Korea Tech Strategy

November 13, 2012 The Age of Transition

Korea Tech Strategy

The outlook for IT from a “disruptive innovation” perspective Daewoo Securities Co., Ltd.

James Song +822-768-3722 Mobile revolution: From revolution to evolution [email protected]

The mobile revolution has been a history of „disruptive innovation.‰ And at the heart of Wonjae Park this remarkable shake-up lie Apple, Samsung Electronics (SEC), Google, and Amazon. +822-768-3372 Notably, the global IT industry is currently facing several major shifts and issues, [email protected] including: 1) AppleÊs „innovatorÊs dilemma‰; 2) a reshuffling of global supply chains; 3) Jonathan Hwang the return of Microsoft; and 4) the zero growth of the PC industry. How Korean IT +822-768-4140 players approach these issues will create significant implications for the memory, [email protected] display, components, and electronic materialsÊ markets in 2013 onwards. Will Cho “Apple without SEC” vs. “SEC without Apple” +822-768-4306 [email protected]

Apple is now one of the most valuable corporations in the world. However, SEC sells Young Ryu more smartphones than Apple does. Unsurprisingly, global investors are paying keen +822-768-4138 attention to the competition between Apple and SEC, their innovations, and their [email protected] potential breakup. Our analysis suggests Apple is increasingly leaning toward „sustaining innovation‰ while SEC pursues a strategy of differentiation. At the same Brian Oh time, in reshuffling the global supply chain, we expect Apple could have difficulty +822-768-4135 [email protected] procuring parts supply without SECÊs contributions, while the Korean giant is likely to see very limited impacts from the absence of demand from Apple.

SEC: Disruptive innovation and strategic decisions

In the late 1990s, Nokia focused on disruptive innovation on its way to achieving massive global expansion. In the 1980s, Intel made a key strategic decision to move from the memory sector into the CPU sector, a shift that led the company to become the global CPU leader. This year, SEC has followed in the footsteps of both Nokia and Intel. SECÊs mass customization of smartphones reminds us of NokiaÊs expansion strategy, which enabled Nokia to obtain a global handset market share of more than 40%. And, just as Intel did in the 1980s, SECÊs semiconductor division is shifting its focus from the memory unit to the System LSI unit. In 2013, we believe SEC is likely to face a key strategic decision in its pursuit of fresh disruptive innovation.

Disruptive and sustaining innovation in the mobile industry Innovation

Disruptive innovation: Revolution

? Strategic decision (e.g., entering into a new market) iPad Sustaining innovation: Evolution

Nokia 9000 iPhone Sustaining innovation: Evolution StarTAC Time 1995 2000 2005 2010 2015 Source: KDB Daewoo Securities Research

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.

[Prologue] Moving from revolution to evolution ...... 4 Mobile market: From revolution to evolution...... 4 Mobile revolution: A story of disruptive innovation...... 5 Strategic decisions: Lessons from Intel of the 1980s ...... 6 Gearing up for the next disruptive innovation ...... 7 IT sector investment strategy for 2013...... 8

I. Apple: “The innovator’s dilemma”...... 12 Why the “innovator’s dilemma?”...... 12 Two issues facing Apple...... 13 Growth of new smart devices...... 14 SEC’s differentiated smartphone lineup...... 15 SEC: “It doesn’t take a genius” ...... 17 Innovation from content producers ...... 18

II. Global supply chain reshuffle...... 21 Implications of Apple’s supply chain change ...... 21 Apple without SEC  Greater supply chain risk ...... 22 Exclusion of SEC from Apple’s supply chain would have a limited impact ...... 24 Exclusion from Apple’s AP supplier list to have minimal impact on SEC...... 25 TSMC could begin supplying APs to Apple from late 2013...... 26 Risks and opportunities for SEC’s System LSI unit...... 27

III. Losers’ league: Competition among second-tier makers to intensify...... 29 Second-tiers to continue the fight for survival...... 29 Who will exceed the 40mn threshold? ...... 30 Nokia: Windows 8 may be the company’s last shot in smartphones...... 33 HTC: Standing out in the low- to mid-end market...... 34 Leaders in the Chinese smartphone market: Huawei vs. ZTE ...... 35 LGE: LTE + vertical integration ...... 36

IV. Return of Microsoft: Windows 8 and tablet market growth...... 38 iOS 6 vs. Jelly Bean ...... 38 Differentiating features of Windows 8: New user experience + productivity ...... 39 Windows 8: New growth driver for the tablet PC market ...... 40 Tablet market to expand by 64% YoY in 2013 ...... 42 Medium- to long-term change in OS market competition ...... 43 Beneficiaries of tablet PC market expansion ...... 44

V. Farewell to the PC era!: Zero PC growth and its implications for the memory industry .47 PC industry headed for zero growth ...... 47 Memory industry’s dynamics have completely changed ...... 48 The Micron-Elpida merger: Bang for the buck? ...... 49 The age of mobile memory: Competitiveness & growth hinge on product mix ...... 50 [DRAM market issue] Will a mobile DRAM supply shortage occur? ...... 52 [NAND market issue] Will prices rise further given limited supply growth?...... 53

VI. Best tech migration play: Semiconductor materials ...... 57 Delays to EUV development to slow tech migration...... 57 Materials offer solution to limitations of lithography...... 58 Core material 1: Spin-on hardmask (SOH)...... 59 Core material 2: Spin-on dielectrics (SOD)...... 60 Core material 3: High-k/metal gate (HKMG)...... 61 Core material 4: Double patterning technology (DPT)...... 62

VII. The ongoing innovation of displays: AMOLED vs. Retina display ...... 64 Proliferation of high-resolution displays: Form factor counts!...... 64 Apple: Retina displays to be adopted across Apple’s product lineup...... 65 Apple: Form factor differentiation via in-cell touch displays...... 66 SEC: Improved resolution of OLED displays ...... 67 SEC: Differentiating itself with flexible OLED technology...... 68 [Supply and demand] Limited supply in 2013 to drive gradual recovery...... 69

VIII. IT sector investment strategy for 2013...... 71 [Macroeconomic view] The IT sector in context...... 71 [Global view] Apple vs. SEC ...... 72 [2013 investment strategy] Weak in 1H, but strong in 2H ...... 73 SEC’s supply chain vs. Apple’s supply chain [Top 11 IT stocks] ...... 74 Semiconductor...... 77 Display...... 78 Telecom equipment/electronic components ...... 79

IX. Top picks ...... 80 Samsung Electronics (005930 KS/Buy)...... 80 SK Hynix (000660 KS/Buy) ...... 83 LG Electronics (066570 KS/Buy) ...... 86 Samsung Electro-Mechanics (009150 KS/Buy)...... 89 Samsung SDI (006400 KS/Buy)...... 92 SFA Engineering (056190 KQ/Buy) ...... 95 Soulbrain (036830 KQ/Buy) ...... 98 Duksan Hi-Metal (077360 KQ/Buy)...... 101 Partron (091700 KQ/Buy)...... 104 Nepes (033640 KQ/Buy) ...... 106 Simmtech (036710 KQ/Buy) ...... 109

KDB Daewoo Securities Research 3 November 13, 2012 The Age of Transition

[Prologue] Moving from revolution to evolution

Mobile market: From revolution to evolution

Is this the end of the The mobile revolution triggered by AppleÊs iPhone and iPad has become so deeply mobile revolution? entrenched in our everyday lives that it is now hard to find a single person who does not own a smartphone. As of 2012, there are more than 2bn smartphone users worldwide, according to the market research firm Gartner.

Since 2010, we have closely followed the changes and innovations that have unfolded in the IT industry in the context of the mobile revolution, as highlighted in our reports „Tablet PC – Another megatrend‰ (February 4, 2010), „2011 Outlook: Mobile revolution to prompt valuation re-rating‰ (December 2, 2010), and „Mobile revolution to bring about a paradigm shift‰ (December 30, 2011).

The mobile game players we underscored in our 2010 tablet report have already seen their share prices soar 400~500% in less than two years. However, AppleÊs new iPhone 5 has been met with criticism for lacking the breakthrough innovation that many had expected. Without Steve Jobs, will the mobile revolution no longer be what it used to be?

New innovations have On the contrary, we believe the mobile revolution has entered an evolutionary phase. The helped increase the global popularity of PsyÊs „Gangnam Style‰ has been in large part powered by the growth pie widespread use of smartphones and social network services (SNS) (on top of the songÊs catchy hook). This phenomenon shows how, nowadays, new changes, innovations, content, and trends resonate on a global scale.

In 2013, we expect the smartphone market to grow to 780mn units (up 25% YoY) and the tablet market to expand to 180mn units (up 64% YoY) in terms of shipments. Hence, the overall smart device market (smartphones and tablets combined) is projected to increase to 960mn units (up 31% YoY). What these numbers show is that new innovations can expand the growth pie, which is why we need to keep a close eye on new changes and innovations as the evolutionary phase of the mobile revolution unfolds.

Figure 1. Paradigm shift in the mobile and semiconductor industries

(US$mn) Global DRAM revenues (L) Global NAND revenues (L) (W'000) SEC share price (R) 9,000 2,200 PC era Mobile phone era Smart device era → Cloud environment 2,000

7,500 1,800 IBM, Microsoft, Intel Nokia, SEC, Intel, Cisco, Qualcomm Apple, Google, SEC 1,600

6,000 1,400

1,200 4,500 1,000 SSD 800 3,000 AP + mobile DRAM + 600 NAND demand DDR3 explodes with mobile DDR2 revolution 400 1,500 DDR SDRAM 200 DDR4

0 0 91 93 95 97 99 01 03 05 07 09 11 13F 15F

Source: WSTS, KDB Daewoo Securities Research KDB Daewoo Securities Research 4 November 13, 2012 The Age of Transition

Mobile revolution: A story of disruptive innovation

Disruptive innovation of The Apple-led mobile revolution could be summed up as a story of disruptive innovation – a the mobile revolution – process that is still ongoing. This story is not just a linear narrative about growth; it is also a growth or survival? story about the struggle to survive amid radical changes. Indeed, a disruptive innovator of the current generation can easily become the one facing disruption in the next. A prime example of this is the downfall of Nokia brought about by AppleÊs disruptive innovation.

The history of disruptive Examples of disruptive innovation can be found throughout history in many industries, with innovation the first significant case tracing back to 1876, when the worldÊs largest communications firm at the time, Western Union, learned of an invention by Alexander Graham Bell that allowed for the transmission of the human voice via telegraph wires. Bell made an offer to sell his patent to the company for US$100,000, but Western Union declined, writing the device off as nothing more than a toy.

More than two decades later, BellÊs company AT&T grew into an industry leader with annual profits of US$13mn in 1900; meanwhile, Western UnionÊs annual net profit was merely half of that figure. And, in 1910, Western Union eventually handed over its ownership to AT&T.

Figure 2. Companies and products based on disruptive innovation (1870~2000)

∼1870 Kodak Beef processing Department stores Bell (Swift, Armour) (Marshall FieldÊs, Macy's) Merrill Lynch Ford Catalog retail (Sears, JCPenney, Montgomery Ward) ∼1950 Plastic (DuPont, Dow)

Sony Honda Motorcycles ∼1960 Minicomputer McDonaldÊs (DEC, Nixdorf) Xerox Discount stores (Kmart, Walmart, Target) Toyota, Nissan Black & Decker (consumer tools) Ultrasound Japanese steel companies Intel Minimills Endoscope Southwest Airlines Credit rating agencies Flat panel display Fidelity Charles Schwab Packaged beef Vanguard PC Community colleges Seiko Synthetic plastic GE Capital (Digital watches) (HiMent) Barnes & Noble Portable blood sugar Toys „R‰ Us Kodak Fun Saver level measuring device University of Phoenix MCI, Spirit ∼1980 Embraer, Circuit City Microsoft Bloomberg Canadair Sun Microsystems Home Depot Mobile phones Oracle Canon Dell Staples, Cisco Intuit QuickBooks Best Buy Inkjet printers TurboTax MBNA Veritas, N.Y Appliance Galanz Digital animation (Pixar) HMC, Kia E-mail eBay Military aircraft Microsoft SQL ECNs Palm, Blackberry Concord Law School Google Linux Amazon SonoSite Digital printing Online Online ∼2000 Salesforce.com 802.11 brokerages travel agencies

New market Low-end

Source: Clayton M. Christensen,「The InnovatorÊs Solution」

Figure 3. Smartphone companiesÊ share price trends since 2010 Figure 4. Smartphone parts companiesÊ share price trends since 2010

(1/1/10 = 100) Apple SEC Nokia LGE (1/1/10 = 100) SEC LGD SK Hynix 400 HTC Motorola RIM 180 TSMC Intel Qualcomm

350 160 140 300 120 250 100 200 80 150 60 100 40

50 20

0 0 1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/12 4/12 7/12 10/12 1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/12 4/12 7/12 10/12

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research

KDB Daewoo Securities Research 5 November 13, 2012 The Age of Transition

Strategic decisions: Lessons from Intel of the 1980s

For disruptive innovation to be successful, it must be supported by strategic decision-making. Here, we look at the key takeaways that SEC can learn from: 1) the disruptive innovation that triggered the collapse of Nokia, which had ruled the global handset market from the late 1990s to the early 21st century; and 2) the strategic decision of Intel to move away from memory products and into CPUs in the 1980s. We think the situation facing present-day SEC share similarities to what Nokia went through in 1999 and Intel in 1980.

Nokia became the top 1) In 1999, Nokia overtook Motorola as the largest global handset supplier in the world. The Nokia global handset maker on 7110 was the first sliding phone the world had ever seen, the 3210 was the first mobile phone the back of disruptive equipped with an antenna, and the 8810 gained wide popularity among celebrities in the fashion innovation world. Compared to todayÊs smartphones, these models may appear outdated and archaic, but they were nonetheless considered examples of disruptive innovation during their time.

In order to meet the diverse demand in the handset market, Nokia took both a tailored and integrated approach, which allowed it to solidify its global expansion strategy. NokiaÊs past approach has a lot in common with SECÊs present mass customization strategy. We highlight two points with regard to NokiaÊs story: First, how did it manage to establish a dominant position in the handset market? And, second, how was AppleÊs disruptive innovation able to bring down the company?

Intel grew into the 2) IntelÊs entry into the CPU market was a matter of coincidence. In 1970, a Japanese largest global CPU electronics maker commissioned Intel to build a calculator chip, which eventually led to the maker on the back of development of the 8080 processor in 1974. Then, IBM decided to outsource its CPU strategic decision- production to Intel, deeming chip-making a non-core operation. This confluence of events making (and changed the course of IntelÊs future, as it led the company to decide to focus on CPUs. And coincidence) the stage was set for IntelÊs phenomenal growth in the CPU market. SECÊs story is a lot like IntelÊs. In 1996, SEC embarked on a project with Digital Equipment Corporation (DEC) to develop a 64bit Alpha chip. But when DEC, which had been bought by Compaq, was sold again to Intel, the Alpha chip project was at risk of being shut down. In the end, the technology SEC accumulated from the project made it possible for the company to design and manufacture the AP for iPhones in 2007, thus setting the stage for its remarkable success in the AP market.

Strategic decisions are Strategic decisions are what drive the dynamic evolution of a company. Professor Robert A. what drive dynamic Burgelman of Stanford University, a renowned expert in business strategy, stresses in his book evolution: Now is the Strategy is Destiny that IntelÊs strategic decision was not made overnight and was rather the result time! of its ability to co-evolve with the changing business environment. This co-evolution enabled Intel to make the successful strategic decision to shift its business focus from memory to CPUs.

Figure 5. NokiaÊs innovative handset models released in 1999 Figure 6. Intel: Transition from memory to CPU % of revenues 100 Microprocessor

60 Memory chip maker Microprocessor maker

20 Memory chips

72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 Memory chip maker Microprocessor maker Source: Nokia Source: Robert A. Burgelman,「Strategy is Destiny」 KDB Daewoo Securities Research 6 November 13, 2012 The Age of Transition

Gearing up for the next disruptive innovation

From mobile revolution Then what will the next disruptive innovation look like? The mobile revolution triggered by to the age of cloud and AppleÊs disruptive innovation continues to evolve into more advanced technologies. We big data believe the immense potential of the disruptive innovation we witnessed in the mobile market will once again prove itself in the smart TV market. The growth of smart TVs should help create a stronger cloud environment, heralding the arrival of the age of big data. At this very moment, all of the data and traces we leave on our smartphones are piling up at Apple and Google data centers located throughout the world. We believe all of this marks a tentative step towards the next big disruptive innovation.

To ride the wave of Unless Apple and SEC fully prepare themselves for the forthcoming disruptive innovation, innovation, SEC needs there is no way to tell whether they will avoid the same kind of fate that befell Nokia and to boost its software Sony. In particular, leading firms in the software space, such as Google, Amazon, and capabilities Microsoft, may be partners today but foes tomorrow. Therefore, for a hardware-oriented company like SEC, it is important to get ready for the upcoming disruptive innovation, by: 1) forming strategic alliances with software providers, 2) strengthening internal capabilities, and 3) pursuing mergers and acquisitions in its core areas.

The hardware segment Disruptive innovation is neither limited to the mobile market nor the software space. Just as Apple also holds potential for took the smartphone market by storm with its iPhone, SEC created its own disruptive innovation in disruptive innovation the ARM application processor market, which had been largely ignored by Intel. In the memory segment, SEC has developed a graphene-based transistor that is 100 times faster than silicon- based ones and expects to commercialize it by 2017. Even in the commodity-like hardware, component, material, and equipment segments, there is always the potential for innovative disruption. This is where we believe the Korean IT industry will find its next growth story.

Figure 7. SECÊs & 4 major Japanese IT firmsÊ market cap trends

(US$bn) SEC Sony Sum of 4 major Japanese IT companies 250 SEC's market cap SEC's market cap exceeds Sony's exceeds sum of 4 major 200 Japanese IT players'

150

100

0 90 92 94 96 98 00 02 04 06 08 10 12

Source: Bloomberg, KDB Daewoo Securities Research

Figure 8. GoogleÊs data center Figure 9. SEC ExynosÊ continuous innovation

Source: World Wide Web Source: SEC

KDB Daewoo Securities Research 7 November 13, 2012 The Age of Transition

IT sector investment strategy for 2013

1. [Macroeconomic view] The IT sector in context

Earnings stability to be We expect macroeconomic factors to have only a minimal impact on the IT sector in 2013. important for SEC next GDP growth is projected at slightly over 3%, and the won is projected to appreciate to year W1,060/US$ at end-2013. In 2013, earnings stability and re-rating should be the keywords for SEC. The market still considers SEC a cyclical stock. If the company maintains stable earnings in 2013, however, its valuation could improve, in our view.

2. [Global view] Apple vs. SEC

Apple is facing the Apple is increasingly leaning toward „sustaining innovations,‰ although it created new innovatorÊs dilemma markets through disruptive innovation. In our view, a company with strong shipment growth is more likely to maintain its earnings in an increasingly competitive smartphone market. If SECÊs smartphone market share reaches 40%, risks (i.e., stagnation in shipments, margin deterioration) and negative biases facing the company would subside.

Apple without SEC vs. „Apple without SEC‰ is likely to experience disruptions in its supply of major parts, including SEC without Apple in-cell displays, mobile DRAM, and APs. In contrast, „SEC without Apple‰ should remain unscathed. Even if Apple switches its AP supplier to TSMC in 2H13, SECÊs semiconductor unitÊs operating profit is projected to decline just 7%, with total 2013 operating profit sliding less than 2% (W520bn).

3. [2013 investment strategy] Weak in 1H, but strong in 2H

2013 outlook for SEC The biggest risk for SEC is the possibility of a decline in smartphone margins. In 3Q12, the and IT stocks: weak in telecom division generated 70% of SECÊs total operating profit. Next year, SECÊs operating 1H; stronger in 2H profit growth is projected to significantly slow to 16.7%. In particular, earnings momentum is expected to be weak in 1Q13 due to the absence of new model launches.

Table 1. Earnings and valuations of top 11 Korean IT companies (Wbn, %, x) Market Revenues OP OP margin Net profit P/E P/B ROE cap. 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6 SK Hynix 17,561 10,094 12,291 -131 1,202 -1.3 9.8 -201 938 - 18.7 1.9 1.7 -2.3 9.0 LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2 SEMCO 7,044 7,924 8,585 645 723 8.1 8.4 473 546 15.5 13.4 2.0 1.8 12.9 13.5 Samsung SDI 6,811 5,827 5,990 297 341 5.1 5.7 1,546 583 4.6 12.1 1.0 0.9 23.1 7.9 SFA Engineering 736 583 850 82 105 14.0 12.4 72 88 10.2 8.4 2.0 1.8 19.5 20.8 Soulbrain 745 583 665 98 115 16.9 17.4 65 79 11.4 9.3 2.2 1.8 22.8 21.3 Duksan Hi-Metal 548 153 202 44 56 28.7 27.9 44 55 12.5 9.9 3.7 2.7 27.4 26.2 Partron 700 767 934 75 92 9.8 9.8 57 75 12.3 9.3 3.4 2.6 32.0 32.0 Nepes 286 275 335 40 56 14.5 16.8 26 44 11.0 6.5 1.6 1.3 15.1 21.1 Simmtech 340 655 757 53 67 8.2 8.9 35 52 9.3 6.4 1.6 1.3 18.3 22.0 Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 8 November 13, 2012 The Age of Transition

Figure 10. AppleÊs 30-year history of disruptive/sustaining innovation (1976~2007): PC  smartphone

Source: Edwin Tofslie, World Wide Web

KDB Daewoo Securities Research 9 November 13, 2012 The Age of Transition

Figure 11. Disruptive/sustaining innovation in mobile industry: cell phone → smartphone Innovation 1995 StarTAC Nokia 9000 (e.g., entering into a new market) new a into entering (e.g., (e.g., entering into a new market) new a into entering (e.g., Sustaining innovation: 2000 Evolution Strategic decision Strategic decision Disruptive innovation: Revolution innovation: Disruptive 2005 iPhone Sustaining innovation: Evolution 2010 iPad ? 2015 Time

Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 10

I Apple: The Innovator’s Dilemma

While Apple has been preoccupied with „sustaining innovations,‰ other new markets have been gaining ground in the smart device world: namely: 1) 5~7-inch smart devices called „phablets‰ and 2) smart PCs, otherwise referred to as hybrid PCs. Amazon and Google are already making their mark in the 7-inch phablet market with the releases of the Kindle Fire and the Nexus 7. In particular, AmazonÊs robust content offerings have made the company a serious competitive threat.

While Amazon, Google, and Microsoft are sweeping into the tablet PC market, the new iPad is increasingly losing its appeal to consumers. Will the iPad Mini be received differently, or will it just signal AppleÊs fall from market visionary to copycat and/or follower? Although we do not yet have an answer, one thing seems clear: Apple is facing the innovatorÊs dilemma.

KDB Daewoo Securities Research 11 November 13, 2012 The Age of Transition

I. Apple: “The innovator’s dilemma”

Why the “innovator’s dilemma?”

Apple is facing Apple created a new ecosystem through iTunes and introduced innovative hardware (e.g., the„innovatorÊs the iPod, the iPhone, the iPad), opening new markets for smartphones and tablet PCs. We dilemma.‰ call this the „mobile revolution.‰ According to Clayton M. ChristensenÊs book The InnovatorÊs Dilemma, this sort of phenomenon qualifies as a disruptive innovation.

However, in 2012, Apple has been neither revolutionary nor innovative. Though the company has introduced new technologies during the past several years, including iCloud, Siri, and in- cell touch displays, these technologies were originally conceived by the late Steve Jobs. This suggests that these technologies are examples of sustaining innovations (according to ChristensenÊs definition), which appear to be AppleÊs main points of focus.

Many analysts are still optimistic about Apple. However, we believe AppleÊs shares might have already peaked this year (above US$700), and will likely undergo corrections for some time. Our projection is based on our belief that Apple is facing the „innovatorÊs dilemma.‰

Figure 12. Disruptive innovation and sustaining innovation

Sustaining innovation Introducing upgraded products in existing markets

e.g., Toyota

e.g., HMC

Disruptive innovation Performance in existingPerformance market in the low-end market

e.g., Electric vehicles Time

Disruptive innovation Creating brand new markets in unexplored areas

Time

Unexplored markets

Source: Clayton M. Christensen,「The InnovatorÊs Dilemma」

Clayton M. Christensen, a professor at Harvard Business School who is widely regarded as the Einstein of the business management world, popularized the theory of disruptive innovation in his 1997 book The InnovatorÊs Dilemma. In it, Christensen argues that established industry leaders tend to use „sustaining innovations‰ to maintain their market dominance. However, this approach can lead to a loss of leadership when a new innovative technology, or so-called „disruptive innovation,‰ emerges. Christensen has laid out corporate strategies related to disruptive innovation in his subsequent books: The InnovatorÊs Solution (2003) and Seeing WhatÊs Next (2004).

KDB Daewoo Securities Research 12 November 13, 2012 The Age of Transition

Two issues facing Apple

Expectations for Apple Apple is one of the most valuable corporations in the world. But expectations for the have increased company have increased. Consumers now need Apple to: 1) deliver outstanding innovations; 2) continue to develop its Siri technology, which acts as an intelligent, personal secretary; and 3) introduce its smart TV, which features an innovative user interface.

In other words, AppleÊs shares should only rise if the companyÊs smartphones undeniably outperform competitorsÊ products. However, AppleÊs new technologies, such as in-cell touch displays and Apple Maps, have many problems. No wonder the companyÊs shares are falling.

Figure 13. AppleÊs share price and market cap trends Figure 14. Apple Maps have many inaccuracies

(US$) (US$bn) 800 Share price (L) 700 Market cap (R) 700 600

600 500 500 400 400 300 300 200 200

100 100

0 0 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12

Source: Bloomberg, KDB Daewoo Securities Research Source: World Wide Web

We believe Apple is faced with two fundamental issues:

1) Apple is faced with 1) Apple has grown through innovations that have disrupted its competitorsÊ established the problem of self- products. But Apple is facing a brand new issue: its own innovations are becoming destructive innovation destructive to the company. According to Professor Christensen, Apple has never experienced this sort of destructive innovation, and thus might have no idea what will happen next. For example, AppleÊs new product, the iPad Mini, is likely to cannibalize iPad demand. Also, how can Apple differentiate its iPad Mini from the Kindle Fire and Nexus 7?

2) AppleÊs closed- 2) We believe AppleÊs increasingly closed-minded approach will hinder the companyÊs minded approach growth. We do not understand why Apple removed the YouTube and Google Map apps from its devices. In addition, the iPhone 5 does not support near-field communication (NFC) technology. In the US, iPhone users cannot utilize LTE data transmission while talking on the phone. In Korea, iPhone users cannot use VoLTE (voice calls with LTE technology). These services require an additional antenna on the iPhone.

Apple could stumble again, unless it realizes the seriousness of these issues. Christensen writes: „Closed architectures eventually gave rise to open structures. PCs were not an exception. Apple fell once, and, given that Android phones are growing faster than iPhones, it could fall again.‰

KDB Daewoo Securities Research 13 November 13, 2012 The Age of Transition

Growth of new smart devices

Phablets and smart PCs: While Apple has been preoccupied with sustaining innovations, other new markets have Newly emerging been gaining ground in the smart device world: namely 1) 5~7-inch smart devices called markets phablets and 2) smart PCs, otherwise referred to as hybrid PCs. Amazon and Google are already making their mark in the 7-inch market with the release of their respective products, the Kindle Fire and the Nexus 7. In particular, AmazonÊs robust content offerings have made the company a serious competitive threat.

The stylus and keyboard, What is worth noting is that both of the aforementioned markets have effectively features largely incorporated features that have been largely ignored by Apple: For example, SECÊs bypassed by Apple, have introduction of stylus functionality in its Galaxy Note phablet, and the integration of been successfully keyboards in MicrosoftÊs Surface and SECÊs ATIV hybrid PCs. And, as for operating systems, Microsoft has been pushing Windows 8 in both markets. introduced It seems almost as if Apple was predestined to strip away the stylus and the keyboard from its smart devices in order to launch the multi-touch market. In the words of Steve Jobs, „We have been very lucky to have brought a few revolutionary user interfaces to the market in our time. First was the mouse. The second was the click wheel. And, now, we're going to bring multi- touch to the market. And each of these revolutionary interfaces has made possible a revolutionary product: the Mac, the iPod and now the iPhone‰

But arenÊt the stylus and the keyboard indispensable parts of our history? In fact, they may have been more groundbreaking than the multi-touch panel.

Figure 15. The creation of the phablet and smart PC markets

Smartphone Tablet PC Notebook PC 3.0~5.0‰ 7.0~10.0‰ 10.0~15.0‰

Phablet Smart/hybrid PC 5.0~7.0‰ (keyboard) (stylus)

Source: KDB Daewoo Securities Research

Figure 16. Content driving AmazonÊs tablet market share expansion Figure 17. SECÊs ATIV series

Source: World Wide Web Source: World Wide Web

KDB Daewoo Securities Research 14 November 13, 2012 The Age of Transition

SEC’s differentiated smartphone lineup

Diversification: SECÊs The strategic differences between SEC and Apple have become pronounced in 2012. Given strategic differentiation that smartphone demand is projected to increase by 33% YoY this year, SECÊs differentiated strategy of diversification will likely stand out.

Early this year, we believed that competition between SEC and Apple would be characterized simply by a battle between the Galaxy S III and the iPhone 5. However, SEC has moved more quickly than expected following its launch of the Galaxy Note, establishing a high-end smartphone lineup of the Galaxy Note, Galaxy S III, and Galaxy Note II. If SEC releases the Galaxy S IV early next year, the company will establish a track record of rolling out new models every one or two quarters.

AppleÊs new product In comparison, AppleÊs strategy of launching a new model only once a year seems to be launch strategy is not causing the company to lag behind smartphone demand growth. The launch of the iPhone 5 keeping up with should be too late despite consumersÊ desire to see a new iPhone model as soon as smartphone demand possible. This strategic difference has led to SECÊs recent overwhelming edge in growth smartphone shipments.

The innovations that the Some Investors believe that the launch of the iPhone 5 will dent Galaxy S III sales. However, Galaxy S III features are we believe that the sales volume of the Galaxy S III will not plunge on the rollout of the new different from those of iPhone model, as the innovations that the Galaxy S III features are different from those of the iPhone 5 the iPhone 5. Consumers who think that a four-inch screen is the greatest downside to the iPhone are unlikely to buy the iPhone 5.

KDB Daewoo Securities Research 15 November 13, 2012 The Age of Transition

Figure 18. Quarterly smartphone shipment trends of SEC and Apple Figure 19. Global smartphone shipments; SEC & AppleÊs M/S trends

(mn units) (mn units) (%) Galaxy S IV 80 SEC 1,500 Smartphone shipments (L) 50 SEC's smartphone market share Apple SEC M/S (R) Galaxy Note II expected to exceed 30% in 2012 Apple M/S (R) 40 60 Galaxy S III 930 1,077 Galaxy Note 1,000 iPhone 5 iPhone 6 780 30 40 iPhone 4S 624 20 Galaxy S II 500 472 20 305 10 173

0 0 0 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F 09 10 11 12F 13F 14F 15F

Source: Gartner, IDC, KDB Daewoo Securities Research estimates Source: Gartner, IDC, KDB Daewoo Securities Research estimates

Figure 20. SECÊs quarterly operating profit trends by division Figure 21. SECÊs flagship modelsÊ quarterly shipment trends

(Wtr) (mn units) 6 Semiconductor 25 Galaxy S Display Galaxy S II 5 IM Galaxy Note 20 CE 4 Galaxy S III Galaxy Note II 3 15 Galaxy S IV Galaxy Note III 2 10 1

0 5 -1

-2 0 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F

Source: Company data, IDC, KDB Daewoo Securities Research estimates Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 16 November 13, 2012 The Age of Transition

SEC: “It doesn’t take a genius”

The patent lawsuit between Apple and SEC resulted in a landslide victory for Apple in San Jose. The final ruling is expected to be handed down in 4Q, and the fight is likely to continue in the US Court of Appeals for the Federal Circuit. So, does this mean that SEC will never be able to catch up to their Cupertino-based rival? Will consumers think that SECÊs products are copycats and become unwilling to buy them?

Copycat or Nokia? This type of lawsuit surely presents a risk for SEC. Still, we need to take a look at the flip side of the coin, especially in terms of marketing. Furthermore, we could raise the question: „Is it better to be a copycat or Nokia?‰

In the face of disruptive innovation (driven by Apple), Nokia lost its long-held global dominance of the handset market to Apple and SEC. Furthermore, SEC not only overtook Nokia, but also surpassed Apple in terms of shipments. This success proves that SEC made the right strategic choices, despite risking being called a copycat.

Although Apple won its US patent lawsuit against SEC, its new iPhone model appears to have fallen short of customer expectations in terms of innovation. So, does this mean that Apple is doomed without Steve Jobs? Or that a genius has been surpassed by a copycat? Although SEC lost the patent suit, we believe that the company is turning lemons into lemonade (in terms of marketing).

SEC will use LTE Going forward, SEC will be able to use Windows 8 to strengthen its case that it is not a technology as a weapon copycat and use LTE technology to attack Apple. against Apple

“It doesn’t take a genius. The Next Big Thing Is Already Here” The advertisement to the right, which SEC started to run in the US market immediately after losing the aforementioned patent lawsuit, created a huge sensation. By emphasizing the innovative features of the Galaxy S III, the company is making a strong appeal to non-Apple users.

Thus, the unfavorable ruling may have a silver lining, especially with regard to marketing. By paying W1tr in damages now, the company may have a chance to earn W10tr in the future.

KDB Daewoo Securities Research 17 November 13, 2012 The Age of Transition

Innovation from content producers

Where does demand „Demand is an unusual form of energy that turns many wheels from big to small, from come from? economies to markets to organizations to our paychecks, here and around the world. Everything depends on it. Without it, growth slows, economies falter, progress stops.‰ --Adrian J. Slyworzky, Demand

In his book Demand, Adrian J. Slyworzky examined six factors that lead to the creation of demand: 1) magnetic offers, 2) a hassle map (and its resolution), 3) a back story, 4) a trigger, 5) a trajectory, and 6) variation.

Creating a legend Take Apple, for example. The tablet PC market was spawned by AppleÊs disruptive through disruptive innovation, the iPad. Although several tablet PC models had preceded the iPad, it was not innovation until the release of AppleÊs version that the market, and an accompanying ecosystem, actually emerged. Based on its ecosystem, Apple could build a differentiated user interface and hardware. And, importantly, all of the six aforementioned factors necessary for demand creation were present during the iPadÊs rise.

Content makers have However, while Apple was resting on its laurels, content providers stepped in and started to emerged as new drive innovation. innovation drivers Jeff Bezos claims that AmazonÊs new Kindle Fire, priced at US$119, is a service, not a product. AmazonÊs Kindle and GoogleÊs Nexus 7 have: 1) magnetic offers and backstories (rich content), 2) triggers (reasonable prices), and 3) variation (7-inch screens). MicrosoftÊs Surface resolved a hassle map problem (e.g., inconveniences arising from the lack of a keyboard) and also has a trigger (Windows 8) and a backstory (Microsoft Office).

As mentioned earlier, Clayton Christensen warned of the risk of the innovatorÊs dilemma, saying that a disruptor of one decade could become a disruptee in the following one. Steve Jobs also emphasized the need to constantly innovate to tackle this issue.

Indeed, while Amazon, Google, and Microsoft are sweeping into the tablet PC market, the new iPad is increasingly losing its appeal to consumers. Will the iPad Mini become a variation, or just signal AppleÊs fall from market visionary to copycat and/or follower? Although we do not yet have an answer, one thing seems clear: Apple is facing the innovatorÊs dilemma.

KDB Daewoo Securities Research 18 November 13, 2012 The Age of Transition

Figure 22. How does the creation of new demand begin?

Combination of strong performance and sensitivity Breaking the illusion of „the average customer‰ with products Magnetic Magnetic CustomerÊs troubles can present that can meet customersÊ needs attractive opportunities to those who exactly create new demand VariationVariation HassleHassle mapmap

DemandDemand External factors that make a product more attractive (e.g., Infrastructure, ecosystem) TrajectoryTrajectory BackstoryBackstory

How quickly the attractiveness of a product improves TriggerTrigger (e.g., via ontinuous quality Something that turns spectators into customers improvement) (e.g., personal experience, quick delivery)

Source: Adrian J. Slyworzky「Demand」

Figure 23. Demand creation by content companies

Content provider Google Amazon Microsoft Product Nexus 7 Kindle Fire Surface

Magnetic: Sensitivity, performance v v v Hassle map: Solutions for problems v Backstory: Infrastructure, ecosystem v v v Trigger: Creation of demand v Trajectory: Quality improvement v v Variation: Various needs v v v

Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 19

II Global Supply Chain Reshuffle

Although Apple and SEC had been widely anticipated to remain business partners despite their court battles, the latest change in AppleÊs supply chain (for the iPhone 5) suggests otherwise. Given their interdependence up to this point, it will be interesting to see how Apple and SEC operate without the help of one another going forward.

How will this change affect SEC next year? SECÊs semiconductor operating profit is forecast to expand to W7.8tr in 2013, from W4.5tr in 2012. However, if SEC does not supply APs to Apple (from 2H13) and fails to find new customers, the 2013 revenues and operating profit of the System LSI segment should decline 15% YoY and 20% YoY, respectively. Even so, a 20% contraction (W520bn) corresponds to only 7% of the semiconductor divisionÊs 2013 operating profit estimate, and just 1.6% of the companyÊs total operating profit projection of W33tr.

KDB Daewoo Securities Research 20 November 13, 2012 The Age of Transition

II. Global supply chain reshuffle

Implications of Apple’s supply chain change iPhone 5 production Unlike AppleÊs previous smartphone models, the iPhone 5 does not feature SECÊs memory marks a change in chips. Given that SEC is the worldÊs largest memory maker, AppleÊs decision not to use AppleÊs supply chain SECÊs chips has given rise to much speculation about the souring relationship between the two companies. This change in AppleÊs supply chain has caught the attention of global parts makers as well as investors.

Apple exerts significant The huge success of AppleÊs iPod, iPhone, and iPad has considerably increased the influence over global companyÊs influence on the global memory market. Indeed, Apple consumes about 30% of memory makers global NAND production, and ToshibaÊs and ElpidaÊs shares of the memory market have fluctuated widely depending on AppleÊs order volume.

However, AppleÊs large order volume does not appear to have improved the earnings of memory makers, such as Toshiba, SK Hynix and Elpida, due to low supply prices. Apple even caused a supply glut in the NAND market after cancelling a large number of orders. Some memory makers that expanded capacity to supply to Apple suffered severe inventory buildup.

It is not clear whether it was Apple or SEC that caused the exclusion of SECÊs memory chips from the iPhone 5. SECÊs basic guideline is that it supplies parts only if a reasonable margin is guaranteed. Thus, we believe that SEC refused to supply its products to Apple.

Table 2. AppleÊs major products Product iPhone 4S iPhone 5 iPad Mini New iPad

Processor 1GHz Apple A5 1.2GHz Dual-Core Apple A6 Dual-core A5X 1GHz Dual-Core Apple A6X OS iOS 5 iOS 6 iOS 6 iOS 6 Display 3.5" Retina display 4.0" Retina display 7.85" 9.7" Retina display Resolution 960 x 640 1136 x 640 1024 x 768 (~163ppi) 2048 x 1536 (~264ppi) RAM 512MB 1GB 512MB 1GB Storage 16GB/32GB/64GB 16GB/32GB/64GB 8GB/16GB/32GB/64GB 16/32/64GB External memory No No No No Wireless 3G, WiFi, Bluetooth v4.0 4G LTE, WiFi, Bluetooth v4.0 Wi-Fi, 4G LTE Wi-Fi, LTE/3G Front: VGA Front: 1.2MP Front: 1.2MP Front: 5MP Camera Back: 8MP Back: 8MP Back: 5MP Back: VGA Battery 1,432mAh 1,440mAh 4,400mAh 11,560mAh Size (H x W x D) 115.2 x 58.6 x 9.3mm 123.8x58.6x7.6mm 200x134.7x7.2mm 241.2x185.7x9.4mm Weight 140g 112g 308g 652g Price 16GB: US$199/32GB: US$299 16GB: US$199/32GB: US$299 16GB: US$329/32GB: US$429 16GB: US$499/32GB: US$599 Release date October 2011 September 2012 November 2012 November 2012 Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 21 November 13, 2012 The Age of Transition

Apple without SEC  Greater supply chain risk

Will SEC and Apple end Although Apple and SEC had been widely anticipated to remain business partners despite their business their court battles, the latest change in AppleÊs supply chain (for the iPhone 5) suggests relationship? otherwise. Given their interdependence up to this point, it will be interesting to see how Apple and SEC operate without the help of one another going forward.

Apple without SEC: The Apple has already started to source essential parts from suppliers other than SEC. LG scenario has already Display (LGD), Japan Display, and Sharp now supply display panels, and Toshiba, SK Hynix, started to unfold and Micron provide NAND to Apple. Mobile DRAM is supplied by SK Hynix and Elpida, and batteries are sourced from ATL and Sanyo. Only APs are purchased from SEC now.

Table 3. iPhone 5 supply chain Components Price (US$, 16GB) Specifics Manufacturers AP 17.50 SEC Memory 20.85 DRAM SEC SK Hynix Micron (Elpida) NAND SEC SK Hynix Toshiba SanDisk Radio frequency 34.00 Baseband/transceiver Qualcomm RF memory Intel PAM Avago Skyworks Triquint SAW module SEMCO Murata TDK PMIC 8.50 AP Dialog Baseband Qualcomm Connectivity 5.00 WiFi/GPS/Bluetooth Murata Broadcom UI & sensor 6.50 Audio codec Cirrus Logic Audio IC Cirrus Logic E-Compass AKM Semiconductor Accelerometer STMicroelectronics Gyroscope STMicroelectronics Display 44.00 TFT Panel LGD Japan Display Sharp Cover glass Corning Touch screen TPK Wintek CMI Touch controller Texas Instruments Broadcom Camera 18.00 Lens Largan Precision Genius Electric Module LG Innotek Sony Qualcomm Image sensor IC OmniVision (front) Sony (back) Battery 4.50 Pack Dynapack Simplo Cell Sony ATL Lishen Casing 7.00 Foxconn PCB and other 33.00 FPCB Interflex Nippon Mektron Fujikura FLEXium HDI Ibiden Nanya PCB Source: IHS iSupply Research, ifixit, KDB Daewoo Securities Research

KDB Daewoo Securities Research 22 November 13, 2012 The Age of Transition

On the surface, the „Apple without SEC‰ scenario seems perfectly viable, given AppleÊs strong market power. However, problems have already begun to emerge on three fronts.

In-cell display: The in-cell display significantly improved iPhone 5Ês form factor, but some Insufficient in-cell display users are experiencing screen-related problems. Moreover, insufficient supply is limiting supply limits production production. LGD and Japan Display, which each satisfy 50% of AppleÊs in-cell display needs, can each produce up to 7mn displays per month. This means that 4Q iPhone 5 shipments are likely to fall short of 45mn units.

Mobile DRAM Mobile DRAM: Apple consumes around 30% of global mobile DRAM production, and SEC production yield produces 60% of global mobile DRAM. Without SEC, Apple has to fully rely on SK Hynix and decrease to be a risk Elpida, which produce the remaining 40% of the global supply. This means a greater risk for Apple in case of any disruption in mobile DRAM production, especially at Elpida.

What if SEC cuts AP AP: SEC is currently AppleÊs exclusive AP supplier. Apple is estimated to need 70mn APs production? per quarter, or 50,000 wafers/month based on SECÊs dual-core AP production capacity. SEC started to produce 28nm chips in 2H, and its customer base (Qualcomm) and product portfolio (baseband) have begun to diversify. Next year, if SEC cuts its AP production for Apple to the 30~40,000 wafer/month level, Apple may face a huge problem in making its products.

Figure 24. iPhone 5 parts (front) RF antenna switch module Memory MCP for LTE Gyroscope GSM PAM Dual-band LTE PAM

WCDMA PAM LTE PAM AP PMIC CDMA PAM Baseband NAND WiFi module PMIC

Source: ifixit, KDB Daewoo Securities Research

Figure 25. iPhone 5 parts (back) Touch screen controller

Accelerometer Touch screen Application processor (AP) LTE Baseband RF transceiver controller

Source: ifixit, KDB Daewoo Securities Research

KDB Daewoo Securities Research 23 November 13, 2012 The Age of Transition

Exclusion of SEC from Apple’s supply chain would have a limited impact

Impact of the potential The likelihood of Apple diversifying its parts suppliers has been seen as the biggest risk exclusion of SEC from factor for SEC due to AppleÊs firm dominance in the smart device market. If Apple excludes AppleÊs supply chain? SEC completely from its supply chain, how much of an impact would it have on SEC?

SEC has steadily increased its presence in the smartphone market. AppleÊs smartphone market share increased from 15% in 2009 to 16% in 2010 and 20% in 2011. The companyÊs market share is forecast at 21% in 2012 and 19% in 2013. Meanwhile, SECÊs market share has expanded more sharply, from 4% in 2009 to 8% in 2010 and 20% in 2011. SECÊs share is projected to reach 32% in 2012 and 34% in 2013.

As such, SECÊs market status has strengthened incredibly since 2009. In particular, SECÊs standing as a supplier for Apple is completely different from that of other suppliers.

Figure 26. Smartphone shipments and global M/S trends and forecasts for SEC and Apple

(mn units) (%) 500 SEC smartphone shipments (L) 50 SEC and Apple's M/S gap Apple smartphone shipments (L) expected to expand 420 400 SEC M/S (R) 40 Apple M/S (R) 350 300 274 30

217 216 200 20 155 183 130 95 93 100 10 23 47 7 25 0 0 09 10 11 12F 13F 14F 15F

Source: Gartner, KDB Daewoo Securities Research

In 3Q, AppleÊs 1) Impact on the memory business unit: Although SEC has been excluded from AppleÊs list contribution to operating of iPhone 5 memory suppliers, SEC had already reduced the memory sales contribution from profit at SECÊs Apple. As of 2Q12, AppleÊs contribution to SECÊs DRAM sales is estimated at 5%, while semiconductor division NAND sales to Apple appear to have accounted for 15% of SECÊs total NAND sales. As such, amounted to W300bn AppleÊs contribution to operating profit at SECÊs memory business unit stood at the low 10% (25%), which accounted level. for a mere 4% of the 2) Impact on the System LSI business unit: More than 60% of SECÊs System LSI sales companyÊs total come from application processors (AP), and more than 50% of the companyÊs AP sales are operating profit attributable to Apple. As such, AppleÊs contribution to SECÊs System LSI sales appears to be at least 30%. Given that APs are much more profitable than driver ICs and CMOS imaging sensors, we believe that Apple contributes more than 40% to operating profit at SECÊs System LSI unit.

3) Impact on the overall semiconductor business: AppleÊs contribution to operating profit of SECÊs overall semiconductor business is estimated at 20~25%. In 3Q, since operating profit at the semiconductor business reached W1.2tr, AppleÊs contribution (25%) is estimated at W300bn, which accounted for a mere 4% of the companyÊs total operating profit (W8.1tr) during the quarter. As such, the exclusion of SEC from AppleÊs supply chain is unlikely to have a significant impact on SECÊs earnings.

KDB Daewoo Securities Research 24 November 13, 2012 The Age of Transition

Exclusion from Apple’s AP supplier list to have minimal impact on SEC

SEC without Apple SECÊs semiconductor operating profit is forecast to expand to W7.8tr in 2013, from W4.5tr in 2012. Assuming that 25% of the semiconductor unitÊs operating profit, or W1.95tr, is generated via Apple, this figure corresponds to only 6% of the companyÊs 2013 total operating profit projection of W33tr.

To assess the impact of Apple on SECÊs earnings, we have reviewed the following two scenarios:

▶ Scenario 1. If SEC does not supply APs to Apple (from 2H13) and fails to find new customers, the 2013 revenues and operating profit of the System LSI segment should decline 15% YoY and 20% YoY, respectively. Even so, a 20% contraction (W520bn) corresponds to only 7% of the semiconductor divisionÊs 2013 operating profit estimate (W7.3tr), and just 1.6% of the companyÊs total operating profit projection of W33tr.

▶ Scenario 2. If SEC does not supply APs to Apple, but find new customers to replace half of AppleÊs order volume, the revenues and operating profit of the System LSI segment should decline 7% YoY and 10% YoY, respectively. Even so, a 10% contraction (W260bn) corresponds to only 3.5% of the semiconductor divisionÊs 2013 operating profit estimate (W7.54tr), and just 0.8% of the companyÊs total operating profit projection of W33tr.

Given the diversification of SECÊs customer base (Qualcomm) and product portfolio (baseband) that began in 2H, scenario 2 seems more likely. Thus, the exclusion of SECÊs AP from AppleÊs products should have only a negligible impact on SECÊs earnings.

Table 4. AppleÊs effect on SECÊs earnings 2012F 2013F SEC semiconductor divisionÊs revenues DRAM 16,283 17,254 NAND 10,243 14,726 System LSI 13,988 20,616 Total 36,096 49,398 AppleÊs contribution to SECÊs revenues DRAM (5%) 814 863 NAND (15%) 1,536 2,209 System LSI (30%) 4,196 6,185 Total 6,547 9,256 SEC semiconductor divisionÊs OP DRAM 2,504 2,873 NAND 1,979 3,794 System LSI 1,179 2,553 Total 4,502 7,781 AppleÊs contribution to SECÊs OP DRAM (5%) 125 144 NAND (15%) 297 569 System LSI (maximum assumption of 45%) 531 1,149 Total 953 1,862 AppleÊs effect on semiconductor division 21% 24% AppleÊs effect on total operating profit 3% 6% Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 25 November 13, 2012 The Age of Transition

TSMC could begin supplying APs to Apple from late 2013

Apple still faces Why has Apple kept SEC as an AP supplier while removing it from its list of memory limitations in diversifying suppliers? Probably because it has no other viable options. For now, it is next to impossible its AP supplier base for Apple to make its tablets and smartphones without SECÊs AP supply. The most viable alternative would be the Taiwanese firm TSMC, but we believe the company does not yet have the production yield and capacity to meet AppleÊs needs.

Then, at what point will TSMC have the yield and capacity to begin supplying Apple?

TSMC lags behind SEC The A6 chip that powers the new iPhone 5 is a dual-core processor manufactured on a 32nm in terms of both yield high-k metal gate (HKMG) process. Even though TSMC was one step ahead of SEC in and capacity offering a 28nm HKMG process (SEC followed after 3Q12), the fact that Apple still relies on SECÊs 32nm process instead indicates that TSMCÊs 28nm process lags behind in terms of both capacity and efficiency.

TSMC is the worldÊs largest foundry, and its fabs and processes are as diverse as its client base. The company owns 15 fabs, of which only three are 12 inch-based. In 2Q12, 65nm or larger processes accounted for 65% of its revenues, while production on the 28nm process made up only 7% (estimated at around 20,000 wafers per month). Therefore, it would be natural to assume that SEC has a much larger capacity than TSMC for APs using 30nm or finer processes.

TSMC already has a number of clients that opt for the 28nm process, including Qualcomm, AMD, and Nvidia. Recently, TSMC has been experiencing yield problems on its 28nm process node, causing a production shortage for QualcommÊs MSM 8960 (one-chip solution). The situation is not that different for Nvidia and AMD, suggesting manufacturing is having difficulty keeping up with design. Thus, although Apple represents an enormous opportunity for TSMC, prioritizing Apple over its existing clients may be a risky move for the foundry given its limited capacity.

Full-fledged supply could Assuming AppleÊs 4Q12 shipments of smartphones and tablets at around 70mn units, its AP become possible from requirements would be roughly 23mn units per month, or based on dual-core capacity, a 2014 monthly supply of 48,000 wafers (23mn/480 per month). This means TSMC would have to ramp up its 28nm capacity to 100,000 wafers per month in order to meet AppleÊs demand.

Thus, while we do see risks of TSMC supplying APs to Apple as early as 2H13, we do not expect any meaningful supply before 2014.

Figure 27. TSMCÊs process breakdown in 2Q12 Figure 28. TSMCÊs sub-65nm revenue trend

0.11/0.13um, 6% 0.5um+, 2% 025/0.35um, 6%

65nm, 26%

0.15/0.18um, 15%

90nm, 10%

28nm, 7% 40/45nm, 28%

Source: TSMC Source: TSMC

KDB Daewoo Securities Research 26 November 13, 2012 The Age of Transition

Risks and opportunities for SEC’s System LSI unit

SEC to be required to If Apple replaces Samsung with other vendors, including TSMC, for AP production in the formulate new growth medium- to long-term, SEC will be required to formulate new growth strategies, such as 1) strategies business portfolio diversification, including the expansion of foundry production, 2) the diversification of value-added products from APs to include baseband processors (BP), and 3) a steady increase in sales contributions from customers other than Apple (including Qualcomm).

SEC to see foundry SEC appears to have been requested to produce MSM 8960, a one-chip solution (AP + BP) production rise product, for Qualcomm (after migration to a 28nm process). As such, the proportion of foundry production out of SECÊs total production is expected to climb from 15% to more than 30% in the medium- to long-term. For MDM 9615 (QualcommÊs BP that supports both 3G and LTE technologies), TSMCÊs production is unlikely to meet QualcommÊs demand.

Competitiveness for SEC has already adopted its in-house produced BPs in the 3G Galaxy S III model. As such, non-memory products, SEC will diversify its value-added product portfolio from APs to include BPs. Furthermore, including BPs, to rise SEC is projected to bolster its product competiveness by developing an integrated chip that further incorporates AP, BP, and connectivity (Wifi, Bluetooth, GPS, etc.) In addition, given its superior mobile DRAM and NAND technologies, SEC is likely to emerge as a total mobile platform provider for smart devices.

Earnings at the System We project operating profit at SECÊs semiconductor division to increase from W4.5tr in 2012 to LSI unit to continue to W7.8tr in 2013. Profitability at the memory business unit is expected to improve on a recovery rise in overall memory prices. The System LSI business unit is expected to see its earnings improve thanks to capacity expansion (to 150,000 wafers (12-inch) per month). Operating profit at the System LSI unit is forecast at W1.4tr in 2012 and W2.6tr in 2013. The System LSI unit is likely to become a highest-margin growth driver in SECÊs semiconductor business after 2014.

Time to make a strategic The fact that SEC, which had focused on memory semiconductors, has recently expanded decision, as Intel did in into the AP business is reminiscent of the 1980s, when Intel shifted its focus from memory the 1980s to CPUs. The strategic decision that Intel made during that time has allowed the chipmaker to dominate the CPU market since 1990.

Going forward, SEC is expected to be in intense competition with Intel, Qualcomm, and TSMC in the system semiconductor market. However, SEC is best positioned to seize opportunities, as the company has secured a dominant position in the smartphone market. Furthermore, SEC has higher growth potential than its competitors, as it produces APs, BPs, and memory chips.

Figure 30. SEC Âs semiconductor unitÊs OP trends and forecasts by Figure 29. Revenues and OP of SECÊs semiconductor division segment

(Wtr) (Wtr) (Wtr) 80 18 8.0 SEC semiconductor division's revenues (L) DRAM NAND SEC semiconductor division's OP (R) System LSI Biggest growth driver 15 6.0 to be System LSI 60 HDD sell-off profit 12 4.0

40 9 2.0 6 20 0.0 3

0 0 -2.0 2008 2010 2012F 2014F 2008 2010 2012F 2014F

Source: Company data, KDB Daewoo Securities Research estimates Source: Company data, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 27

III Losers’ League

With the global smartphone market being dominated by only two makers, we do not expect a third player (that is able to churn out over 50mn smartphones per year) to join the competition anytime soon. Second-tier smartphone makers have yet to differentiate themselves in terms of: 1) hardware, 2) software/content, and 3) marketing strategies.

In 2013, we expect second-tier smartphone makers to compete within their own league. Among the eight second-tier makers, we believe that four (Nokia, HTC, LG Electronics (LGE) and Huawei) will take loftier positions (40mn shipments per year). The rest are anticipated to ship around 20~30mn smartphones per year.

KDB Daewoo Securities Research 28 November 13, 2012 The Age of Transition

III. Losers’ league: Competition among second-tier makers to intensify

Second-tiers to continue the fight for survival

In 2012, top-tier smartphone makers further widened the gap with their second-tier Smartphone shipments competitors. Their combined market share is forecast to increase to 54% in 2012, up from by second-tier firms 23% in 2010 and 40% in 2011, while second-tier makers, including Nokia, are expected to trended down in 2012 ship only 25~45mn smartphones. So, does this mean that there will remain only two dominant players, while the rest struggle to stay afloat?

Among the eight second-tier makers, Motorola was acquired by Google. NokiaÊs quarterly smartphone shipments have continued to decline, to around 10mn. RIM performed even worse, reporting quarterly smartphone shipments of less than 8mn units. Will second-tier makers ever be able to turn around?

Eight second-tiers This year, our forecast for second-tiersÊ smartphone shipments is: 42mn smartphones by remain in operation Nokia, 36mn by HTC, 32mn by RIM, 29mn by Huawei, 26mn by LGE, 25mn by ZTE, 24mn by Sony, and 22mn by Motorola. Among these eight second-tier smartphone makers, Nokia (down 51% YoY) and RIM (down 40% YoY) are likely to suffer the biggest declines in shipments.

RIM established a strong foothold with Blackberry in the early stages of the smartphone revolution. However, the company failed to properly adapt to rapid changes in the market, virtually losing all corporate smartphone demand in North America to Apple.

RIMÊs potential exit from RIM recently postponed its new model release to early next year. Reflecting the companyÊs the market likely to sluggish performance, its share price nosedived from over US$60 in early 2011 to US$8 now. signal an upturn for It is not even clear whether the company will manage to survive the competition next year. surviving second-tiers However, if RIM is forced out of the market, this would send a positive signal to the second- tier peers, suggesting that market restructuring is coming to an end.

Figure 31. RIMÊs quarterly revenues and OP trends Figure 32. RIMÊs market cap trends

(US$bn) (US$bn) (US$tr) 8 Revenues (L) 1.5 50 Market cap 7 Operating profit (R)

6 40 1.0 5 30 4 0.5 3 20 2 0.0 1 10 0

-1 -0.5 0 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1/10 7/10 1/11 7/11 1/12 7/12

Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research

KDB Daewoo Securities Research 29 November 13, 2012 The Age of Transition

Who will exceed the 40mn threshold?

Smartphone market to With the global smartphone market being dominated by only two makers, we do not expect remain divided by SEC a third player (that is able to churn out over 50mn smartphones per year) to join the and Apple competition anytime soon. Second-tier smartphone makers have yet to differentiate themselves in terms of hardware, software/content, and marketing strategies.

Competition among In 2013, we expect second-tier smartphone makers to compete within their own league. second-tiers to intensify Among the eight second-tier makers, we believe that around four (Nokia, HTC, LGE, and Huawei) will take the higher spots (40mn shipments per year). The rest are anticipated to ship around 20~30mn smartphones per year. Key points for each company include:

Top four second-tier Nokia. Our bright outlook for Nokia is based on the companyÊs excellent track record in the makers: Nokia, HTC, handset market. Its global marketing prowess, combined with the Windows mobile OS, LGE, Huawei might give the company another opportunity to establish a new ecosystem.

HTC. HTC has a strong presence in the mid- to low-priced smartphone market segment. Despite a lack of flagship models, the company has delivered consistent margins. In fact, restraining from aggressive business expansion might be the key to the companyÊs stable single-digit OP margins.

LGE. LGE is looking for a growth opportunity in the LTE segment, which is forecast to expand next year. The companyÊs strength in vertical integration (LGD and LG Chem) should help improve its high-end product competitiveness.

Huawei. Huawei is the leading smartphone maker in China. The vast market of China is the companyÊs strongest asset and compensates for its relatively weak competitiveness. ZTE also has similar advantages, but Huawei is believed to have a higher level of economies of scale.

Table 5. Annual shipment trends and forecasts by major smartphone companies (mn units) 09 10 11 12F 13F 14F 15F Samsung 6.8 22.9 94.5 212.5 273.0 350.0 420.0 Apple 25.1 47.5 93.0 131.0 155.0 182.9 215.8 Nokia 67.8 100.3 84.6 41.5 44.0 49.3 53.2 HTC 11.7 21.7 43.0 35.6 44.0 49.3 53.2 LGE 0.6 6.4 19.0 26.0 40.0 44.8 48.4 RIM 34.0 48.3 52.8 31.7 29.0 27.6 28.9 Motorola 3.6 14.0 17.4 20.7 28.0 30.2 32.7 Huawei - 0.8 20.0 29.3 42.0 50.4 59.5 ZTE - 0.3 12.0 24.5 34.0 40.1 46.1 Sony 1.7 10.6 17.5 24.4 30.0 33.0 35.6 Other 21.8 31.7 23.8 48.1 61.0 73.2 84.2 Total 173.1 304.6 471.7 625.3 780.0 930.8 1,077.7 Source: Gartner, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 30 November 13, 2012 The Age of Transition

Figure 33. Global smartphone shipment trends and forecasts

(mn units) (%) 1,250 Smartphone shipments (L) 100 % YoY (R) 1,077 76.0 1,000 930 80

780 750 54.9 60 624

472 500 32.2 40 28.9 25.1 305 19.2 15.8 250 173 20

0 0 09 10 11 12F 13F 14F 15F

Source: Gartner, KDB Daewoo Securities Research estimates

Figure 34. Shipment trends and forecasts of first-tier and second-tier smartphone companies

(mn units) (%) 750 1st-tier smartphone shipments (L) 2nd-tier smartphone shipments (L) 100 1st-tier M/S (R) 2nd-tier M/S (R) 80

500 59 56 57 55 60

40 40 250 23 18 20

0 0 09 10 11 12F 13F 14F 15F

Source: Gartner, KDB Daewoo Securities Research estimates

Figure 35. Smartphone shipment trends and forecasts in 2012 and 2013

0 50 100 150 200 250 300 (mn units)

Samsung Apple Nokia SEC and Apple's shipment gap expected to expand in 2013 HTC LGE Nokia, HTC, LGE, and Huawei RIM expected to become top 4 in 2nd tier Motorola Huawei ZTE Sony Other 2012F 2013F

Source: Gartner, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 31 November 13, 2012 The Age of Transition

Table 6. SECÊs and AppleÊs smartphones Manufacturer SEC Apple Product Galaxy S3 Galaxy Note2 iPhone 4S iPhone 5

Processor 1.4GHz Quad-core Exynos 4212 1.6GHz Quad-core Exyno s4412 1GHz Apple A5 1.2GHz Dual-core Apple A6 OS Android 4.0 ICS Android 4.1 Jelly Bean iOS 5.0 iOS 6 Display 4.8" S-AMOLED capacitive 5.5" S-AMOLED capacitive 3.5" Retina display 4.0" Retina display Resolution 1280 x 720 1280 x 720 960 x 640 1136 x 640 1GB (3G model)/2GB (LTE RAM 2GB 512MB 1GB model) Storage 16GB/32GB 16GB/32GB/64GB 16GB/32GB/64GB 16GB/32GB/64GB External memory Micro SD card (up to 64GB) Micro SD card (up to 32GB) No No Wireless 4G LTE, 3G, WiFi, Bluetooth 4G LTE, WiFi, Bluetooth 3G, WiFi, Bluetooth 4G LTE, WiFi, Bluetooth Camera Front: 1.9MP/Back: 8MP Front: 1.9MP/Back: 8MP Front: VGA/Back: 8MP Front: 1.2MP/Back: 8MP Battery 2,100mAh 3,100mAh 1,432mAh 1,440mAh Size (H x W x D) 136.6 x 70.6 x 8.6mm 151.1 x 80.5 x 9.4mm 115.2 x 58.6 x 9.3mm 123.8 x 58.6 x 7.6mm Weight 133g 180g 140g 112g 16GB: US$199 16GB: US$199 Price High W900,000 level Low W1,000,000 level 32GB: US$299 32GB: US$299 64GB: US$399 64GB: US$399 Release date July 2012 October 2012 October 2012 September 2012 Source: Company data, KDB Daewoo Securities Research

Table 7. LGE, HTC, Nokia, and HuaweiÊs smartphones Manufacturer LGE HTC Nokia Huawei Product Optimus G One X+ Lumia 920 ASCEND P1 LTE

Processor 1.5GHz Quad-core Krait 1.7GHz Quad-core Tegra3 1.5GHz Dual-Core Krait 1.5GHz Dual-Core OMAP 4460 OS Android 4.0 ICS Android 4.1 Jelly Bean Windows8 Android 4.0 ICS Display 4.7" HD-IPS LCD 4.7" Super LCD2 4.5" IPS TFT 4.3" Super AMOLED Resolution 1280 x 768 1280 x 720 1280 x 768 960x 5 40 RAM 2GB 1GB 1GB 1GB Storage 32GB 32GB/64GB 32GB 4GB External memory No No No MicroSD card (up to 32GB) Wireless 4G, WiFi, Bluetooth 3G, WiFi, Bluetooth 4G LTE, 3G, WiFi, Bluetooth 4G LTE, 3G, WiFi, Bluetooth Camera Front: 1.3MP/Back: 13MP Front: 1.6MP/Back: 8MP Front: 1.3MP/Back: 8MP Front: 1.3MP/Back: 8MP Battery 2,100mAh 2,100mAh 2,000mAh 1,800mAh Size (H x W x D) 131.9 x 68.9 x 8.5mm 134.4 x 69.9 x 8.9mm 130.3 x 70.8 x 107.7mm 132.5 x 65.4 x 9.9mm Weight 145g 135g 185g 135g Price W1,000,000 Low W700,000 level TBA Around W500,000 Release date October 2012 October 2012 November 2012 October 2012 Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 32 November 13, 2012 The Age of Transition

Nokia: Windows 8 may be the company’s last shot in smartphones

3Q12 was another In 1Q12, after 14 years on top, Nokia was dethroned by SEC as the worldÊs largest handset disappointing quarter for maker. After accumulating losses of more than EUR3bn over the last six quarters, the Nokia mobile phone giant is now considering selling some of its non-core assets, including its headquarters in Espoo, Finland, and has announced plans to cut its headcount by 20% by the end of next year.

In 3Q12, NokiaÊs Devices & Services unit posted revenues of EUR3.6bn (down 33.9% YoY and 11.4% QoQ), even lower than the 2004 level (EUR4.08bn). The division posted another operating loss (EUR680mn) and saw its OP margin plunge by 22.3%p YoY and 7.4%p QoQ to -9.2%, one of the worst levels on record.

Handset sales fell 22.2% YoY and 1.0% QoQ to 82.9mn in the quarter. Smartphone sales tumbled 62.5% YoY and 38.2% QoQ to 6.3mn units, while feature phone sales were down 14.7% YoY but up 4.2% QoQ to 76.6mn units.

Watch for the release of Although the Devices & Services division is likely to remain in the red in 4Q12, its operating Lumia smartphones and losses should slowly narrow with the release of Lumia 920 and Lumia 820, both of which restructuring efforts in run on Windows 8. Nokia has already gained some ground in the Windows-based 4Q12 smartphone market following its rollouts of low-end products in 2Q and 3Q. Looking ahead, we think Windows 8, which allows consumers to use the same operating system on their PCs and smartphones, will provide a significant boost to Nokia.

With the current smartphone market dominated by SEC and Apple, it will be challenging for Nokia to restore its market position given its lack of apps and tarnished brand reputation. Thus, 4Q will be a critical quarter for Nokia, with much of its survival depending on the expected release of its new Lumia series and corporate restructuring efforts led by its current boss Stephen Elop.

We believe NokiaÊs best chance of survival lies in differentiating its smartphones with the Windows 8 operating system. While it remains to be seen whether the company made the right decision in abandoning its Symbian OS and forming a strategic alliance with Microsoft, we believe the Windows-based differentiation and the commoditization of smartphones will present a new opportunity for Nokia.

Figure 36. NokiaÊs quarterly earnings trend Figure 37. NokiaÊs smartphone lineup

(EURbn) (%) Name Lumia 810 Lumia 920 Lumia 820 12 Sales (L) 30 Operating profit (L) Continuing losses OPM (R) 20 8 10

4 0 Size:127.8 x 68.4 x 10.9mm Size: 130.3 x 70.8 x 10.7mm Size:123.8 x 68.5 x 9.9mm Weight: 145g Weight: 185g Weight: 160g Display:480 x 800 pixels Display: 768 x 1280 pixels Display: 480 x 800 pixels -10 (AMOLED capacitive (TIPS TFT capacitive (AMOLED capacitive Specifications 0 touchscreen) touchscreen) touchscreen) -20 Camera:8MP, LED flash Camera: 8MP, LED flash Camera: 8MP, LED flash OS: Windows Phone 8 OS: Windows Phone 8 OS: Android OS, v4.0 CPU: - CPU: Dual-core 1.5 GHz CPU: Dual-core 1.5 GHz -4 -30 Released 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 4Q12F September 2012F 4Q12F date Source: Company data, KDB Daewoo Securities Research Source: GS Marena, KDB Daewoo Securities Research

KDB Daewoo Securities Research 33 November 13, 2012 The Age of Transition

HTC: Standing out in the low- to mid-end market

HTC quickly responded From the early years of the smartphone market, HTC was very quick to respond to new to changes and changes and opportunities. The initial growth of the smartphone industry was driven by the opportunities in the early alignment of market participantsÊ interests. Indeed, 1) handset makers were eager to expand smartphone years their smartphone sales, 2) consumer demand for access to wireless internet was growing, and 3) mobile operators were intent on raising their ARPU. Of all the market players, Apple and HTC were the ones who made the most of opportunities in the incipient stages of the smartphone industry. Even as the traditional handset market crumbled, HTC maintained resilient growth through a strategy of selection and concentration. The companyÊs focus on the B2C market especially paid off, in contrast to RIM which was more geared towards the B2B market. More recently, however, the intensifying competition between traditional handset suppliers and smartphone makers has significantly eroded HTCÊs market position. Despite making a successful early entry into the smartphone market, the company today has become just another second-tier smartphone maker.

HTCÊs earnings HTCÊs 3Q earnings also considerably missed the market consensus. 3Q revenues were down 48% weakness is due to its YoY to NT$70.2bn, while net profit was down 79% YoY to NT$3.9bn. In our view, such dismal poor performance in the earnings are due to the companyÊs more recent failure to maintain its hold on the US market. US During the past couple of years, HTC generated more than half of its revenues from the US. And, in 3Q11, the firm overtook both Apple and SEC to claim the largest share (24%) of the US smartphone market. But its glory days were brief, and the company soon suffered huge setbacks, including a US customs blockade caused by product defects and a lawsuit with Apple that restricted exports to the US. As of 2Q12, HTCÊs market share in the US was down to 9.5%.

ChinaÊs low- to mid-end Recently, HTC has been diversifying its presence into Europe and Asia and reducing its smartphone market dependency on the US. The market on which the firm is pinning their highest hopes is surely presents new China. Despite the dominating positions of local players like Huawei and ZTE, HTC expanded opportunities for HTC its smartphone market share in China to roughly 5% in 2Q12. Looking forward, we still see more room for HTC to grow in the rapidly expanding Chinese market. We believe it would be smarter for HTC to take on the low- to mid-end market on the back of its design and hardware capabilities accumulated over the years, than to target the highly competitive high-end smartphone market. One of HTCÊs key strengths is its profitability, which is more stable compared to that of other second-tier smartphone players. If the company focuses on low- to mid-end smartphones (as it had done with its selection and concentration strategy in the initial stages of the smartphone market), we believe it has the potential to stand out among the second-tier group.

Figure 38. HTCÊs quarterly earnings trends Figure 39. HTCÊs smartphone line-up

(mn units) (NT$) Name J Butterfly Windows Phone 8S One X+ 16 Sales volume (L) 20 OP margin (R)

12 15

Size: 120.5 x 63 x 10.3mm 8 10 Size:143 x 71 x 9.1mm Size: 134.4 x 69.9 x 8.9mm Weight: 113g Weight: 140g Weight: 135g Display: 480 x 800 pixels Display: 1920 x 1080 pixels Display: 720 x 1280 pixels (S-LCD capacitive (Super LCD 3 Capacitive (Super LCD2 capacitive Specifications touchscreen) 4 5 touchscreen) touchscreen) Camera: 8MP, LED flash Camera: 8MP, LED flash Camera: 5MP, LED flash OS: Android OS, v4.1 OS: Android OS, v 4.1.1 OS: Windows Phone 8 CPU: 1.5GHz quad-core CPU: Quad-core 1.7 GHz CPU: Dual-core 1 GHz Krait 0 0 Released 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 4Q12F November 2012F October 2012 date Source: Company data, KDB Daewoo Securities Research Source: GS Marena, KDB Daewoo Securities Research

KDB Daewoo Securities Research 34 November 13, 2012 The Age of Transition

Leaders in the Chinese smartphone market: Huawei vs. ZTE

Rapid growth of Chinese China has already replaced the US as the largest smartphone market in the world. In March smartphone market and 2012, the number of mobile telecom subscribers in the country exceeded 1bn, and the size smartphone makers of Chinese smartphone market doubled YoY in 2Q12. Growth is expected to continue in light of the low penetration rate of smartphones in the country. Chinese smartphone makers are growing rapidly on the back of their large domestic market.

ZTE already passed LGE to become the fourth-largest handset maker in the world in 4Q11. Huawei Technology has grown into worldÊs sixth-largest handset company. While Apple and SEC still dominate the high-end smartphone segment, Chinese players (e.g., ZTE, Huawei, Xiaomi, Coolpad) are solidifying their footholds in the mid- to low-priced global smartphone segment.

Huawei: 1) steady R&D Going forward, ZTE and Huawei are expected to continue to grow in the global market. In investments and 2) particular, we believe Huawei holds strong growth potential in light of the companyÊs steady leading player in the R&D investments and its competitiveness in the telecom network market. global network market Noteworthy is that over 40% of the workforce at Huawei consists of R&D personnel. Huawei operates over 20 R&D centers in the US, Germany, Sweden, Russia, and China. Based on its R&D efforts, the company is acquiring about 50,000 patents and developing proprietary technology every year. At the Mobile World Congress 2012, Huawei made a big splash by unveiling the AP-mounted Ascend D Quad, which the company claims to be the thinnest smartphone in the world.

Furthermore, Huawei is the second-largest telecom network company in the world. On the back of its price competitiveness (due to its economies of scale), the company is expanding its global outreach. It has forged strategic alliances with global players, based on which Huawei should grow rapidly going forward.

We forecast the low- to mid-priced smartphone market to expand sharply, driven by China. In particular, Huawei is expected to rapidly outpace its competitors on the back of: 1) R&D investments, 2) advanced technology, 3) strong patents, and 4) strategic alliances with global companies. In addition, the sheer enormity of its domestic market should help Huawei take the lead in the competition among second-tier smartphone makers.

Figure 40. HuaweiÊs smartphone lineup Figure 41. ZTEÊs smartphone lineup

Name Ascend P1 LTE Fusion 2 U8665 Ascend G600 Name Warp Sequent Grand Era U895 Blade III

Size:132.5 x 65.4 x 9.9mm Size: 115.8 x 61 x 11.7mm Size: - Size:127 x 64.8 x 9.9mm Size: - x - x 7.9mm Size:123 x 63.5 x 10mm Weight: 135g Weight: 124.2g Weight: - Weight: 129.8g Weight: 110 g Weight: 130g Display:540 x 960 pixels Display: 320 x 480 pixels Display: 540 x 960 pixels Display:540 x 960 pixels Display: 768 x 1280 pixels Display: 480 x 800 pixels (Super AMOLED capacitive (TFT capacitive touchscreen) (IPS LCD capacitive (TFT capacitive touchscreen, (Capacitive touchscreen, 16M (TFT capacitive touchscreen, Specifications Specifications touchscreen) touchscreen) 256K colors) colors) 256K colors) Camera:8MP, LED flash Camera: 3.15MP, LED flash Camera: 8MP, LED flash Camera: MP, LED flash Camera: 8MP, LED flash Camera: 5MP, LED flash OS: Android OS, v4.0 OS: Android OS, v2.3 OS: Android OS, v4.0.4 OS: Android OS, v4.0.4 OS: Android OS, v4.0 OS: Android OS, v4.0 CPU:Dual-core 1.5 GHz CPU: 800 MHz Cortex-A5 CPU: Dual-core 1.2 GHz CPU: 1.4 GHz Scorpion CPU: Nvidia Tegra 3 CPU: Dual-core 1.0 GHz

Released Released October 2012 October 2012 September 2012 September 2012 September 2012 September 2012 date date Source: GS Marena, KDB Daewoo Securities Research Source: GS Marena, KDB Daewoo Securities Research

KDB Daewoo Securities Research 35 November 13, 2012 The Age of Transition

LGE: LTE + vertical integration

LGE underestimated the When the smartphone market was in its early stages, LGE mistakenly forecast demand for pace of smartphone feature phones to remain stable. Thus, the company kept its primary focus on the feature phone penetration market. However, handset demand has shifted to smartphones at a faster-than-expected pace.

On the other hand, SEC recognized, albeit a bit belatedly, the growth potential of the smartphone market, and introduced its first smartphone, the Omnia, in 2008. Although the Omnia was not successful, the failure served as a stepping stone for the company on its way to developing the Galaxy S series and growing into the leading smartphone producer in the world.

LGEÊs earnings Left out of the smartphone competition, LGEÊs earnings nosedived. The MC division deteriorated sharply as it reported losses and carried out restructuring. The company launched its Optimus missed the boat on smartphone model in 2011, but it failed to attract the marketÊs attention. Although the smartphones company introduced various high-end models at CES and MWC, their launches always proved to be tardy. LGEÊs slow responses to the fast-changing smartphone market has further widened the companyÊs gap with leading players.

However, the emergence of the LTE services market in 2012 presented new opportunities to LGE. The company has made enormous investments into the development of LTE technology and holds over 1,400 LTE-related patents, the largest number among the worldÊs smartphone producers. Aiming for LTE-driven growth, LGE launched the Optimus G in 2H12. The new model is considered to have much-improved hardware compared to its predecessors thanks to stronger synergies from LGEÊs subsidiaries.

Growth of the Indeed, the Optimus G confirmed the strength of LGEÊs supply chain. As it is becoming smartphone market to increasingly difficult for smartphone makers to differentiate themselves with hardware, present opportunities for companies that can supply products in a fast and stable manner should have competitive LGE edges going forward. For LGE, LG Innotek and LGD produce components, and LG Chem supplies electronic materials. This strong supply chain should help LGE enhance its global prominence in line with the growth of the smartphone market.

In 2013, LGE to grow It is premature to forecast that LGE will grow into worldÊs third-largest smartphone marker into a leader among (annual shipments of 50mn~100mn units) in 2013. However, we believe that LGE will at second-tier players least grow into a top-four second-tier player with shipments exceeding 40mn units in 2013. As for profitability, the company is expected to generate stable margins of over 1%.

Figure 42. LGEÊs MC divisionÊs quarterly earnings trend Figure 43. LGEÊs smartphone lineup

(Wbn)Handset (L) OP margin (R) (%) Name Optimus 4X HD Optimus G Optimus LTE2 6,000 14 Expect gradual earnings growth based on conservative assumptions Rock bottom: sales & shipments in 2Q12 4,500 7

3,000 0 Size: - x - x 8.9mm Size: 131.9 x 68.9 x 8.5mm Size: 134.7 x 69.5 x 8.9mm Weight: - g Weight: 145g Weight: 145 g Display:720 x 1280 pixels Display: 768 x 1280 pixels Display: 720 x 1280 pixels (HD-IPS TFT capacitive (True HD-IPS + LCD TFT pixels (True HD-IPS LCD Specifications 1,500 -7 touchscreen) capacitive touchscreen) capacitive touchscreen) Camera:8MP, LED flash Camera: 13MP, LED flash Camera: 8MP, LED flash OS: Android OS, v4.0 OS: Android OS, v4.04 OS: Android OS, v4.0 CPU: Quad-core 1.5 GHz CPU: Quad-core 1.5 GHz CPU: Dual-core 1.5 GHz 0 -14 Released 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F June 2012 September 2012 May 2012 date Source: Company data, KDB Daewoo Securities Research Source: GS Marena, KDB Daewoo Securities Research

KDB Daewoo Securities Research 36

IV The Return of Microsoft

Will Windows 8 boost demand for traditional PCs? We do not believe so. The era of operating system and CPU upgrades boosting PC demand appears to be over. Now, demand is being driven by innovation. Therefore, the effect of the Windows 8 launch should be examined through the lens of mobile revolution-driven innovation.

The tablet market is steadily evolving. Newly growing segments are the 5- and 7-inch phablet markets and the hybrid PC (i.e., a tablet with a keyboard) market. In particular, the markets for 7-inch phablets and hybrid PCs running Windows RT (a version of Windows 8) are expected to expand rapidly.

Tablet shipments are projected to surge by 64% YoY to 180mn units in 2013, boosted by the market expansion of 7-inch tablets, including the iPad Mini, and Windows 8-based tablets (including the Surface).

KDB Daewoo Securities Research 37 November 13, 2012 The Age of Transition

IV. Return of Microsoft: Windows 8 and tablet market growth

iOS 6 vs. Jelly Bean

Achieving software Smartphone software and operating platforms heavily influence consumer choices. In our differentiation has view, Android is becoming more open to forming alliances, while AppleÊs iOS is becoming become more difficult less innovative and increasingly closed off. Software differentiation now seems more challenging than ever for Apple.

AppleÊs iOS becomes Major changes in iOS 6 include: 1) reinforcement of Siri features (available in ten languages), more closed off⁄ 2) Passbook (which collects ticket information and coupons), 3) Facebook integration, 4) FaceTime on telecom networks, 5) AppleÊs own maps (vs. Google Maps), and 6) improved Chinese language services.

The exclusion of Google services such as Google Maps has given rise to software-related problems. In particular, complaints about AppleÊs new map application are negatively affecting the brandÊs reputation for reliability. Going forward, driving innovation on a closed platform should become a challenge for the company.

⁄ while Jelly Bean Major improvements in Android 4.1 include: 1) Project Butter (a much smoother user becomes more open interface, which features technologies such as triple buffering and extended VSync timing); 2) Google Now (a personalized mobile search application using voice recognition technology); 3) expandable notifications; 4) the adoption of Chrome as the default browser; 5) improved Google Play content; and 6) Google Wallet (using NFC technology).

Most notably, the touch lag issue, which has been considered a major weakness of Android, appears nearly resolved. Google Now, a voice-activated app (available in more than 40 languages), performs instructions by recognizing repeated actions (e.g., search queries, locations, and calendar appointments). Since Google Now is based on GoogleÊs extensive search database, we think this feature could be a potential threat to Apple.

Figure 44. iOS vs Jelly Bean maps Figure 45. WhatÊs the weather? Faster response from Jelly Bean

Source: World Wide Web Source: World Wide Web

KDB Daewoo Securities Research 38 November 13, 2012 The Age of Transition

Differentiating features of Windows 8: New user experience + productivity

Metro UI offers a unique While iOS 6 and Jelly Bean now have similar features, MicrosoftÊs Metro UI interface user experience appears set to deliver a unique user experience. iOS allows users to organize icons into folders, but Windows 8 offers a tile-based interface (organized by app category) that aims to increase user convenience and scalability.

AppleÊs iPad, which practically created the tablet PC segment, greatly improved information consumption. However, there is a long way to go in terms of productivity, although the iPad allows users to record information using a virtual keyboard.

Microsoft Office Many tablet PC users utilize various forms of keyboards, suggesting persistent demand for + cloud computing output. Thus, Windows 8-based tablet PCs or hybrid PCs equipped with Microsoft Office will present growth be a good alternative for users in need of greater productivity. opportunities for tablet Using Microsoft Office on a tablet PC can further enhance the cloud computing experience. PCs in corporate and e- Microsoft Office 2013 allows users to edit PDF files in Word and then, save the Word file as learning environments PDF. Adding and editing pictures or moving clips on a Word file have also become easier.

Thus, the differentiated features of Windows 8 are anticipated to provide a big boost to tablet PC market growth. The touchscreen feature of the new Microsoft Office proves that the software has started to accommodate the needs of mobile users. Going forward, corporate and e-learning segments will likely offer new growth opportunities for tablet PCs equipped with the Microsoft Office software.

Figure 46. Windows 8 Metro UI Figure 47. Improved touch features of MicrosoftÊs Office 2013

Source: Microsoft Source: CNET

KDB Daewoo Securities Research 39 November 13, 2012 The Age of Transition

Windows 8: New growth driver for the tablet PC market

OS and CPU Will Windows 8 boost demand for traditional PCs? We do not believe so. The era of improvements unlikely operating system and CPU upgrades boosting PC demand appears to be over. Now, demand to boost PC demand is being driven by innovation. Therefore, the effect of the Windows 8 launch should be examined through the lens of mobile revolution-driven innovation.

Windows 8 will likely MicrosoftÊs new operating system is projected to contribute to mobile demand growth. In particular, Windows 8 will likely boost demand for tablets more sharply than smartphones, as: boost demand for tablet PCs more sharply than 1) Windows-based smartphones remain inferior to iOS- and Android-based ones in terms of for smartphones applications. There are 600,000~700,000 iOS and Android applications (each), while the number of Windows applications has just hit the 100,000 mark. 2) Office programs are much less useful on smartphones than on tablet PCs. Thus, taking into account corporate and educational demand, Windows 8 should provide a bigger boost to tablets than to smartphones.

Emergence of the 5~7- Meanwhile, the tablet market is steadily evolving. Newly growing segments are the 5- and 7- inch phablet and hybrid inch phablet markets and the hybrid PC (i.e., a tablet with a keyboard) market. In particular, PC markets the 7-inch phablet and Windows RT-based hybrid PC markets are expected to expand rapidly. There are clear distinctions between the 5- and 7-inch phablet markets. Since 5-inch phablets are part of the smartphone market, they allow their manufacturers to do business with mobile carriers. Therefore, for hardware makers like SEC, the 5-inch phablet market is more profitable than the 7-inch market. In contrast, the 7-inch phablet market was created by Amazon. However, although Google entered the market later than Amazon, its phablet model Nexus 7 has gained explosive popularity. Now, Apple is also attempting to advance into the market. Although competition among Amazon, Google, and Apple is expected to intensify in the 7-inch phablet market, we believe that this market has high growth potential in light of the attractive size and affordable price of 7-inch phablets. In the hybrid PC market, the features of conventional PCs and tablets coexist. Hybrid PCs combine the convenience of tablet PCs and the utility of keyboards. Some hybrid PC models adopt x86 CPUs, while others use ARM APs. In this market, the most important factor is price. An expensive hybrid PC could be forced out the market immediately after its launch. Therefore, ARM AP-based models (Windows RT version), rather than Intel CPU-based models (Windows 8 Pro version), are likely to become dominant in the hybrid PC market. This competition between Intel and ARM in this market deserves attention.

Figure 48. Application market share by OS (as of June 2012) Figure 49. Windows 8 on MicrosoftÊs Surface

Other

iOS

Chinese third-party

CSP

Google Play Web app stores

Amazon Nokia Blackberry Windows Phone

Source: Gartner, KDB Daewoo Securities Research Source: Microsoft

KDB Daewoo Securities Research 40 November 13, 2012 The Age of Transition

Table 8. Major Hybrid PCs Manufacturer SEC Microsoft Product ATIV Smart PC ATIV Smart PC Pro Surface with Windows RT Surface with Windows 8 Pro

1.5GHz Quad-core NVIDIA Tegra Processor 1.5GHz Dual-core Intel Atom 1.7GHz Quad-core Intel Core i5 1.7GHz Dual-core Intel Core i5 3 OS Windows 8 RT Windows 8 Windows 8 RT Windows 8 Display 11.6" Super PLS 11.6" Super PLS 10.6" HD LCD 10.6" FHD LCD Resolution 1366 x 768 (135ppi) 1920 x 1080 (190ppi) 1366 x 768 1920 x 1080 RAM 2GB 4GB 2GB 4GB Storage 64GB SSD 128GB SSD 32/64GB 64/128GB External memory 3G, 4G LTE, Wi-Fi, Bluetooth 3G, 4G LTE, Wi-Fi, Bluetooth Wi-Fi Wi-Fi Front: 2MP Front: 2MP Wireless Front & rear: 720p HD Front & rear: 720p HD Rear: 8MP Rear: 5MP Camera 8,200mAh 8,200mAh - - Battery 13.5hr 8hr 8hr - Size (H x W x D) 304 x 189.4 x 9.9mm 304 x 189.4 x 11.9mm 275 x 172 x 9.4mm 275 x 173 x 13.5mm Weight 0.744Kg 0.888kg 676g 903g 32GB: US$499 Price $750 $1,199 - 32GB+Touch cover: US$599 Release date 4Q12 4Q12 October 2012 - Source: Company data, KDB Daewoo Securities Research

Table 9. Major Hybrid PCs Manufacturer LG Acer Lenovo MSI Product H160 Aspire S7 IdeaPad Yoga 11 Slider S20

Processor 1.8GHz Dual-core Intel Atom 1.7GHz Quad-core Intel Core i5 Nvidia Tegra 3 Dual-core Intel Core i5 OS Windows 8 Windows 8 Windows RT Windows 8 Display 11.6" IPS LCD 11.6" IPS LCD 11.6" LCD 11.6" IPS LCD Resolution 1366 x 768 (135ppi) 1920 x 1080 (190ppi) 1366 x 768 1920 x 1080 (190ppi) RAM 2GB 4GB 2GB 4GB Storage - 128GB SSD 64GB SSD 128GB SSD External memory - Wi-Fi, Bluetooth 4.0 Wi-Fi, Bluetooth 4.0 Wi-Fi, Bluetooth 4.0 Wireless - Front: 1.3MP Front: 1MP - Camera - 3790mAh - 3900mAh Battery 9hr 6hr 13hr 7hr Size (H x W x D) 286 x 192 x 15.9mm 279 x 193 x 12.1mm - - Weight 1.05kg 1.04kg 1.26kg 1kg Price W1.18mn level US$1,199 US$799 US$1,099 Release date 4Q12 October 2012 December 2012 4Q12 Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 41 November 13, 2012 The Age of Transition

Tablet market to expand by 64% YoY in 2013

Tablet shipments to In 2012, tablet shipments are forecast at 110mn units. Tablet shipments are projected to surge by 64% YoY to surge by 64% YoY to 180mn units in 2013, boosted by the market expansion of 7-inch 180mn units in 2013 tablets, including the iPad Mini, and Windows 8-based tablets (including the Surface).

Although some analysts recently raised their 2013 tablet PC shipment forecasts to more than 200mn units, we present a relatively conservative projection, given that the iPad Mini could partially cannibalize the full-sized iPad market. However, even our conservative projection suggests that this market is likely to grow rapidly.

The combined share of In the tablet market, Apple remains dominant, controlling 60% of the market. However, the non-Apple companies to big question is whether tablet market growth will continue to be driven by the Cupertino- exceed 50% in 2013 based giant. We expect AppleÊs tablet market share to fall to 49% in 2013, while the combined share of non-Apple companies should exceed 50% for the first time.

As for the 7-inch tablet market, which is likely to expand rapidly next year, Apple is lagging behind its competitors. In this market, Apple is competing with not only SEC but also Amazon, Google, and Microsoft. Worse, as mentioned above, the iPad Mini is likely to cannibalize demand for the full-size iPad.

Figure 50. Global tablet shipments; Proportions of Apple and non-Apple tablet shipments

(mn units) (%) 300 Global tablet shipments (L) % of Apple (R) % of Non-Apple (R) 285 100

250 240 80

200 180 60 150 110 40 100 60 20 50 17

0 0 10 11 12F 13F 14F 15F

Source: Gartner, KDB Daewoo Securities Research

Figure 51. Major tablet firmsÊ annual shipment trends & forecasts Figure 52. Major tablet firmsÊ quarterly shipment trends & forecasts (mn units) (mn units) 300 60 Microsoft Microsoft Google Google 250 Amazon 50 Amazon SEC SEC Apple Apple 200 40 Others Others

150 30

100 20

50 10

0 0 10 11 12F 13F 14F 15F 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F

Source: Gartner, KDB Daewoo Securities Research Source: Gartner, KDB Daewoo Securities Research

KDB Daewoo Securities Research 42 November 13, 2012 The Age of Transition

Medium- to long-term change in OS market competition

MicrosoftÊs Surface to Recently, MicrosoftÊs Surface with Windows RT was completely sold out upon its release mark a change in smart (3~5mn). Before this event, Apple had been the only tablet PC maker to achieve quarterly device OS sales of over 5mn. We believe that the Surface, which is categorized as a hybrid PC due to its keyboard, signals an upcoming change in the smart device operating system market.

Microsoft, along with Intel, created the golden age of personal computers. However, while Apple drove the mobile revolution and Google emerged as a mobile powerhouse with its Android OS, Microsoft struggled to revive PC demand. Moreover, Windows-based smartphones (mainly produced by Nokia) have failed to take off in the market.

Microsoft to gain market The Surface is Microsoft's ambitious attempt to crack the tablet PC market. Its Windows 8 share in mobile OS OS and Microsoft Office software will likely attract corporate demand. By 2015, we expect Microsoft to command a mobile OS market share of 15~20%. Hardware-oriented companies such as SEC should welcome the return of Microsoft, as the rapid growth of Google, which has strong software lineups, could become a new threat in the future. Indeed, software competitiveness has become more important than ever.

Figure 53. Media tablet market share trends and forecasts by OS

(%) Android iOS/Mac OS QNX Windows Other 100 - 3 13 15 15

63 53 44 37 33 60 83

46 49 20 41 41 35 16 0 10 2011 2012 2013 2014 2015

Source: Gartner, KDB Daewoo Securities Research

Figure 54. Smartphone market share trends and forecasts by OS

(%) Android iOS Symbian Windows RIM Bada Other 100

4 10 2 17 21 80 4 22 23 23 60 22 19

40 16 60 58 53 47 51 20 22

0 2010 2011 2012F 2013F 2014F 2015F

Source: Gartner, KDB Daewoo Securities Research

KDB Daewoo Securities Research 43 November 13, 2012 The Age of Transition

Beneficiaries of tablet PC market expansion

1) Touchscreen panel The biggest beneficiaries of the tablet PC market expansion will be display parts makers and 2) ITO coating developers of related technology, including touchscreens, ITO coating, and glass slimming. 3) Glass slimming 1. Touchscreen panel (TSP)

Add-on type touchscreen demand has declined in the smartphone market due to the growing popularity of on-cell and in-cell technologies. In the tablet PC market, however, add- on type will likely remain in high demand, as on-cell displays (used in OLED) are more expensive and less productive, and in-cell displays (LCD) have production yield issues. Going forward, the expansion of the mid- to low-priced tablet PC market should boost demand for existing add-on touchscreens.

Touchscreen panels The large screen size of tablet PCs presents growth opportunities to touch panel makers. 1) Add-on technology Although the average screen size (7-inch) is getting smaller, it is still three times larger than a 2) Large screen size 4-inch handset screen in terms of area. We expect 7-inch mid- to low-priced tablet PCs, including AppleÊs iPad Mini, the Google Nexus 7 and AmazonÊs Kindle Fire, to drive the expansion of the touchscreen panel market next year.

In terms of area, the tablet PC-use touchscreen market is projected to expand 55% in 2013. Although the average tablet PC size will likely decrease by roughly 8.6% due to the spread of 7-inch models, a greater sales volume (up 64% YoY) should offset the trend toward smaller screen sizes.

Table 10. Tablet PC parts/materials companies Parts/materials Related companies Comments TSP On-cell/in-cell → Add-on Iljin Display Largest touchscreen supplier for SECÊs tablet PCs Larger area and higher ASP SMAC Broad applications ranging from SECÊs smartphones to tablet PCs ELK Customer base (domestic and overseas) to broaden from current LGE and Motorola Melfas Supplier of touch IC for Galaxy Note II (tablet PC-use ICs under development) MNtech Entering large-sized touchscreen business based on metal mesh ITO coating IPS, PLS panel expansion UID SEC: PLS panel ITO coating Avatec LGD: IPS panel ITO coating Glass slimming Slimmer and lighter devices Avatec Tablet PC-use panel slimming for LGD Global Display Tablet PC-use panel slimming for SEC (unlisted) Source: KDB Daewoo Securities Research

Figure 55. Comparison of TSP structures Figure 56. TSP market trends and forecasts by area

(mn m2) (%) 14 Tablet PCs (L) 60 Handsets (L) 12 % of tablet PCs (R) 50

10 40 8 30 6 20 4

10 2

0 0 08 09 10 11 12F 13F 14F 15F

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 44 November 13, 2012 The Age of Transition

2. ITO coating companies

ITO coating companies ITO coating companies are expected to benefit from the increasing use of LGDÊs in-plane to benefit from switching (IPS) or Samsung DisplayÊs plane–to-line switching (PLS) panels in tablet PCs. increasing use of Models using IPS or PLS panels, including AppleÊs iPad and iPad Mini, SECÊs Galaxy Note IPS/PLS panels in tablet 10.1 and Galaxy Tab, AmazonÊs Kindle Fire, and MicrosoftÊs Surface, are forecast to drive up PCs the tablet PC market in 2013.

IPS and PLS technologies feature an electrode pair at the bottom panel (TFT), while the upper panel (color filter) does not have a conductive layer in which electrodes can move. Thus, static electricity resulting from the contact of IPS or PLS panels with other objects could cause electrical damage. Accordingly, an upper panel needs to undergo the ITO coating process to prevent the generation of static electricity.

LGD and Samsung Display carry out some ITO coating in-house, but they also outsource to specialized ITO coating companies: Avatec (149950 KQ) and U.I.D. (069330 KQ). Recently, panel makers are increasing outsourcing to meet increasing demand for tablet PC-use panels.

3. Glass slimming

Market demand for The expansion of the tablet PC market is also spurring the growth of the glass slimming thinner tablet PCs to industry. Glass slimming is the process of reducing the thickness of panels (TFT + color boost the importance of filter) using chemical etching technology. the glass slimming State-of-the-art glass slimming technology can reduce the thickness of a panel from 1mm to process 0.5mm. Using 0.25mm-thick LCD glass in the first place could eliminate the need for the glass slimming process. However, ultra-thin glass cannot withstand high-temperature TFT and color filter processes. Thus, the process of combining TFT and color filter panels should precede the glass slimming process.

The expansion of tablet PC sales volume since 1H12 is boosting earnings at Avatec and Global Display (unlisted), which are carrying out glass slimming for LGD and Samsung Display, respectively. Avatec and Global Display saw their 1H12 operating profits exceed their 2011 full-year operating profits. The glass slimming process should gain a higher profile going forward due to growing demand for slimmer tablet PCs and smartphones.

Figure 57. ITO coating process on IPS panel Figure 58. Glass slimming technology

0.5mm 0.25mm

0.25mm 0.5mm

Source: Industry data Source: Avatec

KDB Daewoo Securities Research 45

V Farewell to the PC Era!

This year, we estimate tablet shipments to grow to around 100mn units. Assuming that a third of this figure displaces traditional PC demand, this would essentially mean the PC market will remain stagnant or modestly contract this year. Looking ahead into 2013, while the market consensus expects the PC market to grow by around 4~6%, we project virtually zero growth next year, based on the assumption that tablet shipments will expand to 150~200mn units in 2013 and cannibalize a portion of traditional PC demand.

In a broad sense, the mobile revolution has given rise to demand for different types of memory, from mobile DRAM to embedded NAND, embedded multimedia cards (eMMC), and embedded multi-chip packages (eMCP). And, as more smart devices make their way into the market, a more diverse range of mobile memory solutions is being adopted. This suggests that, in the current age of mobile memory, product mix, not market share, is what drives the growth, profitability, and competitiveness of memory chip makers.

KDB Daewoo Securities Research 46 November 13, 2012 The Age of Transition

V. Farewell to the PC era!: Zero PC growth and its implications for the memory industry

PC industry headed for zero growth

IT demand can be found 2012 has been a weaker-than-expected year for the PC industry. Amid a slumping global in segments in which economy, overall IT demand has virtually come to a standstill. Despite the impressive innovation is taking place growth of smartphones, the broader handset market has remained stagnant and the situation is not much different for TVs and PCs. The only segments in which IT demand remains buoyant are those that are seeing innovation.

Our 2013 base call is This year, we estimate tablet shipments to grow to around 100mn units. Assuming that a zero growth for the PC third of this figure displaces traditional PC demand, this would essentially mean the PC industry market will remain stagnant or modestly contract this year. Looking ahead into 2013, while the market consensus expects the PC market to grow by around 4~6%, we project virtually zero growth for next year, based on the assumption that tablet shipments will expand to 150~200mn units in 2013 and cannibalize a portion of traditional PC demand.

Thus, our outlook for the memory market rests on a base assumption of zero growth in the PC industry. In other words, gone are the days of traditional PC demand driven by operating systems and CPUs - a new age has dawned!

Figure 59. Evolution of computing demand to tablets and hybrid PCs

Source: Gartner, „Convergence of media tablet, ultramobile notebooks, and even smartphones‰

Figure 60. Platforms: OS/CPU ecosystem competition

Source: Gartner, „Convergence of media tablet, ultramobile notebooks, and even smartphones‰ KDB Daewoo Securities Research 47 November 13, 2012 The Age of Transition

Memory industry’s dynamics have completely changed

The memory market has been experiencing structural changes the likes of which have not been witnessed in the past 10 years. The transition from PC to mobile is the overriding trend in the memory market. And the two trends explained below signal major shifts in the dynamics of the memory industry.

ElpidaÊs bankruptcy 1. Bankruptcy of Elpida failed to reverse the DRAM market trend The global memory industry has long been involved in a game of chicken. The sequential cycle of the memory market is as follows: 1) robust capex is pursued to achieve market dominance ahead of rivals and expand market share; 2) competition rises related to technology migration; 3) prices plunge due to oversupply; 4) the game of chicken and capacity utilization declines; and 5) prices surge and corporate earning grow.

Meaningful changes on the supply side, such as production cuts and restructuring, have traditionally stopped memory market downtrends. In particular, bankruptcies were the strongest signals for the bottoming-out of the memory market.

Earlier this year, Elpida went bankrupt, which was anticipated to have a greater impact on the market than the collapse of Qimonda. However, commodity DRAM prices turned downward less than six months after the bankruptcy. Currently, the 2Gb DDR3 price stands at just US$0.84 although DRAM producers have not increased supply after ElpidaÊs bankruptcy. Investors are wondering whether weak PC demand has driven down DRAM prices. They are also uncertain about the direction of DRAM prices next year.

2. Top-tier NAND producers’ capacity and production cuts Unprecedented moves When the market nears bottom, second-tier players typically see their EBITDA turn negative by top-tier NAND and their cash become depleted. However, top-tier companies are able to survive their producers operating losses. As such, because their market shares inevitably increase during the course of this game of chicken, top-tier companies do not have to consider capacity reductions or production cuts. Indeed, in the aforementioned cycle, top-tier companiesÊ production cuts have traditionally been nothing more than empty gestures.

Since 2Q12, however, top-tier NAND producers have made some unprecedented moves. SEC converted all of its production lines in Austin, Texas to System LSI lines. In addition, Toshiba slashed its production by 30%. Nevertheless, NAND prices remained on the decline until June. Although SEC needed to expand its System LSI capacity, the fact that it converted entire NAND lines indicates that NAND producersÊ market outlook has changed.

Figure 61. Global DRAM and NAND capacity trends and forecasts

(12-inch eq. mn wafers/month) Global NAND Capacity 1.5 Global DRAM Capacity

1.3 Bankruptcy of Elpida Bankruptcy of Qimonda 1.1 Stagnant memory capacity expansion 0.9

0.7

0.5

0.3 06 07 08 09 10 11F 12F 13F

Source: Gartner, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 48 November 13, 2012 The Age of Transition

The Micron-Elpida merger: Bang for the buck?

M&As between memory The prevailing wisdom among market watchers is that mergers between memory suppliers typically chip makers: one plus fail to create synergy. In other words, „one plus one equals two‰ is more often the exception rather one does not often equal than the rule. Then, what about the merger between Micron and Elpida? Is MicronÊs acquisition of two Elpida doomed to lead to failure? Or will it turn Micron into the second-largest chip maker in the world? If so, how will this affect SK HynixÊs position in the memory market?

The Micron-Elpida deal For mergers and acquisitions, a dealÊs value is a critical factor. Micron bought Elpida for an looks lucrative on a estimated US$2.5bn (US$2.8bn after including a 24% stake in Rexchip (US$330mn)), of which numbers basis only US$750mn was paid in cash. The deal has given Micron ownership of ElpidaÊs Hiroshima fab (capacity of 120,000 wafers per month) and a 65% stake in Rexchip (ElpidaÊs subsidiary with capacity of 80,000 wafers per month). The company also plans to pay US$1.75bn in installments to cover a portion of ElpidaÊs US$4.8bn debt over the next seven years.

In effect, Micron has acquired DRAM capacity of 200,000 wafers per month and a long-term debt of W1.9tr in exchange for just W1.2tr in cash. This seems to be a lucrative trade-off.

Post-merger, Micron will What does the deal imply in terms of market share? According to IDC, SEC held the largest become the second- share (40.5%) of the global DRAM market in 2Q12, followed by SK Hynix (25.4%), Micron largest memory maker in (12.4%), Elpida (11.7%), and Nanya Technology (4.9%). This indicates that the combined market terms of market share share (29%) of Micron, Elpida, and Nanya is larger than that of SK Hynix. In the NAND category, SEC accounted for 45.4% of the global market in 2Q12, a sharp gain from 36.5% in 1Q12. During that same period, Toshiba saw its market share plunge from 32.8% to 22.7%. As of 2Q, Micron represented 16.4% of the market, SK Hynix 11.4%, and Intel 4.1%. Interestingly, this puts the combined market share (15.5%) of Micron and Intel above that of SK Hynix.

Thus, although market share rankings could shift over the course of 2H, following the acquisition, Micron stands as the worldÊs second-largest DRAM supplier and the third-largest NAND manufacturer. Going forward, however, market shares may no longer carry as much weight as before, given that SK Hynix is deemed to be one step ahead of Micron and Elpida as far as the manufacturing process is concerned.

MicronÊs takeover of It should be noted that the takeover of Elpida has enabled Micron to fill in a missing piece Elpida could offer (mobile DRAM) of its memory business. As such, we believe the merger could generate a bang for the buck larger-than-expected synergy, especially considering that Micron is believed to be more competitive than SK Hynix in terms of solid-state drives (SSD) and the takeover is likely to help ensure effective supply of mobile memory chips to Apple.

All in all, we believe MicronÊs acquisition of Elpida could offer a big bang for the buck, posing a potential threat to SK Hynix, which is slated to become the third-largest global chipmaker.

Figure 62. 2Q12 DRAM market share breakdown Figure 63. 2Q12 NAND market share breakdown

Powerchip, 1.6% Other, 1.4% Intel, 4.1% Winbond, 1.7% SK Hynix, 11.4% Nanya, 4.9%

Elpida, 11.7%

SEC, 40.5% SEC, 45.4% Micron, 16.4%

Micron, 12.4%

Toshiba, 22.7% SK Hynix, 25.4%

Source: IDC Source: IDC KDB Daewoo Securities Research 49 November 13, 2012 The Age of Transition

The age of mobile memory: Competitiveness & growth hinge on product mix

Product mix is key to the In a broad sense, the mobile revolution has given rise to demand for different types of memory, competitiveness and from mobile DRAM to embedded NAND, eMMC, and eMCP. And, as more smart devices make growth of chip makers their way into the market, a more diverse range of mobile memory solutions is being adopted. This suggests that, in the current age of mobile memory, product mix, not market share, is what drives the growth, profitability and competitiveness of memory chip makers.

Demand for power- In the mobile DRAM market, we expect the memory standard to gradually shift from LPDDR2 to efficient mobile DRAM, LPDDR3 in 2013 before transitioning to the Wide I/O interface. The power consumption per such as LPDDR3 and bandwidth for LPDDR2 is 80mW/GB/sec. Consumption should fall to 70mW/GB/sec with the DDR3L, to rise transition to LPDDR3 and fall further to 40mW/GB/sec when the Wide I/O standard is adopted. For mobile-oriented PCs such as Ultrabooks and hybrid PCs, we expect ultra slim products to adopt the LPDDR3 standard and others to use the more power-efficient DDR3L.

UFS market to take In the embedded NAND segment, demand for eMMC (which combines NAND and logic) and shape eMCP (which integrates NAND, DRAM, and logic) has started to grow. After 2013, we expect universal flash storage (UFS), which features the advantages of both eMMC and SSD, to see meaningful growth. According to JEDEC (a US semiconductor standardization organization), UFS, like eMMC, consumes low amounts power but still transmits data at rates of 6.0Gbps (UFS 2.0) and 12.0Gbps (UFS 3.0) -- faster than eMMC and even SSDs.

Figure 64. Mobile DRAM market evolution: From LPDDR2 to LPDDR3 and Wide I/O

Source: JEDEC

Figure 65. LPDDR3: Lower power consumption, faster than LPDDR2 Figure 66. Power consumption of DDR3L, DDR3L-RS, LPDDR3

Source: JEDEC Source: Intel Developer Forum

KDB Daewoo Securities Research 50 November 13, 2012 The Age of Transition

Figure 67. Mobile-related NAND demand

Source: JEDEC, Mobile Memory Forum 2012

Figure 68. Evolution of eMMc to UFS Figure 69. Major components of smart devices

Source: JEDEC, Mobile Memory Forum 2012 Source: JEDEC, Mobile Memory Forum 2012

Figure 70. Speed comparison of UFS, eMMC, and SSD (SATA) Figure 71. UFS highly reduces information process speed vs. eMMC

Source: JEDEC, Mobile Memory Forum 2012 Source: JEDEC, Mobile Memory Forum 2012

KDB Daewoo Securities Research 51 November 13, 2012 The Age of Transition

[DRAM market issue] Will a mobile DRAM supply shortage occur?

The DRAM market will Given rising mobile DRAM demand, will the DRAM market pick up full swing? We believe that it recover, but the pace of is too premature to conclude so, considering that demand for commodity DRAM is falling more recovery should be only sharply than supply; and supply growth of mobile DRAM could exceed demand growth. Indeed, modest both PC and mobile DRAM prices dropped in 3Q. The proportion of commodity DRAM remains at more than 30%, while that of mobile DRAM stands at the low 20% level.

DRAM supply bit growth From a DRAM supply perspective, low supply bit growth is a positive factor. In particular, is estimated at a low next-generation extreme ultraviolet (EUV) lithography equipment has not yet been level next year introduced for commercial production due to productivity issues. Furthermore, migration to 20nm (or finer) process has caused yield problems and issues related to the implementation of HKMG dielectrics. Therefore, DRAM supply bit growth is estimated at the mid-to-high level of 20% next year.

DRAM demand bit However, the problem is that DRAM demand bit growth could also remain low, assuming growth could also zero growth of PC DRAM demand. PC DRAM content per system has stagnated at 4GB. If remain low PC shipments are stagnant and the growth of DRAM content per system (in GB) stands at only 15~20% next year, DRAM demand bit growth will likely fall below 20%. As such, oversupply of commodity DRAM is unlikely to ease next year.

Then, will the DRAM market see a supply shortage of mobile DRAM in 2013?

The DRAM market is A positive scenario for the DRAM market next year could unfold as follows: 1) production unlikely to see a mobile cuts at Taiwanese chipmakers ease PC DRAM oversupply and stabilize prices; 2) DRAM supply shortage smartphone shipment growth drives up mobile DRAM demand; 3) Apple excludes SEC from next year. its supply chain, benefitting SK Hynix and Elpida; and 4) the mobile DRAM market experiences tight supply or a supply shortage.

However, things could develop differently: 1) production cuts at Taiwanese chip makers stabilize PC DRAM prices; 2) mobile DRAM supply increases on expectations for smartphone shipment growth; 3) Apple asks for higher-than-expected DRAM supply, raising the need for DRAM makers to increase the proportion of mobile DRAM production; and 4) mobile DRAM prices fall on supply growth.

Assuming that PC demand stagnates in 1H13, we believe that production cuts at Taiwanese chip makers will only deplete existing PC DRAM inventories; and SEC, SK Hynix, Micron, and Elpida will expand their mobile DRAM productions in anticipation of an increase in demand for smart devices.

Therefore, we do not expect the DRAM market to see a mobile DRAM supply shortage next year.

Figure 72. Annual DRAM supply/demand bit growth trends Figure 73. DRAM price trends and forecasts (2Gb DDR3)

(%) DRAM demand Bit growth (US$) 3.0 DDR3 2Gb spot price KDB Daewoo forecasts 100 95 DRAM supply bit growth 86 DDR3 2Gb contract price 2.5 75 2.0

46 46 48 50 43 1.5 38 39 31 29 28 1.0 27 25 26 25 0.5 Bankruptcy of Elpida Taiwanese DRAM makers' production cuts

0 0.0 07 08 09 10 11 12F 13F 1/11 7/11 1/12 7/121/13F 1/137/13F 7/13

Source: Gartner, KDB Daewoo Securities Research estimates Source: DRAMeXchange, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 52 November 13, 2012 The Age of Transition

[NAND market issue] Will prices rise further given limited supply growth?

NAND prices are on the NAND prices are on the rise. The price of 32Gb MLC rose by 8.6% in the second half of rise, backed by supply September and by 7.5% in the first half of October. The price of 64Gb MLC surged 9% in reductions and the second half of September and 17.1% in the first half of October. On the supply side, smartphone shipment strong NAND prices are attributable to the phase-out of NAND lines at SECÊs Austin fab and growth a 30% production cut at Toshiba in 2Q. On the demand side, smartphone shipment growth at SEC and Apple are leading to solid NAND prices.

Then, how long will the rise in NAND prices continue? To answer this question, we need to take a look at NAND demand and supply bit growth for 2013.

Both supply and demand From a demand perspective, the smart device market is the most important variable for bit growth for NAND to mobile DRAM and NAND demand. Shipments of smart devices are forecast to increase by reach 60%in 2013 30% from 740mn units (630mn smartphones and 110mn tablets) in 2012 to 960mn units (780mn smartphones and 180mn tablets) in 2013. Assuming the growth of NAND content per system (in GB) will increase by 25%, NAND bit growth arising from smart devices will likely reach 63%(1.3 x 1.25 = 1.63). Considering a decline in demand from memory cards, overall NAND demand bit growth is projected at around 60% next year.

On the supply side, all NAND makers are expected to embark on capacity expansion next year, including SECÊs Chinese line, ToshibaÊs Fab 5, SK HynixÊs M12, and MicronÊs IMFS. Major NAND makers addressed the burden of excessive inventories through production cuts in 1H, and we believe that they now feel the need for capacity expansion. Assuming NAND capacity growth of 15% and an efficiency increase of 40% in 2013, supply bit growth is also forecast at around 60% (1.15 x 1.3 = 1.6).

NAND prices are likely to Therefore, NAND prices are likely to continue to rise until year-end but move sideways continue to rise until thereafter due to capacity expansion at NAND makers. Although NAND makers are currently year-end but move taking drastic actions (e.g., capacity reductions) for the first time in a decade, they are sideways thereafter due unlikely to maintain a conservative strategy in the event of rises in prices and demand. to capacity expansion In particular, SECÊs strategic decision-making will likely be the most important factor. If SEC converts an existing NAND line into a System LSI line in China, rather than embarking on capacity expansion, the burden of supply growth will be lower than expected. In this case, NAND prices are likely to continue to rise through 2H13.

Figure 74. Annual NAND supply/demand bit growth trends Figure 75. NAND price trends and forecasts (64Gb MLC)

(%) NAND demand bit growth (US$) KDB Daewoo forecasts 150 16 NAND 64Gb MLC spot price NAND supply bit growth 131 NAND 64Gb MLC contract price 14 118 12 100 10 79 73 65 65 8 61 59 57 57 60 6 50 42 4

2 SEC: Reduced capacity Toshiba: Reduced capacity (30%) 0 0 08 09 10 11 12F 13F 1/11 7/11 1/12 7/121/13F 1/137/13F 7/13

Source: Gartner, KDB Daewoo Securities Research estimates Source: DRAMeXchange, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 53 November 13, 2012 The Age of Transition

Table 11. Global DRAM supply/demand model (1Gb eq. mn units, %, US$bn, US$) 1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F Supply/demand (oversupply) 103% 106% 104% 105% 106% 105% 102% 103% 102% 103% 104% 104% DRAM demand (1Gb mn) 5,861 6,078 6,619 7,206 7,120 7,873 8,769 9,422 14,944 20,614 25,764 33,185 % QoQ, % YoY 5% 4% 9% 9% -1% 11% 11% 7% 46% 38% 25% 29% DRAM supply (1Gb mn) 6,021 6,436 6,859 7,565 7,533 8,254 8,953 9,742 15,288 21,280 26,880 34,483 % QoQ, % YoY 4% 7% 7% 10% 0% 10% 8% 9% 48% 39% 26% 28% ASP(US$) 1.1 1.2 1.1 0.9 0.9 1.0 0.9 0.8 2.6 1.4 1.1 0.9 % QoQ, % YoY 15.8% 4.5% -4.3% -18.2% 0.0% 11.1% -10.0% -12.2% 19% -46% -23% -16% Revenues (US$bn) 6.6 7.4 7.5 6.8 6.8 8.3 8.1 7.7 39.2 29.4 28.4 30.8 % QoQ, % YoY 20.7% 11.7% 1.9% -9.8% -0.4% 21.7% -2.4% -4.5% 72.1% -24.8% -3.6% 8.5% Major DRAM demand (1Gb mn) PC 2,963 3,000 3,182 3,224 3,091 3,295 3,651 3,884 8,407 11,348 12,369 13,921 Server 899 944 992 1,041 989 1,039 1,091 1,145 1,494 3,008 3,877 4,264 Module 404 425 425 467 420 462 486 437 1,034 1,404 1,721 1,806 Mobile 1,076 1,323 1,566 1,998 2,094 2,431 2,923 3,363 1,500 3,178 5,963 10,811 Consumer 368 386 405 426 426 447 469 493 1,185 1,401 1,584 1,834 Other (including inventories) 150 - 50 50 100 200 150 100 1,325 276 250 500 DRAM demand proportion (%) PC 50.6% 49.4% 48.1% 44.7% 43.4% 41.8% 41.6% 41.2% 56.3% 55.0% 48.0% 42.0% Server 15.3% 15.5% 15.0% 14.4% 13.9% 13.2% 12.4% 12.2% 10.0% 14.6% 15.0% 12.8% Module 6.9% 7.0% 6.4% 6.5% 5.9% 5.9% 5.5% 4.6% 6.9% 6.8% 6.7% 5.4% Mobile 18.4% 21.8% 23.7% 27.7% 29.4% 30.9% 33.3% 35.7% 10.0% 15.4% 23.1% 32.6% Consumer 6.3% 6.4% 6.1% 5.9% 6.0% 5.7% 5.3% 5.2% 7.9% 6.8% 6.1% 5.5% Other (including inventories) 2.6% 0.0% 0.8% 0.7% 1.4% 2.5% 1.7% 1.1% 8.9% 1.3% 1.0% 1.5% Supply by company (1Gb mn) SEC 2,134 2,303 2,462 2,807 2,729 2,970 3,346 3,632 5,805 8,111 9,706 12,677 SK Hynix 1,816 1,943 2,020 2,261 2,391 2,626 2,738 3,024 3,494 5,285 8,039 10,779 Micron 689 744 818 875 875 963 1,040 1,123 1,718 2,289 3,126 4,001 Elpida 1,002 1,083 1,169 1,216 1,216 1,313 1,418 1,532 2,503 3,714 4,470 5,479 Powerchip 97 108 117 123 110 132 143 150 574 545 444 536 Nanya 160 184 203 213 191 230 248 260 512 815 760 930 Bit growth (%) SEC 8% 8% 7% 14% -3% 9% 13% 9% 71% 40% 20% 31% SK Hynix 9% 7% 4% 12% 6% 10% 4% 10% 38% 51% 52% 34% Micron 5% 8% 10% 7% 0% 10% 8% 8% 38% 33% 37% 28% Elpida -5% 8% 8% 4% 0% 8% 8% 8% 35% 48% 20% 23% Powerchip -15% 12% 8% 5% -10% 20% 8% 5% 112% -5% -19% 21% Nanya -15% 15% 10% 5% -10% 20% 8% 5% 30% 59% -7% 22% Source: KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 54 November 13, 2012 The Age of Transition

Table 12. Global NAND supply/demand model (1GB eq. mn units, %, US$bn, US$) 1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F Supply/demand (oversupply) 107% 115% 106% 90% 97% 102% 103% 105% 99% 103% 103% 102% DRAM demand (1Gb mn) 5,725 6,320 7,438 9,275 9,557 10,513 12,394 13,946 10,575 18,304 28,757 46,410 % QoQ, % YoY 6% 10% 18% 25% 3% 10% 18% 13% 65% 73% 57% 61% DRAM supply (1Gb mn) 6,139 7,255 7,876 8,394 9,272 10,718 12,784 14,633 10,508 18,840 29,664 47,407 % QoQ, % YoY 8% 18% 9% 7% 10% 16% 19% 14% 65% 79% 57% 60% ASP(US$) 0.9 0.7 0.6 0.8 0.8 0.7 0.8 0.7 2.0 1.3 0.7 0.8 % QoQ, % YoY -16.0% -22.0% -5.0% 25.0% -2.0% -10.0% 13.0% -8.0% -20% -34% -42% 2% Revenues (US$bn) 5.4 4.9 5.1 6.8 7.4 7.6 10.3 10.9 20.7 24.4 22.2 36.2 % QoQ, % YoY -9.1% -7.8% 3.1% 33.2% 8.3% 4.0% 34.8% 5.3% 31.8% 18.0% -9.1% 62.9% Major NAND demand (1GB mn) Cell phone 2,941 3,073 3,707 4,648 4,694 4,812 5,581 6,214 3,993 8,994 14,369 21,300 SSD 798 895 1,176 1,731 2,065 2,458 3,361 3,995 867 2,077 4,600 11,879 Tablet 445 634 724 1,225 1,065 1,230 1,552 1,877 259 1,441 3,027 5,724 Memory card 240 260 280 300 280 320 300 280 890 960 1,080 1,180 Digital camera 450 480 448 448 448 476 510 540 1,502 1,688 1,826 1,974 MP3 336 364 405 420 384 384 468 468 1,548 1,472 1,525 1,704 USB 360 384 403 403 441 434 473 473 1,060 1,369 1,550 1,820 Other 155 230 295 100 180 400 150 100 456 303 780 830 NAND demand proportion (%) Cell phone 51.4% 48.6% 49.8% 50.1% 49.1% 45.8% 45.0% 44.6% 37.8% 49.1% 50.0% 45.9% SSD 13.9% 14.2% 15.8% 18.7% 21.6% 23.4% 27.1% 28.6% 8.2% 11.3% 16.0% 25.6% Tablet 7.8% 10.0% 9.7% 13.2% 11.1% 11.7% 12.5% 13.5% 2.4% 7.9% 10.5% 12.3% Memory card 4.2% 4.1% 3.8% 3.2% 2.9% 3.0% 2.4% 2.0% 8.4% 5.2% 3.8% 2.5% Digital camera 7.9% 7.6% 6.0% 4.8% 4.7% 4.5% 4.1% 3.9% 14.2% 9.2% 6.3% 4.3% MP3 5.9% 5.8% 5.4% 4.5% 4.0% 3.7% 3.8% 3.4% 14.6% 8.0% 5.3% 3.7% USB 6.3% 6.1% 5.4% 4.3% 4.6% 4.1% 3.8% 3.4% 10.0% 7.5% 5.4% 3.9% Other 2.7% 3.6% 4.0% 1.1% 1.9% 3.8% 1.2% 0.7% 4.3% 1.7% 2.7% 1.8% Supply by company (1GB mn) SEC 1,903 2,554 2,704 2,718 2,939 3,555 4,357 4,958 4,004 7,233 9,880 15,809 Toshiba + SanDisk 2,427 2,719 2,936 3,142 3,519 3,976 4,692 5,489 3,721 6,553 11,223 17,675 Micron (IMFT) 1,057 1,174 1,362 1,566 1,738 1,947 2,239 2,597 1,593 2,640 5,159 8,520 SK Hynix 651 709 774 868 976 1,115 1,372 1,489 1,052 2,039 3,002 4,952 Bit growth (%) SEC 0% 34% 6% 1% 8% 21% 23% 14% 70% 81% 37% 60% Toshiba + SanDisk 12% 12% 8% 7% 12% 13% 18% 17% 60% 76% 71% 57% Micron (IMFT) 24% 11% 16% 15% 11% 12% 15% 16% 51% 66% 95% 65% SK Hynix 2% 9% 9% 12% 12% 14% 23% 9% 114% 94% 47% 65% Source: KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 55

VI Best Tech Migration Play: Semiconductor Materials

EUV machines, the development of which is being led by the Dutch company ASML in partnership with major chip makers including Intel and SEC, are not yet sufficiently efficient for mass production. The delay in the development of EUV machines has underscored the importance of materials related to microfabrication; as a result, additional processes like double patterning technology (DPT) are emerging, and related materials are becoming increasingly sophisticated.

Among the key materials used in sub-30nm processes, we highlight 1) spin-on hardmasks (SOH), 2) spin-on dielectrics (SOD), 3) CVD precursors, 4) high-K materials, 5) DPT materials, and 6) disilane (Si2H6). Major material manufacturers include Cheil Industries, Soulbrain, DNF, Hansol Chemical, Wonik Materials, OCI Materials, and UP Chemical (unlisted).

KDB Daewoo Securities Research 56 November 13, 2012 The Age of Transition

VI. Best tech migration play: Semiconductor materials

Delays to EUV development to slow tech migration

The slow development One of the biggest changes to 10nm and finer process technologies is the introduction of of EUV tools poses a new optical equipment. As semiconductor manufacturing processes become more hurdle to technology miniaturized, they require lithography techniques that use light sources with shorter migration wavelengths. At present, the most commonly used lithography is ArF immersion.

Theoretically, ArF immersion tools have a resolution of 35.7nm. This means that, even if DPT or other processes are adopted, the introduction of EUV machines with a 13.5nm wavelength light is crucial for sub-10nm DRAM processes.

EUV machines, the development of which is being led by the Dutch company ASML in partnership with major chipmakers including Intel and SEC, are not yet sufficiently efficient for mass production. This has caused major DRAM and NAND chipmakers like SEC, Toshiba, and SK Hynix to push back their plans for 10nm mass production. Thus, the slow introduction of EUV equipment is posing a hurdle to technology migration and could become a surprise factor in the industryÊs restructuring.

Figure 76. SECÊs DRAM tech migration trends and forecasts Figure 77. SECÊs NAND tech migration trends and forecasts

90nm 80nm 68nm 56nm 46nm 36nm 28nm 22nm 60nm 50nm 40nm 30nm 22nm 18nm 12nm 100% 100%

75% 75%

50% 50%

25% 25%

0% 0% 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

Figure 78. Number of layers and light sources by process Figure 79. Lithography technology development

(units) 40 ArF Immersion ArF Dry 35 KrF 77 30 I-Line

25 5 6 8 11 20 99 12 14 15 14 10 15 14 14 5 10 10 6 0 2 180nm 130nm 90nm 65nm 45nm 32nm

Source: Chemical Journal Source: Industry data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 57 November 15, 2012 The Age of Transition

Materials offer solution to limitations of lithography

Materials are a key The delay in EUV machine development has underscored the importance of materials related determinant in the to microfabrication. As the number of components on semiconductor chips increases, the production yields for requirements for related materials, such as electrodes, dielectrics, and wires, have also sub-30nm processes grown increasingly sophisticated, especially for additional processes like DPT and related materials. Going forward, if the introduction of EUV machines continues to be delayed, this will naturally slow down the technology migration of chip makers compared to in previous generations. If so, the performance of the materials used will become a key determinant in the production yield for sub-30nm processes, which have been quickly gaining ground more recently.

Key materials to watch Among the key materials used in sub-30 nm processes, we highlight SOH, SOD, CVD in sub-30nm processes precursors, high-K materials, DPT materials, and disilane (Si2H6). Major material manufacturers include Cheil Industries, Soulbrain, DNF, Hansol Chemical, Wonik Materials, OCI Materials, and UP Chemical.

Table 13. Semiconductor materials development road map Major field Current Future Necessary characteristics and technology Gate electrode W6/Poly-Si TiSiN, TiAlN, TaN, TaSiN Metal gate Gate dielectric SiO2, SiON HfO2, HfSiO, HfSiON High-K Capacitor electrode Poly-Si, TiN, TiN/Ti TiN, Ti/TiN, Ru Capacitor dielectric SiO2, Al2O, ZrO2 ZrO2, BST, STO, PZT High-K Al (memory)/Cu(non- Wire Cu Cu precursor/Cu slurry/ Low-K (IMD) memory) Via/Inter-connect Poly-Si, W, Al Al, Cu PMD (preferential metal deposition) Al STI/PMD/IMD SiO2 SiO2 SOD Barrier metal SiN, Ti/TiN TiN, Ti/TiN Source: KDB Daewoo Securities Research

Table 14. Materials related to semiconductor tech migration Major materials Domestic companies Foreign companies SOH Cheil Industries SOD Cheil Industries, DNF, UP Chemical (unlisted) AZEM CVD dielectric (HCDS → TSA) Hansol Chemical Air Liquide High-K DNF, Hansol Chemical, Soulbrain, UP Chemical (unlisted) Adeka, Air Liquide DPT DNF, Hansol Chemical, UP Chemical (unlisted) Air Product, Air Liquide Disilane (Si2H6) Wonik Materials, OCI Materials Voltaix, Mitsui Chem. Source: KDB Daewoo Securities Research

Figure 80. Global foundry capacity trend & forecasts by process Figure 81. Global foundry capacity trend & forecasts under 100nm

(8-inch eq. '000 wafers/year) (8-inch eq. '000 wafers/year) 60,000 Above 130nm 90nm 65nm 10,000 20nm 45nm/40nm 32nm/28nm 20nm 32nm/28nm 50,000 45nm/40nm 8,000 65nm 90nm 40,000 6,000 30,000 4,000 20,000

2,000 10,000

0 0 06 08 10 12F 14F 16F 06 08 10 12F 14F 16F

Source: Gartner, KDB Daewoo Securities Research Source: Gartner, KDB Daewoo Securities Research

58 KDB Daewoo Securities Research November 13, 2012 The Age of Transition

Core material 1: Spin-on hardmask (SOH)

Hardmask materials are Hardmask materials are used in semiconductor fabrication to prevent patterns from used to prevent pattern collapsing. A photoresist that is too thick can cause a pattern to break down, but one that is collapse too thin is unable to sufficiently protect the substrate. Thus, a hardmask is needed to transfer photomask patterns.

Previously, hardmasks were based on the CVD process, but, recently, the spin-on approach (a liquid-type coating) has been gaining ground. CVD hardmasks can cause defects when particles from the chemical vapor form inside of the hardmask. Also, because CVD machines are expensive, the process involves heavy initial investments and maintenance costs.

On the other hand, SOHs offer several advantages: 1) Since they can be formed using traditional coating equipment, they do not require additional facility investments. 2) Because SOHs are in liquid form during the coating process, they yield more even surfaces. 3) SOHs are relatively easy to manipulate and thus can quickly adjust to process changes.

In Korea, Cheil Industries was the first to develop SOH technology and is currently the exclusive supplier to SEC. We believe SEC has replaced its CVD hardmasks with SOH, while SK Hynix and Taiwanese foundries still rely more on CVD hardmasks.

Figure 82. Cheil IndustriesÊ SOH revenue trends and forecasts

(Wbn) 300

250

200

150

100

0 07 08 09 10 11 12F 13F 14F

Source: KDB Daewoo Securities Research

Figure 83. Pattern collapse from tech migration Figure 84. SOH function in patterning process

(A) (B) (C) Evaporation PR patterning Low aspect ratio High aspect ratio Aspect ratio low but unable to (coating) Si-SOH etching (Pattern is maintained) (Pattern collapses) protect substrate during etching PR C-SOH etching

Si-SOH PR C-SOH

C-SOH removal

Pattern Substrate substrate

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 59 November 13, 2012 The Age of Transition

Core material 2: Spin-on dielectrics (SOD)

Korean SOD makers Spin-on dielectric (SOD) films are insulating materials that lie between metal wires or gain market share between transistors and capacitors. As the gap between wires becomes narrower at below- 70nm processes, CVD-based insulator films lose their insulating quality, resulting in leakage current. To prevent this, spin-on technology has been introduced to fill in the space between wires or between gates with liquid-type insulators.

SOD is an optimal dielectric for the application of the spin-on technology. SOD is more effective in filling gaps, requires less capex, and is easier to produce than existing CVD-type materials.

EU-based AZ Electronic Materials (AZEM) was the exclusive producer of SOD until Cheil Industries (001300 KS) and DNF (092070 KQ) joined the market in 2011. The Korean producersÊ domestic market shares are on the rise

As of 2012, the global SOD market is estimated at W250bn. SEC currently consumes roughly W80bn worth of SOD per year, but the number is likely to exceed W100bn if the companyÊs SOD applications broaden from DRAM to NAND and non-memory production. Cheil Industries is forecast to satisfy 50% of SECÊs SOD needs in 2013, up from 30% in 2012.

Figure 85. Global SOD market scale and market share

Other Cheil DNF Other 4% Industries 3% 1% 10%

2011 2012F

AZEM AZEM 86% 96%

Source: KDB Daewoo Securities Research

Figure 86. Spin-on process Figure 87. SOD process (before and after)

Dielectric

Wafer Plate

Before After

Source: Dow Coming Source: Cheil Industries

KDB Daewoo Securities Research 60 November 13, 2012 The Age of Transition

Core material 3: High-k/metal gate (HKMG)

Tech migration gave rise A transistor acts as a switch that sends a current from the source to the drain when voltage to leakage current is applied to a gate. As tech migration progresses to finer processes, the space between the source and the drain narrows, allowing the current to flow at a lower voltage and reducing power consumption. However, if the space narrows up to a certain point, leakage current occurs. To combat this issue, High permittivity dielectric (high-k) materials and metal gates were introduced.

HKMG High-k materials include HfO2, ZrO2, and TiO2, which were developed by Intel. Compared to existing SiO2 insulators, high-k materials boast ultra-low leakage current (100 times lower), which allows transistor capacity to expand up to 60%. Switching from SiO2 to high-k materials was not easy, though, as erratic voltage spikes and a slower switching speed were problematic. However, these issues were solved when metal gates were installed, replacing polysilicon electrodes with metal electrodes (TiSiN, TiAlN, TaN and TaSiN).

Gate first vs. gate last There are two different ways to establish the high-k/metal gate (HKMG) system (depending on when the HKMG is formed): the gate first and the gate last methods. Although both of these methods have their pros and cons, the gate first method seems more effective in producing mobile-use semiconductors, as it allows for smaller chips and a simpler production process. SEC and GlobalFoundries currently use the gate first method, while TSMC and Intel adopted the gate last method to produce APs.

JapanÊs Adeka is the exclusive supplier of high-k materials to SEC, but DNF is also likely to supply materials going forward. SK Hynix sources the material from UP Chemical and Soulbrain.

Table 15. Gate first vs gate last Gate first Gate last Companies IBM, SEC, GlobalFoundries, TI, etc. Intel, TSMC, etc. Production process Relatively simple Relatively complex Production cost Relatively low Relatively high Speed Low High Chip size Relatively small Relatively large Strengths Simple production process Thermally stable Weaknesses Thermally unstable (changes input voltage) Process complexity; high production cost Source: KDB Daewoo Securities Research

Figure 88. High-K metal gate (HKMG) Figure 89. Gate first vs. gate last Silicon-based HKMG

Low resistance layer

Poly-Si Gate electrode Metal gate

SiO2 Gate dielectric High-K

Source Drain Source Drain

Silicon substrate Silicon substrate

Source: KDB Daewoo Securities Research Source: TSMC

KDB Daewoo Securities Research 61 November 13, 2012 The Age of Transition

Core material 4: Double patterning technology (DPT)

DPT enhances the Double patterning technology (DPT) is regarded as the most practical solution for sub-30nm performance of lithography, given the technological limits of ArF immersion lithography and delays to the semiconductor introduction of EUV lithography. DPT allows for the decomposition of a single layout into two equipment masks to simplify the patterning process. By creating another pattern between two existing patterns, the space between patterns is minimized, which should help overcome the technological limitations of semiconductor equipment.

Problems of older DPT In the past, the litho-etch-litho-etch (LELE) method (which requires two etch steps) and the litho- freeze method were most prevalent. The problem with these methods was that, if the first patterning had defects, the second patterning could not be properly executed. Moreover, the use of two photomasks in each process pushed production costs higher and productivity lower.

SaDPT resolved the To resolve these problems, self-aligned DPT (SaDPT) was introduced. Due to the problems of existing technologyÊs utilization of a sacrificial layer, only one etch step is required. As a result, technology production costs have been reduced, and overlay errors between first and second patterns can be prevented. Air Products is the exclusive supplier of SaDPT sacrificial layers to SEC, but DNF is anticipated to join the supplier list going forward. SK Hynix sourced the material exclusively from Air Liquide, but Hansol Chemical and UP Chemical are believed to have recently begun supplying layers, too.

Figure 90. Basic principles of DPT

Source: The University of Texas

Figure 91. LELE patterning vs. litho-freeze patterning Figure 92. Self-aligned DPT (SaDPT) LELE (litho-etch, litho-etch)

Litho-freeze process

Spacer: DPT sacrificial layer

Source: SPIE Source: SPIE

KDB Daewoo Securities Research 62

VII The Ongoing Innovation of Displays

Going forward, form factor (e.g., thickness, weight) and electrical efficiency are expected to differentiate displays. The best way to enhance form factor is to reduce the amount of glass (which is thick and heavy) used in displays. As such, manufacturers are developing in-cell touch panel, G2, and one-glass solution (OGS) technologies as well as new materials that can replace cover glass.

Flexible OLED panels use plastic (polyimide) substrates rather than glass substrates. We project the development path for flexible OLED as follows: unbreakable panels (UBP)  unbreakable and bendable (UBB)  unbreakable and rollable (UBR)  unbreakable and foldable (UBF) panels.

KDB Daewoo Securities Research 63 November 13, 2012 The Age of Transition

VII. The ongoing innovation of displays: AMOLED vs. Retina display

Proliferation of high-resolution displays: Form factor counts!

Apple vs. SEC In terms of display technologies, Apple has shown a differentiated strategy by expanding the application of its high-resolution Retina display to the MacBook Air and creating slim, light in- cell touch panels. In comparison, SEC, which has overcome most technical issues related to high-resolution OLED production, is expected to differentiate itself by producing a slim and light display via the use of unbreakable panels (UBP).

Resolution and form Display attributes include: 1) color reproduction (brightness, contrast, etc.), 2) resolution, 3) factor can still make response time, 4) viewing angle, 5) power consumption, 6) lifespan, and 7) form factor significant differences (physical thickness and weight). With the advancement of display technologies, most of for displays these display attributes are largely uniform among panels. However, resolution and form factor can still be significant differentiating factors for displays.

Form factor is the key In terms of resolution, given that most companies, including Apple and SEC, are expected to differentiating factor roll out products with high-resolution displays in 2013, the differentiation between top-tier firms is likely to be diluted somewhat. However, those with stable supply channels for in-cell touch panels and UBPs will likely continue to gain the upper hand. As for form factor, a variety of new technologies have steadily been introduced to produce slimmer and lighter products despite increased battery capacity.

Table 16. Display characteristics comparison Display characteristics LCD Comparison OLED Mass-production capable over 300ppi (PenTile) Resolution Mass-production capable over 400ppi > Mass-production capable over 267ppi (RGB) Brightness 500 nit (cd/m2) > 300 nit (cd/m2) Contrast ratio 1,000:1 < 1,000,000 : 1 Response time 3,000~30,000 μs < Under 50 μs Viewing angle 160 degree < 180 degree Power consumption 0.74W (white screen) 0.23W (fixed) ≈ (2.4‰ basis) 0.15W (average screen) Lifespan 40,000 hrs > 10,000 hrs 1.5mm (glass) Thickness 3mm < 0.5mm (flexible) Source: KDB Daewoo Securities Research

Figure 93. AppleÊs Retina display Figure 94. SECÊs HD Super AMOLED

Source: Apple Source: SEC KDB Daewoo Securities Research 64 November 13, 2012 The Age of Transition

Apple: Retina displays to be adopted across Apple’s product lineup

Apple claims that Retina, its proprietary high-end LCD technology, has a pixel density so high that the human eye is unable to notice pixelation at a typical viewing distance. The display is used in several Apple products, including the iPhone 4/4S/5, the iPod Touch, the iPad, and the MacBook Pro.

Retina displays to see As display quality has become a major determinant for consumersÊ mobile device purchases, wider adoption in Apple Retina display is now seen as a core differentiating factor for Apple products. Retina display products, technology is expected to be adopted across AppleÊs product lineup, promoting the proliferation of high-resolution display.

Table 17. Retina display adoption model Model Display size Resolution PPI Usable distance iPhone 4/4S,4G iPod Touch 3.5‰ 960 x 640 326 25cm (10‰) iPhone 5, 5G iPod Touch 4.0‰ 1136 x 640 326 25cm (10‰) New iPad 9.7‰ 2048 x 1536 264 38cm (15‰) Macbook Pro with Retina display 15.4‰ 2880 x 1800 220 51cm (20‰) Source: Apple, KDB Daewoo Securities Research

Figure 95. PPI calculation formula

4‰ No. of pixels (No. of pixels)^2 Width 1,136 1,290,496

1136 + Height 640 409,600= √ 640 Diagonal 1,304 1,700,096

iPhone 5 iPhone 4S Change ÷

Diagonal inches 4‰ Processor A6 A5 2x speed =

Display 4‰ Retina display 3.5‰ Retina display 0.5‰ ↑

Resolution 1136X640(326ppi) 960X640(326ppi) 4:3 → 16:9 PPI 326

Source: Google, KDB Daewoo Securities Research

Figure 96. Retina display (4x more pixels than existing displays) Figure 97. MacBook ProÊs Retina display (more pixels than HDTV)

Source: Apple Source: Apple

KDB Daewoo Securities Research 65 November 13, 2012 The Age of Transition

Apple: Form factor differentiation via in-cell touch displays

Higher resolution of If high-resolution panels are widely used, display manufacturers should face increasing panels requires larger difficulties in differentiating themselves. In particular, high-resolution displays require more BLU battery capacities lamps due to their lower aperture ratios and greater power consumption to process more image data. To maintain the same battery duration while using high-resolution panels, the thickness and weight of a device should increase to adopt batteries of larger capacities.

For example, the new iPad with Retina has 67% more battery capacity than the iPad 2, but is 9% thicker and 8% heavier than its predecessor. This is one of the reasons behind the sluggish sales of the new iPad and the relatively solid sales of iPad 2, in our view.

Apple adopted in-cell Going forward, form factor and electrical efficiency are expected to differentiate displays. touch panels and The best way to enhance form factor is to reduce the amount of glass used in displays. As removed back cover such, manufacturers are developing in-cell touch panel, G2, and one-glass solution (OGS) glass to secure more technologies as well as new materials that can replace cover glass. battery space while Meanwhile, Apple succeeded in reducing the thickness and weight of the iPhone 5 by 18% reducing thickness and 20%, respectively (vs. the iPhone 4SÊ specifications), by adopting in-cell touch panels and removing back cover glass. Currently, the mass production of large in-cell touch panels (over four inches) is technically challenging. However, the technology should play a key role in improving the form factor of the iPad.

Figure 98. Form factors (thicknesses and weights) of the iPhone 4S and the iPhone 5

Source: Apple

Figure 99. Structures of the iPhone 4S and the iPhone 5 iPhone 4S iPhone 5

Glass front cover (1.0mm)

Touch panel (0.5mm)

LCD panel (1.5mm) Glass front cover (0.9mm)

Gap (0.5 mm) In-cell touch LCD (1.5mm)

Gap (0.5 mm)

Battery (4.3mm) Battery (4.0mm)

Gap (0.5 mm) Gap (0.5 mm) Glass back cover (1.0mm) Glass back cover (0.5mm) Thickness: 9.3mm Thickness: 7.9mm

Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 66 November 13, 2012 The Age of Transition

SEC: Improved resolution of OLED displays

Resolution is an AchillesÊ heel for OLED displays. Producing high-resolution OLED is challenging due to difficulties in the deposition of organic materials. Furthermore, OLED requires a significantly larger number of transistors to produce the same-pixel display as LCD, since the technology requires a fairly high, continuous current running through electrodes. However, SEC has gotten around these deficiencies to mass-produce high-resolution OLED displays for the Galaxy Note II.

The PenTile method is To improve the resolution of OLED panels, SEC has resorted to the PenTile method (a not a fundamental method in which some subpixels are shared in larger pixels). While RGB LCD displays have solution to improve three subpixels per pixel, PenTile displays use only two subpixels (CRG or BG) per pixel. OLEDÊs resolution Thus, PenTile displays use one-third fewer subpixels than RGB displays to achieve the same pixels per inch (PPI) as LCD. Although the Galaxy S III features resolution of 306ppi, close to the iPhone 4Ês (326ppi), its display is not considered to meet Retina display standards, as SEC used the PenTile method.

SEC improved definition The Galaxy Note II has a resolution of 1,280 x 720 and a screen size of 5.5 inches at a ppi of through the FMM 267. The ppi of the Galaxy Note II is lower than those of the Galaxy S III (306ppi) and the method Galaxy Note (285ppi). However, definition is higher for the Note II, as the device uses an RGB display. Furthermore, the model’s display is manufactured based on the traditional fine metal mask (FMM) production method rather than the laser-induced thermal imaging (LITI) method, which requires high-priced equipment. Thus, SEC improved the quality of displays without a marked increase in production costs.

As the FMM method has limited success in the deposition of organic materials, it is difficult to achieve high resolutions with the method. To improve the resolution of OLED panels, the adoption of a new deposition process (LITI) was considered necessary. However, the LITI process requires additional equipment such as donor film handlers and laser patterning machines. Thus, using the existing FMM method is more cost effective for SEC.

Table 18. SECÊs OLED marketing Name Sub-pixel Touch type Resolution Adapted model AMOLED RGBG PenTile Add-on type Low-definition Omnia series Super AMOLED RGBG PenTile On-cell type Low-definition Galaxy S (4‰, 800 x 480, 233ppi) Super AMOLED Plus Real RGB On-cell type Low-definition Galaxy S II (4.3‰, 800 x 480, 218ppi) Galaxy S III (4.8‰, 1280 x 720, 306ppi) RGBG PenTile On-cell type High-definition HD Super AMOLED Galaxy Note (5.3‰, 1280 x 800, 285ppi) S-Stripe (RGB) On-cell type High-definition Galaxy Note II (5.5‰, 1280 x 720, 267ppi) Source: KDB Daewoo Securities Research

Figure 100. Galaxy NoteÊs PenTile display (RGBG) Figure 101. Galaxy Note IIÊs S-Stripe display (RGB)

Source: GSMArena, KDB Daewoo Securities Research Source: GSMArena, KDB Daewoo Securities Research

KDB Daewoo Securities Research 67 November 13, 2012 The Age of Transition

SEC: Differentiating itself with flexible OLED technology

SEC is differentiating Flexible OLED panels use plastic (polyimide) substrates rather than glass substrates. We itself with flexible OLED project the development path for flexible OLED as follows: unbreakable panels (UBP)  unbreakable and bendable (UBB)  unbreakable and rollable (UBR)  unbreakable and foldable (UBF) panels.

Replacing glass substrates with plastic substrates enables the production of unbreakable, thinner, and lighter devices with more space for batteries. Flexible displays should put manufacturers far ahead of others. If TFT glass substrates are replaced with polyimide substrates, and glass encapsulation is replaced with film encapsulation, the thickness and weight of OLED panels would be reduced to one-sixth and a third of those of LCD panels, respectively.

Figure 102. The evolution of flexible OLED

1Step단계 1 Step2단계 2 Step3단계 3 Step4단계 4 Unbreakable BendableBendable RollableRollable Disposable

Source: Displaybank, KDB Daewoo Securities Research

SEC should swiftly Currently, Samsung Display can produce 4mn UBP units per quarter (at a yield of 70%). Its expand its flexible OLED capacity significantly lags behind projected demand for key smartphone models. As Apple technology and capacity has already reduced the thicknesses and weights of its devices sharply by using in-cell touch screen technology, SEC should speed up the application of UBP to its products. If SEC plans to launch its strategic models in 2H13, it should swiftly expand flexible OLED capacity.

Figure 103. Thickness and weight comparison of LCD, OLED, and UBP OLED

LCD 160g OLED 100g UBP OLED 50g

Polarizer Polarizer Polarizer

Thin film encap 0.5mm Color filter glass Encap glass Organic materials

1.5mm Polyimide (PI) Liquid crystal Organic materials

3.2mm TFT glass TFT glass

Polarizer More space for battery

More space Backlight unit for battery

Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 68 November 13, 2012 The Age of Transition

[Supply and demand] Limited supply in 2013 to drive gradual recovery

2013 global capacity to Although a seasonal dip in demand is likely to cause a temporary uptick in industry overcapacity expand just 4% in 1Q13, we believe limited capacity expansion by global LCD panel makers (forecast at just 4% YoY in 2013 in terms of input glass area) will drive a gradual improvement in supply and demand conditions. Furthermore, top-tier producers are converting their existing lines to produce higher-end products, drawing down production capacity for existing products.

Process conversion to The protracted weakness in commodity panel margins has prompted global panel makers to help bring down capacity shift their existing a-Si facilities to facilities for high-end specialty panels, such as low- temperature polysilicon (LTPS), in-plane switching (IPS)/ fringe-field-switching (FFS) and Oxide-TFT. In particular, LG Display has spent W1.2tr since 2H on converting 40% (80,000 substrates/month) of its current 6G capacity (210,000 substrates/month) into LTPS facilities. LTPS manufacturing involves additional processing, and, as such, the conversion would create LTPS capacity of 20,000 substrates/month.

Panel demand to grow Looking ahead, we expect panel demand to increase 7% YoY in 2013 (in terms of glass area), 7% in 2013 based on on the back of: 1) an increase in the average screen size for LCD TVs; 2) the proliferation of glass area low-end tablet PCs; and 3) the expansion of hybrid PC sales prompted by the launch of Windows 8. While we still do not foresee a margin pickup for commodity TV panels, we expect domestic panel makers to gain market share thanks to the increasing adoption of IPS/FFS panels supported by the growth of tablets and hybrid PCs.

Figure 104. Global panel makersÊ capacity forecasts (based on input glass area)

(mn ㎡) (%) 60 Capacity (L) YoY growth (R) 60

50 40 40

30 20

20 0 10

0 -20 12F 13F 14F 12F 13F 14F 12F 13F 14F 12F 13F 14F 12F 13F 14F 12F 13F 14F SEC LGD CMI AUO Sharp BOE

Source: KDB Daewoo Securities Research

Figure 105. Global LCD panel supply/demand trends and forecasts

(mn m2) (%) 50 Demand (L) Supply (L) Glut (R) 60

50 40

40 30 30 20 20

10 10

0 0 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F

Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 69

VIII IT Sector Investment Strategy for 2013

We project the performances of SEC and IT shares to be weak in 1H but to strengthen in 2H. We advise investors to take the most conservative approach possible in accumulating IT shares. As the global economic outlook remains uncertain, there is no reason for investors to hastily purchase IT shares. In early 2013, SEC is not expected to serve as more than a risk hedging instrument. Still, in 1H13, the low valuations of large-cap IT stocks should offer investors opportunities to expand the weight of the stocks.

We recommend 11 stocks in 2013: Among large-cap plays, we recommend SEC (005930 KS), SK Hynix (000660 KS), LGE (066570 KS), Samsung Electro-Mechanics (009150 KS), and Samsung SDI (006400 KS). Among small- to mid-cap plays, we recommend SFA Engineering (056190 KQ), Duksan Hi-Metal (077360 KQ), Soulbrain (036830 KQ), Partron (091700 KQ), Nepes (033640 KQ), and Simmtech (036710 KQ).

KDB Daewoo Securities Research 70 November 13, 2012 The Age of Transition

VIII. IT sector investment strategy for 2013

[Macroeconomic view] The IT sector in context

Strong economic We expect macroeconomic factors to have only a minimal impact on the IT sector in 2013. recovery not expected in The economy is projected to improve, but the recovery should be largely based on low base 2013 effects. Although KoreaÊs GDP growth is projected to rebound to over 3%, the estimated growth is still below KoreaÊs potential growth rate. ChinaÊs economic recovery is also expected to be slow, and European and American economies are forecast to stagnate due to their fiscal austerity efforts. Furthermore, stronger trade protectionism across the globe, and prospective won appreciation (an estimated W1,060/US$ at end-2013) are likely to weigh on IT shares.

Table 19. GDP growth rate forecasts Korea China US Euro GDP growth rate forecasts (2012→2018) 2.4→3.1% 7.7→8.0% 2.1→2.1% -0.5→0.1% Source: KDB Daewoo Securities Research

Traditional cyclical IT stocks are likely to trade at discounts, as, from a macroeconomic perspective, they lack drivers of aggregate demand. Thus, we advise investors to buy the stocks at low valuations and sell them when valuations recover.

Earnings stability to be Meanwhile, earnings stability and re-rating should be the keywords for leading IT stocks in important for SEC next 2013. SEC is a case in point. Despite stellar earnings this year, the stock has not been year properly valued. Although the company is outperforming the KOSPI, its undervaluation compared to global peers has not significantly improved. The market still considers SEC a cyclical stock. If the company maintains stable earnings in 2013, however, its valuation could improve.

If SEC maintains We witnessed a similar pattern in the Korean stock market during 2005~2006. Earnings at earnings at this yearÊs KoreaÊs listed companies leveled up in 2004. However, the KOSPI remained undervalued levels, its shares could that year as the market doubted the sustainability of earnings levels. During 2005~2006, see a re-rating Korean companies maintained the higher levels of earnings, although growth stagnated, which eventually led to the re-ratings of their shares. If SEC can maintain its earnings at this yearÊs levels next year, its valuation is likely to improve.

Figure 106. Listed companiesÊ quarterly net profits and P/Es Figure 107. SECÊs quarterly OP trend

(Wtr) (x) (Wbn) 40 Listed companies' quarterly NP (L) 15 10,000 Korean stock market's P/E (R)

30 12 8,000 High profit level leads to re-rating 6,000 20 9

4,000 10 6 2,000

0 3 0

-10 0 -2,000 00 01 02 03 04 05 06 07 08 09 10 11 12 00 02 04 06 08 10 12

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 71 November 13, 2012 The Age of Transition

[Global view] Apple vs. SEC

In this report, we forecast the changes, growth, competition, and opportunities for the global IT industry through the frame of disruptive innovation. By necessity, our endeavor has had a special focus on SEC and Apple, the two titans of IT.

Apple is facing the SEC and Apple are inextricably linked in the minds of global investors when it comes to innovatorÊs dilemma forecasting SECÊs future path (i.e., competition, growth, risks). Notably, Apple is facing several risks. First, Apple is increasingly leaning toward sustaining innovations although it has created new markets through disruptive innovation. Second, SEC is differentiating itself from Apple in the smartphone market and utilizing the legal battle with Apple for marketing purposes. Third, Apple is lagging behind its peers in new markets (e.g., phablets, hybrid PCs). Fourth, companies that can introduce competitive content into the market, namely Amazon, Google, Microsoft, are expected to strengthen their market dominance going forward.

In terms of smartphone shipments, SEC is outpacing Apple. However, Apple is still ahead of SEC in terms of margins. However, if competition continues to intensify in the smartphone market, we question whether Apple will be able to maintain its OP margin at the current level of over 30%. Notably, if the iPad Mini cannibalizes the iPad market, AppleÊs margins are highly likely to decline. In our view, a company with strong shipment growth is more likely to maintain its earnings in an increasingly competitive smartphone market. If SECÊs smartphone market share reaches 40%, risks (i.e., stagnation in shipments, margin deterioration) and negative biases facing the company should subside.

„Apple without SEC‰ vs. A second issue is the impact of Apple's move to reduce SECÊs role in its supply chain as well as „SEC without Apple‰ AppleÊs closed-off nature and its implications. First, „Apple without SEC‰ is likely to experiences disruptions in its supply of major parts, including in-cell displays, mobile DRAM, and APs. In contrast, „SEC without Apple‰ should remain unscathed, as the percentage of the companyÊs Apple-related operating profit is estimated at just 4% (W1.1tr) in 2012 and 6% (W1.9tr) in 2013. Third, even if Apple switches its AP supplier to TSMC in 2H13, SECÊs semiconductor unitÊs 2013 operating profit is projected to decline just 7% with total operating profit sliding less than 2% (W520bn).

In summary, SEC has already reduced risks related to being left out of AppleÊs supply chain. Still, the company has to diversify its customer base, so that it does not have to be dependent on Apple in the semiconductor market. When the market becomes confident about SECÊs smartphone business as the companyÊs cash cow and the growth potential of its semiconductor business, its shares should see a re-rating in 2H13.

Figure 108. Apple without SEC: Supply chain risks to increase Figure 109. SEC without Apple: Impact on earnings to be limited

Samsung without Apple AppleApple withoutwithout SamsungSamsung Samsung without Apple

LGD,LGD, JPD,JPD, SharpSharp AppleApple toto expandexpand APAP suppliersupplier listlist toto IncludeInclude TSMCTSMC (2H13)(2H13)

No Toshiba,Toshiba, SKSK HynixHynix Customers:Customers: Rising risks in supply chain Qualcomm,Qualcomm, Nvidia,Nvidia, etc.etc. Substitutes Micron,Micron, ElpidaElpida SEC expanded customer base and product portfolio Products: Yes Products: Baseband,Baseband, etc.etc. TSMCTSMC Effect on earnings when Apple diversifies 50% of its AP supply in 2H13

W260bnW260bn operatingoperating profitprofit decreasedecrease inin 20132013 In-cellIn-cell touchtouch MobileMobile DRAMDRAM APAP 3.5%3.5% decreasedecrease inin 20132013 semiconductorsemiconductor OPOP (W7.8tr)(W7.8tr) 0.8%0.8% decreasedecrease inin 20132013 totaltotal OPOP (W3.3tr)(W3.3tr)

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 72 November 13, 2012 The Age of Transition

[2013 investment strategy] Weak in 1H, but strong in 2H

2013 outlook for SEC We project the performances of SEC and IT shares to be weak in 1H but to strengthen in 2H. and IT stocks: weak in Hence, we advise investors to take the most conservative approach possible in 1H; stronger in 2H accumulating IT shares. As the global economic outlook remains uncertain, there is no reason for investors to hastily purchase IT shares. Notably, in early 2013, SEC is not expected to serve as more than a risk hedging instrument. Still, in 1H13, the low valuations of large-cap IT stocks like SEC should offer investors opportunities to expand their positions.

Why did SEC shares Particularly, our strategy for SEC is as follows. Despite its stellar performance in 1H12, correct in 2Q12? global uncertainties, the legal battle with Apple, and launch of the iPhone 5 weighed on shares starting in May 2012.

Solid fundamentals, but However, despite the marketÊs concerns, SEC is posting solid earnings this year. Its 3Q12 weak sentiment  operating profit exceeded the market consensus of W7.6tr, coming in at over W8tr. We share price volatility expect the companyÊs earnings to grow further in 4Q, giving rise to expectations that SECÊs share price might beat its previous high sometime before the end of this year.

However, the market is not fully confident in SEC. Hence, its share price remains highly volatile despite a sharp improvement in fundamentals. Risks for SEC include: the possibility of SEC failing to maintain this yearÊs growth pace, a possible decline in smartphone margins amid intensifying competition, and excessive dependence on the telecom business in total operating profit.

Pay attention to 1Q13 In this regard, SECÊs 1H13 earnings are worth keeping a close eye on. If growth in high-end earnings smartphone shipments stagnates, 1Q13 earnings are unlikely to significantly improve from the 4Q12 levels. In addition, the launch of new flagship models will be slow until the introduction of the Galaxy S IV. However, even if earnings at SECÊs telecom business decrease steadily, the companyÊs other businesses should be able to offset the declines. Notably, if the semiconductor unit can generate over W2tr in operating profit, the company should be able to maintain its overall operating profit in excess of W8tr, even if the telecom unitÊs operating profit slides to around W4.5tr.

Figure 110. SEC: Robust earnings but share volatility Figure 111. SECÊs smartphone shipments and IM divisionÊs OP

(W) (Wtr) (mn units) (Wtr) 1,800,000 9.0 SEC's quarterly OP (R) 100 SEC's smartphone shipments (L) 6 SEC's share price (L) IM division's OP (R) 1,600,000 5 7.0 80 1,400,000 4 5.0 1,200,000 60 3 1,000,000 3.0 40 2 800,000 1.0 20 600,000 1

400,000 -1.0 0 0 05 06 07 08 09 10 11 12 13 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

Source: Company data, KDB Daewoo Securities Research Source: Company date, KDB Daewoo Securities Research

KDB Daewoo Securities Research 73 November 13, 2012 The Age of Transition

SEC’s supply chain vs. Apple’s supply chain [Top 11 IT stocks]

This year, many analystsÊ IT investment strategies have focused on the beneficiaries of SEC and Apple – the links in their supply chains. However, among those in their supply chains, only Interflex (051370 KQ) displayed a notable re-rating. In particular, due to the delayed launch of the iPhone 5, AppleÊs suppliers exhibited weak share performance, with the exception of LGD, which has seen its stock rise in 2H. For large-cap IT shares, AppleÊs supply chain includes SK Hynix, LGD and LG Innotek, while Large-caps : 1) SEC, SECÊs supply chain includes Samsung Electro-Mechanics (SEMCO), Samsung SDI, and Cheil 2) SK Hynix, 3) LGE, 4) Industries. So, which stocks should investors select for next year? We have selected five SEMCO, 5) Samsung large caps and six small caps as our top 11 IT stock picks. SDI Among suppliers of Apple, we select SK Hynix (000660 KS/Buy/TP: W31,000). In 2013, earnings at SK Hynix are expected to turn around, and its mobile memory sales are likely to expand. In addition, PC DRAM market conditions are improving, NAND prices are strong, and revenue contributions of mobile DRAM (out of overall DRAM revenues) are climbing. Shares of LGD (034220/Buy/TP: W36,000) have recently advanced markedly, and could rise further on the back of rising panel prices. However, even in this case, we recommend investors switch from LGD to SK Hynix. We expect LGE (066570 KS/Buy/TP: W101,000) to become one of the top second-tier smartphone makers, shipping more than W40mn units in 2013. The company should continue to increase its presence in the high-end market, capitalizing on its advanced LTE technology. Moreover, we expect the company to post robust earnings in 1H13. With regard to SECÊs supply chain, we pick SEMCO (009150 KS/Buy/TP: W130,000) and Samsung SDI (006400 KS/Buy/TP: W190,000), in addition to SEC itself (005930 KS/Buy/TP: W1,650,000). Due to recent market corrections, SEMCO shares have fallen to a 2013F P/E of 14x, and Samsung SDI shares have declined to a 2013F P/E of 12x. These valuations appear undemanding relative to their historical ranges. If their shares fall further in end- 2012~early 2013, these pullbacks are expected to present investors with buying opportunities. Among mid- to small-cap stocks, we like: 1) SFA Engineering (0056190 KQ/Buy/TP: Mid- and small-caps: 1) W60,000); 2) Soulbrain (008060 KQ/Buy/TP: W53,000); 3) Duksan Hi-Metal (077360 SFA Engineering, 2) KQ/Buy/TP: W35,000); 4) Partron (091700 KQ/Buy/TP: W19,400); 5) Nepes (033640 Soulbrain , 3) Duksan Hi- KQ/Buy/TP: W24,000); and 6) Simmtech KQ(036710 KQ/Buy/TP: W17,000). These Metal, 4) Partron, 5) companies are mostly included in SECÊs supply chain, and they engage in different sectors, Nepes, 6) Simmtech including the semiconductor, AMOLED equipment/parts, telecom component, and electronic parts sectors.

Table 20. Earnings and valuations of top 11 Korean IT companies (Wbn, %, x) Market Revenues OP OP margin Net profit P/E P/B ROE cap. 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6 SK Hynix 17,561 10,094 12,291 -131 1,202 -1.3 9.8 -201 938 - 18.7 1.9 1.7 -2.3 9.0 LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2 SEMCO 7,044 7,924 8,585 645 723 8.1 8.4 473 546 15.5 13.4 2.0 1.8 12.9 13.5 Samsung SDI 6,811 5,827 5,990 297 341 5.1 5.7 1,546 583 4.6 12.1 1.0 0.9 23.1 7.9 SFA Engineering 736 583 850 82 105 14.0 12.4 72 88 10.2 8.4 2.0 1.8 19.5 20.8 Soulbrain 745 583 665 98 115 16.9 17.4 65 79 11.4 9.3 2.2 1.8 22.8 21.3 Duksan Hi-Metal 548 153 202 44 56 28.7 27.9 44 55 12.5 9.9 3.7 2.7 27.4 26.2 Partron 700 767 934 75 92 9.8 9.8 57 75 12.3 9.3 3.4 2.6 32.0 32.0 Nepes 286 275 335 40 56 14.5 16.8 26 44 11.0 6.5 1.6 1.3 15.1 21.1 Simmtech 340 655 757 53 67 8.2 8.9 35 52 9.3 6.4 1.6 1.3 18.3 22.0 Source: Bloomberg, KDB Daewoo Securities Research

KDB Daewoo Securities Research 74 November 13, 2012 The Age of Transition

Peer valuations of global IT companies

Table 21. Valuations of global IT companies (Wbn, %, x) Revenues OP OP margin NP P/E P/B ROE Market cap 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6 SK Hynix 17,561 10,094 12,291 -131 1,202 -1.3 9.8 -201 938 - 18.7 1.9 1.7 -2.3 9.0 LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2 LG Display 12,649 28,461 29,108 425 1,063 1.5 3.7 256 836 49.4 15.1 1.3 1.2 2.5 7.7 Samsung SDI 6,811 5,827 5,990 297 341 5.1 5.7 1,546 583 4.6 12.1 1.0 0.9 23.1 7.9 SEMCO 7,044 7,924 8,585 645 723 8.1 8.4 473 546 15.5 13.4 2.0 1.8 12.9 13.5 LG Innotek 1,591 5,113 6,104 99 206 1.9 3.4 12 102 131.8 15.7 1.3 1.2 0.9 7.2 Apple 560,261 208,937 241,042 67,881 80,568 32.5 33.4 51,626 61,250 11.0 9.3 3.6 2.7 33.2 31.6 Hitachi 26,283 124,430 127,919 6,614 7,368 5.3 5.8 2,879 3,494 9.1 7.4 1.0 0.9 10.6 11.8 Panasonic 13,116 103,310 104,066 2,589 3,515 2.5 3.4 -4,923 1,292 - 9.2 0.6 0.5 -12.9 5.4 Toshiba 15,802 82,776 87,544 3,467 4,221 4.2 4.8 1,467 2,067 10.7 7.6 1.2 1.1 11.3 15.0 Sony 11,790 91,891 93,095 1,501 2,308 1.6 2.5 97 646 175.0 18.2 0.4 0.4 0.9 2.7 Murata 12,153 9,086 9,698 736 985 8.1 10.2 518 701 21.7 16.1 1.0 1.0 4.8 6.0 Nokia 10,978 41,840 40,850 -3,087 -228 -7.4 -0.6 -2,072 -382 - - 1.0 1.1 -26.7 -8.8 HTC 7,725 11,033 10,241 789 596 7.2 5.8 671 497 11.3 14.2 2.3 2.3 19.1 15.6 Micron 6,226 9,337 10,758 55 954 0.6 8.9 -297 485 - 12.3 0.8 0.7 -4.4 5.9 TDK 4,918 11,798 12,281 628 799 5.3 6.5 396 539 12.2 9.0 0.7 0.7 5.5 7.1 RIM 4,873 12,035 12,143 -1,299 -498 -10.8 -4.1 -747 -309 - - 0.5 0.5 -9.0 -3.5 AUO 3,993 14,198 15,322 -1,423 -176 -10.0 -1.1 -1,746 -277 - - 0.7 0.7 -25.6 -3.5 CMI 3,416 18,007 18,915 -836 209 -4.6 1.1 -1,031 -30 - - 0.5 0.5 -14.9 0.7 Sharp 2,345 32,338 34,073 -2,083 497 -6.4 1.5 -5,034 -96 - - 0.6 0.6 -87.1 -2.4 Average 2.8 6.0 37.1 12.5 1.2 1.1 -1.5 7.5 Source: Bloomberg, KDB Daewoo Securities Research

Table 22. Valuations of global semiconductor companies (Wbn, %, x) Revenues OP OP margin NP P/E P/B ROE Market cap 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6 SK Hynix 17,561 10,094 12,291 -131 1,202 -1.3 9.8 -201 938 - 18.7 1.9 1.7 -2.3 9.0 Qualcomm 114,316 25,602 28,287 9,126 10,423 35.6 36.8 8,163 9,136 14.4 13.0 2.8 2.5 18.6 18.4 Intel 112,681 58,393 59,659 16,040 14,991 27.5 25.1 12,417 11,567 9.6 10.3 2.1 1.9 22.8 18.3 TSMC 88,826 18,930 21,237 6,693 7,250 35.4 34.1 6,190 6,609 14.3 13.5 3.3 2.9 24.4 22.9 Micron 6,226 9,337 10,758 55 954 0.6 8.9 -297 485 - 12.3 0.8 0.7 -4.4 5.9 Nanya 831 1,327 1,469 -1,123 -967 -84.6 -65.9 -1,159 -847 - - - 10.5 -381.2 -405.8 Inotera 599 1,415 1,577 -453 -199 -32.0 -12.6 -534 -287 - - 0.5 0.8 -59.0 -46.8 Powerchip 21 1,072 1,117 -427 -207 -39.9 -18.5 -526 -281 - - - - -235.5 - Toshiba 15,802 82,776 87,544 3,467 4,221 4.2 4.8 1,467 2,067 10.7 7.6 1.2 1.1 11.3 15.0 SanDisk 10,851 5,488 6,505 714 1,288 13.0 19.8 530 906 20.1 12.0 1.4 1.3 5.6 8.9 ASML 31,224 6,604 7,378 1,705 1,962 25.8 26.6 1,465 1,654 17.2 14.9 4.4 3.7 26.8 25.0 AMAT 14,375 9,425 9,079 1,357 1,337 14.4 14.7 1,006 989 14.7 14.9 1.7 1.6 8.8 9.4 TEL 8,369 6,882 7,564 146 401 2.1 5.3 96 269 78.7 29.4 1.0 1.0 1.0 3.6 Advantest 2,583 1,994 2,196 136 221 6.8 10.0 85 143 26.5 15.7 1.2 1.2 4.5 7.9 Average 1.4 7.5 21.6 14.2 1.9 2.3 -35.8 -20.5 Source: Bloomberg, KDB Daewoo Securities Research

KDB Daewoo Securities Research 75 November 13, 2012 The Age of Transition

Table 23. Valuations of global display companies (Wbn, %, x) Revenues OP OP margin NP P/E P/B ROE Market cap 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F LG Display 12,649 28,461 29,108 425 1,063 1.5 3.7 256 836 49.4 15.1 1.3 1.2 2.5 7.7 AUO 3,993 14,198 15,322 -1,423 -176 -10.0 -1.1 -1,746 -277 - - 0.7 0.7 -25.6 -3.5 CMI 3,416 18,007 18,915 -836 209 -4.6 1.1 -1,031 -30 - - 0.5 0.5 -14.9 0.7 Sharp 2,345 32,338 34,073 -2,083 497 -6.4 1.5 -5,034 -96 - - 0.6 0.6 -87.1 -2.4 LCD average -4.9 1.3 49.4 15.1 0.8 0.8 -31.3 0.6 LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2 Samsung SDI 6,811 5,827 5,990 297 341 5.1 5.7 1,546 583 4.6 12.1 1.0 0.9 23.1 7.9 Panasonic 13,116 103,310 104,066 2,589 3,515 2.5 3.4 -4,923 1,292 - 9.2 0.6 0.5 -12.9 5.4 Pioneer 729 6,433 6,707 221 276 3.4 4.1 16 136 41.6 5.3 0.6 0.6 2.6 11.7 Sony 11,790 91,891 93,095 1,501 2,308 1.6 2.5 97 646 175.0 18.2 0.4 0.4 0.9 2.7 Hitachi 26,283 124,430 127,919 6,614 7,368 5.3 5.8 2,879 3,494 9.1 7.4 1.0 0.9 10.6 11.8 PDP average 3.4 4.1 50.1 11.1 0.8 0.7 4.9 7.8 Source: Bloomberg, KDB Daewoo Securities Research

Table 24. Valuations of global handset companies (Wbn, %, x) Revenues OP OP margin NP P/E P/B ROE Market cap 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F SEC 198,118 203,521 240,089 28,247 33,048 13.9 13.8 23,213 27,743 9.9 8.3 1.8 1.5 21.2 20.6 LGE 12,503 50,906 52,760 1,210 1,588 2.4 3.0 683 983 20.2 14.1 1.1 1.1 5.2 7.2 Apple 560,261 208,937 241,042 67,881 80,568 32.5 33.4 51,626 61,250 11.0 9.3 3.6 2.7 33.2 31.6 Nokia 10,978 41,840 40,850 -3,087 -228 -7.4 -0.6 -2,072 -382 - - 1.0 1.1 -26.7 -8.8 HTC 7,725 11,033 10,241 789 596 7.2 5.8 671 497 11.3 14.2 2.3 2.3 19.1 15.6 RIM 4,873 12,035 12,143 -1,299 -498 -10.8 -4.1 -747 -309 - - 0.5 0.5 -9.0 -3.5 Average 6.3 8.6 13.1 11.5 1.7 1.5 7.2 10.5 Source: Bloomberg, KDB Daewoo Securities Research

Table 25. Valuations of global IT materials companies (Wbn, %, x) Revenues OP OP margin NP P/E P/B ROE Market cap 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F SEMCO 7,044 7,924 8,585 645 723 8.1 8.4 473 546 15.5 13.4 2.0 1.8 12.9 13.5 LG Innotek 1,591 5,113 6,104 99 206 1.9 3.4 12 102 131.8 15.7 1.3 1.2 0.9 7.2 TDK 4,918 11,798 12,281 628 799 5.3 6.5 396 539 12.2 9.0 0.7 0.7 5.5 7.1 Murata 12,153 9,086 9,698 736 985 8.1 10.2 518 701 21.7 16.1 1.0 1.0 4.8 6.0 Taiyo Yuden 999 2,705 2,822 84 128 3.1 4.5 26 70 36.9 13.4 0.7 0.7 1.8 4.7 Ibiden 1,986 3,996 4,164 185 247 4.6 5.9 82 162 22.9 11.6 0.5 0.5 2.2 4.2 Shinko 858 1,789 1,835 62 73 3.5 4.0 41 46 21.0 18.9 0.5 0.5 2.4 2.5 NGK Spark 2,682 3,673 3,793 285 346 7.7 9.1 209 244 12.4 10.7 0.8 0.8 6.3 7.0 Nanya PCB 831 1,327 1,469 -1,123 -967 -84.6 -65.9 -1,159 -847 - - - 10.5 -381.2 -405.8 Unomicron 1,689 2,540 2,700 184 209 7.2 7.7 144 177 11.7 9.4 1.0 0.9 8.0 9.4 Tripod 1,087 1,460 1,549 119 126 8.2 8.1 115 116 9.3 9.0 1.2 1.1 12.2 11.8 Seoul 1,254 856 1,093 22 60 2.6 5.5 16 55 81.0 22.7 2.1 2.0 2.5 8.7 Semiconductor CREE 3,947 1,446 1,697 133 221 9.2 13.0 142 205 26.4 19.1 1.4 1.3 4.7 6.1 Toyoda Gosei 2,818 7,994 8,320 513 569 6.4 6.8 303 339 9.3 8.3 0.9 0.8 9.7 10.0 Stanley 2,614 3,677 3,893 458 503 12.4 12.9 288 318 8.6 7.8 0.8 0.7 9.8 9.5 Citizen 1,715 3,892 4,050 243 290 6.2 7.2 141 172 11.2 9.2 0.6 0.6 5.5 6.2 Epistar 1,577 773 863 -6 69 -0.8 8.0 17 67 94.2 23.2 0.9 0.9 0.8 3.5 Lite-On 3,179 4,608 4,865 282 300 6.1 6.2 274 313 11.5 10.4 1.1 1.1 10.8 11.8 Aixtron 1,369 317 507 -105 47 -33.2 9.3 -91 36 - 38.2 1.9 1.8 -15.8 3.4 Veeco 1,286 556 573 62 65 11.2 11.4 53 53 23.3 23.2 1.4 1.3 5.6 5.9 Average -0.3 4.1 31.2 15.2 1.1 1.5 -14.5 -13.4 Source: Bloomberg, KDB Daewoo Securities Research

KDB Daewoo Securities Research 76 November 13, 2012 The Age of Transition

IT industry key data

Semiconductor

Figure 112. Global annual PC shipment trends and forecasts Figure 113. Global smartphone shipment trends and forecasts

(mn units)Global PC shipments (L, excl. tablet PCs) (%) (mn units) 400 YoY global PC shipment growth (R) 371 20 200 180 348 353 356 339 335 180 154 302 15 160 149 146 300 143 140 115 10 120 108 102 100 200 100 83 5 80 64 54 55 60 44 100 36 40 0 40 20 0 -5 0 00 02 04 06 08 10 12F 14F 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F

Source: Gartner, KDB Daewoo Securities Research estimates Source: Gartner, KDB Daewoo Securities Research estimates

Figure 114. DRAM quarterly supply/demand trends and forecasts Figure 115. NAND quarterly supply/demand trends and forecasts

(1Gb eq.bn units) DRAM demand (L) DRAM supply (L) (%) (16Gb eq. bn units) NAND supply (L) NAND demand (L) (%) 12 Oversupply (R) 15 8 Oversupply(R) 15 NAND supply/demand 10 Reduction of PC DRAM will be important in 2H will be tighter than expected at year-end 10 10 6 8 5 5 6 4 0 0 4 2 -5 -5 2

0 -10 0 -10 06 07 08 09 10 11 12F 13F 06 07 08 09 10F 11F 12F 13F

Source: KDB Daewoo Securities Research estimates Source: KDB Daewoo Securities Research estimates

Figure 116. Global semiconductor firmsÊ relative share price trends Figure 117. P/B-ROEs of global semiconductor companies (2013F)

(P/B, x) y = 0.0096x + 1.4923 190 SEC Micron SK Hynix 4.0 Nanya SanDisk Toshiba ASML 160

3.0 130

SanDisk 100 2.0 SK Hynix

70 Inotera AMAT SEC TEL Toshiba 1.0 40 Micron

Advantest (ROE, %) 10 0.0 11/11 1/12 3/12 5/12 7/12 9/12 -60 -40 -20 0 20 40

Source: Bloomberg, KDB Daewoo Securities Research estimates Source: Bloomberg, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 77 November 13, 2012 The Age of Transition

Display

Figure 118. LCD panel price change rate (biweekly) Figure 119. Panel price change rate by model

(%) (4/09 = 100) Notebook 15.6" Monitor 22" 12 Notebook 140 TV 32" TV 42" Monitor TV 47" 130 8 TV 120 4 110

0 100

90 -4 80 -8 70

-12 60 05 06 07 08 09 10 11 12 4/09 10/09 4/10 10/10 4/11 10/11 4/12 10/12

Source: WitsView Source: WitsView

Figure 120. Global LCD panel shipment trends and forecasts Figure 121. Global LCD TV shipment trends and forecasts

(mn units)SEC LGD (%) (mn units) (%) AUO CMI 250 100 80 LED-backlit LCD TV 100 Other YoY growth (R) CCFL-backlit LCD TV 80 200 LED penetration rate (R) 80 60 60

60 150 40 40

100 20 40

0 20 50 20 -20

0 -40 0 0 04 05 06 07 08 09 10 11 12 13F 04 05 06 07 08 09 10 11 12F 13F

Source: DisplaySearch, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research

Figure 122. Relative share price trends of global display companies Figure 123. P/B-ROEs of global display companies (2013F)

(-1Y = 100) (PBR, x) 160 LGD Samsung SDI 1.2 AUO CMI 140 Sharp LGD 1.0 120 Samsung SDI Hitachi 100 0.8 80 AUO 60 0.6 Sharp Panasonic 40 CMI 0.4 Sony 20 (ROE,%) 0 0.2 11/11 2/12 5/12 8/12 -6 -4 -2 0 2 4 6 8 10 12 14

Source: Bloomberg Source: Bloomberg, KDB Daewoo Securities Research

KDB Daewoo Securities Research 78 November 13, 2012 The Age of Transition

Telecom equipment/electronic components

Figure 124. Global quarterly handset market share trends Figure 125. Global quarterly smartphone market share trends

(%) (%) 50 Apple SEC Nokia 50 Nokia SEC Apple RIM HTC LGE ZTE LGE

40 40

30 30

20 20

10 10

0 0 1Q08 1Q09 1Q10 1Q11 1Q12 1Q08 1Q09 1Q10 1Q11 1Q12

Source: Gartner, KDB Daewoo Securities Research Source: Gartner, KDB Daewoo Securities Research

Figure 126. OS market share (as of June 2012) Figure 127. Handset market outlook

Other (mn units) Smartphone (L) (%) Non-smartphone (L) 2,000 Indian smartphone 40 iOS Smartphone proportion (R) Handset market growth rate YoY (R) users each 100mn; Chinese third-party Global crisis Chinese smartphone users 30 1,500 reach 100mn; Internet bubble

1,000 CSP 10

500 Web app stores Google Play 0

Amazon Nokia Windows Phone 0 -10 Blackberry 99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F

Source: Gartner, KDB Daewoo Securities Research Source: IDC, KDB Daewoo Securities Research

Figure 128. Handset/components sectorÊs relative share price trend Figure 129. Relative share price trend of large LED companies

150 Handset/component companies 160 LED companies KOSDAQ KOSPI KOSPI KOSDAQ

130 130 129.0

119.3 109.9 111.1 106.3 110 100 104.7

90 70 10/11 1/12 4/12 7/12 10/12 10/11 12/11 2/12 4/12 6/12 8/12 10/12

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research

KDB Daewoo Securities Research 79 November 13, 2012 The Age of Transition

Samsung Electronics (005930 KS) James Song Reminiscent of Nokia and Intel in their heydays +822-768-3722 james.song @dwsec.com  2013 outlook: Revenues of W240.1tr (up 18.0%); OP of W33.0tr (up 17.0%)  Semiconductor OP to soar to W7.8tr next year  Shares seem undervalued at 2012F and 2013F P/Bs of 1.8x and 1.5x

Buy (Maintain) 2013 earnings: In 2013, we expect Samsung Electronics (SEC) to post revenues of W240.1tr (up 18.0% YoY) and an operating profit of W33.0tr (up 17.0% YoY). The Target Price (12M, W) 1,650,000 companyÊs semiconductor division is projected to show notable growth, with an Share Price (11/12/12, W) 1,345,000 operating profit of W7.8tr (up 73% YoY). As for the telecom division, we Expected Return (%) 22.7 EPS Growth (12F, %) 73.8 conservatively forecast its operating profit at W18.5tr, but, if the unitÊs profitability Market EPS Growth (12F, %) 8.9 remains high, the companyÊs growth should beat our forecast. P/E (12F, x) 9.9 Growth theme: SEC in 2012 reminds us of Nokia back in 1999 and Intel in the Market P/E (12F, x) 10.2 KOSPI 1,900.87 1980s. The companyÊs global market share in smartphones is now approaching Market Cap (Wbn) 198,118 40%, and its semiconductor unitÊs growth driver is shifting from memory to Shares Outstanding (mn) 170 System LSI (Intel achieved strong growth after its transition from memory maker Avg Trading Volume (60D, '000) 309 to CPU producer). Avg Trading Value (60D, Wbn) 398 Dividend Yield (12F, %) 0.6 The large contribution of the IM (telecom) division to SECÊs total profit is not a risk. Free Float (%) 70.8 Unlike Apple, SEC has achieved a high level of vertical integration, including supply 52-Week Low (W) 921,000 of core parts. Thus, if the company can maximize its market share, risks associated 52-Week High (W) 1,418,000 with competition and the end of its partnership with Apple are likely to decrease. Beta (12M, Daily Rate of Return) 1.42 Price Return Volatility (12M Daily, %, SD) 2.0 Catalysts: SECÊs key share price catalyst next year will be its ability to maintain Foreign Ownership (%) 43.7 quarterly operating profits of at least W8tr. Moreover, the Galaxy S IV (expected to Major Shareholder(s) be released in 2Q13) is likely to make history in the smartphone industry. In K.H. Lee et al. (17.63%) addition, the semiconductor division should regain its standing as the companyÊs Treasury stocks (11.55%) engine, delivering quarterly operating profits of more than W2tr after 2Q13. National Pension Service (6%) Price Performance Risks: Risks include stiffer competition with Apple and smartphone margin cuts. (%) 1M 6M 12M However, if the company can boost its market share above 40%, profits will likely Absolute 3.8 3.2 36.8 fall slower than margins. The addition of new AP makers to AppleÊs supply chain Relative 5.5 4.1 34.8 may also pose a risk, but even if we assume that Apple starts to purchase APs from TSMC, it will dent SECÊs annual operating profit by less than 2%.

Valuation: We maintain our Buy call on SEC with a target price of W1,650,000. Next year, we expect SEC shares to remain sluggish in 1H before recovering in 2H. The stockÊs weak performance in 1Q12 should present a buying opportunity. The stock is currently trading at 2012F and 2013F P/Bs of 1.8x and 1.5x, respectively

Share price § Earnings & Valuation Metrics 150 KOSPI FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 140

130 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 120 12/10 154,630 17,29 11.2 15,799 92,863 28,015 907 20.4 10.2 1.8 5.3 110 12/11 165,002 16,25 9.9 13,359 78,522 29,047 2,497 14.6 13.5 1.8 5.7 100 12/12F 203,521 28,24 13.9 23,213 136,443 44,266 9,419 21.2 9.9 1.8 4.6 90 12/13F 240,089 33,04 13.8 27,743 163,067 49,386 18,119 20.6 8.3 1.5 3.9 80 12/14F 272,649 39,48 14.5 32,720 192,320 53,160 42,456 20.0 7.0 1.3 2.8 11/11 3/12 7/12 11/12 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

Daewoo Securities Research 80

November 13, 2012 The Age of Transition

Table 1. Quarterly and annual earnings (Wbn, %) 1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F Revenues 45,271 47,597 52,177 58,477 55,611 57,963 62,284 64,231 154,630 165,002 203,521 240,089 % QoQ -4.3 5.1 9.6 12.1 -4.9 4.2 7.5 3.1 % YoY 22.4 20.7 26.4 23.6 22.8 21.8 19.4 9.8 13.4 6.7 23.3 18 IM 23,220 24,040 29,920 32,460 30,337 31,249 33,693 34,628 41,190 67,440 109,640 129,907 CE 10,670 12,150 11,600 14,395 12,275 12,813 14,362 15,599 57,250 47,020 48,815 55,048 Semiconductor 7,980 8,600 8,712 10,804 11,562 12,407 12,857 12,572 37,640 36,990 36,096 49,398 - Memory 4,890 5,420 5,220 6,578 6,852 7,385 7,518 7,028 25,830 22,710 22,108 28,782 DRAM 3,858 4,309 4,061 4,055 4,102 4,322 4,467 4,363 19,441 16,522 16,283 17,254 NAND 2,147 2,440 2,403 3,254 3,511 3,883 3,886 3,446 9,452 10,270 10,243 14,726 - Non-memory 3,090 3,180 3,492 4,226 4,710 5,023 5,340 5,544 11,810 14,280 13,988 20,616 DP 8,540 8,250 8,460 8,943 9,165 9,547 10,027 10,357 29,910 29,230 34,193 39,097 Operating profit 5,850 6,724 8,120 7,553 8,142 8,331 8,819 7,756 17,297 16,250 28,247 33,048 % QoQ 10.5 14.9 20.8 -7 7.8 2.3 5.9 -12.1 % YoY 98.4 79.2 90.9 42.6 39.2 23.9 8.6 2.7 58.3 -6.1 73.8 17 IM 4,270 4,190 5,630 5,312 4,871 4,656 4,692 4,247 4,300 8,130 19,402 18,466 CE 530 760 430 417 333 442 499 349 450 1,550 2,137 1,623 Semiconductor 760 1,110 1,150 1,482 1,775 2,020 2,136 1,851 10,120 7,330 4,502 7,781 - Memory 594 996 862 1,125 1,342 1,528 1,533 1,264 8,662 4,218 3,576 5,667 DRAM 657 796 556 494 598 717 849 709 6,645 3,522 2,504 2,873 NAND 316 376 457 829 980 1,081 954 778 3,085 1,946 1,979 3,794 - Non-memory 166 114 394 504 548 587 699 719 1,458 3,112 1,179 2,553 DP 280 750 1,090 1,192 1,163 1,213 1,392 1,310 1,990 -750 3,312 5,077 OP margin 12.9 14.1 15.6 12.9 14.6 14.4 14.2 12.1 11.2 9.8 13.9 13.8 IM 18.4 17.4 18.8 16.4 16.1 14.9 13.9 12.3 10.4 12.1 17.7 14.2 CE 5 6.3 3.7 2.9 2.7 3.4 3.5 2.2 0.8 3.3 4.4 2.9 Semiconductor 9.5 12.9 13.2 13.7 15.3 16.3 16.6 14.7 26.9 19.8 12.5 15.8 - Memory 12.1 18.4 16.5 17.1 19.6 20.7 20.4 18 33.5 18.6 16.2 19.7 DRAM 17 18.5 13.7 12.2 14.6 16.6 19 16.2 34.2 21.3 15.4 16.7 NAND 14.7 15.4 19 25.5 27.9 27.8 24.6 22.6 32.6 19 19.3 25.8 - Non-memory 5.4 3.6 11.3 11.9 11.6 11.7 13.1 13 12.3 21.8 8.4 12.4 DP 3.3 9.1 12.9 13.3 12.7 12.7 13.9 12.6 6.7 -2.6 9.7 13 Net profit 5,049 5,193 6,562 6,741 5,752 6,296 7,817 7,877 15,799 13,359 23,213 27,743 % QoQ 29.9 2.9 26.4 2.7 -14.7 9.4 24.2 0.8 % YoY 86 50.2 98.8 73.4 13.9 21.2 19.1 16.9 70.1 -15.4 73.8 19.5 Note: Under consolidated K-IFRS; Source: KDB Daewoo Securities Research estimates

Figure 1. Quarterly operating profit and OP margin trends Figure 2. Annual operating profit trend

(Wtr) (%) (Wtr) (%) 10.0 20 50 Annual operating profit (L) YoY growth (R) 150 Quarterly operating profit (L) 8.8 OP margin (R) 8.1 8.1 8.3 7.6 7.8 41.4 6.7 39.5 7.5 40 100 5.9 33.0 5.3 10 5.0 4.9 5.0 4.2 4.4 4.3 30 28.2 50 3.4 3.8 3.0 2.9 2.6 2.4 2.7 2.5 20 17.3 0 1.4 16.2 0 0.6 11.8 10.9 9.1 9.0 9.0 7.6 0.0 10 9.1 6.3 6.0 -50 4.0 -0.7 -2.5 -10 0 -100 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F 00 02 04 06 08 10 12F 14F

Source: Company data, KDB Daewoo Securities Research estimates Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 81 November 13, 2012 The Age of Transition

Samsung Electronics (005930 KS/Buy/TP: W1,650,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 165,002 203,521 240,089 272,649 Current Assets 71,502 88,936 104,847 155,474 Cost of Sales 112,145 128,355 150,377 177,222 Cash and Cash Equivalents 14,692 22,848 33,395 75,455 Gross Profit 52,857 75,167 89,712 95,427 AR & Other Receivables 24,153 30,876 31,402 35,661 SG&A Expenses 37,402 46,434 56,765 56,094 Inventories 15,717 21,052 24,834 28,202 Operating Profit (Adj) 15,455 28,733 32,948 39,333 Other Current Assets 4,755 5,878 6,934 7,874 Operating Profit 16,250 28,247 33,048 39,483 Non-Current Assets 84,129 98,764 116,914 106,678 Non-Operating Profit 909 1,775 1,278 1,001 Investments in Associates 9,204 9,610 11,510 13,410 Net Financial Income -62 -82 -214 -607 Property, Plant and Equipment 62,044 70,296 79,572 66,443 Net Gain from Inv in Associates 1,399 2,279 1,800 1,750 Intangible Assets 3,355 3,608 3,519 3,448 Pretax Profit 17,159 30,023 34,326 40,483 Total Assets 155,631 187,700 221,761 262,152 Income Tax 3,425 6,477 6,583 7,763 Current Liabilities 44,319 51,911 58,696 65,627 Profit from Continuing Operations 13,734 23,545 27,743 32,720 AP & Other Payables 18,510 23,391 27,593 31,335 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 9,684 8,586 7,586 7,586 Net Profit 13,734 23,545 27,743 32,720 Other Current Liabilities 16,126 19,934 23,516 26,705 Controlling Interests 13,359 23,213 27,743 32,720 Non-Current Liabilities 9,467 12,221 12,797 14,319 Non-Controlling Interests 375 332 0 0 Long-Term Financial Liabilities 4,963 5,885 5,385 5,385 Total Comprehensive Profit 13,232 23,551 27,743 32,720 Other Non-Current Liabilities 4,086 5,576 6,652 8,173 Controlling Interests 12,802 23,231 27,743 32,720 Total Liabilities 53,786 64,132 71,493 79,946 Non-Controlling Interests 430 320 0 0 Controlling Interests 97,600 121,093 147,794 179,732 EBITDA 29,047 44,266 49,386 53,160 Capital Stock 898 898 898 898 FCF (Free Cash Flow) 2,497 9,419 18,119 42,456 Capital Surplus 4,404 4,404 4,404 4,404 EBITDA Margin (%) 17.6 21.8 20.6 19.5 Retained Earnings 97,543 120,009 146,710 178,648 Operating Profit Margin (%) 9.9 13.9 13.8 14.5 Non-Controlling Interests 4,246 2,475 2,475 2,475 Net Profit Margin (%) 8.1 11.4 11.6 12.0 Stockholders' Equity 101,845 123,568 150,268 182,207

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 22,175 33,137 43,482 42,861 P/E (x) 13.5 9.9 8.3 7.0 Net Profit 13,734 23,545 27,743 32,720 P/CF (x) 6.7 5.9 5.2 4.9 Non-Cash Income and Expense 16,476 22,446 41,446 20,441 P/B (x) 1.8 1.8 1.5 1.3 Depreciation 12,934 14,775 15,724 13,129 EV/EBITDA (x) 5.7 4.6 3.9 2.8 Amortization 658 757 715 698 EPS (W) 78,522 136,443 163,067 192,320 Others -858 -1,501 400 400 CFPS (W) 158,413 227,740 259,689 273,595 Chg in Working Capital -4,057 -7,190 678 -2,536 BPS (W) 598,263 733,969 891,429 1,079,577 Chg in AR & Other Receivables -2,197 -6,181 -526 -4,259 DPS (W) 5,500 8,000 5,500 8,000 Chg in Inventories -3,920 -6,043 -3,783 -3,368 Payout ratio (%) 6.2 4.2 2.6 3.2 Chg in AP & Other Payables 1,126 3,967 4,203 3,742 Dividend Yield (%) 0.5 0.6 0.4 0.6 Income Tax Paid -3,977 -5,664 -6,583 -7,763 Revenue Growth (%) 6.7 23.3 18.0 13.6 Cash Flows from Inv Activities -19,728 -21,451 -29,669 629 EBITDA Growth (%) 3.7 52.4 11.6 7.6 Chg in PP&E -21,586 -22,592 -25,000 0 Operating Profit Growth (%) -6.1 73.8 17.0 19.5 Chg in Intangible Assets -654 -626 -626 -626 EPS Growth (%) -15.4 73.8 19.5 17.9 Chg in Financial Assets 590 933 -5,000 0 Accounts Receivable Turnover (x) 8.0 8.2 8.6 9.1 Others 1,922 834 958 1,255 Inventory Turnover (x) 11.4 11.1 10.5 10.3 Cash Flows from Fin Activities 2,468 -3,369 -3,266 -1,430 Accounts Payable Turnover (x) 17.0 17.6 17.1 16.8 Chg in Financial Liabilities 3,758 -468 -1,500 0 ROA (%) 9.5 13.7 13.6 13.5 Chg in Equity 161 44 0 0 ROE (%) 14.6 21.2 20.6 20.0 Dividends Paid -875 -827 -1,042 -782 ROIC (%) 16.7 26.1 27.3 33.0 Others -576 -1,804 -724 -649 Liability to Equity Ratio (%) 52.8 51.9 47.6 43.9 Increase (Decrease) in Cash 4,900 8,157 10,547 42,060 Current Ratio (%) 161.3 171.3 178.6 236.9 Beginning Balance 9,791 14,692 22,848 33,395 Net Debt to Equity Ratio (%) -12.0 -13.5 -19.1 -38.8 Ending Balance 14,692 22,848 33,395 75,455 Interest Coverage Ratio (x) 25.2 38.8 45.7 60.9 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 82 November 13, 2012 The Age of Transition

SK Hynix (000660 KS) James Song Beneficiary of mobile memory market growth +822-768-3722 [email protected]  2013 outlook; Turnaround expected, Revenues of W12.3tr and OP of W1.2tr  To benefit from mobile memory demand growth  To receive premium for memory price increases and earnings turnaround

2013 earnings: Next year, SK Hynix is expected to turn around, reporting revenues Buy (Maintain) of W12.3tr (up 21.8% YoY) and an operating profit of W1.2tr (swinging to positive Target Price (12M, W) 31,000 YoY). The DRAM division is projected to post W778bn in operating profit (OP Share Price (11/12/12, W) 25,300 margin of 9.8%), while the NAND divisionÊs operating profit is estimated at Expected Return (%) 22.5 W353bn (OP margin of 8.1%). We forecast the companyÊs earnings to continue to EPS Growth (12F, %) RR improve until end-2014 on capacity expansion at the M12 line. Market EPS Growth (12F, %) 8.9 P/E (12F, x) - Growth theme: 1) SK HynixÊs growth should be dependent on the growth of the Market P/E (12F, x) 10.2 mobile memory business. The increasing earnings contribution of high-margin KOSPI 1,900.87 mobile DRAM and embedded NAND sales growth are expected to drive up the Market Cap (Wbn) 17,561 companyÊs earnings. Although the PC market is forecast to remain stagnant next Shares Outstanding (mn) 694 year, weighing on the commodity DRAM market, the company is likely to offset Avg Trading Volume (60D, '000) 5,043 this negative by reshuffling its product mix. Avg Trading Value (60D, Wbn) 117 Dividend Yield (12F, %) 0.0 2) Apple is scaling down its dependence on SEC in memory supply (currently 30%). Free Float (%) 74.2 SEC accounts for over 60% of the global mobile DRAM market. Thus, Apple 52-Week Low (W) 19,750 should turn to other DRAM makers, which account for 40% of the global market, 52-Week High (W) 30,950 to meet its memory needs. Thus, SK Hynix could benefit from AppleÊs efforts to Beta (12M, Daily Rate of Return) 1.35 diversify its supply lines. Price Return Volatility (12M Daily, %, SD) 2.5 Foreign Ownership (%) 24.8 Catalysts: 1) Declines in DRAM prices are slowing in 4Q12, and NAND prices are Major Shareholder(s) rising steeply. Positive price trends should be a strong catalyst for the companyÊs SK Telecom (25.82%) share price. 2) Growing demand for MCP driven by mobile device demand could National Pension Service (8.08%) boost sales prices. 3) Smooth migrations to 30nm DRAM and 20nm NAND processes are also positive for the company. Price Performance Risks: 1) For parts producers, Apple presents both opportunities and risks. Price (%) 1M 6M 12M Absolute 12.2 -0.4 17.4 cut pressure from Apple is a major risk for SK Hynix. 2) In 1Q13, major Relative 13.9 0.5 15.4 smartphone producersÊ new model launches are expected to slow down. Thus, mobile DRAM prices are projected to slide after early 2013.

Valuation: We maintain our Buy recommendation on SK Hynix and raise our target price from W28,000 to W31,000. Earnings momentum has been strengthening recently in line with rising NAND prices and a slowdown in the DRAM price downtrend. The companyÊs valuation has risen to a 2013F P/B of 1.7x. But SK HynixÊs share price is expected to rise further, as it is likely to receive a premium for its anticipated medium- to long-term earnings growth after 4Q12.

Share price § Earnings & Valuation Metrics 130 KOSPI FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 120 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 110 12/10 12,106 2,975 24.6 2,621 4,440 6,151 2,749 39.2 5.4 1.9 3.0 100 12/11 10,396 326 3.1 -57 -96 3,572 -1,126 -0.7 - 1.8 5.2 90 12/12F 10,094 -131 -1.3 -201 -289 3,116 472 -2.3 - 1.9 6.8 80 12/13F 12,291 1,202 9.8 938 1,351 4,735 1,022 9.0 18.7 1.7 4.3 70 12/14F 14,178 1,971 13.9 1,790 2,579 5,609 1,074 15.2 9.8 1.5 3.4 11/11 3/12 7/12 11/12 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 83 November 13, 2012 The Age of Transition

Table 1. Quarterly and annual earnings trends and forecasts (Wbn, %) 1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F Revenue 2,388 2,632 2,423 2,651 2,656 2,953 3,381 3,301 12,106 10,396 10,094 12,291 % QoQ -6.5 10.2 -7.9 9.4 0.2 11.1 14.5 -2.4 % YoY -14.5 -4.6 5.8 3.8 11.2 12.2 39.5 24.5 53.1 -14.1 -2.9 21.8 DRAM 1,695 1,974 1,696 1,747 1,661 1,910 2,163 2,171 9,554 7,418 7,112 7,906 NAND 693 658 703 904 995 1,043 1,218 1,130 2,552 2,978 2,981 4,385 COGS 2,182 2,159 2,021 2,029 2,026 2,199 2,483 2,462 7,644 8,721 8,351 9,359 Gross profit 206 473 402 622 631 754 898 839 4,462 1,675 1,743 2,932 SG&A 473 472 381 470 470 480 500 540 1,491 1,570 1,837 1,800 Operating profit -260 23 -15 122 161 324 418 299 2,975 326 -130 1,202 % QoQ RR TTB TTR RR TTB 70.3 45.3 -24.8 % YoY TTR -94.9 TTB RR TTB TTB TTB TTB 1454.5 -89 TTR TTB DRAM -286 98 40 74 102 190 268 218 2,792 -284 -74 778 NAND 19 -123 -19 77 58 84 130 81 179 389 -45 353 EBITDA 572 771 792 891 1,033 1,241 1,293 1,175 6,100 3,572 3,055 4,742 Net profit -271 -53 2 122 146 261 275 255 2,621 -57 -201 938 GP margin 8.6 18 16.6 23.5 23.7 25.5 26.6 25.4 36.9 16.1 17.3 23.9 OP margin -10.9 0.9 -0.6 4.6 6.1 11 12.4 9.1 24.6 3.1 -1.3 9.8 DRAM -16.9 5 2.3 4.3 6.2 10 12.4 10 29.2 -3.8 -1 9.8 NAND 2.7 -18.6 -2.6 8.6 5.9 8 10.6 7.2 7 13.1 -1.5 8.1 EBITDA margin 23.9 29.3 32.7 33.6 38.9 42 38.3 35.6 50.4 34.4 30.3 38.6 NP margin -11.4 -2 0.1 4.6 5.5 8.9 8.1 7.7 21.6 -0.5 -2 7.6 Notes: Under consolidated K-IFRS; TTR refers to „turning to red„; TTB refers to turning to black‰; RR refers to ‰remaining red‰ Source: Company data, KDB Daewoo Securities Research estimates

Figure 1. Annual operating profit trend and outlook Figure 2. Quarterly operating profit trend and outlook

(Wtr) Annual operating profit (L) (%) (Wbn) Quarterly operating profit (L) (%) OP margin (R) 4 OP margin (R) 40 1,200 1016 60 3.0 924 858 742 800 708 40 2.1 2.0 2 20 453 446 323447 418 1.2 387 324 400 360 294 299 20 0.5 254 209 161 0.2 0.3 109 122 23-15 0 0 0 0 -0.1 -172 -211 -167 -400 -318 -277 -260 -20 -2 -1.9 -20 -482 -465 -515 -800 -40 -802

-4 -40 -1,200 -60 06 07 08 09 10 11 12F 13F 14F 06 07 08 09 10 11 12F 13F

Source: Company data, KDB Daewoo Securities Research estimates Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 84 November 13, 2012 The Age of Transition

SK Hynix (000660 KS/Buy/TP: W31,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 10,396 10,094 12,291 14,178 Current Assets 4,937 5,647 5,917 7,044 Cost of Sales 8,721 8,391 9,169 10,257 Cash and Cash Equivalents 1,244 1,698 1,596 2,260 Gross Profit 1,675 1,703 3,122 3,921 AR & Other Receivables 1,754 1,378 1,475 1,701 SG&A Expenses 1,569 1,797 1,990 2,000 Inventories 1,184 1,166 1,420 1,638 Operating Profit (Adj) 105 -94 1,132 1,921 Other Current Assets 124 127 149 167 Operating Profit 326 -131 1,202 1,971 Non-Current Assets 12,301 13,136 13,375 14,168 Non-Operating Profit -280 -28 -125 114 Investments in Associates 104 96 97 98 Net Financial Income 254 214 126 87 Property, Plant and Equipment 10,899 11,571 11,680 12,183 Net Gain from Inv in Associates 3 1 1 1 Intangible Assets 708 787 786 786 Pretax Profit 45 -159 1,077 2,085 Total Assets 17,238 18,783 19,292 21,213 Income Tax 101 43 139 295 Current Liabilities 4,817 4,688 5,137 5,553 Profit from Continuing Operations -56 -201 938 1,790 AP & Other Payables 1,195 1,378 1,758 2,028 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 2,869 2,528 2,428 2,428 Net Profit -56 -201 938 1,790 Other Current Liabilities 753 782 952 1,098 Controlling Interests -57 -201 938 1,790 Non-Current Liabilities 4,546 4,112 3,234 2,949 Non-Controlling Interests 1 0 0 0 Long-Term Financial Liabilities 3,954 3,515 2,615 2,315 Total Comprehensive Profit 13 -221 938 1,790 Other Non-Current Liabilities 133 84 106 120 Controlling Interests 13 -223 935 1,787 Total Liabilities 9,363 8,800 8,372 8,502 Non-Controlling Interests 0 2 3 3 Controlling Interests 7,876 9,981 10,916 12,703 EBITDA 3,572 3,116 4,735 5,609 Capital Stock 2,979 3,488 3,488 3,488 FCF (Free Cash Flow) -1,126 472 1,022 1,074 Capital Surplus 1,229 3,049 3,049 3,049 EBITDA Margin (%) 34.4 30.9 38.5 39.6 Retained Earnings 3,555 3,354 4,292 6,082 Operating Profit Margin (%) 3.1 -1.3 9.8 13.9 Non-Controlling Interests -1 2 5 8 Net Profit Margin (%) -0.5 -2.0 7.6 12.6 Stockholders' Equity 7,875 9,983 10,921 12,711

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 3,055 3,305 4,666 5,192 P/E (x) - - 18.7 9.8 Net Profit 45 -192 938 1,790 P/CF (x) 3.8 5.8 3.9 3.2 Non-Cash Income and Expense 3,847 3,466 3,727 3,770 P/B (x) 1.8 1.9 1.7 1.5 Depreciation 3,401 3,189 3,391 3,497 EV/EBITDA (x) 5.2 6.8 4.3 3.4 Amortization 66 58 142 142 EPS (W) -96 -289 1,351 2,579 Others -89 -42 50 50 CFPS (W) 5,759 4,388 6,441 7,821 Chg in Working Capital -813 76 140 -72 BPS (W) 12,105 13,246 14,594 17,169 Chg in AR & Other Receivables 138 346 -97 -226 DPS (W) 0 0 0 0 Chg in Inventories 100 27 -254 -218 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -230 -338 380 270 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -24 -45 -139 -295 Revenue Growth (%) -14.1 -2.9 21.8 15.4 Cash Flows from Inv Activities -3,312 -3,860 -3,499 -4,004 EBITDA Growth (%) -41.9 -12.8 51.9 18.5 Chg in PP&E -3,554 -3,094 -3,500 -4,000 Operating Profit Growth (%) -89.1 TTR TTB 64.0 Chg in Intangible Assets -162 -141 -141 -141 EPS Growth (%) TTR RR TTB 90.8 Chg in Financial Assets 322 -694 0 0 Accounts Receivable Turnover (x) 5.9 6.5 8.6 8.9 Others 82 69 143 138 Inventory Turnover (x) 8.4 8.6 9.5 9.3 Cash Flows from Fin Activities 244 1,011 -1,269 -525 Accounts Payable Turnover (x) 13.4 14.2 14.3 13.4 Chg in Financial Liabilities 608 -992 -1,000 -300 ROA (%) -0.3 -1.1 4.9 8.8 Chg in Equity 0 2,328 0 0 ROE (%) -0.7 -2.3 9.0 15.2 Dividends Paid -89 0 0 0 ROIC (%) -1.1 -1.1 7.6 12.5 Others -276 -326 -269 -225 Liability to Equity Ratio (%) 118.9 88.2 76.7 66.9 Increase (Decrease) in Cash -9 454 -102 664 Current Ratio (%) 102.5 120.5 115.2 126.9 Beginning Balance 1,253 1,244 1,698 1,596 Net Debt to Equity Ratio (%) 62.8 30.7 19.9 9.5 Ending Balance 1,244 1,698 1,596 2,260 Interest Coverage Ratio (x) 1.0 -0.4 4.5 8.8 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 85 November 13, 2012 The Age of Transition

LG Electronics (066570 KS) Wonjae Park Still undervalued +822-768-3372 [email protected]  The smartphone market to be favorable for LGE  Earnings at the HE, HA, and air conditioning divisions are improving; Smartphone sales are picking up  Maintain Buy with TP of W101,000

Buy (Maintain) Earnings: We forecast revenues at LG Electronics (LGE), which fell by 2.7% in Target Price (12M, W) 101,000 2011, to drop by 6.2% in 2012. The companyÊs operating profit, which reached as Share Price (11/12/12, W) 76,400 high as W2.68tr in 2009, declined to W176.4bn in 2010 and W280.3bn in 2011. Expected Return (%) 32.2 Although LGEÊs poor results are attributable partially to the global economic EPS Growth (12F, %) TTB Market EPS Growth (12F, %) 8.9 recession, the main reason behind them is the companyÊs disappointing P/E (12F, x) 20.2 performance in the smartphone market. Market P/E (12F, x) 10.2 LGEÊs earnings are improving full swing, with operating profit forecast at W1.21tr in KOSPI 1,900.87 Market Cap (Wbn) 12,503 2012. OP margin at the home entertainment division (HE; includes TVs), which stood Shares Outstanding (mn) 181 at only 0.6% in 2010, is expected to climb to 2.9% in 2012 and 3.3% in 2013, Avg Trading Volume (60D, '000) 1,533 backed by rising revenue contributions from high-end products, including 3D TVs. Avg Trading Value (60D, Wbn) 110 Dividend Yield (12F, %) 0.7 Growth theme: The home appliance (HA) and air conditioning divisions, which had Free Float (%) 65.9 poor performances in 2011 because of a surge in raw material costs, are stabilizing. 52-Week Low (W) 55,800 The HA and air conditioning divisions generated respective operating profits of 52-Week High (W) 94,300 W128.5bn and W11.8bn in 3Q, despite sluggish demand. In 4Q, we forecast the Beta (12M, Daily Rate of Return) 1.08 air conditioning division, which is highly sensitive to seasonal changes, to record Price Return Volatility (12M Daily, %, SD) 2.3 an operating loss of W3.3bn. However, we estimate operating profit at the HA Foreign Ownership (%) 15.1 division to reach W93.8bn. The HA and air conditioning divisions are expected to Major Shareholder(s) LG et al. (33.67%) post a full-year operating profit of W550bn and W150bn, respectively, in 2012. National Pension Service (7.41%) Catalysts & risks: The most notable development at LGE is the likelihood of an Trident Securities Limited et al. (6.15%) uptick in earnings at the mobile communications (MC) division. The MC division Price Performance (%) 1M 6M 12M already swung to an operating profit of W21.5bn in 3Q, aided by the recent launch Absolute 12.0 6.7 21.0 of the Optimus G, on which LG Group has focused its energy. The Optimus G is Relative 13.7 7.6 19.0 being offered by three telecoms in Korea, two in the US, and three in Japan. We estimate sales of the Optimus G reached 480,000 units in October, and project the model to sell 1mn units in 4Q. Furthermore, the smartphone market will likely be favorable for LGE going forward. As smartphone specifications are becoming less differentiated, the company will likely benefit from LG GroupÊs solid supply chain.

Share price § Earnings & Valuation Metrics 160 KOSPI Revenu 150 FY OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 140 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 130 12/10 55,754 177 0.3 1,227 7,345 1,378 -1,019 10.0 15.7 1.6 17.1 120 12/11 54,257 280 0.5 -470 -2,809 1,546 366 -3.7 - 1.1 11.8 110 100 12/12F 50,906 1,210 2.4 683 3,776 2,578 1,031 5.2 20.2 1.1 6.8 90 12/13F 52,760 1,588 3.0 983 5,435 2,877 1,519 7.2 14.1 1.1 5.6 80 12/14F 58,370 2,132 3.7 1,345 7,437 3,401 1,464 9.2 10.3 1.0 4.4 11/11 3/12 7/12 11/12 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

Daewoo Securities Research 86

November 13, 2012 The Age of Transition

Valuation: We forecast the combined 2012 operating profit of the HE, HA, and air conditioning divisions to be W1.35tr. LGEÊs market cap stands at W12.1tr, compared to W10.9tr for Nokia, and W8.5tr for HTC. Given these factors, we believe LGEÊs smartphone business is deeply undervalued. We maintain our Buy call on LGE with a target price of W101,000. We derived our target price by applying a P/B of 1.4x (up from 1.3x; compared to LGEÊs five-year average of 1.8x) to our 2013F BPS of W72,601 (under consolidated K-IFRS). Our target price implies an upside of 29.2% from the current price.

Table 1. Quarterly earnings trends (Wbn, %p, Ê000 units) 2011 2012F 3Q12P

1Q 2Q 3Q 4Q Annual 1Q 2Q 3QP 4QF Annual YoY QoQ Previous Chg Mobile Revenues 2909.1 3245.9 2762.4 2775.1 11692.5 2497.2 2321.2 2,447.5 2,678.2 9,944.1 -11.4 5.4 2,480.3 -1.3 communications Operating profit -100.5 -53.9 -138.8 12.0 -281.2 38.9 -56.7 21.5 16.3 20.0 TTB TTB -2.5 TTB (MC) OP margin (%) -3.5 -1.7 -5.0 0.4 -2.4 1.6 -2.4 0.9 0.6 0.2 5.9 3.3 -0.1 1.0 (Handsets) Revenues 2851.7 3200.1 2689.2 2695.3 11436.3 2452.1 2286.3 2,423.1 2,598.4 9,759.9 -9.9 6.0 2,407.1 0.7 Operating profit -101.1 -54.7 -139.9 9.9 -285.8 35.2 -58.9 20.5 13.0 9.8 TTB TTB -7.2 TTB OP margin (%) -3.5 -1.7 -5.2 0.4 -2.5 1.4 -2.6 0.8 0.5 0.1 6.0 3.4 -0.3 1.1 Revenues 5718.5 5818.5 5740.0 6625.5 23902.5 5330.2 5478.4 5,486.4 6,303.6 22,598.6 -4.4 0.1 5,678.9 -3.4 Home entertainment Operating profit 113.1 97.8 88.6 122.2 421.7 217.1 216.3 88.6 132.4 654.4 0.0 -59.0 133.1 -33.4 (HE) OP margin (%) 2.0 1.7 1.5 1.8 1.8 4.1 3.9 1.6 2.1 2.9 0.1 -2.3 2.3 -0.7 Home appliances Revenues 2607.1 2801.1 2694.8 2978.4 11081.4 2535.7 2875.3 2,867.5 3,127.3 11,405.8 6.4 -0.3 2,762.6 3.8 Operating profit 102.1 58.7 74.3 70.8 305.9 151.6 165.3 128.5 93.8 539.2 72.9 -22.3 106.6 20.6 OP margin (%) 3.9 2.1 2.8 2.4 2.8 6.0 5.7 4.5 3.0 4.7 1.7 -1.3 3.9 0.6 Air conditioning Revenues 1232.8 1659.6 1005.9 686.6 4584.9 1217.9 1474.9 974.3 660.5 4,327.6 -3.1 -33.9 949.8 2.6 & energy solutions (AE) Operating profit 34.1 59.5 1.7 -38.3 57.0 81.1 70.1 11.8 -3.3 159.7 594.1 -83.2 10.2 16.2 OP margin (%) 2.8 3.6 0.2 -5.6 1.2 6.7 4.8 1.2 -0.5 3.7 1.0 -3.5 1.1 0.1 Internal & others Revenues 692.4 860.1 694.1 748.7 2995.3 646.9 709.2 600.1 673.8 2,630.0 -13.5 -15.4 694.1 -13.5 Operating profit -18.0 -3.8 -57.7 -143.6 -223.1 -40.5 -46.0 -29.9 -47.2 -163.6 RR RR -41.6 -28.2 OP margin (%) -2.6 -0.4 -8.3 -19.2 -7.4 -6.3 -6.5 -5.0 -7.0 -6.2 3.3 1.5 -6.0 1.0 Revenues 13159.9 14385.2 12897.2 13814.3 54256.6 12227.9 12859.0 12,375.8 13,443.4 50,906.1 -4.0 -3.8 12,565.7 -1.5 Operating profit 130.8 158.3 -31.9 23.1 280.3 448.2 349.0 220.5 192.1 1,209.8 TTB -36.8 205.6 7.2 OP margin (%) 1.0 1.1 -0.2 0.2 0.5 3.7 2.7 1.8 1.4 2.4 2.0 -0.9 1.6 0.1 Pretax profit 38.5 149.7 -530.9 -56.6 -399.3 449.8 236.1 178.7 176.1 1,040.6 TTB -24.3 141.8 26.0 Pretax margin (%) 0.3 1.0 -4.1 -0.4 -0.7 3.7 1.8 1.4 1.3 2.0 5.6 -0.4 1.1 0.3 Net profit -30.1 97.8 -424.2 -113.2 -469.6 235.7 156.5 151.4 139.3 682.9 TTB -3.2 85.3 77.6 Net margin (%) -0.2 0.7 -3.3 -0.8 -0.9 1.9 1.2 1.2 1.0 1.3 4.5 0.0 0.7 0.5 Handset sales volume 24,451 24,786 21,098 17,685 88,020 13,722 12,998 14,361 15,363 56,444 -31.9 10.5 14,446 -0.6 Smartphone sales volume 4,100 6,200 4,400 5,500 20,200 4,900 5,700 7,000 8,250 25,850 59.1 22.8 6,960 0.6 LCD TV sales volume 9,359 9,113 9,194 10,642 38,308 8,375 8,409 8,649 10,211 35,644 -5.9 2.9 8,784 -1.5 TV sales volume 5,783 5,701 5,679 7,562 24,725 5,819 5,990 6,493 8,325 26,627 14.3 8.4 6,295 3.1 Note: Based on K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 87 November 13, 2012 The Age of Transition

LG Electronics (066570 KS/Buy/TP: W101,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 54,257 50,906 52,760 58,370 Current Assets 15,783 15,637 17,206 19,498 Cost of Sales 42,058 38,722 39,873 43,738 Cash and Cash Equivalents 2,346 2,681 3,719 4,595 Gross Profit 12,199 12,184 12,887 14,631 AR & Other Receivables 7,065 6,876 7,075 7,809 SG&A Expenses 11,856 10,902 11,299 12,499 Inventories 4,947 4,814 5,047 5,565 Operating Profit (Adj) 343 1,282 1,588 2,132 Other Current Assets 1,250 1,216 1,314 1,478 Operating Profit 280 1,210 1,588 2,132 Non-Current Assets 16,875 16,366 16,340 16,438 Non-Operating Profit -680 -169 -149 -106 Investments in Associates 5,603 5,421 5,421 5,421 Net Financial Income 228 226 177 133 Property, Plant and Equipment 7,290 7,231 7,148 7,108 Net Gain from Inv in Associates -331 39 0 0 Intangible Assets 1,036 1,022 980 950 Pretax Profit -399 1,041 1,438 2,026 Total Assets 32,659 32,003 33,546 35,937 Income Tax 34 341 431 648 Current Liabilities 14,215 13,401 14,066 15,318 Profit from Continuing Operations -433 700 1,007 1,378 AP & Other Payables 7,360 7,162 7,740 8,710 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3,192 2,674 2,474 2,274 Net Profit -433 700 1,007 1,378 Other Current Liabilities 3,663 3,564 3,852 4,334 Controlling Interests -470 683 983 1,345 Non-Current Liabilities 5,296 4,966 5,093 5,201 Non-Controlling Interests 37 17 24 33 Long-Term Financial Liabilities 4,258 3,754 3,504 3,204 Total Comprehensive Profit -642 535 842 1,213 Other Non-Current Liabilities 615 598 784 1,001 Controlling Interests -692 499 799 1,161 Total Liabilities 19,510 18,367 19,159 20,518 Non-Controlling Interests 50 37 44 53 Controlling Interests 12,894 13,356 14,063 15,042 EBITDA 1,546 2,578 2,877 3,401 Capital Stock 904 904 904 904 FCF (Free Cash Flow) 366 1,031 1,519 1,464 Capital Surplus 2,862 3,100 3,100 3,100 EBITDA Margin (%) 2.9 5.1 5.5 5.8 Retained Earnings 9,500 10,100 10,992 12,155 Operating Profit Margin (%) 0.5 2.4 3.0 3.7 Non-Controlling Interests 254 280 324 376 Net Profit Margin (%) -0.9 1.3 1.9 2.3 Stockholders' Equity 13,148 13,636 14,387 15,418

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 1,881 2,518 2,922 2,892 P/E (x) - 20.2 14.1 10.3 Net Profit -433 700 1,007 1,378 P/CF (x) 17.0 7.0 6.1 5.3 Non-Cash Income and Expense 3,733 2,681 1,870 2,024 P/B (x) 1.1 1.1 1.1 1.0 Depreciation 896 948 948 941 EV/EBITDA (x) 11.8 6.8 5.6 4.4 Amortization 306 348 342 329 EPS (W) -2,809 3,776 5,435 7,437 Others -1,843 -828 27 27 CFPS (W) 4,383 10,942 12,565 14,456 Chg in Working Capital -1,060 -626 476 139 BPS (W) 65,823 68,455 72,601 78,176 Chg in AR & Other Receivables 230 -205 -200 -734 DPS (W) 200 500 1,000 1,500 Chg in Inventories 769 47 -232 -519 Payout ratio (%) -7.9 13.3 18.5 20.2 Chg in AP & Other Payables -345 1,654 578 969 Dividend Yield (%) 0.3 0.7 1.3 2.0 Income Tax Paid -359 -237 -431 -648 Revenue Growth (%) -2.7 -6.2 3.6 10.6 Cash Flows from Inv Activities -2,293 -801 -1,055 -1,068 EBITDA Growth (%) 12.2 66.8 11.6 18.2 Chg in PP&E -1,752 -929 -865 -901 Operating Profit Growth (%) 58.8 331.6 31.2 34.3 Chg in Intangible Assets -304 -299 -299 -299 EPS Growth (%) TTR TTB 43.9 36.8 Chg in Financial Assets -131 113 0 0 Accounts Receivable Turnover (x) 7.9 7.6 7.9 8.2 Others -106 314 110 133 Inventory Turnover (x) 10.0 10.4 10.7 11.0 Cash Flows from Fin Activities 850 -1,335 -828 -949 Accounts Payable Turnover (x) 9.6 9.4 9.5 9.5 Chg in Financial Liabilities 228 -981 -450 -500 ROA (%) -1.3 2.2 3.1 4.0 Chg in Equity 976 9 0 0 ROE (%) -3.7 5.2 7.2 9.2 Dividends Paid -43 -37 -91 -182 ROIC (%) 3.1 7.9 10.2 13.6 Others -311 -307 -287 -267 Liability to Equity Ratio (%) 148.4 134.7 133.2 133.1 Increase (Decrease) in Cash 401 335 1,039 876 Current Ratio (%) 111.0 116.7 122.3 127.3 Beginning Balance 1,944 2,346 2,681 3,719 Net Debt to Equity Ratio (%) 37.5 27.1 15.3 5.4 Ending Balance 2,346 2,681 3,719 4,595 Interest Coverage Ratio (x) 0.9 3.8 5.5 8.0 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 88 November 13, 2012 The Age of Transition

Samsung Electro-Mechanics (009150 KS) Wonjae Park Premium to valuation justified +822-768-3372 [email protected]  2013 outlook: Revenues and operating profit expected to hit record highs  Valuation premium justified in light of stable profitability, growth potential  We maintain our Buy call with TP of W130,000

Buy (Maintain) Earnings: After showing robust revenue growth of more than 20% since 2008, Samsung Electro-Mechanics (SEMCO) stagnated in 2011 with revenue growth of Target Price (12M, W) 130,000 only 0.3%. This stagnation was related to weak earnings at the LED unit, and the Share Price (11/12/12, W) 94,300 companyÊs sale of that unit. However, we forecast SEMCOÊs 2012 revenues to Expected Return (%) 37.9 EPS Growth (12F, %) 35.5 expand 13.4% to W7.92tr on the back of Samsung ElectronicsÊ (SEC) strong Market EPS Growth (12F, %) 8.9 smartphone sales. The outlook for SEMCOÊs profitability is also bright. The P/E (12F, x) 15.5 companyÊs operating profit declined 55.4% to W347.1bn in 2011, from the 2010 Market P/E (12F, x) 10.2 level of W779bn. But we forecast SEMCOÊs 2012 operating profit to jump 85.8% KOSPI 1,900.87 to W645bn. Stripping away the previous high set in 2010 (caused by its strong Market Cap (Wbn) 7,044 LED business), this figure should represent the companyÊs historic yearly high. Shares Outstanding (mn) 78 Avg Trading Volume (60D, '000) 628 Growth theme: SEMCOÊs 3Q12 revenues came in at W2.18tr (up 39% YoY), Avg Trading Value (60D, Wbn) 59 exceeding W2tr for the first time in its history. We anticipate SEMCOÊs earnings to Dividend Yield (12F, %) 0.8 stay strong through 2013; for the year, we forecast the companyÊs revenues and Free Float (%) 76.2 operating profit to reach W8.58tr and W723.1bn (up 12.1% YoY), respectively. In 52-Week Low (W) 68,100 52-Week High (W) 112,500 particular, revenues should reach W8tr for the first time in SEMCOÊs history. Beta (12M, Daily Rate of Return) 1.22 Catalyst: We expect SEMCOÊs strong earnings to be driven by its robust substrate Price Return Volatility (12M Daily, %, SD) 2.1 business at the ACI division. SECÊs strong smartphone sales are positively Foreign Ownership (%) 18.5 Major Shareholder(s) affecting the HDI substrate division, and the FC-CSP division is showing top-line SEC et al. (23.71%) growth from the expansion of the smartphone market. We estimate the 3Q OP Capital Research and Management margin at the ACI division at 15.2%. The camera-module business at the OMS Company(CRMC) et al. (11.46%) division also remained robust. This divisionÊs quarterly revenues have improved to National Pension Service(6.07%) W500bn (vs. W100bn seen in the past) largely from SECÊs robust smartphone Price Performance sales. We estimate the OMS divisionÊs OP margin has improved to 6%. (%) 1M 6M 12M Absolute 7.2 -11.9 20.6 Risks: One concern about SEMCO is that the companyÊs current earnings are too Relative 8.8 -11.0 18.6 good. Investors are worrying that the companyÊs earnings might have peaked, and thus could deteriorate going forward. However, we believe downward pricing pressures could be offset by fixed-cost savings from top-line growth. We also expect SEMCOÊs MLCC division to expand into the non-IT market and increase exports to Chinese companies. We advise investors to focus more on SEMCOÊs improved profit structure rather than on overblown concerns.

Share price § Earnings & Valuation Metrics 140 KOSPI FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 130

120 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 110 12/10 5,651 498 8.8 555 7,148 985 -439 18.3 17.4 2.8 10.8 100 12/11 6,032 321 5.3 350 4,504 942 -504 10.0 17.3 1.7 7.8 90 12/12F 7,924 645 8.1 473 6,101 1,179 -186 12.9 15.5 2.0 7.2 80 12/13F 8,585 723 8.4 546 7,033 1,355 30 13.5 13.4 1.8 6.3 70 12/14F 9,316 837 9.0 621 7,997 1,556 1 13.9 11.8 1.6 5.6 11/11 3/12 7/12 11/12 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 89 November 13, 2012 The Age of Transition

Valuation: We maintain our Buy call on SEMCO with a 12-month target price of W130,000. We arrived at our target price by applying a P/B of 2.52x to our 2013F BPS of W51,483 (under consolidated K-IFRS). Our target P/B might not appear undemanding. However, we believe our multiple is justified, given: 1) SEMCOÊs earnings are likely to continue to grow, thanks to SECÊs robust smartphone sales; and 2) the companyÊs quarterly operating profit has stabilized at more than W150bn, largely from margin expansion at the MLCC capacitor and HDI substrate divisions.

Table 1. Quarterly earnings (Wbn, W, %p) 2011 2012F 3Q12P

1Q 2Q 3Q 4Q Annual 1Q 2Q 3QP 4QF Annual YoY QoQ Previous chg Revenues ACI 351.2 376.6 414.8 459.4 1,602.0 500.7 555.3 530.0 518.7 2,104.7 27.8 -4.5 569.4 -6.9 LCR 429.6 433.1 427.5 399.0 1,689.2 440.5 473.3 512.2 455.6 1,881.6 19.8 8.2 511.7 0.1 CDS 440.0 381.6 391.7 426.4 1,639.7 382.5 393.7 477.8 476.0 1,730.0 22.0 21.4 400.3 19.4 OMS 177.3 209.0 336.8 378.8 1,101.9 424.0 485.7 663.1 635.2 2,208.0 96.9 36.5 546.1 21.4 Total 1,398.1 1,400.3 1,570.8 1,663.6 6,032.8 1,747.7 1,907.9 2,183.1 2,085.5 7,924.3 39.0 14.4 2,027.5 7.7 Operating profit ACI 16.5 18.5 21.6 44.6 101.1 53.6 78.3 80.6 75.2 287.6 273.5 2.9 84.7 -4.9 LCR 64.0 58.5 41.5 23.5 187.5 28.6 43.1 50.2 41.0 162.9 21.0 16.6 62.7 -20.0 CDS 4.7 -14.8 9.3 11.2 10.4 5.0 11.5 27.9 26.2 70.5 198.3 142.5 12.9 116.2 OMS -12.4 6.4 8.2 19.7 21.9 19.5 23.3 41.8 39.4 124.0 408.6 79.2 27.3 53.0 Total 72.8 68.5 80.6 99.0 320.9 106.7 156.2 200.4 181.8 645.0 148.7 28.3 187.6 6.8 OP margin ACI 4.7 4.9 5.2 9.7 6.3 10.7 14.1 15.2 14.5 13.7 10.0 1.1 14.9 0.3 LCR 14.9 13.5 9.7 5.9 11.1 6.5 9.1 9.8 9.0 8.7 0.1 0.7 12.3 -2.5 CDS 1.1 -3.9 2.4 2.6 0.6 1.3 2.9 5.8 5.5 4.1 3.4 2.9 3.2 2.6 OMS -7.0 3.1 2.4 5.2 2.0 4.6 4.8 6.3 6.2 5.6 3.9 1.5 5.0 1.3 Total 5.2 4.9 5.1 6.0 5.3 6.1 8.2 9.2 8.7 8.1 4.0 1.0 9.3 -0.1 Pretax profit 90.1 61.1 51.4 175.4 378.0 98.8 144.7 190.9 177.8 612.2 271.3 31.9 176.6 8.1 Net profit 85.6 54.1 64.9 144.9 349.5 69.5 135.2 139.1 129.7 473.4 149.7 94.5 119.7 16.2 Pretax margin 6.4 4.4 3.3 10.5 6.3 5.7 7.6 8.7 8.5 7.7 5.5 1.2 8.7 0.0 Net margin 6.1 3.9 4.1 8.7 5.8 4.0 7.1 6.4 6.2 6.0 2.2 -0.7 5.9 0.5 Note: Based on K-IFRS Source: Company data, KDB Daewoo Securities Research

Daewoo Securities Research 90

November 13, 2012 The Age of Transition

Samsung Electro-Mechanics (009150 KS/Buy/TP: W130,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 6,032 7,924 8,585 9,316 Current Assets 3,697 2,854 2,996 3,345 Cost of Sales 5,050 6,444 6,944 7,484 Cash and Cash Equivalents 526 620 677 744 Gross Profit 981 1,480 1,641 1,833 AR & Other Receivables 882 1,144 1,189 1,335 SG&A Expenses 704 846 917 996 Inventories 761 972 1,010 1,134 Operating Profit (Adj) 278 634 723 837 Other Current Assets 1,502 91 94 106 Operating Profit 321 645 723 837 Non-Current Assets 3,632 4,366 4,824 5,292 Non-Operating Profit 43 -33 -12 -12 Investments in Associates 41 38 38 38 Net Financial Income 35 61 60 60 Property, Plant and Equipment 2,278 2,756 3,232 3,711 Net Gain from Inv in Associates -1 -4 0 0 Intangible Assets 56 259 237 219 Pretax Profit 364 612 711 825 Total Assets 7,329 7,220 7,820 8,637 Income Tax 56 164 191 230 Current Liabilities 2,711 2,104 2,148 2,292 Profit from Continuing Operations 309 448 521 596 AP & Other Payables 605 839 872 979 Profit from Discontinued Operations 84 27 27 27 Short-Term Financial Liabilities 1,096 973 973 973 Net Profit 392 475 548 623 Other Current Liabilities 1,011 292 303 340 Controlling Interests 350 473 546 621 Non-Current Liabilities 742 1,206 1,358 1,568 Non-Controlling Interests 43 2 2 2 Long-Term Financial Liabilities 495 752 752 808 Total Comprehensive Profit 155 393 466 541 Other Non-Current Liabilities 171 292 359 428 Controlling Interests 108 384 456 531 Total Liabilities 3,453 3,310 3,506 3,860 Non-Controlling Interests 47 10 10 10 Controlling Interests 3,507 3,836 4,230 4,683 EBITDA 942 1,179 1,355 1,556 Capital Stock 388 388 388 388 FCF (Free Cash Flow) -504 -186 30 1 Capital Surplus 1,046 1,045 1,045 1,045 EBITDA Margin (%) 15.6 14.9 15.8 16.7 Retained Earnings 1,529 1,922 2,405 2,948 Operating Profit Margin (%) 5.3 8.1 8.4 9.0 Non-Controlling Interests 368 74 84 94 Net Profit Margin (%) 5.8 6.0 6.4 6.7 Stockholders' Equity 3,876 3,910 4,313 4,777

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 459 1,035 1,233 1,296 P/E (x) 17.3 15.5 13.4 11.8 Net Profit 392 475 548 623 P/CF (x) 6.0 7.2 6.2 5.5 Non-Cash Income and Expense 842 729 835 961 P/B (x) 1.7 2.0 1.8 1.6 Depreciation 648 519 603 694 EV/EBITDA (x) 7.8 7.2 6.3 5.6 Amortization 15 26 29 26 EPS (W) 4,504 6,101 7,033 7,997 Others -102 26 34 34 CFPS (W) 13,055 13,129 15,180 17,269 Chg in Working Capital -691 -22 41 -58 BPS (W) 44,570 46,134 51,483 57,558 Chg in AR & Other Receivables -272 -295 -45 -146 DPS (W) 750 800 1,000 1,300 Chg in Inventories -263 -16 -38 -124 Payout ratio (%) 16.7 13.2 14.3 16.3 Chg in AP & Other Payables 72 204 33 107 Dividend Yield (%) 1.0 0.9 1.1 1.4 Income Tax Paid -84 -146 -191 -230 Revenue Growth (%) 6.7 31.4 8.3 8.5 Cash Flows from Inv Activities -959 -739 -1,076 -1,168 EBITDA Growth (%) -4.4 25.2 15.0 14.8 Chg in PP&E -1,070 -1,006 -1,080 -1,172 Operating Profit Growth (%) -35.6 101.0 12.1 15.7 Chg in Intangible Assets -6 -8 -8 -8 EPS Growth (%) -37.0 35.5 15.3 13.7 Chg in Financial Assets 142 375 0 0 Accounts Receivable Turnover (x) 7.7 8.4 8.0 8.0 Others -25 -100 12 12 Inventory Turnover (x) 8.0 9.2 8.7 8.7 Cash Flows from Fin Activities 315 -225 -101 -61 Accounts Payable Turnover (x) 15.6 17.5 16.6 16.7 Chg in Financial Liabilities 471 -84 0 0 ROA (%) 5.5 6.5 7.3 7.6 Chg in Equity 4 4 0 0 ROE (%) 10.0 12.9 13.5 13.9 Dividends Paid -88 -58 -62 -78 ROIC (%) 7.1 12.5 12.1 12.2 Others -72 -87 -39 -39 Liability to Equity Ratio (%) 89.1 84.7 81.3 80.8 Increase (Decrease) in Cash -170 94 56 68 Current Ratio (%) 136.4 135.6 139.5 145.9 Beginning Balance 695 526 620 677 Net Debt to Equity Ratio (%) 26.8 27.6 23.7 21.2 Ending Balance 526 620 677 744 Interest Coverage Ratio (x) 7.0 9.0 10.1 11.6 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 91 November 13, 2012 The Age of Transition

Samsung SDI (006400 KS) Jonathan Hwang Momentum from tablet PCs and polymer batteries +822-768-4140 [email protected]  2013 outlook: Revenues and OP to grow to W6.0tr (up 3%) and W341bn (up 15%)  Reducing dependence on Apple; Customer base being diversified  We maintain our Buy call with TP of W190,000

2013 earnings: For 2013, we forecast Samsung SDIÊs rechargeable battery Buy (Maintain) revenues to hit W3.7tr because, thanks to growing demand for polymer batteries, Target Price (12M, W) 190,000 we project: 1) shipments to expand 13% and 2) blended ASP to rise 2%. On the Share Price (11/12/12, W) 149,500 other hand, revenues at the PDP and CRT units are forecast to decrease 13% to Expected Return (%) 27.1 W1.7tr and 15% to W292bn, respectively. Although the average US$/W rate is EPS Growth (12F, %) 383.0 likely to decline 6%, we expect the companyÊs 2013 earnings to improve, with Market EPS Growth (12F, %) 8.9 revenues of W6.0tr (up 3% YoY) and an operating profit of W341bn (up 15% YoY). P/E (12F, x) 4.6 Market P/E (12F, x) 10.2 Growth theme: With the launch of Windows 8, PC makers are likely to roll out KOSPI 1,900.87 hybrid PCs and smart PCs. As such, we forecast shipments of tablet PCs to surge Market Cap (Wbn) 6,811 64% YoY to 180mn units in 2013. Since polymer batteries used in tablet PCs Shares Outstanding (mn) 47 require customized production, their replacement costs are high. Thus, Avg Trading Volume (60D, '000) 256 manufacturers tend to turn to existing suppliers. Samsung SDI has the largest Avg Trading Value (60D, Wbn) 38 global rechargeable battery market share, at 27%. In the polymer battery sector, Dividend Yield (12F, %) 1.3 the companyÊs market share is even higher (45%). Free Float (%) 74.5 52-Week Low (W) 115,500 Catalysts: Some market watchers are worried about the decline in the companyÊs 52-Week High (W) 171,500 supply to Apple. However, it should be noted that polymer battery demand is likely to Beta (12M, Daily Rate of Return) 1.04 be driven by Android-powered and Microsoft-powered tablet PCs next year. As such, Price Return Volatility (12M Daily, %, SD) 2.1 the companyÊs efforts to reduce dependence on Apple and diversify its customer base Foreign Ownership (%) 19.4 should enable it to show stable earnings growth. In addition, higher-definition displays Major Shareholder(s) should lead to an increase in power consumption. To maintain the same battery life, Samsung Electronics et al. (20.55%) manufacturers need to improve battery capacity. Their adoption of higher-capacity National Pension Service (9.14%) batteries should lead to improvements in Samsung SDIÊs ASP and margins. Korea Investment Trust Management (8.03%) Risks: Nevertheless, we believe Samsung SDI may experience a steady decline in Price Performance cylinder-type battery shipments in light of sluggish laptop sales. We believe the (%) 1M 6M 12M company needs to secure orders from electronic tool manufacturers and e-bike Absolute 1.0 -9.7 15.0 manufacturers. As for the companyÊs loss-incurring businesses, the solar cell, Relative 2.7 -8.8 13.0 energy storage system, and EV battery units are likely to remain in the red through 2013, but their losses are also likely to decline YoY.

Valuation: We maintain our Buy call on Samsung SDI, with a target price of W190,000. Thanks to gains (W1.4tr) from the sale of Samsung Mobile Display (SMD) shares, the companyÊs BPS expanded 20% from W137,753 to W165,397. Taking into account this BPS increase, the companyÊs share price would correspond to a P/B of only 0.8x.

Share price § Earnings & Valuation Metrics 130 KOSPI FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 120 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 110 12/10 5,124 287 5.6 356 7,548 610 100 6.5 22.3 1.3 11.8 100 12/11 5,444 204 3.7 320 6,785 549 -130 5.3 19.7 1.0 11.6 90 12/12F 5,827 297 5.1 1,546 32,771 722 266 23.1 4.6 1.0 10.2 80 12/13F 5,990 341 5.7 583 12,351 796 196 7.9 12.1 0.9 9.3 70 12/14F 6,488 527 8.1 697 14,776 973 192 9.1 10.1 0.9 7.7 11/11 3/12 7/12 11/12 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

Daewoo Securities Research 92

November 13, 2012 The Age of Transition

Table 1. Consolidated earnings forecasts (under K-IFRS) (Wbn, %) 1Q12 2Q12 3Q12P 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2012F 2013F 2014F Shipments (mn units) CRT 3.0 3.0 2.1 2.6 2.7 2.7 1.9 2.3 10.8 9.8 9.0 PDP 1.7 1.6 1.8 1.8 1.7 1.7 1.8 1.8 6.9 7.0 6.7 Rechargeable batteries 254 293 294 297 293 312 344 337 1,139 1,287 1,519 ASP (US$) CRT 28 27 31 27 28 27 31 27 28 28 29 PDP 275 260 245 241 236 234 232 229 255 233 221 Rechargeable batteries 2.6 2.6 2.7 2.8 2.7 2.7 2.7 2.7 2.7 2.7 2.6 Revenues (Wbn) 1,377 1,477 1,503 1,470 1,446 1,484 1,554 1,505 5,827 5,990 6,488 CRT 95 96 76 77 82 81 63 66 344 292 271 PDP 520 494 499 470 436 418 441 430 1,983 1,726 1,548 Rechargeable batteries 743 873 904 896 871 920 981 935 3,416 3,707 4,174 Other/PV 18 14 24 28 57 65 70 73 84 265 495 Operating profit (Wbn) 67 84 86 60 49 85 111 97 296 341 527 CRT 1 1 -3 0 0 0 0 0 -1 1 -1 PDP 0 11 5 3 0 1 6 7 19 15 22 Rechargeable batteries 68 92 104 99 83 113 135 114 363 445 445 Other/PV -2 -20 -20 -42 -35 -30 -30 -25 -84 -120 60 OP margin (%) 4.9 5.7 5.7 4.1 3.4 5.7 7.1 6.4 5.1 5.7 8.1 CRT 1.0 1.0 -3.7 0.0 0.5 0.5 0.5 0.5 -0.3 0.5 -0.3 PDP 0.0 2.2 1.0 0.7 0.1 0.3 1.3 1.7 0.9 0.9 1.5 Rechargeable batteries 9.2 10.5 11.5 11.0 9.5 12.3 13.8 12.2 10.6 12.0 10.7 Net profit (Wbn) 112 105 1,199 130 113 142 169 159 1,546 583 697 SMD equity-method gains 103 90 131 119 107 110 121 123 442 462 434 Net margin (%) 8.1 7.1 79.8 8.8 7.8 9.5 10.8 10.6 26.5 9.7 10.7 EBITDA (Wbn) 138 213 210 182 138 213 210 182 744 744 744 EBITDA margin (%) 10.0 14.4 14.0 12.4 9.5 14.4 13.5 12.1 12.8 12.4 11.5 % growth (QoQ/YoY) Shipments CRT 5.4 0.0 -29.4 21.0 5.4 0.0 -29.4 21.0 -7.7 -10.0 -7.7 PDP -9.1 -1.8 9.4 -0.7 -4.8 -2.2 9.1 -1.0 1.1 1.0 -3.9 Rechargeable batteries 6.0 15.3 0.3 1.0 -1.3 6.6 10.3 -2.2 12.3 13.0 18.0 ASP CRT 2.2 -0.6 12.8 -12.7 2.2 -0.6 12.8 -12.7 2.5 0.0 2.5 PDP -6.9 -5.2 -6.0 -1.5 -2.0 -1.0 -1.0 -1.0 -12.6 -8.8 -5.0 Rechargeable batteries 3.1 0.0 5.0 2.0 -1.0 0.0 -1.0 -2.0 8.9 1.9 -3.0 Revenues -4.2 7.3 1.8 -2.2 -1.6 2.6 4.8 -3.2 7.0 2.8 8.3 CRT 6.4 1.2 -21.7 1.6 7.2 -1.6 -22.2 5.1 -3.7 -15.0 -7.2 PDP -16.4 -5.1 1.1 -5.9 -7.1 -4.1 5.5 -2.4 -10.4 -13.0 -10.3 Rechargeable batteries 8.0 17.5 3.5 -0.9 -2.8 5.6 6.6 -4.6 24.4 8.5 12.6 Other/PV -52.1 -23.6 75.3 15.4 103.6 13.9 7.4 4.5 -34.7 214.4 87.0 Operating profit 503.4 24.8 2.3 -29.4 -19.6 74.7 31.0 -13.1 45.5 15.0 54.5 CRT 112.7 1.2 TTR TTB - -1.6 -22.2 5.1 TTR TTB TTR PDP TTR TTB -55.2 -28.3 -85.9 180.8 307.4 31.2 111.5 -21.6 52.4 Rechargeable batteries 56.5 34.7 12.7 -4.5 -16.4 36.8 19.6 -15.8 38.9 22.7 0.1 Other/PV RR RR RR RR RR RR RR RR RR RR TTB Net profit 103.9 -6.0 1,038.7 -89.2 -12.8 25.1 19.0 -5.5 382.6 -62.3 19.6 SMD equity-method gains 22.1 -12.4 46.4 -9.8 -9.4 2.7 9.8 1.6 54.1 4.4 -6.1 EBITDA 0.2 54.4 -1.3 -13.4 -24.2 54.4 -1.3 -13.4 35.5 0.0 0.0 Notes: RR, TTR, and TTB refer to „remaining red,‰ ‰turning to red,‰ and ‰turning to black,‰ respectively. 3Q12P operating profit figures exclude one-off profits. Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 93 November 13, 2012 The Age of Transition

Samsung SDI (006400 KS/Buy/TP: W190,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 5,444 5,827 5,990 6,488 Current Assets 2,364 2,389 3,218 3,354 Cost of Sales 4,761 4,997 5,109 5,367 Cash and Cash Equivalents 758 750 1,541 1,539 Gross Profit 683 830 881 1,121 AR & Other Receivables 844 863 884 957 SG&A Expenses 573 585 540 594 Inventories 584 597 611 662 Operating Profit (Adj) 110 245 341 527 Other Current Assets 150 153 157 170 Operating Profit 204 297 341 527 Non-Current Assets 6,163 7,617 7,848 8,180 Non-Operating Profit 274 1,856 462 434 Investments in Associates 1,899 2,333 2,795 3,228 Net Financial Income 0 -5 4 9 Property, Plant and Equipment 1,827 1,731 1,807 1,987 Net Gain from Inv in Associates 285 437 462 434 Intangible Assets 140 134 117 106 Pretax Profit 478 2,153 803 961 Total Assets 8,527 10,006 11,066 11,534 Income Tax 127 568 161 192 Current Liabilities 1,750 1,706 1,730 1,816 Profit from Continuing Operations 351 1,584 642 769 AP & Other Payables 524 536 548 594 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 761 695 695 695 Net Profit 351 1,584 642 769 Other Current Liabilities 465 475 487 527 Controlling Interests 320 1,546 583 697 Non-Current Liabilities 463 766 1,537 1,540 Non-Controlling Interests 31 38 60 72 Long-Term Financial Liabilities 0 260 1,023 1,023 Total Comprehensive Profit 157 1,293 351 477 Other Non-Current Liabilities 431 467 468 470 Controlling Interests 125 1,243 280 394 Total Liabilities 2,213 2,472 3,267 3,356 Non-Controlling Interests 32 50 71 83 Controlling Interests 6,118 7,296 7,489 7,786 EBITDA 549 722 796 973 Capital Stock 241 241 241 241 FCF (Free Cash Flow) -130 266 196 192 Capital Surplus 1,258 1,258 1,258 1,258 EBITDA Margin (%) 10.1 12.4 13.3 15.0 Retained Earnings 3,611 5,090 5,586 6,185 Operating Profit Margin (%) 3.7 5.1 5.7 8.1 Non-Controlling Interests 196 238 309 392 Net Profit Margin (%) 5.9 26.5 9.7 10.7 Stockholders' Equity 6,315 7,534 7,798 8,178

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 279 213 625 720 P/E (x) 19.7 4.6 12.1 10.1 Net Profit 351 1,584 642 769 P/CF (x) 8.3 3.5 6.8 6.2 Non-Cash Income and Expense 221 -826 153 204 P/B (x) 1.0 1.0 0.9 0.9 Depreciation 417 443 424 420 EV/EBITDA (x) 11.6 10.2 9.3 7.7 Amortization 22 34 31 26 EPS (W) 6,785 32,771 12,351 14,776 Others -94 1,410 4 9 CFPS (W) 16,083 42,872 21,984 24,228 Chg in Working Capital -275 -31 -10 -61 BPS (W) 130,331 155,387 159,828 166,365 Chg in AR & Other Receivables -72 -90 -20 -74 DPS (W) 1,500 2,000 2,250 0 Chg in Inventories 0 -21 -14 -51 Payout ratio (%) 21.0 5.6 16.7 0.0 Chg in AP & Other Payables -51 49 13 46 Dividend Yield (%) 1.1 1.3 1.5 0.0 Income Tax Paid -18 -515 -161 -192 Revenue Growth (%) 6.2 7.0 2.8 8.3 Cash Flows from Inv Activities -840 -352 -514 -627 EBITDA Growth (%) -10.0 31.6 10.2 22.3 Chg in PP&E -407 -361 -500 -600 Operating Profit Growth (%) -29.0 45.8 14.8 54.5 Chg in Intangible Assets -23 -14 -14 -14 EPS Growth (%) -10.1 383.0 -62.3 19.6 Chg in Financial Assets 0 0 0 0 Accounts Receivable Turnover (x) 7.3 7.3 7.3 7.5 Others -411 24 0 -12 Inventory Turnover (x) 10.2 9.9 9.9 10.2 Cash Flows from Fin Activities 251 128 679 -94 Accounts Payable Turnover (x) 14.2 15.2 15.3 15.7 Chg in Financial Liabilities 355 136 400 0 ROA (%) 4.3 17.1 6.1 6.8 Chg in Equity 6 2 0 0 ROE (%) 5.3 23.1 7.9 9.1 Dividends Paid -77 -67 -87 -98 ROIC (%) 3.3 6.9 10.4 15.2 Others -34 -1 2 3 Liability to Equity Ratio (%) 35.0 32.8 41.9 41.0 Increase (Decrease) in Cash -309 -8 791 -1 Current Ratio (%) 135.1 140.0 186.0 184.7 Beginning Balance 1,066 758 750 1,541 Net Debt to Equity Ratio (%) -0.4 2.4 2.0 1.9 Ending Balance 758 750 1,541 1,539 Interest Coverage Ratio (x) 176.9 180.2 154.7 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 94 November 13, 2012 The Age of Transition

SFA Engineering (056190 KQ) Jonathan Hwang A step backward for a giant leap forward next year +822-768-3722 [email protected]  2013 outlook: Revenues of W849.9bn (up 46%); OP of W105.4bn (up 29%)  Orders for front-end process equipment to come in starting in 2013  Maintain Buy with TP of W60,000

Buy (Maintain) 2013 earnings: SFA EngineeringÊs orders are forecast to fall by 17% YoY in 2012, as its major customers have been focusing on pilot lines and the development of Target Price (12M, W) 60,000 flexible and large-area OLEDs, rather than capacity expansion. However, the Share Price (11/12/12, W) 41,000 companyÊs orders are expected to increase by 23% to W784bn in 2013, as a Expected Return (%) 46.3 EPS Growth (12F, %) -4.8 customer should start commercial production of flexible OLEDs (UBP) and OLED Market EPS Growth (12F, %) 8.9 TVs. In particular, front-end process equipment orders are anticipated to soar by P/E (12F, x) 10.2 89% YoY to W267bn. Market P/E (12F, x) 10.2 KOSDAQ 521.43 Growth theme: With the spread of high-resolution smartphones and tablets, Market Cap (Wbn) 736 hardware differentiation is being increasingly diluted. Given that further Shares Outstanding (mn) 18 enhancement in display resolution will no longer provide notable benefits to the Avg Trading Volume (60D, '000) 77 human eye, form factor is expected to become a major differentiating factor for Avg Trading Value (60D, Wbn) 4 displays. In particular, the thickness and weight of flexible OLEDs, which use Dividend Yield (12F, %) 3.7 polyimide substrate (vs. glass) and film encapsulation (vs. glass encapsulation), can Free Float (%) 48.2 be reduced to one-sixth and one-third of those of LCDs, respectively. 52-Week Low (W) 39,750 52-Week High (W) 67,500 Catalysts: 1) SFAÊs OLED equipment lineup is expected to expand full swing. Beta (12M, Daily Rate of Return) 0.66 Although the company has won orders mainly for logistical equipment so far, it is Price Return Volatility (12M Daily, %, SD) 2.1 expected to receive orders for front-end process (e.g., deposition, PE-CVD, etc.) Foreign Ownership (%) 7.1 Major Shareholder(s) equipment starting in 2013. As such, the company is projected to be re-evaluated DY Asset et al. (46.97%) as a global OLED equipment maker. Korea Investment Trust Management (14.71%) 2) Since Apple has significantly reduced the thickness and weight of the iPhone 5 through in-cell touch panels, we believe that it is urgent for SEC to apply UBPs to its Price Performance products. In order to do so next year, SEC needs to embark on capacity expansion (%) 1M 6M 12M immediately. Absolute -10.5 -27.9 -34.9 Relative -8.8 -27.1 -36.9 Risks: With the commercial production of flexible OLEDs and large-area OLED TVs being delayed, orders at SFA Engineering declined markedly this year. As for flexible OLEDs, the yields of organic material deposition on polyimide substrate and film encapsulation appear low. If these technological issues are not addressed, OLED equipment orders could be further delayed.

Share price § Earnings & Valuation Metrics 120 KOSDAQ FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 110

100 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 90 12/10 632 71 11.1 56 3,138 71 67 22.2 15.6 3.0 9.9 80 12/11 753 92 12.2 76 4,212 101 86 24.2 14.5 3.1 8.4 70 12/12F 583 82 14.0 72 4,010 75 20 19.5 10.2 2.0 6.0 60 12/13F 850 105 12.4 88 4,907 111 64 20.8 8.4 1.8 3.4 50 12/14F 916 122 13.3 101 5,600 128 85 20.6 7.3 1.6 2.3 11/11 3/12 7/12 11/12 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 95 November 13, 2012 The Age of Transition

Valuation: We maintain our Buy call on SFA Engineering with a target price of W60,000. The shares are being traded at a 12-month forward P/E of 9.4x, lower than the average P/E of global equipment makers. We believe that this is an opportune time to buy the shares, given that the company is repurchasing its shares to stabilize its share price and utilize its free cash flow.

Table 1. Quarterly earnings trends and forecasts (under non-consolidated K-IFRS) (Wbn, %) 1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2012F 2013F 2014F New orders 113 120 122 284 155 184 213 233 639 784 955 Revenues 100 101 110 271 163 177 244 266 583 850 916 Process & precision 17 23 32 58 43 50 73 86 129 252 334 Material handling systems 83 78 79 213 120 127 171 180 454 598 581 Proportion of revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Process & precision 17.0 22.8 28.6 21.2 26.2 28.3 30.0 32.3 22.2 29.6 36.5 Material handling systems 83.0 77.2 71.4 78.8 73.8 71.7 70.0 67.7 77.8 70.4 63.5 Operating profit 19.7 12.0 14.0 36.0 20.0 20.1 31.1 34.2 81.7 105.4 121.7 OP margin 19.7 11.8 12.7 13.3 12.3 11.3 12.7 12.9 14.0 12.4 13.3 Net profit 17.2 11.8 12.9 30.1 17.0 17.1 25.7 28.2 72.0 88.1 100.5 NP margin 17.1 11.7 11.7 11.1 10.4 9.7 10.5 10.6 12.4 10.4 11.0 Source: Company data, KDB Daewoo Securities Research

Table 2. Earnings forecast revisions (under non-consolidated K-IFRS) (Wbn, %, %p) Previous Revised % change

12F 13F 14F 12F 13F 14F 12F 13F 14F Revenues 689 890 1,004 583 850 916 -15.4 -4.5 -8.8 Operating profit 90 108 131 82 105 122 -9.1 -2.2 -7.5 Net profit 77 89 107 72 88 101 -6.2 -1.0 -6.3 EPS 4,275 4,954 5,977 4,010 4,907 5,600 -6.2 -1.0 -6.3 OP margin 13.1 12.1 13.1 14.0 12.4 13.3 1.0 0.3 0.2 Net margin 11.1 10.0 10.7 12.4 10.4 11.0 1.2 0.4 0.3 Avg. F/X rate (W/US$) 1,126 1,064 1,045 1,126 1,064 1,045 0.0 0.0 0.0 Source: KDB Daewoo Securities Research

Figure 1. Quarterly earnings trend and forecasts Figure 2. Annual earnings trend and forecasts

(Wbn)Process & Precision (L) Material handling systems (L) (%) (Wbn)Material handling systems (L) (%) 300 OP margin (R) 25 1,000 Process & Precision (L) 20 OP margin (R) 2010: K-GAAP (completed-contract basis) 250 20 2011~2: K-IFRS (percentage -of-completion basis) 800 16

200 15 600 12 2010: K-GAAP (completed-contract basis) 150 10 2011~12: K-IFRS (percentage-of-completion basis) 400 8 100 5

200 4 50 0

0 -5 0 0 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12F 1Q13F 2004 2006 2008 2010 2012F 2014F

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 96 November 13, 2012 The Age of Transition

SFA Engineering (056190 KQ/Buy/TP: W60,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 753 583 850 916 Current Assets 400 438 506 604 Cost of Sales 610 459 678 724 Cash and Cash Equivalents 75 89 159 246 Gross Profit 143 124 172 192 AR & Other Receivables 134 130 127 137 SG&A Expenses 48 56 67 70 Inventories 7 9 9 10 Operating Profit (Adj) 95 68 105 122 Other Current Assets 10 6 6 7 Operating Profit 92 82 105 122 Non-Current Assets 159 146 140 136 Non-Operating Profit 4 10 8 7 Investments in Associates 22 23 23 23 Net Financial Income -4 -8 -10 -12 Property, Plant and Equipment 107 108 113 116 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 10 22 35 48 Pretax Profit 96 91 113 129 Total Assets 559 584 646 739 Income Tax 20 19 25 28 Current Liabilities 194 170 167 179 Profit from Continuing Operations 76 72 88 101 AP & Other Payables 103 93 91 98 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3 1 1 1 Net Profit 76 72 88 101 Other Current Liabilities 89 76 74 80 Controlling Interests 76 72 88 101 Non-Current Liabilities 20 22 26 39 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 74 71 87 99 Other Non-Current Liabilities 18 19 22 35 Controlling Interests 74 71 87 99 Total Liabilities 214 192 192 218 Non-Controlling Interests 0 0 0 0 Controlling Interests 345 393 453 521 EBITDA 101 75 111 128 Capital Stock 9 9 9 9 FCF (Free Cash Flow) 86 20 64 85 Capital Surplus 20 20 20 20 EBITDA Margin (%) 13.4 12.8 13.1 14.0 Retained Earnings 332 382 444 514 Operating Profit Margin (%) 12.2 14.0 12.4 13.3 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 10.0 12.4 10.4 11.0 Stockholders' Equity 345 393 453 521

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 106 45 87 106 P/E (x) 14.5 10.2 8.4 7.3 Net Profit 76 72 88 101 P/CF (x) 13.4 9.4 7.9 6.9 Non-Cash Income and Expense 44 9 23 28 P/B (x) 3.1 2.0 1.8 1.6 Depreciation 6 7 6 7 EV/EBITDA (x) 8.4 6.0 3.4 2.3 Amortization 0 0 0 0 EPS (W) 4,212 4,010 4,907 5,600 Others -22 8 -2 -5 CFPS (W) 4,566 4,373 5,220 5,972 Chg in Working Capital -1 1 0 6 BPS (W) 19,596 20,631 23,310 26,394 Chg in AR & Other Receivables 46 6 3 -10 DPS (W) 1,280 1,500 1,800 2,000 Chg in Inventories -1 -2 0 -1 Payout ratio (%) 29.9 35.8 35.1 34.2 Chg in AP & Other Payables -9 -10 -2 7 Dividend Yield (%) 2.1 3.7 4.4 4.9 Income Tax Paid -13 -38 -25 -28 Revenue Growth (%) 19.1 -22.6 45.8 7.7 Cash Flows from Inv Activities -90 -8 10 12 EBITDA Growth (%) 42.4 -26.3 49.1 15.6 Chg in PP&E -24 -7 -10 -10 Operating Profit Growth (%) 30.8 -11.3 29.0 15.4 Chg in Intangible Assets -9 -13 -13 -13 EPS Growth (%) 34.2 -4.8 22.4 14.1 Chg in Financial Assets -60 -31 0 0 Accounts Receivable Turnover (x) 4.8 4.4 6.6 6.9 Others 3 42 32 35 Inventory Turnover (x) 117.5 71.3 92.5 96.9 Cash Flows from Fin Activities -9 -23 -26 -31 Accounts Payable Turnover (x) 8.0 7.4 11.7 12.2 Chg in Financial Liabilities 0 0 0 0 ROA (%) 14.1 12.6 14.3 14.5 Chg in Equity 0 0 0 0 ROE (%) 24.2 19.5 20.8 20.6 Dividends Paid -9 -23 -26 -31 ROIC (%) 105.8 68.3 79.2 80.5 Others 0 0 0 0 Liability to Equity Ratio (%) 62.1 48.9 42.4 41.8 Increase (Decrease) in Cash 7 14 70 87 Current Ratio (%) 206.1 257.9 303.6 336.5 Beginning Balance 68 75 89 159 Net Debt to Equity Ratio (%) -71.5 -74.3 -79.8 -86.1 Ending Balance 75 89 159 246 Interest Coverage Ratio (x) 4,561.0 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 97 November 13, 2012 The Age of Transition

Soulbrain (036830 KQ) Will Cho Ability to grow despite slowing downstream industries 02-768-+822-768-4306 [email protected]  Margins to level up on operating leverage effect  Thin glass to drive growth momentum in 2013 aided by strong SEC smartphone sales  Raise TP to W53,000 in light of increased proportion of high-value products and improved margins

Buy (Maintain) 2013 earnings: We expect Soulbrain to deliver solid earnings growth in 2013 even Target Price (12M, W) 53,000 amid the overall weakness of downstream industries (e.g., semiconductors, LCDs, Share Price (11/12/12, W) 45,950 etc.), with full-year revenues of 664.9bn (up 14.2% YoY) and an operating profit of Expected Return (%) 15.3 W115.4bn (up 17.3% YoY; OP margin of 17.4%). We believe the companyÊs EPS Growth (12F, %) 245.8 margins have stabilized to higher levels on the back of product mix improvement Market EPS Growth (12F, %) 8.9 and high operating leverage resulting from top-line growth. Looking forward, we P/E (12F, x) 11.4 forecast OP margin to level up from 12~14% to around 16%. Market P/E (12F, x) 10.2 KOSDAQ 521.43 Growth theme: 1) Aided by SECÊs robust smartphone sales, the thin glass (TG; Market Cap (Wbn) 745 etching of display panels) unit should continue to drive the companyÊs growth Shares Outstanding (mn) 16 momentum into 2013. SoulbrainÊs TG business meets over 90% of SECÊs OLED Avg Trading Volume (60D, '000) 74 needs. Given that sales of SECÊs OLED smartphones (including the Galaxy S series) Avg Trading Value (60D, Wbn) 3 are rising, we expect TG revenues to grow 32.8% YoY to W122.4bn in 2013. Dividend Yield (12F, %) 0.8 Free Float (%) 51.7 2) SoulbrainÊs margins have been improving in line with its increasing revenues. 52-Week Low (W) 25,650 We attribute this to the companyÊs diversified business portfolio, which is the 52-Week High (W) 46,950 result of its continued investments in growth drivers such as TG, high-margin Beta (12M, Daily Rate of Return) 0.55 precursors for semiconductors, and rechargeable battery electrolytes. Looking Price Return Volatility (12M Daily, %, SD) 2.4 ahead, we expect bottom-line growth to outpace top-line growth in 2013 on Foreign Ownership (%) 13.2 operating leverage effects. Major Shareholder(s) Chang, Ji-wan et al. (47.23%) Catalysts: 1) SECÊs rising dominance in the smartphone market, especially in the Allianz Global Investors (9.55%) OLED smartphone category, should directly benefit SoulbrainÊs TG unit. 2) National Pension Service (9.25%) Samsung SDIÊs large capacity ramp-ups for prismatic and polymer batteries slated Price Performance for 2013 should prove positive to the electrolyte division. 3) The accelerated (%) 1M 6M 12M transfer of SECÊs semiconductor manufacturing process and non-memory capacity Absolute 11.1 48.2 11.5 expansion are likely to provide a boost to SoulbrainÊs semiconductor etchants and Relative 12.8 49.1 9.5 CVD precursors.

Risks: 1) We believe the biggest risk to the stock is that the spread of flexible displays could drag down the companyÊs TG sales. 2) The maturation of downstream industries could weaken growth, potentially leading to a valuation discount. 3) The overhang issue (a non-fundamental risk) related to the companyÊs issuance of convertible bonds and bonds with warrants is also a drag on the stock.

Share price § Earnings & Valuation Metrics 120 KOSDAQ FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 110

100 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 90 12/10 349 50 14.3 40 2,708 63 -3 20.4 11.3 2.2 8.1 80 12/11 458 63 13.6 17 1,168 82 -74 7.8 33.1 2.4 8.6 70 12/12F 583 98 16.9 65 4,039 117 16 22.8 11.4 2.2 7.2 60 12/13F 665 115 17.4 79 4,943 137 39 21.3 9.3 1.8 6.0 50 12/14F 753 123 16.3 84 5,278 145 42 18.9 8.7 1.5 5.6 11/11 3/12 7/12 11/12 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

Daewoo Securities Research 98

November 13, 2012 The Age of Transition

Valuation: We reiterate our Buy call on Soulbrain and raise our target price by 8.2% to W53,000 from W49,000, as we revised up our 2013F EPS by 6.6% to reflect the increased contribution of the high-value TG business and improved margins resulting from reduced fixed cost burdens. Despite recent share appreciation, the stock is currently trading at a 12- month forward P/E of 9.2x, below the industry peer average of 11.2x and the stockÊs five- year average multiple of 11.0x.

Table 1. Calculation of target price Comments EPS (W) 4,867 12-month forward estimate Fair P/E (x) 11.0 Average of 12-month forward P/E since 2006 Fair price (W) 53,406 Target price (W) 53,000 Current price (W) 44,000 As of November 3, 2012 Upside potential (%) 20.5 Source: KDB Daewoo Securities Research

Table 2. Earnings forecast revisions (non-consolidated K-IFRS) (Wbn, %) Previous Revised % change Comments 12F 13F 14F 12F 13F 14F 12F 13F 14F Revenues 582 660 742 582 665 752 0.1 0.7 1.4 - Upside revision to TG sales Operating Profit 98 109 119 98 115 123 0.2 6.2 3.1 - Reflect profitability improvement on richer product mix Pretax profit 90 102 112 90 109 116 0.2 6.6 3.2 Net profit 64 74 82 65 79 84 0.2 6.6 3.2 EPS (W) 4,030 4,637 5,112 4,039 4,943 5,278 0.2 6.6 3.2 OP margin 16.9 16.5 16.0 16.9 17.4 16.3 - - - Net margin 11.1 11.2 11.0 11.1 11.9 11.2 - - - Source: KDB Daewoo Securities Research

Table 3. Quarterly earnings forecasts (non-consolidated K-IFRS) (Wbn, %) 1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 11 12F 13F 14F Revenues 131.7 143.3 152.3 155.2 150.8 163.0 171.9 179.2 458.1 582.5 664.9 752.5 Display 44.9 52.6 57.7 59.8 56.5 61.9 63.4 69.0 158.2 215.1 250.9 268.4 Semiconductor 56.9 59.1 61.1 62.6 63.8 69.4 75.3 77.8 197.3 239.7 286.2 344.4 Electronic materials 29.8 31.7 33.5 32.8 30.5 31.7 33.2 32.4 102.5 127.7 127.9 139.6 Revenues portion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Display 34.1 36.7 37.9 38.6 37.5 38.0 36.9 38.5 34.5 36.9 37.7 35.7 Semiconductor 43.2 41.2 40.1 40.3 42.3 42.5 43.8 43.4 43.1 41.2 43.0 45.8 Electronic materials 22.7 22.1 22.0 21.1 20.2 19.5 19.3 18.1 22.4 21.9 19.2 18.6 Operating profit 22.3 25.7 27.4 23.0 25.3 30.1 31.1 29.0 62.5 98.4 115.4 122.7 Pretax profit 20.7 24.9 25.8 18.4 23.9 28.8 29.7 26.5 28.7 89.9 108.8 116.0 Net profit 15.7 16.2 18.9 13.8 17.4 20.6 21.7 19.4 17.2 64.6 79.1 84.4 OP margin 16.9 18.0 18.0 14.8 16.8 18.5 18.1 16.2 13.6 16.9 17.4 16.3 Net margin 11.9 11.3 12.4 8.9 11.6 12.6 12.6 10.8 3.7 11.1 11.9 11.2 Growth (QoQ/YoY) Revenues -2.2 8.8 6.3 1.9 -2.8 8.1 5.5 4.2 31.4 27.2 14.2 13.2 Display -3.3 17.0 9.8 3.6 -5.6 9.6 2.5 8.8 2.5 35.9 16.6 7.0 Semiconductor 3.6 3.8 3.5 2.3 1.9 8.7 8.5 3.3 47.1 21.5 19.4 20.4 Electronic materials -10.1 6.1 5.7 -2.1 -6.8 4.0 4.7 -2.5 70.7 24.6 0.2 9.2 Operating profit 29.0 15.5 6.4 -15.9 9.7 19.1 3.4 -7.0 27.1 57.5 17.3 6.3 Pretax profit TB 20.7 3.7 -28.7 29.6 20.4 3.1 -10.6 -32.0 213.0 21.1 6.6 Net profit TB 3.2 16.4 -26.7 26.1 17.9 5.4 -10.6 -47.9 276.3 22.4 6.8 Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 99 November 13, 2012 The Age of Transition

Soulbrain (036830 KQ/Buy/TP: W53,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 458 583 665 753 Current Assets 146 189 265 334 Cost of Sales 355 452 511 586 Cash and Cash Equivalents 16 37 90 139 Gross Profit 103 131 154 167 AR & Other Receivables 69 81 94 105 SG&A Expenses 38 37 43 48 Inventories 59 69 80 89 Operating Profit (Adj) 66 94 111 119 Other Current Assets 1 1 1 1 Operating Profit 63 98 115 123 Non-Current Assets 289 340 380 424 Non-Operating Profit -34 -9 -7 -7 Investments in Associates 49 49 49 49 Net Financial Income 6 5 5 5 Property, Plant and Equipment 182 219 245 276 Net Gain from Inv in Associates -28 0 0 0 Intangible Assets 4 4 5 5 Pretax Profit 29 90 109 116 Total Assets 435 529 645 757 Income Tax 12 25 30 32 Current Liabilities 148 173 181 189 Profit from Continuing Operations 17 65 79 84 AP & Other Payables 35 41 47 52 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 100 116 116 116 Net Profit 17 65 79 84 Other Current Liabilities 14 16 18 20 Controlling Interests 17 65 79 84 Non-Current Liabilities 53 22 57 84 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 50 21 56 83 Total Comprehensive Profit 16 64 78 84 Other Non-Current Liabilities 3 1 1 1 Controlling Interests 16 64 78 84 Total Liabilities 201 194 238 272 Non-Controlling Interests 0 0 0 0 Controlling Interests 234 334 407 485 EBITDA 82 117 137 145 Capital Stock 7 8 8 8 FCF (Free Cash Flow) -74 16 39 42 Capital Surplus 33 74 74 74 EBITDA Margin (%) 17.8 20.2 20.6 19.3 Retained Earnings 198 257 331 410 Operating Profit Margin (%) 13.6 16.9 17.4 16.3 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 3.7 11.1 11.9 11.2 Stockholders' Equity 234 334 407 485

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 28 82 92 101 P/E (x) 33.1 11.4 9.3 8.7 Net Profit 17 78 79 84 P/CF (x) 17.1 8.4 7.0 6.6 Non-Cash Income and Expense 65 41 58 60 P/B (x) 2.4 2.2 1.8 1.5 Depreciation 16 23 25 26 EV/EBITDA (x) 8.6 7.2 6.0 5.6 Amortization 0 0 0 0 EPS (W) 1,168 4,039 4,943 5,278 Others -5 1 3 3 CFPS (W) 2,255 5,487 6,546 6,926 Chg in Working Capital -44 -18 -15 -13 BPS (W) 15,890 20,562 25,013 29,797 Chg in AR & Other Receivables -23 -19 -13 -11 DPS (W) 350 350 350 350 Chg in Inventories -33 -11 -11 -9 Payout ratio (%) 29.6 8.7 7.1 6.7 Chg in AP & Other Payables 3 16 6 5 Dividend Yield (%) 0.9 0.8 0.8 0.8 Income Tax Paid -11 -19 -30 -32 Revenue Growth (%) 31.4 27.2 14.2 13.2 Cash Flows from Inv Activities -108 -73 -61 -65 EBITDA Growth (%) 29.9 44.1 16.6 5.9 Chg in PP&E -87 -60 -52 -57 Operating Profit Growth (%) 25.1 57.6 17.3 6.3 Chg in Intangible Assets 0 -1 -1 -1 EPS Growth (%) -56.9 245.8 22.4 6.8 Chg in Financial Assets -5 -1 0 0 Accounts Receivable Turnover (x) 9.0 8.6 8.5 8.5 Others -16 -12 -9 -7 Inventory Turnover (x) 10.7 9.1 8.9 8.9 Cash Flows from Fin Activities 90 13 23 13 Accounts Payable Turnover (x) 19.5 21.5 21.1 21.1 Chg in Financial Liabilities 97 9 0 0 ROA (%) 4.6 13.4 13.5 12.0 Chg in Equity 0 0 0 0 ROE (%) 7.8 22.8 21.3 18.9 Dividends Paid -4 -5 -6 -6 ROIC (%) 18.2 23.0 23.6 22.4 Others -3 -8 -7 -8 Liability to Equity Ratio (%) 86.2 58.2 58.5 56.1 Increase (Decrease) in Cash 10 21 53 48 Current Ratio (%) 98.5 109.2 146.3 176.7 Beginning Balance 6 16 37 90 Net Debt to Equity Ratio (%) 57.1 29.9 20.1 12.4 Ending Balance 16 37 90 139 Interest Coverage Ratio (x) 10.4 16.8 15.6 14.3 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 100 November 13, 2012 The Age of Transition

Duksan Hi-Metal (077360 KQ) Will Cho Deeply undervalued +02-768-3372 [email protected]  Samsung Display likely to resume OLED investments in 2013  Dominance in the OLED market to strengthen  Deeply undervalued at 12-month forward P/E of 11x

Buy (Maintain) 2013 earnings: Next year, we expect Duksan Hi-Metal to post revenues of W201.6bn (up 31.8% YoY) and an operating profit of W56.3bn (up 28.8% YoY; OP Target Price (12M, W) 35,000 margin of 27.9%). Even if we assume that Samsung Display delays production of Share Price (11/12/12, W) 18,650 new small- to mid-sized OLEDs until 2Q13 or beyond, and the operation of a large- Expected Return (%) 87.7 EPS Growth (12F, %) 26.9 OLED line to 2014 or beyond, Duksan Hi-MetalÊs EPS is likely to show a CAGR of Market EPS Growth (12F, %) 8.9 more than 25% until end-2014. P/E (12F, x) 12.5 Growth theme: 1) While there is no clear vision of the next paradigm in the IT Market P/E (12F, x) 10.2 KOSDAQ 521.43 industry (after smartphones), we believe OLED will likely drive the next big Market Cap (Wbn) 548 industry expansion. Although the OLED market is in its fledgling stages compared Shares Outstanding (mn) 29 to the LCD market, the spread of OLED screen smartphones and the release of Avg Trading Volume (60D, '000) 326 OLED TVs should drive market growth. Avg Trading Value (60D, Wbn) 7 Dividend Yield (12F, %) 0.0 2) Duksan Hi-Metal is anticipated to cement its dominance of the OLED market. Free Float (%) 43.8 Given growing concerns of technology leaks, and the further sophistication of 52-Week Low (W) 18,400 OLED technology, Samsung is likely to select and manage its supply chain 52-Week High (W) 30,700 carefully. DuksanÊs share of the mobile OLED segment once again stands at over Beta (12M, Daily Rate of Return) 1.11 90%, while its competitors are delaying their entry into the space. Price Return Volatility (12M Daily, %, SD) 2.6 Foreign Ownership (%) 8.9 Catalysts: 1) Mid- to small-sized OLED is currently in tight supply due to the robust Major Shareholder(s) sales of SECÊs OLED smartphones. Despite delays in the rollout of flexible OLED Lee, Jun-Ho et al. (41.9%) displays by Samsung Display, the company is likely to resume OLED investments Treasury shares (14.35%) next year given the tight supply. 2) The expansion of the tablet PC market is Korea Investment Management (6.23%) Price Performance forecast to drive solder ball demand. Increased sales of high-end fine solder balls (%) 1M 6M 12M should boost DuksanÊs profitability. Absolute -14.7 -29.4 -34.9 Risks: 1) Delays to Samsung DisplayÊs OLED investments remain the biggest risk. Relative -13.0 -28.5 -36.9 2) The releases of ultra=definition LCD TVs present a threat to OLED screen TVs. 3) Entries of new players into the OLED market are a valuation discount factor.

Share price § Earnings & Valuation Metrics 110 KOSDAQ FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 100 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 90 12/10 73 20 27.7 16 638 22 -30 18.7 31.8 6.6 23.8 80 12/11 129 35 26.8 35 1,181 43 11 29.0 21.5 6.0 17.1 70 12/12F 153 44 28.7 44 1,498 50 26 27.4 12.5 3.7 10.1 60 12/13F 202 56 27.9 55 1,877 66 23 26.2 9.9 2.7 7.2 50 12/14F 274 74 27.1 72 2,442 86 46 26.3 7.6 2.0 5.0 11/11 3/12 7/12 11/12 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 101 November 13, 2012 The Age of Transition

Valuation: We maintain our Buy call on Duksan Hi-Metal with a target price of W35,000. Even if we assume that Samsung Display delays the production of new mid- to small-sized OLEDs to 2Q13 or beyond, and operation of a large OLED line to 2014 or beyond, Duksan Hi-MetalÊs EPS is likely to show a CAGR of more than 25% until end-2014. Although we assumed that DuksanÊs supply would meet a mere 50% of Samsung DisplayÊs needs in 2014, we have recently seen delays in competitorsÊ supply to Samsung Display. Duksan Hi- MetalÊs shares are deeply undervalued, trading at a 12-month forward P/E of 11x (vs. the companyÊs three-year average of 22x).

Table 1. OLED capacity trends and forecasts of Samsung Display 2011 2012F 2013F 2014F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q A1 (4G, 730 x 920) Half 53 53 53 53 53 53 53 53 53 53 53 53 53 53 53 53 A2 (5.5G, 1300 x 1500) Quarter 8 24 50 56 72 72 88 88 88 88 88 88 88 88 88 Phase 1 (32k/month) 8 16 32 32 32 32 32 32 32 32 32 32 32 32 32 Phase 2 (32k/month) 8 18 24 32 32 32 32 32 32 32 32 32 32 32 Phase 3 (incl. flexible) (24k/month) 8 8 24 24 24 24 24 24 24 24 24 A2E (5.5G, 1300 x 1500) Quarter 8 20 36 64 76 88 96 Phase 1 (32k/month) 8 12 24 32 32 32 32 Phase 2 (32k/month) 8 12 24 32 32 32 Phase 2 (32k/month) 8 12 24 32 V1 (8G, 2200 x 2500) 6th 3 6 6 6 12 12 16 24 24 24 24 V2 (8G, 2200 x 2500) Half 8 32 48 48 Phase 1 (30k/month) 8 24 24 24 Phase 2 (30k/month) 8 24 24 Total capacity on a real basis (k m2/month) 107 154 247 399 434 577 627 721 721 866 937 1,096 1,524 1,990 2,324 2,371 YoY growth (%) 1.9 43.8 60.9 61.5 8.8 32.9 8.6 14.9 0.0 20.2 8.1 17.0 39.0 30.6 16.8 2.0 Duksan's M/S within SD (%) 100.0 100.0 95.0 95.0 85.0 90.0 90.0 90.0 85.0 85.0 80.0 75.0 70.0 50.0 45.0 40.0 Source: KDB Daewoo Securities Research

Table 2. Earnings trends and forecasts (non-consolidated K-IFRS) (Wbn, %) 1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2011 2012F 2013F 2014F Revenues 32.5 37.0 39.5 44.0 40.3 48.1 52.9 60.3 129.4 152.9 201.6 274.4 OLED 17.7 21.7 22.1 25.7 24.6 30.0 32.0 37.8 70.1 87.2 124.3 180.3 Semiconductor 14.8 15.3 17.4 18.3 15.7 18.1 20.9 22.6 59.4 65.7 77.3 94.2 Revenue proportion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 OLED 54.5 58.7 56.0 58.5 61.0 62.3 60.5 62.6 54.1 57.0 61.7 65.7 Semiconductor 45.6 41.3 44.0 41.5 39.0 37.7 39.5 37.4 45.9 43.0 38.3 34.3 Operating profit 9.2 10.5 11.4 12.9 11.3 13.7 14.6 16.7 34.7 43.9 56.3 74.4 Pretax profit 9.5 10.8 11.6 13.2 11.6 14.0 14.9 16.9 35.1 45.2 57.5 75.5 Net profit 9.3 10.9 11.1 12.7 11.1 13.4 14.3 16.3 34.6 44.0 55.2 71.8 OP margin 28.2 28.4 28.8 29.4 28.1 28.5 27.6 27.6 26.8 28.7 27.9 27.1 Net margin 28.7 29.4 28.1 28.9 27.7 27.9 27.1 27.0 26.7 28.8 27.4 26.2 Growth (QoQ/YoY) Revenues -12.2 13.9 7.0 11.3 -8.4 19.5 9.9 13.9 78.6 18.2 31.8 36.1 OLED -17.8 22.8 2.0 16.2 -4.5 22.1 6.8 17.8 106.7 24.5 42.5 45.0 Semiconductor -4.3 3.2 14.1 4.9 -14.0 15.6 15.1 8.0 53.9 10.7 17.6 21.8 Operating profit -15.9 14.4 8.5 13.8 -12.5 21.1 6.7 13.8 164.4 26.6 28.2 32.1 Pretax profit -12.2 13.5 7.0 14.4 -12.3 20.4 6.7 13.5 179.7 28.9 27.2 31.5 Net profit -14.0 16.6 2.4 14.4 -12.3 20.4 6.7 13.5 240.7 27.4 25.4 30.1 Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 102 November 13, 2012 The Age of Transition

Duksan Hi-Metal (077360 KQ/Buy/TP: W35,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 129 153 202 274 Current Assets 46 83 121 177 Cost of Sales 76 90 120 165 Cash and Cash Equivalents 21 25 51 103 Gross Profit 53 64 82 109 AR & Other Receivables 10 12 16 18 SG&A Expenses 14 17 23 32 Inventories 13 15 21 23 Operating Profit (Adj) 39 46 59 77 Other Current Assets 3 3 5 5 Operating Profit 35 44 56 74 Non-Current Assets 106 119 144 168 Non-Operating Profit 0 1 1 1 Investments in Associates 0 0 0 1 Net Financial Income 0 -2 -2 -4 Property, Plant and Equipment 65 77 100 121 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 35 36 37 39 Pretax Profit 35 45 58 76 Total Assets 152 202 265 344 Income Tax 1 1 2 4 Current Liabilities 11 12 14 15 Profit from Continuing Operations 35 44 55 72 AP & Other Payables 5 5 8 8 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 6 6 6 6 Net Profit 35 44 55 72 Other Current Liabilities 1 1 1 1 Controlling Interests 35 44 55 72 Non-Current Liabilities 2 7 13 21 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 35 43 55 71 Other Non-Current Liabilities 1 4 9 16 Controlling Interests 35 43 55 71 Total Liabilities 13 19 27 36 Non-Controlling Interests 0 0 0 0 Controlling Interests 139 183 238 309 EBITDA 43 50 66 86 Capital Stock 6 6 6 6 FCF (Free Cash Flow) 11 26 23 46 Capital Surplus 82 76 76 76 EBITDA Margin (%) 33.1 32.5 32.9 31.3 Retained Earnings 72 115 171 242 Operating Profit Margin (%) 26.8 28.7 27.9 27.1 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 26.7 28.8 27.4 26.2 Stockholders' Equity 139 183 238 309

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 36 49 56 79 P/E (x) 21.5 12.5 9.9 7.6 Net Profit 35 44 55 72 P/CF (x) 19.5 11.6 8.8 6.8 Non-Cash Income and Expense 11 12 11 14 P/B (x) 6.0 3.7 2.7 2.0 Depreciation 3 3 7 8 EV/EBITDA (x) 17.1 10.1 7.2 5.0 Amortization 1 1 1 1 EPS (W) 1,181 1,498 1,877 2,442 Others -8 -9 -4 -6 CFPS (W) 1,300 1,615 2,118 2,732 Chg in Working Capital -8 -7 -8 -3 BPS (W) 4,263 5,010 6,812 9,180 Chg in AR & Other Receivables -2 -2 -4 -2 DPS (W) 0 0 0 0 Chg in Inventories -6 -4 -6 -3 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 2 1 2 1 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -2 0 -2 -4 Revenue Growth (%) 78.6 18.2 31.8 36.1 Cash Flows from Inv Activities -14 -45 -29 -28 EBITDA Growth (%) 97.8 16.0 33.5 29.6 Chg in PP&E -22 -17 -30 -30 Operating Profit Growth (%) 73.0 26.6 28.2 32.1 Chg in Intangible Assets -3 -2 -2 -2 EPS Growth (%) 85.0 26.9 25.3 30.1 Chg in Financial Assets 8 -28 0 0 Accounts Receivable Turnover (x) 14.7 14.3 14.6 16.2 Others 2 2 3 4 Inventory Turnover (x) 13.4 11.1 11.3 12.6 Cash Flows from Fin Activities -6 0 0 0 Accounts Payable Turnover (x) 36.3 30.5 31.2 34.7 Chg in Financial Liabilities -6 0 0 0 ROA (%) 25.5 24.9 23.7 23.6 Chg in Equity 1 0 0 0 ROE (%) 29.0 27.4 26.2 26.3 Dividends Paid 0 0 0 0 ROIC (%) 35.6 34.5 36.5 39.4 Others 0 0 0 0 Liability to Equity Ratio (%) 9.6 10.1 11.3 11.5 Increase (Decrease) in Cash 15 4 26 51 Current Ratio (%) 403.9 716.9 871.3 1,191.6 Beginning Balance 5 21 25 51 Net Debt to Equity Ratio (%) -10.3 -25.8 -30.9 -40.4 Ending Balance 21 25 51 103 Interest Coverage Ratio (x) 132.1 149.1 191.0 252.3 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 103 November 13, 2012 The Age of Transition

Partron (091700 KQ) Wonjae Park Just stellar +822-768-3372 [email protected]  Impressive top-line growth likely: Up 113.1% in 2012 and 21.8% in 2013  Antenna revenues expected to become a new growth engine  Maintain Buy call with TP of W19,400

Earnings: Partron has shown impressive earnings improvement. We forecast the Buy (Maintain) companyÊs revenues to leap 113.1% YoY to W767bn in 2012 (from W233bn in Target Price (12M, W) 19,400 2010 and W360bn in 2011). The companyÊs revenues are likely to grow further to Share Price (11/12/12, W) 18,050 W934bn (up 21.8% YoY) in 2013. Expected Return (%) 7.5 EPS Growth (12F, %) 76.3 Growth theme & catalysts: This stellar performance has largely been the result of the Market EPS Growth (12F, %) 8.9 sustained growth of the companyÊs largest customerÊs smartphone sales, which has P/E (12F, x) 12.3 led to a considerable jump in camera module and antenna sales (Partron meets the Market P/E (12F, x) 10.2 bulk of its largest customerÊs camera-module needs). While most rivals are focusing on KOSDAQ 521.43 modules above 8 megapixels, in line with the increasing adoption of high-megapixel Market Cap (Wbn) 700 camera modules, Partron still maintains a dominant position in the 3-megapixel market. Shares Outstanding (mn) 39 And the firmÊs superior mass-production capabilities have allowed it to generate higher Avg Trading Volume (60D, '000) 748 margins compared to its competitors, despite its reliance on 3-megapixel products. Avg Trading Value (60D, Wbn) 10 Dividend Yield (12F, %) 1.4 Another positive growth driver has been the companyÊs strong antenna revenues, Free Float (%) 73.9 supported by the increasing number of antennae used in smartphones. In 52-Week Low (W) 10,150 particular, PartronÊs proprietary laser technology has helped improve production 52-Week High (W) 18,150 yields, contributing to both top-line and bottom-line growth. Beta (12M, Daily Rate of Return) 0.71 Price Return Volatility (12M Daily, %, SD) 2.9 An increasing number of PartronÊs parts are being used in the production of its largest Foreign Ownership (%) 19.2 customerÊs flagship products. Also, going forward, we expect additional growth from Major Shareholder(s) crystal oscillators and vibration motors. In particular, the outlook for crystal oscillators Jong Ku Kim et al. (25.45%) looks rosy given the ongoing, steady growth of sales to Chinese clients.

Along with this top-line growth, Partron is also showing strong margins. The companyÊs

OP margin has stabilized at 10%. We estimate its operating profit to soar 100.6% YoY to Price Performance W75bn in 2012. OP margin is likely to reach 9.8% in both 2012 and 2013. (%) 1M 6M 12M Absolute 22.4 66.2 78.9 Risks: Over-reliance on a single client is sa common risk among component Relative 24.1 67.0 76.9 suppliers. But, given that the smartphone market is dominated by SEC and Apple, PartronÊs heavy dependence on a single customer seems unavoidable. We believe investors need to focus on the fact that Partron is a major beneficiary of the growth of the smartphone market.

Valuation: We maintain our Buy call on Partron with a target price of W19,400. We derived our target price by applying a P/E of 10x to our 2013F EPS of W1,946. This price implies an upside of 16.2% from the current share price.

Share price § Earnings & Valuation Metrics 190 KOSDAQ FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 170 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 150 12/10 233 38 16.3 32 825 39 6 29.8 13.7 3.5 10.9 130 12/11 360 38 10.4 32 833 41 -15 23.3 13.4 2.8 11.3 110 12/12F 767 75 9.8 57 1,469 80 23 32.0 12.3 3.4 9.5 90 12/13F 934 92 9.8 75 1,946 100 53 32.0 9.3 2.6 7.6 70 12/14F 1,042 104 10.0 86 2,207 114 61 28.0 8.2 2.0 6.7 11/11 3/12 7/12 11/12 Notes: All figures are based on Non- consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

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November 13, 2012 The Age of Transition

Partron (091700 KQ/Buy/TP: W19,400)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 360 767 934 1,042 Current Assets 116 193 231 270 Cost of Sales 291 638 776 864 Cash and Cash Equivalents 4 2 7 20 Gross Profit 69 129 158 179 AR & Other Receivables 71 114 136 153 SG&A Expenses 32 55 67 74 Inventories 33 58 69 77 Operating Profit (Adj) 37 74 92 104 Other Current Assets 3 4 5 6 Operating Profit 38 75 92 104 Non-Current Assets 148 210 270 334 Non-Operating Profit 0 -7 -1 -1 Investments in Associates 2 3 3 3 Net Financial Income 0 1 2 2 Property, Plant and Equipment 33 47 60 77 Net Gain from Inv in Associates 0 -2 0 0 Intangible Assets 2 2 1 1 Pretax Profit 37 68 91 103 Total Assets 264 402 501 604 Income Tax 5 11 15 18 Current Liabilities 103 182 205 223 Profit from Continuing Operations 32 57 75 86 AP & Other Payables 66 117 139 156 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 34 61 61 61 Net Profit 32 57 75 86 Other Current Liabilities 2 4 5 6 Controlling Interests 32 57 75 86 Non-Current Liabilities 8 17 27 39 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 3 9 20 32 Total Comprehensive Profit 34 56 75 85 Other Non-Current Liabilities 4 6 6 5 Controlling Interests 34 56 75 85 Total Liabilities 111 199 232 262 Non-Controlling Interests 0 0 0 0 Controlling Interests 153 203 269 342 EBITDA 41 80 100 114 Capital Stock 15 19 19 19 FCF (Free Cash Flow) -15 23 53 61 Capital Surplus 22 12 12 12 EBITDA Margin (%) 11.4 10.4 10.7 10.9 Retained Earnings 116 167 233 307 Operating Profit Margin (%) 10.4 9.8 9.8 10.0 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 9.0 7.4 8.1 8.2 Stockholders' Equity 153 203 269 342

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 26 50 74 88 P/E (x) 13.4 12.3 9.3 8.2 Net Profit 32 57 75 86 P/CF (x) 12.1 11.2 8.4 7.4 Non-Cash Income and Expense 10 24 24 28 P/B (x) 2.8 3.4 2.6 2.0 Depreciation 3 5 7 9 EV/EBITDA (x) 11.3 9.5 7.6 6.7 Amortization 0 0 0 0 EPS (W) 833 1,469 1,946 2,207 Others 0 -1 0 0 CFPS (W) 1,202 1,616 2,144 2,457 Chg in Working Capital -9 -23 -10 -8 BPS (W) 3,939 5,242 6,932 8,832 Chg in AR & Other Receivables -32 -58 -22 -17 DPS (W) 200 250 300 350 Chg in Inventories -11 -25 -11 -9 Payout ratio (%) 18.4 17.0 15.4 15.8 Chg in AP & Other Payables 35 65 22 18 Dividend Yield (%) 1.4 1.4 1.7 1.9 Income Tax Paid -7 -7 -15 -18 Revenue Growth (%) 54.7 113.1 21.8 11.6 Cash Flows from Inv Activities -53 -53 -67 -73 EBITDA Growth (%) 3.7 94.8 25.0 14.5 Chg in PP&E -37 -27 -21 -27 Operating Profit Growth (%) -0.8 100.6 22.0 13.5 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 1.0 76.3 32.5 13.4 Chg in Financial Assets 2 7 0 0 Accounts Receivable Turnover (x) 7.6 9.5 8.6 8.3 Others -18 -33 -46 -46 Inventory Turnover (x) 13.4 17.0 14.8 14.3 Cash Flows from Fin Activities 19 1 -2 -3 Accounts Payable Turnover (x) 9.5 10.3 9.0 8.7 Chg in Financial Liabilities 25 2 0 0 ROA (%) 14.8 17.1 16.7 15.5 Chg in Equity 0 0 0 0 ROE (%) 23.3 32.0 32.0 28.0 Dividends Paid -5 -6 -10 -12 ROIC (%) 53.5 70.4 66.1 61.8 Others -1 -2 -3 -3 Liability to Equity Ratio (%) 72.5 97.9 86.5 76.7 Increase (Decrease) in Cash -8 -2 5 13 Current Ratio (%) 112.8 105.8 112.6 121.1 Beginning Balance 12 4 2 7 Net Debt to Equity Ratio (%) 17.8 26.5 22.1 17.1 Ending Balance 4 2 7 20 Interest Coverage Ratio (x) 57.5 45.9 41.3 40.9 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 105 November 13, 2012 The Age of Transition

Nepes (033640 KQ) James Song A beneficiary of mobile AP market growth +822-768-3722 [email protected]  2013 outlook: Earnings expected to grow, with revenues of W335.1bn (up 21.8%) and OP of W56.4bn (up 41.7%)  Growing AP demand should boost the company’s 12-inch WLP service revenues  Subsidiary-related risks have already been priced in; Currently undervalued

Buy (Maintain) 2013 earnings: We project Nepes to generate revenues of W335.1bn (up 21.8% Target Price (12M, W) 24,000 YoY) and an operating profit of W56.4bn (up 41.7% YoY) in 2013. Although the Share Price (11/12/12, W) 13,100 companyÊs 1H margins were weaker than expected, its earnings began to pick up Expected Return (%) 83.2 in 3Q on the back of growing revenues related to 12-inch wafer-level packaging EPS Growth (12F, %) 70.1 Market EPS Growth (12F, %) 8.9 (WLP) services. We project NepesÊ 3Q operating profit to improve to W12bn. P/E (12F, x) 11.0 Growth theme: In our view, NepesÊ 2013 earnings will be driven by the growth of Market P/E (12F, x) 10.2 the smartphone and tablet PC markets, as the company is the sole application KOSDAQ 521.43 Market Cap (Wbn) 286 processor (AP) WLP service provider for Samsung Electronics (SEC). Nepes began Shares Outstanding (mn) 22 offering domestic 12-inch WLP services in 2H11. We estimate the companyÊs Avg Trading Volume (60D, '000) 368 monthly 12-inch WLP service capacity to reach 30,000 wafers in 4Q, and expand Avg Trading Value (60D, Wbn) 6 to 40,000~50,000 wafers in 2H13. Dividend Yield (12F, %) 0.4 Free Float (%) 72.1 We forecast revenue contributions from 12-inch WLP services to increase from 52-Week Low (W) 12,050 27% in 2012 to 43% in 2013. Most positively, this business is more profitable than 52-Week High (W) 21,650 the companyÊs established divisions. We believe full-swing growth of 12-inch WLP Beta (12M, Daily Rate of Return) 1.07 revenues will lead the company to deliver stable earnings growth. However, it Price Return Volatility (12M Daily, %, SD) 3.0 should be noted that LCD driver IC bumping services show significant profit Foreign Ownership (%) 6.4 fluctuations depending on capacity utilization ratios. Major Shareholder(s) B.K. Lee et al. (27.83%) Catalysts: In 2013, we anticipate global shipments of smartphones and tablet PCs Allianz Global Investors (11.59%) to reach 780mn units (up 24% YoY) and 180mn units (up 64% YoY), respectively. National Pension Service (7.4%) This should lead to the robust growth of the AP market. As such, we expect Price Performance (%) 1M 6M 12M Nepes to see a surge in demand for WLP services from its top customer. Its Absolute -18.4 -37.6 -19.1 Singaporean subsidiary, Nepes Pte, has a monthly WLP capacity of 30,000 wafers. Relative -16.7 -36.8 -21.2 However, we expect Nepes to increase its dependence on its domestic capacity.

Risks: The biggest risk facing Nepes is the sluggishness of some subsidiaries (e.g., Nepes Display, Nepes LED, Nepes Rigma). We attribute NepesÊ recent share pullbacks to this subsidiary risk. However, we estimate overall losses from subsidiaries to significantly decline YoY to W4.5bn in 2012. In particular, Nepes Display, the biggest loss contributor amongst subsidiaries, is showing signs of recovery.

Share price § Earnings & Valuation Metrics 130 KOSDAQ FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 120

110 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 100 12/10 239 26 11.0 17 831 45 -7 13.6 19.8 2.5 8.8 90 12/11 216 22 10.3 15 702 41 -11 10.1 23.5 2.3 9.9 80 12/12F 275 40 14.5 26 1,194 59 -15 15.1 11.0 1.6 5.8 70 12/13F 335 56 16.8 44 2,015 78 12 21.1 6.5 1.3 4.3 60 12/14F 366 70 19.3 57 2,609 102 28 22.2 5.0 1.0 3.1 11/11 3/12 7/12 11/12 Notes: Based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

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November 15, 2012 The Age of Transition

Valuation: We maintain our Buy call with a target price of W24,000 (a 2013F P/E of 12.0x). In particular, expansion of 12-inch WLP capacities and the resulting revenues should boost top- line and bottom-line growth starting in 2013. Following a recent share pullback, the companyÊs shares are trading at a 2013F P/E of only 6.5x.

Table 1. Earnings forecasts (Wbn, W, %) 1Q12 2Q12 3Q12F 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F Revenues 58.5 65.1 74.5 77 76.1 81.9 86.7 90.3 238.5 215.8 275 335.1 % QoQ 7.3 11.4 14.3 3.4 -1.1 7.6 5.8 4.2 % YoY 12.4 14.6 41.9 41.3 30.2 25.8 16.4 17.4 8.1 -9.5 27.5 21.8 Semiconductor 24.8 29.3 32.3 28.2 24.9 27.5 27.6 27 126.1 100.4 114.6 107 12‰ WLP 12.1 15.1 20.2 27.7 29.7 32.9 37.6 42.3 14.2 75.1 142.6 Chemical 21.5 20.7 22 21 21.5 21.5 21.5 21 112.4 101.2 85.2 85.5 Gross profit 13.8 17.3 19.3 21.1 19.8 22.5 24.4 24.6 44.7 43 71.6 91.3 SG&A 5.7 9.7 7.3 9 8.5 8.7 8.7 9 18.6 20.9 31.7 34.9 Operating profit 8.1 7.5 12.0 12.1 11.3 13.8 15.7 15.6 26 22.1 39.8 56.4 % QoQ 39.7 -7.3 59.9 0.8 -7 22.4 13.6 -0.4 % YoY 48.6 37.7 123.9 108.5 38.9 83.5 30.3 28.8 4.5 -14.8 80 41.7 Pretax profit 8.5 5 10.5 9.3 11.7 12.3 16.2 17.2 18.2 19.8 33.3 57.4 Net profit 7.0 3.8 8.0 7.2 8.9 9.4 12.3 13.4 16.9 15.3 26.1 44 % QoQ 8.9 -45 107.7 -9.5 23.3 5.2 31.3 8.8 % YoY 86.4 24.3 289.6 12.6 27.5 143.6 54 85.2 -14.6 -9.6 70.2 68.8 GP margin 23.7 26.5 26 27.5 26 27.5 28.1 27.3 18.8 19.9 26 27.3 OP margin 13.9 11.6 16.2 15.8 14.8 16.9 18.1 17.3 10.9 10.3 14.5 16.8 Net margin 12 5.9 10.7 9.4 11.7 11.4 14.2 14.8 7.1 7.1 9.5 13.1 Note: Non-consolidated K-IFRS basis Source: Company data, KDB Daewoo Securities Research estimates

Figure 1. Annual revenues and OP trends and forecasts Figure 2. Quarterly revenues and OP trends and forecasts

(Wbn) (Wbn) (Wbn) (Wbn) 400 Revenues (L) 80 100 Revenues (L) 20 Operating profit (R) Operating profit (R) 80 300 60 15

60 200 40 10 40

100 20 5 20

0 0 0 0 06 08 10 12F 14F 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F

Source: Company data, KDB Daewoo Securities Research estimates Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 107 November 13, 2012 The Age of Transition

Nepes (033640 KS or KQ/Buy/TP: W24,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 216 275 335 366 Current Assets 93 129 148 172 Cost of Sales 173 204 244 259 Cash and Cash Equivalents 16 12 18 28 Gross Profit 43 72 91 107 AR & Other Receivables 44 68 79 89 SG&A Expenses 21 32 35 37 Inventories 12 19 21 24 Operating Profit (Adj) 22 40 56 70 Other Current Assets 2 2 3 3 Operating Profit 22 40 56 70 Non-Current Assets 175 200 226 257 Non-Operating Profit -2 -7 1 4 Investments in Associates 16 16 16 16 Net Financial Income 2 2 2 2 Property, Plant and Equipment 124 145 169 182 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 5 4 4 4 Pretax Profit 20 33 57 74 Total Assets 269 329 374 429 Income Tax 5 7 13 17 Current Liabilities 52 72 81 83 Profit from Continuing Operations 15 26 44 57 AP & Other Payables 26 37 45 48 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 22 32 32 32 Net Profit 15 26 44 57 Other Current Liabilities 4 3 4 3 Controlling Interests 15 26 44 57 Non-Current Liabilities 59 70 64 62 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 50 55 51 47 Total Comprehensive Profit 15 25 43 56 Other Non-Current Liabilities 8 12 11 12 Controlling Interests 15 25 43 56 Total Liabilities 111 142 145 144 Non-Controlling Interests 0 0 0 0 Controlling Interests 158 187 229 284 EBITDA 41 59 78 102 Capital Stock 11 11 11 11 FCF (Free Cash Flow) -11 -15 12 28 Capital Surplus 73 76 76 76 EBITDA Margin (%) 18.9 21.5 23.1 28.0 Retained Earnings 78 103 146 201 Operating Profit Margin (%) 10.3 14.5 16.8 19.3 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 7.1 9.5 13.1 15.6 Stockholders' Equity 158 187 229 284

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 21 26 57 72 P/E (x) 23.5 11.0 6.5 5.0 Net Profit 15 26 44 57 P/CF (x) 10.6 6.3 4.4 3.2 Non-Cash Income and Expense 26 37 34 45 P/B (x) 2.3 1.6 1.3 1.0 Depreciation 18 19 21 32 EV/EBITDA (x) 9.9 5.8 4.3 3.1 Amortization 0 0 0 0 EPS (W) 702 1,194 2,015 2,609 Others -3 -8 4 6 CFPS (W) 1,557 2,074 2,980 4,072 Chg in Working Capital -16 -30 -7 -13 BPS (W) 7,136 8,388 10,328 12,861 Chg in AR & Other Receivables -4 -27 -11 -10 DPS (W) 50 50 50 50 Chg in Inventories -1 -6 -2 -3 Payout ratio (%) 7.0 4.2 2.5 1.9 Chg in AP & Other Payables -10 12 8 3 Dividend Yield (%) 0.3 0.4 0.4 0.4 Income Tax Paid -5 -7 -13 -17 Revenue Growth (%) -9.5 27.5 21.8 9.1 Cash Flows from Inv Activities -27 -47 -43 -53 EBITDA Growth (%) -8.8 44.7 31.3 32.1 Chg in PP&E -25 -40 -45 -45 Operating Profit Growth (%) -15.4 80.0 41.7 24.8 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -15.6 70.2 68.8 29.5 Chg in Financial Assets -3 -10 0 0 Accounts Receivable Turnover (x) 6.3 5.8 5.3 5.1 Others 1 2 2 -8 Inventory Turnover (x) 17.9 17.8 17.1 16.5 Cash Flows from Fin Activities -26 18 -8 -9 Accounts Payable Turnover (x) 14.7 15.3 14.0 13.6 Chg in Financial Liabilities -8 21 -4 -4 ROA (%) 5.5 8.7 12.5 14.2 Chg in Equity 0 6 0 0 ROE (%) 10.1 15.1 21.1 22.2 Dividends Paid -1 -1 -1 -1 ROIC (%) 11.3 16.6 19.2 21.2 Others -17 -12 -3 -4 Liability to Equity Ratio (%) 70.3 75.7 63.3 50.7 Increase (Decrease) in Cash -32 -4 6 10 Current Ratio (%) 180.0 179.0 183.5 207.7 Beginning Balance 48 16 12 18 Net Debt to Equity Ratio (%) 23.1 25.0 16.2 8.0 Ending Balance 16 12 18 28 Interest Coverage Ratio (x) 7.5 11.2 15.3 20.0 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 108 November 13, 2012 The Age of Transition

Simmtech (036710 KQ) James Song Mobile PCB revenues on the rise +822-768-3722 [email protected]  2013 outlook: Revenues up 15.6%; OP up 25.7%  Mobile-related revenues to soar to roughly 40% of total revenues next year  Undervalued at a 2013F P/E of 6.5x

2013 earnings: In 2013, we project Simmtech to post revenues of W756.5bn (up Buy (Maintain) 15.6% YoY) and an operating profit of W67bn (up 25.7% YoY). Despite a Target Price (12M, W) 17,000 disappointing performance in 2H12, due to 1) weakening PC memory module Share Price (11/12/12, W) 10,600 demand, 2) falling F/X rates, and 3) rising gold prices, revenues from mobile Expected Return (%) 60.4 substrates including multi-chip packaging (MCP) are steadily on the rise. EPS Growth (12F, %) -20.5 Market EPS Growth (12F, %) 8.9 Growth theme: SimmtechÊs growth next year should hinge on mobile printed- P/E (12F, x) 9.3 circuit boards (PCB). Mobile PCB revenues, which started to pick up full swing in Market P/E (12F, x) 10.2 2H12, are anticipated to surge 64% (to W163.8bn) this year, contributing to 25% KOSDAQ 521.43 of the companyÊs total revenues. In 2013, mobile device-related revenues are Market Cap (Wbn) 340 forecast to soar 86.9%, to W306bn, accounting for 40% of total revenues. Shares Outstanding (mn) 32 Avg Trading Volume (60D, '000) 462 This year, mobile substrate revenues are estimated at: W113bn from MCP, Avg Trading Value (60D, Wbn) 5 W46.1bn from chip-scale packages (CSP), and W4.7bn from flip-chip CSP (FC-CSP). Dividend Yield (12F, %) 1.9 MCP revenues have started to expand in earnest recently, and FC-CSP sales Free Float (%) 73.6 began in 2H. Next year, Simmtech is anticipated to generate revenues of W225bn 52-Week Low (W) 9,700 from MCP (30% of total revenues), W5.2bn from CSP, and W29bn from FC-CSP. 52-Week High (W) 15,600 Beta (12M, Daily Rate of Return) 1.31 Catalysts: 1) In 2013, we forecast the smartphone and tablet PC markets to Price Return Volatility (12M Daily, %, SD) 2.8 respectively grow to 780mn units (up 24% YoY) and 180mn units (up 64% YoY). Foreign Ownership (%) 8.4 As such, mobile memory sales by SimmtechÊs customers are likely to grow. 2) Major Shareholder(s) Simmtech decided to switch part of its PC memory module production to S.H. Jeon (25.82%) manufacture MCP (15,000m2 per month) by 1Q to satisfy rising MCP demand. M.J. Lee (9.46%) Risks: 1) 95% of SimmtechÊs revenues are based on the US dollar, and payments National Pension Service (8.53%) made in dollars (for raw material purchases, etc.) account for 35% of total revenues. Price Performance Thus, a 10% fall in the US$/W rate is estimated to dent the companyÊs OP margin by (%) 1M 6M 12M Absolute -9.4 -14.9 -17.5 2%p. The US$/W rate is forecast to average W1,064 next year. 2) The cost of gold Relative -7.7 -14.0 -19.5 (raw material) is equivalent to 20% of the companyÊs revenues. If gold prices rise 10% (from around W1,700), the companyÊs OP margin may decline by 2%p.

Valuation: We maintain our Buy rating on Simmtech, but cut our target price from W20,000 to W17,000 (2013F P/E of 10.0x). We revised down our 2013 operating profit projection for the company by 16% from W80bn to W67bn to reflect the unfavorable movements of external factors such F/X rates and gold prices, which have weighed on the companyÊs earnings since September. However, the stock appears undervalued, currently trading at a 2013F P/E of 6.4x.

Share price § Earnings & Valuation Metrics 130 KOSDAQ FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 120

110 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 100 12/10 577 85 14.7 71 2,590 111 124 93.2 5.5 3.0 5.2 90 12/11 612 61 10.0 42 1,435 94 56 27.0 8.5 2.1 5.5 80 12/12F 655 53 8.2 35 1,140 89 52 18.3 9.3 1.6 5.1 70 12/13F 757 67 8.9 52 1,669 104 53 22.0 6.4 1.3 3.9 60 12/14F 852 81 9.5 63 2,035 115 63 22.2 5.2 1.1 3.1 11/11 3/12 7/12 11/12 Notes: Based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 109 November 13, 2012 The Age of Transition

Table 1. Quarterly and annual earnings forecasts (Wbn, %) 1Q12 2Q12 3Q12P 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2010 2011 2012F 2013F Revenues 158.3 162.4 166.3 167.6 170.3 184.5 200 201.7 576.6 612.3 654.5 756.5 % QoQ -4.5 2.6 2.4 6.5 1.6 8.3 8.4 15.3 % YoY 6.8 5 15.7 1.1 7.6 13.6 20.3 20.3 16.1 6.2 6.9 15.6 Memory module/BOC 104.7 91.6 86.6 75.7 74 80 86 87 344 383 359 335 Mobile (CSP, MCP, FC-CSP) 20 35 47 63 67 74 82 83 74 100 164 306 Flash memory card 16 14 12 15 16 16 18 18 61 66 57 68 Gross profit 24 25 24 23 25 27 30 31 117 98 97 112 % of Revenues 15.1 15.7 14.5 14 14.4 14.5 14.8 15.2 20.3 16.1 14.8 14.7 SG&A 10 10 10 10 11 10 10 12 32 36 41 43 % of Revenues 6.5 6.4 6 6 6.2 5.4 5 5.9 5.5 5.9 6.2 5.6 Operating profit 12.8 14.1 13.6 13 13.5 16.3 19.1 18.2 85.1 61.1 53.3 67 % QoQ -17.7 10.1 -3.5 -4.4 4.3 20.2 17.5 -4.9 % YoY -23.5 -22 24.7 -16.4 6 15.7 40.9 40.1 66.1 -28.2 -12.7 25.7 Net profit 9.2 9.9 6.9 9.4 9.9 11.9 14.1 15.8 70.7 41.9 35.3 51.7 % QoQ -20.7 7.6 -29.9 35.8 5.2 20.7 17.9 12.7 %YoY -16.7 -15.3 -11.1 -18.7 7.8 21 103.5 68.8 43.3 -40.7 -15.8 46.4 Gross margin 15.1 15.7 14.5 14 14.4 14.5 14.8 15.2 20.3 16.1 14.8 14.7 OP margin 8.1 8.7 8.2 7.7 7.9 8.8 9.6 9 14.8 10 8.1 8.9 Net margin 5.8 6.1 4.2 5.6 5.8 6.5 7 7.9 12.3 6.8 5.4 6.8 Note: Non-consolidated K-IFRS basis Source: Company data, KDB Daewoo Securities Research estimates

Figure 1. Annual revenue and operating profit trends and outlook Figure 2. Quarterly sales trend and forecasts by product

(Wbn) (Wbn) (Wbn)PC-related revenues (L) Mobile-related products' (%) 800 Revenues (L) Expansion of mobile-related products improves 100 150 Mobile-related revenues (L) revenue contribution expands 40 Operating profit (R) growth and earnings Other revenues (L) 125 % of mobile-related revenues (R) 600 75 30 100

400 50 75 20

50 200 25 10 25

0 0 0 0 05 07 09 11 13F 07 08 09 10 11 12F 13F

Source: Company data, KDB Daewoo Securities Research estimates Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 110 November 13, 2012 The Age of Transition

Simmtech (036710 KQ/Buy/TP: W17,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 612 655 757 852 Current Assets 153 163 205 259 Cost of Sales 514 558 645 726 Cash and Cash Equivalents 16 28 31 64 Gross Profit 98 97 112 126 AR & Other Receivables 70 74 91 103 SG&A Expenses 36 41 43 45 Inventories 66 60 72 81 Operating Profit (Adj) 62 56 69 81 Other Current Assets 1 1 1 1 Operating Profit 61 53 67 81 Non-Current Assets 294 297 288 284 Non-Operating Profit -10 -9 -1 1 Investments in Associates 14 14 14 14 Net Financial Income 9 6 4 2 Property, Plant and Equipment 231 235 226 223 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 5 4 3 2 Pretax Profit 52 45 66 80 Total Assets 447 460 492 543 Income Tax 10 10 14 17 Current Liabilities 226 171 169 173 Profit from Continuing Operations 42 35 52 63 AP & Other Payables 93 94 111 125 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 126 70 50 40 Net Profit 42 35 52 63 Other Current Liabilities 7 7 8 9 Controlling Interests 42 35 52 63 Non-Current Liabilities 48 77 67 59 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 35 51 40 30 Total Comprehensive Profit 40 33 50 61 Other Non-Current Liabilities 3 12 14 15 Controlling Interests 40 33 50 61 Total Liabilities 274 247 236 232 Non-Controlling Interests 0 0 0 0 Controlling Interests 173 213 256 311 EBITDA 94 89 104 115 Capital Stock 15 16 16 16 FCF (Free Cash Flow) 56 52 53 63 Capital Surplus 82 92 92 92 EBITDA Margin (%) 15.4 13.6 13.8 13.5 Retained Earnings 78 108 153 210 Operating Profit Margin (%) 10.0 8.2 8.9 9.5 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 6.9 5.4 6.8 7.4 Stockholders' Equity 173 213 256 311

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 71 86 79 93 P/E (x) 8.5 9.3 6.4 5.2 Net Profit 42 35 52 63 P/CF (x) 4.9 4.8 3.8 3.4 Non-Cash Income and Expense 63 58 53 52 P/B (x) 2.1 1.6 1.3 1.1 Depreciation 32 31 34 34 EV/EBITDA (x) 5.5 5.1 3.9 3.1 Amortization 0 2 1 1 EPS (W) 1,435 1,140 1,669 2,035 Others -8 -5 0 1 CFPS (W) 2,527 2,200 2,806 3,142 Chg in Working Capital -33 -1 -11 -6 BPS (W) 5,865 6,565 7,950 9,678 Chg in AR & Other Receivables -2 -5 -17 -12 DPS (W) 200 200 200 200 Chg in Inventories -17 6 -12 -9 Payout ratio (%) 13.7 18.1 12.4 10.1 Chg in AP & Other Payables -7 -5 17 14 Dividend Yield (%) 1.6 1.9 1.9 1.9 Income Tax Paid 0 -6 -14 -17 Revenue Growth (%) 6.2 6.9 15.6 12.6 Cash Flows from Inv Activities -15 -36 -35 -30 EBITDA Growth (%) -14.6 -5.8 17.2 10.7 Chg in PP&E -20 -31 -25 -30 Operating Profit Growth (%) -28.0 -12.7 25.7 21.0 Chg in Intangible Assets 1 0 0 0 EPS Growth (%) -44.6 -20.5 46.4 22.0 Chg in Financial Assets 5 -4 -10 0 Accounts Receivable Turnover (x) 9.8 11.3 11.1 10.6 Others -1 -1 0 0 Inventory Turnover (x) 10.7 10.4 11.4 11.2 Cash Flows from Fin Activities -54 -38 -42 -30 Accounts Payable Turnover (x) 15.5 16.7 17.5 17.2 Chg in Financial Liabilities -40 -77 -50 -20 ROA (%) 9.5 7.8 10.9 12.2 Chg in Equity 0 12 0 0 ROE (%) 27.0 18.3 22.0 22.2 Dividends Paid -5 -6 -6 -6 ROIC (%) 18.9 16.1 19.8 23.3 Others -9 -3 -4 -3 Liability to Equity Ratio (%) 158.3 116.2 92.1 74.7 Increase (Decrease) in Cash 2 12 2 34 Current Ratio (%) 67.5 95.6 121.4 149.3 Beginning Balance 14 16 28 31 Net Debt to Equity Ratio (%) 83.8 43.6 19.2 -1.4 Ending Balance 16 28 31 64 Interest Coverage Ratio (x) 6.7 8.3 15.9 25.8 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 111 November 13, 2012 Korea Tech Strategy

Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of SK Hynix, Samsung Electronics, Samsung SDI, Samsung Electro-Mechanics and LG Electronics as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. has been acting as a financial advisor to SFA Engineering for its treasury stock trust, and other than this, Daewoo Securities has no other special interests in the companies covered in this report. As of the publication date, Daewoo Securities Co., Ltd. has interest in LG Electronics in accordance with a subscription agreement, etc. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with SK Hynix, Samsung Electronics, Samsung SDI, Samsung Electro-Mechanics and LG Electronics as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.

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 Daewoo Securities, 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 analystÊs 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.

(W) Samsung Electronics (W) SK Hynix (W) LG Electronics (W) Samsung Electro-Mechanics

2,000,000 50,000 200,000 200,000 40,000 1,500,000 150,000 150,000 30,000 1,000,000 100,000 100,000 20,000

500,000 10,000 50,000 50,000

0 0 0 0 11/10 5/11 11/11 5/12 11/12 11/10 5/11 11/11 5/12 11/12 11/10 5/11 11/11 5/12 11/12 11/10 5/11 11/11 5/12 11/12

(W) Samsung SDI (W) SFA Engineering (W) Soulbrain (W) Duksan Hi-Metal 250,000 100,000 60,000 50,000 200,000 80,000 50,000 40,000 40,000 150,000 60,000 30,000 30,000 100,000 40,000 20,000 20,000 50,000 20,000 10,000 10,000 0 0 0 0 11/10 5/11 11/11 5/12 11/12 11/10 5/11 11/11 5/12 11/12 11/10 5/11 11/11 5/12 11/12 11/10 5/11 11/11 5/12 11/12

(W) Partron (W) Nepes (W) Simmtech

35,000 35,000 25,000 30,000 30,000 20,000 25,000 25,000 20,000 20,000 15,000 15,000 15,000 10,000 10,000 10,000 5,000 5,000 5,000 0 0 0 11/10 5/11 11/11 5/12 11/12 11/10 5/11 11/11 5/12 11/12 11/10 5/11 11/11 5/12 11/12

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. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs 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 Daewoo Securities, the Analysts receive compensation that is impacted 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 Daewoo Securities Co., Ltd. except as otherwise stated herein.

KDB Daewoo Securities Research 112 November 13, 2012 Korea Tech Strategy

Disclaimers This report is published by Daewoo Securities Co., Ltd. („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 from sources believed to be reliable and in good faith, but such information has not been independently verified and 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. If this report is 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. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. 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 Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and 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 Daewoo. 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. 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. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

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KDB Daewoo Securities International Network

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KDB Daewoo Securities Research 113