Samwha Capacitor (001820)

MLCC to Spearhead Earnings Turnaround

Changmin Lee Analyst / IT January 7, 2019 82-2-6114-2917 [email protected]

Coverage initiated with BUY rating and We initiate our coverage of Samwha Capacitor with a BUY rating and a target price of target price of KRW63,000 KRW63,000. The target price represents an implied PER of 7.1x and was derived using the RIM valuation model. Considering that the shares of its peers (Murata, SEMCO, Taiyo Yuden and TDK) are trading at an average 2019 PER of 8.5x, the valuation pressure on Samwha Capacitor shares is light.

Performance of MLCC business to The first investment point for Samwha Capacitor is its sharp earnings growth resulting improve due to booming market from the market boom. Thanks to the MLCC market boom that started coming out of 2017, Samwha Capacitor’s MLCC sales are expected to grow exponentially, coming in at KRW162.3bn (+86.4% YoY) in 2018 and KRW207.6bn (+27.9% YoY) in 2019. First, MLCC prices remain lofty, backed by continued supply shortages of high-capacitance MLCCs. Next, the sales proportion of high-margin automotive MLCCs (MLCCs for automotive electronics) is rising. Lastly, the 4th Industrial Revolution (e.g., 5G, IoT) is forecast to boost new MLCC demand.

DCLC earnings expected to rise as Our second investment point for Samwha Capacitor is a rosy outlook for its DCLC market for eco-friendly automobiles earnings (DC-link capacitor) on the back of the burgeoning market for eco-friendly expands automobiles. By 2025, eco-friendly automobiles are forecast to account for 17.0% of all vehicles being driven around the world. Accordingly, Samwha Capacitor’s DCLC sales are projected to reach KRW14.9bn (+7.7% YoY) in 2018 and KRW17.1bn in 2019 (+15.1% YoY). Samwha Capacitor is expected to see sales rise in 2H19 due to additional DCLC order wins for some environmentally-friendly cars manufactured by Hyundai Motor Group as well as a growing list of order channels thanks to strong references being built up at home and abroad.

Buy initiation Trading Data Share price performance Free float 70.6% (%) 1M 3M 6M 12M Target Price (initiation) KRW63,000 Avg T/O Val (3M, KRWbn) 20.0 Absolute -24.3 -31.5 -46.6 18.7 Upside/Downside 30.7% Foreign ownership 7.2% Relative -20.4 -22.5 -39.8 45.7 Current price (Jan 4) KRW48,200 Major shareholders Yeong-Ju Oh and 3 others 28.2% Consensus Target Price KRW76,000 Market cap USD446mn

Relative performance (LHS) Forecast earnings & valuation Stock price (RHS) FY-end 2017A 2018E 2019E 2020E % KRW 200 132,000 OR (KRWbn) 199 267 317 346 OP (KRWbn) 22 81 120 114 150 NP to parent (KRWbn) 16 63 91 87 98,000 100 EPS (KRW) 1,493 6,022 8,756 8,408 50 EPS Growth (%) 177.0 303.3 45.4 -4.0 64,000 PER (x) 28.8 8.8 5.7 6.0 0 EV/EBITDA (x) 16.6 5.9 3.3 2.8 -50 30,000 PBR (x) 6.6 4.3 2.4 1.7 18.1 18.4 18.7 18.10 19.1 ROE (%) 25.7 63.6 52.9 34.1 Div. Yield (%) 0.3 0.8 0.9 0.9

Source: Samwha Capacitor, KB Securities estimates

Samwha Capacitor(001820) KB RESEARCH

Stock trading at PER of 5.5x, down The stock is trading at a 2019 PER of 5.5x, tumbling by 55.2% from its short-term peak 55.2% from short-term peak and highlighting the stock’s valuation merits. Concerns over an MLCC supply glut, which have been responsible for the share price’s declines, appear excessive compared to Samwha Capacitor’s fundamentals. Therefore, we recommend a buy approach.

Samwha Capacitor(001820) KB RESEARCH

Investment points and risk factors Base-case Scenario: Catalysts

1) Rise in MLCC selling price

Bull-case Scenario KRW78,000 (10Y avg. ROE 25.3%, RIM) 2) Change in sales proportion of automotive

MLCCs

Base-case Scenario (TP) KRW63,000 (10Y avg. ROE 24.7%, RIM) Bull-case Scenario: Upside risks 1) Rise in MLCC selling price

Current Price KRW48,200 2) Increase in sales proportion of automotive MLCCs

Bear-case Scenario KRW42,000 (10Y avg. ROE 21.7%, RIM) Bear-case Scenario: Downside risks

1) MLCC supply glut

2) Slowdown in MLCC demand

Revised earnings estimates Valuation and target price calculation (KRWbn, %) Previous Revised Change 2018E 2019E 2018E 2019E 2018E 2019E 1) Valuation method: OR 267 317 RIM Valuation OP 81 120 NP to parent 63 91 2) Per-share value: Source: KB Securities estimates COE of 11.2%, terminal growth of 1.3%

Difference vs. Consensus 3) Target price range: KRW78,000 ~ KRW42,000 (KRWbn, %) KB est. Consensus Difference

2018E 2019E 2018E 2019E 2018E 2019E 4) Target price valuation: OR 267 317 267 310 0.1 2.3 Implied PER of 7.1x, PBR of 3.0x OP 81 120 82 96 -0.8 24.5

NP to parent 63 91 63 75 -0.6 21.6 Source: Quantiwise, KB Securities estimates

OR composition (2018, %) Macro-earnings sensitivity analysis (%) Change in EPS 16.0 2018E 2019E 1% rise in FX rate +0.7 +0.7 1%p rise in interest rates -0.3 -0.2

7.1 MLCC F

DCL 5.6 DC

60.7 Othe 10.6

Source: KB Securities estimates

Peer group comparison (KRWbn, USDmn, X, %) Market PER PBR ROA ROE Dividend yield cap. 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E SEMCO 6,380 10.1 6.8 1.5 1.2 4.6 3.6 15.9 19.8 1.0 1.0 Murata 29,139 13.9 11.0 1.9 1.6 7.5 6.0 14.1 15.8 2.1 2.5 Taiyo Yuden 1,856 8.9 6.6 1.0 0.9 3.6 2.8 11.8 14.4 1.5 1.8 TDK 9,077 11.6 9.6 1.1 1.0 5.3 4.6 9.8 11.2 2.1 2.3 Source: Bloomberg, KB Securities

Samwha Capacitor(001820) KB RESEARCH

Contents I. Executive Summary 5

II. Focus Chart 6

III. Recommendation & Valuation 7

IV. Company Overview 11

V. Investment Points 13

1. MLCC Market Entering Boom Cycle 13 ① Growth of Automotive Electronics Market 17 ② Shortage of High-Capacitance MLCC Supply Continues 22 ③ Fourth Industrial Revolution Spreads 24 2. Expansion of Green Car Market to Boost DCLC Demand 26

VI. Earnings and Outlook 31

VII. Risk Factors 33

Samwha Capacitor(001820) KB RESEARCH

I. Executive Summary

Shares trading at 2019 PER of 5.5x, Samwha Capacitor shares have dropped 55.2% from the short-term peak and are down 55.2% from peak currently trading at a 2019 PER of 5.5x. Along with the evident valuation merits, we believe that concerns over an MLCC supply glut forced a share price drop that looks excessive compared to the company’s fundamentals. Hence, we suggest investing in the company.

The investment points for Samwha Capacitor are as follows.

Performance of MLCC business to The first investment point for Samwha Capacitor is a sharp earnings growth resulting improve powered by booming market from booming market conditions. Thanks to the MLCC market boom that started coming out of 2017, Samwha Capacitor’s MLCC sales are expected to grow exponentially, coming in at KRW162.3bn (+86.4% YoY) in 2018 and KRW207.6bn (+27.9% YoY) in 2019. The MLCC business’s earnings are expected to improve on soaring selling prices buttressed by a shortage of high-capacity MLCC supply, increasing sales proportion of high-margin automotive MLCCs and new demand created by the onset of the Fourth Industrial Revolution. DCLC earnings to rise as market for eco-friendly vehicles grows Our second investment point for Samwha Capacitor is a rosy outlook for DCLC earnings spurred by a burgeoning market for eco-friendly vehicles. By 2025, eco-friendly automobiles are forecast to account for 17.0% of all vehicles being driven around the world. Accordingly, Samwha Capacitor’s DCLC sales are projected to reach KRW14.9bn (+7.7% YoY) in 2018 and KRW17.1bn in 2019 (+15.1% YoY). Samwha Capacitor is expected to boost sales in 2H19 backed by additional order wins involving some environmentally-friendly automobiles manufactured by Hyundai Motor Group, while securing more order channels by building up strong references at home and abroad.

Selling prices and profit margins to Concerns over an MLCC supply glut surfaced after Jul 2018, when major MLCC continue rising and remain above manufacturers began announcing aggressive capacity increases. However, MLCC prices current levels until 2020 and profit margins are expected to rise further and remain above current levels until 2020. Our predictions are based on three factors. First, the majority of increased capacity are dedicated to producing automotive MLCCs, demand for which is forecast to rise sharply. Second, the planned capacity increases will boost global capacity by only 10-20%. Third, capacity increases require an average lead time of 14 to 18 months.

Samwha Capacitor(001820) KB RESEARCH

II. Focus Charts

Samwha Capacitor's automotive MLCC sales trend - Samwha Capacitor’s 3Q18 automotive MLCC sales came in at KRW11.6bn (+185.1% YoY) - Samwha Capacitor aims to raise proportion of automotive KRWbn 14 MLCCs from 16% in 2017 to 30% in 2019 11.6 12 - Samwha Capacitor spent about KRW10bn in capex for 10.1 automotive MLCCs in 2H17 and additional KRW20bn in 2018 10 - Samwha Capacitor announced plans on Jan 3 to invest 8 KRW45bn in automotive/industrial-purpose MLCCs 5.9 6 4.1 3.9 3.3 4 2.7 2.4 2.2 2.4 2.4 2

0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Samwha Capacitor, KB Securities

Samwha Capacitor's MLCC sales prices - MLCC market flourishing amid supply shortages since 2017 - Supply-demand imbalances aggravated further, with major MLCC manufacturers shifting their capacity to produce (KRW/Kpcs) (YoY %) 10,000 MLCC prices (L) Grwoth ® 200 automotive MLCCs - MLCC prices precipitously rising, driven by brisk demand and 8,000 150 supply shortages - Samwha Capacitor’s MLCC ASP rose from KRW2.7 in 1Q17 to 6,000 100 KRW4.0 in 1Q18, KRW6.2 in 2Q18 and KRW8.6 in 3Q18 on string of price markups and improved product mix 4,000 50

2,000 0

0 -50 14 15 16 17 18 Source: Company data, KB Securities

Earnings trend of Samwha Capacitor's DCLC division and - Samwha Capacitor’s DCLC OR steadily increased from estimates KRW5.9bn in 2015 to KRW13.5bn in 2016 and KRW13.8bn in 2017 - We project 2018 OR to rise 7.7% YoY to KRW14.9bn and 2019 (KRWbn) (YoY %) OR (L) Change ® 20 140 OR to climb 15.1% YoY to KRW17.1bn - The company is sole supplier of DCLC for hybrid cars Ionic 120 (Hyundai Motors) and Niro (Kia Motors) through Hyundai 15 100 MOBIS; Samwha Capacitor’s DCLC is also used on hybrid 80 vehicles manufactured by BMW and Volvo through orders by 10 60 US-based Delphi Automotive (Delphi) - Full-fledged sales expansions are expected from 2H19 on 40 5 increased order channels; Additional order channels are 20 expected thanks to the company’s strong references at home 0 0 and abroad 14 15 16 17 18E 19E Source: Company data, KB Securities

Samwha Capacitor(001820) KB RESEARCH

III. Recommendation & Valuation

Present BUY rating and target price We initiate our coverage of Samwha Capacitor with a BUY rating and a target price of of KRW63,000 KRW63,000. The target price was derived using the RIM valuation model and represents a target shareholders’ equity value of KRW650.5bn (implied PER of 7.1x). Key assumptions for calculating COE include a risk-free rate (3Y KTB yield) of 1.80%, market risk premium of 9.5% (reciprocal of KOSPI’s projected 2019 PER of 8.85x minus risk-free rate), beta of 1.0 (2015-18 average) and terminal growth of 1.3% (for 2026 and beyond; OECD’s long-term growth rate for Korean economy). Considering that the shares of its peers (Murata, SEMCO, Taiyo Yuden and TDK) are trading at an average 2019 PER of 8.5x, the valuation pressure on Samwha Capacitor shares is light.

Table 1. RIM Valuation KRWbn, %, '000 stocks, KRW, X 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E NP to parent 15.5 62.6 91.2 87.8 94.9 103.1 112.6 122.9 134.0 146.3 159.7 Equity to parent (end-year) 68.1 128.8 215.4 298.5 388.8 487.3 595.3 713.6 843.0 984.7 1,139.8 ROE 48.6 42.4 29.4 24.4 21.2 18.9 17.2 15.9 14.9 14.0 COE 11.2 Risk free rate (3Y treasury bond) 1.8 Market risk premium 9.5 Beta (2015~2018 average) 1.0 ROE-COE 37.4 31.2 18.2 13.2 10.0 7.7 6.0 4.7 3.7 2.8 Shareholders' expected profit 7.6 14.4 24.1 33.4 43.4 54.4 66.5 79.7 94.1 109.9 Residual profit 55.0 76.6 63.3 61.2 59.4 57.8 56.1 54.0 51.8 49.4 Present price coefficient 1.00 0.90 0.81 0.73 0.65 0.59 0.53 0.48 0.43 0.38 PV of residual profit 55.0 68.9 51.2 44.5 38.8 34.0 29.7 25.7 22.2 19.0 Sum of PV of residualt profit (A) 390.1 PV of permanent profit (B) 192.2 Permanent growth rate 1.3 Equity to parent (early-year) (C) 68.1 Shareholders' equity value (A+B+C) 650.5 Number of stocks 10,395 Value per share 62,581 Target price 63,000 Current price 48,200 Upside 30.7 Implied PER 7.1 Implied PBR 3.0

Source: Company data, KB Securities estimates Note 1: Based on Jan 4 closing price Note 2: Shareholders' equity value=Equity to parent (early-year)+sum of forward residual profit, COE=Rf+β*market risk premium, Shareholders' expected profit=Equity to parent (early-year)*COE, Residual profit=NP to parent-Shareholders' expected profit. Market risk premium is based on reciprocal number of market 12M fwd. PER 8.85X-Rf (3Y treasury bond). Applied 1.3%, which is OECD’s long-term GDP estimate for Korea, to terminal growth rate

Samwha Capacitor(001820) KB RESEARCH

Relative valuation-based price higher We calculated the relative valuation-based prices of Samwha Capacitor’s four global than RIM valuation-based price peers to compare them to Samwha Capacitor’s absolute valuation-based price. Based on 2019 PER, the absolute valuation model yielded a target price of KRW74,000 for Samwha Capacitor, which is higher than the price derived using RIM valuation.

Table 2. PER Valuation KRWbn, %, '000 stocks, KRW Note 2019E NP to parent 91.0 Target PER 8.5 Average PER of 4 global peers Fair market cap 774.4 Total number of stocks 10,395 Value per share 74,499 Calculated price 74,000 Current price 48,200 Upside 53.5

Source: Company data, KB Securities estimates Note: Based on Jan 4 closing price

Samwha Capacitor’s share price Samwha Capacitor’s share price hit its short-term peak as MLCC demand surged on increased significantly since 2017 the back of the smartphone market’s growth surge in 2010. After 2011, the share price began to slide due to depreciation costs arising from capex and oversupply concerns resulting from capacity increases by Japanese and Taiwanese MLCC companies. The ensuing struggle at the MLCC wing resulted in NP reaching only KRW0.4bn in 2013 and a net loss of KRW6.0bn in 2014, causing the share price to dive to the lowest levels witnessed since 2006. Once the company began booking DCLC sales in 2015, the share price rebounded as Samwha Capacitor was highlighted as a beneficiary of the EV industry. The share price has been rallying significantly since 2017 as supply shortages pushed MLCC prices up.

Fig 1. Samwha Capacitor's stock price and PER trend Samwha Capacitor shares climbing sharply since 2017 (KRW) (X) stock price (L) PER (R) 60,000 50 45.8 50,000 ⓔ 40

40,000 30 ⓑ 28.8 25.5 30,000 23.9 19.9 20 20,000 ⓐ ⓓ 10.1 10 10,000 ⓒ 8.8 5.5

0 0 10 11 12 13 14 15 16 17 18E 19E Source: Quantiwise, KB Securities Note: Based on Jan 4 closing price

Samwha Capacitor(001820) KB RESEARCH

2019 PER of 5.5x suggests cheap Samwha Capacitor’s current share price represents a 2019E PER of 5.5x. The share valuation merits price declined 55.2% after hitting KRW107,500 on Jul 13, 2108, demonstrating the stock’s valuation merits. Concerns over MLCC supply gluts have weighed on the shares, but such worries are excessive, considering the company’s solid fundamentals. We project MLCC earnings to keep rising in 2019 on the back of robust market conditions. With the green car market kicking off, DCLC earnings are expected to grow as well. We believe the stock possesses 30.7% upside potential from the current price, based on which we present a BUY rating.

Fig 2. 12M forward PER band chart Fig 3. 12M forward PBR band chart

KRW'000 KRW'000 based on 12M Forward EPS based on 12M Forward BPS 120 120 5.3X 12.0X 100 100 10.3X 4.2X 80 80 8.5X 3.1X 60 6.8X 60

5.0X 40 40 1.9X

20 20 0.8X

0 0 10.1 12.1 14.1 16.1 18.1 10.1 12.1 14.1 16.1 18.1

Source: Quantiwise, KB Securities estimates Source: Quantiwise, KB Securities estimates Note: Based on Jan 4 closing price Note: Based on Jan 4 closing price

Fig 4. Relative stock price trend of global MLCC peers MLCC peers’ share prices have fallen after peaking in 3Q18 (16/01/02=100) (16/01/02=100) 1,000 Samwha Capacitor (L) SEMCO (R) Murata (R) Taiyo Yuden (R) 300

250 800

200 600 150 400 100

200 50

0 0 16/01 16/04 16/07 16/10 17/01 17/04 17/07 17/10 18/01 18/04 18/07 18/10 19/01 Source: Bloomberg, KB Securities Note: Based on Jan 4 closing price

Samwha Capacitor(001820) KB RESEARCH

Fig 5. PBR, ROE comparison of global MLCC peers Samwha Capacitor’s 2019 ROE estimated at 53.0%, which is far higher than average ROE of (X) 15.3% of global peers (%) 4 2019E PBR (L) 2019E ROE (R) 60

50 3 40

2 30

20 1 10

0 0 Samwha Capacitor SEMCO Murata Taiyo Yuden TDK

Source: Bloomberg, KB Securities estimates Note 1: Samwha Capacitor is based on KB estimate, peers based on Bloomberg consensus Note 2: Based on Jan 4 closing price

Fig 6. PER comparison of global MLCC peers Samwha Capacitor’s 2019 PER stands at 5.5x

(X) 2018E PER 2019E PER 16 13.9 14 11.6 12 11.0 10.1 9.6 10 8.8 8.9

8 6.8 6.6 5.5 6

0 Samwha Capacitor SEMCO Murata Taiyo Yuden TDK

Source: Bloomberg, KB Securities estimates Note 1: Samwha Capacitor is based on KB estimate, peers based on Bloomberg consensus Note 2: Based on Jan 4 closing price

Samwha Capacitor(001820) KB RESEARCH

IV. Company Overview

Top capacitor maker in Korea dating Founded in 1956 and listed on the KOSPI in 1976, Samwha Capacitor is the only back to 1956 manufacturer of capacitors in Korea. Capacitors, an essential component for electronic circuits, is one of the major passive components for electronic products and can be classified into various types according to form, function and usage. Samwha Capacitor manufactures all kinds of capacitors, except for electrolytic capacitors that are manufactured by Samwha Electric, an affiliate of Samwha Capacitor. Samwha Capacitor’s flagship products include MLCCs (multilayer ceramic capacitors), FCs (film capacitors), DCLCs (DC-Link capacitors), DCCs (disc ceramic capacitors), and CIs (chip bead & chip inductors).

Capacitor industry: Export-driven The capacitor industry is export-driven, with export sales exceeding imports. Samwha industry Capacitor’s export sales accounted for 61.8% of OR in 2016, 61.4% in 2017 and 68.3% in 3Q18, while the company's major export destinations include the greater China region, Europe, Southeast Asia, the Americas and Russia. Sales fluctuate heavily according to FX rate changes due to the nature of the export-driven industry, while earnings are heavily influenced by KRW/USD rates due to all exports being settled in US dollars.

Flagship MLCC to account for Samwha Capacitor is the first domestic company that developed and mass-produced increasing proportion of OR MLCCs in 1985 and the technological prowess ranks the company on a par with Korea’s No. 1 MLCC manufacturer SEMCO and three Japanese MLCC manufacturers (Murata, Taiyo Yuden, TDK). The proportion of MLCC out of OR is expected to expand significantly from 43.7% in 2017 and 60.7% in 2018 to 65.4% in 2019.

Record-high earnings achieved every Samwha Capacitor suffered tepid earnings until 2015 weighed by increased consecutive quarter on MLCC ASP fixed-cost outlays (including depreciation costs) caused by massive investments in hikes and product mix improvements 2010 and the downstream IT industry’s slump. However, earnings began to turn around starting in 2016 on reduced depreciation costs following the end of durable years of assets, recovering demand in the downstream industry and the company’s entry into the market for automotive MLCCs. Recently, MLCC ASP markups amid supply shortages and improved product mix are driving Samwha Capacitor’s earnings to record highs every quarter.

Table 3. Major shareholders Table 4. Major events since company's establishment Shareholder name Number of shares ('000) % Date Data Oh Youngju 1,680 16.16 1956.08 Samhwa Capacitor established NPS 744 7.16 1976.06 Listed in KOSPI Oh Youngho 351 3.38 1985.01 Developed MLCC Samhwa Electric 233 2.24 1997.02 Established PT.SAMCON Korea JCC 662 6.37 1997.11 Established SAMWHA THAI Etc. 6,725 64.69 2007.08 Established SAMWHA POLAND Total 10,395 100.00 2013.12 Developed DCLC

Source: Company data, KB Securities Source: Company data, KB Securities Note: Based on Jan 4 closing price

Samwha Capacitor(001820) KB RESEARCH

Fig 7. Major business areas of Samwha Capacitor Major businesses include MLCC, DCLC and FC

Source: Company data

Fig 8. Samwha Capacitor's OR proportion by division and estimate Proportion of MLCC out of OR expected to climb to 65.4% in 2019 (%) MLCC FC DCLC Other 100

0 13 14 15 16 17 18E 19E Source: Company data, KB Securities

Fig 9. Proportion of Samwha Capacitor's exports compared to OR Exports accounted for 68.3% of OR in 3Q18

(%) Exports Domestic sales 100

0 13 14 15 16 17 3Q18

Source: Company data, KB Securities

Samwha Capacitor(001820) KB RESEARCH

V. Investment Points

1. MLCC Market Entering Boom Cycle

MLCC business to continue The MLCC market boom is expected to continue in 2019. The flourishing market is fast-paced growth in 2019 expected to result in sharp earnings growth at Samwha Capacitor’s MLCC business. The MLCC unit is forecast to turn in OR of KRW162.3bn in 2018 (+86.4% YoY) and KRW207.6bn (+27.9% YoY) in 2019. The company will be able to achieve significant earnings growth as the increasing sales proportion of automotive and industrial MLCCs results in an improved product mix and the shortage of high-capacitance MLCC supply keeps MLCC prices high.

Fig 10. Samwha Capacitor's MLCC OR trends and forecasts MLCC sales forecast at KRW207.6bn (+27.9% YoY) in 2019 (KRWbn) (YoY %) 250 OR (L) Growth (R) 100

80 200

60 150 40 100 20

50 0

0 -20 13 14 15 16 17 18E 19E

Source: Company data, KB Securities

Fig 11. OR proportion of Samwha Capacitor's MLCC Fig 12. OP proportion of Samwha Capacitor's MLCC division and estimates division and estimates

(%) MLCC Other (%) MLCC Other 100 100

80 80

60 60

40 40

20 20

0 0 17 18E 19E 17 18E 19E

Source: Company data, KB Securities Source: Company data, KB Securities estimates Note: Based on KB estimates and figures may differ from actual data

Samwha Capacitor(001820) KB RESEARCH

MLCC is key component used in most Based on 3Q18 earnings, MLCC accounts for 62.9% of Samwha Capacitor’s OR. An electronic products MLCC is a chip-type capacitor with numerous dielectric and electrode layers divided by thin film. In an electric circuit, MLCCs act as a sort of electrical dam, temporarily storing electrical charges and sends out stable levels of electricity to semiconductors to ensure they function properly. MLCCs are essential components in display panels, smartphones, automotive electronics and any electronic device with electrical currents running through its circuits.

MLCC selling prices largely In the past, the MLCC market’s growth was fueled by the proliferation of mobile unchanged since major price cut in devices and the digitalization of electronic devices. With Japanese and Taiwanese 2002 MLCC manufacturers increasing capacity faster than demand growth, the MLCC market experienced supply gluts and substantial price cuts after 2002.

MLCC market exhibits both sales However, MLCC market conditions started to improve, with the explosive growth of growth and margin improvements the smartphone market spurred by the enormous popularity of Apple’s iPhones. since 2017 Jumping on the market trend, Samwha Capacitor boosted its MLCC capacity for two years starting in 2010. But the company’s MLCC division turned out to be a headache for the company, weighed by: 1) a demand slump at downstream set makers and 2) capacity expansion and higher fixed costs (e.g., depreciation expenses). As related depreciation expenses started to decline in 2015 following the end of the useful life of added facilities, MLCC earnings began to rebound again. MLCC earnings have risen since 2017, bolstered by: 1) MLCC price rises thanks to supply shortages and 2) the MLCC unit’s improved product mix.

Fig 13. MLCC (Multilayer Ceramic Capacitor) Fig 14. Global capacitor market size

(KRWtr) (YoY %) 14 Market size (L) Change (R) 6

5 13 4

12 3

2 11 1

10 0 13 14 15 16 17 Source: Company data Source: Company data, KB Securities Note: Based on estimates provided by company

Samwha Capacitor(001820) KB RESEARCH

MLCC market enters boom cycle The MLCC industry has been riding an upcycle since 2017. MLCC demand has grown backed by flourishing downstream due to robust downstream market conditions against the following backdrop: 1) industries emergence of premium smartphones with ultra-high specs (e.g., Apple’s iPhone X), 2) competition for specs among Chinese smartphone makers, 3) sales growth of high-end PCs and console game boxes, and 4) server demand growth and the burgeoning IoT market. In addition, the improving functions of electronic products caused the number of MLCC units required (contents per box) to grow faster than sales of finished products. In fact, 3G smartphones used to require only 100-200 MLCC units in the past. But 4G phones require around 300-500 units of MLCC and ultra-high-end smartphones require around 900 MLCCs, thus driving up MLCC demand growth. In addition, growing consumer preference for thinner smartphones are leading to the production of thinner MLCCs with the same capacitance, pointing to growing demand for ultra-thin/high-capacitance MLCC.

Table 5. Change in number of MLCCs used in smartphones

Number of MLCC 2G/3G LTE early stage LTE mid-stage LTE-A

MLCC 100~200 200~400 300~500 550~900

Micro MLCC 100~200 200~400 350~650

Source: Murata, KB Securities

Fig 15. Proportion by MLCC size Fig 16. Changes in MLCC capacitance

Source: Murata Source: Murata

Fig 18. Huawei's ultra-high spec premium smartphone, Fig 17. Apple iPhoneXS equipped with 900 MLCC Mate 20

Source: Apple Source: Huawei

Samwha Capacitor(001820) KB RESEARCH

Wide applications of automotive Paradigm changes brought on by technological advancements in automobiles are electronics in vehicles and growth of having a huge impact on the MLCC market. Traditional internal combustion engine EV market to spur strong demand for cars require a small number of electronic components, but the following trends are MLCC boosting the required content of electronic components in automobiles: The introduction of micro electro-mechanical systems associated with ADAS (Advanced Driver Assistant System), the emergence of connected cars and the technological advancement of infotainment equipment. Notably, an increase in ECU (Electronic Control Unit) contents in automobiles has bumped up demand for high-capacitance MLCCs (the required number of automotive MLCCs increased to 8,000 units in 2018 from 3,000 units in 2012). Market research institute Strategy Analytics expects the global automotive electronics market to grow from USD239bn in 2015 to USD303.3bn in 2020. Another firm, IC Insights, estimates the automotive electronics market to grow at a CAGR of 5.4% by 2021. Battery EV (BEV), which require far more MLCCs than internal combustion cars, are expected to require around 30,000 MLCCs. Thus, the EV market’s growth along with the commercialization of autonomous vehicles should become a strong catalyst for MLCC demand growth.

Fig 19. MLCC contents by product Fig 20. Changes in automotive MLCC contents

(Unit) (Unit) 20,000 40,000

30,000 15,000 30,000 15,000

20,000 10,000 8,000

8,000 10,000 5,000 3,000 3,000

500 0 0 2012 2018 2020E Smartphones Internal combustion Hybrid EVs (Internal combustion) (Hybrid) (EVs) Source: Murata, SEMCO, Tesla, KB Securities Source: Murata, SEMCO, Tesla, KB Securities

Fig 21. Tesla Model 3 equipped with 15,000 MLCCs Fig 22. Number of MLCCs equipped by EV component

Source: Tesla Source: Murata

Samwha Capacitor(001820) KB RESEARCH

① Growth of Automotive Electronics Market

MLCC makers increasing focus on IT parts companies have flourished due to the growth of the smartphone market. automotive electronics Now, saturated market conditions and slowing unit sales in developing countries have created difficulties for market players. Strategy Analytics predicted global smartphone unit sales to fall 1.3% YoY from 1.51bn units in 2017 to 1.48bn units in 2018. In order to cope with such developments, MLCC manufacturers are shifting their focus from the mobile device/display panel market to the fast-growing automotive electronics market.

Japan’s three MLCC leaders Japan’s top three MLCC manufacturers (Murata, Taiyo Yuden, TDK) are spearheading dedicating bulk of MLCC capacity the MLCC market’s paradigm shift to automotive electronics. Japanese companies increases to automotive MLCCs typically increase their output capacity by 10% each year. Recently, they have been dedicating the bulk of capacity increases to automotive MLCCs, which offer higher margins than general-use MLCCs. Murata, which accounts for the largest share of the global MLCC market, now views automotive electronics as one of its focal markets, along with healthcare and energy. Murata already commands over 50% of the automotive MLCC market with related sales growing rapidly from JPY40.7bn in 2Q16 to JPY47.5bn in 2Q17 and JPY63.0bn in 2Q18. TDK has withdrawn from the general-use MLCC market and is focusing production on automotive MLCCs, while Taiyo Yuden announced its goal of earning 15% of its sales from automotive MLCCs.

Fig 23. Global MLCC market share Fig 24. Murata's MLCC sales

(JPYbn) 70 63 59.6 60 53.3 54.7 47.5 31% 50 44.2 44.8 44.6 Murata 40.7 37% 39 SEMCO 40

Taiyo Yuden 30 Others 19% 20 13% 10

0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Source: Yageo, KB Securities Source: Murata, KB Securities Note: Based on 3Q18 shipments Note: Murata's 2Q18 earnings are results from Jul-Sep, 2018 (YE-Mar)

Samwha Capacitor(001820) KB RESEARCH

Fig 25. Change of Taiyo Yuden's OR composition Fig 26. Taiyo Yuden's automotive MLCC sales guidance

(%) 16 15

10 9

0 2017 Guidance

Source: Taiyo Yuden Source: Taiyo Yuden, KB Securities

Automotive MLCCs: High entry Unlike other electronic devices, automotive electronics have a direct impact on the barrier, but equally high profit safety of passengers. Hence, they must feature outstanding durability, thermal margins resistance and resilience to shock. For instance, components used in powertrains must be able to withstand temperatures of up to 125℃, while engine room components must operate normally at 150℃. Since automobiles require a longer lifespan than other consumer goods, the components must be durable enough to last over 20 years. Automotive MLCCs require highly upgraded specs and endure performance tests for extended periods (1.5-2 years on average), which signifies high entry barriers to the market. Nevertheless, a number of MLCC manufacturers are concentrating their resources on the automotive MLCC market, since these products boast superb profit margins compared to low-end MLCCs. Automotive MLCCs account for only 11% (KRW1tr) of the entire MLCC market (KRW9tr), but the automotive MLCC market is forecast to grow rapidly, driven by the full-fledged growth of EVs and autonomous vehicles.

Fig 27. MLCC market size forecast Fig 28. Automotive MLCC market size forecast

(KRWtr) (KRWtr) (%) Automotive MLCC Contribution (R) 20 10 60

16 50 8 15 12 40 6 10 9 10 30 4 20 5 2 10

0 0 0 17 18E 19E 20E 17 18E 19E 20E

Source: KB Securities estimates Source: KB Securities estimates

Samwha Capacitor(001820) KB RESEARCH

Aims to expand proportion of Samwha Capacitor is manufacturing mostly non-safety automotive MLCCs for now safety-related automotive (e.g., Infotainment components). But the company aims to expand the proportion of components while strengthening safety-related MLCCs that command stronger margins while upgrading its technological prowess technologies. In terms of technology, Samwha Capacitor is capable of manufacturing X7R dielectric materials that can operate in temperatures ranging from -55℃ to 125℃. Samwha Capacitor developed a pilot range of X8R dielectric materials, which only Murata succeeded in commercializing (capable of operating at temperatures ranging from -55℃ to 150℃), and is expected to launch the product soon.

Aims to raise sales proportion of Samwha Capacitor aims to boost the sales proportion of automotive MLCCs from automotive MLCCs to 30% 16% in 2017 to about 30% in 2019. The company invested KRW10bn for capex in 2H17 to meet rising demand for automotive MLCCs and spent an additional KRW20bn in 2018. While capacity expansion that began in 2017 was completed in 1Q18, 80% of capacity additions that started in 2018 have been completed as of 3Q18. The effects of the latest capacity additions should be fully reflected in earnings starting in 4Q18. In addition, Samwha Capacitor announced plans on Jan 3 to invest an additional KRW45bn in automotive/industrial-purpose MLCCs. Most of the planned capex is scheduled to be executed in 1H19 and be used to bolster production facilities and securing output capacity rather than on purchasing land. The capex will be financed wholly by Samwha Capacitor’s capital holdings (cash holdings plus cash to be generated in 2019), without resorting to external financing.

Low possibility of automotive MLCC There are some concerns over a potential supply glut in 2020, when large-scale supply glut production facility expansions by major Japanese companies and SEMCO are completed. But increased facilities expansions will be equivalent to less than 70% of the current automotive MLCC output volume, whereas demand is projected to quadruple in 2020. An MLCC supply glut seems unlikely even considering additional supply caused by the conversion of existing production lines.

Fig 29. Samwha Capacitor's MLCC sales breakdown Sales contribution of both automotive and industrial MLCC steadily rising (KRWbn) 50 Automotive Industrial Display Others

0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Company data, KB Securities

Samwha Capacitor(001820) KB RESEARCH

Fig 30. Samwha Capacitor's automotive MLCC sales Fig 31. Samwha Capacitor's MLCC sales contribution in trend 3Q18

KRWbn 14 11.6 12 10.1 16.5% 10 Display 37.6% 8 Auto electronics 5.9 6 21.0% Industrial 4.1 3.9 3.3 Others 4 2.7 2.4 2.2 2.4 2.4 2 24.9%

0 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Company data, KB Securities Source: Company data, KB Securities

Fig 33. Change in Samwha Capacitor's automotive Fig 32. Samwha Capacitor's MLCC sales breakdown MLCC sales contribution

(%) Display Automotive Industrial Others (%) 100 30 16.6 16.5 25.3 25 80 24.9 16.9 21.0 20 17.7 17.4 60 16.1 19.8 13.8 13.6 24.9 15 13.4 15.7 40 13.5 10 11.6 50.5 20 37.6 5

0 0 17 3Q18 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Company data, KB Securities Source: Company data, KB Securities

Major buyers of automotive MLCCs Major purchasers of Samwha Capacitor’s automotive MLCCs include LGE, Hyundai include LGE, Hyundai MOBIS, Delphi, MOBIS and US-based Delphi and Lear. Sales to LGE involve its VC (vehicle Lear component) business, while Hyundai MOBIS and Delphi are major buyers of automotive MLCCs and DCLCs (DC-Link Capacitor). Barriers to entry are high in the automotive MLCC market due to the technological complexity of MLCC, so a rapid increase in supply is not likely. Oversupply concerns recently emerged after the industry’s No. 1 and 2 players, Murata and SEMCO, announced their plans to expand automotive MLCC production capacity. However, output growth should be limited relative to the scale of investments, because most of the automotive MLCC in demand involves high-capacity products that require highly-dense layers of ceramic and are bigger than general-use MLCC and take up a lot of production capacity.

Samwha Capacitor(001820) KB RESEARCH

Table 6. MLCC capex schedule of global peers

Company Investment period Investment amount Location Start of operations

Murata Jun, 2018 ~ late 2019 JPY29bn Hukui, Japan expected in 1H20

Sep, 2018 ~ late 2019 JPY40bn Shimane, Japan expected in 1H20

Nov, 2018 ~ late 2019 JPY14bn Wuxi, China expected in 1H20

SEMCO Sep, 2018 ~ late 2019 KRW573bn Tianjin, China expected in 1H20

Yageo 2019 ~ 2021 NTD10bn Undecided expected in 2022

Kyocera 2019 ~ 2021 JPY6bn Kagoshima, Japan expected in 2022

Source: Company data, KB Securities

Fig 34. Earnings trend of LG Electronics's VC division 3Q18 OR at LGE’s VC division reached KRW1.18tr (KRWbn) (YoY %) OR (L) Change (R) 1,400 80

1,200 60 1,000

40 800

600 20

400 0 200

0 -20 15 16 17 18 Source: LG Electronics, KB Securities

No threat from large Chinese rivals It is positive that there are no large Chinese rivals that can cause major ripples in the market. Chinese manufacturers tend to mark down their product prices backed by government subsidies, putting rivals at a disadvantage. But major Chinese manufacturers have yet to venture into the MLCC market due to high entry barriers and a wide gap in technological capabilities compared to market leaders. Also, the MLCC market is relatively small compared to markets for other major IT markets. Automotive-use MLCCs require long test periods and high specifications (as demanded by clients), so clients remain loyal to existing players, making it difficult for other companies to enter the market. Against this backdrop, Samwha Capacitor is well positioned to expand sales ahead based on strong references accumulated from various companies at home and abroad.

Samwha Capacitor(001820) KB RESEARCH

② Shortage of High-Capacitance MLCC Supply Continues

Top-line growth and profit margin The shortage of MLCC supply has kept prices strong. This trend, along with the improvement to continue in 2019 resulting increases in sales and profit margins, is not temporary and is likely to continue in 2019. Such developments will be particularly evident in the high-capacitance MLCC market as high-capacitance MLCCs require high levels of technology to produce and Taiwanese companies have yet to establish a meaningful market presence. In 2018, Yageo saw its sales drop 38.4% YoY in Oct and 14.8% YoY in Dec, which fanned concerns over the overall MLCC market. However, Yageo cannot be viewed in the same class as Samwha Capacitor, since the Taiwanese manufacturer is heavily dependent on low/mid-end MLCCs, while Samwha generates over 80% of its sales from high-capacitance MLCCs (over 1µF).

MLCC demand skyrocketing on rising Since 2017, MLCC companies have been flourishing due to favorable market spec requirements of electronic conditions induced by the supply shortage. Fundamentally, the supply shortage is devices and growing demand for attributable to the reluctance of MLCC companies to increasing output capacity after automotive MLCCs suffering for several years under poor market conditions following massive capex in 2010. Now, MLCC demand is skyrocketing on rising spec requirements of electronic devices and growing demand for automotive MLCCs. Demand for IT MLCCs is soaring as MLCC usage in smartphones has increased significantly with the addition of triple-lens cameras and fingerprint/biometric scanners. The specifications of premium/gaming laptops are also skyrocketing. Surging demand for server semiconductors has sparked a rapid growth in passive component demand.

Samwha Capacitor’s MLCC prices rise The supply-demand imbalance has been further intensified by MLCC majors sharply in 2018 converting existing facilities in line with their forays into the automotive MLCC market. Favorable conditions on both supply and demand-sides have caused non-automotive MLCC prices to climb along with automotive MLCC prices. Thanks to consistent increases in prices, Samwha Capacitor was able to implement sharp price hikes. As a result, the company’s MLCC prices have jumped from KRW2.7 in 1Q17 to KRW4.0 in 1Q18, KRW6.2 in 2Q18 and KRW8.6 in 3Q18.

Fig 35. Samwha Capacitor's MLCC sales prices

(KRW/Kpcs) (YoY %) 10,00 MLCC prices (L) Growth ® 200

8,000 150

6,000 100

4,000 5

2,000 0

0 -50 1 1 1 1 1

Source: Company data, KB Securities Note: Chip-type capacitor price-based

Samwha Capacitor(001820) KB RESEARCH

MLCC market to remain monopolized The high-capacitance MLCC market is expected be bullish for two reasons. First, the market is likely to remain monopolized by a select few established manufacturers due to the high market entry barrier created by technological difficulties in developing and mass producing high-capacitance MLCCs. As aforementioned regarding the automotive MLCC business, Chinese manufacturers are not likely to be lured into the high-capacitance MLCC market, because technological barriers are enormously high compared to the market’s small size. Since potential market disrupting factors, i.e., Chinese companies, are unlikely to enter the market, we believe the current monopolistic market dynamics are forecast to continue in the long run.

Non-automotive MLCCs to stay in Second, demand for non-automotive MLCCs is continuously growing, but short supply, with capacity expansion manufacturers’ capacity expansion has tilted towards automotive MLCCs, which concentrated on automotive MLCCs should prolong the supply shortage of non-automotive MLCCs. Even if manufacturers strive to boost non-automotive MLCC capacity, there is not enough land for capacity expansion at most major MLCC companies as was the case involving automotive MLCC capacity. For MLCC manufacturers to expand non-automotive MLCC capacity, they need to secure new land and build facilities, which should take a long time and place a huge burden on MLCC manufacturers. Even if they secure additional manufacturing facilities, their capacity expansion could fall behind schedule due to a prolonged lead time for MLCC manufacturing equipment (14-18 months on average). All in all, factors that could affect market supply dynamics in the short term are limited. Above all, most MLCC manufacturers are going all out to boost automotive MLCC capacity, so their leeway to expand non-automotive MLCC capacity seems to be limited.

High-capacitance MLCC supply Against the above backdrop, we blame the current supply shortages of shortages attributable to structural high-capacitance MLCCs on long-term structural factors, rather than temporary reasons, not temporary ones ones. With a seller’s market persisting, we believe that the high-capacitance MLCC market could enjoy a long-term boom.

Upside of MLCC prices still sufficient Major buyers of Samwha Capacitor’s non-automotive/high-capacitance MLCCs can be categorized as follows according to item: 1) industrial-purpose MLCCs: SK Hynix, defense product companies, medical equipment companies, robotics companies and 2) display/IT-purpose MLCCs: LG Electronics, Samsung Electronics, and China-based BOE. Samwha Capacitor is forecast to continue benefiting from MLCC supply shortages in 2019 as well. We surmise that Samwha Capacitor’s MLCC price markups during 2017-18 varied according to the supply-demand conditions of each ordering party and contract terms. In Jul 2018, Murata marked up its MLCC prices by 20-30% for the first time in 20 years, while SEMCO is also estimated to have marked up prices around the same time. Considering tight supply conditions, Samwha Capacitor seems to have plenty of leeway to lift MLCC prices further.

Samwha Capacitor(001820) KB RESEARCH

③ Fourth Industrial Revolution Spreads

Fourth Industrial Revolution to lead The Fourth Industrial Revolution is gaining steam, resulting in a surge in MLCC to surging MLCC demand demand. MLCC is an essential component of various types of electronic equipment. The Fourth Industrial Revolution represented by Hyperconnectivity has huge implications in various industries and is spreading at a faster clip than previous industrial revolutions. As barriers that used to separate different fields disappear, the applications of IT components are not limited only to electronic equipment, but have expanded to a diverse range of industries including automobiles, retail and healthcare. Future technologies led by the Fourth Industrial Revolution spawned the applications of sensors and telecom modules on all devices to collect, connect and process data and create new value. A diverse range of electronic equipment is needed in order to apply the representative cutting-edge information and communication technologies (e.g., AI, IoT, big data and cloud computing) of the Fourth Industrial Revolution to be applied in our daily lives. In addition, surging demand for collecting and processing as much as data as possible in a single device will create demand for electronic components that are small in size but high in capacity. As a result, demand for MLCC, which is a key element in various electronic equipment, should surge ahead.

Fig 36. Domestic IoT market size trend and estimates Korea’s IoT market scaled at KRW17.1tr in 2020

(KRWtr) (YoY %) 20 Market size (L) Change (R) 60

50 15 40

10 30

20 5 10

0 0 13 14 15 16 17 18E 19E 20E

Source: Machina Research, KB Securities

Growing demand expected due to 5G Although the amount of sales related to the Fourth Industrial Revolution is barely base station installations noticeable at present, subsequent MLCC sales are bound to rise rapidly as innovative new technologies are introduced. Such demand is expected from 5G base station installations as most countries decided to use 5G networks from 2019-20. Samwha Capacitor is receiving industrial MLCC orders for 5G equipment from Samsung Networks. More order channels are expected to materialize as the commercialization of 5G networks is just around the corner.

Samwha Capacitor(001820) KB RESEARCH

Fig 37. Key technology used in 5G networks

Source: KICS

Fig 38. Application of 5G communication in daily life

Source: 5G.co.uk

Growing demand for sensors and MLCC sales involving SK Hynix’s DRAM modules account for the largest proportion of telecom modules to spur demand for existing MLCC sales related to the Fourth Industrial Revolution. MLCC demand from semiconductor module-use MLCC semiconductor modules should increase sharply as the need for sensors and telecom modules attached to electronic devices grows due to increasing IoT applications. Also, the full-fledged growth of smart factories, robotics, VR (virtual reality) and AR (augmented reality) technologies are developments that are worthy of attention.

Samwha Capacitor(001820) KB RESEARCH

2. Expansion of Green Car Market to Boost DCLC Demand

Expansion of eco-friendly car market Samwha Capacitor is expected to see DCLC sales grow as demand is boosted by the to boost DCLC demand growth of the eco-friendly car market. The company developed DCLCs in 2014 planning to supply them to companies manufacturing inverters used in renewable energy devices. In 2015, Samwha Capacitor began producing DCLCs for automotive inverters. The DCLC business generated OR of KRW5.9bn (3.7% of total OR) in 2015, KRW13.5bn (7.8%) in 2016 and KRW13.8bn (6.9%) in 2017. DCLC sales are projected at KRW14.9bn (+7.7% YoY) in 2018 and KRW17.1bn (+15.1% YoY) in 2019 with OR contribution falling to 5.6% and 5.4%, respectively, due to surging MLCC sales.

DCLC is essential component in green DCLC is a type of film capacitor that is used to make inverters, which is an essential cars component of eco-friendly vehicles, renewable energy devices and various electricity-related areas. DCLC stabilizes the voltage in circuits, while converting DC (direct current) into AC (alternating current). Eco-friendly vehicles typically operate on AC, but the engine produces DC. This is where inverters and DCLC come into play. Hybrid cars require only one inverter, while pure EVs require an inverter and a converter. Being an essential component, DCLC demand is expected to increase with the growth of the eco-friendly vehicle market.

Fig 39. DCLC (DC-Link Capacitor) Fig 40. Inverters used in Evs

Source: Company data Source: Delphi

Fig 41. Earnings trend of Samwha Capacitor's DCLC division and estimates 2019 DCLC sales expected at KRW17.1bn (+15.1%) (KRWbn) (YoY %) OR (L) Change ® 20 140

120

15 100

80 10 60

40 5

0 0 14 15 16 17 18E 19E

Source: Company data, KB Securities

Samwha Capacitor(001820) KB RESEARCH

Global EV shipments rise 66.1% YoY The global EV (battery-based EVs, PHEVs and hydrogen cars) shipment volume stood in 2017 at 1.2mn units (+66.1% YoY) in 2017 according the market research firm, Marklines. The era of the EV will dawn in 2020 with global EV shipment volume reaching an estimated 2.59mn units (2.4% of total vehicle shipments).

Eco-friendly cars to account for When hybrid vehicles are included, global eco-friendly vehicle (EVs and HEVs) 17.0% of all cars by 2025 shipments came in at 3.1mn units (+26.7% YoY) in 2017. Shipment volume is projected to reach 6.59mn units in 2020, accounting for 6.2% of total shipments. By 2025, the proportion of eco-friendly vehicles will hit 17.0%.

Fig 42. Global EV shipment volume Global EV shipment volume to reach 2.59mn units by 2020

('0,000 units) (% EV shipments (L) Proportion of total vehicle shipments ® 600 5

500 4

400 3 300 2 200

1 100

0 0 1 1 1 1 1 1 1 1 18E 19E 20E 21E 22E 23E 24E 25E

Source: Marklines, KB Securities Note 1: Past figures based on Marklines data, estimates based on KB Securities projections Note 2: EVs include BEVs, PHEVs and ECEVs

Fig 43. Global eco-friendly vehicle shipment volume Global eco-friendly car shipment volume to reach 6.59mn units by 2020

('0,000 units) (% Eco-friendly car shipments (L) Proportion of total vehicle shipments (R) 2,500 2

2,000 15

1,500 1 1,000

5 500

0 0 1 1 1 1 1 1 1 1 18E 19E 20E 21E 22E 23E 24E 25E

Source: Marklines, KB Securities Note 1: Past figures based on Marklines data, estimates based on KB Securities projections Note 2: EVs include BEVs, PHEVs, ECEVs and FCEVs

Samwha Capacitor(001820) KB RESEARCH

Eco-friendly vehicle market growth The growth of the eco-friendly vehicle market has been fueled by government gains momentum from various subsidies and strengthened regulations. Some governments are promoting subsidies and strengthened eco-friendly vehicle sales by implementing regulations that require automakers to sell regulations EVs. Norway, an avid champion of eco-friendly initiatives, is striving to reduce all vehicular CO2 emissions to zero by 2025. Indeed, EVs account for a staggering 39.2% of all vehicles in Norway. The UK also declared a policy of banning all gasoline/diesel cars by 2040, while France passed a bill banning the sale of internal combustion cars from 2040. China, the world’s largest automobile market, has strengthened regulations on the production and sale of internal combustion cars, while promoting the production and purchase of EVs through subsidies. In fact, China boasts a dominant standing in the global EV market to such an extent that 570,000 units or 47.4% of global EV units were sold in that country in 2017.

Fig 44. China's ecofriendly vehicle shipment volume EV shipments in China to reach 1.61mn units by 2020

('0,000 units) (% Eco-friendly car shipments (L) Proportion of total vehicle shipments (R) 600 1

1 500

1 400 8 300 6 200 4

100 2

0 0 1 1 1 1 1 1 1 1 18E 19E 20E 21E 22E 23E 24E 25E

Source: Marklines, KB Securities Note 1: Past figures based on Marklines data, estimates based on KB Securities projections Note 2: EVs include BEVs, PHEVs, ECEVs and FCEVs

Fig 45. Proportion of ecofriendly cars in China China to account for 24.9% of global EV market by 2020 (%) 30 24.9 24.9 25.2 25.5 24.1 24.8 23.1 23.3 25 21.9

13.9 15 10.2 10

5 2.6 0.9 1.1 0.1 0.4 0 10 11 12 13 14 15 16 17 18E 19E 20E 21E 22E 23E 24E 25E

Source: Marklines, KB Securities Note 1: Past figures based on Marklines data, estimates based on KB Securities projections Note 2: EVs include BEVs, PHEVs, ECEVs and FCEVs

Samwha Capacitor(001820) KB RESEARCH

Companies also expanding their Not only governments, but automobile manufacturers are making efforts to embrace green car line-ups since “dieselgate” green mobility. Since the “dieselgate” or “Volkswagen emissions scandal (tampering of gas emissions test data)” that shocked the world in Sep 2015, global automobile manufacturers have stepped up their green efforts by expanding eco-friendly car line-ups. MercedesBenz plans to launch 10 EV models by 2022, while investing EUR10bn in green endeavors during the same time. BMW aims to lift the proportion of green cars to 15-25% of all newly-launched vehicles while developing 25 new eco-friendly vehicle models (including 12 EV models). Volkswagen, which is at the epicenter of the scandal, declared a goal of investing UER20bn to develop EV models until 2030. That is, global auto powerhouses are all lining up to expand their green car models. In Korea, Hyundai Motor Company and Kia Motors are also committed to expanding their green car line-ups from 13 models (including two EV models) to 38 models (including 14 EVs) by 2025.

Fig 46. BMW's EV roadmap

Source: BMW

Samwha Capacitor(001820) KB RESEARCH

Sales to grow on expansion of client As various countries and enterprises strive to enlarge the green car market, base from 2H19 manufacturers of green vehicle parts stand to benefit enormously in the long run. Samwha Capacitor is exclusively supplying DCLCs to Hyundai Motor Company’s (HMC) “Ioniq” and Kia Motors’s “Niro” hybrid models via Hyundai MOBIS. Samwha Capacitor started to supply DCLCs to Delphi in 2017, which are being used to manufacture BMW and Volvo hybrid vehicles. Revenues from DCLC are still small, but Samwha Capacitor began to receive orders for DCLCs used in Hyundai Rotem’s electric buses in 2018. In addition, Samwha Capacitor signed an MOU involving DCLC parts with WISDRI Engineering & Research, a vendor of automotive parts for five-wheeled vehicles in China. The deal created a bridgehead for Samwha Capacitor’s entry into China, a key country in the global eco-friendly vehicle market. Samwha Capacitor is scheduled to supply DCLCs for one to two eco-friendly vehicles manufactured by HMC/Kia in 2H19 and to Delphi by 2020. Driven by growing sales channels, Samwha Capacitor is forecast to see full-fledged sales growth from 2H19. Samwha Capacitor is expected to secure additional clients backed by references accumulated at home and abroad.

Table 7. DCLC order history and future schedule

Date Company Contents Received DCLC order for hybrid car (Hyundai Motor's "Ioniq," Kia Motors' DELPHI "Niro") 2015 Received DCLC order for hybrid car (Hyundai Motor Ioniq', Kia motors Hyundai Mobis 'Niro') 2017 DELPHI Received DCLC order for hybrid car (BMW, Volvo)

Hyundai Rotem Received DCLC order for electric bus 2018 WISDRI Received DCLC order for mini electric bus (FDG) Scheduled to supply DCLC for more green cars made by Hyundai 2H19 Hyundai Mobis Motor/Kia Motors 2020 DELPHI Scheduled to supply DCLC for more green cars

Source: Company data, KB Securities

Fig 47. Hyundai Ionic hybrid Fig 48. Kia Niro hybrid

Source: Hyundai Motor Source: Kia Motors

Samwha Capacitor(001820) KB RESEARCH

VI. Earnings and Outlook

4Q18 OR up 37.6% YoY and OP up We estimate Samwha Capacitor’s 4Q18 OR at KRW72.4bn (+37.6% YoY) and OP at 297.4% YoY KRW20.8bn (+297.4% YoY, OPM of 28.7%). An earnings uptrend that has continued since 2H17 also occurred in 4Q18 thanks to the impact of automotive MLCC capacity expansions resulting from facilities investments in 2018 and MLCC ASP markups, in spite of inventory adjustments at clients and expenses involving inventory disposal. However, profits are estimated to have dropped QoQ because of one-off expenses associated with bonus payments to reward employees for substantial earnings improvements in 2018. We project Samwha Capacitor’s 4Q18 MLCC OR to have soared 85% YoY and remain little changed QoQ at KRW46.1bn

Table 8. Quarterly earnings trend and forecast

4Q18E % Change Contrast (KRWbn, %) 4Q17 1Q18 2Q18 3Q18 KB estimate Consensus YoY QoQ Consensus

OR 52.7 55.7 65.0 74.0 72.4 77.8 37.6 -2.1 -6.9

OP 5.2 13.1 21.4 26.0 20.8 20.3 297.4 -19.9 2.6

EBT 4.3 13.1 21.5 26.8 20.8 20.2 383.7 -22.4 2.9

NP 3.4 10.1 16.9 20.1 15.6 15.7 358.8 -22.4 -0.5

OP margin 9.9 23.6 32.9 35.1 28.7 26.1 18.8 -6.4 2.6

EBT margin 8.2 23.5 33.0 36.2 28.7 26.0 20.5 -7.5 2.7

NP margin 6.4 18.1 25.9 27.1 21.5 20.1 15.1 -5.6 1.4

Source: Company data, Quantiwise, KB Securities

2018 OR projected to jump 34.1% We project the Samwha Capacitor to achieve 2018 OR of KRW267.2bn (+34.1% YoY) YoY, OP to surge 269.0% YoY and OP of KRW81.4bn (+269.0% YoY, OPM 30.4%). 1) The MLCC business’s OR is estimated at KRW162.3bn (+86.4% YoY), spearheading Samwha Capacitor’s top-line growth and 2) the DCLC business is also expected have achieved stable growth as well (OR of KRW14.9bn, +7.7% YoY). The contribution of high-margin MLCC earnings to profits should rise sharply, spearheading company-wide profit margin growth.

2019 OR projected to climb 18.7% Robust earnings are expected to continue in 2019, with OR estimated at KRW317.2bn YoY, OP to soar 46.9% YoY (+18.7% YoY) and OP at KRW119.6bn (+46.9% YoY, OPM 37.7%) thanks to additional MLCC ASP markups and increased sales volume following facilities expansions (facilities investments made in 2018 + investments planned for 2019).

Samwha Capacitor(001820) KB RESEARCH

Fig 49. Samwha Capacitor's annual earnings and outlook 2019 OR projected at KRW317.2bn (+18.7% YoY) and OP at KRW119.6bn (+46.9% YoY, OPM (KRWbn) (%) 37.7%) OR (LS) OPM (R ) 350 40

300 30 250

20 200

150 10

100 0 50

0 -10 13 14 15 16 17 18E 19E

Source: Company data, Quantiwise, KB Securities

Table 9. Earnings trend and forecast by business division 2017 2018E 2019E KRWbn, % 2017 2018E 2019E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE OR 46.8 47.4 52.4 52.7 55.7 65.0 74.0 72.4 76.9 77.5 83.0 79.8 199.3 267.2 317.2 YoY 11.0 24.8 13.2 14.6 19.1 37.1 41.2 37.6 38.0 19.1 12.2 10.1 15.6 34.1 18.7 MLCC 19.9 19.3 23.0 24.9 29.6 40.0 46.6 46.1 50.4 52.1 53.5 51.6 87.1 162.3 207.6 % 42.5 40.6 43.9 47.3 53.2 61.6 62.9 63.6 65.5 67.2 64.5 64.7 43.7 60.7 65.4 FC 6.3 8.9 8.9 8.6 6.4 6.5 7.7 7.8 6.8 6.8 8.1 8.2 32.8 28.4 29.9 % 13.6 18.7 17.0 16.4 11.5 10.0 10.4 10.7 8.8 8.8 9.8 10.2 16.4 10.6 9.4 DCLC 3.4 3.4 4.0 2.9 3.9 3.4 4.3 3.2 4.3 3.8 5.1 3.9 13.8 14.9 17.1 % 7.2 7.3 7.7 5.6 7.1 5.3 5.8 4.5 5.6 4.9 6.2 4.9 6.9 5.6 5.4 DCC 5.5 5.2 5.2 4.5 4.9 5.1 4.6 4.3 5.1 5.4 4.9 4.5 20.4 18.9 19.9 % 11.8 10.9 9.9 8.6 8.8 7.9 6.3 5.9 6.7 6.9 5.9 5.6 10.2 7.1 6.3 etc. 11.6 10.7 11.3 11.7 10.8 9.9 10.8 11.1 10.3 9.4 11.3 11.6 45.2 42.7 42.7 % 24.8 22.5 21.5 22.2 19.5 15.3 14.6 15.3 13.4 12.2 13.7 14.6 22.7 16.0 13.5 Cost of sales 38.3 38.2 40.0 42.2 38.3 38.9 43.4 46.2 43.8 42.6 46.5 44.7 158.7 166.8 177.6 YoY 9.7 18.0 3.6 9.1 -0.1 2.0 8.4 9.6 14.4 9.5 7.2 -3.3 9.8 5.1 6.5 % 81.9 80.5 76.3 80.0 68.7 59.9 58.6 63.8 56.9 55.0 56.0 56.0 79.6 62.4 56.0 Gross profit 8.4 9.3 12.4 10.5 17.5 26.1 30.6 26.3 33.1 34.8 36.5 35.1 40.6 100.4 139.6 YoY 17.3 63.8 60.7 43.9 106.6 181.9 146.6 149.8 89.7 33.5 19.2 33.8 45.7 147.2 39.0 % 18.1 19.5 23.7 20.0 31.3 40.1 41.4 36.2 43.1 45.0 44.0 44.0 20.4 37.6 44.0 SG&A 4.2 4.6 4.5 5.3 4.3 4.7 4.6 5.4 4.5 4.9 4.9 5.7 18.6 19.1 20.0 YoY -7.8 1.6 2.5 6.9 3.6 1.2 2.7 3.0 5.0 5.0 5.0 5.0 0.9 2.6 5.0 % 8.9 9.8 8.6 10.0 7.8 7.2 6.3 7.5 5.9 6.4 5.9 7.1 9.3 7.1 6.3 OP 4.3 4.6 7.9 5.2 13.1 21.4 26.0 20.8 28.6 29.9 31.7 29.4 22.0 81.4 119.6 YoY 59.6 325.7 137.4 120.7 207.2 363.5 228.5 297.4 117.6 39.7 21.7 41.3 132.8 269.0 46.9 % 9.1 9.7 15.1 9.9 23.6 32.9 35.1 28.7 37.2 38.6 38.1 36.9 11.1 30.4 37.7 EBT 4.3 4.2 7.2 4.3 13.1 21.5 26.8 20.8 28.8 30.2 32.0 29.6 20.1 82.1 120.5 YoY 103.3 839.9 127.0 188.7 203.9 408.3 270.9 383.7 119.7 40.6 19.2 42.4 177.0 309.6 46.7 % 9.2 8.9 13.8 8.2 23.5 33.0 36.2 28.7 37.4 38.9 38.5 37.1 10.1 30.7 38.0 NP 3.4 3.1 5.6 3.4 10.1 16.9 20.1 15.6 21.6 22.6 23.9 22.2 15.5 62.6 90.3 YoY 130.3 383.9 127.8 212.9 198.4 435.9 256.4 358.8 114.2 34.1 19.2 42.4 174.0 302.5 44.3 % 7.2 6.6 10.7 6.4 18.1 25.9 27.1 21.5 28.0 29.2 28.8 27.8 7.8 23.4 28.5

Source: Company data, KB Securities

Samwha Capacitor(001820) KB RESEARCH

VII. Risk Factors

Samwha Capacitor’s major risk factors include: 1) the possibility of an MLCC supply glut and 2) a potential slowing of MLCC demand.

1) MLCC supply glut: Aggressive Concerns over an MLCC supply glut surfaced in Jul 2018, when the No. 1 global MLCC facilities ramp-ups by major MLCC manufacturer, Murata, revealed its plans to boost MLCC production facilities. Other manufacturers major MLCC manufacturers are following suit, with SEMCO, Korea’s No. 1 player and the second-largest in the world, announcing its capacity expansion plans for automotive MLCC in Sep.

Concerns over supply glut overdone The share price of Samwha Capacitor plummeted 55.2% from its peak of KRW107,500 given growing demand and lead time on Jul 13 when oversupply concerns materialized. It seems to be a plausible move for MLCC makers to consider expanding production facilities, because MLCC is highly profitable and is registering steep top-line growth. Despite such output ramp-up plans, ASP and profit margins of MLCC should remain above the current level until 2020, considering: 1) facilities expansions are focused on automotive MLCC whose demand is projected to climb remarkably, 2) increased production capacity is equivalent to only 10-20% of total production capacity by company and 3) the average lead time is around 14-18 months following facilities investments. Murata Manufacturing CEO Tsuneo Murata mentioned that supply shortages will last more than two years, even though global MLCC manufacturers are boosting automotive MLCC output.

2) Slowing MLCC demand: Possibility Meanwhile, concerns over slowing MLCC demand are emerging as downstream IT set low considering increase in required makers are suffering weak earnings. Shares of IT component makers have been number of MLCCs per product and struggling over the long-term as most IT products (smartphones, PC, display) are new demand creation experiencing slowing sales. Such worries, however, will prove to be groundless, because: 1) MLCC content (required number) per device is rising rapidly as electronic devices become multi-functional and high in capacity, 2) new demand is being created associated with 5G/IoT due to the advent of the Fourth Industrial Revolution and 3) demand for automotive electronics is rising sharply. We acknowledge that IT component makers are experiencing sharp share price drops recently triggered by slowing earnings resulting from sluggish sales of Apple’s iPhone X series. However, we believe that Samwha Capacitor will remain relatively unscathed by such worries, because smartphone MLCC sales account for less than 10% of total MLCC sales.

Samwha Capacitor(001820) KB RESEARCH

Profit & Loss Statement of financial position (KRWbn) 2016A 2017A 2018E 2019E 2020E (KRWbn) 2016A 2017A 2018E 2019E 2020E (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (Reporting standard) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C) (IFRS-C)

Operating revenue 172 199 267 317 346 Total assets 122 138 220 310 398 Cost of sales 145 159 167 178 212 Current assets 69 81 144 195 290 Gross profit 28 41 100 140 135 Cash and cash equivalents 6 10 44 84 168

SG&A expenses 18 19 19 20 21 Current financial assets 3 3 7 9 10 Operating profit 9 22 81 120 114 Trade receivables 41 45 62 69 75 EBITDA 17 28 88 133 130 Inventories 18 22 29 32 35

Non-operating accounts -2 -2 1 2 3 Other current assets 1 1 1 1 1 Interest income 0 0 0 1 2 Non-current assets 52 57 75 115 108 Interest expenses 0 0 1 0 0 Investment assets 9 11 14 15 15

Profit on equity method 0 0 0 0 0 Property, plant and equipment 39 44 59 98 90 Net other non-operating income -1 -1 1 2 2 Intangible assets 0 0 0 0 0 Profit before tax 7 20 82 122 117 Other non-current assets 2 2 2 2 2

Income tax expense 2 5 20 30 29 Total liabilities 68 69 90 94 99 Net profit 6 16 63 91 88 Current liabilities 59 60 82 86 90 NP to parent 6 16 63 91 87 Trade payables 23 30 41 46 51

Adj. net profit 6 16 63 91 87 Short-term financial liabilities 31 19 18 16 15

Other current liabilities 5 11 23 24 25 Operating Statistics & Ratios Non-current liabilities 10 8 8 8 8

(%) 2016A 2017A 2018E 2019E 2020E Non-current financial liabilities 0 1 1 1 1

OR growth 8.6 15.6 34.1 18.7 9.2 Other non-current liabilities 1 1 1 1 1

OP growth 75.4 132.8 269.0 46.9 -4.9 Total equity 53 69 130 216 299 EBITDA growth 15.8 63.9 218.6 51.7 -2.7 Issued capital 10 10 10 10 10 NP growth of parent 109.7 177.1 303.4 45.4 -4.0 Share premium 5 5 5 5 5

GP margin 16.2 20.4 37.6 44.0 38.9 Other equity interest -1 -1 -1 -1 -1 OP margin 5.5 11.1 30.5 37.7 32.8 Accumulated other comprehensive income 7 8 7 7 7 EBITDA margin 9.8 13.8 32.9 42.0 37.4 Retained earnings 32 47 108 194 277

EBT margin 4.2 10.1 30.8 38.3 33.7 Equity attributable to owners of parent 53 68 129 215 298 NP margin 3.3 7.8 23.5 28.7 25.3 Non-controlling Interests 1 1 1 1 1

Cash Flow Key Ratio (KRWbn) 2016A 2017A 2018E 2019E 2020E (X, %, KRW) 2016A 2017A 2018E 2019E 2020E

Cash flow from operating activities 13 21 62 76 74 Multiples

Net profit 6 16 63 91 88 PER 19.9 28.8 8.8 5.7 6.0 Depreciation & amortization 7 6 6 14 16 PBR 2.1 6.6 4.3 2.4 1.7

Other non-cash adjustments 5 8 22 30 29 PSR 0.6 2.2 2.1 1.6 1.5 Investments in working capital -4 -7 -24 -29 -29 EV/EBITDA 8.0 16.6 5.9 3.3 2.8 Decrease(Increase) in Receivables -8 -16 -22 -6 -6 EV/EBIT 14.2 20.7 6.4 3.7 3.2 Decrease(Increase) in Inventories -2 -4 -8 -3 -3 Dividend yield, ordinary (%) 0.5 0.3 0.8 0.9 0.9

Increase(Decrease) in Payables 9 16 16 5 5 EPS 539 1,493 6,022 8,756 8,408 Other operating cash flow -1 -1 -6 -30 -29 BPS 5,057 6,555 12,387 20,699 28,663 Cash flow from investing activities -5 -11 -30 -55 -10 SPS 16,590 19,174 25,707 30,510 33,324

Capital expenditure -3 -11 -21 -53 -8 DPS (Annual, Ordnry.) 50 150 450 450 450 Investments in intangibles 0 0 0 0 0 Cash dividends payout ratio (%) 9.2 9.9 7.4 5.1 5.3 Changes in investment assets 0 1 -11 -1 -1 Operating performance

Other investment cash flow 0 0 0 0 0 ROE 11.3 25.7 63.6 52.9 34.1 Cash flow from financing activities -5 -6 2 19 20 ROA 4.8 12.0 35.1 34.4 24.7 Proceeds from (repayments of) debt -5 -5 -1 -1 -1 ROIC 10.4 23.5 76.4 80.5 65.3

Changes in equity 0 0 0 0 0 Financial structure (%) Dividends paid -1 -1 -2 -5 -5 Total liab./equity 128.0 99.6 69.4 43.5 32.9 Other financing cash flow 0 0 5 25 26 Net debt/equity 42.1 11.0 Net Cash Net Cash Net Cash

Other cash flow 0 0 0 0 0 Current Ratio 1.2 1.3 1.8 2.3 3.2 Increase/decrease in cash 2 4 34 40 84 Interest coverage (x) 23.4 108.2 113.7 338.5 348.2 Cash and cash equivalents at FYE 7 10 44 84 168 Activity ratios

Free cash flow 9 10 41 23 66 Asset turnover (x) 1.5 1.5 1.5 1.2 1.0 Net cash flow 3 15 41 43 87 Receivables turnover (x) 4.6 4.6 5.0 4.8 4.8 Net cash (net debt) -22 -8 33 76 163 Inventory turnover (x) 10.0 10.0 10.5 10.3 10.4

Source: Samwha Capacitor, KB Securities estimates

Samwha Capacitor(001820) KB RESEARCH

Disclosures Rating and Target Price Changes (Share price ━, Target Price ━)

Samwha Capacitor (001820) KRW SamSamwha Hwa Capacitor Capacitor Sam Hwa Capacitor (001820) Date R ating Target Price Differential (%) 123,200 (KRW) Av g. Max / Min 19-01-07 Buy 63,000 84,800

46,400

8,000 17.1 17.5 17.9 18.1 18.5 18.9 19.1

KB Securities has not provided in advance the material contained in this report to any Proportion of investment rating (as of December 31, 2018) institutional investor or third party. The analyst(s), who wrote this report, does not have any financial interest in the company(ies) covered herein. The author(s) of this report Buy Hold Sell confirms that the material contained herein correctly represents his/her/their opinion 70.6 29.4 - and that it has been prepared faithfully without any undue influence or intervention.

* Note: Based on reports presented with investment ratings over the past one year

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