Malaysia Central Bank Watch:New Governor,old views

　　Worse-than-expected 1Q16 results: The company reported 1Q16 results with sales atKRW205bn (+34% q-o-q, +136% y-o-y) and OP at KRW5bn (-77% q-o-q, +89% y-o-y).

　　Sales came in above our estimate as the company started to report a consolidatedfinancial statement with its subsidiary SFA Semiconductor, with 46% shareholdings.

　　However, operating profit missed as SFA Semiconductor reported an OP loss ofKRW5bn (OPM -5%) from low utilisation at 42% and price pressure amid slow back-endpackaging demand from Samsung. Despite new orders of KRW327bn in 1Q, mostlyOLED, there was minor revenue recognition since it was received near quarter-end. Neworders should start to be recognized as revenue mainly from 2Q. Taking out SFASemiconductor’s earnings, 1Q sales came in at KRW117bn (-24% q-o-q, +35% y-o-y)and OP of KRW9bn (-54% q-o-q, +273% y-o-y), below our forecasts by 17% and 45%,respectively. On the non-operating side, there was a one-off gain of KRW10bn fromexemption of debt at SFA Semiconductor.

　　Strong sequential earnings improvement likely for the remainder of the year: Orderbacklog, which includes a 30k (6G) order, should start to be recognized as revenue from2Q, and strong earnings improvement is likely to be shown going forward as we expectthe company to receive an additional 60K (6G) order. We forecast 2Qe sales andoperating profit of KRW306bn (+49% q-o-q, +7% y-o-y) and KRW22bn (+363% q-o-q, -16%y-o-y), respectively. Also, we believe SFA Semiconductor will turn around from 2H16e,given the rising seasonal demand. For new orders in 2016e, we assume KRW970bn,slightly lower from KRW1.03tn factoring in delayed TV orders to 2017e from 4Q16previously. There seem to be Street concerns about Samsung having less traction onOLED TV, but we think it is only a slight delay. We believe Samsung will eventually breakinto OLED TV production to differentiate itself from Chinese TV makers. New ordersmomentum from smartphone is intact as we assume net OLED capacity of 108K panelper month in 2017e.

　　Reiterate Buy; TP cut to KRW82,000 (from KRW86,000). We factor in: 1) weaker 1Q; 2)loss from SFA Semiconductor and 3) delay in TV orders, thus we cut 2016e EPS by 20%.

　　We lower our TP slightly while we apply 12-month forward EPS from 2016e EPS. Our TPis based on the stock’s 3-yr average 1-yr forward multiple of 12.3x (unchanged).Theshares now trade at 10.4x 2016e PE and 1.8x 2016e PB. We reiterate our Buy as we seethe company as a key beneficiary of OLED transition in the display industry. Our2016e/2017e operating profit forecasts are 16%/19% above consensus.