www.wooriwm.com OLED investment to continue expanding; recent correction offers good buying opportunity OLED investment to continue; recent correction offers buying opportunity – Recently, OLED-related shares have corrected sharply due to both the delayed start of operations of Samsung Mobile Display (SMD)’s A2 Phase 3 (P3) line and concerns over SMD’s lower-than-expected A3 line investments in 2012. – However, after likely bottoming in 2012, we believe that investment in the OLED segment will continue to rise until at least 2015 given that SMD is expected to start investing in its: A3 Phase 1 (P1) line from 2H12, its A3 Phase 2 and 3 (P2 and P3) and V1 lines in 2013, and its A4 and V2 lines in 2014. – OLED demand is set to grow rapidly, on: 1) the rising adoption of OLED panels by global IT firms; 2) the use of OLED panels in various applications; and 3) an increase in the display size of mobile devices. The OLED market should grow at a CAGR of 54.0% over 2011~2015 (from US$3.87bn to US$21.43bn). Focus on margin improvement and product development for killer apps – As the industry has achieved its targets of both increasing screen resolution and solving mass production issues, future investment will likely center on improving margins and developing products that can be used in new killer applications. – Via lowering costs, the OLED display market is likely to eat into the LED’s display market. Also, the development of products used in killer apps should aid the entry of OLED into new areas. – We expect cost reductions to come from three key areas: 1) advancements in encapsulation technology; 2) improvements in equipment throughput; and 3) the diversification of materials suppliers. Furthermore, we believe that the industry will focus on developing both flexible and transparent OLED panels which can be used in new killer applications. Top picks: Cheil Industries and Duksan Hi-Metal – Cheil Industries and Duksan Hi-Metal are our top picks in the OLED sector given that they should be the prime beneficiaries of expanding OLED investment. – In addition, we advise paying attention to SFA (as the company should benefit from the increasing adoption of Korean-made OLED equipment) and to AP System and Tera Semicon (as they should benefit from aggressive investments in flexible OLED). Rating/investment indices (Units: Won, %, x) Operating margin P/E P/B ROE Code Rating Target price (12M) Current price 2012E 2013F 2012E 2013F 2012E 2013F 2012E 2013F Cheil Industries (001300.KS) Buy(Initiate) 115,000 91,800 6.2 6.5 16.3 14.6 1.4 1.3 8.8 9.1 DS Hi-Metal (077360.KQ) Buy(Initiate) 33,000 24,800 26.3 30.9 21.5 14.2 4.2 3.3 21.8 25.9 SFA (056190.KQ) - n/a 51,500 13.0 13.0 10.3 7.9 2.3 1.9 25.6 24.9 AP Systems (054620.KQ) - n/a 11,650 11.3 11.8 8.2 6.6 2.4 1.8 29.5 27.9 Tera Semicon (123100.KQ) - n/a 27,600 18.5 17.4 7.4 5.3 3.4 2.3 54.5 45.6 Note: Based on closing price of Apr 25; SFA, AP Systems, Tera Semicon based on consensus Source: Woori I&S Research Center estimates OLED Industry Industry Analysis May 7, 2012 Positive (Initiate) Analyst Julius Kim (Display) 822)768-7462, [email protected]Young Park (Semicon/Display) 822)768-7585, [email protected]
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OLED investment to continue expanding; recent correction offers good buying opportunity
OLED investment to continue; recent correction offers buying opportunity– Recently, OLED-related shares have corrected sharply due to both the delayed start of
operations of Samsung Mobile Display (SMD)’s A2 Phase 3 (P3) line and concerns over SMD’s lower-than-expected A3 line investments in 2012.
– However, after likely bottoming in 2012, we believe that investment in the OLED segment will continue to rise until at least 2015 given that SMD is expected to start investing in its: A3 Phase 1 (P1) line from 2H12, its A3 Phase 2 and 3 (P2 and P3) and V1 lines in 2013, and its A4 and V2 lines in 2014.
– OLED demand is set to grow rapidly, on: 1) the rising adoption of OLED panels by global IT firms; 2) the use of OLED panels in various applications; and 3) an increase in the display size of mobile devices. The OLED market should grow at a CAGR of 54.0% over 2011~2015 (from US$3.87bn to US$21.43bn).
Focus on margin improvement and product development for killer apps – As the industry has achieved its targets of both increasing screen resolution and solving
mass production issues, future investment will likely center on improving margins anddeveloping products that can be used in new killer applications.
– Via lowering costs, the OLED display market is likely to eat into the LED’s display market. Also, the development of products used in killer apps should aid the entry of OLED into new areas.
– We expect cost reductions to come from three key areas: 1) advancements in encapsulation technology; 2) improvements in equipment throughput; and 3) the diversification of materials suppliers. Furthermore, we believe that the industry will focus on developing both flexible and transparent OLED panels which can be used innew killer applications.
Top picks: Cheil Industries and Duksan Hi-Metal – Cheil Industries and Duksan Hi-Metal are our top picks in the OLED sector given that
they should be the prime beneficiaries of expanding OLED investment. – In addition, we advise paying attention to SFA (as the company should benefit from the
increasing adoption of Korean-made OLED equipment) and to AP System and Tera Semicon (as they should benefit from aggressive investments in flexible OLED).
I. Summary ............................................................................................................................. II. OLED Market Outlook .....................................................................................................
1. Demand for small- to mid-sized OLED panels—began surging from 2012 2. Large-sized OLED panels: Demand to gain traction from 2014
III. Future OLED investment.................................................................................................
1. Past trend: Focus on display quality and mass production technology 2. Future trend: Focus on margin improvement and product development for killer apps
IV. Value Chain .......................................................................................................................
1. OLED market outlook 1. Mid- to small-sized OLED panels
We expect SMD to invest in its A4 line after competing investment in its A3 line (over 2013~2014), given that OLED demand is likely to grow at a faster pace than is currently expected.
OLED demand should surge on: 1) the rising use of OLED displays by global IT companies; 2) the adoption of OLED displays in various applications; and 3) an increase in the display size of mobile devices. And, if OLED cost savings accelerate, OLED demand—backed by LCD replacement demand—should rise sharply, outstripping forecasts.
Meanwhile, OLED makers will likely have to make further fab investments in order to both meet rising demand and secure large customers such as Apple.
Of note, in 2014—when SMD’s A3 line capacity expansion is likely completed—SMD’s total OLED capacity should equal 24% of global handset display demand (assumes 80% production yield).
2. Large-sized OLED panels
We believe that demand for large-sized OLED panels will increase from 2014. Accordingly, investment in 8G-related mass production lines is unlikely to surface this year; but, capacity expansions for R&D pilot lines will likely continue through 2H13.
Of note, we estimate that global OLED TV shipments will reach 50,000 units in 2012 and 250,000 units in 2013—assuming production of 1,400 panels/month and 7,000 panels /month, respectively, SMD and LG Display (LGD)’s 8G pilot lines should be able to meet this expected demand (based on 50% production yield).
2. OLED technology development outlook Has taken three years for OLED to secure its position as next generation display
Over the past three years, the appropriateness of OLED—as the next-generation display—has been tried and tested. Based on the OLED industry’s efforts to improve display quality and solve mass production issues, OLED has emerged as a promising alternative to LCD.
Since the release of the first OLED smartphone, the ‘Omnia II’, the display quality of OLED has improved substantially (of note, the ‘Galaxy Note’ is the most recent OLED smartphone); in addition, mass production technology has also improved (it has advanced from 4G (panel cut into two pieces) to 5.5G (cut into four pieces)). Of note, many Korean companies have emerged as strong players in the domestic OLED equipment and materials markets.
Key investment focus for OLED industry: cost-reductions and developing products for killer applications
Going forward, as the industry has achieved its targets of both increasing screen resolution and solving mass production issues, investment within the OLED industry will likely shift to center on improving margins and developing products that can be used in new killer applications. As the price of OLED panels declines, in line with lower production costs, OLED should gradually replace LCD, and new flexible and transparent panels, which will likely be the basis for killer applications, should open up new markets.
Cost reductions will likely come from three key areas: 1) advancements in encapsulation technology; 2) improved equipment throughput; and 3) diversification of materials suppliers. The industry is expected to focus on developing both flexible and transparent OLED panels in order to in develop products than can be used in killer applications.
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3. Investment points Sharp falls in share prices of OLED-related companies
Recently, shares in OLED-related companies have fallen due to: 1) postponed operations of SMD’s A2 P3 line; 2) delayed A3 line investment; and 3) concerns over slowing investment growth (after the A3 line has been completed) in line with the grim investment outlook for the OLED segment.
OLED plays’ growth to continue over long term
However, we believe that OLED equipment and materials plays will continue to expand over the longer term as OLED panel demand growth will likely exceed expectations, boosting facility investment.
We forecast that existing domestic OLED equipment and materials producers will benefit from increased OLED investment given that: 1) they possess technological prowess; 2) they are jointly developing next generation technology (with SMD and LGD); and 3) OLED panel makers are highly likely to maintain their ties with existing companies to prevent technology leaks.
In addition, we believe that the OLED growth story will move to flexible OLED panels as the relevant technology progresses. Specifically, producing flexible OLED panels is attractive for panel makers as it allows them to reduce costs; moreover, flexible OLED panels will likely be used in future killer applications.
Amid the entry of new comers into the OLED segment, investment in flexible OLED should accelerate thanks to its high margins and strong growth potential.
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4. Top Picks We recommend Cheil Industries and Duksan Hi-Metal as our top picks in the OLED sector
given that they should be the prime beneficiaries of expanding OLED investment. In addition, we advise paying attention to SFA (as it should benefit from the likely increasing adoption of Korean-made OLED equipment) and to AP System and Tera Semicon (as they should benefit from aggressive investments in flexible OLED).
Cheil Industries Cheil Industries’s market share is forecasted to increase rapidly until at least the end of 2012 given the positive test results for its electron transporting layer (ETL; an OLED material). Of note, the company has started developing and producing other OLED materials such as hole transporting layer (HTL) and donor film. Backed by the Samsung Group’s support for core materials makers, we expect Cheil Industries to become a global materials maker.
Duksan Hi-Metal We believe that Duksan Hi-Metal’s growth story is still valid as the OLED industry will likely continue expanding for some time to come. Increased demand for OLED materials produced by Duksan Hi-Metal—upon the start-up of operations of SMD’s A3 line—should alleviate fears that its market share may fall due to the entry of its peers into the HTL segment. As for its customers, they are unlikely to utilize more than three vendors due to technology leak concerns. Thus, the firm should continue to grow alongside OLED industry expansion.
SFA OLED equipment order momentum at SFA is expected to pick up in 2012 thank to SMD’s A3 line investments. SMD’s capacity expansions (to 88,000 panels/month at its A2 line and to 144,000 panels/month at its A3 line) are acticipated, and additional orders are highly likely, including for both front-end and logistics equipment. In addition, small mask scanning (SMS) deposition equipment (development underway for use on 8G lines) is likely to be installed on mass production lines.
AP Systems Sales growth of laser lift off (LLO) and LITI equipment at AP Systems should draw attention to SMD’s plans to mass produce flexible and high resolution OLED panels. SMD’s mass production line (8G) is highly likely to adopt advanced excimer laser annealing (ELA) and encapsulation equipment (glass, metal), benefiting AP systems.
Tera Semicon Tera Semicon is both a polyimide curing and heat-related equipment maker, and should benefit from strengthening order momentum in the industry. In particular, the OLED and oxide TFT investment trends are forecasted to allow the company to enjoy the most robust growth and earnings momentum among its peers.
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II. OLED market outlook High supply growth to continue
Compared to DisplaySearch’s forecast, we present a more optimistic outlook towards the OLED market.
In 2012, the OLED market is expected to post weaker-than-expected growth, given SMD’s: 1) soft mass production yields (at its A2 P3 line); and 2) likely sluggish investment in its A3 P1 line. However, strong growth in the market is expected to be observed from 2013 on: 1) the starting-up of operations of both SMD’s A3 (144,000 panels/month) and V1 lines; 2) full-fledged OLED investments by late comers; and 3) investment in SMD’s A4 line. Of note, investment in SMD’s A4 line will likely begin in 2H14.
OLED market outlook (shipment area base)
Woori I&S’s outlook on OLED market is more positive than
DisplaySearch’s view; Woori I&S assumes A3 line will reach full
capacity (144,000 panel/month) in 2013
0
2,000
4,000
6,000
8,000
10,000
12,000
'08 '09 '10 '11 '12E '13F '14F
DisplaySearch
Woori Ex pected
(000m2)
Source: DisplaySearch, Woori I&S Research Center estimates
DisplaySearch 133.0 219.1 360.7 881.1 2,592.9 4,848.4 8,133.9 Source: DisplaySearch, Woori I&S Research Center estimates
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OLED capacity by manufacturer
0
2,000
4,000
6,000
8,000
10,000
12,000
'08 '09 '10 '11 '12E '13F '14F
SMD Others
(000m2)
Source: Woori I&S Research Center estimates
OLED capacity by generation
0
2,000
4,000
6,000
8,000
10,000
12,000
'08 '09 '10 '11 '12E '13F '14F
3G 4G 5G 8G
(000m2)
Source: Woori I&S Research Center estimates
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1. Demand for small- to mid-sized OLED panels—began surging from 2012 Small- to mid-sized OLED panel demand—began surging from 2012
Demand for small- to mid-sized OLED panels likely began surging from 2012, as: 1) an increasing number of global IT companies will likely adopt OLED as their main display type; 2) OLED panels are expected to be applied to a more diverse range of products; and 3) the size of the display for mobile devices is rising.
1) OLED panels to be increasingly adopted by global IT firms on improved quality and easing supply concerns
Global IT companies, excluding SEC, have so far shunned OLED due to both its inferior resolution (compared to LTPS LCD) and panel supply shortages. For instance, when HTC first rolled out the ‘Nexus One’ in 2010, the phone was installed with an OLED display; however, the company switched to an LCD display due to an OLED panel shortage.
From 2012, we expect that an increasing number of global IT companies will adopt OLED panels for their IT products given that OLED technology has improved rapidly and that the starting-up of OLED operations at the SMD’s A2 and A3 lines should resolve supply shortage concerns. We note that Nokia and Motorola’s new flagship models are embedded with an OLED panel; moreover, we expect future smartphones to come equipped with an OLED display as standard.
2) Scope of OLED applications to grow
Meanwhile, OLED panels will likely be installed in a variety of new segments, including media-tablet PCs (of note, SEC’s recently-launched the ‘Galaxy Tab 7.7’—a media-tablet PC that possesses an OLED display). Given the strengths of OLED panels, especially related to playing media files (lighter, thinner, simpler, and smaller; low-energy usage), we believe that OLED panels will become widely installed in future media-tablet PCs.
3) Size of displays for mobile devices to increase
Meanwhile, the size of displays for mobile devices is increasing, a trend that deserves attention. SEC’s Galaxy Note, a recent hit product, has a 5.3-inch display—it is about 50% larger than the Galaxy S display. Noting that SMD’s 5.5G fab has the capacity to produce 350 Galaxy S-sized display panels per sheet or 210 Galaxy Note-sized display panels (assuming 100% production yield), we believe that the increasing size of mobile displays will contribute to boosting demand for small- and mid-sized OLED panels.
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Size of OLED market, by device
0
5,000
10,000
15,000
20,000
25,000
'09 '10 '11 '12E '13F '14F '15F
Others
OLED TV
Mobile Phone
Mobile PC
(US$mn)
Source: DisplaySearch
Number of devices that use OLED panels Number of handset makers using OLED displays for their handsets
0
5
10
15
20
25
30
35
'08 '09 '10 '11 1Q12E
SEC Others
(Number of models)
2008 2010 20112009 2012SECNokia
SECNokia
HP
SECNokia
HPHTC
ToshibaHP
SECNokia
HPHTC
ToshibaHPZTELGDellAsus
SECNokia
HPHTC
ToshibaHPZTELGDellAsus
PentechParasonic
HuaweiRIMSony
Source: Woori I&S Research Center Source: Woori I&S Research Center
Smartphone panel shipments—larger panels to boost OLED demand
0
20
40
60
80
100
120
1Q10 3Q10 1Q11 3Q11 1Q12E 3Q12F 1Q13F 3Q13F
>4.5''
4.3~4.5''
4.0~4.3''
<4''
(mn units)
Source: DisplaySearch, Woori I&S Research Center
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Additional capacity required—SMD’s investments in small- to mid-sized OLED to continue
In our view, SMD will start investing in its A4 line, alongside investment in its A3 line, over 2013 and 2014 in order to cope with the expected demand surge for small-and mid-sized OLED panels. SMD likely needs to secure additional capacity in order to not only meet growing demand from the smartphone and media-tablet PC market, but also to induce major clients, including Apple, to adopt OLED panels.
Of note, SMD’s capacity should satisfy 24% of the global handset display demand in 2014 (assuming 80% yield), equivalent to 260mn 4.3-inch smartphone display panels and 67mn 9.7-inch media-tablet PC display panels.
Total (max) 1,006.9 617.8 164.4 80% production yield 805.5 494.2 131.5 70% production yield 704.8 432.4 115.0 Source: Woori I&S Research Center
Handset demand and OLED capacity
0
500
1,000
1,500
2,000
2,500
3,000
3,500
'11 '12E '13F '14F '15F '16F
MobilePhoneSmartPhoneCapacity capable of 4.3-inch display production (production yield assumed at 80% ) Capacity capable of 4.3-inch display production (production yield assumed at 100% )
A+A2+A3
A1+A2
(mn units)
Source: IDC, Woori I&S Research Center estimates
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Media-tablet PC demand and OLED capacity
020406080
100120140160180
'11 '12E '13F '14F '15F
iPadOthersCapacity capable of 9.7-inch display production (production yield assumed at 80% )Capacity capable of 9.7-inch display production (production yield assumed at 100% )
A1+A2+A3
A1+A2
(mn units)
Source: IDC, Woori I&S Research Center estimates
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2. Large-sized OLED panels: Demand to gain traction from 2014 Demand for large-sized OLED panels to grow from 2015
We predict that demand for large-sized OLED panels will begin to rise from 2014. We also hold a more conservative view, than consensus, towards the OLED TV market.
Both SEC and LGD plan to roll out 55-inch OLED TVs in 2012. However, we hold a rather conservative opinion towards OLED TV sales—we forecast 2012 shipments will reach 50,000 units and 2013 shipments will come to 250,000 units—due to the hefty price tag (W9~10mn/TV) and lack of a ‘killer’ application.
Tipping point to be reached when OLED TV price falls below W3mn/unit
Given the history of LED and LCD TVs, we believe that the OLED TV market will reach tipping point when the price tag falls below W3mn/unit. Considering the present rate of OLED development, we believe this will happen in 2014.
Killer application for OLED TV: 3D
When purchasing a new TV, consumers consider not only the price but also whether it possesses a killer application. Woori I&S believes that 3D will be the killer application for OLED TV. In detail, OLED panels possess a number of attributes that make them ideal for rendering 3D, they have both a much faster response rate and superior contrast range (vs LCD displays). We project that OLED TV sales will gain traction from 2014, when terrestrial broadcasting channels are likely to begin providing programs in 3D (without the need to have a set-top box).
OLED TV shipments and ASPs OLED TV shipments and ASPs
0
1
2
3
4
5
6
'12E '13F '14F '15F
0
2,000
4,000
6,000
8,000
10,000
Shipment (LHS)
ASP (RHS)
(mn units) (USD)
0
20
40
60
80
100
120
140
'10 '11 '12E '13F '14F '15F
0
1
2
3
4
5
Other TVs (LHS)OLED TV (LHS)OLED TV M/S (RHS)
(mn units) (%)
Source: DisplaySearch, Woori I&S Research Center Source: DisplaySearch, Woori I&S Research Center
2012E 2013F 2014F 2015FOLED TV shipments 50 250 2,300 5,000
ASP 9,400 6,986 2,872 1,631Source: Woori I&S Research Center estimates
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Pilot lines able to meet OLED TV demand until end-2013
Based on Woori I&S’s forecasts for 2012 and 2013 OLED TV demand (50,000 units in 2012 and 250,000 in 2013), the following conditions will be needed in order to meet anticipated large-sized OLED display demand: monthly capacity of 1,400/sheets and 7,000/sheets (at 8G lines; 50% production yield) in 2012 and 2013, respectively. And, we believe that SMD and LGD’s pilot lines will be sufficient to meet expected demand in both 2012 and in 2013.
Investment in 8G lines to begin from 1H13
Accordingly, aggressive investment in 8G lines appears unnecessary in 2012. We project that SMD and LGD will focus on expanding their pilot lines for R&D purposes in 2012 and that they will construct mass production lines from 1H13 (after accumulating extensive technological know-how).
OLED TV demand and capacity (55-inch)
V1 pilot line to meet early demand, but full-fledged investment required
from 2013
0
1,000
2,000
3,000
4,000
5,000
6,000
'11 '12E '13F '14F '15F
SMD V2 Capa
SMD V1 Capa
SMD V1 Pilot Capa
OLED TV Demand
(000)
Source: Woori I&S Research Center estimates
Production line capacity by AMOLED company (Unit: 1,000m2)
Manufacturer Factory MG Size OLED gen. Cut Equip
Max MP InstallMass-prod.
ramp up2008 2009 2010 2011 2012 2013 2014
LGD LGD M1 1 8 2 4 Pilot Jul ‘11 May ‘12 0 0 0 0 132 264 264 SMD SMD V1 1 8 1 30 MP Jan ‘13 Aug ‘13 0 0 0 0 0 495 1980 SMD SMD V1 Pilot 1 8 6 6 Pilot Aug ‘11 Apr ‘12 0 0 0 0 121 385 396 SMD SMD V2 1 8 1 30 MP Jan ‘14 Aug ‘14 0 0 0 0 0 0 495
Source: DisplaySearch, Woori I&S Research Center estimates
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III. Future OLED investment
1. Past trend: Focus on display quality and mass production technology Taken three years for OLED to secure its position as next generation display
In order to forecast future OLED investment trends, we reviewed the OLED growth story.
For the past three years, the OLED industry has focused on securing mass production technology and on competing head-to-head with LCD panels (specifically regarding display quality). In 2009, the outlook for the OLED segment was quite pessimistic, even amid SEC carrying out an aggressive marketing campaign for AMOLED alongside the release of its ‘Omnia II’. For consumers, OLED appeared to be inferior to LCD, and massive investment in OLED was burdensome for panel makers. All in all, it took three years before OLED was viewed—by consensus—as the next generation display type.
Display quality—in terms of size and resolution—improves
Over the past three years, the display quality of OLED has improved rapidly (in terms of size, pixel per inch (ppi), and pixel composition). Specifically, the size of OLED panels for cell phones has increased from to 3.7-inch to 5.3-inch, the ppi has risen from 167 to more than 280, and the display composition has improved (from pentile to RGB stripe). Improved quality can be seen by comparing the recently released ‘Lumia900’ (Nokia) with the ‘Lumia 800’ (RGB stripe vs pentile), and comparing the Galaxy Note with the ‘iPhone 4S’ (OLED display vs LCD display).
Mass production technology
Mass production technology has also improved rapidly, highlighted by the progress made in organic material deposition technology. In 2009, deposition was achieved by cutting 4G sheets into two pieces. Along with steady advances in technology, in 2010, 5.5G sheets were cut into four pieces; furthermore, deposition in 1H13 will likely be done without the need to cut.
OLED capacity has also increased rapidly, backed by advances in mass production technology and improving yields. SMD invested in its A1 P3 line in 2009, its A2 P1 and P2 lines in 2010, and its A2 P3 line in 2011, raising capacity by a factor of 3.2 (from 208.7km2 in 2009 to 881.1km2 in 2011).
Localization of OLED equipment and materials
Meanwhile, we believe that the localization of OLED equipment and materials also merits attention. While SMD’s A1 line was constructed using imported equipment, localization is rapidly underway, including for materials and encapsulation equipment for the A2 line and organic material deposition equipment for the A3 line. Of note, organic material deposition used to be a major technical issue for OLED panel makers, and it limited increases in OLED panel size. As for organic materials, while the import portion of EML (emissive layer (red, green, blue)) remains lofty, localization of key raw materials HTL and ETL—account for the largest portion of organic material demand (from OLED panel makers)—has been completed. Of note, OLED localization is taking place at a faster rate than in other IT segments.
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LCD VS AMOLED: OLED resolution improving quickly (PPI)
OLED capable of realizing 300ppi resolution (or above) thanks to LITI;
competition over quality of display has become meaningless
0
50
100
150
200
250
300
350
400
'09 '10 '11 '12E
LCD
AMOLED( PPI)
Launch of iPhone 4
Pentile produciton due totechnical difficulties
High resoluiton onLITI process
350ppi and above notnecessary
Source: Woori I&S Research Center estimates
OLED capacity rising (by shipment area) on advances in mass production technology
OLED capacity rises on SMD’s A1 and A2 line investments
0
200
400
600
800
1,000
'08 '09 '10 '11
Others
SMD A2
SMD A1
(000m2)
Source: DisplaySearch
OLED Smartphone (SEC)
Model Omnia 2 Galaxy S Galaxy S2 Galaxy Note Galaxy S3 Display Size (inch) 3.7’’ 4.0’’ 4.3’’ 5.3’’ 4.8’’ Resolution (dot) WVGA (400X800) WVGA WVGA WXGA (1280X800) SXGA (1280X1024) Type Pentile Pentile RGB Pentile Pentile PPI (RGB converted) 252 (167) 233 (155) 217 285 (190) 280+ Release Oct 2009 Mar 2010 Jan 2011 Aug 2011 May 2012 Source: Industry data, Woori I&S Research Center
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OLED of Lumia 800 (Pentile) OLED of Lumia 900 (RGB stripe)
Source: The Verge.com, Nokia Source: The Verge.com, Nokia
Pentile: large pixel effective for mass production RGB Stripe: clear display quality
Source: Woori I&S Research Center i Source: Woori I&S Research Center
2. Focus on margin improvement and product development for killer apps Focus on cost reductions and developing products that can be used in killer applications
We expect the OLED industry to shift its focus to: 1) reducing costs; and 2) developing products that can be used in killer applications. Cost reductions should facilitate expansion of the OLED industry, eroding the LCD market share. Specifically, product development of flexible and transparent OLED panels is expected to lead to new killers applications, carving out new markets.
We believe that the focus of the industry will be quite different from that seen in the past. As advances in deposition technology should end the debate over ppi, we expect the OLED industry to begin focusing on other strengths of OLED.
OLED technology trend
20132009 2011 20122010 2014
Display quality competition with LCD
Mass production technology secured
Cost reduction
Killer Application secured
Source: Woori I&S Research Center
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(1) Cost reductions Need for manufacturing cost reductions
As the resolution of OLED panels is now virtually identical to the resolution of LCD panels, OLED makers are expected to focus on reducing costs. Cost reductions are deemed as being critical to successful competition in the display industry, and should enhance margins and market share (via ASP cuts), eroding the LCD panel market share.
Cost reductions are forecasted to come from three key areas: 1) advancements in encapsulation technology; 2) improved equipment throughput; and 3) diversification of materials suppliers.
Handset panel ASP: Price premium of OLED panels vs LCD panels falls, eroding LCD panel market share
Portion of handsets (based on volume) that have OLED displays Portion of handsets (based on amount) that have OLED
displays
0
5
10
15
20
25
30
1Q09 3Q09 1Q10 3Q10 1Q11 3Q11
0
2
4
6
8
10Shipment volume basis (LHS)
M/S (RHS)
(mn units) (%)
0
200
400
600
800
1,000
1Q09 3Q09 1Q10 3Q10 1Q11 3Q11
0
5
10
15
20
25Shipment value basis (LHS)
M/S (RHS)
(US$mn) (%)
Source: DisplaySearch Source: DisplaySearch
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1) Focus on encapsulation for cost reduction
As OLED panels are sensitive to moisture and air, encapsulation is necessary. When glass is replaced with other materials, costs can be reduced.
Glass accounts for a substantial portion of display production costs; as such, the development of an alternative material should lead to a decline in manufacturing costs. Thus, glass demand should fall over the mid- to long-term, putting pressure on glass makers to reduce ASPs.
Technology to differ by panel size
Encapsulation technology used for OLED panels will likely differ by application. While thin-film encapsulation technology is expected to be used for small and mid-sized panels (front-lit), a range of encapsulation materials (including metal) are forecasted to be utilized for back-lit large-sized panels. As a result, the use of glass as an encapsulation material should decrease going forwards.
Thin-film encapsulation for small- to mid-sized panels
Mass production using thin-film encapsulation is expected to begin in the near future for small- to mid-sized panels (at SMD’s A2 P3 line). However, mass production of metal encapsulation (for larger-sized panels) will likely take a while longer to emerge due to its weak adhesive power.
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OLED Industry www.wooriwm.com
Operating margin gap between glass manufacturers and panel makers 42W LED TV cost analysis—glass cost portion high
-20%-10%
0%10%20%30%40%50%60%70%
`08 `09 `10 `11
LGD AUO SEC
SCP AGC NEG
0
10
20
30
40
50
Glas
s CF
Crys
tal
Pola
rizer
BLU
Drive
r IC
Chem
ical
Othe
rs
(US$)
Source: Industry data Source: Witsview, Woori I&S Research Center
Glass as percent of LED TV cost Glass as percent of OLED panel cost
Glass22.4%
Others77.6%
15.625.9
0
20
40
60
80
100
55'' TV 4'' Handset
Glass Target and Others Organic Material Chemical(%)
Source: Witsview, Woori I&S Research Center Source: Witsview, Woori I&S Research Center
Front lit—applied to smaller panels (handset, tablet PC) Back lit—applied to large panels (TV)
Source: Woori I&S Research Center Source: Woori I&S Research Center
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OLED Industry www.wooriwm.com
2) Equipment throughput improving
OLED panel manufacturing costs are set to decline on improving equipment throughput as efficiency should rise on debottlenecking. Currently, a technical bottleneck exists at both the poly-si TFT process (panel cut into two pieces due to limited laser beam output) and the organic chemical vapor deposition process (panel cut into four pieces due to mask sagging under the force of gravity). Improved throughput should result in debottlenecking at these stages, raising mass production efficiency and cutting costs.
Rising throughput to benefit equipment makers
Despite the prospect of improved throughput negatively impacting equipment makers—given the possible reduction in equipment demand—we believe that improved throughput will benefit them.
OLED panel makers to maintain status quo with suppliers due technology leak concerns
Throughput improvement can come from either calibrating the line or from developing new equipment. Given the absence of standardized production in the OLED industry, OLED panel makers face the possibility of a technology leaks. Thus, they are highly likely to continue working with their existing suppliers (equipment and materials makers).
Equipment makers—potential to secure technology and experience mass production environment
Domestic OLED equipment makers currently lag behind their global peers in terms of technology. However, if SMD or LGD decide to work with equipment makers, equipment makers will likely acquire additional technological know-how, facilitating their evolution into becoming global players (if domestic OLED production technology becomes the industry standard—as expected).
Material/equipment-related strategic alliances, by panel maker
Company Materials/equipment makers Date Remark
Materials Jun 2009 Formed strategic alliance with Idemitsu Kosan (Japan) related to OLED technology development LG Display
Materials Dec 2009 LG’s Global OLED Technology acquired Kodak’s OLED business and patent license (Idemitsu Kosan acquired 33% stake in Jun 2010)
Materials Jan 2001 Partnership between Samsung SDI + NEC (to develop and produce small-sized OLED panels)Equipment Dec 2010 Invested W29.4bn in SNU (rights offering: W14.2bn, acquired W15.2bn in convertible bonds) Equipment Feb 2011 Invested in AP System’s convertible bonds (W27.6bn) Materials Jul 2011 Signed contract to establish joint venture (plastic PI film) with Ube Industries (Japan) Materials Aug 2011 Partnership with SFC (subsidiary of Hodogaya Chemical, OLED maker; Japan) Materials Aug 2011 Formed a patent and technology alliance with UDC (OLED maker)
SMD
Equipment Feb 2012 W29.5bn investment in convertible bonds of Tera Semicon Samsung Venture
Investment Materials Sep 2011 Invested in NOVALED (OLED maker)
SEC Equipment May 2010 Invested in SFA (911,000 shares) Source: LG Business Insights, News, Woori I&S Research Center
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OLED Industry www.wooriwm.com
3) Cost savings via diversifying materials suppliers
Diversification of materials suppliers should help save costs for OLED panel makers. For example, Duksan Hi-Metal and LG Chem used have a duopoly in the supply of HTL and ETL to SMD. However, since 2H11, CSElsolar and Cheil Industries have also been supplying the materials to SMD, likely intensifying competition between the materials makers. Moreover, EML—a material whose import portion is high—is now being locally produced, helping panel makers save costs.
Concerns over stagnating growth of OLED materials market
Thus, concern has arisen over downward pricing pressure on the materials market, which may undermine growth in the segment. Of note, SMD has a number of OLED materials patents, which it allows its materials suppliers to use; thus, the company possesses an upper hand in the materials market.
Focus on OLED industry growth rather than on lower market share
We advise focusing more on the longer-term growth potential of the OLED market rather than on lower organic material ASP concerns, as: 1) demand for organic materials should surge—OLED panels are set to become increasingly adopted for not only high-end smartphones but for TVs as well; and 2) panel makers will likely procure materials from only two or three vendors out of technology leak fears (thus, a vendor should carry on supplying 20~40% of the OLED materials needs of the OLED panel maker that it currently services).
OLED materials—market outlook
0
100
200
300
400
500
600
'10 '11 '12E '13F '14F
ETL
EML
HTL
(US$mn)
Source: Woori I&S Research Center estimates
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OLED Industry www.wooriwm.com
(2) Developing OLED products for use in killer applications
Flexible and transparent OLED panels—products to be used in killer applications
Development within the OLED industry will likely focus on products (including flexible and transparent OLED panels) that can be used in killer applications, given that hybrid patterning system (HPS; 400ppi is expected to be reached in the near future) is forecasted to be used on SMD’s A2 P3 line. In addition, with display panels becoming larger, we believe that competition over resolution with LCD display panels has become meaningless (the larger the display becomes, the lower the resolution needed). Thus, OLED makers will likely focus on developing products for use in killer applications, helping create new markets.
1) Investment in flexible OLED to accelerate
We believe that panel makers will accelerate investing in flexible OLED, as: 1) it should help them reduce costs (no glass is used); 2) it is lighter and more shock-resistant than conventional display panels (should help make smart devices lighter and thinner); and 3) new markets can likely be created.
In fact, SMD is set to begin mass producing flexible OLED panels in 2H12 via its A2 P3 line, while LGD—which is currently focusing on LTPS LCD in the smaller panel market—is likely to continue developing 4G flexible OLED technology.
Key technologies for flexible OLED panel: flexible TFT substrate and thin-film encapsulation
Key technologies required to produce flexible OLED include flexible TFT substrate and thin-film encapsulation. The manufacturing process includes: 1) the deposition of polyimide on glass; 2) the creation of TFT and organic layers; 3) the deposition of organic and inorganic layers (and their encapsulation); and 4) the separation of glass and polyimide.
Some expectations exist in the market that flexible OLED panels will be used for the Galaxy S3. But, we believe that this is unlikely given the rollout schedule for flexible panels at the A2 P3 line and the launch date of the Galaxy S3 (as well as lack of capacity and low yields).
Characteristics of flexible OLED panels Thin-film packaging process: deposition of organic and inorganic layers
Costreduction
Thin, light
Design Free
UnbreakbleFlexibleOLED
Source: Industry data, Woori I&S Research Center Source: Industry data
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OLED Industry www.wooriwm.com
2) Transparent OLED panels
OLED panels that emit light on both sides—so do not need BLU—are likely to be used for transparent displays. Transparent OLED panels will likely be adopted in a variety of products.
However, we forecast that its will take a while longer before transparent OLED panels are ready to be mass produced as a number of technologies still need to be advanced, including the transparency of TFT and electrode layers. As for TFT, a-si and poly-si have to be substituted as they are not transparent, while electrode layers will need to be replaced or made thinner as they are made from metal.
Therefore, we are of the opinion that it is necessary for the OLED industry to develop materials such as oxide, organic (materials), nanowire (for TFTs), and graphene and CNT (for transparent electrodes).
OLED lighting structure suitable for transparent display Transparent OLED notebook
1. Equipment makers Focus on mid- to long-term growth story of domestic OLED equipment makers
Domestic OLED equipment makers’ growth story will likely remain valid over the mid- to long-term, given that: 1) SMD and LGD are forecasted to carry out aggressive capex; 2) domestic equipment makers—which possess a proven track record—should beat overseas new entrants (given their lack of mass production experience); and 3) order flows are likely to increase in line with SMD’s investment in its 5.5G A3 line in 2013 and 8G V1 line in 2014.
OLED process: 1)TFT; 2) deposition; and 3) encapsulation
The OLED panel manufacturing process is largely composed of: 1) backplane; 2) deposition; and 3) encapsulation and logistics. While localization has largely been completed in the TFT, encapsulation, and logistics segments, dependence on imported deposition equipment remains lofty; thus, deposition technology development is underway by domestic OLED equipment makers.
Value chain for equipment maker
Overseas JSW (Japan Steel Works), ULVAC, SHI (Sumitomo Heavy Inc.), TCZ TFT LTPS transformation equipment (ELA: Excimer Laser Annealing) Domestic AP Systems, Tera Semicon, Viatron Tech
Overseas Tokki, Hitachi, ULVAC Evaporation
Domestic YAS, Jusung Engineering,
DMS, Avaco, LIG ADP, DongA Eltek (Sunic System)
SFA, SNU, Wonik IPS
Overseas ULVAC HPS Laser
Domestic AP Systems
Deposition
Donor Film operator Domestic SFA Glass Domestic Avaco, Jusung Engineering, LIG ADP AP Systems, SFA
Domestic Wonik IPS, SNU Film (Yet to be decided) Overseas ULVAC
Metal Domestic Tess, AP Systems
OLED
Encapsulation
Laser Lift Off (LLO) Domestic AP Systems Glass cutting system Domestic Top Engineering Rorze Systems
Backend process Domestic SFA, Toptec Source: Woori I&S Research Center
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OLED Industry www.wooriwm.com
1) What is TFT? TFT is a thin-film semiconductor embedded on a glass substrate. TFT is composed of gates, drains, and sources, and controls the contrast of the display.
Poly-si and a-oxide used for OLED TFT
A-si TFT used for LCD is not suitable for OLED due to its low electron mobility. Thus, poly-si and a-oxide are used for OLED TFT thanks to their faster electron mobility (vs a-si).
Poly-si TFT Low temperature poly-si (LTPS) is widely used for conversion of a-si into poly-si. As TFT is made from glass, it is sensitive to heat; as such, low temperatures are critical to the manufacturing process. SMD uses ELA on its 5.5G mass production line, and tests employing ELA and super grain silicon (SGS) are underway at its pilot 8G line.
a-oxide TFT While electron mobility is high for LTPS, uniformity is low and production costs are lofty. Thus, development of a-oxide TFT is taking place at a rapid pace. A-oxide TFT is superior to LTPS as: 1) it requires less masks; 2) its initial equipment investment burden is small (process is similar to existing LCD mass production so relatively low investment burden); and 3) it can be used in the mass production of high resolution OLED panels. Of note, a growing number of OLED makers, including Sharp and LGD, have started using a-oxide TFT technology to produce OLED panels.
TFT technology comparison
TFT technology Advantage Disadvantage
A-si - Used for LCD, processing lines established - Uniformity (good for larger-sized displays)
- Low electron mobility and stability - Requires heating above 300oC (during processing), so low-
temperature processing needs to be developed
LTPS - Crystallization of a-si silicon using catalyst and laser - High electron mobility and transistor stability
- Need for high-temperature processing (above 400oC) - Complex processing, high processing price, need to
reduce process temperature
Organic - High flexibility, low-temperature fabrication possible so
able to use all substrates - Mass production possible using roll-to-roll processing and
inkjet printing
- Slow electron mobility—needs to be improved
Oxide - High electron mobility and uniformity - Needs high-temperature processing for stabilization - Transistor characteristics change easily during deposition
process Source: Displaybank, Woori I&S Research Center
ELA process mimetic diagram SGS process mimetic diagram
2) Deposition The deposition process refers to layering organic materials such as HTL, EML (RGB), and ETL on TFT. FMM evaporation is used on SMD’s 5.5G A2 line, and HPS (FMM evaporation and LITI) will be used on its A3 line (in order to enhance resolution). Of note, SMS will be used on its 8G V1 line.
FMM evaporation
Fine metal mask (FMM) evaporation—depositing organic materials (heated and evaporated within patterned masks)—is used on SMD’s 5.5G A2 P2 line. It is easy to apply the technology, but difficult to achieve a high resolution. Of note, the deposition of organic materials tends to generate low yields.
HPS
HPS is a combination of FMM evaporation and LITI, and will likely be used on SMD’s 5.5G A2 P3 line. The technology evaporates a charged layer and creates red and green patterns with LITI (results in high resolution). However, additional processing (vs evaporation) is necessary due to LITI, and it is difficult to scale up the process; as such, it is unlikely to be used on 8G lines.
Small mask scanning
FMM cannot be used on mass production 8G lines as the mask easily sags under the force of gravity. To complement this weakness, SMS was developed (small masks are moved in order to facilitate deposition without sagging).
OLED deposition method
Method Description
FMM Evaporating organic thin film for use in small-sized AMOLED panels Laminating organic materials, which are heated and evaporated within patterned masks Deposition of organic materials with intrinsic patterns difficult for 6G-and-above production lines
LITI Firing a laser at the donor film and glass substrate to fabricate OLED HPS Combination of the FMM and LITI methods SMS Deposition by dividing and moving areas
WOLED Using color filters on WOLED Patterning is not required if only white organic layers are formed, so balanced fabrication is possible on large areas Use of color filters can decrease color purity and brightness
Inkjet printing Print colored patterning using ink made from high-polymer materials Source: Displaybank, Woori I&S Research Center
Material characteristics Small molecules Small molecules Soluble (small or polymer)
Small molecules; color filter
Investment cost Middle Mid-high Low Mid-high Source: Displaybank, Woori I&S Research Center
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OLED Industry www.wooriwm.com
SMD: HPS used on A2 P3 line onwards—capable of creating high resolution displays
Substrate PenetrationSubstrate Penetration
D/F PenetrationD/F Penetration
LITILITI
Source: Woori I&S Research Center
SMD: Evaporation used up until (and including) A2 P2 line—difficult to create large-sized high-resolution panels due to sagging mask phenomenon
Source: Industry data, Woori I&S Research Center
SMS expected to be used on 8G lines
Source: OLED Association
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OLED Industry www.wooriwm.com
Deposition: HPS (FMM evaporation + LITI)
Glass In
Pre-Treatment
HIL/HTL
EML-R
EML-G
EML-B
ETL/EIL
Cathod
Clean andPlasma Treatment Deposition
Plasma Treatment
Open Mask Evaporation
Array Test
Glass Out
Evaporation: Tokki, SFALITI: AP Systems (with SFA)
Other
FA:SFADaifuku
LITI(Red)
LITI(Green)
Evaporation(Blue)
Evaporation(Blue)
ITO Sputtering
AOI
Clean: Semes, KC TechDMS
Source: Woori I&S Research Center
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OLED Industry www.wooriwm.com
3) Encapsulation equipment
OLED is highly sensitive to moisture and oxygen—a basic characteristic of organic materials. Thus, encapsulation is needed to protect the organic materials. Of note, the type of encapsulation used differs by light-emitting technology (front-lit vs back-lit).
Smaller OLED panels emit light on both sides, requiring transparent encapsulation materials
For smaller OLED panels (light emitted on both sides), transparent glass or thin-film encapsulation (protecting both organic and inorganic layers) is applied.
SMD has adopted glass encapsulation on its 5.5G A2 P2 line. Going forward, the firm plans to use thin-film encapsulation on the A2 P3 line due to glass being both expensive and inflexible.
Large OLED panels emit light on their reverse, allowing flexible selection of materials
Large panels emit light on their reverse, allowing the selection of encapsulation materials to be less restricted.
Currently, SMD and LGD are developing a variety of encapsulation processes that can be used for large panels. Glass is the most common encapsulation material, but it is expensive and difficult to apply frit technology to large panels. Metal is cheaper, but yields are lower due to differences in the nature of TFT substrate and metal.
Features of encapsulation, by material
Glass Film
Advantage Effective in blocking oxygen and water Effective in protecting OLED layers
Thinner, lighter layers Shockproof
Disadvantage Vulnerable to shock Thick, heavy
Less effective in blocking oxygen and water Less effective in protecting layers when applied to touchpanel
Improvement Thickness and weight to be reduced via glass etching To be improved via deposition of organic/inorganic layers
Source: Woori I&S Research Center
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OLED Industry www.wooriwm.com
Encapsulation process
Glass Encapsulation(Frit Type) Thin Film Encapsulation
OLED technology is based on organic layers that emit light when electron and electron ‘holes’, injected through a cathode and anode, respectively, combine to create energy. OLED is composed of various layers including HTL, ETL, and EML. HTL is a layer through which holes can move, and electrons are carried through ETL. Light is emitted when the holes and electrons meet at the EML (red, green, and blue EML layers).
Korean OLED materials companies need to develop EML materials
Compared to LCD and semicon materials, a relatively large portion of OLED materials are supplied to Korean panel makers by Korean companies. However, Korea still imports a large portion of its EML material requirements. Given the high cost burden of EML, we believe that domestic materials makers need to develop EML in order to increase their market share in the OLED materials segment.
OLED structure OLED materials
EIL
ETL
Emitting layer
HTL
HIL
ITO
Glass substrate
AI AI
Color
Red
Green
Blue
Fluorescent Phosphorescent
O
O O
O
Source: Woori I&S Research Center Source: Woori I&S Research Center
Global OLED materials companies
Korea Japan US and others
LG Chem Cheil Ind
Duksan Hi-Metal Doosan Electronics-CSElsolar
SFC
Idemitsu Kosan Hodogaya Chemical Shinitzu Chemical
Toray Sony Chemical
Sumation
Universal Display Corp (UDC) Eastman Kodak
DuPont Merck
Dow Chemical CDT (UK)
Novaled (Germany) Source: Woori I&S Research Center
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OLED Industry www.wooriwm.com
HTL
HTL is a layer that carries electron ‘holes’ into the emissive layer. As HTL requires thicker deposition than other layers, to eliminate the ‘pin hole’ and ‘peak’ phenomena, HTL formation consumes more materials than the formation of other layers.
Duksan Hi-Metal dominates the Korean HTL market. However, as the HTL market is the largest among the various OLED materials markets, it has attracted many new players. CSElsolar entered the market at the end of 2011, and Cheil Industries is expected to move into the arena in 1H13. Of note, we forecast that Duksan Hi-Metal, Cheil Industries, and CSElsolar will supply a respective 40%, 35%, and 25% of SMD’s HTL needs over the mid- to long term.
EML
The holes and electrons transported through HTL and ETL come together at EML, emitting light at various wavelengths. EML materials emit either red, green, or blue depending on: the wavelength of the light, the emission type (florescent or phosphorescent), and the role played in emission (host or dopant).
The most recent EML issue is whether to introduce phosphorescent material, which has a superior theoretic luminous efficiency (75~100%) and consumes less energy (vs fluorescent). In other words, phosphorescent should help extend the battery’s charge (when it is used in high-quality display and smart devices). Thus, many companies have been developing phosphorescent EML, and sooner or later, phosphorescent is expected to replace fluorescent in EML. We note that phosphorescent is already used for red organic material, and from 2H12, phosphorescent will replace florescent for green organic material.
ETL
As mentioned earlier, ETL is a layer that moves electrons to EML. Thanks to its easier manufacturing process and low raw material costs, ETL is around 15~20% cheaper than HTL.
So far, LG Chem is the exclusive ETL supplier to SMD. However, with Cheil Industries entering the market at end-2011, we expect it to supply ETL to SMD (along with LG Chem). Given its close relationship with SMD, we project that Cheil Industries will supply 30~40% of SMD’s ETL needs by end-2012.
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OLED Industry www.wooriwm.com
Comparison of fluorescent and phosphorescent materials
Fluorescent Phosphorescent Features Theoretic luminous efficiency 25% Theoretic luminous efficiency 75~100%Strengths Long life span Low energy consumption
Source: Woori I&S Research Center
Value chain for materials suppliers
Suppliers
HTL Duksan Hi-metal, Doosan-CSElsolar, Cheil Ind HIL Duksan Hi-metal ETL LG Chem, Cheil Ind
Charged layer
EIL LG Chem Host DOW Graclel Red
Phosphorescent Dopant UDC Host Duksan Hi-metal, Cheil Ind Green
Phosphorescent Dopant UDC Host Doosan-CSElsolar Green
– Viewing the company’s shares as being highly sensitive to OLED-related earnings, our high valuation reflects expectations for its electronic materials (EM) division(which is strongly related to OLED materials).
– Among the company’s OLED materials units, the ETL unit is expected to see tangible growth in 2012, owing to: 1) the positive results of SMD’s quality assessment; 2) SMD’s move toward lessening dependency on LG Chem. We forecast that Cheil Ind will supply 20% of SMD’s ETL needs by yearend.
– Cheil Ind is also in the process of developing both a variety of OLED materials (including HTL and donor film) and semiconductor processing materials. The EMdivision’s contribution to total earnings should strengthen gradually going forward. In line with the Samsung Group’s focus on developing a core materials company, Cheil Ind will likely become a global electronic materials player.
Chemical and fashion divisions: Margins to improve on output growth and decrease in fixed costs
– Going forward, the chemical division should experience both top- and bottom-line growth. Moreover, shipment volume is expected to increase on: 1) the anticipated continuation of the recovery in IT product demand; and 2) completion of EP capacity expansion in 3Q12. Margins should gradually improve in line with likelydecreased fixed costs.
– We believe that the fashion division will remain a steady cash cow for the company. Stable earnings growth should be possible, as: 1) following continuallosses, a turnaround is expected for women’s wear unit; and 2) the division’s already diverse product portfolio should be positively impacted by the launch of new brand SPA ‘8 Seconds’.
Price trend
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50
100
150
200
'11.4 '11.6 '11.8 '11.10 '11.12 '12.2 '12.4
Cheil Industries
KOSPI
Cheil Ind (001300.KS) Company Analysis May 7, 2012
Sales Chg OP NP NP to parent EPS Chg P/E P/B EV/EBITDA ROE Debt/equity Net debtYE-Dec (Wbn) (%) (Wbn) (Wbn) (Wbn) (won) (%) (x) (x) (x) (%) (%) (Wbn)
Note: IFRS basis, but operating profit based on adjusted operating income (gross profit – SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates
II. Valuations Initiate with Buy and target price of W115,000
We initiate coverage on Cheil Ind with a Buy rating and a target price of W115,000. Our target price was derived using the sum of operating value (based on RIM) and asset value (based on sum-of-the-parts valuation). The RIM-derived calculations assume a market risk premium of 6.0%, a risk free rate of 4.0%, and a beta of 1.2, with a CoE of 11.2%. Our target price equates to 20.5x 2012 EPS (W5,621) and 18.3x 2013 EPS (W6,301).
Beginning shareholder’s equity 3,216 PV of forecast period RI 374 PV of continuing value 1,175
Equity value (C+P) 4,765 Number of shares (common, mn) 52 12m TP Fair price (C) 101,053 Current price (C) 91,800 Upside (-downside) 10.1% Implied P/B (x) 1.6 Implied P/E (x) 17.3
Note: The residual income model (RIM) is a cash flow approach that yields a fair shareholder value (value of equity) by adding shareholders’ equity and present value of residual
income (meaning income excluding cost of equity). Value of equity = shareholders’ equity + sum of present value of future residual income * Residual income (RIt) = NP (t) – shareholders’ equity(t-1) * cost of equity (t)= shareholders’ equity (t-1) * (ROEt - COEt) Woori I&S uses RIM as our primary valuation model as RIM is an objective model that minimizes subjectivity of valuation indicators while producing same results as the
dividend discount model (DDM) and DCF.
Market risk premium assessment guidelines Mega cap Large cap Mid cap Small cap
Criteria Market cap of W10tn or higher + credit rating of 'AAA' or higher
Market cap of W1~10tn + credit rating of 'A0' or higher
Market cap of W200bn-1tn + credit rating of 'BBB+' or higher
Market cap of less than W200bn + credit rating of 'BBB-' or higher
1. Operating value Operating value RIM-derived operating value Net debt Value 5,299.0 +783.0 5,817.4
2. Asset value Book value Estimated value Discount ValueListed shares 689.5 1,261.5 20.0% 1,009.2Unlisted shares 269.7 269.7 20.0% 215.8 Shares subject to equity-method valuation 112.3 95.6 20.0% 76.5 Sub-total 1,071.5 1,626.9 1,301.5Note: Listed shares based on closing prices on Apr 24
Unlisted shares based on book value Shares subject to equity-method valuation based on book value
3. Fair value Number of shares (‘000) 52,438 Treasury shares (‘000) 1,865 Sum of operating and asset value (Wbn) 5,817.4 Fair value (won) 115,031.4
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Cheil Ind www.wooriwm.com
III. Earnings forecasts 1Q12 preview: Forecast sales of W1,441.4bn, operating profit of W94.6bn
We forecast consensus-beating 1Q12 sales of W1,441.4bn (up 3.9% q-q) and operating profit of W94.6bn (up 86.2% q-q). In particular, we expect a sharp rise in operating profit on: 1) likely improved margins at the EM division thanks to the softer yen; and 2) lower fixed costs at the chemical division on likely resilient IT industry conditions and higher shipments.
Earnings to improve gradually in 2012
We project full-year 2012 sales of W6,183.8bn (up 10.7% y-y) and adjusted operating profit of W383.2bn (up 80.9% y-y), backed by: 1) anticipated growth at the EM division thanks to increased supply of semiconductor and OLED materials; 2) the chemical unit benefiting from resilient IT demand; and 3) likely top-line growth at the fashion division on the launch of new brands. We believe that Cheil Ind’s supply of high-margin OLED materials will justify its high valuations.
Initiate coverage with Buy rating and target price of W33,000
– We initiate our coverage on Duksan Hi-Metal with a Buy recommendation and a target price of W33,000.
– Our RIM-derived target price assumes a market risk premium of 7.0%, a risk free rate of 4.0%, and a beta of 1.2, with a CoE of 12.4%.
Benefits from growing OLED industry to exceed weight of falling market share and ASP cut pressure
– Duksan Hi-Metal should enjoy strong 2012 top-line expansion (up 14.7% y-y), despite: 1) a likely falling market share upon the entry of new competitors; and 2) price-cutting pressure.
– Going forward, Duksan Hi-Metal Business should enjoy a favorable environment, backed by: 1) the start of operations of SMD’s A3 and V1 lines; and 2) likely additional HTL demand in the wake of SMD’s adoption of a two-track (RGB, WOLED) strategy. Of note, WOLED consumes 50~100% more HTL than RGB.
– Furthermore, Duksan Hi-Metal should be a primary beneficiary of OLED industry expansion, supported by the tendency of client companies to limit their number of vendors to three or less in order to prevent technology leaks.
To see steady demand growth on expansion of solder ball market
– We believe that the company’s solder ball division is well positioned to continue enjoying steady growth, expecting smart devices to continue becoming smaller, thinner, lighter, and simpler, thereby spurring multi-chip package (MCP) and package-on-package (POP) demand.
– Of note, DDR3 manufacturing requires 78 solder balls per unit; in contrast, an average of 150 solder balls per unit are required for MCP and POP (200 solder balls needed for moviMCP).
Price trend
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50
100
150
200
'11.4 '11.6 '11.8 '11.10 '11.12 '12.2 '12.4
DS Hi-metal
KOSDAQ
Duksan Hi-Metal (077360.KQ) Company Analysis May 7, 2012
Sales Chg OP NP NP to parent EPS Chg P/E P/B EV/EBITDA ROE Debt/equity Net debtYE-Dec (Wbn) (%) (Wbn) (Wbn) (Wbn) (won) (%) (x) (x) (x) (%) (%) (Wbn)
Note: IFRS basis, but operating profit based on adjusted operating income (gross profit – SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates
1. Target price of W33,000 based on RIM valuation Target price of W33,000—36% upside potential
We initiate our coverage on Duksan Hi-Metal with a Buy recommendation and a target price of W33,000. Our RIM-derived target price assumes a market risk premium of 7.0%, a risk free rate of 4.0%, and a beta of 1.2, with a CoE of 12.4%. The target price is equivalent to a 2012 P/E of 28.6x (EPS forecasted at W1,153) and a 2013 P/E of 18.9x (EPS at W1,744).
Beginning shareholder’s equity 139 PV of forecast period RI 410 PV of continuing value 317
Equity value (C+P) 866 No of shares (common, thou) 29 12m TP Fair price (C) 33,105 Current price (C) 24,800 Upside (-downside) 33.5% Implied P/B (x) 6.5 Implied P/E (x) 24.5
Note: The residual income model is a cash flow approach that yields a fair shareholder value (value of equity) by adding shareholders’ equity and present value of residual income (meaning income excluding cost of equity).
Value of equity = shareholders’ equity + sum of present value of future residual income * Residual income (RIt) = NP (t) – shareholders’ equity (t-1) * cost of equity (t)= shareholders’ equity (t-1) * (ROEt - COEt) Woori I&S uses RIM as our primary valuation model as RIM is an objective model that minimizes subjectivity of valuation indicators while producing same results as the
dividend discount model (DDM) and DCF.
Market risk premium assessment guidelines Mega cap Large cap Mid cap Small cap
Criteria Market cap of W10tn or higher + credit rating of 'AAA' or higher
Market cap of W1~10tn + credit rating of 'A0' or higher
Market cap of W200bn-1tn + credit rating of 'BBB+' or higher
Market cap of less than W200bn + credit rating of 'BBB-' or higher
III. Earnings forecasts 1Q12 preview: Estimate sales of W32.6bn and operating profit of W8.3bn
We predict that Duksan Hi-Metal will post 1Q12 sales of W32.6bn (down 11.6% q-q), and operating profit of W8.3bn (down 30.2%). We attribute the likely disappointing earnings to: 1) the entry of new competitors into the HTL market; 2) lower ASPs; and 3) a likely lack of a significant increase in SMD’s OLED shipments (based on area). However, we expect to see Duksan Hi-Metal’s earnings improve gradually going forward, based on: 1) anticipated material demand growth following the start of operations of SMD’s A2 P3 line in 2Q12; and 2) the likelihood that its market share will remain stable.
2012 annual earnings forecasts: Earnings growth to weaken slightly y-y
Looking at full-year 2012, we believe that Duksan Hi-Metal will register sales of W148.4bn (up 14.7% y-y) and operating profit of W39.3bn (up 12.4% y-y). The company’s earnings growth should weaken y-y on: 1) a market share decline upon the entry of new competitors; and 2) lower ASPs.
However, we expect earnings growth momentum to pick up strongly after 2H12, believing that HTL demand will surge in the wake of: 1) the start up of operations of SMD’s A2 P3 line in 2Q12 and of its A3 line in 2012; and 2) anticipated mass production of WOLED TVs. Furthermore, any decline in market share should be limited as Duksan Hi-Metal should be a primary beneficiary of anticipated OLED industry expansion, supported by the tendency of client companies to limit their number of vendors to three or less in order to prevent technology leaks. All in all, we view Duksan Hi-Metal as being positioned to be a primary beneficiary of anticipated growth of the OLED industry going forward.
Quarterly sales and operating profit forecasts (Units: Wmn, %)
Diversifying business portfolio from logistics to entire core processing
– Split off from Samsung Techwin in 1998, SFA is a comprehensive logistics equipment maker. Following its successful entry into the LCD industry in 2004 and OLED market in 2010, the company has emerged as Korea’s number-one logistics equipment maker.
– SFA’s operating margin stands at the 10%-level—the lowest among IT equipment players. Enjoying a diverse portfolio ranging from logistics equipment to all IT processing equipment (PECVD and deposition), the company’s margins should improve gradually going forward.
OLED division positioned to enjoy further order momentum
– SFA won OLED equipment orders worth W420bn in 2011 (orders related to SMD’s A2 P2 and A2 P3 lines partially reflected).
– In 2012, new OLED equipment orders should surpass W500bn, given: 1) SMD’s planned investment in its A3 line (144,000 sheets/month) in 2H12 (vs A2: 88,000 sheets/month); and 2) likely further orders for entire processing equipment in addition to logistics equipment.
– We also draw attention to the company’s 8G OLED organic material deposition equipment, noting that SMS (currently under development) is likely to be adopted for mass production.
SMD A3 line investments to benefit SFA in 2013
– Guidance projects that sales will rise 10% y-y in 2012 (vs 78% y-y in 2011).
– Benefits from SMD’s A3 line investments should gain traction in 2013, with SFA expected to win orders for 5.5G one-shot evaporation equipment in addition to logistics equipment.
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SFA
KOSDAQ
SFA (056190.KQ) Company Analysis May 7, 2012
Sales Chg OP NP NP to parent EPS Chg P/E P/B EV/EBITDA ROE Debt/equity Net debtYE-Dec (Wbn) (%) (Wbn) (Wbn) (Wbn) (won) (%) (x) (x) (x) (%) (%) (Wbn)
2012E 892 18.5 116 97 96 5,413 9.5 10.3 2.3 6.0 25.6 na na2013F 1,078 20.9 140 117 103 6,514 20.3 7.9 1.9 4.7 24.9 na na
Note: IFRS basis, but operating profit based on adjusted operating income (gross profit – SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates
Specializes in laser technology-based OLED equipment
– AP Systems utilizes laser technology to manufacture OLED processing equipment. It is the only domestic company possessing a full range of processing capabilities (including TFT, deposition, and encapsulation processing equipment).
Top-line growth to continue on supply of new equipment (LLO and LITI)
– In line with SMD’s A3 line investments, we expect AP Systems to enjoysustainable top-line growth in 2012, believing that the firm will see improvedmargins thanks to its supply of new equipment (including LLO and LITI).
– LLO is a type of equipment that employs lasers to separate flexible substrates. We expect LLO to be used in SMD’s mass production of flexible OLED.
– LITI is a type of equipment that employs lasers to project organic material ontodonor film. Thanks to its high-resolution, we anticipate that the equipment will be used as part of the production process at SMD’s A3 line (however, due to the need for additional components and equipment, LITI is unlikely to be used for the entire production process at the A3 line).
– We believe that AP Systems’ advanced ELA and encapsulation (glass, metal) equipment represents a long-term growth engine for the company, drawing attention to the fact that that it is highly likely that this equipment will be used at SMD’s 8G production line.
Offers good fit for SMD’s OLED investment plan
– According to 2012 guidance, sales are to total W327bn (up 47% y-y) and operating margin is to reach 11% (up 39.4% y-y). By division, we project OLED sales ofW275bn, semiconductor equipment sales of W45bn, and LCD and other equipment sales of W7bn.
– AP Systems supplies a wide range of equipment for SMD’s A1 and A3 lines. Going forward, the company is to further benefit from the likely continuation of SMD’s increased line investments.
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AP Systems
KOSDAQ
Sales Chg OP NP NP to parent EPS Chg P/E P/B EV/EBITDA ROE Debt/equity Net debtYE Dec (Wbn) (%) (Wbn) (Wbn) (Wbn) (won) (%) (x) (x) (x) (%) (%) (Wbn)
Note: IFRS basis, but operating profit based on adjusted operating income (gross profit – SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates
AP Systems (054620.KQ) Company Analysis May 7, 2012
Heat treatment technology is key in production of flexible OLED and oxide TFT
Secur heat treatment technology
– Listed on the Kosdaq in Nov 2011, Tera Semicon specializes in batch-type heat treatment technology, utilizing its specialized processing equipment and knowhow to produce semiconductor, OLED, and solar cell equipment.
– The company displayed lofty top-line growth (up 197.9% y-y) in 2011—OLED related sales jumped from W12.9bn in 2010 to W94.5bn in 2011, backed by increased investment at SMD.
Heat treatment tech—key to flexible OLED and oxide TFT production
– In 2012, Tera Semicon should enjoy order momentum for its heat treatment equipment in line with increased investment in flexible OLED and oxide TFT.
– Of note, curing equipment is required in order for flexible OLED to harden polyimide. Meanwhile, heat treatment equipment is used in the production of oxide TFT in order to stabilize IGZO material.
– Tera Semicon is currently in the process of developing super grain silicon (SGS) equipment. While SMD is highly likely to use ELA for its 8G line, it is also expected to purchase SGS.
Lofty growth expected on SMD’s investment in flexible OLED
– Guidance estimates 2012 sales of W170.0bn (up 21.4% y-y) and an operating margin of 17% (up 112.5% y-y). On the likely absence of one-off costs in 2012, the firm expects to see a rapid y-y rise in its operating margin (in 2012).
– Going forward, we believe that Tera Semicon is well positioned to be a primary beneficiary of SMD’s expanded investment in flexible OLED and oxide TFT.
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Tera Semicon
KOSDAQ
Tera Semicon (123100.KQ) Company Analysis May 7, 2012
Sales Chg OP NP NP to parent EPS Chg P/E P/B EV/EBITDA ROE Debt/equity Net debtYE-Dec (Wbn) (%) (Wbn) (Wbn) (Wbn) (won) (%) (x) (x) (x) (%) (%) (Wbn)
Note: IFRS basis, but operating profit based on adjusted operating income (gross profit – SG&A expenses); EPS, P/E and ROE excluding minority interests based on consensus Source: Woori I&S Research Center estimates
1. Period: Uniform 12-month 2. Rating System: Based on a stock’s absolute return from the date of publication
Strong Buy: High conviction Buy rated stocks Buy: Greater than +15% Hold: 0% and +15% Reduce : Less than 0%
Compliance notice
Woori Investment & Securities does not have a stake greater than or equal to 1% in companies mentioned in this material as of the preparation date Woori Investment & Securities has not provided this material to any institutional investors or other third party in advance. The Korean version of this material was distributed on Apr 26, 2012 The analyst and his/her spouse do not own any securities mentioned in this material as of the preparation date. Woori I&S is an issuer and liquidity provider of ELWs taking ‘Cheil Industries, SFA’ as an underlying asset. ‘SFA’, ‘AP Systems’, and ‘Tera Semicon’ are not under coverage at Woori I&S. Thus, Woori I&S does not present a rating, and target price on the counter. This material is for reference purpose only. This report correctly reflects the analyst’s opinion and was written without any external influence or intervention.
Disclosures The research is based on current public information that Woori I&S considers reliable, but Woori I&S does not represent it as accurate or complete and it should not be relied on as such. Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and Woori I&S is in no way legally responsible for future returns or loss of original capital. All materials in this report are the intellectual property of Woori I&S. Copying, distributing, transmitting, transforming or lending of this material without Woori I&S’ consent is prohibited.