LED

Sector Report / Electronic Components

January 31, 2011

At the trough
Overweight (Upgrade)
Upgrading to Overweight utilization is the key
Company
SEMCO LG Inotek Lumens Seoul Semicon.

Rating TP (KRW)
BUY (-) Hold (-) BUY () BUY (-) 164,000 () 148,000 () 15,000 () 56,000 (-)

We are upgrading the LED sector to Overweight from Neutral as we expect LED industry utilization, the key profit driver, to improve from roughly 50% in 4Q10 to 90% in 4Q11. We expect QoQ demand growth, i.e. the numerator, to exceed QoQ supply growth, i.e. the denominator, throughout 2011 considering 1) recent capex cut announcements and 2) our now higher LED penetration assumptions.

Utilization hikes will mitigate ASP cuts from 2Q11

Our analysis suggests that a 1%pt change in both utilization and ASP impacts operating profit margins by roughly 1%pt at current utilization levels at Korean LED makers (30%). As we expect about a 10%pt utilization hike in 1Q, due to channel inventories, we believe it will be difficult for LED makers to turn to profit. In 2Q11, however, we expect utilization to improve by roughly 20%pt, mitigating ASP declines.

Contents
I. Upgrading to Overweight .....................................................1 1. 4Q10 hard landing, a blessing for the industry 2. Revising up LED penetration assumptions 3. Utilization, the key earning driver, has bottomed in 4Q10 II. Utilization hikes will mitigate ASP cuts from 2Q11......4 1. Utilization to mitigate ASP declines from 2Q11 2. LED margins have bottomed in 4Q10 III. We forecast 54% LED penetration in 2011 .........6 1. Set makers to aggressively shift to LED 2. Ranging the penetration 3. CCFL phase out could accelerate LED growth IV. At the trough ..............................................................................13 V. Top picks SEMCO, Lumens .......................................15 Company ...............................................................................................17

Why we are now more aggressive on LED penetration

We are revising up our 2011 LED TV panel shipment estimates by 14% to 122.4mn (up 236% YoY) as we believe TV makers will get more aggressive in LED adoptions. Due to, 1) declining TV ASPs, 2) lower YoY panel shipment growth and 3) reduced impact of the CRT to LCD shift, we believe TV makers will focus more on LED adoption to improve the product mix. CCFLs selling at a discount price have been the key reason behind weak LED demand, in our view, thus the CCFL phase out by set makers could be the greatest catalyst for LED. We believe consumers will also be more receptive due to the narrower price gap (60% in 4Q10 to 30% in 4Q11).

At the trough a good time to enter LED stocks

We believe the hard landing seen in 4Q10 is a blessing for the LED industry. Thanks to capex cuts and lower ASPs, we believe the earnings of key LED names have bottomed in 4Q10 and show a strong recovery from 2Q11. We believe the combined operating profit of LED companies will recover from W29bn in losses in 4Q10 to W116bn in profits in 4Q11. We note that component company valuations typically move with quarterly earnings leveraging the upside.

YS Chang
82-2-3276-4589 ys.chang@truefriend.com

Top picks SEMCO, Lumens

We are raising our price target for SEMCO to W164,000, from W134,000, and upgrading Lumens to BUY while raising our price target to W15,000 from W10,000. We do think LG Innotek will also be a beneficiary and raise our price target to W148,000, but we maintain our relatively cautious stance as we believe the risk associated with LG Electronics is not resolved.

Youngwoo Chung
82-2-3276-6186 youngwoo.chung @truefriend.com

Daniel Lee
82-2-3276-6279 daniel.lee@truefriend.com

Electronic Components

I. Upgrading to Overweight, utilization is the key

Upgrading to Overweight We are upgrading the LED sector to Overweight from Neutral as we expect LED industry utilization, the key profit driver, to improve from roughly 50% in 4Q10 to 90% in 4Q11. We expect QoQ demand growth, i.e. the numerator, to exceed QoQ supply growth, i.e. the denominator, throughout 2011 considering 1) recent capex cut announcements and 2) our now higher LED penetration assumptions.

1. 4Q10 hard landing, a blessing for the industry

Hard landing, a blessing for the industry As seen in <Table 1>, SEMCO and LG Innotek (Innotek) both reported very disappointing 4Q10 results, with LED earnings widely missing our estimates due to lower-than-expected utilizations amid weak demand.
<Table 1> LED earnings disappoint
4Q10E SEMCO Revenue Operating profit OP margin LG Innotek Revenue Operating profit OP margin
Source: Company data, Korea Investment & Securities Note: LED business only. (W bn)

4Q10P 211 -14.8 -7% 211 -42.2 -20%

Difference -40% NM

349 43 12.3% 258 -7.8 -3.0%

-18% NM

We do, however, believe the hard landing seen in 4Q10 is a blessing for the LED industry. Scaling down Capex Due to low utilization, companies are scaling down their 2011 capex materially compared to 2010 as seen in <Figure 1>. We believe the 2011 capex for three key Korean LED companies, i.e. SEMCO, Innotek and Seoul Semiconductor (Seoul Semi), will decline 63.7% YoY to W666bn, assuming SEMCO cuts capex by 30% YoY. While SEMCO did not disclose FY11 capex numbers, we note that management hinted at no capacity additions in 1H11. As a result, we now expect 2011 LED capacity (for TV-use LEDs) to grow 124.9% YoY compared to our previous 170.5% YoY growth estimate.
Figure 1. Material YoY capex cut expected in 2011
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 2010
Source: Company data, Korea Investment & Securities
(W bn)

2011F

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The seemingly high capacity growth is due to the base effect as material LED capacity was added only in 2H10. If we compare YoY capacity growth between 4Q11 and 4Q10, it amounts to only 39.8%.

2. Revising up LED penetration assumptions

Revising up LED penetration While we discuss more details below, we have revised up our LED TV panel shipment assumptions by 14% to 122.4mn (up 236% YoY) as we believe TV makers will get more aggressive in adopting LEDs.
Figure 2. Revising up LED penetration assumptions
(Thousand)

50,000

Old

New

40,000

30,000

20,000

10,000

0 30"< 30"~40" 40~50" 50~60" 60">

Source: Korea Investment & Securities

We believe LED area growth will amount to 139.1% despite assuming a full twobar (25% YoY decline in LED demand per panel) transition.
<Table 2> Number of LED chips / panels
Size category 30"< 30"~40" 40~50" 50~60" 60">
Source: Korea Investment & Securities

2010F 119 173 242 346 494

2011F 90 127 179 262 374

YoY -24.30% -26.50% -25.90% -24.30% -24.30%

3. Utilization, the key earning driver, has bottomed in 4Q10

Utilization has bottomed in 4Q10 We believe LED should be viewed as a component, similar to MLCC, rather than a cyclical product such as DRAM or TFT-LCD. And from that context, we think utilizations should be considered as the key earnings driver. By their very nature, components are demand driven (or volume driven). That said, because component ASPs rarely move up, volume growth is the key earnings driver, as seen in Figure 3. And again referring from MLCC, utilization shows a very close correlation with operating profit margins as seen in Figure 4.

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Figure 3. Component industry key driver is volume shipments the MLCC example
80% 60% 40% 20% 0% -20% -40% 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 25% 5% -15% -35% -55% Utilization(LHS) 0% 1Q05 1Q06 1Q07 1Q08 1Q09 OP margin(RHS) -75% Shipment QoQ ASP QoQ Rev enue QoQ

Source: Company data, Korea Investment & Securities

Figure 4. MLCC operating profit margins vs. utilization

100%

80%

60%

40%

20%

Source: Company data, Korea Investment & Securities

LED is now bottoming out

As we expect demand (shipment) growth to exceed supply (capacity) growth, we expect LED industry utilizations have bottomed in 4Q10 at roughly 50%, and will improve to approximately 90% utilization in 4Q11. We now finally believe that the LED industry is bottoming out.
Figure 5. LED industry utilizations
100%

80%

60%

40%

20%

0% 1Q10 2Q10 3Q10 4Q10F 1Q11F 2Q11F 3Q11F 4Q11F

Source: Company data, Korea Investment & Securities

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II. Utilization hikes will mitigate ASP cuts from 2Q11

Utilization hikes will mitigate ASP cuts Considering 1) LED TV inventories, 2) weak profitability at panel makers and 3) the lower bargaining power at LED chipmakers, we think LED prices will continue to fall, especially in 1H11. However, we believe utilization hikes can mitigate ASP cuts no later than 2Q11. As a result we expect LED makers to post strong earnings recovery from that point.

1. Utilization to mitigate ASP declines from 2Q11

1%pt utilization change = 1% ASP change Our analysis suggests that a 1%pt change in both utilization and ASP impacts operating profit margins by roughly 1%pt at current utilization levels of Korean LED makers (30%). Innotek also mentioned that they see 50% utilization as a breakeven point if ASPs are flat. Considering that 1) Innotek LED margins were at -20% and 2) utilizations were around 30% in 4Q10, we believe this supports our analysis. We have summarized our QoQ LED ASP assumptions and utilization of Korean companies in Figure 6. As we expect only a 10%pt utilization hike in 1Q11, due to channel inventories, we believe it will be difficult for LED makers to turn to profit. However, from 2Q11 to 4Q11 we expect industry utilization to improve, rapidly mitigating ASP declines.
Figure 6. Utilization and ASP assumptions (Korea)
25.0% Utilization change ASP cut

20.0%

15.0%

10.0%

5.0%

0.0% 1Q11F 2Q11F 3Q11F 4Q11F

Source: Company data, Korea Investment & Securities

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2. LED margins have bottomed in 4Q10

LED margins have already bottomed Considering utilizations, we believe the LED margins of key Korean LED chipmakers have bottomed in 4Q10 as seen in <Table 3>. We have a more positive outlook for companies in the Samsung food chain due to 1) relative cost competitiveness and 2) bottom up findings from our channel checks.
(W bn)

<Table 3> Quarterly earnings forecast (LED only)

1Q10 Samsung LED Sales Operating profit Margin LG Innotek Sales OP Margin (%) Seoul Semi Sales OP Margin (%) Lumens Sales OP Margin (%) Total sales Total OP Margin 51 4 8.1% 660 74 11.2% 66 7 11.1% 997 188 18.9% 73 6 8.5% 950 119 12.6% 60 5 8.6% 705 -29 -4.1% 73 6 8.6% 749 -9 -1.1% 101 10 9.5% 951 44 4.6% 123 13 10.3% 1244 135 10.9% 124 13 10.4% 215 29 13.5% 277 43 15.5% 222 23 10.3% 245 30 12.2% 291 39 13.4% 366 51 13.9% 155 4 2.5% 285 26 9.0% 254 8 3.1% 211 -42 -20.0% 197 -36 -18.0% 252 -20 -8.0% 340 14 4.0% 330 53 16.0% 431 126 29.3% 346 62 18.0% 211 -15 -7.0% 233 -9 -4.0% 307 15 5.0% 415 58 14.0% 2Q10 3Q10 4Q10F 1Q11F 2Q11F 3Q11F

4Q11F 473 57 12.0% 355 11 3.0% 354 39 11.0% 106 10 9.3% 1287 116 9.0%

Source: Company data, Korea Investment & Securities

We believe Samsung is becoming very aggressive in LED transition. According to Lumens, they are seeing almost full utilizations in 1Q10 (70% in 4Q10). And BLU names mentioned that almost 80% of total 40+ models are now being produced using LEDs.

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III. We forecast 54% LED penetration in 2011

54% LED penetration expected We are revising up our 2011 LED TV panel shipment estimates by 14% to 122.4mn (up 236% YoY) or 54% LED penetration on a panel basis. We believe TV makers will become much more aggressive in LED adoptions during 2011. Due to, 1) declining TV ASPs, 2) reduced YoY panel shipment growth and 3) the lower impact from the CRT to LCD mix shift. We believe CCFLs selling at a discount price have been the key reason behind weak LED demand, thus the CCFL phase out by set makers could be the greatest demand driver for LED. We think consumers will also be much more receptive due to the narrower price gap (60% in 4Q10 to 30% in 4Q11).

1. Set makers to aggressively shift to LED

Why set makers will shift to LED We think one key reason why companies shift their product mix is to protect their top line. And considering the industry conditions in 2011, we believe set makers will aggressively adopt LED TVs. As seen in Figure 7, blended TV ASPs, including CRT and PDP, peaked out in 2008. Due to the higher LCD portion out of total revenues (85.2% in 2010), we believe the impact from the CRT to TFT-LCD transition is fading out.
Figure 7. TV ASP vs. LCD TV revenue share
(USD)

1. TV ASPs trending down

600 500 400

TV price

LCD TV revenue portion

100%

80%

60% 300 40% 200 100 0 2004 2005 2006 2007 2008 2009 2010 20%

0%

Source: DisplaySearch, Korea Investment & Securities

2. TV shipment growth to slow

To make matters worse, we expect LCD TV shipment growth to also slow considering the weaker panel shipment growth outlook. We expect YoY LCD panel shipment growth to slow at 18.3% in 2011 compared to the 36.8% seen in 2010.

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Figure 8. YoY panel shipment growth

100%

80%

60%

40%

20%

0% 2005 2006 2007 2008 2009 2010P 2011F

Source: DisplaySearch, Korea Investment & Securities

Product mix shift has happened before

As seen in Figure 8, when LCD panel shipment growth slowed, LCD TV ASPs fell less, suggesting that TV makers focused on improving their product mix. And considering the shipment growth outlook, we believe 2011 will be another year in which TV makers will struggle to defend their ASPs.
Figure 9. TFT-LCD YoY shipment growth vs. YoY TV price declines
100% YoY shipment growth (LHS) 30"-40" YoY change (RHS) 80% 40"-50" YoY change (RHS) -20% 60% 0%

40% -40% 20%

0% 2005 2006 2007 2008 2009 2010P 2011F

-60%

Source: Korea Investment & Securities

Our discussions with panel / set makers indicate that retailers were burdened more than usual during 4Q10 price promotions. We believe this also indicates that TV makers are feeling ASP pressure at current TV price points. Thus, considering much lower LED TV prices, we believe TV set makers will attempt to phase out CCFL TVs, replacing them with LED TVs.

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2. Ranging the penetration

Ranging the penetration We attempted to range the LED penetration for 2011 in order to reach a realistic penetration level. That said, we calculated the max / min quarterly LED penetration for 2011 and assumed that the actual LED penetration would fall somewhere between the two. 1) Minimum penetration Minimum penetration We believe LED penetration will at least reach a level where TV makers can maintain their revenues. And thus, we feel that it should be considered as a minimum penetration range. <Table 4> shows the ASP level required for TV makers to maintain their top line for mainstream 30-40, 40-50 LCD TVs. We note that LCD TV revenues for these two sizes represent roughly 65% of total TV revenues.
<Table 4> LCD TV ASP required to maintain 2010 revenues
1Q11F TV revenue (USD mn) 30"-40" LCD revenue portion 40"-50" LCD revenue portion 30"-40" LCD revenue 40"-50" LCD revenue 30-40" LCD TV shipments 40"-50" LCD TV shipments 30-40" LCD TV blended ASP 40"-50" LCD TV blended ASP
Source: Korea Investment & Securities

2Q11F 27,820 28.00% 35.00% 8,899 9,774 21,523 14,132 413 692

3Q11F 28,417 28.00% 34.00% 9,640 10,589 24,331 15,976 396 663

4Q11F 35,242 28.00% 35.00% 10,382 11,403 28,074 18,434 370 619

Remarks Assuming no YoY growth Roughly 31% in 2010 Roughly 35% in 2010

25,705 30.00% 35.00% 8,157 8,960 19,652 12,904 415 694

10% YoY growth 20% YoY growth

And <Table 5-8> show our ASP assumptions for 30-40 and 40-50 CCFL and LED TVs
<Table 5> 30-40 CCFL TV ASP assumptions
(USD) 2004 2005 2006 2007 2008 2009 2010 2011F QoQ 2004 2005 2006 2007 2008 2009 2010 2011F -8.90% -2.30% -7.10% 2.50% -6.50% -0.30% -2.00% -8.90% -19.60% -8.10% -7.60% 0.10% -2.60% -1.50% -2.00% -15.90% -11.10% -12.40% -6.30% -5.70% -8.00% -5.90% -5.00% -12.50% -15.30% -22.70% -7.70% -15.20% -13.20% -9.90% -8.00% 1Q 4,373 2,670 1,580 914 748 560 434 356 2Q 3,985 2,146 1,452 844 749 545 428 349 3Q 3,353 1,908 1,273 791 706 501 403 331 4Q 2,932 1,617 984 730 598 435 363 305

<Table 6> 40-50 CCFL TV ASP assumptions

(USD) 2004 2005 2006 2007 2008 2009 2010 2011F QoQ 2004 2005 2006 2007 2008 2009 2010 2011F -12.70% -5.00% -4.60% 0.60% -4.20% -4.60% -4.00% -7.10% -12.80% -14.90% -6.50% -3.60% -0.30% -5.30% -4.00% -20.30% -27.30% -15.20% -6.80% -5.00% -9.90% -3.50% -5.00% -2.20% -11.70% -20.80% -12.30% -13.10% -16.10% -5.90% -8.00% 1Q 9,322 5,889 3,128 1,706 1,312 1,000 718 593 2Q 8,658 5,132 2,661 1,595 1,265 997 680 570 3Q 6,904 3,731 2,257 1,487 1,201 898 657 541 4Q 6,748 3,294 1,789 1,305 1,044 753 618 498

Source: DisplaySearch, Korea Investment & Securities

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<Table 7> 30-40 LED TV ASP assumptions

(USD) 2009 2010 2011F QoQ 2009 2010 2011F 1Q 901 538 2Q 782 495 3Q 626 445 4Q 1,048 585 401

<Table 8> 40-50 LED TV ASP assumptions

(USD) 2009 2010 2011F QoQ 2009 2010 2011F 1Q 1,322 908 2Q 1,189 835 3Q 1,080 752 4Q 1,491 987 676

-14.00% -8.00%

-13.20% -8.00%

-20.00% -10.00%

-6.60% -10.00%

-11.30% -8.00%

-10.00% -8.00%

-9.20% -10.00%

-8.60% -10.00%

Source: DisplaySearch, Korea Investment & Securities

Under our ASP assumptions, <Table 9> is the LED penetration level required for TV set makers to maintain their revenues.
<Table 9> Minimum LED penetration assumptions
1Q11F 30"-40" 40"-50"
Source: Korea Investment & Securities (Unit: %)

2Q11F 44.0 46.0

3Q11F 57.0 58.0

4Q11F 68.0 68.0

32.8 32.0

2) Maximum penetration Maximum penetration Maximum penetration assumes, what level of penetration LED TVs should have reached at current price levels compared to that of CCFL TVs. Historically, a price and penetration level of 30-40 and 40-50 CCFL TVs reached a certain level of penetration at similar price points as seen in Figure 10.
Figure 10. LCD TV penetration vs. price
(USD)

2,000

30"~40"

40"~50"

1,500

1,000

500

0 5% 10% 15% 20% 25% 30%

Source: DisplaySearch, Korea Investment Securities

What makes this approach more interesting is that the above phenomenon happened during the times indicated in <Table 10>.
<Table 10> CCFL price vs. penetration
5% When 30"-40" LCD 40"-50" LCD t ASP (USD) 30"-40" LCD 40"-50" LCD 4Q05-1Q06 4Q06-1Q07 1,762 1,749 10% 2Q06-3Q06 4Q07-1Q08 1,323 1,309 15% 1Q07-2Q07 1Q09-3Q09 879 961 20% 3Q07-4Q07 25% 3Q08-4Q08 30% 1Q09-2Q09

740

655

552

Source: DisplaySearch, Korea Investment Securities

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Thus, from this aspect, we compared our LED TV price assumptions with historical CCFL TV prices and indentified the CCFL TV penetration rate. We believe this will be the maximum level of LED penetration. <Table 11> shows our maximum penetration assumptions.
<Table 11> Maximum LED penetration assumptions
1Q11F 30"-40" 40"-50"
Source: Korea Investment & Securities (%)

2Q11F 90.1 75.3

3Q11F 93.0 79.7

4Q11F 95.9 88.6

87.2 70.8

3) Our penetration assumptions Penetration assumptions Figure 11 and 12 show the LED penetration range for 30-40 and 40-50 LED TV and our assumptions.
Figure 12. 40-50 LED penetration range and penetration
100%

Figure 11. 30-40 LED penetration range and penetration

100%

80%

80%

60%

60%

40%

40%

20% Min 0% 1Q11F 2Q11F 3Q11F 4Q11F Max Penetration

20% Min 0% 1Q11F 2Q11F 3Q11F 4Q11F Max Penetration

Source: Korea Investment & Securities

Source: Korea Investment & Securities

We assumed 30-40 penetration will be around the minimum range while 40-50 will be in the middle of the range. The reason we have been more aggressive on 40-50 penetration is because it is a higher end segment and consumers tend to be less price sensitive. Actually in 2010, when comparing LED penetration and historical CCFL penetration and current LED TV pricing, the penetration gap between 40-50 LED and CCFL TVs was much narrower compared to that of 30-40 as seen in Figure 13 and 14.

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Figure 13. 30-40 LED vs. CCFL penetration at LED prices

30% LED 25% CCFL

Figure 14. 40-50 LED vs. CCFL penetration at LED prices

30% LED 25% CCFL

20%

20%

15%

15%

10%

10%

5%

5%

0% 4Q09 1Q10 2Q10 3Q10 4Q10

0% 4Q09 1Q10 2Q10 3Q10 4Q10

Source: Korea Investment & Securities

Source: Korea Investment & Securities

We have applied our TV penetration rate into our panel assumptions as seen in <Table 12>. To note, our 1Q11 panel penetration is lower than our TV penetration assumptions as we believe TV makers will continue to reduce LED TV inventories carried over from 4Q10.
<Table12> LED panel / TV penetration assumptions
1Q11F 30"-40" Set Panel 40"-50" Set Panel
Source: Korea Investment & Securities

2Q11F 45% 45% 61% 61%

3Q11F 58% 58% 70% 70%

4Q11F 70% 70% 80% 80%

33% 28% 51% 46%

3. CCFL phase out could accelerate LED growth

CCFL phase out could accelerate LED growth As seen above in Figure 13 and 14, LED penetration is much weaker compared to that of CCFL at similar price points. We believe the discrepancy comes from the degree of differentiation. CCFL LCD offered a very distinctive form factor compared to CRT while the differences between CCFL LCD and LED LCD TVs are not as significant. Thus the strategic need of TV set makers to shift from CCFL to LED, removing the cheap comparable from consumers, could be one of the key catalyst for LED shipment growth, in our view. We believe consumers will also be more receptive to LED TVs due to the narrower price gap between CCFL and LED (60% in 4Q10 to 30% in 4Q11).

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Figure 15. 30-40 LED and CCFL price gap

(USD) 1,000 CCFL 900 800 700 600 500 400 300 200 100 0 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11F 0% 20% 40% 60% 80% LED Premium 100%

Figure 16. 40-50 LED and CCFL price gap

(USD) 1,400 CCFL 1,200 80% 1,000 800 600 400 20% 200 0 1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11F 0% 60% LED Premium 100%

40%

Source: Korea Investment & Securities

Source: Korea Investment & Securities

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IV. At the trough a good time to enter LED stocks

At the trough We believe the hard landing seen in 4Q10 will prove to be a blessing for the LED industry. Thanks to capex cuts and lower ASPs, we expect the earnings of key LED names have bottomed in 4Q10 and show a strong recovery from 2Q11. We forecast the combined operating profit of LED companies will snap back from an operating loss of W29bn in 4Q10 to an operating profit of W116bn in 4Q11.
(W bn)

<Table 13> Quarterly earnings forecast (LED only)

1Q10 Samsung LED Sales Operating profit Margin LG Innotek Sales OP Margin (%) Seoul Semi Sales OP Margin (%) Lumens Sales OP Margin (%) Total sales Total OP Margin 51 4 8.1% 660 74 11.2% 66 7 11.1% 997 188 18.9% 73 6 8.5% 950 119 12.6% 60 5 8.6% 705 -29 -4.1% 73 6 8.6% 749 -9 -1.1% 101 10 9.5% 951 44 4.6% 123 13 10.3% 1244 135 10.9% 124 13 10.4% 215 29 13.5% 277 43 15.5% 222 23 10.3% 245 30 12.2% 291 39 13.4% 366 51 13.9% 155 4 2.5% 285 26 9.0% 254 8 3.1% 211 -42 -20.0% 197 -36 -18.0% 252 -20 -8.0% 340 14 4.0% 330 53 16.0% 431 126 29.3% 346 62 18.0% 211 -15 -7.0% 233 -9 -4.0% 307 15 5.0% 415 58 14.0% 2Q10 3Q10 4Q10F 1Q11F 2Q11F 3Q11F

4Q11F 473 57 12.0% 355 11 3.0% 354 39 11.0% 106 10 9.3% 1287 116 9.0%

Source: Korea Investment & Securities

Share moves with earnings

Typically the share prices of component companies tend to move with quarterly earnings, as seen in Figure 17 and 18.
Figure 18. Quarterly OP vs. Innoteks share price
350.0 300.0 250.0 140,000 200.0 150.0 120,000 100,000 80,000 60,000 50.0 40,000 0.0 (50.0) 20,000 2008-07-25 2008-09-25 2008-11-25 2009-01-25 2009-03-25 2009-05-25 2009-07-25 2009-09-25 2009-11-25 2010-01-25 2010-03-25 2010-05-25 2010-07-25 2010-09-25 2010-11-25 (20.0) (40.0) 20.0 0.0 200,000 180,000 160,000 60.0 40.0 LGI LGI OP 100.0 80.0

Figure 17. Quarterly OP vs. SEMCOs share price

180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 2004-01-02 2004-07-02 2005-01-02 2005-07-02 2006-01-02 2006-07-02 2007-01-02 2007-07-02 2008-01-02 2008-07-02 2009-01-02 2009-07-02 2010-01-02 2010-07-02 100.0 SEMCO SEMCO OP

Source: SEMCO, Korea Investment & Securities

Source: LG Innotek, Korea Investment & Securities

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Valuations also move with earnings

And we note that component company valuations also move with quarterly earnings leveraging the upside.
Figure 19. SEMCOs OP vs. P/B
(W bn) 350 OP(LHS) 300 250 200 150 100 50 0 Jan-04 -50 -100 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 P/B(RHS) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 4.5

(W)
Source: SEMCO, Korea Investment & Securities

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VII. Top picks SEMCO, Lumens

Top picks SEMCO, Lumens We like companies with 1) better cost structures and 2) stronger earnings momentum. From this context, we recommend investors to focus on companies in the Samsung food chain, i.e. SEMCO and Lumens. We also like Seoul Semiconductor, but we think quarterly earnings momentum is weaker than the two above due to higher earnings base in 4Q10. Maintain Hold on LG Innotek While we do think LG Innotek will be a beneficiary of LED turn around, we believe its more of a trade considering that, 1) LED will turn to profit only in 3Q11, and 2) LGE related risks are not resolved.
(W bn)

<Table 14> Quarterly earnings forecast

1Q10 SEMCO Sales Operating profit Margin OP growth (QoQ) LG Innotek Sales OP Margin (%) OP growth (QoQ) Seoul Semi Sales OP Margin (%) OP growth (QoQ) Lumens Sales OP Margin (%) OP growth (QoQ) Total Sales Total OP Margin (%) OP growth (QoQ) 1,623.5 119.1 7.3% 2Q10 1,906.3 311.1 16.3% 161% 1,028.7 86.9 8.4% 105% 215.3 29.1 13.5% 118% 65.9 7.3 11.1% 79% 3,216.2 434.4 13.5% 143% 3Q10 1,845.5 263.8 14.3% -15% 1,164.0 63.2 5.4% -27% 277.0 42.8 15.5% 47% 72.8 6.2 8.5% -16% 3,359.3 376.0 11.2% -13% 4Q10F 1,593.7 83.8 5.3% -68% 1,135.9 (36.0) -3.2% -157% 222.3 24.5 11.0% -43% 60.3 5.2 8.6% -16% 3,012.2 77.5 2.6% -79% 1Q11F 1,607.8 93.5 5.8% 12% 1,056.0 (8.4) -0.8% -77% 245.3 30.4 12.4% 24% 72.8 6.3 8.6% 21% 2,981.9 121.7 4.1% 57% 2Q11F 1,834.2 185.3 10.1% 98% 1,195.3 21.8 1.8% -361% 291.0 42.0 14.4% 38% 101.1 9.6 9.5% 53% 3,421.7 258.8 7.6% 113% 3Q11F 2,172.7 252.4 11.6% 36% 1,397.9 63.8 4.6% 192% 366.0 58.1 15.9% 38% 123.4 12.7 10.3% 33% 4,059.9 387.0 9.5% 50%

4Q11F 2,133.3 195.8 9.2% -22% 1,332.4 51.8 3.9% -19% 353.8 50.4 14.2% -13% 105.7 9.8 9.3% -23% 3,925.3 307.8 7.8% -20%

774.9 42.4 5.5%

124.5 13.3 10.7%

50.5 4.1 8.1% 2,573.4 178.9 7.0%

Source: Company data, Korea Investment & Securities

<Table 15> Peer Valuation

Market cap Company Korea SEMCO LG Innotek Seoul Semi Lumens Daeduck Elec. Daeduck GDS Japan Murata Taiyo Yuden TDK Toyoda Gosei Stanley Elec. US Cree Taiwan Yageo Lite-On Tech. Everlight Elec. Epistar Rating BUY Hold BUY BUY BUY NR NR NR NR NR NR NR NR NR NR NR (USD mn) 8,676 2,518 2,168 316 352 162 16,865 1,849 8,781 3,057 3,393 5,726 1,148 3,174 1,258 3,107 P/E FY10F 16.7 13.0 25.6 29.1 7.7 7.1 19.6 15.0 13.4 12.2 11.6 25.4 8.4 10.3 14.0 15.4 FY11F 19.3 25.2 17.3 11.4 7.1 5.2 16.6 11.9 11.7 10.7 10.5 21.7 7.6 9.5 13.3 14.3 EV/EBITDA FY10F 7.4 9.5 14.3 10.1 4.7 2.2 8.1 4.1 5.0 3.1 4.2 13.3 5.3 10.6 10.0 10.0 FY11F 8.6 7.5 8.8 7.4 3.7 1.3 7.7 3.8 4.7 2.9 3.9 11.0 5.1 9.0 9.1 8.7 P/B FY10F 16.7 1.7 4.1 3.0 1.2 0.6 1.5 1.0 1.2 1.0 1.2 2.4 1.1 1.3 2.5 2.2 FY11F 19.3 1.6 3.5 2.5 1.0 0.6 1.5 0.9 1.1 1.0 1.1 2.2 1.0 1.3 2.2 2.0 ROE (%) FY10F 17.9 16.7 17.9 11.3 16.5 8.6 7.9 7.0 9.0 8.8 10.4 9.6 12.8 13.9 18.4 15.0 FY11F 13.7 6.7 22.3 24.6 15.3 10.7 8.6 7.8 9.7 9.2 10.5 10.6 12.7 14.3 18.8 14.2 Net debt Net debt to (USD mn) equity FY10F FY11F FY10F FY11F 918 1,295 -76 37 -81 -100 -1,921 84 549 -278 -822 -1,061 38 -364 40 -366 748 1,403 -31 37 -85 -125 -2,095 -2 154 -377 -976 -1,190 -62 -321 61 -312 30% 97% -15% 37% -27% -35% -18% 5% 7% -9% -29% -48% NA -18% NA -24% 21% 98% -5% 29% -25% -40% -19% 0% 2% -12% -32% -49% NA -15% NA -19%

Source: Company data, Bloomberg, Korea Investment & Securities * Note: Japanese makers FY end is March. Cree FY end is June

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Company

SEMCO (009150) ................................................................................................................................................................................... 18

LG Innotek (011070) ......................................................................................................................................................................... 21

Lumens (038060) .................................................................................................................................................................................. 24

Seoul Semiconductor (046890) ..................................................................................................................................... 29

Electronic Components

SEMCO (009150)

BUY (Maintain), TP: W164,000 (Up)

Bottoming out
Weaker-than-expected 4Q10, but we are turning more optimistic SEMCO reported disappointing 4Q10 results with operating profit missing our estimate by 59%. The key culprit was LEDs. We believe SEMCOs LED operating profit margin came in at 7% compared to our 12% estimate due to low utilization. However, despite disappointing earnings, we are now turning more bullish on the LED industry and SEMCO. Cost competitiveness will lead to faster earnings recovery We believe the LED industry is bottoming out as capex cuts and strong demand will lead to utilization hikes. And given SEMCOs cost competitiveness in LED, we think SEMCOs turnaround will arrive faster than Innoteks. We now see SEMCO posting LED profits by 2Q11, followed by a strong turnaround in 2H11 Multiple engines to mitigate the LED downside We expect SEMCO to post an operating loss in LEDs during 1Q11 as utilization hikes (12% pts) will not be sufficient to fully mitigate the anticipated 15% QoQ ASP cut. We note, however, that more than half (52%) of SEMCOs non-LED operating profits are generated from non-captive customers, and we expect them to post healthy results during 2011. Thus, we believe earnings contribution from other divisions can minimize the negative impact from LEDs. Revising down earnings We are revising down our 2011 revenue and operating profit estimates by 10% and 16%, respectively. Again, LED is the key culprit, as it represents 64.1% and 81.1% out of todays revenue and operating profit cut. We have revised down our 2011 LED shipment estimates by 4.7%, reflecting 1) the greater number of LED TV shipments but 2) lower LED area/panel due to the two-bar transition. We have lowered our ASP assumptions by 22.6%, now assuming a 44% YoY ASP cut. Revising up price target valuation to expand when earnings recover We are raising our price target by 22% to W164,000 based on 3.0x FY11 P/B (from 2.5x). Historically, SEMCOs valuation moved in line with operating profit, suggesting that the current 2.7x FY11 P/B can serve as a bottom as we expect earnings to recover from 1Q10. We note, SEMCO peaked at 3.1x P/B in 2009 with 11.6% ROE and 3.7x P/B in 2010 with 16.8% ROE. Our target price is based on 3.0x P/B with 12.4% ROE in 2011. We are basically applying peak multiples for SEMCO as we believe earnings have bottomed in 4Q11 and will show a strong turnaround, especially in 2H11.

January 28, 2011 / W130,500 / Mkt cap: USD8,685mn, KRW9,710bn YS Chang 822-3276-4589 ys.chang@truefriend.com Daniel Lee 822-3276-6279 daniel.lee@truefriend.com
Yr to Dec 2008A 2009A 2010F 2011F 2012F Sales (W bn) 4,284 5,551 6,969 7,740 8,312 OP (W bn) 137 465 778 727 766 EBT (W bn) 84 432 831 674 724 NP (W bn) 48 278 555 503 544 EPS % chg. EBITDA (won) (YoY) (W bn) 631 (56.8) 478 3,697 485.5 842 7,417 100.6 1,458 6,726 (9.3) 1,279 7,269 8.1 1,359 P/E EV/EBITDA (x) (x) 52.7 7.0 29.1 10.6 16.7 7.4 19.4 8.7 18.0 8.0 P/B (x) 1.2 2.9 2.6 2.4 2.1 ROE (%) 2.4 11.6 16.8 12.4 11.8

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Electronic Components

<Table 16> Earnings revision

1Q11F Previous Total revenue Non-LED ACI total revenue LCR total revenue OMS total without LED CDS total revenue LED Operating profit Non-LED LED Operating profit margin Non-LED LED EBT Tax Net profit Minority interest Net profit ex minority
Source: SEMCO, Korea Investment & Securities

(W bn)

2011F Change (%) -11% -4% -2% -2% -18% 0% -38% -38% -15% -131% Previous 8,629 6,608 1,730 1,982 984 1,913 2,022 870 633 236 10.1% 9.6% 11.7% -50% -59% -47% -131% -38% 901 201 700 95 605 Revised 7,740 6,312 1,663 1,871 865 1,913 1,428 727 606 121 9.4% 9.6% 8.5% 674 122 552 48 503 -25% -39% -21% -49% -17% Change (%) -10% -4% -4% -6% -12% 0% -29% -16% -4% -49%

Revised 1,608 1,375 368 417 176 414 233 93 103 -9 5.8% 7.5% -4.0% 80 14 66 -4 69

1,802 1,425 373 425 213 414 377 152 121 30 8.4% 8.5% 8.0% 159 35 124 12 112

<Table 17> Quarterly earnings forecast

(W bn) Total Non-LED ACI total revenue LCR total revenue OMS total without LED CDS total revenue LED Operating profit Non-LED LED Operating profit margin Non-LED LED EBT Tax Net profit Minority interest Net profit ex minority 1Q10 1,623 1,294 335 357 208 393 330 119 66 53 7.3% 5.1% 16.0% 196 44 152 29 123 2Q10 1,906 1,475 366 433 237 439 431 311.1 185 126 16.3% 12.5% 29.3% 303 72 231 50 180 3Q10 1,846 1,499 380 448 228 443 346 263.8 202 62 14.3% 13.4% 18.0% 247 48 199 40 159 4Q10P 1,593 1,383 362 398 182 441 211 84 99 -15 5.3% 7.1% -7.0% 85 -13 98 6 92 2010F 6,969 5,651 1,443 1,637 855 1,716 1,318 778 551 227 11.2% 9.8% 17.2% 831 150 680 125 555 1Q11F 1,608 1,375 368 417 176 414 233 93 103 -9 5.8% 7.5% -4.0% 80 14 66 -4 69 2Q11F 1,834 1,527 404 469 218 436 307 185 170 15 10.1% 11.1% 5.0% 172 31 141 6 135 3Q11F 2,173 1,758 454 529 245 530 415 252 194 58 11.6% 11.1% 14.0% 239 43 196 23 173 4Q11F 2,133 1,661 445 456 226 533 473 196 139 57 9.2% 8.4% 12.0% 182 33 150 23 127 2011F 7,740 6,312 1,663 1,871 865 1,913 1,428 727 606 121 9.4% 9.6% 8.5% 674 122 552 48 503

(W bn)

2012F 8,312 6,770 1,844 1,941 882 2,104 1,542 766 643 123 9.2% 9.5% 8.0% 724 131 593 49 544

Source: SEMCO, Korea Investment & Securities

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Electronic Components

Balance Sheet
Fiscal year ending Dec. (W bn) Current assets Cash & cash equivalent Accounts receivable Inventory Fixed assets Investments Tangible assets Intangible assets Total assets Current liabilities Accounts payable Short-term borrowing Current portion of LT debt Long-term debt Debentures Long-term borrowings Total liabilities Paid-in capital Capital surplus Capital adjustments Retained earnings Shareholders' equity 2008A 2009A 2010F 1,334 330 374 487 2,503 522 1,821 13 3,837 1,168 176 531 150 665 0 500 1,833 388 1,077 (5) 356 2,004 2,393 1,084 646 485 3,170 966 2,088 23 5,563 1,968 322 640 430 800 299 309 2,768 388 1,132 (10) 615 2,795 2,423 677 811 716 4,435 1,238 3,096 87 6,836 2,158 789 1,101 0 875 0 608 3,033 388 1,132 440 1,111 3,416 2011F 2012F 2,699 763 900 795 4,675 1,362 3,212 87 7,374 2,164 897 1,000 0 875 0 608 3,039 388 1,132 440 1,595 3,949 2,970 892 967 854 4,907 1,498 3,307 87 7,877 2,224 966 1,000 0 744 0 487 2,968 388 1,132 440 2,119 4,522

Income Statement
Fiscal year ending Dec. (W bn) Sales Gross profit SG&A expense Operating profit Non-op. profit Interest income FX gains Equity gains Non-op. expense Interest expense FX losses Equity losses Earnings before tax Income taxes Profit from discontinued Net profit EBITDA 2008A 2009A 4,284 731 594 137 278 11 215 1 331 56 223 3 84 30 0 48 478 5,551 1,176 711 465 255 17 161 8 288 67 164 1 432 113 0 278 842 2010F 6,969 1,754 976 778 313 21 147 0 260 68 180 0 831 150 0 555 1,458 2011F 7,740 1,811 1,084 727 212 22 131 0 265 72 193 0 674 122 0 503 1,279 2012F 8,312 1,930 1,164 766 208 25 124 0 250 67 183 0 724 131 0 544 1,359

Cash Flow
Fiscal year ending Dec. (W bn) C/F from operating Net profits Depreciation Amortization Net incr. in W/C Others C/F from investing Capex Decr. in fixed assets Net incr. in current assets Incr. in investment Others C/F from financing Incr. in equity Incr. in debts Dividends Others Increase in cash 2008A 437 48 336 5 (109) 157 (404) (423) 37 (1) (8) (10) 26 1 70 (49) 5 82 2009A 648 278 371 6 (143) 136 (721) (757) 48 5 4 (21) 684 38 521 (24) 149 1,296 2010F 823 555 680 0 (538) 125 (197) 839 0 0 (750) (286) (968) 0 0 (999) 32 (587) 2011F 982 503 552 0 (122) 48 288 1,012 0 0 (600) (124) (789) 0 0 (688) (101) 242 2012F 1,073 544 593 0 (114) 49 335 1,172 0 0 (700) (136) (922) 0 0 (800) (122) 244

Key Financial Data

Fiscal year ending Dec. per share data (won) EPS BPS DPS SPS Growth (%) Sales growth OP growth NP growth EPS growth EBITDA growth Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) Int. coverage (x) D/E ratio (%) Valuation (x) PER PBR PSR EV/EBITDA 52.7 1.2 0.6 7.0 29.1 2.9 1.5 10.6 16.7 2.6 1.4 7.4 19.4 2.4 1.3 8.7 18.0 2.1 1.2 8.0 829 2.4 58.9 572 7.0 60.0 1,010 11.4 50.0 823 10.0 40.7 572 11.5 32.9 3.2 1.1 11.2 1.4 2.4 0.8 8.4 5.0 15.2 6.8 11.6 0.7 11.2 8.0 20.9 11.0 16.8 0.6 9.4 6.5 16.5 7.8 12.4 0.6 9.2 6.5 16.4 7.8 11.8 0.6 21.8 (18.6) (57.4) (56.8) (1.4) 29.5 239.5 479.7 485.5 76.3 25.6 67.3 99.2 100.6 73.1 11.1 (6.5) (9.3) (9.3) (12.3) 7.4 5.4 8.1 8.1 6.3 631 26,832 250 55,743 3,697 37,413 750 72,080 7,417 47,884 750 90,090 6,726 54,740 750 7,269 62,132 750 2008A 2009A 2010F 2011F 2012F

99,951 107,587

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Electronic Components

LG Innotek (011070)

Hold (Maintain), TP: W148,000 (Up)

An LGE proxy
4Q10 weaker than expected Innotek reported disappointing 4Q10 results, posting a W360bn operating loss. The key culprit was LEDs. We believe Innoteks LED operating profit margins came in at 20% compared to our -3% estimates due to low utilization. Recent developments do suggest that the LED sector is bottoming out; however, we maintain our cautious stance on Innotek. LED to turn profitable only in 3Q11 We do think Innoteks LED margins will improve after bottoming out in 4Q10-1Q11. However, we expect the company to reach the breakeven point only in 3Q10 considering 1) weaker cost structure and 2) low base, i.e. -20% operating profit margin in 4Q10. As a result, we are somewhat concerned that LED will post losses for the full year. And exposure to LG Electronics is another risk We continue to believe that high exposure to captive customers, i.e. LG Electronics (LGE) and LG Display, is another key risk factor for Innotek in 2011. For example, PCB, which represented 16.3% of total Innotek revenues in 2010, is dependent on LGEs handsets. Thus, as long as LGE continues to post lackluster results, which we believe as likely, Innoteks earnings and share price will remain suppressed, in our view. Revising down earnings We are revising down our 2011 revenue and operating profit estimates by 1.5% and 45.6%, respectively. We have revised up our Mobile (SnO) revenue estimates by 20.3% thanks to stronger-than-expected camera module sales to overseas customers. However, we have slashed revenue estimates for LED and PCB by 11.7% and 13.0%, respectively. As for operating profit, we now assume LED to be in operating losses from a full-year perspective. Maintain Hold As we believe that the LED industry is bottoming out and expectations are building on LGEs recovery, we do think Innoteks share price can show a short-term bounce. But we still maintain our cautious stance on the stock as LGE related concerns have yet to be resolved, in our view. We raised our price target to W148,000 based on 1.9x FY10 P/B, We have applied a 10% discount to the mid cycle 2.0x P/B multiple due to lower ROE aspects this year (6.5%) compared to the previous mid cycle (8.1%).
January 28, 2011 / W138,500 / Mkt cap: USD2,511mn, KRW2,808bn YS Chang 822-3276-4589 ys.chang@truefriend.com Daniel Lee 822-3276-6279 daniel.lee@truefriend.com
Yr to Dec 2008A 2009A 2010F 2011F 2012F Sales (W bn) 1,922 2,971 4,103 4,982 5,567 OP (W bn) 76 114 157 129 286 EBT (W bn) 52 66 109 115 277 NP EPS % chg. EBITDA (W bn) (won) (YoY) (W bn) 52 4,906 NM 179 57 3,759 (23.4) 274 196 10,278 173.4 432 102 5,086 (50.5) 551 249 12,396 143.7 749 P/E EV/EBITDA (x) (x) 7.4 2.9 25.5 8.6 13.0 9.5 27.2 7.9 11.2 5.5 P/B (x) 0.8 1.6 1.7 1.8 1.5 ROE (%) NM 8.1 16.6 6.5 14.7

21

Electronic Components

<Table 18> Earnings revision

1Q11F Previous Revenue Non-LED D/N (Display & Network) PCB S/D (Semiconductor & Display) Mobile Motor / Automobile LED Operating profit Non-LED LED Operating profit margin Non-LED LED EBT Tax Net profit
Source: LG Innotek, Korea Investment & Securities

(W bn)

2011F Change (%) -2.2% 4.1% -1.0% -13.0% 0.0% 21.3% 8.5% -22.9% -124.0% -39.8% 247.1% Previous 5,056 3,784 1,106 736 508 1,057 377 1,352 237 212 25 4.7% 5.6% 1.8% -158.8% -100.0% -173.4% 179 36 144 Revised 4,982 3,918 1,110 640 511 1,271 386 1,143 129 160 (31) 2.6% 4.1% -2.7% 115 13 102 -35.9% -64.6% -28.7% Change (%) -1.5% 3.6% 0.4% -13.0% 0.6% 20.3% 2.4% -15.4% -45.6% -24.4% -226.2%

Revised 1,056 879 250 142 109 296 82 197 (8) 27 (36) -0.8% 3.1% -18.0% (12) 0 (12)

1,080 844 252 163 109 244 76 256 35 45 (10) 3.2% 5.3% -4.0% 20 4 16

<Table 19> Quarterly earnings forecast

1Q10 Revenue Adjustment factor Non-LED D/N (Display & Network) PCB S/D (Semiconductor & Display) Mobile Motor / Automobile LED Operating profit Non-LED LED Operating profit margin Non-LED LED EBT Tax Net profit Minority interest Net profit ex minority
Source: LG Innotek, Korea Investment & Securities

(W bn)

2Q10 1,029 (24) 768 277 184 132 106 69 285 87 52 26 8.4% 6.8% 9.0% 63 25 38 0 101

3Q10 1,164 (26) 936 308 179 125 253 62 254 63 55 8 5.4% 5.9% 3.1% 60 (7) 67 0 67

4Q10P 1,136 (19) 944 309 150 115 300 78 211 (36) 18 (42) -3.2% 1.9% -20.0% (55) (35) (20) 0 (20)

2010P 4,103 (89) 3,287 1,130 682 491 713 271 905 157 163 (5) 3.8% 5.0% -0.5% 109 (18) 126 0 196

1Q11F 1,056 (20) 879 250 142 109 296 82 197 (8) 27 (36) -0.8% 3.1% -18.0% (12) 0 (12) 0 (12)

2Q11F 1,195 (20) 964 282 154 126 310 92 252 22 42 (20) 1.8% 4.4% -8.0% 18 2 16 0 16

3Q11F 1,398 (20) 1,078 303 180 134 347 114 340 64 50 14 4.6% 4.7% 4.0% 60 6 54 0 54

4Q11F 1,332 (20) 998 275 165 143 317 98 355 52 41 11 3.9% 4.1% 3.0% 49 5 44 0 44

2011F 4,982 (80) 3,918 1,110 640 511 1,271 386 1,143 129 160 (31) 2.6% 4.1% -2.7% 115 13 102 0 102

2012F 5,567 (80) 4,275 1,110 640 552 1,408 565 1,372 286 245 41 5.1% 5.7% 3.0% 277 28 249 0 249

775 (20) 640 236 169 118 55 63 155 42 39 4 5.5% 6.0% 2.5% 41 (0) 42 (0) 47

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Electronic Components

Balance Sheet
Fiscal year ending Dec. (W bn) Current assets Cash & cash equivalent Accounts receivable Inventory Fixed assets Investments Tangible assets Intangible assets Total assets Current liabilities Accounts payable Short-term borrowing Current portion of LT debt Long-term debt Debentures Long-term borrowings Total liabilities Paid-in capital Capital surplus Capital adjustments Retained earnings Shareholders' equity 2008A 2009A 2010F 596 162 224 137 488 7 415 32 1,084 482 167 183 1 114 0 85 596 60 175 0 207 510 1,263 305 634 246 1,541 15 1,394 49 2,804 1,345 409 308 162 584 321 203 1,929 86 505 (0) 260 875 1,489 224 782 365 2,637 16 2,338 121 4,125 1,214 460 126 142 1,442 859 562 2,656 101 846 (0) 533 1,470 2011F 2012F 1,914 379 949 450 2,918 20 2,627 121 4,831 1,784 587 400 142 1,476 859 562 3,259 101 846 (0) 635 1,572 2,206 519 1,052 488 2,977 22 2,666 121 5,183 1,879 656 350 142 1,482 859 562 3,361 101 846 (0) 885 1,821

Income Statement
Fiscal year ending Dec. (W bn) Sales Gross profit SG&A expense Operating profit Non-op. profit Interest income FX gains Equity gains Non-op. expense Interest expense FX losses Equity losses Earnings before tax Income taxes Profit from discontinued Net profit EBITDA 2008A 2009A 1,922 221 144 76 169 4 158 0 193 12 163 0 52 (0) 0 52 179 2,971 368 254 114 119 8 101 0 167 26 100 0 66 15 0 57 274 2010F 4,103 515 362 157 35 7 20 0 83 68 15 0 109 (18) 0 196 432 2011F 4,982 577 448 129 64 10 30 0 79 79 16 0 115 13 0 102 551 2012F 5,567 787 501 286 68 14 30 0 77 77 16 0 277 28 0 249 749

Cash Flow
Fiscal year ending Dec. (W bn) C/F from operating Net profits Depreciation Amortization Net incr. in W/C Others C/F from investing Capex Decr. in fixed assets Net incr. in current assets Incr. in investment Others C/F from financing Incr. in equity Incr. in debts Dividends Others Increase in cash 2008A 105 52 100 4 (78) 28 (145) (113) 6 (27) (5) (6) 179 136 46 (3) 0 149 2009A 132 57 161 0 (136) 51 2010F (102) 196 275 0 (223) (350) 2011F 579 102 422 0 26 28 (707) (700) 0 0 0 (7) 284 0 274 0 10 156 2012F 659 249 463 0 (63) 9 (480) (500) 0 0 0 20 (40) 0 (50) 0 10 140

Key Financial Data

Fiscal year ending Dec. per share data (won) EPS BPS DPS SPS Growth (%) Sales growth OP growth NP growth EPS growth EBITDA growth (314) (1,423) 0 0 0 24 235 0 239 4 (9) 142 0 0 0 383 1,060 355 694 0 10 (81) Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) Int. coverage (x) D/E ratio (%) Valuation (x) PER PBR PSR EV/EBITDA 7.4 0.8 0.2 2.9 25.5 1.6 0.5 8.6 13.0 1.7 0.6 9.5 27.2 1.8 0.6 7.9 11.2 1.5 0.5 5.5 79 6.1 52.7 675 4.4 113.6 1,425 2.3 114.9 1,543 1.6 124.8 1,353 3.7 105.0 4.0 2.7 9.3 NM NM 0.9 3.8 1.9 9.2 2.6 8.1 0.4 3.8 4.8 10.5 3.6 16.6 0.3 2.6 2.1 11.1 2.3 6.5 0.3 5.1 4.5 13.5 5.0 14.7 0.3 NM NM NM NM NM 54.6 49.3 9.7 (23.4) 53.0 38.1 37.7 245.2 173.4 57.4 21.4 (17.5) (47.8) (50.5) 27.7 11.7 121.4 143.7 143.7 35.8 4,906 48,389 350 3,759 59,467 350 10,278 77,091 350 5,086 78,119 350 12,396 90,515 350 2008A 2009A 2010F 2011F 2012F

189,431 203,610 215,233 247,544 276,611

(290) (1,040)

23

Electronic Components

Lumens (038060)

BUY (Upgrade), TP: W15,000 (Up)

Accumulate on early positive signal

Upgrade to BUY on positive LED TV outlook We upgrade Lumens to BUY and raise our 12-month target price to W15,000 (from W10,000) based on the mid-cycle multiple of 4.5x 2011F PBR (from previous 9.5x EV/EBITDA which is a trough multiple). Our rationale for the shift in valuation methodology: 1) uniformity in comparison with main LED peers (SEMCO, LGI and SSC), 2) positive earnings growth outlook from 1Q11, 3) pure LED play that is most favorable to LED TV up-cycle. Our W15,000 target price implies 2011F multiples of 19.6x PER, 12.1x EV/EBITDA and 25% ROE. We prefer pure plays during TV up-cycle With weaker-than-normal seasonal demand and ASP cuts in 4Q10 now behind us, we expect TV market to show a gradual recovery from 1Q11 on the following reasons: 1) return of inventory restocking demand in 2Q11 (according to our display sector analyst in LG Display 4Q10 review: Time to buy on reduced inventory), 2) LED penetration in LCD TV sets may accelerate faster than expected as panel makers seek to improve their product mix to sustain profitability. As a pure TV play (we expect TV LED to account for 85% of 2011F revenue), we believe Lumens is best positioned among major LED names to benefit the most from Samsungs aggressive LED TV strategy. Factoring in weaker 2H10 earnings and positive 2011 outlook, we adjust 2010F and 2011F EPS by -32% and +5%, respectively. 4Q10 earnings could be weaker, but we are passing the bottom We expect Lumens to report 4Q10 sales of W60.3bn and operating profit of W5.2bn, down 17% and 16% QoQ respectively, mainly due to 1) weaker-thanexpected set demand and 2) ASP cuts from LCD price decline. Despite weaker revenue however, our operating margin forecast of 8.6% appears solid compared to SEMCO and LG Innoteks LED profitability in 4Q10. Our channel checks also indicate that the companys utilization is running at near full capacity since recovering in early-mid 4Q10, leading us to believe that we are now passing the earnings bottom and headed towards recovery phase in 1H11. We expect Samsung, Lumens largest customer, to target aggressive LED TV shipments for 2011. We believe Lumens plan to add new capacity (60mn unit per month) on its existing lines (220mn units per month) by end-1Q11 confirms Samsungs aggressiveness. Also, the company remains comfortable with its target of 20%+ market share within Samsung, despite mounting competition from other LED suppliers. Factoring in the aforementioned points, we revise up our 2011F revenue and operating profit forecast by 7% and 22%, respectively versus our previous forecast.
January 27, 2011 / W8,760 / Mkt cap: USD316mn, KRW339bn
Yr to Dec 2008A Sales (W bn) 75 133 250 403 461 OP (W bn) 3 6 23 38 45 EBT (W bn) (3) 4 16 39 47 NP (W bn) (2) 5 11 31 37 EPS % chg. EBITDA (won) (YoY) (W bn) (67) (120.9) 8 160 NM 15 281 75.9 36 767 172.5 53 924 20.5 63 P/E EV/EBITDA (x) (x) NM 9.5 55.8 25.9 29.1 10.1 11.4 7.4 9.5 5.9 P/B (x) 2.3 4.3 3.0 2.5 2.0 ROE (%) (9.3) 9.4 11.3 24.6 23.4

Youngwoo Chung 822-3276-6186 youngwoo.chung@truefriend.com

2009A 2010F 2011F 2012F

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Lumens is our most preferred LED pure play We believe Lumens is on track for a solid earnings recovery in 1Q11. Lumens shares have underperformed both Korean LED sector and Kospi for the past six months. Hence, we recommend investors to accumulate shares on an early positive signal (e.g. full utilization).
<Table 20> Earnings revisions
New 4Q10F Sales LCD Lighting Mobile Auto Operating profit Operating margin EBT Net profit 60.3 52.5 3.9 3.0 1.0 5.2 8.6% 2.4 1.9 2010F 2011F 249.6 210.2 15.0 21.1 2.0 22.8 9.1% 15.6 11.2 403.0 343.4 29.0 25.0 5.5 38.4 9.5% 39.4 30.8 4Q10F 80.0 68.9 3.9 6.2 1.0 6.8 8.5% 7.0 5.5 Old 2010F 269.5 226.7 15.0 24.8 2.0 24.8 9.2% 22.0 16.5 2011F 378.2 312.6 29.0 25.0 11.5 31.5 8.3% 36.7 28.6 -66% -66% -29% -32% 8% 8% 4Q10F -25% -24% 0% -52% 0% -24% Change 2010F -7% -7% 0% -15% 0% -8% 2011F 7% 10% 0% 0% -52% 22%
(W bn)

Source: Korea Investment & Securities

<Table 21> Quarterly earnings forecasts

2009 Sales TV BLU Notebook BLU General lighting Handset Others OP OP margin EBT Pretax margin Net profit Net margin 133.0 84.3 1.6 13.0 32.0 2.1 5.7 4.3% 4.5 3.4% 5.2 3.9% 1Q10 50.5 38.0 2.7 2.1 7.1 0.7 4.1 3.4 6.8% 2.7 5.4% 2Q10 65.9 54.6 0.9 4.2 6.0 0.3 7.3 5.2 7.9% 3.3 5.1%

(W bn)

3Q10 4Q10F 2010F 1Q11F 2Q11F 3Q11F 4Q11F 2011F 72.8 60.7 0.9 4.9 5.0 1.3 6.2 8.5% 4.6 6.3% 3.2 4.5% 60.3 51.6 0.9 3.9 3.0 1.0 5.2 8.6% 2.4 4.0% 1.9 3.1% 249.6 204.9 5.3 15.0 21.1 3.2 22.8 9.1% 15.6 6.3% 11.2 4.5% 72.8 61.9 1.0 4.4 4.5 1.0 6.3 8.6% 6.3 8.7% 4.9 6.8% 101.1 85.4 1.8 6.3 6.3 1.5 9.6 9.8 7.7 7.6% 123.4 101.4 2.8 9.5 7.6 2.0 12.7 13.2 10.3 8.3% 105.7 86.7 2.5 8.9 6.6 1.0 9.8 9.3% 10.1 9.5% 7.9 7.4% 403.0 335.3 8.1 29.0 25.0 5.5 38.4 9.5% 39.4 9.8% 30.8 7.6%

8.1% 11.1%

9.5% 10.3% 9.7% 10.7%

Source: Company data, Korea Investment & Securities

[Figure 20] Worldwide LCD TV shipments & LED penetration

('000) Global LED TV Global LCD TV (non-LED display ) LED penetration (RHS) 70% 60% 50% 40% 40,000 30% 30,000 20,000 10,000 0 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10F 4Q10F 1Q11F 2Q11F 3Q11F 20% 10% 0%

80,000 70,000 60,000 50,000

Source: Display Search, Korea Investment & Securities

25

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[Figure 21] Samsung LCD TV shipments & LED penetration forecast

('000) LED TV LCD TV (non-LED display ) LED penetration (RHS) 80% 70% 60% 50% 40% 30% 20% 10% 0% 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10F 4Q10F 1Q11F 2Q11F 3Q11F

20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Source: Display Search, Korea Investment & Securities

[Figure 22] Lumens 2011F revenue breakdown by application

Lighting 7%

Mobile 6%

Auto 1%

Others 0%

LCD 86%

Source: Company data, DRAMeXchange, Gartner, KISSource: Korea Investment & Securities

[Figure 23] Korea LED share price performance vs. KOSPI

130 120 110 100 90 80 70 60 SEMCO LGI SSC Lumens KOSPI

Oct-10

Oct-10

Oct-10

Jan-11

Dec-10

Nov-10

rce: Company data, DRAMeXchange, Gartner, KISSource: Datastream

26

Nov-10

Dec-10

Aug-10

Aug-10

Sep-10

Sep-10

Jan-11

Jul-10

Electronic Components

[Figure 24] Lumens share price vs. quarterly operating profit

(KRW) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 Mar-07 Mar-08 Mar-09 Mar-10 Sep-07 Sep-08 Sep-09 Sep-10 Mar-11 Jun-07 Jun-08 Jun-09 Jun-10 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Jun-11 18,000 16,000 14,000 12,000 5.0x 10,000 8,000 6,000 3.0x 4,000 2,000 2.0x Oct-09 Feb-09 Feb-10 Aug-09 Aug-10 Jun-09 Oct-10 Apr-09 Apr-10 Jun-10 Dec-08 Dec-09 Dec-10 0 -2 8 6 4 2 Adj. share price Quarterly operating prof it (W bn) 12 10

Source: Company data, DRAMeXchange, Gartner, KIS Source: Lumens, Datastream, Korea Investment & Securities

[Figure 25] Lumens PB vs. share price

7.0x P/B Share price (RHS)

6.0x

4.0x

Source: Company data, DRAMeXchange, Gartner, KIS Source: Lumens, Datastream, Korea Investment & Securities

27

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Balance Sheet
Fiscal year ending Dec. (W bn) Current assets Cash & cash equivalent Accounts receivable Inventory Fixed assets Investments Tangible assets Intangible assets Total assets Current liabilities Accounts payable Short-term borrowing Current portion of LT debt Long-term debt Debentures Long-term borrowings Total liabilities Paid-in capital Capital surplus Capital adjustments Retained earnings Shareholders' equity 2008A 2009A 2010F 33 6 10 11 28 3 13 8 62 27 8 16 0 12 10 1 39 15 22 (19) 5 23 99 12 37 34 83 24 51 5 182 64 38 17 1 31 10 20 94 20 65 (7) 10 88 150 20 50 60 86 28 52 7 236 88 50 22 1 38 10 28 126 20 69 0 21 110 2011F 2012F 229 20 81 97 86 28 52 5 315 136 89 22 1 38 10 28 174 20 69 0 52 141 283 43 92 111 86 29 53 4 368 152 101 22 1 38 10 28 190 20 69 0 89 178

Income Statement
Fiscal year ending Dec. (W bn) Sales Gross profit SG&A expense Operating profit Non-op. profit Interest income FX gains Equity gains Non-op. expense Interest expense FX losses Equity losses Earnings before tax Income taxes Profit from discontinued Net profit EBITDA 2008A 2009A 2010F 75 13 10 3 5 0 3 0 10 1 8 0 (3) (1) 0 (2) 8 133 20 14 6 7 0 4 0 8 2 4 0 4 (1) 0 5 15 250 48 25 23 13 1 7 1 20 3 8 5 16 4 0 11 36 2011F 403 84 46 38 13 1 7 0 12 4 8 0 39 9 0 31 53 2012F 461 98 53 45 14 1 7 1 12 4 8 0 47 9 0 37 63

Cash Flow
Fiscal year ending Dec. (W bn) C/F from operating Net profits Depreciation Amortization Net incr. in W/C Others C/F from investing Capex Decr. in fixed assets Net incr. in current assets Incr. in investment Others C/F from financing Incr. in equity Incr. in debts Dividends Others Increase in cash 2008A (6) (2) 3 2 (13) 4 (4) (7) 0 5 (2) 0 8 0 8 0 (0) (2) 2009A (9) 5 7 2 (26) 3 (63) (46) 2 (1) (20) 3 79 48 22 0 9 6 2010F (1) 11 12 1 (27) 1 (17) (13) 0 0 (4) (0) 23 4 13 0 6 4 2011F 18 31 15 0 (29) 1 (16) (16) 0 0 (0) 0 (2) 0 0 0 (2) (0) 2012F 44 37 18 0 (13) 1 (20) (19) 0 0 (1) (0) (0) 0 0 0 (0) 24

Key Financial Data

Fiscal year ending Dec. per share data (won) EPS BPS DPS SPS Growth (%) Sales growth OP growth NP growth EPS growth EBITDA growth Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) Int. coverage (x) D/E ratio (%) Valuation (x) PER PBR PSR EV/EBITDA NM 2.3 0.9 9.5 55.8 4.3 2.2 25.9 29.1 3.0 1.3 10.1 11.4 2.5 0.9 7.4 9.5 2.0 0.8 5.9 18 2.6 121.1 31 2.6 54.5 40 7.0 55.3 41 10.6 43.2 17 12.3 34.1 4.1 (2.5) 10.7 (4.4) (9.3) 0.0 4.3 3.9 11.2 4.3 9.4 0.0 9.1 4.5 14.6 5.4 11.3 0.0 9.5 7.6 13.2 11.2 24.6 0.0 9.7 8.1 13.7 10.9 23.4 0.0 507.3 8.4 (168.2) (120.9) 140.2 77.4 86.6 NM NM 86.5 87.6 297.8 115.4 75.9 143.8 61.5 68.6 174.7 172.5 46.5 14.3 16.1 21.2 20.5 17.9 (67) 1,138 0 2,870 160 2,090 0 4,092 281 2,754 0 6,255 767 3,486 0 10,032 924 4,410 0 11,465 2008A 2009A 2010F 2011F 2012F

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Seoul Semiconductor (046890)

BUY (Maintain), TP: W56,000 (Maintain)

The best all-around LED play

Diversification a key to sustaining profitability We prefer Seoul Semiconductor (Seoul Semi) as the most stable pure play in the Korea LED universe. We believe Seoul Semis 1) diversified customer base, 2) diversified product mix, and 3) ongoing improvement of vertical integration may help sustain long-term cost leadership and profitability. In 2011 we expect another solid year for Seoul Semi on 1) LED TV market recovery from 2H10 weakness, 2) stable general lighting revenue growth, and 3) strong mobile (e.g. smart-phone, media tablet) demand, which could have a positive impact on the existing handset and notebook LED business. Earnings headed toward sequential recovery We expect 1Q11 earnings to rebound QoQ with sales of W245.3bn (up 10% QoQ) and operating profit of W30.4bn (up 24% QoQ). We believe the earnings recovery will be driven by 1) higher utilization from new TV model launches, 2) solid revenue growth from non-TV products (e.g. mobile and lighting LEDs), and 3) the adoption of IFRS accounting, which may reduce Seoul Optos depreciation costs and improve profitability. For 2011, we forecast sales of W1.3trn and operating profit of W180.8bn, on the back of 1) aggressive LED adoption by TV panel makers, and 2) solid general lighting revenue growth. We believe general lighting may provide further revenue upside if the company secures meaningful orders from new captive customers (POSCO LED and Hyundai LED). Remain long-term positive on Seoul Semi We remain long-term positive on Seoul Semi for following reasons: 1) diversified product mix, 2) diversified customer base, and 3) improving vertical integration. We maintain BUY and our 12-month target price of W56,000 applying a mid cycle multiple of 4.8x 2011F PBR.

January 27, 2011 / W41,450 / Mkt cap: USD2,169mn, KRW2,251bn

Yr to Dec 2008A 2009A 2010F 2011F 2012F Sales (W bn) 284 453 839 1,256 1,501 OP (W bn) (11) 44 110 181 226 EBT (W bn) (15) 33 113 179 225 NP (W bn) (13) 28 92 147 170 EPS % chg. EBITDA (won) 547 1,586 2,402 2,922 (YoY) NM 190.0 51.4 21.7 (W bn) 4 64 160 270 335 (246) (169.1) P/E EV/EBITDA (x) NM 84.8 25.6 17.3 14.2 (x) 114.6 39.4 14.3 8.8 6.8 P/B (x) 3.0 6.1 4.1 3.5 2.9 ROE (%) (7.2) 9.1 17.9 22.3 22.6

Youngwoo Chung 822-3276-6186 youngwoo.chung@truefriend.com

29

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<Table 22> Quarterly earnings forecast

(W bn) Sales Handset Lighting & others Notebook PC TV OP Handset Lighting & others Notebook TV OP margin EBT EBT margin Net profit Net margin 2009 453.4 159.4 173.8 116.4 3.9 44.0 5.7 26.0 12.9 0.2 33.1 28.2 1Q10 124.5 30.0 46.5 29.0 19.0 13.3 0.9 7.6 3.5 1.3 15.2 12.5 2Q10 215.3 30.4 62.3 38.6 84.0 29.1 1.9 10.5 4.6 12.0 39.4 32.1 3Q10 277.0 38.3 80.5 32.2 126.0 42.8 2.7 14.5 4.2 18.9 42.2 34.0 4Q10 222.3 40.0 64.2 31.3 86.8 24.5 2.0 11.0 2.8 8.7 16.4 13.4 2010 1Q11F 2Q11F 3Q11F 4Q11F 839.0 138.6 253.5 131.1 315.8 109.7 7.5 43.6 15.1 41.0 113.2 92.0 245.3 33.4 83.4 32.0 96.5 30.4 2.0 14.9 2.9 10.6 29.9 24.5 291.0 34.7 104.0 32.6 119.8 42.0 2.1 20.8 3.6 15.6 41.6 34.1 366.0 35.9 132.0 37.7 160.3 58.1 2.2 27.7 4.1 24.1 57.6 47.2 39.6 99.2 35.1 179.9 50.4 2.4 19.3 3.5 25.2 49.9 40.9 2011F 143.6 418.6 137.4 556.5 180.8 8.6 82.6 14.1 75.4 14.4% 179.0 14.2% 146.8 11.7%

353.8 1,256.1

9.7% 10.7% 13.5% 15.5% 11.0% 13.1% 12.4% 14.4% 15.9% 14.2% 7.3% 12.2% 18.3% 15.2% 6.2% 10.0% 14.9% 12.3% 7.4% 13.5% 12.2% 14.3% 15.7% 14.1% 6.0% 11.0% 10.0% 11.7% 12.9% 11.6%

Source: Seoul Semiconductor, Korea Investment & Securities

[Figure 26] Korea LED operating margin comparison

40% 30% 20% 10% 0% -10% -20% -30% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 SEMCO (LED) Seoul Semi (consolidated) LGI (LED) Lumens

Source: Company data, DRAMeXchange, Gartner, KIS Source: Korea Investment & Securities

[Figure 27] 2011F operating profit breakdown by application

Handset 5%

Others 2%

TV 41%

General lighting 36%

NB/MNT 8%
eXchange, Gartner, KIS Source: Korea Investment & Securities

Automobile 8%

30

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[Figure 28] Share price vs. quarterly operating profit

(KRW) 60,000 50,000 40,000 30,000 10 20,000 10,000 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Apr-11 60,000 50,000 40,000 30,000 20,000 10,000 0 Feb-04 Mar-06 Oct-05 Apr-03 Apr-08 May-05 Aug-06 Sep-03 Sep-08 Apr-10 Dec-04 Nov-02 Nov-07 Nov-09 Sep-10 Jul-04 Jan-07 Jan-02 Jun-02 Jun-07 Jan-09 Jul-09 0 -10 -20 Adj. share price Quarterly operating prof it (RHS) (W bn) 50 40 30 20

Source: Company data, DRAMeXchange, Gartner, KIS Source: Company data, Datastream, Korea Investment & Securities

[Figure 29] PBR trend

14x 13x 12x 11x 10x 9x 8x 7x 6x 5x 4x 3x 2x 1x P/B Share price (RHS)

Source: Company data, DRAMeXchange, Gartner, KIS Source: Company data, Datastream, Korea Investment & Securities

31

Electronic Components

Balance Sheet
Fiscal year ending Dec. (W bn) Current assets Cash & cash equivalent Accounts receivable Inventory Fixed assets Investments Tangible assets Intangible assets Total assets Current liabilities Accounts payable Short-term borrowing Current portion of LT debt Long-term debt Debentures Long-term borrowings Total liabilities Paid-in capital Capital surplus Capital adjustments Retained earnings Shareholders' equity 2008A 2009A 2010F 171 9 55 35 70 7 43 16 241 75 27 22 1 1 0 0 76 25 78 (1) 61 165 340 27 93 49 188 93 74 19 528 69 42 0 0 1 0 0 70 29 339 0 90 458 506 174 167 103 280 120 150 7 786 112 48 1 0 102 0 100 214 29 366 0 176 572 2011F 2012F 615 125 251 151 343 120 213 7 958 170 75 1 0 104 0 100 273 29 366 0 288 685 804 218 300 180 325 120 193 7 1,128 203 90 1 0 104 0 100 307 29 366 0 425 822

Income Statement
Fiscal year ending Dec. (W bn) Sales Gross profit SG&A expense Operating profit Non-op. profit Interest income FX gains Equity gains Non-op. expense Interest expense FX losses Equity losses Earnings before tax Income taxes Profit from discontinued Net profit EBITDA 2008A 2009A 284 61 72 (11) 22 3 18 0 26 1 12 10 (15) (3) 0 (13) 4 453 102 58 44 17 3 11 0 28 2 17 7 33 5 0 28 64 2010F 839 196 87 110 27 9 11 (1) 23 3 17 0 113 21 0 92 160 2011F 1,256 323 142 181 24 5 12 0 26 5 18 0 179 32 0 147 270 2012F 1,501 397 171 226 25 6 12 0 26 5 18 0 225 41 0 170 335

Cash Flow
Fiscal year ending Dec. (W bn) C/F from operating Net profits Depreciation Amortization Net incr. in W/C Others C/F from investing Capex Decr. in fixed assets Net incr. in current assets Incr. in investment Others C/F from financing Incr. in equity Incr. in debts Dividends Others Increase in cash 2008A 10 (13) 13 2 (12) 19 (28) (17) 0 (24) 13 0 10 0 14 (4) 0 (8) 2009A 19 28 17 3 (39) 10 (239) (51) 0 (103) (79) (7) 238 261 (23) 0 0 18 2010F 26 92 51 0 (123) 6 (284) (270) 0 0 (28) 14 281 27 101 (5) 158 23 2011F 131 140 89 0 (104) 6 (128) (152) 0 0 0 24 (29) 0 (0) (28) (0) (26) 2012F 222 170 109 0 (64) 6 (90) (90) 0 0 0 0 (39) 0 0 (34) (5) 93

Key Financial Data

Fiscal year ending Dec. per share data (won) EPS BPS DPS SPS Growth (%) Sales growth OP growth NP growth EPS growth EBITDA growth Profitability (%) OP margin NP margin EBITDA margin ROA ROE Dividend yield Stability Net debt (W bn) Int. coverage (x) D/E ratio (%) Valuation (x) PER PBR PSR EV/EBITDA NM 3.0 1.6 114.6 84.8 6.1 5.3 39.4 25.6 4.1 2.8 14.3 17.3 3.5 1.9 8.8 14.2 2.9 1.6 6.8 (38) (11.9) 13.7 (176) 20.5 0.0 (83) 42.8 17.7 (35) 35.7 14.7 (128) 44.8 12.3 (4.0) (4.4) 1.3 (5.4) (7.2) 0.0 9.7 6.2 14.0 7.3 9.1 0.2 13.1 11.0 19.1 14.0 17.9 1.2 14.4 11.1 21.5 16.1 22.3 1.4 15.1 11.4 22.4 16.3 22.6 1.5 13.6 (144.8) (170.7) (169.1) 59.6 NM NM NM 85.0 149.6 225.8 190.0 152.5 49.7 64.8 52.2 51.4 68.4 19.5 25.1 21.7 21.7 24.2 (246) 2,931 0 5,586 547 7,598 93 8,780 1,586 9,816 480 14,393 2,402 11,747 584 21,544 2,922 14,090 623 25,740 2008A 2009A 2010F 2011F 2012F

(90.8) 1,660.2

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Changes to recommendation and price target

Company (Code) Samsung ElectroMechanics (009150) Date 01-28-09 02-17-09 09-25-09 11-06-09 02-22-10 04-09-10 07-20-10 07-23-10 10-14-10 01-28-11 LG Innotek (011070) 02-06-09 09-25-09 Recommendation BUY BUY NM BUY BUY BUY BUY BUY BUY BUY BUY NM Price target W42,000 W52,000 W0 W119,000 W126,000 W154,000 W187,000 W175,000 W134,000 W164,000 W63,000 W0 Seoul Semiconductor (046890) Lumens (038060) Company (Code) Date 11-06-09 07-20-10 07-27-10 10-14-10 01-28-11 07-20-10 10-14-10 01-28-11 07-20-10 07-30-10 01-28-11 Recommendation Hold Hold Hold Hold Hold Hold Hold BUY BUY BUY BUY Price target W110,000 W196,000 W164,000 W144,000 W148,000 W14,600 W10,000 W15,000 W58,300 W53,000 W56,000

Samsung Electro-Mechanics(009150)
200, 000 180, 000 160, 000 140, 000 120, 000 100, 000 80, 000 60, 000 40, 000 20, 000 0 Jan -09 M ay-09 Sep -09 Jan -10 M ay-10 Sep -10 Jan -11

LG Innotek(011070)
250, 000

200, 000

150, 000

100, 000

50, 000

0 Jan -09 M ay-09 Sep -09 Jan -10 M ay-10 Sep -10

Lumens(038060)
18, 000 16, 000 14, 000 12, 000 10, 000 8, 000 6, 000 4, 000 2, 000 0 Jan -09 M ay-09 Sep -09 Jan -10 M ay-10 Sep -10

Seoul Semiconductor(046890)
70, 000 60, 000 50, 000 40, 000 30, 000 20, 000 10, 000 0 Jan -09 M ay-09 Sep -09 Jan -10 M ay-10 Sep -10

33

Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and +15% Underweight: Expected to give a return of -15% or less Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sectors weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sectors weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sectors weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report.

Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of the companies mentioned in this report. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment banking services from the companies mentioned in this report in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of Samsung Electro-Mechanics, LG Innotek, Lumens, Seoul Semiconductor shares as of January 28, 2011. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of January 28, 2011. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of Samsung Electro-Mechanics, LG Innotek, Seoul Semiconductor and is the liquidity provider. Prepared by: YS Chang, Heonyoung Lee

This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the clients judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions.

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WON-JAE RHEE, Executive Managing Director (wonjae@truefriend.com +822 3276 5660) PAUL CHUNG, Sales Trading (pchung@truefriend.com +822 3276 5843) 27-1 Yoido-dong, Youngdeungpo-ku, Seoul 150-745, Korea Toll free: US 1 866 258 2552 HK 800 964 464 SG 800 8211 320 Fax: 822 3276 5681~3 Telex: K22966

NEW YORK
DONG KIM, Managing Director (dkim@kisamerica.com +1 212 314 0681) ELAINE LIM, Head of Sales (Elaine@kisamerica.com +1 212 314 0686) JU KIM, Sales (jukim@kisamerica.com +1 212 314 0683) Korea Investment & Securities America, Inc. 1350 Avenue of the Americas, Suite 1110 New York, NY 10019 Fax: 1 201 592 1409

HONG KONG
STEVE KIM, Managing Director (steve.kim@kisasia.com +852 2530 8900) SANGME LEE, Managing Director, Head of Asia Sales (sangme.lee@kisasia.com +852 2530 8910) DAN SONG, Sales (dan.song@kisasia.com, +852-2530-8900) JUN HWAN KIM, Sales (jun.kim@kisasia.com, +852-2530-8912) Korea Investment & Securities Asia, Ltd. Room Suite 2110 Jardine House 1 Connaught Place, Central, Hong Kong Fax: 852-2530-1516

SINGAPORE
SUNG NAMGOONG, Managing Director (snamgoong@truefriend.com +65 6501 5601) TERRY SHIN, Sales (terryshin@truefriend.com +65 6501 5602) Korea Investment & Securities Singapore Pte Ltd 1 Raffles Place, #43-04, OUB Center 048616 Singapore Fax: 65 6501 5617

LONDON
JJ MOON, Managing Director (jamesmoon@kiseurope.com +44 207 065 2765) BRANDON JUNE, Sales (brandonjune@kiseurope.com +44 207 065 2767) MINGOO KANG, Sales (mingookang@kiseurope.com, +44 207 065 2760) Korea Investment & Securities Europe, Ltd. 2nd Floor, 35 Moorgate London EC2R 6AR Fax: 44-207-236-4811 Telex: 8812237

This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private investors. 2011. All rights reserved. No part of this report may be reproduced or distributed in any manner without permission of Korea Investment & Securities Co.,Ltd.