1 2 May 2012

2 May 2012

TABLE OF CONTENTS

[Korea Autos] April US light-vehicle sales results: HKMC's combined m/s up 0.2ppt 2 MoM to 9.3% April US light-vehicle sales results out today.

LG Display [034220 KS; BUY; TP: KRW32,000] 3 LG Display (LGD)’s share price dropped ~4%, led by domestic institutional investors.

Dong-A Pharm [000640 KS; BUY; TP: KRW120,000] 4 On K-IFRS standalone basis, Dong-A Pharm’s 1Q12 sales increased by 4% YoY to KRW218.6bn, while its operating profit declined by 46% YoY to KRW16.2bn.

LG Innotek [011070 KS; BUY; TP: KRW102,000]: 1Q12 earnings review 5 LG Innotek announced 1Q12 earnings and operating profit turnaround. The company recorded revenue of KRW1.2tn (+1.7% QoQ, +12.3% YoY), operating profit of KRW23.9bn (OPM 1.9%) and a net loss of KRW2.4bn. The operating profit came after consecutive operating losses in 3Q11 and 4Q11. Although the LED division remains in the red, increased BLU shipments and LED lamp line-up expansion have led to improved sales. The Camera Module (CM) division increased its profit, from supplying 5M-pixel camera modules to Apple for the new iPad. The Display & Network (DN) division has also likely turned a profit, backed by increased market demand, despite pressure for cost reductions from its major customer.

Hankook Tire [000240 KS; BUY; TP: KRW56,000]: 1Q12 earnings review - 7 Hankook surprised market with 13.8% OPM Hankook Tire released 1Q12 earnings results on 30 April: - Revenue: KRW 1.71tn (+17.1% YoY, -4.2% QoQ) - Operating Profit: KRW235.3bn (+21.6% YoY, +71.2% QoQ), OPM 13.8% Revenue was in line with consensus and our forecast, but OP surpassed both forecasts with surprising 13.8% OPM. Revenue and OP increased by double digits YoY, thanks to ASP hike and product mix improvement.

[Petrochemical] Petrochemical sector down (April 30, 2012) 8 Many petrochemical stocks were down anywhere from 4-8% today intraday, including LG Chem (051910 KS), SK Innovation (096770 KS), and Kumho Petrochemical (011780 KS). With the exception of Samsung Fine Chemicals (004000 KS), which had a good earnings release on Friday and Capro Corp (006380 KS) which has similar products as Samsung Fine Chem. Kumho hit 52 week lows today, but has bounced back since. So have other petrochemical stocks, bouncing back from its lows.

See the last page of this report for important disclosures

[Korea Autos] April US light-vehicle sales results: HKMC's combined m/s up 0.2ppt MoM to 9.3%

Gregory Byung Kwan Kim, Analyst 82 2 3774 1592 [email protected]

Event

April US light-vehicle sales results out today

Impact

- US light-vehicle sales in April came in line with our estimates. US total light-vehicle in April reached 1.19m units (+2.3% YoY, -15.7% MoM), with SAAR reaching 14.4m units; up from 13.2m in April 2011 (the same as March 2012). There were three fewer working days in April, compared with 2011, hence the low single-digit YoY growth. - Hyundai and Kia’s April US sales reached 62k units (+0.8% YoY) and 48k units (+1.0% YoY), respectively, with market shares of 5.3% and 4.0%, respectively. Hyundai and Kia’s combined market share was up 0.2ppt MoM to 9.3% (-0.1ppt YoY), which is a strong result, considering the market share claw-back from the Japanese automakers. Toyota and Honda’s April US market shares reached 15.0% (+0.5ppt MoM, +1.2ppt YoY) and 10.3% (+1.3ppt MoM, -0.5ppt YoY), respectively. - April industry-average incentive per unit reached US$2,446 (-4.7% MoM, +5.6% YoY).

Action and recommendation

We maintain our OVERWEIGHT stance on the sector and reiterate our target prices of KRW320,000 for Hyundai Motor and KRW110,000 for Kia Motors. We expect the share price gains to continue for Hyundai and Kia, on several short-to-mid term catalysts, such as (1) strong sales in Europe and the US in 2Q12; (2) record-high operating profit and margins in 2Q12 (Hyundai’s operating profit up 18.2% YoY to KRW2.5tn, with 11.5% OPM; Kia up 20.9% YoY to KRW1.25tn, with 9.6% OPM); and (3) even stronger overseas sales in 2H12, as a result of new model launches in the US (New Azera, Elantra Coupe, New Santa Fe) and Europe (New i30 and Ceed) and new factories in China and Brazil going into operation. The possibility of a strike by the companies’ labor unions in July remains the biggest short-term risk, but we recommend accumulating more shares on any heavy corrections.

LG Display [034220 KS; BUY; TP: KRW32,000]

Sean Kim, Analyst 82 2 3774 3911 [email protected]

Event

LG Display (LGD)’s share price dropped ~4%, led by domestic institutional investors.

Impact

We believe there has been no significant change in LGD's fundamentals, however, it seems some investors are worried about uncertainties regarding LGD's future strategy (which we assume is closely related to the earnings and strategies of other LG Group companies). Thus, until LGD reveals its strategy in July, its share price may be affected by investor sentiment, rather than its fundamentals.

Action and recommendation

We believe LGD’s OP will return to the black in 2Q12, while earnings improvement should continue through 2H12 form supplying panels for new iPhone. We maintain our BUY rating on LGD at a target price of KRW32,000 (12E P/B 1.1x).

Dong-A Pharm [000640 KS; BUY; TP: KRW120,000]

Ji Won Shin, Analyst 82 2 3774 2176 [email protected]

Event

On a K-IFRS standalone basis, Dong-A Pharm’s 1Q12 sales increased by 4% YoY to KRW218.6bn, while its operating profit declined by 46% YoY to KRW16.2bn.

Impact

Performance by business division: 1) The ETC division saw a 5.9% YoY fall in sales, due to the negative effects of drug price cuts; 2) Bacchus sales rose 23% YoY, helped by channel expansion, via regulatory changes allowing non-pharmaceutical product sales at convenience stores and supermarkets; 3) the export division showed the company’s strongest YoY sales growth (75.6%), driving the company’s overall top-line growth. Most of Dong-A Pharm’s products showed sluggish sales growth; sales declined by over 30% on average. However, Stillen (key product) showed a relatively moderate decline in sales (-5.4% YoY), as it was not subject to drug price cuts. On the other hand, sales of Grotropin increased, as its volume increase offset the negative effects of drug price cuts. Of note, the company saw a significant increase in sales from its export division, primarily driven by the strong sales of Bacchus (exports to Cambodia), along with steady sales growth for other export products. The company’s Bacchus exports in 1Q12 reached over half of its export value for all of 2011. We believe the company’s export division deserves greater attention, given the strong export orders for Bacchus and the increase in new export products, such as Atorvastatin (to Japan).

Action and recommendation

In our view, the company merits attention, as it will be more immune to price-cuts than any other pharmaceutical company, in light of the positive effects from (1) the addition of product line-ups, through its alliances with GSK and Bayer; (2) expansion of output capacity for Bacchus, following regulatory changes allowing non-pharmaceutical product sales at convenience stores and supermarkets; and (3) the release of new products, including in-house developed new drugs. We prefer Dong-A Pharm over other traditional pharma companies.

Figure 1 1Q12 earnings review

LG Innotek [011070 KS; BUY; TP: KRW102,000]: 1Q12 earnings review

Soon-Hak Lee, Analyst 82 2 3774 1651 [email protected]

Event

LG Innotek announced 1Q12 earnings and operating profit turnaround. LG Innotek recorded revenue of KRW1.2tn (+1.7% QoQ, +12.3% YoY), operating profit of KRW23.9bn (OPM 1.9%) and net loss of KRW2.4bn. The operating profit came after consecutive operating losses in 3Q11 and 4Q11. Although the LED division still remains in the red, increased BLU shipments and LED lamp line-up expansion led to improved sales. The Camera Module (CM) division increased its profit, from supplying 5M-pixel camera modules to Apple for the new iPad. The Display & Network (DN) division also has likely turned a profit, backed by increased market demand, despite pressure for cost reductions from its major customer.

Figure 1 LG Innotek 1Q12 earnings and consensus

Impact

There are three implications in LG Innotek’s earnings: 1. LG Innotek firms up its status with Apple 2. We can expect visible improvement in LED from 3Q12 3. 2Q12 will be a groundwork period for the company

1) The company stated that its camera module orders from Apple increased, thanks to the new iPad. As the new iPad adopted a 5M-pixel camera, LG Innotek also improved its product mix and achieved a higher ASP. As they are slated to supply camera modules to iPhone5, revenue expansion and product mix effect is expected to continue in 2H12. The company is likely to solidify its status as Apple’s top camera module vendor.

2) LG Innotek is targeting a turnaround in LED from 3Q. To that end, the company is attempting LED business diversification, emphasizing their LED lamp business, as well as their BLU business. As a result of LED lamp line-up expansion, LED lamp portion in LED revenue increased to 9% in 1Q12

5 from 5% in 4Q11. The company is aiming for LED lamps to achieve a double-digit portion in LED revenue from 2Q12, in order to overcome sluggish BLU demand. Furthermore, the company plans to expand BLU production for low-end direct-lit LED TVs from May. This will contribute positively to the company’s earnings, driven by the London Olympics in 3Q12.

3) The fastest-growing CM division’s top-line growth is likely flat or slightly down in 2Q12, due to the launch of the iPhone5 in 2H12. There is a tendency for old model shipments to decrease before new model launches, thus we expect one or two months of temporarily flat growth for the CM division in 2Q12. We expect the LED business and the display business to turn around from 3Q. The company will attempt profit diversification and cost reduction in 2Q12, in preparation for a successful 2H12.

Action and recommendation

We adjust our earnings forecast for 2Q12 slightly downwards, with an OP of around KRW40bn (from our previous forecast of KRW43bn), due mainly to a decline in demand for old handset models, as well as sluggish LED demand. However, we maintain our annual earnings forecast for KRW5.6tn in revenue and KRW170bn in OP, as we expect a turnaround in the LED business and improvement in camera module profitability in 2H12. In conclusion, we maintain our BUY recommendation and TP of KRW102,000 on LG Innotek at a FY12 target P/B multiple 1.5x. As the company’s historical average P/B for the past three years (since starting its LED and CM business) is 1.7x, we believe a target P/B multiple of 1.5x is reasonable, based on the turnaround scenario in FY12.

Hankook Tire [000240 KS; BUY; TP: KRW56,000]: 1Q12 earnings review - Hankook surprised market with 13.8% OPM

Yoon Ki Kim, Analyst 82 2 3774 3731 [email protected]

Event

Hankook Tire released 1Q12 earnings results on 30 April: - Revenue: KRW1.71tn (+17.1% YoY, -4.2% QoQ) - Operating Profit: KRW235.3bn (+21.6% YoY, +71.2% QoQ), OPM 13.8% Revenue was in line with consensus and our forecast, but OP surpassed both forecasts with surprising 13.8% OPM. Revenue and OP saw double-digit YoY growth, thanks to higher ASP and product mix improvement.

Impact

Korea: - Revenue was up by 16.4% YoY to KRW1.07tn. Thanks to product mix improvement, OPM increased to 16.2% from 8.4% in 4Q11 and 14.8% in 1Q11. China: - Revenue was up by 18.1% YoY to KRW 464bn. Thanks to product mix improvement and ASP hike, OPM increased to 7.4% from 1.1% in 4Q11 and 4.4% in 1Q11. Sales of OE tire drove the revenue increase in China, while the RE market was somewhat weak. Hungary: - Revenue was up by 89.3% YoY to KRW225bn, thanks to the completion of the Hungary plant. OPM declined to 19.1% from 25.7% in 1Q11, but high revenue growth raised OP by 40.8% from 1Q11.

Action and recommendation

BUY rating and T/P of KRW 56,000 maintained - Tire sales in 1Q12 increased by only 7% to 21.8m units, but the company was able to achieve 17.1 revenue growth, due to higher ASP and expansion of UHPT portion. UHPT portion increased to 25.6% from 22.5% in 4Q11 and 22% in 1Q11. We have long emphasized how UHPT capacity is a key factor for tire companies to achieve continuous growth and we expect Hankook to meet UHPT demand through expansion of UHPT capacity. - Lower material costs this year will help company to maintain high OPM. N/R price went down by 15% from 4Q11 (close to 1Q11 level) and is expected to decrease further. S/R price is at similar level to 4Q11 (+20% from 1Q11); it is expected to decrease slightly in the short term, but increase in the long term.

[Petrochemical] Petrochemical Sector Down (30 April 2012)

Raymond Kim, Analyst 82 2 3774 6023 [email protected]

Event

Many petrochemical stocks were down anywhere from 4-8% Monday intraday, including LG Chem (051910 KS), SK Innovation (096770 KS) and Kumho Petrochemical (011780 KS). With the exception of Samsung Fine Chemicals (004000 KS), which had a good earnings release on Friday, and Capro Corp (006380 KS), whose products are similar to those of Samsung Fine Chem. Kumho hit 52-week lows Monday, but has bounced back since. Other petrochemical stocks have also recovered from intraday lows.

Impact

The market, which had expected 1Q to be the bottom for petrochemical companies, has gone into temporary panic mode over underlying fundamentals. Explanation:  Reports of weakened demand from China for butadiene in the petrochemical space, as well as analyst reports released this morning that pointed to slightly lower 2Q earnings for SK Innovation, spooked the market.  During SK Innovations’ earnings conference call, execs said that they expect 2H to be as good as 1Q’s spectacular earnings, implying that 2Q will not be as good as 1Q. Some analysts came out and wrote that 2Q is not going to be as good as 1Q, and this may have caused panic in the market, as many were expecting 1Q to be the bottom for petrochemicals. However, while other petrochemical companies in Korea tend to suffer from higher crude prices, SK tends to benefit from them. All of these nuances have perhaps yet to be digested by the petrochemical market, which has only recently seen a significant portion of SK Innovation’s profits come from its E&P business (over half of its 1Q12 earnings were from oil inventory markups). Underlying fundamentals:  A fall in butadiene prices of 21% MoM actually increases Kumho Petrochem’s tire rubber production margins. Falling butadiene prices are bad for Honam, but their other ethylene polymer margins are increasing.  Producers expect Chinese demand for ABS to rebound slightly after the May Day holiday. Chinese producers will eventually have to restock inventories in preparation for a higher production season in 3Q; however, the extent of the rebound will depend on the strength of US and Europe recovery.  Declines in ABS spreads at LG Chem for their ABS specialty products should not be as bad as those of industry peers. Ethylene polymer margins have increased MoM; these margins were the culprit for much of the petrochem sector’s poor earnings in 1Q12. LG Chem’s acrylate/plasticizer, polymer and PVC margins have stabilized or bounced back slightly from 1Q12.  All signs continue to point towards 1Q12 as being the bottom for earnings for petrochem, with 2Q an improvement over 1Q, but not by much.

Action and recommendation

The sector seems to be oversold. 90% of Korean petrochemical exports head to China, and petrochemicals have historically tracked GDP growth very closely. The sector was a near-term Neutral and long term Buy, but at these levels, LG Chem and Honam Petrochemical warrant a BUY recommendation on further dips and SK Innovation a BUY at current levels.

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