100510 韓國半導體及lcd設備產業報告

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100510 韓國半導體及lcd設備產業報告

  1. 1. Industry Report 7 May 2010 (No. of pages: 48) Korea Semiconductor and LCD Equipment Positive Sector Jae H. Lee (82) 2 787 9173 Electronics: Korea jhlee@kr.daiwacm.com Initiation of coverage: benefitting from a capital-spending bonanza Summary We initiate coverage of three semiconductor and LCD-equipment companies in Korea: Jusung Engineering (Jusung) and KC Tech with 1 (Buy) ratings, and SFA Engineering (SFA) with a 2 (Outperform) rating. In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both semiconductor and LCD-panel makers are now trying to add capacity as fast as they can and are competing for the equipment that would enable them to do so. As we forecast capex increases for 2010 of 63% YoY for the global semiconductor industry and 53% YoY for the LCD industry, we expect Korean equipment-making companies to benefit from rising order intakes throughout this year. Since the semiconductor and LCD industries are highly cyclical in nature, we believe that the equipment companies face significant challenges maintaining their profitability, especially during industry downturns. However, over the past few years, Korean equipment companies have started to explore new markets, such as solar-cell, LED, and AMOLED equipment. As end-product demand expands further for these markets, we expect the opportunities for Korean equipment companies to increase. Following the drastic cutbacks on spending in 2009, Korean semiconductor and LCD-panel makers have been adding new capacity aggressively. We forecast a 96% YoY increase in domestic semiconductor capex and a 61% YoY rise in domestic LCD capex for 2010. While there are more than 20 listed equipment manufacturers in Korea, we like Jusung, KC Tech, and SFA, due mainly to their diversified product mixes and customer bases, which we believe would bolster their revenue and earnings over the next three years. Korea Semiconductor and LCD Equipment Sector: valuation summary Share price PER EV/EBITDA Dividend yield Company Bloomberg 3-May-10 Target price +/- Year (x) (x) (%) name code (local curr.) Rating (local curr.) (%) end 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E Jusung Engineering 036930 KS 20,500 1 28,000 36.6 Dec n.m. 15.5 11.7 10.6 38.3 10.3 8.2 7.4 0.0 0.0 0.0 0.0 KC Tech 029460 KS 7,010 1 9,200 31.2 Dec 21.1 9.7 7.5 6.6 12.6 6.7 4.8 3.9 0.4 0.7 1.1 1.1 SFA Engineering 056190 KS 58,800 2 75,000 27.6 Dec 29.7 16.3 12.7 12.0 22.5 11.2 8.3 7.5 0.7 1.3 1.4 1.5 Source: Companies, Daiwa forecasts IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH Global Equity Research CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT.
  2. 2. Contents The three most important charts in this report ... ..............................................................3 Executive summary...........................................................................................................4 Increasing opportunities for equipment makers................................................................5 Increasing presence in ‘clean’ tech .................................................................................10 Our focus on diversified players .....................................................................................16 Appendix.........................................................................................................................22 Company section Jusung Engineering..................................................................................................23 KC Tech...................................................................................................................29 SFA Engineering .....................................................................................................35 Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 2
  3. 3. The three most important charts in this report ... Shipment volume for key IT and consumer products 250 200 150 100 50 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10E 4Q10E 2Q11E 4Q11E PC Handset LCD-TV Source: Daiwa forecasts Note: Indexed to 100 as of 4Q07 Global LCD-equipment market (US$bn) (%) 16 120 14 100 12 80 60 10 40 8 20 6 0 4 (20) 2 (40) 0 (60) 2003 2004 2005 2006 2007 2008 2009 2010E 2011E Equipment market (LHS) YoY growth (RHS) Source: DisplaySearch Korea semiconductor and LCD capex vs. equipment makers’ revenue (Wbn) (Wtn) 800 25 20 600 15 400 10 200 5 0 0 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 Revenue (LHS) Capex (RHS) Source: Companies, Daiwa Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 3
  4. 4. Executive summary Increasing opportunities for Korean equipment companies We believe Korean Since 2Q09, end-product demand has continued to provide upside surprises. The equipment companies introduction of various stimulus packages in early 2009, followed by an economic are likely to benefit recovery from late 2009, have resulted in upward revisions to demand forecasts by from rising capex Daiwa and market-research firms for key electronics products. In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both semiconductor and LCD-panel makers are now trying to add capacity as fast as they can, and are competing for the equipment that would enable them to do so. As we forecast capex increases for 2010 of 63% YoY for the global semiconductor industry and 53% YoY for the LCD industry, we expect Korean equipment-making companies to benefit from rising order intakes throughout this year. Increasing exposure to new products Potential new Since the semiconductor and LCD industries are highly cyclical in nature, we opportunities in solar- believe that the equipment companies face significant challenges maintaining their cell, LED, and profitability, especially during industry downturns. In addition, equipment AMOLED equipment companies need to continually enhance their existing products and create new markets with new products to sustain or gain market share. Over the past few years, Korean equipment companies have started to explore new markets, such as solar- cell, LED, and AMOLED equipment. As end-product demand expands further for these markets, we would expect opportunities for Korean equipment companies to increase. We are positive on the earnings outlook for Korean equipment companies We focus on firms with Following the drastic cutbacks on spending in 2009, we forecast a 96% YoY diversified products and increase in domestic semiconductor capex and a 61% YoY rise in domestic LCD customer bases capex for 2010. Among LCD companies, LG Display (LGD) (034220 KS, W46,700, 3) is the most aggressive in terms of its planned capacity expansion, with a capex budget of over W5.5tn for FY10. Meanwhile, we forecast a substantial increase in Samsung Electronics’ (SEC) (005930 KS, W832,000, 2) capex for FY10, as we expect SEC to build new capacity for memory chips and a new LCD production line. While there are more than 20 listed equipment manufacturers in Korea, we initiate coverage on just three companies (Jusung, KC Tech, and SFA), due mainly to their diversified product mixes and customer bases. Jusung Engineering: We initiate coverage with a 1 (Buy) rating and a six-month target price of W28,000. Jusung is our top pick among Korean equipment companies, and we expect it to record robust revenue growth for FY10 on the back of a large order intake for solar-cell equipment. Jusung is testing metal-oxide chemical vapour deposition (MOCVD) reactors currently for mass production, and could receive orders from domestic LED-chip companies from 2Q FY10. KC Tech: We initiate coverage with a 1 (Buy) rating and a six-month target price of W9,200. We forecast KC Tech to announce record-high revenue for FY10 due to its rising exposure to semiconductor materials, as well as increasing orders from semiconductor and LCD-panel makers. KC Tech is one of the few domestic equipment companies that supply the same product to multiple customers, since the company has accumulated the necessary experience and technology. SFA Engineering: We initiate coverage with 2 (Outperform) rating and a six- month target price of W75,000. We believe that SFA would be a key beneficiary of SEC’s LCD-capacity expansion and, with the recent equity participation of SEC, the company is a strong contender to supply plasma-enhanced (PE) CVD equipment to SEC for the first time this year. SFA is also developing AMOLED equipment, which we believe has huge growth potential over the longer term. Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 4
  5. 5. Increasing opportunities for equipment makers Due to strong end- Since 2Q09, end-product demand has continued to provide upside surprises. The product demand, introduction of various stimulus packages in early 2009, followed by an economic semiconductor and recovery from late 2009, have resulted in upward revisions to demand forecasts by LCD-panel makers Daiwa and market-research firms for key electronics products. are increasing their capex aggressively Our latest forecast for global PC shipments is for a 15.1% YoY increase for 2010, compared with a 4.7% YoY rise for 2009. Driven by strong consumer demand, PC shipments have recovered fully after a weak start in 1Q09. However, as we expect the corporate replacement cycle to accelerate in 2H10, we believe there could be further upside to our PC shipment forecasts. As for mobile handsets, we forecast increasing demand for smartphones to lead to healthy handset-volume growth of 11.3% YoY for 2010, compared with a 0.9% YoY decline for 2009. We have also revised up our forecast for 2010 LCD-TV shipment volume to 190m units from 169m units previously. Although we forecast the volume growth rate to slow going forward, due to the high penetration rate for flat-panel TVs in developed markets, we expect demand in China and other emerging markets to support double-digit percentage growth annually for the next couple of years. On a quarterly basis, the shipment volume of core IT and consumer products at the end of 2009 surpassed the peak level recorded in 2008, and we expect this to continue to expand throughout 2011. Shipment volume for key IT and consumer products 250 200 150 100 50 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10E 4Q10E 2Q11E 4Q11E PC Handset LCD-TV Source: Daiwa forecasts Note: Indexed to 100 as of 4Q07 Daiwa shipment-growth forecasts (YoY %) PC Handset Total TV Semiconductor 2008 +10.4 +6 +4.1 -3.5 2009 +4.7 -0.9 +1.7 -5.6 2010E +15.1 +11.3 +11.5 +15.0-17.0 2011E +10.3 +10.1 +4.3 +7.0-9.0 Source: Daiwa In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both semiconductor and LCD-panel makers have been increasing their capital spending aggressively in 2010. Although capital spending by semiconductor and LCD-panel makers hit a past-five-year low in 2009, we forecast capex increases for 2010 of 63% YoY for the global semiconductor industry and 53% YoY for the LCD industry, driven by the expansion of new production capacity and migration to finer process technology. Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 5
  6. 6. Semiconductor capex likely to rise strongly for 2010 We forecast global The leading indicators show that the semiconductor cycle is in the midst of a semiconductor capex cyclical uptrend, and we expect industry-wide shipments and utilisation rates to to increase by 63% continue to improve throughout 2010, providing greater opportunities for YoY for 2010 semiconductor equipment companies. ISM index and semiconductor cycle 70 80% 65 60% 60 40% 55 20% 50 0% 45 -20% 40 35 -40% 30 -60% Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 ISM Index (LHS) Semiconductor sales growth (% YoY) (RHS) Source: CEIC, WSTS US new orders for electronics items (US$bn) (%) 36 30 34 20 32 10 30 0 28 (10) 26 24 (20) 22 (30) 20 (40) Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 New orders (LHS) YoY growth (RHS) Source: US Department of Commerce Following one of its worst-ever downturns, the DRAM industry continues to recover on the back of muted supply growth amid robust PC demand. We forecast the DRAM industry’s capex to increase 109% YoY to US$10.3bn for 2010, due to improving profitability and cash flow. Meanwhile, we also forecast foundry capex to increase by 123% YoY to US$9.2bn for 2010, due to rising utilisation rates and increasing outsourcing to the foundry industry as many integrated device manufacturers are losing market share to fabless companies. Given the strong capex increases for memory chips and the foundry sector, we forecast global semiconductor capex to increase to US$33.9bn for 2010 from US$20.8bn for 2009. While the sharp increase in capital spending may raise some concerns in the market about the potential for excess capacity beyond 2010, we do not believe that capital intensity (capex/sales) for the industry is running high. We forecast the capital intensity for the global semiconductor industry to reach 12.1% for 2010, compared with a range of 9.2-20.8% (average of 14.4%) over the past three years. Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 6
  7. 7. Global semiconductor capex and capital intensity trend (US$bn) (%) 60 25 50 20 40 15 30 10 20 10 5 0 0 2003 2004 2005 2006 2007 2008 2009 2010E 2011E Capex (LHS) Capex/sales (RHS) Source: Companies, WSTS, Daiwa forecasts Although Korea has accounted for 18-24% of the global semiconductor equipment market over the past five years, the exposure of domestic equipment companies is relatively small, since just a few players specialise in front-end semiconductor equipment due to technological and intellectual-property barriers. Among the most expensive tools, lithography machines are purchased mainly from ASML Holding (Not rated), while other front-end equipment is procured through Applied Materials (Not rated) and Tokyo Electron (8035 JP, ¥6,210, 1). According to the Korea Semiconductor Industry Association (KSIA), equipment purchases by Korean chip makers through domestic companies have accounted for an average of 20% (10% for front-end and 30-40% for back-end) of total purchases over the past five years. However, as Korean memory-chip makers are planning to incur over W10tn of capex for 2010, compared with W5tn for 2009, we expect equipment makers to benefit despite the low domestic equipment sourcing rate. Korea’s semiconductor equipment market (US$bn) (%) 9 25 8 7 20 6 15 5 4 10 3 2 5 1 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009E Domestic (LHS) Imported (LHS) Domestic ratio (RHS) Source: KSIA, Daiwa forecasts Pending China project could provide further upside to LCD capex We forecast global LCD Emerging markets (particularly China) remain the key driver of LCD-TV demand, capex to increase by and defied the historical seasonal patterns between 4Q09 and 1Q10. Although 53% YoY for 2010 weaker-than-expected TV sell-through during the Lunar New Year resulted in higher inventory levels (two-to-three weeks higher than normal levels) in the channel, we do not foresee a sharp inventory correction in the near term, as we believe lower panel prices are likely to lead to inventory rebuilding in 2H10. Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 7
  8. 8. Given what we see as the healthy outlook for the LCD-panel market in 2010, we expect the earnings volatility of the panel makers to decrease and, as a result, spending on equipment to rise going forward. Many of the leading panel makers are scrambling to add capacity, as their utilisation rates are running at close to 100% currently. According to DisplaySearch, 2008 was the biggest year ever for capital spending on LCD equipment, while spending dipped substantially for 2009, due to sharp panel- price declines during 3Q08-1Q09. However, DisplaySearch expects global spending on LCD equipment in 2010 to return to near the 2008 level, at US$13.2bn. Global LCD-equipment market (US$bn) (%) 16 120 14 100 12 80 60 10 40 8 20 6 0 4 (20) 2 (40) 0 (60) 2003 2004 2005 2006 2007 2008 2009 2010E 2011E Equipment market (LHS) YoY growth (RHS) Source: DisplaySearch Meanwhile, Korean panel makers are becoming more aggressive about adding capacity. LGD has announced that it will build an extension to its second Gen8 line (Line P8E+), taking its total Gen8 line capacity to more than 300,000 substrates a month by mid-2011, from 120,000 substrates a month currently, and has also decided to incur over W5.5tn of capex for FY10. We also expect SEC to equip its fourth Gen8 production line by the end of this year, and now forecast its FY10 LCD capex to rise to W4.5tn, from W3.0tn previously. Given that the two Korean panel makers’ capex may rise to W10tn for 2010, we forecast global LCD capital spending to increase by 53% YoY to US$19.6bn, which would represent a past-10-year high. With respect to the capital intensity of the LCD market, we forecast a capex-to-revenue ratio of 23% for 2010, which is near the high end of the past-three-year range of 16-25%. Global LCD capex and capital intensity (US$bn) (%) 25 60 20 50 40 15 30 10 20 5 10 0 0 2003 2004 2005 2006 2007 2008 2009 2010E 2011E Capex (LHS) Capex/sales (RHS) Source: Companies, DisplaySearch, Daiwa forecasts Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 8
  9. 9. We believe LCD-TV demand in China will remain strong for the next three years, and panel makers are rushing to build new production lines there. Combined with the CRT-TV replacement trend and the government’s stimulus package, we forecast LCD-TV demand in China to increase by 45% YoY to 42.6m units for 2010, from 29.3m units for 2009. The leading panel makers globally plan to set up new lines in China, since local TV manufacturers have the lion’s share of China’s LCD-TV market and the PRC Government may impose a higher import duty on LCD panels (from 3% currently to 5% or higher in the future). Although there are several Gen5 lines running already in China, the PRC Government has approved the construction of three new Gen8 lines by local panel makers. BOE’s (Not rated) Gen8 line in Beijing (capacity of 90,000 substrates per month), IVO’s (Not listed) Gen8 line in Kunshan (capacity of 90,000 substrates per month), and TCL’s (Not rated) Gen8 line in Shenzhen (capacity of 60,000 substrates per month) are confirmed for mass production starting from the middle to end of 2011. Other potential projects pending the PRC Government’s approval include SEC’s Gen7.5 line in Suzhou, LGD’s Gen8 line in Guangzhou, AU Optronics’ (Not rated) Gen7.5 line in Suzhou, Chimei Innolux’s (Not rated) Gen7.5 line in Chengdu, and CEC-Panda and Sharp’s (6753 JP, ¥1,226, 3) Gen8 line in Nanjing. The PRC Government could grant approvals for two-to-three additional new production lines in China. Should Korean panel makers win such approval, we believe this could provide further upside for orders for Korean equipment makers. Unlike for semiconductor equipment, the local sourcing ratio for LCD equipment is much higher, at 50-60%. Since two Korean panel makers have the largest market shares globally, they have been setting industry standards, such as glass substrate sizes, and local equipment companies have worked closely with them from the early stages of development while offering competitive prices for their equipment. New LCD production-line projects in China Company Location Investment Production start Gen6 BOE Heifei US$2.5bn 4Q10 CEC Nanjing US$2.0bn 1Q11 Gen7.5 Samsung Electronics Suzhou US$2.4bn 4Q11 AU Optronics Suzhou US$3.0bn 1Q12 Chimei Innolux Chengdu TBD 2Q12 Gen8 BOE Beijing US$4.0bn 3Q11 CEC (Sharp) Nanjing US$4.0bn 4Q11 IVO Kunshan US$4.0bn 4Q11 TCL Shenzen US$3.6bn 4Q11 LG Display Guangzhou US$4.0bn 2Q12 Source: Companies, Daiwa Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 9
  10. 10. Increasing presence in ‘clean’ tech Korean equipment Since the semiconductor (particularly memory chips) and LCD industries are makers have started to highly cyclical in nature, we believe that equipment companies face significant explore solar-cell, LED challenges maintaining their profitability, especially during industry downturns. In and AMOLED addition, equipment makers need to continually enhance their existing products and equipment create new markets with new products to sustain or gain market share. Over the past few years, Korean semiconductor and LCD-equipment companies have started to explore new markets, such as solar-cell, LED, and AMOLED equipment. Among the top-15 listed Korean equipment companies, Jusung and IPS (Not rated) have made the biggest progress in solar-cell equipment, as their proportions of solar-cell equipment sales increased to 39% and 43% for 2009 from 11% and 3% for 2007, respectively. Meanwhile, a handful of other equipment companies are preparing to enter the solar-cell equipment market in anticipation of supplying systems to SEC and LG Electronics (LGE) (066570 KS, W119,500, 2), since both companies plan to expand their solar-cell businesses over the next few years. Korean equipment companies’ segment revenue breakdown Bloomberg Mkt cap 2009 rev. 2009 revenue breakdown (%) Company code (Wbn) (Wbn) Semi LCD Solar Others Semes Not listed n.a. 316 70 23 0 7 Jusung Eng 036930 KS 673 170 28 33 39 0 SFA 056190 KS 536 307 0 50 0 50 EO Technics 039030 KS 306 81 63 28 0 10 DMS 068790 KS 276 153 11 84 0 5 Atto 030530 KS 273 91 100 0 0 0 IPS 051820 KS 236 50 26 17 43 14 KC Tech 029460 KS 219 96 7 67 0 25 Hanmi Semi 042700 KS 214 75 78 0 6 16 PSK 031980 KS 186 33 81 0 0 19 Eugenetech 084370 KS 187 49 97 0 0 3 LIG ADP 079950 KS 164 86 0 98 0 2 Hanyang Eng 045100 KS 147 121 15 30 0 55 Osung LST 052420 KS 127 127 11 30 1 58 Top Eng 065130 KS 115 101 0 89 0 11 SNU 080000 KS 111 34 0 77 23 0 Source: Companies, Bloomberg, Daiwa Note: share prices as at the close on 3 May Meanwhile, as we forecast a strong increase in demand for LED chips for 2010, due to proliferation of LED TVs, we expect two largest LED-chip makers globally, Samsung LED (Not listed) and LG Innotek (011070 KS, W170,000, 2), to work more closely in developing MOCVD reactors with domestic equipment companies. Until now, Samsung LED and LG Innotek have purchased MOCVD reactors primarily from Aixtron (Not rated) and Veeco (Not rated), but as core equipment has been a bottleneck in LED-chip production due to tight supply, they have formed tie-ups with Korean equipment companies. In AMOLED, the core processing equipment market is dominated mainly by Japanese manufacturers, such as Tokki (Not rated) and Ulvac (Not rated). Although Samsung Mobile Display (SMD) (Not listed) is the undisputed leader in AMOLED, with a 98% share of the global market for 2009, SMD has not purchased any AMOLED equipment from Korean equipment companies in the past. However, as SMD’s current Gen4 (730mmx460mm) line will reach full capacity of 50,000 substrates per month by the end of 2010, we expect the company to add a Gen5.5 (1,500mmx1,350mm) in 2011, which we believe would give Korean equipment companies the opportunity to provide AMOLED equipment to SMD. Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 10
  11. 11. Solar: industry’s revenue growth should resume from 2010 Potentially more Following the exponential growth between 2004 and 2008, revenue for the opportunities for photovoltaic (PV) system market declined by 37% YoY to US$23.4bn for 2009 equipment companies as due to weak demand at the start of the year and high inventory levels in the value SEC and LGE expand chain. In 2010, overcapacity remains an issue for the solar industry, and we believe their solar-cell this is likely to continue throughout 2010, due to the further ramp-up of new businesses production capacity. In addition, a reduction in Germany’s feed-in tariff from July has raised some concerns in the market about a potential decline in shipments. However, as we expect Italy, France, the Czech Republic and Benelux countries to account for about 2GW of demand, we forecast capacity additions to total 9.5GW for the industry in 2010. Global PV-related market (US$bn) 45 40 35 30 25 20 15 10 5 0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E PV cell market Module market System market Annual capacity add (GWp) Source: Daiwa forecasts On the supply side, we forecast the capacity of the top-14 solar-cell companies to increase to about 12GW for 2010. Notably, PRC solar-cell companies are taking the most aggressive approach to gaining market share. In Korea, Hyundai Heavy Industries (009540 KS, W251,000, 3) is the largest solar-cell producer, with a current capacity of 330MW, but plans to raise this to 1GW by end of 2012. Meanwhile, LGE started a 120MW production line in early 2010, and plans to double its capacity in 2011. SEC is a relative latecomer to the market and currently has an R&D line with a capacity of 30MW, but the company plans to increase this to 130MW by the end of 2010. As Korean solar-cell companies plan to continue to increase their capacity over the next few years, we would expect equipment companies to benefit. Capacity of the top-14 solar-cell companies (MW) 2007 2008 2009E 2010E First Solar 308 716 1,189 1,241 Suntech 480 1,000 1,000 1,200 Sharp 710 710 900 1,180 Q-Cells 645 760 800 950 JA Solar 175 600 875 950 SolarWorld 250 400 750 900 Yingli 200 400 600 800 Trina 150 350 600 800 Motech 240 450 600 700 Solarfun 240 360 510 700 Sunpower 214 414 574 650 Kyocera 220 360 450 600 Sanyo 350 340 340 565 Gintech 180 460 500 550 Total 4,362 7,320 9,688 11,786 Source: Companies, Daiwa forecasts Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 11
  12. 12. Jusung has been one of the more active players in the solar-cell equipment market over the past three years. The company won four thin-film turnkey projects in 2009 worth a total of more than W150bn, with three of these from solar companies in the PRC. Jusung is also working closely with LGE and one large US solar-cell company to supply core equipment in FY10. Although 80% of the solar-cell equipment orders received by Jusung during FY09 were based on thin-film technology, Jusung is expanding rapidly, using discrete equipment for silicon- based solar cells, as well as a hybrid system that the company believes will bolster its market exposure in the future. Jusung focuses primarily on supporting its customers to reach grid parity, rather than just selling equipment, which has resulted in several turnkey projects. IPS supplies CVD equipment to a few solar-cell companies in Japan and Korea, and we expect the company to work more closely with SEC as a result of the recent cash injection. In March, IPS issued W22bn worth of convertible bonds to SEC, effectively placing a 17.5% stake at the time of issue. We also believe Semes (Not listed) could become one of the major players in domestic solar-cell equipment market, as the company already supplies core semiconductor and LCD equipment to SEC. Semes was formed in 1992 as a joint-venture between SEC and Dainippon Screen Mfg. (7735 JP, ¥535, 2), and these two companies hold 64% and 22% stakes, respectively, in Semes. LED: everyone’s thinking big in LED TVs Due to a sharp pick-up We believe 2010 will be a breakthrough year for LED TVs, as we forecast LED- in demand for LED TV shipments to increase to 38.5m units for 2010 from 4.2m units for 2009. Since chips, orders for SEC has been marketing LED TVs successfully (focusing on the benefits of thinner MOCVD reactors design, improved colour gamut, and brightness) and had a lion’s share of the also rose strongly market in 2009, we expect other TV-set makers to become more aggressive about rolling out LED TVs in 2010. Our recent channel checks indicate that the major TV makers are revising up their LED-TV shipment targets for 2010 due to better- than-expected sell-through, and we believe that there could be further upside to our LED-TV shipment forecasts. LED-TV shipment target for key brands LED-TV shipments ('000) TV brand 2009 2010E Focus inch size Samsung Electronics 2,600 15,000 19-65" LG Electronics 300 8,000 19-60" Sharp 500 6,000 19-68" Sony 200 5,000 32-60" Vizio 100 2,500 16-72" Skyworth 10 2,000 26-47" TCL 0 2,000 40-55" Funai 0 2,000 19" Panasonic 0 1,000 26" Toshiba 100 1,000 46-55" Total 3,810 44,500 Source: Companies, Daiwa forecasts We expect the cost reductions for backlight units to accelerate due to declines in the prices of components, including LED chips, and for this to boost the adoption rate for LEDs as a backlight source for LCD TVs and monitors. We forecast the price gap between LED TVs and conventional LCD TVs (with CCFL backlights) to narrow to 10-20% for 2010, from the 30-50% in 2009. As a result, we forecast adoption rates of LED backlights for LCD-TV to increase from 19% for 2010 to 54% for 2011 and 78% for 2012, and for those for monitors to rise from 17% for 2010 to 51% for 2011 and 78% for 2012. Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 12
  13. 13. LED-adoption rate for large-sized LCD-panel backlight sources (%) 100 80 60 40 20 0 1Q08 3Q08 1Q09 3Q09 1Q10E 3Q10E 1Q11E 3Q11E 1Q12E 3Q12E Notebook Monitor TV Source: DisplaySearch, Daiwa forecasts Due to the sharp increase in demand for LED chips, orders for MOCVD reactors also rose strongly during 2009. However, equipment vendors were not able to supply a sufficient number of reactors in time. At one point, the lead time for MOCVD tools increased to as much as 10 months. However, both Aixtron and Veeco have announced expansion plans to manage the record level of rising orders. Aixtron plans to expand its capacity to 150 MOCVD reactors per quarter by the end of 2010, up from 100 MOCVD reactors per quarter at the end of 2009. Meanwhile, Veeco plans to raise its overall MOCVD output capacity to 90 units per quarter by mid-2010. We forecast global MOCVD reactor shipments to increase to 720 units for 2010, from 246 units for 2009. We expect Aixtron to secure a 55-60% market share, Veeco 35-40%, and the rest to go to Taiyo Nippon Sanso (Not rated) and other small players. Although Applied Materials has announced that it plans to enter the MOCVD market, it has not delivered an effective product so far. Meanwhile, Korean equipment companies are co-operating closely with domestic LED-chip producers. LIG ADP (Not rated) is testing an MOCVD reactor currently with LG Innotek, and the company expects to start shipments from 4Q10. IPS is also developing MOCVD reactors with Samsung LED. Jusung delivered a test unit to a small LED-chip company in January, and plans to complete reliability tests by June. Jusung said it is currently discussing potential order contracts with a few LED-chip makers, as its reactors are more productive than those of its peers. Global MOCVD shipments and net installed base (units) 2,500 2,000 1,500 1,000 500 0 2003 2004 2005 2006 2007 2008 2009 2010E 2011E Net installed base Shipments Source: Daiwa Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 13
  14. 14. AMOLED: market appears set for strong growth We believe Gen5.5 line The global AMOLED market increased to US$526m for 2009 from US$232m for investment will be the 2008, surpassing the size of the passive matrix OLED (PMOLED) market for the turning point for first time since 1Q09. Due to SEC’s aggressive marketing push for its premium domestic equipment handsets with new display technology, SMD’s AMOLED shipments increased to companies 21m units for 2009 from 7m units for 2008. For 2010, SMD plans to expand its customer base to several major handset and digital-camera makers, and expects to ship over 40m AMOLEDs. As a few display companies have scrapped AMOLED projects over the past three years, SMD dominates the AMOLED market with a 98% share in terms of revenue for 2009. Global OLED market (US$m) 180 160 140 120 100 80 60 40 20 0 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 AMOLED PMOLED Source: DisplaySearch Global OLED (AM and PM combined) market share Company Region 2009 revenue (US$m) YoY (%) M/S (%) Samsung Mobile Display Korea 566 90 69 RiTdisplay Taiwan 106 (18) 13 Pioneer Japan 60 (15) 7 TDK Japan 42 15 5 Visionox China 15 n.m. 2 Others 28 (50) 3 Total 816 37 100 Source: DisplaySearch Although we have little doubt that the AMOLED market will record strong shipment growth over the next five years, due to the superior image quality, faster response times, lower power consumption, and thinner form factor offered by AMOLED panels compared with conventional LCD panels, we believe that the core applications will be limited to mobile displays in the near future due to high production costs. In order for AMOLEDs to have an impact on the TV market, we believe that the glass substrate size for AMOLEDs would have to increase to that of LCDs, and be able to sustain similar production yields so that the companies can produce TV modules at commercially-viable costs. However, for mobile displays, the cost premium of AMOLED over LCD modules has narrowed. According to a recent cost-breakdown analysis by market research firm, iSuppli, the 3.7-inch AMOLED used in Google’s (Not rated) Nexus One model costs US$23.50, compared with US$19.25 for the 3.5-inch LCD module used in Apple’s (Not rated) iPhone 3GS and US$17.75 for the 3.7-inch LCD module used in Motorola’s (Not rated) Droid. As we expect AMOLEDs to be used mainly for displays in smartphones and many digital SLR cameras, we forecast the addressable market to increase at a CAGR of 44% over the next three years. Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 14
  15. 15. Addressable market for AMOLED (m units) Smartphone SLR camera Total YoY (%) 2006 80 5 85 47.7 2007 122 7 129 51.8 2008 139 10 149 14.8 2009 172 10 182 22.3 2010E 280 11 291 60.2 2011E 385 13 398 36.5 2012E 490 14 504 26.7 Source: CIPA, Daiwa forecasts In order for AMOLED to be adopted by the mass market, we believe that the number of AMOLED manufacturers would have to increase, as many set makers require multiple sources able to provide sufficient volume. SMD had one Gen4 (730mmx460mm) line with a capacity of 22,000 substrates per month at the end of 2009, but plans to ramp this up to 50,000 substrates per month by the end of 2010. Although SMD has not announced plans for a new production line, we expect the company to ramp up its Gen5.5 line (1,500mmx1,350mm) some time in 2011. LGD is a relative newcomer to the AMOLED market. Both LGD and LGE had worked on AMOLED separately before the consolidation of their AMOLED businesses into LGD in early 2008. LGD is building a Gen4 (730mmx460mm) line currently, and plans to start volume production from 3Q10 with an initial capacity of 8,000 substrates per month. However, as LGD and its affiliate companies purchased AMOLED-related assets from Eastman Kodak (Not rated) in December 2009, we believe this would help LGD’s ascent up the learning curve. OLED technology was invented by Kodak in the early 1980s, and a number of Japanese display makers initiated R&D in the early 1990s. Currently, most OLED equipment is supplied by Japanese companies. However, since SMD and LGD plan to expand their capacity beyond Gen4 lines, they have started to develop core AMOLED equipment with local companies. SMD has appointed SFA as project leader for the development of AMOLED equipment, and is working with SNU Precision on organic material deposition and encapsulation process systems. LGD is also developing deposition equipment for a Gen5.5 line with Jusung. Although we do not expect AMOLED to make a material contribution to revenue in the near term, given that the localisation of LCD equipment has gained momentum from Gen5 investments, we expect the Gen5.5 line investment to be the turning point for domestic equipment companies. OLED equipment manufacturers in Japan Company Ticker Equipment Tazmo 6266 JP Supplier of coaters Mitsubishi Electric 6503 JP Solid state laser (green) for laser annealers Shibaura Mechatronics 6590 JP OLED vacuum bonding equipment Nissin Electric 6641 JP Ion implantation systems for LTPS Ulvac 6728 JP CVD for material deposition Hitachi Zosen 7004 JP Deposition equipment using planar evaporation source Mitsubishi Heavy Ind 7011 JP Deposition equipment using linear evaporation source IHI 7013 JP Laser annealers Dainippon Screen Mfg 7735 JP Co-developed nozzle printing tech with DuPont Nikon 7731 JP Exposure systems for LTPS Hitachi High-Tech 8036 JP Makes and sells manufacturing equipment Tokki 9813 JP Systems for electrode, organic material deposition, and encapsulation processes Source: Companies, Daiwa Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 15
  16. 16. Our focus on diversified players We like the companies Although the semiconductor- and LCD-capex cycles have not necessarily moved in with diversified products tandem over the past 10 years, we expect both segments to record strong capex and customer bases growth for 2010, following the drastic cutbacks in spending in 2009. We forecast a 96% YoY increase in domestic semiconductor capex and a 61% YoY rise in domestic LCD capex for 2010, concentrated on technology upgrades and new capacity additions, respectively, and we expect local equipment companies to benefit from rising orders throughout this year. Korea semiconductor and LCD capex vs. equipment makers’ revenue (Wbn) (Wtn) 800 25 20 600 15 400 10 200 5 0 0 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 Revenue (LHS) Capex (RHS) Source: Companies, Daiwa While there are more than 20 listed equipment manufacturers in Korea, we initiate coverage of just three companies (Jusung, KC Tech, and SFA), due mainly to their increasing exposure to new businesses, such as solar-cell equipment, factory automation systems, and semiconductor materials. We believe diverse revenue sources would help to reduce the volatility of earnings streams, since both the LCD and memory-chip industries are highly cyclical. In addition, these companies have diversified customer bases, which could boost their pricing power, in our view. In Korea, it is common for equipment companies to supply one customer but not necessarily its competitors. This is because some equipment is developed to meet customers’ specific needs, and customers may have concerns about potential leakages of its technology and manufacturing processes. Korean equipment companies: revenue breakdown by customer Bloomberg Mkt cap 2009 rev. 2009 revenue breakdown (%) Company code (Wbn) (Wbn) SEC HYN LGD Others Semes Not listed n.a. 316 81 0 0 19 Jusung Eng 036930 KS 673 170 0 18 32 50 SFA 056190 KS 536 307 20 0 0 80 EO Technics 039030 KS 306 81 5 5 0 90 DMS 068790 KS 276 153 6 4 80 10 Atto 030530 KS 273 91 80 20 0 0 IPS 051820 KS 236 50 60 2 0 38 KC Tech 029460 KS 219 96 20 10 45 25 Hanmi Semi 042700 KS 214 75 3 2 0 95 PSK 031980 KS 186 33 25 15 0 60 Eugenetech 084370 KS 187 49 80 20 0 0 LIG ADP 079950 KS 164 86 0 0 92 8 Hanyang Eng 045100 KS 147 121 34 0 11 55 Osung LST 052420 KS 127 127 20 0 0 80 Top Eng 065130 KS 115 101 0 0 60 40 SNU 080000 KS 111 34 0 0 20 80 Source: Companies, Bloomberg, Daiwa Note: share prices as at the close on 3 May Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 16
  17. 17. As a result, companies like Semes supply semiconductor and LCD equipment primarily to SEC, while LCD equipment accounts for 98% of LIG ADP’s revenue, and most of these orders come from LGD. Meanwhile, Jusung supplies LCD equipment to LGD and BOE, and sells semiconductor equipment to Hynix Semiconductor (000660 KS, W27,600, 2), as well as to a few chip makers in Taiwan. SFA also provides display equipment to SEC, BOE and some panel makers in Taiwan. SFA has more diverse range of customers for its factory automation and logistics systems, from chemical companies to dairy producers. KC Tech supplies its display and semiconductor equipment to all of the Korean LCD and memory-chip makers. Although equipment companies are under constant pressure to cut costs, Korean equipment companies have spent an average of 5-10% of revenue on R&D annually over the past three years. In terms of average R&D spending, these firms expensed W8-10bn each year, which is tiny compared with that of the larger global equipment firms, like Applied Materials, which spends about US$1bn annually on R&D and Tokyo Electron, which spends about ¥60bn. However, among the domestic equipment makers, Jusung has been the top spender on R&D over the past three years, as the company is actively expanding into new markets, including solar-cell and LED equipment. Korean equipment companies’ R&D spending trend R&D expenses (Wbn) R&D as a % of revenue Company Ticker 2007 2008 2009 2007 2008 2009 Semes Not listed 17.6 30.2 19.8 5.8 7.4 6.3 Jusung Eng 036930 KS 36.6 44.4 28.2 17.3 29.2 16.6 SFA 056190 KS 9.2 13.5 11.5 3.0 3.1 3.7 EO Technics 039030 KS 6.0 10.4 8.1 7.4 10.4 10.0 DMS 068790 KS 10.6 12.5 8.7 12.0 4.5 5.7 Atto 030530 KS 4.6 2.6 3.4 5.7 3.5 3.8 IPS 051820 KS 11.9 11.0 5.5 15.7 3.5 11.0 KC Tech 029460 KS 8.9 9.1 4.4 6.8 4.9 4.6 Hanmi Semi 042700 KS 8.3 8.1 8.7 7.2 11.4 11.5 PSK 031980 KS 8.3 7.1 4.6 7.2 12.9 14.2 Eugenetech 084370 KS 5.1 7.5 3.9 22.0 79.1 8.1 LIG ADP 079950 KS 4.9 5.5 6.4 3.5 5.2 7.5 Hanyang Eng 045100 KS 1.1 1.5 1.1 0.6 0.8 0.9 Osung LST 052420 KS 1.1 1.4 1.8 4.3 2.1 1.4 Top Eng 065130 KS 3.3 3.9 1.0 17.1 9.7 11.8 SNU 080000 KS 6.5 4.7 11.6 35.2 6.5 34.2 Source: Companies, Daiwa What drives the share price? We see the new order For many equipment companies, we believe that the new order intake and order intake and order backlog are the key share-price drivers, since semiconductor and LCD-panel backlogs as the key companies normally give large purchasing orders coinciding with their capacity- share-price drivers expansion plans. In the past, whenever these companies announced new capacity expansion or upward revisions to capex, the local equipment companies’ shares have rallied. For companies like SFA, there is a strong correlation between its average share price (for each quarter) versus the new order intake and the order backlog over the past three years. Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 17
  18. 18. SFA: new orders and order backlog versus average share price (Wbn) (W) 350 80,000 300 70,000 60,000 250 50,000 200 40,000 150 30,000 100 20,000 50 10,000 0 0 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 New orders (LHS) Order backlog (LHS) Average price (RHS) Source: Companies, FnData Although equipment companies normally disclose large order intakes, quite often, some sizeable orders are not revealed at the request of their customers. In addition, as lead times vary for different types of equipment (between three and nine months), the actual order intake may take longer to turn into revenue. Therefore, we believe that the capex trend of their key customers is also an important driver of equipment companies’ share prices. LGD revised up its FY10 capex plan recently to over W5.5tn from over W4.0tn. However, we believe there could be further upside for this, should LGD get approval from the PRC Government to build a Gen8 line in China. LGD plans to ramp its P8E line in May, and we expect the P8E+ line to start ramping up from 1H11. Therefore, we believe local equipment companies are likely to receive purchasing orders for the P8E+ line starting from 2Q10, and possibly orders for the China fab in 1H11. Meanwhile, SEC still has not confirmed its FY10 capex (from an initial plan of W5.5tn for memory chips and W3.0tn for LCDs), but several local equipment companies have told us that there could be substantial upside for its semiconductor capex, given that its competitors are investing aggressively. The Korea Economic Daily reported recently that SEC’s semiconductor capex may rise to W8.3tn for FY10, and increase further to W11.0tn for 2011, as SEC equips Line16 during 2H10 and builds the new Line17 next year, which could lead to further upward revisions to our global semiconductor capex forecasts. Korea semiconductor and LCD capex vs. equipment company index (Wtn) 25 400 350 20 300 15 250 200 10 150 100 5 50 0 0 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Capex (LHS) Index (RHS) Source: Companies, Daiwa forecasts Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 18

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