See the last page of this report for important disclosures Industry update Handsets Into the storm We maintain our OVERWEIGHT weighting for Korean handset makers and recommend Samsung Electro-Mechanics (SEMCO; 009150 KS) as our sector top pick. Smartphone demand growth in 2013 will be driven by emerging markets. The recent rapid market share gains by Chinese smartphone makers will lower industry-wide ASPs and margins, but help enhance the average hardware performance of handsets, thus boosting demand for high-end components going forward. In addition, the expected market share expansion by SEC in 2013 should lead to qualitative and quantitative growth of SEMCO, the largest parts supplier for SEC. Chinese handset makers to expand local market share Chinese smartphone makers ZTE, Huawei and Lenovo are aiming to expand local market share in 1H13; we expect their combined market share in China to rise by 3.9ppt YoY to 22.2% in 2013, as a result. At the Mobile World Congress (MWC), we confirmed that the three Chinese handset makers are: 1) rapidly advancing, in terms of smartphone hardware competitiveness; 2) competitive against peers, in terms of production costs; and 3) set to see shipment growth, with new smartphones slated for release in early 2Q12 through local telecom carriers (China Mobile, China Unicom and China Telecom). We expect the three Chinese smartphone makers to swiftly expand their market shares in mid- to low-end smartphones and steadily eat into the white-box smartphone market going forward. Profitability of mid-to-low-end smartphones to decline in 2H13 We expect market competition among handset makers to stiffen further in 2H13, with the three Chinese companies set to post rapid growth in 1H13 and new flagship models to be released by Samsung Electronics and Apple in 2Q13. Meanwhile, we believe the increasing size of the Chinese market and the rise in Chinese handset makers’ global market share will pull down worldwide smartphone ASP by 13.6% YoY in 2013, driving up the cost burden of components for handset makers, as a result. Moreover, the aggressive release of new smartphones in 2H13 should spark subsidy competition, driving down the profitability of mid-to-low-end smartphones even further going forward. We thus expect the operating margin of SEC’s IM division to decrease by 1.9ppt to 16.0% in 2013 and the operating margin of LG Electronics’ MC division to increase to a high of 4.1% in 3Q13, before decreasing to 3.4% in 4Q13. Return of smartphone paradigm identity and eco-system At this year’s MWC, we noted that handset suppliers are focusing on building the identities of new flagship models through UX and killer applications, while seeking to develop an independent ecosystem by diversifying platforms beyond the oligopolistic Android (whose smartphone OS market share stood at 64% in 2012) in 2013. Through these efforts, handset makers are seeking to protect the premium of high-margin flagship smartphones, reinforce customer loyalty through the emphasis on differentiation and reduce marketing costs for mid- to low-end models. Between 2011 and 2012, competition in the handset industry had focused primarily on developing advanced hardware features. However, due to the rapid improvement in flagship smartphone hardware, competition to find differentiation points in hardware ceased in 2013, with latecomers closing the gap with top-tiers, in terms of hardware competitiveness. Korea / Handsets 5 March 2013 OVERWEIGHT Stocks under coverage Company Rating Price Target price LG Electronics (066570 KS) BUY 78,300 88,000 SEMCO (009150 KS) BUY 95,500 125,000 LG Innotek (011070 KS) BUY 75,700 83,000 Melfas (096640 KS) BUY 20,550 35,000 Silicon Works (108320 KS) BUY 21,300 38,000 Note: Prices are in KRW; price close as of 1 Mar. 2013 Global handset market share in 4Q12 Others, 30.4% HTC, 1.4% RIM, 1.6% Google, 1.7% Sony, 1.7% Lenovo, 1.8% Huawei, 2.9% LGE, 3.3% ZTE, 3.4% Apple, 10.1% Nokia, 18.3% SEC, 23.6% Source: Gartner, Mirae Asset Research Global smartphone market share in 4Q12 SEC, 30.1% Apple, 20.9% RIM, 3.5% HTC, 3.2% Huawei, 4.2% ZTE, 4.0% Nokia, 3.2% LGE, 4.1% Sony, 3.4% Google, 2.2% Others, 22.0% Source: Gartner, Mirae Asset Research Jinho Cho, Analyst 82 2 3774 3831 [email protected]Yongjei Jeong 82 2 3774 1938 [email protected]
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
See the last page of this report for important disclosures
Industry update Handsets Into the storm We maintain our OVERWEIGHT weighting for Korean handset makers and recommend Samsung Electro-Mechanics (SEMCO; 009150 KS) as our sector top pick. Smartphone demand growth in 2013 will be driven by emerging markets. The recent rapid market share gains by Chinese smartphone makers will lower industry-wide ASPs and margins, but help enhance the average hardware performance of handsets, thus boosting demand for high-end components going forward. In addition, the expected market share expansion by SEC in 2013 should lead to qualitative and quantitative growth of SEMCO, the largest parts supplier for SEC.
Chinese handset makers to expand local market share Chinese smartphone makers ZTE, Huawei and Lenovo are aiming to expand local market share in 1H13; we expect their combined market share in China to rise by 3.9ppt YoY to 22.2% in 2013, as a result. At the Mobile World Congress (MWC), we confirmed that the three Chinese handset makers are: 1) rapidly advancing, in terms of smartphone hardware competitiveness; 2) competitive against peers, in terms of production costs; and 3) set to see shipment growth, with new smartphones slated for release in early 2Q12 through local telecom carriers (China Mobile, China Unicom and China Telecom). We expect the three Chinese smartphone makers to swiftly expand their market shares in mid- to low-end smartphones and steadily eat into the white-box smartphone market going forward.
Profitability of mid-to-low-end smartphones to decline in 2H13 We expect market competition among handset makers to stiffen further in 2H13, with the three Chinese companies set to post rapid growth in 1H13 and new flagship models to be released by Samsung Electronics and Apple in 2Q13. Meanwhile, we believe the increasing size of the Chinese market and the rise in Chinese handset makers’ global market share will pull down worldwide smartphone ASP by 13.6% YoY in 2013, driving up the cost burden of components for handset makers, as a result. Moreover, the aggressive release of new smartphones in 2H13 should spark subsidy competition, driving down the profitability of mid-to-low-end smartphones even further going forward. We thus expect the operating margin of SEC’s IM division to decrease by 1.9ppt to 16.0% in 2013 and the operating margin of LG Electronics’ MC division to increase to a high of 4.1% in 3Q13, before decreasing to 3.4% in 4Q13.
Return of smartphone paradigm identity and eco-system At this year’s MWC, we noted that handset suppliers are focusing on building the identities of new flagship models through UX and killer applications, while seeking to develop an independent ecosystem by diversifying platforms beyond the oligopolistic Android (whose smartphone OS market share stood at 64% in 2012) in 2013. Through these efforts, handset makers are seeking to protect the premium of high-margin flagship smartphones, reinforce customer loyalty through the emphasis on differentiation and reduce marketing costs for mid- to low-end models. Between 2011 and 2012, competition in the handset industry had focused primarily on developing advanced hardware features. However, due to the rapid improvement in flagship smartphone hardware, competition to find differentiation points in hardware ceased in 2013, with latecomers closing the gap with top-tiers, in terms of hardware competitiveness.
Korea / Handsets 5 March 2013 OVERWEIGHT
Stocks under coverage Company Rating Price Target price LG Electronics (066570 KS) BUY 78,300 88,000 SEMCO (009150 KS) BUY 95,500 125,000 LG Innotek (011070 KS) BUY 75,700 83,000 Melfas (096640 KS) BUY 20,550 35,000 Silicon Works (108320 KS) BUY 21,300 38,000 Note: Prices are in KRW; price close as of 1 Mar. 2013
SEMCO remains our top pick, LG Electronics our second pick We expect Samsung Electronics’ global market share to continue to grow by 0.4ppt YoY to 23.6% in 2013, benefiting its largest parts supplier, SEMCO (009150 KS). SEMCO remains our top pick, as: 1) parts shipments are set to grow visibly, with Samsung Electronics’ smartphone shipments forecast to rise by 34.4% YoY to 290m units in 2013; 2) backed by 89% YoY growth in Samsung Electronics’ flagship smartphone shipments to 146m units in 2013, product mix improvement should drive up SEMCO’s profitability; and 3) market prices of handsets components are unlikely to decline, despite the recently improved profitability of Japanese parts makers. LG Electronics (066570 KS) is selected as our second top pick, given: 1) the steady improvement in the competitiveness of its flagship smartphones; and 2) forecasts for market share recovery in Korea and Latin America and improvement in profitability in 1H13, backed by a competitive smartphone lineup and its platform-sharing strategy.
Demand growth to be driven by emerging markets We forecast global demand for handsets and smartphones in 2013 to reach 1.89bn units (+8.7% YoY) and 897m units (+32.4% YoY), respectively. We expect China to drive global demand growth in 2013, as demand for handsets and smartphones in China should expand by 21.8% YoY (to 495m units) and 56% YoY (to 270m units), respectively. Notably, China’s contribution to global demand should rise by 4.6ppt YoY to 30.2% in 2013. We see ample upside in demand growth in China, given that: 1) smartphone users’ portion of mobile phone subscribers in China remains relatively low, at 24% (compared with 48% in North America); and 2) the smartphone penetration rate in China is also lower than that of North America (42.6%, versus 65.3%); and 3) the portion of white-box smartphones in China is also high (45.2% in 2012).
Top-3 Chinese handset makers to expand local market share The top-three Chinese smartphone makers, ZTE, Huawei and Lenovo, are aiming to expand local market share in 1H13; as a result, we expect their combined market share in China to rise by 3.9ppt YoY to 22.2% in 2013. At this year’s Mobile World Congress (MWC), we confirmed that the three Chinese handset makers are: 1) rapidly advancing, in terms of smartphone hardware competitiveness; 2) competitive against peers, in terms of production costs; and 3) set to see shipment growth, with new smartphones slated for release in early 2Q12 through local telecom carriers (China Mobile, China Unicom and China Telecom). We expect the three Chinese smartphone makers to rapidly expand their market shares in low-to mid-end smartphones and steadily eat into the white-box smartphone market going forward.
SEC to outshine peers in cost and supply chain competitiveness We expect market competition among handset makers to stiffen further in 2H13, with the top-three Chinese companies set to post rapid growth in 1H13 and new flagship models to be released by SEC and Apple in 2Q13. Meanwhile, we believe the increasing weight of the Chinese market in global demand and the rise in Chinese handset makers’ global market share will lower worldwide smartphone ASP by 13.6% YoY in 2013, driving up the cost burden of components for handset makers as a result. Moreover, the aggressive release of new smartphones in 2H13 should spark subsidy competition, driving down the industry’s profitability even further going forward. Nevertheless, we expect SEC to continue to expand its Chinese and global market share in 2013, outpacing market growth with limited fluctuations in profitability. With a relatively high portion of in-house produced components and strict control exerted over its (financially sound) supply chain, we believe SEC still has the scope for additional reductions in components’ portion of total costs.
Smartphone paradigm returning to identity and eco-system At this year’s MWC, we noted that handset suppliers are focusing on building the identities of their new flagship models through UX and killer applications, while seeking to develop an independent ecosystem by diversifying platforms beyond the oligopolistic Android (whose smartphone OS market share stood at 64% in 2012) in 2013. Through these efforts, handset makers are seeking to preserve the premium of high-margin flagship smartphones, reinforce customer loyalty through the emphasis on differentiation and reduce marketing costs for low-to mid-end models. Between 2011 and 2012, competition in the handset industry had focused primarily on developing advanced hardware features. However, due to the rapid improvement in flagship smartphone hardware, competition to find differentiation points in hardware ceased in 2013, with latecomers closing the gap with top-tiers, in terms of hardware competitiveness.
Through efforts to establish a solid identity, handset makers are seeking to: 1) preserve margins for high-margin flagship smartphones; 2) increase customer loyalty and expand market share through the development of an independent ecosystem; 3) reduce marketing costs for low-to mid-end models; and 4) diversify profit models to software/content (after focusing primarily on hardware sales to date). In sharp contrast to Chinese smartphone makers, which continued to emphasize the advanced hardware performance of their flagship models at the 2013 MWC, other smartphone makers (SEC, LG Electronics, Nokia, HTC and Sony) focused on the identity and differentiated UX of their new smartphone models.
Demand: Global demand growth will continue into 2013, driven by China
Supply: Top-three Chinese smartphone makers (ZTE, Huawei and Lenovo) to expand their local market share
Competitive landscape: SEC to outshine peers in cost and supply chain competitiveness
Industry paradigm returning to identity and eco-system
SEMCO (009150 KS) remains our top-pick; LGE is our second pick In light of the likely continued expansion in SEC’s global market share in 2013 (+0.4ppt YoY to 23.6%), we reiterate our BUY rating and target price of KRW125,000 for SEMCO, as a top-pick for the sector. We believe that: 1) 34.4% YoY growth in SEC’s smartphone shipments (to 290m units) expected in 2013 should drive up shipments of related components; 2) the expected 89% YoY growth in SEC’s flagship smartphone shipments (to 146m units) should improve SEMCO’s product mix, thus lifting its profitability; and 3) component ASPs are unlikely to decline, despite the recent margin improvement by Japanese component makers. Our second-pick for the sector is LGE, due to: 1) the gradual improvement in the competitiveness of its flagship smartphone models; and 2) the likely recovery in its market shares in both Korea and Latin America in 1H13, backed by its competitive new smartphone lineup and platform-sharing strategy.
Pure smartphone suppliers, such as Apple, HTC and RIM, have traded at an average P/B of 5.2x (3.6x-9.7x) since 2007, when the smartphone market began to expand significantly. These companies have enjoyed a price premium to feature-phone suppliers, such as LGE and Nokia, whose shares have traded at an average P/B of 2.1x (0.6x-6.3x) during the same period. Compared with feature-phone suppliers, pure smartphone suppliers: 1) have been able to achieve faster market share gains, thanks to steep increases in smartphone penetration rates; 2) have maintained stronger profitability; and 3) have seen higher BPS growth rate from 2007 to 2012 (+30.6%, compared with +28.2% for feature-phone vendors).
However, smartphone demand growth began to slow from 1Q12 (when the penetration rate of smartphones in North America exceeded 50%), while the rapid growth of Chinese handset suppliers (ZTE, Huawei and Lenovo) intensified competiton over ASP. Moreover, SEC and Apple confirmed their competitiveness in the smartphone market by increasing their market shares.
In 2013, handset suppliers valuations should remain almost unchanged (in 2012, smartphone suppliers’ average P/B was 2.3x, while that of feature-phone suppliers was 1.2x). Global demand should remain relatively strong, as handset and smartphone shipments should increase by 8.7% YoY and 32.4% YoY in 2013. However, the profitability improvement of second-tiers should remain limited, as: 1) the penetration rate of smartphones (+8.5ppt YoY to 47.4%) should increase at a slower pace; and 2) top-tiers SEC and Apple, as well as Chinese vendors, should continue to expand their shipments.
With their cost competitiveness, China’s top-three smartphone makers (ZTE, Huawei and Lenovo) should rapidly expand their presence in China, as well as emerging markets and thus see a continued increase in shipments in 2013. As such, they should enjoy a valuation premium to peers in 2013.
Figure 2 Smartphone vendors’ (Apple, HTC, RIM) P/B band
Figure 3 Handset vendors’ (Nokia, LGE) P/B band
0
2
4
6
8
10
12
14
16
2007 2008 2009 2010 2011 2012E 2013E
(x)
High
Average
Low
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012E 2013E
(x)
HighAverage
Low
Source: Bloomberg, Mirae Asset Research Source: Bloomberg, Mirae Asset Research
Pure smartphone suppliers have traded within P/B band of 3.6-9.7x since 2007
Valuation premium versus second-tiers should narrow going forward
Handset suppliers’ valuation should remain unchanged in 2013
China’s top-three smartphone makers should achieve market share gains both in China and emerging markets and thus maintain valuation premium vs. peers
We forecast global demand for handsets and smartphones in 2013 to reach 1.89bn units (+8.7% YoY) and 897m units (+32.4% YoY), respectively. We expect China to drive global demand growth in 2013, as demand for handsets and smartphones in China should expand by 21.8% YoY (to 495m units) and 56% YoY (to 270m units), respectively. Notably, China’s contribution to global demand should rise by 4.6ppt YoY to 30.2% in 2013. We see ample upside in demand growth in China, given that: 1) smartphone users’ portion of mobile phone subscribers in China remains relatively low, at 24% (compared with 48% in North America); and 2) the smartphone penetration rate in China is also lower than that of North America (42.6%, versus 65.3%); and 3) the portion of white-box smartphones is high (45.2% in 2012).
Figure 28 Global handset demand (new + replacement) and YoY growth
Figure 29 Smartphone users by country and portion
0
500
1,000
1,500
2,000
2,500
2006 2007 2008 2009 2010 2011 20122013E2014E2015E
(m units)
-5
0
5
10
15
20
25
30
35
(%)
New(LHS) Replacement(LHS) YoY(RHS)
0
50
100
150
200
250
300
China US
AJa
pan
Braz
ilIn
dia UKKo
rea
Indo
nesia
Fran
ce
Germ
any
(m people)
0
10
20
30
40
50
60
70
(%)
Smartphone Portion
Source: Gartner, Mirae Asset Research Source: KPCB Mary Meeker, Mirae Asset Research
Meanwhile, as of end-2012, 3G’s portion of mobile telecom network in Asia (including China) stood at 19.9%, far lower than the 89.1% in North America. Given the sharp expansion of handset demand in North America, buoyed by network upgrades resulting from massive investments in CDMA (2000) and 3G (2007), we believe that China’s smartphone demand growth in 2013 should also be driven by 3G coverage expansion and investments in TD-LTE by China Mobile (66.1% of total mobile subscribers in China, as of end-2012).
Figure 30 China handset demand in 2012 Figure 31 China handset supply market share trend
Feature,57.4%
Highsmartphone,
10.7%
Midsmartphone,
15.3%
Lowsmartphone,
16.6%
Mid-smartphone:CNY1,000~2,000
0
10
20
30
40
50
60
70
80
90
100
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
(%)
Others
Ginoee
TCL
Yulong
Lenovo
HuaweiZTE
HTC
Apple
LGE
SEC
Nokia
Source: Mirae Asset Research Source: Gartner, Mirae Asset Research
Global demand growth will continue to be driven by China in 2013
Capex by China Mobile to drive demand growth in China
We expect demand growth in China in 2013 to be led by demand increases for low-to mid-end smartphones (mid-end: RMB1,000-2,000, low-end: RMB1,000 or below). We forecast demand for mid-end and low-end smartphones in China to jump by 58.5% YoY (to 98.9m units) and 66.8% YoY (112.7m units), respectively. Chinese local smartphone suppliers plan to offer new high-end smartphone models, with specifications comparable to SEC’s Galaxy S series and Apple’s iPhone, for ASPs of RMB2,000 or below, thus stimulating demand for mid-end models. In addition, their aggressive lineup expansion should lower the ASP for low-end smartphones to the levels of feature-phones, thus boosting low-end demand.
Figure 32 China-based makers’ shipments by price Figure 33 China-based makers’ shipment portions by price
0
100
200
300
400
500
600
2011 2012 2013 2014 2015 2016
(m units)
Less than $50 $51-$100 $101-$150 More than $150
0
10
20
30
40
50
60
70
80
90
100
2011 2012 2013 2014 2015 2016
(%)
Less than $50 $51-$100 $101-$150 More than $150
Source: Gartner, Mirae Asset Research Source: Gartner, Mirae Asset Research
Notably, high-end smartphone demand in China should remain solid in 2013, as its high-end demand growth (YoY) should reach 35.6%, outpacing the global market grwoth (32.4% YoY). Likely continued concentration of mobile carriers’ subsidies in high-end smartphone models should keep gross margins for high-end models higher than those of low-to mid-end models.
Figure 34 China handset supply market share in 4Q12 Figure 35 China smartphone supply market share in 4Q12
(%)
SEC, 10.7 ZTE, 5.0
Huawei, 5.5
Lenovo, 7.5
Apple, 4.6Others, 66.6
(%)
Others, 44.1
Lenovo,13.6
Huawei, 9.4
ZTE, 8.2
Apple, 8.7
SEC, 15.9
Source: Gartner, Mirae Asset Research Source: Gartner, Mirae Asset Research
China’s top-three smartphone suppliers (ZTE, Huawei and Lenovo) to eat rapidly into low-to mid-end market share in 2013
High-end smartphone demand in China to remain solid
2. Chinese peers to expand local market share on reinforced competitiveness
Based on developments witnessed at this year’s MWC, we expect China’s top-three smartphone makers, i.e. ZTE, Huawei and Lenovo, to show visible progress in 1H13, as they aim to expand their local market shares. With the three Chinese companies (ZTE, Huawei, and Lenovo) quickly catching up to global peers, in terms of hardware competiveness, existing players are finding it increasingly difficult to differentiate their products through enhancement of hardware features. ZTE’s flagship smartphone, Grand Memo, slated for release in 1Q13, employs Qualcomm Snapdragon 600, the fastest AP on the market, offering a 40% improvement in performance, compared with its predecessor, the Qualcomm S4 Pro. The Grand Memo model also adopts a 5.7”, 1280x720, 288ppi HD display, on par with other display-focused smartphone models, such as LG Electronics’ Optimus G Pro (5.5”, 1920x1080, 400ppi display) and Sony’s Xperia Z (5”, 1920x1080, 441ppi display). Moreover, ZTE’s new model runs on the latest version of the Android platform (4.1.2), demonstrating the company’s advancement, in terms of software competitiveness.
In addition to reinforcing hardware competitiveness, China’s top-three smartphone makers are seeking to cut ASP to improve price competitiveness, backed by lower production costs. ZTE’s Grand S, scheduled for market release in 1Q13, has an estimated bill of materials (BOM) of US$178, 16.7% lower than Galaxy S3’s BOM of US$213.5. In addition, it is forecast to sell for an ASP of US$499.99, US$100 cheaper than Galaxy S3. We do not expect the Chinese companies to see rapid growth in sell-through of their smartphone models within 1H13, given their absence of competitive brand images or differentiation points (setting their products apart from the flagship models of existing companies). However, due to expanded marketing spending, on the back of steady growth in shipments and reduction of materials costs, we believe Chinese smartphone makers will gradually eat into the high-end market shares of other second-tiers from 2H13.
Power management 10.0 Battery 4.5 Mech./electro-mech. 23.0 Camera 18.0 Box contents 3.0
Source: Mirae Asset Research Source: Mirae Asset Research
Buoyed by reinforced hardware/software competitiveness and reduced production costs, the top-three smartphone makers in China (ZTE, Huawei, Lenovo) are set to see visible shipment growth, with new smartphones slated for release in early 2Q12 (through local telecom carriers, i.e. China Mobile, China Unicom and China Telecom). In 1H13, we expect the three Chinese smartphone makers to rapidly expand their shares of the low-to mid-end smartphones and steadily eat into the white-box smartphone market, enhancing the brand image of their flagship models as a result. In 2H13, we expect the three companies to expand their footing aggressively in the US, Latin American and Indian handset markets. Overall, we expect the combined market share of the three companies in China to rise by 3.9ppt YoY to 22.2% in 2013.
Figure 40 Specifications of smartphone line-ups in 1Q13 Company Product Display CPU Memory Storage Battery
Meanwhile, we believe that any adverse impact from Chinese local players’ rapid market share gains in China on Korean smartphone makers should remain limited in 1H13, given that: 1) the portion of low-end models in SEC’s total smartphone shipments to China is low, at mere 5% levels; 2) SEC’s mid-end models should maintain a solid brand premium, despite improved price competitiveness; and 3) Chinese smartphone makers’ new flagship models, which have failed to secure their own identity, are unlikely to eat into the market shares of SEC’s Galaxy series. Chinese players should erode the market shares of peers with relatively low cost competitiveness and brand premiums, while rapidly absorbing demand for white-box smartphones, which represented a hefty 45.2% (-5.2ppt YoY) of global demand, as of end-2012.
LGE should see marginal impact from Chinese players’ market share gains in China in 1H13, in light of its negligible market share in China (0.2% as of end-2012) and the meager portion of China-bound shipments (1.3% in end-2012, down by 4.3ppt YoY). However, LGE could see a slight fall in its market share in 2H13, due to an increase in COGS/sales ratio resulting from ASP declines and a subsequent slowdown in profitability improvement.
Figure 41 Supply portion of China smartphone market by price
0
1020
30
4050
60
70
8090
100
Apple SE
CHT
CRI
MNo
kia
Motoro
laLG
ESo
ny
Huaw
eiZT
E
Leno
vo
Coolp
ad
Xiaom
i
K-To
uch
Gion
eeOPP
OMeiz
uTC
L
Others To
tal
(%)
Low
Mid
High
Source: SEC, LGE. Gartner, Mirae Asset Research
Chinese local players’ rapid market share gains will have a marginal impact on SEC
Adverse impact on LGE should also be limited in 1H13; from 2H13, margin improvement could slow, due to ASP declines
3. SEC to outshine peers in cost and supply chain competitiveness
SEC is set to expand its shipments of the Galaxy S4 from 2Q13, while China’s top-3 smartphone makers should significantly expand their smartphone shipments (within China) 1H13. In addition, Apple plans to launch a successor model to the iPhone in 3Q13, thus leading to fiercer subsidy competition among handset makers. Apple is highly likely to cut the ASP for the iPhone in 2013, in order to expand its market share in emerging markets. ASP declines and subsidy expansion should drive the handset industry’s average margin downwards by 7.1ppt QoQ in 3Q13.
While global smartphone demand is forecast to reach 897m units (+32.4% YoY) in 2013, we expect the combined smartphone shipments by SEC/Apple and Chinese players in 2013 to reach 453m units (+32% YoY) and 284m units (+56% YoY), respectively. This suggests that second-tiers (excluding Chinese players) should see a mere 9.5% YoY increase in shipments (versus the industry average of 32.4% YoY) to 160m units in 2013. Significant shipment growth by Chinese makers in 2013 is highly likely, given their high shipment portions to emerging markets. Going forward, emerging markets (e.g. China and India) should drive global smartphone demand growth, as we forecast smartphone demand in China to climb by 56% YoY (to 270m units) in 2013.
The smartphone industry should suffer margin erosion in 2H13, for the following reasons:
1) The Chinese market should increase its portion of global smartphone demand, while Chinese smartphone makers should expand their global market shares. The sharp growth of Chinese players should lower the smartphone industry’s ASP by 13.6% YoY in 2013, while first-tier smartphone makers should see an increased portion of raw material costs in total costs and a rise in marketing costs.
2) Most second-tier smartphone makers (excluding SEC, Nokia and Chinese companies) strategically focus on the North American market, which is close to saturation point, with a smartphone penetration rate of 67.7% in 2012.
3) Latecomers (Amazon, Facebook, Google, Chinese players) also aim to enter the North American market, while some first-tiers (HTC, Sony and RIM, which has recently seen a downtrend in shipments) pursue shipment growth-backed turnarounds.
4) Given Apple’s firm resolve to expand its market share in emerging markets in 2013, we see a high possibility of the company offering the iPhone to China Mobile at lower prices. ASP declines and subsidy expansion should drive down the handset industry’s average margin by 7.1ppt QoQ in 3Q13, from its 2Q13 high.
Industry-wide profitability to deteriorate in 3Q13
Limited demand growth vs. increased supply and new smartphone lineup expansion
Industry-wide margin erosion expected in 2H13, due to: 1) ASP declines; 2) intensifying competition in North America; and 3) delays in market restructuring
In order to remain competitive in 2013, smartphone vendors should be able to: 1) cut development costs, by having their low-to mid-end models share platforms with flagship models; 2) reduce their bill of materials (BOM) by expanding the portion of in-house production of core parts; and 3) promptly respond to constantly changing market needs by shortening their new-model development cycles. Only those with price competitiveness versus Chinese players will be able to expand their market shares in both emerging and global markets. They will also be able to preserve operating margins, by maintaining both margins and shipments for flagship models at relatively high levels. We forecast SEC’s global market share to edge higher, by 0.4ppt to 23.6%, in 2013 and its 2013E operating margin to exceed the industry average by 3.8ppt. SEC is positioned to: 1) shorten its hardware development cycle, backed by its relatively high portion of in-house production of core components (e.g. AP, DRAM, NAND, display, batteries, MLCC, HDI and camera modules); and 2) further cut the portion of raw material costs, backed by strong financials and strict control of suppliers; and 3) improve its price and hardware competitiveness and thus increase its share of emerging markets.
4. Smartphone industry paradigm returning to identity and ecosystem
At this year’s MWC, we noted that handset suppliers are focusing on building the identities of their new flagship models through UX and killer applications, while seeking to develop an independent ecosystem by diversifying platforms beyond the oligopolistic Android (whose smartphone OS market share stood at 64% in 2012) in 2013. Between 2011 and 2012, competition in the handset industry had focused primarily on developing advanced hardware features for flagship models and upgrading to higher versions of the Android OS. However, following the rapid improvement in flagship smartphone hardware, competition to find differentiation points in hardware temporarily ceased in 2013, with latecomers closing the gap with top tiers, in terms of hardware competitiveness.
Through efforts to establish solid identities, handset makers are seeking to: 1) protect the premium of high-margin flagship smartphones; 2) reinforce customer loyalty and expand market share through the development of an independent ecosystem; 3) reduce marketing costs for low-to mid-end models; and 4) diversify profit structures to software/contents, after focusing primarily on hardware sales to date. In sharp contrast to Chinese smartphone makers, which continued to emphasize the advanced hardware performance of their flagship models at the 2013 MWC, other smartphone makers (SEC, LG Electronics, Nokia, HTC and Sony emphasized the identity and differentiated UX of their new smartphone models.
Figure 55 Smartphone line-up at MWC2013 Vendor Alcatel Sony Huawei HTC ZTE Picture
Name One Touch idol x Xperia Z Ascend P2 One Grand memo Core 1.2GHz Quad core Qualcomm S4 1.5GHz 1.5GHz Quad core Qualcomm 600 1.7Ghz Qualcomm 600 1.7GhzOS Android 4.1.2 Android 4.1.2 Android 4.1.2 Android 4.1 Android 4.1.2
Source: Company data, PhoneArena, Mirae Asset Research
With platforms rising as a key element in competition this year, smartphone makers are likely to expand efforts to diversify smartphone OS. As such, market attention should once again focus on the competitiveness of SEC (relatively less burdened by development costs), Apple and RIM (companies offering proprietary platforms). For Android smartphones, the process of ‘platform porting/optimization/application of UI/main application installation’ accounts for 50-55% of the entire development process and uses up more than half of all R&D costs. In the long term, by adopting an alternative platform, smartphone makers would be able to: 1) reduce R&D expenses; 2) minimize R&D periods; and 3) increase customer loyalty, while differentiating flagship models by building an exclusive ecosystem. However, with the market share of Android OS reaching 66.1% (+19.4% YoY) at end-2012, we expect the platform’s oligopolistic control over the market (which started in 2011) to continue into 2013. Efforts to diversify platforms should drive up the R&D cost burden for second tiers, which struggle from higher fixed cost portions, due to their relatively lower shipment volumes.
Smartphone industry paradigm returning to identity and eco-system
Efforts to develop alternative platforms to drive up R&D costs, raising the cost burden for second tiers with higher fixed cost portions
Efforts to develop alternative platforms to drive up R&D costs, raising the cost burden for second tiers with higher fixed cost portions
Figure 56 Upcoming smartphones using new OS Vendor Samsung ZTE Sony Alcatel Ubuntu Picture
Name Tizen phone Open Xperia E One Touch Fire TBA Core TBA Qualcomm S1 Qualcomm S1 1GHz Qualcomm 1GHz TBA OS Tizen 2.0 Firefox OS Firefox OS Firefox OS Ubuntu
Source: Company data, PhoneArena, Mirae Asset Research
Figure 57 Character comparisons among newest smartphones’ OS Apple: iOS6 Android: Jelly Bean (4.1/4.2) RIM: BlackBerry 10 Microsoft: Windows 8 New map app Improvement of touch screen response BlackBerry Hub New bookmark function Siri, multiple languages support (Korean) Expansion of alarm function BlackBerry keyboard Live tile custom option Integration of Facebook To support multiple languages and keyboards BBM video with screen
share Live app
Streaming share photos Performance improvements both HTML5 and JSP Camera with time shift mode Features for children
Passbook USB audio output/multi-channel audio Blackberry Balance People Hub FaceTime, mobile comm. network support Media function improvement BlackBerry Remember Photo Hub New call function (e.g. Interruption-free mode) Performance improvement of home launcher Sharing made easy
with NFC Office Hub
Simple mail system Adjustment of Project Butter Voice control SkyDrive Improvement of Safari searching environment Chrome as a base browser Super-fast browsing Games Hub
Guided access for handicapped Not supporting Adobe Flash Player Electronic wallet Camera panorama function SELinux Redesigned stores "Daydream" screensaver Additional function for Chinese users Power alarm management Improvement of locked screen To support multiple accounts in tablets Gesture typing Photosphere (panorama) Improvement of Google Now Wireless display (Miracast)
Source: Apple, Google, RIM, Microsoft, Mirae Asset Research
*Samsung Electronics (005930 KS): We expect SEC’s Galaxy Note 8”, unveiled at MWC 2013, to eat into the market shares of the iPad mini and tablet PC second tiers (Amazon and Barnes & Noble) within 1H13. We note that the Galaxy Note 8”: 1) placed emphasis on identity, leveraging on the design similarities with the Galaxy smartphone series (rather than its predecessor, the Galaxy Note 10.1”), as well as the advanced features of its S-Pen stylus feature killer app; and 2) stands to secure market share within the 7-8” category in 1H13, with the new iPad mini model slated for release in end-2Q13. As such, we expect SEC’s tablet PC shipments to grow by 64.2% YoY to 30m units in FY13, driving up the company’s global market share to 20.5% (+6.1ppt YoY) as a result.
Figure 59 Galaxy Note 8.0 vs. iPad mini Galaxy Note 8.0 Versus iPad mini
1.6Ghz Quad AP A5 1GHz
2GB RAM Memory 512MB RAM
8” Display size 7.9”
Android 4.1.2 OS iOS6
4600mAh Battery 4400mAh
211x136x7.95mm Dimensions 200x134.7x7.2mm
338g Weight 312g
1280x800 Resolution 1024x768
189ppi Density 162ppi
5M (1.3M) Main camera (front) 5M (1.2M)
Source: PhoneArena, SEC, Apple, Mirae Asset Research
*LGE (066570 KS): At the Mobile World Congress (MWC), LG Electronics (LGE) unveiled the Optimus F series (entry-level LTE smartphones) and the Optimus L II series (3G smartphone successors to the Optimus L series). The Optimus F-series shares its platform (design, UI and UX) with the Optimus G Pro, unveiled last week. We believe LGE’s efforts to vertically integrate its smartphone lineup will partially reduce marketing and R&D costs and enable the company to compete with SEC’s three major entry-level smartphones, the Galaxy Ace2 (3.8”, 800x480, 768MB DRAM), Galaxy S3 mini (4.0”, 800x480, 1GB DRAM) and Galaxy Grand (5”, 800x480, 1GB DRAM). On a positive note, cumulative sales of the Optimus G Pro (260k units) have recently exceeded those of its predecessor, the Optimus G.
Figure 60 LGE’s new smartphone line-up at MWC2013 Vendor LGE LGE LGE LGE LGE Picture
*HTC (2498 TT): At MWC 2013, HTC revealed its new One flagship smartphone model, scheduled for release in 80-plus markets around the world from March. The new flagship model offers: a new UX focusing on visual and auditory senses; advanced video recording and editing functions; a 4M ultra-pixel camera on the front; and Dolby Surround speakers. HTC’s global smartphone market share stood at 3.2% (-1.8ppt YoY) in 4Q12. We expect the company’s operating margin to remain flat QoQ, at 1% in 1Q13, despite a rise in demand for the One, owing to seasonal weakness and greater spending on R&D and marketing for new models.
*Sony (6758 JP): After revealing its new Xperia Z flagship smartphone at the CES in February 2013, Sony announced plans to release the new model in 60-plus markets around the world within 1Q13, at US$849. The company also plans to release its new tablet PC Xperia Tablet Z within 1Q13. For the new model, Sony focused on emphasizing exquisite designs typical of Japanese products for the set and UI, added waterproof capabilities and reinforced marketing efforts. The company adopted the Bravia Engine for the new model to enhance display functions, and differentiated hardware features by installing an RGB image sensor. We expect Sony’s smartphone sales volume to rise by 4.6% QoQ to 9.1m units in 1Q13, backed by growth in market shares at home and in Europe. The company is likely to meet its targets to sell 34m (+51% YoY) smartphones in FY2012, considering its local market share of 7.5% (-0.1ppt QoQ, fourth largest in terms of share of supply) at 4QFY12. We expect Sony’s shipment growth to have a limited impact on both SEC and LG Electronics, with the two companies’ Japanese market share standing at 6.5% (sixth largest, in terms of share of supply) and a mere 2%, respectively, in 2012 and shipments to the Japanese market accounting for only 1% of SEC’s total smartphone shipments.
Figure 62 Sony's smartphone line-up in 1H13 Vendor Sony Sony Sony Sony Sony Picture
Name Xperia T Xperia TL Xperia E Xperia Z Xperia ZL Core Qualcomm S4 1.5GHz Qualcomm S4 1.5GHz Qualcomm S1 Qualcomm S4 1.5GHz Qualcomm S4 1.5GHz OS Android 4.0 Android 4.0 Android 4.1 Android 4.1.2 Android 4.1.2
*Nokia (NOK US): Nokia unveiled four new low-end smartphone models (the Lumia720, Lumia620, Lumia301 and Lumia105) at Mobile World Congress (MWC) 2013. It plans to launch: 1) the Lumia720 (equipped with 4.3-inch display and 512MB RAM) in China in 1Q13 and then in Europe in 2Q13; 2) the Lumia620 (low-end model embedded with 4-inch display) in Hong Kong and Vietnam in 1Q13 and then in the US in 2Q13; and 3) the Lumia301 and Lumia105 at ultra-low prices (EUR65 and EUR15, respectively). Nokia’s continued expansion of low-end smartphone lineup is attributable to its strategy for increasing its emerging market share. The company accounted for 5.6% of the global smartphone market in 2012 (-12ppt YoY). Nokia saw a turnaround in its handset business in 4Q12, thanks to the rise in its smartphone sales (to 6.6m units, up 5.9ppt QoQ), following the launch of the Lumia920. However, its handset division should find it difficult to maintain positive earnings in 1Q13, without strengthening its price competitiveness against Chinese local brands and improving its currently low compatibility with Android OS (which dominates the mobile OS market).
Figure 63 Nokia's handset line-up in 1H13 Vendor Nokia Nokia Nokia Nokia Nokia Picture
Name Lumia 920 Asha 205 Asha 206 Lumia 620 Lumia 720 Core Qualcomm S4 1.5GHz X X Qualcomm S4 1.0GHz Qualcomm S4 1.0GHz OS Windows 8 Series 40 UI Series 40 UI Windows 8 Windows 8
*Lenovo (992 HK): Lenovo posted a turnaround in its handset business in 3Q12. At MWC 2013, it added a new model (the K900, which was first introduced at CES) to its flagship model lineup. The company has continued to expand its smartphone market share in China (FY12 market share: 12.2%, up 10.1% YoY). It is focused on expanding its market share in China in 1H13 and its global market share in 2H13.
*ZTE (763 HK): ZTE unveiled the 5.7-inch display phablet Grand Memo at MWC 2013, adding to its high-end smartphone lineup (which includes the Grand S and the Nubia Z5, introduced at CES 2013 in January). The company’s market share in China’s handset market rose by 1.8ppt YoY to 5.8% in 2012; in particular, its smartphone market share in China continued to grow to 8.4% in 2012 (+0.6ppt YoY). ZTE plans to launch the three new high-end smartphone models in China in 1Q13, before going global in 2Q13. Backed by increased smartphone shipments, we expect ZTE’s handset business to post a turnaround in 2013.
Name Grand X Grand X In Nubia Z5 Grand S Grand memo Core Nvidia Tegra2 1.2GHz Intel Z2460 1.6GHz Qualcomm S4 1.5GHz Qualcomm S4 1.7GHz Qualcomm 600 1.7GHzOS Android 4.0 Android 4.0 Android 4.1 Android 4.1 Android 4.1.2
*Huawei (002502 CH): Huawei shipped 8.7m smartphone units in 4Q12 (+11% QoQ), the third largest shipments among smartphone makers. The company has focused on improving its brand image, with the launch of new flagship smartphones - the Ascend D2 (5’’ full HD), the Ascend Mate (5.5” full HD) and the Ascend P2 (4.7” 1280x720) - at CES 2013 and MWC 2013. Huawei aims to expand exports of the Ascend P2, following its launch in Europe in 2Q13, while expanding its domestic market share during 1H13. The Ascend P2, which will be available at an ASP of US$525, should help Huawei’s flagship models expand their combined market share in 2H13 (when they should see an additional fall in ASP, due to increased shipments).
5. SEMCO (009150 KS) remains our top-pick, LGE is our second pick
In light of the likely continued expansion in SEC’s global market share in 2013 (+0.4ppt YoY to 23.6%), we reiterate our BUY rating and target price of KRW125,000 for SEMCO. We believe that: 1) the 34.4% YoY growth in SEC’s smartphone shipments (to 290m units) expected in 2013 should drive up shipments of related components; 2) the expected 89% YoY growth in SEC’s flagship smartphone shipments (to 146m units) should improve SEMCO’s product mix, thus lifting its profitability; and 3) component ASPs are unlikely to decline, despite the recent margin improvement by Japanese component makers. SEMCO shares are currently trading at a 2013E P/E of 16.6x and P/B of 1.7x (versus ROE of 10.5%).
We maintain our BUY rating and target price of KRW88,000 for LGE, as: 1) efforts to vertically integrate its smartphone lineup should gradually sharpen competitiveness; 2) the sales outlook for its new flagship smartphone, the Optimus G Pro, remains bright in 1H13; and 3) profitability should improve in 1H13, driven by shipment growth and higher ASP, following a rise in smartphone market share. LGE shares currently trade at FY13E P/E of 12.4x and P/B of 1.0x (versus ROE of 7.8%), while competitors (RIM, HTC and ZTE) are trading at FY13E P/E average of 13.9x and P/B average of 1.6x (versus ROE average of 7.1%).
We maintain our target price of KRW12,500 for SEMCO, as our sector top-pick
Our target price of KRW88,000 maintained for LGE, as our second pick for the sector
Smartphone and tablet PC demand expected to decrease QoQ, due to weak seasonality.
LGE 11,819 12.5 1.0 Smartphone shipments guidance in 1Q13 is 8.3m units (-3.5% QoQ). (066570 KS) Apple 417,477 10.0 2.9 Revenue guidance for 1Q13 is US$41-43bn, GPM 37.5-39.5%. (AAPL US) HTC 7,966 17.5 2.6 Revenue guidance for 1Q13 is NT$50-60bn, GPM 21-23%, OPM 0.5-1.0%. (2498 TT) RIM 6,945 - 0.8(RIMM US)
Continued drag on operating margin from promotional costs for the launch of Blackberry10 in 1Q13.
Google 264,837 17.5 3.1 Reduction in demand, due to weak seasonality. (GOOG US) Pressure from Motorola's operating losses expected to continue. ZTE 5,502 18.0 1.5 Plans to enter Chinese local market with high-end smartphone. (763 HK) Sony 14,693 23.5 0.7 Smartphone shipment guidance for CY1Q13 is 9.1m units (+4.6% QoQ). (6758 JP) Nokia 14,118 62.5 1.3 OPM of -2% expected for handset business. (NOK US)
Source: Company data, Mirae Asset Research Note: Share price data as of 1 March 2013
Figure 77 Tablet PC MS in 2012 Figure 78 Tablet PC MS in 2013
Apple,52.4%
SEC, 14.4%
Others,33.3%
Apple,51.7%
SEC, 20.5%
Others,27.8%
Source: Gartner, Mirae Asset Research Source: Gartner, Mirae Asset Research
Figure 79 7-8” tablet PC line-up Vendor SEC Apple Amazon Google Barnes & Noble Picture
Name Galaxy Note 8 iPad mini Kindle Fire HD Nexus 7 NOOK HD Core 1.6GHz Quad A5 OMAP4460 1.2Ghz Nvidia Tegra3 1.3Ghz TI OMAP4470 1.3Ghz OS Android 4.1.2 iOS6 Android 4.0 Android 4.1 Android 4.0
본 자료는 투자자의 증권투자를 돕기 위하여 당사 고객에 한하여 배포되는 자료로서 어떠한 경우에도 복사되거나 대여될 수 없습니다. 본 조사자료에 수록된 내용은 당사 리서치센터가 신뢰할 만한 자료 및 정보로부터 얻어진 것
이나 당사는 그 정확성이나 완전성을 보장할 수 없습니다. 따라서, 어떠한 경우에도 본 자료는 고객의 증권투자의 결과에 대한 법적 책임소재에 대한 증빙자료로 사용될 수 없습니다. 동 자료는 기관투자가 또는 제3자에게 사전 제
공한 사실이 없습니다. 자료에 게재된 내용들은 본인의 의견을 정확하게 반영하고 있으며, 외부의 부당한 압력이나 간섭 없이 작성되었음을 확인함.
작 성 자: 조진호, 정용제
담당자 보유주식수
종목 담당자 종류 수량 취득가 취득일
1%이상 보유여부
유가증권 종목
계열사 담당자
자사주 종류
REMARK: Korean analyst is only responsible for Korean securities and relevant sectors only.
(009150 KS, BUY, TP: KRW125,000)
(066570 KS, BUY, TP: KRW88,000)
Samsung Electro-Mechanics
LG Electronics
Company Analysis
40See the last page of this report for important disclosures
Korea Research
Company update
Samsung Electro-Mechanics (009150 KS)
Chinese seeking quality parts We maintain our BUY rating and target price of KRW125,000 for Samsung Electro-Mechanics (SEMCO), as we expect: 1) growth in Samsung Electronics’ (SEC’s) smartphone sales to drive up SEMCO’s earnings in 2013; 2) SEMCO’s improved product mix to lift its profitability; 3) limited capacity expansion by Japanese peers in 2013 to lead to balanced supply/demand in the market; and 4) steady profitability of high value-added premium components to drive SEMCO’s earnings growth in 2013. SEMCO shares currently trade at 16.6x FY13E P/E and 1.7x P/B (versus ROE of 10.5%).
Earnings to improve visibly, after bottoming out in 1Q13 We now expect SEMCO to post sales of KRW2tn (+13.5% YoY, -4.4% QoQ) and operating profit of KRW119bn (+11.5% YoY, -18% QoQ) for 1Q13. Earnings should improve visibly, after bottoming out in 1Q13. In 2Q13, we expect: 1) losses from FC-BGA sales to persist, amid sluggish PC demand; 2) the release of TV-related parts to gradually rise, on the release of new TV models; 3) Galaxy S4 sales growth to start in earnest, driving up SEC’s flagship smartphone shipments to 35m units (+25% QoQ); 4) growth in demand for FC-CSP to remain steady, at 4.5% QoQ, on the release of new smartphone models by non-SEC clients; and 5) the LCR division’s operating margin to improve by 1.5ppt QoQ to 9.5%, backed by a rise in the MLCC capacity utilization rate. We thus expect SEMCO to record sales of KRW2.1tn (+12.3% YoY, +8.1% QoQ) and operating profit of KRW171.6bn (+9.9% YoY, +44.2% QoQ) in 2Q13. With 2Q13 earnings momentum remaining intact, we expect SEMCO’s valuation attractiveness to exceed that of peers.
SEMCO to benefit, as smartphone parts become increasingly complex Smartphone parts are likely to represent 55% of FY13E sales (based on FY12 results). SEMCO is set to see its profitability rise, backed by product mix improvement, with smartphone parts becoming increasingly complex and high value-added components accounting for a larger part of total shipments. We note that Chinese smartphone makers are rapidly advancing, in terms of hardware performance, and expect China’s three smartphone makers (ZTE, Huawei and Lenovo) to expand their mid- to high-end smartphone shipments visibly in 2H13. With demand for high value-added parts, such as HDI, MLCC and FC-CSP, forecast to rise by more than 32.4% YoY, but the number of suppliers expected to remain limited (MLCC: Murata, Taiyo Yuden, TDK; FC-CSP: Ibiden, Unimicron, Kinsus; HDI: Ibiden, Unimicron), we believe market supply/demand will remain in balance in 2013, driving up SEMCO’s operating margin by 0.1ppt YoY to 7.5% in FY13 as a result.
MLCC supply/demand balance to lift profitability We maintain our forecast that the MLCC market will see a balance between supply and demand in 2013, and that the decline in SEMCO’s MLCC ASP will stand at the level of 2012 (around 4.9% YoY). We believe SEMCO’s LCR division will post sales of KRW2tn (+5.5% YoY) and operating profit of KRW181.5bn (+11.8% YoY) for FY13. We expect MLCC shipments to grow by 21.7% YoY, as SEC’s and other key clients’ smartphone shipments should increase to 290m units (+34.4% YoY) and 160m units (+21.9% YoY), respectively, in 2013. With the LCR division representing 27.5% of SEMCO’s FY13E earnings, the division’s growth should drive up the entire company’s operating profit in FY13. Meanwhile, we expect capacity expansion by Japanese rivals (Murata: +10% YoY; TDK: Partial expansion for 0402 size; Taiyo Yuden: +5 % YoY) to fall below the sector average of +15% per annum in 2013. Moreover, rivals are unlikely to pursue market share expansion by lowering ASP in 1H13, with their 4Q12 margins (Murata: high single-digit; TDK: continued losses; Taiyo Yuden: low single-digit) lower than that of SEMCO.
Korea / Handsets 5 March 2013 BUY
Target price KRW125,000 Last price (1 Mar 13) KRW95,500
54See the last page of this report for important disclosures
Korea Research
Industry update
LG Electronics (066570 KS) Optimus vertical integration We maintain our BUY rating and target price of KRW88,000 for LG Electronics (LGE), as: 1) efforts to vertically integrate its smartphone lineup should gradually sharpen competitiveness; 2) the sales outlook for its new flagship smartphone, the Optimus G Pro, remains bright in 1H13; and 3) profitability should improve in 1H13, driven by shipment growth and higher ASP, following a rise in smartphone market share. LGE shares currently trade at FY13E P/E of 12.4x and P/B of 1.0x (versus ROE of 7.8%), while competitors (RIM, HTC and ZTE) are trading at FY13E P/E average of 13.9x and P/B average of 1.6x (versus ROE average of 7.1%).
LGE to unveil mid-end Optimus series At the Mobile World Congress (MWC), which kicked off on 25 February, LG Electronics (LGE) unveiled the Optimus F series (entry-level LTE smartphones) and the Optimus L II series (3G smartphones, successors to the Optimus L series). The Optimus F-series shares its platform (design, UI and UX) with the Optimus G Pro, unveiled last week. We believe LGE’s efforts to vertically integrate its smartphone lineup will partially reduce marketing and R&D costs and enable the company to compete with Samsung Electronics’ (SEC) three major entry-level smartphones, the Galaxy Ace2 (3.8”, 800x480, 768MB DRAM), Galaxy S3 mini (4.0”, 800x480, 1GB DRAM) and Galaxy Grand (5”, 800x480, 1GB DRAM).
Success of Optimus G the key to successful vertical integration As shown in the case of the Optimus F-series, LGE has adopted the strategy of shared platforms for its smartphones; this is reminiscent of SEC’s strategy back in 2011-2012, when that company leveraged the identity of its flagship smartphones (the Galaxy S-series) for its entry-level models (the Galaxy Ace2 and Galaxy S3 mini). The previous success of its flagship smartphones enabled SEC to enjoy brisk entry-level smartphone sales during 2011-2012, backed by its platform-sharing strategy. In a similar vein, we believe the success of the Optimus F series will hinge on the success of the Optimus G.
MC division to outperform in 1H13 We expect LGE to report 1Q13 sales of KRW11.9tn (-11.7% QoQ) and operating profit of KRW283.9bn (+164.8% QoQ). We forecast LGE’s smartphone shipments to rise by 9.3% QoQ to 9.4m units, in light of limited supply of new smartphone models by rivals in the key markets of North America, Latin America and Korea (1Q13 has seen the release of Blackberry’s Z10, Sony’s Xperia series and HTC’s M7). As such, the MC division’s operating profit should improve by 7.8% QoQ to KRW60.7bn in 1Q13. For the full-year of 2013, we expect the MC division to report sales of KRW13tn (+29.3% YoY) and operating profit of KRW444bn (+657.7% YoY). Moreover, the division should enjoy a 2.8ppt YoY rise in operating margin to 3.4% in 2013, as increased sales should significantly reduce the portion of fixed costs (marketing costs). On a quarterly basis, MC division’s operating margins should decrease, after peaking at 4.1% in 3Q13, weighed down by continued rises in raw material and R&D costs resulting from the increased sales contribution of flagship smartphones. We also reiterate our previous view that subsidy competition among smartphone makers will further intensify in 3Q13.
Korea / Handsets 5 March 2013 BUY
Target price KRW88,000 Last price (1 Mar 13) KRW78,300
Value of listed holdings 4,861 4,874 Source: Bloomberg, LGE, Mirae Asset Research * FY13E Market P/E: KOSPI of 9.4x, DOW of 12.5x, NIKKEI225 of 21.9x, TWSE of15.0x, HSI of 11.3x
Recommendations By stock (12 months) Buy: A target price + 10% or more above the current price, Hold: Target price within - 10% to +10% of the current price Reduce: A target price of –10% or less below the current price
By industry Overweight: over +10% of the current industry index Neutral: -10% to +10% of the current industry index Underweight: -10% or less than the current industry index
Compliance Notice This report is distributed to our clients only, and none of the report material may be copied or distributed to any other party. While Mirae Asset Securities have taken all reasonable care to ensure its reliability, we do not guarantee that it is accurate or complete. Therefore, Mirae Asset Securities shall not be liable for any result from the use of this report. This report has never been provided to any institutional investor or third party. This report has been prepared without any undue external influence or interference, and accurately reflects the personal views of the analyst on the company herein. [Analyst: Jinho Cho, Yongjei Jeong]
Securities Held by the Analyst
Stock Analyst Type Number of Shares
Purchase Price
Purchase Date
Holdings of share of over 1%
Participation in Issuance of
Securities
Involvement with Affiliates
Treasury Stock Held
REMARK: Korean analyst is responsible for Korean securities and relevant sectors only. Target Price and Recommendation Chart
Hong Kong Compliance Disclosures The views expressed in this report accurately reflect the personal views of the analysts about the subject securities, issuer(s) or new listing applicant(s). Each Hong Kong analyst declares that neither he/she nor his/her associate serves as an officer or has any financial interests in relation to the issuer(s) or new listing applicant(s) reviewed by the analyst. None of the issuer(s) or the new listing applicant(s) reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analysts of Mirae Asset Securities (HK) Limited (“MASHK”). MASHK and/or its employees may participate or invest in financing transactions with the covered issuer(s) and new listing applicant(s), referred to in this research report, perform financial and business services for or solicit investment banking business from such covered issuer(s) and new listing applicant(s), and/or have a proprietary trading position or effect transactions in the securities or other financial instruments and related derivatives of covered issuer(s) or new listing applicant(s) thereon. MASHK confirms that it (i) does not own 1% or more aggregate financial interests of market capitalization in any of the issuer(s) or new listing applicant(s) reviewed; (ii) has no investment banking relationship with the issuer(s) or new listing applicant(s) covered within the preceding 12 months; (iii) does not involve in market making activities in the securities of the covered issuer(s) or new listing applicant(s); or (iv) does not have any Individual employed by or associated with MASHK serving as an officer of any issuer(s) or new listing applicant(s) reviewed. The aforesaid “Individual” means (i) any individual employed by MASHK in accordance with whose directions or instructions the analyst is accustomed or obliged to act; (ii) employed by MASHK who has influence on the subject matter or content, or the timing of distribution, of research report; or (iii) who is responsible for determining the remuneration of the analyst. This disclosure statement and above terms’ interpretations are made and defined pursuant to paragraph 16 of the “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission”. Disclaimers This report is originally prepared by MASHK and/or Mirae Asset Securities Co. Ltd. (“MAS”) for distribution to their accredited professional and institutional investor customers. It is not directed to, or intended for distribution to or use by any person or entity, who is a citizen or resident of or located in any other jurisdiction, where the distribution, publication, availability or use would be contrary to such law or regulation or which would restrict MAS, MASHK or its subsidiaries and affiliates (collectively “MAS Group”) to any registration or licensing requirement within such jurisdictions. It is not permitted to alter, transmit, copy or distribute any materials, contents and copies of this report to any other persons or entity without the prior express written permission of MAS Group. MAS Group owns all property rights of trademarks, service marks and logos used in this report. The information, opinion and material presented in this report are provided for general information purposes only. This document is not and should not be construed as an offer or the solicitation of an offer to sell, buy or subscribe for any investments of securities, financial instruments or related derivatives. MAS Group may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. The contents of this report do not constitute investment advice to any person and such person shall not be treated as a customer of MAS Group by virtue of receiving this report. Information and opinions presented in this report have been obtained or derived from sources believed by MAS Group to be reliable, but MAS Group makes no representation or warranty, express or implied as to their accuracy, fairness or completeness and MAS Group accepts no liability for any direct or consequential loss arising from the use of the material presented in this report unless such liability arises under specific statutes or regulations. This report is not to be relied upon in substitution for the exercise of independent judgment. MAS Group may have other issued reports that are inconsistent with, and reach different conclusions from, the information presented in this report. This report reflects the different assumptions, views and analytical methods of the analysts who prepared them. For the avoidance of doubt, views expressed in this report do not necessarily represent those of MAS Group and may not imply comparable future performance. This report may provide the addresses of, or contain hyperlinks to, various websites. To the extent that this report refers to material outside MAS Group’s own website, MAS Group has not reviewed the linked sites and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to MAS Group own website material) is provided solely for your convenience and information and the content of the linked sites does not in any way form part of this report. Accessing such websites shall be at your own risks. MAS Group may, to the extent permitted by law, participate or invest in financing transactions with the covered issuer(s) or the new listing applicant(s) referred to in this report, perform various services for or solicit business from such covered issuer(s) or new listing applicant(s), have proprietary trading position or effect transactions in the securities or other financial instruments and derivatives of the covered issuer(s) and new listing applicant(s) thereon. MAS Group may have investments less than 1% in securities, financial instruments or derivatives of reviewed issuer(s) and new listing applicant(s) that may trade them in different ways from those discussions in the reports. Employees of MAS Group who were not involved in the preparation of this report may have investments in securities, financial instruments or derivatives of reviewed issuer(s) or the new listing applicant(s) and also may trade in different ways from those discussions in the reports. MAS Group may, to the extent permitted by law, act upon or use the information or opinions presented herein, or the research or analysis on which they are based, before the material is published. MAS Group, its officers or directors and the analysts preparing the report may have relationships with, financial interests in or business relationships with any or all of the covered issuer(s) and new applicant(s) mentioned in this report. As a result of abovementioned matters, you should be aware that MAS Group may have a conflict of interest that could affect the objectivity of MAS Group’s research reports. You should consider the research produced by MAS Group as only a single factor in making your investment decisions. Information, opinions and estimates are provided on an “as if” basis without warranty of any kind and may be changed at any time without prior notice. There can be no assurance that future events or results will be consistent with any such opinion. Nothing in this report constitutes investment, legal, accounting or tax advice nor a representation that any investment or strategy is suitable or appropriate to your individual circumstances. Nothing in this report constitutes a personal recommendation to you. This report has been prepared by the research analyst(s) who are licensed and regulated by the Securities and Futures Commission in Hong Kong or Korea Financial Investment Association in Korea who are not associated persons of any issuers or new listing applicants mentioned in this report. These research analysts are not registered as research analysts with FINRA or the NYSE, but instead have satisfied the registration requirements of Hong Kong or Korean standards. These research analysts may not be associated persons of Mirae Asset Securities (USA) Inc. and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. This report is prepared by MASHK for distribution in Hong Kong; in Korea by the holding company named MAS; in Vietnam by the joint venture company named Mirae Asset Securities (Vietnam) Joint Stock Company; in the United Kingdom by the subsidiary named Mirae Asset Securities (UK) Ltd; in the United States by the subsidiary named Mirae Asset Securities (USA) Inc; and in the People’s Republic of China by the subsidiary named Mirae Asset (Shanghai) Investment Consulting Co., Ltd.. This information may only be issued or passed on to any person in the United Kingdom if that person is of a kind described in Article 19.5 of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001 or otherwise pursuant to exemptions to section 21 of the Financial Services and Market Act 2000. In addition, no person who is an authorised person may issue or pass on this information, or otherwise promote MAS Group, to any person in the United Kingdom other than under the rules of the Financial Services Authority applicable to such authorised persons. This report and any information, material and contents herein are intended for general circulation only and do not take into account the specific investment objectives, financial situation or particular needs or any particular person. Any United States recipient of this report that would like further information regarding any security discussed herein should contact Mirae Asset Securities (USA) Inc. Furthermore, any recipient of this report that would like to effect any transaction in any security discussed herein should contact and place the orders with Mirae Asset Securities (USA) Inc. which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the SEC Act of 19.534) for this report and its dissemination in the United States. If this report is being distributed by a financial institution other than MAS Group, that financial institution should take sole responsibility for its distribution. This kind of report recipients should effect transactions in the securities mentioned in this report or require further information though such financial institution. This report does not constitute investment advice by MAS Group to that kind of report recipients of the distributing financial institution. MAS Group and its
officers, directors and employees do not accept any liability whatsoever for any direct or consequential loss arising from the use of the contents of this report. Investments in general and, derivatives, in particular, involve numerous risks, including, inter alia, market risk, counterparty default risk and liquidity risk. The price of securities may go up as well as down. It may include the possibility of the invested capital loss. The past performance presented is not indicative of future performance. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the value or risks related to the security or financial instrument may be absent. The investment(s) mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from an independent financial adviser regarding the suitability of such investment(s), taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to purchase any of such investment(s). The suitability of any particular investment or strategy whether opined on, or referred to in this report or otherwise will depend on a person’s individual circumstances and objectives and should be confirmed by such person with his advisers independently before adoption or implementation thereof. Copyright January 2012 MAS Group. All rights reserved.