Nomura - Asia LED Lighting

ANCHOR REPORT
Asia LED lighting

EQUITY RESEARCH
Still trapped in the dark
December 15, 2011
Stay bearish: backlighting is unprofitable and general lighting a tough market

We retain our Bearish view on the LED industry, and recommend caution in any short-term rallies triggered by positive news flow. Near term, we expect LED backlighting to remain unprofitable in 2012F in the face of continued pricing pressure from panel makers and severe LED oversupply (55% oversupply). Further out, we think general lighting will be another tough market for LED makers. The rules of the game in the LED industry have changed, with the core value of the supply chain likely to shift from LED components to LED lighting solutions. We do not recommend buying any LED makers. Key analysis in this anchor report includes: LED backlighting market looks set to peak in 2012F. Supply-demand analysis for LED industry suggests continued severe oversupply in 2012F. The actual addressable market of LED lighting for LED makers is smaller than the market expected. The LED industrys profitability during the peak LED lighting cycle will not be as high as that during the peak LED TV cycle.
Research analysts Asia Technology Anne Lee, CFA - NITB anne.lee@nomura.com +886 2 2176 9966 Regional Head of Technology James Kim - NFIK james.kim@nomura.com +852 2252 6203 Greg Kang - NFIK greg.kang@nomura.com +82 2 3783 2336 Eason Hung - NITB eason.hung@nomura.com +886 2 2176 9965 Kyoichiro Yokoyama - NSC kyoichiro.yokoyama@nomura.com +81 3 6703 1113
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Asia LED lighting

TECHNOLOGY
EQUITY RESEARCH
ANCHOR REPORT: Still trapped in the dark
December 15, 2011
Stay bearish: backlighting is unprofitable and general lighting a tough market

We are cautious of any rally, given our bearish view on fundamentals We retain our bearish view on the LED industry for both the short and the long terms. We believe that deteriorating profitability for LED backlighting will continue in 2012F and onward, and that general lighting will be another tough market for LED makers in the longer term. As such, we recommend that investors be cautious of any bear-market rally which could be triggered by a rebound in LED TV demand in 2Q12F or positive news flow on LED lighting demand. In the short term, we are bearish on backlighting applications In the short term, we estimate that the LED market for backlighting will remain unprofitable in 2012F. We estimate that the LED packaged price for backlighting will drop at least 15-20% y-y in 2012F, as LED makers will continue to face pricing pressure from downstream amid weak LED TV demand. Meanwhile, we estimate that in 2012F the LED industry will be oversupplied by 55%, resulting in low utilization at 45-50%. Lastly, we estimate the overall LED market size for backlighting will peak at USD4.2bn in 2012F. In the longer term, general lighting looks to be another tough market In the long term, we think that the general lighting market will be another tough market for LED makers. 1) The actual addressable LED market size for lighting is smaller than the market expected; we estimate that in 2015F the market size will be only 1.2 times that of our 2012F peak market for backlighting, and 2) we think that industry profitability during the peak lighting cycle will not be as high as that during the peak LED TV cycle, and that the LED lighting market will be commoditized as latecomers catch up with the technology, thus weighing down the industrys profitability. We do not recommend buying any LED names We reaffirm Reduce on Everlight, as we think its intention to have ownbrand LED lighting will cause it to lose opportunities to cooperate with lighting companies. Given our long-term bearish view on the industry, we are Neutral on Seoul Semi, LG Innotek and Epistar although valuations are close to 2008 financial-crisis lows. Our relative preference is SEMCO, given its strong commitment to the lighting business and own-brand LED lighting products. However, we maintain Neutral on SEMCO as it may spin off its LED business in 2012F and earnings in other businesses are weak.
Fig. 1: Stocks for action
Code 009150 KS 011070 KS 046890 KS 2448 TT 2393 TT Company SEMCO LGI SSC Epistar Everlight Price Target 13-Dec Price 90,000 90,000 73,100 74,000 22,000 22,000 60.0 71.0 47.8 44.0 P/E Nomura Rating FY10 FY11 FY12F NEUTRAL 12.6 25.5 26.3 NEUTRAL 7.5 nm 18.1 NEUTRAL 13.6 31.0 31.0 NEUTRAL 8.4 45.2 23.5 REDUCE 8.6 13.4 12.9 P/B ROE FY1 FY11 FY12F FY10 FY11 FY12F 2.0 2.3 2.0 18.4 8.4 8.1 1.0 1.1 1.0 16.8 (4.7) 5.7 2.2 2.1 2.0 17.9 6.8 6.6 1.1 1.1 1.1 14.0 2.5 4.8 1.3 1.3 1.2 15.6 9.6 9.5
Anchor themes We are bearish on the LED industry in both the short and long terms, as we believe that deteriorating profitability in backlighting will continue in 2012F, and because LED lighting is another tough market to address in the long term. Nomura vs consensus We are first to be bearish on LED lighting. Not all LED lighting revenue is addressable, and the packaged LED value by 2015F is only 1.2x of the backlighting peak.
Research analysts Asia Technology Anne Lee, CFA - NITB anne.lee@nomura.com +886 2 2176 9966 Regional Head of Technology James Kim - NFIK james.kim@nomura.com +852 2252 6203 Greg Kang - NFIK greg.kang@nomura.com +82 2 3783 2336 Eason Hung - NITB eason.hung@nomura.com +886 2 2176 9965 Kyoichiro Yokoyama - NSC kyoichiro.yokoyama@nomura.com +81 3 6703 1113
Source Upgrade. Source: Bloomberg, Nomura estimates
Rating: See report end for details of Nomuras rating system.
Nomura | Asia LED lighting
December 15, 2011
Contents
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Investment summary Gloomy outlook for backlighting LED lighting another tough market Supply-demand analysis Oversupply risk remains in 2012F and onward Payback period analysis Industry consolidation is necessary, in our view Earnings, valuation, and stock action SEMCO LG Innotek Seoul Semiconductor Epistar Corp Everlight Electronics Appendix A-1
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December 15, 2011
Investment summary
We retain our bearish view on the LED industry. In the short term, while demand for LED lighting seems to us to be unlikely to be ready to take off until 2013F due to high initial costs and macro uncertainties, we estimate that the LED market for backlighting will remain unprofitable in 2012F and onward due mainly to weak LED TV demand and continued pricing pressure. Moreover, we estimate that the LED industry will be oversupplied by 55% in 2012F. In the long term, we believe that the general lighting market will prove to be another tough market for LED makers. 1) The actual addressable market size of packaged LED for lighting is smaller than the market expected; we estimate that in 2015F the size of the market will be only 1.2 times our estimated peak size for packaged LED for backlighting in 2012F, and 2) we think that the industrys profitability during the peak lighting cycle will not be as high as that during the peak LED TV cycle, and that the LED lighting market will be commoditized as latecomers catch up with technology, thus weighing on the industrys profitability. As a result, we retain our negative view on LED companies and maintain our Neutral ratings on SEMCO, LGI, and Epistar, and our Reduce rating on Everlight. However, we upgrade SSC to Neutral.
Deteriorating profitability for LED backlighting to continue in 2012F and beyond

LED makers' profitability for backlighting will continue to deteriorate in 2012F, in our view, due mainly to weak LED TV demand and continued pricing pressure on LEDs. We estimate that LED penetration into LCD TVs will increase to 73% in 2012F from 45% in 2011F, indicating 79% y-y demand growth for LED TVs. However, we think that the overall shipments for LEDs will grow by only 18% y-y in 2012F due to continued improvements in technology, lowering the average number of LEDs equipped by 35% y-y, and because of the increased penetration of low-end direct-type LED TVs. Meanwhile, we think that LED prices for backlighting will drop at least 15-20% y-y in 2012F. We believe that, because of the slow demand trend and because most of the panel makers are making operating losses, TV set and panel makers are unlikely to increase set and panel prices. As such, in our view, component makers will likely face continued pricing pressure from downstream. Furthermore, we estimate that the LED industry will be significantly oversupplied by 55% in 2012F, resulting in low utilization, weak pricing power, and weak profitability. In results, we estimate LED segment operating margins of -2.8% for SEMCO, -4.5% for LGI, 5.3% for SSC, 13.2% for Epistar and 9.9% for Everlight in 2012F. Moreover, we forecast that the market size for LED backlighting will peak out at USD4.2bn in 2012F, and thus believe deteriorated profitability for LED backlighting will continue in 2012F and onward.
General lighting is also a tough market for LED makers

We believe the demand for LED lighting is unlikely to take off in 2012F, as still-high initial replacement costs will, in our view, remain a burden on individual users and investment in LED lighting products will not take off amid macro weakness. LED lighting prices are likely to need another year to reach tipping points, and we see industry standards becoming more unified by 2013F with macro headwinds likely to ease by then. However, we believe the general lighting market is also a tough market for LED makers. The LED market for lighting will not grow significantly larger than that for backlighting, in our view. We forecast that the total LED lighting market will grow 56% y-y to USD20bn in 2013F, but the packaged LED market for lighting will grow to only USD3.1bn in 2013F, vs. USD4.0bn for LED backlighting. LED lighting includes fixtures and lamp/module assembly (light source), with light source accounting for 40-50% of total value and package account, and packaged LED value around 35% of the light source value, on our estimates. As such, we think LED lighting cannot offer sizeable growth opportunity for the packaged LED market; we estimate that in 2015F the size of the
December 15, 2011
packaged LED market for lighting will grow only 1.2 times our estimated peak size for packaged LED for backlighting in 2012F. Moreover, industry profitability during the peak cycle of lighting is not as high as that of LED TVs, given the formers fragmented market, no rush to bring the products to markets (compared to IT products), and continued price cuts to stimulate demand. In our view, LED makers in the lighting market are likely to experience margin squeeze eventually, when third-tier makers catch up with technology. While we expect first-tier LED makers to enjoy a meaningful margin recovery if demand for LED lighting picks up, we believe such will likely be short-lived. As a result, we are bearish on the LED industry in the short and long terms. In our opinion, LED lighting is causing structural changes in the LED industry. We believe consolidation is necessary in this industry and see 2012F the best time to undergo such a change. In this report, we identify four directions: 1) LED makers move towards downstream lamps, fixtures, etc; 2) LED chip makers work towards horizontal integration and build direct relationships with lighting companies; 3) global lighting giants further enhance their technology and channel networks by M&As; and 4) small/mid-size lighting companies/channels cooperate with LED makers.
Oversupply is still the major downside risk

The industry may continue to face the risk of oversupply, in our view. We estimate that the lead-time for new capacity ramp-up is ~3-6months. We believe LED lighting supply from the upstream is now much more flexible than during the golden period of LED TVs during 3Q09-2Q10. The industry is currently suffering from a severe oversupply of over 50%, on our estimates, resulting in significant profit deterioration. We believe LED makers will continue to suffer low utilizations in 2012F due to significant LED capacity, slow LED TV demand and immature LED lighting demand. We believe capex discipline is necessary to prevent the oversupply condition from getting worse.
Payback period analysis commercial demand to come first followed by residential demand; street lighting to be subsidydriven
We believe payback periods are a reasonable measure than price differences to evaluate competitiveness of LED lighting, given LED lightings lower power consumption and longer life span compared to incandescents. We analyse that some commercial LED lighting (eg. MR16 used in display window) will be competitive in 2012F, as the payback period is already at around 0.6 years. For residential lighting, the payback period of LED vs. incandescent will reach our estimated 1.3 years in 2012F. However, we believe LED penetration will be slow due to competition from compact fluorescent lamp (CFL) which offers a comparative price and high luminous efficiency (the payback period of LED for CFL will be around 5.8 years by 2013F, on our estimates). We believe CFL will continue to be the major challenge for LED lighting. Lastly, we believe governments subsidy programmes are necessary to promote LED street lighting, due to the long payback period and high replacement costs. We estimate that the payback period of LED against conventional street lights will remain long at 11.9 years and 7.4 years in 2011F and 2012F respectively.
Stock action- Prefer vertically-integrated players

We are more positive on vertically-integrated LED makers with good technology in developing LED lighting including lamps, fixtures and systems, and have a good relationship with distribution channels and customers. We believe the game rule in the LED industry has changed from backlighting to general lighting, as we expect the core value of the supply chain in LED lighting market to gradually shift from LED components to LED lighting solutions. We estimate:
December 15, 2011
The market size of LED fixtures and systems will reach USD21.2bn in 2015F vs. USD4.8bn for the market size of packaged LED for lighting LED makers will eventually see a margin squeeze in the lighting market as third-tier makers catch up with technology in a market with limited growth opportunity. Meanwhile, we believe it is difficult for LED chip and package makers to move to downstream makers due to potential conflicts with existing customers. Nevertheless, we believe that investors are looking to revisit LED players. The share prices of LED makers are currently trading at or near historical low valuations, on our estimates. As such, we expect a short-term bear-market rally on: 1) a potential rebound in LED TV demand in 2Q12F; and 2) positive news flow regarding LED lighting demand. However, we remain bearish on the LED industry in the short and long terms and we would recommend investors be cautious on any short-term rally. We believe some investors continue to hold a positive view on the LED lighting market, expecting demand to rise significantly. In this report, we highlight that not all LED lighting market segments are addressable markets for LED makers and caution that LED makers will continue to face price competition. Of the stocks in our coverage, we are positive on SEMCO in view of its strong commitment to the lighting business and own-brand LED lighting products. However, we maintain our Neutral rating on SEMCO due to possibility of a spin-off of its LED business in 2012F and weak earnings contributions from other businesses. We have Neutral ratings on Seoul Semiconductor (SSC), LG Innotek (LGI) and Epistar, considering our short- and long-term bearish view on the industry. We maintain our Reduce rating on Everlight, as we think its intention in having its own-brand LED lighting is likely to cause it to lose cooperative opportunity with lighting companies. Moreover, we believe its ownbrand products lack competitiveness vs. those of leading lighting companies. SEMCO (009150 KS, Neutral): In our view, SEMCOs business momentum has deteriorated due to high revenue exposure to TV and PC-related components. We believe its business momentum will reach a bottom in 1Q12F, as the PC industry will likely face HDD supply issues in 1Q12F, negatively impacting other PC-related components and TV demand, which we believe will bottom in 1Q12F. As for the LED business, we think its business momentum will be better than peers given its intention to build own-brand lighting products, but we see low profitability inevitable in 2012F. LGI (011070 KS, Neutral): We maintain our Neutral rating on LGI, as we believe visibility of earnings momentum recovery is low in the short term due mainly to its structural weakness. While IT demand polarization of smartphones will likely continue in 2012F, we estimate its revenue exposure to TV- and PC-related components will be ~52% in 2012F, leading to continued weakness in the overall earnings trend. Moreover, we estimate the proportion of LED revenue in lighting will only be 13% in 2012F and, thus we believe its LED business profitability will continue to be under pressure. SSC (046890 KS, Upgrade to Neutral) - We upgrade our rating on SSC to Neutral from Reduce, as we believe it is trading at its fair value after a significant correction over the last one year. However, we believe its earnings momentum will remain weak in the short and long terms, in line with the industry trend. Epistar (2448 TT, Neutral): As a pure chip maker, Epistar faces serious risk-reward imbalance challenges in the lighting business, bearing heavy capex but only earning chip level revenues. It also faces oversupply risks, in our view. Although Epistar's earnings may hit a short-term trough in 4Q11-1Q12F, we expect its 2012-13F earnings to remain low, given continued oversupply and severe competition in LED lighting. We may turn more positive if Epistar is able to secure more long-term orders from LED lighting companies with easing industry over-supply. Everlight (2393 TT, Reduce): We maintain our Reduce rating on Everlight, in view of its weakening industry position in LED lighting and backlighting business. For LED lighting, Everlight's own-brand business faces direct competition from leading lighting companies, and its margins are much lower than the corporate average, dragged by low economies of scale and low-priced strategy. For backlighting, Everlight's several structural issues remain: shrinking addressable market, which is squeezed by panel makers' increased in-house production, competition from Chinese makers, and weak customer base in TV and tablet PC applications.
December 15, 2011
Fig. 2: Peer valuation

Price 13-Dec 8.78 22.22 Nomura Rating Not rated Not rated P/E FY10 FY11F FY12F 4.8 3.9 4.3 60.00 15.95 47.80 22.39 22,000 90,000 73,100 NEUTRAL Not rated REDUCE Not rated NEUTRAL NEUTRAL NEUTRAL NEUTRAL 8.4 5.2 8.6 15.7 9.7 13.6 12.6 7.5 10.2 9.0 8.0 6.2 7.1 45.2 60.6 13.4 16.7 13.0 31.0 25.5 nm 29.4 24.4 15.0 11.4 13.2 23.5 124.6 12.9 31.3 9.2 31.0 26.3 18.1 34.6 30.3 FY10 1.5 1.2 1.4 1.1 0.8 1.3 1.2 0.8 2.2 2.0 1.0 1.3 1.3 P/B FY11F FY12F 1.4 1.1 1.2 1.1 0.7 1.3 1.1 0.8 2.1 2.3 1.1 1.3 1.3 1.3 1.0 1.2 1.1 na 1.2 1.0 0.7 2.0 2.0 1.0 1.3 1.3 ROE FY10 FY11F FY12F 35.9 43.7 39.8 14.0 18.4 15.6 9.6 7.9 17.9 18.4 16.8 14.8 19.8 18.6 24.5 21.5 2.5 (0.9) 9.6 7.2 5.8 6.8 8.4 (4.7) 4.3 7.8 8.9 8.3 8.6 4.8 0.2 9.5 6.1 7.9 6.6 8.1 5.7 6.1 6.6 EPS growth (%) FY10 351.7 nm 351.7 176.2 395.3 12.1 352.7 20.0 229.7 95.4 191.0 184.0 202.7 FY11F (40.1) (37.2) (38.6) (81.5) (91.4) (35.7) (6.0) (25.8) (56.1) (50.6) nm (49.6) (47.1) FY12F (47.1) (45.6) (46.4) 92.5 (51.3) 4.2 (46.6) 41.0 0.0 (3.2) nm 5.2 (6.2)
Code AIXA GR VECO US
Company Aixtron Veeco
Equipment maker
Equipment average LED chip/package maker 2448 TT 3061 TT 2393 TT CREE US 7282 JP 046890 KS 009150 KS 011070 KS Epistar Forepi Everlight Cree Seoul Semi SEMCO LG Innotek
Toyoda Gose 1,279.00
Chip/package average Total average
Note: Upgrade. Source: Company data, Bloomberg, Nomura estimates
December 15, 2011
Gloomy outlook for backlighting

We expect LED profitability for backlighting to remain weak in 2012F. For backlighting demand, LCD TVs are the major application for LED demand as they account for 3940% of the total backlighting market value, according to our estimates. However, we note that: Despite the increased penetration from 45% in 2011F to 73% in 2012F, the overall shipment for LEDs will grow only by our estimated 18% y-y in 2012F due to continued improvement in technology, and increased penetration of low-end direct-type LED TVs. Meanwhile, LCD TV set and panel makers are suffering significant losses due to very weak LCD (and LED) TV demand, leading to continued price cuts. However, we believe TV set and panel makers are unlikely to increase prices until demand recovers. As such, we believe LED makers will continue to face pricing pressure from the downstream. We believe IT demand polarization will continue in 2012F and, thus we expect the demand for smartphones to remain strong while the demand for LCD TVs and PCs to remain weak. For 2012F, we estimate demand growth for smartphones and tablet PCs will be at 36% and 80% y-y, respectively, while that for LCD TV and PCs will be at 10% and 6% y-y, respectively. Lastly, we estimate that the LED industry will be oversupplied by 55% in 2012F on significantly overgrown capacity, and this will result in low utilizations of 45-50% in 2012F, on our numbers. Meanwhile, we forecast the tablet LED market value will grow 161% y-y to reach USD669mn in 2012F, buoyed by tablet PC demand growth and increased LED dollar content per device. However, we expect this to benefit mostly Japanese LED makers. Furthermore, we estimate the overall LED market size for backlighting will peak out at USD4.2bn in 2012F. As such, we believe deteriorating LED profitability for backlighting will continue in 2012F and onward. The LED backlighting market saw a golden period in 2010 with growth at 118% y-y. We expect the growth rate in the LED market size to slow to 11% y-y in 2011F and 9% y-y in 2012F. We believe the demand for LED lighting is unlikely to take off in 2012F, as still-high initial replacement costs will, in our view, remain a burden on individual users and investment in LED lighting products will not take off amid macro weakness. LED lighting prices are likely to need another year to reach tipping points (see our analysis regarding payback periods), and we see industry standards becoming more matured by 2013F with macro headwinds likely to ease by then. Overall, we believe 2012F will be another tough year for the LED industry.
December 15, 2011
Fig. 3: LED supply-demand and utilization (for backlighting and lighting)

(mn units, 500x500) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F
Source: DisplaySearch; IDC; Nomura estimates
Demand for backlight and lighting
Supply 2012 S-D should gradually improve from low bases.
MOCVD utilization 120% 2013 ? Depending on capex 100% 80% 60% 40% 20% 0%
Fig. 4: LED market value by backlight applications I

(USDmn) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008
Source: IDC; Nomura estimates
TV Tablet PC Monitor Notebook Handset y-y
TV accounts for 39% of the LED 117.5%
LED market for backlightings to peak 140% out in 2012F 120% 100% 80% 60% 40%
12.8%
10.9%
9.0%
20% -4.1% 0% -20%
2009
2010
2011F
2012F
2013F
Fig. 5: LED market value for backlight applications II

LED market value (USDmn) Handset Notebook Monitor Tablet PC TV LED lighting Total y-y Handset Notebook Monitor Tablet PC TV Total
Source: IDC; Nomura estimates
2008 1,350 54 450 1,854 2008
2009 990 352 38 203 650 2,233 2009 -27% 551%
2010 1,176 468 160 98 1,544 857 4,302 2010 19% 33% 318% 661% 117.5%
2011F 1,089 457 365 256 1,653 1,376 5,198 2011F -7% -2% 129% 163% 7% 10.9%
2012F 984 406 470 669 1,638 1,874 6,040 2012F -10% -11% 29% 161% -1% 9.0%
2013F 975 374 442 624 1,580 3,132 7,127 2013F -1% -8% -6% -7% -4% -4.1%
12.8%
December 15, 2011
Fig. 6: IT product shipment forecasts

2008 LCD TV PC (Desktop + NB) Feature phone Smartphone Tablet PC Shipment (mn) y-y Shipment (mn) y-y Shipment (mn) y-y Shipment (mn) y-y Shipment (mn) y-y
Source: Displaysearch, IDC, Nomura estimates
2009 146 37% 305 4% 1032 -5% 172 24%
2010 192 32% 347 14% 1300 26% 297 72% 18
2011F 202 5% 358 3% 1356 4% 478 61% 55 201%
2012F 223 10% 379 6% 1378 2% 649 36% 100 80%
106 34% 293 11% 1083 5% 139 14%
Fig. 7: IT product shipment y-y growth

250% 200% 150% 100% 50% 0% -50% 2008 2009 2010 2011F
LCD TV PC (Desktop + NB) Feature phone Smartphone Tablet PC Strong demand growth for new device
Weak demand growth to be continued 2012F
Low cost direct-type LED TVs to stimulate LED penetration; but not helpful to LED market values and profitability
TV vendors have been launching new-feature products such as LED TVs, 3D TVs, connected TVs, smart TVs, etc. over the past two years, trying to boost revenues by introducing premium products into the matured industry. However, given current slowing macro conditions, we believe consumers are less likely to pay extra money to buy premium products and prefer to purchase new devices including smartphones and tablet PCs. When it comes to buying TVs, we believe affordability plays a more important role than new features, such as Internet and 3D functions, in consumers buying process. As such, LED penetration in LCD TVs has continued to disappoint, as mainstream edgetype LED TVs still have a 20-30% price premium over traditional CCFL TVs. We forecast the penetration rate of LED TV will reach only 45% in 2011F vs market expectations of ~50-60% at the beginning of 2011F. To meet consumer needs for lower-cost products amid current macro uncertainties, we believe TV vendors will continue to lower LED TV retail prices and start to launch lowerspec LED TVs in 2012F. Low-cost direct-type LED TVs, which adopt the current CCFL mechanical structure, are an alternative, as they use fewer LEDs (30-50 LEDs in 32" TVs, vs edge-type 80-100) and diffuser plates, eliminating expensive light guide plates and BEF film to save costs. We think this is slightly positive for LED makers, as the LED dollar content per TV is similar to that for edge-type LED TVs, given higher spec and larger-size LEDs used (ASP per LED is 3-4x higher, although # of LEDs is only about one-third, according to our channel checks).
December 15, 2011
However, as we estimate the LED industry will be severely oversupplied at 55% in 2012F and competition will intensify further, we do not expect the low-cost direct-type LED TVs to improve LED makers' profitability.
Fig. 8: Backlight comparison
Low-cost direct-type LED Thickness LED number (32" TV) Brightness (nits) LED chip reflective coating Backlight cost Light guide plate LED packaging Diffuser plate Thick 30-50 300 Yes CCFL +15-20% No Small (#3528, #3228) High efficiency Direct CCFL Thick No 350 No CCFL No No Normal Edge LED Thin 70-90 250-350 No CCFL +50-70% Yes Big (#5630, #6030) No
Fig. 9: Fewer LEDs used in the low-cost direct-type LED TV

Model Brightness 400-450 nits LED 350-400 nits 300-350 nits 300-350 nits
Source: LEDinside
Type Edge Edge Edge Direct
32" >120 80-100 60-70 30-50
42" >160 120-140 100-110 40-60
Source: Displaysearch
Tablet is a growing segment in 2012F, but mostly benefiting Japanese makers

In our observation, tablet is a key growth application in 2012F. We estimate the tablet LED market value will grow 161% y-y to reach USD669mn in 2012F, driven by increased LED dollar content per device and strong tablet PC growth. For high-end tablet PCs, to achieve better display quality, we believe the makers will likely double the number of LEDs per device in 2012F. However, given the requirements for high quality and IP-free tablet, tablet-use LEDs are mostly provided by Japan LED makers, such as Toyoda Gosei and Nichia. Consequently, we believe the trend will benefit mostly Japanese makers.
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December 15, 2011
LED lighting - another tough market

We are bearish on the LED lighting market in the short and long terms. We believe LED lighting demand will remain weak in 2012F due to still-high replacement costs and macro weakness. For the long term, we believe: 1) the LED market size for lighting will not grow significantly larger than the LED backlighting market; we estimate that in 2015F the market size will be only 1.2 times that of our 2012F peak market for backlighting; and 2) we think that industry profitability during the peak lighting cycle will not be as high as that during the peak LED TV cycle, given the formers fragmented market, no rush time-tomarket (compared to IT products), and continued price cuts to stimulate demand. We also expect LED makers to eventually witness a margin squeeze in the lighting market as third-tier makers catch up with technology.
LED lighting demand to take off from 2013F

We forecast that the LED lighting market will grow from USD7.5bn in 2011F to USD35.4bn in 2015F. General lighting is a big market with a market size of USD75bn in 2011F, with LED lighting accounting for 10% of the market in 2011F, on our numbers. We believe LED penetration in general lighting will grow to 36% in 2015F, in view of its: 1) lesser power consumption 2) longer life span and 3) less hazardous to environment compared to fluorescent lamps. Japan and China are currently the fastest-growing markets for LED lighting, according to our estimates. LED bulb (residential and commercial) demand in Japan has grown dramatically after the Tohoku earthquake. We also estimate that China is the biggest market for LED streetlights in 2011F, thanks to the government policy to save energy. Nevertheless, LED lighting is still facing a number of issues that need to be addressed before we see real penetration, in our view. Price: We believe payback periods are a more reasonable measure than price differences to evaluate competitiveness of LED lighting and we estimate the payback period will be shortened to less than two years in the residential and commercial areas from the current two years in incandescent replacement in residential areas. However, high replacement costs are a large burden on individual users. We expect LED lighting prices to fall by 30% y-y in each of 2012F and 2013F to stimulate demand Industry standards: Over the years, consumers have difficulties distinguishing the quality of LED light bulbs due to lack of a unified industry standard, which has caused a great variety of specifications and reduced consumers' willingness to purchase LED lighting. Government subsidies: Due to high fixture costs, we believe government programmes are necessary to promote LED lighting in industrial areas. However, we think subsidies given will not be significant in 2012F due to global macro headwinds. In our view, we believe LED lighting demand will be ready to take-off from 2013F, as: 1) we expect the payback period to fall significantly to shorter than one year in the residential (except for CFL) and commercial areas by then, 2) we expect macro conditions to stabilize by 2013F; and 3) the industry standards for LED light engines and luminaries get more matured.
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December 15, 2011
Fig. 10: General lighting market overview (USD)

($mn) 120,000 100,000 80,000 6% 60,000 40,000 20,000 0 2010 2011F 2012F 2013F 2014F 2015F
Source: Mckinsey; Nomura estimates
Incandescent
The number represents share of LED
Halogen
HID
LFL
CFL
LED
LED lighting demand is ready to pick up from 2013F
Fig. 11: LED lighting market growing fast (USD) ($mn) LED lighting market value y-y 40,000
35,000 30,000 69% 53% 35% 28% 76%
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
10%
14%
22%
29%
36%
25,000 20,000 15,000 10,000 5,000 0 2010
2011F 2012F 2013F 2014F 2015F
Source: Nomura estimates; Mckinsey
Fig. 12: Market share of LED bulbs in 2011F

ROW, 10%
Fig. 13: Market share of LED streetlight in 2011F

ROW, 4% N.A,, 16% Japan, 15%
N.A,, 10%
EU, 10% Japan, 65% China, 6%
EU, 10%
China, 55%
Source: DisplaySearch, Nomura estimates Source: Nomura estimates
Fig. 14: Overview of payback period analysis

Residential Incandescent Payback (current) Payback (2H12) Payback (3H12)
Source: Nomura research
Commercial CFL >20 yrs 18.7 yrs 6.6 yrs LFL 4.1 yrs 2.1 yrs 0.5 yrs Halogen 0.4 yrs 0.3 yrs 0.2 yrs
Industrial Streetlight 11.9 yrs 7.4 yrs 4.9 yrs
2.0 yrs 1.3 yrs 0.5 yrs
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December 15, 2011
Fig. 15: Bottlenecks of LED lighting- standard, price, and return

Tax sanctions
Enforce mentof standards
Government
Technology subsidies (topdown)
Definition of standards
Capacity incentives (bottom up)
Incan descent bans
LEDlighting
Produc tivity Ecological awareness
Product quality (lm/w) Returnon Invest ment Best pratice migation Product price (lm/$) Capital invest ment Product availability
Energy savings Cost/ benefit conflict Product quality Product price
Source: Aixtron
Addressable LED lighting market is not as big as expected

However, the packaged LED market value for lighting is only 15-18% of the total LED lighting market, on our estimates. LED lighting include fixtures and lamp/module assembly (light sources), with the light sources accounting for 40-50% of the total value and package account, and the packaged LED value accounting for around 35% of the light source value. Therefore, we estimate that the actual addressable LED market for lighting will grow to only USD4.8bn in 2015F, 1.2 times that of our 2012F peak market for backlighting. We do not expect LED lighting to provide significant growth opportunities for LED makers. Meanwhile, LED lighting fixture and system controls are territories of traditional lighting vendors, which have channels, design experience, and various light sources to provide total solutions to end users. We think it is difficult for LED makers to address the fixture and system control market, given lack of economies of scale, experience and technology, and conflicts with existing lighting makers. Moreover, LED lighting fixtures and system controls will become more valuable alongside increased penetration in general lighting, in our view. We estimate the proportion of fixtures and system controls in total LED lighting sales will rise from 52% in 2011F to 60% in 2015F, shrinking the value for LED chips, packages and lamp/module. Overall, we estimate the revenue growth of LED light sources (41% CAGR over 20112015F) will be slower than that of the LED lighting fixture and system control system (53% CAGR over 2011-2015F), and the real value of LED lighting will gradually shift toward fixtures and system designs.
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December 15, 2011
Fig. 16: A breakdown of LED lighting market (USD)

($mn) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2010 2011F 2012F 2013F 2014F 2015F
Source: Nomura estimates; Mckinsey
Market value of LED lamp/module Market value of LED lighting fixture
($mn) 40,000 35,000 30,000
LED lighting fixture, system control LED module/lamp value-add LED packaging value-add Lighting LED chip LED lighting
Market value growth for LED fixtures is faster than market value growth for LED modules
53%
Breaking down
25,000 20,000 15,000 10,000 5,000 0

2010 2011F 2012F 2013F 2014F 2015F
Module/lamps Package
41% CAGR
Chip
Fig. 17: How big is the LED lighting market (vs peak market value for backlighting in 2012F) in 2015F? (USD)
($mn) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2012F
Source: Nomura estimates
Total LED lighting market value $35.4bn
8.4x
LED lighting fixture,control syetem..
LED market value for backlighting $4.2bn
3.4x 1.2x LED module/ lamp value-adds Packaged LED 2015F LED lighting source
Fig. 18: LED lighting market breakdown (%) (2011F)

Lighting LED chip 8% LED packaging value-add 10%
Fig. 19: LED lighting market breakdown (%) (2015F)

Lighting LED chip 6% LED packaging value-add 8%
LED lighting fixture, system control 52%
LED module/lamp value-add 30%
LED lighting fixture, system control 60%

LED module/lamp value-add 26%
We estimate the LED market size for lighting will exceed that of total backlight applications by 2014F, and to be 1.2 times in 2015F. In 2010, backlighting saw an impressive growth rate of 118% y-y, thanks to LED TV demand. However, we expect the growth rate for LED backlighting to drop significantly in 2011F and eventually drop to negative territory from 2013F, suggesting that the LED market for backlighting will peak out in 2012F. Meanwhile, we expect relatively stable growth for the LED lighting market. We estimate the packaged LED market for lighting will grow 67% y-y in 2013F on
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December 15, 2011
increased demand for LED lighting. We estimate the LED industry for lighting and backlighting will witness a 13% CAGR over 2011F-2015F.
Fig. 20: Total value of packaged LED for both backlighting and lighting
($mn) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 20.5% 20.8% 16.2% 18.0% 11.9% LED lighting LED backlighting y-y (Overall) y-y (backlighting) y-y (lighting) 92.6% Explosive growth thanks to LED TV demand The overall market to show gradual growth at 13% CAGR over 2011-2015F 140% 120% 100% 80% 60% 40% 20% 7.9% 0% -20%
Source: Nomura estimates; Mckinsey; IDC
Fig. 21: Market size comparison of packaged LEDs: lighting vs backlighting

($mn) 6,000 5,000
106%
Fig. 22: Market size comparison of LED chips: lighting vs backlighting

($mn )
Lighting LED chips Backlighting LED chips Lighting/backlighting %
118%
Packaged LED for lighting Packaged LED for backlighting Lighitng/backlighting %
Crossoverin2014F
4,000 3,000 2,000
36% 45% 25% 78%
132%
1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
6,000 5,000 4,000 3,000 2,000
1.4 1.2 1 0.8 0.6
95% 78%
36%
45%
0.4 0.2 0
1,000 0 2010
1,000 0 2010
25%
2011F
2012F
2013F
2014F
2015F
2011F
2012F
2013F
2014F
2015F
"Golden period" to come in 2013F, as macro conditions, prices, and industry standards will be more ready by then
We think LED lighting will be ready to take off in 2013F, with LED lighting market revenue expanding 76% y-y to USD20.4bn in 2013F, reflecting our view of a stabilising macro economy and LED lighting prices hitting tipping points by late-2012F. For example, we expect prices of a 60W-replacement LED light bulb to drop to USD10-15 by late-2012/early-2013 (only 3-4 times the price of a CFL light bulb), from current levels of USD25-35. At USD10-15, we believe the prices are low enough to trigger demand. We think the industry standards for LED lighting will become more matured and stringent in 2013F, in the way of a more comprehensive interface endorsement label (eg. Energy Star) and standardization consortium (eg. Zhaga Consortium). Over the past few years, the lack of a unified industry standard has made it difficult for consumers to distinguish the quality of LED light bulbs which has many varieties of specifications, reducing their willingness to purchase LED light bulbs. With no unified industry standard, LED lighting
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December 15, 2011
vendors also face production challenges such as low economies of scale, inventory control, and short product cycles. However, we see the industry standards for LED light engines and luminaires getting more matured, which will help to stimulate LED lighting penetration by fostering competition, preventing fragmentation, and reducing the development costs of lighting applications. For example, nine lighting giants such as Philips, Osram, Panasonic, and Toshiba established a "Zhaga" consortium in Feb 2010, aiming to create standardized interfaces for LED light engines to secure a stable design platform for luminaire makers and designers. As of today, the total number of members has reached 162. Also, governments are pushing the standardized endorsement label very hard for LED lighting products. For example, the US Department of Energy (DoE) and Environmental Protection Agency (EPA) established an Energy Star standard for integral LED lamps in Aug 2010, and it will set up a new Energy Star luminaires standard with effect from Apr 2012. Although the Energy Star is not a compulsory international standard now, some states in the US have started to ban unqualified LED lighting products from product launches. Most LED makers have slowed down capacity expansion since 2H11, and we believe limited capex will be spent in 1Q-3Q12F due to low utilization rates and the gloomy macro environment. Therefore, we expect only a gradual recovery in utilization rates and profitability in late-2012F/early-2013, which we estimate will likely last into 2013F, when the LED lighting demand is expected to take off. Consequently, we think LED makers will enjoy improved profitability in 2013F (we call it the "golden period").
Fig. 23: The timetable for Energy Star and Zhaga Consortium
Nine lighting giant companies announced to establish "Zhaga" Consortium for the standardization of LED light engine
Number of Zhaga members hits 25
Final Energy Star Standard for integral LED lamps effecitve
Number of Zhaga members hits 162
New Energy Star Luminaires V1.1 for the standardization of luminaires effective
2010.2
2010.3
2010.8
2011.11
2012.4
Source: Nomura, Zhaga website
Profitability in LED lighting cycle may not be as high as that in the LED TV cycle
However, we believe that profitability of LED makers during the peak LED lighting cycle will not be as high as that in the peak LED TV cycle. Gradual demand growth: We expect the demand for LED lighting to grow gradually compared to significant growth seen for LED backlighting. Compared to IT products, the general lighting market is currently fragmented by region and country as formfactors, specifications and lighting type are not determined by end users only but by LED vendors and local regulations. As such, LED makers need to meet many specifications, increased overhead costs, and have to build relationships with channel distributors. In addition, there is no rush to put LED lighting products to the markets, as there are many alternative light sources and users are unlikely to put a priority on transitioning light source.
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December 15, 2011
Already overgrown capacity: LED supply in the upstream has increased during the golden period in the LED TV cycle and the industry is currently suffering an oversupply condition of over 50%. Alongside the gradual transitioning to LED lighting from conventional lighting, we believe the LED industry will not experience supply shortages. Therefore, for LED makers (chip, packaging levels), without significant strong growth, we think the high margins experienced by LED TVs during the golden period is unlikely to be repeated in the lighting cycle. Increased competition again: Furthermore, we believe LED makers will eventually see a margin squeeze in the lighting market as third-tier makers catch up with technology. Price cuts: We estimate prices for LED lighting will be cut by another 30% in 2012F to stimulate demand. We also estimate prices for packaged LED (chip and package) will drop 30-35% y-y in 2012F. To some extent, we believe LED makers will enjoy improved margins from LED lighting demand growth, but a golden period in the LED lighting cycle is likely to be short-lived, about 4-5 quarters. We also expect LED makers to face price competition again. The golden period of LED TVs for LED makers was from 3Q09 to 2Q10. During that period, LED demand grew 193% and the penetration rate increased from 2% to 18%, causing severe shortages in the upstream supply. In particular, MOCVD equipment and sapphire wafers were key bottlenecks in the supply chain. However, both bottlenecks were resolved within one year. Since then, the supply of MOCVD equipment and sapphire wafer has increased tremendously. For example, Veeco rapidly increased its MOCVD equipment capacity from 25-30 tools per quarter in 3Q09 to more than 100 tools (almost 4x) in 3Q10. In our opinion, shortages happen only when the time to bring products to markets is important and when supply fails to catch up with demand in the short run. In our view, shortages are more likely to happen in IT products, for which consumers are willing to spend before the supply picks up. In contrast, we think a severe shortage is less likely to happen in a lighting market, as there are many alternative light sources/solutions. If LED supply, performance, or standards/regulations are not ready on time, demand can be pushed out a few quarters later until everything is ready.
Fig. 24: Packaged LED demand growth for backlighting
(mn) 30,000 25,000 20,000 15,000 10,000 5,000 0 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11F1Q12F3Q12F1Q13F3Q13F
Backlighting
Lighting
LED demand for lighting picked up significantly
LED demand for backlighting picked up significantly
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December 15, 2011
Fig. 25: Sales growth of LED makers
Fig. 26: OP margin of LED makers
(USDmn)
600 500 400 300 200 100 0
Golden period of LED TV cycle
(%)
Cree Epistar Everlight LGI SSC S-LED
40 30 20 10 0 (10) (20) (30)

1Q08 3Q08
Golden period of LED TV cycle Cree Epistar Everlight S-LED LGI SSC
1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
Source: Company data, Bloomberg
1Q13
Fig. 27: MOCVD shipment

(Unit) 250 200 150 100 50 0 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11
Source: Company data
Fig. 28: Sapphire wafer price trend and forecast

MOCVD demand shrank sharply in 2011
($) 35 30 Price for sapphire wafer increased significantly on short supply
Aixtron
Veeco
Price stablizing as shortage in supply resolved
Supply capability of MOCVD has increased significantly in LED TV cycle
25 20 15 10 5 0 2004 2006
2008
2H09
2Q10
4Q10
2Q11 4Q11E
Source: Yole Development, Nomura estimates
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December 15, 2011
Supply-demand analysis Oversupply risk remains in 2012F and onward

We estimate that the LED industry will be oversupplied by 55% in 2011F, resulting in significant profit deterioration. We believe LED makers will continue to suffer from low utilizations until 2012F due to overgrown LED capacity and weak LED demand. More importantly, we caution that a recovery in utilization rates and rising LED lighting demand will likely trigger another capex cycle in the LED industry in 2013F. Considering 3-6 month lead time for MOCVD tools and 3-6 month ramp-up time, overcapacity risk may surface again if LED makers are not capex disciplined, in our view. Although it is still too early to conclude, our worry is not without cause, as we have seen how DRAM and TFT industries evolved amid Windows Vista and TV replacement expectations. Further, the LED industry is much more fragmented than DRAM and TFTs, which means the LED industry is more likely to be over-invested, if every player overestimates its opportunities. 2012F supply: capex slows down, but has not totally halted On the supply side, we note that most LED makers have slowed down on their capex investments, and decided to put on hold their capex decisions until at least 2Q-3Q12F. However, we estimate that LED supply will still grow by 18% y-y in 2012F, as (1) many LED makers are focusing on upgrading their processes toward more 4" and 6" to increase outputs, (2) several Taiwan and Korean LED makers have installed/ordered new MOCVD tools in 2H11F, but have yet to fully ramp up the tools, (3) Japan LED makers still see some capex expansion due to their long-term commitments to LED lighting and strong tablet growth opportunity in 2012F, and (4) we expect some capacity in China to come onstream. 2013F - capex discipline is needed to prevent oversupply deterioration In 2013F, we will likely see recovered utilization rates and profitability in LED makers, with more positive signs of LED lighting demand taking off. This may trigger another round of capex investments. Although it is still too early to judge the supply-demand situation for 2013F, we think capex discipline is needed in the LED industry to prevent the oversupply condition from deteriorating.
Fig. 29: LED supply-demand and utilization (for backlighting and lighting) (mn units, 500x500) Demand for backlight and lighting Supply
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F
Source: DisplaySearch; Nomura estimates
MOCVD utilization 120%

2013 ? Depending on capex
2012 S-D should gradually improve from
100% 80% 60% 40% 20% 0%
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December 15, 2011
Idle LED capacity in China could eventually be a threat for global players in China market
China is one of the largest markets for general lighting including LED lamps, due to its large population and fast-growing economy. Meanwhile, we estimate China will have 700-plus MOCVD installations by 2011F (similar scale with Taiwan and Koreas) vs. 261 in 2010. We expect this to be driven by government subsidy programmes. However, due to lack of technology and engineers, many of the machines are not running yet. Nevertheless, we believe this idle capacity will gradually come onstream and may eventually become a threat to global players in the Chinese market, as 1) the Chinese government may have higher incentives to subside products produced locally, and 2) Chinese LED makers are located closer to the local supply chain.
Fig. 30: MOCVD installation by country
2010 1,000 900 800 700 600 500 400 300 200 100 0 China Japan Korea Taiwan Other
Source: Displaysearch, Company data, Nomura estimates
2011F
2012F
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December 15, 2011
Payback period analysis

While prices are much higher, LED lighting has a lower cost of ownership thanks to lower power consumption and longer life span compared to incandescents. Therefore, we find it reasonable to use payback periods, which calculate how long it will take the savings from a lower cost of ownership to cover initial cost differences, rather than price differences to gauge the price competitiveness of LED lighting. The general lighting market comprises largely of three segments: residential, commercial (eg, offices, shops) and industrial (eg, factories, street lighting). For our payback period analyses, we use the mainstream light sources for each segment: incandescent and CFL for residential, LFL and halogen for commercial, and HID for industrial. According to our calculations, some commercial LED lighting (eg, MR16 used in display windows) will be competitive in 2012F, given the payback period is already at around 0.6 years. For residential lighting, we expect the payback period for LED vs incadescent to reach 1.3 years in 2012F. However, LED penetration will likely be slow due to competition from CFL, which offers a comparative price and high luminous efficiency (we estimate the payback period of LED for CFL will be around 5.8 years by 2013F). We believe CFL will continue to be the major challenge for LED lighting. Lastly, we believe a government subsidy programme is necessary to promote LED street lighting, given the long payback period and high replacement cost. We estimate the payback period of LED vs conventional street lighting will still be very long at 11.9 years for 2011F and 7.4 years for 2012F. (Note: in our payback period analysis, our electricity price assumption is based on the electricity price in the US.)
Fig. 31: General lighting market by segment

($mn) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2010
Source: Mckinsey
Fig. 32: M/S of light source by unit

CFL 17% LED 1%
Residential
Commercial
40% 41%
42% 32%
41% 34% 34%
35%
21% 21% 20%
20%
LFL 14% HID 2% Halogen 7%

Source: Mckinsey
Incandescent 59%
2011F
2012F
2013F
Residential: consumers more sensitive to initial cost than payback period

Residential lighting accounts for 40-41% of the general lighting market and the most widely used lighting sources are incandescent bulbs (especially in Europe and the US), and CFLs (especially in Asia). Incandescent bulbs offer high CRI (colour rendering index, measuring how well a light source makes the colour of an object appear to human eyes), which is the main reason for high usage, despite being very inefficient. However, many regions plan to ban incandescent bulbs and we believe this will enhance demand for LED lighting, which not only has a lower cost of ownership but also offers light quality with high CRI ratings.
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December 15, 2011
We believe individual consumers are more sensitive to price and are less tolerant of a large initial investment. According to a Mckinsey survey, the purchase price is the most important criteria in deciding on the type of light source for residential use, followed by light quality and life cycle costs. Therefore, a high LED replacement cost will remain a burden on individual consumers, and potentially impede a demand pick-up in the residential lighting market. Incandescent bulbs (60W): payback period to fall to inflection point by end-2012F With our assumption of a 30% y-y price drop and a 15% y-y luminous efficiency improvement for LED bulbs, we expect LED bulbs to reach a price level that is competitive with incandescent bulbs in 2013F. Our 30% y-y price drop assumption is derived from the SSL manufacturing roadmap from the US Department of Energy. According to Mckinsey's Global Lighting Professionals & Consumer Survey, consumers will choose LED over traditional lighting when the payback period falls below two years on average. Based on our payback period model, we estimate the payback period for 60W incandescent bulbs will drop to 1.3 years and 0.5 years in 2012F and 2013F respectively, which seems to be attractive to consumers, in our view. However, a 60Wequivalent LED bulb price will still be 14 times higher than an incandescent bulb in 2012F, and it should be a large burden on individual consumers to replace cheap conventional bulbs, delaying demand pick in the residential lighting market. We estimate a 60W-equivalent LED bulb price will fall to 10 times higher than an incandescent bulb in 2013F, within the tipping point in the range of 9-12x suggested by Aixtron.
Fig. 33: Solid-state Lighting Manufacturing Roadmap 2011
60 40 20 0 2010 2012 2015 2020 16 10 50 -28% p.a. -13% p.a. OEM lamp price 5
20 15 10 5 0
18
-28% p.a. 8 2 -15% p.a. 1 2020 Package price- Warm color
2010 15 10 5 0 2010 13
2012
2015
-28% p.a. 6 2 2012 2015 -13% p.a. 1 2020 Package price- Cool color
Source: US Department of Energy, Mckinsey
CFL: a major challenge for LED bulbs in the residential area Meanwhile, we believe that CFL is the major challenge for LED bulbs in the residential segment, offering comparative prices at 10-15% of LED lamps and luminous efficiency of ~60lm/, as high as LED lamps. Therefore, we believe it will take years to see LED bulbs replace CFLs in terms of payback period. However, LED may be more preferable in developed markets given CFLs have a low CRI rating and contain hazardous mercury.
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December 15, 2011
Fig. 34: Assumption for residential lighting

Residential Incandescent Electricity cost ($/kWh) Watt Lumens Life span (hr) Luminaire cost Lm/W Cost ($) Electricity cost Lamp replacement cost Total annual cost Payback Assumption Electricity cost growth rate Discount rate
Florescent 0.1203 15 950 8,000 4 63
LED 0.1203 12 800 50,000 28 65
0.1203 60 900 1,000 1 15
15.8 3.1 18.9 2 yrs
4.0 1.0 4.9 >20 yrs
3.2 1.2 4.5
2% 4%
Fig. 35: Payback analysis for incandescent (60W) in residential applications

($) 250
Incandescent LED_2011
Fig. 36: Payback analysis for CFL in residential applications

($) 120 100 80
CFL
LED
200
150
60
100
40
2.0 yrs
50
20 0
Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9 Yr10 Yr11 Yr12 Yr13 Yr14 Yr15 Yr16 Yr17 Yr18 Yr19
Yr0
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
Yr9
Yr10
Note: Based on prices in 2011 Source: Nomura research
Fig. 37: The tipping point of LED lighting

Stores Average US Average Japan Average EU Average Korea Average Taiwan Tipping point
Source: Aixtron
Incandescent 1.2 1.6 1.7 0.9 1.7 1.2
CFL 3.5 11 7.1 4.5 4.3 3.5
LED 39 20 58 17 24 $15-20
LED vs Incandescent 32.9x 12.5x 33.9x 18.0x 13.9x 9-12x
LED vs CFL 11.2x 1.8x 8.1x 3.7x 5.6x 3-4x
Yr20
23
December 15, 2011
Fig. 38: Government regulations to ban incandescent lights

Country China Description The government will forbid selling and importing regular incandescent lights with luminous efficacies of 100W and higher, 60W and higher, 15W and higher starting from the end of 2012, the end of 2014, and 2016, respectively. Also, the government has forbidden manufacturing, selling and importing halogen lamps with luminous efficacies lower than the benchmark. The government plans to replace 400 million incandescent light bulbs with energy-saving lights by the end of 2012. It started forbidding the use of 100W incandescent lights (type C) since 2009; it started forbidding the use of 65W incandescent light bulbs since 2010 and had forbidden selling 60W incandescent light bulbs since September, 2011; it will forbid selling 40W and 25W incandescent light bulbs since September, 2012 and only light bulbs with luminous efficacies higher than that of type D light bulb are allowed to be sold. European Union plans to fully replace incandescent light bulbs by 2015 and only light bulbs with luminous efficacies higher than that of type B light bulb are allowed to be sold by 2016. Population (mn) 1348
India European
1207 329.94
U.S. Brazil Japan Philippines U.K. South Korea Canada Malaysia Australia Portugal Ireland
The government will completely replace incandescent lights from 2012 to 2014. The government has forbidden the use of incandescent lights since January, 2010. The government wi l l forbid the use of incandescent lights starting from 2012. The government forbade the use of incandescent The government has forbidden the use of incandescent lights since 2011 The government will forbid the use of incandescent lights starting from 2013. The government will forbid selling incandescent lights starting from 2012. The government will forbid manufacturing, importing and selling incandescent lights starting from January, 2014. It has forbidden importing and selling incandescent lights from 2008 to 2009. The government has increased the tax of imported incandescent lights by EUR 0.5. The government has forbidden selling incandescent lights with low luminous efficacies since 2009.
312.891 194.933 127.92 95.834 62.644 49.006 34.384 29.219 22.504 10.658 4.581
Source: LED inside, Nomura research
Commercial lighting: better upside for LED replacement

The commercial lighting market accounts for around 34-35% of the general lighting market and LFLs (long fluorescent lamps) are the mostly widely used with a 60% market share in the commercial segment. Given the competitive total cost of ownership resulting from long daily usage, we expect LED penetration here will grow faster than in the residential market. In particular, we think meaningful replacement will be seen in display windows using downlights (eg, MR16), given the payback period for halogen is already less than a year at 0.6 years. In our view, compared to LFLs, LED lighting will also become attractive as we estimate the payback period will drop to 2.1 years in 2012F and 0.5 years in 2013F, from 4.1 years in 2011F, given our assumption of a 30% y-y price drop and 15% y-y luminous efficiency improvement.
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December 15, 2011
Fig. 39: Assumption for commercial lighting

Commercial (LFL) LFL Electricity cost ($/kWh) Watt Lumens Life span (hr) Luminaire cost Lm/W Ballast cost Ballast lifespan Installation cost Cost ($) Electricity cost Lamp replacement cost Total annual cost Payback
LED (tube) 0.1197 25 1,650 50,000 57 65
Halogen 0.1197 50 750 3,000 4 15
LED (MR16) 0.1197 4 160 50,000 25 40
0.1197 50 3,100 20,000 4 62 12 25,000 5
32.8 1.9 34.7 4.1 yrs
16.6 2.5 19.1 0.6 yrs
32.8 2.9 35.7
2.6 1.1 3.7
Fig. 40: Payback analysis for LFL in commercial area

($) 350 300 250 200 150 100 50 0
Yr0 Yr1 Yr2 Yr3 Yr4 Yr5 Yr6 Yr7 Yr8 Yr9
4.1 yrs
Fig. 41: Payback analysis for halogen in commercial area

($) Halogen LED
LFL
LED
350 300 250 200 150 100 50 0

0.6 yrs
Yr-0
Yr-1
Yr-2
Yr-3
Yr-4
Yr-5
Yr-6
Yr-7
Yr-8
Fig. 42: Commercial LED lighting market size

($mn) 30,000 25,000 20,000 15,000 10,000 5,000 0 2010
Source: Mckinsey
Incandescent
Halogen
HID
LFL
CFL
LED
2011F
2012F
Yr-9
25
December 15, 2011
Streetlight The industrial lighting market accounts for around 20% of the general lighting market and HIDs (High Intensity Discharge lamp) are mostly widely used. There are various types of HID lamps, depending on areas of use. Here, we conduct a payback period analysis for street lighting, as it can be easily and commonly replaced. We believe government programmes to promote LED lamps for industrial usage are necessary due to LED lightings high payback period and high replacement costs. We estimate the payback period of LED against conventional streetlight will be very long at 11.9 years and 7.4 years in 2011F and 2012F, respectively.
Fig. 43: Assumption for street lighting
Street light Streetlight Electricity cost ($/kWh) Watt Lumens Life span (hr) Luminaire cost Lm/W Fixture (incl. Luminaire) Ballast + Igniter cost Ballast lifespan Installation cost Cost ($) Electricity cost Lamp replacement cost Maintenance cost Total annual cost Payback Assumption Electricity cost growth rate Discount rate Inflation
Street light LED 0.0672 150 8,400 50,000 38 56 1,034
0.0672 250 11,250 8,000 70 45
12 40,000 50 50
74 26 55 155 11.9 yrs
44 8 40 92
2% 4% 3%
Fig. 44: Payback analysis for street lighting

($) 3,000 2,500 2,000 1,500 1,000 500 0
11.9 yrs
HID
LED
Yr0
Yr1
Yr2
Yr3
Yr4
Yr5
Yr6
Yr7
Yr8
Yr9
Yr10
Yr11
Yr12
Yr13
Yr14
Yr15
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December 15, 2011
Industry consolidation is necessary, in our view

Four directions of integration We expect increased industry activities on consolidation and/or business integration to happen in the next few years. We identify four potential directions: (1) For LED makers, we see strong incentives for them to move downstream to light lamps/ engines/ modules: 1) to amplify revenue and profit, and 2) to build relationships with lighting companies and local channels. Some LED makers, such as Samsung and Everlight, are trying to build own branding for LED lighting products in order to control end customers/channels. (2) However, we think the trend is not positive for large-size LED chip makers, such as Epistar, as it will be difficult for them to work towards vertical integration into downstream, given the conflict of interest with packaging customers. An alternative way to secure downstream opportunities for chip makers, in our view, is to adopt horizontal consolidation, build direct communications with lighting companies, and then outsource LED packaging and module assembly to packaging partners. However, in our view, supply chain management will be less efficient than vertically-integrated LED makers, and chip makers cannot enjoy inflated ASP and profits in packages and/or lamp levels, which means heavy capex and low returns. (3) Global lighting giants, such as Philips and Osram, are vertically integrated from chips to fixture/systems. Given their strong patents and technologies in LEDs, their M&A activities in recent years have focused on lighting designs, system controls, and local/specialized channels for different lighting fields, eg commercial, medical, and street lighting. (4) We see rising awareness of regional/local small/mid-size lighting companies in LED lighting recently. As these smaller lighting companies are not familiar with LED lighting designs, many of them seek cooperation with LED packaging makers for light bulb/module assembly in this initial stage. However, we think once they are more familiar with LED features, they may want to move upward to lamp assembly and packaging businesses in order to save costs. We think 2012F is the best period for consolidation. As most LED makers will likely continue to suffer poor profitability and low utilization rates in 2012F, M&As or strategic investments will be easier to go through during a downturn, in our view. Lighting companies, in the early stage of LED lighting, will need help from LED makers.
Fig. 45: Directions of industry consolidation/ integration
Integration in LED chips Lighting companies moving into upstream
LED packaging/chip makers moving into downstream Acquiring system control design technology, or local channels
LED packaging value-add, 0.10032
Lighting LED chip, 9%
LED module/lamp value-add, 0.2976
LED lighting fixture, system control, 0.52
LED lighting market value breakdown 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
27
December 15, 2011
Fig. 46: LED lighting supply chain
MOCVD Equipment
Epi/Chip
Package
Module/ lightengine
Lightingfixture/ Luminaire
Branding/ localchannels Philips,Osram,GE...
* MOCVD equipment making is an oligopoly Description market, dominated by Aixtron and Veeco
* Grow epi layer on sapphire wafer * Structure and dope the substrate * Cut the chip into dies
* Encapsulate and make contacts and primary optics * Coat with phosphor (for white LED)
* Mount LED packages on a PCB * Optimize into application * Integrate light modules with optics and thermal/ power management components
* Combine module and ballast, with a fixture, that plays a key role in the optics, and a heat sink * Attach external control unit for fixtures
* Branding includes various know-how such as marketing, advertising, channel, and promotion
Epistar, Forepi,Genesis Taiwan Liteon Edison,Delta,BrightLED,UnityOpto Everlight TSMC, UMC,HonHai AUO/Lextar Epivally Korea Lumens,Luxpia, Itswell SeoulSemiconductor LGInnotek,Samsung LED(Samsung) Nichia Japan Citizen Toyoda Gosei Sharp Toshiba, Panasonic Sanan,Silan, Epilight, AquaLite,ElecTech, Tsinghua Tongfang China Nationstar,Honglitronic, Refond, Ledman,MLS Tospo,Opple,NVC,Yankon, Foshan, Yamming Aixtron,Veeco USA/EU SemiLeds Cree Osram,GE Philips/Lumileds
Source: Mckinsey, LEDinside, and Nomura research
28
December 15, 2011
Earnings, valuation, and stock action

We remain cautious on the LED industry and profitability of LED makers in the short and long terms.
Earnings should bottom in 1H12F, but long-term margins will have structural problems, in our view
Considering the expected severe LED oversupply and macro weakness, we think many LED makers' earnings will approach new lows in 4Q11-2Q12F. Although we expect earnings to recover gradually from 3Q12F with demand recovery and slowed capacity expansion, we think LED makers' margins may not return to peak levels in the LED TV cycle, and in the long run, we see LED maker's margins facing several structural problems. We believe the profitability of LED makers during the golden period in the LED lighting cycle will not be as high as that in the LED TV cycle. As highlighted in earlier sections, we think the peak LED lighting cycle will be shortlived, as shortages are less likely to happen, given the lighting markets very fragmented nature and no rush needed to bring products to markets. Moreover, we believe LED makers will eventually see price competition in the lighting market, as late comers catch up with technology. As packaged LEDs account for the largest proportion in LED lighting costs (30-60% of LED luminaire costs, according to DOE) and aggressive cost reduction is to trigger a take-off in LED lighting demand, we think the pricing pressure for LEDs will continue to be high in 2012-13F, not only from industry competition, but also from lighting customers' cost requirements. For LED makers that penetrate into the LED light source and fixture business, despite higher sales growth potential, we believe their margins will be at risk as well. Margins for OEM/ODM for global leading lighting companies will be low, in our view, given strong bargaining power of customers. Margins for own-brand or smaller customers should ideally be higher, but are also subject to economies of scale and inventory controls. We forecast the LED operating margins of Epistar, Everlight, SSC, LG Innotek, and SLED will bottom out in 2Q12F and recover gradually in 2H12F. However, we estimate their operating margins in 2H12F will be only half of the peak levels in 2Q-3Q10.
Fig. 47: Sales of LED makers
(USDmn) 600 500 400 300 200 100 0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13
Fig. 48: OP margin of LED makers

(%) 40 30 20 10 0 (10) (20) (30) Cree S-LED Epistar LGI Everlight SSC
Cree LGI
Epistar SSC
Everlight S-LED
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13
29
December 15, 2011
Valuation is not demanding, but be cautious on recovery

We believe investors are looking to revisit LED players. The share prices of LED players have declined over 40% YTD, due mainly to deteriorated profitability and weak LED TV demand. The shares are now trading at FY12F P/BV of 1.0x~2.0x, at or near their historical lows. Meanwhile investors believe an increased demand for LED lighting will enhance profitability of LED makers, providing a positive potential share-price catalyst. However, we remain cautious on the LED industry. In our view, profitability of LED makers will remain under pressure in the short and long terms. The golden cycle for the LED industry ignited by LED lighting demand will only be short-lived, in our view. We think the game has changed for LED makers in the LED lighting cycle. We believe the core value of the supply chain in the LED lighting market will gradually shift from LED components to LED lighting product designs. Therefore, we are more positive on vertically integrated LED makers, which have good technology in developing LED lighting products, eg. lamps, or even fixtures and systems, and good access to end channels/customers. Of the stocks in our coverage, we are positive on SEMCO in view of its strong commitment to the lighting business and own-brand LED lighting products. However, we maintain our Neutral rating on SEMCO due to possibility of a spin-off of its LED business in 2012F and weak earnings contributions from other businesses. We have Neutral ratings on SSC, LGI and Epistar, considering our short- and long-term bearish view on the industry. We maintain our Reduce rating on Everlight, as we think its intention in having its own-brand LED lighting is likely to cause it to lose cooperative opportunity with lighting companies. Moreover, we believe its own-brand products lack competitiveness vs. those of leading lighting companies. SEMCO (009150 KS, Neutral): In our view, its business momentum has deteriorated due mainly to high revenue exposure to TV and PC-related components. We believe SEMCOs business momentum will reach a bottom in 1Q12F as the PC industry will likely face HDD supply issues in 1Q12F, negatively impacting other PC-related components and TV demand, which we expect to bottom out in 1Q12F. As for the LED business, we think its business momentum will be better than peers given its intention to develop own-brand lighting products, although we see low profitability inevitable in 2012F. LGI (011070 KS, Neutral): We maintain our Neutral rating on LGI, as we believe visibility of earnings momentum recovery is low in the short term due to its structural weakness. While IT demand polarization of smartphones will likely continue in 2012F, we estimate its revenue exposure to TV- and PC-related components will be at ~52% in 2012F, leading to continued weakness in the overall earnings trend. Moreover, we estimate the proportion of its LED revenue in lighting will only be 13% in 2012F and, thus, we believe its profitability for the LED business will continue to be significantly under pressure. SSC (046890 KS, Upgrade to Neutral) - We upgrade our rating on SSC to Neutral from Reduce, as we believe it is trading at its fair value after a significant correction over the last one year. However, we believe its earnings momentum will remain weak in the short and long terms, in line with the industry trend. Epistar (2448 TT, Neutral): As a pure chip maker, Epistar faces serious risk-reward imbalance challenges in the lighting business, bearing heavy capex but only earning chip level revenues. It also faces oversupply risks, in our view. Although Epistar's earnings may hit a short-term trough in 4Q11-1Q12F, we expect its 2012-13F earnings to remain low, given continued oversupply and severe competition in LED lighting. We may turn more positive if Epistar is able to secure more long-term orders from LED lighting companies with easing industry over-supply. Everlight (2393 TT, Reduce): We maintain our Reduce rating on Everlight, in view of its weakening industry position in LED lighting and backlighting business. For LED lighting, Everlight's own-brand business faces direct competition from leading lighting companies, and its margins are much lower than the corporate average, dragged by low economies of scale and low-priced strategy. For backlighting, Everlight's several
30
December 15, 2011
structural issues remain: shrinking addressable market, which is squeezed by panel makers' increased in-house production, competition from Chinese makers, and weak customer base in TV and tablet PC applications.
Fig. 49: Share price performance (2009-present)
Jan 09=100 700 600 500 400 300 200 Epistar Everlight SEMCO Forepi Cree Seoul Semi
Fig. 50: Share price performance (2004-present)

Jan 04=100 1,000 900 800 700 600 500 400 300 200 100 0 Epistar Everlight SEMCO Forepi Cree Seoul Semi
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-09
Jan-10
Jan-11
Jul-09
Jul-10
Oct-09
Oct-10
Jul-11
Source: Bloomberg
Oct-11
Apr-09
Apr-10
Apr-11
Source: Bloomberg
Fig. 51: P/E trend

P/E (x) 80 70 60 50 40 30 20 10 0 Epistar SEMCO Everlight Seoul Semi Cree
Fig. 52: P/B trend

P/B (x) 6 5 4 3 2 1
Sep-09 Sep-10
Epistar Everlight SEMCO
Forepi Cree Seoul Semi
May-09
May-10
May-11
Sep-11
Jan-09
Jan-10
Jan-11
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: Bloomberg, Company data
Source: Bloomberg, Company data
Jan-11
Jul-11
31
100
SEMCO
TECHNOLOGY
009150.KS 009150 KS
EQUITY RESEARCH
Bottom in 1Q12F
December 15, 2011 Rating Remains Target price Remains Closing price December 13, 2011 Potential downside
Weakening PC and TV demand to continue impacting SEMCOs earnings in 1H12F

Action: Maintain Neutral We maintain our Neutral rating on SEMCO to reflect a weak industry cycle and lacklustre company-specific profitability trend. While SEMCO has high revenue exposure to PC and TV, we expect IT demand polarisation to smartphones to continue in 2012F, impacting TV- and PC-related components. We cut our 2012F operating-profit forecast by 41%, mainly because of SEMCOs sluggish earnings in its MLCC and LED businesses. Meanwhile, we have revised up our 2012F operating-profit forecast for SEMCOs ACI division as we expect continued strong earnings from smartphone-related components, including HDI and FC-CSP. Catalyst: PC and TV demand recovery We believe a recovery in PC and TV demand should rejuvenate SEMCOs earnings momentum. However, we believe that a recovery is not viable in 2012F. Valuation: Maintaining TP at KRW90,000 but changing methodology We maintain our Neutral rating on SEMCO and our KRW90,000 target price. The valuation is at a historical low P/B of 2.0x, based on 2012F BVPS, thus we apply the current valuation to derive our target price (changed from an EV/EBITDA-based SOTP methodology).
Neutral
KRW 90,000 KRW 90,000 0%
Anchor themes Recovery of TV and PC demand seems unlikely until 1H12F, impacting SEMCO's profitability in 2012F. Moreover, its major products, including MLCC and LED, seem to be weaker than we had expected. Nomura vs consensus Our FY12F EPS estimate is 28% below market consensus. We are bearish on the stock to reflect weak downstream demand in 1H12F.
Research analysts South Korea Technology James Kim - NFIK james.kim@nomura.com +852 2252 6203 Greg Kang - NFIK greg.kang@nomura.com +82 2 3783 2336
31 Dec Currency (KRW)
FY10 Actual Old
FY11F New Old
FY12F New Old
FY13F New
Revenue (bn) Reported net profit (bn) Normalised net profit (bn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)
6,969 555 555
7,227 347 347
7,133 274 274
8,524 620 620
7,926 265 265
9,973 699 699
9,013 408 408
7,147.54 4,469.15 3,529.20 7,986.19 3,416.45 9,005.85 5,263.22 95.4 12.4 5.9 2.0 1.1 18.4 29.2 -37.5 N/A 8.9 N/A N/A 10.6 47.5 -50.6 25.1 9.5 2.2 0.8 8.4 48.2 78.7 N/A 6.2 N/A N/A 18.5 34.7 -3.2 26.0 8.5 2.0 0.8 8.1 36.2 12.8 N/A 5.6 N/A N/A 17.8 24.6 54.1 16.9 7.0 1.7 0.8 10.9 27.4
Key company data: See page 2 for company data and detailed price/index chart.
Nomura | SEMCO
December 15, 2011
Key data on SEMCO

Incomestatement(KRWbn)
Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (KRW) Norm EPS (KRW) Fully diluted norm EPS (KRW) Book value per share (KRW) DPS (KRW)
Relative performance chart (one year)

FY09 5,551 -4,370 1,181 -699 482 853 -371 482 -48 0 7 441 -115 325 -41 FY10 6,969 -5,277 1,691 -913 778 1,286 -508 778 -48 0 101 831 -164 667 -112 FY11F 7,133 -5,091 2,042 -1,731 311 853 -542 311 -56 0 32 287 2 289 -15 FY12F 7,926 -5,679 2,247 -1,924 323 933 -610 323 -60 0 47 310 -62 248 17 FY13F 9,013 -6,383 2,631 -2,188 443 1,110 -667 443 -54 0 60 449 -53 396 13
(KRW) 140000 120000 100000 80 80000 60000 40000 A ug 11 S ep 11 M ay 11 F eb 11 J an 11 J un 11 N ov 11 O c t 11 A pr 11 J ul 11 D ec 11 M ar 11 60 40 Price Rel MSCI Korea 120 100
Source: ThomsonReuters, Nomura research

(%) Absolute (KRW) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (KRW) 3-mth avg daily turnover (USDmn) Major shareholders (%) Samsung Electronics NPS 1M 3M 12M
13.4 46.1 -31.0 10.7 39.2 -31.8 11.4 38.9 -26.0 5,739.9 76.3 138000/59200 74.26
284 0 284 -58 226
555 0 555 -78 477
274 0 274 -54 220
265 0 265 -54 211
408 0 408 -54 354
23.7 6.8
Source: Thomson Reuters, Nomura research
24.3 21.6 24.3 0.8 9.3 2.7 8.5 15.0 21.3 15.4 8.7 5.1 26.2 20.5 5.7 0.8 12.4 12.1
12.4 11.1 12.4 1.1 7.1 2.0 5.9 9.8 24.3 18.5 11.2 8.0 19.7 14.0 13.9 1.9 18.4 14.6
25.1 22.4 25.1 0.8 7.7 2.2 9.5 26.1 28.6 12.0 4.4 3.8 -0.7 19.8 15.6 2.1 8.4 5.0
26.0 23.1 26.0 0.8 5.1 2.0 8.5 24.4 28.3 11.8 4.1 3.3 20.0 20.5 12.0 1.6 8.1 5.0
16.9 15.0 16.9 0.8 5.1 1.7 7.0 17.4 29.2 12.3 4.9 4.5 11.8 13.3 10.5 1.4 10.9 6.3
Notes
OP to grow only 4% y-y in 2012F
29.5 95.2 252.1 424.6 424.6
25.6 50.7 61.4 95.4 95.4
2.4 -33.7 -60.0 -50.6 -50.6
11.1 9.4 3.9 -3.2 -3.2
13.7 19.0 37.2 54.1 54.1
3,657.01 3,657.01 3,657.01 33,443.32 749.21
7,147.54 7,147.54 7,147.54 44,782.13 999.49
3,529.20 3,529.20 3,529.20 39,469.05 698.13
3,416.45 3,416.45 3,416.45 45,108.69 699.09
5,263.22 5,263.22 5,263.22 52,058.18 700.05
33
Nomura | SEMCO
December 15, 2011
Cashflow(KRWbn)
Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
FY09 853 124 -236 740 -315 425 -274 -71 -43 -15 23 -24 -28 222 565 736 759 330 1,089 631 FY10 1,286 -325 4 965 -970 -5 -614 -23 139 268 -235 -68 -3 62 -149 -158 -393 1,089 696 1,014 FY11F 853 9 27 890 -1,115 -225 -47 41 -26 27 -230 -78 -1 224 -153 -7 -237 695 458 1,476 FY12F 933 106 314 1,352 -950 402 -144 53 24 -25 310 -54 0 -157 -46 -257 53 458 511 1,266 FY13F 1,110 -30 277 1,357 -950 407 -175 0 26 -30 228 -54 0 -32 -15 -102 127 511 638 1,107 Notes
Stable cash flow in 2012F
Balancesheet(KRWbn)
As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
FY09 1,089 0 764 487 63 2,403 943 2,104 60 71 5,581 1,111 849 71 2,032 608 123 2,763 223 15 373 470 1,737 2,595 5,581
FY10 695 0 839 752 189 2,476 1,557 2,619 90 94 6,836 757 956 106 1,819 953 262 3,033 328 15 373 721 2,366 3,475 6,836
FY11F 458 0 880 704 214 2,256 1,603 2,709 89 53 6,710 1,011 976 112 2,099 923 235 3,258 389 15 373 940 1,734 3,063 6,710
FY12F 511 0 829 760 238 2,338 1,748 3,049 89 0 7,224 943 1,120 102 2,166 834 259 3,259 465 15 373 1,151 1,961 3,500 7,224
FY13F 638 0 870 864 306 2,679 1,922 3,333 93 0 8,027 981 1,312 96 2,389 764 285 3,437 550 15 373 1,505 2,146 4,040 8,027
Notes
Stable financial condition
1.18 10.0
1.36 16.1
1.07 5.5
1.08 5.4
1.12 8.2
0.74 24.3
0.79 29.2
1.73 48.2
1.36 36.2
1.00 27.4
37.4 40.7 51.4 26.7
42.0 42.9 62.4 22.4
44.0 52.2 69.3 26.9
39.5 47.2 67.6 19.1
34.4 46.4 69.5 11.3
34
Nomura | SEMCO
December 15, 2011
Lowering 2012F OP forecast by 41%

We maintain our Neutral rating on SEMCO and our KRW90,000 target price. SEMCOs valuation is at a historical low P/B of 2.0x, based on 2012F BVPS, thus we apply the current valuation to derive our target price (changed from an EV/EBITDA-based SOTP methodology). In our view, SEMCOs business momentum has deteriorated mainly due to its high revenue exposure to TV- and PC-related components. We believe SEMCO's business momentum will reach a bottom in 1Q12F as the PC industry is likely to suffer HDD supply problems in 1Q12F, negatively impacting other PC-related components, and we think that TV demand will also bottom out in 1Q12F. We have cut our 2012F operating-profit forecast by 41%, mainly because of SEMCOs sluggish earnings for its MLCC and LED businesses. Meanwhile, we have revised upwards our 2012F operating-profit forecast for SEMCOs ACI division by 20% as we expect continued strong earnings from smartphone-related components including HDI and FC-CSP. MLCC: We estimate SEMCOs operating margin for the MLCC business at around 6% in 4Q11F, much lower than we had previously expected. We expect MLCC margins to remain sluggish until 1H12F: 1) the MLCC business should continue to face intensified price competition, in our view, and 2) we think that MLCC oversupply will linger due to weak TV and PC demand. Meanwhile, 3) our view is that strong MLCC demand for smartphones will not be enough to offset weak MLCC demand for TVs and PCs. LED: We have a bearish view on the LED industry in the short and long term. While we think that demand for LED lighting demand will not be ready to take off in 2012F, we believe deteriorating profitability for backlighting will continue in 2012F and beyond due to weak LED TV demand and continued pricing pressure. In the long term, we estimate that: 1) the addressable LED market for lighting in 2015F will be only 1.1x larger than the peak market size for backlighting in 2012F, 2) the industrys profitability during the peak lighting cycle will not be as high as that during the peak LED TV cycle, and 3) the LED lighting market will be commoditized as latecomers catch up with the technology, weighing down the industrys profitability. We expect operating profit at SEMCOs ACI division to increase 34% y-y to KRW127bn in 2012F thanks to smartphone-related components, including HDI and FC-CSP. This is largely attributable to our expectation for strong smartphone shipments for SEC in 2012F. 4Q11F earnings flattish to 3Q11 earnings We expect SEMCOs overall earnings in 4Q11F to be better than the market expected thanks to stronger shipments for HDI, FC-CSP, and FC-BGA. Meanwhile, we think that the LED and MLCC businesses will continue to suffer margin pressure in 4Q11F and that they will reach bottom in 1Q12F.
Fig. 53: Nomura vs. consensus
Nomura Street consensus # of recommendation on street PT range (KRW)
Source: Bloomberg
NEUTRAL with PT of W90,000 BUY 12 84,000 - 110,000 NEUTRAL 10 75,000 - 105,000 REDUCE 3 51,000-73,000
Risks: The won/US dollar exchange rate is the biggest earnings risk for SEMCO, which translates to higher earnings volatility, both to the upside and downside, depending on currency movements. In addition, downside risks to our target price include the possibility of aggressive MLCC capacity expansion by Japanese manufacturers.
35
Nomura | SEMCO
December 15, 2011
Fig. 54: 2012F earnings revision

(KRWbn) Sales ACI HDI FC BGA LCR MLCC Other CDS OMS CM LED Other Total Operating profit ACI LCR CDS OMS Total
Revised 1,737 494 294 950 1,844 1,700 144 1,535 2,810 932 1,618 261 7,926 127 159 54 -16 323
Previous 1,856 491 309 1,055 2,158 2,019 140 1,827 2,684 572 1,818 294 8,524 106 316 60 63 545
Differential (%) -6.4 0.5 -4.8 -10.0 -14.5 -15.8 2.8 -16.0 4.7 62.9 -11.0 -11.3 -7.0 19.6 -49.8 -10.2 n.a. -40.8
Fig. 55: SEMCO: share price vs. EPS

(KRW) 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 EPS (RHS) Price (LHS) (KRW) 3,000 2,500 2,000 1,500 1,000 500 0 -500
Source: Company data, Bloomberg, Nomura estimates
36
Nomura | SEMCO
December 15, 2011
Fig. 56: Quarterly sales and operating profit

Sales (% q-q) (% y-y) ACI HDI FC-BGA BGA LCR MLCC Other CDS OMS CM LED Other Operating Profit (% q-q) (% y-y) ACI LCR CDS OMS OP margin (%) Sales Mix (%) (%) ACI HDI FC-BGA BGA LCR MLCC Other CDS OMS CM LED Other 1Q10 21 7 5 8 22 19 3 24 33 8 20 5 2Q10 19 6 5 8 23 19 4 23 35 8 23 4 3Q10 21 7 4 10 24 21 3 24 31 9 18 4 4Q10 23 6 4 12 25 22 3 28 25 9 12 4 1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F FY10F FY11F FY12F 20 22 22 22 22 23 22 21 21 22 22 5 7 6 6 7 7 6 5 7 6 6 4 4 4 4 4 4 4 4 4 4 4 11 11 11 12 12 12 12 12 10 11 12 25 26 22 21 21 23 26 22 23 23 23 23 23 20 19 19 21 24 21 20 21 21 2 3 2 2 2 2 2 2 3 2 2 26 23 20 21 22 20 18 17 25 22 19 29 29 25 36 34 34 34 39 31 30 35 7 9 14 13 13 12 12 11 8 11 12 18 17 19 19 18 19 19 25 19 18 20 3 4 (7) 3 3 3 4 3 4 1 3 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 1,624 1,907 1,846 1,593 1,714 1,682 1,929 1,809 1,710 1,871 2,128 2,217 5 17 (3) (14) 8 (2) 15 (6) (5) 9 14 4 43 45 19 3 6 (12) 5 14 (0) 11 10 23 335 366 380 362 351 377 415 397 380 422 468 467 115 120 121 102 91 110 118 112 113 125 135 121 86 89 67 69 76 75 82 73 67 72 75 80 134 156 192 192 184 192 215 212 201 225 258 266 357 433 448 398 430 433 428 385 362 436 547 499 303 365 388 356 396 391 384 347 328 399 509 464 54 68 60 42 34 43 44 38 34 36 38 35 394 439 443 441 440 382 392 376 379 377 393 386 538 668 574 393 493 490 490 651 588 636 720 866 131 144 159 147 120 145 262 240 219 225 247 241 330 444 332 185 316 282 358 348 311 349 396 561 77 80 82 61 57 63 (130) 62 58 62 77 64 119 314 263 86 92 87 69 63 48 84 107 84 (23) 163 (16) (67) 7 (5) (21) (9) (24) 76 28 (22) n.a. 143 27 (45) (23) (72) (74) (27) (48) (4) 56 34 8 49 47 22 18 19 27 30 26 30 39 32 48 95 98 57 58 52 39 22 21 41 53 43 7 33 49 15 9 11 9 11 8 15 20 12 56 137 69 (8) 7 5 (6) (1) (7) (3) (4) (3) 7.3 16.5 14.2 5.4 5.4 5.2 3.6 3.5 2.8 4.5 5.0 3.8 FY10F FY11F FY12F 6,969 7,133 7,926 26 1,443 458 311 674 1,637 1,412 225 1,717 2,172 581 1,292 299 781 61 127 297 104 254 11.2 (1) (5) 1,540 1,737 430 494 306 294 803 950 1,675 1,844 1,517 1,700 158 144 1,589 1,535 2,124 2,810 767 932 1,304 1,618 53 261 311 323 (60) 95 171 41 4 4.4 4 127 159 54 (16) 4.1
Source: Company data, Nomura estimates
37
LG Innotek
TECHNOLOGY
011070.KS 011070 KS
EQUITY RESEARCH
Maintain Neutral
December 15, 2011 Rating Remains Target price Increased from 71,000 Closing price December 13, 2011 Potential upside
No relief in sight on structural weakness

Action: Maintain Neutral on lingering structural weakness We maintain our Neutral rating on LGI given its structural weakness, which we think the company might not be able to overcome in the short term. We estimate its revenue exposure to TVs and PCs at around 52% in 2012F, which lags the IT industry trend, while we believe IT demand polarization to new devices such as smartphones will linger. Moreover, we believe its LED business also lags the industry trend. Meanwhile, we estimate the portion of its lighting revenue from LED lighting will be only 6% in 2011F and 13% in 2012F, leading to more margin pressure than that of peers. Catalyst: Low demand visibility in 2012F With a recovery of the downstream market, LGIs earnings momentum should gather steam again, in our view. However, we think visibility for momentum seems low in 2012F. Moreover, its product mix is vulnerable to macro factors. Valuation: TP raised by 4% to KRW74,000 We have raised our target price for LGI by 4% to KRW74,000 to reflect our earnings estimate revisions. We think applying 1.0x P/B (rolled forward to 2012F BVPS of KRW73,597) is reasonable given our view that LGI will likely continue to suffer slowing top-line growth with low profitability in 2012F and face lacklustre cash generation for a while. Moreover, global component makers are currently trading at 1.0x P/B, while LGI shares currently trade at their fair value of 0.9x 2012F P/B.
Neutral
KRW 74,000 KRW 73,100 +1.2%
Anchor themes LGI has structural weaknesses that may linger for a while. LGI has limited cash on hand for future investment, while a consumer-taste shift to smartphones will continue to impact LGI's earnings. Nomura vs consensus Our 2012F EPS forecast is in line with market consensus. We believe its weak earnings momentum should continue in 2012F.
FY10 Actual Old
FY11F New Old
FY12F New Old
FY13F New
4,104 197 197
4,467 -70 -70
4,457 -67 -67
4,672 37 37
4,819 76 76
5,040 170 170
5,070 182 182
9,785.29 -3,457.87 -3,342.08 1,860.81 3,779.87 8,453.03 9,060.17 191.0 6.9 6.4 0.9 0.5 16.8 96.9 -135.3 N/A 8.5 N/A N/A -4.9 144.2 -134.2 na 9.8 1.0 0.4 -4.7 142.6 na N/A 5.1 N/A N/A 2.7 132.9 na 18.0 6.1 0.9 0.5 5.3 130.7 354.3 N/A 3.8 N/A N/A 11.3 140.6 139.7 7.5 4.3 0.8 0.5 11.7 111.9
Nomura | LG Innotek
December 15, 2011
Key data on LG Innotek


FY09 2,971 -2,603 368 -254 114 280 -166 114 -19 0 -28 67 -15 52 5 0 58 58 -6 52 FY10 4,104 -3,586 518 -361 157 440 -283 157 -52 0 4 109 17 126 0 71 197 197 -7 190 FY11F 4,457 -4,038 419 -433 -14 343 -357 -14 -79 0 -11 -104 36 -67 0 0 -67 -67 -5 -72 FY12F 4,819 -4,207 612 -472 139 539 -400 139 -52 0 5 93 -17 76 0 0 76 76 -7 69 FY13F 5,070 -4,304 765 -497 268 751 -483 268 -48 4 225 -42 182 0 0 182 182 -7 175
(KRW) 160000 140000 120000 100000 80000 60000 40000 A ug 11 S ep 11 M ay 11 F eb 11 J an 11 J un 11 N ov 11 O c t 11 A pr 11 J ul 11 D ec 11 M ar 11 Price Rel MSCI Korea 120 100 80 60 40

(%) Absolute (KRW) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (KRW) 3-mth avg daily turnover (USDmn) Major shareholders (%) LGE 1M -11.2 -7.5 1,199.0 51.9 147500/56200 10.57 3M 12M -5.6 -48.3 -9.5 -45.9
-14.1 -11.1 -47.6
48.1
Notes 20.2 38.1 20.2 0.5 7.3 1.3 7.3 18.0 12.4 9.4 3.8 1.9 22.2 10.4 11.1 2.0 8.5 6.6 6.9 13.1 6.9 0.5 243.9 0.9 6.4 17.8 12.6 10.7 3.8 4.8 -16.0 3.6 35.7 5.2 16.8 4.9 na na na 0.4 na 1.0 9.8 na 9.4 7.7 -0.3 -1.5 na na 11.2 1.4 -4.7 -0.3 18.0 33.9 18.0 0.5 3.9 0.9 6.1 23.7 12.7 11.2 2.9 1.6 18.0 9.3 9.3 1.1 5.3 3.3 7.5 14.1 7.5 0.5 2.1 0.8 4.3 11.9 15.1 14.8 5.3 3.6 18.8 3.8 14.8 1.6 11.7 6.3
Limited top-line growth in 2012F
54.6 56.2 49.3 -21.9 -21.9
38.1 56.9 37.7 191.0 191.0
8.6 -22.0 -108.7 -134.2 -134.2
8.1 57.1 na na na
5.2 39.4 92.7 139.7 139.7
3,363.13 3,363.13 3,363.13 51,073.84 349.99
9,785.29 9,785.29 9,785.29 73,035.31 349.98
-3,342.08 -3,342.08 -3,342.08 69,201.10 250.00
3,779.87 3,779.87 3,779.87 73,596.76 350.00
9,060.17 9,060.17 9,060.17 81,578.94 347.79
39
Nomura | LG Innotek
December 15, 2011
Cashflow(KRWbn)
FY09 280 39 -159 160 -329 -169 19 -32 32 76 -73 -4 356 549 -686 214 141 162 303 675 FY10 440 -192 -242 6 -1,466 -1,461 -40 -46 -62 522 -1,086 -6 355 753 -73 1,029 -57 304 247 1,424 FY11F 343 -398 -109 -165 -500 -665 25 -25 32 130 -502 -7 2 369 44 408 -95 247 153 1,986 FY12F 539 -24 -165 349 -450 -101 0 0 20 89 8 -5 0 -29 100 65 73 152 225 1,935 FY13F 751 132 -228 655 -750 -95 0 90 20 -11 3 -7 0 -146 151 -3 1 225 226 1,837 Notes
Negative free cash flow in 2012F
Balancesheet(KRWbn)
FY09 304 1 667 246 45 1,263 15 1,394 53 80 2,804 455 796 94 1,345 524 60 1,929
FY10 247 1 791 365 90 1,495 55 2,338 121 117 4,126 228 460 527 1,214 1,444 -2 2,656
FY11F 152 1 883 383 140 1,560 30 2,351 146 223 4,310 505 435 314 1,253 1,634 30 2,917
FY12F 225 1 894 395 140 1,655 30 2,363 150 241 4,438 477 454 292 1,223 1,684 50 2,957
FY13F 226 1 892 391 50 1,559 30 2,624 176 167 4,557 481 489 293 1,262 1,582 70 2,914
Notes
High net debt-to-equity ratio
86 260 529 875 2,804
101 533 836 1,470 4,126
101 461 831 1,393 4,310
101 530 851 1,481 4,438
101 705 836 1,642 4,556
0.94 6.1
1.23 3.0
1.24 -0.2
1.35 2.7
1.24 5.6
2.41 77.2
3.24 96.9
5.79 142.6
3.59 130.7
2.44 111.9
56.6 26.9 74.0 9.5
64.8 31.1 63.9 32.0
68.6 33.8 40.4 61.9
67.5 33.9 38.7 62.7
64.3 33.3 40.0 57.6
40
Nomura | LG Innotek
December 15, 2011
Lagging the industry trend

We maintain our Neutral rating on LGI as we believe the visibility of a recovery in LGIs earnings momentum seems low in the short term mainly due to its structural weaknesses. Behind the IT industry trend We think LGIs business structure is lagging the IT industry trend, leading to limited topline growth and low profitability in 2012F; we estimate LGI will see only 8% y-y revenue growth to KRW4,819bn with an operating margin of 3%. In our view, IT demand polarization to smartphones will continue in 2012F; however, LGIs revenue exposure to TV- and PC-related component should remain high at 52%. It is essential for LGI to improve its business structure to overcome its current weakness, but we think that it is not easy to transform a business structure, in general. Moreover, we wonder if LGI will be able to reform its business structure rapidly at a time when it seems to have limited cash flow on hand and while its cash-generation capability has deteriorated due mainly to significant losses from the LED business. We estimate its debt-equity ratio at 156% at end-2011F. Also behind the LED industry trend We estimate LGIs 4Q11F operating margin in its LED business at -16% and expect that it will continue to make operating losses in its LED business until 2Q12F. LGI has focused on supplying LEDs for TV backlights, while LED TV demand has been notably weak, leading to a continued pricing pressure and low utilization for LED makers. As such, LGI has been relatively slower than its peers to penetrate the lighting market, suffering more margin pressure than peers. We estimate the portion of LGIs lighting revenue from LED lighting will be only 13% in 2012F (vs. 6% in 2011F). In our view, the general lighting market is very fragmented, and we observe that building relationships with lighting/fixture companies takes time. Revising up 2012F OP forecast by 35% We addressed the negative factors outlined above in our September 8, 2011 report, No relief in sight on structural weakness. However, we raise our 2012F operating profit forecast by 30% to KRW139bn to acknowledge increased shipments of smartphonerelated components, including camera modules, touch windows and build-up PCBs. We maintain our Neutral rating on LGI and raise our target price by 4% to KRW74,000 to reflect our earnings revision. We think applying 1.0x P/B (rolled forward to 2012F BVPS of KRW73,597) is reasonable as we think that LGI will likely continue to suffer slowing top-line growth with low profitability in 2012F and that it will face lacklustre cash generation for a while. Moreover, global component makers are currently trading at 1.0x P/B. LGI shares currently trade at their fair value (ie, 0.9x P/B). Our valuation methodology and P/B multiple are unchanged.
Fig. 57: Revenue forecast 2011F vs. 2012F
(KRWbn) 6,000 5,000 4,000 3,000 2,000 1,000 0 2011F
Fig. 58: 2012F operating profit by segment

(KRWbn) 200 150 100 50 0
Components that have more exposure to PCs, TVs and NBs Components that have large exposure to handset
TV, PC and other Feature phone Smartphone
8% y-y growth ,driven only by handsetrelated components
54%
52%
-50 -100
2012F
LED
D&N SubstrateMaterial
PCB
CM
Motor/ Automotive
41
Nomura | LG Innotek
December 15, 2011
Fig. 59: Debt and debt/equity trend and forecast

(KRWbn) 2,500 2,000 1,500 1,000 500 0 08 09 10 11F
Fig. 60: EBITDA trend

180% 160% 140% 120% 100% 80% 60% 40% 20% 0%
(KRWbn) 500 450 400 350 300 250 200 150 100 50 0 08 09 10 11F
Debt (LHS)
Debt/Equity (RHS)
Weakening cash generating ability
Big jump in debt /equity ratio due to hugh capex on LED , but deteriorated profitability
Fig. 61: LED: Revenue portion

IT 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2011F
Fig. 62: LED: Quarterly revenue and OPM trend and forecast
(KRWbn) 300 Sales (LHS) OPM (RHS) 5% 0% -5% -10% -15% -20% 1Q11 2Q11 3Q11 4Q11F1Q12F2Q12F3Q12F4Q12F
General lighting
6% 13%
250 200 150 100 50

2012F
Fig. 63: 2012F earnings revision

(KRWbn) Sales Camera module DN LED Motor/Automotive Material PCB Package substrate Others Total Operating profit Camera module DN LED Motor/Automotive Material PCB Package substrate Others Total
Revise 1,358 1,003 970 354 347 408 379 0 4,819 83 16 -44 16 34 26 8 0 139
Previous 1,179 960 1,041 349 341 401 400 0 4,672 53 5 -44 16 29 22 25 0 107
Differential 15% 5% -7% 1% 2% 2% -5% n.a. 3% 55% 197% n.a. 1% 17% 18% -68% n.a. 30%
42
Nomura | LG Innotek
December 15, 2011
Fig. 64: LGI: Revenue and operating profit trend and forecasts
(KRWbn) Sales Camera module DN Power Tuner Wireless Total LED Motor/Automotive Motor Automotive Total Material Photomask Lead frame Total PCB Package substrate Lead frame Tape substrate Package Total Others Total sales q-q y-y Operating profit Camera module DN Power Tuner Wireless Total LED Motor/Automotive Motor Automotive Total Material Photomask Lead frame Total PCB Package substrate Lead frame Tape substrate Package Total Others Total sales q-q y-y (2) 6 (3) 1 (2) (7) n.a. n.a. (3) 5 (3) (1) 1 6 n.a. (93.2) (3) 4 (3) (2) 1 (5) n.a. n.a. (3) 4 (4) (2) 0 (7) n.a. n.a. (2) 3 (2) (2) 0 (6) n.a. n.a. (2) 5 (2) 1 (0) 34 n.a. 482.0 2 7 (2) 7 0 68 98.4 n.a. 1 4 (3) 2 0 43 (37.4) n.a. 38.5 n.a. n.a. 6 33 (15) 25 4 157 (11) 19 (13) (5) (0) (14) (1) 18 (9) 8 (0) 139 5 0 5 5 7 3 10 6 4 2 7 6 2 3 5 6 4 3 7 5 5 4 8 7 6 4 11 8 5 4 8 6 26 (0) 25 26 18 9 27 23 19 14 34 26 2 (3) (1) 3 (2) 1 1 (1) 1 1 0 1 1 1 2 2 2 4 3 3 5 2 3 5 21 (10) 11 8 (6) 2 8 8 16 (1) 3 0 2 (34) (2) 3 1 2 (23) 0 3 2 5 (30) 2 0 2 4 (33) (2) (0) (1) (4) (33) 4 2 2 8 (15) 4 4 4 12 3 (2) 1 1 (0) 1 17 19 22 58 (11) (1) 9 5 13 (119) 3 7 7 16 (44) 17 10 7 12 19 21 23 21 19 46 83 21 51 25 97 (8) 1,099 (3.2) 41.9 24 47 27 98 (15) 1,173 6.7 14.0 23 43 28 94 0 1,069 (8.9) (8.2) 20 44 24 88 0 1,116 4.4 (1.7) 22 39 22 83 0 1,061 (4.9) (3.5) 24 48 23 94 0 1,200 13.1 2.3 29 55 24 108 0 1,319 9.9 23.4 26 45 22 93 0 1,238 (6.1) 10.9 38.0 8.6 8.1 88 222 101 410 (70) 4,104 87 185 105 377 (23) 4,457 100 187 92 379 0 4,819 39 24 63 100 46 46 92 102 32 41 73 96 29 52 81 99 28 49 77 96 35 50 85 97 41 55 96 112 37 51 88 103 164 66 230 582 147 163 310 397 141 206 347 408 40 30 70 43 34 78 39 41 80 36 46 83 34 42 77 38 48 86 43 55 98 38 56 93 201 71 271 158 152 310 153 201 354 107 64 87 257 203 111 55 90 256 273 111 54 85 250 249 105 47 91 243 203 97 46 77 220 203 111 51 91 253 245 122 59 101 282 267 110 48 89 248 255 478 285 368 1,130 905 434 219 353 1,006 928 440 205 358 1,003 970 316 289 228 319 305 340 355 358 644 1,152 1,358 1Q11 2Q11 3Q11 4Q11F 1Q12F 2Q12F 3Q12F 4Q12F 2010 2011F 2012F
Risks Captive customers slowing down: As a key component supplier for the LG group, volatility in captive earnings momentum is a risk for LG Innotek, both to the upside and downside. However, LG Innotek is diversifying its client base and product line to reduce the dependency on captive customers.
43
Seoul Semiconductor
TECHNOLOGY
046890.KQ 046890 KS
EQUITY RESEARCH
Upgrade to Neutral
December 15, 2011 Rating Up from Reduce Target price Reduced from 27,000 Closing price December 13, 2011 Potential downside
No lights for LED maker
Neutral
KRW 22,000 KRW 22,000 0%
Action: Upgrade to Neutral on limited growth momentum In line with LED industry trends, we foresee limited growth momentum for SSC in the short and long term. While LED lighting demand is unlikely to take off in 2012F, we believe backlightings will remain unprofitable in 2012F and onward due to weak LED TV demand and continued pricing pressure. We estimate SSCs revenue will increase only by 7% y-y to W795bn in 2012F and operating profit will drop 7% y-y to W42bn. In the long term, we have a bearish view on the LED lighting market, as: 1) we estimate the addressable LED market for lightings in 2015F will be only 1.1x larger than the peak market size for backlightings in 2012F; 2) industry profitability during the peak lighting cycle is unlikely to be as high as that during the peak LED TV cycle; and 3) the LED lighting market will be commoditised as latecomers catch up with the technology levels, weighing on industry profitability. Nevertheless, we upgrade SSC to Neutral from Reduce, as we believe that it is currently trading at its fair value of 2012F P/B of 1.9x. Catalyst: Rapid penetration of LED lighting should boost profitability We believe rapid penetration of LED lighting may result in high profitability, though the likelihood of this seems low given the many alternatives. Valuation: Lowering applied multiple to 2.0x, from 2.5x We lower our target price by 18% to W22,000 to reflect our downward revision of 2012F earnings forecasts. Moreover, we now apply a target multiple of 2.0x (2.5x previously), considering our long-term bearish view.
Anchor themes We have a Neutral rating on SSC due to the company's short- and long-term earnings momentum. Nomura vs consensus Our 2012F EPS forecast is 47% below consensus (EPS of W1,341), as we believe LED lighting demand will not be ready to take off, while deteriorating profitability for backlightings will continue.
FY10 Actual Old
FY11F New Old
FY12F New Old
FY13F New
839 94 94
1,181 70 70
746 41 41
1,359 83 83
795 41 41 709.00 0.0 30.0 16.1 1.9 1.4 6.6 22.1 N/A N/A N/A
1,027 73 73 1,253.08 76.7 17.0 10.7 1.8 1.4 10.9 17.1
1,613.63 1,193.89 229.7 13.2 9.8 2.1 1.5 17.9 8.7 -26.0 N/A 16.8 N/A N/A 11.6 8.9
708.97 1,424.59 -56.1 30.0 19.5 2.0 1.4 6.8 27.2 19.3 N/A 12.4 N/A N/A 12.6 4.4
Nomura | Seoul Semiconductor
December 15, 2011
Key data on Seoul Semiconductor


FY09 453 -351 102 -58 44 64 -20 44 0 -7 -4 33 -5 28 FY10 839 -643 196 -86 110 135 -25 110 5 -3 0 111 -17 94 FY11F 746 -627 119 -74 45 84 -38 45 3 -11 14 50 -9 41 FY12F 795 -668 127 -85 42 82 -40 42 2 4 4 52 -11 41 FY13F 1,027 -862 164 -101 64 110 -47 64 3 17 6 89 -16 73
(KRW) 45000 40000 35000 30000 25000 20000 15000 A ug 11 S ep 11 M ay 11 F eb 11 J an 11 J un 11 N ov 11 O c t 11 A pr 11 J ul 11 D ec 11 M ar 11 Price Rel MSCI Korea 120 100 80 60 40

(%) Absolute (KRW) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (KRW) 3-mth avg daily turnover (USDmn) Major shareholders (%) Lee Jung Hun Ion Investment 1M 3M 12M
-7.6 -20.8 -45.4 -7.8 -25.2 -44.1 -8.1 -25.4 -45.4 1,104.1 69.4 45200/18550 28.74
28 0 28 -5 23
94 0 94 -18 76
41 0 41 -17 24
41 0 41 -17 24
73 0 73 -17 56
18.7 11.8
43.5 55.2 43.5 0.4 65.0 2.7 21.5 32.9 22.6 14.0 9.7 6.2 14.6 19.0 12.5 2.9 9.1 10.1
13.2 16.7 13.2 1.5 34.6 2.1 9.8 12.1 23.4 16.1 13.1 11.2 15.6 19.5 13.0 4.3 17.9 16.8
30.0 38.1 30.0 1.4 57.4 2.0 19.5 41.4 16.0 11.2 6.1 5.5 18.1 42.3 13.4 2.6 6.8 4.2
30.0 38.1 30.0 1.4 8.8 1.9 16.1 30.1 16.0 10.3 5.3 5.2 20.3 42.3 12.6 2.5 6.6 5.3
17.0 21.5 17.0 1.4 11.2 1.8 10.7 17.0 16.0 10.8 6.2 7.1 17.9 23.9 9.8 2.2 10.9 8.8
Notes
Only 7% y-y revenue growth in 2012F, with lower OP
59.6 1,660.2 na na na
85.0 113.0 150.2 229.7 229.7
-11.1 -38.2 -58.9 -56.1 -56.1
6.6 -2.3 -7.2 0.0 0.0
29.1 35.0 51.5 76.7 76.7
489.44 489.44 489.44 7,931.31 92.99
1,613.63 1,613.63 1,613.63 10,160.93 315.00
708.97 708.97 708.97 10,569.91 300.00
709.00 709.00 709.00 10,978.91 300.00
1,253.08 1,253.08 1,253.08 11,931.99 300.00
45
December 15, 2011
Cashflow(KRWbn)
FY09 64 -138 93 19 -57 -38 -83 2 2 -104 -220 -5 265 -22 0 238 18 9 27 -27 FY10 135 -105 5 36 -109 -73 -22 1 12 46 -36 -18 21 101 -45 59 23 27 50 52 FY11F 84 -27 -35 22 -100 -78 -62 0 -13 38 -115 -17 0 74 17 73 -42 50 7 168 FY12F 82 25 35 141 -100 41 -12 0 0 -41 -12 -17 0 -8 55 30 18 7 25 142 FY13F 110 -44 45 111 -101 10 13 0 0 -17 6 -17 0 -3 34 14 20 25 46 119 Notes
Stable cash flow
Balancesheet(KRWbn)
FY09 27 2 96 49 166 340 93 74 19 3 528 0 56 13 69 0 1 70 0 29 90 339 458 528
FY10 50 1 164 103 186 504 116 163 9 22 814 1 48 60 109 100 13 222 0 29 204 360 592 814
FY11F 7 0 172 103 165 448 179 193 16 22 858 75 39 28 142 100 0 242 0 29 227 360 616 858
FY12F 25 1 171 109 171 477 191 196 22 24 910 95 61 42 198 72 0 270 0 29 251 360 640 910
FY13F 46 1 187 137 184 554 177 190 23 31 976 91 78 37 207 73 0 280 0 29 307 360 696 976
Notes
Sound financial condition
4.93 na
4.64 na
3.15 na
2.41 na
2.68 na
net cash net cash
0.38 8.7
2.00 27.2
1.73 22.1
1.08 17.1
61.3 43.8 49.4 55.6
56.6 43.1 29.4 70.3
82.3 59.8 25.3 116.8
78.9 58.1 27.4 109.6
63.7 52.1 29.5 86.4
46
December 15, 2011
Neutral on limited growth momentum

SSC is a leading package supplier for LED lightings. However, we believe it will be difficult for SSC to regain strong growth momentum, which we saw during the LED TV peak cycle, on limited growth from LED lightings in the short- and long-terms.
Limited growth momentum in the short- and long-terms

In line with the industry trend, we foresee limited growth momentum for SSC in the shortand long-terms. Short-term: We believe deteriorated profitability for backlightings will continue in 2012F due mainly to weak LED TV demand and continued pricing pressure from the downstream. Meanwhile, demand for LED lighting is unlikely to take off in 2012F due to high initial replacement cost, macro uncertainties and lack of industry standards. Overall, we estimate SSCs revenue will grow by 7% y-y to W795bn and operating profit will drop 7% y-y to W42bn in 2012F. Long term: We judge that it will be challenging for SSC to regain strong growth momentum, which we evidenced during the LED TV peak cycle, from the LED lighting market. We have a long-term bearish view on the LED lighting market as: 1) we estimate the addressable market in 2015F will be only 1.1x larger than the peak LED market size for backlightings in 2012F; 2) the industry profitability during the peak lighting cycle will not be as high as that during the peak LED TV cycle, and 3) the LED lighting market will be commoditised as late-comers catch up with the technology level, weighing on industry profitability. As a leading package maker for LED lightings, we estimate that SSC will increase lighting revenue by 39% y-y to W364bn in 2012F and 69% y-y to W615bn in 2013F. However, we estimate the overall operating profit margin only at 5% in 2012F and 6% in 2013F, vs 14% during the LED TV peak cycle in 2010. Nevertheless, we upgrade SSC to Neutral from Reduce as we believe that it is currently trading at its fair value of 2012F P/B of 1.9x, which is a historical low, based on our earnings forecast.
Cutting 2012F operating profit forecast by 58% to W42bn

We cut our 2012F operating profit forecast by 58% to W42bn to reflect weaker-than previously expected revenue growth for TV backlights due to the continued weakness in LED TV demand and lower margin assumption for both TV backlighting and lightings due to LED industry oversupply at 55% in 2012F and the continued pricing pressure. We revise downwards our revenue estimates for TV backlights by 75% to W143bn, and lower our margin assumption from 5% to 3% for TV backlights and from 12% to 7% for lightings.
Lowering TP by 18% to W22,000

We lower our target price by 18% to W22,000 to reflect the downward revision of our 2012F earnings forecast. Moreover, we now apply a target multiple of 2.0x (from 2.5x), which is the historical trough, to our FY12F BVPS estimate of W10,978 (methodology unchanged), considering our long-term bearish view on the LED industry. Meanwhile we change our base year from 2011F to 2012F. We believe rapid penetration of LEDs in general lighting will provide high profitability for LED makers. However, slow penetration of LED in general lighting would provide a further downside risk to our earnings forecasts in 2012F and 2013F.
47
December 15, 2011
Fig. 65: Nomura vs. consensus

Nomura Street consensus No. of recommendations on street PT range (KRW)
Source: Bloomberg, Nomura research
NEUTRAL with PT of KRW22,000 BUY 8 W23,000-58,000 NEUTRAL 7 W20,000-30,000 REDUCE 4 W13,000-27,000
Fig. 66: SSC: yearly revenue trend and forecast

(KRWbn) 1,200 1,000 800 600 400 200 0
Handset Notebook TV General lighting
20% 15% 10% 5% 0% -5% -10%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011F
2012F
Fig. 67: SSC: Quarterly sales and operating profit trend and forecasts
Sales Operating profit OP margin Sales breakdown Handset Notebook TV Lighting Others Sales contribution (%) Handset Notebook TV Lighting Others y-y growth rate Handset Notebook TV Lighting Others q-q growth rate Handset Notebook TV Lighting Others 1Q10 125 16 13% 31 26 18 40 9 25.1 21.1 14.5 32.4 6.8 0.4 86.1 62.1 -23.4 -24.9 -11.1 852.6 2.0 -19.8 2Q10 215 31 14% 33 37 83 53 10 15.1 17.1 38.7 24.6 4.5 -16.2 -7.4 82.5 16.7 4.2 40.0 360.3 31.3 13.6 3Q10 277 45 16% 41 39 122 65 11 14.8 14.0 43.9 23.3 3.9 -13.0 22.9 9,049.2 63.1 -17.8 26.0 5.4 46.0 21.9 13.3 4Q10 222 25 11% 43 29 87 53 10 19.6 13.0 39.1 23.9 4.4 4.3 -2.0 4,478.3 34.2 -7.9 5.9 -25.3 -28.5 -17.8 -10.7 1Q11 207 14 7% 34 31 89 47 7 16.3 15.1 42.8 22.5 3.3 7.7 19.2 390.7 15.9 -20.0 -22.5 8.1 2.1 -11.9 -30.3 2Q11 208 18 9% 33 38 51 79 7 15.7 18.2 24.7 37.9 3.5 0.2 2.9 -38.3 49.1 -24.4 -3.1 20.8 -42.1 68.9 7.4 3Q11 4Q11F 1Q12F 166 165 169 6 7 7 4% 4% 4% 32 32 26 69 7 19.4 19.1 15.5 41.8 4.1 -21.4 -18.1 -78.8 7.5 -37.3 -1.1 -16.0 -49.8 -12.0 -6.2 33 34 25 66 7 19.9 20.6 15.3 40.0 4.2 -24.5 16.9 -71.1 24.3 -29.8 1.7 6.6 -2.6 -5.0 0.0 30 34 30 69 7 17.5 20.2 17.7 40.5 4.1 -12.3 9.2 -66.2 46.8 2.9 -9.9 1.0 19.4 4.0 2.1 2Q12F 3Q12F 4Q12F 191 219 217 10 13 12 5% 6% 5% 28 35 33 87 8 14.9 18.4 17.1 45.7 4.0 -13.1 -7.4 -36.6 10.4 3.4 -4.0 2.4 8.6 27.0 7.9 28 40 37 106 8 12.7 18.1 16.8 48.6 3.8 -13.8 24.3 42.6 53.1 20.7 -2.0 12.8 12.9 22.0 9.6 29 34 44 102 8 13.3 15.8 20.1 47.1 3.7 -12.5 0.8 73.4 54.7 17.9 3.2 -13.5 18.5 -4.0 -2.3 2010 839 116 14% 148 131 310 211 39 17.7 15.6 37.0 25.1 4.6 -6.6 13.8 9,500.2 58.6 -10.2 2011F 746 45 6% 132 135 191 261 28 17.6 18.1 25.6 35.0 3.7 -11.4 3.1 -38.3 23.8 -28.4 2012F 795 42 5% 115 143 143 364 31 14.4 18.0 18.0 45.7 3.9 -12.9 6.0 -25.2 39.4 11.1
2013F
48
Epistar Corp
DISPLAYS
2448.TW 2448 TT
EQUITY RESEARCH
Asymmetric effort vs reward; Neutral
December 15, 2011 Rating Remains Target price Increased from 62.0 Closing price December 13, 2011 Potential upside
We expect ROE to remain low, amid oversupply and overcompetition

Action/Valuation: Effort-reward imbalance; Neutral rating maintained We think Epistars pure chip supplier role will mean it faces serious effortreward imbalances in the LED lighting market (which is much more fragmented than the LED backlight market). Epistar needs to bear heavy capex, deal directly with lighting companies, and coordinate the whole supply chain, but only earns chip-level revenue (15-20% of light source sales) and may easily suffer from oversupply risk. With only mid-single digit ROE for 2012-13F, we set our revised target price at TWD71, based on 1.3x 2012F BVPS, and maintain our Neutral rating. Structural challenges in LED lighting We see structural challenges for Epistar in the LED lighting market such as: 1) Epistars pure chip supplier role makes it difficult to benefit from inflated value in the downstream business, 2) we think Epistars strategy in building up direct relationships with lighting companies will consume significant operating resources as Epistar needs to deal with many lighting companies and handle projects with various packaging partners, and 3) pure chip business requires heavy capex. The fragmented lighting market will make expansion projections more difficult, and oversupply risk is high, in our view. Catalysts: Oversupply, competition and weak macro press earnings We think Epistars earnings have approached the short-term bottom in 4Q11-1Q12F. However, earnings returns for 2012-13F are likely to remain low, in our view, given continued oversupply, severe competition in LED lighting and the weak macro outlook. We would turn more positive if Epistar could secure more long-term orders from lighting companies, with mitigated industry oversupply.
31 Dec Currency (TWD) FY10 Actual Old FY11F New Old FY12F New Old FY13F New
Neutral
TWD 71.0 TWD 60.0 +18.3%
Anchor themes We are conservative on the 2012F LED industry outlook, as we believe continued ASP/margin pressure from LCD backlight applications, as well as the lighting applications, will weigh on the margins of LED companies. Nomura vs consensus Our FY12F EPS estimate is 4% below market consensus, as we expect higher pricing pressure to lead to lower margins.
Research analysts Taiwan Technology/Hardware Anne Lee, CFA - NITB anne.lee@nomura.com +886 2 2176 9966 Eason Hung - NITB eason.hung@nomura.com +886 2 2176 9965
Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)
19,766 5,766 5,766 7.17 176.2 8.4 5.3 1.1 7.5 14.0
18,406 1,200 1,200 1.40 -80.4 N/A 8.7 N/A N/A 2.3
17,751 1,136 1,136 1.33 -81.5 45.2 12.5 1.1 1.1 2.5
20,008 2,151 2,151 2.51 79.3 N/A 6.2 N/A N/A 4.1
19,077 2,188 2,188 2.56 92.5 23.5 9.0 1.1 2.1 4.8
22,457 2,778 2,778 3.25 29.1 N/A 5.0 N/A N/A 5.1
21,435 2,901 2,901 3.39 32.6 17.7 7.3 1.1 2.8 6.1
net cash net cash
1.1 net cash net cash net cash net cash
Nomura | Epistar Corp
December 15, 2011
Key data on Epistar Corp

Incomestatement(TWDmn)
Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (TWD) Norm EPS (TWD) Fully diluted norm EPS (TWD) Book value per share (TWD) DPS (TWD)

FY09 12,706 -9,627 3,079 -1,406 1,673 3,888 -2,216 1,673 -23 79 116 1,845 -113 1,732 0 FY10 19,766 -12,685 7,081 -2,134 4,947 7,260 -2,313 4,947 -27 854 445 6,220 -454 5,766 0 FY11F 17,751 -14,231 3,520 -1,730 1,790 4,659 -2,869 1,790 -154 -560 190 1,265 -129 1,136 0 FY12F 19,077 -14,782 4,295 -1,775 2,520 5,723 -3,202 2,520 -174 -220 360 2,486 -298 2,188 0 FY13F 21,435 -16,469 4,966 -1,895 3,071 6,829 -3,758 3,071 -174 -150 550 3,297 -396 2,901 0
(TWD) 120 100 80 60 40 A ug 11 S ep 11 M ay 11 F eb 11 J an 11 J un 11 N ov 11 O c t 11 A pr 11 J ul 11 D ec 11 M ar 11 Price Rel MSCI Taiwan 120 100 80 60 40

(%) Absolute (TWD) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (TWD) 3-mth avg daily turnover (USDmn) Major shareholders (%) 1M 3M 12M
-2.8 13.4 -40.6 -3.0 11.0 -41.0 2.6 18.5 -20.3 1,681.3 75.0 116.5/48 25.28
1,732 0 1,732 -1,384 348
5,766 0 5,766 -3,837 1,929
1,136 0 1,136 -562 575
2,188 0 2,188 -1,081 1,106
2,901 0 2,901 -1,434 1,467
JP Morgan & Ou-Pen Han5.1 Ma Fund Everlight Electronics Co. 4.1 Ltd. Source: Thomson Reuters, Nomura research
23.1 27.4 23.1 3.0 15.6 1.3 9.4 21.2 24.2 30.6 13.2 13.6 6.1 79.9 21.4 1.2 6.0 7.1
8.4 9.9 8.4 7.5 4.9 1.1 5.3 7.5 35.8 36.7 25.0 29.2 7.3 66.5 25.2 2.2 14.0 16.0
45.2 53.5 45.2 1.1 60.7 1.1 12.5 41.8 19.8 26.2 10.1 6.4 10.2 49.4 28.2 1.7 2.5 2.6
23.5 27.8 23.5 2.1 9.4 1.1 9.0 21.5 22.5 30.0 13.2 11.5 12.0 49.4 15.7 0.9 4.8 4.6
17.7 20.9 17.7 2.8 7.9 1.1 7.3 16.8 23.2 31.9 14.3 13.5 12.0 49.4 23.3 1.3 6.1 5.8
Notes
Deteriorating gross margins
23.1 95.9 na 3,745.7 3,745.7
55.6 86.7 195.7 176.2 176.2
-10.2 -35.8 -63.8 -81.5 -81.5
7.5 22.8 40.8 92.5 92.5
12.4 19.3 21.9 32.6 32.6
2.59 2.59 2.59 46.43 1.80
7.17 7.17 7.17 54.83 4.53
1.33 1.33 1.33 52.56 0.65
2.56 2.56 2.56 54.45 1.26
3.39 3.39 3.39 56.57 1.67
50
December 15, 2011
Cashflow(TWDmn)
FY09 3,888 2,375 -3,695 2,569 -2,720 -151 -3,138 -25 117 1,675 -1,522 -75 11,252 3,830 203 15,210 13,687 4,411 18,098 -13,695 FY10 7,260 -2,218 4,759 9,801 -4,980 4,822 -11,298 78 -10 3,351 -3,057 -1,384 0 499 18 -867 -3,925 18,098 14,173 -7,509 FY11F 4,659 -3,719 -93 846 -5,000 -4,154 560 -1,351 0 790 -4,154 -3,837 0 5,900 0 2,063 -2,091 14,173 12,082 482 FY12F 5,723 -135 -113 5,475 -3,000 2,475 220 0 0 -220 2,475 -562 0 0 0 -562 1,913 12,082 13,996 -1,431 FY13F 6,829 -335 -20 6,474 -5,000 1,474 150 0 0 -150 1,474 -1,081 0 0 0 -1,081 393 13,996 14,388 -1,824 Notes
Increasing our capex estimate for FY11F
Balancesheet(TWDmn)
FY09 18,098 3,730 4,534 1,946 485 28,793 2,215 13,840 0 616 45,464 4,403 976 4,251 9,630 0 132 9,762 0 7,690 1,784 26,229 35,702 45,464
FY10 14,173 207 6,646 2,676 734 24,436 17,036 17,345 0 538 59,355 4,301 1,383 4,718 10,401 2,363 122 12,887 0 8,475 5,993 32,000 46,468 59,355
FY11F 12,082 207 7,633 3,273 734 23,929 16,476 19,476 0 1,889 61,771 1,801 1,565 2,400 5,767 10,763 122 16,652 0 9,826 3,292 32,000 45,118 61,771
FY12F 13,996 207 7,822 3,400 734 26,158 16,256 19,274 0 1,889 63,577 1,801 1,626 2,520 5,947 10,763 122 16,833 0 9,826 4,918 32,000 46,744 63,577
FY13F 14,388 207 8,574 3,294 734 27,197 16,106 20,516 0 1,889 65,708 1,801 1,812 2,646 6,259 10,763 122 17,144 0 9,826 6,738 32,000 48,564 65,708
Notes
Net cash position
2.99 74.0
2.35 186.4
4.15 11.6
4.40 14.4
4.35 17.6
net cash net cash
net cash net cash
0.10 1.1
net cash net cash
net cash net cash
109.9 83.5 28.4 165.0
103.2 66.5 33.9 135.8
146.8 76.3 37.8 185.3
148.2 82.6 39.5 191.4
139.6 74.2 38.1 175.7
51
December 15, 2011
Fig. 68: Epistar: Earnings estimate revisions

New forecasts TWDmn Revenues Gross profit Operating profit Pre-tax profit Net profit EPS (TWD) Margins (%) Gross margin Operating margin Pretax margin Net margin 19.8 10.1 7.1 6.4 22.5 13.2 13.0 11.5 23.2 14.3 15.4 13.5 20.0 10.4 7.3 6.5 22.5 13.2 12.1 10.8 22.7 14.0 13.9 12.4 (0.2) (0.3) (0.1) (0.1) 0.0 0.1 0.9 0.7 0.5 0.3 1.5 1.2 2011F 17,751 3,520 1,790 1,265 1,136 1.3 2012F 19,077 4,295 2,520 2,486 2,188 2.6 2013F 21,435 4,966 3,071 3,297 2,901 3.4 Previous forecasts 2011F 18,406 3,679 1,909 1,335 1,200 1.4 2012F 20,008 4,497 2,632 2,417 2,151 2.5 2013F 22,457 5,093 3,146 3,121 2,778 3.2 2011F (3.6) (4.3) (6.2) (5.2) (5.3) Change (%) 2012F (4.7) (4.5) (4.2) 2.8 1.7 2013F (4.5) (2.5) (2.4) 5.6 4.4
Fig. 69: Epistar: quarterly earnings forecasts (Parent base)

(TWDmn) Net sales COGS Gross profit Op expenses Op profit Non-op income Pre-tax profit Net profit EPS (TWD) Operating ratios (%) Gross margin Operating margin Pre-tax profit margin Net profit margin Year-to-year (%) Net sales Gross profit Operating profit Pre-tax profit Net profit Qtr-to-Qtr (%) Net sales Gross profit Operating profit Pre-tax profit Net profit -8% -48% -63% -64% -70% 20% 125% 304% 101% 112% -20% -52% -74% -99% -98% -13% -8% -3% 301% 198% 4% 7% 21% 247% 247% 24% 53% 100% 267% 267% 11% 23% 37% 78% 78% -4% -10% -14% -12% -12% 10% -54% -76% -64% -65% 2% -28% -34% -55% -56% -25% -69% -84% -100% -99% -23% -48% -62% -96% -97% -10% -50% -64% -80% -80% -13% 7% 23% -64% -63% -10% -27% -39% -34% -36% 25% 85% 223% 8980% 6656% 38% 80% 187% 1885% 1885% 7% 22% 41% 96% 92% 14.8% 5.7% 9.0% 7.8% 27.9% 19.1% 15.2% 13.8% 16.7% 6.2% 0.2% 0.3% 17.8% 6.9% 1.1% 1.0% 19.8% 10.1% 7.1% 6.4% 18.3% 8.1% 3.8% 3.4% 22.6% 13.0% 11.2% 9.9% 24.9% 16.0% 18.0% 15.9% 23.2% 14.3% 16.4% 14.4% 22.5% 13.2% 13.0% 11.5% 1Q11 4,448 3,787 660 408 252 150 402 349 0.41 2Q11 5,332 3,846 1,486 468 1,018 (208) 810 738 0.86 3Q11 4,263 3,549 714 450 264 (253) 11 12 0.01 4Q11F 3,708 3,049 659 403 256 (214) 42 37 0.04 2011F 17,751 14,231 3,520 1,730 1,790 (524) 1,265 1,136 1.33 1Q12F 3,850 3,146 704 394 310 (164) 147 129 0.15 2Q12F 4,784 3,705 1,079 457 622 (84) 538 474 0.55 3Q12F 5,319 3,997 1,323 469 853 106 960 844 0.99 4Q12F 5,124 3,934 1,190 455 735 106 841 740 0.87 2012F 19,077 14,782 4,295 1,775 2,520 (34) 2,486 2,188 2.56
52
December 15, 2011
Fig. 70: Epistar: P/E bands (bonus-adjusted)

(TWD) 200 180 160 140 120 100 80 60 40 20 0
Fig. 71: Epistar: P/BV bands

(TWD) 200 180 160 140 120 100 80 60 40 20 0
2.4x 1.8x 1.2x 0.6x
40x 30x 20x 10x
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Source: TEJ, Nomura estimates
Valuation methodology. As we revise our earnings estimates, we raise our TP to TWD71. Our new TP of TWD71 is based on 1.3x FY12F BVPS of TWD54.5 vs our previous TP of TWD62, based on 1.0x FY12F BVPS of TWD62. We use the mid-end of the historical range of 0.6-2.0x post the 2008 financial crisis, reflecting its leading technology but lower profitability and our low ROE estimate of 2-4% for 2011-12F. Key risks include: 1) faster/slower-than-expected LED TV growth; 2) faster/slowerthan-expected ramp-up of panel makers in-house LED chip capacity, and 3) worse-thanexpected ASP/margin erosion caused by oversupply or the ramp-up of replacement new technology such as AM-OLED.
Jul-12
53
Everlight Electronics
DISPLAYS
2393.TW 2393 TT
EQUITY RESEARCH
No light at the end of the tunnel
December 15, 2011 Rating Remains Target price Reduced from 46.0 Closing price December 13, 2011 Potential downside
Weakening industry position in the LED lighting and backlighting business

Action/Valuation: Reduce on weakening industry position We maintain our Reduce rating on Everlight, owing to structural issues in the LED backlighting and general lighting business. With Everlights weakening industry position, we trim our FY11-13F earnings forecasts by 8-12% and lower our TP to TWD44 (from TWD46), based on 12x FY12F EPS of TWD3.71. Catalyst I: LED lighting a tough market to penetrate Everlight is facing several structural issues in the LED lighting market: 1) as the core value of the supply chain is shifting to downstream LED lighting fixture/design, standalone packaging makers such as Everlight are forced to tap into the fragmented lighting fixture/design business, which is unfamiliar territory for such players; 2) Everlight is aggressively developing its own-brand lighting, but we see increasing new challenges ahead, such as direct competition from existing large players , supply chain management, distribution channels, marketing, etc, and 3) lighting margins could be way below the corporate average, dragged by limited economies of scale and low-priced strategies in the branding business. Catalyst ll: Backlighting structural issues remain We havent seen any turnaround in backlighting for Everlight, due to: 1) its addressable market being squeezed by increasing in-house production by panel makers; 2) intensifying competition from emerging Chinese players, and 3) a weak customer base in TV and tablet PC applications. Although we expect Everlights 4Q11F utilisation rate may be sustained (our 4Q11F sales forecast: -1% q-q), driven by some rush orders ahead of the Chinese New Year, we see limited growth drivers beyond CNY demand.
Reduce
TWD 44.0 TWD 47.8 -8%
Anchor themes As LED TV price premiums continue to shrink, we expect packaging companies will suffer the most from pricing pressure, since they provide value-added effort and have less bargaining power. Also, the LED lighting is a tough market to address. Nomura vs consensus Our FY12F EPS forecast is 9% lower than consensus, as we factor in higher pricing pressure and the company's weakening industry position.
Research analysts Taiwan Technology/Hardware Anne Lee, CFA - NITB anne.lee@nomura.com +886 2 2176 9966 Eason Hung - NITB eason.hung@nomura.com +886 2 2176 9965
31 Dec Currency (TWD)
FY10 Actual Old
FY11F New Old
FY12F New Old
FY13F New
Revenue (mn) Reported net profit (mn) Normalised net profit (mn) Normalised EPS Norm. EPS growth (%) Norm. P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)
16,652 2,310 2,310 5.53 12.1 8.6 6.0 1.3 8.4 15.6
16,230 1,621 1,621 3.88 -29.8 N/A 7.8 N/A N/A 10.4
16,277 1,486 1,486 3.56 -35.7 13.4 7.9 1.3 7.5 9.6
17,744 1,741 1,741 4.17 7.4 N/A 6.5 N/A N/A 10.5
17,504 1,549 1,549 3.71 4.2 12.9 6.5 1.2 4.8 9.5
19,311 1,875 1,875 4.49 7.7 N/A 5.7 N/A N/A 10.7
18,856 1,656 1,656 3.96 7.0 12.1 5.7 1.1 5.0 9.6
1.1 net cash net cash net cash net cash net cash net cash
Nomura | Everlight Electronics
December 15, 2011
Key data on Everlight Electronics

Incomestatement(TWDmn)
Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis FD normalised P/E (x) FD normalised P/E at price target (x) Reported P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (TWD) Norm EPS (TWD) Fully diluted norm EPS (TWD) Book value per share (TWD) DPS (TWD)

FY09 11,208 -7,917 3,292 -1,850 1,442 2,136 -694 1,442 -69 251 317 1,941 -140 1,800 0 FY10 16,652 -12,320 4,332 -2,197 2,136 2,949 -813 2,136 -102 429 66 2,529 -219 2,310 0 FY11F 16,277 -12,712 3,566 -2,019 1,547 2,471 -924 1,547 -121 31 256 1,712 -227 1,486 0 FY12F 17,504 -13,680 3,824 -2,093 1,731 2,767 -1,036 1,731 -131 180 0 1,780 -231 1,549 0 FY13F 18,856 -14,794 4,062 -2,307 1,755 2,902 -1,147 1,755 -131 280 0 1,904 -248 1,656 0
(TWD) 90 80 70 60 50 40 A ug 11 S ep 11 M ay 11 F eb 11 J an 11 J un 11 N ov 11 O c t 11 A pr 11 J ul 11 D ec 11 M ar 11 Price Rel MSCI Taiwan 110 100 90 80 70 60

(%) Absolute (TWD) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (TWD) 3-mth avg daily turnover (USDmn) Major shareholders (%) Yeh Yin Fu Labor Pension Fund 1M -14.9 -15.1 -9.6 662.5 75.0 90.8/45.3 7.31 3M 12M -5.2 -42.1 -7.2 -42.4 0.0 -21.8
1,800 1,800 -1,167 633
2,310 2,310 -1,675 635
1,486 1,486 -1,505 -19
1,549 1,549 -967 581
1,656 1,656 -1,008 648
4.3 3.9
9.7 8.9 9.7 6.0 40.0 1.3 8.0 11.3 29.4 19.1 12.9 16.1 7.2 64.8 6.6 1.1 14.8 9.5
8.6 8.0 8.6 8.4 4.8 1.3 6.0 7.9 26.0 17.7 12.8 13.9 8.7 72.5 6.7 1.4 15.6 11.8
13.4 12.4 13.4 7.5 7.9 1.3 7.9 12.6 21.9 15.2 9.5 9.1 13.2 101.3 6.1 1.1 9.6 6.7
12.9 11.9 12.9 4.8 8.3 1.2 6.5 10.0 21.8 15.8 9.9 8.8 13.0 62.5 5.7 1.0 9.5 7.7
12.1 11.1 12.1 5.0 7.5 1.1 5.7 8.9 21.5 15.4 9.3 8.8 13.0 60.9 5.3 0.9 9.6 8.1
Notes
Deteriorating gross margins
1.5 10.6 7.3 31.0 31.0
48.6 38.1 48.1 12.1 12.1
-2.3 -16.2 -27.6 -35.7 -35.7
7.5 12.0 11.9 4.2 4.2
7.7 4.9 1.4 7.0 7.0
4.93 4.93 4.93 35.49 2.85
5.53 5.53 5.53 36.10 4.00
3.56 3.56 3.56 38.07 3.59
3.71 3.71 3.71 39.98 2.31
3.96 3.96 3.96 42.05 2.40
55
December 15, 2011
Cashflow(TWDmn)
FY09 2,136 2,167 -3,866 437 -743 -306 -4,753 522 -151 2,614 -2,074 -1,167 2,831 3,110 89 4,863 2,789 1,208 3,996 -965 FY10 2,949 -220 1,414 4,143 -1,110 3,032 -1,111 118 43 -1,970 112 -1,675 0 290 313 -1,072 -960 3,996 3,037 168 FY11F 2,471 142 -92 2,521 -1,000 1,521 -31 -532 0 563 1,521 -1,505 0 0 313 -1,192 329 3,037 3,366 -162 FY12F 2,767 4 -363 2,409 -1,000 1,409 -180 93 0 87 1,409 -967 0 0 313 -655 754 3,366 4,120 -915 FY13F 2,902 143 -379 2,666 -1,000 1,666 -280 93 0 187 1,666 -1,008 0 0 313 -695 971 4,120 5,091 -1,886 Notes
Positive net cash position
Balancesheet(TWDmn)
FY09 3,996 2,472 3,476 627 510 11,082 8,594 3,923 0 742 24,340 808 2,558 4,004 7,370 2,223 212 9,806
FY10 3,037 836 4,151 829 764 9,617 11,342 4,483 0 624 26,066 1,098 2,681 4,793 8,572 2,106 255 10,932
FY11F 3,366 836 4,558 1,144 764 10,668 11,373 4,558 0 1,156 27,755 1,098 3,305 5,032 9,436 2,106 255 11,796
FY12F 4,120 836 4,901 1,300 764 11,921 11,553 4,523 0 1,064 29,060 1,098 3,557 5,284 9,939 2,106 255 12,300
FY13F 5,091 836 5,280 1,331 764 13,302 11,833 4,376 0 971 30,482 1,098 3,846 5,548 10,493 2,106 255 12,853
Notes
Net cash position
4,102 10,457 -25 14,535 24,340
4,192 11,499 -558 15,133 26,066
4,198 11,480 280 15,959 27,755
4,198 12,062 500 16,760 29,060
4,198 12,710 720 17,628 30,482
1.50 20.9
1.12 21.0
1.13 12.8
1.20 13.2
1.27 13.4
net cash net cash
0.06 1.1
net cash net cash
net cash net cash
net cash net cash
102.2 28.6 101.8 29.1
83.6 21.6 77.6 27.5
97.6 28.3 85.9 40.0
98.9 32.7 91.8 39.8
98.5 32.5 91.3 39.7
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Fig. 72: Everlight: earnings revisions

New forecasts (TWDmn) Revenues Gross profit Operating profit Pre-tax profit Net profit EPS (TWD) Margins (%) Gross margin Operating margin Pretax margin Net margin 2011F 16,277 3,566 1,547 1,712 1,486 3.56 21.9 9.5 10.5 9.1 2012F 17,504 3,824 1,731 1,780 1,549 3.71 21.8 9.9 10.2 8.8 2013F 18,856 4,062 1,755 1,904 1,656 3.96 21.5 9.3 10.1 8.8 Previous forecasts 2011F 16,230 3,744 1,641 1,873 1,621 3.88 23.1 10.1 11.5 10.0 2012F 17,744 4,001 1,760 2,002 1,741 4.17 22.5 9.9 11.3 9.8 2013F 19,311 4,276 1,914 2,156 1,875 4.49 22.1 9.9 11.2 9.7 2011F 0.3 (4.8) (5.8) (8.6) (8.4) Change (%) 2012F (1.4) (4.4) (1.7) (11.1) (11.1) 2013F (2.4) (5.0) (8.3) (11.7) (11.7)
(1.2) (0.6) (1.0) (0.9)
(0.7) (0.0) (1.1) (1.0)
(0.6) (0.6) (1.1) (0.9)
Source: Company data, Nomura research estimates
Fig. 73: Everlight: quarterly earnings forecasts

(TWDmn) Net sales COGS Gross profit Op expenses Op profit Non-op income Pre-tax profit Net profit EPS (TWD) Operating ratios (%) Gross margin Operating margin Pre-tax profit margin Net profit margin Year-to-year (%) Net sales Gross profit Operating profit Pre-tax profit Net profit Qtr-to-Qtr (%) Net sales Gross profit Operating profit Pre-tax profit Net profit -3% 23% 66% 179% 107% 20% 8% 8% -9% -6% -10% -22% -38% -27% -27% -1% -1% 11% -9% -10% -9% -10% -16% -19% -19% 21% 40% 72% 86% 86% 8% 11% 14% 10% 10% -4% -10% -18% -9% -9% 4% -20% -36% -19% -15% 1% -19% -20% -45% -50% -15% -28% -49% -54% -54% 4% 2% 23% 68% 28% -2% -18% -28% -32% -36% -2% -25% -38% -51% -50% -1% -2% -1% 0% -1% 19% 39% 83% 50% 48% 15% 26% 35% 50% 50% 8% 7% 12% 4% 4% 25.4% 11.9% 14.4% 12.2% 22.9% 10.7% 10.9% 9.6% 19.7% 7.3% 8.9% 7.8% 19.8% 8.2% 8.1% 7.1% 21.9% 9.5% 10.5% 9.1% 19.5% 7.5% 7.2% 6.3% 22.6% 10.7% 11.1% 9.6% 23.1% 11.3% 11.2% 9.8% 21.6% 9.5% 10.6% 9.2% 21.8% 9.9% 10.2% 8.8% 1Q11 3,738 2,788 950 506 444 94 538 457 1.09 2Q11 4,486 3,460 1,025 546 479 12 491 430 1.03 3Q11 4,048 3,249 799 503 295 63 358 316 0.76 4Q11F 4,006 3,214 792 464 328 (3) 325 283 0.68 2011F 16,277 12,712 3,566 2,019 1,547 166 1,712 1,486 3.56 1Q12F 3,656 2,942 715 439 276 (13) 263 229 0.55 2Q12F 4,427 3,425 1,002 529 473 17 490 426 1.02 3Q12F 4,799 3,692 1,107 566 541 (3) 539 469 1.12 4Q12F 4,622 3,622 1,000 559 441 47 489 425 1.02 2012F 17,504 13,680 3,824 2,093 1,731 49 1,780 1,549 3.71
Source: Company data, Nomura research estimates
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Fig. 74: Everlight: P/E bands (bonus-adjusted)

(TWD) 140 120 100 80 60 40 20
Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12
Fig. 75: Everlight: P/BV bands

(TWD) 140 120 3.2x 2.4x 1.6x 0.8x
22x 17x 12x 7x
100 80 60 40 20
Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12
Valuation Methodology. Our TP of TWD44 is based on 12x 2012F EPS of TWD3.71 (at the low-end of its historical P/E range of 12-21x), vs. our previous TP of TWD46, at 13x 2H11-1H12E EPS. We lower our P/E multiple to the trough 12x valuation, reflecting its weakening industry position. Key risks to our target price include: 1) faster-than-expected LED TV growth; 2) higher-than-expected margin share gain in backlight applications; 3) better-thanexpected ASP/margin erosion, and; 4) faster-than-expected growth from lighting.
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Appendix A-1
Analyst Certification
We, Anne Lee, James Kim, Greg Kang, Eason Hung and Kyoichiro Yokoyama, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures

Mentioned companies
Issuer name SEMCO LG Innotek Seoul Semiconductor Everlight Electronics Epistar Corp Ticker 009150 KS 011070 KS 046890 KS 2393 TT 2448 TT Price KRW 90,300 KRW 73,100 KRW 22,050 TWD 51.1 TWD 64.2 Price date 14-Dec-2011 14-Dec-2011 14-Dec-2011 14-Dec-2011 14-Dec-2011 Stock rating Neutral Neutral Neutral Reduce Neutral Sector rating Not rated Not rated Not rated Not rated Not rated Disclosures 4,128 4,165
Disclosures required in the European Union

4 Market maker Nomura International plc or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related derivatives of the issuer.
Disclosures required in Korea

128 Liquidity Provider for Equity Linked Warrant Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is SEMCO (009150.KS), and holds 45,077,200 warrants as of 13-Dec-2011. 165 Liquidity Provider for Equity Linked Warrant Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is LG Innotek (011070.KS), and holds 7,058,890 warrants as of 13-Dec-2011.
Previous Rating
Issuer name SEMCO LG Innotek Seoul Semiconductor Everlight Electronics Epistar Corp Previous Rating Buy Not Rated Reduce Neutral Buy Date of change 26-Jul-2011 24-Sep-2010 14-Dec-2011 24-Mar-2011 24-Sep-2010
Rating and target price changes

Ticker Old stock rating New stock rating Old target price New target price
LG Innotek Seoul Semiconductor Everlight Electronics Epistar Corp
011070 KS 046890 KS 2393 TT 2448 TT
Neutral Reduce Reduce Neutral
Neutral Neutral Reduce Neutral
KRW 71,000 KRW 27,000 TWD 46.0 TWD 62.0
KRW 74,000 KRW 22,000 TWD 44.0 TWD 71.0
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LG Innotek (011070 KS)

Rating and target price chart (three year history)
KRW 73,100 (14-Dec-2011) Neutral (Sector rating: Not rated)

Date 08-Sep-11 30-Jun-11 24-Jan-11 24-Sep-10 24-Sep-10 Rating Target price 71,000.00 107,000.00 128,000.00 142,000.00 Closing price 62,600.00 96,400.00 135,500.00 134,000.00 134,000.00
Neutral
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology Our target price of KRW74,000 is based on 1.0x FY12F BVPS of KRW73,597. We think applying 1.0x P/B (rolled forward to 2012F BVPS of KRW73,597) is reasonable as we think that LGI will likely continue to suffer slowing topline growth with low profitability in 2012F and that it will face lacklustre cash generation for a while. Risks that may impede the achievement of the target price Captive customers slowing down: As a key component supplier for the LG group, volatility in captive earnings momentum is a risk for LG Innotek, both to the upside and downside. However, LG Innotek is diversifying its client base and product line to reduce dependency on captive customers.
Seoul Semiconductor (046890 KS)
Rating and target price chart (three year history) Date 28-Apr-11 24-Sep-10 24-Sep-10 26-Jul-10 26-Jul-10 18-Jun-10 22-Mar-10 22-Mar-10 Rating Reduce 34,000.00 Neutral 50,000.00 53,000.00 Buy 49,000.00 Target price 27,000.00 Closing price 34,100.00 43,300.00 43,300.00 46,150.00 46,150.00 45,400.00 41,700.00 41,700.00
Valuation Methodology Our target price of W22,000 is derived by applying a target multiple of 2.0x, which is a historical trough, to our FY11F BVPS estimate of W10,978. Risks that may impede the achievement of the target price We believe rapid penetration of LEDs in general lighting will provide high profitability for LED makers. However, slow penetration of LED in general lighting would provide further downside to our earnings forecasts in 2012F and 2013F
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Epistar Corp (2448 TT)

TWD 64.2 (14-Dec-2011) Neutral (Sector rating: Not rated)

Date 28-Oct-11 29-Apr-11 24-Sep-10 24-Sep-10 26-Jul-10 30-Apr-10 26-Jan-10 26-Jan-10 10-Oct-09 27-Apr-09 25-Mar-09 17-Dec-08 Target price Closing price 62.00 55.70 98.00 94.90 Neutral 99.30 101.00 99.30 120.00 90.50 155.00 101.50 Buy 97.50 146.00 97.50 Suspended 113.00 54.00 63.10 25.30 52.50 25.00 30.75 Rating
Valuation Methodology Our TP of TWD71 is based on 1.3x FY12F BVPS of TWD54.5. We use the mid-end of the historical range of 0.6-2.0x post the 2008 financial crisis, reflecting its leading technology but lower profitability and our low ROE estimate of 2-4% for 2011-12F. Risks that may impede the achievement of the target price Key risks include: 1) faster/slower-than-expected LED TV growth; 2) faster/slower-than-expected ramp-up of panel makers in-house LED chip capacity and 3) worse-than-expected ASP/margin erosion, caused by oversupply or the ramp-up of replacement new technology, such as AM-OLED.
Everlight Electronics (2393 TT)
Rating and target price chart (three year history) Date 30-Aug-11 24-Mar-11 24-Mar-11 24-Sep-10 20-Aug-10 26-Jan-10 26-Jan-10 10-Oct-09 25-Mar-09 17-Dec-08 17-Dec-08 Target price Closing price 46.00 50.70 Reduce 83.10 74.00 83.10 86.00 89.50 90.00 86.00 Neutral 94.40 117.00 94.40 Suspended 99.48 38.00 59.20 Reduce 43.39 40.00 43.39 Rating
TWD 51.1 (14-Dec-2011) Reduce (Sector rating: Not rated)
Valuation Methodology Our TP of TWD44 is based on 12x 2012F EPS of TWD3.71 (at the low-end of its historical P/E range of 12-21x). Risks that may impede the achievement of the target price Key risks to our target price include: 1) faster-than-expected LED TV growth; 2) higher-than-expected margin share gain in backlight applications; 3) better-than-expected ASP/margin erosion, and; 4) faster-than-expected growth from lighting.
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December 15, 2011
SEMCO (009150 KS)


Date 26-Jul-11 26-Jul-11 02-Jun-11 24-Jan-11 24-Sep-10 28-May-10 08-Apr-10 29-Jan-10 03-Sep-09 28-Jul-09 28-Jul-09 26-Jun-09 26-Jun-09 24-Apr-09 05-Mar-09 Rating Target price Neutral 90,000.00 126,000.00 148,000.00 144,000.00 164,000.00 155,000.00 130,000.00 124,000.00 Buy 96,000.00 Neutral 62,000.00 36,000.00 35,000.00 Closing price 89,900.00 89,900.00 93,500.00 124,500.00 117,500.00 139,500.00 128,000.00 97,500.00 94,400.00 69,000.00 69,000.00 64,000.00 64,000.00 50,100.00 43,200.00
Valuation Methodology Our price target of KRW90,000 is derived by applying a P/B of 2.0x to 2012F BVPS of KRW45,109. Risks that may impede the achievement of the target price The won/US dollar exchange rate is the biggest earnings risk for SEMCO, which translates to higher earnings volatility, both to the upside and downside, depending on currency movements. In addition, downside risks to our target price include the possibility of aggressive MLCC capacity expansion by Japanese manufacturers.
Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura research is available on www.nomuranow.com, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx/ or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport-eu@nomura.com for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.
Distribution of ratings (US)

The distribution of all ratings published by Nomura US Equity Research is as follows: 39% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 8% of companies with this rating are investment banking clients of the Nomura Group*. 54% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 3% of companies with this rating are investment banking clients of the Nomura Group*. 7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.
Distribution of ratings (Global)

The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 41% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 50% of companies with this rating are investment banking clients of the Nomura Group*. 10% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 20% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report.
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Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009
STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.
Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.
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ANCHOR REPORT

Asia LED lighting

Still trapped in the dark

December 15, 2011

Stay bearish: backlighting is unprofitable and general lighting a tough market

Asia LED lighting

ANCHOR REPORT: Still trapped in the dark

December 15, 2011

Stay bearish: backlighting is unprofitable and general lighting a tough market

Source Upgrade. Source: Bloomberg, Nomura estimates

Rating: See report end for details of Nomuras rating system.