111017 Small cap FINALfile.myasset.com/sitemanager/upload/2011/1018/17244353/111017_… · POSCO Chemtech (003670 KS) / 25 Simpac Metalloy (090730 KS) / 26 Chemical Finetec (033500

2 TONGYANG Securities Inc.

Contents

Small-cap strategy / 3

Semiconductor, Display

KCTech (029460 KS) / 10

Soulbrain (036830 KS) / 11

Electronic Parts

Koh Young (098460 KS) / 14

Isu Petasys (007660 KS) / 15

Iljin Display (020760 KS) / 16

RFsemi (096610 KS) / 17

Mobile

Jahwa Electronics (033240 KS) / 20

KCP (060250 KS) / 21

Partron (091700 KS) / 22

Steel

POSCO C&C (058430 KS) / 24

POSCO Chemtech (003670 KS) / 25

Simpac Metalloy (090730 KS) / 26

Chemical

Finetec (033500 KS) / 28

Kukdo Chemical (007690 KS) / 29

Samyoung Chemical (003720 KS) / 30

Machinery

Dongyang Mechatronics (013570 KS) / 32

Sungjin Geotec (051310 KS) / 33

TPC (048770 KS) / 34

Woorim Machinery (101170 KS) / 35

YG1 (019210 KS) / 36

Healthcare, Bio

Bioland (052260 KS) / 38

Small-cap

TONGYANG Securities Inc. 3

Small-cap strategy

Small-cap strategy

I. Small- to mid-cap market trends

Korea’s stock market trends, which continued from 2009, have changed since Jun 2011. After large-cap stocks performed better than small- to mid-caps for two and half years, small- to mid-caps are now gaining strength. Although small- to mid-caps have fallen slightly amid the Korean market’s drastic fluctuations since September, we believe the change in trend is being maintained.

Large caps’ 2-1/2 years outperformance ends; small- to mid-caps gaining strength

50

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2009 2010 2011

-50

0

50

(Jan 2009 = 100) (Jan 2009 = 0)

KOSPI

KOSDAQ

KOSPI-KOSDAQ

Source: TONGYANG Securities

From Jan 2009 to May 2011, the KOSPI surged 90.5%, while the KOSDAQ rose only 45.9%. Within the KOSPI, large caps spiked 94.6%, while small- to mid-caps gained about 70%. After the 2008 financial crisis, investors preferred the KOSPI over the KOSDAQ, and among KOSPI stocks, large caps over small- to mid-caps.

However, the situation has changed. From June to August 2011, while the KOSPI lost 12.2%, the KOSDAQ gained 1.8%, and the average returns of small- to mid-caps were higher than for large caps. With the KOSPI surging, investors turned their eyes to small- to mid-caps. Although large caps have regained strength relative to small/mid since August as concerns over a global financial crisis renewed appetite for safe assets, interest in small- to mid-caps has remained high.

Small- to mid-caps gain strength (%)

KOSPI Large Mid Small KOSDAQ

Jan 2009~Jun 2011 90.5 94.6 68.4 75.3 45.9

Jun~Aug 2011 -12.2 -14.7 -0.2 -0.2 1.8

Aug 2011~ -9.0 -7.9 -14.6 -15.6 -12.6



It is worth noting that the leading sectors and stocks among the small- to mid-caps are changing.

In the KOSDAQ, non-manufacturing stocks, such as media, Internet, content, and pharmaceutical (including bio), led the small- to mid cap market from June. These sectors’ indices rose over 30% for three months from June, driving up the KOSDAQ. During the same period, IT stocks, which account for almost half of the KOSDAQ’s market cap, dropped more than 20%.

However, so far in October, while media, Internet, and content shares are declining, IT hardware is making large gains.

KOSDAQ returns by sector (%)

Internet Content Entertain/

culture Pharma IT H/W

Electro/

electric Comm equip

Semicon IT parts

Jun~Sep 20 31.1 36.1 21.5 28.4 -23.8 -25.1 -18.9 -25.5 -24.1

Oct 2011~ -9.9 -2.8 -6.9 2.9 -0.6 -3.8 -0.7 -2.0 1.3

Oct 5, 2011~ -0.4 0.2 2.0 6.3 8.2 4.5 5.6 9.0 8.4


Leading small- to mid-cap stocks clearly changing in October

-30-20-10

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From O ct 2011

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Small-cap strategy


Small-cap strategy

II. 4Q11 small- to mid-cap investment strategy

Why are IT component stocks, neglected during the bullish stock market for almost a year, suddenly going up? We see two reasons: 1) negative news flows for Apple; and 2) the growth of Samsung Electronics, in particular, its mobile communication division.

Apple announced the “iPhone 4S” on Oct 4. After exciting Apple followers and adding new Apple users with a new iPhone model every year since the summer of 2007, this newest iteration of the iPhone seems to have been a disappointment. However, we believe that behind such responses lies the absence of Steve Jobs. It’s not that iPhone 4S’ features are disappointing compared to recent iPhone models. The problem is that consumers have such high expectations that it is hard to satisfy them with only “small” improvements.

Among the total of five iPhone models, including the 4S, the iPhone 4 was the most innovative compared to its immediate predecessor (in terms of design and specs), offering a “Retina” display, 5-megapixel camera module, and clearly distinct design from the previous version.

Released around the opening of the App Store, the “iPhone 3” provided users with the new experience of consuming content (albeit a novel innovation), while the “iPhone 3GS” adopted a 3.15-megapixel camera module and upgraded CPU. Thus, although the iPhone 4S, with an 8-megapixel camera module, voice recognition function, and higher speed CPU, is not being that well received, Apple’s sales are unlikely to fall immediately.

iPhone comparison

iPhone iPhone 3 iPhone 3GS iPhone 4 iPhone 4S

Launch Jun 2007 Jul 2008 Jun 2009 Jun 2010 Oct 2011

Display 320 x 480 / 3.5” 320 x 480 / 3.5” 320 x 480 / 3.5” 640 x 960 / 3.5” 640 x 960 / 3.5”

Memory 4/8/16GB 8/16GB 8/16/32BG 16/32GB 16/32/64GB

Camera 2MP 2MP 3.15MP 5MP 8MP

OS iPhone OS iPhone OS iphone OS3 iOS4 iOS5

CPU ARM 11 412MHz ARM 11 412MHz A8 600MHz A8 1GHz A9 dual-core 1GHz

Other App Store opened Antenna gate Voice recognition



The bigger issue is probably the death of Steve Jobs. Jobs passed away on Oct 5, and when the iPhone 4S was unveiled the next day, there were pessimistic views about Apple’s ability to continue to produce innovative iPhone models. Of course, Apple’s iPhone, “iPod,” and “iPad” are not the achievement of Jobs alone, but Apple may have to face employee turnover and the sense of loss within the company.

Although iPhone 4S sales may be strong in the short term, we doubt Apple will remain as innovative as it has been in the mid- to long term, and this likely represents opportunities for Apple’s competitors.

iPhone shipments

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2007 2008 2009 2010 2011

('000 units )

2Greleased

3Greleased

3GSreleased

4Greleased

4Sreleased


Now, curiosity is peaking as to who will benefit from the disappointment over the iPhone 4S and Job’s absence, and who has the potential to become the next game changer if Apple stumbles.

The first in line is Samsung Electronics (SEC). Its smartphone sales were right behind Apple’s in 2Q and likely surpassed Apple’s in 3Q sales. Compared to SEC, other handset makers like Nokia, RIM, and HTC do not pose as great a threat to Apple.

SEC surprised the market on Oct 7, when it announced its preliminary 3Q results, as its operating profit of W4.2tn was much higher than market estimates. Such robust earnings were largely thanks to its handset sales.

Among the top-five names who ruled the mobile handset market in the early 2000s, Siemens and Motorola have fallen out of the competition, and LGE and Sony Ericsson are now struggling in the smartphone race. Nokia is barely holding onto its number-one position and will probably lose it soon to SEC. Rising smartphone names, such as RIM and HTC, have stalled in market share growth for awhile. SEC is the only player that has seen a steady increase in market share. One of the reasons it did so well is because it was able to exploit opportunities arising from other players’ slumps. Now it has another opportunity, as Apple is expected to struggle in the absence of its spiritual leader. Many expect SEC to make another great leap forward.

Small-cap strategy


Small-cap strategy

Only SEC saw steady increase in market share in past decade

0%

10%

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50%

2005 2006 2007 2008 2009 2010

Nokia MotorolaSamsung SonyEric ssonLGE RIMA pple


We believe SEC took over the number-one spot in smartphone market share in 3Q and also looks set to surpass Nokia to become the world’s top handset seller. As such, much attention will be focused on its mobile business. And in turn, it is only natural that attention will eventually turn to Korean handset component makers that supply SEC.

We expect handset part suppliers to SEC to enjoy strong share price performance for some time to come. On the other hand, we can’t expect all suppliers to rally equally, and recommend a selective approach in picking stocks. In this regard, we need to see how the smartphone industry is changing, and what direction it is taking.

A review of Apple’s iPhone 4S gives us some clues: it differs most from its predecessor in terms of camera module (from 5 to 8 megapixel), CPU, and offering voice recognition.

As such, we especially note manufacturers of camera modules and voice recognition software that supply SEC. Below is a list of companies that supply SEC with key handset parts.


Likely beneficiaries of Samsung’s smartphone leadership

Handset parts Company Description

Camera module SEMCO Stronger demand for high-pixel camera module

Partron

AF actuator Jahwa Electronics Higher demand for AF-enabled camera module

Voice-recognition chip RF Semi Wider adoption of voice recognition feature

Embedded SW Infraware Mobile office increasingly become the norm

Main board SEMCO PCB spec improvement

Daeduck Electronics

FPC Interflex Higher demand as smartphones spread and specs improve

Innox Higher demand as smartphones spread and specs improve

Case Intops Wider use of high-quality coating material

SAW filter Wisol Higher filter demand as smartphone functions become more diverse

Vibration motor SEMCO Larger demand for linear vibration motor

Jahwa Electronics

Source: TONGYANG SecuritiesSource: TONGYANG Securities

Having said that, Europe’s debt crisis still weighs heavily on the market. Market volatility will likely intensify until at least early next year whenever major negative events occur. But in the short term, we expect rallies among small-cap names driven by the smartphone theme and SEC rise to the top. We advise picking up these names while the rally continues, and then switching to undervalued plays when volatility becomes more extreme at the end of 2011.

Small-cap strategy


3Q11 Earnings Update


KCTech (029460 KS)

Soulbrain (036830 KS)



KCTech (029460 KS)

KOREA Small cap

BUY (M) / TP: W7,700 (D)

Share price (won, Oct 12) 4,735

Paid-in capital (Wbn) 16

Market cap (Wbn) 154

BPS (won) 5,062

Net debt to equity (%) -3.8

Shares outstanding 32,420,856

Avg daily T/O (2M, Wbn) 2

Avg daily vol (2M, shrs) 260,538

52-week high (won) 9,500

52-week low (won) 3,840

Foreign ownership (%) 12.10

Major shareholders (%)

Seok-tae Koh and others 42.3

Stock performance (%)

1M 3M 12M

Absolute (3.6) (32.7) (11.9)

Relative (3.4) (21.6) (9.0)

Abs (US$) (11.5) (41.6) (14.5)

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2,000

4,000

6,000

8,000

10,000

Oct 2009 Oct 2010 Oct 20110

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KCTech(LHS)Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

Semicon mats up, but LCD cleaners not yet 3Q preview

3Q11 K-IFRS sales are estimated at W51.0bn (-7.9% q-q) and operating profit at W5.5bn (-11.3% q-q). Despite an unfavorable LCD display environment, KCTech should post solid earnings thanks to reflection of orders (LCD cleaning equipment) for LG Display’s P98 line. CMP material sales have steadily increased, but LCD cleaning equipment orders have declined.

Mid- to long-term earnings forecast

KCTech showed stable earnings in LCD cleaning equipment as a player in the oligopolistic global market, but orders are down due to slowing downstream industries. Even so, it is encouraging that semicon CMP material (ceria slurry) sales have grown (we expect W35.0bn in 2011 and W50.0bn in 2012, with market share up to 30% in 2011 and 50% in 2012). Newly-released CMP equipment orders are currently delayed, but should drive growth when supply begins (Korea’s semicon CMP equipment market is worth W300bn, dominated by US-based AMAT and Japan’s Ebara).

We forecast 2011 sales of W223.3bn (-3.0% y-y) and operating profit W24.5bn (+7.0% y-y). Shares look undervalued at a 2011 P/E of 6.0x. We think the pullback was overdone and note that semicon material sales are rising, suggesting a strong rally when the LCD business environment recovers.

Other

KCTech has a 28.3% stake in subsidiary TCK (market cap W157.0bn).

Forecasts and valuations

FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 186 95.5 230.3 223.3 205

Adj OP (Wbn) 23.2 9.7 22.9 24.5 25

Adj OP margin (%) 12.5 10.2 9.9 11.0 12.2

NP, CI (Wbn) 11.2 10.1 25 23 23.5

EPS, CI (won) 349 313 775 709 724

P/E (x) 6.3 17.9 8.2 6.0 5.9

P/B (x) 0.5 1.3 1.2 1.1 1.0

Note: Adj OP = reported OP (K-IFRS) – other op profit/loss. CI = controlling interest Source: TONGYANG Securities

Kyung-taek Oh [email protected] +822-3770-3583

Quarterly earnings forecast

3Q10 4Q10 1Q11 2Q11 3Q11E Chg (% y-y) Chg (% q-q)

Sales (Wbn) 76.3 50.6 49.3 55.4 51 -33.2 -7.9

Operating profit (Wbn) 7.9 4.5 4.4 6.2 5.5 -30.4 -11.3

Net profit (Wbn) 8.7 6.4 3.6 3.6 4.4 -29.4 22.2

Note: Highlighted figures based on K-IFRS Source: TONGYANG Securities



Soulbrain (formerly Techno Semichem) (036830 KS)

KOREA Small cap

BUY (M) / TP: W54,800 (M)




BPS (won) 14,587

Net debt to equity (%) 27.8








Ji-wan Jeong and others 52.2


1M 3M 12M

Absolute 0.6 (9.7) 43.3

Relative 1.3 (5.2) 51.3

Abs (US$) (7.3) (18.6) 40.6

010,000

20,00030,00040,000

50,00060,000

Oct 2009 Oct 2010 Oct 2011050

100150200

250300

Soulbrain(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Stable earnings as major IT material maker 3Q preview

We expect 3Q sales of W116.0bn (+5.0% q-q), OP W16.5bn (+0.6%). Despite weakness in display etchant on lower utilization at LG Display, semicon etchant demand grew on operation of Samsung Electronics’ (SEC) Austin line. Also, we think thin glass demand rose on operation of Samsung Mobile Display’s (SMD) 5.5-gen line; and secondary battery electrolyte improved on rising supply to Samsung SDI. 3Q semicon material sales likely grew 9.9% q-q, thin glass 31.5%, secondary battery electrolyte 35.9%, but display etchant fell 25.6%.


Despite softening downstream industries amid global recession woes, Soulbrain is posting solid earnings on sales growth. Display earnings recovery will depend on utilization, while semicon materials should see solid demand. For thin glass, earnings growth should be strong as SMD is expected to operate its A2-2 lines in 2H and A3 and 8th-gen lines going forward. Secondary battery electrolyte should grow steadily as tablet PCs boost demand for polymer battery. 2011 sales are estimated at W448.6bn (+28.6% y-y) and operating profit W61.2bn (+24.4% y-y). The company is trading at a premium to the market (2011E P/E of 13.3x), presumably due to rising sales in AMOLED and secondary battery businesses, which have growth potential.

Other

Techno Semichem was renamed Soulbrain Sep 23 (stock renamed Oct 10). First BW: 1,510,000 shares (W32,900 over Feb 28, 2012~Feb 27, 2016). Second BW: 300,000 shares (W32,900 over Feb 28, 2012~Feb 27, 2016)


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 223.8 290.1 348.7 448.6 590

Adj OP (Wbn) 30.4 35.7 49.2 61.2 76.5

Adj OP margin (%) 13.6 12.3 14.1 13.6 13.0

NP, CI (Wbn) 18.7 25.5 33 45.8 59

EPS, CI (won) 1,272 1,733 2,245 3,118 4,017

P/E (x) 7.6 12.6 13.6 13.3 10.4

P/B (x) 0.9 1.7 2.1 1.8 1.5





Sales (Wbn) 95.2 92.8 94.6 110.5 116 21.8 5.0

Operating profit (Wbn) 14 13 11.8 16.4 16.5 17.9 0.6

Net profit (Wbn) 9.3 4.8 7.7 11.9 12.5 34.4 5.0




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Electronic Parts

Koh Young (098460 KS)

Isu Petasys (007660 KS)

Iljin Display (020760 KS)

RFsemi (096610 KS)


Electronic Parts

Koh Young (098460 KS)

KOREA Small cap

BUY (M) / TP: W32,000 (D)




BPS (won) 6,040









Kwang-il Koh and others 17.8


1M 3M 12M

Absolute (17.8) (22.7) 100.8

Relative (17.2) (18.9) 112.2

Abs (US$) (25.7) (31.6) 98.2

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Oct 2009 Oct 2010 Oct 20110

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Koh Young(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Big picture intact, but in lull short term 3Q preview

3Q K-IFRS non-consol sales of W21.2bn (+9.1% q-q), OP W5.5bn (+25.0%). Equipment orders, down after Japan’s quake, have yet to fully recover. Many companies delayed equipment investment given rising uncertainty amid the global financial crisis, and this situation is likely to continue for a while.

Mid- to long-term earnings outlook

Demand for 3D SPI equipment is steady, but order growth is weaker than expected on rising uncertainty. Short-term sales growth will likely depend on whether sales of AOI equipment (bigger market, higher ASP than SPI) grow.

Koh Young has submitted semicon testing equipment to a semicon maker for quality approval; the decision will likely come in 1Q12. Success would help both sales growth and recognition of Koh Young’s technology.

We expect 2011 sales of W85.0bn and operating profit of W22.2bn, below guidance, but think investors should focus on market growth and Koh Young’s technological prowess, rather than the top- and bottom line.

Other

Koh Young completed designing a new plant to be built in Asan to boost production capacity, but has not yet decided when to start construction. Strong sales growth will be possible when the new plant comes on-line.

Korea Investment Value Asset Mgmt holds 5.37%, RCM Asia Pacific 5.33%.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 34.3 26.9 71.2 85 156.2

Adj OP (Wbn) 5.9 2.3 18.8 22.2 38

Adj OP margin (%) 17.2 8.4 26.4 26.1 24.3

NP, CI (Wbn) 8.1 1.2 15.8 16.7 28.8

EPS, CI (won) 1,121 146 1,955 1,962 3,375

P/E (x) 5.6 42.4 5.6 11.1 6.4

P/B (x) 1.6 1.5 1.8 2.8 1.9


Hyun-jae Choi [email protected] +822-3770-3541



Sales (Wbn) 18.5 21 20.2 19.4 21.2 14.7 9.1

Operating profit (Wbn) 5.1 5.7 5.7 4.4 5.5 7.5 25.0

Net profit (Wbn) 4 4.8 4.6 3.5 4.1 2.2 16.3




Isu Petasys (007660 KS)

KOREA Small cap

BUY (M) / TP: W6,000 (M)




BPS (won) 3,813









Isu Corp and others 30.2


1M 3M 12M

Absolute 6.2 18.1 51.1

Relative 6.4 37.7 56.0

Abs (US$) (1.7) 9.2 48.5

01,0002,0003,0004,0005,0006,0007,000

Oct 2009 Oct 2010 Oct 2011050100150200250300350

ISUPETASYS(LHS)

Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

3Q results weaker than expected 3Q preview

3Q11 K-IFRS non-consolidated sales are estimated at W78.3bn (+2.4% q-q) and operating profit at W6.0bn (-1.9% q-q), below expectations.

This is mostly because MLB orders, which were initially sound, did not lead to actual sales due to yield issues with new products.


We expect 4Q earnings to improve q-q on steady orders from Cisco and sound MLB supply to Clay and Alcatel.

The business of build-up PCB for handset mainboard was previously expected to turn a profit in 2H after a loss in 1H, but is still making a loss of around 5%. Isu Exaplex, a FPC firm acquired for W12.0bn in Apr 2011, swung to profit in July. Isu Petasys improved product mix (from MLB and build-up PCB to FPC).

We expect 2011 sales of W303.1bn and operating profit of W22.6bn. Valuation looks attractive at a 2011 P/E of 9.1x. Earnings momentum is also sound given rising investment worldwide in network equipment.

Other

National Pension Service holds 6.41% and Yurie Asset Management 6.42%. In 3Q, Templeton bought 5.23% and Allianz 5.02%.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 260.8 275.1 307.4 303.1 337.7

Adj OP (Wbn) 13.2 11.9 20.9 22.6 29.5

Adj OP margin (%) 5.1 4.3 6.8 7.5 8.7

NP, CI (Wbn) 11 17.7 24 23.3 29.2

EPS, CI (won) 342 429 581 565 707

P/E (x) 4.1 4.1 5.4 9.1 7.3

P/B (x) 0.4 0.5 0.8 1.3 1.1





Sales (Wbn) 79.2 78.5 67.5 76.4 78.3 -1.2 2.4

Operating profit (Wbn) 6.9 3.7 4.1 6.1 6 -13.6 -1.9

Net profit (Wbn) 6.4 7.1 3.3 5.1 6.7 4.5 32.5



Electronic Parts

Iljin Display (020760 KS)

KOREA Small cap

BUY (M) / TP: W18,000 (M)




BPS (won) 1,316









Jin-kyu Heo and others 45.7


1M 3M 12M

Absolute 22.0 9.9 (9.3)

Relative 22.2 28.1 (6.4)

Abs (US$) 14.0 1.0 (12.0)

0

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Oct 2009 Oct 2010 Oct 2011050100150200250300350

ILJINDISPLAY(LHS)Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

Performance outstanding 3Q preview

3Q K-IFRS non-consol sales now estimated at W118.2bn (+103.7% q-q), operating profit W13.0bn (+85.3%). Sapphire wafer utilization is still at around 50%, but 3Q likely surged on touch panel sales for 10.1” Galaxy Tab. 4Q sales should grow 20~30% given current order inflow. Iljin has transformed itself into a touch panel producer.

Mid- and long-term earnings forecast

Tablet PC 10.1” touch panels, supplied from June, have generated solid sales, taking almost 70% of the market on Iljin’s tech prowess, better yield vs rivals. Although an alternative technology allowing the use of one ITO film instead of the usual two has arrived, it has lower yield and higher costs. Thus, Iljin should be strong for some time. Sapphire wafer sales are unlikely to grow for a while due to weaker LED demand (TV market slump) and inventory adjustment at epi (epitaxy) firms.

We estimate 2011 sales at W373.3bn, operating profit W43.4bn. Shares look undervalued at a 2011 P/E of 5.3x. With Iljin, investors can diversify risk while betting on Samsung Electronics’ tablet PC and LED businesses.

Other

Some 3.8mn out of 5.5mn BWs issued in 2010 are held by affiliate Iljin Semicon, meaning overhang risk is low. Shares with unexercised rights stand at only 400,000, which is unlikely to be a drag on the share price. KB Asset Management holds 5.38%.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 9.9 33.8 113.9 373.3 499.5

Adj OP (Wbn) -4.1 0.6 13.1 43.4 59.9

Adj OP margin (%) -41.2 1.7 11.5 11.6 12.0

NP, CI (Wbn) -31.6 0.5 10.1 40.6 52.5

EPS, CI (won) -2,327 26 394 1,530 1,947

P/E (x) - 120.0 22.9 5.3 4.2

P/B (x) - 4.1 6.8 2.7 1.7





Sales (Wbn) 30.1 49.4 47.4 58 118.2 292.2 103.7

Operating profit (Wbn) 4.3 6.2 5.4 7 13 202.2 85.3

Net profit (Wbn) 3.8 5.1 5.2 6.6 12 212.3 82.2




RFsemi (096610 KS)

KOREA Small cap

BUY (M) / TP: W13,900 (M)



Market cap (Wbn) 58

BPS (won) 5,664









Jin-hyo Lee and others 36.2


1M 3M 12M

Absolute 19.1 13.9 0.0

Relative 19.9 19.5 5.7

Abs (US$) 11.1 5.0 (2.7)

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Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Set to see record-high earnings 3Q preview

We expect RFsemi to post record earnings in 3Q11, with K-IFRS sales of W9.5bn (+10.5% q-q) and operating profit of W2.5bn (+25% q-q), thanks to increasing demand for ECM chips, driven by the rising popularity of smart IT devices, such as smartphones and tablet PCs.


RFsemi has set record-high earnings every year on rising ECM chip demand and market share expansion. It is encouraging that ECM chip demand has continued to grow alongside rising demand for smart IT devices.

In addition, newly-released PKG-type TVS diode sales are robust after RFsemi became a vendor to Samsung Electronics in Nov 2010. TVS diode sales should come to W4.0bn in 2011, and then jump to W15.0bn in 2012 on the development of additional models and customer diversification. We expect RFsemi to reduce its heavy reliance on ECM chip sales from 87.3% in 2011 to 57.7% in 2012, and boost PKG sales to 25.4% in 2012.

RFsemi should post record-high earnings in 2011, with sales of W35.5bn (+21.9% y-y) and operating profit of W9.3bn (+24.0% y-y). Shares look undervalued at a 2011 P/E of 8.1x and 2012 P/E of 4.9x, while the earnings growth outlook is bright.

Other

Korea Investment Value Asset Management holds a 11.0% stake.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 16.9 23.2 29.1 35.5 59.2

Adj OP (Wbn) 3.9 6.1 7.5 9 15

Adj OP margin (%) 22.9 26.1 25.8 25.4 25.4

NP, CI (Wbn) 5.6 4.8 6.4 7.1 11.6

EPS, CI (won) 4,314 891.0 1,182.5 1,303.5 2,148.4

P/E (x) 2.9 8.4 9.3 8.1 4.9

P/B (x) 0.7 1.5 1.8 1.4 1.1





Sales (Wbn) 7.2 8.4 8.1 8.6 9.5 31.9 10.5

Operating profit (Wbn) 1.8 2.3 2.1 2 2.5 38.9 25.0

Net profit (Wbn) 1.4 2 1.6 1.7 2.1 50.0 23.5



Electronic Parts

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Mobile

Jahwa Electronics (033240 KS)

KCP (060250 KS)

Partron (091700 KS)


Mobile

Jahwa Electronics (033240 KS)

KOREA Small cap

BUY (M) / TP: W13,000 (U)




BPS (won) 8,408









Sang-myeon Kim & others 37.6


1M 3M 12M

Absolute 33.8 66.1 40.0

Relative 34.1 93.6 44.5

Abs (US$) 25.9 57.2 37.3

0

2,000

4,000

6,000

8,000

10,000

12,000

Oct 2009 Oct 2010 Oct 20110

20

40

60

80

100

120

JahwaElec(LHS)Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

Solid auto focus actuator sales 3Q preview

We now believe IFRS non-consolidated sales grew 58% q-q to W58.2bn and operating profit jumped 216.9% q-q to W6.1bn. Earnings improved q-q, with sales of its auto-focus actuator for camera modules rising from W20.4bn in 2Q to more than W40.0bn in 3Q.


Following the lead of the “Galaxy S2” and “iPhone 4S,” most upcoming high-end smartphones will also come with 8-megapixel camera modules. As a result, VCM-based auto focus actuators will likely be replaced with encoding-type actuators, in which Jahwa has a competitive edge.

The supply of VCM actuators for 3- or 5-megapixel camera modules to Samsung Fiberoptics has been gradually increasing. We expect the auto-focus actuator market to continue to expand, as next-generation smartphones will likely adopt auto focus functions in sub-camera modules used for video calls.

In 2011, sales should reach W172.2bn and operating profit W10.4bn, and then rise to W216.4bn and W19.1bn, respectively, in 2012.

Other

Jahwa issued W1.2bn in convertible bonds to Industrial Bank of Korea in August (convertible into 80,000 shares at W15,000)


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 71.3 102.8 99.4 172.2 216.4

Adj OP (Wbn) 4.8 6.5 -3.3 10.4 19.1

Adj OP margin (%) 6.7 6.3 -3.3 6 8.8

NP, CI (Wbn) 8.8 5.7 2.7 11 18.4

EPS, CI (won) 494 322 152 615 1,033

P/E (x) 11.4 22.3 43.6 13.0 7.7

P/B (x)


Hyun-jae Choi [email protected]

+822-3770-3541



Sales (Wbn) 23.8 24 23.3 36.9 58.2 144.4 58.0

Operating profit (Wbn) 0.1 -2.9 -1 1.9 6.1 9,101.1 216.9

Net profit (Wbn) 1.3 -1.6 0.4 2.1 4.9 284.8 130.2




KCP (060250 KS)

KOREA Small cap

BUY (M) / TP: W6,900 (M)



Market cap (Wbn) 57

BPS (won) 1,414









Yoon-ho Song & others 23.2


1M 3M 12M

Absolute (7.9) 16.1 149.0

Relative (7.3) 21.7 163.1

Abs (US$) (15.9) 7.1 146.3

0

1,000

2,000

3,000

4,000

5,000

6,000

Oct 2009 Oct 2010 Oct 2011050100150200250300350

KCP(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Growth momentum on track 3Q preview

Korea Cyber Payment’s (KCP) K-IFRS 3Q sales likely grew 11.5% q-q to W30.0bn and OP 33.3% q-q to W2.0bn. Sales and margins rose as demand for electronic payment services grew. In particular, 3Q is traditionally strong for online shopping and games, and demand in 3Q11 was especially healthy amid concerns over a global economic downturn.


The domestic electronic payment market has posted a 10-year CAGR of 24.0% and should grow further on new markets and payment methods, such as social commerce and near-field communication (NFC). KPC now controls the online payment gateway (PG) market with a 23% market share, and after entering the VAN (value-added network) business in 2007, it now accounts for about 5% with market share still growing. KCP should benefit from the growth of the electronic payment service market thanks to its diversified business portfolio of PG, online and offline VAN, and mobile payment. We forecast 2011 sales at W111.0bn (+33.4% y-y) and operating profit at W7.0bn (+84.2% y-y). Shares are trading at a 2011 P/E of 7.1x (undervalued vs KOSDAQ), even though sales and operating profit will likely grow throughout 2011. We expect KCP to become more attractive in 2012 on undervaluation vs earnings.

Other

KCP is making moves to go overseas, signing an MOU with US electronic payment service provider UMS.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 51.1 62.1 83.2 111 136

Adj OP (Wbn) 0.8 1.5 3.8 7 8.8

Adj OP margin (%) 1.6 2.5 4.5 6.3 6.5

NP, CI (Wbn) 1.5 2 5 7.5 9.1

EPS, CI (won) 155 200 501 659 800

P/E (x) 10.1 10.6 6.6 7.1 5.8

P/B (x)


Kyung-taek Oh [email protected]

+822-3770-3583



Sales (Wbn) 21.2 24.3 25 26.9 30 41.5 11.5

Operating profit (Wbn) 1.1 1.1 1.3 1.5 2 81.8 33.3

Net profit (Wbn) 1.4 1.8 1.5 2 2.2 54.3 8.0



Mobile

Partron (091700 KS)

KOREA Small cap

BUY (M) / TP: W15,000 (D)




BPS (won) 3,911









Jong-ku Kim and others 25.8


1M 3M 12M

Absolute 21.3 8.2 13.8

Relative 22.1 13.5 20.2

Abs (US$) 13.3 (0.7) 11.1

0

5,000

10,000

15,000

20,000

Oct 2009 Oct 2010 Oct 20110

50

100

150

200

250

PARTRON(LHS)Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Camera module sales rising 3Q preview

We now expect 3Q K-IFRS non-consolidated sales of W105.2bn (+35.1% q-q) and operating profit of W12.0bn (+32.7% q-q). Samsung Electronics’ (SEC) solid handset sales boosted top- and bottom-line growth (Partron which supplies camera module). The portion of camera module sales in total sales grew to 70% in 3Q, but we think risks from heavy reliance on camera module sales will decline going forward, as new product sales are rising gradually.

Mid-to long-term earnings forecast

Sales are growing hand-in-hand with SEC’s handset division. Partron supplies most of the camera modules for SEC’s video phone-enabled smartphones, and has also started supplying 5megapixel products for the main camera modules of feature phones. We think it is benefitting from Samsung Techwin’s withdrawal from the camera module business. With the camera module sales portion rising, operating margin is unlikely to recover to the mid-10%s, but we note profits are growing in absolute terms on sales growth. Partron’s strength is its diverse handset component line-up.

We estimate 2011 sales at W350.0bn and operating profit at W37.7bn. Current valuation is undemanding at a 2011 P/E of 8.3x. The key point is whether Partron can improve its growth potential with newly-added product sales.

Other

Equity capital increased to W14.9bn on a 50% bonus issue.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 117.4 192.2 232.6 350 465.1

Adj OP (Wbn) 20.3 33.3 36.3 37.7 51.5

Adj OP margin (%) 17.3 17.3 15.6 10.8 11.1

NP, CI (Wbn) 16.6 24.1 23.7 36.9 47.7

EPS, CI (won) 372 540 530 1,234 1,598

P/E (x) 7.9 12.7 22.2 8.3 6.4

P/B (x) 1.8 3.3 4.5 1.9 1.5





Sales (Wbn) 57.7 65.2 53.1 77.9 105.2 82.1 35.1

Operating profit (Wbn) 9.4 9.2 5.5 9 12 27.4 32.7

Net profit (Wbn) 6.4 4 4.7 8.1 11.5 81.0 41.5




Steel

POSCO C&C (058430 KS)

POSCO Chemtech (003670 KS)

Simpac Metalloy (090730 KS)


Steel

POSCO C&C (058430 KS)

KOREA Small cap

HOLD (D) / TP: W24,900 (D)




BPS (won) 42,296









POSCO 56.9


1M 3M 12M

Absolute (17.0) (23.6) (43.3)

Relative (16.9) (10.9) (41.5)

Abs (US$) (25.0) (32.5) (46.0)

0

10,000

20,000

30,000

40,000

Oct 2009 Oct 2010 Oct 20110

20

4060

80

100

120

POSCO C&C(LHS)

Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

Focus on benefits of strong won in 4Q 3Q preview

We estimate that sales declined slightly and operating profit fell in 3Q.

Sales dropped through August as overseas orders only came from clients that agreed to pay its non-discounted price after POSCO’s CR price hikes in 2Q. However, C&C boosted sales by cutting prices in September, albeit probably squeezing margins.


Won appreciation since mid-September has been favorable for the company.

POSCO (C&C’s key raw material supplier) is reducing discounts on its HR and CR. This is negative for C&C’s earnings, but should be offset by a strong won.

We expect the non-carbon steel division to stagnate for now due to the sluggish domestic construction industry.

The metal copper clad laminate (MCCL) division’s earnings should turn around from 2013, when the LED (downstream) industry is expected to recover.

Other

Construction of the MCCL plant has started but is suspended temporarily for conversion of land use; mass production should start in 2H12, as planned.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 956.4 703.5 1,001.8 908.1 9,726

Adj OP (Wbn) 90.3 -32.8 4.8 -2.6 117

Adj OP margin (%) 9.4 -4.7 0.5 -0.3 1.2

NP, CI (Wbn) -48.5 -19.2 4.9 1.3 113

EPS, CI (won) -8,080 -3,207 823 208 1,889

P/E (x) - - 35.4 86.4 9.5

P/B (x)


Byung-joon Lee heavybrian @myasset.com

+822-3770-3594



Sales (Wbn) 241.8 291.5 228.2 239.1 229.5 -5.1 -4.0

Operating profit (Wbn) 3.6 -17.4 -9.6 4.9 1.1 -68.0 -76.6

Net profit (Wbn) 3.1 -14.3 -7.5 4.8 2.1 -33.6 -56.8




POSCO Chemtech (003670 KS)

KOREA Small cap

BUY (M) / TP: W229,000 (M)



Market cap (Wbn) 1,156

BPS (won) 39,450









POSCO & other 65.0


1M 3M 12M

Absolute (7.7) 13.0 36.9

Relative (7.0) 18.5 44.6

Abs (US$) (15.6) 4.1 34.2

0

50,000

100,000

150,000

200,000

250,000

Oct 2009 Oct 2010 Oct 20110100200300400500600700

POSCO CHEMTECH(LHS)Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

3Q firm despite seasonality; 4Q to be strong 3Q preview

POSCO Chemtech’s 3Q sales likely dipped q-q, while operating profit was flat q-q.

We believe sales of its materials used in steel fell in 3Q due to weak seasonality in the steel sector, but margin likely stayed firm thanks to ongoing improvement in productivity at the Hwaseong plant.


Sales will likely improve in 4Q on strong seasonality in the steel industry.

A plant for cathode rechargeable batteries, its next growth catalyst, is set to come on-line in October. Chemtech is working to increase its client base and continues to test products. Sales should materialize from 1Q12 on.

Chemtech entered an MOU with Mitsubishi Chemical and Mitsubishi Corp in September to build a factory for needle coke, which uses light oil and coal tar. This is an important marker on its road to long-term growth. When the plant comes on-line in 2014, Chemtech’s sales will likely break W3tn.

Other

Chemtech may have to raise funds to fulfill its capex commitment (eg, needle coke plant). Capex for the plant is about W400bn, but the impact on shares should be limited given the company’s current financial holdings and profitability.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 446.9 574.4 756.1 1,185.3 1,417.7

Adj OP (Wbn) 32.1 41.5 70.2 127.1 148.9

Adj OP margin (%) 7.2 7.2 9.3 10.7 10.5

NP, CI (Wbn) 25.2 33.1 56.1 100.4 121.5

EPS, CI (won) 4,263 5,602 9,494 16,997 20,566

P/E (x) 8.4 8.9 15.7 11.0 9.1

P/B (x) 1.4 1.6 3.8 3.3 2.4


Byung-joon Lee [email protected] +822-3770-3594



Sales (Wbn) 187.9 241.1 279.6 294.6 291.0 54.9 -1.2


Net profit (Wbn) 8.8 22.2 18.5 25.4 26.5 203.1 4.4



Steel

Simpac Metalloy (090730 KS)

KOREA Small cap

BUY (I) / TP: W14,000 (I)



Market cap (Wbn) 90

BPS (won) 10,803









Simpac Holdings & others 61.2


1M 3M 12M

Absolute (18.4) (19.2) (9.9)

Relative (17.8) (15.2) (4.8)

Abs (US$) (26.3) (28.1) (12.6)

02,000

4,0006,000

8,00010,000

12,000

Oct 2009 Oct 2010 Oct 20110

50

100

150

200

SIMPAC METALLOY(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Focus on long-term growth, not current flux 3Q preview

We believe 3Q results will decrease q-q.

We believe 3Q production was flat q-q, but that earnings were hurt by lower contract prices with POSCO caused by manganese price declines.


4Q results should improve q-q as a continued fall in manganese prices reduces Simpac’s import costs, leading to better margins.

The Dangjin plant (dubbed Simpac Metal), thought to be the company’s growth driver, will start operations in early November after construction wraps up at end-October. The plant is unlikely to have much impact on 2011 results, but should have a significant impact on sales and margins from 2012. Simpac has already launched a marketing campaign targeting potential clients, and furnace expansion at Hyundai Steel should also boost sales. The plant will make value-added products like low-carbon ferromanganese. Simpac Metal should boost Metalloy’s production by 70% (or 70,000 tpa) and sales by 110% (or W200bn).

Other

Dongbu Metal, Korea’s biggest manganese-based ferroalloy maker, plans to do an IPO. While this is unlikely to happen within 2011, when it does goes public, other companies in similar businesses should also receive more of the market’s attention, amid increasing demand for value-added ferroalloys.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 234.2 119.2 196.6 167.2 172.1

Adj OP (Wbn) 59.0 9.3 27.9 25.2 25.0

Adj OP margin (%) 25.2 7.8 14.2 15.1 14.5

NP, CI (Wbn) 41.2 9.0 24.9 20.9 28.8

EPS, CI (won) 4,108 702 1,951 1,610 2,212

P/E (x) 1.2 10.6 4.3 4.0 2.9

P/B (x) 0.6 0.8 0.8 0.5 0.4





Sales (Wbn) 54.6 45.8 42.2 43.3 41.5 -24.0 -4.1

Operating profit (Wbn) 5.2 8.1 7.0 6.9 5.8 12.1 -16.1

Net profit (Wbn) 6.9 6.8 5.8 5.6 4.8 -30.3 -14.5




Chemical

Finetec (033500 KS)

Kukdo Chemical (007690 KS)

Samyoung Chemical (003720 KS)


Chemical

Finetec (033500 KS)

KOREA Small cap

HOLD (I) / TP: W3,900 (I)



Market cap (Wbn) 81

BPS (won) 2,752









Dongsung Holdings 34.6


1M 3M 12M

Absolute (25.9) (36.8) (11.6)

Relative (25.4) (33.7) (6.6)

Abs (US$) (33.9) (45.7) (14.3)

01,0002,0003,0004,0005,0006,0007,000

Oct 2009 Oct 2010 Oct 2011020406080100120140

FineTec(LHS)Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Earnings likely to improve in 2012 3Q preview

Finetec’s 3Q results likely dipped q-q.

Slow orders in 2009 and 2010 probably dampened Finetec’s LNG insulation material sales in 3Q, and construction material sales (eg, panel) also appear to have slumped due to slow demand from the construction sector.


Sales of insulation and construction materials will likely remain weak in 4Q11, but sales should turn around from next year as Korean shipbuilders won multiple orders for LNG ships this year.

Finetec entered a W98.1bn contract with Samsung Heavy on Aug 23 for LNG insulation material, which should materialize into earnings from next year.

Earning momentum could pick up gradually on increasing demand from its major clients (eg, Hyundai Heavy’s Gorgon Project, Samsung Heavy winning three additional LNG carrier orders, etc).

Other

In 2011, STX Offshore & Shipbuilding won its first LNG carrier order, and we think it may adopt the “MARK III System,” a containment method that Finetec specializes in. Potential orders from STX O&S would help diversify Finetec’s client base and boost earnings.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 364.2 252.5 181.4 193.4 265.9

Adj OP (Wbn) 61.8 19.9 11.5 8.3 22.6

Adj OP margin (%) 17.0 7.9 6.3 4.3 8.5

NP, CI (Wbn) -55.2 -32.2 2.0 1.2 13.3

EPS, CI (won) -3,680 -1,886 85 44 492

P/E (x) - - 48.1 65.5 5.9

P/B (x) 0.8 1.7 1.5 1.0 0.9





Sales (Wbn) 43.5 55.1 50.6 52.9 43.9 0.8 -17.0


Net profit (Wbn) 3.1 -1.5 1.7 0.8 -0.6 Turn to red Turn to red




Kukdo Chemical (007690 KS)

KOREA Small cap

BUY (M) / TP: W63,000 (D)




BPS (won) 48,293









Shinilchul Chemical & others 35.3


1M 3M 12M

Absolute (19.7) (46.0) (4.3)

Relative (19.5) (37.0) (1.1)

Abs (US$) (27.6) (54.9) (6.9)

0

20,000

40,000

60,000

80,000

100,000

Oct 2009 Oct 2010 Oct 20110

50

100

150

200

250

KukdoChem(LHS)Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

Unfavorable macros weigh on earnings 3Q preview

Kukdo’s growth likely slowed in 3Q.

Epoxy resin prices stayed flat, but demand from Europe and the US faltered.

The price of BPA, a key raw material, is falling, but margin growth will likely be limited due to capex depreciation and higher SG&A costs.


Epoxy resin prices should stay strong, which is positive.

Its China business is enjoying robust demand, in contrast to Europe and the US. Under IFRS, the China subsidiary is expected to account for over 20% of Kukdo’s earnings in 2011.

That said, there is the chance that epoxy resin demand and prices will fall on slumping IT demand and reduced government investment in wind turbine plants, which are expected to generate fresh demand for epoxy resin.

Other

Kukdo should be better able to strengthen its position in Europe (22% sales contribution) given the Korea-Europe FTA signed in July.

If it successfully enters the wind turbine market, its earnings growth should accelerate considerably when the global economy recovers.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 433.2 405.2 623.9 784.8 857.4

Adj OP (Wbn) 21.9 21.1 30.4 44.0 43.7

Adj OP margin (%) 5.1 5.2 4.9 5.6 5.1

NP, CI (Wbn) 29.2 22.7 26.5 43.4 45.4

EPS, CI (won) 5,027 3,899 4,555 7,470 7,810

P/E (x) 4.4 7.1 11.4 5.0 4.7

P/B (x) 0.6 0.7 1.1 0.7 0.6





Sales (Wbn) 162.0 160.8 174.6 195.5 199.4 23.0 2.0


Net profit (Wbn) 8.7 4.8 7.1 9.5 10.0 14.6 5.7



Chemical

Samyoung Chemical (003720 KS)

KOREA Small cap

BUY (I) / TP: W8,800 (I)




BPS (won) 2,423




Avg daily vol (2M, shrs) 1,207,582





Suk-jun Lee & others 40.5


1M 3M 12M

Absolute 5.0 12.0 155.7

Relative 5.2 30.6 164.0

Abs (US$) (2.9) 3.1 153.1

01,0002,0003,0004,0005,0006,0007,000

Oct 2009 Oct 2010 Oct 20110

100

200

300

400

500

SamyoungChem(LHS)

Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

Growth story of capacitor film on track 3Q preview

After a solid 2Q, we believe earnings continued to grow in 3Q. The key driver was likely an ASP hike for capacitor film (main product) as demand spiked.

Mid- to long-term forecast

The packaging film division should sustain stable earnings. In 1H, capacitor film ASP rose about 40%, with Samyoung Chem already winning capacitor film orders for 4Q11~1H12. Thus, capacitor film earnings should keep rising.

Chinese subsidiary Daeryun Samyoung Chem should finish capacity ramp-up (from 3,800 tonnes/year to 8,600) by early next year, boosting Samyoung Chem’s sales growth.

Capacitor thin film should see rising demand from electric vehicles (EV), solar cells, and wind power. In particular, Samyoung is already supplying it to green energy industries (solar, wind) and testing samples for EVs.

For capacitor thin film for EVs, Japanese rivals are dominant. As Samyoung begins supplying to domestic carmakers, earnings should surge.

Other

Subsidiary Samyoung Heavy Ind (50% stake) should trim losses from W3.0bn in 2010 to W2.0bn or less in 2011, boosting parent-company earnings.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 158.5 159.7 192.4 243.3 269.8

Adj OP (Wbn) 9.2 10.6 17.6 35 41.3

Adj OP margin (%) 5.8 6.7 9.1 14.4 15.3

NP, CI (Wbn) -3.2 7.7 9 31.3 37.2

EPS, CI (won) -1,071 2,490 2,793 920 1,093

P/E (x) - 5.5 8.8 5.5 4.6

P/B (x) 0.3 0.6 1.0 1.5 1.1





Sales (Wbn) 48.3 52.7 51.2 61.1 63.9 32.3 4.6


Net profit (Wbn) 3.3 3 4.3 6 7.8 137.6 30.7




Machinery

Dongyang Mechatronics (013570 KS)

Sungjin Geotec (051310 KS)

TPC (048770 KS)

Woorim Machinery (101170 KS)

YG1 (019210 KS)


Machinery

Dongyang Mechatronics (013570 KS)

KOREA Small cap

BUY (M) / TP: W26,000 (M)




BPS (won) 6,838









Byung-ho Cho & others 29.7


1M 3M 12M

Absolute (12.4) (22.3) 12.0

Relative (12.3) (9.4) 15.6

Abs (US$) (20.4) (31.2) 9.4

0

5,000

10,000

15,000

20,000

25,000

Oct 2009 Oct 2010 Oct 20110

100

200

300

400

DongyangMecha(LHS)

Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

Soft earnings in 3Q to be temporary 3Q preview

K-IFRS 3Q sales to come to W145.0bn (-5.8% q-q), OP W10.5bn (-7.9%); weaker q-q on seasonal slowdown in China’s construction equipment market. However, 4Q results should rebound, as Doosan Infracore is slated to launch a new excavator model and construction equipment makers are expected to build up inventories in anticipation of next year’s peak season.


Dongyang Mechatronics is the biggest hydraulic cylinder supplier for China’s construction equipment. Amid the growth of China’s excavator market, hydraulic cylinder sales should post a CAGR of more than 20% through 2015.

Dongyang is accelerating capex at home and abroad (eg, China, India). In Korea, capacity addition at Changwon plant 1 should finish in Nov 2011. With capacity additions in China, total capacity there should rise from W190.0bn now to W250.0bn in 2012. The Asan plant, which will supply to the Hyundai-Kia Auto Group, should begin full-fledged operation in 2012. Under K-IFRS, 2011 sales to reach W600.0bn, OP W50.4bn, operating margin 8.4%. Earnings are expected to improve substantially on capacity expansion.

Other

Sales to the Hyundai-Kia Auto Group should rise from W30.0bn in 2010 to W40.0bn in 2011. Also, with the Korean launch of the Chevrolet brand, sales to GM Korea are on the rise.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 418.6 281.3 473.9 600 670

Adj OP (Wbn) 23.3 5.8 26.3 50.4 58.3

Adj OP margin (%) 5.6 2.1 5.5 8.4 8.7

NP, CI (Wbn) -10.7 13.2 46.5 62.7 79.6

EPS, CI (won) -340 416 1,469 1,981 2,594

P/E (x) -33.2 27.2 7.7 5.7 4.4

P/B (x)


Sang-phil Won [email protected]

+822-3770-3569



Sales (Wbn) 121 132.2 149.7 159.2 145 23.9 -5.8


Net profit (Wbn) 13.8 11.8 10.8 11.5 9 -35.0 -21.7




Sungjin Geotec (051310 KS)

KOREA Small cap

BUY (M) / TP: W18,000 (D)




BPS (won) 3,216









POSCO & other 36.7


1M 3M 12M

Absolute (23.5) (31.9) (45.5)

Relative (23.4) (20.6) (43.7)

Abs (US$) (31.5) (40.8) (48.1)

0

5,000

10,000

15,000

20,000

25,000

Oct 2009 Oct 2010 Oct 20110

50

100

150

200

250

SUNG JIN GEOTEC(LHS)Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

To meet 2011 order target 3Q preview

3Q K-IFRS sales should come to W148.0bn (-19.6% q-q) and operating profit W9.5bn (+2.2% q-q). Sales fell q-q largely due to fewer operating days: 1) plant maintenance after completion of the first Canadian oil sands project; and 2) summer vacation and Chuseok (Korean Thanksgiving) holidays.

Sales should pick up from 4Q, when Hyundai Heavy is slated to launch the Gorgon Project and Samsung Heavy its FPU (floating production unit) project.


Over January~September, Sungjin fulfilled US$500mn of it full-year order target of US$800mn. It should meet its 2011 target, as it is expected to win a series of orders, including the second Canadian oil sands project (US$260mn) and a Saudi desalination plant (US$100mn). 2011 sales should hit W631.0bn and operating profit W50.6bn. In 2H, despite signs that the plant market is faltering, we expect Sungjin to easily meet its sales guidance of W631.0bn.

We reiterate BUY and set our target price at W18,000, based on the TONGYANG Universe 2012 machinery/machinery parts sector average P/E of 15x and 2012 EPS of W1,173. We revise down our target price by 36% from our previous W28,000 as we revise down 2012 earnings.

Other

Sungjin is bolstering its offshore plant operations with the appointment of former DSME director Jang-jin Kim (strong track record) as Sungjin’s CEO


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 520.1 380.1 370.6 631 850

Adj OP (Wbn) 74.9 -26.3 -12 50.6 70

Adj OP margin (%) 14.4 -6.9 -3.2 8 8.2

NP, CI (Wbn) -191 -6.4 -11.8 6.5 55

EPS, CI (won) -6,249 -178 -298 138 1,173

P/E (x) - - - 67.1 7.9

P/B (x)



+822-3770-3569



Sales (Wbn) 112.9 139.2 155.5 184.1 148 31.1 -19.6


Net profit (Wbn) 8.6 10.6 2.2 -0.2 0.5 -94.2 Turn positive



Machinery

TPC (048770 KS)

KOREA Small cap

BUY (M) / TP: W10,800 (D)



Market cap (Wbn) 67

BPS (won) 2,863









Jae-yoon Um & others 71.0


1M 3M 12M

Absolute (17.6) (5.0) 122.6

Relative (17.0) (0.3) 135.2

Abs (US$) (25.5) (13.9) 119.9

0

2,000

4,000

6,000

8,000

10,000

12,000

Oct 2009 Oct 2010 Oct 201102004006008001,0001,2001,400

TPC(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Growth momentum on track 3Q preview

1QFY11 (fiscal year end June) K-IFRS sales should come to W18.0bn (-13.9% q-q) and operating profit W1.5bn (-42.3% q-q). Sales likely down 13.9% q-q, as the chaebols delay capex on global economy fears. The plunge in operating profit is due to W900mn in incentive payments after the fiscal year end. On a y-y basis, 1QFY11 sales should rise 15.4% and operating profit 50.0%, sustaining upward trends.


Founded in 1979, TPC makes pneumatic solutions (core parts for automated machinery). The domestic pneumatic solutions market is estimated at W500.0bn, with foreign firms like SMC Korea (Japan) and FESTO Korea (Germany) holding 60%, vs TPC at 15%. Recently, as TPC has gained the upper hand over Japanese rivals in price competitiveness (strong yen) and supplying products on time, it is enjoying continuing market share gains, which should translate to sales growth. TPC has 10 subsidiaries with the M&A of automated machinery parts suppliers and establishment of overseas sales and production arms. In particular, the China production arm has ample growth potential. In 4QFY10, the China arm began supplying pneumatic solutions for spinning and weaving machinery to local firms. FY11 sales should come to W81.3bn (+11.2% y-y) and OP W9.8bn (+19.5% y-y). Shares are trading at 7.1x FY11 P/E, which we believe offers compelling value.

Note

Fiscal year ends in June (dividend per share W75).


FY ends Jun 2008 2009 2010 2011E 2012E

Sales (Wbn) 32.4 31.2 48.4 73.1 81.3

Adj OP (Wbn) -0.9 -0.6 4.2 8.2 9.8

Adj OP margin (%) -2.9 -2 8.8 11.2 12

NP, CI (Wbn) -0.9 -1.7 3.5 6.8 8.8

EPS, CI (won) -112 -202 403 787 1,027

P/E (x) 10.0 - 8.4 8.8 6.7

P/B (x)


Kyung-taek Oh [email protected]

+822-3770-3583



Sales (Wbn) 15.6 18.8 17.8 20.9 18 15.4 -13.9

Operating profit (Wbn) 1 2.5 2.2 2.6 1.5 50.0 -42.3

Net profit (Wbn) 0.8 2.5 2.5 1 1.3 62.5 30.0




Woorim Machinery (101170 KS)

KOREA Small cap

BUY (M) / TP: W14,000 (M)



Market cap (Wbn) 72

BPS (won) 6,835









Gyu-suk Han & others 60.8


1M 3M 12M

Absolute (17.2) (3.1) (10.1)

Relative (16.6) 1.6 (5.0)

Abs (US$) (25.1) (12.0) (12.7)

0

5,000

10,000

15,000

Oct 2009 Oct 2010 Oct 2011020406080100120140

WOORIM(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Earnings and growth to be solid 3Q preview

K-IFRS 3Q sales should come to W18.0bn (-4.3% q-q) and operating profit W2.7bn (-6.9% q-q). Earnings should shrink modestly q-q due to fewer operating days (summer vacation, Chuseok (Korean Thanksgiving) holidays).

However, 4Q sales to hit quarterly record on rising sales to Doosan Mottrol.


60% of sales come from speed reducers for excavators to Doosan Mottrol (Woorim supplies 80% of Doosan’s needs). Also, Doosan is building a new plant on rising demand from Chinese firms, with operation to start Apr 2012.

In 4Q, Woorim is poised to win W10.0bn in orders for speed reducers for natural gas drilling from the US. Speed reducers for natural gas drilling tend to be replaced yearly, thus providing a key growth driver.

Under K-IFRS, 2011 sales should come to W69.3bn, operating profit W12.3bn, and operating margin 17.7%. Earnings growth should accelerate through 2012 on rising demand for speed reducers for excavators for Doosan Mottrol and growing overseas sales of industrial speed reducers.

Other

Once capacity addition is completed by end-2011, total capacity should rise from W80.0bn currently to W160.0bn.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 53.9 44.2 50.3 69.3 77.1

Adj OP (Wbn) 14.1 10 6.7 12.3 13.6

Adj OP margin (%) 26.1 22.6 13.3 17.7 17.6

NP, CI (Wbn) 11 8.6 6.4 11.2 12.6

EPS, CI (won) 1580 1024 715 1,242 1,401

P/E (x) 4.7 7.3 10.5 6.0 5.4

P/B (x)



+822-3770-3569



Sales (Wbn) 12.1 15.3 15.6 18.8 18 48.8 -4.3


Net profit (Wbn) 1.2 1.7 1.8 2.4 2.3 91.7 -4.2



Machinery

YG1 (019210 KS)

KOREA Small cap

BUY (M) / TP: W20,600 (M)




BPS (won) 3,850









Ho-gun Song & others 49.1


1M 3M 12M

Absolute 9.0 7.4 416.8

Relative 9.7 12.6 446.0

Abs (US$) 1.0 (1.6) 414.2

0

5,000

10,000

15,000

20,000

Oct 2009 Oct 2010 Oct 20110100200300400500600700

YG-1(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Growth to revive in 4Q as Chungju plant starts 3Q preview

We expect 3Q results to be in line with 2Q’s.

In particular, 2Q results beat expectations thanks to speculative demand prior to the July price hike, and we believe 3Q results remained steady q-q.


The Chungju plant (annual capacity of W100.0bn) began operating at end-September, and this should help revitalize growth from 4Q. The won’s weakening vs the dollar from mid-September should benefit YG1. Order backlog is estimated at over W90.0bn as of end-September. YG1 is wary of excessive order backlog and plans to keep it at an appropriate level.

China plant 2 has thus far completed three of seven lines. So far this year, China plant 2 has already generated earnings similar to full-year 2010, and with capacity additions, future earnings should grow even further. Also, demand for machine tools in China continues to rise, so that China plant 2 should maintain its current utilization.

Other

Given high debt-to-equity (184.5% as of 2Q) and expected continued investment, YG1 may need to raise funds. The company says it may turn to debt or equity financing. While this could lead to share dilution, any such dilution should be substantially offset by the company’s growth.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 174.8 115.5 163.2 260.1 341.2

Adj OP (Wbn) 19.5 -5.1 10.1 37.5 47.2

Adj OP margin (%) 11.1 -4.4 6.2 14.4 13.8

NP, CI (Wbn) 7.7 -14.6 10.7 34.8 45.4

EPS, CI (won) 355 -678 494 1,608 2,101

P/E (x) 10.0 - 8.4 8.8 6.7

P/B (x)


Byung-joon Lee [email protected]

+822-3770-3594



Sales (Wbn) 45.3 46.3 51.3 67.4 66.7 47.3 -1.0

Operating profit (Wbn) 5.3 3 3.8 12.1 10.4 96.4 -14.0

Net profit (Wbn) 3.8 5.5 2.4 8.9 7.1 87.5 -19.9




Healthcare, Bio

Bioland (052260 KS)


Healthcare, Bio

Bioland (052260 KS)

KOREA Small cap

BUY (M) / TP: W17,500 (M)




BPS (won) 4,805









Taek-sun Lee & others 37.6


1M 3M 12M

Absolute 4.2 39.9 40.2

Relative 4.9 46.8 48.1

Abs (US$) (3.7) 31.0 37.5

0

5,000

10,000

15,000

20,000

Oct 2009 Oct 2010 Oct 20110

50

100150

200

250

300

Bioland(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

Seasonality q-q, but y-y growth intact 3Q preview

We estimate 3Q sales at W17.2bn (+20.3% y-y, -5.0% q-q), OP W3.8bn (+46.2% y-y, -15.6% q-q), and NP W7.37bn (+74% y-y, -2.9% q-q). Earnings likely shrank q-q on seasonal weakness for cosmetics materials (sales portion 60%) in 3Q. Bioland needs to act, as weakness at the medical device (diagnostic) division is squeezing operating margin, as are rising sales of low-margin red ginseng materials. Furthermore, we did not see speculative demand in 3Q like we did in 2Q, when Amore Pacific relocated its Osan plant (when a company relocates a plant, it usually orders more materials to get ready for production after moving). We advise focusing on continued y-y growth, not q-q declines.

Capacity ramp-up to bear fruit in 2012

The Osong plant for herbal medicines and cosmetics materials should finish construction in Nov 2011. We expect the plant to yield sales of W20.0bn for 2012. Bioland’s orders should grow as Amore Pacific expands its presence in China. It should accelerate efforts to expand its drug material (sales portion currently 6%) and medical device (3%) divisions. The bio business’ operating profit should turn positive in 2012. After hitting W2.8bn in 2010, sales at the bio business should top W5.0bn in 2011 on increasing sales of HA (hyaluronic acid) and tissue engineering products (eg, treatment for wounds or burns), and approach W8.0bn in 2012. Bioland will complete and file the IND (investigational new drug) application for a botanical drug for dementia with the Korea Food & Drug Administration by end-Oct 2011.


FY ends Dec 2008 2009 2010 2011E 2012E

Sales (Wbn) 36.7 51 62.5 75 90.5

Adj OP (Wbn) 7.7 11.1 15.1 19 22.8

Adj OP margin (%) 21 21.7 24.1 25.3 25.2

NP, CI (Wbn) 6.4 11 12.6 15 17.6

EPS, CI (won) 427 732 838 998 1,170

P/E (x) 9.1 7.4 10.2 12.9 11.0

P/B (x)


Sang-yun Lee [email protected] +822-3770-3580



Sales (Wbn) 14.3 17.6 18.4 18.1 17.2 20.3 -5.0


Net profit (Wbn) 1.9 2.5 4.7 3.4 3.3 73.7 -2.9




KCTech (029460 KS) ratings and target price history

0

2,000

4 ,000

6 ,000

8 ,000

10,000

12,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price

(W) Date Rating TP (W)

2011/10/11 BUY 7,700

2011/07/18 BUY 11,000

2011/04/26 BUY 11,000

Analyst Changed


Soulbrain (036830 KS) ratings and target price history

0

10,000

20,000

30,000

40,000

50,000

60,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 54,800

2011/04/26 BUY 54,800

Analyst Changed

2010/07/15 BUY 32,000

2010/05/11 BUY 29,000


Koh Young (098460 KS) ratings and target price history

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 32,000

2011/07/18 BUY 39,000

2011/04/26 BUY 39,000




Iljin Display (020760 KS) ratings and target price history

0

5,000

10,000

15,000

20,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 18,000

2011/07/18 BUY 18,000

2011/04/26 BUY 18,000

2009/11/10 BUY 13,000


RFsemi (096610) ratings and target price history

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 13,900

2011/09/29 BUY 13,900

2010/02/23 NOT RATED -


Simpac Metalloy (090730 KS) ratings and target price history

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 14,000

2009/10/16 NOT RATED -




Jahwa Electronics (033240 KS) ratings and target price history

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 13,000


KCP (060250 KS) ratings and target price history

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 6,900

2011/06/28 BUY 6,900


Partron (091700 KS) ratings and target price history

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 15,000

2010/11/29 BUY 29,000




POSCO C&C (058430 KS) ratings and target price history

0

10,000

20,000

30,000

40,000

50,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 24,900

2011/04/26 BUY 45,700


POSCO Chemtech (003670 KS) ratings and target price history

0

50,000

100,000

150,000

200,000

250,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 229,000

2011/07/18 BUY 229,000


Finetec (033500 KS) ratings and target price history

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 HOLD 3,900

2011/04/26 NOT RATED -




Isu Petasys (007660) ratings and target price history

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 6,000

2011/07/18 BUY 6,000

2010/01/12 BUY 4,300


Kukdo Chemical (007690 KS) ratings and target price history

0

20,000

40,000

60,000

80,000

100,000

120,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 63,000

2011/07/18 BUY 100,000


Samyoung Chemical (003720 KS) ratings and target price history

0

2,000

4,000

6,000

8,000

10,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 8,800




Dongyang Mechatronics (013570 KS) ratings and target price history

0

5,000

10,000

15,000

20,000

25,000

30,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 26,000

2011/04/26 BUY 26,000

2010/07/05 HOLD 6,000


Sungjin Geotec (051310 KS) ratings and target price history

0

5,000

10,000

15,000

20,000

25,000

30,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 18,000

2011/04/26 BUY 28,000


TPC (048770 KS) ratings and target price history

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 10,800

2011/08/16 BUY 15,400

2011/04/11 NOT RATED -

2010/10/21 stock split (0.5)




Woorim Machinery (101170 KS) ratings and target price history

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/11/11 BUY 14,000

2011/08/16 BUY 14,000

2010/09/03 BUY 11,000

2010/04/02 NOT RATED -

2010/03/02 NOT RATED -


YG1 (019210 KS) ratings and target price history

0

5,000

10,000

15,000

20,000

25,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 20,600

2011/08/16 BUY 20,600

2011/04/11 BUY 10,300

2011/01/07 BUY 7,100

2010/11/30 NOT RATED -


Bioland (052260 KS) ratings and target price history

0

5,000

10,000

15,000

20,000

O ct 2009 A ug 2010 Jun 2011

C urrent price

Target price


2011/10/11 BUY 17,500

2011/07/18 BUY 17,500

2011/04/26 BUY 17,500




Disclosures & disclaimers

This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of Tong Yang Securities Inc.

As of the publication date of this report, Tong Yang Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Tong Yang Securities Inc. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s)’ spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification

I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report.

Stock and sector ratings

Stock ratings include an Investment Rating (Buy, Hold, Sell) as well as a Volatility Risk Rating (High, Low) that are based on the expected absolute return of a stock over the next 6 -12 months.

- Buy: Low Risk if a stock is expected to return 10% or more; High Risk if a stock is expected to return 20% or more

- Hold: Low Risk if a stock is expected to return between -10 and +10%; High Risk if a stock is expected to return between -20 and +20%

- Sell: Low Risk if a stock is expected to decline by 10% or more; High Risk if a stock is expected to fall by 20% or more

Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting.

- Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting

Documents

111017 Small cap FINALfile.myasset.com/sitemanager/upload/2011/1018/17244353/111017_… · POSCO Chemtech (003670 KS) / 25 Simpac Metalloy (090730 KS) / 26 Chemical Finetec (033500