Display/Electronic Materials The age of components and materials Favorable environment to continue in 2015 Overweight (Initiate) In 2014, panel makers thrived on the back of tight supply and demand conditions caused Initiation Report by rising demand for larger TV screens. In 2015, we believe industry conditions will remain favorable. Indeed, TV panel prices remained on a slight upward trajectory as of January 23, 2015 January 20 th . Supply and demand conditions still appear tight, though not as tight as in 2H14. We Daewoo Securities CCCo.,Co., Ltd. forecast such conditions to continue at least through 1H. The impact of Chinese [Display/IT Materials] companies’ capacity ramp-ups, scheduled to start coming online in 2H, should be limited this year. Young Ryu +822-768-4138 Robust demand for larger TVs to limit supply growth [email protected] In 2015, demand is projected to grow 6.8% YoY (based on shipment area), with LCD panel capacity rising 6.8% YoY. We anticipate largely balanced supply and demand conditions this year, and most new capacity is expected to come online starting in 2 H. Given 1) the tight supply and demand conditions in 2014 and 2) the fact that LCD production tends to increase in 2H, supply and demand in the LCD industry are likely to strike a balance heading into 2H. We foresee robust demand in 2015, aided by 1) the start of the TV replacement cycle, 2) TV manufacturers’ aggressive sales plans, 3) limited supply growth due to the shift to larger TV sizes, 4) substitute demand following the end of plasma display panel (PDP) production, and 5) continued growth in demand from emerging markets. Initiate coverage with Overweight rating; LGD is our top pick We initiate our overage on the display/electronic materials sector with an Overweight rating. We recommend LG Display (LGD) as our top pick, as 1) earnings should impro ve on the back of the favorable TV market, and 2) the company ’s strong competitiveness in OLED TVs should support its mid- to long-term growth prospects. Among small/mid- caps, we believe materials suppliers will continue to perform well owing to the streng th of downstream industries. We advise watching 1) OCI Materials, which stands to benefit from rising panel utilization and semiconductor microfabrication, and 2) Soulbrain, which should receive a boost from the recovery of Samsung Display’s (SDC) utilizat ion and the growth of semiconductor materials. LCD panel market and LGDLGD’’’’ss share performance Source: KDB Daewoo Securities Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. January 23, 2015 Display/Electronic Materials C O N T E N T S Display (Overweight) 3 Market conditions were favorable in 2014 3 Supply outlook: Supply might increase in 2016 and beyond 5 Demand outlook: Environment likely to remain favorable through 2015 9 Issues: Quantum dot technology 11 Electronic Materials (Overweight) 17 Stable and lucrative 17 Rebound of forgotten plays 18 LCD/semiconductor materials: Stable 19 Smartphone materials: Recovery anticipated 23 Rechargeable batteries: Medium- to long-term growth potential 24 Investment strategy and valuation 25 LGD is our top pick; OCI Materials and Soulbrain also warrant attention 25 Global peer analysis 26 Display panels 26 Rechargeable batteries 27 Electronic materials 28 Other 30 Key Recommendations 31 LG Display (034220 KS) 32 Samsung SDI (006400 KS) 40 OCI Materials (036490 KQ) 50 Soulbrain (036830 KQ) 57 Innox (088390 KQ) 62 Iljin Materials (020150 KS) 69 KDB Daewoo Securities Research 2 January 23, 2015 Display/Electronic Materials Display (Overweight) Market conditions were favorable in 2014 Growing demand for TV replacement and larger TV screens led to supply shortage In 2014, the LCD TV market environment was favorable due to: 1) suppliers’ aggressive marketing, 2) increased TV demand, and 3) growth in demand for larger TV screens. LCD TV shipments in 2014 are estimated to have risen 6.4% YoY to 220mn units, with average TV screen size expanding 6% YoY. The growth in demand for larger TV screens caused a decline in panel shipments, tightening supply and demand conditions. As a result, the prices of 30-39" panels, which had been less profitable, picked up due to a supply shortage. Larger-size panel prices also remained on a slight uptrend due to the tight supply and demand conditions. We believe the increase in larger-screen TV demand was the panel market’s major driver last year. In 2014, for the first time ever, panels smaller than 40” made up less than 50% of total shipments. For a long time, 30-39" TVs had propped up the TV market, but last year, TVs with screens 40” and up emerged as a new market driver. As panel makers expanded production of larger-size panels, output of 30-39" TV panels decreased. In addition, overall production volume lagged behind capacity growth. While an 8G glass substrate (2,200 x 2,500 mm) can produce 18 panels for a 32” TV, it can produce only eight panels for a 40” TV (a 56% decrease in terms of production volume). As such, an increase in larger-size panel production sharply reduces overall production volume. In summary, panel prices strengthened in 2014 thanks to tight supply and demand conditions. In particular, the prices of 32” panels kept rising due to the supply shortage. And despite the weak seasonality in 1Q, the prices of TV panels remain elevated. As such, inventory levels still appear healthy. Figure 111.1. LCD ppanelanel shipment area (by application) 2 (%) (mn m ) Other (L) LCD TV (L) 200 PC monitor (L) Tablet PC (L) 40 33.0 Notebook (L) Growth (R) 150 30 100 20 16.4 9.7 50 6.8 10 4.7 4.2 0 0 10 11 12 13 14F 15F Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 3 January 23, 2015 Display/Electronic Materials Table 111.1. Number of LCD panelpanelssss that can be produced with one substrate (units) Generation Substrate sssizesizeizeize (mm(mm(mm)(mm ))) 323232”32 ””” 373737”37 ””” 404040”40 ””” 424242”42 ””” 464646”46 ””” 474747”47 ””” 525252”52 ””” 5G 1100 x 1300 3 2 2 2 2 2 5.5G 1300 x 1500 6 3 2 2 2 2 6G 1500 x 1850 8 6 4 3 3 2 2 7G 1870 x 2200 12 8 8 6 6 4 7.5G 1950 x 2250 12 8 8 8 6 6 3 8G 2200 x 2500 18 10 8 8 8 8 6 Source: KDB Daewoo Securities Research Table 222.2. LCD TV panel shipments (by size) (‘000 units, %, %p) SizeSizeSize 2020200620 060606 2020200720 070707 2020200820 080808 2020200920 090909 2020201020 101010 2020201120 111111 2020201220 121212 2020201320 131313 20202014F20 14F14F14F 10-19'' 5,031.4 8,220.8 10,992.7 12,720.7 11,740.8 11,026.7 6,230.0 3,850.2 3,081.2 20-29'' 15,503.8 17,840.5 19,456.8 26,576.2 35,136.5 33,147.1 26,062.8 23,979.8 24,968.0 30-39'' 19,367.9 35,532.6 47,834.2 66,578.5 86,416.7 91,807.2 92,304.8 96,158.0 83,239.9 40-49'' 5,982.8 16,689.4 25,316.1 35,292.9 52,362.3 61,303.5 63,795.5 59,759.7 75,728.4 50-59'' 95.3 1,024.3 2,755.0 4,107.5 5,283.0 6,360.0 11,585.0 18,383.4 28,561.6 60'' and up 8.7 25.8 62.5 120.6 617.3 1,634.5 3,310.6 5,624.4 7,782.9 Share (%) 10-19'' 10.9 10.4 10.3 8.7 6.1 5.4 3.1 1.9 1.4 20-29'' 33.7 22.5 18.3 18.3 18.3 16.1 12.8 11.5 11.2 30-39'' 42.1 44.8 44.9 45.8 45.1 44.7 45.4 46.3 37.3 40-49'' 13.0 21.0 23.8 24.3 27.3 29.9 31.4 28.8 33.9 50-59'' 0.2 1.3 2.6 2.8 2.8 3.1 5.7 8.8 12.8 60'' and up 0.0 0.0 0.1 0.1 0.3 0.8 1.6 2.7 3.5 (Growth, %p) 10'-19'' -0.6 -0.0 -1.6 -2.6 -0.8 -2.3 -1.2 -0.5 20-29'' -11.2 -4.2 -0.0 0.1 -2.2 -3.3 -1.3 -0.4 30-39'' 2.7 0.2 0.8 -0.7 -0.4 0.7 0.9 -9.0 40-49'' 8.0 2.8 0.5 3.1 2.5 1.5 -2.6 5.1 50-59'' 1.1 1.3 0.2 -0.1 0.3 2.6 3.1 3.9 60'' and up 0.0 0.0 0.0 0.2 0.5 0.8 1.1 0.8 Source: DisplaySearch, KDB Daewoo Securities Research Figure 222.2. LCD panel price (32(32””””andand 464646”46 ”””)))) Figure 333.3. PPPanelPanel inventorinventoryyyy level (US$) (US$) (weeks) 1.5 IT TV Overall 120 32'' 200 46'' 1 180 100 0.5 160 0 80 -0.5 140 -1 60 120 -1.5 4/13 8/13 12/13 4/14 8/14 12/14 1/13 5/13 9/13 1/14 5/14 9/14 1/15 Source: WitsView, KDB Daewoo Securities Research Source: IHS, KDB Daewoo Securities Research KDB Daewoo Securities Research 4 January 23, 2015 Display/Electronic Materials Supply outlook: Supply might increase in 2016 and beyond Impact of capacity ramp-ups in 1H to be limited In 2015, demand is projected to grow 6.8% YoY (based on shipment area), with LCD panel capacity rising 6.8% YoY.