sector_led_20100323_daishin

SECTOR ANALYSIS

LEDLED sector series #1/2- limited LED chip supply

OVERWEIGHT

Maintain

Benjamin Ban +822-769-3849 [email protected]

Wafer shortage relative to MOCVD supply growth: The theme of the first report of our LED sector series is limited LED chip supply. LED chip manufacturers have rapidly purchased an increased number of equipments and created concerns of a possible LED chip oversupply situation. Combined sales of MOCVDs (Metal Organic Chemical Vapor Deposition; used for LED production) manufactured by Veeco, US and Aixtron, Europe are expected to rise from 130 units in 2009 to more than 380 units in 2010. Increased MOCVD sales may seem to suggest oversupply for LED chips. However, we believe growth of LED chip supply will be limited, due to a limited supply of sapphire ingots the raw material used to produce LED chips. Entry into the troffer lighting market is likely: LED troffer lighting is similar to the LED TV minus the LCD and circuits. LED lighting began in the downlighting market. Now, we believe LED lighting will expand into the troffer lighting market, based on LED BLU-related cost savings, increased chip supply capacities, and improved efficiency. If LED BLU-based LCD TVs reach sales of 45mn units in 2010, LED troffer lighting will likely provide a new growth engine for the LED lighting market. Top picks are Samsung Electronics, Seoul Semiconductor and Lumens: We maintain the OVERWEIGHT rating for the LED sector. Our top recommendations are Samsung Electronics (expected to hold a more than 50% share in the LED TV market), Seoul Semiconductor and Lumens (LED package manufacturers), due to the high sales growth of LED BLU in 2Q10, and potential growth of the LED lighting market in 2H10.

LED TVs

LED Lighting

Source: Daishin Securities Research Center

Source: Cree, GE

Please read carefully the important disclosures at the end of this publication.

KOREA

23 Mar 2010

I. SummarySapphire ingot shortageLED BLU market is expected to show growth in 2H10, in addition to penetration into the troffer lighting market (new growth engine). In 2009, LED BLU provided the LED sector with a foundation for growth. We believe LED BLU will maintain growth through 1H11. Despite lower selling prices and increased supply, LED BLU has continued to grow, backed by expanded use of LEDs in LCD TVs. We expect the LED BLU growth rate will increase qoq in 2Q10. Similar to the Semiconductor sector, introduction of large diameter wafers and an oversupply of chips could lead to a decline in selling prices for the LED sector. Some analysts have a negative outlook for the LED market, based on the following: 1) LED chip price reductions and fewer new applications for LED chips could limit the growth of Koreas LED sector; 2) Increased quarterly production of MOCVDs by Veeco (US) and Aixtron (Europe) could lead to an LED chip oversupply situation in 2H10; and 3) The current transition from 4 sapphire wafers to 6 sapphire wafers. Extremely large capex is likely, as existing MOCVD equipment is unable to support the 6 sapphire wafer. However, despite the increase in MOCVD equipment, we believe the possibility of an LED chip oversupply situation in 2H10 is limited. In order to produce LED chips, GaN is grown on the surface of sapphire wafers or SiC (Silicon Carbide) wafers, utilizing MOCVD. Major manufacturers of MOCVD equipment include Veeco from the US and Aixtron from Germany. Annual production of MOCVD is likely to increase from approximately 150 units in 2009 to 380 units in 2010. In theory, an increase to 380 MOCVD units will cause LED chip production to increase more than 280% yoy in 2010. Therefore, the concern over a possible oversupply situation is plausible. The sapphire wafer market is dominated by Rubicon (US), Monocrystal (Russia), and Sapphire Technology (Korea). Global sapphire wafer production is estimated at roughly 16mn wafers (2 wafers). As a result, at least 200 of the total 380 MOCVD equipments expected to be sold in 2010 will have no supply of sapphire wafers. Therefore, we believe the concerns of oversupply in LED chips are unfounded, due to limited growth of sapphire wafer sales. Supply of LED chips is expected to increase approximately 100% in 2010. Rubicon, US manufacturer of sapphire wafers, is at the low end of the LED supply chain and is considered a prospective stock. Aixtron and Veeco (LED equipment manufacturers) are likely to experience limited growth in new order placements. In the current timeframe, LED ingot manufacturers, such as Rubicon (US), Monocrystal (Russia), and Sapphire Technology (Korea), warrant attention. We reaffirm the OVERWEIGHT rating for the LED sector. We believe LED module manufacturers will exhibit rapid sales growth, benefiting from the launch of new LED TV models in 2Q10. Our top recommendations are Samsung Electronics (scheduled to launch new LED TV models and holds more than 50% marketshare), Seoul Semiconductor and Lumens (LED package manufacturers).

[ 2 ]

II. Importance of sapphire wafers2-1. Process order: sapphire ingotsapphire waferLED chipIncreased supply of MOCVD equipment has created concerns of possible overproduction in LED chips. MOCVD is indispensable equipment for LED chip production and is very expensive. In theory, increased sales of MOCVD equipment lead to increased LED chip production. Therefore, the extremely rapid increase in the number of MOCVD equipment could create an LED chip oversupply situation. However, we argue an estimation of LED production based solely on MOCVD equipment sales is misleading and stems from an incorrect understanding of the LED manufacturing process. The LED manufacturing process begins with the sapphire ingot. A processed sapphire ingot is used to create the sapphire wafer, which is used for LED chip production. LED chip output is determined by the supply of sapphire ingots, rather than the number of MOCDVD equipment. In LED production (blue LEDs), sapphire wafers or SiC (Silicon Carbide) wafers are utilized to grow GaN. GaN grows under extremely high temperatures (2,400 degrees Celsius) and pressure (40,000 atm). Sapphire wafers are used primarily to grow GaN, as they have similar lattice constant and temperature drift with GaN and can endure extremely high temperatures and pressure. MOCVD deposits GaN (Gallium Nitride) on sapphire wafers or SiC wafers. More than 80% of LED chip manufacturers around the world (excludes Cree, US) use sapphire wafers to manufacture LED chips. Therefore, supply of sapphire wafers is verily proportionate to LED chip output. Even with an oversupply of MOCVD equipment available, LED chip manufacturing is impossible without a supply of sapphire wafers. Consequently, estimating LED chip production based on MOCVD equipment supply is an unrealistic approach, without a full consideration of sapphire ingot supply.Process of LED chip production


2-2. Supply of sapphire ingots is estimated at 16mnIn 2010, we estimate the total supply of sapphire ingots (2equivalent) will reach 16mn. Major suppliers of sapphire ingots include Rubicon (US), Monocrystal (Russia) and Sapphire Technology (Korea). Production capacity was approximately 12mn sheets in 2009 and is estimated at 16mn sheets in 2010, even with facility expansion. Capex in sapphire ingots increased in 2008, and facility expansion was somewhat limited in 2009. Consequently, production capacity will rise 33% yoy in 2010. Therefore, a large number of MOCVD equipment will have no supply of sapphire wafers in 2H10. Rubicon (a listed company in the US with a large global marketshare) posted a decline in sales (-48% yoy) from $37.8mn in 2008 to $19.8mn in 2009. Additionally, OP reversed to the negative territory at -$10.3mn. The poor results are due to an absence of sales generated in 1H10, due to the sharp decline in selling prices (caused by increased sapphire wafer inventories and price competition) and lower operating rates. Rubicons production capacity is estimated at 5mn wafers in 2009 and 6.5mn wafers in 2010, even with the scheduled operation of three fabs. Capex potential remains limited, due to decreased operating rates in 1H09.[ 3 ]

Ingot

Sapphire wafer

Epitaxy

Forecasts for sapphire ingot production capacityCategory Company Rubicon Monocrystal Annual capacity (2 equivalent) Sapphire Technology Total Shipment Rubicon Monocrystal Forecasted sales Sapphire Technology Total sales ASP( US$)Source: Daishin Securities Research Center

(US$mn)2009 5,000,000 4,000,000 3,000,000 12,000,000 5,850,000 19.8 15.3 12.5 35.1 6 52 35 41 87 12 128 104 112 232 16 2010E 6,500,000 4,500,000 5,000,000 16,000,000 2011E 8,000,000 6,500,000 7,000,000 21,500,000

Although large LED chips are manufactured utilizing SiC wafers, the majority of LED chip production utilizes sapphire wafers. LED chips used for IT products are predominantly manufactured from sapphire wafers. Sapphire wafers are believed to have been first used to develop heat-seeking missiles. Thereafter, sapphire wafers were further developed for highly valuable watches or military devices to resist high temperatures and pressure. Sapphire wafers and GaN bear similarity, with a lattice mismatch ratio of 16.02% and a thermal mismatch ratio of 25.5%. However, SiC wafers show greater similarity to GaN than sapphire wafers. Major manufacturers of sapphire wafers include Rubicon from the US (listed on NASDAQ; RBCN), Monocrystal from Russia and Sapphire Technology from Korea. Electric furnaces are used to create the sapphire ingots, from which sapphire wafers are made. The sapphire ingots take 2~4 weeks to be processed in the furnace. Moreover, operation of the furnaces require an approximate one year start-up period. Companies looking to invest capex in furnaces only do so after long-term contracts are signed with government or local electricity providers. SMEs in Korea require an average of two years to secure electricity. SiC wafers are mostly used by Cree, US. Cree mainly targets the American lighting market and holds a dominant share in LED chip production utilizing SiC wafers. SiC wafers are more similar to GaN than sapphire wafers, with a lattice mismatch ratio of 3.5% and a thermal mismatch ratio of 18.9%. The physical characteristics of SiC wafers have helped Cree to gain competitiveness in HB (high brightness) LEDs. Generally, physical characteristics do not matter for small-sized LED chips. However, in large-sized chips, physical deviation due to lattice mismatch and warpage due to thermal mismatch is noticeable. Irregardless of the outstanding physical characteristics of SiC wafers, price is the determining factor. As a result sapphire wafers are the primary material used for LED chip production. In a comparison between SiC and sapphire wafers, SiC wafers have two major drawbacks: 1) SiC wafers are created via sublimation and cannot be liquefied. Therefore, processes must utilize vaporization methodologies. Production of SiC wafers is limited and the resulting wafers are high priced; and 2) Limited sizes. The largest possible SiC wafer size is 3. HB LEDs are increasingly based on large LED chips. Therefore, the limited size of SiC wafer causes limitations for LED chips, which is a major negative.

Category GaN Sapphire SiCSource: Daishin Securities Research Center

Lattice constant a: 3.189 b: 5.185 a: 4.758 b: 12.991 a: 4.36

Lattice mismatch (%) 16.02 3.5

Coefficient of thermal expansion (10-6/K) a: 5.59 b: 3.17 a: 7.5 b: 8.5 4.7

Thermal mismatch 25.5 18.9

[ 4 ]

Physical characteristics comparison of GaN, sapphire wafer and SiC wafer

( )

2-3. MOCVD sales: 380 systemsMOCVD system utilization is forecasted at 425 in 2009, and 805 in 2010. However, based on the efficiency of the Aixtron MOCVD system, the number of MOCVD systems in actual operation globally in 2009 is estimated at 310 systems. The efficiency of the Aixtron MOCVD system is based on completing GaN growth in 8 hours by using 42 2inch wafers. Previously, MOCVD equipment utilized 1~2 trays per system. However, the number of trays used increased to 16 in 2007, to 32 in 2008, and continues to rise. Although some MOCVD systems are cited as utilizing 42 trays, actual production volumes are based on the systems operated in 2009. We project actual production capacity will exceed 380 systems in 2010, as systems have displayed enhanced efficiencies yoy. The expected MOCVD production capacity in 2010 suggests global sapphire wafer demand will reach approximately 31mn. However, assuming a maximum of 16mn sapphire wafers are supplied, operation rates are unlikely to increase above 50%. We believe companies unable to secure enough sapphire substrates, relative to MOCVD production capacities, will endure declines in operation rates, which should lead to sharp reductions in profitability. The operation rate in 2009 reached 74%, based on production volumes. However, actual sales volumes only reached approximately 5.8mn wafers, due to oversupply in 1H09. We believe operation rates in 2010 will remain similar to 2009. Consequently, the possibility of additional MOCVD equipment sales in 2H10 will be reduced.

Number of MOCVD systems and wafer usage by companyCategory No. of MOCVD system Nichia EPISTAR Toyota Gosei Formosa Epi Huga Samsung LED Seoul Opto LG Innotek Others Total Wafer capacity Operation rateSource: Daishin Securities Research Center

2009 MOCVD system 120 80 40 50 45 50 10 10 20 425 Wafer demand 4,599,000 3,066,000 1,533,000 1,916,250 1,724,625 1,916,250 383,250 383,250 766,500 16,288,125 12,000,000 74% MOCVD system 180 120 60 70 60 90 60 70 95 805

2010 Wafer demand 6,898,500 4,599,000 2,299,500 2,682,750 2,299,500 3,449,250 2,299,500 2,682,750 3,640,875 30,851,625 16,000,000 52%

A review of MOCVD equipment supply is highlighted by the introduction of a new system by Veeco (US). The new MOCVD system, K465i GaN, has displayed high capacity improvement. Veeco plans to supply 45 systems in 1Q10, 70 systems in 2Q10 and 120 systems in 4Q10. Veecos previous success in MOCVD equipment was somewhat limited, due to weaknesses in certain areas. The new K465i boasts both high yields and output; however still contains some relative weakness for companies that produce LED TVs and large lighting applications, as production remains concentrated in 2 inch wafers. Aixtrons system produced 11 4-inch sapphire substrates. Presently, Aixtron created a partnership with Epistar (Taiwan) for research & development on new models for 2010. Testing at the AIX G5 HT production facility was successfully completed in Feb 2010. Aixtron plans to release the AIX G5 HT for sale. The new system can produce 56 2-inch sapphire substrates, 14 4-inch sapphire substrates and 8 6-inch sapphire substrates. Companies focused on the production of chips used in LED TVs (utilizing 4-inch wafers) are expected to continue concentrating purchases on Aixtron systems.

[ 5 ]

Aixtron MOCVD (G5 HT)

Veeco K465i

Source: Aixtron

Source: Veeco

Aixtron G4HT, G5HT comparisonCategory Operating temperature 2-inch 4-inch 6-inch 8-inchSource: Aixtron

G4 HT

G5 HT

G5/G4 efficiency Same 32% 27% 33% -

42 11 6 -

56 14 8 5

2-4. Why are 4-inch wafers used?Large-caliber LED wafer growth is projected to be limited to 4-inch through 2011. Recently, signs have shown the possibility of migration to 6-inch wafers. However, 4inch and 2-inch wafers should continue to dominate the market. Companies in production of large LED chips using MOCVD systems utilize 4-inch wafers. However, the area growth of 4-inch wafers relative to 2-inch wafers is only about 4.8%. Companies that used 2-inch sapphire substrates in the past are similarly positioned to utilize 2-inch substrates in 2010 (based on substrate proportion). The Veeco system is largely geared towards the 2-inch process. The new Aixtron equipment highlights an ability to upgrade to the larger 4-inch sapphire substrate. The majority of LED chip manufacturers that purchase 4-inch wafers utilize the wafers to produce larger chips for LED TVs. However, the wafers do not provide high process efficiency, with area growth only improving 4.8% relative to 2-inch wafers. The 4-inch sapphire substrate is less efficient in area growth at 1,200 , and is less advantageous due to the thickness. The 2-inch sapphire substrate is approximately 0.43mm thick, whereas the 4-inch sapphire substrate is 0.65mm thick. Selling price naturally increases, based on area and thickness. We forecast sapphire substrate supply will further decline due to the increased thickness of the 4-inch sapphire substrate. The 4-inch sapphire substrate is predominantly used by companies that manufacture large LED chips, such as chips used in LED TVs. Large LED chips have transitioned from a square shape to a rectangle shape. Consequently, the 4-inch substrate provides a higher yield per LED wafer, compared to the 2-inch substrates. Additionally, the cost associated with the chip process can be reduced for the 4-inch substrates. Debate over use of the 6-inch sapphire substrate is premature. Equipment to process the 6-inch substrate and the preparations for production of the 6-inch substrate are still in the very initial stages. The supply of the 4-inch substrates only began in 2009. Therefore, supply for the 6-inch sapphire substrates is not ready. Moreover, we expect more than 1 year will be required before any real supply can begin.

[ 6 ]

1,200~1,300

1,200~1,300

Wafer production efficiency based on Aixtron G4HTCategory inch R Area (mm^2) Area growth Per wafer Wafer Production area Growth relative to 2-inchSource: Daishin Securities Research Center

2" 2 25 2,027

4" 4 51 8,107 4 11 12,045 267,541 8,026,240 97,652,583 4.8%

6" 6 76 1,8241 9 6 6,570 328,346 9,850,385 119,846,352 28.6%

1inch=25.4mm (rel. to 2-inch) Loading Unit Annual usage Daily Monthly Annual

42 45,990 255,380 7,661,411 93,213,829

III. LED TV growth pace is still rapid3-1. Revise of 2010 LED TV sales volume upward by 40.7% from 32.4mn to 45mnWe revise our LED TV market outlook upwards by 40.7% from 32mn units to 45mn units, due to the following: 1) LED market continues to receive premium, as advanced countries continue to show a positive response towards the upside of low electricity consumption, and emerging markets (including China) have positively received the slim design of LED TVs; 2) LED supply shortage is partially offset by the decline in the number of LED chips per product, based on enhanced efficiencies of LED chips; 3) LED TVs improve the profit structure of TV manufacturers, on the back of lowered costs relative to higher priced premium LED TVs. We expect the LED market to display steady growth, as 3D LED TVs provide yet another premium for the LED market. The low electricity consumption of LEDs boost the value of LED TVs in advanced countries. At present, LEDs have a high efficiency of approximately 80~90 lumens/watt. 40-inch LCD TVs use 16 CCFLs. In contrast, edge-lit type LEDs enhanced efficiency by more than 30%, lowering the number of CCFLs from 420 to 250. As a result, the energy efficiency of BLU LEDs has improved by more than 30%. We anticipate LED prices will continue to receive a high premium, in light of the energy efficiency relative to previous LCD TVs.

46~47-inch LED TV selling priceSamsung Electronics LG Electronics Sony Sharp

Model design

Inch Price (US$) Screen size Screen refresh rate ENERGY STAR qualification Brightness Product height Product width Product weight Product depthSource: Best Buy

46 1,299 45-8/9" 120Hz Yes 30" with stand (27-3/4" without) 43-7/8" 49.4 lbs. with stand (38.8 lbs. without) 10-7/8" with stand (1-1/4" without)

47 1,499.99 46-8/9" 240Hz Yes 500 cd/m 33-3/5" with stand (30-2/3" without) 46-2/5" 56 lbs. with stand (51,8 lbs. without) 15-2/3" with stand (4-15" without)

46 1,529.99 46" 120Hz No 28-3/4" with stand (27-1/2" without) 44-1/8" 47 lbs. with stand (40 lbs. without) 11-1/8" with stand (2-5/8" without)

46 1,619.98 45-63/64" 120Hz Yes 450 cd/m 29-11/64" with stand (27-3/32" without) 43-9/32" 47.4 lbs. with stand (40.8 lbs. without) 13-61/64" with stand (3-45/64" without)

[ 7 ]

3-2. Packaging companies will benefit from declines in LED selling pricesPackaging companies, for LEDs used in LCD TVs, are expected to enjoy continued sales growth and increased profitability, despite the decline in LED selling prices. The price of LED modules used in LCD TVs is expected to have decreased by 45% (based on 6 bar, 420 LED chip). Concerns over deteriorated profitability of LED packaging companies are widespread, due to price cuts for LED chips used in TVs, along with the reduced adoption of LED chips per product. However, LED module prices have retreated within a limited range of around 17%, supported by the increased efficiency of LED chips and processing. The selling price decreased 45% based on one TV unit. However, the price declines in LED modules were limited at approximately 17%. We project the profitability of packaging companies will improve based on improved LED process technology (2x die bonding and wire bonding -> 1x die bonding and wire bonding). The selling price for edge-lit type LED TVs has recently declined by roughly 45% from the $90 level to the $50 level. Selling prices have declined sharply, due to price cuts in LED modules and the reduced adoption of LED chips per product. The sharp decline has created some concern. However, the actual rate of decline is less worrisome, when based on the price per module. We forecast packaging companies will display a relatively strong recovery in profitability, based on a more efficient use of raw materials. LED TVs utilized 6 modules, and were price at $90 in 2009. In other words, the price per module was around $15. The new edge-lit type LED TV from Samsung Electronics in 2010 utilizes 4 modules. The price per module is $12.5, which is roughly 17% lower. We expect LED TV sales volumes will increase 14x in 2010. Even if the number of modules used decreases from 6 to 4, we believe the LED module market will grow by more than 9x.

6 bar type LED BLU

4 bar type LED BLU

LCD Panel

LED Panel



Despite the increased sales volumes of LED modules, concerns of dampened profitability for LED packaging companies remains ever present, due to the price cuts of LED chips used in TVs and the reduced application of LED chips per product. However, LED module prices have retreated within a limited range of around 17%, supported by the increased efficiency of LED chips and processing. However, lowered chip purchase prices and price declines resulting from boosted efficiency of processing technologies have driven the profitability of LED packaging companies upward. As such, we believe LED packaging companies are likely to see profitability expand.

[ 8 ]

Edge-lit type LED TVs have migrated from a 2 chip solution to a 1 chip solution. Consequently, LED packaging companies have been provided an opportunity to increase profitability. A 2 chip solution refers to a product with 2 LED chips in one LED package. The 1 chip solution has created some worries of a potential oversupply in LED chips. However, the size of the LED chips used in the 1 chip solution is almost double the size of the chips used in the 2 chip solution. Therefore, although the number of adopted LED chips decline, the usage area of LED chips remains about the same. Additionally, advantages are gained from the 1 chip solution reducing the die bonding and wire bonding processes by 50%. We believe LED packaging companies will be able to enhance profitability, based on the more efficient production processes.

Processing from ingot to LED chipDie Bonding Wire Bonding Dispense Trim Test Taping


2 chip solutionGold Wire Bonding 2 LED Chips

1 chip solutionGold Wire Bonding LED Chip

Die BondingSource: Daishin Securities Research Center

Die BondingSource: Daishin Securities Research Center

The 1 chip solution benefits LED packaging companies in two ways. First, costs decline as a result of improved efficiency. Second, capex investment is reduced for the packaging process and increased sales volume per set. We believe LED chip prices will decline by an annual average of approximately 30%. LED chips improve energy efficiency by 30% each year, as LED chips share the characteristics of semiconductors. We anticipate the relative profitability of module manufacturers will increase in 2010, as the decline in LED chip purchase prices outpaces the decline in LED module prices. Moreover, the improved efficiency in die bonding and wire bonding processes from 2x to 1x bear close scrutiny. LED packaging companies will benefit from the reduction in both processes, as the reduced costs will outweigh the decline in capex investment.

[ 9 ]

IV. Competition and issues in the LED lighting market4-1. Increase in CRI required for LED to replace incandescent lamps and halogen lampsThe lighting market is dominated by incandescent lamps and halogen lamps. The incandescent lamp is the historic invention of Edison, but has the downside of low efficiency. The halogen lamp operates at a extremely high temperature. Although fluorescent lamps and compact fluorescent lamps used in offices have higher efficiency, incandescent lamps and halogen lamps are still used due to the superior color rendering index (CRI). CRI is an index that is a quantitative measure of the ability of a light source to reproduce the colors of an object. A light source with a higher CRI can exactly reproduce the color of an object. The CRI for fluorescent lamps is approximately 50, and roughly 70~80 for CFLs. The CRI for general incandescent lamps and halogen lamps is 100, which means high color rendering. The high CRI is the reason why incandescent lamps provide a more comfortable feeling compared to fluorescent lamps. In order to enter the lighting market, LEDs must provide a high CRI. Although many LED products already provide a high CRI, the weak point for LED lighting is relatively low efficiency.

Incandescent light bulb

Halogen light bulb

Source: GE

Source: Wikipedia

Liner fluorescent light bulb

Compact fluorescent light bulb

Source: GE

Source: Wikipedia

[ 10 ]

4-2. Second in line: CFLLED lighting markets next area of growth is CFL (Compact Fluorescent Lamp). A CFL lighting fixture consists of a compact fluorescent lamp, ballast, glow switch, and condensers (which makes the CFL the second target for LED). In terms of energyefficiency, LED bulbs are apparently superior, followed by liner fluorescent lamps (the first target) and CFL. As previously stated, a CFL lighting fixture requires a ballast, glow switch, and condensers. The ballast regulates the 220V 60Hz AC electricity at around 20KHz~50KHz (60Hz means electrical flow changes direction 60 times per second). In general, an electronic ballast, the most widely used model, amplifies the 60-flickerings up to more than 200,000 times per second, relieving eye-strain. The price of a fluorescent lamp itself is similar to the incandescent lamp, but requires a whole new set of subordinate parts, which increases the total price. In fact, the price of CFL is US$12~15, slightly higher than the liner fluorescent lamp. The subordinate parts for LED lighting are generally more expensive than CFL, and works only with DC supply. Therefore, in order to install LED lights in the home, an inverter is necessary (or a functional equivalent) to transform AC to DC. Nevertheless, we believe LED has strong potential to replace CFL because LED utilizes the same circuit structure. In fact, the PAR 20 LED lamp is the representative replacement lamp that could benefit most from the transition to LED lamps.

CFL ballast

PAR 20 LED Lamp

Source: Wikipedia

Source: GE

[ 11 ]

4-3. LED TV BLU enters the troffer marketThe LED TV market is expected to continue growing through 2010. Of particular note, the application of BLUs in LED TVs has expanded, thanks to cost competitiveness against the premium market. Global LED TV sales are projected to reach 45mn units in 2010, as ASPs rapidly decline due to cheaper LED modules and reduced application. Currently, edge lit-type LED modules are priced at around $40. We believe the troffer market will begin growing in 2H10, once edge lit LED modules become cheaper. Troffer is a recessed lighting fixture for use in ceilings, with multiple fluorescent lamps placed in parallel. Troffers are widely used in office and residential buildings. About 50% of troffers are used in luminaries and are generally regarded as a costly option. If the price of edge lit-type LED declines below $40, LEDs will emerge as a competitive option in the troffer market. LED module suppliers carry great growth potential as suppliers of LED modules, as LED TVs are expected grow in tandem with the LED TV market. Furthermore, the light fixture market could provide an area for growth in 2011.

LED Troffer lamp

FL Troffer

Source: Cree

Source: American Lighting

[ 12 ]

COMPANY ANALYSIS

Samsung ElectronicsLED TV: 50% marketshare

BUY W768,000

Maintain Target: W975,000

Mkt.Cap: W124.66tn/US$109.86bn Semiconductors

005930 KS

Benjamin Ban +822-769-3849 - [email protected]

SEC still holds absolute marketshare in LED TVIn 2009, Samsung Electronics created (figuratively speaking) the market for LED TVs by selling 2.5mn units. The companys 2010 sales forecast was revised upwards to 18mn units. In accordance with the new projection, we expect LED module sales will exceed 2.2mn units in 2010. We believe global LED sales will reach 45mn units in 2010, and SEC will likely have more than a 50% marketshare. We revised Samsung Electronics 2010 LED TV sales forecast upward, based on the following: 1) Higher profitability and stable supply from a robust supply chain for LED TVs; 2) Despite declining LED TV prices, the company has secured profitability in premium segment and from the potential application of 3D TV; 3) Potential sales increase due to late-market entrants in China and Japan.

Maintain BUY & TP of W975,000We reiterate the BUY rating and TP of W975,000 for Samsung Electronics. Samsung Electronics is a semiconductor and LCD manufacturer, holding stakes in Samsung LED, a JV of Samsung Electro-Mechanics. Therefore, the company will likely create synergies with Samsung Electro-Mechanics, once the LED market grows enough to reach economies of scale.

Absolute LED TV marketshare in 2010Samsung Electronics is expected to hold 43% LED TV marketshare in 2010. Armed with a full product line-up from 20 to 60, the companys LED TV sales will increase 7-times from 2.56mn in 2009 to 18mn in 2010. LED module sales are expected to reach 22mn units in 2010. Generally, LED TV manufacturers buy LCD panels and BLUs from contractors. Therefore, the AMOLED business will be able to record overseas sales of 4mn units. Of particular note, Samsung Electronics LCD sales could increase, as LCD manufacturers in China adopt LED modules. Samsung Electronics established a joint venture, Samsung LED, with Samsung Electro-Mechanics. The majority of LED demand from Samsung Electronics (LED TV, mobile phone, laptop, and ect) is provided by Samsung LED. We expect additional sales will be generated, once the company enters the lighting industry. The LG Group is expected to utilize LG Electronics to sell LED light fixtures. The Samsung Group is expected to enter the LED lighting market, utilizing the companys strong brand power. We anticipate the entrance into the lighting industry will provide additional growth potential, as the lighting market stages a full-blown expansion in 2011.

[ 13 ]

KOREA

23 Mar 2010

Operating performance and investment indicatorsLED TV sales SEC LGE Sharp Sony Toshiba Philips Panasonic Vizio Others TotalSource: Daishin Securities Research Center

(1K units)2009 2010 M/S 77% 2% 3% 3% 2% 1% 1% 0% 10% Sales 18,000 5,228 5,422 6,458 2,296 2,291 1,501 315 394 41,905 M/S 43% 12% 13% 15% 5% 5% 4% 1% 1%

Sales 2,560 75 115 85 78 45 25 10 318 3,311

Financial summaryFYE Dec Revenue (Won bn) EBITDA (Won bn) EBITDA margins (%) Pretax profit (Won bn) Net profit (Won bn) EPS (Won) EPS growth (%) P/E (x) FD core EPS (Won) FD core P/E (x) Gross DPS (Won) Dividend yield (%) P/BV (x) ROE (%) Net gearing (%) EV/EBITDA (x) Change in EPS estimates Daishin/Consensus (x)Source: Company, Daishin Research, Bloomberg

Price chart(Won 000) ('000) 900 800 700 600 500 400 300 200 100 09.03 09.06 09.09 09.12 10.03Share Trading Volume (RHS) Adj. Price

1400 1200 1000 800 600 400 200

2007 63,176.0 12,999.6 20.6 8,630.0 7,425.0 49,323 -6.9 11.3 49,323 11.3 8,000 1.4 1.6 15.3 22.8 6.5

2008 72,953.0 11,753.3 16.1 5,908.2 5,525.9 36,767 -25.5 12.3 36,767 12.3 5,500 1.2 1.1 10.1 21.0 5.7

2009F 89,772.8 14,087.5 15.7 10,839.4 9,649.9 64,427 75.2 12.4 64,427 12.4 8,000 1.0 1.8 15.4 9.2 8.2 0.0 1.0

2010F 102,842.5 18,440.3 17.9 16,630.1 14,493.1 97,173 50.8 7.9 97,173 7.9 9,000 1.2 1.4 19.7 -4.0 5.4 0.0 1.1

2011F 120,659.7 20,158.9 16.7 18,471.5 16,140.6 108,155 11.3 7.1 108,155 7.1 10,500 1.4 1.2 18.4 -12.7 4.3 0.0 1.2

Source: Bloomberg

[ 14 ]

COMPANY ANALYSIS

Seoul SemiconductorImminent sales and profitability improvement

BUY W39,150


Mkt.Cap: W2.28tn/US$2.01bn Semiconductors

046890 KS


A full-blown LED TV sales increase in 2Q10Seoul Semiconductor displayed substantial growth in 2009 thanks to reduced legal costs and growth of mobile phones, laptops, and the lighting market. The company is projected to exhibit substantial growth in 2Q10, as LED TV sales increase. In general, TV manufacturers launch new models in Mar and Sep. Therefore, having already secured contracts in 2H09, Seoul Semiconductor is positioned to supply parts for new models starting Mar 2010. Seoul Semiconductor secured cash holdings of W276bn through a paid-in capital increase for foreign investors in 2H09. We expect the facility expansion for LED TV module production will produce positive results in 2010. Due to the growth of the LED TV market, the company will have additional foreign contractors. In addition, the company has gained an upper hand in the legal dispute regarding patents by securing a cross license with Nichia. Thanks to increased investment into Seoul Opto Device and Huga Opto (JV), Seoul Semiconductor will enjoy a stable chip supply. Although Seoul Opto Device is expected to record equity method losses, new MOCVD equipment should help improve profitability and yields. Equity method losses are projected to reverse into the positive in 2H10.

Maintain BUY rating & TP of W51,000We reiterate the BUY rating and TP of W51,000 for Seoul Semiconductor. The company staged limited growth in 2H09, due to sluggish sales of LED TV modules. Looking ahead, the companys LED TV module sales will increase thanks to growth of the LED TV market, a diversified customer base, and facility expansion. The sales increase will be more evident in 2Q, thanks to an initial supply to customer companies and in 3Q, as a result of new models.

A full-blown LED TV sales in 2Q10Seoul Semiconductor is expected to post increased LED TV module sales in 2010, aided by growth in both the LED TV and lighting markets. The company will benefit from increased overseas sales of LED TVs, and post sales and OP growth of 8%~9% in 1Q10. In 4Q09, Seoul Semiconductor reported worse-than-expected earnings, due to equity method losses from Seoul Opto Device, inventory valuation losses, and increased incentive payouts. However, the company posted respectable earnings in 1Q10, with sales of W131bn and OP and W11.3bn. In addition, the company should generate full-blown LED TV sales starting Mar 10. We believe sales growth will be aided by expected sales of 4mn LED TV modules, or W200bn.

[ 15 ]

KOREA

23 Mar 2010

Operating performance and investment indicators2008 Sales QoQ Growth (%) Mobile phone Portion of Sales LCD Portion of Sales Lighting fixture Portion of Sales Sales cost QoQ Growth (%) Gross profit Gross Margin (%) SG&A QoQ Growth (%) OP QoQ Growth (%) OP Margin (%) NP NP Margin (%) -3.5% (7.6) -2.7% 9.7% 26.4 5.8% 15.0% 78.1 11.2% (9.8) 44.2 104.5 49.3 17.4% 59.1 102.3 22.6% 58.1 155.3 22.3% 50.8 196.8 69.3% 45.5 16.0% 40.3 14.2% 234.8 284.1 2009 453.4 59.6% 160.0 35.3% 120.0 26.5% 173.0 38.2% 354.0 2010F 696.1 53.5% 136.1 19.6% 209.2 30.1% 350.8 50.4% 540.8 41.8% 13.4 16.5% 33.0 40.6% 65.2 -17.7% 19.0 23.3% 16.1 -1.2% 2.9 -116.6% 3.6% 2.1 2.5% 1Q09 81.3 4.0% 34.0 34.5% 12.6 10.9% 47.0 40.6% 89.3 36.9% 26.6 23.0% 14.3 -10.7% 12.3 324.0% 10.6% 9.6 8.2% 2Q09 115.9 42.6% 40.0 33.9% 14.0 10.5% 42.0 31.6% 99.2 11.1% 33.7 25.3% 12.6 -12.4% 21.1 72.0% 15.9% 14.1 10.6% 3Q09 132.9 14.7% 45.0 33.2% 29.0 23.5% 51.0 41.4% 100.3 1.1% 23.0 18.7% 15.1 20.2% 7.9 -62.4% 6.4% 0.7 0.6% 4Q09 123.3 -7.2% 41.0 29.0% 46.0 35.0% 54.0 41.0% 108.0 7.7% 23.6 17.9% 12.3 -18.5% 11.3 41.9% 8.5% 5.6 4.2% 1Q10E 131.6 6.7% 38.1 20.8% 31.0 18.2% 79.6 46.7% 132.9 23.0% 37.5 22.0% 12.5 1.9% 25.0 121.8% 14.6% 18.7 11.0% 2Q10E 170.4 29.5% 35.4 16.1% 39.5 20.2% 102.4 52.3% 138.6 4.3% 57.2 29.2% 12.9 2.6% 44.3 77.6% 22.6% 35.4 18.1% 3Q10E 195.8 14.9% 31.6

(Wbn)4Q10E 198.3 1.3% 31.0 15.7% 55.4 27.9% 114.8 57.9% 161.2 16.3% 37.1 18.7% 13.1 1.5% 24.0 -45.8% 12.1% 18.5 9.3%

Source: Seoul Semiconductor, Daishin Securities Research Center


Price chart(Won 000) ('000) 60 50 40 30 20 10Share Trading Volume (RHS) Adj. Price

12000 10000 8000 6000 4000 2000

2007 250.2 39.4 15.8 24.0 17.7 356 66.8 69.7 356 69.7 70 0.3 6.9 12.3 15.2 31.4

2008 284.1 3.6 1.3 -15.3 -12.5 -246 TTL -246 0 2.7 -7.2 44.9 119.1

09.03

09.06

09.09

09.12

10.03

2009F 453.4 56.0 12.4 32.6 26.2 504 TTP 92.1 504 92.1 150 0.3 5.9 8.4 -33.6 42.9 0.0 1.0

2010F 696.1 119.8 17.2 93.8 78.1 1,340 165.9 29.2 1,340 29.2 350 0.9 4.3 15.9 -18.3 16.8 -6.8 0.9

2011F 1,075.0 157.6 14.7 143.3 116.6 2,001 49.3 19.6 2,001 19.6 500 1.3 3.7 20.3 -1.1 12.8 0.0 0.9

Source: Bloomberg

[ 16 ]

COMPANY ANALYSIS

LumensQuarterly growth in the form of staircase

BUY W9,330


Mkt.Cap: W371bn/US$327mn Semiconductors

038060 KS


Bright prospect for 1Q10Approximately 70% of Lumens 2010 sales will be generated from LED BLU. Looking ahead, we project the company will post sales of W48.5bn (-6% qoq) and OP of W3.3bn (+7% qoq) in 1Q10, due to newly launched models. As customer companies tend to focus on marketing activities for new models, Lumens will likely continue to develop new LED modules. Lumens new factory at Kunshan, China, is expected to begin operations in Mar 10. The factory in Gunsan, Korea, plans to ramp up capacity. The first phase build-up will increase LED packaging capacity by 50mn units per month, and begin operations in 2Q. The second-phase of the capacity increase will start in 3Q10. Accordingly, we expect Lumens sales will display a step-by-step increase.

Maintain BUY rating and TP of W13,000We reiterate the BUY rating and the TP of W13,000 for Lumens. The company stands to benefit from LED TV sales growth. We forecast LED TV sales will continue to grow into 2010. Looking ahead, Lumens is expected to continue to display staggering growth, posting sales of W303bn (+83% yoy) and OP of W34bn (+494% yoy) in 2010.

Operating performance and investment indicators2008 Sales QoQ Growth(%) Mobile Portion of Sales(%) LCD Portion of Sales(%) Lighting fixture Portion of Sales(%) Sales cost QoQ Growth(%) Gross profit Gross Margin(%) SG&A QoQ Growth(%) OP QoQ Growth(%) OP Margin(%) NP NP Margin(%) 7.3% 1.3 1.6% 4.2% 5.2 3.9% 11.1% 31.7 10.4% 5.6 5.7 33.6 15.4 19.9% 9.8 19.4 14.6% 13.8 51.4 16.9% 17.8 43.2 55.9% 9.7 12.5% 11.9 15.4% 62.6 77.3 2009F 133.1 72.1% 34.0 25.6% 83.9 63.0% 12.7 9.6% 113.7 2010F 303.4 128.0% 27.7 9.1% 232.4 76.6% 15.8 5.2% 252.0 1Q09 15.5 -3.3% 9.5 60.9% 3.6 23.1% 2.3 14.6% 12.6 -11.3% 2.9 18.7% 2.7 6.2% 0.2 -1,218% 1.4% (0.4) -2.4% 2Q09F 23.3 50.0% 7.2 31.0% 10.3 44.3% 4.0 17.3% 19.7 55.9% 3.6 15.4% 3.4 26.6% 0.2 -4.7% 0.9% 0.1 0.6% 3Q09F 42.8 83.6% 9.7 22.6% 29.7 69.4% 2.9 6.8% 37.1 88.3% 5.7 13.3% 3.6 5.1% 2.1 895.3% 5.0% 2.3 5.3% 4Q09 51.4 20.2% 7.6 14.8% 40.3 78.3% 3.5 6.8% 44.2 19.1% 7.2 14.0% 4.1 16.0% 3.1 45.9% 6.0% 2.8 5.4% 1Q10E 48.5 -5.6% 7.0 14.5% 34.2 70.5% 1.8 3.7% 41.3 -6.6% 7.2 14.9% 3.9 -5.4% 3.3 7.5% 6.9% 3.1 6.5% 2Q10E 71.2 46.6% 7.1 10.0% 51.7 72.6% 4.5 6.3% 59.8 44.7% 11.4 16.0% 4.7 19.1% 6.7 102.5% 9.5% 6.5 9.2% 3Q10E 98.5 38.4% 7.6 7.7% 77.1 78.3% 5.0 5.1% 80.5 34.6% 18.0 18.3% 4.5 -2.4% 13.5 100.3% 13.7% 12.5 12.7%

(Wbn)4Q10E 85.2 -13.5% 6.0 7.0% 69.5 81.6% 4.5 5.3% 70.4 -12.5% 14.7 17.3% 4.7 3.8% 10.0 -25.7% 11.8% 9.5 11.2%

Source: Lumens, Daishin Securities Research Center

[ 17 ]

KOREA

23 Mar 2010


Price chart(Won 000) ('000) 12 10 8 6 4 2 4000 2000Share Trading Volume (RHS) Adj. Price

10000 8000 6000

2007 12.3 3.3 27.0 3.4 2.7 323 4.5 16.4 323 16.4 0 0.0 2.6 17.1 -1.8 9.8

2008 75.0 8.0 10.7 -2.6 -1.9 -62 TTL -62 0 3.5 -9.3 220.6 12.0

09.03

09.06

09.09

09.12

10.03

2009F 133.0 13.2 9.9 5.1 4.9 132 TTP 67.5 132 67.5 0 0.0 3.7 8.2 -3.4 24.8 0.0 0.9

2010F 303.4 44.3 14.6 37.1 31.7 798 502.9 11.7 798 11.7 0 0.0 2.9 28.1 33.9 8.2 23.0 1.2

2011F 404.2 55.6 13.8 40.4 33.4 841 5.4 11.1 841 11.1 0 0.0 2.3 23.0 37.3 6.6 -11.3 0.9

Source: Bloomberg

[ 18 ]

COMPLIANCE NOTICEIn accordance with Subparagraph 5 of Paragraph 1 of Article 4-20 of the supervisory regulations for the financial investment industry, we confirm that no information or content has been shared prior to its release on Daishins website, and that the analyst has not received nor will receive direct or indirect compensation in exchange for expressing specific opinions. Daishin is not affiliated with the company presented in this report. This report has been presented without any undue external influence or interference, and accurately reflects the personal views of the analyst who is responsible for its content. Company ratings breakdown - Buy: the stock is expected to outperform the market by at least 10%p over the next six months. - Marketperform: the stock is expected to either outperform or underperform the market by less than 10%p over the next six months. - Underperform: the stock is expected to underperform the market by at least 10%p over the next six months. Sector ratings breakdown - Overweight : industry indicators are expected to outperform the market over the next 6m - Neutral : industry indicators are expected to be in line with the market over the next 6m - Underweight: industry indicators are expected to underperform the market over the next 6ms.

DISCLAIMERDaishin Securities Co., Ltd does not have more than 1% of the recommended stock and the analyst does not own share of the stock as of the preparation date of the report. Daishin Securities Co., Ltd did not provide this report to either institutional investors or any third party prior to the preparation date of the report.

Samsung Electronics (005930 KS) Ratings and target price historyDate Rating TP Date Rating TP 10.03.16 Buy 975,000 09.07.07 Buy 800,000 10.02.23 Buy 975,000 09.07.06 Buy 700,000Share price

10.02.01 09.11.14 09.11.02 Buy Buy Buy 860,000 860,000 860,000 09.06.09 09.06.08 09.05.16 Buy Buy Buy 700,000 700,000 700,000Adj.Target Price

09.10.22 09.10.07 Buy Buy 860,000 860,000 09.05.11 09.04.27 Buy Buy 700,000 700,000

09.09.14 Buy 860,000 09.04.15 Buy 700,000

09.09.14 Buy 860,000 09.04.06 Buy 630,000

09.08.10 Buy 800,000 09.03.09 Buy 630,000

09.07.27 Buy 800,000 09.02.11 Buy 630,000

1,500,000 1,000,000 500,000 0 08.03 08.06 08.09 08.12 09.03 09.06 09.09 09.12 10.03

Seoul Semiconductor (046890 KS) Ratings and target price historyDate Rating TP Date Rating TP 10.03.16 Buy 51,000 10.02.04 Buy 51,000 09.11.14 09.11.05 09.09.14 Buy Buy Buy 51,000 51,000 51,000 09.08.24 09.07.28 Buy Buy 45,000 45,000 09.07.07 Buy 37,000 09.03.04 Buy 32,000 09.02.11 Buy 25,000 09.02.11 Buy 25,000

Share price

Adj.Target Price

60,000 40,000 20,000 0 08.03 08.06 08.09 08.12 09.03 09.06 09.09 09.12 10.03

[ 19 ]

Lumens (038060 KS) Ratings and target price historyDate Rating TP Date Rating TP 10.03.16 Buy 13,000 09.12.17 Buy 13,000 09.11.14 09.10.30 09.10.09 Buy Buy Buy 10,300 10,300 10,300 09.09.14 09.08.24 Buy Buy 12,000 8,000 09.07.07 Buy 6,500 09.03.04 Buy 6,500 09.02.11 Buy 6,500 09.02.11 Buy 6,500

Share price

Adj.Target Price

15,000 10,000 5,000 0 08.03 08.06 08.09 08.12 09.03 09.06 09.09 09.12 10.03

[ 20 ]

sector_led_20100323_daishin

Documents