2Q review: Duksan Neolux’s sales and operating profit in 2Q soared 169% and 937% y-yto KRW26.7b and KRW5b, respectively, the figures beating consensus but in line with ourestimates. We attribute the strength to increased sales of red phosphorescent andfunctional layer materials following the launch of the Galaxy S8 in 2Q.
Raising target to KRW25,000; reiterating BUY: Shares in SKC Kolon PI (SKPI)have gained 49% thus far this year, topping our previous target price of KRW21,000 (seton Apr 24) earlier this month. We once again adjust our target, lifting it 19% toKRW25,000 believing the company is enjoying profitability this quarter on par with therobust level shown in 1Q. The firm’s PI film business—which is operating at full capacity—should keep improving its product mix, while earnings momentum should pick up into2H. We now apply a 30% premium to a global peer average in calculating our target price,as client Samsung Display should select a second PI varnish supplier following its capacityexpansion of flexible OLED panels. We expect the premium to remain in place untilfoldable OLED device(s) are launched.
2H outlook mixed: Even though the smartphone market enjoys strong seasonality in3Q, Samsung Electronics (SEC)—the company’s major customer—has a conservativeoutlook. Duksan Neolux should start shipping new functional-layer OLED materials toApple, but we are cautious on its prospects for SEC-bound red phosphorescent materialssales volume for the Galaxy S8. Positively, the firm’s customers began restocking inAugust after destocking in July. The launch of the Galaxy Note 8 and growing sales oflower-end smartphones to China should also present opportunities. Accordingly, we liftour 2017 sales and operating profit estimates by a respective 5% and 6% to KRW97.7band KRW16.8b. Even so, shares should be skittish until the OLED material structures fornext year’s flagship OLED smartphones are decided and the suppliers are named.
Raising estimate: We maintain our forecast that SKPI will post somewhat weaker q-qresults but now expect margin to stay at robust levels for 2Q. We thus raise our 2017-2018operating profit forecasts by 9.2% and 12.1% to KRW48.3b and KRW53.7b, respectively,as the firm’s utilization rate remains high, product mix is moving toward high-valueaddedproducts (eg, FPCB-use black PI), and heat-resistance sheet-use PI film businessshould add more customers.
Maintaining HOLD and target: We downgraded Duksan Neolux to HOLD in Juneafter it hit a valuation on par with that of monopolistic supplier Universal Display (UDC),the gains driven by anticipation of the company supplying functional-layer materials (inaddition to HTL materials). Impacts on earnings in 2Q met market expectations, whilethe outlook for 3Q holds both opportunities (related to new product launches at a client)and risks (eg, a change in supply volume). The company needs to have a less demandingvaluation or deliver stronger-than-expected earnings improvements before we canupgrade our rating. The firm’s current P/E of 45x seems all the more uncomfortable asUDC’s has dropped to 55x thanks to earnings improvements. We keep the stock at HOLDand our 12-month target price at KRW23,000.
OLED to boost PI varnish unit: The market for flexible OLED substrate-use PIvarnish has been expanding, leading Samsung Display to choose a second supplier. SKPIis the top player in the global PI film market and hence the largest consumer of PI varnish,which it also makes. The company stands to benefit greatly if it is selected by SamsungDisplay as a second PI varnish supplier. Given that a PI varnish capacity expansion takesabout 8 months, a product-approval delay would lead to a disruption in SamsungDisplay's PI varnish sourcing in 2018. SU Materials—the exclusive PI varnish supplier forSamsung Display—saw sales of KRW15b in 2016 when edge phone sell-through volumehit over 35m units. Assuming 300m edge phones are sold in 2018 and SKPI meets 30% ofSamsung Display’s needs (if selected as a second supplier), flexible OLED substrate-usePI varnish will inevitably bolster SKPI’s operating results.