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Kr touch screen120207
1. Electronics / Korea
7 February 2012
In touch with new market Korea Touch Screen
Sector
opportunities
• The outlook for the touch-screen market remains bright on the
back of the proliferation of smartphones and tablet PCs
• We expect the addressable market to expand due to favourable
developments in touch-screen technology
• Initiating coverage of Iljin Display and Melfas with Buy (1) ratings How do we justify our view?
touch screen to remain the What we recommend
mainstream product, but they are Among the domestic touch-screen
likely to shift to OGS in the future. companies, our top pick is Iljin
Display, as we expect the company
Samsung Electronics (SEC) (005930 to continue to gain share in the
Jae H. Lee KS, W1,074,000, Outperform [2]) domestic touch-screen market and
(82) 2 787 9173
jhlee@kr.daiwacm.com plans to launch smartphones with forecast a robust revenue growth
flexible displays in 2Q12, and we rate of 51% YoY for 2012. We initiate
Joshua Oh, CFA expect the company to increasingly coverage of the company with a Buy
(82) 2 787 9176
joshua.oh@kr.daiwacm.com outsource touch-screen production (1) rating and six-month target price
to domestic TSM companies. As a of W16,500.
result, we believe that over the next
What's new few years, the addressable market We also initiate coverage of Melfas
for domestic touch-screen with a Buy (1) rating, and a six-
We initiate coverage of the Korea
companies will expand much faster month target price of W30,000.
Touch Screen Sector with a Positive
than the growth in the touch-screen Although 2011 appears to have been
rating, as we see a bright market
market for mobile handsets. a difficult year for the company with
outlook for 2012, with robust
flat revenue growth YoY and a
demand growth for smart devices
The potential adoption of substantial erosion in the operating-
and favourable developments in
integrated-type touch screens, such profit margin, we forecast Melfas to
touch-screen technology. post stronger revenue and earnings
as those using in-cell technology, are
the major threat to the touch-screen growth for 2012 due to rising sales
What's the impact
industry. However, in-cell of touch-sensor chips and tablet-PC
The touch-screen market should TSMs.
continue to boom in 2012, as technology will have to overcome
smartphone and tablet-PC makers production issues as well as
production costs in order to have a How we differ
need touch-screen modules (TSM) Unlike most others in the market,
to add value to their products. In major impact, in our view. In
addition, as SEC will continue to use among the domestic TSM
addition, we see more opportunities companies, we believe that Iljin
opening up for the domestic TSM active-matrix organic light-emitting
diodes (AMOLED) for its high-end Display and Melfas are the best-
companies due to emerging new positioned in the fast-growing and
smartphones, we believe the
technologies such as the one-glass fast-changing touch-screen market.
potential threat is relatively smaller
solution (OGS) and flexible displays.
for the Korea TSM companies.
Key stock calls
While some touch-screen New Prev.
Based on our and the Bloomberg-
technologies are becoming obsolete Iljin Display (020760 KS)
consensus earnings forecasts, the
as new ones emerge, we believe there Rating Buy
Korea Touch Screen Sector (seven
is no perfect touch-screen technology Target price W16,500
listed companies) is trading Up/downside 44.7%
for all applications, and that costs are
currently at a 2012 PER of 6.8x and
an important variable factor in a Melfas Inc (096640 KS)
a 2012 PBR of 1.9x. Given that the Rating Buy
technology being adopted. For many past-two-year weighted average Target price W30,000
of the handset makers other than (based on market capitalisation) Up/downside 25.5%
Apple (AAPL US, US$459.68, PBR is 2.8x, we believe the sector Source: Daiwa forecasts
Outperform [2]), we expect film-type valuation is attractive. Note: Please refer to page 3 for details.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.
2. Korea Touch Screen Sector
7 February 2012
How do we justify our view?
Growth outlook
Valuation
Earnings revisions
Growth outlook TAM analysis for mobile-handset touch screens in Korea
While we forecast combined shipments for SEC and LG (m units) (%)
Electronics (LGE) (Not rated) mobile handsets to
600 70
increase by 10.7% YoY to 465m units for 2012, we
60
believe the total addressable market (TAM) for touch 500
50
screens in mobile handsets will expand by 37.8% YoY to 400
40
268m units. 300
30
200
20
100 10
0 0
2010 2011E 2012E 2013E
Handset shipment TAM Portion of TAM (RHS)
Source: Companies, Daiwa forecasts
Valuation Korea touch-screen sector PBR trend
Based on our and the Bloomberg-consensus earnings (x)
forecasts, the Korea Touch Screen Sector is currently 4.0
trading at a 2012 PER of 6.8x and a 2012 PBR of 1.9x. 3.5
Given that the past-two-year weighted average (based
3.0
on market capitalisation) PBR is 2.8x, we believe the
sector valuation is attractive. 2.5
2.0
1.5
1.0
Jul-10
Jul-11
Jan-10
Jan-11
Jan-12
May-10
May-11
Mar-10
Mar-11
Sep-10
Nov-10
Sep-11
Nov-11
Korea touch-screen sector Average
Source: Companies, FnData, Bloomberg, Daiwa forecasts
Earnings revisions Iljin Display and Melfas: Daiwa vs. consensus EPS forecasts
For both Iljin Display and Melfas, our 2012-13 EPS (W)
forecasts are 4-7% higher than those of the FnGuide- 3,000
consensus forecasts. We believe there could be upside to 2,500
the consensus forecasts in the event of stronger sales
2,000
growth of touch-screen market
1,500
1,000
500
0
2012E 2013E
Iljin Display (Daiwa) Iljin Display (Consensus) Melfas (Daiwa) Melfas (Consensus)
Source: FnData, Daiwa forecasts
-2-
3. Korea Touch Screen Sector
7 February 2012
Key stock calls
EPS (local curr.)
Share Rating Target price (local curr.) FY1 FY2
%
Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev.
chg
Iljin Display 020760 KS 11,400 Buy 16,500 n.a. 1,047 n.a. 1,971 n.a.
Melfas Inc 096640 KS 23,900 Buy 30,000 n.a. 1,048 n.a. 1,991 n.a.
Source: Daiwa forecasts
-3-
4. Korea Touch Screen Sector
7 February 2012
Table of contents
In touch with new market opportunities ......................................................................................... 5
Why touch-screen companies at this juncture? ........................................................................... 5
We expect strong growth in the addressable market for 2012 ................................................. 5
Potential threat from in-cell technology is relatively smaller for Korea TSM companies....... 6
We believe valuations are attractive, trading below the past-two-year average PBR ............. 6
Change in touch-screen technologies does not pose a threat to everyone .................................. 8
P-cap touch screen takes over from resistive ........................................................................... 8
Glass-type vs. film-type p-cap .................................................................................................. 8
Integrated touch screens are a potential threat but not in the short term .............................. 9
There is no perfect touch-screen technology; cost is an important factor............................. 10
Market opportunities remain bright ........................................................................................... 11
Positioning in the competitive landscape .................................................................................. 12
Ability to keep up with changes in technologies is a key to boosting top-line growth .......... 13
Profitability varies with the degree of vertical integration and productivity ......................... 13
Company Section
Iljin Display................................................................................................................................. 15
Melfas Inc.................................................................................................................................... 23
-4-
5. Korea Touch Screen Sector
7 February 2012
We expect strong growth in the
addressable market for 2012
For 2012, we expect the wide adoption of touch screens
in mobile handsets and tablet PCs to continue.
However, we see more opportunities opening up for the
In touch with new domestic TSM companies due to favourable
developments in touch-screen technologies, such as
market opportunities OGS and flexible displays. Although we provide a more
detailed discussion of various touch-screen
technologies later in this report, we believe that many
We initiate coverage of the Korea Touch handset makers will shift to OGS for touch screens, in
Screen Sector with a Positive rating, as order to lower production costs and improve the
quality of certain aspects of the touch function.
we see bright prospects for the market in
2012, with robust demand growth for In addition, as SEC plans to launch smartphones with
smart devices and favourable flexible displays in 2Q12, we expect the company to
developments in touch-screen technology. increasingly outsource touch-screen production to
domestic TSM companies. Since more than 60% of
SEC’s smartphones used AMOLED in 2011, and the
Why touch-screen companies at touch screens for these displays were all produced
inhouse (using on-cell technology), we see
this juncture? opportunities for the domestic TSM companies once
AMOLED substrates are switched to plastic/film from
Although most of touch-screen companies in Korea glass for flexible displays.
enjoyed solid growth in revenue and earnings in 2010,
only a few of them saw a robust growth for 2011, due to Although we forecast combined mobile-handset
changes in touch-screen technologies and differences shipments for SEC and LGE to increase by 10.7% YoY
in their production efficiencies. As a result of changes to 465m units for 2012, we believe the for touch
in their market shares and increased price pressure, the screens in mobile handsets will expand by 37.8% YoY
share prices of the domestic TSM companies were to 268m units. We expect the main drivers should be:
extremely volatile in 2011, with the sector index (of 1) the increased proportion of smartphone shipments,
seven listed companies) falling nearly 55% from early 2) a higher proportion of touch screens being used in
April to late September and then rising by more than feature phones, and 3) new touch-screen opportunities
80% up to early December. Meanwhile, the share from the shift to flexible displays.
prices of the Taiwan TSM companies declined sharply
between early July and December, due to what we TAM analysis for mobile-handset touch screens in Korea
believe were the market’s concerns about the potential (m units) (%)
threat from in-cell touch-screen technology. 600 70
500 60
Korea and Taiwan touch-screen companies’ share-price
50
performances 400
40
(Index) 300
30
250 200
20
200 100 10
150 0 0
2010 2011E 2012E 2013E
100
Handset shipment TAM Portion of TAM (RHS)
50 Source: Companies, Daiwa forecasts
0
Nov-10
Nov-11
Sep-10
Sep-11
Jul-10
Jul-11
Jan-10
Jan-11
Jan-12
May-10
May-11
Mar-10
Mar-11
Korea Taiwan
Source: FnData, Bloomberg
Note: Share-price index comprised of seven listed touch-screen companies in Korea and
four companies in Taiwan
-5-
6. Korea Touch Screen Sector
7 February 2012
Potential threat from in-cell technology is Touch-screen companies: PBR and ROE comparison
relatively smaller for Korea TSM 4
companies
3
The potential adoption of integrated-type touch screens, Melfas
S-mac TPK
Iljin Display
such as those using in-cell technology, are currently
PBR 2012E (x)
being developed by several LCD-panel makers, and 2
J Touch
pose a major threat to the touch-screen industry. As Wintek
ELK
LCD-panel companies can directly embed the touch 1
Young Fast Digitech
function in the display, there may be fewer
opportunities for touch-screen makers in the future. 0
However, as in-cell technology has to overcome 0 10 20 30 40 50 60
production-yield issues as well as production costs, we ROE 2012E (%)
do not believe it will be a major threat to the current Source: FnData, Bloomberg, Daiwa forecasts
touch-screen technologies in the near term. In addition,
as SEC will continue to use AMOLED for its high-end Our top pick among the Korea touch-screen companies
smartphones, we believe that the potential threat is is Iljin Display, as we expect the company to continue
relatively smaller for the Korea TSM companies. to gain share in the domestic touch-screen market and
forecast a robust revenue growth rate of 51% YoY for
We believe valuations are attractive, 2012. We initiate coverage of the company with a Buy
trading below the past-two-year average (1) rating and a six-month target price of W16,500. We
PBR also initiate coverage of Melfas with a Buy (1) rating,
Based on our and the Bloomberg-consensus earnings and a six-month target price of W30,000. Although
forecasts, the Korea Touch Screen Sector is currently 2011 appears to have been a difficult year for the
trading at a 2011 PER of 11.6x and 2012 PER of 6.8x. In company with flat revenue growth YoY and a
terms of PBR, the sector trades at 2.4x and 1.9x on the substantial erosion in the operating-profit margin, we
respective 2011 and 2012 BVPS forecasts. Given the forecast Melfas to post stronger revenue and earnings
past-two-year weighted average (based on market growth for 2012 due to rising sales of touch-sensor
capitalisation) PBR is 2.8x, we believe the sector chips and tablet-PC TSMs.
valuation is attractive.
Iljin Display and Melfas: PBRs
Korea Touch Screen Sector: PBR (x)
(x) 8
4.0 7
6
3.5 5
3.0 4
3
2.5
2
2.0 1
1.5 0
Jul-10
Jul-11
Jan-10
Jan-11
Jan-12
May-10
May-11
Mar-10
Mar-11
Sep-10
Nov-10
Sep-11
Nov-11
1.0
Jul-10
Jul-11
Jan-10
Jan-11
Jan-12
May-10
May-11
Mar-10
Mar-11
Sep-10
Nov-10
Sep-11
Nov-11
Melfas Iljin Display
Korea touch-screen sector Average Source: Companies, FnData, Daiwa forecasts
Source: Companies, FnData, Bloomberg, Daiwa forecasts
Compared with the Taiwan TSM makers, the Korea
TSM companies generally trade at higher PBR
multiples, but ROEs are also higher than those of their
peers in Taiwan.
-6-
8. Korea Touch Screen Sector
7 February 2012
Although resistive touch screens were the mainstream
Change in touch-screen products until 2010, p-cap touch screens have gained
technologies does not pose a in popularity, due to their: 1) durability, 2) high optical
quality, 3) multi-touch functionality, as the application
threat to everyone software used in smartphones and tablet PCs has
become more sophisticated, and 4) declining prices, as
The touch-screen market should continue to boom as manufacturers continue to cut production costs on
mobile-handset and tablet-PC makers need TSM to add increased usage. Although we forecast resistive touch-
value to their products. Although some touch-screen screen shipments to decline from 408m units for 2010
technologies are becoming obsolete as new ones to 318m units for 2013, we forecast p-cap touch-screen
emerge, we believe that there is no touch-screen shipments to increase from 345m units to 1.1bn units
technology that is suited to all applications and that over the same period.
costs are likely to be an important factor in a
technology being adopted. We expect add-on type Global touch-screen module shipments by technology
touch screens, such as glass/film/film (GFF), (m units)
glass/glass (G/G), and OGS, to remain the mainstream 1,600
products. 1,400
1,200
P-cap touch screen takes over from 1,000
resistive 800
600
The previous generation of touch screens is mostly
400
based on a resistive technology that features a flexible
200
outer layer of thin plastic film, and through contact
0
with a rigid inner layer, electrical contact is recognised. 2010 2011E 2012E 2013E 2014E
Although resistive TSM is inexpensive to produce, the Resistive P-cap
thin plastic outer layer makes the screen less durable
and manual recalibration is required periodically. Source: DisplaySearch, Daiwa forecasts
Resistive-type touch screen: cross section Glass-type vs. film-type p-cap
There are various types of p-cap touch screens and they
Hard coating
PET can be largely categorised as glass-type and film-type.
ITO coating In 2007, the iPhone became the first mobile device to
Micro spacer
ITO coating
use the G/G touch screen with indium tin oxide (ITO),
Glass substrate a transparent conductor, deposited on glass.
TFT-LCD Meanwhile, film-type touch screen has been mainly
adopted by most of non-Apple handset makers. In
Source: Various sources (including Melfas), Daiwa Taiwan, there are many TSM companies producing
glass-type touch screens as they transformed their
Meanwhile, the adoption of projective capacitive (p- existing small- to medium-sized colour filters or STN-
cap) touch screens has increased with the launch of LCD production lines to TSM production. However, as
Apple’s iPhone in 2007. P-cap features two layers of there were fewer numbers of these production lines in
glass and the conductive material is placed between the Korea, particularly among small- to medium-sized
glass layers. The electric fields are projected from a grid enterprises, many TSM companies have been focusing
of conductive materials in rows and columns, and by more on the film-type touch screen.
placing a finger on the outer layer it detects the contact.
Comparing these two touch-screen technologies, G/G
P-cap touch screen: cross-sectional view
has advantages in optical performance and durability,
Optical clear and a narrow bezel, while film-type has advantages in
adhesive
Cover glass terms of cost, thinness and lightness, and the ease of
ITO sensor
(X-axis) production. In addition, G/G is more suitable for a
ITO sensor
Glass substrate single product manufactured in high volume (such as
(Y-axis) Optical clear
adhesive
the iPhone), whereas film-type has advantages in a
TFT-LCD
variety of low-volume products with a quick time-to-
market. Given the distinct advantages of these two
Source: Various sources (including Melfas), Daiwa
types of p-cap touch screen, we believe that G/G will be
-8-
9. Korea Touch Screen Sector
7 February 2012
used mainly for certain high-end smartphones and for G1F solution: cross-section
tablet PCs, while film-type will become more popular
Cover Glass
among the low-end to mid-range smartphones.
ITO sensor
Optical clear (X-axis)
Meanwhile, the technology used in film-type touch adhesive
ITO sensor
screens is evolving from glass/film/film (GFF) to Film (Y-axis)
glass/one film (G1F) and to OGS. The main reason for TFT-LCD
the shift in technology is lower production costs and
the improved quality of certain aspects of the touch Source: Various sources (including Melfas), Daiwa
screen. Although G/G touch screens use two layers of
glass, GFF uses cover glass and two layers of film. However, one drawback of the G1F solution is that it
Therefore, production costs are 10-20% lower for GFF tends to have a low production yield, and so we believe
than G/G touch screens. OGS will be more widely used by TSM makers in 2012.
By removing all the films, the production cost of OGS is
GFF solution: cross-section more than 20% lower than that of the conventional
G/G touch screens, and is also lighter and has a better
Optical clear Cover Glass optical quality than the GFF solution. While the
adhesive ITO sensor concept of OGS is similar among TSM makers, they
(Y-axis)
ITO sensor
have different names for their own technologies. Melfas
Film/Film (X-axis) calls it direct patterned window (DPW) as the ITO
TFT-LCD material is sputtered directly on the covered glass,
while TPK (3673TT, NT$465.50, Buy [1]) has a touch-
Source: Various sources (including Melfas), Daiwa on-lens (TOL) solution, and Wintek (2384 TT,
NT$24.65, Outperform [2]) has the advanced-
Production cost breakdown for GFF touch screens technology touch (ATT) solution, which the company
Others
began shipments of in April 2010, for low-end to mid-
14% range smartphones.
Silver paste Cover glass
3% 33% OGS solution: cross-section
OCA
6% Optical clear Cover Glass
adhesive
Explosion-proof
membrane
Insulator
ITO sensor
Conductive (X-axis)
ITO film jumper
20% ITO sensor
TFT-LCD (Y-axis)
FPCB & chip
24% Source: Various sources (including Melfas), Daiwa
Source: Various sources (including Melfas), Daiwa
Integrated touch screens are a potential
In order to reduce production costs further, TSM threat but not in the short term
makers are trying to reduce the number of film layers We have discussed different touch-screen technologies,
in the touch screen. However, prior to a full shift to but they all fall in to one major category of add-on (out-
OGS, in which no ITO films are used, G1F provides a cell) type, in which the TSM is attached on the top of
hybrid solution, in which one axis of ITO sensors are the main display, such as TFT-LCD. However, another
printed on the cover glass and another axis of ITO touch-screen technology emerging, in which the touch
sensors is attached to the film. As G1F uses one less screen is integrated into the main display. This is led by
film than the GFF solution, it is slightly thinner and has LCD panel makers and competes with the conventional
better translucence or optical quality. TSM industry.
Integrated-type technologies, such as on-cell and in-
cell touch screens, are currently being developed by the
major LCD panel makers. However, this technology
would need to be verified for mass production, as
defective touch screens would result in the scrapping of
the whole display as the touch screen cannot be
separated from the main display.
-9-
10. Korea Touch Screen Sector
7 February 2012
Comparison of conventional TSM and integrated touch panel
Conventional TSM Integrated touch panel
TSM
types
1 Out‐cell type 2 On‐cell type 3 In‐cell type
Touch function
Polariser
Polariser Touch function Polariser
Glass Glass Glass
Conceptual
Cell Cell Cell (touch function)
structures
Glass Glass Glass
Polariser Polariser Polariser
LCD panel LCD panel LCD panel
Key
technology Film lamination, patterning technology TFT‐LCD technology
Main driving
* TSM maker * Colour filter and LCD maker * LCD maker
forces
Source: Displaybank, Daiwa
On-cell touch screen for LCD voltage sensing, pressing the LCD surface closes micro-
For on-cell touch screens, the touch sensor is deposited switches in each pixel to detect the location touched. It
on the top of the colour filter and one layer of glass is works with any touch objects, such as a finger or stylus.
eliminated, resulting in a thinner module with lower However, durability is an issue as it requires touching
production costs (theoretically). However, the major the LCD surface and the cover glass cannot be added.
challenges for on-cell technology include: 1) it requires In charge-sensing, pressing the LCD surface changes
additional photo mask steps to create the touch sensors the dielectric constant of the liquid crystal, which
on the top surface of the colour filter substrate, and this changes the capacitance between the electrodes.
effectively lowers the overall production yield and 2) However, durability is also an issue as the cover glass
potential defects on the touch sensor could result in the cannot be attached.
whole colour filter being scrapped.
There is no perfect touch-screen
On-cell touch screen for AMOLED technology; cost is an important factor
SEC launched its own touch-screen technology for
While there many different types of touch screens
AMOLED in 2010 and this is currently used in its high-
available and new ones continue to emerge, there is no
end smartphones, such as the Galaxy S2 and Galaxy
perfect solution for all touch applications as each touch
Note. The company integrated touch sensors on the top
technology has its own strengths and weaknesses, in
glass layer of AMOLED and covered it with tempered
our view. Recently, many investors have raised
glass. As the touch screen is already integrated with the
concerns about the sales-growth prospects for TSM
AMOLED, SEC produces them inhouse as it does not
makers, as the potential adoption of integrated-type
need to outsource the touch-function process to TSM
touch screens, such as on-cell and in-cell technologies,
makers.
should eventually take the business opportunities away
from TSM companies.
In-cell touch screen
For in-cell touch screens, the touch sensor is physically
However, the LCD-panel makers have told us that the
inside the LCD cell and the touch sensor can be light-
most important factors for touch panels are the cost
sensing elements, micro switches (voltage-sensing), or
competitiveness and the customer’s acceptance of
capacitive electrodes (charge-sensing). In light sensing,
different touch-screen technologies. Although a few
the photo sensor is placed in each pixel or group of
integrated touch screens could be ready to market at
pixels and the visible-light sensor recognises the
this time, mobile-handset makers may not choose this
shadow of a finger under bright light or the reflection
solution as they have a higher cost than conventional
of the backlight on the finger in dim light. As for
add-on type solutions and as integrated touch screens
- 10 -
11. Korea Touch Screen Sector
7 February 2012
have not been verified for mass production, as this Global touch-screen market: revenue forecasts
could pose a potential procurement risk. (US$bn) (%)
25 100
In conclusion, we have no doubt that the touch-screen
20 80
market will continue to boom as mobile-handset and
tablet-PC makers need TSMs to add value to their 15 60
products. Currently, the dominant technology is p-cap,
as it is more reliable in terms of cost and volume 10 40
production. We forecast global p-cap touch-screen
5 20
shipments to increase at a CAGR of 23% over the next
three years (2012-14). Among the p-cap touch-screen 0 0
solutions in 2012, we expect GFF to account for over 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
60%, G/G to account for about 20%, and the remainder Revenue (LHS) YoY growth (RHS)
to be both OGS and G1F solutions. Source: DisplaySearch
Comparison of touch-screen technologies Global tablet-PC shipments
G/G GFF G1F OGS
(m units) (%)
Cost ★ ★★ ★ ★★★
Durability ★★★ ★★ ★★ ★ 160 300
Optical quality ★★★ ★★ ★★ ★★★ 140
250
Narrow bezel ★★ ★ ★ ★★★ 120
70 200
Thickness ★ ★★ ★★ ★★★ 100
Production yield ★★ ★★★ ★ ★★ 80 39 150
Sensitivity ★★★ ★ ★★ ★★ 60
20 100
Source: Various sources, Daiwa 40 78
63 50
20 3 41
15
0 0
Market opportunities remain 2009 2010 2011E 2012E 2013E
bright iPad (LHS) Others (LHS) Total YoY growth (RHS)
Source: Various sources, Daiwa forecasts
According to DisplaySearch, the value of the global
TSM market will increase by 90% YoY to US$13.4bn For mobile handsets, out of the 1.78bn unit shipments
for 2011 and nearly double to US$23.9bn in 2017. The for 2011, we estimate 47% (837m units) were touch-
TSM market should see strong growth in revenue, units, enabled, compared with 32% (517m units) for 2010.
and area due to increasing penetration in mobile For 2012, we forecast the touch-screen adoption rate to
devices during this period. Although touch screens for increase to 57%. We see the major drivers of touch-
smartphones currently make up more than 70% of the screen handset shipment as being: 1) rising
total TSM market in terms of volume, we believe the smartphone shipments, and 2) increased touch-screen
fastest-growing segment is tablet PCs, and forecast adoption in feature phones.
shipments to increase to 61m units for 2011 from 18m
units for 2010, and rise to 102m units for 2012. Global touch-screen handset shipments and adoption rate
Although the iPad currently dominates the global (m units) (%)
tablet-PC market with a 67% share for 2011, we 1,600 80
forecast its share to decline to 53% for 2013 as 1,400
Android-based tablets and the Kindle Fire gain market 1,200 60
share. 1,000
800 40
600
400 20
200
0 0
2008 2009 2010 2011E 2012E 2013E
Touch-screen handset shipments (LHS) Adoption rate (RHS)
Source: DisplaySearch, Daiwa forecasts
- 11 -
12. Korea Touch Screen Sector
7 February 2012
Meanwhile, Taiwan TSM makers have been riding on Smartphone shipments by key handset maker
the success of Apple in mobile devices. Three (m units)
companies, TPK, Wintek and Chimei Innolux (3481 TT, 250
NT$16.2, Hold [3]) currently dominate the touch-
200
screen market for both the iPhone and the iPad.
However, the Korea TSM makers have been competing 150
more fiercely in a much smaller and fragmented
domestic market, supplying touch screens mainly to 100
SEC and LGE.
50
Allocation of touch screen for Apple
0
2007 2008 2009 2010 2011E 2012E
2008 2009 2010 2011 2012E 2013E
iPhone Apple SEC LGE
TPK 100 80 65 60 45 40
Wintek 20 30 30 35 30 Source: Companies, Daiwa forecasts
CMI 5 10 20 30
iPad
TPK 50 55 50 Positioning in the competitive
Wintek 50 35 30
CMI 10 20 landscape
Source: Daiwa forecasts
One TSM company told us that there were more than
As a substantial proportion of SEC’s smartphone TSMs 50 touch-screen companies in Korea, and 7-8 of them
have been produced inhouse (as on-cell technology is account for an 80-90% share of the domestic market.
used for AMOLED touch screens) until now, domestic Given that there is no single dominant player, the key
TSM companies were not able to benefit substantially to the TSM companies’ revenue growth has been their
from the rapid market-share gains by SEC. However, as ability to adapt to new technologies, and their
the company expands its smartphones into the low-end profitability has depended greatly on their productivity
to mid-range segments, and as LGE gradually gains as well as the degree of vertical integration, in our view.
traction in the smartphone market globally, we believe
there will be greater opportunities for the Korea TSM While most of the domestic TSM makers (seven listed
companies in the future. companies) recorded robust YoY revenue growth for
2010, some TSM makers were on track to see flat YoY
For 2011, we estimate that SEC shipped 99m revenue growth for 2011. We believe that a few of these
smartphones, accounting for the largest share of the companies have been facing technological or
global smartphone market for the first time. Although productivity issues amid the changes in touch-screen
the company expects the global smartphone market to technologies. For the first nine months of 2011, only
expand by 30-40% YoY for 2012, it believes it will three companies, Iljin Display, S-mac (Not rated), and
outgrow the market, with a shipment growth rate of Synopex (Not rated) recorded touch-screen revenue
over 50% YoY. Meanwhile, LGE shipped 20.2m greater than that for 2010 (full year).
smartphones for 2011, a substantial increase from the
6.5m units for 2010, and it aims to sell 30-35m units Korea TSM makers: touch-screen revenues
for 2012. In addition, as SEC plans to launch Bloomberg Mkt cap TSM revenue only
smartphones with flexible displays in 2Q12, we think it Company code (Wbn) 2009 2010 9M11
Melfas 096640 KS 410 134 195 132
is highly likely that touch screens will be outsourced to
Iljin Display 020760 KS 309 11 43 175
domestic TSM makers, as on-cell technology will only S-mac 097780 KS 190 70 168 240
be used for AMOLED displays with glass substrates. ELK 094190 KS 184 103 227 175
Digitech Systems 091690 KS 177 115 136 106
Moreens 110310 KS 111 86 74 16
Synopex 025320 KS 93 28 84 190
Source: Companies
- 12 -
13. Korea Touch Screen Sector
7 February 2012
Ability to keep up with changes in Korea TSM companies: R&D spending
R&D expenses (Wbn) R&D as a % of revenue
technologies is a key to boosting top-line Company 2009 2010 9M11 2009 2010 9M11
growth Melfas 6.3 8.6 8.2 4.2 3.4 4.6
Over the past two years, the Taiwan TSM makers such Iljin Display 1.3 1.5 4.6 3.8 1.4 2.1
ELK 4.7 3.4 4.4 4.0 1.4 2.5
as TPK and Wintek have seen robust revenue growth S-mac 4.9 8.2 6.8 3.4 4.0 2.2
due to their advantages in capacity, yield, and Digitech Systems 2.1 1.8 1.2 1.8 1.3 1.1
production costs. Meanwhile, the TSM makers in Korea Moreens 2.0 0.3 0.4 2.3 0.4 2.4
have realised much smaller revenue-growth rates due Synopex 4.8 3.9 5.2 3.1 1.8 2.1
to the smaller addressable market and more intense Source: Companies
competition. As touch-screen technology evolved from
resistive to p-cap, handset companies such as SEC Profitability varies with the degree of
reduced their dependency on Digitech, Moreens, and vertical integration and productivity
Taiwan TSM companies such as Young Fast and J Although there are many TSM companies, not all of
Touch, while increasing procurements to S-mac and them are vertically integrated. One of the important
Synopex, which have spent years developing p-cap components in TSMs is touch sensors, and in Korea
technology in co-operation with SEC. Meanwhile, Iljin there are only five TSM makers that can produce touch
Display started to supply touch screens for SEC’s 7.0- sensors inhouse: Samsung Mobile Display (Not listed),
inch tablet PC in late 2010 and later expanded to TSMs LG Innotek (Not rated), Iljin Display, ELK (Not rated),
for the 10.1-inch model. We estimate that Iljin Display and Digitech Systems (Not rated). Meanwhile, Melfas
currently manufactures nearly half of SEC’s tablet-PC is the only domestic company that can produce the
touch screens. controller ICs.
TSM companies: market shares with SEC and LGE Vertical integration of TSM companies
TSM maker Share (%) TSM Touch sensor Cover glass ITO film Controller IC
Samsung Electronics Korea
Handset w/ AMOLED Samsung Mobile Display 100 Melfas
Handset w/ LCD S-mac 31 Iljin Display
Synopex 22 ELK
Melfas 18 S-mac
Iljin Display 9 Digitech
Digitech Systems 7 Moreens
Others 14 Synopex
Tablet PC Iljin Display 47 Taiwan
S-mac 17 TPK
Digitech Systems 9 Wintek
Melfas 6 Youngfast
Others 22 J Touch
LG Electronics Cando
Hanset LG innotek 60 Source; Companies, Daiwa estimates
ELK 40
Tablet PC ELK 100
Source: Companies, Daiwa estimates
As a result of these diversification efforts, companies
such as Melfas, Iljin Display, ELK, and Digitech posted
As touch-screen technology evolves to OGS, we believe robust operating-profit margins of 10-15% for 2010.
that companies such as Melfas are likely to benefit, However, except for Iljin Display, the other three
since Melfas has spent a lot of time and resources on companies saw the margin erode for 2011 due to
developing DPW technology. While domestic TSM market share losses and productivity issues. Although
companies spend an average of 2-3% of revenue on companies such as S-mac and Synopex have gained
R&D expenses annually, Melfas has been the top R&D market share and touch-screen revenue expanded in
spender over the past three years. However, as 2011, their operating-profit margins remained at mid-
companies such as Samsung Fiberoptics (Not listed) single-digit percentages as they do not source
and Nepes Display (Not listed) are developing similar components internally.
types of OGS technology, productivity and cost
competitiveness will be the key in garnering market
share, in our view. As for flexible displays, we believe
that Iljin Display is currently developing touch screens
for the new display technology.
- 13 -
14. Korea Touch Screen Sector
7 February 2012
TSM makers: operating-profit margin comparison
(%)
Melfas Iljin Display ELK S-mac Digitech Synopex
20
(096640 KS) (020760 KS) (094190 KS) (097780 KS) (091690 KS) (025320 KS)
15
10
5
0
(5)
(10)
1Q10
3Q10
1Q11
3Q11
2Q10
4Q10
2Q11
1Q10
3Q10
1Q11
3Q11
2Q10
4Q10
2Q11
1Q10
3Q10
1Q11
3Q11
2Q10
4Q10
2Q11
Source: Companies
In conclusion, we believe that both Iljin Display and
Melfas are well-positioned in the growing touch-screen
market. Iljin Display is the most profitable company
among the domestic TSM makers (seven listed
companies) and is continuing to expand its market
share through production efficiencies and cost
competitiveness. Meanwhile, Melfas is likely to benefit
from the technology shift to OGS, and its touch-sensor
chip revenue is likely to increase strongly from the
proliferation of low-end smartphones in China.
- 14 -
15. Electronics / Korea
7 February 2012
Target price: W16,500
Iljin Display Up/downside: +44.7%
020760 KS Share price (6 Feb): W11,400
Initiation: market-share gains on
high productivity
• Coverage initiated with a Buy (1) rating and six-month target price
of W16,500
• The company continues to gain market share in both handsets and
tablet-PC touch-screen modules
• We are upbeat on earnings growth, forecasting operating profit to
expand by 55% YoY for 2012
How do we justify our view?
and we expect its exposure to there could be upside to the
smartphone TSMs to expand further consensus forecasts if Iljin Display
in 2012. The company was the only gains market share in touch-screens
domestic TSM maker to raise its and sapphire wafer demand rises.
production capacity during 2H11.
Jae H. Lee Share price performance
(82) 2 787 9173
jhlee@kr.daiwacm.com Meanwhile, Iljin Display enjoys a (W) (%)
relatively high operating-profit 14,000 140
Joshua Oh, CFA margin of a low-teen percentage for 12,000 120
(82) 2 787 9176 10,000 100
joshua.oh@kr.daiwacm.com its TSM business. Although there are 8,000 80
a few TSM makers that can produce 6,000 60
touch sensors inhouse, Iljin Display Feb-11 May-11 Aug-11 Nov-11 Feb-12
What's new is the only TSM maker that produces Iljin Display (LHS) Relative to KOSPI (RHS)
Iljin Display is one of the fastest- its entire touch-sensor requirements
growing touch-screen makers in internally. As a result, we expect the 12-month range 6,990-12,950
Korea, forecast by us to record company to deploy a more Market cap (US$m) 275.11
touch-screen module (TSM) revenue aggressive pricing strategy to gain Average daily turnover (US$m) 5.75
growth of over 515% YoY for 2011. share in the handset TSM market. Shares outstanding (m) 27
Major shareholder Chin-Kyu Huh (26.3%)
As it continues to gain share in both
the handset and tablet-PC touch- What we recommend
screen markets, we forecast the The stock is trading currently at Financial summary (W)
2011E and 2012E PERs of 10.9x and Year to 31 Dec 11E 12E 13E
company’s revenue to rise by 51% Revenue (bn) 326 492 596
YoY to W492bn for 2012. 5.8x, respectively, and at respective
Operating profit (bn) 37 56 67
PBRs of 3.8x and 2.3x. Given the
Net profit (bn) 28 53 57
What's the impact robust revenue and earnings growth
Core EPS 1,047 1,971 2,113
Iljin Display’s touch-screen revenue outlook for 2012, we set our six- EPS change (%) 165.5 88.1 7.2
started to expand from 4Q10, as the month target price at W16,500, Daiwa vs Cons. EPS (%) (5.8) 6.7 4.7
company was able to satisfy SEC’s based on a mid-cycle PBR of 3.3x on PER (x) 10.9 5.8 5.4
need for both quality and price for our 2012 BVPS forecast. The key Dividend yield (%) 0.0 0.0 0.0
the Galaxy Tab in a short period of risks are weak TSM orders from its DPS 0.000 0.000 0.000
time. Iljin Display is the largest TSM customers and intensifying PBR (x) 3.8 2.3 1.6
provider for SEC’s tablet PC, with a competition. EV/EBITDA (x) 8.0 5.0 3.8
ROE (%) 43.0 49.8 35.2
47% share in 2011. In order to cope
with the changes in touch-screen How we differ Source: Bloomberg, Daiwa forecasts
technologies, the company is Our 2012 and 2013 EPS forecasts
currently working on several new are 6.7% and 4.7% higher,
projects with this captive customer, respectively, than those of the
FnGuide consensus. We believe
Important disclosures, including any required research certifications, are provided on the last two pages of this report.
![Electronics / Korea
7 February 2012
In touch with new market Korea Touch Screen
Sector
opportunities
• The outlook for the touch-screen market remains bright on the
back of the proliferation of smartphones and tablet PCs
• We expect the addressable market to expand due to favourable
developments in touch-screen technology
• Initiating coverage of Iljin Display and Melfas with Buy (1) ratings How do we justify our view?
touch screen to remain the What we recommend
mainstream product, but they are Among the domestic touch-screen
likely to shift to OGS in the future. companies, our top pick is Iljin
Display, as we expect the company
Samsung Electronics (SEC) (005930 to continue to gain share in the
Jae H. Lee KS, W1,074,000, Outperform [2]) domestic touch-screen market and
(82) 2 787 9173
jhlee@kr.daiwacm.com plans to launch smartphones with forecast a robust revenue growth
flexible displays in 2Q12, and we rate of 51% YoY for 2012. We initiate
Joshua Oh, CFA expect the company to increasingly coverage of the company with a Buy
(82) 2 787 9176
joshua.oh@kr.daiwacm.com outsource touch-screen production (1) rating and six-month target price
to domestic TSM companies. As a of W16,500.
result, we believe that over the next
What's new few years, the addressable market We also initiate coverage of Melfas
for domestic touch-screen with a Buy (1) rating, and a six-
We initiate coverage of the Korea
companies will expand much faster month target price of W30,000.
Touch Screen Sector with a Positive
than the growth in the touch-screen Although 2011 appears to have been
rating, as we see a bright market
market for mobile handsets. a difficult year for the company with
outlook for 2012, with robust
flat revenue growth YoY and a
demand growth for smart devices
The potential adoption of substantial erosion in the operating-
and favourable developments in
integrated-type touch screens, such profit margin, we forecast Melfas to
touch-screen technology. post stronger revenue and earnings
as those using in-cell technology, are
the major threat to the touch-screen growth for 2012 due to rising sales
What's the impact
industry. However, in-cell of touch-sensor chips and tablet-PC
The touch-screen market should TSMs.
continue to boom in 2012, as technology will have to overcome
smartphone and tablet-PC makers production issues as well as
production costs in order to have a How we differ
need touch-screen modules (TSM) Unlike most others in the market,
to add value to their products. In major impact, in our view. In
addition, as SEC will continue to use among the domestic TSM
addition, we see more opportunities companies, we believe that Iljin
opening up for the domestic TSM active-matrix organic light-emitting
diodes (AMOLED) for its high-end Display and Melfas are the best-
companies due to emerging new positioned in the fast-growing and
smartphones, we believe the
technologies such as the one-glass fast-changing touch-screen market.
potential threat is relatively smaller
solution (OGS) and flexible displays.
for the Korea TSM companies.
Key stock calls
While some touch-screen New Prev.
Based on our and the Bloomberg-
technologies are becoming obsolete Iljin Display (020760 KS)
consensus earnings forecasts, the
as new ones emerge, we believe there Rating Buy
Korea Touch Screen Sector (seven
is no perfect touch-screen technology Target price W16,500
listed companies) is trading Up/downside 44.7%
for all applications, and that costs are
currently at a 2012 PER of 6.8x and
an important variable factor in a Melfas Inc (096640 KS)
a 2012 PBR of 1.9x. Given that the Rating Buy
technology being adopted. For many past-two-year weighted average Target price W30,000
of the handset makers other than (based on market capitalisation) Up/downside 25.5%
Apple (AAPL US, US$459.68, PBR is 2.8x, we believe the sector Source: Daiwa forecasts
Outperform [2]), we expect film-type valuation is attractive. Note: Please refer to page 3 for details.
Important disclosures, including any required research certifications, are provided on the last three pages of this report.](https://image.slidesharecdn.com/krtouchscreen120207-120729015230-phpapp02/85/Kr-touch-screen120207-1-320.jpg)
