27 March 2017 Regional Powers Strive for Industry Dominance Korea’s strength in memory and OLED

Keon Han, Head of Korea Research & Technology Research Analyst, +82-2-3707-3740, [email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURES, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Global DRAM M/S: Korea dominates Global DRAM market share trend KR chipmakers gaining global m/s (%)

Relative to 15 years ago, 100% 80% 90% only three meaningful 80% 70% DRAM companies have 70% 60% 60% 50% survived to enjoy the higher 50% 40% profits post consolidation. 30% 40% 20% Samsung remains the 10% 30% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F dominant DRAM producer, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F Korea chipmakers m/s (SEC + Hynix, %) but the suppliers are more Samsung SK Hynix Micron Group Micron MMJ(Elpida) ProMOS Winbond Powerchip Nanya Others balanced in terms of impacting price. Global DRAM market share as of 4Q16

Korea’s domination of the Others DRAM industry has grown 6% from 45% in 2005 to 75% Micron Group in 2016. 19% Samsung DRAM profitability is the 48% highest in over a decade.

SK Hynix 27%

Source: DRAMeXchange based on sales

2 Global M/S in Specialty DRAM dominated by Top 3 Global mobile DRAM market share trend Global mobile DRAM market share as of 4Q16

Samsung’s higher DRAM 100% Others 12% 2% 25% 24% profitability stems from the 80% 30% Micron group ability to dominate the 24% 13% 60% 23% 29% 24% specialty segments such as 40% the Mobile and Server 61% 20% 47% 44% 50% SK Hynix DRAMs 24% 0% 2013 2014 2015 2016 DRAM domination has SEC become more concentrated SEC SK Hynix Micron group Others 61% for Mobile DRAMs (85%) Global server DRAM market share trend as of 4Q16 (revenue base) and Server DRAMS (81%) Others 3% Micron (+Elpida) 16%

SEC SK Hynix 51% 30%

Source: IDC, IHS Suppli

3 Mobile surpasses PC: Growth rate remains high Global DRAM production by application and mobile growth YoY Content growth in mobile DRAM has led to rising 100% 90% portion of mobile DRAM 90% 80% production to total 80% Mobile DRAM demand 70% 70% growth rate is significant 60% and drives the overall 60% DRAM industry demand 50% 50% 2016 acceleration of the 40% mobile DRAM growth rate 40% 30% helped to bring the DRAM 30% industry back into balance 20% in mid-2016 20% 10% 10% 0% 0% 2013 2014 2015 2016 2017E

PC Server Mobile Graphics Others Mobile YoY (RHS)

Source: DRAMeXchange

4 Servers also surpassing PC DRAM demand Global DRAM production by application PC DRAM will only take 17% of total DRAM 2Gb equiv. Mn 2013 2014 2015 2016 2017E production while PC 6,408 7,491 7,358 7,212 7,580 mobile/server DRAM portion continues to rise (mobile: Server 3,409 4,372 6,487 9,026 11,465 44% / server: 25% in Mobile 5,816 8,330 11,126 15,465 20,256 2017E) Graphics 1,230 1,785 1,967 2,239 2,632 This is a major change as PCs and secondary market Others 1,721 2,086 2,430 2,965 3,645 DRAM module sales Total 18,585 24,064 29,367 36,908 45,577 accounted for over 80% of % of total 2013 2014 2015 2016 2017E industry demand in the past High volumes in the PC 34% 31% 25% 20% 17% smartphone industry and the Server 18% 18% 22% 24% 25% capability of each Mobile 31% 35% 38% 42% 44% smartphone unit consuming as much DRAM as an Graphics 7% 7% 7% 6% 6% average PC keeps the Others 9% 9% 8% 8% 8% market growing and attractive Total 100% 100% 100% 100% 100% Source: DRAMeXchange

5 DRAM pricing power fully swings to producers

DRAM spot vs contract price trend (2016) Hynix—record quarterly OP trend (DRAM + NAND)

US$ Wbn 2.00 90% 3,000

1.80 80% 2,500 1.60 70% 1.40 60% 2,000 1.20 50% 1,500

1.00 40% 1,000 0.80 30% 0.60 20% 500 0 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17E 3Q17E -500

Spot/Contract (%, RHS) DRAM spot px(2Gb) DRAM contract px(2Gb) DRAM NAND

Source: DRAMeXchange, Credit Suisse estimates

6 DRAM industry revenue in record territory DRAM industry revenues (US$mn)

70,000 80.0%

60,000 60.0%

50,000 40.0% 40,000 20.0% 30,000 0.0% 20,000

10,000 -20.0%

- -40.0% 2010 2011 2012 2013 2014 2015 2016 2017F

DRAM Revenue ($millions) YoY % (DRAM Revenue, RHS)

Source: Gartner, DRAMeXchange, Credit Suisse estimates

7 Korea chipmakers: Historical DRAM OPM (%) Korea chipmakers - historical DRAM OPM(%) Profitability through the recent cycle 80% Higher-highs, higher-lows 60% in terms of profit margins

40%

20%

0%

-20%

-40%

-60% 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17E 1Q18E

Samsung - DRAM OPM(%) SK Hynix - DRAM OPM(%)

Source: Gartner, DRAMeXchange, Credit Suisse estimates

8 DRAM cycle: In the midst of a strong upcycle 2017 is headed for the strongest DRAM investment cycle recovery since 2010. Biggest surprise in 2016 was the Revenue Growth (YoY) Capex Growth (YoY) DRAM Capex/ Revenue pace of Chinese smartphone DRAM density increase (66% YoY 200% vs. 35% expected). 171% This unexpected surge in Mobile DRAM demand, led the capacity 150% shifts away from the PC/Sever DRAM, driving the sharp DRAM 100% 77%74% 75% industry turnaround. 63% 54% 55% 61% Along with more 8GB loads in 48% 50% 40% 36% 33%35% PCs, DRAM density competition 31% 29% 32% among smartphone makers, and 2% 4% 9% wait-and-see attitude on increasing 0% capacity are the key areas to -5% -7% -7% -11% -4% monitor in 2017. -21% -23% -10% -50% -25% -29% -25% With record low FG inventory, any -38% softness in prices will be met with -61% strong demand on both customer -100%

and producer’s FG inventory

2003 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

replenishment. 1986 2017E

Source: WSTS, DRAMeXchange, Gartner, Credit Suisse estimates

9 Tight supply conditions despite slowing demand WW DRAM Wafer Starts Have Been Stable As… ….No Surges in Global DRAM Capex Cycle…

Globally, DRAM wafer Kpcs USD mn 27% 16,000 30% 25,000 processed has been on a 25% 15,000 declining trend and 20% 20,000 14,000 15% 10% stabilised to a new normal 13,000 15,000 1% 1% 5% -1% 4% -4% -4% Despite the rising capex 12,000 0% 10,000 -9% -5% dollars, the YoY DRAM 11,000 -10% 5,000 10,000 -15% supply bit growth has been 2010 2011 2012 2013 2014 2015 2016 2017E - on a decline – diminishing WW DRAM wafer starts 12" equiv. (lhs) YoY (%, RHS) 1995 1998 2001 2004 2007 2010 2013 2016 marginal returns on capex dollars invested YoY DRAM Demand Growth Rate Continues to Slow OPM(%) by DRAM makers

60% There is little incentive to 100% 50% 90% engage in capex war as 40% 80% 30% demand end-market has 70% 20% 60% diversified and M/S is no 10% 50% 0% longer a key competitive 40% -10% 30% weapon -20% 20% -30% 10% 0% 2001 2003 2005 2007 2009 2011 2013 2015 2017E Samsung SK Hynix Micron

Source: Gartner, DRAMeXchange, Credit Suisse estimates

10 DRAM capex muted, investment focus in NAND Global Foundry, DRAM and Flash CAPEX (forecasts from 2016)

DRAM 2010 2011 2012 2013 2014 2015 2016E 2017E Flash 2010 2011 2012 2013 2014 2015 2016E 2017E Samsung $5,220 $2,484 $1,694 $2,779 $4,501 $5,975 $2,316 $3,752 Samsung $3,533 $3,516 $3,952 $4,456 $4,120 $4,366 $7,947 $9,142 Hynix $2,358 $1,757 $1,705 $1,937 $3,195 $3,972 $3,624 $2,900 Hynix $688 $1,317 $1,705 $1,291 $1,369 $2,046 $1,553 $2,900 Toshiba+SNDK $2,753 $3,049 $2,094 $2,170 $3,153 $3,236 $4,073 $4,913 Elpida (Includes PSC and Rexchip) $2,070 $1,812 $920 $973 $0 $0 $0 $0 Micron $214 $2,416 $665 $1,112 $1,760 $1,106 $2,556 $1,750 Micron $856 $604 $998 $692 $1,846 $3,789 $2,204 $2,250 Intel $1,500 $1,500 Others $2,889 $985 $314 $264 $474 $379 $1,029 $1,233 Others $1,426 $1,148 $69 $103 $168 $343 $355 $918 Total $13,393 $7,642 $5,630 $6,644 $10,015 $14,114 $9,172 $10,134 Total $8,614 $11,446 $8,484 $9,131 $10,570 $11,096 $17,985 $21,123 Y/y Change 201% -43% -26% 18% 51% 41% -35% 10% Y/y Change 88% 33% -26% 8% 16% 5% 62% 17%

Logic 2010 2011 2012 2013 2014 2015 2016E 2017E Foundry 2010 2011 2012 2013 2014 2015 2016E 2017E Intel $5,200 $9,418 $11,027 $10,711 $10,105 $7,326 $8,000 $8,000 TSMC $5,788 $7,286 $8,322 $9,688 $9,522 $8,123 $9,600 $9,800 TI $1,079 $734 $446 $371 $347 $496 $464 $479 Samsung $2,648 $5,700 $6,645 $4,382 $4,880 $2,695 $3,316 $3,001 Infineon $121 $1,287 $913 $467 $719 $780 $874 $906 GF/Chartered $2,700 $4,700 $3,800 $3,700 $3,800 $2,300 $1,900 $2,300 STM $776 $1,258 $486 $531 $496 $467 $615 $615 UMC $1,800 $1,600 $1,750 $1,103 $1,367 $1,892 $2,700 $3,000 Sony $474 $1,563 $1,280 $686 $661 $1,681 $1,271 $1,600 Fujitsu $482 $550 $450 $300 $300 $300 $300 $300 SMIC $619 $765 $499 $770 $1,014 $1,573 $2,650 $2,200 Others $1,652 $1,839 $1,265 $1,211 $1,416 $1,476 $1,649 $1,989 Other $888 $559 $498 $527 $924 $768 $868 $868 Total $9,783 $16,648 $15,866 $14,277 $14,044 $12,526 $13,173 $13,889 Total $14,441 $20,610 $21,514 $20,170 $21,508 $17,351 $21,034 $21,169 Y/y Change 38% 70% -5% -10% -2% -11% 5% 5% Y/y Change 205% 43% 4% -6% 7% -19% 21% 1%

Source: Credit Suisse estimates

11 China LT threat: Roadmap on DRAM/NAND China roadmap on DRAM/NAND

China’s memory Designed Total Total investment semiconductor investment Status Company Location Tech-node capacity Products investment MP Remark (Rmb,bn) announcement (kwpm) (US$,bn) Mostly lagging technology, Existing SK Hynix Wuxi 20nm 130 DRAM 0.8 5.5 2005 which would result in Existing Samsung Xian 30nm 100 3D NAND 1.1 7.5 2014 significant cost gap Existing YMTC (XMC) Wuhan 45nm 20 NOR 0.1 0.4 2007 Announced capacity would Existing Intel Dalian 30nm 30 3D NAND 0.8 5.5 2016 With Dalian gov only ramp up in phases Building YMTC (XMC) Wuhan 30nm 200 3D NAND 3.5 24 2018 With Wuhan gov, Tsinghua Unigroup, SMIC; Fab 1 and 2 each 100kwpm after yield success Building Tsinghua Unigroup Nanjing TBC 100 DRAM 4.4 30 2018 With Nanjing gov Building Jinhua Fujian 32nm 60 DRAM 0.8 5.3 2018 With Fujian gov and UMC; May have phase 2 to expand to 120k Building Changxin Hefei TBC 125 DRAM 1.0 7.2 2018 With Hefei gov and GigaDevice Building Tsinghua Unigroup Shezhen TBC TBC DRAM TBC TBC TBC Existing 280 2.7 18.9 Building 485 9.7 66.5

Source: Credit Suisse estimates, company data

12 DRAM/NAND: Technology roadmap

Source: Gartner, DRAMeXchange, Credit Suisse estimates

13 NAND M/S: Industry more fragmented vs. DRAM Global NAND market share trend KR chipmakers NAND m/s recovering(%)

NAND industry has more 100% 6% 8% 8% 6% 7% 8% 7% 55% supplier but the industry 9% 12% 12% 11% 10% 11% 10% 80% 11% 10% 11% 50% growing at a much faster 12% 14% 13% 14% 17% 45% rate. 60% 19% 19% 15% 34% 31% 28% 40% 20% Korea continues to 40% 22% 22% 20% 35% dominate. Samsung and 30% 20% 39% 38% 38% 36% 2010 2011 2012 2013 2014 2015 2016 Hynix combine for nearly 31% 30% 32% 0% 50% global M/S. 2010 2011 2012 2013 2014 2015 2016 Korea chipmakers m/s (SEC + Hynix, %) Samsung Toshiba WDC(SanDisk) Micron SK Hynix Intel Global NAND market share as of 4Q16

Intel 7% SK Hynix 10% Micron Samsung 10% 37%

WDC(SanDisk) 18% Toshiba 18%

Source: DRAMeXchange based on sales

14 NAND industry revenues NAND industry revenues (US$mn)

60 70.0% 60.0% 50 50.0% 40.0% 40 30.0% 30 20.0% 10.0% 20 0.0% -10.0% 10 -20.0% 0 -30.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Global NAND Flash Market Sales (US$bn) YoY % (RHS)

Source: Gartner, DRAMeXchange, Credit Suisse estimates

15 Samsung benefits from early 3D NAND transition Samsung's OPM accelerates on 3D NAND Productivity comparison (2D vs. 3D / 32L vs. 48L vs. 64L)

SEC’s NAND profitability will 40% 200 200 180 180 improve further on rising 30% 160 160 20% 140 48L/64L 3D NAND penetration 140 10% 120 with a better cost structure 120 100 0% 100 80 Our estimates suggest 24L 3D -10% 80 60 40 -20% NAND has c80% better 60 20 40 0 productivity over 1xnm planar 20 Samsung 32 Samsung 48 Samsung 64 Samsung - OPM(%) Toshiba - OPM(%) layer (TLC) layer (TLC) layer (TLC) NAND while 48L has c50% Micron - OPM(%) SK Hynix - OPM(%) 0 1xnm planar NAND (TLC) 24L 3D NAND (TLC) more over 32L 3D NAND Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates With more 48L 3D NAND production, upcoming new Samsung's NAND technology roadmap Samsung dominates 3D NAND, but penetration only beginning technology (64L/96L) would support further margin expansion Unit: '000 wafers per month,12" equiv. 300 80% for Samsung 70% 250 Despite SEC’s dominance in 60% 200 global 3D NAND, the penetration 50% into total NAND market is just 150 40% 30% taking off 100 20% That said, Samsung will enjoy 50 10% better NAND profitability on 0 0% technology leadership and 2013 2014 2015 2016 2017E economies of scale for the next Samsung 3D NAND capacity % of SEC's 3D NAND to global total(RHS) couple of years Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

16 3D NAND proliferation driving earnings growth Samsung NAND OPM rising on 3D penetration NAND profit contribution set to rise into 2018E Samsung is currently the only Unit: '000 wafers per month,12" equiv. mass scale 3D NAND producer 60% in the world on technology 55% 70% 50% leadership and capacity. 60% 50% NAND becomes one of the 45% 50% strongest growth drivers with 40% 40% rising contribution (20% as a % 35% 40% of total OP by 2020 vs. 11% in 30% 30% 30% 2015) based on rising 3D NAND 25% 20% penetration 20% 20% 48L 3D NAND taking off amid better 32L yield Key catalysts are (1) AAPL’s 10% 10% iPhone 7/7 Plus doubling its 15% storage memory with 256GB 10% 0% Yield penalties at the beginning of 3D NAND 2013 2014 2015 2016 2017E 2018E 0% equipped with SEC’s 3D NAND; 2011 2012 2013 2014 2015 2016 2017E 2018E (2) Solid SSD market expansion Samsung - NAND OPM(%) 3D NAND wafer capacity as % to total (RHS) Samsung Rising 48L/64L 3D NAND production should lead to better Source: Credit Suisse estimates, company data Source: Credit Suisse estimates, company data profitability on productivity enhancement 64L 3D NAND ramp up has begun and should scale in 2H17

17 Mobile and SSD demand for 3D NAND AAPL’s all iPhone NAND demand requirement Sensitivity to NAND shortage (4Q16E/2017E)

Not only from AAPL, 7,000 300% 4Q16 Base Case Bull Base 2017 Base Case Bull Base 6,000 250% ASP assumption (QoQ) -3% 0% ASP assumption (YoY) -24% -15% NAND demand from data 5,000 200% Bit growth (QoQ) 13% 15% Bit growth (YoY) 53% 53% center/enterprise SSD 4,000 150% 3,000 100% NAND OP (Wbn) 1,462 1,632 NAND OP (Wbn) 6,001 8,168 should remain solid 2,000 50% Bit growth growth Bit (YoY %) Total OP (Wbn) 7,539 7,709 Total OP (Wbn) 33,513 35,680 1,000 0% NAND OPM (%) 32% 34% NAND OPM (%) 32% 39%

Global 3D NAND capacity NAND demand(mn GB/quarter) 0 -50%

% of NAND OP chg 12% % of NAND OP chg 36%

1Q12 2Q14 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

3Q16E 4Q16E unlikely to expand rapidly 2Q16E % to Total OP chg 2% % to Total OP chg 6% given (1) fully-ramped NAND demand from iPhone YoY % Source: IDC, Credit Suisse Estimates Source: Credit Suisse estimates SEC’s Xian; (2) yield penalty at major Solid demand from data centre/enterprise SSD competitors and (3) lead Million TB time requirement for new 35 Pyungtaek or 2D capacity 30 8.4x conversions 25 20

15

10

5

0 2014 2015 2016E 2017E 2018E Enterprise Data center

Source: Company data, Credit Suisse estimates

18 DRAM/NAND applications DRAM by Usage – Balanced Convergence

DRAM demand is no longer 70% dominated by PCs. Rather, 60% 50% Mobile is the biggest 40% demand driver and Servers 30% 20% have surpassed PCs in 10% terms of demand volume 0% 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17E3Q17E

Therefore, the ability to PC Server & workstation Handsets improve the performance of the specialty products and NAND Flash Demand: SSD Takes Off

applying the leading edge Unit: 16Gb M. Equiv. WW NAND Flash Demand (16Gb M Equiv.) nodes to specialty products 16,000 are the competitive 14,000 differentiators 12,000 10,000 Mobile and SSDs are 8,000 primary demand drivers 6,000 4,000 2,000 - 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 1Q17F2Q17F3Q17F4Q17F Handsets Tablet PC PMP USB DSC SSD Others Source: Gartner, DRAMeXchange, Credit Suisse estimates

19 Total memory semiconductor market growth (YoY) Total memory industry revenues (US$mn) With faster growth rate, NAND industry should US$bn surpass DRAM industry in 140.0 70% size in a few years 60% 120.0 50% 100.0 40% 80.0 30% 20% 60.0 10% 40.0 0% -10% 20.0 -20% 0.0 -30% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E DRAM NAND YoY (%, RHS)

Source: Gartner, DRAMeXchange, Credit Suisse estimates

20 Samsung/LGD TFT-LCD market share trend Samsung/LGD LCD market shares trend

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0% 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17E

Samsung LG Display

Source: Gartner, DRAMeXchange, Credit Suisse estimates

21 TFL-LCDs: China supply is competitive threat

China’s Gen 6 and above TFT ramp-up schedule – new Gen 8.5/10.5 fabs under construction in 2015-18

As an industrial policy, Company 2013 2014 2015 2016 2017 2018 BOE China wants to become Hefei Gen 6 90K substrates/month -> 105K/month (10K: Oxide TFT) Beijing Gen 8.5 120K/month -> 135K/month

more self-reliant on key Hefei Gen 8.5 30K/month -> 70K/month (4K for white OLED) -> 100K/month

tech components Gen 5.5 (LTPS & OLED) 30K/month -> 25K/month -> 58K/month

China has been Chongqing Gen 8.5 60K/month - > 90K/month -> 120K/month aggressively adding Fuqing Gen 8.5 50K -> 120K/month =>140K/mth capacity since 2012 Hefei Gen 10.5 90K/mth CSOT China is now 19% of global Shenzhen Gen 8.5 120K substrates/month -> 145K/month large-size panel supply, Shenzhen Gen 8.5 100K/month CEC-Panda rising from 9% in 2013 and Nanjing Gen 6 83K/month 13% in 2014 Nanjing Gen 8.5 30K/m -> 60K/m -> 90K/m -> 120K/m Chengdu Gen 8.6 60K/month CEC-IRICO Korea needs to move up Xianyang Gen 8.6 120K/month HKC the value chain Chengdu Gen 8.6 60K/month Samsung Suzhou Gen 8.5 65K/month -> 130K/month LGD Guanzhou Gen 8.5 90K/month -> 120K/month AUO Gen 8.5 60K/month -> 80-90K/month

Innolux Gen 8.5/8.6 60K/month -> 100K/month

Gen 6 350K/month -> 400K/month Source: Company data, Credit Suisse estimates

22 Korea’s head-start in OLED Total glass inputs area by vendor (mobile only, TOP 7)

(K m²) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E Samsung Display LG Display AUO BOE GoVisionox EverDisplay JDI

Source: Company data, Credit Suisse estimates

23 Samsung’s OLED capacity investment plans Various methods of controlling Equity investment and acquisition of OLED supply chain the supply chain include the equity investment and full acquisition Samsung A1: This fab is the world's first OLED facility. All lines depreciated, making it a cost-efficient fab in producing mid-range rigid OLED Samsung A2: This fab is world's first 5.5G OLED facility and also houses Samsung's first flexible Source: Company data, Credit Suisse research OLED lines. Initial hybrid TF encapsulation for flexible OLED was set up here Samsung Display OLED panel capacity Samsung A3: This is Samsung's Factory Target product Capacity (k sheet/month) Production status first 6G OLED production line dedicated to flexible OLEDs. We 4.5 Gen OLED Glass Rigid OLED 56 Mass production believe this will be manufacturing 5.5 Gen OLED Glass Rigid OLED/Flexible OLED 121 Mass production majority of AAPL-related OLED displays. A3 fab could reach 6 Gen OLED Flexible OLED 15 Mass production (Expand to 120K 2017-end) maximum(120K) by end-2017 8 Gen or above OLED OLED TV 8 V1 RGB TV R&D driven by APPL. Source: Company data

24 LG Display’s OLED capacity investment plans LG Display’s OLED capacity next to take off (Total) LG Display’s OLED capacity next to take off (mobile only)

Through 2018, LGD plans to (K m²) (K m²) invest about $8.5 bn primarily 6,000 4,500 4,000 into OLED displays 5,000 3,500 LGD plans to expand OLED 4,000 3,000 applications to signage and 2,500 3,000 automobiles 2,000 2,000 Paju P10: It will likely be a mega 1,500 1,000 1,000 facility with production expected 500 to commence in 1H18 0 0 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Paju P9: It is running 26K 8.5G 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Samsung Display LG Display AUO Samsung Display LG Display AUO substrates with plans to ramp up BOE GoVisionox EverDisplay BOE GoVisionox EverDisplay to 49K by the end of 2016 and JDI JDI expand up to 60K by 2017 Source: Company data, Credit Suisse research Kumi P6: It is currently being LGD OLED panel capacity retrofitted to convert into 6G OLED fab. OLED production will Factory Location Target product Capacity (k sheet/month) Production status begin in 1H17 4.5 Gen OLED Wearables, smartphones 14 Mass production Paju AP2: The facility makes 8.5 Gen OLED OLED TV 49 Mass production plastic OLED panels for AAPL 6 Gen OLED Wearables, smartphones, automotive 15 1H17 watches, LGE's G-flex screens 6 Gen OLED Wearables, smartphones, automotive 15 1H18 and some auto display 9 Gen or above OLED OLED TV, wearables, automotive NA 1H18 Source: Company data

25 AAPL and China to drive OLED demand two-fold Forecast of AAPL’s OLED penetration (2017 to 2020) Samsung’s OLED CAPEX rose sharply in 2016 We expect AAPL to adopt OLED display in 2H17 100% Unit: Wtn starting with iPhone 8. 12.0 80% 10.0 AAPL’s early OLED 8.0 demand likely all supplied 60% 6.0 by Samsung 40% 4.0 Hence, Samsung increases 2.0 20% OLED CAPEX by more 0.0 than 2x YoY in 2016 to 0% 2010 2011 2012 2013 2014 2015 2016 2017E Samsung's OLED CAPEX W9.0 tn, AAPL’s OLED 2017E 2018E 2019E 2020E requirement can grow as OLED based devices Others large as Samsung’s by 2020 Within next couple of years, Samsung should benefit the most given the rising demand along with the dominant market share, in particular for mobile-usage Source: Company Data, Credit Suisse estimates Source: Company Data, Credit Suisse estimates

26 AAPL and China to drive OLED demand two-fold Chinese smartphone models using OLED growing Cost advantage to drive faster penetration of OLED panel

China demand is also rising. LCD LCD with QD film AMOLED More Chinese smartphones 130% adopt OLEDs (18 models in 125% 1H16, 15 more models in 120% 115% 2H16) 110% More internal OLED usage in 105% 100% mid-to-low end smartphones 95% create additional demand 90% (Galaxy A, J series) 5.5" Smartphone 7" Tablet PC Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Rigid OLED cost structure has declined as its older fabs are Global smartphone OLED penetration (%) OLED earnings sensitivity to smartphone penetration(%)

becoming fully depreciated. (mn unit) Base case Conventional OLED is now 2,000 100% (mn units) 2016E 2017E 2018E Global smartphones 1,504 1,559 1,645 1,800 90% cheaper to use than high quality OLED smartphones 178 329 436 1,600 80% OLED pentration (%) 12% 21% 26% LCD displays 1,400 70% Samsung OLED total output (K m 2) 2,048 2,608 3,675 1,200 60% Samsung OLED OP (Wbn) 2,169 3,117 3,763 Our sensitivity analysis for 1,000 50% Bull case Global smartphones 1,504 1,559 1,645 800 40% Samsung shows 4% upside to OLED smartphones 286 546 691 total OP if OLED penetration in 600 30% OLED pentration (%) 19% 35% 42% 400 20% OLED smartphones (additional) 107 216 255 2 global smartphones reaches 200 10% Samsung OLED total output (K m ) 2,109 3,156 5,035 0 0% % chg to total OLED output 3% 21% 37% 42% by 2018E 2015 2016E 2017E 2018E 2019E Samsung OLED OP (Wbn) 2,234 3,772 5,156 % chg to OLED OP 3% 21% 37% Total units (lhs) OLED penetration rate % chg to total OP 0% 2% 4% Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

27 Global smartphone volume & penetration rate Smartphone shipment vs YoY growth Smartphone as a % of total handset

Smartphone volume is still mn 95.8% 100% 91.1% 2,000 80% growing, but at a slower 90% 85.8% 79.4% 1,800 growth rate 70% 80% 72.6% 72.7% 1,600 60% 70% 66.3% Faster volume growth from 1,400 50% 60% 55.2% 1,200 low and mid-end price 40% 50% 41.8% 1,000 40% segments inherently 30% 28.8% 800 30% pressures margins 20% 19.1% 600 20% 12.9% 10% Due to the sheer volume of 400 10% smartphone growth for the 200 0% 0% 0 -10% 2009A 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E next several years, earnings 2009 2011 2013 2015 2017E 2019E % of global handset market can still be driven by Global smartphone units ('000) % change yoy components Smartphone volume growth = more components sales Source: Gartner, Credit Suisse estimates

28 Smartphone BOM cost breakdown AAPL – iPhone 7 (32GB) Samsung – Galaxy S7 (32GB)

$250.00 $300.00 Manufacturing cost Conversion cost Box Contents Others $250.00 $200.00 Mechanical/Electro- Box contents Mechanical/Glue Logic BT/WLAN Battery $200.00 Battery Power Mgmt $150.00 Sensors

BT/WLAN $150.00 User interface IC

UI & sensors Power Mgmt $100.00 RF/PA Wireless Section $100.00 (BB/RF/PA) Sub Camera Cameras (Main/Sub) Main Camera $50.00 Processor $50.00 Processor + BB Display & Touchscreen Display & Touchscreen Memory (NAND+DRAM) $0.00 $0.00 Memory (DRAM+NAND) iPhone 7 (32GB) Galaxy S7(32GB)

Source: IHS Technology, Credit Suisse estimates

29 Samsung: 3D NAND and OLED driving growth

So what? Earnings are becoming much more balanced and now growing on an annualised basis Earnings and FCF will be going up. We are more confident capital returns will rise in 2H and into 2018. Samsung is currently under- delivering its FCF target of 30% to 50% at 27%. Core profits becoming more balanced

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E DRAM NAND OLED Handsets CE

Source: Company Data, Credit Suisse estimates

30 Korea technology universe valuation chart Mkt cap TP Price Up/ ROE(%) PBR(X) PER(X) Company Ticker Rating CCY (US$mn) (local ccy) (local ccy) Down(%) 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E

Large Cap (Keon Han) Samsung Electronics 005930.KS OUTPERFORM KRW 266,025 2,900,000 2,120,000 37% 11% 16% 15% 1.4 1.2 1.1 13.1 8.1 7.5 SK Hynix 000660.KS OUTPERFORM KRW 30,358 71,000 46,750 52% 13% 29% 25% 1.3 1.0 0.8 11.1 4.0 3.6 SEMCO 009150.KS OUTPERFORM KRW 4,417 78,600 66,300 19% 0% 6% 7% 1.2 1.1 1.0 327.7 17.8 15.4 LG Display 034220.KS NEUTRAL KRW 8,937 27,000 28,000 -4% 7% 8% 6% 0.8 0.8 0.8 12.3 9.8 13.6 LG Electronics 066570.KS NEUTRAL KRW 10,057 59,000 68,900 -14% 2% 8% 7% 0.9 0.8 0.7 45.7 10.5 11.2 Samsung SDI 006400.KS NEUTRAL KRW 8,342 99,000 136,000 -27% 2% 4% 5% 0.9 0.9 0.9 42.6 23.3 18.0 Seoul Semiconductor 046890.KQ NEUTRAL KRW 866 16,000 16,650 -4% 6% 6% 6% 1.5 1.4 1.3 25.1 24.5 22.9 Mid/small cap (Sang Uk Kim) LG Innotek 011070.KS OUTPERFORM KRW 2,787 135,000 132,000 2% 0% 13% 12% 1.8 1.6 1.4 631.8 12.7 12.5 Soulbrain 036830.KQ OUTPERFORM KRW 708 72,000 47,900 50% 15% 16% 15% 1.4 1.2 1.0 9.8 8.1 7.2 SK Materials 036490.KQ OUTPERFORM KRW 1,609 210,000 171,000 23% 28% 30% 29% 4.3 3.2 2.6 16.6 12.0 10.2 Wonik Materials 104830.KQ OUTPERFORM KRW 344 82,500 61,800 33% 8% 11% 14% 1.8 1.6 1.4 24.5 15.5 11.0 DNF 092070.KQ OUTPERFORM KRW 134 21,000 13,950 51% 15% 18% 17% 2.1 1.7 1.4 14.4 10.5 9.1

Source: Credit Suisse estimates

31 32 Companies Mentioned (Price as of 22-Mar-2017) AU Optronics (2409.TW, NT$11.9) 3-Year Price and Rating History for LG Electronics Inc (066570.KS) Alphabet (GOOGL.OQ, $849.8) Apple Inc (AAPL.OQ, $141.42) Asustek (2357.TW, NT$290.5) BOE Technology Group Co. Ltd (000725.SZ, Rmb3.32) DNF (092070.KQ, W13,100) 066570.KS Closing Price Target Price Intel Corp. (INTC.OQ, $35.37) Date (W) (W) Rating Japan Display (6740.T, ¥263) Jinhua Marine (JNMB.PK, $0.1) 29-Apr-14 71,700 83,000 N * LG Display Co Ltd. (034220.KS, W29,500) 24-Jul-14 77,000 87,000 LG Electronics Inc (066570.KS, W69,200) LG Innotek (011070.KS, W137,000) 29-Oct-14 67,800 78,000 Lenovo Group Ltd (0992.HK, HK$4.91) 29-Jan-15 62,600 75,000 Micron Technology Inc. (MU.OQ, $26.06) Motorola Solutions (MSI.N, $83.59) 29-Apr-15 61,200 68,000 Nanya Technology (2408.TW, NT$47.15) SK Hynix Inc. (000660.KS, W48,650) 02-Jun-15 55,400 62,000 SK Materials (036490.KQ, W160,800) 09-Jul-15 45,750 53,500 Samsung Electro-Mechanics (009150.KS, W67,600) Samsung Electronics (005930.KS, W2,123,000) 29-Jul-15 43,800 49,000 Samsung SDI (006400.KS, W135,000) 25-Aug-15 40,850 45,500 NEUTRAL SanDisk Corp. (SNDK.OQ^E16) Seoul Semiconductor Co Ltd (046890.KQ, W16,900) 30-Oct-15 49,100 46,200 Soulbrain (036830.KQ, W47,800) 26-Jan-16 54,800 49,000 TCL Corporation (000100.SZ, Rmb3.53) Toshiba (6502.T, ¥194) 16-Mar-16 61,900 54,000 Tsinghua Unigroup (Unlisted) 28-Apr-16 58,200 57,000 Wonik Materials (104830.KQ, W60,400) ZTE Corporation (0763.HK, HK$14.52) 19-May-16 54,000 50,000 25-Jan-17 54,200 52,000 16-Mar-17 68,100 59,000 Disclosure Appendix * Asterisk signifies initiation or assumption of coverage. Analyst Certification 3-Year Price and Rating History for LG Innotek (011070.KS) I, Keon Han, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for DNF (092070.KQ) 011070.KS Closing Price Target Price Date (W) (W) Rating 27-Jun-14 143,000 NR 092070.KQ Closing Price Target Price 04-Nov-16 77,300 105,000 O * Date (W) (W) Rating 06-Jan-17 90,800 110,000 21-Jul-16 13,800 12,000 N * 24-Jan-17 91,700 120,000 05-Oct-16 14,650 18,500 O 22-Feb-17 120,000 135,000 04-Jan-17 15,800 21,000 * Asterisk signifies initiation or assumption of coverage. * Asterisk signifies initiation or assumption of coverage.

N O T RAT ED OUTPERFORM

NEUTRAL OUTPERFORM 3-Year Price and Rating History for SK Hynix Inc. (000660.KS)

3-Year Price and Rating History for LG Display Co Ltd. (034220.KS) 000660.KS Closing Price Target Price Date (W) (W) Rating 034220.KS Closing Price Target Price 25-Apr-14 40,750 49,000 O Date (W) (W) Rating 23-Jun-14 48,900 64,000 23-Apr-14 29,000 26,000 N * 29-May-15 51,100 R 15-Oct-14 32,250 26,000 U 01-Jun-15 51,100 64,000 O 04-Dec-14 34,500 27,000 06-Jul-15 40,750 59,000 28-Jan-15 36,050 29,000 23-Jul-15 39,000 57,000 18-Jun-15 26,450 27,000 N 19-Aug-15 33,000 56,000 23-Jul-15 22,950 26,000 22-Oct-15 31,950 49,000 31-Aug-15 23,050 25,800 26-Jan-16 27,850 45,000 22-Oct-15 23,550 25,600 OUTPERFORM 26-Apr-16 29,150 42,000 REST RICT ED 06-Jan-16 23,100 25,300 NEUTRAL 20-Sep-16 39,250 46,000 27-Jan-16 22,800 24,000 UNDERPERFORM 03-Oct-16 40,200 55,000 17-May-16 24,400 23,700 27-Jul-16 30,450 25,800 13-Jan-17 50,300 65,000 24-Jan-17 31,750 27,000 26-Jan-17 53,300 71,000 * Asterisk signifies initiation or assumption of coverage. * Asterisk signifies initiation or assumption of coverage.

33 3-Year Price and Rating History for SK Materials (036490.KQ) 3-Year Price and Rating History for Samsung SDI (006400.KS)

006400.KS Closing Price Target Price 036490.KQ Closing Price Target Price Date (W) (W) Rating Date (W) (W) Rating 27-Apr-14 150,000 142,000 N 21-Jul-16 142,700 180,000 O * 28-Apr-15 126,000 132,000 19-Jan-17 187,400 210,000 30-Jul-15 94,600 105,000 * Asterisk signifies initiation or assumption of coverage. 31-Aug-15 84,500 88,000 02-Nov-15 111,000 91,000 26-Jan-17 116,000 99,000 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL

OUTPERFORM 3-Year Price and Rating History for Seoul Semiconductor Co Ltd (046890.KQ) 3-Year Price and Rating History for Samsung Electro-Mechanics (009150.KS)

046890.KQ Closing Price Target Price Date (W) (W) Rating 009150.KS Closing Price Target Price 02-May-14 39,950 53,000 O Date (W) (W) Rating 30-Jul-14 34,000 37,000 N 28-Apr-14 69,000 72,000 N 03-Nov-14 16,200 21,000 02-Jul-14 58,700 44,000 U 11-Feb-15 17,400 13,000 U 30-Oct-14 47,000 44,000 N 27-Jul-15 16,000 12,800 26-Oct-15 16,350 15,400 N 02-Dec-14 59,700 53,000 24-Nov-15 18,800 16,800 30-Jan-15 67,000 58,000 02-Feb-16 15,650 16,600 27-Apr-15 67,900 60,000 25-Apr-16 15,500 14,300 OUTPERFORM 10-Jun-15 57,300 58,000 03-Feb-17 16,600 16,000 NEUTRAL UNDERPERFORM 14-Oct-15 61,500 80,000 O * Asterisk signifies initiation or assumption of coverage.

25-Jan-16 54,100 70,000 NEUTRAL 26-Apr-16 53,400 65,000 UNDERPERFORM 3-Year Price and Rating History for Soulbrain (036830.KQ) OUTPERFORM 25-Jul-16 55,800 68,000 27-Oct-16 48,000 60,000 25-Jan-17 56,600 66,000 036830.KQ Closing Price Target Price 15-Mar-17 62,700 78,600 Date (W) (W) Rating * Asterisk signifies initiation or assumption of coverage. 21-Jul-16 62,700 90,000 O * 14-Nov-16 61,000 87,000 3-Year Price and Rating History for Samsung Electronics (005930.KS) 03-Feb-17 53,300 72,000 * Asterisk signifies initiation or assumption of coverage.

005930.KS Closing Price Target Price Date (W) (W) Rating 06-May-14 1,346,000 1,760,000 O OUTPERFORM

07-Jul-14 1,292,000 1,740,000 08-Jul-14 1,295,000 1,720,000 3-Year Price and Rating History for Wonik Materials (104830.KQ) 28-Aug-14 1,242,000 1,700,000 07-Oct-14 1,162,000 1,680,000 03-Sep-15 1,122,000 1,630,000 104830.KQ Closing Price Target Price 29-Oct-15 1,325,000 1,785,000 Date (W) (W) Rating 21-Jul-16 68,100 80,000 O * 11-Jan-16 1,152,000 1,690,000 28-Jan-16 1,145,000 1,550,000 16-Aug-16 69,600 82,500 01-Jun-16 1,333,000 1,702,000 * Asterisk signifies initiation or assumption of coverage. 28-Jul-16 1,507,000 1,790,000 15-Dec-16 1,759,000 2,400,000 24-Jan-17 1,908,000 2,650,000 09-Mar-17 2,010,000 2,900,000

* Asterisk signifies initiation or assumption of coverage.

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34 As of December 10, 2012 Analysts’ stock rating are defined as follows: Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (2408.TW, 034220.KS, Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. AAPL.OQ, 000660.KS, 2409.TW, 6502.T, 005930.KS, MU.OQ, INTC.OQ, 066570.KS, 046890.KQ, 011070.KS, 006400.KS, 009150.KS, 0763.HK, Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. 2357.TW, MSI.N, 0992.HK, 6740.T, GOOGL.OQ) within the next 3 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (AAPL.OQ). *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (2409.TW, 0763.HK, relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most 2357.TW, 6740.T). attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (034220.KS, 000660.KS, 005930.KS, coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between - 066570.KS, 011070.KS, 006400.KS, 009150.KS, GOOGL.OQ). 5% and 15%. 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EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. 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When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only

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