009 2010 2011 Revenue
50 0 2012 2013E 2014E 2015E YoY growth (RHS)
(KRWbn) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0
(% ) 30 25 20 15 10 5 0
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
Revenue
Source: Company
OP margin (RHS)
As the OLED display market continues to grow, we also expect OLED-panel makers to step up their investments. We forecast global OLED capex to increase to USD5.6bn for 2013 and to USD9.6bn for 2015 as new capacity is brought on stream. In our view, the processing equipment and materials companies will be front-line beneficiaries of this spending.
Global OLED capex
(USDbn) 12 10 8 6 4 2 0 2009 2010 2011 Samsung
Source: Companies, Daiwa forecasts
The other major OLED panel maker in Korea is LGD, which has focused mainly on large-size displays such as TVs. For small displays, LGD only has a pilot line for OLED, since the company believes that its in-plane switching (IPS) LCD, referred to in Apples marketing as Retina Display, is more optimised for mobile devices. However, LGD has adopted OLED technology for flexible displays and is preparing to launch related products in 4Q13. Since OLED does not require backlights or optical films, unlike LCDs, the supply chain mainly comprises processing-equipment and materials companies. As Samsung Display and LGD are the only two companies offering OLED displays, most of the smaller equipment and materials companies in Korea supply the two OLED makers exclusively. The OLED business contributes a relatively small portion of revenue for both SEC and LGD compared with the companies other divisions, such as smartphones and LCD panels. But for the Korea equipment and materials companies, OLED is big business, contributing as much as 90% of these companies revenues.
Korea OLED companies: revenue contribution from OLED
Company Samsung Electronics LG Display SFA Engineering Soulbrain Duksan Hi-Metal* Wonik IPS* AP System ICD SNU Tera Semicon Viatron LIG ADP Avaco LTS Ticker 005930 KS 034220 KS 056190 KS 036830 KS 077360 KS 030530 KS 054620 KS 040910 KS 080000 KS 123100 KS 141000 KS 079950 KS 083930 KS 138690 KS Market cap (KRWbn) 192,815 10,502 910 704 689 481 242 194 173 161 140 115 80 68 2012 OLED revenue (%) 5.3 0.0 40.8 26.8 54.9 6.3 88.1 76.7 76.0 30.0 14.0 0.0 10.0 5.0 2013E OLED revenue (%) 6.7 0.1 59.8 34.4 51.7 17.4 89.9 74.5 60.0 55.0 55.0 30.0 26.7 30.0
2012 LG
2013E Others
2014E
2015E
Key OLED players in Korea

At Samsung Display, the largest OLED maker globally, revenue from small displays (including OLED) totalled KRW10.7tn in 2012. The company currently realises an operating-profit margin of over 20% for its OLED business, compared with a low- to mid-single-digit operating margin for its LCD business. Samsung Display is consolidated under SEC, which is its core customer and major shareholder (84.8% stake).
Source: Companies, Daiwa forecasts * Parent-company basis
- 13 -
2Q13

29 August 2013
Valuations look attractive

Based on our and the Bloomberg-consensus earnings forecasts, the Korea OLED-display Sector is trading at a 2013E PER of 11.2x. On PBR, the sector is trading at 1.8x (simple average) our 2013E BVPS forecast and 1.9x if we exclude large-cap companies such as SEC and LGD. Since the sectors average PBR multiple during the past three years is 2.3x (2.8x weighted average excluding SEC and LGD), we see prevailing valuations as appealing.
Korea OLED-display Sector: PBR
(x) 5 4 3 2 1 0
display makers may not immediately translate to revenue, but as the capacity ramps up over time the materials companies are likely to reap the full benefits, in our opinion. In the past, whenever the display companies have announced capacity-expansion plans or upward revisions to their capex, the Korea equipment companies shares have rallied. Sometimes, however, the equipment companies do not reveal the size of their equipment orders at the request of their customers. In addition, as lead times vary from three to six months depending on the type of equipment, it can be some time before orders starts to generate revenue. Therefore, we recommend tracking the display companies current capacity, as well as the demand outlook for existing and new applications.
Jan-10 Mar-10 May-10 Jul-10
Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11
Four OLED-display equipment/materials companies to watch

We initiate coverage of four OLED-display equipment and materials companies that can benefit from rising OLED investments by Samsung Display and LGD, the two major companies with commercial OLED-display products. We are positive on Wonik IPSs equipment-order momentum for 2H13 on the back of an increase in capital spending at SECs semiconductor and OLEDdisplay businesses. The company recently supplied to Samsung Display dry etchers, which are used in the OLED-display production lines, as well as encapsulation system for the flexible displays. In addition, with 3D vertical NAND-flash chips due to be used by the memory-chip makers from 2H13, we expect rising sales of deposition equipment. We initiate coverage of Wonik with a Buy (1) rating and six-month target price of KRW10,000. We also like AP Systems, which is sole supplier of laser-applied OLED-display equipment to Samsung Display. As Samsung Display continues to use LTPS backplanes for its mobile display production line, we expect sales to pick up of AP Systems laser-annealing systems, which currently make up more than 50% of its OLED-display equipment revenue. Although the companys glass-encapsulation systems sales could be adversely affected by the industrys shift to flexible displays, it also makes laser lift-off devices, which are used to manufacture flexible displays. We initiate coverage with a Buy (1) rating and six-month target price of KRW13,500.
Simple average
Weighted average excluding SEC, LGD
Source: Companies, FnData, Bloomberg, Daiwa forecasts
Comparing their PBR multiples and ROE for 2013E, most of the OLED companies under our coverage have ROEs of above 20%, with the exception of LGD and Wonik. LGDs LCD-panel business is not highly profitable, while Woniks equipment business posted an operating loss for 1H13. Although we forecast LGDs ROE to remain at a mid- to high-single-digit percentage for the next three years, we expect Woniks to improve to a mid-teen percentage in 2014.
OLED companies: PBR and ROE comparison
4.0 Duksan 3.0 Tera Semicon SFA AP Systems 2.0 1.0 LGD 0.0 0 10 20 ROE 2013E (%)
Source: FnData, Bloomberg, Daiwa forecasts
PBR 2013E (x)
Wonik IPS
ICD
Soulbrain SEC
LTS
Viatron
Avaco
30
40
The equipment companies share prices tend to move in tandem with their new orders and order backlogs, and we believe that investments in capacity by Samsung Display and LGD are key share-price catalysts. For materials companies, investments by
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29 August 2013
Duksan Hi-Metal mainly supplies OLED-display materials to Samsung Display. Although the company was affected by pricing pressure in 1H13, we expect it revenue to expand for 2H13 on the back of rising capacity at Samsung Display. The company also makes the organic materials for OLED-TV production, and we believe this will be a key revenue driver once Samsung Display finalises its OLED-TV line investments in the future, as TVs consume larger amounts of organic materials than smartphones. We initiate coverage with a Buy (1) rating and six-month target price of KRW31,000. Soulbrain, meanwhile, does not have direct exposure to OLED-display materials. The company mainly manufactures process chemicals and materials used in semiconductor and LCD production lines, while for OLED displays it makes thin-glass chemicals, which are used after an OLED display has been modularised. As the displays in mobile devices are becoming slimmer, we expect demand for Soulbrains etchant chemicals to increase robustly. We initiate coverage with an Outperform (2) rating and six-month target price of KRW50,000.
systems for Samsung Displays OLED-display production line, there is high likelihood it will provide the core deposition equipment for OLED-TV lines going forward. Among the companies on which we initiate coverage, our top picks are Wonik IPS, for its growing exposure to OLED-display equipment as well as its opportunity in NAND-flash, and Duksan Hi-Metal, on the back of the potential revenue growth in organic materials for OLED-TVs.
Our stock picks in the Korea OLED-display space

Although the share prices of the companies in the OLED-display Sector tend to move in unison, our picks are based on the competitiveness of their products and their relatively sound financials, as we think the sector could become more cyclical as new entrants arrive. Our top pick in the Korea OLED-display Sector is SEC, as the company is the largest user of OLED displays in its consumer devices, and also has a major stake (84.8%) in Samsung Display. We also believe that SEC will continue to commit to OLED-display production in an effort to differentiate its products. Among the equipment companies, we like SFA Engineering, as it is an all-around equipment player. Although the company has mainly supplied logistics
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29 August 2013
Global OLED companies: valuation comparison

Company Korea Samsung Electronics* LG Display* SFA Engineering* Soulbrain* Duksan Hi-Metal* Wonik IPS* AP System* ICD Viatron Tera Semicon Avaco LTS Japan Panasonic* Sony* Hitachi Hi-Tec* Canon (Tokki) Ulvac Ube Industries Idemitsu Kosan* Toray Other regions AU Optronics Innolux Dow Chemical Universal Display Merck BOE Tianma Average
Source: Companies, Bloomberg, *Daiwa forecasts Note: prices as of close on 28 August 2013
BBG code 005930 KS 034220 KS 056190 KS 036830 KS 077360 KS 030530 KS 054620 KS 040910 KS 141000 KS 123100 KS 083930 KS 138690 KS
Main OLED-display products Display Display Logistics equipment Thin glass solution OLED materials Dry etchers and film encapsulation ELA and glass encapsulation Dry etchers LTPS processing equipment Polyimide curing Glass encapsulation Glass encapsulation (cell sealing)
2013E revenue (USDm) 210,630 25,332 604 645 123 350 294 86 88 92 204 72
2013E operating profit (USDm) 35,249 1,192 92 113 37 26 29 17 21 13 9 11
2013E operating-profit margin (%) 16.7 4.7 15.3 17.5 30.0 7.4 9.7 20.3 23.5 14.3 4.6 15.0
PER 2013E 2014E 6.3 15.7 10.3 7.9 16.7 18.2 8.7 11.9 6.4 12.9 11.3 8.5 5.7 12.0 8.2 6.8 12.2 10.3 7.1 8.6 4.7 8.1 8.7 n.a.
PBR 2013E 2014E 1.3 1.0 2.1 1.7 3.1 1.6 2.1 1.7 1.9 2.2 1.0 2.0 1.1 0.9 1.8 1.4 2.5 1.4 1.6 1.5 1.4 1.7 1.0 n.a.
6752 JP 6758 JP 8036 JP 8035 JP 6728 JP 4208 JP 5019 JP 3402 JP
Display Display Deposition equipment Photo lithography and deposition Sputter Plastic substrate OLED materials OLED materials
75,195 79,093 6,535 5,708 1,823 6,758 47,300 18,231
2,770 2,513 236 220 88 296 800 1,139
3.7 3.2 3.6 3.9 4.8 4.4 1.7 6.2
34.3 34.9 16.5 43.9 10.6 13.4 6.4 15.3
29.9 24.9 12.8 17.4 7.5 10.7 8.1 12.9
1.5 0.9 1.0 1.2 0.9 0.8 0.5 1.3
1.4 0.8 0.9 1.2 0.8 0.8 0.4 1.2
2409 TW 3481 TW DOW US OLED US MRK GR 200725 SZ 000050 SZ
Display Display OLED materials OLED materials OLED materials Display Display
14,202 15,356 57,266 127 15,036 5,474 793 21,756
371 812 5,334 29 2,264 327 53 2,002
2.6 5.3 9.3 22.8 15.1 6.0 6.7 10.3
22.8 9.3 15.8 69.2 13.3 14.0 36.9 18.2
14.3 8.2 13.0 28.5 12.7 10.5 27.9 12.8
0.6 0.7 2.1 4.3 2.3 0.8 4.8 1.7
0.6 0.6 1.9 3.8 2.1 0.7 4.1 1.4
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29 August 2013
Equipment companies should be the first to benefit

In this section, we discuss how the expansion of the OLED-display market can benefit the equipment companies, particularly those in Korea. As most of the R&D on OLED technology was done in Japan from the late 1990s, the OLED-display processing system market was dominated by Japan equipment companies prior to the introduction of Gen5.5 lines (glass substrate size of 1,300 x 1,500mm) in 2011. However, as the manufacturing process turned out to be even more difficult than the development of OLEDdisplay technology, Samsung Display has had to spend a lot of time and effort to modify existing equipment to optimise the process and improve the production yield. The Korea equipment companies have gained access to the development of OLED processing systems from Gen5.5 lines, as since they were quick to adapt to changes in the equipments specifications.
There are only a few smartphone makers using OLED displays currently, but with Samsung Display and LGD planning to launch flexible displays in 2H13, we expect the number of smartphone makers adopting OLED displays to expand. Besides SEC, Nokia has been using OLED displays in its smartphones, while recently Motorola Mobility used OLED displays in its Moto X smartphone. Apple, meanwhile, has been a big proponent of IPS LCDs in its smart devices, but the company appears to have a growing interest in flexible displays, as it has applied for a number of patents for flexible-display applications. In addition to rising OLED-display demand from its growing use in smartphones, we believe the increasing size of handset displays will augment the need for additional OLED-display capacity. As many smartphone makers continue to believe that bigger display sizes are better, the average size of a smartphone display has almost doubled since 2008.
Smartphone display size
(inches) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Jan-08
Rising smartphone shipments and increasing display sizes to drive demand for OLEDs
We expect mobile displays to account for the majority of OLED-display shipments this year, and forecast shipments of small and medium-sized OLED displays to increase by 80% YoY to 252m units for 2013. As an increasing number of SECs mid-range smartphones, in addition to its high-end models, use OLED displays, market growth should remain robust over the next few years. Although some OLED displays are used in digital still cameras, most are used in smart devices. We forecast smartphones to account for 96% of small and mediumsized OLED-display shipments for 2013. Meanwhile, we forecast global smartphone shipments of 980m units for 2013, and expect OLED displays to be used in 25%.
Small and medium-sized OLED-display shipments
(m units) 400 350 300 250 200 150 100 50 0 2008 2009 2010 2011 2012 2013E 2014E 2015E Small and medium size shipments
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
(% ) 100 95 90 85 80 75 70 Mobile phone portion (RHS)
Most new smartphones (using the Android operating system) have display sizes of about five inches, compared with less than three inches five years ago. However, we do not believe the size of smartphone displays will increase much more, since larger devices would be difficult to carry, much less hold up while taking a phone call. Indeed, we regard a device with a screen of more than 6-7 inches as a tablet. As the average diagonal size of smartphones increases, existing OLED-display capacity is absorbed, because the larger the display, the fewer the cuts on a given glass substrate. For Gen5.5 glass, for example, an OLED-display maker can cut 323 4-inch displays but only 198 5-inch displays. Samsung Display plans to market OLED displays for tablet PCs in 2014, and we believe this will reduce its output capacity for smartphones. - 17 -

29 August 2013
Display cuts per glass substrate

Gen5.5 (1,300x1,500) Gen6 (1,500x1,850) Gen8 (2,200x2,500) Small- and mid-sized: 4.0-inch 4.5-inch 4.7-inch 5.0-inch 5.2-inch 5.7-inch 7.9-inch 9.7-inch 15.6-inch Large: 42-inch TV 55-inch TV 65-inch TV
How much does it cost to build an OLEDdisplay production line?

In May 2010, Samsung Display announced it was going to invest KRW2.5tn to build its A2 line or Gen5.5 OLED-display production line in Asan (100km south of Seoul), Korea. Given that phase 1 of the A2 line was ramped up to 64,000 substrates/month at the end of 2011, we estimate that each sub-line (8,000 substrates) costs about KRW300bn.
Samsung Display: LCD and OLED production lines in Asan
323 255 228 198 195 160 80 56 24 2 2 1
468 360 342 306 273 240 112 72 36 3 3 2
925 726 672 600 551 460 247 150 66 10 6 3
A3
A2
Growing need for new capacity

We estimate that the current monthly substrate capacity for Samsung Displays is 50,000 for the A1 line (Gen4) and 100,000 for the A2 line (Gen5.5). In terms of 5-inch mobile displays, Samsung Display can effectively churn out 24m units/month, assuming a production yield of 100%. Meanwhile, LG Display has one Gen4 line producing flexible displays. However, the glass capacity of this line is only 9,000 substrates/month, implying that it can produce 66 5-inch displays per substrate or 0.6m units/month, assuming a 100% production yield. As production yields for OLED lines currently are 8090% and given our OLED-display market (small and medium-sized) demand forecast of 252m units for 2013, we believe that Samsung Displays OLED-display capacity is quite tight. As a result, we expect Samsung Display to ramp up the phase 5 expansion of the A2 line in 4Q13 and possibly phase 1 of the A3 line from the middle of 2014.
Samsung Display: OLED display fab ramp-up forecast
mass A3 phase1 install production (32K) A2 phase5 install A2 phase4 install A2 phase3 install (flexible - LITI) modified to FMM A2 phase2 install (flexible / glass) A2 phase1 install mass production (64K) mass production (16K) mass production (27K) mass production (27K) mass production (8K) conversion to flexible
Source: Naver.com, Daiwa
As for LCD-production lines, Beijing-based BOEs Gen6 TFT-LCD line in Hefei, China, with a designed monthly capacity of 90,000 substrates in 2010, cost CNY17.5bn. In June 2013, Japan Display started mass production of a Gen6 LCD (low-temperature polysilicon [LTPS]) line in Mobara, Japan, with an initial capacity of 24,000 substrates/month, eventually ramping up to 50,000 sheets /month. Japan Display estimated the total capex for the line at JPY200bn. As each production line has a different glass capacity, we calculate the cost of building each production line for 10,000 substrates/month. It appears that LCDs based on amorphous silicon (a-Si) backplane technology are the cheapest, with an investment per 10,000 sheets of USD318m, followed by OLED displays at USD351m, and LCD based on LTPS-backplane technology at USD416m. However, as OLED displays are based on Gen5.5 glass substrates, which are 30% smaller (in terms of display area) than those of Gen6, if we adjust for the glass area, an OLED-display production line costs USD500m on a Gen6 line equivalent basis. Therefore, an OLED display line requires an investment of about 20% more than an LCD line based on LTPS technology.
2010
2011
2012
2013E
2014E
Source: Company, Daiwa forecasts
- 18 -

29 August 2013
Cost comparison of building OLED-display and LCD fabs

(USDm) 600 500 400 300 200 100 0 LCD (a-Si) LCD (LTPS) OLED OLED (adjusted for glass area)
For each manufacturing process, we analyse the equipment requirements as well as the costs of these systems. It appears that backplane is the most expensive process (56% of OLED-display equipment costs) due to the use of LTPS technology. It takes longer to process an LTPS backplane than an amorphous-silicon based (a-Si) backplane, as extra masking steps are required and an additional laserannealing process is needed to crystallise the silicon. As a result, LTPS has better electron mobility (100x greater than for a-Si backplane) and a faster response time when used for a display. In our analysis, the deposition system or evaporator constitutes 26% of the OLED-display equipment cost, while the encapsulation and module process equipment account for 13% and 5%, respectively. In between these processes, logistics systems are used to transport the glass substrates as well as to attach protection films. Although logistics systems are broken up into the four major processes listed above, if we calculate the logistic systems separately in the OLEDdisplay production line, they are 15-20% of total OLED-display equipment costs.
OLED-display investment breakdown by major process
Encapsulation 12.8% Module 5.3%
Source: Companies, Daiwa estimates Note: Cost comparison based on 10,000 substrates/month
Although the higher investment required for an OLEDdisplay production line may imply that the manufacturing costs are also higher, OLED displays use a fewer number of components, such as glass and organic materials, while LCDs use various optical films as well as backlights. Therefore, once production efficiency improves through economies of scale and better production yields, we believe that the production costs for OLED displays could be cheaper than for LCDs.
Core equipment for OLED production

Generally, OLED manufacturing can be classified into four major processes: backplane, deposition, encapsulation, and module. The backplane process involves creating the switches and driving mechanism for OLED displays and deposition process is responsible for patterning sup-pixels and depositing organic materials on the glass substrate. Encapsulation means protecting the OLED display from water vapour and oxygen by attaching a layer of glass or films. The module process involves cutting substrates to small sizes, etching the glass to make it thinner, attaching circuitry, and testing for any defects.
OLED manufacturing process
TFT Fabrication
Semiconductor Layer Pattering Gate Electrode Pattering Source Drain Electrode Pattering Passivation Pattering Pixel Electrode Patterning - Cleaning - PR Coating - Exposure - Develop - Etch - PR Remove - Inspection
Deposition 25.6%
Backplane 56.3%
Source: Companies, Daiwa estimates
OLED Fabrication Encapsulation

Plasma/ UV treatment HIL Deposition HTL Depostion Blue Layer Deposition Green Layer Deposition Red Layer Depostion ETL Deposition EIL Depostion Metal Electrode Deposition - Alignment - Evaporation Source - Glass Handling Canister/ Cover glass Cleaning Attach Getter Sealent Dispensing Sealing (UV)
Module Process
Aging Cell Cutting Probe Testing Pol. Lamination COF Bond
Who are the major players and what are the opportunities/risks in OLED equipment?
The thermal processing equipment use by Samsung Display in the backplane process is provided by Tera Semicon and Viatron, and the laser-annealing system is supplied by AP Systems. Thin-film transistors act as switches in the backplane to turn individual pixels on and off, and these transistors are created using photolithography machines from Nikon and Canon and PECVD and sputters machines from SFA and Ulvac. In addition, etchers have been provided solely by ICD for the first three expansion phases of the A2 line. However, Wonik IPS became the second vendor in phase 4 of the A2 line. - 19 -

29 August 2013
Canon Tokki is the main supplier of evaporators, used for organic material deposition on glass substrates, for both Samsung Display and LGD. However, Samsung Display added a second vendor (Hitachi Hi-Tech) for its Gen5.5 line and is working with SFA on deposition equipment based on a small-mask system (SMS) for its Gen8 line. LGD, meanwhile, uses evaporator from Canon Tokki with key components supplied by the Korea equipment company YAS. In order to improve the resolution of OLED displays, the laser-induced thermal-imaging (LITI) system was once considered by Samsung Display. However, we believe the project was halted due to low production yields. AP Systems provides glass-based encapsulation systems to Samsung Display. LTS supplies laser-sealing machines to melt the frit powder to form a hermetic seal between the two glass plates to enable the cutting of small displays (ie, for smartphones) from large glass substrates. For flexible displays, several layers of film are used as protection cover. Organic layers are deposited with equipment from SNU, while inorganic layers are placed with atomic layer deposition systems from Wonik IPS.
OLED equipment supply chain by process
Samsung Display Backplane process: Cleansing / wet processing Semes (Not listed) DMS (068790 KS) Crystallisation AP System (054620 KS) Tera Semicon (123100 KS) Viatron (141000 KS) Deposition (PE-CVD / Ulvac (6728 JP) SFA (056190 KS) sputter) Applied Materials (AMAT US) Photo lithography Nikon (7731 JP) Canon (7751 JP) Etching ICD (040910 KS) Wonik IPS (030530 KS) Deposition process: Evaporator Canon Tokki (Not listed) Hitachi Hi-tech (8036 JP) SFA (056190 KS) Encapsulation process: Encapsulation system AP System (054620 KS) LTS (138690 KS) SNU (080000 KS) Wonik IPS (030530 KS) Module process: Scriber/grinder SFA (056190 KS) Bonder SFA (056190 KS)
Backplane process Although LTPS is the most widely used backplane technology for OLED displays, it is expensive. Metal oxide may become an alternative solution, particularly for large displays. A metal-oxide backplane is easier to manufacture than an LTPS backplane as it can be made in an existing a-Si facility on an LCD production line, and fewer mask steps are required to create the transistors. As a result, a transition to metal-oxide backplanes could be a risk to equipment suppliers for the LTPS process. Deposition process Due to the chamber-size limitations of evaporators, glass substrate is normally cut into four or two pieces prior to the deposition process. Therefore, evaporators that can handle the full-size Gen5.5 or Gen8 glass would be of great interest to OLED-display makers. For OLEDTV, Samsung Display currently uses SMS type evaporators supplied by SFA. If this method is chosen for future production lines, SFA would be a key beneficiary, in our opinion. Encapsulation process Glass-type encapsulation is the most common one in use currently for OLED displays. However, if the industry moves to flexible displays, the film-type encapsulation process is likely to be the most widely used process. In Samsung Displays supply chain, SNU and Wonik IPS are likely to benefit from a transition to flexible displays. As an OLED displays lifespan can be affected by a decrease in electroluminescence, effective encapsulation methods will need to be developed going forward.
LGD DMS (068790 KS) KC Tech (029460 KS) Unlisted local companies Ulvac (6728 JP) Jusung Engineering (036930 KS) Nikon (7731 JP) Canon (7751 JP) LIG ADP (079950 KS)
Materials companies should catch up with rising production volume

As already discussed, we expect Samsung Displays production capacity for OLED displays to expand, as it is likely to ramp up phase 5 of its A2 line in 4Q13 and possibly phase 1 of its A3 line from the middle of 2014. We therefore forecast the companys production capacity (in terms of area) for OLED displays to increase to 380,000 sq m/month for 2Q14 from 280,000 sq m/month for 2Q13, and expect orders for OLED materials to strengthen accordingly.
Canon Tokki (Not listed) YAS (Not listed)
Avaco (083930 KS) Jusung Engineering (036930 KS)
Top Engineering (065130 KS)
As OLED displays are still at an early stage of growth, we believe the core technology has scope for improvement. Given that OLED-display makers will reward with large orders equipment companies that can improve production efficiencies and reduce costs, we believe there are opportunities as well as risks for the equipment companies.
Core materials for OLED production

In a typical OLED display structure for mobile devices, an electrical current flows from a cathode to an anode through hole transport layers (HTL), emission layers (EML), and electron transport layer (ETL). When a current flows through the device, the cathode injects electrons through the HTL and the anode removes - 20 -

29 August 2013
electrons, thereby creating electron-holes. Then, electrons and electron-holes are recombined in the EMLs and create photon of light in the process. EMLs consist of red, green, and blue layers, and each colour layer is composed of a host and a dopant. In OLED displays for TVs, the hole injection layers (HIL) and electron injection layers (EIL) are used in addition to the layers used in mobile devices.
OLED: how light is created
OLED Creating Light
Cathode Cathode Anode Cathode
Cost structure of an OLED display for the Galaxy S4

HTL Red host 8.1% 4.7% Red dopant 1.1% Green host 4.7% Green dopant 1.1% Blue host 3.6% Blue dopant 0.9% Others 69.6% ETL 6.1%
Source: Companies, Daiwa estimates

Emissive Layer
Conductive Layer
Cathode injects electrons through ETL and anode

removes electrons
Electron Electron-holes are created and these are injected through HTL
By comparison, the costs of the OLED display materials used in TVs are higher than those used in mobile devices, assuming the same display area. For example, 1 sq m of substrate requires 12g of HTLs to make an OLED display for a mobile device, but for a TV 25-50g is needed for a 1 sq m substrate, as a TV needs to have a longer lifespan than that of a mobile device. Typically, consumers replace their handsets every 2-3 years: for TVs this is about every 10 years. In addition, TVs require additional organic materials, such as HILs and EILs.
Structure of an OLED display for Galaxy S4 (chart is replaced)
OLED Structure
Cathode Emissive layer (Organic molecules or polymers) Conductive layer (Organic molecules or polymers)
Light photon
Electron and electronholes are are recombined in EML and create photon of light
Cathode Electron Transport Layer (ETL) Emission Layer (EML) Hole Transport Layer (HIL) Anode Substrate
Source: HowStuffWorks, Daiwa
Anode Substrate
As for the cost breakdown of OLED displays in mobile devices, OLED materials account for 30% of the total display cost. Of this 30%, EMLs account for the largest portion, of 16%, followed by HTLs (8%) and ETLs (6%). However, if fluorescent blue is replaced with phosphorescent blue, the cost of the EMLs increases, as phosphorescent layers are more expensive than fluorescent ones. Meanwhile, all OLED displays already use phosphorescent red, and Samsung Display recently started using phosphorescent green on OLED displays for the Galaxy S4.
Source: HowStuffWorks, Daiwa
Phosphorescent vs. fluorescent emission layers

EMLs are categorised as either phosphorescent or fluorescent depending on the type of emission, and mobile displays increasingly use phosphorescent EMLs, as battery life is important, especially when the sizes of displays are getting larger in smartphones. Phosphorescent EMLs consume less power than fluorescent EMLs, as their theoretical luminous efficiency ranges from 75-100% compared with 25% for fluorescent EMLs. However, a shorter lifespan is a major hurdle to the wider adoption of phosphorescent EMLs, especially for the colour blue. Due to the lifespan and power-consumption issues, Samsung Display previously used a mixture of various emission layers phosphorescent red (which has a relatively long lifespan, and thus can be used more
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29 August 2013
easily to replace fluorescent red), and fluorescent green and blue up until 2012. However, for the Galaxy S4, Samsung Display used an upgraded mixture of phosphorescent red/green layer and fluorescent blue, which reduces the power consumption of the display by 25% compared with its predecessor. Although Samsung Display plans to replace all three emission layers with phosphorescent layers, this could take a long time due to limited lifespan of phosphorescent blue.
Power consumption of PHOLED panels
(mW) 400
domestic and overseas companies looking to enter this market, these companies are affected by low production yields. As for OLED-TVs, Duksan is currently the sole supplier of HTLs and HILs, and should benefit once the OLED-TV market takes off. Cheil Industries and LG Chemical are the main suppliers of ETLs to Samsung Display, with Cheil Industries is the sole ETL supplier for the Galaxy S4. Cheil Industries recently acquired Novaled, which specialises in manufacturing the additives for charged layers, including HTLs and ETLs, and this is likely to strengthen its ETL business. LG Chemical is the dominant EIL supplier for OLED-TVs. As for EMLs, although Dow Chemical is the only supplier for the phosphorescent red host for Samsung Display, the phosphorescent red dopant and green host/dopant are supplied solely by Universal Display. Although Duksan, Cheil Industries, and CS Elsolar are currently working with Samsung Display to develop a phosphorescent green host, we expect these companies to start shipping from 2014 at the earliest. However, among these three companies, we believe Duksan is slightly ahead in terms of technology as it provides refinement services for the phosphorescent green host for Universal Display. As for the blue host and dopant, Samsung Display continues to use fluorescent blue, and SFC is currently the sole supplier. In LGDs supply chain, Universal Display is the dominant supplier of phosphorescent EMLs, and there are multiple suppliers of other OLED-display materials. Orders from LGD should be small for now, and some of these companies may have production-yield issues in mass production if orders from LGDs production lines strengthen.
300
200
100
0 PHOLED R PHOLED RG PHOLED RGB

Source: Daiwa estimates Note: Based on a 4-inch diagonal display, operating at 300 cd/sq m PHOLED R: uses phosphorescent red and fluorescent green/blue PHOLED RG: uses phosphorescent red/green and fluorescent blue PHOLED RG: uses phosphorescent red, green and blue
Major players and potential opportunities/risks in OLED materials

As Samsung Display accounted for 96% of global OLED-display production capacity for 2012, we focus our discussion mainly on the companys supply chain, and touch briefly on that of LGD at the end. Duksan is the main supplier to Samsung Display of the HTLs used in the OLED displays of mobile devices, with a 90% share of its business, and the remainder being supplied by CS Elsolar. Although there are few
OLED supply chain for materials
Samsung Display Charged layer HTL HIL ETL EIL Emissive layer Red phosphorescent Green phosphorescent Green fluorescent Blue fluorescent
LG Display Idemitsu Kosan (5019 JP), Merck (MRK GR), Hodogaya (4112 JP) Idemitsu Kosan (5019 JP), Merck (MRK GR), Hodogaya (4112 JP) LG Chemical (051910 KS), Idemitsu Kosan (5019 JP) ,Merck (MRK GR), Toray (3402 JP) LG Chemical (051910 KS), Idemitsu Kosan (5019 JP), Merck (MRK GR), Toray (3402 JP) Dow Chemical (DOW US), Idemitsu Kosan (5019 JP) Universal Display (OLED US) Universal Display (OLED US) Universal DIsplay (OLED US) Universal Display (OLED US), Idemitsu Kosan (5019 JP) Universal DIsplay (OLED US) Idemitsu Kosan (5019 JP), Hodogaya (4112 JP) Idemitsu Kosan (5019 JP), Hodogaya (4112 JP)
Duksan Hi-Metal (077360 KS), CS Elsolar (159910 KS) Duksan Hi-Metal (077360 KS) LG Chemical (051910 KS), Cheil Industries (001300 KS) LG Chemical (051910 KS) Host Dopant Host Dopant Host Dopant Host Dopant Dow Chemical (DOW US) Universal Display (OLED US) Universal Display (OLED US) Universal Display (OLED US) CS Elsolar (159910 KS) Universal Display (OLED US) SFC (Not listed) SFC (Not listed)
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29 August 2013
OLED market should expand with new entrants

We believe that one of the core reasons for the high cost of producing OLED displays is that there are very few players. Samsung Display was the only OLED display maker with a commercial product globally until the end of 2012. Although LGD started to manufacture OLED-TV panels from early 2013, the production volume remains quite small due to a low yield and high manufacturing costs. At the 2013 CES trade show in Las Vegas, Sony announced the first 4K OLED-TV, produced on an oxide backplane, but no price or release dates were provided. Meanwhile, Panasonic claimed to have built the worlds largest OLED-TV with a 56-inch screen. As Taiwan and China display companies are spurring on developments in OLED displays, we are likely to see more OLED-display production lines ramp up over the next 2-3 years. Therefore, we expect the costs of equipment and materials to decline, and the OLEDdisplay market to expand as well.
China panel makers, meanwhile, have steadily expanded their production capacity. They have been focused on gaining the largest share of the LCD market, as they have a huge domestic TV market that can absorb excess panel output. Although China panel makers accounted for about 13% of LCD-panel (notebooks, monitors, and TV panels combined) market in 2Q13, their market share for TV panels was about 17% for 2Q13, and we expect this to continue to rise in the future.
Global LCD-TV panel shipment share by region
(% ) 60 50 40 30 20 10 0
Korea
Taiwan
China
Japan
Future looks bleak for LCD market with continuous capacity ramp-up in China
Although panel makers in Japan once dominated the global LCD market, Korea LCD manufacturers overtook them in the early 2000s and expanded their market shares with aggressive investments in Gen5 lines. By the mid-2000s, the Taiwan panel makers, with strategic support from its government, had increased their presence in the global LCD market and accounted for the largest share of production globally in 1Q05. However, following the global economic slowdown in 2008, market-share gains by Taiwan panel makers lost momentum, as they were faced with sharp declines in fab utilisation rates and recorded huge losses.
Global LCD-panel shipment share by region
(% ) 60 50 40 30 20 10 0
3Q13E 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13
Meanwhile, the global LCD market is facing chronic overcapacity due to slowing demand and a continuous ramp-up in new capacity. The utilisation rate for global LCD production lines has never exceeded 90% over the past five years: the highest level achieved in the past three years was 81% for 2Q13.
Utilisation rates for global LCD production lines
(% ) 100 90 80 70 60 50
Despite low utilisation rates, the construction of new fabs in China is continuing. BOE is the most aggressive company, with two new fabs due to ramp up production over 2014-15. Samsung Display and LGD are building their new LCD-production lines in China to avoid potential tariff increases, currently 5%, for LCD panels imported to China.
Korea
Taiwan
China
Japan
- 23 -
1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13
3Q13E
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13

29 August 2013
New Gen8 LCD production lines being ramped up in China

Company BOE Fab Beijing B4 Phase 1 2 3 1 2 1 2 1 1 1 1 2 3 Capacity (per month) 50,000 50,000 30,000 30,000 30,000 45,000 45,000 45,000 45,000 70,000 30,000 25,000 30,000 Mass production 3Q11 2Q12 3Q13 1Q14 4Q14 2Q15 3Q15 1Q15 2Q15 3Q14 4Q13 2Q14 3Q15
Hefei B5 Chongqing B8
CEC Panda China Star LG Display Samsung Display
Nanjing G8 Shenzen 2 Guangzhou 1 Suzhou
With OLED displays poised to replace LCDs in the future, Samsung Display and LGD are committed in building additional OLED- display lines as production efficiency improves. However, other than these two Korea companies, no other OLED-display makers have confirmed that mass production is under way. Although several companies have R&D or pilot lines in place, production yield is a major hurdle: once it stabilises, we expect these companies to start volume production. The fab activity by other OLED-display companies is as follows: AU Optronics For small panels, currently has Gen3.5 line in Taiwan and a Gen4 line in Singapore, but it remains uncertain when the company will start the volume production as it is having difficulty in raising the production yield. In 2012, the company teamed up with Idemitsu Kosan to access organic materials as well as OLED-display technology. AU Optronics is developing oxide-based white-OLED displays for TVs and it may build a Gen6 or Gen8 fab in Taiwan with technology from Sony and Panasonic. Innolux Likely to delay ramping up its Gen3.5 line in Hsinchu until early or mid-2014. The Taiwan companys OLED-display development appears to be tracking much slower than it expected, and so far it has no plans for an OLED-TV production line as the company is focused on selling UHD-TV panels based on LCD technology. BOE This China-based company has started construction of a Gen5.5 OLED line in Ordos, Mongolia. We estimate the investment cost will be more than USD3bn and production at the facility may start to be ramped up from the end of 2013. However, it would first produce LCDs on LTPS backplanes and it to OLED displays later. There have been media reports that BOE has encountered production issues and recently placed an order for deposition equipment with a Korea company. Tianma Operates a Gen4.5 pilot line in Shanghai. This China-based company aims to build a Gen5.5 line to produce small-size OLED panels. However, we expect mass production for this fab to start from early 2015. Visionox Plans to ramp up production of a Gen5.5 OLED-display line in Kunshan, China with a capacity of 15,000 substrates/month. We expect equipment to be moved in for 1H14, and mass production to begin from late-2014 for this Chinabased company.
Source: Companies, DisplaySearch
Due to several new fab additions in China over the next couple of years, we forecast global LCD-panel capacity to increase by about 2% YoY for 2013 and 5% YoY for 2014. Therefore, with muted growth in panel demand, we expect panel makers profitability to depend largely on their adjustments to fab utilisation rates due to inherent overcapacity. We believe the panel-makers operating-profit margins will continue to be low- to mid-single digit percentages over the next few years.
LCD panel makers: operating-profit margin
(% ) 30 20 10 0 (10) (20) (30) (40) (50) 1Q05 1Q06 AUO
Source: Companies
1Q07
1Q08
1Q09 Innolux
1Q10
1Q11 LGD
1Q12
1Q13 SEC
LCD-panel makers eventually should shift to the OLED-display market

As the OLED-display market offers higher growth potential and better profitability than that of LCDs, we expect an increasing number of LCD panel makers to shift to OLED-display production. However, we do not think that will happen immediately, given productionyield issues and the large investment required to build OLED-display fabs. But Samsung Displays current operating-profit margin of more than 20% on its OLED-display business is certain to attract new entrants, in our view.
- 24 -
Information Technology / Korea 005930 KS

Samsung Electronics
Samsung Electronics
005930 KS
Target (KRW): 1,800,000 1,800,000 Upside: 37.5% 28 Aug price (KRW): 1,309,000
At the centre of OLED-market expansion

SEC will use OLEDs as a key display technology for mobile devices and TVs in an effort to differentiate its products We expect it to launch its first flexible-display product in 2H13, followed by foldable and rollable displays in the future It will fund most of its OLED-display investment with internal cash flow as this business is highly profitable
1 2 3 4 5
Buy (unchanged) Outperform Hold Underperform Sell
has now improved to 80%, the company is likely to launch its first flexible-display product in 2H13.
Jae H. Lee
market as we expect OLED to emerge as a game-changing feature in its product-differentiation strategy.

Forecast revisions (%)
Year to 31 Dec Revenue change Net profit change Core EPS (FD) change
What's new
In an effort to differentiate its consumer devices, we expect SEC to expand the uses for OLED displays to TVs and tablets, as well as to adopt OLED-based flexible displays for its flagship smartphones.
What's the impact
Although the first generation of flexible displays will be unbreakable, which are thinner, lighter, and sturdier than the current glass-based OLED, as other hardware components have flexible properties, we believe the launch of foldable and rollable displays will take place in the not-too-distant future. While several billion dollars of investment is needed to build a new OLED-display production line, we expect Samsung Display to fund most of this through internally generated cash flow, as its operating-profit margin in the OLED business is currently more than 20%. As OLED-display shipments should be strong for 3Q13, we are raising slightly our 2013-14 EPS forecasts.
What we recommend
13E (0.7) 1.0 1.0
14E (0.9) 0.5 0.5
15E (1.4) (1.9) (1.9)
Share price performance

(KRW)
1,600,000 1,487,500 1,375,000 1,262,500 1,150,000
(%)
130 121 113 104 95
Aug-12
Nov-12
Feb-13
May-13
SEC, through 84.5%-owned affiliate Samsung Display, accounted for 96% of OLED-display production capacity globally for 2012. Although SEC has used OLED displays in mobile handsets since 2007, it is now using them as the main display for all of its premium smartphones and for a new 55-inch OLED-TV. In the next few years, we expect the company to utilise fully OLEDs inherent advantages in product differentiation and offer flexible and transparent displays. Until now, the challenge of launching flexible displays has been difficulties with the encapsulation process. However, as we believe the production yield
Samsng Ele (LHS) Relative to KOSPI (RHS)
12-month range Market cap (USDbn) 3m avg daily turnover (USDm) Shares outstanding (m) Major shareholder
1,189,000-1,576,000 172.72 380.48 147 Samsung Life (7.6%)
Financial summary (KRW)

Year to 31 Dec Revenue (bn) Operating profit (bn) Net profit (bn) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) 13E 233,442 39,067 30,752 208,771 29.0 3.6 6.3 0.8 10,000 1.3 2.9 23.4 14E 251,553 42,788 33,653 228,467 9.4 5.1 5.7 0.8 11,000 1.1 2.4 20.8 15E 267,268 44,536 35,156 238,668 4.5 4.4 5.5 0.9 12,000 0.9 1.9 18.1
We reaffirm our SOTP-based sixmonth target price of KRW1.8m and Buy (1) rating. The key risks are weaker-than-expected sales of PCs, mobile handsets, and flat-panel TVs.
How we differ
We are more positive on SECs OLED-display business than the
Source: FactSet, Daiwa forecasts

29 August 2013
Financial summary
Key assumptions
Year to 31 Dec DRAM shipment (m 1Gb equiv.) NAND shipment (m 8Gb equiv.) Handset shipment (m) 2008 2,312.5 1,625.0 196.7 2009 3,260.0 2,180.0 227.1 2010 5,470.0 3,600.0 280.2 2011 8,245.0 6,480.0 332.0 2012 10,640.0 9,780.0 409.0 2013E 13,020.0 15,500.0 440.0 2014E 17,200.0 24,880.0 485.0 2015E 22,640.0 39,160.0 525.0
Profit and loss (KRWbn)

Year to 31 Dec Semiconductor Display Other Revenue Total Revenue Other income COGS SG&A Other op.expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported)(KRW) EPS (adjusted)(KRW) EPS (adjusted fully-diluted)(KRW) DPS (KRW) EBIT EBITDA 2008 22,353 21,518 77,423 121,294 0 (89,762) (25,500) 612 6,644 (56) (10) 6,578 (688) 0 5,890 5,890 39,988 39,988 39,988 5,500 6,644 16,739 2009 26,808 25,837 83,679 136,324 0 (94,595) (30,749) (55) 10,925 (174) 1,441 12,192 (2,431) 0 9,761 9,761 66,263 66,263 66,263 8,000 10,925 22,063 2010 37,639 29,920 87,072 154,630 0 (102,667) (35,207) 0 16,757 (23) 2,642 19,376 (3,193) 0 16,182 16,182 109,860 109,860 109,860 10,000 16,757 28,150 2011 36,990 29,243 98,769 165,002 0 (112,145) (37,212) 0 15,644 62 1,486 17,192 (3,433) 0 13,759 13,759 93,409 93,409 93,409 5,500 15,644 29,236 2012 34,887 32,999 133,218 201,104 0 (126,652) (45,402) 0 29,049 246 619 29,915 (6,070) 0 23,845 23,845 161,883 161,883 161,883 8,000 29,049 44,671 2013E 37,724 32,773 162,944 233,442 0 (141,241) (53,134) 0 39,067 321 37 39,425 (8,674) 0 30,752 30,752 208,771 208,771 208,771 10,000 39,067 56,263 2014E 42,101 35,254 174,199 251,553 0 (151,953) (56,812) 0 42,788 596 39 43,423 (9,770) 0 33,653 33,653 228,467 228,467 228,467 11,000 42,788 61,789 2015E 44,811 37,844 184,613 267,268 0 (162,792) (59,940) 0 44,536 850 (23) 45,362 (10,206) 0 35,156 35,156 238,668 238,668 238,668 12,000 44,536 65,945
Cash flow (KRWbn)

Year to 31 Dec Profit before tax Depreciation and amortisation Tax paid Change in working capital Other operational CF items Cash flow from operations Capex Net (acquisitions)/disposals Other investing CF items Cash flow from investing Change in debt Net share issues/(repurchases) Dividends paid Other financing CF items Cash flow from financing Forex effect/others Change in cash Free cash flow
2008 6,578 10,095 (688) (4,526) 1,900 13,360 (13,793) (13) 677 (13,128) 2,773 0 (1,098) 260 1,934 817 2,983 (433)
2009 12,192 11,138 (2,431) (6,599) 4,223 18,522 (7,971) (84) (6,122) (14,177) (622) 0 (824) 82 (1,364) (1,646) 1,335 10,551
2010 19,376 11,394 (3,193) (11,094) 7,345 23,827 (20,391) (406) (3,188) (23,985) 1,702 0 (1,918) 64 (152) (48) (359) 3,436
2011 17,192 13,592 (3,433) (7,292) 2,859 22,918 (21,586) (137) 610 (21,113) 3,758 0 (875) 227 3,110 (15) 4,900 1,332
2012 29,915 15,622 (6,070) (8,632) 7,138 37,973 (22,321) (799) (8,202) (31,322) 539 0 (1,265) (1,138) (1,865) (687) 4,100 15,652
2013E 39,425 17,197 (8,674) (2,608) (782) 44,558 (23,000) (11,890) (4,601) (39,491) (1,366) 0 (1,362) (340) (3,068) 0 1,999 21,558
2014E 43,423 19,001 (9,770) (2,374) (948) 49,331 (24,000) (11,624) (3,905) (39,529) (2,405) 0 (1,702) (170) (4,277) 0 5,526 25,331
2015E 45,362 21,409 (10,206) (2,421) (1,100) 53,043 (25,000) (15,438) (4,442) (44,880) (334) 0 (1,873) (169) (2,376) 0 5,787 28,043
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29 August 2013
Financial summary continued

Balance sheet (KRWbn)
As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (KRW) 2008 13,388 9,493 12,044 14,044 48,969 42,496 787 13,049 105,301 11,290 5,587 15,330 32,207 6,165 4,005 42,377 898 57,219 58,117 4,807 105,301 206,495 4,067 394,550 2009 20,883 9,839 17,819 5,670 54,211 43,560 1,256 13,152 112,180 8,014 8,235 17,955 34,204 1,380 3,550 39,135 898 68,668 69,565 3,480 112,180 188,286 (11,489) 472,270 2010 22,480 13,365 19,153 6,405 61,403 52,965 2,779 17,162 134,309 9,554 9,149 21,242 39,945 1,222 3,965 45,131 898 84,544 85,442 3,736 134,309 188,582 (11,705) 580,054 2011 26,878 15,717 21,882 7,026 71,502 62,044 3,355 18,899 155,800 9,684 10,277 24,358 44,319 4,963 5,205 54,487 898 96,193 97,090 4,223 155,800 189,030 (12,231) 659,137 2012 37,448 17,747 23,861 8,212 87,269 68,485 3,730 21,588 181,072 9,443 9,489 28,001 46,933 5,452 7,206 59,591 898 116,197 117,094 4,386 181,072 179,034 (22,553) 794,939 2013E 49,312 19,963 27,061 9,771 106,107 74,288 4,607 28,589 213,591 10,266 10,629 31,041 51,937 3,263 7,861 63,061 898 145,246 146,143 4,386 213,591 165,804 (35,783) 992,152 2014E 64,765 21,705 28,811 10,476 125,757 79,287 5,287 34,911 245,242 7,348 11,168 32,279 50,794 3,777 8,360 62,932 898 177,026 177,924 4,386 245,242 147,947 (53,640) 1,207,906 2015E 84,148 23,268 30,243 11,075 148,735 82,878 5,982 42,053 279,648 7,393 11,569 33,095 52,056 3,398 8,770 64,224 898 210,140 211,038 4,386 279,648 128,230 (73,357) 1,432,713
Key ratios (%)

Year to 31 Dec Sales (YoY) EBITDA (YoY) Operating profit (YoY) Net profit (YoY) Core EPS (fully-diluted) (YoY) Gross-profit margin EBITDA margin Operating-profit margin Net profit margin ROAE ROAA ROCE ROIC Net debt to equity Effective tax rate Accounts receivable (days) Current ratio (x) Net interest cover (x) Net dividend payout Free cash flow yield
2008 23.1 (4.8) (26.9) (25.7) (25.7) 26.0 13.8 5.5 4.9 10.7 5.9 8.8 9.5 7.0 10.5 34.9 1.5 118.5 13.8 n.a.
2009 12.4 31.8 64.4 65.7 65.7 30.6 16.2 8.0 7.2 15.3 9.0 13.4 13.6 net cash 19.9 40.0 1.6 62.7 12.1 5.5
2010 13.4 27.6 53.4 65.8 65.8 33.6 18.2 10.8 10.5 20.9 13.1 18.4 20.1 net cash 16.5 43.6 1.5 729.2 9.1 1.8
2011 6.7 3.9 (6.6) (15.0) (15.0) 32.0 17.7 9.5 8.3 15.1 9.5 14.5 15.0 net cash 20.0 45.4 1.6 n.a. 5.9 0.7
2012 21.9 52.8 85.7 73.3 73.3 37.0 22.2 14.4 11.9 22.3 14.2 23.0 24.6 net cash 20.3 41.5 1.9 n.a. 4.9 8.1
2013E 16.1 25.9 34.5 29.0 29.0 39.5 24.1 16.7 13.2 23.4 15.6 26.0 28.5 net cash 22.0 39.8 2.0 n.a. 4.8 11.2
2014E 7.8 9.8 9.5 9.4 9.4 39.6 24.6 17.0 13.4 20.8 14.7 23.9 27.2 net cash 22.5 40.5 2.5 n.a. 4.8 13.1
2015E 6.2 6.7 4.1 4.5 4.5 39.1 24.7 16.7 13.2 18.1 13.4 21.2 25.5 net cash 22.5 40.3 2.9 n.a. 5.0 14.5
Company profile
Samsung Electronics is the world's largest manufacturer of memory chips and flat-panel TVs and the largest supplier of smartphones. The company has core production facilities in Korea and four business divisions semiconductor, display, IT & mobile, and consumer electronics.
- 27 -

SFA Engineering
SFA Engineering
056190 KS
Target (KRW): 72,000 72,000 Upside: 42.0% 28 Aug price (KRW): 50,700
A multi-purpose player in OLED equipment

Order momentum for 2H13 is improving on the back of new OLED-display line investments Potential supply of deposition system for OLED-TV production line could boost revenue further We expect SFA to sustain an operating-profit margin of a midteen percentage on the back of effective cost control
1 2 3 4 5
Buy (unchanged) Outperform Hold Underperform Sell
Samsung Display invest in a new mass-production line for OLED-TV (possibly in 2014), SFA is likely to supply the deposition equipment.
Jae H. Lee
consensus as we are more positive on potential new-equipment orders from its customers.
What's new
Despite moderate delays in new equipment orders in 1H13, we expect SFA Engineerings (SFA) order intake to improve for 2H13 as investments in new OLED-display production lines are finalised towards the year-end.
What's the impact
For 2013, we forecast SFA to post revenue of KRW669bn (up 39% YoY) and an operating profit of KRW102bn (up 58% YoY). We expect an operating-profit margin of a mid-teen percentage (compared with a low-teen percentage in 201012) as a result of effective cost reductions and the shortening of the lead time for equipment delivery. Following the 2Q13 results (21 August), we are making small cuts to our 2013-15 earnings forecasts.
What we recommend
13E (0.9) (1.4) (1.4)
14E (1.1) (2.6) (2.6)
15E (1.0) (2.6) (2.6)

(KRW)
70,000 61,250 52,500 43,750 35,000
(%)
140 125 110 95 80
Aug-12
Nov-12 SFA Eng (LHS)
Feb-13
May-13 Relative to KOSPI (RHS)
For 1H13, the companys new equipment orders amounted to KRW267bn (a 14% YoY rise). However, we forecast its new-order intake to increase to KRW436bn for 2H13 as Samsung Display will ramp up its phase5 expansion of A2 line from 4Q13 and the new A3 line from the middle of 2014. Although SFA has so far provided mainly logistics equipment for OLED production lines, it has developed front-end equipment, such as a deposition system for OLED-TV production lines and that is being used in Samsung Displays Gen8 pilot line. Therefore, should
We maintain our six-month target price of KRW72,000, based on a 2013E PBR of 3.0x, corresponding to the stocks mid- to peak-cycle PBR over the past three years. As we expect order visibility for display equipment to improve in 2H13, we reaffirm our Buy (1) rating. Risks to our call include delays in investments at Samsung Displays new LCD and OLED production lines.
How we differ
40,000-67,700 0.82 3.20 18 DY Asset (33.3%)

Year to 31 Dec Revenue (bn) Operating profit (bn) Net profit (bn) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) 13E 669 102 88 4,927 29.4 7.0 10.3 2.4 1,200 2.1 5.8 22.6 14E 864 131 111 6,182 25.5 10.8 8.2 2.8 1,400 1.8 4.1 23.7 15E 977 145 122 6,813 10.2 10.1 7.4 3.0 1,500 1.4 3.5 21.9
Our 2013E and 2014E EPS are respectively 7.0% and 10.8% higher than those of the Bloomberg

29 August 2013
Financial summary
Key assumptions
Year to 31 Dec Global semiconductor capex (USDbn) Global LCD capex (USDbn) New order intake (KRWbn) 2008 33.3 24.1 409.6 2009 19.9 15.9 261.3 2010 43.3 25.3 739.1 2011 56.4 17.3 773.4 2012 49.8 13.4 620.0 2013E 50.9 14.6 703.3 2014E 52.2 15.2 900.0 2015E 53.8 15.7 980.0

Year to 31 Dec Logistic system Processing equipment Other Revenue Total Revenue Other income COGS SG&A Other op.expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported)(KRW) EPS (adjusted)(KRW) EPS (adjusted fully-diluted)(KRW) DPS (KRW) EBIT EBITDA 2008 357 74 0 431 0 (355) (22) 0 54 8 7 69 (19) 0 50 50 2,773 2,773 2,773 700 54 58 2009 254 53 0 307 0 (270) (22) 0 15 5 5 25 (7) 0 18 18 1,004 1,004 1,004 200 15 20 2010 361 62 209 632 0 (529) (38) 0 66 4 5 75 (18) 0 56 56 3,138 3,138 3,138 500 66 71 2011 618 136 0 753 0 (610) (48) 0 95 4 (3) 96 (20) 0 76 76 4,212 4,212 4,212 1,280 95 101 2012 390 91 0 481 0 (354) (63) 0 64 10 14 88 (20) 0 68 68 3,806 3,806 3,806 1,000 64 73 2013E 509 160 (0) 669 0 (502) (65) 0 102 9 6 117 (29) 0 88 88 4,927 4,927 4,927 1,200 102 111 2014E 673 191 0 864 0 (650) (82) 0 131 10 6 147 (36) 0 111 111 6,182 6,182 6,182 1,400 131 142 2015E 723 253 0 977 0 (737) (95) 0 145 11 7 162 (40) 0 122 122 6,813 6,813 6,813 1,500 145 158
Cash flow (KRWbn)

2008 69 4 (19) (25) 1 31 (12) (3) 42 27 0 0 (13) (17) (30) 0 28 18
2009 25 5 (7) (26) 0 (3) (5) 1 10 6 0 0 (12) 0 (12) 0 (10) (8)
2010 75 5 (18) 33 (3) 91 (8) (2) (38) (48) 0 0 (4) (0) (4) 0 40 83
2011 96 6 (20) (1) 32 112 (24) 0 (73) (96) 0 0 (9) 0 (9) 0 7 89
2012 88 8 (20) (18) (13) 45 (5) (0) (34) (39) 0 0 (23) (31) (54) 0 (48) 41
2013E 117 9 (29) (14) (2) 81 (25) (3) 1 (27) 0 0 (18) (8) (26) 0 29 56
2014E 147 11 (36) (4) (3) 115 (25) (9) (37) (71) 0 0 (22) (3) (25) 0 19 90
2015E 162 13 (40) (17) (3) 116 (30) (6) (43) (79) 0 0 (25) (5) (30) 0 7 86
- 29 -

29 August 2013

As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (KRW) 2008 110 109 46 8 274 90 0 52 417 0 41 137 178 0 16 194 5 218 223 0 417 800 (110) 12,404 2009 91 27 38 10 167 91 0 52 310 0 30 39 69 0 12 81 5 224 228 0 310 819 (91) 12,715 2010 181 6 142 52 380 94 4 36 514 0 115 101 216 0 18 234 9 271 280 0 514 729 (181) 15,588 2011 248 7 78 67 400 107 10 42 559 0 107 87 194 0 20 214 9 336 345 0 559 662 (248) 19,196 2012 241 3 98 66 408 105 14 34 561 0 107 72 179 0 23 202 9 349 358 0 561 669 (241) 19,962 2013E 267 4 99 70 439 122 17 42 621 0 98 74 171 0 24 195 9 416 425 0 621 644 (267) 23,689 2014E 320 4 116 82 522 137 19 58 737 0 115 81 197 0 29 226 9 502 511 0 737 590 (320) 28,471 2015E 360 4 128 91 583 156 31 70 839 0 123 78 202 0 31 233 9 598 607 0 839 551 (360) 35,777
Key ratios (%)

2008 40.4 21.0 21.4 18.4 18.4 17.6 13.5 12.4 11.6 23.4 12.5 25.2 41.7 net cash 27.3 45.8 1.5 n.a. 25.2 2.0
2009 (28.7) (65.9) (71.6) (63.8) (63.8) 12.0 6.4 4.9 5.9 8.0 5.0 6.7 8.8 net cash 28.1 50.5 2.4 n.a. 19.9 n.a.
2010 106.0 259.1 335.7 212.5 212.5 16.4 11.2 10.5 8.9 22.2 13.7 26.0 42.2 net cash 24.7 52.0 1.8 n.a. 15.9 9.1
2011 19.1 42.4 43.1 34.2 34.2 19.0 13.4 12.6 10.0 24.2 14.1 30.3 76.5 net cash 21.1 53.2 2.1 n.a. 30.4 9.7
2012 (36.2) (28.2) (31.9) (9.6) (9.6) 26.5 15.1 13.4 14.2 19.4 12.2 18.3 46.8 net cash 22.6 66.6 2.3 n.a. 26.3 4.5
2013E 39.2 52.9 58.4 29.4 29.4 25.0 16.6 15.3 13.2 22.6 15.0 26.1 55.9 net cash 24.5 53.8 2.6 n.a. 24.4 6.2
2014E 29.0 28.3 28.4 25.5 25.5 24.7 16.5 15.2 12.9 23.7 16.4 28.0 56.6 net cash 24.5 45.6 2.7 n.a. 22.6 9.9
2015E 13.1 11.2 10.4 10.2 10.2 24.6 16.2 14.8 12.5 21.9 15.5 25.9 49.9 net cash 24.5 45.6 2.9 n.a. 22.0 9.5
Company profile
SFA Engineering (SFA) was spun off from Samsung Techwin in December 1998 and supplies primarily advanced equipment for factory automation and logistics. Since 2001, the company has expanded its business into FPDs, solar cells, and semiconductor equipment. In 2012, logistic systems accounted for 81% of revenues, while processing equipments accounted for 19%.
- 30 -

Wonik IPS
Wonik IPS
030530 KS
Target (KRW): 10,000 Upside: 52.2% 28 Aug price (KRW): 6,570
Initiation: OLED and NAND should drive top-line growth

We initiate coverage of Wonik IPS with a Buy (1) rating and sixmonth target price of KRW10,000 Its OLED-display equipment exposure is rising as it makes dry etchers and encapsulation systems (for flexible displays) There could be upside to sales of semiconductor-deposition equipment on the back of new NAND-flash production lines
1 2 3 4 5
Buy (initiation) Outperform Hold Underperform Sell
Jae H. Lee
Investment case
We initiate coverage of Wonik IPS (Wonik), a maker of semiconductor and display-processing equipment, with a Buy (1) rating. Despite a weak order intake over 4Q12-1Q13, equipment-order momentum began to pick up from late-2Q13, and we forecast revenue growth of 78% HoH for 2H13.
Catalysts
In semiconductor equipment, we believe the memory-chip makers shift to advanced-process technologies as well as the adoption of new technology for NAND-flash (3D NAND) is positive for Wonik, as this will require large quantities of deposition equipment. Although Wonik has a 10-15% share of the domestic deposition-system market, it expects its share to rise to 15-20% over the next 1-2 years on new fab additions by memory-chip makers. For 2013, we forecast consolidated revenue of KRW388bn (up 11% YoY) and an operating profit of KRW29bn (up 8% YoY). We expect stronger revenue and earnings growth for 2014, due to a rise in investments for flexible-display production lines and capacity rises for SECs NAND-flash capacity in China. We also expect a steady earnings contribution from 47%-owned affiliate Wonik Materials to consolidated financials on rising sales of specialty gas.
Valuation
Risks
The key risks to our view include weaker-than-expected demand for new products, such as flexible displays, and delays in the ramp-up of semiconductor and display production lines.

(KRW)
8,000 7,000 6,000 5,000 4,000
(%)
145 126 108 89 70
Aug-12
Nov-12 Wonik IPS (LHS)
Feb-13
We are positive on the outlook for the companys equipment-order momentum in 2H13 due to rises in capital spending for SECs semiconductor and OLED businesses. In the OLED business, we expect Samsung Display to start the phase 5 expansion of its A2 line from 4Q13 and begin production on a new A3 line from the middle of 2014. As a result, Woniks sales of dry etchers and encapsulation systems (for flexible displays) are likely to pick up from 3Q13.
4,130-7,700 0.43 8.75 73 Wonik Corp (11.2%)

Year to 31 Dec Revenue (bn) Operating profit (bn) Net profit (bn) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) 13E 388 29 26 329 (10.4) n.a. 20.0 0.0 0 1.6 9.9 9.4 14E 529 56 47 582 76.7 n.a. 11.3 0.0 0 1.4 4.6 14.7 15E 585 63 53 664 14.2 n.a. 9.9 0.0 0 1.2 3.7 14.5
On our respective 2013 and 2014 forecasts, the stock is trading currently at PERs of 20.0x and 11.3x and at PBRs of 1.6x and 1.4x. We initiate coverage of the stock with a six-month target price of KRW10,000, based on a mid- to peak-cycle PBR of 2.3x on the average of our 2013-14E BVPS.

29 August 2013
1 2 3 4 5

Growth outlook
We expect Woniks revenue to expand from 2H13 on the back of a rise in new-equipment orders. For 2014, we forecast the companys revenue to increase by 36% YoY to KRW529bn and operating profit to almost double to KRW56bn.
Wonik: revenue and operating-profit margin forecasts

(KRWbn) 700 600 500 400 300 200 100 0 2011 Semiconductor
(%) 12 10 8 6 4 2 0 2012 2013E Display 2014E Others 2015E OP margin (RHS)
Valuation
The stock is trading currently at PERs of 20.0x and 11.3x on our 2013 and 2014 EPS forecasts, respectively. It is also trading at respective PBRs of 1.6x and 1.4x on our 2013 and 2014 BVPS forecasts, compared with a past-three-year trading range of 1.1-3.2x. Given the volatile nature of the companys earnings, we prefer to base our valuation for the stock on a PBR multiple rather than a PER. We use a mid-cycle PBR to value it due to the risk of delays in equipment orders.
Wonik: PBR bands

(KRW) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 3.9x 3.4x 2.9x 2.2x 1.7x 1.2x
Source: Company, Bloomberg, Daiwa forecasts
Earnings revisions
As the company started to report its financials on a consolidated basis since 1Q13, there are no consensus earnings (consolidated) forecasts available. However, there could be upside to our earnings forecasts on the back of a rise in investment in OLED production lines. Samsung Display is one of Woniks key customers and an increase in its new capacity should lead to rising orders for Woniks equipment.
Global OLED capex

(USDbn) 12 10 8 6 4 2 0 2009 2010 2011 Samsung
2012 LG
2013E Others
2014E
2015E
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29 August 2013
Financial summary
Key assumptions
Year to 31 Dec Global semicon capex (USDbn) Global LCD capex (USDbn) Global OLED capex (USDbn) 2008 33.3 24.1 0.0 2009 19.9 15.9 0.5 2010 43.3 25.3 2.0 2011 56.4 17.3 5.0 2012 49.8 13.4 4.6 2013E 50.9 14.6 5.4 2014E 52.2 15.2 7.2 2015E 53.8 15.7 9.6

Year to 31 Dec Semiconductor Display Other Revenue Total Revenue Other income COGS SG&A Other op.expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported)(KRW) EPS (adjusted)(KRW) EPS (adjusted fully-diluted)(KRW) DPS (KRW) EBIT EBITDA 2008 44 0 78 123 0 (78) (25) 0 19 1 (1) 19 (5) 0 14 14 424 424 424 0 19 24 2009 77 0 73 150 0 (104) (29) 0 17 0 0 18 (6) 0 12 12 373 373 373 0 17 23 2010 131 0 110 241 0 (163) (43) 0 35 1 1 37 (9) 0 28 28 404 404 404 0 35 41 2011 163 33 144 340 0 (237) (74) 0 29 (3) 9 36 (10) 0 25 25 350 350 350 0 29 40 2012 140 31 177 349 0 (239) (83) 0 26 1 4 32 (5) 0 27 27 367 367 367 0 26 39 2013E 130 74 184 388 0 (265) (94) 0 29 2 3 34 (7) 0 26 26 361 361 329 0 29 52 2014E 172 99 258 529 0 (342) (131) 0 56 4 (1) 59 (12) 0 47 47 639 639 582 0 56 81 2015E 180 123 282 585 0 (375) (147) 0 63 5 (1) 68 (14) 0 53 53 730 730 664 0 63 89
Cash flow (KRWbn)

2008 19 5 (5) (7) 6 18 (6) 2 (7) (11) (2) 0 0 3 1 0 8 12
2009 18 6 (6) 13 4 35 (6) (5) (18) (28) (2) 0 0 (1) (3) 0 3 29
2010 37 6 (9) (18) 7 24 (18) 105 (84) 3 (2) 1 0 (0) (1) (0) 25 5
2011 36 11 (10) (47) 5 (7) (57) 130 (120) (48) 12 75 0 (4) 82 0 28 (64)
2012 32 12 (5) 6 (1) 44 (47) 344 (358) (62) 2 3 0 (1) 3 (0) (15) (3)
2013E 34 23 (7) (35) 0 16 (10) (7) (5) (22) 2 0 0 2 4 0 (3) 6
2014E 59 24 (12) (47) (4) 20 (15) (10) (7) (31) (6) 0 0 2 (4) 0 (16) 5
2015E 68 26 (14) (42) (10) 27 (20) (8) (7) (35) (5) 0 0 2 (3) 0 (11) 7
- 33 -

29 August 2013

As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (KRW) 2008 29 17 9 4 60 39 6 10 114 4 13 14 32 4 2 38 17 59 76 1 114 462 (21) 2,280 2009 45 23 14 3 85 41 3 21 149 4 39 9 52 2 6 60 17 72 88 1 149 444 (39) 2,672 2010 77 56 27 7 167 111 17 46 341 11 49 37 98 41 16 154 34 151 185 2 341 460 (25) 2,696 2011 133 82 52 12 279 139 20 55 493 10 61 57 128 38 18 184 36 218 254 55 493 506 (85) 3,515 2012 122 67 21 7 217 151 27 83 478 4 24 59 87 37 19 143 37 232 268 67 478 534 (81) 3,666 2013E 149 71 29 8 257 139 31 93 519 16 27 64 106 28 22 156 37 258 295 69 519 513 (106) 4,023 2014E 182 85 36 9 312 131 34 105 581 15 31 72 118 24 28 169 37 305 341 71 581 373 (144) 4,662 2015E 221 93 39 10 363 126 38 115 643 16 33 76 125 20 31 175 37 358 395 73 643 330 (185) 5,392
Key ratios (%)

2008 9.9 5.7 6.0 (3.8) (3.8) 36.1 19.6 15.6 11.4 20.4 13.2 24.8 27.1 net cash 25.3 30.2 1.9 n.a. 0.0 2.4
2009 22.1 (3.8) (9.8) (12.0) (12.0) 30.6 15.5 11.5 8.3 15.1 9.4 19.2 22.4 net cash 31.4 28.9 1.6 n.a. 0.0 6.0
2010 60.9 77.0 101.0 124.3 8.2 32.5 17.0 14.4 11.5 20.3 11.3 20.8 24.7 net cash 24.4 31.4 1.7 n.a. 0.0 1.1
2011 41.2 (3.4) (16.5) (8.7) (13.3) 30.3 11.7 8.5 7.4 11.5 6.1 9.7 10.7 net cash 28.9 42.3 2.2 10.5 0.0 n.a.
2012 2.5 (2.0) (8.8) 6.1 4.9 31.5 11.2 7.6 7.7 10.3 5.5 7.2 9.4 net cash 15.2 38.3 2.5 n.a. 0.0 n.a.
2013E 11.4 34.0 8.2 (1.5) (10.4) 31.7 13.4 7.4 6.8 9.4 5.3 7.3 8.8 net cash 21.0 23.7 2.4 n.a. 0.0 1.2
2014E 36.3 54.7 96.7 76.7 76.7 35.4 15.2 10.6 8.8 14.7 8.5 13.1 16.9 net cash 21.0 22.5 2.7 n.a. 0.0 1.0
2015E 10.5 10.3 12.2 14.2 14.2 35.9 15.2 10.8 9.1 14.5 8.7 13.2 18.1 net cash 21.0 23.5 2.9 n.a. 0.0 1.5
Company profile
Wonik IPS specialises in manufacture of chemical vapour deposition equipment for the semiconductor production lines and dry etchers for display processing equipments. The company was established in 1991 and merged with IPS in December 2010. For FY12, semiconductor equipments accounted for 34% of revenue, display equipments for 19%, gas supply system for 14% and contribution from Wonik Materials (47% owned affiliate) for 33%.
- 34 -

29 August 2013
Positive surprises should come from OLED and NAND

Woniks equipment-order momentum is likely to pick up from 2H13 on the back of increases in capital spending for SECs semiconductor and OLED businesses.
Woniks share price dropped sharply (57%) from lateFebruary to mid-November 2012 due to a slowdown in new orders. However, the share price has rebounded by more than 70% since mid-November 2012 as ordermomentum has improved. Despite continued losses for its equipment business, we believe an earnings turnaround from 3Q13 and rising equipment investment by its captive customer will be the key share-price catalysts over the next six months. Based on our respective 2013 and 2014 forecasts, the stock is trading currently at PERs of 20.0x and 11.3x and PBRs of 1.6x and 1.4x (compared with its pastthree-year trading range of 1.1-3.2x). Given the robust revenue and earnings growth we expect for 2H13 and 2014, we set our six-month target price at KRW10,000, based on a mid- to peak-cycle PBR of 2.3x on the average of our 2013 and 2014 BVPS forecasts.
Wonik: PBR bands
(KRW) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
Investment summary
We initiate coverage of Wonik with a Buy (1) rating and six-month target price of KRW10,000. Despite a weak order intake from 4Q12-1Q13, the companys equipment-order momentum started to pick up from late-2Q13. Benefiting from capacity increases in Samsung Displays OLED production lines and a potential ramp-up of SECs NAND-flash fab in China in 1Q14, we expect new-equipment orders to expand for 2H13, and forecast the companys consolidated revenue to rise by 78% HoH to KRW248bn for 2H13 from KRW140bn for 1H13. Wonik has diverse revenue sources, with semiconductor equipment, display equipment, and gas-supply systems accounting respectively for 59%, 13%, and 27% of revenue for 2012 on a standalone basis. The companys main customer is SEC, which accounted for more than 80% of semiconductor equipment and 100% of its display-equipment sales for 2012. SEC also owns convertible bonds in Wonik, equivalent to a 9.9% stake when fully converted. Wonik is keen to expand its semiconductor-equipment business overseas on the back of its ties with US-based Applied Materials (Not rated). Since 1Q13, Wonik has reported its financials on a consolidated basis, including the results from 46.9%owned Wonik Materials, which supplies specialty gases to semiconductor and LCD-panel makers globally. For 4Q12 and 1Q13, Wonik recorded operating losses due to weak equipment revenue. Although we forecast the company to post a KRW2bn operating loss for the equipment business for 2Q13, we expect the company to turn profitable from 3Q13 due to rising equipment orders.
3.9x 3.4x 2.9x 2.2x 1.7x 1.2x
Source: Bloomberg, Daiwa forecasts
Revenue-growth prospects
Although Wonik has been selling dry etchers (used for the removal of selective materials from glass substrate) to Samsung Displays TFT-LCD production line since 2006, the company did not supply the dry etchers for Samsung Displays OLED-display production line as its domestic competitor dominates the OLED-display etcher market. However, Wonik became the second vendor of dry etchers for Samsung Display in 2012. We estimate that the company has secured about 20% of dry-etcher orders for the phase 4 expansion of Samsung Displays A2 line. However, for the phase5 expansion (possibly in 4Q13) and for the new A3 production line, due to ramp up from the middle of 2014, we expect the companys market share to increase to 30-40%, due to improved equipment quality as well as throughput.
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29 August 2013
Meanwhile, Wonik has been qualified by Samsung Display to supply the encapsulation systems for forming a non-organic layer on the plastic substrate of flexible display. The encapsulation system for forming an organic layer is provided by another Korea equipment company, SNU Precision (Not rated). Wonik shipped its first batch of encapsulation systems to Samsung Display for testing in 2Q13 and as the production yield on flexible display improves from the current level of 80%, we expect additional orders. As new smartphones using flexible display are likely to be launched by SEC in 4Q13, we expect more smartphone makers to use flexible displays to differentiate their handsets. As a result, demand for Woniks encapsulation systems should rise strongly over the next few years.
Film encapsulation
[Film encapsulation] Coating layer for avoiding moisture OLED TFT array
As memory chip companies are continuing to adopt finer process technology to reduce production costs, the demand for CVD and ALD systems is rising. Wonik provides most of its deposition equipment to domestic memory-chip companies such as SEC and SK Hynix (Hynix).
Memory chips: process technology roadmap
3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E DRAM SEC Hynix Micron Elpida NAND SEC Toshiba Micron Hynix 28nm 38nm 30nm 35nm 25nm 29nm 25nm 25nm 22nm 25nm
27nm 21nm 24nm 19nm 25nm 20nm 26nm
19nm
20nm
V-NAND 15nm 16nm 16nm
Thin film encapsulation (TFE)
Emitting layer (EL)
Although the sales of semiconductor equipment has been tracking in line with memory-chip companies migration to new process technology, we see upside to Woniks equipment orders as SEC plans to ramp up a new NAND-flash fab in Xian, China, in 1Q14. We expect an initial ramp-up of 50,000 wafers/month, with the equipment orders likely to materialise from 3Q13. In addition, as SEC plans to produce V-NAND from the Xian fab, we believe it will require 30% more deposition equipment systems than the line producing conventional planar NAND. SECs new V-NAND is a 3D vertical NAND-flash chip that is constructed in layers, stacking up to 24 individual NAND cells on top of one other. This will allow the company to scale up the chips capacity without taking additional space on the wafer (expanding vertically, rather than in planar). The stacking of layers requires more deposition systems.
SECs V-NAND
Source: Daiwa
Prior to the merger with IPS at the end of 2010, Wonik specialised in producing semiconductor equipment. The company has supplied various types of deposition equipment, such as chemical-vapour deposition (CVD), atomic-layer deposition (ALD), and plasma-enhanced (PE) CVD systems, which are used primarily to place thin films of materials (metal and oxides) on the wafer surface during the semiconductor-manufacturing process.
Wonik: deposition equipment
30nm
CVD ALD PE-CVD
20nm
10nm
Planar NAND
Vertical NAND
Source: MoneyToday, Daiwa
Source: Company
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29 August 2013
In deposition systems, Wonik competes with other international equipment companies, such as Applied Materials and Tokyo Electron. However, in Korea, the company supplies different lines of deposition equipment to its peer, Eugene Tech, which also supplies CVD and ALD systems to SEC. Wonik claims to have a 10-15% share of the domestic-deposition system (for semiconductors) market currently, but expects this to rise to 15-20% over the next 1-2 years on the back of new fab additions by SEC and Hynix. Meanwhile, affiliate Wonik Materials provides about 100 different types of specialty gases to various semiconductor and display makers. SEC is its largest customer, accounting for 73% of 2012 revenue. The major gas products are nitrogen monoxide (NO) nitrous oxide (N2O), and disilane (Si2H6), which are used for the annealing and deposition process in semiconductor manufacturing. Wonik Materials revenue and earnings have increased strongly over the past five years, and with the capacity ramp-ups planned over the next few years, we expect it to contribute steady earnings to its parent.
Wonik Materials: revenue and operating-profit margin
(KRWbn) 200 150 100 50 0 2007 2008 2009 2010 2011 Revenue (LHS) 2012 2013E 2014E OP margin (RHS) 2015E (%) 24 23 22 21 20 19 18 17
For 2013, we forecast Wonik to post consolidated revenue of KRW388.4bn (up 11% YoY) and an operating profit of KRW28.6bn (up 8% YoY). Although the growth rates for revenue and operating profit are not particularly strong as we expect the 1H13 results to be weak, we are positive on 2014 growth rates as Samsung Display plans to increase its investment in flexible-display capacity and as SECs should increase capacity for its NAND-flash fab in China. For 2014, we forecast robust revenue growth of 36% YoY to W529.4bn and operating profit to almost double to KRW56.3bn.
Wonik: quarterly earnings forecasts (KRWbn)
1Q13 Revenue: Semiconductor Display Solar Gas-supply systems Wonik Materials Total Operating profit Operating-profit margin (%) 12.5 10.7 0.1 8.5 28.6 60.3 (2.2) (3.6) 1Q14 Revenue: Semiconductor Display Solar Gas-supply systems Wonik Materials Total Operating profit Operating-profit margin (%) 43.5 16.5 0.2 57.4 33.1 150.7 13.6 9.0 2Q13E 23.1 18.4 0.1 8.5 29.5 79.7 3.6 4.5 2Q14E 40.5 20.4 0.3 12.5 34.5 108.1 11.3 10.4 3Q13E 39.0 22.1 0.1 24.5 34.6 120.3 12.4 10.3 3Q14E 39.8 31.3 0.2 17.8 41.0 130.0 14.9 11.4 4Q13E 55.1 23.2 0.2 12.2 37.5 128.1 14.8 11.6 4Q14E 48.5 31.1 0.2 16.1 44.8 140.6 16.5 11.7 2013E 129.7 74.3 0.4 53.8 130.2 388.4 28.6 7.4 2014E 172.3 99.3 0.8 103.7 153.3 529.4 56.3 10.6
Earnings outlook
Wonik plans to disclose its 2Q13 results in late August. We forecast consolidated revenue of KRW79.7bn (up 32% QoQ) and an operating profit of KRW3.6bn (turning into the black QoQ). However, on a standalone basis, we forecast an operating loss of KRW1.8bn, as we believe that the equipment business only turned profitable in later part of the quarter on the back of rising new-order momentum. For 3Q13, as equipment-order intake remains robust, we forecast consolidated revenue of KRW120.3bn and an operating profit of KRW12.4bn.
Wonik has a healthy balance sheet, as it held KRW80.0bn in cash equivalents and borrowing of KRW55.9bn at the end of 1Q13. The company has not paid any dividend in the past and has no plans to do so over the near term. Meanwhile, its capex will be maintained at KRW10-20bn annually, as its current equipment-production capacity cover annual revenue of KRW1tn.
Risk factors
The risks to our earnings forecasts and target price include a sharp decline in component prices, such as memory chips and LCD panels. As Woniks revenue depends mostly on the capex for semiconductor- and display-production lines, potential component-price erosion could adversely affect its customers cash flow and capital-investment plans. In addition, any delays in the ramp up of new production lines could adversely affect its top-line growth.
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29 August 2013
Company description
Wonik was created from the merger between Atto and IPS in December 2010. Atto specialised in the manufacture of semiconductor-processing equipment and IPS produced display-manufacturing systems. As a result of the merger, the company diversified its product portfolio to cover both semiconductor and display equipment. Wonik is competitive in deposition equipment and etchers. Although the company has developed solar-cell equipment, the revenue contribution from this has been quite small over the past three years. The companys head office is in Pyeongtaek, Gyeonggi Province, and it also has production facilities in the Pyeongtaek area. It supplies semiconductor equipment to SEC and Hynix and display equipment to Samsung Display. At the end of 1Q13, the company had 581 employees. Woniks affiliate companies have an 18.5% stake in the company, and the chairman of Wonik group, Yong Han Lee, holds 7.5% stake. The companys CEO, Moon Yong Lee, joined the company in 2010 from Cheil Industries.
Wonik: shareholder structure
Wonik affiliates 18.5% Yong Han Lee 7.5% Company executives 1.7% Others 65.3% Treasury stock 7.0%
Wonik: consolidated revenue by product (2013E)
Wonik Materials 33.5%
Semiconductor 33.4%
Gas supply system 13.8%

Solar 0.1%
Display 19.1%
Wonik: consolidated operating profit by product (2013E)

Semiconductor -2.6% Display 13.3% Solar -0.2% Gas supply system 4.2%
Wonik Materials 79.7%
Source: Company Note: as at 31 March 2013
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Duksan Hi-Metal
Duksan Hi-Metal
077360 KS
Initiation: riding on robust OLED-display shipments

The company is the main beneficiary of Samsung Displays ramp-up of OLED display production lines Revenue and earnings should pick up from 2H13, and should continue to be strong for 2014 Initiating coverage with a Buy (1) rating and six-month target price of KRW31,000
1 2 3 4 5
well-placed to benefit as it accounts for 80-90% of the orders from Samsung Display for the HTLs used in smartphones OLED displays.
Joshua Oh, CFA
Risks
Jae H. Lee
Investment case
We initiate coverage of Duksan HiMetal (Duksan), a major supplier of OLED materials to Samsung Display, with a Buy (1) rating. Due to rising orders for the companys OLED-display materials, such as hole transport layers (HTL), for Samsung Displays new production lines, we expect its revenue and earnings to pick up from 2H13 and continue to be strong in 2014.
Catalysts
In terms of OLED materials for TVs, we expect the revenue and earnings contribution to be small for 2013 as we forecast SEC to sell only 4,000 OLED-TVs this year. However, we believe the addressable market for Duksans OLED materials will expand exponentially once the OLED-TV market takes off, as (in terms of the dollar amount) these TVs require more than 100x more OLED materials than a smartphone. As for new products, Duksan started providing refinement services for the green host used to make emission layers (EML) for Universal Display from 1Q13. Although we forecast this segment to account for less than 5% of its OLED materials revenue for 2013, the operatingprofit margin for this business is much higher, at about 50% compared with 20-30% for its other OLED-material products. The company is also working with Samsung Display to develop EMLs for OLED displays.
Valuation
The main risks to our earnings forecasts and target price would be slower-than-expected sales of end applications, including OLEDdisplay smartphones and TVs.

(KRW)
29,500 26,125 22,750 19,375 16,000
(% )
135 121 108 94 80
Aug-12
Nov-12 Duksan Hi (LHS)
Feb-13
17,200-29,200 0.62 4.86 29 Joon-Ho Lee (20.0%)

Year to 31 Dec Revenue (bn) Operating profit (bn) Net profit (bn) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) 13E 136 41 41 1,408 (1.3) 2.2 16.7 0.0 0 3.1 12.4 20.4 14E 175 56 57 1,929 37.0 8.4 12.2 0.0 0 2.5 8.6 22.5 15E 205 67 68 2,311 19.8 18.0 10.1 0.0 0 2.0 6.6 21.6
With SEC increasingly using OLED displays in its mid-range smartphones, as well as in its highend ones, Samsung Display is expanding its production capacity for OLED displays. We forecast Samsung Displays production capacity (in terms of area) for OLED displays to expand to 380,000 sq m/month for 2Q14 from 280,000 sq m/month for 2Q13, with Duksan
We have a six-month target price at KRW31,000, based on a mid-cycle PBR of 4.1x on 2013E BVPS.

29 August 2013
1 2 3 4 5

Growth outlook
For 2013, we forecast a slight decline in Duksans revenue and earnings due to slow order momentum for its OLED-display materials in 1H13. However, for 2014, we forecast the companys revenue to rise by 29% YoY to KRW175bn and its operating profit to increase by 37% YoY to KRW56bn on the back of rising orders for Samsung Displays new production lines.
Duksan: revenue and operating-profit margin

(KRWbn) 250 200 150 25.0 100 50 0 2011 2012 2013E 2014E 2015E OP margin (RHS) OLED material (LHS)
(%) 35.0 30.0
20.0 15.0 Solder ball (LHS)
Valuation
The stock is trading currently at a PER of 16.7x on our 2013 EPS forecast, and a PBR of 3.1x on our 2013 BVPS forecast (past-three-year range of 2.8-6.4x). We believe the stock is attractive, trading close its downcycle average PBR of 3.0x over the past three years. Given the volatile nature of the companys earnings, we prefer to base our valuation for the stock on a PBR multiple rather than a PER. We use a mid-cycle PBR to value it because while the stock is trading currently at the low end of its past-three-year PBR, we expect it to be rerated.
Duksan: PBR bands

(KRW) 50,000 40,000 30,000 20,000 10,000 0 7.2x 6.2x 5.1x 4.1x 3.0x
May-11
May-12
May-13
2015E
Feb-11
Feb-12
Feb-13
Aug-12
Aug-11
Aug-10
Source: Company, FnGuide, Daiwa forecasts
Earnings revisions
Our EPS forecasts are above those of the FnGuide consensus by 2.2% for 2013, 8.4% for 2014, and 18.0% for 2015. This is because we are more positive than the market on the companys revenue and earnings growth outlook for its OLED material business. We are one of only six brokers actively covering the stock.
Duksan: Daiwa vs. consensus EPS forecasts (2013-15E)

(KRW) 2,500 2,000 1,500 1,000 500 0 2013E Daiwa
Nov-10
Nov-11
2014E Consensus
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Aug-13

29 August 2013
Financial summary
Key assumptions
Year to 31 Dec SEC's smartphone shipment (m SEC's tablet PC shipment (m units) SEC's OLED-TV shipment (K units) 2008 0.0 0.0 0.0 2009 0.0 0.0 0.0 2010 25.0 1.5 0.0 2011 97.9 5.9 0.0 2012 213.0 16.9 0.0 2013E 310.0 41.0 4.3 2014E 400.0 50.0 243.0 2015E 480.0 62.0 1,370.0

Year to 31 Dec Solder ball OLED material Other Revenue Total Revenue Other income COGS SG&A Other op.expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported)(KRW) EPS (adjusted)(KRW) EPS (adjusted fully-diluted)(KRW) DPS (KRW) EBIT EBITDA 2008 23 0 0 23 0 (14) (4) (7) (2) (0) 0 (2) 0 0 (2) (2) (122) (122) (122) 0 (2) (1) 2009 26 6 0 32 0 (20) (8) 1 6 (1) 0 5 (1) 0 4 4 169 169 169 0 6 9 2010 39 34 0 72 0 (42) (11) 0 20 (0) (0) 19 (3) 0 16 16 552 552 552 0 20 22 2011 59 70 0 129 0 (76) (14) 0 39 0 (5) 35 (0) 0 35 35 1,176 1,176 1,176 0 39 43 2012 64 79 0 144 0 (84) (18) 0 42 1 (0) 43 (1) 0 42 42 1,426 1,426 1,426 0 42 47 2013E 65 72 0 136 0 (76) (19) 0 41 1 0 42 (1) 0 41 41 1,408 1,408 1,408 0 41 47 2014E 65 110 0 175 0 (95) (24) 0 56 2 0 58 (1) 0 57 57 1,929 1,929 1,929 0 56 63 2015E 64 141 0 205 0 (109) (28) 0 67 2 0 69 (1) 0 68 68 2,311 2,311 2,311 0 67 74
Cash flow (KRWbn)

2008 (2) 1 0 (3) 8 3 (4) (16) (1) (21) 22 (0) (4) 0 18 0 0 (1)
2009 5 4 0 4 (3) 10 (7) 1 (4) (10) (12) 12 0 1 0 0 0 3
2010 19 2 (8) (6) 3 10 (28) 1 (1) (28) 2 6 0 0 9 (0) (9) (18)
2011 35 3 (2) (6) 7 37 (22) 8 (1) (16) (8) 1 0 1 (6) 0 15 15
2012 43 6 1 (3) 5 51 (4) (0) (49) (54) (0) 0 0 (3) (3) (0) (7) 47
2013E 42 6 (1) (21) 3 30 (7) (0) 2 (5) (0) 0 0 0 (0) 0 24 23
2014E 58 7 (1) (34) 3 32 (7) (1) (12) (21) (0) 0 0 0 (0) 0 11 25
2015E 69 8 (1) (44) 4 35 (7) (1) (10) (18) (0) 0 0 0 (0) 0 18 28
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29 August 2013

As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (KRW) 2008 15 2 2 1 20 11 1 31 63 15 1 6 22 3 0 25 4 34 38 0 63 691 2 1,961 2009 19 4 4 0 26 18 30 18 92 6 1 8 16 5 0 21 5 66 70 0 92 682 (7) 2,882 2010 5 7 7 2 21 46 34 17 119 2 3 7 11 7 1 19 6 94 100 0 119 692 3 3,465 2011 21 13 9 4 46 65 35 6 152 0 5 7 11 0 2 13 6 133 139 0 152 669 (21) 4,713 2012 63 12 12 2 89 65 34 10 199 2 3 9 14 0 2 16 6 177 183 0 199 628 (61) 6,212 2013E 106 12 12 2 132 67 32 10 241 1 5 8 15 0 2 17 6 218 224 0 241 585 (104) 7,620 2014E 146 16 16 3 181 68 40 14 303 1 7 11 19 0 3 22 6 275 281 0 303 544 (145) 9,549 2015E 200 18 20 3 242 69 47 16 374 1 8 14 23 0 3 26 6 343 349 0 374 490 (199) 11,860
Key ratios (%)

2008 24.1 n.a. n.a. n.a. n.a. 40.1 n.a. n.a. (10.5) n.a. n.a. n.a. (5.7) 5.9 n.a. 37.0 0.9 n.a. n.a. n.a.
2009 41.8 n.a. n.a. n.a. n.a. 38.7 28.6 17.7 12.8 7.6 5.3 8.3 8.9 net cash 18.9 34.3 1.7 9.3 0.0 0.5
2010 125.5 135.3 249.5 286.0 226.8 42.2 29.9 27.5 22.0 18.7 15.1 20.9 19.7 3.1 17.7 27.5 1.9 67.4 0.0 n.a.
2011 78.6 97.8 97.5 116.9 113.2 41.1 33.1 30.4 26.7 29.0 25.5 31.8 35.1 net cash 1.4 22.6 4.0 n.a. 0.0 2.2
2012 11.1 10.8 5.9 21.3 21.3 41.4 33.0 29.0 29.1 26.1 23.9 25.8 34.0 net cash 2.4 26.5 6.5 n.a. 0.0 6.8
2013E (5.3) (0.5) (2.0) (1.3) (1.3) 44.0 34.7 30.0 30.4 20.4 18.8 19.9 33.2 net cash 2.0 32.5 8.7 n.a. 0.0 3.3
2014E 28.5 33.4 37.2 37.0 37.0 45.9 36.0 32.0 32.4 22.5 20.9 22.1 43.0 net cash 2.0 29.1 9.3 n.a. 0.0 3.7
2015E 16.8 18.2 19.4 19.8 19.8 46.5 36.4 32.7 33.2 21.6 20.1 21.2 45.9 net cash 2.0 32.3 10.7 n.a. 0.0 4.1
Company profile
Duksan Hi-Metal is a core supplier of OLED materials including hole transport layers (HTL) to Samsung Display. The company also makes solder balls used in semiconductor packaging and currently has 30% market share globally.
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29 August 2013
Valuation at low end of pastthree-year range
Riding on the robust OLED-display shipments of Samsung Display

Core beneficiary of Samsung Displays ramp up in OLED production lines
Although demand for Duksans OLED materials was low for 1H13, we expect it to pick up strongly from 2H13 due to rising orders from Samsung Display for its new production lines, and we expect this demand to extend into 2014. We initiate coverage of Duksan with a Buy (1) rating and six-month target price of KRW31,000. Despite market concerns about a potential slowdown in smartphone shipments globally this year, we believe the demand for OLED displays will be strong as SEC is increasingly using OLED displays in its mid-range smartphones, including the Galaxy S4 Mini, along with its use in its high-end ones. Accordingly, we forecast Samsung Display to expand its production capacity (in terms of area) for OLED displays to 380,000 sq m/month for 2Q14 from 280,000 sq m/month for 2Q13. We believe Duksan is well-placed to benefit from this as it accounts for 80-90% of HTL orders from Samsung Display for use in the OLED displays of smartphones. The recent launch of an OLED-TV by SEC also bodes well for Duksans revenue and earnings growth, as the company is the sole HTL and hole injection layer (HIL) supplier for SECs OLED-TVs. We believe the addressable market for its OLED-display materials will expand exponentially once the market for OLED-TVs takes off, as the value of OLED-display materials, in dollar terms, in a 55-inch OLED-TV is 100x greater than that for a 5-inch smartphone display. For 2013, we forecast a slight decline in Duksans revenue and earnings due to slow order momentum for its OLED-display materials in 1H13. However, for 2014, we forecast the companys revenue to rise by 29% YoY to KRW175bn and its operating profit to increase by 37% YoY to KRW56bn on the back of rising orders for Samsung Displays new production lines.
Duksans share price has been quite volatile this year, rising by 32% from January to early May, and then falling by 23% up until late July due to market concerns about a potential slowdown in shipments of SECs Galaxy S4, which uses an OLED display. However, the share price has picked up recently as orders for the companys OLED materials from Samsung Displays new production lines have strengthened. The stock is trading currently at 2013E PER of 16.7x, which is slightly higher than its peers average of 15.5x (based on the Bloomberg-consensus 2013 forecasts), while the 2014E PER of 12.2x is lower. Meanwhile, although its 2013E and 2014E PBRs are both higher than the averages of its peer, the companys ROEs for both years are also higher.
Duksan: peer-group valuation comparison
Company Duksan Hi-Metal* Cheil Industries Mitsubishi Chemical Toray Industries Dow Chem Dupont UDC Average Bloomberg code 077360 KS 001300 KS 4188 JP 3402 JP DOW US DD US OLED US PER 2013E 16.7 17.8 13.7 15.6 15.7 14.9 75.3 15.5 2014E 12.2 13.4 12.1 13.2 12.7 12.9 31.2 12.8 PBR 2013E 2014E 3.1 2.5 1.4 1.3 0.8 0.8 1.3 1.2 2.0 1.7 4.7 n.a. 4.3 3.8 2.0 1.2
Source: Companies, Bloomberg, *Daiwa forecasts Note: Based on share prices as at 28 August 2013. Average excludes UDC, which we regard as an outlier.
The stock is trading at a PBR of 3.1x on our 2013 BVPS forecast, compared with its past-three-year trading range of 2.8-6.4x. Our six-month target price of KRW31,000 is based on a mid-cycle PBR of 4.1x on our 2013 BVPS forecast.
Duksan: PBR bands
(KRW) 50,000 40,000 30,000 20,000 10,000 0 7.2x 6.2x 5.1x 4.1x 3.0x
May-11
May-12
May-13
Feb-11
Feb-12
Feb-13
Aug-12
Aug-11
Aug-10
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Nov-11
Nov-12
Aug-13

29 August 2013
Duksan has two business divisions. The OLED material division is engaged in the production of HTLs for OLED displays, and this product accounted for more than 90% of the divisions revenue for 2012, with the remainder coming from HILs. Meanwhile, the semiconductor material division is involved in the production of solder balls, which are used in semiconductor packaging. For 2012, the OLED and semiconductor material divisions respectively accounted for 55% and 45% of the companys total revenue.
Duksan: business with Samsung Display

(%) 100 80 60 40 20 0 HTL for smartphones HTL for TVs Dukan
Source: Company, Daiwa estimates
HIL for TVs
Others
OLED materials
With SEC increasingly using OLED displays in its midrange smartphones, including the Galaxy S4 Mini, as well as in its high-end ones, and other smartphone makers increasingly using OLED displays, we believe Samsung Display will continue to add production capacity for OLED displays in its A2 and A3 lines going forward. Up until 1H14, we forecast Samsung Displays production capacity for OLED displays to expand robustly to 210,000 substrates/month from 150,000 currently, and believe Duksan is well-placed to benefit given the high proportion of HTL orders it accounts for with Samsung Display. Accordingly, we forecast the companys revenue for OLED-display materials to rise to KRW40bn for 2H13 from KRW30bn for 1H13, as it started shipping HTLs to Samsung Displays new production lines from June. For 2014, we forecast the revenue for OLED-display materials to expand by 59% YoY to KRW110bn, as we expect continued robust orders from Samsung Display. As for the OLED-display materials for TVs, although the company is the sole HTL and HIL supplier to Samsung Display (which is the supplier for SEC), the contribution to Duksans revenue and earnings should be small this year as we forecast SEC to sell only 4,000 OLED-TVs for 2013. However, we believe the addressable market for its OLED-display materials will expand exponentially once the OLED-TV market takes off, as the value of OLED-display materials in a 55-inch OLED-TV is 100x greater than that for a 5-inch smartphone in terms of dollar amount. As for new products, Duksan started providing refinement services for the green host used to make the EMLs for Universal Display from 1Q13. Although we expect this business to account for less than 5% of its revenue for OLED-display materials for 2013, the operating-profit margin of this business is about 50%, much higher than the 20-30% for its other OLEDdisplay material products.
Duksan: OLED material products
Source: Company
Semiconductor materials
Duksan is currently the second-largest solder-ball maker globally, with a 30% market share. Its customers include SEC, SK Hynix, Advanced Semiconductor Engineering, Statschippac, and Amkor. Solder balls are micro-sized metal balls that are used to connect a package substrate and a printed circuit board. Although lead frames were used in legacy semiconductor packaging, these are being replaced increasingly with solder balls, which enable slimmer form factors and faster data processing speeds for semiconductor chips. We forecast the divisions revenue to expand by 3% YoY to KRW67bn for 2013 due to an increase in orders from SECs application processors from 3Q13. As both SEC and Apple are likely to launch new flagship smartphones in September and application processors for these smartphones use the companys solder balls, orders for Duksans solder balls should rise from 3Q13. We forecast solder balls for application processors to account for 40% of the divisions revenue for 2013, up from 30% for 2012. Although solder balls for application processors are cheaper to make than those
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29 August 2013
for DRAMs, as the size is much smaller (200m compared with 450m), both the ASP and the operating-profit margin are higher.
Duksan: revenue and operating-profit margin forecasts
(KRWbn) 250 200 150 25.0 100 50 0 2011 2012 2013E 2014E 2015E OP margin (RHS) OLED material (LHS)
Duksan: quarterly earnings (KRWbn)

1Q13 Revenue: OLED-display materials Solder balls Total
(%) 35.0 30.0
2Q13E 13.7 15.8 29.5 8.0 27.0 2Q14E 25.9 15.8 41.7 13.3 31.8
3Q13E 17.9 16.6 34.5 10.6 30.7 3Q14E 28.9 17.3 46.2 15.2 32.9
4Q13E 22.2 17.8 40.0 13.1 32.7 4Q14E 31.6 16.5 48.0 15.5 32.2
2013E 69.6 66.6 136.2 40.8 30.0 2014E 110.5 64.6 175.1 56.0 32.0
15.9 16.3 32.2 9.2 28.5 1Q14E
Operating profit Operating-profit margin (%)
20.0 15.0 Solder ball (LHS)
Revenue: OLED-display materials Solder balls Total Operating profit Operating-profit margin (%)
24.1 15.0 39.1 12.0 30.8
Earnings outlook
We forecast Duksans 2Q13 revenue to contract by 8% QoQ to KRW30bn and its operating profit to decline by 13% QoQ to KRW8bn, due to an increase in pricing pressure for its OLED-display materials and weak orders for solder balls. However, we expect the operating-profit margin for OLED-display materials to improve QoQ on the back of cost-reduction efforts. For 2H13, although we still expect prices to decline by 5-6% each quarter for its OLED-display materials, we forecast the companys quarterly revenue to expand to KRW35bn for 3Q13 and KRW40bn for 4Q13, due to a rise in orders for its OLED-display materials from Samsung Displays new production lines. Accordingly, we also forecast the companys operating-profit margin to improve to 31% for 3Q13 and 33% for 4Q13, from 27% for 2Q13, due to improved economies of scale and a better product mix. We are positive on Duksans earnings outlook for 2014 as the company should continue to benefit from robust orders from Samsung Display and a better product mix. For 2014, we forecast revenue to expand by 29% YoY to KRW175bn and operating profit to increase by 37% YoY to KRW56bn.
The company has a healthy balance sheet, and was in a net-cash position at the end of 1Q13. As the company held cash of KRW10bn at the end of 1Q13 and we forecast capex of KRW7bn for 2013, it is likely to maintain its net cash position at the end of this year. Duksan hedges its exposure to forex risk, as 20-25% of its revenue is based in US Dollars, while about 20-25% of its COGS is based in US Dollars.
Risk factors
The main risks to our earnings forecasts and target price would be slower-than-expected sales of end applications, including smartphones and TVs with OLED displays. In addition, increased pricing pressure and fierce competition would adversely affect its earnings.
Company background
Duksan was founded in 1999 and was listed on the Kosdaq in 2007. Although the mainstay of its business in its early days was solder balls, the company moved into the OLED-display materials business by acquiring Ludis, an HTL manufacturer, in 2009. Duksan currently has an 80-90% share of Samsung Displays orders for HTLs, which are used for the OLED displays in smartphones, and is working to develop EMLs with Samsung Display. The company has two plants in Korea. At its Ulsan plant, it makes solder balls, and currently has a monthly production capacity of 250bn solder balls. Meanwhile, its Cheonan plant is engaged in the production of OLED-display materials, and has a production capacity of 1,000kg/month. While Samsung Display is Duksans only customer for OLED-display material products, the companys
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29 August 2013
customer base for solder balls is more diverse, as it supplies to SEC, SK Hynix, and domestic/overseas backend companies. The founder of Duksan, Joon-Ho Lee, is the largest shareholder in the company with a 20% stake.
Duksan: shareholder structure
Joon-Ho Lee 20.0%
Duksan: revenue forecast by division (2013E)
Solder ball 48.9%
OLED material 51.1%
Others 30.5%
National Pension Service 4.0% FIL Limited 4.0% Morgan Stanley Korea 4.3% Investment Trust 5.6%
Source: Bloomberg Note: As at 20 August 2013
Duksan Industry 17.3%
Duksan: operating-profit forecast by division (2013E)

Duksan Hi-Metal 14.4%
Solder ball 39.2%
OLED material 60.8%
- 46 -

Advanced Process Systems
Advanced Process Systems

054620 KS
Initiation: the sole supplier of laser-applied OLED equipment

Initiating coverage with a Buy (1) rating and six-month target price of KRW13,500 Likely to maintain its sole-supplier position for laser-applied OLED equipment Bright equipment-order outlook for 2013: we forecast revenue to rise by 50% YoY
1 2 3 4 5
Jae H. Lee
Investment case
We initiate coverage of Advanced Process Systems (AP Systems), which specialises in the manufacture of laser-applied OLED-display equipment, with a Buy (1) rating. We forecast the companys consolidated revenue and operating profit to increase by 50% YoY and 142% YoY, respectively, for 2013 on the back of new-equipment orders from its main customer.
Catalysts
Despite concerns in the market that a shift to flexible displays could lead to weak demand for glassencapsulation systems, we expect glass-based OLED capacity to increase due to rising demand for OLED displays for mid-range smartphones. In addition, as there are technological hurdles to overcome in flexible displays, glassencapsulation demand should be stable for at least the next 1-2 years. For 2013, we forecast record revenue of KRW326bn for AP Systems, driven by OLED-display equipment. We forecast the operating-profit margin to expand to 10% for 2013 from 6% for 2012 and remain at this level of profitability for the next two years, as high revenue should offset rising fixed costs. For 2014, a rampup in Samsung Displays Gen6 line and potential investments in OLEDTV production could result in upside to the companys revenue.
Valuation
based on a mid-cycle PBR of 2.7x on our 2013 BVPS forecast.

Risks
The key risks to our view are delays in new-equipment orders and changes in OLED-production technology that could affect sales of the companys existing equipment.
(KRW)
14,000 12,000 10,000 8,000 6,000
(%)
135 116 98 79 60
Aug-12
Nov-12
Feb-13
May-13
AP Systems (LHS) Relative to KOSPI (RHS)
We expect the company to remain the sole supplier of laser-applied OLED-display equipment for Samsung Display due to its proven track record and its attractive cost of ownership of equipment. As Samsung Display continues to use LTPS backplanes for its mobiledisplay production lines, we expect sales to pick up for AP Systems laser-annealing systems, which currently make up more than 50% of its OLED-equipment revenue.
6,370-13,600 0.21 8.51 22 Kiro Jung (9.1%)

Year to 31 Dec Revenue (bn) Operating profit (bn) Net profit (bn) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) 13E 326 32 27 955 65.9 6.6 11.1 0.0 0 2.1 5.8 27.4 14E 363 38 33 1,167 22.3 1.2 9.1 0.0 0 1.6 3.9 25.7 15E 395 40 36 1,271 8.8 3.3 8.3 0.0 0 1.3 3.1 22.0
The stock is trading currently at PERs of 11.1x and 9.1x on our respective 2013 and 2014 EPS forecasts. In terms of PBR it is trading at 2.1x and 1.6x on our respective 2013 and 2014 BVPS forecasts, compared with its past three-year trading range of 1.5-4.5x. We initiate coverage with a sixmonth target price of KRW13,500,

29 August 2013
1 2 3 4 5

Growth outlook
AP Systems quarterly revenue improved from 1Q13 on the back of new-equipment orders from Samsung Display that started in December 2012. Given the order momentum, we forecast revenue to increase by 50% YoY to KRW326bn and operating profit to expand by 142% YoY to KRW32bn for 2013.
AP Systems: revenue and operating-profit margin

(KRWbn) 500 400 300 200 100 0 2010 2011 2012 2013E 2014E 2015E OLED (LHS) Semicon and others (LHS)
(%) 14 12 10 8 6 4 2 0 LCD (LHS) OP margin (%) (RHS)
Valuation
The stock is trading currently at respective PERs of 11.1x and 9.1x on our 2013 and 2014 EPS forecasts. In terms of PBR, it is trading at 2.1x and 1.6x on our respective 2013 and 2014 BVPS forecasts, compared with its pastthree-year trading range of 1.5-4.5x. Given the volatile nature of the companys earnings, we prefer to base our valuation for the stock on a PBR multiple rather than a PER. We use a mid-cycle PBR to value it because while the revenue growth for 2013 is strong, we do not expect it to be as high as that for 2014.
AP Systems: PBR bands

(KRW) 20,000 16,000 12,000 8,000 4,000 0 Jan-10 4.7x 4.1x 3.6x 3.0x 2.3x 1.7x
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Earnings revisions
Our 2013 and 2014 EPS forecasts are respectively 6.6% and 1.2% higher than those of the Bloomberg consensus. We expect the consensus forecasts to be raised should AP Systems win additional orders from new OLEDdisplay production lines.
AP Systems: Daiwa vs. consensus EPS forecasts (2013-15E)

(KRW) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2013E Daiwa
2014E Consensus
2015E
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29 August 2013
Financial summary
Key assumptions
Year to 31 Dec Global semicon capex (USDbn) Global LCD capex (USDbn) Global OLED capex (USDbn) 2008 33.3 24.1 0.0 2009 19.9 15.9 0.5 2010 43.3 25.3 2.0 2011 56.4 17.3 5.0 2012 49.8 13.4 4.6 2013E 50.9 14.6 5.4 2014E 52.2 15.2 7.2 2015E 53.8 15.7 9.6

Year to 31 Dec OLED LCD Other Revenue Total Revenue Other income COGS SG&A Other op.expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported)(KRW) EPS (adjusted)(KRW) EPS (adjusted fully-diluted)(KRW) DPS (KRW) EBIT EBITDA 2008 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2009 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2010 66 41 28 134 0 (115) (8) 0 11 0 (12) (1) 0 (12) (12) (12) (568) (568) (568) 0 11 17 2011 169 12 44 225 0 (177) (20) 0 27 (1) (9) 17 (3) (3) 11 11 520 520 520 0 27 31 2012 192 10 16 217 0 (180) (25) 0 13 1 1 16 (3) 0 12 12 576 576 576 0 13 18 2013E 293 11 22 326 0 (266) (28) 0 32 2 0 33 (6) 0 27 27 1,213 1,213 955 0 32 37 2014E 330 12 21 363 0 (296) (29) 0 38 3 0 41 (8) 0 33 33 1,483 1,483 1,167 0 38 45 2015E 358 13 24 395 0 (324) (31) 0 40 4 0 44 (8) 0 36 36 1,614 1,614 1,271 0 40 49
Cash flow (KRWbn)

2008 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
2009 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
2010 (1) 5 0 (26) 16 (6) (5) 15 (11) (2) 5 2 0 3 11 (0) 3 (11)
2011 17 4 (3) (12) 21 27 (22) 17 (33) (37) 46 0 0 5 51 0 41 5
2012 16 5 (3) 4 9 31 (28) 31 (11) (8) (31) (7) 0 0 (38) (0) (15) 3
2013E 33 6 (6) (43) 16 5 (15) (2) (4) (21) 1 0 0 0 1 0 (14) (10)
2014E 41 7 (8) (19) 18 40 (15) (1) (4) (20) (5) 0 0 0 (5) 0 15 25
2015E 44 9 (8) (16) (3) 26 (15) (2) (5) (21) (5) 0 0 0 (5) 0 (0) 11
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29 August 2013

As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (KRW) 2008 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2009 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 2010 15 12 37 24 89 24 3 11 127 21 14 23 58 0 2 60 11 55 66 2 127 246 5 3,057 2011 65 13 57 84 218 40 3 17 277 42 23 101 166 26 2 194 11 70 81 2 277 245 3 3,763 2012 43 20 55 10 128 52 6 19 206 27 10 65 101 13 4 118 11 75 86 2 206 239 (2) 3,957 2013E 64 18 60 13 155 62 6 21 244 31 10 76 116 9 4 130 11 102 113 2 244 218 (24) 5,033 2014E 82 20 62 14 177 70 7 23 277 28 10 81 119 5 4 129 11 135 146 2 277 177 (48) 6,516 2015E 100 21 66 15 202 76 7 25 311 26 11 84 121 1 4 127 11 171 182 2 311 151 (72) 8,131
Key ratios (%)

2008 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. net cash n.a. n.a. n.a. n.a. n.a. n.a.
2009 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. net cash n.a. n.a. n.a. n.a. n.a. n.a.
2010 n.a. n.a. n.a. n.a. n.a. 14.4 12.3 8.4 (9.1) n.a. n.a. 25.9 15.7 7.8 n.a. 50.9 1.5 n.a. n.a. n.a.
2011 67.1 89.0 136.5 n.a. n.a. 21.0 13.9 12.0 5.0 15.3 5.5 22.5 28.2 3.3 16.8 76.5 1.3 26.3 0.0 2.2
2012 (3.2) (43.5) (51.4) 11.2 10.7 17.4 8.1 6.0 5.7 14.9 5.2 9.4 12.1 net cash 20.9 93.7 1.3 n.a. 0.0 1.2
2013E 49.8 111.8 142.4 118.3 65.9 18.4 11.5 9.7 8.3 27.4 12.1 22.4 29.3 net cash 18.5 64.2 1.3 n.a. 0.0 n.a.
2014E 11.4 19.8 18.8 22.3 22.3 18.4 12.3 10.4 9.1 25.7 12.7 22.3 32.1 net cash 18.5 61.2 1.5 n.a. 0.0 10.6
2015E 8.7 9.6 7.3 8.8 8.8 18.0 12.4 10.2 9.2 22.0 12.3 20.5 31.0 net cash 18.5 59.4 1.7 n.a. 0.0 4.6
Company profile
AP System is a leading OLED equipment maker supplying excimer laser annealing (ELA) devices for OLED backplane process and encapsulation systems. The company was established in October 1994 and was listed on the KOSDAQ in December 2001. In 2012, OLED equipments accounted for 88% of its revenue, LCD equipment 5%, semiconductor processing systems and others 7%.
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29 August 2013
Steady revenue growth from laser-applied equipment

With an increase in the revenue contribution from OLED equipment, we forecast AP Systems to have an operating-profit margin of 10% for 2013
AP Systems share price fell by 44% from the start to the end of 2012 due to weak order momentum. However, it has risen by 46% YTD, reflecting the strong revenue growth from OLED equipment for 1H13. In addition, AP Systems was investigated by the Gyeonggi Provincial Police Agency from October 2012 for allegedly leaking OLED technology to an overseas company, but in March 2013 there was found to be no case to answer, and its share price has recovered further since then. The stock is trading currently at PERs of 11.1x and 9.1x on our respective 2013 and 2014 EPS forecasts. In terms of PBR, it is trading at 2.1x and 1.6x on our respective 2013 and 2014 BVPS forecasts, compared with its past-three-year trading range of 1.5-4.5x. Given the robust growth in revenue for 1H13 (a 41% HoH increase), we forecast 2H13 revenue to increase by 6% HoH. However, as the company looks on track to post record revenue for 2013, we set our six-month target price at KRW13,500, based on a mid-cycle PBR of 2.7x on our 2013 BVPS forecast.
AP Systems: PBR bands
(KRW) 20,000 16,000 12,000 8,000 4,000 0 Jan-10 4.7x 4.1x 3.6x 3.0x 2.3x 1.7x
Investment summary
We initiate coverage of AP Systems with a Buy (1) rating and six-month target price of KRW13,500. Following the sharp rise in mobile-display investment by Samsung Display since late-2012, AP Systems quarterly revenue increased to about KRW80bn in 1H13, compared with KRW40-60bn in 2012. As a result, we forecast the companys operating profit margin to be 10% for 2013, up from 6% for 2012, as it can cover its fixed costs with a rise in revenue. AP Systems specialises in the manufacture of laserapplied OLED-display equipment, such as excimer laser-annealing (ELA) devices, laser lift-off (LLO) machines, and glass-encapsulation systems. The company provides equipment for placing liquid crystals on glass substrates for LCD production lines, and rapid thermal process (RTP) systems for semiconductor manufacturing. The companys main customer is Samsung Display, which accounted for 85% of 2012 revenue. Samsung Display owns 3.6m shares in AP Systems (22.8m shares outstanding) through convertible bonds. For 2012, equipment for OLED, LCD, and semiconductor and other system components respectively accounted for 88%, 5%, and 7% of consolidated revenue. AP Systems started to disclose its financial results on a consolidated basis from 1Q13. However, the consolidated results include only one of its affiliates, Kornic Automation (60% stake), which develops the control software for semiconductor and display equipment. AP Systems currently has the highest revenue exposure to the OLED business among the Korea equipment and material companies at 90% for 2013 (based on our forecast).
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
In OLED-display equipment, AP Systems is the sole supplier to Samsung Display of ELA, LLO, and glassencapsulation systems. Most OLED-display makers use LTPS backplanes to produce mobile displays, and ELA is a core process to change amorphous silicon (a-Si) to poly-crystalline silicon (p-Si), as it provides higher carrier mobility of electrons than conventional LCDs. As a result of the use of LTPS backplanes, users of OLED screens do not notice any ghosting on the display or become dizzy when viewing high-speed animation.
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29 August 2013
Laser-annealing process for LTPS backplanes
a-Si
p-Si
Laser anneal
Crystalline
Source: Daiwa
For the next generation of OLED displays, AP Systems developed a laser-induced thermal imaging (LITI) deposition system and provided a prototype model to Samsung Display in 2012. Instead of evaporating the organic materials through fine masks to deposit them on the substrate (either glass or plastic) as in the traditional method, LITI uses a laser to place the organic materials in a film on the substrate. The resolution of OLED displays using the LITI process improves substantially, according to the company. However, we believe the project has been put on a hold, as there have been issues with particles (fine dust) when the laser is scanning the film.
Laser-annealing process for LTPS backplane
Galvanometer (Scan) Scan lens Donor film EML Substrate (Correction) AOD Laser beam Laser beam
As Samsung Display is using LTPS backplanes for all of its Gen4 and Gen5.5 fabs and is likely to use it for the Gen6 line due to be ramped up in the middle of 2014, we expect a steady revenue contribution for AP Systems from ELA equipment over the next few years. We forecast ELA revenue to account for over 50% of the companys OLED-equipment revenue for 2013. AP Systems also provides glass-encapsulation systems to Samsung Display, and these accounted for less than 30% of its OLED-equipment revenue for 2012. As moisture and oxygen may cause organic material to degrade and dark-spot problems may occur on OLED displays, effective sealing, or encapsulation, is required. AP Systems encapsulation systems use frit, or glass powder, to form a tight seal between the top and the bottom glass panels of OLED displays.
Glass encapsulation
Cylindrical lens
Substrate
Stage moving
Source: Daiwa
Glass
Frit
For flexible displays, AP Systems supplies the LLO equipment that is used in the last stage of front-end process. A plastic film is first laminated on the glass so that the substrate follows the backplane, deposition, and encapsulation processes without being deformed. However, the processed film needs to be separated from the bottom glass so that it can be used as a flexible display, and LLO equipment separates them or lifts off the film from the bottom glass. As Samsung Display is increasing its investment in flexible-display production, we forecast LLO equipment to account for about 10-15% of AP Systems OLED-equipment revenue for 2013 and 2014. In LCD equipments, the company supplies one-drop fill (ODF) systems to Samsung Display and overseas LCDpanel makers. In the cell-assembly process in LCD manufacturing, liquid crystals are used to fill some of the space between the two glass substrates (a backplane with thin-film transistors and a colour filter substrate for displaying the colour). In the traditional method, liquid crystals are injected from the edge of the display, which takes a long time, especially for large substrates.
OLED
Source: Daiwa
Although sales of the companys encapsulation system have picked up in line with the expansion of Samsung Displays OLED-production line over the past few quarters, should flexible displays become more popular, we believe that film-type encapsulation systems would be more viable due to the flexibility of their design. However, given the current hurdles to producing flexible displays, we expect glassencapsulation demand to remain stable, at least for the next 1-2 years.
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29 August 2013
AP Systems: ODF system
AP Systems: quarterly earnings forecasts (KRWbn)

1Q13 Revenue: OLED LCD Semiconductor Others Total Operating profit Operating-profit margin (%) 78.6 1.7 0.4 1.2 81.9 8.2 10.0 1Q14E Revenue: OLED LCD Semiconductor Others Total Operating profit Operating-profit margin (%)
2Q13 68.3 3.2 2.2 2.7 76.3 7.2 9.5 2Q14E 81.9 3.2 4.2 2.5 91.8 9.7 10.6
3Q13E 70.6 3.1 4.3 2.2 80.3 7.9 9.8 3Q14E 93.3 3.6 2.3 1.4 100.6 11.2 11.2
4Q13E 75.5 2.8 7.1 1.8 87.3 8.4 9.6 4Q14E 83.2 3.1 1.2 2.4 89.8 8.9 9.9
2013E 293.0 10.8 14.1 8.0 325.8 31.6 9.7 2014E 329.8 12.1 13.9 7.3 363.1 37.6 10.4
Source: Korea Semiconductor Industry Association
However, ODF systems drop liquid crystals directly on to one of the substrates and this is then aligned with the other substrate. This makes the process time much faster. As there have been no major LCD line investments by LCD-panel makers since 2010, sales of AP Systems LCD equipment have been declining since then. For 2013, we forecast LCD-equipment revenue to account for 3% of AP Systems consolidated revenue. In the semiconductor business, AP Systems supplies RTP equipment to SEC. RTP is used to heat wafers at high temperatures (450-1,200C) in a short period of time. Although semiconductor equipment currently makes up less than 5% of the companys consolidated revenue, it plans to expand this business by applying its expertise in display equipment, such as laser annealing machines and LLO equipment in the LED chipmanufacturing process.
71.4 2.2 6.2 1.0 80.8 7.8 9.6
Earnings outlook
AP Systems quarterly revenue improved from 1Q13, on the back of new-equipment orders from Samsung Display that started in December 2012. As the company recognises equipment revenue on a progressive basis, we forecast its 2013 revenue to be more or less evenly distributed over 1Q-4Q13. However, compared with 2012, we forecast 2013 revenue to increase by 50% YoY to KRW326bn and operating profit to rise by 142% YoY to KRW32bn. For 2012, AP Systems posted an operating-profit margin (consolidated) of 6%, but we forecast this to expand to 10% for 2013 and remain at this level for 2014, as we expect the rise in revenue to cover its fixed costs. Although equipment prices normally decline by about 5% each year, due to cost reductions and upgrades in specifications, we forecast the company to maintain its operating profit of about 10% for next two years.
At the end of 1Q13, AP Systems had KRW56bn in cash, and borrowings amounted to KRW42bn. The company has not paid a dividend for five years and has no plans to do so in the future. Like other equipment companies, its capex requirement is relatively small, at about KRW15bn/year, as AP Systems mainly invests in tools and equipment. As at 23 May (the filing date for its 1Q13 financial statements), the company had 22.4m shares outstanding, but there are potential dilution risks from convertible bonds (held by Samsung Display) equivalent to 3.6m shares and bonds with warrants (held by the CEO and strategic investors) equivalent to 2.4m shares.
Risk factors
The key risks to our view are potential delays in the ramp-up of new production lines by its main customer. In addition, changes in technology, such as glass-based OLEDs for flexible displays (film-based), could result in weak orders for the companys glass-based encapsulation systems. In addition, advancements in backplane technology through the use of metal oxide could pose a risk to sales of its ELA systems, which are the core piece of equipment used in the LTPS process.
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29 August 2013
Company description
AP Systems was established in October 1994 and was listed on the KOSDAQ in December 2001. The company is engaged in the manufacture of laserapplied front-end equipment for OLED-display production lines. The CEO, Kiro Jung, was a founding member of the company, and worked as a researcher at the government funded Electronics and Telecommunications Research Institute before establishing the company in 1994. AP Systems head office is in Hwasung, Gyeonggi Province, and it has manufacturing facilities nearby. The companys main customer is Samsung Display, which accounted for 85% of 2012 revenue. Overseas revenue made up 8% of the total for 2012. At the end of 1Q13, AP Systems had 314 employees. At the same time, the CEO and other executives held a 9.9% stake and treasury stocks amounted to 3.8% of the total.
AP Systems: shareholder structure
Kiro Jung 9.1% Treasury stock 3.8%
AP Systems: consolidated revenue by product (2013E)

Semiconductor 4.3% Others 2.4%
LCD 3.3%
OLED 89.9%
AP Systems: consolidated operating profit by product (2013E)

Semiconductor 3.1% LCD 2.4% Others 0.3%
OLED 94.2%
Others 87.1%
Source: Company
- 54 -
Materials / Korea 036830 KS
Materials / Korea 29 August 2013

Soulbrain
Soulbrain
036830 KS
Initiation: an all-round player in materials

Thin-glass revenue should expand by 38% YoY for 2013E on rising adoption of OLED as well as increase in display sizes Investment in tech migration and 3D cell structure by core customers should benefit its semiconductor materials business Initiating coverage with an Outperform (2) rating and six-month target price of KRW50,000
1 2 3 4 5
Buy Outperform (initiation) Hold Underperform Sell
Joshua Oh, CFA

slowdown in the global smartphone market, we expect robust shipments of OLED displays, as SEC is increasingly using these in its midrange phones along with its highend models, and may use them in a tablet PC in 2014. In our view, Soulbrain has a wellbalanced portfolio of process chemicals for the semiconductor, display, and electronics industries. In the semiconductor business, the company provides etchants for photolithography and the chemical vapour-deposition (CVD) process. We expect demand for etchants to increase with the shift to advancedprocess technology and the use of 3D cell structures for NAND flash. In electronic materials, Soulbrain supplies the electrolytes for rechargeable batteries. Although most of its electrolytes are for use in the batteries of IT devices, as demand for electric vehicles rises, we expect it to expand its electrolyte exposure to large batteries.
Valuation
Risks
The main risks to our view would be slower-than-expected sales of end applications, including OLEDdisplay smartphones, LCD-TVs, and PCs.
Jae H. Lee

(KRW)
55,000 50,250 45,500 40,750 36,000
(% )
140 128 115 103 90
Investment case
We initiate coverage of Soulbrain, a major thin-glass and processchemical maker in Korea, with a Buy (1) rating. We expect the company to see record revenue and earnings for 2013, on the back of rising orders for its thin-glass services for OLED displays. We are also positive on the companys semiconductor materials business due to continued investment in tech migrations by the memory-chip makers.
Catalysts
Aug-12
Nov-12 Soulbrain (LHS)
Feb-13
37,000-50,400 0.64 3.03 17 Ji-Wan Chung (34.3%)

Year to 31 Dec Revenue (bn) Operating profit (bn) Net profit (bn) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) 13E 715 125 92 5,532 20.9 4.6 7.9 0.9 400 1.7 4.6 24.1 14E 812 142 107 6,436 16.4 4.7 6.8 0.9 400 1.4 3.5 22.3 15E 916 161 119 7,194 11.8 4.9 6.0 0.9 400 1.1 2.8 20.4
With mobile devices becoming slimmer, the demand for displays using thin glass is rising. This, combined with the increasing adoption of OLED displays in mobile devices and the continued increase in smartphone display sizes, is likely to be the key revenue driver for its thin-glass service business. Despite investor concerns about a potential
The stock is trading currently at a 2013E PBR of 1.7x compared with a past-three-year trading range of 1.62.5x. We have a six-month target price of KRW50,000, based on a mid-cycle 2013E PBR of 2.0x.

29 August 2013
1 2 3 4 5
Buy Outperform (initiation) Hold Underperform Sell

Growth outlook
We believe Soulbrain is on track to post record revenue and earnings for 2013 as the companys thin-glass business continues to benefit from strong orders from Samsung Display. We forecast the companys revenue from thin glass to expand by 38% YoY to KRW246bn for 2013 and 23% YoY to KRW303bn for 2014.
Soulbrain: revenue and operating-profit margin

(KRWbn) (%)
1,000 800 600
20 15 10
400 200 0 2011 2012 2013E 2014E 2015E Display (LHS) Electronic material (LHS)
5 0 Semiconductor (LHS) OP margin (RHS)
Valuation
Based on our 2013 forecasts, the stock is trading currently at a PER of 7.9x and a PBR of 1.7x. In comparison with other process-chemical companies, the valuation is attractive as the stock is trading at discounts in both PER and PBR terms. The ROEs we forecast for the company, of 24% for 2013 and 22% for 2014, are higher than those of its peers. Given the volatile nature of the companys earnings, we prefer to base our valuation for the stock on a PBR multiple rather than a PER. We use a mid-cycle PBR to value it given the strong earnings growth we expect for the thin-glass services business this year.
Soulbrain: PBR bands

(KRW) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 3.3x 2.8x 2.4x 1.9x 1.5x
Jul-10
Jul-11
Jul-12
Oct-10
Oct-11
Jan-10
Jan-11
Jan-12
Oct-12
Jan-13
Apr-10
Apr-11
Apr-12
Earnings revisions
Our EPS forecasts are higher those of the Bloomberg consensus by 4.6% for 2013, 4.7% for 2014, and 4.9% for 2015. We are more positive than the market on the companys revenue and earnings-growth outlook on the back of its thin-glass business. We are one of only six brokers actively covering the stock.
Soulbrain: Daiwa vs. consensus EPS forecasts (2013-15E)

(KRW) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2013E Daiwa
2014E Consensus
2015E
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Jul-13

29 August 2013
Financial summary
Key assumptions
Year to 31 Dec SEC smartphone shipments (m) SEC tablet PC shipments (m) Global smartphone shipments (m) 2008 0.0 0.0 n.a. 2009 0.0 0.0 172.4 2010 25.0 1.5 298.2 2011 97.9 5.9 472.9 2012 213.0 16.9 680.1 2013E 310.0 41.0 980.1 2014E 400.0 50.0 1,187.6 2015E 480.0 62.0 1,380.0

Year to 31 Dec Thin Glass Etchant (display) Other Revenue Total Revenue Other income COGS SG&A Other op.expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported)(KRW) EPS (adjusted)(KRW) EPS (adjusted fully-diluted)(KRW) DPS (KRW) EBIT EBITDA 2008 80 126 28 234 0 (181) (21) 0 31 (1) (3) 27 (8) 0 19 19 1,301 1,301 1,301 200 31 44 2009 131 124 48 303 0 (242) (24) 0 37 (1) (0) 35 (9) 0 26 26 1,765 1,765 1,765 250 37 51 2010 165 134 60 359 0 (282) (31) 0 46 (2) (1) 43 (11) 0 32 32 2,204 2,204 2,204 300 46 61 2011 181 197 103 481 0 (376) (47) 0 59 (7) (33) 19 (12) 0 7 7 475 475 475 350 59 79 2012 302 240 121 664 0 (508) (48) 0 107 (6) (5) 96 (22) 0 74 74 4,577 4,577 4,577 375 107 137 2013E 376 243 96 715 0 (537) (53) 0 125 (3) (3) 119 (27) 0 92 92 5,532 5,532 5,532 400 125 166 2014E 436 277 99 812 0 (609) (61) 0 142 (2) (2) 138 (32) 0 107 107 6,436 6,436 6,436 400 142 191 2015E 492 314 110 916 0 (685) (70) 0 161 (1) (5) 155 (36) 0 119 119 7,194 7,194 7,194 400 161 217
Cash flow (KRWbn)

2008 27 13 (8) 0 8 40 (24) (4) 9 (19) 3 (1) (3) 0 (1) (0) 20 17
2009 35 14 (9) 5 1 46 (14) (37) 9 (42) 14 0 (3) 0 11 0 16 33
2010 43 15 (11) (18) 5 34 (76) 6 (5) (74) 34 0 (4) 5 35 (1) (6) (42)
2011 19 20 (12) (48) 38 17 (118) 3 (15) (130) 123 0 (4) 1 120 (0) 8 (101)
2012 96 30 (22) 6 13 123 (59) (0) (7) (67) (28) 0 (5) 0 (33) (0) 23 64
2013E 119 42 (27) 13 (91) 55 (70) (18) (5) (93) (41) 10 (6) 79 42 0 4 (15)
2014E 138 49 (32) (5) (107) 43 (70) (13) (6) (89) (29) 0 (7) 93 58 0 13 (27)
2015E 155 56 (36) (20) (120) 36 (70) (14) (6) (90) (27) 0 (7) 106 72 0 19 (34)
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29 August 2013

As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (KRW) 2008 35 25 17 41 118 87 2 68 276 15 13 72 100 11 4 115 7 149 157 4 276 718 (10) 10,664 2009 47 18 28 54 146 86 2 96 330 34 17 84 135 2 6 143 7 175 182 5 330 718 (11) 12,392 2010 21 28 48 1 98 141 13 85 337 82 23 19 124 2 2 128 7 203 210 (0) 337 781 62 14,304 2011 26 61 62 8 158 234 13 71 475 120 25 26 171 72 7 250 7 218 226 (1) 475 884 166 15,375 2012 49 46 70 7 173 253 24 78 527 93 24 38 155 32 7 194 8 325 333 0 527 796 76 20,547 2013E 37 64 79 11 191 282 26 88 587 58 25 38 121 30 8 159 8 420 428 0 587 770 50 25,858 2014E 44 81 97 13 236 305 30 100 670 36 28 41 105 28 9 142 8 520 528 0 670 666 19 31,894 2015E 66 101 119 15 301 320 35 112 768 13 31 44 89 28 10 127 8 632 640 0 768 612 (25) 38,688
Key ratios (%)

2008 28.6 (0.1) (8.1) (30.6) (30.6) 22.5 19.0 13.4 8.2 12.7 7.5 17.2 14.3 net cash 30.4 25.2 1.2 25.6 15.4 2.3
2009 29.6 13.8 17.1 35.6 35.6 20.0 16.7 12.1 8.6 15.3 8.6 17.9 16.6 net cash 26.0 26.8 1.1 29.1 14.2 4.5
2010 18.7 20.5 24.2 24.9 24.9 21.4 16.9 12.7 9.0 16.5 9.7 17.7 15.3 29.6 24.7 38.7 0.8 28.4 13.6 n.a.
2011 33.9 29.6 28.6 (78.5) (78.5) 21.9 16.4 12.2 1.4 3.2 1.7 16.5 6.6 73.4 62.7 42.0 0.9 8.6 73.7 n.a.
2012 37.9 73.7 82.5 964.2 864.4 23.4 20.6 16.1 11.2 26.5 14.8 24.4 20.7 22.8 22.7 36.5 1.1 19.1 8.2 8.9
2013E 7.7 21.4 16.6 23.4 20.9 24.9 23.3 17.5 12.8 24.1 16.4 25.6 21.6 11.8 23.0 38.0 1.6 41.0 7.2 n.a.
2014E 13.7 15.0 14.2 16.4 16.4 25.1 23.5 17.5 13.1 22.3 16.9 25.7 21.4 3.7 23.0 39.6 2.2 85.8 6.2 n.a.
2015E 12.8 13.5 12.9 11.8 11.8 25.2 23.7 17.6 13.0 20.4 16.6 25.3 21.3 net cash 23.0 43.1 3.4 187.9 5.6 n.a.
Company profile
Soulbrain is the main thin-glass supplier for Samsung Display's OLED displays. The company is also a manufacturer of process chemicals and materials for the semiconductor and TFT-LCD industries. Its customers include Samsung Electronics, SK Hynix, and LG Display.
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29 August 2013
An all-round player in materials

Poised to benefit from investment by its core customers
We expect Soulbrain to post record revenue and earnings for 2013 on the back of rising orders for thinglass service from Samsung Display. As mobile devices are becoming slimmer, the demand for displays using thin glass is rising. This, combined with the increasing adoption of OLED displays in mobile devices and the continued increase in smartphone display sizes, is likely to be the key revenue driver for its thin-glass service business. As we regard Soulbrain as having a well-balanced portfolio of process chemicals for the semiconductor and display industries, we initiate coverage with an Outperform (2) rating and six-month target price of KRW50,000. For 2012, semiconductor, display, and electronics materials respectively accounted for 41%, 38%, and 21% of consolidated revenue. In the semiconductor business, the company specialises in providing etchants to both SEC and SK Hynix. Etchants are used to remove unnecessary materials on a wafers surface, following the photolithography and CVD processes. As memory-chip companies continue to adopt advancedprocess technology to reduce production costs and also shift to 3D cell structures for NAND-flash, we expect an increase in the use of etchants, which bodes well for Soulbrains semiconductor-material revenue. In electronic materials, the company manufactures electrolytes to several rechargeable battery makers, including Samsung SDI (SDI), as well as neodymium (ND) magnets for the motors used in home appliances and automobiles. In the electrolyte business, Soulbrain competes with Japanese chemical companies and accounted for a 10% share of the global electrolyte market for 2012. The companys core customers for ND magnets are LGE and Hyundai Motor. Based on our 2013 forecasts, the stock is trading currently at a PER of 7.9x and a PBR of 1.7x. On a PER basis, it is trading slightly higher than the average of competing thin-glass companies (based on the Bloomberg-consensus forecasts), as it has the largest
share of business (60%) in Samsung Displays OLED displays and a more diversified product mix. Meanwhile, the stock is trading at discounts in both PER and PBR terms to other process-chemical companies, while its ROEs of 24% for 2013E and 22% for 2014E are both higher than those of its peers.
Soulbrain: peer-group valuation comparison
PER Company Thin-glass companies Soulbrain* GD Chemtronics Avatec Average BBG code 036830 KS 155960 KS 089010 KS 149950 KS 2013E 7.9 6.0 7.3 6.3 6.5 2014E 6.8 4.6 5.9 5.1 5.2 PBR 2013E 1.7 1.9 1.5 1.6 1.7 2014E 1.4 1.4 1.2 1.2 1.3
Process-chemical companies KC Tech 029460 KS ENF Technology 102710 KS Average
10.7 9.2 10.0
8.8 8.2 8.5
0.8 1.4 1.1
0.7 1.2 1.0
Source: Companies, Bloomberg, *Daiwa forecasts Note: Based on share prices as at 28 August 2013
Although Soulbrains share price rose by 28% between late January and late May on the back of market expectations of revenue and earnings expansion, investor concerns about a potential slowdown in Galaxy S4 shipments has led to weaker share prices since then. The stock has traded in a range of KRW38,750-45,700 since early June. As Soulbrains current PBR of 1.7x (on our 2013E BVPS) is at the low end of its past three-year trading range of 1.6-2.5x, we set our six-month target price at KRW50,000, based on a mid-cycle PBR of 2.0x on our 2013 BVPS forecast.
Soulbrain: PBR bands
(KRW) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 3.3x 2.8x 2.4x 1.9x 1.5x
Jul-10
Jul-11
Jul-12
Oct-10
Oct-11
Jan-10
Jan-11
Jan-12
Oct-12
Jan-13
Apr-10
Apr-11
Apr-12
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Jul-13

29 August 2013
Display materials
Soulbrain makes three key materials for displays, including a thin-glass solution for OLED displays, display etchants, and the organic materials used in LCD fabrication. While we expect flat YoY revenue growth for display etchants and organic materials for 2013, we forecast thin-glass revenue to expand by 38% YoY due to a rise in orders from Samsung Display for OLED displays for smartphones. On the back of this, we forecast revenue for display-material division to rise by 24% YoY to KRW376bn.
Soulbrain: thin-glass fabrication process
1.0mm 0.2-0.3mm
compared with screen sizes of 5.5 inches for the Galaxy Note 2 and 5.0 inches for the Galaxy S4. To meet the rising demand for its thin-glass services, the company recently increased production capacity by 10%, replacing its existing manual equipment with automatic equipment, and may expand production capacity further depending on the orders from Samsung Display.
Semiconductor materials
Semiconductor etchants accounted for 81% of total semiconductor division revenue for 2012, with the remainder coming from precursors (10%) and slurries (9%). For 2013, we forecast the revenue for the division to decline slightly YoY due to unfavourable forex rates. However, we are positive on the earnings growth outlook for the companys slurry, high selectivity nitride (HSN) etchant, and electrolysed water-system businesses, which benefit from investment in tech migration and 3D cell structure development at its customers. Slurries are used mainly in the chemical mechanical polishing (CMP) process in semiconductor fabrication, and Soulbrain only supplied to SK Hynix until 1Q13. However, the company started shipping slurries to SEC from 2Q13, and shipments should increase for 2H13. We also expect this business to benefit from investments in tech migration and 3D cell structures at SEC and SK Hynix, as new semiconductor fabrication processes use more slurries. We forecast the companys revenue from slurries to expand by 61% YoY to KRW32bn for 2013. Meanwhile, we expect its HSN etchants and electrolysed water-system businesses to benefit from tech migration by semiconductor companies. HSN etchants allow more precise etching of semiconductor wafers when fabricating chips under the 20nm process node, and electrolysed water systems enhance production yields by reducing the number of particles in the semiconductor fabrication process by 30% compared with conventional equipment, which uses pure water and hydrogen peroxide.
Input
Etching
Rinsing
Drying
Output
Source: Daiwa
Thin-glass service is used to make both OLED (one for encapsulation and another for TFT backplanes) and LCD displays (one for colour filters and another for TFT backplanes) to achieve slim form factors and good optical quality. Soulbrain specialises in providing thinglass services for OLED displays, and reduces the thickness of mother-glass substrates to as little as 0.20.3mm from 1.0mm by spraying etchants on to the glass. Once the displays become thinner, these glass substrates are sent to its 100%-owned subsidiary, Soulbrain SLD, and cut to size for mobile displays. Although there are market concerns about a potential slowdown this year in smartphone shipments globally, we expect robust demand for OLED displays to continue and this, in turn, should lead to a rise in demand for Soulbrains thin glass. SEC is increasingly using OLED displays in its mid-range smartphones, including the Galaxy S4 Mini, as well as in its high-end ones, while other smartphone makers, including Motorola, have been using OLED displays in their newly launched smartphones. On the back of this, we forecast Samsung Displays production capacity (in terms of area) for OLED displays to expand robustly to 380,000 sq m/month for 2Q14 from 280,000 sq m/month for 2Q13, and believe Soulbrain is wellplaced to benefit as it currently accounts for a 60% share of the thin-glass business in Samsung Displays OLED displays. In addition, Soulbrain recently started to provide thin-glass service for the Galaxy Note 3: this should see its blended ASP for the thin-glass business improve, as the Galaxy Note 3 has a 5.7-inch display
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29 August 2013
Soulbrain: CMP slurry

CMP slurry
orders for the Galaxy S4. For 2Q13, we forecast Soulbrains revenue to expand by 6% QoQ to KRW169bn and its operating-profit to increase by 11% QoQ to KRW30bn. We are positive on the companys 2013 revenue and earnings outlook as it continues to benefit from strong thin-glass orders from Samsung Display and a product mix improvement. For 2013, we forecast Soulbrain to post record revenue and operating profit levels of KRW715bn and KRW125bn, respectively.
Soulbrain: quarterly earnings (KRWbn)
1Q13 Revenue: Displays Semiconductors Electronic materials Total Operating profit Operating-profit margin (%) 84 53 22 159 27 16.8 1Q14E Revenue: Displays Semiconductors Electronic materials Total Operating profit Operating-profit margin (%)
CMP head Wafer
CMP pad
Source: Daiwa
2Q13E 89 57 24 169 30 17.9 2Q14E 106 68 25 200 35 17.6
3Q13E 102 64 26 192 35 18.1 3Q14E 111 73 26 210 37 17.7
4Q13E 102 68 25 194 33 17.0 4Q14E 114 71 25 210 36 17.3
2013E 376 243 96 715 125 17.5 2014E 436 277 99 812 142 17.5
Electronic materials
In the electronic materials division, electrolytes for lithium-ion batteries account for the largest proportion of revenue, followed by ND magnets for automobiles/home appliances and lead tabs for rechargeable batteries. Electrolytes act as carrier between the cathodes and the anodes in rechargeable batteries, and the company currently has a 40% share of SDIs business in this area. For 2013, despite the likelihood of strong orders for its electrolytes from Samsung SDI, we forecast revenue for the division to decline by 21% YoY due to a sharp increase in pricing pressure since the start of the year.
Soulbrain: revenue and operating-profit margin
(KRWbn) (%)
104 66 24 193 34 17.6
1,000 800 600
20 15 10
The company has a fairly healthy balance sheet, with a net debt-to-equity ratio of 20.1% at the end of 1Q13. In 2012, the company paid a cash dividend of KRW375/share, representing a payout ratio of 10.2%. Soulbrain hedges its exposure to forex risk, as 25% of its revenue is based in US Dollars and another 25% is denominated in Yen, while about 25% of its COGS is in US Dollars and another 25% in Yen.
400 200 0 2011 2012 2013E 2014E 2015E Display (LHS) Electronic material (LHS)
5 0 Semiconductor (LHS) OP margin (RHS)
Risk factors
The main risks to our earnings forecasts and target price would be slower-than-expected sales of end applications, including OLED-display smartphones and LCD-TVs, and PCs. In addition, increasing pricing pressure and intensifying competition would adversely affect its earnings.
Earnings outlook
For 2012, Soulbrain reported record revenue and operating profit, while for 3Q12 its operating-profit margin topped 20%, driven by pick-ups in the utilisation rates in its core businesses and favourable forex rates. Although the companys profitability was negatively affected by unfavourable forex rates for 1Q13, we forecast its operating-profit margin to improve to 17.9% for 2Q13 (1Q13: 16.8%) due to strong thin-glass
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Company background
Soulbrain was established in 1986 as Techno Trading, and its mainstay business was chemical and semiconductor equipment trading in its early days. It moved into the material business by establishing a display etchant plant in 1998 and changed its name to Techno Semichem in 1999. The company was listed on the Kosdaq in 2000 and was renamed Soulbrain in 2011. Soulbrain has three business divisions display, semiconductor, and electronic materials in which its products are categorised depending on the end application. The companys key products are etchants and thin glass, which respectively accounted for 47% and 17% of the companys total revenue for 2012. The founder of the company, Ji-Wan Chung, is also the largest shareholder in the company, with a 34% stake. At the end of 1Q13, the company had several affiliates, including Soulbrain SLD, Soulbrain ENG, and Soulbrain Savings Bank.
Soulbrain: shareholder structure
Soulbrain: operating-profit forecast by division (2013)

Display materials 7.1%
Semiconductor 36.4%
Display 56.5%
Others 32.8%
Ji-Wan Chung 34.3%
Despite market concerns about slowing smartphone shipments globally this year (OLED displays are used mostly in smartphones at present), we expect the demand for OLED displays to remain robust. SEC is increasingly using such displays in its mid-range smartphones as well as in its high-end ones, while other smartphone makers, including Motorola, have used OLED displays in newly launched smartphones. On the back of this, we forecast Samsung Display to expand its production capacity for OLED displays to 210,000 substrates/month until 1H14 from the current 150,000 substrates/month. Soulbrain should benefit as it currently accounts for 60% of Samsung Displays thin-glass business for OLED displays. In addition, Soulbrain recently started to provide thinglass for the Galaxy Note 3: this should see its blended ASP for the thin glass improve, as the Galaxy Note 3 has a 5.7-inch display compared with screen sizes of 5.5 inches for the Galaxy Note 2 and 5.0 inches for the Galaxy S4. Meanwhile, as SEC and SK Hynix focus on investing in tech migration and 3D cell structures over wafer capacity increases, this should lead to a rise in orders for Soulbrains slurries, HSN etchants, and electrolysed water systems.
Norges Bank 2.9% Stic Investment 4.3% He-Ok Yim 6.6%

Source: Company Note: as at 20 August 2013
National Pension Service 9.3%
Allianz Global Investors 9.9%
Soulbrain: revenue forecast by division (2013E)

Display materials 13.5%
Display 52.6% Semiconductor 34.0%
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LG Display
LG Display
034220 KS
Target (KRW): 30,000 30,000 Upside: 2.2% 28 Aug price (KRW): 29,350
Dont expect OLED-display earnings over the near term

In January this year, LGD became the first company worldwide to supply OLED-TV panels However, the volume shipments of OLED displays are quite small and loss-making due to low production yields With the LCD market ailing, the company has limited capital resources to invest heavily in OLED-display technology
1 2 3 4 5
Buy Outperform Hold (unchanged) Underperform Sell
Jae H. Lee
LGD plans to launch a flexible display for use in mobile devices in 4Q13. However, we understand the company is facing difficulties with the encapsulation process. Also, we believe the volume of flexible displays will be small, as LGD only has a pilot line using Gen4 substrates (730x920mm substrate). Unlike Samsung Display, LGD only has commercial products for OLEDTVs, which are losing money currently. The company has limited capital resources to invest heavily in OLED technology, as its core business (LCD panels) has an operating-profit margin of a low-to mid-single digit percentage. As LCD-panel prices continue to soften on weak demand, we cut our 2013-15 EPS forecasts by 12-24%.
What we recommend
lower panel-demand and pricing assumptions.

13E (6.1) (24.2) (24.2)
14E (4.9) (14.2) (14.2)
15E (4.3) (12.4) (12.4)
What's new
Given that the LCD-TV market has past its prime time, LGD is looking to boost top-line growth with OLED displays. However, we think it will be challenging to make money from the OLED business in the near future due to low production yields.
What's the impact

(KRW)
36,500 33,375 30,250 27,125 24,000
(%)
140 129 118 106 95
Aug-12
Nov-12 LG Display (LHS)
Feb-13
In January 2013, LG Electronics became the first company to commercialise OLED-TVs globally, using white-OLED panels supplied by LGD. LG Electronics OLED-TVs have better picture quality than LCD-TVs, consume less power, and are only 4mm thick. However, as the retail price of OLED-TVs is high, at USD10,000, shipment volume is quite small, at about a few hundred units per quarter. In addition, due to a current production yield of well under 50%, we believe the earnings contribution from OLED displays will take quite a long time to come through.
We maintain our six-month target price of KRW30,000, based on the stocks mid-cycle PBR, of 1.0x, applied to our 2013E BVPS, and Hold (3) rating. Upside risks to our view include a strong panel-price recovery on improving product demand; downside risks include further panel-price erosion and increased competition.
How we differ
25,950-36,200 9.41 48.75 358 LG Electronics (37.9%)

Year to 31 Dec Revenue (bn) Operating profit (bn) Net profit (bn) Core EPS (fully-diluted) EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) 13E 28,076 1,321 668 1,867 182.6 (0.3) 15.7 1.0 300 1.0 2.3 6.4 14E 29,181 1,380 876 2,449 31.2 (1.5) 12.0 1.4 400 0.9 2.1 7.9 15E 31,280 1,523 982 2,744 12.1 (5.5) 10.7 1.5 450 0.9 1.9 8.3
Our EPS forecasts are below those of the Bloomberg consensus due to

29 August 2013
Financial summary
Key assumptions
Year to 31 Dec Panel shipment (m square meter) Panel ASP (US$ per square meter) Global LCD capex (US$bn) 2008 14.0 1,092.8 24.1 2009 20.6 762.5 15.9 2010 27.7 793.5 23.6 2011 30.7 711.0 15.4 2012 35.9 726.3 12.2 2013E 36.1 703.5 11.8 2014E 38.5 685.2 12.5 2015E 40.4 659.9 13.1

Year to 31 Dec TV Panel IT Panel Other Revenue Total Revenue Other income COGS SG&A Other op.expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported)(KRW) EPS (adjusted)(KRW) EPS (adjusted fully-diluted)(KRW) DPS (KRW) EBIT EBITDA 2008 7,807 7,485 972 16,264 2,894 (13,617) (912) (3,162) 1,467 56 (211) 1,311 (225) 0 1,087 1,087 3,037 3,037 3,037 500 1,467 4,008 2009 11,115 8,038 885 20,038 1,366 (17,477) (1,446) (1,470) 1,010 10 (8) 1,013 105 0 1,118 1,118 3,124 3,124 3,124 500 1,010 3,852 2010 14,109 9,855 1,547 25,512 0 (21,781) (2,042) 0 1,689 (8) (415) 1,266 (106) 0 1,159 1,159 3,240 3,240 3,240 500 1,689 4,614 2011 11,531 10,505 2,255 24,291 0 (23,081) (1,974) 0 (764) (86) (231) (1,081) 293 0 (788) (788) (2,202) (2,202) (2,202) 0 (764) 2,888 2012 13,620 12,469 3,340 29,430 0 (26,425) (2,093) 0 912 (159) (295) 459 (222) 0 236 236 661 661 661 0 912 5,382 2013E 13,087 11,687 3,302 28,076 0 (24,441) (2,314) 0 1,321 (123) (325) 873 (205) 0 668 668 1,867 1,867 1,867 300 1,321 5,286 2014E 12,905 11,917 4,359 29,181 0 (25,419) (2,381) 0 1,380 (110) (221) 1,049 (173) 0 876 876 2,449 2,449 2,449 400 1,380 5,510 2015E 12,766 11,501 7,013 31,280 0 (27,221) (2,535) 0 1,523 (99) (249) 1,176 (194) 0 982 982 2,744 2,744 2,744 450 1,523 5,798
Cash flow (KRWbn)

2008 1,311 2,541 (225) 114 859 4,601 (2,773) (130) (1,402) (4,305) 116 0 (268) 27 (125) 0 171 1,828
2009 1,013 2,842 105 275 (81) 4,153 (3,754) (445) (366) (4,564) 62 0 (179) 0 (117) (22) (550) 400
2010 1,266 2,925 (106) 303 496 4,884 (4,940) 997 (572) (4,515) 565 0 (179) 22 408 37 813 (57)
2011 (1,081) 3,651 293 819 (16) 3,666 (4,062) 688 (120) (3,494) (105) 0 (179) 6 (278) (6) (113) (397)
2012 459 4,469 (222) (959) 823 4,570 (3,914) 500 (275) (3,688) (61) 0 0 13 (48) (13) 821 656
2013E 873 3,965 (205) (216) 49 4,465 (4,000) (7) 30 (3,977) (441) 0 0 (129) (570) 0 (82) 465
2014E 1,049 4,130 (173) (243) 42 4,805 (4,250) (16) (19) (4,286) (209) 0 (107) (58) (374) 0 146 555
2015E 1,176 4,275 (194) (62) 35 5,230 (4,500) (51) (68) (4,618) (252) 0 (143) (39) (435) 0 177 730
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As at 31 Dec Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (KRW) 2008 3,423 1,137 2,005 454 7,018 9,270 200 900 17,388 1,154 3,632 0 4,786 2,733 581 8,100 1,789 7,487 9,276 13 17,388 10,992 465 25,924 2009 3,318 1,668 2,950 290 8,226 9,596 352 1,528 19,703 2,007 2,031 2,456 6,495 2,076 1,092 9,664 1,789 8,251 10,040 0 19,703 11,267 766 28,058 2010 3,134 2,215 3,001 491 8,840 12,815 540 1,662 23,858 2,101 2,962 3,819 8,882 2,543 1,372 12,797 1,789 9,247 11,036 25 23,858 12,062 1,510 30,843 2011 2,333 2,317 2,740 468 7,858 14,697 535 2,073 25,163 895 3,783 5,234 9,911 3,722 1,398 15,032 1,789 8,327 10,116 15 25,163 12,817 2,284 28,271 2012 2,654 2,390 3,334 537 8,915 13,108 498 1,936 24,456 1,015 4,147 4,044 9,206 3,441 1,569 14,215 1,789 8,421 10,210 30 24,456 12,365 1,802 28,534 2013E 2,581 2,323 3,089 509 8,503 13,143 477 1,894 24,016 856 3,897 3,800 8,553 3,186 1,498 13,238 1,789 8,956 10,745 33 24,016 12,030 1,461 30,031 2014E 2,738 2,473 3,281 543 9,034 13,263 503 1,969 24,770 1,123 3,969 3,874 8,967 2,736 1,577 13,280 1,789 9,664 11,453 37 24,770 11,696 1,121 32,009 2015E 2,957 2,637 3,510 596 9,701 13,488 553 2,121 25,863 896 4,148 4,074 9,119 2,735 1,720 13,574 1,789 10,460 12,249 40 25,863 11,256 674 34,233
Key ratios (%)

2008 13.3 (10.9) (12.1) (19.1) (19.1) 16.3 24.6 9.0 6.7 12.4 7.0 11.8 12.5 5.0 17.1 48.8 1.5 n.a. 16.5 17.4
2009 23.2 (3.9) (31.1) 2.9 2.9 12.8 19.2 5.0 5.6 11.6 6.0 7.4 9.8 7.6 n.a. 45.1 1.3 n.a. 16.0 3.8
2010 27.3 19.8 67.1 3.7 3.7 14.6 18.1 6.6 4.5 11.0 5.3 11.3 13.2 13.7 8.4 42.6 1.0 199.7 15.4 n.a.
2011 (4.8) (37.4) n.a. n.a. n.a. 5.0 11.9 n.a. (3.2) n.a. n.a. n.a. (6.1) 22.6 n.a. 43.1 0.8 n.a. n.a. n.a.
2012 21.2 86.4 n.a. n.a. n.a. 10.2 18.3 3.1 0.8 2.3 1.0 6.2 3.8 17.7 48.5 37.7 1.0 5.7 0.0 6.2
2013E (4.6) (1.8) 44.8 182.6 182.6 12.9 18.8 4.7 2.4 6.4 2.8 8.9 8.3 13.6 23.5 41.8 1.0 10.8 16.1 4.4
2014E 3.9 4.2 4.5 31.2 31.2 12.9 18.9 4.7 3.0 7.9 3.6 9.1 9.3 9.8 16.5 39.8 1.0 12.5 16.3 5.3
2015E 7.2 5.2 10.4 12.1 12.1 13.0 18.5 4.9 3.1 8.3 3.9 9.7 9.9 5.5 16.5 39.6 1.1 15.5 16.4 6.9
Company profile
LG Display (LGD), formerly LG.Philips LCD, is the largest TFT-LCD panel maker globally, with a 28% market share (in terms of revenue) in 2012. The company provides LCD panels for TVs, monitors, notebook PCs, and mobile devices. It was established through a 50:50 joint venture with LG Electronics and Philips Electronics in September 1999, and was listed on the Korea Stock Exchange and New York Stock Exchange in July 2004.
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Daiwas Asia Pacific Research Directory

HONG KONG Hiroaki KATO Regional Research Head John HETHERINGTON (852) 2532 4121 (852) 2773 8787 hiroaki.kato@hk.daiwacm.com john.hetherington@hk.daiwacm.com pranab.sarmah@hk.daiwacm.com SOUTH KOREA Chang H LEE (82) 2 787 9177 Head of Korea Research; Strategy chlee@kr.daiwacm.com
Daiwas Regional Deputy Asia Head Pacific of Asia Pacific Research Research; Regional Directory Head of Product Management
Pranab Kumar SARMAH (852) 2848 4441 Regional Head of Research Promotion Kevin LAI (852) 2848 4926 kevin.lai@hk.daiwacm.com Deputy Head of Regional Economics; Macro Economics (Regional) Christie CHIEN (852) 2848 4482 Macro Economics (Taiwan) christie.chien@hk.daiwacm.com
Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Jun Yong BANG Tyres; Chemicals Anderson CHA Banking/Finance (82) 2 787 9168 (82) 2 787 9185 junyong.bang@kr.daiwacm.com anderson.cha@kr.daiwacm.com
Jonas KAN (852) 2848 4439 jonas.kan@hk.daiwacm.com Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Property Coordinator; Property Developers (Hong Kong) Jeff CHUNG (852) 2773 8783 Automobiles and Components (China) jeff.chung@hk.daiwacm.com
Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com Capital Goods (Construction and Machinery) Sang Hee PARK Consumer/Retail (82) 2 787 9165 sanghee.park@kr.daiwacm.com
Jae H LEE (82) 2 787 9173 jhlee@kr.daiwacm.com IT/Electronics (Tech Hardware and Memory Chips) Joshua OH (82) 2 787 9176 IT/Electronics (Handset Components) joshua.oh@kr.daiwacm.com
Grace WU (852) 2532 4383 grace.wu@hk.daiwacm.com Head of Greater China FIG; Banking (Hong Kong, China) Jerry YANG (852) 2773 8842 jerry.yang@hk.daiwacm.com Banking (Taiwan)/Diversified Financials (Taiwan and China) Leon QI (852) 2532 4381 Banking (Hong Kong, China) leon.qi@hk.daiwacm.com
Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com Pan-Asia Head of Internet & Telecommunications; Software (Korea) Internet/On-line Game SoYoung WANG Transportation/Logistics TAIWAN Mark CHANG Head of Research Steven TSENG (886) 2 8758 6245 mark.chang@daiwacm-cathay.com.tw (886) 2 8758 6252 steven.tseng@daiwacm-cathay.com.tw (82) 2 787 9133 soyoung.wang@kr.daiwacm.com
Joseph HO (852) 2848 4443 joseph.ho@hk.daiwacm.com Head of Industrials and Machineries (Hong Kong, China); Capital Goods Electronics Equipments and Machinery (Hong Kong, China) Winston CAO (852) 2848 4469 Capital Goods Machinery (China) winston.cao@hk.daiwacm.com
Eric CHEN (852) 2773 8702 eric.chen@hk.daiwacm.com Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) Felix LAM (852) 2532 4341 felix.lam@hk.daiwacm.com Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China) John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com Regional Head of Small/Medium Cap; Small/Mid Cap (Regional); Head of Multi-Industries (Hong Kong, China); Internet (China) Joey CHEN Steel (China) (852) 2848 4483 joey.chen@hk.daiwacm.com
IT/Technology Hardware (PC Hardware) Christine WANG (886) 2 8758 6249 christine.wang@daiwacm-cathay.com.tw IT/Technology Hardware (Automation); Cement; Consumer Kylie HUANG (886) 2 8758 6248 kylie.huang@daiwacm-cathay.com.tw IT/Technology Hardware (Handsets and Components) Lynn CHENG (886) 2 8758 6253 lynn.cheng@daiwacm-cathay.com.tw IT/Electronics (Semiconductor) INDIA Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com Head of Research; Strategy; Banking/Finance Navin MATTA (91) 22 6622 8411 Automobiles and Components Saurabh MEHTA Capital Goods; Utilities Mihir SHAH FMCG/Consumer Deepak PODDAR Materials Nirmal RAGHAVAN Oil and Gas; Utilities (91) 22 6622 1018 nirmal.raghavan@in.daiwacm.com (91) 22 6622 1009 (91) 22 6622 1020 (91) 22 6622 1016 navin.matta@in.daiwacm.com saurabh.mehta@in.daiwacm.com mihir.shah@in.daiwacm.com deepak.poddar@in.daiwacm.com
Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional) Jibo MA (852) 2848 4489 jibo.ma@hk.daiwacm.com Head of Custom Products Group; Custom Products Group Thomas HO Custom Products Group PHILIPPINES Rommel RODRIGO (63) 2 813 7344 rommel.rodrigo@dbpdaiwacm.com.ph ext 302 Head of Philippines Research; Strategy; Capital Goods; Materials (852) 2773 8716 thomas.ho@hk.daiwacm.com
SINGAPORE Adrian LOH (65) 6499 6548 adrian.loh@sg.daiwacm.com Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) David LUM Property and REITs (65) 6329 2102 david.lum@sg.daiwacm.com
Ramakrishna MARUVADA (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)
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Daiwas Offices
Office / Branch / Affiliate DAIWA SECURITIES GROUP INC HEAD OFFICE Daiwa Securities Trust Company Daiwa Securities Trust and Banking (Europe) PLC (Head Office) Daiwa Europe Trustees (Ireland) Ltd Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. 5 King William Street, London EC4N 7JB, United Kingdom Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (1) 201 333 7300 (81) 3 5555 0661 (1) 201 333 7726 Address Tel Fax
(44) 207 320 8000 (44) 207 410 0129 (353) 1 603 9900 (353) 1 478 3469
Daiwa Capital Markets America Inc Daiwa Capital Markets America Inc. San Francisco Branch Daiwa Capital Markets Europe Limited Daiwa Capital Markets Europe Limited, Frankfurt Branch Daiwa Capital Markets Europe Limited, Paris Representative Office Daiwa Capital Markets Europe Limited, London, Geneva Branch Daiwa Capital Markets Europe Limited, Moscow Representative Office Daiwa Capital Markets Europe Limited, Bahrain Branch Daiwa Capital Markets Hong Kong Limited Daiwa Capital Markets Singapore Limited Daiwa Capital Markets Australia Limited DBP-Daiwa Capital Markets Philippines, Inc Daiwa-Cathay Capital Markets Co Ltd Daiwa Securities Capital Markets Korea Co., Ltd. Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office Daiwa SSC Securities Co Ltd Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office Daiwa Capital Markets India Private Ltd Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office
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(1) 212 612 7000 (1) 415 955 8100
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DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE MARUNOUCHI OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 (81) 3 5202 2021
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(1) 212 612 6100
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29 August 2013
Share price and Daiwa recommendation trend

LG Display: share price and Daiwa recommendation trend
Date 13/04/11 15/06/11 21/07/11
50,000 45,000 40,000 38,000 35,000 30,000 25,000 20,000 15,000
Jul-11 Jul-12 Oct-10 Oct-11 Jan-11 Jun-11 Jan-12 Jun-12 Oct-12 Jan-13 May-11 May-12 May-13 Feb-11 Mar-11 Feb-12 Mar-12 Feb-13 Aug-10 Sep-10 Aug-11 Sep-11 Aug-12 Sep-12 Nov-10 Dec-10 Nov-11 Dec-11 Nov-12 Dec-12 Mar-13 Jun-13 Apr-11 Apr-12 Apr-13 Jul-13
Target price 44,000 38,000 36,000
Rating Outperform Outperform Outperform
Date 28/09/11 20/10/11 30/01/12
Target price 19,000 21,000 27,000
Rating Hold Hold Hold
Date 08/06/12 27/10/12
Target price 23,000 30,000
Rating Hold Hold
47,000 44,000 38,000 36,000 30,000 27,000 21,000 19,000 23,000
Target price (KRW)

Source: Daiwa
Closing Price (KRW)
Samsung Electronics: share price and Daiwa recommendation trend

Date 22/12/10 28/01/11 07/07/11 27/09/11
2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000
Jul-11 Jul-12 Oct-10 Oct-11 Jun-11 Jun-12 Oct-12 Jan-11 Jan-12 May-11 May-12 Jan-13 May-13 Mar-11 Mar-12 Feb-11 Feb-12 Nov-10 Dec-10 Nov-11 Dec-11 Nov-12 Dec-12 Aug-10 Sep-10 Aug-11 Sep-11 Aug-12 Sep-12 Feb-13 Mar-13 Jun-13 Apr-11 Apr-12 Apr-13 Jul-13
Target price 1,100,000 1,200,000 1,100,000 1,000,000
Rating Outperform Outperform Outperform Outperform
Date 28/10/11 06/12/11 27/01/12 21/03/12
Target price 1,100,000 1,200,000 1,300,000 1,600,000
Rating Outperform Outperform Outperform Buy
Date 10/04/12 27/04/12 08/01/13 05/07/13
Target price 1,700,000 1,800,000 2,000,000 1,800,000

2,000,000
Rating Buy Buy Buy Buy
1,800,000 1,700,000 1,600,000
1,800,000
1,080,000 970,000
1,200,000 1,100,000
1,100,000
1,300,000 1,200,000 1,100,000 1,000,000
Target price (KRW)

Source: Daiwa
Closing Price (KRW)
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SFA Engineering: share price and Daiwa recommendation trend

Date 30/09/10 11/11/10 06/01/11 14/02/11 08/04/11
80,000 75,000 70,000 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000
Jul-11 Jul-12 Oct-10 Oct-11 Jan-11 Jun-11 Jan-12 Jun-12 Oct-12 Jan-13 May-11 May-12 May-13 Feb-11 Mar-11 Feb-12 Mar-12 Feb-13 Aug-10 Sep-10 Aug-11 Sep-11 Aug-12 Sep-12 Nov-10 Dec-10 Nov-11 Dec-11 Nov-12 Dec-12 Mar-13 Jun-13 Jun-13 Apr-11 Apr-12 Apr-13 Jul-13
Target price 47,000 52,000 62,000 70,000 75,000
Rating Outperform Outperform Outperform Outperform Outperform
Date 08/11/11 20/01/12 09/02/12 28/06/12 10/08/12
Target price 72,000 68,000 65,000 62,000 52,000
Rating Outperform Outperform Outperform Outperform Outperform
Date 13/11/12 05/12/12 14/02/13 08/05/13 06/08/13
Target price 48,000 57,000 65,000 80,000 72,000
Rating Outperform Buy Buy Buy Buy

80,000
75,000 70,000 62,000
75,000 72,000 68,000 65,000 62,000 57,000 52,000 52,000 48,000 65,000 72,000
47,000 43,000
Target price (KRW)

Source: Daiwa
Closing Price (KRW)
Advanced Process Systems: share price and Daiwa recommendation trend

Date
18,000 16,000 14,000 12,000 10,000 8,000 6,000
Jul-11 Jul-12 Oct-10 Oct-11 Jan-11 Jun-11 Jan-12 Jun-12 Oct-12 May-11 May-12 Jan-13 May-13 Feb-11 Feb-12 Feb-13 Mar-11 Mar-12 Aug-10 Sep-10 Aug-11 Sep-11 Aug-12 Sep-12 Nov-10 Dec-10 Nov-11 Dec-11 Nov-12 Dec-12 Mar-13 Apr-11 Apr-12 Apr-13 Jul-13
Target price
Rating
Date
Target price
Rating
Date
Target price
Rating
Target price (KRW)

Source: Daiwa
Closing Price (KRW)
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29 August 2013
Duksan Hi-Metal: share price and Daiwa recommendation trend

Date Target price Rating Date Target price Rating Date Target price Rating
30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000

Jul-11 Jul-12 Oct-10 Oct-11 Jan-11 Jun-11 Jan-12 Jun-12 Oct-12 Jan-13 May-11 May-12 May-13 Feb-11 Feb-12 Feb-13 Mar-11 Mar-12 Aug-10 Sep-10 Aug-11 Sep-11 Aug-12 Sep-12 Nov-10 Dec-10 Nov-11 Dec-11 Nov-12 Dec-12 Mar-13 Jun-13 Jun-13 Apr-11 Apr-12 Apr-13 Jul-13
Target price (KRW)

Source: Daiwa
Closing Price (KRW)
Soulbrain: share price and Daiwa recommendation trend

Date
55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000
Jul-11 Jul-12 Oct-10 Oct-11 Jan-11 Jun-11 Jan-12 Jun-12 Oct-12 May-11 May-12 Jan-13 May-13 Feb-11 Mar-11 Feb-12 Mar-12 Feb-13 Aug-10 Sep-10 Aug-11 Sep-11 Aug-12 Sep-12 Nov-10 Dec-10 Nov-11 Dec-11 Nov-12 Dec-12 Mar-13 Apr-11 Apr-12 Apr-13 Jul-13
Target price
Rating
Date
Target price
Rating
Date
Target price
Rating
Target price (KRW)

Source: Daiwa
Closing Price (KRW)
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Wonik IPS: share price and Daiwa recommendation trend

Date
12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000
Jul-11 Jul-12 Oct-10 Oct-11 Jan-11 Jun-11 Jan-12 Jun-12 Oct-12 Jan-13 May-11 May-12 May-13 Feb-11 Feb-12 Feb-13 Mar-11 Mar-12 Aug-10 Sep-10 Aug-11 Sep-11 Aug-12 Sep-12 Nov-10 Dec-10 Nov-11 Dec-11 Nov-12 Dec-12 Mar-13 Jun-13 Jun-13 Apr-11 Apr-12 Apr-13 Jul-13
Target price
Rating
Date
Target price
Rating
Date
Target price
Rating
Target price (KRW)

Source: Daiwa
Closing Price (KRW)
LG Electronics: share price and Daiwa recommendation trend

Date 07/01/11 27/04/11 04/07/11
130,000 125,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000
Jul-11 Jul-12 Oct-10 Oct-11 Jan-11 Jun-11 Jan-12 Jun-12 Oct-12 May-11 May-12 Jan-13 May-13 Feb-11 Mar-11 Feb-12 Mar-12 Feb-13 Aug-10 Sep-10 Aug-11 Sep-11 Aug-12 Sep-12 Nov-10 Dec-10 Nov-11 Dec-11 Nov-12 Dec-12 Mar-13 Apr-11 Apr-12 Apr-13 Jul-13
Target price 130,000 120,000 90,000

130,000
Rating Outperform Outperform Hold
Date 10/09/12 11/10/12 20/02/13
Target price 72,000 70,000 75,000
Date 18/04/13 12/06/13 24/07/13
Target price 82,000 78,000 75,000
120,000 110,000
90,000 82,000 72,000 70,000 75,000 78,000 75,000
Target price (KRW)

Source: Daiwa
Closing Price (KRW)
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29 August 2013
Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: REXLot Holdings Limited (555 HK); Huadian Fuxin Energy Corporation Limited (816 HK); Chaowei Power Holdings Limited (951 HK); CITIC Securities Company Limited (6030 HK); China Outfitters Holdings Limited (1146 HK); The People's Insurance Company (Group) of China Limited (1339 HK); China Precious Metal Resources Holdings Company Limited (1194 HK); Jiangnan Group Limited (1366 HK); Blackgold International Holdings Ltd (BGG AU); Tosei Corporation (8923 JP); Modern Land (China) Co. Ltd (1107 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (DHK) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For Investment Banking Relationship, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research. Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analysts views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party. Name of Analyst : Jae H. Lee / Joshua Oh Disclosure of Analysts Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(Daiwa Securities Korea)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets. Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the tender offer agent pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity. Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next six months. "2": the security is expected to outperform the KOSPI by 5-15% over the next six months. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months. "4": the security is expected to underperform the KOSPI by 5-15% over the next six months. "5": the security could underperform the KOSPI by more than 15% over the next six months. Positive means that the analyst expects the sector to outperform the KOSPI over the next six months. Neutral means that the analyst expects the sector to be in-line with the KOSPI over the next six months Negative means that the analyst expects the sector to underperform the KOSPI over the next six months Additional information may be available upon request.
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Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limiteds interest and/or its representatives interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analysts personal views about the securities and issuers that are subject of the Report, and that no part of the analysts compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (FCA) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the Securities), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europes affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113 This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparers views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMAs views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMAs non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For Ownership of Securities information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
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Investment Banking Relationships For Investment Banking Relationships please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For DCMA Market Making please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on Research Analyst Conflicts please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on Research Analyst Certification and Rating System please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association
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Korea OLED Display Sector

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Korea OLED Display Sector

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Information Technology / Korea 29 August 2013

Initiation: catch the next wave in OLED displays