Daewoo Securities Display Outlook Jun2011

8/3/2019 Daewoo Securities Display Outlook Jun2011

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Please read carefully important disclosures at the end of this report.

June 14, 2011

2H11Outlook Report

Display (Overweight)

[2H11 Outlook] Differentiation to restart growth engines

Concerns stemming from the continuous commoditization of panels and weakening TV

demand in advanced nations are dragging down expectations for the LCD industry. It is

difficult to distinguish LCD panels from one another, and cost reduction is the only way

to generate value added. However, going into this year, some top-tier LCD panelmakers managed to differentiate themselves by: 1) taking advantage of a tight supply

chain in the wakes of the global crisis and the Japanese earthquake, and 2) dominating

markets for certain products like AMOLED, FPR 3D TVs, and tablet PCs.

Although concerns over supply chains have eased due to falling IT demand in Europe

and weak seasonality, if demand recovers with the arrival of a strong season in 3Q, the

2H09~1H10 market situation may repeat itself (during this period, top-tier panel makers

benefited from a parts supply shortage).

We reiterate our Overweight rating on the display sector and select LG Display (LGD)

as our top pick in light of the projected recovery of the LCD TV market (from 2H11) and

the companys product differentiation (e.g., panels for FPR 3D TVs and tablet PCs).

Among mid- to small-cap shares, we like domestic equipment manufacturers, whichstand to benefit from the AMOLED investment expansion. We recommend SFA

Engineering, which is Koreas largest equipment maker, and KC Tech, which boasts a

stable equipment business and a materials business with high growth potential.

Jonathan Hwang

+822-768-4140

[email protected]

Brian Oh

+822-768-4135

[email protected]


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2

I. Investment point: Differentiation of Korean makers................................................................31. AMOLED, 3D FPR and tablet PC .............................................................................................32. Supply chains improve on vertical integration ..........................................................................8

II. Valuation ....................................................................................................................................101. Maintain Overweight; Top picks are LGD, SFA Engineering and KC Tech...........................10

III. LCD supply/demand and price forecasts ..............................................................................141. Supply forecast........................................................................................................................142. Demand forecast .....................................................................................................................163. Price outlook............................................................................................................................20

LG Display (034220 KS) ............................................................................................................... 23SFA Engineering (056190 KQ) .................................................................................................... 27KC Tech (029460 KS) ................................................................................................................... 30Silicon Works (108320 KQ).......................................................................................................... 33Top Engineering (065130 KQ) ..................................................................................................... 36DMS (068790 KQ).......................................................................................................................... 39Avaco (083930 KQ)....................................................................................................................... 42Samsung SDI (006400 KS)........................................................................................................... 45MNtech (095500 KQ)..................................................................................................................... 49


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June 14, 2011 Display

3Daewoo Securities Research

I. Investment point: Differentiation of Korean makers

1. AMOLED, 3D FPR and tablet PC

1) AMOLED (Active Matrix Organic Light Emitting Diode)

AMOLED is positioned to replace LCD as the leading display technology, despite the

following disadvantages: 1) high prices (1.5~2 times more expensive than LCD), 2) difficulty

displaying high-resolution images, and 3) short life. However, these issues can be resolved

through technological advances and economies of scale.

The industrys shift into AMOLED production not only implies that higher-resolution panels

will be produced, but that operating leverage will increase due to a rise in the proportion of

depreciation costs in COGS. The percentage of raw material costs out of total production

costs should decline from 67% for LCD production to 44% for AMOLED production, but the

percentage of depreciation costs will jump from 17% to 38%. Although AMOLED

production uses fewer raw materials, it requires huge initial investments and expensive

equipment, due to complicated production processes. Considering the risks associated with

higher operating leverage, Korean panel makers will likely continue to hold an edge thanks to

their stable financial positions and strong captive markets.

Figure 1. Cost structure of LCD module (2010) Figure 2. Cost structure of AMOLED module (2010)

Source: DisplaySearch, Daewoo Securities Research Source: DisplaySearch, Daewoo Securities Research

Figure 3. OP margins of semiconductor and LCD industries Figure 4. Depreciation costs at Hynix and LGD

Source: Daewoo Securities Research Source: Daewoo Securities Research

AMOLED likely to bring

about structural changes

Glass

6.5%

Color filter

13.5%

Polarizer

6.5%

Liquid crystal

3.2%

Backlight

15.0%

Driver IC

3.8%Inverter

5.2%

PCB

8.4%

Other materials

4.8%

Labor cost

9.7%

Yield loss

2.3%Others

4.6%

Depreciation16.6%

Glass

5.9%

Organic material

23.2%

Others

4.2%

Yield loss

5.1%

Depreciation

37.5% Driver IC

3.4%

PCB

7.6%

Other materials

4.3%Labor cost

8.8%

0

5

10

15

20

25

30

35

40

45

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

D&A/COGS at Hynix

D&A/COGS at LGD

(%) Depreciation costs account for

around 40% of COGS at Hynix

Depreciation costs account foraround 16% of COGS at LGD

A M O L E D

-180

-120

-60

0

60

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

Top-tier semiconductor makers 2nd-tier semiconductor makers

Top-t ier LCD panel mak ers 2nd-t ier LCD panel makers

(%)

Operating leverage of semiconductor industry

is higher than that of LCD industry due to

larger portion of fixed costs Restructuring

of 2nd-tier semiconductor makers


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2) Growth story of Korean AMOLED makers

The display industry is entering a new technology cycle, driven by Korean AMOLED makers.

Indeed, only Korean panel makers are aggressively investing in AMOLED. In 2011, Samsung

Mobile Display (SMD) and LG Display (LGD) are anticipated to invest W5.4tr and W800bn,

respectively.

We expect SMD and LGD to emerge as the two dominant AMOLED suppliers by 2013 (with

a combined market share of more than 95%). SMD has already begun mass-producing 5.5G

AMOLED in 2Q. In 2H, both SMD and LGD will start making investments in 8G pilot lines.

SMDs panel production capacity is anticipated to increase from 3mn units (4G) per month to

12.5mn units (5.5G) per month by year-end. The companys earnings are forecast to surge in

2011, achieving sales of W6.3tr (up 43%), and operating profit of W800bn (up 147%).

We expect that the competitiveness of Korean AMOLED supply chains will also strengthen.

Factors essential to AMOLED market expansion are: 1) larger panel sizes, 2) higher

production yields, and 3) economies of scale, all of which can be achieved through close

cooperation between equipment and materials makers at the development stage, and

vertical integration. Key beneficiaries of AMOLED market expansion should be: SFA

Engineering, AP Systems, SNU Precision and Avaco among Korean equipment makers, and

Cheil Industries, LG Chem, and DS Hi-Metal among Korean materials makers.

Figure 5. AMOLED capacity trend and forecasts Figure 6. SMDs quarterly earnings trends and forecasts

Source: DisplaySearch, Daewoo Securities Research Source: SMD, LGD, Daewoo Securities Research

Figure 7. Global LTPS capex trend and forecasts Figure 8. Global organic material market trends and forecasts

Source: DisplaySearch, Daewoo Securities Research Source: DisplaySearch, KETI, Daewoo Securities Research

Korean panel makers are

leading the new

technology cycle

Strengthening

competitiveness of

Korean equipment and

materials makers

0

500

1,000

1,500

2,000

1Q09 3Q09 1Q10 3Q10 1Q11 3Q11F

-15

-10

-5

0

5

10

15

SMD's sales SMD's OP margin (R)

LGD's OP margin (R)

(Wbn) (%)

0

500

1,000

1,500

2,000

2,500

3,000

01 03 05 07 09 11F 13F 15F

-100

0

100

200

300

400

500Capex (L)

YoY growth (R)

(US$mn) (%)

0

200

400

600

800

1,000

1,200

1,400

1,600

09 10 11F 12F 13F 14F

SMD's organic material purchase

AMOLED organic material market

(Wbn)

0

200

400

600

800

1,000

1Q09 1Q10 1Q11F 1Q12F 1Q13F

70

75

80

85

90

95

100

SMD 4G (L) SMD 5.5G (L)SMD 8G (L) LGD 4G (L)

LGD 8G (L) OthersDomestic market share (R)

(Km2) (%)


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3) Rapid expansion of FPR 3D TV market

As the LCD industry has already entered a mature stage of growth, efforts are being made

to search for new growth engines. LED TVs led market growth in 2009, but 3D TVs failed to

become the new growth driver in 2010, due to: 1) the inconvenience of having to wear

glasses, 2) lack of content and channels, and 3) high prices. Going forward, panel makers

should help resolve 1) and 3), while broadcasters need to produce more 3D content and

create additional channels.

This year, LGD released FPR (film patterned retarder) 3D TVs which resolved many of the

aforementioned issues. Compared to shutter glass-type 3D TVs, FPR 3D TVs have the

following advantages: 1) glasses are light, 2) batteries and electronic circuits are not

embedded in the glasses, and 3) prices are cheaper. Active shutter 3D glasses weigh around

45g, while FPR passive 3D glasses weigh only 10~15g. Moreover, the former costs around

W50,000~W200,000, while the latter costs only a few thousand won.

The World Health Organization recently announced that radiation from cell phones might

cause cancer. This implies that active shutter 3D glasses embedded with electronic circuits

may also pose a risk of cancer, especially since the viewer is exposed to the radiation for as

long as 1~2 hours at a time. As such, we expect demand for FPR 3D TVs to expand further.

Figure 9. Shutter glasses (SG) 3D technology Figure 10. Patterned retarder (PR) 3D technology

Source: Panasonic Source: DisplaySearch

Figure 11. Chinese market shares of SG and FPR 3D TVs (2011F) Figure 12. FPR film core technology of FPR type 3D panels

Source: LG Display Source: LG Display

3D TV sales were

weaker than expected

last year

FPR 3D TVs are much

cheaper than active

shutter 3D TVs

55%

5%8%

27%33%

35%

44% 44% 44% 45%

56%56%56%

65%67%

92%

73%

95%

0

20

40

60

80

100

Jan Feb 10th

week

11th

week

12th

week

13 th

week

14th

week

15th

week

16th

week

FPR

SG

(%)

FPR market share overtook SG market share in just

3 months


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4) Can RealD 3D technology succeed in the TV market?

FPR 3D TVs overtook shutter glass-type 3D TVs (in terms of market share) just three months

after being released in China. We believe that cheap prices as well as light-weight glasses

led to rapid sales growth. In China, the market penetration of 3D TVs jumped from 2.3%

early this year to 8.0% as of now.

Shutter glass-type 3D TVs use a time multiplexing approach which disrupts operating

frequency. Thus, shutter glass-type 3D TV screens need to refresh at least 120 times per

second (120Hz refresh rate) to turn a lower input (60Hz) into a clear 3D image, and 240

times per second (240Hz refresh rate) to prevent crosstalk. Moreover, panel brightness must

be improved to compensate for decreased brightness of the 3D glasses, making it difficult to

apply the technology to low- to mid-end TV models. On the contrary, FPR 3D TVs use a

spatial multiplexing method, which does not decrease brightness or disrupt frequencies.

Thus, the technology can be applied to 60Hz displays and CCFL backlights, which are usedin cheaper models.

Samsung Electronics (SEC) recently developed AR (active retarder) 3D display in partnership

with RealD, which specializes in cinema 3D technology. AR 3D display combines the

advantages of the FPR and shutter glass methods, such as full display resolution, high

brightness, and light-weight glasses. Under the AR method, the liquid panel that separates

the left and right frames is inside the display, instead of the 3D glasses.

Despite such advantages, AR 3D display is unlikely to succeed in the market due to high

prices. The Z-screen polarization switch used to separate the left-right parallel streams is

made of liquid crystal panel, which pushes up costs. Moreover, the 240-Hz display uses the

time multiplexing method, which is more expensive than spatial multiplexing..

The success of 3D TVs should depend on: 1) price competitiveness, and 2) the launches of

low- to mid-end models.

Table 1. 3D display technology3D realization technologyGlasses Multiplexing method 3D Only 2D/3D convertible

Spatial multiplexing - Patterned retarder

- Shutter glassesGlasses typeTime multiplexing

- Active retarder (RealD)

Barrier Switchable barrierSpatial multiplexing

Lenticular Switchable lensGlasses-less type

Time multiplexing - -

Source: LG Electronics

Figure 13. RealDs 3D technology for movie theaters

Source: RealD

FPR 3D technology can

be applied to low- to

mid-end TV models

SECs AR 3D display

seems unlikely to

dominate the market

due to high prices

Projection

Screen


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5) Smartphones and tablet PCs increasingly adopt higher resolution displays

The tablet PC market is anticipated to grow at an explosive pace in 2011. Indeed, global

tablet PC shipments are forecast to reach 50mn units, up 213% YoY. Apples iPad should

remain the dominant market leader, shipping 39mn units globally (up 160% YoY) this year,

despite a decreased market share (from 94% in 2010 to 78% this year) due to the launches

of Android OS-based products (e.g., SECs Galaxy Tab).

The explosion of Foxconns iPad factory in China in May was initially forecast to lead to a

production decline of 10~15% in 2Q. However, cumulative iPad sales reached 25mn units,

according to Steve Jobs, indicating that the explosion barely affected iPad production.

LGD provides 70% of in-plane switching (IPS) panels for the iPad, while Samsung

Electronics (SEC) supplies the remaining 30%. Despite last years news that Taiwan-based

CMI and AUO might join the list of suppliers, they have yet to supply the panels to Apple

due to their failures to secure sufficient production yields and price competitiveness. Given

that the resolution of the iPad 3 (scheduled to be launched in 1Q12) is expected to double to

264 ppi (from 132 ppi), Korean panel makers superior technology should enable them to

remain dominant suppliers.

Table 2. Panel resolution development historyApplication 100 PPI 150 PPI 200 PPI 250 PPI 300 PPI 400 PPISmart phone

3.5400x234

(132 PPI)

3.5 480x320

(164 PPI)

3.5 800x480

(266 PPI)

3.5 960x640

(326 PPI)

3.5 1280x800

(400+ PPI)

7 800x400

(133 PPI)

7 1024x600

(169 PPI)

7 1280x800

(215 PPI)

7 1920x1080

(314 PPI)

9.7 1024x600

(132 PPI)

9.7 2048x1536

(264 PPI)Tablet PC

10.1 1024x600

(118 PPI)

10.1 1280x800

(150 PPI)

10.11920x1080

(210 PPI)

Mini notebook

PC

10.1 1024x600

(118 PPI)

Notebook PC15.6 1366x768

(110 PPI)

Monitor

21.5

1920x1080

(100 PPI)

Source: DisplaySearch, Daewoo Securities Research

Figure 14. Tablet PC and iPads sales trends and forecasts Figure 15. SEC and LGDs IPS panel market shares for Apples iPad


Tablet PC market to

expand 213% in 2011

Shift toward higher-

resolution to benefit

Korean panel makers

0

5

10

15

20

25

30

35

1Q10 1Q11 1Q12F 1Q13F

0

20

40

60

80

100Tablet PC (L) Apple's iPad (L)

iPad's market share (R)

(mn units) (%)

LG Display

70%

Samsung

Electronics

30%


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2. Supply chains improve on vertical integration

1) Competiveness determined by supply chain, vertical integration, customer base

Due to supply disruptions in the LCD industry, competitiveness will be increasingly determined

by secure supply chains (through vertical integration), in addition to customer bases.

Since 2009, Chinese TV producers have gained prominence thanks to the strong growth of

the Chinese LCD TV market. Local TV producers account for 80% of the Chinese TV market.

Five leading companies, Hisense, Skyworth, TCL, Konka, and Changhong, took up 75% of

TV shipments in China in 2010. At SEC and LGD, the portions of shipments to Chinese

companies have expanded sharply since 2009.

At LGD, the percentage of shipments to Philips has decreased to below 10%, while the

portions to Amtran (Vizio's OEM provider) and Skyworth have risen to 12% and 7%,respectively. Since the company supplies panels to all of the five leading TV makers in China,

the portion of shipments to Chinese TV makers has climbed to 20%. At SEC, the portion of

shipments to Samsung Group affiliates and Sony still stands at 65%. However, the company

is strengthening cooperation with TCL, a China-based consumer electronics maker, by

acquiring a 15% stake in CSOT (TCLs subsidiary). Meanwhile, TCL holds a 10% stake in

SECs Suzhou subsidiary.

Figure 16. LGDs LCD TV panel shipments by customer


Figure 17. SECs LCD TV panel shipments by customer


Competitiveness

increasingly determined

by supply chains

Portion of shipments to

Chinese TV makers isincreasing

0

3

6

9

12

15

1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10

SEC Sony

Toshiba TCL

Hisense Others

(mn units)

0

3

6

9

12

15

18

1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10

LGE Philips

Toshiba Panasonic

A mt ran S kyworthOthers

(mn units)


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2) Growing importance of stable supply chains

We expect securing a stable supply chain among upstream parts and material providers will

gain increasing importance in 2011. Since the LCD industry requires massive facility

investments, any production setbacks caused by supply disruptions in parts and materials

lead to heavy losses, which can be fatal to panel makers.

Since the global crisis in 2008, the industrys supply chain has been tightening. Even though

the LCD TV market grew 80% to 180mn units in 2010 from just 100mn units in 2008,

investments by small-and mid-sized parts and material suppliers were limited due to the

global crisis. More recently, the Japanese earthquake in March has sparked concerns over

the impact on parts and material suppliers.

Although concerns over supply chains have eased due to falling TV demand in Europe and

weak seasonality, if demand recovers with the arrival of a strong season in 3Q, the

2H09~1H10 market situation may repeat itself (during this period, top-tier panel makers

benefited from a parts supply shortage).

After collapsing in the wake of the financial crisis, capacity utilization ratio recovered quickly

in 2H09, so much so that parts suppliers were unable to meet the sudden jump in new

orders. When this happens, the gap between top-tier panel makers and second-tier makers

becomes more evident. Parts suppliers give priority to panel makers that 1) place a sizeable

amount of orders, 2) have captive market (thereby increasing the likelihood of long-term

contracts), and 3) have less volatile capacity utilization ratios.

Compared to Korean panel makers with stable supply chains, second-tier panel makers are

likely to suffer considerably in the current cycle. If Taiwanese and Japanese second-tiermakers fail to generate profits during this up cycle, their financial position could worsen,

hindering their investment plans and thus widening the gap with top-tier makers.

Toshiba and Sony are reportedly considering the integration of their small- and mid-sized

LCD businesses. Innovation Network Corporation of Japan, a public-private partnership fund,

has stated that it would invest JPY100bn, if the two companies decide to merge their LCD

businesses. Faced with sluggish TV domestic demand, Sharp is also weighing the decision

to merge its LCD business with Chimei Innolux (CMI). We believe such consolidation is

aimed at achieving economies of scale to improve parts supply conditions.

Figure 18. Major LCD facilities in Japan Figure 19. Share performances of LGD, AUO, CMI (2H09~present)

Source: Japan Meteorological Agency, Daewoo Securities Research Source: Daewoo Securities Research

A shortage of parts

highly likely in 2H

Gap between top-tier

and second-tier panel

makers widens when

faced with parts

shortages

Second tier makers

planning to consolidate

to achieve economies of

scale

50

70

90

110

130

150

170

190

6/09 9/09 12/09 3/10 6/10 9/10 12/10 3/11 6/11

LGDAUO

CMI

(6/09=100) Earthquake inJapan

Share performances vary

depending on

supply chains

Epicenter


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II. Valuation

1. Maintain Overweight; Top picks are LGD, SFA Engineering and KC Tech

Concerns stemming from the continuous commoditization of panels and TV demand

contraction in advanced nations are dragging down expectations for the LCD industry. It is

difficult to distinguish LCD panels from one another, and cost reduction is the only way to

generate value added. However, going into this year, some domestic LCD panel makers

managed to dominate markets for certain products like AMOLED, FPR 3D TVs and tablet

PCs, as there is limited competition in these product categories.

We maintain our Overweight rating on the display sector and present LGD as our top pick in

light of the projected recovery of the LCD TV market (from 2H11) and the companys

product differentiation (e.g., panels for FPR 3D TVs and tablet PCs). Among mid- to small-cap

shares, we like domestic equipment manufacturers, which stand to benefit from the

AMOLED investment expansion. We also recommend SFA Engineering, which is Koreas

largest equipment maker, and KC Tech, which boasts a stable equipment business and a

materials business with high growth potential.

However, we do not like LCD parts makers due to downward pricing pressure from panel

makers as well as the potential decline in demand for parts following the industrys shift

from LCD to AMOLED. Still, we recommend Silicon Works, as the company is expected to

benefit from the stellar tablet PC market growth.

Table 3. Ratings and target prices for key players in the display industryCompany Ticker Rating Current price(W)

Target price(W)

P/E(x)

P/B(x)

EV/EBITDA(x)

LG Display 034220 Buy 33,000 48,000 13.2 1.0 2.8

SFA Engineering 056190 Buy 56,000 80,000 12.8 3.0 8.1

KC Tech 029460 Buy 6,950 12,000 6.7 1.1 5.1

Silicon Works 108320 Buy 29,350 43,000 11.4 2.0 6.4

Top Engineering 065130 Buy 6,990 11,000 7.4 0.9 8.3

DMS 068790 Buy 6,490 10,000 11.0 0.9 3.7

Avaco 083930 Buy 12,000 20,000 8.2 2.2 7.4

Samsung SDI 006400 Trading Buy 165,500 230,000 15.8 1.3 9.4

MNtech 095500 Trading Buy 7,240 10,000 12.2 1.0 4.5

Note: As of June 9, 2011; Source: Daewoo Securities Research

Figure 20. LG Displays OP and 12M-fwd P/B trend and forecasts Figure 21. LG Displays 12M-fwd P/B band


Possible re-rating on

product differentiation

Among mid- to small-cap

shares, we prefer LCD

equipment makers over

parts suppliers

10,000

20,000

30,000

40,000

50,000

60,000

04 05 06 07 08 09 10 11 12

(W)

0.7x

1.0x

1.3x

1.6x1.9x2.2x

Fell below 1.0x

during the financial crisis

11F 12F

0.0

0.5

1.0

1.5

2.0

2.5

3.0

04 05 06 07 08 09 10 11 12

-600

-400

-200

0

200

400

600

800

1,000

Operating profit (R) P/B (L)(x) (Wbn)

Mi d - c y c l e v a l u a t i o n f e l l c o n t i n u ou s l y ;E x p e c t r e - r at i n g o n p r o d u c t d i f f e r e n t i a t i o n

12F11F


11/53



Table 4. Global display panel makers earnings and valuations (Wbn, %, x)Sales OP NP ROE P/E P/B EV/EBITDA11F 12F 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F

LG Display 24,415 27,255 807 1,458 898 1,378 8.0 11.3 13.2 8.6 1.0 0.9 2.8 2.1

Samsung SDI 5,512 5,954 405 528 495 620 8.2 9.5 15.8 12.6 1.3 1.2 9.4 8.8

SEC 125,835 138,952 12,943 16,249 12,353 14,942 14.5 15.4 11.9 9.8 1.7 1.5 6.3 5.2

LGE 31,021 34,152 251 1,099 570 1,173 5.6 10.7 26.1 12.7 1.4 1.2 19.7 11.6

Sharp 38,863 40,980 898 1,182 169 517 1.3 3.6 72.8 21.0 0.8 0.8 4.6 4.4

Sony 98,352 102,169 3,134 4,481 1,354 2,215 3.8 6.0 19.7 12.2 0.7 0.7 2.9 2.5

Panasonic 114,472 119,145 3,582 5,038 726 2,048 1.8 5.3 33.9 13.0 0.7 0.7 5.6 4.7

Hitachi 124,848 127,127 5,697 6,723 3,206 3,216 15.6 12.3 9.2 9.1 1.3 1.1 5.6 5.0

AUO 16,972 18,086 -82 616 -79 431 -0.2 3.9 - 16.4 0.7 0.7 3.7 3.2

CMI 22,137 24,227 154 700 -100 510 -2.1 4.4 - 14.7 0.8 0.7 4.8 3.8

Avg. 5.7 8.2 25.3 13.0 1.0 1.0 6.5 5.1

Source: Bloomberg, Daewoo Securities Research

Figure 22. Major Korean IT companies share performances Figure 23. Global display panel makers share performances

Source: Thomson Reuters Source: Thomson Reuters

Figure 24. ROE - P/B comparison of global display peers (11F) Figure 25. Global LCD panel makers OP margin trends (11F)

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

0

50

100

150

200

250

300

350

400

1/09 5/09 9/09 1/10 5/10 9/10 1/11 5/11

LGD SEC

LGE Samsung SDI

(1/5/09=100)

0

50

100

150

200

250

1/09 5/09 9/09 1/10 5/10 9/10 1/11 5/11

LGD AUO

CMI CPT

(1/5/09=100)

LG D

S a m s u n g S D I

S E C

LG E

SharpSony

Panasonic

Hitachi

AUO

CMI

0.0

0.3

0.6

0.9

1.2

1.5

1.8

-4 -2 0 2 4 6 8 10 12 14 16 18

(P/B, x)

(ROE, %)

-80

-60

-40

-20

0

20

40

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

LGD AUO CMI

(%)


12/53



Table 5. Global LCD equipment makers earnings and valuations (Wbn, %, x)Sales OP NP ROE P/E P/B EV/EBITDA11F 12F 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F

SFA Engineering 756 943 91 125 79 107 26.3 28.0 12.8 9.4 3.0 2.4 8.1 5.3

Top Engineering 150 176 13 17 14 18 11.7 13.5 7.4 5.7 0.9 0.8 8.3 6.0

DMS 248 261 31 27 12 18 8.0 11.0 11.0 7.2 0.9 0.8 3.7 3.7

KC Tech 254 322 31 41 34 41 18.0 18.4 6.7 5.5 1.1 1.0 5.1 3.6

Avaco 256 317 17 25 15 22 25.0 33.2 8.2 5.7 2.2 1.6 7.4 4.6

ULVAC 3,039 3,277 76 162 1 82 0.8 6.2 - 17.0 1.1 1.0 10.8 7.4

TEL 9,756 9,813 1,427 1,423 934 925 11.2 11.3 11.3 11.5 1.2 1.1 3.9 3.9

DNS 3,758 3,707 398 363 307 222 22.7 14.4 7.2 10.0 1.5 1.3 5.2 5.6

MJC 391 432 23 37 13 21 4.4 6.8 15.2 9.3 0.7 0.6 3.9 3.0

TOK 1,108 1,119 98 118 64 75 3.9 4.5 16.6 13.9 0.6 0.6 3.0 2.7

NSK 9,802 10,690 639 826 359 481 9.4 11.8 15.1 11.3 1.5 1.3 7.0 5.8

Avg. 12.8 14.5 11.2 9.7 1.3 1.2 6.0 4.7Source: Bloomberg, Daewoo Securities Research

Figure 26. Global LCD equipment makers share performances Figure 27. ROE - P/B comparison of global equipment makers (11F)

Source: Thomson Reuters Source: Bloomberg, Daewoo Securities Research

Figure 28. Kor. LCD equipment makers market cap/new orders (11F) Figure 29. Global LCD equipment makers OP margin trends (11F)

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

-60

-40

-20

0

20

40

1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

SFA Engineering KC Tech Top Engineering

DMS Avaco

(%)

0

100

200

300

400

500

1/09 5/09 9/09 1/10 5/10 9/10 1/11 5/11

KC Tech

SFA Engineering

Top Engineering

TEL

Ulvac

(1/5/09=100)

S F AEng ineer ing

T opE n g i n e e r i n g

D M SK C T e c h

A v a c o

ULVACTEL

DNS

MJCTOK

NSK

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0 5 10 15 20 25 30

(P/B, x)

(ROE, %)

44

61

7787

107

0

200

400

600

800

1,000

1,200

SFA Engineering KC Tech Top Engineering DMS Avaco

0

20

40

60

80

100

120

Market cap (L)

New orders (11F, L)

Mkt cap/new orders (R)

(Wbn) (%)


13/53



Table 6. Global LCD part makers (fabless companies) earnings and valuations (Wbn, %, x)Sales OP NP ROE P/E P/B EV/EBITDA11F 12F 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F 11F 12F

Silicon Works 367 450 47 63 46 60 20.6 22.7 10.4 8.0 2.0 1.7 5.7 3.6

TLI 111 125 18 21 19 21 18.0 17.5 3.7 3.4 0.7 0.6 1.7 1.5

Telechips 89 107 8 14 12 17 11.2 14.4 5.2 3.6 0.6 0.5 0.9 0.6

Qualcomm 15,685 17,632 6,401 7,305 5,706 6,399 19.0 18.0 18.0 16.5 3.5 3.0 13.3 11.4

NVIDIA 4,444 4,863 844 1,002 788 927 17.1 18.9 15.5 13.5 2.7 2.3 8.2 7.1

Broadcom 8,204 9,030 1,447 1,679 1,783 1,966 22.5 22.0 12.4 11.4 2.9 2.5 11.6 10.1

Marvell 3,958 4,371 1,022 1,155 1,039 1,161 17.1 17.0 9.7 9.0 1.7 1.4 6.6 5.8

Mediatek 3,477 4,029 632 870 648 821 16.0 19.8 20.1 15.7 3.2 2.9 12.5 9.7

Realtek 911 984 111 119 70 75 10.1 10.3 16.1 15.5 1.7 1.7 7.3 6.9

Novatek 1,461 1,611 199 233 179 202 21.2 22.6 12.2 10.7 2.5 2.3 8.5 7.5

ARM Holdings 824 949 302 402 259 328 14.3 16.0 53.0 42.6 7.4 6.5 38.7 30.6

Avg. 17.0 18.1 16.0 13.6 2.6 2.3 10.4 8.6Source: Bloomberg, Daewoo Securities Research

Figure 30. Global fabless peers share performances Figure 31. Korean fabless peers share performances

Source: Thomson Reuters Source: Thomson Reuters

Figure 32. ROE - P/B comparison of global fabless peers (11F) Figure 33. EPSG-P/E comparison of global fabless peers (11F)

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

0

50

100

150

200

250

300

350

1/09 5/09 9/09 1/10 5/10 9/10 1/11 5/11

Qualcomm

Broadcom

Marvell

NVDIA

(1/5/09=100)

0

100

200

300

400

500

1/09 5/09 9/09 1/10 5/10 9/10 1/11 5/11

Silicon Works

TLI

Telechips

Mtek Vision

Core Logic

(1/5/09=100)

ARM Holdings

Novatek

Realtek

Mediatek

Marvell

BroadcomNVIDIA

Qualcomm

Telechips TLI

S i l i c o n Wo r k s

0

1

2

3

4

5

6

7

8

9 12 15 18 21 24

(P/B, x)

(ROE, %)

S i l i c o n Wo r k sTLI

Telechips

Qualcomm

NVIDIABroadcom

Marvell

Mediatek

Realtek

Novatek

ARM Holdings

0

10

20

30

40

50

60

-100 -50 0 50 100 150 200 250

(P/E, x)

(EPSG, %)


14/53



III. LCD supply/demand and price forecasts

1. Supply forecast

1) Chinese makers to operate new 8G lines in 2H

With the LCD industry maturing, capacity expansion at global LCD panel makers is slowing

sharply. We expect global LCD panel capacity (in terms of glass area input) to increase by

17.2% in 2011, and by 13.4% in 2012. Since product differentiation is increasingly important

due to the commoditization of LCD panel production technology, only panel makers with

differentiated product lineups will likely be able to continue to expand capacity. Therefore,

we believe that the two Korean panel makers that are currently dominating the global display

market are likely to enhance their dominant positions.

New lines scheduled to open in 2H are mostly at Chinese makers. For example, BOE (8G),

CSOT (8G), and CEC Panda (6G) are set to commence operations in 2H. As such, the

combined capacity of Chinese panel makers is forecast to expand by 86% YoY in 2011.

Among the top 5 global makers, LGD is slated to open an 8G line in 4Q. Unlike other 8G

lines, the new line will be dedicated to IT panel production, including tablet PCs and IPS

monitors.

Figure 34. Global panel makers capac ity trends by generation


Figure 35. Global LCD panel capacity trend and forecasts


Global LCD panel

capacity to increase by

17.2% YoY in 2011

LGD, BOE, and CSOT to

start operations of new

8G lines in 2H

0

10

20

30

40

10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F

0

20

40

60

4G or lower (L) 5G (L)

6G (L) 7G (L)

8G or higher (L) Capacity growth rate (R)

(mn m2) (%)

SEC LGD CMI AUO Sharp BOE

0

30

60

90

120

150

180

01 02 03 04 05 06 07 08 09 10 11F 12F

0

20

40

60

80SEC (L) LGD (L) CMI (L) AUO (L)

Sharp (L) BOE (L) Others (L) Growth rate (R)

(mn m2) (%)


15/53



2) Domestic panel makers to expand AMOLED capacity

We expect global AMOLED panel capacity (in terms of glass area input) to soar by 153.9%

YoY in 2011. SMDs 5.5G line will take the lions share of global capacity expansion.

Although LGD is also scheduled to open its AP2 (4G) line in 2Q, its capacity expansion will

account for only 30% of SMDs. Both SMD and LGD are expected to invest in 8G pilot lines

for TV panels in 2011 and operate them in 1H12.

Table 7. Global LCD makers new lines (000 sheets/month)Company Factory Phase Gen. 1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F

1 8 90 90 90 90 90 90 90 90SEC L8-2

2 8 50 70 80 100 110 110 120 120

1 8 125 130 135 135 135 135 135 135

2 8 120 120 125 135 135 135 135 135P8

3 8 15 30 30 45 70 70 70 701 8 - - - 20 40 60 70 70

LG Display

P92 7 - - - - - - 20 40

1 8 5 5 5 5 5 5 5 5

2 8 20 20 20 20 20 20 20 20CMI Fab 8

3 8 20 30 30 33 33 33 33

1 8 - 25 40 45 45 47 50 50AUO L8B

2 8 - - - - - - - 20

1 6 30 30 30 30 30 30 30 30

2 6 15 30 30 30 30 30 30 30B3

3 6 - 10 30 30 30 30 30 30

1 8 - - 25 30 40 45 45 45

BOE

B42 8 - - - - 15 45 45 45

1 6 - 15 40 65 65 65 65 65CEC Panda Nanjing

2 6 - - - 7 15 18 18 18

1 8 - - - 10 25 45 50 50

2 8 - - - - - 15 30 45CSOT Shenzhen

3 8 - - - - - - - 10


Table 8. Global AMOLED makers new lines (000 sheets/month)Company Factory Phase Gen. 1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F

1 4 (1/2) 27 27 27 27 27 27 27 27

2 4 (1/2) 14 14 14 14 14 14 14 14A1

3 4 (1/2) 48 48 48 48 48 48 48 48

1 5.5 (1/4) - 16 48 96 96 96 96 96

2 5.5 (1/4) - - - 48 72 72 96 96A2

3 5.5 (1/4) - - - - 28 72 100 100

A3 1 5.5 - - - - - - - 6

SEC

V1 1 8 (1/6) - - - - - 20 40 60

AP1 1 4 (1/2) 4 4 4 4 4 4 4 4

1 4 (1/2) 4 12 12 12 12 12 12 12AP2

2 4 (1/2) - 4 8 12 16 16 16 16LG Display

M1* 1 8 (1/2) - - - - 2 4 8 8

Note: LG Displays M1 is expected to be an 8G white OLED production facility


Global AMOLED

capacity to soar by

153.9% YoY in 2011


16/53



2. Demand forecast

1) IT panel demand

In 2011, we forecast IT panel demand to expand by 11.6% YoY. Global PC shipments are

expected to rise by 9.3% YoY to 371mn units: 137mn units (up 1.7% YoY) for desktop PCs

and 234mn units (up 14.2% YoY) for mobile PCs, such as notebooks and tablet PCs. In

particular, tablet PC shipments are projected to surge by 213% YoY from 16mn units to

50mn units.

Apples iPad will continue to dominate the tablet PC market in 2011. Sales volume of the

iPad is forecast to soar by 179% from 14mn units (market share of 88%) in 2010 to 39mn

units (market share of 78%) in 2011. There are concerns about disruptions to iPad

production resulting from an explosion at a Chinese factory operated by Foxconn, an EMS

(electronics manufacturing services) provider for Apple. However, we believe that its impact

on annual sales volume will be minimal. Although some reports indicate that the explosion

will result in a production loss of 2mn units in 2Q, we estimate the loss to be limited to

500,000 units. Moreover, we expect this loss to be recovered by 2H.

Notably, the percentage of highly value-added IT panels is increasing. The adoption of

IPS/FFS panels in IT products is increasing thanks to the expansion of the tablet PC market,

while the percentage of monitors that use LED BLU and IPS panels is also climbing.

Figure 36. IT panel shipment area trend and forecasts Figure 37. Global desktop PC shipment trend and forecasts


Figure 38. Global laptop shipment trend and forecasts Figure 39. Global tablet PC shipment trend and forecasts


In 2011, global PC

shipments to rise by

9.3% YoY; IT panel

demand to expand by

11.6% YoY

Impact of production

disruptions at Foxconns

factory to be minimal

0

10

20

30

40

50

1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12F

-20

-15

-10

-5

0

5

10Desktop PC shipments (L) YoY growth (R)

(mn units) (%)

0

2

4

6

8

10

1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12F

-20

0

20

40

60

Laptop (L) Monitor (L)

YoY growth (R)

(km2) (%)

0

10

20

30

40

50

60

70

80

1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12F

0

10

20

30

40

50Laptop shipments (L) YoY growth (R)

(mn units) (%)

0

5

10

15

20

25

30

35

1Q10 1Q11 1Q12F 1Q13F

0

50

100

150

200Tablet PC (L)

YoY growth (R)

(mn units) (%)


17/53



2) TV panel demand outlook

We lowered our forecast for TV panel demand growth (in terms of glass area input) this year

from 24.3% to 18.4%. In 1H, TV sales were slower than expected due to the spread of

smartphones and tablet PCs. Thus, we also revised down our annual LCD TV shipment

forecast by 5%. In particular, LCD TV shipments to advanced markets, including North

America, Europe, and Japan, are anticipated to turn downward for the first time.

We expect annual TV panel shipments to increase 11.7% this year to 213mn units. While

shipments to advanced countries are anticipated to shrink 1.3% to 111mn units, shipments

to developing countries are anticipated to climb 31.3% to 120mn units. China is likely to

emerge as the second biggest TV market next to Europe; shipments to China are expected

to grow 18% to 43mn units. TV markets in Asia (excluding China and Japan), South America,

and the Middle East/Africa are projected to expand 66%, 25%, and 43%, respectively.

LED TV sales, which had slowed down in 2H10, deteriorated further in 1H11. In our view,

they have failed to enter the mainstream due to price resistance (30~40% more expensive

than CCFL backlit LCD TVs). Accordingly, we lowered our forecast for annual LED TV panel

shipments by 17.2% to 120mn units. LED-backlit TVs are anticipated to account for 48% of

all LCD TV sales this year.

Figure 40. Global TV shipment trend and forecasts Figure 41. Downward revisions to LED TV shipment forecasts


Figure 42. TV shipment trend and forecasts in advanced countries Figure 43. TV shipment trend and forecasts in developing countries


Revised down global

LCD TV sales by 5%

Lowered global LED TV

sales forecast by 17%

0

10

20

30

40

50

1Q08 1Q09 1Q10 1Q11 1Q12F

0

20

40

60

80

100

120LCD TV shipments in delveoping countries (L)

YoY growth (R)

(mn units) (%)

0

10

20

30

40

50

1Q08 1Q09 1Q10 1Q11 1Q12F

-20

-10

0

10

20

30

40

50LCD TV shipments in advanced countries (L)

YoY growth (R)

(mn units) (%)

0

10

20

30

40

50

1Q09 3Q09 1Q10 3Q10 1Q11 3Q11F

0

20

40

60

804Q 10 Shipment s (L) 2Q 11 S hipment s (L)

Proport ion in 4Q10 (R) Proportion in 2Q11 (R)

(mn units) (%)

Weak LED TV sales in 1H11 dueto slow TV demand recovery;

Demand to recover in 2H11

0

20

40

60

80

100

1Q08 1Q09 1Q10 1Q11 1Q12F

-10

0

10

20

30CRT (L) LCD (L)

PDP (L) Others (L)

YoY growth (R)

(mn units) (%)2011 TV growth: 3.6%;

LCD TV growth: 12.0%


18/53



Figure 44. LCD TV market share trends in North Ame rica (revenue basis)


Figure 45. LCD TV market share trends in Europe (revenue basis)


Figure 46. LCD TV market share trends in China (revenue basis)


0

5

10

15

20

25

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11

HISENSE SKYWORTH TCL

SONY SAMSUNG

(%)

0

10

20

30

40

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11

SAMSUNG LGE SONY

PHILIPS TOSHIBA

(%)

0

5

10

15

20

25

30

35

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11

SAMSUNG VIZIO SONY

LGE FUNAI

(%)


19/53



Table 9. Global LCD supply and demand trends and forecasts (000 units, Km2, %)1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 2009 2010 2011F 2012FSupply

Shipment unit 183,108 209,093 221,612 209,829 219,516 230,593 234,246 224,960 564,438 705,468 823,642 909,315

Laptop 63,606 73,785 79,458 76,026 80,468 86,496 89,434 86,845 172,801 236,745 292,874 343,242

Monitor 58,169 64,287 65,491 61,834 65,294 67,315 67,100 64,794 196,926 214,277 249,780 264,503

TV 49,732 58,264 63,341 58,804 60,439 63,029 63,656 59,492 158,779 212,681 230,141 246,615

Shipment area 27,416 32,256 34,941 33,024 34,762 36,894 38,077 36,294 85,120 112,164 127,636 146,027

Laptop 3,257 3,792 4,096 3,917 4,145 4,478 4,655 4,538 9,762 12,669 15,061 17,816

Monitor 6,283 6,912 6,955 6,482 6,864 7,127 7,162 6,972 22,009 23,960 26,631 28,124

TV 16,333 19,685 21,849 20,629 21,544 22,857 23,615 22,445 50,012 69,745 78,496 90,461

Growth rate of

shipment area-6.3 17.7 8.3 -5.5 5.3 6.1 3.2 -4.7 25.5 31.8 13.8 14.4

Laptop -4.4 16.4 8.0 -4.4 5.8 8.0 3.9 -2.5 10.1 29.8 18.9 18.3

Monitor 0.6 10.0 0.6 -6.8 5.9 3.8 0.5 -2.7 11.3 8.9 11.1 5.6TV -10.0 20.5 11.0 -5.6 4.4 6.1 3.3 -5.0 38.3 39.5 12.5 15.2

Shipment area by

region

Korea 13,766 16,338 17,604 16,193 17,485 18,711 19,043 17,932 43,458 55,562 63,901 73,171

Taiwan 10,726 11,872 12,762 12,339 12,142 12,852 13,151 12,759 31,883 42,236 47,699 50,903

Japan 2,152 3,224 3,725 3,605 4,445 4,528 4,948 4,475 7,178 11,018 12,706 18,396

Shipment area by

supplier

LGD 6,999 8,364 9,069 8,448 9,186 9,954 10,105 9,300 20,777 27,852 32,880 38,545

SEC 6,664 7,856 8,408 7,625 8,183 8,637 8,820 8,530 22,243 27,221 30,553 34,170

AUO 4,232 4,836 5,240 5,062 5,062 5,360 5,659 5,514 12,705 17,453 19,371 21,596

CMO 4,806 5,233 5,657 5,448 5,480 5,807 5,807 5,643 13,882 17,800 21,144 22,737

Sharp 1,554 2,624 3,139 3,032 3,210 3,218 3,404 3,053 4,845 8,677 10,349 12,885

Utilization rate bysupplier

LGD 81 90 95 85 90 95 95 85 91 92 88 90

SEC 85 90 95 85 90 95 95 90 89 92 89 90

AUO 80 85 90 85 85 90 90 85 75 84 85 86

CMO 80 85 90 85 85 90 90 85 73 79 85 86

Sharp 45 75 88 85 90 90 95 85 73 82 73 85

DemandDemand unit 135,740 144,446 161,995 182,338 151,365 161,912 177,634 194,840 441,294 551,303 624,518 685,751

Laptop 51,175 52,867 62,250 67,828 59,810 63,240 71,209 75,028 143,660 189,552 234,120 269,288

Monitor 40,196 43,249 46,408 45,892 41,105 43,697 46,367 45,704 165,377 173,408 175,745 176,873

TV 44,369 48,329 53,336 68,618 50,450 54,975 60,057 74,108 132,258 188,343 214,653 239,590

Demand area 24,582 26,510 29,801 36,436 28,860 31,152 34,544 40,992 72,441 99,464 117,329 135,548

Laptop 2,820 2,788 3,246 3,527 3,230 3,269 3,640 3,824 8,157 10,334 12,382 13,963Monitor 5,122 5,516 6,066 6,037 5,557 5,912 6,430 6,378 19,185 21,148 22,740 24,277

TV 16,640 18,206 20,488 26,872 20,073 21,971 24,475 30,790 45,098 67,981 82,207 97,309

Growth rate -20.5 7.8 12.4 22.3 -20.8 7.9 10.9 18.7 16.2 37.3 18.0 15.5

Laptop -3.6 -1.1 16.4 8.6 -8.4 1.2 11.3 5.1 -9.7 26.7 19.8 12.8

Monitor -9.2 7.7 10.0 -0.5 -8.0 6.4 8.8 -0.8 2.2 10.2 7.5 6.8

TV -25.5 9.4 12.5 31.2 -25.3 9.5 11.4 25.8 30.6 50.7 20.9 18.4

Demand unit by

region

North America 7,304 10,625 11,050 12,538 9,246 11,275 11,501 13,079 37,323 38,078 41,516 45,100

Europe 12,171 12,185 13,420 19,795 13,787 14,401 13,665 19,517 42,902 53,262 57,571 61,370

Japan 4,670 3,545 2,115 3,110 2,850 2,934 3,103 3,023 12,534 19,239 13,440 11,910

China 10,215 8,486 11,853 14,947 11,220 9,996 13,515 16,269 29,296 38,657 45,500 51,000

Asia* 4,279 5,982 7,023 8,063 6,530 7,905 9,280 10,655 10,259 15,250 25,347 34,370South America 3,322 4,780 4,860 6,570 4,030 5,106 5,278 7,136 8,226 15,654 19,532 21,550

Mid East/Africa 2,409 2,726 3,016 3,596 2,787 3,358 3,715 4,430 4,860 8,203 11,747 14,290

Glut 19.0 3.4 8.2 -4.1 14.4 11.6 6.8 -7.1 17.5 12.8 8.8 7.7

Note: Asia does not include China and Japan; Source: DisplaySearch, IDC, Daewoo Securities Research


20/53



3. Price outlook

LCD panel prices have slid by an average of 25% for 13 months after peaking in March 2010,

which is the longest down cycle since the compilation of panel price data in 2004. IT panel

prices have stabilized since falling to cash costs in 4Q10, and TV panel prices began to

stabilize in 2Q11. This year, IT panel prices remain flat, while TV panel prices have fallen by

an average of 8% since early-2011.

In 2H11, panel price fluctuations are forecast to ease significantly. Panel makers

demanded price hikes for FPR 3D panels, and the prices of some FPR 3D models are likely

to be raised slightly. However, unlike FPR 3D panel prices, which have upside potential

due to limited supply (PR film makers are limited), the prices of other panels are unlikely to

be hiked as supply may expand following an increase in capacity utilization. As of 2Q,

panel makers capacity utilization fell below 90%; however, we expect this percentage toincrease steadily going forward.

Still, stable parts supply should remain a major variable. There are concerns over LCD parts

shortages in the aftermath of the March earthquake. Although this issue is still lurking

under the surface amid low demand, if demand picks up with the arrival of the strong

season in July, parts shortages may disrupt panel production.

Figure 47. LCD panel price trends and forecasts (biweekly) Figure 48. LCD panel price trends by application

Source: Witsview, Daewoo Securities Research Source: Witsview, Daewoo Securities Research

Figure 49. Monthly change in LCD panel price Figure 50. Global LCD panel makers capacity utilization trends

Source: Witsview, Daewoo Securities Research Source: DisplaySearch, Daewoo Securities Research

Longest down cycle of

LCD panel prices since

2004

Panel price hikes to be

limited

Parts shortages may

disrupt panel production

-12

-8

-4

0

4

8

12

05 06 07 08 09 10 11

Laptop

Monitor

TV

(%)

Panel price

fluctuations to ease

70

80

90

100

110

120

130

140

4/09 7/09 10/09 1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11

Laptop 15.6" Monitor 19"

Monitor 22" TV 32"

TV 42" TV 47"

(4/09=100)

TV panel price has stablized

and is likely to rebound slightly

in 2 11

-15

-10

-5

0

5

10

1 2 3 4 5 6 7 8 9 10 11 12

2005 2006 2007 2008

2009 2010 2011

(%)

(month) 0

20

40

60

80

100

1Q07 1Q08 1Q09 1Q10 1Q11

SEC LGD AUO CMI Sharp

Global financial crisis

(%)

Voluntary production cuts due to

a rapid fall in panel prices

Ut i l i z a t i o nr a t i o s

d i f f e r e n t i a t e ddepend ing on

c a p t i v ema r k e t s


21/53



Figure 51. 15.6HD laptop panel price trend Figure 52. 19 WXGA+ monitor panel price trend

Source: WitsView, Daewoo Securities Research Source: WitsView, Daewoo Securities Research

Figure 53. 22 WSXGA+ monitor panel price trend Figure 54. 32 WXGA TV panel price trend


Figure 55. 42 FHD TV panel price trend Figure 56. 47 FHD TV panel price trend


0

24

48

72

96

120

1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11

0

8

16

24

32

40Laptop 15.6" (L)

Panel Price Index (R)

(US$) (4/04=100)

0

28

56

84

112

140

1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11

0

8

16

24

32

40Monitor 19" (L)


(US$) (4/04=100)

0

40

80

120

160

200

1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11

0

8

16

24

32

40Monitor 22" (L)


(US$) (4/04=100)

0

72

144

216

288

360

1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11

0

8

16

24

32

40TV 32" (L)


(US$) (4/04=100)

0

140

280

420

560

700

1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11

0

8

16

24

32

40

TV 42"Panel Price Index (R)

(US$) (4/04=100)

0

200

400

600

800

1,000

1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11

0

8

16

24

32

40

TV 47"Panel Price Index (R)

(US$) (4/04=100)


22/53



Table 10. Monthly LCD TV price trends (US$, %)Jun. 10 Jul. 10 Aug. 10 Sep. 10 Oct. 10 Nov. 10 Dec. 10 Jan. 11 Feb. 11 Mar. 11 Apr. 11 May 11

32" LCD TV 607 606 586 600 554 587 582 544 521 506 415 414

37" LCD TV 808 808 773 778 766 840 792 754 728 729 528 529

42" LCD TV 993 960 939 898 871 904 844 869 830 972 624 612

47" LCD TV 1,315 1,325 1,329 1,174 1,123 1,153 1,112 1,193 1,110 1,132 842 786

52" LCD TV 2,048 2,043 1,978 1,910 1,774 1,755 1,844 1,721 1,902 1,878 1,477 1,593

32" LED TV 848 850 880 876 805 806 766 715 709 680 612 581

42" LED TV 1,282 1,268 1,232 1,229 1,176 1,127 1,085 1,084 1,020 997 997 997

47" LED TV 2,054 2,139 2,240 1,708 1,630 1,680 1,580 1,582 1,506 1,499 1,232 1,314

52" LED TV 2,314 2,431 2,327 2,161 2,227 2,267 2,124 2,274 1,942 1,872 1,888 1,818

Growth rate (%, MoM)32" LCD TV 2.4 -0.2 -3.3 2.4 -7.7 6.0 -0.9 -6.5 -4.2 -2.9 -18.0 -0.2

37" LCD TV 2.5 0.0 -4.3 0.6 -1.5 9.7 -5.7 -4.8 -3.4 0.1 -27.6 0.2

42" LCD TV 3.4 -3.3 -2.2 -4.4 -3.0 3.8 -6.6 3.0 -4.5 17.1 -35.8 -1.947" LCD TV -2.2 0.8 0.3 -11.7 -4.3 2.7 -3.6 7.3 -7.0 2.0 -25.6 -6.7

52" LCD TV -3.8 -0.2 -3.2 -3.4 -7.1 -1.1 5.1 -6.7 10.5 -1.3 -21.4 7.9

32" LED TV -6.6 0.2 3.5 -0.5 -8.1 0.1 -5.0 -6.7 -0.8 -4.1 -10.0 -5.1

42" LED TV -17.9 -1.1 -2.8 -0.2 -4.3 -4.2 -3.7 -0.1 -5.9 -2.3 0.0 0.0

47" LED TV -14.5 4.1 4.7 -23.8 -4.6 3.1 -6.0 0.1 -4.8 -0.5 -17.8 6.7

52" LED TV -0.5 5.1 -4.3 -7.1 3.1 1.8 -6.3 7.1 -14.6 -3.6 0.9 -3.7

LED TV premium (%)32" LED TV 39.7 40.3 50.2 46.0 45.3 37.3 31.6 31.4 36.1 34.4 47.5 40.3

42" LED TV 29.1 32.1 31.2 36.9 35.0 24.7 28.6 24.7 22.9 2.6 59.8 62.9

47" LED TV 56.2 61.4 68.5 45.5 45.1 45.7 42.1 32.6 35.7 32.4 46.3 67.2

52" LED TV 13.0 19.0 17.6 13.1 25.5 29.2 15.2 32.1 2.1 -0.3 27.8 14.1

% of LCD panel productioncost32" LCD Panel 32.8 32.0 31.7 28.9 29.8 26.7 26.3 27.9 28.4 29.2 35.5 35.6

37" LCD Panel 30.5 29.6 29.8 28.3 28.4 25.3 26.1 30.2 29.5 29.1 40.2 40.2

42" LCD Panel 33.0 33.1 31.9 31.7 31.9 29.3 30.2 28.8 28.9 24.4 38.1 38.8

47" LCD Panel 32.9 31.9 30.5 33.2 33.8 31.7 31.9 29.3 30.6 29.8 40.1 42.9

Source: WitsView

Figure 57. 32 LCD TV price and % of production costs Figure 58. 47 LCD TV price and % of production costs


300

400

500

600

700

800

900

7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11

20

26

32

38

44

5032" LCD TV price (L)

Panel share in TV price (R)

(US$) (%)

700

1,000

1,300

1,600

1,900

2,200

2,500

7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11

20

26

32

38

44

5047" LCD TV price (L)

Panel share in TV price (R)

(%)(US$)


23/53



LG Display (034220 KS)

Weathering the storm with differentiation

Seasonal demand for LCD TVs likely to grow amid limited supply Earnings to further differentiate on stable supply chain and growing portion of high

value products

Maintain Buy and TP of W48,000

We reiterate our Buy rating on LG display with a target price of W48,000. The

companys current share price is equivalent to a P/E of 13.2x, a P/B of 1.0x and an

EV/EBITDA of 2.8x. Our target price was derived by applying a fair P/B of 1.5x to

our 2011F BSP of W32,552. We applied a fair P/B of 1.5x, which is a peak cyclevaluation, given that the companys P/B has historically bottomed at 1.0x during

past down cycles and LCD demand is expected to steadily recover from 3Q.

Our investment recommendation is premised on the following:

1) Seasonal demand for LCD TVs are likely to grow amid limited supply: With TV

demand in advanced economics showing signs of recovering, 2Q panel shipments are

expected to rise 18% QoQ. On the supply side, however, we see limited growth given

continued oversupply and concerns related to the procurement of parts and

equipments due to the Japanese earthquake. Furthermore, with the destocking of set

makers coming to an end, seasonal demand is likely to gradually improve starting 3Q.

As the business environment has improved in May with the stabilization of panel prices

(prices have even rebounded in some products), the company may turn black in 2Q.

2) Stable supply chain is a differentiating factor: Concerns over the supply chain,

which has grown increasingly tighter since the 2008 financial crisis, have

intensified in the wake of the Japanese earthquake. Although part suppliers in the

display sector were not directly impacted by the earthquake, there are risks of a

parts shortage in 2H due to facility maintenance and conservative investments.

Given that domestic manufacturers locally procure most of their parts and

equipments, we expect LG Displays stable supply chain will further set the

company apart from second-tier players.

3) Improved margin on higher portion of high value-added panels: LG Display

supplies 70% of the panels for iPad 2 and now supplies low-priced 3D TVs using

film type patterned retarder (FPR) technology in North America (in addition toChina). The growing sales portion of high value-added products differentiated by

such superior technology should enable the company to improve its margins.

4) Focus on IPS for small- and mid-sized panels and AMOLED for TV panels: While

Samsung has concentrated on AMOLED panels, LG Display plans to continue to

focus on IPS for the small- and mid-sized panel segment and on AMOLED for TV

panels with full-scale investment in an 8G AMOLED pilot line starting in 2H.

Earnings & Valuation MetricsFY Sales OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA

(Wbn) (Wbn) (%) (Wbn) (W) (Wbn) (Wbn) (%) (x) (x) (x)

12/09 20,119 1,001 5.0 1,068 2,985 3,612 4 11.0 13.2 1.4 3.9

12/10 25,004 1,402 5.6 1,003 2,802 4,051 -555 9.6 14.2 1.4 4.0

12/11F 24,415 807 3.3 898 2,509 4,392 836 8.0 12.5 1.0 2.7

12/12F 27,255 1,458 5.4 1,378 3,851 5,086 1,466 11.3 8.2 0.8 2.0

12/13F 28,765 1,845 6.4 1,758 4,913 5,451 1,703 13.0 6.4 0.7 1.5

Source: Company data, Daewoo Securities Research estimates

Buy (Maintain)

Target Price (12M, W) 48,000

Share Price (06/13/11, W) 31,400

Expected Return (%) 52.9

EPS Growth (11F, %) -10.5

Market EPS Growth (11F, %) 25.3

P/E (11F, x) 12.5

Market P/E (11F, x) 10.3

KOSPI 2,048.74

Market Cap (Wbn) 11,235

Shares Outstanding (mn) 358

Avg Trading Volume (60D, '000) 3,316

Avg Trading Value (60D, Wbn) 122

Dividend Yield (11F, %) 1.6

Free Float (%) 62.1

52-Week Low 31,400

52-Week High 43,200

Beta (12M, Daily Rate of Return) 1.0

Price Return Volatility (12M Daily,%,SD) 2.0

Foreign Ownership (%) 32.6

Major Shareholder(s):LG Electronics et al. (37.91%)

National Pension Fund (6.05%)

Price Performance(%) 1M 6M 12MAbsolute -21.8 -24.7 -23.7

Relative -18.4 -27.3 -46.0

40

60

80

100

120

140

160

6/10 10/10 2/11 6/11

Share price

KOSPI


24/53



2011 Earnings Outlook: Sales of W24.7tr, OP of W807.5bnLG Displays shipment area is expected to grow 13.7% YoY in 2011. However, with ASP

likely to fall 10.6% YoY and the W/US$ to decline 5.8% YoY on average, annual sales are

projected to shrink 3.1% to W24.7tr. In contrast, operating profit is likely to plunge 38.3% to

W807.5bn on increased depreciation due to capacity expansion in the P9 and P8 lines.

After two straight quarters of operating loss (4Q10~1Q11), however, the company is

projected to turn black in 2Q, posting an operating profit of W89bn. Demand is showing

signs of recovery, with May shipments growing roughly 10% MoM, and the downtrend in

panel prices likely to moderately turn around. Also, given the growing sales portion of high

value-added products (30% in 1Q to 40% in 2Q), we expect margins to show meaningful

improvement.

Table 11. LG Display's consolidated earnings trends and forecasts (Wbn, %, %p)1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F 2010 2011F 2012F

Avg. W/US$ rate 1143.9 1161.4 1182.6 1132.2 1119.6 1080.0 1040.0 1100.0 1151.6 1084.9 1100.0

Shipment area (Km2) 6,162 6,446 7,198 7,892 6,728 8,024 8,682 8,070 27,699 31,504 36,174

ASP (US$/m2) 834 862 778 695 694 697 716 703 787 703 666

Sales 5,876 6,454 6,698 6,483 5,366 6,245 6,670 6,448 25,511 24,730 27,255

Notebook 1,138 1,007 993 982 940 1,157 1,258 1,259 4,120 4,614 5,026

Monitor 1,532 1,500 1,493 1,263 1,382 1,517 1,371 1,297 5,787 5,567 5,700

TV 3,207 3,947 4,141 3,970 2,905 3,368 3,837 3,689 15,263 13,799 15,779

COGS 4,639 5,125 5,927 6,089 5,133 5,670 5,734 5,411 21,780 21,947 23,723

Raw material cost 3,710 4,146 4,840 4,876 3,977 4,415 4,416 4,124 17,571 16,932 18,432

Depreciation 632 707 804 783 816 904 957 913 2,926 3,590 3,792

SG&A 448 603 589 781 472 486 501 516 2,422 1,975 2,073

OP 789 726 182 -387 -239 89 435 522 1,310 807 1,458

OP margin 13.4 11.2 2.7 -6.0 -4.5 1.4 6.5 8.1 5.1 3.3 5.4

EBITDA 1,421 1,433 986 396 577 993 1,392 1,436 4,236 4,398 5,250

EBITDA margin 24.2 22.2 14.7 6.1 10.8 15.9 20.9 22.3 16.6 17.8 19.3

Growth (QoQ/YoY)Shipment area -1.0 4.6 11.7 9.6 -14.8 18.3 8.2 -7.0 34.2 13.7 14.8

ASP 3.1 3.4 -9.7 -10.6 -0.2 0.5 2.7 -1.8 1.7 -10.6 -5.3

Sales -0.5 9.8 3.8 -3.2 -17.2 16.4 6.8 -3.3 27.3 -3.1 10.2

Notebook 4.0 -11.5 -1.4 -1.1 -4.3 23.2 8.7 0.1 9.7 12.0 8.9

Monitor 12.5 -2.1 -0.5 -15.4 9.4 9.7 -9.6 -5.4 23.3 -3.8 2.4

TV -4.8 23.1 4.9 -4.1 -26.8 15.9 13.9 -3.9 32.9 -9.6 14.3

COGS -12.3 10.5 15.7 2.7 -15.7 10.5 1.1 -5.6 18.9 0.8 8.1Raw material cost -11.7 11.8 16.7 0.8 -18.4 11.0 0.0 -6.6 21.4 -3.6 8.9

Depreciation -18.5 11.9 13.7 -2.6 4.2 10.8 5.8 -4.5 3.1 22.7 5.6

SG&A 2.6 34.6 -2.3 32.5 -39.6 3.0 3.0 3.0 96.5 -18.5 5.0

OP 121.0 -8.0 -75.0 -312.9 -38.3 -137.3 388.6 20.0 166.9 -38.3 80.6

OP margin (%p) 7.4 -2.2 -8.5 -8.7 1.5 5.9 5.1 1.6 2.7 -1.9 2.1

EBITDA -16.0 0.8 -31.2 -59.8 45.7 72.1 40.2 3.1 27.3 3.8 19.4

EBITDA margin (%p) -4.5 -2.0 -7.5 -8.6 4.6 5.1 5.0 1.4 0.0 1.2 1.5

Source: Company data, Daewoo Securities Research

Sales expected to fall

3.1% YoY on ASP and

won appreciation

Likely to turn black in 2Q

as margins to improve

on growing portion of

high value-added

products


25/53



Figure 59. LG Displays consolidated sales trend and forecasts Figure 60. LG Displays consolidated OP trend and forecasts

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

Figure 61. LG Displays panel shipment area trend and forecasts Figure 62. LG Displays panel ASP trend and forecasts


Figure 63. Panel price trends (bi-weekly) Figure 64. Panel price changes by model

Source: Witsview Source: Witsview

0

1

2

3

4

5

6

7

8

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11F

-20

-10

0

10

20

30

40Consolidated sales (L) QoQ growth (R)

(Wtr) (%)

881 889

254

-288

-412

218

904

357

789726

182

-387

-239

189

598676

-600

-300

0

300

600

900

1,200

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11F

(Wbn)

0

2

4

6

8

10

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11F

-20

-10

0

10

20

30

40Shipment area (L) QoQ growth (R)

(mn m2) (%)

0

300

600

900

1,200

1,500

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11F

-30

-20

-10

0

10

20ASP/m2 (L) QoQ growth (R)

(US$/m2) (%)

70

80

90

100

110

120

130

140

4/09 7/09 10/09 1/10 4/10 7/10 10/10 1/11 4/11

Notebook 15.6" Monit or 19"

Monitor 22" TV 32"

TV 42" TV 47"

(4/09=100)

-12

-8

-4

0

4

8

12

05 06 07 08 09 10 11

Notebook

MonitorTV

(%)


26/53



LG Display (034220 KS/Buy/TP: W48,000)

Income Statement (Summarized) Balance Sheet (Summarized)

(Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F

Sales 25,004 24,415 27,255 28,765 Current Assets 8,500 11,326 13,931 16,507Cost of Goods Sold 22,011 21,737 23,723 24,742 Cash and Cash Equivalents 890 2,282 3,880 5,902Gross Profit 2,993 2,678 3,532 4,022 Accounts Receivable 3,883 4,238 4,731 4,993SG&A 1,590 1,871 2,073 2,177 Inventories 1,760 2,710 3,026 3,193Operating Profit 1,402 807 1,458 1,845 Other Current Assets 1,967 2,096 2,295 2,419Non-Operating Income -350 214 109 154 Non-Current Assets 14,658 15,713 15,595 15,283Interest Income/Expense 4 -36 -2 43 Investment Assets 2,487 3,290 3,673 3,876

F/X-Related Gain/Loss 0 431 0 0 Property, Plant and Equipment 11,688 12,481 12,487 12,296

Equity Method Gain/Loss 0 0 0 0 Intangible Assets 483 -58 -564 -889

Asset Disposal Gain/Loss 4 0 0 0 Total Assets 23,158 27,040 29,526 31,790Other Non-Operating Profit/Loss -358 -181 111 111 Current Liabilities 8,454 11,669 12,800 13,401Pretax Profit 1,052 1,021 1,567 2,000 Accounts Payable 2,986 3,747 4,183 4,415

Tax 49 123 189 242 Short-Term Debt 1,093 860 860 860

Profit from Continuing Operation 1,003 898 1,378 1,758 Current Long-Term Debt 813 1,087 1,087 1,087

Profit from Discontinued Operation 0 0 0 0 Other Current Liabilities 3,562 5,975 6,670 7,039

Tax Effect 0 0 0 0 Non-Current Liabilities 3,833 3,781 3,938 4,022Net Profit 1,003 898 1,378 1,758 Bonds 1,628 1,994 1,994 1,994Residual Income 1,003 898 1,378 1,758 Long-Term Debt 758 437 437 437

EBITDA 4,051 4,392 5,086 5,451 Other Non-Current Liabilities 1,447 1,351 1,508 1,591

Free Cash Flow -555 836 1,466 1,703 Total Liabilities 12,287 15,450 16,738 17,423Gross Profit Margin (%) 12.0 11.0 13.0 14.0 Paid-In Capital 1,789 1,789 1,789 1,789

EBITDA Margin (%) 16.2 18.0 18.7 19.0 Capital Surplus 2,251 2,251 2,251 2,251

Operating Margin (%) 5.6 3.3 5.4 6.4 Retained Earnings 6,838 7,558 8,757 10,336

Net Margin (%) 4.0 3.7 5.1 6.1 Stockholders' Equity 10,871 11,589 12,788 14,367

Cash Flow (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F

Cash Flow from Operating Activities 3,942 4,633 5,263 5,501 P/E (x) 14.2 12.5 8.2 6.4Net Profit 1,003 898 1,378 1,758 P/CF (x) 4.1 2.7 2.3 2.1

Non-Cash Income and Expense 3,243 3,068 3,628 3,606 P/B (x) 1.4 1.0 0.8 0.7

Tangible Assets Depreciation 2,488 3,474 3,792 3,988 EV/EBITDA (x) 4.0 2.7 2.0 1.5

Intangible Assets Depreciation 161 112 -164 -382 EPS (W) 2,802 2,509 3,851 4,913

Others 594 -517 0 0 CFPS (W) 9,755 12,217 14,448 16,058

Chg in Working Capital -303 667 257 137 BPS (W) 29,030 32,552 37,318 42,639

Chg in Accounts Receivable -635 -410 -493 -262 DPS (W) 500 500 500 500

Chg in Inventories -456 -950 -315 -168 Payout Ratio (%) - 19.9 13.0 10.2

Chg in Accounts Payable 978 801 436 232 Dividend Yield (%) 1.3 1.6 1.6 1.6

Others -191 1,227 629 335 Sales Growth (%) 24.3 -2.4 11.6 5.5

Cash Flow from Investment Activities -4,153 -3,720 -3,643 -3,383 EBITDA Growth (%) 12.2 8.4 15.8 7.2Chg in Tangible Assets -4,497 -3,797 -3,797 -3,797 Operating Profit Growth (%) 40.2 -42.5 80.8 26.5

Chg in Intangible Assets -211 417 670 707 EPS Growth (%) -6.1 -10.5 53.5 27.6

Chg in Investment Assets 615 -625 -383 -203 Accounts Receivable Turnover (x) 7.2 6.0 6.1 5.9

Others -60 284 -133 -89 Inventory Turnover (x) 16.4 10.9 9.5 9.3

Cash Flow from Financing Acitivities 396 480 -22 -95 Accounts Payable Turnover (x) 10.0 7.3 6.9 6.7Chg in Borrowings 575 383 157 84 ROA (%) 4.8 3.6 4.9 5.7

Chg in Equity -179 0 -179 -179 ROE (%) 9.6 8.0 11.3 13.0

Dividends -179 0 -179 -179 ROIC (%) 9.4 5.2 9.8 13.0

Others 0 98 0 0 Liability to Equity Ratio (%) 113.0 133.3 130.9 121.3

Chg in Cash 185 1,393 1,598 2,022 Current Ratio (%) 100.5 97.1 108.8 123.2Beginning Cash Balance 704 890 2,282 3,880 Net Debt to Equity Ratio (%) 17.5 4.9 -9.1 -22.8

Ending Cash Balance 890 2,282 3,880 5,902 Interest Coverage Ratio (x) 16.2 7.3 13.1 16.6



27/53



SFA Engineering (056190 KQ)

Growth story remains intact

Record new orders expected in 2011; Order momentum to strengthen in 2H Likely to dominate market on the back of Samsungs AMOLED investment Maintain Buy and TP of W80,000

We reiterate our Buy rating on SFA Engineering with a target price of W80,000.

The companys current share price is equivalent to a 2011F P/E of 12.8x, a P/B of

3.0x and an EV/EBITDA of 8.1x. We arrived at our target price by applying a fair P/E

of 15.8x (derived from the EPS growth and P/E range of other global industry

peers) to 12-month forward EPS of W5,032.


1) Strong new order momentum in 2H: We expect SFA Engineering to post record

new orders again this year at W879bn (up 18% YoY) on the back of its core

equipment businesses (i.e. LCD front-end process and AMOLED equipments). The

company is expected to take follow-up orders from Samsung Mobile Display

(SMD), which raised W2tr in March and begins its 5.5G AMOLED mass production

in 2Q. We expect to see larger order volume in 2H than in 1H, thanks to 8G

AMOLED pilot lines and 6G/8G LCD and glass equipment orders from panel

makers in China.

2) Well-positioned to dominate AMOLED equipment market: Samsung Electronics

plans to significantly expand its investment in AMOLED to W5.4tr in 2011.

Contrary to market concerns over investment delays, investment in AMOLED

seems to be moving faster than expected. Accordingly, SFA Engineerings annual

AMOLED equipment orders are projected to reach W300bn. The company is also

expected to continue to expand its AMOLED equipment lineup to supply organic

film evaporation equipments in addition to vacuum and logistics equipments. In

2012, it is likely to take orders for front-end process equipments (e.g. PE-CVD,

evaporator and encapsulation equipments). Looking ahead, we believe the

company will be rerated as a global AMOLED equipment player.

3) Sound financials and high dividend payout ratio: SFA Engineering remainsleverage-free to this day and holds W100bn in cash and cash equivalents. The

company is expected to maintain its annual dividend payout ratio at over 30% to

enhance its shareholder value. With its net profit projected to more than double

from last year, the company is likely to continue to pay out attractive dividends.



12/09 307 15 5.0 18 1,004 20 -8 8.0 16.9 1.3 10.8

12/10 423 38 8.9 39 2,192 43 77 16.0 22.4 3.3 16.5

12/11F 756 91 12.0 79 4,385 97 54 26.3 12.0 2.8 7.5

12/12F 943 125 13.3 107 5,937 131 105 28.0 8.9 2.2 4.8

12/13F 1,139 165 14.5 139 7,732 171 138 28.5 6.8 1.7 3.0


Buy (Maintain)

Target Price (12M, W) 80,000

Share Price (06/13/11, W) 52,700

Expected Return (%) 51.8

EPS Growth (11F, %) 100.1

Market EPS Growth (11F, %) 25.3

P/E (11F, x) 12.0

Market P/E (11F, x) 10.3

KOSDAQ 458.15

Market Cap (Wbn) 946

Shares Outstanding (mn) 18

Avg Trading Volume (60D, '000) 187

Avg Trading Value (60D, Wbn) 11

Dividend Yield (11F, %) 1.4

Free Float (%) 51.8

52-Week Low 36,200

52-Week High 70,200

Beta (12M, Daily Rate of Return) 1.1

Price Return Volatility (12M Daily,%,SD) 2.9

Foreign Ownership (%) 17.4

Major Shareholder(s):DY Asset et al. (46.7%)

Korea Investment Management el al.

(10.03%)

Price Performance(%) 1M 6M 12MAbsolute -14.7 1.7 59.4

Relative -5.0 12.5 66.1

40

90

140

190

240

6/10 10/10 2/11 6/11

Share price

KOSDAQ


28/53



Table 12. SFA Engineerings earnings trends and forecasts (Wbn, %)1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 2010 2011F 2012F

New orders 114 269 274 221 201 244 272 234 743 878 950

Sales 134 207 217 198 223 222 246 251 423 756 943

Front-end 5 12 14 12 13 15 20 22 - 43 70

Back-end and module 19 49 54 50 50 42 44 48 - 172 183

Logistics 86 93 101 95 110 107 114 117 - 375 448

FGA 24 53 47 41 51 58 68 65 - 166 241

Sales portion (%)

Front-end 4.0 5.7 6.7 6.0 5.7 6.7 8.3 8.6 - 5.7 7.4

Back-end and module 14.0 23.5 25.1 25.2 22.2 18.8 18.0 19.0 - 22.7 19.5

Logistics 64.0 45.2 46.5 48.0 49.2 48.4 46.3 46.5 - 49.6 47.5

FGA 18.0 25.6 21.8 20.9 22.9 26.0 27.4 25.9 - 21.9 25.6

Operating profit 17 26 28 20 30 31 35 29 38 91 125

OP margin 13.0 12.4 13.0 10.0 13.5 14.0 14.1 11.7 8.9 12.0 13.3* Sales breakdown of FY2010 is unavailable due to reorganization of business groups

** K-GAAP for FY2010; K-IFRS for FY2011 and FY2012

Source: Company data, Daewoo Securities Research

Figure 65. SFA Engineerings quarterly earnings trend and forecasts Figure 66. SFA Engineerings annual earnings trend and forecasts


Figure 67. Global AMOLED logistics equipment market forecast Figure 68. Glob. AMOLED evaporation/encapsulation equip. forecast


0

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29/53



SFA Engineering (056190 KQ/Buy/TP: W80,000)

Income Statement (Summarized) Balance Sheet (Summarized)

(Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F

Sales 423 756 943 1,139 Current Assets 494 455 605 786Cost of Goods Sold 353 629 786 943 Cash and Cash Equivalents 66 46 117 196Gross Profit 70 127 157 196 Accounts Receivable 86 95 118 143SG&A 32 36 32 31 Inventories 216 119 148 179Operating Profit 38 91 125 165 Other Current Assets 126 195 222 268Non-Operating Income 12 8 9 10 Non-Current Assets 136 149 159 169Interest Income/Expense 5 5 5 5 Investment Assets 41 51 58 66

F/X-Related Gain/Loss 2 -8 0 0 Property, Plant and Equipment 94 97 100 103

Equity Method Gain/Loss 2 3 3 3 Intangible Assets 1 0 0 0

Asset Disposal Gain/Loss 0 0 0 0 Total Assets 630 603 763 954Other Non-Operating Profit/Loss 4 9 1 2 Current Liabilities 357 254 316 382Pretax Profit 50 99 134 174 Accounts Payable 104 82 102 124

Tax 11 20 27 36 Short-Term Debt 0 0 0 0

Profit from Continuing Operation 39 79 107 139 Current Long-Term Debt 0 0 0 0

Profit from Discontinued Operation 0 0 0 0 Other Current Liabilities 253 172 214 259

Tax Effect 0 0 0 0 Non-Current Liabilities 9 16 20 24Net Profit 39 79 107 139 Bonds 0 0 0 0Residual Income 39 79 107 139 Long-Term Debt 0 0 0 0

EBITDA 43 97 131 171 Other Non-Current Liabilities 9 16 20 24

Free Cash Flow 77 54 105 138 Total Liabilities 366 269 336 406Gross Profit Margin (%) 16.6 16.7 16.6 17.2 Paid-In Capital 9 9 9 9

EBITDA Margin (%) 10.1 12.8 13.9 15.0 Capital Surplus 20 20 20 20

Operating Margin (%) 8.9 12.0 13.3 14.5 Retained Earnings 252 322 415 536

Net Margin (%) 9.3 10.4 11.3 12.2 Stockholders' Equity 264 334 427 548

Cash Flow (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F

Cash Flow from Operating Activities 85 63 114 147 P/E (x) 22.4 12.0 8.9 6.8Net Profit 39 79 107 139 P/CF (x) 20.0 12.4 9.3 7.2

Non-Cash Income and Expense 12 14 7 8 P/B (x) 3.3 2.8 2.2 1.7

Tangible Assets Depreciation 5 6 6 6 EV/EBITDA (x) 16.5 7.5 4.8 3.0

Intangible Assets Depreciation 0 0 0 0 EPS (W) 2,192 4,385 5,937 7,732

Others 8 8 1 2 CFPS (W) 2,453 4,697 6,273 8,093

Chg in Working Capital 33 -30 0 0 BPS (W) 14,674 18,572 23,775 30,525

Chg in Accounts Receivable -50 -12 -27 -29 DPS (W) 500 750 1,000 1,000

Chg in Inventories -189 97 -29 -31 Payout Ratio (%) 22.5 16.9 16.6 12.7

Chg in Accounts Payable 74 -22 20 21 Dividend Yield (%) 1.0 1.4 1.9 1.9

Others 198 -93 37 39 Sales Growth (%) 37.8 78.7 24.7 20.8

Cash Flow from Investment Activities -46 -81 -34 -53 EBITDA Growth (%) 115.2 127.4 35.8 30.5Chg in Tangible Assets -8 -9 -9 -9 Operating Profit Growth (%) 148.6 140.9 37.6 31.7

Chg in Intangible Assets -1 0 0 0 EPS Growth (%) 118.3 100.1 35.4 30.2

Chg in Investment Assets -6 -7 -4 -4 Accounts Receivable Turnover (x) 6.8 8.4 8.9 8.7

Others -30 -65 -21 -40 Inventory Turnover (x) 3.5 4.5 7.1 7.0

Cash Flow from Financing Acitivities 1 -4 -9 -14 Accounts Payable Turnover (x) 6.3 8.1 10.2 10.1Chg in Borrowings 0 7 4 4 ROA (%) 8.4 12.8 15.6 16.2

Chg in Equity -4 -9 -13 -18 ROE (%) 16.0 26.3 28.0 28.5

Dividends -4 -9 -13 -18 ROIC (%) 38.5 110.2 126.2 170.0

Others 4 -2 0 0 Liability to Equity Ratio (%) 138.5 80.7 78.7 74.1

Chg in Cash 40 -22 71 80 Current Ratio (%) 138.5 179.2 191.1 205.6Beginning Cash Balance 28 66 46 117 Net Debt to Equity Ratio (%) -68.0 -65.3 -72.5 -78.3

Ending Cash Balance 68 45 117 196 Interest Coverage Ratio (x) - - - -



30/53



KC Tech (029460 KS)

Outstanding qualitative improvement

Semiconductor equipment orders to rise on SECs approval of a CMP equipment CMP slurry business to help stabilize earnings Maintain Buy with TP of W12,000

We maintain our Buy call on KC Tech with a target price of W12,000. The

companys shares are undervalued against other equipment makers despite the

solid growth of its materials business, trading at 2011F P/E of 6.7x, P/B of 1.1x,

and EV/EBITDA of 5.1x. We derived our target price by applying a P/E of 10.6x to

12-month forward EPS of W1,129. Recently, shares of equipment makers haveundergone corrections due to worries over delays in investments by display and

semiconductor makers. However, as these concerns appear to have already been

priced in, we recommend investors accumulate shares of equipment makers.


1) Orders for semiconductor equipment to rise on SECs approval of CMP equipment:We expect semiconductor equipment orders at KC Tech to rise full swing from 2Q on

the back of Samsung Electronics (SEC) approval of the companys chemical

mechanical polishing (CMP) equipment and SECs semiconductor investments. As

such, we forecast KC Techs semiconductor equipment orders to surge by 217% YoY

to W63.8bn in 2011. In particular, orders for CMP equipment are also expected to

reach W21.5bn. Given that KC Techs semiconductor division is more profitable thanits display division, sales growth of semiconductor equipment and materials will likely

drive up the companys profitability.

2) CMP slurry business to help stabilize earnings: The CMP ceria slurry, which KCTech provides, is more profitable than other slurries. Last year, the domestic CMP

ceria slurry market was dominated by Hitachi Chemical (market share of 73%).

However, as Hitachis Ibaraki plant has been devastated by the recent earthquake

in Japan, KC Techs market share is expected to rise to 30% in 2011. Therefore,

the companys CMP slurry sales are forecast to soar by 123% YoY to W40bn

during the year. We believe that the CMP slurry business will stabilize the

companys earnings, as it is typically less volatile than the display business.

3) Diverse customer base and value of subsidiaries: Since KC Tech supplies wetstations to both SEC and LG Display (LGD), the company is expected to benefit

from LGD and SECs capacity expansion, particularly for 8G lines. In addition, the

companys customer base includes Hynix, AUO, and CMI.

Furthermore, we believe that the value of the companys subsidiaries will attract

attention in light of the solid growth of its subsidiaries, including TCK (solar cells),

KKT (dry pump), KPC (scrubber, purifier), and KCE&C (clean room).



12/09 96 10 10.2 10 313 13 41 7.4 18.0 1.4 10.2

12/10 230 23 10.0 25 775 28 -47 16.1 8.2 1.3 7.2

12/11F 254 31 12.1 34 1,038 35 44 18.0

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