electronic materials - mirae asset

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Electronic materials SOS: The secrets of survivors

[Industry key word] “SAFE”

We present “SAFE” (semiconductor, AMOLED, FPCB, and electronic materials) as the keyword for the electronic materials sector in 2014. Companies operating in the SAFE segments are maintaining top-line growth and earnings stability despite the absence of new post-smartphone game changers in the IT industry. Broadly speaking,semiconductor-, OLED-, and FPCB-related materials firms should be able to expand shipments based on structural growth. While Samsung Electronics’ (SEC) semiconductor investments and technology development have driven up the semiconductor materials segment, electronics companies’ investments in OLED TV production lines have driven the OLED materials segment. As for FPCB materials, companies’ capacity expansion, in line with an increase in mobile device demand, is propelling the segment’s growth.

[Company key word] “SOS”

For individual companies, we present “SOS” (secrets of survivors) as our key word. Our analysis reveals that an electronic materials maker’s survival generally hinges on itsability to fluidly adopt a different, appropriate strategy at each stage of downstreamindustry growth. For instance, a concentration strategy tends to be useful when therelevant downstream industry is expanding, while a diversification strategy is required when the industry is maturing. Thus, we believe companies with a diversified approachwill post high growth in the semiconductor/FPCB materials segment, while those with a focused strategy will be more successful in the OLED materials area.

[Investment strategy] Top picks: Soulbrain, Innox, Duksan Hi-Metal

We present Soulbrain (036830 KQ/Buy/TP: W68,000), Innox (088390 KQ/Buy/TP:W35,000), and Duksan Hi-Metal (077360 KQ/Buy/TP: W34,000), as our top picks. Soulbrain and Innox are expected to offset the slowing growth downstream with product diversification into high-end businesses. Duksan Hi-Metal is anticipated to benefit from the expansion of the OLED industry, given the company’s focus on the segment.

As our runner-up picks, we recommend Cheil Industries (001300 KS/Buy/TP: W120,000),and Hansol Chemical (014680 KS/Buy/TP: W35,000). Cheil Industries is expected to show structural growth in electronic materials, including OLED, and post greater sales ofsemiconductor materials. Hansol Chemical is forecast to enjoy stable earnings andincreased semiconductor materials sales.

Overweight (Maintain)

2014 Outlook November 1, 2013

Daewoo Securities Co., Ltd.

Electronic materials

Will Cho +822-768-4306 [email protected]

Positioning of electronic materials makers (in the KDB Daewoo universe)

M/S gain

M/S decline

Slowing downstream

GrowthRe-rating

GrowthRe-rating

Negative growthDe-rating


Growth

(Industry growth > M/S decline)

Growth


Growth

(Industry slowdown < M/S gain)

Growth


Cheil Ind. Innox

OCIM

Soulbrain

DuksanHansol Chemical

Iljin Materials

Interflex

Growing downstream

Source: KDB Daewoo Securities Research

2 KDB Daewoo Securities Research

C O N T E N T S

The secrets of survivors 3

1. JSR 3 2. AZ Electronic Materials 5 3. OCI Materials 7 4. Soulbrain 9

Concentration and diversification 11

1. Growth industries: Concentration; Maturing industries: Diversification 11 2. Focus on firms’ specific strategies 12 3. Diversification strategy (for mature industries): Semiconductor and FPCB 12 4. Concentration strategy (for growth industries): OLED and rechargeable batteries 12

Investment strategy and valuations 12

Soulbrain (036830 KQ) 12

Innox (088390 KQ) 12

Duksan Hi-Metal (077360 KQ) 12

Cheil Industries (001300 KS) 12

Hansol Chemical (014680 KS) 12

Interflex (051370 KQ) 12

OCI Materials (036490 KQ) 12

Iljin Materials (020150 KS) 12


3

November 1, 2013

KDB Daewoo Securities Research

The secrets of survivors

1. JSR

JSR started its business as a chemicals manufacturer, but later grew into a producer of electronic materials for semiconductors and displays. In 2007, electronic materials contributed 45% of the company’s revenue (up from 10% in 1992) and 74% of operating profit (up from 7%), thanks to robust sales of high-end semiconductor materials.

Growth stage (2002-2007): JSR’s growth closely tracks the growth of the semiconductor industry. In the early 2000s, when the semiconductor industry entered a prolonged boom period, electronic materials revenue growth outpaced market growth. As tech migration picked up speed, JSR’s high-end ArF photoresist quickly gained market share. The company’s electronic materials’ OP margin jumped from 10% to 30%, and the stock was re-rated as anticipation for structural growth increased.

Contraction stage (2008-2012): Since 2008, however, JSR’s electronic materials revenue growth has fallen below semiconductor market growth. Although the market continued to expand, the company increasingly lost its photoresist market share amid intensifying competition. We believe such a development was inevitable, given the company’s heavy reliance on a single product. JSR’s failure to diversify its product lineup led to profitability deterioration, and a lack of new growth drivers resulted in a valuation de-rating.

Figure 1. Revenue breakdown of JSR (2007) Figure 2. Operating profit breakdown of JSR (2007)

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

Figure 3. Revenue and OP margin of JSR’s electronic materials

unit Figure 4. Semiconductor photoresist market share of JSR


Other

7%

Plastics

17%

Semiconductor

37%

Other

21%

FPD

42%

Elastomers

31%


45%


73%

Plastics

5%

Other

3%

Elastomers

19%

0

40

80

120

160

200

03 05 07 09 11

0

10

20

30

40

50Semiconductor (L) FPD

Other (L) Semiconductor proportion (R)

OP margin (R)

(JPYbn) (%)

36

2725

15

45

0

10

20

30

40

50

00 06 08 10 11

(%)


4

November 1, 2013


Figure 5. JSR and the semiconductor market

Source: Company data, Bloomberg, Gartner, KDB Daewoo Securities Research

0

40

80

120

160

200

92 94 96 98 00 02 04 06 08 10 12

0

50

100

150

200

250

300

350JSR's electronic materials revenue (L)

Global semiconductor revenue (R)

(US$bn)(JPYbn) Electronic materials

revenue moves in line

with global semiconductor

revenue

-50

-40

-30

-20

-10

0

10

20

30

40

50

92 94 96 98 00 02 04 06 08 10 12

JSR's revenue growth - global semiconductor revenue growth

(%p)

M/S gains

JSR's revenue growth > downstream growth

Fierce competition

Declining M/S

-> Revenue growth to soften

0

10

20

30

40

50

92 94 96 98 00 02 04 06 08 10 12

0

5

10

15

20

25

30

35Electronic materials OP (L)

Electronic materials OP margin (R)

(JPYbn) (%)Sharp improvement of

electronic materials

profitability

Profitability to worsen

-40

-30

-20

-10

0

10

20

30

40

50

92 94 96 98 00 02 04 06 08 10 12

Global semiconductor revenue growth

(%, YoY)

+ + +

-- -

Industry turnaround

+

Long-term boom (six years)

Recovery from

global crisis

+

0

10

20

30

40

50

60

70

90 92 94 96 98 00 02 04 06 08 10 12

0.7

1.4

2.1

2.8

3.5Chemicals OP (L)

Electronic materials OP (L)

12-month forward P/B (R)

(JPYbn) (x)

Valuation re-rating on structural growth De-rating


5

November 1, 2013


2. AZ Electronic Materials

AZ Electronic Materials (AZEM) boasts unrivalled technological prowess in high-end semiconductor fabrication materials. AZEM commands over a 50% market share in photoresist, niche materials, and CMP slurry (which collectively account for 30% of the semiconductor materials market). Although the semiconductor materials market – where AZEM is operating - is small in size, high technological barriers to entry have created an oligopolistic, seller’s market that generates hefty profits (OP margin of around 30%).

Growth stage (2009-2012): AZEM’s revenue growth outpaced market growth as the semiconductor industry continued to expand. The company secured a large market share in high-end semiconductor fabrication materials as semiconductor manufacturers increasingly adopted next-generation technologies. OP margin also recovered to over 20% after years of deterioration in the wake of the 2008 global financial crisis. Even after the semiconductor industry entered a stable growth period (as opposed to a rapid growth stage), AZEM continued to enjoy valuation re-ratings in 2010-2012, driven by expectations that high-end materials demand would continue to pick up strongly.

Contraction stage (2013): In April of this year, AZEM’s share price tanked 40% on profitability concerns. Those concerns came mainly from the fact that Korean semiconductor makers will start sourcing spin-on dielectrics (SOD) from other makers in addition to AZEM. As a result, the company’s valuation has suffered a de-rating.

Figure 6. Revenue breakdown of AZEM Figure 7. Operating profit breakdown of AZEM


Figure 8. Breakdown of semiconductor materials Figure 9. Market share of AZEM by product

Note: Sections highlighted in blue indicate AZEM’s business areas

Source: Company data, KDB Daewoo Securities Research


Conventional

35%

Niche

65%

Semiconductor

69%

FPD

31%

Semiconductor

80%

FPD

20%

Photoresist

ancillaries

6%

Wafers

38%

Photomasks

13%Photoresists

6%

Specialty gas

14%

Sputter targets

2%

CMP slurry

6%

New materials

11%

Wet chemicals

4%

0 20 40 60 80 100

FPD photoresists

Yield enhancers

Pattern enhancers

CMP slurry

SOD

2009

2012 (%)

Semiconductor


6

November 1, 2013


Figure 10. AZEM and the semiconductor market

Source: Company data, Bloomberg, Gartner, KDB Daewoo Securities Research

0

200

400

600

800

05 06 07 08 09 10 11 12 13F

4

8

12

16

20FPD (L)

Semiconductor (L)

OP margin (R)

(US&mn) (%)Profitabilty

to worsen

Rising revenue contribution of

high-margin semiconductor materials

-30

-20

-10

0

10

20

30

40

05 06 07 08 09 10 11 12 13F

Global semiconductor revenue growth

AZEM revenue growth

(%)AZEM's revenue growth > downstream growth

Declining M/S

Competition to

increase

400

500

600

700

800

900

05 06 07 08 09 10 11 12 13F

200

240

280

320

360AZEM revenue (L)

Global semiconductor revenue (R)

(US$mn) (US$bn)

Revenue moves in line with global

semiconductor revenues

1.5

2.0

2.5

3.0

3.5

10/10 4/11 10/11 4/12 10/12 4/13

12-month forward P/B

(x)

Maintained market dominance in the high-margin

semiconductor materials market

Valuation re-rating

M/S decline in the high-margin

semiconductor materials market;

Worries over dual-sourcing


7

November 1, 2013


3. OCI Materials

OCI Materials (OCIM) has localized the production of specialty gases used in the manufacturing of LCDs and semiconductors ahead of other domestic players. The company is the global NF3 leader (market share: 35%) and the number two player in the monosilane market (market share: 20%). NF3 and monosilane gas are used in chemical vapor deposition (CVD), the core process for LCD and semiconductor manufacturing. In particular, the company has grown to become the leading NF3 supplier to SEC, LG Display, and SK Hynix by steadily expanding its facilities and localizing production. NF3 generates 75% of revenue for OCIM.

Growth stage (2006-2011): During the expansion of the LCD sector, revenue growth at OCIM outpaced the growth of its downstream industry. The company was able to strengthen its position in the NF3 market through preemptive capacity expansion efforts. On the back of growth in both the downstream industry and its market share, OCIM recorded an OP margin over 30% even in the midst of the global financial crisis (2009). Profit growth and structural growth through capacity expansion also led to a valuation re-rating.

Contraction stage (2012-2013): OCIM has steadily lost competitiveness in line with the slowdown of the LCD industry. Competition has intensified as an increasing number of players have entered the market, leading to market share contraction and product price falls. Stagnating demand for NF3, the biggest revenue source for the company, has sharply depressed the company’s top-line growth. OP margin, which once surpassed 30%, slid to break-even point levels in 3Q13. Slowing growth downstream and heavy reliance on a single product have also dragged down valuations.

Figure 11. Revenue breakdown of OCIM by product Figure 12. Revenue breakdown of OCIM by downstream industry


Figure 13. NF3 demand growth and OCIM’s NF3 production

capacity growth Figure 14. NF3 market share of OCIM


NF3

75%

Monosilane

10%

WF6

15%

LCD

55%

Semiconductor

35%

Solar

10%

0

20

40

60

80

100

120

03 05 07 09 11 13F

0

10

20

30

40

50

60

OCIM's NF3 capacity growth (R)

NF3 demand growth (L)

Preemptive capacity

expansion ahead of

strong demand

(%) (%)

0

5

10

15

20

25

30

35

40

45

03 05 07 09 11 13F

(%)


8

November 1, 2013


Figure 15. OCIM and the LCD market

Source: DisplaySearch, Company data, KDB Daewoo Securities Research

-40

-20

0

20

40

60

80

100

04 05 06 07 08 09 10 11 12 13

Global LCD panel revenue growth

OCIM's revenue growth

(%, YoY)

Downstream industry growth < OCIM's revenues growth

M/S gains amid industry upturn

LCD industry to slow down

Declining M/S

0

10

20

30

40

50

60

70

80

90

04 05 06 07 08 09 10 11 12 13F

0

50

100

150

200

250

300

350Global LCD panel revenue (L)

OCIM's revenue (R)

(US$bn) (Wbn)

OCIM's revenue grows in line with LCD market

0

50

100

150

200

250

300

350

04 05 06 07 08 09 10 11 12 13F

0

10

20

30

40OCIM's revenue (L)

OCIM's OP margin (R)

(Wbn) (%)Both top- and bottom-line growthProfitability to worsen

due to increasing

competition

0

50

100

150

200

250

300

350

04 05 06 07 08 09 10 11 12 13F

0

1

2

3

4OCIM's revenue (L)

OCIM's 12-month forward P/B (R)

(Wbn) (x)

Valuation re-rating De-rating


9

November 1, 2013


4. Soulbrain

Soulbrain produces LCD and semiconductor materials and electrolytes for rechargeable batteries (lithium-ion batteries (LIB)). In its early days, the company focused on etchants used in LCD and semiconductor pattering. Since 2006, the company has expanded its business portfolio to include thin glass and electrolytes for rechargeable batteries. The company has reduced earnings volatility by swiftly making inroads into fast-growing markets.

„Differentiated‰ growth stage (2005-2011): Soulbrain maintained steady earnings, staying immune from the cyclicality of downstream industries. Thanks to its diversified business portfolio, which ranged from semiconductor and rechargeable batteries to OLED, the company’s earnings remained steady despite fluctuations in LCD capacity utilization. The company largely outperformed the LCD industry during the sector’s growth stages. Indeed, although the company was not able to leverage the industry’s growth as much as companies focusing on a narrow range of products, it was able to maintain stable earnings. Soulbrain’s shares were once de-rated on margin deterioration, but later underwent a re-rating as revenue growth and margin stability attracted investors’ attention.

„Differentiated‰ stabilization phase (2012-2013): Although the LCD sector has slowed down, Soulbrain has sharply outperformed the industry in terms of revenue growth. The company saw its margins improve in line with revenue growth on the back of a diversified product portfolio and economies of scale. In particular, the semiconductor materials and thin glass businesses have driven up the company’s revenue growth. While most electronic materials companies recorded sluggish earnings in 2012 amid downstream sluggishness, Soulbrain reported historic-high earnings. As the company’s earnings stability took center stage once more, Soulbrain experienced a valuation re-rating.

Figure 16. Revenue breakdown of Soulbrain by product Figure 17. Revenue breakdown of Soulbrain by downstream industry


Figure 18. Revenue breakdown of Soulbrain by business Figure 19. LCD utilization rate and OP margin of Soulbrain


Thin glass

30%

Semiconductor

etchants

32%

FPD chemicals

20%

Precursors

5%

Slurry

3%

Electrolytes

10%

Display

47%

Semiconductor

37%

LIB

9%

Other

7%

0

10

20

30

40

50

60

05 07 09 11 13F

Display

Semiconductor

Other

(%)

-20

-10

0

10

20

30

05 06 07 08 09 10 11

50

60

70

80

90

100

LG Display's OP margin (L) Soulbrain's OP margin (L)

LCD utilization (R)

(%) (%)


10

November 1, 2013


Figure 20. Soulbrain and the LCD market

Source: DisplaySearch, company data, KDB Daewoo Securities Research

-20

0

20

40

60

80

100

04 05 06 07 08 09 10 11 12 13F

Global LCD panel revenue growth (L)

Soulbrain's revenue growth (L)

(%, YoY)

1) Industry growth < Soulbrain's revenue growth

-> M/S gains amid industry upturn

2) Direction of growth different from that of downstream growth

-> business diversification

Product diversification

-> revenue growth to surpass

downstream industry growth

0

10

20

30

40

50

60

70

80

90

04 05 06 07 08 09 10 11 12 13F

0

100

200

300

400

500

600

700

800Global LCD panel revenue (L)

Soulbrain's revenue (R)

(US$bn) (Wbn)

Stable growth regardless of downstream industry situation

0

100

200

300

400

500

600

700

800

04 05 06 07 08 09 10 11 12 13F

0

5

10

15

20

25Soulbrain's revenue (L)

Soulbrain's OP margin (R)

(Wbn) (%)

Profitability to stabilize downward

Better product mix;

Economies of scale

0

100

200

300

400

500

600

700

800

04 05 06 07 08 09 10 11 12 13F

0

1

2

3Soulbrain's revenue (L)

Soulbrains's 12-month forward P/B (R)

(Wbn) (x)

Profitability to worsen -> de-rating

Profitability to improve -> re-rating

Re-rating


11

November 1, 2013


Concentration and diversification

1. Growth industries: Concentration; Maturing industries: Diversification

Key takeaways from the case studies in the previous section are as follows:

Conditions for growth and re-rating: Market share expansion amid downstream up cycle

Conditions for growth: 1) Market share gains offsetting downstream slowdown or 2) downstream industry growth offsetting market share declines

Conditions for negative growth and de-rating: Market share declines amid maturation of downstream industries

JSR, AZEM and OCIM achieved growth by concentrating on a handful of key products and riding the growth of their respective downstream industries. By maximizing their leverage to downstream up cycles, they were able to enjoy valuation re-ratings. However, these companies suffered market share losses as competition intensified despite the slowing growth of downstream industries. Failing to expand into new businesses, they saw their top-line growth slow and underwent de-ratings.

Meanwhile, Soulbrain has taken a different road. The company has steadily diversified its business portfolio. Due to its diversified focus, Soulbrain displayed weaker growth than the companies mentioned above when downstream industries staged explosive growth. When overall downstream industries were slowing down, however, its diversified portfolio helped the company achieve stable growth.

Figure 21. Changes in the positioning of major electronic materials makers


Table 1. Cycles of major electronic materials makers

JSR AZEM OCIM Soulbrain

Downstream Semiconductor Semiconductor LCD LCD/semiconductor/

smartphones

Up cycle Period 2002-2007 2009-2012 2006-2011 2006-2013

Driver Semiconductor photoresist

market share gains

Oligopolistic supplier of high-

end semiconductor materials

Market share gains via NF3

capacity expansion Product lineup diversification

Downstream ◎ ○ ○ ◎

Revenue

growth

Faster than downstream industry

growth

Faster than downstream

industry growth


industry growth


industry growth

Down cycle Period 2008-2012 2013 2012-2013 2007-2009

Risks Intensifying competition; Delays

to semiconductor tech migration

Market share losses in high-end

semiconductor materials

Heavy reliance on single

product Profitability deterioration

Downstream △ X X △

Revenue

growth

Slower than downstream

industry growth


industry growth


industry growth


industry growth

Note: Industry growth rate: ◎: Very high, ○: High, △: Moderate , X: Low / Source: KDB Daewoo Securities Research

M/S gain

M/S decline

Slowing downstream

GrowthRe-rating

GrowthRe-rating



Growth(Industry growth > M/S decline)

Growth(Industry growth > M/S decline)

Growth(Industry slowdown < M/S gain)

Growth(Industry slowdown < M/S gain)

JSRAZEM

OCIM

Soulbrain

Growing downstream


12

November 1, 2013


2. Focus on firms’ specific strategies

Generally speaking, electronic materials companies (which produce base and process materials using chemical technologies) tend to enjoy longer periods of growth than downstream companies thanks to high barriers to entry. It is difficult for new entrants to imitate the production processes of electronic materials, as they generally require long periods of technology development, strong manufacturing know-how, and stringent quality management. Furthermore, electronic materials producers and set makers tend to maintain strong relationships, which keep entry barriers especially high.

However, once electronic materials producers suffer market share losses, they often find it difficult to recover. The nature of the electronic materials business makes the process of securing new growth engines difficult and time-intensive. Thus, market share contraction amid a mature market usually signals the start of a deep and protracted downswing.

Considering this, we advise electronic materials investors to pay close attention to the specific strategies that firms are pursuing. As mentioned earlier, when downstream industries are robust, electronic materials producers need to concentrate on flagship items to achieve growth. And when they become mature, producers should diversify their business areas.

We think that the semiconductor, LCD, and FPCB markets are now mature given their sizes and slowing growth. By contrast, we see OLEDs and rechargeable batteries as growth industries. As such, when it comes to semiconductor, LCD, and FPCB materials firms, only those seeking diversification have strong growth potential. And, among OLED- and rechargeable battery-related companies, those concentrating on flagship businesses should deliver strong growth.

Figure 22. Up cycle of electronic materials makers; Share price trends of downstream industries


Figure 23. Growth rates of major downstream industries (2012-2015F CAGR)

Note: Based on market revenue

Source: DisplaySearch, Gartner, IIT, KDB Daewoo Securities Research

43.6

21.1

7.8 6.8

3.1

0

10

20

30

40

50

OLED LIB FPCB Semiconductor LCD

(%)

Growth industries: Concentration Mature industries: Diversification

0

100

200

300

400

05 06 07 08 09 10 11 12 13

LG Display SK Hynix Samsung SDI

(1/1/05=100)

JSR

AZEM

Soulbrain

OCIM

Semiconductor

LCD

Semiconductor/LCD/LIB Semiconductor/LIB

Growth phase


13

November 1, 2013


3. Diversification strategy (for mature industries): Semiconductor and FPCB

Semiconductor

We project SEC’s semiconductor investments to reach W13tr in 2013 and W16tr in 2014. We note that SEC’s Xi'an NAND fab has recently placed its first equipment orders (50% of first-round orders). The factory is forecast to place further equipment orders after 3Q. And SEC plans to launch a domestic line (Line 17) in 4Q13. Indeed, semiconductor equipment shares have recently fared well. Taking into account a potential trickle-down effect, we believe that materials companies stand to be the next beneficiaries.

Semiconductor materials producers stand to benefit from both market growth (semiconductor production capacity expansion) and technological evolution (changes in market drivers/process migration). Market growth will be driven by SEC’s launch of its Xi'an NAND factory in 1H14 and the launch of operations at Line 17 in end-2014. Furthermore, it should be noted that technological evolution is likely to stem from the adoption of 3D NAND technology at the Chinese NAND factory and from the use of 14nm technology at Line 17. We select Soulbrain, Cheil Industries, and Hansol Chemical as our top picks for the semiconductor-use materials segment given their diversification efforts.

Semiconductor makers are working to introduce new technologies (e.g., 3D NAND, quadruple patterning technology (QPT)) to overcome the technological challenges associated with process migration. Against this backdrop, we expect a surge in demand for materials, including high selectivity nitride (HSN) etchants for use in 3D NAND (produced by Soulbrain), spin-on hardmask (SOH; Cheil Industries), and QPT-use spacers (Hansol Chemical).

Figure 24. SEC’s semiconductor capex Figure 25. SEC’s 3D NAND design

Source: Company data, KDB Daewoo Securities Research Source: Industry data

Table 2. Materials related to semiconductor process migration

Major materials Domestic companies Foreign companies

Double/quadruple patterning spacers Hansol Chemical, DNF, UP Chemical (unlisted) Air Products, Air Liquide

High-k Hansol Chemical, Soulbrain, DNF, UP Chemical (unlisted) Adeka, Air Liquide

CVD dielectric (HCDS → TSA) Hansol Chemical, UMT (a subsidiary of Duksan Hi-Metal) Air Liquide

Electrolyzed water Soulbrain

Etchants (HSN) Soulbrain

SOH Cheil Industries

Amorphous carbon layers (ACL) DNF, Wonik Materials

SOC DNF, Dongjin Semichem AZEM, Nissan Chem., Shin-Etsu

SOD Cheil Industries, DNF, UP Chemical (unlisted) AZEM

Disilane Wonik Materials, OCIM Voltaix, Mitsui Chemicals


65

4

12

11

15

13

16

0

3

6

9

12

15

18

07 08 09 10 11 12 13F 14F

40

50

60

70

80Semiconductor capex (L)

Semiconductor proportion out of total capex (R)

(Wtr) (%)


14

November 1, 2013


FPCB

We anticipate the FPCB market to grow at a CAGR of 8% until end-2015. Although the broader FPCB market has matured, we expect mobile-use FPCB market to continue to expand. Manufacturers are increasingly adopting high-end FPCBs to make mobile devices lighter and thinner, and FPCB content per device is also increasing.

Furthermore, a robust downstream market should directly benefit FPCB producers. Demand related to smartphones and tablet PCs is growing steadily. In addition, materials are becoming more advanced, and new products (e.g., digitizer materials) are emerging.

As IT devices become smaller, thinner, and lighter, three-layer flexible copper clad laminate (FCCL; a material used in FPCBs) is being rapidly replaced by two-layer FCCL. The proliferation of smartphones and tablet PCs should further accelerate this trend. As a result, the proportion of two-layer FCCL in the FCCL market is projected to rise from 55% in 2009 to 75% in 2015.

The market for digitizer materials (a new type of product) is growing on the back of the increasing adoption of mobile device styli. We expect the digitizer materials market to grow from W37bn in 2012, to W69bn in 2013, to W82bn in 2014, and to W100bn in 2015.

Our top pick in this segment is Innox, Korea’s largest FPCB materials maker. Despite the fact that the FPCB market has largely matured, we believe that Innox is likely to enjoy margin growth by expanding into new business areas.

Figure 26. Global FPCB market Figure 27. FPCB use by application

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

Figure 28. FCCL market breakdown by type Figure 29. Digitizer absorber film market


0

3,000

6,000

9,000

12,000

15,000

05 07 09 11 13F 15F

(US$mn)

G lobal FP CB market

2012-15F CA GR: 8%

0

20

40

60

80

100

09 10 11 12 13F 14F 15F

Feature phone Smartphone Tablet PC Notebook PC Other

0

400

800

1,200

1,600

2,000

09 10 11 12 13F 14F 15F

50

55

60

65

70

75

802-layer (adhesiveless, L)

3-layer (adhesive, L)

2-layer proportion (R)

(%)(US$mn)

0

20

40

60

80

100

120

140

12 13F 14F 15F

0

20

40

60

80

100

120Galaxy Note series sales volume (L)

Digitizer absorber film market (R)

Innox's digitizer absorber revenue (R)

(mn units) (Wbn)


15

November 1, 2013


4. Concentration strategy (for growth industries): OLED and rechargeable batteries

OLED

OLED technology has a much wider range of applications than LCD, which is almost exclusively used in the production of TVs. Backed by its simple structure and its potential to be rendered flexible and transparent, OLED can be used in lighting, automotive glass, interior glass, and signboards. As such, OLED’s applications will likely expand from the consumer electronics market, which is characterized by high volatility and seasonality, to the larger, more stable industrial electronics market.

The fact that large IT firms are increasing investments in OLED indicates that the technology is in an early stage of growth. The Samsung Group recently announced that it had acquired Novaled, a German OLED materials maker. This acquisition indicates that Samsung is confident of OLED market growth and will make steady investments in the segment. LG Display has also expanded investments in its OLED lines full swing since the beginning of this year. In addition, BOE, the largest display panel maker in China, has launched OLED investments. Although Apple has never adopted OLED displays in its products, the company has steadily applied for OLED-related patents. The entries of multiple display makers into the OLED space suggest that the market has high growth potential.

If the applications of OLED expand from mobile products to include TVs within two to three years, the materials market will be significantly impacted. Assuming OLED TV penetration at 1.5% (3mn units annually), we expect OLED production capacity to jump 4.4 times and the OLED materials market to grow 2.5 times by 2015 (vs. 2012 levels). If penetration increases further after 2015 (3% 6% 9%), the OLED materials market is likely to expand by at least 50% annually.

We present Duksan Hi-Metal as our top OLED-related pick, as it: 1) boast the highest OLED materials revenue contribution (50%) in its peer group; and 2) should be able to deliver steady growth in line with downstream industry expansion (despite the fact that its market share will likely fall on the entries of new competitors).

Table 3. Apple’s OLED-related patents

Date of application Details Core technology

Jan. 2011 Mouse-utilizing flexible OLED Flexible OLED

Feb. 2011 Three patents related to touchscreen technology OLED + touchscreen

July 2011 Transparent OLED using glasses-free 3D technology Transparent OLED

Nov. 2011 Energy-efficient transparent OLED Transparent OLED

Nov. 2011 OLED BLU that can be used in LCD displays OLED BLU

Apr. 2012 OLED BLU brightness control OLED BLU

May 2012 Haptic display using flexible OLED Flexible OLED

Mar. 2013 Wrap-around display using flexible OLED Flexible OLED

Aug. 2013 OLED brightness control using photosensor OLED-use photosensor

Source: Patently Apple, KDB Daewoo Securities Research

Figure 30. Global OLED production capacity Figure 31. Global OLED organic materials market

Source: : DisplaySearch, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

0

2

4

6

8

10

12

09 10 11 12 13F 14F 15F

0

50

100

150

200

2508G (L)

6G (L)

5.5G (L)

4G (L)

YoY growth (R)

(mn m2) (%)OLE D TV penet rat ion

rate of 1.5%

0

200

400

600

800

1,000

09 10 11 12 13F 14F 15F

-60

-30

0

30

60

90

120

150

HTL (L) ETL (L)

EML (L) YoY growth (R)

(Wbn) (%)


16

November 1, 2013


Rechargeable batteries

The rechargeable battery market has high growth potential in the medium to long term. If the applications of rechargeable batteries expand to include xEV (i.e., hybrid EV (HEV), plug-in HEV (PHEV), EV) and energy storage systems (ESS), the market will likely quadruple by 2020. The average capacity and price for EV batteries are around 1,000 times higher than those for laptop batteries. As such, even if the EV and ESS markets grow only modestly, their impact on the rechargeable battery market would be significant. We expect the rechargeable battery market to grow at a CAGR of 19% until 2020. Although the market for small- and medium-sized IT batteries will likely display only modest growth, the rechargeable battery markets for EVs and ESS should expand at respective CAGRs of 43% and 29% during this period, driving overall market growth.

Nevertheless, domestic materials makers are unlikely to benefit sharply from the growth of the mid- to large-sized battery market. The prerequisite for EV market expansion is an EV price cut. In order to lower EV prices, it will be essential to cut rechargeable battery prices, which account for almost 30% of an EV’s price. For rechargeable batteries, the proportion of material costs out of total manufacturing costs stands at as high as 70%, leading to low operating leverage. Since the percentage of variable costs is high, manufacturing costs per unit do not fall sharply in line with an increase in production. Therefore, rechargeable battery makers tend to demand price cuts for materials. As such, we believe that materials makers will benefit only modestly from the expansion of the mid- to large-sized battery market—unless they develop innovative materials. The mid- to large-sized battery materials market is currently dominated by Japanese makers, which have more advanced technology.

Figure 32. Rechargeable battery supply chain


Figure 33. Rechargeable battery market Figure 34. Rechargeable battery costs


0

10

20

30

40

50

60

04 06 08 10 12 14F 16F 18F 20F

ESS

xEV

IT

(US$bn)

2012~2020F CAGR: 18.7%

→ IT: 2.0%, xEV: 43.1%, ESS: 28.7%

E V penet rat ion rate of 0. 9%

E V penet rat ion rate of 3.7%

Cathode

25%

Anode

7%

Other

14%

Electolytes

11%

Separators

14%

Other

29%

Material

costs

70%

Korea Overseas

Panax EtecSoulbrainLG ChemSFC

Ube IndustriesMitsubishi Chem.Central GlassTomiyama

Electrolytes

Korea Overseas

Panax EtecSoulbrainLG ChemSFC

Ube IndustriesMitsubishi Chem.Central GlassTomiyama

Electrolytes

Korea Overseas

L&FEcoproCosmoLG ChemSFCHanwha Chem.

NichiaUmicoreTodaAGCHunan Shanshan

Cathode

Korea Overseas

POSCOGS CaltexSK Innovation

Hitachi Chem.Nippon CarbonMitsubishi Chem.JEFBTR

Anode

Korea Overseas

SK InnovationLG ChemToptecCheil Ind.

Asahi KaseiToray TonenCelgard

Separators

Korea Overseas

SK InnovationLG ChemToptecCheil Ind.

Asahi KaseiToray TonenCelgard

Separators

Korea Overseas

Iljin MaterialsLS Mtron

FurukawaNippon DenkaiCCP

Elecfoils

Korea Overseas

Iljin MaterialsLS Mtron

FurukawaNippon DenkaiCCP

Elecfoils

Korea Overseas

FoosungSoulbrain

Stella ChemifaKanto DenkaMorita Chem.

LiPF6

Korea Overseas

FoosungSoulbrain

Stella ChemifaKanto DenkaMorita Chem.

LiPF6

Korea Overseas

LeechemUbe IndustriesMitsubishi Chem.Tomiyama

Additives

Korea Overseas

LeechemUbe IndustriesMitsubishi Chem.Tomiyama

Additives Korea Overseas

Cosmo Chem.Daejung Chem.ENF Tech

JapanAustraliaChina

Precursors

Korea Overseas

Power LogicsNexcontech

Taiyo YudenBYDMitsui

PCM/SM

Korea Overseas

Power LogicsNexcontech

Taiyo YudenBYDMitsui

PCM/SM

SDI

LG Chem

SDI

LG Chem


17

November 1, 2013


Investment strategy and valuations

Maintain Overweight; Top picks are Soulbrain, Innox, and Duksan Hi-Metal

We maintain our Overweight call on the electronic materials sector. In our 2H13 outlook report (published on May 30th), we presented “SAFE” (semiconductor, AMOLED, FPCB, and electronic materials) as our key word for the industry. SAFE companies are maintaining top-line growth and earnings stability despite the absence of new game changers after smartphones in the IT industry.

For 2014, we maintain our overall view on the electronic materials sector. However, in picking stocks, we advise investors to look closely at companies’ respective strategies. Our analysis reveals that an electronic materials maker’s ability to survive generally hinges on its ability to fluidly adopt a different, appropriate strategy at each stage of industry growth. For instance, a concentration strategy tends to be useful when the relevant downstream industry is expanding, while a diversification strategy is required when the industry is maturing. Thus, we believe companies with a diversified approach will post high growth in the semiconductor/FPCB materials segment, while those with a focused strategy will be more successful in the OLED materials area.

We present Soulbrain (036830 KQ/Buy/TP: W68,000), Innox (088390 KQ/Buy/TP: W35,000), and Duksan Hi-Metal (077360 KQ/Buy/TP: W34,000), as our top picks. Soulbrain and Innox are expected to offset the slowing growth downstream with product diversification into high-end businesses. Duksan Hi-Metal is anticipated to benefit from the expansion of the OLED industry, given the company’s focus on this segment.

As our runner-up picks, we recommend Cheil Industries (001300 KS/Buy/TP: W120,000), and Hansol Chemical (014680 KS/Buy/TP: W35,000). Cheil Industries is expected to show structural growth in electronic materials, including OLED, and post greater sales of semiconductor materials. Hansol Chemical is forecast to enjoy stable earnings and increased semiconductor materials sales.

Figure 35. Positioning of electronic materials makers (in the KDB Daewoo universe)


Table 4. Ratings and valuations of electronic materials makers in the KDB Daewoo universe

P/E (x) P/B (x) EPS growth (%) ROE (%)

Rating

TP

(W)

Current

share price

(W)

Upside

(%) 12 13F 14F 12 13F 14F 12 13F 14F 12 13F 14F

Soulbrain Buy 68,000 53,000 28.3 10.1 10.1 8.5 2.4 2.2 1.8 864.3 14.3 17.9 26.4 22.9 21.9

Innox Buy 35,000 25,500 37.3 13.6 10.5 7.5 2.4 3.1 2.2 30.1 109.0 39.5 18.1 31.1 33.5

Duksan Hi-Metal Buy 34,000 20,950 62.3 14.9 16.3 12.2 3.7 2.9 2.4 20.8 -10.0 34.1 26.1 18.7 20.6

Cheil Industries Buy 120,000 90,000 33.3 23.7 12.2 14.7 1.7 1.7 1.7 -21.7 85.7 -17.0 6.5 11.9 9.8

Hansol Chemical Buy 35,000 27,300 28.2 7.5 12.9 9.6 1.6 1.6 1.4 93.4 -33.9 35.1 21.6 12.4 14.6

Interflex Buy 43,000 31,700 35.6 13.7 20.0 10.1 2.5 1.6 1.4 70.5 -58.5 98.8 19.8 7.5 15.0

OCI Materials Hold - 33,200 - 13.9 - 44.7 1.2 1.1 1.1 -55.8 TTR TTB 8.7 -0.8 2.5

Iljin Materials Hold - 12,200 - - 62.6 31.0 1.3 1.7 1.6 TTR TTB 102.1 -17.4 2.7 5.2


M/S gain

M/S decline

Slowing downstream

GrowthRe-rating

GrowthRe-rating



Growth


Growth


Growth


Growth


Cheil Ind. Innox

OCIM

Soulbrain

DuksanHansol Chemical

Iljin Materials

Interflex

Growing downstream


18

November 1, 2013


Figure 36. SAFE: An investment strategy for a period of low growth


Table 5. Valuation metrics of global IT materials makers (Wbn, %, x)

Revenue OP NP ROE P/E P/B EV/EBITDA

Market cap

13F 14F 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F

Soulbrain 859 707 809 121 138 87 100 23.3 22.0 9.8 8.5 2.1 1.7 5.8 5.1

Innox 314 205 308 37 57 29 45 28.9 32.1 10.4 7.1 2.7 2.0 7.4 5.1

Duksan Hi-Metal 616 144 186 40 51 42 52 20.3 20.4 14.3 11.6 2.6 2.1 13.7 10.7

Cheil Industries 4,719 6,511 6,531 325 407 287 320 8.9 9.0 16.0 14.6 1.4 1.3 10.3 8.9

Hansol Chemical 308 330 403 28 37 24 32 12.7 15.0 12.7 9.6 1.7 1.4 10.6 8.5

OCIM 350 219 241 21 35 9 21 2.7 6.2 38.4 16.7 1.1 1.0 5.0 4.4

Iljin Materials 478 280 302 7 14 16 23 5.7 7.6 19.2 21.1 1.6 1.4 - -

Wonik Materials 226 130 154 26 33 22 28 18.8 18.4 10.5 8.1 1.6 1.3 5.5 4.5

Domestic average 16.5 17.6 16.4 12.2 1.9 1.5 8.3 6.7

Shin-Etsu Chemical 25,778 12,189 12,732 1,989 2,209 1,347 1,486 7.6 8.0 18.9 17.1 1.4 1.3 7.0 6.5

Hitachi Chemical 3,378 5,369 5,601 339 402 258 264 7.5 7.5 12.8 12.6 1.0 0.9 4.9 4.3

SUMCO 2,475 1,961 2,289 182 385 12 251 1.1 12.8 474.9 10.4 1.8 1.4 12.9 8.5

Sumitomo Chemical 6,393 24,158 24,785 1,027 1,147 349 567 6.4 10.2 18.2 11.2 1.1 1.0 8.7 8.2

JSR 4,780 4,294 4,571 416 480 306 350 8.9 9.7 15.6 13.6 1.3 1.3 6.0 5.4

Mitsubishi Chemical 7,442 37,323 37,409 1,531 1,703 519 581 5.1 6.5 14.1 12.5 0.8 0.8 7.7 7.1

Showa Denko 2,148 8,944 9,050 279 373 107 155 3.8 4.8 20.0 13.6 0.7 0.7 8.5 7.4

Furukawa 1,730 9,923 9,080 266 279 72 154 4.2 8.6 24.1 11.3 0.9 0.9 9.9 10.3

Sumitomo Bakelite 1,001 2,207 2,186 124 136 64 73 4.7 5.2 14.1 12.3 0.6 0.6 4.3 4.0

Nitto Denko 9,616 8,235 8,754 998 1,150 689 797 12.4 13.0 13.5 11.7 1.6 1.5 5.6 5.0

UDC 1,558 135 193 31 74 24 56 7.9 15.0 63.2 26.2 4.0 3.5 28.6 14.4

DuPont 59,935 38,091 40,450 5,496 6,137 3,614 4,093 30.6 30.5 15.9 14.1 4.1 3.2 9.7 8.9

Cabot Microelectronics 1,038 479 502 97 106 66 72 - 17.5 16.9 15.2 - - 8.2 7.6

Global avg. 8.3 11.5 16.7 14.0 1.4 1.2 7.8 6.9

Avg. 12.4 14.5 16.6 13.1 1.6 1.4 8.0 6.8

Source: Bloomberg consensus, KDB Daewoo Securities Research

emiconductor ⇨ Hansol Chem./Soulbrain/Cheil Ind.SS

AA

FF

EE

MOLED ⇨ Duksan/Cheil Ind.

PCB ⇨ Innox

lectronic materials

SAFE in 2014 !

SAFE: Volume expansion via structural growthSAFE: Volume expansion via structural growth

19 KDB Daewoo Securities Research

Key recommendations

Soulbrain (036830 KQ/Buy) Quiet evolution ongoing

2014 outlook: All business units to be solid Catalysts: 1) Increased semiconductor capacity, 2) new semiconductor materials, 3) spread of OLED Valuation: Raise TP to 68,000; 12-month forward P/E of 9x

Innox (088390 KQ/Buy) Expecting strong growth

2014 outlook: A strong materials player Catalysts: 1) Growing FPCB demand, 2) new businesses, 3) excellent production management Valuation: Maintain TP of W35,000; 12-month forward P/E of 8x (vs. peers’ average: 13x)

Duksan Hi-Metal (077360 KQ/Buy) OLED to drive growth in 2014

2014 outlook: OLED materials demand to rebound sharply Catalyst: Confidence in the OLED growth story Valuation: Maintain TP of W34,000; 12-month forward P/E of 13x, lowest since OLED business launch

Cheil Industries (001300 KS/Buy) Big picture is taking shape

2014 outlook: New start as a pure electronic materials producer Catalysts: 1) Semiconductor materials, 2) polarizers, 3) OLED materials Maintain TP of W120,000; 12-month forward P/E of 14.2x (vs. five-year average of 18x)

Hansol Chemical (014680 KS/Buy) Structural growth phase has begun

2014 outlook: Steady hydrogen peroxide revenue growth, recovery in latex revenue, robust subsidiary revenue Catalysts: 1) SEC’s capacity expansion and 2) full-swing growth of electronic materials business Valuation: Maintain TP of W35,000; Attractively valued at P/E of 10x

Interflex (051370 KQ/Buy) In need of profitability improvement

2014 outlook: ASP decline seems inevitable Catalysts: 1) FPCB business to gain market share; 2) Touchscreen business to gain momentum Valuation: Lower TP to W43,000; Maintain Buy

OCI Materials (036490 KQ/Hold) New growth engines are needed

2014 outlook: NF3 market to show limited recovery Catalyst & risk: Turnaround of photovoltaic market vs. lack of new growth drivers Valuation: Maintain Hold (2014F P/E of 45x)

Iljin Materials (020150 KS/Hold) Spring has yet to come

2014 outlook: Profitability to climb thanks to rechargeable battery elecfoils Catalyst & risk: Growth of large-sized rechargeable battery market vs. price cuts Valuation still seems demanding; Maintain Hold


20

November 1, 2013


Soulbrain (036830 KQ) Quiet evolution ongoing

2014 outlook: All business units to be solid

Despite the slowdowns of downstream industries, we expect all of Soulbrain’s business units to deliver solid growth in 2014 thanks to the company’s business diversification efforts. Furthermore, margins should stay healthy in spite of unit price cuts, aided by increased in-house production of raw materials (e.g., hydrofluoric acid, a raw material for semiconductor etchants, and LiPF6 for LIB-use electrolyte).

We anticipate the company’s semiconductor materials unit to find benefits from chip makers’ capacity ramp-ups and new technologies. As for the display materials unit, thin glass is still driving growth. The rechargeable battery-use electrolyte unit is likely to see a rise in its share of supply to customers and greater sales to the US (in line with growing demand for EV batteries).

Catalysts: 1) Increased semiconductor capacity, 2) new semiconductor materials, 3) spread of OLED

▶ Soulbrain should benefit from SEC’s capacity ramp-ups. SEC’s semiconductor division is forecast to invest W13tr in 2013 and W16tr in 2014. SEC’s Chinese 3D NAND line and domestic Line 17 should drive Soulbrain’s etchant sales growth. As for CMP slurry, Soulbrain’s supply still meets only a small proportion of SEC’s needs. However, we expect Soulbrain’s CMP slurry unit to find boosts from CMP slurry market growth and the company’s market share expansion.

▶ Semiconductor technological advances (changes in market drivers/process migration) are expected to bring attention to new semiconductor materials. SEC is likely to adopt 3D NAND technology at its Chinese NAND fab and the 14nm process at its domestic S3 fab. Together with SEC, Soulbrain has jointly developed high selectivity nitride (HSN) for 3D NAND production. In 14nm (or finer) processes, cleaning solutions will become more important for the removal of fine dust. Soulbrain’s supply of electrolyzed water equipment to SEC (which began last year) should increase in line with process migration.

▶ The thin glass business is likely to continue to grow. SEC is still focusing on OLED smartphones and might adopt OLED panels in its tablet PCs. If Soulbrain takes over Samsung Display’s thin glass and ITO coating businesses, we could see additional upside to top-line growth.

Valuation: Raise TP to 68,000; 12-month forward P/E of 9x

We maintain our Buy call and raise our target price by 13% to W68,000, as we changed the base year for our EPS estimate to 2014 and raised our 2014F EPS by 4% to reflect improved product mix. Soulbrain has one of the most well-balanced and stable portfolios among IT stocks. It has ties to almost every major IT segment, including smartphones, tablets, OLED, non-memory chips, and semiconductor technology migration—and yet the stock is trading at a cheaper multiple (12-month forward P/E of 9x) than its peers (average of 13x). FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F

Revenue (Wbn) 359 481 664 668 759 848

OP (Wbn) 45 59 107 119 135 146

OP margin (%) 12.5 12.2 16.1 17.8 17.8 17.3

NP (Wbn) 32 7 74 86 101 110

EPS (W) 2,206 479 4,614 5,275 6,220 6,774

ROE (%) 16.5 3.2 26.4 22.9 21.9 19.6

P/E (x) 13.9 80.7 10.1 10.1 8.5 7.8

P/B (x) 2.2 2.6 2.4 2.2 1.8 1.4

Notes: All figures are based on consolidated K-IFRS; NP refers to profit attributable to controlling interests

Source: Company data, KDB Daewoo Securities Research estimates

Technology

(Maintain) Buy

Target Price (12M, W) 68,000

Share Price (10/31/13, W) 53,000

Expected Return 28%

OP (13F, Wbn) 119

Consensus OP (13F, Wbn) 121

EPS Growth (13F, %) 14.3

Market EPS Growth (13F, %) 17.0

P/E (13F, x) 10.1

Market P/E (13F, x) 10.9

KOSDAQ 532.44

Market Cap (Wbn) 859

Shares Outstanding (mn) 16

Free Float (%) 54.9

Foreign Ownership (%) 24.0

Beta (12M) 0.63

52-Week Low (W) 37,700

52-Week High (W) 55,000

(%) 1M 6M 12M

Absolute 2.9 15.3 20.7

Relative 1.3 12.0 14.6

80

90

100

110

120

130

140

10/12 2/13 6/13 10/13

Share price

KOSDAQ


21

November 1, 2013


Table 6. Earnings forecast revisions (Wbn, %)

Previous Revised % chg.

2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes

Revenue 686 784 858 668 759 848 -2.6 -3.2 -1.2- Margins to improve on in-house production of raw

materials

Operating profit 122 130 137 119 135 146 -2.8 3.9 6.6 - Product mix to improve

Pretax profit 115 124 132 112 129 141 -3.0 4.1 6.9

Net profit 88 97 103 85 101 110 -3.1 4.1 6.9

EPS (W) 5,440 5,973 6,337 5,275 6,220 6,774 -3.1 4.1 6.9

OP margin 17.8 16.6 16.0 17.8 17.8 17.3 - - -

Net margin 12.9 12.4 12.0 12.8 13.3 12.9 - - -

Note: All figures are based on consolidated K-IFRS;

Source: KDB Daewoo Securities Research estimates

Table 7. Quarterly and annual earnings (under consolidated K-IFRS) (Wbn, %)

1Q13 2Q13 3Q13F 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F

Revenue 158.8 167.4 170.2 171.7 165.0 186.5 201.2 206.1 663.6 668.0 758.9 847.6

Display 83.7 93.7 94.9 93.0 82.7 91.0 99.4 110.6 307.2 365.3 383.7 421.8

Chemical 29.9 28.8 29.8 31.6 30.1 33.4 34.4 32.1 123.7 120.1 130.0 134.1

Thin glass/scribing 53.8 64.9 65.1 61.4 52.7 57.6 65.0 78.5 183.5 245.2 253.8 287.7

Semiconductor 53.5 51.0 49.8 55.3 57.5 68.7 73.6 72.7 247.3 209.7 272.6 316.2

Etchants 42.0 39.1 37.3 41.9 43.1 51.8 52.2 51.5 194.6 160.3 198.6 222.0

Precursors 6.0 5.6 5.5 5.4 6.3 8.1 11.4 10.7 32.9 22.6 36.5 48.0

CMP slurry 5.5 6.3 7.0 8.0 8.2 8.8 10.0 10.5 19.8 26.8 37.5 46.1

LIB 12.4 12.0 14.9 14.6 16.0 17.7 19.2 15.3 59.4 53.9 68.2 79.7

Other 9.3 10.6 10.5 8.7 8.6 9.1 9.1 7.5 49.8 39.2 34.4 30.0

Revenue contribution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Display 52.7 56.0 55.7 54.2 50.2 48.8 49.4 53.6 46.3 54.7 50.6 49.8

Semiconductor 33.7 30.5 29.3 32.2 34.9 36.8 36.6 35.3 37.3 31.4 35.9 37.3

LIB 7.8 7.2 8.8 8.5 9.7 9.5 9.5 7.4 8.9 8.1 9.0 9.4

Other 5.9 6.3 6.2 5.1 5.2 4.9 4.5 3.7 7.5 5.9 4.5 3.5

Operating profit 23.7 33.0 32.1 30.2 26.7 35.6 38.4 34.5 107.0 119.0 135.2 146.3

Pretax profit 21.5 30.2 31.4 28.6 25.4 33.8 37.0 33.0 96.0 111.7 129.2 140.7

Net profit 16.7 21.9 24.5 22.3 19.8 26.3 28.8 25.8 74.2 85.4 100.8 109.7

OP margin 14.9 19.7 18.9 17.6 16.2 19.1 19.1 16.8 16.1 17.8 17.8 17.3

Net margin 10.5 13.1 14.4 13.0 12.0 14.1 14.3 12.5 11.2 12.8 13.3 12.9

QoQ/YoY growth

Revenue 5.4 1.7 0.9 -3.9 13.1 7.9 2.4 0.7 13.6 11.7

Display 12.0 1.2 -1.9 -11.1 9.9 9.3 11.2 18.9 5.1 9.9

Semiconductor -3.4 3.1 6.3 -4.8 10.9 3.2 -6.7 -2.9 8.2 3.2

LIB 20.6 0.3 -5.7 -14.3 9.4 12.8 20.7 33.6 3.5 13.4

Other -4.6 -2.4 11.1 4.0 19.4 7.1 -1.1 -15.2 30.0 16.0

Operating profit 39.7 -2.9 -5.9 -11.7 33.4 7.9 -10.0 11.2 13.6 8.2

Pretax profit 40.2 4.2 -8.9 -11.3 33.0 9.4 -10.6 16.4 15.7 8.9

Net profit 30.8 12.0 -8.9 -11.3 33.0 9.4 -10.6 15.2 17.9 8.9



22

November 1, 2013


Soulbrain (036830 KQ/TP: W68,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)

(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F

Revenue 664 668 759 848 Current Assets 173 233 347 433

Cost of Sales 508 497 565 635 Cash and Cash Equivalents 49 107 197 268

Gross Profit 155 171 194 213 AR & Other Receivables 70 82 98 108

SG&A Expenses 48 52 59 66 Inventories 46 42 50 55

Operating Profit (Adj) 107 119 135 146 Other Current Assets 7 0 0 0

Operating Profit 107 119 135 146 Non-Current Assets 354 371 401 437

Non-Operating Profit -11 -7 -6 -6 Investments in Associates 56 60 66 72

Net Financial Income 6 0 0 0 Property, Plant and Equipment 253 276 300 329

Net Gain from Inv in Associates 1 6 6 6 Intangible Assets 24 20 20 20

Pretax Profit 96 112 129 141 Total Assets 527 604 748 870

Income Tax 22 26 28 31 Current Liabilities 155 153 164 170

Profit from Continuing Operations 74 86 101 110 AP & Other Payables 32 54 65 71

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 93 99 99 99

Net Profit 74 86 101 110 Other Current Liabilities 29 0 0 0

Controlling Interests 74 86 101 110 Non-Current Liabilities 39 38 76 86

Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 32 27 54 54

Total Comprehensive Profit 74 86 102 111 Other Non-Current Liabilities 7 11 22 33

Controlling Interests 74 86 102 111 Total Liabilities 194 191 239 256

Non-Controlling Interests 0 0 0 0 Controlling Interests 333 413 509 613

EBITDA 137 136 171 183 Capital Stock 8 8 8 8

FCF (Free Cash Flow) 70 50 67 76 Capital Surplus 70 70 70 70

EBITDA Margin (%) 20.7 20.4 22.5 21.5 Retained Earnings 255 335 430 533

Operating Profit Margin (%) 16.1 17.8 17.8 17.3 Non-Controlling Interests 0 0 0 0

Net Profit Margin (%) 11.1 12.8 13.3 13.0 Stockholders' Equity 333 414 509 614

Cash Flows (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F

Cash Flows from Op Activities 127 123 128 143 P/E (x) 10.1 10.1 8.5 7.8

Net Profit 96 86 101 110 P/CF (x) 7.2 8.4 6.3 5.9

Non-Cash Income and Expense 41 67 70 73 P/B (x) 2.4 2.2 1.8 1.4

Depreciation 29 17 35 36 EV/EBITDA (x) 6.1 6.4 4.8 4.1

Amortization 1 0 0 0 EPS (W) 4,614 5,275 6,220 6,774

Others -6 -37 -8 -8 CFPS (W) 6,490 6,348 8,414 9,012

Chg in Working Capital 6 -5 -14 -8 BPS (W) 19,284 24,490 30,361 36,786

Chg in AR & Other Receivables -8 -4 -16 -10 DPS (W) 375 375 375 375

Chg in Inventories 13 -2 -8 -5 Payout ratio (%) 8.2 7.0 6.0 5.5

Chg in AP & Other Payables -1 2 11 6 Dividend Yield (%) 0.8 0.7 0.7 0.7

Income Tax Paid -17 -26 -28 -31 Revenue Growth (%) 37.9 0.7 13.6 11.7

Cash Flows from Inv Activities -64 -54 -60 -66 EBITDA Growth (%) 73.7 -0.5 25.2 6.9

Chg in PP&E -58 -54 -59 -65 Operating Profit Growth (%) 82.5 11.2 13.6 8.2

Chg in Intangible Assets -1 -1 -1 -1 EPS Growth (%) 864.3 14.3 17.9 8.9

Chg in Financial Assets -1 -2 0 0 Accounts Receivable Turnover (x) 10.0 8.8 8.4 8.2

Others -4 2 0 0 Inventory Turnover (x) 12.3 15.2 16.6 16.2

Cash Flows from Fin Activities -39 -12 21 -6 Accounts Payable Turnover (x) 27.0 17.2 12.8 12.5

Chg in Financial Liabilities -28 -20 0 0 ROA (%) 14.8 15.1 14.9 13.6

Chg in Equity 0 0 0 0 ROE (%) 26.4 22.9 21.9 19.6

Dividends Paid -5 -6 -6 -6 ROIC (%) 24.7 25.8 27.4 27.0

Others -5 -2 0 0 Liability to Equity Ratio (%) 58.2 46.2 47.0 41.8

Increase (Decrease) in Cash 23 58 89 72 Current Ratio (%) 111.8 152.5 212.0 254.8

Beginning Balance 26 49 107 197 Net Debt to Equity Ratio (%) 22.8 3.9 -9.1 -19.3

Ending Balance 49 107 197 268 Interest Coverage Ratio (x) 15.8



23

November 1, 2013


Innox (088390 KQ) Expecting strong growth

2014 outlook: A strong materials player

FPCB demand remains solid. Manufacturers are increasingly adopting high-end FPCBs to make mobile devices lighter and thinner, and FPCB area per device is also increasing. While there are worries that smartphone growth is moving to the mid- to low-end segment, this shift is actually positive to materials suppliers like Innox, as shipment growth is more important for them than product specifications (or prices).

Innox’s new product launches should increase its market share, making the company less vulnerable to downstream conditions. Also, increased market share should enable the company to deliver growth even when downstream industry growth stagnates. Furthermore, new businesses are likely to create synergies with established units, boosting overall margins.

Catalysts: 1) Growing FPCB demand, 2) new businesses, 3) excellent production management

▶ Innox stands to benefit from growing FPCB demand. On the back of robust mobile-related demand and customers’ capacity expansion, the company’s FPCB materials revenue is forecast to grow 22% in 2013, 22% in 2014, and 19% in 2015.

▶ New business units are anticipated to grow full swing on the back of: 1) the emergence of new devices (digitizer absorbers), 2) tight supply and demand conditions (two-layer FCCL), and 3) still-weak domestic production (EMI shielding films). The revenue contribution of new businesses is likely to surge from 16% in 2013, to 32% in 2014, and to 38% in 2015.

▶ Innox’s high production efficiency and stable yields appear notable. Remarkably, the company has seen its margins improve almost immediately following the launches of new capacity, as it has been able to quickly stabilize yields at new lines. Looking forward, the firm’s efficient production capabilities should help stabilize new high value-added businesses, which should in turn improve product mix and margins.

Valuation: Maintain TP of W35,000; 12-month forward P/E of 8x

We reiterate our Buy call with a target price of W35,000. Our target price corresponds to a 12-month forward P/E of 12x, the average of FPCB makers and electronic materials suppliers. The stock is currently trading at a 12-month forward P/E of just 8x, vs. our respective 2013 and 2014 EPS growth estimates of 72% and 39%y. We thus believe the stock remains undervalued, despites its recent appreciation. As the largest domestic FPCB material supplier, Innox is well-positioned to benefit from capacity additions by FPCB manufacturers and expand its market share by advancing into new businesses.

FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F

Revenue (Wbn) 104 115 142 199 296 385

OP (Wbn) 13 14 20 37 54 64

OP margin (%) 13.0 11.8 13.9 18.4 18.1 16.6

NP (Wbn) 9 9 13 28 42 49

EPS (W) 989 892 1,161 2,426 3,384 3,949

ROE (%) 23.1 16.0 18.1 31.1 33.5 28.9

P/E (x) 9.8 15.1 13.6 10.5 7.5 6.5

P/B (x) 2.1 2.5 2.4 3.1 2.2 1.7

Note: All figures are based on non-consolidated K-IFRS


Technology

(Maintain) Buy


Share Price (10/31/13, W) 25,500

Expected Return 37%

OP (13F, Wbn) 37




P/E (13F, x) 10.5


KOSDAQ 532.44



Free Float (%) 72.2


Beta (12M) 1.02

52-Week Low (W) 17,800

52-Week High (W) 32,900

(%) 1M 6M 12M

Absolute 1.6 -1.2 61.0

Relative -0.1 -4.6 54.8

80

100

120

140

160

180

10/12 2/13 6/13 10/13

Share price

KOSDAQ


24

November 1, 2013




2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes

Revenue 202 298 384 199 296 385 -1.3 -0.6 0.1 - Upward revision to digitizer materials sales

Operating Profit 36 54 63 37 54 64 3.5 -0.4 1.9 - Reflected the closing of MCCL business

Pretax profit 34 52 59 36 52 61 4.3 -0.2 2.1

Net profit 27 42 48 28 42 49 3.0 -0.2 2.1

EPS (W) 2,355 3,392 3,867 2,425 3,384 3,949 3.0 -0.2 2.1

OP margin 17.6 18.1 16.3 18.4 18.1 16.6 - - -

Net margin 13.4 14.0 12.4 14.0 14.0 12.6 - - -



Table 9. Quarterly and annual earnings (Wbn, %)

1Q13 2Q13 3Q13P 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F

Revenue 40.0 40.9 62.0 56.5 58.7 70.1 80.4 87.3 142.3 199.4 296.4 384.6

FPCB 32.7 32.4 40.3 35.5 35.9 42.9 47.0 46.3 115.7 140.9 172.1 205.5

Coverlay 19.4 19.0 22.5 19.4 20.2 24.2 26.2 25.7 66.2 80.2 96.3 112.8

Three-layer FCCL 5.8 5.3 9.4 8.3 7.5 9.4 11.1 10.4 21.9 28.8 38.4 48.7

Other 7.5 8.1 8.4 7.8 8.2 9.4 9.7 10.2 27.6 31.8 37.5 44.0

Semiconductor 5.5 6.4 7.3 7.0 7.6 7.8 7.7 8.0 21.6 26.2 31.1 33.7

Smart FLEX (new

business) 1.8 2.1 14.4 14.1 15.2 19.3 25.7 33.0 5.0 32.4 93.2 145.4

EMI 0.9 0.5 1.2 1.3 1.3 2.8 4.5 5.5 3.3 3.9 14.2 32.0

Digitizer

absorber 0.1 0.3 12.1 11.5 11.7 12.6 14.1 17.0 0.0 23.9 55.3 62.5

Two-layer FCCL 0.6 0.9 0.8 1.3 2.2 3.9 7.1 10.5 0.0 3.6 23.7 50.9

Other 0.2 0.4 0.3 0.0 0.0 0.0 0.0 0.0 1.8 1.0 0.0 0.0

Shipment area (000 m2) 4,678 4,794 5,847 5,177 5,488 6,607 7,444 7,550 15,435 20,496 27,090 34,319

ASP (W'000/m2) 8.6 8.5 10.6 10.9 10.7 10.6 10.8 11.6 9.2 9.7 10.9 11.2


Pretax profit 6.4 7.3 11.2 10.9 9.5 12.2 14.7 15.7 14.9 35.9 52.1 60.8

Net profit 5.2 5.4 8.6 8.8 7.6 9.7 11.7 12.6 12.5 28.0 41.6 48.6

OP margin 15.8 18.3 19.4 19.4 16.3 18.3 19.8 17.6 13.9 18.4 18.1 16.6

Net margin 12.9 13.1 13.9 15.6 12.9 13.9 14.6 14.4 8.8 14.0 14.0 12.6

Growth (QoQ/YoY)

Revenue 8.8 2.2 51.7 -8.8 3.8 19.4 14.7 8.5 23.3 40.1 48.7 29.7

OP 55.3 18.2 60.8 -8.8 -12.6 34.1 24.2 -3.9 44.9 85.7 46.1 19.2

Pretax profit 212.7 14.9 53.4 -3.0 -13.0 28.5 20.2 7.4 30.0 141.2 45.2 16.7

Net profit 128.9 4.1 60.9 2.4 -14.1 28.5 20.2 7.4 35.6 123.2 48.9 16.7




25

November 1, 2013


Innox (088390 KQ/TP: W35,000)


(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F









Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 3 3 2 2












FCF (Free Cash Flow) 2 -18 -4 16 Capital Surplus 33 34 34 34





(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F


Net Profit 13 28 42 49 P/CF (x) 8.9 7.9 6.1 5.3




Others -3 1 1 0 CFPS (W) 2,139 3,213 4,202 4,778

Chg in Working Capital -1 -23 -30 -21 BPS (W) 6,695 8,220 11,565 15,456


Chg in Inventories -2 -12 -19 -14 Payout ratio (%) 0.0 0.0 0.0 0.0

Chg in AP & Other Payables 3 3 8 6 Dividend Yield (%) 0.0 0.0 0.0 0.0


Cash Flows from Inv Activities -21 -33 -24 -22 EBITDA Growth (%) 46.2 72.9 39.1 16.3


Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 30.1 109.0 39.5 16.7

Chg in Financial Assets 0 1 0 0 Accounts Receivable Turnover (x) 5.3 5.7 5.5 5.2

Others 0 1 1 1 Inventory Turnover (x) 6.6 6.9 6.7 6.3

Cash Flows from Fin Activities 1 10 -3 -3 Accounts Payable Turnover (x) 26.5 23.7 22.9 21.7

Chg in Financial Liabilities 2 2 0 0 ROA (%) 9.1 16.3 18.7 17.4

Chg in Equity 2 2 0 0 ROE (%) 18.1 31.1 33.5 28.9

Dividends Paid 0 0 0 0 ROIC (%) 15.4 20.6 23.1 22.5

Others -3 -3 -3 -3 Liability to Equity Ratio (%) 93.9 88.5 73.1 61.0

Increase (Decrease) in Cash 3 -5 -4 16 Current Ratio (%) 123.2 133.6 163.9 202.7

Beginning Balance 14 17 12 9 Net Debt to Equity Ratio (%) 48.4 52.0 40.1 21.7

Ending Balance 17 12 9 25 Interest Coverage Ratio (x) 5.9 12.4 15.8 18.8



26

November 1, 2013


Duksan Hi-Metal (077360 KQ) OLED to drive growth in 2014

2014 outlook: OLED materials demand to rebound sharply

Demand for OLED materials is expected to increase sharply in 2014. Major customers’ OLED capacity is anticipated to grow 44% (in terms of area) next year on the back of production line expansion. An increase in OLED TV production should boost material input per unit area, as TV production is characterized by lower materials efficiency than mobile device production. Other positive trends include: 1) an increase in the number of smartphone models adopting bigger OLED displays, 2) the rising possibility of tablet PCs using OLED displays, and 3) slower-than-expected entries by competitors (which should slow down the pace of the company’s market share decline). We forecast the company’s OLED materials revenue to jump 62% YoY to W100bn in 2014.

Catalyst: Confidence in the OLED growth story

▶ OLED to bring about a paradigm shift: Unlike LCD, OLED has applications that go far beyond TVs. Thanks to their simplified structure, flexibility, and transparency, OLED displays have a wide range of applications, including lighting, automotive glass, interior glass, and commercial billboards. In other words, OLED technology can extend beyond the cyclical seasonal consumer electronics market and into the larger, more stable industrial electronics market.

▶ Confidence in OLED growth: Major technology firms have been beefing up their OLED investments. SEC recently announced its acquisition of the German OLED materials supplier Novaled. LG Display has been pushing ahead with OLED line investments since early this year, and China’s largest panel maker BOE has followed suit. Although Apple has never adopted OLED technology in any of its products, it has steadily filed for OLED patents. Such industry moves are illustrative of the strong confidence in the growth of OLED.

▶ Materials market to almost triple based on a 1.5% OLED TV penetration rate: If the application of OLED displays extends from mobile devices to TVs in the next two to three years, we believe this will have a considerable impact on the OLED materials market. Assuming an OLED TV penetration rate of 1.5% (3mn units annually), we expect OLED production capacity to grow 4.4 times and the OLED materials market to grow 2.5 times compared to 2012. If the penetration rate increases to 3% and further to 6%, the OLED materials market could see annual growth of more than 50% even with a decline in ASP.

Valuation: 12-month forward P/E of 13x, lowest since OLED business launch

Currently, Duksan Hi-Metal shares are trading at a 12-month forward P/E of 13x, the lowest level since the company began its OLED business. The stock previously dipped to a low of 14x in 4Q12 amid doubts over the potential of OLED TVs, as well as concerns that SEC might opt for LCD instead of OLED for its Galaxy S4 model. But in the end, these worries proved to be unfounded. We believe the present situation is not any worse than it was in late 2012, and think now is a good time to aggressively overweight the stock.

FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F

Revenue (Wbn) 73 129 144 132 184 220

OP (Wbn) 20 39 42 34 50 58

OP margin (%) 27.7 30.4 29.0 26.0 27.1 26.3

NP (Wbn) 16 35 42 38 51 52

EPS (W) 638 1,181 1,426 1,284 1,721 1,760

ROE (%) 18.7 29.0 26.1 18.7 20.6 17.4

P/E (x) 31.8 21.5 14.9 16.3 12.2 11.9

P/B (x) 6.6 6.0 3.7 2.9 2.4 2.0



Technology

(Maintain) Buy


Share Price (10/31/13, W) 20,950

Expected Return 62%

OP (13F, Wbn) 34


EPS Growth (13F, %) -10.0


P/E (13F, x) 16.5


KOSDAQ 532.44



Free Float (%) 44.1


Beta (12M) 0.69

52-Week Low (W) 16,500

52-Week High (W) 29,600

(%) 1M 6M 12M

Absolute -3.7 -23.3 2.7

Relative -5.3 -26.6 -3.5

60

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10/12 2/13 6/13 10/13

Share price

KOSDAQ


27

November 1, 2013




2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes

Revenue 132 184 220 132 184 220 0.0 0.0 0.0

Operating profit 34 50 58 34 50 58 0.0 0.0 0.0

Pretax profit 38 53 61 38 53 61 0.0 0.0 0.0

Net profit 38 51 52 38 51 52 0.0 0.0 0.0

EPS (W) 1,285 1,721 1,760 1,285 1,721 1,760 0.0 0.0 0.0

OP margin 26.0 27.1 26.3 26.0 27.1 26.3 - - -

Net margin 28.7 27.5 23.6 28.7 27.5 23.6 - - -

Note: All figures are based on consolidated K-IFRS




Revenue 32.2 29.6 33.8 36.0 38.4 47.6 47.5 50.1 143.8 131.5 183.7 219.6

OLED 15.9 14.5 15.4 16.1 19.3 25.9 24.7 30.1 79.4 61.9 100.0 126.7

Semiconductor 16.3 15.0 18.4 19.9 19.1 21.7 22.8 20.0 64.4 69.6 83.7 92.9

Revenue

proportion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

OLED 49.3 49.2 45.6 44.8 50.3 54.4 52.0 60.0 55.2 47.1 54.4 57.7

Semiconductor 50.7 50.8 54.4 55.2 49.7 45.6 48.0 40.0 44.8 52.9 45.6 42.3


Pretax profit 10.4 8.1 9.2 9.9 11.1 13.6 13.5 14.5 42.9 37.6 52.7 60.9

Net profit 10.0 8.3 9.4 10.1 10.6 13.1 13.0 13.9 41.9 37.8 50.6 51.7

OP margin 28.5 25.5 24.9 25.2 27.0 27.0 26.8 27.4 29.0 26.0 27.1 26.3

Net margin 31.0 28.1 27.8 28.1 27.7 27.5 27.3 27.7 29.1 28.7 27.5 23.6

Growth

(QoQ/YoY)

Revenue -16.1 -8.2 14.4 6.4 6.8 24.0 -0.2 5.4 11.1 -8.5 39.7 19.5

OLED -25.7 -8.4 5.9 4.7 19.8 34.2 -4.7 21.7 13.3 -22.0 61.5 26.7

Semiconductor -4.0 -8.1 22.7 7.9 -3.7 13.6 5.2 -12.2 8.6 8.0 20.3 10.9

Operating profit -16.1 -18.0 11.7 7.7 14.3 24.3 -1.0 7.6 5.9 -17.9 45.3 16.3

Pretax profit -10.2 -21.8 13.2 7.8 11.8 23.3 -0.9 7.0 22.5 -12.5 40.3 15.5

Net profit -7.8 -16.9 13.2 7.8 5.0 23.3 -0.9 7.0 21.2 -9.8 33.9 2.2

Note: All figures are based on consolidated K-IFRS


Table 12. Samsung Display’s OLED capacity

2012 2013F 2014F 2015F

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Total capacity (‘000 m2) 434 577 627 627 674 738 773 826 931 984 1,101 1,285 1,416 1,612 1,941 2,138

Growth rate (%) 8.8 32.9 8.6 0.0 7.5 9.6 4.8 6.8 12.7 5.7 11.9 16.7 10.2 13.9 20.4 10.1

('000 sheets/month) Type

A1 (4G, 730 x 920) Half 53 53 53 53 53 53 53 53 53 53 53 53 53 53 53 53

A2 (5.5G, 1300 x 1500) Quarter 56 72 72 72 80 91 97 106 124 133 142 151 151 151 151 151

Phase 1 (32K/month) 32 32 32 32 32 32 32 32 32 32 32 32 32 32 32 32

Phase 2 (incl. flexible) (32K/month) 24 32 32 32 32 32 32 32 32 32 32 32 32 32 32 32

Phase 3 (incl. flexible) (24K/month) 8 8 8 16 24 24 24 24 24 24 24 24 24 24 24

Phase 4 (27K/month) 3 9 18 27 27 27 27 27 27 27 27

Phase 5 (18K/month) 18 18 18 18 18 18 18

Phase 6 (18K/month) 9 18 18 18 18 18

A3 (6G, 1500 x 1800) Half 8 16 24 32 40 48

Phase 1 (32K/month) 8 16 24 24 24 24

Phase 2 (32K/month) 8 16 24

V1 (8G, 2200 x 2500) Sixth 3 6 6 6 6 6 6 6 6 6 6 6 6 6 6

V2 (8G, 2200 x 2500) Half 4 8 16 32 40

Phase 1 (24K/month) 4 8 16 24 24

Phase 2 (24K/month) 8 16

Source: DisplaySearch, KDB Daewoo Securities Research


28

November 1, 2013


Duksan Hi-Metal (077360 KQ/TP: W34,000)


(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F







Non-Operating Profit 1 3 3 3 Investments in Associates 0 0 0 0

Net Financial Income -1 -1 -1 0 Property, Plant and Equipment 65 84 133 191













FCF (Free Cash Flow) 40 15 -9 -13 Capital Surplus 82 82 82 82





(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F


Net Profit 42 38 51 52 P/CF (x) 13.1 14.6 10.4 10.2




Others -5 -4 2 3 CFPS (W) 1,624 1,440 2,007 2,065

Chg in Working Capital -3 9 -9 -6 BPS (W) 5,793 7,128 8,841 10,593


Chg in Inventories 1 2 -4 -3 Payout ratio (%) 0.0 0.0 0.0 0.0


Income Tax Paid 1 0 -2 -9 Revenue Growth (%) 11.1 -8.5 39.7 19.5


Chg in PP&E -4 -25 -57 -66 Operating Profit Growth (%) 5.9 -17.9 45.3 16.3

Chg in Intangible Assets -1 -1 -1 -1 EPS Growth (%) 20.8 -10.0 34.1 2.2

Chg in Financial Assets -49 0 0 0 Accounts Receivable Turnover (x) 12.7 10.5 12.7 11.9

Others 1 -33 -31 -31 Inventory Turnover (x) 11.8 11.5 13.9 13.0

Cash Flows from Fin Activities -3 15 49 38 Accounts Payable Turnover (x) 36.3 40.4 48.8 45.8


Chg in Equity 0 0 0 0 ROE (%) 26.1 18.7 20.6 17.4

Dividends Paid 0 0 0 0 ROIC (%) 34.2 26.9 29.0 21.9

Others -3 0 -1 -2 Liability to Equity Ratio (%) 8.7 16.0 32.6 40.5

Increase (Decrease) in Cash -7 10 8 -7 Current Ratio (%) 647.7 290.2 302.1 278.6

Beginning Balance 21 14 24 32 Net Debt to Equity Ratio (%) -33.4 -22.7 -2.9 12.2




29

November 1, 2013


Cheil Industries (001300 KS) Big picture is taking shape

2014 outlook: New start as a pure electronic materials producer

Cheil Industries’ decision to sell its fashion unit is expected to strengthen its position as an electronic materials producer within the Samsung Group. Having almost completed restructuring, the company should enjoy growth going forward by: 1) expanding production of high value-added semiconductor materials, 2) focusing on items with strong growth potential (OLED- and rechargeable battery-use materials), and 3) increasing polarizer market shares within major customers.

The Samsung Group is a leading player in the global electronic part (semiconductor, display, and handset parts) and set (handsets and TVs) markets. The group is expected to shift its focus to electronic materials, for which it is currently still largely dependent on imports. Cheil Industries is anticipated to take the lead in the Samsung Group’s efforts in this space. By establishing a new electronic materials research center, the group is expected to spur Cheil Industries’ R&D drive to generate synergies with downstream affiliates, including SEC and Samsung SDI.

Catalysts: 1) Semiconductor materials, 2) polarizers, 3) OLED materials

▶ Sales of high value-added semiconductor materials to increase: SEC’s new NAND fab in Xi’an and acceleration of DRAM process migration should boost Cheil Industries’ sales of high value-added semiconductor materials, including SOH. If SEC expands its NAND lines in China, Cheil Industries might ramp up its SOH capacity. In light of the strong bottom-line contribution of semiconductor materials (55% of 2013F operating profit), higher semiconductor materials sales should improve the company’s overall product mix.

▶ Polarizer margins to improve: The applications of polarizers are likely to expand to encompass TVs, tablet PCs, and OLED smartphones. Polarizers for such products deliver margins two times higher than those for notebook PC- and monitor-use polarizers. However, currently, overseas companies are estimated to supply over 90% of the polarizers used by SEC. In 2014, Cheil Industries plans to aggressively expand its polarizer market share, aiming at simultaneously improving its top- and bottom-lines.

▶ OLED materials sales to surge: The acquisition of Novaled should help Cheil Industries further diversify its product portfolio and expand its OLED materials market share, sharply boosting the company’s OLED materials sales to W100bn in 2014 from W17bn this year.

FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F

Revenue (Wbn) 5,113 5,581 6,010 5,649 5,555 6,288

OP (Wbn) 330 223 322 306 391 460

OP margin (%) 6.5 4.0 5.4 5.4 7.0 7.3

NP (Wbn) 279 259 209 387 322 381

EPS (W) 5,573 5,079 3,979 7,387 6,134 7,261

ROE (%) 11.8 8.7 6.5 11.9 9.8 11.7

P/E (x) 19.9 19.9 23.7 12.2 14.7 12.4

P/B (x) 2.0 1.9 1.7 1.7 1.7 1.7



Technology

(Maintain) Buy


Share Price (10/31/13, W) 90,000

Expected Return 33%

OP (13F, Wbn) 306




P/E (13F, x) 12.2


KOSPI 2,030.09

Market Cap (Wbn) 4,719


Free Float (%) 85.3


Beta (12M) 0.73

52-Week Low (W) 82,100

52-Week High (W) 98,900

(%) 1M 6M 12M

Absolute -1.9 -5.2 -3.6

Relative -3.5 -8.5 -9.8

70

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Share price

KOSPI


30

November 1, 2013


Maintain TP of W120,000; 12-month forward P/E: 14.2x (five-year average: 18x)

Cheil Industries is currently trading at a 12-month forward P/E of 14.2x, which is significantly lower than the company’s historic high of 29x and five-year average of 18x. However, the stock is likely to receive a valuation premium going forward thanks to strong growth in margins (outpacing revenue growth) and increasing OLED business momentum. We maintain our Buy call on Cheil Industries and our target price of W120,000 (12-month forward P/E of 19x).



2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNote

Revenue 6,633 5,594 6,304 5,649 5,555 6,288 -14.8 -0.7 -0.3 - Reflects the disposal of the fashion unit

Operating

profit 327 415 487 306 391 460 -6.3 -5.7 -5.4

- In light of an expected decrease in

chemical product spreads

Pretax profit 491 430 507 461 406 481 -6.2 -5.5 -5.2

Net profit 413 340 401 387 321 380 -6.5 -5.5 -5.2

EPS (W) 7,900 6,491 7,657 7,387 6,134 7,261 -6.5 -5.5 -5.2

OP margin 5.6 7.0 6.9 5.4 7.0 7.3 - - -

Net margin 4.4 5.4 5.3 6.8 5.8 6.0 - - -

Note: All figures are based on consolidated K-IFRS / Source: KDB Daewoo Securities Research



Revenue 1,523 1,628 1,271 1,227 1,220 1,379 1,511 1,445 6,010 5,649 5,555 6,288

Chemicals 642 731 835 775 776 876 963 913 2,666 2,984 3,528 4,025

Electronic materials 387 434 436 452 444 503 548 532 1,569 1,709 2,027 2,263

Fashion 481 447 1,725 1,896

Other 13 16 50 58


Chemicals 42.2 44.9 65.7 63.2 63.6 63.5 63.8 63.2 44.4 52.8 63.5 64.0

Electronic materials 25.4 26.7 34.3 36.8 36.4 36.5 36.2 36.8 26.1 30.3 36.5 36.0

Fashion 31.6 27.4 28.7 33.6

Other 0.9 1.0 0.8 1.0

Operating profit 72 73 89 73 71 101 127 92 322 306 391 460

Chemicals 13 23 24 13 12 29 41 20 89 73 102 129

Electronic materials 36 54 65 60 59 72 86 72 167 214 289 331

Fashion 22 -6 65 30

OP contribution 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Chemicals 18.1 31.0 27.1 18.1 17.1 28.7 32.1 21.5 27.7 23.8 26.0 28.1


Fashion 30.1 -7.6 20.2 9.9

OP margin 4.7 4.5 7.0 5.9 5.8 7.3 8.4 6.4 5.4 5.4 7.0 7.3

Chemicals 2.0 3.1 2.9 1.7 1.6 3.3 4.2 2.2 3.3 2.4 2.9 3.2


Fashion 4.5 -1.2 3.8 1.6

Pretax profit 94 66 68 233 86 101 127 93 293 461 406 481

Net profit 67 53 55 212 68 79 100 74 209 387 321 380

Pretax margin 6.2 4.1 5.4 18.9 7.0 7.3 8.4 6.5 4.9 8.2 7.3 7.7

Net margin 4.4 3.2 4.3 17.2 5.6 5.8 6.6 5.1 3.5 6.8 5.8 6.0

Growth (QoQ/YoY)

Revenue -3.7 6.9 -21.9 -3.4 -0.6 13.0 9.6 -4.4 7.7 -6.0 -1.7 13.2

Chemicals -0.5 13.8 14.2 -7.1 0.1 12.8 10.0 -5.3 10.4 11.9 18.3 14.1

Electronic materials -3.4 12.2 0.4 3.7 -1.8 13.3 8.9 -2.8 1.4 9.0 18.6 11.7

Fashion -8.1 -7.1 13.4 9.9

Other 13.9 25.2 -48.8 15.3

Operating profit -4.2 0.8 21.9 -17.7 -3.2 43.2 25.8 -27.6 44.6 -4.8 27.6 17.7

Chemicals 155.3 72.7 6.6 -44.9 -8.8 140.8 40.7 -51.5 70.7 -18.5 39.9 27.0

Electronic materials -9.4 50.6 20.3 -7.6 -2.0 23.1 19.9 -16.4 63.3 28.1 35.3 14.4

Fashion -29.7 TTR -2.2 -53.6

Pretax profit 63.8 -29.6 3.6 240.0 -63.1 17.2 26.3 -26.6 6.3 57.2 -11.8 18.4

Net profit 89.1 -21.6 3.6 286.8 -68.0 17.2 26.3 -26.6 -19.4 85.1 -17.0 18.4

Note: All figures are based on consolidated K-IFRS / Source: KDB Daewoo Securities Research


31

November 1, 2013


Cheil Industries (001300 KS/TP: W120,000)


(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F

Revenue 6,010 5,649 5,555 6,288 Current Assets 1,837 1,996 1,912 2,034

Cost of Sales 4,155 4,348 4,808 5,418 Cash and Cash Equivalents 114 640 399 341

Gross Profit 1,855 1,302 747 869 AR & Other Receivables 679 537 556 623

SG&A Expenses 1,533 996 356 409 Inventories 909 706 831 932


Operating Profit 322 306 391 460 Non-Current Assets 3,582 3,515 3,540 3,784

Non-Operating Profit -29 154 15 21 Investments in Associates 99 97 95 94

Net Financial Income 33 33 23 29 Property, Plant and Equipment 1,696 1,890 2,062 2,257

Net Gain from Inv in Associates -15 -2 -2 -1 Intangible Assets 463 514 559 599

Pretax Profit 293 461 406 481 Total Assets 5,419 5,511 5,452 5,818

Income Tax 84 74 85 -101 Current Liabilities 1,004 1,019 1,008 980




Controlling Interests 209 387 322 381 Non-Current Liabilities 1,157 1,204 1,192 1,562

Non-Controlling Interests 0 -1 -1 -1 Long-Term Financial Liabilities 912 1,065 965 1,055


Controlling Interests 76 69 3 62 Total Liabilities 2,161 2,223 2,200 2,542

Non-Controlling Interests 0 -1 -1 -1 Controlling Interests 3,254 3,286 3,251 3,275


FCF (Free Cash Flow) -309 253 11 12 Capital Surplus 702 702 702 702

EBITDA Margin (%) 8.8 9.5 11.2 11.5 Retained Earnings 1,538 1,887 2,171 2,514


Net Profit Margin (%) 3.5 6.9 5.8 6.1 Stockholders' Equity 3,257 3,288 3,253 3,277


(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F


Net Profit 209 387 321 380 P/CF (x) 11.8 7.7 8.6 7.3




Others -77 140 50 61 CFPS (W) 7,958 11,752 10,525 12,272


Chg in AR & Other Receivables -162 160 -19 -68 DPS (W) 750 750 750 750

Chg in Inventories -171 211 -125 -101 Payout ratio (%) 18.2 9.8 11.8 10.0

Chg in AP & Other Payables 53 -75 72 58 Dividend Yield (%) 0.8 0.9 0.9 0.9

Income Tax Paid -47 -83 -85 -101 Revenue Growth (%) 7.7 -6.0 -1.7 13.2



Chg in Intangible Assets -37 -67 -67 -67 EPS Growth (%) -21.7 85.7 -17.0 18.4



Cash Flows from Fin Activities 338 218 -290 -94 Accounts Payable Turnover (x) 11.9 12.2 12.7 12.5

Chg in Financial Liabilities 420 272 -200 -200 ROA (%) 4.0 7.1 5.9 6.7

Chg in Equity 0 0 0 0 ROE (%) 6.5 11.9 9.8 11.7



Increase (Decrease) in Cash 17 527 -241 -58 Current Ratio (%) 183.0 195.8 189.7 207.6





32

November 1, 2013


Hansol Chemical (014680 KS) Structural growth phase has begun

2014 outlook: Steady hydrogen peroxide revenue growth, recovery in latex revenue, robust subsidiary revenue

We expect Hansol Chemical’s hydrogen peroxide revenue to continue to grow steadily in 2014. In addition, we project the profitability of hydrogen peroxide to improve thanks to a rise in the revenue contribution of value-added semiconductor-use hydrogen peroxide arising from capacity expansion at Korean chip makers.

Furthermore, latex revenue, the sluggishness of which dented the company’s 2013 earnings, is expected to recover in 2014. Latex revenue accounts for 30% of the company’s total revenue. Latex prices tend to move in tandem with butadiene (a raw material) prices, which fell by more than 60% between 1Q and end-3Q. Thus far in 4Q, however, butadiene prices have climbed by 45% from the 3Q level. We project latex revenue to decline by 24% YoY in 2013 but pick up by 27% YoY on sales volume growth and price increases in 2014.

Moreover, earnings at the subsidiary Hansol C&P (producer of exterior coatings for IT products) will likely improve rapidly on a surge in revenue from SEC’s handset business, contributing to Hansol Chemical’s overall earnings growth. We project the subsidiary’s revenue to soar by 60% YoY to W49bn in 2013 and by 37% to W68bn in 2014.

Catalysts: 1) SEC’s capacity expansion and 2) full-swing growth of electronic materials business

▶ Stable hydrogen peroxide business: SEC’s semiconductor capacity expansion should directly affect Hansol’s hydrogen peroxide sales, as Hansol satisfies 70% of the electronics giant’s needs for domestic semiconductor-use hydrogen peroxide. SEC’s NAND line in China and Line 17 in Korea, scheduled to come online in 2014, are driving demand for Hansol’s hydrogen peroxide. Hansol is expected to exclusively supply hydrogen peroxide to SEC’s NAND plant in China

▶ Growing electronic materials business: For Hansol Chemical’s electronic materials business, full-swing revenue growth has encountered delays. In the development of electronic materials, it typically takes six month to one year to progress from customers’ testing to mass production. Once mass production begins, revenue tends to grow rapidly. We expect customers’ testing to be completed within 2013, paving the way for full-scale electronic materials revenue growth. Despite its small contribution to total revenue, the electronic materials business’ contribution to operating profit is projected to continue to rise, from 3% in 2013 to 18% in 2014 and to 23% in 2015.

FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F

Revenue (Wbn) 244 297 319 333 430 509

OP (Wbn) 20 24 27 28 40 54

OP margin (%) 8.1 8.2 8.4 8.5 9.2 10.6

NP (Wbn) 16 19 36 24 32 43

EPS (W) 1,377 1,652 3,195 2,111 2,852 3,762

ROE (%) 12.1 12.7 21.6 12.4 14.6 16.6

P/E (x) 11.4 11.4 7.5 12.9 9.6 7.3

P/B (x) 1.2 1.4 1.6 1.6 1.4 1.2



Technology

(Maintain) Buy


Share Price (10/31/13, W) 27,300

Expected Return 28%

OP (13F, Wbn) 28




P/E (13F, x) 12.9


KOSPI 2,030.09



Free Float (%) 63.5


Beta (12M) 0.20

52-Week Low (W) 21,600

52-Week High (W) 29,550

(%) 1M 6M 12M

Absolute 10.5 -1.4 15.0

Relative 8.9 -4.8 8.8

80

90

100

110

120

130

10/12 2/13 6/13 10/13

Share price

KOSPI


33

November 1, 2013


Valuation: Maintain TP of W35,000; Attractively valued at P/E of 10x

We maintain our Buy call on Hansol Chemical with a target price of W35,000. In calculating our target price, we applied a P/E of 13x (the average peer group multiple) to our 12-month forward EPS of W2,725. The company’s shares are currently trading at a 12-month forward P/E of 10x, similar to the average of domestic chemicals makers. We believe that the company is attractively valued in light of the stable nature of its hydrogen peroxide business and the high growth potential of its electronic materials business.



2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015F Comments

Revenue 338 422 495 333 430 509 -1.3 1.9 2.9 - Upward revision to SB latex ASP

Operating

profit 28 39 53 28 40 54 1.5 0.4 2.4

Pretax profit 29 40 52 29 40 53 0.4 0.2 1.5

Net profit 24 32 42 24 32 42 0.4 0.2 1.5

EPS 2,100 2,847 3,705 2,111 2,852 3,762 0.4 0.2 1.5

OP margin 8.3 9.3 10.7 8.5 9.2 10.6 - - -

Net margin 7.0 7.6 8.5 7.1 7.5 8.3 - - -

Note: Based on consolidated K-IFRS




Revenue 74.8 80.4 90.7 87.3 96.1 104.3 110.0 119.7 322.5 333.2 430.1 508.9

Hansol Chemical 66.5 70.1 77.3 74.4 77.9 84.5 89.1 96.9 291.7 284.0 348.4 398.8

Hansol C&P 10.5 12.4 13.4 13.0 15.1 16.4 17.3 18.8 30.8 49.3 67.5 85.2

Hansol Electronic

Materials 0.0 0.0 0.0 0.0 3.2 3.5 3.6 4.0 0.0 14.3 24.9

COGS 61.1 65.4 74.2 70.6 78.9 85.7 88.2 100.6 243.8 271.1 353.3 413.5

SG&A 6.6 7.8 8.8 10.4 8.0 9.0 9.2 10.9 24.2 33.7 37.2 41.4


Non-operating

gains 0.5 0.1 0.4 0.1 0.1 0.1 0.2 0.3 11.2 1.0 0.7 -0.9

Pretax profit 7.6 7.3 8.2 6.3 9.3 9.6 12.8 8.5 37.1 29.4 40.3 53.1

Net profit 5.5 6.7 6.5 5.1 7.4 7.7 10.3 6.8 31.2 23.8 32.2 42.5

OP margin 9.5 9.0 8.6 7.2 9.6 9.2 11.5 6.8 8.0 8.5 9.2 10.6

Pretax margin 10.1 9.1 9.0 7.3 9.6 9.3 11.6 7.1 11.5 8.8 9.4 10.4

Net margin 7.4 8.4 7.2 5.8 7.7 7.4 9.3 5.7 9.7 7.1 7.5 8.3

Growth (QoQ/YoY)

Revenue 7.5 12.8 -3.8 10.2 8.5 5.5 8.8 29.1 18.3

Operating profit 1.7 7.4 -19.4 46.7 3.8 31.9 -35.0 39.2 36.5

Pretax profit -3.2 11.4 -22.5 46.5 4.0 32.9 -33.5 37.0 31.9

Net profit 22.0 -2.8 -22.5 46.5 4.0 32.9 -33.5 35.2 31.9




34

November 1, 2013


Table 17. Annual earnings breakdown (under non-consolidated K-IFRS) (Wbn, %)

2010 2011 2012 2013F 2014F 2015F

Hydrogen peroxide shipments ('000 tonnes) 54 56 70 81 87 95

SEC's semiconductor shipments (mn units) 10,004 15,863 20,781 32,829 51,089 77,301

LG Display's LCD panel shipment area ('000 m2) 27,852 32,238 36,048 40,013 43,934 48,108

SB latex shipments ('000 tonnes) 70 79 81 87 94 102

Revenue (Wbn) 228.3 278.6 291.7 284.0 348.4 398.8

Hydrogen peroxide 57.0 66.0 77.0 83.0 90.9 104.6

SB latex 85.0 111.0 106.5 81.3 103.6 115.3

Fine chemicals 86.3 99.5 104.7 109.7 118.9 128.9

Electronic materials 0.0 2.0 3.5 10.0 35.0 50.0

Semiconductor 0.0 0.0 1.0 6.5 15.0 20.0

Display 0.0 2.0 2.5 3.5 20.0 30.0

Operating profit 20.1 23.7 24.9 23.6 33.4 40.9

OP margin 8.8 8.5 8.5 8.3 9.6 10.3

Pretax profit 17.4 12.0 29.5 18.4 29.0 36.8

Net profit 14.7 7.6 25.2 15.2 24.0 29.6

Net margin 6.5 2.7 8.6 5.4 6.9 7.4

YoY growth

Revenue 18.7 22.0 4.7 -2.6 22.7 14.5

Operating profit 8.4 17.6 5.2 -5.2 41.5 22.5

Pretax profit 23.0 -31.1 146.3 -37.6 58.0 26.8

Net profit -10.8 -48.2 230.2 -39.6 57.8 23.5



35

November 1, 2013


Hansol Chemical (014680 KS/TP: W35,000)


(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F







Non-Operating Profit 15 1 1 -1 Investments in Associates 27 27 27 27














FCF (Free Cash Flow) -32 -27 0 17 Capital Surplus 31 31 31 31





(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F


Net Profit 36 24 32 43 P/CF (x) 5.8 8.3 6.5 5.2




Others 11 3 8 7 CFPS (W) 4,115 3,278 4,178 5,255

Chg in Working Capital -3 -1 -16 -13 BPS (W) 14,831 16,635 19,231 22,742

Chg in AR & Other Receivables 14 -11 -28 -22 DPS (W) 500 500 500 500

Chg in Inventories 0 -4 -10 -8 Payout ratio (%) 15.4 21.2 15.7 11.9

Chg in AP & Other Payables -3 6 21 16 Dividend Yield (%) 2.1 1.8 1.8 1.8







Cash Flows from Fin Activities 10 41 0 -14 Accounts Payable Turnover (x) 7.9 7.1 6.5 6.1


Chg in Equity 0 0 0 0 ROE (%) 21.6 12.4 14.6 16.6








36

November 1, 2013


Interflex (051370 KQ) In need of profitability improvement

2014 outlook: ASP decline seems inevitable

We expect FPCB demand to remain healthy next year, driven by an increase in FPCB area per device and the growth of the mobile device market. For 2014, we forecast smartphone shipments to jump by 20% YoY (1.2bn smartphones), and Interflex’s FPCB shipment area by 25% YoY.

However, FPCB ASP is anticipated decline 14% next year as low- to mid-end smartphone demand grows. Furthermore, production capacity is forecast to expand by at least 30% this year at major domestic FPCB makers. As such, price cuts and stiffer competition will be inevitable if demand rises more slowly than expected. Given such circumstances, Interflex is anticipated to focus on: 1) gaining market share to increase its sales volume, and 2) selling high-end products to improve profitability.

Catalysts: 1) FPCB business to gain market share; 2) Touchscreen business to gain momentum

▶ FPCB business to gain market share: Interflex’s FPCB sales should be driven not only by growing smartphone shipments, but also by the company’s increased share of supply to SEC. Thanks to its robust production capacity (the largest in Korea) and superior high-end product technologies, Interflex was chosen by SEC as a major parts supplier for the Galaxy Note 3. In addition to digitizers, the company is now the preferred vendor for camera module FPCBs.

▶ Touchscreen business to gain momentum: Last year, Interflex jointly developed a touch sensor suitable for use in flexible displays with Samsung Display. The company adopted a photolithography technology that patterns X and Y axis lines on one side of an ITO film, enabling the production of thinner display panels and bezels. If SEC rolls out smartphone models featuring flexible displays, it is highly likely that Interflex’s touchscreen modules will be adopted. Interflex is the only domestic supplier of flexible display touchscreen modules. The company’s touchscreen-related revenue is forecast to surge from W55bn this year to W156bn next year.

Lower TP to W43,000; Maintain Buy

We maintain our Buy rating on Interflex, but lower our target price by 17%, to W43,000. We revised down our 2013 and 2014 EPS forecasts for the company by 50% and 30%, respectively, in light of further FPCB price cuts and increased fixed costs for touchscreen panel production. In deriving our target price, we applied a P/E of 13.6x (15% premium to the average multiple of peers) to our 12-month forward EPS of W3,155. The stock is currently trading at a 12-month forward P/E of 11x, close to the peer group average multiple.

FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F

Revenue (Wbn) 419 518 765 1,087 1,251 1,470

OP (Wbn) 31 40 47 27 67 76

OP margin (%) 7.3 7.8 6.1 2.4 5.4 5.2

NP (Wbn) 31 31 54 23 52 59

EPS (W) 2,440 2,241 3,822 1,587 3,155 3,601

ROE (%) 20.9 14.8 19.8 7.5 15.0 14.9

P/E (x) 13.2 16.1 13.7 20.0 10.1 8.8

P/B (x) 2.4 2.1 2.5 1.6 1.4 1.2



Technology

(Maintain) Buy


Share Price (10/31/13, W) 31,700

Expected Return 36%

OP (13F, Wbn) 26




P/E (13F, x) 20.0


KOSDAQ 532.44



Free Float (%) 45.5


Beta (12M) 1.36

52-Week Low (W) 31,650

52-Week High (W) 71,200

(%) 1M 6M 12M

Absolute -16.9 -29.5 -47.4

Relative -16.4 -24.0 -52.2

40

60

80

100

120

10/12 2/13 6/13 10/13

Share price

KOSDAQ


37

November 1, 2013




2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes

Revenue 1,070 1,222 1,444 1,087 1,251 1,470 1.6 2.4 1.8 - Lower FPCB prices

Operating

profit 55 91 109 26 67 76 -52.0 -25.9 -29.6

- Reflects increased fixed costs for

touchscreen production

Pretax profit 56 92 120 27 65 74 -51.1 -30.0 -38.6

Net profit 46 74 96 23 52 59 -49.5 -30.0 -38.6

EPS (W) 3,199 4,508 5,867 1,587 3,155 3,601 -50.4 -30.0 -38.6

OP margin 5.2 7.4 7.5 2.4 5.4 5.2 - - -

Net margin 4.3 6.0 6.7 2.2 4.1 4.0 - - -

Note: All figures are based on non consolidated K-IFRS




Revenue 227.3 250.3 291.9 318.0 257.4 307.8 322.6 363.2 765.4 1,087.4 1,251.0 1,470.3

S/S 2.9 2.3 2.6 2.7 2.3 2.5 2.5 2.7 6.6 10.5 10.0 9.9

D/S 106.8 94.8 122.6 138.0 110.3 122.0 121.9 141.2 418.1 462.1 495.4 534.0

Multi 55.0 110.8 87.6 83.6 70.5 86.8 91.1 101.0 107.7 337.0 349.4 411.3

R/F 35.4 21.3 52.5 51.5 42.9 52.1 55.8 62.1 140.3 160.7 213.0 254.8

Touchscreen 0.0 9.0 22.4 23.8 25.1 39.0 44.1 47.6 55.1 155.9 203.4

Other 27.1 12.1 4.3 18.5 6.3 5.4 7.2 8.6 92.7 62.0 27.4 56.9


S/S 1.3 0.9 0.9 0.8 0.9 0.8 0.8 0.7 0.9 1.0 0.8 0.7

D/S 47.0 37.9 42.0 43.4 42.8 39.7 37.8 38.9 54.6 42.5 39.6 36.3

Multi 24.2 44.3 30.0 26.3 27.4 28.2 28.2 27.8 14.1 31.0 27.9 28.0

R/F 15.6 8.5 18.0 16.2 16.7 16.9 17.3 17.1 18.3 14.8 17.0 17.3

Touchscreen 0.0 3.6 7.7 7.5 9.8 12.7 13.7 13.1 0.0 5.1 12.5 13.8

Other 11.9 4.8 1.5 5.8 2.4 1.7 2.2 2.4 12.1 5.7 2.2 3.9

Shipments ('000 m2) 313.7 292.6 370.8 412.5 353.8 415.5 458.0 510.8 1,173.0 1,460.7 1,798.9 2,284.7

S/S 8.8 9.5 3.6 3.9 3.6 4.0 4.2 4.5 17.7 25.8 16.4 17.8

D/S 226.4 190.6 173.6 199.3 174.7 195.0 207.1 236.4 854.0 790.0 813.1 962.5

Multi 47.0 72.1 124.0 120.7 111.7 138.6 154.8 169.1 113.7 363.8 574.3 741.6

R/F 31.6 20.4 74.4 74.4 68.0 83.3 94.8 104.0 163.0 200.7 350.1 459.5

ASP (W'000/m2) 678.5 784.7 706.2 692.1 631.2 626.1 588.5 597.3 652.5 706.7 608.8 554.5

Operating profit -9.7 21.1 2.9 12.2 9.0 16.0 18.2 24.2 46.5 26.5 67.4 76.4

Pretax profit -8.8 21.9 3.9 10.4 9.5 15.9 17.1 22.1 69.0 27.4 64.6 73.7

Net profit -5.7 17.6 3.1 8.3 7.6 12.7 13.7 17.7 54.5 23.4 51.7 59.0

OP margin -4.3 8.4 1.0 3.8 3.5 5.2 5.6 6.7 6.1 2.4 5.4 5.2

Net margin -2.5 7.0 1.1 2.6 3.0 4.1 4.2 4.9 7.1 2.2 4.1 4.0

QoQ/YoY growth

Revenue -29.4 10.1 16.6 8.9 -19.0 19.6 4.8 12.6 47.8 42.1 15.0 17.5

S/S 102.6 -21.9 12.6 5.0 -14.7 7.8 0.3 9.0 1.7 59.0 -4.7 -1.1

D/S -27.5 -11.3 29.4 12.5 -20.1 10.7 -0.2 15.9 62.6 10.5 7.2 7.8

Multi -4.6 101.4 -21.0 -4.6 -15.6 23.1 5.0 10.8 -5.9 212.8 3.7 17.7

R/F -19.6 -39.9 146.6 -2.0 -16.6 21.5 6.9 11.4 59.0 14.6 32.5 19.6

Touchscreen 149.8 6.4 5.7 55.0 13.2 8.0 182.9 30.5

Other -62.2 -55.3 -64.9 334.6 -66.0 -14.8 35.3 18.2 80.3 -33.1 -55.8 107.5

Operating profit TTR TTB -86.3 321.1 -26.3 78.4 13.6 33.3 15.2 -43.1 154.5 13.3

Pretax profit TTR TTB -82.1 165.4 -8.9 67.3 7.8 28.9 76.1 -60.3 135.7 14.1

Net profit TTR TTB -82.2 165.4 -8.9 67.3 7.8 28.9 75.2 -57.0 120.8 14.1

Notes: All figures are based on non-consolidated K-IFRS; TTB stands for “turn to black” and TTR stands for “turn to red”



38

November 1, 2013


Interflex (051370 KQ/TP: W43,000)


(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F

Revenue 765 1,087 1,251 1,470 Current Assets 519 524 631 733

Cost of Sales 702 1,039 1,164 1,371 Cash and Cash Equivalents 4 26 68 94





Non-Operating Profit 23 1 -3 -3 Investments in Associates 15 18 20 22



Pretax Profit 69 27 65 74 Total Assets 875 883 983 1,065











FCF (Free Cash Flow) -185 -29 43 60 Capital Surplus 63 63 63 63





(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F

Cash Flows from Op Activities -24 114 125 126 P/E (x) 13.7 20.0 10.1 8.8

Net Profit 54 23 52 59 P/CF (x) 8.4 6.5 3.7 3.6




Others -5 -35 0 -1 CFPS (W) 6,301 4,899 8,521 8,820



Chg in Inventories -77 -9 -19 -23 Payout ratio (%) 0.0 0.0 4.8 4.2








Cash Flows from Fin Activities 153 -20 -7 -41 Accounts Payable Turnover (x) 4.4 4.5 4.8 5.0

Chg in Financial Liabilities 159 -36 -50 -50 ROA (%) 8.0 2.7 5.5 5.8

Chg in Equity 0 0 0 0 ROE (%) 19.8 7.5 15.0 14.9

Dividends Paid -2 0 0 -3 ROIC (%) 10.7 4.1 11.3 12.7


Increase (Decrease) in Cash -20 21 43 26 Current Ratio (%) 99.8 108.9 132.7 153.3





39

November 1, 2013


OCI Materials (036490 KQ) New growth engines are needed

2014 outlook: NF3 market to show limited recovery

For 2014, we expect OCI Materials’ (OCIM) revenue and operating profit to contract 24% and 91%, respectively, due to intensifying competition amid a stagnating LCD industry. Weak sales of NF3, which makes a 70% contribution to OCIM’s revenue, will likely limit any earnings recovery despite the fact that a series of positive events are expected next year, including: 1) the launch of operations at the NF3 production factory in China, 2) a decrease in depreciation expenses following the shutdowns of some factories, and 3) accelerating sales of high-end new products.

On the supply side, growing competition among NF3 makers should continue to weigh on ASP. And our demand outlook is also negative, as major LCD panel makers are cutting down on production to switch to higher-end products, and semiconductor makers have limited investment plans.

Catalysts & risks: Turnaround of photovoltaic market vs. lack of new drivers

▶ Turnaround of photovoltaic market: OCIM’s monosilane sales can be directly and/or indirectly determined by photovoltaic (PV) demand. A recovery in the PV market will boost demand for polysilicon, and monosilane demand from polysilicon makers that use the fluidized bed reactor process (in which monosilane is used as feedstock) will rise. If monosilane/polysilicon makers such as REC choose to reduce monosilane sales to increase polysilicon production, monosilane supply may fall. If OCIM begins to directly supply monosilane to polysilicon makers, the recovery of PV demand should directly benefit the company.

▶ Lack of new growth drivers: OCIM’s NF3 shipments and ASP have steadily declined as the downstream industry has slowed down. The company’s heavy reliance on a single product creates strong leverage effects when the downstream industry is booming, but the damage is that much worse when the industry suffers. Thus, business diversification will be required for OCIM to improve its earnings.

Maintain Hold (2014F P/E of 45x)

We maintain our Hold rating on OCIM. The recovery of the PV market, although positive for OCIM, has yet to gain strong footing. A high level of NF3 inventory is also a negative. The stock does not seem cheap despite a recent slide, as it is currently trading at a 2014F P/E of 45x, which is much higher than its five-year average P/E of 20x.

FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F

Revenue (Wbn) 235 297 254 193 214 233

OP (Wbn) 78 97 50 5 18 30

OP margin (%) 33.2 32.7 19.8 2.5 8.5 12.9

NP (Wbn) 59 66 29 -3 8 17

EPS (W) 5,600 6,230 2,756 -249 743 1,590

ROE (%) 24.2 22.2 8.7 -0.8 2.5 5.2

P/E (x) 18.3 12.8 13.9 - 44.7 20.9

P/B (x) 4.2 2.6 1.2 1.1 1.1 1.1



Technology

(Maintain) Hold

Target Price (12M, W) -

Share Price (10/31/13, W) 33,200

Expected Return -

OP (13F, Wbn) 5


EPS Growth (13F, %) TTR


P/E (13F, x) -


KOSDAQ 532.44



Free Float (%) 50.9


Beta (12M) 0.79

52-Week Low (W) 28,800

52-Week High (W) 41,050

(%) 1M 6M 12M

Absolute -7.4 4.4 2.6

Relative -9.1 1.0 -3.5

60

70

80

90

100

110

120

10/12 2/13 6/13 10/13

Share price

KOSDAQ


40

November 1, 2013




2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes

Revenue 217 229 236 193 214 233 -11.4 -6.3 -1.4 - Lowered NF3 ASP and shipment forecasts

Operating profit 18 25 30 5 18 30 -72.7 -26.9 1.0 - Lowered monosilane shipment forecast

Pretax profit 13 19 23 -1 10 22 -110.5 -46.9 -8.0 - Reflected 3Q13 earnings

Net profit 11 15 18 -3 8 17 -124.9 -46.9 -8.0

EPS (W) 1,001 1,399 1,728 -249 743 1,591 -124.9 -46.9 -8.0

OP margin 8.1 10.9 12.6 2.5 8.5 12.9 - - -

Net margin 4.9 6.5 7.7 -1.4 3.7 7.2 - - -




1Q13 2Q13 3Q13P 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2012 2013F 2014F 2015F

Revenue 52.7 51.2 46.6 42.1 50.4 53.9 57.7 52.4 254.6 192.6 214.4 233.1

Operating profit 5.2 1.9 0.2 -2.4 0.7 5.1 7.5 5.0 53.2 4.8 18.3 30.2

Pretax profit 5.3 1.9 -3.2 -5.4 -0.9 3.1 5.1 2.8 38.1 -1.4 10.0 21.5

Net profit 3.5 1.9 -3.4 -4.6 -0.7 2.4 4.0 2.2 30.7 -2.6 7.8 16.8

OP margin 9.9 3.7 0.4 -5.8 1.3 9.5 13.1 9.5 20.9 2.5 8.5 12.9

Net margin 6.6 3.7 -7.4 -10.8 -1.4 4.5 6.8 4.1 12.1 -1.4 3.7 7.2

Growth (QoQ/YoY)

Revenues -1.6 -2.8 -8.9 -9.6 19.6 6.9 7.2 -9.2 -14.1 -24.4 11.3 8.7

Operating profit -32.2 -64.1 -89.5 TTR TTB 681.0 47.7 -33.8 -45.7 -90.9 278.7 65.0

Pretax profit 112.4 -64.4 TTR RR RR TTB 61.9 -45.5 -55.6 -103.7 -812.9 114.1

Net profit 11.2 -45.7 TTR RR RR TTB 61.9 -45.5 -54.2 -108.6 -397.9 114.1

Note: Based on consolidated K-IFRS (except for 2012 figures)



41

November 1, 2013


OCI Materials (036490 KQ)


(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F










Pretax Profit 36 -1 10 22 Total Assets 691 599 624 640


Profit from Continuing Operations 29 -3 8 17 AP & Other Payables 39 0 0 0


Net Profit 29 -3 8 17 Other Current Liabilities 10 0 0 0

Controlling Interests 29 -3 8 17 Non-Current Liabilities 210 197 219 222






FCF (Free Cash Flow) -48 83 34 50 Capital Surplus 68 68 68 68



Net Profit Margin (%) 11.4 -1.4 3.7 7.2 Stockholders' Equity 346 316 319 331


(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F

Cash Flows from Op Activities 63 145 76 83 P/E (x) 13.9 - 44.7 20.9

Net Profit 29 -3 8 17 P/CF (x) 3.9 7.0 5.2 4.8



Amortization 1 0 0 0 EPS (W) 2,756 -249 743 1,590

Others -6 -48 -3 -3 CFPS (W) 9,719 4,743 6,356 6,906

Chg in Working Capital -44 42 1 1 BPS (W) 32,286 29,528 29,859 31,035

Chg in AR & Other Receivables -10 41 0 0 DPS (W) 2,850 700 700 700

Chg in Inventories -7 55 0 0 Payout ratio (%) 103.4 -280.7 94.3 44.0

Chg in AP & Other Payables -20 -39 0 0 Dividend Yield (%) 7.5 2.1 2.1 2.1

Income Tax Paid -18 -3 -2 -5 Revenue Growth (%) -14.2 -24.3 11.3 8.7

Cash Flows from Inv Activities -116 -35 -40 -30 EBITDA Growth (%) -24.6 -53.5 34.8 11.3

Chg in PP&E -114 -24 -40 -30 Operating Profit Growth (%) -48.1 -90.4 277.9 65.0

Chg in Intangible Assets 0 0 0 0 EPS Growth (%) -55.8 TTR TTB 114.1



Cash Flows from Fin Activities 74 -64 8 -12 Accounts Payable Turnover (x) 17.2 9.6 10.6 11.2

Chg in Financial Liabilities 92 -55 -9 0 ROA (%) 4.5 -0.4 1.3 2.7

Chg in Equity 0 0 0 0 ROE (%) 8.7 -0.8 2.5 5.2








42

November 1, 2013


Iljin Materials (020150 KS) Spring has yet to come

2014 outlook: Profitability to climb thanks to rechargeable battery elecfoils

We expect Iljin Materials’ profitability to improve next year, as the loss-making PCB-use elecfoil unit was downsized, and high-end, rechargeable battery-use elecfoil sales are increasing. Iljin’s revenue is forecast to contract 28% YoY this year due to factory relocation at end-2012. However, OP margin is anticipated to improve from -0.7% to 1.8%, as a 40% cut in PCB-use elecfoil production capacity should help narrow losses. In 2014, the company’s margin should improve further, as the revenue contribution of rechargeable battery-use elecfoils climb from 32% to 37%.

Until the end of next year, elecfoils for small- to mid-sized rechargeable batteries will likely drive Iljin’s earnings (elecfoils used in mid- to large-sized rechargeable batteries are anticipated to account for less than 10% of the company’s elecfoil shipments). And elecfoils for thinner and lighter rechargeable batteries are estimated to be more expensive.

Catalyst & risk: Growth of large-sized rechargeable battery market vs. price cuts

▶ Growth of large-sized rechargeable battery market: Growing demand for large-sized rechargeable batteries for EVs and ESS surely bodes well for materials makers. Assuming that EVs will account for 3.7% of total vehicle demand, the rechargeable battery market is expected to quadruple in size (from 2012 levels). And, assuming annual BMW i3 sales at 40,000 units, production yield at 80%, and Iljin Materials’ market share at 100%, demand for Iljin’s large-sized rechargeable battery-use elecfoils will be 650 tonnes per year (roughly 13% of Iljin’s total annual sales volume).

▶ Price cuts: Despite such a positive demand outlook, downward pricing pressures will likely weigh on Iljin. The growth of EV demand will depend on price cuts. Given that batteries account for almost 30% of the vehicle price, battery price needs to be lowered. The rechargeable battery business has low operating leverage, with raw materials representing 70% of total production costs. This means that per-unit production costs do not fall significantly even if production volume increases. As such, battery makers will attempt to lower material prices.

Valuation still seems demanding; Maintain Hold

Iljin Materials is currently trading at a 12-month forward P/E of 34x. Although the company’s earnings momentum is expected to pick up next year, this valuation does not seem attractive yet. Revenue contribution from rechargeable battery-use elecfoils is growing, but PCB-use elecfoils still generate over 50% of revenue. Excluding government compensation from factory relocation, the valuation looks even less attractive. We maintain our Hold rating.

FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F

Revenue (Wbn) 298 308 350 253 260 275

OP (Wbn) 41 11 -3 5 14 21

OP margin (%) 13.7 3.5 -0.7 1.8 5.4 7.6

NP (Wbn) 34 14 -53 8 16 14

EPS (W) 1,202 365 -1,345 195 394 344

ROE (%) 27.4 5.8 -17.4 2.7 5.2 4.3

P/E (x) 0.0 46.6 - 62.6 31.0 35.5

P/B (x) 0.0 2.1 1.3 1.7 1.6 1.6



Technology

(Maintain) Hold

Target Price (12M, W) -

Share Price (10/31/13, W) 12,200

Expected Return -

OP (13F, Wbn) 5

Consensus OP (13F, Wbn) -1

EPS Growth (13F, %) TTB


P/E (13F, x) 62.6


KOSPI 2,030.09



Free Float (%) 36.6


Beta (12M) 0.99

52-Week Low (W) 7,250

52-Week High (W) 18,000

(%) 1M 6M 12M

Absolute -22.3 14.6 31.3

Relative -24.0 11.2 25.2

60

80

100

120

140

160

180

10/12 2/13 6/13 10/13

Share price

KOSPI


43

November 1, 2013




2013F 2014F 2015F 2013F 2014F 2015F 2013F 2014F 2015FNotes

Revenue 290 311 331 253 260 275 -12.7 -16.3 -17.0- Reflects government compensation for

factory relocation

Operating

profit 7 14 18 5 14 21 -29.8 3.1 18.7

- Profitability improvement in rechargeable

battery-use elecfoils

Pretax profit 8 12 17 11 20 16 27.2 63.8 -4.4

Net profit 8 11 15 8 15 13 -3.9 38.3 -9.7

EPS (W) 203 285 381 195 394 344 -3.9 38.3 -9.7

OP margin 8.9 10.0 10.0 1.8 5.4 7.6 - - -

Net margin 8.3 9.1 9.1 3.0 5.9 4.9 - - -

Note: K-IFRS, non-consolidated


Table 23. Earnings trends and forecasts (Wbn, %)

1Q13 2Q13 3Q13F 4Q13F 1Q14F 2Q14F 3Q14F 4Q14F 2011 2012 2013F 2014F 2015F

Revenue 65.8 62.7 64.3 60.5 57.5 66.8 70.2 65.7 308.0 349.5 253.3 260.2 274.7

PCB-use elecfoils (ICS) 44.5 39.3 38.9 35.5 33.7 37.1 38.9 35.8 194.6 225.5 158.2 145.4 146.8

LIB-use elecfoils (I2B) 18.5 20.1 21.4 21.7 20.4 25.4 26.3 24.6 100.3 104.8 81.7 96.6 103.0

FPCB-use elecfoils (IHT) 2.5 1.9 2.2 2.1 2.0 2.6 3.2 3.5 12.4 13.0 8.7 11.3 15.0

LMO 0.1 0.6 0.6 0.5 0.6 0.7 0.7 0.7 1.8 2.7 4.3

Other 0.1 0.9 1.1 0.7 0.9 1.1 1.1 1.1 0.7 5.3 2.8 4.2 5.6

Revenue proportion 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

PCB-use elecfoils (ICS) 67.6 62.7 60.5 58.6 58.6 55.5 55.4 54.5 63.2 64.5 62.4 55.9 53.4

LIB-use elecfoils (I2B) 28.1 32.1 33.3 35.9 35.4 38.0 37.5 37.4 32.6 30.0 32.3 37.1 37.5

FPCB-use elecfoils (IHT) 3.9 3.0 3.4 3.5 3.5 4.0 4.5 5.4 4.0 3.7 3.5 4.3 5.5

LMO 0.2 0.9 0.9 0.9 1.0 1.0 1.0 1.0 0.7 1.0 1.6

Other 0.2 1.4 1.8 1.1 1.5 1.6 1.6 1.7 0.2 1.5 1.1 1.6 2.0

Operating profit -1.5 2.5 2.3 1.4 0.1 4.4 5.5 4.0 10.7 -2.5 4.6 14.0 20.8

Pretax profit 1.5 1.9 4.1 3.1 1.8 5.7 7.2 5.7 16.7 -68.7 10.5 20.3 15.9

Net profit 1.6 0.6 3.1 2.3 1.3 4.3 5.5 4.3 13.6 -52.7 7.6 15.5 13.5

OP margin -2.3 4.0 3.5 2.3 0.2 6.6 7.8 6.1 3.5 -0.7 1.8 5.4 7.6

Pretax margin 2.2 3.1 6.4 5.1 3.1 8.5 10.2 8.7 5.4 -19.7 4.2 7.8 5.8

Net margin 2.4 1.0 4.8 3.9 2.3 6.5 7.8 6.6 4.4 -15.1 3.0 5.9 4.9

Growth (QoQ/YoY)

Revenue -3.0 -4.7 2.6 -5.9 -5.0 16.1 5.2 -6.5 3.2 13.5 -27.5 2.7 5.6

PCB-use elecfoils (ICS) -3.1 -11.6 -1.0 -8.9 -5.0 10.0 5.0 -8.0 -15.7 15.9 -29.9 -8.1 0.9

LIB-use elecfoils (I2B) 1.3 8.7 6.6 1.2 -6.1 24.5 3.8 -6.7 74.6 4.5 -22.0 18.2 6.6

FPCB-use elecfoils (IHT) -6.8 -27.1 18.4 -2.5 -7.2 32.7 19.8 11.1 24.4 5.2 -32.9 29.3 32.6

Other 323.1 10.0 -10.0 10.0 10.0 10.0 -5.0 46.0 61.6

Operating profit 45.7 556.7 30.6 -41.1 25.9 25.3 5.3 -0.7 664.2 -46.8 46.4 35.3

Pretax profit RR TTB -10.1 -38.4 -90.5 3,269.3 23.3 -26.8 -72.0 TTR TTB 202.2 48.6

Net profit TTB 31.5 113.6 -25.2 -42.4 223.1 25.8 -20.8 -60.0 TTR TTB 92.8 -21.9

Note: K-IFRS, non-consolidated



44

November 1, 2013


Iljin Materials (020150 KS)


(Wbn) 12/12 12/13F 12/14F 12/15F (Wbn) 12/12 12/13F 12/14F 12/15F





Operating Profit (Adj) -3 5 14 21 Other Current Assets 1 1 1 1

Operating Profit -3 5 14 21 Non-Current Assets 319 430 544 615

Non-Operating Profit -66 6 6 -5 Investments in Associates 0 0 0 0



Pretax Profit -69 11 20 16 Total Assets 448 598 731 822

Income Tax -16 3 5 2 Current Liabilities 144 131 138 143

Profit from Continuing Operations -53 8 16 14 AP & Other Payables 23 21 23 24


Net Profit -53 8 16 14 Other Current Liabilities 73 66 72 75

Controlling Interests -53 8 16 14 Non-Current Liabilities 26 180 290 362


Total Comprehensive Profit -51 8 16 14 Other Non-Current Liabilities 4 4 4 4

Controlling Interests -51 8 16 14 Total Liabilities 170 311 428 505



FCF (Free Cash Flow) 59 -18 -4 35 Capital Surplus 188 188 188 188


Operating Profit Margin (%) -0.7 1.8 5.4 7.6 Non-Controlling Interests 0 0 0 0

Net Profit Margin (%) -15.1 3.0 5.9 4.9 Stockholders' Equity 278 287 304 318


(Wbn) 12/12 12/13F 12/14F 12/15F 12/12 12/13F 12/14F 12/15F

Cash Flows from Op Activities 69 31 28 39 P/E (x) - 62.6 31.0 35.5

Net Profit -53 8 16 14 P/CF (x) -12.7 18.3 13.7 13.8



Amortization 1 1 1 2 EPS (W) -1,345 195 394 344

Others -52 0 11 -1 CFPS (W) -710 666 892 887

Chg in Working Capital 47 0 -1 0 BPS (W) 6,939 7,119 7,490 7,817

Chg in AR & Other Receivables -2 4 -3 -2 DPS (W) 0 0 0 0

Chg in Inventories -17 7 -6 -4 Payout ratio (%) 0.0 0.0 0.0 0.0

Chg in AP & Other Payables -1 -6 2 1 Dividend Yield (%) 0.0 0.0 0.0 0.0

Income Tax Paid -2 -2 -5 -2 Revenue Growth (%) 13.5 -27.5 2.7 5.6

Cash Flows from Inv Activities -39 -127 -121 -88 EBITDA Growth (%) -15.8 3.3 45.1 25.5

Chg in PP&E -37 -37 -30 0 Operating Profit Growth (%) TTR TTB 201.3 48.6

Chg in Intangible Assets -4 -3 -3 -3 EPS Growth (%) TTR TTB 102.1 -12.7

Chg in Financial Assets -1 0 0 0 Accounts Receivable Turnover (x) 9.7 7.6 7.9 7.8

Others 3 -87 -88 -85 Inventory Turnover (x) 4.4 3.7 3.8 3.8

Cash Flows from Fin Activities -2 147 104 63 Accounts Payable Turnover (x) 94.1 100.1 104.1 103.0

Chg in Financial Liabilities 2 -10 0 0 ROA (%) -11.9 1.5 2.3 1.7

Chg in Equity 0 0 0 0 ROE (%) -17.4 2.7 5.2 4.3

Dividends Paid -2 0 0 0 ROIC (%) -1.0 1.0 5.4 9.0




Ending Balance 20 70 81 96 Interest Coverage Ratio (x) -1.2 2.5 2.8 2.6



45

November 1, 2013


APPENDIX 1

Important Disclosures & Disclaimers

Stock Ratings Industry Ratings

Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving

Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes

Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening

Sell Relative performance of -10%

* Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))

* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.

* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material

development.

* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of

future earnings.

The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic

conditions.

Analyst Certification

The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean

securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions

expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this

report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s

area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified

herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been

promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific

recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by

overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and

private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of

the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclosures

As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Cheil Industries as an

underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.

As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with Cheil Industries as an underlying asset, and other than this, Daewoo

Securities has no other special interests in the covered companies.

Of the equity-linked warrants covered in this report, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares

of Cheil Industries as underlying assets.

Soulbrain

0

20,000

40,000

60,000

80,000

11/11 4/12 10/12 4/13 10/13

(W) Innox

0

10,000

20,000

30,000

40,000

50,000

11/11 4/12 10/12 4/13 10/13

(W) Duksan Hi-Metal

0

10,000

20,000

30,000

40,000

50,000

11/11 4/12 10/12 4/13 10/13

(W)

Hansol Chemical

0

10,000

20,000

30,000

40,000

11/11 4/12 10/12 4/13 10/13

(W) Interflex

0

20,000

40,000

60,000

80,000

100,000

11/11 4/12 10/12 4/13 10/13

(W) Iljin Materials

0

5,000

10,000

15,000

20,000

25,000

11/11 4/12 10/12 4/13 10/13

(W)OCI Materials

0

50,000

100,000

150,000

11/11 5/12 10/12 4/13 10/13

(W)

Cheil Industries

0

50,000

100,000

150,000

11/11 5/12 11/12 4/13 10/13

(W)


46

November 1, 2013


Disclaimers

This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.

Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been

independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or

correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English

translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this

report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This

report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any

securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of

the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any

laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof.

Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or

form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers,

employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a

purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or

agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment

banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to

in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to

future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Distribution

United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within

Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other

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contents.

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investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance

thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that

they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed

herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The

securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or

sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements.

Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong

Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for

distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws

of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person.

All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or

its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its

affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc.

Head Office

34-3 Yeouido-dong, Yeongdeungpo-gu

Seoul 150-716

Korea

Two International Finance Centre

Suites 2005-2012

8 Finance Street, Central

Hong Kong

320 Park Avenue, 31st Fl.

New York, NY 10022

United States

Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1000

Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Representative Office

Tower 42, Level 41

25 Old Broad Street

London EC2N 1HQ

United Kingdom

6 Battery Road, #11-01

Singapore, 049909

7th Floor, Yusen Building

2-3-2 Marunouchi, Chiyoda-ku

Tokyo 100-0005

Japan

Tel: 44-20-7982-8016 Tel: 65-6671-9845 Tel: 81-3- 3211-5511

Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office

Suite 2602, Twin Towers (East)

B-12 Jianguomenwai Avenue

Chaoyang District, Beijing 100022

China

Unit 13, 28th Floor, Hang Seng Bank Tower

1000 Lujiazui Ring Road

Pudong New Area, Shanghai 200120

China

Centec Tower

72-74 Nguyen Thi Minh Khai Street

Ward 6, District 3, Ho Chi Minh City

Vietnam

Tel: 86-10-6567-9699 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

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