Korea/Asia, Events, IPOs, Douglas Research Advisory

Douglas Kim

Korea/Asia, Events, IPOs

Equity Capital Markets

Wonbang Tech Co Ltd / Equity Capital Markets

In this insight, we provide a valuation analysis of Wonbangtech IPO. Its bookbuilding for the institutional investors starts on 8 September. We have a positive view on this IPO.Wonbangtech is one of the leading companies in Korea for providing clean room facilities for the semiconductor/display industries and dry room facilities for the lithium ion battery, medical device, and pharmaceutical production.Our base case valuation of the company is 341 billion won in market cap or 76,930 won per share, which represents 42% higher than the high end of the IPO price range of 54,300 won per share. To derive our base case valuation, we used a P/E multiple of 13.5x (average multiple of the comps) and applied it against our estimated net profit of 25.3 billion won in 2020.

In this insight, we provide a valuation analysis of Wonbangtech IPO. Its bookbuilding for the institutional investors starts on 8 September. We have a positive view on this IPO.Wonbangtech is one of the leading companies in Korea for providing clean room facilities for the semiconductor/display industries and dry room facilities for the lithium ion battery, medical device, and pharmaceutical production.Our base case valuation of the company is 341 billion won in market cap or 76,930 won per share, which represents 42% higher than the high end of the IPO price range of 54,300 won per share. To derive our base case valuation, we used a P/E multiple of 13.5x (average multiple of the comps) and applied it against our estimated net profit of 25.3 billion won in 2020.

Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

C&amp;G Hi Tech Co Ltd (264660 KS) is basically an semiconductor equipment (precisely, chemical central supply system - CCSS for short) maker and supplier. It was founded in 2002 by the former Samsung engineer named Hong Sa-moon. Thanks to Hong's Samsung background and connections, the company immediately joined Samsung's supply chain inner circle in 2002. 4 years later in 2006, it also became SK Hynix' supply partner. The following year, the company caught the attention of Japan's NAGASE and eventually got equity investment (10%) from NAGASE who will continue to own a 5.07% stake after the IPO.What does this CCSS do?CCSS is a system that automatically supplies essential chemical materials to the critical equipment in the semiconductor and display panel production process. The key factor for a CCSS is the blending part. That is, blending precise chemical materials in the most accurate manner is the key differentiating factor, and exactly in this sense, C&amp;G Hi Tech is having a great success with the mega clients such as Samsung Electronics and Hynix. In fact, C&amp;G Hi Tech was Korea's first one to successfully commercialize CCSS, and its system structure is quite unique that it blends chemical materials at the central unit instead of each production unit. This way, it delivers much higher production capacity at a much lower error rate. Thanks to this unique system structure, the company is now a nearly monopolistic supplier of CCSS in Korea, and in the overall central supply system market it takes about 15-20% market share. (C&amp;G Hi Tech's actual CCSS equipment - Courtesy - News 1)plans to offer a total of 1,288,000 shares (100% new rights offering) at ₩16,000 - ₩20,000 which gives a market cap of ₩69.3bil - ₩86.6bil. Shinhan is the bookrunner. It will be listed in KOSDAQ later this month.IPO summaryCompany nameC&amp;G Hi Tech Co Ltd (264660 KS)FoundationJuly 16, 2002CEOHong Sa-moonHQ address162 Seungnyang−gil, Wongok−myeon, Anseong−si, Gyeonggi−do, KoreaCorporate homepagewww.cnghitech.comIndustry / specialtySemiconductor equipment and precision flow control systemTotal number of share offerings1,288,000 shares(100% new rights offering)Indicative price band₩16,000 - ₩20,000Total amount to be raised (at ₩16,000)₩20,608,000,000Target valuation (at ₩43,000)₩69.3bilBookrunnersMirae Asset Daewoo Securities Co Ltd (006800 KS)Yuanta Securities Korea (003470 KS)Hanwha Securities Co Ltd (003530 KS)BourseKOSDAQSource: DARTCCSS blending unit is the anchor business with a 44.31% share of its total sales. CCSS regenerative unit accounts for another 12,75%. So, CCSS alone accounts for 57.06% of its total sales. In addition, the company makes money by installing CCSS at the site of a client. This installation job generates 14.89% of its total sales as of 3Q17. So, the total coming from the CCSS business amounts to 71.95%. The company also provides one of the key chemical materials called 'fluoroplastics'. This accounts for 10.68% of its total sales. So, we can safely say that the CCSS related business is responsible for more than 80% of its current sales. Samsung Electronics, Japan's NAGASE and Hynix, these 3 clients are responsible for more than 80% of its sales. By client type, semiconductor makers are responsible for 72% of the total sales, whereas display panel makers are responsible for 17%.Sales breakdown by product type (₩ mil)2016Accu. 3Q17Chemical central supply system - blending unit20,69346.66%27,13744.31%Chemical central supply system - regenerative uint5,43512.26%7,80912.75%Sub-total26,12858.92%34,94657.06%Fluoroplastics8,28118.67%6,54410.68%Chemical central supply system installation4,2339.55%9,11814.89%Others5,70312.86%10,64117.37%Total44,345100.00%61,249100.00%Source: DARTSales breakdown by client type (as of 3Q17)Semiconductor72%Display17%Others11%Source: DARTSales breakdown by client (as of 3Q17)Samsung Electronics39.2%NAGASE (Japan)33.2%SK Hynix7.8%Others19.8%Source: DARTNow let's look at the valuations.The following 3 local peers were picked as the valuation peers. Their avg. PER on FY17e NP is 13.0x.3 local valuation peers(₩ mil)Systems Technology Inc (039440 KS)Dms Co Ltd (068790 KS)Oceanbridge (241790 KS)Accu. 3Q17 NP22,8886,1716,502Annualized FY17 NP30,5178,2288,669Number of issued shares12,733,67022,937,4879,124,980EPS (₩)2,396359950Reference price (₩)20,8686,95010,380PER (x)8.7119.3810.93Avg. PER (x)13.00Note: FY17 annualized NPs are derived by multiplying each valuation peer's accu. 3Q17 NP by 4/3. Source: DARTAt this 13.0x PER, C&amp;G Hi Tech's total value amounts to ₩111.4bil. From this, a 22.22% - 37.78% discount range was given. As a result, we have this indicative price band of ₩16,000 - ₩20,000 which gives a market cap of ₩69.3bil - ₩86.6bil.C&amp;G Hi Tech's PER valuation (₩ mil)Accu. 3Q17 NP6,425Annualized FY17 NP8,567Number of issued shares4,332,165EPS (₩)1,978PER (x)13.0xPrice per share (₩)25,715Note: FY17 annualized NP is derived by multiplying each valuation peer's accu. 3Q17 NP by 4/3. Source: DARTIndicative price bandPER based price per share₩25,715Discount %22.22% - 37.78%Indicative price band₩16,000 - ₩20,000Market cap₩69.3bil - ₩86.6bilSource: DART→ Local market mood and personal thoughtsBookbuilding actually began today and it will end tomorrow. Subscription will take place on Jan 16-17, and allocation will be done on Jan 19. Listing date will be announced later.Upcoming eventsCorporate IRJan 10BookbuildingJan 11-12IPO price determinationTBASubscriptionJan 16-17AllocationJan 19ListingTBASource: DARTShould we take this deal? I think we should. We all know Korea's local semicon equipment makers do not get much appreciation in the stock market. Generally, a 10x PER (or less) is granted. This is mainly because their heavy dependence on a few mega clients (yes SamE) and more importantly many of Korea's local semicon equipment makers lack 'real' differentiating technological values. However, in the case of this company, things are a bit different. Yes, C&amp;G Hi Tech is also heavily dependent on SamE. But unlike many other suppliers in SamE's supply chain, C&amp;G Hi Tech enjoys a nearly monopolistic status (at least in the field of CCSS), which is quite rare among SamE supply chain players. And its unique approach to the system structure is making this possible. That is, this company is a different breed which has actual technological differentiating values.Valuation wise, its indicative price band is like a 7.7x-9.6x PER on FY17e (if we assume its FY17 NP will be about ₩9.0bil). If this company is just one of the typical SamE value chain players with no clear technological differentiating value, this 7.7x-9.6x PER can hardly be an attractive point. But as I said, this company is a little more value-added company. It should deserve a higher valuation than the 7.7x-9.6x PER, and the mood of Korea's local market also seems to be agreeing with me on this. The general perception/mood among local investors seems that C&amp;G Hi Tech's valuation should be at least what its local peer called Systems Technology Inc (039440 KS) is currently getting from the market. STI (for short) makes a different type of chemical material processing equipment (similar but different from the one that C&amp;G Hi Tech makes), and it is currently getting a 12.0x PER on FY17e.(Systems Technology Inc (039440 KS) 1 year price chart - Courtesy Naver Finance)Systems Technology Inc (039440 KS) consensus(₩ mil)20162017E2018ESales180305400OP224159NP173146EPS (₩)1,3112,4573,635PER (x)8.8512.008.12Source: FnGuideYes, we all know that this debate of whether the semicon industry has peaked out or not is still going on and getting more heated. But some names still seem to be going very strong and unaffected by this peak-out debate. One great example is STI. Its share price has more than tripled just in one year, and it is still staying hot until now. This means, if you are a value creator rather than a mere value follower, then the market will continue to appreciate you no matter what the macro market conditions are. And the local perception seems to be that C&amp;G Hi Tech is another rare value creator in Korea's semicon supply chain. So, my personal feeling is you should consider taking this deal and if you will, then it will be better to be aggressive in the pricing in the bookbuilding.

C&G Hi Tech IPO Summary - Unfancy but Attractive Valuation Wise

Sunic System Ltd. / Equity Capital Markets

The most important question for Sunic's IPO bookbuilding that is currently in progress is whether Sunic will receive more orders from LGD for the small-sized OLED panel production lines that will be housed in LGD's P10. Samsung Display won't do business with Sunic any time soon. In addition, those Chinese and Taiwanese display makers are still some years aways from turning to 6GH. Of course, mid capacity equipment is also an important element for Sunic's overall sales performance. But its success with this product segment also highly depends on its success in the large capacity equipment market since this allows Sunic to gain further trust even from mid capacity equipment buyers. So once again, the whole focus of this IPO bookbuilding is whether Sunic can get orders from LGD for P10 and if so how many.

The most important question for Sunic's IPO bookbuilding that is currently in progress is whether Sunic will receive more orders from LGD for the small-sized OLED panel production lines that will be housed in LGD's P10. Samsung Display won't do business with Sunic any time soon. In addition, those Chinese and Taiwanese display makers are still some years aways from turning to 6GH. Of course, mid capacity equipment is also an important element for Sunic's overall sales performance. But its success with this product segment also highly depends on its success in the large capacity equipment market since this allows Sunic to gain further trust even from mid capacity equipment buyers. So once again, the whole focus of this IPO bookbuilding is whether Sunic can get orders from LGD for P10 and if so how many.

Sunic System IPO Part 2 - Key Considerations for Bookbuilding

Equity Bottom-Up

Now is the time for LG Display (LGD) to start supplying OLED for mobile devices to its biggest client, Apple, but with a focus on plastic-OLED (P-OLED). Apple plans to make a huge facelift to its iPhone 7s in 2017 with P-OLED. Samsung Display (SDC) signed its first display panel contract with Apple. The deal will last for three years until 2019. Apple will need a total production capacity of 150k/month for P-OLED panels by 2020.LGD is probably the only other display maker who has some real experience of mass producing P-OLED. LGD aims to have a production capacity of 30k/month for P-OLED panels in 2018, which is enough for about 40% of what Apple needs by then. Of course, there is still a question mark about LGD’s LGD’s actual capability of RGB OLED fabrication. But it is also important to note that LGD can capitalize on Korea’s strong OLED ecosystem, which it can use to catch up with SDC in RGD OLED fabrication.Nonetheless, there are several key areas, which LGD cannot easily address. First, LGD cannot get the industry’s best organic red, green and blue (RGB) material deposition equipment from Canon’s subsidiary Tokki, which has recently signed a 3-year exclusive supply deal with SDC. Second, Dainippon Printing’s (DNP, 7912 JP) production capacity for shadow mask, which is the most critical component in the entire P- OLED fabrication process, falls far short of meeting a growing demand.LGD is currently working with Sunic System (Dong A Eltek (088130)’s subsidiary) on the development of organic RGB deposition equipment. In regard to the shortage of shadow mask, LGD turned its eye to the ink jet technology developed by Systems Technology (039440).

Now is the time for LG Display (LGD) to start supplying OLED for mobile devices to its biggest client, Apple, but with a focus on plastic-OLED (P-OLED). Apple plans to make a huge facelift to its iPhone 7s in 2017 with P-OLED. Samsung Display (SDC) signed its first display panel contract with Apple. The deal will last for three years until 2019. Apple will need a total production capacity of 150k/month for P-OLED panels by 2020.LGD is probably the only other display maker who has some real experience of mass producing P-OLED. LGD aims to have a production capacity of 30k/month for P-OLED panels in 2018, which is enough for about 40% of what Apple needs by then. Of course, there is still a question mark about LGD’s LGD’s actual capability of RGB OLED fabrication. But it is also important to note that LGD can capitalize on Korea’s strong OLED ecosystem, which it can use to catch up with SDC in RGD OLED fabrication.Nonetheless, there are several key areas, which LGD cannot easily address. First, LGD cannot get the industry’s best organic red, green and blue (RGB) material deposition equipment from Canon’s subsidiary Tokki, which has recently signed a 3-year exclusive supply deal with SDC. Second, Dainippon Printing’s (DNP, 7912 JP) production capacity for shadow mask, which is the most critical component in the entire P- OLED fabrication process, falls far short of meeting a growing demand.LGD is currently working with Sunic System (Dong A Eltek (088130)’s subsidiary) on the development of organic RGB deposition equipment. In regard to the shortage of shadow mask, LGD turned its eye to the ink jet technology developed by Systems Technology (039440).

Challenges & Opportunities in LG Display's Plastic OLED Supply Chain

Korea's OLED stocks continue to hit record highs ahead of the expected iPhone shift to AMOLED next year; along with stories of Chinese handset maker, Oppo, suffering from shortages for its new OLED handset. There is doubt that Samsung Electronics is the top manufacturer of OLED, and within Samsung's OLED supply chain, Advanced Process Systems (054620) and Dong A Eltek (088130) are two companies benefiting from the growing use of OLED displays. But the problem is these two companies and other…

Korea's OLED stocks continue to hit record highs ahead of the expected iPhone shift to AMOLED next year; along with stories of Chinese handset maker, Oppo, suffering from shortages for its new OLED handset. There is doubt that Samsung Electronics is the top manufacturer of OLED, and within Samsung's OLED supply chain, Advanced Process Systems (054620) and Dong A Eltek (088130) are two companies benefiting from the growing use of OLED displays. But the problem is these two companies and other…

Korea's OLED Rally: Stocks to Buy at This Time

South Korea

Systems Technology Inc. produces semiconductor manufacturing equipment, such as central chemical supply system, slurry supply system, auto wet station for semiconductor, chemical mixing system, TFT-LCD pre-cleaner, LCD cassette cleaner, and LCD glass slimming system.  The Company also provides equipment maintenance service.

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Systems Technology (039440 KS)

Wonbangtech IPO Valuation Analysis

In this insight, we provide a valuation analysis of Wonbangtech IPO. Its bookbuilding for the institutional investors starts on 8 September.

Douglas Kim

C&G Hi Tech IPO Summary - Unfancy but Attractive Valuation Wise

C&G Hi Tech Co Ltd (264660 KS) is basically an semiconductor equipment (precisely, chemical central supply system - CCSS for short) maker and...

Sanghyun Park

Sunic System IPO Part 2 - Key Considerations for Bookbuilding

The most important question for Sunic's IPO bookbuilding that is currently in progress is whether Sunic will receive more orders from LGD for the...

Sanghyun Park

Challenges & Opportunities in LG Display's Plastic OLED Supply Chain

Now is the time for LG Display (LGD) to start supplying OLED for mobile devices to its biggest client, Apple, but with a focus on plastic-OLED...

Sanghyun Park

Korea's OLED Rally: Stocks to Buy at This Time

Korea's OLED stocks continue to hit record highs ahead of the expected iPhone shift to AMOLED next year; along with stories of Chinese handset...

Sanghyun Park

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