Semiconductor (Overweight)
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KDB Daewoo Securities upgraded to AA+ (highest credit rating given to a domestic securities firm) December 30, 2011 By KR, KIS, and NICE on Nov. 2011 2012 Outlook Report Industry Report Semiconductor (Overweight) Daewoo Securities Co., Ltd. James Song +822-768-3722 [email protected] William Lee +822-768-4168 [email protected] Mobile revolution to bring about a paradigm shift The mobile revolution is now transitioning from its initial phase of creative innovation to one of evolution and growth. In 2012, the smart device market is projected to reach economies of scale by growing to 800mn units (twice the PC market). Samsung Electronics (SEC), having already overtaken Apple as the worldÊs top smartphone seller, is well positioned to leverage its strengths to continue its lead through this next phase. In light of the mid- to long-term growth of smart devices, the global application processor (AP) market is expected to display explosive growth in the coming years. Although global AP sales are forecast to come in at US$8bn in 2011, in contrast to CPU sales of US$40bn, we project the AP market to dramatically expand to US$38bn in 2015, surpassing the CPU market. This should provide enormous opportunities for SEC, which already controls over 50% of the global AP market. SEC has differentiated itself from its leading peers in the mobile market by achieving strong vertical integration. As such, the companyÊs AP, mobile DRAM, NAND, and AMOLED businesses will all grow in line with the growth of its smartphone business. In addition to overtaking Apple in the smartphone segment, SEC is likely to eclipse Intel in the semiconductor segment over the mid- to long-term. Considering such positive momentum behind SEC, we are highly optimistic of the shares. We reiterate our Overweight rating on the semiconductor sector. Our top picks are SEC (005930 KS/Buy/TP: W1,300,000), Hynix Semiconductor (000660 KS/Buy/TP: W26,000), Eugene Technology (084370 KQ/Buy/TP: W30,000), Nepes (033640 KQ/Buy/TP: W22,000), and Simmtech (036710 KQ/Buy/TP: W18,000). Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. I. Second phase of mobile revolution: Change in market leadership .......................................3 1. Global IT industry is undergoing seismic change .....................................................................3 2. Changes in the OS and CPU markets ......................................................................................4 3. SEC is at the center of the leadership change .........................................................................5 4. Mid- to long-term outlook for the smart device market .............................................................6 II. Mega-trend of global semiconductor market: Shift from CPU to AP ....................................8 1. What’s behind the mega shift?..................................................................................................8 2. APs to undergo continued evolution .......................................................................................10 3. SEC is increasing its dominance in the AP market ................................................................12 4. Main AP rivals: Qualcomm and Texas Instruments................................................................15 5. Possible competition with TSMC and Intel .............................................................................18 III. Memory market outlook...........................................................................................................21 1. Memory market growth to be led by NAND demand from 2012.............................................21 2. Smartphones and PCs (SSD) to drive NAND demand...........................................................22 3. NAND supply may tighten after 2Q12 due to limited capacity growth....................................24 4. [DRAM competitiveness] Competitiveness gap widened during down-cycle.........................25 5. [DRAM demand] PC demand to enter low growth cycle ........................................................26 6. [DRAM demand] Release of Ivy Bridge and Windows 8 to have limited impact........................27 7. DRAM supply/demand conditions to gradually improve from 1Q12.......................................29 IV. Issue analysis: Migration to 1Xnm process..........................................................................30 1. New lithography equipment to be introduced with migration to 1Xnm process .........................30 2. Introduction of EUV lithography equipment may trigger restructuring....................................31 3. NAND design to evolve to 3D method ....................................................................................33 4. DRAM modules to evolve to HMC ..........................................................................................34 V. Investment strategy and valuation .........................................................................................35 1. SEC: “Short Intel and long SEC” over the mid- to long-term..................................................35 2. Hynix Semiconductor: Beneficiary of growing mobile demand ..............................................36 3. Equipment segment: Focus on capex expansion in 2012......................................................37 4. Parts segment: Fundamentals improving at back-end processors ........................................38 Samsung Electronics (005930 KS) ............................................................................................. 39 Hynix Semiconductor (000660 KS)............................................................................................. 44 Eugene Technology (084370 KQ) ............................................................................................... 48 Nepes (033640 KQ)....................................................................................................................... 51 Simmtech (036710 KQ) ................................................................................................................ 54 2 December 30, 2011 Semiconductor I. Second phase of mobile revolution: Change in market leadership 1. Global IT industry is undergoing seismic change IT hardware companies The Apple-led mobile revolution has brought about a sea change in the global IT hardware under crisis industry, causing a crisis at some major hardware players. Recently, the industry has seen developments that were unimaginable a few years back, such as Nokia losing its grip on the market, Motorola Mobility being acquired by Google, and HP contemplating the split off of its PC unit. Big strategic differences Many established hardware companies are unable to keep up with software companies (e.g., between hardware and Google), which rapidly adopt new technologies by aggressive M&A. The reasons for this is software companies that hardware companies are generally focused on capacity ramp-ups and effective supply chain management. However, Apple is differentiating itself from other hardware companies by acquiring software technology. The benefits of AppleÊs recent acquisition of Siri should become evident over time. Figure 1. Mobile revolution and the market caps of Apple and other global IT hardware companies (US$bn) 500 Apple Intel+Dell+HP+Nokia+Sony 400 300 200 100 0 1/09 7/09 1/10 7/10 1/11 7/11 Source: Thomson Reuters, KDB Daewoo Securities Research Figure 2. Google growing rapidly via aggressive M&As Acquisition date Company Business Value Apr. 2003 Applied Semantics Online Advertising US$102mn Oct. 2004 Keyhole, Inc. Map Analysis Not disclosed Aug. 2005 Android Mobile Software US$50mn est. Jan. 2006 dMarc Broadcasting Advertising US$102mn Oct. 2006 YouTube Video Sharing US$1,650mn Apr. 2007 DoubleClick Online Advertising US$3,100mn Jul. 2007 Postini Communications Security US$625mn Nov. 2009 AdMob Mobile Advertising US$750mn Feb. 2010 On2 Video Compression US$133mn Jul. 2010 ITA Software Travel Technology US$700mn Aug. 2010 Slide.com Social Gaming US$228mn Aug. 2011 Motorola Mobility Mobile Device US$12,500mn Source: Web, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 December 30, 2011 Semiconductor 2. Changes in the OS and CPU markets OS and CPU markets are The growth of smart devices has brought changes not only to handset/TV set makers, but also undergoing big also to OS and CPU makers. While Microsoft has been the OS market leader in the PC era, changes Google will likely take the reins in the smart device era with its Android OS (50% market share). In addition, we expect the AP market to experience explosive growth, while the Intel- dominated CPU market should continue to wane. Hence, in our view, the age of Wintel (Windows + Intel) is slowly drawing to a close. Figure 3. Shift in OS hegemony in an era of smart devices [PC Era] [Smart Device Era] (%) Android Symbian iOS RIM Microsoft Others 100 3.8 7.3 7.9 12.9 17.3 20.6 13.5 80 14.8 17.8 19.3 18.8 14.9 18.1 60 17.6 5.9 11.7 13.8 4.9 1.1 0.2 28.0 40 39.9 53.1 45.5 52.0 52.8 51.7 47.2 20 35.2 16.1 0.3 0 2.5 08 09 10 11F 12F 13F 14F 15F Source: IDC, KDB Daewoo Securities Research Figure 4. Seismic shift from CPU to AP in an era of smart devices [PC Era] [Smart Device Era] C P U/ A * CISC(Complex Instruction Set Computer) * RISC(Reduced Instruction Set Computer) P M Intel Core i3, i5, i7 Intel Atom Coretex A–15, 9, 8, 5 ARM 11 ARM 9 A (Apple A6/A5/A4, Samsung Exynos) R Smartbook/