September 29, 2010

Seoul Semiconductor
Electronic Device Reuters Code 046890.KQ Bloomberg Code 046890 KS

BUY The game has just begun

Price (Sep. 28) W44,550
Fair Value W74,000 Lighting is the LED business at its best The LED industry took off in
2009 and is growing exponentially in 2010 on the back of LCD TVs based on
COMPANY REPORT

Joon Doo Ha Eui Keun Kim

(82-2) 3772-1545 (82-2) 3772-1553 LED BLUs. The LED BLU market is going through a correction for now witth
jdha1017@goodi.com ekkim@goodi.com Samsung Electronics, LG Electronics, Sharp, Sony and even Chinese
companies competing for market share. LED stocks are under pressure as
KOSPI : 1,855.97p well with investors turned away by rising inventories on amid a demand
KOSDAQ : 487.74p
Market Cap. : W2,597.5bn/ US$2,278.5mn
slowdown in 3Q10 and price cuts. The LED industry has been primarily
Par Value : W500 associated with LED TVs, but the real story is LED lighting. The LED lighting
Outstanding Shares : 58.3mn
market is just blooming and the related industry is estimated to grow to a
Free Floating Shares : 30.1mn (51.7%)
52-Week High/Low : W49,850/ W34,650 market worth W50~60tr in 2015. It may take a year before LED lighting can
60-Day Avg. Trading Volume 857,681shrs replace LED TV as the engine of growth, and now is a good time for stock
60-Day. Avg. Trading T/O : W36,840mn
Foreign Ownership : 21.57% picking to exploit the LED lighting market’s takeoff.
Major Shareholders : Jung Hoon Lee 18.7%
Ion Investments BV 11.8% Three reasons why Seoul Semiconductor is a BUY Seoul Semiconductor
Absolute Performance 3M -1.7% is the best LED stock pick in our opinion. First, the LED industry’s target
6M -0.2%
12M 2.6% market is lighting devices, TV BLUs. Seoul Semiconductor is leading the LED
Relative Performance 3M 0.7% lighting market with innovative products such as Ariche. Second, the
to KOSDAQ 6M 7.6%
12M 9.0%
company's competitive strengths extend from general lighting to specialty
lighting solutions such as deep UV LED and non-polar LED. Third, the
Share Price Performance company’s customer base includes global lighting solution providers, TV
(won) (Indexed,Sep-09=100)
60,000 150 makers and medical equipment suppliers. Seoul Semiconductor is executing
40,000 100 a smart strategy not to make its customers competitors. Strong cost
20,000 50
competitiveness is a big plus.
KOSDAQ Index=100
0 0
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Initiate coverage with a BUY rating and a fair value of W74,000 We
Seoul Semiconductor Price (LHS)
Relative Performance to KOSDAQ (RHS)
initiate our coverage on Seoul Semiconductor, which is leading the global
LED market change, with a BUY rating and a fair value of W74,000 based on
Fair Value & Recommendation History Cree’s 2011E P/E of 21.6x and 2011E EPS of W3,423. Seoul Semiconductor
(won)
60,000 BUY
deserves Cree’s valuation because the company‘s diverse product mix
40,000
covering handsets, laptops, TVs and lighting devices puts it way ahead of
20,000
HOLD
rivals in earning power and growth.
0 REDUCE
Sep-08 Mar-09 Sep-09 Mar-10 Sep-10
Fair Value (LHS)
Seoul Semiconductor Price (LHS)
Recommendation (RHS)

Year to Dec. Sales OP Pre-tax NP EPS Growth PER EV/EBITDA PBR ROE Net Debt Div. Yield
(W bn) (W bn) (W bn) (W bn) (Won) (%) (x) (x) (x) (%) Ratio (%) (%)
2008 284.1 (11.4) (15.3) (12.5) (246) - na 193.0 4.4 (7.2) (22.8) -
2009 453.4 44.0 33.1 28.2 547 - 60.1 24.0 4.1 9.1 (38.4) 0.3
2010E 916.9 124.4 137.3 117.2 2,031 271.2 21.9 13.5 4.5 22.8 (30.2) 0.2
2011E 1,499.7 219.0 235.2 197.6 3,423 68.5 13.0 7.8 3.4 29.7 (39.5) 0.2
2012E 2,172.7 333.6 355.2 291.2 5,046 47.4 8.8 4.9 2.5 32.2 (52.2) 0.2

Korea Equity Research

COMPANY REPORT Seoul Semiconductor September 29, 2010

Contents

Valuation: Is Seoul Semiconductor expensive? 3

A forerunner in the race for LED lighting 6

Growth accelerates with TV-use LED 10

Unique competitive advantages 15

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COMPANY REPORT Seoul Semiconductor September 29, 2010

Valuation: Is Seoul Semiconductor expensive?

¾ A leader in the LED lighting market with Acriche LEDs
¾ Competitive strengths in both general and specialty lighting solutions
¾ Growth story continues on a diversified client base and strong cost
competitiveness

LED-related stocks LED companies’ earnings boom and share price rally driven by the LED TV market’s
remain unstable explosive growth are over, and the market is having a second though. Major LED-related
stocks including Samsung Electro-Mechanics, LG Innotek and Seoul Semiconductor are
losing ground, weighed down by 1) pricing pressure due to margin gaps between
customers and parts suppliers; and 2) worries over a supply glut amid global LED makers’
aggressive capacity expansion. Sales prices are also under pressure from rising LED TV
inventories. With growth slowing, investors are asking questions about LED-related stocks’
upside potential.

Finding the beneficiaries When it comes to LED stock picking, investors need to look at a big picture and think
of the evolving LED outside the box. The LED industry’s growth is taking off in 2010. Korean companies, led
industry cycle by Samsung Electronics, are aggressively rolling out LCD TVs based on LED chips, and the
growth story still continues. A growth slump may follow in 2011 in the absence of killer
applications until 2012. Despite such fears, Seoul Semiconductor deserves a premium in
view of its global competitiveness not only in LED TVs, handsets, and notebook LED
packaging but also in LED lighting.

Valuation consensus comparison

Company Aggregate value 2010E 2011E
PER PBR EV/EBITDA ROE PER PBR EV/EBITDA ROE
(USD bn) (x) (x) (x) (%) (x) (x) (x) (%)
Cree 5.5 31.7 2.7 15.5 9.6 21.6 2.4 10.3 12.2
Toyoda Gosei 3.0 12.6 1.1 3.1 8.7 10.9 1.0 2.9 9.1
Epistar Corp. 2.6 16.0 2.0 9.1 12.2 15.5 1.9 8.1 11.4
Everlight Electroonics Co 1.2 13.6 2.4 9.2 17.3 13.0 2.2 8.1 17.6
Stanley Electric Co Ltd 3.0 12.2 1.1 4.1 9.6 11.0 1.1 3.8 10.0
Rohm Co Ltd 7.2 22.5 0.8 4.0 3.7 17.9 0.8 3.4 4.6
Showa Denko 2.9 10.9 0.9 5.9 8.5 9.2 0.8 5.5 9.7
Samsung Electro-Mechanics 7.7 15.9 3.0 11.9 21.6 14.1 2.5 11.5 20.2
LG Innotek 2.3 11.3 1.9 6.5 21.0 9.5 1.6 5.0 18.7
Lumens 0.3 12.4 3.1 9.9 27.4 7.2 2.2 6.3 33.8
Seoul Semiconductor 2.2 22.2 4.3 16.8 21.9 15.3 3.4 11.6 25.4
Source: Bloomberg as of September 27, Shinhan Investment Corp.

Seoul Semiconductor Seoul Semiconductor shares may not look like a bargain in terms of P/E and P/B multiples.
deserves a premium The stock is valued more richly than Samsung Electro-Mechanics and LG Innotek, leading
LED players. Seoul Semiconductor is a W1tr sales company now, but it can grow into a
W3tr sales company by 2013. Even if the company falls short of the W3tr sales milestone,
it still deserves a premium apart from other LED peers.

3
COMPANY REPORT Seoul Semiconductor September 29, 2010

1. A leader in the LED First, the LED industry’s target market is lighting, not TVs. Seoul Semiconductor is leading
lighting market the LED lighting market with its innovative product line-up led by Ariche.

2. Competitive strengths Second, the company's competitive strengths extend from general lighting to specialty
in specialty lighting lighting solutions such as deep UV LED and non-polar LED.
solution
3. Diverse client bases Third, the company’s clients include global lighting solution providers, TV makers and
and strong cost medical equipment companies. Seoul Semiconductor is executing a smart strategy not to
competitiveness make its customers competitors. Strong cost competitiveness is a big plus.

We initiate our coverage on Seoul Semiconductor, which is leading the global LED market
change, with a BUY rating and a fair value of W74,000 based on Cree’s 2011E P/E of 21.6x
and 2011E EPS of W3,423. Seoul Semiconductor deserves Cree’s valuation because the
company‘s diverse product mix covering handsets, laptops, TVs and lighting devices puts
it way ahead of rivals in earning power and growth.

Operating profit and share price trend (QoQ)

(won) (W bn)
60,000 Operating Profit (RHS) 50
Share Price (LHS) 40
50,000
30
40,000
20
30,000 10
0
20,000
(10)
10,000
(20)
0 (30)
Jan-07 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Oct-09 Mar-10 Jul-10 Nov-10

Source: Bloomberg, Seoul Semiconductor, Shinhan Investment Corp.

Seoul Semiconductor sales mix by product group

1. Handset 2. Notebook/Monitor 3. TV 4. General lighting & others
100%

80%

60%

40%

20%

0%
2008 2009 2010E 2011E 2012E 2013E

Source: Seoul Semiconductor, Shinhan Investment Corp.

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COMPANY REPORT Seoul Semiconductor September 29, 2010

Seoul Optodevice
Seoul Optodevice’s Seoul Optodevice, 43.8% owned by Seoul Semiconductor, achieved record earnings in
growth engine 2Q10, helped by stabilizing production yields on rising sales of LED TV chips and Acriche
cranking up LED chips. Seoul Optodevice became profitable for the first time in 1Q10 with an
operating profit margin of 9.7%. The operating margin jumped to 17% in 2Q10.

Seoul Optodevice’s sales and operating margin trend

(W bn)
90 Sales (LHS)
매출액 30%
80 Operating Margin (RHS)
영업이익률 20%
70 (RHS) 10%
60 0%
50 -10%
40 -20%
30 -30%
20 -40%
10 -50%
0 -60%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Source: Seoul Semiconductor, Shinhan Investment Corp.

Chip supply from Seoul Seoul Optodevice is ramping up LED chip sales for LED TVs. Sales are estimated to soar
Optodevice to meet 60% 479.7% YoY to W267.4bn in 2010 with the operating profit exceeding W40bn. Sales will
of demand at Seoul approach the W400bn mark in 2011, driven by aggressive investments in MOCVD (W185bn
Semiconductor in equipment + W15bn in land and buildings) and strong demand for LED TV, Acriche and
specialty lighting devices. Seoul Semiconductor plans to meet 60% of its chip demand
with supply from Seoul Optodevice nsumes and the remaining 40% with shipments from
Toyoda Gosei, Cree and other outside suppliers. Seoul Optodevice’s supply share at Seoul
Semiconductor increased from 5% to 20% in 2009 alone, and it rose to 35% in 1H10 and
to 60% now.

Seoul Optodevice’s YoY sales growth trend

(W bn)
500

384.9
400

300 267.4

200

100 46.1
9.9 18.7 18.0
4.5
0
2005 2006 2007 2008 2009 2010E 2011E

Source: Seoul Semiconductor, Shinhan Investment Corp.

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COMPANY REPORT Seoul Semiconductor September 29, 2010

A forerunner in the race for LED lighting

¾ A future Intel of the LED industry
¾ LED lighting market to grow into a W50~60tr market in 2015
¾ Acriche pave the way to GE, Philips and other big customers

Currently, LEDs mostly LEDs are increasingly penetrating in our everyday lives. LEDs are becoming the mainstream
used in TVs, but LED illumination platform. LEDs are already used in numerous applications including handsets,
lighting to become LED TV, advertisement screens, automobile lamps and exterior of buildings. However, LEDs
center in 2~3 years have yet to come into blossom in the general lighting market, the largest segment for
lighting devices. The early LED market was driven by handsets. Then, LEDs spread to
displays and automobile lighting. LED BLU is currently the most common form of LED
application and will continue to be until the era of LED lighting dawns around 2012. Once
LED lighting becomes the focus of the LED industry, Seoul Semiconductor will benefit
heavily from the change, as its competitiveness does not fall short of its rivals-Nichia,
Toyoda Gosei, Cree and Lumileds. In reality, Seoul Semiconductor’s strategic focus is
ultimately on LED lighting, not LED BLU for TVs.

Lighting market sales trend Acriche’s sale share trend

(W bn) 35% 30.8%
200
30%

150 25%
18.4%
20%
100 15%
9.1%
10% 7.3%
50
5%
0 0%
1Q09 3Q09 1Q10 3Q10E 1Q11E 3Q11E 2010E 2011E 2012E 2013E

Source: Seoul Semiconductor, Shinhan Investment Corp. estimates Source: Seoul Semiconductor, Shinhan Investment Corp. estimates

Seoul Semiconductor Acriche product series

Source: Seoul Semiconductor, Shinhan Investment Corp.

6
COMPANY REPORT Seoul Semiconductor September 29, 2010

Incandescent light bulb bans worldwide

Country Year
U.S., Korea 2012 ~2014
UK, Italy, Russia, Argentina 2011
Australia, Ireland, Switzerland 2009
Canada, EU 2012
Source: Ministry of Knowledge Economy

LED lighting market to Different research firms have different predictions on when the LED lighting market will
begin blooming in 2011 bloom. We predict that the market will begin taking shape in 2011 because the
incandescent light bulb ban of various nations are scheduled to take full effect around
2012 and lighting companies will begin competition 1~2 years before in order to get a
lead in the market.

Lighting market size estimates

(USD 00mn)
2,000 LED
Fluorescent light
백열등
형광등
Incandescent light
1,500 463

110
34
1,000 497
662
678

500
695
375 453

0
2010E 2012E 2015E

Source: Samsung Economic Research Institute, Shinhan Investment Corp. estimates

LED lighting market to The lighting market is currently a US$100bn (W126tr) market and is expected to grow to
grow to W50~60tr by US$165bn (W191tr) by 2015. Incandescent light bulbs, which are being banned because
2015 they are considered a key culprit of global warming, will be replaced by LED lighting
devices, enabling the LED lighting market to grow into a W50tr~60tr market by 2015.

Seoul Semiconductor’s Since LED lighting packages form 54% of LED lighting market, the value of the LED
lighting package sales lighting parts market related to Seoul Semiconductor and Seoul Optodevice is estimated
(Acriche) to reach W3tr at W4tr and is expected to grow to W30tr by 2015. Seoul Semiconductor’s sales for the
by 2013 whole year of 2010 is estimated at W870bn, with 32% (W297bn) coming from the lighting
business. Once the LED lighting (Acriche) market enters a full-blown growth phase, its
sales are expected to surge to W544.1bn in 2011 and W997.0bn in 2012.

Acriche vs. LED vs. incandescent light bulbs

Products Acriche A4 LED Incandescent bulbs
Components Converter, Driver not required Converter, Driver required Converter required
Light efficiency (lm/W) 100 100 10~20
Running efficiency (%) 100 80 10
Power consumption (W) 4 5 60
Running cost per year (won) 1,285 1,606 19,272
Life expectancy 35,000hrs(12years) 20,000hrs(6.85years) 1,000hrs(0.34years)
Source: Seoul Semiconductor, Shinhan Investment Corp.

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COMPANY REPORT Seoul Semiconductor September 29, 2010

LED lighting production cost breakdown

Case Plastic
MCPCB 3%
5%
6%
Heatsink
9%

LED PKG
54%
Power
23%

Source: Shinhan Investment Corp.

Seoul Semiconductor’s Seoul Semiconductor is already highly competitive in the LED lighting sector and is free
Acriche already supplied from patent-related issues as it has cross licenses with the big 5 LED manufacturers. The
to GE, Philips and othe company began supplying LED chips to GE, Philips and other global lighting companies in
global lighting 2009. The reason such global giants purchase Seoul Semiconductor’s LED chips is because
companies of the company’s flagship Acriche. In January 2005, Seoul Semiconductor was the world’s
first to develop Acriche. Acriche began to rise in prominence in advanced markets such as
Europe. In addition, Seoul Semiconductor is expected to begin supplying Acriche to Osram
soon.

Acriche does not require IC drivers and converters, since it does not need to convert
alternating current into direct current to operate, reducing production costs by 15~20%,
but with a 25% higher photonic efficiency. Acriche also has other advantages, such as
design. In conclusion, lighting companies will see Acriche as a solution to the high prices
of lighting devices in the early stages of the LED market growth. Acriche currently
generates only 5~7% of Seoul Semiconductor’s sales. However, its contribution will
increase to around 10% by 2011, before developing into a major contributor when the
market blossoms in 2012.

Major Korean LED manufacturers

Manufacturer Chip supplier Patent license Fluorescent
substance
Seoul Semiconductor Seoul Optodevice, Toyoda Gosei,Cree Toyoda Gosei, Cree, Nichia, Osram BOSE, Own
SEMCO SEM, Toyoda Gosei Toyoda Gosei Intematix
LG Innotek LG Innotek, Toyoda Gosei Toyoda Gosei Toyoda Gosei, Own
Source: DisplaySearch, Shinhan Investment Corp.

Alliance with POSCO Finally, the strategic alliance with POSCO will enable to Seoul Semiconductor provide a
group to bring stable stable supply of LED lighting packages to its partner. POSCO has already announced that it
earnings plans to invest a total of W7tr by 2018 in its green business. The POSCO Group plans to
replace the lighting of all its plants with LED lighting and begin full-fledged efforts to
enter the LED lighting market. Therefore, Seoul Semiconductor’s deal to supply POSCO
with chips and lighting packages will become a solid contributor to the company’s
earnings. We expect the deal to begin generating sales in 4Q10.

8
COMPANY REPORT Seoul Semiconductor September 29, 2010

Likely to become the Seoul Semiconductor’s business model differs from that of other Korean LED companies.
LED industry’s “Intel” The Seoul Semiconductor model is known as the “Intel model,” in homage to the fact that
Intel did not actually launch a PC business, but profited off the PC industry by selling
semiconductors to PC makers. Like Intel, Seoul Semiconductor plans to procure chips from
Seoul Optodevice, manufacture LED packages and sell them to numerous lighting-related
companies. Since domestic conglomerates have achieved vertical integration and possess
strong marketing power, they are fit to venture into the global lighting market. However,
the Intel model seems to be the optimal strategy for Seoul Semiconductor, which is a
single company.

9
COMPANY REPORT Seoul Semiconductor September 29, 2010

Growth accelerates with TV-use LED

¾ Customer base diversifying from Samsung and LG to Sony, Sharp, and Chinese set
makers
¾ TV-use LED sales upswing: 2010 sales likely to top W300bn
¾ Chip self-sufficiency rate rose to the 60% level thanks to Seoul Optodevice

Strongest client base Seoul Semiconductor’s sales share of handset and laptop LEDs topped 60% through to
among the domestic LED 2009. But this trend will change significantly from 2010 due to sales from shipments to
manufacturers LED TVs kicking in with smooth chip supply from Seoul Optodevice. Although the company
launched LED TV-use LED chip business later than domestic rivals Samsung LED and LG
Innotek, its sales share is estimated to reach the 40% level in 2010. In addition,
shipments to AUO, Sony, Sharp, and Chinese set makers are growing continuously besides
Samsung Electronics and LG Electronics. Seoul Semiconductor features the strongest client
base among the domestic LED manufacturers.

Earnings upswing to be Most TV manufacturers will likely expand the proportion of LED TV business aggressively
maintained based on going forward. Seoul Semiconductor will benefit with diverse TV makers, such as SEC, LGE,
strong client base, such Sony, and Sharp, as its major clients. SEC is pushing most aggressively into the LED TV
as SEC, LGE, Sony, and market, followed by Japan’s Sharp close on its heels. The company will be able to
Sharp maintain strong earnings in the TV segment based on diverse clientele.

Chip self-sufficiency Sales from LED TV segment are projected to come in at W108.7bn in 3Q10, vs. W18.7bn in
rate rose to the 60% 1Q10 and W83.1bn in 2Q10. On an annual basis, sales will likely reach W334.8bn. Strong
level thanks to Seoul earnings set Seoul Semiconductor apart from other LED manufacturers who are struggling
Optodevice under price cut pressure from captive clients’ inventory build-up. The company has
completed vertical integration of core process with chip procurement from subsidiary
Seoul Optodevice. Chip self-sufficiency rate has increased to the 60% level, which will
likely be maintained going forward.

Major LED panel and led TV manufacturers

LED panel manufacturers Samsung Electronics(S-LCD inclusive), LG Display, AUO, CMI, Sharp
LED TV manufacturers Samsung Electronics, LG Electronics, Sony, Toshiba, Sharp, Philips, Panasonic, Vizio
Source: Shinhan Investment Corp.

Seoul Semiconductor, LED for TV earnings estimates

(W bn)
250

200

150

100

50

0
1Q10 2Q10 3Q10E 4Q10E 1Q11E 2Q11E 3Q11E 4Q11E

Source: Seoul Semiconductor, Shinhan Investment Corp.

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COMPANY REPORT Seoul Semiconductor September 29, 2010

LED panel production trend by manufacturer

(Units mn)
10 Samsung
LGD
8 Sharp
AUO
CMI
6

0
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10E 4Q10E

Source: Shinhan Investment Corp.

LED panel sales weights

(LED Penetration)
70% Sharp
Samsung
60%
LGD
50% AUO
CMI
40%

30%

20%

10%

0%
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10E 4Q10E

Source: Shinhan Investment Corp.

LED BLU production and LED penetration trend (QoQ)

(Units mn)
40 LED (LHS) 60%

LED Penetration (RHS) 50%

30
40%

20 30%

20%
10
10%

0 0%
1Q09 3Q09 1Q10 3Q10E 1Q11E 3Q11E

Source: Shinhan Investment Corp.

11
COMPANY REPORT Seoul Semiconductor September 29, 2010

LED BLU production and LED penetration trend (YoY)

(Units mn)
350 LED (LHS) 100%
LED Penetration (RHS)
300 80%
250
60%
200
40%
150
20%
100

50 0%

0 -20%
2007 2009 2011E 2013E 2015E 2017E

Source: Seoul Semiconductor, Shinhan Investment Corp.

LED BLU supply chain (laptops) (%)

BLU makers Samsung LED LG Display
DaeYoung 9 0
TaeSan 15 0
DID 26 0
DS LCD 15 0
New Optics 0 36
Wonwoo 0 2
Heesung 0 40
Coretronic 0 8
Radiant 35 14
Source: Shinhan Investment Corp.

LED BLU supply chain (LCD monitors) (%)

BLU makers Samsung LED LG Display
DS LCD 40 0
New Optics 0 23
Heesung 0 77
Coretronic 30 0
Radiant 30 0
Source: Shinhan Investment Corp.

LED BLU supply chain (LCD TVs) (%)

BLU Makers Samsung LED LG Display
Taesan LCD 16 0
Hansol LCD 52 0
DS LCD 32 0
New Optics 0 35
Heesung 0 65
Source: Shinhan Investment Corp.

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COMPANY REPORT Seoul Semiconductor September 29, 2010

LED supply chain (laptops) (%)

LED PKG Maker(Chip Supplier) AUO CMI CPT LG Display Samsung
Nichia (Nichia) 30 25 35 11 9
TG (TG) 15 30 39 15
Samsung LED (Samsung LED) 65
Seoul Semi (Cree, Seoul Opto) 20 6
LG Innotek (LGI) 30
ALTI Elec (SDK or TG)
Lumens (Epistar) 5
Everlight (Epistar) 18
Lite-on (TG, Cree) 10
Lextar (TG, Cree) 45 15 47
ChiMei Lighting (TG) 30
Total 100 100 100 100 100
Source: Shinhan Investment Corp.

LED supply chain (LCD monitors) (%)

LED PKG Maker(Chip Supplier) AUO CMI CPT LG Display Samsung
Nichia (Nichia) 30 20
TG (TG)
Samsung LED (Samsung LED) 30 63 (Sample)
Seoul Semi (Cree, Seoul Opto) 20 37 (Sample)
LG Innotek (LGI) 10 40
Lite-on (TG, Cree) 20
Lumens (TG)
Everlight (TG) 100
Lumileds (Lumileds) 10
LightHouse (Lextar) 40
GIO (CMLT, Epistar, TG) 50
AOT (Nichia) 30
Total 100 100 100 100 100
Source: Shinhan Investment Corp.

LED supply chain (LCD TVs) (%)

LED PKG Maker(Chip) AUO CMI LG Display Samsung Sharp
Nichia, Sharp (Nichia) 30 97
TG (TG)
Stanley
Samsung LED (Samsung LED) 20 93 3
Seoul Semi (Seoul Opto) 20 9 5
LG Innotek (LGI) 63
ALTI Electronics
Lumens (Forepi, Epistar) 8 2
Everlight (Huga, Epistar)
Lite-on (Huga, Epistar) 20
Lextar (Lextar), Wellypower(Lextar) 60
GIO (CMLT, Epistar, TG) 40
Unity (Epistar, CMLT)
AOT (Nichia) 30
Total 100 100 100 100 100
Source: Shinhan Investment Corp.

13
COMPANY REPORT Seoul Semiconductor September 29, 2010

Unique competitive advantages

¾ Seoul Semiconductor makes inroads into deep UV LED market estimated to be
worth W5tr
¾ Non-polar LED is a next-generation LED light source with light efficiency of
250lm/W
¾ Professor Nakamura Shuji will play a key role in new product development

Making inroads into LED Besides the LED BLU market, Seoul Semiconductor is starting to make significant progress
niche markets like UV in the general LED lighting market with Acriche. Its competitiveness does not stop here.
LED and non-polar LED The company is making inroads into the UV LED and non-polar LED markets. These
businesses have yet to show visible contribution in sales. But accumulation of technology
in these areas will set the company apart from other domestic LED manufacturers given
that UV LED and non-polar LED will emerge as niche markets in the future.

Deep UV LED expected Most medical lightings use mercury or halogen. There are movements to find alternatives
to replace existing for these lightings as mercury is harmful to the human body and halogen emits too much
medical lightings heat. A good alternative light source is deep UV LED (ultraviolet light emitting diode). UV
LED in the 200~350nm wavelength band has diverse applications besides medical
equipments, such as human genome analysis, heart disease treatment, counterfeit bill
detectors, air purifiers, and high-density optical recording systems.

Seoul Optodevice UV LED in the 260~280nm wavelength band is effective in sterilization of bacteria,
developed UV LED including colon bacillus. Featuring high efficiency and long life span, UV LED will likely
jointly with U.S.’ SETI replace most of other light sources. Related markets are estimated to be worth W5tr.
Seoul Optodevice succeeded in developing UV LED jointly with U.S.’ SETI (SETI provided
wafers, Seoul Optodevice in charge of chips and packaging) in 2006, and has already
started mass production of UV LED in the 260~340nm wavelength band. The sales
contribution of deep UV LED is currently less than 1%, but earnings will start kicking in
from 2013.

Advancement in Furthermore, Seoul Semiconductor will likely emerge as a global leader in non-polar LED
next-generation LED market. The present LED chip deposits a layer of nitrogen and a layer of potassium on
technology is possible sapphire substrate. The non-polar LED combines these two layers into one. This will be
with Professor Nakamura the next-generation LED. Once non-polar LED is commercialized, costs will drop
Shuji as adviser significantly as polarizers and DBEF (dual brightness enhancement film) sheets will no
longer be needed. Light efficiency will also increase to 250lm/W, double the current level
of 100-150lm/W. Seoul Semiconductor’s advancement in next-generation LED technology
is possible with renowned scholar Professor Nakamura Shuji of University of California
Santa Barbara (U.S.) as its adviser.

14
COMPANY REPORT Seoul Semiconductor September 29, 2010

Global LED manufacturers profit estimates and valuation comparisons

Company Toyoda Gosei Epistar Corp. Cree Samsung Electro-Mechanics Seoul Semiconductor
Symbol 7282 JP 2448 TT Cree US 009150 KS 046890 KS
Country JP TT US KS KS
Market Tokyo Taiwan NASDAQ GS Korea SE KOSDAQ
Share price (as of 27 Sep. 2010) 1,912.0 96.4 51.2 118,000 43,100
Market Cap. 248,579 81,695.5 5,533.8 8,813,856 2,512,963
Currency (mn) JPY TWD USD KRW KRW
Sales 2008 546,380 10,321 493 3,099,821 284,137
2009 495,002 12,706 567 3,192,031 453,433
2010E 527,712 19,986 867 4,630,987 894,794
OP 2008 15,833 (34) 13 84,421 (11,381)
2009 26,202 1,685 37 215,964 43,950
2010E 35,763 5,016 211 553,598 114,950
OPM (%) 2008 2.9 (0.3) 2.7 2.7 (4.0)
2009 5.3 13.3 6.6 6.8 9.7
2010E 6.8 25.1 24.4 12.0 12.8
NP 2008 3,951 42 33 48,080 (12,513)
2009 14,255 1,732 30 278,476 28,248
2010E 19,562 4,823 152 600,234 114,305
EPS 2008 30.6 0.1 0.4 624 (246)
2009 110.2 2.6 0.3 3,616 547
2010E 152.1 6.0 1.7 7,415 1,943
PER (x) 2008 48.5 422.9 59.2 53.4 N/A
2009 23.8 46.3 58.7 29.7 84.8
2010E 12.6 16.0 31.7 15.9 22.2
PBR (x) 2008 1.0 0.8 1.8 1.3 2.7
2009 1.6 2.6 2.2 3.1 5.8
2010E 1.1 2.0 2.7 3.0 4.3
EV/EBITDA (x) 2008 4.0 7.2 15.9 9.3 117.6
2009 5.1 19.6 16.9 19.3 39.6
2010E 3.1 9.1 15.5 11.9 16.8
ROE (%) 2008 1.8 0.2 3.1 2.4 (7.2)
2009 6.9 6.0 2.6 12.3 9.1
2010E 8.7 12.2 9.6 21.6 21.9
ROA (%) 2008 0.9 0.2 2.8 1.5 (5.4)
2009 3.5 4.8 2.2 7.5 7.3
2010E 5.9 10.3 8.8 13.3 17.7
Current Ratio 2009 1.5 3.0 11.3 1.2 4.9
Quick Ratio 2009 1.2 2.7 9.9 1.0 3.7
Asset T/O 2009 1.2 0.4 0.5 0.9 1.2
Financial leverage 2009 2.0 1.2 1.1 1.6 1.2
LT debt/Asset 2009 10.3 0.0 0.0 8.3 0.0
Source: Bloomberg, Shinhan Investment Corp.

15
■ SHIC Rating Classifications (As of 10 Feb. 2003) : BUY; Over +15%, HOLD; -15% to +15%, REDUCE; -15% or More

Balance Sheet Profit and Loss

Year to Dec. (W bn) 2008 2009 2010E 2011E 2012E Year to Dec. (W bn) 2008 2009 2010E 2011E 2012E
Total Assets 240.8 528.4 685.0 932.2 1,280.8 Net Sales 284.1 453.4 916.9 1,499.7 2,172.7
Current Assets 171.1 339.9 399.3 596.6 920.7 Growth (%) 13.6 59.6 102.2 63.6 44.9
Cash & Cash Equivalents 9.0 26.9 15.5 136.6 375.0 Export ratio (%) 0.0 0.0 0.0 0.0 0.0
St. Investment Assets 51.3 148.9 156.4 164.2 172.4 Cost of Sales 223.4 351.2 685.9 1,100.7 1,594.6
Accounts Receivable 55.1 92.7 113.0 143.8 178.6 Growth (%) 23.1 57.2 95.3 60.5 44.9
Inventory 35.3 48.9 85.1 115.0 148.8 Gross Profit 60.7 102.3 231.0 399.0 578.0
Others 20.4 22.5 29.3 37.0 45.9 Gross Margin(%) 21.4 22.6 25.2 26.6 26.6
Non-current Assets 69.8 188.5 285.6 335.6 360.1 SG&A Expenses 72.1 58.3 106.7 180.0 244.4
Investment Assets 7.0 92.6 106.4 122.4 140.6 Growth (%) 66.7 (19.1) 82.9 68.8 35.8
Tangible Assets 43.5 73.5 139.9 156.4 147.0 Operating Profit (11.4) 44.0 124.4 219.0 333.6
Intangible Assets 16.0 19.5 36.3 53.6 69.2 Growth (%) TR TB 183.0 76.1 52.3
Total Liabilities 75.8 70.4 115.1 170.1 232.9 Operating Margin (%) (4.0) 9.7 13.6 14.6 15.4
Current Liabilities 74.6 69.0 113.7 168.6 231.3 Non-Operating Inc (Exp) (3.9) (10.9) 12.9 16.2 21.5
Accounts Payable 26.5 42.3 85.5 139.9 202.6 Interest Income 3.1 2.5 4.1 5.3 8.5
St. Debt 22.0 0.0 0.0 0.0 0.0 Interest Expenses 1.0 2.1 0.0 0.0 0.0
Current Portion of Lt. Debt 0.7 0.0 0.0 0.0 0.0 Net F/X 6.2 (6.3) (3.4) (3.4) (3.4)
Others 25.5 26.7 28.1 28.7 28.6 Net Asset Disposal 0.2 2.3 2.4 2.6 2.7
Non-current Liabilities 1.2 1.4 1.5 1.5 1.6 Net Equity Method (10.2) (7.0) 10.0 12.0 14.0
Bonds 0.0 0.0 0.0 0.0 0.0 Net Other non-operating (2.2) (0.2) (0.3) (0.3) (0.3)
Lt. Debt 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit from Cont. Op (15.3) 33.1 137.3 235.2 355.2
Others 1.2 1.4 1.5 1.5 1.6 Income Taxes (2.7) 4.8 20.0 37.6 63.9
Total Stockholders Equity 165.0 458.0 569.8 762.1 1,047.9 Profit from Cont. Op (12.5) 28.2 117.2 197.6 291.2
Paid-in Capital 25.4 28.9 28.9 28.9 28.9 Profit from Discont. Op 0.0 0.0 0.0 0.0 0.0
Capital Surplus 77.8 339.3 339.3 339.3 339.3 Net Profit (12.5) 28.2 117.2 197.6 291.2
Capital Adjustment (0.5) 0.0 0.0 0.0 0.0 Growth (%) TR TB 315.0 68.5 47.4
Other Accumulated Earnings 1.0 0.2 0.2 0.2 0.2 Net Margin (%) (4.4) 6.2 12.8 13.2 13.4
Retained Earnings 61.3 89.6 201.5 393.7 679.5 EBITDA 3.6 63.5 178.1 290.4 413.7
Total Debt 22.7 0.0 0.0 0.0 0.0 Growth (%) (90.8) 1,660.2 180.4 63.1 42.5
Net Debt(Cash) (37.6) (175.8) (171.9) (300.8) (547.4) Dividend Payout (%) 0.0 19.0 4.6 2.7 1.8

Cash Flow Key Ratios

Year to Dec. (W bn) 2008 2009 2010E 2011E 2012E Year to Dec. 2008 2009 2010E 2011E 2012E
Cash Flows from Operating 9.6 18.9 116.1 213.9 311.6 EPS (won) (246) 547 2,031 3,423 5,046
Net Profit (12.5) 28.2 117.2 197.6 291.2 Adj. EPS (won) (249) 502 1,989 3,379 5,000
Depreciation 12.7 16.8 50.6 65.6 71.6 BPS (won) 3,247 7,935 9,874 13,204 18,157
Amortization 2.3 2.8 3.1 5.7 8.5 DPS (won) 0 93 93 93 93
Equity Method Loss(Gain) 10.2 7.0 (10.0) (12.0) (14.0) PER (x) na 60.1 21.9 13.0 8.8
Investment Asset Disp Loss(Gain) 0.3 (0.1) (0.1) (0.1) (0.1) Adj. PER (x) na 65.5 22.4 13.2 8.9
Tangible Asset Disp Loss(Gain) (0.5) (2.2) (2.3) (2.4) (2.5) PBR (x) 4.4 4.1 4.5 3.4 2.5
Changes in Working Capital (11.6) (39.1) (41.6) (38.8) (41.0) PCR (x) 34.5 29.2 16.3 10.2 7.3
Others 8.7 5.6 (0.8) (1.6) (2.1) EV/ EBITDA (x) 193.0 24.0 13.5 7.8 4.9
Cash Flows from Investing (27.9) (238.9) (122.1) (87.5) (67.8) PEG (x) na 0.5 0.4 0.4 na
St. Investment Assets Dec.(Inc.) (23.6) (102.5) (7.4) (7.8) (8.2) Dividend Yield (%) - 0.3 0.2 0.2 0.2
Investment Securities Dec.(Inc.) 13.7 (5.1) 0.0 0.0 0.0 Profitability
Tangible Assets Dec.(Inc.) (17.1) (50.3) (114.7) (79.7) (59.6) Operating Margin (%) (4.0) 9.7 13.6 14.6 15.4
Others (1.0) (80.9) 0.0 (0.0) 0.0 EBITDA Margin (%) 1.3 14.0 19.4 19.4 19.0
Free Cash Flow (18.3) (220.0) (6.0) 126.5 243.7 Pre-tax Profit Margin (%) (5.4) 7.3 15.0 15.7 16.3
Cash Flows from Financing 10.0 238.0 (5.4) (5.4) (5.4) Net Margin (%) (4.4) 6.2 12.8 13.2 13.4
St. Debt Inc.(Dec.) 15.4 (22.0) 0.0 0.0 0.0 ROA (%) (5.4) 7.3 19.3 24.4 26.3
Cur. Por. of Lt. Debt Inc.(Dec.) (1.8) (0.7) 0.0 0.0 0.0 ROE (%) (7.2) 9.1 22.8 29.7 32.2
Bonds Inc.(Dec.) 0.0 0.0 0.0 0.0 0.0 ROIC (%) (7.7) 19.8 34.4 47.4 64.2
Lt. Debt Inc.(Dec.) 0.0 0.0 0.0 0.0 0.0 Stability
Share Capital Inc.(Dec.) 0.0 260.6 0.0 0.0 0.0 Debt Ratio (%) 46.0 15.4 20.2 22.3 22.2
Dividend Paid (3.6) 0.0 (5.4) (5.4) (5.4) Net Debt Ratio (%) (22.8) (38.4) (30.2) (39.5) (52.2)
Others 0.0 0.0 0.0 0.0 0.0 Interest Coverage (x) na 20.5 na na na
Change in Cash (8.2) 17.9 (11.4) 121.1 238.4 Activity
Beginning Cash 17.2 9.0 26.9 15.5 136.6 Asset Turnover (x) 1.2 1.2 1.5 1.9 2.0
Ending Cash 9.0 26.9 15.5 136.6 375.0 Receivables Turnover (x) 5.5 5.8 8.3 11.0 12.9
Capex/ Sales (%) 6.0 11.1 12.5 5.3 2.7 Inventory Turnover (x) 9.2 10.8 13.7 15.0 16.5
Depreciation/ Sales (%) 4.5 3.7 5.5 4.4 3.3 Payables Turnover (x) 13.9 13.2 14.3 13.3 12.7
Depreciation/ Capex (%) 74.4 33.3 44.1 82.3 120.1 Working Capital Turnover (x) 4.9 5.9 8.8 12.4 16.1
Source: Company data, Shinhan Investment Corp. estimates Source: Company data, Shinhan Investment Corp. estimates

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Tel: (82-2) 3772-2700, 2702 Tel: (44-20) 7283-4900 Tel: (1-212) 397-4000 Tel: (852) 3713-5333 Tel : (86-21) 6888-9135/6
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Analyst Certification: The following analysts hereby certify that their views on the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive
direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Joon Doo Ha. Eui Keun Kim. Shinhan Investment Corp. has issued ELW based on the company's asset and
floated LP. As of the date of this report, Shinhan Investment Corp.' holdings of shares of the company mentioned in this report do not exceed 1% of the outstanding shares of the company. As of the date of this report,
Shinhan Investment Corp. had not participated as a lead manager or adviser during the past 1 year, in issuance of the securities of the company mentioned in this report. As of the date of this report, the covering
analyst did not maintain any financial interest in the securities or debt instruments convertible into such shares of the company mentioned in this report. All opinions and estimates included in this report constitute our
judgments as of the date of this report and are subject to changes without notice. This information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its completeness
or accuracy. It is not an offer to sell or solicitation of an offer to buy any securities. Clients should consider whether it is suitable for their particular circumstances before acting on any opinions and recommendations in
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