Coretronic Corporation (5371 TT) Company Report TRADING BUY Getting LED Backlight Application Off the Ground MasterLink Research Analyst: Freda Yu fredayu@masterlink.com.tw Contact Information Lucy Tsai lucytsai@masterlink.com.tw Recommendation Date: 2010/3/4 Share Price (NT$): 46.65 Target Price (NT$): 56 52-wk Range (NT$): 17.7-51.3 TWSE: 7,436.1 Company Data Capital Size (US$/mn): 226.43 Market Cap (US$/mn): 993.01 20d Avg Vol (lots): 8,696 PER ( 10): 9.2 PBR ( 10): 1.4 Foreign Ownership: 39 TCRI 6 Price Performance 1-m 3-m 6-m Absolute (%) -6.8 5.7 16.5 Relative to TAIEX -2.1-3.9 10.7 Key Changes Current TRADING TRADING Recommendation BUY BUY Target Price (NT$) 56 56 Revenue (NT$/mn) 94,856 96,919 Gross Margin (%) 12.8 12.55 Operating Margin (%) 4.4 3.9 EPS (NT$) 4.77 4.23 BVPS (NT$) 32 31.5 9,500 8,500 7,500 6,500 Y9999 加 權 指 數 5371 中 光 電 60 50 40 30 Better-than-expected 4Q09 earnings. Coretronic is an LCD backlight module maker, with TV/monitor/NB applications representing 25-30%/ 20-30%/10-15% of total sales. ODM projector business accounts for 12% of total sales, while own-brand Liuli-Optoma projector also 12%, and Young Optics (3504 TT) 4%. 4Q09 gross margin rose to 14% from 12.6% thanks to new high-end LED monitor backlight modules, while operating expense resumed to the level at NT$2.09bn, leading operating margin to 5.6% with pre-tax profit of NT$1.36bn, net profit of NT$1.12bn, and EPS at NT$1.42, topping our estimate of NT$1.21. 1Q10 backlight module shipments estimated to remain flat QoQ. Since downstream customers re-stocked prior to the Lunar New Year, their inventory is currently still high. Coretronic thus guides that 1Q10 TV backlight module shipments may slide. We estimate 1Q10 backlight module shipments to amount to 20.06mn sets, or flattish QoQ, with sales to decline 10.3% to NT$15.17bn. Leading in LED backlight modules. Coretronic has dedicated its R&D to light guide plate technology, with commencement of LED TV backlight module shipments to a Korean customer from Mar10 onwards and with preliminary shipments expected at NT$100k units per month. Coretronic, furthermore, expressed confidence on a 10% penetration rate for 2010. We believe, LED NB application may further witness a continual increase in penetration rate to over 90%, while LED monitor application is anticipated to remain at a penetration rate of 15-20%. On the whole, the company outperforms peers in LED backlight modules. TRADING BUY rating recommended. We estimate Coretronic FY10 sales of NT$94.86bn, +22% YoY, with EPS of NT$4.77, and retain our TRADING BUY rating as 1) it leads in LED backlight module technology, and 2) surpasses peers in terms of LED expertise with greater potential of profit improvement, in our view. Target price is set at NT$56. Exhibit 1: P/E Band 55 50 45 40 35 30 25 20 15 10 2005/01 2005/07 2006/01 2006/07 2007/01 2007/07 2008/01 2008/07 2009/01 2009/07 2010/01 Source: MasterLink Exhibit 2: Sales and YoY Growth 30,000 25,000 20,000 15,000 10,000 百 萬 元 Sales Sale YoY unit: NT$mn 80% 60% 40% 20% 0% 5,500 20 5,000-20% 4,500 10 0 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10-40% 3,500 0 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 Source: MasterLink 2010/3/4 Page 1 of 5
Coretronic, an LCD backlight module maker, also manufactures projectors with global market share of 20%. Coretronic, an LCD backlight module provider, carries products applied to NBs, monitors, and TVs. Sales weight by application is as follows: TV 25-30%, monitor 20-30%, and NB 10-15%. ODM projector business occupies 12% of total sales, while own-brand Liuli-Optoma projector consists of 12% of total sales, and Young Optics 4%. Exhibit 3: Coretronic Sales Mix by Product 2008 3Q09 4Q09 2009 2010F 2010 YoY Monitor 22% 20% 30% 26% 25% 19.8% NB 10% 12% 12% 11% 14% 57.5% TV 27% 30% 27% 26% 29% 39.3% BLU - others 1% 1% 0% 0% 0% 3.9% Projector 14% 12% 14% 11% -1.2% Liuli-Optoma 34% 12% 12% 12% 13% 30.1% Young Optics 6% 4% 6% 3% -32.7% Others 7% 4% 4% 5% 4% -5.0% Increased sales weight of high-end products sent 4Q09 gross margin upward, with EPS topping forecasts at NT$1.42. On the back of new high-end LED monitor backlight module shipments, coupled with projector shipments delayed from 3Q09 to 4Q09, sales in 4Q09 grew 18% QoQ, or 49.6% YoY, to NT$24.87bn. The release of new LED monitor models helped push gross margin to 14% from 12.6%, beating expectations. Operating expense, on the other hand, resumed to NT$2.09bn, thus lifting operating margin to 5.6%. Overall, operating business topped forecasts. To further factor in 1) the subsidiary asset impairment of NT$118mn, and 2) Forex loss of NT$45mn, 4Q09 pre-tax profit totaled NT$1.36bn, net profit of NT$1.12bn, and EPS at NT$1.42, topping our former projection of NT$1.21. Exhibit 4: Coretronic 4Q09 Actual & Estimated Results NT$ 000s 4Q09 (A) 4Q09 (E) Sales 24,874 24,352 Gross Margin % 14.0 12.7 Operating Profit % 5.6 4.5 Pretax 1,358 1,079 Net Income 1,121 885 Exhibit 5: Coretronic Shipments Unit: k 2008 2009 2010F 2009 YoY 2010 YoY Monitor 33,639 31,479 36,144-6% 15% NB 19,789 21,907 31,652 11% 44% TV 7,032 11,996 15,729 71% 31% Projector 1,131 938 1,240-17% 32% 1Q10 backlight module shipments to remain flat QoQ. Since downstream customers re-stocked prior to the Lunar New Year, their inventory is currently still high. Coretronic thus guides that 1Q10 TV backlight module shipments may slide. NB and monitor applications, on the other hand, are expected to enjoy releases of new models and thus witness a small increase in 1Q10 shipments, while large-sized backlight module shipments are projected to stay flat QoQ. We estimate 1Q10 backlight module shipments to amount to 20.06mn sets, or flattish QoQ, with sales to decline 10.3% to NT$15.17bn. 2010/3/4 Page 2 of 5
Leading in LED TV backlight module. Coretronic has dedicated its R&D to light guide plate technology (see exhibit 6). LED TV is migrating to the slim compact design, which the majority of backlight module makers have difficulty accommodating. Coretronic has gained preliminary laser technology but still needs to enhance the operational efficiency of its facilities. The company is to ship LED TV modules to a Korean customer in Mar10. This Korean client formerly relied on its own backlight module maker, with light guide plates based on laser technology. Coretronic, after entering the supply chain, is estimated to report initial monthly shipments of 100k. The backlight module maker guided that its LED TV penetration rate should reach 10%, relatively ahead of its peers, this year. LED NB penetration to shoot further to over 90% from 70%. Coretronic posted 4Q09 penetration rate of 70% in LED NB. As new NB models released in 2010 are nearly all bundled with LED backlight modules, Coretronic s LED NB application may see penetration rate grow further to over 90%. Coretronic also outperforms peers in LED monitor backlight modules, with 4Q09 shipment weight reaching 20% and far exceeding peers. We foresee that 2010 shipment weight of LED monitor backlight module will be sustained at 15-20%. With further improved penetration rate of LED backlight modules ahead, we forecast FY10 NB backlight module shipment to come to 31.65mn units, contributing NT$12.91bn to sales, +57% YoY, while that of monitor at 36.14mn units, contributing NT$24.06bn to sales. Yearly projector shipments to surge 32%, and market share to leap above 20%. Coretronic guided FY09 global projector shipments to total 5.1mn units, 938k units of which are provided by the company, or translating to a 20% market share. The raw material shortage is not expected to alleviate until end-2q10, while Coretronic estimates monthly projector shipments in 1Q10 to average 100-105k units. We expect to see 1Q10 shipments remaining flat QoQ at 310k units. This year the global projector market is estimated to balloon 18% YoY to 6mn units from 5.1mn units. Thus we project Coretronic to report FY10 projector shipments at 1.24mn units, grabbing a market share of over 20% and outperforming the overall industry growth. TRADING BUY rating retained. We estimate FY10 sales of NT$94.86bn, +22% YoY, with EPS of NT$4.77. The following catalysts support our rating: 1) Coretronic surpasses peers in LED monitor and TV backlight module with an expected increase in penetration rate of LED NB backlight modules. 2) Its more advanced LED expertise makes it stand out among peers with greater potential for profit improvement. With our TRADING BUY rating, we set target price at NT$56. 2010/3/4 Page 3 of 5
Consolidated Income Statement NT$m Consolidated Balance Sheet NT$m Year-end Dec. 31 FY07 FY08 FY09 FY10F Year-end Dec. 31 FY07 FY08 FY09 FY10F Net sales 78,828 79,904 77,425 94,856 Cash 5,787 11,455 18,375 20,353 COGS 68,780 69,691 66,837 82,683 Marketable securities 16 161 42 42 Gross profit 10,048 10,213 10,587 12,173 A/R & N/R 22,606 15,358 19,689 21,558 Operating expense 5,865 7,255 7,622 7,990 Inventory 5,834 5,156 6,233 6,615 Operating profit 4,183 2,959 2,965 4,184 Others 1,205 1,545 1,171 1,810 Net interest inc/(exp) (183) (153) (148) (161) Total current asset 35,449 33,674 45,511 50,378 Investment income 0 0 0 0 Long-term invest. 566 529 465 965 Total non-operate. Inc. (241) 19 584 95 Total fixed assets 7,805 9,175 8,086 10,086 Pre-tax profit 3,942 2,977 3,550 4,279 Total other assets 1,181 1,826 1,155 2,052 Net profit 3,406 2,318 2,677 3,451 Total assets 45,001 45,204 55,217 63,482 EPS (NT$) 4.90 3.20 3.70 4.77 Y/Y % FY07 FY08 FY09 FY10F Short-term Borrow 3,260 6,480 10,189 13,389 Sales 6.1 1.4 (3.1) 22.5 A/P &N/P 18,628 13,662 19,362 18,252 Gross profit (0.2) 1.6 3.7 15.0 Other current liab. 2,245 2,365 3,166 7,269 Operating profit (13.9) (29.3) 0.2 41.1 Total current liab. 24,133 22,506 32,717 38,911 Pre-tax profit (7.1) (24.5) 19.2 20.5 L-T borrows 974 1,481 346 638 Net profit 1.2 (31.9) 15.5 28.9 Other L-T liab. 370 515 512 355 EPS (4.8) (34.7) 15.5 28.9 Total liability. 25,478 24,502 33,575 39,904 Margins % FY07 FY08 FY09 FY10F Gross 12.7 12.8 13.7 12.8 Common stocks 6,945 7,240 7,240 7,240 Operating 5.3 3.7 3.8 4.4 Reserves 4,557 4,804 4,864 4,864 EBITDA 6.7 5.5 7.3 6.5 Retain earnings 4,838 4,202 5,056 6,992 Pre-tax 5.0 3.7 4.6 4.5 Total Equity 19,523 20,702 21,642 23,578 Net 4.3 2.9 3.5 3.6 Total Liab. & Equity 45,001 45,204 55,217 63,482 Consolidated Quarterly Income Statement NT$m Consolidated Statement of Cash flow NT$m 1Q10F 2Q10F 3Q10F 4Q10F Year-end Dec. 31 FY07 FY08 FY09 FY10F Net sales 22,523 22,220 25,592 24,521 Net income 3,406 2,318 2,677 3,451 Gross profit 2,948 2,825 3,282 3,118 Dep & Amort 1,152 1,267 1,975 1,723 Operating profit 1,043 927 1,153 1,061 Investment income 0 0 13 0 Investment income 0 0 0 0 Changes in W/C (4,034) 2,339 (52) (3,360) Total non-ope inc. 26 22 24 23 Other adjustment 1,930 1,074 2,192 1,100 Pre-tax profit 1,069 949 1,177 1,084 Cash flow ope. 2,454 6,998 6,806 2,913 Net profit 863 764 950 874 EPS 1.19 1.05 1.31 1.21 Capex (1,332) (2,135) (637) (2,000) Y/Y % 1Q10F 2Q10F 3Q10F 4Q10F Change in L-T inv. 0 39 (52) (500) Net sales 69.0 22.3 21.6 (1.4) Other adjustment (957) (268) (83) (500) Gross profit 37.2 23.0 23.9 (10.8) Cash flow inve. (2,290) (2,364) (772) (3,000) Operating profit 127.6 44.7 148.7 (24.4) Free cash flow 1,122 4,862 6,169 913 Net profit 226.9 39.9 12.6 (14.7) Q/Q % 1Q10F 2Q10F 3Q10F 4Q10F Inc. (Dec.) debt 1,738 3,734 2,651 3,500 Net sales (9.5) (1.3) 15.2 (4.2) Cash dividend (2,202) (2,083) (1,593) (1,515) Gross profit (15.6) (4.2) 16.2 (5.0) Bond issue (150) (200) 0 0 Operating profit (25.7) (11.1) 24.3 (8.0) Right issue 0 0 0 0 Net profit (15.7) (11.6) 24.4 (8.1) Other adjustment 168 (820) (167) 50 Margins % 1Q10F 2Q10F 3Q10F 4Q10F Cash flow-fin. (446) 631 891 2,035 Gross 13.1 12.7 12.8 12.7 Operating 4.6 4.2 4.5 4.3 Exchange influence 35 403 (4) 30 Net 3.8 3.4 3.7 3.6 Change in Cash (282) 5,265 6,925 1,978 MasterLink Securities Stock Rating System STRONG BUY: Total return expected to appreciate 50% or more over a 3-month period. BUY: Total return expected to appreciate 30% to less than 50% over a 3-month period. TRADING BUY: Total return expected to appreciate 10% to less than 30% over a 3-month period. HOLD: Total return expected to be between 10% and -10% over a 3-month period. SELL: Total return expected to depreciate 10% or more over a 3-month period. Additional information available on request. 2010/3/4 Page 4 of 5
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