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OLED Industry

Industry Analysis
May 7, 2012

Positive (Initiate)
Analyst Julius Kim (Display)
822)768-7462, julius.kim@wooriwm.com

OLED investment to continue expanding; recent correction offers good buying opportunity
OLED investment to continue; recent correction offers buying opportunity
Recently, OLED-related shares have corrected sharply due to both the delayed start of operations of Samsung Mobile Display (SMD)s A2 Phase 3 (P3) line and concerns over SMDs lower-than-expected A3 line investments in 2012. However, after likely bottoming in 2012, we believe that investment in the OLED segment will continue to rise until at least 2015 given that SMD is expected to start investing in its: A3 Phase 1 (P1) line from 2H12, its A3 Phase 2 and 3 (P2 and P3) and V1 lines in 2013, and its A4 and V2 lines in 2014. OLED demand is set to grow rapidly, on: 1) the rising adoption of OLED panels by global IT firms; 2) the use of OLED panels in various applications; and 3) an increase in the display size of mobile devices. The OLED market should grow at a CAGR of 54.0% over 2011~2015 (from US$3.87bn to US$21.43bn).

Young Park (Semicon/Display)

822)768-7585, young.park@wooriwm.com

Focus on margin improvement and product development for killer apps


As the industry has achieved its targets of both increasing screen resolution and solving mass production issues, future investment will likely center on improving margins and developing products that can be used in new killer applications. Via lowering costs, the OLED display market is likely to eat into the LEDs display market. Also, the development of products used in killer apps should aid the entry of OLED into new areas. We expect cost reductions to come from three key areas: 1) advancements in encapsulation technology; 2) improvements in equipment throughput; and 3) the diversification of materials suppliers. Furthermore, we believe that the industry will focus on developing both flexible and transparent OLED panels which can be used in new killer applications.

Top picks: Cheil Industries and Duksan Hi-Metal


Cheil Industries and Duksan Hi-Metal are our top picks in the OLED sector given that they should be the prime beneficiaries of expanding OLED investment. In addition, we advise paying attention to SFA (as the company should benefit from the increasing adoption of Korean-made OLED equipment) and to AP System and Tera Semicon (as they should benefit from aggressive investments in flexible OLED). Rating/investment indices
Code Cheil Industries DS Hi-Metal SFA AP Systems Tera Semicon Rating Target price (12M) 115,000 33,000 n/a n/a n/a Current price 91,800 24,800 51,500 11,650 27,600 Operating margin 2012E 2013F 6.2 6.5 26.3 30.9 13.0 13.0 11.3 11.8 18.5 17.4 P/E 2012E 2013F 16.3 14.6 21.5 14.2 10.3 7.9 8.2 6.6 7.4 5.3 P/B 2012E 2013F 1.4 1.3 4.2 3.3 2.3 1.9 2.4 1.8 3.4 2.3
(Units: Won, %, x)

(001300.KS) Buy(Initiate) (077360.KQ) Buy(Initiate) (056190.KQ) (054620.KQ) (123100.KQ) -

ROE 2012E 2013F 8.8 9.1 21.8 25.9 25.6 24.9 29.5 27.9 54.5 45.6

Note: Based on closing price of Apr 25; SFA, AP Systems, Tera Semicon based on consensus Source: Woori I&S Research Center estimates

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CONTENTS
I. Summary ............................................................................................................................. II. OLED Market Outlook ..................................................................................................... 1. Demand for small- to mid-sized OLED panelsbegan surging from 2012 2. Large-sized OLED panels: Demand to gain traction from 2014 III. Future OLED investment................................................................................................. 1. Past trend: Focus on display quality and mass production technology 2. Future trend: Focus on margin improvement and product development for killer apps IV. Value Chain ....................................................................................................................... 1. Equipment maker 2. Materials companies 25 14 3 6

[Company Analysis] ............................................................................................................. 1. Cheil Industries (Buy, TP W115,000) 2. Duksan Hi-metal (Buy, TP W33,000) 3. SFA (Not Rated) 4. AP Systems (Not Rated) 5. Tera Semicon (Not Rated)

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I. Summary
1. OLED market outlook
1. Mid- to small-sized OLED panels We expect SMD to invest in its A4 line after competing investment in its A3 line (over 2013~2014), given that OLED demand is likely to grow at a faster pace than is currently expected. OLED demand should surge on: 1) the rising use of OLED displays by global IT companies; 2) the adoption of OLED displays in various applications; and 3) an increase in the display size of mobile devices. And, if OLED cost savings accelerate, OLED demandbacked by LCD replacement demandshould rise sharply, outstripping forecasts. Meanwhile, OLED makers will likely have to make further fab investments in order to both meet rising demand and secure large customers such as Apple. Of note, in 2014when SMDs A3 line capacity expansion is likely completedSMDs total OLED capacity should equal 24% of global handset display demand (assumes 80% production yield).

2. Large-sized OLED panels

We believe that demand for large-sized OLED panels will increase from 2014. Accordingly, investment in 8G-related mass production lines is unlikely to surface this year; but, capacity expansions for R&D pilot lines will likely continue through 2H13. Of note, we estimate that global OLED TV shipments will reach 50,000 units in 2012 and 250,000 units in 2013assuming production of 1,400 panels/month and 7,000 panels /month, respectively, SMD and LG Display (LGD)s 8G pilot lines should be able to meet this expected demand (based on 50% production yield).

2. OLED technology development outlook


Has taken three years for OLED to secure its position as next generation display Over the past three years, the appropriateness of OLEDas the next-generation displayhas been tried and tested. Based on the OLED industrys efforts to improve display quality and solve mass production issues, OLED has emerged as a promising alternative to LCD. Since the release of the first OLED smartphone, the Omnia II, the display quality of OLED has improved substantially (of note, the Galaxy Note is the most recent OLED smartphone); in addition, mass production technology has also improved (it has advanced from 4G (panel cut into two pieces) to 5.5G (cut into four pieces)). Of note, many Korean companies have emerged as strong players in the domestic OLED equipment and materials markets.

Key investment focus for OLED industry: cost-reductions and developing products for killer applications

Going forward, as the industry has achieved its targets of both increasing screen resolution and solving mass production issues, investment within the OLED industry will likely shift to center on improving margins and developing products that can be used in new killer applications. As the price of OLED panels declines, in line with lower production costs, OLED should gradually replace LCD, and new flexible and transparent panels, which will likely be the basis for killer applications, should open up new markets. Cost reductions will likely come from three key areas: 1) advancements in encapsulation technology; 2) improved equipment throughput; and 3) diversification of materials suppliers. The industry is expected to focus on developing both flexible and transparent OLED panels in order to in develop products than can be used in killer applications.

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3. Investment points
Sharp falls in share prices of OLEDrelated companies Recently, shares in OLED-related companies have fallen due to: 1) postponed operations of SMDs A2 P3 line; 2) delayed A3 line investment; and 3) concerns over slowing investment growth (after the A3 line has been completed) in line with the grim investment outlook for the OLED segment.

OLED plays growth to continue over long term

However, we believe that OLED equipment and materials plays will continue to expand over the longer term as OLED panel demand growth will likely exceed expectations, boosting facility investment. We forecast that existing domestic OLED equipment and materials producers will benefit from increased OLED investment given that: 1) they possess technological prowess; 2) they are jointly developing next generation technology (with SMD and LGD); and 3) OLED panel makers are highly likely to maintain their ties with existing companies to prevent technology leaks. In addition, we believe that the OLED growth story will move to flexible OLED panels as the relevant technology progresses. Specifically, producing flexible OLED panels is attractive for panel makers as it allows them to reduce costs; moreover, flexible OLED panels will likely be used in future killer applications. Amid the entry of new comers into the OLED segment, investment in flexible OLED should accelerate thanks to its high margins and strong growth potential.

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4. Top Picks
We recommend Cheil Industries and Duksan Hi-Metal as our top picks in the OLED sector given that they should be the prime beneficiaries of expanding OLED investment. In addition, we advise paying attention to SFA (as it should benefit from the likely increasing adoption of Korean-made OLED equipment) and to AP System and Tera Semicon (as they should benefit from aggressive investments in flexible OLED).

Cheil Industries

Cheil Industriess market share is forecasted to increase rapidly until at least the end of 2012 given the positive test results for its electron transporting layer (ETL; an OLED material). Of note, the company has started developing and producing other OLED materials such as hole transporting layer (HTL) and donor film. Backed by the Samsung Groups support for core materials makers, we expect Cheil Industries to become a global materials maker.

Duksan Hi-Metal

We believe that Duksan Hi-Metals growth story is still valid as the OLED industry will likely continue expanding for some time to come. Increased demand for OLED materials produced by Duksan Hi-Metalupon the start-up of operations of SMDs A3 lineshould alleviate fears that its market share may fall due to the entry of its peers into the HTL segment. As for its customers, they are unlikely to utilize more than three vendors due to technology leak concerns. Thus, the firm should continue to grow alongside OLED industry expansion.

SFA

OLED equipment order momentum at SFA is expected to pick up in 2012 thank to SMDs A3 line investments. SMDs capacity expansions (to 88,000 panels/month at its A2 line and to 144,000 panels/month at its A3 line) are acticipated, and additional orders are highly likely, including for both front-end and logistics equipment. In addition, small mask scanning (SMS) deposition equipment (development underway for use on 8G lines) is likely to be installed on mass production lines.

AP Systems

Sales growth of laser lift off (LLO) and LITI equipment at AP Systems should draw attention to SMDs plans to mass produce flexible and high resolution OLED panels. SMDs mass production line (8G) is highly likely to adopt advanced excimer laser annealing (ELA) and encapsulation equipment (glass, metal), benefiting AP systems.

Tera Semicon

Tera Semicon is both a polyimide curing and heat-related equipment maker, and should benefit from strengthening order momentum in the industry. In particular, the OLED and oxide TFT investment trends are forecasted to allow the company to enjoy the most robust growth and earnings momentum among its peers.

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II. OLED market outlook


High supply growth to continue Compared to DisplaySearchs forecast, we present a more optimistic outlook towards the OLED market. In 2012, the OLED market is expected to post weaker-than-expected growth, given SMDs: 1) soft mass production yields (at its A2 P3 line); and 2) likely sluggish investment in its A3 P1 line. However, strong growth in the market is expected to be observed from 2013 on: 1) the starting-up of operations of both SMDs A3 (144,000 panels/month) and V1 lines; 2) fullfledged OLED investments by late comers; and 3) investment in SMDs A4 line. Of note, investment in SMDs A4 line will likely begin in 2H14.

OLED market outlook (shipment area base)


(000m2) 12,000 10,000 8,000 6,000 4,000
DisplaySearch Woori Ex pected

Woori I&Ss outlook on OLED market is more positive than DisplaySearchs view; Woori I&S assumes A3 line will reach full capacity (144,000 panel/month) in 2013

2,000 0 '08 '09 '10 '11 '12E '13F '14F

Source: DisplaySearch, Woori I&S Research Center estimates

OLED Capacity outlook


Company Woori DisplaySearch 2008 133.0 133.0 2009 208.7 219.1 2010 351.6 360.7 2011 881.1 881.1 2012E 2,483.8 2,592.9 2013F 5,114.0 4,848.4

(Unit: 000m2)

2014F 9,750.1 8,133.9

Source: DisplaySearch, Woori I&S Research Center estimates

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OLED capacity by manufacturer


(000m2) 12,000
SMD Others

10,000 8,000 6,000 4,000 2,000 0 '08 '09 '10 '11 '12E '13F '14F

Source: Woori I&S Research Center estimates

OLED capacity by generation


(000m2) 12,000 10,000 8,000 6,000 4,000 2,000 0 '08 '09 '10 '11 '12E '13F '14F

3G

4G

5G

8G

Source: Woori I&S Research Center estimates

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1. Demand for small- to mid-sized OLED panelsbegan surging from 2012


Small- to mid-sized OLED panel demandbegan surging from 2012 Demand for small- to mid-sized OLED panels likely began surging from 2012, as: 1) an increasing number of global IT companies will likely adopt OLED as their main display type; 2) OLED panels are expected to be applied to a more diverse range of products; and 3) the size of the display for mobile devices is rising.

1) OLED panels to be increasingly adopted by global IT firms on improved quality and easing supply concerns

Global IT companies, excluding SEC, have so far shunned OLED due to both its inferior resolution (compared to LTPS LCD) and panel supply shortages. For instance, when HTC first rolled out the Nexus One in 2010, the phone was installed with an OLED display; however, the company switched to an LCD display due to an OLED panel shortage. From 2012, we expect that an increasing number of global IT companies will adopt OLED panels for their IT products given that OLED technology has improved rapidly and that the starting-up of OLED operations at the SMDs A2 and A3 lines should resolve supply shortage concerns. We note that Nokia and Motorolas new flagship models are embedded with an OLED panel; moreover, we expect future smartphones to come equipped with an OLED display as standard.

2) Scope of OLED applications to grow

Meanwhile, OLED panels will likely be installed in a variety of new segments, including media-tablet PCs (of note, SECs recently-launched the Galaxy Tab 7.7a media-tablet PC that possesses an OLED display). Given the strengths of OLED panels, especially related to playing media files (lighter, thinner, simpler, and smaller; low-energy usage), we believe that OLED panels will become widely installed in future media-tablet PCs.

3) Size of displays for mobile devices to increase

Meanwhile, the size of displays for mobile devices is increasing, a trend that deserves attention. SECs Galaxy Note, a recent hit product, has a 5.3-inch displayit is about 50% larger than the Galaxy S display. Noting that SMDs 5.5G fab has the capacity to produce 350 Galaxy S-sized display panels per sheet or 210 Galaxy Note-sized display panels (assuming 100% production yield), we believe that the increasing size of mobile displays will contribute to boosting demand for small- and mid-sized OLED panels.

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Size of OLED market, by device


(US$mn) 25,000 20,000 15,000 10,000 5,000 0 '09 '10 '11 '12E '13F '14F '15F

Others OLED TV Mobile Phone Mobile PC

Source: DisplaySearch

Number of devices that use OLED panels


(Number of models) 35 30 25 20 15 10 5 0 '08 '09 '10 '11 1Q12E
SEC Others

Number of handset makers using OLED displays for their handsets


Sony RIM Huawei Parasonic Pentech Asus Dell LG HP Toshiba HTC HP Nokia SEC ZTE HP Toshiba HTC HP Nokia SEC Asus Dell LG ZTE HP Toshiba HTC HP Nokia SEC

HP Nokia SEC Nokia SEC

2008

2009

2010

2011

2012

Source: Woori I&S Research Center

Source: Woori I&S Research Center

Smartphone panel shipmentslarger panels to boost OLED demand


(mn units) 120 100 80 60 40 20 0 1Q10 3Q10 1Q11 3Q11 1Q12E 3Q12F 1Q13F 3Q13F

>4.5'' 4.3~4.5'' 4.0~4.3'' <4''

Source: DisplaySearch, Woori I&S Research Center

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Additional capacity requiredSMDs investments in smallto mid-sized OLED to continue

In our view, SMD will start investing in its A4 line, alongside investment in its A3 line, over 2013 and 2014 in order to cope with the expected demand surge for small-and mid-sized OLED panels. SMD likely needs to secure additional capacity in order to not only meet growing demand from the smartphone and media-tablet PC market, but also to induce major clients, including Apple, to adopt OLED panels. Of note, SMDs capacity should satisfy 24% of the global handset display demand in 2014 (assuming 80% yield), equivalent to 260mn 4.3-inch smartphone display panels and 67mn 9.7-inch media-tablet PC display panels.

SMDs production capacity


Line A1 A2 A3 Total (max) 80% production yield 70% production yield Generation 4 5.5 5.5 Capacity (glass substrate basis) 48,000 88,000 144,000 Galaxy S (4) 60.4 359.0 587.5 1,006.9 805.5 704.8 Galaxy Note (5.3) 38.8 219.6 359.4 617.8 494.2 432.4

(Units: Number, mn)

iPad (9.7) (unit: mn) 8.6 59.1 96.7 164.4 131.5 115.0

Source: Woori I&S Research Center

Handset demand and OLED capacity


(mn units) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 '11 '12E '13F '14F '15F '16F A+A2+A3 A1+A2
MobilePhone SmartPhone Capacity capable of 4.3-inch display production (production yield assumed at 80% ) Capacity capable of 4.3-inch display production (production yield assumed at 100% )

Source: IDC, Woori I&S Research Center estimates

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Media-tablet PC demand and OLED capacity


(mn units) 180 160 140 120 100 80 60 40 20 0 '11 '12E '13F '14F '15F A1+A2
iPad Others Capacity capable of 9.7-inch display production (production yield assumed at 80% ) Capacity capable of 9.7-inch display production (production yield assumed at 100% )

A1+A2+A3

Source: IDC, Woori I&S Research Center estimates

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2. Large-sized OLED panels: Demand to gain traction from 2014


Demand for largesized OLED panels to grow from 2015 We predict that demand for large-sized OLED panels will begin to rise from 2014. We also hold a more conservative view, than consensus, towards the OLED TV market. Both SEC and LGD plan to roll out 55-inch OLED TVs in 2012. However, we hold a rather conservative opinion towards OLED TV saleswe forecast 2012 shipments will reach 50,000 units and 2013 shipments will come to 250,000 unitsdue to the hefty price tag (W9~10mn/TV) and lack of a killer application.

Tipping point to be reached when OLED TV price falls below W3mn/unit Killer application for OLED TV: 3D

Given the history of LED and LCD TVs, we believe that the OLED TV market will reach tipping point when the price tag falls below W3mn/unit. Considering the present rate of OLED development, we believe this will happen in 2014.

When purchasing a new TV, consumers consider not only the price but also whether it possesses a killer application. Woori I&S believes that 3D will be the killer application for OLED TV. In detail, OLED panels possess a number of attributes that make them ideal for rendering 3D, they have both a much faster response rate and superior contrast range (vs LCD displays). We project that OLED TV sales will gain traction from 2014, when terrestrial broadcasting channels are likely to begin providing programs in 3D (without the need to have a set-top box).

OLED TV shipments and ASPs


(mn units) 6 5 4 3 2 1 0 '12E '13F '14F '15F 4,000 2,000 0
Shipment (LHS) ASP (RHS)

OLED TV shipments and ASPs


(USD) 10,000 8,000 6,000 (mn units) 140 120 100 80 60 40 20 0 '10 '11 '12E '13F '14F '15F 1 0 3 2 Other TVs (LHS) OLED TV (LHS) OLED TV M/S (RHS) (%) 5 4

Source: DisplaySearch, Woori I&S Research Center

Source: DisplaySearch, Woori I&S Research Center

OLED market forecasts


2012E OLED TV shipments ASP 50 9,400 2013F 250 6,986

(Units: 1,000 units, W1,000)

2014F 2,300 2,872

2015F 5,000 1,631

Source: Woori I&S Research Center estimates

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Pilot lines able to meet OLED TV demand until end2013

Based on Woori I&Ss forecasts for 2012 and 2013 OLED TV demand (50,000 units in 2012 and 250,000 in 2013), the following conditions will be needed in order to meet anticipated large-sized OLED display demand: monthly capacity of 1,400/sheets and 7,000/sheets (at 8G lines; 50% production yield) in 2012 and 2013, respectively. And, we believe that SMD and LGDs pilot lines will be sufficient to meet expected demand in both 2012 and in 2013.

Investment in 8G lines to begin from 1H13

Accordingly, aggressive investment in 8G lines appears unnecessary in 2012. We project that SMD and LGD will focus on expanding their pilot lines for R&D purposes in 2012 and that they will construct mass production lines from 1H13 (after accumulating extensive technological know-how).

OLED TV demand and capacity (55-inch)


(000) 6,000 5,000 4,000 3,000 2,000 1,000

SMD V2 Capa SMD V1 Capa SMD V1 Pilot Capa OLED TV Demand

V1 pilot line to meet early demand, but full-fledged investment required from 2013

0 '11 '12E '13F '14F '15F

Source: Woori I&S Research Center estimates

Production line capacity by AMOLED company


Manufacturer Factory MG Size 1 1 1 1 OLED gen. 8 8 8 8 Cut 2 1 6 1 Equip Max 4 30 6 30 MP Pilot MP Pilot MP Install Jul 11 Jan 13 Aug 11 Jan 14 Massprod. ramp up May 12 Aug 13 Apr 12 Aug 14 2008 0 0 0 0 2009 0 0 0 0 2010 0 0 0 0 2011 0 0 0 0 2012 132 0 121 0

(Unit: 1,000m2)

2013 264 495 385 0

2014 264 1980 396 495

LGD LGD M1 SMD SMD V1 SMD SMD V1 Pilot SMD SMD V2

Source: DisplaySearch, Woori I&S Research Center estimates

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III. Future OLED investment


1. Past trend: Focus on display quality and mass production technology
Taken three years for OLED to secure its position as next generation display In order to forecast future OLED investment trends, we reviewed the OLED growth story. For the past three years, the OLED industry has focused on securing mass production technology and on competing head-to-head with LCD panels (specifically regarding display quality). In 2009, the outlook for the OLED segment was quite pessimistic, even amid SEC carrying out an aggressive marketing campaign for AMOLED alongside the release of its Omnia II. For consumers, OLED appeared to be inferior to LCD, and massive investment in OLED was burdensome for panel makers. All in all, it took three years before OLED was viewedby consensusas the next generation display type.

Display qualityin terms of size and resolutionimproves

Over the past three years, the display quality of OLED has improved rapidly (in terms of size, pixel per inch (ppi), and pixel composition). Specifically, the size of OLED panels for cell phones has increased from to 3.7-inch to 5.3-inch, the ppi has risen from 167 to more than 280, and the display composition has improved (from pentile to RGB stripe). Improved quality can be seen by comparing the recently released Lumia900 (Nokia) with the Lumia 800 (RGB stripe vs pentile), and comparing the Galaxy Note with the iPhone 4S (OLED display vs LCD display).

Mass production technology

Mass production technology has also improved rapidly, highlighted by the progress made in organic material deposition technology. In 2009, deposition was achieved by cutting 4G sheets into two pieces. Along with steady advances in technology, in 2010, 5.5G sheets were cut into four pieces; furthermore, deposition in 1H13 will likely be done without the need to cut. OLED capacity has also increased rapidly, backed by advances in mass production technology and improving yields. SMD invested in its A1 P3 line in 2009, its A2 P1 and P2 lines in 2010, and its A2 P3 line in 2011, raising capacity by a factor of 3.2 (from 208.7km2 in 2009 to 881.1km2 in 2011).

Localization of OLED equipment and materials

Meanwhile, we believe that the localization of OLED equipment and materials also merits attention. While SMDs A1 line was constructed using imported equipment, localization is rapidly underway, including for materials and encapsulation equipment for the A2 line and organic material deposition equipment for the A3 line. Of note, organic material deposition used to be a major technical issue for OLED panel makers, and it limited increases in OLED panel size. As for organic materials, while the import portion of EML (emissive layer (red, green, blue)) remains lofty, localization of key raw materials HTL and ETLaccount for the largest portion of organic material demand (from OLED panel makers)has been completed. Of note, OLED localization is taking place at a faster rate than in other IT segments.

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LCD VS AMOLED: OLED resolution improving quickly (PPI)


( PPI) 400 350 300 250 200 150 100 Pentile produciton due to technical difficulties
LCD AMOLED

350ppi and above not Launch of iPhone 4 necessary High resoluiton on LITI process

OLED capable of realizing 300ppi resolution (or above) thanks to LITI; competition over quality of display has become meaningless

50 0 '09

'10

'11

'12E

Source: Woori I&S Research Center estimates

OLED capacity rising (by shipment area) on advances in mass production technology
(000m2) 1,000 800 600 400 200 0

Others SMD A2 SMD A1

OLED capacity rises on SMDs A1 and A2 line investments


Source: DisplaySearch

'08

'09

'10

'11

OLED Smartphone (SEC)

Model Display Size (inch) Resolution (dot) Type PPI (RGB converted) Release

Omnia 2 3.7 WVGA (400X800) Pentile 252 (167) Oct 2009

Galaxy S 4.0 WVGA Pentile 233 (155) Mar 2010

Galaxy S2 4.3 WVGA RGB 217 Jan 2011

Galaxy Note 5.3 WXGA (1280X800) Pentile 285 (190) Aug 2011

Galaxy S3 4.8 SXGA (1280X1024) Pentile 280+ May 2012

Source: Industry data, Woori I&S Research Center

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OLED of Lumia 800 (Pentile)

OLED of Lumia 900 (RGB stripe)

Source: The Verge.com, Nokia

Source: The Verge.com, Nokia

Pentile: large pixel effective for mass production

RGB Stripe: clear display quality

Source: Woori I&S Research Center i

Source: Woori I&S Research Center

iPhone 4S: clear picture quality

Galaxy Note: comparable resolution to retina display

Source: Phonearena.com

Source: Phonearena.com

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2. Focus on margin improvement and product development for killer apps


Focus on cost reductions and developing products that can be used in killer applications We expect the OLED industry to shift its focus to: 1) reducing costs; and 2) developing products that can be used in killer applications. Cost reductions should facilitate expansion of the OLED industry, eroding the LCD market share. Specifically, product development of flexible and transparent OLED panels is expected to lead to new killers applications, carving out new markets.

We believe that the focus of the industry will be quite different from that seen in the past. As advances in deposition technology should end the debate over ppi, we expect the OLED industry to begin focusing on other strengths of OLED.

OLED technology trend

2009

2010

2011

2012

2013

2014

Display quality competition with LCD

Cost reduction

Mass production technology secured

Killer Application secured

Source: Woori I&S Research Center

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(1) Cost reductions


Need for manufacturing cost reductions As the resolution of OLED panels is now virtually identical to the resolution of LCD panels, OLED makers are expected to focus on reducing costs. Cost reductions are deemed as being critical to successful competition in the display industry, and should enhance margins and market share (via ASP cuts), eroding the LCD panel market share.

Cost reductions are forecasted to come from three key areas: 1) advancements in encapsulation technology; 2) improved equipment throughput; and 3) diversification of materials suppliers. Handset panel ASP: Price premium of OLED panels vs LCD panels falls, eroding LCD panel market share
(US$) 50 40 30 20 10 0 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12F 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 20 40
4.0'' Premium(RHS) 4.0''AMOLED(LHS) 4.0''LTPS LCD(LHS) 4.3'' Premium(RHS) 4.3''AMOLED(LHS) 4.3''LTPS LCD(LHS)

(%) 50

30

Source: DisplaySearch

Portion of handsets (based on volume) that have OLED displays


(mn units) 30 25 20 15 10 5 0 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 4 2 0 (%) 10 8 6

Portion of handsets (based on amount) that have OLED displays


(US$mn) 1,000 800 600 400 200 0 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 (%) 25 20 15 10 5 0

Shipment volume basis (LHS) M/S (RHS)

Shipment value basis (LHS) M/S (RHS)

Source: DisplaySearch

Source: DisplaySearch

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1) Focus on encapsulation for cost reduction

As OLED panels are sensitive to moisture and air, encapsulation is necessary. When glass is replaced with other materials, costs can be reduced. Glass accounts for a substantial portion of display production costs; as such, the development of an alternative material should lead to a decline in manufacturing costs. Thus, glass demand should fall over the mid- to long-term, putting pressure on glass makers to reduce ASPs.

Technology to differ by panel size

Encapsulation technology used for OLED panels will likely differ by application. While thinfilm encapsulation technology is expected to be used for small and mid-sized panels (frontlit), a range of encapsulation materials (including metal) are forecasted to be utilized for backlit large-sized panels. As a result, the use of glass as an encapsulation material should decrease going forwards.

Thin-film encapsulation for small- to mid-sized panels

Mass production using thin-film encapsulation is expected to begin in the near future for small- to mid-sized panels (at SMDs A2 P3 line). However, mass production of metal encapsulation (for larger-sized panels) will likely take a while longer to emerge due to its weak adhesive power.

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Operating margin gap between glass manufacturers and panel makers


LGD 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% `08 `09 `10 `11 SCP AUO AGC SEC NEG

42W LED TV cost analysisglass cost portion high


(US$) 50 40 30 20 10 0 BLU Chemical Polarizer Driver IC Crystal Others Glass CF

Source: Industry data

Source: Witsview, Woori I&S Research Center

Glass as percent of LED TV cost

Glass as percent of OLED panel cost


(%) 100 80 60 40 Glass Target and Others Organic Material Chemical

Glass 22.4%

Others 77.6%

20 0 15.6 55'' TV

25.9

4'' Handset

Source: Witsview, Woori I&S Research Center

Source: Witsview, Woori I&S Research Center

Front litapplied to smaller panels (handset, tablet PC)

Back litapplied to large panels (TV)

Source: Woori I&S Research Center

Source: Woori I&S Research Center

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2) Equipment throughput improving

OLED panel manufacturing costs are set to decline on improving equipment throughput as efficiency should rise on debottlenecking. Currently, a technical bottleneck exists at both the poly-si TFT process (panel cut into two pieces due to limited laser beam output) and the organic chemical vapor deposition process (panel cut into four pieces due to mask sagging under the force of gravity). Improved throughput should result in debottlenecking at these stages, raising mass production efficiency and cutting costs.

Rising throughput to benefit equipment makers

Despite the prospect of improved throughput negatively impacting equipment makersgiven the possible reduction in equipment demandwe believe that improved throughput will benefit them.

OLED panel makers to maintain status quo with suppliers due technology leak concerns Equipment makers potential to secure technology and experience mass production environment

Throughput improvement can come from either calibrating the line or from developing new equipment. Given the absence of standardized production in the OLED industry, OLED panel makers face the possibility of a technology leaks. Thus, they are highly likely to continue working with their existing suppliers (equipment and materials makers).

Domestic OLED equipment makers currently lag behind their global peers in terms of technology. However, if SMD or LGD decide to work with equipment makers, equipment makers will likely acquire additional technological know-how, facilitating their evolution into becoming global players (if domestic OLED production technology becomes the industry standardas expected).

Material/equipment-related strategic alliances, by panel maker


Company LG Display Materials/equip ment makers Materials Materials Materials Equipment Equipment Materials Materials Materials Equipment Materials Equipment Date Jun 2009 Dec 2009 Jan 2001 Dec 2010 Feb 2011 Jul 2011 Aug 2011 Aug 2011 Feb 2012 Sep 2011 May 2010 Remark Formed strategic alliance with Idemitsu Kosan (Japan) related to OLED technology development LGs Global OLED Technology acquired Kodaks OLED business and patent license (Idemitsu Kosan acquired 33% stake in Jun 2010) Partnership between Samsung SDI + NEC (to develop and produce small-sized OLED panels) Invested W29.4bn in SNU (rights offering: W14.2bn, acquired W15.2bn in convertible bonds) Invested in AP Systems convertible bonds (W27.6bn) Signed contract to establish joint venture (plastic PI film) with Ube Industries (Japan) Partnership with SFC (subsidiary of Hodogaya Chemical, OLED maker; Japan) Formed a patent and technology alliance with UDC (OLED maker) W29.5bn investment in convertible bonds of Tera Semicon Invested in NOVALED (OLED maker) Invested in SFA (911,000 shares)

SMD

Samsung Venture Investment SEC

Source: LG Business Insights, News, Woori I&S Research Center

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3) Cost savings via diversifying materials suppliers

Diversification of materials suppliers should help save costs for OLED panel makers. For example, Duksan Hi-Metal and LG Chem used have a duopoly in the supply of HTL and ETL to SMD. However, since 2H11, CSElsolar and Cheil Industries have also been supplying the materials to SMD, likely intensifying competition between the materials makers. Moreover, EMLa material whose import portion is highis now being locally produced, helping panel makers save costs.

Concerns over stagnating growth of OLED materials market

Thus, concern has arisen over downward pricing pressure on the materials market, which may undermine growth in the segment. Of note, SMD has a number of OLED materials patents, which it allows its materials suppliers to use; thus, the company possesses an upper hand in the materials market.

Focus on OLED industry growth rather than on lower market share

We advise focusing more on the longer-term growth potential of the OLED market rather than on lower organic material ASP concerns, as: 1) demand for organic materials should surge OLED panels are set to become increasingly adopted for not only high-end smartphones but for TVs as well; and 2) panel makers will likely procure materials from only two or three vendors out of technology leak fears (thus, a vendor should carry on supplying 20~40% of the OLED materials needs of the OLED panel maker that it currently services).

OLED materialsmarket outlook


(US$mn) 600 500 400 300 200 100 0 '10 '11 '12E '13F '14F

ETL EML HTL

Source: Woori I&S Research Center estimates

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(2) Developing OLED products for use in killer applications


Flexible and transparent OLED panelsproducts to be used in killer applications Development within the OLED industry will likely focus on products (including flexible and transparent OLED panels) that can be used in killer applications, given that hybrid patterning system (HPS; 400ppi is expected to be reached in the near future) is forecasted to be used on SMDs A2 P3 line. In addition, with display panels becoming larger, we believe that competition over resolution with LCD display panels has become meaningless (the larger the display becomes, the lower the resolution needed). Thus, OLED makers will likely focus on developing products for use in killer applications, helping create new markets.

1) Investment in flexible OLED to accelerate

We believe that panel makers will accelerate investing in flexible OLED, as: 1) it should help them reduce costs (no glass is used); 2) it is lighter and more shock-resistant than conventional display panels (should help make smart devices lighter and thinner); and 3) new markets can likely be created.

In fact, SMD is set to begin mass producing flexible OLED panels in 2H12 via its A2 P3 line, while LGDwhich is currently focusing on LTPS LCD in the smaller panel marketis likely to continue developing 4G flexible OLED technology.

Key technologies for flexible OLED panel: flexible TFT substrate and thinfilm encapsulation

Key technologies required to produce flexible OLED include flexible TFT substrate and thinfilm encapsulation. The manufacturing process includes: 1) the deposition of polyimide on glass; 2) the creation of TFT and organic layers; 3) the deposition of organic and inorganic layers (and their encapsulation); and 4) the separation of glass and polyimide. Some expectations exist in the market that flexible OLED panels will be used for the Galaxy S3. But, we believe that this is unlikely given the rollout schedule for flexible panels at the A2 P3 line and the launch date of the Galaxy S3 (as well as lack of capacity and low yields). Thin-film packaging process: deposition of organic and inorganic layers

Characteristics of flexible OLED panels

Cost reduction

Thin, light

Flexible OLED

Unbreakble

Design Free

Source: Industry data, Woori I&S Research Center

Source: Industry data

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2) Transparent OLED panels

OLED panels that emit light on both sidesso do not need BLUare likely to be used for transparent displays. Transparent OLED panels will likely be adopted in a variety of products. However, we forecast that its will take a while longer before transparent OLED panels are ready to be mass produced as a number of technologies still need to be advanced, including the transparency of TFT and electrode layers. As for TFT, a-si and poly-si have to be substituted as they are not transparent, while electrode layers will need to be replaced or made thinner as they are made from metal. Therefore, we are of the opinion that it is necessary for the OLED industry to develop materials such as oxide, organic (materials), nanowire (for TFTs), and graphene and CNT (for transparent electrodes).

OLED lighting structure suitable for transparent display

Transparent OLED notebook

Source: HowStuffWorks.com

Source: SEC

Automobile OLED rear view mirror

LUMUSs transparent glasses-type HMD

Source: NeoView Kolon

Source: LUMUS

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IV. Value chain


1. Equipment makers
Focus on mid- to long-term growth story of domestic OLED equipment makers Domestic OLED equipment makers growth story will likely remain valid over the mid- to long-term, given that: 1) SMD and LGD are forecasted to carry out aggressive capex; 2) domestic equipment makerswhich possess a proven track recordshould beat overseas new entrants (given their lack of mass production experience); and 3) order flows are likely to increase in line with SMDs investment in its 5.5G A3 line in 2013 and 8G V1 line in 2014.

OLED process: 1)TFT; 2) deposition; and 3) encapsulation

The OLED panel manufacturing process is largely composed of: 1) backplane; 2) deposition; and 3) encapsulation and logistics. While localization has largely been completed in the TFT, encapsulation, and logistics segments, dependence on imported deposition equipment remains lofty; thus, deposition technology development is underway by domestic OLED equipment makers.

Value chain for equipment maker


TFT LTPS transformation equipment (ELA: Excimer Laser Annealing) Evaporation Deposition HPS Laser OLED Donor Film operator Glass Encapsulation Film (Yet to be decided) Overseas Domestic Overseas Domestic Overseas Domestic Domestic Domestic Domestic Overseas Domestic Domestic Domestic Domestic JSW (Japan Steel Works), ULVAC, SHI (Sumitomo Heavy Inc.), TCZ AP Systems, Tera Semicon, Viatron Tech Tokki, Hitachi, ULVAC YAS, Jusung Engineering, DMS, Avaco, LIG ADP, SFA, SNU, Wonik IPS DongA Eltek (Sunic System) ULVAC AP Systems SFA Avaco, Jusung Engineering, LIG ADP AP Systems, SFA Wonik IPS, SNU ULVAC Tess, AP Systems AP Systems Top Engineering Rorze Systems SFA, Toptec

Metal Laser Lift Off (LLO) Glass cutting system Backend process
Source: Woori I&S Research Center

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1) What is TFT?

TFT is a thin-film semiconductor embedded on a glass substrate. TFT is composed of gates, drains, and sources, and controls the contrast of the display.

Poly-si and a-oxide used for OLED TFT

A-si TFT used for LCD is not suitable for OLED due to its low electron mobility. Thus, polysi and a-oxide are used for OLED TFT thanks to their faster electron mobility (vs a-si).

Poly-si TFT

Low temperature poly-si (LTPS) is widely used for conversion of a-si into poly-si. As TFT is made from glass, it is sensitive to heat; as such, low temperatures are critical to the manufacturing process. SMD uses ELA on its 5.5G mass production line, and tests employing ELA and super grain silicon (SGS) are underway at its pilot 8G line.

a-oxide TFT

While electron mobility is high for LTPS, uniformity is low and production costs are lofty. Thus, development of a-oxide TFT is taking place at a rapid pace. A-oxide TFT is superior to LTPS as: 1) it requires less masks; 2) its initial equipment investment burden is small (process is similar to existing LCD mass production so relatively low investment burden); and 3) it can be used in the mass production of high resolution OLED panels. Of note, a growing number of OLED makers, including Sharp and LGD, have started using a-oxide TFT technology to produce OLED panels.

TFT technology comparison


TFT technology A-si LTPS Advantage - Used for LCD, processing lines established - Uniformity (good for larger-sized displays) - Crystallization of a-si silicon using catalyst and laser - High electron mobility and transistor stability - High flexibility, low-temperature fabrication possible so able to use all substrates - Mass production possible using roll-to-roll processing and inkjet printing - High electron mobility and uniformity Disadvantage - Low electron mobility and stability - Requires heating above 300oC (during processing), so lowtemperature processing needs to be developed - Need for high-temperature processing (above 400oC) - Complex processing, high processing price, need to reduce process temperature - Slow electron mobilityneeds to be improved - Needs high-temperature processing for stabilization - Transistor characteristics change easily during deposition process

Organic

Oxide

Source: Displaybank, Woori I&S Research Center

ELA process mimetic diagram

SGS process mimetic diagram

Source: Industry data

Source: Industry data

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Substrate process [LTPS]


Clean Clean: Semes, KC Tech DMS Deposition PECVD:SFA Sputter: Ulvac Lithography Photo: Nikon Coating, Developer : Semes, DNS, TEL Etch, Strip Etcher: ICD,Wonik IPS, TEL LTPS ELA:AP Systems SGS: Tera Semicon RTA, Hydrogenation: Tera Semicon, Viatron Pre Compaction:RTA Other FA:SFA, Daifuku ETC: Rotze Systems, Toptec

Glass In Buffer/a-Si:H poly-Si

Clean

PECVD

Thermal Dehydrogenation Crystallization:ELA

Clean Gate Insulator Gate Clean PECVD Sputter

Mask1

Dry Etching

Mask2 Mask3 Mask4

Wet Etching P+Ion Drop N+Ion Drop Dopant Activation:RTA

P+ Ion Doping N+Ion Doping

Contact Hole Source/Drain Passivation/Via Anode(ITO) Bank

Clean Clean Clean Clean Clean

PECVD Sputter PECVD Sputter

Mask5 Mask6 Mask7 Mask8 Mask9

Dry Etching Wet Etching Dry Etching Wet Etching Wet Etching Hydrogenation

Source: Woori I&S Research Center

Substrate process [Oxide]


Clean Clean:Semes, KC Tech DMS Glass In Gate Gate Insulator IGZO Clean Clean Sputter Mask1 Wet Etching Deposition PECVD:SFA Sputter: Ulvac MOCVD:Jusung Eng. Lithography Photo: Nikon Coating, Developer : Semes, DNS, TEL Etch, Strip Etcher: ICD,Wonik IPS, TEL Curing Curing: Tera Semicon, Viatron Other FA:SFA, Daifuku ETC: Rotze Systems, Toptec

PECVD Sputter MOCVD? Mask2 Wet Etching Dry Etching Wet Etching Dry Etching Wet Etching Wet Etching Thermal Curing

Etch-Stop Layer Source/Drain Passivation/Via Anode(ITO) Bank

Clean Clean Clean Clean Clean

PECVD Sputter PECVD Sputter

Mask3 Mask4 Mask5 Mask6 Mask7

Source: Woori I&S Research Center

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2) Deposition

The deposition process refers to layering organic materials such as HTL, EML (RGB), and ETL on TFT. FMM evaporation is used on SMDs 5.5G A2 line, and HPS (FMM evaporation and LITI) will be used on its A3 line (in order to enhance resolution). Of note, SMS will be used on its 8G V1 line.

FMM evaporation

Fine metal mask (FMM) evaporationdepositing organic materials (heated and evaporated within patterned masks)is used on SMDs 5.5G A2 P2 line. It is easy to apply the technology, but difficult to achieve a high resolution. Of note, the deposition of organic materials tends to generate low yields.

HPS

HPS is a combination of FMM evaporation and LITI, and will likely be used on SMDs 5.5G A2 P3 line. The technology evaporates a charged layer and creates red and green patterns with LITI (results in high resolution). However, additional processing (vs evaporation) is necessary due to LITI, and it is difficult to scale up the process; as such, it is unlikely to be used on 8G lines.

Small mask scanning

FMM cannot be used on mass production 8G lines as the mask easily sags under the force of gravity. To complement this weakness, SMS was developed (small masks are moved in order to facilitate deposition without sagging).

OLED deposition method


Method FMM LITI HPS SMS WOLED Inkjet printing Description Evaporating organic thin film for use in small-sized AMOLED panels Laminating organic materials, which are heated and evaporated within patterned masks Deposition of organic materials with intrinsic patterns difficult for 6G-and-above production lines Firing a laser at the donor film and glass substrate to fabricate OLED Combination of the FMM and LITI methods Deposition by dividing and moving areas Using color filters on WOLED Patterning is not required if only white organic layers are formed, so balanced fabrication is possible on large areas Use of color filters can decrease color purity and brightness Print colored patterning using ink made from high-polymer materials

Source: Displaybank, Woori I&S Research Center

Comparison of color patterning technologies


FMM Accuracy () Glass size (G) Resolution (ppi) Lifecycle (hrs) Efficiency (cd/A) Material characteristics Investment cost 5
< 6G 240 > 60,000 20~25 Small molecules Middle

HPS 2.5
> 6G > 300 ~ 20,000 18~22 Small molecules Mid-high

Printing 5
> 6G < 200 ~ 5,000 12~15 Soluble (small or polymer) Low

WOLED 1.5
> 6G > 300 ~ 5,000 12~15 Small molecules; color filter Mid-high

Source: Displaybank, Woori I&S Research Center

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SMD: HPS used on A2 P3 line onwardscapable of creating high resolution displays


Substrate Penetration Substrate Penetration LITI LITI

D/F Penetration D/F Penetration

Source: Woori I&S Research Center

SMD: Evaporation used up until (and including) A2 P2 linedifficult to create large-sized highresolution panels due to sagging mask phenomenon

Source: Industry data, Woori I&S Research Center

SMS expected to be used on 8G lines

Source: OLED Association

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Deposition: HPS (FMM evaporation + LITI)


Clean and Plasma Treatment Clean: Semes, KC Tech DMS Glass In Plasma Treatment Open Mask Evaporation Deposition Evaporation: Tokki, SFA LITI: AP Systems (with SFA) Other FA:SFA Daifuku

Pre-Treatment

HIL/HTL

EML-R

LITI(Red)

Array Test

EML-G

LITI(Green)

AOI

EML-B

Evaporation(Blue)

ETL/EIL

Evaporation(Blue)

Cathod

ITO Sputtering

Glass Out
Source: Woori I&S Research Center

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3) Encapsulation equipment

OLED is highly sensitive to moisture and oxygena basic characteristic of organic materials. Thus, encapsulation is needed to protect the organic materials. Of note, the type of encapsulation used differs by light-emitting technology (front-lit vs back-lit).

Smaller OLED panels emit light on both sides, requiring transparent encapsulation materials Large OLED panels emit light on their reverse, allowing flexible selection of materials

For smaller OLED panels (light emitted on both sides), transparent glass or thin-film encapsulation (protecting both organic and inorganic layers) is applied. SMD has adopted glass encapsulation on its 5.5G A2 P2 line. Going forward, the firm plans to use thin-film encapsulation on the A2 P3 line due to glass being both expensive and inflexible.

Large panels emit light on their reverse, allowing the selection of encapsulation materials to be less restricted. Currently, SMD and LGD are developing a variety of encapsulation processes that can be used for large panels. Glass is the most common encapsulation material, but it is expensive and difficult to apply frit technology to large panels. Metal is cheaper, but yields are lower due to differences in the nature of TFT substrate and metal.

Features of encapsulation, by material


Glass Effective in blocking oxygen and water Effective in protecting OLED layers Vulnerable to shock Thick, heavy Thickness and weight to be reduced via glass etching Film Thinner, lighter layers Shockproof Less effective in blocking oxygen and water Less effective in protecting layers when applied to touchpanel To be improved via deposition of organic/inorganic layers

Advantage Disadvantage Improvement


Source: Woori I&S Research Center

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Encapsulation process

Small-Middle Size Panel Glass Encapsulation(Frit Type) Encap:AP Systems, Frit: LTS Frit Sintering: Tera Semicon, Viatron
Sealant

Large Size Panel Glass Encapsulation(Frit Type) Encap:AP Systems Frit: LTS Frit Sintering: Tera Semicon, Viatron
Sealant

Thin Film Encapsulation Organic : SNU Inorganic: Ulvac(Sputter) Wonik IPS(ALD, PECVD)

Glass Encapsulation(Epoxy Type) Encap: AP System, SFA

Metal Encapsulation Encap:AP System

Frit Encap Glass

Frit Encap Glass

Sealant

Getter

Sealant

Encap Glass

Encap Metal

Encap Glass Al2O3 TFT Glass Polymer Polymer Polymer Encap Glass TFT Glass UV Curing(Sealant) Polymer

Encap Glass

TFT Glass

Epoxy

Encap Glass TFT Glass UV Curing(Sealant)

TFT Glass

Laser Curing(Frit)

Laser Curing(Frit) TFT Glass UV Curing(Sealant)

UV Curing(Sealant)

Source: Woori I&S Research Center

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2. OLED materials companies


Core organic materials for OLED panels: HTL, EML, ETL OLED technology is based on organic layers that emit light when electron and electron holes, injected through a cathode and anode, respectively, combine to create energy. OLED is composed of various layers including HTL, ETL, and EML. HTL is a layer through which holes can move, and electrons are carried through ETL. Light is emitted when the holes and electrons meet at the EML (red, green, and blue EML layers).

Korean OLED materials companies need to develop EML materials

Compared to LCD and semicon materials, a relatively large portion of OLED materials are supplied to Korean panel makers by Korean companies. However, Korea still imports a large portion of its EML material requirements. Given the high cost burden of EML, we believe that domestic materials makers need to develop EML in order to increase their market share in the OLED materials segment.

OLED structure
AI EIL ETL Emitting layer HTL HIL ITO Glass substrate AI

OLED materials

Color

Fluorescent

Phosphorescent

Red

Green

Blue

Source: Woori I&S Research Center

Source: Woori I&S Research Center

Global OLED materials companies


Korea LG Chem Cheil Ind Duksan Hi-Metal Doosan Electronics-CSElsolar SFC
Source: Woori I&S Research Center

Japan Idemitsu Kosan Hodogaya Chemical Shinitzu Chemical Toray Sony Chemical Sumation

US and others Universal Display Corp (UDC) Eastman Kodak DuPont Merck Dow Chemical CDT (UK) Novaled (Germany)

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HTL

HTL is a layer that carries electron holes into the emissive layer. As HTL requires thicker deposition than other layers, to eliminate the pin hole and peak phenomena, HTL formation consumes more materials than the formation of other layers. Duksan Hi-Metal dominates the Korean HTL market. However, as the HTL market is the largest among the various OLED materials markets, it has attracted many new players. CSElsolar entered the market at the end of 2011, and Cheil Industries is expected to move into the arena in 1H13. Of note, we forecast that Duksan Hi-Metal, Cheil Industries, and CSElsolar will supply a respective 40%, 35%, and 25% of SMDs HTL needs over the midto long term.

EML

The holes and electrons transported through HTL and ETL come together at EML, emitting light at various wavelengths. EML materials emit either red, green, or blue depending on: the wavelength of the light, the emission type (florescent or phosphorescent), and the role played in emission (host or dopant). The most recent EML issue is whether to introduce phosphorescent material, which has a superior theoretic luminous efficiency (75~100%) and consumes less energy (vs fluorescent). In other words, phosphorescent should help extend the batterys charge (when it is used in high-quality display and smart devices). Thus, many companies have been developing phosphorescent EML, and sooner or later, phosphorescent is expected to replace fluorescent in EML. We note that phosphorescent is already used for red organic material, and from 2H12, phosphorescent will replace florescent for green organic material.

ETL

As mentioned earlier, ETL is a layer that moves electrons to EML. Thanks to its easier manufacturing process and low raw material costs, ETL is around 15~20% cheaper than HTL. So far, LG Chem is the exclusive ETL supplier to SMD. However, with Cheil Industries entering the market at end-2011, we expect it to supply ETL to SMD (along with LG Chem). Given its close relationship with SMD, we project that Cheil Industries will supply 30~40% of SMDs ETL needs by end-2012.

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Comparison of fluorescent and phosphorescent materials


Fluorescent Features Strengths
Source: Woori I&S Research Center

Phosphorescent Theoretic luminous efficiency 75~100% Low energy consumption

Theoretic luminous efficiency 25% Long life span

Value chain for materials suppliers


Suppliers HTL HIL ETL EIL Red Phosphorescent Green Phosphorescent Green Fluorescent Blue Fluorescent
Source: Woori I&S Research Center

Charged layer

Host Dopant Host Dopant Host Dopant Host Dopant

Duksan Hi-metal, Doosan-CSElsolar, Cheil Ind Duksan Hi-metal LG Chem, Cheil Ind LG Chem DOW Graclel UDC Duksan Hi-metal, Cheil Ind UDC Doosan-CSElsolar UDC SFC SFC

Emissive layer

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OLED capacity forecast

AMOLED capacity by company


Manufacturer AUO AUO BOE
Chimei Innolux

(Units: 1,000m2)

Factory L4B AMOLED


L3D Linkou AMOLED

CMEL IRICO IRICO Japan Display Mobara AMOLED LG Display LGD AP1-E1 LG Display LGD AP2-E2 LG Display LG Display LGD M1 SMD SDI A1 SMD SMD SMD SMD A2 SMD SMD SMD SMD SMD A3 SMD SMD SMD SMD A4 SMD SMD SMD SMD V1 SMD SMD V1 Pilot SMD SMD V2 Panasonic IPSA Himeji 1 TMDisplay Ishikawa Total

BOE B6 AMOLED TPO Hinschu 1 CMEL Tainan 2 Foshan-Shunde 3

MG Size 1 1 2 1 1 1 2 1 1 1 2 1 1 2 3 1 2 Flex-1 Flex-2 1 2 1 2 3 1 1 1 1 1

OLED Gen 4 3.25 5.5 3.25 3.25 4 4 6 4 4 4 8 4 4 4 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5 8 8 8 5 4

Cut 2 1 4 2 2 2 2 1 2 2 2 2 2 2 2 4 4 4 4 1 1 1 1 1 1 1 6 1 1 2

Equip Max 15 7 15 8 7 15 15 15 3 6 5 4 13.5 7 24 24 32 8 24 48 48 48 48 48 48 30 6 30 5 4

MP MP MP MP MP MP MP MP MP Pilot MP MP Pilot MP MP MP MP MP Pilot MP MP MP MP MP MP MP MP Pilot MP Pilot MP

Install Oct-11 Sep-10 Jun-14 Mar-13 Feb-07 Dec-12 Oct-13 Nov-13 Mar-08 Dec-09 Nov-10 Jul-11 Apr-06 Aug-08 Jan-10 Dec-10 Jul-11 Aug-11 Feb-12 Nov-12 Apr-13 Jan-13 Apr-14 Jan-13 Aug-11 Jan-14 Jun-12 Nov-08

MP Ramp Sep-12 May-12 Oct-14 Sep-13 Jul-07 Jun-13 Jun-14 Jun-14 Sep-09 Mar-11 May-11 May-12 Sep-07 May-09 Jun-10 May-11 Oct-11 Apr-12 Jun-12 Apr-13 Aug-13 Aug-13 Jan-15 Aug-13 Apr-12 Aug-14 Dec-12 Oct-12

2008 0 0 0 0 3 0 0 0 0 0 0 0 100 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 102

2009 0 0 0 0 27 0 0 0 8 0 0 0 109 32 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 176

2010 0 0 0 0 39 0 0 0 14 0 0 0 109 56 98 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 316

2011 0 0 0 0 0 0 0 0 0 40 19 0 109 56 193 328 94 0 0 0 0 0 0 0 0 0 0 0 0 0 881

2012 15 22 0 0 33 0 0 0 0 48 40 132 109 56 193 562 702 105 293 0 0 0 0 0 0 0 121 0 4 3 2,483

2013 111 39 0 8 39 35 0 0 0 48 40 264 109 56 193 562 749 187 562 702 304 94 0 0 0 495 385 0 50 30 5,114

2014 121 39 29 45 39 121 60 216 0 48 40 264 109 56 193 562 749 187 562 1123 1123 1053 0 0 0 1980 396 495 50 32 9,750

Source: DisplaySearch, Woori I&S Research Center estimates

36

Cheil Ind (001300.KS)


Company Analysis
May 7, 2012

Buy (Initiate)
TP W115,000 (Initiate)
W91,800 CP (12/04/25)
Analyst Julius Kim (Display)
822)768-7462, julius.kim@wooriwm.com

OLED momentum reloaded


Initiate at Buy and target price of W115,000
We initiate coverage on Cheil Industries at Buy and a target price of W115,000. Our sum-of-the-parts derived target price offers upside potential of 25.3%.

Young Park (Semicon/Display)

OLED momentum reloaded


Viewing the companys shares as being highly sensitive to OLED-related earnings, our high valuation reflects expectations for its electronic materials (EM) division (which is strongly related to OLED materials). Among the companys OLED materials units, the ETL unit is expected to see tangible growth in 2012, owing to: 1) the positive results of SMDs quality assessment; 2) SMDs move toward lessening dependency on LG Chem. We forecast that Cheil Ind will supply 20% of SMDs ETL needs by yearend. Cheil Ind is also in the process of developing both a variety of OLED materials (including HTL and donor film) and semiconductor processing materials. The EM divisions contribution to total earnings should strengthen gradually going forward. In line with the Samsung Groups focus on developing a core materials company, Cheil Ind will likely become a global electronic materials player.

822)768-7585, young.park@wooriwm.com

Sector

Chemicals

Kospi 1,961.98 Kosdaq 483.48 Market cap (common) W4,813.8bn Outstanding shares (common) 52.4mn shrs 52W high (11/05/31) W138,000 low (11/09/26) W74,000 Dividend yield (2011) 0.7% Foreign ownership 24.3% Major shareholders National Pension Service (NPS) Samsung Card and 5 others Share performance (%)3M Absolute Relative Price trend
200 150 100 50 0 '11.4 '11.6 '11.8 '11.10 '11.12 '12.2 '12.4 Cheil Industries KOSPI

7.7% 7.3% 12M -27.7 -18.4

Chemical and fashion divisions: Margins to improve on output growth and decrease in fixed costs
Going forward, the chemical division should experience both top- and bottom-line growth. Moreover, shipment volume is expected to increase on: 1) the anticipated continuation of the recovery in IT product demand; and 2) completion of EP capacity expansion in 3Q12. Margins should gradually improve in line with likely decreased fixed costs. We believe that the fashion division will remain a steady cash cow for the company. Stable earnings growth should be possible, as: 1) following continual losses, a turnaround is expected for womens wear unit; and 2) the divisions already diverse product portfolio should be positively impacted by the launch of new brand SPA 8 Seconds.

6M -8.2 -11.6

-10.9 -11.3

YE-Dec 2010 2011 2012E 2013F 2014F

Sales (Wbn) 5,113 5,581 6,184 6,836 7,553

Chg (%) 16.1 9.2 10.8 10.6 10.5

OP (Wbn) 343 222 383 438 493

NP (Wbn) 273 259 295 330 368

NP to parent (Wbn) 279 259 295 330 368

EPS (won) 5,573 5,079 5,621 6,301 7,016

Chg (%) 132.5 -8.9 10.7 12.1 11.4

P/E (x) 19.9 19.9 16.3 14.6 13.1

P/B (x) 2.0 1.6 1.4 1.3 1.2

EV/EBITDA (x) 12.2 15.7 9.0 8.0 7.1

ROE (%) 11.8 8.7 8.8 9.1 9.4

Debt/equity Net debt (%) (Wbn) 46.0 53.3 52.9 52.3 51.6 281 754 783 677 559

Note: IFRS basis, but operating profit based on adjusted operating income (gross profit SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates

www.wooriwm.com

Cheil Ind

www.wooriwm.com

II. Valuations
Initiate with Buy and target price of W115,000 We initiate coverage on Cheil Ind with a Buy rating and a target price of W115,000. Our target price was derived using the sum of operating value (based on RIM) and asset value (based on sum-of-the-parts valuation). The RIM-derived calculations assume a market risk premium of 6.0%, a risk free rate of 4.0%, and a beta of 1.2, with a CoE of 11.2%. Our target price equates to 20.5x 2012 EPS (W5,621) and 18.3x 2013 EPS (W6,301).

RIM-derived operating value


2012E Net profit Shareholders equity Forecast ROE (FROE) Spread (FROE-COE) Residual income Cost of equity (COE) Beta Market risk premium (Rm-Rf) Risk-free rate (Rf) Beginning shareholders equity PV of forecast period RI PV of continuing value Equity value (C+P) Number of shares (common, mn) Fair price (C) Current price (C) Upside (-downside) Implied P/B (x) Implied P/E (x) 295 3,473 8.8% -2.4% -80 11.2% 1.2 6.0% 4.0% 3,216 374 1,175 4,765 52 12m TP 101,053 91,800 10.1% 1.6 17.3 2013F 330 3,765 9.1% -2.1% -75 2014F 368 4,095 9.4% -1.8% -72 2015F 392 4,449 9.2% -2.0% -87 2016F 487 4,898 10.4% -0.8% -37 2017F 639 5,499 12.3% 1.1% 57 2018F 774 6,211 13.2% 2.0% 118 2019F 918 7,038 13.9% 2.7% 176 2020F 1,077 7,987 14.3% 3.1% 236 2021F 1,282 9,090 15.0% 3.8% 325

(Units: Wbn, won)

2022F 1,474 10,329 15.2% 4.0% 386

2023F 1,737 11,754 15.7% 4.5% 501

Note: The residual income model (RIM) is a cash flow approach that yields a fair shareholder value (value of equity) by adding shareholders equity and present value of residual income (meaning income excluding cost of equity). Value of equity = shareholders equity + sum of present value of future residual income * Residual income (RIt) = NP (t) shareholders equity(t-1) * cost of equity (t)= shareholders equity (t-1) * (ROEt - COEt) Woori I&S uses RIM as our primary valuation model as RIM is an objective model that minimizes subjectivity of valuation indicators while producing same results as the dividend discount model (DDM) and DCF.

Market risk premium assessment guidelines


Criteria Risk premium Mega cap Market cap of W10tn or higher + credit rating of 'AAA' or higher 5.2% Large cap Market cap of W1~10tn + credit rating of 'A0' or higher 6.0% Mid cap Market cap of W200bn-1tn + credit rating of 'BBB+' or higher 7.0% Small cap Market cap of less than W200bn + credit rating of 'BBB-' or higher 8.0%

* Risk Free Rate = 4.0%( standardized)

38

Cheil Ind

www.wooriwm.com

Sum-of-the-parts and RIM valuations


1. Operating value Operating value RIM-derived operating value 5,299.0 Book value 689.5 269.7 112.3 1,071.5 Estimated value 1,261.5 269.7 95.6 1,626.9 Net debt +783.0 Discount 20.0% 20.0% 20.0%

(Units: Wbn)

Value 5,817.4 Value 1,009.2 215.8 76.5 1,301.5

2. Asset value Listed shares Unlisted shares Shares subject to equity-method valuation Sub-total

Note: Listed shares based on closing prices on Apr 24 Unlisted shares based on book value Shares subject to equity-method valuation based on book value 3. Fair value Number of shares (000) Treasury shares (000) Sum of operating and asset value (Wbn) Fair value (won) 52,438 1,865 5,817.4 115,031.4

39

Cheil Ind

www.wooriwm.com

III. Earnings forecasts


1Q12 preview: Forecast sales of W1,441.4bn, operating profit of W94.6bn Earnings to improve gradually in 2012 We forecast consensus-beating 1Q12 sales of W1,441.4bn (up 3.9% q-q) and operating profit of W94.6bn (up 86.2% q-q). In particular, we expect a sharp rise in operating profit on: 1) likely improved margins at the EM division thanks to the softer yen; and 2) lower fixed costs at the chemical division on likely resilient IT industry conditions and higher shipments.

We project full-year 2012 sales of W6,183.8bn (up 10.7% y-y) and adjusted operating profit of W383.2bn (up 80.9% y-y), backed by: 1) anticipated growth at the EM division thanks to increased supply of semiconductor and OLED materials; 2) the chemical unit benefiting from resilient IT demand; and 3) likely top-line growth at the fashion division on the launch of new brands. We believe that Cheil Inds supply of high-margin OLED materials will justify its high valuations.

Earnings forecasts
2011 Sales Operating profit EBITDA Net profit EPS P/E P/B EV/EBITDA ROE 5,581 222 384 259 5,079 19.9 1.6 15.7 8.7 2012E 6,184 383 622 295 5,621 16.3 1.4 9.0 8.8 2013F 6,836 438 689 330 6,301 14.6 1.3 8.0 9.1

(Units: Wbn, won, x, %)

2014F 7,553 493 756 368 7,016 13.1 1.2 7.1 9.4

Source: Woori I&S Research Center estimates

40

Cheil Ind

www.wooriwm.com

Sales breakdown
(Wbn) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1Q10 3Q10 1Q11 3Q11 1Q12E 3Q12F
Fashion E.M Chemical

Operating profit breakdown


(Wbn) 120 100 80 60 40 20 0 1Q10 3Q10 1Q11 3Q11 1Q12F 3Q12F
Fashion E.M Chemical

Source: Cheil Ind, Woori I&S Research Center estimates

Source: Cheil Ind, Woori I&S Research Center estimates

Chemical product prices


($MT) 5,000 4,000 3,000 2,000 1,000 0 '08.1 '08.8 '09.3 '09.10 '10.5 '10.12 '11.8 '12.3 ABS SM BD PS AN

ABS, PS spreads
($MT) 1,000 800 600 400 200 0 -200 -400 '08.4 '08.11 '09.6 '10.1 '10.9 '11.4 '11.11

PS spread ABS spread

Source: Datastream, Woori I&S Research Center

Source: Datastream, Woori I&S Research Center

OLED capacity at SMD


(000m2) 10,000 8,000 6,000 4,000 2,000 0 2011 2012E 2013F 2014F

OLED materials (ETL) supply for SMD


(ton) 14 12 10 8 6 4 2 0 2012E 2013F 2014F

Cheil. Ind Others

Source: Woori I&S Research Center estimates

Source: Woori I&S Research Center estimates

41

Cheil Ind

www.wooriwm.com

Quarterly earnings
1Q11 Sales (Wbn) Chemical EM Fashion Total Operating profit (Wbn) Chemical EM Fashion Total Adj operating (Wbn) Operating margin Chemical EM Fashion Total Sales growth q-q Chemical EM Fashion Total profit 2Q11 3Q11 4Q11 1Q12E 2Q12F 3Q12F 4Q12F 2011 2012E 2013F

621.0 383.7 394.9 1,399.6 35.5 36.4 28.7 100.6 79.2

650.3 406.5 423.9 1,480.7 23.0 26.9 11.1 61.0 61.3

592.6 395.6 328.9 1,317.1 2.3 68.1 5.3 75.7 28.1

550.8 361.5 471.2 1,383.5 9.7 17.8 23.3 50.8 53.8

618.1 402.3 421.0 1,441.4 24.3 47.2 23.2 94.6 75.6

636.4 444.3 452.4 1,533.1 28.6 37.6 20.5 86.8 84.7

723.2 471.2 372.7 1,567.1 41.2 48.8 13.3 103.3 100.0

669.9 463.7 508.5 1,642.1 32.2 44.0 24.7 100.9 122.9

2,414.7 1,547.4 1,618.9 5,581.0 70.5 149.2 68.4 286.5 221.8

2,647.6 1,781.6 1,754.6 6,183.8 126.3 177.7 81.7 385.7 383.2

2,904.5 2,031.3 1,900.5 6,836.3 140.7 205.1 96.6 442.4 437.5

5.7% 9.5% 7.3% 7.2% 5.2% 8.9% -4.9% 3.1%

3.5% 6.6% 2.6% 4.1% 4.7% 5.9% 7.3% 5.8%

0.4% 17.2% 1.6% 5.7% -8.9% -2.7% -22.4% -11.0%

1.8% 4.8% 5.0% 3.7% -7.0% -5.9% 41.2% 5.4%

3.9% 11.7% 5.5% 6.6% 12.2% 8.0% -9.4% 3.9%

4.5% 8.5% 4.5% 5.7% 3.0% 10.4% 7.5% 6.4%

5.7% 10.4% 3.6% 6.6% 13.6% 6.1% -17.6% 2.2%

4.8% 9.5% 4.9% 6.1% -7.4% -1.6% 36.4% 4.8%

2.9% 9.6% 4.2% 5.1% 6.5% 10.3% 12.5% 9.2%

4.8% 10.0% 4.7% 6.2% 9.6% 14.3% 8.8% 10.7%

4.8% 10.1% 5.1% 6.5% 9.7% 14.0% 8.3% 10.6%

Operating profit growth q-q Chemical 7.3% EM 1,003.0% Fashion 124.2% Total 104.5% % of sales Chemical EM Fashion Total % of operating profit Chemical EM Fashion Total 44.4% 27.4% 28.2% 100.0% 35.3% 36.2% 28.5% 100.0%

-35.2% -26.1% -61.3% -39.4% 43.9% 27.5% 28.6% 100.0% 37.7% 44.1% 18.2% 100.0%

-90.0% 153.2% -52.3% 24.1% 45.0% 30.0% 25.0% 100.0% 3.0% 90.0% 7.0% 100.0%

321.7% -73.9% 339.6% -32.9% 39.7% 26.8% 33.5% 100.0% 19.1% 35.0% 45.9% 100.0%

150.1% 164.9% -0.3% 86.3% 42.9% 27.9% 29.2% 100.0% 25.6% 49.8% 24.5% 100.0%

18.0% -20.2% -11.8% -8.3% 41.5% 29.0% 29.5% 100.0% 33.0% 43.4% 23.6% 100.0%

43.9% 29.7% -35.2% 19.1% 46.1% 30.1% 23.8% 100.0% 39.9% 47.3% 12.9% 100.0%

-22.0% -9.8% 86.2% -2.3% 40.8% 28.2% 31.0% 100.0% 31.9% 43.6% 24.5% 100.0%

-57.6% 43.6% 14.4% -13.2% 43.2% 27.9% 28.9% 100.0% 24.6% 52.1% 23.9% 100.0%

79.1% 19.1% 19.5% 34.6% 42.8% 28.8% 28.4% 100.0% 32.7% 46.1% 21.2% 100.0%

11.4% 15.5% 18.2% 14.7% 42.5% 29.7% 27.8% 100.0% 31.8% 46.4% 21.8% 100.0%

Note: IFRS consolidated basis Source: Woori I&S Research Center estimates

42

Cheil Ind
STATEMENT OF COMPREHENSIVE INCOME
(Wbn) Sales Growth (%) COGS Gross Profit Gross margin (%) SG&A GAAP Operating Income GAAP Operating margin (%) Other Operating Income(Exp.) EBITDA Operating Income Operating margin (%) Financial Income(Costs) Other Non-Operating Profits
Gains(Losses) in Associates, Subsidiaries and JVs

www.wooriwm.com

VALUATION INDEX
Price/Earnings (x) P/E (High, x) P/E (Low, x) Price/ Book Value (x) P/B (High, x) P/B (Low, x) Price/ Gross Cash Flow (x) Price/ Sales (x) P/E/ EPS growth (x) P/E/ EBITPS growth (x) P/E/ EBITDAPS growth (x) EV/ EBITDA (x) EV/ EBIT (x) Enterprise Value (Wbn) EPS CAGR (3-Yr) (%) EBITPS CAGR (3-Yr) (%) EBITDAPS CAGR (3-Yr) (%) EBITPS (won) EBITDAPS (won) Fully diluted EPS (won) BVPS (won) CFPS (won) Sales PS (won) DPS (won) 2011/12A 2012/12E 2013/12F 2014/12F 19.9 16.3 14.6 13.1 27.5 19.5 17.4 15.6 13.9 16.1 14.4 12.9 1.6 1.4 1.3 1.2 2.3 1.7 1.5 1.4 1.2 1.4 1.3 1.2 12.5 7.9 7.1 6.5 0.9 0.8 0.7 0.6 1.7 1.6 1.1 0.6 0.7 1.4 1.0 0.7 0.8 1.8 1.4 0.9 15.7 9.0 8.0 7.1 27.2 14.6 12.6 10.9 6,050 5,597 5,492 5,373 11.4 9.9 13.8 20.2 29.2 11.6 14.2 19.6 24.1 9.0 10.5 14.3 4,361 7,308 8,344 9,400 7,531 11,857 13,148 14,410 5,079 5,621 6,301 7,016 61,333 66,231 71,808 78,101 8,073 11,566 12,888 14,169 109,399 117,926 130,369 144,038 750 750 750 750

Pre-tax Profit from Cont. Op. Income Taxes Profit from Continuing Op. Net Profit Net margin (%) Net Profit of Parent Net Profit to Non-Controlling Other Comprehensive Income Total Comprehensive Income

2011/12A 2012/12E 2013/12F 2014/12F 5,581 6,184 6,836 7,553 9.2 10.8 10.6 10.5 3,997 4,376 4,910 5,494 1,584 1,808 1,926 2,060 28.4 29.2 28.2 27.3 1,361 1,425 1,488 1,567 222 383 438 493 4.0 6.2 6.4 6.5 65 2 5 8 384 622 689 756 287 386 442 501 5.1 6.2 6.5 6.6 -24 -39 -39 -41 0 0 0 0 12 0 0 0 276 347 403 460 17 52 73 92 259 295 330 368 259 295 330 368 4.6 4.8 4.8 4.9 259 295 330 368 0 0 0 0 -68 0 0 0 191 295 330 368

CASH FLOW STATEMENT


(Wbn) Operating Cash Flow Net Profit Depreciation & Amortization + Loss(Gains) from Subs + FC translation loss(profit) + Losses(Gains) on Disposal of Assets Gross Cash Flow - Incr. (Decr.) in WC Investing Cash Flow + Decr. In Tangible Assets - Incr. In Tangible Assets (capex) + Disp.(Acq.) of Inv. Assets Free Cash Flow Net Cash Flow Financing Cash Flow Equity Financing Debt Financing Incr.(Decr.) in Cash Ending Cash and Cash Equivalents Net Debt (Cash) 2011/12A 2012/12E 2013/12F 2014/12F 195 484 527 570 259 295 330 368 162 239 252 263 -57 0 0 0 0 0 0 0 3 0 0 0 412 607 676 743 -155 -49 -55 -60 -333 -478 -384 -414 2 0 0 0 -327 -420 -300 -300 10 -57 -74 -93 -133 64 227 270 -138 6 143 156 202 -4 -6 -6 294 0 0 0 -92 -4 -6 -6 63 2 137 151 96 99 236 387 754 783 677 559 RIM Spread (FROE-COE) (%) Residual Income 12M RIM Target Price (won) EVA Invested Capital NOPAT ROIC (%) ROIC - WACC (%) EVA DCF EBIT + Depreciation/Amortization - Capex - Incr. (Decr.) in Working Capital Free Cash Flow for Firm WACC Cost of Debt (Tax Adj.) Cost of Equity (COE) WACC (%)

RIM & EVA


2011/12A 2012/12E 2013/12F 2014/12F 0.4 10.7 101,053 2,586.6 184.5 8.6 1.6 41.8 222.5 162 -327.3 -206.0 249.6 4.5 8.3 7.0 0.4 -79.8 1.0 -75.0 1.3 -72.3

2,845.1 350.6 12.9 6.0 170.3 383.2 239 -420.0 -77.1 221.4 4.1 8.4 6.9

2,990.2 385.7 13.2 6.5 194.8 437.5 252 -300.0 -87.0 397.7 4.0 8.1 6.7

3,143.1 423.9 13.8 7.2 227.0 492.9 263 -300.0 -95.6 452.6 3.9 8.0 6.6

STATEMENT OF FINANCIAL POSITION


(Wbn) Cash and Cash Equivalents Accounts Receivables Total Current Assets Tangible Assets Investment Assets Non-Current Assets Assets Short-Term Debt Account Payables Current Liabilities Long-Term Debt Long-Term Allowance Non-Current Liabilities Liabilities Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Equity Shareholders' Equity 2011/12A 2012/12E 2013/12F 2014/12F 96 99 236 387 485 536 593 655 1,435 1,578 1,871 2,193 1,491 1,680 1,737 1,784 1,482 1,539 1,613 1,706 3,496 3,735 3,867 4,017 4,931 5,313 5,738 6,211 271 291 313 337 280 310 343 378 864 948 1,039 1,139 581 594 604 612 38 42 47 51 850 892 933 975 1,714 1,839 1,971 2,114 262 262 262 262 702 702 702 702 1,386 1,643 1,936 2,266 1 1 1 1 3,217 3,474 3,766 4,096

PROFITABILITY & STABILITY


ROE (%) ROA (%) ROIC (%) EBITDA/ equity (%) EBITDA/ asset (%) Dividend Yield (%) Payout Ratio (%) Total Cash Dividend (Wbn) Cash DPS (won) Net debt(cash)/ equity (%) Debt/ equity (%) Net interest exp/ sales (%) Interest coverage (x) Current Ratio (%) Quick Ratio (%) Total shares (mn) Par value (won) Share price (won) Market Cap (Wbn) 2011/12A 2012/12E 2013/12F 2014/12F 8.7 8.8 9.1 9.4 5.8 5.8 6.0 6.2 8.6 12.9 13.2 13.8 11.9 17.9 18.3 18.4 7.8 11.7 12.0 12.2 0.7 0.8 0.8 0.8 13.9 12.9 11.5 10.3 36 38 38 38 750 750 750 750 23.4 22.5 18.0 13.6 53.3 52.9 52.3 51.6 510.7 678.7 636.4 596.5 7.8 9.1 10.1 10.9 166.0 166.5 180.1 192.6 80.0 79.9 92.7 104.5 52 52 52 52 5,000 5,000 5,000 5,000 101,000 91,800 91,800 91,800 5,296 4,814 4,814 4,814

43

Duksan Hi-Metal (077360.KQ)


Company Analysis
May 7, 2012

Buy (Initiate)
TP W33,000 (Initiate)
W24,800 CP (12/04/25)
Analyst Julius Kim (Display)
822)768-7462, julius.kim@wooriwm.com

Strong growth momentum to offset negatives


Initiate coverage with Buy rating and target price of W33,000
We initiate our coverage on Duksan Hi-Metal with a Buy recommendation and a target price of W33,000. Our RIM-derived target price assumes a market risk premium of 7.0%, a risk free rate of 4.0%, and a beta of 1.2, with a CoE of 12.4%.

Young Park (Semicon/Display)

822)768-7585, young.park@wooriwm.com

Benefits from growing OLED industry to exceed weight of falling market share and ASP cut pressure
Duksan Hi-Metal should enjoy strong 2012 top-line expansion (up 14.7% y-y), despite: 1) a likely falling market share upon the entry of new competitors; and 2) price-cutting pressure.

Sector

Semiconductors

Kospi 1,961.98 Kosdaq 483.48 Market cap (common) W728.9bn Outstanding shares (common) 29.4mn shrs 52W high (11/08/03) W30,150 low (11/05/23) W19,800 Dividend yield (2011) 0.0% Foreign ownership 16.2% Major shareholders Jun-Ho Lee and 11 others Share performance (%)3M Absolute Relative Price trend
200 150 100 50 0 '11.4 '11.6 '11.8 '11.10 '11.12 '12.2 '12.4 DS Hi-metal KOSDAQ

Going forward, Duksan Hi-Metal Business should enjoy a favorable environment, backed by: 1) the start of operations of SMDs A3 and V1 lines; and 2) likely additional HTL demand in the wake of SMDs adoption of a twotrack (RGB, WOLED) strategy. Of note, WOLED consumes 50~100% more HTL than RGB. Furthermore, Duksan Hi-Metal should be a primary beneficiary of OLED industry expansion, supported by the tendency of client companies to limit their number of vendors to three or less in order to prevent technology leaks.

42.0% 6M -10.1 -8.4 12M +4.4 +14.2

To see steady demand growth on expansion of solder ball market


We believe that the companys solder ball division is well positioned to continue enjoying steady growth, expecting smart devices to continue becoming smaller, thinner, lighter, and simpler, thereby spurring multi-chip package (MCP) and package-on-package (POP) demand. Of note, DDR3 manufacturing requires 78 solder balls per unit; in contrast, an average of 150 solder balls per unit are required for MCP and POP (200 solder balls needed for moviMCP).

+0.4 +6.2

YE-Dec 2010 2011 2012E 2013F 2014F

Sales (Wbn) 72 129 148 198 234

Chg (%) 125.5 78.6 14.7 33.3 18.5

OP (Wbn) 13 39 40 62 81

NP (Wbn) 10 35 34 51 67

NP to parent (Wbn) 10 35 34 51 67

EPS (won) 409 1,181 1,153 1,744 2,272

Chg (%) 82.7 83.7 -2.4 51.3 30.2

P/E (x) 49.6 21.5 21.5 14.2 10.9

P/B (x) 6.3 5.4 4.2 3.3 2.5

EV/EBITDA (x) 23.6 17.0 15.0 9.6 7.1

ROE Debt/equity (%) (%) 12.4 29.0 21.8 25.9 26.0 19.7 9.6 8.5 8.0 6.9

Net debt (Wbn) 6 -18 -33 -54 -94

Note: IFRS basis, but operating profit based on adjusted operating income (gross profit SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates

www.wooriwm.com

Duksan Hi-Metal

www.wooriwm.com

II. Valuation
1. Target price of W33,000 based on RIM valuation
Target price of W33,00036% upside potential We initiate our coverage on Duksan Hi-Metal with a Buy recommendation and a target price of W33,000. Our RIM-derived target price assumes a market risk premium of 7.0%, a risk free rate of 4.0%, and a beta of 1.2, with a CoE of 12.4%. The target price is equivalent to a 2012 P/E of 28.6x (EPS forecasted at W1,153) and a 2013 P/E of 18.9x (EPS at W1,744).

RIM valuation
2012F Net profit Shareholders equity Forecast ROE (FROE) Spread (FROE-COE) Residual income Cost of equity (COE) Beta Market risk premium (Rm-Rf) Risk-free rate (Rf) Beginning shareholders equity PV of forecast period RI PV of continuing value Equity value (C+P) No of shares (common, thou) Fair price (C) Current price (C) Upside (-downside) Implied P/B (x) Implied P/E (x) 34 172 21.8% 9.4% 15 12.4% 1.2 7.0% 4.0% 139 410 317 866 29 12m TP 33,105 24,800 33.5% 6.5 24.5 2013F 51 224 25.9% 13.5% 27 2014F 67 290 26.0% 13.6% 35 2015F 82 372 24.7% 12.3% 41 2016F 108 480 25.3% 12.9% 55 2017F 140 620 25.5% 13.1% 72 2018F 170 787 24.1% 11.7% 82 2019F 207 985 23.4% 11.0% 97 2020F 250 1,221 22.7% 10.3% 114 2021F 303 1,500 22.3% 9.9% 134

(Units: Wbn, won)

2022F 364 1,827 21.9% 9.5% 157

2023F 433 2,208 21.5% 9.1% 183

Note: The residual income model is a cash flow approach that yields a fair shareholder value (value of equity) by adding shareholders equity and present value of residual income (meaning income excluding cost of equity). Value of equity = shareholders equity + sum of present value of future residual income * Residual income (RIt) = NP (t) shareholders equity (t-1) * cost of equity (t)= shareholders equity (t-1) * (ROEt - COEt) Woori I&S uses RIM as our primary valuation model as RIM is an objective model that minimizes subjectivity of valuation indicators while producing same results as the dividend discount model (DDM) and DCF.

Market risk premium assessment guidelines


Criteria Risk premium Mega cap Market cap of W10tn or higher + credit rating of 'AAA' or higher 5.2% Large cap Market cap of W1~10tn + credit rating of 'A0' or higher 6.0% Mid cap Market cap of W200bn-1tn + credit rating of 'BBB+' or higher 7.0% Small cap Market cap of less than W200bn + credit rating of 'BBB-' or higher 8.0%

* Risk Free Rate = 4.0%( standardized)

45

Duksan Hi-Metal

www.wooriwm.com

III. Earnings forecasts


1Q12 preview: Estimate sales of W32.6bn and operating profit of W8.3bn We predict that Duksan Hi-Metal will post 1Q12 sales of W32.6bn (down 11.6% q-q), and operating profit of W8.3bn (down 30.2%). We attribute the likely disappointing earnings to: 1) the entry of new competitors into the HTL market; 2) lower ASPs; and 3) a likely lack of a significant increase in SMDs OLED shipments (based on area). However, we expect to see Duksan Hi-Metals earnings improve gradually going forward, based on: 1) anticipated material demand growth following the start of operations of SMDs A2 P3 line in 2Q12; and 2) the likelihood that its market share will remain stable.

2012 annual earnings forecasts: Earnings growth to weaken slightly y-y

Looking at full-year 2012, we believe that Duksan Hi-Metal will register sales of W148.4bn (up 14.7% y-y) and operating profit of W39.3bn (up 12.4% y-y). The companys earnings growth should weaken y-y on: 1) a market share decline upon the entry of new competitors; and 2) lower ASPs. However, we expect earnings growth momentum to pick up strongly after 2H12, believing that HTL demand will surge in the wake of: 1) the start up of operations of SMDs A2 P3 line in 2Q12 and of its A3 line in 2012; and 2) anticipated mass production of WOLED TVs. Furthermore, any decline in market share should be limited as Duksan Hi-Metal should be a primary beneficiary of anticipated OLED industry expansion, supported by the tendency of client companies to limit their number of vendors to three or less in order to prevent technology leaks. All in all, we view Duksan Hi-Metal as being positioned to be a primary beneficiary of anticipated growth of the OLED industry going forward.

Quarterly sales and operating profit forecasts


1Q11 Sales Semicon Organic materials Adj operating profit Adj operating margin Operating profit Operating margin 23,256 12,576 10,680 5,580 24.0 5,517 23.7 2Q11 33,860 15,217 18,643 8,540 25.2 8,474 25.0 3Q11 35,370 16,117 19,253 11,061 31.3 9,832 27.8 4Q11 36,955 15,494 21,461 14,157 38.3 10,902 29.5 1Q12E 32,671 15,240 17,431 8,570 26.2 8,377 25.6 2Q12F 36,974 16,218 20,756 9,932 26.9 9,867 26.7 3Q12F 38,408 17,700 20,708 10,684 27.8 10,180 26.5 4Q12F 40,351 17,866 22,485 11,072 27.4 10,674 26.5 2011 129,441 59,404 70,037 39,338 30.4 34,726 26.8

(Units: Wmn, %)

2012E 148,404 67,024 81,380 40,258 27.1 39,098 26.3

2013F 197,778 73,493 124,285 62,462 31.6 61,162 30.9

Source: Woori I&S Research Center estimates

46

Duksan Hi-Metal

www.wooriwm.com

Sales breakdown, by business (2012E)

Sales, operating profit, and operating margin


(Wbn) 50 40 30 20 10 0 1Q10 3Q10 1Q11 3Q11 1Q12E 3Q12F Sales (LHS) Adj operating profit (LHS) Adj operating margin (RHS) (%) 50 40 30 20 10 0

Solderball 44% Organic Materials 56%

Source: Duksan Hi-Metal, Woori I&S Research Center estimates

Source: Duksan Hi-Metal, Woori I&S Research Center estimates

WOLED structures

Single EML
Source: Industry data

Multi EML

Tandem

47

Duksan Hi-Metal

www.wooriwm.com

STATEMENT OF COMPREHENSIVE INCOME


(Wbn) Sales Growth (%) COGS Gross Profit Gross margin (%) SG&A GAAP Operating Income GAAP Operating margin (%) Other Operating Income(Exp.) EBITDA Operating Income Operating margin (%) Financial Income(Costs) Other Non-Operating Profits
Gains(Losses) in Associates, Subsidiaries and JVs

VALUATION INDEX
Price/Earnings (x) P/E (High, x) P/E (Low, x) Price/ Book Value (x) P/B (High, x) P/B (Low, x) Price/ Gross Cash Flow (x) Price/ Sales (x) P/E/ EPS growth (x) P/E/ EBITPS growth (x) P/E/ EBITDAPS growth (x) EV/ EBITDA (x) EV/ EBIT (x) Enterprise Value (Wbn) EPS CAGR (3-Yr) (%) EBITPS CAGR (3-Yr) (%) EBITDAPS CAGR (3-Yr) (%) EBITPS (won) EBITDAPS (won) Fully diluted EPS (won) BVPS (won) CFPS (won) Sales PS (won) DPS (won) 2011/12A 2012/12E 2013/12F 2014/12F 21.5 21.5 14.2 10.9 27.3 23.9 15.8 12.1 16.3 18.4 12.2 9.4 5.4 4.2 3.3 2.5 6.8 4.7 3.6 2.8 4.1 3.6 2.8 2.2 16.2 16.1 10.5 8.2 5.7 4.9 3.7 3.1 0.9 0.6 0.5 0.4 0.8 0.6 0.5 0.4 0.8 0.7 0.5 0.4 17.0 15.0 9.6 7.1 18.5 17.3 10.8 7.9 728 696 675 635 24.4 34.1 28.2 28.1 26.8 34.4 27.1 27.1 27.9 33.1 26.4 26.2 1,344 1,370 2,125 2,743 1,464 1,577 2,389 3,059 1,181 1,153 1,744 2,272 4,713 5,866 7,611 9,883 1,563 1,542 2,354 3,026 4,424 5,049 6,729 7,973 0 0 0 0

Pre-tax Profit from Cont. Op. Income Taxes Profit from Continuing Op. Net Profit Net margin (%) Net Profit of Parent Net Profit to Non-Controlling Other Comprehensive Income Total Comprehensive Income

2011/12A 2012/12E 2013/12F 2014/12F 129 148 198 234 78.6 14.7 33.3 18.5 76 92 115 131 53 57 83 104 41.1 38.3 41.7 44.3 14 17 20 23 39 40 62 81 30.4 27.1 31.6 34.4 -5 -1 -1 -1 43 46 70 90 35 39 61 79 26.8 26.3 30.9 33.8 0 1 1 2 0 0 0 0 0 0 0 0 35 40 63 81 0 6 11 15 35 34 51 67 35 34 51 67 26.7 22.8 25.9 28.5 35 34 51 67 0 0 0 0 0 1 0 0 35 35 51 67

CASH FLOW STATEMENT


(Wbn) Operating Cash Flow Net Profit Depreciation & Amortization + Loss(Gains) from Subs + FC translation loss(profit) + Losses(Gains) on Disposal of Assets Gross Cash Flow - Incr. (Decr.) in WC Investing Cash Flow + Decr. In Tangible Assets - Incr. In Tangible Assets (capex) + Disp.(Acq.) of Inv. Assets Free Cash Flow Net Cash Flow Financing Cash Flow Equity Financing Debt Financing Incr.(Decr.) in Cash Ending Cash and Cash Equivalents Net Debt (Cash) 2011/12A 2012/12E 2013/12F 2014/12F 36 37 52 71 35 34 51 67 3 6 8 9 0 0 0 0 0 0 0 0 0 0 0 0 46 45 69 89 -7 -3 -7 -5 -15 -42 -38 -36 0 0 0 0 -22 -22 -30 -30 11 0 -1 -1 14 15 22 41 22 -5 14 35 -6 0 1 0 6 0 0 0 -12 0 1 0 15 -5 15 35 21 16 30 66 -18 -33 -54 -94 RIM Spread (FROE-COE) (%) Residual Income 12M RIM Target Price (won) EVA Invested Capital NOPAT ROIC (%) ROIC - WACC (%) EVA DCF EBIT + Depreciation/Amortization - Capex - Incr. (Decr.) in Working Capital Free Cash Flow for Firm WACC Cost of Debt (Tax Adj.) Cost of Equity (COE) WACC (%)

RIM & EVA


2011/12A 2012/12E 2013/12F 2014/12F 16.7 19.9 33,105 120.2 39.3 37.8 26.2 31.5 39.3 3 -22.1 -8.2 28.4 4.0 12.3 11.6 9.4 14.6 139.0 34.3 26.5 14.8 20.6 40.3 6 -22.0 -2.9 21.3 3.4 12.4 11.7 13.8 26.7 169.0 51.5 33.5 22.0 37.1 62.5 8 -30.0 -7.7 36.6 3.4 12.1 11.5 14.0 34.9 195.3 66.3 36.4 25.0 48.8 80.6 9 -30.0 -5.7 51.1 3.4 12.0 11.4

STATEMENT OF FINANCIAL POSITION


(Wbn) Cash and Cash Equivalents Accounts Receivables Total Current Assets Tangible Assets Investment Assets Non-Current Assets Assets Short-Term Debt Account Payables Current Liabilities Long-Term Debt Long-Term Allowance Non-Current Liabilities Liabilities Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Equity Shareholders' Equity 2011/12A 2012/12E 2013/12F 2014/12F 21 16 30 66 9 10 13 16 46 65 96 143 65 82 105 126 4 4 6 7 106 122 146 168 152 187 242 311 6 7 7 8 5 5 7 8 11 12 15 17 0 0 0 0 1 1 1 2 2 2 3 3 13 15 18 20 6 6 6 6 82 82 82 82 72 105 157 223 0 0 0 0 139 172 224 290

PROFITABILITY & STABILITY


ROE (%) ROA (%) ROIC (%) EBITDA/ equity (%) EBITDA/ asset (%) Dividend Yield (%) Payout Ratio (%) Total Cash Dividend (Wbn) Cash DPS (won) Net debt(cash)/ equity (%) Debt/ equity (%) Net interest exp/ sales (%) Interest coverage (x) Current Ratio (%) Quick Ratio (%) Total shares (mn) Par value (won) Share price (won) Market Cap (Wbn) 2011/12A 2012/12E 2013/12F 2014/12F 29.0 21.8 25.9 26.0 25.5 20.0 23.9 24.2 37.8 26.5 33.5 36.4 30.9 26.9 31.4 31.0 28.2 24.8 29.1 28.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0 0 0 0 0 0 -13.2 -19.3 -24.2 -32.4 9.6 8.5 8.0 6.9 203.1 64.9 54.6 52.8 149.7 418.2 578.7 652.1 403.9 521.5 638.9 852.1 293.1 405.0 510.2 716.1 29 29 29 29 200 200 200 200 25,400 24,800 24,800 24,800 747 729 729 729

48

SFA (056190.KQ)
Company Analysis
May 7, 2012

Not Rated
CP (12/4/25) W51,500

Equipment maker with higher value


Diversifying business portfolio from logistics to entire core processing

Analyst Julius Kim (Display)


822)768-7462, julius.kim@wooriwm.com

Split off from Samsung Techwin in 1998, SFA is a comprehensive logistics equipment maker. Following its successful entry into the LCD industry in 2004 and OLED market in 2010, the company has emerged as Koreas number-one logistics equipment maker. SFAs operating margin stands at the 10%-levelthe lowest among IT equipment players. Enjoying a diverse portfolio ranging from logistics equipment to all IT processing equipment (PECVD and deposition), the companys margins should improve gradually going forward.

Young Park (Semicon/Display)

822)768-7585, young.park@wooriwm.com

OLED division positioned to enjoy further order momentum


Sector Machinery
Kospi 1,961.98 Kosdaq 483.48 Market cap (common) W924.7bn Outstanding shares (common) 18.0mn shrs 52W high (11/07/27) W66,700 low (11/10/18) W49,250 Dividend yield (2011) 0.0% Foreign ownership 7.9% Major shareholders DY Assets and four others Samsung Display Share performance (%)3M Absolute Relative Price trend
200 150 100 50 0 '11.4 '11.6 '11.8 '11.10 '11.12 '12.2 '12.4 SFA KOSDAQ

SFA won OLED equipment orders worth W420bn in 2011 (orders related to SMDs A2 P2 and A2 P3 lines partially reflected). In 2012, new OLED equipment orders should surpass W500bn, given: 1) SMDs planned investment in its A3 line (144,000 sheets/month) in 2H12 (vs A2: 88,000 sheets/month); and 2) likely further orders for entire processing equipment in addition to logistics equipment. We also draw attention to the companys 8G OLED organic material deposition equipment, noting that SMS (currently under development) is likely to be adopted for mass production.

42.0% 10.2% 6M -8.7 -6.9 12M -16.8 -9.0

-9.2 -3.9

SMD A3 line investments to benefit SFA in 2013


Guidance projects that sales will rise 10% y-y in 2012 (vs 78% y-y in 2011). Benefits from SMDs A3 line investments should gain traction in 2013, with SFA expected to win orders for 5.5G one-shot evaporation equipment in addition to logistics equipment.

YE-Dec 2009 2010 2011 2012E 2013F

Sales (Wbn) 307 632 753 892 1,078

Chg (%) 106.0 19.1 18.5 20.9

OP (Wbn) 15 66 95 116 140

NP (Wbn) 18 56 76 97 117

NP to parent (Wbn) 18 56 76 96 103

EPS (won) 1,004 2,192 4,943 5,413 6,514

Chg (%) 118.3 125.5 9.5 20.3

P/E (x) 16.9 22.4 12.3 10.3 7.9

P/B (x) 1.3 3.3 3.1 2.3 1.9

EV/EBITDA (x) 10.8 9.9 8.4 6.0 4.7

ROE Debt/equity Net debt (%) (%) (Wbn) 8.0 15.5 28.4 25.6 24.9 35.6 83.8 62.1 na na -91 -181 -249 na na

Note: IFRS basis, but operating profit based on adjusted operating income (gross profit SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates

www.wooriwm.com

SFA

www.wooriwm.com

STATEMENT OF COMPREHENSIVE INCOME


(Wbn) Sales Growth (%) COGS Gross Profit Gross margin (%) SG&A GAAP Operating Income GAAP Operating margin (%) Other Operating Income(Exp.) EBITDA Operating Income Operating margin (%) Financial Income(Costs) Other Non-Operating Profits
Gains(Losses) in Associates, Subsidiaries and JVs

VALUATION INDEX
Price/Earnings (x) P/E (High, x) P/E (Low, x) Price/ Book Value (x) P/B (High, x) P/B (Low, x) Price/ Gross Cash Flow (x) Price/ Sales (x) P/E/ EPS growth (x) P/E/ EBITPS growth (x) P/E/ EBITDAPS growth (x) EV/ EBITDA (x) EV/ EBIT (x) Enterprise Value (Wbn) EPS CAGR (3-Yr) (%) EBITPS CAGR (3-Yr) (%) EBITDAPS CAGR (3-Yr) (%) EBITPS (won) EBITDAPS (won) Fully diluted EPS (won) BVPS (won) CFPS (won) Sales PS (won) DPS (won) 2008/12A 2009/12A 2010/12\A 2011/12A 6.0 16.9 22.4 12.3 14.1 27.8 24.0 14.4 3.5 13.9 7.3 9.1 1.4 1.3 3.3 3.1 3.1 2.2 3.6 3.6 0.8 1.1 1.1 2.3 5.4 13.2 10.2 9.1 0.7 1.0 1.4 1.5 0.3 0.2 0.5 0.9 0.3 0.2 0.8 0.6 0.3 0.2 0.9 0.7 3.3 10.8 9.9 8.4 3.6 14.0 10.6 8.9 190 213 699 846 21.3 72.5 40.9 14.0 20.9 95.5 27.0 19.6 20.3 82.6 25.9 18.3 2,981 846 3,686 5,274 3,231 1,100 3,951 5,627 2,773 1,004 2,192 4,943 12,404 12,715 14,704 19,845 3,092 1,283 4,800 6,679 23,995 17,103 35,224 41,960 1,400 400 500 1,280

Pre-tax Profit from Cont. Op. Income Taxes Profit from Continuing Op. Net Profit Net margin (%) Net Profit of Parent Net Profit to Non-Controlling Other Comprehensive Income Total Comprehensive Income

2008/12A 2009/12A 2010/12\A 2011/12A 431 307 632 753 40.4 -28.7 106.0 19.1 355 270 529 610 76 37 104 143 17.6 12.0 16.4 19.0 22 22 38 48 54 15 66 95 12.4 4.9 10.5 12.6 10 -1 4 -3 58 20 71 101 64 15 70 92 14.8 4.8 11.1 12.2 4 7 4 4 0 0 0 0 0 3 0 0 69 25 75 96 19 7 18 20 50 18 56 76 50 18 56 76 11.6 5.9 8.9 10.0 50 18 56 76 0 0 0 0 0 0 -2 -2 0 0 54 74

CASH FLOW STATEMENT


(Wbn) Operating Cash Flow Net Profit Depreciation&Amortization + Loss(Gains) from Subs + FC translation loss(profit) + Losses(Gains) on Disposal of Assets Gross Cash Flow - Incr. (Decr.) in WC Investing Cash Flow + Decr. In Tangible Assets - Incr. In Tangible Assets (capex) + Disp.(Acq.) of Inv. Assets Free Cash Flow Net Cash Flow Financing Cash Flow Equity Financing Debt Financing Incr.(Decr.) in Cash Ending Cash and Cash Equivalents Net Debt (Cash) 2008/12A 2009/12A 2010/12\A 2011/12A 31 -3 91 112 50 18 56 76 4 5 5 6 0 -3 0 0 -3 1 -1 -1 0 0 0 1 56 23 86 120 -25 -26 5 -1 27 6 -48 -96 0 0 0 0 -12 -5 -8 -24 -5 1 14 0 18 -8 83 88 57 3 43 16 -30 -12 -4 -9 0 0 0 0 -30 -12 -4 -9 28 -10 40 7 37 28 68 75 -110 -91 -181 -249 RIM Spread (FROE-COE) (%) Residual Income 12M RIM Target Price (won) EVA Invested Capital NOPAT ROIC (%) ROIC - WACC (%) EVA DCF EBIT + Depreciation/Amortization - Capex - Incr. (Decr.) in Working Capital Free Cash Flow for Firm WACC Cost of Debt (Tax Adj.) Cost of Equity (COE) WACC (%)

RIM & EVA


2008/12A 2009/12A 2010/12\A 2011/12A 12.7 27.0 N/R 79.3 40.5 65.7 59.9 47.5 53.5 4 -12.4 -21.6 52.5 0.0 10.7 5.7 -2.0 -4.5 102.4 12.0 13.2 5.9 6.0 15.2 5 -5.1 -19.9 30.3 0.0 10.0 7.4 5.8 14.8 88.0 59.7 62.7 57.5 50.6 66.2 5 -8.4 20.9 25.3 0.0 9.6 5.2 19.2 59.9 82.8 61.6 72.1 65.2 53.9 94.7 6 -24.0 25.4 31.7 3.2 9.2 6.9

STATEMENT OF FINANCIAL POSITION


(Wbn) Cash and Cash Equivalents Accounts Receivables Total Current Assets Tangible Assets Investment Assets Non-Current Assets Assets Short-Term Debt Account Payables Current Liabilities Long-Term Debt Long-Term Allowance Non-Current Liabilities Liabilities Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Equity Shareholders' Equity 2008/12A 2009/12A 2010/12\A 2011/12A 36 26 68 75 46 38 142 78 274 167 380 400 90 91 94 107 43 44 29 29 143 143 134 158 417 310 514 559 0 0 2 3 41 30 104 85 178 69 216 194 0 0 0 0 16 12 10 19 16 12 18 20 194 81 234 214 5 5 9 9 25 25 20 20 210 216 268 332 0 0 0 0 223 228 280 345

PROFITABILITY & STABILITY


ROE (%) ROA (%) ROIC (%) EBITDA/ equity (%) EBITDA/ asset (%) Dividend Yield (%) Payout Ratio (%) Total Cash Dividend (Wbn) Cash DPS (won) Net debt(cash)/ equity (%) Debt/ equity (%) Net interest exp/ sales (%) Interest coverage (x) Current Ratio (%) Quick Ratio (%) Total shares (mn) Par value (won) Share price (won) Market Cap (Wbn) 2008/12A 2009/12A 2010/12\A 2011/12A 23.4 8.0 15.5 28.4 12.5 5.0 13.7 14.1 65.7 13.2 62.7 72.1 26.1 8.7 25.3 29.3 13.9 6.4 13.8 18.1 8.4 2.4 1.0 2.1 24.9 19.6 22.5 25.5 12 4 9 23 1,400 400 500 1,280 -49.5 -40.0 -64.7 -72.2 87.2 35.6 83.8 62.1 0.0 0.0 0.0 0.0 N/A N/A N/A 4,686.5 154.1 240.5 175.9 206.1 92.7 201.8 173.2 202.5 18 18 18 18 500 500 500 500 16,764 16,967 49,000 61,000 301 304 880 1,095

50

AP Systems (054620.KQ)
Company Analysis
May 7, 2012

Not Rated
CP (12/4/25) W11,650

Offers good fit for SMDs OLED investment plan


Specializes in laser technology-based OLED equipment

Analyst Julius Kim (Display)


822)768-7462, julius.kim@wooriwm.com

AP Systems utilizes laser technology to manufacture OLED processing equipment. It is the only domestic company possessing a full range of processing capabilities (including TFT, deposition, and encapsulation processing equipment).

Young Park (Semicon/Display)

822)768-7585, young.park@wooriwm.com

Top-line growth to continue on supply of new equipment (LLO and LITI)


In line with SMDs A3 line investments, we expect AP Systems to enjoy sustainable top-line growth in 2012, believing that the firm will see improved margins thanks to its supply of new equipment (including LLO and LITI). LLO is a type of equipment that employs lasers to separate flexible substrates. We expect LLO to be used in SMDs mass production of flexible OLED. LITI is a type of equipment that employs lasers to project organic material onto donor film. Thanks to its high-resolution, we anticipate that the equipment will be used as part of the production process at SMDs A3 line (however, due to the need for additional components and equipment, LITI is unlikely to be used for the entire production process at the A3 line). We believe that AP Systems advanced ELA and encapsulation (glass, metal) equipment represents a long-term growth engine for the company, drawing attention to the fact that that it is highly likely that this equipment will be used at SMDs 8G production line.

Sector

Semiconductor

Kospi 1,961.98 Kosdaq 483.48 Market cap (common) W251.6bn Outstanding shares (common) 21.6mn shrs 52W high (11/08/03) W16,850 low (11/10/05) W10,150 Dividend yield (2011) 0.0% Foreign ownership 16.1% Major shareholders Gi-Ro Jung and four others Fid Series Emrg Mrkts Fund Share performance (%)3M Absolute Relative Price trend
200 150 100 50 0 '11.4 '11.6 '11.8 '11.10 '11.12 '12.2 '12.4 AP Systems KOSDAQ

10.2% 8.4% 6M -8.7 -6.9 12M -16.8 -9.0

-9.2 -3.9

Offers good fit for SMDs OLED investment plan


According to 2012 guidance, sales are to total W327bn (up 47% y-y) and operating margin is to reach 11% (up 39.4% y-y). By division, we project OLED sales of W275bn, semiconductor equipment sales of W45bn, and LCD and other equipment sales of W7bn. AP Systems supplies a wide range of equipment for SMDs A1 and A3 lines. Going forward, the company is to further benefit from the likely continuation of SMDs increased line investments.

YE Dec 2009 2010 2011 2012E 2013F

Sales (Wbn) 92 134 222 318 372

Chg (%) 45.6 66.1 43.2 16.9

OP (Wbn) 4 12 26 36 44

NP (Wbn) 2 -12 12 30 38

NP to parent (Wbn) 2 -12 12 28 36

EPS (won) 115 -645 497 1,418 1,772

Chg (%) TTL TTP 185.3 24.9

P/E (x) 37.3 -11.8 26.1 8.2 6.6

P/B (x) 1.3 2.5 3.5 2.4 1.8

EV/EBITDA (x) 6.4 10.1 9.3 6.2 4.8

ROE (%) 3.2 -18.2 14.5 29.5 27.9

Debt/equity Net debt (%) (Wbn) 97.0 90.8 233.9 N/A N/A -1 6 4 N/A N/A

Note: IFRS basis, but operating profit based on adjusted operating income (gross profit SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates

www.wooriwm.com

AP Systems

www.wooriwm.com

STATEMENT OF COMPREHENSIVE INCOME


(Wbn) Sales Growth (%) COGS Gross Profit Gross margin (%) SG&A GAAP Operating Income GAAP Operating margin (%) Other Operating Income(Exp.) EBITDA Operating Income Operating margin (%) Financial Income(Costs) Other Non-Operating Profits
Gains(Losses) in Associates, Subsidiaries and JVs

VALUATION INDEX
Price/Earnings (x) P/E (High, x) P/E (Low, x) Price/ Book Value (x) P/B (High, x) P/B (Low, x) Price/ Gross Cash Flow (x) Price/ Sales (x) P/E/ EPS growth (x) P/E/ EBITPS growth (x) P/E/ EBITDAPS growth (x) EV/ EBITDA (x) EV/ EBIT (x) Enterprise Value (Wbn) EPS CAGR (3-Yr) (%) EBITPS CAGR (3-Yr) (%) EBITDAPS CAGR (3-Yr) (%) EBITPS (won) EBITDAPS (won) Fully diluted EPS (won) BVPS (won) CFPS (won) Sales PS (won) DPS (won) 2008/12A 2009/12A 2010/12\A 2011/12A 8.8 37.3 -11.8 26.1 18.7 62.6 -15.1 34.3 6.9 26.4 -6.5 15.6 1.1 1.3 2.5 3.5 2.4 2.2 3.2 4.5 0.9 0.9 1.4 2.1 4.5 5.6 17.2 7.4 1.8 0.8 1.1 1.3 1.0 0.3 N/A 0.2 0.1 0.3 -0.2 0.4 0.2 0.8 -0.2 0.4 23.7 6.4 10.1 9.3 104.4 21.6 14.6 10.8 96 77 169 284 8.5 138.0 -258.3 105.2 142.7 117.5 76.8 66.7 55.7 49.6 58.8 59.8 86 199 618 1,227 377 668 892 1,425 390 115 -645 497 3,084 3,306 3,057 3,763 770 764 444 1,758 1,901 5,147 7,131 10,337 0 0 0 0

Pre-tax Profit from Cont. Op. Income Taxes Profit from Continuing Op. Net Profit Net margin (%) Net Profit of Parent Net Profit to Non-Controlling Other Comprehensive Income Total Comprehensive Income

2008/12A 2009/12A 2010/12\A 2011/12A 20 92 134 222 -52.2 353.2 45.6 66.1 13 74 115 178 7 18 19 45 33.7 19.9 14.4 20.1 6 15 8 18 1 4 12 26 4.5 3.9 8.7 11.9 2 -1 -12 -1 4 12 17 31 3 2 -1 26 12.9 2.2 -0.6 11.6 0 -2 0 -1 0 0 0 0 0 0 0 -8 3 0 0 17 -2 -2 0 3 4 2 0 14 4 2 -12 12 20.5 2.2 -9.0 5.3 4 2 -12 12 0 0 0 0 0 0 0 -1 0 0 -12 11

CASH FLOW STATEMENT


(Wbn) Operating Cash Flow Net Profit Depreciation&Amortization + Loss(Gains) from Subs + FC translation loss(profit) + Losses(Gains) on Disposal of Assets Gross Cash Flow - Incr. (Decr.) in WC Investing Cash Flow + Decr. In Tangible Assets - Incr. In Tangible Assets (capex) + Disp.(Acq.) of Inv. Assets Free Cash Flow Net Cash Flow Financing Cash Flow Equity Financing Debt Financing Incr.(Decr.) in Cash Ending Cash and Cash Equivalents Net Debt (Cash) 2008/12A 2009/12A 2010/12\A 2011/12A -1 26 -6 26 4 2 -12 12 3 8 5 4 0 0 0 8 0 0 0 1 0 1 2 0 8 14 8 38 -9 12 -26 -13 -12 1 -2 -37 0 8 0 0 -1 -1 -5 -22 -1 1 -4 -6 -1 25 -11 5 -13 27 -8 -10 13 -24 11 49 20 4 4 5 -6 -27 6 45 1 4 3 39 9 13 16 55 36 -1 6 4 RIM Spread (FROE-COE) (%) Residual Income 12M RIM Target Price (won) EVA Invested Capital NOPAT ROIC (%) ROIC - WACC (%) EVA DCF EBIT + Depreciation/Amortization - Capex - Incr. (Decr.) in Working Capital Free Cash Flow for Firm WACC Cost of Debt (Tax Adj.) Cost of Equity (COE) WACC (%)

RIM & EVA


2008/12A 2009/12A 2010/12\A 2011/12A -1.7 -0.8 N/R 85.6 -1.7 -2.4 -7.8 -6.7 0.9 3 -0.8 2.9 0.9 0.0 11.2 5.4 -7.3 -4.7 66.1 20.0 26.3 8.5 5.6 3.6 8 -1.0 11.1 13.8 25.5 10.5 17.9 -28.3 -18.9 61.6 7.0 11.0 5.7 3.5 11.6 5 -5.4 -19.0 30.3 0.0 10.1 5.3 4.8 3.5 64.5 22.1 35.1 28.8 18.6 26.4 4 -21.7 3.2 0.8 4.9 9.7 6.3

STATEMENT OF FINANCIAL POSITION


(Wbn) Cash and Cash Equivalents Accounts Receivables Total Current Assets Tangible Assets Investment Assets Non-Current Assets Assets Short-Term Debt Account Payables Current Liabilities Long-Term Debt Long-Term Allowance Non-Current Liabilities Liabilities Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Equity Shareholders' Equity 2008/12A 2009/12A 2010/12\A 2011/12A 8 10 14 46 21 34 37 56 53 79 86 214 41 28 24 39 4 4 7 13 73 55 39 59 126 134 125 273 36 18 21 40 10 21 14 23 52 62 58 163 11 0 0 26 3 3 1 2 14 4 2 28 66 66 59 191 10 10 11 11 45 48 52 57 13 15 3 14 0 0 0 0 61 68 65 82

PROFITABILITY & STABILITY


ROE (%) ROA (%) ROIC (%) EBITDA/ equity (%) EBITDA/ asset (%) Dividend Yield (%) Payout Ratio (%) Total Cash Dividend (Wbn) Cash DPS (w) Net debt(cash)/ equity (%) Debt/ equity (%) Net interest exp/ sales (%) Interest coverage (x) Current Ratio (%) Quick Ratio (%) Total shares (mn) Par value (won) Share price (won) Market Cap (Wbn) 2008/12A 2009/12A 2010/12\A 2011/12A 9.5 3.2 -18.2 14.5 4.3 1.6 -9.3 5.9 -2.4 26.3 11.0 35.1 6.6 17.5 25.7 37.5 3.2 8.9 13.4 11.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0 0 0 0 0 0 59.4 -2.1 8.5 5.4 108.4 97.0 90.8 233.9 2.7 1.8 0.1 1.2 1.7 2.1 58.7 10.2 102.3 127.6 149.6 130.6 64.2 94.2 128.9 122.3 20 21 21 22 500 500 500 500 3,445 4,275 7,640 13,000 60 78 164 280

52

Tera Semicon (123100.KQ)


Company Analysis
May 7, 2012

Not Rated
CP (12/04/25 ) W27,600

Heat treatment technology is key in production of flexible OLED and oxide TFT
Secur heat treatment technology

Analyst Julius Kim (Display)


822)768-7462, julius.kim@wooriwm.com

Young Park (Semicon/Display)

Listed on the Kosdaq in Nov 2011, Tera Semicon specializes in batch-type heat treatment technology, utilizing its specialized processing equipment and knowhow to produce semiconductor, OLED, and solar cell equipment. The company displayed lofty top-line growth (up 197.9% y-y) in 2011OLED related sales jumped from W12.9bn in 2010 to W94.5bn in 2011, backed by increased investment at SMD.

822)768-7585, young.park@wooriwm.com

Heat treatment techkey to flexible OLED and oxide TFT production


Sector Semiconductors
Kospi 1,961.98 Kosdaq 483.48 Market cap (common) W223.9bn Outstanding shares (common) 8.1mn shrs 52W high (11/08/03) W34,900 low (11/10/05) W23,300 Dividend yield (2011) 0.0% Foreign ownership 1.4% Major shareholders Taek-Yong Chang and 10 others Shinhan BNP Paribas ITMC Share performance (%)3M Absolute Relative Price trend
200 150 100 50 0 '11.11 '11.12 '12.1 '12.2 '12.3 '12.4 Tera Semicon KOSDAQ

In 2012, Tera Semicon should enjoy order momentum for its heat treatment equipment in line with increased investment in flexible OLED and oxide TFT. Of note, curing equipment is required in order for flexible OLED to harden polyimide. Meanwhile, heat treatment equipment is used in the production of oxide TFT in order to stabilize IGZO material. Tera Semicon is currently in the process of developing super grain silicon (SGS) equipment. While SMD is highly likely to use ELA for its 8G line, it is also expected to purchase SGS.

36.0% 6.2% 12M N/A N/A

6M N/A N/A

Lofty growth expected on SMDs investment in flexible OLED


Guidance estimates 2012 sales of W170.0bn (up 21.4% y-y) and an operating margin of 17% (up 112.5% y-y). On the likely absence of one-off costs in 2012, the firm expects to see a rapid y-y rise in its operating margin (in 2012). Going forward, we believe that Tera Semicon is well positioned to be a primary beneficiary of SMDs expanded investment in flexible OLED and oxide TFT.

-8.0 -2.7

YE-Dec 2009 2010 2011 2012E 2013F

Sales (Wbn) 11 47 140 194 276

Chg (%) 321.2 198.8 38.6 42.2

OP (Wbn) 0 7 11 36 48

NP (Wbn) 0 6 9 30 42

NP to parent (Wbn) 0 6 9 30 42

EPS (won)

Chg (%)

P/E (x) 0.0 0.0 21.4 7.4 5.3

P/B (x) 0.0 0.0 5.5 3.4 2.3

EV/EBITDA (x) 4.5 0.1 16.7 6.3 4.4

ROE (%) 1.3 47.2 32.7 54.5 45.6

Debt/equity (%) 90.4 147.3 92.3 N/A N/A

Net debt (Wbn) 4 1 -2 N/A N/A

21 1,053 4,826.0 1,281 21.7 3,741 192.0 5,219 39.5

Note: IFRS basis, but operating profit based on adjusted operating income (gross profit SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates

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Tera Semicon

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STATEMENT OF COMPREHENSIVE INCOME


(Wbn) Sales Growth (%) COGS Gross Profit Gross margin (%) SG&A GAAP Operating Income GAAP Operating margin (%) Other Operating Income(Exp.) EBITDA Operating Income Operating margin (%) Financial Income(Costs) Other Non-Operating Profits
Gains(Losses) in Associates, Subsidiaries and JVs

VALUATION INDEX
Price/Earnings(x) P/E (High, x) P/E (Low, x) Price/ Book Value (x) P/B (High, x) P/B (Low, x) Price/ Gross Cash Flow (x) Price/ Sales (x) P/E/ EPS growth (x) P/E/ EBITPS growth (x) P/E/ EBITDAPS growth (x) EV/ EBITDA (x) EV/ EBIT (x) Enterprise Value (Wbn) EPS CAGR (3-Yr) (%) EBITPS CAGR (3-Yr) (%) EBITDAPS CAGR (3-Yr) (%) EBITPS (won) EBITDAPS (won) Fully diluted EPS (won) BVPS (won) CFPS (won) Sales PS (won) DPS (won) 2008/12A 2009/12A 2010/12\A 2011/12A 0.0 0.0 0.0 21.4 0.0 0.0 0.0 23.6 0.0 0.0 0.0 15.8 0.0 0.0 0.0 5.5 0.0 0.0 0.0 6.1 0.0 0.0 0.0 4.1 0.0 0.0 0.0 12.2 0.0 0.0 0.0 1.4 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.1 22.7 4.5 0.1 16.7 -17.4 25.0 0.1 19.4 5 4 1 221 231.2 450.0 117.8 194.5 -405.9 448.7 116.1 193.2 251.3 215.8 107.5 179.6 -55 26 1,315 1,580 42 147 1,512 1,833 35 21 1,053 1,281 1,308 1,325 2,332 4,978 139 154 1,523 2,256 1,666 2,003 8,223 19,404 0 0 0 0

Pre-tax Profit from Cont. Op. Income Taxes Profit from Continuing Op. Net Profit Net margin (%) Net Profit of Parent Net Profit to Non-Controlling Other Comprehensive Income Total Comprehensive Income

2008/12A 2009/12A 2010/12\A 2011/12A 9 11 47 140 -7.9 20.2 321.2 198.8 7 8 33 118 2 3 14 22 26.6 27.3 30.0 15.5 3 3 7 10 0 0 7 11 -3.3 1.3 16.0 8.1 2 0 0 0 0 1 9 13 1 0 8 12 14.1 3.4 16.4 8.3 -1 0 -1 0 0 0 0 0 0 0 0 0 0 0 7 11 0 0 1 2 0 0 6 9 0 0 6 9 2.2 1.1 12.8 6.6 0 0 6 9 0 0 0 0 0 0 0 0 0 0 6 9

CASH FLOW STATEMENT


(Wbn) Operating Cash Flow Net Profit Depreciation & Amortization + Loss(Gains) from Subs + FC translation loss(profit) + Losses(Gains) on Disposal of Assets Gross Cash Flow - Incr. (Decr.) in WC Investing Cash Flow + Decr. In Tangible Assets - Incr. In Tangible Assets (capex) + Disp.(Acq.) of Inv. Assets Free Cash Flow Net Cash Flow Financing Cash Flow Equity Financing Debt Financing Incr.(Decr.) in Cash Ending Cash and Cash Equivalents Net Debt (Cash) 2008/12A 2009/12A 2010/12\A 2011/12A 4 3 6 7 0 0 6 9 1 1 1 2 0 0 0 0 0 0 0 0 0 0 0 0 1 1 9 16 3 2 -3 -8 -1 1 -5 -14 0 0 0 0 -1 -2 -6 -13 0 0 -1 -1 3 1 0 -6 3 4 1 -7 -2 -1 -1 7 0 0 2 12 -2 -1 -3 -5 1 2 0 0 1 3 4 4 5 4 1 -2 RIM Spread (FROE-COE) (%) Residual Income 12M RIM Target Price (won) EVA Invested Capital NOPAT ROIC (%) ROIC - WACC (%) EVA DCF EBIT + Depreciation/Amortization - Capex - Incr. (Decr.) in Working Capital Free Cash Flow for Firm WACC Cost of Debt (Tax Adj.) Cost of Equity (COE) WACC (%)

RIM & EVA


2008/12A 2009/12A 2010/12\A 2011/12A -12.6 -1.1 N/R 14.2 -0.1 -0.5 -9.8 -1.4 -0.3 1 -0.9 3.6 -4.2 3.1 14.8 9.3 -12.7 -1.2 12.1 0.2 1.3 -8.9 -1.1 0.1 1 -2.0 2.5 -3.7 5.9 14.1 10.2 33.5 4.3 22.4 7.5 43.7 24.7 5.5 7.5 1 -5.8 -2.3 4.5 22.6 13.7 19.0 19.3 5.5 40.1 9.4 30.1 18.3 7.4 11.4 2 -12.9 -5.6 3.8 10.1 13.3 11.8

STATEMENT OF FINANCIAL POSITION


(Wbn) Cash and Cash Equivalents Accounts Receivables Total Current Assets Tangible Assets Investment Assets Non-Current Assets Assets Short-Term Debt Account Payables Current Liabilities Long-Term Debt Long-Term Allowance Non-Current Liabilities Liabilities Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Equity Shareholders' Equity

PROFITABILITY & STABILITY


2008/12A 2009/12A 2010/12\A 2011/12A 2.2 1.3 47.2 32.7 1.1 0.7 20.8 15.7 -0.5 1.3 43.7 30.1 2.6 8.9 53.1 32.7 1.4 4.7 21.5 17.0 N/A N/A N/A 0.0 0.0 0.0 0.0 0.0 0 0 0 0 0 0 0 0 58.6 39.7 4.0 -4.0 88.3 90.4 147.3 92.3 4.6 2.6 2.5 0.3 -0.7 0.5 6.5 27.4 196.3 149.4 96.0 138.0 163.5 120.4 80.6 116.5 7 7 7 8 500 500 500 500 0 0 0 27,450 0 0 0 222

2008/12A 2009/12A 2010/12\A 2011/12A 1 1 4 4 ROE (%) 5 4 6 7 ROA (%) 8 7 19 44 ROIC (%) 8 9 16 27 EBITDA/ equity (%) 0 0 2 3 EBITDA/ asset (%) 9 11 21 34 Dividend Yield (%) 17 18 40 78 Payout Ratio (%) 2 2 10 2 Total Cash Dividend (Wbn) 1 2 7 8 Cash DPS (won) 4 5 20 32 Net debt(cash)/ equity (%) 4 3 3 2 Debt/ equity (%) 0 0 0 0 Net interest exp/ sales (%) 4 4 4 6 Interest coverage (x) 8 8 24 37 Current Ratio (%) 2 2 3 4 Quick Ratio (%) 6 6 6 17 Total shares (mn) 1 2 10 19 Par value (won) 0 0 0 0 Share price (won) 9 9 16 40 Market Cap (Wbn)

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OLED Industry

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Rating and target price update


Company Cheil Industries Code 001300.KS Date 2012.04.26 2012.01.19 2011.09.02 2011.01.26 2010.09.01 2010.05.06 2010.04.02 Rating Buy Buy Buy Buy Buy Buy Target price W115,000(12M) W130,000(12M) W140,000(12M) W130,000(12M) W93,000(12M) W77,000(12M)

Covering analyst changed

(won) 150,000 100,000 50,000 0 '10.4 '10.8 '10.12 '11.4 Closing price Target Price(12M) '11.8 '11.12

Company DS Hi-Metal

Code 077360.KQ

Date 2012.04.26 2012.01.19 2011.11.08 2011.02.16 2010.10.22

Rating Buy Buy Buy Buy

Target price W33,000 (12M) W40,000(12M) W35,000(12M) W30,000(12M)

Covering analyst changed

(won) 50,000 40,000 30,000 20,000 10,000 0 '10.4 '10.7 '10.10 '11.1 Closing price Target price(12M) '11.4 '11.7 '11.10 '12.1

Woori investment & Securities stock ratings


1. Period: Uniform 12-month 2. Rating System: Based on a stocks absolute return from the date of publication Strong Buy: High conviction Buy rated stocks Buy: Greater than +15% Hold: 0% and +15% Reduce : Less than 0%

Compliance notice
Woori Investment & Securities does not have a stake greater than or equal to 1% in companies mentioned in this material as of the preparation date Woori Investment & Securities has not provided this material to any institutional investors or other third party in advance. The Korean version of this material was distributed on Apr 26, 2012 The analyst and his/her spouse do not own any securities mentioned in this material as of the preparation date. Woori I&S is an issuer and liquidity provider of ELWs taking Cheil Industries, SFA as an underlying asset. SFA, AP Systems, and Tera Semicon are not under coverage at Woori I&S. Thus, Woori I&S does not present a rating, and target price on the counter. This material is for reference purpose only. This report correctly reflects the analysts opinion and was written without any external influence or intervention.

Disclosures
The research is based on current public information that Woori I&S considers reliable, but Woori I&S does not represent it as accurate or complete and it should not be relied on as such. Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and Woori I&S is in no way legally responsible for future returns or loss of original capital. All materials in this report are the intellectual property of Woori I&S. Copying, distributing, transmitting, transforming or lending of this material without Woori I&S consent is prohibited.

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