SeoulSemicon_20100929_GMS_InitiateCoverage_16pg

8/7/2019 SeoulSemicon_20100929_GMS_InitiateCoverage_16pg

1/16

Korea Equity Research

C O MP A N Y

R E P

O R T

The game has just begun

Lighting is the LED business at its best The LED industry took off in2009 and is growing exponentially in 2010 on the back of LCD TVs based onLED BLUs. The LED BLU market is going through a correction for now witthSamsung Electronics, LG Electronics, Sharp, Sony and even Chinesecompanies competing for market share. LED stocks are under pressure aswell with investors turned away by rising inventories on amid a demandslowdown in 3Q10 and price cuts. The LED industry has been primarilyassociated with LED TVs, but the real story is LED lighting. The LED lightingmarket is just blooming and the related industry is estimated to grow to amarket worth W50~60tr in 2015. It may take a year before LED lighting canreplace LED TV as the engine of growth, and now is a good time for stockpicking to exploit the LED lighting markets takeoff.

Three reasons why Seoul Semiconductor is a BUY Seoul Semiconductoris the best LED stock pick in our opinion. First, the LED industrys targetmarket is lighting devices, TV BLUs. Seoul Semiconductor is leading the LEDlighting market with innovative products such as Ariche. Second, thecompany's competitive strengths extend from general lighting to specialtylighting solutions such as deep UV LED and non-polar LED. Third, thecompanys customer base includes global lighting solution providers, TVmakers and medical equipment suppliers. Seoul Semiconductor is executinga smart strategy not to make its customers competitors. Strong costcompetitiveness is a big plus.

Initiate coverage with a BUY rating and a fair value of W74,000 Weinitiate our coverage on Seoul Semiconductor, which is leading the global LED market change, with a BUY rating and a fair value of W74,000 based onCrees 2011E P/E of 21.6x and 2011E EPS of W3,423. Seoul Semiconductordeserves Crees valuation because the companys diverse product mixcovering handsets, laptops, TVs and lighting devices puts it way ahead of rivals in earning power and growth.

Year to Dec. Sales OP Pre-tax NP EPS Growth PER EV/EBITDA PBR ROE Net Debt Div. Y(W bn) (W bn) (W bn) (W bn) (Won) (%) (x) (x) (x) (%) Ratio (%) (%)

2008 284.1 (11.4) (15.3) (12.5) (246) - na 193.0 4.4 (7.2) (22.8) -2009 453.4 44.0 33.1 28.2 547 - 60.1 24.0 4.1 9.1 (38.4) 0.32010E 916.9 124.4 137.3 117.2 2,031 271.2 21.9 13.5 4.5 22.8 (30.2) 0.22011E 1,499.7 219.0 235.2 197.6 3,423 68.5 13.0 7.8 3.4 29.7 (39.5) 0.22012E 2,172.7 333.6 355.2 291.2 5,046 47.4 8.8 4.9 2.5 32.2 (52.2) 0.2

Seoul Semiconductor Electronic Device Reuters Code 046890.KQ Bloomberg Code 046890 KS

September 29, 2010

BUYPrice (Sep. 28) W44,550Fair Value W74,000

Joon Doo Ha Eui Keun Kim(82-2) 3772-1545 (82-2) 3772-1553

[email protected] [email protected]

KOSPI : 1,855.97pKOSDAQ : 487.74pMarket Cap. : W2,597.5bn/ US$2,278.5mnPar Value : W500Outstanding Shares : 58.3mnFree Floating Shares : 30.1mn (51.7%)52-Week High/Low : W49,850/ W34,65060-Day Avg. Trading Volume 857,681shrs60-Day. Avg. Trading T/O : W36,840mnForeign Ownership : 21.57%Major Shareholders : Jung Hoon Lee 18.7%

Ion Investments BV 11.8%Absolute Performance 3M -1.7%

6M -0.2%12M 2.6%

Relative Performance 3M 0.7%to KOSDAQ 6M 7.6%

12M 9.0%

Share Price Performance

0

20,000

40,000

60,000

Sep-09 Dec-09 Mar-10 Jun-10 Sep-100

50

100

150

Seoul Semiconductor Price (LHS)Relative Performance to KOSDAQ (RHS)

(won) (Indexed,Sep-09=100)

KOSDAQ Index=100

Fair Value & Recommendation History

0

20,000

40,000

60,000

Sep-08 Mar-09 Sep-09 Mar-10 Sep-10REDUCE

HOLD

BUY

Fair Value (LHS)Seoul Sem iconductor Price (LHS)Recommendation (RHS)

(won)


2/16

COMPANY REPORT Seoul Semiconductor September 29, 2010

2

Contents

Valuation: Is Seoul Semiconductor expensive? 3

A forerunner in the race for LED lighting 6

Growth accelerates with TV-use LED 10

Unique competitive advantages 15


3/16


3

Valuation: Is Seoul Semiconductor expensive? A leader in the LED lighting market with Acriche LEDs Competitive strengths in both general and specialty lighting solutions Growth story continues on a diversified client base and strong cost

competitiveness

LED companies earnings boom and share price rally driven by the LED TV marketsexplosive growth are over, and the market is having a second though. Major LED-relatedstocks including Samsung Electro-Mechanics, LG Innotek and Seoul Semiconductor arelosing ground, weighed down by 1) pricing pressure due to margin gaps betweencustomers and parts suppliers; and 2) worries over a supply glut amid global LED makersaggressive capacity expansion. Sales prices are also under pressure from rising LED TVinventories. With growth slowing, investors are asking questions about LED-related stocksupside potential.

When it comes to LED stock picking, investors need to look at a big picture and thinkoutside the box. The LED industrys growth is taking off in 2010. Korean companies, ledby Samsung Electronics, are aggressively rolling out LCD TVs based on LED chips, and thegrowth story still continues. A growth slump may follow in 2011 in the absence of killerapplications until 2012. Despite such fears, Seoul Semiconductor deserves a premium inview of its global competitiveness not only in LED TVs, handsets, and notebook LEDpackaging but also in LED lighting.

Valuation consensus comparisonCompany Aggregate value 2010E 2011E

(USD bn)PER(x)

PBR(x)

EV/EBITDA(x)

ROE(%)

PER(x)

PBR(x)

EV/EBITDA(x)

ROE(%)

Cree 5.5 31.7 2.7 15.5 9.6 21.6 2.4 10.3 12.2Toyoda Gosei 3.0 12.6 1.1 3.1 8.7 10.9 1.0 2.9 9.1Epistar Corp. 2.6 16.0 2.0 9.1 12.2 15.5 1.9 8.1 11.4Everlight Electroonics Co 1.2 13.6 2.4 9.2 17.3 13.0 2.2 8.1 17.6Stanley Electric Co Ltd 3.0 12.2 1.1 4.1 9.6 11.0 1.1 3.8 10.0Rohm Co Ltd 7.2 22.5 0.8 4.0 3.7 17.9 0.8 3.4 4.6Showa Denko 2.9 10.9 0.9 5.9 8.5 9.2 0.8 5.5 9.7Samsung Electro-Mechanics 7.7 15.9 3.0 11.9 21.6 14.1 2.5 11.5 20.2LG Innotek 2.3 11.3 1.9 6.5 21.0 9.5 1.6 5.0 18.7Lumens 0.3 12.4 3.1 9.9 27.4 7.2 2.2 6.3 33.8Seoul Semiconductor 2.2 22.2 4.3 16.8 21.9 15.3 3.4 11.6 25.4Source: Bloomberg as of September 27, Shinhan Investment Corp.

Seoul Semiconductor shares may not look like a bargain in terms of P/E and P/B multiples.The stock is valued more richly than Samsung Electro-Mechanics and LG Innotek, leadingLED players. Seoul Semiconductor is a W1tr sales company now, but it can grow into aW3tr sales company by 2013. Even if the company falls short of the W3tr sales milestone,it still deserves a premium apart from other LED peers.

LED-related stocksremain unstable

Finding the beneficiariesof the evolving LEDindustry cycle

Seoul Semiconductor deserves a premium


4/16


4

First, the LED industrys target market is lighting, not TVs. Seoul Semiconductor is leadingthe LED lighting market with its innovative product line-up led by Ariche.

Second, the company's competitive strengths extend from general lighting to specialtylighting solutions such as deep UV LED and non-polar LED.

Third, the companys clients include global lighting solution providers, TV makers andmedical equipment companies. Seoul Semiconductor is executing a smart strategy not tomake its customers competitors. Strong cost competitiveness is a big plus.

We initiate our coverage on Seoul Semiconductor, which is leading the global LED marketchange, with a BUY rating and a fair value of W74,000 based on Crees 2011E P/E of 21.6xand 2011E EPS of W3,423. Seoul Semiconductor deserves Crees valuation because thecompanys diverse product mix covering handsets, laptops, TVs and lighting devices putsit way ahead of rivals in earning power and growth.

Operating profit and share price trend (QoQ)

Source: Bloomberg, Seoul Semiconductor, Shinhan Investment Corp.

Seoul Semiconductor sales mix by product group

Source: Seoul Semiconductor, Shinhan Investment Corp.

1. A leader in the LEDlighting market

2. Competitive strengthsin specialty lightingsolution

3. Diverse client basesand strong costcompetitiveness

0%

20%

40%

60%

80%

100%

2008 2009 2010E 2011E 2012E 2013E

1. Handset 2. Notebook/Monitor 3. TV 4. General lighting & others

0

10,000

20,000

30,000

40,000

50,000

60,000

Jan-07 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Oct-09 Mar-10 Jul-10 Nov-10

(won)

(30)

(20)

(10)

0

10

20

30

40

50(W bn)

Operating Profit (RHS)Share Price (LHS)


5/16


5

Seoul OptodeviceSeoul Optodevice, 43.8% owned by Seoul Semiconductor, achieved record earnings in2Q10, helped by stabilizing production yields on rising sales of LED TV chips and AcricheLED chips. Seoul Optodevice became profitable for the first time in 1Q10 with anoperating profit margin of 9.7%. The operating margin jumped to 17% in 2Q10.

Seoul Optodevices sales and operating margin trend


Seoul Optodevice is ramping up LED chip sales for LED TVs. Sales are estimated to soar479.7% YoY to W267.4bn in 2010 with the operating profit exceeding W40bn. Sales will approach the W400bn mark in 2011, driven by aggressive investments in MOCVD (W185bnin equipment + W15bn in land and buildings) and strong demand for LED TV, Acriche andspecialty lighting devices. Seoul Semiconductor plans to meet 60% of its chip demandwith supply from Seoul Optodevice nsumes and the remaining 40% with shipments from

Toyoda Gosei, Cree and other outside suppliers. Seoul Optodevices supply share at Seoul Semiconductor increased from 5% to 20% in 2009 alone, and it rose to 35% in 1H10 andto 60% now.

Seoul Optodevices YoY sales growth trend


Seoul Optodevicesgrowth enginecranking up

Chip supply from SeoulOptodevice to meet 60%of demand at SeoulSemiconductor

4.5 9.9 18.7 18.046.1

267.4

384.9

0

100

200

300

400

500

2005 2006 2007 2008 2009 2010E 2011E

(W bn)

0

10

20

30

40

50

60

70

80

90

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

(W bn)

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%Sales (LHS)Operating Margin (RHS)


6/16


6

A forerunner in the race for LED lighting A future Intel of the LED industry LED lighting market to grow into a W50~60tr market in 2015 Acriche pave the way to GE, Philips and other big customers

LEDs are increasingly penetrating in our everyday lives. LEDs are becoming the mainstreamillumination platform. LEDs are already used in numerous applications including handsets,LED TV, advertisement screens, automobile lamps and exterior of buildings. However, LEDshave yet to come into blossom in the general lighting market, the largest segment forlighting devices. The early LED market was driven by handsets. Then, LEDs spread todisplays and automobile lighting. LED BLU is currently the most common form of LEDapplication and will continue to be until the era of LED lighting dawns around 2012. OnceLED lighting becomes the focus of the LED industry, Seoul Semiconductor will benefitheavily from the change, as its competitiveness does not fall short of its rivals-Nichia,Toyoda Gosei, Cree and Lumileds. In reality, Seoul Semiconductors strategic focus is

ultimately on LED lighting, not LED BLU for TVs.

Seoul Semiconductor Acriche product series


Currently, LEDs mostlyused in TVs, but LEDlighting to becomecenter in 2~3 years

Lighting market sales trend

0

50

100

150

200

1Q09 3Q09 1Q10 3Q10E 1Q11E 3Q11E

(W bn)

Source: Seoul Semiconductor, Shinhan Investment Corp. estimates

Acriches sale share trend

7.3%9.1%

18.4%

30.8%

0%

5%

10%

15%

20%

25%

30%

35%

2010E 2011E 2012E 2013E

Source: Seoul Semiconductor, Shinhan Investment Corp. estimates


7/16


7

Incandescent light bulb bans worldwideCountry Year U.S., Korea 2012 ~2014UK, Italy, Russia, Argentina 2011Australia, Ireland, Switzerland 2009

Canada, EU 2012Source: Ministry of Knowledge Economy

Different research firms have different predictions on when the LED lighting market will bloom. We predict that the market will begin taking shape in 2011 because theincandescent light bulb ban of various nations are scheduled to take full effect around2012 and lighting companies will begin competition 1~2 years before in order to get alead in the market.

Lighting market size estimates

Source: Samsung Economic Research Institute, Shinhan Investment Corp. estimates

The lighting market is currently a US$100bn (W126tr) market and is expected to grow toUS$165bn (W191tr) by 2015. Incandescent light bulbs, which are being banned becausethey are considered a key culprit of global warming, will be replaced by LED lightingdevices, enabling the LED lighting market to grow into a W50tr~60tr market by 2015.

Since LED lighting packages form 54% of LED lighting market, the value of the LEDlighting parts market related to Seoul Semiconductor and Seoul Optodevice is estimatedat W4tr and is expected to grow to W30tr by 2015. Seoul Semiconductors sales for thewhole year of 2010 is estimated at W870bn, with 32% (W297bn) coming from the lightingbusiness. Once the LED lighting (Acriche) market enters a full-blown growth phase, its

sales are expected to surge to W544.1bn in 2011 and W997.0bn in 2012.

Acriche vs. LED vs. incandescent light bulbsProducts Acriche A4 LED Incandescent bulbsComponents Converter, Driver not required Converter, Driver required Converter requiredLight efficiency (lm/W) 100 100 10~20Running efficiency (%) 100 80 10Power consumption (W) 4 5 60Running cost per year (won) 1,285 1,606 19,272Life expectancy 35,000hrs(12years) 20,000hrs(6.85years) 1,000hrs(0.34years)Source: Seoul Semiconductor, Shinhan Investment Corp.

LED lighting market tobegin blooming in 2011

LED lighting market togrow to W50~60tr by2015

Seoul Semiconductorslighting package sales(Acriche) to reach W3tr by 2013

375 453695

678662

49734

110

463

0

500

1,000

1,500

2,000

2010E 2012E 2015E

(USD 00mn)

LEDFluorescent lightIncandescent light


8/16


8

LED lighting production cost breakdown

Source: Shinhan Investment Corp.

Seoul Semiconductor is already highly competitive in the LED lighting sector and is freefrom patent-related issues as it has cross licenses with the big 5 LED manufacturers. Thecompany began supplying LED chips to GE, Philips and other global lighting companies in2009. The reason such global giants purchase Seoul Semiconductors LED chips is becauseof the companys flagship Acriche. In January 2005, Seoul Semiconductor was the worldsfirst to develop Acriche. Acriche began to rise in prominence in advanced markets such asEurope. In addition, Seoul Semiconductor is expected to begin supplying Acriche to Osramsoon.

Acriche does not require IC drivers and converters, since it does not need to convertalternating current into direct current to operate, reducing production costs by 15~20%,but with a 25% higher photonic efficiency. Acriche also has other advantages, such asdesign. In conclusion, lighting companies will see Acriche as a solution to the high pricesof lighting devices in the early stages of the LED market growth. Acriche currentlygenerates only 5~7% of Seoul Semiconductors sales. However, its contribution will increase to around 10% by 2011, before developing into a major contributor when themarket blossoms in 2012.

Major Korean LED manufacturersManufacturer Chip supplier Patent license Fluorescent

substanceSeoul Semiconductor Seoul Optodevice, Toyoda Gosei,Cree Toyoda Gosei, Cree, Nichia, Osram BOSE, OwnSEMCO SEM, Toyoda Gosei Toyoda Gosei IntematixLG Innotek LG Innotek, Toyoda Gosei Toyoda Gosei Toyoda Gosei, OwnSource: DisplaySearch, Shinhan Investment Corp.

Finally, the strategic alliance with POSCO will enable to Seoul Semiconductor provide astable supply of LED lighting packages to its partner. POSCO has already announced that itplans to invest a total of W7tr by 2018 in its green business. The POSCO Group plans toreplace the lighting of all its plants with LED lighting and begin full-fledged efforts toenter the LED lighting market. Therefore, Seoul Semiconductors deal to supply POSCOwith chips and lighting packages will become a solid contributor to the companysearnings. We expect the deal to begin generating sales in 4Q10.

Seoul SemiconductorsAcriche already suppliedto GE, Philips and otheglobal lightingcompanies

Alliance with POSCOgroup to bring stableearnings

LED PKG54%

Power23%

Heatsink

9%

MCPCB6%

Case5%

Plastic3%


9/16


9

Seoul Semiconductors business model differs from that of other Korean LED companies.The Seoul Semiconductor model is known as the Intel model, in homage to the fact thatIntel did not actually launch a PC business, but profited off the PC industry by sellingsemiconductors to PC makers. Like Intel, Seoul Semiconductor plans to procure chips fromSeoul Optodevice, manufacture LED packages and sell them to numerous lighting-related

companies. Since domestic conglomerates have achieved vertical integration and possessstrong marketing power, they are fit to venture into the global lighting market. However,the Intel model seems to be the optimal strategy for Seoul Semiconductor, which is asingle company.

Likely to become theLED industrys Intel


10/16


10

Growth accelerates with TV-use LED Customer base diversifying from Samsung and LG to Sony, Sharp, and Chinese set

makers TV-use LED sales upswing: 2010 sales likely to top W300bn

Chip self-sufficiency rate rose to the 60% level thanks to Seoul Optodevice

Seoul Semiconductors sales share of handset and laptop LEDs topped 60% through to2009. But this trend will change significantly from 2010 due to sales from shipments toLED TVs kicking in with smooth chip supply from Seoul Optodevice. Although the companylaunched LED TV-use LED chip business later than domestic rivals Samsung LED and LGInnotek, its sales share is estimated to reach the 40% level in 2010. In addition,shipments to AUO, Sony, Sharp, and Chinese set makers are growing continuously besidesSamsung Electronics and LG Electronics. Seoul Semiconductor features the strongest clientbase among the domestic LED manufacturers.

Most TV manufacturers will likely expand the proportion of LED TV business aggressivelygoing forward. Seoul Semiconductor will benefit with diverse TV makers, such as SEC, LGE,Sony, and Sharp, as its major clients. SEC is pushing most aggressively into the LED TVmarket, followed by Japans Sharp close on its heels. The company will be able tomaintain strong earnings in the TV segment based on diverse clientele.

Sales from LED TV segment are projected to come in at W108.7bn in 3Q10, vs. W18.7bn in1Q10 and W83.1bn in 2Q10. On an annual basis, sales will likely reach W334.8bn. Strongearnings set Seoul Semiconductor apart from other LED manufacturers who are strugglingunder price cut pressure from captive clients inventory build-up. The company hascompleted vertical integration of core process with chip procurement from subsidiarySeoul Optodevice. Chip self-sufficiency rate has increased to the 60% level, which will likely be maintained going forward.

Major LED panel and led TV manufacturersLED panel manufacturers Samsung Electronics(S-LCD inclusive), LG Display, AUO, CMI, SharpLED TV manufacturers Samsung Electronics, LG Electronics, Sony, Toshiba, Sharp, Philips, Panasonic, VizioSource: Shinhan Investment Corp.

Seoul Semiconductor, LED for TV earnings estimates


Strongest client baseamong the domestic LEDmanufacturers

Earnings upswing to bemaintained based onstrong client base, suchas SEC, LGE, Sony, andSharp

Chip self-sufficiencyrate rose to the 60%level thanks to SeoulOptodevice

0

50

10 0

15 0

20 0

25 0

1Q10 2Q10 3Q10E 4Q10E 1Q11E 2Q11E 3Q11E 4Q11E

(W bn)


11/16


11

LED panel production trend by manufacturer


LED panel sales weights


LED BLU production and LED penetration trend (QoQ)


0

2

4

6

8

10

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10E 4Q10E

(Units mn)

SamsungLGDSharpAUOCMI

0%

10 %

20 %

30 %

40 %

50 %

60 %

70 %

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10E 4Q10E

(LED Penetration)SharpSamsungLGDAUOCMI

0

10

20

30

40

1Q09 3Q09 1Q10 3Q10E 1Q11E 3Q11E

(Units mn)

0%

10 %

20 %

30 %

40 %

50 %

60 %LED (LHS)

LED Penetration (RHS)


12/16


12

LED BLU production and LED penetration trend (YoY)


LED BLU supply chain (laptops) (%)BLU makers Samsung LED LG DisplayDaeYoung 9 0TaeSan 15 0DID 26 0DS LCD 15 0New Optics 0 36Wonwoo 0 2Heesung 0 40Coretronic 0 8Radiant 35 14Source: Shinhan Investment Corp.

LED BLU supply chain (LCD monitors) (%)BLU makers Samsung LED LG DisplayDS LCD 40 0New Optics 0 23Heesung 0 77Coretronic 30 0Radiant 30 0Source: Shinhan Investment Corp.

LED BLU supply chain (LCD TVs) (%)BLU Makers Samsung LED LG Display

Taesan LCD 16 0Hansol LCD 52 0DS LCD 32 0New Optics 0 35Heesung 0 65Source: Shinhan Investment Corp.

0

50

100

150

200250

300

350

2007 2009 2011E 2013E 2015E 2017E

(Units mn)

-20%

0%

20%

40%

60%

80%

100%LED (LHS)LED Penetration (RHS)


13/16


13

LED supply chain (laptops) (%)LED PKG Maker(Chip Supplier) AUO CMI CPT LG Display SamsungNichia (Nichia) 30 25 35 11 9TG (TG) 15 30 39 15Samsung LED (Samsung LED) 65

Seoul Semi (Cree, Seoul Opto) 20 6LG Innotek (LGI) 30ALTI Elec (SDK or TG)Lumens (Epistar) 5Everlight (Epistar) 18Lite-on (TG, Cree) 10Lextar (TG, Cree) 45 15 47ChiMei Lighting (TG) 30Total 100 100 100 100 100Source: Shinhan Investment Corp.

LED supply chain (LCD monitors) (%)LED PKG Maker(Chip Supplier) AUO CMI CPT LG Display SamsungNichia (Nichia) 30 20TG (TG)Samsung LED (Samsung LED) 30 63 (Sample)Seoul Semi (Cree, Seoul Opto) 20 37 (Sample)LG Innotek (LGI) 10 40Lite-on (TG, Cree) 20Lumens (TG)Everlight (TG) 100Lumileds (Lumileds) 10LightHouse (Lextar) 40GIO (CMLT, Epistar, TG) 50

AOT (Nichia) 30Total 100 100 100 100 100Source: Shinhan Investment Corp.

LED supply chain (LCD TVs) (%)LED PKG Maker(Chip) AUO CMI LG Display Samsung SharpNichia, Sharp (Nichia) 30 97TG (TG)StanleySamsung LED (Samsung LED) 20 93 3Seoul Semi (Seoul Opto) 20 9 5LG Innotek (LGI) 63ALTI ElectronicsLumens (Forepi, Epistar) 8 2Everlight (Huga, Epistar)Lite-on (Huga, Epistar) 20Lextar (Lextar), Wellypower(Lextar) 60GIO (CMLT, Epistar, TG) 40Unity (Epistar, CMLT)AOT (Nichia) 30Total 100 100 100 100 100Source: Shinhan Investment Corp.


14/16


14

Unique competitive advantages Seoul Semiconductor makes inroads into deep UV LED market estimated to be

worth W5tr Non-polar LED is a next-generation LED light source with light efficiency of

250lm/W Professor Nakamura Shuji will play a key role in new product development

Besides the LED BLU market, Seoul Semiconductor is starting to make significant progressin the general LED lighting market with Acriche. Its competitiveness does not stop here.The company is making inroads into the UV LED and non-polar LED markets. Thesebusinesses have yet to show visible contribution in sales. But accumulation of technologyin these areas will set the company apart from other domestic LED manufacturers giventhat UV LED and non-polar LED will emerge as niche markets in the future.

Most medical lightings use mercury or halogen. There are movements to find alternatives

for these lightings as mercury is harmful to the human body and halogen emits too muchheat. A good alternative light source is deep UV LED (ultraviolet light emitting diode). UVLED in the 200~350nm wavelength band has diverse applications besides medical equipments, such as human genome analysis, heart disease treatment, counterfeit bill detectors, air purifiers, and high-density optical recording systems.

UV LED in the 260~280nm wavelength band is effective in sterilization of bacteria,including colon bacillus. Featuring high efficiency and long life span, UV LED will likelyreplace most of other light sources. Related markets are estimated to be worth W5tr.Seoul Optodevice succeeded in developing UV LED jointly with U.S. SETI (SETI providedwafers, Seoul Optodevice in charge of chips and packaging) in 2006, and has alreadystarted mass production of UV LED in the 260~340nm wavelength band. The sales

contribution of deep UV LED is currently less than 1%, but earnings will start kicking infrom 2013.

Furthermore, Seoul Semiconductor will likely emerge as a global leader in non-polar LEDmarket. The present LED chip deposits a layer of nitrogen and a layer of potassium onsapphire substrate. The non-polar LED combines these two layers into one. This will bethe next-generation LED. Once non-polar LED is commercialized, costs will dropsignificantly as polarizers and DBEF (dual brightness enhancement film) sheets will nolonger be needed. Light efficiency will also increase to 250lm/W, double the current level of 100-150lm/W. Seoul Semiconductors advancement in next-generation LED technologyis possible with renowned scholar Professor Nakamura Shuji of University of CaliforniaSanta Barbara (U.S.) as its adviser.

Making inroads into LEDniche markets like UVLED and non-polar LED

Deep UV LED expected

to replace existingmedical lightings

Seoul Optodevicedeveloped UV LED

jointly with U.S. SETI

Advancement innext-generation LEDtechnology is possiblewith Professor NakamuraShuji as adviser


15/16


15

Global LED manufacturers profit estimates and valuation comparisonsCompany Toyoda Gosei Epistar Corp. Cree Samsung Electro-Mechanics Seoul Semiconductor Symbol 7282 JP 2448 TT Cree US 009150 KS 046890 KSCountry JP TT US KS KSMarket Tokyo Taiwan NASDAQ GS Korea SE KOSDAQ

Share price (as of 27 Sep. 2010) 1,912.0 96.4 51.2 118,000 43,100Market Cap. 248,579 81,695.5 5,533.8 8,813,856 2,512,963Currency (mn) JPY TWD USD KRW KRWSales 2008 546,380 10,321 493 3,099,821 284,137

2009 495,002 12,706 567 3,192,031 453,4332010E 527,712 19,986 867 4,630,987 894,794

OP 2008 15,833 (34) 13 84,421 (11,381)2009 26,202 1,685 37 215,964 43,9502010E 35,763 5,016 211 553,598 114,950

OPM (%) 2008 2.9 (0.3) 2.7 2.7 (4.0)2009 5.3 13.3 6.6 6.8 9.72010E 6.8 25.1 24.4 12.0 12.8

NP 2008 3,951 42 33 48,080 (12,513)2009 14,255 1,732 30 278,476 28,2482010E 19,562 4,823 152 600,234 114,305

EPS 2008 30.6 0.1 0.4 624 (246)2009 110.2 2.6 0.3 3,616 5472010E 152.1 6.0 1.7 7,415 1,943

PER (x) 2008 48.5 422.9 59.2 53.4 N/A2009 23.8 46.3 58.7 29.7 84.82010E 12.6 16.0 31.7 15.9 22.2

PBR (x) 2008 1.0 0.8 1.8 1.3 2.72009 1.6 2.6 2.2 3.1 5.82010E 1.1 2.0 2.7 3.0 4.3

EV/EBITDA (x) 2008 4.0 7.2 15.9 9.3 117.6

2009 5.1 19.6 16.9 19.3 39.62010E 3.1 9.1 15.5 11.9 16.8

ROE (%) 2008 1.8 0.2 3.1 2.4 (7.2)2009 6.9 6.0 2.6 12.3 9.12010E 8.7 12.2 9.6 21.6 21.9

ROA (%) 2008 0.9 0.2 2.8 1.5 (5.4)2009 3.5 4.8 2.2 7.5 7.32010E 5.9 10.3 8.8 13.3 17.7

Current Ratio 2009 1.5 3.0 11.3 1.2 4.9Quick Ratio 2009 1.2 2.7 9.9 1.0 3.7Asset T/O 2009 1.2 0.4 0.5 0.9 1.2Financial leverage 2009 2.0 1.2 1.1 1.6 1.2LT debt/Asset 2009 10.3 0.0 0.0 8.3 0.0

Source: Bloomberg, Shinhan Investment Corp.


16/16

Analyst Certification: The following analysts hereby certify that their views on the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receivedirect or indirect compensation in exchange for expressing specific recommendations or views in this report: Joon Doo Ha. Eui Keun Kim. Shinhan Investment Corp. has issued ELW based on the company's asset andfloated LP. As of the date of this report, Shinhan Investment Corp.' holdings of shares of the company mentioned in this report do not exceed 1% of the outstanding shares of the company. As of the date of this report,Shinhan Investment Corp. had not participated as a lead manager or adviser during the past 1 year, in issuance of the securities of the company mentioned in this report. As of the date of this report, the coveringanalyst did not maintain any financial interest in the securities or debt instruments convertible into such shares of the company mentioned in this report. All opinions and estimates included in this report constitute ourj d f h d f hi d bj h i h i Thi i f i h b il d f b li b li bl b d h ld l ibl f i l

SHIC Rating Classifications (As of 10 Feb. 2003) : BUY; Over +15%, HOLD; -15% to +15%, REDUCE; -15% or More

SEOUL LONDON NEW YORK Hong Kong ShanghaiTel: (82-2) 3772-2700, 2702 Tel: (44-20) 7283-4900 Tel: (1-212) 397-4000 Tel: (852) 3713-5333 Tel : (86-21) 6888-9135Fax: (82-2) 6671-7573 Fax: (44-20) 7283-5678 Fax: (1-212) 397-0032 Fax: (852) 3713-5300 Fax : (86-21) 6888-913

Balance Sheet Year to Dec. (W bn) 2008 2009 2010E 2011E 2012ETotal Assets 240.8 528.4 685.0 932.2 1,280.8Current Assets 171.1 339.9 399.3 596.6 920.7

Cash & Cash Equivalents 9.0 26.9 15.5 136.6 375.0St. Investment Assets 51.3 148.9 156.4 164.2 172.4Accounts Receivable 55.1 92.7 113.0 143.8 178.6

Inventory 35.3 48.9 85.1 115.0 148.8Others 20.4 22.5 29.3 37.0 45.9

Non-current Assets 69.8 188.5 285.6 335.6 360.1Investment Assets 7.0 92.6 106.4 122.4 140.6Tangible Assets 43.5 73.5 139.9 156.4 147.0Intangible Assets 16.0 19.5 36.3 53.6 69.2

Total Liabilities 75.8 70.4 115.1 170.1 232.9Current Liabilities 74.6 69.0 113.7 168.6 231.3

Accounts Payable 26.5 42.3 85.5 139.9 202.6St. Debt 22.0 0.0 0.0 0.0 0.0Current Portion of Lt. Debt 0.7 0.0 0.0 0.0 0.0Others 25.5 26.7 28.1 28.7 28.6

Non-current Liabilities 1.2 1.4 1.5 1.5 1.6Bonds 0.0 0.0 0.0 0.0 0.0Lt. Debt 0.0 0.0 0.0 0.0 0.0Others 1.2 1.4 1.5 1.5 1.6

Total Stockholders Equity 165.0 458.0 569.8 762.1 1,047.9Paid-in Capital 25.4 28.9 28.9 28.9 28.9Capital Surplus 77.8 339.3 339.3 339.3 339.3Capital Adjustment (0.5) 0.0 0.0 0.0 0.0Other Accumulated Earnings 1.0 0.2 0.2 0.2 0.2Retained Earnings 61.3 89.6 201.5 393.7 679.5

Total Debt 22.7 0.0 0.0 0.0 0.0Net Debt(Cash) (37.6) (175.8) (171.9) (300.8) (547.4)

Cash Flow Year to Dec. (W bn) 2008 2009 2010E 2011E 2012ECash Flows from Operating 9.6 18.9 116.1 213.9 311.6

Net Profit (12.5) 28.2 117.2 197.6 291.2Depreciation 12.7 16.8 50.6 65.6 71.6Amortization 2.3 2.8 3.1 5.7 8.5Equity Method Loss(Gain) 10.2 7.0 (10.0) (12.0) (14.0)Investment Asset Disp Loss(Gain) 0.3 (0.1) (0.1) (0.1) (0.1)Tangible Asset Disp Loss(Gain) (0.5) (2.2) (2.3) (2.4) (2.5)Changes in Working Capital (11.6) (39.1) (41.6) (38.8) (41.0)Others 8.7 5.6 (0.8) (1.6) (2.1)

Cash Flows from Investing (27.9) (238.9) (122.1) (87.5) (67.8)St. Investment Assets Dec.(Inc.) (23.6) (102.5) (7.4) (7.8) (8.2)Investment Securities Dec.(Inc.) 13.7 (5.1) 0.0 0.0 0.0Tangible Assets Dec.(Inc.) (17.1) (50.3) (114.7) (79.7) (59.6)Others (1.0) (80.9) 0.0 (0.0) 0.0

Free Cash Flow (18.3) (220.0) (6.0) 126.5 243.7Cash Flows from Financing 10.0 238.0 (5.4) (5.4) (5.4)

St. Debt Inc.(Dec.) 15.4 (22.0) 0.0 0.0 0.0Cur. Por. of Lt. Debt Inc.(Dec.) (1.8) (0.7) 0.0 0.0 0.0Bonds Inc.(Dec.) 0.0 0.0 0.0 0.0 0.0Lt. Debt Inc.(Dec.) 0.0 0.0 0.0 0.0 0.0Share Capital Inc.(Dec.) 0.0 260.6 0.0 0.0 0.0Dividend Paid (3.6) 0.0 (5.4) (5.4) (5.4)

Others 0.0 0.0 0.0 0.0 0.0Change in Cash (8.2) 17.9 (11.4) 121.1 238.4

Beginning Cash 17.2 9.0 26.9 15.5 136.6Ending Cash 9.0 26.9 15.5 136.6 375.0

Capex/ Sales (%) 6.0 11.1 12.5 5.3 2.7Depreciation/ Sales (%) 4.5 3.7 5.5 4.4 3.3Depreciation/ Capex (%) 74.4 33.3 44.1 82.3 120.1Source: Company data, Shinhan Investment Corp. estimates

Profit and Loss Year to Dec. (W bn) 2008 2009 2010E 2011E 2012ENet Sales 284.1 453.4 916.9 1,499.7 2,172.7

Growth (%) 13.6 59.6 102.2 63.6 44.9Export ratio (%) 0.0 0.0 0.0 0.0 0.0

Cost of Sales 223.4 351.2 685.9 1,100.7 1,594.6Growth (%) 23.1 57.2 95.3 60.5 44.9

Gross Profit 60.7 102.3 231.0 399.0 578.0Gross Margin(%) 21.4 22.6 25.2 26.6 26.6

SG&A Expenses 72.1 58.3 106.7 180.0 244.4Growth (%) 66.7 (19.1) 82.9 68.8 35.8

Operating Profit (11.4) 44.0 124.4 219.0 333.6Growth (%) TR TB 183.0 76.1 52.3Operating Margin (%) (4.0) 9.7 13.6 14.6 15.4

Non-Operating Inc (Exp) (3.9) (10.9) 12.9 16.2 21.5Interest Income 3.1 2.5 4.1 5.3 8.5Interest Expenses 1.0 2.1 0.0 0.0 0.0Net F/X 6.2 (6.3) (3.4) (3.4) (3.4)Net Asset Disposal 0.2 2.3 2.4 2.6 2.7Net Equity Method (10.2) (7.0) 10.0 12.0 14.0Net Other non-operating (2.2) (0.2) (0.3) (0.3) (0.3)

Pre-tax Profit from Cont. Op (15.3) 33.1 137.3 235.2 355.2Income Taxes (2.7) 4.8 20.0 37.6 63.9

Profit from Cont. Op (12.5) 28.2 117.2 197.6 291.2Profit from Discont. Op 0.0 0.0 0.0 0.0 0.0Net Profit (12.5) 28.2 117.2 197.6 291.2

Growth (%) TR TB 315.0 68.5 47.4Net Margin (%) (4.4) 6.2 12.8 13.2 13.4

EBITDA 3.6 63.5 178.1 290.4 413.7Growth (%) (90.8) 1,660.2 180.4 63.1 42.5

Dividend Payout (%) 0.0 19.0 4.6 2.7 1.8

Key Ratios Year to Dec. 2008 2009 2010E 2011E 2012E

EPS (won) (246) 547 2,031 3,423 5,046Adj. EPS (won) (249) 502 1,989 3,379 5,000BPS (won) 3,247 7,935 9,874 13,204 18,157DPS (won) 0 93 93 93 93PER (x) na 60.1 21.9 13.0 8.8Adj. PER (x) na 65.5 22.4 13.2 8.9PBR (x) 4.4 4.1 4.5 3.4 2.5PCR (x) 34.5 29.2 16.3 10.2 7.3EV/ EBITDA (x) 193.0 24.0 13.5 7.8 4.9PEG (x) na 0.5 0.4 0.4 naDividend Yield (%) - 0.3 0.2 0.2 0.2

ProfitabilityOperating Margin (%) (4.0) 9.7 13.6 14.6 15.4EBITDA Margin (%) 1.3 14.0 19.4 19.4 19.0Pre-tax Profit Margin (%) (5.4) 7.3 15.0 15.7 16.3Net Margin (%) (4.4) 6.2 12.8 13.2 13.4ROA (%) (5.4) 7.3 19.3 24.4 26.3ROE (%) (7.2) 9.1 22.8 29.7 32.2ROIC (%) (7.7) 19.8 34.4 47.4 64.2

StabilityDebt Ratio (%) 46.0 15.4 20.2 22.3 22.2Net Debt Ratio (%) (22.8) (38.4) (30.2) (39.5) (52.2)

Interest Coverage (x) na 20.5 na na naActivity

Asset Turnover (x) 1.2 1.2 1.5 1.9 2.0Receivables Turnover (x) 5.5 5.8 8.3 11.0 12.9Inventory Turnover (x) 9.2 10.8 13.7 15.0 16.5Payables Turnover (x) 13.9 13.2 14.3 13.3 12.7Working Capital Turnover (x) 4.9 5.9 8.8 12.4 16.1

Source: Company data, Shinhan Investment Corp. estimates

SeoulSemicon_20100929_GMS_InitiateCoverage_16pg

Documents