KIS Korea Daily

December 23, 2011

Market Performance
Dec 23 KOSPI (pt) Turnover (W bn) KOSDAQ (pt) 1867.22 4,209 502.59 0.21 2.47 12.56 -1.59 1D 1.07 1M 4.72 3M 10.00 YTD -8.96

WHATS NEW TODAY

Company & sector note
GKL (114090): Valuation merit & new business Hynix (000660): 4Q11 preview- Bet on turnaround

momentum Major Indicators

Dec 22
10-yr US Treasury Notes 3-yr govt bonds (%) AA- corporate bonds (%) KRW/USD (won) KRW/100JPY (won) JPY/USD (yen) USD/EUR (USD) WTI (USD/bbl) Gold (USD/oz) 1.95 3.36 4.25 1,152.13 1,473.78 78.18 1.31 99.43 1,605.55

Handset component (Overweight): Buy Semco

1-wk ago
1.91 3.33 4.22

1M ago
1.92 3.39 4.24

end-10
3.29 3.38 4.27 1,124.80 1,383.56 81.16 1.34 91.38 1,420.78

alternatives

1,157.15 1,147.10 1,487.60 1,502.07 77.77 1.30 93.87 77.31 1.33 98.01

1,570.52 1,699.82

Domestic Institutions Net Buy / Sell

Net Buy
LG Chem GS Retail Hynix LG Display KT (W bn) 57.0 24.1 11.4 9.4 9.2

Net Sell
Samsung Electronics Samsung Engineering Woori Finance NC Soft NHN

(W bn) 12.6 8.8 8.2 7.8 6.9

Foreign Net Buy / Sell

Net Buy
Samsung Electronics Hyundai Motor Hynix Honam Petrochemical Hyundai Heavy (W bn) 21.7 21.6 16.8 16.3 13.5

Our market view (for the mid- to long-term)

Net Sell
GS Retail E-Mart LG Display Hyundai Glovis Poongsan (W bn) 17.2 5.0 3.8 3.2 2.8

(%, x) Corporate Earnings Valuation

OP growth NP growth PER PBR

2010A
41.7 52.4 11.9 1.45

2011F
5.1 6.8 10.1 1.14

2012F
16.3 18.8 8.5 1.01

Economic Forecast Daily performance by sector

Top five sectors Pharmaceuticals Electric/Electronics Securities F&B Metals % chg 1.82 1.39 1.07 1 0.98 Bottom five sectors Textile/Apparel Chemicals Retail Utilities Transportation % chg -0.07 0.2 0.42 0.55 0.57

Factors
GDP (%) Private consumption (%) Facility investment (%) Current account (USD bn) CPI (%) KRW/USD (AVG) Policy rate (%, EOP)

1Q11A 2Q11A 3Q11A 4Q11F 2011F

4.2 2.8 11.7 2.6 3.8 1120 3.0 3.4 3.0 7.5 5.5 4.0 1083 3.25 3.5 2.0 1.0 7.2 4.3 1085 3.25 3.6 2.4 4.0 4.8 4.1 1133 3.25 3.7 2.6 5.9 20.1 4.4 1105 3.25

2012F
4.2 4.3 7.9 8.6 3.1 1104 2.75

Note) All figures growth rates are on YoY basis.

Korea Investment & Securities 1

KIS Korea Daily

Company & sector note

GKL (114090) Valuation merit & new business BUY (Maintain), TP: W25,000 (Maintain) Closing price: W18,100 (+2.55%)
Jonggil Hong 822-3276-6168 jonggil@truefriend.com

We maintain BUY and a TP of W25,000, derived by applying a 2012F target PER of 15x. 1) Earnings have been recovering quickly after falling temporarily on a reorganization of comps and credit policies. 2) GKL added a new business goal at the shareholders meeting to secure a midto long-term growth driver. 3) Shares are trading at only 11.1x 2012F PE, a discount to peers (13.5x). While 4Q11 earnings should deteriorate QoQ and YoY, we are more focused on the improving earnings outlook as results have recovered from Nov after weakness in Sep and Oct due to changes due to the comps and credit policies. Specifically, we estimate 4Q11 sales of W132.2bn (-5.3% YoY) and OP of W27.6bn (-22.0% YoY). In 2012, GKL plans to limit non-casino related OPM erosion via cost cutting efforts. Koreas casino market for foreigners should continue growing given the uptick in tourism, particularly from China. However, competition should also ramp up over the mid to long term given the possible construction of a new casino in Yongjong-do, Paradises Walkerhill Casino expansion and affiliated casino integration and the casino expansion in Yangjong-do slated to be ready by 2016. As such, GKL approved a new business goal at the Nov 24 shareholders meeting, which is aimed at entering the tourist accommodation, international convention, travel agency and country club markets, in addition to food services and duty free shopping.

Hynix (000660)

4Q11 preview: Bet on turnaround momentum BUY (Maintain), TP: W30,000 (Maintain) Closing price: W21,700 (+2.60%)

Won Seo 822-3276-6162 wonseo@truefriend.com

We believe Hynix will report weaker-than-expected 4Q11 sales of W2.28trn (previous W2.35trn), OP of -W287bn (previous -W158bn) and NP of -W20.4bn (previous -W7bn) mainly due to sluggish DRAM bit growth. We estimate 4Q11 DRAM bit growth at 12% QoQ (previous 15%, company guidance remains at mid-20%). We also expect DRAM ASP to decline 18% QoQ (previous -16%), and NAND ASP to decline 14% QoQ (previous -10%). In 1Q12, we expect PC OEM and DRAM makers DRAM inventory levels to remain high, especially as slow seasonal demand continues. However, conditions should improve as second-tier chipmakers that lack cost competitiveness and strong financial structures announce large-scale production cuts. The brisk SSD market is bolstering the 2012 outlook for NAND. With the successful mass production of 26nm products, Hynix is now evenly matched with rivals in terms of quality and cost competitiveness. Moreover, expansion of its M11 capacity has enabled Hynix to regain market share. By 2012, Hynix should be on track to mass produce 20nm products along with its industry rivals. Our TP of W30,000 is based on a 2012F BPS of W15,872 and 2012F PB of 1.9x, the historical valuation multiple during an industry upturn. We forecast Hynixs quarterly earnings will improve in 2012, and expect second-tier DRAM makers to announce production cuts near yearend.

Handset component (Overweight)

Matthew Yang

Buy Semco alternatives

Smartphone shipments by Samsung Electronics (SEC) should jump 26% QoQ

Korea Investment & Securities 2

KIS Korea Daily

822-3276-6174 matthew.yang@truefriend.com

to 35.8mn units in 4Q11F. And, the upbeat outlook is drawing investor attention towards Samsung Electro-Mechanics (Semco). However, we see only limited upside for Semco, given: 1) falling margins on multi-layered ceramic capacitors (MLCCs), 2) sluggish LED earnings, and 3) already-high valuation multiples. Instead, we believe Interflex (flexible PCB), Daeduck Electronics (PCBs) and Patron (camera modules and antennas) are attractive alternatives to Semcos handset parts division.

Daeduck Electronics (Daeduck) should post sales of W755.7bn (+16.7% YoY) and OP of W75.9bn (+34.2% YoY) in 2012F, led by semiconductor substrates. Daeduck has competed against Semco in chip scale package (CSP) for mobile DRAM and high-density interconnection (HDI) for mobile motherboards. Interflex should record sales of W689.2bn (+32.3% YoY) and OP of W71.6bn (+91.9% YoY) in 2012F. In addition, capex should rise 27% YoY in 2012F. We believe the aggressive capex strategy will bear fruit in 2012F as SECs smartphone shipments are expected to jump 95% YoY, while domestic FPCB supply growth is minimal, excluding Interflex. Partron should post sales of W497.5bn (+37.6% YoY) and OP of W61bn (+44.4% YoY) in 2012F. Camera module and antenna sales should grow further, and new components (sensor modules and linear motors) should contribute to top-line growth as well. Unlike other handset component makers, Patron should benefit from higher parts ASP (P) by supplying new, higherpriced components, in addition to the positive effects of SECs shipment growth (Q).

Please click on the underlined companies and sectors to see the full reports. The KIS Morning Brief, KIS Korea Daily and other research reports can be viewed at eng.truefriend.com

Guide to Korea Investment & Securities Co., Ltd. stock ratings based on 12-month-forward share price performance relative to market index BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and +15% Underweight: Expected to give a return of -15% or less Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sectors weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sectors weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sectors weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization.

Disclaimer This material is prepared by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This material is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this material or its contents. The final investment decision is based on the clients judgment, and this material cannot be used as evidence in any legal dispute related to investment decisions. The contents of this material accurately reflect the analysts views. Under no circumstances were there any external pressure or intervention during the analysis process or the preparation of this material.

Korea Investment & Securities 3