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Silicon Works-Implications of LG Group’s acquisition

May 26, 2014 14:05|May 26, 2014 14:05
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May 23, LG Group bought Silicon Works, a local developer for logic chips, for W86.5bn. We expect the synergy-effect driven by both LG and Silicon Works’ sensor business aiming automobile market. We recommend focusing on the company’s mid-to-long term business diversification and expect the company’s shares to be re-valuated.

 May 23, LG Group buys Silicon Works
– LG Group bought Silicon Works’ shares from Comet Network (16.52%) and LG Display (2.89%) at closing price
of 26,600 (May 23). The total amount of the deal was W86.5bn.
– Silicon Works is Korea’s largest display chip developer. The sales breakdown in 2013 was Driver IC 78.5% and T-con 11.7%.

 LG Group’s purpose of acquisition expected to be focused on new business such as automobile sensors
− LG Group’s acquisition of Silicon Works’ implied more of intentions for new business than its display business.
The reasons for our anticipation are: 1) While the tablet PC market growth is slowing down, ASP is continuously decreasing. Moreover the Silicon Works’ sales is highly dependent on the tablet PC market which is why we expect the company’s earnings improvement to be limited, and 2) the chances of the acquisition-focus aiming
display-related business are very limited because LG Group already has a subsidiary with similar business structure (Lusem).

− LG Group is highly interested in automobile electrification as their new growth momentum. Its subsidiaries are contributing to the group’s goal by focusing on the business items related to automobiles (LG Display: car display, LG Innotek: electromechanical components, LG Chem: batteries).

− As such, we expect the synergy effect from LG Group-Silicon Works acquisition for the following reasons: 1) Silicon Works has started to record sales from APS (Accelerator Pedal Sensor) and automobile-related sensors, 2) The company is capable of developing semiconductors that are needed for controlling major electromechanical
components.

Focus on mid-to-long term business diversification
− The company’s shares have been relatively under-valued despite its solid financial structures and earnings (foreign fabless peers P/E: 15x, while Silicon Works’ P/E is 10x). We anticipate such low-valuation to have come from the company’s high dependency on iPad sales and low expectations for new business other than display.
− We believe LG Group’s acquisition has given the company’s shares a chance to be re-valuated because 1) we expect the company to drive synergy with LG Group’s efforts in the automobile sensor business and 2) the expectations toward its business diversification in non-display area.
*Source: Woori Investment & Securities Co.