LG Electronics W72,000 Initiation: steady progress, but...

Important disclosures, including any required research certifications, are provided on the last three pages of this report.

Jae H. Lee (82) 2 787 9173 [email protected]

What's new LG Electronics (LGE) has struggled in the rapidly changing smartphone market, losing its focus as well as market share over the past few years. Although the company is making steady progress in rolling out more competitive products, such as the Optimus G, we expect its handset earnings to remain volatile over the near term and forecast a meaningful earnings turnaround only from mid-2013.

What's the impact A common question from investors is in whose footsteps will LGE follow – those of Samsung Electronics (SEC) (005930 KS, W1,250,000, Buy [1]) and Apple (AAPL US, US$680.44, Outperform [2]), or Motorola Mobility (Not listed) and Nokia (NOK1V FH, €2.074, Underperform [4])? LGE’s share price has declined continuously along with its handset revenue since September 2009, but we expect a gradual recovery in its

handset revenue from 3Q12 on the back of an improving product mix (rise in the proportion of smartphones). However, we only expect an earnings turnaround from mid-2013, when we forecast LGE’s share of the global smartphone market to reach 5%. We recently visited nearly 50 mobile-handset distributors in 20 of the largest commercial districts in Korea. Although the popularity of LGE’s smartphone was low, consumers’ perceptions appear to be improving as the company is shying away from mass-market phones and focusing on premium models.

What we recommend We initiate coverage with a Hold (3) rating and SOTP-based six-month target price of W72,000. Even though the stock has run-up nearly 30% since late-July, we believe its handset profit will remain weak until mid-2013, and expect the stock to trade in a PBR range of 0.7-0.9x over the next six months. We still prefer SEC in the Korea tech (smartphone) space due to its market leadership. The downside risk to our call would be weaker-than-expected demand for handsets, TVs, and appliances, while an upside catalyst would be an improving macroeconomic environment, leading to increased sales of the company’s core products.

How we differ Our 2012 EPS forecast is 5.7% lower than that of the Bloomberg consensus, and we believe there is upside to our forecast in the event of stronger smartphone shipments. Share price performance

7090110130150

52,00064,00076,00088,000

100,000

Sep-11 Dec-11 Mar-12 Jun-12 Sep-12LG Electronics (LHS)Relative to KOSPI (RHS)

(W) (%)

12-month range 56,100-93,300 Market cap (US$bn) 10.42 Average daily turnover (US$m) 92.70 Shares outstanding (m) 164 Major shareholder LG Corporation (33.7%) Financial summary (W) Year to 31 Dec 12E 13E 14E Revenue (bn) 51,823 55,341 57,525 Operating profit (bn) 1,174 1,467 1,579 Net profit (bn) 752 1,195 1,345 Core EPS 4,595 7,302 8,218 EPS change (%) n.a. 58.9 12.5 Daiwa vs Cons. EPS (%) (5.7) 3.8 5.3 PER (x) 15.7 9.9 8.8 Dividend yield (%) 0.4 0.6 0.7 DPS 300 450 500 PBR (x) 0.9 0.8 0.7 EV/EBITDA (x) 6.9 6.0 5.5 ROE (%) 5.7 8.5 8.8 Source: Bloomberg, Daiwa forecasts

Consumer durables & apparel / Korea

10 September 2012

LG Electronics 066570 KS

Target price: W72,000 Up/downside: +0.0% Share price (10 Sep): W72,000

Initiation: steady progress, but yet to see breakthrough

• LGE is trying to get back into the handset market with premium smartphones

• While the Optimus G has a cutting-edge design and features, company's earnings only likely to turn around from mid-2013

• Too early to call a full-fledged recovery; prefer Samsung Electronics

How do we justify our view?How do we justify our view?

Consumer durables & apparel / Korea 066570 KS

10 September 2012

- 2 -

Can LGE stage a comeback? ............................................................................................................. 6

Making steady progress in smartphones...................................................................................... 7

On-the-ground research reveals LGE’s phones are not popular, but perception improving.... 10

Consumer electronics business: stable but muted revenue growth .......................................... 12

Earnings outlook ......................................................................................................................... 13

Valuation ..................................................................................................................................... 15

Risks ............................................................................................................................................. 17

Table of contents


10 September 2012

- 3 -

Growth outlook LGE: revenue and operating-profit margin trend

We forecast a 4.5% YoY decline in LGE’s revenue for 2012 but revenue growth of mid-single digit percentages YoY for 2013 and 2014, driven by a recovery in the company’s handset business. We forecast its operating-profit margin to remain at 2-3% over 2012-14.

0

1

2

3

4

5

6

7

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2008 2009 2010 2011 2012E 2013E 2014E

Others Mobile Communications OP margin (RHS)

(Wbn) (% )

Source: Company, Daiwa forecasts

Valuation LGE: one-year forward PBR bands

The stock is trading currently at a PBR of 0.9x on our 2012 BVPS forecast, which compares with a past-3-year trading range of 0.6-1.4x. As we forecast the earnings for LGE’s handset business to remain volatile over the next couple of quarters while earnings from the consumer electronics business track weaker per the normal seasonal trend, we expect the shares to trade in a narrow PBR range of 0.7-0.9x.

10,000

60,000

110,000

160,000

210,000

260,000

310,000

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

(W)

3.0x

2.0x

1.5x

1.0x

0.6x

Source: Company, FnData, Daiwa forecasts

Earnings revisions LGE: Daiwa vs. consensus EPS forecasts (2012-14E)

Our 2012 EPS forecast is 5.7% lower than that of the Bloomberg, but our 2013 and 2014 forecasts are respectively 3.8% and 5.3% higher. As we expect LGE to make progress in the smartphone market, we see upside potential to the 2013-14 consensus forecasts.

01,0002,0003,0004,0005,0006,0007,0008,0009,000

2012E 2013E 2014E

Daiwa Consensus

(W)

Source: Bloomberg, Daiwa forecasts

How do we justify our view?

Growth outlook Valuation Earnings revisions


10 September 2012

- 4 -

Key assumptionsYear to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Handset shipment(m) 80 101 118 117 88 57 62 68 Smartphone shipment (m) 0.0 0.3 0.6 6.5 20.2 25.8 40.0 52.0 LCD-TV shipment (m) 7 11 16 23 25 26 28 30

Profit and loss (Wbn) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Home Entertainment 12,619 15,848 19,635 23,695 23,902 22,906 23,638 24,079 Mobile Comm 11,059 16,030 18,199 12,975 11,692 10,263 12,137 13,185 Others 29,749 31,402 17,657 19,084 18,662 18,654 19,566 20,261 Total revenue 53,427 63,280 55,491 55,754 54,257 51,823 55,341 57,525 Other income 0 0 0 0 0 0 0 0 COGS (41,352) (47,707) (41,341) (43,453) (42,058) (39,419) (42,296) (44,059) SG&A (9,254) (11,519) (11,190) (12,213) (11,856) (11,168) (11,539) (11,852) Other op. expenses (221) (847) (279) 88 (63) (63) (39) (34) Operating profit 2,600 3,207 2,681 176 280 1,174 1,467 1,579 Net-interest inc./(exp.) (401) (153) (293) (154) (228) (238) (239) (203) Assoc/forex/extraord./others 180 (1,435) 477 412 (451) 146 365 417 Pre-tax profit 2,379 1,619 2,865 435 (399) 1,082 1,593 1,793 Tax (310) (480) (589) 0 (33) (330) (398) (448) Min. int./pref. div./others 0 0 74 848 0 0 0 0 Net profit (reported) 2,069 1,139 2,350 1,282 (433) 752 1,195 1,345 Net profit (adjusted) 2,069 1,139 2,350 1,282 (433) 752 1,195 1,345 EPS (reported) (W) 14,302 7,873 16,247 8,864 (2,992) 4,595 7,302 8,218 EPS (adjusted) (W) 14,302 7,873 16,247 8,864 (2,992) 4,595 7,302 8,218 EPS (adjusted fully-diluted) (W) 14,302 7,873 16,247 8,864 (2,992) 4,595 7,302 8,218 DPS (W) 850 350 1,750 200 200 300 450 500 EBIT 2,600 3,207 2,681 176 280 1,174 1,467 1,579 EBITDA 6,605 6,886 4,020 1,466 1,483 2,433 2,777 2,950

Cash flow (Wbn) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Profit before tax 2,379 1,619 2,865 435 (399) 1,082 1,593 1,793 Depreciation and amortisation 4,005 3,679 1,339 1,290 1,202 1,260 1,310 1,371 Tax paid 0 0 (502) (394) (359) (330) (398) (448) Change in working capital (3,035) (2,310) (4) (2,640) (1,060) (1,966) (1,893) (2,123) Other operational CF items 1,687 2,867 2,452 1,318 2,346 1,727 1,252 1,150 Cash flow from operations 5,036 5,854 6,150 9 1,730 1,773 1,864 1,742 Capex (2,468) (3,972) (1,591) (1,745) (1,830) (1,400) (1,450) (1,500) Net (acquisitions)/disposals (435) (954) (153) 552 (53) 276 341 820 Other investing CF items (166) (570) (249) (477) (569) (73) (477) (391) Cash flow from investing (3,069) (5,496) (1,993) (1,670) (2,452) (1,197) (1,586) (1,071) Change in debt (1,617) 1,084 (4,136) 1,528 228 (621) 31 (370) Net share issues/(repurchases) 0 0 0 1 975 0 0 0 Dividends paid (122) (138) (71) (308) (43) (33) (55) (82) Other financing CF items 192 97 (1) 0 0 (94) (45) (16) Cash flow from financing (1,547) 1,043 (4,208) 1,221 1,161 (748) (69) (468) Forex effect/others 4 3 (1,454) (39) (37) 0 0 0 Change in cash 423 1,405 (1,505) (480) 401 (172) 208 203 Free cash flow 2,567 1,883 4,558 (1,737) (100) 373 414 242 Source: Company, Daiwa forecasts

Financial summary


10 September 2012

- 5 -

Balance sheet (Wbn) As at 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Cash & short-term investment 3,310 6,034 2,647 2,029 2,495 2,272 2,534 2,755 Inventory 5,708 6,449 4,899 5,872 4,947 4,678 4,821 4,936 Accounts receivable 5,384 6,105 7,637 7,002 6,753 6,746 6,887 7,023 Other current assets 2,924 3,686 1,727 1,611 1,588 1,619 1,720 1,762 Total current assets 17,326 22,274 16,910 16,515 15,783 15,315 15,962 16,476 Fixed assets 14,406 16,253 7,709 6,500 7,290 7,748 8,215 8,683 Goodwill & intangibles 591 774 804 763 1,036 1,010 1,093 1,130 Other non-current assets 2,261 3,071 6,692 8,540 8,549 8,323 8,877 9,018 Total assets 34,584 42,372 32,115 32,318 32,658 32,396 34,147 35,308 Short-term debt 5,151 7,406 4,307 4,009 3,178 2,796 2,895 2,385 Accounts payable 4,453 4,456 5,316 5,824 5,487 5,314 5,612 5,676 Other current liabilities 5,474 8,539 6,546 5,484 5,549 5,290 5,464 5,590 Total current liabilities 15,078 20,400 16,169 15,317 14,215 13,401 13,971 13,651 Long-term debt 5,540 5,455 2,602 3,184 4,257 4,077 4,103 4,313 Other non-current liabilities 1,138 1,724 919 958 1,038 1,145 1,205 1,230 Total liabilities 21,756 27,580 19,689 19,459 19,510 18,623 19,280 19,194 Share capital 809 809 809 809 904 904 904 904 Reserves/R.E./others 6,369 7,510 10,995 11,835 11,990 12,611 13,699 14,940 Shareholders' equity 7,178 8,319 11,804 12,644 12,894 13,515 14,603 15,844 Minority interests 5,650 6,473 621 215 254 258 264 270 Total equity & liabilities 34,584 42,372 32,115 32,318 32,658 32,396 34,147 35,308 EV 29,096 30,188 15,919 16,009 15,863 16,901 16,775 16,266 Net debt/(cash) 7,381 6,827 4,262 5,164 4,940 4,602 4,463 3,943 BVPS (W) 49,623 57,515 81,606 87,413 89,140 82,587 89,237 96,819

Key ratios (%) Year to 31 Dec 2007 2008 2009 2010 2011 2012E 2013E 2014E Sales (YoY) n.a. 18.4 (12.3) 0.5 (2.7) (4.5) 6.8 3.9 EBITDA (YoY) n.a. 4.3 (41.6) (63.5) 1.1 64.1 14.1 6.2 Operating profit (YoY) n.a. 23.3 (16.4) (93.4) 58.8 318.7 25.0 7.6 Net profit (YoY) n.a. (44.9) 106.4 (45.4) n.a. n.a. 58.9 12.5 EPS (YoY) n.a. (44.9) 106.4 (45.4) n.a. n.a. 58.9 12.5 Gross-profit margin 22.6 24.6 25.5 22.1 22.5 23.9 23.6 23.4 EBITDA margin 12.4 10.9 7.2 2.6 2.7 4.7 5.0 5.1 Operating-profit margin 4.9 5.1 4.8 0.3 0.5 2.3 2.7 2.7 ROAE 28.8 14.7 23.4 10.5 n.a. 5.7 8.5 8.8 ROAA 6.0 3.0 6.3 4.0 n.a. 2.3 3.6 3.9 ROCE 11.1 12.5 11.4 0.9 1.4 5.7 6.9 7.1 ROIC 11.2 10.8 11.1 1.0 1.6 4.5 5.8 6.0 Net debt to equity 102.8 82.1 36.1 40.8 38.3 34.1 30.6 24.9 Effective tax rate 13.0 29.7 20.5 0.0 n.a. 30.5 25.0 25.0 Accounts receivable (days) 36.8 33.1 45.2 47.9 46.3 47.5 45.0 44.1 Payables (days) 30.4 25.7 32.1 36.5 38.0 38.0 36.0 35.8 Net interest cover (x) 6.5 20.9 9.2 1.1 1.2 4.9 6.1 7.8 Net dividend payout 5.9 4.4 10.8 2.3 n.a. 6.5 6.2 6.1 Source: Company, Daiwa forecasts

Company profile LG Electronics is a leading manufacturer of consumer electronics and mobile handsets in Korea. The company has four business divisions: home entertainment, mobile communications, home appliances, and air conditioning & energy solutions. LG Electronics also has a 47.9% stake in its component affiliate, LG Innotek and a 37.9% stake in its display affiliate, LG Display.

Financial summary continued …


10 September 2012

- 6 -

Can LGE stage a comeback? LGE’s share price has been on a declining trend since September 2009, ie, after its record quarterly operating profit of W1.2tn recorded for 2Q09. The company’s handset shipments have also been losing momentum after reaching a peak of 118m units in 2009. Whereas Apple launched its first iPhone in June 2007, five years later, LGE still only has a small presence in the global smartphone market, with a 3.8% market share in terms of shipments for 2Q12. However, as the company rolls out more competitive products, we believe it will have the opportunity to expand its market share. LGE: share-price performance since January 2005

020,00040,00060,00080,000

100,000120,000140,000160,000180,000


(W)

First launch of Chocolate phone

Handset operating profit starts to improve

New CEO is appointed

Handset OPM peaks at 14% in 2Q08

Record quarterly earnings for 2Q09

Shares under pressure due to lack

of smartphones

Handsets post operating losses

Handsets turn profitable

New CEO is appointed

Source: Company, FnData

Handsets: still the key share-price driver While LGE’s mobile-handset business accounted for just 17.8% of its 2Q12 revenue, we believe it is the single most important share-price driver, given that earnings for the company’s consumer electronics business are relatively less volatile than those for the mobile-handset business. A look at LGE’s performance over the past five years shows that the company’s mobile handset segment has tended to perform well for several years when the mega-hit models are released, but it has tended to suffer for about as long once it lost momentum, as it takes time to develop and launch new competitive products, and the losses from existing handsets have weighed down the segment’s profitability and capital resources. LGE was successful in the 3G feature-phone market with back-to-back hit models, such as the Chocolate phone in 2005, Shine in 2006, and the Cookie in 2008, all of which sold a lot more than 10m units globally.

However, during the smartphone era, LGE has been too late in rolling out a competitive model, in our view, and has been fighting an uphill battle with the market leaders, such as SEC and Apple. Among LGE’s dozens of smartphones, the Optimus One is the only model to sell over 10m units (in 15 months), following its launch in September 2010.

LGE: share price vs. handset revenue and operating profit

020,00040,00060,00080,000100,000120,000140,000160,000180,000

(1,000)

0

1,000

2,000

3,000

4,000

5,000

6,000


Handset revenue Handset OP Share price (RHS)

(Wbn) (W)

Source: Company, FnData, Daiwa forecasts

Will LGE be another Motorola or Nokia? One of the most common questions investors ask is: what path will LGE follow? Will it be that of the dominant players such as SEC and Apple, or will it follow the less successful Motorola Mobility and Nokia? Nokia was formerly the market leader for over a decade, overtaking Motorola to become the largest handset maker globally in 1998, a position which it has since lost to SEC, long before the launches of Apple’s iPhone and SEC’s Galaxy. However, both Nokia and Motorola Mobility have since seen sharp declines in revenue as they lacked innovation (design and features) and failed to adapt to the changing technology. LGE: revenue comparison with Motorola Mobility and Nokia

over different quarterly periods*

0

2

4

6

0

5

10

15

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Motorola (LHS) Nokia (LHS) LGE (RHS)

(US$bn) (US$bn)

Source: Companies, Daiwa forecasts (for LGE)

Note: * revenue for Motorola Mobility is from 1Q05-4Q09, for Nokia from 1Q09-2Q12, and for LGE from 1Q08-4Q12E with our forecasts for 3Q12 and 4Q12


10 September 2012

- 7 -

Meanwhile, although LGE was late in entering the smartphone market, we do not believe the company will suffer the same fate as Motorola Mobility or Nokia, as LGE is changing its strategy and making an effort to launch more competitive products. Our only concern is LGE’s steep decline in handset revenue since 2009, as its feature-phone sales have been declining faster than its smartphone sales have been increasing. Although LGE is guiding for 25-26m smartphone sales for 2012, from 20m units for 2011, we forecast its total handset shipments (including feature phones) to decline to around 57m units for 2012, from 88m units for 2011. The company has stated that its feature-phone sales are declining rapidly, as many developed markets are shifting to smartphones and are making the transition to the faster 4G Long Term Evolution (LTE) network. Even for the emerging markets, the ultra low-end smartphones are becoming extremely popular, leaving less room for feature phones. Handset revenue appears to have bottomed out in 2Q12 After recording low handset revenue of W2.3tn for 2Q12, we believe LGE’s handset revenue has reached an inflection point. Compared with its peak revenue of W4.9tn for 2Q09, its handset revenue has more than halved over the past three years. LGE: quarterly handset shipments and revenue

0

1,000

2,000

3,000

4,000

5,000

6,000

0

10

20

30

40

1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12E 1Q13E 3Q13E

Revenue (RHS) Shipments (LHS)

(m units) (Wbn)We ex pect product mix to have positive impact on revenue from 3Q12E


However, as we forecast its smartphone volume to account for nearly half of its total handset shipments for 3Q12, product-mix improvements are likely to have a positive impact on its revenue going forward. Although we do not forecast a full recovery in LGE’s quarterly handset revenue until 2Q13, we do expect more gradual improvements as its smartphone volume rises.

LGE: feature-phone and smartphone shipments

0

20

40

60

80

100

0

10

20

30

40

1Q09 1Q10 1Q11 1Q12 1Q13E 1Q14E

Smartphones Feature phones Smartphone portion (RHS)

(m units) (% )


While LGE may succeed in halting the erosion in its total handset revenue in 3Q12, we forecast it to post a weak operating profit for its handset business for at least the next 2-3 quarters. The company is likely to spend more on marketing and incur higher manufacturing costs (for each handset) compared with competitors like SEC and Apple, as it has fallen behind in terms of brand awareness and economies of scale. LGE was also criticised by some investors earlier this year for sacrificing profitability in return for market-share gains in the smartphone industry. However, we believe the company’s absolute smartphone sales volume has been just too low for the past few years to cover its fixed costs, including R&D expenses. In fact, LGE’s management has informed us that in order to sustain stable profitability for its smartphone business, the company needs to secure at least a 5% share of the global smartphone market. In 2Q12, LGE’s market share was 3.8%, but we expect this to increase to 5% by mid-2013, and think this may be the inflection point for the company’s handset operating profit.

Making steady progress in smartphones

With LGE struggling in the fast-growing smartphone market, the company believes 2012 will be make-or-break year and has pledged to introduce more LTE smartphones, focusing on design and hardware specs to regain its market share. In August 2012, LGE announced that it had sold over 5m LTE smartphones globally since the launch of its Optimus LTE in the domestic market in 4Q11. Of its shipments of 5m LTE smartphones, the company said the Optimus LTE accounted for 2.0m units, the Optimus Vu and Optimus LTE II smartphones for 0.5m each, while other smartphones made up 2m.


10 September 2012

- 8 -

LGE’s best-selling LTE smartphones

Optimus LTE Optimus Vu Optimus LTE II

Source: Company

Focusing on key markets with its LTE products LGE has launched more than 10 LTE smartphones since mid-2011 and they are mainly sold in Korea, Japan, the US and select markets in Europe and Asia. The company forecasts global demand for LTE smartphones to increase more than 10-fold for 2012 compared with 2011, and plans to launch more competitive LTE models in 2H12. In Korea, LTE subscribers have already surpassed the 10m mark (as at the end of August this year), reaching close to 20% of the country’s total mobile population, as all three local carriers now offer nationwide coverage. Although LTE services were initially rolled out in October 2011, over 80% of new subscribers and existing subscribers that are replacing their handsets are currently signing up for LTE services to take advantage of the faster data-transmission speed of 10-30Mbps. The monthly handset penetration rate for LTE services has increased sharply from 21% for October 2011 to 81% for July 2012. Monthly LTE handset penetration rate in Korea

0

20

40

60

80

100

0.0

0.5

1.0

1.5

2.0

2.5

Oct-11 Dec-11 Feb-12 Apr-12 Jun-12

LTE phone shipments (LHS) Penetration rate (RHS)

(m units) (% )

Source: Companies, Digital Daily

As its LG Group affiliate, LG Uplus (032640 KS, W7,270, Hold [3]) was the first operator to offer LTE services in Korea in October 2011, and LGE made an early move to supply it with its LTE phones and take advantage of the faster network. Both companies worked closely to develop handsets to optimise the network, and they have an ambitious plan to capitalise on the evolution of the 4G LTE business. LGE’s employees are also committed to expanding the company’s share of the growing LTE market. Close to the LGE headquarters in Yoido, Seoul, we spotted a number of employees’ cars displaying the company’s LTE business tagline: ‘LTE, it’s always LG’ (see below).

Example of an LGE employee’s car with the LTE slogan

Source: Daiwa

However, almost a year after the LTE service took off in Korea, the strategic alliance between LG Uplus and LGE has only been a partial success, in our view. We believe LG Uplus has made meaningful progress, because despite being the smallest mobile carrier (of Korea’s three) for 3G and 4G (LTE) services combined, it now has the second-highest subscriber base on the LTE network, with a 32% share of subscribers on the LTE network at the end of August. Meanwhile, the domestic LTE market has been a difficult one for LGE, as it has lagged SEC since the LTE service was introduced and is currently competing head-to-head with a small local player, Pantech (Not listed), which focuses on selling smartphones for the domestic market. In July 2012, LGE had a 15% share of the LTE phone market in Korea, while SEC had 70%.


10 September 2012

- 9 -

Monthly market share of LTE phones in Korea

3424

1813 14

19 19 2115 15

01020304050607080

Oct-11 Dec-11 Feb-12 Apr-12 Jun-12

SEC LGE Pantech

(%)

Source: Companies, Digital Daily

Despite its weakness in the domestic market, LGE remains aggressive in securing a larger share of the global LTE phone market. In 2011, it shipped 1.2m LTE phones globally, but in 2012, it targets to sell 8.0m units, or about one-third of its total smartphone shipments. LGE said its share of the global LTE market was 15.0% for 2Q12, which is substantially higher than its global smartphone market share of 3.8%. According to market research firm Strategy Analytics, global LTE phone shipments are forecast to increase from 6.8m units in 2011 to 67.0m units in 2012, with the US, Korea and Japan being the main markets driving this growth. As a result, LGE is targeting key carriers to sell its products, such as NTT DoCoMo (9437 JP, ¥129,500, Outperform [2]) and Verizon (VZ US, US$43.72, Hold [3]), as well as all three local carriers in Korea. Plans to get back into the handset market with the Optimus G LGE’s management acknowledges that the company lost its focus in smartphones but is now refocusing on its fundamental strengths. Using high-end specs, LGE plans to move into the premium smartphone market. A few years ago, the company was more focused on selling affordable smartphones to mass-market consumers, but its handsets were not distinctly different from those of other brands. Therefore, LGE is now planning to launch several premium models with high-end specs including high-definition (HD) displays and quad-core processors before the end of 2012. At the consumer electronics trade show in Berlin (IFA) during the week of 27 August 2012, LGE unveiled its new flagship smartphone, the Optimus G. The new phone will have LTE connectivity, a 1.5 GHz quad-core processor, a 4.7-inch HD (1,280x768) IPS display, 2GB of RAM, a 13 megapixel rear camera and a 2,100mAh battery, and it will be only 8mm thick.

LGE’s new Optimus G smartphone

Source: Company

To make sure the Optimus G differs suitably from competing models, LGE has gathered some of the best components from its affiliate companies. As its affiliates also supply several components for Apple’s iPhones, it made sense to integrate the best quality parts. As for the processor, LGE has worked closely with Qualcomm (QCOM US, US$61.93, Outperform [2]) to launch LGE’s first LTE smartphone, embedded with the Snapdragon S4 Pro central processing unit (CPU). Assisted by LG Display (034220 KS, W27,450, Hold [3]), the Optimus G will have a similar retina display as the iPhone, but it will be larger, with an 15:9 aspect ratio. LCD panel used for the Optimus G smartphone

Source: Company

LG Innotek (Not rated) will supply a 13-megapixel camera module and new touch screen using a one-glass solution, which is thinner than the previous glass-film-film touch screen. LG Chem (Not rated) has developed a 2,100mAh lithium-polymer battery with higher voltage, extending the battery life to 800 cycles, at 80% charging capacity, compared with a lifespan of 500 cycles for conventional batteries.


10 September 2012

- 10 -

Based on these specs, we believe LGE’s Optimus G currently has the best hardware among the premium smartphones in the market. LGE plans to start selling the Optimus G from late September this year in Korea. The new smartphone will have a slightly different design for the Japanese market and will be sold through NTT DoCoMo onwards of October or November, according to LGE. For the US market, LGE plans to launch the Optimus G through two carriers initially from October this year.

Hardware spec comparison for flagship smartphones LGE SEC Apple

Model Optimus G Galaxy S III iPhone 4S Operating system Android 4.0 Android 4.0 iOS5 Display 4.7-inch HD IPS 4.8-inch HD AMOLED 3.5-inch HD IPS Resolution 1,280x768 1,280x720 960x640 Camera 13 megapixel 8 megapixel 8 megapixel RAM 2GB 2GB 512MB Battery 2,100mAh 2,100mAh 1,430mAh New features Live zoom, one-glass

solution Near-field

communication, eye recognition

iCloud, voice recognition

Source: Companies, Daiwa

In November 2011, LGE announced a W1tn rights issue to secure resources to improve its smartphone business. The company spent much of the proceeds on R&D and is now looking to make a big impact with the launch of the Optimus G. While hands-on experience with the new smartphone will help us to decide whether LGE can stage an early comeback in the smartphone market, the Optimus G seems to us to have the best design and hardware specs among the company’s smartphones so far. From our research in the market, we have gleaned that the Optimus G could have a sales volume of 0.5-1.0m units for 4Q12, which would be better than its LTE predecessors but not any better than the best-selling models from its competitors (based on competitors’ recent quarterly sales-volume trends).

On-the-ground research reveals LGE’s phones are not popular, but perception improving

Over the past month, we have visited nearly 50 mobile handset distributors in the 20 largest and busiest commercial districts in Korea (mostly in metropolitan Seoul). We asked the distributors specific questions, such as: 1) what are the popular smartphone brands and models currently? 2) what are the key factors customers consider when purchasing smartphones?, and 3) what are customers’ views of LGE handsets?

Korea’s 20 largest commercial districts: profiles (2011)

Rank Commercial district Annual district revenue (Wtn)

Daily floating population

1 North of Gangnam station 3.9 78,831 2 Apgujung station 3.7 59,201 3 South of Gangnam station 3.4 75,749 4 Sinsa and Nonhyun station 2.6 65,441 5 Jonggak station 2.4 63,603 6 Hakdong intersection 2.1 55,924 7 Hakdong station 1.7 57,948 8 Seomyun station, Busan 1.6 58,842 9 Sulleung station 1.6 108,872 10 Samsung station 1.6 76,026 11 Bupyong market station, Incheon 1.4 63,882 12 Shinchon station 1.4 66,539 13 Banwoldang intersection, Daegu 1.4 37,145 14 Myungdong station 1.3 79,501 15 Seohyun station, Bundang 1.3 21,688 16 Nambu Terminal station 1.3 45,988 17 Dongdaemun station 1.2 76,858 18 Seoul University station 1.2 47,256 19 Gwanghwamoon station 1.1 76,656 20 Euljiro 4-Ga station 1.1 37,625 Source: Mail Business Daily

Not surprisingly, our survey revealed that SEC has a huge lead over both LGE and Pantech (Sky brand) in terms of brand recognition. We heard that many customers simply ask for SEC-branded handsets based on their hardware specs and design, and SEC’s after-service capabilities. None of the foreign brands were mentioned by the distributors as being among the top-selling handsets, especially in the LTE segment. Although the iPhone was popular at one stage with the local 3G network, it lost momentum after the LTE service began in Korea. Most of the handset distributors we surveyed told us that about 90% of their customers are currently signing up for the LTE service, since data transmission speeds on the LTE network are 5-7 times’ faster than on the 3G network. Among all smartphones, every distributor told us that SEC’s Galaxy S III (LTE) was the best-selling model. We were also surprised discover that the Galaxy Note, which was launched almost a year ago, is still selling quite well – actually better than LGE’s Optimus LTE II smartphone. The main reason is that the 5.3-inch screen on the Galaxy Note has attracted many elderly subscribers looking for a larger display. Meanwhile, the Optimus LTE II was ranked as the 3rd best-selling model by the off-line distributors followed by a couple of smartphones from Pantech.


10 September 2012

- 11 -

Off-line distributors' top-selling models in August Rank Product Reasons 1 Galaxy S III LTE (SEC) Design, spec, features 2 Galaxy Note (SEC) Large display, S-pen, brand 3 Optimus LTE II (LGE) Display resolution, soft touch 4 Vega S5 (Pantech) Large display, grip 5 Vega Racer 2 (Pantech) Motion sensor, longer battery life Source: Daiwa

Since not all handsets are sold via off-line channels, we checked the handset sales of on-line shops. According to a recent study by ebuzz (a consumer portal owned by Electronics Times), LGE’s handsets were less popular in on-line shops than with off-line distributors. Among the top-10-selling models in August, only one was from LGE. In addition, LGE’s Optimus LTE II was ranked 4th in on-line sales after Pantech’s Vega S5 at No.3, as the Vega S5 is a more recent model (launched in July 2012) than the Optimus LTE II (launched in May). Despite having a 5.0-inch display, the Vega S5 is longer in height and has a narrow bezel, which many customers like, as it makes it easy to grip the phone using one hand, according to the distributors.

Top-10 on-line sales of smartphones in Korea (August 2012)

Rank Product Display size

(inch) Suggested retail price

(W) 1 Galaxy S III LTE (SEC) 4.8 994,000 2 Galaxy Note (SEC) 5.3 940,000 3 Vega S5 (Pantech) 5.0 950,000 4 Optimus LTE II (LGE) 4.7 935,000 5 Vega LTE EX (Pantech) 4.5 899,800 6 Galaxy S III 3G (SEC) 4.8 904,000 7 Vega LTE(Pantech) 4.5 900,000 8 Galaxy S II HD LTE (SEC) 4.7 900,000 9 Vega Racer 2 (Pantech) 4.8 913,000 10 iPhone 4S (Apple) 3.5 800,000 Source: ebuzz

Based on our on-the-ground research, it is apparent that LGE’s handsets are not popular and have not made a strong impression on local consumers. However, interestingly, many distributors told us that some customers think LGE’s phones are faster on the LTE network and some are switching to LGE’s phones as they have tired of other leading brands. Although our visits took place before the introduction of the Optimus G, some distributors pondered on the specs of the new premium smartphone, and said they were likely to change customers’ perception of LGE’s handsets.

Meanwhile, many distributors said LGE’s brand value is still high, as its phones are quite reliable, except that their design is not as sleek and they lack some features compared with phones like the Galaxy S III. According to a recent survey by Strategy Analytics, LGE still ranks high in the Technology Brand Preference Index, which measures how likely it is that consumers would choose these brands when buying phones, PCs and TVs.

Technology Brand Preference Index

(60% ) (40% ) (20% ) 0% 20% 40% 60%

LenovoRIM

SanyoAsus

MotorolaSharp

AcerDell

ToshibaPhilipsNokia

PanasonicLGE

AppleHP

SonySamsung

Would buy

Would not buy

Source: Strategy Analytics

So what should LGE do? Since the company already has an established brand in both the domestic and global markets, we think it needs to roll out more competitive models with distinct characteristics. Our survey of off-line distributors also showed that most smartphone buyers choose handsets for their brand (31%), while the display (20%) and features (20%) are also important factors in determining consumers’ purchases. Although SEC and Apple currently dominate the high-end smartphone segment, we see room for a third player. Top reasons for choosing a smartphone (%)

0 5 10 15 20 25 30 35

A/S

Quality

Advertisement

Design

Price

Feature

Display

Brand

Source: Daiwa

Note: A/S – after service


10 September 2012

- 12 -

Daiwa's visit to mobile handset distributors in the 20 largest commercial districts in Korea

Source: Daiwa

Consumer electronics business: stable but muted revenue growth

While LGE’s handset business has experienced some wild swings in operating profit over the past few years, the company’s earnings from the TV (home entertainment division) and appliance businesses have been relatively stable. For 1H12, the operating-profit margin for these two divisions actually improved on a YoY basis, as LGE focused more on selling premium products, such as 3D-TVs and 800-litre refrigerators, despite the weak market demand. LGE: quarterly operating-profit margin by division

(15)

(10)

(5)

0

5

10

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Mobile Communications Home Entertainment Appliances

(% )

Source: Company

LCD-TV market likely to see flat YoY shipment growth for 2012 Global LCD-TV shipments are tracking worse than expected so far in 2012, due to the lacklustre economic performance in Europe and the US. Although we expect China to remain the largest LCD-TV market, shipping 48.8m units in 2012, demand is also slowing and tracking at a less than 10% YoY growth rate, compared with 18% YoY for 2011. For the global market, we forecast LCD-TV shipments to increase only by 1.1% YoY to 207.6m units for 2012. Global LCD-TV shipments

0

50

100

150

200

250

300

0

50

100

150

200

250

2001 2003 2005 2007 2009 2011 2013E

LCD-TV shipments YoY growth rate (RHS)

(m units) (% )

Source: DisplaySearch, Daiwa forecasts

Although LGE revised down its 2012 LCD-TV shipment target to 26m units from 30m projected at the beginning of this year, the company expects to continue to gain market share with its 3D and smart-TV line up. The company said the portion of its 3D-TV shipments is likely to increase from 17% for 1Q12 to a high-20% for 4Q12.


10 September 2012

- 13 -

LGE is the second-largest LCD-TV maker with a 13.6% share of the global market in 2Q12. It has steadily increased its market share while most of the Japanese brands have lost share as they continue to struggle with massive losses. Meanwhile, LGE has maintained a low-single digit percentage operating-profit margin for the home entertainment division for the past 4-5 years. Global LCD-TV market-share trend

18.320.4

12.7 13.6

9.2 8.2

8.1 5.9

4.3 5.5

0

5

10

15

20

25

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

SEC LGE Sony Toshiba Panasonic

(%)

Source: DisplaySearch

As the LCD-TV market remains competitive and is maturing rapidly, LGE also has plans to enter the organic light emitting diode (OLED) TV business. The company plans to launch a commercial model in 4Q12, but we think the initial volume will be very small since its display affiliate, LG Display, is struggling with a low production yield for its OLED panels, and the mass production line is only likely to ramp up in late 2013 or early 2014. LGE has not set the price point for the OLED-TV yet, but the initial price tag on the 55-inch TV is likely to be steep, at around US$8,000. LGE: OLED-TV showcased at IFA Berlin

Source: Company

Weaker revenue growth for consumer electronics LGE’s total revenue has increased at a CAGR of 3.2% over the past five years (2006-11), however, if we just look at consumer electronics, this business grew at a CAGR of 10.0% over this period. LGE benefited from the strong growth of the LCD-TV market, where volume shipments increased at a CAGR of 35% over the period. However, we forecast the LCD-TV market to decelerate to low-single digit percentage volume growth for the next three years, and appliances revenue to record similar low growth, and therefore see little momentum for LGE’s consumer electronics revenue. LGE: revenue growth for consumer electronics

(5)

0

5

10

15

20

05

10152025303540

2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Home Entertainment Appliances YoY growth rate (RHS)

(Wtn) (% )


Earnings outlook

During our recent visit, LGE told us that the overall demand for key IT and consumer electronics products was tracking weaker than expected for 3Q12. However, the company said smartphone demand is relatively strong. Mobile Communications (2012E revenues and segment margins: 20% of total/breakeven) LGE expects 3Q smartphone shipments of about 7m units and total handset shipments of 15m units, including feature phones. The company shipped 5.8m smartphones and 7.3m feature phones in 2Q12. For 4Q, we forecast LGE’s total handset shipments to be flat, while smartphone sales increase slightly to 8.1m units on the back of the new Optimus G smartphone launch scheduled for October. With LGE continuing to retreat from selling low-end feature phones, we forecast its total handset shipments to decline by 35% YoY for 2012. However, as we forecast its smartphone shipments to increase by 63% YoY for 2013, total handset shipments are expected to post 12% YoY growth for 2013, ending three consecutive years of declining or stagnant revenues.


10 September 2012

- 14 -

LGE: annual feature phone and smartphone shipments

0102030405060708090

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Smartphones Feature phones Smartphone portion (RHS)

(m units) (% )


The company’s operating-profit guidance for the mobile communications division calls for a slight loss to break-even for 3Q, and break-even to a slight profit for 4Q, as the company believes there could be upside to its blended average selling prices (ASP) from the increase of premium smartphones in the sales mix. We forecast a small operating loss for LGE’s handset business for 2012, but expect the division to post a profit in 2013. With the smartphone portion rising to about two-thirds of its handset shipments in 2013, we see upside potential for its blended ASP (7-8% YoY). LGE: handset ASP and operating profit

0

50

100

150

200

(1,000)

(500)

0

500

1,000

1,500

2,000

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Operating profit Handset ASP (RHS)

(Wbn) (US$)


Home Entertainment (44%/ 3.5%) Despite weak TV demand, LGE says its TV inventory level decreased slightly to 6.5 weeks recently from 7.0 weeks at the end of 2Q12. The company targets a single-digit percentage QoQ increase in LCD-TV shipments for 3Q ,while expecting its shipments to expand by 30% QoQ for 4Q12. LGE shipped 6.0m LCD-TVs and 0.8m PDP-TVs during 2Q12. For 2012, we forecast LGE’s LCD-TV shipments to increase by 5.6% YoY to 26.1m units, moderately higher than our market growth rate forecast of 1.1% YoY for 2012.

LGE: LCD-TV shipments and global market share

0

2

4

6

8

10

12

14

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

LCD-TV shipments Market share (RHS)

(m units) (% )


For the home entertainment division, LGE recorded an operating-profit margin of 3.9% for 2Q12. While the company guides for an operating-profit margin of 3-4% for 3Q, we believe there could be downside to profitability, as the company may spend more on marketing due to the weak TV demand. We forecast global LCD-TV demand to record a mid-single digit percentage YoY growth for 2013 and 2014, and LGE’s operating profit margin for the division to remain at 3-4%. Home Appliances (22%/ 4.5%) LGE’s home appliances division posted robust revenue growth of 13.4% QoQ and 2.4% YoY for 2Q due to stronger sales in the emerging markets. The company expects demand in the developed markets to remain weak for 2H12, but plans to focus more on high-end products to gain market share. LGE guides for a slight increase in 3Q revenue on both QoQ and YoY bases, but expects a moderate decline in profitability due to increased marketing costs. We forecast an operating profit margin of 3.0-3.5% for 3Q and 4Q12. Air Conditioning and Energy Solutions (9%/ 3.3%) As air conditioner sales move into the slow season, LGE expects a substantial QoQ decline in revenue and operating profit for 3Q and 4Q. Despite the unusual heat wave hitting the Korean peninsula in early August, the company said it had no material impact on its 3Q revenue since the heat wave was short-lived and air conditioner sales in other regions have already slowed. We forecast an operating-profit margin of 1-2% for 3Q but a small operating loss for 4Q12, as we expect year-end cost adjustments for the energy solutions business.


10 September 2012

- 15 -

For 3Q12, we forecast W13.0tn in revenue and an operating profit of W227bn, compared with the Bloomberg-consensus forecast of W259bn. Our operating profit forecast is lower as we expect higher marketing costs associated with LCD-TVs. For 2012, we forecast W51.8tn in revenue and W1.2tn in operating profit, which is slightly lower than the Bloomberg-consensus forecasts for W52.5tn in revenue and W1.3tn in operating profit.

LGE: quarterly earnings forecasts (W bn) 1Q12 2Q12 3Q12E 4Q12E 2012E 2013E Revenue Home Entertainment 5,330 5,478 5,687 6,410 22,906 23,638 Mobile Communications 2,497 2,321 2,568 2,877 10,263 12,137 Home Appliances 2,536 2,875 2,867 3,057 11,334 12,124 AC & Energy Solution 1,218 1,475 1,096 730 4,519 4,571 Others 647 709 743 702 2,801 2,871 Total 12,228 12,859 12,960 13,776 51,823 55,341 Operating profit Home Entertainment 217 216 193 179 806 825 Mobile Communications 39 -57 -8 19 -6 218 Home Appliances 152 165 100 89 506 527 AC & Energy Solution 81 70 16 -18 150 160 Others -41 -46 -75 -121 -283 -263 Total 448 349 227 149 1,174 1,467 Operating-profit margin (%) Home Entertainment 4.1 3.9 3.4 2.8 3.5 3.5 Mobile Communications 1.6 -2.4 -0.3 0.7 -0.1 1.8 Home Appliances 6.0 5.7 3.5 2.9 4.5 4.3 AC & Energy Solution 6.7 4.8 1.5 -2.4 3.3 3.5 Others -6.3 -6.5 -10.1 -17.2 -10.1 -9.2 Total 3.7 2.7 1.8 1.1 2.3 2.7 Source: Company, Daiwa forecasts

Valuation

Following a sharp decline in its share price from W93,000 in mid-March to W56,000 in late-July, likely due to volatility in the company’s handset business, LGE’s share price has rebounded recently to the W70,000 level, due to what we believe is the market’s anticipation of a potential recovery in its handset business. Although we believe LGE’s handset revenue reached the bottom in 2Q12, we do not expect a full-fledged earnings recovery yet, given the relatively small scale of its smartphone sales volume. We expect its handset business to show a meaningful turnaround from mid-2003 when we forecast its smartphone share in the global market to reach 5%. Six-month target price of W72,000 Using our SOTP valuation, we set our six-month target price at W72,000. We value LGE’s business segments using a peer-group EV/EBITDA comparison, and account for its holdings in various affiliate companies at market value.

LGE: SOTP valuation (W bn) Home

Enter Mobile Comm Appliances

AC & others Total

2013E revenue 23,638 12,137 12,124 7,442 55,341 2013E EBITDA 1,368 487 829 93 2,777 EV/EBITDA multiple 4.0x 6.0x 4.0x 3.0x Divisional EV 5,471 2,919 3,318 280 11,988 Value of affiliates 5,309 Total EV 17,297 Net debt (end 2013E) 4,463 Net value 12,833 Value per share (end 2013E) (W) 78,420 Six-month target price (W) 72,000 Source: Daiwa forecasts

LGE shares are trading currently at a 2012E PER of 15.7x and a 2012E PBR of 0.9x, compared with its past-three-year PBR trading range of 0.6-1.4x. Although its PBR-based valuation is not demanding from a historical perspective, we note that its PBR has been derated over the past four years, due mainly to a sharp decline in its handset shipments and revenue. LGE: historical PBR range (x)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2004 2005 2006 2007 2008 2009 2010 2011 2012E

Source: FnData, Company, Daiwa forecasts

Near-term handset earnings likely to remain volatile We expect earnings for LGE’s handset business to remain volatile over the next couple of quarters while earnings from the consumer electronics business track weaker per the normal seasonal trend, resulting in the shares trading in a narrow PBR range of 0.7-0.9x. We would look for a potential comeback for LGE in the handset market, but for now initiate coverage of the company with a Hold (3) rating. We would become more positive on the stock if LGE’s smartphone shipments pick up more rapidly and contribute to higher earnings. However, we think the global smartphone market will become more competitive in 4Q12 with the potential launch of new models from competitors, such as the Galaxy Note II and iPhone 5.


10 September 2012

- 16 -

Checklist for a potential rerating of LGE shares While we believe LGE is making steady progress in terms of becoming more relevant in the global smartphone space, many investors hold the belief that it will be a tough battle for the company. Over the past 6.5 years, we have seen a substantial sell-off in the company’s shares by foreign investors as their stake holding has decreased from 44% in February 2006 to about 20% recently. LGE: share price vs. foreign investors’ shareholdings

0

10

20

30

40

50

020,00040,00060,00080,000

100,000120,000140,000160,000180,000


Foreign shareholding (RHS) Share price

(W) (% )

Source: FnData

If LGE is to ever stage a comeback, we believe the company would need to gain more traction in the competitive smartphone market. Although smartphones are only a small part of the company’s operations, they are the single most important share-price driver, in our view. With this in mind, we have put together a simple checklist below to help guide investors in determining whether/when a turnaround will take place for LGE’s smartphone business, as well as a rerating of its shares.

LGE: smartphone checklist for a potential rerating Killer device: LGE needs a killer device that sells tens of millions of units. Model features: Needs to churn out more appealing models with distinctive features. Flagship models: Product cycles are becoming shorter and it may need two flagship models a year. Market presence: Needs to build a stronger presence in operator-driven markets, like the US, and get more shelf space. Marketing: how many people remember the last time seeing a smartphone commercial from LGE? Profitability: improvement with less volatility. Source: Daiwa

Valuation comparison of handset and consumer electronics companies

Bloomberg Mkt cap PER (x) EV/EBITDA (x) PBR (x) ROE (%) code Rating (US$bn) 2012E 2013E 2012E 2013E 2012E 2013E 2012E 2013E

LG Electronics 066570 KS Hold (3) 10.4 15.7 9.9 6.9 6.0 0.9 0.8 5.7 8.5 Samsung Electronics 005930 KS Buy (1) 163.1 8.2 7.5 4.3 3.8 1.6 1.3 20.8 18.9 Apple AAPL US Outperform (2) 637.8 15.1 12.2 8.6 6.9 5.4 4.2 36.0 34.7 Nokia NOK1V FH Underperform (4) 9.8 n.a. n.a. n.a. 8.3 1.0 1.1 -31.1 -14.9 Sony 6758 JP Hold (3) 11.8 230.3 30.8 2.9 2.4 0.5 0.5 0.2 1.5 HTC 2498 TT Sell (5) 7.6 10.7 11.9 5.8 6.7 2.3 2.3 20.5 19.0 Research in Motion RIMM US Not rated 3.8 n.a. n.a. 4.7 2.2 0.4 0.4 -8.7 -4.9 Panasonic 6752 JP Hold (3) 17.0 31.4 15.7 4.3 3.8 0.6 0.6 2.1 4.1 Electrolux ELUXB SS Not rated 7.8 13.7 10.5 7.0 6.0 2.3 2.1 14.8 18.3 Whirlpool WHR US Not rated 6.1 12.8 8.6 5.5 4.0 n.a. n.a. n.a. n.a. Sharp 6753 JP Hold (3) 2.9 n.a. n.a. 17.5 6.1 0.6 0.6 n.a. n.a. Source: Bloomberg, Daiwa forecasts

Note: share prices are as of close on 10 September 2012, except for US and Europe companies (7 September 2012)


10 September 2012

- 17 -

Risks

We believe the key downside risks to our earnings forecasts and target price would be weaker-than-expected demand for mobile handsets, flat-panel TVs, and consumer-electronics products. In addition, aggressive spending on marketing by LGE’s competitors could have an adverse impact on the company’s product prices. The upside catalysts include an improving macroeconomic environment leading to increased sales of its core products, and rivals coming out with less-competitive product offerings. Meanwhile, given the ongoing legal battles between SEC and Apple, we do not believe LGE is completely free from potential patent disputes with Apple, as LGE uses the Android operating system on all of its smartphones. However, as the company already launched a phone with a rectangular shape and rounded corners back in 2007 (its Prada phone – the first image of which appeared in January 2007), before the launch of the first iPhone, we think it is unlikely to face design issues. Meanwhile, LGE told us that as it had built a strong patent portfolio in LTE technology, and should be able to fend off any large-scale litigation.

LGE: first Prada phone in 2007

Source: Company

Number of LTE technology patents

819 780687

412 402 389 385 380 374318

Sams

ung

Interd

igital

Qualc

omm

Erics

son

Huaw

ei

Nokia LG

E

ZTE

Motor

ola

Apple

Source: Korea Intellectual Property Office

- 18 -

LG Electronics: share price and Daiwa recommendation trend Date 10/09/2012 Target price 72,000 Rating 3

72,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Sep-1

0

Oct-1

0

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-1

1

Apr-1

1

May-1

1

Jun-1

1

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Target price (W) Closing price (W)

Source: Daiwa

LG Display: share price and Daiwa recommendation trend

Date 08/06/12 30/01/12 20/10/11 28/09/11 21/07/11 15/06/11 13/04/11 Target price 23,000 27,000 21,000 19,000 36,000 38,000 44,000 Rating 3 3 3 3 2 2 2 Date 19/01/11 Target price 47,000 Rating 2

47,00044,000

38,00036,000

19,00021,000

27,000

23,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Jul-1

0

Aug-1

0

Sep-1

0

Oct-1

0

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-1

1

Apr-1

1

May-1

1

Jun-1

1

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2


Source: Daiwa

- 19 -

LG Uplus: share price and Daiwa recommendation trend Date 8/31/2012 7/31/2012 1/30/2012 12/26/2011 10/27/2011 7/29/2011 5/3/2011 Target price 7,500 6,300 5,800 6,100 5,400 5,100 5,600 Rating 3 3 4 4 4 4 4 Date 3/10/2011 2/23/2011 1/31/2011 1/11/2011 Target price 5,400 5,500 6,200 6,700 Rating 4 4 4 4

6,7006,200

5,500 5,4005,600

5,100 5,4006,100 5,800

6,300

7,500

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Sep-1

0

Oct-1

0

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-1

1

Apr-1

1

May-1

1

Jun-1

1

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2


Source: Daiwa

Samsung Electronics: share price and Daiwa recommendation trend

Date 27/04/2012 10/04/2012 21/03/2012 27/01/2012 06/12/2011 28/10/2011 27/09/2011 Target price 1,800,000 1,700,000 1,600,000 1,300,000 1,200,000 1,100,000 1,000,000 Rating 1 1 1 2 2 2 2

Date 07/07/2011 28/01/2011 22/12/2010 06/10/2010 Target price 1,100,000 1,200,000 1,100,000 970.000 Rating 2 2 2 2

970,0001,100,000

1,200,000 1,100,0001,000,000

1,100,0001,200,000

1,300,000

1,600,0001,700,000

1,800,000

15,000

215,000

415,000

615,000

815,000

1,015,000

1,215,000

1,415,000

1,615,000

1,815,000

2,015,000

Aug-1

0

Sep-1

0

Oct-1

0

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-1

1

Apr-1

1

May-1

1

Jun-1

1

Jul-1

1

Aug-1

1

Sep-1

1

Oct-1

1

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-1

2

Apr-1

2

May-1

2

Jun-1

2

Jul-1

2

Aug-1

2


Source: Daiwa

- 20 -

Daiwa’s Asia Pacific Research Directory

HONG KONG Nagahisa MIYABE (852) 2848 4971 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Head of Product Management

Pranab Kumar SARMAH (852) 2848 4441 [email protected] Regional Head of Research Promotion

Mingchun SUN (852) 2773 8751 [email protected] Head of China Research; Chief Economist (Regional)

Dave DAI (852) 2848 4068 [email protected] Deputy Head of Hong Kong and China Research; Pan-Asia/Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China)

Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)

Chi SUN (852) 2848 4427 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property; Regional Property Coordinator; Property Developers (Hong Kong)

Jeff CHUNG (852) 2773 8783 [email protected] Automobiles and Components (China)

Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China) Jerry YANG (852) 2773 8842 [email protected] Banking/Diversified Financials (Taiwan)

Joseph HO (852) 2848 4443 [email protected] Head of Industrials and Machineries (Hong Kong, China); Capital Goods –Electronics Equipments and Machinery (Hong Kong, China)

Bing ZHOU (852) 2773 8782 [email protected] Consumer/Retail (Hong Kong, China)

Hongxia ZHU (852) 2848 4460 [email protected] Consumer, Pharmaceuticals and Healthcare (China)

Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China) – Cement and Building Materials (China and Taiwan); China Property

John CHOI (852) 2773 8730 [email protected] Head of Multi-Industries (Hong Kong, China); Small/Mid Cap (Regional); Internet (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong, China); Hong Kong and China Research Coordinator; Transportation (Regional)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES Rommel RODRIGO (63) 2 813 7344

ext 302 [email protected]

Head of Philippines Research; Strategy; Capital Goods; Materials

Danielo PICACHE (63) 2 813 7344 ext 293

[email protected]

Property; Banking; Transportation – Port

SOUTH KOREA Chang H LEE (82) 2 787 9177 [email protected] Head of Korea Research; Strategy; Banking/Finance

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Anderson CHA (82) 2 787 9185 [email protected] Banking/Finance

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail

Jae H LEE (82) 2 787 9173 [email protected] IT/Electronics (Tech Hardware and Memory Chips)

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game

Shannen PARK (82) 2 787 9184 [email protected] Custom Products Group

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Research; Regional Head of Small/Medium Cap; Small/Medium Cap (Regional)

Yoshihiko KAWASHIMA (886) 2 8758 6247 [email protected] Consumer/Retail

Birdy LU (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (PC Hardware)

Chris LIN (886) 2 8758 6251 [email protected] IT/Technology Hardware (Panels)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of Research; Strategy; Banking/Finance

Navin MATTA (91) 22 6622 8411 [email protected] Automobiles and Components

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

Mihir SHAH (91) 22 6622 1020 [email protected] FMCG/Consumer

Deepak PODDAR (91) 22 6622 1016 [email protected]

Materials

Nirmal RAGHAVAN (91) 22 6622 1018 [email protected] Oil and Gas; Utilities

SINGAPORE Tony DARWELL (65) 6321 3050 [email protected]

Head of Singapore Research, Pan-Asia Head of Property

Srikanth VADLAMANI (65) 6499 6570 [email protected] Banking (ASEAN)

Adrian LOH (65) 6499 6548 [email protected] Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

David LUM (65) 6329 2102 [email protected] Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India)

- 21 -

Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, Federal Republic of Germany

(49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Representative Office 36, rue de Naples, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

Daiwa Capital Markets Europe Limited, London, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai 200120, People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office

18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550

- 22 -

Disclaimer This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

Japan

Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: SBI Holdings Inc. (6488 HK); Shunfeng Photovoltaic International Ltd. (1165 HK); Rexlot Holdings Limited (555 HK); China Outfitters Holdings Limited (1146 HK); Beijing Jingneng Clean Energy Co. Limited (579 HK); Infraware Inc. (041020 KS)

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited, Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

Hong Kong

This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

Korea

The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party. Name of Analyst : Jae H. Lee Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the

investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets. Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the

acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of

the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or

the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity. Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next six months. "2": the security is expected to outperform the KOSPI by 5-15% over the next six months. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months. "4": the security is expected to underperform the KOSPI by 5-15% over the next six months. "5": the security could underperform the KOSPI by more than 15% over the next six months. “Positive” means that the analyst expects the sector to outperform the KOSPI over the next six months. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next six months “Negative” means that the analyst expects the sector to underperform the KOSPI over the next six months Additional information may be available upon request.

Singapore

This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.

- 23 -

Australia

This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

India

This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited.

Taiwan

This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Philippines

This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.

For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

United Kingdom

This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (“FSA”) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Germany

This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain

This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent.

United States

This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

- 24 -

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Investment Advisers Association Type II Financial Instruments Firms Association

LG Electronics W72,000 Initiation: steady progress, but...

Documents

Transcript of LG Electronics W72,000 Initiation: steady progress, but...