Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Electronic materials SOS: The secrets of survivors
[Industry key word] “SAFE”
We present “SAFE” (semiconductor, AMOLED, FPCB, and electronic materials) as the keyword for the electronic materials sector in 2014. Companies operating in the SAFE segments are maintaining top-line growth and earnings stability despite the absence of new post-smartphone game changers in the IT industry. Broadly speaking,semiconductor-, OLED-, and FPCB-related materials firms should be able to expand shipments based on structural growth. While Samsung Electronics’ (SEC) semiconductor investments and technology development have driven up the semiconductor materials segment, electronics companies’ investments in OLED TV production lines have driven the OLED materials segment. As for FPCB materials, companies’ capacity expansion, in line with an increase in mobile device demand, is propelling the segment’s growth.
[Company key word] “SOS”
For individual companies, we present “SOS” (secrets of survivors) as our key word. Our analysis reveals that an electronic materials maker’s survival generally hinges on itsability to fluidly adopt a different, appropriate strategy at each stage of downstreamindustry growth. For instance, a concentration strategy tends to be useful when therelevant downstream industry is expanding, while a diversification strategy is required when the industry is maturing. Thus, we believe companies with a diversified approachwill post high growth in the semiconductor/FPCB materials segment, while those with a focused strategy will be more successful in the OLED materials area.
[Investment strategy] Top picks: Soulbrain, Innox, Duksan Hi-Metal
We present Soulbrain (036830 KQ/Buy/TP: W68,000), Innox (088390 KQ/Buy/TP:W35,000), and Duksan Hi-Metal (077360 KQ/Buy/TP: W34,000), as our top picks. Soulbrain and Innox are expected to offset the slowing growth downstream with product diversification into high-end businesses. Duksan Hi-Metal is anticipated to benefit from the expansion of the OLED industry, given the company’s focus on the segment.
As our runner-up picks, we recommend Cheil Industries (001300 KS/Buy/TP: W120,000),and Hansol Chemical (014680 KS/Buy/TP: W35,000). Cheil Industries is expected to show structural growth in electronic materials, including OLED, and post greater sales ofsemiconductor materials. Hansol Chemical is forecast to enjoy stable earnings andincreased semiconductor materials sales.
Overweight (Maintain)
2014 Outlook November 1, 2013
Daewoo Securities Co., Ltd.
Electronic materials
Will Cho +822-768-4306 [email protected]
Positioning of electronic materials makers (in the KDB Daewoo universe)
M/S gain
M/S decline
Slowing downstream
GrowthRe-rating
GrowthRe-rating
Negative growthDe-rating
Negative growthDe-rating
Growth
(Industry growth > M/S decline)
Growth
(Industry growth > M/S decline)
Growth
(Industry slowdown < M/S gain)
Growth
(Industry slowdown < M/S gain)
Cheil Ind. Innox
OCIM
Soulbrain
DuksanHansol Chemical
Iljin Materials
Interflex
Growing downstream
Source: KDB Daewoo Securities Research
2 KDB Daewoo Securities Research
C O N T E N T S
The secrets of survivors 3
1. JSR 3 2. AZ Electronic Materials 5 3. OCI Materials 7 4. Soulbrain 9
Concentration and diversification 11
1. Growth industries: Concentration; Maturing industries: Diversification 11 2. Focus on firms’ specific strategies 12 3. Diversification strategy (for mature industries): Semiconductor and FPCB 12 4. Concentration strategy (for growth industries): OLED and rechargeable batteries 12
Investment strategy and valuations 12
Soulbrain (036830 KQ) 12
Innox (088390 KQ) 12
Duksan Hi-Metal (077360 KQ) 12
Cheil Industries (001300 KS) 12
Hansol Chemical (014680 KS) 12
Interflex (051370 KQ) 12
OCI Materials (036490 KQ) 12
Iljin Materials (020150 KS) 12
Electronic materials
3
November 1, 2013
KDB Daewoo Securities Research
The secrets of survivors
1. JSR
JSR started its business as a chemicals manufacturer, but later grew into a producer of electronic materials for semiconductors and displays. In 2007, electronic materials contributed 45% of the company’s revenue (up from 10% in 1992) and 74% of operating profit (up from 7%), thanks to robust sales of high-end semiconductor materials.
Growth stage (2002-2007): JSR’s growth closely tracks the growth of the semiconductor industry. In the early 2000s, when the semiconductor industry entered a prolonged boom period, electronic materials revenue growth outpaced market growth. As tech migration picked up speed, JSR’s high-end ArF photoresist quickly gained market share. The company’s electronic materials’ OP margin jumped from 10% to 30%, and the stock was re-rated as anticipation for structural growth increased.
Contraction stage (2008-2012): Since 2008, however, JSR’s electronic materials revenue growth has fallen below semiconductor market growth. Although the market continued to expand, the company increasingly lost its photoresist market share amid intensifying competition. We believe such a development was inevitable, given the company’s heavy reliance on a single product. JSR’s failure to diversify its product lineup led to profitability deterioration, and a lack of new growth drivers resulted in a valuation de-rating.
Figure 1. Revenue breakdown of JSR (2007) Figure 2. Operating profit breakdown of JSR (2007)
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 3. Revenue and OP margin of JSR’s electronic materials
unit Figure 4. Semiconductor photoresist market share of JSR
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Other
7%
Plastics
17%
Semiconductor
37%
Other
21%
FPD
42%
Elastomers
31%
Electronic materials
45%
Electronic materials
73%
Plastics
5%
Other
3%
Elastomers
19%
0
40
80
120
160
200
03 05 07 09 11
0
10
20
30
40
50Semiconductor (L) FPD
Other (L) Semiconductor proportion (R)
OP margin (R)
(JPYbn) (%)
36
2725
15
45
0
10
20
30
40
50
00 06 08 10 11
(%)
Electronic materials
4
November 1, 2013
KDB Daewoo Securities Research
Figure 5. JSR and the semiconductor market
Source: Company data, Bloomberg, Gartner, KDB Daewoo Securities Research
0
40
80
120
160
200
92 94 96 98 00 02 04 06 08 10 12
0
50
100
150
200
250
300
350JSR's electronic materials revenue (L)
Global semiconductor revenue (R)
(US$bn)(JPYbn) Electronic materials
revenue moves in line
with global semiconductor
revenue
-50
-40
-30
-20
-10
0
10
20
30
40
50
92 94 96 98 00 02 04 06 08 10 12
JSR's revenue growth - global semiconductor revenue growth
(%p)
M/S gains
JSR's revenue growth > downstream growth
Fierce competition
Declining M/S
-> Revenue growth to soften
0
10
20
30
40
50
92 94 96 98 00 02 04 06 08 10 12
0
5
10
15
20
25
30
35Electronic materials OP (L)
Electronic materials OP margin (R)
(JPYbn) (%)Sharp improvement of
electronic materials
profitability
Profitability to worsen
-40
-30
-20
-10
0
10
20
30
40
50
92 94 96 98 00 02 04 06 08 10 12
Global semiconductor revenue growth
(%, YoY)
+ + +
-- -
Industry turnaround
+
Long-term boom (six years)
Recovery from
global crisis
+
0
10
20
30
40
50
60
70
90 92 94 96 98 00 02 04 06 08 10 12
0.7
1.4
2.1
2.8
3.5Chemicals OP (L)
Electronic materials OP (L)
12-month forward P/B (R)
(JPYbn) (x)
Valuation re-rating on structural growth De-rating
Electronic materials
5
November 1, 2013
KDB Daewoo Securities Research
2. AZ Electronic Materials
AZ Electronic Materials (AZEM) boasts unrivalled technological prowess in high-end semiconductor fabrication materials. AZEM commands over a 50% market share in photoresist, niche materials, and CMP slurry (which collectively account for 30% of the semiconductor materials market). Although the semiconductor materials market – where AZEM is operating - is small in size, high technological barriers to entry have created an oligopolistic, seller’s market that generates hefty profits (OP margin of around 30%).
Growth stage (2009-2012): AZEM’s revenue growth outpaced market growth as the semiconductor industry continued to expand. The company secured a large market share in high-end semiconductor fabrication materials as semiconductor manufacturers increasingly adopted next-generation technologies. OP margin also recovered to over 20% after years of deterioration in the wake of the 2008 global financial crisis. Even after the semiconductor industry entered a stable growth period (as opposed to a rapid growth stage), AZEM continued to enjoy valuation re-ratings in 2010-2012, driven by expectations that high-end materials demand would continue to pick up strongly.
Contraction stage (2013): In April of this year, AZEM’s share price tanked 40% on profitability concerns. Those concerns came mainly from the fact that Korean semiconductor makers will start sourcing spin-on dielectrics (SOD) from other makers in addition to AZEM. As a result, the company’s valuation has suffered a de-rating.
Figure 6. Revenue breakdown of AZEM Figure 7. Operating profit breakdown of AZEM
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 8. Breakdown of semiconductor materials Figure 9. Market share of AZEM by product
Note: Sections highlighted in blue indicate AZEM’s business areas
Source: Company data, KDB Daewoo Securities Research
Source: Company data, KDB Daewoo Securities Research
Conventional
35%
Niche
65%
Semiconductor
69%
FPD
31%
Semiconductor
80%
FPD
20%
Photoresist
ancillaries
6%
Wafers
38%
Photomasks
13%Photoresists
6%
Specialty gas
14%
Sputter targets
2%
CMP slurry
6%
New materials
11%
Wet chemicals
4%
0 20 40 60 80 100
FPD photoresists
Yield enhancers
Pattern enhancers
CMP slurry
SOD
2009
2012 (%)
Semiconductor
Electronic materials
6
November 1, 2013
KDB Daewoo Securities Research
Figure 10. AZEM and the semiconductor market
Source: Company data, Bloomberg, Gartner, KDB Daewoo Securities Research
0
200
400
600
800
05 06 07 08 09 10 11 12 13F
4
8
12
16
20FPD (L)
Semiconductor (L)
OP margin (R)
(US&mn) (%)Profitabilty
to worsen
Rising revenue contribution of
high-margin semiconductor materials
-30
-20
-10
0
10
20
30
40
05 06 07 08 09 10 11 12 13F
Global semiconductor revenue growth
AZEM revenue growth
(%)AZEM's revenue growth > downstream growth
Declining M/S
Competition to
increase
400
500
600
700
800
900
05 06 07 08 09 10 11 12 13F
200
240
280
320
360AZEM revenue (L)
Global semiconductor revenue (R)
(US$mn) (US$bn)
Revenue moves in line with global
semiconductor revenues
1.5
2.0
2.5
3.0
3.5
10/10 4/11 10/11 4/12 10/12 4/13
12-month forward P/B
(x)
Maintained market dominance in the high-margin
semiconductor materials market
Valuation re-rating
M/S decline in the high-margin
semiconductor materials market;
Worries over dual-sourcing
Electronic materials
7
November 1, 2013
KDB Daewoo Securities Research
3. OCI Materials
OCI Materials (OCIM) has localized the production of specialty gases used in the manufacturing of LCDs and semiconductors ahead of other domestic players. The company is the global NF3 leader (market share: 35%) and the number two player in the monosilane market (market share: 20%). NF3 and monosilane gas are used in chemical vapor deposition (CVD), the core process for LCD and semiconductor manufacturing. In particular, the company has grown to become the leading NF3 supplier to SEC, LG Display, and SK Hynix by steadily expanding its facilities and localizing production. NF3 generates 75% of revenue for OCIM.
Growth stage (2006-2011): During the expansion of the LCD sector, revenue growth at OCIM outpaced the growth of its downstream industry. The company was able to strengthen its position in the NF3 market through preemptive capacity expansion efforts. On the back of growth in both the downstream industry and its market share, OCIM recorded an OP margin over 30% even in the midst of the global financial crisis (2009). Profit growth and structural growth through capacity expansion also led to a valuation re-rating.
Contraction stage (2012-2013): OCIM has steadily lost competitiveness in line with the slowdown of the LCD industry. Competition has intensified as an increasing number of players have entered the market, leading to market share contraction and product price falls. Stagnating demand for NF3, the biggest revenue source for the company, has sharply depressed the company’s top-line growth. OP margin, which once surpassed 30%, slid to break-even point levels in 3Q13. Slowing growth downstream and heavy reliance on a single product have also dragged down valuations.
Figure 11. Revenue breakdown of OCIM by product Figure 12. Revenue breakdown of OCIM by downstream industry
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 13. NF3 demand growth and OCIM’s NF3 production
capacity growth Figure 14. NF3 market share of OCIM
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
NF3
75%
Monosilane
10%
WF6
15%
LCD
55%
Semiconductor
35%
Solar
10%
0
20
40
60
80
100
120
03 05 07 09 11 13F
0
10
20
30
40
50
60
OCIM's NF3 capacity growth (R)
NF3 demand growth (L)
Preemptive capacity
expansion ahead of
strong demand
(%) (%)
0
5
10
15
20
25
30
35
40
45
03 05 07 09 11 13F
(%)
Electronic materials
8
November 1, 2013
KDB Daewoo Securities Research
Figure 15. OCIM and the LCD market
Source: DisplaySearch, Company data, KDB Daewoo Securities Research
-40
-20
0
20
40
60
80
100
04 05 06 07 08 09 10 11 12 13
Global LCD panel revenue growth
OCIM's revenue growth
(%, YoY)
Downstream industry growth < OCIM's revenues growth
M/S gains amid industry upturn
LCD industry to slow down
Declining M/S
0
10
20
30
40
50
60
70
80
90
04 05 06 07 08 09 10 11 12 13F
0
50
100
150
200
250
300
350Global LCD panel revenue (L)
OCIM's revenue (R)
(US$bn) (Wbn)
OCIM's revenue grows in line with LCD market
0
50
100
150
200
250
300
350
04 05 06 07 08 09 10 11 12 13F
0
10
20
30
40OCIM's revenue (L)
OCIM's OP margin (R)
(Wbn) (%)Both top- and bottom-line growthProfitability to worsen
due to increasing
competition
0
50
100
150
200
250
300
350
04 05 06 07 08 09 10 11 12 13F
0
1
2
3
4OCIM's revenue (L)
OCIM's 12-month forward P/B (R)
(Wbn) (x)
Valuation re-rating De-rating
Electronic materials
9
November 1, 2013
KDB Daewoo Securities Research
4. Soulbrain
Soulbrain produces LCD and semiconductor materials and electrolytes for rechargeable batteries (lithium-ion batteries (LIB)). In its early days, the company focused on etchants used in LCD and semiconductor pattering. Since 2006, the company has expanded its business portfolio to include thin glass and electrolytes for rechargeable batteries. The company has reduced earnings volatility by swiftly making inroads into fast-growing markets.
„Differentiated‰ growth stage (2005-2011): Soulbrain maintained steady earnings, staying immune from the cyclicality of downstream industries. Thanks to its diversified business portfolio, which ranged from semiconductor and rechargeable batteries to OLED, the company’s earnings remained steady despite fluctuations in LCD capacity utilization. The company largely outperformed the LCD industry during the sector’s growth stages. Indeed, although the company was not able to leverage the industry’s growth as much as companies focusing on a narrow range of products, it was able to maintain stable earnings. Soulbrain’s shares were once de-rated on margin deterioration, but later underwent a re-rating as revenue growth and margin stability attracted investors’ attention.
„Differentiated‰ stabilization phase (2012-2013): Although the LCD sector has slowed down, Soulbrain has sharply outperformed the industry in terms of revenue growth. The company saw its margins improve in line with revenue growth on the back of a diversified product portfolio and economies of scale. In particular, the semiconductor materials and thin glass businesses have driven up the company’s revenue growth. While most electronic materials companies recorded sluggish earnings in 2012 amid downstream sluggishness, Soulbrain reported historic-high earnings. As the company’s earnings stability took center stage once more, Soulbrain experienced a valuation re-rating.
Figure 16. Revenue breakdown of Soulbrain by product Figure 17. Revenue breakdown of Soulbrain by downstream industry
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 18. Revenue breakdown of Soulbrain by business Figure 19. LCD utilization rate and OP margin of Soulbrain
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Thin glass
30%
Semiconductor
etchants
32%
FPD chemicals
20%
Precursors
5%
Slurry
3%
Electrolytes
10%
Display
47%
Semiconductor
37%
LIB
9%
Other
7%
0
10
20
30
40
50
60
05 07 09 11 13F
Display
Semiconductor
Other
(%)
-20
-10
0
10
20
30
05 06 07 08 09 10 11
50
60
70
80
90
100
LG Display's OP margin (L) Soulbrain's OP margin (L)
LCD utilization (R)
(%) (%)
Electronic materials
10
November 1, 2013
KDB Daewoo Securities Research
Figure 20. Soulbrain and the LCD market
Source: DisplaySearch, company data, KDB Daewoo Securities Research
-20
0
20
40
60
80
100
04 05 06 07 08 09 10 11 12 13F
Global LCD panel revenue growth (L)
Soulbrain's revenue growth (L)
(%, YoY)
1) Industry growth < Soulbrain's revenue growth
-> M/S gains amid industry upturn
2) Direction of growth different from that of downstream growth
-> business diversification
Product diversification
-> revenue growth to surpass
downstream industry growth
0
10
20
30
40
50
60
70
80
90
04 05 06 07 08 09 10 11 12 13F
0
100
200
300
400
500
600
700
800Global LCD panel revenue (L)
Soulbrain's revenue (R)
(US$bn) (Wbn)
Stable growth regardless of downstream industry situation
0
100
200
300
400
500
600
700
800
04 05 06 07 08 09 10 11 12 13F
0
5
10
15
20
25Soulbrain's revenue (L)
Soulbrain's OP margin (R)
(Wbn) (%)
Profitability to stabilize downward
Better product mix;
Economies of scale
0
100
200
300
400
500
600
700
800
04 05 06 07 08 09 10 11 12 13F
0
1
2
3Soulbrain's revenue (L)
Soulbrains's 12-month forward P/B (R)
(Wbn) (x)
Profitability to worsen -> de-rating
Profitability to improve -> re-rating
Re-rating
Electronic materials
11
November 1, 2013
KDB Daewoo Securities Research
Concentration and diversification
1. Growth industries: Concentration; Maturing industries: Diversification
Key takeaways from the case studies in the previous section are as follows:
Conditions for growth and re-rating: Market share expansion amid downstream up cycle
Conditions for growth: 1) Market share gains offsetting downstream slowdown or 2) downstream industry growth offsetting market share declines
Conditions for negative growth and de-rating: Market share declines amid maturation of downstream industries
JSR, AZEM and OCIM achieved growth by concentrating on a handful of key products and riding the growth of their respective downstream industries. By maximizing their leverage to downstream up cycles, they were able to enjoy valuation re-ratings. However, these companies suffered market share losses as competition intensified despite the slowing growth of downstream industries. Failing to expand into new businesses, they saw their top-line growth slow and underwent de-ratings.
Meanwhile, Soulbrain has taken a different road. The company has steadily diversified its business portfolio. Due to its diversified focus, Soulbrain displayed weaker growth than the companies mentioned above when downstream industries staged explosive growth. When overall downstream industries were slowing down, however, its diversified portfolio helped the company achieve stable growth.
Figure 21. Changes in the positioning of major electronic materials makers
Source: KDB Daewoo Securities Research
Table 1. Cycles of major electronic materials makers
JSR AZEM OCIM Soulbrain
Downstream Semiconductor Semiconductor LCD LCD/semiconductor/
smartphones
Up cycle Period 2002-2007 2009-2012 2006-2011 2006-2013
Driver Semiconductor photoresist
market share gains
Oligopolistic supplier of high-
end semiconductor materials
Market share gains via NF3
capacity expansion Product lineup diversification
Downstream ◎ ○ ○ ◎
Revenue
growth
Faster than downstream industry
growth
Faster than downstream
industry growth
Faster than downstream
industry growth
Faster than downstream
industry growth
Down cycle Period 2008-2012 2013 2012-2013 2007-2009
Risks Intensifying competition; Delays
to semiconductor tech migration
Market share losses in high-end
semiconductor materials
Heavy reliance on single
product Profitability deterioration
Downstream △ X X △
Revenue
growth
Slower than downstream
industry growth
Slower than downstream
industry growth
Slower than downstream
industry growth
Faster than downstream
industry growth
Note: Industry growth rate: ◎: Very high, ○: High, △: Moderate , X: Low / Source: KDB Daewoo Securities Research
M/S gain
M/S decline
Slowing downstream
GrowthRe-rating
GrowthRe-rating
Negative growthDe-rating
Negative growthDe-rating
Growth(Industry growth > M/S decline)
Growth(Industry growth > M/S decline)
Growth(Industry slowdown < M/S gain)
Growth(Industry slowdown < M/S gain)
JSRAZEM
OCIM
Soulbrain
Growing downstream
Electronic materials
12
November 1, 2013
KDB Daewoo Securities Research
2. Focus on firms’ specific strategies
Generally speaking, electronic materials companies (which produce base and process materials using chemical technologies) tend to enjoy longer periods of growth than downstream companies thanks to high barriers to entry. It is difficult for new entrants to imitate the production processes of electronic materials, as they generally require long periods of technology development, strong manufacturing know-how, and stringent quality management. Furthermore, electronic materials producers and set makers tend to maintain strong relationships, which keep entry barriers especially high.
However, once electronic materials producers suffer market share losses, they often find it difficult to recover. The nature of the electronic materials business makes the process of securing new growth engines difficult and time-intensive. Thus, market share contraction amid a mature market usually signals the start of a deep and protracted downswing.
Considering this, we advise electronic materials investors to pay close attention to the specific strategies that firms are pursuing. As mentioned earlier, when downstream industries are robust, electronic materials producers need to concentrate on flagship items to achieve growth. And when they become mature, producers should diversify their business areas.
We think that the semiconductor, LCD, and FPCB markets are now mature given their sizes and slowing growth. By contrast, we see OLEDs and rechargeable batteries as growth industries. As such, when it comes to semiconductor, LCD, and FPCB materials firms, only those seeking diversification have strong growth potential. And, among OLED- and rechargeable battery-related companies, those concentrating on flagship businesses should deliver strong growth.
Figure 22. Up cycle of electronic materials makers; Share price trends of downstream industries
Source: KDB Daewoo Securities Research
Figure 23. Growth rates of major downstream industries (2012-2015F CAGR)
Note: Based on market revenue
Source: DisplaySearch, Gartner, IIT, KDB Daewoo Securities Research
43.6
21.1
7.8 6.8
3.1
0
10
20
30
40
50
OLED LIB FPCB Semiconductor LCD
(%)
Growth industries: Concentration Mature industries: Diversification
0
100
200
300
400
05 06 07 08 09 10 11 12 13
LG Display SK Hynix Samsung SDI
(1/1/05=100)
JSR
AZEM
Soulbrain
OCIM
Semiconductor
LCD
Semiconductor/LCD/LIB Semiconductor/LIB
Growth phase
Electronic materials
13
November 1, 2013
KDB Daewoo Securities Research
3. Diversification strategy (for mature industries): Semiconductor and FPCB
Semiconductor
We project SEC’s semiconductor investments to reach W13tr in 2013 and W16tr in 2014. We note that SEC’s Xi'an NAND fab has recently placed its first equipment orders (50% of first-round orders). The factory is forecast to place further equipment orders after 3Q. And SEC plans to launch a domestic line (Line 17) in 4Q13. Indeed, semiconductor equipment shares have recently fared well. Taking into account a potential trickle-down effect, we believe that materials companies stand to be the next beneficiaries.
Semiconductor materials producers stand to benefit from both market growth (semiconductor production capacity expansion) and technological evolution (changes in market drivers/process migration). Market growth will be driven by SEC’s launch of its Xi'an NAND factory in 1H14 and the launch of operations at Line 17 in end-2014. Furthermore, it should be noted that technological evolution is likely to stem from the adoption of 3D NAND technology at the Chinese NAND factory and from the use of 14nm technology at Line 17. We select Soulbrain, Cheil Industries, and Hansol Chemical as our top picks for the semiconductor-use materials segment given their diversification efforts.
Semiconductor makers are working to introduce new technologies (e.g., 3D NAND, quadruple patterning technology (QPT)) to overcome the technological challenges associated with process migration. Against this backdrop, we expect a surge in demand for materials, including high selectivity nitride (HSN) etchants for use in 3D NAND (produced by Soulbrain), spin-on hardmask (SOH; Cheil Industries), and QPT-use spacers (Hansol Chemical).
Figure 24. SEC’s semiconductor capex Figure 25. SEC’s 3D NAND design
Source: Company data, KDB Daewoo Securities Research Source: Industry data
Table 2. Materials related to semiconductor process migration
Major materials Domestic companies Foreign companies
Double/quadruple patterning spacers Hansol Chemical, DNF, UP Chemical (unlisted) Air Products, Air Liquide
High-k Hansol Chemical, Soulbrain, DNF, UP Chemical (unlisted) Adeka, Air Liquide
CVD dielectric (HCDS → TSA) Hansol Chemical, UMT (a subsidiary of Duksan Hi-Metal) Air Liquide
Electrolyzed water Soulbrain
Etchants (HSN) Soulbrain
SOH Cheil Industries
Amorphous carbon layers (ACL) DNF, Wonik Materials
SOC DNF, Dongjin Semichem AZEM, Nissan Chem., Shin-Etsu
SOD Cheil Industries, DNF, UP Chemical (unlisted) AZEM
Disilane Wonik Materials, OCIM Voltaix, Mitsui Chemicals
Source: KDB Daewoo Securities Research
65
4
12
11
15
13
16
0
3
6
9
12
15
18
07 08 09 10 11 12 13F 14F
40
50
60
70
80Semiconductor capex (L)
Semiconductor proportion out of total capex (R)
(Wtr) (%)
Electronic materials
14
November 1, 2013
KDB Daewoo Securities Research
FPCB
We anticipate the FPCB market to grow at a CAGR of 8% until end-2015. Although the broader FPCB market has matured, we expect mobile-use FPCB market to continue to expand. Manufacturers are increasingly adopting high-end FPCBs to make mobile devices lighter and thinner, and FPCB content per device is also increasing.
Furthermore, a robust downstream market should directly benefit FPCB producers. Demand related to smartphones and tablet PCs is growing steadily. In addition, materials are becoming more advanced, and new products (e.g., digitizer materials) are emerging.
As IT devices become smaller, thinner, and lighter, three-layer flexible copper clad laminate (FCCL; a material used in FPCBs) is being rapidly replaced by two-layer FCCL. The proliferation of smartphones and tablet PCs should further accelerate this trend. As a result, the proportion of two-layer FCCL in the FCCL market is projected to rise from 55% in 2009 to 75% in 2015.
The market for digitizer materials (a new type of product) is growing on the back of the increasing adoption of mobile device styli. We expect the digitizer materials market to grow from W37bn in 2012, to W69bn in 2013, to W82bn in 2014, and to W100bn in 2015.
Our top pick in this segment is Innox, Korea’s largest FPCB materials maker. Despite the fact that the FPCB market has largely matured, we believe that Innox is likely to enjoy margin growth by expanding into new business areas.
Figure 26. Global FPCB market Figure 27. FPCB use by application
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure 28. FCCL market breakdown by type Figure 29. Digitizer absorber film market
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
0
3,000
6,000
9,000
12,000
15,000
05 07 09 11 13F 15F
(US$mn)
G lobal FP CB market
2012-15F CA GR: 8%
0
20
40
60
80
100
09 10 11 12 13F 14F 15F
Feature phone Smartphone Tablet PC Notebook PC Other
0
400
800
1,200
1,600
2,000
09 10 11 12 13F 14F 15F
50
55
60
65
70
75
802-layer (adhesiveless, L)
3-layer (adhesive, L)
2-layer proportion (R)
(%)(US$mn)
0
20
40
60
80
100
120
140
12 13F 14F 15F
0
20
40
60
80
100
120Galaxy Note series sales volume (L)
Digitizer absorber film market (R)
Innox's digitizer absorber revenue (R)
(mn units) (Wbn)
Electronic materials
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KDB Daewoo Securities Research
4. Concentration strategy (for growth industries): OLED and rechargeable batteries
OLED
OLED technology has a much wider range of applications than LCD, which is almost exclusively used in the production of TVs. Backed by its simple structure and its potential to be rendered flexible and transparent, OLED can be used in lighting, automotive glass, interior glass, and signboards. As such, OLED’s applications will likely expand from the consumer electronics market, which is characterized by high volatility and seasonality, to the larger, more stable industrial electronics market.
The fact that large IT firms are increasing investments in OLED indicates that the technology is in an early stage of growth. The Samsung Group recently announced that it had acquired Novaled, a German OLED materials maker. This acquisition indicates that Samsung is confident of OLED market growth and will make steady investments in the segment. LG Display has also expanded investments in its OLED lines full swing since the beginning of this year. In addition, BOE, the largest display panel maker in China, has launched OLED investments. Although Apple has never adopted OLED displays in its products, the company has steadily applied for OLED-related patents. The entries of multiple display makers into the OLED space suggest that the market has high growth potential.
If the applications of OLED expand from mobile products to include TVs within two to three years, the materials market will be significantly impacted. Assuming OLED TV penetration at 1.5% (3mn units annually), we expect OLED production capacity to jump 4.4 times and the OLED materials market to grow 2.5 times by 2015 (vs. 2012 levels). If penetration increases further after 2015 (3% 6% 9%), the OLED materials market is likely to expand by at least 50% annually.
We present Duksan Hi-Metal as our top OLED-related pick, as it: 1) boast the highest OLED materials revenue contribution (50%) in its peer group; and 2) should be able to deliver steady growth in line with downstream industry expansion (despite the fact that its market share will likely fall on the entries of new competitors).
Table 3. Apple’s OLED-related patents
Date of application Details Core technology
Jan. 2011 Mouse-utilizing flexible OLED Flexible OLED
Feb. 2011 Three patents related to touchscreen technology OLED + touchscreen
July 2011 Transparent OLED using glasses-free 3D technology Transparent OLED
Nov. 2011 Energy-efficient transparent OLED Transparent OLED
Nov. 2011 OLED BLU that can be used in LCD displays OLED BLU
Apr. 2012 OLED BLU brightness control OLED BLU
May 2012 Haptic display using flexible OLED Flexible OLED
Mar. 2013 Wrap-around display using flexible OLED Flexible OLED
Aug. 2013 OLED brightness control using photosensor OLED-use photosensor
Source: Patently Apple, KDB Daewoo Securities Research
Figure 30. Global OLED production capacity Figure 31. Global OLED organic materials market
Source: : DisplaySearch, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
0
2
4
6
8
10
12
09 10 11 12 13F 14F 15F
0
50
100
150
200
2508G (L)
6G (L)
5.5G (L)
4G (L)
YoY growth (R)
(mn m2) (%)OLE D TV penet rat ion
rate of 1.5%
0
200
400
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800
1,000
09 10 11 12 13F 14F 15F
-60
-30
0
30
60
90
120
150
HTL (L) ETL (L)
EML (L) YoY growth (R)
(Wbn) (%)
Electronic materials
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KDB Daewoo Securities Research
Rechargeable batteries
The rechargeable battery market has high growth potential in the medium to long term. If the applications of rechargeable batteries expand to include xEV (i.e., hybrid EV (HEV), plug-in HEV (PHEV), EV) and energy storage systems (ESS), the market will likely quadruple by 2020. The average capacity and price for EV batteries are around 1,000 times higher than those for laptop batteries. As such, even if the EV and ESS markets grow only modestly, their impact on the rechargeable battery market would be significant. We expect the rechargeable battery market to grow at a CAGR of 19% until 2020. Although the market for small- and medium-sized IT batteries will likely display only modest growth, the rechargeable battery markets for EVs and ESS should expand at respective CAGRs of 43% and 29% during this period, driving overall market growth.
Nevertheless, domestic materials makers are unlikely to benefit sharply from the growth of the mid- to large-sized battery market. The prerequisite for EV market expansion is an EV price cut. In order to lower EV prices, it will be essential to cut rechargeable battery prices, which account for almost 30% of an EV’s price. For rechargeable batteries, the proportion of material costs out of total manufacturing costs stands at as high as 70%, leading to low operating leverage. Since the percentage of variable costs is high, manufacturing costs per unit do not fall sharply in line with an increase in production. Therefore, rechargeable battery makers tend to demand price cuts for materials. As such, we believe that materials makers will benefit only modestly from the expansion of the mid- to large-sized battery market—unless they develop innovative materials. The mid- to large-sized battery materials market is currently dominated by Japanese makers, which have more advanced technology.
Figure 32. Rechargeable battery supply chain
Source: KDB Daewoo Securities Research
Figure 33. Rechargeable battery market Figure 34. Rechargeable battery costs
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
0
10
20
30
40
50
60
04 06 08 10 12 14F 16F 18F 20F
ESS
xEV
IT
(US$bn)
2012~2020F CAGR: 18.7%
→ IT: 2.0%, xEV: 43.1%, ESS: 28.7%
E V penet rat ion rate of 0. 9%
E V penet rat ion rate of 3.7%
Cathode
25%
Anode
7%
Other
14%
Electolytes
11%
Separators
14%
Other
29%
Material
costs
70%
Korea Overseas
Panax EtecSoulbrainLG ChemSFC
Ube IndustriesMitsubishi Chem.Central GlassTomiyama
Electrolytes
Korea Overseas
Panax EtecSoulbrainLG ChemSFC
Ube IndustriesMitsubishi Chem.Central GlassTomiyama
Electrolytes
Korea Overseas
L&FEcoproCosmoLG ChemSFCHanwha Chem.
NichiaUmicoreTodaAGCHunan Shanshan
Cathode
Korea Overseas
POSCOGS CaltexSK Innovation
Hitachi Chem.Nippon CarbonMitsubishi Chem.JEFBTR
Anode
Korea Overseas
SK InnovationLG ChemToptecCheil Ind.
Asahi KaseiToray TonenCelgard
Separators
Korea Overseas
SK InnovationLG ChemToptecCheil Ind.
Asahi KaseiToray TonenCelgard
Separators
Korea Overseas
Iljin MaterialsLS Mtron
FurukawaNippon DenkaiCCP
Elecfoils
Korea Overseas
Iljin MaterialsLS Mtron
FurukawaNippon DenkaiCCP
Elecfoils
Korea Overseas
FoosungSoulbrain
Stella ChemifaKanto DenkaMorita Chem.
LiPF6
Korea Overseas
FoosungSoulbrain
Stella ChemifaKanto DenkaMorita Chem.
LiPF6
Korea Overseas
LeechemUbe IndustriesMitsubishi Chem.Tomiyama
Additives
Korea Overseas
LeechemUbe IndustriesMitsubishi Chem.Tomiyama
Additives Korea Overseas
Cosmo Chem.Daejung Chem.ENF Tech
JapanAustraliaChina
Precursors
Korea Overseas
Power LogicsNexcontech
Taiyo YudenBYDMitsui
PCM/SM
Korea Overseas
Power LogicsNexcontech
Taiyo YudenBYDMitsui
PCM/SM
SDI
LG Chem
SDI
LG Chem
Electronic materials
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KDB Daewoo Securities Research
Investment strategy and valuations
Maintain Overweight; Top picks are Soulbrain, Innox, and Duksan Hi-Metal
We maintain our Overweight call on the electronic materials sector. In our 2H13 outlook report (published on May 30th), we presented “SAFE” (semiconductor, AMOLED, FPCB, and electronic materials) as our key word for the industry. SAFE companies are maintaining top-line growth and earnings stability despite the absence of new game changers after smartphones in the IT industry.
For 2014, we maintain our overall view on the electronic materials sector. However, in picking stocks, we advise investors to look closely at companies’ respective strategies. Our analysis reveals that an electronic materials maker’s ability to survive generally hinges on its ability to fluidly adopt a different, appropriate strategy at each stage of industry growth. For instance, a concentration strategy tends to be useful when the relevant downstream industry is expanding, while a diversification strategy is required when the industry is maturing. Thus, we believe companies with a diversified approach will post high growth in the semiconductor/FPCB materials segment, while those with a focused strategy will be more successful in the OLED materials area.
We present Soulbrain (036830 KQ/Buy/TP: W68,000), Innox (088390 KQ/Buy/TP: W35,000), and Duksan Hi-Metal (077360 KQ/Buy/TP: W34,000), as our top picks. Soulbrain and Innox are expected to offset the slowing growth downstream with product diversification into high-end businesses. Duksan Hi-Metal is anticipated to benefit from the expansion of the OLED industry, given the company’s focus on this segment.
As our runner-up picks, we recommend Cheil Industries (001300 KS/Buy/TP: W120,000), and Hansol Chemical (014680 KS/Buy/TP: W35,000). Cheil Industries is expected to show structural growth in electronic materials, including OLED, and post greater sales of semiconductor materials. Hansol Chemical is forecast to enjoy stable earnings and increased semiconductor materials sales.
Figure 35. Positioning of electronic materials makers (in the KDB Daewoo universe)
Source: KDB Daewoo Securities Research
Table 4. Ratings and valuations of electronic materials makers in the KDB Daewoo universe
P/E (x) P/B (x) EPS growth (%) ROE (%)
Rating
TP
(W)
Current
share price
(W)
Upside
(%) 12 13F 14F 12 13F 14F 12 13F 14F 12 13F 14F
Soulbrain Buy 68,000 53,000 28.3 10.1 10.1 8.5 2.4 2.2 1.8 864.3 14.3 17.9 26.4 22.9 21.9
Innox Buy 35,000 25,500 37.3 13.6 10.5 7.5 2.4 3.1 2.2 30.1 109.0 39.5 18.1 31.1 33.5
Duksan Hi-Metal Buy 34,000 20,950 62.3 14.9 16.3 12.2 3.7 2.9 2.4 20.8 -10.0 34.1 26.1 18.7 20.6
Cheil Industries Buy 120,000 90,000 33.3 23.7 12.2 14.7 1.7 1.7 1.7 -21.7 85.7 -17.0 6.5 11.9 9.8
Hansol Chemical Buy 35,000 27,300 28.2 7.5 12.9 9.6 1.6 1.6 1.4 93.4 -33.9 35.1 21.6 12.4 14.6
Interflex Buy 43,000 31,700 35.6 13.7 20.0 10.1 2.5 1.6 1.4 70.5 -58.5 98.8 19.8 7.5 15.0
OCI Materials Hold - 33,200 - 13.9 - 44.7 1.2 1.1 1.1 -55.8 TTR TTB 8.7 -0.8 2.5
Iljin Materials Hold - 12,200 - - 62.6 31.0 1.3 1.7 1.6 TTR TTB 102.1 -17.4 2.7 5.2
Source: KDB Daewoo Securities Research
M/S gain
M/S decline
Slowing downstream
GrowthRe-rating
GrowthRe-rating
Negative growthDe-rating
Negative growthDe-rating
Growth
(Industry growth > M/S decline)
Growth
(Industry growth > M/S decline)
Growth
(Industry slowdown < M/S gain)
Growth
(Industry slowdown < M/S gain)
Cheil Ind. Innox
OCIM
Soulbrain
DuksanHansol Chemical
Iljin Materials
Interflex
Growing downstream
Electronic materials
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Figure 36. SAFE: An investment strategy for a period of low growth
Source: KDB Daewoo Securities Research
Table 5. Valuation metrics of global IT materials makers (Wbn, %, x)
Revenue OP NP ROE P/E P/B EV/EBITDA
Market cap
13F 14F 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F
Soulbrain 859 707 809 121 138 87 100 23.3 22.0 9.8 8.5 2.1 1.7 5.8 5.1
Innox 314 205 308 37 57 29 45 28.9 32.1 10.4 7.1 2.7 2.0 7.4 5.1
Duksan Hi-Metal 616 144 186 40 51 42 52 20.3 20.4 14.3 11.6 2.6 2.1 13.7 10.7
Cheil Industries 4,719 6,511 6,531 325 407 287 320 8.9 9.0 16.0 14.6 1.4 1.3 10.3 8.9
Hansol Chemical 308 330 403 28 37 24 32 12.7 15.0 12.7 9.6 1.7 1.4 10.6 8.5
OCIM 350 219 241 21 35 9 21 2.7 6.2 38.4 16.7 1.1 1.0 5.0 4.4
Iljin Materials 478 280 302 7 14 16 23 5.7 7.6 19.2 21.1 1.6 1.4 - -
Wonik Materials 226 130 154 26 33 22 28 18.8 18.4 10.5 8.1 1.6 1.3 5.5 4.5
Domestic average 16.5 17.6 16.4 12.2 1.9 1.5 8.3 6.7
Shin-Etsu Chemical 25,778 12,189 12,732 1,989 2,209 1,347 1,486 7.6 8.0 18.9 17.1 1.4 1.3 7.0 6.5
Hitachi Chemical 3,378 5,369 5,601 339 402 258 264 7.5 7.5 12.8 12.6 1.0 0.9 4.9 4.3
SUMCO 2,475 1,961 2,289 182 385 12 251 1.1 12.8 474.9 10.4 1.8 1.4 12.9 8.5
Sumitomo Chemical 6,393 24,158 24,785 1,027 1,147 349 567 6.4 10.2 18.2 11.2 1.1 1.0 8.7 8.2
JSR 4,780 4,294 4,571 416 480 306 350 8.9 9.7 15.6 13.6 1.3 1.3 6.0 5.4
Mitsubishi Chemical 7,442 37,323 37,409 1,531 1,703 519 581 5.1 6.5 14.1 12.5 0.8 0.8 7.7 7.1
Showa Denko 2,148 8,944 9,050 279 373 107 155 3.8 4.8 20.0 13.6 0.7 0.7 8.5 7.4
Furukawa 1,730 9,923 9,080 266 279 72 154 4.2 8.6 24.1 11.3 0.9 0.9 9.9 10.3
Sumitomo Bakelite 1,001 2,207 2,186 124 136 64 73 4.7 5.2 14.1 12.3 0.6 0.6 4.3 4.0
Nitto Denko 9,616 8,235 8,754 998 1,150 689 797 12.4 13.0 13.5 11.7 1.6 1.5 5.6 5.0
UDC 1,558 135 193 31 74 24 56 7.9 15.0 63.2 26.2 4.0 3.5 28.6 14.4
DuPont 59,935 38,091 40,450 5,496 6,137 3,614 4,093 30.6 30.5 15.9 14.1 4.1 3.2 9.7 8.9
Cabot Microelectronics 1,038 479 502 97 106 66 72 - 17.5 16.9 15.2 - - 8.2 7.6
Global avg. 8.3 11.5 16.7 14.0 1.4 1.2 7.8 6.9
Avg. 12.4 14.5 16.6 13.1 1.6 1.4 8.0 6.8
Source: Bloomberg consensus, KDB Daewoo Securities Research
emiconductor ⇨ Hansol Chem./Soulbrain/Cheil Ind.SS
AA
FF
EE
MOLED ⇨ Duksan/Cheil Ind.
PCB ⇨ Innox
lectronic materials
SAFE in 2014 !
SAFE: Volume expansion via structural growthSAFE: Volume expansion via structural growth
19 KDB Daewoo Securities Research
Key recommendations
Soulbrain (036830 KQ/Buy) Quiet evolution ongoing
2014 outlook: All business units to be solid Catalysts: 1) Increased semiconductor capacity, 2) new semiconductor materials, 3) spread of OLED Valuation: Raise TP to 68,000; 12-month forward P/E of 9x
Innox (088390 KQ/Buy) Expecting strong growth
2014 outlook: A strong materials player Catalysts: 1) Growing FPCB demand, 2) new businesses, 3) excellent production management Valuation: Maintain TP of W35,000; 12-month forward P/E of 8x (vs. peers’ average: 13x)
Duksan Hi-Metal (077360 KQ/Buy) OLED to drive growth in 2014
2014 outlook: OLED materials demand to rebound sharply Catalyst: Confidence in the OLED growth story Valuation: Maintain TP of W34,000; 12-month forward P/E of 13x, lowest since OLED business launch
Cheil Industries (001300 KS/Buy) Big picture is taking shape
2014 outlook: New start as a pure electronic materials producer Catalysts: 1) Semiconductor materials, 2) polarizers, 3) OLED materials Maintain TP of W120,000; 12-month forward P/E of 14.2x (vs. five-year average of 18x)
Hansol Chemical (014680 KS/Buy) Structural growth phase has begun
2014 outlook: Steady hydrogen peroxide revenue growth, recovery in latex revenue, robust subsidiary revenue Catalysts: 1) SEC’s capacity expansion and 2) full-swing growth of electronic materials business Valuation: Maintain TP of W35,000; Attractively valued at P/E of 10x
Interflex (051370 KQ/Buy) In need of profitability improvement
2014 outlook: ASP decline seems inevitable Catalysts: 1) FPCB business to gain market share; 2) Touchscreen business to gain momentum Valuation: Lower TP to W43,000; Maintain Buy
OCI Materials (036490 KQ/Hold) New growth engines are needed
2014 outlook: NF3 market to show limited recovery Catalyst & risk: Turnaround of photovoltaic market vs. lack of new growth drivers Valuation: Maintain Hold (2014F P/E of 45x)
Iljin Materials (020150 KS/Hold) Spring has yet to come
2014 outlook: Profitability to climb thanks to rechargeable battery elecfoils Catalyst & risk: Growth of large-sized rechargeable battery market vs. price cuts Valuation still seems demanding; Maintain Hold
Electronic materials
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KDB Daewoo Securities Research
Soulbrain (036830 KQ) Quiet evolution ongoing
2014 outlook: All business units to be solid
Despite the slowdowns of downstream industries, we expect all of Soulbrain’s business units to deliver solid growth in 2014 thanks to the company’s business diversification efforts. Furthermore, margins should stay healthy in spite of unit price cuts, aided by increased in-house production of raw materials (e.g., hydrofluoric acid, a raw material for semiconductor etchants, and LiPF6 for LIB-use electrolyte).
We anticipate the company’s semiconductor materials unit to find benefits from chip makers’ capacity ramp-ups and new technologies. As for the display materials unit, thin glass is still driving growth. The rechargeable battery-use electrolyte unit is likely to see a rise in its share of supply to customers and greater sales to the US (in line with growing demand for EV batteries).
Catalysts: 1) Increased semiconductor capacity, 2) new semiconductor materials, 3) spread of OLED
▶ Soulbrain should benefit from SEC’s capacity ramp-ups. SEC’s semiconductor division is forecast to invest W13tr in 2013 and W16tr in 2014. SEC’s Chinese 3D NAND line and domestic Line 17 should drive Soulbrain’s etchant sales growth. As for CMP slurry, Soulbrain’s supply still meets only a small proportion of SEC’s needs. However, we expect Soulbrain’s CMP slurry unit to find boosts from CMP slurry market growth and the company’s market share expansion.
▶ Semiconductor technological advances (changes in market drivers/process migration) are expected to bring attention to new semiconductor materials. SEC is likely to adopt 3D NAND technology at its Chinese NAND fab and the 14nm process at its domestic S3 fab. Together with SEC, Soulbrain has jointly developed high selectivity nitride (HSN) for 3D NAND production. In 14nm (or finer) processes, cleaning solutions will become more important for the removal of fine dust. Soulbrain’s supply of electrolyzed water equipment to SEC (which began last year) should increase in line with process migration.
▶ The thin glass business is likely to continue to grow. SEC is still focusing on OLED smartphones and might adopt OLED panels in its tablet PCs. If Soulbrain takes over Samsung Display’s thin glass and ITO coating businesses, we could see additional upside to top-line growth.
Valuation: Raise TP to 68,000; 12-month forward P/E of 9x
We maintain our Buy call and raise our target price by 13% to W68,000, as we changed the base year for our EPS estimate to 2014 and raised our 2014F EPS by 4% to reflect improved product mix. Soulbrain has one of the most well-balanced and stable portfolios among IT stocks. It has ties to almost every major IT segment, including smartphones, tablets, OLED, non-memory chips, and semiconductor technology migration—and yet the stock is trading at a cheaper multiple (12-month forward P/E of 9x) than its peers (average of 13x). FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F
Revenue (Wbn) 359 481 664 668 759 848
OP (Wbn) 45 59 107 119 135 146
OP margin (%) 12.5 12.2 16.1 17.8 17.8 17.3
NP (Wbn) 32 7 74 86 101 110
EPS (W) 2,206 479 4,614 5,275 6,220 6,774
ROE (%) 16.5 3.2 26.4 22.9 21.9 19.6
P/E (x) 13.9 80.7 10.1 10.1 8.5 7.8
P/B (x) 2.2 2.6 2.4 2.2 1.8 1.4
Notes: All figures are based on consolidated K-IFRS; NP refers to profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates
Technology
(Maintain) Buy
Target Price (12M, W) 68,000
Share Price (10/31/13, W) 53,000
Expected Return 28%
OP (13F, Wbn) 119
Consensus OP (13F, Wbn) 121
EPS Growth (13F, %) 14.3
Market EPS Growth (13F, %) 17.0
P/E (13F, x) 10.1
Market P/E (13F, x) 10.9
KOSDAQ 532.44
Market Cap (Wbn) 859
Shares Outstanding (mn) 16
Free Float (%) 54.9
Foreign Ownership (%) 24.0
Beta (12M) 0.63
52-Week Low (W) 37,700
52-Week High (W) 55,000
(%) 1M 6M 12M
Absolute 2.9 15.3 20.7
Relative 1.3 12.0 14.6
80
90
100
110
120
130
140
10/12 2/13 6/13 10/13
Share price
KOSDAQ
Electronic materials
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November 1, 2013
KDB Daewoo Securities Research
Table 6. Earnings forecast revisions (Wbn, %)
Previous Revised % chg.
2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes
Revenue 686 784 858 668 759 848 -2.6 -3.2 -1.2- Margins to improve on in-house production of raw
materials
Operating profit 122 130 137 119 135 146 -2.8 3.9 6.6 - Product mix to improve
Pretax profit 115 124 132 112 129 141 -3.0 4.1 6.9
Net profit 88 97 103 85 101 110 -3.1 4.1 6.9
EPS (W) 5,440 5,973 6,337 5,275 6,220 6,774 -3.1 4.1 6.9
OP margin 17.8 16.6 16.0 17.8 17.8 17.3 - - -
Net margin 12.9 12.4 12.0 12.8 13.3 12.9 - - -
Note: All figures are based on consolidated K-IFRS;
Source: KDB Daewoo Securities Research estimates
Table 7. Quarterly and annual earnings (under consolidated K-IFRS) (Wbn, %)
1Q13 2Q13 3Q13F 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F
Revenue 158.8 167.4 170.2 171.7 165.0 186.5 201.2 206.1 663.6 668.0 758.9 847.6
Display 83.7 93.7 94.9 93.0 82.7 91.0 99.4 110.6 307.2 365.3 383.7 421.8
Chemical 29.9 28.8 29.8 31.6 30.1 33.4 34.4 32.1 123.7 120.1 130.0 134.1
Thin glass/scribing 53.8 64.9 65.1 61.4 52.7 57.6 65.0 78.5 183.5 245.2 253.8 287.7
Semiconductor 53.5 51.0 49.8 55.3 57.5 68.7 73.6 72.7 247.3 209.7 272.6 316.2
Etchants 42.0 39.1 37.3 41.9 43.1 51.8 52.2 51.5 194.6 160.3 198.6 222.0
Precursors 6.0 5.6 5.5 5.4 6.3 8.1 11.4 10.7 32.9 22.6 36.5 48.0
CMP slurry 5.5 6.3 7.0 8.0 8.2 8.8 10.0 10.5 19.8 26.8 37.5 46.1
LIB 12.4 12.0 14.9 14.6 16.0 17.7 19.2 15.3 59.4 53.9 68.2 79.7
Other 9.3 10.6 10.5 8.7 8.6 9.1 9.1 7.5 49.8 39.2 34.4 30.0
Revenue contribution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Display 52.7 56.0 55.7 54.2 50.2 48.8 49.4 53.6 46.3 54.7 50.6 49.8
Semiconductor 33.7 30.5 29.3 32.2 34.9 36.8 36.6 35.3 37.3 31.4 35.9 37.3
LIB 7.8 7.2 8.8 8.5 9.7 9.5 9.5 7.4 8.9 8.1 9.0 9.4
Other 5.9 6.3 6.2 5.1 5.2 4.9 4.5 3.7 7.5 5.9 4.5 3.5
Operating profit 23.7 33.0 32.1 30.2 26.7 35.6 38.4 34.5 107.0 119.0 135.2 146.3
Pretax profit 21.5 30.2 31.4 28.6 25.4 33.8 37.0 33.0 96.0 111.7 129.2 140.7
Net profit 16.7 21.9 24.5 22.3 19.8 26.3 28.8 25.8 74.2 85.4 100.8 109.7
OP margin 14.9 19.7 18.9 17.6 16.2 19.1 19.1 16.8 16.1 17.8 17.8 17.3
Net margin 10.5 13.1 14.4 13.0 12.0 14.1 14.3 12.5 11.2 12.8 13.3 12.9
QoQ/YoY growth
Revenue 5.4 1.7 0.9 -3.9 13.1 7.9 2.4 0.7 13.6 11.7
Display 12.0 1.2 -1.9 -11.1 9.9 9.3 11.2 18.9 5.1 9.9
Semiconductor -3.4 3.1 6.3 -4.8 10.9 3.2 -6.7 -2.9 8.2 3.2
LIB 20.6 0.3 -5.7 -14.3 9.4 12.8 20.7 33.6 3.5 13.4
Other -4.6 -2.4 11.1 4.0 19.4 7.1 -1.1 -15.2 30.0 16.0
Operating profit 39.7 -2.9 -5.9 -11.7 33.4 7.9 -10.0 11.2 13.6 8.2
Pretax profit 40.2 4.2 -8.9 -11.3 33.0 9.4 -10.6 16.4 15.7 8.9
Net profit 30.8 12.0 -8.9 -11.3 33.0 9.4 -10.6 15.2 17.9 8.9
Source: KDB Daewoo Securities Research estimates
Electronic materials
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Soulbrain (036830 KQ/TP: W68,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F
Revenue 664 668 759 848 Current Assets 173 233 347 433
Cost of Sales 508 497 565 635 Cash and Cash Equivalents 49 107 197 268
Gross Profit 155 171 194 213 AR & Other Receivables 70 82 98 108
SG&A Expenses 48 52 59 66 Inventories 46 42 50 55
Operating Profit (Adj) 107 119 135 146 Other Current Assets 7 0 0 0
Operating Profit 107 119 135 146 Non-Current Assets 354 371 401 437
Non-Operating Profit -11 -7 -6 -6 Investments in Associates 56 60 66 72
Net Financial Income 6 0 0 0 Property, Plant and Equipment 253 276 300 329
Net Gain from Inv in Associates 1 6 6 6 Intangible Assets 24 20 20 20
Pretax Profit 96 112 129 141 Total Assets 527 604 748 870
Income Tax 22 26 28 31 Current Liabilities 155 153 164 170
Profit from Continuing Operations 74 86 101 110 AP & Other Payables 32 54 65 71
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 93 99 99 99
Net Profit 74 86 101 110 Other Current Liabilities 29 0 0 0
Controlling Interests 74 86 101 110 Non-Current Liabilities 39 38 76 86
Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 32 27 54 54
Total Comprehensive Profit 74 86 102 111 Other Non-Current Liabilities 7 11 22 33
Controlling Interests 74 86 102 111 Total Liabilities 194 191 239 256
Non-Controlling Interests 0 0 0 0 Controlling Interests 333 413 509 613
EBITDA 137 136 171 183 Capital Stock 8 8 8 8
FCF (Free Cash Flow) 70 50 67 76 Capital Surplus 70 70 70 70
EBITDA Margin (%) 20.7 20.4 22.5 21.5 Retained Earnings 255 335 430 533
Operating Profit Margin (%) 16.1 17.8 17.8 17.3 Non-Controlling Interests 0 0 0 0
Net Profit Margin (%) 11.1 12.8 13.3 13.0 Stockholders' Equity 333 414 509 614
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F
Cash Flows from Op Activities 127 123 128 143 P/E (x) 10.1 10.1 8.5 7.8
Net Profit 96 86 101 110 P/CF (x) 7.2 8.4 6.3 5.9
Non-Cash Income and Expense 41 67 70 73 P/B (x) 2.4 2.2 1.8 1.4
Depreciation 29 17 35 36 EV/EBITDA (x) 6.1 6.4 4.8 4.1
Amortization 1 0 0 0 EPS (W) 4,614 5,275 6,220 6,774
Others -6 -37 -8 -8 CFPS (W) 6,490 6,348 8,414 9,012
Chg in Working Capital 6 -5 -14 -8 BPS (W) 19,284 24,490 30,361 36,786
Chg in AR & Other Receivables -8 -4 -16 -10 DPS (W) 375 375 375 375
Chg in Inventories 13 -2 -8 -5 Payout ratio (%) 8.2 7.0 6.0 5.5
Chg in AP & Other Payables -1 2 11 6 Dividend Yield (%) 0.8 0.7 0.7 0.7
Income Tax Paid -17 -26 -28 -31 Revenue Growth (%) 37.9 0.7 13.6 11.7
Cash Flows from Inv Activities -64 -54 -60 -66 EBITDA Growth (%) 73.7 -0.5 25.2 6.9
Chg in PP&E -58 -54 -59 -65 Operating Profit Growth (%) 82.5 11.2 13.6 8.2
Chg in Intangible Assets -1 -1 -1 -1 EPS Growth (%) 864.3 14.3 17.9 8.9
Chg in Financial Assets -1 -2 0 0 Accounts Receivable Turnover (x) 10.0 8.8 8.4 8.2
Others -4 2 0 0 Inventory Turnover (x) 12.3 15.2 16.6 16.2
Cash Flows from Fin Activities -39 -12 21 -6 Accounts Payable Turnover (x) 27.0 17.2 12.8 12.5
Chg in Financial Liabilities -28 -20 0 0 ROA (%) 14.8 15.1 14.9 13.6
Chg in Equity 0 0 0 0 ROE (%) 26.4 22.9 21.9 19.6
Dividends Paid -5 -6 -6 -6 ROIC (%) 24.7 25.8 27.4 27.0
Others -5 -2 0 0 Liability to Equity Ratio (%) 58.2 46.2 47.0 41.8
Increase (Decrease) in Cash 23 58 89 72 Current Ratio (%) 111.8 152.5 212.0 254.8
Beginning Balance 26 49 107 197 Net Debt to Equity Ratio (%) 22.8 3.9 -9.1 -19.3
Ending Balance 49 107 197 268 Interest Coverage Ratio (x) 15.8
Source: Company data, KDB Daewoo Securities Research estimates
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Innox (088390 KQ) Expecting strong growth
2014 outlook: A strong materials player
FPCB demand remains solid. Manufacturers are increasingly adopting high-end FPCBs to make mobile devices lighter and thinner, and FPCB area per device is also increasing. While there are worries that smartphone growth is moving to the mid- to low-end segment, this shift is actually positive to materials suppliers like Innox, as shipment growth is more important for them than product specifications (or prices).
Innox’s new product launches should increase its market share, making the company less vulnerable to downstream conditions. Also, increased market share should enable the company to deliver growth even when downstream industry growth stagnates. Furthermore, new businesses are likely to create synergies with established units, boosting overall margins.
Catalysts: 1) Growing FPCB demand, 2) new businesses, 3) excellent production management
▶ Innox stands to benefit from growing FPCB demand. On the back of robust mobile-related demand and customers’ capacity expansion, the company’s FPCB materials revenue is forecast to grow 22% in 2013, 22% in 2014, and 19% in 2015.
▶ New business units are anticipated to grow full swing on the back of: 1) the emergence of new devices (digitizer absorbers), 2) tight supply and demand conditions (two-layer FCCL), and 3) still-weak domestic production (EMI shielding films). The revenue contribution of new businesses is likely to surge from 16% in 2013, to 32% in 2014, and to 38% in 2015.
▶ Innox’s high production efficiency and stable yields appear notable. Remarkably, the company has seen its margins improve almost immediately following the launches of new capacity, as it has been able to quickly stabilize yields at new lines. Looking forward, the firm’s efficient production capabilities should help stabilize new high value-added businesses, which should in turn improve product mix and margins.
Valuation: Maintain TP of W35,000; 12-month forward P/E of 8x
We reiterate our Buy call with a target price of W35,000. Our target price corresponds to a 12-month forward P/E of 12x, the average of FPCB makers and electronic materials suppliers. The stock is currently trading at a 12-month forward P/E of just 8x, vs. our respective 2013 and 2014 EPS growth estimates of 72% and 39%y. We thus believe the stock remains undervalued, despites its recent appreciation. As the largest domestic FPCB material supplier, Innox is well-positioned to benefit from capacity additions by FPCB manufacturers and expand its market share by advancing into new businesses.
FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F
Revenue (Wbn) 104 115 142 199 296 385
OP (Wbn) 13 14 20 37 54 64
OP margin (%) 13.0 11.8 13.9 18.4 18.1 16.6
NP (Wbn) 9 9 13 28 42 49
EPS (W) 989 892 1,161 2,426 3,384 3,949
ROE (%) 23.1 16.0 18.1 31.1 33.5 28.9
P/E (x) 9.8 15.1 13.6 10.5 7.5 6.5
P/B (x) 2.1 2.5 2.4 3.1 2.2 1.7
Note: All figures are based on non-consolidated K-IFRS
Source: Company data, KDB Daewoo Securities Research estimates
Technology
(Maintain) Buy
Target Price (12M, W) 35,000
Share Price (10/31/13, W) 25,500
Expected Return 37%
OP (13F, Wbn) 37
Consensus OP (13F, Wbn) 37
EPS Growth (13F, %) 74.1
Market EPS Growth (13F, %) 17.0
P/E (13F, x) 10.5
Market P/E (13F, x) 10.9
KOSDAQ 532.44
Market Cap (Wbn) 314
Shares Outstanding (mn) 12
Free Float (%) 72.2
Foreign Ownership (%) 5.7
Beta (12M) 1.02
52-Week Low (W) 17,800
52-Week High (W) 32,900
(%) 1M 6M 12M
Absolute 1.6 -1.2 61.0
Relative -0.1 -4.6 54.8
80
100
120
140
160
180
10/12 2/13 6/13 10/13
Share price
KOSDAQ
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Table 8. Earnings forecast revisions (Wbn, %)
Previous Revised % chg.
2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes
Revenue 202 298 384 199 296 385 -1.3 -0.6 0.1 - Upward revision to digitizer materials sales
Operating Profit 36 54 63 37 54 64 3.5 -0.4 1.9 - Reflected the closing of MCCL business
Pretax profit 34 52 59 36 52 61 4.3 -0.2 2.1
Net profit 27 42 48 28 42 49 3.0 -0.2 2.1
EPS (W) 2,355 3,392 3,867 2,425 3,384 3,949 3.0 -0.2 2.1
OP margin 17.6 18.1 16.3 18.4 18.1 16.6 - - -
Net margin 13.4 14.0 12.4 14.0 14.0 12.6 - - -
Note: All figures are based on non-consolidated K-IFRS
Source: KDB Daewoo Securities Research estimates
Table 9. Quarterly and annual earnings (Wbn, %)
1Q13 2Q13 3Q13P 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F
Revenue 40.0 40.9 62.0 56.5 58.7 70.1 80.4 87.3 142.3 199.4 296.4 384.6
FPCB 32.7 32.4 40.3 35.5 35.9 42.9 47.0 46.3 115.7 140.9 172.1 205.5
Coverlay 19.4 19.0 22.5 19.4 20.2 24.2 26.2 25.7 66.2 80.2 96.3 112.8
Three-layer FCCL 5.8 5.3 9.4 8.3 7.5 9.4 11.1 10.4 21.9 28.8 38.4 48.7
Other 7.5 8.1 8.4 7.8 8.2 9.4 9.7 10.2 27.6 31.8 37.5 44.0
Semiconductor 5.5 6.4 7.3 7.0 7.6 7.8 7.7 8.0 21.6 26.2 31.1 33.7
Smart FLEX (new
business) 1.8 2.1 14.4 14.1 15.2 19.3 25.7 33.0 5.0 32.4 93.2 145.4
EMI 0.9 0.5 1.2 1.3 1.3 2.8 4.5 5.5 3.3 3.9 14.2 32.0
Digitizer
absorber 0.1 0.3 12.1 11.5 11.7 12.6 14.1 17.0 0.0 23.9 55.3 62.5
Two-layer FCCL 0.6 0.9 0.8 1.3 2.2 3.9 7.1 10.5 0.0 3.6 23.7 50.9
Other 0.2 0.4 0.3 0.0 0.0 0.0 0.0 0.0 1.8 1.0 0.0 0.0
Shipment area (000 m2) 4,678 4,794 5,847 5,177 5,488 6,607 7,444 7,550 15,435 20,496 27,090 34,319
ASP (W'000/m2) 8.6 8.5 10.6 10.9 10.7 10.6 10.8 11.6 9.2 9.7 10.9 11.2
Operating profit 6.3 7.5 12.0 11.0 9.6 12.8 16.0 15.3 19.8 36.8 53.7 64.0
Pretax profit 6.4 7.3 11.2 10.9 9.5 12.2 14.7 15.7 14.9 35.9 52.1 60.8
Net profit 5.2 5.4 8.6 8.8 7.6 9.7 11.7 12.6 12.5 28.0 41.6 48.6
OP margin 15.8 18.3 19.4 19.4 16.3 18.3 19.8 17.6 13.9 18.4 18.1 16.6
Net margin 12.9 13.1 13.9 15.6 12.9 13.9 14.6 14.4 8.8 14.0 14.0 12.6
Growth (QoQ/YoY)
Revenue 8.8 2.2 51.7 -8.8 3.8 19.4 14.7 8.5 23.3 40.1 48.7 29.7
OP 55.3 18.2 60.8 -8.8 -12.6 34.1 24.2 -3.9 44.9 85.7 46.1 19.2
Pretax profit 212.7 14.9 53.4 -3.0 -13.0 28.5 20.2 7.4 30.0 141.2 45.2 16.7
Net profit 128.9 4.1 60.9 2.4 -14.1 28.5 20.2 7.4 35.6 123.2 48.9 16.7
Note: All figures are based on non-consolidated K-IFRS
Source: KDB Daewoo Securities Research estimates
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Innox (088390 KQ/TP: W35,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F
Revenue 142 199 296 385 Current Assets 70 91 130 178
Cost of Sales 106 141 220 296 Cash and Cash Equivalents 17 12 9 25
Gross Profit 37 58 77 89 AR & Other Receivables 28 43 66 83
SG&A Expenses 17 21 23 25 Inventories 23 35 54 68
Operating Profit (Adj) 20 37 54 64 Other Current Assets 1 1 2 2
Operating Profit 20 37 54 64 Non-Current Assets 78 105 120 131
Non-Operating Profit -5 -1 -2 -3 Investments in Associates 0 0 0 0
Net Financial Income 3 3 3 3 Property, Plant and Equipment 74 102 118 131
Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 3 3 2 2
Pretax Profit 15 36 52 61 Total Assets 147 196 250 309
Income Tax 2 8 10 12 Current Liabilities 56 68 79 88
Profit from Continuing Operations 13 28 42 49 AP & Other Payables 10 15 23 28
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 43 47 47 47
Net Profit 13 28 42 49 Other Current Liabilities 4 6 10 12
Controlling Interests 13 28 42 49 Non-Current Liabilities 15 24 26 29
Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 12 19 19 19
Total Comprehensive Profit 12 27 40 47 Other Non-Current Liabilities 0 0 0 2
Controlling Interests 12 27 40 47 Total Liabilities 71 92 106 117
Non-Controlling Interests 0 0 0 0 Controlling Interests 76 104 144 192
EBITDA 27 46 64 74 Capital Stock 5 5 5 5
FCF (Free Cash Flow) 2 -18 -4 16 Capital Surplus 33 34 34 34
EBITDA Margin (%) 18.6 23.0 21.5 19.3 Retained Earnings 39 67 108 157
Operating Profit Margin (%) 13.9 18.4 18.1 16.6 Non-Controlling Interests 0 0 0 0
Net Profit Margin (%) 8.8 14.0 14.1 12.6 Stockholders' Equity 76 104 144 192
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F
Cash Flows from Op Activities 23 18 24 41 P/E (x) 13.6 10.5 7.5 6.5
Net Profit 13 28 42 49 P/CF (x) 8.9 7.9 6.1 5.3
Non-Cash Income and Expense 14 20 22 26 P/B (x) 2.4 3.1 2.2 1.7
Depreciation 6 8 9 10 EV/EBITDA (x) 8.2 8.1 5.9 4.9
Amortization 1 1 1 1 EPS (W) 1,161 2,426 3,384 3,949
Others -3 1 1 0 CFPS (W) 2,139 3,213 4,202 4,778
Chg in Working Capital -1 -23 -30 -21 BPS (W) 6,695 8,220 11,565 15,456
Chg in AR & Other Receivables -1 -14 -23 -17 DPS (W) 0 0 0 0
Chg in Inventories -2 -12 -19 -14 Payout ratio (%) 0.0 0.0 0.0 0.0
Chg in AP & Other Payables 3 3 8 6 Dividend Yield (%) 0.0 0.0 0.0 0.0
Income Tax Paid -2 -6 -10 -12 Revenue Growth (%) 23.3 40.1 48.7 29.7
Cash Flows from Inv Activities -21 -33 -24 -22 EBITDA Growth (%) 46.2 72.9 39.1 16.3
Chg in PP&E -21 -35 -25 -23 Operating Profit Growth (%) 44.9 85.6 46.1 19.2
Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 30.1 109.0 39.5 16.7
Chg in Financial Assets 0 1 0 0 Accounts Receivable Turnover (x) 5.3 5.7 5.5 5.2
Others 0 1 1 1 Inventory Turnover (x) 6.6 6.9 6.7 6.3
Cash Flows from Fin Activities 1 10 -3 -3 Accounts Payable Turnover (x) 26.5 23.7 22.9 21.7
Chg in Financial Liabilities 2 2 0 0 ROA (%) 9.1 16.3 18.7 17.4
Chg in Equity 2 2 0 0 ROE (%) 18.1 31.1 33.5 28.9
Dividends Paid 0 0 0 0 ROIC (%) 15.4 20.6 23.1 22.5
Others -3 -3 -3 -3 Liability to Equity Ratio (%) 93.9 88.5 73.1 61.0
Increase (Decrease) in Cash 3 -5 -4 16 Current Ratio (%) 123.2 133.6 163.9 202.7
Beginning Balance 14 17 12 9 Net Debt to Equity Ratio (%) 48.4 52.0 40.1 21.7
Ending Balance 17 12 9 25 Interest Coverage Ratio (x) 5.9 12.4 15.8 18.8
Source: Company data, KDB Daewoo Securities Research estimates
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Duksan Hi-Metal (077360 KQ) OLED to drive growth in 2014
2014 outlook: OLED materials demand to rebound sharply
Demand for OLED materials is expected to increase sharply in 2014. Major customers’ OLED capacity is anticipated to grow 44% (in terms of area) next year on the back of production line expansion. An increase in OLED TV production should boost material input per unit area, as TV production is characterized by lower materials efficiency than mobile device production. Other positive trends include: 1) an increase in the number of smartphone models adopting bigger OLED displays, 2) the rising possibility of tablet PCs using OLED displays, and 3) slower-than-expected entries by competitors (which should slow down the pace of the company’s market share decline). We forecast the company’s OLED materials revenue to jump 62% YoY to W100bn in 2014.
Catalyst: Confidence in the OLED growth story
▶ OLED to bring about a paradigm shift: Unlike LCD, OLED has applications that go far beyond TVs. Thanks to their simplified structure, flexibility, and transparency, OLED displays have a wide range of applications, including lighting, automotive glass, interior glass, and commercial billboards. In other words, OLED technology can extend beyond the cyclical seasonal consumer electronics market and into the larger, more stable industrial electronics market.
▶ Confidence in OLED growth: Major technology firms have been beefing up their OLED investments. SEC recently announced its acquisition of the German OLED materials supplier Novaled. LG Display has been pushing ahead with OLED line investments since early this year, and China’s largest panel maker BOE has followed suit. Although Apple has never adopted OLED technology in any of its products, it has steadily filed for OLED patents. Such industry moves are illustrative of the strong confidence in the growth of OLED.
▶ Materials market to almost triple based on a 1.5% OLED TV penetration rate: If the application of OLED displays extends from mobile devices to TVs in the next two to three years, we believe this will have a considerable impact on the OLED materials market. Assuming an OLED TV penetration rate of 1.5% (3mn units annually), we expect OLED production capacity to grow 4.4 times and the OLED materials market to grow 2.5 times compared to 2012. If the penetration rate increases to 3% and further to 6%, the OLED materials market could see annual growth of more than 50% even with a decline in ASP.
Valuation: 12-month forward P/E of 13x, lowest since OLED business launch
Currently, Duksan Hi-Metal shares are trading at a 12-month forward P/E of 13x, the lowest level since the company began its OLED business. The stock previously dipped to a low of 14x in 4Q12 amid doubts over the potential of OLED TVs, as well as concerns that SEC might opt for LCD instead of OLED for its Galaxy S4 model. But in the end, these worries proved to be unfounded. We believe the present situation is not any worse than it was in late 2012, and think now is a good time to aggressively overweight the stock.
FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F
Revenue (Wbn) 73 129 144 132 184 220
OP (Wbn) 20 39 42 34 50 58
OP margin (%) 27.7 30.4 29.0 26.0 27.1 26.3
NP (Wbn) 16 35 42 38 51 52
EPS (W) 638 1,181 1,426 1,284 1,721 1,760
ROE (%) 18.7 29.0 26.1 18.7 20.6 17.4
P/E (x) 31.8 21.5 14.9 16.3 12.2 11.9
P/B (x) 6.6 6.0 3.7 2.9 2.4 2.0
Notes: All figures are based on consolidated K-IFRS; NP refers to profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates
Technology
(Maintain) Buy
Target Price (12M, W) 34,000
Share Price (10/31/13, W) 20,950
Expected Return 62%
OP (13F, Wbn) 34
Consensus OP (13F, Wbn) 39
EPS Growth (13F, %) -10.0
Market EPS Growth (13F, %) 17.0
P/E (13F, x) 16.5
Market P/E (13F, x) 10.9
KOSDAQ 532.44
Market Cap (Wbn) 616
Shares Outstanding (mn) 29
Free Float (%) 44.1
Foreign Ownership (%) 15.3
Beta (12M) 0.69
52-Week Low (W) 16,500
52-Week High (W) 29,600
(%) 1M 6M 12M
Absolute -3.7 -23.3 2.7
Relative -5.3 -26.6 -3.5
60
80
100
120
140
10/12 2/13 6/13 10/13
Share price
KOSDAQ
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Table 10. Earnings forecast revisions (Wbn, %)
Previous Revised % chg.
2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes
Revenue 132 184 220 132 184 220 0.0 0.0 0.0
Operating profit 34 50 58 34 50 58 0.0 0.0 0.0
Pretax profit 38 53 61 38 53 61 0.0 0.0 0.0
Net profit 38 51 52 38 51 52 0.0 0.0 0.0
EPS (W) 1,285 1,721 1,760 1,285 1,721 1,760 0.0 0.0 0.0
OP margin 26.0 27.1 26.3 26.0 27.1 26.3 - - -
Net margin 28.7 27.5 23.6 28.7 27.5 23.6 - - -
Note: All figures are based on consolidated K-IFRS
Source: KDB Daewoo Securities Research
Table 11. Quarterly and annual earnings (Wbn, %)
1Q13 2Q13 3Q13F 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F
Revenue 32.2 29.6 33.8 36.0 38.4 47.6 47.5 50.1 143.8 131.5 183.7 219.6
OLED 15.9 14.5 15.4 16.1 19.3 25.9 24.7 30.1 79.4 61.9 100.0 126.7
Semiconductor 16.3 15.0 18.4 19.9 19.1 21.7 22.8 20.0 64.4 69.6 83.7 92.9
Revenue
proportion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
OLED 49.3 49.2 45.6 44.8 50.3 54.4 52.0 60.0 55.2 47.1 54.4 57.7
Semiconductor 50.7 50.8 54.4 55.2 49.7 45.6 48.0 40.0 44.8 52.9 45.6 42.3
Operating profit 9.2 7.5 8.4 9.1 10.4 12.9 12.7 13.7 41.7 34.2 49.7 57.8
Pretax profit 10.4 8.1 9.2 9.9 11.1 13.6 13.5 14.5 42.9 37.6 52.7 60.9
Net profit 10.0 8.3 9.4 10.1 10.6 13.1 13.0 13.9 41.9 37.8 50.6 51.7
OP margin 28.5 25.5 24.9 25.2 27.0 27.0 26.8 27.4 29.0 26.0 27.1 26.3
Net margin 31.0 28.1 27.8 28.1 27.7 27.5 27.3 27.7 29.1 28.7 27.5 23.6
Growth
(QoQ/YoY)
Revenue -16.1 -8.2 14.4 6.4 6.8 24.0 -0.2 5.4 11.1 -8.5 39.7 19.5
OLED -25.7 -8.4 5.9 4.7 19.8 34.2 -4.7 21.7 13.3 -22.0 61.5 26.7
Semiconductor -4.0 -8.1 22.7 7.9 -3.7 13.6 5.2 -12.2 8.6 8.0 20.3 10.9
Operating profit -16.1 -18.0 11.7 7.7 14.3 24.3 -1.0 7.6 5.9 -17.9 45.3 16.3
Pretax profit -10.2 -21.8 13.2 7.8 11.8 23.3 -0.9 7.0 22.5 -12.5 40.3 15.5
Net profit -7.8 -16.9 13.2 7.8 5.0 23.3 -0.9 7.0 21.2 -9.8 33.9 2.2
Note: All figures are based on consolidated K-IFRS
Source: KDB Daewoo Securities Research
Table 12. Samsung Display’s OLED capacity
2012 2013F 2014F 2015F
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Total capacity (‘000 m2) 434 577 627 627 674 738 773 826 931 984 1,101 1,285 1,416 1,612 1,941 2,138
Growth rate (%) 8.8 32.9 8.6 0.0 7.5 9.6 4.8 6.8 12.7 5.7 11.9 16.7 10.2 13.9 20.4 10.1
('000 sheets/month) Type
A1 (4G, 730 x 920) Half 53 53 53 53 53 53 53 53 53 53 53 53 53 53 53 53
A2 (5.5G, 1300 x 1500) Quarter 56 72 72 72 80 91 97 106 124 133 142 151 151 151 151 151
Phase 1 (32K/month) 32 32 32 32 32 32 32 32 32 32 32 32 32 32 32 32
Phase 2 (incl. flexible) (32K/month) 24 32 32 32 32 32 32 32 32 32 32 32 32 32 32 32
Phase 3 (incl. flexible) (24K/month) 8 8 8 16 24 24 24 24 24 24 24 24 24 24 24
Phase 4 (27K/month) 3 9 18 27 27 27 27 27 27 27 27
Phase 5 (18K/month) 18 18 18 18 18 18 18
Phase 6 (18K/month) 9 18 18 18 18 18
A3 (6G, 1500 x 1800) Half 8 16 24 32 40 48
Phase 1 (32K/month) 8 16 24 24 24 24
Phase 2 (32K/month) 8 16 24
V1 (8G, 2200 x 2500) Sixth 3 6 6 6 6 6 6 6 6 6 6 6 6 6 6
V2 (8G, 2200 x 2500) Half 4 8 16 32 40
Phase 1 (24K/month) 4 8 16 24 24
Phase 2 (24K/month) 8 16
Source: DisplaySearch, KDB Daewoo Securities Research
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November 1, 2013
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Duksan Hi-Metal (077360 KQ/TP: W34,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F
Revenue 144 132 184 220 Current Assets 89 98 115 114
Cost of Sales 84 81 112 135 Cash and Cash Equivalents 14 24 32 24
Gross Profit 60 51 72 84 AR & Other Receivables 13 12 17 20
SG&A Expenses 18 17 22 27 Inventories 12 11 15 18
Operating Profit (Adj) 42 34 50 58 Other Current Assets 2 2 2 3
Operating Profit 42 34 50 58 Non-Current Assets 109 159 244 338
Non-Operating Profit 1 3 3 3 Investments in Associates 0 0 0 0
Net Financial Income -1 -1 -1 0 Property, Plant and Equipment 65 84 133 191
Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 34 33 33 33
Pretax Profit 43 38 53 61 Total Assets 199 256 359 453
Income Tax 1 0 2 9 Current Liabilities 14 34 38 41
Profit from Continuing Operations 42 38 51 52 AP & Other Payables 10 9 12 15
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2 23 23 23
Net Profit 42 38 51 52 Other Current Liabilities 2 2 3 4
Controlling Interests 42 38 51 52 Non-Current Liabilities 2 2 50 89
Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 1 50 90
Total Comprehensive Profit 42 37 50 51 Other Non-Current Liabilities 1 1 1 1
Controlling Interests 42 37 50 51 Total Liabilities 16 35 88 130
Non-Controlling Interests 0 0 0 0 Controlling Interests 183 221 271 322
EBITDA 48 39 58 67 Capital Stock 6 6 6 6
FCF (Free Cash Flow) 40 15 -9 -13 Capital Surplus 82 82 82 82
EBITDA Margin (%) 33.0 29.5 31.6 30.4 Retained Earnings 113 151 201 253
Operating Profit Margin (%) 29.0 26.0 27.1 26.3 Non-Controlling Interests 0 0 0 0
Net Profit Margin (%) 29.2 28.7 27.5 23.6 Stockholders' Equity 183 221 271 322
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F
Cash Flows from Op Activities 51 53 47 52 P/E (x) 14.9 16.3 12.2 11.9
Net Profit 42 38 51 52 P/CF (x) 13.1 14.6 10.4 10.2
Non-Cash Income and Expense 11 7 8 15 P/B (x) 3.7 2.9 2.4 2.0
Depreciation 5 3 7 8 EV/EBITDA (x) 11.9 14.6 10.5 9.8
Amortization 1 1 1 1 EPS (W) 1,426 1,284 1,721 1,760
Others -5 -4 2 3 CFPS (W) 1,624 1,440 2,007 2,065
Chg in Working Capital -3 9 -9 -6 BPS (W) 5,793 7,128 8,841 10,593
Chg in AR & Other Receivables -3 -3 -5 -3 DPS (W) 0 0 0 0
Chg in Inventories 1 2 -4 -3 Payout ratio (%) 0.0 0.0 0.0 0.0
Chg in AP & Other Payables 2 6 4 2 Dividend Yield (%) 0.0 0.0 0.0 0.0
Income Tax Paid 1 0 -2 -9 Revenue Growth (%) 11.1 -8.5 39.7 19.5
Cash Flows from Inv Activities -53 -59 -89 -97 EBITDA Growth (%) 10.8 -18.2 49.7 15.0
Chg in PP&E -4 -25 -57 -66 Operating Profit Growth (%) 5.9 -17.9 45.3 16.3
Chg in Intangible Assets -1 -1 -1 -1 EPS Growth (%) 20.8 -10.0 34.1 2.2
Chg in Financial Assets -49 0 0 0 Accounts Receivable Turnover (x) 12.7 10.5 12.7 11.9
Others 1 -33 -31 -31 Inventory Turnover (x) 11.8 11.5 13.9 13.0
Cash Flows from Fin Activities -3 15 49 38 Accounts Payable Turnover (x) 36.3 40.4 48.8 45.8
Chg in Financial Liabilities 0 15 0 0 ROA (%) 23.9 16.6 16.4 12.7
Chg in Equity 0 0 0 0 ROE (%) 26.1 18.7 20.6 17.4
Dividends Paid 0 0 0 0 ROIC (%) 34.2 26.9 29.0 21.9
Others -3 0 -1 -2 Liability to Equity Ratio (%) 8.7 16.0 32.6 40.5
Increase (Decrease) in Cash -7 10 8 -7 Current Ratio (%) 647.7 290.2 302.1 278.6
Beginning Balance 21 14 24 32 Net Debt to Equity Ratio (%) -33.4 -22.7 -2.9 12.2
Ending Balance 14 24 32 24 Interest Coverage Ratio (x) 645.5 100.8 53.4 37.5
Source: Company data, KDB Daewoo Securities Research estimates
Electronic materials
29
November 1, 2013
KDB Daewoo Securities Research
Cheil Industries (001300 KS) Big picture is taking shape
2014 outlook: New start as a pure electronic materials producer
Cheil Industries’ decision to sell its fashion unit is expected to strengthen its position as an electronic materials producer within the Samsung Group. Having almost completed restructuring, the company should enjoy growth going forward by: 1) expanding production of high value-added semiconductor materials, 2) focusing on items with strong growth potential (OLED- and rechargeable battery-use materials), and 3) increasing polarizer market shares within major customers.
The Samsung Group is a leading player in the global electronic part (semiconductor, display, and handset parts) and set (handsets and TVs) markets. The group is expected to shift its focus to electronic materials, for which it is currently still largely dependent on imports. Cheil Industries is anticipated to take the lead in the Samsung Group’s efforts in this space. By establishing a new electronic materials research center, the group is expected to spur Cheil Industries’ R&D drive to generate synergies with downstream affiliates, including SEC and Samsung SDI.
Catalysts: 1) Semiconductor materials, 2) polarizers, 3) OLED materials
▶ Sales of high value-added semiconductor materials to increase: SEC’s new NAND fab in Xi’an and acceleration of DRAM process migration should boost Cheil Industries’ sales of high value-added semiconductor materials, including SOH. If SEC expands its NAND lines in China, Cheil Industries might ramp up its SOH capacity. In light of the strong bottom-line contribution of semiconductor materials (55% of 2013F operating profit), higher semiconductor materials sales should improve the company’s overall product mix.
▶ Polarizer margins to improve: The applications of polarizers are likely to expand to encompass TVs, tablet PCs, and OLED smartphones. Polarizers for such products deliver margins two times higher than those for notebook PC- and monitor-use polarizers. However, currently, overseas companies are estimated to supply over 90% of the polarizers used by SEC. In 2014, Cheil Industries plans to aggressively expand its polarizer market share, aiming at simultaneously improving its top- and bottom-lines.
▶ OLED materials sales to surge: The acquisition of Novaled should help Cheil Industries further diversify its product portfolio and expand its OLED materials market share, sharply boosting the company’s OLED materials sales to W100bn in 2014 from W17bn this year.
FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F
Revenue (Wbn) 5,113 5,581 6,010 5,649 5,555 6,288
OP (Wbn) 330 223 322 306 391 460
OP margin (%) 6.5 4.0 5.4 5.4 7.0 7.3
NP (Wbn) 279 259 209 387 322 381
EPS (W) 5,573 5,079 3,979 7,387 6,134 7,261
ROE (%) 11.8 8.7 6.5 11.9 9.8 11.7
P/E (x) 19.9 19.9 23.7 12.2 14.7 12.4
P/B (x) 2.0 1.9 1.7 1.7 1.7 1.7
Notes: All figures are based on consolidated K-IFRS; NP refers to profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates
Technology
(Maintain) Buy
Target Price (12M, W) 120,000
Share Price (10/31/13, W) 90,000
Expected Return 33%
OP (13F, Wbn) 306
Consensus OP (13F, Wbn) 320
EPS Growth (13F, %) 85.7
Market EPS Growth (13F, %) 17.0
P/E (13F, x) 12.2
Market P/E (13F, x) 11.1
KOSPI 2,030.09
Market Cap (Wbn) 4,719
Shares Outstanding (mn) 52
Free Float (%) 85.3
Foreign Ownership (%) 24.2
Beta (12M) 0.73
52-Week Low (W) 82,100
52-Week High (W) 98,900
(%) 1M 6M 12M
Absolute -1.9 -5.2 -3.6
Relative -3.5 -8.5 -9.8
70
80
90
100
110
10/12 2/13 6/13 10/13
Share price
KOSPI
Electronic materials
30
November 1, 2013
KDB Daewoo Securities Research
Maintain TP of W120,000; 12-month forward P/E: 14.2x (five-year average: 18x)
Cheil Industries is currently trading at a 12-month forward P/E of 14.2x, which is significantly lower than the company’s historic high of 29x and five-year average of 18x. However, the stock is likely to receive a valuation premium going forward thanks to strong growth in margins (outpacing revenue growth) and increasing OLED business momentum. We maintain our Buy call on Cheil Industries and our target price of W120,000 (12-month forward P/E of 19x).
Table 13. Earnings forecast revisions (Wbn, %)
Previous Revised % chg.
2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNote
Revenue 6,633 5,594 6,304 5,649 5,555 6,288 -14.8 -0.7 -0.3 - Reflects the disposal of the fashion unit
Operating
profit 327 415 487 306 391 460 -6.3 -5.7 -5.4
- In light of an expected decrease in
chemical product spreads
Pretax profit 491 430 507 461 406 481 -6.2 -5.5 -5.2
Net profit 413 340 401 387 321 380 -6.5 -5.5 -5.2
EPS (W) 7,900 6,491 7,657 7,387 6,134 7,261 -6.5 -5.5 -5.2
OP margin 5.6 7.0 6.9 5.4 7.0 7.3 - - -
Net margin 4.4 5.4 5.3 6.8 5.8 6.0 - - -
Note: All figures are based on consolidated K-IFRS / Source: KDB Daewoo Securities Research
Table 14. Quarterly and annual earnings (Wbn, %)
1Q13 2Q13 3Q13F 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F
Revenue 1,523 1,628 1,271 1,227 1,220 1,379 1,511 1,445 6,010 5,649 5,555 6,288
Chemicals 642 731 835 775 776 876 963 913 2,666 2,984 3,528 4,025
Electronic materials 387 434 436 452 444 503 548 532 1,569 1,709 2,027 2,263
Fashion 481 447 1,725 1,896
Other 13 16 50 58
Revenue contribution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Chemicals 42.2 44.9 65.7 63.2 63.6 63.5 63.8 63.2 44.4 52.8 63.5 64.0
Electronic materials 25.4 26.7 34.3 36.8 36.4 36.5 36.2 36.8 26.1 30.3 36.5 36.0
Fashion 31.6 27.4 28.7 33.6
Other 0.9 1.0 0.8 1.0
Operating profit 72 73 89 73 71 101 127 92 322 306 391 460
Chemicals 13 23 24 13 12 29 41 20 89 73 102 129
Electronic materials 36 54 65 60 59 72 86 72 167 214 289 331
Fashion 22 -6 65 30
OP contribution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Chemicals 18.1 31.0 27.1 18.1 17.1 28.7 32.1 21.5 27.7 23.8 26.0 28.1
Electronic materials 49.4 73.9 72.9 81.9 82.9 71.3 67.9 78.5 51.8 69.7 74.0 71.9
Fashion 30.1 -7.6 20.2 9.9
OP margin 4.7 4.5 7.0 5.9 5.8 7.3 8.4 6.4 5.4 5.4 7.0 7.3
Chemicals 2.0 3.1 2.9 1.7 1.6 3.3 4.2 2.2 3.3 2.4 2.9 3.2
Electronic materials 9.2 12.4 14.8 13.2 13.2 14.3 15.8 13.6 10.6 12.5 14.3 14.6
Fashion 4.5 -1.2 3.8 1.6
Pretax profit 94 66 68 233 86 101 127 93 293 461 406 481
Net profit 67 53 55 212 68 79 100 74 209 387 321 380
Pretax margin 6.2 4.1 5.4 18.9 7.0 7.3 8.4 6.5 4.9 8.2 7.3 7.7
Net margin 4.4 3.2 4.3 17.2 5.6 5.8 6.6 5.1 3.5 6.8 5.8 6.0
Growth (QoQ/YoY)
Revenue -3.7 6.9 -21.9 -3.4 -0.6 13.0 9.6 -4.4 7.7 -6.0 -1.7 13.2
Chemicals -0.5 13.8 14.2 -7.1 0.1 12.8 10.0 -5.3 10.4 11.9 18.3 14.1
Electronic materials -3.4 12.2 0.4 3.7 -1.8 13.3 8.9 -2.8 1.4 9.0 18.6 11.7
Fashion -8.1 -7.1 13.4 9.9
Other 13.9 25.2 -48.8 15.3
Operating profit -4.2 0.8 21.9 -17.7 -3.2 43.2 25.8 -27.6 44.6 -4.8 27.6 17.7
Chemicals 155.3 72.7 6.6 -44.9 -8.8 140.8 40.7 -51.5 70.7 -18.5 39.9 27.0
Electronic materials -9.4 50.6 20.3 -7.6 -2.0 23.1 19.9 -16.4 63.3 28.1 35.3 14.4
Fashion -29.7 TTR -2.2 -53.6
Pretax profit 63.8 -29.6 3.6 240.0 -63.1 17.2 26.3 -26.6 6.3 57.2 -11.8 18.4
Net profit 89.1 -21.6 3.6 286.8 -68.0 17.2 26.3 -26.6 -19.4 85.1 -17.0 18.4
Note: All figures are based on consolidated K-IFRS / Source: KDB Daewoo Securities Research
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Cheil Industries (001300 KS/TP: W120,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F
Revenue 6,010 5,649 5,555 6,288 Current Assets 1,837 1,996 1,912 2,034
Cost of Sales 4,155 4,348 4,808 5,418 Cash and Cash Equivalents 114 640 399 341
Gross Profit 1,855 1,302 747 869 AR & Other Receivables 679 537 556 623
SG&A Expenses 1,533 996 356 409 Inventories 909 706 831 932
Operating Profit (Adj) 322 306 391 460 Other Current Assets 102 79 93 104
Operating Profit 322 306 391 460 Non-Current Assets 3,582 3,515 3,540 3,784
Non-Operating Profit -29 154 15 21 Investments in Associates 99 97 95 94
Net Financial Income 33 33 23 29 Property, Plant and Equipment 1,696 1,890 2,062 2,257
Net Gain from Inv in Associates -15 -2 -2 -1 Intangible Assets 463 514 559 599
Pretax Profit 293 461 406 481 Total Assets 5,419 5,511 5,452 5,818
Income Tax 84 74 85 -101 Current Liabilities 1,004 1,019 1,008 980
Profit from Continuing Operations 209 387 321 380 AP & Other Payables 520 404 475 533
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 358 518 418 318
Net Profit 209 387 321 380 Other Current Liabilities 126 98 115 129
Controlling Interests 209 387 322 381 Non-Current Liabilities 1,157 1,204 1,192 1,562
Non-Controlling Interests 0 -1 -1 -1 Long-Term Financial Liabilities 912 1,065 965 1,055
Total Comprehensive Profit 76 68 3 62 Other Non-Current Liabilities 209 91 167 436
Controlling Interests 76 69 3 62 Total Liabilities 2,161 2,223 2,200 2,542
Non-Controlling Interests 0 -1 -1 -1 Controlling Interests 3,254 3,286 3,251 3,275
EBITDA 530 535 621 723 Capital Stock 262 262 262 262
FCF (Free Cash Flow) -309 253 11 12 Capital Surplus 702 702 702 702
EBITDA Margin (%) 8.8 9.5 11.2 11.5 Retained Earnings 1,538 1,887 2,171 2,514
Operating Profit Margin (%) 5.4 5.4 7.0 7.3 Non-Controlling Interests 3 2 2 1
Net Profit Margin (%) 3.5 6.9 5.8 6.1 Stockholders' Equity 3,257 3,288 3,253 3,277
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F
Cash Flows from Op Activities 139 744 466 516 P/E (x) 23.7 12.2 14.7 12.4
Net Profit 209 387 321 380 P/CF (x) 11.8 7.7 8.6 7.3
Non-Cash Income and Expense 368 185 300 343 P/B (x) 1.7 1.7 1.7 1.7
Depreciation 199 213 208 235 EV/EBITDA (x) 11.5 10.6 9.2 8.0
Amortization 9 16 22 28 EPS (W) 3,979 7,387 6,134 7,261
Others -77 140 50 61 CFPS (W) 7,958 11,752 10,525 12,272
Chg in Working Capital -392 256 -70 -106 BPS (W) 54,157 53,766 52,248 51,967
Chg in AR & Other Receivables -162 160 -19 -68 DPS (W) 750 750 750 750
Chg in Inventories -171 211 -125 -101 Payout ratio (%) 18.2 9.8 11.8 10.0
Chg in AP & Other Payables 53 -75 72 58 Dividend Yield (%) 0.8 0.9 0.9 0.9
Income Tax Paid -47 -83 -85 -101 Revenue Growth (%) 7.7 -6.0 -1.7 13.2
Cash Flows from Inv Activities -459 -437 -418 -480 EBITDA Growth (%) 38.1 0.9 16.1 16.4
Chg in PP&E -408 -399 -380 -430 Operating Profit Growth (%) 44.6 -4.8 27.6 17.7
Chg in Intangible Assets -37 -67 -67 -67 EPS Growth (%) -21.7 85.7 -17.0 18.4
Chg in Financial Assets -34 -1 0 0 Accounts Receivable Turnover (x) 10.8 10.1 11.1 11.7
Others 20 30 30 17 Inventory Turnover (x) 7.3 7.0 7.2 7.1
Cash Flows from Fin Activities 338 218 -290 -94 Accounts Payable Turnover (x) 11.9 12.2 12.7 12.5
Chg in Financial Liabilities 420 272 -200 -200 ROA (%) 4.0 7.1 5.9 6.7
Chg in Equity 0 0 0 0 ROE (%) 6.5 11.9 9.8 11.7
Dividends Paid -38 -38 -38 -38 ROIC (%) 7.6 7.5 9.0 9.7
Others -45 -52 -52 -46 Liability to Equity Ratio (%) 66.3 67.6 67.6 77.6
Increase (Decrease) in Cash 17 527 -241 -58 Current Ratio (%) 183.0 195.8 189.7 207.6
Beginning Balance 96 114 640 399 Net Debt to Equity Ratio (%) 34.5 27.6 29.2 30.5
Ending Balance 114 640 399 341 Interest Coverage Ratio (x) 8.1 6.4 7.5 10.0
Source: Company data, KDB Daewoo Securities Research estimates
Electronic materials
32
November 1, 2013
KDB Daewoo Securities Research
Hansol Chemical (014680 KS) Structural growth phase has begun
2014 outlook: Steady hydrogen peroxide revenue growth, recovery in latex revenue, robust subsidiary revenue
We expect Hansol Chemical’s hydrogen peroxide revenue to continue to grow steadily in 2014. In addition, we project the profitability of hydrogen peroxide to improve thanks to a rise in the revenue contribution of value-added semiconductor-use hydrogen peroxide arising from capacity expansion at Korean chip makers.
Furthermore, latex revenue, the sluggishness of which dented the company’s 2013 earnings, is expected to recover in 2014. Latex revenue accounts for 30% of the company’s total revenue. Latex prices tend to move in tandem with butadiene (a raw material) prices, which fell by more than 60% between 1Q and end-3Q. Thus far in 4Q, however, butadiene prices have climbed by 45% from the 3Q level. We project latex revenue to decline by 24% YoY in 2013 but pick up by 27% YoY on sales volume growth and price increases in 2014.
Moreover, earnings at the subsidiary Hansol C&P (producer of exterior coatings for IT products) will likely improve rapidly on a surge in revenue from SEC’s handset business, contributing to Hansol Chemical’s overall earnings growth. We project the subsidiary’s revenue to soar by 60% YoY to W49bn in 2013 and by 37% to W68bn in 2014.
Catalysts: 1) SEC’s capacity expansion and 2) full-swing growth of electronic materials business
▶ Stable hydrogen peroxide business: SEC’s semiconductor capacity expansion should directly affect Hansol’s hydrogen peroxide sales, as Hansol satisfies 70% of the electronics giant’s needs for domestic semiconductor-use hydrogen peroxide. SEC’s NAND line in China and Line 17 in Korea, scheduled to come online in 2014, are driving demand for Hansol’s hydrogen peroxide. Hansol is expected to exclusively supply hydrogen peroxide to SEC’s NAND plant in China
▶ Growing electronic materials business: For Hansol Chemical’s electronic materials business, full-swing revenue growth has encountered delays. In the development of electronic materials, it typically takes six month to one year to progress from customers’ testing to mass production. Once mass production begins, revenue tends to grow rapidly. We expect customers’ testing to be completed within 2013, paving the way for full-scale electronic materials revenue growth. Despite its small contribution to total revenue, the electronic materials business’ contribution to operating profit is projected to continue to rise, from 3% in 2013 to 18% in 2014 and to 23% in 2015.
FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F
Revenue (Wbn) 244 297 319 333 430 509
OP (Wbn) 20 24 27 28 40 54
OP margin (%) 8.1 8.2 8.4 8.5 9.2 10.6
NP (Wbn) 16 19 36 24 32 43
EPS (W) 1,377 1,652 3,195 2,111 2,852 3,762
ROE (%) 12.1 12.7 21.6 12.4 14.6 16.6
P/E (x) 11.4 11.4 7.5 12.9 9.6 7.3
P/B (x) 1.2 1.4 1.6 1.6 1.4 1.2
Notes: All figures are based on consolidated K-IFRS; NP refers to profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates
Technology
(Maintain) Buy
Target Price (12M, W) 35,000
Share Price (10/31/13, W) 27,300
Expected Return 28%
OP (13F, Wbn) 28
Consensus OP (13F, Wbn) 28
EPS Growth (13F, %) -33.9
Market EPS Growth (13F, %) 17.0
P/E (13F, x) 12.9
Market P/E (13F, x) 11.1
KOSPI 2,030.09
Market Cap (Wbn) 308
Shares Outstanding (mn) 11
Free Float (%) 63.5
Foreign Ownership (%) 2.8
Beta (12M) 0.20
52-Week Low (W) 21,600
52-Week High (W) 29,550
(%) 1M 6M 12M
Absolute 10.5 -1.4 15.0
Relative 8.9 -4.8 8.8
80
90
100
110
120
130
10/12 2/13 6/13 10/13
Share price
KOSPI
Electronic materials
33
November 1, 2013
KDB Daewoo Securities Research
Valuation: Maintain TP of W35,000; Attractively valued at P/E of 10x
We maintain our Buy call on Hansol Chemical with a target price of W35,000. In calculating our target price, we applied a P/E of 13x (the average peer group multiple) to our 12-month forward EPS of W2,725. The company’s shares are currently trading at a 12-month forward P/E of 10x, similar to the average of domestic chemicals makers. We believe that the company is attractively valued in light of the stable nature of its hydrogen peroxide business and the high growth potential of its electronic materials business.
Table 15. Earnings forecast revisions (Wbn, %)
Previous Revised % chg.
2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015F Comments
Revenue 338 422 495 333 430 509 -1.3 1.9 2.9 - Upward revision to SB latex ASP
Operating
profit 28 39 53 28 40 54 1.5 0.4 2.4
Pretax profit 29 40 52 29 40 53 0.4 0.2 1.5
Net profit 24 32 42 24 32 42 0.4 0.2 1.5
EPS 2,100 2,847 3,705 2,111 2,852 3,762 0.4 0.2 1.5
OP margin 8.3 9.3 10.7 8.5 9.2 10.6 - - -
Net margin 7.0 7.6 8.5 7.1 7.5 8.3 - - -
Note: Based on consolidated K-IFRS
Source: KDB Daewoo Securities Research estimates
Table 16. Quarterly and annual earnings (Wbn, %)
1Q13 2Q13 3Q13F 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F
Revenue 74.8 80.4 90.7 87.3 96.1 104.3 110.0 119.7 322.5 333.2 430.1 508.9
Hansol Chemical 66.5 70.1 77.3 74.4 77.9 84.5 89.1 96.9 291.7 284.0 348.4 398.8
Hansol C&P 10.5 12.4 13.4 13.0 15.1 16.4 17.3 18.8 30.8 49.3 67.5 85.2
Hansol Electronic
Materials 0.0 0.0 0.0 0.0 3.2 3.5 3.6 4.0 0.0 14.3 24.9
COGS 61.1 65.4 74.2 70.6 78.9 85.7 88.2 100.6 243.8 271.1 353.3 413.5
SG&A 6.6 7.8 8.8 10.4 8.0 9.0 9.2 10.9 24.2 33.7 37.2 41.4
Operating profit 7.1 7.2 7.8 6.3 9.2 9.6 12.6 8.2 25.9 28.4 39.6 54.0
Non-operating
gains 0.5 0.1 0.4 0.1 0.1 0.1 0.2 0.3 11.2 1.0 0.7 -0.9
Pretax profit 7.6 7.3 8.2 6.3 9.3 9.6 12.8 8.5 37.1 29.4 40.3 53.1
Net profit 5.5 6.7 6.5 5.1 7.4 7.7 10.3 6.8 31.2 23.8 32.2 42.5
OP margin 9.5 9.0 8.6 7.2 9.6 9.2 11.5 6.8 8.0 8.5 9.2 10.6
Pretax margin 10.1 9.1 9.0 7.3 9.6 9.3 11.6 7.1 11.5 8.8 9.4 10.4
Net margin 7.4 8.4 7.2 5.8 7.7 7.4 9.3 5.7 9.7 7.1 7.5 8.3
Growth (QoQ/YoY)
Revenue 7.5 12.8 -3.8 10.2 8.5 5.5 8.8 29.1 18.3
Operating profit 1.7 7.4 -19.4 46.7 3.8 31.9 -35.0 39.2 36.5
Pretax profit -3.2 11.4 -22.5 46.5 4.0 32.9 -33.5 37.0 31.9
Net profit 22.0 -2.8 -22.5 46.5 4.0 32.9 -33.5 35.2 31.9
Note: Based on consolidated K-IFRS
Source: KDB Daewoo Securities Research estimates
Electronic materials
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November 1, 2013
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Table 17. Annual earnings breakdown (under non-consolidated K-IFRS) (Wbn, %)
2010 2011 2012 2013F 2014F 2015F
Hydrogen peroxide shipments ('000 tonnes) 54 56 70 81 87 95
SEC's semiconductor shipments (mn units) 10,004 15,863 20,781 32,829 51,089 77,301
LG Display's LCD panel shipment area ('000 m2) 27,852 32,238 36,048 40,013 43,934 48,108
SB latex shipments ('000 tonnes) 70 79 81 87 94 102
Revenue (Wbn) 228.3 278.6 291.7 284.0 348.4 398.8
Hydrogen peroxide 57.0 66.0 77.0 83.0 90.9 104.6
SB latex 85.0 111.0 106.5 81.3 103.6 115.3
Fine chemicals 86.3 99.5 104.7 109.7 118.9 128.9
Electronic materials 0.0 2.0 3.5 10.0 35.0 50.0
Semiconductor 0.0 0.0 1.0 6.5 15.0 20.0
Display 0.0 2.0 2.5 3.5 20.0 30.0
Operating profit 20.1 23.7 24.9 23.6 33.4 40.9
OP margin 8.8 8.5 8.5 8.3 9.6 10.3
Pretax profit 17.4 12.0 29.5 18.4 29.0 36.8
Net profit 14.7 7.6 25.2 15.2 24.0 29.6
Net margin 6.5 2.7 8.6 5.4 6.9 7.4
YoY growth
Revenue 18.7 22.0 4.7 -2.6 22.7 14.5
Operating profit 8.4 17.6 5.2 -5.2 41.5 22.5
Pretax profit 23.0 -31.1 146.3 -37.6 58.0 26.8
Net profit -10.8 -48.2 230.2 -39.6 57.8 23.5
Source: KDB Daewoo Securities Research estimates
Electronic materials
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Hansol Chemical (014680 KS/TP: W35,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F
Revenue 319 333 430 509 Current Assets 100 134 172 207
Cost of Sales 264 271 353 414 Cash and Cash Equivalents 12 33 34 39
Gross Profit 55 62 77 95 AR & Other Receivables 64 74 102 124
SG&A Expenses 28 34 37 41 Inventories 22 27 37 44
Operating Profit (Adj) 27 28 40 54 Other Current Assets 1 0 0 0
Operating Profit 27 28 40 54 Non-Current Assets 259 302 329 353
Non-Operating Profit 15 1 1 -1 Investments in Associates 27 27 27 27
Net Financial Income 5 6 7 8 Property, Plant and Equipment 193 238 250 261
Net Gain from Inv in Associates 8 3 0 0 Intangible Assets 16 18 21 23
Pretax Profit 42 29 40 53 Total Assets 359 435 501 560
Income Tax 6 6 8 11 Current Liabilities 76 85 106 122
Profit from Continuing Operations 36 24 32 43 AP & Other Payables 46 55 76 92
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 19 30 30 30
Net Profit 36 24 32 43 Other Current Liabilities 11 0 0 0
Controlling Interests 36 24 32 43 Non-Current Liabilities 101 145 159 160
Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 98 141 154 154
Total Comprehensive Profit 21 28 37 47 Other Non-Current Liabilities 2 3 3 3
Controlling Interests 21 28 37 47 Total Liabilities 177 231 265 282
Non-Controlling Interests 0 0 0 0 Controlling Interests 181 204 236 278
EBITDA 37 42 55 71 Capital Stock 57 57 57 57
FCF (Free Cash Flow) -32 -27 0 17 Capital Surplus 31 31 31 31
EBITDA Margin (%) 11.7 12.5 12.7 13.9 Retained Earnings 92 110 137 175
Operating Profit Margin (%) 8.4 8.5 9.2 10.6 Non-Controlling Interests 0 0 0 0
Net Profit Margin (%) 11.3 7.2 7.5 8.4 Stockholders' Equity 182 204 236 278
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F
Cash Flows from Op Activities 32 33 30 48 P/E (x) 7.5 12.9 9.6 7.3
Net Profit 36 24 32 43 P/CF (x) 5.8 8.3 6.5 5.2
Non-Cash Income and Expense 1 18 22 28 P/B (x) 1.6 1.6 1.4 1.2
Depreciation 10 13 15 17 EV/EBITDA (x) 10.1 10.8 8.5 6.4
Amortization 1 0 0 0 EPS (W) 3,195 2,111 2,852 3,762
Others 11 3 8 7 CFPS (W) 4,115 3,278 4,178 5,255
Chg in Working Capital -3 -1 -16 -13 BPS (W) 14,831 16,635 19,231 22,742
Chg in AR & Other Receivables 14 -11 -28 -22 DPS (W) 500 500 500 500
Chg in Inventories 0 -4 -10 -8 Payout ratio (%) 15.4 21.2 15.7 11.9
Chg in AP & Other Payables -3 6 21 16 Dividend Yield (%) 2.1 1.8 1.8 1.8
Income Tax Paid -2 -9 -8 -11 Revenue Growth (%) 7.4 4.5 29.1 18.3
Cash Flows from Inv Activities -30 -54 -29 -29 EBITDA Growth (%) 14.6 11.9 31.1 29.9
Chg in PP&E -53 -57 -27 -27 Operating Profit Growth (%) 10.7 6.1 39.2 36.5
Chg in Intangible Assets -5 -3 -3 -3 EPS Growth (%) 93.4 -33.9 35.1 31.9
Chg in Financial Assets 23 0 0 0 Accounts Receivable Turnover (x) 4.7 4.9 4.9 4.5
Others 4 5 1 1 Inventory Turnover (x) 14.4 13.6 13.6 12.6
Cash Flows from Fin Activities 10 41 0 -14 Accounts Payable Turnover (x) 7.9 7.1 6.5 6.1
Chg in Financial Liabilities 20 33 0 0 ROA (%) 10.6 6.0 6.9 8.0
Chg in Equity 0 0 0 0 ROE (%) 21.6 12.4 14.6 16.6
Dividends Paid -5 -6 -5 -5 ROIC (%) 10.4 8.4 10.0 12.5
Others -5 -7 -8 -9 Liability to Equity Ratio (%) 97.5 112.8 112.3 101.4
Increase (Decrease) in Cash 11 20 1 5 Current Ratio (%) 131.6 156.7 163.0 169.7
Beginning Balance 1 12 33 34 Net Debt to Equity Ratio (%) 56.8 67.4 63.4 52.0
Ending Balance 12 33 34 39 Interest Coverage Ratio (x) 5.2 4.1 4.7 6.1
Source: Company data, KDB Daewoo Securities Research estimates
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Interflex (051370 KQ) In need of profitability improvement
2014 outlook: ASP decline seems inevitable
We expect FPCB demand to remain healthy next year, driven by an increase in FPCB area per device and the growth of the mobile device market. For 2014, we forecast smartphone shipments to jump by 20% YoY (1.2bn smartphones), and Interflex’s FPCB shipment area by 25% YoY.
However, FPCB ASP is anticipated decline 14% next year as low- to mid-end smartphone demand grows. Furthermore, production capacity is forecast to expand by at least 30% this year at major domestic FPCB makers. As such, price cuts and stiffer competition will be inevitable if demand rises more slowly than expected. Given such circumstances, Interflex is anticipated to focus on: 1) gaining market share to increase its sales volume, and 2) selling high-end products to improve profitability.
Catalysts: 1) FPCB business to gain market share; 2) Touchscreen business to gain momentum
▶ FPCB business to gain market share: Interflex’s FPCB sales should be driven not only by growing smartphone shipments, but also by the company’s increased share of supply to SEC. Thanks to its robust production capacity (the largest in Korea) and superior high-end product technologies, Interflex was chosen by SEC as a major parts supplier for the Galaxy Note 3. In addition to digitizers, the company is now the preferred vendor for camera module FPCBs.
▶ Touchscreen business to gain momentum: Last year, Interflex jointly developed a touch sensor suitable for use in flexible displays with Samsung Display. The company adopted a photolithography technology that patterns X and Y axis lines on one side of an ITO film, enabling the production of thinner display panels and bezels. If SEC rolls out smartphone models featuring flexible displays, it is highly likely that Interflex’s touchscreen modules will be adopted. Interflex is the only domestic supplier of flexible display touchscreen modules. The company’s touchscreen-related revenue is forecast to surge from W55bn this year to W156bn next year.
Lower TP to W43,000; Maintain Buy
We maintain our Buy rating on Interflex, but lower our target price by 17%, to W43,000. We revised down our 2013 and 2014 EPS forecasts for the company by 50% and 30%, respectively, in light of further FPCB price cuts and increased fixed costs for touchscreen panel production. In deriving our target price, we applied a P/E of 13.6x (15% premium to the average multiple of peers) to our 12-month forward EPS of W3,155. The stock is currently trading at a 12-month forward P/E of 11x, close to the peer group average multiple.
FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F
Revenue (Wbn) 419 518 765 1,087 1,251 1,470
OP (Wbn) 31 40 47 27 67 76
OP margin (%) 7.3 7.8 6.1 2.4 5.4 5.2
NP (Wbn) 31 31 54 23 52 59
EPS (W) 2,440 2,241 3,822 1,587 3,155 3,601
ROE (%) 20.9 14.8 19.8 7.5 15.0 14.9
P/E (x) 13.2 16.1 13.7 20.0 10.1 8.8
P/B (x) 2.4 2.1 2.5 1.6 1.4 1.2
Note: All figures are based on non-consolidated K-IFRS
Source: Company data, KDB Daewoo Securities Research estimates
Technology
(Maintain) Buy
Target Price (12M, W) 43,000
Share Price (10/31/13, W) 31,700
Expected Return 36%
OP (13F, Wbn) 26
Consensus OP (13F, Wbn) 60
EPS Growth (13F, %) -58.5
Market EPS Growth (13F, %) 17.0
P/E (13F, x) 20.0
Market P/E (13F, x) 10.9
KOSDAQ 532.44
Market Cap (Wbn) 519
Shares Outstanding (mn) 16
Free Float (%) 45.5
Foreign Ownership (%) 3.1
Beta (12M) 1.36
52-Week Low (W) 31,650
52-Week High (W) 71,200
(%) 1M 6M 12M
Absolute -16.9 -29.5 -47.4
Relative -16.4 -24.0 -52.2
40
60
80
100
120
10/12 2/13 6/13 10/13
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Table 18. Earnings forecast revisions (Wbn, %)
Previous Revised % chg.
2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes
Revenue 1,070 1,222 1,444 1,087 1,251 1,470 1.6 2.4 1.8 - Lower FPCB prices
Operating
profit 55 91 109 26 67 76 -52.0 -25.9 -29.6
- Reflects increased fixed costs for
touchscreen production
Pretax profit 56 92 120 27 65 74 -51.1 -30.0 -38.6
Net profit 46 74 96 23 52 59 -49.5 -30.0 -38.6
EPS (W) 3,199 4,508 5,867 1,587 3,155 3,601 -50.4 -30.0 -38.6
OP margin 5.2 7.4 7.5 2.4 5.4 5.2 - - -
Net margin 4.3 6.0 6.7 2.2 4.1 4.0 - - -
Note: All figures are based on non consolidated K-IFRS
Source: KDB Daewoo Securities Research estimates
Table 19. Quarterly and annual earnings (Wbn, %)
1Q13 2Q13 3Q13F 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 12 13F 14F 15F
Revenue 227.3 250.3 291.9 318.0 257.4 307.8 322.6 363.2 765.4 1,087.4 1,251.0 1,470.3
S/S 2.9 2.3 2.6 2.7 2.3 2.5 2.5 2.7 6.6 10.5 10.0 9.9
D/S 106.8 94.8 122.6 138.0 110.3 122.0 121.9 141.2 418.1 462.1 495.4 534.0
Multi 55.0 110.8 87.6 83.6 70.5 86.8 91.1 101.0 107.7 337.0 349.4 411.3
R/F 35.4 21.3 52.5 51.5 42.9 52.1 55.8 62.1 140.3 160.7 213.0 254.8
Touchscreen 0.0 9.0 22.4 23.8 25.1 39.0 44.1 47.6 55.1 155.9 203.4
Other 27.1 12.1 4.3 18.5 6.3 5.4 7.2 8.6 92.7 62.0 27.4 56.9
Revenue contribution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
S/S 1.3 0.9 0.9 0.8 0.9 0.8 0.8 0.7 0.9 1.0 0.8 0.7
D/S 47.0 37.9 42.0 43.4 42.8 39.7 37.8 38.9 54.6 42.5 39.6 36.3
Multi 24.2 44.3 30.0 26.3 27.4 28.2 28.2 27.8 14.1 31.0 27.9 28.0
R/F 15.6 8.5 18.0 16.2 16.7 16.9 17.3 17.1 18.3 14.8 17.0 17.3
Touchscreen 0.0 3.6 7.7 7.5 9.8 12.7 13.7 13.1 0.0 5.1 12.5 13.8
Other 11.9 4.8 1.5 5.8 2.4 1.7 2.2 2.4 12.1 5.7 2.2 3.9
Shipments ('000 m2) 313.7 292.6 370.8 412.5 353.8 415.5 458.0 510.8 1,173.0 1,460.7 1,798.9 2,284.7
S/S 8.8 9.5 3.6 3.9 3.6 4.0 4.2 4.5 17.7 25.8 16.4 17.8
D/S 226.4 190.6 173.6 199.3 174.7 195.0 207.1 236.4 854.0 790.0 813.1 962.5
Multi 47.0 72.1 124.0 120.7 111.7 138.6 154.8 169.1 113.7 363.8 574.3 741.6
R/F 31.6 20.4 74.4 74.4 68.0 83.3 94.8 104.0 163.0 200.7 350.1 459.5
ASP (W'000/m2) 678.5 784.7 706.2 692.1 631.2 626.1 588.5 597.3 652.5 706.7 608.8 554.5
Operating profit -9.7 21.1 2.9 12.2 9.0 16.0 18.2 24.2 46.5 26.5 67.4 76.4
Pretax profit -8.8 21.9 3.9 10.4 9.5 15.9 17.1 22.1 69.0 27.4 64.6 73.7
Net profit -5.7 17.6 3.1 8.3 7.6 12.7 13.7 17.7 54.5 23.4 51.7 59.0
OP margin -4.3 8.4 1.0 3.8 3.5 5.2 5.6 6.7 6.1 2.4 5.4 5.2
Net margin -2.5 7.0 1.1 2.6 3.0 4.1 4.2 4.9 7.1 2.2 4.1 4.0
QoQ/YoY growth
Revenue -29.4 10.1 16.6 8.9 -19.0 19.6 4.8 12.6 47.8 42.1 15.0 17.5
S/S 102.6 -21.9 12.6 5.0 -14.7 7.8 0.3 9.0 1.7 59.0 -4.7 -1.1
D/S -27.5 -11.3 29.4 12.5 -20.1 10.7 -0.2 15.9 62.6 10.5 7.2 7.8
Multi -4.6 101.4 -21.0 -4.6 -15.6 23.1 5.0 10.8 -5.9 212.8 3.7 17.7
R/F -19.6 -39.9 146.6 -2.0 -16.6 21.5 6.9 11.4 59.0 14.6 32.5 19.6
Touchscreen 149.8 6.4 5.7 55.0 13.2 8.0 182.9 30.5
Other -62.2 -55.3 -64.9 334.6 -66.0 -14.8 35.3 18.2 80.3 -33.1 -55.8 107.5
Operating profit TTR TTB -86.3 321.1 -26.3 78.4 13.6 33.3 15.2 -43.1 154.5 13.3
Pretax profit TTR TTB -82.1 165.4 -8.9 67.3 7.8 28.9 76.1 -60.3 135.7 14.1
Net profit TTR TTB -82.2 165.4 -8.9 67.3 7.8 28.9 75.2 -57.0 120.8 14.1
Notes: All figures are based on non-consolidated K-IFRS; TTB stands for “turn to black” and TTR stands for “turn to red”
Source: KDB Daewoo Securities Research estimates
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Interflex (051370 KQ/TP: W43,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F
Revenue 765 1,087 1,251 1,470 Current Assets 519 524 631 733
Cost of Sales 702 1,039 1,164 1,371 Cash and Cash Equivalents 4 26 68 94
Gross Profit 63 49 88 99 AR & Other Receivables 318 314 358 411
SG&A Expenses 17 22 20 23 Inventories 136 134 153 176
Operating Profit (Adj) 47 27 67 76 Other Current Assets 4 4 4 5
Operating Profit 47 27 67 76 Non-Current Assets 356 359 352 332
Non-Operating Profit 23 1 -3 -3 Investments in Associates 15 18 20 22
Net Financial Income 4 6 5 4 Property, Plant and Equipment 322 328 319 297
Net Gain from Inv in Associates 19 2 2 2 Intangible Assets 2 2 3 3
Pretax Profit 69 27 65 74 Total Assets 875 883 983 1,065
Income Tax 15 4 13 15 Current Liabilities 521 481 476 478
Profit from Continuing Operations 54 23 52 59 AP & Other Payables 302 298 340 390
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 204 169 119 69
Net Profit 54 23 52 59 Other Current Liabilities 15 14 17 19
Controlling Interests 54 23 52 59 Non-Current Liabilities 54 81 138 163
Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 45 69 121 141
Total Comprehensive Profit 52 21 49 56 Other Non-Current Liabilities 3 3 6 9
Controlling Interests 52 21 49 56 Total Liabilities 575 562 613 641
Non-Controlling Interests 0 0 0 0 Controlling Interests 300 321 370 424
EBITDA 80 75 155 162 Capital Stock 7 7 7 7
FCF (Free Cash Flow) -185 -29 43 60 Capital Surplus 63 63 63 63
EBITDA Margin (%) 10.5 6.9 12.4 11.0 Retained Earnings 230 253 305 361
Operating Profit Margin (%) 6.1 2.4 5.4 5.2 Non-Controlling Interests 0 0 0 0
Net Profit Margin (%) 7.1 2.2 4.1 4.0 Stockholders' Equity 300 321 370 424
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F
Cash Flows from Op Activities -24 114 125 126 P/E (x) 13.7 20.0 10.1 8.8
Net Profit 54 23 52 59 P/CF (x) 8.4 6.5 3.7 3.6
Non-Cash Income and Expense 34 91 104 103 P/B (x) 2.5 1.6 1.4 1.2
Depreciation 33 48 87 85 EV/EBITDA (x) 11.8 9.2 4.2 3.7
Amortization 0 1 1 1 EPS (W) 3,822 1,587 3,155 3,601
Others -5 -35 0 -1 CFPS (W) 6,301 4,899 8,521 8,820
Chg in Working Capital -101 14 -18 -21 BPS (W) 20,945 19,461 22,427 25,695
Chg in AR & Other Receivables -148 -50 -45 -53 DPS (W) 0 0 150 150
Chg in Inventories -77 -9 -19 -23 Payout ratio (%) 0.0 0.0 4.8 4.2
Chg in AP & Other Payables 146 83 42 50 Dividend Yield (%) 0.0 0.0 0.5 0.5
Income Tax Paid -11 -15 -13 -15 Revenue Growth (%) 47.8 42.1 15.1 17.5
Cash Flows from Inv Activities -148 -73 -75 -59 EBITDA Growth (%) 35.5 -6.0 106.1 4.2
Chg in PP&E -178 -98 -78 -62 Operating Profit Growth (%) 15.2 -43.1 154.6 13.3
Chg in Intangible Assets -1 -1 -1 -1 EPS Growth (%) 70.5 -58.5 98.8 14.1
Chg in Financial Assets 27 23 0 0 Accounts Receivable Turnover (x) 3.8 4.0 4.3 4.4
Others 3 2 4 5 Inventory Turnover (x) 7.9 8.1 8.7 9.0
Cash Flows from Fin Activities 153 -20 -7 -41 Accounts Payable Turnover (x) 4.4 4.5 4.8 5.0
Chg in Financial Liabilities 159 -36 -50 -50 ROA (%) 8.0 2.7 5.5 5.8
Chg in Equity 0 0 0 0 ROE (%) 19.8 7.5 15.0 14.9
Dividends Paid -2 0 0 -3 ROIC (%) 10.7 4.1 11.3 12.7
Others -4 -8 -9 -8 Liability to Equity Ratio (%) 191.5 175.1 165.7 151.3
Increase (Decrease) in Cash -20 21 43 26 Current Ratio (%) 99.8 108.9 132.7 153.3
Beginning Balance 24 4 26 68 Net Debt to Equity Ratio (%) 62.2 51.6 33.7 16.1
Ending Balance 4 26 68 94 Interest Coverage Ratio (x) 8.7 3.3 7.8 9.3
Source: Company data, KDB Daewoo Securities Research estimates
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OCI Materials (036490 KQ) New growth engines are needed
2014 outlook: NF3 market to show limited recovery
For 2014, we expect OCI Materials’ (OCIM) revenue and operating profit to contract 24% and 91%, respectively, due to intensifying competition amid a stagnating LCD industry. Weak sales of NF3, which makes a 70% contribution to OCIM’s revenue, will likely limit any earnings recovery despite the fact that a series of positive events are expected next year, including: 1) the launch of operations at the NF3 production factory in China, 2) a decrease in depreciation expenses following the shutdowns of some factories, and 3) accelerating sales of high-end new products.
On the supply side, growing competition among NF3 makers should continue to weigh on ASP. And our demand outlook is also negative, as major LCD panel makers are cutting down on production to switch to higher-end products, and semiconductor makers have limited investment plans.
Catalysts & risks: Turnaround of photovoltaic market vs. lack of new drivers
▶ Turnaround of photovoltaic market: OCIM’s monosilane sales can be directly and/or indirectly determined by photovoltaic (PV) demand. A recovery in the PV market will boost demand for polysilicon, and monosilane demand from polysilicon makers that use the fluidized bed reactor process (in which monosilane is used as feedstock) will rise. If monosilane/polysilicon makers such as REC choose to reduce monosilane sales to increase polysilicon production, monosilane supply may fall. If OCIM begins to directly supply monosilane to polysilicon makers, the recovery of PV demand should directly benefit the company.
▶ Lack of new growth drivers: OCIM’s NF3 shipments and ASP have steadily declined as the downstream industry has slowed down. The company’s heavy reliance on a single product creates strong leverage effects when the downstream industry is booming, but the damage is that much worse when the industry suffers. Thus, business diversification will be required for OCIM to improve its earnings.
Maintain Hold (2014F P/E of 45x)
We maintain our Hold rating on OCIM. The recovery of the PV market, although positive for OCIM, has yet to gain strong footing. A high level of NF3 inventory is also a negative. The stock does not seem cheap despite a recent slide, as it is currently trading at a 2014F P/E of 45x, which is much higher than its five-year average P/E of 20x.
FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F
Revenue (Wbn) 235 297 254 193 214 233
OP (Wbn) 78 97 50 5 18 30
OP margin (%) 33.2 32.7 19.8 2.5 8.5 12.9
NP (Wbn) 59 66 29 -3 8 17
EPS (W) 5,600 6,230 2,756 -249 743 1,590
ROE (%) 24.2 22.2 8.7 -0.8 2.5 5.2
P/E (x) 18.3 12.8 13.9 - 44.7 20.9
P/B (x) 4.2 2.6 1.2 1.1 1.1 1.1
Notes: All figures are based on consolidated K-IFRS; NP refers to profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research estimates
Technology
(Maintain) Hold
Target Price (12M, W) -
Share Price (10/31/13, W) 33,200
Expected Return -
OP (13F, Wbn) 5
Consensus OP (13F, Wbn) 7
EPS Growth (13F, %) TTR
Market EPS Growth (13F, %) 17.0
P/E (13F, x) -
Market P/E (13F, x) 10.9
KOSDAQ 532.44
Market Cap (Wbn) 350
Shares Outstanding (mn) 11
Free Float (%) 50.9
Foreign Ownership (%) 4.8
Beta (12M) 0.79
52-Week Low (W) 28,800
52-Week High (W) 41,050
(%) 1M 6M 12M
Absolute -7.4 4.4 2.6
Relative -9.1 1.0 -3.5
60
70
80
90
100
110
120
10/12 2/13 6/13 10/13
Share price
KOSDAQ
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November 1, 2013
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Table 20. Earnings forecast revisions (Wbn, %)
Previous Revised % chg.
2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes
Revenue 217 229 236 193 214 233 -11.4 -6.3 -1.4 - Lowered NF3 ASP and shipment forecasts
Operating profit 18 25 30 5 18 30 -72.7 -26.9 1.0 - Lowered monosilane shipment forecast
Pretax profit 13 19 23 -1 10 22 -110.5 -46.9 -8.0 - Reflected 3Q13 earnings
Net profit 11 15 18 -3 8 17 -124.9 -46.9 -8.0
EPS (W) 1,001 1,399 1,728 -249 743 1,591 -124.9 -46.9 -8.0
OP margin 8.1 10.9 12.6 2.5 8.5 12.9 - - -
Net margin 4.9 6.5 7.7 -1.4 3.7 7.2 - - -
Note: Based on consolidated K-IFRS
Source: KDB Daewoo Securities Research
Table 21. Quarterly and annual earnings (Wbn, %)
1Q13 2Q13 3Q13P 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F
Revenue 52.7 51.2 46.6 42.1 50.4 53.9 57.7 52.4 254.6 192.6 214.4 233.1
Operating profit 5.2 1.9 0.2 -2.4 0.7 5.1 7.5 5.0 53.2 4.8 18.3 30.2
Pretax profit 5.3 1.9 -3.2 -5.4 -0.9 3.1 5.1 2.8 38.1 -1.4 10.0 21.5
Net profit 3.5 1.9 -3.4 -4.6 -0.7 2.4 4.0 2.2 30.7 -2.6 7.8 16.8
OP margin 9.9 3.7 0.4 -5.8 1.3 9.5 13.1 9.5 20.9 2.5 8.5 12.9
Net margin 6.6 3.7 -7.4 -10.8 -1.4 4.5 6.8 4.1 12.1 -1.4 3.7 7.2
Growth (QoQ/YoY)
Revenues -1.6 -2.8 -8.9 -9.6 19.6 6.9 7.2 -9.2 -14.1 -24.4 11.3 8.7
Operating profit -32.2 -64.1 -89.5 TTR TTB 681.0 47.7 -33.8 -45.7 -90.9 278.7 65.0
Pretax profit 112.4 -64.4 TTR RR RR TTB 61.9 -45.5 -55.6 -103.7 -812.9 114.1
Net profit 11.2 -45.7 TTR RR RR TTB 61.9 -45.5 -54.2 -108.6 -397.9 114.1
Note: Based on consolidated K-IFRS (except for 2012 figures)
Source: KDB Daewoo Securities Research
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November 1, 2013
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OCI Materials (036490 KQ)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F
Revenue 254 193 214 233 Current Assets 127 89 133 175
Cost of Sales 178 167 175 181 Cash and Cash Equivalents 26 73 118 159
Gross Profit 77 25 40 53 AR & Other Receivables 39 0 0 0
SG&A Expenses 26 20 21 22 Inventories 57 0 0 0
Operating Profit (Adj) 50 5 18 30 Other Current Assets 1 1 1 1
Operating Profit 50 5 18 30 Non-Current Assets 564 510 491 465
Non-Operating Profit -15 -6 -8 -9 Investments in Associates 2 2 2 2
Net Financial Income 10 5 4 4 Property, Plant and Equipment 546 485 467 441
Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 5 4 4 4
Pretax Profit 36 -1 10 22 Total Assets 691 599 624 640
Income Tax 7 1 2 5 Current Liabilities 135 86 86 86
Profit from Continuing Operations 29 -3 8 17 AP & Other Payables 39 0 0 0
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 87 86 86 86
Net Profit 29 -3 8 17 Other Current Liabilities 10 0 0 0
Controlling Interests 29 -3 8 17 Non-Current Liabilities 210 197 219 222
Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 205 185 204 204
Total Comprehensive Profit 27 0 11 20 Other Non-Current Liabilities 4 11 13 15
Controlling Interests 27 0 11 20 Total Liabilities 345 283 305 308
Non-Controlling Interests 0 0 0 0 Controlling Interests 346 316 319 331
EBITDA 124 58 78 86 Capital Stock 5 5 5 5
FCF (Free Cash Flow) -48 83 34 50 Capital Surplus 68 68 68 68
EBITDA Margin (%) 48.6 29.9 36.2 37.0 Retained Earnings 273 240 241 250
Operating Profit Margin (%) 19.8 2.5 8.5 12.9 Non-Controlling Interests 0 0 0 0
Net Profit Margin (%) 11.4 -1.4 3.7 7.2 Stockholders' Equity 346 316 319 331
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F
Cash Flows from Op Activities 63 145 76 83 P/E (x) 13.9 - 44.7 20.9
Net Profit 29 -3 8 17 P/CF (x) 3.9 7.0 5.2 4.8
Non-Cash Income and Expense 95 109 70 70 P/B (x) 1.2 1.1 1.1 1.1
Depreciation 72 52 59 56 EV/EBITDA (x) 5.4 9.4 6.7 5.5
Amortization 1 0 0 0 EPS (W) 2,756 -249 743 1,590
Others -6 -48 -3 -3 CFPS (W) 9,719 4,743 6,356 6,906
Chg in Working Capital -44 42 1 1 BPS (W) 32,286 29,528 29,859 31,035
Chg in AR & Other Receivables -10 41 0 0 DPS (W) 2,850 700 700 700
Chg in Inventories -7 55 0 0 Payout ratio (%) 103.4 -280.7 94.3 44.0
Chg in AP & Other Payables -20 -39 0 0 Dividend Yield (%) 7.5 2.1 2.1 2.1
Income Tax Paid -18 -3 -2 -5 Revenue Growth (%) -14.2 -24.3 11.3 8.7
Cash Flows from Inv Activities -116 -35 -40 -30 EBITDA Growth (%) -24.6 -53.5 34.8 11.3
Chg in PP&E -114 -24 -40 -30 Operating Profit Growth (%) -48.1 -90.4 277.9 65.0
Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -55.8 TTR TTB 114.1
Chg in Financial Assets -2 -11 0 0 Accounts Receivable Turnover (x) 10.3 7.0 7.4 7.9
Others 0 0 0 0 Inventory Turnover (x) 4.8 3.4 3.6 3.8
Cash Flows from Fin Activities 74 -64 8 -12 Accounts Payable Turnover (x) 17.2 9.6 10.6 11.2
Chg in Financial Liabilities 92 -55 -9 0 ROA (%) 4.5 -0.4 1.3 2.7
Chg in Equity 0 0 0 0 ROE (%) 8.7 -0.8 2.5 5.2
Dividends Paid -8 -30 -7 -7 ROIC (%) 7.3 0.6 3.0 5.1
Others -10 -5 -4 -4 Liability to Equity Ratio (%) 99.6 89.5 95.7 93.1
Increase (Decrease) in Cash 22 47 45 41 Current Ratio (%) 94.3 103.0 154.9 203.0
Beginning Balance 3 26 73 118 Net Debt to Equity Ratio (%) 75.9 57.8 49.3 35.1
Ending Balance 26 73 118 159 Interest Coverage Ratio (x) 5.0 1.0 4.2 6.5
Source: Company data, KDB Daewoo Securities Research estimates
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Iljin Materials (020150 KS) Spring has yet to come
2014 outlook: Profitability to climb thanks to rechargeable battery elecfoils
We expect Iljin Materials’ profitability to improve next year, as the loss-making PCB-use elecfoil unit was downsized, and high-end, rechargeable battery-use elecfoil sales are increasing. Iljin’s revenue is forecast to contract 28% YoY this year due to factory relocation at end-2012. However, OP margin is anticipated to improve from -0.7% to 1.8%, as a 40% cut in PCB-use elecfoil production capacity should help narrow losses. In 2014, the company’s margin should improve further, as the revenue contribution of rechargeable battery-use elecfoils climb from 32% to 37%.
Until the end of next year, elecfoils for small- to mid-sized rechargeable batteries will likely drive Iljin’s earnings (elecfoils used in mid- to large-sized rechargeable batteries are anticipated to account for less than 10% of the company’s elecfoil shipments). And elecfoils for thinner and lighter rechargeable batteries are estimated to be more expensive.
Catalyst & risk: Growth of large-sized rechargeable battery market vs. price cuts
▶ Growth of large-sized rechargeable battery market: Growing demand for large-sized rechargeable batteries for EVs and ESS surely bodes well for materials makers. Assuming that EVs will account for 3.7% of total vehicle demand, the rechargeable battery market is expected to quadruple in size (from 2012 levels). And, assuming annual BMW i3 sales at 40,000 units, production yield at 80%, and Iljin Materials’ market share at 100%, demand for Iljin’s large-sized rechargeable battery-use elecfoils will be 650 tonnes per year (roughly 13% of Iljin’s total annual sales volume).
▶ Price cuts: Despite such a positive demand outlook, downward pricing pressures will likely weigh on Iljin. The growth of EV demand will depend on price cuts. Given that batteries account for almost 30% of the vehicle price, battery price needs to be lowered. The rechargeable battery business has low operating leverage, with raw materials representing 70% of total production costs. This means that per-unit production costs do not fall significantly even if production volume increases. As such, battery makers will attempt to lower material prices.
Valuation still seems demanding; Maintain Hold
Iljin Materials is currently trading at a 12-month forward P/E of 34x. Although the company’s earnings momentum is expected to pick up next year, this valuation does not seem attractive yet. Revenue contribution from rechargeable battery-use elecfoils is growing, but PCB-use elecfoils still generate over 50% of revenue. Excluding government compensation from factory relocation, the valuation looks even less attractive. We maintain our Hold rating.
FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F
Revenue (Wbn) 298 308 350 253 260 275
OP (Wbn) 41 11 -3 5 14 21
OP margin (%) 13.7 3.5 -0.7 1.8 5.4 7.6
NP (Wbn) 34 14 -53 8 16 14
EPS (W) 1,202 365 -1,345 195 394 344
ROE (%) 27.4 5.8 -17.4 2.7 5.2 4.3
P/E (x) 0.0 46.6 - 62.6 31.0 35.5
P/B (x) 0.0 2.1 1.3 1.7 1.6 1.6
Note: All figures are based on non-consolidated K-IFRS
Source: Company data, KDB Daewoo Securities Research estimates
Technology
(Maintain) Hold
Target Price (12M, W) -
Share Price (10/31/13, W) 12,200
Expected Return -
OP (13F, Wbn) 5
Consensus OP (13F, Wbn) -1
EPS Growth (13F, %) TTB
Market EPS Growth (13F, %) 17.0
P/E (13F, x) 62.6
Market P/E (13F, x) 11.1
KOSPI 2,030.09
Market Cap (Wbn) 478
Shares Outstanding (mn) 39
Free Float (%) 36.6
Foreign Ownership (%) 1.7
Beta (12M) 0.99
52-Week Low (W) 7,250
52-Week High (W) 18,000
(%) 1M 6M 12M
Absolute -22.3 14.6 31.3
Relative -24.0 11.2 25.2
60
80
100
120
140
160
180
10/12 2/13 6/13 10/13
Share price
KOSPI
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Table 22. Earnings forecast revisions (Wbn, %)
Previous Revised % chg.
2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes
Revenue 290 311 331 253 260 275 -12.7 -16.3 -17.0- Reflects government compensation for
factory relocation
Operating
profit 7 14 18 5 14 21 -29.8 3.1 18.7
- Profitability improvement in rechargeable
battery-use elecfoils
Pretax profit 8 12 17 11 20 16 27.2 63.8 -4.4
Net profit 8 11 15 8 15 13 -3.9 38.3 -9.7
EPS (W) 203 285 381 195 394 344 -3.9 38.3 -9.7
OP margin 8.9 10.0 10.0 1.8 5.4 7.6 - - -
Net margin 8.3 9.1 9.1 3.0 5.9 4.9 - - -
Note: K-IFRS, non-consolidated
Source: KDB Daewoo Securities Research
Table 23. Earnings trends and forecasts (Wbn, %)
1Q13 2Q13 3Q13F 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2011 2012 2013F 2014F 2015F
Revenue 65.8 62.7 64.3 60.5 57.5 66.8 70.2 65.7 308.0 349.5 253.3 260.2 274.7
PCB-use elecfoils (ICS) 44.5 39.3 38.9 35.5 33.7 37.1 38.9 35.8 194.6 225.5 158.2 145.4 146.8
LIB-use elecfoils (I2B) 18.5 20.1 21.4 21.7 20.4 25.4 26.3 24.6 100.3 104.8 81.7 96.6 103.0
FPCB-use elecfoils (IHT) 2.5 1.9 2.2 2.1 2.0 2.6 3.2 3.5 12.4 13.0 8.7 11.3 15.0
LMO 0.1 0.6 0.6 0.5 0.6 0.7 0.7 0.7 1.8 2.7 4.3
Other 0.1 0.9 1.1 0.7 0.9 1.1 1.1 1.1 0.7 5.3 2.8 4.2 5.6
Revenue proportion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
PCB-use elecfoils (ICS) 67.6 62.7 60.5 58.6 58.6 55.5 55.4 54.5 63.2 64.5 62.4 55.9 53.4
LIB-use elecfoils (I2B) 28.1 32.1 33.3 35.9 35.4 38.0 37.5 37.4 32.6 30.0 32.3 37.1 37.5
FPCB-use elecfoils (IHT) 3.9 3.0 3.4 3.5 3.5 4.0 4.5 5.4 4.0 3.7 3.5 4.3 5.5
LMO 0.2 0.9 0.9 0.9 1.0 1.0 1.0 1.0 0.7 1.0 1.6
Other 0.2 1.4 1.8 1.1 1.5 1.6 1.6 1.7 0.2 1.5 1.1 1.6 2.0
Operating profit -1.5 2.5 2.3 1.4 0.1 4.4 5.5 4.0 10.7 -2.5 4.6 14.0 20.8
Pretax profit 1.5 1.9 4.1 3.1 1.8 5.7 7.2 5.7 16.7 -68.7 10.5 20.3 15.9
Net profit 1.6 0.6 3.1 2.3 1.3 4.3 5.5 4.3 13.6 -52.7 7.6 15.5 13.5
OP margin -2.3 4.0 3.5 2.3 0.2 6.6 7.8 6.1 3.5 -0.7 1.8 5.4 7.6
Pretax margin 2.2 3.1 6.4 5.1 3.1 8.5 10.2 8.7 5.4 -19.7 4.2 7.8 5.8
Net margin 2.4 1.0 4.8 3.9 2.3 6.5 7.8 6.6 4.4 -15.1 3.0 5.9 4.9
Growth (QoQ/YoY)
Revenue -3.0 -4.7 2.6 -5.9 -5.0 16.1 5.2 -6.5 3.2 13.5 -27.5 2.7 5.6
PCB-use elecfoils (ICS) -3.1 -11.6 -1.0 -8.9 -5.0 10.0 5.0 -8.0 -15.7 15.9 -29.9 -8.1 0.9
LIB-use elecfoils (I2B) 1.3 8.7 6.6 1.2 -6.1 24.5 3.8 -6.7 74.6 4.5 -22.0 18.2 6.6
FPCB-use elecfoils (IHT) -6.8 -27.1 18.4 -2.5 -7.2 32.7 19.8 11.1 24.4 5.2 -32.9 29.3 32.6
Other 323.1 10.0 -10.0 10.0 10.0 10.0 -5.0 46.0 61.6
Operating profit 45.7 556.7 30.6 -41.1 25.9 25.3 5.3 -0.7 664.2 -46.8 46.4 35.3
Pretax profit RR TTB -10.1 -38.4 -90.5 3,269.3 23.3 -26.8 -72.0 TTR TTB 202.2 48.6
Net profit TTB 31.5 113.6 -25.2 -42.4 223.1 25.8 -20.8 -60.0 TTR TTB 92.8 -21.9
Note: K-IFRS, non-consolidated
Source: Company data, KDB Daewoo Securities Research
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Iljin Materials (020150 KS)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F
Revenue 350 253 260 275 Current Assets 129 168 187 208
Cost of Sales 334 233 231 238 Cash and Cash Equivalents 20 70 81 96
Gross Profit 16 20 30 37 AR & Other Receivables 35 32 34 36
SG&A Expenses 18 15 16 16 Inventories 73 66 71 75
Operating Profit (Adj) -3 5 14 21 Other Current Assets 1 1 1 1
Operating Profit -3 5 14 21 Non-Current Assets 319 430 544 615
Non-Operating Profit -66 6 6 -5 Investments in Associates 0 0 0 0
Net Financial Income 1 2 3 2 Property, Plant and Equipment 150 167 179 159
Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 6 8 10 11
Pretax Profit -69 11 20 16 Total Assets 448 598 731 822
Income Tax -16 3 5 2 Current Liabilities 144 131 138 143
Profit from Continuing Operations -53 8 16 14 AP & Other Payables 23 21 23 24
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 47 44 44 44
Net Profit -53 8 16 14 Other Current Liabilities 73 66 72 75
Controlling Interests -53 8 16 14 Non-Current Liabilities 26 180 290 362
Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 12 166 275 346
Total Comprehensive Profit -51 8 16 14 Other Non-Current Liabilities 4 4 4 4
Controlling Interests -51 8 16 14 Total Liabilities 170 311 428 505
Non-Controlling Interests 0 0 0 0 Controlling Interests 278 287 304 318
EBITDA 22 23 34 42 Capital Stock 20 20 20 20
FCF (Free Cash Flow) 59 -18 -4 35 Capital Surplus 188 188 188 188
EBITDA Margin (%) 6.4 9.1 12.9 15.3 Retained Earnings 65 73 88 102
Operating Profit Margin (%) -0.7 1.8 5.4 7.6 Non-Controlling Interests 0 0 0 0
Net Profit Margin (%) -15.1 3.0 5.9 4.9 Stockholders' Equity 278 287 304 318
Cash Flows (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F
Cash Flows from Op Activities 69 31 28 39 P/E (x) - 62.6 31.0 35.5
Net Profit -53 8 16 14 P/CF (x) -12.7 18.3 13.7 13.8
Non-Cash Income and Expense 77 24 18 29 P/B (x) 1.3 1.7 1.6 1.6
Depreciation 24 18 18 20 EV/EBITDA (x) 18.0 27.2 21.7 18.6
Amortization 1 1 1 2 EPS (W) -1,345 195 394 344
Others -52 0 11 -1 CFPS (W) -710 666 892 887
Chg in Working Capital 47 0 -1 0 BPS (W) 6,939 7,119 7,490 7,817
Chg in AR & Other Receivables -2 4 -3 -2 DPS (W) 0 0 0 0
Chg in Inventories -17 7 -6 -4 Payout ratio (%) 0.0 0.0 0.0 0.0
Chg in AP & Other Payables -1 -6 2 1 Dividend Yield (%) 0.0 0.0 0.0 0.0
Income Tax Paid -2 -2 -5 -2 Revenue Growth (%) 13.5 -27.5 2.7 5.6
Cash Flows from Inv Activities -39 -127 -121 -88 EBITDA Growth (%) -15.8 3.3 45.1 25.5
Chg in PP&E -37 -37 -30 0 Operating Profit Growth (%) TTR TTB 201.3 48.6
Chg in Intangible Assets -4 -3 -3 -3 EPS Growth (%) TTR TTB 102.1 -12.7
Chg in Financial Assets -1 0 0 0 Accounts Receivable Turnover (x) 9.7 7.6 7.9 7.8
Others 3 -87 -88 -85 Inventory Turnover (x) 4.4 3.7 3.8 3.8
Cash Flows from Fin Activities -2 147 104 63 Accounts Payable Turnover (x) 94.1 100.1 104.1 103.0
Chg in Financial Liabilities 2 -10 0 0 ROA (%) -11.9 1.5 2.3 1.7
Chg in Equity 0 0 0 0 ROE (%) -17.4 2.7 5.2 4.3
Dividends Paid -2 0 0 0 ROIC (%) -1.0 1.0 5.4 9.0
Others -2 -3 -5 -8 Liability to Equity Ratio (%) 61.0 108.2 141.0 158.8
Increase (Decrease) in Cash 18 50 10 15 Current Ratio (%) 89.8 128.5 135.2 145.3
Beginning Balance 2 20 70 81 Net Debt to Equity Ratio (%) 14.1 48.7 78.4 92.5
Ending Balance 20 70 81 96 Interest Coverage Ratio (x) -1.2 2.5 2.8 2.6
Source: Company data, KDB Daewoo Securities Research estimates
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APPENDIX 1
Important Disclosures & Disclaimers
Stock Ratings Industry Ratings
Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving
Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes
Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening
Sell Relative performance of -10%
* Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))
* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.
* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material
development.
* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of
future earnings.
The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic
conditions.
Analyst Certification
The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean
securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions
expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this
report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s
area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified
herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been
promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific
recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by
overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and
private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of
the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.
Disclosures
As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Cheil Industries as an
underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.
As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with Cheil Industries as an underlying asset, and other than this, Daewoo
Securities has no other special interests in the covered companies.
Of the equity-linked warrants covered in this report, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares
of Cheil Industries as underlying assets.
Soulbrain
0
20,000
40,000
60,000
80,000
11/11 4/12 10/12 4/13 10/13
(W) Innox
0
10,000
20,000
30,000
40,000
50,000
11/11 4/12 10/12 4/13 10/13
(W) Duksan Hi-Metal
0
10,000
20,000
30,000
40,000
50,000
11/11 4/12 10/12 4/13 10/13
(W)
Hansol Chemical
0
10,000
20,000
30,000
40,000
11/11 4/12 10/12 4/13 10/13
(W) Interflex
0
20,000
40,000
60,000
80,000
100,000
11/11 4/12 10/12 4/13 10/13
(W) Iljin Materials
0
5,000
10,000
15,000
20,000
25,000
11/11 4/12 10/12 4/13 10/13
(W)OCI Materials
0
50,000
100,000
150,000
11/11 5/12 10/12 4/13 10/13
(W)
Cheil Industries
0
50,000
100,000
150,000
11/11 5/12 11/12 4/13 10/13
(W)
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Disclaimers
This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.
Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been
independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or
correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English
translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this
report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This
report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any
securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of
the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any
laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof.
Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or
form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers,
employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a
purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or
agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment
banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to
in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to
future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Distribution
United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within
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securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or
sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements.
Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong
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All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or
its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its
affiliates to any registration or licensing requirement within such jurisdiction.
KDB Daewoo Securities International Network
Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc.
Head Office
34-3 Yeouido-dong, Yeongdeungpo-gu
Seoul 150-716
Korea
Two International Finance Centre
Suites 2005-2012
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Suite 2602, Twin Towers (East)
B-12 Jianguomenwai Avenue
Chaoyang District, Beijing 100022
China
Unit 13, 28th Floor, Hang Seng Bank Tower
1000 Lujiazui Ring Road
Pudong New Area, Shanghai 200120
China
Centec Tower
72-74 Nguyen Thi Minh Khai Street
Ward 6, District 3, Ho Chi Minh City
Vietnam
Tel: 86-10-6567-9699 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000