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Large AMOLED gets a cost edge over
LCD
Large AMOLED to start pilot production in 2012 and enter mass production stage in 2013
Samsung Mobile Display (SMD) and LG Display (LGD) should dip their
toes in the large AMOLED waters in 2012. Both SMD and LGD are
working on 8G AMOLED pilot lines, which should be ready for test runs in
2012. We expect the large-size AMOLED camp to be split between SMD’s
p-Si based TFT substrates and LGD’s a-Si based oxide TFT substrates.
SMD should outperform LGD in terms of substrate functionality but LGD
should deliver greater cost savings than its rival. Samsung Electronics
(Samsung) is reportedly developing oxide TFT technologies but the type of
technology, investment scale, or production timing remains uncertain.
Given the early mover’s advantage in the TV market, we expect the mass
production of large AMOLED panels to start from 2013 or 2014 at the
latest.
LCD capex reduction but ongoing AMOLED capex As the recovery of the LCD market has been delayed, LCD panel makers
are rapidly scaling back capex. The global top four LCD players slashed
their 2011F capex by 30%-50% compared to initial plans (35% YoY).
Investments, however, remain intact in AMOLED and high-end LCD panels.
SMD should go ahead with 5.5G capex and AMOLED pilot lines, while
LGD is gearing up to pilot-run large AMOLED panel lines and Taiwanese
panel makers are shifting to oxide TFT lines.
Cost-competitive oxide TFT to lead large AMOLED
As large panels are more cost-sensitive than small to mid segments, the
large AMOLED panel market is likely to adopt a-Si based oxide TFT
technology, not LTPS technology, to gain cost competitiveness. Oxide TFT
technology allows panel makers to diversify product mix because it is
widely applicable from AMOLED to glass-free 3D LCD panels and ultra-
definition LCD panels. LTPS technology should improve and be
commercially viable over the long term. But we believe oxide TFT will lead
the development of large AMOLED because it reduces initial capex
requirements.
Beneficiaries of large AMOLED
The TV display market is worth 10 times more than the mobile display
market in terms of area surface. As such, if equipment or material vendors
can extend their market reach beyond the small to midsize to large
AMOLEDs, we believe they deserve high valuation. Our top-picks are
Cheil Ind and Duksan Hi-Metal, steadfast materials suppliers, and SFA and
ICD whose equipment can be used on large-size panel lines.
Sector Report / Display
Display
August 16, 2011
Overweight (Maintain)
Company Rating TP (KRW)
Cheil Ind. (001300) BUY 140,000
Duksan Hi-Metal(077360) BUY 37,000
SFA Engineering (056190) BUY 80,000
ICD (040910) BUY 98,000
AP Systems (054620) Not rated NA
Advanced Nano Products (121600) BUY 25,000
Contents
1. Display capex fast shifts from LCD to
AMOLED .....................................................1
2. Large AMOLED manufacturing costs by
technology ..................................................3
3. Material and equipment makers have the
most investment appeal ...........................6
Jay Yoo, CFA 82-2-3276-6178 jongwoo.yoo@truefriend.com
Moon Sung Kang 82-2-3276-6235 mskang@truefriend.com
Matthew Yang 82-2-3276-6174 matthew.yang@truefriend.com
Heuiseok Jeong 82-2-3276-6277 heuiseok.j@truefriend.com
Sector report focus
� What is the report about?
• Analyze large AMOLED capex and market developments
• Examine Samsung Mobile Display’s and LG Display’s cost
structure and technologies and forecast their business directions
• Identify beneficiaries from the expansion of the large-size
AMOLED market and recommend investment strategies
� Key assumptions and valuation
LCD capex by major panel makers (USD mn)
2008 2009 2010 2011F 2012F 2010-2011F
growth 2011-2012F
growth
LG Display 2,667 3,209 4,377 2,759 1,810 -37.0% -34.4%
SEC’s LCD 3,896 1,683 4,109 2,858 1,357 -30.4% -52.5%
AUO 3,081 2,004 2,639 1,714 1,086 -35.0% -36.7%
CMI 3,203 1,423 2,671 1,701 1,086 -36.3% -36.1%
Total 12,846 8,319 13,796 9,032 5,339 -34.5% -40.9%
Source: Company data, Korea Investment & Securities
AMOLED capex by major panel makers ( USD mn)
2009 2010 2011F 2012F 2010-2011F
growth 2011-2012F
growth
LG Display 183 642 452 250.0% -29.5%
SEC’s LCD 257 1,833 4,125 6,829 125.0% 65.6%
AUO - - 452 - -
CMI - - 452 - -
Total 257 2,016 4,766 8,186 136.4% 71.8%
Source: Company data, Korea Investment & Securities
� Sensitivity & scenario analysis
• Large AMOLED TV to debut in 2012 and enter the mass
production stage in 2014 at the latest
Area-based demand for mobile panels and TV panels
0
15,000
30,000
45,000
60,000
75,000
90,000
Panel demand f or handset in terms of area Panel demand f or LCD TV in terms of area
(Km2)
11.8 fold increase
Source: Company data, Korea Investment & Securities
� Risks/opportunities
• AMOLED investments should accelerate when the LCD market recovers.
• If the global economic slowdown drags on, the AMOLED
market faces investment delays or retrenchment.
� Sector highlights
1) Oxide TFT to lead the large AMOLED panel market
• AMOLED market winners should be those who can roll out
products at a faster pace and at a cheaper price than rivals.
• It is important to secure cost competitive in the TFT process,
which is a major cost factor to AMOLED production.
• The Oxide-TFT AMOLED method is 34% more cost effective
than p-Si AMOLED and 28% than LCD a-Si method.
• LG Display and Samsung Electronics are likely to covert its
LCD lines to oxide-TFT AMOLED method.
Cost analysis by AMOLED technology
0
100,000
200,000
300,000
400,000
500,000
600,000
TFT-LCD ELA+FMM ELA+LITI Oxide+FMM
Capex per unit area
Cash cost per unit area
Total cost per unit area
(won/m2 per month)
Source: Market data, Korea Investment & Securities
2) Materials and equipment vendors look attractive if they
can serve large AMOLED
• Order momentum may differ by AMOLED equipment maker as
their clients may change process technologies to produce
large AMOLED panels.
• AMOLED material suppliers should be able to easily extend
their market reach beyond small AMOLED to include large
AMOLED.
• Large AMOLED equipment vendors deserve a PER of 15x,
which is the level that LCD equipment vendors traded at
during the expansion of the large LCD panel market in 2004-
2005.
• Materials suppliers’ high valuation levels are justifiable
because large AMOLED panels need material input.
� Peer comparison
• AMOLED materials and equipment vendors are overvalued to
other players in the display value chain.
• Peer group PER band.
Display
1
1. Display capex fast shifts from LCD to AMOLED
As the LCD panel market remains weak, major panel makers continue to scale
back their LCD capex. During the 2Q11 earnings season, the top five panel
producers, which represent 82% of global LCD panel production capacity,
announced their decision to cut annual LCD capex by 30-50% compared to the
initial plans set in early 2011. As such, LCD capex should decline 35% YoY in 2011
and the pace of capex cuts should accelerate in 2012. But, LCD capex
retrenchment should allow market leaders to spend more on large AMOLED.
Samsung Mobile Display (SMD), which is operating a 5.5G AMOLED line is
expected to start 8G investments in 2012. LG Display (LGD) is also looking toward
the mass production of 8G from 2013.
Unlike Chinese counterparts, Korean and Taiwanese panel makers are passive
LCD investors in China. Major foreign makers were in a hurry to obtain capex
approval from the Chinese government in early 2010. But most of these capex
projects are being delayed due to chronic market oversupply. LGD was the first to
clear the regulatory hurdle but is still sitting on its capex plan. Pending the approval
process, LGD has already secured LCD production capacity domestically, which
makes it unnecessary to rush overseas capex. In contrast, Samsung Electronics
(Samsung) needs additional LCD capacity because the company has not invested
in domestic facilities. Nevertheless, Samsung is likely to chew over its Chinese
capex. Taiwanese panel makers also said they do not plan capex in China in the
near term.
LCD capex by major panel makers (USD mn)
2008 2009 2010 2011F 2012F 2010-2011F
growth 2011-2012F
growth
LG Display 2,667 3,209 4,377 2,759 1,810 -37.0% -34.4%
Samsung LCD 3,896 1,683 4,109 2,858 1,357 -30.4% -52.5%
AUO 3,081 2,004 2,639 1,714 1,086 -35.0% -36.7%
CMI 3,203 1,423 2,671 1,701 1,086 -36.3% -36.1%
Total 12,846 8,319 13,796 9,032 5,339 -34.5% -40.9%
Source: Company data, Korea Investment & Securities
Capex is rapidly shifting
from LCD to
large AMOLED; SMD
leads the transition
Korean and Taiwanese
panel makers are
passive investors in
China
Quarterly LCD capex
1000
2000
3000
4000
5000
1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11F
(USD mn)
Capex
retrenchment stage
Source: DisplaySearch, Korea Investment & Securities
Display
2
While LCD capex projects face delays and reductions, the large AMOLED panel
market sees a looming capex race among Korean display makers. As the 8G pilot
line is fully equipped, SMD, which leads the capex race, should be ready for trial
runs. SMD is expected to invest in a mass production line in 1H12 when the pilot
test is complete. LGD scaled back its investments in LCD and small AMOLED but
remains committed to large AMOLED. LGD plans pilot-production of 55” AMOLED
TV panels in 2H12. LGD plans to build 60K-capacity large AMOLED panel lines
from 2013 with a goal to start mass production in 2014. Taiwanese panel makers
have yet to unveil large AMOLED panel capex but are likely to take their cues from
SMD and LGD.
The TV market plays by marketing and cost competitiveness, rather than
technology. As such, AMOLED market winners should be those who can roll out
products at a faster pace and at a cheaper price than rivals. We believe SMD and
Samsung will make a faster advance to the AMOLED market than their rivals.
However, SMD still does not have production lines dedicated to large panels. SMD
cannot switch its LCD line to AMOLED, which erodes its cost competitiveness and
requires changes in production technologies. Given SMD’s weak cost
competitiveness, there is a growing possibility for Samsung to enter the large
AMOLED panel business. Samsung can convert its LCD lines to oxide TFT
AMOLED panels just as LGD does. Samsung can sharpen its competitive edge
quickly when its oxide TFT meets SMD’s organic deposition technologies. LGD
faces growing concerns over the large panel business due to its suspension of
small AMOLED panel business. To compensate for its weaker financing capacity
compared to Samsung, LGD will enhance cost competitiveness through line
conversion from LCD to AMOLED.
Large AMOLED technologies adopted by SMD, Samsung, LGD
TFT-Backplane process Deposition process Encapsulation process
Samsung Electronics Oxide TFT SMS (same as SMD) glass/metal type (same as SMD)
SMD poly-Si TFT SMS glass/metal type
LG Display Oxide TFT White OLED glass/metal type
Korean display makers
in an AMOLED capex
race
Major panel makers’ AMOLED timeline
Note: A2 P3 is expected to exclude TFT-process
Source: Korea Investment & Securities
Who can roll out
AMOLED faster and at a
cheaper price?
Display
3
2. Large AMOLED manufacturing costs by technology
We view oxide TFT technology as the most optimal for large AMOLED panel
production. Although the oxide TFT AMOLED panel is technologically inferior to
LPTS AMOLED, it could be the best choice in terms of cost competitiveness, which
is crucial for the large panels used in TVs. In contrast to LTPS, oxide TFT
technology is compatible with the process and equipment of existing LCD-use TFT
lines, which sharply reduces the initial capex burden for AMOLED panel makers.
The technology has not been applied for mass production and thus the production
yield remains uncertain. However, many panel makers are now preparing for mass
production by applying oxide TFT technology to existing LCD lines and will soon
start the pilot test. In addition to AMOLED panels, high-end glassless 3D and ultra-
definition LCD panels can be built on the oxide TFT technology. As such, the oxide
TFT technology will allow panel makers to diversify product lineups.
Manufacturing of AMOLED panels on the existing LCD TFT line using the oxide
TFT technology will cost 34% less than LTPS AMOLED panels or 28% less than
LCD panels. AMOLED panels’ parts cost 40% less than those for LCD panels but,
to remain competitive in terms of total costs, the capex burden needs to be
contained. The area capex for excimer laser annealing (ELA)-based LTPS
AMOLED panels is four times greater than LCDs’. As it offsets cost reduction on
the parts front, the LTPS AMOLED’s total manufacturing costs surpass LCD
panels’ in the end. In contrast, capex increase is limited for oxide TFT AMOLED
panel production and thus its total costs should be 20% less than LCD panels’. As
such, we believe the oxide TFT technology, which uses the existing LCD TFT line,
will be adopted for large AMOLED panel production in the initial phase.
8G TFT technology by company
Company Technology Mobility Uniformity Stability No. of masks
Temperature Cost Technological
complexity
SMD Advanced
ELA 100cm2/Vs Low Very high 7~10 Low High High
SGC 10~40cm2/Vs High High 4~6 High Low Low
Samsung Electronics
Oxide TFT 9cm2/Vs High High 4~5 Low Low Low
LG Display Oxide TFT 9cm2/Vs High High 4~5 Low Low Low
Source: Company data, Korea Investment & Securities
Oxide TFT technology is
optimal for large
AMOLED panels
Evolution of small and midsized AMOLED panel
technology Evolution of large AMOLED panel technology
Source: Industry data, Korea Investment & Securities Source: Industry data, Korea Investment & Securities
Oxide TFT AMOLED
manufacturing costs
34% less than LTPS
AMOLED or 28% less
than LCD panel
Display
4
Unit costs by technology
AMOLED 8G (Oxide+FMM)
AMOLED 8G (ELA+FMM)
AMOLED 8G (ELA+LITI)
LCD 8G line
Panel size (mm) 2,200x2,500 2,200x2,500 2,200x2,500 2,200x2,500
Capex (W trn) 4 10 11 3
Capacity (1,000 sheets per month) 120 120 120 120
Total capacity for 5yrs by area (1,000m2) 39,600 39,600 39,600 39,600
Capex per area (KRW/m2 per month) 95,833 252,525 282,828 75,758
Unit cash cost (KRW/m2 per month) 204,545 204,545 204,545 340,909
Total cost per area (KRW/m2 per month) 300,379 457,071 487,374 416,667
Note: Assuming useful life of five years Source: Industry data, Korea Investment & Securities
Cost analysis: per area
LCD 8G line AMOLED 8G (Oxide+FMM)
Capex per area (KRW/m2 per month) 75,758 Capex per area (KRW/m2 per month) 95,833
TFT backplane process 40,152 TFT backplane process 20,076
CF & cell/module process 35,606 Deposition (evaporation) & encapsulation 75,758
Cash cost per area (KRW/m2 per month) 340,909 Cash cost per area (KRW/m2 per month) 204,545
Total cost per area (KRW/m2 per month) 416,667 Total cost per area (KRW/m2 per month) 300,379
Note: Key assumptions: 1) LCD cash cost per area: 4.5 times capex per area, 2) OLED line cash cost: 60% of LCD line, 3) Oxide OLED line can use the existing LCD line and thus its TFT backplane process costs 50% less than its LCD counterpart
Source: Industry data, Korea Investment & Securities
Cost analysis: per area
AMOLED 8G (ELA+FMM)
AMOLED 8G (ELA+LITI)
Capex per area (KRW/m2 per month 252,525 Capex per area (KRW/m2 per month) 282,828
TFT backplane process 176,768 TFT backplane process 176,768
Deposition (evaporation) & encapsulation 75,758 Deposition (LITI) & encapsulation 106,061
Cash cost per area (KRW/m2 per month) 204,545 Cash cost per area (KRW/m2 per month) 204,545
Total cost per area (KRW/m2 per month) 457,071 Total cost per area (KRW/m2 per month) 487,374
Note: Key assumptions: 1) OLED line cash cost: 60% of LCD line, 2) LITI deposition: 40% greater than FMM method, 2) LITI deposition method costs 40% more in the deposition process than the FMM method Source: Industry data, Korea Investment & Securities
8G AMOLED (oxide) costs vs. 8G LCD
LCD 8G line AMOLED 8G (Oxide+FMM)
Cost reduction or increase
Capex per area (KRW/m2 per month) 75,758 95,833 26.5%
Cash cost per area (KRW/m2 per month) 340,909 204,545 -40.0%
Total cost per area (KRW/m2 per month) 416,667 300,379 -27.9%
Source: Industry data, Korea Investment & Securities
Oxide-based 8G AMOLED vs. ELA-based 8G AMOLED
AMOLED 8G (ELA+FMM)
AMOLED 8G (Oxide+FMM)
Cost reduction or increase
Capex per area (KRW/m2 per month) 252,525 95,833 -62.1%
TFT backplane process 176,768 20,076 -88.6%
Deposition & encapsulation 75,758 75,758 0.0%
Cash cost per area (KRW/m2 per month) 204,545 204,545 0.0%
Total cost per area (KRW/m2 per month) 457,071 300,379 -34.3%
Source: Industry data, Korea Investment & Securities
Display
5
AMOLED (oxide) costs vs. LCD
0
100,000
200,000
300,000
400,000
500,000
600,000
TFT-LCD ELA+FMM ELA+LITI Oxide+FMM
Capex per area
Total cost per area
Total cost per area
(won/m2 per month)
Source: Industry data, Korea Investment & Securities
LCD panel makers’ profitability has continued to fall hit by slowing LCD TV
shipment growth. Their profitability moves up and down as the industry cycle
changes. Panel makers’ operating margin reached 20% in 2H07, the first upcycle
since they entered the full-scale production of LCD panels used in TVs. The
upcycle revisited the industry in 1H10 but the panel producers’ operating margin
averaged 10%, a sharp decline from the past. To shore up the operating margin,
panel makers are considering starting production of large AMOLED panels earlier
than scheduled as it is more cost competitive than LCD panel production. We
believe there will be intense competition to build presence in the market before the
rivals square off because profitability tends to be higher while the market is still
burgeoning.
Global panel makers’ OP margin
-30%
-20%
-10%
0%
10%
20%
30%
40%
1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11
Note: Global panel makers refer to Samsung Electronics (LCD business), LG Display, AUO and CMI. Source: Company data, Korea Investment & Securities
Panel makers should
speed up large
AMOLED panel
production to shore up
profitability
Display
6
3. Material and equipment makers have the most
investment appeal
Material suppliers are the most appealing among AMOLED-related companies as
they can continue to benefit from the production of both small and large AMOLED
panels. Although there are differences between the materials used in small and
large AMOLED panels, it does not mean material suppliers have to drastically alter
their product mix. Thus, major material suppliers should continue to supply
products used in the production of small and large panels and their supply volume
should grow rapidly as well when the production area expands. In addition,
companies that can supply indium gallium zinc oxide (IGZO) required for oxide-
TFT processing should be able to benefit from the growth of the large AMOLED
panel industry.
The TV panel market is appealing because its area-based demand is at least 12-
times bigger than that of the mobile display market. At present, AMOLED panels
have less than 5% share in the handset display market. Even if all handsets were
to adopt AMOLED panels (4-inch), the mobile display market’s area-based
demand would still be less than the 8% total demand for LCD TV panels that are
expected to sell in 2011. While mobile displays are more expensive than large
displays in terms of costs per unit area and prices, the TV panel market has much
stronger growth potential.
Area-based demand for mobile panels and TV panels
0
15,000
30,000
45,000
60,000
75,000
90,000
Panel demand f or handset in terms of area Panel demand f or LCD TV in terms of area
(Km2)
11.8 fold increase
Source: DisplaySearch, Korea Investment & Securities
As the TV panel market is enormous, the companies that can supply equipment or
materials used in the production of large AMOLED displays will have a wide
window of opportunity to achieve growth. In particular, as new technologies are
required for the production of large panels, the firms that can supply processing
equipment that satisfies such demand will be afforded fresh opportunities. As for
material suppliers, they are able to supply products for small and large panels
without drastically altering their product mix, which justifies their higher valuation
compared to equipment makers. At present, DS Hi-Metal’s stock trades at a PER
of 25x and 15x 2011F and 2012F EPS, respectively. But when we consider the
large panel market’s area-based demand for materials can grow more than 10-
times bigger than that of the mobile market, DS Hi-Metal’s high valuation is fully
justified.
Material suppliers are
the most appealing
Even if all handsets
were to adopt AMOLED
panels, demand for TV
panels would still be 12-
times more than that for
mobile panels
Material suppliers’
ability to satisfy
demand for both small
and large panels may
justify their high
valuation
Display
7
DS Hi-Metal’s PER band Cheil Ind.’s PER band
x 15.0
x 24.0
x 36.0
x 48.0
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11
(KRW)
x 9.0
x 12.0
x 15.0
x 18.0
x 6.0
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Jan-03 May-04 Sep-05 Jan-07 May-08 Sep-09 Jan-11
(KRW)
Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities
SFA’s PER band AP System’s PER band
x 4.0
x 6.0
x 9.0
x 12.0
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Jan-03 May-04 Sep-05 Jan-07 May-08 Sep-09 Jan-11
(KRW)
x 5.0
x 9.0
x 13.0
x 17.0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
Jan-03 May-04 Sep-05 Jan-07 May-08 Sep-09 Jan-11
(KRW)
Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities
SNU’s PER band Display equipment makers’ PER band
x 8.0
x 11.0
x 14.0
x 17.0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
(KRW)
x6.0
x9.0
x12.0
x15.0
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Dec-01 Mar-03 Jun-04 Sep-05 Dec-06 Mar-08 Jun-09 Sep-10
(won bn)
Source: Company data, Korea Investment & Securities
Note: Display equipment makers are SFA, DMS, KC Tech, Jusung Engineering, Top Engineering Source: Company data, Korea Investment & Securities
Display
8
The technology switch at panel makers presents both opportunities and risks to
equipment suppliers. SMD’s technological changes at 5.5G fabs where capacity
additions are taking place have shed a positive light on some, but not all. SMD
plans to adopt the LITI (laser-induced thermal imaging) deposition method on its
5.5G P3 lines in parallel with the conventional fine-metal mask (FMM) method.
This offers fewer chances of orders for FMM-based equipment makers such as
SFA and SNU Precision but more opportunities for AP Systems, a supplier of laser
deposition equipment that is key to the LITI process. SFA has the potential to
offset the negative effect as it also produces equipment necessary for the LITI
process. Like this, technological changes made by panel makers will continue to
be a mixed bag of pros and cons for vendors. If the technology norm shifts from
LTPS to oxide TFT in the TFT backplane process with the heaviest capex burden
across the entire AMOLED panel process, the equipment order momentum should
vary from company to company.
Among equipment vendors, we draw attention to producers of the oxide TFT
process equipment as the process is likely to go mainstream in the large AMOLED
panel market. The necessity of the new processes in addition to the TFT-LCD
substrate manufacturing underlines the need for new equipment such as high-
density plasma etchers or heat treatment equipment. Accordingly, suppliers of
such equipment are worthy of attention.
LCD equipment makers’ PER rose to 15x during 2004-2005 when capex to
produce 40-inch or larger LCD TV panels was underway. We believe the PER of
vendors for large AMOLED panels has the potential to reach the same level as
capex for large AMOLED TV panels should start from 2012 and this will, in turn,
give a boost to equipment makers. As such, we applied a PER of 15x to SFA and
ICD that serve large panel makers.
AMOLED technology by generation and process
5.5G (1,500X1,300) A2 P1-P2 5.5G (1,500X1,300) A2 P3 5.5G (1,500X1,300) A3 8G V1
1) 24K (P1)+40K (P2) 32K 100K 8K
2) ELA (two-scan) ELA (two-scan) ELA (one-scan) Advanced ELA
SGC
A-SPC
Oxide (IGZO)
3) FMM (horizontal, cut a mother glass into 4 units)
LITI (cut mother glass into 4 units, for red, green materials)
LITI (mother glass, for red, green materials)
SMS (horizontal, cut a mother glass into 6 units)
FMM (horizontal, cut a mother glass into 4 units for blue and other materials)
FMM (vertical, mother glass for blue and other materials)
4) Glass-type Glass-type Metal-type Glass-type
Thin-film-type Thin-film-type Metal-type
Note: 1) capacity per month, 2) TFT backplane process, 3) deposition process, 4) encapsulation process
Source: Industry data, Korea Investment & Securities
Among equipment
makers, those with
steady order flows are
the most attractive
Producers of oxide TFT
process equipment
merit attention given the
high applicability to
larger panels
LCD equipment makers’
PER peaked at 15x in
2004
Display
9
Oxide flow chart (backplane manufacturing)
Source: Korea Investment & Securities
LTPS flow chart (backplane manufacturing)
Source: Korea Investment & Securities
Display
10
AMOLED supply chain
Product Company type Company
AMOLED material
HTL Domestic DS Hi-Metal, Doosan Corp. Electro-Materials, Cheil Ind.
Foreign NSC (Japan)*, Idemitsu Kosan (Japan), Hodogaya (Japan), Merck (Germany), Toyo Ink (Japan), Kodak (US)
HIL Domestic LG Chem., DS Hi-Metal
Foreign NSC(Japan)*, Idemitsu Kosan (Japan), Hodogaya (Japan)
ETL Domestic LG Chem., Cheil Ind.
Foreign NSC (Japan)*, Idemitsu Kosan (Japan), Merck (Germany), Toyo Ink (Japan), DuPont (US)
EIL Domestic LG Chem
Foreign NSC (Japan)*, Cerac (US)*, DuPont (US)
EML (red) Domestic Dow Chemical*
Foreign NSC (Japan)*, Idemitsu Kosan (Japan), Merck (Germany), Kodak (US), DuPont (US)
EML (green) Domestic Doosan Corp. Electro-Materials
Foreign NSC (Japan)*, Idemitsu Kosan (Japan), Eray (Taiwan)*
EML (blue) Domestic SFC*, Dongwoo Fine-Chem*, Daejoo Electronic Materials
Foreign Idemistus Kosan (Japan), Merck (Germany), Kodak (US), DuPont (US)
ITO Domestic Advanced Nano Products
Foreign -
Shadow mask Domestic -
Foreign DNP (Japan), Mitani (Japan)*
Desiccant Domestic -
Foreign Dynic (Japan)*, Gore-tex (US)*, Saes Getters (Italy)
Sealants Domestic -
Foreign Nagase (Japan), Kyoritsu (Japan)*
Encapsulant
Domestic Nanonix*
Foreign NSG (Japan)*
Donor film for laser evaporation Domestic Cheil Ind.
Foreign Kodak (US)
AMOLED equipment makers
ELA Domestic AP System
Foreign -
FMM deposition Domestic SFA, SNU, Avaco, Dong A Eltek, Jusung Engineering, Top Engineering
Foreign Tokki (Japan)*, Hitachi (Japan)*, ULVAC (Japan)
Laser deposition Domestic AP System
Foreign -
Encapsulation Domestic AP System, SFA, SNU, LTS, Avaco, Jusung Engineering
Foreign Miwa MFG (Japan)*, Vitex (US)*, Lantechnical (Japan)*
Etchers Domestic ICD
Foreign Y.A.C. (Japan)*
Sputtering equipment Domestic Avaco
Foreign ULVAC (Japan)
AMOLED material makers
AMOLED polarizer Domestic Cheil Ind.
Foreign Shenzen Sunnypol Optoelecronic (China), Optimax (Taiwan)
AMOLED donor film Domestic Cheil Ind.
Foreign Kodak (US)
AMOLED driver-IC Domestic LDT, Clover Hitech, Silicon Works, Nepes
Foreign -
AMOLED bezel Domestic Sangsin EDP
Foreign -
Note: Non-listed companies are marked with * Source: Industry data, Korea Investment & Securities
Cheil Ind. (001300) ......................................................................................................................................................................12
Duksan Hi-Metal (077360) ...................................................................................................................................................15
SFA Engineering (056190) ..................................................................................................................................................18
ICD (040910) ........................................................................................................................................................................................21
AP Systems (054620) ................................................................................................................................................................24
Advanced Nano Products (121600) .........................................................................................................................25
Company
Display
12
Cheil Ind. (001300) BUY (Maintain), TP: W140,000 (Maintain)
Hopeful 4Q11 Potential dominant supplier of large AMOLED materials to Samsung: Cheil Ind. (Cheil) should become a dominant supplier of large AMOLED materials to Samsung. Although development and production of materials for large AMOLED panels are behind schedule, we remain confident that the company will ultimately secure a dominant supply share at Samsung. A bright spot is that the company has started developing films suitable for the LITI (laser-induced thermal imaging) method in line with the adoption of the LITI technique. Accordingly, its product portfolio of AMOLED materials is growing more diverse. As Cheil’s forte lies in large panels rather than mobile panels, panel makers’ ongoing shift to large AMOLED panel production hints at more business opportunities going forward. AMOLED materials supply to kick off in Sep upon the completion of mass production lines: The last phase of Cheil’s AMOLED material development is testing the prototypes produced at the mass production lines set for completion in Sep. After Sep, products such as electron transport layer (ETL), pixel defining layer (PDL) and hole transport layer (HTL) should come on stream, in that order. Moreover, as the supply dates fall within a similar timeframe as SMD’s ramp-up of the 5.5G P2 and P3 lines and V1 (8G pilot) lines, shipments should fast increase after decisions are made to supply the products. In 2012, Cheil will also supply one or two new AMOLED materials, polarizer and donor films, which should complete the product mix of 7-8 AMOLED materials.
TV polarizer film business to normalize: We believe the TV polarizer film
business will normalize because its production yield improved to the normal level
at end-2Q11 and shipment volumes are expected to increase. It is also positive
that Cheil’s organization has stabilized with the completion of the post-merger
integration process after taking over its subsidiary Ace Digitech. Although new
product development and market share growth have been slower than our
expectations due to the lackluster LCD market, top-line growth should gain
momentum in 2H11 or 2012. We estimate polarizer film sales at W660bn in 2011F
but the figure should jump to W1.2trn in 2012F. The bottom line is unlikely to turn
profitable in 2011 but the operating margin should climb to 8% in 2012F.
Maintain BUY and TP of W140,000: The stock lost 19% since early Aug due to
disappointing earnings and the stock market crash. The stock trades at the 2011F
PER of 15x and 2012F PER of 11x, the lowest level since Oct 2009. The supply of
new AMOLED materials has been delayed but the start is a matter of when, not if.
We believe the recent correction offers a long-awaited entry point. We maintain
BUY and our TP of W140,000 (target PE 18x the 2011F-2012F average EPS). The
stock has 44% upside. OP should skyrocket 101% QoQ in 3Q11F. Despite
lingering uncertainties over the global economy and the demand side, we believe
Cheil looks more attractive than other IT plays because of its high earnings stability.
August 12, 2011 / W97,500 won / Mkt cap: USD4,520.2mn, KRW4,520.2bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2009A 4,261 264 155 127 2,654 (18.5) 395 21.3 8.0 1.4 7.1
2010A 5,019 334 314 259 5,395 103.3 468 20.6 12.3 2.0 10.9
2011F 5,982 384 369 316 6,448 19.5 540 15.1 9.4 1.7 10.9
2012F 7,124 573 558 463 9,172 42.2 767 10.6 6.6 1.5 14.3
2013F 8,549 691 686 569 11,269 22.9 915 8.7 5.6 1.5 16.4
Jay Yoo, CFA 82-2-3276-6178 jongwoo.yoo@truefriend.com
Heuiseok Jeong 82-2-3276-6277
heuiseok.j@truefriend.com
Display
13
Quarterly earnings estimates (W bn, %)
2008 2009 1Q10 2Q10 3Q10 4Q10 2010 1Q11 2Q11P 3Q11F 4Q11F 2011F 2012F
Sales 3,728 4,261 1,164 1,309 1,234 1,311 5,019 1,400 1,481 1,519 1,583 5,982 7,124
Electronic materials 815 1,209 321 367 370 351 1,410 382 402 470 488 1,742 2,649
Chemicals 1,774 1,827 519 592 568 551 2,231 621 650 694 675 2,641 2,904
Fashion 1,139 1,142 311 325 273 390 1,298 377 397 355 420 1,547 1,571
CGS 2,610 3,018 820 922 880 913 3,534 998 1,105 1,137 1,183 4,424 5,202
% of sales 70.0 70.8 70.4 70.4 71.3 69.6 70.4 71.3 74.7 74.9 74.7 74.0 73.0
SG&A 878 980 267 285 258 341 1150 299 313 256 306 1174 1,349
% of sales 23.5 23.0 22.9 21.7 20.9 26.0 22.9 21.3 21.1 16.9 19.4 19.6 18.9
Operating profit 240 264 77 103 97 57 334 103 63 126 93 384 573
Electronic materials 95 95 30 41 42 19 131 36 27 81 42 186 290
Chemicals 91 124 23 49 43 27 142 35 23 31 30 119 189
Fashion 47 52 25 13 12 13 63 29 11 14 21 75 94
Operating margin (%) 6.4 6.2 6.7 7.9 7.8 4.4 6.7 7.3 4.2 8.3 5.9 6.4 8.0
Electronic materials 11.7 7.8 9.4 11.1 11.2 5.3 9.3 9.5 6.6 17.2 8.6 10.7 11.0
Chemicals 5.1 6.8 4.5 8.2 7.6 4.8 6.3 5.7 3.5 4.5 4.5 4.5 6.5
Fashion 4.1 4.6 7.9 3.9 4.4 3.4 4.8 7.6 2.8 4.0 5.0 4.8 6.0
EBT 191 155 80 101 79 54 314 110 55 118 86 369 558
EBT margin (%) 5.1 3.6 6.9 7.7 6.4 4.1 6.3 7.8 3.7 7.8 5.4 6.2 7.8
Net profit 157 127 66 83 65 45 259 92 55 98 71 316 463
Net margin (%) 4.2 3.0 5.7 6.3 5.3 3.4 5.2 6.6 3.7 6.5 4.5 5.3 6.5
Note: K-GAAP stand-alone until 2010 and K-IFRS consolidated from 2011. Source: Company data, Korea Investment & Securities
Display
14
Balance Sheet
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Current assets 1,146 1,200 1,360 1,620 1,944
Cash & cash equivalent 80 18 22 26 31
Accounts receivable 444 461 479 570 684
Inventory 488 562 670 798 958
Fixed assets 1,972 2,815 3,312 3,951 4,649
Investments 812 1,573 1,730 2,061 2,473
Tangible assets 988 1,104 1,417 1,694 1,941
Intangible assets 61 29 35 42 50
Total assets 3,119 4,015 4,672 5,570 6,593
Current liabilities 607 809 1,125 1,521 2,409
Accounts payable 292 344 410 488 586
Short-term borrowing 50 0 0 0 0
Current portion of LT debt 62 191 191 191 191
Long-term debt 542 444 510 588 685
Debentures 292 100 100 100 100
Long-term borrowings 90 3 3 3 3
Total liabilities 1,149 1,253 1,634 2,109 3,093
Paid-in capital 250 250 262 262 262
Capital surplus 431 429 417 417 417
Capital adjustments (55) (51) (51) (51) (51)
Retained earnings 926 1,149 1,425 1,850 2,379
Shareholders' equity 1,970 2,761 3,038 3,462 3,499
Income Statement
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Sales 4,261 5,019 5,982 7,124 8,549
Gross profit 1,244 1,484 1,558 1,922 2,306
SG&A expense 980 1,150 1,174 1,349 1,616
Operating profit 264 334 384 573 691
Non-op. profit 179 176 80 80 83
Interest income 6 2 1 1 1
FX gains 113 74 15 59 59
Equity gains 26 42 42 42 42
Non-op. expense 287 196 95 95 88
Interest expense 41 27 27 27 20
FX losses 116 75 15 60 60
Equity losses 17 20 5 6 6
Earnings before tax 155 314 369 558 686
Income taxes 28 56 53 95 117
Profit from discontinued 0 0 0 0 0
Net profit 127 259 316 463 569
EBITDA 395 468 540 767 915
Key Financial Data
Fiscal year ending Dec. 2009A 2010A 2011F 2012F 2013F
per share data (won)
EPS 2,654 5,395 6,448 9,172 11,269
BPS 39,287 55,682 58,257 66,216 66,774
DPS 750 750 750 750 750
SPS 85,222 104,656 122,165 141,013 169,216
Growth (%)
Sales growth 14.3 17.8 19.2 19.1 20.0
OP growth 9.9 26.7 15.0 49.2 20.5
NP growth (19.4) 103.7 22.0 46.8 22.9
EPS growth (18.5) 103.3 19.5 42.2 22.9
EBITDA growth 11.7 18.6 15.4 42.1 19.3
Profitability (%)
OP margin 6.2 6.7 6.4 8.0 8.1
NP margin 3.0 5.2 5.3 6.5 6.7
EBITDA margin 9.3 9.3 9.0 10.8 10.7
ROA 4.3 7.3 7.3 9.0 9.4
ROE 7.1 10.9 10.9 14.3 16.4
Dividend yield 1.3 0.7 0.8 0.8 0.8
Stability
Net debt (W bn) 403 274 270 266 260
Int. coverage (x) 6.4 12.5 14.5 21.6 34.6
D/E ratio (%) 25.1 10.6 9.6 8.5 8.4
Valuation (x)
PER 21.3 20.6 15.1 10.6 8.7
PBR 1.4 2.0 1.7 1.5 1.5
PSR 0.7 1.1 0.8 0.7 0.6
EV/EBITDA 8.0 12.3 9.4 6.6 5.6
Cash Flow
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
C/F from operating 457 448 602 773 1,340
Net profits 127 259 316 463 569
Depreciation 112 126 150 187 217
Amortization 19 8 6 7 8
Net incr. in W/C 72 (11) 149 131 559
Others 127 66 (18) (15) (13)
C/F from investing (170) (274) (619) (800) (1,383)
Capex (124) (248) (470) (470) (470)
Decr. in fixed assets 7 1 1 1 1
Net incr. in current assets (8) 16 (0) (0) (0)
Incr. in investment (9) (21) (118) (293) (867)
Others (36) (22) (32) (38) (47)
C/F from financing (224) (235) 20 31 48
Incr. in equity 0 0 0 0 0
Incr. in debts (189) (200) (0) (1) (1)
Dividends (36) (36) (36) (39) (39)
Others 1 1 57 71 89
Increase in cash 64 (61) 3 4 5
Display
15
Duksan Hi-Metal (077360) BUY (Maintain), TP: W37,000 (Maintain)
OLED materials to keep thriving backed by larger AMOLED
Ample upside despite demanding valuation: Duksan Hi-Metal (Duksan) currently trades at a high 2011F PE 25x, which we view as tenable on the back of strong growth potential for its AMOLED materials business. We have an upbeat outlook due to the following. 1) As AMOLED panels get larger, the materials market will fast expand. 2) Given rivals’ delayed entry to the HTL (hole transport layers) market, Duksan should be able to hold on to its large share at Samsung Mobile Display (SMD) after 2011. We peg the 2011F EPS at W1,056, up 116% YoY, and expect a decent rise of 67% for 2012F. We maintain BUY and a TP of W37,000 that equals a target PE 25x the 2011-2012F average EPS W1,412 (2012F earnings growth potential priced in). We applied the current PE 25x as the target multiple given the company’s good earnings visibility. Larger AMOLED spurs materials market growth: As AMOLED formats get larger, we expect the OLED materials market to grow rapidly as well. An 8G AMOLED substrate requires OLED materials 2.8-fold more than a 5.5G substrate. As AMOLED panel makers make full-fledged investment in 8G lines from 2012, the HTL market’s growth would get into high gear at the same time. In particular, Duksan can offer a steady supply of OLED materials regardless of possible technology changes to the deposition process at 5.5G and 8G lines. Unlike AMOLED equipment vendors whose orders momentum can slow with the technology shift, materials suppliers including Duksan face limited risk to sales.
Large presence at SMD to remain intact: Duksan is an exclusive supplier of HTL
to SMD. There is concern that it will face a threat from emerging rivals but we
believe chances of its vendor share shrinking are remote. SMD’s 5.5G phase 2 line
ready to be operational in 2H11 will use the same materials as phase 1 and thus
chances are good that it will continue to use Duksan’s products. It is difficult for a
manufacturer to change a supplier of materials used at the current production line.
Given this, Duksan being equipped with the most stable mass-production lines
should keep the upper hand over rivals. The company’s vendor share could shrink
from the current level when large-size AMOLED panels are made at the phase 3
line as major rivals will pose competitive threats at that time. However, its supply
volume would expand thanks to larger panels. We estimate OLED materials sales
to jump 119% YoY to W74.1bn in 2011F and gain 114% YoY to W158.3bn in 2012F.
August 12, 2011 / W26,700 won / Mkt cap: USD727.7mn, KRW727.7bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2009A 32 5 6 5 251 NM 8 52.0 35.4 5.1 8.7
2010A 72 13 13 10 489 94.8 22 41.5 22.6 6.7 12.4
2011F 125 33 34 31 1,055 115.7 43 25.3 17.7 6.7 28.4
2012F 213 56 57 52 1,766 67.4 67 15.1 11.0 4.7 34.4
2013F 261 66 67 61 2,084 18.0 78 12.8 9.1 3.5 29.5
Jay Yoo, CFA 82-2-3276-6178 jongwoo.yoo@truefriend.com
Heuiseok Jeong 82-2-3276-6277
heuiseok.j@truefriend.com
Display
16
OLED materials sales
0
10
20
30
40
50
1Q10 3Q10 1Q11 3Q11F 1Q12F 3Q12F
(won bn)
Ramp-up of A2 P1 at
8G line
Ramp-up of A2
P2
Ramp-up of A2
P3 and A3
Source: Company data, Korea Investment & Securities
Quarterly earnings estimates (W bn)
2009 2010 1Q11 2Q11F 3Q11F 4Q11F 2011F 1Q12F 2Q12F 3Q12F 4Q12F 2012F
Sales 32.1 72.5 23.3 29.9 34.3 37.9 125.3 46.0 53.0 53.5 60.1 212.6
OLED 18.1 33.9 10.7 16.9 21.3 25.2 74.1 33.3 39.7 39.4 45.9 158.3
Semiconductor materials 25.7 38.6 12.6 13.0 13.1 12.6 51.3 12.7 13.4 14.1 14.2 54.3
COGS 19.7 42.7 14.8 18.2 20.8 23.1 76.9 28.0 32.4 32.9 37.3 130.7
(% of sales) 61.3% 59.0% 63.5% 61.1% 60.7% 60.8% 61.3% 60.9% 61.2% 61.5% 62.1% 61.5%
OP 4.7 13.1 5.6 8.0 9.4 10.3 33.3 12.4 14.2 14.1 15.5 56.3
OP margin (%) 14.6% 18.1% 24.3% 26.9% 27.3% 27.2% 26.6% 27.0% 26.7% 26.4% 25.9% 26.5%
EBT 5.7 12.5 5.8 8.1 9.5 10.4 33.8 12.5 14.3 14.2 15.6 56.6
EBT margin (%) 17.7% 17.3% 24.9% 27.3% 27.6% 27.4% 27.0% 27.2% 26.9% 26.6% 26.0% 26.6%
NP 4.7 10.1 5.3 7.5 8.7 9.5 31.0 11.5 13.1 13.0 14.3 51.9
NP margin (%) 14.7% 14.0% 22.9% 25.0% 25.3% 25.2% 24.7% 24.9% 24.7% 24.4% 23.8% 24.4%
Note: 1) Accounting changes from K-GAAP to K-IFRS as of 2011. 2) OLED sales figures until 2009 are based on Ludis prior to the merger with Duksan Hi-Metal. Source: Company data, Korea Investment & Securities
Display
17
Balance Sheet
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Current assets 26 22 47 90 136
Cash & cash equivalent 14 5 19 43 76
Accounts receivable 4 7 12 21 26
Inventory 4 7 12 20 26
Fixed assets 66 90 103 121 135
Investments 15 16 19 22 25
Tangible assets 18 44 52 60 69
Intangible assets 30 27 29 33 35
Total assets 92 112 150 211 271
Current liabilities 16 11 13 19 15
Accounts payable 1 3 4 8 10
Short-term borrowing 6 2 0 0 0
Current portion of LT debt 0 3 5 8 5
Long-term debt 6 7 12 15 18
Debentures 3 1 1 2 2
Long-term borrowings 2 6 10 12 14
Total liabilities 21 18 25 34 33
Paid-in capital 5 6 6 6 6
Capital surplus 68 76 76 76 76
Capital adjustments (20) (18) (18) (18) (18)
Retained earnings 21 31 62 114 175
Shareholders' equity 70 93 125 177 238
Income Statement
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Sales 32 72 125 213 261
Gross profit 12 30 48 82 97
SG&A expense 8 17 15 26 31
Operating profit 5 13 33 56 66
Non-op. profit 5 2 2 2 2
Interest income 1 0 0 0 1
FX gains 1 0 0 0 1
Equity gains 2 0 0 0 0
Non-op. expense 4 2 1 1 1
Interest expense 2 1 0 0 0
FX losses 0 1 0 0 0
Equity losses 0 0 0 0 0
Earnings before tax 6 13 34 57 67
Income taxes 1 2 3 5 6
Profit from discontinued 0 0 0 0 0
Net profit 5 10 31 52 61
EBITDA 8 22 43 67 78
Key Financial Data
Fiscal year ending Dec. 2009A 2010A 2011F 2012F 2013F
per share data (won)
EPS 251 489 1,055 1,766 2,084
BPS 2,558 3,048 3,993 5,628 7,639
DPS 0 0 0 0 0
SPS 1,702 3,494 4,264 7,233 8,864
Growth (%)
Sales growth 41.8 125.5 73.0 69.6 22.5
OP growth (4.4) 179.2 154.1 68.7 17.5
NP growth NM 114.0 205.6 67.4 18.0
EPS growth NM 94.8 115.7 67.4 18.0
EBITDA growth 37.1 164.3 98.4 56.0 16.4
Profitability (%)
OP margin 14.6 18.1 26.6 26.5 25.4
NP margin 14.7 14.0 24.7 24.4 23.5
EBITDA margin 25.5 29.9 34.3 31.6 30.0
ROA 6.1 10.0 23.7 28.8 25.4
ROE 8.7 12.4 28.4 34.4 29.5
Dividend yield 0.0 0.0 0.0 0.0 0.0
Stability
Net debt (W bn) (7) 6 (3) (22) (56)
Int. coverage (x) 3.1 19.1 114.1 153.6 184.1
D/E ratio (%) 15.8 11.8 12.7 11.8 8.5
Valuation (x)
PER 52.0 41.5 25.3 15.1 12.8
PBR 5.1 6.7 6.7 4.7 3.5
PSR 7.7 5.8 6.3 3.7 3.0
EV/EBITDA 35.4 22.6 17.7 11.0 9.1
Cash Flow
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
C/F from operating 10 10 30 47 59
Net profits 5 10 31 52 61
Depreciation 1 2 3 4 4
Amortization 2 6 6 7 8
Net incr. in W/C 4 (12) (10) (16) (14)
Others (2) 4 (0) 0 (0)
C/F from investing (10) (28) (22) (28) (26)
Capex (7) (28) (11) (12) (13)
Decr. in fixed assets 0 0 0 0 0
Net incr. in current assets (3) 3 (0) (0) (0)
Incr. in investment 1 1 (2) (3) (1)
Others (0) (4) (9) (13) (11)
C/F from financing 0 9 6 5 (0)
Incr. in equity 0 6 0 0 0
Incr. in debts (12) 2 6 5 (0)
Dividends 0 0 0 0 0
Others 12 0 0 0 0
Increase in cash 0 (9) 14 24 33
Display
18
SFA Engineering (056190) BUY (Maintain), TP: W80,000 (Maintain)
Large AMOLED capex projects need SFA
Changes in TFT backplane and deposition technology to have limited effect: SFA Engineering’s (SFA) wide product mix gives the equipment maker a sharper competitive edge over domestic rivals. Moreover, SFA is capable of adapting to the technological changes that occur when panel makers shift their capex from LCD to AMOLED or when the production of small and midsize panels expands to include large panels. In 2011, SFA’s overall new orders for equipment are expected to reach W834.2bn, of which LCD-related equipment should be a mere W200bn. Given that SFA’s AMOLED-related equipment orders already amount to W400bn, the company boasts strong product competitiveness. To supply deposition equipment to A3 line: In 2H11, SFA will likely receive new orders worth W200bn from SMD, which is expanding the deposition process for its A2 lines. In addition to the existing orders for logistic systems, the company should supply new equipment required for the newly implemented laser-induced thermal imaging (LITI) method. SFA was preparing to supply vertical deposition equipment for 5.5G lines but technological changes have delayed their application in A3 lines. Instead, SFA is now supplying blank deposition equipment and donor handlers, which minimizes the effect caused by the supply delay of vertical deposition equipment. At present, SFA is making plans to supply vertical deposition equipment for the FMM method used in A3 lines in 2012. Equipment for 8G oxide-TFT and deposition methods: SFA is also preparing equipment for the oxide-TFT method when it is adopted for 8G AMOLEDs. As for front-end equipment, the company already has experience with supplying plasma-enhanced chemical vapor deposition (PECVD) equipment and it is currently developing equipment for the oxide deposition process. In addition to the vertical deposition equipment for the FMM method currently in development, SFA is developing equipment for the SMS method that could be applied to 8G AMOLEDs. Although it is premature to say whether every piece of equipment will be successfully developed and supplied, the company faces limited risk from failing to supply equipment due to its a wide product mix. Maintain BUY and TP of W80,000: We maintain BUY and our TP of W80,000 on SFA, which has been shifting its sales portion from LCD to AMOLED equipment and from logistics systems to front-end equipment. We derived the TP by applying the AMOLED equipment suppliers’ target PE of 15x the 2011F and 2012F average EPS. SFA should see its overall new orders for equipment used in AMOLED panel production jump from the mid-40% level in 2011 to more than 70% in 2012 when new orders flow in from SMD’s A3 lines and 8G lines. Even if Samsung Electronics starts investing in the oxide-TFT method for 8G AMOLEDs, it would not greatly affect SFA’s equipment orders.
August 12, 2011 / W55,500 won / Mkt cap: USD923.9mn, KRW923.9bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2008A 431 54 69 50 5,570 20.7 58 9.9 6.5 2.1 23.4
2009A 307 15 25 18 2,038 (63.4) 20 16.4 9.9 1.2 8.0
2010A 423 38 50 39 2,192 7.6 42 22.4 16.1 3.1 16.0
2011F 790 103 106 85 4,731 115.8 108 11.7 7.5 2.8 28.1
2012F 975 136 139 111 6,206 31.2 141 8.9 5.5 2.2 28.5
Jay Yoo, CFA 82-2-3276-6178 jongwoo.yoo@truefriend.com
Heuiseok Jeong 82-2-3276-6277
heuiseok.j@truefriend.com
Display
19
Quarterly earnings estimates (W bn)
2008 2009 1Q10 2Q10 3Q10 4Q10 2010 1Q11 2Q12F 3Q11F 4Q11F 2011F
Sales 430.8 307.1 48.8 91.8 98.9 183.5 423.0 134.1 204.9 213.5 237.3 789.8
Growth (% YoY) 40.4 (28.7) 3.9 45.8 32.5 49.8 37.8 174.8 123.2 115.9 29.3 86.7
COGS 355.1 270.4 41.0 77.2 85.2 149.4 352.8 109.0 170.0 175.3 192.2 646.5
Operating profit 53.5 15.2 1.5 7.1 5.6 23.6 37.8 17.3 25.0 27.2 33.6 103.1
OP margin (%) 12.4 4.9 3.0 7.7 5.7 12.9 8.9 12.9 12.2 12.7 14.2 13.1
Non-OP gains 14.9 9.9 3.1 0.0 3.9 5.3 12.3 0.7 0.8 0.8 0.8 3.1
EBT 68.5 25.1 4.5 7.1 9.5 28.9 50.0 18.1 25.8 28.0 34.4 106.2
Net profit 49.8 18.0 3.5 5.5 7.4 22.9 39.4 14.4 20.6 22.4 27.5 84.9
Net margin (%) 11.6 5.9 7.2 6.0 7.5 12.5 9.3 10.7 10.1 10.5 11.6 10.8
New orders 409.5 254.4 143.0 197.0 240.7 158.4 743.4 114.2 210.0 240.0 270.0 834.2
Backlog 228.7 176.0 270.2 379.3 521.5 496.4 496.4 235.4 240.5 267.0 299.7 540.8
Note: Figures up to FY2010 based on K-GAAP; Figures from FY2011 and onward based on K-IFRS Source: Company data, Korea Investment & Securities
Display
20
Balance Sheet
Fiscal year ending Dec. (W bn) 2008A 2009A 2010A 2011F 2012F
Current assets 274 167 494 361 445
Cash & cash equivalent 36 26 66 63 78
Accounts receivable 46 38 86 99 122
Inventory 109 27 216 69 85
Fixed assets 143 143 136 161 184
Investments 43 44 33 42 52
Tangible assets 90 91 94 104 113
Intangible assets 0 0 1 0 0
Total assets 417 310 630 521 629
Current liabilities 178 69 357 150 148
Accounts payable 41 30 104 78 96
Short-term borrowing 0 0 0 0 0
Current portion of LT debt 0 0 0 0 0
Long-term debt 16 12 9 31 38
Debentures 0 0 0 0 0
Long-term borrowings 0 0 0 0 0
Total liabilities 194 81 366 181 187
Paid-in capital 5 5 9 9 9
Capital surplus 25 25 20 20 20
Capital adjustments (17) (17) (17) (17) (17)
Retained earnings 210 216 252 328 430
Shareholders' equity 223 228 264 340 442
Income Statement
Fiscal year ending Dec. (W bn) 2008A 2009A 2010A 2011F 2012F
Sales 431 307 423 790 975
Gross profit 76 37 70 143 180
SG&A expense 22 22 32 42 44
Operating profit 54 15 38 103 136
Non-op. profit 22 15 17 4 4
Interest income 8 5 7 9 9
FX gains 6 1 1 1 1
Equity gains 2 3 3 3 3
Non-op. expense 7 5 5 1 1
Interest expense 0 0 0 0 0
FX losses 1 3 3 3 3
Equity losses 1 2 2 2 2
Earnings before tax 69 25 50 106 139
Income taxes 19 7 11 21 28
Profit from discontinued 0 0 0 0 0
Net profit 50 18 39 85 111
EBITDA 58 20 42 108 141
Key Financial Data
Fiscal year ending Dec. 2008A 2009A 2010A 2011F 2012F
per share data (won)
EPS 5,570 2,038 2,192 4,731 6,206
BPS 26,302 26,916 15,615 19,877 25,583
DPS 1,400 400 500 500 500
SPS 47,291 33,707 23,559 43,991 54,304
Growth (%)
Sales growth 40.4 (28.7) 37.7 86.7 23.4
OP growth 21.4 (71.6) 148.6 173.0 32.0
NP growth 18.4 (63.8) 118.3 115.8 31.2
EPS growth 20.7 (63.4) 7.6 115.8 31.2
EBITDA growth 21.0 (65.9) 115.0 154.0 30.7
Profitability (%)
OP margin 12.4 4.9 8.9 13.1 14.0
NP margin 11.6 5.9 9.3 10.8 11.4
EBITDA margin 13.5 6.4 10.0 13.7 14.5
ROA 12.5 5.0 8.4 14.8 19.4
ROE 23.4 8.0 16.0 28.1 28.5
Dividend yield 4.2 1.2 1.0 0.9 0.9
Stability
Net debt (W bn) (110) (91) (179) (169) (208)
Int. coverage (x) NM NM NM NM NM
D/E ratio (%) 0.0 0.0 0.0 0.0 0.0
Valuation (x)
PER 5.9 16.4 22.4 11.7 8.9
PBR 1.3 1.2 3.1 2.8 2.2
PSR 0.7 1.0 2.1 1.3 1.0
EV/EBITDA 3.0 9.9 16.1 7.5 5.5
Cash Flow
Fiscal year ending Dec. (W bn) 2008A 2009A 2010A 2011F 2012F
C/F from operating 31 (3) 85 29 76
Net profits 50 18 39 85 111
Depreciation 4 5 5 5 5
Amortization 0 0 0 0 0
Net incr. in W/C (25) (26) 33 (87) (50)
Others 1 0 8 26 10
C/F from investing 27 6 (46) (22) (52)
Capex (12) (5) (8) (15) (15)
Decr. in fixed assets 0 0 0 0 0
Net incr. in current assets 46 12 (30) 8 (25)
Incr. in investment (5) (1) (4) (8) (9)
Others (2) (0) (3) (6) (3)
C/F from financing (30) (12) 1 (10) (10)
Incr. in equity 0 0 0 0 0
Incr. in debts 0 0 0 (1) (1)
Dividends (13) (12) (4) (9) (9)
Others (17) 0 4 0 0
Increase in cash 28 (10) 40 (3) 15
Display
21
ICD (040910) BUY (Maintain), TP: W98,000 (Maintain)
8G oxide-TFT needs HDP etchers
Supplying HDP etchers to SMD’s 5.5G: The 2011F sales should hit W156.8bn and the operating margin jump to 23.6% with the sharp increase in high-density plasma (HDP) etcher sales. Japan’s TEL and YAC met most of SMD’s equipment demand until 4.5G but ICD supplies more than 90% of the equipment for the 5.5G line. We expect ICD to retain its dominant supply share at SMD as it will be difficult for rivals to match ICD’s large-area plasma source technology in the short-term. We estimate ICD’s HDP etcher sales to jump from W7.4bn in 2010 to a whopping W120.7bn in 2011F. Supply to A3 line to boost 2012F sales and OP 83% and 84%, respectively: We estimate 2012F sales at W286.4bn and OP at W68bn. Our decent YoY growth outlook is attributed to the start of SMD’s order placements for its 5.5G A3 lines in early 2012. The A3 lines have a monthly capacity of 100Kcps, 56% greater than 64Kcps at the current A2 lines and this will fuel ICD’s equipment supply growth.
Additional orders momentum when 8G oxide-TFT technique is adopted: We expect the oxide-TFT method to become the trendsetter in the 8G technology evolution as it costs 28% and 34% less than the current TFT-LCD and AMOLED excimer-laser annealing (ELA) and fine-metal mask (FMM) methods, respectively. Despite the technology shift, we believe ICD can continue to supply HDP etchers as oxides have more than 68% greater bond energy than hydrogenate amorphous silicone (a-Si:H) and thus, oxides require a more elaborate etching process. We estimate ICD’s HDP etcher sales to jump 26% YoY to W314.9bn in 2013F. We believe related sales will likely exceed our estimate when capex projects for 8G mass-production lines get underway from 2H12F in full force.
Maintain BUY and TP of W98,000: We maintain BUY and a 12M TP of W98,000
using 15x 2012F EPS. We applied the peak multiple LCD equipment makers
received in 2004-2005 when LCD capex was aggressive. We considered: 1)
potential benefits from greater AMOLED capex given its sales structure being
skewed toward the panels (89% of total in 2011F, a sector-high), 2) strong sales
growth in 2011F (+342% YoY) and 2012F (+83% YoY) on its HDP etcher sales to
SMD’s 5.5G production line, and 3) further orders backlog growth with the adoption
of the oxide-TFT method for 8G AMOLED. Our price target implies 40% upside.
August 12, 2011 / W69,000 won / Mkt cap: USD539.8mn, KRW539.8bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2009A 8 (0) (1) (1) (178) 0.0 1 0.0 12.0 0.0 (11.7)
2010A 35 4 3 3 504 0.0 6 0.0 1.5 0.0 29.6
2011F 157 37 36 28 3,668 627.8 40 19.1 13.1 5.9 54.9
2012F 286 68 66 50 6,526 77.9 70 10.7 7.5 3.8 43.0
2013F 344 72 71 54 6,938 6.3 74 10.1 6.7 2.8 31.7
Matthew Yang 82-2-3276-6174
matthew.yang@truefriend.com
Jay Yoo, CFA 82-2-3276-6178 jongwoo.yoo@truefriend.com
Display
22
Quarterly earnings estimates (W bn)
FY10 1Q11 2Q11 3Q11F 4Q11F FY11F 1Q12F 2Q12F 3Q12F 4Q12F FY12F
Sales 35.5 12.2 28.1 52.5 64.2 156.8 76.7 54.5 74.7 80.5 286.4
QoQ, YoY (%) 325% 71% 131% 87% 22% 342% 19% -29% 37% 8% 83%
AMOLED 10.4 12.2 28.1 52.3 46.7 139.3 68.3 54.1 74.3 80.2 276.9
HDP etcher 7.4 10.5 24.7 47.5 37.9 120.7 60.5 47.0 67.9 74.5 249.9
Plasma asher 3.0 1.7 3.4 4.8 8.7 18.6 7.8 7.1 6.4 5.7 27.0
TFT-LCD 23.9 0.0 0.0 0.0 17.5 17.5 8.0 0.0 0.0 0.0 8.0
OP 4.3 1.8 6.4 14.1 14.7 37.0 18.0 12.7 18.3 19.0 68.0
QoQ, YoY (%) NM 1% 263% 120% 4% 764% 23% -29% 43% 4% 84%
AMOLED 0.0 1.8 6.4 14.1 12.3 34.7 17.2 12.7 18.3 19.0 67.2
TFT-LCD 1.1 0.0 0.0 0.0 2.1 2.1 0.8 0.0 0.0 0.0 0.8
OP margin (%) 12.1% 14.6% 22.8% 26.9% 22.9% 23.6% 23.5% 23.4% 24.4% 23.6% 23.8%
AMOLED 0.0% 14.6% 22.8% 27.0% 26.5% 24.9% 25.2% 23.5% 24.6% 23.7% 24.3%
TFT-LCD 4.6% 12.0% 12.0% 12.0% 12.0% 12.0% 10.0% 10.0% 10.0% 10.0% 10.0%
EBT 2.9 1.5 6.3 14.0 14.6 36.4 17.7 12.3 17.9 18.6 66.5
EBT margin (%) 8.2% 12.1% 22.3% 26.7% 22.7% 23.2% 23.0% 22.6% 23.9% 23.1% 23.2%
NP 2.8 1.5 5.2 10.6 11.1 28.3 13.4 9.4 13.5 14.1 50.4
NP margin (%) 8.0% 12.1% 18.4% 20.2% 17.2% 18.1% 17.4% 17.2% 18.1% 17.5% 17.6%
Source: Company data , Korea Investment & Securities
SMD equipment orders and ICD’s HDP etcher sales
0
10
20
30
40
50
60
70
80
90
1Q11 2Q11 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F
(W bn)
A2 5.5G phase 1,2,3 (96Kcps/month)
A3 5.5G (100Kcps/month)
Source: Company data , Korea Investment & Securities
Bond energy by technology
0
100
200
300
400
500
600
Poly cry stalline silicon
(P-Si)
Hy drogenate amorphous
silicon (a-Si:H)
Oxide-TFT (IGZO)
Bond energy
(kJ/mol)
Source: Company data , Korea Investment & Securities
Display
23
Balance Sheet
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Current assets 12 28 129 214 285
Cash & cash equivalent 0 3 24 22 55
Accounts receivable 8 13 59 108 129
Inventory 2 10 45 83 99
Fixed assets 13 19 26 36 41
Investments 0 0 0 0 0
Tangible assets 5 11 18 28 33
Intangible assets 8 7 7 7 7
Total assets 25 47 155 250 326
Current liabilities 14 28 62 106 128
Accounts payable 3 11 44 88 111
Short-term borrowing 9 6 6 6 6
Current portion of LT debt 3 0 0 0 0
Long-term debt 2 8 2 2 2
Debentures 1 3 0 0 0
Long-term borrowings 0 3 2 2 2
Total liabilities 17 36 63 108 130
Paid-in capital 3 3 4 4 4
Capital surplus 2 2 54 54 54
Capital adjustments 0 0 0 0 0
Retained earnings 4 6 35 85 139
Shareholders' equity 8 11 92 142 196
Income Statement
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Sales 8 35 157 286 344
Gross profit 2 10 53 78 82
SG&A expense 2 6 16 10 10
Operating profit 0 0 0 0 0
Non-op. profit (0) 4 37 68 72
Interest income 0 0 0 2 8
FX gains 0 0 0 0 0
Equity gains 1 1 1 2 2
Non-op. expense 1 1 1 0 0
Interest expense (0) (0) (0) (2) (2)
FX losses 0 0 0 0 0
Equity losses (1) 3 36 66 71
Earnings before tax (0) 0 8 16 17
Income taxes (1) 3 28 50 54
Profit from discontinued 0 0 0 0 0
Net profit (1) 3 16 73 313
EBITDA 1 6 40 70 74
Key Financial Data
Fiscal year ending Dec. 2009A 2010A 2011F 2012F 2013F
per share data (KRW)
EPS (178) 504 3,668 6,526 6,938
BPS 1,440 1,970 11,924 18,450 25,388
DPS 0 0 0 0 0
Growth (%)
Sales growth (49.6) 324.7 342.0 82.7 20.0
OP growth 0.0 0.0 763.7 83.9 6.2
NP growth 0.0 0.0 900.5 77.9 6.3
EPS growth 0.0 0.0 627.8 77.9 6.3
EBITDA growth (69.4) 472.7 584.6 75.4 6.0
Profitability (%)
OP margin (2.1) 12.1 23.6 23.8 21.0
NP margin (12.0) 8.0 18.1 17.6 15.6
EBITDA margin 12.2 16.5 25.5 24.5 21.6
ROA (3.7) 7.8 28.0 24.9 18.6
ROE (11.7) 29.6 54.9 43.0 31.7
Dividend yield 0.0 0.0 0.0 0.0 0.0
Stability
Net debt (W bn) 12 9 (16) (14) (47)
Debt/equity ratio (%) 159.0 113.2 8.9 5.8 4.2
Valuation (X)
PER 0.0 0.0 19.1 10.7 10.1
PBR 0.0 0.0 5.9 3.8 2.8
PSR 0.0 0.0 3.4 1.9 1.6
EV/EBITDA 12.0 1.5 13.1 7.5 6.7
Cash Flow
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
C/F from operating (0) 10 (11) 11 40
Net profit (1) 3 28 50 54
Depreciation 0 0 3 2 2
Amortization 1 1 0 0 0
Net incr. in W/C (1) 1 (47) (42) (16)
Others 1 5 5 1 0
C/F from investing (1) (7) (15) (12) (7)
CAPEX (0) (7) (7) (10) (5)
Decr. in fixed assets 0 0 0 0 0
Incr. in investment (0) 0 0 0 0
Net incr. in intangible assets
(1) (0) 0 0 0
Others 0 0 (8) (2) (2)
C/F from financing 1 (0) 46 0 0
Incr. in equity 0 0 52 0 0
Incr. in debts 1 (0) (6) 0 0
Dividends 0 0 0 0 0
Others 0 0 0 0 0
C/F from others 0 0 0 0 0
Increase in cash (0) 3 21 (2) 33
Display
24
AP Systems (054620) Not rated
Momentum to boom for SMD’s 5.5G capex but burst for 8G
SMD AMOLED equipment supplier: AP Systems supplies Samsung Mobile
Display (SMD) with AMOLED equipment such as ELA (excimer laser annealing)
and glass-type encapsulation. AMOLED panels must feature a high level of
brightness and uniformity and thus go through the LTPS (low temperature
polysilicon) process that converts a-Si backplane to poly-Si. ELA equipment
formulates poly-Si during the TFT LTPS process. AP Systems exclusively supplies
ELA equipment to SMD’s AMOLED line. Moreover, the company sells SMD
encapsulation equipment that applies a glass cap to prevent oxidation and
moisture deformation in OLED materials.
Largest beneficiary of SMD’s 5.5G capex: SMD is ready to apply LTPS
technology for the AMOLED 5.5G A3 line to increase brightness and uniformity of
substrates. We believe AP Systems will exclusively supply ELA equipment to
SMD’s 5.5G line (up to A3) as SMD has no other ELA equipment vendors. Besides,
AP Systems is likely to win laser deposition equipment orders for the 5.5G line.
SMD plans to partly introduce LITI (laser-induced thermal imaging) technology for
the organic materials deposition process at the 5.5G A2 P3 line. AP Systems
should be SMD’s exclusive supplier of laser deposition equipment as it is the only
Korean company with the technology.
Orders momentum likely to weaken for 8G AMOLED: The stock gained 114%
from the trough in Dec 2010 on mounting orders momentum where AP Systems
would sell ELA and laser deposition equipment for SMD’s 5.5G. But we expect
orders momentum to slow as SMD is shifting toward large-size AMOLED panels.
Chances are SMD will introduce more cost-competitive technologies, not capital-
intensive LTPS and LITI, for its large AMOLED segment. SMD is likely to introduce
oxide method to the backplane process starting with 8G, departing from LTPS that
5.5G and earlier generations used. While 5.5G partly uses laser deposition
technology, the 8G process is likely to introduce non-laser SMS (small-mask
system) deposition. As such, AP Systems’ front-end equipment orders momentum
will likely fizzle out after 5.5G. The stock’s 2011F PE stands at 17x compared to the
average 14x among AMOLED equipment vendors. Given high earnings volatility or
sensitivity to orders momentum inherent to equipment makers, we believe the
stock is overvalued. Its orders momentum remains intact for 5.5G but we call for a
prudent approach to AP System. The company is less likely to win new orders for
8G as large AMOLED panels go mainstream.
August 12, 2011 / W14,300 won / Mkt cap: USD308.0mn, KRW308.0bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2008A 20 1 3 4 466 NA 3 10.8 1.0 1.5 9.5
2009A 92 4 0 2 124 (73.4) 10 42.2 2.9 1.7 3.2
2010A 145 4 1 (4) NA (260.0) 16 NA 16.5 0.0 (6.2)
2011F 251 20 20 18 823 NA 33 17.0 9.0 4.0 26.4
2012F 406 39 37 34 1,589 93.2 49 8.8 6.2 2.4 33.9
Jay Yoo, CFA 82-2-3276-6178 jongwoo.yoo@truefriend.com
Heuiseok Jeong 82-2-3276-6277
heuiseok.j@truefriend.com
Display
25
Advanced Nano Products (121600) BUY (Maintain), TP: W25,000 (Maintain)
Biggest gainer from probable adoption of oxide
semiconductor in display technology
Transparent conductive oxide (TCO) target maker: Having a source technology
for nano-sized powder, Advanced Nano Products (ANP) makes electronic
materials targeting TCO (transparent-conductive oxides), CMP (chemical
mechanical planarization) slurries and silver pastes. TCO target is now used
mainly to make transparent electrodes for solar cells, flat panel displays such as
LCD and touch panels, and its application will expand when oxide TFT technology
enters the industry. CMP slurries are used to polish semiconductor wafers. ANP
sells intermediate materials to Cabot Microelectronics, the leading supplier of
polishing slurries and CMP pads in the world. Silver pastes are used in the
formation of electrodes for crystalline silicon solar cells and product testing is
ongoing at Chinese and Taiwanese companies. ANP’s sales break down to 56%
TCO target for solar cells, 20% TCO target for displays and 9% CMP slurries.
TCO target is sluggish for solar cells but promising for displays: ANP’s 1H11
sales and operating profit came in at W15bn and W4bn, respectively. The figures
met 39% and 36% of the company’s full-year guidance (W39bn sales and W11bn
operating profit) due to poorer-than-expected sales of its flagship TCO target for
solar cells. Chances are the sluggishness will continue given the unfavorable solar
PV industry conditions. Nonetheless, we believe the full-year guidance is easily
achievable backed by seasonally strong demand in 2H and likely substantial
growth of TCO target sales for displays. More and more manufacturers of displays
and touch panels are adopting sputters loaded with AKT’s rotary-type target, which
should benefit ANP, a vendor to AKT. We expect the positive changes to become
visible in 2H11 and in 2012, the display TCO target should emerge as a main sales driver.
To benefit from probable adoption of oxide semiconductor in display
backplane technology: Oxide semiconductor is gradually being adopted in
display backplane technology as LCD goes high-definition and AMOLED grows
larger. Oxide semiconductor is known to be crucial for flexible display fabrication.
As such, we believe the use of oxide semiconductor in the display process is a
matter of when, not if. The adoption of oxide semiconductor in the backplane
would lead to a significant increase in demand for TCO target using indium gallium
zinc oxide (IGZO) as a material. When adopted, consumption of the IGZO target
will be multiple times greater than for ITO target.
August 12, 2011 / W18,950 won / Mkt cap: USD127.1mn, KRW127.1bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA P/B ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2009A 20 5 5 5 900 72.9 7 NM NM NM 31.1
2010A 28 9 8 7 1,311 45.7 10 NM NM NM 31.7
2011F 40 12 11 9 1,327 1.2 13 14.3 11.5 3.8 29.2
2012F 57 17 17 14 1,872 41.1 19 10.1 7.5 2.8 30.7
2013F 77 22 22 17 2,410 28.8 25 7.9 5.5 2.1 29.3
Moonsung Kang 82-2-3276-6235
mskang@truefriend.com
Display
26
Maintain BUY with TP W25,000: We maintain BUY with a price target of
W25,000(TP equals target PE 17x 12 fwd EPS). The stock trades at 2011F PE of
14x that is a premium to the market average. The premium is justified by
expectations for sustainable growth fueled by: 1) display targets growth, 2) probable
adoption of oxide semiconductor in the display backplane process, and 3) diverse growth
drivers such as silver pastes. We peg the company’s earnings CAGR at 37% over the
next three years and give a target PE of 17x.
Display
27
Balance Sheet
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Current assets 23 28 35 47 61
Cash & cash equivalent 2 3 4 7 10
Accounts receivable 4 8 10 13 17
Inventory 16 16 19 25 32
Fixed assets 15 21 28 28 29
Investments 0 0 0 0 0
Tangible assets 14 19 26 26 26
Intangible assets 1 1 1 2 2
Total assets 38 49 62 75 90
Current liabilities 11 11 12 11 10
Accounts payable 0 0 1 1 2
Short-term borrowing 8 5 5 3 3
Current portion of LT debt 1 2 1 1 0
Long-term debt 10 13 13 13 12
Debentures 1 2 2 2 2
Long-term borrowings 7 9 9 9 7
Total liabilities 20 23 25 24 22
Paid-in capital 3 3 4 4 4
Capital surplus 5 7 8 8 8
Capital adjustments 0 0 0 0 0
Retained earnings 10 17 26 39 57
Shareholders' equity 17 26 37 51 68
Income Statement
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Sales 20 28 40 57 77
Gross profit 9 14 19 27 35
SG&A expense 4 5 8 10 13
Operating profit 5 9 12 17 22
Non-op. profit 2 1 0 1 1
Interest income 0 0 0 0 0
FX gains 1 1 0 0 0
Equity gains 0 0 0 0 0
Non-op. expense 2 2 1 1 1
Interest expense 1 1 1 1 1
FX losses 1 1 0 0 0
Equity losses 0 0 0 0 0
Earnings before tax 5 8 11 17 22
Income taxes 0 1 2 3 5
Profit from discontinued 0 0 0 0 0
Net profit 5 7 9 14 17
EBITDA 7 10 13 19 25
Key Financial Data
Fiscal year ending Dec. 2009A 2010A 2011F 2012F 2013F
per share data (won)
EPS 900 1,311 1,327 1,872 2,410
BPS 3,231 4,676 4,976 6,796 9,138
DPS 0 0 0 0 0
SPS 38,677 5,295 5,674 7,937 10,686
Growth (%)
Sales growth 63.4 39.3 42.0 45.3 34.6
OP growth 46.3 67.7 33.3 47.9 29.0
NP growth 171.1 48.2 34.1 46.5 28.8
EPS growth 72.9 45.7 1.2 41.1 28.8
EBITDA growth 40.0 54.0 30.1 48.4 30.1
Profitability (%)
OP margin 25.9 31.1 29.2 29.8 28.5
NP margin 23.3 24.8 23.4 23.6 22.6
EBITDA margin 32.8 36.3 33.2 33.9 32.8
ROA 15.3 15.8 16.5 19.7 21.1
ROE 31.1 31.7 29.2 30.7 29.3
Dividend yield NM NM 0.0 0.0 0.0
Stability
Net debt (W bn) 16 16 14 9 2
Int. coverage (x) 8.9 12.3 15.9 25.7 39.1
D/E ratio (%) 98.2 72.4 47.2 30.7 18.4
Valuation (x)
PER NM NM 14.3 10.1 7.9
PBR NM NM 3.8 2.8 2.1
PSR NM NM 3.3 2.4 1.8
EV/EBITDA NM NM 11.5 7.5 5.5
Cash Flow
Fiscal year ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
C/F from operating (2) 7 8 8 10
Net profits 5 7 9 14 17
Depreciation 1 1 1 2 3
Amortization 0 0 0 0 0
Net incr. in W/C (8) (2) (3) (8) (11)
Others 0 1 0 0 0
C/F from investing (6) (8) (8) (3) (4)
Capex (6) (7) (8) (2) (3)
Decr. in fixed assets 0 0 0 0 0
Net incr. in current assets 0 0 (0) (0) (0)
Incr. in investment (0) 0 (0) (0) (0)
Others (1) (1) 0 (1) (1)
C/F from financing 8 3 1 (2) (3)
Incr. in equity 0 2 1 0 0
Incr. in debts 8 1 0 (2) (3)
Dividends 0 0 0 0 0
Others 0 (0) 0 0 0
Increase in cash 0 2 1 3 3
Display
28
Changes to recommendation and price target
Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target
Cheil Ind. (001300) 10-09-09 BUY W63,000 SFA Engineering 08-31-09 BUY W52,000
01-14-10 BUY W75,000 (056190) 11-08-09 BUY W45,000
04-11-10 BUY W89,000 10-14-10 BUY W58,000
05-05-10 BUY W101,000 01-16-11 BUY W75,000
07-18-10 BUY W115,000 02-14-11 BUY W80,000
01-26-11 BUY W130,000 Duk San Hi Metal 03-20-11 BUY W31,500
05-29-11 BUY W165,000 (077360) 07-20-11 BUY W37,000
08-04-11 BUY W140,000
ICD (040910) 08-11-11 BUY W98,000 Advanced Nano Products (121600)
05-04-11 BUY W25,000
Cheil Ind.(001300) ICD(040910)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Aug-09 D ec-09 Apr-10 Aug-10 D ec-10 Apr-11 Aug-11
0
20,000
40,000
60,000
80,000
100,000
120,000
Aug-09 D ec-09 Apr-10 Aug-10 D ec-10 Apr-11
SFA Engineering(056190) Duk San Hi Metal(077360)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Aug-09 D ec-09 Apr-10 Aug-10 D ec-10 Apr-11
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Aug-09 D ec-09 Apr-10 Aug-10 D ec-10 Apr-11
Advanced Nano Products(121600)
0
5,000
10,000
15,000
20,000
25,000
30,000
Aug-09 D ec-09 Apr-10 Aug-10 D ec-10 Apr-11
Display
29
■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance
� BUY: Expected to give a return of +15% or more
� Hold: Expected to give a return between -15% and +15%
� Underweight: Expected to give a return of -15% or less
■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months
� Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
� Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization.
� Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
■ Analyst Certification
I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal
views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or
indirectly related to the specific recommendations or views contained in this research report.
■ Important Disclosures
As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent
month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does
not own 1% or more of any class of common equity securities of the companies mentioned in this report.
There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of
the research report or at the time of the public appearance.
Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report
in the past 12 months;
Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this
report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment
banking services from the companies mentioned in this report in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research
report was published.
Korea Investment & Securities Co., Ltd. does not own over 1% of Cheil Ind.,ICD,SFA Engineering,Duk San Hi Metal,Advanced Nano Products shares as of August
12, 2011.
Korea Investment & Securities Co., Ltd. has not provided this report to various third parties.
Neither the analysts covering these companies nor their associates own any shares of as of August 12, 2011.
Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Cheil Ind. and is the liquidity provider.
Korea Investment & Securities Co., Ltd. has lead-managed an initial public offering of the companies mentioned in this report in the past 12 months.
Prepared by: Jay Yoo, CFA, Heuiseok Jeong
This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed,
forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd.
and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no
representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential
loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment, and this report cannot be used as evidence in any
legal dispute related to investment decisions.
HEAD OFFICE
WON-JAE RHEE, Executive Managing Director (wonjae@truefriend.com +822 3276 5660)
PAUL CHUNG, Sales Trading (pchung@truefriend.com +822 3276 5843)
27-1 Yoido-dong, Youngdeungpo-ku, Seoul 150-745, Korea
Toll free: US 1 866 258 2552 HK 800 964 464 SG 800 8211 320
Fax: 822 3276 5681~3
Telex: K2296
NEW YORK
DONG KIM, Managing Director (dkim@kisamerica.com +1 212 314 0681)
ELAINE LIM, Head of Sales (Elaine@kisamerica.com +1 212 314 0686)
JU KIM, Sales (jukim@kisamerica.com +1 212 314 0683)
Korea Investment & Securities America, Inc.
1350 Avenue of the Americas, Suite 1110
New York, NY 10019
Fax: 1 201 592 1409
HONG KONG
STEVE KIM, Managing Director (steve.kim@kisasia.com +852 2530 8900)
DANIEL KIM, Managing Director, Head of HK Sales (daniel.kim@kisasia.com +85202530 8950)
SANGME LEE, Merchandising Director (sangme.lee@kisasia.com +852 2530 8910)
DAN SONG, Sales (dan.song@kisasia.com, +852-2530-8900)
JUN HWAN KIM, Sales (jun.kim@kisasia.com, +852-2530-8912)
Korea Investment & Securities Asia, Ltd.
Suite 2201-2, Jardine House
1 Connaught Place, Central, Hong Kong
Fax: 852-2530-1516
SINGAPORE
SUNG NAMGOONG, Managing Director, Head of Singapore Sales (snamgoong@truefriend.com +65 6501 5601)
ALEX JUN, Managing Director (alex.jun@truefriend.com +65 6501 5602)
Korea Investment & Securities Singapore Pte Ltd
1 Raffles Place, #43-04, OUB Center
048616 Singapore
Fax: 65 6501 5617
LONDON
JJ MOON, Managing Director (jamesmoon@kiseurope.com +44 207 065 2765)
MINGOO KANG, Sales (mingookang@kiseurope.com, +44 207 065 2760)
Korea Investment & Securities Europe, Ltd.
2nd Floor, 35 Moorgate
London EC2R 6AR
Fax: 44-207-236-4811
Telex: 8812237
This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or
considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue
or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided
solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company
accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private
investors.
2011. All rights reserved. No part of this report may be reproduced or distributed in any manner without permission of Korea Investment & Securities Co.,Ltd.
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