Hanwha Techwin (Notable) Seoul Semiconductor [Summary] Price-Driven Growth; Start of New Era

2H17 Outlook

Telecom equipment /Electronic components Age of transition: Q to P

Wonjae Park Young-gun Kim +822-3774-1426 +822-3774-1583 [email protected] [email protected]

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Contents

[Summary] 3

I. 1H17 review 5

II. 2H17 preview 11

III. Mid-long term forecast 16

IV. Conclusion 18

V. Top picks 19 LG Electronics, LG Innotek, SEMCO, Hanwha Techwin (notable) Seoul Semiconductor [Summary] Price-driven growth; start of new era

(1/3/05 =100) MSCI Korea IT (L) USD-KRW (R) 100JPY-KRW (R) (W) 600 2,000

TV era (Sony) Feature phone era (Nokia) Smartphone era (Apple) New era SEC 1st SEC 2nd SEC 1st -Fourth industrial LGE 2nd LGE 3rd LGE 4th revolution

400 1,500

200 1,000

0 500 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F

Source: Mirae Asset Daewoo Research

3| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research [Summary] Price-driven growth; start of new era

Better-than-anticipated performance in 1H17; rise of new growth engines in 2H17

Strategy: Focus on components and materials rather than devices Components: Differentiation and new Galaxy S5 iPhone 6 Galaxy Note 7 Galaxy Note 5 Galaxy S7 technologies

Galaxy S6/E Foldable?

iPhone 7/7+ Galaxy S8

2H17: New markets * IT applications iPhone 8? -Auto F/X, Galaxy S7 -Healthcare Galaxy S8? * New devices F/X Galaxy Note7 -IoT - Flexible

1Q15 1Q16 1Q17 1Q18F

Source: Mirae Asset Daewoo Research

4| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research I. 1H17 review

Market environment: • 2016 smartphone shipments grew by only 2.5% in 2017 Smartphone market’s • 2017 smartphone shipments are forecast to grow 4.2% to 1.53bn units turnaround •  In 1Q, shipments expanded 4.1% YoY to 347mn units • In 1H, top tiers displayed stable performances, amid a rise of China’s “Big 3” players  Normalization  Rise of China’s “Big 3” players Annual smartphone shipments YoY growth of quarterly smartphone shipments and value

(bn units) (%) (%) 2.0 Smartphone Shipments (L) 100 70 YoY growth (R)

1.6 75.8 1.5 1.5 1.5 1.4 75 50 62.3 1.3

47.0 1.0 29.7 1.0 50 30 26.6 22.9 0.7 27.8 21.7 0.5 0.5 25 10 4.1 0.3 1.2 10.4 -0.9 -0.9 0.1 0.2 4.2 4.4 0.2 2.5 0.0 0 -10 2007 2009 2011 2013 2015 2017F Market Samsung Apple Huawei Oppo Vivo Others

Source: IDC, Mirae Asset Daewoo Research Source: IDC, Mirae Asset Daewoo Research

5| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research I. 1H17 review

• SEC Market leaders: - Considering the Galaxy Note 7 debacle, SEC posted better-than-expected performance for 1Q, with smartphone SEC’s relatively strong shipments growing by 1.2% YoY to 80mn units (M/S: 23.1%) shipments vs. Apple’s - Market share will likely rise further in 2Q, backed by full-fledged sales of the Galaxy S8 • Apple modest performance - Given the seasonal downturn in smartphone demand, Apple exhibited modest performance in 1Q, with shipments edging lower by 0.9% YoY to 51mn units (M/S:14.6%) - A further drop in shipments appears inevitable for 2Q

SEC’s smartphone shipments and YoY growth Apple’s smartphone shipments and YoY growth (mn units) Smartphone shipments (L) (%) (mn units) (%) 100 YoY growth (R) 400 100 iPhone shipments (L) 100 YoY growth (R) Apple M/S (R) 80 300 80 80

60 200 60 60

40 100 40 40

20 0 20 20

0 -100 0 0 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17 2Q07 3Q08 4Q09 1Q11 2Q12 3Q13 4Q14 1Q16 2Q17F

Source: IDC, Mirae Asset Daewoo Research Source: IDC, Mirae Asset Daewoo Research

6| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research I. 1H17 review

US market: • US smartphone shipments reached 39.63mn units (+2% YoY, -32.7% QoQ) Apple/SEC’s stable • Apple and SEC maintained stable market shares in the US performances; surge of • LGE’s US-bound smartphone shipments totaled 5.88mn units (+7% YoY, -9.6% QoQ)  LGE’s US market share hit an all-time high of 14.9% (3rd in market share terms) LGE

Smartphone shipments and YoY growth in US Smartphone M/S in US

(mn units) (%) (%) (mn units) 60 8 80 Shipments (L) 90 LG Electronics shipments (R) Shipments YoY growth (R) Apple (L) Value YoY growth (R) Samsung (L) LG Electronics (L) ZTE (L) 60 60 45 6

40 30 30 4

20 0 15 2

0 -30 0 0 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17

Source: IDC, Mirae Asset Daewoo Research Source: IDC, Mirae Asset Daewoo Research

7| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research I. 1H17 review

China’s smartphone • In China, 1Q smartphone shipments reached 104mn units (+0.8% YoY, -23.3% QoQ), 6.9% below our previous forecast (111mn units) market being reorganized  Signs of a slowdown in China’s smartphone market based on local top tiers, • 1Q: Local top-three smartphone makers’ shipments: 54mn units (+18.5% YoY) vs. combined shipments of other local players: 50mn units (-13.2% YoY) amid slowdown in growth  The market has increasingly been reorganized based on top-tier local players  Rise of Oppo and Vivo in 1Q: Combined shipments in China: 33.53mn units (+14% YoY), combined market share: 35%

Smartphone shipments and YoY growth in China Monthly smartphone M/S in China

(mn units) Total smartphone shipments in China (L) (%) (%) 160 Huawei+Oppo+Vivo shipments (L) 120 40 Oppo+Vivo Total YoY Growth (R) Huawei Big3 YoY Growth (R) Apple Xiaomi Samsung 120 80 30 -6.9%

80 40 20

+18.1%

40 0 10 +0.8%

0 -40 0 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 09/13 03/14 09/14 03/15 09/15 03/16 09/16 03/17 Source: IDC, Mirae Asset Daewoo Research Source: Counterpoint, Mirae Asset Daewoo Research

8| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research I. 1H17 review

India: • Estimated smartphone shipments in 1Q17: 245.1 units (+4.3% YoY, -4.8% QoQ)  SEC maintained dominance; Shipment growth has slowed, due to stagnating smartphone penetration (mid-40%); market volume expanded 22% YoY in 1Q Chinese players grew • As of March 2017, SEC topped the Indian smartphone market with a market share of 22.5%, followed by Xiaomi sharply (7.6%)  SEC has maintained a market share in the low/mid-20% levels  Indian companies’ combined market share has shrunk, but Chinese players’ market share has expanded

Smartphone shipments and YoY growth in India Monthly smartphone M/S in India

(mn units) (%) (%) 40 Shipments (L) 60 60 Samsung Shipments YoY growth (R) China Big3(Xiaomi+Vivo+Oppo) Value YoY growth (R) India Big4(Micromax+Lava+Intex+Karbonn) Smartphone penetration (R)

30 40 45

20 20 30

10 0 15

0 -20 0 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17F 03/15 06/15 09/15 12/15 03/16 06/16 09/16 12/16 03/17

Source: IDC, Mirae Asset Daewoo Research Source: Counterpoint, Mirae Asset Daewoo Research

9| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research I. 1H17 review

Components: • New technologies or scale effects  Differentiation has – Differentiation New features, including iris recognition, dustproof/waterproof, 3D sensor modules, and connectors (USB 3.1 C-type) gained traction spurred • Component industries that face overcapacity have continued to struggle  In some industry segments, by new technologies and restructuring has come to a close the economies of scale • Slowing smartphone market growth has lowered investor expectations  Positive investments in oligopolistic players and companies with new technologies have decreased

Major IT sectors and market index USD/W rate and handset/component market index

(1/2/16=100) (1/2/15=100) 220 KOSPI 140 Handset/Appliances Index KOSDAQ USD-KRW Handset/Appliances Semiconductor 180 Display 125

140 110

100 95

60 80 01/16 05/16 09/16 01/17 05/17 01/16 05/16 09/16 01/17 05/17

Source: Quantiwise, Mirae Asset Daewoo Research Source: Quantiwise, Mirae Asset Daewoo Research Note: The handset/component market index is composed of 138 stocks, including LG Innotek, SEMCO, and Partron.

10| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research II. 2H17 preview

2017 smartphone shipments • For 2017, handset shipments are projected at 1.99bn units (+1.1% YoY), picking up slightly from negative growth forecast at 1.53bn units (-0.4% YoY) in 2016 • Smartphone shipments (units): 1.44bn in 2015  1.46bn in 2016F  1.53bn in 2017F  1.60bn in 2018F (+4.2%) • The smartphone market maturation is accelerating: 2017F growth of just 4.2% (+1.7%p YoY)  Market maturation to Companies face dual threats: Apple’s upcoming release of the 10th anniversary iPhone vs. Chinese continue suppliers’ aggressive push  Industry competition is expected to intensify further  Competition to intensify Global handset shipment and growth trends

(bn units) (%) 2.4 Feature phones (L) 100 Smartphones (L) +1.1% 20.1 Growth rate (R) 19.8 19.9 19.7 80 1.8 0.3 0.5 0.5 0.4 0.7 60 1.6 1.5 1.2 14.7 14.4 +4.4% +4.2% 40 1.3 +2.5%

0.6 20

0.0 0 1999 2002 2005 2008 2011 2014 2017F Source: IDC, Mirae Asset Daewoo Research

11| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research II. 2H17 preview

Slowing growth of • The smartphone market growth in China, as well as in the US and West Europe, is slowing rapidly developed and Indian • Going forward, the Indian and Asian markets will likely drive up global market growth markets; global market  In 2017, India’s smartphone market is expected to grow 10.3% growth hinges on Indian market

Global smartphone sales volume growth

2015 2016 2017F 2018F

US 2.8% 5.2% 1.6% 1.3%

Western 4.3% -8.2% -3.0% -1.3% Europe

Japan -2.2% 2.3% 4.9% -3.6%

China 1.6% 8.7% 4.5% 2.7%

India 28.8% 5.2% 10.3% 18.4%

Other 21.3% -0.1% 5.7% 6.8% Asia South 5.5% -0.6% 3.3% 2.9% America

Total 10.4% 2.5% 4.2% 4.4%

Source: IDC, Mirae Asset Daewoo Research

12| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research II. 2H17 outlook

SEC to expand its • Mature smartphone market  low/mid-end lineup, SEC needs to expand its low/mid-end lineup (growth markets: India, South America, Southeast Asia), while also maintaining competitiveness in the high-end segment while maintaining  We think SEC has to continue its efforts to improve cost efficiency, while maintaining brand competitiveness competitiveness in high- and economies of scale  The company will likely reconfirm its smartphone competitiveness with the launch of the Galaxy S8 end segment  The company’s earnings are likely to be driven by its semiconductor, components, and materials businesses for now Economies of scale are important (OP margins of the global Revenue and OP margin of SEC’s IM division top 3 handset makers in the mid-2000s) (Wbn) (%) (%) 40,000 Revenue (L) 20 30 Samsung Electronics OP margin (R) LG Electronics Nokia

30,000 15 20

20,000 10 10

10,000 5 0

0 0 -10 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15 1Q17F 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

13| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research II. 2H17 outlook

Apple needs to start • Apple, an icon of innovation, failed to show substantial innovation with the iPhone 7 innovating again; • As such, interest in the iPhone 8 (10th-anniverary iPhone) is high; the company also needs to recover market share in China, as its piece of the pie has been declining since the beginning of 2016 Chinese smartphone • Chinese smartphone makers are seeing declining sales volume makers fighting to  The number of Chinese smartphone makers has ballooned, and investors should take note of those that survive prevail amid fierce competition

Apple iPhone 7 and 6S Chinese smartphone makers’ M/S

iPhone 7 iPhone 7 Plus iPhone 6S iPhone 6S Plus Vendor 1Q16 (units) 1Q17 (units) M/S (%) YoY shipments (%) Huawei 16,577,000 20,799,000 16.0 25.5 OPPO 15,813,550 18,903,000 15.3 19.5 vivo 13,595,771 14,827,776 13.2 9.1 Xiaomi 10,088,709 9,334,295 9.8 -7.5 Meizu 1,125,954 6,034,900 1.1 436.0 Gionee 5,081,266 6,005,030 4.9 18.2 ZTE 3,850,000 2,590,000 3.7 -32.7 LeEco 3,501,790 1,885,270 3.4 -46.2 Coolpad 3,795,639 1,613,649 3.7 -57.5 AP Apple A10 Fusion Apple A9 (64-bit) M9 motion coprocessor Hisense 1,027,681 842,117 1.0 -18.1 Qihoo 360 673,825 805,363 0.7 19.5 OS iOS 10 iOS 9 Koobee 694,822 758,837 0.7 9.2 Smartisan 284,899 502,349 0.3 76.3 4.7‰ IPS LCD 5.5‰ IPS LCD 4.7‰ IPS LCD 5.5‰ IPS LCD Display HTC 390,121 318,333 0.4 -18.4 LED-backlit IPS LCD 3D Touch Taptic Engine China Mobile 287,618 282,723 0.3 -1.7 K-Touch 911,797 270,035 0.9 -70.4 Resolution 1334 x 750 1920 x 1080 133 4x 750 192 0x 1080 Lenovo 1,259,415 257,151 1.2 -79.6 RAM 2GB 2GB Doov 216,276 230,734 0.2 6.7 Konka 160,514 200,728 0.2 25.1 Storage 32/128/256 GB 16/64/128 GB Meitu 100,840 200,384 0.1 98.7 Bird 224,856 154,537 0.2 -31.3 Wireless LTE Advance 802.11ac Wi-Fi LTE Advance 802.11ac Wi-Fi Haier 141,340 142,176 0.1 0.6 Primary: 12MP Primary: 12MP dual Primary: 12MP Primary: 12MP Changhong 98,058 104,865 0.1 6.9 Camera Secondary: 7MP Secondary: 7MP Secondary: 5MP Secondary: 5MP ASUS 206,312 80,194 0.2 -61.1 Battery 1,960mAh 2,900mAh 1,715mAh 2,750mAh OnePlus 87,042 79,976 0.1 -8.1 TCL 500,000 70,000 0.5 -86.0 Source: GSMArena, Mirae Asset Daewoo Research Source: IDC, Mirae Asset Daewoo Research

14| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research II. 2H17 outlook

• The current earnings improvements have been driven by higher prices arising from a premium strategy for home Focusing on prices, appliances, including TVs, rather than sales volume growth rather than sales volume • Expansion of high-end smartphone models: SEC and Apple have been expanding their premium smartphone model line-ups - In the Chinese market, OPPO and Vivo are gaining market share  The adoption of new technologies and parts, including OLED, dual cameras, 3D sensing, and VR/AR, is increasing  Favorable for domestic smartphone parts makers

High-end smartphone shipments and portion of high- LGE’s super-premium brand, “LG Signature” resolution smartphone cameras in China (mn units) (%) 40 High-end (above US$400) smartphone shipments (L) 100 Portion of high resolution (above 12MP) smartphone camera (R)

30 75

20 50

10 25

0 0 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16

Source: LGE, Mirae Asset Daewoo Research Source: IDC, Mirae Asset Daewoo Research

15| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research III. Mid-long term outlook

Smartphones becoming • Smartphones are becoming commodity products that can be manufactured by a growing number of firms commoditized: Solid • Commodity products: Swift response to consumer needs + cost efficiency + ability to apply new technology + brand value  Increasing importance of supply chain  SEC vs. LGE vs. Sony and Apple supply chain is important • SEC and LGE are likely to maintain or improve their competitiveness

IT products: Life cycle vs. profitability Major IT firms’ supply chains

(%) (%) 99 Penetration (L) 45 Set Samsung Electronics LG Electronics APPLE Foxconn Sony Earnings (R)

66 30

Samsung SEC, LGD, Display Samsung LG LG Part SEMCO SEMCO, LG Innotek, Murata, Display Innotek Display Murata, Ibiden, Nichia etc. Ibiden, TDK etc.

33 15

Shin-Etsu Chemical, SUMCO, Hitachi Samsung Material Others LG Chem Others Chemical, JSR, Sumitomo Chemical, S&T Nitto Denko, Sumitomo Bakelite 0 0 Beginning Middle Maturing

Source: Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

16| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research III. Mid-long term outlook

IT components and • IT powerhouses saw their IT businesses advance in the following order: 1) IT products; 2) components; and 3) materials/equipment materials/equipment • It has been about 10 years since Korean IT products began to gain major ground in the global market markets to expand • The competitiveness of Korean IT products has been driven by component quality  Accelerating overseas expansion: The component industry to become a major pillar of the Korean IT industry • In addition to the component makers, Korean materials/equipment makers are also likely to display growth

Countries that lead the components/materials markets M/S in semiconductor and LCD industries

Changes in market leadership LCD

Others DRAM 75% of total 1st place Entry 65% CSOT LCD 90% 1st place Entry Entry 60% BOE Sharp Wafer 1st place Entry 15% AU Optronics Chimei Innolux Photoresist Oligopoly Entry 10% Samsung Display Entry 0% Liquid crystal LG Display 06 07 08 09 10 11 12 13 14 15 16 Polarizer Oligopoly Entry 45% DRAM Appliances 1st place TV 1st place Handsets 1st place Others 1st place Nanya Technology Camera modules 27.9 26.0 22.6 24.8 27.3 21.0 27.3 Micron Technology MLCC 2nd place 21.6 1st place SK Hynix Power modules 42.1 41.2 45.5 47.1 32.5 38.0 36.1 40.5 LED 3rd place Samsung Electronics

09 10 11 12 13 14 15 16 70 80 90 00 10 20F 30F

Source: GSMArena, Mirae Asset Daewoo Research Source: IDC Mirae Asset Daewoo Research

17| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research [Conclusion]

Searching for new growth drivers

Price-driven era New growth - SEMCO, LG Innnotek engines - Component makers -LGE, - Hanwha Techwin

New markets in 2H

F/X, Note 7 Application of IT -Auto -Healthcare

New devices -IoT iPhone 8? -Flexible

Galaxy S8 Note 8? Foldable?

1Q16 2Q 3Q 4QF 1Q17 2QF 3QF 4QF

Source: Mirae Asset Daewoo Research

18| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Top picks LG Electronics (066570 KS)

Improved fundamentals Enhanced earnings stability; smartphone business needs to stabilize (Maintain) Buy • The home appliance and TV units should maintain stable earnings, on an increased mix of premium products • In 2H, earnings should hinge on smartphone performances Target Price (12M, W) 96,000  The smartphone unit will likely break even (in terms of OP margin), thanks to successful restructuring  Need for preparation for 2018, with plans to offer both conventional and differentiated products Share Price (5/18/17, W) 79,100 • Positives: Normalization of tax rate alongside improving earnings; attractive valuation • We estimate 2Q revenue at W14.82tr (+5.8% YoY, +1.1% QoQ) and operating profit at W798.7bn (+36.6% YoY, Expected Return 21% -13.3% QoQ)

Reiterate Buy and TP of W96,000 OP (17F, Wbn) 3,047 The smartphone business, which has been the main drag on the stock, is also turning around Consensus OP (17F, Wbn) 2,794 • With the normalization of the tax rate, valuation has become attractive EPS Growth (17F, %) 2,610.8 •

Market EPS Growth (17F, %) 35.7

P/E (17F, x) 6.9

Market P/E (17F, x) 9.9 KOSPI 2,286.82

160 Market Cap (Wbn) 12,945 LG Electronics FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F

Shares Outstanding (mn) 181 150 KOSPI Revenue (Wbn) 56,772 59,041 56,509 55,367 60,010 63,435 Free Float (%) 65.0 140 OP (Wbn) 1,249 1,829 1,192 1,338 3,047 3,281 Foreign Ownership (%) 31.4 130 OP margin (%) 2.2 3.1 2.1 2.4 5.1 5.2

Beta (12M) 1.14 120 NP (Wbn) 177 399 124 77 2,084 1,887

52-Week Low 44,900 110 EPS (W) 978 2,208 688 425 11,525 10,437

52-Week High 81,200 100 ROE (%) 1.5 3.4 1.1 0.7 16.0 12.7 (%) 1M 6M 12M90 P/E (x) 69.7 26.8 78.2 121.4 6.9 7.6 80 Absolute 13.0 68.8 46.8 P/B (x) 1.0 0.9 0.8 0.8 1.0 0.9 70 Relative 6.2 45.8 25.616.5 16.9 17.1 17.5 Div.Yield (%) 0.3 0.7 0.7 0.8 0.5 0.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: LG Electronics, Mirae Asset Daewoo Research estimates

19| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Top picks LG Electronics (066570 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F

Revenue 56,509 55,367 60,010 63,435 Current Assets 16,398 16,991 19,677 22,142 P/E (x) 78.2 121.4 6.9 7.6

Cost of Sales 43,635 41,630 44,042 46,218 Cash and Cash Equivalents 2,710 3,015 4,751 6,340 P/CF (x) 2.2 1.6 3.2 3.2

Gross Profit 12,874 13,737 15,968 17,217 AR & Other Receivables 7,450 7,317 7,815 8,274 P/B (x) 0.8 0.8 1.0 0.9

SG&A Expenses 11,682 12,399 12,921 13,936 Inventories 4,873 5,171 5,523 5,847 EV/EBITDA (x) 5.3 5.1 3.9 3.4

Operating Profit (Adj) 1,192 1,338 3,047 3,281 Other Current Assets 1,365 1,488 1,588 1,681 EPS (W) 688 425 11,525 10,437

Operating Profit 1,192 1,338 3,047 3,281 Non-Current Assets 19,916 20,865 21,147 21,403 CFPS (W) 24,943 31,354 24,782 25,048

Non-Operating Profit -599 -616 177 -159 Investments in Associates 4,842 5,105 5,452 5,772 BPS (W) 64,542 66,536 77,658 87,691

Net Financial Income -359 -324 -277 -221 Property, Plant and Equipment 10,460 11,222 11,117 11,014 DPS (W) 400 400 400 400

Net Gain from Inv in Associates 360 269 721 504 Intangible Assets 1,473 1,571 1,597 1,624 Payout ratio (%) 26.2 51.6 2.9 3.2

Pretax Profit 593 722 3,224 3,122 Total Assets 36,314 37,855 40,825 43,545 Dividend Yield (%) 0.7 0.8 0.5 0.5

Income Tax 340 595 1,002 1,093 Current Liabilities 14,773 15,744 16,704 17,586 Revenue Growth (%) -4.3 -2.0 8.4 5.7

Profit from Continuing Operations 253 126 2,222 2,029 AP & Other Payables 8,175 9,235 9,864 10,442 EBITDA Growth (%) -17.1 -1.4 54.1 4.7

Profit from Discontinued Operations -4 0 0 0 Short-Term Financial Liabilities 2,340 1,672 1,673 1,674 Operating Profit Growth (%) -34.8 12.2 127.7 7.7

Net Profit 249 126 2,222 2,029 Other Current Liabilities 4,258 4,837 5,167 5,470 EPS Growth (%) -68.8 -38.2 2,611.8 -9.4

Controlling Interests 124 77 2,084 1,887 Non-Current Liabilities 8,558 8,754 8,616 8,497 Accounts Receivable Turnover (x) 7.6 7.8 8.2 8.2

Non-Controlling Interests 125 49 137 142 Long-Term Financial Liabilities 6,571 7,082 6,829 6,606 Inventory Turnover (x) 10.7 11.0 11.2 11.2

Total Comprehensive Profit 101 484 2,222 2,029 Other Non-Current Liabilities 1,987 1,672 1,787 1,891 Accounts Payable Turnover (x) 6.8 6.5 6.3 6.2

Controlling Interests -20 433 1,867 1,706 Total Liabilities 23,330 24,499 25,319 26,083 ROA (%) 0.7 0.3 5.6 4.8

Non-Controlling Interests 121 52 354 324 Controlling Interests 11,626 11,987 13,998 15,813 ROE (%) 1.1 0.7 16.0 12.7

EBITDA 3,125 3,081 4,748 4,972 Capital Stock 904 904 904 904 ROIC (%) 3.3 1.6 14.6 14.9

FCF (Free Cash Flow) 872 1,139 2,171 2,191 Capital Surplus 2,923 2,923 2,923 2,923 Liability to Equity Ratio (%) 179.7 183.4 163.3 149.4

EBITDA Margin (%) 5.5 5.6 7.9 7.8 Retained Earnings 9,017 9,233 11,245 13,059 Current Ratio (%) 111.0 107.9 117.8 125.9

Operating Profit Margin (%) 2.1 2.4 5.1 5.2 Non-Controlling Interests 1,357 1,370 1,507 1,649 Net Debt to Equity Ratio (%) 46.6 41.8 23.1 10.1

Net Profit Margin (%) 0.2 0.1 3.5 3.0 Stockholders' Equity 12,983 13,357 15,505 17,462 Interest Coverage Ratio (x) 2.6 3.2 7.9 8.8

Source: LG Electronics, Mirae Asset Daewoo Research estimates

20| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Top picks Samsung Electro-Mechanics (009150 KS)

Things will only get better Earnings to continue to improve in 2Q and beyond (Maintain) Buy • The effects of the Galaxy S8 should kick into high gear, driving strong earnings growth • China-bound sales of camera modules should grow further: W100bn in 4Q16  W180bn in 1Q17W250bn in Target Price (12M, W) 93,000 2Q17F • The MLCC unit should also deliver a double-digit OP margin, on strong sales of high-margin products and Share Price (5/18/17, W) 75,600 growing supply to the automotive sector • Positive effects of management efficiency initiatives should drive further earnings improvement Expected Return 23% • Both the semiconductor and display businesses have secured their respective growth drivers

Maintain Buy and TP of W93,000 OP (17F, Wbn) 223

Consensus OP (17F, Wbn) 269 • Our target price is based on a P/B of 1.6x (20% premium to the five-year average) our 12-month forward PBS of 58,074 EPS Growth (17F, %) 719.2 We are upbeat on the firm’s new products and positive earnings outlook Market EPS Growth (17F, %) 35.7 • Fan-out panel level packaging (FO-PLP) should provide significant momentum to business diversification P/E (17F, x) 48.7 •

Market P/E (17F, x) 9.9 KOSPI 2,286.82

Market Cap (Wbn) 5,647 160 Samsung Electro- FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F Mechanics Shares Outstanding (mn) 78 150 KOSPI Revenue (Wbn) 8,257 6,100 6,176 6,033 6,749 6,965

Free Float (%) 73.4 140 OP (Wbn) 464 65 301 24 223 272

Foreign Ownership (%) 19.5 130 OP margin (%) 5.6 1.1 4.9 0.4 3.3 3.9 Beta (12M) 1.33 NP (Wbn) 330 503 11 15 120 150 120 52-Week Low 45,350 EPS (W) 4,256 6,478 144 190 1,553 1,927 110 52-Week High 78,000 ROE (%) 8.2 11.5 0.3 0.3 2.8 3.4 100 (%) 1M 6M 12M P/E (x) 17.2 8.4 436.3 268.0 48.7 39.2 90 Absolute 11.2 57.2 49.4 P/B (x) 1.4 0.9 1.1 0.9 1.3 1.3 80 Relative 4.4 35.7 27.816.5 16.9 17.1 17.5 Div.Yield (%) 1.0 1.4 0.8 1.0 0.8 0.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Samsung Electro-Mechanics, Mirae Asset Daewoo Research estimates

21| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Top picks Samsung Electro-Mechanics (009150 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F

Revenue 6,176 6,033 6,749 6,965 Current Assets 2,730 2,812 2,619 2,622 P/E (x) 436.3 268.0 48.7 39.2

Cost of Sales 4,865 5,006 5,399 5,531 Cash and Cash Equivalents 1,035 796 384 345 P/CF (x) 7.6 5.3 7.2 6.6

Gross Profit 1,311 1,027 1,350 1,434 AR & Other Receivables 821 782 977 994 P/B (x) 1.1 0.9 1.3 1.3

SG&A Expenses 1,010 1,002 1,127 1,162 Inventories 679 827 827 842 EV/EBITDA (x) 7.3 8.4 9.1 8.4

Operating Profit (Adj) 301 24 223 272 Other Current Assets 195 407 431 441 EPS (W) 144 190 1,553 1,927

Operating Profit 301 24 223 272 Non-Current Assets 4,539 4,850 5,189 5,342 CFPS (W) 8,290 9,671 10,429 11,489

Non-Operating Profit 66 8 -52 -46 Investments in Associates 44 47 59 60 BPS (W) 56,299 56,531 57,595 59,033

Net Financial Income -17 -31 -35 -37 Property, Plant and Equipment 3,298 3,714 3,846 3,984 DPS (W) 500 500 600 700

Net Gain from Inv in Associates 7 9 0 0 Intangible Assets 91 92 87 83 Payout ratio (%) 176.1 158.6 33.8 28.9

Pretax Profit 367 32 171 226 Total Assets 7,269 7,663 7,808 7,963 Dividend Yield (%) 0.8 1.0 0.8 0.9

Income Tax 45 9 42 50 Current Liabilities 1,768 2,043 2,097 2,113 Revenue Growth (%) 1.2 -2.3 11.9 3.2

Profit from Continuing Operations 322 23 129 176 AP & Other Payables 485 620 666 678 EBITDA Growth (%) 9.7 -20.4 31.6 8.9

Profit from Discontinued Operations -302 0 0 0 Short-Term Financial Liabilities 1,025 1,166 1,166 1,166 Operating Profit Growth (%) 363.1 -92.0 829.2 22.0

Net Profit 21 23 129 176 Other Current Liabilities 258 257 265 269 EPS Growth (%) -97.8 31.9 717.4 24.1

Controlling Interests 11 15 120 150 Non-Current Liabilities 1,186 1,282 1,283 1,283 Accounts Receivable Turnover (x) 7.8 9.1 9.3 8.5

Non-Controlling Interests 9 8 8 26 Long-Term Financial Liabilities 1,017 1,278 1,278 1,278 Inventory Turnover (x) 8.1 8.0 8.2 8.3

Total Comprehensive Profit -119 64 129 176 Other Non-Current Liabilities 169 4 5 5 Accounts Payable Turnover (x) 14.7 15.0 13.8 14.2

Controlling Interests -127 56 -110 -150 Total Liabilities 2,954 3,325 3,380 3,396 ROA (%) 0.3 0.3 1.7 2.2

Non-Controlling Interests 8 8 239 326 Controlling Interests 4,222 4,241 4,323 4,435 ROE (%) 0.3 0.3 2.8 3.4

EBITDA 795 633 833 907 Capital Stock 388 388 388 388 ROIC (%) 6.2 0.4 3.4 4.1

FCF (Free Cash Flow) -659 -372 -101 86 Capital Surplus 1,045 1,045 1,045 1,045 Liability to Equity Ratio (%) 68.5 76.7 76.3 74.4

EBITDA Margin (%) 12.9 10.5 12.3 13.0 Retained Earnings 2,446 2,534 2,616 2,728 Current Ratio (%) 154.4 137.7 124.9 124.0

Operating Profit Margin (%) 4.9 0.4 3.3 3.9 Non-Controlling Interests 93 97 106 132 Net Debt to Equity Ratio (%) 21.2 30.8 39.5 39.0

Net Profit Margin (%) 0.2 0.2 1.8 2.2 Stockholders' Equity 4,315 4,338 4,429 4,567 Interest Coverage Ratio (x) 8.5 0.5 4.0 4.9

Source: Samsung Electro-Mechanics, Mirae Asset Daewoo Research estimates

22| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research LG Innotek (011070 KS)

Earnings to improve meaningfully in 2H

Dual-camera modules to drive growth in 2H17 (Maintain) Buy • Earnings are expected to meaningfully improve starting in 3Q17 1) Dual cameras will likely be adopted in upcoming smartphone models set for release in the fall Target Price (12M, W) 171,000 2) Introduction of new components • The company disclosed plans to invest W269.7bn in new mobile module technologies, which we suspect will be focused on 3D sensing modules Share Price (5/18/17, W) 128,500  Earnings growth will likely accelerate starting 4Q17, when the Vietnam plant is slated to come online • Improvement in automotive parts sales and LED profitability is also positive Expected Return 33% Maintain Buy and TP of W171,000 • We advise investors to increase exposure around 2Q17 earnings release, as we are confident about earnings OP (17F, Wbn) 331 growth in 2H17 Consensus OP (17F, Wbn) 353 • In the near term, we believe that market expectations may need to be adjusted EPS Growth (17F, %) 4,152.2

Market EPS Growth (17F, %) 35.7

P/E (17F, x) 14.4

Market P/E (17F, x) 9.9 KOSPI 2,286.82

200 Market Cap (Wbn) 3,041 LG Innotek FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F

Shares Outstanding (mn) 24 KOSPI Revenue (Wbn) 6,212 6,466 6,138 5,755 7,093 7,663 180 Free Float (%) 59.2 OP (Wbn) 136 314 224 105 331 406 Foreign Ownership (%) 29.5 160 OP margin (%) 2.2 4.9 3.6 1.8 4.7 5.3

Beta (12M) 0.89 NP (Wbn) 16 113 95 5 211 273 140 52-Week Low 74,500 EPS (W) 770 5,020 4,018 209 8,899 11,518

52-Week High 143,000 120 ROE (%) 1.2 7.5 5.5 0.3 11.2 12.9

(%) 1M 6M 12M100 P/E (x) 108.6 22.4 24.5 422.4 14.4 11.2 Absolute -3.7 65.6 69.7 P/B (x) 1.3 1.6 1.3 1.2 1.5 1.4 80 Relative -9.6 43.0 45.216.5 16.9 17.1 17.5 Div.Yield (%) 0.0 0.2 0.4 0.3 0.3 0.4 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: LG Innotek, Mirae Asset Daewoo Research estimates

23| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research LG Innotek (011070 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F

Revenue 6,138 5,755 7,093 7,663 Current Assets 1,789 2,084 2,150 2,461 P/E (x) 24.5 422.4 14.4 11.2

Cost of Sales 5,365 5,102 6,079 6,519 Cash and Cash Equivalents 360 341 328 599 P/CF (x) 3.1 3.8 4.7 4.2

Gross Profit 773 653 1,014 1,144 AR & Other Receivables 1,084 1,292 1,307 1,321 P/B (x) 1.3 1.2 1.5 1.4

SG&A Expenses 549 548 683 739 Inventories 303 403 460 483 EV/EBITDA (x) 4.3 6.2 5.6 4.6

Operating Profit (Adj) 224 105 331 406 Other Current Assets 42 48 55 58 EPS (W) 4,018 209 8,899 11,518

Operating Profit 224 105 331 406 Non-Current Assets 2,125 2,239 2,533 2,522 CFPS (W) 31,524 23,210 27,425 30,724

Non-Operating Profit -102 -94 -46 -47 Investments in Associates 0 0 0 0 BPS (W) 74,592 75,159 83,708 94,976

Net Financial Income -40 -30 -29 -27 Property, Plant and Equipment 1,647 1,729 2,019 2,005 DPS (W) 350 250 350 450

Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 207 227 227 227 Payout ratio (%) 8.7 119.4 3.9 3.9

Pretax Profit 122 11 285 359 Total Assets 3,914 4,324 4,684 4,983 Dividend Yield (%) 0.4 0.3 0.3 0.4

Income Tax 27 6 75 86 Current Liabilities 1,295 1,734 1,873 1,899 Revenue Growth (%) -5.1 -6.2 23.2 8.0

Profit from Continuing Operations 95 5 211 273 AP & Other Payables 776 1,199 1,369 1,437 EBITDA Growth (%) -16.8 -35.4 46.1 12.2

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 366 395 345 295 Operating Profit Growth (%) -28.7 -53.1 215.2 22.7

Net Profit 95 5 211 273 Other Current Liabilities 153 140 159 167 EPS Growth (%) -20.0 -94.8 4,157.9 29.4

Controlling Interests 95 5 211 273 Non-Current Liabilities 854 811 829 836 Accounts Receivable Turnover (x) 5.3 4.9 5.5 5.9

Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 698 686 686 686 Inventory Turnover (x) 18.7 16.3 16.4 16.2

Total Comprehensive Profit 74 22 211 273 Other Non-Current Liabilities 156 125 143 150 Accounts Payable Turnover (x) 9.3 7.8 7.0 6.9

Controlling Interests 74 22 211 273 Total Liabilities 2,149 2,545 2,703 2,735 ROA (%) 2.3 0.1 4.7 5.6

Non-Controlling Interests 0 0 0 0 Controlling Interests 1,765 1,778 1,981 2,247 ROE (%) 5.5 0.3 11.2 12.9

EBITDA 706 456 666 747 Capital Stock 118 118 118 118 ROIC (%) 6.8 2.0 9.5 11.8

FCF (Free Cash Flow) 417 13 95 375 Capital Surplus 1,134 1,134 1,134 1,134 Liability to Equity Ratio (%) 121.8 143.1 136.4 121.7

EBITDA Margin (%) 11.5 7.9 9.4 9.7 Retained Earnings 522 542 745 1,011 Current Ratio (%) 138.1 120.2 114.8 129.6

Operating Profit Margin (%) 3.6 1.8 4.7 5.3 Non-Controlling Interests 0 0 0 0 Net Debt to Equity Ratio (%) 39.7 41.6 35.5 17.0

Net Profit Margin (%) 1.5 0.1 3.0 3.6 Stockholders' Equity 1,765 1,778 1,981 2,247 Interest Coverage Ratio (x) 4.8 2.9 10.5 13.5

Source: LG Innotek, Mirae Asset Daewoo Research estimates

24| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Hanwha Techwin (012450 KS)

Robust growth potential Earnings growth to pick up in 2H17 (Maintain) Buy • Defense exports (e.g., growing overseas K9 orders) are increasing, which should boost profitability via economies of scale Target Price (12M, W) 69,000 • The firm is expanding into new businesses (e.g. driverless/electric car systems, and robotics) • Hanwha Techwin has decided to spin off its businesses into separate companies: Share Price (5/18/17, W) 48,500  Hanwha Techwin (surviving company), Hanwha Dynamics, Hanwha Power System, Hanwha Precision Machinery, and Hanwha Systems  If shareholders approve the decision at the June 15th meeting, the business divisions will be spun off on Expected Return 42% July 1st and registered as separate entities on July 4th  In the medium to long term, possible IPOs of subsidiaries could lead to an increase in cash inflow; OP (17F, Wbn) 139 shareholders should also benefit from a post-spin-off re-rating of the company’s enterprise value Consensus OP (17F, Wbn) 164 EPS Growth (17F, %) -74.2 Maintain Buy and 12-month forward TP of W69,000 Market EPS Growth (17F, %) 35.7 • We derived our target price based on our 12-month forward BPS estimate of W46,090 and target P/B of 1.5x P/E (17F, x) 28.9 (five-year average; previously 1.345x) Market P/E (17F, x) 9.9 KOSPI 2,286.82

150 Market Cap (Wbn) 2,577 Hanwha Techwin FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F

Shares Outstanding (mn) 53 140 KOSPI Revenue (Wbn) 2,630 2,616 2,613 3,519 3,897 4,139

Free Float (%) 66.6 130 OP (Wbn) 96 8 -60 151 139 172

Foreign Ownership (%) 23.5 120 OP margin (%) 3.7 0.3 -2.3 4.3 3.6 4.2 Beta (12M) 1.48 NP (Wbn) 132 -119 6 345 89 110 110 52-Week Low 40,000 EPS (W) 2,494 -2,236 108 6,498 1,676 2,068 100 52-Week High 67,700 ROE (%) 8.1 -7.1 0.3 15.1 3.7 4.5 90 (%) 1M 6M 12M P/E (x) 21.8 - 329.2 6.7 28.9 23.5 80 Absolute 1.7 -12.3 4.8 P/B (x) 1.7 0.8 0.8 1.0 1.1 1.0 70 Relative -4.5 -24.3 -10.416.5 16.9 17.1 17.5 Div.Yield (%) 0.9 0.0 0.8 0.0 0.2 0.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Hanwha Techwin, Mirae Asset Daewoo Research estimates

25| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Hanwha Techwin (012450 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F

Revenue 2,613 3,519 3,897 4,139 Current Assets 1,998 2,780 2,583 2,709 P/E (x) 329.2 6.7 28.9 23.5

Cost of Sales 2,097 2,802 3,198 3,372 Cash and Cash Equivalents 143 257 296 394 P/CF (x) 20.7 11.2 9.7 8.7

Gross Profit 516 717 699 767 AR & Other Receivables 492 924 736 755 P/B (x) 0.8 1.0 1.1 1.0

SG&A Expenses 576 566 560 595 Inventories 569 769 733 704 EV/EBITDA (x) 102.4 12.2 11.5 9.8

Operating Profit (Adj) -60 151 139 172 Other Current Assets 794 830 818 856 EPS (W) 108 6,498 1,676 2,068

Operating Profit -60 151 139 172 Non-Current Assets 2,110 2,872 2,936 3,001 CFPS (W) 1,718 3,865 4,978 5,603

Non-Operating Profit 41 268 -36 -37 Investments in Associates 230 36 143 150 BPS (W) 42,224 44,025 45,400 47,468

Net Financial Income -13 -13 -33 -32 Property, Plant and Equipment 845 1,360 1,326 1,311 DPS (W) 300 0 100 100

Net Gain from Inv in Associates 55 7 0 0 Intangible Assets 229 927 944 999 Payout ratio (%) 255.3 0.0 5.9 4.8

Pretax Profit -19 419 103 135 Total Assets 4,108 5,652 5,520 5,709 Dividend Yield (%) 0.8 0.0 0.2 0.2

Income Tax -25 73 13 24 Current Liabilities 1,352 1,969 1,792 1,852 Revenue Growth (%) -0.1 34.7 10.7 6.2

Profit from Continuing Operations 6 346 90 110 AP & Other Payables 192 449 342 356 EBITDA Growth (%) -78.4 1,147.4 13.5 13.4

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 364 360 360 360 Operating Profit Growth (%) - - -7.9 23.7

Net Profit 6 346 90 110 Other Current Liabilities 796 1,160 1,090 1,136 EPS Growth (%) - 5,916.7 -74.2 23.4

Controlling Interests 6 345 89 110 Non-Current Liabilities 511 1,343 1,313 1,333 Accounts Receivable Turnover (x) 5.6 5.3 4.9 5.8

Non-Controlling Interests 1 1 1 1 Long-Term Financial Liabilities 158 826 826 826 Inventory Turnover (x) 4.8 5.3 5.2 5.8

Total Comprehensive Profit 603 112 90 110 Other Non-Current Liabilities 353 517 487 507 Accounts Payable Turnover (x) 13.0 10.5 9.7 11.5

Controlling Interests 602 112 89 110 Total Liabilities 1,863 3,312 3,105 3,184 ROA (%) 0.2 7.1 1.6 2.0

Non-Controlling Interests 1 1 1 1 Controlling Interests 2,243 2,339 2,413 2,522 ROE (%) 0.3 15.1 3.7 4.5

EBITDA 19 237 269 305 Capital Stock 266 266 266 266 ROIC (%) 1.3 5.4 4.1 5.0

FCF (Free Cash Flow) -79 107 221 251 Capital Surplus 188 188 188 188 Liability to Equity Ratio (%) 83.0 141.5 128.6 126.1

EBITDA Margin (%) 0.7 6.7 6.9 7.4 Retained Earnings 1,016 1,350 1,423 1,533 Current Ratio (%) 147.8 141.2 144.1 146.3

Operating Profit Margin (%) -2.3 4.3 3.6 4.2 Non-Controlling Interests 2 2 2 3 Net Debt to Equity Ratio (%) 1.1 24.8 21.7 16.2

Net Profit Margin (%) 0.2 9.8 2.3 2.7 Stockholders' Equity 2,245 2,341 2,415 2,525 Interest Coverage Ratio (x) -3.6 7.1 3.5 4.3

Source: Hanwha Techwin, Mirae Asset Daewoo Research estimates

26| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Notable Seoul Semiconductor (046890 KQ)

Benefiting from growth of automotive electronics

Automotive electronics driving margin expansion (Maintain) Buy • For 2Q17, we anticipate revenue of W261.2bn (+12.5% YoY) and operating profit of W24.1bn (+145.3% YoY) • Profitably will likely remain stable in 2H17 Target Price (12M, W) 23,400 The decline in LED chip prices is slowing Automotive: Double-digit growth to continue Share Price (5/18/17, W) 19,300 Mobile: Laptop-related revenue to be generated from a North American customer Efficient control over SG&A expenses is another important positive Expected Return 21% Maintain Buy and TP of W23,400 • Note earnings stability, rather than valuation burden OP (17F, Wbn) 97 • Patents a further source of competitiveness for SSC Consensus OP (17F, Wbn) 92 • Likely to benefit from industry restructuring EPS Growth (17F, %) 51.5

Market EPS Growth (17F, %) 35.7

P/E (17F, x) 20.5

Market P/E (17F, x) 9.9 KOSDAQ 638.12

150 Market Cap (Wbn) 1,125 Seoul Semiconductor FY (Dec.) 12/13 12/14 12/15 12/16 12/17F 12/18F

Shares Outstanding (mn) 58 140 KOSDAQ Revenue (Wbn) 1,032 939 1,011 954 1,048 1,103

Free Float (%) 64.8 130 OP (Wbn) 96 3 46 58 97 107

Foreign Ownership (%) 10.7 120 OP margin (%) 9.3 0.3 4.5 6.1 9.3 9.7 Beta (12M) 0.49 NP (Wbn)36-717365573 110 52-Week Low 13,200 EPS (W) 619 -118 291 621 941 1,254 100 52-Week High 20,000 ROE (%) 6.3 -1.2 3.0 6.1 8.7 10.6 90 (%) 1M 6M 12M P/E (x) 65.2 - 54.0 25.1 20.5 15.4 80 Absolute 12.9 41.4 41.9 P/B (x) 4.1 2.1 1.6 1.5 1.7 1.5 70 Relative 12.3 37.4 52.116.5 16.9 17.1 17.5 Div.Yield (%) 0.4 0.0 0.5 0.5 0.5 0.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Seoul Semiconductor, Mirae Asset Daewoo Research estimates

27| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Seoul Semiconductor (046890 KQ)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/15 12/16 12/17F 12/18F (Wbn) 12/15 12/16 12/17F 12/18F 12/15 12/16 12/17F 12/18F

Revenue 1,011 954 1,048 1,103 Current Assets 500 504 562 642 P/E (x) 54.0 25.1 20.5 15.4

Cost of Sales 773 720 763 799 Cash and Cash Equivalents 41 32 61 109 P/CF (x) 6.2 5.1 5.9 5.2

Gross Profit 238 234 285 304 AR & Other Receivables 281 322 343 364 P/B (x) 1.6 1.5 1.7 1.5

SG&A Expenses 193 176 189 198 Inventories 107 108 115 123 EV/EBITDA (x) 7.0 6.4 6.2 5.7

Operating Profit (Adj) 46 58 97 107 Other Current Assets 71 42 43 46 EPS (W) 291 621 941 1,254

Operating Profit 46 58 97 107 Non-Current Assets 636 587 597 605 CFPS (W) 2,549 3,041 3,281 3,746

Non-Operating Profit -9 -8 -19 -4 Investments in Associates 2 2 2 2 BPS (W) 10,023 10,515 11,381 12,555

Net Financial Income -5 -4 -4 -3 Property, Plant and Equipment 548 480 479 473 DPS (W) 75 81 90 90

Net Gain from Inv in Associates 0 -1 0 0 Intangible Assets 44 49 59 71 Payout ratio (%) 16.2 12.5 9.3 6.9

Pretax Profit 37 50 78 103 Total Assets 1,136 1,091 1,159 1,248 Dividend Yield (%) 0.5 0.5 0.5 0.5

Income Tax 10 12 22 28 Current Liabilities 406 396 413 430 Revenue Growth (%) 7.7 -5.6 9.9 5.2

Profit from Continuing Operations 27 38 56 75 AP & Other Payables 211 201 214 228 EBITDA Growth (%) 49.1 6.2 20.5 5.8

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 156 162 164 166 Operating Profit Growth (%) 1,433.3 26.1 67.2 10.3

Net Profit 27 38 56 75 Other Current Liabilities 39 33 35 36 EPS Growth (%) - 113.4 51.5 33.3

Controlling Interests 17 36 55 73 Non-Current Liabilities 105 42 43 43 Accounts Receivable Turnover (x) 4.5 3.8 3.8 3.8

Non-Controlling Interests 10 1 1 2 Long-Term Financial Liabilities 102 41 41 41 Inventory Turnover (x) 8.6 8.9 9.4 9.3

Total Comprehensive Profit 28 35 56 75 Other Non-Current Liabilities 3 1 2 2 Accounts Payable Turnover (x) 5.9 4.3 4.4 4.4

Controlling Interests 18 35 56 75 Total Liabilities 511 439 455 473 ROA (%) 2.3 3.4 5.0 6.3

Non-Controlling Interests 9 0 0 0 Controlling Interests 574 603 654 722 ROE (%) 3.0 6.1 8.7 10.6

EBITDA 161 171 206 218 Capital Stock 29 29 29 29 ROIC (%) 4.0 5.8 9.1 9.9

FCF (Free Cash Flow) 182 49 60 85 Capital Surplus 346 346 346 346 Liability to Equity Ratio (%) 81.8 67.3 64.7 61.1

EBITDA Margin (%) 15.9 17.9 19.7 19.8 Retained Earnings 231 263 313 382 Current Ratio (%) 123.3 127.1 136.3 149.2

Operating Profit Margin (%) 4.5 6.1 9.3 9.7 Non-Controlling Interests 51 49 50 52 Net Debt to Equity Ratio (%) 24.4 21.8 16.0 8.4

Net Profit Margin (%) 1.7 3.8 5.2 6.6 Stockholders' Equity 625 652 704 774 Interest Coverage Ratio (x) 7.8 11.8 23.7 25.9

Source: Seoul Semiconductor, Mirae Asset Daewoo Research estimates

28| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price LG Innotek(011070) 04/02/2017 Buy 171,000 10/27/2015 Buy 24,000 03/01/2017 Buy 156,000 07/27/2015 Buy 22,600 01/25/2017 Buy 130,000 05/04/2015 Buy 23,500 01/01/2017 Buy 119,000 LG Electronics(066570) 04/09/2017 Buy 96,000 11/29/2016 Buy 115,000 03/13/2017 Buy 87,700 10/03/2016 Buy 105,000 03/01/2017 Buy 79,000 07/27/2016 Buy 117,000 01/26/2017 Buy 65,600 06/01/2016 Buy 107,000 10/28/2016 Buy 64,000 04/27/2016 Buy 96,000 10/03/2016 Buy 67,000 04/01/2016 Buy 102,000 07/28/2016 Buy 75,000 01/25/2016 Buy 115,000 03/01/2016 Buy 78,000 07/26/2015 Buy 123,000 01/26/2016 Buy 67,000 05/04/2015 Buy 136,000 11/27/2015 Buy 70,000 Hanwha Techwin(012450) 05/01/2017 Buy 69,000 10/30/2015 Buy 65,000 04/23/2017 Buy 61,000 07/01/2015 Buy 67,000 01/31/2017 Buy 62,000 06/01/2015 Buy 84,000 11/02/2016 Buy 71,000 05/04/2015 Buy 87,000 10/03/2016 Buy 80,000 Samsung Electro-Mechanics(009150) 05/01/2017 Buy 93,000 07/31/2016 Buy 77,000 04/02/2017 Buy 85,000 06/08/2016 Buy 61,000 02/20/2017 Buy 76,000 05/01/2016 Buy 59,000 01/26/2017 Buy 68,000 10/28/2015 Buy 49,000 10/03/2016 Buy 65,300 07/30/2015 Buy 44,000 08/31/2016 Buy 72,200 07/01/2015 Buy 39,000 04/26/2016 Buy 73,700 05/04/2015 Buy 33,000 01/31/2016 Buy 74,600 Seoul Semiconductor(046890) 04/02/2017 Buy 23,400 10/30/2015 Buy 93,000 02/02/2017 Buy 20,300 09/08/2015 Buy 82,000 10/03/2016 Buy 19,900 07/28/2015 Buy 79,000 07/31/2016 Buy 21,500 06/01/2015 Buy 82,000 02/01/2016 Buy 19,500 05/04/2015 Buy 97,000

29| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research (W) LG Innotek (W) Hanwha Techwin (W) Seoul Semiconductor(W) LG Electronics (W) Samsung Electro-Mechanics

200,000 100,000 30,000 120,000 120,000

80,000 25,000 100,000 100,000 150,000 20,000 80,000 80,000 60,000 100,000 15,000 60,000 60,000 40,000 10,000 40,000 40,000 50,000 20,000 5,000 20,000 20,000

0 0 0 0 0 May 15 May 16May May 15 17 May 16May May 15 17 May 16May May 15 17 May 16May May 15 17 May 16 May 17

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight: Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution Buy Trading Buy Hold Sell 72.86% 15.58% 11.56% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has been acting as a financial advisor to Seoul Semiconductor for its treasury stock trust.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

30| 2H17 Outlook [Telecom equipment/Electronic components] Mirae Asset Daewoo Research Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (USA) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Mirae Asset Securities (HK) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

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