130305 mirae handsets-into the storm

See the last page of this report for important disclosures

Industry update Handsets Into the storm We maintain our OVERWEIGHT weighting for Korean handset makers and recommend Samsung Electro-Mechanics (SEMCO; 009150 KS) as our sector top pick. Smartphone demand growth in 2013 will be driven by emerging markets. The recent rapid market share gains by Chinese smartphone makers will lower industry-wide ASPs and margins, but help enhance the average hardware performance of handsets, thus boosting demand for high-end components going forward. In addition, the expected market share expansion by SEC in 2013 should lead to qualitative and quantitative growth of SEMCO, the largest parts supplier for SEC.

Chinese handset makers to expand local market share Chinese smartphone makers ZTE, Huawei and Lenovo are aiming to expand local market share in 1H13; we expect their combined market share in China to rise by 3.9ppt YoY to 22.2% in 2013, as a result. At the Mobile World Congress (MWC), we confirmed that the three Chinese handset makers are: 1) rapidly advancing, in terms of smartphone hardware competitiveness; 2) competitive against peers, in terms of production costs; and 3) set to see shipment growth, with new smartphones slated for release in early 2Q12 through local telecom carriers (China Mobile, China Unicom and China Telecom). We expect the three Chinese smartphone makers to swiftly expand their market shares in mid- to low-end smartphones and steadily eat into the white-box smartphone market going forward.

Profitability of mid-to-low-end smartphones to decline in 2H13 We expect market competition among handset makers to stiffen further in 2H13, with the three Chinese companies set to post rapid growth in 1H13 and new flagship models to be released by Samsung Electronics and Apple in 2Q13. Meanwhile, we believe the increasing size of the Chinese market and the rise in Chinese handset makers’ global market share will pull down worldwide smartphone ASP by 13.6% YoY in 2013, driving up the cost burden of components for handset makers, as a result. Moreover, the aggressive release of new smartphones in 2H13 should spark subsidy competition, driving down the profitability of mid-to-low-end smartphones even further going forward. We thus expect the operating margin of SEC’s IM division to decrease by 1.9ppt to 16.0% in 2013 and the operating margin of LG Electronics’ MC division to increase to a high of 4.1% in 3Q13, before decreasing to 3.4% in 4Q13.

Return of smartphone paradigm identity and eco-system At this year’s MWC, we noted that handset suppliers are focusing on building the identities of new flagship models through UX and killer applications, while seeking to develop an independent ecosystem by diversifying platforms beyond the oligopolistic Android (whose smartphone OS market share stood at 64% in 2012) in 2013. Through these efforts, handset makers are seeking to protect the premium of high-margin flagship smartphones, reinforce customer loyalty through the emphasis on differentiation and reduce marketing costs for mid- to low-end models. Between 2011 and 2012, competition in the handset industry had focused primarily on developing advanced hardware features. However, due to the rapid improvement in flagship smartphone hardware, competition to find differentiation points in hardware ceased in 2013, with latecomers closing the gap with top-tiers, in terms of hardware competitiveness.

Korea / Handsets 5 March 2013 OVERWEIGHT

Stocks under coverage Company Rating Price Target price LG Electronics (066570 KS) BUY 78,300 88,000 SEMCO (009150 KS) BUY 95,500 125,000 LG Innotek (011070 KS) BUY 75,700 83,000 Melfas (096640 KS) BUY 20,550 35,000 Silicon Works (108320 KS) BUY 21,300 38,000 Note: Prices are in KRW; price close as of 1 Mar. 2013

Global handset market share in 4Q12

Others, 30.4%

HTC, 1.4%

RIM, 1.6%Google,

1.7%

Sony, 1.7%

Lenovo, 1.8%

Huawei, 2.9% LGE, 3.3%ZTE, 3.4%

Apple, 10.1%

Nokia, 18.3%

SEC, 23.6%

Source: Gartner, Mirae Asset Research

Global smartphone market share in 4Q12

SEC, 30.1%

Apple, 20.9%

RIM, 3.5%HTC, 3.2%

Huawei, 4.2%

ZTE, 4.0%

Nokia, 3.2%

LGE, 4.1%

Sony, 3.4%

Google, 2.2%

Others, 22.0%


Jinho Cho, Analyst 82 2 3774 3831 [email protected] Yongjei Jeong

82 2 3774 1938 [email protected]

Jinho Cho, Analyst, 82 2 3774 3831, [email protected] Yongjei Jeong, 82 2 3774 1938, [email protected] Handsets

22Mirae Asset Securities

SEMCO remains our top pick, LG Electronics our second pick We expect Samsung Electronics’ global market share to continue to grow by 0.4ppt YoY to 23.6% in 2013, benefiting its largest parts supplier, SEMCO (009150 KS). SEMCO remains our top pick, as: 1) parts shipments are set to grow visibly, with Samsung Electronics’ smartphone shipments forecast to rise by 34.4% YoY to 290m units in 2013; 2) backed by 89% YoY growth in Samsung Electronics’ flagship smartphone shipments to 146m units in 2013, product mix improvement should drive up SEMCO’s profitability; and 3) market prices of handsets components are unlikely to decline, despite the recently improved profitability of Japanese parts makers. LG Electronics (066570 KS) is selected as our second top pick, given: 1) the steady improvement in the competitiveness of its flagship smartphones; and 2) forecasts for market share recovery in Korea and Latin America and improvement in profitability in 1H13, backed by a competitive smartphone lineup and its platform-sharing strategy.



T a b l e o f c o n t e n t s

. Executive Summary Ⅰ 4

1. Summary 4

2. Valuation 6

. Investment PointsⅡ 13

1. Continued demand growth in emerging markets 13

2. Chinese peers to expand local market share on reinforced competitiveness 15

3. SEC to outshine peers in cost and supply chain competitiveness 22

4. Smartphone industry paradigm returning to identity and ecosystem 26

5. SEMCO (009150 KS) remains our top-pick, LGE is our second pick 32

. AppendixⅢ 33

1. 1Q13E smartphone peers’ earnings guidance & consensus 33

2. Handset peers’ shipment portions by country 35

3. Handset market share by vendor in 2012 36

4. Smartphone market share by vendor in 2012 37

5. Tablet PC market share and line-up in 2013 38

Company Analysis 39

Samsung Electro-Mechanics (009150 KS, BUY, TP: KRW125,000) 40

LG Electronics (066570 KS, BUY, TP: KRW88,00) 54



. Executive summaryⅠ

1. Summary

Demand growth to be driven by emerging markets We forecast global demand for handsets and smartphones in 2013 to reach 1.89bn units (+8.7% YoY) and 897m units (+32.4% YoY), respectively. We expect China to drive global demand growth in 2013, as demand for handsets and smartphones in China should expand by 21.8% YoY (to 495m units) and 56% YoY (to 270m units), respectively. Notably, China’s contribution to global demand should rise by 4.6ppt YoY to 30.2% in 2013. We see ample upside in demand growth in China, given that: 1) smartphone users’ portion of mobile phone subscribers in China remains relatively low, at 24% (compared with 48% in North America); and 2) the smartphone penetration rate in China is also lower than that of North America (42.6%, versus 65.3%); and 3) the portion of white-box smartphones in China is also high (45.2% in 2012).

Top-3 Chinese handset makers to expand local market share The top-three Chinese smartphone makers, ZTE, Huawei and Lenovo, are aiming to expand local market share in 1H13; as a result, we expect their combined market share in China to rise by 3.9ppt YoY to 22.2% in 2013. At this year’s Mobile World Congress (MWC), we confirmed that the three Chinese handset makers are: 1) rapidly advancing, in terms of smartphone hardware competitiveness; 2) competitive against peers, in terms of production costs; and 3) set to see shipment growth, with new smartphones slated for release in early 2Q12 through local telecom carriers (China Mobile, China Unicom and China Telecom). We expect the three Chinese smartphone makers to rapidly expand their market shares in low-to mid-end smartphones and steadily eat into the white-box smartphone market going forward.

SEC to outshine peers in cost and supply chain competitiveness We expect market competition among handset makers to stiffen further in 2H13, with the top-three Chinese companies set to post rapid growth in 1H13 and new flagship models to be released by SEC and Apple in 2Q13. Meanwhile, we believe the increasing weight of the Chinese market in global demand and the rise in Chinese handset makers’ global market share will lower worldwide smartphone ASP by 13.6% YoY in 2013, driving up the cost burden of components for handset makers as a result. Moreover, the aggressive release of new smartphones in 2H13 should spark subsidy competition, driving down the industry’s profitability even further going forward. Nevertheless, we expect SEC to continue to expand its Chinese and global market share in 2013, outpacing market growth with limited fluctuations in profitability. With a relatively high portion of in-house produced components and strict control exerted over its (financially sound) supply chain, we believe SEC still has the scope for additional reductions in components’ portion of total costs.

Smartphone paradigm returning to identity and eco-system At this year’s MWC, we noted that handset suppliers are focusing on building the identities of their new flagship models through UX and killer applications, while seeking to develop an independent ecosystem by diversifying platforms beyond the oligopolistic Android (whose smartphone OS market share stood at 64% in 2012) in 2013. Through these efforts, handset makers are seeking to preserve the premium of high-margin flagship smartphones, reinforce customer loyalty through the emphasis on differentiation and reduce marketing costs for low-to mid-end models. Between 2011 and 2012, competition in the handset industry had focused primarily on developing advanced hardware features. However, due to the rapid improvement in flagship smartphone hardware, competition to find differentiation points in hardware ceased in 2013, with latecomers closing the gap with top-tiers, in terms of hardware competitiveness.

Through efforts to establish a solid identity, handset makers are seeking to: 1) preserve margins for high-margin flagship smartphones; 2) increase customer loyalty and expand market share through the development of an independent ecosystem; 3) reduce marketing costs for low-to mid-end models; and 4) diversify profit models to software/content (after focusing primarily on hardware sales to date). In sharp contrast to Chinese smartphone makers, which continued to emphasize the advanced hardware performance of their flagship models at the 2013 MWC, other smartphone makers (SEC, LG Electronics, Nokia, HTC and Sony) focused on the identity and differentiated UX of their new smartphone models.

Demand: Global demand growth will continue into 2013, driven by China

Supply: Top-three Chinese smartphone makers (ZTE, Huawei and Lenovo) to expand their local market share

Competitive landscape: SEC to outshine peers in cost and supply chain competitiveness

Industry paradigm returning to identity and eco-system



SEMCO (009150 KS) remains our top-pick; LGE is our second pick In light of the likely continued expansion in SEC’s global market share in 2013 (+0.4ppt YoY to 23.6%), we reiterate our BUY rating and target price of KRW125,000 for SEMCO, as a top-pick for the sector. We believe that: 1) 34.4% YoY growth in SEC’s smartphone shipments (to 290m units) expected in 2013 should drive up shipments of related components; 2) the expected 89% YoY growth in SEC’s flagship smartphone shipments (to 146m units) should improve SEMCO’s product mix, thus lifting its profitability; and 3) component ASPs are unlikely to decline, despite the recent margin improvement by Japanese component makers. Our second-pick for the sector is LGE, due to: 1) the gradual improvement in the competitiveness of its flagship smartphone models; and 2) the likely recovery in its market shares in both Korea and Latin America in 1H13, backed by its competitive new smartphone lineup and platform-sharing strategy.

Figure 1 Handset shipment forecasts by supplier 1Q13E 2Q13E 3Q13E 4Q13E 2011 2012E 2013E 2014E 2015E

Population/m 7,022 7,041 7,060 7,079 7,062 7,135 7,207 7,279 7,425 Subscriber/m 6,192 6,308 6,424 6,540 5,613 6,120 6,559 6,955 7,319 Shipment/m Total 415 445 489 543 1,776 1,741 1,892 2,026 2,106 Smartphone 201 212 233 251 473 678 897 1,108 1,319

QoQ/YoY (%) Total (12.0) 7.0 10.0 11.0 11.2 (2.0) 8.7 7.1 4.0 Smartphone (3.0) 5.0 10.0 8.0 58.2 43.3 32.4 23.5 19.1 Penetration (%) 48.5 47.6 47.6 46.3 26.6 38.9 47.4 54.7 62.6 Net added 584 506 439 396 365 Replacement 1,191 1,234 1,453 1,629 1,741

Replacement/month 51 55 51 48 48 ASP/US$ 130 149 157 142 139

Market sales/US$ bn 231 260 297 287 294 Shipment/m

Total 415 445 489 543 1,776 1,741 1,892 2,026 2,106 Nokia 82 88 97 107 414 335 375 401 417 Samsung 100 108 114 123 328 405 446 536 615 LG Electronics 15 16 18 18 87 56 67 67 68 RIM 9 9 10 10 52 34 38 36 38 Sony 8 9 10 11 33 31 38 41 42 Google 8 8 11 13 41 34 41 48 49 Apple 35 37 43 50 91 134 166 207 259 HTC 9 8 8 12 43 32 36 45 46 ZTE 25 31 37 41 56 68 133 152 158 Huawei 17 22 29 38 41 47 106 142 147 Lenovo 12 13 15 16 16 28 57 61 63 MS (%) Nokia 19.8 19.8 19.8 19.8 23.3 19.2 19.8 19.8 19.8 Samsung 24.1 24.3 23.4 22.7 18.5 23.2 23.6 26.5 29.2 LG Electronics 3.7 3.6 3.6 3.3 4.9 3.2 3.5 3.3 3.2 RIM 2.2 2.1 2.0 1.8 2.9 2.0 2.0 1.8 1.8 Sony 2.0 2.0 2.0 2.0 1.8 1.8 2.0 2.0 2.0 Google 2.0 1.9 2.3 2.3 2.3 1.9 2.1 2.3 2.3 Apple 8.5 8.4 8.8 9.2 5.1 7.7 8.8 10.2 12.3 HTC 2.2 1.7 1.6 2.2 2.4 1.8 1.9 2.2 2.2 ZTE 6.0 7.0 7.5 7.5 3.1 3.9 7.1 7.5 7.5 Huawei 4.0 5.0 6.0 7.0 2.3 2.7 5.6 7.0 7.0 Lenovo 3.0 3.0 3.0 3.0 0.9 1.6 3.0 3.0 3.0 Smartphone shipments Nokia 6.4 6.7 7.4 8.0 85.9 35.0 28.5 35.2 41.9 Samsung 60.1 69.1 76.0 85.1 97.0 216.0 290.3 393.2 483.3 LG Electronics 9.4 10.3 12.4 13.0 19.0 26.2 45.2 51.8 56.5 RIM 9.1 9.3 9.8 9.8 52.7 35.2 38.0 36.5 37.9 Sony 7.7 8.0 8.6 8.8 19.6 24.5 33.1 38.8 42.2 Google 5.6 5.7 6.3 6.5 18.6 19.5 24.2 31.2 46.2 Apple 35.4 37.5 42.8 49.8 90.6 133.8 165.5 207.4 259.2 HTC 9.1 7.6 7.8 11.9 43.6 32.1 36.5 44.6 46.3 ZTE 8.1 8.5 9.3 10.1 10.5 26.8 35.9 44.3 52.8 Huawei 8.4 8.8 9.7 10.5 15.6 27.2 37.4 46.2 55.0 Lenovo 8.1 8.5 9.3 10.1 1.7 21.7 35.9 44.3 52.8

Source: Gartner, IMF, Mirae Asset Research

SEMCO remains our sector-top pick, with an unchanged target price of KRW125,000



2. Valuation

Pure smartphone suppliers, such as Apple, HTC and RIM, have traded at an average P/B of 5.2x (3.6x-9.7x) since 2007, when the smartphone market began to expand significantly. These companies have enjoyed a price premium to feature-phone suppliers, such as LGE and Nokia, whose shares have traded at an average P/B of 2.1x (0.6x-6.3x) during the same period. Compared with feature-phone suppliers, pure smartphone suppliers: 1) have been able to achieve faster market share gains, thanks to steep increases in smartphone penetration rates; 2) have maintained stronger profitability; and 3) have seen higher BPS growth rate from 2007 to 2012 (+30.6%, compared with +28.2% for feature-phone vendors).

However, smartphone demand growth began to slow from 1Q12 (when the penetration rate of smartphones in North America exceeded 50%), while the rapid growth of Chinese handset suppliers (ZTE, Huawei and Lenovo) intensified competiton over ASP. Moreover, SEC and Apple confirmed their competitiveness in the smartphone market by increasing their market shares.

In 2013, handset suppliers valuations should remain almost unchanged (in 2012, smartphone suppliers’ average P/B was 2.3x, while that of feature-phone suppliers was 1.2x). Global demand should remain relatively strong, as handset and smartphone shipments should increase by 8.7% YoY and 32.4% YoY in 2013. However, the profitability improvement of second-tiers should remain limited, as: 1) the penetration rate of smartphones (+8.5ppt YoY to 47.4%) should increase at a slower pace; and 2) top-tiers SEC and Apple, as well as Chinese vendors, should continue to expand their shipments.

With their cost competitiveness, China’s top-three smartphone makers (ZTE, Huawei and Lenovo) should rapidly expand their presence in China, as well as emerging markets and thus see a continued increase in shipments in 2013. As such, they should enjoy a valuation premium to peers in 2013.

Figure 2 Smartphone vendors’ (Apple, HTC, RIM) P/B band

Figure 3 Handset vendors’ (Nokia, LGE) P/B band

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Pure smartphone suppliers have traded within P/B band of 3.6-9.7x since 2007

Valuation premium versus second-tiers should narrow going forward

Handset suppliers’ valuation should remain unchanged in 2013

China’s top-three smartphone makers should achieve market share gains both in China and emerging markets and thus maintain valuation premium vs. peers



Figure 4 Handset peers’ valuation table LGE Apple SEC HTC Nokia RIM ZTE Lenovo

Price (KRW,US$,HK$,NT$) 78,300 434 1,544,000 280.0 3.6 13.7 12.8 9.0 Market cap.(US$ m) 11,819 407,633 208,594 8,047 13,407 7,165 5,510 12,107 Sales (US$ m)

2010 48,239 65,225 133,789 8,858 56,309 19,907 10,330 21,594 2011 49,021 108,249 149,080 15,849 53,829 18,435 13,348 29,574 2012E 46,327 156,212 183,017 9,991 39,628 11,267 14,262 34,311 2013E 46,477 182,497 195,583 9,495 39,119 12,928 16,677 38,669 2014E 48,763 205,625 211,741 10,100 40,025 12,101 18,825 42,594

OP (US$ m) 2010 76 18,385 14,381 1,402 2,746 4,636 616 369 2011 310 33,790 13,964 2,341 24 1,845 426 594 2012E 1,022 55,252 26,413 661 115 (1,160) (34) 778 2013E 1,299 55,296 31,427 454 1,311 (458) 579 975 2014E 1,377 63,371 35,085 591 1,386 (374) 686 1,112

NI (US$ m) 2010 1,062 14,013 13,670 1,256 2,454 3,411 480 273 2011 (424) 25,922 12,070 2,109 (1,621) 1,164 319 473 2012E 83 41,811 21,677 578 (894) (629) (178) 619 2013E 916 42,016 25,818 438 144 (198) 329 764 2014E 979 47,935 28,805 495 545 (234) 432 885

P/E (x) 2010 48.3 19.3 8.8 18.6 15.5 10.4 22.4 20.1 2011 - 14.6 11.7 6.8 - 3.3 32.4 19.3 2012E 174.2 9.8 9.7 14.3 - - - 19.3 2013E 12.5 9.8 8.3 17.7 60.0 - 17.4 15.7 2014E 11.7 8.6 7.3 14.2 21.7 - 13.2 13.5

P/B (x) 2010 1.4 5.6 1.9 9.7 2.0 3.9 3.3 3.1 2011 1.0 4.9 1.8 4.1 1.2 0.7 2.8 3.9 2012E 1.0 3.5 2.2 2.7 1.2 0.8 1.5 4.5 2013E 1.0 2.8 1.8 2.6 1.3 0.8 1.4 3.7 2014E 1.0 2.3 1.5 2.4 1.2 0.8 1.3 3.3

EV/EBITDA (x) 2010 16.3 11.2 5.0 14.4 6.4 5.8 16.4 5.2 2011 11.5 8.3 5.3 4.6 6.9 1.6 17.2 7.0 2012E 7.2 4.8 4.6 7.9 10.7 8.5 195.6 8.5 2013E 6.6 4.6 3.7 10.5 4.4 4.2 10.4 6.4 2014E 6.3 3.9 3.0 9.3 3.3 6.3 8.7 5.2

ROE (%) 2010 11.3 35.3 21.2 56.3 13.5 41.2 16.3 15.9 2011 (3.7) 41.7 15.0 70.4 (8.9) 12.2 8.7 22.5 2012E 0.5 40.5 22.0 17.8 (15.2) (8.1) (4.9) 24.1 2013E 7.8 31.8 21.3 15.2 0.5 (2.3) 8.4 26.0 2014E 7.7 28.2 19.8 16.0 7.0 (2.8) 10.2 25.8

Source: Bloomberg, Mirae Asset Research Note: Mirae Asset estimates for LGE and SEC (share price data as of 1 March 2013)



Figure 5 Handset peers’ historical valuations 2007 2008 2009 2010 2011 2012E 2013E 2014ELGE (066570 KS) EPS KRW 7,625 2,717 14,197 7,612 (3,132) 422 6,249 6,678 BPS KRW 49,289 57,223 81,014 87,280 71,303 70,220 75,590 81,343 P/E (x) 13.1 27.5 8.6 48.3 - 174.2 12.5 11.7 high 73.2 27.5 54.7 48.3 50.8 174.2 low 13.1 9.2 8.6 6.5 22.3 13.5 P/B (x) 2.0 1.3 1.5 1.4 1.0 1.0 1.0 1.0 high 2.7 3.3 2.6 1.6 1.4 1.6 low 1.3 1.3 1.2 1.1 0.6 0.7 ROE (%) 31.5 14.7 30.2 11.3 (3.7) 0.5 7.8 7.7Apple (AAPL US) EPS US$ 4.0 6.9 9.2 15.4 28.1 44.3 44.5 50.7 BPS US$ 16.7 25.1 35.2 52.2 82.4 124.6 154.2 192.2 P/E (x) 39.1 18.9 20.1 19.3 14.6 10.0 10.0 8.8 high 88.0 49.6 31.2 35.8 27.9 25.4 low 36.7 12.6 11.5 21.2 14.6 12.1 P/B (x) 9.2 5.1 5.2 5.6 4.9 3.6 2.9 2.3 high 17.1 11.7 8.4 9.3 8.1 8.5 low 7.1 3.4 3.1 5.5 4.9 4.2 ROE (%) 28.5 33.2 30.5 35.3 41.7 40.5 31.8 28.2 HTC (2498 TT) EPS US$ 1.0 1.0 0.8 1.5 2.5 0.7 0.5 0.7 BPS US$ 2.0 2.1 2.4 3.0 4.0 3.6 3.6 3.9 P/E (x) 11.9 8.6 12.8 18.6 6.8 14.2 17.5 14.1 high 11.9 17.6 14.1 31.8 26.8 14.9 low 6.9 5.4 8.2 9.7 6.8 2.6 P/B (x) 6.1 4.0 4.4 9.7 4.1 2.7 2.6 2.4 high 7.1 9.1 6.6 11.0 14.1 5.5 low 4.1 2.8 3.8 3.3 4.1 1.6 ROE (%) 58.7 49.1 35.8 56.3 70.4 17.8 15.2 16.0 Nokia (NOK US) EPS US$ 2.5 1.6 0.3 0.7 (0.4) (0.3) 0.1 0.2 BPS US$ 5.4 5.4 5.1 5.2 4.1 2.9 2.5 3.0 P/E (x) 14.3 10.4 37.1 15.5 - - 62.5 22.6 high 27.0 13.9 37.1 48.7 16.8 - low 13.8 5.4 6.5 15.5 6.9 - P/B (x) 7.1 2.9 2.5 2.0 1.2 1.3 1.3 1.3 high 9.8 7.0 3.1 3.3 2.2 1.4 low 5.0 2.7 1.8 1.9 0.9 0.4 ROE (%) 53.9 27.5 6.5 13.5 (8.9) (15.2) 0.5 7.0 RIM (BBRY US) EPS US$ 2.3 3.3 4.3 6.4 2.2 (1.2) (0.3) (0.4) BPS US$ 7.0 10.4 13.6 17.1 19.3 17.5 17.2 17.1 P/E (x) 46.3 12.2 16.6 10.4 3.3 - - high 71.3 65.3 26.0 17.8 11.0 4.2 low 23.3 12.3 10.7 9.1 2.0 1.5 P/B (x) 15.0 3.9 5.2 3.9 0.7 0.8 0.8 0.8 high 17.7 21.1 8.3 5.6 4.1 0.9 low 5.8 3.9 3.4 3.1 0.7 0.3 ROE (%) 40.3 38.6 36.5 41.2 12.2 (8.1) (2.3) (2.8)ZTE (763 HK) EPS US$ 0.1 0.1 0.1 0.1 0.1 (0.1) 0.1 0.1 BPS US$ 0.5 0.7 0.7 1.0 1.1 1.1 1.2 1.3 P/E (x) 30.4 14.4 30.2 22.4 32.4 (0.0) 18.0 13.7 high 57.9 34.8 35.4 33.6 32.4 33.1 low 30.4 7.9 13.5 14.1 12.2 12.4 P/B (x) 3.1 1.7 4.6 3.3 2.8 1.6 1.5 1.3 high 4.1 3.6 4.6 5.1 3.8 2.9 low 2.5 0.8 1.6 2.1 1.8 1.1 ROE (%) 10.9 12.6 15.8 16.3 8.7 (4.9) 8.4 10.2

Source: Bloomberg, Mirae Asset Research



Figure 6 SEC handset division’s OP vs. stock price

Figure 7 LGE MC division’s OP vs. stock price

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Figure 8 Apple ( AAPL US) iPhone OP vs. stock price

Figure 9 HTC (2498 TT) OP vs. stock price

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Figure 10 Nokia (NOK US) handset division’s OP vs. stock price

Figure 11 RIM (RIMM US) OP vs. stock price

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Figure 12 SEC P/E band

Figure 13 SEC P/B band

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Figure 15 LGE P/B band

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Figure 16 Apple (AAPL US) P/E band

Figure 17 Apple (AAPL US) P/B band

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Figure 18 Nokia (NOK US) P/E band

Figure 19 Nokia (NOK US) P/B band

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Figure 21 RIM (RIMM US) P/B band

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Figure 22 HTC (2498 TT) P/E band

Figure 23 HTC (2498 TT) P/B band

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Figure 24 ZTE (763 HK) P/E band

Figure 25 ZTE (763 HK) P/B band

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Figure 26 Sony (6758 JP) P/E band Figure 27 Sony (6758 JP) P/B band

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Ⅱ. Investment points

1. Continued demand growth in emerging markets

We forecast global demand for handsets and smartphones in 2013 to reach 1.89bn units (+8.7% YoY) and 897m units (+32.4% YoY), respectively. We expect China to drive global demand growth in 2013, as demand for handsets and smartphones in China should expand by 21.8% YoY (to 495m units) and 56% YoY (to 270m units), respectively. Notably, China’s contribution to global demand should rise by 4.6ppt YoY to 30.2% in 2013. We see ample upside in demand growth in China, given that: 1) smartphone users’ portion of mobile phone subscribers in China remains relatively low, at 24% (compared with 48% in North America); and 2) the smartphone penetration rate in China is also lower than that of North America (42.6%, versus 65.3%); and 3) the portion of white-box smartphones is high (45.2% in 2012).

Figure 28 Global handset demand (new + replacement) and YoY growth

Figure 29 Smartphone users by country and portion

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011 20122013E2014E2015E

(m units)

-5

0

5

10

15

20

25

30

35

(%)

New(LHS) Replacement(LHS) YoY(RHS)

0

50

100

150

200

250

300

China US

AJa

pan

Braz

ilIn

dia UKKo

rea

Indo

nesia

Fran

ce

Germ

any

(m people)

0

10

20

30

40

50

60

70

(%)

Smartphone Portion

Source: Gartner, Mirae Asset Research Source: KPCB Mary Meeker, Mirae Asset Research

Meanwhile, as of end-2012, 3G’s portion of mobile telecom network in Asia (including China) stood at 19.9%, far lower than the 89.1% in North America. Given the sharp expansion of handset demand in North America, buoyed by network upgrades resulting from massive investments in CDMA (2000) and 3G (2007), we believe that China’s smartphone demand growth in 2013 should also be driven by 3G coverage expansion and investments in TD-LTE by China Mobile (66.1% of total mobile subscribers in China, as of end-2012).

Figure 30 China handset demand in 2012 Figure 31 China handset supply market share trend

Feature,57.4%

Highsmartphone,

10.7%

Midsmartphone,

15.3%

Lowsmartphone,

16.6%

Mid-smartphone:CNY1,000~2,000

0

10

20

30

40

50

60

70

80

90

100

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

(%)

Others

Ginoee

TCL

Yulong

Lenovo

HuaweiZTE

HTC

Apple

LGE

SEC

Nokia

Source: Mirae Asset Research Source: Gartner, Mirae Asset Research

Global demand growth will continue to be driven by China in 2013

Capex by China Mobile to drive demand growth in China



We expect demand growth in China in 2013 to be led by demand increases for low-to mid-end smartphones (mid-end: RMB1,000-2,000, low-end: RMB1,000 or below). We forecast demand for mid-end and low-end smartphones in China to jump by 58.5% YoY (to 98.9m units) and 66.8% YoY (112.7m units), respectively. Chinese local smartphone suppliers plan to offer new high-end smartphone models, with specifications comparable to SEC’s Galaxy S series and Apple’s iPhone, for ASPs of RMB2,000 or below, thus stimulating demand for mid-end models. In addition, their aggressive lineup expansion should lower the ASP for low-end smartphones to the levels of feature-phones, thus boosting low-end demand.

Figure 32 China-based makers’ shipments by price Figure 33 China-based makers’ shipment portions by price

0

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70

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Less than $50 $51-$100 $101-$150 More than $150

Source: Gartner, Mirae Asset Research Source: Gartner, Mirae Asset Research

Notably, high-end smartphone demand in China should remain solid in 2013, as its high-end demand growth (YoY) should reach 35.6%, outpacing the global market grwoth (32.4% YoY). Likely continued concentration of mobile carriers’ subsidies in high-end smartphone models should keep gross margins for high-end models higher than those of low-to mid-end models.

Figure 34 China handset supply market share in 4Q12 Figure 35 China smartphone supply market share in 4Q12

(%)

SEC, 10.7 ZTE, 5.0

Huawei, 5.5

Lenovo, 7.5

Apple, 4.6Others, 66.6

(%)

Others, 44.1

Lenovo,13.6

Huawei, 9.4

ZTE, 8.2

Apple, 8.7

SEC, 15.9


China’s top-three smartphone suppliers (ZTE, Huawei and Lenovo) to eat rapidly into low-to mid-end market share in 2013

High-end smartphone demand in China to remain solid



2. Chinese peers to expand local market share on reinforced competitiveness

Based on developments witnessed at this year’s MWC, we expect China’s top-three smartphone makers, i.e. ZTE, Huawei and Lenovo, to show visible progress in 1H13, as they aim to expand their local market shares. With the three Chinese companies (ZTE, Huawei, and Lenovo) quickly catching up to global peers, in terms of hardware competiveness, existing players are finding it increasingly difficult to differentiate their products through enhancement of hardware features. ZTE’s flagship smartphone, Grand Memo, slated for release in 1Q13, employs Qualcomm Snapdragon 600, the fastest AP on the market, offering a 40% improvement in performance, compared with its predecessor, the Qualcomm S4 Pro. The Grand Memo model also adopts a 5.7”, 1280x720, 288ppi HD display, on par with other display-focused smartphone models, such as LG Electronics’ Optimus G Pro (5.5”, 1920x1080, 400ppi display) and Sony’s Xperia Z (5”, 1920x1080, 441ppi display). Moreover, ZTE’s new model runs on the latest version of the Android platform (4.1.2), demonstrating the company’s advancement, in terms of software competitiveness.

In addition to reinforcing hardware competitiveness, China’s top-three smartphone makers are seeking to cut ASP to improve price competitiveness, backed by lower production costs. ZTE’s Grand S, scheduled for market release in 1Q13, has an estimated bill of materials (BOM) of US$178, 16.7% lower than Galaxy S3’s BOM of US$213.5. In addition, it is forecast to sell for an ASP of US$499.99, US$100 cheaper than Galaxy S3. We do not expect the Chinese companies to see rapid growth in sell-through of their smartphone models within 1H13, given their absence of competitive brand images or differentiation points (setting their products apart from the flagship models of existing companies). However, due to expanded marketing spending, on the back of steady growth in shipments and reduction of materials costs, we believe Chinese smartphone makers will gradually eat into the high-end market shares of other second-tiers from 2H13.

Figure 36 Chinese makers’ flagship smartphone line-up Vendor ZTE Huawei Lenovo Meizu OPPO Picture

Name Grand S Ascend D2 K900 Meizu MX2 OPPO Find 5 Core Qualcomm S4 1.7GHz Hi-silicon K3V2 1.5GHz Intel Atom 2.0GHz 1.6GHz Quad core Qualcomm S4 1.5GHz OS Android 4.1 Android 4.1.2 Android 4.2 Android 4.1 Android 4.1.2

Display 5" (1920x1080),441ppi 5" (1920x1080),441ppi 5.5" (1920x1080), 400ppi 4.4" (1280x800), 343ppi 5" (1920x1080), 441ppi

Size 142x69x6.9mm 140x71x9.4mm thickness: 6.9mm 124.9x64.9x10.2mm 141.8x68.8x8.9mm Weight TBA 170g 162g 142g 165g Memory 2GB RAM 2GB 2GB 2GB RAM 2GB RAM Storage 16GB 32GB 16GB 64GB 16GB Battery 1780mAh 3000mAh TBA 1800mAh 2500mAh Release 2013.1Q 2013.01 2013.04 2012-11-27 2012-12-12

Source: Company data, PhoneArena, Mirae Asset Research

Chinese smartphone makers to expand local market share in 1H13, backed by: 1) reinforced hardware competitiveness;

…2) cost competitiveness;



Figure 37 Global handset makers’ smartphone line-up in 1Q13 Vendor Samsung LGE Apple RIM Sony Picture

Name Galaxy S3 LTE Optimus G Pro iPhone 5 BlackBerry Z10 Xperia Z Core Exynos 4412 1.4GHz Qualcomm 600 1.7GHz A6 Qualcomm S4 1.5GHz Qualcomm S4 1.5GHzOS Android 4.1 Android 4.1 iOS 6 BlackBerry 10 Android 4.1.2

Display 4.8" (1280x720), 306ppi 5.5" (1920x1080) 4" (1136x640), 326ppi 4.2" (1280x768),355ppi 5" (1920x1080), 441ppiSize 136.6x70.6x9.0mm 150.2x76.1x9.4mm 123.8x58.6x7.6mm 130x65.6x9mm 139x71x7.9mm

Weight 138.5g 172g 112g 138g 146g Memory 2GB RAM 2GB RAM 1GB RAM 2GB RAM 2GB RAM Storage 32GB 32GB 16GB~ 16GB 16GB Battery 2100mAh 3140mAH 1440mAh 1,800mAh 2330mAh Release 2012.05.29 2013.02.20 2012.09.21 2013.01.31 2013.02.09




Figure 38 Samsung Galaxy S3 BOM costs

Figure 39 ZTE Grand S BOM costs Galaxy Note 2

Components Manufacturer Cost (US$)

BOM + manufacturing 213.5 Total BOM cost 205.5

Manufacturing cost 8.0 Major cost drivers

Memory Samsung 20.0 Display/touchscreen Samsung/Melfas 62.0 Processor Samsung 15.0 Wireless section Intel/Qualcomm 25.0 User interface & sensors & WLAN/BT/FM SEMCO/Infineon 16.5

Power management Maxim 11.0 Battery Samsung 5.0 Mech./electro-mech. SEMCO 30.0 Camera SEMCOP/Patron 15.0 Box contents 6.0

ZTE Grand S

Components Manufacturer Cost (US$)

BOM + manufacturing 178.0 Total BOM cost 175.0

Manufacturing cost 3.0 Major cost drivers

Memory 23.0 Display/touchscreen 45.5 Processor Qualcomm 15.0 Wireless section 20.0 User interface & sensors & WLAN/BT/FM

13.0

Power management 10.0 Battery 4.5 Mech./electro-mech. 23.0 Camera 18.0 Box contents 3.0

Source: Mirae Asset Research Source: Mirae Asset Research

Buoyed by reinforced hardware/software competitiveness and reduced production costs, the top-three smartphone makers in China (ZTE, Huawei, Lenovo) are set to see visible shipment growth, with new smartphones slated for release in early 2Q12 (through local telecom carriers, i.e. China Mobile, China Unicom and China Telecom). In 1H13, we expect the three Chinese smartphone makers to rapidly expand their shares of the low-to mid-end smartphones and steadily eat into the white-box smartphone market, enhancing the brand image of their flagship models as a result. In 2H13, we expect the three companies to expand their footing aggressively in the US, Latin American and Indian handset markets. Overall, we expect the combined market share of the three companies in China to rise by 3.9ppt YoY to 22.2% in 2013.

Figure 40 Specifications of smartphone line-ups in 1Q13 Company Product Display CPU Memory Storage Battery

(mAh)Launch

Global manufacturers

SEC Galaxy S3 4.8” (1280x720), 306ppi Exynos 4412 1.4Ghz 1GB RAM 32GM 2,100 2012-05-22

LGE Optimus G Pro 5.5" (1920x1080), 400ppi Qualcomm 600 1.7GHz 2GB RAM 32GB 3.140 2013-02-20

LGE Optimus F7 4.7" (1280x720), 312ppi 1.5GHz Dual core 2GB RAM 8GB 2.540 2013.1Q

LGE Optimus L7 Ⅱ 4.4" (800x480), 217ppi Qualcomm S4 1GHz 768MB RAM 4GB 2.460 2013.1Q

Apple iPhone 5 4.0” (1136x640), 326ppi Apple A6 1.3GHz 1GB RAM 16GB 1,440 2012-09-21

RIM BlackBerry Z10 4.2" (1280x768), 356ppi Qualcomm S4 1.5GHz 2GB RAM 16GB 1,800 2013-01-31

Sony Xperia Z 5" (1920x1080), 441ppi Qualcomm S4 1.5GHz 2GB RAM 16GB 2,330 2013-02-09

HTC One 4.7" (1920x1080), 469ppi Qualcomm 600 1.7Ghz 2GB RAM 32GB 2,300 2013.1Q

Chinese manufacturers

ZTE Grand S 5" (1920x1080), 441ppi Qualcomm S4 1.7GHz 2GB RAM 16GB 1,780 2013.1Q

ZTE Grand Memo 5.7” (1280x720), 258ppi Qualcomm S4 1.7GHz 2GB RAM 16GB 3,200 2013.1Q

ZTE Nubia Z5 5.0” (1920x1280), 441ppi Qualcomm S4 1.5GHz 2GB RAM 32GB 2,300 2013.01

Huawei Ascend P2 4.7" (1280x720), 312ppi 1.5GHz Quad core 1GB RAM 16GB 2.420 2013.1Q

Huawei Ascend D2 5.0” (1920x1280), 441ppi Hi-Silicon 1.5GHz 2GB RAM 32GB 3,000 2013.1Q

Lenovo K900 5.5” (1920x1080), 401ppi Intel Atom 2GHz 2GB RAM 16GB TBA 2013-04

Meizu Meizu MX2 4.4” (1280x800), 343ppi 1.6GHz Quad core 2GB RAM 64GB 1,800 2012-11

OPPO OPPO Find 5 5.0” (1920x1080), 441ppi Qualcomm S4 1.5GHz 2GB RAM 16GB 2,500 2012-12 Source: Company data, PhoneArena, Mirae Asset Research

…and 3) wider telecom carrier lineup



Meanwhile, we believe that any adverse impact from Chinese local players’ rapid market share gains in China on Korean smartphone makers should remain limited in 1H13, given that: 1) the portion of low-end models in SEC’s total smartphone shipments to China is low, at mere 5% levels; 2) SEC’s mid-end models should maintain a solid brand premium, despite improved price competitiveness; and 3) Chinese smartphone makers’ new flagship models, which have failed to secure their own identity, are unlikely to eat into the market shares of SEC’s Galaxy series. Chinese players should erode the market shares of peers with relatively low cost competitiveness and brand premiums, while rapidly absorbing demand for white-box smartphones, which represented a hefty 45.2% (-5.2ppt YoY) of global demand, as of end-2012.

LGE should see marginal impact from Chinese players’ market share gains in China in 1H13, in light of its negligible market share in China (0.2% as of end-2012) and the meager portion of China-bound shipments (1.3% in end-2012, down by 4.3ppt YoY). However, LGE could see a slight fall in its market share in 2H13, due to an increase in COGS/sales ratio resulting from ASP declines and a subsequent slowdown in profitability improvement.

Figure 41 Supply portion of China smartphone market by price

0

1020

30

4050

60

70

8090

100

Apple SE

CHT

CRI

MNo

kia

Motoro

laLG

ESo

ny

Huaw

eiZT

E

Leno

vo

Coolp

ad

Xiaom

i

K-To

uch

Gion

eeOPP

OMeiz

uTC

L

Others To

tal

(%)

Low

Mid

High

Source: SEC, LGE. Gartner, Mirae Asset Research

Chinese local players’ rapid market share gains will have a marginal impact on SEC

Adverse impact on LGE should also be limited in 1H13; from 2H13, margin improvement could slow, due to ASP declines



Figure 42 China Mobile’s smartphone sales in 1Q13

December January February Vendor Model (CNY) Vendor Model (CNY) Vendor Model (CNY)

SEC B9062 2,599 SEC B9062 2,599 SEC B9062 2,399 I9050 1,999 I9050 1,999 I8250 1,599 I8250 1,599 I8250 1,599 Galaxy Note 9228 3,699 Galaxy Ace 1,499 7568 1,299 GalaxyS3 i9308 4,199 Galaxy S3 i9308 4,199 Galaxy Note 9228 3,499 Galaxy Note2 4,899 Galaxy Note2 5,199 Galaxy S3 i9308 4,199 Galaxy Ace 999 HTC S720t 3,899 Galaxy Note2 5,199 S6108 899 T328t 1,859 HTC S720t 3,899 S6358 999 Google MT680 1,199 T328t 1,859 HTC T327t 1,499 MT917 2,499 T329t 1,999 T329t 1,899 Coolpad 8870 2,299 Motorola MT680 1,199 T528t 2,499

8150 1,300 MT788 1,999 8S 1,999 8810 1,300 MT917 2,499 8X 3,999 8180 1,400 Nokia Lumia920T 4,599 Motorola MT887 2,800

Lenovo A698T 1,300 Coolpad 8870 2,299 MT788 1,999 ZTE U885 1,300 8020 399 Nokia Lumia920T 4,599 U880S 800 8190 1,099 ZTE I880F1 899 Huawei T8828 1,400 Lenovo A278T 399 U930 1,600 Hisense T96 1,300 U960S2 930 Coolpad 8950 2,199 8020+ 389 8190 999 8060 649 8070 999 8050 519

Lenovo A278T 399 A798T 999

Tianyu T6 999 T621 399 T619 599

Huawei T8951 999 Y310 599 Y220T 521

Hisense T950 998

Haier I710 799 Huawei T8951 999

Source: China Mobile, Mirae Asset Research



Figure 43 China Telecom’s smartphone sales in 1Q13

December January February Vendor Model (CNY) Vendor Model (CNY) Vendor Model (CNY) Apple iPhone 4S 16Gb 4,488 Apple iPhone 4S 16GB 4,488 Apple iPhone 4S 16GB 4,488 SEC Galaxy S3 i939 4,699 iPhone 5 16GB 5,288 iPhone 5 16GB 5,288 SCH-W689 4,980 iPhone 5 32GB 6,088 iPhone 5 32GB 6,088 HTC Desire VC T328d 1,690 iPhone 5 64GB 6,888 iPhone 5 64GB 6,888 Google XT928 3,980 SEC Galaxy S3 i939 4,699 SEC Galaxy S3 i939 4,699 XT882 3,599 SCH-W689 4,980 SCH-W689 4,980 Nokia Lumia 800C 2,399 Galaxy Note2 N719 5,699 Galaxy Note2 N719 5,699 Huawei C8810 990 HTC Desire VC T328d 1,690 Nokia Lumia 800C 2,399 C8812 839 Motorola XT882 3,599 ZTE N881E 990 C8812+ 990 Nokia Lumia 800C 2,399 Huawei C8812+ 990

G300C 1,490 ZTE N881E 990 C8812 990Hisense ET919 1,590 Huawei C8810 990 Xiaomi M2 2,199 EG870 890 C8812 839 Hisense ET919 1,590

E89 459 C8812+ 990 EG870 890 K-touch E619 699 G300C 1,490 E89 459 Lamtam S600D 650 Hisense ET919 1,590 Lamtam S600D 650 S800 980 EG870 890 S800 980 Sharp SH7218T 1,390 E926 990 Coolpad 5860S 990

E89 459

Lamtam S600D 650 S800 980

Sharp SH7218T 1,390 Coolpad 5860S 990

Source: China Telecom, Mirae Asset Research



Figure 44 China Unicom’s smartphone sales in 1Q13 December January February

Vendor Model (CNY) Vendor Model (CNY) Vendor Model (CNY)Apple iPhone 4 8GB 3,088 Apple iPhone 4 8GB 3,088 Apple iPhone 4 8GB 3,088 iPhone 4S 16GB 4,488 iPhone 4S 16GB 4,899 iPhone 4S 16GB 4,899 iPhone 4S 32GB 5,288 iPhone 4S 32GB 6,999 iPhone 4S 32GB 6,999 iPhone 4S 64GB 5,988 iPhone 4S 64GB 7,999 iPhone 4S 64GB 7,999 SEC Galaxy Ace S5838 2,298 iphone5 16GB 5,899 iphone5 16GB 5,899 B9120 9,999 iphone5 32GB 6,899 iphone5 32GB 6,899 I8150 2,599 iphone5 64GB 7,899 iphone5 64GB 7,899 I9103 3,599 SEC Galaxy Ace S5838 2,298 SEC Galaxy Ace S5838 1,398 Galaxy S3 i9300 4,699 B9120 9,999 B9120 9,999 S6102E 999 I8150 2,599 I8150 2,599 S5690 2,098 I9103 3,599 I9103 3,599 S5830I 1,398 Galaxy S3 i9300 4,699 Galaxy S3 i9300 3,999 S6352 1,199 Galaxy Note2 N7102 5,799 Galaxy Note2 N7102 5,799 S5380D 1,498 Galaxy Camera 3,999 S6102E 999

S5578 1,499 S6102E 999 S5690 2,098 Galaxy S2 i9100G 4,899 S5690 2,098 S6352 999

LGE Optimus L7 1,999 S6352 1,199 S5578 1,499 Optimus 3D P920 5,399 S5578 1,698 Galaxy S2 S9100G 4,899

HTC T328W 1,539 Galaxy S2 S9100G 4,899 Galaxy Wave Y S5380D 1,498 One SU T528W 2,699 LGE Optimus L7 1,999 Galax Grand 3,199

S510d 1,399 Optimus 3D P920 5,399 LGE Optimus L7 988 Pico A310e 899 HTC Desire T328W 1,539 Optimus 3D P920 5,399 Z710e 4,499 One SU T528W 2,699 HTC Desire T328W 1,299

RIM Bold 9900 5,498 S510d 2,499 One SU T528W 2,199 Torch 9800 4,663 Pico A310e 899 Z710e 4,499 Curve 9300 2,537 Z710e 4,499 8X 3,999 Google XT390 999 RIM Bold 9900 5,498 8S 1,999

XT316 1,499 Torch 9800 4,663 RIM Bold 9900 5,498 XT615 2,598 Curve 9300 2,537 Torch 9800 4,663 ME722 2,980 Google XT390 999 Curve 9300 2,537 DEFY XT536 1,399 XT316 1,499 Google XT390 999 RAZR MAXX XT910 4,298 XT615 2,598 XT316 399 ME860 4,198 ME722 2,980 ME722 2,980 XT319 1,698 DEFY XT536 1,399 Atrix 4G ME860 4,198 Atrix2 ME865 4,198 Razr MAXX XT910 4,298 XT319 1,698

XT300 1,497 Atrix 4G ME860 4,198 XT701 3,688 XT701 3,688 XT319 1,698 Nokia Lumia610 1,599

Nokia Lumia610 1,699 XT300 1,497 N9 4,218 N9 4,218 XT701 3,688 Lumia800 3,799 Lumia800 3,799 Nokia Lumia610 1,599 Lumia920 4,599

Sony LT26i 4,599 N9 4,218 ZTE V788D 599 MK16i 3,204 Lumia800 3,799 V889D 1,199 ZTE V889D 1,199 Sony LT26i 2,869 V889M 1,399 V889M 1,399 LT18i 2,268 V889S 799

V965W 1,899 MK16i 3,204 V965W 1,899 V960 1,598 MT27i 1,786 V955 1,199 V6500 1,399 ZTE V788D 599 V960 1,598 Huawei Honor 2,199 V889D 1,199 Huawei Honor 2,199 Ascend G600 1,599 V889M 1,399 Sonic+ 799 Ascend P1 2,799 V889S 1,199 Ascend G600 1,599 Ascend G330D 1,199 V965W 1,899 Ascend P1 2,099 U8500 1,159 V955 1,199 U8500 1,159 G300 1,599 V960 1,598 G300 1,599 Coolpad 7266 999 V6500 1,399 G510 998 7500 1,399 Huawei Honor 2,199 Y210 699 7290 1,199 Sonic+ 799 Y300 999 W770 4,100 Ascend G600 1,799 Coolpad 7011 700 Lenovo A789 1,199 Ascend P1 2,799 7019 799 A690 799 Ascend G330D 1,199 7266 999 A780 999 U8500 1,559 7260 999

A750 1,099 G300 1,599 7290 1,199 A800 1,188 G510 1,166 W770 4,100 Hisense U950 1,399 Y210 699 Lenovo A65 799 Haier W801 1,199 Lenovo A65 799 A789 819 N88W 1,799 A789 819 A60+ 599 Xiaomi 1S 1,766 A60+ 599 A789 1,199 Tianyu W806 1,699 A789 1,199 A690 639 W760 1,199 A690 799 A800 888 U6 1,199 A750 1,099 Xiaomi 1S 1,644

W700 2,888 A800 1,188 M2 2,399 Amoi N89 1,299 Coolpad 7266 999 Amoi N89 1,599 N79 1,159 7500 1,399 Meizu MX2 2,699TCL W989 1,199 7290 1,199 Haier N88W 1,799 Philips W635 1,299 W770 4,100 Hisense U930 999Malata i8 1,399 Xiaomi M2 2,499 Tianyu W700 2,888

Source: China Unicom, Mirae Asset Research



3. SEC to outshine peers in cost and supply chain competitiveness

SEC is set to expand its shipments of the Galaxy S4 from 2Q13, while China’s top-3 smartphone makers should significantly expand their smartphone shipments (within China) 1H13. In addition, Apple plans to launch a successor model to the iPhone in 3Q13, thus leading to fiercer subsidy competition among handset makers. Apple is highly likely to cut the ASP for the iPhone in 2013, in order to expand its market share in emerging markets. ASP declines and subsidy expansion should drive the handset industry’s average margin downwards by 7.1ppt QoQ in 3Q13.

While global smartphone demand is forecast to reach 897m units (+32.4% YoY) in 2013, we expect the combined smartphone shipments by SEC/Apple and Chinese players in 2013 to reach 453m units (+32% YoY) and 284m units (+56% YoY), respectively. This suggests that second-tiers (excluding Chinese players) should see a mere 9.5% YoY increase in shipments (versus the industry average of 32.4% YoY) to 160m units in 2013. Significant shipment growth by Chinese makers in 2013 is highly likely, given their high shipment portions to emerging markets. Going forward, emerging markets (e.g. China and India) should drive global smartphone demand growth, as we forecast smartphone demand in China to climb by 56% YoY (to 270m units) in 2013.

Figure 45 2013E global smartphone market share

LGE, 5.0%

LGE, 3.9%

Apple, 19.7%

Apple, 18.1%

SEC, 32.4%

SEC, 31.9%

2012E 2013E

678m units (+43.3% YoY)

897m units (+32.4% YoY)

ZTE 4.0%Huawei 4.0%RIM 5.0%Lenovo 3.2%HTC 4.7%Sony 3.6%Nokia 5.6%Google 2.8%

ZTE 4.0%Huawei 4.2%RIM 4.2%Lenovo 4.0%HTC 4.1%Sony 3.7%Nokia 3.2%Google 2.7%


The smartphone industry should suffer margin erosion in 2H13, for the following reasons:

1) The Chinese market should increase its portion of global smartphone demand, while Chinese smartphone makers should expand their global market shares. The sharp growth of Chinese players should lower the smartphone industry’s ASP by 13.6% YoY in 2013, while first-tier smartphone makers should see an increased portion of raw material costs in total costs and a rise in marketing costs.

2) Most second-tier smartphone makers (excluding SEC, Nokia and Chinese companies) strategically focus on the North American market, which is close to saturation point, with a smartphone penetration rate of 67.7% in 2012.

3) Latecomers (Amazon, Facebook, Google, Chinese players) also aim to enter the North American market, while some first-tiers (HTC, Sony and RIM, which has recently seen a downtrend in shipments) pursue shipment growth-backed turnarounds.

4) Given Apple’s firm resolve to expand its market share in emerging markets in 2013, we see a high possibility of the company offering the iPhone to China Mobile at lower prices. ASP declines and subsidy expansion should drive down the handset industry’s average margin by 7.1ppt QoQ in 3Q13, from its 2Q13 high.

Industry-wide profitability to deteriorate in 3Q13

Limited demand growth vs. increased supply and new smartphone lineup expansion

Industry-wide margin erosion expected in 2H13, due to: 1) ASP declines; 2) intensifying competition in North America; and 3) delays in market restructuring



Figure 46 OPM comparison of handset industry versus SEC’s and LGE’s handset divisions

(15)

(10)

(5)

0

5

10

15

20

25

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13

(%)

Handset industry SEC's handset LGE' handset

Source: SEC, LGE, Gartner, Mirae Asset Research

In order to remain competitive in 2013, smartphone vendors should be able to: 1) cut development costs, by having their low-to mid-end models share platforms with flagship models; 2) reduce their bill of materials (BOM) by expanding the portion of in-house production of core parts; and 3) promptly respond to constantly changing market needs by shortening their new-model development cycles. Only those with price competitiveness versus Chinese players will be able to expand their market shares in both emerging and global markets. They will also be able to preserve operating margins, by maintaining both margins and shipments for flagship models at relatively high levels. We forecast SEC’s global market share to edge higher, by 0.4ppt to 23.6%, in 2013 and its 2013E operating margin to exceed the industry average by 3.8ppt. SEC is positioned to: 1) shorten its hardware development cycle, backed by its relatively high portion of in-house production of core components (e.g. AP, DRAM, NAND, display, batteries, MLCC, HDI and camera modules); and 2) further cut the portion of raw material costs, backed by strong financials and strict control of suppliers; and 3) improve its price and hardware competitiveness and thus increase its share of emerging markets.

Figure 47 SEC parts’ internalisation portion (63.7%)

Figure 48 LGE parts’ internalisation portion (46.8%)

Others,36.3%

Cameramodule,9.0%

Substrate,3.0%

Battery,2.1%

Memory,13.1%

AP, 9.0%

Motor, 0.2%

MLCC, 1.0%

Display/touch26.3%

FPCB, 1.5%Motor, 0.2%

Cameramodule,9.0%

Substrate,3.0%

Battery,2.1%

Others,53.2%

Display/touch31.3%

Source: Mirae Asset Research Source: Mirae Asset Research

SEC has shown: 1) an increase in the portion of in-house production for core components; 2) a diversified supply chain; and 3) strong balance sheet

SEC’s strong cost and supply chain competitiveness to be in spotlight



Figure 49 SEC’s smartphone supply chain

Source: SEC, Mirae Asset Research

Figure 50 LGE’s smartphone supply chain

Source: LGE, Mirae Asset Research

Figure 51 Apple’s smartphone supply chain

Source: Apple, Mirae Asset Research



Figure 52 HTC’s smartphone supply chain

Source: HTC, Mirae Asset Research

Figure 53 RIM’s smartphone supply chain

Source: RIM, Mirae Asset Research

Figure 54 Sony’s smartphone supply chain

Source: Sony, Mirae Asset Research



4. Smartphone industry paradigm returning to identity and ecosystem

At this year’s MWC, we noted that handset suppliers are focusing on building the identities of their new flagship models through UX and killer applications, while seeking to develop an independent ecosystem by diversifying platforms beyond the oligopolistic Android (whose smartphone OS market share stood at 64% in 2012) in 2013. Between 2011 and 2012, competition in the handset industry had focused primarily on developing advanced hardware features for flagship models and upgrading to higher versions of the Android OS. However, following the rapid improvement in flagship smartphone hardware, competition to find differentiation points in hardware temporarily ceased in 2013, with latecomers closing the gap with top tiers, in terms of hardware competitiveness.

Through efforts to establish solid identities, handset makers are seeking to: 1) protect the premium of high-margin flagship smartphones; 2) reinforce customer loyalty and expand market share through the development of an independent ecosystem; 3) reduce marketing costs for low-to mid-end models; and 4) diversify profit structures to software/contents, after focusing primarily on hardware sales to date. In sharp contrast to Chinese smartphone makers, which continued to emphasize the advanced hardware performance of their flagship models at the 2013 MWC, other smartphone makers (SEC, LG Electronics, Nokia, HTC and Sony emphasized the identity and differentiated UX of their new smartphone models.

Figure 55 Smartphone line-up at MWC2013 Vendor Alcatel Sony Huawei HTC ZTE Picture

Name One Touch idol x Xperia Z Ascend P2 One Grand memo Core 1.2GHz Quad core Qualcomm S4 1.5GHz 1.5GHz Quad core Qualcomm 600 1.7Ghz Qualcomm 600 1.7GhzOS Android 4.1.2 Android 4.1.2 Android 4.1.2 Android 4.1 Android 4.1.2

Display 5" (1920x1080),441ppi 5" (1920x1080), 441ppi 4.7" (1280x720), 312ppi 4.7" (1920x1080),469ppi 5.7" (1280x720), 288ppiSize 140.4x67.5x7mm 139x71x7.9mm Unknown 137.4x68.2x9.3mm 159.9x82.6x8.5mm

Weight TBA 146g Unknown 143g TBA Memory 2GB RAM 2GB RAM 1GB RAM 2GB RAM 2GB RAM Storage 16GB 16GB 16GB 32GB 16GB Battery 2,000mAh 2,330mAh 2.420mAh 2,300mAh 3,200mAh Release TBA 2013.02.09 2013.1Q 2013.03. 2013.1Q


With platforms rising as a key element in competition this year, smartphone makers are likely to expand efforts to diversify smartphone OS. As such, market attention should once again focus on the competitiveness of SEC (relatively less burdened by development costs), Apple and RIM (companies offering proprietary platforms). For Android smartphones, the process of ‘platform porting/optimization/application of UI/main application installation’ accounts for 50-55% of the entire development process and uses up more than half of all R&D costs. In the long term, by adopting an alternative platform, smartphone makers would be able to: 1) reduce R&D expenses; 2) minimize R&D periods; and 3) increase customer loyalty, while differentiating flagship models by building an exclusive ecosystem. However, with the market share of Android OS reaching 66.1% (+19.4% YoY) at end-2012, we expect the platform’s oligopolistic control over the market (which started in 2011) to continue into 2013. Efforts to diversify platforms should drive up the R&D cost burden for second tiers, which struggle from higher fixed cost portions, due to their relatively lower shipment volumes.

Smartphone industry paradigm returning to identity and eco-system

Efforts to develop alternative platforms to drive up R&D costs, raising the cost burden for second tiers with higher fixed cost portions

Efforts to develop alternative platforms to drive up R&D costs, raising the cost burden for second tiers with higher fixed cost portions



Figure 56 Upcoming smartphones using new OS Vendor Samsung ZTE Sony Alcatel Ubuntu Picture

Name Tizen phone Open Xperia E One Touch Fire TBA Core TBA Qualcomm S1 Qualcomm S1 1GHz Qualcomm 1GHz TBA OS Tizen 2.0 Firefox OS Firefox OS Firefox OS Ubuntu

Display TBA 3.5" (480x320), 165pi 3.5" (480x320), 165ppi 3.5"(480x320), 165ppi TBA Size TBA 114x62x12.5mm 113.5x61.8x11mm 116x62.3x12.2mm TBA

Weight TBA TBA 116g TBA TBA Memory TBA 256MB RAM 512MB RAM 256MB RAM TBA Storage TBA 0.5GB 4GB 2GB TBA Battery TBA 1,200mAh 1,500mAh 1,400mAh TBA Release 2013.07. 2013.2Q 2014E 2013.06 2013.2H


Figure 57 Character comparisons among newest smartphones’ OS Apple: iOS6 Android: Jelly Bean (4.1/4.2) RIM: BlackBerry 10 Microsoft: Windows 8 New map app Improvement of touch screen response BlackBerry Hub New bookmark function Siri, multiple languages support (Korean) Expansion of alarm function BlackBerry keyboard Live tile custom option Integration of Facebook To support multiple languages and keyboards BBM video with screen

share Live app

Streaming share photos Performance improvements both HTML5 and JSP Camera with time shift mode Features for children

Passbook USB audio output/multi-channel audio Blackberry Balance People Hub FaceTime, mobile comm. network support Media function improvement BlackBerry Remember Photo Hub New call function (e.g. Interruption-free mode) Performance improvement of home launcher Sharing made easy

with NFC Office Hub

Simple mail system Adjustment of Project Butter Voice control SkyDrive Improvement of Safari searching environment Chrome as a base browser Super-fast browsing Games Hub

Guided access for handicapped Not supporting Adobe Flash Player Electronic wallet Camera panorama function SELinux Redesigned stores "Daydream" screensaver Additional function for Chinese users Power alarm management Improvement of locked screen To support multiple accounts in tablets Gesture typing Photosphere (panorama) Improvement of Google Now Wireless display (Miracast)

Source: Apple, Google, RIM, Microsoft, Mirae Asset Research

Figure 58 Global smartphone OS market share

0

10

20

30

40

50

60

70

80

90

100

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

(%)

Others

Symbian

Microsoft

Bada

RIM

iOS

Android




*Samsung Electronics (005930 KS): We expect SEC’s Galaxy Note 8”, unveiled at MWC 2013, to eat into the market shares of the iPad mini and tablet PC second tiers (Amazon and Barnes & Noble) within 1H13. We note that the Galaxy Note 8”: 1) placed emphasis on identity, leveraging on the design similarities with the Galaxy smartphone series (rather than its predecessor, the Galaxy Note 10.1”), as well as the advanced features of its S-Pen stylus feature killer app; and 2) stands to secure market share within the 7-8” category in 1H13, with the new iPad mini model slated for release in end-2Q13. As such, we expect SEC’s tablet PC shipments to grow by 64.2% YoY to 30m units in FY13, driving up the company’s global market share to 20.5% (+6.1ppt YoY) as a result.

Figure 59 Galaxy Note 8.0 vs. iPad mini Galaxy Note 8.0 Versus iPad mini

1.6Ghz Quad AP A5 1GHz

2GB RAM Memory 512MB RAM

8” Display size 7.9”

Android 4.1.2 OS iOS6

4600mAh Battery 4400mAh

211x136x7.95mm Dimensions 200x134.7x7.2mm

338g Weight 312g

1280x800 Resolution 1024x768

189ppi Density 162ppi

5M (1.3M) Main camera (front) 5M (1.2M)

Source: PhoneArena, SEC, Apple, Mirae Asset Research

*LGE (066570 KS): At the Mobile World Congress (MWC), LG Electronics (LGE) unveiled the Optimus F series (entry-level LTE smartphones) and the Optimus L II series (3G smartphone successors to the Optimus L series). The Optimus F-series shares its platform (design, UI and UX) with the Optimus G Pro, unveiled last week. We believe LGE’s efforts to vertically integrate its smartphone lineup will partially reduce marketing and R&D costs and enable the company to compete with SEC’s three major entry-level smartphones, the Galaxy Ace2 (3.8”, 800x480, 768MB DRAM), Galaxy S3 mini (4.0”, 800x480, 1GB DRAM) and Galaxy Grand (5”, 800x480, 1GB DRAM). On a positive note, cumulative sales of the Optimus G Pro (260k units) have recently exceeded those of its predecessor, the Optimus G.

Figure 60 LGE’s new smartphone line-up at MWC2013 Vendor LGE LGE LGE LGE LGE Picture

Name Optimus L7 Ⅱ Optimus L5 Ⅱ Optimus L3 Ⅱ Optimus F7 Optimus F5 Core Qualcomm S4 1GHz 1GHz Qualcomm S1 1GHz 1.5GHz Dual core 1.2GHz Dual core OS Android 4.1 Android 4.1.2 Android 4.1.2 Android 4.1.2 Android 4.1.2

Display 4.3" (800x480), 217pp 4" (800x480), 233ppi 3.2" (320x240),125ppi 4.7" (1280x720),312ppi 4.3" (960x540),256ppi Size 121.5x66.6x9.7mm 117.5x62.2x9.2mm Unknown 131.7x68.2x9.6mm 126x64.5x9.3mm

Weight TBA TBA Unknown TBA TBA Specs 768MB RAM 512MB RAM 512MB RAM 2GB RAM 1GB RAM

Release 2013.1Q 2013.1Q 2013.1Q 2013.1Q 2013.1Q Source: LGE, PhoneArena, Mirae Asset Research

SEC’s new tablet PC Galaxy Note 8”, revealed at MWC 2013, likely to emerge as the 8” category killer product and eat into iPad mini’s market share



*HTC (2498 TT): At MWC 2013, HTC revealed its new One flagship smartphone model, scheduled for release in 80-plus markets around the world from March. The new flagship model offers: a new UX focusing on visual and auditory senses; advanced video recording and editing functions; a 4M ultra-pixel camera on the front; and Dolby Surround speakers. HTC’s global smartphone market share stood at 3.2% (-1.8ppt YoY) in 4Q12. We expect the company’s operating margin to remain flat QoQ, at 1% in 1Q13, despite a rise in demand for the One, owing to seasonal weakness and greater spending on R&D and marketing for new models.

Figure 61 HTC's smartphone lineup in 1H13 Vendor HTC HTC HTC HTC HTC Picture

Name 8S 8X J butterfly Droid DNA One Core Qualcomm S4 1.0GHz Qualcomm S4 1.2GHz Qualcomm S4 1.5GHz Qualcomm S4 1.5GHz Qualcomm 600 1.7GhzOS Windows 8 Windows 8 Android 4.1 Android 4.1 Android 4.1

Display 4" (800x480) 4.3" (1280x720) 5" (1920x1080) 5" (1920x1080) 4.7" (1920x1080) Size 120.5x63x10.3mm 132.35x66.2x10.12mm 143x71x9.1mm 141x71x9.7mm 137.4x68.2x9.3mm

Weight 113g 130g 140g 138g 143g Specs S-LCD / 512MB RAM S-LCD 2 / 1GB RAM Super LCD 2 / 2GB RAM 441ppi / 2GB RAM 468ppi

Release 2012.11. 2012.11. 2012.12. 2012.11. 2013.03. Source: HTC, PhoneArena, Mirae Asset Research

*Sony (6758 JP): After revealing its new Xperia Z flagship smartphone at the CES in February 2013, Sony announced plans to release the new model in 60-plus markets around the world within 1Q13, at US$849. The company also plans to release its new tablet PC Xperia Tablet Z within 1Q13. For the new model, Sony focused on emphasizing exquisite designs typical of Japanese products for the set and UI, added waterproof capabilities and reinforced marketing efforts. The company adopted the Bravia Engine for the new model to enhance display functions, and differentiated hardware features by installing an RGB image sensor. We expect Sony’s smartphone sales volume to rise by 4.6% QoQ to 9.1m units in 1Q13, backed by growth in market shares at home and in Europe. The company is likely to meet its targets to sell 34m (+51% YoY) smartphones in FY2012, considering its local market share of 7.5% (-0.1ppt QoQ, fourth largest in terms of share of supply) at 4QFY12. We expect Sony’s shipment growth to have a limited impact on both SEC and LG Electronics, with the two companies’ Japanese market share standing at 6.5% (sixth largest, in terms of share of supply) and a mere 2%, respectively, in 2012 and shipments to the Japanese market accounting for only 1% of SEC’s total smartphone shipments.

Figure 62 Sony's smartphone line-up in 1H13 Vendor Sony Sony Sony Sony Sony Picture

Name Xperia T Xperia TL Xperia E Xperia Z Xperia ZL Core Qualcomm S4 1.5GHz Qualcomm S4 1.5GHz Qualcomm S1 Qualcomm S4 1.5GHz Qualcomm S4 1.5GHz OS Android 4.0 Android 4.0 Android 4.1 Android 4.1.2 Android 4.1.2

Display 4.6" (1280x720) 4.6" (1280x720) 3.5" (480x320) 5" (1920x1080),441ppi 5" (1920x1080),441ppiSize 129.4x67.3x9.35mm 129.4x67.3x9.4mm 114x62x11mm 139x71x7.9mm 132x69x9.8mm

Weight 139g 148g 116g 146g 151g Specs 1GB RAM 1GB RAM 512MB RAM 2GB RAM 2GB RAM

Release 2012.09 2012.11 2013.Q1 2013.01. 2013.01. Source: Sony, PhoneArena, Mirae Asset Research



*Nokia (NOK US): Nokia unveiled four new low-end smartphone models (the Lumia720, Lumia620, Lumia301 and Lumia105) at Mobile World Congress (MWC) 2013. It plans to launch: 1) the Lumia720 (equipped with 4.3-inch display and 512MB RAM) in China in 1Q13 and then in Europe in 2Q13; 2) the Lumia620 (low-end model embedded with 4-inch display) in Hong Kong and Vietnam in 1Q13 and then in the US in 2Q13; and 3) the Lumia301 and Lumia105 at ultra-low prices (EUR65 and EUR15, respectively). Nokia’s continued expansion of low-end smartphone lineup is attributable to its strategy for increasing its emerging market share. The company accounted for 5.6% of the global smartphone market in 2012 (-12ppt YoY). Nokia saw a turnaround in its handset business in 4Q12, thanks to the rise in its smartphone sales (to 6.6m units, up 5.9ppt QoQ), following the launch of the Lumia920. However, its handset division should find it difficult to maintain positive earnings in 1Q13, without strengthening its price competitiveness against Chinese local brands and improving its currently low compatibility with Android OS (which dominates the mobile OS market).

Figure 63 Nokia's handset line-up in 1H13 Vendor Nokia Nokia Nokia Nokia Nokia Picture

Name Lumia 920 Asha 205 Asha 206 Lumia 620 Lumia 720 Core Qualcomm S4 1.5GHz X X Qualcomm S4 1.0GHz Qualcomm S4 1.0GHz OS Windows 8 Series 40 UI Series 40 UI Windows 8 Windows 8

Display 4.5" (1280x768) 2.4" (320x240), 167ppi 2.4" (320x240), 167ppi 3.8" (800x480), 246ppi 4.3" (800x480), 217ppiSize 130.3x70.8x10.7mm 112.8x61.1x13mm 116x49.4x12.4mm 115.4x61.1x11mm 127.9x67.5x9mm

Weight 185g 94g 91g 127g 128g Specs 1GB RAM 16MB RAM 16MB RAM 512MB RAM 512MB RAM

Release 2012.11.13 2012.12. 2012.12 2013.01. 2013.1Q Source: Nokia, PhoneArena, Mirae Asset Research

*Lenovo (992 HK): Lenovo posted a turnaround in its handset business in 3Q12. At MWC 2013, it added a new model (the K900, which was first introduced at CES) to its flagship model lineup. The company has continued to expand its smartphone market share in China (FY12 market share: 12.2%, up 10.1% YoY). It is focused on expanding its market share in China in 1H13 and its global market share in 2H13.

Figure 64 Lenovo's smartphone & tablet line-up in 1H13 Vendor Lenovo Lenovo Lenovo Lenovo Lenovo Picture

Name K800 K900 IdeaTab A1000 IdeaTab A3000 IdeaTab S6000 Core Intel Atom 1.6GHz Intel Atom 2.0GHz 1.2GHz Dual core 1.2GHz Quad core 1.2GHz Quad core OS Android 2.3 Android 4.2 Android 4.1 Android 4.1 Android 4.1

Display 4.5" (1280x720), 326ppi 5.5" (1920x1080), 400ppi 7" (1024x600), 170ppi 7" (1024x600), 170ppi 10.2" (1280x800),

149ppi Size 131x71x11mm Thickness: 6.9mm 199x121x107mm 194x120x11mm 260x180x8.6mm

Weight 161g 162g 340g 340g 560g Specs 1GB 2GB 1GB 1GB 1GB

Release 2012.01. 2013.04 2013.1Q 2013.1Q 2013.1Q Source: Lenovo, PhoneArena, Mirae Asset Research



*ZTE (763 HK): ZTE unveiled the 5.7-inch display phablet Grand Memo at MWC 2013, adding to its high-end smartphone lineup (which includes the Grand S and the Nubia Z5, introduced at CES 2013 in January). The company’s market share in China’s handset market rose by 1.8ppt YoY to 5.8% in 2012; in particular, its smartphone market share in China continued to grow to 8.4% in 2012 (+0.6ppt YoY). ZTE plans to launch the three new high-end smartphone models in China in 1Q13, before going global in 2Q13. Backed by increased smartphone shipments, we expect ZTE’s handset business to post a turnaround in 2013.

Figure 65 ZTE's smartphone line-up in 1H13 Vendor ZTE ZTE ZTE ZTE ZTE Picture

Name Grand X Grand X In Nubia Z5 Grand S Grand memo Core Nvidia Tegra2 1.2GHz Intel Z2460 1.6GHz Qualcomm S4 1.5GHz Qualcomm S4 1.7GHz Qualcomm 600 1.7GHzOS Android 4.0 Android 4.0 Android 4.1 Android 4.1 Android 4.1.2

Display 4.3" (960x540), 256ppi 4.3" (960x540) 5" (1920x1080) 5" (1920x1080),441ppi 5.7" (1280x720), 288ppiSize 127x64.6x9.9mm 127x65x9.9mm 138x69.2x7.6mm 142x69x6.9mm 159.9x82.6x8.5mm

Weight 110g 140.8g 126g TBA TBA Specs 512MB RAM 1GB RAM 2GB RAM / 441ppi 2GB RAM 2GB RAM

Release 2012.07.18 2012.09 2013.Q1 2013.1Q 2013.1Q Source: ZTE, PhoneArena, Mirae Asset Research

*Huawei (002502 CH): Huawei shipped 8.7m smartphone units in 4Q12 (+11% QoQ), the third largest shipments among smartphone makers. The company has focused on improving its brand image, with the launch of new flagship smartphones - the Ascend D2 (5’’ full HD), the Ascend Mate (5.5” full HD) and the Ascend P2 (4.7” 1280x720) - at CES 2013 and MWC 2013. Huawei aims to expand exports of the Ascend P2, following its launch in Europe in 2Q13, while expanding its domestic market share during 1H13. The Ascend P2, which will be available at an ASP of US$525, should help Huawei’s flagship models expand their combined market share in 2H13 (when they should see an additional fall in ASP, due to increased shipments).

Figure 66 Huawei's smartphone line-up in 1H13 Vendor Huawei Huawei Huawei Huawei Huawei Picture

Name 4Afrika Ascend D2 Ascend Mate W1 Ascend P2 Core Qualcomm S4 1.2GHz Hi-silicon K3V2 1.5GHz Hi-silicon K3V2 1.5GHz Qualcomm S4 1.2GHz 1.5GHz Quad core OS Windows 7.8 Android 4.1.2 Android 4.1.2 Windows 8 Android 4.1.2

Display 4" (800x480), 233ppi 5" (1920x1080),441ppi 6.1" (1280x720) 4" (800x480) 4.7" (1280x720), 312ppiSize TBA 140x71x9.4mm 163.5x865.7x9.9mm 124.5x63.5x10.2mm Unknown

Weight TBA 170g 198g 130g Unknown Specs 512MB RAM 2GB 241ppi 220ppi 1GB RAM

Release 2013.1H 2013.01 2013.02 2013.01 2013.2Q Source: Huawei, PhoneArena, Mirae Asset Research



5. SEMCO (009150 KS) remains our top-pick, LGE is our second pick

In light of the likely continued expansion in SEC’s global market share in 2013 (+0.4ppt YoY to 23.6%), we reiterate our BUY rating and target price of KRW125,000 for SEMCO. We believe that: 1) the 34.4% YoY growth in SEC’s smartphone shipments (to 290m units) expected in 2013 should drive up shipments of related components; 2) the expected 89% YoY growth in SEC’s flagship smartphone shipments (to 146m units) should improve SEMCO’s product mix, thus lifting its profitability; and 3) component ASPs are unlikely to decline, despite the recent margin improvement by Japanese component makers. SEMCO shares are currently trading at a 2013E P/E of 16.6x and P/B of 1.7x (versus ROE of 10.5%).

We maintain our BUY rating and target price of KRW88,000 for LGE, as: 1) efforts to vertically integrate its smartphone lineup should gradually sharpen competitiveness; 2) the sales outlook for its new flagship smartphone, the Optimus G Pro, remains bright in 1H13; and 3) profitability should improve in 1H13, driven by shipment growth and higher ASP, following a rise in smartphone market share. LGE shares currently trade at FY13E P/E of 12.4x and P/B of 1.0x (versus ROE of 7.8%), while competitors (RIM, HTC and ZTE) are trading at FY13E P/E average of 13.9x and P/B average of 1.6x (versus ROE average of 7.1%).

We maintain our target price of KRW12,500 for SEMCO, as our sector top-pick

Our target price of KRW88,000 maintained for LGE, as our second pick for the sector



.Ⅲ Appendix

1. 1Q13E smartphone peers’ earnings guidance & consensus

Figure 67 1Q13E smartphone peers earnings guidance Company Market cap.

(US$ m) 2013E 1Q13E guidance

(code) P/E (x) P/B (x) SEC 209,777 8.3 1.8(005930 KS)

Smartphone and tablet PC demand expected to decrease QoQ, due to weak seasonality.

LGE 11,819 12.5 1.0 Smartphone shipments guidance in 1Q13 is 8.3m units (-3.5% QoQ). (066570 KS) Apple 417,477 10.0 2.9 Revenue guidance for 1Q13 is US$41-43bn, GPM 37.5-39.5%. (AAPL US) HTC 7,966 17.5 2.6 Revenue guidance for 1Q13 is NT$50-60bn, GPM 21-23%, OPM 0.5-1.0%. (2498 TT) RIM 6,945 - 0.8(RIMM US)

Continued drag on operating margin from promotional costs for the launch of Blackberry10 in 1Q13.

Google 264,837 17.5 3.1 Reduction in demand, due to weak seasonality. (GOOG US) Pressure from Motorola's operating losses expected to continue. ZTE 5,502 18.0 1.5 Plans to enter Chinese local market with high-end smartphone. (763 HK) Sony 14,693 23.5 0.7 Smartphone shipment guidance for CY1Q13 is 9.1m units (+4.6% QoQ). (6758 JP) Nokia 14,118 62.5 1.3 OPM of -2% expected for handset business. (NOK US)

Source: Company data, Mirae Asset Research Note: Share price data as of 1 March 2013



Figure 68 Smartphone peers’ earnings consensus Company (code) / US$ m 2Q12 3Q12 4Q12 1Q13E 2011 2012E 2013E 2014EApple (AAPL US)

Total handset shipments 35 37 43 50 91 134 166 207 Sales 35,023 35,966 54,878 42,935 65,225 156,212 182,705 206,040 YoY (%) 22.6 27.2 18.4 9.6 (39.7) 139.5 17.0 12.8 OP 11,573 10,944 16,976 12,691 18,385 55,252 55,383 63,500 YoY (%) 23.4 25.6 (2.1) (17.5) (45.6) 200.5 0.2 14.7 OPM (%) 33.0 30.4 30.9 29.6 28.2 35.4 30.3 30.8

HTC (2498 TT) Total handset shipments 9 8 8 12 43 32 36 45 Sales 3,074 2,352 2,086 1,887 8,858 9,991 9,495 10,100 YoY (%) (28.7) (49.5) (37.7) (17.4) (44.1) 12.8 (5.0) 6.4 OP 277 165 38 42 1,402 661 454 591 YoY (%) (58.5) (76.2) (91.0) (75.7) (40.1) (52.9) (31.3) 30.2 OPM (%) 9.0 7.0 1.8 2.2 15.8 6.6 4.8 5.8

Nokia (NOK US) Total handset shipments 82 88 97 107 414 335 375 401 Smartphone shipments 6 7 7 8 86 35 29 35 Sales 9,678 9,056 10,581 8,901 56,309 39,628 39,119 40,025 YoY (%) (27.5) (28.6) (21.5) (7.7) 4.6 (29.6) (1.3) 2.3 OP (1,060) (721) 762 25 2,746 115 1,311 1,386 YoY (%) 51.2 618.4 315.9 (101.4) 11,501.1 (95.8) 1,043.1 5.7 OPM (%) (11.0) (8.0) 7.2 0.3 4.9 0.3 3.4 3.5

RIM (RIMM US) Total handset shipments 9 9 10 10 52 34 38 36 Sales 2,814 2,873 2,664 2,835 19,907 11,266 12,920 12,082 YoY (%) (42.7) (31.1) (48.4) (32.3) 8.0 (43.4) 14.7 (6.5) OP (308) (363) (280) (246) 4,636 (1,161) (463) (369) YoY (%) (134.3) (189.2) (185.3) (215.3) 151.3 (125.0) (60.2) (20.1) OPM (%) (10.9) (12.6) (10.5) (8.7) 23.3 (10.3) (3.6) (3.1)

ZTE (763 HK) Total handset shipments 25 31 37 41 56 68 133 152 Smartphone shipments 8 8 9 10 11 27 36 44 Sales 3,728 2,809 4,657 3,203 10,330 14,262 16,677 18,825 YoY (%) 11.6 (12.2) 6.4 9.6 (22.6) 38.1 16.9 12.9 OP (37) (460) 233 N/A 616 (34) 579 686 YoY (%) (28.7) (604.0) 44.2 N/A 44.8 (105.6) (1,784.5) 18.6 OPM (%) (1.0) (16.4) 5.0 N/A 6.0 (0.2) 3.5 3.6

Sony (6758 JP) Total handset shipments 8 9 10 11 33 31 38 41 Smartphone shipments 8 8 9 9 20 24 33 39 Sales 18,925 20,407 21,988 17,051 84,029 72,306 74,795 75,374 YoY (%) 3.2 0.6 (6.7) (15.6) 2.1 (14.0) 3.4 0.8 OP 78 385 877 507 2,338 1,417 2,067 2,447 YoY (%) (76.8) (1,927.2) (173.9) (2,947.3) (374.2) (39.4) 45.9 18.4 OPM (%) 0.4 1.9 4.0 3.0 2.8 2.0 2.8 3.2

Google (GOOG US) Total handset shipments 8 8 11 13 41 34 41 48 Smartphone shipments 6 6 6 7 19 19 24 31 Sales 12,214 14,101 12,357 11,305 29,321 41,665 49,236 56,510 YoY (%) 35.3 45.1 16.8 6.2 (22.6) 42.1 18.2 14.8 OP 3,203 2,736 3,619 3,789 10,381 13,358 16,046 19,295 YoY (%) 11.2 (10.5) 3.2 11.8 (11.6) 28.7 20.1 20.3 OPM (%) 26.2 19.4 29.3 33.5 35.4 32.1 32.6 34.1




2. Handset peers’ shipment portions by country

Figure 69 SEC shipment portions by country in 4Q12

Figure 70 LGE shipment portions by country in 4Q12

(%)

Others, 54.7

Russia, 4.1

Brazil, 5.1

India, 11.2

US, 14.5

China, 10.4

(%)

US, 30.0

Spain, 2.4

Korea, 5.4

Brazil, 21.1

Mexico, 6.4

Others, 34.8


Figure 71 Nokia shipment portions by country in 4Q12

Figure 72 HTC shipment portions by country in 4Q12

(%)China, 4.3

India, 16.3

Brazil, 5.1

Mexico, 2.5

Russia, 3.0

Others, 60.1

(%)

China, 26.9

US, 22.6

Japan, 3.0

Germany,8.7

UK, 10.0

Others, 28.8


Figure 73 RIM shipment portions by country in 4Q12

Figure 74 Apple shipment portions by country in 4Q12

(%)

Others, 57.6

South Africa,7.4

Mexico, 10.2

UK, 11.8

Spain, 4.4US, 8.6 (%)

Others, 39.2

UK, 4.6

Japan, 7.0Canada, 3.1

US, 35.7

China, 10.4


Jinho Cho, Analyst, 82 2 3774 3831, [email protected] Handset Yongjei Jeong, 82 2 3774 1938, [email protected]

36

36 Mirae Asset Securities

3. Handset market share by vendor in 2012

Figure 75 Apple’s handset shipment market share in 4Q12



37

37 Mirae Asset Securities

4. Smartphone market share by vendor in 2012

Figure 76 Apple’s smartphone shipment market share in 4Q12




5. Tablet PC market share and line-up in 2013

Figure 77 Tablet PC MS in 2012 Figure 78 Tablet PC MS in 2013

Apple,52.4%

SEC, 14.4%

Others,33.3%

Apple,51.7%

SEC, 20.5%

Others,27.8%


Figure 79 7-8” tablet PC line-up Vendor SEC Apple Amazon Google Barnes & Noble Picture

Name Galaxy Note 8 iPad mini Kindle Fire HD Nexus 7 NOOK HD Core 1.6GHz Quad A5 OMAP4460 1.2Ghz Nvidia Tegra3 1.3Ghz TI OMAP4470 1.3Ghz OS Android 4.1.2 iOS6 Android 4.0 Android 4.1 Android 4.0

Display 8" (1280x800) 7.9" (1024x768), 162ppi 7.0" (1280x800) 7" (1280x600) 7" (1440x900) Size 211x136x7.95mm 200x134.7x7.2mm 193x137x10.3mm 198.5x12x10.45mm 194x127x11mm

Weight 338g 312g 395g 340g 315g Specs 2GB RAM IPS LCD HD LCD 1GB RAM IPS LCD

Release 2013.2Q 2012.11.02 2012.09.14 2012.07.13 2012.10. Source: PhoneArena, Mirae Asset Research

Figure 80 Galaxy Note 10.1 (HSPA+, 16G) Galaxy Note 10.1 (HSPA+, 16G) Components Manufacturer Cost (US$)BOM + manufacturing 312.8

Total BOM cost 302.8 Manufacturing cost 10.0

Major cost drivers NAND Flash Samsung DRAM Samsung/ Winbond

45.0

Display/touch screen Samsung/Atmel 120.0 Processor Samsung 18.8 Wireless Section - BB/RF/PA 15.0 User Interface & sensors BT / WLAN / FM / GPS Murata / Intel / STMicro / Wacom 18.0

Power mgt. Maxim 12.0 Camera 15.0 Battery Samsung 18.0 Mech./ electro-mech. DAP 35.0 Box contents 6.0



Recommendations

종목별 투자의견 (12개월 기준)

Buy : 현주가 대비 목표주가 +10% 초과

Hold : 현주가 대비 목표주가 ±10%이내

Reduce : 현주가 대비 목표주가 –10%초과

단, 업종 투자의견에 의한 ±10%내의 조정치 감안 가능

업종별 투자의견

Overweight : 현 업종지수대비 +10% 초과

Neutral : 현 업종지수대비 ±10% 이내

Underweight : 현 업종지수 대비 –10%초과

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REMARK: Korean analyst is only responsible for Korean securities and relevant sectors only.

(009150 KS, BUY, TP: KRW125,000)

(066570 KS, BUY, TP: KRW88,000)

Samsung Electro-Mechanics

LG Electronics

Company Analysis

40See the last page of this report for important disclosures

Korea Research

Company update

Samsung Electro-Mechanics (009150 KS)

Chinese seeking quality parts We maintain our BUY rating and target price of KRW125,000 for Samsung Electro-Mechanics (SEMCO), as we expect: 1) growth in Samsung Electronics’ (SEC’s) smartphone sales to drive up SEMCO’s earnings in 2013; 2) SEMCO’s improved product mix to lift its profitability; 3) limited capacity expansion by Japanese peers in 2013 to lead to balanced supply/demand in the market; and 4) steady profitability of high value-added premium components to drive SEMCO’s earnings growth in 2013. SEMCO shares currently trade at 16.6x FY13E P/E and 1.7x P/B (versus ROE of 10.5%).

Earnings to improve visibly, after bottoming out in 1Q13 We now expect SEMCO to post sales of KRW2tn (+13.5% YoY, -4.4% QoQ) and operating profit of KRW119bn (+11.5% YoY, -18% QoQ) for 1Q13. Earnings should improve visibly, after bottoming out in 1Q13. In 2Q13, we expect: 1) losses from FC-BGA sales to persist, amid sluggish PC demand; 2) the release of TV-related parts to gradually rise, on the release of new TV models; 3) Galaxy S4 sales growth to start in earnest, driving up SEC’s flagship smartphone shipments to 35m units (+25% QoQ); 4) growth in demand for FC-CSP to remain steady, at 4.5% QoQ, on the release of new smartphone models by non-SEC clients; and 5) the LCR division’s operating margin to improve by 1.5ppt QoQ to 9.5%, backed by a rise in the MLCC capacity utilization rate. We thus expect SEMCO to record sales of KRW2.1tn (+12.3% YoY, +8.1% QoQ) and operating profit of KRW171.6bn (+9.9% YoY, +44.2% QoQ) in 2Q13. With 2Q13 earnings momentum remaining intact, we expect SEMCO’s valuation attractiveness to exceed that of peers.

SEMCO to benefit, as smartphone parts become increasingly complex Smartphone parts are likely to represent 55% of FY13E sales (based on FY12 results). SEMCO is set to see its profitability rise, backed by product mix improvement, with smartphone parts becoming increasingly complex and high value-added components accounting for a larger part of total shipments. We note that Chinese smartphone makers are rapidly advancing, in terms of hardware performance, and expect China’s three smartphone makers (ZTE, Huawei and Lenovo) to expand their mid- to high-end smartphone shipments visibly in 2H13. With demand for high value-added parts, such as HDI, MLCC and FC-CSP, forecast to rise by more than 32.4% YoY, but the number of suppliers expected to remain limited (MLCC: Murata, Taiyo Yuden, TDK; FC-CSP: Ibiden, Unimicron, Kinsus; HDI: Ibiden, Unimicron), we believe market supply/demand will remain in balance in 2013, driving up SEMCO’s operating margin by 0.1ppt YoY to 7.5% in FY13 as a result.

MLCC supply/demand balance to lift profitability We maintain our forecast that the MLCC market will see a balance between supply and demand in 2013, and that the decline in SEMCO’s MLCC ASP will stand at the level of 2012 (around 4.9% YoY). We believe SEMCO’s LCR division will post sales of KRW2tn (+5.5% YoY) and operating profit of KRW181.5bn (+11.8% YoY) for FY13. We expect MLCC shipments to grow by 21.7% YoY, as SEC’s and other key clients’ smartphone shipments should increase to 290m units (+34.4% YoY) and 160m units (+21.9% YoY), respectively, in 2013. With the LCR division representing 27.5% of SEMCO’s FY13E earnings, the division’s growth should drive up the entire company’s operating profit in FY13. Meanwhile, we expect capacity expansion by Japanese rivals (Murata: +10% YoY; TDK: Partial expansion for 0402 size; Taiyo Yuden: +5 % YoY) to fall below the sector average of +15% per annum in 2013. Moreover, rivals are unlikely to pursue market share expansion by lowering ASP in 1H13, with their 4Q12 margins (Murata: high single-digit; TDK: continued losses; Taiyo Yuden: low single-digit) lower than that of SEMCO.

Korea / Handsets 5 March 2013 BUY

Target price KRW125,000 Last price (1 Mar 13) KRW95,500

Upside/downside (%) 30.9 KOSPI 2026.49 Mkt. cap (KRWbn/US$bn) 7,133/6.6 52 week range (KRW) 85,700 - 112,500 Avg. trading volume daily (KRWbn) 50.6 Foreign ownership (%) 22.09

Forecast earnings & valuation

Fiscal year ending Dec-11 Dec-12 Dec-13 Dec-14 Revenue (KRWbn) 6,032 7,913 8,773 9,865 EBIT (KRWbn) 320.9 608.3 659.2 739.7

Net profit (KRWbn) 392.4 446.1 443.9 507.1 Net profit(underlying) 349.5 437.8 430.6 491.9

EPS (KRW) 4,679 5,862 5,765 6,586

EPS growth (%) (37.0) 25.3 (1.7) 14.2

P/E (x) 16.6 16.9 16.6 14.5 EV/EBITDA (x) 6.9 7.0 5.2 4.7

Dividend yield (%) 1.0 0.8 0.8 0.8

P/B (x) 1.7 2.0 1.7 1.6

ROE (%) 10.0 11.8 10.5 10.9 Net debt/equity (%) 26.8 23.7 15.3 5.9

Performance

81,700

86,700

91,700

96,700

101,700

106,700

111,700

Mar-12 Jun-12 Sep-12 Dec-12

KRW

92%

97%

102%

107%

112%

117%

122%

Price(LHS) Rel. to KOSPI(RHS)

Performance 1M 3M 12M Absolute (%) 4.5 (9.5) 1.8 Absolute (US$, %) 4.5 (9.7) 4.3 Relative to KOSPI (%) 1.0 (14.3) 2.0

Jinho Cho, Analyst


Yongjei Jeong


Jinho Cho, Analyst, 82 2 3774 3831, [email protected] Samsung Electro-Mechanics Yongjei Jeong, 82 2 3774 1938, [email protected] 009150 KS


Figure 1 SEMCO peers’ historical valuations 2006 2007 2008 2009 2010 2011 2012E 2013E 2014ESEMCO (009150 KS) EPS KRW 1,268 1,462 624 3,616 7,171 4,679 5,862 5,765 6.586 BPS KRW 23,869 26,362 26,233 34,371 46,410 45,198 50,542 55,511 61.294 P/E (x) 34.2 33.6 53.4 29.7 17.3 16.6 16.9 16.6 14.5 high 34.2 52.2 53.4 174.7 44.1 20.3 22.9 low 34.2 25.2 20.2 29.7 17.3 8.3 10.1 P/B (x) 1.8 1.9 1.3 3.1 2.7 1.7 2.0 1.7 1.6 high 2.0 2.8 2.1 4.2 4.6 2.9 2.6 low 1.2 1.3 1.1 1.3 2.7 1.3 1.2 ROE (%) 5.7 5.8 2.4 11.9 18.3 10.0 11.8 10.5 10.9


Figure 2 SEMCO’s P/B valuation BPS

(KRW) Sales

(KRW bn)OP

(KRW bn)OPM(%)

Note

1Q13E 50,764 1,983.1 119.0 6.0 Seasonal weak demand 2Q13E 52,260 2,143.1 171.6 8.0 SEC to release Galaxy S4 3Q13E 54,075 2,303.1 203.6 8.8 4Q13E 55,511 2,343.5 165.1 7.0 1Q14E 55,952 2,281.9 140.7 6.2

1Q14E BPS (KRW) 55,592 Target P/B (x) 2.12 Target price (KRW) 125,000 Upside potential 30.9% Current share price (KRW) 95,500

Source: SEMCO, Mirae Asset Research

Figure 3 SEMCO’s earnings summary

(KRW bn) 1Q12 2Q12 3Q12 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 2011 2012E 2013E

Sales 1,748 1,908 2,183 2,074 1,983 2,143 2,303 2,344 6,045 7,886 8,773 QoQ/YoY (%) 5.1 9.2 14.4 (5.0) (4.4) 8.1 7.5 1.8 7.0 30.4 11.2

OP 107 145 184 145 119 172 204 165 278 581 659 QoQ/YoY (%) 7.8 35.7 27.1 (21.2) (18.0) 44.2 18.6 (18.9) (64.3) 109.0 13.6 OPM (%) 6.1 7.6 8.5 7.0 6.0 8.0 8.8 7.0 4.6 7.4 7.5

NI 70 135 143 97 76 116 141 111 392 446 444 NPM (%) 4.0 7.1 6.6 4.7 3.8 5.4 6.1 4.8 6.5 5.7 5.1

Sales by division Total 1,748 1,908 2,183 2,074 1,983 2,143 2,303 2,344 6,045 7,886 8,773 ACI 501 555 530 516 454 496 535 579 1,615 2,102 2,064 LCR 441 473 511 472 459 512 551 481 1,689 1,897 2,002 OMS 424 486 663 600 624 680 739 793 1,101 2,173 2,836 CDS 383 394 478 486 445 456 479 490 1,640 1,713 1,871

OPM by division (%)

Total 6.1 7.6 8.5 7.0 6.0 8.0 8.8 7.0 4.6 7.4 7.5 ACI 10.7 13.5 14.0 12.0 10.0 14.0 14.0 12.5 6.4 12.0 12.7 LCR 5.9 9.5 9.8 8.8 8.0 9.5 9.8 8.8 9.0 8.6 9.1 OMS 3.9 4.9 6.9 4.5 3.9 5.2 6.0 4.5 2.6 5.2 4.9 CDS 2.8 3.2 6.4 3.0 2.8 4.0 6.4 3.0 2.4 3.0 4.1

OP by division

Total 107 145 184 145 119 172 204 165 278 581 659 ACI 54 64 74 62 45 69 75 72 103 253 262 LCR 26 45 50 42 37 49 54 42 152 162 182 OMS 17 24 46 27 24 35 44 36 28 113 140 CDS 11 13 14 15 12 18 30 15 39 52 76




Figure 4 SEMCO’s P/B band

0

20

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013

(KRW '000)

1.7x

2.1x

1.3x

2Q11 earnings belowconsensus due to TV

components

high earningsexpectations for mobile components

Plans to establishLED joint venture

with SECannounced

Expanded LEDdivision & high

earningsexpectations

1Q07 OPM 4.2%(-6.8ppt QoQ)

3Q12 earningssurprise

FC-BGA:Turning negative

Increasing demand forMLCC, with SEMCO'smarket share rising

ASPs of LEDexpected to

decrease

Japan earthquake:Under-supply of

components

Release ofGalaxy S3

1Q09 turn into thered (OPM -1.1%)


Figure 5 SEMCO’s OP vs. share price

(300)

(200)

(100)

0

100

200

300

400

2007 2008 2009 2010 2011 2012 2013

(KRW bn)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

(KRW)

OP(LHS) Price(RHS)




Figure 6 SEMCO’s P/E band Figure 7 SEMCO’s P/B band

(100)

(50)

0

50

100

150

200

250

2000 2002 2004 2006 2008 2010 2012

(KRW '000)

28x

21x

14x

7x

Share price

0

50

100

150

200

250

2000 2002 2004 2006 2008 2010 2012

(KRW '000)

1x

2x

3x

4x

Share price


Figure 8 SEMCO peers’ 3M performance

Figure 9 SEMCO peers’ YTD performance

(20)

(10)

0

10

20

30

40

50

SEMCO

LG In

notek

Murata TD

K

Taiyo

Yud

en

Ibide

n

Shink

o

Kyoc

era

(%)

(15)(10)(5)05

10152025303540

SEMCO

LG In

notek

Murata TD

K

Taiyo

Yud

en

Ibide

n

Shink

o

Kyoc

era

(%)


Figure 10 SEMCO’s share price, relative to peers

Figure 11 SEMCO’s share price, relative to peers

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5


(x)

SEMCO

TDK

TaiyoYuden

Murata

0.4

0.6

0.8

1.0

1.2

1.4

1.6


(x)

SEMCO

Shinko

Kyocera

Ibiden




Figure 12 SEMCO peers’ valuations SEMCO Murata TDK Taiyo Yuden Ibiden Shinko Kyocera

Price(KRW,JPY,USD) 95,500 6,100 3,175 1,011 1,431 743 7,950Market Cap. (US$ m) 6,564 14,683 4,396 1,302 2,307 1,073 16,251Sales (US$ m) 2010 6,030 7,231 10,203 2,462 3,568 1,649 14,825

2011 5,450 7,410 10,323 2,329 3,813 1,595 15,093 2012E 7,194 7,244 9,047 2,098 3,069 1,352 13,836 2013E 7,975 8,123 9,576 2,245 3,268 1,421 14,741 2014E 8,968 8,527 9,932 2,307 3,376 1,467 15,211

OP (US$ m) 2010 636 907 753 103 396 54 1,824 2011 251 570 237 -102 197 -47 1,238 2012E 553 600 262 53 69 17 865 2013E 599 969 515 128 202 81 1,443 2014E 673 1,138 602 153 234 88 1,528

NI (US$ m) 2010 480 626 530 -64 231 28 1,433 2011 316 390 -31 -274 135 -28 1,006 2012E 405 412 86 35 26 22 681 2013E 404 677 339 75 132 54 1,034 2014E 461 808 392 89 153 58 1,117

P/E (x) 2010 16.7 24.0 13.9 - 19.1 47.9 12.6 2011 16.6 34.0 100,637.3 - 28.5 - 17.5 2012E 16.9 34.1 52.1 36.6 88.3 46.6 23.4 2013E 16.6 20.9 13.1 17.4 16.7 20.8 15.4 2014E 14.5 17.1 11.4 14.7 14.1 19.2 14.3

P/B (x) 2010 2.8 1.6 1.2 1.0 1.4 0.9 1.1 2011 1.7 1.3 1.2 1.0 1.1 0.8 0.9 2012E 2.0 1.6 0.8 1.1 0.8 0.8 1.0 2013E 1.7 1.5 0.8 1.1 0.7 0.8 0.9 2014E 1.6 1.4 0.7 1.0 0.7 0.7 0.9

EV/EBITDA (x) 2010 10.1 8.2 4.9 4.8 4.2 3.6 5.0 2011 6.9 8.8 7.1 11.3 4.6 5.9 5.9 2012E 7.0 10.1 5.2 6.0 3.8 3.6 7.4 2013E 5.2 7.9 4.2 4.5 3.3 2.6 5.4 2014E 4.7 6.9 3.8 4.2 2.9 2.4 4.6

ROE (%) 2010 8.4 6.6 8.4 (4.1) 7.4 1.8 8.9 2011 10.0 3.8 (0.5) (18.6) 4.0 (1.7) 5.5 2012E 11.8 5.0 2.2 3.6 1.0 2.1 4.2 2013E 10.5 7.4 6.1 6.5 4.6 4.1 6.3 2014E 10.9 8.8 6.9 7.3 5.1 4.4 6.4

Source: Bloomberg, Mirae Asset Research Note: SEMCO’s earnings are Mirae Asset Research estimates; share prices as of 1 March



Figure 13 SEMCO peers’ historical valuations 2006 2007 2008 2009 2010 2011 2012E 2013E 2014ESEMCO (009150 KS) EPS KRW 1,268 1,462 624 3,616 7,171 4,679 5,862 5,765 6.586 BPS KRW 23,869 26,362 26,233 34,371 46,410 45,198 50,542 55,511 61.294 P/E (x) 34.2 33.6 53.4 29.7 17.3 16.6 16.9 16.6 14.5 high 34.2 52.2 53.4 174.7 44.1 20.3 22.9 low 34.2 25.2 20.2 29.7 17.3 8.3 10.1 P/B (x) 1.8 1.9 1.3 3.1 2.7 1.7 2.0 1.7 1.6 high 2.0 2.8 2.1 4.2 4.6 2.9 2.6 low 1.2 1.3 1.1 1.3 2.7 1.3 1.2 ROE (%) 5.7 5.8 2.4 11.9 18.3 10.0 11.8 10.5 10.9Murata (6981 JT) EPS US$ 2.7 3.1 0.2 1.2 2.9 1.8 1.9 3.2 3.9 BPS US$ 31.5 38.5 36.8 39.9 46.2 46.4 41.6 43.7 46.3 P/E (x) 26.8 14.2 229.4 46.0 24.0 34.0 34.1 20.9 17.1 high 33.3 28.9 229.4 282.2 49.6 34.0 35.5 low 25.0 18.3 8.1 39.9 22.9 15.7 25.6 P/B (x) 2.3 1.3 1.0 1.4 1.6 1.3 1.6 1.5 1.4 high 2.6 2.5 1.6 1.4 1.6 1.7 1.3 low 2.0 1.6 0.7 0.9 1.1 1.0 1.0 ROE (%) 9.0 9.3 0.4 3.1 6.6 3.8 5.0 7.4 8.8 TDK (6762 JT) EPS US$ 4.5 4.8 (4.9) 1.1 4.1 (0.2) 0.7 2.6 3.0 BPS US$ 49.0 55.6 43.3 45.1 50.0 47.9 42.9 44.7 46.8 P/E (x) 19.3 10.7 - 59.3 13.9 - 52.1 13.1 11.4 high 29.8 22.5 14.7 59.3 62.6 73,171.3 103,105.0 low 17.9 13.9 4.7 53.9 15.9 6.9 52.1 P/B (x) 1.8 1.1 0.8 1.5 1.2 1.2 0.8 0.8 0.7 high 1.9 2.1 1.5 1.5 1.6 1.5 1.2 low 1.5 1.3 0.5 0.7 1.0 0.6 0.7 ROE (%) 9.6 9.7 (9.9) 2.5 8.4 (0.5) 2.2 6.1 6.9 Taiyo Yuden (6976 JT) EPS US$ 0.9 0.8 (1.2) (0.1) (0.5) (2.3) 0.3 0.6 0.7 BPS US$ 12.1 14.1 11.9 12.6 13.1 10.7 9.8 10.3 11.1 P/E (x) 22.6 10.9 - - - - 36.6 17.4 14.7 high 84.8 26.6 19.5 - - - - low 19.3 15.4 4.5 - - - - P/B (x) 1.7 0.7 0.6 1.2 1.0 1.0 1.1 1.1 1.0 high 1.7 2.0 1.2 1.1 1.3 1.3 1.0 low 1.0 1.2 0.3 0.4 0.8 0.5 0.7 ROE (%) 8.0 6.3 (9.3) (0.5) (4.1) (18.6) 3.6 6.5 7.3 Ibiden (4062 JT) EPS US$ 2.8 2.7 (0.6) 0.9 1.6 0.9 0.2 0.9 1.1 BPS US$ 15.7 20.1 17.8 19.5 22.6 22.9 20.2 20.9 22.0 P/E (x) 18.6 12.6 - 39.4 19.1 28.5 88.3 16.7 14.1 high 33.9 30.8 23.0 40.3 44.0 21.2 29.0 low 18.3 16.9 4.0 39.4 18.7 10.9 12.3 P/B (x) 3.3 2.0 1.3 1.8 1.4 1.1 0.8 0.7 0.7 high 4.3 5.5 3.6 2.0 2.0 1.6 1.1 low 3.1 3.0 0.6 0.9 1.1 0.8 0.5 ROE (%) 19.3 16.2 (3.2) 4.6 7.4 4.0 1.0 4.6 5.1 Kyocera (6971 JT) EPS US$ 4.8 5.0 1.6 2.4 7.8 5.5 3.7 5.6 6.0 BPS US$ 67.3 76.7 72.6 78.4 93.4 96.9 88.6 92.9 97.4 P/E (x) 20.6 14.8 41.2 41.7 12.6 17.5 23.4 15.4 14.3 high 31.6 24.9 41.2 53.7 44.3 17.5 18.2 low 20.8 17.5 8.0 33.8 12.4 9.2 14.0 P/B (x) 1.4 1.1 0.9 1.2 1.1 0.9 1.0 0.9 0.9 high 1.7 1.7 1.4 1.2 1.3 1.2 1.0 low 1.2 1.2 0.6 0.7 1.0 0.8 0.8 ROE (%) 15.2 8.1 (4.4) 2.4 1.8 (1.7) 4.2 6.3 6.4




Figure 14 SEMCO peers’ earning consensus Company(code) / US$ m 2Q12 3Q12 4Q12E 1Q13E 2011 2012E 2013E Murata (6981 JP)

Sales 1,781 2,189 1,725 1,901 7,410 7,244 8,123 YoY (%) 1.4 11.3 (10.3) 7.5 2.5 (2.2) 12.1 OP 76 232 73 154 570 600 969 YoY (%) (63.9) 30.6 (49.7) 338.9 (37.1) 5.3 61.4 OPM (%) 4.3 10.6 4.2 8.1 7.7 8.3 11.9 NI 44 147 58 73 390 412 677 NPM (%) 2.5 6.7 3.3 3.8 5.3 5.7 8.3

TDK (6762 JP) Sales 2,606 2,632 2,450 2,695 10,323 9,047 9,576 YoY (%) 2.7 (2.8) (1.2) 3.9 1.2 (12.4) 5.8 OP 115 142 (97) 142 237 262 515 YoY (%) 66.4 35.2 (206.3) (627.5) (68.5) 10.8 96.4 OPM (%) 4.4 5.4 (3.9) 5.3 2.3 2.9 5.4 NI 56 67 (37) 84 (31) 86 339 NPM (%) 2.1 2.5 (1.5) 3.1 (0.3) 1.0 3.5

Taiyo Yuden (6976 JP) Sales 581 622 540 593 2,329 2,098 2,245 YoY (%) 0.7 (3.6) (5.7) 11.0 (5.4) (9.9) 7.0 OP 14 4 (44) 5 (102) 53 128 YoY (%) (271.5) (131.3) 37.2 (109.7) (198.7) (152.3) 141.3 OPM (%) 2.4 0.7 (8.1) 0.8 (4.4) 2.5 5.7 NI (8) 0 (98) (5) (274) 35 75 NPM (%) (1.3) 0.0 (18.1) (0.9) (11.8) 1.7 3.3

Ibiden (4062 JP) Sales 869 908 1,039 918 3,813 3,069 3,268 YoY (%) 3.7 (1.8) 7.6 (15.5) 6.9 (19.5) 6.5 OP 49 28 60 55 197 69 202 YoY (%) (4.5) (5.8) 45.9 (24.6) (50.3) (65.0) 194.1 OPM (%) 5.6 3.1 5.8 6.0 5.2 2.2 6.2 NI (1) 10 41 38 135 26 132 NPM (%) (0.2) 1.1 4.0 4.1 3.5 0.8 4.0

Shinko (6967 JP) Sales 422 398 419 456 1,595 1,352 1,421 YoY (%) 12.1 12.8 6.0 (2.8) (3.3) (15.2) 5.1 OP 31 3 3 24 (47) 17 81 YoY (%) (1384.4) (108.1) (110.7) 17.4 (185.7) (135.7) 388.7 OPM (%) 7.3 0.8 0.7 5.3 (2.9) 1.2 5.7 NI 25 4 0 13 -28 22 54 NPM (%) 5.9 1.1 0.1 2.9 (1.8) 1.6 3.8

Kyocera (6971 JP) Sales 3,719 3,951 3,661 3,929 15,093 13,836 14,741 YoY (%) (0.7) 2.6 0.7 1.9 1.8 (8.3) 6.5 OP (25) 355 171 278 1,238 865 1,443 YoY (%) (106.1) (20.0) (35.8) 137.0 (32.2) (30.1) 66.9 OPM (%) (0.7) 9.0 4.7 7.1 8.2 6.3 9.8 NI 82 239 89 197 1,006 681 1,034 NPM (%) 2.2 6.1 2.4 5.0 6.7 4.9 7.0




Figure 15 Murata (6981 JP) P/E band Figure 16 Murata (6981 JP) P/B band

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Figure 17 TDK (6981 JP) P/E band Figure 18 TDK (6981 JP) P/B band

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Figure 19 Ibiden (4062 JP) P/E band Figure 20 Ibiden (4062 JP) P/B band

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Figure 21 Shinko (6967 JP) P/E band Figure 22 Shinko (6967 JP) P/B band

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Figure 23 Kyocera (6971 JP) P/E band

Figure 24 Kyocera (6971 JP) P/B band

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Figure 25 SEC’s smartphone market share in 4Q12


Figure 26 Major shareholders of SEMCO Figure 27 SEC shipment portions by country in 4Q12

(%)SEC, 23.7

NationalPension

service, 6.1

KoreaInvestmentTrust, 5.3

Others, 64.9

Others, 54.7

Russia, 4.1

Brazil, 5.1

India, 11.2

US, 14.5

China, 10.4

Source: SEMCO, Bloomberg, Mirae Asset Research Source: Gartner, Mirae Asset Research

(‘000 units)

(%) (%)



Figure 28 4Q12 global handset MS Figure 29 4Q12 global smartphone MS

Others, 21.6

ZTE, 3.4

Apple, 10.1LGE, 3.3

SEC, 23.6

Nokia, 18.3

SEC, 30.1

Nokia, 20.9

LGE, 3.5Google, 3.2

ZTE, 4.2

Others, 38.0


Figure 30 4Q12 Korea handset MS

Figure 31 4Q12 US handset MS

SEC, 64.1

LGE, 14.7

Pantech,11.8

Apple, 8.9 Others, 0.4

(

Apple, 33.6

SEC, 31.8

LGE, 9.2

Huawei, 4.3

Google, 4.1

Others, 17.0


Figure 32 4Q12 Brazil handset MS

Figure 33 4Q12 Mexico handset MS

SEC, 29.2

Nokia, 22.7LGE, 16.8

Google, 9.3

ZTE, 5.1

Others, 16.9

(

SEC, 24.5

Nokia, 18.2

LGE, 9.5Google, 9.2

ZTE, 8.3

Others, 30.3


(%) (%)

Apple, 20.9

LGE, 4.1 Google, 2.2

ZTE, 4.0

Others, 38.7

(%) (%)

(%) (%)

LGE, 8.3Google, 9.5

ZTE, 4.2

Others, 35.3



Figure 34 SEMCO’s sales breakdown Figure 35 SEMCO’s OP breakdown

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Source: SEMCO, Mirae Asset Research Source: SEMCO, Mirae Asset Research

Figure 36 1H13 SEC smartphone lineup Vendor Samsung Samsung Samsung Samsung Samsung Picture

Name Galaxy S3 LTE Galaxy Note 2 Galaxy S3 Mini Ativ S Galaxy S4 Core Exynos 4412 1.4GHz Exynos 4412 1.6GHz 1Ghz Dual-core Qualcomm S4 1.5Ghz TBA OS Android 4.0 Android 4.1 Android 4.1 Windows 8 TBA

Display 4.8" (1280x720) 5.5" (1280x720) 4" (800x480) 4.8" (1280x720) TBA Size 136.6x70.6x9.0mm 151.1x80.5x9.4mm 121.55x63x9.9mm 137.2x70.5x8.7mm TBA

Weight 138.5g 180g 111.5g 135g TBA Specs AMOLED / 2GB RAM AMOLED / 2GB RAM AMOLED AMOLED / 1GB RAM TBA

Release 2012.05.29 2012.09.26 2012.11.02 2012.11. TBA Source: SEC, Mirae Asset Research

Figure 37 SEMCO’s price vs. debit balance vs. foreign ownership

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Source: Quantiwise, Mirae Asset Research



Figure 38 State of SEMCO parts production by application Smartphone (incl. feature)

Computer (incl. Tablet)

TV (incl. LCD, PDP)

RF components In mold antenna Chipset FC-BGA Power Power driver(LED)

MLCC MLCC SMPS

Chip inductor UT CSP LED driver IC

Chip bead Memory BOC Super OP board

Crystal unit MLCC Inverter

Network Wifi+BT Combo module Chip resistor Tuner Digital tuner

NFC module HDD HDD motor Slim tuner

Power Tantalum capacitor Network Wifi+BT Combo module Network WLAN module for CE device

Chip inductor CDMA cellular module Wifi module

Chip bead NFC module Main board PBGA

MLCC WiMAX module FC-BGA

Chip resistor DVD ODD motor MLCC

Wireless power transfer Power Adapter Chip inductor

Adapter Server power Chip bead

Motor Vibration motor Main board HDI Chip resistor

Multimedia Camera module MLCC LCD panel LED driver IC

Optical navigation module Tantalum capacitor

Display HDI-flex Chip inductor

Chipset FC-CSP Chip bead

RF-SiP Chip resistor

UT CSP Crystal unit

Crystal unit Others Camera module

Main board HDI LED driver IC

HDI-flex Vibration motor

Chip bead

Chip inductor

MLCC

Chip resistor Crystal unit




Summary financial statements Profit & loss Balance sheet

Cash flow Ratio analysis

Year end Dec 31 2011A 2012E 2013E 2014E

ROE (%) 10.0 11.8 10.5 10.9

ROA (%) 5.5 6.2 6.1 6.5

Inventory days 54.7 44.2 41.3 38.9

Receivables days 52.1 48.0 50.9 48.8

Payable days 45.7 39.3 41.5 40.1

Net debt/equity (%) 26.8 23.7 15.3 5.9

Interest cover (x) 9.2 18.3 21.3 25.2

Source: SEMCO, Mirae Asset Research estimates

Year end Dec 31 (KRWbn) 2011A 2012E 2013E 2014E

Cash flow from operations 473 1,221 1,196 1,306

Net profit 392 446 444 507

Depr. & amortization 664 592 833 826

Others 108 88 14 14

Change in working capital (691) 96 (95) (41)

Cash flow from investing (973) (918) (861) (863)

Capital expenditures (1,070) (1,072) (800) (800)

Others 97 153 (61) (63)

Cash flow from financing 315 (200) (58) (58)

Dividends (88) (58) (58) (58)

Increase in equity

Increase in debt 471 (96)

Beginning cash 695 526 671 947

Ending cash 526 671 947 1,331



Current assets 3,697 2,805 3,103 3,718

Cash & equivalents 526 671 947 1,331

Short-term financial asset 27 25 26 27

Accounts receivable 882 1,200 1,248 1,388

Inventory 760 820 821 913

Other current assets 1,502 90 61 58

Non-current assets 3,632 4,344 4,372 4,409

Net fixed assets 2,278 2,698 2,728 2,750

Investments 1,242 1,338 1,392 1,449

Other long-term assets 112 308 252 210

Total assets 7,329 7,150 7,474 8,127

Current liabilities 2,711 2,104 2,028 2,217

Accounts payable 605 800 847 942

Short-term debt 1,096 954 954 954

Other current liabilities 1,011 350 228 321

Non-current liabilities 742 1,056 1,070 1,085

Long-term debt 495 687 687 687

Other long-term liabilities 247 369 383 398

Total liabilities 3,453 3,159 3,098 3,302

Controlling Interests 3,507 3,922 4,308 4,756

Non-Controlling Interests 368 68 68 68

Shareholder's equity 3,876 3,991 4,376 4,825

BVPS(KRW) 45,198 50,542 55,511 61,294



Revenue 6,032 7,913 8,773 9,865

Cost of goods sold (5,050) (6,524) (7,242) (8,145)

Gross profit 981 1,389 1,531 1,721

SG&A (704) (809) (872) (981)

EBIT (Adj.) 278 580 659 740

EBIT 321 608 659 740

Net interest income (loss) (35) (33) (31) (29)

Income (loss) from associates 0 (4) 0 0

Others 79 13 (52) (52)

Recurring profit 364 584 576 659

Income tax (56) (165) (133) (151)

Net profit 392 446 444 507

Net profit (Controlling Interests) 349 438 431 492

EPS (Controlling Interests, KRW) 4,679 5,862 5,765 6,586

Growth & margins (%) 2011A 2012E 2013E 2014E

Revenue growth 6.7 31.2 10.9 12.5

Gross profit growth (16.1) 41.5 10.2 12.4

EBIT growth (35.6) 89.6 8.4 12.2

Net profit growth (37.0) 25.3 (1.7) 14.2

EPS growth (37.0) 25.3 (1.7) 14.2

Gross margin 16.3 17.6 17.4 17.4

EBIT margin 5.3 7.7 7.5 7.5

Net profit margin 5.8 5.5 4.9 5.0


54See the last page of this report for important disclosures

Korea Research

Industry update

LG Electronics (066570 KS) Optimus vertical integration We maintain our BUY rating and target price of KRW88,000 for LG Electronics (LGE), as: 1) efforts to vertically integrate its smartphone lineup should gradually sharpen competitiveness; 2) the sales outlook for its new flagship smartphone, the Optimus G Pro, remains bright in 1H13; and 3) profitability should improve in 1H13, driven by shipment growth and higher ASP, following a rise in smartphone market share. LGE shares currently trade at FY13E P/E of 12.4x and P/B of 1.0x (versus ROE of 7.8%), while competitors (RIM, HTC and ZTE) are trading at FY13E P/E average of 13.9x and P/B average of 1.6x (versus ROE average of 7.1%).

LGE to unveil mid-end Optimus series At the Mobile World Congress (MWC), which kicked off on 25 February, LG Electronics (LGE) unveiled the Optimus F series (entry-level LTE smartphones) and the Optimus L II series (3G smartphones, successors to the Optimus L series). The Optimus F-series shares its platform (design, UI and UX) with the Optimus G Pro, unveiled last week. We believe LGE’s efforts to vertically integrate its smartphone lineup will partially reduce marketing and R&D costs and enable the company to compete with Samsung Electronics’ (SEC) three major entry-level smartphones, the Galaxy Ace2 (3.8”, 800x480, 768MB DRAM), Galaxy S3 mini (4.0”, 800x480, 1GB DRAM) and Galaxy Grand (5”, 800x480, 1GB DRAM).

Success of Optimus G the key to successful vertical integration As shown in the case of the Optimus F-series, LGE has adopted the strategy of shared platforms for its smartphones; this is reminiscent of SEC’s strategy back in 2011-2012, when that company leveraged the identity of its flagship smartphones (the Galaxy S-series) for its entry-level models (the Galaxy Ace2 and Galaxy S3 mini). The previous success of its flagship smartphones enabled SEC to enjoy brisk entry-level smartphone sales during 2011-2012, backed by its platform-sharing strategy. In a similar vein, we believe the success of the Optimus F series will hinge on the success of the Optimus G.

MC division to outperform in 1H13 We expect LGE to report 1Q13 sales of KRW11.9tn (-11.7% QoQ) and operating profit of KRW283.9bn (+164.8% QoQ). We forecast LGE’s smartphone shipments to rise by 9.3% QoQ to 9.4m units, in light of limited supply of new smartphone models by rivals in the key markets of North America, Latin America and Korea (1Q13 has seen the release of Blackberry’s Z10, Sony’s Xperia series and HTC’s M7). As such, the MC division’s operating profit should improve by 7.8% QoQ to KRW60.7bn in 1Q13. For the full-year of 2013, we expect the MC division to report sales of KRW13tn (+29.3% YoY) and operating profit of KRW444bn (+657.7% YoY). Moreover, the division should enjoy a 2.8ppt YoY rise in operating margin to 3.4% in 2013, as increased sales should significantly reduce the portion of fixed costs (marketing costs). On a quarterly basis, MC division’s operating margins should decrease, after peaking at 4.1% in 3Q13, weighed down by continued rises in raw material and R&D costs resulting from the increased sales contribution of flagship smartphones. We also reiterate our previous view that subsidy competition among smartphone makers will further intensify in 3Q13.

Korea / Handsets 5 March 2013 BUY

Target price KRW88,000 Last price (1 Mar 13) KRW78,300

Upside/downside (%) 12.4 KOSPI 2026.49 Mkt. cap (KRWbn/US$bn) 12,699/11.8 52 week range (KRW) 55,800 - 94,300 Avg. trading volume daily (KRWbn) 79.4 Foreign ownership (%) 17.9

Forecast earnings & valuation

Fiscal year ending Dec-11 Dec-12 Dec-13 Dec-14 Revenue (KRWbn) 54,257 50,960 51,125 53,640 EBIT (KRWbn) 280.3 1,124.9 1,429.1 1,514.5

Net profit (KRWbn) (432.8) 90.8 1,008.1 1,077.4 Net profit(underlying) (469.6) 69.1 1,022.6 1,092.9

EPS (KRW) (3,132) 422 6,249 6,678

EPS growth (%) TN TP 1,379.1 6.9

P/E (x) - 174.2 12.5 11.7 EV/EBITDA (x) 11.5 7.2 6.6 6.3

Dividend yield (%) 0.3 0.3 0.3 0.3

P/B (x) 1.0 1.0 1.0 1.0

ROE (%) (3.7) 0.5 7.8 7.7 Net debt/equity (%) 37.5 42.8 40.6 37.8

Performance

53,200

58,200

63,200

68,200

73,200

78,200

83,200

88,200

93,200

Jan-12 Apr-12 Jul-12 Oct-12

KRW

70%

75%

80%

85%

90%

95%

100%

105%

Price(LHS) Rel. to KOSPI(RHS)

Performance 1M 3M 12M Absolute (%) 8.8 2.6 (8.3) Absolute (US$, %) 8.9 2.5 (5.7) Relative to KOSPI (%) 5.2 (2.2) (8.1)

Jinho Cho, Analyst


Yongjei Jeong


Jinho Cho, Analyst, 82 2 3774 3831, [email protected] LG Electronics Yongjei Jeong, 82 2 3774 1938, [email protected] 066570 KS


Figure 1 LGE’s new lineup at MWC2013 Vendor LGE LGE LGE LGE LGE Picture

Name Optimus L7 Ⅱ Optimus L5 Ⅱ Optimus L3 Ⅱ Optimus F7 Optimus F5 Core Qualcomm S4 1GHz Unknown Unknown 1.5GHz Dual core 1.2GHz Dual core OS Android 4.1 Android 4.1 Android 4.1 Android 4.1.2 Android 4.1.2

Display 4.3" (800x480) 4" (800x480) 3.2" (320x240),125ppi 4.7" (1280x720),312ppi 4.3" (960x540),256ppi Size TBA TBA TBA 131.7x68.2x9.6mm 126x64.5x9.3mm

Weight 121.5x66.6x9.7g TBA TBA TBA TBA Spec 217ppi / 768MB RAM TBA TBA 2GB RAM 1GB RAM

Release 2013.1Q 2013.1Q 2013.1Q 2013.1Q 2013.1Q Source: LGE, PhoneArena, Mirae Asset Research

Figure 2 Peers’ new smartphone lineups in 1Q13 Vendor RIM Sony Huawei HTC ZTE Picture

Name BlackBerry Z10 Xperia Z Ascend P2 One Grand S Core Qualcomm S4 1.5GHz Qualcomm S4 1.5GHz 1.5GHz Quad core Qualcomm 600 1.7Ghz Qualcomm S4 1.7GHz OS BlackBerry 10 Android 4.1.2 Android 4.1.2 Android 4.1 Android 4.1

Display 4.2" (1280x768), 355ppi 5" (1920x1080), 441ppi 4.7" (1280x720), 312ppi 4.7" (1920x1080) 5" (1920x1080), 441ppiSize 130x65.6x9 139x71x7.9 Unknown 137.4x68.2x9.3 142x69x6.9

Weight 138g 146g Unknown 143g TBA Spec 2GB RAM 2GB RAM 1GB RAM 2GB RAM 2GB RAM

Release 2013.01.31 2013.02.09 2013.1Q 2013.03. 2013.Q1 Source: LGE, PhoneArena, Mirae Asset Research

Figure 3 Specifications of new smartphone lineup in 2013 Company Product Display CPU Memory Storage Battery

(mAh)Launch

LGE Optimus G Pro 5.5" (1920x1080), 400ppi Qualcomm 600 1.7GHz 2GB RAM 32GB 3.140 2013-02-20



LGE Optimus L3 Ⅱ TBA TBA TBA TBA 1.540 2013.1Q

LGE Optimus L5 Ⅱ 4.0" TBA TBA TBA 1.700 2013.1Q

LGE Optimus L7 Ⅱ 4.4" (800x480), 217ppi Qualcomm S4 1Ghz 768MB RAM 4GB 2.460 2013.1Q

RIM BlackBerry Z10 4.2" (1280x768), 356ppi Qualcomm S4 1.5GHz 2GB RAM 16GB 1,800 2013.01.31

Sony Xperia Z 5" (1920x1080), 441ppi Qualcomm S4 1.5GHz 2GB RAM 16GB 2,330 2013.02.09

Huawei Ascend P2 4.7" (1280x720), 312ppi 1.5GHz Quad core 1GB RAM 16GB 2.420 2013.1Q

HTC One 4.7" (1920x1080) Qualcomm 600 1.7Ghz 2GB RAM 32GB 2,300 2013.1Q

ZTE Grand S 5" (1920x1080), 441ppi Qualcomm S4 1.7GHz 2GB RAM 16GB 1,780 2013.1Q Source: LGE, PhoneArena, Mirae Asset Research



Figure 4 Optimus G Pro vs. Galaxy Note 2 Optimus G Pro Versus Galaxy Note2

Qualcomm 600 1.7GHz AP Exynos 4412 1.6GHZ

2GB RAM Memory 2GB RAM

5.5" Display size 5.5"

Android (4.1.2) OS Android (4.1.2)

3,140mAh Battery 3,100mAh

150.2x76.1x9.4mm Dimension 151x80.5x9.4mm

172g Weight 182g


400ppi Density 265ppi 13M (2.1M) Main camera (front) 8M (1.9M)

Source: LGE, SEC, PhoneArena, Mirae Asset Research

Figure 5 Optimus F7 vs. Galaxy Grand Optimus F7 Versus Galaxy Grand

1.5GHz Dual core AP 1.2GHz Dual core

2GB RAM Memory 1GB RAM

4.7” Display size 5.0”

Android (4.1.2) OS Android (4.1.2)


131.7x68.2x9.6mm Dimension 143.5x76.9x9.6mm

TBA Weight 162g



8M (1.3M) Main camera (front) 8M (2M) Source: LGE, SEC, PhoneArena, Mirae Asset Research

Figure 6 Optimus L7 vs. Galaxy S3 miniⅡ Optimus L7 Ⅱ Versus Galaxy S3 mini

Qualcomm S4 1GHz AP 1GHz Dual core

768MB RAM Memory 1GB RAM

4.3” Display size 4.0”

Android (4.1) OS Android (4.1.2)


121.5x66.6x9.7mm Dimension 121.5x63x9.8mm

TBA Weight 112g



8M (0.3M) Main camera (front) 5M (0.3M) Source: LGE, SEC, PhoneArena, Mirae Asset Research



Figure 7 LGE earnings forecast summary (KRW 100m) 1Q12 2Q12 3Q12 4Q12 1Q13E 2Q13E 3Q13E 4Q13E 2011 2012 2013E 2014E

Sales by division

Total 122,279 128,590 123,758 134,973 119,155 122,489 128,187 141,420 542,566 509,600 511,252 536,404 QoQ/YoY (%) (11.5) 5.2 (3.8) 9.1 (11.7) 2.8 4.7 10.3 (2.7) (6.1) 0.3 4.9

HE 53,302 54,784 54,864 64,430 51,169 48,662 53,615 65,370 239,023 227,380 218,815 234,138 MC 24,972 23,212 24,476 28,116 29,276 30,359 35,053 35,587 116,925 100,776 130,276 137,866

Handset 24,520 22,862 24,231 27,793 28,957 30,070 34,777 35,297 114,364 99,406 129,102 136,724 HA 25,357 28,753 28,675 29,423 26,530 29,601 28,929 30,891 110,815 112,208 115,951 129,757 AC&ES 12,179 14,749 9,743 6,825 7,016 9,008 6,037 5,048 45,849 43,496 27,109 20,258 others 6,469 7,092 6,000 6,179 5,164 4,859 4,554 4,524 29,954 25,740 19,101 14,385

OP by division

Total 3,753 5,074 1,461 1,072 2,839 4,020 4,266 3,165 3,789 11,360 14,291 15,145 QoQ/YoY (%) 338.4 35.2 (71.2) (26.6) 164.8 41.6 6.1 (25.8) 114.8 199.8 25.8 6.0

HE 1,684 3,103 442 192 601 777 1,824 1,171 4,748 5,421 4,372 5,235 MC 342 (280) (39) 563 607 1,204 1,425 1,205 (2,758) 586 4,440 4,225 HA 1,432 1,834 1,218 799 1,579 1,689 1,101 687 3,194 5,283 5,056 5,425 AC&ES 713 826 135 (111) 311 433 48 35 754 1,563 826 588 Others (418) (409) (295) (371) (258) (82) (131) 68 (2,149) (1,493) (403) (328)

OPM (%)

Total 3.1 3.9 1.2 0.8 2.4 3.3 3.3 2.2 0.7 2.2 2.8 2.8 HE 3.2 5.7 0.8 0.3 1.2 1.6 3.4 1.8 2.0 2.4 2.0 2.2 MC 1.4 (1.2) (0.2) 2.0 2.1 4.0 4.1 3.4 (2.4) 0.6 3.4 3.1 HA 5.6 6.4 4.2 2.7 6.0 5.7 3.8 2.2 2.9 4.7 4.4 4.2 AC&ES 5.9 5.6 1.4 (1.6) 4.4 4.8 0.8 0.7 1.6 3.6 3.0 2.9 Others (6.5) (5.8) (4.9) (6.0) (5.0) (1.7) (2.9) 1.5 (7.2) (5.8) (2.1) (2.3)

Pretax income 4,498 2,361 1,787 (3,405) 2,539 3,710 3,964 2,880 (3,993) 5,240 13,093 13,993

Tax 2,073 771 216 1,273 584 853 912 662 335 4,332 3,011 3,218

NI 2,425 1,590 1,571 (4,678) 1,955 2,856 3,052 2,218 (4,328) 908 10,081 10,774

NPM (%) 2.0 1.2 1.3 (3.5) 1.7 2.4 2.3 1.5 (0.8) 0.2 2.0 2.0 Source: LGE, Mirae Asset Research

Figure 8 Major assumptions ('000 units) 1Q12 2Q12 3Q12 4Q12 1Q13E 2Q13E 3Q13E 4Q13E 2011 2012 2013E 2014EKRW/US$ 1,131 1,152 1,133 1,090 1,050 1,030 1,010 1,005 1,108 1,127 1,024 1,024

Handset shipments

Total 13,722 12,998 14,361 15,420 15,197 15,847 17,640 17,998 88,039 56,501 66,682 67,472 Smartphone 4,900 5,700 7,000 8,600 9,400 10,340 12,408 13,028 19,107 26,200 45,175 51,799

Feature 8,822 7,298 7,361 6,820 5,797 5,507 5,232 4,970 68,932 30,301 21,506 15,673 Handset ASP (US$)

Total 156 154 148 165 181 184 195 195 117 156 189 202 Smartphone 300 250 229 252 255 250 252 247 219 255 251 246

Feature 77 74 70 64 63 61 60 59 89 72 61 56 TV shipments

Total 8,375 8,409 8,355 10,542 8,786 8,807 9,981 12,325 36,834 35,681 39,899 47,190 LCD 5,819 5,990 6,193 8,600 6,880 6,983 8,321 10,709 25,908 26,602 32,893 41,207

TV ASP (US$) Total 557 572 576 561 534 516 514 513 560 544 519 479 LCD 579 582 588 549 551 528 520 516 529 572 527 484




Figure 9 4Q12 global handset MS Figure 10 4Q12 global smartphone MS

Others, 21.6

ZTE, 3.4

Apple, 10.1LGE, 3.3

SEC, 23.6

Nokia, 18.3

SEC, 30.1

Nokia, 20.9

LGE, 3.5Google, 3.2

ZTE, 4.2

Others, 38.0


Figure 11 4Q12 Korea handset MS

Figure 12 4Q12 US handset MS

SEC, 64.1

LGE, 14.7

Pantech,11.8

Apple, 8.9 Others, 0.4

(

Apple, 33.6

SEC, 31.8

LGE, 9.2

Huawei, 4.3

Google, 4.1

Others, 17.0


Figure 13 4Q12 Brazil handset MS

Figure 14 4Q12 Mexico handset MS

SEC, 29.2

Nokia, 22.7LGE, 16.8

Google, 9.3

ZTE, 5.1

Others, 16.9

(

SEC, 24.5

Nokia, 18.2

LGE, 9.5Google, 9.2

ZTE, 8.3

Others, 30.3


(%) (%)

Apple, 20.9

LGE, 4.1 Google, 2.2

ZTE, 4.0

Others, 38.7

(%) (%)

(%) (%)

LGE, 8.3Google, 9.5

ZTE, 4.2

Others, 35.3



Figure 15 LGE P/B band

0

20

40

60

80

100

120

140

160

180

2007 2008 2009 2010 2011 2012 2013

(KRW '000)

0.8x

1.0x

1.16x

ReleasedOpimus G

Decided toincrease capitalby issuing new

shares

20m units comulative sales of full-touch phone2Q09 MC division OPM 10.3%(+4.7ppt QoQ)

Expectations about recovery:1Q12 OPM 3.1%(+2.4ppt QoQ)

3Q10 MC divsionOPM -10%, -6.5ppt QoQ)

Earngnis shock: 4Q08OPM 0.8%(-3.9ppt)

)

15m sales of "Chocolate"phone


Figure 16 LGE’s sum-of-the-parts valuation Fair value Sales Noplat Peers’ mkt.

relative avg. P/E (KRW bn) 2012E 2013E 2012E 2013E FY13E Peers

HE 3,075 22,738 21,882 407 328 9.4x Panasonic, SonyMC 3,454 10,078 13,028 44 333 10.4x HTCHA 3,655 11,221 11,595 396 379 9.6x Electrolux, Philips, GE, WhirlpoolAC&ES 510 4,350 2,711 117 62 8.2x Carrier, DaikinOthers 2,574 1,910 (112) (30) 9.8x Other assets 3,699 0.75x Target Mkt. Cap. 14,393 50,960 51,125 852 1,072 7.4x

Fair value (KRW) 88,000

Upside (%) 12.4

Share price (KRW) 78,300

(KRW, KRW bn, m)

Company (code) Shares (%) BVPS BV Share price (28 Feb.) Mkt. value

LG Display (034220 KS) 357.8 37.9 135.6 31,202 4,231 30,550 4,143LG Innotek (011070 KS) 20.2 47.9 65,139 629 75,700 731

Value of listed holdings 4,861 4,874 Source: Bloomberg, LGE, Mirae Asset Research * FY13E Market P/E: KOSPI of 9.4x, DOW of 12.5x, NIKKEI225 of 21.9x, TWSE of15.0x, HSI of 11.3x



Figure 17 LGE’s shareholders Figure 18 4Q12 LGE’s handset sales mix

LG CORP,33.7

NationalPension

Serrvice, 9.4Vanguard,

3.4

Others, 53.5

US, 30.0

Spain, 2.4

Korea, 5.4

Brazil, 21.1

Mexico, 6.4

Others, 34.8

Source: Bloomberg, LGE, Mirae Asset Research Source: Gartner, Mirae Asset Research

Figure 19 32” LCD panel vs. 32” LCD TV set price forecast Figure 20 40” LCD panel vs. 40” LCD TV set price forecast

0

200

400

600

800

1,000

1,200

1,400

1,600

Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11 Jan-13

(US$)

0

5

10

15

20

25

30

35

40

45

50(%)

TV 32"set(LHS) TV 32"LCD(LHS) LCD%(RHS)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11 Jan-13

(US$)

0

5

10

15

20

25

30

35

40

45(%)

TV 40"set(LHS) TV 40"LCD(LHS) LCD%(RHS)

Source: WitsView, Mirae Asset Research Source: WitsView, Mirae Asset Research

(%) (%)

US, 31.0

Spain, 2.5

Korea, 5.6

Brazil, 21.1

Mexico, 6.6



Figure 21 LGE’s smartphone lineup in North America (AT&T, Verizon, Sprint) Verizon AT&T Sprint Model 2-year contract

($) Model 2-year contract

($)Model 2-year contract

($)Jun Lucid LTE 79.99 Phoenix - Free Optimus S 19.99 Spectrum LTE 79.99 Nitro HD LTE 49.99 Optimus Elite 29.99 Enlighten Free Viper LTE LTE 79.99 Enlighten bundle 39.99 Ally Free Vortex Free Revolution LTE 69.99 Jul Lucid LTE 49.99 Phoenix Free Viper LTE Free Spectrum LTE 99.99 Nitro HD LTE 49.99 Optimus Elite Free Enlighten 29.99 Optimus S Free Enlighten Bundle 39.99 Revolution LTE 69.99 Aug Lucid LTE 49.99 Nitro HD LTE 49.99 Viper LTE 79.99 Spectrum LTE 49.99 Optimus Elite Free Enlighten Free Optimus S Free Enlighten Bundle 39.99 Revolution LTE 69.99 Sep Lucid LTE 49.99 Nitro HD LTE 49.99 Viper LTE 79.99

Lucid Bundle 94.99 Optimus Elite Free Spectrum LTE 99.99 Optimus S 19.99 Enlighten Free Enlighten Bundle 39.99 Revolution LTE 69.99

Intuition LTE 199.99 Oct Lucid LTE 19.99 Nitro HD LTE 49.99 Viper LTE 49.99

Lucid Bundle 64.99 Escape LTE 49.99 Optimus Elite Free Spectrum LTE 49.99 Optimus G LTE 199.99 Optimus S Free Enlighten 29.99 Marquee 19.99 Enlighten Bundle 69.99 Intuition LTE 149.99

Nov Lucid LTE 19.99 Nitro HD LTE 49.99 Optimus G LTE 199.99 Lucid Bundle 64.99 Escape LTE 49.99 Viper LTE 49.99

Spectrum2 LTE 99.99 Optimus G LTE 199.99 Optimus Elite Free Enlighten 29.99 Optimus S Free Enlighten Bundle 69.99 Marquee 19.99 Intuition LTE 149.99

Dec Lucid LTE 0 Nitro HD LTE 49.99 Optimus G LTE 199.99 Lucid Bundle LTE 44.99 Escape LTE 49.99 Viper LTE 49.99 Spectrum2 LTE 99.99 Optimus G LTE 199.99 Optimus Elite 29.99 Enlighten 29.99 Optimus S Free Enlighten Bundle 69.99 Marquee 19.99 Intuition LTE 149.99 Mach LTE 99.99

Jan Lucid LTE Free Nitro HD LTE 0.01 Optimus G LTE 199.99 Lucid Bundle LTE 44.99 Escape LTE 49.99 Viper LTE 49.99 Spectrum2 LTE 49.99 Optimus G LTE 199.99 Optimus Elite Free Intuition LTE 99.99 Optimus S Free Marquee 19.99 Mach LTE 99.99

Feb Lucid LTE 0 Nitro HD LTE 0.01 Optimus G LTE 19.99 Lucid Bundle LTE 44.99 Escape LTE 49.99 Viper LTE 49.99 Spectrum2 LTE 79.99 Optimus G LTE 99.99 Optimus Elite 29.99 Intuition LTE 149.99 Optimus S 0 Mach LTE 49.99

Source: AT&T, Verizon, Sprint, Mirae Asset Research



Figure 22 LGE peers (TV set/home appliance) valuation table LGE Panasonic Electrolux Sony Philips Whirlpool GE UTX Daikin

Price (KRW,JPY,SEK,US$) 78,300 666 166 1,390.0 21.6 114.4 23.2 90 3,520 Market cap.(US$ m) 11,819 17,457 7,957 15,030 26,878 8,981 241,136 82,617 11,025 Sales (US$ m)

2010 48,239 101,715 14,794 84,029 29,566 18,366 148,442 54,326 13,577 2011 49,021 99,441 15,667 82,293 31,439 18,666 142,224 55,754 15,446 2012E 46,327 78,669 16,892 71,980 33,337 18,240 146,589 57,988 13,758 2013E 46,477 81,117 17,566 74,522 32,760 18,778 149,355 65,072 16,244 2014E 48,763 81,585 18,277 75,226 33,937 19,547 155,051 68,884 17,051

OP (US$ m) 2010 76 3,572 905 2,338 2,759 1,082 13,961 7,186 883 2011 310 554 462 (853) (375) 928 15,855 7,846 1,029 2012E 1,022 1,582 683 1,507 1,989 928 20,072 7,940 940 2013E 1,299 2,675 874 2,087 2,932 1,317 22,201 9,314 1,281 2014E 1,377 3,092 1,027 2,458 3,283 1,571 24,148 10,460 1,474

NI (US$ m) 2010 1,062 866 556 (3,037) 1,918 619 11,644 4,373 233 2011 (424) (9,786) 318 (5,788) (1,803) 390 14,151 4,979 522 2012E 83 (8,140) 528 172 1,519 551 15,912 4,787 284 2013E 916 953 613 666 1,945 791 17,169 5,556 678 2014E 979 1,293 747 729 2,225 953 18,369 6,334 788

P/E (x) 2010 48.3 29.6 13.6 - 14.6 9.0 16.0 16.1 36.6 2011 - - 15.1 - - 6.7 12.9 13.7 15.9 2012E 174.2 - 14.1 99.5 18.0 16.4 15.4 16.9 39.1 2013E 12.5 16.9 12.4 24.5 12.8 11.8 13.8 14.8 16.3 2014E 11.7 12.5 10.2 20.9 11.3 10.0 12.6 12.9 14.1

P/B (x) 2010 1.4 0.9 2.9 1.0 1.4 1.6 1.6 3.4 1.5 2011 1.0 0.9 1.7 0.8 1.2 0.9 1.6 3.0 1.3 2012E 1.0 1.2 2.4 0.7 1.7 1.9 2.0 3.2 1.9 2013E 1.0 1.0 2.4 0.7 1.7 1.6 1.9 2.8 1.8 2014E 1.0 0.9 2.1 0.7 1.6 1.1 1.8 2.5 1.6

EV/EBITDA (x) 2010 16.3 4.7 6.0 4.7 6.0 4.9 8.0 9.4 7.4 2011 11.5 7.3 6.6 7.1 13.4 3.4 7.8 7.9 7.0 2012E 7.2 6.0 7.5 3.5 7.8 - 18.7 11.0 11.8 2013E 6.6 5.0 6.4 3.1 6.2 - 17.9 9.1 9.2 2014E 6.3 4.6 5.5 2.8 5.4 - 15.8 8.0 8.0

ROE (%) 2010 11.3 2.8 20.3 (9.4) 9.8 15.7 9.6 21.1 4.0 2011 (3.7) (34.4) 10.0 (20.0) (9.5) 9.3 11.1 23.0 8.3 2012E 0.5 (48.7) 14.4 0.8 6.3 10.6 12.4 19.5 5.9 2013E 7.8 5.9 17.4 3.4 12.9 14.8 13.8 19.9 10.9 2014E 7.7 7.9 19.6 4.5 13.9 13.3 14.8 21.2 11.7

Source: Bloomberg, Mirae Asset Research Note: LGE’s earnings are Mirae Asset Research estimates; share prices as of 1 March



Figure 23 LGE TV set/home appliance peers’ historical valuations 2006 2007 2008 2009 2010 2011 2012E 2013E 2014ELG Electronics (066570 KS) EPS KRW 1,517 7,625 2,717 14,197 7,612 (3,132) 422 6,249 6,678 BPS KRW 35,871 43,149 50,011 60,914 76,009 71,303 70,220 75,590 81,343 P/E (x) 36.3 13.1 27.5 8.6 48.3 - 174.2 12.5 11.7 high 36.3 73.2 27.5 54.7 48.3 50.8 174.2 low 13.6 13.1 9.2 8.6 6.5 22.3 13.5 P/B (x) 1.3 2.0 1.3 1.5 1.4 1.0 1.0 1.0 1.0 high 2.2 2.7 3.3 2.6 1.6 1.4 1.6 low 1.2 1.3 1.3 1.2 1.1 0.6 0.7 ROE (%) (3.5) 31.5 14.7 30.2 11.3 (3.7) 0.5 7.8 7.7Panasonic (6752 JT) EPS US$ 0.9 1.2 (1.8) (0.5) 0.4 (4.2) (3.6) 0.4 0.4 BPS US$ 15.5 17.8 13.5 14.4 14.9 10.1 5.9 7.3 7.3 P/E (x) 23.9 16.3 - - 32.3 - - 16.9 16.9 high 41.1 25.9 18.8 - 32.3 33.7 - low 23.9 17.4 7.6 - 29.6 17.9 - P/B (x) 1.3 1.2 0.8 1.1 0.9 0.9 1.2 1.0 1.0 high 1.7 1.4 1.4 1.1 1.2 1.0 0.9 low 1.2 1.1 0.6 0.8 0.8 0.5 0.5 ROE (%) 5.6 7.4 (11.6) (3.7) 2.8 (34.4) (48.7) 5.9 5.9 Electrolux (ELUXB SS) EPS US$ 1.8 1.5 0.2 1.2 2.0 1.1 1.8 2.1 2.1 BPS US$ 6.2 8.0 6.8 8.5 9.9 9.7 11.1 11.1 11.1 P/E (x) 14.9 10.4 51.6 18.2 13.6 15.1 14.1 12.4 12.4 high 38.0 20.7 51.6 142.4 21.2 15.1 24.7 low 14.9 10.4 5.1 18.2 13.6 6.8 15.4 P/B (x) 3.2 2.1 1.3 2.7 2.9 1.7 2.4 2.4 2.4 high 3.2 4.4 2.0 3.5 3.2 2.9 2.7 low 1.0 2.1 1.0 1.1 2.3 1.4 1.7 ROE (%) 19.7 20.0 2.3 14.8 20.3 10.0 14.4 17.4 17.4 Sony (6758 JT) EPS US$ 1.1 3.2 (1.0) (0.4) (3.0) (5.8) 0.2 0.6 0.6 BPS US$ 28.6 34.6 29.7 31.6 30.7 24.5 21.4 22.2 22.2 P/E (x) 47.5 10.8 - - - - 99.5 24.5 24.5 high 50.2 56.7 16.8 - - - 99.5 low 36.2 16.8 4.7 - - - - P/B (x) 1.8 1.1 0.7 1.2 1.0 0.8 0.7 0.7 0.7 high 1.9 2.1 1.8 0.9 1.2 1.2 0.9 low 1.4 1.5 0.5 0.5 0.8 0.5 0.4 ROE (%) 3.8 10.8 (3.1) (1.4) (9.4) (20.0) 0.8 3.4 3.4 Philips (PHG US) EPS US$ 5.8 6.2 (0.1) 0.6 2.0 (1.9) 1.6 2.2 2.2 BPS US$ 27.4 29.8 23.5 22.6 21.3 17.3 16.8 16.6 16.6 P/E (x) 37.3 6.4 - 41.4 - - 18.0 12.8 12.8 high 36.6 42.3 6.8 - - 16.5 71.1 low 7.7 7.0 2.9 - - 7.9 71.1 P/B (x) 1.4 1.4 0.8 1.3 1.4 1.2 1.7 1.7 1.7 high 2.1 1.6 1.4 1.3 1.7 1.6 1.6 low 1.4 1.3 0.6 0.6 1.3 0.8 1.0 ROE (%) 27.1 21.8 (0.5) 2.7 9.8 (9.5) 6.3 12.9 12.9 Whirlpool (WHR US) EPS US$ 5.8 8.2 5.6 4.4 8.1 5.1 7.0 9.7 9.7 BPS US$ 42.1 51.5 41.2 48.9 55.6 55.0 59.5 69.5 69.5 P/E (x) 12.2 9.3 6.1 13.2 9.0 6.7 16.4 11.8 11.8 high 14.3 17.1 10.7 13.2 18.5 9.3 14.6 low 11.1 9.3 3.5 2.9 9.0 4.6 6.9 P/B (x) 2.0 1.6 1.0 1.7 1.6 0.9 1.9 1.6 1.6 high 3.7 2.8 1.8 2.0 2.3 1.6 1.9 low 2.0 1.6 0.6 0.5 1.5 0.8 0.9 ROE (%) 17.2 17.8 12.1 9.8 15.7 9.3 10.6 14.8 14.8 GE (GE US) EPS US$ 2.0 2.2 1.7 1.0 1.1 1.2 1.5 1.7 1.7 BPS US$ 10.8 11.6 9.9 11.0 11.2 11.0 11.9 12.5 12.5 P/E (x) 10.8 11.6 9.9 11.0 11.2 11.0 15.4 13.8 13.8 high 20.0 16.9 8.4 12.5 16.0 13.1 16.6 low 21.7 22.6 17.5 12.5 16.1 18.9 13.1 P/B (x) 18.2 16.9 5.8 3.5 11.5 12.9 2.0 1.9 1.9 high 3.4 3.2 1.6 1.4 1.6 1.6 2.1 low 3.7 3.9 3.3 1.7 1.8 1.9 1.6 ROE (%) 3.1 3.1 1.1 0.7 1.3 1.3 12.4 13.8 13.8 Source: Bloomberg, Mirae Asset Research



Figure 24 LGE peers (TV set/home appliance) earnings consensus Company (Code) / US$ m 2Q12 3Q12 4Q12E 1Q13E 2011 2012E 2013E 2014EPanasonic (6752 JT)

Sales 22,663 23,193 20,587 19,193 99,441 78,669 81,117 81,585 YoY (%) (4.2) (13.2) (18.8) (19.1) (2.2) (20.9) 3.1 0.6 OP 482 620 341 329 554 1,582 2,675 3,092 YoY (%) 604.9 14.6 (427.1) 522.6 (84.5) 185.4 69.2 15.6 OPM (%) 2.1 2.7 1.7 1.7 0.6 2.0 3.3 3.8 NI 160 (8,877) (192) (503) (9,786) (8,140) 953 1,293 NPM (%) 0.7 (38.3) (0.9) (2.6) (9.8) (10.3) 1.2 1.6

Electrolux (ELUXB SS) Sales 3,997 4,030 4,400 4,071 15,667 16,892 17,566 18,277 YoY (%) 3.6 1.7 4.6 6.2 5.9 7.8 4.0 4.0 OP 166 217 95 143 462 683 874 1,027 YoY (%) 39.1 27.8 4.0 2.3 (48.9) 47.9 27.9 17.5 OPM (%) 4.1 5.4 2.2 3.5 2.9 4.0 5.0 5.6 NI 110 146 174 104 318 528 613 747 NPM (%) 2.7 3.6 4.0 2.6 2.0 3.1 3.5 4.1

Sony (6758 JT) Sales 18,925 20,407 21,988 17,365 82,293 71,980 74,522 75,226 YoY (%) 3.2 0.6 (6.7) (14.0) (2.1) (12.5) 3.5 0.9 OP 78 385 877 734 (853) 1,507 2,087 2,458 YoY (%) (76.8) (1,927.2) (173.9) (4,219.7) (136.5) (276.8) 38.5 17.8 OPM (%) 0.4 1.9 4.0 4.2 (1.0) 2.1 2.8 3.3 NI (308) (197) 253 724 (5,788) 172 666 729 NPM (%) (1.6) (1.0) 1.2 4.2 (7.0) 0.2 0.9 1.0

Philips (PHG US) Sales 7,561 7,665 9,583 7,355 31,439 33,337 32,760 33,937 YoY (%) 0.7 0.6 5.9 (0.0) 6.3 6.0 (1.7) 3.6 OP 434 417 446 429 (375) 1,989 2,932 3,283 YoY (%) 29.9 8.0 (130.3) (25.3) (113.6) (631.0) 47.4 12.0 OPM (%) 5.7 5.4 4.7 5.8 (1.2) 6.0 9.0 9.7 NI 214 211 413 290 (1,803) 1,519 1,945 2,225 NPM (%) 2.8 2.8 4.3 3.9 (5.7) 4.6 5.9 6.6

Whirlpool (WHR US) Sales 4,511 4,495 4,885 4,370 18,666 18,240 18,778 19,547 YoY (%) (4.6) (2.8) (0.5) 0.5 1.6 (2.3) 3.0 4.1 OP 274 276 279 266 928 928 1,317 1,571 YoY (%) 15.6 60.5 (1.3) 11.1 (14.2) 0.0 42.0 19.2 OPM (%) 6.1 6.1 5.7 6.1 5.0 5.1 7.0 8.0 NI 113 74 176 136 390 551 791 953 NPM (%) 2.5 1.6 3.6 3.1 2.1 3.0 4.2 4.9

GE (GE US) Sales 36,108 35,562 38,439 33,794 142,224 146,589 149,355 155,051 YoY (%) 3.2 2.2 1.9 (2.4) (4.2) 3.1 1.9 3.8 OP 4,015 3,413 5,853 5,038 15,855 20,072 22,201 24,148 YoY (%) (1.7) 0.8 34.1 42.7 13.6 26.6 10.6 8.8 OPM (%) 11.1 9.6 15.2 14.9 11.1 13.7 14.9 15.6 NI 3,105 3,491 4,494 3,704 14,151 15,912 17,169 18,369 NPM (%) 8.6 9.8 11.7 11.0 9.9 10.9 11.5 11.8




Figure 25 Panasonic (6752 JP) P/E band

Figure 26 Panasonic (6752 JP) P/B band

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Figure 27 Electrolux (ELUXB SS) P/E band Figure 28 Electrolux (ELUXB SS) P/B band

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Figure 29 Sony (6758 JP) P/E band Figure 30 Sony (6758 JP) P/B band

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Figure 31 Philips (PHG US) P/E band Figure 32 Philips (PHG US) P/B band

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Figure 33 GE (GE US) P/E band

Figure 34 GE (GE US) P/B band

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Figure 35 Whirlpool (WHR US) P/E band

Figure 36 Whirlpool (WHR US) P/B band

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Figure 37 LGE’s share price, relative to handset peers

Figure 38 LGE’s share price, relative to handset peers

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Figure 39 LGE’s share price, relative to TV set/home appliance peers

Figure 40 LGE’s share price, relative to TV set/home appliance peers

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Figure 41 LGE handset peers’ 3M performance

Figure 42 LGE handset peers’ YDT performance

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Figure 43 LGE TV/home appliance peers’ 3M performance Figure 44 LGE TV/home appliance peers’ YDT performance

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Summary financial statements Profit & loss Balance sheet

Cash flow Ratio analysis

Year end Dec 31 2011A 2012E 2013E 2014E

ROE (%) (3.7) 0.5 7.8 7.7

ROA (%) (1.3) 0.3 3.1 3.1

Inventory days 46.9 48.5 51.7 51.7

Receivables days 48.5 51.8 54.1 54.0

Payable days 64.9 69.7 71.8 71.7

Net debt/equity (%) 37.5 42.8 40.6 37.8

Interest cover (x) 1.2 5.3 5.8 6.3

Source: LGE, Mirae Asset Research estimates


Cash flow from operations 1,730 582 1,962 2,080

Net profit (433) 91 1,008 1,077

Depr. & amortization 1,202 1,306 1,362 1,430

Others 2,020 1,105 (178) (176)

Change in working capital (1,060) (1,920) (230) (252)

Cash flow from investing (2,452) (1,159) (2,041) (2,055)

Capital expenditures (1,752) (1,089) (1,600) (1,600)

Others (700) (70) (441) (455)

Cash flow from financing 1,161 (433) (37) (37)

Dividends (43) (59) (37) (37)

Increase in equity 975 9

Increase in debt 228 (383)

Beginning cash 1,944 2,345 1,317 1,201

Ending cash 2,345 1,317 1,201 1,188



Current assets 15,783 15,451 15,961 16,630

Cash & equivalents 2,345 1,317 1,201 1,188

Short-term financial asset 176 152 158 164

Accounts receivable 7,065 7,396 7,749 8,133

Inventory 4,947 5,325 5,579 5,856

Other current assets 1,250 1,262 1,275 1,287

Non-current assets 16,875 16,798 17,697 18,542

Net fixed assets 7,290 7,384 7,944 8,436

Investments 5,729 5,492 5,715 5,947

Other long-term assets 3,855 3,922 4,038 4,160

Total assets 32,658 32,249 33,659 35,172

Current liabilities 14,215 13,573 13,963 14,385

Accounts payable 7,360 7,396 7,749 8,133

Short-term debt 3,192 2,478 2,478 2,478

Other current liabilities 3,663 3,699 3,736 3,774

Non-current liabilities 5,296 5,728 5,777 5,827

Long-term debt 4,258 4,531 4,531 4,531

Other long-term liabilities 1,038 1,197 1,246 1,297

Total liabilities 19,510 19,301 19,740 20,213

Controlling Interests 12,894 12,698 13,669 14,710

Non-Controlling Interests 254 250 250 250

Shareholder's equity 13,148 12,948 13,919 14,959

BVPS(KRW) 71,303 70,220 75,590 81,343



Revenue 54,257 50,960 51,125 53,640

Cost of goods sold (42,058) (38,653) (38,517) (40,400)

Gross profit 12,199 12,307 12,608 13,241

SG&A (11,856) (11,191) (11,179) (11,726)

EBIT (Adj.) 343 1,116 1,429 1,514

EBIT 280 1,125 1,429 1,514

Net interest income (loss) (228) (212) (246) (241)

Income (loss) from associates (331) 152 226 226

Others (121) (541) (100) (100)

Recurring profit (399) 524 1,309 1,399

Income tax (33) (433) (301) (322)

Net profit (433) 91 1,008 1,077

Net profit (Controlling Interests) (470) 69 1,023 1,093

EPS (Controlling Interests, KRW) (3,132) 422 6,249 6,678

Growth & margins (%) 2011A 2012E 2013E 2014E

Revenue growth (2.7) (6.1) 0.3 4.9

Gross profit growth (0.8) 0.9 2.4 5.0

EBIT growth 58.8 301.4 27.0 6.0

Net profit growth TN TP 1,379.1 6.9

EPS growth TN TP 1,379.1 6.9

Gross margin 22.5 24.2 24.7 24.7

EBIT margin 0.5 2.2 2.8 2.8

Net profit margin (0.9) 0.1 2.0 2.0




Recommendations By stock (12 months) Buy: A target price + 10% or more above the current price, Hold: Target price within - 10% to +10% of the current price Reduce: A target price of –10% or less below the current price

By industry Overweight: over +10% of the current industry index Neutral: -10% to +10% of the current industry index Underweight: -10% or less than the current industry index

Compliance Notice This report is distributed to our clients only, and none of the report material may be copied or distributed to any other party. While Mirae Asset Securities have taken all reasonable care to ensure its reliability, we do not guarantee that it is accurate or complete. Therefore, Mirae Asset Securities shall not be liable for any result from the use of this report. This report has never been provided to any institutional investor or third party. This report has been prepared without any undue external influence or interference, and accurately reflects the personal views of the analyst on the company herein. [Analyst: Jinho Cho, Yongjei Jeong]

Securities Held by the Analyst

Stock Analyst Type Number of Shares

Purchase Price

Purchase Date

Holdings of share of over 1%

Participation in Issuance of

Securities

Involvement with Affiliates

Treasury Stock Held

REMARK: Korean analyst is responsible for Korean securities and relevant sectors only. Target Price and Recommendation Chart

Stock Price & Target Price TrendStock PriceTarget Price Samsung Electro-Mechanics (009150 KS)

■ B - Buy■ H - Hold■ R - Reduce

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Date Recommendation 12M target price (KRW)

2012-11-28 BUY (Initiate) 125,0002013-01-03 BUY 125,000 2013-02-01 BUY 125,000 2013-02-14 BUY 125,000 2013-03-05 BUY 125,000

Stock Price & Target Price TrendStock PriceTarget Price LG Electronics (066570 KS)

■ B - Buy■ H - Hold■ R - Reduce

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Date Recommendation 12M target price (KRW)

2012-11-28 HOLD (Initiate) 79,0002012-12-07 HOLD 79,000 2013-01-03 HOLD 79,000 2013-01-31 HOLD 79,000 2013-02-21 BUY 88,000(Up) 2013-03-05 BUY 88,000



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