Focus On iVD

Industry Analysis
January 8, 2010
Bio/Healthcare
Focus on in-vitro diagnostics
Positive (Initiate)
Analyst Irene Kim
822)768-7977, irene.kim@wooriwm.com
Domestic healthcare players go abroad Global players such as Roche, J&J, and Siemens have entered the medical equipment business, where operating margins exceed 20%. We advise focusing on companies doing in-vitro diagnostics (IVD; large overlap with equipment), given: 1) high operating margins; 2) strong growth for the healthcare market (2008~2013 CAGR of 13.2%); and 3) an expected surge in the medical equipment and diagnosis markets triggered by US healthcare reform, which supports medical expenditures for the elderly. Korean group companies to lead domestic healthcare market The Samsung Group and SK Chemical have started to focus on healthcare and biotech for three reasons. First, global healthcare expenditures continue to grow. In particular, we expect 2010 total healthcare spending-to-GDP ratios of 18.0% in the US, 10.6% in Germany, and 5.5% in Korea. Second, demand for medical equipment grows as a population ages. Third, technological improvement will likely lead to the creation of new markets. Top picks: Samsung Techwin, SD We recommend Samsung Techwin and Standard Diagnostics (SD) as our top picks. We also expect rapid growth for Macrogen, which has core competencies in personalized medicine.
Susie Lee (RA)
822)768-7646, susie.lee@wooriwm.com
Rating and investment indices

Ticker Samsung Techwin SD Macrogen Bionia Infopia 012450.KS 066930.KQ 038290.KQ 064550.KQ 036220.KQ Rating Buy (Maintain) Buy (Initiate) NR NR NR Target price (12M) 120,000 (Maintain) 38,000 (Initiate) NR NR NR Price (1/4) 91,000 32,300 12,900 5,900 14,700 Op margin 2009E 2010F 8.1 45.3 5.0 25.0 25.6 7.9 42.2 7.1 25.8 26.9 P/E 2009E 2010F 26.6 8.3 21.5 10.8 12.3 17.4 6.9 16.1 9.2 9.0 P/B 2009E 2010F 4.5 3.3 3.6 2.3 -
(Unit: won, %, x)
ROE 2009E 2010F 17.3 47.9 22.6 39.1 -
Source: Woori I&S research center estimates
Woori Investment & Securities does not have a stake greater than or equal to 1% in companies mentioned in this material as of the preparation date. Woori I&S has not provided this material to an institutional investor or other third party in advance. The Korean version of this material was distributed on January 5, 2010. The analyst and his/her spouse do not own any securities of companies mentioned in this material as of the preparation date. Woori I&S is an issuer and LP (liquidity provider) of ELW taking Samsung Techwin as an underlying asset. Macrogen, Bionia, and Infopia are not under coverage at Woori I&S. Thus, Woori I&S does not present a rating and target price on the counter. This report correctly reflects the analysts opinion and was written without any external influence or intervention.
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Table of contents
I. Investment Summary ................................................................................................... 3
II. Valuation.......................................................................................................................
III. Healthcare to show high growth compared to other industries ............................

1. Healthcare market to post 2008~2013 CAGR of 13.2% 2. Focus on growth of IVD 3. Samsung and SK Chemical enter bio/healthcare
10
IV. Changing domestic and global diagnostics market ............................................... 16

1. Developed markets such as US, Europe leading global diagnostics industry 2. Domestic diagnostics overview 3. FDA approval to begin with 510k clearance
[Company Analysis]
Samsung Techwin (012450.KS, Buy, TP W120,000) ................................................... 22 SD (066930.KQ, Buy, TP W38,000) ............................................................................... 28 Macrogen (038290.KQ, Not Rated) ............................................................................... 33 Bioneer (064550.KQ, Not Rated) .................................................................................. 35 Infopia (036220.KQ, Not Rated) .................................................................................... 36
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I. Investment summary
The biotech industry, particularly healthcare, is expected to attract investor attention in 2010. In particular, traditional pharmaceutical companies focusing on synthetic drugs face limited growth due to lower chances of new drug development. Moreover, it has become more difficult to gain FDA approval for new drugs. Thus, drug makers are shifting focus to biodrugs instead of synthetic drugs.
Within the healthcare industry, investors have been less interested up to now in the nonpharmaceutical sectors. But while pharmaceutical companies have enjoyed lofty operating margins, structural changes are underway in the market amid the absence of new drug development and intensifying competition.
Diagnosis market to grow on US healthcare reform
In addition to traditional pharmaceuticals, we note that medical equipment is also profitable. Roche, J&J, GE, Siemens, and Abbott have diversified into the medical equipment market, where operating margins are over 20%.
Healthcare reform has been a major political issue in the US, and we expect reform to drive the growth of the global medical equipment and diagnostic markets. In particular, the US is stressing the need for government intervention in the healthcare industry, with policy measures including promoting the use of generic drugs and nurturing the medical equipment/diagnostic markets to reduce chronic diseases in the elderly. In addition, because of the lack of public healthcare coverage, 16% of the US population (46.60mn) is not covered by health insurance.
Focus on companies with biodrug pipelines, medical equipment plays
Of the many biotech companies, only a few have both technology and marketing capability. New drug development is almost impossible for them without licensing-out due to the massive capital needed. As such, we recommend screening biotech companies for plays boasting competitive drugs and equipment protected by patents.
Top picks: Samsung Techwin, SD
Biotech/healthcare companies look attractive. The value chain of the healthcare industry is prevention diagnosis treatment management, and we see promising companies in each link of the chain. For biodrug makers, we note that it is critical to select the right sales partner. Once biotech companies succeed in developing new drugs and/or biodrugs, the markets interest tends to shift interest to the distribution partner. For biotech companies, the selection of distribution partner is important, as this decision can affect sales growth and market share. In this regard, we recommend Samsung Techwin and Standard Diagnostics (SD) as our top picks, partly due to their successful track records in selecting partners. In addition, we also maintain a positive view on Macrogen, which should also grow rapidly based on its core competencies in individualized prescription.
Bio/Healthcare
Samsung Techwin: transforming into a healthcare play
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Samsung Techwin has a traditional cash cow (defense business) and has recently secured a new growth driver in its security equipment business. However, 4Q09 earnings are believed to be disappointing due to performance bonus payments and a higher-than-expected acquisition price for its CCTV division. On the upside, Techwin has prepared entry into new growth businesses, such as robotics, biotech, and healthcare, and these new businesses are expected to generate meaningful sales from 2010. Key investment points for Techwin are as follows: 1) it should be the primary beneficiary of the Samsung Groups biotech and healthcare business initiatives; 2) it is expected to take over Samsung Electronics security equipment division; and 3) it boasts stable cash cows, such as its power system and defense businesses.
SD: strong player in rapid testing
Standard Diagnostics (SD) is a specialized virus diagnostics company, and its core business is rapid test kits based on blood samples. The companys rapid test kit diagnoses antibodies or antigens, which are markers of specific diseases. Currently, it sells rapid test kits for AIDS, malaria, and hepatitis B. SD is capable of producing the antibodies and antigens used for the rapid test kits internally, which not only shows its technological prowess but also gives it a competitive edge in pricing. Key investment points for SD are: 1) it is the leading player in rapid test kits; 2) it is expected to advance into developed markets following the expiry of Inverness patent; and 3) it has been successful in R&D in biochips and molecule diagnostics.
Macrogen: leader in consumer genomics
Macrogen, a genetic diagnostics company, was listed in 2000. Following completion of the Human Genome Project in 2007, the company set a new paradigm in information medicine, and is expected to emerge as a leader in the personalized medicine market based on its strength in genetics. In 2000, when genomic medicine was just getting started, genome analysis per person would have cost more than US$3bn, but the cost has plummeted and should reach US$1,000/person in 2010 thanks to advancing gene sequencing technology. The drop in cost should lead to explosive growth in personalized medicine business. Currently, the personalized medicine market is estimated at US$232bn, but should grow more than 11% per annum going forward. Key investment points for Macrogen are as follows: 1) it is a leader in consumer genomics; 2) it is the only downstream company in Korea in the personalized medicine business; and 3) it has made investments in a global sequencing equipment company to better position itself in the personalized medicine market.
Recommendations
Code Samsung Techwin SD Macrogen Bioneer Infopia 012450.KS 066930.KQ 038290.KQ 064550.KQ 036220.KQ Rating Target price (12M) Current price (1/4) 91,000 32,300 12,900 5,900 14,700 OP margin 2009E 8.1 45.3 5.0 25.0 25.6 2010F 7.9 42.2 7.1 25.8 26.9 P/E 2009E 26.6 8.3 21.5 10.8 12.3 2010F 17.4 6.9 16.1 9.2 9.0 P/B 2009E 4.5 3.3 2010F 3.6 2.3 -
(Units: won, %, x)
ROE 2009E 17.3 47.9 2010F 22.6 39.1 -
120,000 Buy (Maintain) ( Maintain ) Buy(Initiate) 38,000( Initiate ) Not Rated Not Rated Not Rated Not Rated Not Rated Not Rated
Source: Woori I&S Research Center estimates
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II. Valuation
We initiate coverage on SD with a Buy rating and target price of W38,000. Meanwhile, we note that Samsung Techwin is already under our coverage under its traditional categorization as a tech stock, but in this report, we take a closer look at Techwins prospects in healthcare.
Mindray enjoying 45% premium to sector average
Our target was derived via RIM valuation. For comparison purposes, we note that there is no suitable comparable for SD or Techwin in Korea due to the healthcare industrys short history. Looking overseas, we think Mindray (China) is a good comparable for Samsung Techwins healthcare business model. Following the financial crisis, the healthcare sector has traded at a 16% discount to the MSCI US market, while Mindray has enjoyed a 45% premium to the sector thanks to its pronounced top- and bottom-line growth.
We believe Techwin is a similar case, boasting stable operations, strong margins, and growth potential. Currently, shares are trading at a 2010 P/E of 17x, vs the Kospi of 10x. We believe it merits a premium given: 1) a three-year-forward EPS CAGR of 37.1%, higher than peers; 2) synergy with the robotics division following the acquisition of its security & imaging business; and 3) the growth potential of the robotics and healthcare businesses.
Similarly, SD also boasts strong margins. The company sells rapid diagnostic kits at 200 agencies in 105 countries worldwide, and is set to tap into advanced markets in 2010. Shares are trading at a 2010 P/E of only 6.9x (EPS of W4,713), and thus, offer strong upside, in our view.
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US healthcare relative to MSCI US

(2006.1 =100) 120 110 100 90 80 70 60 '06.1 '07.1 '08.1 '09.1 MSCI US Healthcare (LHS) Relative return to MSCI US (RHS) 30 15 0 -15 -30 -45 -60
Source: Datastream, Woori I&S Research Center
Mindray enjoys 45% premium to sector average

(x) 50 40 30 20 10 0 '06 '07 '08 '09
MSCI US - P/E MSCI US. Healthcare - P/E Mindray- P/E
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Investment indicators for domestic healthcare players

Samsung Techwin Electronics Buy 012450.KS 91,000 4,384.8 0.93 2,339.6 2,652.0 3,237.0 146.9 214.1 254.6 956 3,553 5,232 -63.8 271.6 47.3 6.3 8.1 7.9 3.1 7.1 8.6 7.0 17.3 22.6 35.8 26.6 17.4 2.5 4.5 3.6 SD Pharma Buy 066930.KQ 32,300 258.4 0.91 40.3 64.3 82.4 14.2 29.1 34.8 1,091 3,828 4,713 3.5 250.8 23.1 35.2 45.3 42.2 21.6 47.7 45.7 18.3 47.9 39.1 8.3 8.3 6.9 1.5 3.3 2.3 Macrogen Pharma Not Rated 038290.KQ 12,900 64.6 0.99 16.5 -1.1 35 TTP -6.5 1.1 0.5 268.2 1.5 Bioneer Pharma Not Rated 064550.KQ 5,900 67.0 1.18 14.9 -0.3 -314 RR -2.3 -23.9 -10.1 NA 0.8 Infopia Pharma Not Rated 036220.KQ 14,700 109.3 1.39 37.2 11.2 747 -41.2 30.2 14.9 12.0 15.1 1.9 Nano EnTek Pharma Not Rated 039860.KQ 5,240 92.5 1.15 6.4 -1.6 -311 RR -24.9 -85.0 -24.9 NA 2.0 -
Core biz Rating Code Current price Market cap Beta Sales (Wbn) Op prof (Wbn) EPS (won) EPS growth (% y-y) Op margin (%) Net margin (%) ROE (%) P/E (x) P/B (x)
(Jan 4, won) (Wbn) (2-yr weekly) 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F
Source: annual reports, , Woori I&S Research Center estimates
Investment indicators for domestic healthcare players (1): 2010 P/E and EPS growth
(PER, x) 25 20 15 10 5 J&J Bio Merieux Becton Dickinson Roche Beckman Coulter Bayer Siemens SD (EPS growth, %) Samsung Techwin
Inverness Abbott
10
20
30
40
50
Source: Bloomberg, Woori I&S Research Center estimates
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Investment indicators for overseas healthcare players

Roche Country Ticker Current price Market cap Beta Sales ($mn) Op prof ($mn) EPS ($) EPS growth (% y-y) Op margin (%) Net margin (%) ROE (%) P/E (x) P/B (x) (Bloomberg) (Jan 4, $) ($mn) (2 weekly) 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F 2008 2009E 2010F Switzerland RO SW 174.5 146,987.9 0.85 39,494.6 47,928.6 48,709.1 12,529.2 13,774.3 15,934.4 10.0 11.6 13.0 -8.2 16.0 12.1 31.7 28.7 32.7 21.7 20.2 23.1 20.8 36.8 127.8 17.5 15.0 13.4 3.5 32.1 13.7 Siemens Germany SIE GY 91.8 83,880.8 1.09 103,865.1 104,827.6 108,691.2 7,768.4 7,586.0 9,515.1 3.6 5.9 7.6 -58.7 63.9 28.8 7.5 7.2 8.8 3.0 4.6 6.0 8.6 11.8 14.7 24.5 15.6 12.1 2.1 1.9 1.7 Abbott US ABT US 54.0 83,508.4 0.62 29,622.8 30,524.5 33,083.5 6,361.1 7,205.0 7,978.1 3.3 3.7 4.2 35.0 12.1 13.5 21.5 23.6 24.1 17.5 18.9 19.4 26.1 30.3 28.6 16.2 14.5 13.0 4.0 4.0 3.4 J&J US JNJ US 64.4 177,713.6 0.68 64,469.5 61,096.1 64,040.3 16,467.9 16,767.9 17,888.2 4.5 4.6 4.9 25.9 2.2 6.5 25.5 27.4 27.9 19.9 20.9 21.3 28.1 27.3 27.0 14.2 14.1 13.1 3.9 3.7 3.2 Beckman Bio Merieux Coulter US France BEC US BIM FP 65.4 116.7 4,537.0 4,604.9 0.76 0.68 3,097.8 1,428.2 3,237.5 1,762.9 3,766.4 1,894.2 341.7 226.2 406.3 298.5 515.9 328.0 3.6 3.9 3.9 5.2 4.5 5.8 -8.9 32.7 8.3 33.3 15.4 11.5 11.0 15.8 12.5 16.9 13.7 17.3 7.1 10.9 8.0 11.6 8.5 12.0 14.6 18.5 14.6 19.2 14.5 18.5 18.3 29.7 17.0 22.5 14.5 20.3 2.6 5.3 2.2 4.1 1.9 3.6 Bayer Germany BAYN GY 80.0 66,126.1 0.81 41,336.6 45,030.3 46,995.5 5,334.2 5,298.6 6,555.7 4.9 4.8 5.7 -62.0 -2.0 18.8 12.9 11.8 13.9 7.7 7.1 8.6 14.3 13.0 15.0 16.4 16.6 14.1 2.9 2.5 2.3 Becton Dickinson US BDX US 78.9 18,699.2 0.65 7,160.9 7,593.5 8,053.3 1,650.4 1,709.1 1,845.8 5.1 5.1 5.6 11.1 0.0 9.8 23.0 22.5 22.9 17.2 16.2 16.6 24.4 22.2 20.6 14.1 15.5 14.2 3.2 3.2 2.8 Inverness US IMA US 41.5 3,454.2 1.02 1,660.3 1,983.8 2,210.3 329.8 464.2 539.0 2.0 2.6 3.0 30.0 15.4 19.9 23.4 24.4 9.6 12.2 12.8 0.1 7.1 8.4 21.2 16.0 13.9 1.2 1.0 1.0
Source: Bloomberg, Woori I&S Research Center
Investment indicators for overseas healthcare players (1): 2010 P/B and ROE
(ROE, %) 30 24 18 12 6 0 0.0 0.8 1.6 2.4 3.2 4.0 Inverness Siemens Bayer Becton Dickinson Bio Merieux Roche (13.7, 127.8) Abbott
J&J
Beckman Coulter
(PBR, x)
Source: Bloomberg, Woori I&S Research Center estimates
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Peer analysis domestic healthcare share performance

Samsung Techwin 91,000 4,384.8 -3.2 -13.2 -6.6 10.2 86.9 -2.2 2.9 -7.9 -11.5 -18.4 12.6 0.2 SD 32,300 258.4 1.1 7.2 11.9 17.5 141.0 0.6 2.7 11.8 26.9 40.1 250.3 1.3 Macrogen 12,900 64.6 11.2 14.9 -0.3 -43.8 12.1 16.5 4.0 9.8 -3.7 -38.6 50.2 7.5 Bioneer 5,900 67.0 4.9 27.2 25.0 23.1 166.8 5.0 5.4 27.0 21.3 40.6 268.8 1.2 Infopia 14,700 109.3 1.0 8.2 14.7 -34.2 -14.9 0.6 5.0 15.7 24.1 -19.5 26.8 3.9 Nano EnTek 5,240 92.5 6.2 29.2 0.7 -23.8 63.2 7.5 -3.7 26.7 -0.9 -14.5 132.9 1.7
Current price (Jan 4, won) Market cap (Wbn) 1 week 1 month 3 month Relative (%) 6 month 1 year Ytd 1 week 1 month 3 month Absolute (%) 6 month 1 year Ytd
Global peer analysis overseas healthcare share performance

Roche Current price (Jan 4, $) Market cap ($mn) 1 week 1 month 3 month Relative (%) 6 month 1 year Ytd 1 week 1 month 3 month Absolute (%) 6 month 1 year Ytd 174.5 146,987.9 1.5 5.3 0.7 -3.7 -6.1 0.7 2.2 7.4 8.7 19.6 13.1 2.0 Siemens 91.8 83,880.8 1.9 -0.8 -1.5 7.6 -1.7 0.4 2.6 3.1 8.8 38.2 22.0 2.0 Abbott 54.0 83,508.4 0.1 -1.1 -0.6 -6.9 -15.3 -0.7 0.6 1.3 10.2 19.7 5.1 0.9 J&J 64.4 177,713.6 -0.5 -1.9 -0.7 -8.6 -11.8 -1.2 0.0 0.5 9.1 17.4 10.2 0.4 Beckman Bio Merieux Coulter 65.4 116.7 4,537.0 4,604.9 1.1 0.0 -1.7 -2.4 -8.0 2.2 -4.0 2.3 24.4 12.8 1.3 0.3 1.5 1.7 0.7 1.9 1.3 12.1 21.9 31.7 52.2 34.1 2.9 2.2 Bayer 80.0 66,126.1 1.0 1.0 10.9 17.4 8.5 -0.7 1.8 5.0 24.0 50.8 36.7 0.8 Becton Dickinson 78.9 18,699.2 -1.2 -1.7 7.3 -9.9 -6.9 -1.9 -0.8 1.2 17.3 14.9 14.7 -0.3 Inverness 41.5 3,454.2 -2.4 -1.9 -1.9 -1.2 63.1 0.2 -2.0 0.5 9.1 24.8 105.0 1.8
Global peer analysis market valuation

Kospi 10.0 10.35 9.12 0.69 1.14 5.90 7.08 1.73 Dow Jones 13.9 16.46 11.80 1.17 2.27 7.83 7.37 2.95 Shanghai 17.6 19.26 16.07 1.65 2.47 6.02 6.38 2.00 Taiwan 22.5 24.83 17.16 2.15 2.44 7.58 FTSE 24.7 15.24 12.21 1.02 1.78 6.45 10.29 4.05
(Units: x, %)
P/E P/S P/B P/cash EV/EBITDA Div yield
2008 2009 2010 2010 2010 2010 2010 2010
CAC 9.0 12.38 10.30 0.79 1.27 5.59 16.62 4.37
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III. Healthcare to show high growth compared to other industries

Healthcare outperforms other sectors Since 1990, the S&P500s cumulative returns by sector break down as follows: healthcare 290%, IT 272%, energy 271%, and the overall S&P500 126%, clearly indicating healthcares exceptional return. But though the pharmaceutical industry has driven growth up to now, public health insurance is financially strapped due to the growth of chronic illnesses resulting from an aging population, coupled with increased medical spending by the elderly. Accordingly, we believe investors should focus more on prevention and diagnosis than treatment.
Overall, we believe the healthcare industry will continue to expand thanks to: 1) the growth of chronic illnesses in line with the aging of the population; and 2) rising per-capita medical spending. In addition, we note that along with pharmaceuticals, medical equipment is also enjoying high margins, and has already seen the entry of several large global players. Moreover, the diagnostic industry should show high growth given the following: - the healthcare market is expected to post a 2008~2013 CAGR of 13.2%; - increasing demand for in-vitro diagnostics (IVD), which can has many applications; - Samsung and SK Chemical will likely accelerate their entries into new growth industries, including biotech and healthcare.
Healthcare outperformed other sectors (in terms of cumulative returns)

(%) Telecom Utilites Financials Materials Industrials Cons. Disc. S&P 500 Cons. Energy IT Healthcare 0 100 200 300 400 (%) Telecom Utilites Financials Materials Industrials Cons. Disc. S&P 500 Cons. Energy IT Healthcare 0 2 4 6 8
Note: Dec 31, 1989~Mar 31, 2009 Source: Industry data, Woori I&S Research Center
Note: Dec 31, 1989~Mar 31, 2009 Source: Industry data, Woori I&S Research Center
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1. Healthcare market to post 2008~2013 CAGR of 13.2%

Healthcare market to post 2008~2013 CAGR of 13.2% Global healthcare market has expanded sharply, from US$306.5bn (W368tn) in 2000 to an estimated US$928.2bn (W1,114tn) in 2009, for a CAGR of 13.2%. The global healthcare market is steadily growing on rising demand for medical services in line population aging in many major markets. We believe the biotech/healthcare market has brighter growth prospects than the traditional pharmaceutical market (growth estimated in the 5% range).
The healthcare industry includes drugs, medical equipment, medical services, and other medical goods. In Korea, the healthcare industry comprises only 1.6% of total stock market capitalization, vs 20% in the US and 13% in Japan. Although Koreas medical service market is in its fledgling stages, it is expected to grow when life insurers go public. In particular, we expect the Korean healthcare industrys market cap to increase following the listing of life insurers such as Tongyang Life (2009), Samsung Life (2010), and Korea Life in (2010).
US healthcare spending rising sharply

($bn) 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009E 2013E 2017E Healthcare spending up sharply following inflation 2008~2013 CAGR estimated at 6.2% National Health Expenditures
Source: Woori I&S Research Center
Healthcare spending to steadily increase

(US$) 12,000 China India Switzerland US Germany Korea UK
US seeks to reduce healthcare spending
Health expenditure per capital
10,000 8,000 6,000 4,000 2,000 0 1995
It's time for Korea seek to increase healthcare spending
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Datamonitor, Woori I&S Research Center
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2. Focus on growth of IVD

Medical equipment boasts lofty operating margins In the healthcare industry, medical equipment boasts the second-highest operating margins, following pharmaceutical products. Given that the medical equipment business requires R&D and massive capital, global leaders maintain oligopolies in developed markets such as the US and Europe.
We expect the genetic diagnosis market (which overlaps substantially with the equipment market) to grow in line with the expansion of personalized medicine. In particular, the genetic diagnostic market is enjoying rapid growth amid rising demand for PCR (polymerase chain reaction) equipment. For example, global leaders are accelerating their R&D efforts for the diagnosis of critical illnesses. Genetic diagnosis growing rapidly Diagnosis is largely based on tests using urine, blood, or genetic material (PCR). Sensitivity and accuracy are lower for urine- and blood-based tests than genetic tests, and sensitivity of rapid diagnostic kits is far lower than that of traditional PCR. Thus, we believe there would strong demand for a fast PCR-based kit.
Going forward, when mass production of biochips and DNA chips becomes possible, we expect the diagnostics market to show explosive growth. One shortcoming of biochip kits is low sensitivity because of difficulty in protein amplification. The key features of a diagnostic kit should be high sensitivity, accuracy, price competitiveness, reproducibility, automatability, and short response time.
Medical equipment market classification: Korean companies competitive in IVD, imaging diagnostics, and dental equipment
PI&D Medical equip made for Definition specific purpose SI&S Surgery equip and commodities used in all divisions Stent, catheter Bandage, thread Artificial knee/joint Surgical knife, Major needle products Syringe, surgical gloves EMI R&I Electronic medical Imaging devices equipment used used for for treatment/ diagnosing surgery disease Hemodialyzer X-Ray, CT, MRI, Patient monitoring Ultrasound system IVD Other Diagnose disease Aid for bodily by using bodily functions; simple fluid or cells testers Blood sugar tester Wheelchair, bed Immune tester Hearing aid Nucleic acid Apnea monitoring tester device Dental Dental equipment
Chair Electric hand piece Artificial tooth
Note: Global 2008 medical equipment market US$280bn Source: Woori I&S Research Center
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IVD market to grow at CAGR of 7% from US$40bn in 2008

($bn) 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009E 2010F 2011F 2012F 2013F MDx market IVD market IVD market to grow to US$52bn by 2013 (2009~13 CAGR of, 5%); geneteic diagnostics to reach US$5.9bn (2009~13 CAGR of 15%)
Gene diagnostics market to expand at 2009~2013 CAGR of 15%
Traditional IVDs
New IVD
Blood analysis
Clinical chemistry
Micro-organism analysis
Immune analysis
Gene analysis
Definition
Definition
Definition
Definition Diagnose hormone balance or disease using antigen-antibody reaction test on biopolymer (eg, hormone or phatogen) Example Automatic immune analyzer
Definition Diagnose disease (incl epidemic, cancer) or disease progress by decoding target chromosome/nucleic acid rank Example Microarray PCR
Analyze number/shape of red & white blood cells, platelets Example Blood cell calculator Blood clotting tester
Analyze chemical compounds of small molecules for blood sugar, PH, and drug levels Example Blood sugar tester Urine tester
Analyze drug sensitivity via germs and parasites, for epidemics Example Incubator
Diagnostic chip overview

DNA chip Application Technology Protein chip Application Technology Application Lab-on-a-chip (LOC) Technology Used for diagnosing disease by detecting RNA from a cell by fixing DNA Detect RNA (from blood) related to a specific disease DNA chip used for gene expression or reagent development research Used for confirming disease or screening reagent Detect protein or biopolymer that interacts with a certain protein by fixing protein Protein chips can detect protein using small sample, but commercialization hindered by difficulties in amplifying protein Detect and trigger diverse chemical reactions by forming a circuit on a chip Applicable to diverse fields, including diagnosis, environmental monitoring, and food testing LOC has more diverse applications than DNA chip, but suffers issues in production (plastic injection) If technology becomes fully developed, LOC likely to beat DNA chips
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3. Samsung and SK Chemical enter bio/healthcare

Samsung and SK Chemical enter healthcare business Large players, including the Samsung Group and SK Chemical, are diversifying into the healthcare/bio business. We expect rapid growth for the domestic healthcare industry.
In Oct 2007, the Samsung Group selected bio/healthcare (including medical equipment) as one of its six new growth drivers, and mid- to long-term investment is underway. Samsung is likely to enter the personalized medicine market to cure terminal illnesses, including cancer. Personalized medicine is expected to grow at more than 11% per annum (up from US$232.0bn in 2009. The Samsung Medical Center will do R&D and the Samsung Cancer Research Institute will develop treatments for terminal illnesses. The Institute appointed Dr Sun-myung Paek, who successfully commercialized a breast cancer diagnosis kit (Oncotype DX), as head of the institute, and development of cancer targeting therapy is underway.
Meanwhile, SK Chems entry into the healthcare business began in 2008 with the takeover of Ubicare, and its pharmaceutical division has been attracting attention since 2007 due to its operating profit contribution. However, sales dropped in 2008 as the divisions flagship drugs were excluded from insurance coverage and sales of new drug Mvix disappointed. The company was able to offset sluggish sales with the licensing-out of new drug projects. We believe SK Chem will be able to pay down debt using cash from the disposal of its stake in SK E&C (40%) and land in Suwon. While cash flow should improve from the disposal of the stake in the construction affiliate, it is likely to hurt asset value.
We expect SK Chems green chemical division to enter new businesses such as biodiesel. In addition, the pharmaceutical division aims to diversify into vaccines and healthcare. The company may adjust its strategic approach in line with the Samsung Groups progress in entering the biotech and healthcare businesses.
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Bio/Healthcare
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Diagnostics business essential for personalized medicine market growth
Primary risk assessment
Diagnosis
Prognosis
Drug selection
Disease monitoring /management
Pre-disease /disease development Personalized medicine = using diagnostic tools for drug selection and disease monitoring/management
Health outcome
Samsungs biotech & healthcare push, led by SEC, Techwin, Samsung Medical Center
Policyholders: 18.6mn Sales: W25tn
Insurance
Samsung Life
Samsung Medical Center

Biosimilar government project submitted (Jun 2009)
Medicine
SEC
Overview - Samsung Medical Ctr system launches Aug 1, 2008 - SMC becomes control tower for Samsung Groups medical/bio-tech-related companies Background Focus on healthcare, a next-generation growth driver Organic combination of medical treatment, research, and education to maximize synergies in clinical testing and medical business Constituents - Medical treatment Samsung Seoul Hospital, Gangbuk Samsung Hospital, Masan Samsung Hospital - Research Samsung Biomedical Research Institute, Samsung Cancer Research Center, IN-SUNG Foundation For Medical Research, Samsung Mental health institute - Education Sungkyungkwan University School of Medicine
SEC consortium SEC and other companies
Medical expense
Digital X-ray Detector mass production (2007) Blood test equipment development (2007) Gene analysis equipment development (2007)
Medical equipment
Products
SEC Samsung Techwin
Samsung Medical Center
5 hospital groups (composed of 26 hospitals) 40 general hospitals
Medical commodities
Infra
Eight hospitals (in Korea, overseas) including SMC
Hospitals
Samsung C&T Construction
IT Infra
Samsung SDI
15
Bio/Healthcare
www.wooriwm.com
IV. Changing domestic and global diagnostics market

1. Developed markets such as US, Europe leading global diagnostics industry
1.1. Diagnostics becomes new growth driver for global healthcare companies
MDx market to expand at 2009~2013 CAGR of 15% In 2008, the global IVD (in-vitro diagnostic) market grew more than 9.5% y-y to US$40bn. In particular, the molecular diagnostic (MDx) market expanded from US$1bn in 2001 to US$3bn in 2008. We expect the explosive growth of the global IVD market to continue as technology advancesin 2013, we forecast that global IVD will reach US$53bn.
The major global players in IVD are Siemens, Roche Diagnostics, and Abbott Diagnostics, and these three account for two thirds of the global market. In particular, Roche Diagnostics is a leading player in genetic diagnostics, with a market share of more than 20%. While the genetic diagnosis kit market is still small, we expect it to grow more than 15% per annum going forward. In 2007, Roches IVD business generated US$7.8bn in sales, US$984mn of which came from genetic diagnostic kits.
M&As to drive growth of IVD
The big three in global IVD have grown through active M&As. For instance, Siemens purchased Bayer Diagnostics for US$5.3bn, Dade Behring for US$6bn, and Diagnostic Product Corporation for US$2bn, and these aggressive M&As helped Siemens emerge as a strong player in IVD (with 35% market share). Meanwhile, Abbott added a strategic alliance strategy to its M&A tactics to become a global IVD player. Abbott first entered the genetic diagnostic market (breast cancer, colorectal cancer) by taking over Vysis for US$55mn in 2001. The technology and products secured via this M&A helped accelerate Abbotts growth in diagnostics, as well as improve the IVD divisions operating margins (average 20%).
16
Bio/Healthcare
www.wooriwm.com
1.2. Direction of Techwins healthcare business: learn from Mindrays growth

Techwin should learn from Mindrays growth Mindray is Chinas largest medical equipment maker and is listed on the Nasdaq. Since listing, Mindray has received a premium relative to the market, and although the premium narrowed from Oct 2008 amid the financial crisis, it has returned recently, with shares Mindray shares outperforming the market.
Mindray makes patient-monitoring devices, IVD equipment, diagnostic kits, and visual equipment at its China-based plant. The company has more than 1,500 R&D personnel and six global R&D centers. It has been able to grow faster than competitors thanks to strong price competitiveness, and showed steep growth in 2008 with the rollout of 10 new products.
Mindrays 2008 sales grew 87% y-y to US$548mn (up from US$294mn in 2007), and operating margin remains over 20%.
Mindray receives 45% premium since financial crisis

(%) 240 210 180 150 120 90 60 30 0 -30 '06 '07 '08 '09 Mindray received premium of 102% since listing and 45% since financial crisis
MSCI US healthcare premium relative to market Mindray premium relative to market
Source: Woori I&S Research Center Note: Acquired Datascope PMB(patient monitoring business) in March 2008
17
Bio/Healthcare
Patient-monitoring devices
Other domestic 17% Other domestic Mindray 49% 39%
www.wooriwm.com
Hematology analyzers & reagents
Mindray 39%
Foreign brands 34%
Foreign brands 22%
Source: Mindray, Woori I&S Research Center
Ultrasound systems
Rapid growth in developed mkt: 15% in 2007

2008 sales: US$550mn
27% in 2008
Other
Mindray 32% Other domestic 44%
12% China 42%
Emerging market 19%
Foreign brands 24%
Developed market 27%
Mindrays sales and net profit

($mn) 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 7 0 CAGR 59.2% 21 14 NP (LHS) NP margin (RHS) 28 (%) 35
18
Bio/Healthcare
www.wooriwm.com
2. Domestic diagnostics overview

Domestic diagnostics market boasts bright growth prospects There are only a few diagnostics makers in Korea. We believe the diagnostics market will grow rapidly when life insurers go public.
Samsung Techwin should become the Samsung Groups medical equipment and diagnostics arm. We expect it to enter the genetic diagnostics business in 2010 with the rollout of a blood analysis device, polymerase chain reaction (PCR) device/reagent, and diagnostics kits (HBV, HCV, AIDS). The company also has cancer diagnostic kits (breast, colon cancer) in its R&D pipeline.
The method and application of diagnostics differ depending on the kind of sample used (eg, urine, blood, genetic material). In terms of technology, genetic diagnostics requires more advanced technology than urine diagnostics. Genetic diagnostics is classified into PCR/RTPCR (real-time PCR), sequencing, MS spectrometry, and microarray.
Classification by diagnostic method

Method Company Urine SD Blood SD Infopia Nanoen Tek Gene PCR/RT-PCR (Techwin, Bioneer) Sequencing (Macrogen) MS Spectrometry (GeneMatrix) Microarray
19
Bio/Healthcare
www.wooriwm.com
3. FDA approval to begin with 510k clearance

The US classifies medical devices according to potential risk to the human body, given the wide range of devices and their close relationship to health.
In the US, several measures have been taken to improve safety. For example, under the FDAs differentiated approval system (1976), medical devices are classified into three quality categories, and good manufacturing practices (GMP) were implemented to control the quality of medical devices. We also note that US accounts for 50% of the global medical equipment market.
510k clearance key to US exports
Exports of medical devices to the US require FDA approval, which is largely divisible into two processes. Class I and II medical devices are subject to 510k clearance, while class III (newly developed) must obtain premarket approval (PMA). Most medical devices manufactured in Korea are subject to 510k clearance.
The FDA does not require clinical test data for 510k clearance (except in the cases of some life-support devices) and focuses on whether imported devices are compatible with other devices in use in the nation. In addition, it requires all medical device makers to follow GMP.
With the medical device industry emerging as one of the most promising high-end markets for the 21st century, we believe Korean players will have to focus on product quality, in addition to product development.
20
Bio/Healthcare
www.wooriwm.com
510k clearance process
Existing medical device maker Class 1 & 2 Sales continued Class 3
New medical device maker similar to existing ones
Medical device maker different from existing ones
Potential medical device maker
Sales continued until FDA asks for PMA
510k application
Sales prohibited until FDA approval
Sales prohibited until FDA approval
510k process Class 1 & 2 Class 3
Sales
Sales continued until FDA asks for PMA
Submission to FDA FDA PMS process
Sales (continued)
21
(012450.KS)
Samsung Techwin
Prime beneficiary of healthcare industry growth

Maintain Buy with TP of W120,000
Our target is based on RIM (assuming market risk premium of 6.0%, risk-free rate 4.0%, beta 1.0, COE 10.1%) and implies 31.9% upside (as of Jan 4). Shares currently trade at a 2010 P/E of 17x, vs the Kospi average of 10x, but we believe Techwin deserves a premium due to the following: 1) three-year EPS growth of 37.1%, higher than peers; 2) takeover of SECs CCTV unit and synergy with robotics; and 3) growth potential from robotics and healthcare.
Buy (Maintain)
TP W120,000 (Maintain)
Analyst Irene Kim

Young Park
822)768-7585, young.park@wooriwm.com
2009 results: to miss consensus, but expected to turn around

2009 sales and operating profit estimated at W2,652.0bn (+13.3% y-y) and W214.0bn (+45.6% y-y), respectively. In particular, 4Q09 sales and operating profit likely reached W715.0bn (TTP y-y) and W36.0bn (-26.0% y-y), respectively, far below market consensus, due to:
Sector
Pharmaceutical/bio
W91,000 1,696.14 528.09 $4,257.86mn W5,000 689,820 shrs W86,893 W104,500 W30,250 0.44% 16.7% 25.5% 11.0%
Current price (01/04/10) KOSPI KOSDAQ Market cap (common) Par value 120DA trading vol 120DA share price 52W high (09/25/09) Low (01/28/09) Dividend yield (2008) Free float rate Foreign ownership Major shareholders SEC Mirae Asset Investment Stock performance (%) 3M Absolute Relative -11.5 -24.6
1) bonus payments (additional W30bn); 2) shipment and ASP fall at the phone camera module business; and 3) excessive hopes for margin improvement from takeover of CCTV unit (W185.7bn) 2010 sales and operating profit estimated at W3,237.0bn (+22.1% y-y) and W255.0bn (+18.9% y-y), respectively
Outstanding shares (common) 53.1mn
Entry into healthcare business promising

Large players such as the Samsung Group and SK Chemical are diversifying into healthcare/biotech. We expect domestic healthcare market to grow rapidly Samsung likely to focus on medical equipment and genetic diagnostics 1) Samsung plans to launch blood analysis equipment in 2010 as well as genetic diagnostics (PCR)/agent and diagnostic kits (HBV, HCV, AIDS) 2) Global IVD kit market to grow to US$52.0bn in 2013. PCR equipment key to genetic diagnosis/diagnostic kitshas many applications, including testing for diseases/food poisoning, and determining specific breeds.
6M -18.4 -43.6
12M 12.6 -0.5
YE-Dec 2007 2008 2009E 2010F 2011F
Sales (Wbn) 3,243 2,340 2,652 3,237 4,095
Chg (%) 13.1 -27.9 13.4 22.1 26.5
OP (Wbn) 170 147 214 255 404
Pre-tax (Wbn) 232 166 274 316 481
NP (Wbn) 203 74 189 278 424
EPS (won) 2,638 956 3,414 5,232 7,974
Chg (%) 28.7 -63.8 257.1 53.2 52.4
P/E (x) 19.2 35.8 26.6 17.4 11.4
P/B (x) 3.9 2.5 4.5 3.6 2.8
EV/EBITDA (x) 12.8 9.5 15.8 13.2 8.5
ROE Debt/equity (%) (%) 21.7 7.0 17.3 22.6 27.4 85.1 121.0 124.8 119.0 110.0
Net debt (Wbn) -74 -50 -96 -362 -677

Woori I&S does not have a stake greater than or equal to 1% in Samsung Techwin as of the preparation date. Woori I&S has not provided this material to an institutional investor or other third party in advance. The Korean version of this material was distributed on January 5, 2010. The analyst and his/her spouse do not own any securities of companies mentioned in this material as of the preparation date. Woori I&S is an issuer and LP (liquidity provider) of ELW taking Samsung Techwin as an underlying asset. This report correctly reflects the analysts opinion and was written without any external influence or intervention.
Samsung Techwin
www.wooriwm.com
RIM valuation
2009E Net profit Shareholders equity Forecast ROE (FROE) Spread (FROE-COE) Residual income Cost of equity (COE) Beta Market risk premium (Rm-Rf) Risk-free rate (Rf) Beginning shareholders equity PV of forecast period RI PV of continuing value Equity value (C+P) No of shares (common, mn) Fair price (C) Current price (C) Upside (-downside) Implied P/B (x) Implied P/E (x) 189 1,100 17.3% 7.2% 79 10.1% 1.0 6.0% 4.0% 1,081.3 2,637.2 1,907.1 5,625.6 53.1 12m TP 116,535 91,000 28.1% 4.6 22.3 2010F 278 1,356 22.6% 12.6% 154 2011F 424 1,740 27.4% 17.3% 268 2012F 522 2,209 26.4% 16.4% 323 2013F 648 2,778 26.0% 15.9% 397 2014F 727 3,399 23.5% 13.5% 416 2015F 810 4,046 21.8% 11.7% 436 2016F 912 4,755 20.7% 10.7% 469 2017F 1,026 5,533 19.9% 9.9% 508 2018F 1,154 6,384 19.4% 9.3% 554
(Units: Wbn, won)
2019F 1,298 7,316 18.9% 8.9% 609
2020F 1,460 8,336 18.7% 8.6% 673
Note: RIM (Residual Income Model) is a cash flow approach that yields a fair shareholder value (value of equity) by adding shareholders equity and present value of residual income (meaning income excluding cost of equity). Value of equity = shareholders equity + sum of present value of future residual income * Residual income (RIt) = NP (t) shareholders equity(t-1) * cost of equity (t)= shareholders equity (t-1) * (ROEt - COEt) Woori I&S uses RIM as our primary valuation model as RIM is an objective model that minimizes subjectivity of valuation indicators while producing same results as DDM (dividend discount model) and DCF.
Market risk premium assessment guidelines

Criteria Risk premium Mega cap Market cap of W10tn or higher + credit rating of 'AAA' or higher 5.2% Large cap Market cap of W1~10tn + credit rating of 'A0' or higher 6.0% Mid cap Market cap of W200bn-1tn + credit rating of 'BBB+' or higher 7.0% Small cap Market cap of less than W200bn + credit rating of 'BBB-' or higher 8.0%
* Risk Free Rate = 4.0%( standardized)
23
Samsung Techwin
www.wooriwm.com
Samsung Techwin: P/E band

(Won) 100,000 80,000 60,000 40,000 20,000 0 '05.1 '06.1 '07.1 '08.1 '09.1 '10.1 '11.1 Price 21.0x 27.0x 17.0x 24.0x 33.0x
Samsung Techwin: Premium to the Kospi
600 500 400 300 200 100 0 -100 '04
Premium to the Kospi 305% premium since 2009 on: 1) entry into heatlhcare; 2) takeover of CCTV unit; and 3) stable sales of defense unit
'05
'06
'07
'08
'09
'10
Source: Dataguide Pro, Woori I&S Research Center
Samsung Techwin: P/B band

(Won) 120,000 100,000 80,000 60,000 40,000 20,000 0 '05.1 '06.1 '07.1 '08.1 '09.1 '10.1 '11.1 Price 2.5x 6.0x 1.0x 5.0x 6.5x
(W100mn) 900 800 700 600 500 400 300 200 100 0
Diagnostics division earnings estimates
Sales OP margin
25% 20% 15% 10% 5% 0%
3Q10F
4Q10F
1Q11F
2Q11F
3Q11F
4Q11F
24
Samsung Techwin
www.wooriwm.com
Entry into diagnostics market

Prime beneficiary of Samsung Groups entry into bio/healthcare Techwin is likely to be the prime beneficiary of the Samsung Groups entry into bio/healthcare business.
We believe the closest comparable for Techwin is Mindray. Established in 1991, Mindray sells patient-monitoring equipment, IVD equipment, diagnostics kits, and imaging equipment. It is Chinas largest medical equipment producer and has traded at lofty premiums to the market since its listing on the Nasdaq. The company has more than 5,000 employees, with more than 1,500 in R&D. The company operates six R&D centers worldwide.
We believe Samsung Techwin deserves a premium to the market for its entry into diagnostics and medical equipment. Shares currently trade at a 2010 P/E of 17x. Valuations may look burdensome given its heavy dependence on the defense and machinery divisions, however, the company is making efforts to strengthen growth potential by entering the robotics and healthcare industries. As an important part of the Samsung Groups healthcare business value chain, we expect Techwin to enjoy synergies with group affiliates. In addition, the company is likely to enter overseas diagnostics markets, which offer lofty margins.
Samsung Techwin: medical equipmentdiagnostics
Life science
In-vitro diagnostics
Pharma
SMC
Samsung Techwin
Development Improve lab efficiency Develop new tests
SEC/ SMC
Become pharma play via biodrugs Biomarker expertise Develop new bio drug
Genomics Microarray Sequencing PCR
Increasing medical value to patients & physicians
25
Samsung Techwin
www.wooriwm.com
Investment points: maintain Buy with target price of W120,000

Prime beneficiary of Samsung Groups entry into healthcare business First, prime beneficiary of Samsung Groups entry into bio/healthcare business
Samsung Techwin is entering the healthcare industry in 2010 with the launch of its diagnostics business. In addition, we expect cash inflow of more than W300bn per annum from 2010 thanks to stable results at the defense division. Techwin plans to pour cash into new growth business such as healthcare, robotics, and FPSO (floating production, storage, and offloading).
Security business expansion
Second, takeover of SECs CCTV unit
Techwin announced in Oct 2009 that it would take over Samsung Electronics CCTV division to strengthen Techwins security division. Going forward, we expect to see demand for CCTVs from a variety of sources, including military applications. For example, Techwin completed development of monitoring robot systems in a project for the Ministry of Knowledge Economy in Nov 2008, and automated monitoring devices are slated to be used at national borders and guard posts. Export is also a possibility, as there are currently no monitoring systems with the range of features offered by Techwins products. In addition, sales should see further demand for Koreas planned U-cities (ubiquitous city).
Stable revenue sources
Third, stable revenue sources (power system and defense)
The power system and defense divisions bring in steady sales and profits regardless of economic conditions.
26
Samsung Techwin
INCOME STATEMENT
(Wbn) Sales Growth (%) Cost of sales Gross profit Gross margin (%) SG&A EBITDA EBITDA margin (%) Depr & amort Operating profit OP margin (%) Non-operating Income Non-operating Expenses Net interest inc/ (exp) Pre-tax Profit from Continuing Operations Pretax margin (%) Tax Profit from Continuing Operations Net profit Net margin (%) Adjusted Net Profit
www.wooriwm.com
VALUATION INDEX
2009/12E 2010/12F 2011/12F 2012/12F 15.8 13.2 8.5 6.5 22.1 17.6 10.3 7.8 26.6 17.4 11.4 9.3 35.7 19.7 12.4 10.0 23.9 13.9 9.6 8.0 4.5 3.6 2.8 2.2 1.9 1.5 1.2 1.0 0.63 0.5 0.6 na 0.8 0.5 0.6 na 1.0 0.6 0.6 na 4,728.1 4,472.4 4,157.7 3,872.6 42.2 32.6 19.7 na 34.3 33.3 18.9 na 27.6 28.7 18.6 na 3,873 4,792 7,601 9,373 5,428 6,367 9,202 11,269 3,414 5,232 7,974 9,825 2,541 4,619 7,311 9,080 3,801 6,547 9,461 11,378 20,355 25,234 32,518 41,394 47,967 60,926 77,075 90,949
2009/12E 2010/12F 2011/12F 2012/12F 2,652.0 3,237.0 4,095.0 4,832.1 EV/ EBITDA (X) 13.4 22.1 26.5 18.0 EV/ EBIT (X) 2,260.7 2,766.7 3,418.8 4,012.7 Price/ Earning (FD) (X) 391.3 470.3 676.2 819.4 Adjusted PER (X) 14.8 14.5 16.5 17.0 Price/ Gross Cash Flow (X) 177.2 215.7 272.4 321.4 Price/ Book Value (X) 300.1 338.3 488.9 598.7 Price/ Sales (X) 11.3 10.5 11.9 12.4 PER/ EPS growth (X) 86.0 83.7 85.1 100.7 PER/ EBITPS growth (X) 214.1 254.6 403.8 498.0 PER/ EBITDAPS growth (X) 8.1 7.9 9.9 10.3 Enterprise Value (Wbn) 161.1 88.7 104.7 121.2 EPS CAGR (3-Yr, FD) (%) 101.6 27.4 27.2 25.9 EBITPS CAGR (3-Yr, FD) (%) 5.5 9.3 19.6 30.2 EBITDAPS CAGR (3-Yr, FD) (%) 273.6 315.9 481.4 593.2 EBITPS (FD) (W) 10.3 9.8 11.8 12.3 EBITDAPS (FD) (W) 84.8 37.9 57.8 71.2 Fully diluted EPS (W) 188.8 278.0 423.6 522.0 Adjusted EPS (FD) (W) 188.8 278.0 423.6 522.0 CFPS (W) 7.1 8.6 10.3 10.8 BVPS (W) 140.5 245.4 388.4 482.4 Sales PS (W)
CASH FLOW STATEMENT

(Wbn) Operating Cash Flow Net profit + Depr & amort + Associates loss (-profits) + FC translation loss (-profit) + Loss (-gain) on tangible asset disp Gross Cash Flow - Incr (+dec) in working capital Investing Cash Flow Decr. in Tangible Assets Incr. in Tangible Assets (CAPEX) + Disp (-acq) of inv assets Free Cash Flow Net Cash Flow Financing Cash Flow Equity financing Debt financing + Inc (-dec) in Cash & St. financial goods Net debt/(cash) end
RIM & EVA
2009/12E 2010/12F 2011/12F 2012/12F 2009/12E 2010/12F 2011/12F 2012/12F 162.3 264.0 374.2 458.4 RIM 188.8 278.0 423.6 522.0 Spread (FROE-COE) (%) 7.2 12.6 17.3 16.4 86.0 83.7 85.1 100.7 Residual Income 79.0 154.5 267.9 323.4 -70.0 -37.0 -40.0 -45.0 12M RIM-based Target Price(W) 116,067 0.0 0.0 0.0 0.0 Economic Value Added 0.0 0.0 0.0 0.0 Invested capital 712.1 739.4 853.0 1,072.8 210.1 347.8 502.7 604.5 NOPAT 147.7 224.0 355.4 438.2 -47.8 -83.8 -128.5 -146.2 ROIC (%) 20.6 30.9 44.6 45.5 -50.4 -98.3 -135.8 -213.8 ROIC - WACC (%) 13.6 23.0 36.6 37.4 0.0 0.0 0.0 0.0 EVA 96.9 170.1 311.9 401.7 -60.0 -73.2 -92.6 -180.0 Discounted Cash Flow 20.0 20.0 20.0 20.0 EBIT 214.1 254.6 403.8 498.0 102.3 190.8 281.5 278.4 + Depreciation 86.0 83.7 85.1 100.7 112.0 165.7 238.4 244.5 - CAPEX 60.0 73.2 92.6 180.0 -91.3 117.5 105.9 64.1 Free cash flow for DCF valuation 160.5 217.6 272.3 244.8 0.0 0.0 0.0 0.0 Weighted Average Cost of Capital (%) -91.3 117.5 105.9 64.1 Cost of debt (tax adjusted) 3.8 5.1 5.4 5.3 20.6 283.2 344.3 308.6 Cost of equity (COE) 10.1 10.7 10.8 10.9 -96.1 -362.4 -677.1 -962.3 WACC 6.9 7.9 8.1 8.1
BALANCE SHEET
(Wbn) Cash & St. Financial Goods Accounts Receivable Total current assets Tangible Assets Investment assets Non-current Assets Total Asset Short-term debt Accounts Payable Total current Liabilities Long-term debt Long-term allowance Non-current Liabilities Total Liabilities Paid-in Capital Capital surplus Retained earnings Total shareholders Equity
PROFITABILITY & STABILITY

2009/12E 2010/12F 2011/12F 2012/12F 17.3 22.6 27.4 26.4 7.8 10.2 12.8 13.1 20.6 30.9 44.6 45.5 27.3 25.0 28.1 27.1 12.1 11.4 13.4 13.8 0.6 0.8 1.1 1.6 26.4 39.6 52.8 79.3 500 750 1,000 1,500 -8.7 -26.7 -38.9 -43.6 124.8 119.0 110.0 95.9 -0.2 -0.3 -0.5 -0.6 -39.2 -27.4 -20.6 -16.5 103.7 122.9 142.6 160.3 65.8 83.6 100.4 115.0 53 53 53 53 5,000 5,000 5,000 5,000 90,800 91,000 91,000 91,000 4,824 4,835 4,835 4,835
2009/12E 2010/12F 2011/12F 2012/12F 336.3 619.5 963.8 1,271.9 ROE (%) 267.1 326.0 412.4 486.7 ROA (%) 1,272.8 1,758.0 2,404.0 2,971.3 ROIC (%) 594.1 587.4 598.0 679.7 EBITDA/ equity (%) 421.6 421.7 421.8 421.9 EBITDA/ asset (%) 1,200.9 1,211.3 1,249.5 1,355.1 Dividend Yield (%) 2,473.7 2,969.3 3,653.6 4,326.4 Cash dividends(Wbn) 240.2 257.1 286.7 309.6 Cash DPS (W) 331.1 404.2 511.3 567.5 Net debt(cash)/ equity (%) 1,227.9 1,429.9 1,685.8 1,853.7 Debt/ equity (%) 0.0 0.0 0.0 0.0 Net interest exp/ sales (%) 121.3 144.5 178.4 205.2 Interest coverage (X) 145.6 183.7 228.1 263.8 Current Ratio (%) 1,373.4 1,613.6 1,913.9 2,117.5 Quick Ratio (%) 265.7 265.7 265.7 265.7 Total shares (mn) 215.4 215.4 215.4 215.4 Par value (W) 623.8 875.4 1,259.4 1,728.5 Share price (W) 1,100.3 1,355.7 1,739.7 2,208.9 Market cap (Wbn)
27
SD
(066930.KQ)
Likely to roll out rapid test kits in developed markets

Initiate coverage at Buy with target price of W38,000
Target based on RIM (assuming market risk premium of 8.0%, risk-free rate 4.0%, beta 1.0, COE of 12.0%), equivalent to 2010 P/E of 6.9x (EPS of W4,713) and offering 17.6% upside (as of Jan 4).
Buy (Initiate)
TP W38,000 (Initiate)
Analyst Irene Kim
2009 operating profit estimated to have risen 105% y-y

2009 sales and operating profit are estimated at W64.3bn (+59.3% y-y) and W29.1bn (+105.2% y-y), respectively, indicating sharp margin improvement. 2009 earnings should substantially beat company guidance (sales W60.0bn, operating profit W21.0bn) on: 1) growing export of new malaria and dengue fever diagnostic kits; 2) sharp increase in domestic AH1N1 diagnostic kit sales, leading to strong sales of rapid test kits and subsequent margin improvement. 2010 sales and operating profit estimated at W82.4bn (+28.3% y-y) and W34.8bn (+19.3% y-y), respectively, on entry of flagship AIDS diagnostic kit into developed markets and high growth of Indias rapid-test-kit market.
Susie Lee (RA)
Sector
Pharm/biotech
W32,300 1,696.14 528.09 $227.4mn W500 391,149 shrs W29,537 W38,250 W9,290 0.62% 2.0% 29.4%
Share price (01/04/10) KOSPI KOSDAQ Market cap (common) Par value 120DA trading volume 120DA share price 52W High (08/21/09) Low (01/05/09) Dividend yield (2008) Free float rate Foreign ownership Major shareholders Young-shik, Cho
Biodrug exports to increase at rapid-test-kit division

Standard Diagnostics (SD) is a specialized virus diagnostics kit maker, whose products are selling in 105 countries around the world. The company strengthened its global presence when its signed a supply contract with WHO (World Health Organization). SD is the leading player in rapid test kits. We expect its global market share to grow on product diversification, as it is capable of manufacturing antigens and antibodies (diagnostic kit input) internally. SD boasts growth potential, as it plans to enter new businesses such as bio sensors, biochips, and molecular diagnostics.
Asian Small Companies Portfolio 4.5% Stock performance (%) 3M Absolute Relative 26.9 21.8 6M 12M 40.1 250.3 34.9 194.9
YE Dec 2007 2008 2009E 2010F 2011F
Sales (Wbn) 27.6 40.3 64.3 82.4 89.4
Chg (%) 51.4 46.3 59.3 28.3 8.5
OP (Wbn) 8.2 14.2 29.1 34.8 37.7
Pre-tax (Wbn) 8.6 8.6 30.3 37.7 42.1
NP (Wbn) 8.4 8.7 30.6 37.7 42.6
EPS (won) 1,054 1,091 3,828 4,713 5,319
Chg (%) 78.2 3.5 250.8 23.1 12.9
P/E (x) 15.7 8.3 8.3 6.9 6.1
P/B (x) 3.0 1.5 3.3 2.3 1.7
EV/EBITDA (x) 12.1 3.7 7.0 5.3 3.9
ROE Debt/equity (%) (%) 20.4 18.3 47.9 39.1 31.5 10.2 25.5 24.9 21.7 17.3
Net debt (Wbn) -13.3 -11.2 -32.6 -62.6 -101.0

Woori I&S does not have a stake greater than or equal to 1% in SD as of the preparation date. Woori I&S has not provided this material to an institutional investor or other third party in advance. The Korean version of this material was distributed on January 5, 2010. The analyst and his/her spouse do not own any securities of companies mentioned in this material as of the preparation date. This report correctly reflects the analysts opinion and was written without any external influence or intervention.
SD
www.wooriwm.com
RIM valuation
2009E Net profit Shareholders equity Forecast ROE (FROE) Spread (FROE-COE) Residual income Cost of equity (COE) Beta Market risk premium (Rm-Rf) Risk-free rate (Rf) Beginning shareholders equity PV of forecast period RI PV of continuing value Equity value (C+P) No of shares (common, mn) Fair price (C) Current price (C) Upside (-downside) Implied P/B (x) Implied P/E (x) 31 78 47.9% 35.9% 23 12.0% 1.0 8.0% 4.0% 49.4 186.0 35.2 270.7 8.0 12m TP 37,896 32,300 17.3% 2.7 8.0 2010F 38 115 39.1% 27.1% 26 2011F 43 156 31.5% 19.5% 26 2012F 49 203 27.5% 15.5% 28 2013F 56 258 24.5% 12.5% 29 2014F 65 321 22.3% 10.3% 30 2015F 71 390 20.1% 8.1% 29 2016F 79 464 18.5% 6.5% 28 2017F 88 544 17.4% 5.4% 27 2018F 97 631 16.5% 4.5% 27
(Units: Wbn, won)
2019F 107 725 15.8% 3.8% 26
2020F 119 827 15.3% 3.3% 26
Note: RIM (Residual Income Model) is a cash flow approach that yields a fair shareholder value (value of equity) by adding shareholders equity and present value of residual income (meaning income excluding cost of equity). Value of equity = shareholders equity + sum of present value of future residual income * Residual income (RIt) = NP (t) shareholders equity(t-1) * cost of equity (t)= shareholders equity (t-1) * (ROEt - COEt) Woori I&S uses RIM as our primary valuation model as RIM is an objective model that minimizes subjectivity of valuation indicators while producing same results as DDM (dividend discount model) and DCF.
Market risk premium assessment guidelines

Criteria Risk premium Mega cap Market cap of W10tn or higher + credit rating of 'AAA' or higher 5.2% Large cap Market cap of W1~10tn + credit rating of 'A0' or higher 6.0% Mid cap Market cap of W200bn-1tn + credit rating of 'BBB+' or higher 7.0% Small cap Market cap of less than W200bn + credit rating of 'BBB-' or higher 8.0%
* Risk Free Rate = 4.0%( standardized)
P/E band
(Won) 50,000 40,000 30,000 20,000 10,000 0 '05.1 '06.1 '07.1 '08.1 '09.1 '10.1 '11.1 Price 14.0x 28.0x 7.0x 21.0x 35.0x 40,000 30,000 20,000 10,000 0 '05.1 '06.1 '07.1 (Won) 50,000 Price 3.0x 5.0x
P/B band
1.5x 4.5x 6.0x
'08.1
'09.1
'10.1
'11.1
29
SD
www.wooriwm.com
Likely to roll out rapid test kits in developed markets

SD to roll out rapid test kits in developed markets SD is a specialized virus diagnostics company, with a flagship business of blood-based rapid test kits. Rapid test kits detect antigens and antibodies related to certain illnesses, and are used in diagnosing AIDS, malaria, and hepatitis. The company is capable of manufacturing antigens and antibodies (the raw materials for test kits) internally, demonstrating its technological prowess and giving it an edge in pricing. SD posted 2005~2008 sales and operating profit CAGRs of 49% and 72%, respectively.
The companys 2008 sales broke down as: rapid test kits 76.5%, urine chemical analysis 3.9%, ELISA 2.2%, and bio sensors 4.6%. We expect the sales contribution of new bio sensors to increases, diversifying the companys earnings sources, as rapid test kits and bio sensors are expected to become major businesses. Going forward, we believe SD will emerge as a major player in POCT (point-of-care testing).
Operating profit and margin to improve sharply
We believe the rapid test kit divisions 2009 sales surged 79.4% y-y to W51.0bn. We estimate 2009 sales and operating profit at W64.3bn (+59.3% y-y) and W29.1bn (+105.2% y-y), respectively, showing a sharp improvement in margins. We believe 2009 earnings will substantially beat company guidance (sales W60.0bn, operating profit W21.0bn) on: 1) growing export of new malaria and dengue fever diagnostic kits; and 2) a sharp increase in domestic AH1N1 diagnostic kit sales, leading to growing sales of rapid test kits and subsequently stronger margins. Meanwhile, we estimate 2010 sales and operating profit at W82.4bn (+28.3% y-y) and W34.8bn (+19.3% y-y), respectively, on the entry of flagship AIDS test kits into developed markets and the high growth of Indias rapid-test-kit market.
Sales and operating profit to sustain high growth on entry into developed market
(Wbn) 100 80 60 40 20 0 2006
Sales (LHS) OP (LHS) OP margin (RHS)
(%) 50 40 30 20 10 0
(Wbn) 100 80 60 40 20 0 2007 2008 2009 2010 2011 83.7% 76.6% 80.0% Rapid Urine Raw material and other ELISA Bio sensor
79.5% 86.2%
2007
2008
2009
2010F
2011F
Source: SD, Woori I&S Research Center
Source: SD, Woori I&S Research Center
30
SD
www.wooriwm.com
Investment points: initiate coverage at Buy with target price of W38,000

Leading player in rapid test kits First, SD is a leading player in rapid test kits. SD is a specialized virus diagnostics company, with a flagship business of blood-based rapid test kits. Rapid test kits detect antigens and antibodies related to certain illnesses, and are used in diagnosing AIDS, malaria, and hepatitis. The company is capable of manufacturing antigens and antibodies (the raw materials for test kits) internally, demonstrating its technological prowess and giving it an edge in pricing. SD posted 2005~2008 sales and operating profit CAGRs of 49% and 72%, respectively.
Likely to enter developed markets
Second, SD to enter developed market following expiry of Inverness patent. SD has been unable to enter the AIDS test kit market in US, Europe, and Japan due to competition with Inverness. However, Inverness patent will expire in 2010, and we believe this will allow SD to sell its rapid test kits in developed markets (eg, Japan and Europe).
Plans to enter molecular diagnostics
Third, R&D to yield tangible results, easing entry into biochips, molecular diagnostics SD plans to enter the biochip and molecular diagnostic markets, which are rapidly growing segments of the IVD industry. Existing rapid test kits have qualitative limitations, as they are only able to determine whether a virus/target exists. In contrast, biochips and gene diagnostics offer quantitative analysis, allowing the measurement of the progress of a disease and monitoring of post-operative condition. SD is making efforts to roll out diagnostic chips that can detect five major cancers and cardiovascular disease, by investing in new businesses.
Inverness flagship business: diagnostics reagent and kit
Diagnostics unit contribute 63% of 2008 sales (totaling US$1.7bn). Inverness' patent for AIDS test kits expired in Europe and Japan in 2009.
Other 37% Diagnostics 63%
SD likely to enter developed markets
Source: Bloomberg, Woori I&S Research Center Note: Inverness asked SD for tender offer in 2009
31
SD
INCOME STATEMENT
(Wbn) Sales Growth (%) Cost of sales Gross profit Gross margin (%) SG&A EBITDA EBITDA margin (%) Depr & amort Operating profit OP margin (%) Non-operating Income Non-operating Expenses Net interest inc/ (exp) Pre-tax Profit from Continuing Operations Pretax margin (%) Tax Profit from Continuing Operations Net profit Net margin (%) Adjusted Net Profit
www.wooriwm.com
VALUATION INDEX
2009/12E 2010/12F 2011/12F 2012/12F 7.0 5.3 3.9 2.5 7.6 5.6 4.2 2.7 8.3 6.9 6.1 5.2 8.3 6.9 6.1 5.2 7.7 6.4 5.7 5.0 3.3 2.3 1.7 1.3 4.0 3.1 2.9 2.6 0.5 0.5 0.4 na 0.6 0.7 0.5 na 0.7 0.7 0.6 na 222.6 195.8 157.4 113.6 17.2 14.4 14.9 na 13.1 10.3 11.1 na 12.4 9.9 10.8 na 3,642 4,345 4,714 5,273 3,951 4,658 5,035 5,607 3,828 4,713 5,319 6,165 3,828 4,713 5,319 6,165 4,139 5,027 5,641 6,499 9,601 14,146 19,294 25,287 8,033 10,304 11,178 12,471
2009/12E 2010/12F 2011/12F 2012/12F 64.3 82.4 89.4 99.8 EV/ EBITDA (X) 59.3 28.3 8.5 11.6 EV/ EBIT (X) 21.7 27.3 29.6 33.0 Price/ Earning (FD) (X) 42.6 55.2 59.8 66.8 Adjusted PER (X) 66.3 66.9 66.9 66.9 Price/ Gross Cash Flow (X) 13.5 20.4 22.1 24.6 Price/ Book Value (X) 31.6 37.3 40.3 44.9 Price/ Sales (X) 49.2 45.2 45.0 45.0 PER/ EPS growth (X) 2.5 2.5 2.6 2.7 PER/ EBITPS growth (X) 29.1 34.8 37.7 42.2 PER/ EBITDAPS growth (X) 45.3 42.2 42.2 42.3 Enterprise Value (Wbn) 1.2 2.6 4.5 6.7 EPS CAGR (3-Yr, FD) (%) 0.0 0.0 0.0 0.0 EBITPS CAGR (3-Yr, FD) (%) 1.2 2.6 4.4 6.7 EBITDAPS CAGR (3-Yr, FD) (%) 30.3 37.3 42.1 48.8 EBITPS (FD) (W) 47.2 45.3 47.1 49.0 EBITDAPS (FD) (W) -0.3 -0.4 -0.4 -0.5 Fully diluted EPS (W) 30.6 37.7 42.6 49.3 Adjusted EPS (FD) (W) 30.6 37.7 42.6 49.3 CFPS (W) 47.7 45.7 47.6 49.4 BVPS (W) 30.6 37.7 42.6 49.3 Sales PS (W)
CASH FLOW STATEMENT

(Wbn) Operating Cash Flow Net profit + Depr & amort + Associates loss (-profits) + FC translation loss (-profit) + Loss (-gain) on tangible asset disp Gross Cash Flow - Incr (+dec) in working capital Investing Cash Flow Decr. in Tangible Assets Incr. in Tangible Assets (CAPEX) + Disp (-acq) of inv assets Free Cash Flow Net Cash Flow Financing Cash Flow Equity financing Debt financing + Inc (-dec) in Cash & St. financial goods Net debt/(cash) end
RIM & EVA
2009/12E 2010/12F 2011/12F 2012/12F 2009/12E 2010/12F 2011/12F 2012/12F 21.8 31.6 41.8 47.1 RIM 30.6 37.7 42.6 49.3 Spread (FROE-COE) (%) 35.9 27.1 19.5 15.5 2.5 2.5 2.6 2.7 Residual Income 23.0 26.1 26.3 27.8 0.0 0.0 0.0 0.0 12M RIM-based Target Price(W) 37,848 0.0 0.0 0.0 0.0 Economic Value Added 0.0 0.0 0.0 0.0 Invested capital 42.3 48.7 51.4 55.4 33.1 40.2 45.1 52.0 NOPAT 29.4 35.1 38.1 42.6 -11.3 -8.6 -3.3 -4.9 ROIC (%) 76.7 77.2 76.2 79.8 -3.0 -3.4 -3.1 -3.6 ROIC - WACC (%) 68.5 68.8 67.8 71.4 0.0 0.0 0.0 0.0 EVA 29.0 33.5 34.8 39.6 -2.1 -2.6 -2.9 -3.2 Discounted Cash Flow 0.0 0.0 0.0 0.0 EBIT 29.1 34.8 37.7 42.2 19.7 29.0 39.0 43.9 + Depreciation 2.5 2.5 2.6 2.7 18.8 28.2 38.7 43.5 - CAPEX 2.1 2.6 2.9 3.2 2.5 1.5 1.5 -1.5 Free cash flow for DCF valuation 22.3 29.2 35.6 38.8 0.0 0.0 0.0 0.0 Weighted Average Cost of Capital (%) 2.5 1.5 1.5 -1.5 Cost of debt (tax adjusted) 4.4 4.1 4.0 3.9 21.2 29.7 40.1 42.0 Cost of equity (COE) 12.0 12.6 12.7 12.8 -32.6 -62.6 -101.0 -144.8 WACC 8.2 8.4 8.3 8.4
BALANCE SHEET
(Wbn) Cash & St. Financial Goods Accounts Receivable Total current assets Tangible Assets Investment assets Non-current Assets Total Asset Short-term debt Accounts Payable Total current Liabilities Long-term debt Long-term allowance Non-current Liabilities Total Liabilities Paid-in Capital Capital surplus Retained earnings Total shareholders Equity
PROFITABILITY & STABILITY

2009/12E 2010/12F 2011/12F 2012/12F 47.9 39.1 31.5 27.5 38.3 31.8 26.4 23.7 76.7 77.2 76.2 79.8 40.3 32.5 25.9 22.1 32.3 26.7 22.1 19.2 0.6 0.6 0.6 0.6 1.5 1.5 1.5 1.5 200 200 200 200 -41.6 -54.6 -64.9 -71.2 24.9 21.7 17.3 14.7 -1.9 -3.1 -5.0 -6.7 -24.5 -13.5 -8.5 -6.3 385.4 472.5 600.7 712.5 343.9 430.9 559.0 670.8 8 8 8 8 500 500 500 500 31,900 32,300 32,300 32,300 255 258 258 258
2009/12E 2010/12F 2011/12F 2012/12F 33.1 63.0 101.4 145.1 ROE (%) 28.3 36.3 39.4 44.0 ROA (%) 71.9 112.7 155.2 205.2 ROIC (%) 18.8 19.1 19.5 20.2 EBITDA/ equity (%) 5.2 5.6 5.8 6.0 EBITDA/ asset (%) 26.1 26.7 27.2 28.0 Dividend Yield (%) 97.9 139.4 182.4 233.2 Cash dividends(Wbn) 0.3 0.3 0.3 0.3 Cash DPS (W) 5.7 7.3 7.9 8.8 Net debt(cash)/ equity (%) 18.6 23.8 25.8 28.8 Debt/ equity (%) 0.6 0.6 0.6 0.6 Net interest exp/ sales (%) 0.0 0.0 0.0 0.0 Interest coverage (X) 0.9 1.0 1.0 1.1 Current Ratio (%) 19.5 24.8 26.9 29.9 Quick Ratio (%) 4.0 4.0 4.0 4.0 Total shares (mn) 18.8 18.8 18.8 18.8 Par value (W) 58.8 95.0 136.0 183.8 Share price (W) 78.4 114.6 155.6 203.4 Market cap (Wbn)
32
Macrogen
(038290.KQ)
Leader in consumer genomics
Not Rated
Analyst Irene Kim
Competitive in genetic analysis

Leader in genomics-based preventive medicine. Completion of Human Genome Project in 2007 offers new paradigm for information medicine.
2QFY09 earnings to be in line with 1QFY09

We expect 2QFY09 sales (October~December, fiscal year ends June) of W5.8bn (down 6.4% y-y, up 0.1% q-q) and operating profit of W300mn (up 2.4% y-y and 0.5% q-q). Sales break down as: gene analysis 84%, biochips 11%, and transgenic mice (5%). Exports account for 65% of sales.
Susie Lee (RA)
Sector
Current price (01/04/10) KOSPI KOSDAQ Market cap (common) Par value 120DA trading vol 120DA share price 52W high (09/04/27) Low (09/01/21) Dividend yield (2008) Free float Foreign ownership Major shareholders Jungsun Seo
Pharma/bio
W12,900 1,696.14 528.09 $56.89mn W500 62,848 shrs W14,385 W22,700 W8,560 0.0% 0.1% 8.0%
Despite the steady rise in the sequencing business, sales slowed due to: 1) falling won/dollar rates (although sales volume increased) 2) stiff competition in sequencing overseas amid rise in personalized medicine

Genomic medicine is the fundamental basis for personalized medicine. Although the price tag for a personal genome analysis in 2000 would have come to more than US$3bn, we expect the price to fall to only US$1,000 in 2010 thanks to improvements in sequencing devices. Macrogen is the largest shareholder of US-based sequencing device developer LightSpeed, with a 25% stake (including stakes held by Macrogen subsidiaries) The personalized medicine market should grow at a 2008~2013 CAGR of more than 11% (up from US$232bn in 2009) Since investing in LightSpeed, Macrogen has become more competitive in personalized preventive medicine. Share price will likely rise further as personalized medicine grows.
Hanmi Gross Equity Investment Union 4.6% Share performance (%) 3M Absolute Relative -3.7 -8.8 6M -38.6 -43.8 12M 50.2 -5.3
YE-Jun 2008 2009 2010E 2011F
Sales (Wbn) 16.5 22.5 25.9 33.7
Chg (%) 31.1 36.0 15.1 30.1
OP (Wbn) -1.1 1.6 1.3 2.4
Pre-tax (Wbn) 0.2 3.3 -
NP (Wbn) 0.2 3.3 3.0 4.0
EPS (won) 35 653 600 800
Chg (%) TTP 1763.9 -8.1 33.3
P/E (x) 268.2 27.8 21.5 16.2
P/B EV/EBITDA (x) (x) 1.5 2.7 18.0 19.1 -
ROE Debt/equity Net debt (%) (%) (Wbn) 0.5 9.7 10.0 14.0 -10.0 -7.1 -
Source: Macrogen, Woori I&S Research Center estimates
Woori I&S does not have a stake greater than or equal to 1% in Macrogen as of the preparation date. Woori I&S has not provided this material to an institutional investor or other third party in advance. The Korean version of this material was distributed on January 5, 2010. The analyst and his/her spouse do not own any securities of companies mentioned in this material as of the preparation date. Macrogen is not under coverage at Woori I&S. Thus, Woori I&S does not present a rating and target price on the counter. This report correctly reflects the analysts opinion and was written without any external influence or intervention.
Macrogen
www.wooriwm.com

Cheaper genetic analysis to help bolster personalized medicine Listed in 2000, Macrogen is a genetic analysis specialist and exports to 60 countries. The completion of the Human Genome Project in 2007 offered a new paradigm for information medicine, and Macrogen should be able to take the lead in personalized medicine.
Genomic medicine is the fundamental basis for personalized medicine. Macrogen provides personalized services (including genetic database services), and makes bio diagnostic chips.
Although the price tag for a personal genome analysis in 2000 would have been more than US$3bn, we expect the price to fall to only US$1,000 in 2010 thanks to improvements in sequencing devices. Cheaper genetic analysis should help grow the personalized medicine market at a 2008~2013 CAGR of more than 11% (up from the current market size of US$232bn in 2009).
Macrogen is the largest shareholder of US-based sequencing device developer LightSpeed, with a 25% stake (including stakes held by Macrogen subsidiaries). Since investing in LightSpeed, Macrogen has become more competitive in personalized preventive medicine. Share price will likely rise further as personalized medicine grows.
34
Bioneer
(064550.KQ)
Focus on high margins in diagnostics

Genetic diagnostics business growing rapidly
Bioneer specializes in the production of genetic diagnostic equipment and kits, and research diagnosis equipment Since the breakout of AH1N1 in 2009, there has been strong demand for genetic diagnostic tools, which have been distributed to major general hospitals and public clinics in Korea. Bionner has sold 30 units of gene diagnosis equipment (totaling W2.6bn) to the Seoul metropolitan government.
Not Rated
Analyst Irene Kim
Susie Lee (RA)
2009 preview: operating profit to turn positive

We expect Bioneer to post 2009 sales of W28.8bn (up 93.2% y-y) and operating profit of W7.2bn (TTP, y-y). In particular, we believe 4Q09 sales were a record-high (since listing) thanks to growing sales of diagnosis equipment and test kits related to the AH1N1 virus. Strong sales and operating profit are attributed to: 1) large-scale margin improvement on diagnostic equipment and kit sales (W9bn) related to AH1N1; and 2) falling cost-to-sales ratio on growing sales contribution from high-margin genetic diagnostic kits and equipment, and even distribution of fixed costs.
Sector
Pharm/bio-tech
W5,900 1,696.14 528.09 $59mn W500 414,790shrs W5,021 W7,910 W1,500 0.00% 0.1% 25.2% 5.2%
Current price (01/04/19) KOSPI KOSDAQ Market cap (common) Par value 120DA trading vol. 120DA share price 52W high (08/28/09) Low (01/15/09) Foreign ownership (2008) Free float rate Foreign ownership Major shareholders Han-oh Park Dae-sil Lee Share performance (%) 3M Absolute Relative 21.3 16.2
Advancing into overseas markets

The global IVD kit market expected to grow to US$5.2bn in 2013 (2003~2013 CAGR of 9%). PCR equipmentkey to genetic diagnosis/diagnostic kitshas many applications, including testing for diseases and food poisoning and determining the specific breed of a species Rapid change expected in domestic healthcare market in 2010, triggered by the entry of the Samsung Group, led by Samsung Techwin We expect Bioneer to grow, driven by the rapidly expanding genetic and other diagnostic kit businesses. Excluding the temporary sales spike from AH1N1 in 2009, 2010 sales and operating profit should rise 14.6% and 61.1% y-y, respectively, to W33bn and W11.6bn Major share price catalysts for Bioneer are sales growth of diagnostic tests and kits (given the expansion of the diagnostic test market in the aftermath of the AH1N1 virus breakout) and diagnostic divisions entry into overseas markets
6M
12M
40.6 268.8 35.4 213.3
YE-Dec 2007 2008 2009E 2010F
Sales (Wbn) 12.5 14.9 28.8 33.0
Chg (%) 7.7 19.3 93.3 14.6
OP (Wbn) -2.3 -0.3 7.2 8.5
Pre-tax (Wbn) -6.3 -3.6 -
NP (Wbn) -6.3 -3.6 6.2 7.3
EPS (won) -559 -314 564 664
Chg (%) RR RR TTP 17.7
P/E (x) NA NA 10.8 9.2
P/B (x) 1.4 0.8 -
EV/EBITDA (x) 136.0 11.8 -
ROE Debt/equity Net debts (%) (%) (Wbn) -16.3 -10.1 52.1 73.5 7 13 -
Source: Bioneer, Woori I&S Research Center estimates
Woori I&S does not have a stake greater than or equal to 1% in Bioneer as of the preparation date. Woori I&S has not provided this material to an institutional investor or other third party in advance. The Korean version of this material was distributed on January 5, 2010. The analyst and his/her spouse do not own any securities of companies mentioned in this material as of the preparation date. Bioneer is not under coverage at Woori I&S. Thus, Woori I&S does not present a rating and target price on the counter. This report correctly reflects the analysts opinion and was written without any external influence or intervention.
Infopia
(036220.KQ)
Quality high, but marketing weak
Not Rated
Analyst Irene Kim
Core product is blood glucose bio sensor kit (diabetes)

Infopias core product is a blood-glucose bio sensor kit for diabetes diagnosis. In line with the aging society, diagnostic kit market becoming increasingly important within healthcare industry. However, Infopias global market share has not risen much yet due to weak overseas marketing capability.
Susie Lee (RA)
2009 preview: results likely to fall short of market consensus

Infopia is expected to post 2009 sales of W41bn (up 10.2% y-y) and net profit of W8.9bn (up 58.9% y-y), falling far short of company guidance (sales of W55bn, net profit of W14.4bn). Disappointing earnings are attributed to: 1) weak sales of HbA1C equipment (sales originally estimated at W10bn or more) due to defects; and 2) delayed sales in US to improve accounts receivable turnover in US market
Sector
Pharm/bio-tech
W14,700 1,696.14 528.09 $96.26mn W500 162,446shrs W13,219 W22,305 W10,041 0.68% 12.1% 12.9% 4.6%
Current price (01/04/10) KOSPI KOSDAQ Market cap (common) Par value 120DA trading vol. 120DA share price 52W high (05/19/09) Low (11/03/09) Dividend yield (2008) Free float rate Foreign ownership Major shareholders Byung-woo Bae Sei Asset Korea Share performance (%) 3M Absolute Relative 24.1 19.0
Time to move aggressively overseas

Given increasing number of diabetes patients worldwide (170mn in 2000 to 370mn in 2030, according to WHO), the global market for blood-glucose diagnosis kits is expected to surge. In addition, the listing of life insurers should increase demand for blood-glucose test kit and bio sensors, which are simple, cost-effective ways for individuals to monitor their condition Infopia has made efforts to diversify its product portfolio to lower its dependence on one item (blood-glucose test biosensor), but in the process, its HbA1C equipment (blood glucose test equipment for hospitals) was found to have defects. However, its efforts to diversify its product portfolio (cholesterol/ liver disease diagnosis sensor, heart disease diagnosis sensor) will continue in line with efforts to strengthen future growth potential. While Infopia is known to have both earnings stability and sound growth potential, potential investors should keep a close eye on intensifying competition in the domestic market and its weakness in overseas markets.
6M -19.5
12M 26.8
-24.7 -28.6
YE-Dec 2007 2008 2009E 2010F
Sales (Wbn) 31.2 37.2 41.0 53.5
Chg (%) 50.5 19.4 10.2 30.5
OP (Wbn) 8.4 11.2 10.5 14.4
Pre-tax (Wbn) 10.8 7.6 -
NP (Wbn) 8.8 5.6 8.9 12.2
EPS (won) 1,271 747 1,271 1,743
Chg (%) 36.5 -41.2 70.1 37.1
P/E (x) 32.3 15.1 12.3 9.0
P/B (x) 6.8 1.9 -
EV/EBITDA (x) 30.1 6.6 -
ROE Debt/equity Net debts (%) (%) (Wbn) 30.3 12.0 14.0 24.9 -11.8 1.6 -
Source: Infopia, Woori I&S Research Center estimates
Woori I&S does not have a stake greater than or equal to 1% in Infopia as of the preparation date. Woori I&S has not provided this material to an institutional investor or other third party in advance. The Korean version of this material was distributed on January 5, 2010. The analyst and his/her spouse do not own any securities of companies mentioned in this material as of the preparation date. Infopia is not under coverage at Woori I&S. Thus, Woori I&S does not present a rating and target price on the counter. This report correctly reflects the analysts opinion and was written without any external influence or intervention.
Bio/Healthcare
Rating and Target Price Update Company
Samsung Techwin
www.wooriwm.com
Code
012450.KS
Date
2009.11.02 2009.09.14 2009.05.25 2009.04.20 2009.03.17 2009.02.23 2008.11.11 2008.10.21
Company
Buy Buy Buy Buy Buy Buy Buy Buy
Code
W120,000 (12M) W110,000 (12M) W89,000 (12M) W65,000 (12M) W46,000 (12M) W42,000 (12M) W42,000 (12M) W33,000 (12M)
(w on) 150,000 100,000 50,000 0 '08.1
Closing price Target price (12M)
'08.4
'08.7
'08.10
'09.1
'09.4
'09.7
'09.10
Company
SD
Code
066930.KS
Date
2010.01.05
Company
Buy
Code
W38,000 (12M)
(w on) 50,000 40,000 30,000 20,000 10,000 0 '08.1
Closing price Target price (12M)
'08.4
'08.7
'08.10
'09.1
'09.4
'09.7
'09.10
WOORI Investment & Securities stock ratings 1. 2. Period: Uniform 12-month Rating System: Based on a stocks absolute return from the date of publication, Strong Buy: high conviction Buy rated stocks Buy: greater than +15% Hold: 0% and +15% Reduce: less than 0%
The research is based on current public information that Woori I&S considers reliable, but Woori I&S does not represent it as accurate or complete and it should not be relied on as such. Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and Woori I&S is in no way legally responsible for future returns or loss of original capital. All materials in this report are the intellectual property of Woori I&S. Copying, distributing, transmitting, transforming or lending of this material without Woori I&S' consent is prohibited.
37

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Industry Analysis

Focus on in-vitro diagnostics

Susie Lee (RA)

Rating and investment indices

ROE 2009E 2010F 17.3 47.9 22.6 39.1 -

Source: Woori I&S research center estimates

III. Healthcare to show high growth compared to other industries ............................

IV. Changing domestic and global diagnostics market ............................................... 16

Diagnosis market to grow on US healthcare reform

Focus on companies with biodrug pipelines, medical equipment plays

Top picks: Samsung Techwin, SD

SD: strong player in rapid testing

Macrogen: leader in consumer genomics

ROE 2009E 17.3 47.9 2010F 22.6 39.1 -

Source: Woori I&S Research Center estimates

Mindray enjoying 45% premium to sector average

US healthcare relative to MSCI US

Source: Datastream, Woori I&S Research Center

Mindray enjoys 45% premium to sector average

MSCI US - P/E MSCI US. Healthcare - P/E Mindray- P/E

Source: Datastream, Woori I&S Research Center

Investment indicators for domestic healthcare players

Source: annual reports, , Woori I&S Research Center estimates

Source: Bloomberg, Woori I&S Research Center estimates

Investment indicators for overseas healthcare players

Source: Bloomberg, Woori I&S Research Center

Source: Bloomberg, Woori I&S Research Center estimates

Peer analysis domestic healthcare share performance

Global peer analysis overseas healthcare share performance

Source: Bloomberg, Woori I&S Research Center

Global peer analysis market valuation

P/E P/S P/B P/cash EV/EBITDA Div yield

2008 2009 2010 2010 2010 2010 2010 2010

CAC 9.0 12.38 10.30 0.79 1.27 5.59 16.62 4.37

Source: Bloomberg, Woori I&S Research Center

III. Healthcare to show high growth compared to other industries

Healthcare outperformed other sectors (in terms of cumulative returns)

1. Healthcare market to post 2008~2013 CAGR of 13.2%

US healthcare spending rising sharply

Source: Woori I&S Research Center

Healthcare spending to steadily increase

US seeks to reduce healthcare spending

Health expenditure per capital

10,000 8,000 6,000 4,000 2,000 0 1995

It's time for Korea seek to increase healthcare spending

Source: Datamonitor, Woori I&S Research Center

2. Focus on growth of IVD

Chair Electric hand piece Artificial tooth

IVD market to grow at CAGR of 7% from US$40bn in 2008

Source: Datamonitor, Woori I&S Research Center

Gene diagnostics market to expand at 2009~2013 CAGR of 15%

Source: Woori I&S Research Center

Diagnostic chip overview

Source: Woori I&S Research Center

3. Samsung and SK Chemical enter bio/healthcare

Diagnostics business essential for personalized medicine market growth

Primary risk assessment

Disease monitoring /management

Source: Datamonitor, Woori I&S Research Center

Policyholders: 18.6mn Sales: W25tn

Samsung Medical Center

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