Korea / Special Situations, Clepsydra Capital

Sanghyun Park

Korea / Special Situations

Event-Driven

<p>Samsung restructuring now has another twist to come. <a href="https://www.smartkarma.com/entities/11109" target="_blank" data-smartkarma-citation="entities:11109:1">KCC Corp (002380 KS)</a> has a 8.97% stake in <a href="https://www.smartkarma.com/entities/481" target="_blank" data-smartkarma-citation="entities:481:1">Samsung C&amp;T (028260 KS)</a>, and it is being locally reported that KCC may sell out all (or at least a significant portion) of this C&amp;T stake in the near future. What is the story here? KCC mulls taking over US-based Momentive Performance Materials. Price tag is nearly US$3bil. As shown in the below regulatory filing put out on July 31, KCC acknowledged that it has been reviewing a number of strategies…</p>

Samsung restructuring now has another twist to come. KCC Corp (002380 KS) has a 8.97% stake in Samsung C&amp;T (028260 KS), and it is being locally reported that KCC may sell out all (or at least a significant portion) of this C&amp;T stake in the near future. What is the story here? KCC mulls taking over US-based Momentive Performance Materials. Price tag is nearly US$3bil. As shown in the below regulatory filing put out on July 31, KCC acknowledged that it has been reviewing a number of strategies…

KCC's Samsung C&T Equity Block Deals May Happen Soon: It Worsens C&T Overhang Concern

Equity Capital Markets


Below is the regulatory filing for the APTC Co Ltd (089970 KS) IPO.
Link: https://dart.fss.or.kr/dsaf001/main.do?rcpNo=20180802000306
For more details about the process of this IPO, please jump to the DETAIL section of this insight.
Valuation in IPO bookThe following 4 companies, Applied Materials (AMAT US), Lam Research (LRCX US), Tokyo Electron (8035 JP) and Orbotech (ORBK US), are the valuation peers. No local peer was chosen since APTC is virtually the only local manufacturer in its field. The avg. PER based on these 4 overseas valuation peers' last 12M earnings is 16.3x.



Peer valuation
Applied Materials (AMAT US)
Lam Research (LRCX US)
Tokyo Electron (8035 JP)
Orbotech (ORBK US)


Currency
USD
USD
JPY
USD


Shares outstanding
1,008,047,762
164,045,205
165,210,911
48,506,282


Reference share price
US$46.13
US$173.86
¥18,115
US$62.7


Last 12M earnings
US$3,171mil
US$1,886mil
¥204mil
US$148mil


Fiscal year
Oct
June
Mar
Dec


Last 12M earnings period
2017.05 ~ 2018.04
2017.04 ~ 2018.03
2017.04 ~ 2018.03
2017.04 ~ 2018.03


PER
14.7x
15.1x
14.6x
20.6x


Avg. PER
16.3x

Source: DART

Below shows how the banker arrived at ₩17,834 as APTC's intrinsic price per share. The banker simply annualizes FY1Q18 earnings by multiplying it by 4. This way, they get an EPS of ₩1,069 and apply the above 16.3x PER to arrive at ₩17,834.



APTC Co Ltd (089970 KS) valuation

FY1Q18 earnings
₩6,498mil
A


FY2018 projected full year earnings (simply annualized based on 1Q18 earnings)
₩25,944mil 
B = A × 4


Total shares (including stock options - 611,000 shares)
24,305,595
C


EPS
₩1,069
D = B / C


PER
16.3x
E


Price per share
₩17,834
F = D × E

Source: DART

The banker then comes up with a 25.22 - 33.85% discount. So, the indicative price band is set at ₩11,500 - 13,000.


Indicative price band

Target price per share
₩17,834


Discount
25.22 - 33.85%


Indicative price band
₩11,500 - 13,000

Source: DART

Valuation studyAPTC is a typical pure play tech company which you can easily find in the Korean tech industry scene. It develops an etch system. Currently, it supplies this etch system almost solely for SK Hynix Inc (000660 KS)'s memory chip production. What is an etch system? Its main role is to shape the thin film into a desired patterns using chemicals or gases. It is widely agreed that etching process is one the three most critical processes in semiconductor production. The other two are photolithography process and deposition process. ASML Holding NV (ASML NA) has a near monopoly status in photolithography. As for deposition, Applied Materials and Tokyo Electron have a powerful presence. As for etch, LAM Research and ASML have an unparalleled presence. Korea's two memory chip giants, Samsung Electronics (005930 KS) and SK Hynix, have long been making a lot of efforts to localize some of these critical processes. So far, they have achieved some successes. ASML still maintains a near monopoly status in the field of photolithography; however, as for deposition, Wonik Ips (240810 KS), Tes Co Ltd (095610 KS), Eugene Technology (084370 KS) and Jusung Engineering (036930 KS) have made some successes in localization. In the case of etch, APTC and SEMES (privately-held, Samsung Electronics' subsidiary) are the leading local players.

Dominant players in each of the three most critical processes
Global leaders
Local players


1. Photolithography
ASML (near monopoly) 
None


2. Deposition
Applied Materials, Tokyo Electron

Wonik Ips (240810 KS), Tes Co Ltd (095610 KS), Eugene Technology (084370 KS) and Jusung Engineering (036930 KS)



3. Etch
LAM Research, ASML

APTC Co Ltd (089970 KS) and SEMES (unlisted - Samsung Elec subsidiary)

Source: Sanghyun Park
In the field of etch, we Korea have two leading local players, APTC and SEMES. It's like this. Samsung Electronics has SEMES and SK Hynix has APTC although unlike SamE, SK Hynix has no equity investment. This means both good and bad for APTC. A good thing is APTC has a very reliable client of its main product. But this also means APTC's super heavy dependence on a single client (SK Hynix) may scare a lot of potential investors because it'd be hard to smooth out income fluctuations. In fact, this concern is very clearly shown in the company's sales fluctuation over the years. APTC developed a 200mm etch system many years ago for SK Hynix, but ever since SK Hynix moved onto 300mm, APTC was again pushed into a financially crunch mode to develop a 300mm etch system up until 2016 when it finally succeeded the development of a 300mm etch system. With its new 300mm etch system, APTC has been turning out a decent profit now. Its 1Q18 OPM reached 38.60% and its first quarter sales already reached nearly half of the last year sales.



(₩ mil)
2015

2016
2017
1Q18


Sales
4,400
37,851
41,122
20,289


OP
-1,753
9,390
12,690
7,832


OPM
-39.84%
24.81%
30.86%
38.60%


EBIT
-2,114
9,457
12,807
7,906


EBIT margin
-48.05%
24.98%
31.14%
38.97%

Source: DART

Then, how would this good and bad thing situation be translated into valuation? Well, this depends on two things. First is China's AMEC and second is 3D NAND. What am I talking about? Well, as long as APTC remains good enough (technologically and price wise) for Hynix, there won't be any reason for Hynix to ditch APTC. This is very simple. But in reality, things do not look that simple. It has been locally said and reported that Hynix is still feeling the need to use the etch system made and supplied by China's AMEC which is another low-cost but highly competitive (technologically) etch system producer. Hynix' initial plan was to use both APTC and AMEC. But the main reason why APTC got much more orders lately from Hynix was because Hynix began to worry about possible technology leakage to its memory chip competitors in China through AMEC. That is, trust issue is making Hynix stay away from AMEC for now. But the question is how long this trust issue will last with AMEC. This is where the second factor (3D NAND) comes in. APTC is still mainly about DRAM. As we all know, Hynix' strategic focus is being placed on 3D NAND, and Hynix has favored AMEC over APTC for 3D NAND. APTC recently began to supply an etch system for 3D NAND, but still Hynix is said to be favoring AMEC for 3D NAND. This implies that APTC has a little more work to do to catch up with AMEC technology wise. In other words? Its current situation may not be as good as what its current financial results show.So, many in the local market seem to be thinking that a 16-17x PER multiple is a bit too much. As for this year's earnings, thanks to Hynix' trust issue with AMEC, they seem to be having no problem with the banker's projected ₩25.9bil. But the company's still unstable positioning in Hynix' 3D NAND is a source of great concern which should serve as a valuation discount. So, somewhere around 10-11x seems to be an appropriate number in many local investors' mind. This means we shouldn't be surprised if the price is set at near the floor (₩11,500) or worse.


APTC valuation

FY2018 projected earnings
₩25.9bil




Target PER multiple
Market cap
Price per share


Valuation for each target PER multiple
10.0x
₩259.4bil
₩10,674


11.0x
₩285.4bil
₩11,741


12.0x
₩311.3bil
₩12,809

Source: Sanghyun Park



South Korea

Wonik IPS Co., Ltd. manufactures and sells semiconductor processing equipments.  The Company's main businesses include Semiconductor, Display and Solar industries.

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Wonik Ips (240810 KS)

KCC's Samsung C&T Equity Block Deals May Happen Soon: It Worsens C&T Overhang Concern

Samsung restructuring now has another twist to come. KCC Corp (002380 KS) has a 8.97% stake in Samsung C&T (028260 KS), and it is being locally...

Sanghyun Park

APTC (089970): IPO Valuation Study

Below is the regulatory filing for the APTC Co Ltd (089970 KS) IPO. Link: https://dart.fss.or.kr/dsaf001/main.do?rcpNo=20180802000306 For more...

Sanghyun Park

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