Asia Essentials

Event

We are no longer negative on Soulbrain and upgrade the stock fromUnderperform to Outperform with target price of Won84,000.

Impact

We had over-estimated the negatives from a new competitor in semietchantmarket. Our previous downgrade turned out to be premature, sincethe share price has jumped 50% over the last three months (fig 8). Admittedly,we were overly concerned about the loss of monopoly in the profitable semietchantmarket on the foray of ENF Tech (102710 KS, NR, Won21,400).

Moreover, the recovery in money-losing Thin-glass/scribing (TGS) divisionwas faster than our expectation.

Bright prospects on 3D NAND offsetting share loss at Hynix. ENF haswon 50% share at SK Hynix and 10% at Samsung. But Soulbrain is likely toremain Samsung’s sole vendor for the next three years, given it has codeveloped3D NAND semi-etchant solution with Samsung. This is becauseSamsung is keen on maintaining its technology leadership than on reducingcosts. It’s encouraging that Samsung plans to more than double its 3D NANDwafer capacity in the next two years.

Faster turnaround at TGS division. TGS has seen higher utilisation andbetter margins since early this year, as Samsung’s OLED fab has run flat-outon the back of deepening OLED panel shortage. This shortage has stemmedfrom the massive adoption by Samsung’s low-end smartphone model and byChinese vendors like Oppo and Vivo. Indeed, this division has limited growthpotential, since Samsung’s capex should be solely on POLED, which does notrequire TGS. However, due to the reduced workforce and lower costs, TGSshould make no losses for the next three years.

Meaningful financial improvement at Genic. We remain reluctant toapprove its move to acquire Genic, a cosmetics company, whose share pricehas halved since the acquisition. Nonetheless, Genic posted far betterfinancial performance in 1H16, thanks to Soulbrain’s restructuring.