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At the trough

Upgrading to Overweight – utilization is the keyWe 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 2Q11Our 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.

Why we are now more aggressive on LED penetrationWe 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 stocksWe 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.

Top picks – SEMCO, LumensWe 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 cautiousstance as we believe the risk associated with LG Electronics is not

resolved.

Sector Report / Electronic Components

LED

January 31, 2011

Overweight (Upgrade)

Company Rating TP (KRW)

SEMCO BUY (-) 164,000 (▲)

LG Inotek Hold (-) 148,000 (▲)

Lumens BUY (▲) 15,000 (▲)

Seoul Semicon. BUY (-) 56,000 (-)

Contents

I. Upgrading to Overweight ..................................................... 1

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

2. Revising up LED penetration assumptions3. 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

YS Chang82-2-3276-4589

[email protected]

Youngwoo Chung82-2-3276-6186

youngwoo.chung @truefriend.com

Daniel Lee82-2-3276-6279

[email protected]



Electronic Components

1

I. Upgrading to Overweight, utilization is the key

We are upgrading the LED sector to Overweight from Neutral as we expect LEDindustry 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

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 (W bn)

4Q10E 4Q10P Difference

SEMCO

Revenue 349 211 -40%

Operating profit 43 -14.8 NM

OP margin 12.3% -7%

LG Innotek

Revenue 258 211 -18%

Operating profit -7.8 -42.2 NM

OP margin -3.0% -20%

Source: Company data, Korea Investment & SecuritiesNote: LED business only.

We do, however, believe the hard landing seen in 4Q10 is a blessing for the LED industry.

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.

Upgrading to Overweight

Hard landing, a blessing

for the industry

Scaling down Capex

Figure 1. Material YoY capex cut expected in 2011

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2010 2011F

(W bn)

Source: Company data, Korea Investment & Securities




3

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 3. Component industry key driver is volume shipments – the MLCC example

-40%

-20%

0%

20%

40%

60%

80%

1 Q 9 1

1 Q 9 2

1 Q 9 3

1 Q 9 4

1 Q 9 5

1 Q 9 6

1 Q 9 7

1 Q 9 8

1 Q 9 9

1 Q 0 0

1 Q 0 1

1 Q 0 2

1 Q 0 3

1 Q 0 4

1 Q 0 5

1 Q 0 6

1 Q 0 7

1 Q 0 8

1 Q 0 9

1 Q 1 0

Shipment QoQ

ASP QoQ

Rev enue QoQ


Figure 4. MLCC operating profit margins vs. utilization

0%

20%

40%

60%

80%

100%

1Q05 1Q06 1Q07 1Q08 1Q09

-75%

-55%

-35%

-15%

5%

25%

Util ization(LHS) OP margin(RHS)


LED is now bottoming out

Figure 5. LED industry utilizations

0%

20%

40%

60%

80%

100%

1Q10 2Q10 3Q10 4Q10F 1Q11F 2Q11F 3Q11F 4Q11F





4

II. Utilization hikes will mitigate ASP cuts

from 2Q11

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

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.

Utilization hikes will

mitigate ASP cuts

1%pt utilization change =

1% ASP change

Figure 6. Utilization and ASP assumptions (Korea)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1Q11F 2Q11F 3Q11F 4Q11F

Utilization change ASP cut





5

2. LED margins have bottomed in 4Q10

Considering utilizations, we believe the LED margins of key Korean LED

chipmakers have bottomed in 4Q10 as seen in <Table 3>. We have a morepositive outlook for companies in the Samsung food chain due to 1) relative cost

competitiveness and 2) bottom up findings from our channel checks.

<Table 3> Quarterly earnings forecast (LED only) (W bn)

1Q10 2Q10 3Q10 4Q10F 1Q11F 2Q11F 3Q11F 4Q11F

Samsung LED

Sales 330 431 346 211 233 307 415 473

Operating profit 53 126 62 -15 -9 15 58 57

Margin 16.0% 29.3% 18.0% -7.0% -4.0% 5.0% 14.0% 12.0%

LG Innotek

Sales 155 285 254 211 197 252 340 355

OP 4 26 8 -42 -36 -20 14 11

Margin (%) 2.5% 9.0% 3.1% -20.0% -18.0% -8.0% 4.0% 3.0%

Seoul Semi

Sales 124 215 277 222 245 291 366 354

OP 13 29 43 23 30 39 51 39

Margin (%) 10.4% 13.5% 15.5% 10.3% 12.2% 13.4% 13.9% 11.0%

Lumens

Sales 51 66 73 60 73 101 123 106

OP 4 7 6 5 6 10 13 10

Margin (%) 8.1% 11.1% 8.5% 8.6% 8.6% 9.5% 10.3% 9.3%

Total sales 660 997 950 705 749 951 1244 1287

Total OP 74 188 119 -29 -9 44 135 116

Margin 11.2% 18.9% 12.6% -4.1% -1.1% 4.6% 10.9% 9.0%


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.

LED margins have already

bottomed




6

III. We forecast 54% LED penetration in 2011

We are revising up our 2011 LED TV panel shipment estimates by 14% to122.4mn (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

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.

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.

54% LED penetrationexpected

Why set makers will shift

to LED

1. TV ASPs trending down

Figure 7. TV ASP vs. LCD TV revenue share

0

100

200

300

400

500

600

2004 2005 2006 2007 2008 2009 2010

0%

20%

40%

60%

80%

100%TV price LCD TV revenue portion

(USD)

Source: DisplaySearch, Korea Investment & Securities

2. TV shipment growth to

slow




7

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.

Our discussions with panel / set makers indicate that retailers were burdened morethan 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.

Figure 8. YoY panel shipment growth

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010P 2011F


Product mix shift has

happened before

Figure 9. TFT-LCD YoY shipment growth vs. YoY TV price declines

Source: Korea Investment & Securities

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010P 2011F

-60%

-40%

-20%

0% YoY shipment growth (LHS)

30"-40" YoY change (RHS)

40"-50" YoY change (RHS)




8

2. 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 penetrationfor 2011 and assumed that the actual LED penetration would fall somewhere

between the two.

1) 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 2Q11F 3Q11F 4Q11F Remarks

TV revenue (USD mn) 25,705 27,820 28,417 35,242 Assuming no YoY growth

30"-40" LCD revenue portion 30.00% 28.00% 28.00% 28.00% Roughly 31% in 2010

40"-50" LCD revenue portion 35.00% 35.00% 34.00% 35.00% Roughly 35% in 2010

30"-40" LCD revenue 8,157 8,899 9,640 10,382

40"-50" LCD revenue 8,960 9,774 10,589 11,403

30”-40" LCD TV shipments 19,652 21,523 24,331 28,074 10% YoY growth

40"-50" LCD TV shipments 12,904 14,132 15,976 18,434 20% YoY growth

30”-40" LCD TV blended ASP 415 413 396 370

40"-50" LCD TV blended ASP 694 692 663 619


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 <Table 6> 40”-50” CCFL TV ASP assumptions

(USD) 1Q 2Q 3Q 4Q (USD) 1Q 2Q 3Q 4Q

2004 4,373 3,985 3,353 2,932 2004 9,322 8,658 6,904 6,748

2005 2,670 2,146 1,908 1,617 2005 5,889 5,132 3,731 3,294

2006 1,580 1,452 1,273 984 2006 3,128 2,661 2,257 1,789

2007 914 844 791 730 2007 1,706 1,595 1,487 1,305

2008 748 749 706 598 2008 1,312 1,265 1,201 1,044

2009 560 545 501 435 2009 1,000 997 898 753

2010 434 428 403 363 2010 718 680 657 618

2011F 356 349 331 305 2011F 593 570 541 498

QoQ QoQ

2004 -8.90% -15.90% -12.50% 2004 -7.10% -20.30% -2.20%

2005 -8.90% -19.60% -11.10% -15.30% 2005 -12.70% -12.80% -27.30% -11.70%

2006 -2.30% -8.10% -12.40% -22.70% 2006 -5.00% -14.90% -15.20% -20.80%

2007 -7.10% -7.60% -6.30% -7.70% 2007 -4.60% -6.50% -6.80% -12.30%

2008 2.50% 0.10% -5.70% -15.20% 2008 0.60% -3.60% -5.00% -13.10%

2009 -6.50% -2.60% -8.00% -13.20% 2009 -4.20% -0.30% -9.90% -16.10%

2010 -0.30% -1.50% -5.90% -9.90% 2010 -4.60% -5.30% -3.50% -5.90%

2011F -2.00% -2.00% -5.00% -8.00% 2011F -4.00% -4.00% -5.00% -8.00%


Ranging the penetration

Minimum penetration




9

<Table 7> 30”-40” LED TV ASP assumptions <Table 8> 40”-50” LED TV ASP assumptions

(USD) 1Q 2Q 3Q 4Q (USD) 1Q 2Q 3Q 4Q

2009 1,048 2009 1,491

2010 901 782 626 585 2010 1,322 1,189 1,080 987

2011F 538 495 445 401 2011F 908 835 752 676

QoQ QoQ

2009 2009

2010 -14.00% -13.20% -20.00% -6.60% 2010 -11.30% -10.00% -9.20% -8.60%

2011F -8.00% -8.00% -10.00% -10.00% 2011F -8.00% -8.00% -10.00% -10.00%


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 (Unit: %)

1Q11F 2Q11F 3Q11F 4Q11F

30"-40" 32.8 44.0 57.0 68.0

40"-50" 32.0 46.0 58.0 68.0


2) 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.

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% 10% 15% 20% 25% 30%

When

30"-40" LCD 4Q05-1Q06 2Q06-3Q06 1Q07-2Q07 3Q07-4Q07 3Q08-4Q08 1Q09-2Q09

40"-50" LCD t 4Q06-1Q07 4Q07-1Q08 1Q09-3Q09

ASP (USD)

30"-40" LCD 1,762 1,323 879 740 655 552

40"-50" LCD 1,749 1,309 961

Source: DisplaySearch, Korea Investment Securities

Maximum penetration

Figure 10. LCD TV penetration vs. price

0

500

1,000

1,500

2,000

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

30"~40" 40"~50"

(USD)

Source: DisplaySearch, Korea Investment Securities




10

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 2Q11F 3Q11F 4Q11F

30"-40" 87.2 90.1 93.0 95.9

40"-50" 70.8 75.3 79.7 88.6


3) Our penetration assumptions

Figure 11 and 12 show the LED penetration range for 30”-40” and 40”-50” LED TV

and our assumptions.

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 Figure13 and 14.

Penetration assumptions

Figure 11. 30”-40” LED penetration range andpenetration

Figure 12. 40”-50” LED penetration range andpenetration

0%

20%

40%

60%

80%

100%

1Q11F 2Q11F 3Q11F 4Q11F

Min Max Penetration

0%

20%

40%

60%

80%

100%

1Q11F 2Q11F 3Q11F 4Q11F

Min Max Penetration

Source: Korea Investment & Securities Source: Korea Investment & Securities




11

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 2Q11F 3Q11F 4Q11F

30"-40"

Set 33% 45% 58% 70%

Panel 28% 45% 58% 70%

40"-50"

Set 51% 61% 70% 80%

Panel 46% 61% 70% 80%


3. 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 keycatalyst 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).

Figure 13. 30”-40” LED vs. CCFL penetration at LEDprices

Figure 14. 40”-50” LED vs. CCFL penetration at LEDprices

0%

5%

10%

15%

20%

25%

30%

4Q09 1Q10 2Q10 3Q10 4Q10

LED CCFL

0%

5%

10%

15%

20%

25%

30%

4Q09 1Q10 2Q10 3Q10 4Q10

LED CCFL


CCFL phase out could

accelerate LED growth




12

Figure 15. 30”-40” LED and CCFL price gap Figure 16. 40”-50” LED and CCFL price gap

0

100

200

300

400

500

600

700

800

900

1,000

1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11F

0%

20%

40%

60%

80%

100%

CCFL LED Premium

(USD)

0

200

400

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800

1,000

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1Q10 2Q10 3Q10 4Q10 1Q11F 2Q11F 3Q11F 4Q11F

0%

20%

40%

60%

80%

100%

CCFL LED Pr emium

(USD)





13

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

stocks

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.

<Table 13> Quarterly earnings forecast (LED only) (W bn)

1Q10 2Q10 3Q10 4Q10F 1Q11F 2Q11F 3Q11F 4Q11F

Samsung LED

Sales 330 431 346 211 233 307 415 473

Operating profit 53 126 62 -15 -9 15 58 57

Margin 16.0% 29.3% 18.0% -7.0% -4.0% 5.0% 14.0% 12.0%

LG Innotek

Sales 155 285 254 211 197 252 340 355

OP 4 26 8 -42 -36 -20 14 11

Margin (%) 2.5% 9.0% 3.1% -20.0% -18.0% -8.0% 4.0% 3.0%

Seoul Semi

Sales 124 215 277 222 245 291 366 354

OP 13 29 43 23 30 39 51 39

Margin (%) 10.4% 13.5% 15.5% 10.3% 12.2% 13.4% 13.9% 11.0%

Lumens

Sales 51 66 73 60 73 101 123 106

OP 4 7 6 5 6 10 13 10

Margin (%) 8.1% 11.1% 8.5% 8.6% 8.6% 9.5% 10.3% 9.3%

Total sales 660 997 950 705 749 951 1244 1287

Total OP 74 188 119 -29 -9 44 135 116

Margin 11.2% 18.9% 12.6% -4.1% -1.1% 4.6% 10.9% 9.0%


Typically the share prices of component companies tend to move with quarterly

earnings, as seen in Figure 17 and 18.

At the trough

Share moves with earnings

Figure 17. Quarterly OP vs. SEMCO’s share price Figure 18. Quarterly OP vs. Innotek’s share price

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2 0 0 4 - 0 1 - 0 2

2 0 0 4 - 0 7 - 0 2

2 0 0 5 - 0 1 - 0 2

2 0 0 5 - 0 7 - 0 2

2 0 0 6 - 0 1 - 0 2

2 0 0 6 - 0 7 - 0 2

2 0 0 7 - 0 1 - 0 2

2 0 0 7 - 0 7 - 0 2

2 0 0 8 - 0 1 - 0 2

2 0 0 8 - 0 7 - 0 2

2 0 0 9 - 0 1 - 0 2

2 0 0 9 - 0 7 - 0 2

2 0 1 0 - 0 1 - 0 2

2 0 1 0 - 0 7 - 0 2

(50.0)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0SEMCO SEMCO OP

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2 0 0 8 - 0 7 - 2 5

2 0 0 8 - 0 9 - 2 5

2 0 0 8 - 1 1 - 2 5

2 0 0 9 - 0 1 - 2 5

2 0 0 9 - 0 3 - 2 5

2 0 0 9 - 0 5 - 2 5

2 0 0 9 - 0 7 - 2 5

2 0 0 9 - 0 9 - 2 5

2 0 0 9 - 1 1 - 2 5

2 0 1 0 - 0 1 - 2 5

2 0 1 0 - 0 3 - 2 5

2 0 1 0 - 0 5 - 2 5

2 0 1 0 - 0 7 - 2 5

2 0 1 0 - 0 9 - 2 5

2 0 1 0 - 1 1 - 2 5

(40.0)

(20.0)

0.0

20.0

40.0

60.0

80.0

100.0LGI LGI OP

Source: SEMCO, Korea Investment & Securities Source: LG Innotek, Korea Investment & Securities




14

And we note that component company valuations also move with quarterly

earnings leveraging the upside.

Valuations also move with

earnings

Figure 19. SEMCO’s OP vs. P/B

-100

-50

0

50

100

150

200

250

300

350

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5OP(LHS) P/B(RHS)

(W bn)

Source: SEMCO, Korea Investment & Securities




15

VII. Top picks – SEMCO, Lumens

We like companies with 1) better cost structures and 2) stronger earningsmomentum. 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.

While we do think LG Innotek will be a beneficiary of LED turn around, we believe

it’s more of a trade considering that, 1) LED will turn to profit only in 3Q11, and 2)

LGE related risks are not resolved.

<Table 14> Quarterly earnings forecast (W bn)

1Q10 2Q10 3Q10 4Q10F 1Q11F 2Q11F 3Q11F 4Q11FSEMCO

Sales 1,623.5 1,906.3 1,845.5 1,593.7 1,607.8 1,834.2 2,172.7 2,133.3

Operating profit 119.1 311.1 263.8 83.8 93.5 185.3 252.4 195.8

Margin 7.3% 16.3% 14.3% 5.3% 5.8% 10.1% 11.6% 9.2%

OP growth (QoQ) 161% -15% -68% 12% 98% 36% -22%

LG Innotek

Sales 774.9 1,028.7 1,164.0 1,135.9 1,056.0 1,195.3 1,397.9 1,332.4

OP 42.4 86.9 63.2 (36.0) (8.4) 21.8 63.8 51.8

Margin (%) 5.5% 8.4% 5.4% -3.2% -0.8% 1.8% 4.6% 3.9%

OP growth (QoQ) 105% -27% -157% -77% -361% 192% -19%

Seoul Semi

Sales 124.5 215.3 277.0 222.3 245.3 291.0 366.0 353.8

OP 13.3 29.1 42.8 24.5 30.4 42.0 58.1 50.4

Margin (%) 10.7% 13.5% 15.5% 11.0% 12.4% 14.4% 15.9% 14.2%

OP growth (QoQ) 118% 47% -43% 24% 38% 38% -13%

Lumens

Sales 50.5 65.9 72.8 60.3 72.8 101.1 123.4 105.7

OP 4.1 7.3 6.2 5.2 6.3 9.6 12.7 9.8

Margin (%) 8.1% 11.1% 8.5% 8.6% 8.6% 9.5% 10.3% 9.3%

OP growth (QoQ) 79% -16% -16% 21% 53% 33% -23%

Total Sales 2,573.4 3,216.2 3,359.3 3,012.2 2,981.9 3,421.7 4,059.9 3,925.3

Total OP 178.9 434.4 376.0 77.5 121.7 258.8 387.0 307.8

Margin (%) 7.0% 13.5% 11.2% 2.6% 4.1% 7.6% 9.5% 7.8%

OP growth (QoQ) 143% -13% -79% 57% 113% 50% -20%


<Table 15> Peer Valuation

Market cap P/E EV/EBITDA P/B ROE (%)Net debt

(USD mn)Net debt to

equity

Company Rating (USD mn) FY10F FY11F FY10F FY11F FY10F FY11F FY10F FY11F FY10F FY11F FY10F FY11F

Korea

SEMCO BUY 8,676 16.7 19.3 7.4 8.6 16.7 19.3 17.9 13.7 918 748 30% 21%

LG Innotek Hold 2,518 13.0 25.2 9.5 7.5 1.7 1.6 16.7 6.7 1,295 1,403 97% 98%Seoul Semi BUY 2,168 25.6 17.3 14.3 8.8 4.1 3.5 17.9 22.3 -76 -31 -15% -5%

Lumens BUY 316 29.1 11.4 10.1 7.4 3.0 2.5 11.3 24.6 37 37 37% 29%

Daeduck Elec. BUY 352 7.7 7.1 4.7 3.7 1.2 1.0 16.5 15.3 -81 -85 -27% -25%

Daeduck GDS NR 162 7.1 5.2 2.2 1.3 0.6 0.6 8.6 10.7 -100 -125 -35% -40%

Japan

Murata NR 16,865 19.6 16.6 8.1 7.7 1.5 1.5 7.9 8.6 -1,921 -2,095 -18% -19%

Taiyo Yuden NR 1,849 15.0 11.9 4.1 3.8 1.0 0.9 7.0 7.8 84 -2 5% 0%

TDK NR 8,781 13.4 11.7 5.0 4.7 1.2 1.1 9.0 9.7 549 154 7% 2%

Toyoda Gosei NR 3,057 12.2 10.7 3.1 2.9 1.0 1.0 8.8 9.2 -278 -377 -9% -12%

Stanley Elec. NR 3,393 11.6 10.5 4.2 3.9 1.2 1.1 10.4 10.5 -822 -976 -29% -32%US

Cree NR 5,726 25.4 21.7 13.3 11.0 2.4 2.2 9.6 10.6 -1,061 -1,190 -48% -49%Taiwan

Yageo NR 1,148 8.4 7.6 5.3 5.1 1.1 1.0 12.8 12.7 38 -62 NA NA

Lite-On Tech. NR 3,174 10.3 9.5 10.6 9.0 1.3 1.3 13.9 14.3 -364 -321 -18% -15%

Everlight Elec. NR 1,258 14.0 13.3 10.0 9.1 2.5 2.2 18.4 18.8 40 61 NA NA

Epistar NR 3,107 15.4 14.3 10.0 8.7 2.2 2.0 15.0 14.2 -366 -312 -24% -19%

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

Top picks – SEMCO,

Lumens

Maintain Hold on LG

Innotek



This page is left blank intentionally



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

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

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

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

Company




18

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 SEMCO’s 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 SEMCO’s cost competitiveness in LED, we

think SEMCO’s turnaround will arrive faster than Innotek’s. 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 SEMCO’s 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 today’s 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, SEMCO’s 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

Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA P/B ROE

Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)

2008A 4,284 137 84 48 631 (56.8) 478 52.7 7.0 1.2 2.4

2009A 5,551 465 432 278 3,697 485.5 842 29.1 10.6 2.9 11.6

2010F 6,969 778 831 555 7,417 100.6 1,458 16.7 7.4 2.6 16.82011F 7,740 727 674 503 6,726 (9.3) 1,279 19.4 8.7 2.4 12.4

2012F 8,312 766 724 544 7,269 8.1 1,359 18.0 8.0 2.1 11.8

YS Chang

822-3276-4589

[email protected]

Daniel Lee

822-3276-6279

[email protected]




19

<Table 16> Earnings revision (W bn)

1Q11F 2011F

Previous Revised Change (%) Previous Revised Change (%)

Total revenue 1,802 1,608 -11% 8,629 7,740 -10%

Non-LED 1,425 1,375 -4% 6,608 6,312 -4%

ACI total revenue 373 368 -2% 1,730 1,663 -4%

LCR total revenue 425 417 -2% 1,982 1,871 -6%

OMS total without LED 213 176 -18% 984 865 -12%

CDS total revenue 414 414 0% 1,913 1,913 0%

LED 377 233 -38% 2,022 1,428 -29%

Operating profit 152 93 -38% 870 727 -16%

Non-LED 121 103 -15% 633 606 -4%

LED 30 -9 -131% 236 121 -49%

Operating profit margin 8.4% 5.8% 10.1% 9.4%

Non-LED 8.5% 7.5% 9.6% 9.6%

LED 8.0% -4.0% 11.7% 8.5%

EBT 159 80 -50% 901 674 -25%

Tax 35 14 -59% 201 122 -39%

Net profit 124 66 -47% 700 552 -21%

Minority interest 12 -4 -131% 95 48 -49%

Net profit ex minority 112 69 -38% 605 503 -17%



(W bn) 1Q10 2Q10 3Q10 4Q10P 2010F 1Q11F 2Q11F 3Q11F 4Q11F 2011F 2012F

Total 1,623 1,906 1,846 1,593 6,969 1,608 1,834 2,173 2,133 7,740 8,312

Non-LED 1,294 1,475 1,499 1,383 5,651 1,375 1,527 1,758 1,661 6,312 6,770

ACI total revenue 335 366 380 362 1,443 368 404 454 445 1,663 1,844

LCR total revenue 357 433 448 398 1,637 417 469 529 456 1,871 1,941OMS total without LED 208 237 228 182 855 176 218 245 226 865 882

CDS total revenue 393 439 443 441 1,716 414 436 530 533 1,913 2,104

LED 330 431 346 211 1,318 233 307 415 473 1,428 1,542

Operating profit 119 311.1 263.8 84 778 93 185 252 196 727 766

Non-LED 66 185 202 99 551 103 170 194 139 606 643

LED 53 126 62 -15 227 -9 15 58 57 121 123

Operating profit margin 7.3% 16.3% 14.3% 5.3% 11.2% 5.8% 10.1% 11.6% 9.2% 9.4% 9.2%

Non-LED 5.1% 12.5% 13.4% 7.1% 9.8% 7.5% 11.1% 11.1% 8.4% 9.6% 9.5%

LED 16.0% 29.3% 18.0% -7.0% 17.2% -4.0% 5.0% 14.0% 12.0% 8.5% 8.0%

EBT 196 303 247 85 831 80 172 239 182 674 724

Tax 44 72 48 -13 150 14 31 43 33 122 131

Net profit 152 231 199 98 680 66 141 196 150 552 593

Minority interest 29 50 40 6 125 -4 6 23 23 48 49Net profit ex minority 123 180 159 92 555 69 135 173 127 503 544





20

Balance Sheet

Fiscal year ending Dec. (W bn) 2008A 2009A 2010F 2011F 2012F

Current assets 1,334 2,393 2,423 2,699 2,970

Cash & cash equivalent 330 1,084 677 763 892

Accounts receivable 374 646 811 900 967

Inventory 487 485 716 795 854

Fixed assets 2,503 3,170 4,435 4,675 4,907

Investments 522 966 1,238 1,362 1,498

Tangible assets 1,821 2,088 3,096 3,212 3,307

Intangible assets 13 23 87 87 87

Total assets 3,837 5,563 6,836 7,374 7,877

Current liabilities 1,168 1,968 2,158 2,164 2,224

Accounts payable 176 322 789 897 966

Short-term borrowing 531 640 1,101 1,000 1,000

Current portion of LT debt 150 430 0 0 0

Long-term debt 665 800 875 875 744

Debentures 0 299 0 0 0

Long-term borrowings 500 309 608 608 487

Total liabilit ies 1,833 2,768 3,033 3,039 2,968

Paid-in capital 388 388 388 388 388

Capital surplus 1,077 1,132 1,132 1,132 1,132

Capital adjustments (5) (10) 440 440 440

Retained earnings 356 615 1,111 1,595 2,119

Shareholders' equity 2,004 2,795 3,416 3,949 4,522

Income Statement


Sales 4,284 5,551 6,969 7,740 8,312

Gross profit 731 1,176 1,754 1,811 1,930

SG&A expense 594 711 976 1,084 1,164

Operating profit 137 465 778 727 766

Non-op. profit 278 255 313 212 208

Interest income 11 17 21 22 25

FX gains 215 161 147 131 124

Equity gains 1 8 0 0 0

Non-op. expense 331 288 260 265 250

Interest expense 56 67 68 72 67

FX losses 223 164 180 193 183

Equity losses 3 1 0 0 0

Earnings before tax 84 432 831 674 724

Income taxes 30 113 150 122 131

Profit from discontinued 0 0 0 0 0

Net profit 48 278 555 503 544

EBITDA 478 842 1,458 1,279 1,359

Key Financial Data

Fiscal year ending Dec. 2008A 2009A 2010F 2011F 2012F

per share data (won)

EPS 631 3,697 7,417 6,726 7,269

BPS 26,832 37,413 47,884 54,740 62,132

DPS 250 750 750 750 750

SPS 55,743 72,080 90,090 99,951 107,587

Growth (%)

Sales growth 21.8 29.5 25.6 11.1 7.4

OP growth (18.6) 239.5 67.3 (6.5) 5.4

NP growth (57.4) 479.7 99.2 (9.3) 8.1

EPS growth (56.8) 485.5 100.6 (9.3) 8.1

EBITDA growth (1.4) 76.3 73.1 (12.3) 6.3

Profitability (%)

OP margin 3.2 8.4 11.2 9.4 9.2

NP margin 1.1 5.0 8.0 6.5 6.5

EBITDA margin 11.2 15.2 20.9 16.5 16.4

ROA 1.4 6.8 11.0 7.8 7.8

ROE 2.4 11.6 16.8 12.4 11.8

Dividend yield 0.8 0.7 0.6 0.6 0.6

Stability

Net debt (W bn) 829 572 1,010 823 572

Int. coverage (x) 2.4 7.0 11.4 10.0 11.5

D/E ratio (%) 58.9 60.0 50.0 40.7 32.9

Valuation (x)

PER 52.7 29.1 16.7 19.4 18.0

PBR 1.2 2.9 2.6 2.4 2.1

PSR 0.6 1.5 1.4 1.3 1.2

EV/EBITDA 7.0 10.6 7.4 8.7 8.0

Cash Flow


C/F from operating 437 648 823 982 1,073

Net profits 48 278 555 503 544

Depreciation 336 371 680 552 593

Amortization 5 6 0 0 0

Net incr. in W/C (109) (143) (538) (122) (114)

Others 157 136 125 48 49

C/F from investing (404) (721) (197) 288 335

Capex (423) (757) 839 1,012 1,172

Decr. in fixed assets 37 48 0 0 0

Net incr. in current assets (1) 5 0 0 0

Incr. in investment (8) 4 (750) (600) (700)

Others (10) (21) (286) (124) (136)

C/F from financing 26 684 (968) (789) (922)

Incr. in equity 1 38 0 0 0

Incr. in debts 70 521 0 0 0

Dividends (49) (24) (999) (688) (800)

Others 5 149 32 (101) (122)

Increase in cash 82 1,296 (587) 242 244




21

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 Innotek’s 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 Innotek’s 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 LGE’s handsets. Thus, as long as LGE continues to post lackluster

results, which we believe as likely, Innotek’s 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 LGE’s recovery, we do think Innotek’s 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%).




2008A 1,922 76 52 52 4,906 NM 179 7.4 2.9 0.8 NM

2009A 2,971 114 66 57 3,759 (23.4) 274 25.5 8.6 1.6 8.1

2010F 4,103 157 109 196 10,278 173.4 432 13.0 9.5 1.7 16.6

2011F 4,982 129 115 102 5,086 (50.5) 551 27.2 7.9 1.8 6.52012F 5,567 286 277 249 12,396 143.7 749 11.2 5.5 1.5 14.7

YS Chang

822-3276-4589

[email protected]

Daniel Lee

822-3276-6279 [email protected]




22

<Table 18> Earnings revision (W bn)

1Q11F 2011F

Previous Revised Change (%) Previous Revised Change (%)

Revenue 1,080 1,056 -2.2% 5,056 4,982 -1.5%

Non-LED 844 879 4.1% 3,784 3,918 3.6%

D/N (Display & Network) 252 250 -1.0% 1,106 1,110 0.4%

PCB 163 142 -13.0% 736 640 -13.0%

S/D (Semiconductor & Display) 109 109 0.0% 508 511 0.6%

Mobile 244 296 21.3% 1,057 1,271 20.3%

Motor / Automobile 76 82 8.5% 377 386 2.4%

LED 256 197 -22.9% 1,352 1,143 -15.4%

Operating profit 35 (8) -124.0% 237 129 -45.6%

Non-LED 45 27 -39.8% 212 160 -24.4%

LED (10) (36) 247.1% 25 (31) -226.2%

Operating profit margin 3.2% -0.8% 4.7% 2.6%

Non-LED 5.3% 3.1% 5.6% 4.1%

LED -4.0% -18.0% 1.8% -2.7%

EBT 20 (12) -158.8% 179 115 -35.9%

Tax 4 0 -100.0% 36 13 -64.6%

Net profit 16 (12) -173.4% 144 102 -28.7%

Source: LG Innotek, Korea Investment & Securities


1Q10 2Q10 3Q10 4Q10P 2010P 1Q11F 2Q11F 3Q11F 4Q11F 2011F 2012F

Revenue 775 1,029 1,164 1,136 4,103 1,056 1,195 1,398 1,332 4,982 5,567

Adjustment factor (20) (24) (26) (19) (89) (20) (20) (20) (20) (80) (80)

Non-LED 640 768 936 944 3,287 879 964 1,078 998 3,918 4,275

D/N (Display & Network) 236 277 308 309 1,130 250 282 303 275 1,110 1,110

PCB 169 184 179 150 682 142 154 180 165 640 640S/D (Semiconductor & Display) 118 132 125 115 491 109 126 134 143 511 552

Mobile 55 106 253 300 713 296 310 347 317 1,271 1,408

Motor / Automobile 63 69 62 78 271 82 92 114 98 386 565

LED 155 285 254 211 905 197 252 340 355 1,143 1,372

Operating profit 42 87 63 (36) 157 (8) 22 64 52 129 286

Non-LED 39 52 55 18 163 27 42 50 41 160 245

LED 4 26 8 (42) (5) (36) (20) 14 11 (31) 41

Operating profit margin 5.5% 8.4% 5.4% -3.2% 3.8% -0.8% 1.8% 4.6% 3.9% 2.6% 5.1%

Non-LED 6.0% 6.8% 5.9% 1.9% 5.0% 3.1% 4.4% 4.7% 4.1% 4.1% 5.7%

LED 2.5% 9.0% 3.1% -20.0% -0.5% -18.0% -8.0% 4.0% 3.0% -2.7% 3.0%

EBT 41 63 60 (55) 109 (12) 18 60 49 115 277

Tax (0) 25 (7) (35) (18) 0 2 6 5 13 28

Net profit 42 38 67 (20) 126 (12) 16 54 44 102 249Minority interest (0) 0 0 0 0 0 0 0 0 0 0

Net profit ex minority 47 101 67 (20) 196 (12) 16 54 44 102 249

Source: LG Innotek, Korea Investment & Securities




23

Balance Sheet


Current assets 596 1,263 1,489 1,914 2,206

Cash & cash equivalent 162 305 224 379 519

Accounts receivable 224 634 782 949 1,052

Inventory 137 246 365 450 488

Fixed assets 488 1,541 2,637 2,918 2,977

Investments 7 15 16 20 22

Tangible assets 415 1,394 2,338 2,627 2,666


Total assets 1,084 2,804 4,125 4,831 5,183

Current liabilities 482 1,345 1,214 1,784 1,879


Short-term borrowing 183 308 126 400 350


Long-term debt 114 584 1,442 1,476 1,482

Debentures 0 321 859 859 859


Total liabilit ies 596 1,929 2,656 3,259 3,361

Paid-in capital 60 86 101 101 101

Capital surplus 175 505 846 846 846

Capital adjustments 0 (0) (0) (0) (0)

Retained earnings 207 260 533 635 885

Shareholders' equity 510 875 1,470 1,572 1,821

Income Statement


Sales 1,922 2,971 4,103 4,982 5,567

Gross profit 221 368 515 577 787

SG&A expense 144 254 362 448 501


Non-op. profit 169 119 35 64 68


FX gains 158 101 20 30 30


Non-op. expense 193 167 83 79 77


FX losses 163 100 15 16 16


Earnings before tax 52 66 109 115 277

Income taxes (0) 15 (18) 13 28


Net profit 52 57 196 102 249

EBITDA 179 274 432 551 749

Key Financial Data



EPS 4,906 3,759 10,278 5,086 12,396

BPS 48,389 59,467 77,091 78,119 90,515

DPS 350 350 350 350 350

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

Growth (%)

Sales growth NM 54.6 38.1 21.4 11.7

OP growth NM 49.3 37.7 (17.5) 121.4

NP growth NM 9.7 245.2 (47.8) 143.7

EPS growth NM (23.4) 173.4 (50.5) 143.7

EBITDA growth NM 53.0 57.4 27.7 35.8

Profitability (%)

OP margin 4.0 3.8 3.8 2.6 5.1

NP margin 2.7 1.9 4.8 2.1 4.5

EBITDA margin 9.3 9.2 10.5 11.1 13.5

ROA NM 2.6 3.6 2.3 5.0

ROE NM 8.1 16.6 6.5 14.7

Dividend yield 0.9 0.4 0.3 0.3 0.3

Stability

Net debt (W bn) 79 675 1,425 1,543 1,353

Int. coverage (x) 6.1 4.4 2.3 1.6 3.7

D/E ratio (%) 52.7 113.6 114.9 124.8 105.0

Valuation (x)

PER 7.4 25.5 13.0 27.2 11.2

PBR 0.8 1.6 1.7 1.8 1.5

PSR 0.2 0.5 0.6 0.6 0.5

EV/EBITDA 2.9 8.6 9.5 7.9 5.5

Cash Flow


C/F from operating 105 132 (102) 579 659

Net profits 52 57 196 102 249

Depreciation 100 161 275 422 463


Net incr. in W/C (78) (136) (223) 26 (63)

Others 28 51 (350) 28 9

C/F from investing (145) (290) (1,040) (707) (480)

Capex (113) (314) (1,423) (700) (500)


Net incr. in current assets (27) 0 0 0 0

Incr. in investment (5) 0 0 0 0

Others (6) 24 383 (7) 20

C/F from financing 179 235 1,060 284 (40)


Incr. in debts 46 239 694 274 (50)

Dividends (3) 4 0 0 0

Others 0 (9) 10 10 10

Increase in cash 149 142 (81) 156 140




24

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 Samsung’s 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-than-

expected 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 Innotek’s LED profitability in 4Q10. Our channel checks also

indicate that the company’s 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 Samsung’s

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



2008A 75 3 (3) (2) (67) (120.9) 8 NM 9.5 2.3 (9.3)

2009A 133 6 4 5 160 NM 15 55.8 25.9 4.3 9.4

2010F 250 23 16 11 281 75.9 36 29.1 10.1 3.0 11.32011F 403 38 39 31 767 172.5 53 11.4 7.4 2.5 24.6

2012F 461 45 47 37 924 20.5 63 9.5 5.9 2.0 23.4

Youngwoo Chung





25

Lumens is our most preferred LED pure playWe believe Lumens is on track for a solid earnings recovery in 1Q11. Lumensshares have underperformed both Korean LED sector and Kospi for the past sixmonths. Hence, we recommend investors to accumulate shares on an earlypositive signal (e.g. full utilization).

<Table 20> Earnings revisions (W bn)

New Old Change

4Q10F 2010F 2011F 4Q10F 2010F 2011F 4Q10F 2010F 2011F

Sales 60.3 249.6 403.0 80.0 269.5 378.2 -25% -7% 7%

LCD 52.5 210.2 343.4 68.9 226.7 312.6 -24% -7% 10%

Lighting 3.9 15.0 29.0 3.9 15.0 29.0 0% 0% 0%

Mobile 3.0 21.1 25.0 6.2 24.8 25.0 -52% -15% 0%

Auto 1.0 2.0 5.5 1.0 2.0 11.5 0% 0% -52%

Operating profit 5.2 22.8 38.4 6.8 24.8 31.5 -24% -8% 22%

Operating margin 8.6% 9.1% 9.5% 8.5% 9.2% 8.3%

EBT 2.4 15.6 39.4 7.0 22.0 36.7 -66% -29% 8%Net profit 1.9 11.2 30.8 5.5 16.5 28.6 -66% -32% 8%


<Table 21> Quarterly earnings forecasts (W bn)

2009 1Q10 2Q10 3Q10 4Q10F 2010F 1Q11F 2Q11F 3Q11F 4Q11F 2011F

Sales 133.0 50.5 65.9 72.8 60.3 249.6 72.8 101.1 123.4 105.7 403.0

TV BLU 84.3 38.0 54.6 60.7 51.6 204.9 61.9 85.4 101.4 86.7 335.3

Notebook BLU 1.6 2.7 0.9 0.9 0.9 5.3 1.0 1.8 2.8 2.5 8.1

General lighting 13.0 2.1 4.2 4.9 3.9 15.0 4.4 6.3 9.5 8.9 29.0

Handset 32.0 7.1 6.0 5.0 3.0 21.1 4.5 6.3 7.6 6.6 25.0

Others 2.1 0.7 0.3 1.3 1.0 3.2 1.0 1.5 2.0 1.0 5.5

OP 5.7 4.1 7.3 6.2 5.2 22.8 6.3 9.6 12.7 9.8 38.4

OP margin 4.3% 8.1% 11.1% 8.5% 8.6% 9.1% 8.6% 9.5% 10.3% 9.3% 9.5%

EBT 4.5 3.4 5.2 4.6 2.4 15.6 6.3 9.8 13.2 10.1 39.4

Pretax margin 3.4% 6.8% 7.9% 6.3% 4.0% 6.3% 8.7% 9.7% 10.7% 9.5% 9.8%

Net profit 5.2 2.7 3.3 3.2 1.9 11.2 4.9 7.7 10.3 7.9 30.8

Net margin 3.9% 5.4% 5.1% 4.5% 3.1% 4.5% 6.8% 7.6% 8.3% 7.4% 7.6%


[Figure 20] Worldwide LCD TV shipments & LED penetration

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2Q09 3Q09 4Q09 1Q10 2Q10 3Q10F 4Q10F 1Q11F 2Q11F 3Q11F

('000)

0%

10%

20%

30%

40%

50%

60%

70%Global LED TV

Global LCD TV (non-LED display)

LED penetration (RHS)

Source: Display Search, Korea Investment & Securities




26

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

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2Q09 3Q09 4Q09 1Q10 2Q10 3Q10F 4Q10F 1Q11F 2Q11F 3Q11F

('000)

0%

10%

20%

30%

40%

50%

60%

70%

80%LED TV

LCD TV (non-LED display )

LED penetration (RHS)

Source: Display Search, Korea Investment & Securities

[Figure 22] Lumens 2011F revenue breakdown by application

LCD

86%

Auto

1%

Others

0%Mobile

6%Lighting

7%


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

60

70

80

90

100

110

120

130

J u l - 1 0

A u g - 1 0

A u g - 1 0

S e p - 1 0

S e p - 1 0

O c t - 1 0

O c t - 1 0

O c t - 1 0

N o v - 1 0

N o v - 1 0

D e c - 1 0

D e c - 1 0

J a n - 1 1

J a n - 1 1

SEMCO LGI SSC Lumens KOSPI

Source: Datastream




27

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

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

D e c - 0 6

M a r - 0 7

J u n - 0 7

S e p - 0 7

D e c - 0 7

M a r - 0 8

J u n - 0 8

S e p - 0 8

D e c - 0 8

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

M a r - 1 0

J u n - 1 0

S e p - 1 0

D e c - 1 0

M a r - 1 1

J u n - 1 1

(KRW)

-2

0

2

4

6

8

10

12(W bn)

Adj. share priceQuarterly operating profit

Source: Lumens, Datastream, Korea Investment & Securities

[Figure 25] Lumens PB vs. share price

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

D e c - 0 8

F e b - 0 9

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

O c t - 1 0

D e c - 1 0

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000P/B

Share price (RHS)

Source: Lumens, Datastream, Korea Investment & Securities




28

Balance Sheet


Current assets 33 99 150 229 283



Inventory 11 34 60 97 111

Fixed assets 28 83 86 86 86

Investments 3 24 28 28 29

Tangible assets 13 51 52 52 53


Total assets 62 182 236 315 368

Current liabilities 27 64 88 136 152




Long-term debt 12 31 38 38 38



Total liabilit ies 39 94 126 174 190

Paid-in capital 15 20 20 20 20


Capital adjustments (19) (7) 0 0 0


Shareholders' equity 23 88 110 141 178

Income Statement


Sales 75 133 250 403 461

Gross profit 13 20 48 84 98

SG&A expense 10 14 25 46 53


Non-op. profit 5 7 13 13 14


FX gains 3 4 7 7 7


Non-op. expense 10 8 20 12 12


FX losses 8 4 8 8 8


Earnings before tax (3) 4 16 39 47

Income taxes (1) (1) 4 9 9


Net profit (2) 5 11 31 37

EBITDA 8 15 36 53 63

Key Financial Data



EPS (67) 160 281 767 924

BPS 1,138 2,090 2,754 3,486 4,410

DPS 0 0 0 0 0

SPS 2,870 4,092 6,255 10,032 11,465

Growth (%)

Sales growth 507.3 77.4 87.6 61.5 14.3

OP growth 8.4 86.6 297.8 68.6 16.1

NP growth (168.2) NM 115.4 174.7 21.2

EPS growth (120.9) NM 75.9 172.5 20.5

EBITDA growth 140.2 86.5 143.8 46.5 17.9

Profitability (%)

OP margin 4.1 4.3 9.1 9.5 9.7

NP margin (2.5) 3.9 4.5 7.6 8.1

EBITDA margin 10.7 11.2 14.6 13.2 13.7

ROA (4.4) 4.3 5.4 11.2 10.9

ROE (9.3) 9.4 11.3 24.6 23.4

Dividend yield 0.0 0.0 0.0 0.0 0.0

Stability

Net debt (W bn) 18 31 40 41 17

Int. coverage (x) 2.6 2.6 7.0 10.6 12.3

D/E ratio (%) 121.1 54.5 55.3 43.2 34.1

Valuation (x)

PER NM 55.8 29.1 11.4 9.5

PBR 2.3 4.3 3.0 2.5 2.0

PSR 0.9 2.2 1.3 0.9 0.8

EV/EBITDA 9.5 25.9 10.1 7.4 5.9

Cash Flow


C/F from operating (6) (9) (1) 18 44

Net profits (2) 5 11 31 37

Depreciation 3 7 12 15 18


Net incr. in W/C (13) (26) (27) (29) (13)

Others 4 3 1 1 1

C/F from investing (4) (63) (17) (16) (20)

Capex (7) (46) (13) (16) (19)


Net incr. in current assets 5 (1) 0 0 0

Incr. in investment (2) (20) (4) (0) (1)

Others 0 3 (0) 0 (0)

C/F from financing 8 79 23 (2) (0)


Incr. in debts 8 22 13 0 0

Dividends 0 0 0 0 0

Others (0) 9 6 (2) (0)

Increase in cash (2) 6 4 (0) 24




29

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 Semi’s 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 Opto’s 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.




2008A 284 (11) (15) (13) (246) (169.1) 4 NM 114.6 3.0 (7.2)

2009A 453 44 33 28 547 NM 64 84.8 39.4 6.1 9.1

2010F 839 110 113 92 1,586 190.0 160 25.6 14.3 4.1 17.9

2011F 1,256 181 179 147 2,402 51.4 270 17.3 8.8 3.5 22.3

2012F 1,501 226 225 170 2,922 21.7 335 14.2 6.8 2.9 22.6

Youngwoo Chung





30

<Table 22> Quarterly earnings forecast

(W bn) 2009 1Q10 2Q10 3Q10 4Q10 2010 1Q11F 2Q11F 3Q11F 4Q11F 2011F

Sales 453.4 124.5 215.3 277.0 222.3 839.0 245.3 291.0 366.0 353.8 1,256.1

Handset 159.4 30.0 30.4 38.3 40.0 138.6 33.4 34.7 35.9 39.6 143.6

Lighting & others 173.8 46.5 62.3 80.5 64.2 253.5 83.4 104.0 132.0 99.2 418.6

Notebook PC 116.4 29.0 38.6 32.2 31.3 131.1 32.0 32.6 37.7 35.1 137.4

TV 3.9 19.0 84.0 126.0 86.8 315.8 96.5 119.8 160.3 179.9 556.5

OP 44.0 13.3 29.1 42.8 24.5 109.7 30.4 42.0 58.1 50.4 180.8

Handset 5.7 0.9 1.9 2.7 2.0 7.5 2.0 2.1 2.2 2.4 8.6

Lighting & others 26.0 7.6 10.5 14.5 11.0 43.6 14.9 20.8 27.7 19.3 82.6

Notebook 12.9 3.5 4.6 4.2 2.8 15.1 2.9 3.6 4.1 3.5 14.1

TV 0.2 1.3 12.0 18.9 8.7 41.0 10.6 15.6 24.1 25.2 75.4

OP margin 9.7% 10.7% 13.5% 15.5% 11.0% 13.1% 12.4% 14.4% 15.9% 14.2% 14.4%

EBT 33.1 15.2 39.4 42.2 16.4 113.2 29.9 41.6 57.6 49.9 179.0

EBT margin 7.3% 12.2% 18.3% 15.2% 7.4% 13.5% 12.2% 14.3% 15.7% 14.1% 14.2%

Net profit 28.2 12.5 32.1 34.0 13.4 92.0 24.5 34.1 47.2 40.9 146.8

Net margin 6.2% 10.0% 14.9% 12.3% 6.0% 11.0% 10.0% 11.7% 12.9% 11.6% 11.7%

Source: Seoul Semiconductor, Korea Investment & Securities

[Figure 26] Korea LED operating margin comparison

-30%

-20%

-10%

0%

10%

20%

30%

40%

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

SEMCO (LED) LGI (LED)

Seoul Semi (consolidated) Lumens


[Figure 27] 2011F operating profit breakdown by application

Handset

5%

General lighting

36%

Automobile

8%NB/MNT

8%

TV

41%

Others

2%





31

[Figure 28] Share price vs. quarterly operating profit

-

10,000

20,000

30,000

40,000

50,000

60,000

D e c - 0 5

A p r - 0 6

A u g - 0 6

D e c - 0 6

A p r - 0 7

A u g - 0 7

D e c - 0 7

A p r - 0 8

A u g - 0 8

D e c - 0 8

A p r - 0 9

A u g - 0 9

D e c - 0 9

A p r - 1 0

A u g - 1 0

D e c - 1 0

A p r - 1 1

(KRW)

-20

-10

0

10

20

30

40

50(W bn)Adj. share price

Quarterly operating profit (RHS)

Source: Company data, Datastream, Korea Investment & Securities

[Figure 29] PBR trend

1x

2x3x

4x

5x

6x

7x

8x

9x

10x

11x

12x

13x

14x

J a n - 0 2

J u n - 0 2

N o v - 0 2

A p r - 0 3

S e p - 0 3

F e b - 0 4

J u l - 0 4

D e c - 0 4

M a y - 0 5

O c t - 0 5

M a r - 0 6

A u g - 0 6

J a n - 0 7

J u n - 0 7

N o v - 0 7

A p r - 0 8

S e p - 0 8

J a n - 0 9

J u l - 0 9

N o v - 0 9

A p r - 1 0

S e p - 1 0

0

10,000

20,000

30,000

40,000

50,000

60,000P/B

Share price (RHS)

Source: Company data, Datastream, Korea Investment & Securities




32

Balance Sheet


Current assets 171 340 506 615 804



Inventory 35 49 103 151 180

Fixed assets 70 188 280 343 325

Investments 7 93 120 120 120

Tangible assets 43 74 150 213 193


Total assets 241 528 786 958 1,128

Current liabilities 75 69 112 170 203




Long-term debt 1 1 102 104 104



Total liabilit ies 76 70 214 273 307

Paid-in capital 25 29 29 29 29


Capital adjustments (1) 0 0 0 0


Shareholders' equity 165 458 572 685 822

Income Statement


Sales 284 453 839 1,256 1,501

Gross profit 61 102 196 323 397

SG&A expense 72 58 87 142 171

Operating profit (11) 44 110 181 226

Non-op. profit 22 17 27 24 25


FX gains 18 11 11 12 12

Equity gains 0 0 (1) 0 0

Non-op. expense 26 28 23 26 26


FX losses 12 17 17 18 18


Earnings before tax (15) 33 113 179 225

Income taxes (3) 5 21 32 41


Net profit (13) 28 92 147 170

EBITDA 4 64 160 270 335

Key Financial Data



EPS (246) 547 1,586 2,402 2,922

BPS 2,931 7,598 9,816 11,747 14,090

DPS 0 93 480 584 623

SPS 5,586 8,780 14,393 21,544 25,740

Growth (%)

Sales growth 13.6 59.6 85.0 49.7 19.5

OP growth (144.8) NM 149.6 64.8 25.1

NP growth (170.7) NM 225.8 52.2 21.7

EPS growth (169.1) NM 190.0 51.4 21.7

EBITDA growth (90.8) 1,660.2 152.5 68.4 24.2

Profitability (%)

OP margin (4.0) 9.7 13.1 14.4 15.1

NP margin (4.4) 6.2 11.0 11.1 11.4

EBITDA margin 1.3 14.0 19.1 21.5 22.4

ROA (5.4) 7.3 14.0 16.1 16.3

ROE (7.2) 9.1 17.9 22.3 22.6

Dividend yield 0.0 0.2 1.2 1.4 1.5

Stability

Net debt (W bn) (38) (176) (83) (35) (128)

Int. coverage (x) (11.9) 20.5 42.8 35.7 44.8

D/E ratio (%) 13.7 0.0 17.7 14.7 12.3

Valuation (x)

PER NM 84.8 25.6 17.3 14.2

PBR 3.0 6.1 4.1 3.5 2.9

PSR 1.6 5.3 2.8 1.9 1.6

EV/EBITDA 114.6 39.4 14.3 8.8 6.8

Cash Flow


C/F from operating 10 19 26 131 222

Net profits (13) 28 92 140 170

Depreciation 13 17 51 89 109


Net incr. in W/C (12) (39) (123) (104) (64)

Others 19 10 6 6 6

C/F from investing (28) (239) (284) (128) (90)

Capex (17) (51) (270) (152) (90)


Net incr. in current assets (24) (103) 0 0 0

Incr. in investment 13 (79) (28) 0 0

Others 0 (7) 14 24 0

C/F from financing 10 238 281 (29) (39)


Incr. in debts 14 (23) 101 (0) 0

Dividends (4) 0 (5) (28) (34)

Others 0 0 158 (0) (5)

Increase in cash (8) 18 23 (26) 93




33

Changes to recommendation and price target Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target

Samsung Electro-

Mechanics (009150)

01-28-09 BUY W42,000 11-06-09 Hold W110,000

02-17-09 BUY W52,000 07-20-10 Hold W196,000

09-25-09 NM W0 07-27-10 Hold W164,000

11-06-09 BUY W119,000 10-14-10 Hold W144,000

02-22-10 BUY W126,000 01-28-11 Hold W148,000

04-09-10 BUY W154,000 Lumens (038060) 07-20-10 Hold W14,600

07-20-10 BUY W187,000 10-14-10 Hold W10,000

07-23-10 BUY W175,000 01-28-11 BUY W15,000

10-14-10 BUY W134,000SeoulSemiconductor (046890)

07-20-10 BUY W58,300

01-28-11 BUY W164,000 07-30-10 BUY W53,000

LG Innotek (011070) 02-06-09 BUY W63,000 01-28-11 BUY W56,000

09-25-09 NM W0

Samsung Electro-Mechanics(009150) LG Innotek(011070)

0

20,000

40,000

60,000

80,000

100 ,000

120 ,000

140 ,000

160 ,000

180 ,000

200 ,000

Jan -09 M ay-09 Sep -09 Jan -10 M ay-10 Sep -10 Jan -11

0

50,000

100,000

150,000

200,000

250,000

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

Lumens(038060) Seoul Semiconductor(046890)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000




■ 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 sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market

capitalization.

Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector’s 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 client’s judgment, and this report cannot be used as evidence in any

legal dispute related to investment decisions.



HEAD OFFICE

WON-JAE RHEE, Executive Managing Director ([email protected] +822 3276 5660)

PAUL CHUNG, Sales Trading ([email protected] +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 ([email protected] +1 212 314 0681)

ELAINE LIM, Head of Sales ([email protected] +1 212 314 0686)

JU KIM, Sales ([email protected] +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 ([email protected] +852 2530 8900)

SANGME LEE, Managing Director, Head of Asia Sales ([email protected] +852 2530 8910)

DAN SONG, Sales ([email protected], +852-2530-8900)

JUN HWAN KIM, Sales ([email protected], +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 ([email protected] +65 6501 5601)

TERRY SHIN, Sales ([email protected] +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 ([email protected] +44 207 065 2765)

BRANDON JUNE, Sales ([email protected] +44 207 065 2767)

MINGOO KANG, Sales ([email protected], +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

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