1. Industry Report
7 May 2010 (No. of pages: 48)
Korea Semiconductor
and LCD Equipment Positive
Sector Jae H. Lee
(82) 2 787 9173
Electronics: Korea jhlee@kr.daiwacm.com
Initiation of coverage: benefitting from a capital-spending bonanza
Summary
We initiate coverage of three semiconductor and LCD-equipment companies in Korea: Jusung
Engineering (Jusung) and KC Tech with 1 (Buy) ratings, and SFA Engineering (SFA) with a 2
(Outperform) rating.
In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both
semiconductor and LCD-panel makers are now trying to add capacity as fast as they can and
are competing for the equipment that would enable them to do so. As we forecast capex
increases for 2010 of 63% YoY for the global semiconductor industry and 53% YoY for the
LCD industry, we expect Korean equipment-making companies to benefit from rising order
intakes throughout this year.
Since the semiconductor and LCD industries are highly cyclical in nature, we believe that the
equipment companies face significant challenges maintaining their profitability, especially
during industry downturns. However, over the past few years, Korean equipment companies
have started to explore new markets, such as solar-cell, LED, and AMOLED equipment. As
end-product demand expands further for these markets, we expect the opportunities for
Korean equipment companies to increase.
Following the drastic cutbacks on spending in 2009, Korean semiconductor and LCD-panel
makers have been adding new capacity aggressively. We forecast a 96% YoY increase in
domestic semiconductor capex and a 61% YoY rise in domestic LCD capex for 2010. While
there are more than 20 listed equipment manufacturers in Korea, we like Jusung, KC Tech,
and SFA, due mainly to their diversified product mixes and customer bases, which we believe
would bolster their revenue and earnings over the next three years.
Korea Semiconductor and LCD Equipment Sector: valuation summary
Share price PER EV/EBITDA Dividend yield
Company Bloomberg 3-May-10 Target price +/- Year (x) (x) (%)
name code (local curr.) Rating (local curr.) (%) end 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E
Jusung Engineering 036930 KS 20,500 1 28,000 36.6 Dec n.m. 15.5 11.7 10.6 38.3 10.3 8.2 7.4 0.0 0.0 0.0 0.0
KC Tech 029460 KS 7,010 1 9,200 31.2 Dec 21.1 9.7 7.5 6.6 12.6 6.7 4.8 3.9 0.4 0.7 1.1 1.1
SFA Engineering 056190 KS 58,800 2 75,000 27.6 Dec 29.7 16.3 12.7 12.0 22.5 11.2 8.3 7.5 0.7 1.3 1.4 1.5
Source: Companies, Daiwa forecasts
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH Global Equity Research
CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT.

2. Contents
The three most important charts in this report ... ..............................................................3
Executive summary...........................................................................................................4
Increasing opportunities for equipment makers................................................................5
Increasing presence in ‘clean’ tech .................................................................................10
Our focus on diversified players .....................................................................................16
Appendix.........................................................................................................................22
Company section
Jusung Engineering..................................................................................................23
KC Tech...................................................................................................................29
SFA Engineering .....................................................................................................35
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 2

3. The three most important charts in this report ...
Shipment volume for key IT and consumer products
250
200
150
100
50
4Q07 2Q08 4Q08 2Q09 4Q09 2Q10E 4Q10E 2Q11E 4Q11E
PC Handset LCD-TV
Source: Daiwa forecasts
Note: Indexed to 100 as of 4Q07
Global LCD-equipment market
(US$bn) (%)
16 120
14 100
12 80
60
10
40
8
20
6
0
4 (20)
2 (40)
0 (60)
2003 2004 2005 2006 2007 2008 2009 2010E 2011E
Equipment market (LHS) YoY growth (RHS)
Source: DisplaySearch
Korea semiconductor and LCD capex vs. equipment makers’ revenue
(Wbn) (Wtn)
800 25
20
600
15
400
10
200
5
0 0
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
Revenue (LHS) Capex (RHS)
Source: Companies, Daiwa
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 3

4. Executive summary
Increasing opportunities for Korean equipment companies
We believe Korean Since 2Q09, end-product demand has continued to provide upside surprises. The
equipment companies introduction of various stimulus packages in early 2009, followed by an economic
are likely to benefit recovery from late 2009, have resulted in upward revisions to demand forecasts by
from rising capex Daiwa and market-research firms for key electronics products.
In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both
semiconductor and LCD-panel makers are now trying to add capacity as fast as
they can, and are competing for the equipment that would enable them to do so. As
we forecast capex increases for 2010 of 63% YoY for the global semiconductor
industry and 53% YoY for the LCD industry, we expect Korean equipment-making
companies to benefit from rising order intakes throughout this year.
Increasing exposure to new products
Potential new Since the semiconductor and LCD industries are highly cyclical in nature, we
opportunities in solar- believe that the equipment companies face significant challenges maintaining their
cell, LED, and profitability, especially during industry downturns. In addition, equipment
AMOLED equipment companies need to continually enhance their existing products and create new
markets with new products to sustain or gain market share. Over the past few years,
Korean equipment companies have started to explore new markets, such as solar-
cell, LED, and AMOLED equipment. As end-product demand expands further for
these markets, we would expect opportunities for Korean equipment companies to
increase.
We are positive on the earnings outlook for Korean equipment companies
We focus on firms with Following the drastic cutbacks on spending in 2009, we forecast a 96% YoY
diversified products and increase in domestic semiconductor capex and a 61% YoY rise in domestic LCD
customer bases capex for 2010. Among LCD companies, LG Display (LGD) (034220 KS,
W46,700, 3) is the most aggressive in terms of its planned capacity expansion, with
a capex budget of over W5.5tn for FY10. Meanwhile, we forecast a substantial
increase in Samsung Electronics’ (SEC) (005930 KS, W832,000, 2) capex for
FY10, as we expect SEC to build new capacity for memory chips and a new LCD
production line. While there are more than 20 listed equipment manufacturers in
Korea, we initiate coverage on just three companies (Jusung, KC Tech, and SFA),
due mainly to their diversified product mixes and customer bases.
Jusung Engineering: We initiate coverage with a 1 (Buy) rating and a six-month
target price of W28,000. Jusung is our top pick among Korean equipment
companies, and we expect it to record robust revenue growth for FY10 on the back
of a large order intake for solar-cell equipment. Jusung is testing metal-oxide
chemical vapour deposition (MOCVD) reactors currently for mass production, and
could receive orders from domestic LED-chip companies from 2Q FY10.
KC Tech: We initiate coverage with a 1 (Buy) rating and a six-month target price
of W9,200. We forecast KC Tech to announce record-high revenue for FY10 due
to its rising exposure to semiconductor materials, as well as increasing orders from
semiconductor and LCD-panel makers. KC Tech is one of the few domestic
equipment companies that supply the same product to multiple customers, since the
company has accumulated the necessary experience and technology.
SFA Engineering: We initiate coverage with 2 (Outperform) rating and a six-
month target price of W75,000. We believe that SFA would be a key beneficiary of
SEC’s LCD-capacity expansion and, with the recent equity participation of SEC,
the company is a strong contender to supply plasma-enhanced (PE) CVD
equipment to SEC for the first time this year. SFA is also developing AMOLED
equipment, which we believe has huge growth potential over the longer term.
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 4

5. Increasing opportunities for equipment makers
Due to strong end- Since 2Q09, end-product demand has continued to provide upside surprises. The
product demand, introduction of various stimulus packages in early 2009, followed by an economic
semiconductor and recovery from late 2009, have resulted in upward revisions to demand forecasts by
LCD-panel makers Daiwa and market-research firms for key electronics products.
are increasing their
capex aggressively Our latest forecast for global PC shipments is for a 15.1% YoY increase for 2010,
compared with a 4.7% YoY rise for 2009. Driven by strong consumer demand, PC
shipments have recovered fully after a weak start in 1Q09. However, as we expect
the corporate replacement cycle to accelerate in 2H10, we believe there could be
further upside to our PC shipment forecasts. As for mobile handsets, we forecast
increasing demand for smartphones to lead to healthy handset-volume growth of
11.3% YoY for 2010, compared with a 0.9% YoY decline for 2009.
We have also revised up our forecast for 2010 LCD-TV shipment volume to 190m
units from 169m units previously. Although we forecast the volume growth rate to
slow going forward, due to the high penetration rate for flat-panel TVs in
developed markets, we expect demand in China and other emerging markets to
support double-digit percentage growth annually for the next couple of years. On a
quarterly basis, the shipment volume of core IT and consumer products at the end
of 2009 surpassed the peak level recorded in 2008, and we expect this to continue
to expand throughout 2011.
Shipment volume for key IT and consumer products
250
200
150
100
50
4Q07 2Q08 4Q08 2Q09 4Q09 2Q10E 4Q10E 2Q11E 4Q11E
PC Handset LCD-TV
Source: Daiwa forecasts
Note: Indexed to 100 as of 4Q07
Daiwa shipment-growth forecasts (YoY %)
PC Handset Total TV Semiconductor
2008 +10.4 +6 +4.1 -3.5
2009 +4.7 -0.9 +1.7 -5.6
2010E +15.1 +11.3 +11.5 +15.0-17.0
2011E +10.3 +10.1 +4.3 +7.0-9.0
Source: Daiwa
In response to booming demand for PCs, mobile handsets, and flat-panel TVs, both
semiconductor and LCD-panel makers have been increasing their capital spending
aggressively in 2010. Although capital spending by semiconductor and LCD-panel
makers hit a past-five-year low in 2009, we forecast capex increases for 2010 of
63% YoY for the global semiconductor industry and 53% YoY for the LCD
industry, driven by the expansion of new production capacity and migration to
finer process technology.
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 5

6. Semiconductor capex likely to rise strongly for 2010
We forecast global The leading indicators show that the semiconductor cycle is in the midst of a
semiconductor capex cyclical uptrend, and we expect industry-wide shipments and utilisation rates to
to increase by 63% continue to improve throughout 2010, providing greater opportunities for
YoY for 2010 semiconductor equipment companies.
ISM index and semiconductor cycle
70 80%
65 60%
60
40%
55
20%
50
0%
45
-20%
40
35 -40%
30 -60%
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
ISM Index (LHS) Semiconductor sales growth (% YoY) (RHS)
Source: CEIC, WSTS
US new orders for electronics items
(US$bn) (%)
36 30
34 20
32 10
30
0
28
(10)
26
24 (20)
22 (30)
20 (40)
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
New orders (LHS) YoY growth (RHS)
Source: US Department of Commerce
Following one of its worst-ever downturns, the DRAM industry continues to
recover on the back of muted supply growth amid robust PC demand. We forecast
the DRAM industry’s capex to increase 109% YoY to US$10.3bn for 2010, due to
improving profitability and cash flow. Meanwhile, we also forecast foundry capex
to increase by 123% YoY to US$9.2bn for 2010, due to rising utilisation rates and
increasing outsourcing to the foundry industry as many integrated device
manufacturers are losing market share to fabless companies. Given the strong
capex increases for memory chips and the foundry sector, we forecast global
semiconductor capex to increase to US$33.9bn for 2010 from US$20.8bn for 2009.
While the sharp increase in capital spending may raise some concerns in the market
about the potential for excess capacity beyond 2010, we do not believe that capital
intensity (capex/sales) for the industry is running high. We forecast the capital
intensity for the global semiconductor industry to reach 12.1% for 2010, compared
with a range of 9.2-20.8% (average of 14.4%) over the past three years.
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 6

7. Global semiconductor capex and capital intensity trend
(US$bn) (%)
60 25
50 20
40
15
30
10
20
10 5
0 0
2003 2004 2005 2006 2007 2008 2009 2010E 2011E
Capex (LHS) Capex/sales (RHS)
Source: Companies, WSTS, Daiwa forecasts
Although Korea has accounted for 18-24% of the global semiconductor equipment
market over the past five years, the exposure of domestic equipment companies is
relatively small, since just a few players specialise in front-end semiconductor
equipment due to technological and intellectual-property barriers. Among the most
expensive tools, lithography machines are purchased mainly from ASML Holding
(Not rated), while other front-end equipment is procured through Applied Materials
(Not rated) and Tokyo Electron (8035 JP, ¥6,210, 1).
According to the Korea Semiconductor Industry Association (KSIA), equipment
purchases by Korean chip makers through domestic companies have accounted for
an average of 20% (10% for front-end and 30-40% for back-end) of total purchases
over the past five years. However, as Korean memory-chip makers are planning to
incur over W10tn of capex for 2010, compared with W5tn for 2009, we expect
equipment makers to benefit despite the low domestic equipment sourcing rate.
Korea’s semiconductor equipment market
(US$bn) (%)
9 25
8
7 20
6
15
5
4
10
3
2 5
1
0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009E
Domestic (LHS) Imported (LHS) Domestic ratio (RHS)
Source: KSIA, Daiwa forecasts
Pending China project could provide further upside to LCD capex
We forecast global LCD Emerging markets (particularly China) remain the key driver of LCD-TV demand,
capex to increase by and defied the historical seasonal patterns between 4Q09 and 1Q10. Although
53% YoY for 2010 weaker-than-expected TV sell-through during the Lunar New Year resulted in
higher inventory levels (two-to-three weeks higher than normal levels) in the
channel, we do not foresee a sharp inventory correction in the near term, as we
believe lower panel prices are likely to lead to inventory rebuilding in 2H10.
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 7

8. Given what we see as the healthy outlook for the LCD-panel market in 2010, we
expect the earnings volatility of the panel makers to decrease and, as a result, spending
on equipment to rise going forward. Many of the leading panel makers are scrambling
to add capacity, as their utilisation rates are running at close to 100% currently.
According to DisplaySearch, 2008 was the biggest year ever for capital spending on
LCD equipment, while spending dipped substantially for 2009, due to sharp panel-
price declines during 3Q08-1Q09. However, DisplaySearch expects global spending
on LCD equipment in 2010 to return to near the 2008 level, at US$13.2bn.
Global LCD-equipment market
(US$bn) (%)
16 120
14 100
12 80
60
10
40
8
20
6
0
4 (20)
2 (40)
0 (60)
2003 2004 2005 2006 2007 2008 2009 2010E 2011E
Equipment market (LHS) YoY growth (RHS)
Source: DisplaySearch
Meanwhile, Korean panel makers are becoming more aggressive about adding
capacity. LGD has announced that it will build an extension to its second Gen8 line
(Line P8E+), taking its total Gen8 line capacity to more than 300,000 substrates a
month by mid-2011, from 120,000 substrates a month currently, and has also
decided to incur over W5.5tn of capex for FY10. We also expect SEC to equip its
fourth Gen8 production line by the end of this year, and now forecast its FY10
LCD capex to rise to W4.5tn, from W3.0tn previously.
Given that the two Korean panel makers’ capex may rise to W10tn for 2010, we
forecast global LCD capital spending to increase by 53% YoY to US$19.6bn,
which would represent a past-10-year high. With respect to the capital intensity of
the LCD market, we forecast a capex-to-revenue ratio of 23% for 2010, which is
near the high end of the past-three-year range of 16-25%.
Global LCD capex and capital intensity
(US$bn) (%)
25 60
20 50
40
15
30
10
20
5 10
0 0
2003 2004 2005 2006 2007 2008 2009 2010E 2011E
Capex (LHS) Capex/sales (RHS)
Source: Companies, DisplaySearch, Daiwa forecasts
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 8

9. We believe LCD-TV demand in China will remain strong for the next three years,
and panel makers are rushing to build new production lines there. Combined with
the CRT-TV replacement trend and the government’s stimulus package, we
forecast LCD-TV demand in China to increase by 45% YoY to 42.6m units for
2010, from 29.3m units for 2009. The leading panel makers globally plan to set up
new lines in China, since local TV manufacturers have the lion’s share of China’s
LCD-TV market and the PRC Government may impose a higher import duty on
LCD panels (from 3% currently to 5% or higher in the future).
Although there are several Gen5 lines running already in China, the PRC
Government has approved the construction of three new Gen8 lines by local panel
makers. BOE’s (Not rated) Gen8 line in Beijing (capacity of 90,000 substrates per
month), IVO’s (Not listed) Gen8 line in Kunshan (capacity of 90,000 substrates per
month), and TCL’s (Not rated) Gen8 line in Shenzhen (capacity of 60,000
substrates per month) are confirmed for mass production starting from the middle
to end of 2011.
Other potential projects pending the PRC Government’s approval include SEC’s
Gen7.5 line in Suzhou, LGD’s Gen8 line in Guangzhou, AU Optronics’ (Not rated)
Gen7.5 line in Suzhou, Chimei Innolux’s (Not rated) Gen7.5 line in Chengdu, and
CEC-Panda and Sharp’s (6753 JP, ¥1,226, 3) Gen8 line in Nanjing. The PRC
Government could grant approvals for two-to-three additional new production lines
in China. Should Korean panel makers win such approval, we believe this could
provide further upside for orders for Korean equipment makers.
Unlike for semiconductor equipment, the local sourcing ratio for LCD equipment is
much higher, at 50-60%. Since two Korean panel makers have the largest market
shares globally, they have been setting industry standards, such as glass substrate
sizes, and local equipment companies have worked closely with them from the early
stages of development while offering competitive prices for their equipment.
New LCD production-line projects in China
Company Location Investment Production start
Gen6
BOE Heifei US$2.5bn 4Q10
CEC Nanjing US$2.0bn 1Q11
Gen7.5
Samsung Electronics Suzhou US$2.4bn 4Q11
AU Optronics Suzhou US$3.0bn 1Q12
Chimei Innolux Chengdu TBD 2Q12
Gen8
BOE Beijing US$4.0bn 3Q11
CEC (Sharp) Nanjing US$4.0bn 4Q11
IVO Kunshan US$4.0bn 4Q11
TCL Shenzen US$3.6bn 4Q11
LG Display Guangzhou US$4.0bn 2Q12
Source: Companies, Daiwa
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 9

10. Increasing presence in ‘clean’ tech
Korean equipment Since the semiconductor (particularly memory chips) and LCD industries are
makers have started to highly cyclical in nature, we believe that equipment companies face significant
explore solar-cell, LED challenges maintaining their profitability, especially during industry downturns. In
and AMOLED addition, equipment makers need to continually enhance their existing products and
equipment create new markets with new products to sustain or gain market share. Over the
past few years, Korean semiconductor and LCD-equipment companies have started
to explore new markets, such as solar-cell, LED, and AMOLED equipment.
Among the top-15 listed Korean equipment companies, Jusung and IPS (Not rated)
have made the biggest progress in solar-cell equipment, as their proportions of
solar-cell equipment sales increased to 39% and 43% for 2009 from 11% and 3%
for 2007, respectively. Meanwhile, a handful of other equipment companies are
preparing to enter the solar-cell equipment market in anticipation of supplying
systems to SEC and LG Electronics (LGE) (066570 KS, W119,500, 2), since both
companies plan to expand their solar-cell businesses over the next few years.
Korean equipment companies’ segment revenue breakdown
Bloomberg Mkt cap 2009 rev. 2009 revenue breakdown (%)
Company code (Wbn) (Wbn) Semi LCD Solar Others
Semes Not listed n.a. 316 70 23 0 7
Jusung Eng 036930 KS 673 170 28 33 39 0
SFA 056190 KS 536 307 0 50 0 50
EO Technics 039030 KS 306 81 63 28 0 10
DMS 068790 KS 276 153 11 84 0 5
Atto 030530 KS 273 91 100 0 0 0
IPS 051820 KS 236 50 26 17 43 14
KC Tech 029460 KS 219 96 7 67 0 25
Hanmi Semi 042700 KS 214 75 78 0 6 16
PSK 031980 KS 186 33 81 0 0 19
Eugenetech 084370 KS 187 49 97 0 0 3
LIG ADP 079950 KS 164 86 0 98 0 2
Hanyang Eng 045100 KS 147 121 15 30 0 55
Osung LST 052420 KS 127 127 11 30 1 58
Top Eng 065130 KS 115 101 0 89 0 11
SNU 080000 KS 111 34 0 77 23 0
Source: Companies, Bloomberg, Daiwa
Note: share prices as at the close on 3 May
Meanwhile, as we forecast a strong increase in demand for LED chips for 2010,
due to proliferation of LED TVs, we expect two largest LED-chip makers globally,
Samsung LED (Not listed) and LG Innotek (011070 KS, W170,000, 2), to work
more closely in developing MOCVD reactors with domestic equipment companies.
Until now, Samsung LED and LG Innotek have purchased MOCVD reactors
primarily from Aixtron (Not rated) and Veeco (Not rated), but as core equipment
has been a bottleneck in LED-chip production due to tight supply, they have
formed tie-ups with Korean equipment companies.
In AMOLED, the core processing equipment market is dominated mainly by
Japanese manufacturers, such as Tokki (Not rated) and Ulvac (Not rated).
Although Samsung Mobile Display (SMD) (Not listed) is the undisputed leader in
AMOLED, with a 98% share of the global market for 2009, SMD has not
purchased any AMOLED equipment from Korean equipment companies in the past.
However, as SMD’s current Gen4 (730mmx460mm) line will reach full capacity of
50,000 substrates per month by the end of 2010, we expect the company to add a
Gen5.5 (1,500mmx1,350mm) in 2011, which we believe would give Korean
equipment companies the opportunity to provide AMOLED equipment to SMD.
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 10

11. Solar: industry’s revenue growth should resume from 2010
Potentially more Following the exponential growth between 2004 and 2008, revenue for the
opportunities for photovoltaic (PV) system market declined by 37% YoY to US$23.4bn for 2009
equipment companies as due to weak demand at the start of the year and high inventory levels in the value
SEC and LGE expand chain. In 2010, overcapacity remains an issue for the solar industry, and we believe
their solar-cell this is likely to continue throughout 2010, due to the further ramp-up of new
businesses production capacity. In addition, a reduction in Germany’s feed-in tariff from July
has raised some concerns in the market about a potential decline in shipments.
However, as we expect Italy, France, the Czech Republic and Benelux countries to
account for about 2GW of demand, we forecast capacity additions to total 9.5GW
for the industry in 2010.
Global PV-related market (US$bn)
45
40
35
30
25
20
15
10
5
0
2004 2005 2006 2007 2008 2009 2010E 2011E 2012E
PV cell market Module market System market Annual capacity add (GWp)
Source: Daiwa forecasts
On the supply side, we forecast the capacity of the top-14 solar-cell companies to
increase to about 12GW for 2010. Notably, PRC solar-cell companies are taking
the most aggressive approach to gaining market share. In Korea, Hyundai Heavy
Industries (009540 KS, W251,000, 3) is the largest solar-cell producer, with a
current capacity of 330MW, but plans to raise this to 1GW by end of 2012.
Meanwhile, LGE started a 120MW production line in early 2010, and plans to
double its capacity in 2011. SEC is a relative latecomer to the market and currently
has an R&D line with a capacity of 30MW, but the company plans to increase this
to 130MW by the end of 2010. As Korean solar-cell companies plan to continue to
increase their capacity over the next few years, we would expect equipment
companies to benefit.
Capacity of the top-14 solar-cell companies (MW)
2007 2008 2009E 2010E
First Solar 308 716 1,189 1,241
Suntech 480 1,000 1,000 1,200
Sharp 710 710 900 1,180
Q-Cells 645 760 800 950
JA Solar 175 600 875 950
SolarWorld 250 400 750 900
Yingli 200 400 600 800
Trina 150 350 600 800
Motech 240 450 600 700
Solarfun 240 360 510 700
Sunpower 214 414 574 650
Kyocera 220 360 450 600
Sanyo 350 340 340 565
Gintech 180 460 500 550
Total 4,362 7,320 9,688 11,786
Source: Companies, Daiwa forecasts
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 11

12. Jusung has been one of the more active players in the solar-cell equipment market
over the past three years. The company won four thin-film turnkey projects in 2009
worth a total of more than W150bn, with three of these from solar companies in the
PRC. Jusung is also working closely with LGE and one large US solar-cell
company to supply core equipment in FY10. Although 80% of the solar-cell
equipment orders received by Jusung during FY09 were based on thin-film
technology, Jusung is expanding rapidly, using discrete equipment for silicon-
based solar cells, as well as a hybrid system that the company believes will bolster
its market exposure in the future. Jusung focuses primarily on supporting its
customers to reach grid parity, rather than just selling equipment, which has
resulted in several turnkey projects.
IPS supplies CVD equipment to a few solar-cell companies in Japan and Korea,
and we expect the company to work more closely with SEC as a result of the recent
cash injection. In March, IPS issued W22bn worth of convertible bonds to SEC,
effectively placing a 17.5% stake at the time of issue. We also believe Semes (Not
listed) could become one of the major players in domestic solar-cell equipment
market, as the company already supplies core semiconductor and LCD equipment
to SEC. Semes was formed in 1992 as a joint-venture between SEC and Dainippon
Screen Mfg. (7735 JP, ¥535, 2), and these two companies hold 64% and 22%
stakes, respectively, in Semes.
LED: everyone’s thinking big in LED TVs
Due to a sharp pick-up We believe 2010 will be a breakthrough year for LED TVs, as we forecast LED-
in demand for LED TV shipments to increase to 38.5m units for 2010 from 4.2m units for 2009. Since
chips, orders for SEC has been marketing LED TVs successfully (focusing on the benefits of thinner
MOCVD reactors design, improved colour gamut, and brightness) and had a lion’s share of the
also rose strongly market in 2009, we expect other TV-set makers to become more aggressive about
rolling out LED TVs in 2010. Our recent channel checks indicate that the major
TV makers are revising up their LED-TV shipment targets for 2010 due to better-
than-expected sell-through, and we believe that there could be further upside to our
LED-TV shipment forecasts.
LED-TV shipment target for key brands
LED-TV shipments ('000)
TV brand 2009 2010E Focus inch size
Samsung Electronics 2,600 15,000 19-65"
LG Electronics 300 8,000 19-60"
Sharp 500 6,000 19-68"
Sony 200 5,000 32-60"
Vizio 100 2,500 16-72"
Skyworth 10 2,000 26-47"
TCL 0 2,000 40-55"
Funai 0 2,000 19"
Panasonic 0 1,000 26"
Toshiba 100 1,000 46-55"
Total 3,810 44,500
Source: Companies, Daiwa forecasts
We expect the cost reductions for backlight units to accelerate due to declines in
the prices of components, including LED chips, and for this to boost the adoption
rate for LEDs as a backlight source for LCD TVs and monitors. We forecast the
price gap between LED TVs and conventional LCD TVs (with CCFL backlights)
to narrow to 10-20% for 2010, from the 30-50% in 2009. As a result, we forecast
adoption rates of LED backlights for LCD-TV to increase from 19% for 2010 to
54% for 2011 and 78% for 2012, and for those for monitors to rise from 17% for
2010 to 51% for 2011 and 78% for 2012.
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 12

13. LED-adoption rate for large-sized LCD-panel backlight sources (%)
100
80
60
40
20
0
1Q08 3Q08 1Q09 3Q09 1Q10E 3Q10E 1Q11E 3Q11E 1Q12E 3Q12E
Notebook Monitor TV
Source: DisplaySearch, Daiwa forecasts
Due to the sharp increase in demand for LED chips, orders for MOCVD reactors
also rose strongly during 2009. However, equipment vendors were not able to
supply a sufficient number of reactors in time. At one point, the lead time for
MOCVD tools increased to as much as 10 months. However, both Aixtron and
Veeco have announced expansion plans to manage the record level of rising orders.
Aixtron plans to expand its capacity to 150 MOCVD reactors per quarter by the
end of 2010, up from 100 MOCVD reactors per quarter at the end of 2009.
Meanwhile, Veeco plans to raise its overall MOCVD output capacity to 90 units
per quarter by mid-2010.
We forecast global MOCVD reactor shipments to increase to 720 units for 2010,
from 246 units for 2009. We expect Aixtron to secure a 55-60% market share,
Veeco 35-40%, and the rest to go to Taiyo Nippon Sanso (Not rated) and other
small players. Although Applied Materials has announced that it plans to enter the
MOCVD market, it has not delivered an effective product so far. Meanwhile,
Korean equipment companies are co-operating closely with domestic LED-chip
producers. LIG ADP (Not rated) is testing an MOCVD reactor currently with LG
Innotek, and the company expects to start shipments from 4Q10. IPS is also
developing MOCVD reactors with Samsung LED. Jusung delivered a test unit to a
small LED-chip company in January, and plans to complete reliability tests by June.
Jusung said it is currently discussing potential order contracts with a few LED-chip
makers, as its reactors are more productive than those of its peers.
Global MOCVD shipments and net installed base
(units)
2,500
2,000
1,500
1,000
500
0
2003 2004 2005 2006 2007 2008 2009 2010E 2011E
Net installed base Shipments
Source: Daiwa
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 13

14. AMOLED: market appears set for strong growth
We believe Gen5.5 line The global AMOLED market increased to US$526m for 2009 from US$232m for
investment will be the 2008, surpassing the size of the passive matrix OLED (PMOLED) market for the
turning point for first time since 1Q09. Due to SEC’s aggressive marketing push for its premium
domestic equipment handsets with new display technology, SMD’s AMOLED shipments increased to
companies 21m units for 2009 from 7m units for 2008. For 2010, SMD plans to expand its
customer base to several major handset and digital-camera makers, and expects to
ship over 40m AMOLEDs. As a few display companies have scrapped AMOLED
projects over the past three years, SMD dominates the AMOLED market with a
98% share in terms of revenue for 2009.
Global OLED market (US$m)
180
160
140
120
100
80
60
40
20
0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
AMOLED PMOLED
Source: DisplaySearch
Global OLED (AM and PM combined) market share
Company Region 2009 revenue (US$m) YoY (%) M/S (%)
Samsung Mobile Display Korea 566 90 69
RiTdisplay Taiwan 106 (18) 13
Pioneer Japan 60 (15) 7
TDK Japan 42 15 5
Visionox China 15 n.m. 2
Others 28 (50) 3
Total 816 37 100
Source: DisplaySearch
Although we have little doubt that the AMOLED market will record strong
shipment growth over the next five years, due to the superior image quality, faster
response times, lower power consumption, and thinner form factor offered by
AMOLED panels compared with conventional LCD panels, we believe that the
core applications will be limited to mobile displays in the near future due to high
production costs. In order for AMOLEDs to have an impact on the TV market, we
believe that the glass substrate size for AMOLEDs would have to increase to that
of LCDs, and be able to sustain similar production yields so that the companies can
produce TV modules at commercially-viable costs.
However, for mobile displays, the cost premium of AMOLED over LCD modules
has narrowed. According to a recent cost-breakdown analysis by market research
firm, iSuppli, the 3.7-inch AMOLED used in Google’s (Not rated) Nexus One
model costs US$23.50, compared with US$19.25 for the 3.5-inch LCD module
used in Apple’s (Not rated) iPhone 3GS and US$17.75 for the 3.7-inch LCD
module used in Motorola’s (Not rated) Droid. As we expect AMOLEDs to be used
mainly for displays in smartphones and many digital SLR cameras, we forecast the
addressable market to increase at a CAGR of 44% over the next three years.
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 14

15. Addressable market for AMOLED (m units)
Smartphone SLR camera Total YoY (%)
2006 80 5 85 47.7
2007 122 7 129 51.8
2008 139 10 149 14.8
2009 172 10 182 22.3
2010E 280 11 291 60.2
2011E 385 13 398 36.5
2012E 490 14 504 26.7
Source: CIPA, Daiwa forecasts
In order for AMOLED to be adopted by the mass market, we believe that the
number of AMOLED manufacturers would have to increase, as many set makers
require multiple sources able to provide sufficient volume. SMD had one Gen4
(730mmx460mm) line with a capacity of 22,000 substrates per month at the end of
2009, but plans to ramp this up to 50,000 substrates per month by the end of 2010.
Although SMD has not announced plans for a new production line, we expect the
company to ramp up its Gen5.5 line (1,500mmx1,350mm) some time in 2011.
LGD is a relative newcomer to the AMOLED market. Both LGD and LGE had
worked on AMOLED separately before the consolidation of their AMOLED
businesses into LGD in early 2008. LGD is building a Gen4 (730mmx460mm) line
currently, and plans to start volume production from 3Q10 with an initial capacity
of 8,000 substrates per month. However, as LGD and its affiliate companies
purchased AMOLED-related assets from Eastman Kodak (Not rated) in December
2009, we believe this would help LGD’s ascent up the learning curve.
OLED technology was invented by Kodak in the early 1980s, and a number of
Japanese display makers initiated R&D in the early 1990s. Currently, most OLED
equipment is supplied by Japanese companies. However, since SMD and LGD plan
to expand their capacity beyond Gen4 lines, they have started to develop core
AMOLED equipment with local companies. SMD has appointed SFA as project
leader for the development of AMOLED equipment, and is working with SNU
Precision on organic material deposition and encapsulation process systems. LGD
is also developing deposition equipment for a Gen5.5 line with Jusung. Although
we do not expect AMOLED to make a material contribution to revenue in the near
term, given that the localisation of LCD equipment has gained momentum from
Gen5 investments, we expect the Gen5.5 line investment to be the turning point for
domestic equipment companies.
OLED equipment manufacturers in Japan
Company Ticker Equipment
Tazmo 6266 JP Supplier of coaters
Mitsubishi Electric 6503 JP Solid state laser (green) for laser annealers
Shibaura Mechatronics 6590 JP OLED vacuum bonding equipment
Nissin Electric 6641 JP Ion implantation systems for LTPS
Ulvac 6728 JP CVD for material deposition
Hitachi Zosen 7004 JP Deposition equipment using planar evaporation source
Mitsubishi Heavy Ind 7011 JP Deposition equipment using linear evaporation source
IHI 7013 JP Laser annealers
Dainippon Screen Mfg 7735 JP Co-developed nozzle printing tech with DuPont
Nikon 7731 JP Exposure systems for LTPS
Hitachi High-Tech 8036 JP Makes and sells manufacturing equipment
Tokki 9813 JP Systems for electrode, organic material deposition, and
encapsulation processes
Source: Companies, Daiwa
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 15

16. Our focus on diversified players
We like the companies Although the semiconductor- and LCD-capex cycles have not necessarily moved in
with diversified products tandem over the past 10 years, we expect both segments to record strong capex
and customer bases growth for 2010, following the drastic cutbacks in spending in 2009. We forecast a
96% YoY increase in domestic semiconductor capex and a 61% YoY rise in
domestic LCD capex for 2010, concentrated on technology upgrades and new
capacity additions, respectively, and we expect local equipment companies to
benefit from rising orders throughout this year.
Korea semiconductor and LCD capex vs. equipment makers’ revenue
(Wbn) (Wtn)
800 25
20
600
15
400
10
200
5
0 0
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
Revenue (LHS) Capex (RHS)
Source: Companies, Daiwa
While there are more than 20 listed equipment manufacturers in Korea, we initiate
coverage of just three companies (Jusung, KC Tech, and SFA), due mainly to their
increasing exposure to new businesses, such as solar-cell equipment, factory
automation systems, and semiconductor materials. We believe diverse revenue
sources would help to reduce the volatility of earnings streams, since both the LCD
and memory-chip industries are highly cyclical. In addition, these companies have
diversified customer bases, which could boost their pricing power, in our view. In
Korea, it is common for equipment companies to supply one customer but not
necessarily its competitors. This is because some equipment is developed to meet
customers’ specific needs, and customers may have concerns about potential
leakages of its technology and manufacturing processes.
Korean equipment companies: revenue breakdown by customer
Bloomberg Mkt cap 2009 rev. 2009 revenue breakdown (%)
Company code (Wbn) (Wbn) SEC HYN LGD Others
Semes Not listed n.a. 316 81 0 0 19
Jusung Eng 036930 KS 673 170 0 18 32 50
SFA 056190 KS 536 307 20 0 0 80
EO Technics 039030 KS 306 81 5 5 0 90
DMS 068790 KS 276 153 6 4 80 10
Atto 030530 KS 273 91 80 20 0 0
IPS 051820 KS 236 50 60 2 0 38
KC Tech 029460 KS 219 96 20 10 45 25
Hanmi Semi 042700 KS 214 75 3 2 0 95
PSK 031980 KS 186 33 25 15 0 60
Eugenetech 084370 KS 187 49 80 20 0 0
LIG ADP 079950 KS 164 86 0 0 92 8
Hanyang Eng 045100 KS 147 121 34 0 11 55
Osung LST 052420 KS 127 127 20 0 0 80
Top Eng 065130 KS 115 101 0 0 60 40
SNU 080000 KS 111 34 0 0 20 80
Source: Companies, Bloomberg, Daiwa
Note: share prices as at the close on 3 May
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 16

17. As a result, companies like Semes supply semiconductor and LCD equipment
primarily to SEC, while LCD equipment accounts for 98% of LIG ADP’s revenue,
and most of these orders come from LGD. Meanwhile, Jusung supplies LCD
equipment to LGD and BOE, and sells semiconductor equipment to Hynix
Semiconductor (000660 KS, W27,600, 2), as well as to a few chip makers in
Taiwan. SFA also provides display equipment to SEC, BOE and some panel
makers in Taiwan. SFA has more diverse range of customers for its factory
automation and logistics systems, from chemical companies to dairy producers. KC
Tech supplies its display and semiconductor equipment to all of the Korean LCD
and memory-chip makers.
Although equipment companies are under constant pressure to cut costs, Korean
equipment companies have spent an average of 5-10% of revenue on R&D
annually over the past three years. In terms of average R&D spending, these firms
expensed W8-10bn each year, which is tiny compared with that of the larger global
equipment firms, like Applied Materials, which spends about US$1bn annually on
R&D and Tokyo Electron, which spends about ¥60bn. However, among the
domestic equipment makers, Jusung has been the top spender on R&D over the
past three years, as the company is actively expanding into new markets, including
solar-cell and LED equipment.
Korean equipment companies’ R&D spending trend
R&D expenses (Wbn) R&D as a % of revenue
Company Ticker 2007 2008 2009 2007 2008 2009
Semes Not listed 17.6 30.2 19.8 5.8 7.4 6.3
Jusung Eng 036930 KS 36.6 44.4 28.2 17.3 29.2 16.6
SFA 056190 KS 9.2 13.5 11.5 3.0 3.1 3.7
EO Technics 039030 KS 6.0 10.4 8.1 7.4 10.4 10.0
DMS 068790 KS 10.6 12.5 8.7 12.0 4.5 5.7
Atto 030530 KS 4.6 2.6 3.4 5.7 3.5 3.8
IPS 051820 KS 11.9 11.0 5.5 15.7 3.5 11.0
KC Tech 029460 KS 8.9 9.1 4.4 6.8 4.9 4.6
Hanmi Semi 042700 KS 8.3 8.1 8.7 7.2 11.4 11.5
PSK 031980 KS 8.3 7.1 4.6 7.2 12.9 14.2
Eugenetech 084370 KS 5.1 7.5 3.9 22.0 79.1 8.1
LIG ADP 079950 KS 4.9 5.5 6.4 3.5 5.2 7.5
Hanyang Eng 045100 KS 1.1 1.5 1.1 0.6 0.8 0.9
Osung LST 052420 KS 1.1 1.4 1.8 4.3 2.1 1.4
Top Eng 065130 KS 3.3 3.9 1.0 17.1 9.7 11.8
SNU 080000 KS 6.5 4.7 11.6 35.2 6.5 34.2
Source: Companies, Daiwa
What drives the share price?
We see the new order For many equipment companies, we believe that the new order intake and order
intake and order backlog are the key share-price drivers, since semiconductor and LCD-panel
backlogs as the key companies normally give large purchasing orders coinciding with their capacity-
share-price drivers expansion plans. In the past, whenever these companies announced new capacity
expansion or upward revisions to capex, the local equipment companies’ shares
have rallied. For companies like SFA, there is a strong correlation between its
average share price (for each quarter) versus the new order intake and the order
backlog over the past three years.
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 17

18. SFA: new orders and order backlog versus average share price
(Wbn) (W)
350 80,000
300 70,000
60,000
250
50,000
200
40,000
150
30,000
100
20,000
50 10,000
0 0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
New orders (LHS) Order backlog (LHS) Average price (RHS)
Source: Companies, FnData
Although equipment companies normally disclose large order intakes, quite often,
some sizeable orders are not revealed at the request of their customers. In addition,
as lead times vary for different types of equipment (between three and nine
months), the actual order intake may take longer to turn into revenue. Therefore,
we believe that the capex trend of their key customers is also an important driver of
equipment companies’ share prices.
LGD revised up its FY10 capex plan recently to over W5.5tn from over W4.0tn.
However, we believe there could be further upside for this, should LGD get
approval from the PRC Government to build a Gen8 line in China. LGD plans to
ramp its P8E line in May, and we expect the P8E+ line to start ramping up from
1H11. Therefore, we believe local equipment companies are likely to receive
purchasing orders for the P8E+ line starting from 2Q10, and possibly orders for the
China fab in 1H11.
Meanwhile, SEC still has not confirmed its FY10 capex (from an initial plan of
W5.5tn for memory chips and W3.0tn for LCDs), but several local equipment
companies have told us that there could be substantial upside for its semiconductor
capex, given that its competitors are investing aggressively. The Korea Economic
Daily reported recently that SEC’s semiconductor capex may rise to W8.3tn for
FY10, and increase further to W11.0tn for 2011, as SEC equips Line16 during
2H10 and builds the new Line17 next year, which could lead to further upward
revisions to our global semiconductor capex forecasts.
Korea semiconductor and LCD capex vs. equipment company index
(Wtn)
25 400
350
20
300
15 250
200
10 150
100
5
50
0 0
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Capex (LHS) Index (RHS)
Source: Companies, Daiwa forecasts
Jae H. Lee (82) 2 787 9173 Korea Semiconductor and LCD Equipment Sector 18