Electronics / Korea 7 February 2012In touch with new market Korea Touch Screen Sectoropportunities• The outlook for the touch-screen market remains bright on the back of the proliferation of smartphones and tablet PCs• We expect the addressable market to expand due to favourable developments in touch-screen technology• Initiating coverage of Iljin Display and Melfas with Buy (1) ratings How do we justify our view? touch screen to remain the What we recommend mainstream product, but they are Among the domestic touch-screen likely to shift to OGS in the future. companies, our top pick is Iljin Display, as we expect the company Samsung Electronics (SEC) (005930 to continue to gain share in theJae H. Lee KS, W1,074,000, Outperform ) domestic touch-screen market and(82) 2 787 email@example.com plans to launch smartphones with forecast a robust revenue growth flexible displays in 2Q12, and we rate of 51% YoY for 2012. We initiateJoshua Oh, CFA expect the company to increasingly coverage of the company with a Buy(82) 2 787 firstname.lastname@example.org outsource touch-screen production (1) rating and six-month target price to domestic TSM companies. As a of W16,500. result, we believe that over the next Whats new few years, the addressable market We also initiate coverage of Melfas for domestic touch-screen with a Buy (1) rating, and a six-We initiate coverage of the Korea companies will expand much faster month target price of W30,000.Touch Screen Sector with a Positive than the growth in the touch-screen Although 2011 appears to have beenrating, as we see a bright market market for mobile handsets. a difficult year for the company withoutlook for 2012, with robust flat revenue growth YoY and ademand growth for smart devices The potential adoption of substantial erosion in the operating-and favourable developments in integrated-type touch screens, such profit margin, we forecast Melfas totouch-screen technology. post stronger revenue and earnings as those using in-cell technology, are the major threat to the touch-screen growth for 2012 due to rising sales Whats the impact industry. However, in-cell of touch-sensor chips and tablet-PCThe touch-screen market should TSMs.continue to boom in 2012, as technology will have to overcomesmartphone and tablet-PC makers production issues as well as production costs in order to have a How we differneed touch-screen modules (TSM) Unlike most others in the market,to add value to their products. In major impact, in our view. In addition, as SEC will continue to use among the domestic TSMaddition, we see more opportunities companies, we believe that Iljinopening up for the domestic TSM active-matrix organic light-emitting diodes (AMOLED) for its high-end Display and Melfas are the best-companies due to emerging new positioned in the fast-growing and smartphones, we believe thetechnologies such as the one-glass fast-changing touch-screen market. potential threat is relatively smallersolution (OGS) and flexible displays. for the Korea TSM companies. Key stock callsWhile some touch-screen New Prev. Based on our and the Bloomberg-technologies are becoming obsolete Iljin Display (020760 KS) consensus earnings forecasts, theas new ones emerge, we believe there Rating Buy Korea Touch Screen Sector (sevenis no perfect touch-screen technology Target price W16,500 listed companies) is trading Up/downside 44.7%for all applications, and that costs are currently at a 2012 PER of 6.8x andan important variable factor in a Melfas Inc (096640 KS) a 2012 PBR of 1.9x. Given that the Rating Buytechnology being adopted. For many past-two-year weighted average Target price W30,000of the handset makers other than (based on market capitalisation) Up/downside 25.5%Apple (AAPL US, US$459.68, PBR is 2.8x, we believe the sector Source: Daiwa forecastsOutperform ), we expect film-type valuation is attractive. Note: Please refer to page 3 for details.Important disclosures, including any required research certifications, are provided on the last three pages of this report.
Korea Touch Screen Sector 7 February 2012 How do we justify our view? Growth outlook Valuation Earnings revisions Growth outlook TAM analysis for mobile-handset touch screens in KoreaWhile we forecast combined shipments for SEC and LG (m units) (%)Electronics (LGE) (Not rated) mobile handsets to 600 70increase by 10.7% YoY to 465m units for 2012, we 60believe the total addressable market (TAM) for touch 500 50screens in mobile handsets will expand by 37.8% YoY to 400 40268m units. 300 30 200 20 100 10 0 0 2010 2011E 2012E 2013E Handset shipment TAM Portion of TAM (RHS) Source: Companies, Daiwa forecasts Valuation Korea touch-screen sector PBR trendBased on our and the Bloomberg-consensus earnings (x)forecasts, the Korea Touch Screen Sector is currently 4.0trading at a 2012 PER of 6.8x and a 2012 PBR of 1.9x. 3.5Given that the past-two-year weighted average (based 3.0on market capitalisation) PBR is 2.8x, we believe thesector valuation is attractive. 2.5 2.0 1.5 1.0 Jul-10 Jul-11 Jan-10 Jan-11 Jan-12 May-10 May-11 Mar-10 Mar-11 Sep-10 Nov-10 Sep-11 Nov-11 Korea touch-screen sector Average Source: Companies, FnData, Bloomberg, Daiwa forecasts Earnings revisions Iljin Display and Melfas: Daiwa vs. consensus EPS forecastsFor both Iljin Display and Melfas, our 2012-13 EPS (W)forecasts are 4-7% higher than those of the FnGuide- 3,000consensus forecasts. We believe there could be upside to 2,500the consensus forecasts in the event of stronger sales 2,000growth of touch-screen market 1,500 1,000 500 0 2012E 2013E Iljin Display (Daiwa) Iljin Display (Consensus) Melfas (Daiwa) Melfas (Consensus) Source: FnData, Daiwa forecasts -2-
Korea Touch Screen Sector 7 February 2012Key stock calls EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 %Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. chgIljin Display 020760 KS 11,400 Buy 16,500 n.a. 1,047 n.a. 1,971 n.a.Melfas Inc 096640 KS 23,900 Buy 30,000 n.a. 1,048 n.a. 1,991 n.a.Source: Daiwa forecasts -3-
Korea Touch Screen Sector 7 February 2012Table of contentsIn touch with new market opportunities ......................................................................................... 5 Why touch-screen companies at this juncture? ........................................................................... 5 We expect strong growth in the addressable market for 2012 ................................................. 5 Potential threat from in-cell technology is relatively smaller for Korea TSM companies....... 6 We believe valuations are attractive, trading below the past-two-year average PBR ............. 6 Change in touch-screen technologies does not pose a threat to everyone .................................. 8 P-cap touch screen takes over from resistive ........................................................................... 8 Glass-type vs. film-type p-cap .................................................................................................. 8 Integrated touch screens are a potential threat but not in the short term .............................. 9 There is no perfect touch-screen technology; cost is an important factor............................. 10 Market opportunities remain bright ........................................................................................... 11 Positioning in the competitive landscape .................................................................................. 12 Ability to keep up with changes in technologies is a key to boosting top-line growth .......... 13 Profitability varies with the degree of vertical integration and productivity ......................... 13 Company Section Iljin Display................................................................................................................................. 15 Melfas Inc.................................................................................................................................... 23 -4-
Korea Touch Screen Sector 7 February 2012 We expect strong growth in the addressable market for 2012 For 2012, we expect the wide adoption of touch screens in mobile handsets and tablet PCs to continue. However, we see more opportunities opening up for theIn touch with new domestic TSM companies due to favourable developments in touch-screen technologies, such asmarket opportunities OGS and flexible displays. Although we provide a more detailed discussion of various touch-screen technologies later in this report, we believe that manyWe initiate coverage of the Korea Touch handset makers will shift to OGS for touch screens, inScreen Sector with a Positive rating, as order to lower production costs and improve the quality of certain aspects of the touch function.we see bright prospects for the market in2012, with robust demand growth for In addition, as SEC plans to launch smartphones withsmart devices and favourable flexible displays in 2Q12, we expect the company todevelopments in touch-screen technology. increasingly outsource touch-screen production to domestic TSM companies. Since more than 60% of SEC’s smartphones used AMOLED in 2011, and theWhy touch-screen companies at touch screens for these displays were all produced inhouse (using on-cell technology), we seethis juncture? opportunities for the domestic TSM companies once AMOLED substrates are switched to plastic/film fromAlthough most of touch-screen companies in Korea glass for flexible displays.enjoyed solid growth in revenue and earnings in 2010,only a few of them saw a robust growth for 2011, due to Although we forecast combined mobile-handsetchanges in touch-screen technologies and differences shipments for SEC and LGE to increase by 10.7% YoYin their production efficiencies. As a result of changes to 465m units for 2012, we believe the for touchin their market shares and increased price pressure, the screens in mobile handsets will expand by 37.8% YoYshare prices of the domestic TSM companies were to 268m units. We expect the main drivers should be:extremely volatile in 2011, with the sector index (of 1) the increased proportion of smartphone shipments,seven listed companies) falling nearly 55% from early 2) a higher proportion of touch screens being used inApril to late September and then rising by more than feature phones, and 3) new touch-screen opportunities80% up to early December. Meanwhile, the share from the shift to flexible displays.prices of the Taiwan TSM companies declined sharplybetween early July and December, due to what we TAM analysis for mobile-handset touch screens in Koreabelieve were the market’s concerns about the potential (m units) (%)threat from in-cell touch-screen technology. 600 70 500 60 Korea and Taiwan touch-screen companies’ share-price 50performances 400 40 (Index) 300 30 250 200 20 200 100 10 150 0 0 2010 2011E 2012E 2013E 100 Handset shipment TAM Portion of TAM (RHS) 50 Source: Companies, Daiwa forecasts 0 Nov-10 Nov-11 Sep-10 Sep-11 Jul-10 Jul-11 Jan-10 Jan-11 Jan-12 May-10 May-11 Mar-10 Mar-11 Korea TaiwanSource: FnData, BloombergNote: Share-price index comprised of seven listed touch-screen companies in Korea andfour companies in Taiwan -5-
Korea Touch Screen Sector 7 February 2012Potential threat from in-cell technology is Touch-screen companies: PBR and ROE comparisonrelatively smaller for Korea TSM 4companies 3The potential adoption of integrated-type touch screens, Melfas S-mac TPK Iljin Displaysuch as those using in-cell technology, are currently PBR 2012E (x)being developed by several LCD-panel makers, and 2 J Touchpose a major threat to the touch-screen industry. As Wintek ELKLCD-panel companies can directly embed the touch 1 Young Fast Digitechfunction in the display, there may be feweropportunities for touch-screen makers in the future. 0However, as in-cell technology has to overcome 0 10 20 30 40 50 60production-yield issues as well as production costs, we ROE 2012E (%)do not believe it will be a major threat to the current Source: FnData, Bloomberg, Daiwa forecaststouch-screen technologies in the near term. In addition,as SEC will continue to use AMOLED for its high-end Our top pick among the Korea touch-screen companiessmartphones, we believe that the potential threat is is Iljin Display, as we expect the company to continuerelatively smaller for the Korea TSM companies. to gain share in the domestic touch-screen market and forecast a robust revenue growth rate of 51% YoY forWe believe valuations are attractive, 2012. We initiate coverage of the company with a Buytrading below the past-two-year average (1) rating and a six-month target price of W16,500. WePBR also initiate coverage of Melfas with a Buy (1) rating,Based on our and the Bloomberg-consensus earnings and a six-month target price of W30,000. Althoughforecasts, the Korea Touch Screen Sector is currently 2011 appears to have been a difficult year for thetrading at a 2011 PER of 11.6x and 2012 PER of 6.8x. In company with flat revenue growth YoY and aterms of PBR, the sector trades at 2.4x and 1.9x on the substantial erosion in the operating-profit margin, werespective 2011 and 2012 BVPS forecasts. Given the forecast Melfas to post stronger revenue and earningspast-two-year weighted average (based on market growth for 2012 due to rising sales of touch-sensorcapitalisation) PBR is 2.8x, we believe the sector chips and tablet-PC TSMs.valuation is attractive. Iljin Display and Melfas: PBRs Korea Touch Screen Sector: PBR (x) (x) 8 4.0 7 6 3.5 5 3.0 4 3 2.5 2 2.0 1 1.5 0 Jul-10 Jul-11 Jan-10 Jan-11 Jan-12 May-10 May-11 Mar-10 Mar-11 Sep-10 Nov-10 Sep-11 Nov-11 1.0 Jul-10 Jul-11 Jan-10 Jan-11 Jan-12 May-10 May-11 Mar-10 Mar-11 Sep-10 Nov-10 Sep-11 Nov-11 Melfas Iljin Display Korea touch-screen sector Average Source: Companies, FnData, Daiwa forecastsSource: Companies, FnData, Bloomberg, Daiwa forecastsCompared with the Taiwan TSM makers, the KoreaTSM companies generally trade at higher PBRmultiples, but ROEs are also higher than those of theirpeers in Taiwan. -6-
Korea Touch Screen Sector 7 February 2012 Although resistive touch screens were the mainstreamChange in touch-screen products until 2010, p-cap touch screens have gainedtechnologies does not pose a in popularity, due to their: 1) durability, 2) high optical quality, 3) multi-touch functionality, as the applicationthreat to everyone software used in smartphones and tablet PCs has become more sophisticated, and 4) declining prices, asThe touch-screen market should continue to boom as manufacturers continue to cut production costs onmobile-handset and tablet-PC makers need TSM to add increased usage. Although we forecast resistive touch-value to their products. Although some touch-screen screen shipments to decline from 408m units for 2010technologies are becoming obsolete as new ones to 318m units for 2013, we forecast p-cap touch-screenemerge, we believe that there is no touch-screen shipments to increase from 345m units to 1.1bn unitstechnology that is suited to all applications and that over the same period.costs are likely to be an important factor in atechnology being adopted. We expect add-on type Global touch-screen module shipments by technologytouch screens, such as glass/film/film (GFF), (m units)glass/glass (G/G), and OGS, to remain the mainstream 1,600products. 1,400 1,200P-cap touch screen takes over from 1,000resistive 800 600The previous generation of touch screens is mostly 400based on a resistive technology that features a flexible 200outer layer of thin plastic film, and through contact 0with a rigid inner layer, electrical contact is recognised. 2010 2011E 2012E 2013E 2014EAlthough resistive TSM is inexpensive to produce, the Resistive P-capthin plastic outer layer makes the screen less durableand manual recalibration is required periodically. Source: DisplaySearch, Daiwa forecasts Resistive-type touch screen: cross section Glass-type vs. film-type p-cap There are various types of p-cap touch screens and they Hard coating PET can be largely categorised as glass-type and film-type. ITO coating In 2007, the iPhone became the first mobile device to Micro spacer ITO coating use the G/G touch screen with indium tin oxide (ITO), Glass substrate a transparent conductor, deposited on glass. TFT-LCD Meanwhile, film-type touch screen has been mainly adopted by most of non-Apple handset makers. InSource: Various sources (including Melfas), Daiwa Taiwan, there are many TSM companies producing glass-type touch screens as they transformed theirMeanwhile, the adoption of projective capacitive (p- existing small- to medium-sized colour filters or STN-cap) touch screens has increased with the launch of LCD production lines to TSM production. However, asApple’s iPhone in 2007. P-cap features two layers of there were fewer numbers of these production lines inglass and the conductive material is placed between the Korea, particularly among small- to medium-sizedglass layers. The electric fields are projected from a grid enterprises, many TSM companies have been focusingof conductive materials in rows and columns, and by more on the film-type touch screen.placing a finger on the outer layer it detects the contact. Comparing these two touch-screen technologies, G/G P-cap touch screen: cross-sectional view has advantages in optical performance and durability, Optical clear and a narrow bezel, while film-type has advantages in adhesive Cover glass terms of cost, thinness and lightness, and the ease of ITO sensor (X-axis) production. In addition, G/G is more suitable for a ITO sensor Glass substrate single product manufactured in high volume (such as (Y-axis) Optical clear adhesive the iPhone), whereas film-type has advantages in a TFT-LCD variety of low-volume products with a quick time-to- market. Given the distinct advantages of these twoSource: Various sources (including Melfas), Daiwa types of p-cap touch screen, we believe that G/G will be -8-
Korea Touch Screen Sector 7 February 2012used mainly for certain high-end smartphones and for G1F solution: cross-sectiontablet PCs, while film-type will become more popular Cover Glassamong the low-end to mid-range smartphones. ITO sensor Optical clear (X-axis)Meanwhile, the technology used in film-type touch adhesive ITO sensorscreens is evolving from glass/film/film (GFF) to Film (Y-axis)glass/one film (G1F) and to OGS. The main reason for TFT-LCDthe shift in technology is lower production costs andthe improved quality of certain aspects of the touch Source: Various sources (including Melfas), Daiwascreen. Although G/G touch screens use two layers ofglass, GFF uses cover glass and two layers of film. However, one drawback of the G1F solution is that itTherefore, production costs are 10-20% lower for GFF tends to have a low production yield, and so we believethan G/G touch screens. OGS will be more widely used by TSM makers in 2012. By removing all the films, the production cost of OGS is GFF solution: cross-section more than 20% lower than that of the conventional G/G touch screens, and is also lighter and has a better Optical clear Cover Glass optical quality than the GFF solution. While the adhesive ITO sensor concept of OGS is similar among TSM makers, they (Y-axis) ITO sensor have different names for their own technologies. Melfas Film/Film (X-axis) calls it direct patterned window (DPW) as the ITO TFT-LCD material is sputtered directly on the covered glass, while TPK (3673TT, NT$465.50, Buy ) has a touch-Source: Various sources (including Melfas), Daiwa on-lens (TOL) solution, and Wintek (2384 TT, NT$24.65, Outperform ) has the advanced- Production cost breakdown for GFF touch screens technology touch (ATT) solution, which the company Others began shipments of in April 2010, for low-end to mid- 14% range smartphones. Silver paste Cover glass 3% 33% OGS solution: cross-section OCA 6% Optical clear Cover Glass adhesive Explosion-proof membrane Insulator ITO sensor Conductive (X-axis) ITO film jumper 20% ITO sensor TFT-LCD (Y-axis) FPCB & chip 24% Source: Various sources (including Melfas), DaiwaSource: Various sources (including Melfas), Daiwa Integrated touch screens are a potentialIn order to reduce production costs further, TSM threat but not in the short termmakers are trying to reduce the number of film layers We have discussed different touch-screen technologies,in the touch screen. However, prior to a full shift to but they all fall in to one major category of add-on (out-OGS, in which no ITO films are used, G1F provides a cell) type, in which the TSM is attached on the top ofhybrid solution, in which one axis of ITO sensors are the main display, such as TFT-LCD. However, anotherprinted on the cover glass and another axis of ITO touch-screen technology emerging, in which the touchsensors is attached to the film. As G1F uses one less screen is integrated into the main display. This is led byfilm than the GFF solution, it is slightly thinner and has LCD panel makers and competes with the conventionalbetter translucence or optical quality. TSM industry. Integrated-type technologies, such as on-cell and in- cell touch screens, are currently being developed by the major LCD panel makers. However, this technology would need to be verified for mass production, as defective touch screens would result in the scrapping of the whole display as the touch screen cannot be separated from the main display. -9-
Korea Touch Screen Sector 7 February 2012 Comparison of conventional TSM and integrated touch panel Conventional TSM Integrated touch panel TSM types 1 Out‐cell type 2 On‐cell type 3 In‐cell type Touch function Polariser Polariser Touch function Polariser Glass Glass Glass Conceptual Cell Cell Cell (touch function) structures Glass Glass Glass Polariser Polariser Polariser LCD panel LCD panel LCD panel Key technology Film lamination, patterning technology TFT‐LCD technology Main driving * TSM maker * Colour filter and LCD maker * LCD maker forcesSource: Displaybank, DaiwaOn-cell touch screen for LCD voltage sensing, pressing the LCD surface closes micro-For on-cell touch screens, the touch sensor is deposited switches in each pixel to detect the location touched. Iton the top of the colour filter and one layer of glass is works with any touch objects, such as a finger or stylus.eliminated, resulting in a thinner module with lower However, durability is an issue as it requires touchingproduction costs (theoretically). However, the major the LCD surface and the cover glass cannot be added.challenges for on-cell technology include: 1) it requires In charge-sensing, pressing the LCD surface changesadditional photo mask steps to create the touch sensors the dielectric constant of the liquid crystal, whichon the top surface of the colour filter substrate, and this changes the capacitance between the electrodes.effectively lowers the overall production yield and 2) However, durability is also an issue as the cover glasspotential defects on the touch sensor could result in the cannot be attached.whole colour filter being scrapped. There is no perfect touch-screenOn-cell touch screen for AMOLED technology; cost is an important factorSEC launched its own touch-screen technology for While there many different types of touch screensAMOLED in 2010 and this is currently used in its high- available and new ones continue to emerge, there is noend smartphones, such as the Galaxy S2 and Galaxy perfect solution for all touch applications as each touchNote. The company integrated touch sensors on the top technology has its own strengths and weaknesses, inglass layer of AMOLED and covered it with tempered our view. Recently, many investors have raisedglass. As the touch screen is already integrated with the concerns about the sales-growth prospects for TSMAMOLED, SEC produces them inhouse as it does not makers, as the potential adoption of integrated-typeneed to outsource the touch-function process to TSM touch screens, such as on-cell and in-cell technologies,makers. should eventually take the business opportunities away from TSM companies.In-cell touch screenFor in-cell touch screens, the touch sensor is physically However, the LCD-panel makers have told us that theinside the LCD cell and the touch sensor can be light- most important factors for touch panels are the costsensing elements, micro switches (voltage-sensing), or competitiveness and the customer’s acceptance ofcapacitive electrodes (charge-sensing). In light sensing, different touch-screen technologies. Although a fewthe photo sensor is placed in each pixel or group of integrated touch screens could be ready to market atpixels and the visible-light sensor recognises the this time, mobile-handset makers may not choose thisshadow of a finger under bright light or the reflection solution as they have a higher cost than conventionalof the backlight on the finger in dim light. As for add-on type solutions and as integrated touch screens - 10 -
Korea Touch Screen Sector 7 February 2012have not been verified for mass production, as this Global touch-screen market: revenue forecastscould pose a potential procurement risk. (US$bn) (%) 25 100In conclusion, we have no doubt that the touch-screen 20 80market will continue to boom as mobile-handset andtablet-PC makers need TSMs to add value to their 15 60products. Currently, the dominant technology is p-cap,as it is more reliable in terms of cost and volume 10 40production. We forecast global p-cap touch-screen 5 20shipments to increase at a CAGR of 23% over the nextthree years (2012-14). Among the p-cap touch-screen 0 0solutions in 2012, we expect GFF to account for over 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E60%, G/G to account for about 20%, and the remainder Revenue (LHS) YoY growth (RHS)to be both OGS and G1F solutions. Source: DisplaySearch Comparison of touch-screen technologies Global tablet-PC shipments G/G GFF G1F OGS (m units) (%)Cost ★ ★★ ★ ★★★Durability ★★★ ★★ ★★ ★ 160 300Optical quality ★★★ ★★ ★★ ★★★ 140 250Narrow bezel ★★ ★ ★ ★★★ 120 70 200Thickness ★ ★★ ★★ ★★★ 100Production yield ★★ ★★★ ★ ★★ 80 39 150Sensitivity ★★★ ★ ★★ ★★ 60 20 100Source: Various sources, Daiwa 40 78 63 50 20 3 41 15 0 0Market opportunities remain 2009 2010 2011E 2012E 2013Ebright iPad (LHS) Others (LHS) Total YoY growth (RHS) Source: Various sources, Daiwa forecastsAccording to DisplaySearch, the value of the globalTSM market will increase by 90% YoY to US$13.4bn For mobile handsets, out of the 1.78bn unit shipmentsfor 2011 and nearly double to US$23.9bn in 2017. The for 2011, we estimate 47% (837m units) were touch-TSM market should see strong growth in revenue, units, enabled, compared with 32% (517m units) for 2010.and area due to increasing penetration in mobile For 2012, we forecast the touch-screen adoption rate todevices during this period. Although touch screens for increase to 57%. We see the major drivers of touch-smartphones currently make up more than 70% of the screen handset shipment as being: 1) risingtotal TSM market in terms of volume, we believe the smartphone shipments, and 2) increased touch-screenfastest-growing segment is tablet PCs, and forecast adoption in feature phones.shipments to increase to 61m units for 2011 from 18munits for 2010, and rise to 102m units for 2012. Global touch-screen handset shipments and adoption rateAlthough the iPad currently dominates the global (m units) (%)tablet-PC market with a 67% share for 2011, we 1,600 80forecast its share to decline to 53% for 2013 as 1,400Android-based tablets and the Kindle Fire gain market 1,200 60share. 1,000 800 40 600 400 20 200 0 0 2008 2009 2010 2011E 2012E 2013E Touch-screen handset shipments (LHS) Adoption rate (RHS) Source: DisplaySearch, Daiwa forecasts - 11 -
Korea Touch Screen Sector 7 February 2012Meanwhile, Taiwan TSM makers have been riding on Smartphone shipments by key handset makerthe success of Apple in mobile devices. Three (m units)companies, TPK, Wintek and Chimei Innolux (3481 TT, 250NT$16.2, Hold ) currently dominate the touch- 200screen market for both the iPhone and the iPad.However, the Korea TSM makers have been competing 150more fiercely in a much smaller and fragmenteddomestic market, supplying touch screens mainly to 100SEC and LGE. 50 Allocation of touch screen for Apple 0 2007 2008 2009 2010 2011E 2012E 2008 2009 2010 2011 2012E 2013EiPhone Apple SEC LGETPK 100 80 65 60 45 40Wintek 20 30 30 35 30 Source: Companies, Daiwa forecastsCMI 5 10 20 30iPadTPK 50 55 50 Positioning in the competitiveWintek 50 35 30CMI 10 20 landscapeSource: Daiwa forecasts One TSM company told us that there were more thanAs a substantial proportion of SEC’s smartphone TSMs 50 touch-screen companies in Korea, and 7-8 of themhave been produced inhouse (as on-cell technology is account for an 80-90% share of the domestic market.used for AMOLED touch screens) until now, domestic Given that there is no single dominant player, the keyTSM companies were not able to benefit substantially to the TSM companies’ revenue growth has been theirfrom the rapid market-share gains by SEC. However, as ability to adapt to new technologies, and theirthe company expands its smartphones into the low-end profitability has depended greatly on their productivityto mid-range segments, and as LGE gradually gains as well as the degree of vertical integration, in our view.traction in the smartphone market globally, we believethere will be greater opportunities for the Korea TSM While most of the domestic TSM makers (seven listedcompanies in the future. companies) recorded robust YoY revenue growth for 2010, some TSM makers were on track to see flat YoYFor 2011, we estimate that SEC shipped 99m revenue growth for 2011. We believe that a few of thesesmartphones, accounting for the largest share of the companies have been facing technological orglobal smartphone market for the first time. Although productivity issues amid the changes in touch-screenthe company expects the global smartphone market to technologies. For the first nine months of 2011, onlyexpand by 30-40% YoY for 2012, it believes it will three companies, Iljin Display, S-mac (Not rated), andoutgrow the market, with a shipment growth rate of Synopex (Not rated) recorded touch-screen revenueover 50% YoY. Meanwhile, LGE shipped 20.2m greater than that for 2010 (full year).smartphones for 2011, a substantial increase from the6.5m units for 2010, and it aims to sell 30-35m units Korea TSM makers: touch-screen revenuesfor 2012. In addition, as SEC plans to launch Bloomberg Mkt cap TSM revenue onlysmartphones with flexible displays in 2Q12, we think it Company code (Wbn) 2009 2010 9M11 Melfas 096640 KS 410 134 195 132is highly likely that touch screens will be outsourced to Iljin Display 020760 KS 309 11 43 175domestic TSM makers, as on-cell technology will only S-mac 097780 KS 190 70 168 240be used for AMOLED displays with glass substrates. ELK 094190 KS 184 103 227 175 Digitech Systems 091690 KS 177 115 136 106 Moreens 110310 KS 111 86 74 16 Synopex 025320 KS 93 28 84 190 Source: Companies - 12 -
Korea Touch Screen Sector 7 February 2012Ability to keep up with changes in Korea TSM companies: R&D spending R&D expenses (Wbn) R&D as a % of revenuetechnologies is a key to boosting top-line Company 2009 2010 9M11 2009 2010 9M11growth Melfas 6.3 8.6 8.2 4.2 3.4 4.6Over the past two years, the Taiwan TSM makers such Iljin Display 1.3 1.5 4.6 3.8 1.4 2.1 ELK 4.7 3.4 4.4 4.0 1.4 2.5as TPK and Wintek have seen robust revenue growth S-mac 4.9 8.2 6.8 3.4 4.0 2.2due to their advantages in capacity, yield, and Digitech Systems 2.1 1.8 1.2 1.8 1.3 1.1production costs. Meanwhile, the TSM makers in Korea Moreens 2.0 0.3 0.4 2.3 0.4 2.4have realised much smaller revenue-growth rates due Synopex 4.8 3.9 5.2 3.1 1.8 2.1to the smaller addressable market and more intense Source: Companiescompetition. As touch-screen technology evolved fromresistive to p-cap, handset companies such as SEC Profitability varies with the degree ofreduced their dependency on Digitech, Moreens, and vertical integration and productivityTaiwan TSM companies such as Young Fast and J Although there are many TSM companies, not all ofTouch, while increasing procurements to S-mac and them are vertically integrated. One of the importantSynopex, which have spent years developing p-cap components in TSMs is touch sensors, and in Koreatechnology in co-operation with SEC. Meanwhile, Iljin there are only five TSM makers that can produce touchDisplay started to supply touch screens for SEC’s 7.0- sensors inhouse: Samsung Mobile Display (Not listed),inch tablet PC in late 2010 and later expanded to TSMs LG Innotek (Not rated), Iljin Display, ELK (Not rated),for the 10.1-inch model. We estimate that Iljin Display and Digitech Systems (Not rated). Meanwhile, Melfascurrently manufactures nearly half of SEC’s tablet-PC is the only domestic company that can produce thetouch screens. controller ICs. TSM companies: market shares with SEC and LGE Vertical integration of TSM companies TSM maker Share (%) TSM Touch sensor Cover glass ITO film Controller ICSamsung Electronics Korea Handset w/ AMOLED Samsung Mobile Display 100 Melfas Handset w/ LCD S-mac 31 Iljin Display Synopex 22 ELK Melfas 18 S-mac Iljin Display 9 Digitech Digitech Systems 7 Moreens Others 14 Synopex Tablet PC Iljin Display 47 Taiwan S-mac 17 TPK Digitech Systems 9 Wintek Melfas 6 Youngfast Others 22 J TouchLG Electronics Cando Hanset LG innotek 60 Source; Companies, Daiwa estimates ELK 40 Tablet PC ELK 100Source: Companies, Daiwa estimates As a result of these diversification efforts, companies such as Melfas, Iljin Display, ELK, and Digitech postedAs touch-screen technology evolves to OGS, we believe robust operating-profit margins of 10-15% for 2010.that companies such as Melfas are likely to benefit, However, except for Iljin Display, the other threesince Melfas has spent a lot of time and resources on companies saw the margin erode for 2011 due todeveloping DPW technology. While domestic TSM market share losses and productivity issues. Althoughcompanies spend an average of 2-3% of revenue on companies such as S-mac and Synopex have gainedR&D expenses annually, Melfas has been the top R&D market share and touch-screen revenue expanded inspender over the past three years. However, as 2011, their operating-profit margins remained at mid-companies such as Samsung Fiberoptics (Not listed) single-digit percentages as they do not sourceand Nepes Display (Not listed) are developing similar components internally.types of OGS technology, productivity and costcompetitiveness will be the key in garnering marketshare, in our view. As for flexible displays, we believethat Iljin Display is currently developing touch screensfor the new display technology. - 13 -
Korea Touch Screen Sector 7 February 2012 TSM makers: operating-profit margin comparison (%) Melfas Iljin Display ELK S-mac Digitech Synopex 20 (096640 KS) (020760 KS) (094190 KS) (097780 KS) (091690 KS) (025320 KS) 15 10 5 0 (5) (10) 1Q10 3Q10 1Q11 3Q11 2Q10 4Q10 2Q11 1Q10 3Q10 1Q11 3Q11 2Q10 4Q10 2Q11 1Q10 3Q10 1Q11 3Q11 2Q10 4Q10 2Q11Source: CompaniesIn conclusion, we believe that both Iljin Display andMelfas are well-positioned in the growing touch-screenmarket. Iljin Display is the most profitable companyamong the domestic TSM makers (seven listedcompanies) and is continuing to expand its marketshare through production efficiencies and costcompetitiveness. Meanwhile, Melfas is likely to benefitfrom the technology shift to OGS, and its touch-sensorchip revenue is likely to increase strongly from theproliferation of low-end smartphones in China. - 14 -
Electronics / Korea 7 February 2012 Target price: W16,500Iljin Display Up/downside: +44.7%020760 KS Share price (6 Feb): W11,400Initiation: market-share gains onhigh productivity• Coverage initiated with a Buy (1) rating and six-month target price of W16,500• The company continues to gain market share in both handsets and tablet-PC touch-screen modules• We are upbeat on earnings growth, forecasting operating profit to expand by 55% YoY for 2012 How do we justify our view? and we expect its exposure to there could be upside to the smartphone TSMs to expand further consensus forecasts if Iljin Display in 2012. The company was the only gains market share in touch-screens domestic TSM maker to raise its and sapphire wafer demand rises. production capacity during 2H11.Jae H. Lee Share price performance(82) 2 787 email@example.com Meanwhile, Iljin Display enjoys a (W) (%) relatively high operating-profit 14,000 140Joshua Oh, CFA margin of a low-teen percentage for 12,000 120(82) 2 787 9176 10,000 firstname.lastname@example.org its TSM business. Although there are 8,000 80 a few TSM makers that can produce 6,000 60 touch sensors inhouse, Iljin Display Feb-11 May-11 Aug-11 Nov-11 Feb-12 Whats new is the only TSM maker that produces Iljin Display (LHS) Relative to KOSPI (RHS)Iljin Display is one of the fastest- its entire touch-sensor requirementsgrowing touch-screen makers in internally. As a result, we expect the 12-month range 6,990-12,950Korea, forecast by us to record company to deploy a more Market cap (US$m) 275.11touch-screen module (TSM) revenue aggressive pricing strategy to gain Average daily turnover (US$m) 5.75growth of over 515% YoY for 2011. share in the handset TSM market. Shares outstanding (m) 27 Major shareholder Chin-Kyu Huh (26.3%)As it continues to gain share in boththe handset and tablet-PC touch- What we recommendscreen markets, we forecast the The stock is trading currently at Financial summary (W) 2011E and 2012E PERs of 10.9x and Year to 31 Dec 11E 12E 13Ecompany’s revenue to rise by 51% Revenue (bn) 326 492 596YoY to W492bn for 2012. 5.8x, respectively, and at respective Operating profit (bn) 37 56 67 PBRs of 3.8x and 2.3x. Given the Net profit (bn) 28 53 57 Whats the impact robust revenue and earnings growth Core EPS 1,047 1,971 2,113Iljin Display’s touch-screen revenue outlook for 2012, we set our six- EPS change (%) 165.5 88.1 7.2started to expand from 4Q10, as the month target price at W16,500, Daiwa vs Cons. EPS (%) (5.8) 6.7 4.7company was able to satisfy SEC’s based on a mid-cycle PBR of 3.3x on PER (x) 10.9 5.8 5.4need for both quality and price for our 2012 BVPS forecast. The key Dividend yield (%) 0.0 0.0 0.0the Galaxy Tab in a short period of risks are weak TSM orders from its DPS 0.000 0.000 0.000time. Iljin Display is the largest TSM customers and intensifying PBR (x) 3.8 2.3 1.6provider for SEC’s tablet PC, with a competition. EV/EBITDA (x) 8.0 5.0 3.8 ROE (%) 43.0 49.8 35.247% share in 2011. In order to copewith the changes in touch-screen How we differ Source: Bloomberg, Daiwa forecaststechnologies, the company is Our 2012 and 2013 EPS forecastscurrently working on several new are 6.7% and 4.7% higher,projects with this captive customer, respectively, than those of the FnGuide consensus. We believeImportant disclosures, including any required research certifications, are provided on the last two pages of this report.