Korea Information Technology 15 October 2015

Korea Technology Sector

Initiation: technological inflection point on the way

 With the advent of 1x DRAM, 3D V-NAND and 10nm FF, 2016 should herald a major technological inflection point

 We look for new supply constraints to clear the way for a recovery in the global memory market from 2H16 SK Kim (82) 2 787 9173  Initiating on SEC and SK Hynix with Buy (1) calls; we see SEC as the [email protected] likely winner from the coming inflection point Brian Cho

(82) 2 787 9182 [email protected]

Investment case: We initiate coverage of the Korea Technology Sector Key stock calls with a Positive stance, and Samsung Electronics (SEC; 005930 KS, New Prev. KRW1,254,000) and SK Hynix (000660 KS, KRW36,400) with Buy (1) Samsung Electronics (005930 KS) ratings. We believe that SEC, backed by its cutting-edge technology in the Rating Buy memory and logic segments, is well placed to expand its earnings upon our Target 1,470,000 Upside p 17.2% forecast memory market recovery in 2H16 and a broadening of its SK Hynix (000660 KS) customer base for foundry. Our view of greater visibility on SEC’s recovery Rating Buy next year, together with the possibility of more clarity in the coming months Target 43,000 on shareholder returns, underlines our Buy (1) call today. Upside p 18.1%

Source: Daiwa forecasts On a regional basis, we prefer SEC over TSMC (2330 TT, TWD136.5, Outperform [2]), as we think SEC will have the upper hand through stable memory earnings and earnings growth momentum from system LSI. Indeed, SEC is now Daiwa’s top pick in the regional tech space.

Separately, as a result of its flexible product mix management, we look for SK Hynix to stage a rapid earnings improvement arising from our forecast recovery in the DRAM market in 2H16. SK Hynix declared its first annual cash dividend, of KRW218bn, at the end of 2014, and we expect a similar one for 2015. Group restructuring could also see further buyback schemes.

Catalysts: Memory market forecast to recover from 2H16. We expect memory demand to remain weak in major applications and oversupply to persist until 1H16. However, given our view that supply growth will be tempered by slow technology migration, we expect the supply-demand balance to improve and the market to recover from 2H16.

Technological inflection promises shake-up. The likely rise of 20nm/1xnm DRAM and 3D V-NAND in 2016 and 2017 will see SEC strengthen its already-sound position in the memory market, in our view. Meanwhile, on the logic side, we believe that SEC, after securing its technology leadership beyond 14nm FF, will be well placed to expand its customer base and market share in foundry, likely at the expense of TSMC.

Valuation: We initiate our coverage of SEC with a 12-month TP of KRW1,470,000, based on a target PBR of 1.2x for 2016E. On SK Hynix, we have a 12-month TP of KRW43,000, set at a PBR of 1.2x for 2016E.

Risks: The main risk to our Positive sector stance would be the potential market entry of China players, either through acquisitions or strategic alliances with existing players. A secondary risk would be a further decline in demand resulting from global macro conditions.

See important disclosures, including any required research certifications, beginning on page 58

Korea Technology Sector: 15 October 2015

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Samsung Electronics 005930 KS 1,254,000 Buy 1,470,000 124,698 129,760 SK Hynix 000660 KS 36,400 Buy 43,000 6,310 4,808 Source: Bloomberg, Daiwa forecasts

DRAM spot price trend NAND spot price trend (USD) (USD) 5.0 7.0

4.5 6.0 4.0 5.0 3.5 4.0 3.0 3.0 2.5 2.0 2.0 1.5 1.0 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar/13 Sep/13 Mar/14 Sep/14 Mar/15 Sep/15 Spot price - DDR3 4Gb 512Mx8 1600MHz Spot price - 64GB MLC (8Gx8)

Source: DRAM eXchange, Daiwa Research Source: DRAM eXchange, Daiwa Research

DRAM: technology migration roadmap comparison 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E SEC 25nm 20nm 1xnm

SK Hynix 29nm 25nm 21nm

Micron 3x 2x 20nm

Source: Company, Daiwa forecasts

NAND: technology migration roadmap comparison 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E SEC 19nm 16nm 1znm V-NAND V24/V32 V48 V64 Toshiba 1x 1y 1Z V-NAND V48 Micron 20nm 16nm V-NAND V32/48 SK Hynix 20nm 16nm 1znm V-NAND V36 48

Source: Company, Daiwa forecasts

Logic: technology migration roadmap comparison 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Intel 32nm HKMG 22nm FF 14nm FF 10nm FF 7nm

TSMC 40/45nm 28nm SiON/HKMG 20nm SOC / 16nm FF 10nm FF 7nm

SEC 45nm 32/28nm 20nm 14nm FF 10nm FF 7nm

Source: Company, Daiwa forecasts

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Korea Technology Sector: 15 October 2015

Table of contents

Global memory market ...... 4 Supply constraints to drive market recovery from 2H16E ...... 4 Demand ...... 4 Supply ...... 8 Impact of potential new entrants from China ...... 10 Technological inflection point coming in 2016 ...... 14 DRAM ...... 14 NAND ...... 15 Logic ...... 15 Implications for the Korea Tech Sector ...... 17 Risks to our Positive sector stance ...... 19

Company Section Samsung Electronics ...... 20 SK Hynix ...... 43

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Korea Technology Sector: 15 October 2015

Global memory market Supply constraints to drive market recovery from 2H16E We expect supply While we expect memory demand to remain subdued for major applications, the memory constraints to drive supply-demand balance should improve and the market should recover from 2H16 due to market recovery constraints on supply growth stemming from slow technology migration.

Demand On our forecasts, demand for major applications, such as smartphones, PCs, TVs and tablets, will be stagnant until 2017. Thereafter, we believe overall demand will be spurred by increasing demand from the mid-range and low-end segments on the back of increased content in mobile devices. With the onset of new “form factors” (eg, foldable displays) for the high-end mobile segments, as well as the further commercialisation of the Internet of Things (IoT) (eg, smart cars), we expect the market to return to an upward trajectory.

PC, TV, tablet and smartphone production growth

60% 53% 42% 40% 28%

20% 13% 9% 9% 7% 4% 3% 0% -1% -1% -6% -2% (20%) -11% -8% 2013 2014 2015E 2016E 2017E TV PC Tablet Smartphones

Source: Daiwa Research

At the product level, we highlight the following factors as central to our expectation of subdued global memory demand until 2017:

 Due to cannibalisation from smartphones and tablets, we expect demand for PCs to continue to decline until 2017. At its big event on 9 September, Apple unveiled, among other products, a flagship 12.9” tablet, the iPad Pro, which in some respects offers performance equivalent to that of a traditional PC. In this context, we believe that the traditional PC market will remain sluggish, and new form factors, such as the Stick PC, will be needed to unlock growth in the market on a long-term basis.

Apple iPad Pro Apple iPad Pro: specs

Operating System iOS9

Screen 12.9"

Resolution 2732x2048, 264ppi

Display Retina HD

Chipset(RAM) A9 (64bit architecture) M9 motion processor

Storage (GB) 4GB Rear:8MP Camera Front: 1.2MP Battery 11,000mAh

Color Silver/Gold/Space Gray

Size (mm) 305.7 x 220.6 x 6.9mm

713g (Wi-Fi) Weight (g) 723g (Wi-Fi + Cellular)

Source: Apple Source: Apple Note: iPad Pro runs MS Office with functionality almost on par with that of a traditional PC

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Korea Technology Sector: 15 October 2015

New form factors will The Stick PC (aka PC on a Stick) is a small-factor device that can be plugged into a TV or likely be needed to display and used for light productivity work. Given this form factor’s low price and high enhance PC demand mobility, we think users could ultimately own multiple Stick PCs, using each for its own specific purpose.

Stick PC: new “form factor”

Source: Intel

Stick PC: specs

Intel Google

Product STICK1A32WFC ASUS Chromebit Price USD149 USD100 OS Window 8.1 with Bing 32-bit Chrome OS System Memory 2GB DDR 3L 2GB Flash Storage 32GB eMMc 16GB Processor Intel Atom processor Z3735F Rockchip RK3288 quad-core processor Intel HD Graphics Graphics ARM Mali-T764 graphics 1x HDMI 1.4a Integrated 802.11bgn Wireless Wi-Fi Peripheral connectivity Bluetooth 4.0 Bluetooth Micron SD card Slot Release date 24 April 2015 Within 2015

Source: Company, Daiwa Research

 We expect demand for smartphones to be lackluster in the face of waning differentiation at the high end of the market. In our view, demand growth, when it does come through, is likely to come largely from growth in the mid-range and low-end segments, particularly in emerging markets. But, overall, we think the growth rate will be lower than it has been in the past.

Global smartphone shipments (m)

2,000 45%

1,500 30%

1,000

15% 500

0 0% 2013 2014 2015E 2016E 2017E

Smartphones YoY % (RHS)

Source: Daiwa estimates and forecasts

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Korea Technology Sector: 15 October 2015

With the onset of new form factors, such as foldable displays, in the high-end mobile segment, together with the further commercialisation of the IoT (eg, smart cars) from 2017, we expect mobile demand to return to an upward trajectory.

 After SEC adopted edge displays in its Galaxy Note 4 and 6 Edge (Plus), we see a high possibility that the company will come up with a new pilot mobile device featuring a foldable display in 2016, and embark on production of related products in earnest from 2017.

 According to IHS Technology, foldable displays will be gradually adopted in an expanding range of mobile devices, such as tablet PCs and smartphones, starting from 2016.

New form factor: foldable display New form factor: foldable display (2)

Source: SEC Source: Nokia

Flexible display market: production forecasts by form factor (m) 400 350 300 250 183 200 131 92 150 56 100 30 50 0 2016E 2017E 2018E 2019E 2020E Flat Curved Bendable Foldable Rollable Stretchable

Source: IHS, Daiwa forecasts

 We forecast the value of the global IoT market to see a CAGR of around 90% over 2014-18, from USD69bn in 2014 to USD882bn by 2018. In our view, IoT devices were in their infancy during the 2010-14 period, since industry standards were still being established in many market segments. We look for demand growth momentum for IoT to take off in 2016, with the size of the market by 2018 exceeding USD880bn, ie, far greater than the size of the mobile computing devices (MCD) market in the same year.

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Korea Technology Sector: 15 October 2015

Demand market forecast: IoT vs MCD (USDbn) 2,000

1,500 MCD-IoT crossover 1,000

500

0 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E MCD IoT

Source: Daiwa Research Note: MCD includes smartphones and tablet PCs

 Factoring in IoT, MCDs and servers, together with notebooks (NBs) and other cloud- related peripheral devices such as switches, routers, gateways and HDDs, we estimate the Big Data-enabled market was worth USD661bn in 2014, a rise of 16% YoY.

Big Data-enabled market: forecast growth trend (USDbn) 3,000

2,500

2,000

1,500

1,000

500

0 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E MCD IoT Server Others*

Source: Daiwa Research Note: MCD=smartphones + tablets; Others include NBs and cloud-related devices such as switches, HDDs, routers and gateways

We look for mid- As for memory demand, we expect increasing demand to come from the mid-range and range/low-end low-end smartphone segments, backed by increased content growth in mobile devices. smartphone to drive memory demand  Compared with the robust growth of previous years, we expect the increase in DRAM content in smartphones to be modest. On our forecasts, content growth for smartphones will be 18.9% YoY for 2017, compared with 27.2% YoY in 2014.

 We expect NAND demand to be more solid, as solid state drives (SSDs) are rapidly replacing hard disk drives (HDDs) in both the client PC and enterprise PC segments. On our forecasts, SSD penetration of mobile PCs will increase to 50.1% in 2017, from 24.9% in 2014.

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DRAM: content growth (MB per system, YoY %) by application NAND: content growth (MB per system, YoY %) by application

50% 60%

40% 40%

30% 20%

20% 0%

10% (20%)

0% 2013 2014 2015E 2016E 2017E (40%) 2013 2014 2015E 2016E 2017E Server Smartphone tablet PC Tablet Handset SSD

Source: Daiwa, Gartner (DRAM Supply and Demand, Worldwide, Andrew Norwood, 29 Source: Daiwa, Gartner (DRAM Supply and Demand, Worldwide, Andrew Norwood, 29 September 2015) September 2015)

SSD penetration: client PC market SSD penetration: enterprise PC market

(m) (m) 160 80% 30 40%

25 120 60% 30% 20

80 40% 15 20%

10 40 20% 10% 5

0 0% 0 0% 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2012 2013 2014 2015E 2016E 2017E 2018E 2019E SSDs SSD penetration rate (RHS) Enterprise SSD SSD % penetration rate (RHS)

Source: Gartner (Hard-Disk Drives, Worldwide, 2012-2019, John Monroe, 26 August 2015) Source: Gartner (Hard-Disk Drives, Worldwide, 2012-2019, John Monroe, 26 August 2015)

On our forecasts, demand bit growth for DRAM will be 24% YoY for 2015 and 22% YoY for 2016, while demand bit growth for NAND will be 44% YoY for 2015 and 36% YoY for 2016.

Supply While we expect memory demand to remain subdued for major applications, we believe the memory supply-demand balance will improve, paving the way for a market recovery from 2H16. Central to our expectation here is that supply growth will be mitigated by a slowing of technology migration in the face of technology hurdles.

DRAM We expect DRAM supply In the DRAM market, we expect supply growth to be mitigated by prolonged life cycles, growth to decline in 2016 largely owing to slow technology migration, a trend we expect to materialise around mid- 2016. As we see it, supply growth will slow as a result of delays in the top-tier players’ shift to 1xnm processes and second-tier players’ shift to the 20nm process. Because of these likely delays in geometry migration, we also expect capacity expansion to be lacklustre in 2016.

Our expectation of slowing technology migration is premised on: 1) weak demand growth, 2) increased capex burdens set against limited output growth, and 3) technological hurdles. In sum, we forecast DRAM industry supply bit growth of 23% YoY in 2015 and 21% YoY in 2016.

SEC  We believe that SEC will commence mass production at 1xnm in 2H16, with limited capacity. Therefore, we expect the life cycle for the 20nm process, currently SEC’s flagship process, to be drawn out (ie, relative to the previous process) until 2H16.

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Korea Technology Sector: 15 October 2015

According to our research in the market, aside from investing in a 40k expansion for its Line17 (full capacity: 80k at 20nm), SEC has not decided whether to increase its capacity in 2016. Hence, we expect its capex to focus primarily on the process transition from 20nm to 1xnm, with mass production of 1xnm not starting until 2H16. As a result of this slower-than-expected geometry migration, we expect SEC’s bit growth in 2016 and 2017 to fall short of the growth rate for 2015.

SEC: DRAM process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 35nm 28nm 25nm 20nm 1xnm

Source: Company, Daiwa Research

SK Hynix  SK Hynix is looking to expand its output of mobile DRAM produced at the 25nm process as a proportion of its product mix. However, given lingering issues with larger DDR4 chip sizes and production yields, we foresee only limited cost reductions materialising in 2H15. Furthermore, as the company’s relocation plans for its new M14 line have been delayed due to safety issues, we expect the conversion to the 20nm process to proceed only gradually over the course of 2016. Moreover, we believe that its investment in DRAM will be limited, as SK Hynix will also need to consider sizable capex for 3D V- NAND production in 2016.

SK Hynix: DRAM process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E

38nm 29nm 25nm 21nm 1xnm

Source: Company, Daiwa Research

Micron  We expect Micron’s supply growth in 2016 to be limited due to delays in the 20nm process for mobile DRAM. And, as with SK Hynix, we believe Micron will need to consider sizable capex for 3D V-NAND in 2016, thereby limiting the resources that it can allocate to DRAM.

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Korea Technology Sector: 15 October 2015

Micron: DRAM process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 4x 3x 2x 20nm

Source: Company, Daiwa forecasts

DRAM bit growth comparison (YoY %) 2014 2015E 2016E SEC 57% 33% 25% SK Hynix 33% 24% 21% Micron 16% 0% 13% Total 37% 23% 21%

Source: Companies, Daiwa forecasts

Impact of potential new entrants from China New entrants could form The market is constantly trying to get a handle on the potential impact of new entrants to strategic alliances or the DRAM industry. However, in our view, it would be vital for any new entrant to either: 1) acquire existing players form a strategic alliance with 1 of the existing 3 major players (SEC, SK Hynix and Micron), or 2) acquire an existing player equipped with leading-edge technology.

Given the competitive landscape as it now stands, we think it would be very difficult for a new entrant to acquire existing players in view of their sheer size. But, for an entrant looking to go it alone, we believe it would take perhaps 3 years to be fully equipped for production in a fast-paced environment. Hence, in our view, potential new entrants would pose only a limited threat to the market supply picture and indeed the competitive landscape in the near term.

As far as China is concerned, we believe its semiconductor industry will focus on beefing up its fabless business, centring on the mobile area, and foundry business. Moreover, we believe that China’s semiconductor industry as a whole will push ahead by implementing a number of strategies revolving around M&A and technology adoption.

China corporates’ attempts to acquire global semiconductor players Date Details Jun 2014 Chinese government announces plans to raise CNY120bn (USD19bn) for IC investment fund Sep 2014 XMC, a China-based wafer foundry house, ties up with Spansion to develop and produce 3D NAND flash chips Mar 2015 ISSI enters agreement to be acquired by Chinese investment consortium for USD640m SMIC announces it will form a new company with Qualcomm to help it develop/produce new generations Jun 2015 of advanced semiconductors Tsinghua Unigroup offers Micron, the largest US memory chip maker, a buyout deal for USD21 per share, Jul 2015 equivalent to USD23bn (19.3% premium) Aug 2015 Chinese state firms, including Leadcore and PDSTI, weigh making offers for Marvell's mobile unit Advanced Technology Investment (ATIC), a major shareholder of Globalfoundries (GF), is reportedly ready to sell its Aug 2015 holding in the company. China-based Hua Capital Management is reported to have approached GF with a view to acquiring it Sep 2015 China Electronics Corp. (CEC) is reported to be in preliminary talks US-based Atmel for USD8.50 per share Sep 2015 Tsinghua plans to take a 15% stake in Western Digital Source: Media reports, Daiwa Research

NAND NAND supply growth We expect industry-wide NAND supply to increase as a result of 1znm planar and TLC forecast to decrease in conversion by the major players through to 1H16. However, due to lingering issues with the 2016 planar process conversion beyond 1znm, we believe that most NAND players other than SEC will embark on 3D V-NAND production from 2H16. We expect supply growth to be

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Korea Technology Sector: 15 October 2015

limited due to the barriers posed by high initial costs and yield issues, particularly for the second-tier players. All told, we forecast NAND industry supply bit growth of 42% YoY in 2015 and 35% YoY in 2016.

SEC  SEC started producing 3D V-NAND in 2H14 and is planning to increase the production capacity of its Xian fab, which it is targeting to reach 80k per month by end-2015. Also, the company started mass production of 3rd-generation 48-layer Triple Level Cell (TLC) NAND, supplying enterprise and retail SSDs, in 3Q15.

SEC: NAND process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 35/27nm 21nm 19nm 16nm 1znm V24 V32 V48 V64

Source: Company, Daiwa Research

Toshiba  As for Toshiba, we expect its NAND supply to increase in 2H15 as it ramps up production at 1znm. The company plans to produce 48-layer 3D V-NAND at its Yokkaichi Fab in 2016, with sampling targeted to begin in 2015. However, we expect its supply growth to be limited initially, given the possibility of yield issues in the early stages. Separately, we think Toshiba’s capex plans for 2016 could be affected by the ongoing probe into the company’s finances.

Toshiba: NAND process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 24nm 1x 1y 1z V48

Source: Company, Daiwa Research

SK Hynix  As for SK Hynix, we believe that its NAND supply will increase in 2H15 on the back of its 1ynm-based TLC production, and we expect it to use part of its existing M10 line for 3D NAND production in 2016. SK Hynix is targeting to start producing 3D NAND in 2H16, depending on customers’ response, and, according to management, no decision has yet been made on the related capex.

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Korea Technology Sector: 15 October 2015

SK Hynix: NAND process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 41/32nm 26nm 20nm 16nm 1znm V36 V48

Source: Company, Daiwa forecasts

Micron  We expect Micron to produce 16nm-based TLC/SSD within 2H15, and the company is now sampling 32-layer based product. It plans to start producing second-generation products in 2H16.

Micron: NAND process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 34nm 25nm 20nm 16nm V32/48

Source: Company, Daiwa Research

NAND bit growth: breakdown by company (% YoY) 2014 2015E 2016E SEC 45% 55% 40% Toshiba 65% 32% 32% Micron 55% 24% 29% SK Hynix 58% 62% 30% Total 55% 42% 35%

Source: Companies, Daiwa Research

Given the current supply-demand imbalance stems from sluggish demand, we believe the oversupply situation and price declines will continue until 1H16 for both DRAM and NAND. However, we believe that supply increases will diminish considerably with the conversion to next-generation processes and new technology from 2H16 onward. Hence, we look for the supply-demand picture to start improving in 2H16.

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Korea Technology Sector: 15 October 2015

DRAM: supply-demand outlook NAND: supply-demand outlook

(1Gb eq. mn) (16Gb eq. m) 20,000 3.0% 20,000 3.0%

16,000 2.0% 16,000 2.0% 12,000 1.0% 8,000 12,000 1.0% 0.0% 4,000

8,000 0.0% 0 -1.0% 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Demand Supply S-D ratio (rhs) Demand Supply S-D ratio (rhs)

Source: Daiwa, Gartner (DRAM Supply and Demand, Worldwide, Andrew Norwood, 29 Source: Daiwa, Gartner (DRAM Supply and Demand, Worldwide, Andrew Norwood, 29 September 2015) September 2015)

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Korea Technology Sector: 15 October 2015

Technological inflection point coming in 2016

In our view, 2016 will bring a major technological inflection point, with the rise of 1xnm DRAM, 3D V-NAND and 10nm FF logic, and we expect the competitive landscape to be reshaped according to the technology gaps that will exist among the major players.

DRAM DRAM migration likely to EUV (Extreme Ultraviolet) lithography, widely seen as pivotal in the process conversion for slow across the industry DRAM to 1xnm (below 20nm), has not yet developed to the point it is ready for mass production. Hence, we expect a relatively slow process conversion to 1xnm by the leading company, given low efficiency as a result of its continued use of the existing ArF immersion lithography. Furthermore, we believe the second-tier companies will continue to struggle with process conversion to 20nm, as their issues with the current processes are unresolved. In our view, all the major players are likely to delay their geometry migration plans, which should cap overall industry supply.

 We expect SEC to adopt QPT (Quadruple Patterning Technology) using its existing ArF immersion lithography for the production of 1xnm DRAM in 2016. However, we think it is likely to be difficult to secure high yields due to the increased number of processes to be used, such as CVD (Chemical Vapor Deposition)/Etching.

SEC: trade-off between technology and capex Micron: complexity creating barriers to supply growth 20mn

x1.8 50mn x2.0

100mn x1.1

x1.0 x1.5 Turnaround time

CAPEX 30nm 25nm 20nm 1xnm

Number of photo masks Wafer outs per sqm of fab space

Source: SEC, Daiwa Research Source: Micron, Daiwa Research

 Despite the likelihood of a slower process migration to 1xnm, we believe SEC’s technology gap over the second-tier players will be secured by delays in process conversion to 20nm and the limited resources available to SK Hynix and Micron to invest in V-NAND in 2016.

 Due to the likely delays in the conversion to 1xnm DRAM, we think it is possible for leading companies to accelerate the development of next-generation memory such as MRAM.

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SEC: 3-pronged approach to sub-20nm breakthrough

Source: SEC

NAND We expect SEC to gain Due to the increased difficulties of planar process migration beyond the 1znm process, we market share in NAND do not expect the 3D V-NAND conversion to start in earnest until 2H16. The second-tier companies are unlikely to have the requisite resources for investment or to capture decent yields in the initial stages. As a result, SEC’s market leadership should be enhanced, given it is already mass-producing SSD based on 48L 3D V-NAND and should end up with an ever greater technological edge over the second-tier players. Supported by its ability to produce 48L-based TLC SSD (80K per month capacity by end-2015), SEC looks well placed to win more market share, in our view.

Node transition: cost 3D NAND: manufacturing considerations

Addtional tools needed Additional space needed Additional space needed for conversion for conversion for conversion

3-4x >4x 2-3x

24nm 20nm 16nm Additional 3D NAND 3D NAND Planar Planar Planar Planar Shrink 32-Tier Next Gen 2D BiCS 2D BiCS 2D BiCS Source: Micron, Daiwa Research Source: Sandisk, Daiwa Research

On 29 July 2015, Intel and Micron jointly announced a new type of memory, 3D Xpoint, which spurred market expectations regarding the early adoption of next-generation memory. However, we believe there remain several uncertainties at play, including issues regarding mass production and costs. Hence, at this juncture, we believe this development will have only a limited impact on the market.

Logic We expect the competition between SEC and TSMC in developing leading-edge processes to remain intense over our forecast horizon. While the market had been expecting Intel to make the transition to advanced foundry business at the 10nm process, Intel announced during its 2Q earnings release that the transition would be deferred from 2016 to 2H17. Hence, in our view, the foundry business going forward will mainly split between SEC and TSMC, both using leading-edge process technology, with Intel lagging in the adoption of the 10nm process.

 We believe SEC is well placed to expand its customer base in the foundry business as it has secured technology leadership after transitioning to 14nm FF.

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Korea Technology Sector: 15 October 2015

Technology migration roadmap comparison 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Intel 32nm HKMG 22nm FF 14nm FF 10nm FF 7nm

TSMC 40/45nm 28nm SiON/HKMG 20nm SOC / 16nm FF 10nm FF 7nm

SEC 45nm 32/28nm 20nm 14nm FF 10nm FF 7nm

Source: Daiwa forecasts

SEC should be able to  In April 2014, SEC and GlobalFoundries announced a strategic collaboration through expand its customer which their major customers could enjoy multi-sourcing options and SEC could lessen base in foundry its capex burden. With technology migration becoming ever more difficult, we believe such moves are positive, as the Samsung camp should be able to attract more customers as well as second-tier foundry players that have difficulty developing leading- edge technology on their own.

 Furthermore, through SEC’s aggressive adoption of single-chip solutions (AP+baseband) in the SoC business, we believe it will be able to expand its product portfolio to the mass smartphone market and therefore sustain its earnings growth from 2016.

SEC: global FinFET capacity

Source: SEC/Global Foundries

TSMC may face a  We also expect TSMC to maintain its competitive position in the foundry industry. challenge maintaining its However, due to the likely departure of a major customer over our forecast horizon, we strong earnings growth believe that TSMC may face a challenge maintaining the strong earnings growth it recorded after its success with the 28nm process. Given TSMC’s slow ramp-up of 16/16+nm capacity compared with that of SEC, we think it could be hard for the company to secure high margins from what is effectively trailing-edge technology. We believe TSMC had a short life cycle issue with its 20nm capacity and may have difficulty securing demand for its 16nm capacity.

Global foundry players: market share 60%

50%

40%

30%

20%

10%

0% 2008 2009 2010 2011 2012 2013 2014 TSMC UMC Samsung+ GF SMIC

Source: Gartner (Market Share: Semiconductor Foundry, Worldwide by Samuel Wang, 14 April 2015)

16

Korea Technology Sector: 15 October 2015

Implications for the Korea Tech Sector

SEC is our favoured In our view, SEC will be the main beneficiary of the major trend changes that we forecast stock within the Korea for the global technology industry. Technology sector…  DRAM. We believe SEC will be able to secure its market share and profitability on the back of its adoption of leading-node technology one year ahead of its rivals in the DRAM segment.

 NAND. We believe that SEC will be able to build its market share and profitability by widening the cost gap over its competitors, backed by its leadership in V-NAND technology and capacity.

 Logic. On the back of its lead in terms of process and capacity, SEC should be able to gain market share and secure profitability by expanding its foundry customer base. Furthermore, as AP plays a pivotal role in the smartphone segment, we think SEC looks well placed to expand its product portfolio and increase its utilisation rate through the aggressive adoption of single-chip solutions (AP+baseband) for the SoC business within the logic segment.

We believe that SK Hynix, currently the no. 2 player globally in DRAM, will also benefit from the recovery of that market in 2H16. However, we see limited upside for SK Hynix in NAND, since in our view it is not well prepared for 3D V-NAND conversion currently.

…and we like it on a From a regional perspective, we prefer SEC over TSMC as we believe SEC will recover regional basis too profitability by maintaining stable earnings growth from its memory business and wider foundry customer base from System LSI, whereas we think TSMC may face challenges in maintaining strong earnings growth due to the departure of its main customer base.

Furthermore, SEC’s shareholder return activities have to date been modest compared with those of TSMC (SEC had a dividend payout of 13.0% for 2014, compared with TSMC’s 29.5% for the same period). Hence, we would see any news of an increase in SEC’s targeted shareholder returns as a potential share-price catalyst.

17

Korea Technology Sector: 15 October 2015

Global technology: valuation comparisons Company Ticker Rating Price Mkt cap P/E (x) P/BV (x) ROE (%) EV/EBITDA (x) Div yield (%) (Bloomberg) (Local curr) (USDm) FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Coverage Samsung Electronics 005930 KS Buy 1,254,000 161,070 8.7 8.4 1.0 1.0 12% 12% 2.4 2.0 1.6% 1.6% SK Hynix 000660 KS Buy 36,400 23,108 5.8 7.6 1.2 1.0 23% 15% 2.5 2.6 1.1% 1.1%

Semiconductor

Samsung Electronics 005930 KS Buy 1,254,000 161,070 10.1 8.4 1.0 1.0 12% 12% 2.4 2.0 1.6% 1.6% SK Hynix 000660 KS Buy 36,400 23,108 5.8 7.6 1.2 1.0 23% 15% 2.5 2.6 1.1% 1.1% Micron MU US NR 18.82 20,390 7.1 12.8 1.7 1.5 24% 11% 4.3 4.9 0.0% 0.0% Sandisk SNDK US NR 68.70 14,045 22.1 16.2 2.6 2.5 8% 13% 10.5 8.7 1.7% 1.8% Intel INTC US Outperform 32.80 155,931 14.3 13.9 2.6 2.5 19% 18% 6.8 6.4 2.9% 3.0% Mediatek 2454 TT Buy 272.50 13,170 13.9 12.0 1.7 1.8 10% 12% 7.4 6.8 8.3% 7.3% TSMC 2330 TT Outperform 136.50 108,822 11.4 12.7 2.8 2.5 23% 21% 5.7 5.5 3.4% 3.3% Qualcomm QCOM US Underperform 58.63 92,120 12.7 12.6 3.0 2.9 19% 22% 8.7 9.0 3.0% 3.3% Nanya 2408 TT N/R 40.50 3,043 5.5 7.5 1.8 1.6 37% 21% na na 4.2% 2.9% Average 11.4 11.7 3.3 3.1 28% 26% 8.5 8.2 2.9% 2.7%

Handset

Apple AAPL US Outperform 110.21 628,497 12.1 11.3 4.9 4.0 40% 38% 5.9 5.4 2% 2% LG Electronics 066570 KS N/R 46,150 6,636 16.3 10.6 0.7 0.6 4% 6% 5.1 4.5 1% 1% HTC 2498 TT Underperform 72.20 1,836 na na 0.9 1.0 na na na na na na Lenovo 992 HK Hold 7.49 10,736 12.4 na 2.5 2.6 0% na 6.4 13.0 0% 0% ZTE 763 HK N/R 18.48 10,929 17.4 15.3 2.0 1.8 13% 14% 12.1 10.8 1% 2% Average 14.6 12.4 2.2 2.0 14% 19% 7.4 8.4 1.0% 1.1%

Display

LG Display 034220 KS N/R 22,750 7,153 6.2 8.3 0.7 0.6 10.8% 7.3% 1.8 1.9 2.3% 2.3% Innolux 3481 TT N/R 11.00 3,387 5.1 8.6 0.5 0.4 9.1% 4.9% 1.6 1.8 5.2% 3.8% AUO 2409 TT N/R 10.35 3,082 6.7 10.3 0.5 0.5 7.6% 4.8% 2.2 2.4 4.5% 3.1% Japan Display 6740 JP N/R 365.00 1,848 na 11.1 0.5 0.5 -2.2% 5.0% 2.6 1.7 0.0% 0.8% Sharp 6753 JP Underperform 145.00 2,077 na na 1.3 1.6 -0.1% -0.1% 5.4 7.3 0.0% 0.0% Average 6.0 9.6 0.7 0.7 5% 4% 2.7 3.0 2.4% 2.0%

Consumer Electronics

LG Electronics 066570 KS N/R 46,150 6,636 16.3 10.6 0.7 0.6 4.3% 6.3% 5.1 4.5 0.8% 0.9% Sony 6758 JP Buy 3,129 33,256 na 20.3 1.6 1.4 -5.9% 7.5% 10.8 5.1 0.0% 0.7% Panasonic 6752 JP Hold 1,298 26,811 16.0 14.9 1.7 1.5 11.2% 10.3% 4.8 4.1 1.3% 1.7% Whirlpool WHR US N/R 151.51 11,881 12.6 10.1 2.3 na 17.2% na 7.1 5.8 2.3% 2.4% Electrolux ELUXB SS N/R 235.30 8,962 22.5 14.9 3.8 3.3 17.2% 23.0% 9.6 8.1 2.8% 2.9% Average 16.9 14.2 2.0 1.7 9% 12% 7.5 5.5 1.5% 1.7%

Source: Daiwa forecasts for SEC, Hynix, HTC, Lenovo, Mediatek, TSMC; Bloomberg for others, Pricing as of 14th October 2015.

18

Korea Technology Sector: 15 October 2015

Risks to our Positive sector stance

The main risk to our Positive stance on the Korea Technology Sector would be the potential market entry of China players, either through acquisitions or strategic alliances with existing players. Recently, Tsinghua Unicom expressed interest in acquiring stakes in Micron and WDC, signalling its potential entry to the memory market. If China companies do go on to form strategic alliances or acquire existing memory players, they would likely pose a threat not only to the Korea memory players but also to the global memory industry.

A secondary risk to our sector view would be a further decline in demand driven by continued global macro headwinds and the associated weakness in the China economy. If the present economic outlook persists, we expect oversupply risk to linger in the memory market.

19

Korea Information Technology 15 October 2015

(005930 KS) Samsung Electronics Samsung El ectronics

Target price: KRW1,470,000 Share price (14 Oct): KRW1,254,000 | Up/downside: +17.2%

Initiation: winner from technological inflection point SK Kim (82) 2 787 9173  Solid earnings outlook driven by component business (semi/display) [email protected]  Potential shareholder returns could spur share price Brian Cho (82) 2 787 9182  Initiating with Buy (1) call, 12-month TP of KRW1,470,000 [email protected]

Investment case: Samsung Electronics (SEC) shares, trading at a 12- Share price performance month-forward PBR of 1.1x, or near 2SD below its past-5-year average, are (KRW) (%) now in deep value territory, in our view. Backed by its competitive edge in 1,550,000 130 the component business, we forecast SEC’s operating margin to widen 1,425,000 120 from 13.2% in 2015 to 15.6% in 2017. Given SEC’s role as the core arm of 1,300,000 110 1,175,000 100 the Samsung group, if management can come up with clear guidance on 1,050,000 90 shareholder return, we think it will ease lingering market concerns over Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 cash management and corporate governance. SEC is now Daiwa’s top pick Samsng Ele (LHS) Relative to KOSPI (RHS) in the regional tech space. 12-month range 1,067,000-1,503,000 Catalysts: Semicon business to remain the most competitive. We Market cap (USDbn) 161.07 believe SEC will maintain its outstanding operating margin in memory by 3m avg daily turnover (USDm) 286.30 leveraging its technology and capacity leadership in DRAM and 3D V- Shares outstanding (m) 147 Major shareholder National Pension Service (8.0%) NAND. On the System LSI (SLSI) side, SEC aims to expand its customer base and gain market share by establishing its technological edge from Financial summary (KRW) 14nm FF. Year to 31 Dec 15E 16E 17E Revenue (bn) 201,693 199,790 211,915 Tough going in mobile, but should maintain 10% margin through cost Operating profit (bn) 26,615 26,866 33,017 Net profit (bn) 21,215 22,076 27,225 rationalisation. Despite ongoing concerns in the market over muted Core EPS (fully-diluted) 144,027 149,875 184,831 demand and increased competition in the smartphone space, we expect EPS change (%) (8.1) 4.1 23.3 SEC’s mobile business to maintain an operating margin of around 10% Daiwa vs Cons. EPS (%) 4.0 5.6 22.1 through hardware differentiation, backed by strong vertical integration PER (x) 8.7 8.4 6.8 Dividend yield (%) 1.6 1.6 2.0 (flexible/foldable display, Exynos SoC, premium memory) and operational DPS 20,000 20,000 25,000 efficiency. PBR (x) 1.0 1.0 0.9 EV/EBITDA (x) 2.4 2.0 1.4 ROE (%) 12.4 11.7 13.0 Potential increase in shareholder returns would assuage doubts over Source: FactSet, Daiwa forecasts capital management. Market concern over corporate governance and the perception that SEC is holding excessive net cash (KRW50.5tn as of 2Q15), thereby crimping its ROE, have weighed on the share price. However, we expect SEC to consider delivering clear guidance on targeted shareholder returns, supported by buybacks and higher dividends.

Valuation: We initiate coverage of SEC with a Buy rating and 12-month target price of KRW1,470,000. Our target multiple is 1.2x 2016E BVPS, based on SEC’s average 12-month-forward PBR in 3Q11, when the DRAM market was going through a steep downcycle prior to recovering.

Risks: The main risk to our call on SEC would be the potential entrants of China corporates to the memory industry. A secondary risk would be a sharp decline in smartphone demand.

See important disclosures, including any required research certifications, beginning on page 58

Samsung Electronics (005930 KS): 15 October 2015

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook SEC: revenue and operating margin We forecast SEC’s revenue to decline by -2.2% YoY in (KRWbn) 2015 and -0.9% YoY in 2016, due mainly to weak 220,000 20% smartphone sales and declining ASPs. However, our 200,000 forecasts call for revenue growth of 6.1% YoY in 2017, on 15% the back of the following factors: 1) the recovery that we forecast for the memory market from 2H16, 2) sustainable 180,000 revenue/OP growth on the System LSI side, together with 10% an expanding customer base, 3) new mobile product 160,000 launches, and 4) the rise of flexible/foldable displays. 140,000 5% 2014 2015E 2016E 2017E Sales OPM (RHS)

Source: Company, Daiwa forecasts

Valuation SEC: 12-month-forward PBR Our PBR-based 12-month target price is KRW1,470,000. (x) Hence, we believe SEC shares are in deep value territory, 3.0 trading at a 12-month-forward PBR of 1.1x, near 2SD 2.5 below the stock’s past-5-year-average. The market’s 2.0 concerns over SEC’s mobile business, net cash hoard 1.5 (KRW50.5tn as of 2Q15), and governance issues have all weighed on the share price in recent months, in our view. 1.0 0.5 However, we expect SEC to be the main beneficiary of the Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 technological inflection point and memory market recovery 12mths +2STDV +1STDV Fwd (x) that we forecast for 2H16. Moreover, we highlight the Average -1STDV -2STDV potential for consistent shareholder returns in the coming Source: Company, Daiwa forecasts years as a potential share-price catalyst.

Earnings revisions SEC: consensus earnings revision trend

The Bloomberg consensus forecasts for SEC’s 2016 (KRW tr) operating profit and net profit have been revised down in 50 recent months in the face of concerns over the IM division 45 (results have undershot the market’s expectations in recent 40 quarters) and the recent decline in DRAM prices (the 35 semiconductor and IM divisions contribute the majority of 30 SEC’s operating profit). Our operating and net profit forecasts are close to the 2016E consensus (-1.4% and 25 0.6%, respectively), reflecting our expectation for a 20 recovery for the semi and IM divisions only from 2H16. But 15 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 we are above the consensus operating and net profit Consensus OP Consensus NP forecasts by 15.3% and 16.4% for 2017, by which time the Source: Bloomberg, Daiwa forecasts recovery should be well under way and given the likely rise of new “form factor” products from the IM division.

21

Samsung Electronics (005930 KS): 15 October 2015

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E DRAM bit growth (%) n.a. n.a. n.a. 23.1 57.1 32.7 24.8 15.3 DRAM ASP (%) n.a. n.a. n.a. (5.7) (8.1) (15.5) (23.8) (8.0) NAND bit growth (%) n.a. n.a. n.a. 55.5 45.1 55.2 40.8 38.2 NAND ASP (%) n.a. n.a. n.a. (24.8) (26.9) (28.8) (27.9) (20.5) LCD Area (%) n.a. n.a. n.a. (6.2) 17.1 0.7 5.5 6.6 LCD Area ASP (%) n.a. n.a. n.a. (22.2) (18.2) (5.5) (18.8) (16.8) OLED Unit (%) n.a. n.a. n.a. 40.1 (10.7) 26.6 31.2 21.6 OLED ASP (%) n.a. n.a. n.a. (3.1) (13.1) (1.3) (10.2) (2.0)

Profit and loss (KRWbn) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Semiconductor 37,639 36,990 34,890 37,437 39,730 48,098 49,634 55,309 IT & Mobile Communication 40,070 67,440 105,840 138,817 111,764 103,018 96,168 99,201 Other Revenue 76,922 60,572 60,374 52,439 54,712 50,577 53,989 57,405 Total Revenue 154,630 165,002 201,104 228,693 206,206 201,693 199,790 211,915 Other income 13,149 16,014 15,622 16,445 18,053 20,999 22,278 23,132 COGS (102,667) (112,145) (126,652) (137,696) (128,279) (124,051) (121,597) (124,181) SG&A (26,243) (27,422) (33,870) (39,892) (38,517) (37,123) (36,358) (39,099) Other op.expenses (19,413) (21,945) (27,155) (30,765) (32,439) (34,903) (37,247) (38,750) Operating profit 19,456 19,504 29,049 36,785 25,025 26,615 26,866 33,017 Net-interest inc./(exp.) (23) 62 246 842 1,240 1,117 1,648 2,338 Assoc/forex/extraord./others 2,055 848 619 737 1,610 1,047 1,312 1,295 Pre-tax profit 21,489 20,413 29,915 38,364 27,875 28,780 29,826 36,651 Tax (3,182) (3,425) (6,070) (7,890) (4,481) (7,141) (7,334) (9,012) Min. int./pref. div./others (347) (367) (660) (654) (312) (424) (415) (413) Net profit (reported) 17,959 16,621 23,185 29,821 23,083 21,215 22,076 27,225 Net profit (adjusted) 17,959 16,621 23,185 29,821 23,083 21,215 22,076 27,225 EPS (reported)(KRW) 121,921 112,840 157,403 202,453 156,705 144,027 149,875 184,831 EPS (adjusted)(KRW) 121,921 112,840 157,403 202,453 156,705 144,027 149,875 184,831 EPS (adjusted fully-diluted)(KRW) 121,921 112,840 157,403 202,453 156,705 144,027 149,875 184,831 DPS (KRW) 10,000 5,500 8,000 14,300 20,000 20,000 20,000 25,000 EBIT 19,456 19,504 29,049 36,785 25,025 26,615 26,866 33,017 EBITDA 30,850 33,096 44,671 53,230 43,078 47,614 49,144 56,149

Cash flow (KRWbn) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 21,489 20,413 29,915 38,364 27,875 28,780 29,826 36,651 Depreciation and amortisation 11,394 13,592 15,622 16,445 18,053 20,999 22,278 23,132 Tax paid (3,182) (3,425) (6,070) (7,890) (4,481) (7,141) (7,334) (9,012) Change in working capital (1,394) (1,458) (2,341) (1,483) 2,690 (5,951) 314 (1,871) Other operational CF items (4,480) (6,205) 847 1,270 (7,163) 2,052 303 320 Cash flow from operations 23,827 22,918 37,973 46,707 36,975 38,740 45,387 49,219 Capex (21,619) (21,966) (22,965) (23,158) (22,043) (28,000) (22,563) (25,281) Net (acquisitions)/disposals 1,228 380 644 377 386 262 224 224 Other investing CF items (3,594) 473 (9,000) (21,967) (11,149) 3,746 0 0 Cash flow from investing (23,985) (21,113) (31,322) (44,747) (32,806) (23,993) (22,339) (25,058) Change in debt 1,381 3,871 249 (3,735) 105 (1,055) (1,894) (1,543) Net share issues/(repurchases) 0 0 0 0 (2,446) 0 0 0 Dividends paid (1,497) (827) (1,265) (1,250) (2,234) (3,076) (3,017) (3,017) Other financing CF items 1,870 (452) (848) 847 (928) (708) 695 1,547 Cash flow from financing 1,755 2,592 (1,865) (4,137) (5,503) (4,839) (4,215) (3,013) Forex effect/others 180 665 144 330 250 402 445 461 Change in cash 1,776 5,062 4,931 (1,846) (1,084) 10,310 19,278 21,609 Free cash flow 2,208 952 15,008 23,550 14,932 10,740 22,824 23,937 Source: FactSet, Daiwa forecasts

22

Samsung Electronics (005930 KS): 15 October 2015

Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 22,480 26,878 37,448 54,496 61,817 80,896 99,637 120,696 Inventory 13,365 15,717 17,747 19,135 17,318 19,561 19,174 19,581 Accounts receivable 19,215 21,989 23,861 25,256 24,695 26,344 26,095 27,679 Other current assets 6,343 6,919 8,212 11,873 11,317 10,062 9,857 9,832 Total current assets 61,403 71,502 87,269 110,760 115,146 136,862 154,763 177,788 Fixed assets 52,965 62,044 68,485 75,496 80,873 76,258 77,596 80,866 Goodwill & intangibles 2,779 3,355 3,730 3,981 4,785 5,607 5,907 6,202 Other non-current assets 17,142 18,730 21,588 23,838 29,619 25,984 26,083 25,784 Total assets 134,289 155,631 181,072 214,075 230,423 244,710 264,348 290,639 Short-term debt 9,554 9,684 9,443 8,864 9,808 8,866 7,222 5,882 Accounts payable 9,149 10,277 9,489 8,437 7,915 6,854 6,719 6,862 Other current liabilities 21,242 24,358 28,001 34,014 34,291 32,038 31,648 31,600 Total current liabilities 39,945 44,319 46,933 51,315 52,014 47,759 45,588 44,343 Long-term debt 1,222 4,963 5,452 2,296 1,458 1,344 1,095 892 Other non-current liabilities 3,773 4,504 7,206 10,447 8,863 9,476 9,657 9,694 Total liabilities 44,940 53,786 59,591 64,059 62,335 58,579 56,340 54,930 Share capital 898 898 898 898 898 898 898 898 Reserves/R.E./others 84,692 96,702 116,197 143,545 161,284 177,980 197,040 221,248 Shareholders' equity 85,590 97,600 117,094 144,443 162,182 178,878 197,937 222,146 Minority interests 3,760 4,246 4,386 5,573 5,906 7,253 10,071 13,564 Total equity & liabilities 134,289 155,631 181,072 214,075 230,423 244,710 264,348 290,639 EV 168,433 167,524 157,761 140,529 134,836 115,930 98,030 79,233 Net debt/(cash) (11,705) (12,231) (22,553) (43,335) (50,552) (70,685) (91,320) (113,922) BVPS (KRW) 525,173 598,623 714,032 881,758 987,982 1,263,623 1,222,624 1,385,446

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 13.4 6.7 21.9 13.7 (9.8) (2.2) (0.9) 6.1 EBITDA (YoY) 39.3 7.3 35.0 19.2 (19.1) 10.5 3.2 14.3 Operating profit (YoY) 77.2 0.2 48.9 26.6 (32.0) 6.4 0.9 22.9 Net profit (YoY) 94.5 (7.4) 39.5 28.6 (22.6) (8.1) 4.1 23.3 Core EPS (fully-diluted) (YoY) 94.5 (7.4) 39.5 28.6 (22.6) (8.1) 4.1 23.3 Gross-profit margin 33.6 32.0 37.0 39.8 37.8 38.5 39.1 41.4 EBITDA margin 20.0 20.1 22.2 23.3 20.9 23.6 24.6 26.5 Operating-profit margin 12.6 11.8 14.4 16.1 12.1 13.2 13.4 15.6 Net profit margin 11.6 10.1 11.5 13.0 11.2 10.5 11.0 12.8 ROAE 23.2 18.2 21.6 22.8 15.1 12.4 11.7 13.0 ROAA 14.6 11.5 13.8 15.1 10.4 8.9 8.7 9.8 ROCE 21.3 18.0 23.0 24.7 14.7 14.2 13.0 14.4 ROIC 23.8 19.4 24.6 28.4 18.7 17.2 17.5 20.9 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 14.8 16.8 20.3 20.6 16.1 24.8 24.6 24.6 Accounts receivable (days) 43.7 45.6 41.6 39.2 44.2 46.2 47.9 46.3 Current ratio (x) 1.5 1.6 1.9 2.2 2.2 2.9 3.4 4.0 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 8.2 4.9 5.1 7.1 12.8 13.9 13.3 13.5 Free cash flow yield 1.2 0.5 8.1 12.7 8.1 5.8 12.4 13.0 Source: FactSet, Daiwa forecasts

Company profile

Samsung Electronics Co., Ltd. manufactures a wide range of consumer and industrial electronic equipment and products such as semiconductors, handsets, personal computers, peripherals, and etc.

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Samsung Electronics (005930 KS): 15 October 2015

Semicon: set to remain the most competitive

We look for SEC’s memory business to maintain its profitability on the back of the improved supply-demand balance that we forecast for 2H16. As for System LSI, we expect SEC to expand its customer base for foundry business after securing its technology leadership from 14nm FF. Furthermore, through the adoption of single-chip solutions (AP+baseband) within the SoC business, we believe that SEC will be able to improve earnings further. In sum, we forecast the semiconductor division to post an operating margin of 27.5% for 2015, 26.4% for 2016, and 30.3% for 2017.

Memory supply-demand balance to improve from 2H16 On our forecasts, demand for major applications, such as PCs, TVs and tablets, will remain subdued and oversupply will persist until 1H16. However, we foresee an improvement in the memory supply-demand balance as a result of reduced supply growth in the face of slower-than-planned technology migration, which we expect to pave the way for a market recovery from 2H16. This slow technology migration will, we think, result from: 1) weak demand growth, 2) an increased cost burden, and 3) technology difficulties.

DRAM DRAM OPM to improve We expect SEC’s DRAM operating margin to be subdued given lingering oversupply in the from 2H16 face of lacklustre demand from 2H15 to 1H16. However, we forecast its operating margin on DRAM to improve from 2H16, driven by a more stable DRAM price. On our forecasts, SEC’s DRAM operating margin will come in at 48.4% for 2015, 46.4% for 2016, and 50.4% for 2017.

 We consider SEC to be well placed to maintain its market leadership on the back of its cutting-edge technology. However, we expect the life cycle for the 20nm process to be prolonged because we believe the migration of the 1xnm process will be relatively slow. Considering our expectation of slow geometry migration and only a limited capacity increase, we look for SEC’s bit growth for 2016/17 to fall short of that for 2014/15. On our forecasts, it will see DRAM bit growth of 32.7% YoY in 2015 and 24.8% for 2016.

SEC: DRAM process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 35nm 28nm 25nm 20nm 1xnm

Source: Company, Daiwa forecasts

 However, we expect SEC to secure a DRAM market share in 2016 in the mid-40s (45.2% in 2Q15), as we think supply growth from its peers will also be mitigated by a slower process conversion to 20nm/Mobile DRAM in 2016.

24

Samsung Electronics (005930 KS): 15 October 2015

DRAM: technology migration roadmap comparison 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E SEC 25nm 20nm 1xnm

SK Hynix 29nm 25nm 21nm

Micron 3x 2x 20nm

Source: Company, Daiwa forecasts

 SEC has increased the capacity of its new 17 line, to 40K wafers per month (full capacity: 80K based on 20nm process) in 4Q15, but we expect further capacity expansion to be done only gradually as it becomes clear that 1xnm adoption will likely be slow. Hence, we expect SEC’s 2016 DRAM capex to focus primarily on process conversion to 20nm, with only limited capacity increases for 1xnm starting from 2H16.

SEC: DRAM operating margin trend SEC: DRAM ASP outlook (KRWbn) (USD) 12,000 55% 1.2 0%

8,000 50% 0.8 (10%)

4,000 45% 0.4 (20%)

0 40% 0.0 (30%) 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E OP OPM (RHS) ASP YoY% (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

 In sum, we expect oversupply to linger until 1H16 and the supply-demand balance to improve from 2H16, due to largely to emerging supply constraints.

DRAM market: supply-demand outlook (1Gb eq. mn) 20,000 3.0%

16,000 2.0%

12,000 1.0%

8,000 0.0% 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Demand Supply S-D ratio (rhs)

Source: Gartner (DRAM Supply and Demand, Worldwide, Andrew Norwood, 29 Sept 2015), calculated by Daiwa

NAND NAND OPM to recover We forecast SEC’s NAND operating margin to decrease (currently 17%) until 1H16 due to from 2H16 increased supply. But we expect its NAND operating margin to recover in 2H16 amid a stable pricing environment resulting from supply constraints due to difficulties in applying the planar process beyond 1znm and the V-NAND conversion of peers. Our forecasts call for SEC to record a NAND operating margin of 14.2% in 2015, 14.0% in 2016, and 20.1% in 2017.

 SEC started producing 3D V-NAND in mid-2014, giving it a circa 2-year lead over the second-tier players, which do not expect to commence production of 3D V-NAND in earnest until 2H16. In the same vein, we believe its cost advantage over the second-tier players will widen further, given the high entry barriers and low initial yields that the smaller companies are likely to face.

25

Samsung Electronics (005930 KS): 15 October 2015

SEC: NAND process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 21nm 19nm 16nm 1znm V24 V32 V48 V64

Source: Company, Daiwa forecasts

 SEC started to produce third-generation 48-layer TLC V-NAND-based SSDs in 3Q15, and has sought to boost its production efficiency by pulling in capex to get its Xian (China) fab up to full capacity of 80k per month by end-2015. According to our research, a second phase of investment has yet to be confirmed; we believe that SEC’s production facilities in Pyeongtak (Korea) and Xian would be candidates for any phase-2 investment.

NAND: technology migration roadmap comparison 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E SEC 19nm 16nm 1znm V-NAND V24/V32 V48 V64 Toshiba 1x 1y 1Z V-NAND V48 Micron 20nm 16nm V-NAND V32/48 SK Hynix 20nm 16nm 1znm V36 V-NAND 48 Source: Companies, Daiwa forecasts

V-NAND: premium quality SEC: V-NAND roadmap

Source: SEC Source: SEC

SEC: NAND operating margin trend SEC: NAND ASP outlook (KRWbn) (USD) 4,000 30% 0.6 (10%)

3,000 20% 0.4 (20%)

2,000

10% 0.2 (30%) 1,000

0 0% 0.0 (40%) 2014 2015E 2016E 2017E 2014 2015 2016 2017 OP OPM (RHS) ASP YoY% (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

26

Samsung Electronics (005930 KS): 15 October 2015

 SEC’s share of the Solid State Drive (SSD) market stood at 32.6% in 2014, up from 23.2% in 2012, and we look for the company to expand its market share further on the back of increasing sales of 48-layer TLC V-NAND-based SSDs.

SSD: market share

40%

30%

20%

10%

0% 2010 2011 2012 2013 2014

Samsung Intel SanDisk Micron Toshiba

Source: Gartner (Market Share Analysis: SSDs and Solid-State Arrays, Worldwide, 2015, Joseph Unsworth, John Monroe, 1 May 2015), calculated by Daiwa

NAND: supply-demand outlook (16Gb eq. m) 20,000 3.0%

16,000 2.0%

12,000 1.0% 8,000

0.0% 4,000

0 -1.0% 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Demand Supply S-D ratio (rhs)

Source: Gartner (NAND Supply and Demand, Worldwide, Joseph Unsworth, 29 Sept 2015), calculated by Daiwa

System LSI Driven by increasing sales from SEC’s foundry and SoC businesses, we expect the company’s System LSI revenue to improve YoY by 23.6%, 11.2%, 19.4% in 2015E, 2016E and 2017E, respectively. And we look for this division’s OPM to improve to 4.7%, 9.8% and 14.1% for 2015E, 2016E and 2017E, respectively, after a turnaround in 2Q15.

 We expect competition between SEC and TSMC to intensify, but we believe SEC will improve its earnings going forward by widening its customer base for its foundry business and increasing single-chip SoC (AP+baseband) supply.

 Most observers had expected Intel to enter the leading-edge foundry business in the 10nm process space. However, with the Intel having so far lagged behind in the adoption of the 10nm process, we believe that SEC and TSMC will mainly lead the foundry industry over the next 3 years.

Logic: technology migration roadmap comparison 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Intel 32nm HKMG 22nm FF 14nm FF 10nm FF 7nm

TSMC 40/45nm 28nm SiON/HKMG 20nm SOC / 16nm FF 10nm FF 7nm

SEC 45nm 32/28nm 20nm 14nm FF 10nm FF 7nm

Source: Companies, Daiwa estimates

 After SEC surpassed TSMC in establishing its technology leadership in 14nm FF in 2015, it has attempted to capture a large-scale customer base and minimise the investment/cost burden by forming a strategic alliance with GlobalFoundries. We

27

Samsung Electronics (005930 KS): 15 October 2015

forecast SEC to capture a large market share for 14nm/14nm+ until 2H16 and expect its 10nm production to rapidly expand.

SEC: global FinFET capacity

Source: SEC/GlobalFoundries

 We expect the S3 phase 2 line to gradually be ramped up from 2H16 for the 10nm process.

 As for the SoC business, SEC plans to increase Exynos single-chip (AP+baseband) supply to the mid-range smartphone segment, as opposed to only high-end models. We believe this move will help it maintain a high utilisation rate for 12” capacity, along with an enhanced foundry business.

 We also expect TSMC to be able to maintain a leading market presence within the foundry industry. However, due to the departure of a major US customer, we anticipate that TSMC could face challenges in terms of maintaining strong earnings growth, after its success with the 28nm process. With a slow ramp-up of 16/16+nm capacity, we think it could be a challenge for TSMC to secure high margins on the back of its trailing-edge technology. Indeed, we believe it already had a short life cycle issue at its 20nm capacity.

Market share: global foundry players 60%

40%

20%

0% 2008 2009 2010 2011 2012 2013 2014 TSMC UMC Samsung + GF SMIC

Source: Gartner(Market Share: Semiconductor Foundry, Worldwide by Samuel Wang, 14 April 2015), calculated by Daiwa

 Furthermore, SEC’s ISOCELL-based high-resolution CMOS image sensor business has consistently been on an uptrend in terms of sales (SEC is now the no. 2 player behind Sony in CMOS image sensors). We believe a continuation of this trend would improve the utilisation rate and earnings for the System LSI business.

28

Samsung Electronics (005930 KS): 15 October 2015

System LSI: sales and operating margin (%) (KRWbn) 20,000 20%

16,000 10%

12,000 0%

8,000 (10%) 2014 2015E 2016E 2017E Sales OPM (RHS)

Source: Company, Daiwa forecasts

29

Samsung Electronics (005930 KS): 15 October 2015

Mobile: cost rationalisation to secure operating margins

We expect SEC’s market share in the global smartphone space to gradually decline, largely owing to a broader market slowdown and intensified competition. However, we believe SEC can maintain an around 10% operating margin through product differentiation, supported by vertical integration and cost rationalisation. After the introduction of new product lines embedded with a new form factor and foldable displays, we believe its high- end segment will be back on an upward trajectory in terms of margins. (IM operating margin: 9.8%, 10.0% and 11.6% for 2015E, 2016E and 2017E, respectively)

 SEC, which produces most of the mobile components globally, including semiconductors and display panels, aims to strengthen its product line by embedding core components — not solely in its high-end product lines but also in its mid-range and low-end product lines. For the Galaxy S6, rather than adopting the Snapdragon810 by Qualcomm, which faced an overheating issue, SEC decided to widely adopt the Exynos 7420 AP/baseband by System LSI, LPDDR4/UFS memory by SEC’s semiconductor business, and a flexible display from Samsung Display. These products use newly- adopted technology, which were developed by Samsung, and have been positioned as key differentiating factors.

 After the company successfully embedded edge displays in the Galaxy Note 4 and S6, we see a high possibility of SEC coming up with a new pilot mobile device that adopts a new form factor, such as a foldable display, in 2016E. We expect it to rapidly embark on the production of new product lines from 2017E.

SEC: vertical integration for Galaxy S6/S6 Edge Product Description Application Processor Exynos 7420, Octacore/14nm FF Display 5.1” Dual Edge QHD/ Dual Edge QHD Super AMOLED (2560 x 1440, 577ppi) DRAM 3GB LPDDR4/25nm Baseband Exynos, 3 Band LTE-A Storage UFS 2.0 (32GB/64GB)

Source: SEC, Daiwa

New form factor- foldable display

Source: Company

 We expect SEC to continue to improve its operational efficiency by narrowing the number of products it offers. SEC once offered a wide array of models through different carriers around in the world, but it began rationalising the number of product lines by replacing them with more platform-centric ones, such as the A/E/J series. The number of Galaxy derivatives and others exceeded 100 at end-2014, but we expect this number to halve by end-2015. We believe SEC is consistently making such efforts in order to

30

Samsung Electronics (005930 KS): 15 October 2015

improve its operational efficiency and rationalise costs. In the same vein, we also expect it to cut its marketing expenses, which mainly focus on flagship models.

SEC: Galaxy S6 Edge Plus and Note 5 specs

GalaxyGalaxy S6 S6 Edge Edge Plus Plus GalaxyGalaxy Note5 Note5 Size (mm)Size (mm) 154.4154.4 x 75.8x 75.8 x 6.9 x 6.9 153.2 153.2x 76.1 x x76.1 7.6 x 7.6 OS OS AndroidAndroid AndroidAndroid Weight (g) 153 171 AP Weight (g) Octacore (2.1Ghz153 Quad + 1.5GHz Quad), 64bit, 14nm based Exynos171 7420 chipset 5.7" QHD Super AMOLED AP Octacore (2.1Ghz Quad + 1.5GHz Quad), 64bit, 14nm based5.7" Exynos QHD 7420Super chipset AMOLED 2560X1440 Display 2560X1440 5.7" QHDDual Super-edge AMOLED 5.7" QHD Super518ppit AMOLED 2560X1440518ppi Display 2560X1440 Dual-edge Camera Rear: 16MP, Front 5MP 518ppit Battery 518ppi 3000mAh MemoryCamera 3GB LPDDR4 Rear: 16MP, Front 5MP 4GB LPDDR4 Storage 32/64GB Battery 3000mAh

Source: Company,Memory Daiwa 3GB LPDDR4 4GB LPDDR4

Storage 32/64GB  We believe that SEC has an edge in terms of scale economies and supply chain management (SCM), backed by its extensive global operations, that will keep it competitive.

 SEC’s high dependence on Google’s Android could be seen as a weakness in that it underlines the difficulty the company faces in establishing its own ecosystem in the way that Apple has done. However, SEC has been pushing its own software (eg, Samsung Pay) in an effort to build out its own mini ecosystem and lessen its dependence on Android. We believe that SEC can differentiate itself in software by further expanding this mini ecosystem for future IT devices (eg, wearable devices).

Samsung Pay (1) Samsung Pay (2)

Source: Company Source: Company

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Samsung Electronics (005930 KS): 15 October 2015

SEC: mobile sales and operating-profit margin (KRWbn) 120,000 14%

100,000

80,000 12%

60,000

40,000 10%

20,000

0 8% 2014 2015E 2016E 2017E Sales OPM (RHS)

Source: Company, Daiwa forecasts

32

Samsung Electronics (005930 KS): 15 October 2015

Earnings growth outlook: solid earnings driven by components business

We believe that SEC’s earnings over our forecast horizon will be driven by its component businesses, such as semiconductors and display. Indeed, we forecast the contribution from the component business to operating profit will increase to 61.8% by 2017, from 37.6% in 2014, on the back of SEC’s technological edge over its peers.

SEC: operating profit contribution by business (2014-17E) 100%

80%

60%

40%

20%

0% 2014 2015E 2016E 2017E Semi DP IM CE

Source: Company, Daiwa forecasts

 Memory. We believe that SEC’s memory business is likely to continue to record solid earnings on the back of stable ASPs, driven by the slower process migration that we expect from 2H16. We forecast the operating-profit margin for the memory business to come in at 35.3%, 33.6% and 38.0% for 2015E, 2016E and 2017E, respectively. The memory segment will, in our view, grow in prominence as one of SEC’s core businesses in terms of its contribution to operating profit.

 System LSI. We expect SEC to widen its customer base for the foundry business as it upgrades its technology over peers for 14/10nm FF. Furthermore, given its goal of increasing sales for single-chip solutions (AP+baseband) within its SoC business, we expect SEC to record a 3-year System LSI sales CAGR of 15.19% over 2015-17E and operating profit margins of 4.7%, 9.8% and 14.1% for 2015, 2016E and 2017E, respectively.

 Display. For the display business, we expect SEC to improve earnings by increasing its sales of premium LCD products, including UHD, and increasing OLED sales to external clients. Also, we believe that the rising adoption of flexible/foldable displays embedded in premium smartphone/tablet products, led by SEC, will improve profitability further. All told, we expect the operating profit margin for SEC’s display segment to come in at 9.2%, 10.2% and 11.7% for 2015E, 2016E and 2017E, respectively. However, there are market concerns on oversupply issues stemming from a potential production capacity increase in China.

 IM. We expect the industry-wide struggles to continue, triggered by fierce competition and market saturation. But we believe that SEC’s operating-profit margin for this segment will come in at around the 10% level (9.8%, 10.0% and 11.6% for 2015E, 2016E and 2017E) due to efficiency gains stemming from cost rationalization.

 CE. We foresee limited upside for the CE segment in the short to medium term, due to intensified competition and sluggish TV demand. However, in our view, SEC will be able to capture stable earnings growth, backed by sales of premium product lines and its brand equity in the TV segment. Furthermore, we expect its sales from its home appliance business to continue to grow. We forecast the operating-profit margin of the CE business to be 1.6%, 2.2% and 2.2% for 2015E, 2016E and 2017E, respectively.

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Samsung Electronics (005930 KS): 15 October 2015

SEC: quarterly and annual earnings and forecasts 1Q15 2Q15 3Q15E 4Q15E 2015E 2016E 2017E Sales (KRW bn) 47,118 48,538 51,803 54,235 201,693 199,790 211,915 Semiconductor 10,490 11,418 13,126 13,064 48,098 49,634 55,309 DRAM 5,286 5,325 5,865 5,367 21,843 21,304 22,622 NAND 2,676 2,923 3,148 3,054 11,801 12,299 13,564 S.LSI 2,347 3,100 4,068 4,584 14,099 15,673 18,709 Display 6,852 6,620 7,729 7,738 28,939 30,050 31,228 IM 25,887 26,060 25,512 25,559 103,018 96,168 99,201 Handset 21,400 22,603 21,743 20,717 86,463 82,162 87,548 CE 10,257 11,200 11,285 13,928 46,670 48,325 50,495 Visual Display 6,220 6,660 7,330 9,775 29,985 30,770 31,351 OP (KRW bn) 5,979 6,898 7,265 6,513 26,615 26,866 33,017 Semiconductor 2,933 3,400 3,721 3,182 13,237 13,127 16,767 DRAM 2,587 2,630 2,912 2,441 10,570 9,877 11,395 NAND 310 485 511 374 1,680 1,720 2,729 S.LSI -155 158 299 367 669 1,530 2,643 Display 525 540 853 765 2,663 3,061 3,669 IM 2,743 2,760 2,426 2,147 10,076 9,662 11,497 Handset 2,713 2,731 2,399 2,103 9,947 9,534 11,383 CE -136 210 265 419 738 1,071 1,130 OPM 12.7% 14.2% 14.0% 12.0% 13.2% 13.4% 15.6% Semiconductor 28.0% 29.8% 28.4% 24.4% 27.5% 26.4% 30.3% DRAM 48.9% 49.4% 49.6% 45.5% 48.4% 46.4% 50.4% NAND 11.6% 16.6% 16.2% 12.2% 14.2% 14.0% 20.1% S.LSI -6.6% 5.1% 7.3% 8.0% 4.7% 9.8% 14.1% Display 7.7% 8.2% 11.0% 9.9% 9.2% 10.2% 11.7% IM 10.6% 10.6% 9.5% 8.4% 9.8% 10.0% 11.6% Handset 12.7% 12.1% 11.0% 10.2% 11.5% 11.6% 13.0% CE -1.3% 1.9% 2.3% 3.0% 1.6% 2.2% 2.2% Net profit to parent (KRW bn) 4,519 5,627 5,837 5,232 21,215 22,076 27,225 Source: Company, Daiwa forecasts

SEC: key assumptions 1Q15 2Q15 3Q15E 4Q15E 2015E 2016E 2017E DRAM Bit growth (%) 2.0% 7.0% 14.0% 3.0% 32.7% 24.8% 15.3% ASP (%) -6.1% -4.0% -10.0% -10.0% -15.5% -23.8% -8.0% NAND Bit growth (%) 11.0% 16.0% 14.0% 8.0% 55.2% 40.8% 38.2% ASP (%) -8.0% -4.0% -12.0% -9.0% -28.8% -27.9% -20.5% LCD Area (%) -11.2% 1.3% 10.4% 4.0% 0.7% 5.5% 6.6% Area ASP (%) -3.3% -7.7% -6.0% -5.0% -5.5% -18.8% -16.8% OLED Unit (%) 21.5% -5.1% 10.0% 17.0% 26.6% 31.2% 21.6% ASP (%) -2.1% 8.5% -5.0% -9.0% -1.3% -10.2% -2.0% Smartphone Volume (%) 10.8% -12.2% 12.0% 0.0% -0.2% 2.2% 7.2% ASP (%) -5.0% 11.0% -15.0% -3.0% -11.8% -7.4% 0.4% TV Volume (%) -5.8% -6.5% -6.4% -6.7% -6.4% 5.4% 4.6% ASP (%) -5.0% 5.0% 4.0% 1.0% -6.9% -4.6% -2.6% Source: Company, Daiwa forecasts

34

Samsung Electronics (005930 KS): 15 October 2015

Capex

We forecast SEC’s 2015 capex to come in at KRW28tn. Of the total capex, we expect the semi, display and IM businesses to account for KRW15.8tn, KRW6tn and KRW4tn, respectively. Within semi, we expect memory and System LSI to account for KRW12.1tn and KRW3.7tn, respectively, and believe SEC will mainly concentrate on capacity expansion for 20nm DRAM in the 17 line (40K), V-NAND (40K) in Xian, and conversion to 14nm and construction of S3 Ph2 line for System LSI. As for display, we expect 2015 capex to focus on the LCD module-line transfer, and production expansion for 8Gen fabless in China. And for IM, we expect the 2015 capex to go mainly towards the construction of a production facility and CNC equipment for metal casings in Vietnam.

For 2016, we believe SEC’s total capex will decline YoY, primarily owing to decreased investment in memory and IM. Within the memory business, we expect lower capex YoY for DRAM and NAND given our expectation of a limited capacity increase for 1xnm DRAM and V-NAND.

SEC: capex (2014-16E) (KRW tr) 2014 2015E 2016E Semiconductor 14.2 15.8 13.5 Memory 11.5 12.1 9.5 SLSI 2.7 3.7 4.0 Display 4.0 6.0 5.0 Others 3.8 6.2 4.0 Total 22.0 28.0 22.6 YoY (%) -4.8% 27.0% -19.4%

Source: Company, Daiwa forecasts

35

Samsung Electronics (005930 KS): 15 October 2015

Clarity on potential shareholder returns would likely address some concerns

SEC had KRW50.5tn in net cash as at 2Q15 (equivalent to 30% of its market cap), and we forecast its net cash holding to increase to KRW 57.1tn by end-2015E. There have been lingering concerns in the market over a lack of clarity in SEC’s plans for large-scale M&A and investment in new businesses. In addition, since the merger between Samsung C&T and Cheil Industries on 1 September, investors have voiced concerns over the possibility of additional mergers that would strengthen the holdings of the Lee family and other parties during the group’s restructuring.

However, during the merger between Samsung C&T and Cheil Industries, we believe that management paid more attention to investors’ comments. If management can come up with clear guidance on shareholder returns, and narrow the gap between SEC and its global peers in terms of shareholder returns through share repurchases and/or an increase in dividend payouts, we would expect the share price to respond positively.

Shareholder returns: peer comparison SEC (KRWbn) 2012 2013 2014 Dividend 1,207 2,157 3,000 Share-buyback - - 2,446 Div. Payout 5.2% 7.2% 13.0% Total shareholder return (% of NP) 5.2% 7.2% 23.6% Net profit 23,185 29,821 23,083

TSMC (TWDbn) 2012 2013 2014 Dividend 77,749 77,773 77,786 Share-buyback - - - Div. Payout 46.8% 41.3% 29.5% Total shareholder return (% of NP) 46.8% 41.3% 29.5% Net profit 166,159 188,147 263,899

Intel (USDm) 2012 2013 2014 Dividend 4,350 4,479 4,409 Share-buyback 4,765 2,100 10,800 Div. Payout 39.5% 46.6% 37.7% Total shareholder return (% of NP) 82.8% 68.4% 129.9% Net profit 11,005 9,620 11,704

Micron (USDm) 2012 2013 2014 Dividend - - - Share-buyback 6 0 161 Div. Payout na na na Total shareholder return (% of NP) -0.6% 0.0% 5.3% Net profit -1,032 1,190 3,045

Sandisk (USDm) 2012 2013 2014 Dividend 0 101 235 Share-buyback 230 589 1,300 Div. Payout 0.0% 9.7% 23.3% Total shareholder return (% of NP) na 166.2% 152.3% Net profit 417 1,043 1,007

Source: Companies, Daiwa

We expect the pace of restructuring to slow as the merger between Samsung C&T and Cheil is the most important part of the group restructuring process. In the medium to long term, we think management could consider splitting SEC into 2 separate entities, holding and operating, and then merge the holding company with Samsung C&T to enhance the ownership of SEC.

36

Samsung Electronics (005930 KS): 15 October 2015

Samsung Group: cross-shareholding structure

11.3% 3.9% 3.9%

GH Lee JY Lee BJ Lee SH Lee

20.8% 2.9% 16.4% 5.5% 5.5% 3.4%

6.9% 3.5% 1.5% Samsung C&T Samsung (Tresuary: 12.7%) 51.2% Biologics

19.3% 4.1%

4.7% 0.7% 2.6% 17.1%

Samsung Samsung 7.2% Life Electronics (Treasury: 5.6%) (Treasury:(12.2%) 12.2%) 1.3% 37.5%

15.0% 98.7% 11.2% 34.4% 19.6% 23.7% 22.6% 84.8% 68.5% 17.6%

Samsung Samsung Samsung Samsung Samsung Samsung Samsung Samsung SDI SEMCO Fire Asset mgmt Securities Card SDS Display Medison Heavy

13.1% 14.7% 11.0% unlisted Samsung Samsung S1 Eng. Fine Chem.

Source: Dart, Daiwa

37

Samsung Electronics (005930 KS): 15 October 2015

Valuation

Initiating with Buy (1) We derive our 12-month target price of KRW1,470,000 by applying a 1.2x PBR to our call and 12-month target 2016E BVPS. Our target multiple is set at the average of SEC’s 12-month-forward PBR price of KRW1,470,000 during 3Q11, when the DRAM market was going through a steep downcycle due to: 1) an oversupply issue, and 2) declining DRAM prices. This downcycle eventually led to a period of market consolidation, with Elpida filing for bankruptcy in February 2012.

We believe SEC shares are now in deep value territory, trading at a 12-month-forward PBR of 1.0X, or 2SD below the stock’s past-10-year average. In our view, our target multiple is justified given: 1) the weak global IT demand currently, 2) our forecast ROE for 2015-16E staying at around 13%, and 3) the declining DRAM price currently. At SEC’s current share price, we see 17.2% potential upside and hence a compelling entry point for investors looking to accumulate the stock on a 12-month view.

SEC: 12-month-forward PBR SEC: 12-month-forward PBR band (x) (KRW) 3.0 3,000,000 2.5 2,500,000

2.0 2,000,000

1.5 1,500,000

1.0 1,000,000 500,000 0.5 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 0 12mths +2STDV +1STDV Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Fwd (x) Price 0.8x 1.0x Average -1STDV -2STDV 1.4x 1.8x 2.0x

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

As a backtest, we use an SOTP valuation to derive a value per share of KRW1,470,000. In our SOTP valuation, we: 1) apply the average of peer 2016E EV/EBITDA multiples to the EBITDA of SEC’s different business units, and 2) ascribe 10-85% valuation discounts for each business to reflect the fact that SEC is not a pure play, and the respective business environments and industry positions.

SEC: sum-of-the-parts valuation (KRW bn) FY16E EBITDA Avg multiple (x) Discount (%) Target multiple (x) EV Peer Group IT & Mobile 15,157 8.3 -90% 0.8 12,641 Apple,Lenovo,ZTE,LGE Memory 18,731 5.0 -10% 4.5 84,289 Micron, SK Hynix, Toshiba, Sandisk, Mediatek, Nanya System LSI 6,212 5.7 -10% 5.1 31,925 Intel, TSMC, and Qualcomm Display 6,196 3.0 -60% 1.2 7,435 LGD, Innolux, AUO, Japan Display, Sharp Consumer Electronics 2,848 6.5 -65% 2.3 6,468 LGE, Sony, Panasonic, Whirlpool, Electrolux, GE Operational value 49,144 2.9 142,759

Net cash 50,520

Treasury shares 20,646 10% discount Investment asset 13,020 10% discount Minority interests 6,128 Fair Enterprise Value 220,816 Outstanding shares less treasury shares (m) 151 SOTP valuation (KRW) 1,470,000 Source: Company, Bloomberg, Daiwa estimates

38

Samsung Electronics (005930 KS): 15 October 2015

Peer valuations Company Ticker Rating Price Mkt cap P/E (x) P/BV (x) ROE (%) EV/EBITDA (x) Div yield (%) (Bloomberg) (Local curr) (USD m) FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E Coverage Samsung Electronics 005930 KS Buy 1,254,000 161,070 8.7 8.4 1.0 1.0 12% 12% 2.4 2.0 1.6% 1.6%

Semiconductor

Samsung Electronics 005930 KS Buy 1,254,000 161,070 8.7 8.4 1.0 1.0 12% 12% 2.4 2.0 1.6% 1.6% SK Hynix 000660 KS Buy 36,400 23,108 5.7 7.6 1.2 1.0 23% 15% 2.5 2.6 1.1% 1.1% Micron MU US NR 18.82 20,390 7.1 12.8 1.7 1.5 24% 11% 4.3 4.9 0.0% 0.0% Sandisk SNDK US NR 68.70 14,045 22.1 16.2 2.6 2.5 8% 13% 10.5 8.7 1.7% 1.8% Intel INTC US Outperform 32.80 155,931 14.3 13.9 2.6 2.5 19% 18% 6.8 6.4 2.9% 3.0% Mediatek 2454 TT Buy 272.50 13,170 13.9 12.0 1.7 1.8 10% 12% 7.4 6.8 8.3% 7.3% TSMC 2330 TT Outperform 136.50 108,822 11.4 12.7 2.8 2.5 23% 21% 5.7 5.5 3.4% 3.3% Qualcomm QCOM US Underperform 58.63 92,120 12.7 12.6 3.0 2.9 19% 22% 8.7 9.0 3.0% 3.3% Nanya 2408 TT N/R 40.50 3,043 5.5 7.5 1.8 1.6 37% 21% na na 4.2% 2.9% Average 11.4 11.7 3.3 3.1 28% 26% 8.5 8.2 2.9% 2.7%

Handset

Apple AAPL US Outperform 110.21 628,497 12.1 11.3 4.9 4.0 40% 38% 5.9 5.4 2% 2% LG Electronics 066570 KS N/R 46,150.00 6,636 16.3 10.6 0.7 0.6 4% 6% 5.1 4.5 1% 1% HTC 2498 TT Underperform 72.20 1,836 -3.8 -11.7 0.9 1.0 na na -2.0 -10.0 0% 0% Lenovo 992 HK Hold 7.49 10,736 12.4 -62.4 2.5 2.6 0% na 6.4 13.0 0% 0% ZTE 763 HK N/R 18.48 10,929 17.4 15.3 2.0 1.8 13% 14% 12.1 10.8 1% 2% Average 10.9 -7.4 2.2 2.0 14% 19% 5.5 4.7 0.8% 0.9%

Display

LG Display 034220 KS N/R 22,750.00 7,153 6.2 8.3 0.7 0.6 10.8% 7.3% 1.8 1.9 2.3% 2.3% Innolux 3481 TT N/R 11.00 3,387 5.1 8.6 0.5 0.4 9.1% 4.9% 1.6 1.8 5.2% 3.8% AUO 2409 TT N/R 10.35 3,082 6.7 10.3 0.5 0.5 7.6% 4.8% 2.2 2.4 4.5% 3.1% Japan Display 6740 JP N/R 365.00 1,848 na 11.1 0.5 0.5 -2.2% 5.0% 2.6 1.7 0.0% 0.8% Sharp 6753 JP Underperform 145.00 2,077 na na 1.3 1.6 -0.1% -0.1% 5.4 7.3 0.0% 0.0% Average 6.0 9.6 0.7 0.7 5% 4% 2.7 3.0 2.4% 2.0%

Consumer Electronics

LG Electronics 066570 KS N/R 46,150.00 6,636 16.3 10.6 0.7 0.6 4.3% 6.3% 5.1 4.5 0.8% 0.9% Sony 6758 JP Buy 3,129.00 33,256 na 20.3 1.6 1.4 -5.9% 7.5% 10.8 5.1 0.0% 0.7% Panasonic 6752 JP Hold 1,298.00 26,811 16.0 14.9 1.7 1.5 11.2% 10.3% 4.8 4.1 1.3% 1.7% Whirlpool WHR US N/R 151.51 11,881 12.6 10.1 2.3 na 17.2% na 7.1 5.8 2.3% 2.4% Electrolux ELUXB SS N/R 235.30 8,962 22.5 14.9 3.8 3.3 17.2% 23.0% 9.6 8.1 2.8% 2.9% Average 16.9 14.2 2.0 1.7 9% 12% 7.5 5.5 1.5% 1.7%

Source: Daiwa forecasts for SEC, Hynix, HTC, Lenovo, Mediatek, TSMC; Bloomberg for others Note: closing prices as of 14 October 2015.

39

Samsung Electronics (005930 KS): 15 October 2015

Risks to our call

First risk to our call on SEC would be the potential entrants of China corporates to the memory industry. If China players, backed by the government, enter the industry by acquiring existing players or forming joint ventures/strategic alliances with the major players, we think the current oligopoly structure would be at stake and the oversupply issue and decline in DRAM prices would continue.

A secondary risk would be a sharp decline in smartphone demand. Since lacklustre smartphone demand continues, it may pose a considerable impact on SEC’s profitability as its high-end smartphone accounts for considerable portion (around 80% based on our estimates) within IM division, which accounts for 50% of total SEC’s sales.

40

Samsung Electronics (005930 KS): 15 October 2015

Company background

SEC operates mainly in 3 business divisions: consumer electronics (CE) division, information technology & mobile communications (IM) division, device solutions (DM) division, which is comprised of semiconductor and display business parts, providing DRAM, NAND flash as well as TFT-LCDs, OLED and others.

SEC distributes its products domestically and internationally.

41

Samsung Electronics (005930 KS): 15 October 2015

Appendix

Historical DRAM spot prices

(USD) 6.0

5.0

4.0

3.0

2.0

1.0

0.0 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 DDR3 2Gb 1333MHz~1600MHz DDR3 1Gb 1333MHz DDR2 1Gb 800MHz

Source: DRAMeXchange, Daiwa

SEC: 2015E consensus earnings revision trend SEC: 2016E consensus earnings revision trend

(KRW tr) (KRW tr) 38 50 36 45 34 32 40 30 35 28 30 26 25 24 22 20 20 15 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Consensus OP Consensus NP Consensus OP Consensus NP

Source: Bloomberg, Daiwa Source: Bloomberg, Daiwa

42

Korea Information Technology 15 October 2015

(000660 KS) SK Hynix SK H yni x

Target price: KRW43,000 Share price (14 Oct): KRW36,400 | Up/downside: +18.1%

Initiation: beneficiary of a DRAM market recovery SK Kim (82) 2 787 9173  DRAM market likely to recover from 2H16 [email protected]  No. 2 player; benefits from its flexible response to market changes Brian Cho (82) 2 787 9182  Initiating with a Buy (1) rating and TP of KRW43,000 [email protected]

Investment case: SK Hynix is the No. 2 player among the 3 major global Share price performance players in the oligopolistic DRAM market. We believe its earnings will stage (KRW) (%) a rapid improvement from mid-2016 as DRAM prices recover, on the back 55,000 120 of its flexible product mix management as a pure memory-chip maker. The 48,750 109 stock is trading currently at a PBR of 1.0x for 2016E, which is about 2SD 42,500 98 36,250 86 below its past-10-year average. Coverage initiated with a Buy (1) rating. 30,000 75 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15

Catalysts: We expect the global DRAM oversupply situation to linger until SK Hynix (LHS) Relative to KOSPI (RHS) 1H16 due to weak demand for major applications, including those for PCs and smartphones, in the face of the weak global economy and a saturated 12-month range 31,050-51,200 market. However, from 2H16, we look for DRAM prices to recover, boosted Market cap (USDbn) 23.10 by an improved supply-demand balance as a result of slower geometry 3m avg daily turnover (USDm) 129.47 migration by semiconductor manufacturers. As the world’s No. 2 player, Shares outstanding (m) 728 Major shareholder SK Telecom (20.8%) and with its ability to respond quickly to market changes, SK Hynix stands to benefit handsomely from a recovery in the DRAM market, in our view, Financial summary (KRW) and as such, we see its earnings improving from 2H16. Year to 31 Dec 15E 16E 17E Revenue (bn) 18,933 17,690 18,968 On the other hand, we believe it will be difficult for SK Hynix to secure Operating profit (bn) 5,543 4,132 5,164 Net profit (bn) 4,594 3,500 4,341 stable profitability for its NAND business due to its weaker position and lack Core EPS (fully-diluted) 6,310 4,808 5,962 of competitive technology in NAND compared with DRAM. As such, we see EPS change (%) 8.9 (23.8) 24.0 the possibility of the company forming a strategic alliance or acquiring an Daiwa vs Cons. EPS (%) 1.4 (13.7) 2.9 existing NAND player going forward in order to strengthen its NAND PER (x) 5.8 7.6 6.1 Dividend yield (%) 1.1 1.1 1.1 business. DPS 400 400 400 PBR (x) 1.2 1.0 0.9 SK Hynix declared its first annual cash dividend, of KRW218bn, at the end EV/EBITDA (x) 2.6 2.6 2.0 ROE (%) 22.7 14.5 15.3 of 2014, and we expect it to declare a similar annual dividend for 2015, Source: FactSet, Daiwa forecasts despite its current dividend yield, at 1.1%, still being far below that of its global peers. In 2Q15, SK Hynix announced a KRW859bn share buyback scheme, and we expect it to initiate other buyback schemes going forward on the back of the restructuring ongoing at SK Group.

Valuation: We initiate coverage of SK Hynix with a Buy (1) rating and 12- month target price of KRW43,000, which is based on a 1.2x 2016E PBR, derived from the average of the stock’s trough multiples from 2009-14.

Risks: The main risk to our call on SK Hynix would be the entry of China corporates into the memory industry. A secondary risk would be a further delay in the company securing competitiveness in NAND.

See important disclosures, including any required research certifications, beginning on page 58

SK Hynix (000660 KS): 15 October 2015

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook SK Hynix: revenue and operating margin

We forecast SK Hynix’s revenue to increase by 10.6% YoY (KRWbn) for 2015, but decline by 6.6% YoY for 2016, due mainly to 20,000 35% falling DRAM prices and the oversupply situation plaguing 18,000 30% most applications. However, we see revenue recovering in 25% 2017 to 7.2% YoY growth, on the back of: 1) a potential 16,000 20% recovery in memory-chip prices from 2H16, and 2) the 14,000 company being able to adjust its product mix quickly to 15% 12,000 meet changing market demand in an upcycle. 10% 10,000 5% 8,000 0% 2014 2015 2016E 2017E Sales OPM (RHS)

Source: Company, Daiwa forecasts

Valuation SK Hynix: 12-month forward PBR

We initiate coverage of SK Hynix with a Buy (1) rating and (x) 12-month target price of KRW43,000, based on a 1.2x 3.0 2016E PBR. Our target multiple is based on the average of 2.5 the stock’s trough multiples across the cycle from 2009-14. SK Hynix shares are trading in historically low-level 2.0 territory, at a 12-month-forward PBR of 1.0x, or 2SD below 1.5 its past-10-year average. The market’s concerns over 1.0 declining PC DRAM prices due to weak PC demand have weighed on the shares in recent months, resulting in the 0.5 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 share price falling by 28% since its 2015 peak reached in June. 12mths Fwd (x) +2STDV +1STDV Average -1STDV -2STDV Source: Company, Daiwa forecasts

Earnings revisions SK Hynix: consensus earnings revision trend

The Bloomberg-consensus forecasts for SK Hynix’s 2016 (KRWtr) operating profit and net profit have been revised down in 6.5 recent months due to concerns over weak DRAM demand 6.0 and declining DRAM prices. Nevertheless, our 2016 5.5 operating profit and net profit forecasts are 16.9% and 5.0 14.0%, respectively, below the consensus numbers, likely 4.5 as we expect the oversupply situation to continue until 1H16. 4.0 3.5 3.0 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Consensus OP Consensus NP

Source: Bloomberg, Daiwa

44

SK Hynix (000660 KS): 15 October 2015

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E DRAM bit growth (%) n.a. n.a. n.a. 34.1 33.4 24.5 20.7 16.8 DRAM ASP (%) n.a. n.a. n.a. 7.5 2.2 (18.6) (24.0) (7.6) NAND bit growth (%) n.a. n.a. n.a. 45.9 58.0 62.1 30.0 27.1 NAND ASP (%) n.a. n.a. n.a. (7.9) (38.0) (21.7) (29.8) (17.3)

Profit and loss (KRWbn) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E DRAM 10,048 7,426 7,229 10,229 13,286 14,546 13,503 14,620 NAND 1,915 2,733 2,536 3,409 3,340 4,237 3,866 4,063 Other Revenue 144 236 397 526 500 150 321 285 Total Revenue 12,107 10,396 10,162 14,165 17,126 18,933 17,690 18,968 Other income 3,637 4,077 4,179 4,047 4,854 5,800 6,785 7,829 COGS (7,644) (8,705) (8,551) (8,865) (9,462) (10,464) (10,945) (10,947) SG&A (1,461) (1,322) (1,839) (1,921) (2,554) (2,926) (2,614) (2,857) Other op.expenses (3,637) (4,077) (4,179) (4,047) (4,854) (5,800) (6,785) (7,829) Operating profit 3,002 369 (227) 3,380 5,109 5,543 4,132 5,164 Net-interest inc./(exp.) (279) (254) (238) (190) (118) (69) (53) (40) Assoc/forex/extraord./others 32 (17) 262 23 20 212 254 254 Pre-tax profit 2,755 99 (204) 3,212 5,011 5,686 4,333 5,378 Tax (69) (101) 41 (202) (853) (1,092) (833) (1,038) Min. int./pref. div./others (9) 7 (0) (0) 0 0 0 0 Net profit (reported) 2,677 5 (163) 3,010 4,159 4,594 3,500 4,341 Net profit (adjusted) 2,677 5 (163) 3,010 4,159 4,594 3,500 4,341 EPS (reported)(KRW) 4,536 8 (239) 4,295 5,792 6,310 4,808 5,962 EPS (adjusted)(KRW) 4,536 8 (239) 4,295 5,792 6,310 4,808 5,962 EPS (adjusted fully-diluted)(KRW) 4,536 8 (239) 4,295 5,792 6,310 4,808 5,962 DPS (KRW) 150 0 0 0 300 400 400 400 EBIT 3,002 369 (227) 3,380 5,109 5,543 4,132 5,164 EBITDA 5,829 3,836 2,976 6,458 8,553 9,483 8,493 9,838

Cash flow (KRWbn) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax 2,755 99 (204) 3,212 5,011 5,686 4,333 5,378 Depreciation and amortisation 2,827 3,467 3,204 3,079 3,444 3,940 4,361 4,674 Tax paid (69) (101) 41 (202) (853) (1,092) (833) (1,038) Change in working capital 27 (632) (733) 148 (640) (47) 188 (265) Other operational CF items 368 23 (96) 135 (1,097) 282 (99) (99) Cash flow from operations 5,908 2,856 2,212 6,372 5,867 8,768 7,950 8,651 Capex (3,421) (3,568) (3,773) (3,206) (4,801) (6,367) (5,507) (5,563) Net (acquisitions)/disposals 38 14 36 16 199 63 0 0 Other investing CF items (1,327) 165 (961) (1,702) (1,486) (199) 0 0 Cash flow from investing (4,709) (3,389) (4,698) (4,892) (6,088) (6,503) (5,507) (5,563) Change in debt (900) 722 (304) (1,895) (402) (709) (137) (131) Net share issues/(repurchases) (107) 45 2,335 432 827 (859) 0 0 Dividends paid 0 (89) 0 0 0 (218) (291) (291) Other financing CF items 275 (76) 365 985 1,065 560 301 226 Cash flow from financing (732) 602 2,395 (478) 1,490 (1,226) (127) (197) Forex effect/others (62) 19 (264) (94) (129) (48) 0 0 Change in cash 404 88 (355) 907 1,140 990 2,317 2,890 Free cash flow 2,487 (712) (1,561) 3,166 1,066 2,401 2,443 3,087 Source: FactSet, Daiwa forecasts

45

SK Hynix (000660 KS): 15 October 2015

Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment 2,195 1,876 1,785 2,786 4,055 4,394 6,523 9,138 Inventory 1,265 1,184 1,509 1,178 1,498 1,779 1,861 1,861 Accounts receivable 1,604 1,541 1,720 1,942 3,733 3,787 3,538 3,794 Other current assets 629 336 300 747 1,078 746 699 693 Total current assets 5,692 4,937 5,314 6,653 10,364 10,706 12,621 15,486 Fixed assets 10,817 10,899 11,586 12,130 14,090 16,965 18,312 19,443 Goodwill & intangibles 549 708 984 1,110 1,337 1,636 1,941 2,356 Other non-current assets 527 694 765 903 1,092 1,203 1,203 1,203 Total assets 17,584 17,238 18,649 20,796 26,883 30,510 34,078 38,489 Short-term debt 2,531 2,830 2,719 870 1,755 1,123 1,079 1,036 Accounts payable 874 678 593 649 788 942 985 985 Other current liabilities 1,937 1,308 1,129 1,559 3,222 3,024 2,955 2,940 Total current liabilities 5,342 4,817 4,441 3,078 5,765 5,089 5,019 4,961 Long-term debt 3,513 3,946 3,753 3,706 2,420 2,343 2,251 2,162 Other non-current liabilities 560 600 715 946 662 728 746 749 Total liabilities 9,415 9,363 8,909 7,730 8,847 8,161 8,015 7,872 Share capital 2,969 2,979 3,488 3,569 3,658 3,658 3,658 3,658 Reserves/R.E./others 5,201 4,897 6,252 9,499 14,379 18,693 22,406 26,960 Shareholders' equity 8,170 7,876 9,740 13,067 18,036 22,351 26,064 30,618 Minority interests (0) (0) (1) (0) (0) (0) (0) (0) Total equity & liabilities 17,584 17,238 18,649 20,797 26,883 30,511 34,079 38,490 EV 29,822 30,705 30,421 27,387 25,527 24,367 22,102 19,356 Net debt/(cash) 3,849 4,901 4,687 1,790 120 (928) (3,194) (5,940) BVPS (KRW) 13,840 13,299 14,031 18,399 24,775 30,701 35,801 42,057

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) 53.1 (14.1) (2.2) 39.4 20.9 10.6 (6.6) 7.2 EBITDA (YoY) 95.1 (34.2) (22.4) 117.0 32.4 10.9 (10.4) 15.8 Operating profit (YoY) 1,464.4 (87.7) n.a. n.a. 51.2 8.5 (25.5) 25.0 Net profit (YoY) n.a. (99.8) n.a. n.a. 38.2 10.4 (23.8) 24.0 Core EPS (fully-diluted) (YoY) n.a. (99.8) n.a. n.a. 34.9 8.9 (23.8) 24.0 Gross-profit margin 36.9 16.3 15.9 37.4 44.8 44.7 38.1 42.3 EBITDA margin 48.1 36.9 29.3 45.6 49.9 50.1 48.0 51.9 Operating-profit margin 24.8 3.6 n.a. 23.9 29.8 29.3 23.4 27.2 Net profit margin 22.1 0.0 (1.6) 21.2 24.3 24.3 19.8 22.9 ROAE 39.3 0.1 n.a. 26.4 26.7 22.7 14.5 15.3 ROAA 15.8 0.0 n.a. 15.3 17.4 16.0 10.8 12.0 ROCE 22.1 2.6 n.a. 20.0 25.6 23.1 15.0 16.3 ROIC 24.9 (0.1) (1.7) 21.6 25.7 22.6 15.1 17.5 Net debt to equity 47.1 62.2 48.1 13.7 0.7 n.a. n.a. n.a. Effective tax rate 2.5 102.6 n.a. 6.3 17.0 19.2 19.2 19.3 Accounts receivable (days) 50.2 55.2 58.6 47.2 60.5 72.5 75.6 70.5 Current ratio (x) 1.1 1.0 1.2 2.2 1.8 2.1 2.5 3.1 Net interest cover (x) 10.8 1.5 n.a. 17.8 43.2 80.3 78.3 130.0 Net dividend payout 3.3 0.0 n.a. 0.0 5.2 6.3 8.3 6.7 Free cash flow yield 9.4 n.a. n.a. 11.9 4.0 9.1 9.2 11.7 Source: FactSet, Daiwa forecasts

Company profile

SK Hynix manufactures semiconductors, such as dynamic random access memory (DRAM) and NAND flash memory. Formerly known as “Hynix”, the company was acquired by SK Group in November 2011 and renamed “SK Hynix” in March 2013. Currently, SK Hynix is the world’s No.2 player in the DRAM market and has competitive technology in the NAND business as well. SK Telecom is the biggest stakeholder, currently holding 21% of SK Hynix's outstanding shares.

46

SK Hynix (000660 KS): 15 October 2015

DRAM DRAM market outlook Due to weak demand for major applications, including those for PCs and smartphones, the industry’s oversupply situation and declining DRAM prices look likely to extend until the end of 1H16. However, from 2H16, we expect the DRAM market to recover on the back of an improved demand-supply balance as a result of slower geometry migration than in the past by the semiconductor manufacturers.

DRAM spot price trend DRAM: supply-demand outlook

(USD) (1Gb eq. mn) 5.0 20,000 3.0%

4.5

4.0 16,000 2.0%

3.5

3.0 12,000 1.0% 2.5

2.0 8,000 0.0% 1.5 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Demand Supply S-D ratio (rhs)

Spot price - DDR3 4Gb 512Mx8 1600MHz

Source: DRAM eXchange, Daiwa Source: compiled by Daiwa, Daiwa forecasts

Company’s DRAM DRAM margin to improve from 2H16 operating margin should We forecast SK Hynix’s DRAM operating margin to continue declining until 1H16, but start recover from 2H16E to increase as the market recovers from 2H16 (operating margin: 32.1% in 2016E, 37.5% in 2017E).

 In the face of lacklustre PC demand, SK Hynix is currently converting its capacity for PC DRAM to mobile DRAM. We believe there have been delays in the conversion to 25nm- based LPDDR4, due to a chip-size penalty (DDR4 over DDR3, mobile DRAM over PC DRAM) issue and difficulties in realising high yields at an early stage. Therefore, we expect cost reductions to be limited in 2H15.

SK Hynix: DRAM product mix 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 PC Server Mobile Others

Source: Company, Daiwa estimates

 We expect the company’s conversion to 2znm (20-nano) DRAM to be slow in 2016 due to weak demand, and hence expect a scaling-back of the capacity expansion plan for SK Hynix’s new M14 line (from 20,000 to 13,000 wafers per month). We also believe the transfer of equipment from its M10 line to the M14 line will be gradual, and not completed within 2016. We forecast SK Hynix’s DRAM bit shipment volume to rise by 24% YoY for 2015 and 21% YoY for 2016.

47

SK Hynix (000660 KS): 15 October 2015

SK Hynix: DRAM process migration 100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E

38nm 29nm 25nm 2znm 1xnm

Source: Company, Daiwa forecasts

SK Hynix still has a  SK Hynix is the world’s No. 2 player (of 3) in the oligopolistic DRAM market, after technology edge over Samsung Electronics (SEC) (005930 KS, KRW1,254,000, Buy [1]) in No. 1 place, and Micron ahead of Micron (Not rated) in No. 3 position. We expect its earnings to show a rapid improvement from 2H16, on the back of a market recovery (when SK Hynix’s flexible product-mix management should come to the fore), given its status as a pure memory company.

DRAM: technology migration roadmap comparison 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E SEC 25nm 20nm 1xnm

SK Hynix 29nm 25nm 21nm

Micron 3x 2x 20nm

Source: Company, Daiwa forecasts

 We also believe the technology lead that SK Hynix enjoys over Micron, the No. 3 player, remains in place, especially for mobile DRAM products, such as multi-chip packaging (MCP) devices for mass smartphones. According to Gartner (Market share analysis: eMMC and eMCP Vendors, Worldwide, 2014, Brady Wang, 1 July 2015), SK Hynix’s market share in the eMCP market was 29.8% in 2014, whereas Micron’s was 5.2%.

SK Hynix: DRAM operating margin trend SK Hynix: DRAM ASP outlook (KRWbn) (USD) 6,000 50% 1.0 10%

40% 0.8 0% 4,000 30% 0.6 (10%) 20% 0.4 2,000 (20%) 10% 0.2

0.0 (30%) 0 0% 2014 2015 2016E 2017E 2014 2015 2016E 2017E OP OPM (RHS) ASP YoY % (RHS)

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

48

SK Hynix (000660 KS): 15 October 2015

NAND NAND market outlook Compared with the DRAM market, NAND demand should be more solid over the next 3 years, as solid state drives (SSD), one of the fastest-growing NAND applications, are rapidly replacing hard disk drives (HDDs) in the client PC and enterprise PC segments. We forecast SSD penetration for the mobile (notebook) PC industry to increase to 50.1% in 2017, from 24.9% in 2014.

 On the supply side, we expect industry supply to increase as a result of 1znm planar and triple level cell (TLC) conversion by the major players by 1H16. However, due to lingering issues with the planar process conversion beyond 1znm, most NAND players (other than SEC) are likely to embark on 3D V-NAND production from 2H16. We expect supply growth to be limited due to the barriers posed by high initial costs and yield issues, particularly for second-tier players like SK Hynix.

SSD penetration: mobile PC market SSD penetration: enterprise market

(m) (m) 160 80% 30 40%

25 120 60% 30% 20

80 40% 15 20%

10 40 20% 10% 5

0 0% 0 0% 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2012 2013 2014 2015E 2016E 2017E 2018E 2019E SSDs SSD penetration rate (RHS) Enterprise SSD SSD % penetration rate (RHS)

Source: Gartner (Hard-Disk Drives, Worldwide, 2012-2019, By John Monroe,1 July 2015) Source: Gartner (Hard-Disk Drives, Worldwide, 2012-2019, By John Monroe, 1 July 2015)

NAND: supply-demand outlook

(16Gb eq. m) 20,000 3.0%

16,000 2.0%

12,000 1.0% 8,000

0.0% 4,000

0 -1.0% 1Q15 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Demand Supply S-D ratio (rhs)

Source: Daiwa estimates and forecasts

49

SK Hynix (000660 KS): 15 October 2015

NAND margins likely to struggle NAND bit shipments set We expect SK Hynix’s NAND supply output to rise in 2H15 as a result of increased 16nm- to slow in 2016 based TLC supply. However, due to delays in the conversion to 1znm and 3D V-NAND production due to difficulties at the initial stage, SK Hynix’s NAND bit shipment growth is likely to slow in 2016, to 29% YoY from 63% YoY for 2015E.

SK Hynix: NAND process migration

100%

80%

60%

40%

20%

0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E 41/32nm 26nm 20nm 16nm 1znm V36 V48

Source: Company, Daiwa estimates and forecasts

Could be difficult to  We believe it will be difficult for SK Hynix to secure stable profitability for its NAND achieve profitability in business until 2017 due to its relatively weaker position in NAND versus DRAM. As NAND flash in 2016E such, with a high cost burden in the early stages in 3D V-NAND, its NAND operating margin should come in at 1.5% for 2015E and -5.3% in 2016E, based on our forecasts.

 However, leveraging its cutting-edge DRAM technology, SK Hynix could form a strategic alliance or acquire an existing NAND player, in our view, in order to strengthen its NAND business.

NAND: technology migration roadmap comparison 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E SEC 19nm 16nm 1znm V-NAND V24/V32 V48 V64 Toshiba 1x 1y 1Z V-NAND V48 Micron 20nm 16nm V-NAND V32/48 SK Hynix 20nm 16nm 1znm V-NAND V36 48 Source: Company, Daiwa forecasts

50

SK Hynix (000660 KS): 15 October 2015

Earnings outlook

Operating margin should With the DRAM oversupply and price decline issues likely to linger until 1H16, we forecast pick up in 2017E SK Hynix’s operating margin to decline to 23.4% for 2016, from 29.3% for 2015. However, assuming the DRAM market recovers from 2H16, we look for its operating margin to improve to 27.2% for 2017.

 In terms of its product mix, we believe SK Hynix’s future earnings will be mainly driven by competitive DRAM product lines (such as mobile), and not mainly by PC DRAM as they were previously. Hence, we forecast the DRAM portion of its total revenue to increase to 77.1% in 2017E, from 76.8% in 2015E. Moreover, as earnings from NAND are unlikely to emerge in the short term, SK Hynix’s dependency on DRAM business will likely remain as high as it is currently (76.8% for 2015, on our forecasts).

SK Hynix: DRAM/NAND revenue portion (2014-17E)

100%

80%

60% 77.6% 76.8% 76.3% 77.1%

40%

20% 19.5% 22.4% 21.9% 21.4% 0% 2014 2015E 2016E 2017E Others NAND DRAM

Source: Company, Daiwa forecasts

SK Hynix: quarterly and annual earnings and forecasts 1Q15 2Q15 3Q15E 4Q15E 2015E 2016E 2017E Sales (KRW bn) 4,818 4,639 4,874 4,602 18,933 17,690 18,968 DRAM 3,633 3,707 3,686 3,519 14,546 13,503 14,620 NAND 1,041 1,108 1,094 994 4,237 3,866 4,063 OP (KRW bn) 1,589 1,375 1,393 1,186 5,543 4,132 5,164 DRAM 1,564 1,507 1,379 1,213 5,663 4,337 5,477 NAND 27 49 15 -27 66 -205 -312 OPM 33.0% 29.6% 28.6% 25.8% 29.3% 23.4% 27.2% DRAM 43.1% 40.7% 37.4% 34.5% 38.9% 32.1% 37.5% NAND 2.6% 4.5% 1.4% -2.7% 1.5% -5.3% -7.7% Net profit to parent (KRW bn) 1,296 1,108 1,142 976 4,522 3,422 4,263

Source: Company, Daiwa forecasts

SK Hynix: key assumptions 1Q15 2Q15 3Q15E 4Q15E 2015E 2016E 2017E DRAM Bit growth (%) -5.0% 4.0% 10.0% 4.0% 24.5% 20.7% 16.8% ASP (%) -4.0% -8.0% -10.0% -7.0% -18.6% -24.0% -7.6% NAND Bit growth (%) 0.0% 8.0% 13.0% 7.0% 62.1% 30.0% 27.1% ASP (%) -7.0% -6.0% -13.0% -14.0% -21.7% -29.8% -17.3%

Source: Daiwa forecasts

51

SK Hynix (000660 KS): 15 October 2015

Capital management Capital expenditure In August 2015, SK Hynix announced a 10-year capex plan to spend KRW46tn in facility investments on 3 new lines. Of the total amount, the company said it would spend KRW15tn on equipment for the recently completed DRAM chip plant (M14 line) in Icheon, and KRW31tn to construct 2 new chip plants, one each in Icheon and Cheongju.

 We believe SK Hynix’s long-term investment plan will have a limited impact on industry supply, as the company can be flexible and adapt quickly to the demand situation. Indeed, the company has mentioned that it plans to downsize its capacity expansion plan for the M14 line and slow down the transfer of production facilities from the older M10 line to the M14 line.

Capex to decrease in  We expect SK Hynix to spend KRW6.3tn on capex in 2015, compared with KRW4.8tn in 2016E 2014, and KRW5.5tn for 2016. In terms of capex breakdown, we estimate 83% of the capex will be spent on the DRAM business in 2015, declining to 55% in 2016, due to the company’s plan to increase investment in 3D NAND in 2016.

Shareholder returns At the end of 2014, SK Hynix declared its first annual cash dividend, which amounted to KRW218bn, and we believe it will declare a similar annual dividend for 2015, despite its current dividend yield, at 1.1%, still being far below than that of its global peers. In 2Q15, SK Hynix announced a KRW859bn share buyback programme (which was subsequently launched on 22 July and closes on 22 October), and we expect the company to launch other buyback programmes going forward as part of the ongoing restructuring occurring at parent SK Group.

SK Hynix: share buyback plan announced on 21 July 2015 Repurchase of treasury shares by SK Hynix Number of shares to be repurchased (’000) 22,000 Total number of issued shares (’000) 728,002 % of total number of shares 3.0% Expected repurchase amount KRW859bn Expected repurchase period 23 July-22 Oct

Source: Dart, Daiwa

52

SK Hynix (000660 KS): 15 October 2015

Valuation and risks

We initiate coverage with We initiate coverage of SK Hynix with a Buy (1) rating and 12-month target price of a Buy rating and TP of KRW43,000, which is based on a 1.2x 2016E PBR. Taking a conservative stance to derive KRW43,000, based on a our target price, we use the average of SK Hynix stock’s trough PBR multiples for each 2016E PBR of 1.2x year over the 2009-14 period.

SK Hynix: historical PBR (x) 2009 2010 2011 2012 2013 2014 High 2.3 2.1 2.8 2.2 2.0 2.1 P/BV Avg 1.5 1.7 1.9 1.8 1.6 1.8 Low 0.6 1.5 1.2 1.4 1.3 1.4

Source: Bloomberg

SK Hynix: 12-month-forward PBR SK Hynix: 12-month-forward PBR bands

(x) (KRW) 3.0 70,000 60,000 2.5 50,000 2.0 40,000 1.5 30,000 20,000 1.0 10,000 0.5 0 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 12mths Fwd (x) +2STDV +1STDV Price 1.0x 1.2x

Average -1STDV -2STDV 1.4x 1.6x 1.8x Source: Bloomberg, Daiwa Source: Bloomberg, Daiwa

Peer valuations Ticker Recom. TP Upside Price Mkt cap P/E (x) P/BV (x) ROE (%) EV/EBITDA (x) Div yield (%) Company (Bloomberg) (Local curr) (%) (Local curr) (USDm) FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E

Coverage

SK Hynix 000660 KS Buy 43,000 18.1% 36,400 23,108 5.8 7.6 1.2 1.0 23% 15% 2.6 2.6 1.1% 1.1%

Semiconductor

SK Hynix 000660 KS Buy 43,000 18.1% 36,400 23,108 5.8 7.6 1.2 1.0 23% 15% 2.5 2.6 1.1% 1.1% Samsung Electronics 005930 KS Buy 1,470,000 17.2% 1,254,000 161,070 8.7 8.4 1.0 1.0 12% 12% 2.4 2.0 1.6% 1.6% Micron MU US NR n/a na 18.82 20,390 7.1 12.8 1.7 1.5 24% 11% 4.3 4.9 0.0% 0.0% Sandisk SNDK US NR n/a na 68.70 14,045 22.1 16.2 2.6 2.5 8% 13% 10.5 8.7 1.7% 1.8% Intel INTC US Outperform 33.2 1.2% 32.80 155,931 14.3 13.9 2.6 2.5 19% 18% 6.8 6.4 2.9% 3.0% Mediatek 2454 TT Buy 375 37.6% 272.50 13,170 13.9 12.0 1.7 1.8 10% 12% 7.4 6.8 8.3% 7.3% TSMC 2330 TT Outperform 145 6.2% 136.50 108,822 11.4 12.7 2.8 2.5 23% 21% 5.7 5.5 3.4% 3.3% Qualcomm QCOM US Underperform 59.2 1.0% 58.63 92,120 12.7 12.6 3.0 2.9 19% 22% 8.7 9.0 3.0% 3.3% Nanya 2408 TT N/R n/a na 40.50 3,043 5.5 7.5 1.8 1.6 37% 21% na na 4.2% 2.9% Average 12.1 12.2 3.2 3.0 26% 25% 8.4 8.0 3.1% 2.9%

Source: Daiwa forecasts for SK Hynix, SEC, Mediatek, TSMC; Bloomberg for all others Note: share prices as at the close on 14 October 2015

Risks to our call The main risk to our call on SK Hynix would be China corporates entering the memory industry. If China players, backed by the government, enter the industry by acquiring existing players or forming joint ventures/strategic alliances with the major players, we think the current oligopoly structure would be at stake and the oversupply issue and decline in DRAM prices would continue.

A secondary risk would be the company taking longer than expected to secure competitiveness in NAND. We believe SK Hynix needs to strengthen its NAND business at the current juncture and, in doing so, capture such core technology as 3D NAND, controller and etc, which will play a crucial part in boosting its profitability over the next few years. In the case of a delay in capturing competitive technology, SK Hynix would likely struggle for a prolonged period to see an earnings recovery.

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SK Hynix (000660 KS): 15 October 2015

Company background

SK Hynix manufactures semiconductors, such as dynamic random access memory (DRAM) and NAND flash memory. Formerly known as “Hynix”, the company was acquired by SK Group in November 2011 and renamed “SK Hynix” in March 2013. Currently, SK Hynix is the world’s No.2 player in the DRAM market and has competitive technology in the NAND business as well. SK Telecom is the biggest stakeholder, currently holding 21% of SK Hynix's outstanding shares.

According to iSuppli, SK Hynix was ranked in 2nd position with a 27.6% share of the DRAM market, and had a 15.2% NAND flash market share, as of 1Q15. SK Hynix occupies 4th place in the global semiconductor market as a whole.

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SK Hynix (000660 KS): 15 October 2015

Appendix

SK Hynix: historical DRAM spot price (USD) 3.5

3.0

2.5

2.0

1.5

1.0

0.5 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 DDR3 2Gb 1333MHz~1600MHz DDR3 1Gb 1333MHz DDR2 1Gb 800MHz

Source: Company, Daiwa

SK Hynix: 2015 consensus earnings revision trend SK Hynix: 2016 consensus earnings revision trend

(KRW tr) (KRW tr) 6.5 7.0

6.5 6.0

6.0 5.5 5.5 5.0 5.0

4.5 4.5

4.0 4.0

3.5 3.5 3.0 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 3.0 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Consensus OP Consensus NP Consensus OP Consensus NP

Source: Bloomberg, Daiwa Source: Bloomberg, Daiwa

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SK Hynix (000660 KS): 15 October 2015

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional); Banking; Insurance (Taiwan) TAIWAN Junjie TANG (852) 2773 8736 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Macro Economics (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Jonas KAN (852) 2848 4439 [email protected] (Regional) Head of Hong Kong and China Property Steven TSENG (886) 2 8758 6252 [email protected] Cynthia CHAN (852) 2773 8243 [email protected] IT/Technology Hardware (PC Hardware) Property (China) Christine WANG (886) 2 8758 6249 [email protected] Leon QI (852) 2532 4381 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Banking (Hong Kong/China); Broker (China); Insurance (China) Kylie HUANG (886) 2 8758 6248 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Jamie SOO (852) 2773 8529 [email protected] Small/Mid Cap Gaming and Leisure (Hong Kong/China) Dennis IP (852) 2848 4068 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Kelvin LAU (852) 2848 4467 [email protected] Capital Goods; Utilities

Head of Automobiles; Transportation and Industrial (Hong Kong/China) SINGAPORE Brian LAM (852) 2532 4341 [email protected] Ramakrishna MARUVADA (65) 6499 6543 [email protected] Transportation – Railway; Construction and Engineering (China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Jibo MA (852) 2848 4489 [email protected] Royston TAN (65) 6321 3086 [email protected] Head of Custom Products Group Oil and Gas; Capital Goods Thomas HO (852) 2773 8716 [email protected] David LUM (65) 6329 2102 [email protected] Custom Products Group Property and REITs

Shane GOH (65) 64996546 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Utilities and Energy Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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SK Hynix (000660 KS): 15 October 2015

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SK Hynix (000660 KS): 15 October 2015

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SK Hynix (000660 KS): 15 October 2015

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The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

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SK Hynix (000660 KS): 15 October 2015

Disclosure of investment ratings Rating Percentage of total Buy* 63.8% Hold** 22.2% Sell*** 14.0% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

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