December 1, 2011 Industry Report
Electronic Materials (Overweight)
Daewoo Securities Co., Ltd. More attractive than downstream industries Will Cho +822-768-4306 Initiate coverage with Overweight rating [email protected]
We initiate our coverage on the electronic materials sector, presenting an Overweight rating. The industry is noteworthy, as: 1) electronic materials makersÊ earnings are relatively insensitive to IT market conditions since their products are necessary for downstream manufacturing, and 2) companies in the sector can actively adapt to new IT paradigms thanks to their strong technology scalability. As such, when the IT market is in a down cycle, electronic materials shares tend to outperform semiconductor, LCD, and IT parts shares.
Korean electronic materials companies to enter a boom
Korean electronic device makers have become increasingly competitive in key IT segments (e.g., semiconductors, LCDs, and rechargeable batteries). And the growing market dominance of Korean electronic device makers should play a critical role in boosting the competitiveness of domestic electronic materials suppliers on the back of localization and vertical integration. In addition, the Korean government seems committed to supporting the local production of materials going forward in an effort to adjust the trade imbalance with Japan. Furthermore, F/X rates look favorable. Rises in the US$/W rate have positive impacts on KoreaÊs export-driven IT industry, and yen appreciation should boost the price competitiveness of Korean electronic materials companies.
Top picks: Duksan Hi-Metal, Cheil Industries, and OCI Materials Among electronic materials segments, AMOLED materials appears to be the most attractive in light of the strong growth potential of the related downstream industry, high barriers to entry, and further room for market share expansion. Over the medium- to long- term, the rechargeable battery-use materials business appears attractive. We recommend Duksan Hi-Metal (077360 KQ/Buy) in light of its focus on AMOLED materials; Cheil Industries (001300 KS/Buy) in light of its expected vertical integration with SMD in the AMOLED materials segment; and OCI Materials (036490 KQ/Buy) in light of its dominant position in the semiconductor-, LCD-, and AMOLED-use gas markets and valuation merits. We also like Soulbrain (036830 KQ/Buy), due to its diversified business portfolio and earnings stability; and Iljin Materials (020150 KS/Buy), as it should benefit from rechargeable battery market growth.
Share performance comparison among IT segments
(1/1/10=100) IT slump to start Earthquake in Japan 220 Electronic materials IT parts Slowdown in IT demad IT devices → Differentiation in share prices 180 IT sector index Strong IT market Concerns over supply chain → Share prices moved → Differentiation in share prices 140 in the same direction
100
60 1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11
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.
I. Investment summary ...... 3
II. Merits of electronic materials makers ...... 5 1. Earnings stability thanks to high barriers to entry...... 5 2. Mid- to long-term growth potential ...... 6
III. What makes Korean suppliers competitive? ...... 7 1. Market dominance of Korean electronic device makers...... 7 2. Government support for the domestic production of materials...... 8 3. Favorable F/X environment...... 9
IV. Industry analysis...... 10 1. AMOLED materials...... 10 2. Rechargeable battery materials ...... 16 3. Semiconductor materials...... 27 4. LCD materials...... 30 5. Special gases ...... 34
V. Investment strategy and valuation ...... 39 1. Initiate with Overweight; Top picks: Duksan, Cheil Industries and OCIM ...... 39
Cheil Industries (001300 KS)...... 41
OCI Materials (036490 KQ) ...... 49
Duksan Hi-Metal (077360 KQ) ...... 55
Soulbrain (036830 KQ)...... 65
Iljin Materials (020150 KS) ...... 77
2
December 1, 2011 Electronic Materials
I. Investment summary
Merits of electronic We initiate our coverage on the electronic materials sector, presenting an Overweight rating. materials: The industry is noteworthy, as: 1) electronic materials makersÊ earnings are relatively ① Defensive stocks insensitive to IT market conditions since their products are necessary for downstream ② Mid- to long-term manufacturing, and 2) companies in the sector can actively adapt to new IT paradigms growth potential thanks to their strong technology scalability. As such, when the IT market is in a down cycle, electronic materials shares tend to outperform semiconductor, LCD, and IT parts shares. Indeed, since the IT industry fell into a down cycle in 2010, electronic materials shares have risen by a whopping 78% (on average), while IT parts shares climbed only 13%, and large- cap IT shares and the IT sector index plunged by 17% and 2%, respectively.
Merits of Korean Korean electronic device makers have become increasingly competitive in key IT segments electronic materials (e.g., semiconductors, LCDs, and rechargeable batteries). And the growing market makers: dominance of Korean electronic device makers should play a critical role in boosting the ① Competitiveness of competitiveness of domestic electronic materials suppliers on the back of localization and domestic electronic vertical integration. In addition, the Korean government seems committed to supporting the device makers local production of materials going forward in an effort to adjust the trade imbalance with ② Government support Japan. Furthermore, F/X rates look favorable. Rises in the US$/W rate have positive impacts for local production on KoreaÊs export-driven IT industry, and yen appreciation should boost the price ③ Favorable F/X rates competitiveness of Korean electronic materials companies.
AMOLED materials and Among electronic materials segments, AMOLED materials appears to be the most attractive rechargeable battery in light of the strong growth potential of the related downstream industry, high barriers to materials stocks seem entry, and further room for market share expansion. The downstream AMOLED panel particularly attractive market is likely to grow at a CAGR of 87% through 2015. And the technological barriers to entry are so high that only a few companies have succeeded in developing and mass- producing products. Of particular note, given that Samsung Mobile Display (SMD) is leading the global AMOLED market, domestic materials makers are likely to quickly expand their market shares. Over the medium- to long-term, the rechargeable battery-use materials business appears attractive. The market is likely to show eightfold growth, as applications of rechargeable batteries are expanding to xEV (HEV, PHEV, and EV) and energy storage systems (ESS).
Top picks are Duksan Hi- We recommend Duksan Hi-Metal (077360 KQ/Buy) in light of its focus on AMOLED Metal, Cheil Industries materials; Cheil Industries (001300 KS/Buy) in light of its expected vertical integration with and OCI Materials SMD in the AMOLED materials segment; and OCI Materials (036490 KQ/Buy) in light of its dominant position in the semiconductor-, LCD-, and AMOLED-use gas markets and valuation merits. We also like Soulbrain (036830 KQ/Buy), due to its diversified business portfolio and earnings stability, and Iljin Materials (020150 KS/Buy), as it should benefit from rechargeable battery market growth.
KDB Daewoo Securities Research 3 December 1, 2011 Electronic Materials
Table 1. Segments of the electronic materials industry Growth potential of Further room for Downstream Entry barrier Core materials Related companies downstream industry M/S expansion Duksan Hi-Metal (077360 KQ) - Organic materials (HTL, ETL, EML) Cheil Industries (001300 KS) - Etchant (thin glass) AMOLED ★★★★★ ★★★★ ★★★★ Soulbrain (036830 KQ) - NF3, monosilane OCI Materials (036490 KQ) - TCO target ANP (121600 KQ) - Cathode/anode materials, separators, Soulbrain (036830 KQ) electrolytes Iljin Materials (020150 KS) Rechargeable ★★★★ ★★★★ ★★★★ - Anode electron collector (elecfoil) OCI Materials (036490 KQ) battery - LiPF6 Foosung (093370 KQ) - Electrolyte additives Leechem (131100 KQ) - High-end process materials related to Cheil Industries (001300 KS) Semiconductor ★★ ★★★★ ★★★ process migration Duksan Hi-Metal (077360 KQ) - Micro solder ball - Polarizer and raw materials (TAC, PVA) Cheil Industries (001300 KS) LCD ★ ★★★ ★★★ - Glass substrate LG Chem (051910 KS) - NF3 Special gas ★★★ ★★★★★ ★★ OCI Materials (036490 KQ) - Monosilane Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 4 December 1, 2011 Electronic Materials
II. Merits of electronic materials makers
1. Earnings stability thanks to high barriers to entry
High entry barriers, low Electronic materials is a term often used to describe the special chemicals that are needed price-cut pressure to produce IT products such as semiconductors, LCDs, rechargeable batteries, AMOLEDs and solar cells. A broad definition of electronic materials includes all IT product components, ranging from basic materials to parts. In this report, however, we limit the definition to chemicals-based basic and process materials (vs. assembly-based IT parts and components).
The greatest merits of electronic materials companies are their high barriers to entry. It requires a significant amount of time for an electronic materials maker to acquire the necessary technologies, production know-how and quality control skills. Even with the same production facilities and technologies, a competitor might struggle to produce an identical product. In addition, on the customer side, there is no reason to change the supplier without a promise of marked improvements in costs or quality.
Once a relationship is formed between an electronic materials maker and its customer (an electronic device maker), it becomes increasingly difficult to break the relationship. For an electronic device maker, close cooperation with an electronic materials maker is essential to adeptly respond to ever-changing IT trends. For an electronic materials maker, a partnership with an electronic device maker from the early stage of product development enables it to quickly identify and satisfy client needs.
Such high barriers to entry allow electronic materials makers to enjoy stable and profitable growth relative to electronic device and IT parts makers. Indeed, electronic materials makers in Korea and Japan have reported stable earnings since the 1990s, irrespective of the ups and downs of the electronic device makers.
The earnings stability of electronic materials makers becomes particularly evident when compared to IT parts makers. While electronic materials are not easily replaceable and price- cut pressure is low, IT parts are strongly affected by end product demand. For instance, FPCB demand surged in the early 2000s when flip phones were all the rage, but demand fell as slide phones (which require fewer FPCBs per handset) hit the market. Afterwards, competition intensified with the entry of new players, and profitability deteriorated as a result. Since 2008, however, FPCB demand has soared again with the release of smartphones (five FPCBs per handset), and profitability has also improved.
Figure 1. OPM comparison of electronic materials/device makers Figure 2. Earnings trend of Interflex (FPCB maker)
(%) (Wbn)Revenues (L) - New competitors to enter the market (%) 60 OCI Materials Soulbrain 500 Operating profit (R) - Shipments to decrease due to the proliferation 20 Shin-Etsu Chemical JSR of slide phones Elpida Hynix - Declines in market share and ASP 40 15 400 10 20 300 5 0 0 200 -20 -5 100 -40 Electronic material makers (OCI Materials, Soulbrain, Shin-Etsu, JSR) -10 have more stable profitability than electronic parts and device makers (Hynix, Elpida) -60 0 -15 95 97 99 01 03 05 07 09 00 02 04 06 08 10
Source: Bloomberg, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 5 December 1, 2011 Electronic Materials
2. Mid- to long-term growth potential
Actively responding to Electronic materials makers can actively respond and adapt to the new IT paradigm thanks the paradigm shift to their strong technology scalability. The scalability enables them to: 1) lead technology developments by encouraging their clients to upgrade processes and 2) expand into new growth areas such as AMOLED, large-sized rechargeable batteries and environmental materials, reducing their earnings volatility driven by rapid changes in the IT industry. AMOLED makers can diversify into the flexible display segment, and small- to mid-sized rechargeable battery materials can later be applied to mid- to large-sized xEV and ESS. In the past, Japanese electronic materials companies actively made inroads into the fledging semiconductor, LCD and rechargeable battery markets utilizing their petrochemical technologies. As a result, their global market share exceeded 60% in 2005 (over 70% in the LCD materials market). The strong performance of Japanese electronic materials companies was partially enabled by the growth of Japanese electronic device makers such as Sony, Sharp, Panasonic and Toshiba, but more importantly, by high entry barriers fortified by aggressive investments and the development of next generation technologies. As materials companies have accumulated technologies from the ground up (development of raw materials), they could actively respond to paradigm shifts. JSR, a synthetic rubber maker, advanced into the semiconductor-use photoresist industry in the early 1980s. The company is currently the largest semiconductor-use photoresist producer with a global market share of 33%, and is expanding into the next-generation semiconductor and display materials markets. Hitachi Chemical, which started out as an auto-use insulating materials producer, is now unrivaled in small- to mid-sized insulating materials and anode materials for xEV-use rechargeable batteries. Korean electronic materials markers are also diversifying their business portfolios. Cheil Industries plans to advance into the rechargeable battery separator market in the mid- to long-term using its water treatment membrane technology. Foosung became the first Korean company to locally produce electrolyte salt (LiPF6) used in rechargeable batteries, putting to use its fluorine-related know-how. OCI Materials is reviewing a plan to expand into the electrolytes market (for rechargeable batteries) based on its NF3-related know-how and technologies.
Table 2. Business diversification strategies of major electronic materials companies Previous business Current mainstay business Future growth engine Specific product JSR Petrochem Semiconductor and LCD Next-gen processing materials EUV PR, flexible display substrate processing materials Environment and energy materials LIB capacitor, fuel cell separator Biomedical materials Diagnostic particles Hitachi Chem Carbon brushes Semiconductor and LCD LIB materials xEV-use anode materials Industrial laminates processing materials Insulting varnishes LIB anode materials Mitsubishi Chem Petrochem Petrochem Environment and energy materials LIB materials, water treatment materials Healthcare Next-gen lighting White LED lighting, OLED lighting FPD materials Healthcare solution Diagnostic particles Kuraray Synthetic fiber Resin and rubber Environment materials Water treatment materials Polarizer materials Energy materials Solar cell passivation and fuel cell materials Next-gen optical materials Transparent conductive films Cheil Industries Textile ECM (LCD, semiconductor) Next-gen processing materials Processing materials related to tech migration Fashion Chemicals (ABS, EP) AMOLED AMOLED materials, flexible display substrate Petrochem Fashion Environment and energy materials Water treatment materials, solar cell paste OCI Materials CRT abrasives Processing gas AMOLED-use processing gas NF3, monosilane (NF3, monosilane, WF6) LIB materials (expected) LiPF6 (expected) Duksan Hi-Metal Solder ball AMOLED materials (HTL) AMOLED materials AMOLED materials for large-area AMOLED Solder ball Micro solder ball Mobile DRAM-use micro solderball Soulbrain Etchant Etchant Next-gen semiconductor materials CVD precursor Electrolyte LIB materials xEV, ESS-use electrolyte Foosung Refrigerant gas Refrigerant gas LIB materials Electrolyte salt (LiPF6) Car mat Processing gas CDM CDM Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 6 December 1, 2011 Electronic Materials
III. What makes Korean suppliers competitive?
1. Market dominance of Korean electronic device makers
Vertical integration by Korean electronic device makers have become increasingly competitive in key IT industries, Korean electronic device such as semiconductors, LCDs and rechargeable batteries, with Korean companies now makers to gain traction accounting for over 60% of the global DRAM market, 53% of LCD panels, 40% of rechargeable batteries, and 34% of LCD TVs. The growing market dominance of Korean electronic device makers plays a critical role in boosting the competitiveness of domestic electronic material suppliers on the back of localization and vertical integration. Major Korean electronic device makers have been working on vertically integrating the supply chain to save costs and reduce volatility arising from external shocks. For example, after experiencing severe supply disruptions in the aftermath of the massive Japanese earthquake in March, Korean electronic device makers have been switching over to domestic electronic materials suppliers. Such moves should help Korean suppliers capture captive markets and enjoy a strong market presence. As customers gain market share, we expect domestic electronic materials suppliers to also expand their market shares, while joint efforts in product development should help cement their positions within customer markets. And given the strong operating leverage of the electronic materials industry, we believe Korean companies can improve profitability by achieving economies of scale, even amid downward pricing pressures from domestic customers.
Figure 3. Global M/S of DRAM Figure 4. Global M/S of LCD panel
(%) (%) 50 SEC Hynix 35 SEC LGD AUO Korea M/S 53.1% Elpida Micron Korea M/S 60% CMI CPT Nanya PowerChip 30 40 25
30 20
15 20
10 10 5
0 0 00 02 04 06 08 10 04 05 06 07 08 09 10
Source: KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research
Figure 5. Global M/S of LCD TV Figure 6. Global M/S of rechargeable battery
(%) (%) SEC LGE 30 30 Samsung SDI LG Chem SONY SHARP Sanyo Sony PHILIPS PANASONIC Korea M/S 34% BYD 25 25 Korea M/S 39.5%
20 20
15 15
10 10
5 5
0 0 04 05 06 07 08 09 10 02 03 04 05 06 07 08 09 10
Source: DisplaySearch, KDB Daewoo Securities Research Source: IIT, KDB Daewoo Securities Research KDB Daewoo Securities Research 7 December 1, 2011 Electronic Materials
2. Government support for the domestic production of materials
The government The Korean governmentÊs strong commitment to the domestic production of materials is commits W1tr to the one of the key driving forces of the domestic electronic materials industry. Over the past WPM project decade, government subsidies, support for joint development between the industry and universities, promotion of collaboration between large and small-sized companies, and tax benefits have all helped to steadily raise the percentage of domestically produced materials in semiconductors, LCDs, rechargeable batteries and other key IT industries. In particular, the LCD materials market, which had been dominated by Japanese suppliers (70% of the global market up until 2006), is now localized by over 50%. We estimate that the semiconductor materials market is localized by 55% and the rechargeable battery materials industry by 56%. Still, dependence on Japanese suppliers remains high, which is one reason why KoreaÊs trade deficit with Japan hit a record in 2010 (US$34.8bn). In an effort to adjust the trade imbalance with Japan, the Korean government is expected to continue to support the local production of materials going forward.
In May 2010, the government announced its plan to promote next-generation displays and related equipments, components and materials, with the goal for domestic companies to satisfy 70% of KoreaÊs display equipment and material requirements by 2015 (currently, the percentage stands at 50%). R&D tax deductions, which had been limited to AMOLED facility investments, will also be extended to other sectors, including flexible displays.
The World Premier Materials (WPM) project, unveiled in August 2010, should also provide a boost to the domestic electronic materials industry. The government plans to invest W1tr in the project by 2018 and hopes to attract W10tr in private investments.
Table 3. WPM (World Premier Materials) projects (Wbn) Investment No Project Leading company ~CY12 ~CY15 ~CY18 Sub-total 1 Smart steel sheet POSCO 0 0 222 222 2 Ultra-light magnesium materials POSCO 84 202 1,195 1,481 3 Nano carbon materials LG Chem 4 119 3,744 3,868 4 Smart membrane materials Kolon Fashion Material 79 232 421 732 5 Flexible display substrate Cheil Industries 8 15 343 366 6 High-performance LIB materials Samsung SDI 0 0 1,215 1,215 7 Biomedical materials Aminologics 34 70 50 153 8 Ultra-pure SiC materials LG Innotek 37 263 365 664 9 Super sapphire monocrystal Sapphire Technology 348 449 578 1,374 10 Premium ketone Hyosung 2 7 421 431 Total 596 1,357 8,553 10,505 Source: MKE
Figure 7. Localization of semiconductor materials (2010) Figure 8. Localization of rechargeable battery materials (2010)
(%) (%) (%) (%) 50 100 Market portion (L) 100 Market portion (L) 100 Localization (R) Localization (R) 40 80 80 80
30 60 Localization of semiconductor materials (2010): 54.8% 60 Localization of secondary battery (2010): 56.0% 60 Localization of semiconductor materials (2004): 49.7% 20 40 40 40 10 20 Localization of secondary battery (2003): 30.7% 20 20 0 0 Wafer Back-end Photo Precursor Chemicals CMP Gas Materials Resist Slurry/ 0 0 (PR) Pad Total Cathod material Separator Electrolyte Anode material
Source: Consortium of Semiconductor Advanced Research, Source: KDB Daewoo Securities Research KDB Daewoo Securities Research KDB Daewoo Securities Research 8 December 1, 2011 Electronic Materials
3. Favorable F/X environment
Won depreciation Lately, the Korean won has weakened against major currencies. Due to ongoing macro boosts price uncertainties, the Japanese yen and the U.S. dollar, both considered safe haven assets, are competitiveness likely to remain strong against the won for the time being. Given that Korean electronic materials makers are now almost as technically competitive as their Japanese counterparts, won depreciation should help drive their market shares going forward.
Overall, a rise in the US$/W rate has a positive impact on KoreaÊs e export-driven IT industry. More specifically, if the rise in US$/W improves the profitability of large electronic device makers and boosts their price competitiveness, domestic materials suppliers are also likely to benefit. Better profitability at customers could also help ease downward pricing pressures.
Won depreciation against the yen is also positive to domestic electronic materials makers. One of the key drivers behind Korean makersÊ market share gains against Japanese suppliers (which had virtually dominated the market until 2007) has been yen appreciation. The JPY/W rate had been on a downward trend for four years since 2004, but reversed upwards in 2H07 and doubled until 2009. The sharp appreciation of the yen allowed Korean suppliers to gain an upper hand over their Japanese peers.
Figure 9. Correlation between US$/W and Korea IT sector index
(US$/W) (IT sector index/KOSPI) 1,600 US$/W F/X-rate (L) 7 IT sector relative index (R)
6 1,400
5
1,200 4
1,000 3
800 2 00 02 04 06 08 10
Source: KDB Daewoo Securities Research
Figure 10. JPY100/W trend and forecast
(W/100JPY) 1,600 Yen to remain strong
1,400
1,200
1,000
800
600 00 02 04 06 08 1012F 12
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 9 December 1, 2011 Electronic Materials
IV. Industry analysis
1. AMOLED materials
1) Market outlook Superior short-term AMOLED-related materials are divided into backplane, pixel and passivation materials, of growth potential with a which light-emitting organic materials (a type of pixel material) are considered to be the most 2010~15F CAGR of 89% essential. Except for organic materials, all of the materials are also used to create LCD panels. Moreover, the necessity of the materials depends on which technology process is established as the industry standard (e.g., backplane, organic material deposition). However, organic materials, which are exclusively used in AMOLED panels, are essential irrespective of the technology process. In addition, the organic materials market has a high barrier to entry, as customers demand a long life span, high light-emitting efficiency, superior thermal stability, and high purity.
We expect the AMOLED materials market to grow at a CAGR of 88.7% through 2015, backed by the downstream AMOLED market. AMOLED panels, which have been adopted in handsets and tablet PCs, are projected to be used in TVs from 2012.
Table 4. Classification of AMOLED-related materials LTPS Back plane Oxide TFT Metal positive electrode Electrode Transparent negative electrode HIL (hole injection layer) Electron/hole HTL (hole transport layer) Pixel transport materials EIL (electron injection layer) materials Small molecular/ ETL (electron transport layer) Polymer Host (RGB) Efficiency EML Dopant (RGB) (emission layer) Emission Fluorescence mechanism Phosphorescence Glass can Thin film Passivation (encapsulation) Moisture absorbent Sealant Source: KETI
Figure 11. AMOLED panel and AMOLED materials market trend and forecasts
(Wtr) (Wtr) 40 AMOLED (L) 3 AMOLED materials (R)
30 2
20
1 10
0 0 09 10 11F 12F 13F 14F 15F
Source: DisplaySearch, KDB Daewoo Securities Research
KDB Daewoo Securities Research 10 December 1, 2011 Electronic Materials
2) AMOLED TVs to proliferate the market by 2015 Conditions for the In order to be considered a major display panel, AMOLED displays need to be adopted in proliferation of AMOLED TVs, which account for 66% of the total display market (in terms of panel area). We TVs: examined the trends of the LCD industry to project when the AMOLED TV market will begin 1) high percentage of to grow full swing. large-sized panels; and The LCD industry started to expand full swing in 2006 when the penetration of LCD TVs 2) adequate production exceeded 20% on the back of larger LCD panels
As such, the AMOLED TV market also needs to gain price competitiveness via economies of scale in order to experience robust growth. To this end, the market must meet two conditions: 1) a high percentage of large-sized panels (5.5G or higher) and 2) adequate production capacity.
As for AMOLED, the percentage of large-sized panels appears to have already reached the LCDÊs 2006 level of 45%. AMOLED panels are transitioning from 4G to 5.5G more rapidly than LCDs, as panel makers are seeking to expand the application of AMOLED from handsets directly to TVs, bypassing laptops and PC monitors. TVs are a more appropriate application for AMOLED panels than laptops and PC monitors which display still frames (backgrounds, icons and banners). If AMOLED panels display still frames for a significant period of time, the efficiency of the organic materials will decline, leading to such problems as image sticking, which shortens the life span of the panels.
Once the percentage of large-sized panels reaches the critical level, the next question is production capacity. Taking into consideration the time that it takes to create standard technologies and develop equipment, AMOLED capacity will not reach the 2006 level for LCDs until 2016, in our view. However, the capacity for AMOLED TV panels is expected to reach the 2006 level for LCD TV panels in 2015, as the percentage of laptop- and PC monitor-use AMOLED capacity out of total AMOLED capacity is lower than that of LCDs.
As such, the penetration of AMOLED TVs is projected to reach 20% (marking the beginning of full-scale proliferation) in 2015, in light of 1) the percentage of large-sized panels, which is anticipated to exceed 90% in 2015; 2) TV panel capacity; and 3) a TV replacement cycle of 7~8 years (the most recent TV replacement period occurred in 2007).
Figure 12. Penetration rate of LCD TV Figure 13. LCD TV penetration rate and enlargement of LCD panels (%) (LCD TV penetration rate, %) LCD TV penetration rate 100 100 CRT TV penetration rate
80 80
60 60
Penetration of LCD TVs to speed up 40 40 after 6G- or larger-area portion exceeds 45% LCD TV penetration rate exceeded 20% in 2006
20 20
(6G- or larger-area portion, %) 0 0 01 02 03 04 05 06 07 08 09 10 11F 0 102030405060708090
Source: DisplaySearch, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research KDB Daewoo Securities Research 11 December 1, 2011 Electronic Materials
Figure 14. Generation transition of LCD Figure 15. Generation transition of AMOLED
(mn m2/month) (mn m2/month) 14 4G 5G 6G 7G 8G 1.4 4G 5.5G 8G
12 1.2
10 Transition from 5G to 8G to take more than four year 1.0 Transition from 5.5G to 8G to take a year 8 8G 0.8
6 7G 0.6 8G 6G 5.5G 4 5G 0.4
2 0.2
0 0.0 01 02 03 04 05 06 07 08 09 10 07 08 09 10 11F 12F 13F 14F
Source: DisplaySearch, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research
Figure 16. Image sticking on AMOLED panels Figure 17. Comparison of image sticking by AMOLED materials
Source: 4D Systems Source: 4D Systems
Figure 18. Conditions for proliferation of AMOLED TV Figure 19. TV shipment trend and forecasts
(%) LCD large area capacity (R) ('000 m2/month) (mn units) (%) Sport events + Demand from emerging markets 100 AMOLED large area capacity (R) 25 300 TV shipment (L) 20 LCD large area portion (L) YoY growth (R) AMOLED large area portion (L) 80 20 15 250
60 15 10 TV replacement period 200 TV replacement period Condition 1: High portion of 40 large-area producton lines 10 5 AMOLED TV growth 150 20 Condition 2: Sufficient capacity 5 0
0 0 100 -5 04 06 08 10 12F 14F 16F 04 06 08 10 12F 14F 16F
Note: Large area refers to 6G- or larger for LCD, 5.5G- or larger for AMOLD Source: DisplaySearch, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research
KDB Daewoo Securities Research 12 December 1, 2011 Electronic Materials
3) Domestic makers are leading the materials market Domestic production of The percentage of domestically produced AMOLED materials is rising rapidly; 50% of the materials will lead to the materials were manufactured in Korea only four years after commercialization (vs. 12 years price competitiveness of for semiconductors and 18 years for LCDs). This trend is attributable to the fact that Korea- AMOLED TVs based Samsung Mobile Display (SMD) is leading the AMOLED market with its unparalleled technological prowess, and the domestic production of materials is essential for AMOLED TVs to gain price competitiveness.
SMD is estimated to control more than 95% of the global AMOLED market. SMD has already started the operation of 5.5G lines. Furthermore, the company is expected to operate 8G lines in 2H12. The companyÊs AMOLED capacity (in terms of panel area) is projected to expand at a CAGR of 103% through 2014.
In order for AMOLED TVs to proliferate the market, prices must at least come down to the level of LCD TVs. Such a feat can only be accomplished by 1) achieving economies of scale through mass production and 2) cutting costs. Mass production can be driven by technological solutions, including large-sized panel equipment. However, we believe that the key to cost reduction lies in the domestic production of materials. SMD is anticipated to double its efforts to develop materials in cooperation with domestic materials makers, in addition to production capacity expansion.
Figure 20. AMOLED supply chain of SMD
AMOLED materials AMOLED panel AMOLED set
Duksan SEC HTL Cheil Industries
Nokia Dopant (RGB) UDC
Red (phosphorescence) Dow Gracel EML Green (fluorescence) Doosan Elec. SMD Microsoft
Green (phosphorescence) UDC/Dow
Blue (fluorescence) SFC(Hodogaya) i-River
LG Chem ETL Cheil COWON Industries Source: KDB Daewoo Securities Research
Figure 21. Global M/S of OLED (2010) Figure 22. AMOLED capacity trend and forecasts of SMD
2 Others ('000 m /month) (%) TDK 5.1% 3,000 600 3.0% 4G (L) 5.5G (L) RiTdisplay 8G (L) YoY growth (R) 4.8% 2,500 500 Pioneer 5.3% 2,000 400
1,500 300
1,000 200
500 100 SMD 81.8% 0 0 07 08 09 10 11F 12F 13F 14F
Source: DisplaySearch Source: DisplaySearch, KDB Daewoo Securities Research
KDB Daewoo Securities Research 13 December 1, 2011 Electronic Materials
SMDÊs JVs to be The Samsung Group has recently signed joint venture agreements with a number of positive for domestic overseas AMOLED materials producers. In August, SMD agreed to expand cooperation with materials producers U.S.Ês Universal Display Corporation (UDC), which holds over 1,000 patents for phosphor materials. In the same month, the company concluded a deal with Hodogaya, a holder of an original patent for organic materials based in Japan, to jointly develop OLED. In addition, Samsung Venture Investment expanded its stake in Sun Fine Chem (SFC, non-listed), a subsidiary of Hodogaya, and took a stake in Novaled, a Germany-based AMOLED materials producer.
In our view, Samsung Group is taking proactive steps to avoid issues related to AMOLED materials by establishing comprehensive and cooperative partnerships with overseas companies. As these moves should promote sharing of patents and production technologies with overseas partners, we believe this will lead to increased production of AMOLED materials by domestic companies.
Table 5. AMOLED materials makers Country Company AMOLED materials Note Korea Cheil Industries ETL, HTL, PDL Expect to supply PDL/ ETL in 4Q11 and HTL in 1Q12 to SMD EML (under R&D) Developing EML to supply to SMD in 2H12 Duksan Hi-Metal HTL, HIL Currently supplying HTL to SMD (M/S 95%) LG Chem ETL, HIL, HTL, EML (G/B) Currently supplying ETL to both SMD and LGD Signed a strategic partnership with UDC to develop phosphorescent materials Announced investment plan for OLED lighting in 2011 (W100bn) SFC EML (G/B), ETL, HTL Subsidiary of Hodogaya Chemical Currently supplying fluorescent EML (blue) to SMD Doosan EML (G), HTL Currently supplying fluorescent EML (green) to SMD (CS Elsolar) Estimated to start supplying HTL to SMD from 3Q11 Daeju Electronic Materials EML (B) Developing phosphorescent EML (blue) Japan Hodogaya Chemical HTL, ETL Currently supplying HTL to SMD and LGD and developing ETL Signed a strategic partnership with SMD regarding EML Idemitsu Kosan HIL, HTL, ETL, EML (R/G/B) Supplying fluorescent EML to LGD Established J/V with Sony in 2005 Signed a strategic alliance with UDC to develop phosphorescent EML (blue) in 2006 Signed a strategic partnership with LGD in 2009 Acquired a stake of 32.73% in Global OLED Technology, an affiliate of LG, in 2010 Established a J/V with Panasonic Electric Work regarding OLED lighting in 2011 Sumitomo Chemical Polymer EML (R/G/B) Focusing on polymer materials Developing soluble printing technology with Panasonic Kodak Original patents on OLED Sold all OLED patents to Global OLED Technology, an affiliate of LG, in 2009 Toyo Ink EML (R/G), HIL, HTL, ETL R&D Mistubishi Chemical Polymer EML, HIL Established a strategic partnership with Pioneer to develop OLED lighting in 2010 Developing materials suitable for soluble printing Showa Denko Polymer phosphorescence EML Lighting Toray EML (R/B), ETL R&D U.S. UDC EML (dopant), EML (G ph.) Holding original patents on phosphorescent EML (Universal Display Currently supplying EML (dopant) to SMD Corporation) Signed a strategic partnership with SMD to develop phosphorescent EML in 2011 Signed a license agreement with Pioneer on the production of OLED lighting in 2011 Dow Chemical EML (R/G/B) Acquired Gracel Display in 2008 Currently supplying red phosphorescent EML (R) to SMD Developed phosphorescent EML (Green) Dupont Chemical EML (R/G/B), HIL, HTL, ETL Focusing on polymer materials Holding material printing technology Germany Novaled HTL, p-dopant Holding p/n doping technology ETL, n-dopant SVC (Samsung Venture Capital) acquired a stake in the company Merck Chemical HIL, HTL, EML (B) Developed phosphorescent EML (green) Developing both small molecular and polymer materials Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 14 December 1, 2011 Electronic Materials
4) Flexible display based on AMOLED technology Flexible display Flexible display is increasingly considered to be an ideal display in light of its superior substrate market is applicability and portability. In our view, AMOLED is the most suitable material for flexible projected to grow to display for the following reasons: 1) it uses organic materials, not backlights; 2) it enables the W4.8tr by end-2015 production of slimmer and lighter displays; and 3) it enables the production of transparent displays.
A key element in the production of flexible display is advanced substrate materials. Of the materials that can be used as substrates (plastic, glass, and metal foil), plastic is considered the most suitable material given its processability, durability, and appropriateness for a low- cost, roll-to-roll process.
Flexible display substrates consist of a base film, hardcoat layer and barrier (for protection from moisture and oxide), and transparent electrodes. High value-added synthetic resins, including PEN, PES, PC, and PI, are used for base film. As each synthetic resin has its own strong/weak points, a particular resin has not yet emerged as a market leader. Currently, PEN produced by Dupont Teijin and PES produced by Sumitomo Bakelite are favored by many display producers.
In Korea, a project for developing substrate materials for flexible displays is underway as a part of the government-initiated 10 World Premier Materials (WPM) projects. Participating in the project are 16 companies, including Cheil Industries, SEC, SMD, LG Chem, LG Display, and Advanced Nano Products. The flexible display materials market is estimated grow from W1tr to W4.8tr by end-2015.
Table 6. Types and features of flexible display substrates Advantage Disadvantage Temp. range (℃) CTE (ppm/℃) Maker - Chemical resistance - Low CTE - Optical transmittance PEN 150 20 Dupon Teijin - Low water absorption - Birefringence - Low cost - Chemical resistance - Optical transmittance PC - High CTE 155 70 Teijin, GE, Mitsubishi Engineering - Process-ability - Out-gassing - Thermal resistance - High cost PI 275 20 Mitsubishi Gas, Dupont - Chemical resistance - High water absorption - Chemical resistance - Resistance to UV - High cost Sumitomo Bakelite, PES 230 60 - Optical transmittance - High water absorption i-Components - High CTE Note: Products with higher temperature range and lower CTE (coefficient of thermal expansion) are preferred Source: ETRI, Company data, KDB Daewoo Securities Research
Figure 23. Structure of flexible display substrate Figure 24. Flexible display and materials market trend and forecast (Wtr) 7 Flexible display material Flexible display 6
5
4
3
2
1
0 08 09 10 11F 12F 13F 14F 15F
Source: Cheil Industries Source: DisplaySearch, MKE, KDB Daewoo Securities Research KDB Daewoo Securities Research 15 December 1, 2011 Electronic Materials
2. Rechargeable battery materials
1) New markets (xEV and ESS) are opening up Rechargeable battery Materials take up 70% of the rechargeable battery (lithium-ion battery) production costs. market for mid- to large- Among them, cathode materials (35%), anode materials (10%), separator (15%), and sized applications to be electrolyte (15%) account for 80% of total material costs. The barriers to entry for the eight times larger than materials market remain high due to productivity and safety issues. In addition, there exists huge room for technological development in line with expanding applications. the rechargeable battery market for small-sized IT The rechargeable battery materials market boasts the greatest mid- to long-term growth products potential in the electronic materials industry. As the applications for rechargeable batteries expand to xEV (HEV, PHEV, and EV) and energy storage system (ESS), a market that is eight times larger than the current rechargeable market (mostly concentrated on small-sized IT products) is awaiting.
Although markets for rechargeable batteries for small-sized IT products might stagnate, the full-blown growth of the xEV and ESS markets starting in 2012 is anticipated to help the rechargeable battery market to grow at a CAGR of 27.1% until 2020. As xEV and ESS require 300x greater battery capacity per unit than small-sized IT products, the rechargeable battery market is forecast to expand rapidly, despite modest growth in applications for mid- to large-sized products. Nevertheless, the increase in applications for mid- to large-sized products should boost the market for the four major materials (CAGR of 27.4% until 2020).
Figure 25. Cost structure of LIB (lithium ion battery) Figure 26. LIB structure and cost portion of each material Others (20%)
Anode material (10%)
Other costs 30%
Separator (20%)
Material costs 70%
Electrolyte (15%) Cathod material (35%) Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure 27. LIB market trend and forecasts Figure 28. LIB core materials market trend and forecasts
(Wbn) (Wbn) 120 ESS 60 Electrolyte xEV Separator 100 IT 50 Anode material Cathod material 80 40 2010~2020F CAGR: 27.1% - IT: 9.2% 2010~2020F CAGR: 27.4% 60 30 - xEV: 58.4% - ESS: 71.9% 40 20
20 10
0 0 06 08 10 12F 14F 16F 18F 20F 06 08 10 12F 14F 16F 18F 20F
Source: CMRI, IIT, LGERI, KDB Daewoo Securities Research Source: CMRI, IIT, LGERI, KDB Daewoo Securities Research KDB Daewoo Securities Research 16 December 1, 2011 Electronic Materials
Major domestic The percentage of domestically produced rechargeable battery materials has risen from 30% companies are to 56% since 2003, boosted by 1) the market dominance of Korean rechargeable battery accelerating their makers and 2) their commitment to domestically produced materials. However, the expansion into the mid- domestic rechargeable battery materials market remains weak, as: 1) it is mostly composed of small- and medium-sized companies, making massive investments or technological to large-sized battery development difficult; and 2) few rechargeable battery materials for mid- to large-sized materials market applications, such as xEV and ESS, are domestically produced (the mid- to large-sized battery materials market has higher growth potential than the small-sized battery materials market).
As such, major domestic companies, including Samsung, LG, Hanwha, SK, and GS, are accelerating their expansion into the rechargeable battery materials market, with some companies pursuing vertical integration through investments in small- and medium-sized companies. In particular, these major companies are focusing on the burgeoning mid- to large-sized battery materials market. Therefore, the percentage of domestically produced mid- to large-sized battery materials will rise faster than small-sized battery materials.
Figure 29. Global M/S of major LIB makers Figure 30. Localization of core materials for LIB (2010)
(Wbn) (%) (%) 60 Electrolyte 100 Market portion (L) 100 Separator Localizaiton ratio (R) 50 Anode material 80 80 Cathod material 40 60 Localization ratio of rechargeable battery materials (2010): 56.0% 60 2010~2020F CAGR: 27.4% 30 40 40 20 Localization ratio of rechargeable battery materials (2003): 30.7% 20 20 10
0 0 0 06 08 10 12F 14F 16F 18F 20F Total Cathod material Separator Electrolyte Anode material
Source: IIT, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Table 7. LIB materials makers Core materials Auxiliary Makers Ticker Customer Overseas competitor Cathode materials L&F 066970 KQ SDI, LG Chem Nichia Ecopro 086520 KQ SDI, LG Chem Umicore LG Chem 051910 KS In house Toda Cosmo AM&T 005070 KS SDI, LG Chem (expected) Hunan Shanshan Samsung Fine Chem 004000 KS SDI (expected) CITIC Guoan Hanwha Chem 009830 KS AGC Daejung Chem 120240 KQ GS Group (expected) ENF Technology 102710 KQ LG Chem Anode materials POSCO Chemtech 003670 KQ SDI, LG Chem (expected) Hitachi Chem GS Caltex Unlisted LG Chem (expected) Nippon Carbon SK Innovation 096770 KS In house, SDI/LG Chem (expected) BTR Elecfoil Iljin Materials 020150 KS SDI, LG Chem, Sanyo, A123 Furukawa LS Mtron Unlisted LG Chem Nippon Denkai Separator SK Innovation 096770 KS SDI, LG Chem Asahi Kasei Cheil Industries 001300 KS SDI (expected) Celgard Toray Tonen Electrolyte Panax E-Tec Unlisted SDI Ube Industries Soulbrain 036830 KQ SDI Mitsubishi Chem LG Chem 051910 KS In house Tomiyama Pure Chem LiPF6 Foosung 093370 KQ Panax E-Tech, Soulbrain, LG Chem Stella Chemifa OCI Materials 036490 KQ Kanto Denka Morita Chem Additives Leechem 131100 KQ Panax E-Tech, Soulbrain, LG Chem Ube Industries Solution ENG Tech Unlisted Panax E-Tech Mitsubishi Chem Ecopro 086520 KQ Panax E-Tech, LG Chem Tomiyama Pure Chem Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 17 December 1, 2011 Electronic Materials
Table 8. LIB market forecasts 10 11F 12F 13F 14F 15F 16F 17F 18F 19F 20F Assumption for xEV market forecast Auto shipment (mn units) 72.3 74.1 78.8 84.9 90.4 94.6 98.1 101.6 104.2 106.4 108.9 xEV shipment (mn units) 1.1 1.4 1.7 2.2 3.0 4.2 5.7 7.3 9.7 11.4 13.0 % of xEV out of auto 1.5 1.9 2.1 2.6 3.3 4.5 5.8 7.2 9.3 10.7 11.9 % of Li-ion battery based 9.4 24.4 58.1 71.7 86.7 93.9 95.0 96.0 96.9 97.9 98.9 xEV based on Li-ion battery (mn units) 0.1 0.4 1.0 1.6 2.6 4.0 5.4 7.0 9.4 11.2 12.8 HEV 0.1 0.3 0.8 1.3 1.9 2.8 3.5 4.2 5.2 5.6 5.8 PHEV 0.0 0.0 0.1 0.2 0.4 0.8 1.1 1.5 2.2 2.7 3.2 EV 0.0 0.0 0.1 0.1 0.2 0.4 0.8 1.3 2.1 2.9 3.8 ASP of Li-ion battery in xEV ('000 US$) 3.5 3.5 3.3 3.0 2.9 2.8 2.8 2.7 2.8 2.8 2.8 HEV 3.0 2.7 2.3 2.0 1.8 1.6 1.4 1.3 1.2 1.2 1.1 PHEV 10.0 9.0 7.7 6.5 5.9 5.3 4.7 4.3 4.1 3.9 3.7 EV 13.0 11.7 9.9 8.5 7.6 6.8 6.2 5.5 5.3 5.0 4.8 Li-ion battery market for xEV (US$bn) 0.4 1.2 3.2 4.8 7.5 11.3 15.0 18.9 26.0 31.3 36.3 Cost portion (%) Cathode 26.3 26.3 25.0 25.0 25.0 24.2 24.2 24.2 23.1 23.1 23.1 Anode 7.0 7.0 6.7 6.7 6.7 6.4 6.4 6.4 6.2 6.2 6.2 Separator 17.5 17.5 16.6 16.6 16.6 16.1 16.1 16.1 15.4 15.4 15.4 Electrolyte 7.0 7.0 6.7 6.7 6.7 6.4 6.4 6.4 6.2 6.2 6.2 Market for core materials (US$bn) 0.2 0.7 1.7 2.7 4.1 6.0 8.0 10.1 13.2 15.9 18.5 Cathode 0.1 0.3 0.8 1.2 1.9 2.7 3.6 4.6 6.0 7.3 8.4 Anode 0.0 0.1 0.2 0.3 0.5 0.7 1.0 1.2 1.6 1.9 2.2 Separator 0.1 0.2 0.5 0.8 1.3 1.8 2.4 3.0 4.0 4.8 5.6 Electrolyte 0.0 0.1 0.2 0.3 0.5 0.7 1.0 1.2 1.6 1.9 2.2 Li-ion battery market for ESS (US$bn) 0.2 1.1 2.1 4.4 6.7 9.0 12.9 16.8 26.2 35.6 45.0 Cost portion (%) Cathode 27.1 27.1 25.8 25.8 25.8 24.5 24.5 24.5 24.5 24.5 24.5 Anode 7.2 7.2 6.9 6.9 6.9 6.5 6.5 6.5 6.5 6.5 6.5 Separator 18.0 18.0 17.2 17.2 17.2 16.3 16.3 16.3 16.3 16.3 16.3 Electrolyte 7.2 7.2 6.9 6.9 6.9 6.5 6.5 6.5 6.5 6.5 6.5 Market for core materials (US$bn) 0.1 0.7 1.2 2.5 3.8 4.8 6.9 9.0 14.1 19.1 24.2 Cathode 0.1 0.3 0.5 1.1 1.7 2.2 3.2 4.1 6.4 8.7 11.0 Anode 0.0 0.1 0.1 0.3 0.5 0.6 0.8 1.1 1.7 2.3 2.9 Separator 0.0 0.2 0.4 0.8 1.1 1.5 2.1 2.7 4.3 5.8 7.3 Electrolyte 0.0 0.1 0.1 0.3 0.5 0.6 0.8 1.1 1.7 2.3 2.9 Li-ion battery market for IT devices (US$bn) 8.8 9.9 12.3 12.8 13.3 13.8 16.3 18.9 19.6 20.3 21.0 Cost portion (%) Cathode 22.1 22.1 22.3 22.3 22.3 22.5 22.5 22.5 22.5 22.5 22.5 Anode 6.3 6.3 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4 6.4 Separator 12.6 12.6 12.7 12.7 12.7 12.9 12.9 12.9 12.9 12.9 12.9 Electrolyte 9.5 9.5 9.6 9.6 9.6 9.7 9.7 9.7 9.7 9.7 9.7 Market for core materials (US$bn) 4.4 5.0 6.3 6.5 6.8 7.1 8.4 9.7 10.1 10.5 10.8 Cathode 1.9 2.2 2.8 2.9 3.0 3.1 3.7 4.2 4.4 4.6 4.7 Anode 0.6 0.6 0.8 0.8 0.8 0.9 1.1 1.2 1.3 1.3 1.4 Separator 1.1 1.3 1.6 1.6 1.7 1.8 2.1 2.4 2.5 2.6 2.7 Electrolyte 0.8 0.9 1.2 1.2 1.3 1.3 1.6 1.8 1.9 2.0 2.0 Total LIB market (US$bn) 9.3 12.3 17.6 22.1 27.6 34.1 44.2 54.6 71.8 87.2 102.3 YoY growth (%) 49.6 32.2 42.8 25.5 24.8 23.7 29.8 23.4 31.5 21.5 17.3 Total LIB materials market (US$bn) 4.7 6.4 9.2 11.7 14.7 17.9 23.3 28.8 37.4 45.5 53.5 YoY growth (%) 36.0 35.1 43.8 27.0 25.9 21.9 30.0 23.5 29.8 21.8 17.5 Cathode 2.1 2.8 4.1 5.2 6.6 8.0 10.5 12.9 16.8 20.5 24.2 Anode 0.6 0.8 1.1 1.4 1.8 2.2 2.9 3.5 4.6 5.6 6.5 Separator 1.2 1.7 2.5 3.2 4.1 5.1 6.6 8.2 10.8 13.2 15.6 Electrolyte 0.9 1.1 1.5 1.9 2.2 2.6 3.4 4.1 5.2 6.2 7.2 Source: CMRI, IIT, LGERI, KDB Daewoo Securities Research
KDB Daewoo Securities Research 18 December 1, 2011 Electronic Materials
2) Cathode materials Two key issues: Cost Cathode materials, which make up the lithium ions in Li-ion batteries, take up the lionÊs reduction and domestic share (35%) of the total materials costs. As such, these materials offer the largest room for production of mid- to cost reduction from domestic production. The cathode materials market, which is estimated large-sized battery at US$ 2.1bn, is expected to expand at a CAGR of 27.8% through 2020. materials The global cathode materials market is led by Nichia with a market share of 12%. The Japanese maker is considered to have the most advanced technology for mid- to large-sized battery materials. Umicore of Belgium has strong cost competitiveness thanks to its own cobalt mine, and the companyÊs Korean subsidiary Umicore Korea supplies cathode materials to Samsung SDI and LG Chem.
In Korea, L&F, the first company to develop cathode materials, supplies to Samsung SDI and LG Chem. The company is estimated to have an annual capacity of 9,000 tonnes (including its Chinese plant) through aggressive capacity expansion.
Ecopro produces a precursor to a cathode material (NCM) with an annual capacity of 2,900 tonnes and supplies to LG Chem. The company also produces a cathode material (NCA) with an annual capacity of 1,900 tonnes and supplies to Samsung SDI.
Cosmo AM&T has an annual capacity of 2,400 tonnes for a cathode material (LCO) and supplies to Samsung SDI. The company is set to supply a precursor to a large-sized battery- use cathode material (NCM) to LG Chem from 2012. The company is expected to procure cobalt sulphate, the core material for the precursor, from its parent company Cosmo Chemical.
Almost 70% of cathode materials for small-sized IT products are domestically produced, while the percentage for mid- to large-sized applications stands in the mid-single digits. In terms of technology, Korean makers are still trailing behind Japanese makers. However, the advanced rechargeable battery development team (led by Samsung SDI) under the WPM project recently announced that they developed cathode materials, replicating 82% of NichiaÊs xEV-use battery technology and 92% of the companyÊs ESS battery technology.
Large companies are speeding up their efforts to expand into the large-sized battery-use cathode materials market. Samsung Fine Chemicals plans to jointly construct a 2,500 tonne cathode material (NCM) plant with Toda, a Japanese maker, by end-2012. Hanwha Chemical, which already constructed an LFP-type cathode material plant, plans to expand its annual capacity from 600 tonnes to 12,000 tonnes by 2015.
Figure 31. Global M/S of cathode materials (2010) Figure 32. Supply chain of cathode materials
Nichia L&F Nichia Umicore Toda In-house Others 12% 100%
Umicore 10% 80%
Others 47% 60% L&F 10% 40%
Hunan Shanshan 20% 9%
LG Chem CITIC Guoan 0% 6% 6% Samsung SDI LG Chem Sanyo Sony
Source: KDB Daewoo Securities Research Source: IIT, KDB Daewoo Securities Research
KDB Daewoo Securities Research 19 December 1, 2011 Electronic Materials
LMO- or LFP-type Cathode materials are divided into three categories depending on composition: 1) LCO with cathode materials to high cobalt content; 2) NCA and NCM with less cobalt content but additional nickel, attract attention aluminum and manganese contents; and 3) LMO and LFP with manganese and iron contents instead of cobalt content.
Since cathode materials account for the largest share of total battery materials costs, price is the most important issue. Cost reduction has been focused on lowering the content of cobalt, which enhances battery capacity and performance but is expensive. As a result, NCM-type cathode materials have gained the upper hand, as they are 60% less expensive than LCO-type cathode materials and they support 10% more battery capacity.
Price takes on more importance for mid- to large-sized batteries (capacity of 300~500 times that of small-sized batteries). In addition, large-sized batteries require higher safety standards. As such, LMO- or LFP-type cathode materials with superior price competitiveness and safety are expected to attract attention going forward. Iljin Materials is currently developing an LMO-type cathode material in cooperation with its domestic customer, while Hanwha Chemical is pursuing the commercialization of LFP-type materials.
Table 9. Comparison of cathode materials Types Chemical formula mAh/g mAh/cc Avg. voltage Feature Main application
LCO LiCoO2 145 500 3.9 Comparison Comparison High capacity Li[NiCoAl]O Long life IT devices (high-end) NCA 2 175 525 3.8 Ni/Co/Al = 80/15/5 Low safety Power tools Low thermal stability Relatively good structural safety Li[NiCoMn]O Good thermal stability IT devices (low-end) 2 145 465 3.8 Ni/Co/Mn = 33/33/33 Low capacity Power tools Inferior power due to low voltage NCM High capacity IT devices (low-end) Li[NiCoMn]O Relatively good structural safety Power tools 2 163 500 3.8 Ni/Co/Mn = 50/20/30 Good thermal stability xEV Inferior power due to low voltage ESS Good safety Power tools Low price LMO LiMn O 100 263 4.0 xEV 2 4 Very low capacity ESS Poor high-temperature properties Good safety Power tools Low price LFP LiFePO 132 254 3.4 xEV 4 Low capacity and voltage ESS Heavy due to containing Fe Source: KETI, KDB Daewoo Securities Research
Figure 33. Relative price comparison of cathode materials Figure 34. Capacity comparison of cathode materials
(LCO=100) (mAh/g) 100 Around 100K W/kg 200
80 160
60 120
40 Primarily IT-use 80 Gaining attraction for xEV-use
20 40
0 0 LCO NCA NCM LMO LFP NCA NCM LCO LFP LMO
Source: KDB Daewoo Securities Research Source: KETI
KDB Daewoo Securities Research 20 December 1, 2011 Electronic Materials
3) Anode materials Domestic production to Anode materials generate electricity by absorbing lithium ion when charged and by accelerate transporting lithium ion to positive and negative electrodes when discharged. Anode materials include graphite type and carbon type. Silicon or tin-based anode materials are also being developed to increase capacity. Since Korean parts makers rely heavily on imported anode materials, there is a strong commitment to domestically produce the materials. The anode materials market is estimated to be worth US$800mn (as of 2010), and the market is forecast to grow 27.1% per year until 2020 as applications increase.
Hitachi Chemical is currently the largest producer of anode materials with a market share of 30%, followed by other Japanese makers including Mitsubishi Chemical (14%), Nippon Carbon (10%) and JFE (8%). Artificial graphite, the most widely used anode material, has high barriers to entry due to sophisticated technologies and costly initial investments. However, natural graphite, which is cheaper than - but does not perform as well as - artificial graphite, is becoming more widely used as Chinese producers are rapidly gaining market share on price competitiveness. Since China is the largest natural graphite producer in the world, we expect Chinese materials suppliers, such as BTR, to grow rapidly going forward.
These days, anode materials makers mix natural graphite with artificial graphite, in an attempt to lower costs and improve performance. Japanese makers produce artificial and natural graphite-based anode materials, in addition to most of the necessary raw materials including coke and pitch coke.
Japanese makers are spurring the development of anode materials for mid- to large-sized applications such as xEV and ESS. Hitachi Chemical has already started mass-producing xEV- use carbon-based anode materials in 2010 at two of its production lines, and plans to operate another two lines beginning in 2H12 (requiring an investment of JPY3.5bn). Mitsubishi Chemical is anticipated to expand its production capacity for anode materials from 5,000 tonnes per year, to 7,000 tonnes by 2012 and to 35,000 tonnes by 2015.
Anode materials have virtually been an unchartered territory for Korean companies, but POSCO Chemtech, GS Caltex and SK Innovation are now preparing to advance into the market. POSCO Chemtech has secured a 2,400-tonne annual production capacity for natural graphite- based anode materials by acquiring Carbonix, a subsidiary of LS Mtron. GS Caltex developed soft carbon-based anode materials jointly with JapanÊs JX NOE and plans to operate a 2,000 tonne-capacity factory beginning in 2012. SK Innovation, the only rechargeable battery separator producer in Korea, is anticipated to undertake development of hard carbon-based anode materials in partnership with AeKyung Petrochemical.
Figure 35. Global M/S of anode materials (2010) Figure 36. Supply chain of anode materials
Hitachi Chem Nippon Carbon BTR JFE Mitsubishi Others Others 100% 19% Hitach Chem 30% 80%
JFE 60% 10%
40%
Nippon Carbon 10% 20% BTR 17% Mitsubishi 0% 14% Samsung SDI LG Chem Sanyo Sony
Source: KDB Daewoo Securities Research Source: IIT, KDB Daewoo Securities Research
KDB Daewoo Securities Research 21 December 1, 2011 Electronic Materials
Demand for carbon- Rechargeable batteries have been mostly used for small-sized IT products, and thus, energy based anode materials density has been the most important quality of anode materials (to enable the longest to increase battery life per charge). For this reason, graphite-based anode materials have often been used due to their high energy density.
Going forward, we expect high capacity and long cycle life to become more important qualities of anode materials in line with the use of rechargeable batteries for more energy consuming applications, such as xEV and ESS. Thus, carbon-based anode materials should be in higher demand than graphite-based materials in the future.
Table 10. Comparison of anode materials Types Advantages Disadvantages Main application Maker Low purity (high resistance) BTR, Mitsubishi Chem, Low price Natural Low safety IT devices (low-end) Hitachi Chem High energy density Short life POSCO Chemtech Graphite High purity (low resistance) Hitachi Chemical, JFE, High price IT devices (high-end) Artificial High energy density Nippon Carbon Complicated manufacturing process xEV/ESS Long life POSCO Chemtech (developing), Large output Low capacity Power tools Hard Kureha Capacity stability Low safety xEV/ESS Carbon Large output Power tools Hitachi Chemical Soft Low capacity Fast charging xEV/ESS PCT (J/V of GS Caltex and JX NOE) High price Non-carbon Si/Sn alloys High capacity Inferior high temperature property xEV/ESS R&D Short life Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 22 December 1, 2011 Electronic Materials
4) Separators Oligopolistic market A separator is a membrane forming a microporous layer that keeps the positive and negative structure; Pay attention electrodes apart while also allowing the transport of lithium ions. Olefin synthetic resins, to SK Innovation and such as PE and PP, are mostly used as raw materials. A separator requires a high level of Cheil Industries mechanical strength and chemical stability, and thus, has particularly high barriers to entry compared to other rechargeable battery materials. As separators will be used for larger applications such as xEV and ESS, we expect the separator market to expand rapidly, and product requirements to become more sophisticated to ensure enhanced product safety. The market is estimated at US$1.2bn as of 2010, and should grow 29.2% per year until 2020.
The separator market is dominated by four major players due to high barriers to entry, with Asahi Kasei, Celgard and Toray Tonen holding respective market shares of 26%, 16% and 14%. SK Innovation, KoreaÊs first (and the worldÊs third) separator developer, is rapidly gaining market share in the domestic rechargeable battery industry with a 12% share in the separator market. SK Innovation plans to expand its capacity to around 200mn m2 by adding production lines 6 and 7 by end-2012.
Cheil Industries plans to advance into the rechargeable battery separator market in the mid- to long-term using its water treatment membrane technology. Given its captive market (Samsung Group), the company should be able to secure a healthy market share once it commences the business.
Figure 37. Global M/S of separator (2010) Figure 38. Supply chain of separator
Asahi Kasei Celgard Toray Ube SK 100% Others 32% Asahi Kasei 80% 26%
60%
40%
Celgard 20% 16% SK Innovation 12% Toray Tonen 0% 14% Samsung SDI LG Chem Sanyo Sony
Source: KDB Daewoo Securities Research Source: IIT, KDB Daewoo Securities Research
Figure 39. Separator capacity trend and forecasts of SK Innovation Figure 40. Separator market trend and forecasts
(mn m2) (US$bn) 6 240 6th and 7th line to start operation Dry type Wet type 200 5 Portion of dry type to increase on expansion of mid- to large-scale applicaitons 4th and 5th line to start operation 160 4
120 3
80 2
40 1
0 0 06 07 08 09 10 11F 12F 06 08 10 12F 14F
Source: Company data, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 23 December 1, 2011 Electronic Materials
Dry-type separators Separators are divided into dry and wet types depending on the manufacturing process. The likely to be adopted for wet process consists of three steps: 1) the mixing of polymer resins, solvents and additives; mid- to large-sized 2) heating; and 3) cooling. Meanwhile, in the dry process, cold stretch is used to create the applications pore structure in the separator.
Wet-type separators boast 1) excellent tensile strength both it terms of length and width, 2) high chemical stability and 3) strong tolerance to liquids such as electrolytes. These separators are mainly used in small-sized IT products. However, they are expensive and the manufacturing process is complex. Currently, JapanÊs Asaihi Kasei and Toray Tonen, and KoreaÊs SK Innovation focus on the production of wet-type separators.
Dry-type separators are cheaper and less complex to produce than wet-type separators. However, their mechanical strength is weak (the tensile strength is only high it terms of length or width, not both), and the thickness is relatively less uniform than the wet type. U.S.-based Celgard and Japan-based Ube Industries are major producers of dry-type separators.
For large-sized applications such as xEVs, battery safety is particularly important and thus, wet-type separators with excellent chemical stability and high mechanical strength will likely continue to be commonly used. However, price is also an important factor for broader applications. This is why dry-type separators are increasingly drawing attention. Indeed, we assume that Asahi Kasei, the worldÊs largest separator maker, has also started to produce dry-type separators. Going forward, we expect enhanced dry-type separators to become more popular for xEVs and ESS-use rechargeable batteries.
Table 11. Comparison of separators Wet type Dry type Makers Asahi Kasei, Toray Tonen, SK Innovation Celgard, Ube Industries, Toray Tonen Raw materials PE Three layers of PP/PE/PP Price △ ◎ Manufacturing process △ ○ Mechanical strength ◎ △ Stretching ◎ (biaxial) △ (uniaxial) Chemical stability ◎ ○ Uniformity ◎ △ Main application IT devices, xEV xEV, ESS Source: KDB Daewoo Securities Research
Figure 41. Structures of wet- and dry-type separators
Wet type Dry type
Source: Celgard
KDB Daewoo Securities Research 24 December 1, 2011 Electronic Materials
5) Electrolyte Strategic partnerships Electrolytes act as a medium that allows lithium ions to flow uninterrupted from one and localization electrode to another. Given their low production costs and competitive marketplace strategies are key compared to other rechargeable battery materials, we expect pricing pressures to continue differentiating factors going forward. Thus, we believe strategic partnerships with customers and localized production strategies will be important differentiating factors that set key players apart from the competition. As of 2010, the electrolyte market is estimated at US$900bn and is forecast to grow at a CAGR of 23.6% until 2020.
Roughly 85% of electrolytes are domestically produced – a relatively higher ratio compared to other materials. After acquiring Cheil IndustriesÊ electrolyte division, Panax E-Tec became the top global maker and is now one of only two suppliers (the other is Soulbrain) to Samsung SDI. LG Chem internally sources 60% of its electrolyte requirements. Considering their sizeable market share within leading domestic rechargeable battery makers, we estimate that Korean electrolyte suppliers account for over 30% of the global market.
Electrolyte makers, Korean firms in particular, are accelerating their capacity expansions to gear up for potential market growth in the mid to large battery segment. We expect Panax E-Tec to more than triple its annual production capacity from 4,000 tonnes to 14,000 tonnes by 2012. With the completion of its Michigan plant, Soulbrain is forecast to ramp up its capacity from 5,000 tonnes to 10,000 tonnes in 2012. JapanÊs Mitsubishi Chemical – the third largest player in the world – has a more aggressive mid- to long-term plan that involves increasing its capacity from 8,500 tonnes to 33,500 tonnes by 2012 and 50,000 tonnes by 2015.
With competition in the electric vehicle (xEV) market likely to intensify, electrolyte makers are responding by localizing their production. Soulbrain is set to operate its Michigan plant in 2012 to prepare for xEV market expansion in the U.S. The company is also the exclusive electrolyte supplier to the U.S. lithium battery producer A123 Systems and supplies almost 70% of Johnson Controls-SaftÊs requirements.
Ube Industries, a Japanese electrolyte maker that is the second largest global player, formed a joint venture (Advanced Electrolyte Technologies) with Dow Chemical in July to target the U.S. and European markets. The joint venture will go into local production in 2013 and is estimated to reach annual production capacity of 10,000 tonnes.
Mitsubishi Chemical has been working independently to localize U.S. production, which is set to come online in late 2012. The U.S. electrolyte producer Novolyte has established a joint venture with the Korean electrolyte salt maker Foosung to expand its presence in the U.S. and China.
Figure 42. Global M/S of electrolyte (2010) Figure 43. Supply chain of electrolyte
Panax E-tec Panax E-Tec Soulbrain Ube Mitsubishi In-house Others Others 15% 100% 22%
80% Ube 13% 60% Tomiyama 6% 40% Dongguan Shanshan Mitsubishi 10% 20% 12%
ZGHN Soulbrain 0% 10% 12% Samsung SDI LG Chem Sanyo Sony
Source: KDB Daewoo Securities Research Source: IIT, KDB Daewoo Securities Research
KDB Daewoo Securities Research 25 December 1, 2011 Electronic Materials
Watch for Foosung in Electrolytes consist of electrolyte salts (LiPF6), additives and solvents. In terms of costs, the electrolyte salt electrolyte salts and additives account for a sizeable portion (40% each) with solvents segment and Leechem making up the rest (20%). As suggested in the cost breakdown, electrolyte salts and in the additives segment additives have high technological entry barriers, which is why their markets are dominated by just a few manufacturers.
The most commonly used electrolyte salt is LiPF6, which had been an oligopolistic market consisting of just three Japanese companies (Stella Chemifa, Kanto Denka and Morita) before Foosung succeeded in domestic production in 2010. Individually, Japanese makersÊ annual production capacity is estimated at 1,200~1,300 tonnes and is forecast to more than double by 2013 to meet potential demand in the mid to large battery segment.
On the back of its fluoride technology, Foosung entered the electrolyte salt market and began mass production relatively early on. The company currently supplies electrolyte salts to every electrolyte producer in Korea, accounting for 70% of the domestic market. It intends to ramp up its capacity by an additional 1,000 tonnes this year to a total of 2,000 tonnes in 2012 and then to 5,000 tonnes in 2015.
OCI Materials, the largest global NF3 producer, is also considering advancing into the electrolyte salt business. Given its leading fluoride technology and current overreliance on a single product (NF3), we believe OCI Materials is also likely to venture into the electrolyte salt business.
In most cases, additives are internally produced by electrolyte makers or manufactured by several small- to mid-sized suppliers. In the additive and solvent segments, Leechem stands out. The company commands over 70% of the domestic additive market, which has stringent requirements. In Korea, Leechem and ENG Tech (unlisted) are believed to be the only two companies that mass produce additives. Like Foosung, Leechem supplies additives to every electrolyte maker in Korea.
Figure 44. Composition of electrolytes and production cost Figure 45. Global M/S of electrolyte salt LiPF6 (2010)
Others Solution 8% 20% Foosung 12% Stella 33% LiPF6 40%
Morita 22%
Additives Kanto Denka 40% 25%
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 26 December 1, 2011 Electronic Materials
3. Semiconductor materials
1) Growth potential seems limited… 2010~2013 CAGR The semiconductor materials marketÊs growth trajectory is affected by the market conditions forecast at 5.5% of the downstream semiconductor industry. However, this correlation appears relatively low compared to other upstream-downstream correlations because semiconductor materials are necessary to run semiconductor manufacturing lines. Furthermore, since the business requires sophisticated technologies, the barrier to entry is high, and customers rarely change suppliers.
Nevertheless, we believe that the growth potential of the semiconductor materials business should be limited, considering that: 1) materials costs account for less than 20% of semiconductor production costs, and 2) the downstream semiconductor industry is anticipated to grow at an annual rate of only 6.2% going forward. Indeed, the semiconductor materials market is likely to stagnate at US$44.6bn in 2011 and is forecast to show a CAGR of 5.5% until 2013.
Figure 46. Semiconductor market trend and forecast Figure 47. Semiconductor materials market trend and forecast
(US$bn) (%) (US$bn) (%) 400 40 400 17 Semiconductor market size (L) Semiconductor (L) YoY growth (R) Semiconductor materials (L) 30 Material portion (R) 16 320 300 20 15 240 10 200 14 160 0 13 100 80 -10 12
0 -20 0 11 04 05 06 07 08 09 10 11F 12F 13F 04 05 06 07 08 09 10F 11F 12F 13F
Source: WSTS, KDB Daewoo Securities Research Source: WSTS, KISA, KDB Daewoo Securities Research
Table 12. Semiconductor materials and suppliers (2011) (%, Wtr) Market Market Global suppliers Korean suppliers portion size Front-end Wafer 50 15.3 Shin-Etsu, SUMCO, MEMC, Wacker Siltron LG Siltron materials Special gas 13 4.0 Kanto Denka, Mitsui Chem, Central Glass OCI Materials (NF3, SiH4, WF6)
DNP, Toppan Printing, Photronics (photomast), Photomask 13 4.0 LG Innotek (Photomask), S&S Tech (Blankmask) Hoya (blankmask) Photo resist 9 2.7 JSR, TOK, Shin-Etsu, Fuji Film, Sumitomo Cheil Industries (ArF PR), Dongjin Semichem (KrF PR) Cabot, Hitachi Chem, Sumitomo, Mitsui Chem, KC Tech, Soulbrain CMP pad and slurry 4 1.2 Fuji, JSR Advanced Nano Product, Cheil Industries Soulbrain, Dongjin Semichem Processing materials 4 1.2 Dongwoo Fine Chem (Sumitomo), Mitsubishi ENF Technology Others 7 2.1 Sub total 100 30.5 Back-end PCB 38 6.4 Ibiden, Nanya PCB SEC, Daeduk Elec, Simmtech materials Bonding wire 19 3.2 Tanaka, NAMICS MK Elec.
Lead frame 18 3.1 Mitsubishi Shindoh, Kobe Steel, Hitachi Cable PSMC, Acqutek Epoxy molding compound 10 1.7 Sumitomo, Hitachi, Shin-Etsu Chem, Nitto Denko Cheil Industries, KCC DAF 3 0.5 Hitachi Chem, Lintech, Nitto Denko Cheil Industries, Innox Others 2 0.3 SMIC, NMC, Heraus, Alpha Metal Duksan Hi-Metal, MK Elec, Phoenix Materials Sub total 100 17.0 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 27 December 1, 2011 Electronic Materials
2) Process migrations lead to the creation of new profitable markets Efforts to promote Process migrations by semiconductor makers are creating new profitable markets for domestic high-margin materials makers. The existing wafer and specialty gas segments are unlikely to show any materials production dramatic technological innovations and new material developments. By contrast, new underway materials for use in patterning or process migrations appear attractive, as: 1) they are profitable thanks to high barriers to entry, and 2) demand is growing on the acceleration of semiconductor makersÊ process migrations.
Process migration is at the heart of the semiconductor business. The prices of semiconductor chips tend to decline after their releases. Thus, in order to protect profitability, manufacturers need to cut costs by migrating to finer processes (or to increase unit prices by rolling out premium products). Indeed, finer processes enable companies to achieve cost cuts and produce faster chips. Global memory makers, including SEC and Hynix Semiconductor, are accelerating their process migrations.
Migration to a finer process requires premium materials. As part of their efforts to reduce reliance on high-priced imported materials and lower costs, Korean semiconductor makers have actively supported the domestic production of premium materials. Meanwhile, materials makers have long engaged in R&D efforts to expand into this new segment. As these R&D efforts should create synergies with customers, we expect domestic materials makersÊ market shares to grow going forward.
Figure 48. Semiconductor materials market trend and forecast
(US$bn) (%) 60 Back-end (L) 40 Front-end (L) 50 Back-end YoY growth (R) 30 Front-end YoY growth (R) 40 20 30 10 20
0 10
0 -10 04 05 06 07 08 09 10F 11F 12F 13F
Source: KISA, KDB Daewoo Securities Research
Figure 49. Process migration trend and forecast of the DRAM division Figure 50. Number of layers required for different processes
3Q10 4Q10 1Q11 2Q11 3Q11 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F (unit) 40 ArF Immersion SEC 35nm 2X nm 1X nm ArF Dry 35 KrF Hynix 44nm 38nm 2X nm 1X nm 77 30 I-Line
Elpida 65nm XS 40nm 30nm 25nm 25 5 6 8 11 Micron 50nm 42nm 30nm 20 99 12 14 Powerchip 65nm XS 40nm 30nm 15 14 10 15 Rexchip 65nm XS 40nm 30nm 25nm 14 14 5 10 10 Nanya 50nm 42nm 30nm 6 0 2 Inotera 50nm 42nm 30nm 180nm 130nm 90nm 65nm 45nm 32nm
Source: Company data, KDB Daewoo Securities Research Source: CMRI
KDB Daewoo Securities Research 28 December 1, 2011 Electronic Materials
Focus on highly- At finer processes, lithography (a patterning technique) is likely to require light sources with profitable new materials short wavelengths (e.g., G-Line, I-Line, KrF, and ArF). Currently, ArF is the most widely used despite their small light source, as it can narrow the space between wires (to 45nm). Going forward, demand for markets extreme ultraviolet light sources (which can narrow spaces to 32~18nm) is likely to increase. ArF photoresist is the optimal material for the ArF lithography process. At present, JSR Corporation of Japan is the industry leader with a global market share of 35%. In Korea, Dongjin Semichem and Dongwoo Fine-Chem (a subsidiary of Sumitomo Chemical) are manufacturing the material. The ArF photoresist market is expected to grow to US$700mn in 2011 and is forecast to expand 7% annually from next year.
Hardmasks are used to keep patterns from collapsing at finer processes. When thick photoresists are used, patterns could collapse (while thin photoresists may not be able to protect substrates during etching). In Korea, Cheil Industries has succeeded in developing hardmasks in-house and monopolistically provides the material to SEC.
When the space between wires on a chip narrows to a certain degree, cross-talk noise or electronic current leakage could occur. Thus, semiconductor makers use spin-on dielectrics (SOD) to prevent the former, and high-K dielectrics to prevent the latter. Of particular note, Cheil Industries is expected to supply SOD to SEC starting in 2012. So far, Korean semiconductor makers have entirely depended on imports for SOD.
Chemical mechanical polishing (CMP) slurries are used in CMP processes. Major producers include Hitachi Chemical in Japan, Cabot in the U.S., and domestic companies (including KC Tech, Techno Semichem, Cheil Industries, and Advanced Nano Products Corporation). The CMP slurry market is forecast to grow to US$1.4bn in 2011. As semiconductor makers are moving into copper processes, the market is forecast to show a CAGR of 7.2% during 2012~2014.
Table 13. Semiconductor materials related to finer processes Materials Description ArF photoresist 2010~15F CAGR of 7% Applied to protect pattern on the wafer, which would otherwise collapse at finer process Hardmask materials 2010~13F CAGR of over 30% SOD (spin on dielectric) Applied to prevent the crossing of wires High-K Functions as an insulation plate to prevent leakage Chemical abrasive used in the chemical mechanical polishing process CMP slurry 2010~14F CAGR of 7.2% Source: KDB Daewoo Securities Research
Figure 51. Pattern collapses due to finer processes Figure 52. Function of hardmask at patterning process
Evaporation PR patterning (coating) Si-SOH etching
(A) (B) (C) PR Etching C-SOH Low height/bottom ratio High height/bottom ratio Low height/bottom ratio (Pattern retained) (Pattern collapsed) (Substrates not protected Si-SOH Etching substrates in etching process) C-SOH PR Removing C-SOH
Substrates
Substrates
Source: CMEL, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research
KDB Daewoo Securities Research 29 December 1, 2011 Electronic Materials
4. LCD materials
1) A mature industry, but opportunities still exist We see opportunities in Materials account for almost 70% of total LCD panel production costs; thus, the LCD 1) core materials with materials market is more dependent on its downstream industry than other IT industries like low percentages of semiconductors and AMOLEDs. Due to the sharp rise in the percentage of domestically domestic production and produced materials since 2005, LCD materials makers are highly vulnerable to downward 2) items with potential pricing pressures during the down-cycles of the panel industry. for market share gains As of 2011, the LCD materials market is estimated at US$48.5bn and is forecast to grow at a within affiliates CAGR of only 6.1% through 2015, as the LCD industry has already matured and the LCD panel market is likely to show a CAGR of less than 7% in the coming years. In the long run, the proliferation of AMOLEDs should reduce demand for LCD related products.
Even amid stagnant growth in the downstream industry, we still see attractive opportunities in 1) core materials with low percentages of domestic production and 2) items with potential for market share gains in captive markets. Among the five key LCD materials (glass, liquid crystals, polarizers, color filters and backlights), liquid crystals and polarizer materials (TAC and PVA) are almost entirely produced overseas. Moreover, Samsung ElectronicsÊ TV polarizers and LG DisplayÊs glasses are mostly supplied by external sources even though they have affiliates – Cheil Industries and LG Chem, respectively – that are competitive materials suppliers. These products still have strong growth potential relative to that of the overall industry.
Figure 53. LCD panel and materials market trend and forecasts
(US$bn) (%) 120 LCD materials (L) 60 LCD panel (L) LCD materials market YoY growth (R) 90 40
60 20
30 0
0 -20 04 06 08 10 12F 14F
Source: DisplaySearch, KDB Daewoo Securities Research
Figure 54. Cost structure of LCD panel Figure 55. Trend of LCD panel and TV-use polarizer price
Others Yield loss Glass (US$)32" TV (1366X768) LCD panel (US$) 5% 2% 6% Polarizer 400 32" TV (1366X768) polarizer 25 6%
Depreciation Liquid crystal 3% 18% 20
300 Price of TV-use polarizer to Raw materials decline by 17.4% YoY on average account for Color filter 15 70% of 13% Labor cost production 10% costs 200 10 Other materials 5% Backlight 15% PCB 100 5 Driver IC 8% Inverter 1Q07 1Q08 1Q09 1Q10 1Q11 5% 4% Source: CMEL, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research KDB Daewoo Securities Research 30 December 1, 2011 Electronic Materials
2) Polarizer materials: Growing need for domestic production TAC and PVA are ripe for Polarizer, a special material that converts diverging beams of light into a single ray, is domestic production; essential to LCD production. Due to subdued TV demand, we expect the polarizer market to Watch for Cheil slightly shrink YoY to US$6.9bn in 2011. Given heavy price cut pressures and the slim IndustriesÊ market share chance of product mix improvement, we foresee a CAGR of less than 2% in the years ahead. gains in the TV-use Despite weak growth prospects, one area where we see potential for growth is the polarizer segment domestic production of core polarizer materials. Although over 50% of polarizers are domestically produced, there are virtually no domestic manufacturers of their core materials (TAC film and PVA film). The TAC film market is currently monopolized by Japan-based Fuji (75%) and Konica (25%), while the PVA film market is dominated by Kuraray (70%) and Nichigo (30%). Considering that the two materials account for 60% of total polarizer production costs, LG Chem and Cheil Industries (both polarizer makers) are likely to accelerate the in-house production of these materials. SK Innovation is also set to mass- produce TAC film from 2012.
Ever since its merger with Ace Digitech, Cheil Industries has steadily expanded its supply of TV polarizer to SEC, and is expected to save costs by developing polarizer materials in-house (based on its proprietary film-related technologies, including surface coating).
Figure 56. Polarizer manufacturing process Figure 57. Polarizer market trend and forecast
(US$bn) (%) 8 Notebook (L) Monitor (L) 20 TV (L) Others (L) YoY growth (R) 16 6 12
4 8
4 2 0
0 -4 08 09 10 11F 12F 13F
Source: DisplaySearch Source: DisplaySearch, KDB Daewoo Securities Research
Figure 58. Polarizer structures and materials suppliers Figure 59. Cost structure of polarizer (32‰ LCD TV)
Protective Film PSA LR/AR Layer AG/HC Layer Release film 5% TAC PVA 5% TAC TAC WV film or Compensation 25% film PSA Protection film 10% Release Film
Compensation film 18%
Front TAC with surface treatment 21% PVA 16%
Source: DisplaySearch Source: : DisplaySearch
KDB Daewoo Securities Research 31 December 1, 2011 Electronic Materials
3) LCD glass: High barriers to entry Demand growth likely to In the LCD materials segment, the LCD glass business has the highest barriers to entry, slow after 2011 since the materialÊs thin and fragile nature makes it difficult to transport. Although global capacity is sufficient, supply is often disrupted when earthquakes or production disruptions occur. Due to its high barriers to entry, the LCD glass market is currently being oligopolized by Samsung Corning Precision Materials (Korea), Asahi Glass and NEG (Japan), Corning (U.S.), and AvanStrate (Taiwan).
LCD glass was in tight supply until end-2010 on the back of solid LCD panel demand. However, the LCD glass market entered a supply glut in 2011 due to glass makersÊ aggressive capacity expansion in 2010 as well as panel makersÊ production cuts. As the growth of the LCD panel market is likely to slow, LCD glass demand is anticipated to stagnate as well. LCD glass demand is projected to grow at an annual average rate of 9.2% after 2011 (vs. more than 20% during 2009~2010).
On the domestic front, LG Chem is scheduled to expand into the LCD glass business starting in 2012. Although the businessÊ growth momentum has slowed, we believe that LG Chem should generate earnings momentum by drawing upon its captive market (LG Display). Furthermore, the company could enhance momentum by developing high-potential products (e.g., CorningÊs Gorilla Glass, which is used in smartphones). In light of the high demand for mobile devices, demand for slim and durable glass should stay solid going forward.
Table 14. Supply chain of LCD glass (%) SCP Corning Asahi Glass NEG AvanStrate SEC 74 14 1 11 LGD 38 22 40 AUO 32 43 24 1 CMI 31 36 21 12 Sharp 64 22 12 2 BOE 20 80 Infovision 50 45 5 Tianma 34 66 Hannstar 85 15 CPT 53 13 34 Source: DisplaySearch
Figure 60. Global M/S of LCD glass (2010) Figure 61. Trend and forecast of LCD glass demand
Avanstrate (mn m2) (%) 5% 500 40 TV (L) Monitor (L) Corning SCP Notebook (L) Mid- to small-size (L) 28% Others (L) YoY growth (R) 19% 400 30
300 20 200
10 100 NEG 22% AGC 0 0 26% 09 10 11F 12F 13F 14F
Source: DisplaySearch, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research
KDB Daewoo Securities Research 32 December 1, 2011 Electronic Materials
4) Optical film business sluggish; Healthy market for materials used in manufacturing Optical film demand Optical films are used to improve the efficiency of LCD backlights. The optical film business likely to decline saw success in 1H10 on the back of high LCD panel demand and robust LED TV-use high- end optical film demand. However, with the LCD industry slowing (since 2H10), optical film makers have experienced market contraction and strong downward pricing pressure. The optical film market is anticipated to shrink after 2011.
Since AMOLED does not require backlights, the technologyÊs proliferation should lead to a further drop in optical film demand. In the long run, optical film makers need to expand into films for use in AMOLED manufacturing or flexible display substrates.
Demand for materials In the meantime, materials for use in LCD manufacturing are relatively insensitive to LCD used in LCD market conditions. Because these materials are critical to the quality of final products, they manufacturing is stable generally face relatively limited downward pricing pressure. Indeed, demand should remain stable unless LCD makersÊ capacity utilization plunges.
Etchant used in LCD manufacturing is being produced by Soulbrain, Dongwoo Fine-Chem, and ENF Technology. Etchant shipments vary depending on panel makersÊ capacity utilization, but volatility is only minimal. Shipments have steadily expanded as LCD screens have gotten bigger. As for thin glass provided by Soulbrain and Chemtronics, demand is likely to expand in line with growing demand for smartphones and tablet PCs.
Figure 62. LCD-use optical film market trend and forecast
(US$bn) (%) 4 Reflector film (L) Diffuser film (L) Reflective polarizer (L) 12 Microlens film (L) MF-prism (L) Normal prism (L) YoY growth (R) 8 3 4
2 0
-4 1 -8
0 -12 08 09 10 11F 12F 13F
Source: DisplaySearch, KDB Daewoo Securities Research
Figure 63. AMOLED panel vs. LCD panel Figure 64. LCD etchant and thin glass revenues of Soulbrain
(Wbn) 150 Thin glass LCD etchant 120
90
60
30
0 06 07 08 09 10 11F 12F 13F
Source: CMEL, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 33 December 1, 2011 Electronic Materials
5. Special gases
1) IT manufacturing process materials Core materials for CVD Special gases are one of the most widely used materials in IT manufacturing processes process: NF3 and including LCDs, semiconductors, AMOLEDs and solar cells. In particular, NF3 and SiH4 are monosilane essential gases used in chemical vapor deposition (CVD), a core front-end process where chemicals are vaporized and coated on the surface of silicone wafers or LCD glass substrates to form a thin layer.
NF3 is used to clean chambers following chemical vapor deposition to eliminate residues before another vapor deposition. The CVD process is used when manufacturing semiconductors, LCDs and solar cells.
Monosilane (SiH4) is also used in the CVD process. When heat or electric shock is applied to monosilane gas in a CVD chamber, silicon thin film forms on semiconductors or LCD substrates.
Figure 65. Function of NF3 and monosilane
Source: Mitsui Chemical
Figure 66. NF3 demand by segment Figure 67. Monosilane demand by segment
Solar 9% Semiconductor 16%
LCD 46% LCD Solar 56% Semiconductor 28% 45%
Note: LCD includes AMOLED Note: LCD includes AMOLED Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 34 December 1, 2011 Electronic Materials
2) NF3: Downward pricing pressure expected in 2012 OCI Materials to win In 1H11, NF3 was in tight supply due to increased capacity utilization at semiconductor, LCD game of chicken and AMOLED makers, and limited capacity expansion at NF3 producers as well as supply disruptions due to earthquakes in Japan. As a result, the NF3 price jumped 10% YoY, which was unusual. In 2012, however, we expect downward pricing pressures to mount YoY due to capacity expansion at major producers and slowing demand. However, any price cuts will likely be limited to 5% per year, considering: 1) NF3 prices are already stabilizing, and 2) process materials do not usually face significant downward pricing pressure.
The LCD market, albeit sluggish since 2H10, is still growing in terms of area. The semiconductor industry is forecast to continue to grow steadily thanks to rising demand for non-memories and finer processes. AMOLED demand is also anticipated to grow rapidly. AMOLED production is estimated to require around 20% more NF3 than LCD production on a comparable area basis.
If NF3 producers start the game of chicken, OCI Materials should emerge as the winner. The company can slash prices deeper than its competitors given its high profitability (more than double that of competitors), and it can maintain profitability by increasing sales volume, as the gas industry typically has high operating leverage.
Figure 68. NF3 supply/demand trend and forecast
(tonne) (%) 20,000 Supply (L) 40 Demand (L) Oversupply ratio (R) 16,000 30
12,000 20
8,000 10
4,000 0
0 -10 00 02 04 06 08 10 12F
Source: DisplaySearch, Gartner, PV News, KDB Daewoo Securities Research
Figure 69. NF3 price trend and forecast Figure 70. Global M/S of NF3 (2011F)
(US$/kg) Others 140 Central Glass 8% 4% 120 Mitsui Chemical 8% 100 OCI Materials 38% 80
60 Kanto Denka 40 19%
20
0 Air Products 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13F 23%
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 35 December 1, 2011 Electronic Materials
Table 15. NF3 supply/demand analysis 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F Capacity (tonne) 1,296 1,938 2,933 3,415 3,815 5,282 6,225 8,975 10,075 11,625 13,220 14,220 17,425 20,625 Air Products 431 613 908 1,133 1,133 2,000 2,000 2,500 2,500 3,200 3,200 3,200 3,700 4,200 KDK 240 400 600 657 657 657 1,200 1,650 2,150 2,700 2,700 2,700 3,000 3,700 Mitsui 200 200 400 600 600 600 900 1,300 1,500 1,500 1,095 1,095 1,500 1,500 Central Glass 200 300 300 300 300 600 600 600 600 600 600 600 600 600 OCI Materials 300 300 600 900 900 2,100 2,500 2,500 4,500 5,500 7,500 9,500 Linde 125 125 125 125 125 125 125 125 125 125 125 125 125 125 Others 100 300 300 300 400 400 500 700 700 1,000 1,000 1,000 1,000 1,000 YoY growth (%) 49.5 51.3 16.4 11.7 38.5 17.9 44.2 12.3 15.4 13.7 7.6 22.5 18.4 Air Products 42.1 48.1 24.8 0.0 76.5 0.0 25.0 0.0 28.0 0.0 0.0 15.6 13.5 KDK 66.7 50.0 9.5 0.0 0.0 82.6 37.5 30.3 25.6 0.0 0.0 11.1 23.3 Mitsui 0.0 100.0 50.0 0.0 0.0 50.0 44.4 15.4 0.0 -27.0 0.0 37.0 0.0 Central Glass 50.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 OCI Materials 0.0 100.0 50.0 0.0 133.3 19.0 0.0 80.0 22.2 36.4 26.7 Linde 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 200.0 0.0 0.0 33.3 0.0 25.0 40.0 0.0 42.9 0.0 0.0 0.0 0.0 M/S based on capacity (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Air Products 33.3 31.6 31.0 33.2 29.7 37.9 32.1 27.9 24.8 27.5 24.2 22.5 21.2 20.4 KDK 18.5 20.6 20.5 19.2 17.2 12.4 19.3 18.4 21.3 23.2 20.4 19.0 17.2 17.9 Mitsui 15.4 10.3 13.6 17.6 15.7 11.4 14.5 14.5 14.9 12.9 8.3 7.7 8.6 7.3 Central Glass 15.4 15.5 10.2 8.8 7.9 11.4 9.6 6.7 6.0 5.2 4.5 4.2 3.4 2.9 OCI Materials 10.2 8.8 15.7 17.0 14.5 23.4 24.8 21.5 34.0 38.7 43.0 46.1 Linde 9.6 6.5 4.3 3.7 3.3 2.4 2.0 1.4 1.2 1.1 0.9 0.9 0.7 0.6 Others 7.7 15.5 10.2 8.8 10.5 7.6 8.0 7.8 6.9 8.6 7.6 7.0 5.7 4.8 Utilization (%) 70.0 65.0 65.0 75.0 85.0 80.0 85.0 75.0 85.0 80.0 85.0 85.0 85.0 82.0 Supply (tonne) 907 1,260 1,906 2,561 3,243 4,226 5,291 6,731 8,564 9,300 11,237 12,087 14,811 16,913 YoY growth (%) 38.8 51.3 34.3 26.6 30.3 25.2 27.2 27.2 8.6 20.8 7.6 22.5 14.2 LCD LCD panel shipment (ksqm) 2,671 4,167 6,049 8,781 14,137 23,088 33,547 54,415 64,786 81,219 108,016 118,819 130,701 156,841 NF3 required (tonne/ksqm) 0.025 0.026 0.028 0.029 0.030 0.031 0.033 0.034 0.036 0.038 0.039 0.041 0.043 0.045 NF3 consumed (tonne) 67 110 166 253 426 727 1,105 1,875 2,335 3,062 4,260 4,902 5,640 7,079 Semiconductor Wafer shipment (msi) 5,666 4,030 4,783 5,292 6,425 6,851 8,259 8,928 8,390 6,964 9,722 10,021 10,945 11,388 NF3 required (tonne/msi) 0.148 0.266 0.383 0.425 0.439 0.453 0.468 0.484 0.500 0.516 0.533 0.551 0.569 0.588 NF3 consumed (tonne) 841 1,071 1,834 2,247 2,818 3,104 3,868 4,320 4,194 3,596 5,185 5,521 6,229 6,695 Solar cell Installation (MWp) 278 334 447 598 1,086 1,460 1,808 2,685 5,520 6,000 15,997 20,386 23,038 28,122 Cell production (MWp) 249 373 539 744 1,196 1,771 2,474 3,733 7,086 10,700 23,308 30,186 35,951 42,130 Installation/cell production (%) 89.7 89.7 83.0 80.4 90.8 82.4 73.1 71.9 77.9 56.1 68.6 67.5 64.1 66.8 NF3 required (tonne/ksqm) 0.054 0.059 0.062 0.068 0.071 0.082 0.089 0.081 0.084 0.085 0.083 0.084 0.084 0.084 NF3 consumed (tonne) 13 22 33 51 85 145 221 217 464 509 1,332 1,714 1,936 2,356 AMOLED AMOLED shipment (ksqm) 144 265 1,050 2,582 6,553 NF3 required (tonne/ksqm) 0.045 0.047 0.050 0.052 0.054 NF3 consumed (tonne) 6 13 52 134 355 Demand (tonne) 921 1,202 2,033 2,551 3,329 3,977 5,195 6,412 6,993 7,173 10,790 12,188 13,939 16,486 YoY growth (%) 30.5 69.1 25.4 30.5 19.5 30.6 23.4 9.1 2.6 50.4 13.0 14.4 18.3 Oversupply ratio (%) 40.7 61.2 44.2 33.9 14.6 32.8 19.8 40.0 44.1 62.1 22.5 16.7 25.0 25.1 Utilization-adjusted (%) -1.5 4.8 -6.2 0.4 -2.6 6.3 1.9 5.0 22.5 29.6 4.1 -0.8 6.3 2.6 Note: msi = million square inches; Source: DisplaySearch, Gartner, PV News, KDB Daewoo Securities Research
KDB Daewoo Securities Research 36 December 1, 2011 Electronic Materials
3) Monosilane: Supply glut to continue Monosilane prices to fall Monosilane oversupply has worsened since 2009 due to a sluggish a-Si thin film solar cell by more than 10% in (TFSC) market. a-Si (amorphous silicon) TFSCs consume six times more monosilane than 2012 LCDs on a comparable area basis. Major monosilane producers have aggressively expanded capacity since 2008 in anticipation of the explosive growth of the TFSC market. However, the market has stagnated as TFSCs lost price competitiveness due to falling polysilicone prices since 2009.
Oversupply should continue in 2012 as the a-Si TFSC market is unlikely to expand. On the supply side, new entrants such as Dow Chemical and TNS Evonic should increase supply. On the demand side, growth is slowing in the LCD industry, which accounts for 60% of monosilane demand. REC, the worldÊs largest monosilane maker, trimmed its 2011 sales forecast from 2,150 tonnes to 1,600 tonnes. Monosilane prices have fallen by 7~10% per year. In 2012, however, price declines should exceed 10% due to oversupply. Given the persistent oversupply and mounting price cut pressure, capacity expansions and new players will likely be limited after 2012.
Figure 71. Monosilane supply/demand trend and forecast
(tonne) (%) 7,000 Supply (L) 50 Demand (L) 6,000 Oversupply ratio (R) 40
5,000 30 4,000 20 3,000 10 2,000
0 1,000
0 -10 07 08 09 10 11F 12F 13F
Source: DisplaySearch, REC, SEMI, KDB Daewoo Securities Research
Figure 72. Monosilane demand trends and forecasts by segment Figure 73. Global M/S of monosilane (2011F)
(tonne) 5,000 Solar Others 19% Semiconductor REC LCD 31% 4,000
Mitsui Chemical 3,000 5%
MEMC 2,000 5%
1,000
Denal Silane OCI Materials 15% 25% 0 07 08 09 10 11F 12F 13F
Source: DisplaySearch, REC, SEMI, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 37 December 1, 2011 Electronic Materials
Table 16. Monosilane supply/demand analysis 07 08 09 10 11F 12F 13F Capacity (tonne) 2,858 3,048 3,343 5,812 6,831 7,610 8,063 Denal Silane 300 300 300 540 800 800 800 Mitsui Chemicals 150 150 150 200 250 250 250 REC (internal usage) 9,000 9,750 17,250 20,250 28,000 27,000 26,000 REC (merchant) 1,838 1,838 2,187 1,891 1,600 1,991 1,944 MEMC (merchant) 270 360 306 281 281 169 169 OCI Materials 300 400 400 2,400 2,400 2,400 2,400 Others (Dow, TNS, etc.) 500 1,500 2,000 2,500 YoY growth (%) 6.6 9.7 73.9 17.5 11.4 5.9 Denal Silane 0.0 0.0 80.0 48.1 0.0 0.0 Mitsui Chemicals 0.0 0.0 33.3 25.0 0.0 0.0 REC (total) 8.3 76.9 17.4 38.3 -3.6 -3.7 REC (merchant) 0.0 19.0 -13.5 -15.4 24.5 -2.4 MEMC (merchant) 33.3 -15.0 -8.1 0.0 -40.0 0.0 OCI Materials 33.3 0.0 500.0 0.0 0.0 0.0 Others (Dow, TNS, etc.) 200.0 33.3 25.0 M/S based on capacity (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Denal Silane 10.5 9.8 9.0 9.3 11.7 10.5 9.9 Mitsui Chemicals 5.2 4.9 4.5 3.4 3.7 3.3 3.1 REC (merchant) 64.3 60.3 65.4 32.5 23.4 26.2 24.1 MEMC (merchant) 9.4 11.8 9.2 4.8 4.1 2.2 2.1 OCI Materials 10.5 13.1 12.0 41.3 35.1 31.5 29.8 Others (Dow, TNS, etc.) 0.0 0.0 0.0 8.6 22.0 26.3 31.0 Utilization (%) 75.0 75.0 80.0 70.0 75.0 78.0 80.0 Supply (tonne) 2,144 2,286 2,674 4,069 5,123 5,936 6,450 YoY growth (%) 6.6 17.0 52.1 25.9 15.9 8.7 Solar cell (tonne) 181 352 363 871 1,005 973 1,007 SiH4 required for bulk type (g/W) 50 45 41 36 33 30 27 SiH4 required for a-Si (g/W) 500 475 451 429 407 387 368 Bulk type (MW) 2,282 4,692 4,964 14,495 18,237 20,389 24,122 a-Si (MW) 134 297 360 800 999 960 996 Bulk type (tonne) 114 211 201 528 598 602 641 a-Si (tonne) 67 141 162 343 407 371 366 Semiconductor (tonne) 780 950 941 1,016 970 1,000 1,066 LCD (tonne) 990 1,050 1,293 1,683 1,925 2,204 2,745 Demand (tonne) 1,951 2,352 2,596 3,570 3,900 4,177 4,818 YoY growth (%) 20.6 10.4 37.5 9.2 7.1 15.3 Oversupply ratio (%) 46.5 29.6 28.8 62.8 75.2 82.2 67.4 Utilization-adjusted (%) 9.9 -2.8 3.0 14.0 31.4 42.1 33.9 Source: DisplaySearch, REC, SEMI, KDB Daewoo Securities Research
KDB Daewoo Securities Research 38 December 1, 2011 Electronic Materials
V. Investment strategy and valuation
1. Initiate with Overweight; Top picks: Duksan, Cheil Industries and OCIM
AMOLED materials We initiate our coverage on the electronic materials sector, presenting an Overweight rating. seem particularly The industry is noteworthy, as: 1) electronic materials makersÊ earnings are relatively attractive insensitive to IT market conditions since their products are necessary for downstream manufacturing, and 2) companies in the sector can actively adapt to new IT paradigms thanks to their strong technology scalability. As such, when the IT market is in a down cycle, electronic materials shares tend to outperform semiconductor, LCD, and IT parts shares.
Among electronic materials segments, AMOLED materials appears to be the most attractive in light of the strong growth potential of the related downstream industry, high barriers to entry, and further room for market share expansion. The downstream AMOLED panel market is likely to grow at a CAGR of 87% through 2015. And the technological barriers to entry are so high that only a few companies have succeeded in developing and mass- producing products. Of particular note, given that Samsung Mobile Display (SMD) is leading the global AMOLED market, domestic materials makers are likely to quickly expand their market shares.
Rechargeable battery Over the medium- to long-term, the rechargeable battery-use materials business appears makers have high mid- attractive. The market is likely to show eightfold growth, as applications of rechargeable to long-term growth batteries are expanding to xEV (HEV, PHEV, and EV) and energy storage systems (ESS). momentum Meanwhile, semiconductor and LCD stocks look less attractive than AMOLED and rechargeable battery-related stocks as the semiconductor and LCD markets have already matured.
Top picks are Duksan Hi- We recommend Duksan Hi-Metal (077360 KQ/Buy) in light of its focus on AMOLED Metal, Cheil Industries materials; Cheil Industries (001300 KS/Buy) in light of its expected vertical integration with and OCI Materials SMD in the AMOLED materials segment; and OCI Materials (036490 KQ/Buy) in light of its dominant position in the semiconductor-, LCD-, and AMOLED-use gas markets and valuation merits. We also like Soulbrain (036830 KQ/Buy), due to its diversified business portfolio and earnings stability, and Iljin Materials (020150 KS/Buy), as it should benefit from rechargeable battery market growth.
Table 17. Segments of the electronic materials industry Growth potential of Further room for Downstream Entry barrier Core materials Related companies downstream industry M/S expansion Duksan Hi-Metal (077360 KQ) - Organic materials (HTL, ETL, EML) Cheil Industries (001300 KS) - Etchant (thin glass) AMOLED ★★★★★ ★★★★ ★★★★ Soulbrain (036830 KQ) - NF3, Monosilane OCI Materials (036490 KQ) - TCO target ANP (121600 KQ) - Cathode/anode materials, separators, Soulbrain (036830 KQ) electrolytes Iljin Materials (020150 KS) Rechargeable ★★★★ ★★★★ ★★★★ - Anode electron collector (elecfoil) OCI Materials (036490 KQ) battery - LiPF6 Foosung (093370 KQ) - Electrolyte additives Leechem (131100 KQ) - High-end process materials related to Cheil Industries (001300 KS) Semiconductor ★★ ★★★★ ★★★ process migration Duksan Hi-Metal (077360 KQ) - Micro solder ball - Polarizer and raw materials (TAC, PVA) Cheil Industries (001300 KS) LCD ★ ★★★ ★★★ - Glass substrate LG Chem (051910 KS) - NF3 Special gas ★★★ ★★★★★ ★★ OCI Materials (036490 KQ) - Monosilane Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 39 December 1, 2011 Electronic Materials
Table 18. Electronic materials makers in the KDB Daewoo Universe Rechargeable AMOLED LCD Semiconductor Rating TP CP Upside P/E (x) P/B (x) battery 2011~15F CAGR (%) 86.6 29.4 6.6 6.2 (W) (W) (%) 11F 12F 11F 12F Cheil Industries ○◎ △ ○ ◎ Buy 120,000 97,700 22.8 18.5 14.8 1.6 1.3 OCI Materials ○ △ ◎ ○ Buy 130,000 83,600 55.5 13.1 9.9 2.8 2.2 Duksan Hi-Metal ◎ ○ Buy 40,000 26,500 50.9 23.1 17.9 6.2 4.5 Soulbrain △ ○ ○ ○ Buy 56,000 43,450 28.9 14.1 11.0 2.4 2.0 Iljin Materials ◎ Buy 23,000 17,100 34.5 28.1 15.9 2.0 2.0 Source: KDB Daewoo Securities Research
Table 19. Valuation comparison of global electronic materials makers (Wbn, %, x) Share performance OP margin P/E P/B EV/EBITDA ROE Company Mkt. cap -1M -3M 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F Cheil Industries 5,123 -3.3 1.2 6.7 6.4 7.3 18.1 15.4 12.1 1.7 1.6 1.4 12.0 10.2 8.1 10.9 11.0 13.0 Duksan Hi-Metal 779 0.8 -8.6 18.1 25.6 27.0 54.2 26.6 14.2 7.0 7.0 4.7 23.4 18.4 11.4 12.4 28.9 36.2 OCI Materials 882 -3.8 -10.6 33.4 34.7 35.3 14.7 11.4 9.3 3.2 2.6 2.0 9.6 6.2 5.3 24.1 24.7 24.4 Soulbrain 638 8.6 3.0 14.1 13.8 14.0 19.1 13.6 11.1 3.0 2.5 2.0 8.0 9.4 7.6 16.8 19.8 19.8 Iljin Materials 670 -13.0 -12.8 12.8 6.4 10.4 12.5 44.5 15.2 3.2 1.9 1.8 - 20.4 10.4 30.1 8.6 12.2 Kolon Industries 1,525 -17.7 -42.9 7.8 8.3 8.4 5.1 4.6 4.2 1.1 1.0 0.8 6.8 4.8 4.3 - 22.5 19.8 Foosung 630 -4.3 1.1 4.8 13.5 15.6 108.3 22.2 16.4 5.6 4.5 3.5 16.1 15.3 10.9 5.4 22.4 23.8 Hansol Chemical 215 10.8 28.8 8.9 9.3 10.7 12.7 6.5 5.5 1.5 1.3 1.2 8.4 8.3 6.4 11.7 13.9 15.8 E&F Technology 177 19.1 46.5 12.7 11.2 11.5 13.0 11.4 9.3 2.6 2.2 1.8 6.0 7.0 6.0 22.5 21.2 21.2 Korea avg. -0.3 0.6 13.3 14.3 15.6 28.6 17.3 10.8 3.2 2.7 2.1 11.3 11.1 7.8 16.7 19.2 20.7 Shin-Etsu Chemical 23,529 -9.5 -2.8 14.1 14.7 15.4 17.4 14.6 12.8 1.1 1.0 1.0 5.5 5.1 4.7 7.0 7.2 7.9 Hitachi Chemical 4,351 -3.3 6.8 8.7 7.2 8.4 24.5 14.5 11.2 1.1 1.0 1.0 3.4 3.6 3.1 7.0 6.9 8.6 SUMCO 2,428 -21.4 -31.5 -3.0 3.8 9.1 - 160.9 10.2 0.8 0.8 0.8 8.3 6.2 5.5 -28.5 -0.6 7.6 Sumitomo Chemical 6,730 -8.8 -14.8 4.4 4.0 4.4 23.1 23.5 7.7 0.9 0.8 0.8 7.3 7.6 7.2 4.5 2.9 10.1 JSR 5,370 -7.4 2.2 11.5 11.0 11.9 13.1 12.5 10.8 1.3 1.2 1.1 4.8 4.8 4.3 10.7 10.1 10.8 Mitsubishi Chemical 9,467 -14.1 -19.1 7.2 6.1 6.3 8.0 8.1 7.4 0.8 0.8 0.7 5.8 5.5 5.3 11.7 9.5 9.3 Showa Denko 3,324 -1.3 0.7 4.9 5.3 5.6 17.3 10.5 9.7 0.9 0.9 0.8 6.5 6.1 5.8 5.2 8.8 9.2 Furukawa 1,696 -29.5 -39.6 3.8 1.8 2.9 - - 10.0 0.8 0.7 0.7 7.4 8.1 7.0 7.4 -3.5 6.3 Sumitomo Chemical 6,730 -8.8 -14.8 4.4 4.0 4.4 23.1 23.5 7.7 0.9 0.8 0.8 7.3 7.6 7.2 4.5 2.9 10.1 Sumitomo Bakelite 1,613 -7.7 -7.5 5.9 5.2 7.0 19.3 17.1 11.5 0.8 0.8 0.8 4.8 4.6 3.9 4.1 5.2 6.8 Nitto Denko 7,687 -15.7 -3.0 13.3 10.6 11.0 10.3 11.3 10.2 1.2 1.1 1.0 3.3 3.4 3.2 13.8 10.0 10.0 DuPont 46,995 -10.0 -4.8 9.6 13.4 13.6 10.7 10.9 10.0 3.6 3.7 3.0 9.3 7.9 7.2 37.7 34.9 31.3 Cabot Microelec. 1,021 -2.5 -2.0 18.0 17.7 21.0 17.4 17.0 12.7 1.6 - - 4.7 5.3 3.1 9.6 - - Overseas avg. -10.8 -10.0 7.9 8.1 9.3 16.8 27.0 10.2 1.2 1.1 1.0 6.0 5.8 5.2 7.3 7.9 10.7 Total avg. -6.5 -5.7 10.1 10.6 11.9 22.1 22.9 10.4 2.0 1.8 1.5 8.0 8.0 6.3 10.9 12.7 15.0 Source: Bloomberg
Figure 74. ROE-P/B comparison of electronic materials makers (11F) Figure 75. ROE-P/B comparison of electronic materials makers (12F)
(P/B, x) (P/B, x) 8 5 Duksan Hi- Metal Duksan Hi- 6 4 Metal
4 3 Soulbrain Iljin Materials OCI Materials Soulbrain 2 Cheil Industries 2 OCI Materials Iljin Materials Cheil Industries 0 1
(ROE, %) -2 (ROE, %) 0 -10-50 5 10152025303540 0 5 10 15 20 25 30 35 40
Source: Bloomberg Source: Bloomberg KDB Daewoo Securities Research 40 December 1, 2011 Electronic Materials
Cheil Industries (001300 KS)
Buy (Maintain) AMOLED premium; Beneficiary of SEC’s investments
Target Price (12M, W) 120,000 Maintain Buy and TP of W120,000 Share Price (11/29/11, W) 101,000 Expected Return (%) 18.8 Now is the time that Cheil deserves a premium as an AMOLED materials producer EPS Growth (11F, %) -1.4 Cheil has swiftly responded to IT market changes Market EPS Growth (11F, %) -2.3 P/E (11F, x) 19.1 Market P/E (11F, x) 10.5 We maintain our Buy call on Cheil Industries with a target price of W120,000. Our KOSPI 1,856.52 target price was derived using a sum-of-the-parts methodology. In calculating our Market Cap (Wbn) 5,296 target price, we reflected the value of the companyÊs AMOLED materials business. Shares Outstanding (mn) 52 Samsung ElectronicsÊ (SEC) AMOLED investments are forecast to exceed W5tr in Avg Trading Volume (60D, '000) 543 2012, and Cheil Industries is likely to generate AMOLED materials sales starting in Avg Trading Value (60D, Wbn) 50 1H12. Dividend Yield (11F, %) 0.7 Free Float (%) 87.7 Our investment recommendation is premised on the following: 52-Week Low (W) 70,800 1) Cheil Industries deserves a premium as an AMOLED materials producer. At 52-Week High (W) 139,500 present, the companyÊs shares are trading at a 12-month forward P/E of 15.1x (a Beta (12M, Daily Rate of Return) 1.1 74% premium to the KOSPI). Since earnings are unlikely to show any dramatic Price Return Volatility (12M Daily, %, SD) 2.9 improvement in the near term, this valuation may look burdensome. However, Foreign Ownership (%) 22.9 other AMOLED materials makers such as Duksan Hi-Metal and U.S.-based Major Shareholder(s) Universal Display Corporation are receiving premiums of 110% and 500% (relative National Pension Service (8.68%) to their respective markets). Given this, the value of Cheil IndustriesÊ AMOLED Samsung Card et al. (7.43%) Korea Investment Management Co. (5.95%) materials business does not seem to have been reflected into its share price. In Price Performance 2011, the AMOLED materials division is expected to post weak revenues of (%) 1M 6M 12M W3.4bn. However, we forecast the divisionsÊ revenues to grow to W283.7bn in Absolute 1.3 -24.9 -6.1 2013 and W930bn in 2015 on the back of surging AMOLED panel shipments and Relative 5.1 -13.3 -4.0 increasing supplies to SMD. 2) Cheil Industries is expected to benefit from SECÊs large-scale investments. SEC plans to make a W27tr investment in 2012 – W15tr in semiconductor, W10tr in AMOLED and LCD, and W2tr in others. Accordingly, CheilÊs earnings should be boosted by growth at SECÊs non-memory and AMOLED businesses (i.e., fulfilling larger semiconductor patterning materials orders and producing AMOLED materials).
3) Cheil Industries is swiftly preparing for a paradigm shift in the IT market. In order to ensure mid- to long-term growth, Cheil is undertaking new businesses (as outlined in its 2015 roadmap), including: 1) AMOLED materials, 2) solar cell pastes, 3) water treatment membranes and 4) flexible display substrates. Given that these businesses should benefit from the Samsung GroupÊs new growth engines and the governmentÊs long-term projects, their earnings visibility appears high. Once these new businesses take off (by 2015), their combined revenues are projected to reach W1.5tr.
Share price § Earnings & Valuation Metrics 140 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) 100 12/09 4,406 253 5.7 120 2,397 390 329 6.7 23.6 1.5 8.4
80 12/10 5,121 335 6.5 270 5,395 474 147 11.4 20.6 2.0 12.4 12/11F 5,649 302 5.4 270 5,295 390 17 9.1 18.5 1.6 14.1 60 12/12F 6,605 419 6.4 337 6,601 611 -82 9.7 14.9 1.3 9.2 40 12/13F 7,736 582 7.5 461 9,032 807 105 11.3 10.9 1.1 7.0 11/10 3/11 7/11 11/11
Note: 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 41 December 1, 2011 Electronic Materials
Maintain Buy call with TP of W120,000
Share prices likely to We maintain our Buy call on Cheil Industries with a target price of W120,000. Our target reflect the AMOLED price was derived using a sum-of-the-parts methodology. In calculating our target price, we materials business in reflected the value of the companyÊs AMOLED materials business. Samsung ElectronicsÊ 2012 (SEC) AMOLED investments are forecast to exceed W5tr in 2012, and Cheil Industries is likely to generate AMOLED materials sales starting in 1H12.
At present, the companyÊs shares are trading at a 12-month forward P/E of 15.1x (a 74% premium to the KOSPI). Since earnings are unlikely to show any dramatic improvement in the near term, this valuation may look burdensome. However, other AMOLED materials makers such as Duksan Hi-Metal and U.S.-based Universal Display Corporation are receiving premiums of 110% and 500% (relative to their respective markets). Given this, the value of Cheil IndustriesÊ AMOLED materials business does not seem to have been reflected into its share price. Excluding the companyÊs asset value of W1.15tr, the companyÊs P/E is equivalent to only 11.8x.
Table 20. Earnings forecast revisions (K-IFRS consolidated basis) (Wbn, %) Previous Revised % change 11F 12F 13F 11F 12F 13F 11F 12F 13F Revenues 5,649 6,627 7,764 5,649 6,605 7,736 0.0 -0.3 -0.4 Operating profit 302 421 585 302 419 582 0.0 -0.5 -0.5 Net profit 270 339 464 270 337 461 0.0 -0.5 -0.5 EPS (W) 5,295 6,632 9,082 5,295 6,601 9,032 0.0 -0.5 -0.5 OP margin 5.3 6.4 7.5 5.3 6.3 7.5 - - - Net margin 4.8 5.1 6.0 4.8 5.1 6.0 - - - Source: KDB Daewoo Securities Research
Table 21. Calculation of target price (sum-of-the-parts) (Wbn, % ) 12M-fwd EBITDA Target EV/EBITDA Fair value Notes Chemicals 228 6.3 1,424 Average EV/EBITDA of peers ECM (excluding AMOLED) 260 10.9 2,835 30% premium to average EV/EBITDA of peers AMOLED 21 17.9 377 Average EV/EBITDA of Duksan Hi-Metal and UDC Fashion 113 6.0 680 Average EV/EBITDA of peers Operating value ① 5,316 Investment asset value ② 1,155 Value of stakes in affiliated companies Net debt ③ 512 End-2011 estimate Equity value (① + ② - ③) 5,959 # of shares ('000 shares) 50,530 Excludes treasury shares Target price (W) 117,937 Current price (W) 97,700 Closing price as of Nov. 25, 2011 Upside potential (%) 20.7% Source: KDB Daewoo Securities Research
Table 22. Stake value of affiliated companies (%, Wbn) Company Stake Value Notes Marketable securities Samsung Engineering 13.1 871.9 20% discount to market value Samsung Fine Petrochemicals 3.2 31.6 Samsung Heavy Industries 0.4 21.3 Samsung Techwin 0.1 2.6 Samsung Electronics 0.0 7.3 Non-marketable securities Samsung Economics Research Institute 1.0 0.5 20% discount to fair value as of end-4Q10 Samsung Everland 4.0 171.4 Samsung General Petrochemicals 0.9 11.8 Investments under equity method Samsung Petrochemical 21.4 34.2 20% discount to fair value as of end-3Q10 SD Flex 50.0 2.6 Total 1,155.3 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 42 December 1, 2011 Electronic Materials
Comparison of share performance and valuation against global peers
Table 23. Valuation comparison of global peers (Wbn, %, x) Share OP margin P/E P/B EV/EBITDA ROE Sector Company Mkt Cap performance -1M -3M 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F Cheil Industries 5,123 -5.6 1.2 6.7 6.4 7.3 18.1 15.4 12.1 1.7 1.6 1.4 12.0 10.2 8.1 10.9 11.0 13.0 Chemical LG Chem 20,411 -16.5 -14.0 14.9 13.9 14.6 11.5 9.1 7.9 2.8 2.3 1.8 8.6 5.5 4.9 29.8 27.9 25.4 Honam Petrochem 9,558 4.7 -5.8 12.6 11.8 12.1 12.2 8.0 7.1 2.1 1.7 1.4 8.5 5.6 5.4 19.2 22.7 20.9 Hanhwa Chem 3,332 -12.8 -26.9 13.4 14.4 14.8 8.4 5.1 4.7 1.1 0.9 0.8 9.8 6.6 6.1 14.1 19.3 18.0 Dow Chemical 33,537 -9.0 -8.8 5.8 8.7 8.4 8.8 9.2 8.7 1.4 1.2 1.2 6.8 6.4 6.3 11.5 14.8 13.6 Chemical avg. -8.4 -13.9 11.7 12.2 12.5 10.2 7.8 7.1 1.9 1.5 1.3 8.4 6.0 5.7 18.6 21.2 19.5 ECM OCI Materials 882 -3.1 -10.6 33.4 34.7 35.3 14.7 11.4 9.3 3.2 2.6 2.0 9.6 6.2 5.3 24.1 24.7 24.4 Duksan Hi-Metal 779 -4.3 -8.6 18.1 25.6 27.0 54.2 26.6 14.2 7.0 7.0 4.7 23.4 19.2 11.4 12.4 28.9 36.2 Shin-Etsu Chemical 23,529 -8.0 -2.8 14.1 14.7 15.4 17.4 14.6 12.8 1.1 1.0 1.0 5.5 5.8 4.8 7.0 7.2 7.9 Sumitomo Chemical 6,730 -4.9 -14.8 4.4 4.0 4.4 23.1 23.5 7.7 0.9 0.8 0.8 7.3 7.6 7.3 4.5 2.9 10.1 ECM avg. -5.1 -9.2 17.5 19.8 20.5 27.3 19.0 11.0 3.0 2.9 2.1 11.4 9.7 7.2 12.0 15.9 19.6 Fashion LG Fashion 1,345 0.5 5.7 10.7 11.3 11.9 14.6 11.1 9.0 2.1 1.7 1.5 5.2 7.4 6.0 15.4 16.7 17.4 Handsom 628 -9.3 -5.6 18.4 20.6 20.7 7.9 7.5 6.6 1.0 1.0 0.9 3.6 5.7 4.9 14.0 14.1 14.3 GAP 10,426 -5.5 8.2 13.4 9.5 9.8 10.2 11.7 10.0 3.4 3.4 3.2 4.6 5.5 5.4 26.8 24.2 34.9 Fashion avg. -4.7 2.8 14.2 13.8 14.1 10.9 10.1 8.5 2.2 2.1 1.9 4.5 6.2 5.4 18.7 18.3 22.2 Source: Bloomberg
Figure 76. Share performances of global electronic material makers Figure 77. Share performances of global chemical makers
(1/1/10=100) (1/1/10=100) 250 Cheil Industries 550 Cheil Industries OCI Materials LG Chem Shin-Etsu Chem Honam Petrochem 450 Hanwha Chem 200 Sumitomo Chem Dow Chem 350
150 250
100 150
50 50 1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11
Source: Thomson Reuters Source: Thomson Reuters
Figure 78. 12-month forward P/E band Figure 79. 12-month forward P/B band
(W) (W) 25.0x 22.0x 2.5x 2.1x 200,000 200,000 18.0x 1.7x 160,000 160,000 14.0x 1.3x 120,000 120,000 10.0x 0.9x 80,000 80,000 6.0x
40,000 40,000
0 0 00 02 04 06 08 1012F 12 00 02 04 06 08 10 1212F
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 43 December 1, 2011 Electronic Materials
Still has a lot to prove
In order to ensure mid-to long-term growth, Cheil is undertaking new businesses (as outlined in its 2015 roadmap), including 1) AMOLED materials, 2) solar cell pastes, 3) water treatment membranes and 4) flexible display substrates. Given that these businesses should benefit from the Samsung GroupÊs new growth engines and the governmentÊs long-term projects, their earnings visibility appears high. Once these new businesses take off (by 2015), their combined revenues are projected to reach W1.5tr.
AMOLED materials The companyÊs AMOLED materials business is highly likely to be vertically integrated with revenues to reach Samsung Mobile Display (SMD). Cheil plans to produce electron transport layers (ETL) and W930bn in 2015 pixel defining layers (PDL) in 4Q and hole transport layers (HTL) in 1H12. In 2011, the AMOLED materials division is expected to post weak revenues of W3.4bn. However, we forecast revenues to grow to W283.7bn in 2013 and W930bn in 2015 on the back of surging AMOLED panel shipments and increasing supplies to SMD.
Solar cell paste revenues Solar cell pastes help transport electrons generated from solar cells to external circuits. to climb to W300bn in Silver (Ag) paste is used on the front-side of the electrode and aluminum (Al) paste is used 2015 on the back-side. The back-side bus bars use a mix of Ag and Al pastes. Cheil produces silver paste – although silver paste is used one-tenth as frequently as aluminum paste, it has the highest added value.
In 3Q10, Cheil began to generate revenues from solar cell paste in China. Aided by a larger Chinese customer base, 2011 solar cell paste revenues are expected to exceed W60bn. Going forward, we project solar cell paste revenues to reach W300bn by 2015, driven by the increasing localized production of solar power equipments and Samsung SDIÊs ramp-up of solar cell production capacity (3GW).
Table 24. Summary of new businesses Market size Generation of Long-term roadmap (target revenues) OP margin Competitors (15F) revenues AMOLED UDC, Dow Gracel, Hodogaya, Idemitsu W1.7tr 3Q11 W300bn (13F), W600bn (14F), W1tr (15F) 20~25% materials Kosan, Duksan Hi-metal, LG Chem Dupont, Ferro, Dongjin Semichem, W300bn (15F): Assuming Samsung SDI's solar Solar cell paste W3.5tr 3Q10 15~20% Daejoo Electronic Materials, SSCP, cell capacity will reach 3GW Advanced Nano Products Water treatment W150bn (15F): Advancing into rechargeable Dow Chemical, Asahi Kasei, Nitto Denko, W3.4tr 1Q12 10~15% membrane battery separator business Woongjin Chemical, Kolon Industries Flexible display Dupon Teijin, Sumitomo Bakelite, W4.8tr 2015 W50bn (15F), W500bn (20F): Only for base film 15~20% substrate Mitsubishi, i-Component Source: ETRI, Photon International, The Freedonia Group, Company data, MKE, KDB Daewoo Securities Research
Figure 80. AMOLED material revenues and market trend Figure 81. Solar cell paste market trend and forecast
(Wbn) (%) (Wtr) (%) 2,500 50 4 200 SMD's AMOLED material purchses (L) Market for solar cell paste (L) Cheil's AMOLED material revenues (L) YoY growth (R) 2,000 Cheil's M/S at SMD (R) 40 160 3
1,500 30 120 2 1,000 20 80
1 500 10 40
0 0 0 0 09 10 11F 12F 13F 14F 15F 09 10 11F 12F 13F 14F 15F
Source: KDB Daewoo Securities Research Source: Photon International , KDB Daewoo Securities Research
KDB Daewoo Securities Research 44 December 1, 2011 Electronic Materials
Water treatment Membranes are used to filter specific particles from liquid or gas mixtures (e.g. micro membrane revenues to filtration (MF), ultra filtration (UF), nano filtration (NF), reverse osmosis (RO) and ion reach W150bn in 2015 exchange (IE)). Different membranes are appropriate for different types of particles. For example, IEs are used as a filter for rechargeable batteries. Membranes are applicable in a wide range of areas, such as water treatment, semiconductor/LCD production processes, rechargeable battery filters and pharmaceuticals/healthcare.
Membrane bioreactors (MBR) for wastewater treatment have gained significant popularity due to tougher water quality regulations following law revisions in 2009. The wider use of MBRs has led to growing demand for membranes. The global membrane market for water treatment is estimated at around W2tr and is expected to grow to W3tr by 2015. The Korean market is estimated at roughly W200bn (according to ChemLocus). Local players already produce water treatment membranes, such as Woogjin Chemical (RO/MF), Kolon Industries (UF) and SK Chemicals (UF), but their domestic market shares are limited.
Largest source of Cheil plans to establish a pilot production line for water treatment membranes, with the aim demand to come from to start production in 2012. We forecast revenues to grow to W150bn by 2015, led by Samsung Group demand for wastewater treatment and processing facilities from Samsung Group affiliates. affiliates Going forward, the company is expected to leverage its water treatment membrane technology to tap into the rechargeable battery filter business.
Figure 82. Types of water treatment membranes Figure 83. Product portfolio of global membrane makers
Source: Econity Source: LGERI
Figure 84. Membrane market trend and forecast Figure 85. Water treatment and rech. battery-use membrane markets
(Wtr) (Wtr) (%) 10 Others 3.5 Rechargeable battery separator (L) 60 Pharmaceuticals Water treatment membrane (L) 3.0 8 Rechargeable battery Rechargeable battery/water treatment (R) 55 Food and beverage 2.5 Water treatment 6 2.0 50 4 1.5
1.0 45 2 0.5
0 0.0 40 09 10 11F 12F 13F 14F 15F 09 10 11F 12F 13F 14F 15F
Source: The Freedonia Group, IIT, LGERI, KDB Daewoo Securities Research Source: The Freedonia Group, IIT, LGERI, KDB Daewoo Securities Research
KDB Daewoo Securities Research 45 December 1, 2011 Electronic Materials
The flexible display Flexible displays are attracting attention due to their potential for various applications and materials market to high portability. Substrates help differentiate flexible displays from one another. Although a expand to W4.8tr by variety of materials, including plastic, glass, and metal foil, can be adopted to produce 2015 substrates for flexible displays, we believe that plastic is the most appropriate material in light of 1) its durability and 2) the ease of manufacturing and roll-to-roll processing.
A flexible substrate is composed of a base film, coated layers, a barrier (blocking moisture and oxygen), and transparent electrodes. Base film is made from value-added synthetic resins, including PEN, PES, PC, and PI. Since each film has its own strengths and weaknesses, there is no clear market leader. However, Dupont TeijinÊs PEN film and Sumitomo BakeliteÊs PES film are relatively popular. According to the Ministry of Knowledge Economy, the global flexible display materials market is estimated at W1tr, and it is expected to expand to W4.8tr by 2015.
Cheil targets base film As part of the governmentÊs 10 WPM (World Premier Materials) projects, Cheil has been revenues of W50bn in designated as the leading company of substrate materials for flexible displays; accordingly, 2015 the company is developing base film. We believe that the company will be competitive in the base film market in light of its outstanding engineering plastic (EP) technology. The base film market is expected to grow to W200bn in 2015 and W500bn in 2020. The company targets base film revenues of W50bn in 2015, controlling 25% of the market. Furthermore, we expect the companyÊs base film business to create synergies with its AMOLED business.
Table 25. Types and features of flexible display substrates Temp. range CTE Advantage Disadvantage Maker ()℃ (ppm/℃ ) - Chemical resistance - Low CTE - Optical transmittance PEN 150 20 Dupon Teijin - Low water absorption - Birefringence - Low cost - Chemical resistance - Optical transmittance PC - High CTE 155 70 Teijin, GE, Mitsubishi Engineering - Process-ability - Out-gassing - Thermal resistance - High cost PI 275 20 Mitsubishi Gas, Dupont - Chemical resistance - High water absorption - Chemical resistance - Resistance to UV - High cost Sumitomo Bakelite, PES 230 60 - Optical transmittance - High water absorption i-Components - High CTE - High cost - Thermal resistance Arylite - High CTE 330 70 FIS - Chemical resistance - Resistance to UV Note: Products with higher temperature range and lower CTE (coefficient of thermal expansion) are preferred Source: ETRI, Company data, KDB Daewoo Securities Research
Figure 86. Structure of flexible display substrate Figure 87. Flexible display and material market trend and forecast (Wtr) 7 Flexible display material Flexible display 6
5
4
3
2
1
0 09 10 11F 12F 13F 14F 15F
Source: Company data Source: DisplaySearch, MKE, KDB Daewoo Securities Research
KDB Daewoo Securities Research 46 December 1, 2011 Electronic Materials
Earnings outlook: EPS expected to grow at a CAGR of 21.9% during 2010~2013
Revenues and operating We project Cheil IndustriesÊ operating profit to grow at a CAGR of 20.8% during 2010~2013 profit are expected to on the back of the growth of the high-margin electronic chemical materials (ECM) business. grow at a CAGR of As operating profit growth is expected to outpace average revenue growth of 15.1%, OP 15.1% and 20.8%, margin is forecast to improve from 6.5% in 2010 to 7.5% in 2013. Revenues and operating respectively, during profit at the ECM division are anticipated to climb at a CAGR of 22.7% and 41.2%, 2010~2013 respectively, driving up the companyÊs earnings.
We expect CheilÊs revenues to increase 16.9% to W6.6tr and operating profit to increase 38.8% to W419bn with an OP margin of 6.3% in 2012. The earnings contribution of the chemicals division is forecast to increase YoY on the back of an improvement in spreads and the recovery of shipments. In the ECM division, operating profit is anticipated to grow 23.3% YoY thanks to higher revenues from non-memory-use semiconductor patterning materials and the launch of new patterning materials. Meanwhile, OP margin for the TV-use polarizer film business, which is currently breaking even, is projected to rise to 4~5%, despite the LCD market slowdown, due to larger supplies to customers.
Table 26. Earnings forecasts (K-IFRS consolidated basis) (Wbn, %) 1Q11 2Q11 3Q11 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 2010 2011F 2012F 2013F Revenues 1,400 1,481 1,317 1,452 1,493 1,657 1,678 1,777 5,080 5,649 6,605 7,736 Chemical 621 650 599 600 649 719 797 745 2,234 2,469 2,911 3,396 Electronic material 384 406 403 419 429 489 545 572 1,413 1,612 2,034 2,610 Fashion 377 397 298 426 397 421 317 452 1,354 1,497 1,586 1,651 Others 18 27 18 7 19 28 19 7 79 71 73 79 Revenues contribution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Chemical 44.4 43.9 45.4 41.3 43.5 43.4 47.5 42.0 44.0 43.7 44.1 43.9 Electronic material 27.4 27.5 30.6 28.8 28.7 29.5 32.5 32.2 27.8 28.5 30.8 33.7 Fashion 26.9 26.8 22.6 29.4 26.6 25.4 18.9 25.4 26.6 26.5 24.0 21.3 Others 1.3 1.8 1.4 0.5 1.3 1.7 1.1 0.4 1.6 1.3 1.1 1.0 Operating Profit 103 63 72 64 96 102 119 103 330 302 419 582 Chemical 36 23 1 19 32 39 49 29 166 79 150 215 Electronic material 36 27 67 28 37 44 61 54 104 159 195 293 Fashion 29 11 5 16 26 18 9 19 59 61 72 72 OP contribution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Chemical 34.7 36.6 2.0 30.2 33.3 38.7 41.5 28.1 50.4 26.3 35.7 36.9 Electronic material 35.5 42.7 92.6 44.0 38.2 43.2 50.9 52.9 31.5 52.5 46.6 50.3 Fashion 28.0 17.7 6.6 24.7 27.6 17.5 7.2 18.4 17.8 20.0 17.1 12.4 OP margin 7.3 4.2 5.5 4.4 6.4 6.1 7.1 5.8 6.5 5.3 6.3 7.5 Chemical 5.7 3.5 0.2 3.2 4.9 5.5 6.2 3.9 7.4 3.2 5.1 6.3 Electronic material 9.5 6.6 16.7 6.7 8.6 9.0 11.1 9.5 7.4 9.8 9.6 11.2 Fashion 7.6 2.8 1.6 3.7 6.7 4.2 2.7 4.2 4.3 4.0 4.5 4.4 Pretax income 110 56 80 63 95 99 117 99 310 308 411 562 Net profit 92 54 73 52 78 81 96 81 255 270 337 461 RP margin 7.8 3.8 6.0 4.3 6.4 6.0 7.0 5.6 6.1 5.4 6.2 7.3 NP margin 6.6 3.7 5.5 3.6 5.2 4.9 5.7 4.6 5.0 4.8 5.1 6.0 Growth (QoQ/YoY) Revenues 5.6 5.8 -11.1 10.2 2.9 11.0 1.2 5.9 19.2 11.2 16.9 17.1 Chemical 11.4 4.7 -8.0 0.2 8.3 10.8 10.9 -6.5 22.3 10.5 17.9 16.7 Electronic material 9.0 5.9 -0.9 4.0 2.3 14.1 11.4 5.0 16.8 14.1 26.2 28.3 Fashion -6.9 5.3 -25.0 43.3 -6.9 5.9 -24.7 42.6 18.6 10.6 5.9 4.1 Others 67.9 49.2 -33.3 -61.1 166.8 49.2 -33.3 -61.1 -4.3 -10.6 3.3 8.3 Operating Profit 108.3 -38.8 15.4 -11.4 49.5 5.8 17.1 -13.6 25.1 -8.5 38.8 38.8 Chemical 7.5 -35.3 -93.6 1,213.3 65.1 23.0 25.6 -41.6 35.0 -52.2 88.3 43.7 Electronic material 1,003.0 -26.2 149.8 -57.9 29.8 19.7 38.2 -10.2 9.3 52.6 23.3 49.7 Fashion 124.2 -61.2 -56.9 230.5 66.9 -33.0 -51.5 119.1 12.5 3.1 18.5 0.5 Pretax income 132.5 -49.4 43.3 -20.9 51.2 4.0 18.6 -15.5 97.8 -0.8 33.5 36.8 Net profit 143.7 -40.6 33.1 -28.8 51.2 4.0 18.6 -15.5 98.1 6.1 24.7 36.8 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 47 December 1, 2011 Electronic Materials
Cheil Industries (001300 KS/Buy/TP: W120,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 5,121 5,649 6,605 7,736 Current Assets 1,207 1,272 1,569 2,129 Cost of Sales 3,573 4,116 4,810 5,644 Cash and Cash Equivalents 28 139 169 347 Gross Profit 1,549 1,534 1,795 2,092 AR & Other Receivables 515 534 671 962 SG&A Expenses 1,214 1,301 1,393 1,526 Inventories 612 581 711 802 Operating Profit (Adj) 335 232 402 566 Other Current Assets 38 0 0 0 Operating Profit 335 302 419 582 Non-Current Assets 2,865 3,316 3,857 4,189 Non-Operating Profit -8 31 -8 -20 Investments in Associates 148 162 162 162 Net Financial Income 26 19 25 33 Property, Plant and Equipment 1,121 1,370 1,635 1,697 Net Gain from Inv in Associates 32 14 0 0 Intangible Assets 30 47 48 48 Pretax Profit 326 308 411 562 Total Assets 4,072 4,588 5,425 6,318 Income Tax 56 38 74 101 Current Liabilities 861 900 872 957 Profit from Continuing Operations 270 270 337 461 AP & Other Payables 488 544 665 751 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 223 356 206 206 Net Profit 270 270 337 461 Other Current Liabilities 150 0 0 0 Controlling Interests 270 270 337 461 Non-Current Liabilities 446 486 810 951 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 104 102 396 508 Total Comprehensive Profit 270 471 578 702 Other Non-Current Liabilities 313 340 357 373 Controlling Interests 270 471 578 702 Total Liabilities 1,308 1,386 1,681 1,908 Non-Controlling Interests 0 0 0 0 Controlling Interests 2,761 3,202 3,743 4,409 EBITDA 474 390 611 807 Capital Stock 250 250 250 250 FCF (Free Cash Flow) 147 17 -82 105 Capital Surplus 429 421 421 421 EBITDA Margin (%) 9.3 6.9 9.3 10.4 Retained Earnings 1,149 1,408 1,709 2,133 Operating Profit Margin (%) 6.5 5.4 6.4 7.5 Non-Controlling Interests 4 1 1 1 Net Profit Margin (%) 5.3 4.8 5.1 6.0 Stockholders' Equity 2,765 3,202 3,744 4,410
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flows from Op Activities 432 444 404 423 P/E (x) 20.6 18.5 14.9 10.9 Net Profit 269 270 337 461 P/CF (x) 13.6 11.7 9.2 7.1 Non-Cash Income and Expense 194 136 274 346 P/B (x) 2.0 1.6 1.3 1.1 Depreciation 129 155 205 238 EV/EBITDA (x) 12.4 14.1 9.2 7.0 Amortization 10 3 3 3 EPS (W) 5,395 5,295 6,601 9,032 Others -89 42 37 33 CFPS (W) 8,186 8,378 10,688 13,763 Chg in Working Capital -31 88 -132 -283 BPS (W) 54,678 63,120 73,936 87,234 Chg in AR & Other Receivables -27 -6 -138 -291 DPS (W) 750 750 750 750 Chg in Inventories -95 30 -130 -91 Payout ratio (%) 13.4 13.4 10.7 7.8 Chg in AP & Other Payables 88 12 122 85 Dividend Yield (%) 0.7 0.8 0.8 0.8 Income Tax Paid 0 -51 -74 -101 Revenue Growth (%) 16.3 10.3 16.9 17.1 Cash Flows from Inv Activities -262 -419 -469 -296 EBITDA Growth (%) 21.5 -17.8 56.8 32.2 Chg in PP&E -250 -404 -470 -300 Operating Profit Growth (%) 32.2 -9.7 38.8 38.8 Chg in Intangible Assets -12 -4 -4 -4 EPS Growth (%) 125.1 -1.9 24.7 36.8 Chg in Financial Assets -2 -33 0 0 Accounts Receivable Turnover (x) 11.3 11.4 11.0 9.5 Others 1 23 6 8 Inventory Turnover (x) 9.0 9.5 10.2 10.2 Cash Flows from Fin Activities -226 117 94 52 Accounts Payable Turnover (x) 15.6 12.6 10.9 10.9 Chg in Financial Liabilities -104 133 -50 -50 ROA (%) 7.4 6.2 6.7 7.9 Chg in Equity -86 1 0 0 ROE (%) 11.4 9.1 9.7 11.3 Dividends Paid -36 -36 -36 -36 ROIC (%) 15.8 10.8 15.0 18.0 Others 0 -17 -14 -24 Liability to Equity Ratio (%) 47.3 43.3 44.9 43.3 Increase (Decrease) in Cash -58 111 29 178 Current Ratio (%) 140.2 141.3 180.0 222.5 Beginning Balance 86 28 139 169 Net Debt to Equity Ratio (%) 10.4 9.4 11.1 7.9 Ending Balance 28 139 169 347 Interest Coverage Ratio (x) 11.9 11.4 13.7 14.3 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 48 December 1, 2011 Electronic Materials
OCI Materials (036490 KQ)
Buy (Maintain) An indisputable top global player
Target Price (12M, W) 130,000 Maintain Buy rating with TP of W130,000 Share Price (11/29/11, W) 88,300 Expected Return (%) 47.2 Market share gains, driven by cost competitiveness, to help maintain profitability EPS Growth (11F, %) 12.1 As a producer of essential materials, resilient to industry downturns Market EPS Growth (11F, %) -2.3 P/E (11F, x) 13.9 Market P/E (11F, x) 10.5 We reiterate our Buy rating on OCI Materials with a target price of W130,000. We KOSDAQ 492.73 arrived at our target price by applying a target P/E of 13.1x (a 15% discount to the Market Cap (Wbn) 931 companyÊs five-year average 12-month forward P/E) to our 2012F EPS. Even after Shares Outstanding (mn) 11 considering the industry slowdown, OCI Materials currently trades at a 12-month Avg Trading Volume (60D, '000) 66 forward P/E of 10.2x, which seems attractive not only compared to its historical Avg Trading Value (60D, Wbn) 5 average (15.4x) but also to other specialty gas and electronic materials makers. Dividend Yield (11F, %) 0.8 Free Float (%) 50.9 Our investment recommendation is premised on the following: 52-Week Low (W) 55,400 52-Week High (W) 151,000 1) We expect market share gains, driven by cost competitiveness, to help the Beta (12M, Daily Rate of Return) 1.3 company maintain its profitability. Although capacity expansions by OCI Materials Price Return Volatility (12M Daily, %, SD) 3.2 and other major NF3 manufacturers are likely to put downward pressures on NF3 Foreign Ownership (%) 19.4 prices from 2012, the companyÊs OP margin is nearly double that of its Major Shareholder(s) competitors, indicating that it has more room to lower prices. This would put OCI OCI (49.1%) National Pension Service (7.25%) Materials way ahead of its competition if the industry were to play a game of Capital Research and Management Company chicken next year, as the company would be able to maintain its profitability by (CRMC) (5.26%) expanding its sales volume on the back of an aggressive pricing policy (which Price Performance would be possible given the specialty gas industryÊs high operating leverage). We (%) 1M 6M 12M also expect the company to gain additional cost competitiveness in 2H12 by Absolute 1.6 -31.0 -18.5 procuring raw materials at a lower price thanks to its Chinese joint venture. Relative 5.4 -19.4 -16.5 2) As a producer of essential electronic materials, OCI Materials is relatively less vulnerable to industry downturns. By end-product, LCDs account for 55% of total revenues, semiconductors 35% and solar P/Vs 10%. Despite ongoing weaknesses since 2H10, the LCD industry is still growing annually in terms of area. Even when the utilization ratio of LCD panel makers stood at 70% in 2H08 and 3Q11, the company managed to maintain an OP margin in excess of 30%. As for semiconductors, capacity utilization is less volatile due to the industryÊs high proportion of fixed costs. Furthermore, new demand from the rapidly growing AMOLED market is projected to provide an additional boost, as AMOLED production is estimated to require around 20% more NF3 than LCD production on a comparable area basis.
Share price § Earnings & Valuation Metrics 140 KOSDAQ 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) 100 12/09 180 61 33.9 52 4,949 96 -8 26.5 19.1 4.6 12.2
80 12/10 235 79 33.4 60 5,680 132 -17 24.1 18.1 4.0 9.6 12/11F 301 97 32.3 67 6,367 165 12 22.3 14.6 3.1 7.3 60 12/12F 358 118 32.9 89 8,420 192 85 24.2 11.0 2.4 6.0 40 12/13F 422 144 34.0 116 10,993 226 144 25.1 8.5 1.9 4.7 11/10 3/11 7/11 11/11
Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 49 December 1, 2011 Electronic Materials
3) We expect the company to raise its monosilane capacity utilization from 55% currently to 70% in 2012 with the addition of new clients and the bundling of NF3 and monosilane products. OCI Materials is projected to start supplying monosilane to a Japanese client from 1H12. It also plans to expand its market share within existing customers by bundling monosilane with NF3 to existing customers. Assuming a utilization ratio of 80%, we estimate the monosilane OP margin to stand at 35~37%.
Maintain Buy with TP of W130,000
Profitability is not fully We reiterate our Buy rating on OCI Materials with a target price of W130,000. We arrived at priced in our target price by applying a target P/E of 13.1x (a 15% discount to the companyÊs five-year average 12-month forward P/E) to our 2012F EPS. We applied a 15% discount as the NF3 industryÊs capacity expansion in 2012 is likely to ease supply and demand conditions while putting greater downward pressure on prices.
Even after considering the industry slowdown, OCI Materials currently trades at a 12-month forward P/E of 10.2x, which is not only below its historical average (15.4x) but also cheaper than other specialty gas and electronic materials makers. When the utilization ratio of LCD panel makers stood at 70% in 2H08 and 3Q11, the company still managed to maintain an OP margin of over 30%, as its cost competitiveness allowed earnings to remain resilient in the face of price cut pressures. Even if the companyÊs growth story of expanding its market dominance on the back of capacity expansion from 2012 is slightly derailed, we still believe current share prices do not fully reflect the companyÊs profitability.
Table 27. Calculation of target price Note EPS (W) 9,959 2012F estimate Comparable P/E (x) 15.4 5-year average Discount rate (%) 15.0 NF3 tight supply situation should ease due to IT slump Fair P/E (x) 13.1 Target price (W) 130,612 Current price (W) 83,600 As of Nov. 25, 2011 Upside potential (%) 56.2 Source: KDB Daewoo Securities Research
Figure 88. 12-month forward P/E band Figure 89. P/E and OP margin trends and forecasts
(W) (x) (%) 25.0x 22.0x 200 18.0x 30 12-month forward P/E (L) 50 14.0x 12-month forward OPM (R) 25 160 40 20 10.0x 120 15 30 80 6.0x 10 20 40 5
0 0 10 00 02 04 06 08 1012F 12 06 07 08 09 1011F 1112F 12
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 50 December 1, 2011 Electronic Materials
Share performances and valuations of global peers
Table 28. Valuation comparison of global peers (Wbn, %, x) Share performance OP margin P/E P/B EV/EBITDA ROE Sector Company Mkt cap -1M -3M 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F OCI Materials 882 -3.1 -10.6 33.4 34.7 35.3 14.7 11.4 9.3 3.2 2.6 2.0 9.6 6.2 5.3 24.1 24.7 24.4 Gas Air Liquide 37,727 -6.2 -0.8 16.7 16.9 17.4 16.4 15.8 14.9 2.8 2.5 2.3 9.6 8.3 7.9 17.0 16.6 16.0 Praxair 32,507 -10.4 -0.9 21.4 21.8 22.1 17.6 17.2 15.7 4.9 4.6 3.9 10.2 10.0 9.4 21.5 27.0 26.1 Linde 27,665 -8.1 3.0 12.4 14.1 14.3 15.3 14.0 13.4 1.7 1.5 1.4 7.7 7.7 7.4 10.3 11.2 11.2 Air Products 18,730 -9.2 -2.4 16.6 16.7 17.4 13.4 12.8 11.3 2.8 2.5 2.1 8.0 7.4 6.9 21.6 19.6 19.0 Mitsui Chem 3,541 -9.8 -9.1 2.9 3.4 3.5 11.0 8.7 8.0 0.6 0.6 0.6 6.4 5.9 5.7 6.5 6.9 6.9 KDK 253 -23.9 -39.1 9.8 2.9 6.6 15.7 61.5 14.6 0.9 0.9 0.8 5.5 24.9 12.0 9.1 1.7 5.4 Avg. -10.1 -8.5 16.2 15.8 16.7 14.9 20.2 12.5 2.4 2.2 1.9 8.1 10.1 7.8 15.7 15.4 15.6 Electronic Duksan Hi-Metal 779 -4.3 -8.6 18.1 25.6 27.0 54.2 26.6 14.2 7.0 7.0 4.7 23.4 18.4 11.4 12.4 28.9 36.2 materials Soulbrain 638 8.6 3.0 14.1 13.8 14.0 19.1 13.6 11.1 3.0 2.5 2.0 8.0 9.4 7.6 16.8 19.8 19.8 Shin-Etsu Chem 23,529 -8.0 -2.8 14.1 14.7 15.4 17.4 14.6 12.8 1.1 1.0 1.0 5.5 5.1 4.7 7.0 7.2 7.9 Sumitomo Chem 6,730 -4.9 -14.8 4.4 4.0 4.4 23.1 23.5 7.7 0.9 0.8 0.8 7.3 7.6 7.2 4.5 2.9 10.1 JSR 5,370 -3.9 2.2 11.5 11.0 11.9 13.1 12.5 10.8 1.3 1.2 1.1 4.8 4.8 4.3 10.7 10.1 10.8 Avg. -2.5 -4.2 12.4 13.8 14.5 25.4 18.2 11.3 2.7 2.5 1.9 9.8 9.1 7.0 10.3 13.8 16.9 Source: Bloomberg
Figure 90. Share performances of global special gas makers Figure 91. Share performances of global electronic material makers
(1/1/09=100) (1/1/09=100) 500 300 OCI Materials OCI Materials Air Products Soulbrain KDK Shin-Etsu 250 Mitsui Chemical 400 Sumitomo
200 300
150 200
100 100
50 0 1/09 5/09 9/09 1/10 5/10 9/10 1/11 5/11 9/11 1/09 5/09 9/09 1/10 5/10 9/10 1/11 5/11 9/11
Source: Thomson Reuters Source: Thomson Reuters
Figure 92. P/B-ROE comparison of global special gas makers (12F) Figure 93. P/B-ROE comparison of electronic material makers (12F)
(P/B, x) (P/B, x) 5 6
Duksan Hi-Metal 4 Praxair 4 3
Air Liquide OCI materials 2 Air Products OCI materials 2 Linde JSR Soulbrain 1 KDK Shin-Etsu Chem Mitsui Chem Sumitomo Chem (ROE, %) (ROE, %) 0 0 0 5 10 15 20 25 30 0 5 10 15 20 25 30 35 40
Source: KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 51 December 1, 2011 Electronic Materials
Superior advantage over competitors in price cutting race
Likely to maintain In 2012, we project NF3 supply to increase faster than demand, given the planned capacity profitability on the back expansions of NF3 makers (including OCI Materials) and the anticipated slowdown of the of an aggressive pricing LCD industry. As oversupply deepens, downward pricing pressures from customers are policy likely to intensify.
However, the companyÊs OP margin is nearly double that of its competitors, indicating that it has more room to lower prices. This would put it way ahead of its competition if the industry were to play a game of chicken next year, as the company would be able to maintain its profitability by expanding its sales volume on the back of an aggressive pricing policy (which would be possible given the specialty gas industryÊs high operating leverage). We also expect the company to gain additional cost competitiveness in 2H12 by procuring raw materials at a lower price thanks to its Chinese joint venture.
Monosilane oversupply should continue into 2012. On the supply side, new entrants such as Dow Chemical and TNS Evonic should increase supply, while on the demand side, growth is slowing in the LCD industry, which accounts for 60% of monosilane demand. We expect the company to raise its monosilane utilization from 55% currently to 70% in 2012 with the addition of new clients and the bundling of NF3 and monosilane products.
Figure 94. NF3 supply/demand trend and forecasts Figure 95. NF3 price trend and forecasts
(tonne) (%) (US$/kg) 20,000 40 140 Supply (L) Demand (L) 120 16,000 Oversupply ratio (R) 30 100
12,000 20 80
60 8,000 10
40 4,000 0 20
0 -10 0 00 02 04 06 08 10 12F 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13F
Source: DisplaySearch, Gartner, PV News, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure 96. OP margin comparison of OCIM and competitors Figure 97. Cost structure (high operating leverage)
(%) 40
Variable cost 30% 30
20
10 Fixed cost 70%
0 OCI Materials Competitors
Source: KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 52 December 1, 2011 Electronic Materials
Earnings outlook: Profitability to improve on high operating leverage
Both sales volume and We expect OCI Materials to maintain a robust OP margin as it expands its market margins expected to dominance on the back of capacity expansion. While its competitors also have plans for improve capacity expansion, they are unlikely to expand production significantly, as 1) NF3 prices are already at low levels and 2) the weakness in downstream industries would make the resulting fixed costs unmanageable. On the back of lower fixed cost burden, driven by top- line growth, we forecast OCI MaterialsÊ OP margin to rise from 32.3% in 2011 to 32.9% in 2012 and 34% in 2013.
Despite falling NF3 prices, we expect 2012 revenues and operating profit to climb to W358bn (up 19% YoY) and W117.8bn (up 21.1% YoY; OP margin of 32.9%), respectively, thanks to shipment growth.
Table 29. Quarterly earnings trend and forecasts (non-consolidated K-IFRS) (Wbn, %) 1Q11 2Q11 3Q11 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 2010 2011F 2012F 2013F Revenues 71.8 80.2 71.4 77.5 79.2 88.3 96.6 93.9 235.4 300.9 358.0 422.4 Operating profit 24.1 28.2 22.1 22.9 23.0 29.1 33.3 32.5 78.7 97.3 117.8 143.7 Pretax profit 21.4 24.6 18.9 20.0 20.9 27.1 31.8 31.2 73.3 84.9 111.0 144.9 Net profit 16.8 19.4 15.1 15.9 16.7 21.7 25.4 25.0 59.9 67.2 88.8 115.9 OP margin 33.5 35.1 31.0 29.6 29.1 32.9 34.4 34.6 33.4 32.3 32.9 34.0 Net margin 23.4 24.2 21.1 20.5 21.1 24.6 26.3 26.6 25.5 22.3 24.8 27.4 Growth (QoQ/YoY) Revenues 15.9 11.6 -11.0 8.7 2.1 11.5 9.5 -2.8 30.9 27.8 19.0 18.0 Operating profit 21.7 16.9 -21.5 3.8 0.3 26.3 14.5 -2.4 29.0 23.6 21.1 22.0 Pretax profit 25.8 15.2 -23.1 5.7 4.7 29.7 17.0 -1.7 32.2 15.7 30.8 30.6 Net profit 16.9 15.2 -22.3 5.7 5.2 29.7 17.0 -1.7 18.3 12.0 32.3 30.6 Source: Company data, Daewoo Securities Research
Table 30. Earnings forecast revisions (non-consolidated K-IFRS) (Wbn, %) Previous Revised % change 2011F 2012F 2013F 2011F 2012F 2013F 2011F 2012F 2013F Revenues 299 378 476 301 358 422 0.6 -5.2 -11.2 Operating Profit 98 129 180 97 118 144 -0.5 -8.7 -20.2 Net profit 68 95 138 67 89 116 -1.0 -6.6 -15.7 EPS (W) 7,032 10,665 15,194 6,958 9,959 12,812 -1.0 -6.6 -15.7 OP margin 32.7 34.1 37.9 32.3 32.9 34.0 - - - Net margin 22.7 25.2 28.9 22.3 24.8 27.4 - - - Source: Daewoo Securities Research
Figure 98. Quarterly earnings trend and forecasts Figure 99. NF3 capacity and OPM trend and forecasts
(Wbn) (%) (tonne) (%) NF3 capacity (L) 150 NF3 (L) Monosilane (L) 50 10,000 OP margin (R) 45 Others (L) OP margin (R) Depreciation cost to revenues (R) 45 40 120 8,000 35 40 90 6,000 30 35 60 4,000 25 30 20 30 2,000 25 15
0 20 0 10 07 08 09 10 11F 12F 13F 03 05 07 09 11F 13F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 53 December 1, 2011 Electronic Materials
OCI Materials (036490 KQ/Buy/TP: W130,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 235 301 358 422 Current Assets 78 87 129 173 Cost of Sales 138 181 210 244 Cash and Cash Equivalents 8 0 24 52 Gross Profit 98 120 148 179 AR & Other Receivables 29 36 44 50 SG&A Expenses 19 23 30 35 Inventories 38 47 57 66 Operating Profit (Adj) 79 97 118 144 Other Current Assets 3 3 4 5 Operating Profit 79 97 118 144 Non-Current Assets 453 532 571 578 Non-Operating Profit -5 -12 -7 1 Investments in Associates 4 0 0 0 Net Financial Income 6 9 9 7 Property, Plant and Equipment 436 488 494 463 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 4 5 4 4 Pretax Profit 73 85 111 145 Total Assets 531 619 700 750 Income Tax 13 18 22 29 Current Liabilities 146 154 164 172 Profit from Continuing Operations 60 67 89 116 AP & Other Payables 44 55 66 76 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 88 82 77 72 Net Profit 60 67 89 116 Other Current Liabilities 14 17 21 24 Controlling Interests 60 67 89 116 Non-Current Liabilities 110 139 128 63 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 107 135 124 57 Total Comprehensive Profit 60 67 89 116 Other Non-Current Liabilities 0 1 0 0 Controlling Interests 60 67 89 116 Total Liabilities 256 293 292 235 Non-Controlling Interests 0 0 0 0 Controlling Interests 276 327 407 515 EBITDA 132 165 192 226 Capital Stock 5 5 5 5 FCF (Free Cash Flow) -17 12 85 144 Capital Surplus 68 68 68 68 EBITDA Margin (%) 56.2 54.7 53.7 53.6 Retained Earnings 203 254 334 443 Operating Profit Margin (%) 33.4 32.3 32.9 34.0 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 25.5 22.3 24.8 27.5 Stockholders' Equity 276 327 407 515
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flows from Op Activities 95 146 167 195 P/E (x) 18.1 14.6 11.0 8.5 Net Profit 60 67 89 116 P/CF (x) 9.5 7.3 6.0 4.9 Non-Cash Income and Expense 57 98 103 111 P/B (x) 4.0 3.1 2.4 1.9 Depreciation 53 67 73 82 EV/EBITDA (x) 9.6 7.3 6.0 4.7 Amortization 1 1 1 1 EPS (W) 5,680 6,367 8,420 10,993 Others -3 -5 2 8 CFPS (W) 10,764 12,787 15,471 18,832 Chg in Working Capital -21 -2 -3 -2 BPS (W) 25,717 30,446 38,205 48,519 Chg in AR & Other Receivables -7 -4 -8 -7 DPS (W) 750 750 750 750 Chg in Inventories -2 -10 -10 -9 Payout ratio (%) 13.2 11.8 8.9 6.8 Chg in AP & Other Payables -19 11 12 10 Dividend Yield (%) 0.7 0.8 0.8 0.8 Income Tax Paid 0 -17 -22 -29 Revenue Growth (%) 31.0 27.9 19.0 18.0 Cash Flows from Inv Activities -113 -155 -111 -80 EBITDA Growth (%) 38.6 24.5 16.7 17.8 Chg in PP&E -113 -129 -80 -50 Operating Profit Growth (%) 29.0 23.6 21.1 22.0 Chg in Intangible Assets -1 0 0 0 EPS Growth (%) 14.8 12.1 32.3 30.6 Chg in Financial Assets 1 0 0 0 Accounts Receivable Turnover (x) 9.2 9.3 9.0 9.0 Others -1 -27 -30 -30 Inventory Turnover (x) 6.4 7.1 6.9 6.9 Cash Flows from Fin Activities 20 10 -33 -87 Accounts Payable Turnover (x) 37.5 39.4 38.2 38.3 Chg in Financial Liabilities 26 13 -26 -79 ROA (%) 12.0 11.7 13.5 16.0 Chg in Equity 0 0 0 0 ROE (%) 24.1 22.3 24.2 25.1 Dividends Paid -5 -8 -8 -8 ROIC (%) 15.5 15.9 18.3 22.8 Others 0 -9 -9 -8 Liability to Equity Ratio (%) 92.8 89.7 71.8 45.6 Increase (Decrease) in Cash 2 -8 24 28 Current Ratio (%) 53.3 56.6 78.7 100.4 Beginning Balance 6 8 0 24 Net Debt to Equity Ratio (%) 67.7 66.1 43.2 14.8 Ending Balance 8 0 24 52 Interest Coverage Ratio (x) 12.6 11.0 12.7 19.1 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 54 December 1, 2011 Electronic Materials
Duksan Hi-Metal (077360 KQ)
Buy (Initiate) Strong valuation reflects bright earnings outlook
Target Price (12M, W) 40,000 Initiate coverage with Buy rating and TP of W40,000 Share Price (11/29/11, W) 26,450 Expected Return (%) 51.2 Earnings expected to improve in line with the expansion of the AMOLED market EPS Growth (11F, %) 182.0 Expansion of smartphone/tablet PC markets to boost solder ball profitability Market EPS Growth (11F, %) -2.3 P/E (11F, x) 23.1 Market P/E (11F, x) 10.5 We initiate our coverage on Duksan Hi-Metal with a Buy rating and a target price KOSDAQ 492.73 of W40,000. We derived our target price by applying a fair P/E of 27.1x to 2012F Market Cap (Wbn) 777 EPS of W1,486. The fair P/E of 27.1x corresponds to a premium of 3.2x (the upper Shares Outstanding (mn) 29 end of the companyÊs relative P/E band since 2010) to the KOSPIÊs 2012F P/E. Avg Trading Volume (60D, '000) 534 Avg Trading Value (60D, Wbn) 14 Our investment recommendation is premised on the following: Dividend Yield (11F, %) 0.0 Free Float (%) 43.7 1) The company deserves a valuation premium for its sharp earnings growth in line 52-Week Low (W) 17,950 with the expansion of the AMOLED market. The shares of UDC, a specialized 52-Week High (W) 32,200 AMOLED materials producer based in the U.S., are trading at a 12-month forward Beta (12M, Daily Rate of Return) 1.1 P/E of 60x (a premium of 5x to the market average). The share premium is based Price Return Volatility (12M Daily, %, SD) 3.7 on a positive earnings outlook for UDC in light of strategic alliances with a number Foreign Ownership (%) 20.2 of panel makers, namely Samsung Mobile Display (SMD). Thus, Duksan Hi-Metal Major Shareholder(s) will likely trade at a premium as 1) it has secured the worldÊs largest panel Lee, Jun-Ho et al. (41.97%) Treasury Stock (14.35%) producer (SMD) as a customer and 2) earnings have already begun to take off. FIDELITY SELECT TECHNOLOGY 2) Duksan Hi-MetalÊs revenues from AMOLED materials are projected to grow at a PORTFOLIO et al. (5.02%) Price Performance CAGR of 96.3% until end-2013 on the back of SMDÊs aggressive capacity (%) 1M 6M 12M expansion. Although 1) Duksan Hi-MetalÊs share within SMD is expected to fall Absolute 5.6 14.5 24.5 due to an influx of new suppliers and 2) unit prices for AMOLED materials are Relative 9.4 26.1 26.5 sliding by 20~25% every year, SMDÊs AMOLED display production capacity is anticipated to expand at a CAGR of 178.2% until end-2013 thanks to the production of larger-sized panels. During the initial stage of mass-production for new production lines, the panel production yield usually comes in below 50%. When the panel production yield is low, even though AMOLED demand is robust, the input of organic materials per unit increases. The input of organic materials per unit should stabilize at a lower level over the mid- to long-term in line with an improvement in yield. However, given that 1) yield stabilization takes about one to two quarters for each unit and 2) technologies for the production of larger-sized panels have not been standardized yet, the companyÊs earnings are expected to climb sharply in line with the spread of AMOLED.
Share price § Earnings & Valuation Metrics 140 KOSDAQ 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) 100 12/09 32 5 14.6 5 224 8 5 8.7 58.2 4.6 38.1
80 12/10 73 13 18.1 10 406 22 -24 12.4 50.0 6.6 23.6 12/11F 130 34 26.3 34 1,146 66 34 29.3 23.7 6.4 11.6 60 12/12F 193 53 27.2 43 1,484 68 24 27.8 18.3 4.6 10.8 40 12/13F 296 79 26.7 65 2,228 92 38 31.2 12.2 3.4 7.6 11/10 3/11 7/11 11/11
Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 55 December 1, 2011 Electronic Materials
3) Profitability at the companyÊs semiconductor unit is expected to improve in line with the expansion of the smartphone and tablet PC markets. Chips for mobile devices increasingly require high value-added packaging due to rising demand for lighter and smaller chips. Fine- pitch solder balls that are used for smartphones and tablet PCs are two times more profitable than regular versions. An increase in the production of fine-pitch solder balls should improve the semiconductor unitÊs product mix.
Initiate coverage with Buy rating and TP of W40,000
UDC, a U.S.- based We initiate our coverage on Duksan Hi-Metal with a Buy rating and a target price of W40,000. AMOLED materials We derived our target price by applying a fair P/E of 27.1x to 2012F EPS of W1,486. The fair producer, is trading at P/E of 27.1x corresponds to a premium of 3.2x (the upper end of the companyÊs relative P/E a 12-month forward P/E band since 2010) to the KOSPIÊs 2012F P/E. of 60x The premium the company receives from the market is attributable to the following: 1) the AMOLED market is projected to expand at a CAGR of 86.6% until end-2015, 2) the company holds a dominant position in the AMOLED materials market, and 3) the companyÊs annual average EPS growth is expected to remain around 40% until end-2013.
The premium of 3.2x (the upper end of the companyÊs relative P/E band) is based on 1) the fact that an increasing number of handset makers are adopting AMOLED panels for displays and 2) more TV manufacturers are anticipated to introduce AMOLED displays after 2012.
Despite the strong performance, high valuations have weighed down Duksan Hi-Metal. As for UDC, an exclusive holder of phosphor-related patents, its shares are trading at a premium of 5x to the market average, although the company has remained in the red for the past 16 consecutive years. UDCÊs shares are currently trading at a 12-month forward P/E of a whopping 60x. The share premium is based on a positive earnings outlook for UDC in light of strategic alliances with a number of panel makers, namely Samsung Mobile Display (SMD). Thus, Duksan Hi-Metal will likely trade at a premium as 1) it has secured the worldÊs largest panel producer (SMD) as a customer and 2) earnings have already begun to take off.
Table 31. Calculation of target price Note KOSPI market P/E (x) 8.5 2011F consensus Fair relative P/E (x) 3.2 Upper band since 2010 Fair P/E (x) 27.1 EPS (x) 1,484 2012F Target price (W) 40,153 Current price (W) 26,500 Upside potential (%) 51.5 Source: KDB Daewoo Securities Research
Figure 100. 12-month forward P/E band of UDC Figure 101. Relative P/E trend of Duksan Hi-Metal
(US$) 80.0x 60.0x (Relative P/E, x) 120 50.0x 8 40.0x UDC's average relative P/E in 2011 (6.5x) 100 6 30.0x 80
60 4 20.0x Upper-end of relative P/E after 2010 (3.2x)
40 Average (2.1x) 2 20 Lower-end of relative P/E after 2010 (1.5x)
0 0 06 07 08 09 1011F 1112F 1213F 13 1/09 5/09 9/09 1/10 5/10 9/10 1/11 5/11 9/11
Source: Bloomberg, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 56 December 1, 2011 Electronic Materials
Figure 102. 12-month forward P/E band
(W) 40.0x 30.0x 25.0x 50,000 20.0x
40,000 15.0x
30,000
20,000
10,000
0 06 07 08 09 1011F 1112F 1213F 13
Source: KDB Daewoo Securities Research
Figure 103. 12-month forward P/B band
(W) 6.0x 5.0x 50,000
4.0x 40,000
3.0x 30,000
20,000 2.0x
10,000
0 06 07 08 09 10 1111F 1212F 13F 13
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 57 December 1, 2011 Electronic Materials
Investment point: 1) Earnings to improve thanks to AMOLED market expansion
SMDÊs production Duksan Hi-MetalÊs revenues from AMOLED materials are projected to grow at a CAGR of capacity is projected to 96.3% until end-2013 on the back of SMDÊs aggressive capacity expansion. Although 1) expand at a CAGR of Duksan Hi-MetalÊs share within SMD is expected to fall due to an influx of new suppliers and 178% during 2010~2013 2) unit prices for AMOLED materials are sliding by 20~25% every year, SMDÊs AMOLED display production capacity is anticipated to expand at a CAGR of 178.2% until end-2013 thanks to the production of larger-sized panels. If LG Display and other panel makers mass- produce AMOLED panels full swing after 2013, the companyÊs customer base should expand further.
DuksanÊs earnings to In addition, the input of organic materials per unit is anticipated to increase thanks to new receive a boost from the technologies for the production of larger-sized AMOLED panels. During the initial stage of adoption of new mass-production for new production lines, the panel production yield usually comes in below technologies during 50%. When the panel production yield is low, even though AMOLED demand is robust, the input of organic materials per unit increases. A decline in SMDÊs panel production yield (from the initial stage of the 85% to 45%), due to the commencement of its A2 line, contributed to DuksanÊs earnings spread of AMOLEDs growth in 2Q. The input of organic materials per unit should stabilize at a lower level over the mid- to long-term in line with an improvement in yield. However, given that 1) yield stabilization takes about one to two quarters for each unit and 2) technologies for the production of larger-sized panels have not been standardized yet, the companyÊs earnings are expected to climb sharply in line with the spread of AMOLED.
Figure 104. AMOLED supply chain of SMD
AMOLED materials AMOLED panel AMOLED set
Duksan SEC HTL Cheil Industries
Nokia Dopant (RGB) UDC Strategic partnership
Red (phosphorescence) Dow Gracel EML Green (fluorescence) Doosan Elec. SMD Microsoft
Green (phosphorescence) UDC/Dow
Blue (fluorescence) SFC(Hodogaya) Strategic partnership i-River
LG Chem ETL Cheil Industries COWON
Source: KDB Daewoo Securities Research
Figure 105. AMOLED capacity trend and forecasts of SMD Figure 106. Revenues trend and forecasts at DuksanÊs EL division
(mn m2) (Wbn) (%) 70 120 2.4 4G (half) 5.5G (quarter) HTL revenues (L) HTL revenues to surge even 5.5G (original) 8G (6th) M/S within SMD (R) considering a fall in M/S within SMD 60 2.0 8G (original) 100
50 1.6 Matarial input to increase on adoption of 80 new process technologies 40 1.2 60 30 0.8 40 20
20 0.4 10
0.0 0 0 1Q11 1Q12F 1Q13F 1Q14F 11F 12F 13F 14F
Source: DisplaySearch, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 58 December 1, 2011 Electronic Materials
Figure 107. AMOLED and AMOLED materials market trend and forecasts
(Wtr) (Wtr) 40 AMOLED (L) 3 AMOLED materials (R)
30 2
20
1 10
0 0 09 10 11F 12F 13F 14F 15F
Source: DisplaySearch, KDB Daewoo Securities Research
Table 32. AMOLED capacity trend and forecasts of SMD 2011F 2012F 2013F 2014F ('000 m2) Type 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q A1 (4G, 730 x 920) Half 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90 A2 (5.5G, 1300 x 1500) Quarter 47 257 328 374 374 421 468 515 562 562 562 562 562 562 562 Phase 1 (24K/month) 47 164 187 187 187 187 187 187 187 187 187 187 187 187 187 Phase 2 (24K/month) 94 140 187 187 187 187 187 187 187 187 187 187 187 187 Phase 3 (32K/month) 47 94 140 187 187 187 187 187 187 187 A3 (5.5G, 1300 x 1500) Original 70 140 246 351 386 421 421 421 421 Phase 1 (36K/month) 70 140 176 211 211 211 211 211 211 Phase 2 (36K/month) 70 140 176 211 211 211 211 V1 (8G, 2200 x 2500) 6th 50 99 99 99 99 99 99 99 99 99 99 99 V2 (8G, 2200 x 2500) Original 198 396 495 495 693 891 990 990 Phase 1 (30K/month) 198 396 495 495 495 495 495 495 Phase 2 (30K/month) 198 396 495 495 Total capacity 90 136 347 417 514 563 610 727 1,042 1,392 1,596 1,631 1,864 2,062 2,161 2,161 Growth rate (%) 0.0 52.2 154.3 20.2 23.1 9.6 8.3 19.2 43.3 33.6 14.7 2.2 14.3 10.6 4.8 0.0 Duksan's M/S at SMD (%) 100.0 100.0 95.0 95.0 90.0 80.0 75.0 75.0 70.0 65.0 60.0 55.0 50.0 50.0 45.0 45.0 ('000 sheets/month) Type A1 (4G, 730 x 920) Half 45 45 45 45 45 45 45 45 45 45 45 45 45 45 45 45 A2 (5.5G, 1300 x 1500) Quarter 8 44 56 64 64 72 80 88 96 96 96 96 96 96 96 Phase 1 (24K/month) 8 28 32 32 32 32 32 32 32 32 32 32 32 32 32 Phase 2 (24K/month) 16 24 32 32 32 32 32 32 32 32 32 32 32 32 Phase 3 (32K/month) 8 16 24 32 32 32 32 32 32 32 A3 (5.5G, 1300 x 1500) Original 12 24 42 60 66 72 72 72 72 Phase 1 (36K/month) 12 24 30 36 36 36 36 36 36 Phase 2 (36K/month) 12 24 30 36 36 36 36 V1 (8G, 2200 x 2500) 6th 3 6 6 6 6 6 6 6 6 6 6 6 V2 (8G, 2200 x 2500) Original 12 24 30 30 42 54 60 60 Phase 1 (30K/month) 12 24 30 30 30 30 30 30 Phase 2 (30K/month) 12 24 30 30 Source: DisplaySearch, KDB Daewoo Securities Research
KDB Daewoo Securities Research 59 December 1, 2011 Electronic Materials
Investment point: 2) Solder ball profitability driven by smartphones/tablet PCs
Increasing contribution Revenues at the semiconductor unit are closely related to the shipments of ball grid array of fine-pitch solder balls (BGA) packages, which use solder balls instead of lead frames. We project the unitÊs to boost profitability revenues to climb on the back of a higher percentage of BGA packages in the sales mix. The expansion of the smartphone/tablet PC markets, which require high value-added packaging, should boost profitability.
As demand for slimmer and lighter IT devices has grown, BGA packaging has emerged as the most frequently used semiconductor packaging process. BGA packaging is anticipated to account for 70% of the entire packaging market by end-2014, boosting demand for solder balls steadily. In addition, an increase in the number of solder balls used per chip is also expected to drive up demand.
More noteworthy is that chips for mobile devices increasingly require high value-added packaging in line with rising demand for slimmer and lighter devices. The fine-pitch ball grid array (FBGA) packing method is used for chips for smartphones and tablet PCs. The solder balls are two times more profitable than regular versions. FBGA packaging shipment growth is estimated at 22.5% per annum from 2009~2014, exceeding the 12.1% shipment growth forecast for the entire packaging market.
Figure 108. Solder ball revenues and global BGA package shipments Figure 109. IC package shipment trends and forecasts by type
(Revenues at Duksan's semiconductor division, Wbn) R2=0.9268 (bn units) (%) 40 300 Solderball (L) 70 Leadframe (L) 60 250 Portion of package using solderball (R) 30 50 200 40 20 150 30 100 20 10
50 10 (Global BGA package shipments, bn units) 0 0 0 0 102030405060708090 00 02 04 06 08 10 12F 14F
Source: Company data, Gartner, KDB Daewoo Securities Research Source: Gartner, KDB Daewoo Securities Research
Figure 110. Smartphone and tablet PC shipment trend and forecasts Figure 111. Revenues trend and forecast of semiconductor division
(mn units) (mn units) (Wbn) (%) 1,800 Smartphone 350 120 Revenues at the semiconductor division (L) 60 Tablet PC YoY growth (%) 1,500 300 50 90 250 1,200 40 200 900 60 30 150 600 20 100 30
300 50 10
0 0 0 0 08 09 10 11F 12F 13F 14F 15F 05 06 07 08 09 10 11F 12F 13F 14F
Source: IDC, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 60 December 1, 2011 Electronic Materials
Earnings outlook: Annual average EPS growth to reach 39.4% in 2011~2013
Revenues and operating We forecast Duksan Hi-MetalÊs revenues and operating profit to grow at CAGRs of 51.0% profit to grow at CAGRs and 52.4%, respectively, through 2013 on the back of 1) rapid sales growth of AMOLED of 51.0% and 52.4%, materials and 2) higher profitability at its semiconductor division. AMOLED materials sales respectively, through are expected to continue to increase despite an annual average price cut of 20~25% and a drop in market share from the entry of new players, as AMOLED capacity should double 2013 annually through 2013. In addition, a rise in the percentage of AMOLED materials sales will likely improve profitability, given that the EL division, which produces AMOLED materials, is twice as profitable as the semiconductor division. In our view, the semiconductor division will also contribute to profitability improvement, as sales contribution from the less profitable solder powder business should fall while that of the more profitable solder ball business will likely expand.
4Q Earnings are forecast to improve QoQ modestly with revenues of W37.1bn (up 5.0% QoQ, up 74.5% YoY), operating profit of W10.2bn (up 3.6% QoQ, up 171.5% YoY, OP margin of 27.4%). AMOLED capacity expansion at SMD is unlikely to boost DuksanÊs sales during the quarter. However, AMOLED materials sales are expected to increase by 8.4% QoQ, aided by higher capacity utilization at SMDÊs new lines completed in September.
Table 33. Earnings trend and forecasts (Non-consolidated K-IFRS) (Wbn, %) 1Q11 2Q11 3Q11 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 10 11F 12F 13F Revenues 23.3 33.9 35.4 37.1 41.2 45.3 47.1 59.2 72.5 129.6 192.8 295.5 EL 10.7 18.6 19.3 20.9 25.8 26.8 26.1 35.8 33.9 69.4 114.5 195.3 Semiconductor 12.6 15.2 16.1 16.3 15.3 18.5 21.1 23.4 38.6 60.2 78.3 100.3 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 EL 45.9 55.1 54.4 56.2 62.7 59.2 55.3 60.4 46.8 53.6 59.4 66.1 Semiconductor 54.1 44.9 45.6 43.8 37.3 40.8 44.7 39.6 53.2 46.4 40.6 33.9 Operating profit 5.7 8.4 9.8 10.2 10.9 12.3 12.9 16.4 13.1 34.0 52.5 79.0 Pretax profit 5.8 8.3 10.1 10.3 11.0 12.5 13.0 16.5 12.5 34.5 53.0 79.5 Net profit 5.3 8.6 9.8 9.8 9.0 10.2 10.6 13.5 10.1 33.5 43.4 65.2 OP margin 24.3 24.7 27.8 27.4 26.5 27.2 27.3 27.6 18.1 26.2 27.2 26.7 Net margin 22.9 25.5 27.6 26.4 22.0 22.6 22.6 22.9 14.0 25.9 22.5 22.1 Growth (QoQ/YoY) Revenues 9.9 45.6 4.5 5.0 10.8 10.0 4.1 25.5 125.6 78.9 48.7 53.3 EL 0.0 74.6 3.3 8.4 23.7 3.8 -2.7 37.1 87.4 104.9 64.8 70.6 Semiconductor 19.8 21.0 5.9 1.0 -5.7 20.4 13.9 11.3 39.4 56.0 30.1 28.0 Operating profit 50.7 47.8 17.7 3.6 7.3 12.7 4.4 27.2 180.6 159.0 54.2 50.6 Pretax profit 53.4 43.4 21.0 2.3 7.1 13.0 4.1 27.0 121.0 175.3 53.6 50.1 Net profit 48.1 61.9 13.2 0.4 -7.8 13.0 4.1 27.0 115.7 230.8 29.5 50.1 Source: Company data, KDB Daewoo Securities Research
Figure 112. Revenues trend and forecasts by division Figure 113. Earnings trend and forecasts
(Wbn) (%) (Wbn) Revenues (L) (%) 360 EL (L) 120 400 Operating profit (L) 60 OP margin (R) Semiconductor (L) 100 300 YoY growth (R) 50
80 300 240 40 60 180 200 30 40 120 20 20 100
60 0 10
0 -20 0 0 05 06 07 08 09 10 11F 12F 13F 14F 05 06 07 08 09 10 11F 12F 13F 14F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 61 December 1, 2011 Electronic Materials
Transforming from a semiconductor to an AMOLED materials maker
Ranks first in HTL Duksan Hi-Metal is a monopolistic AMOLED materials maker with a stable customer base. The materials and second in company mainly produced solder balls, which are used for semiconductor BGA (ball grid array) solder ball materials in packaging, until it merged with Lu-dis, an AMOLED materials maker, in 2009. Currently, sales at the global market the EL division are larger than that of the semiconductor division. As of end-3Q, sales contribution from the EL and semiconductor divisions respectively stood at 53% and 47%. Going forward, sales contribution from the EL division is expected to exceed 60%.
Duksan produces materials for the hole transport layer (HTL) and hole injection layer (HIL) in AMOLED panels. Since HIL is increasingly being integrated into HTL in mobile AMOLED panels, the companyÊs flagship products are HTL materials. The company supplies AMOLED materials to SMD, the worldÊs largest AMOLED maker, which generates 95% of global AMOLED materials sales.
The semiconductor division produces solder balls and powder for packaging. Solder ball sales accounted for 72% for the divisionÊs total sales as of end-3Q, while solder powder sales took up 28%. Duksan dominates the domestic solder ball market with a market share of 90%, and ranks second in the global market with a market share of 35% following Japan- based Senju Metal. The company has diversified its customer base to include SEC, Hynix, Amkor, and Intel.
Figure 114. Revenues breakdown by division (as of 3Q11) Figure 115. Revenues breakdown by customer at the EL division
Others 5%
Semiconductor 47% EL 53%
SMD 95%
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 116. Structure of AMOLED panel Figure 117. Solder ball [Wire bond BGA]
[Flip chip BGA]
Source: Company data Source: Amkor
KDB Daewoo Securities Research 62 December 1, 2011 Electronic Materials
Risk factors
Diminishing AMOLED Duksan Hi-Metal is the only electronic materials maker in Korea that has generated premium is the largest meaningful earnings from AMOLED organic materials. This is one reason why the company risk has been trading at a premium over its industry peers. Thus, the largest downside risk to share prices would be a diminishing AMOLED premium.
One concern is that SMD might delay its investment in AMOLED. If AMOLED capacity expansion slows down due to some technical or equipment-related reasons, this would inevitably lead to weaker top-line growth for Duksan Hi-Metal. Since AMOLED organic materials are more profitable than semiconductor materials, margin improvement would also take a hit.
Another risk would be rapid market share gains by competitors. One factor behind Duksan Hi-MetalÊs valuation premium has been its dominating position within the SMD market. Although this concern has already been priced in, if it happens faster than expected, Duksan Hi-MetalÊs earnings are likely to fall short of expectations. Cheil Industries (also a Samsung affiliate) and companies that already supply green fluorescents to SMD (e.g., lCS Elsolar), are purportedly accelerating their advance into the HTL market.
A third risk would be failure to supply organic materials for large TV panels. We believe this is unlikely given the companyÊs supply track record and strong production technology. Moreover, customers are likely to prefer existing suppliers with proven production capabilities over new ones. However, if a key competitorÊs product is chosen as the main product for large-sized panels, Duksan Hi-Metal could lose its competitiveness during the AMOLED up-cycle.
KDB Daewoo Securities Research 63 December 1, 2011 Electronic Materials
Duksan Hi-Metal (077360 KQ/Buy/TP: W40,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 73 130 193 296 Current Assets 21 68 112 171 Cost of Sales 43 80 118 184 Cash and Cash Equivalents 5 40 68 112 Gross Profit 30 50 75 112 AR & Other Receivables 7 13 21 27 SG&A Expenses 17 14 20 30 Inventories 7 12 19 25 Operating Profit (Adj) 13 36 55 81 Other Current Assets 2 3 5 7 Operating Profit 13 34 53 79 Non-Current Assets 90 86 97 118 Non-Operating Profit -1 -1 1 1 Investments in Associates 0 0 1 1 Net Financial Income 0 -1 -3 -5 Property, Plant and Equipment 44 63 78 98 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 27 10 5 4 Pretax Profit 13 35 53 80 Total Assets 112 153 209 289 Income Tax 2 1 10 14 Current Liabilities 11 14 21 27 Profit from Continuing Operations 10 34 43 65 AP & Other Payables 5 9 14 19 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 4 3 3 3 Net Profit 10 34 43 65 Other Current Liabilities 2 3 4 6 Controlling Interests 10 34 43 65 Non-Current Liabilities 7 3 11 21 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 7 1 1 1 Total Comprehensive Profit 10 32 42 63 Other Non-Current Liabilities 0 1 7 16 Controlling Interests 10 32 42 63 Total Liabilities 18 17 32 48 Non-Controlling Interests 0 0 0 0 Controlling Interests 93 136 177 241 EBITDA 22 66 68 92 Capital Stock 6 6 6 6 FCF (Free Cash Flow) -24 34 24 38 Capital Surplus 76 82 82 82 EBITDA Margin (%) 29.9 51.0 35.3 31.1 Retained Earnings 31 71 115 180 Operating Profit Margin (%) 18.1 26.3 27.2 26.7 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 14.0 25.9 22.5 22.1 Stockholders' Equity 93 136 177 241
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flows from Op Activities 10 55 48 69 P/E (x) 50.0 23.7 18.3 12.2 Net Profit 10 34 43 65 P/CF (x) 27.1 12.5 14.0 10.5 Non-Cash Income and Expense 12 35 25 27 P/B (x) 6.6 6.4 4.6 3.4 Depreciation 2 3 5 6 EV/EBITDA (x) 23.6 11.6 10.8 7.6 Amortization 7 27 8 4 EPS (W) 406 1,146 1,484 2,228 Others -3 -4 -5 -7 CFPS (W) 749 2,180 1,941 2,585 Chg in Working Capital -12 -11 -10 -9 BPS (W) 3,068 4,286 5,874 8,065 Chg in AR & Other Receivables -4 -6 -8 -7 DPS (W) 0 0 0 0 Chg in Inventories -3 -5 -7 -6 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 1 6 5 5 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid 0 -2 -10 -14 Revenue Growth (%) 125.5 78.9 48.7 53.3 Cash Flows from Inv Activities -28 -16 -20 -24 EBITDA Growth (%) 164.3 204.9 3.1 34.8 Chg in PP&E -28 -20 -20 -26 Operating Profit Growth (%) 179.2 160.1 53.7 50.6 Chg in Intangible Assets -4 -3 -3 -3 EPS Growth (%) 81.3 182.0 29.6 50.1 Chg in Financial Assets 4 7 0 0 Accounts Receivable Turnover (x) 13.4 13.2 11.8 12.8 Others 0 1 3 5 Inventory Turnover (x) 14.1 14.2 12.7 13.7 Cash Flows from Fin Activities 9 -9 0 0 Accounts Payable Turnover (x) 37.2 36.7 33.0 35.6 Chg in Financial Liabilities 3 -10 0 0 ROA (%) 10.0 25.4 24.0 26.2 Chg in Equity 6 1 0 0 ROE (%) 12.4 29.3 27.8 31.2 Dividends Paid 0 0 0 0 ROIC (%) 16.4 40.0 43.8 52.4 Others 0 0 0 0 Liability to Equity Ratio (%) 19.7 12.7 18.1 19.9 Increase (Decrease) in Cash -9 34 28 45 Current Ratio (%) 192.5 475.5 530.1 631.7 Beginning Balance 15 5 40 68 Net Debt to Equity Ratio (%) 6.0 -26.7 -36.2 -45.2 Ending Balance 5 40 68 112 Interest Coverage Ratio (x) 19.1 178.6 585.5 881.6 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 64 December 1, 2011 Electronic Materials
Soulbrain (036830 KQ)
Buy (Initiate) Resilient to external headwinds
Target Price (12M, W) 56,000 Initiate coverage with Buy rating and TP of W56,000 Share Price (11/29/11, W) 44,400 Expected Return (%) 26.1 A perfect combination of stability and growth EPS Growth (11F, %) 37.0 Electrolytes to drive mid- to long-term growth Market EPS Growth (11F, %) -2.3 P/E (11F, x) 14.4 Market P/E (11F, x) 10.5 We initiate our coverage on Soulbrain with a Buy rating and a target price of W56,000. KOSDAQ 492.73 Our target price was derived by applying a P/E of 14.3x (upper end of the stockÊs 12- Market Cap (Wbn) 652 month forward P/E band since 2009) to the companyÊs 2012F EPS. We used the upper Shares Outstanding (mn) 15 end of the P/E band as 1) the stock has consistently been re-rated since 2009 and 2) Avg Trading Volume (60D, '000) 68 fundamentals are still robust relative to when the companyÊs P/E reached 14.3x. Avg Trading Value (60D, Wbn) 3 Our investment recommendation is premised on the following: Dividend Yield (11F, %) 0.7 Free Float (%) 46.7 1) As an electronic materials maker, Soulbrain enjoys stable earnings. Because the 52-Week Low (W) 27,100 company manufactures electronic materials that are essential for the production of 52-Week High (W) 51,200 semiconductors and LCD panels, it is less exposed to price cut pressures. Moreover, Beta (12M, Daily Rate of Return) 0.9 SoulbrainÊs product shipments are less vulnerable to changes in the industry cycle Price Return Volatility (12M Daily, %, SD) 3.2 compared to other IT products. When utilization ratios at LCD manufacturers plunged Foreign Ownership (%) 14.8 during the recessions in 4Q08 and 3Q11, LG Display (an LCD panel supplier) suffered Major Shareholder (s) severe margin deterioration. In contrast, Soulbrain, which supplies LCD etchant to LG Chang, Ji-Wan et al. (52.13%) Display, managed to maintain an OP margin of 12~14%. Allianz Global Investors (8.37%) National Pension Service (7.1%) 2) We believe the companyÊs thin glass (TG) business stands to benefit from the strong growth of smartphones and tablet PCs. On the back of the sharp increase Price Performance in smartphone and tablet PC shipments since 2H10, SoulbrainÊs TG division has (%) 1M 6M 12M Absolute 11.3 -5.6 47.8 seen rapid top-line growth. As more smartphones begin to adopt AMOLED panels, Relative 15.1 6.0 49.8 SoulbrainÊs TG business should grow in tandem with the AMOLED industry. In 2Q, the company ramped up its TG production capacity by 2.5x YoY to meet a potential rise in demand, and it is expected to expand its capacity by an additional 20% in 4Q. In line with such capacity expansion, we expect TG revenues to more than triple from W24.5bn in 2010 to W77.2bn in 2013.
3) On the back of capacity expansion and localized electrolyte production, Soulbrain should benefit from the expansion of the mid- to large-sized rechargeable battery market, which is eight times larger than the existing market. The anticipated growth of electronic vehicles (xEV) and energy storage systems (ESS) in 2012 and beyond should help the rechargeable battery market grow at a CAGR of 27.1% until 2020. At present, SoulbrainÊs domestic electrolyte capacity is estimated at 5,000 tonnes per annum, but the company is set to begin production at its Michigan plant (annual capacity of 5,000 tonnes) in 2012 to target the xEV rechargeable battery market in the U.S. When it comes to localized production, the company is far ahead of its competitors, as it already supplies over 70% of the electrolyte requirements of U.S. secondary batter makers (including A123 and JSC).
Share price § Earnings & Valuation Metrics 180 KOSDAQ FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 160
140 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 120 12/09 290 36 12.3 26 1,733 49 24 15.0 12.6 1.8 7.0 100 12/10 349 49 14.1 33 2,245 63 -7 16.8 13.6 2.1 8.1 80 12/11F 450 63 14.0 45 3,077 80 -43 19.0 14.3 2.5 9.4 60 12/12F 561 79 14.1 58 3,936 99 23 19.8 11.2 2.0 7.9 40 12/13F 631 90 14.3 67 4,526 111 28 19.0 9.7 1.7 7.3 11/10 3/11 7/11 11/11
Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 65 December 1, 2011 Electronic Materials
Initiate coverage with Buy rating and TP of W56,000
Re-rating to continue on We initiate our coverage on Soulbrain with a Buy rating and a target price of W56,000. Our strong fundamentals target price was derived by applying a P/E of 14.3x (upper end of the stockÊs 12-month forward P/E band since 2009) to the companyÊs 2012F EPS. We used the upper end of the P/E band as: 1) the stock has consistently been re-rated since 2009; 2) fundamentals are still robust relative to when the companyÊs P/E reached 14.3x; and 3) its earnings remained resilient even during the height of the LCD industry downturn in 3Q.
Given that the companyÊs 12-month forward P/E stood at 15x~20x during the LCD expansion period and semiconductor up-cycle in 2007~2008, we believe a target P/E of 14.3x (a 20% discount to that period) is reasonable in light of the present slowdown in the LCD industry. Despite its earnings stability and solid customer base, the company currently trades at a 2012 P/E of 11.2x, which is below the industry average of 12.9x.
Table 34. Calculation of target price Note EPS (W) 3,936 2012F Comparable P/E (x) 14.3 Upper band of 12-month forward P/E since 2009 Target price (W) 56,231 Current price (W) 43,450 As of Nov 25, 2011 Upside potential (%) 29.4 Source: KDB Daewoo Securities Research
Table 35. Valuation comparison of global peers (Wbn, x, %) Share performance OP margin P/E P/B EV/EBITDA ROE Company Mkt. cap -1M -3M 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F Soulbrain 638 8.6 3.0 14.1 13.8 14.0 19.1 13.6 11.1 3.0 2.5 2.0 8.0 9.4 7.6 16.8 19.8 19.8 Cheil Industries 5,123 -5.6 1.2 6.7 6.4 7.3 18.1 15.4 12.1 1.7 1.6 1.4 12.0 10.2 8.1 10.9 11.0 13.0 Duksan Hi-Metal 779 -4.3 -8.6 18.1 25.6 27.0 54.2 26.6 14.2 7.0 7.0 4.7 23.4 18.4 11.4 12.4 28.9 36.2 OCI Materials 882 -3.1 -10.6 33.4 34.7 35.3 14.7 11.4 9.3 3.2 2.6 2.0 9.6 6.2 5.3 24.1 24.7 24.4 Iljin Materials 670 -16.0 -12.8 12.8 6.4 10.4 12.5 44.5 15.2 3.2 1.9 1.8 - 20.4 10.4 30.1 8.6 12.2 Foosung 630 -6.9 1.1 4.8 13.5 15.6 108.3 22.2 16.4 5.6 4.5 3.5 16.1 15.3 10.9 5.4 22.4 23.8 Shin-Etsu Chemical 23,529 -8.0 -2.8 14.1 14.7 15.4 17.4 14.6 12.8 1.1 1.0 1.0 5.5 5.1 4.7 7.0 7.2 7.9 Hitachi Chemical 4,351 0.0 6.8 8.7 7.2 8.4 24.5 14.5 11.2 1.1 1.0 1.0 3.4 3.6 3.1 7.0 6.9 8.6 JSR 5,370 -3.9 2.2 11.5 11.0 11.9 13.1 12.5 10.8 1.3 1.2 1.1 4.8 4.8 4.3 10.7 10.1 10.8 Avg. -6.0 -2.9 13.8 14.9 16.4 32.8 20.2 12.7 3.0 2.6 2.1 10.7 10.5 7.3 13.5 15.0 17.1 Source: Bloomberg consensus
Figure 118. 12-month forward P/E band Figure 119. 12-month forward P/E trend
(W) (x) 20.0x 17.0x 70,000 14.0x 25
60,000 20 11.0x 50,000 Upper-end of 12-month forward P/E 15 since 2009: 14.3x 40,000 8.0x Re-rating 30,000 10 5.0x 20,000 5 10,000 Lower-end of 12-month forward P/E since 2009: 5.9x 0 0 01 03 05 07 0911F 1113F 13 06 07 08 09 10 11
Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 66 December 1, 2011 Electronic Materials
Investment point: 1) Strong earnings stability
OP margin remained Electronic materials makers show strong earnings resilience relative to IT components or stable at 12~14% even electronic device manufacturers thanks to high entry barriers and their dominating position during the worst times within customer markets. As a pure electronic materials maker, Soulbrain also enjoys stable earnings. Because the company supplies electronic materials that are essential to the production of semiconductors and LCD panels, it is less exposed to price cut pressures and product shipments are less vulnerable to changes in the industry cycle compared to other IT products.
For example, when utilization ratios at LCD manufacturers plunged during the recessions in 4Q08 and 3Q11, LG Display (an LCD panel supplier) suffered severe margin contraction. In contrast, Soulbrain, which supplies LCD etchant to LG Display, managed to maintain its OP margin at 12~14% even amid the industry downturn.
Soulbrain is also actively responding to changes in the IT industry paradigm through ongoing business diversification. While steadily reducing its maturing LCD/semiconductor etchant business, the company has expanded its thin glass business for small-to-mid sized AMOLED panels (an industry that is rapidly growing) as well as its electrolyte business (which has strong growth potential). The companyÊs shift to newly growing businesses should help lower its earnings volatility from fluctuations in the IT industry.
Figure 120. LCD utilization rates and OP margins of LGD and Soulbrain
(%) (%) 30 LCD utilization rate (R) LGD's OP margin (L) Soulbrain's OP margin (L) 100
20 90
10 80
0 70
-10 60
-20 50 05 06 07 08 09 10 11F
Source: DisplaySearch, KDB Daewoo Securities Research Figure 121. Earnings trend and forecasts Figure 122. Trend and forecasts of revenues contributions by product
(Wbn)Display (L) Semiconductor (L) (%) (%) Thin glass (L) (%) 800 Electronic materials (L) OP margin (R) 25 15 Electrolyte (L) 90 LCD/semiconductor etchant (R)
20 12 80 600
15 9 70 400
10 6 60
200 5 3 50
0 0 0 40 05 07 09 11F 13F 06 07 08 09 10 11F 12F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 67 December 1, 2011 Electronic Materials
Investment point: 2) A smartphone, tablet PC, and AMOLED play
TG business to more We believe the companyÊs thin glass (TG) business stands to benefit from the strong growth than threefold by 2013 of smartphones and tablet PCs. Thin glasses involve the process of etching 0.7~1.1mm thick panels into 0.2mm ones and are mostly used in the manufacturing of laptops, smartphones and tablet PCs. On the back of the sharp increase in smartphone and tablet PC shipments since 2H10, SoulbrainÊs TG division has achieved rapid top-line growth. As more smartphones begin to adopt AMOLED panels, SoulbrainÊs TG business should grow in tandem with the AMOLED industry.
Despite the IT industry downturn since 2H10, the companyÊs TG utilization ratio stood over 90% prior to its capacity expansion. In 2Q, the company ramped up its TG production capacity by 2.5 times YoY to meet potential rise in demand and is expected to expand its capacity by an additional 20% in 4Q. In line with such capacity expansion, we expect TG revenues to more than threefold from W24.5bn in 2010 to W77.2bn in 2013.
Figure 123. Smartphone and tablet PC shipment trend and forecasts Figure 124. AMOLED capacity trend and forecasts
(mn units) (mn units) (mn m2) 1,800 Smartphone 350 2.4 8G Tablet PC 5.5G 1,500 300 2.0 4G
250 1,200 1.6 200 900 1.2 150 600 0.8 100
300 50 0.4
0 0 0.0 08 09 10 11F 12F 13F 14F 15F 11F 12F 13F 14F
Source: IDC, KDB Daewoo Securities Research Source: DisplaySearch, KDB Daewoo Securities Research
Figure 125. TG capacity trend and forecasts Figure 126. TG and LCD etchant revenues trend and forecasts
('000 tonnes) Capacity expansion by 20% (Wbn) 7,000 140 Thin glass LCD etchant 6,000 Capacity expansion by 2.5x 120
5,000 100
4,000 80
3,000 60
2,000 40
1,000 20
0 0 05 06 07 08 09 10 11F 12F 06 07 08 09 10 11F 12F 13F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 68 December 1, 2011 Electronic Materials
Investment point: 3) In pursuit of mid- to long-term growth drivers
Rechargeable battery On the back of capacity expansion and localized electrolyte production, Soulbrain should market to grow at a benefit from the expansion of the mid- to large-sized rechargeable battery market, which will CAGR of 27.1% until be eight times larger than the existing market. Although we expect the growth of 2020 rechargeable batteries for small-sized IT products to stagnate, the anticipated growth of electronic vehicles (xEV) and energy storage systems (ESS) in 2012 and beyond should help the rechargeable battery market grow at a CAGR of 27.1% until 2020.
At present, SoulbrainÊs domestic electrolyte capacity is estimated at 5,000 tonnes per annum, but the company is set to begin production at its Michigan plant (annual capacity of an additional 5,000 tonnes) in 2012 to target the xEV rechargeable battery market in the U.S. When it comes to localized production, the company is far ahead of its competitors, as it already supplies over 70% of the electrolyte requirements of U.S. secondary batter makers (including A123 and JSC).
In the short term, we see strong potential for top-line growth in the companyÊs domestic electrolyte business, given 1) its growing market share in Samsung SDI (for polymer-type batteries) and 2) the likely increase in Samsung SDIÊs polymer battery production in line with the expected growth of the mobile market.
Figure 127. Rechargeable battery market trend and forecasts
(Wbn) 120 ESS xEV 100 IT
80 2010~2020F CAGR: 27.1% - IT: 9.2% - xEV: 58.4% 60 - ESS: 71.9%
40
20
0 06 08 10 12F 14F 16F 18F 20F
Source: CMRI, IIT, LGERI, KDB Daewoo Securities Research
Figure 128. Electrolyte capacity and utilization rate trend of Soulbrain Figure 129. LIB capacity trend and forecasts of Samsung SDI
(tonne) Capacity expansion by 5,000 (%) (mn cells/month) 60 12,000 Capacity (L) tonnes at the Michigan plant 50 Polymer-type Utilization rate (R) Prismatic-type 10,000 50 Cylindrical-type 40
8,000 40 30 6,000 30 20 4,000 20
10 2,000 10
0 0 0 06 07 08 09 10 11F 12F 10 11F 12F
Source: Company data, KDB Daewoo Securities Research Source: IIT
KDB Daewoo Securities Research 69 December 1, 2011 Electronic Materials
Earning outlook: EPS to grow at an CAGR of 20.8% in 2010~2013
2012 Revenues and OP SoulbrainÊs revenues and operating profit are expected to respectively expand at a CAGR of margin are forecast at 22.4% and 22.6% through 2013, aided by 1) steady sales of LCD- and semiconductor-use W566.2bn and 14.1%, etchant and 2) rapid sales growth of TG and electrolyte. respectively In 2012, revenues are forecast to rise by 25.7% YoY to W566.2bn, while operating profit is projected to increase by 25.9% YoY to W79.2bn on an OP margin of 14.1%. Revenues at the display division are forecast to climb by 32.4% YoY on the back of 1) a recovery in capacity utilization at the companyÊs customers (LGD and SEC) and 2) solid TG sales. In addition, the semiconductor division is expected to release a new CVD-use product and expand its CMP slurry customer base to include SEC, while the electronic materials division is projected to post revenue growth of 32.4% YoY thanks to higher market shares within its customers.
In 4Q, revenues are projected to inch up by 2.5% QoQ to W123.7bn, boosted by 1) a recovery in capacity utilization at LGD and SEC and 2) higher electrolyte sales, while operating profit is forecast at W17.6bn (OP margin of 14.2%), similar to the level seen in 3Q.
Table 36. Earnings trend and forecasts (Non-consolidated K-IFRS) (Wbn, %) 1Q11 2Q11 3Q11 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 10 11F 12F 13F Revenues 94.6 110.5 120.7 123.7 126.9 138.1 148.6 147.1 348.7 449.5 560.6 631.4 Display 35.9 39.1 36.6 40.1 42.6 47.7 53.1 53.6 154.4 151.9 197.0 237.9 Semiconductor 41.3 48.2 55.2 55.8 55.9 58.6 60.2 60.4 134.1 200.6 235.1 252.4 Electronic Materials 17.4 23.1 28.8 27.7 28.4 31.8 35.3 33.1 60.1 97.1 128.6 141.1 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 38.0 35.4 30.4 32.5 33.5 34.6 35.7 36.4 44.3 33.8 35.1 37.7 Semiconductor 43.6 43.7 45.8 45.1 44.1 42.4 40.5 41.0 38.5 44.6 41.9 40.0 Electronic Materials 18.4 20.9 23.9 22.4 22.4 23.0 23.7 22.5 17.2 21.6 22.9 22.3 Operating profit 11.0 16.3 17.9 17.6 17.7 19.5 21.4 20.5 49.2 62.8 79.1 90.3 Pretax profit 10.1 14.8 16.7 16.4 16.5 18.3 20.1 19.3 47.0 58.1 74.2 85.4 Net profit 7.7 12.0 13.0 12.6 12.9 14.3 15.7 15.0 37.7 45.3 57.8 66.5 OP margin 11.7 14.7 14.9 14.2 14.0 14.2 14.4 13.9 14.1 14.0 14.1 14.3 Net margin 8.1 10.8 10.8 10.2 10.1 10.4 10.5 10.2 10.8 10.1 10.3 10.5 Growth (QoQ/YoY) Revenues 2.0 16.8 9.2 2.5 2.6 8.8 7.6 -1.0 20.2 28.9 24.7 12.6 Display -6.4 8.9 -6.4 9.6 6.0 12.2 11.2 1.0 31.0 -1.7 29.7 20.8 Semiconductor 7.9 16.9 14.5 1.1 0.2 4.7 2.8 0.2 8.4 49.5 17.2 7.4 Electronic Materials 8.2 32.7 24.8 -3.8 2.4 11.8 11.1 -6.2 24.1 61.6 32.4 9.8 Operating profit -14.7 47.3 10.3 -2.0 0.8 10.3 9.3 -4.1 37.7 27.7 25.9 14.1 Pretax profit -9.8 46.3 12.6 -1.9 0.9 10.6 10.1 -4.3 36.8 23.5 27.8 15.1 Net profit -1.0 56.2 8.8 -3.6 2.3 11.4 9.3 -4.4 47.9 20.0 27.7 15.0 Source: Company data, KDB Daewoo Securities Research
Figure 130. Revenues trend and forecasts by division Figure 131. Earnings trend and forecasts
(Wbn) (%) (Wbn) (%) 800 Display (L) Semiconductor (L) 50 800 Revenues (L) Operating profit (L) OP margin (R) 25 Electronic materials (L) YoY growth (R)
40 20 600 600
30 15 400 400 20 10
200 200 10 5
0 0 0 0 05 07 09 11F 13F 05 07 09 11F 13F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 70 December 1, 2011 Electronic Materials
Corporate overview: Korea’s major electronic materials maker
1) Diversified business portfolio Diversified business Soulbrain is a major electronic materials maker which produces process materials for LCDs portfolio to include LCDs, and semiconductors, and rechargeable battery-use electrolytes. In the early days of its semiconductors, establishment, the company focused on producing etchant, an LCD/semiconductor AMOLEDs, and patterning material. However, the company has expanded the TG and rechargeable battery- rechargeable batteries use electrolyte businesses since 2006.
Soulbrain can be divided into three divisions: display, semiconductor, and electronic materials. As of 2010, the LCD etchant-oriented display division generated 45% of total revenues, followed by the semiconductor division (producing semiconductor etchant) with 38% and the electronic materials division (producing electrolyte and Nd magnet) with 17%. In 2011, the semiconductor divisionÊs contribution to total revenues is expected to exceed that of the display division due to the sluggish display market.
SoulbrainÊs major customers include SEC, LGD, Hynix, and SMD. 33% of SoulbrainÊs total revenues come from SEC, which produces both semiconductors and LCDs.
Figure 132. Trend and forecasts of revenues contribution by product
(%) Thin glass (L) (%) 15 Electrolyte (L) Diversification of product portfolio 90 LCD/semiconductor etchant (R)
12 80
9 70
6 60
3 50
Contribution of etchant to decline 0 40 06 07 08 09 10 11F 12F
Source: Company data, KDB Daewoo Securities Research
Figure 133. Revenues breakdown by product Figure 134. Revenues breakdown by customer
Others 25% Electronic materials Electronic SEC 17% Display materials 33% 45% 22% Display 34%
2010 2011F SMD 11%
Semiconductor Semiconductor 38% 44% LGD Hynix 14% 17%
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 71 December 1, 2011 Electronic Materials
2) Display TG revenues are SoulbrainÊs display segment produces LCD etchant, thin glasses (TG) and organic materials expanding rapidly used in LCD color filters. LCD etchant makes up the largest percentage of total revenues (58%), followed by TG (32%) and organic materials (10%). Major customers include display makers such as LG Display (LGD), Samsung Electronics (SEC) and SMD.
Soulbrain dominates the LCD etchant market along with Dongwoo Fine-Chem, a subsidiary of Japan-based Sumitomo Chemical. The company is estimated to satisfy 65% of LGDÊs etchant requirements, and 30% of SECÊs. The companyÊs market share in SEC may rise to 50% if it starts to supply copper etchant, which is currently supplied by Dongwoo Fine-Chem.
Soulbrain also dominates the TG market along with Chemtronics. TG allows for thinner panels used in notebooks, tablet PCs and smartphones. The companyÊs domestic market share is estimated to have increased from 60% to 70% on the back of recent capacity expansion. Despite a sluggish LCD market, TG revenues are expanding rapidly thanks to growing smartphone and tablet PC sales.
The main product of SoulbrainÊs LCD organic materials business is resin black matrix (RBM), which is used to identify RGB pixels in color filters. We expect the companyÊs LCD organic material revenues to contract this year, as the company failed to win contracts for its customerÊs new product line-up.
Figure 135. Revenues breakdown by product at the display division Figure 136. Revenues breakdown by customer at the display division
SMD Organic materials 5% 10%
SEC Thin glass 38% 32% Etchant LGD 58% 57%
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 137. LCD etchant M/S within customers Figure 138. Major product shipment trends at the display division
(%) ('000 tonnes) ('000 tonnes) 70 800 Thin glass (L) 35 M/S to expand further given the start Etchant (R) of supplying Cu-etchant 700 60 30
600 50 25 500 40 20 400 30 15 300 20 10 200
10 100 5
0 0 0 LGD SEC 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 72 December 1, 2011 Electronic Materials
3) Semiconductor Exclusive producer of SoulbrainÊs semiconductor segment produces semiconductor etchant, chemical vapor semiconductor etchant deposition (CVD) materials and CMP slurry. Semiconductor etchant makes up the largest in Korea portion of total revenues (74%), followed by CVD materials (17%) and CMP slurry (9%). Major customers include semiconductor makers such as SEC and Hynix.
Soulbrain holds a monopolistic domestic market share of 95% in semiconductor etchant, which is used in semiconductor patterning processes. We expect semiconductor etchant revenues to expand thanks to SECÊs capacity expansion (line 16 and the line in Austin, Texas).
Soulbrain is estimated to hold a 60% market share in CVD materials, which are used to deposit layers on semiconductor wafers through CVD processes. The company has mainly produced Low-k materials, but should add High-k materials to its product line-up given the rising demand due to process migration.
CMP slurry is a planarization material used to etch copper interconnects where patterning processing cannot be applied. Soulbrain currently supplies CMP slurry to Hynix only, but the company has plans to supply the products to SEC.
Figure 139. Revenues breakdown by product at the semicon. division Figure 140. Revenues breakdown by customer at the semi. division
CMP slurry 9% Hynix 30% CVD 17%
SEC 70% Etchant 74%
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 141. Semiconductor etchant M/S within customers Figure 142. Major product shipment trends at the semicon. division
(%) Domestic M/S of 95% ('000 tonnes) (tonne) 100 16 Etchant (L) 160 CMP slurry (L)
80 CVD (R) 12 120
60 8 80 40
4 40 20
0 0 0 SEC Hynix 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 73 December 1, 2011 Electronic Materials
4) Electronic materials business Electrolyte business is The electronic materials business produces electrolytes for rechargeable batteries and expanding rapidly neodium (ND) magnets. Electrolytes generate 44% of the businessÊ revenues, and ND magnets and other materials generate 35% and 21%, respectively.
Electrolyte is one of the four major materials for lithium-ion rechargeable batteries, accounting for 10% of material costs. Soulbrain is the second largest electrolyte producer in Korea, following Panax E-Tec, with an annual production capacity of 5,000 tonnes. Currently, the domestic market is the main source of electrolyte revenues (about 80% from Samsung SDI). However, the electrolyte plant in Michigan, which is scheduled to start operation in 2012, should help expand SoulbrainÊs customer base and accelerate the companyÊs entry into the mid- to large-sized applications markets.
ND magnets are used for EVs, refrigerators, and air conditioners. Samwhan Techno, in which the company has a stake, is producing ND magnets.
Figure 143. Revenues breakdown by product at the elec. mat. Figure 144. Structure and cost breakdown of LIB division Others (20%) Others Anode material (10%) 21%
Electrolyte 44%
Separator (20%)
ND magnet 35% Electrolyte (15%) Cathod material (35%) Source: Company data, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure 145. Rechargeable battery material market trend and forecasts Figure 146. ND magnet
(Wbn) 60 Electrolyte Separator 50 Anode material Cathod material 40
2010~2020F CAGR: 27.4% 30
20
10
0 06 08 10 12F 14F 16F 18F 20F
Source: CMRI, IIT, LGERI, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 74 December 1, 2011 Electronic Materials
Risk factors
Despite a stable revenues base and mid- to long-term growth drivers, the company lacks a distinct driver for short-term momentum. Although the TG business is growing rapidly, revenues are still minor and the business does not stand to benefit from the expansion of the AMOLED market. In addition, electrolytes are not expected to generate earnings momentum for at least another two years (until the mid- to large-sized rechargeable battery applications market starts to pick up).
The other risk for Soulbrain is a possible share dilution related to bonds with warrants (BWs) and convertible bonds (CBs). On February 28th, the company issued BWs worth W50bn and CBs worth W10bn to raise capital for new investments. The CBs and BWs can be exercised starting on March 29, 2012 (conversion/exercise price of W32,900). If rights to the entire CBs and BWs are exercised, it should result in an 11% share dilution (1.82mn shares).
KDB Daewoo Securities Research 75 December 1, 2011 Electronic Materials
Soulbrain (036830 KQ/Buy/TP: W56,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 349 450 561 631 Current Assets 88 134 176 201 Cost of Sales 272 349 435 489 Cash and Cash Equivalents 6 25 46 58 Gross Profit 77 101 126 143 AR & Other Receivables 53 70 84 92 SG&A Expenses 27 37 47 53 Inventories 27 36 43 47 Operating Profit (Adj) 49 63 79 90 Other Current Assets 1 1 1 1 Operating Profit 49 63 79 90 Non-Current Assets 233 321 391 470 Non-Operating Profit -7 -5 -5 -5 Investments in Associates 100 70 67 64 Net Financial Income 1 5 8 10 Property, Plant and Equipment 118 194 223 258 Net Gain from Inv in Associates -5 -3 -3 -3 Intangible Assets 0 3 1 1 Pretax Profit 42 58 74 85 Total Assets 321 455 567 671 Income Tax 9 13 16 19 Current Liabilities 108 139 149 156 Profit from Continuing Operations 33 45 58 67 AP & Other Payables 33 44 52 57 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 67 84 84 84 Net Profit 33 45 58 67 Other Current Liabilities 8 11 13 14 Controlling Interests 33 45 58 67 Non-Current Liabilities 2 51 100 135 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 49 98 133 Total Comprehensive Profit 33 45 58 67 Other Non-Current Liabilities 2 2 2 2 Controlling Interests 33 45 58 67 Total Liabilities 110 190 249 291 Non-Controlling Interests 0 0 0 0 Controlling Interests 211 265 318 380 EBITDA 63 80 99 111 Capital Stock 7 7 7 7 FCF (Free Cash Flow) -7 -43 23 28 Capital Surplus 19 33 33 33 EBITDA Margin (%) 18.0 17.8 17.6 17.5 Retained Earnings 187 231 285 347 Operating Profit Margin (%) 14.1 14.0 14.1 14.3 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 9.5 10.1 10.3 10.5 Stockholders' Equity 211 265 318 380
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flows from Op Activities 38 51 71 84 P/E (x) 13.6 14.3 11.2 9.7 Net Profit 33 45 58 67 P/CF (x) 9.7 10.5 8.3 7.4 Non-Cash Income and Expense 18 36 41 44 P/B (x) 2.1 2.5 2.0 1.7 Depreciation 13 16 19 20 EV/EBITDA (x) 8.1 9.4 7.9 7.3 Amortization 0 1 1 1 EPS (W) 2,245 3,077 3,936 4,526 Others 1 1 6 8 CFPS (W) 3,163 4,207 5,276 5,933 Chg in Working Capital -14 -15 -11 -7 BPS (W) 14,361 17,837 21,559 25,835 Chg in AR & Other Receivables -20 -19 -13 -9 DPS (W) 300 300 300 300 Chg in Inventories -9 -10 -7 -4 Payout ratio (%) 13.2 9.6 7.5 6.6 Chg in AP & Other Payables 13 14 8 5 Dividend Yield (%) 1.0 0.7 0.7 0.7 Income Tax Paid 0 -14 -16 -19 Revenue Growth (%) 20.2 28.9 24.7 12.6 Cash Flows from Inv Activities -73 -104 -86 -93 EBITDA Growth (%) 28.2 27.6 23.1 12.4 Chg in PP&E -45 -94 -47 -55 Operating Profit Growth (%) 37.8 27.7 25.9 14.1 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 29.6 37.0 27.9 15.0 Chg in Financial Assets -1 2 0 0 Accounts Receivable Turnover (x) 10.5 10.0 9.9 9.8 Others -27 -12 -38 -38 Inventory Turnover (x) 15.5 14.3 14.2 14.0 Cash Flows from Fin Activities 19 81 36 20 Accounts Payable Turnover (x) 17.9 17.4 17.4 17.1 Chg in Financial Liabilities 22 85 0 0 ROA (%) 11.5 11.6 11.3 10.7 Chg in Equity 0 0 0 0 ROE (%) 16.8 19.0 19.8 19.0 Dividends Paid -4 -4 -4 -4 ROIC (%) 27.4 23.6 22.3 22.2 Others 0 -4 -8 -11 Liability to Equity Ratio (%) 52.1 71.9 78.3 76.5 Increase (Decrease) in Cash -17 18 22 12 Current Ratio (%) 81.7 96.5 117.9 128.8 Beginning Balance 24 6 25 46 Net Debt to Equity Ratio (%) 27.9 40.2 42.0 41.3 Ending Balance 6 25 46 58 Interest Coverage Ratio (x) 27.8 11.4 9.9 8.8 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 76 December 1, 2011 Electronic Materials
Iljin Materials (020150 KS)
Buy (Initiate) The show has just begun
Target Price (12M, W) 23,000 Initiate coverage with a Buy call and a target price of W23,000 Share Price (11/29/11, W) 18,700 Expected Return (%) 23.0 Dominant in the rechargeable battery-use elecfoil market with high growth potential EPS Growth (11F, %) -55.2 Profitability to improve on higher contribution of rechargeable battery-use elecfoil Market EPS Growth (11F, %) -2.3 P/E (11F, x) 30.7 Market P/E (11F, x) 10.5 We initiate our coverage on Iljin Materials with a Buy call and a target price of KOSPI 1,856.52 W23,000. We derived our target price by applying a P/E of 21.1x to 2012F EPS. Market Cap (Wbn) 733 Our target P/E of 21.1x corresponds to a 15% discount to the average of Shares Outstanding (mn) 39 Furukawa ElectricÊs P/Es in 2006 and 2009 when the Japanese maker (and IljinÊs Avg Trading Volume (60D, '000) 807 main competitor in the rechargeable battery-use elecfoil industry) dominated the Avg Trading Value (60D, Wbn) 13 market with a market share of more than 40%. Iljin even deserves the valuation Dividend Yield (11F, %) 2.7 Free Float (%) 36.6 premium that Furukawa received in the past, given 1) the companyÊs rising market 52-Week Low (W) 10,800 share and 2) the rapid growth of the rechargeable battery-use elecfoil market 52-Week High (W) 37,700 arising from the expansion of mid-to large-sized applications. Beta (12M, Daily Rate of Return) 1.9 Price Return Volatility (12M Daily, %, SD) 5.6 Our investment recommendation is premised on the following: Foreign Ownership (%) 3.0 1) The company is expected to continue to consolidate its market dominance on Major Shareholder (s) the back of aggressive capacity expansion and a higher market share. The Huh, Jae-Myung et al. (63.36%) Korea Development Bank (6.63%) companyÊs customers include major rechargeable battery makers, including Samsung SDI, LG Chem, and Sanyo. The companyÊs market share increased from Price Performance 19% in 2008 to 34.5% in 2010, as its largest customer Samsung SDI expanded its (%) 1M 6M 12M rechargeable battery market share. Capacity expansion at the companyÊs Absolute -0.8 -35.4 competitors will be limited even though rechargeable battery makers are likely to Relative 3.0 -23.8 expand over the next one to two years, in our view. The company is expected to increase its shares within Sanyo and LG Chem to around 50% each through preemptive capacity expansion. The companyÊs competitors currently hold higher market shares within these two companies.
2) The rapid growth of the rechargeable battery-use elecfoil market, arising from the expansion of mid-to large-sized applications, is also likely to provide mid- to long-term momentum to the company. A large-sized battery for xEV requires 30~120kg of elecfoil, far larger than the 3~4g of elecfoil required for a small-sized rechargeable battery. Although large-sized applications may proliferate more slowly than small- to mid-sized applications, the use of elecfoil per large-sized application is much larger than that of a small- to mid-sized application. Therefore, the rechargeable battery-use elecfoil market is projected to expand at a CAGR of 30% from US$180mn in 2010 to US$2.4bn in 2020.
Share price § Earnings & Valuation Metrics 290 KOSPI FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 240 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 190 12/09 203 21 10.2 13 413 29 7 12.7 0.0 0.0 1.4
140 12/10 298 38 12.8 38 1,359 48 -20 30.1 0.0 0.0 2.0 12/11F 319 21 6.7 23 609 33 -180 9.4 31.2 2.3 25.1 90 12/12F 405 41 10.0 40 1,078 57 -43 11.6 17.6 2.2 15.9 40 12/13F 484 60 12.5 56 1,509 77 22 15.2 12.6 2.0 11.8 3/11 7/11 11/11
Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 77 December 1, 2011 Electronic Materials
3) Profitability is expected to improve markedly on higher sales contribution of rechargeable battery-use elecfoil. Assuming normal operations, the OP margin on PCB-use elecfoil stands at 6~7%, while that of rechargeable battery-use elecfoil is estimated at more than 20%. The sales contribution of rechargeable battery-use elecfoil should climb from 35% in 2011 to 46% in 2012 and to 50% in 2013, improving product mix.
Initiate coverage with a Buy call and a target price of W23,000
Iljin even deserves the We initiate our coverage on Iljin Materials with a Buy call and a target price of W23,000. We valuation premium that derived our target price by applying a P/E of 21.1x to 2012F EPS. Our target P/E of 21.1x Furukawa received corresponds to a 15% discount to the average of Furukawa ElectricÊs P/Es in 2006 and 2009 when the Japanese maker (and IljinÊs main competitor in the rechargeable battery-use elecfoil industry) dominated the market with a market share of more than 40%. The 15% discount is attributable to the weak performance of the PCB-use elccfoil division, which accounts for 60% of the companyÊs revenues. However, earnings at the division are expected to pick up full swing from 2Q12.
Shares of Furukawa began to re-rate from 2006 thanks to the expansion of the rechargeable battery market and the companyÊs dominance of the rechargeable battery-use elecfoil market. In particular, the P/E exceeded 25x both in 2006 and 2009 when the IT market boomed. However, the P/E has fallen to around 12x, due to 1) a decline in market share since 2010 and 2) the Japanese earthquake in March. Meanwhile, Iljin has emerged to become the leading rechargeable battery-use elecfoil maker with a market share of 40% in 2011. Iljin even deserves the valuation premium that Furukawa received, given 1) the companyÊs rising market share and 2) the rapid growth of the rechargeable battery-use elecfoil market arising from the expansion of mid-to large-sized applications.
Table 37. Calculation of target price Note EPS (W) 1,078 2012F estimate Comparable P/E (x) 24.8 Average of Furukawa's 12-month forward P/E during FY06~07 and FY09~10 Discount rate (%) 15.0 Taking into account the poor performance of the PCB-use elecfoil division Target P/E 21.1 Target price (W) 22,753 Current price (W) 17,100 As of Nov 25, 2011 Upside potential (%) 33.1 Source: KDB Daewoo Securities Research
Figure 147. 12-month forward P/E band of Furukawa Electric
(JPY) 1,400 Before re-rating M/S 50% M/S 42% 1,200
1,000
800 30.0x 600 25.0x 20.0x 400 15.0x
200 10.0x 5.0x 0 04 05 06 07 08 09 1011F 1112F 1213F 13
Source: Bloomberg, KDB Daewoo Securities Research
KDB Daewoo Securities Research 78 December 1, 2011 Electronic Materials
Investment point: 1) Dominant rechargeable battery-use elecfoil maker
Market share to expand Iljin is the worldÊs largest rechargeable battery-use elecfoil maker whose customers include thanks to preemptive major rechargeable battery makers, including Samsung SDI, LG Chem, and Sanyo. The capacity expansion amid companyÊs market share within the largest rechargeable battery maker (Samsung SDI) is tight supply estimated at 80% vs. 25% each within the second and third largest rechargeable battery makers (Sanyo and LG Chem, respectively). The companyÊs overall market share increased from 19% in 2008 to 26.6% in 2009 and 34.5% in 2010, as Samsung SDI expanded its rechargeable battery market share. In 2011, the market share is estimated to have reached almost 40%, due to 1) production disruptions at Furukawa following the Japanese earthquake and 2) limited supply growth amid solid demand.
The company is expected to continue to consolidate its market dominance on the back of aggressive capex. Capacity expansion at the companyÊs competitors will be limited even though rechargeable battery makers are expected to expand over the next one to two years. Sanyo, for which Furukawa accounts for a high market share, and LG Chem, which procures from LS Mtron, have requested Iljin to supply elecfoil due to a supply shortage. Iljin doubled its elecfoil capacity from 6,000 tonnes in 2010 to 12,000 tonnes in 2011. The company is expected to increase its shares within Sanyo and LG Chem to around 50% on the back of proactive capacity expansion amid tight supply.
Figure 148. Revenue breakdown of rech. battery-use elecfoil by cust. Figure 149. Rechargeable battery-use elecfoil M/S within customers
Others (%) 10% 100 A123 5% 80 Shares to climb on the back of capacity expansion
Samsung SDI 60 LG Chem 45% 20% 40
20
0 Sanyo Samsung SDI Sanyo LG Chem A123 SBL 20% Source: Company data, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research
Figure 150. M/S trend of major rechargeable battery makers Figure 151. Capacity trend of major rechargeable battery makers
(%) (mn cells/month) 60 30 Samsung SDI LG Chem Samsung SDI Sanyo Sony Sanyo 25 BYD 50 LG Chem Iljin's customers Sony
20 40
15 30
10 20
5 10
0 0 02 03 04 05 06 07 08 09 10 09 10 11 12F
Source: IIT Source: IIT, KDB Daewoo Securities Research
KDB Daewoo Securities Research 79 December 1, 2011 Electronic Materials
Investment point: 2) Benefits from the growing rechargeable battery market
Rechargeable battery- The rapid growth of the rechargeable battery-use elecfoil market, arising from the expansion use elecfoil market to of mid-to large-sized applications, is also likely to boost the company in the mid- to long-term. expand at a CAGR of A large-sized battery for xEV requires 30~120kg of elecfoil, far larger than the 3~4g of 30% from US$180mn in elecfoil required for a small-sized rechargeable battery. Although large-sized applications may 2010 to US$2.4bn in proliferate more slowly than small- to mid-sized applications, the use of elecfoil per large- 2020 sized application is much larger than that of a small- to mid-sized application. Therefore, the rechargeable battery-use elecfoil market is projected to expand at a CAGR of 30% from US$180mn in 2010 to US$2.4bn in 2020. Demand for rechargeable battery-use elecfoil is anticipated to increase tenfold from 12,000 tonnes in 2010 to 170,000 tonnes in 2020.
Iljin will likely bolster its competiveness in the mid- to large-sized rechargeable battery market. The companyÊs customers include SB Limotive (SBL) and LG Chem, which are leading the xEV-use rechargeable battery market. The companyÊs market share is expected to exceed 40% by 2015 thanks to the solid customer base and proactive capacity expansion.
Figure 152. Rechargeable battery-use elecfoil market trend and forecasts
(Wbn) 3.0 ESS-use xEV-use 2.5 IT-use
2.0 2010~20F CAGR: 30.0% - IT-use: 11.8% 1.5 - xEV-use: 59.8% - ESS-use: 73.9%
1.0
0.5
0.0 06 08 10 12F 14F 16F 18F 20F
Source: IIT, LGERI, Fuji Economy, Company data, KDB Daewoo Securities Research
Figure 153. Rechargeable battery-use elecfoil demand and ASP Figure 154. Rechargeable battery-use elecfoil shipment and M/S
('000 tonnes) (US$/kg) (tonne) (%) 18,000 50 180 Demand for elecfoil (L) 25 Iljin's shipments (L) ASP (R) Iljin's M/S (R) 150 15,000 20 40
120 12,000 15 30
90 9,000 10 20 60 6,000
5 10 30 3,000
0 0 0 0 06 08 10 12F 14F 16F 18F 20F 07 08 09 10 11F 12F 13F 14F 15F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 80 December 1, 2011 Electronic Materials
Investment point: 3) Profitability to improve on the PCB-use elecfoil business
Sales contribution of Earnings at Iljin have deteriorated sharply since 2Q despite solid rechargeable battery-use rechargeable battery-use elecfoil sales, as demand for PCB-use elecfoil has weakened due to the sluggish IT market. elecfoil should climb However, profitability is expected to improve markedly on 1) higher sales contribution of from 35% in 2011 to rechargeable battery-use elecfoil and 2) the growth of the value-added PCB market. 46% in 2012 and to The overall PCB (including FPCB) market is expected to grow at a CAGR of 6.3% through 50% in 2013, improving 2015, while the contribution of semiconductor-use value-added products (including CSP and profitability FC-CSP) out of total PCB sales should expand. Iljin is gradually increasing the production of semiconductor-use value-added products. In addition, the sales contribution of FPCB-use elecfoil will likely expand amid the proliferation of mobile devices. The FPCB-use elecfoil business is expected to boost profitability despite its relatively low sales contribution, as its ASP is twice as high as that of PCB-use elecfoil.
Higher sales contribution of rechargeable battery-use elecfoil is also likely to improve profitability markedly. Assuming normal operations, the OP margin on PCB-use elecfoil stands at 6~7%, while that of rechargeable battery-use elecfoil is estimated at more than 20%. The sales contribution of rechargeable battery-use elecfoil should climb from 35% in 2011 to 46% in 2012 and to 50% in 2013, improving product mix. In 3Q, the company already converted part of its PCB-use elecfoil line (2,000 tonnes/month) into a rechargeable battery-use elecfoil line.
Figure 155. PCB/FPCB-use elecfoil market trend and forecasts
(US$bn) 3.5 FPCB-use elecfoil PCB-use elecfoil 3.0 2010~15F CAGR: 6.3% - PCB-use: 5.9% 2.5 - FPCB-use: 8.5%
2.0
1.5
1.0
0.5
0.0 02 04 06 08 10 12F 14F
Source: KPCA, Prismark, KDB Daewoo Securities Research
Figure 156. PCB/FPCB-use elecfoil shipment trend and forecasts Figure 157. Earnings trend and forecasts
('000 tonnes) (tonne) (Wbn) (%) 24 700 600 16 PCB-use elecfoil (L) FPCB-use elecfoil (L) FPCB-use elecfoil (R) Rechargeable battery-use elecfoil (L) 20 600 500 PCB-use elecfoil (L) 12 500 OP margin (R) 16 400 400 12 300 8 300 8 200 200 4
4 100 100
0 0 0 0 07 08 09 10 11F 12F 13F 14F 07 08 09 10 11F 12F 13F 14F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 81 December 1, 2011 Electronic Materials
Earnings outlook: Profitability to improve rapidly in 2012
2011F~2014F Growth We expect IljinÊs profitability to improve steadily after 2011 on the back of a greater revenue outlook: Revenues contribution from rechargeable battery-use elecfoils (from the current 35% to 52% in 2014). of18.6%; operating In 2011~2014, the companyÊs operating profit should expand at a CAGR of 50.3% (vs. profit of 50.3% revenue growth of 18.6%). In 2012, the companyÊs revenues and operating profit should reach W405.3bn (up 27.1%) and W40.7bn (up 91.7%), respectively, on elecfoil capacity expansion (OP margin of 10%).
Despite a slight increase in the sale of rechargeable battery-use elecfoils, we project IljinÊs 4Q revenues and operating profit to remain flat QoQ due to weak seasonality and inventory clearing at electronics makers.
Table 38. Earnings trend and forecasts (Non-consolidated K-IFRS) (Wbn, %) 1Q11 2Q11 3Q11 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 10 11F 12F 13F Revenues 80.3 74.9 81.8 82.1 82.3 96.6 115.9 110.6 298.4 318.9 405.3 483.8 PCB-use elecfoil 58.9 41.0 47.9 45.5 42.4 48.3 57.3 53.9 230.8 193.3 201.9 224.9 LIB-use elecfoil 19.7 30.9 29.1 32.0 35.9 43.9 53.7 52.1 57.5 111.6 185.6 241.2 FPCB-use elecfoil 1.8 2.9 4.1 3.9 3.7 4.0 4.4 4.1 10.0 12.7 16.2 15.8 Others 0.0 0.0 0.7 0.7 0.3 0.4 0.5 0.5 1.3 1.7 1.8 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 PCB-use elecfoil 73.3 54.8 58.6 55.5 51.5 50.0 49.4 48.8 77.3 60.6 49.8 46.5 LIB-use elecfoil 24.5 41.3 35.5 39.0 43.6 45.5 46.3 47.1 19.3 35.0 45.8 49.9 FPCB-use elecfoil 2.2 3.9 5.0 4.8 4.5 4.1 3.8 3.7 3.3 4.0 4.0 3.3 Others 0.0 0.0 0.8 0.8 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Operating profit 9.5 3.0 4.4 4.3 4.6 8.0 14.8 13.2 38.1 21.2 40.7 60.3 Pretax profit 9.0 3.7 8.3 5.6 6.6 10.4 16.7 15.3 40.4 26.6 49.0 68.6 Net profit 6.8 4.0 6.4 5.5 5.4 8.5 13.7 12.6 37.0 22.7 40.2 56.3 OP margin 11.9 4.0 5.4 5.2 5.6 8.3 12.8 12.0 12.8 6.7 10.0 12.5 Net margin 8.4 5.4 7.8 6.7 6.6 8.8 11.8 11.4 12.4 7.1 9.9 11.6 Growth (QoQ/YoY) Revenues 5.1 -6.7 9.2 0.4 0.2 17.4 20.1 -4.6 46.8 6.9 27.1 19.4 PCB-use elecfoil -0.4 -30.3 16.7 -5.0 -6.9 13.9 18.8 -6.0 39.4 -16.2 4.4 11.4 LIB-use elecfoil 33.7 57.2 -6.0 10.0 12.2 22.4 22.4 -3.1 81.2 94.2 66.3 30.0 FPCB-use elecfoil -31.4 65.1 42.5 -5.0 -6.0 8.9 8.9 -6.0 66.7 27.2 27.5 -2.0 Others 0.0 -50.0 25.0 25.0 -7.0 31.6 5.3 Operating profit 137.7 -68.7 48.7 -3.3 7.6 73.8 85.3 -10.8 83.8 -44.2 91.7 48.2 Pretax profit 100.2 -59.4 128.2 -32.5 16.9 58.3 60.8 -8.5 120.7 -34.2 84.4 40.0 Net profit -17.4 -40.7 59.0 -13.5 -2.4 58.3 60.8 -8.5 141.1 -38.6 77.1 40.0 Source: Company data, KDB Daewoo Securities Research
Figure 158. Revenues trend and forecasts by division Figure 159. Earnings trend and forecasts
(Wbn) (%) (Wbn) (%) 600 FPCB-use elecfoil (L) 60 600 Revenues (L) 16 Rechargeable battery-use elecfoil (L) OP margin (R) 500 PCB-use elecfoil (L) 50 500 Portion of rechargeable battery-use (R) 12 400 40 400
300 30 300 8
200 20 200 4 100 10 100
0 0 0 0 07 08 09 10 11F 12F 13F 14F 07 08 09 10 11F 12F 13F 14F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 82 December 1, 2011 Electronic Materials
Company overview: KoreaÊs no.1 elecfoil producer
Iljin is the maker of a Iljin Materials is the first Korean company to domestically produce elecfoils. Elecfoil is a high- core rechargeable purity copper foil manufactured through the electrolysis of copper scrap. Elecfoils are used battery material to produce CCLs (copper clad laminates) and FCCLs (flexible CCLs), which are raw materials for PCBs and FPCBs. They are also used as the anode current collector for the negative electrode of lithium rechargeable batteries. Elecfoils are estimated to account for 75% of CCL production costs, and 3% of rechargeable battery production costs. Until 2009, PCB- use elecfoils contributed to over 80% of the companyÊs revenues, but the portion of rechargeable battery-use elecfoils should rise to 35% in 2011 on capacity expansion.
In Korea, only Iljin Materials and LS Mtron are producing elecfoils; globally, Japanese companies such as Furukawa, Mitsui and Nippon Denkai also make elecfoils. Iljin held the largest market share of 35% in rechargeable battery-use elecfoils as of 2010, but competition is more intense in the PCB-use elecfoil market, where multiple elecfoil makers compete against each other. As of 2010, JapanÊs Furukawa commanded the largest market share of 54% in FPCB-use elecfoils, with Iljin holding a 22% share.
Figure 160. Elecfoil Figure 161. Revenues breakdown by product (2011F)
FPCB-use 4%
Rechargeable battery-use 35%
PCB-use 61%
Source: Company data Source: Company data, KDB Daewoo Securities Research
Figure 162. PCB manufacturing process Figure 163. Cost breakdown of rechargeable batteries by material
Others CCL(copper clad laminate) Elecfoil 16%
Elecfoil Cothod material 3% 36%
Electrolyte 15%
Anode material Separator 10% 20%
Source: Industry data Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 83 December 1, 2011 Electronic Materials
Figure 164. Global M/S of rechargeable battery-use elecfoil (2010) Figure 165. Global M/S of PCB-use elecfoil (2010)
Others 8% Mitsui 13% Nippon Denkai Furukawa 10% Iljin Materials 6% 35%
Iljin Materials 8% LS Mtron 18% Nanya 5% Others 65% LS Mtron 3% Furukawa 29%
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 166. Global M/S of FPCB-use elecfoil (2010) Figure 167. Domestic M/S of PCB-use elecfoil (2010) LS Mtron 2%
Nippon Denkai Iljin Materials 22% 60%
LS Mtron 40%
Furukawa 54%
Iljin Materials 22%
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
Figure 168. Rechargeable battery-use elecfoil capacity trend Figure 169. PCB/FPCB-use elecfoil capacity trend and forecasts
(tonne) (tonne) (tonne) 15,000 30,000 PCB-use (L) 700 FPCB-use (R) 25,000 600 12,000 500 20,000 9,000 400 15,000 300 6,000 10,000 200 3,000 5,000 100
0 0 0 07 08 09 10 11F 12F 13F 14F 07 08 09 10 11F 12F 13F 14F
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 84 December 1, 2011 Electronic Materials
Risk factors
1) Delay to IT demand The biggest risk facing Iljin Materials is slowing IT demand. The companyÊs OP margin fell by recovery a whopping 7.9%p, from 11.9%, due to a plunge in PCB-use elecfoil demand. The companyÊs capacity utilization ratio of PCB-use elecfoils is estimated to have remained below 70% until 3Q, at which level the business can barely turn a profit given the normal OP margin level of 6~7%. If IT demand remains sluggish after 2Q12 (when demand typically picks up) then profitability improvement should be limited despite the greater production of rechargeable battery-use elecfoils.
2) Aggressive capacity Aggressive capacity expansions at rechargeable battery-use elecfoil makers also pose a risk expansions by rival for Iljin Materials. The company has gained market share since the earthquake hit Japan, as companies customers diversified suppliers. In addition, rechargeable battery-use elecfoil prices have continued to rise since 1Q on tight supply. However, if competitors normalize production and aggressively expand production capacity, downward pricing pressures should mount and the companyÊs fixed cost burden will likely increase due to large-scale capacity expansion and a decrease in sales volume.
KDB Daewoo Securities Research 85 December 1, 2011 Electronic Materials
Iljin Materials (020150 KS/Buy/TP: W23,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 298 319 405 484 Current Assets 89 134 198 223 Cost of Sales 246 285 348 403 Cash and Cash Equivalents 7 10 31 32 Gross Profit 52 34 57 81 AR & Other Receivables 32 35 48 55 SG&A Expenses 14 18 21 25 Inventories 49 89 120 137 Operating Profit (Adj) 38 17 36 56 Other Current Assets 0 0 0 0 Operating Profit 38 21 41 60 Non-Current Assets 247 299 348 366 Non-Operating Profit 4 9 8 8 Investments in Associates 27 0 0 0 Net Financial Income 1 0 0 -1 Property, Plant and Equipment 176 238 268 267 Net Gain from Inv in Associates 1 0 0 0 Intangible Assets 6 9 9 10 Pretax Profit 42 27 49 69 Total Assets 336 434 547 589 Income Tax 3 4 9 12 Current Liabilities 127 61 82 83 Profit from Continuing Operations 38 23 40 56 AP & Other Payables 59 3 4 4 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 56 58 78 78 Net Profit 38 23 40 56 Other Current Liabilities 11 0 0 0 Controlling Interests 38 23 40 56 Non-Current Liabilities 62 35 111 121 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 44 19 93 101 Total Comprehensive Profit 38 18 35 51 Other Non-Current Liabilities 12 8 8 8 Controlling Interests 38 18 35 51 Total Liabilities 188 96 193 204 Non-Controlling Interests 0 0 0 0 Controlling Interests 147 338 354 385 EBITDA 48 33 57 77 Capital Stock 14 20 20 20 FCF (Free Cash Flow) -20 -180 -43 22 Capital Surplus 26 188 188 188 EBITDA Margin (%) 16.2 10.2 13.9 15.9 Retained Earnings 102 129 150 187 Operating Profit Margin (%) 12.8 6.7 10.0 12.5 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 12.9 7.1 9.9 11.6 Stockholders' Equity 147 338 354 385
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flows from Op Activities 41 -51 8 43 P/E (x) 0.0 31.2 17.6 12.6 Net Profit 38 23 40 56 P/CF (x) 0.0 18.4 11.7 9.1 Non-Cash Income and Expense 8 13 16 21 P/B (x) 0.0 2.3 2.2 2.0 Depreciation 10 16 20 21 EV/EBITDA (x) 2.0 25.1 15.9 11.8 Amortization 0 0 0 0 EPS (W) 1,359 609 1,078 1,509 Others 1 7 13 13 CFPS (W) 1,722 1,033 1,627 2,081 Chg in Working Capital -5 -80 -40 -22 BPS (W) 5,165 8,399 8,786 9,583 Chg in AR & Other Receivables -7 -6 -12 -7 DPS (W) 0 500 500 500 Chg in Inventories -12 -40 -31 -17 Payout ratio (%) 0.0 86.3 48.7 34.8 Chg in AP & Other Payables 8 -7 1 1 Dividend Yield (%) 2.6 2.6 2.6 Income Tax Paid 0 -7 -9 -12 Revenue Growth (%) 46.8 6.9 27.1 19.4 Cash Flows from Inv Activities -88 -100 -60 -28 EBITDA Growth (%) 66.8 -32.5 73.2 36.1 Chg in PP&E -91 -100 -50 -20 Operating Profit Growth (%) 83.8 -44.2 91.6 48.2 Chg in Intangible Assets -5 -1 -1 -1 EPS Growth (%) 229.0 -55.2 77.1 40.0 Chg in Financial Assets 0 11 0 0 Accounts Receivable Turnover (x) 13.1 10.7 9.8 9.5 Others 8 -9 -9 -8 Inventory Turnover (x) 7.0 4.6 3.9 3.8 Cash Flows from Fin Activities 47 156 73 -14 Accounts Payable Turnover (x) 61.2 83.6 123.9 120.2 Chg in Financial Liabilities 55 -39 20 0 ROA (%) 14.6 5.9 8.2 9.9 Chg in Equity -5 183 0 0 ROE (%) 30.1 9.4 11.6 15.2 Dividends Paid -3 0 -20 -20 ROIC (%) 23.5 5.0 7.3 10.1 Others 0 -2 -1 -2 Liability to Equity Ratio (%) 127.7 28.4 54.6 52.9 Increase (Decrease) in Cash 0 2 21 1 Current Ratio (%) 69.9 220.1 241.8 270.4 Beginning Balance 8 8 10 31 Net Debt to Equity Ratio (%) 62.3 19.9 39.8 38.4 Ending Balance 8 10 31 32 Interest Coverage Ratio (x) 17.8 29.5 30.8 25.5 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 86 December 1, 2011 Electronic Materials
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 CheilInd 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. issued equity-linked warrants with CheilInd 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) CheilInd (W) OCI Materials (W) DSHM (W) Soulbrain
200,000 200,000 50,000 60,000 50,000 150,000 150,000 40,000 40,000 30,000 100,000 100,000 30,000 20,000 20,000 50,000 50,000 10,000 10,000 0 0 0 0 12/09 5/10 11/10 5/11 11/11 12/09 5/10 11/10 5/11 11/11 12/09 5/10 11/10 5/11 11/11 12/09 5/10 11/10 5/11 11/11
(W) ILJIN MATERIALS 40,000
30,000
20,000
10,000
0 12/09 5/10 11/10 5/11 11/11
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.
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
KDB Daewoo Securities Research 87 December 1, 2011 Electronic Materials
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.
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the „Order‰), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as „Relevant Persons‰). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
KDB Daewoo Securities International Network
Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 600 Lexington Avenue 31-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 Suite 301 Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1022
Daewoo Securities (Europe) Ltd. Tokyo Representative Office Beijing Representative Office Tower 42, Level 41 7th Floor, Yusen Building Suite 2602, Twin Towers (East) 25 Old Broad Street 2-3-2 Marunouchi, Chiyoda-ku B-12 Jianguomenwai Avenue London EC2N 1HQ Tokyo 100-0005 Chaoyang District, Beijing 100022 United Kingdom Japan China Tel: 44-20-7982-8016 Tel: 81-3- 3211-5511 Tel: 86-10-6567-9699
Shanghai Representative Office Ho Chi Minh Representative Office Unit 13, 28th Floor, Hang Seng Bank Tower Centec Tower 1000 Lujiazui Ring Road 72-74 Nguyen Thi Minh Khai Street Pudong New Area, Shanghai 200120 Ward 6, District 3, Ho Chi Minh City China Vietnam Tel: 86-21-5013-6392 Tel: 84-8-3910-6000
KDB Daewoo Securities Research 88