Samsung Electronics - A Moore Stress Case Study - … Samsung to continue profitable growth in TV,...

KRW Prev. 2011E Prev. 2012E Prev. 2013E Prev. 2014E

Rev. (B) -- 165,002 -- 201,104 -- 236,501 -- 263,327

EV/Rev 1.0x 0.9x 0.7x 0.7x

EPS

Mar -- 17,793 -- 32,315 -- 44,242 -- 58,383

Jun -- 22,972 -- 33,496 -- 49,120 -- 61,222

Sep -- 21,968 -- 42,623 -- 57,526 -- 71,340

Dec -- 26,222 -- 46,730 -- 65,211 -- 76,003

FY Dec -- 88,990 -- 155,181 -- 216,099 -- 266,948

FY P/E 16.8x 9.6x 6.9x 5.6x

Price Performance

MAR-12 JUL-12 NOV-12 MAR-13

1,600k

1,400k

1,200k

1,000k

COMPANY NOTE

Initiating Coverage

USA | Technology | Semiconductors March 25, 2013

Samsung Electronics (005930 KS)The Next Big Thing, A Moore Stress CaseStudy - Initiate with Buy

EQU

ITY R

ESEARC

H G

LOB

AL

BUYPrice target KRW2,100,000

Price KRW1,495,000

Financial SummaryNet Debt (MM): (22,767)BN

Market Data52 Week Range: 1,584,000 - 1,091,000Total Entprs. Value (MM): 171,583BNMarket Cap. (MM): 194,350BNShares Out. (MM): 130.0Float (MM): 106.6Avg. Daily Vol.: 266,804

Sundeep Bajikar *Equity Analyst

(415) 229-1552 [email protected] Lipacis *

Equity Analyst(415) 229-1438 [email protected]

Peter Misek, CFA, CPA *Equity Analyst

(212) 336-7361 [email protected] Simpson §

Equity Analyst44 (0) 207 029 8695 [email protected]

Yoshihiro Azuma ||Equity Analyst

+81 3 5251 6186 [email protected] Wakasugi ||

Equity Analyst+81 3 5251 6158 [email protected]

Ken Hui #Equity Analyst

+852 3743 8061 [email protected]

* Jefferies LLC § Jefferies International Limited

|| Jefferies (Japan) Limited # Jefferies Hong Kong Limited

Key TakeawayWe expect Moore Stress to drive upside surprises in Memory andFoundry, highlighting the strategic strength of Samsung's integrated designmanufacturing model, which we believe will strongly differentiate its hardwarebusiness. Our checks indicate strong momentum in Smartphones, and weexpect Samsung to continue profitable growth in TV, Tablet, PC, Server andBase Station, driving further appreciation of brand value. Initiate with Buy.

Moore Stress = Margin Expansion in Memory. Our proprietary checks and ROICanalysis indicate DRAM contract prices are likely to increase by 30-40% while NAND pricescould increase by 15-75% from current levels. We model Samsung's memory gross marginsto expand by 2,500 bps over the next 12 months driving 300 bps of overall marginexpansion. We also continue to expect memory competitors Micron and SanDisk to benefitfrom higher gross margins due to this dynamic.

Moore Stress = Foundry Growth in ARM-based Processors. The Jefferies Global TechTeam's analysis shows that Samsung's advanced manufacturing nodes tuned for low-powerARM processors are likely to attract competitor TSMC's customers (e.g. Qualcomm, Nvidia),as TSMC struggles to stay on the leading edge. We show the incremental ARM processormarket opportunity is 6x larger than the Apple business that Samsung is at risk of losing.We also show that if Apple took its foundry business to TSMC, Apple would be more likelyto make a second foundry and architecture transition to Intel.

Strong Momentum in Smartphone. According to Gartner, Samsung took 2,000 bpsof market share in Smartphone over the last two years, and we conservatively model nomarket share expansion in CY13 and CY14. We recognize the imminent threat from low-cost Chinese Smartphones, and believe Samsung is well prepared to compete aggressively,through both its lower cost IDM model, and its ability to choose suppliers flexibly.

Valuation/RisksSamsung is trading at a P/E of 7x at the low end of its historical 7-to-11x range, suggestinginvestors are cautious. Our PT of KRW 2,100K (EV/S of 2x off our CY14 rev est) represents a P/Eof 8x off our CY14 EPS of KRW 267K, and 10x off our CY13 EPS of 216K. Samsung is currentlytrading at a discount to the KOSPI, and to its peer group of global tech companies. We expectSamsung's P/E to expand toward the high end of its range driven by higher semiconductormargins. Downside risks: deceleration in Smartphone, memory capacity additions, Forexlosses, mis-execution, geopolitical risks related to N.Korea.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 66 to 70 of this report.

Long Term Financial Model Drivers

LT Earnings CAGR 5-20%

Organic Revenue Growth 5-20%

Acquisition Contribution 0-5%

Operating Margin Expansion 0-5%

Other Considerations

According to Interbrand, Samsung held

the 9th most valuable global brand in

2012, with a brand value of $33B, and

Samsung’s brand value increased by 40%

in 2012.

Samsung’s shares and GDR trade in Korea

and London respectively.

1 Year Forward P/E

Source: Capital IQ, Jefferies estimates

Samsung Electronics Co. Ltd., together with its subsidiaries, designs, manufactures,

distributes, and sells finished electronic products and device solutions worldwide. It offers

consumer products, including mobile phones, tablets, and televisions; home appliances,

such as refrigerators, air conditioners, and washing machines; PC/peripherals/printers, and

memory and storage products. The company is also the world’s largest manufacturer of

integrated circuits for storing digital information, including dynamic random access

memory (DRAM), static random access memory (SRAM), NAND flash memory, and Solid

State Drives (SSDs). Samsung Electronics Co. Ltd. was founded in 1938 and is

headquartered in Seoul, South Korea.

Daily/weekly market DRAM/NAND prices.

Announcement of new Foundry customers

or products.

Industry data points related to mobile

device shipments.

Catalysts

Target Investment Thesis

Moore Stress leads to gross margin

expansion in DRAM and NAND. DRAM

ASPs increase by 30% and NAND ASPs

decrease by 5% in CY13.

Moore Stress leads to expansion of

Foundry business

Revenues grow by 18% in 2013, and 11%

in CY14

2014 EPS: KRW 267k; P/E(NTM): 8x; Target

Price: KRW 2,100k

Upside Scenario

DRAM ASPs increase by 40-50% in CY13,

NAND prices remain unchanged.

Handset ASPs remain firm, and Display

Business grows at a higher rate.

2014 EPS: KRW 297k; P/E(NTM): 8x; Target

Price: KRW 2,300k

Downside Scenario

DRAM and NAND ASPs decrease by 5-10%

in CY13.

Share loss in handsets, combined with

weakness in Display Business.

Appreciation of the Korean Won vs. major

global currencies impacts gross margins

and earnings.

2014 EPS: KRW 186k; P/E(NTM): 7x;

Target Price: KRW 1,250k

Long Term Analysis

Scenarios

Group P/Es


Revenue Growth vs P/E


Recommendation / Price Target

Ticker Rec. PT

005930.KS Buy KRW 2,100k

SNDK Buy $59

INTC Hold $24

AAPL Hold $420

QCOM NC

TSEC:2330 NC

000660.KS NC

LG Electronics NC

Company Description

THE LO

NG

VIE

W

Peer Group:

Samsung Electronics (005930.KS)

BUY: KRW 2,100K Price Target

005930 KS

Initiating Coverage

March 25, 2013

page 2 of 70 , Equity Analyst, (415) 229-1552, [email protected] Bajikar

Please see important disclosure information on pages 66 - 70 of this report.

Table of Contents THE NEXT BIG THING, A MOORE STRESS CASE STUDY – INITIATE WITH BUY ................................ 4

Executive Summary ...................................................................................................................... 4

[I] MOORE STRESS = MARGIN EXPANSION IN DRAM AND NAND ................................................. 7

Deceleration in Cost Reductions ................................................................................................... 9 Slower Technology Node Transitions .......................................................................................... 10 Supply Moderation ..................................................................................................................... 11 Recent Checks in Asia ................................................................................................................. 11 Industry Consolidation in DRAM ................................................................................................. 12 Price-Inelasticity ......................................................................................................................... 12 When Would New Memory Capacity be Added? ....................................................................... 16

[II] MOORE STRESS = FOUNDRY BUSINESS EXPANSION ............................................................. 18

Apple Business is Nice to Have ................................................................................................... 18 Samsung’s Leading Edge Logic Foundry Capacity Better than TSMC’s........................................ 20 Samsung’s Expertise in Manufacturing ARM Processors is a Great Set Up for Taking Share ...... 21 TSMC at Risk of Falling Off the Leading Edge .............................................................................. 23 Semiconductor “Drop-Out Zone” ............................................................................................... 25 Apple Foundry Options: Scenario Analysis ................................................................................. 27

[III] STRONG MOMENTUM IN MOBILE ...................................................................................... 29

Smartphone and Tablet Revenues, ASP and Market Share ........................................................ 29 Galaxy S4 Launch – Focus on Software ....................................................................................... 31 Expertise in ARM processors – Design & Manufacturing ............................................................ 33 Samsung Design and Manufacturing Capabilities vs. Competition ............................................. 35

[IV] BRAND VALUE APPRECIATION ............................................................................................ 36

[V] VALUATION ........................................................................................................................ 38

[VI] SAMSUNG ELECTRONICS FINANCIAL MODEL ...................................................................... 48

APPENDIX I: COMPANY INFORMATION .................................................................................... 51

APPENDIX II: BROADER IMPLICATIONS OF MOORE STRESS ....................................................... 56

More Positive on MU ($10.04, BUY) and SNDK ($55.19, BUY) .................................................... 58 More Positive on ARM LN (878.21p, BUY) – Lee Simpson .......................................................... 58 More Positive on INTC ($21.33, HOLD) Longer Term – Mark Lipacis .......................................... 58 More Cautious on AAPL ($461.91, HOLD) – Peter Misek ............................................................ 58 More Cautious on ALTR ($34.72, HOLD) and XLNX ($37.97, HOLD) – Mark Lipacis .................... 59

APPENDIX III: DECELERATION IN DRAM AND NAND COST REDUCTIONS .................................... 60

APPENDIX IV: SAMSUNG ATIV SMART PC (WIN8) – PROPRIETARY TEST RESULTS ...................... 63

005930 KS

Initiating Coverage

March 25, 2013



The Next Big Thing, A Moore Stress

Case Study – Initiate With Buy

Executive Summary We are initiating research coverage of Samsung Electronics with a Buy rating and a KRW

2,100K PT. We think that the technology industry is seeing the most important transitions

ever. For the first time in 40 years, semiconductor transistor costs are no longer modeled

to decline – we call this dynamic “Moore Stress.” We think that declining transistor costs

have underpinned growth in technology for 40 years, and dictated a set of specific

investing patterns that are poised to change drastically. In the Moore Stress paradigm,

we think benefits accrue to those who have the critical mass to maintain a leading edge

transistor manufacturing capability – we view Samsung as one of only two who do.

We think profit and share improvements will manifest at Samsung along three

dimensions:

1) Memory – the combination of Moore Stress, industry consolidation and

declining memory price elasticity of demand lead us to forecast Samsung’s

CY13 semiconductor gross margins to increase by 1,400 bps driven by a 2,500

bps increase in memory gross margins.

2) Foundry – Our Moore Stress framework published in Sep-12 predicted that

leading edge fabless chip companies would have to move to Samsung or Intel,

and Altera recently made that announcement. We expect Samsung to gain

share as a foundry supplier as other leading edge fabless companies shift from

TSMC.

3) Smartphone – Samsung is the only handset OEM that is also a manufacturer

of chips that go into the handset. We think that this inherently gives Samsung a

cost advantage that will manifest in both share gains and increased profitability.

Chart 1: Value Drivers

Source: Company Reports, Jefferies

Relative to Street estimates (Chart 2), we model higher gross margins in

CY13 (by 300 bps) and CY14 (by 500 bps). Our EPS estimates for CY13 and

CY14 are 10% and 24% above the Street estimates respectively. Our PT of KRW

2,100K represents a P/E of 8x applied to our CY14 EPS of KRW 267K, and a P/E of 10x

applied to our CY13 EPS of KRW 216K.

% of Revenues % YoY Gross Margins

CY11 CY12 CY13 CY14 CY12 CY13 CY13

Consumer Electronics 29% 24% 22% 21% 2% 6% +200 bps

IT & Mobile Comms 41% 54% 54% 54% 61% 14% +100 bps

Semiconductor 22% 17% 21% 23% -6% 38% +1,400 bps

Display Panel 18% 16% 14% 14% 13% -1% -

Inter-segment -10% -12% -13% -11% 47% 15% -

Segment

005930 KS

Initiating Coverage

March 25, 2013



Chart 2: JEF vs. Street Estimates

Source: Capital IQ, Jefferies ** Audited consolidated financial statements for 4Q12 were not available as of the date of this report

We think there are two reasons why Samsung is likely to be viewed as a more

attractive investment compared to peers in hardware (e.g. Apple, Nokia) that

depend on semiconductor components manufactured at the leading edge:

1. Samsung is able to successfully design and manufacture components (e.g.

DRAM/NAND, OLED panels) for own-branded systems, or third party customers,

and systems using organic or third party components (e.g. Galaxy branded

Smartphones that use either Samsung’s internally designed or Qualcomm-

provided application processors).

2. We expect Samsung’s Integrated Design Manufacturing (IDM) model to

translate into more differentiated products manufactured using Samsung’s own

low-power leading edge process nodes which are cost- and feature-optimized

for its own products. We expect this to manifest itself in the form of gross

margin expansion in Smartphone (we model +100 bps in CY13) and Consumer

Electronics (+200 bps), and increased brand recognition for Samsung,

particularly in the US.

While we focus on Memory and Foundry drivers in this report, we believe similar

frameworks can be applied to Samsung’s Display Panel and Digital TV businesses.

Where we could be wrong. Smartphone growth could decelerate more than

expected, or could come at lower than expected margins due to increased competition

from low-cost handsets in emerging markets. Unexpected new capacity growth in

memory could limit pricing power and margin expansion. Foundry competitor TSMC

could solve its capital and technology challenges faster than we expect by partnering with

cash-rich customers. Appreciation of the Korean Won could generate higher than

expected headwinds. Samsung could mis-execute in its technology development.

Geopolitical tensions related to N. Korea could affect valuation.

JEF Street JEF Street JEF Street

Revenues (KRW, Tr) 201 201 237 234 263 259

Gross Margins (%) 37% 37% 40% 37% 42% 37%

EBIT (KRW, Tr) 29 29 42 37 51 41

Interest Inc/Exp (KRW, Tr) 0 -1 0 0 0 -1

Tax Rate (%) 20% 20% 20% 20% 20% 20%

EPS (KRW) 154,148 154,288 216,099 196,065 266,948 215,958

CapEx (KRW, Tr) 24 23 25 21 26 24

D & A (KRW, Tr) 16 15 18 17 20 18

CY14ECY12 ** CY13E

005930 KS

Initiating Coverage

March 25, 2013



The chart below shows Samsung’s combined DRAM and NAND gross margins. We

believe a combination of deceleration in technology scaling (“Moore’s Law”) cost

reductions, industry consolidation, and price in-elasticity of demand, is likely to translate

into continued strength in DRAM and NAND prices.

Chart 3: Memory Gross Margin Expansion

Source: Company Reports, DRAMeXchange, Jefferies Research

Chart 4: Foundry Business Expansion

Source: Company Reports, Jefferies Research

30%

35%

40%

45%

50%

55%

60%

65%

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

E

2Q

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E

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E

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E

Gro

ss M

argi

ns

(%)

Expect memory gross margins to expand by 2,500 bps over the next 12 months

0

2

4

6

8

10

12

14

16

18

20

2011 2012 2013E 2014E

Syst

em

LSI

Re

ven

ues

($

, B)

Apple Non-Apple

As pricing power increases and

industry capacity additions are

limited, we expect memory gross

margins to expand by 2,500 bps for

Samsung over the next 12 months

(2,700 bps over the next 24

months).

We believe there is upside to our

memory gross margin estimates, as

we assume DRAM ASP increase of

30%, and NAND ASP declines of 5-

15%, whereas DRAM ASPs are

actually up 50-100% YTD and NAND

ASPs are up 7-11% YTD after

increasing by 17-30% in 4Q12.

We expect minimal impact if any on

DRAM and NAND prices due to

perturbations in transitory DRAM

capacity in Taiwan, or Micron’s

conversion of DRAM capacity to

NAND.

We expect Samsung to become the

de facto foundry for low power

ARM-based processors manufactured

at leading-edge nodes. We believe

Samsung already provides some

level of foundry services for

Qualcomm, Xilinx, and others.

We model Samsung to lose ~50% of

its Apple AP business in CY14.

However, we show the incremental

market opportunity in ARM-based

processors is 6x larger than the

Apple business.

We expect Samsung to take leading-

edge foundry share from TSMC.

005930 KS

Initiating Coverage

March 25, 2013



[I] Moore Stress = Margin Expansion in

DRAM and NAND We believe that DRAM and NAND technology scaling cost reductions are decelerating,

due in part to delays in next-gen EUV Lithography technology. When combined with

industry consolidation in DRAM, and increasing price-inelasticity of demand in both

DRAM and NAND, we think industry fundamentals are likely to support a favorable

pricing environment for much longer than investors expect. Additionally, we believe

Samsung is aggressively shifting its product mix toward higher value-added products

such as mobile DRAM and SSD. Together, we believe these factors translate into margin

expansion.

Chart 5: 3 structural factors drive memory margin expansion


Chart 6: We Expect DRAM Prices to Continue to Increase

Source: DRAMeXchange, Jefferies Research

Moore Stress

Industry Consolidation

Price-inelastic Demand

+

+

Pricing Power &Margin Expansion

=

0.7

0.9

1.1

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1.5

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2G

b D

DR

3 D

RA

M P

rice

($

)

Contract Price Spot Price

Expect DRAM Contract Prices to increase by 30%, after increasing by 54% YTD

DRAM spot prices have spiked up

100% and contract prices increased

by 54% from their 4Q12 troughs, in

spite of seasonal demand weakness

in Q1.

Our checks indicate DRAM contract

prices are likely to increase by ~30%

from current levels, driven by a

combination of PC-DRAM supply

cuts executed in 4Q12, and Haswell

PC builds.

We think industry fundamentals are

likely to support a favorable pricing

environment in DRAM and NAND for

much longer than investors expect.

005930 KS

Initiating Coverage

March 25, 2013



Chart 7: Samsung vs. Micron DRAM gross margins


Chart 8: Samsung vs. SanDisk and Micron NAND gross margins


-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1Q

11

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DR

AM

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argi

ns

(%)

Samsung DRAM Micron DRAM

15%

20%

25%

30%

35%

40%

45%

1Q

11

2Q

11

3Q

11

4Q

11

1Q

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NA

ND

Gro

ss M

argi

ns

(%)

Samsung NAND SanDisk NAND Micron NAND

We model Samsung’s DRAM gross

margins to expand by 3,100 bps

over the next 12 months (3,400 bps

over the next 24 months).

Due to its industry-leading cost

structure and product mix, we

believe Samsung would continue to

enjoy better gross margins

compared to Micron.

We expect Samsung’s DRAM ASPs

and gross margins to deliver an

upside surprise for 1Q13.

We model Samsung’s NAND gross

margins to expand by 900 bps over

the next 12 months (1,300 bps over

the next 24 months).

We expect NAND cost structures for

Samsung, SanDisk and Micron to be

relatively more equalized than DRAM

cost structures for Samsung and

Micron.

We think there is a good chance that

Samsung and SanDisk’s NAND gross

margins deliver upside surprises for

1Q13.

005930 KS

Initiating Coverage

March 25, 2013



Deceleration in Cost Reductions The chart below captures recent statements from Micron, SKHynix and SanDisk,

indicating deceleration in DRAM cost reduction to 25-30% per year (from ~30-35%), and

in NAND cost reduction to 25-30% per year (from 30-55%). We call this phenomenon

“Moore Stress”.

Chart 9: Decelerating Cost Reductions in DRAM and NAND

Source: Micron, SanDisk, SKHynix, DRAMeXchange, Jefferies

We believe there are far-reaching implications of Moore Stress for the Semiconductor

industry, and highlight three of them below specifically for DRAM and NAND:

1. Implication # 1: Slower Technology Transitions at the Leading Edge

would allow equalization of cost structure across industry players. In the case of

Micron, we believe this means Micron would have a chance to catch up to

Samsung’s industry leading DRAM cost structure. Additionally, we think the

basis of competition would shift toward value added system-level memory

solutions, an area we believe all industry players are increasing strategic focus

on.

2. Implication # 2: More Rational Capacity Adds. As the rate of cost

reductions declines, we believe the industry’s ability to sustain lower prices

would diminish, leading to more caution in capacity additions, particularly in a

soft macro environment. Additionally, for the same level of CapEx, the portion

available for capacity additions would be lower, due to increasing capital

intensity of node transitions.

3. Implication # 3: Increased Price Stability. A combination of slower

technology transitions, and more rational capacity additions would translate

into lower supply bit growth, which would lend support to pricing.

Additionally, we believe the DRAM market has become increasingly inelastic

over the last 20 years, and the NAND market is progressing in the same

direction.

Where we could be wrong. EUV and 450mm technologies could progress faster than

we expect, and become ready for volume memory production before 2015. Memory

suppliers could achieve breakthrough technology innovations in new memory types and

structures capable of continuing the historical cadence of cost reductions and technology

transitions in DRAM and NAND. Memory suppliers could act irrationally, delaying the

effects of the structural industry changes we have discussed.

Cost Reduction YoY Historical Future D

DRAM

Micron ~30% 25-30% -250 bps

SKHynix ~33% 20-30% -800 bps

NAND

Micron ~40% 25-30% -1250 bps

SanDisk 30-55% 25-35% -1250 bps

DRAM and NAND technology scaling

cost reductions are decelerating.

As a result, we expect future capacity

adds to be more rational, and

volatility in DRAM and NAND prices to

diminish.

Consistent with our view, as

evidenced by market DRAM prices, we

believe the DRAM market is in the

process of getting rerated up. We

expect this dynamic to translate into

investors taking a more positive view

of DRAM makers.

005930 KS

Initiating Coverage

March 25, 2013



Slower Technology Node Transitions We expect DRAM supplier roadmaps to roughly align at the 20nm node in the CY13-CY14

timeframe. Our checks indicate the transition from the current state of the art 28nm node

(Samsung) to the 20nm node is likely to take at least two intermediate steps, and at least

two years to accomplish. For the 1X node in the CY15+ timeframe, our checks indicate

that EUV is likely to be required. Our view is that EUV is likely to be delayed, and

production quality EUV is unlikely to be available before 2017. Consequently, we expect

to see a period in the DRAM industry during which all major suppliers would be at

roughly similar process nodes, which translate to similar cost structures. During this

period, we think DRAM suppliers that are able to deliver more value-added system-level

products (e.g. Server DRAM modules, Hybrid Memory Cube), are likely to generate higher

margins.

Chart 10: DRAM Roadmap

Source: DRAMeXchange, Jefferies

On the NAND side, we believe supplier roadmaps are already closely aligned at the 2Xnm

node, and we expect the alignment to continue at the 1X nm node, until the next major

process node transition in CY14+. Given decelerating NAND cost reductions, we expect

1Xnm ramps in CY13 to be slower than similar historical ramps of new process nodes.

Our checks indicate NAND technology scaling is unlikely to be dependent on EUV

availability for the next couple of years.

Chart 11: NAND Roadmap


DRAM Node CY12 CY13+ CY14+ CY15-CY17+

Samsung 35nm/28nm 2Ynm 2Anm 1Xnm

SKHynix 38nm/29nm 2Znm 2Bnm 1Znm

Micron 42nm/30nm 2Xnm 2Cnm 1Ynm

Elpida 30nm 2Xnm 2Cnm 1Ynm

EUV dependent?

NAND Node CY12 CY13+ CY14+ CY15+

Samsung 27nm/21nm 1Xnm

Toshiba/SanDisk 24nm/19nm 1Ynm 1Znm, 3D BiCS 3D ReRAM

SKHynix 20nm 1Xnm

Micron/Intel 20nm 1Xnm

EUV required

Contrary to the Street view which

focuses on cyclical upside in DRAM

prices, we expect to see a period in

the DRAM industry during which all

major suppliers would be at roughly

similar process nodes, which translate

to similar cost structures and

structurally more stable/favorable

pricing for much longer than investors

expect.

Given decelerating NAND cost

reductions, we expect 1Xnm ramps in

CY13 to be slower than similar

historical ramps of new process

nodes.

We believe the NAND market is

relatively more price-elastic than the

DRAM market, and expect a lower

level of price increases in NAND

compared to DRAM.

005930 KS

Initiating Coverage

March 25, 2013



Supply Moderation

Chart 12: Memory Industry Supply Outlook

Source: Micron, SanDisk, Samsung, SKHynix, Applied Materials, LAM Research, Jefferies

Recent Checks in Asia Our recent checks in Asia indicate Samsung is likely to ramp 25nm “half-node” DRAM to

as much as 30-40% of total production by the end of the year. We believe 25nm

DRAM would use double patterning, which drives both higher costs (vs. single

patterning) and lower manufacturing yields. Samsung expects EUV to be ready

and available for DRAM production by 2015, but we are concerned there are multiple

challenges beyond just the light source, which increase the risk of delays in EUV

availability. We do not expect EUV to be available for mass production before 2017 in

DRAM and 2018 in logic.

On the NAND side, our checks suggest Apple, the largest single consumer of

NAND, is negotiating longer term contracts with suppliers, and that this is

contributing to more stability in NAND prices in an otherwise seasonally weak Q1

demand environment. At the 16nm node, we believe suppliers would be able to

reduce cost per bit by ~20%, much lower than historical cost reductions in

the 30-35% range. We expect Samsung and SanDisk to sample 16nm NAND in 3Q12.

We expect 3D NAND to be initially introduced in the market later this year, but believe it

would take until 2015 for 3D NAND to ramp in mainstream products. We believe 3D

NAND would not be able to reuse 16nm NAND equipment, and this is likely to

result in slower than usual industry investments in 16nm ramps.

We do not expect Samsung to add new NAND capacity this year. We expect SKHynix and

SanDisk to finalize their capacity decisions over the next month or so, and expect them to

take a conservative approach to capacity additions if any. Based on the pace of price

increases in DRAM relative to NAND, and our checks and ROIC analysis (see

Charts 22-24), we do not expect Micron to execute substantial DRAM wafer

capacity conversions to NAND this year. This applies primarily to new DRAM

capacity that Micron would acquire through Elpida.

Date 2013 Supply Bit

Updated Growth Outlook Industry Company Industry Company

3/21/2013 Micron 30-40% ~40% 20-30%

1/29/2013 SKHynix mid-40% ~industry mid-20% ~industry

1/24/2013 Samsung mid-40% ~industry mid-20% ~industry

1/23/2013 SanDisk (captive) 30-40% < industry

Date 2012 Supply Bit

Updated Growth Outlook Industry Company Industry Company

10/12/2012 Micron 61% 29%

10/18/2012 SanDisk (captive) 60% 80%

10/26/2012 Samsung low-60% ~ industry ~29% ~ industry

7/25/2012 SKHynix > industry ~industry

8/15/2012 Applied Materials 60-65% ~30%

7/25/2012 LAM Research ~65% ~30%

DRAMNAND

NAND DRAMWe expect DRAM supply bit growth

to decelerate to ~20-30% in CY13

from ~30% in CY12.

We expect NAND supply bit growth

to decelerate to ~40% in CY13 from

~60% in CY12, primarily due to a

combination of Moore Stress and

limited wafer capacity growth.

As supply bit growth gets cut, we

expect DRAM and NAND prices to

remain favorable longer than

investors expect.

005930 KS

Initiating Coverage

March 25, 2013



Industry Consolidation in DRAM

Chart 13: Industry Consolidation in DRAM

Source: Company Reports, DRAMeXchange, Jefferies

Price-Inelasticity Our analysis (chart below) indicates over the last 20 years the DRAM market

has become increasingly inelastic. We note three instances (1994, 2004, 2010) when

industry DRAM ASPs increased by 3% to 20%, while DRAM bit shipments grew by 41% to

54% at the same time, highlighting negative price elasticity over those periods at the

prevailing market prices. We note that in each of those three instances, DRAM suppliers

generated higher gross margins.

Samsung

SKHynix

Elpida

Micron

Inotera

"Taiwan Inc."

Samsung

SKHynix

Micron

BEFORE 2013+After Micron’s acquisition of Elpida

closes in 1H13, the industry will be

left with three suppliers of DRAM –

Samsung, Micron, and SKHynix.

We believe independent Taiwan-

based suppliers of DRAM (e.g.

ProMos, PowerChip, Nanya) exited

the market in 4Q12, and we do not

expect these suppliers to re-enter the

market, even if DRAM prices continue

to increase in CY13. We think the

exponentially rising cost of

developing and providing leading-

edge nodes (“Moore Stress”)

combined with lack of scale, keeps

Taiwan-based suppliers out of the

market.

005930 KS

Initiating Coverage

March 25, 2013



Chart 14: DRAM Market Becoming Increasingly Inelastic

Source: Gartner, Jefferies

Going forward, in an environment where technology cost reductions are

decelerating, and capacity growth is moderating, we think DRAM industry

players will have less incentive to lower prices to stimulate demand.

We also think that due to stronger growth in non-commodity (non-PC) end markets

relative to PCs over the last couple of years, the mix of more price insensitive categories

such as Server, Networking/Comms, and Embedded has increased, and supports our view

that the DRAM market is becoming increasingly inelastic.

The NAND market on the other hand appears to be price elastic, although the

elasticity is in a downtrend. In other words, NAND suppliers would continue to have

an incentive to lower prices to stimulate demand and generate revenue growth.

However, we believe that after another period of hard re-learning in 1H12, NAND

suppliers are likely to be more cautious in adding wafer capacity, particularly given a

deceleration in technology scaling cost reductions in NAND.

-40

-20

0

20

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80

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20

09

20

11

MU

Gro

ss M

argi

ns

(%)

DR

AM

Pri

ce E

last

icit

y

DRAM market becoming increasingly inelastic

Bits: 41%ASP: +6%

Bits: 54%ASP: +3%

Bits: 44%ASP: +20%

ElasticityTrendline

Elasticity

MU Gross Margins

005930 KS

Initiating Coverage

March 25, 2013



Chart 15: NAND Market Still Price Elastic, But Elasticity Decreasing


Chart 16: Estimating Apple’s Profits from NAND

Source: Jefferies

Chart 17: Apple Component Cost Analysis

Source: Company data, iSuppli, Jefferies Research Estimates

-

1.0

2.0

3.0

4.0

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6.0

20

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20

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NA

ND

Pri

ce E

last

icit

y

NAND market still price elastic, although elasticity appears to be decreasing

ElasticityTrendline

Elasticity

Price Elastic Market

Price Inelastic Market

CY12 Assumptions

iPhone and iPad units (m) 200

Units upgraded to 32GB (m) 67 a third of devices upgraded

Upgrade price ($) 100

Cost of upgrade to Apple ($) 10 Apple pays market prices

Apple profit from NAND ($, m) 6,000

Apple EBIT 55,111

NAND % of Apple EBIT 11%

iPhone 4 iPhone 4S iPhone 5 iPhone 5S iPhone 6

Apps Processor 14 18 22 24 28

Baseband + Pow er Amps 22 19 30 30 30

Display 33 45 45 42 52

Assembly 8 9 10 11 12

Total 77 90 107 107 122

Delta 14 17 0 15

NAND (16GB) 27 19 10 9 8

Delta -8 -9 -1 -1

Net Impact ($) 6 8 -1 14

Net Impact (bp) 93 128 -22 224

The NAND market is still price elastic,

but the elasticity appears to be in

decline.

SanDisk’s view is that SSD and retail

categories tend to be more price

elastic compared to mobile-

embedded.

We think the Apple portion of NAND

demand (~50% of NAND market) is

inelastic.

In this framework we assume only a

third of all iOS devices are upgraded

to 32GB NAND (from 16GB).

We further assume that Apple does

not get preferential pricing for NAND.

Clearly, if Apple received preferential

pricing, for both upgrades and the

base 16GB NAND content in iOS

devices, NAND would represent more

than 11% of Apple’s profits.

Jefferies AAPL analyst Peter Misek

believes Apple has been able to add

functionality by using NAND price

declines to subsidize other costs.

However, as NAND price declines

moderate, and iPhone 6 uses a pricier

AP manufactured at TSMC, Apple is

likely to face a 200+ bps gross margin

headwind in iPhone.

005930 KS

Initiating Coverage

March 25, 2013



DRAM Prices Spiked Up, NAND Prices Also Increasing According to DRAMeXchange, DRAM Spot Prices shot up 100% off the bottom, and are

now tracking up ~60% YTD. DRAM Contract Prices are also up 54% YTD, and we expect

them to appreciate by ~30% from current levels. NAND Contract Prices are up 7% YTD

after increasing by 17% in 4Q12. NAND Spot Prices are tracking up 11% YTD after

increasing by 31% in 4Q12.

Chart 18: DRAM Contract Prices (2Gb DDR3)


Chart 19: NAND Contract Prices (64Gb MLC)


Chart 20: DRAM Spot Prices (2Gb DDR3)


Chart 21: NAND Spot Prices (64Gb MLC)


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b D

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($

) DRAM Contract Prices up 54% YTD.

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64

Gb

MLC

NA

ND

Co

ntr

act

Pri

ce (

$) NAND Contract Prices increased

by 17% in 4Q12, and are tracking up 7% YTD.

0.70

0.90

1.10

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1.50

1.70

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b D

DR

3 D

RA

M S

po

t P

rice

($

)

DRAM spot prices spiked up 100% off the bottom

3

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64

Gb

MLC

NA

ND

Sp

ot

Pri

ce (

$) NAND Spot Prices

increased by ~31% in 4Q12, and are tracking up 11% YTD.

005930 KS

Initiating Coverage

March 25, 2013



When Would New Memory Capacity be Added?

Chart 22: NAND ROIC Framework


Chart 23: NAND ROIC Framework for Micron / Rexchip


Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Free Cash flow ($, m) -500 149 149 149 149 149

NPV 0

IRR 15%

Economics of Incremental Capacity

Size of increment (WSPM) 10,000 20nm NAND

Cost of increment ($, m) 500 source: DRAMeXchange, InSpectrum

Wafer processing cost per wafer ($) 1,400 source: DRAMeXchange

Gross die per wafer (64Gb die) 475 source: DRAMeXchange

Yield rate 80% source: DRAMeXchange

Good die per wafer (64Gb die) 380

NAND output (GB) per wafer 3,040

NAND output per year (GB, m) 365

Wafer Processing Cost per GB 0.46

Back-end processing cost per GB 0.05 source: DRAMeXchange

Manufacturing Cost per GB 0.51

OpEx per GB 0.23 source: SanDisk CY10-CY12 results

Total Cost per GB 0.74

EBIT per GB needed ($) 0.41

ASP per GB needed 1.15

Market ASP per GB 0.67 source: DRAMeXchange

NAND ASP needs to appreciate by: 73%


Free Cash flow ($, m) -45 14 14 14 14 14

NPV 0

IRR 15%


Size of increment (WSPM) 10,000 20nm NAND



Gross die per wafer (64Gb die) 475 source: DRAMeXchange


Good die per wafer (64Gb die) 380

NAND output (GB) per wafer 3,040

NAND output per year (GB, m) 365



Manufacturing Cost per GB 0.51

OpEx per GB 0.23 source: SanDisk CY10-CY12 results





NAND ASP needs to appreciate by: 17%

Our proprietary analysis indicates

NAND prices would need to increase

by 73% from current levels to support

a 15% IRR for incremental wafer

capacity investments by NAND

manufacturers.

Micron has indicated it would partially

or completely convert all of Rexchip’s

DRAM capacity to NAND, upon

closing its Elpida acquisition. Our

analysis indicates NAND prices would

need to increase by 25% from current

levels to support a 15% IRR for such a

conversion by Micron (see the next

chart).

The price levels we are referring to

here would need to be sustained for a

period of several years, for the ROIC to

be realized. We are not referring to

one-time or temporary price increases

in this framework.

Our analysis indicates NAND prices

would need to increase by 17% from

current levels to support a 15% IRR for

Micron’s conversion of Rexchip’s

DRAM capacity to NAND.

We believe Micron’s cost for

converting existing DRAM capacity to

NAND would be roughly 5-10% of the

cost of adding equivalent new NAND

capacity.

After Micron’s Rexchip conversion to

NAND is completed, NAND prices

would need to increase further to a

level that is 73% higher than current

prices, before the industry can add

additional NAND capacity at a 15%

IRR.

005930 KS

Initiating Coverage

March 25, 2013



Chart 24: DRAM ROIC Framework


At its C1Q13 earnings call on 3/21/13, Micron made it clear it would pursue engineering

efforts to prepare for conversion of certain DRAM capacity to NAND, but that it had not

actually made a decision about a specific timing or magnitude of such conversion. We

note any conversion from DRAM to NAND would take up to 6 months to become

effective, and during that period Micron would be unable to benefit from DRAM prices

rising faster than NAND.


Free Cash flow ($, m) -500 150 150 150 150 150

NPV 0

IRR 15%


Size of increment (WSPM) 10,000 2Xnm DRAM



Gross die per wafer (4Gb die) 1,300 source: DRAMeXchange


Good die per wafer (4Gb die) 1,105

DRAM output (GB) per wafer 553

DRAM output per year (GB, m) 66



Manufacturing Cost per GB 3.06 commodity DRAM

OpEx per GB 1.91 source: Samsung, DRAMeXchange





DRAM ASP needs to appreciate by: 41%

Our proprietary analysis indicates

DRAM prices would need to increase

by 41% from current levels to

support a 15% IRR for DRAM makers

to add incremental wafer capacity.

DRAM prices have been rising faster

than NAND prices. If this continues

to be the case, Micron and other

DRAM makers would be more likely

to keep their DRAM capacity

unchanged and delay any planned

conversions to NAND.

The price levels we are referring to

here would need to be sustained for

a period of several years, for the

ROIC to be realized. We are not

referring to one-time or temporary

price increases in this framework.

005930 KS

Initiating Coverage

March 25, 2013



[II] Moore Stress = Foundry Business

Expansion

Apple Business is Nice to Have Our conversations with investors indicate most expect Apple to partially or completely

transition its AP business from Samsung to TSMC. We model Samsung to lose ~50% of its

Apple AP business in CY14. However, we show the incremental market opportunity in

ARM-based processors is 6x larger than the Apple business.

Chart 25: Apple Business is Nice to Have


Chart 26: Smartphone Application Processor Opportunity

Source: Gartner, Company Reports, Jefferies Research

(units, m)Apple

Business

Samsung

Business

Incremental

Non-Apple

Opportunity

As of

Total 202 132 1277

Smartphone AP 136 115 479 CY12

Tablet AP 66 17 35 CY12

Baseband Processor 0 0 730 CY12

Server Processor 0 0 33 CY16E

(millions of units) 2012

Smartphone application processor (AP) shipments 730

Apple 136

Samsung 230

Rest of the market 364

Samsung Foundry AP shipments 251

Apple 136

Samsung 115


We show the incremental foundry

market opportunity in ARM-based

processors is 6x larger than the size

of Samsung’s Apple AP business.

We believe Samsung currently

manufactures 100% of Apple’s APs,

but only 40-50% of APs used in

Samsung phones and tablets.


opportunity for Samsung AP, and

non-Apple AP is almost 2x the size of

Samsung’s current AP foundry

business.

005930 KS

Initiating Coverage

March 25, 2013



For the purposes of this analysis we assume that baseband processors (BP) either use ARM

cores within their design, or would otherwise benefit from Samsung’s manufacturing

process nodes optimized for low power ARM processors.

Chart 27: Smartphone Baseband Processor Opportunity


Chart 28: Tablet Application Processor Opportunity


In the next chart, we provide a framework to size the foundry opportunity for ARM-based

server processors. We believe there are two important industry trends that are likely to

allow 64bit ARM-based server processors to penetrate a market which has long been

dominated by x86, and more specifically Intel – 1) rapid growth in Cloud Data Center,

and 2) emergence of open standards for Software Defined Networking (SDN).


Smartphone baseband processor (BP) shipments 730

Apple 136

Samsung 230


Samsung Foundry BP shipments 0

Apple 0

Samsung 0



Tablet application processor (AP) shipments 118

Apple 66

Samsung 17

Windows on x86


Samsung Foundry AP shipments 83

Apple 66

Samsung 17


We believe Samsung does not

currently manufacture a significant

portion of baseband processors (BP)

within its foundry.

Consequently we show the foundry

market opportunity in BP is large.


manufactures 100% of the APs used

in Apple iPads, and all of the APs

used in Samsung Tablets.


market opportunity in Tablet APs is

~50% of Samsung’s current Tablet

AP foundry business, but we believe

this estimate is conservative given

we expect Samsung to take share in

Tablets in CY13 and CY14.

005930 KS

Initiating Coverage

March 25, 2013



Using Cavium’s Octeon II (32 MIPS cores) and Octeon III (48 MIPS cores) processors as an

example, we note that future ARM-based server processors (such as Cavium’s Thunder)

are likely to integrate equivalent or a higher number of ARM cores. In estimating

Samsung’s foundry opportunity in Chart 29 below, we assume each ARM-based server

processor integrates 10 ARM cores (“conversion factor” of 10x), and Samsung is able to

achieve 50% market share.

In addition to potentially serving as the de facto foundry for ARM-based

server processors, our checks indicate Samsung is also likely to design and

manufacture its own ARM-based server processors, and build Servers using its

organically produced processors.

Chart 29: Server Processor Opportunity


Samsung’s Leading Edge Logic Foundry Capacity Better than TSMC’s

Chart 30: Existing Advanced Node (45nm, 32/28nm) Foundry Capacity

Source: Gartner 3Q12 data, Company Reports, Jefferies Research

(millions of units) 2012 2016E

Server processor shipments 18 22

x86 based 18 15

ARM based 0 7

Samsung Foundry Server processor shipments

x86 based 0 0

ARM based 0 3

conversion factor 10

Effective ARM processor cores 33

(WSPM) 40/45nm 28/32nm Total

Samsung 40,000 160,000 200,000

TSMC 255,000 95,000 350,000

UMC 81,000 20,000 101,000

Global Foundries 55,000 50,000 105,000

Total 431,000 325,000 756,000

Samsung % of Total 9% 49% 26%

We believe ARM-based server

processor is likely to become a

growth category starting in the next

12 to 18 months, driven by rapid

expansion of Cloud-based workloads

and a resulting shift in underlying

processor architecture requirements.

We estimate the ARM-based server

processor opportunity in CY16

would be 33m units of equivalent

ARM-based AP cores, and believe our

estimate is conservative.

We show that Samsung already

represents ~50% of leading edge

(28/32nm) foundry capacity.

005930 KS

Initiating Coverage

March 25, 2013



Samsung’s Expertise in Manufacturing ARM Processors is a Great Set Up for Taking Share

Chart 31: Foundry Technology Roadmap


Chart 32: Process Nodes Converging on Low Power – TSMC


process node (nm) 2012 2013 2014 Target Applications

Samsung 32/28 28/20 28/20/14

Gate first,

HKMG

Gate first,

HKMG

Gate first,

FinFET

TSMC 40/28 28/20 28/20/16

Gate last,

HKMG

Gate last,

HKMG

Gate last,

FinFET

Intel 22 22/14 14

Gate last,

FinFET

Gate last,

FinFET

Gate last,

FinFET

Global Foundries 32/28 28/20 28/20/14

Gate first,

HKMG

Gate first,

HKMG

Gate first,

FinFET

ARM-MPU

(mobile and server)

x86 MPU, ARM-MPU,

GPU, FPGA, Baseband,

etc.

x86 MPU and chipset

x86 MPU and chipset,

GPU, etc.

55/40nm 28nm 20nm 16/14nm

HKMG HKMG FinFET

CLN65/55GP CLN28HP

CLN40G

CLN28HPM CLN20SOC CLN16FF

CLN65/55LP CLN28HPL

CLN45/40LP

CLN40LPG CLN28LP

High

Performance

Low Power

TSMC

We believe the most important

attribute that differentiates

Samsung’s manufacturing

capabilities compared to TSMC,

Global Foundries and Intel, is that its

process nodes are optimized for low

power ARM-based processors.

Consequently we believe that

Samsung is likely to become the de

facto foundry for ARM-based

processors going forward.

As a result of Moore Stress, we

believe TSMC is likely to focus its

process development efforts at each

future advanced node geometry on

a single node that emphasizes low

power consumption versus high

performance.

We expect this dynamic to translate

into sub-optimal process parameters

for companies like Altera, Xilinx and

Nvidia, that require high

performance.

005930 KS

Initiating Coverage

March 25, 2013



Chart 33: Process Nodes Converging on Low Power – Global Foundries


Chart 34: Process Nodes Converging on Low Power – Advantage Samsung


Chart 35: 14nm FinFET Progress

At the Common Platform Technology conference earlier this year, Samsung

reported it had taped out test chips on 14nm, and that its design infrastructure

was ready. Samsung noted it was working with Synopsys, ARM, Cadence, and

Mentor Graphics to ensure the availability of EDA tools for existing and new

foundry customers. Samsung noted it was accepting Multi-Project Wafer (MPW)

orders from new customers for its 14nm node, and was planning validation and

delivery to be completed in 2013.

Samsung is confident it would be able to provide sufficient foundry capacity for

its existing and new customers through a combination of: 1) S1 Fab in Korea, 2)

S2 Fab in Austin (used to be a memory fab. Samsung converted phase 1 to logic

in 2011, and started converting phase 2 to logic in 2012. Samsung expects to

start producing wafers this year), 3) NRD Fab in Korea (R&D fab with fast

turnaround times), and 4) a new fab in Korea focused on 20nm and 14nm

products targeted for late-2014 to early-2015, depending on market demand.

Source: Company Reports, Common Platform Technology Conference, Jefferies Research

32/28nm 20nm 14nm

HKMG HKMG FinFET

High Performance 28HPP

28SLP 20LPM 14XM

Low Power

28LPS

Global Foundries

32/28nm 20nm 14nm

HKMG HKMG FinFET

LPP

Low Power

LPH

Samsung

As a result of Moore Stress, we

believe Global Foundries is likely to

focus its process development efforts

at each future advanced node

geometry on a single node that

emphasizes low power consumption

versus high performance.

We expect this dynamic to translate

into sub-optimal process parameters

for companies like Altera, Xilinx and

Nvidia, which require high

performance.

We believe Samsung has focused on

optimizing its process technology for

low power ARM-based processors,

and we expect Samsung’s focus on

low power to continue.

At the Common Platform

Technology conference earlier this

year, Samsung reported it was

accepting MPW orders from new

foundry customers for its 14nm

FinFET node, and was confident it

would be able to provide sufficient

foundry capacity for existing and

new customers.

005930 KS

Initiating Coverage

March 25, 2013



TSMC at Risk of Falling Off the Leading Edge Costs Growing Exponentially. In the chart below, we used data from Intel, Global

Foundries and TSMC to estimate the cost of building a leading edge semiconductor

manufacturing fab over time. The data shows that this cost has been growing

exponentially.

Chart 36: Cost of Building a Leading Edge Semiconductor Factory

Source: Reports and press releases from Intel, TSMC and Global Foundries

Fewer Companies Driving CapEx Spend. The higher costs have resulted in fewer

companies able to afford to build a leading edge factory. According to data we collected

from Gartner, only 3 semiconductor companies account for 50% of global semiconductor

CapEx, down from 10 at the beginning of the decade.

Chart 37: Number of Semiconductor Companies Accounting for 50% of

CapEx

Source: Gartner, CapIQ, Jefferies Research

$1.3 $1.5 $1.7$2.3

$3.0$3.8

$4.4

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$10.0

y = 0.8729e0.255x

R² = 0.9761

$0

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4

6

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12

19

99

20

00

20

01

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# o

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i Cap

ex

TXN enteredhybrid fab strategy, 5/22/07

Renesas announced fablite strategy, 7/30/10

LSI adopts fabless strategy, 9/13/05

AMD goes fabless, 10/07/08

GlobalFoundries acquired Chartered Semi, 9/07/09

Elpida files for bankruptcy protection, 02/27/12

Toshiba's Logic unit goes fablite, 12/24/10

Infineon affirms move to go fablite, 12/01/05

The cost of building a leading edge

semiconductor manufacturing facility

has been increasing exponentially

over time

Fewer companies can afford to build

leading edge factories. Only 3

semiconductor companies (Intel,

Samsung, TSMC) account for 50% of

industry capex, down from 10 at the

beginning of the decade.

005930 KS

Initiating Coverage

March 25, 2013



Semiconductor Manufacturing Shake-Out. The higher costs have caused

Integrated Semiconductor Device Makers (IDMs) to fall off the leading edge. According

to Handel Jones from International Business Strategies, only 5 companies are supporting

leading edge manufacturing capabilities today, down from nearly 20 a decade ago.

Chart 38: Semiconductor Manufacturers on Leading Edge Manufacturing

Process Over Time

Source: Handel Jones, IBS Consulting. http://www.ibs-inc.net/

The number of semiconductor

companies with factories at the leading

edge has declined to 5, from nearly 20

at the beginning of the decade

005930 KS

Initiating Coverage

March 25, 2013



http://www.ibs-inc.net/

Semiconductor “Drop-Out Zone” Revenues = 0.8x-to-2.0x Cost of Leading Edge Factory. For each semiconductor

manufacturer that dropped off the leading edge (as shown in Chart 38), we divided

revenues during the last year they were on the leading edge by our estimated cost to

build a leading edge factory during that year.

The chart below shows that semiconductor manufacturers typically drop off the leading

edge when their revenues equal 0.8x-to-2.0x the cost to build a leading edge

semiconductor manufacturing facility.

Chart 39: Semis Typically Stop Building Leading Edge Factories when

Revenues are 0.8x-to-2.0x cost of Leading Edge Fab

Source: IBS, Gartner, CapIQ, Jefferies Research

In Chart 40, we show a temporal representation of the data in Chart 39. We plotted

semiconductor manufacturer revenues over time, and how they compared to the cost of

building a leading edge semiconductor manufacturing facility (blue line with diamond

markers). Our estimated future costs for building a leading edge factory (represented by

the dashed, blue line with diamond markers), was calculated by fitting an exponential

curve to the data in Chart 36.

We also put on the graph what we label as the “Drop-Out Zone,” highlighted by the two

upwardly sloping red lines. We define the “Drop-Out Zone” as 0.8x-to-2.0x the cost to

build a leading edge factory, and is typically the revenue range at which semiconductor

manufacturers can no longer support building a leading edge factory (see Chart 40).

Company

Last Year on

Leading Edge

Semi Revs/Cost of Leading Edge

Fab. (Ratio of When They Stopped

Building Leading Edge Fabs)

SONY 2003 1.4

Infineon* 2003 3.2

Freescale 2005 1.8

Renesas 2005 1.8

NEC 2005 1.9

AMD 2007 1.6

TI-Baseband 2006 1.6

UMC 2007 0.9

Fujitsu 2007 0.7

Panasonic 2007 1.1

Toshiba* 2007 3.2

IBM 2009 0.5

Average 1.7

Average ex-memory 1.3

Range of "Drop-out Zone" 0.8 - 1.9

005930 KS

Initiating Coverage

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Chart 40: Semiconductor Manufacturer Revenues vs. Leading Edge “Drop-Out Zone” Represented by 0.8x-to-2.0x the

Cost to Build a Leading Edge Manufacturing Capability

Source: Gartner, CapIQ, Jefferies Research . *Matsushita's name was changed to Panasonic in 2003. *Renesas combined Mitsubishi and Hitachi in 2003 and merged with NEC in 2009. *Globalfoundries combined revenue of Chartered Semiconductor in 2009. TXN revenues assumes DSP, ASICs, and RISC CPUs. Samsung Semiconductor includes internal and external semiconductor revenues.

Chart 40 leads us to the following observations:

1) Samsung Semiconductor and Intel are the only two companies well above the

“Drop-Out Zone.” We expect these two companies to have the critical mass of

revenues required to support the building of leading edge factories for at least

the next several manufacturing process nodes.

2) TSMC is close to the upper end of the “Drop-Out Zone.” We think it is

imperative for TSMC to win a big customer like Apple for it to retain scale

required to justify building leading edge factories.

3) Global Foundries is operating below the “Drop-Out Zone,” and in investment /

customer acquisition mode. We expect it to be aggressive with spending and

pricing.

4) STM is in the middle of the “Drop-Out Zone;” we don’t expect it to maintain a

critical mass of revenues to support leading edge factory capabilities for much

longer.

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"Drop-Out Zone" -Revenue Level at which Semis have stopped building leading edge Fabs

AMD

STM

Renesas

NECFSL

SONY Fujitsu

UMC

NXPI

Upper End of "Drop-Out Zone." Revs ~2.0x cost of leading edge Fab

Lower End of "Drop-Out Zone." Revs ~0.8x cost of leading edge Fab

Cost to build leading edge Fab. 2013-2017 forecasted based on exponential fit of historical Fab costs

"X" denotes last year companies were on leading edge manufacturing

IBM

Samsung Semiconductor

GF+ CHRT

TXN

005930 KS

Initiating Coverage

March 25, 2013



Apple Foundry Options: Scenario Analysis

Chart 41: Apple Foundry Scenarios

Source: Jefferies Research

Chart 42: Apple Foundry Scenario 1 Timeline


Scenario 1: 50% TSMC in CY14 Scenario 2: 100% TSMC in CY14 Scenario 3: 0% TSMC in CY14

Probability: 50% Probability: 20% Probability: 30%

Operational Risk

for Apple

2 different foundries translates to two

process flows for manufacturing, and

increases operational risk for Apple,

particularly on the TSMC side

high likelihood that TSMC is unable to

deliver good enough manufacturing

for Apple

status quo maintains operational risk

profile for Apple and Samsung

Apple's Cost of

Manufacturing,

Gross Margins

high likelihood that Samsung raises

prices to Apple. This would raise

Samsung's own gross margins and

lower Apple's gross margins

TSMC's model has been 50% gross

margins, while we believe Samsung

was accepting ~30% gross margins

from Apple -- net, we think Apple pays

higher prices for manufacturing at

TSMC

high likelihood that Samsung raises

prices to Apple. This would raise

Samsung's own gross margins and

lower Apple's gross margins

Samsung's

capacity under-

utilization risk

Samsung can backfill its capacity

vacated by Apple relatively easily

it could take some time for Samsung

to backfill all the capacity vacated by

Apple

low

Overall Risk to

Applemedium to high risk for Apple high risk for Apple low risk for Apple

Overall Risk to

Samsunglow risk for Samsung low to medium risk for Samsung low risk for Samsung

Ultimate

Outcome

Apple is pushed to make another

foundry transition from TSMC to Intel

Apple is pushed to make another

foundry transition from TSMC to IntelApple pays higher prices to Samsung

Scenario 1 2013 2014 2015 2016 2017

Samsung 100% 50-75% 0-25% ~0% ~0%

32nm 32nm 32nm 32nm 32nm

TSMC 0% 25-50% 50-100% 75-100% 25-75%

28nm 20nm 20nm/16nm 20nm/16nm 20nm/16nm

Intel 0% 0% 0-25% 0-50% 25-75%

22nm 14nm 14nm 14nm/10nm 10nm

The Jefferies Global Tech team

believes that Scenario 1 carries the

highest probability, though Scenario 3

would actually represent the lowest

risk for both Samsung and Apple.

005930 KS

Initiating Coverage

March 25, 2013



Chart 43: Apple Foundry Scenario 2 Timeline


Regardless of which Scenario Apple and Samsung decide to pursue, we think

it is likely to translate into foundry gross margin expansion for Samsung.

Our conversations with Samsung suggest Apple is likely to make a gradual

foundry transition to TSMC in CY14, potentially more meaningfully in 2H14.

We believe Samsung currently provides a full turnkey manufacturing solution for Apple,

from design to fab, assembly and testing. Upon moving its business to TSMC, we would

expect Apple’s cost of manufacturing to increase, and for this dynamic to provide

Samsung a cost advantage relative to Apple in the mobile market.

Our conversations also indicate Samsung has lined up multiple foundry

customers who would be able to backfill the capacity vacated by Apple in

2H14. Furthermore, we believe Samsung is likely to increase the use of its internal APs

within its Smartphone in 2H14 to the extent that more than 50% of Samsung

Smartphones could have a Samsung AP starting in that timeframe, from ~40-50% in CY12

and CY13.

We believe Samsung has an internal LTE solution, and its recent acquisition of CSR

provides connectivity solutions. Over time we would expect Samsung to also

develop an internal 3G baseband solution, and ultimately manufacture

Samsung baseband processors on its advanced process nodes. Until then, we

expect Samsung to continue using Qualcomm’s baseband solutions, and for an

increasing portion of all of Qualcomm’s chips to be manufactured at Samsung’s foundry.

We note Qualcomm is one of competitor TSMC’s largest customers, and the expanding

Samsung-Qualcomm relationship would translate into direct foundry share loss for TSMC.

Scenario 2 2013 2014 2015 2016 2017

Samsung 100% 0% 0% 0% 0%

32nm 32nm 32nm 32nm 32nm

TSMC 0% 100% 75-100% 50-75% 0-50%

28nm 20nm 20nm/16nm 20nm/16nm 20nm/16nm

Intel 0% 0% 0-25% 25-50% 50-100%

22nm 14nm 14nm 14nm/10nm 10nm

We assign the lowest probability to

Scenario 2 primarily due to

technological and execution

challenges involved in this approach.

005930 KS

Initiating Coverage

March 25, 2013



[III] Strong Momentum in Mobile The IT and Mobile Communications business has experienced explosive growth over the

last two years driven by Smartphone, and our checks indicate there is strong momentum

for continued growth. Investors are concerned about increased competition from low-

cost handsets promoted by companies like Huawei and ZTE, and we believe this is

reflected in the lower valuation multiple Samsung is trading at. We believe due to its

integrated design manufacturing strategy and expertise, Samsung is the best positioned

among handset/smartphone makers to address the evolving needs of the market and

expect Samsung to continue to profitably dominate the market with a broad range of

products.

Smartphone and Tablet Revenues, ASP and Market Share

Chart 44: IT and Mobile Communications Revenue Mix


Chart 45: Handset Revenues and ASP

Source: Company Reports, Gartner, Jefferies Research

CY11 CY12 CY13E CY14E CY12 CY13E CY14E

Mobile 32% 46% 47% 47% 74% 14% 16%

IT & Imaging 8% 8% 7% 7% 11% 8% 7%

Total 41% 54% 54% 54% 61% 14% 15%

% of Total Revenues % YoY

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s ($

, B)

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($

)

Revenues ASP

We estimate Samsung took ~2,000

bps of share in Smartphone in the

last two years. We conservatively

model no market share expansion

for Samsung in CY13 and CY14.

We note Samsung’s ASPs increased

by 50-100% from CY2010 to

CY2012, driven by increasing mix of

Smartphone shipments, and within

that a higher portion of premium

Smartphones. We conservatively

model Samsung’s handset ASPs to

remain stable in CY13 and CY14.

We expect the IT and Mobile Comms

business to grow by 14% in CY13

and 16% in CY14, and believe our

expectations are conservative, and in

line with the Street’s

005930 KS

Initiating Coverage

March 25, 2013



Chart 46: Smartphone vs. Feature Phone Mix


Chart 47: Tablet Revenues and ASP


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($

)

Revenues ASP

The chart shows that Samsung’s

Smartphone mix increased

dramatically from CY2010 to CY2012

driving higher ASPs, Revenues, and

Profits.

We estimate Smartphones represent

50-70% of Samsung’s overall

operating profits.

We estimate each point of

Smartphone unit market share

represents roughly 1-2% of EPS for

Samsung.

We model Samsung’s Tablet

revenues to roughly double in CY13,

and grow by ~30% in CY14.

We expect Tablet ASPs to decline at

~5% per year in CY13 and CY14.

005930 KS

Initiating Coverage

March 25, 2013



Chart 48: Tablet Units and Market Share


Galaxy S4 Launch – Focus on Software

Chart 49: Galaxy S4 Launch Summary

Mr. JK Shin, Head of IT and Mobile Communications, launched the Galaxy S4 at

Radio City Music Hall in New York

Key hardware features highlighted included: large 5” display, slimmer/lighter

than the Galaxy S3, higher resolution cameras, 8 sensors including temperature,

humidity and infrared support, support for LTE including TD-LTE, and a larger

and removable battery

Key usage models and software highlighted included: using front and rear

cameras simultaneously, recording sound with pictures, smart scroll (gesture

support), air view (touch-less navigation), S Translator, group play, S Health,

Knox (enterprise and personal usage), and HomeSync

Samsung’s launch event featured a cast of Broadway artists that demonstrated

virtually every new feature added to the S4 through real-life usage scenarios,

including: drama shot and eraser, air view, S Translator with support for 9

languages (both text to speech and speech to text), adaptive display, story

album, HomeSync, S Voice Drive, phone switch program, operation with gloves

on, Samsung Hub, Knox, group play, and ChatON.

We noticed several third party application developers at the launch event, and

believe a lot of the new features and software were developed in collaboration

with such independent developers.

Source: Company Reports, The Wall Street Journal, Jefferies Research

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s (%

)

Units Market Share

After attending Samsung’s

“Unpacked” launch event, it is clear

to us the company has dramatically

increased its focus on Software.

According to an interview with Mr.

JK Shin published by the Wall Street

Journal, in the process of developing

the Galaxy S4, Samsung filed for

~120 new patents related to user

interface and software.

We estimate Samsung’s Tablet unit

share increased from 6% in CY11 to

14% in CY12.

We are modeling Samsung’s Tablet

share to increase further to 19% in

CY13 and 21% in CY14.

We believe a combination of

industry-leading processor and

display hardware, and software

solutions (such as Smart School) is

likely to drive higher penetration of

Samsung Tablets.

See Appendix IV for a summary of

our proprietary test results after

comparing a Samsung Win8 Tablet

with an iPad and Ultrabooks.

005930 KS

Initiating Coverage

March 25, 2013



Chart 50: Galaxy S4 vs. Competition


Chart 51: Takeaways from Samsung’s MWC 2013 Booth Tour

We saw a demo of Samsung’s Smart School solution using a 65” interactive

whiteboard and several Galaxy Note 10.1 tablets. Using the new technology,

teachers have the ability to lead interactive lessons and real-time group activities.

Students can participate directly with the teacher and view course material, all

through the tablets. Teachers maintain control over the material that students

are able to view or work on using their individual tablets. Samsung’s booth

representatives told us the Smart School solution was being rolled out in as

many as 70 countries.

We saw a demo of Samsung’s KNOX, a solution that integrates standalone

functions of a personal phone and a work phone into one device. Samsung

KNOX addresses platform security with a comprehensive strategy: Hardware

baked in Secure Boot, ARM TrustZone based Integrity Measurement Architecture

and Kernel with built in Security Enhanced Android Mandatory Access Controls

to secure the system


Samsung Galaxy S4 Apple iPhone 5 HTC One BlackBerry Z10

Operating

systemAndroid 4.2.2 iOS 6 Android 4.1 BB10

Dimensions5.38 x 2.71 x 0.31

inch; 4.6 ounces

4.87 x 2.31 x 0.30

inch; 3.95 ounces

5.41 x 2.69 x

0.37 inch; 5.04

ounces

5.12 x 2.58 x

0.35 inch; 4.78

ounces

Display

5-inch full HD Super

AMOLED;

1,920x1,080 pixels,

441ppi

4-inch IPS LCD;

1,136x640 pixels,

326ppi

4.7-inch LCD;

1,920x1,080

pixels, 468ppi

4.2-inch LCD;

1,280x768 pixels,

355ppi

4G LTE Yes Yes Yes Yes

NFC Yes No Yes Yes

Rear camera

and recording

13-megapixel, 1080p

HD video

8-megapixel,

1080p HD video

4-megapixel

(Ultrapixel),

1080p HD video

8-megapixel,

1080p HD video

Front-facing

camera2-megapixel 1.2-megapixel 2.1-megapixel 2-megapixel

Processor

1.9GHz, quad-core

Snapdragon Fusion

Pro; or proprietary

1.6GHz octa-core

Exynos 5 Octa

Proprietary A6

1.7GHz, quad-

core Snapdragon

600

1.5GHz, dual-

core Snapdragon

S4 Plus

Capacity 16GB, 32GB, 64GB16GB, 32GB,

64GB32GB, 64GB 16GB

Expandable

memoryUp to 64GB No No Up to 32GB

Battery 2,600mAhNot disclosed by

Apple2,300mAh 1,800mAh

On the hardware side, we think the

Galaxy S4’s standout features vs.

competition include: its largest size

5” display, highest resolution rear

camera, fastest application

processors, and expandability of

NAND storage to 64GB.

Beyond industry-leading hardware, it

was clear to us after attending

Samsung’s “Unpacked” launch

event, that the company is putting a

lot of emphasis on industry-leading

software capabilities and features.

Our checks indicate the Galaxy Note

II with its larger display is outselling

the Galaxy S3 in Korea, and we think

this bodes well for the Galaxy S4

with its large display.

We were impressed by Samsung’s

Smart School and KNOX enterprise

security software solutions demo’d

at MWC 2013

005930 KS

Initiating Coverage

March 25, 2013



Chart 52: Tizen Summary

Tizen is an open source, standards-based software platform supported by

mobile operators, device manufacturers, and silicon suppliers for multiple

device categories such as smartphones, tablets, in-vehicle infotainment devices,

and smart TV. Tizen is based on HTML5.

The Tizen project resides within the Linux Foundation and is governed by a

Technical Steering Group.

Samsung and Intel are both active contributors to Tizen. We believe Samsung is

merging its internal software effort called Bada, and Intel is merging its prior

effort called MeeGo, with the development of Tizen.

Source: Company Reports, The Wall Street Journal, http://www.tizen.org, Jefferies Research

Expertise in ARM processors – Design & Manufacturing On the hardware side, we believe Samsung’s ability to design and manufacture its own

smartphone application processors (AP) in-house gives it a strong competitive advantage

over other smartphone players like Apple, who can design their own chips but have to

depend on a third party foundry to manufacture the chips. As leading-edge

manufacturing challenges intensify over the next few years due to Moore Stress, we

expect Samsung’s integrated design manufacturing model to be viewed more favorably

by investors.

Chart 53: Exynos 5 Octa – an Industry First

Source: Company Reports, AnandTech, IEEE, Jefferies Research

Our checks indicate Samsung plans

to introduce its first Smartphone

using Tizen in 3Q12 in select

geographies only.

We believe Samsung has developed

a strong high-end software platform,

which it can easily waterfall for its

low-cost Smartphones with minimal

R&D.

Samsung introduced its Exynos 5

Octa SoC at CES earlier this year. The

chip is one of the first in the industry

to implement ARM’s big.LITTLE

architecture using 4 ARM Cortex A15

cores combined with 4 ARM Cortex

A7 cores, and will be manufactured

on Samsung’s own 28nm low

power process

005930 KS

Initiating Coverage

March 25, 2013



http://www.tizen.org/

Chart 54: Exynos 5 dual vs. Apple A6

Source: Company Reports, Jefferies Research ** Lower is better http://cpuboss.com/cpus/Samsung-Exynos-5-Dual-vs-Apple-A6-(APL0598)-specs http://www.androidauthority.com/exynos-5-dual-benchmarks-125134/

Chart 55: Mix of Samsung vs. Third Party AP in Samsung Smartphone


Samsung Apple

Exynos 5 Dual A6

SunSpider** 668.5 ms 908 ms

V8 3,871 1,533

Octane 3,465 1,672

BrowserMark 139,561 191,158

GLBenchmark 2.1 74.1 fps 91 fps

GeekBench 2,433 1,570

CPU ARM A15 Custom ARM v7

CPU clock speed 1.7 GHz 1.3 GHz

CPU cores 2 2

GPU ARM Mali-7604 PowerVR SGX543MP3

Release date Oct-12 Sep-12

Process node 32nm 32nm

System Chromebook iPhone 5

0%

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Third Party AP Samsung AP

We expect Samsung to increasingly

use its internally designed

Application Processors (AP) for its

Smartphones.

We believe all of Samsung’s in-house

APs are manufactured at Samsung,

and would help offset potential

business lost from Apple AP in

CY2014.

Jefferies analyst Ken Hui believes

Samsung has started using

Smartphone processors from

Spreadtrum (SPRD US, BUY, $19.40)

in 4Q12 to address the low-cost

Smartphone market.

Industry benchmark tests suggest

Samsung’s Exynos 5 dual-core

processor compares favorably with

Apple’s A6.

005930 KS

Initiating Coverage

March 25, 2013



http://cpuboss.com/cpus/Samsung-Exynos-5-Dual-vs-Apple-A6-(APL0598)-specs

http://www.androidauthority.com/exynos-5-dual-benchmarks-125134/

Samsung Design and Manufacturing Capabilities vs. Competition We believe Samsung enjoys an intrinsic cost advantage over its competitors because

Samsung designs and manufactures the vast majority of components and ingredient

technologies used within its mobile and other devices. With Samsung’s increased focus

on software through a combination of in-house development, partnership with third-

party application developers, and partnership with Intel (for Tizen), we believe Samsung

is well positioned to address the growing threat from low-cost phones in emerging

markets.

The table below showcases Samsung’s strong design and manufacturing advantage over

a range of competitors in different markets.

Chart 56: Samsung Design and Manufacturing Capabilities vs. Competition

Source: Jefferies Research D = Design, M= Manufacturing

Beyond Smartphone and Tablet, we believe Samsung also produces high

quality PC hardware. We present our first-hand test results of Samsung’s ATIV

Smart PC 500T Windows 8 Convertible Tablet/PC (uses Intel’s Clover Trail

x86 MPU) in Appendix IV. Our proprietary testing shows Samsung’s Win8 Convertible

PC performs better than the iPad 3 across a range of content creation and content

consumption applications. We believe Windows 8 represents another strategic

opportunity for Samsung to introduce innovative new products and take market share.

Samsung Apple Intel Qualcomm TSMC SKHynix Micron SanDisk

MPU D & M D D & M D M

GPU D & M D D & M D M

Baseband (expected) D & M D M

Power Mgmt IC (expected)

DRAM D & M D & M D & M

NAND D & M D & M D & M D & M D & M

NOR D & M D & M

LCD/LED/OLED Panels D & M

Image Sensor D & M

OS (expected) D & M

App Store D & M D & M

Smartphone D & M D

Feature phone D & M

Tablet D & M D

PC D & M D

Digital TV D & M

Base Station D & M

SSD D & M D & M D & M D & M

DRAM modules D & M D & M D & M

Server D & M D

Home Appliances D & M

005930 KS

Initiating Coverage

March 25, 2013



[IV] Brand Value Appreciation According to Interbrand’s CY12 global brand value analysis (chart below), Samsung’s

brand value increased by 40% in CY12, and Samsung holds the 9th most valuable global

brand.

Chart 57: Samsung Brand Value Increased by 40% in 2012

Source: Interbrand, Jefferies

Chart 58: Samsung beat Apple in Smartphone, and tied in Tablet

Source: Brand Keys, Jefferies

005930 KS

Initiating Coverage

March 25, 2013



Samsung’s brand value has growth steadily over the last decade, with large increases in

the last two years, we think due to Samsung’s dominance in the mobile device market.

We expect Samsung’s brand value to continue to appreciate, helped by increased

penetration of its devices and brand recognition in the US, where Apple is still the

dominant brand. According to Brand Keys, Samsung displaced Apple to become the top

global Smartphone brand in CY12, and is tied with Apple for the second most desired

Tablet brand.

The charts below present data from our proprietary handset survey conducted by Peter

Misek. The survey focuses on Apple, Blackberry, Samsung, HTC, Motorola, Nokia, and

smartphone industry trends. Carriers and retails are among the groups surveyed.

Chart 59: What is your best-selling smartphone?

Source: Jefferies & Company estimates

Chart 60: What top new handsets are customers asking for?

Source: Jefferies & Company estimates

0%

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40%

50%

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Apple Blackberry HTC Motorola Samsung

Nov-10 Jan-11 May-11 Sep-11 Dec-11 Mar-12 May-12 Sep-12 Dec-12 Feb-13

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Nov-10 Jan-11 May-11 Sep-11 Dec-11 Mar-12 May-12 Sep-12 Dec-12 Feb-13

Our proprietary survey data show that

Samsung and Apple continue to take

share in Smartphone.

Survey data show Samsung handsets

are among the most desired by

customers compared to other major

brands.

005930 KS

Initiating Coverage

March 25, 2013



[V] Valuation

Scenario Price Targets Samsung has traded at P/E ratios of 7-to-11x over the last 3 years, and is currently trading

at 7x. Our Base Case PT of KRW 2,100K represents a P/E of 8x applied to our Street-high

CY14 EPS of KRW 267K, and a P/E of 10x off our CY13 EPS of KRW 216K. Our KRW 2,100K

PT represents EV/S of 2x applied to our CY14 revenues of KRW 263Tr. We model DRAM

ASPs to increase by 30% in CY13 and 11% in CY14, and model NAND ASPs to decrease by

5% in CY13 and 14% in CY14. We believe there is upside to our estimates primarily from

Memory and Foundry. Downside risks include higher than expected deceleration in

Smartphone growth, unexpected memory capacity additions, Forex-related losses, mis-

execution, geopolitical factors associated with South Korea.

Our Bull Case Scenario for CY14 assumes DRAM ASPs increase by 40-50% and NAND

prices remain unchanged in CY13, handset ASPs remain firm despite share gains, and the

Display Business grows at a higher rate.

Our Bear Case Scenario assumes DRAM and NAND ASPs decrease by 5-10% in CY13,

combined with share loss in handsets, and weakness in Display Business.

Chart 61: Scenario Price Targets

Source: Capital IQ, Jefferies & Company estimates Based on Samsung’s closing price of KRW 1,455,000 on 3/22/13

We show that Samsung is currently trading at a discount to its global peers Apple, TSMC,

LG Electronics, Intel, Qualcomm, SKHynix, and SanDisk. We expect Samsung’s Forward

P/E multiple to expand from 8x to 9x driven by 1) margin expansion, and 2) global brand

value appreciation.

Base Bull Bear

Revenues KRW, Tr 259 263 272 241

Gross Margins % 37% 42% 43% 37%

EPS KRW 215,958 266,948 297,111 186,043

P/E 8 8 7

Scenario PT KRW 2,100,000 2,300,000 1,250,000

Upside 44% 58% -14%

Cash KRW, Tr 26 as of 4Q12

LT Debt KRW, Tr 6 as of 4Q12

Cash / share KRW 198,164 as of 4Q12

Net Debt / share KRW (154,405) as of 4Q12

BV / share KRW 928,194 as of 4Q12

Dil. Shares 1,000s 130,878 as of 4Q12

Market Cap KRW, Tr 275 for Base Case PT

EV KRW, Tr 255 for Base Case PT

EV/S 2 for Base Case PT

P/BV 2 for Base Case PT

StreetCY14 UnitsJEF ScenariosOur Price Target for Samsung

Electronics common stock is KRW

2,100,000.

005930 KS

Initiating Coverage

March 25, 2013



Samsung Trading at a Discount to Peers

Chart 62: Forward P/E vs. CY13 Projected Revenue Growth

Source: Capital IQ, Jefferies & Company estimates

The charts below show both Samsung’s actual revenue growth in CY12 and projected

growth in CY13 compare favorably within its peer group comprised of domestic (South

Korea) and global tech companies.

Chart 63: CY12 USD Revenue Growth

Source: Capital IQ, Jefferies

Chart 64: CY13 Projected USD Revenue Growth


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The chart shows high correlation

between projected revenue growth

and Forward P/E multiples.

The chart shows Apple and Samsung

trade at a discount to the rest of the

group.

Samsung trades at a substantial

discount to Apple, and its broader

peer group. We believe Samsung’s

trading discount is driven by a

combination of 1) its ownership

structure, 2) its large size relative to

the liquidity pool in South Korea, 3)

lack of multiple listing for its stock,

with primary listing in South Korea.

005930 KS

Initiating Coverage

March 25, 2013



Chart 65: Forward P/E

Source: Capital IQ, Jefferies & Company estimates

Chart 66: TTM EV/S


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The chart shows that Samsung trades

at the lowest P/E multiple when

compared to 7 other companies

within its peer group comprised of

domestic (South Korea) and global

tech companies.

The chart shows that Samsung trades

at the low end of range on a EV/S

basis, when compared to 7 other

companies within its peer group

comprised of domestic (South Korea)

and global tech companies.

005930 KS

Initiating Coverage

March 25, 2013



Chart 67: CY13 Gross Margin Expansion


Chart 68: CY14 Gross Margin Expansion


Chart 69: CY13 Operating Margin Expansion


Chart 70: CY14 Operating Margin Expansion


The charts above show that we are forecasting Samsung’s gross margins and operating

margins to expand in CY13 and CY14, and the magnitude of Samsung’s margin

expansion falls in the middle of the range forecasted for its peer group.

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005930 KS

Initiating Coverage

March 25, 2013



Chart 71: P/E NTM – Samsung vs. AAPL

Source: Factset, Jefferies estimates

Chart 72: P/E NTM – Samsung vs. TSMC


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The chart shows that on a P/E (NTM)

basis, Samsung has traded at a

discount to AAPL over the last decade.

We expect Samsung’s P/E multiple to

move toward the higher end of its

range of 7x – 11x driven by margin

expansion.


basis, Samsung is trading at a

substantial discount to TSMC.

TSMC’s multiple has expanded over

the last year, and we believe this is in

large part driven by higher investor

expectations around Apple

transitioning to TSMC as a major

foundry service provider.




expansion.

005930 KS

Initiating Coverage

March 25, 2013



Chart 73: P/E NTM – Samsung vs. GOOG


Under-owned in the US

Chart 74: US vs. non-US ownership

Source: Factset, Capital IQ, Jefferies estimates

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The chart shows Samsung is under-

owned in the US compared to other

large global tech company peers.

We estimate only 11% of Samsung’s

outstanding shares are owned by US

investors, compared to 55% for AAPL

and 72% for GOOG.

We believe the primary reason for the

difference is that Samsung is not listed

on a major US exchange, and is not

easily available as an investment for

US investors.


basis, Samsung is trading at a

substantial discount to GOOG.




expansion.

005930 KS

Initiating Coverage

March 25, 2013



Chart 75: Institutional ownership


Valuation Constrained by Domestic Liquidity Pool Our view is that valuations for Samsung Electronics are constrained by factors specific to

the South Korean equity markets, including the inability of domestic investors to buy

Samsung in size, stock movements for geopolitical reasons including tensions with N.

Korea, trading related to exchange rate fluctuations etc. We believe Samsung’s valuations

are also indirectly constrained by management’s desire not to split up the company or

pursue multiple listing to unlock value.

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We estimate the proportion of

Samsung’s institutional ownership

(~30%) is at the low end of the range

(30% to 85%) when compared to

GOOG, AAPL and TSMC.

005930 KS

Initiating Coverage

March 25, 2013



Chart 76: Weighting of Largest Company in Country Index

Source: Jefferies Global Equity Strategy Team

Chart 77: Weighting of Largest Tech Company in Country Index

Source: Jefferies Global Equity Strategy Team

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The chart shows that when compared

to the largest companies within

investable indices for a range of

countries, Samsung has the highest

weighting within the South Korean

country index.

We believe Samsung’s large (25-30%)


country index makes it difficult for

portfolio managers to be overweight

Samsung. We believe investors in

South Korea are constrained to hold

not more than 5-10% of their funds in

any single security.

The chart shows that when compared

to the largest tech companies within

investable indices for a range of

countries, Samsung has the highest


country index.

We believe Samsung’s large (25-30%)


country index makes it difficult for

portfolio managers to be overweight

Samsung. We believe investors in

South Korea are constrained to hold

not more than 5-10% of their funds in

any single security.

005930 KS

Initiating Coverage

March 25, 2013



Chart 78: Samsung vs. KOSPI Forward P/E


Chart 79: Insider ownership


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Almost 30% of Samsung’s

outstanding shares are held by

insiders, compared to 0-10% for its

global peer group.

We note this is one of the reasons why

Samsung shares are not as liquid

compared to those of its global peers.

The chart shows that Samsung is

trading at a ~20% discount on a

Forward P/E basis relative to the KOSPI

index, after tracking the index P/E

more closely or trading at a premium

previously.

We think one explanation for

Samsung’s trading discount relative

to the KOSPI is that it has outgrown

other South Korean companies over

the last couple of years, making it a

larger portion of the country’s

investable index.

005930 KS

Initiating Coverage

March 25, 2013



Chart 80: Trading Volumes for Samsung vs. Peer Group


We believe speculation about potential multiple listing for Samsung Electronics shares

across major international exchanges, including US exchanges, has been around for

several years, but the stock is still not easily available for US investors to invest in. Our

recent checks indicate an elevated level of expectations among industry players about

Samsung potentially listing its shares on a US exchange to, among other things, help it

attract global talent more easily.

We think it is possible that Samsung Electronics opts for multiple listing at some point in

the future, but our investment thesis does not make any specific assumptions around

such multiple listing for Samsung Electronics shares. Furthermore, while we believe

multiple listing could help close the valuation gap between Samsung and its global tech

peers, we note even after potential multiple listing, it could take a substantial amount of

time for such valuation convergence to occur.

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The chart shows that over the last 5

years on average, Samsung’s weekly

trading volume was only 2% of its

peer group average.

005930 KS

Initiating Coverage

March 25, 2013



[VI] Samsung Electronics Financial

Model

Chart 81: Samsung Electronics Income Statement

Source: Company Reports, Jefferies Research Estimates

Income StatementCurrency: KRW 1Q12 2Q12 3Q12 4Q12 1Q13E 2Q13E 3Q13E 4Q13E CY2012 CY2013E CY2014E

Revenue 45,270,517 47,596,979 52,177,270 56,058,800 53,255,860 55,918,653 61,510,518 65,816,255 201,103,566 236,501,286 263,327,044

QoQ -4% 5% 10% 7% -5% 5% 10% 7%

YoY 22% 21% 26% 19% 18% 17% 18% 17% 22% 18% 11%

Cost Of Goods Sold 30,138,374 29,971,206 31,989,604 34,552,700 33,018,633 34,110,378 36,906,311 38,831,590 126,651,884 142866912.7 153951498.2

Gross Profit 15,132,143 17,625,773 20,187,666 21,506,100 20,237,227 21,808,275 24,604,207 26,984,664 74,451,682 93,634,373 109,375,545

Gross Margin 33% 37% 39% 38% 38% 39% 40% 41% 37% 40% 42%

R & D Exp. 2,728,381 2,872,922 2,975,618 2,955,900 2,662,793 2,795,933 3,075,526 3,290,813 11,532,821 11,825,064 13,166,352

% of sales 6% 6% 6% 5% 5% 5% 5% 5%

Selling General & Admin Exp. 6,767,133 8,359,387 9,218,701 9,713,000 9,053,496 9,506,171 10,456,788 11,188,763 34,058,221 40,205,219 44,765,597

% of sales 15% 18% 18% 17% 17% 17% 17% 17%

Operating Income 5,636,629 6,393,464 7,993,347 8,837,200 8,520,938 9,506,171 11,071,893 12,505,088 28,860,640 41,604,090 51,443,596

% of sales 12% 13% 15% 16% 16% 17% 18% 19% 14% 18% 20%

Non-operating income/loss 213,818 330,649 131,348 (510,300) 0 0 0 0 165,515 0 0

% of sales 0% 1% 0% -1% 0% 0% 0% 0%

Share of profit/loss of associates/JVs 367,334 268,771 132,552 218,000 986,657 0 0

Finance Income (Interest and Invest. Income) 2,035,414 2,318,645 1,524,423 324,191 258,040 305,097 346,541 5,878,482 1,233,868 2,134,389

Finance Expense (Interest Expense) 1,902,930 2,581,474 1,479,283 12,600 338,955 338,955 338,955 338,955 5,976,287 1,355,820 2,355,820

Profit before Taxes 6,350,265 6,730,055 8,302,387 8,532,300 8,506,173 9,425,256 11,038,035 12,512,674 29,915,007 41,482,138 51,222,165

Taxes 1,301,804 1,536,635 1,737,460 1,493,800 1,701,235 1,885,051 2,207,607 2,502,535 6,069,699 8,296,428 10,244,433

Tax rate (%) 20% 23% 21% 18% 20% 20% 20% 20% 20% 20% 20%

Net Income 5,048,461 5,193,420 6,564,927 7,038,500 6,804,939 7,540,205 8,830,428 10,010,139 23,845,308 33,185,710 40,977,732

Profit attributable to

Owners of the parent 4,860,894 5,049,042 6,424,872 6,888,342 6,668,840 7,389,401 8,653,819 9,809,936 23,223,150 32,521,996 40,158,177

96% 97% 98% 98% 98% 98% 98% 98%

Non-controlling interests 187,567 144,378 140,055 150,158 136,099 150,804 176,609 200,203 622,158 663,714 819,555

EPS attributable to owners of parent

Basic EPS 32,341 33,524 42,653

Diluted EPS 32,315 33,496 42,623 45,698 44,242 49,120 57,526 65,211 154,148 216,099 266,948

005930 KS

Initiating Coverage

March 25, 2013



Chart 82: Samsung Electronics Balance Sheet


Balance Sheet (Currency: KRW) 1Q12 2Q12 3Q12 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E

Cash and cash equivalents 15,923,545 15,521,957 18,823,533 25,935,248 20,643,203 24,407,723 27,723,246 32,947,747

Short-term financial instruments 9,013,539 7,828,604 10,659,209 10,659,209 10,659,209 10,659,209 10,659,209 10,659,209

Available-for-sale financial assets 453,108 453,649 853,843 853,843 853,843 853,843 853,843 853,843

Trade and other receivables 24,289,667 26,952,754 26,769,984 23,861,300 28,029,400 29,430,870 32,805,610 35,102,002

Advances 1,517,443 1,582,265 1,577,035 1,694,353 1,609,635 1,690,117 1,859,128 1,989,267

Prepaid expenses 2,727,825 2,368,952 2,557,017 3,363,528 3,195,352 3,355,119 3,690,631 3,948,975

Inventories 16,356,523 17,443,032 19,473,845 17,747,400 18,867,790 19,491,645 21,089,321 22,189,480

Other current assets 1,011,103 1,309,035 1,362,980 3,154,119 1,065,117 1,118,373 1,230,210 1,316,325

Total current assets 71,292,753 73,460,248 82,077,446 87,269,000 84,923,549 91,006,899 99,911,198 109,006,849

Available-for-sale financial assets 4,159,420 4,081,481 5,141,467 5,045,292 4,793,027 5,032,679 5,535,947 5,923,463

Associates and joint ventures 8,947,331 8,996,920 9,157,660 10,651,172 10,651,172 11,183,731 12,302,104 13,163,251

Property, plant and equipment 65,998,358 68,839,598 68,995,769 68,484,700 70,233,763 72,170,789 74,606,698 76,711,922

Intangible assets 3,329,107 3,672,924 3,697,687 3,729,700 3,505,918 3,295,563 3,097,829 2,911,959

Deposits 820,324 876,769 826,422 1,121,176 1,065,117 1,118,373 1,230,210 1,316,325

Long-term prepaid expenses 3,427,881 3,300,131 3,557,929 4,484,704 4,260,469 4,473,492 4,920,841 5,265,300

Deferred income tax assets 1,635,091 2,373,457 2,595,014 2,802,940 2,662,793 2,795,933 3,075,526 3,290,813

Other non-current assets 546,356 698,481 677,752 (2,517,084) 532,559 559,187 615,105 658,163

Total Assets 160,156,621 166,300,009 176,727,146 181,071,600 182,628,366 191,636,644 205,295,459 218,248,045

Trade and other payables 19,757,865 18,173,203 17,810,202 19,744,400 18,867,790 19,491,645 21,089,321 22,189,480

Short-term borrowings 8,975,990 7,683,630 8,712,628 8,712,628 8,712,628 8,712,628 8,712,628 8,712,628

Advance received 1,552,128 1,527,731 1,524,621 1,681,764 1,597,676 1,677,560 1,845,316 1,974,488

Withholdings 1,536,284 1,240,729 990,146 1,681,764 1,597,676 1,677,560 1,845,316 1,974,488

Accrued expenses 5,782,210 6,610,015 7,733,029 7,848,232 7,455,820 7,828,611 8,611,473 9,214,276

Income tax payables 2,384,300 2,327,392 3,356,302 2,242,352 2,130,234 2,236,746 2,460,421 2,632,650

Current portion of long-term borrowings and debentures28,792 902,736 905,162

Provisions 4,860,643 5,681,884 6,368,444 6,727,056 6,390,703 6,710,238 7,381,262 7,897,951

Other current liabilities 305,898 288,803 297,290 560,588 532,559 559,187 615,105 658,163

Total current liabilities 45,184,110 44,436,123 47,697,824 49,198,784 47,285,087 48,894,174 52,560,840 55,254,122

Debentures 1,279,308 1,920,582 1,878,646 1,878,646 1,878,646 1,878,646 1,878,646 1,878,646

Long-term borrowings 3,584,666 3,964,723 3,848,382 3,848,382 3,848,382 3,848,382 3,848,382 3,848,382

Long-term other payables 933,536 908,910 1,289,461 1,681,764 1,597,676 1,677,560 1,845,316 1,974,488

Long-term accrued expenses

Retirement benefit obligation 554,349 775,394 958,851

Deferred income tax liabilities 2,369,912 3,227,045 3,517,972 2,802,940 2,662,793 2,795,933 3,075,526 3,290,813

Provisions 408,092 462,938 503,021 560,588 532,559 559,187 615,105 658,163

Other non-current liabilities 335,955 340,185 494,155 (379,704) 532,559 559,187 615,105 658,163

Total Liabilities 54,649,928 56,035,900 60,188,312 59,591,400 58,337,701 60,213,068 64,438,920 67,562,776

Preferred stock 119,467 119,467 119,467 119,467 119,467 119,467 119,467 119,467

Common stock 778,047 778,047 778,047 778,047 778,047 778,047 778,047 778,047

Share premium 4,403,893 4,403,893 4,403,893 4,403,893 4,403,893 4,403,893 4,403,893 4,403,893

Retained earnings 101,651,224 106,705,209 113,054,774 119,619,701 126,658,201 133,463,140 141,003,344 149,833,772

Other reserve (3,855,544) (4,217,141) (6,051,948)

Non-controlling interests 2,409,606 2,474,634 4,234,601 4,234,601 4,234,601 4,234,601 4,234,601 4,234,601

Total Equity 105,506,693 110,264,109 116,538,834 121,480,200 124,290,666 131,423,577 140,856,539 150,685,269

Total Liabilities and Equity 160,156,621 166,300,009 176,727,146 181,071,600 182,628,366 191,636,644 205,295,459 218,248,045

005930 KS

Initiating Coverage

March 25, 2013



Chart 83: Samsung Electronics Cash Flow


Cash Flow Stmt (Currency: KRW) 1Q12 2Q12 3Q12 4Q12 1Q13E 2Q13E 3Q13E 4Q13E 2012 2013 2014

Profit 5,048,461 5,193,420 6,564,927 7,038,500 6,804,939 7,540,205 8,830,428 10,010,139 23,845,308 33,185,710 40,977,732

Adjustments 5,231,051 5,893,466 5,854,691 4,361,607 4,332,864 4,424,381 4,527,981 4,662,272 21,340,815 17,947,498 19,608,441

Depreciation 3,489,792 3,741,998 3,868,287 4,139,746 4,109,082 4,214,026 4,330,247 4,476,402 15,239,823 17,129,757 18,969,991

Amortization 185,578 199,746 186,638 221,861 223,782 210,355 197,734 185,870 793,823 817,741 638,450

Changes in Operating Assets (1,887,077) (3,790,294) (173,509) 7,780,934 (9,254,850) (496,718) (1,474,761) (833,409) 1,930,054 (12,059,739) (1,318,544)

Interest Received 206,078 194,084 209,414 235,294 324,191 258,040 305,097 346,541 844,870 1,233,868 2,134,389

Interest Paid (168,536) (165,615) (147,768) (147,768) (147,768) (147,768) (147,768) (147,768) (629,687) (591,072) (591,072)

Dividend Received 513,015 115,587 18,767 280,294 266,279 279,593 307,553 329,081 927,663 1,182,506 1,316,635

Income Tax Paid (516,048) (1,508,828) (786,780) (853,230) (1,275,926) (1,413,788) (1,655,705) (1,876,901) (3,664,886) (6,222,321) (7,683,325)

Cash From Operations 8,426,944 5,931,820 11,539,742 18,695,632 1,049,728 10,443,944 10,692,824 12,489,954 44,594,138 34,676,450 54,444,257

Net decrease (increase) in short-term financial instruments2,524,678 1,193,929 (2,755,236) 963,371 - -

Net decrease in short-term available-for-sale securities207,823 (4,405) (395,520) (192,102) - -

Proceeds from disposal of long-term available-for-sale securities26,720 40,916 37,281 104,917 - -

Acquisition of long-term available-for-sale securities(21,315) (34,975) (764,814) (821,104) - -

Proceeds from disposal of associates and joint ventures 32,750 6,988 39,738 - -

Acquisition of associates and joint ventures (94,463) (154,104) (28,445) (277,012) - -

Purchases of Property, Plant and Equipment (7,689,035) (6,179,474) (4,943,572) (5,605,880) (5,858,145) (6,151,052) (6,766,157) (6,581,625) (24,417,961) (25,356,979) (26,332,704)

Disposal of Property, Plant and Equipment 109,090 167,378 52,827 52,436 53,775 55,258 57,123 58,735 381,731 224,891 247,712

Purchases of intangible assets (124,922) (196,826) (199,831) (214,697) (203,962) (214,160) (235,576) (252,066) (736,276) (905,764) (1,008,502)

Net Cash Used in Investing Activities (5,300,185) (5,297,059) (8,983,375) (5,768,141) (6,008,332) (6,309,954) (6,944,610) (6,774,957) (25,348,760) (26,037,852) (27,093,495)

Payment of dividends (290,081) (850,226) (87,483) (344,417) (333,442) (369,470) (432,691) (490,497) (1,572,207) (1,626,100) (2,007,909)

Disposal of treasury stock 39,610 4,675 12,815 57,100 - -

Net procceds/repayment from short-term borrowings(712,570) (1,130,564) 1,003,836 (839,298) - -

Net repayment of long-term borrowings (29,564) (411,168) (77,292) (518,024) - -

Proceeds from long-term borrowings 1,815,705 - 1,815,705 - -

Others (996,351) (209,675) (8,870) (5,471,359) (6,686,255) - -

Net Cash Used in Financing Activities (1,988,956) (781,253) 843,006 (5,815,776) (333,442) (369,470) (432,691) (490,497) (7,742,979) (1,626,100) (2,007,909)

Effect of exchange rate changes 93,981 (255,096) (97,797) (258,912) - -

Net increase in cash and cash and cash equivalents from changes in consolidated subsidiaries

Net Increase/Decrease in Cash and Cash Equivalents1,231,784 (401,588) 3,301,576 7,111,715 (5,292,045) 3,764,520 3,315,523 5,224,501 11,243,487 7,012,499 25,342,853

005930 KS

Initiating Coverage

March 25, 2013



Appendix I: Company Information

Summary of Business Segments The chart below shows Samsung’s major business segments, and our growth projections

for each over the next two years. We expect the Semiconductor business to outgrow

other segments over the next two years. We also expect the Semiconductor business to

drive ~300 bps of overall gross margin expansion for the company in CY13.

Chart 84: Samsung Electronics Segment Model

Source: Company reports, Jefferies Estimates

In the charts below we provide snapshots of the company’s key focus areas in its

Consumer Electronics and Display Panel businesses.

Chart 85: Consumer Electronics Business Summary

Two sub-segments: Visual Display and Digital Appliances

Visual Display: Flat-panel TVs, LCD TVs, Smart TVs, 3D TVs, Large Format Display

(LFD), and Video Wall Display

Digital Appliances: Air Conditioners, Refrigerators, Washing Machines, and other

appliances

We model the Consumer Electronics business to grow by 6% in CY13 and 7% in

CY14, following 2% growth in CY12

Source: Company Reports, Capital IQ, Jefferies Research Estimates

% of Revenues % YoY

CY11 CY12 CY13 CY14 CY12 CY13 CY14

Consumer Electronics 29% 24% 22% 21% 2% 6% 7%

IT & Mobile Comms 41% 54% 54% 54% 61% 14% 15%

Mobile 32% 46% 47% 47% 74% 14% 16%

Semiconductor 22% 17% 21% 23% -6% 38% 24%

Memory 14% 10% 13% 15% -8% 49% 28%

System LSI 9% 7% 7% 8% -2% 21% 18%

Display Panel 18% 16% 14% 14% 13% -1% 11%

Inter-segment -10% -12% -13% -11% 47% 15% 2%

Segment

005930 KS

Initiating Coverage

March 25, 2013



Chart 86: Display Panel Business Summary

The Display Panel business represented ~16% of total revenues in CY12, and has

grown at a CAGR of 17% over the last 5 years, and we are modeling this

business to grow at a CAGR of 5% over the next 2 years.

We believe the barriers to entry are lower in TFT-LCD panels, and the market is

currently going through a period of over-capacity.

We believe Samsung’s CapEx focus is on growing the OLED portion of the

business in which we believe Samsung currently dominates, particularly in

smartphone applications of OLED. We estimate Samsung generated roughly a

third of its ~KRW 33Tr in CY12 Display Panel revenues from OLED, and we

believe OLED panels are already more profitable compared to TFT-LCD for

Samsung. We would not be surprised if Samsung introduced industry-leading

OLED “unbreakable displays” in Smartphone in CY13, to be followed by flexible

displays in 2014-2015.


Chart 87: Samsung vs. Corning Display Panel Revenues


300

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($, m

)

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(KR

W, T

r)

Samsung Display Panel Corning Display Panel

The chart shows Samsung’s Display

Panel revenues roughly track

Corning’s Display Panel revenues.

Samsung’s Display Panel revenues

appear to exhibit lower volatility

compared to Corning’s business.


dominates in OLED panels for

Smartphone.

Going forward, we expect Samsung

to take share in large-size panels,

and continue growth in Smartphone

panels.

005930 KS

Initiating Coverage

March 25, 2013



Outlook on the Korean Won (KRW) The Jefferies FX Strategy team has a broadly constructive view on the KRW, relative to the

USD and JPY. Our view is that the Koreans have greater appetite to allow KRW

appreciation as the authorities shift from their previous weak KRW policy, in particular as

private consumption becomes a more important component of Korean growth. We do

not see a hard landing in China (though growth may slow) and expect Korean export

growth to pick-up as the US economy recovers.

However, we believe the KRW must also be viewed in the context of the sharp fall in the

value of the JPY, its major competitor, so that further JPY weakness would stop KRW

appreciation against the USD. As we look for USDJPY to head to 100, this means that we

see broad stability and expect marginal KRW appreciation over time against the USD.

At its 4Q12 earnings conference call, Samsung noted there could be a negative impact of

KRW 3 Tr on CY13 operating profits due to FX rates. We believe Samsung is actively

involved in trying to lower FX risks in advance through lowering net FX exposure,

adjusting foreign deposits and AR negotiation periods in line with currency changes.

005930 KS

Initiating Coverage

March 25, 2013



Chart 88: Samsung’s Global Supply Chain

Semi EquipmentTop-6:Applied Materials (AMAT) 27% (3%

of Samsung’s COGS) (semi equipment and LCD equipment)

ASM Lithography (ASML.NA) 23% (2% of Samsung’s COGS) (lithography)

Lam Research (LRCX) 24% (ion implant; acquiring Novellus)

Novellus (NVLS) 22% (deposition; Lam acquiring)

Tokyo Electron (8035.JP) 15% (2% of Samsung’s COGS) (semi equipment and LCD equipment)

KLA-Tencor (KLAC) >10% (metrology)

Other:Mattson Technology (MTSN) 42%

(dry strip, RTP)Nanometrics (NANO) 30%

(metrology)FSI (FSII) 27% (wafer cleaning

systems)Photronics (PLAB) 20%

(photomasks)Ultratech (UTEK) 18% (lithography)PDF Solutions (PDFS) 15% (process

control software)Rudolph Technologies (RTEC) 14%

(metrology)FormFactor (FORM) 11% (DRAM

testing)Cymer (CYMI) 10% (lithography

lasers)Cabot Microelectronics (CCMP)

10% (CMP consumables)Kulicke & Soffa (KLIC) #9 customer

(wire bonders)Amkor (AMKR) top-25 (OSAT)Sumco (3436.JP) (wafers)Shin-Etsu Chemical (4063.JP)

(wafers; photomask substrates)

Customers

Samsung Electronics (05930.KS)

Handset ComponentsInterDigital (IDCC) 34% (wireless

patents)Audience (ADNC) 20% (audio

semiconductors)Anadigics (ANAD) 19%

(Semiconductors: RF)Wolfson (WLF.LN) 16% (mixed-

signal ICs)InvenSense (INVN) 13%

(gyroscopes)Semtech (SMTC) 13% (analog ICs)Silicon Laboratories (SLAB) 13%

(analog ICs)Qualcomm (QCOM) >10% (comm

ICs) Skyworks (SWKS) >10% (analog ICs)Broadcom (BRCM) 10% (comm ICs)Cypress (CY) 10% (touchscreen

controllers)Dialog Semi (DLG.GR) 4% (mixed-

signal semiconductors)Hirose Electric (6806.JP) 3%

(connectors)AAC Technologies (2018.HK) 2%

(acoustic products)Aeroflex (ARX) major customer

(testing)

Silicon Image (SIMG) 23%Semiconductors: HDMI

Maxim (MXIM) 12%Semiconductors: High-Performance

Analog

SuppliersInphi (IPHI) 27%

Semiconductors: Analog (for Memory)

Top-5 13% of revs

Best Buy (BBY) top-5 supplier(top-5 39% of BBY’s COGS)

Retailer

Rambus (RMBS) >10%Semiconductors: Intellectual Property

Silicon Motion (SIMO) 15%NAND Controllers

Foundry CustomersAltera (ALTR)Apple (AAPL)Cavium (CAVM) (second-tier)CSR (CSR.LN)IXYS (IXYS) (primary)NVIDIA (NVDA) (28nm)Qualcomm (QCOM)Texas Instruments (TXN)TranSwitch (TXCC)Xilinx (XLNX)

Sprint (S) (Samsung one of three main LTE Project Vision vendors)

Carrier

Brightpoint (CELL) distributor for 2% of Samsung’s handsets (19% of CELL’s

distribution handsets handled)Handset Distributor

STEC (STEC) (some NAND, all DRAM)SSD PCIe Server Cards

OCZ Technology (OCZ)SSDs

Display Equipment/ Components

Universal Display (PANL) 51% (OLED patents)

Applied Materials (AMAT) 12% (1% of Samsung’s COGS) (semi equipment and LCD equipment)

Corning (GLW) 19% of total net income (65% of SCP JV revs) (glass)

Tokyo Electron (8035.JP) 15% (2% of Samsung’s COGS) (semi equipment and LCD equipment)

AU Optronics (2409.TT) 13% (LCD panels)

Nitto Denko (6988.JP) 8% (LCD polarizing films)

Asahi Glass (5201.JP) tied for #4 glass customer

J Touch (3584.TT) largest customer (touchscreens)

Sumitomo Chemical (4005.JP) polarizing films, color filters

HDD Components(sold to Western Digital)

TDK (6762.JP) 4% (HDD heads)Showa Denko (4004.JP) major HDD

media customerFuji Electric (6504.JP) major HDD

media customer

Sandisk (SNDK) 10%NAND

Apple (AAPL) (NAND, DRAM, foundry for Apple app processors)

Handsets, Tablets, PCs

Source: company filings, Jefferies estimates

Source: Jefferies Global Supply Chain Databook published by Peter Misek

005930 KS

Initiating Coverage

March 25, 2013



Executive Bios

Mr. Oh-Hyun Kwon

Vice Chairman & CEO

Education 1975 B.S. in Electrical Engineering, Seoul National University

1977 M.S. in Electrical Engineering, Korea Advanced

Institute of Science and technology

1985 Ph.D. in Electrical Engineering, Stanford University

Career 2012. 6 ~ present Vice Chairman & CEO, Chairman of the Board of

Directors

2011 Vice Chairman & Head, Device Solutions, Samsung

Electronics

2008 President & Head, Semiconductor Business, Samsung

Electronics

2004 President & Head, System LSI Division, Samsung

Electronics

2000 Head, LSI Technology, Samsung Electronics

1998 Head, ASIC Business, Samsung Electronics

Mr. Gee-Sung Choi

Vice Chairman

Education 1977 BA in International Trade from the Seoul National

University

Career June 2012 ~ present Vice Chairman, Corporate Strategy Office

2010 Vice Chairman & CEO, Chairman of the Board of

Directors

2009 President of the Digital Media & Communications

Business

2007 President & CEO of Telecommunications Business of

Samsung Electronics

2004 President & CEO of the Digital Media Business Head of

the

2002 Digital Media Business' Visual Display Division

1998 Senior Vice President of the Semiconductor Sales

Division

Mr. Ju-Hwa Yoon

President, CFO

Education 1979 SungKyunKwan University BA degree in Statistics

Career 2010~present President, Chief Financial Officer

2009 President of the Corporate Auditing Team

2007 Head of Management Support Team of the Corporate

Executive Staff and the Global ERP T/F

1998 Head of the Corporate Executive Staffs Management

Support Team

005930 KS

Initiating Coverage

March 25, 2013



Appendix II: Broader Implications of

Moore Stress Moore’s Law Benefits. In addition to doubling the number of transistors per chip every

18-24 months, Moore’s Law has also delivered a consistent reduction in cost per

transistor to the tune of 25-30% annually. We think companies and stocks have come to

expect these phenomena.

Chart 89: Cost per Transistor over Time for Intel MPUs

Source: Wikipedia.org, anandtech.com, Intel, CNET.com, processortimeline.info, thocp.net

Is Cost Per Transistor Going Up? However, commentary from NVidia and Broadcom,

as well as an interesting analysis by Handel Jones from IBS lead us to believe that the cost

per transistor improvements historically seen at manufacturing process node transitions,

are changing for fabless players. At best, we think that the cost per transistor

improvements are decelerating from node-to-node. At worst, they start increasing. At a

minimum, cost per transistor improvements appear to be taking longer to realize.

Chart 90 shows of NVidia’s calculation of relative cost per transistor for different

manufacturing process node (extremetech.com). Chart 91 is Handel Jones’ calculation

for cost per transistor for each manufacturing process node, which we found at

embedded.com.

NVidia’s chart shows that the cost per transistor curve for the 28nm process node takes 6

quarters before crossing over the 40nm process node, but the 20nm process node takes a

full 11 quarters before crossing over the 28nm node. What is worse, it appears that the

cost improvement is nearly negligible once the cost cross over happens. Assuming that

NVidia has to spend 10s of millions of dollars if not $100m to transition between nodes,

the economics for migrating products to the new node do not appear compelling.

y = 1E+285e-0.334x

R² = 0.97340.0000001

0.0000010

0.0000100

0.0001000

0.0010000

0.0100000

0.1000000

1.0000000

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005930 KS

Initiating Coverage

March 25, 2013



Chart 90: Nvidia’s Calculation of Cost per Transistor

Crossover Curves

Source: NVIDIA . http://www.extremetech.com/computing/123529-nvidia-deeply-unhappy-with-tsmc-claims-22nm-essentially-worthless

Chart 91: IBS Calculation of Cost per Transistor by Node

Source: IBS. http://embedded.com/discussion/other/4238315/Feature-dimension-reduction-slowdown

The chart below illustrates a shift in NVidia’s practice of introducing flagship desktop

GPUs at increasing die size. We think this reflects a shift in the cost per transistor

improvements the industry has seen over the past 40 years.

Chart 92: Nvidia Die Size for Flagship Desktop GPU

Source: Wikipedia.org, techpowerup.com

111

111 128

142

207

287

225

484(GT80)

324(GT92)

576(GT200)

470(GT200)

529(Fermi1GTX480)

520(Fermi2GTX580)

294(Kepler

GTX680)

0

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Linear Fit

...but a 44% reduction in die size for most recent flagship product "Kepler" supports the thesis that there is a change in the Cost per Transitor curve at the leading edge

005930 KS

Initiating Coverage

March 25, 2013



http://www.extremetech.com/computing/123529-nvidia-deeply-unhappy-with-tsmc-claims-22nm-essentially-worthless

http://www.extremetech.com/computing/123529-nvidia-deeply-unhappy-with-tsmc-claims-22nm-essentially-worthless

http://embedded.com/discussion/other/4238315/Feature-dimension-reduction-slowdown

http://embedded.com/discussion/other/4238315/Feature-dimension-reduction-slowdown

Consistent with Nvidia’s analysis, Broadcom’s CEO, Scott McGregor, was quoted in

Electronics Weekly (http://www.electronicsweekly.com/blogs/david-manners-

semiconductor-blog/2012/05/the-end-of-the-learning-curve.html) as saying that not

only is 28nm more expensive than 40nm now, but that based on Broadcom’s

calculations, it will never be cheaper than 40nm across the entire lifetime of the node.

More Positive on MU ($10.04, BUY) and SNDK ($55.19, BUY) Our analysis shows that memory pure plays MU and SNDK are likely to generate higher

gross margins due to higher DRAM and NAND prices, which we believe would persist

longer than investors expect. Specifically, our call is that DRAM contract prices are likely to

increase by 30% from current levels ($1.28), and NAND prices are also likely to either

remain stable or increase from current levels.

More Positive on ARM LN (878.21p, BUY) – Lee Simpson We recently upgraded ARM to Buy (from Hold) and are more positive on ARM due to 1)

our view that Samsung is well positioned to become the de facto foundry for low-power

ARM-based processors, providing a solid manufacturing roadmap for a range of ARM

licensees, and 2) our view that ARM is likely to take share in Server Processor starting in

the next ~12-to-24 months, driven by major market discontinuities, including a rapid shift

toward Cloud-based workloads, and the emergence of industry standards for software-

defined networking (SDN).

We believe ARM remains well-positioned given: (i) rising royalty rates (cortex-A driven),

(ii) record licensing (j/est backlog of $450m+), (iii) opex control, and (iv) upcoming tax

benefits. We expect earnings growth to continue largely unperturbed through 2013-14

but see much of that reflected in recent trading (up 30% since Nov'12).

More Positive on INTC ($21.33, HOLD) Longer Term – Mark Lipacis Near term, we expect Intel’s Client (PC) MPU ASPs to compress due to an ongoing shift in

the consumer mindset toward Tablet form factors priced in the ~$500 range. We also see

a similar risk of low-end disruption in Intel’s Server MPU business, owing to 1) an ongoing

industry shift toward Cloud-based workloads that require more sophisticated networking

capabilities than computational intensity, and 2) the emergence of industry standards for

software-defined networking (SDN) that threaten to disrupt proprietary solutions.

Longer term, unless Apple and Samsung resolve their disputes and agree to continue

their manufacturing partnership, we believe Apple is likely to be pushed into making a

second foundry transition to Intel, after making a troublesome first foundry transition to

TSMC.

More Cautious on AAPL ($461.91, HOLD) – Peter Misek Cut CQ1 estimates. We cut our iPhone estimate from 37.5M to 35M on 3/12 due to

builds being only ~25M. We estimate Apple is holding ~2M of excess iPhone inventory on

its balance sheet and that Hon Hai also has a few million of WIP inventory. We cut our

revenues to $41B (guidance $41-$43B; St $43B) but see a 25% probability of missed

005930 KS

Initiating Coverage

March 25, 2013



http://www.electronicsweekly.com/blogs/david-manners-semiconductor-blog/2012/05/the-end-of-the-learning-curve.html

http://www.electronicsweekly.com/blogs/david-manners-semiconductor-blog/2012/05/the-end-of-the-learning-curve.html

guidance due to sales slowing even further in H2:Mar after Samsung's Galaxy S4 launch

event on 3/14.

Moore Stress = Gross Margin Headwinds. We believe Apple has added functionality

by using NAND price declines to subsidize other costs. For the iPhone 4S we estimate the

16GB NAND cost declined by $8 and declined by $9 for the iPhone 5 in contrast to app

processor + baseband/power amps + display + assembly increasing $14/$17 for the

iPhone 4S/5. We think Apple will reap some GM improvements from the little-changed

iPhone 5S, but we expect the iPhone 6 to have a pricier app processor (mainly due to a

foundry transition to TSMC) and display (due to poor 4.8" in-cell yields) combined with

limited NAND price declines (due to industry consolidation, Moore's Stress, and price-

inelasticity), which will lead to a 200bp+ headwind for the iPhone GM.

Increased Competition. Our checks indicate Samsung Galaxy S4’s enormous CY13

build plans of 100m units (we estimate the S3 sold 60m units) is leading some suppliers

to say they would reallocate resources away from Apple. Beyond direct product

competition, our checks also indicate that Apple’s patent feud with Samsung is

emboldening other suppliers to demand more.

More Cautious on ALTR ($34.72, HOLD) and XLNX ($37.97, HOLD) – Mark Lipacis Altera and Intel’s announcement last month that Altera would outsource manufacturing

to Intel, is consistent with our Moore Stress thesis published on 26-Sep-12. We think it

highlights cost structure challenges for leading-edge semiconductor players. We are

concerned that Altera will have to pay a higher price for chips manufactured by Intel vs.

TSMC. We think this will ultimately impact their value proposition and revenue growth

potential. We also think there is increased execution risk for Altera associated with

building IP necessary to transition its front end manufacturing to Intel.

At its recently held analyst day, Xilinx’s CEO conceded that there were diminishing

transistor cost benefits to node shrinks. We think this means that 28nm will become an

“Extended” node, with higher revenues for a longer period of time. Given our view that

Xilinx has materially improved its market position on 28nm vs. 40nm, we expect Xilinx to

take share from Altera for the next several years.

While Xilinx did not intimate anything about a shift in its foundry strategy, our Moore

Stress thesis argues that all leading edge semiconductor makers will ultimately have to

source all of their advanced process node products from either Intel or Samsung. Given

Altera’s recent announcement of an exclusive FPGA fab relationship with Intel, we would

not be surprised if Xilinx ultimately moved its advanced process nodes to Samsung.

Similar to our concerns around foundry pricing for Altera at Intel, we would expect Xilinx

to pay higher prices at Samsung, and potentially use process nodes that are not directly

optimized for manufacturing FPGAs.

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Appendix III: Deceleration in DRAM and

NAND Cost Reductions

Deceleration in DRAM Cost Reductions

Chart 93: DRAM ASP/GB Declined at 35% per year for 37 years


Chart 94: SKHynix DRAM Cost Reduction Forecast

Source: SKHynix Keynote at the Flash Summit 2012

R² = 0.9854

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AM

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DRAM ASP/GB declined at 35% per year for the last 37 years

The chart shows that DRAM ASPs have

declined on average at 35% per year

for the last 37 years.

Our view is that future DRAM

technology scaling cost reductions

would range from ~20-30%, and

reduce the DRAM industry’s ability to

sustain larger ASP declines.

SKHynix believes that DRAM cost

reductions are likely to decelerate to

20-30% per year (from ~33% per year

historically) going forward.

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Chart 95: Micron’s DRAM/NAND Cost Reduction Forecast

Source: Micron’s Fall Analyst Day 2012

Micron believes that DRAM cost


~25-30% per year (from ~30% per

year historically) going forward.

Micron believes that NAND cost


~25-30% per year (from ~40% per


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Deceleration in NAND Cost Reductions

Chart 96: NAND ASP/GB Declined at 50% per year for 11 years


Chart 97: SanDisk Forecast for NAND Cost Reductions

Source: SanDisk Analyst Day 2012

R² = 0.9785

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($

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NAND ASPs have declinedat 50% per year for the last 11 years

The chart shows that NAND ASPs have

declined on average at 50% per year

for the last 11 years.

Our view is that future NAND

technology scaling cost reductions

would range from ~25-35%, and

reduce the NAND industry’s ability to

sustain larger ASP declines.

SanDisk believes that NAND cost


25-35% per year (from ~30-55% per


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Appendix IV: Samsung ATIV Smart PC

(Win8) – Proprietary Test Results We summarize our proprietary test results after comparing Samsung’s Atom-based

ATIV 500T Win8 Tablet-PC with three devices:

A first-generation Ultrabook (Dell XPS13) which uses Intel’s Sandy Bridge MPU.

A second-generation Ultrabook (Fujitsu Lifebook U772) which uses Intel’s Ivy

Bridge MPU, and

An iPad 3 with WiFi (no 3G)

Chart 98: System Specifications and Key Attributes

Source: Dell, Fujitsu, Apple, Intel, Jefferies * with optional camera connection kit ** includes Bluetooth keyboard sleeve and camera connection kit

In our tests the Samsung ATIV 500T was able to play locally stored movies

back-to-back for 10+ hours.

Dell XPS13 Fujitsu Lifebook U772 Samsung ATIV 500T iPad3

Price $999 $1,149 $749 *** $677 **

CPU i5-2467M @ 1.6GHz i5-3317U @1.7GHz Z2760 @1.8GHz A5X @ 1 GHz

Turbo to 2.3GHz Turbo to 2.6GHz Atom SoC

Sandy Bridge Ivy Bridge

32nm 22nm 32nm 40nm

DRAM 4 GB 4 GB 2 GB 1 GB

SSD 128 GB 128 GB 64 GB 16 GB

available storage 60 GB 60 GB 50 GB 16 GB

Display size 13" 14" 11.6" 10"

Display resolution 1366x768 1368x768 1368x768 2048x1536

Battery 47 WHr 6-cell 45 WHr 4-cell 30 WHr 2-cell 42.5 WHr

Camera 1.3 MP 1 MP 2 MP/8 MP 5 MP

USB ports 2 3 3 *** 1*

microSD card slot 0 0 1 0

Length 316mm 327mm 295mm 241mm

Width 205mm 225mm 183mm 186mm

Thickness 6-18mm 17.5mm 9.6mm 9.4mm

Weight 2.99 lbs 3.15 lbs TBD (1.65 - 3.0 lbs) 3.0 lbs **

Connectivity WiFi, BT WiFi, BT WiFi, BT WiFi, BT

Trackpad Cypress Synaptics N/A

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Chart 99: Battery Life Scenario Performance

Source: Jefferies

Our tests indicate the Atom-based Samsung ATIV 500T starts up and shuts

down faster than the iPad.

Chart 100: System Startup and Shutdown Performance

Source: Jefferies

We found the Atom-based Samsung ATIV 500T to be twice as fast compared

to the iPad 3 in transcoding performance. Jefferies AAPL analyst Peter Misek

believes that the new iPad (iPad 4) doubles transcoding performance, putting it roughly

on par with the Atom-based Samsung Win8 Tablet-PC.

Chart 101: Transcoding Performance

Source: Jefferies


Battery Life (default display settings) - Movie stored on device

Continuous Movie Playback 4 hr 37 min 4 hr 9 min 10+ hr 13+ hr

System Startup Dell XPS13 Fujitsu Lifebook U772 Samsung ATIV 500T iPad3

On Battery (seconds)

Startup to Login Prompt 15 18 12 24

Login + load applications 40 47 25 -

Sleep (Suspend) 1 1 1 1

Resume from Sleep 2 2 1 1

Shutdown 12 10 5 8


Workload # 1

input: 304MB, 2 min, .MOV MPEG-2 format, 1920x1280

(video shot using iPad)

output: ~30MB, 1280x720 (1080p)

(for YouTube HD)

On Battery

Transcoding Time 27 sec 21 sec 48 sec 80 sec *

Workload # 2

input: 1.5GB, 10 min, .MOV MPEG-2 format, 1920x1280

(video shot using iPad)

output: ~150MB, 1280x720 (1080p)

(for YouTube HD)

On Battery

Transcoding Time 114 sec 114 sec 240 sec 392 sec *

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We found the Atom-based Samsung ATIV 500T to be ~7x faster than the iPad

in compressing RAW images to JPEG.

Chart 102: Photo Processing Performance

Source: Jefferies * Third party app called piRAWnha used to process 10 RAW images (maximum supported in batch mode) ** 10 RAW images processed in batch mode

Photo Processing Dell XPS13 Fujitsu Lifebook U772 Samsung ATIV 500T ** iPad3 *

Bibble Lite: Time taken to convert 200 images from RAW to JPEG in batch mode

On Battery (seconds per image) 1.72 4.05 4.6 31

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Company DescriptionSamsung Electronics Co. Ltd., together with its subsidiaries, designs, manufactures, distributes, and sells finished electronic products anddevice solutions worldwide. It offers consumer products, including mobile phones, tablets, and televisions; home appliances, such asrefrigerators, air conditioners, and washing machines; PC/peripherals/printers, and memory and storage products. The company is alsothe world’s largest manufacturer of integrated circuits for storing digital information, including dynamic random access memory (DRAM),static random access memory (SRAM), NAND flash memory, and Solid State Drives (SSDs). Further, the company offers telecommunicationproducts such as mobile WiMAX, WCDMA, CDMA, Femto cell, and enterprise networking systems. It has operations in Korea, the UnitedStates, Europe, Asia, Africa, and China. Samsung Electronics Co. Ltd. was founded in 1938 and is headquartered in Seoul, South Korea.

Analyst CertificationI, Sundeep Bajikar, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Mark Lipacis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Peter Misek, CFA, CPA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Lee Simpson, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Yoshihiro Azuma, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Masahiro Wakasugi, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Ken Hui, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subjectcompany(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or viewsexpressed in this research report.Registration of non-US analysts: Lee Simpson is employed by Jefferies International Limited, a non-US affiliate of Jefferies & Company, Inc. andis not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies & Company, Inc., a FINRAmember firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subjectcompany, public appearances and trading securities held by a research analyst.

Registration of non-US analysts: Yoshihiro Azuma is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies & Company, Inc. andis not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies & Company, Inc., a FINRAmember firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subjectcompany, public appearances and trading securities held by a research analyst.

Registration of non-US analysts: Masahiro Wakasugi is employed by Jefferies (Japan) Limited, a non-US affiliate of Jefferies & Company, Inc. andis not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies & Company, Inc., a FINRAmember firm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subjectcompany, public appearances and trading securities held by a research analyst.

Registration of non-US analysts: Ken Hui is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies & Company, Inc. and is notregistered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies & Company, Inc., a FINRA memberfirm, and therefore may not be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company,public appearances and trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.

Company Specific DisclosuresTimothy O'Shea owns a long equity position of Google Inc. Common Stock.Rafi Hassan owns shares of Nividia Corporation common stock.

For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

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Meanings of Jefferies RatingsBuy - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 10% or more within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated stocks with an average stock price consistently below $10 is 20% or more withina 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated stocks with an average stock priceconsistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperformrated stocks with an average stock price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes stocks whose company fundamentals and financials are being monitored, and for which no financial projections or opinions onthe investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Conviction List Methodology

1. The aim of the conviction list is to publicise the best individual stock ideas from Jefferies Global Research2. Only stocks with a Buy rating are allowed to be included in the recommended list.3. Stocks are screened for minimum market capitalisation and adequate daily turnover. Furthermore, a valuation, correlation and style screen

is used to ensure a well-diversified portfolio.4. Stocks are sorted to a maximum of 30 stocks with the maximum country exposure at around 50%. Limits are also imposed on a sector basis.5. Once a month, analysts are invited to recommend their best ideas. Analysts’ stock selection can be based on one or more of the following:

non-Consensus investment view, difference in earnings relative to Consensus, valuation methodology, target upside/downside % relativeto the current stock price. These are then assessed against existing holdings to ensure consistency. Stocks that have either reached theirtarget price, been downgraded over the course of the month or where a more suitable candidate has been found are removed.

6. All stocks are inserted at the last closing price and removed at the last closing price. There are no changes to the conviction list duringthe month.

7. Performance is calculated in US dollars on an equally weighted basis and is compared to MSCI World AC US$.8. The conviction list is published once a month whilst global equity markets are closed.9. Transaction fees are not included.

10. All corporate actions are taken into account.

Risk which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• Altera Corp (ALTR: $34.72, HOLD)• Apple Inc. (AAPL: $461.91, HOLD)• ARM Holdings plc (ARM LN: p916.00, BUY)• Cavium Inc. (CAVM: $37.63, BUY)• Google, Inc. (GOOG: $810.31, BUY)• Intel Corporation (INTC: $21.33, HOLD)

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• Micron Technology, Inc. (MU: $10.04, BUY)• NVIDIA Corporation (NVDA: $12.48, HOLD)• SanDisk Corporation (SNDK: $55.19, BUY)• Spreadtrum Communications Inc. (SPRD US: $19.40, BUY)• Xilinx Corp (XLNX: $37.97, HOLD)

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 753 47.06% 127 16.87%HOLD 714 44.62% 86 12.04%UNDERPERFORM 133 8.31% 2 1.50%

Other Important Disclosures

Jefferies Equity Research refers to research reports produced by analysts employed by one of the following Jefferies Group LLC (“Jefferies”) groupcompanies:

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This material has been prepared by Jefferies employing appropriate expertise, and in the belief that it is fair and not misleading. The information setforth herein was obtained from sources believed to be reliable, but has not been independently verified by Jefferies. Therefore, except for any obligation

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under applicable rules we do not guarantee its accuracy. Additional and supporting information is available upon request. Unless prohibited by theprovisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States ("US"), by Jefferies LLC, a US-registeredbroker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of1934. Transactions by or on behalf of any US person may only be effected through Jefferies LLC. In the United Kingdom and European EconomicArea this report is issued and/or approved for distribution by Jefferies International Limited and is intended for use only by persons who have, or havebeen assessed as having, suitable professional experience and expertise, or by persons to whom it can be otherwise lawfully distributed. JefferiesInternational Limited has adopted a conflicts management policy in connection with the preparation and publication of research, the details of whichare available upon request in writing to the Compliance Officer. Jefferies International Limited may allow its analysts to undertake private consultancywork. Jefferies International Limited’s conflicts management policy sets out the arrangements Jefferies International Limited employs to manage anypotential conflicts of interest that may arise as a result of such consultancy work. For Canadian investors, this material is intended for use only byprofessional or institutional investors. None of the investments or investment services mentioned or described herein is available to other personsor to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). In Singapore, Jefferies Singapore Limited isregulated by the Monetary Authority of Singapore. For investors in the Republic of Singapore, this material is provided by Jefferies Singapore Limitedpursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for accredited, expert orinstitutional investors, as defined under the Securities and Futures Act (Cap. 289 of Singapore). If there are any matters arising from, or in connectionwith this material, please contact Jefferies Singapore Limited, located at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +656551 3950. In Japan this material is issued and distributed by Jefferies (Japan) Limited to institutional investors only. In Hong Kong, this report isissued and approved by Jefferies Hong Kong Limited and is intended for use only by professional investors as defined in the Hong Kong Securities andFutures Ordinance and its subsidiary legislation. In the Republic of China (Taiwan), this report should not be distributed. The research in relation tothis report is conducted outside the PRC. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC.PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses,verifications and/or registrations from the relevant governmental authorities themselves. In India this report is made available by Jefferies India PrivateLimited. In Australia this information is issued solely by Jefferies International Limited and is directed solely at wholesale clients within the meaning ofthe Corporations Act 2001 of Australia (the "Act") in connection with their consideration of any investment or investment service that is the subject ofthis document. Any offer or issue that is the subject of this document does not require, and this document is not, a disclosure document or productdisclosure statement within the meaning of the Act. Jefferies International Limited is authorised and regulated by the Financial Services Authorityunder the laws of the United Kingdom, which differ from Australian laws. Jefferies International Limited has obtained relief under Australian Securitiesand Investments Commission Class Order 03/1099, which conditionally exempts it from holding an Australian financial services licence under theAct in respect of the provision of certain financial services to wholesale clients. Recipients of this document in any other jurisdictions should informthemselves about and observe any applicable legal requirements in relation to the receipt of this document.

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For Important Disclosure information, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 1.888.JEFFERIES

© 2013 Jefferies Group LLC

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