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					Handset                                                                                                    Neutral
New Phase of Competition Based on Specs                                                                             Update
1Q11 preview: narrowed technology gap + beginning of spec
competition = price competition
                                                                                                   April 4, 2011
We expect the competitive structure of the handset market to change from 2011. Until 2010,         Analyst
there was a large difference between the platform technologies of early movers and                 Seonghoon Chun
                                                                                                   82-2-3771-7566
latecomers. Early movers maintained high margins with their advanced technologies, while
                                                                                                   sh.chun@hanaw.com
latecomers suffered delayed product releases because of platform technologies. With the
gap in platform technologies narrowing in 2011, handset makers have begun to compete
based on hardware specs. Generally, the cycle of competition in the handset industry is as
follows: technological advances spec competition price competition technological
advances. The market seems to have entered the second phase in early 2011. Spec
competition traditionally involves differences in hardware, but now also includes CPU
processing speed and memory capacity. After competing on specs, handset makers should
begin price competition similar to that of the PC market.

Shares of CDMA iPhone growing in Korea and North America                                           Top picks
January’s handset sales in Korea and North America indicate that CDMA iPhone sales                 Stock            Rating    TP(12M)
rose, resulting in declining market shares for other phones. With respect to Android-based         LG Electronics   Neutral   W100,000
phones, although market shares for companies have increased, fiercer competition is
leading to a reduction in the number of market competitors. In light of failing rival platforms
such as RIM’s Blackberry and Windows Phone 7, competition in the smartphone market is
likely to be based on Apple’s iPhone and Google’s Android. While Apple maintains its prices
despite a strategy to expand telecom service providers and improve phone specs,
companies with Android-based phones should see competition based on specs and prices
intensify.

Industry to see margins weaken; maintain Neutral
The smartphone market is rapidly expanding. Smartphones represented 88% of domestic
handset sales in 1Q; thus, the market is expected to make a rapid transition from hardware
competition to price competition. During hardware and price competition, the handset
industry traditionally sees a drop in margins. As such, we maintain our Neutral rating on
Handset. When price competition begins in earnest, the market is likely to follow a similar
pattern to that of the PC market. Domestic handset makers should have an edge in
hardware spec competition based on manufacturing competitiveness, while the industry as
a whole should see margins weaken. LG Electronics (LGE) is unlikely to suffer as large a
drop in competitiveness as it did in the past, as the company has narrowed the gap in
platform technologies with its rivals. Yet, the company’s handset division should be unable
to turn a profit until it can establish recognition in the smartphone market with the release of
new models. We expect LGE’s handset division to become profitable from 3Q11.




 Equity Research
Handset                                                                                             April 4, 2011




          1. 1Q11 market preview: change in competition
          We believe the handset market has shifted into a new phase of competition in early 2011.
          Latecomers that failed to release competitive smartphones until 2010 because of a platform
          technology gap have begun to produce smartphones in earnest.

          Generally, competition in the handset market is cyclical: technological advances→ spec
          competition → price competition → technological advances. We believe the market is
          currently in the second phase. With the narrowing of the technology gap between early
          movers and latecomers, companies will begin to differentiate themselves based on hardware
          specs, while the industry as a whole should see margins weaken.

          In the past, hardware competition involved changes in phone design (e.g., thickness) or the
          inclusion of new functions (e.g., cameras). Now, with full touchscreen smartphones becoming
          the standard, handset makers should focus on data processing capacity.

          Competition will then rapidly transition toward price competition, as latecomers find it easier to
          compete in terms of design or internal functions compared to technological advancements.
          The release of similar products will intensify price competition even further.

          The shift to price competition is expected to come in a year or two. Korean handset makers
          must achieve economies of scale in order to be profitable during this phase. At present, they
          must 1) achieve economies of scale in the feature phone market (which is still the mainstream
          of the overall handset market) and 2) dominate the high-end market ahead of their global
          rivals via technological development.

          With respect to LGE, we expect the company’s handset division to continue to record losses
          until 2Q11. Telecom service providers are still reluctant to choose the phones of latecomers,
          thus LGE should experience a delay in overseas market expansion. Handsets currently have
          a nine- to twelve-month life cycle. Accordingly, if a handset’s release is delayed by
          approximately two quarters, it becomes impossible for the phone to hit the market. Thus, we
          expect LGE to obtain recognition from small-sized telecom service providers based on its
          Optimus 2x and expand market share in 3Q with the release of new products. We expect
          LGE’s handset division to be profitable from 3Q.

          In light of the change in competition, latecomer LGE must achieve two goals simultaneously:
          1) economies of scale for its feature phone business and 2) better development capabilities
          for its smartphone business. LGE has focused on the development of smartphones for the
          past two years, thus we believe its feature phone development capabilities have declined
          considerably. In our view, LGE must maintain or expand its feature-phone market share and
          reach economies of scale so that it can survive during the price competition phase. If LGE
          concentrates exclusively on smartphones, then it will find difficulties in differentiating itself from
          rivals that follow the same strategy (i.e., Motorola, HTC and Sony Ericsson). In addition,
          accelerating price competition will be even more onerous without LGE achieving economics
          of scale for its smartphone business.




                                                                                                                    2
 Handset                                                                                                                                            April 4, 2011




                                           Phases of market competition: technological advances→    →                                                    Spec
                                           competition → price competition → technological advances
                                           We believe the current handset industry is changing much like it has in the past. A brief
                                           overview of the industry pre-smartphone provides a clear understanding of how the
                                           smartphone market may develop going forward.



Table 1. Competition changes of handset market: technological changes → Spec competition → price competition
         → technological changes
 Changes of Core
                                    Changed Technology                                 Spec Competition                           Price Competition
  Competencies
Core Competencies             Quick reaction to new technology                    Design, Manufacturing ability             Cost structure, Economy of scale
                        First tier firms report high profits, second tier                                                Firms w/ high M/S make profits, others
 Industry Profitability                                                     Equalization of lowered profitability
                                 firms continue to report losses                                                                      report losses
      1st Cycle                   Release of handsets (90~92)                  Miniaturization of handsets(92~94)      Declining prices of analog handsets(94~96)
   Winner&Loser                   Monopolization of Motorola                                W:Nokia                    L:Motorola, Ericsson L:Motorola, Ericsson
      2nd Cycle            Analog → Converted to Digital (96~00)             Camera phone, Folder design(00~02)            Reduced price of handsets(03~05)
   Winner&Loser          W:Nokia, Samsung L:Motorola, Ericsson W: Samsung, LGE                      L:Nokia, Siemens        W:Nokia               L: All firms
      3rd Cycle                    Converted to 3G (06~07)                   Equipped with Touch Screen (07~08)         Dropped price of Feature phone(08~09)
                                                                                                                       W:Nokia, Chinese firms
   Winner&Loser          W: Samsung, LGE               L:Motorola                W:LGE                   L:Nokia        manufacturing low-          L: All firms
                                                                                                                          priced products
                            Introduction of App. stores, Growing                                                              Start of price competition of
      4 th Cycle                                                                H/W Spec Competition (11~12)
                               Smartphone market (08.7~10)                                                                        Smartphone(12~ ?)
                           W: Apple, MOT,          L: Nokia, LGE,
   Winner&Loser                                                                   W: ??                   L: ??               W: ??                  L: ??
                                 HTC                   SEMC
Source: Hanadaetoo Securities




                                           The industry has undergone four major cycles since Motorola first developed the mobile
                                           phone in 1983. Owing to the short life cycle of a handset, the industry has an average four-
                                           year to six-year cycle.

                                           Competition has followed the following cycle: technological advances spec competition
                                           price competition        technological advances. Each phase presents different factors of
                                           competition, thus companies acquire and lose market positions depending on how well they
                                           attended to the factors.

                                           A cycle always begins with technological change. In this phase, a key factor is company
                                           responsiveness. The handset market entered its first cycle in 1990 with an increase in the
                                           number of handset manufacturers. At the time, the key factor was technological
                                           competitiveness. Motorola, which dominated the telecom equipment market, maintained a
                                           monopoly for some time, then Ericsson and Nokia began to encroach by expanding their
                                           European market shares.

                                           The second cycle began when key technologies shifted from analog to digital. Nokia saw its
                                           market position soar because of its rapid response to the digital era. Korean handset makers
                                           entered global markets at this time. Motorola saw its market position weaken along with that
                                           of Ericsson, which eventually placed its handset business in a joint venture with Sony.




                                                                                                                                                                    3
Handset                                                                                              April 4, 2011




          The third cycle began with the switch to 3G. At this point, Korean companies began to see
          their market shares rise. In particular, LGE, which lagged its rivals because of its slow
          response to 2G GSM, prepared itself for technological change and executed pre-emptive
          moves for 3G technology. With a global handset market in flux from 2006, LGE’s market
          share rose handsomely. The company grew to become the world’s third largest handset
          maker in 2009 because it made investments in key 3G touchscreen designs more than a year
          earlier than its rivals.

          The fourth cycle began upon the launch of Apple’s app store in July 2008. Although Apple
          released its iPhone in June 2007, it was only after the establishment of this game-changing
          value chain that the company was able to capture substantial market share. LGE lost a large
          portion of its market position because of its slow response to the smartphone market.

          Factors of competition shift to hardware differentiation when latecomers are able to respond
          to technological changes. In the past, handset makers differentiated their phones based on
          design changes. Now, as touchscreens have become the standard, hardware differentiation is
          based on CPU processing capacity.

          Once competition is based on hardware specs, a rapid shift toward price competition occurs.
          Latecomers find it easier to catch up based on design or internal functions compared to
          technology differences. The rollout of similar products intensifies price competition.

          As price competition builds, most companies, excluding top-tier companies that are price
          competitive, will find it more difficult to realize profits, thus they will stop production or drop out
          of the market. If they are capable of developing next-generation technologies, they can
          prepare themselves for the next cycle and raise their positions in the future much like LGE did
          in the second major industry cycle.

          Just as the competitiveness of each company varies with changes in factors of competition,
          the profitability of the handset industry as a whole adjusts accordingly. In the first phase of a
          cycle, early movers report 20-30% operating margins, while latecomers continue to incur
          losses as they focus on developing their products. In the second phase, latecomers begin to
          manufacture products and record profits, while early movers see their margins fall because of
          the removal of technology premiums. Therefore, the industry’s overall margins tend to fall. In
          the last phase of price competition, many companies (excluding top-tier companies with
          economies of scale) continue to incur losses and exit the market.

          We believe the current handset industry has entered the second phase of its fourth cycle.
          That is, with technology gaps between early movers and latecomers narrowing, handset
          makers are differentiating themselves through hardware spec competition. The industry’s
          overall profitability should decline.




                                                                                                                     4
Handset                                                                                                                                                              April 4, 2011




                                          Current market competition based on specs
                                          Since the launch of Apple’s app store, the Android platform has been upgraded six times
                                          (from v.1.0 to v.2.3 Froyo). The constant upgrading, about once every four months, has
                                          caused difficulties for latecomers attempting to respond to platform changes. It seemed that
                                          whenever latecomers released a new product on the market, a new version of Android was
                                          launched shortly thereafter. Given that it takes nine to twelve months to develop a handset,
                                          releasing new products that coincide with platform upgrades has been essential for
                                          latecomers.



Figure 1. Upgrades of Android platform: updates every four months act as entry barriers for latecomers




                                                                                                                                           -Optimized UI for tablets
                                                                                                                                           -New system bar
                                                                         -Improved market                                                  -3 dimension desktop
                                          -Support more resolution       -Built-in camera interface                                        -Improved tab function
                                          -New UI and HTML5              -CDMA, EVDO update                                                -Support privacy browsing
                                                                                                    -Simplification and
                                          -Improvement of                -Support WVGA                                                     -Support synchronization of
                                                                                                     improvement of UI
                                            Google Map 3.1.2               display resolution                                                Google account bookmark
                                                                                                    -Support internet phones (SIP)
                                          -Bluetooth 2.1
                                                                                                    - Improved spec for games
                                          -Live wallpapers
                                                                                                    -Support VP8, WebM, AAC
                                                                                                    -Improvement of Camera API                       * 2011-1·4Q
                                                                                                                                     Expected release date of 3.0
                        Update only for                                     * 2009-09-15       -Wi-Fi Hotspot                                          for tablets
                        T-Mobile G1              * 2009-02-09                 1.6 SDK “Donut" -Adobe flash 10.1                                   minor upgrade
                                                   1.1 Update                                  -Call using Bluetooth                               “Honeycomb"
                                                                            * 2009-10-26
              -Support camcorder mode
                                                 * 2009-04-30                 2.0 SDK         * 2010-05-20           * 2010-12-06
              -Uploading to Youtube
                                                   Official 1.5 Update         Eclair"
                                                                              “Eclair"          Unveil 2.2 SDK        Unveil 2.3 SDK
               using handsets
                                                         cake”
                                                   “Cup cake”                                    Froyo"
                                                                                                “Froyo"              “Gingerbread"
              -Support Bluetooth A2DP/AVRCP
              -Animation effect
                                * 2008-09-23
                                  1.0 Announcement




            2008                                2009                                         2010                                         2011




Source: Hanadaetoo Securities




                                                                                                                                                                                     5
Handset                                                                                       April 4, 2011




          Latecomers have improved their platform technologies for the past two years, and an
          increasing number of latecomers are choosing the most recent version of smartphone
          platforms in 1H11. In particular, LGE has shown remarkable improvement in its technological
          capacity compared with its performance in 1Q10, when it used the Android 1.5 “Cupcake”
          platform while most of its rivals chose the 2.1 “Éclair.” We expect platforms to play a smaller
          role in smartphone competition now that LGE, Sony-Ericsson, Dell and, more generally,
          Japanese and Chinese companies have entered the market.

          Latecomers have begun to upgrade the hardware specs of their phones as they compete with
          top-tier companies. For example, LGE chose a ‘dual core’ CPU for its Optimus 2X (released
          in January 2011), as did Motorola for its Atrix, Samsung Electronics (SEC) for its Galaxy S2
          and Apple for its iPad2.

          In the past, hardware competition involved changes in design or the inclusion of new
          functions. Now, with full touchscreen displays becoming the standard, spec competition
          should involve data processing capacity.




                                                                                                              6
 Handset                                                                                                                                    April 4, 2011




Table 2. Specs of smartphones released since 4Q10
                                                                                                   CPU Clock
                                                                                                                  Dual                            Camera
           Manufacturer Model                       OS                                  CPU        Speed     CORE        RAM    NAND    Display
                                                                                                                  Core                            (MP)
                                                                                                   (MHz,GHz)
2010.11    Motorola       MT810lx                   Android-based OPhone OS v2.0 TI OMAP           600       A8          512    128     480 x 854 5
2010.11    Motorola       DROID 2 Global            Android OS, v2.2 (Froyo)            TI OMAP    1.2      A8           512    8000    480 x 854 5
2010.11    Motorola       DROID PRO XT610           Android OS, v2.2 (Froyo)            TI OMAP    1        A8           512    8000    320 x 480 5
2010.11    Motorola       BRAVO MB520               Android OS, v2.1 (Eclair)           TI OMAP    800      A8           512    1300    480 x 854 3.15
2010.11    Motorola       FLIPSIDE MB508            Android OS, v2.1 (Eclair)           TI OMAP    720      A8           512    150     320 x 480 3.15
2010.11    Motorola       CITRUS WX445              Android OS, v2.1 (Eclair)           Qualcomm   528      A8           256    100     240 x 320 3.15
2010.11    Motorola       A1260                     Android OS, v1.6 (Donut)            Marvell    624      A8           256    300     240 x 400 5
2010.11    Samsung        Focus                     Microsoft Windows Phone 7           Qualcomm   1        A8           512    8000    480 x 800 5
2010.11    Samsung        S8530 Wave II             Bada OS 1.2                         SEC        1        A8                  2000    480 x 800 5
2010.11    Samsung        Continuum I400            Android OS, v2.1 (Eclair)           SEC        1        A8           336    2000    480 x 800 5
2010.11    LG             Apex                      Android OS, v2.1 (Eclair)           Qualcomm   600      A11          256    100     480 x 800 3.15
2010.11    LG             Optimus Chic E720         Android OS, v2.2 (Froyo)                       600      A8                  150     320 x 480 5
2010.11    Dell           XCD28                     Android OS, v2.1 (Eclair)           Qualcomm   600      A11          256    200     240 x 320 3.15
2010.11    Dell           Venue Pro                 Microsoft Windows Phone 7           Qualcomm   1        A8           512    16000   480 x 800 5
2010.11    BlackBerry     Bold 9780                 BlackBerry OS 6.0                              624      A8           512    256     480 x 360 5
2010.11    Microsoft      Kin TWOm                  KIN OS                              Nvidia     600      A11          256    8000    320 x 480 8
2010.11    Microsoft      Kin ONEm                  KIN OS                              Nvidia     600      A11          256    4000    320 x 240 5
2010.11    HTC            Gratia                    Android OS, v2.2 (Froyo)            Qualcomm   600      A11          384            320 x 480 5
2010.11    Nokia          C6-01                     Symbian^3 OS                                   680      A11          256    340     360 x 640 8
2010.12    Motorola       SPICE XT300               Android OS, v2.1 (Eclair)           Qualcomm   528      A11          256    100     240 x 320 3.15
2010.12    Samsung        Nexus S                   Android OS, v2.3 Gingerbread                   1        A8           512    16000   480 x 800 5
2010.12    LG             Optimus S                 Android OS, v2.2 (Froyo)     Qualcomm          600      A8                          320 x 480 3.15
2010.12    LG             Optimus T                 Android OS, v2.2 (Froyo)            Qualcomm   600      A8                  170     320 x 480 3.15
2010.12    LG             Vortex VS660              Android OS, v2.2 (Froyo)            Qualcomm   600      A8                  170     320 x 480 3.15
2010.12    LG             Optimus Mach LU3000       Android OS, v2.2 (Froyo)            TI OMAP    1        A8                          480 x 800 5
2010.12    Dell           Venue                     Android OS, v2.2 (Froyo)            Qualcomm   1        A11          512            480 x 800 8
2010.12    Dell           XCD 35                    Android OS, v2.1 (Eclair)                      600      A11          256    200     480 x 800 3.15
2010.12    Nokia          C5-03                     Symbian OS v9.4, Series 60 rel. 5              600      A11          128    40      360 x 640 5
2011.01    Motorola       Cliq 2                    Android OS, v2.2 (Froyo)                       1        A8           512    1000    480 x 854 5
2011.01    Motorola       DROID X ME811                Android OS, v2.2 (Froyo)         TI OMAP    1.2      A8           512            480 x 854 8
2011.01    Samsung        I9010 Galaxy S GiorgioArmani Android OS, v2.2 (Froyo)         SEC        1        A8                  16000   480 x 800 5
2011.01    LG             Revolution                Android OS, v2.2 (Froyo)                       1        A8                  16000   480 x 800 5
2011.01    LG             Optimus 2X                Android OS, v2.2 (Froyo)            Nvidia     1        A8    ○      380    8000    480 x 800 8
2011.01    LG             Axis                      Android OS, v2.1 (Eclair)           Qualcomm   600      A11          256    100     480 x 800 3.15
2011.01    HTC            Inspire 4G                Android OS, v2.2 (Froyo)            Qualcomm   1        A8           768    4000    480 x 800 8
2011.01    HTC            EVO Shift 4G              Android OS, v2.2 (Froyo)            Qualcomm   800      A8           512            480 x 800 5
2011.02    Apple          iPhone 4                  iOS 4.2.1                                      1        A8           512    32000   640 x 960 5
2011.1Q Motorola          XT301                     Android OS, v2.1 (Eclair)           Qualcomm   528      A11          256    150     240 x 320 3.15
2011.1Q Samsung           Galaxy S 4G               Android OS, v2.2 (Froyo)            SEC        1        A8           512            480 x 800 5
2011.1Q Samsung           I100 Gem                  Android OS, v2.1 (Eclair)                      800      A8                  124     240 x 400 3.15
2011.1Q Samsung           Galaxy Ace S5830          Android OS, v2.2 (Froyo)            Qualcomm   800      A11                 158     320 x 480 5
2011.1Q Samsung           Galaxy Fit S5670          Android OS, v2.2 (Froyo)                       600      A8                  160     240 x 320 5
2011.1Q Samsung           Galaxy Gio S5660          Android OS, v2.2 (Froyo)                       800      A8                  158     320 x 480 3.15
2011.1Q Samsung           Galaxy Mini S5570         Android OS, v2.2 (Froyo)                       600      A8                  160     240 x 320 3.15
2011.1Q Samsung           i997 Infuse 4G            Android OS                                     1.2      A8                          480 x 800 8
2011.1Q Samsung           4G LTE                    Android OS, v2.2 (Froyo)                       1        A8                          480 x 800 8
2011.1Q LG                P350                      Android OS, v2.2 (Froyo)                                A8                  140     320 x 480 3.15
2011.1Q LG                GW910                     Microsoft Windows Phone 7           Qualcomm   1        A8                          480 x 800 5
2011.1Q Sony Ericsson     XPERIA Arc                Android OS, v2.3 (Gingerbread)      Qualcomm   1        A8           512            480 x 854 8
2011.1Q HTC               ThunderBolt 4G            Android OS, v2.2 (Froyo)            Qualcomm   1        A8           768    8000    480 x 800 8
2011.1Q Nokia             E7                        Symbian^3 OS                                   680      A8           256    16000   360 x 640 8
2011.2Q Motorola          ATRIX 4G                  Android OS, v2.2 (Froyo)            Nvidia     1        A9    ○      1024   16000   540 x 960 5
2011.2Q Motorola          ATRIX                     Android OS, v2.2 (Froyo)            Nvidia     1        A9    ○      1024   16000   540 x 960 5
2011.2Q Motorola          DROID BIONIC              Android OS, v2.2 (Froyo)            Nvidia     1        A9    ○      512    16000   540 x 960 8
2011.2Q LG                Optimus Black             Android OS, v2.2 (Froyo)                                A8                  2000    480 x 800 5
Source: Hana Daetoo Securities


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Handset                                                                                              April 4, 2011




          With spec competition accelerating, the industry’s overall profitability should fall. In spite of
          improved specs, top-tier companies (which enjoyed high margins of more than 15%) should
          be hard-pressed in raising prices amid intensifying competition. Thus, their operating margins
          should decline to below 10%.

          For latecomers, the rollout of new products should increase margins. While latecomers have
          incurred losses for the past two years because of development costs, they should be able to
          reduce losses or even record 2-3% profit margins in 2011.

          With respect to SEC, we expect operating margin for its handset business to fall below 10% in
          2011 (12% in 4Q10) because of a drop in its technology premium.

          LGE should remain in negative territory until 2Q11 because of a delay in global market
          expansion coming from telecom companies’ reluctance to choose the phones of latecomers.

          Handsets currently have a nine- to twelve-month life cycle. Accordingly, if a handset’s release
          is delayed by approximately two quarters, it becomes impossible for the phone to hit the
          market. Thus, we expect LGE to obtain recognition from small-sized telecom service
          providers based on its Optimus 2x, the release of new products and market expansion in 3Q.
          We expect LGE’s handset division to be profitable from 3Q.




           Table 3. Verizon’s handset release schedules for March to May: LGE’s first release in May (4G)
           Date                             Company & product name      Function
           2011.03.17                       HTC Thunderbolt             4G Android
           2011.03.31                       Novated Mifi 4510L          4G
           2011.03.31                       Samsung Mifi SCH-LC11       4G
           2011.03.31                       Novatel USB 551L            4G
           2011.04.07                       Casio Commando              Android, Water Proof
           2011.04.07                       Samsung Charge              4G, Android, Touch
           2011.04.14                       Sony Xperia                 Android (able to play on Playstation)
           2011.04.15                       HTC Trophy                  Windows 7, Global
           2011.04.28                       HTC Incredible 2            Android, Global
           2011.05.05                       LG Revolution               4G Android
           May                              Motorola Bionic             4G Android
                                            Motorola Droid X 2          4G Android
                                            Samsung Galaxy 2            4G Android
           Source: Hana Daetoo Securities




                                                                                                                     8
Handset                                                                                        April 4, 2011




          Economies of scale key to price competition
          Yet, the increasing margins for latecomers should be short-lived given past transition periods
          from hardware spec competition to price competition. This occurs because 1) hardware specs
          can easily be copied and 2) the launch of handsets with similar specs will inevitably trigger
          price cutting as part of an effort to secure optimal mobile carriers ahead of competitors.

          Price reductions before the transition differ in nature from those executed thereafter. During
          spec competition, prices decline or remain flat as spec similarities among handsets
          encourage price competition, despite spec improvements. During price competition, low-
          priced, more affordable products enter the market, pushing prices down. Without strong
          economies of scale to produce affordable handsets, companies face negative margins, with
          some eventually exiting the market.

          For instance, Apple released its iPad 2 at the same price as its first iPad despite the iPad 2
          having more advanced specs. This has prevented its competitors from raising prices for their
          tablet products, effectively reducing prices. When prices behave in this manner, past cycles
          indicate that the industry is currently in its third phase.

          In response to Apple, Motorola recently reduced the price of its tablet PC Xoom to a level
          comparable to the price of the iPad 2. In addition, it will release its new handset Atrix at the
          price level of W600,000, about 33% below the normal high-end smartphone price of
          W900,000 (under Korea Telecom provider).

          Domestic handset makers should be able to realize the economies of scale required for them
          to realize profits when the market enters the price competition phase in a year or two. They
          must 1) achieve economies of scale in the feature phone market (which is still the mainstream
          of the overall handset market) and 2) dominate the high-end market ahead of their global
          rivals via technological development.

          We believe the competitive edge of domestic handset makers will be apparent during the third
          phase for the following reasons: 1) domestic companies hold the second or third largest
          market share in the global handset market, providing a strong advantage over their rivals in
          terms of economies of scale 2) solid cost competitiveness coming from a large production
          base could provide steady margins.

          We expect SEC to make a significant market advancement when price competition begins;
          the company’s outstanding technology in smartphone development and its economies of
          scale in feature phones should give it an upper hand in price negotiations compared to
          competitors.

          In contrast, latecomer LGE must double its efforts at the very least. After spending about two
          years concentrating on smartphone development, there is concern that the company has lost
          its capabilities in feature-phone development. We believe that LGE can compete effectively in
          smartphone price competition only when it has the economies of scale in feature phones to
          maintain or increase market share. Focusing exclusively on smartphone development would
          not set LGE apart from other handset makers such as Motorola, HTC and Sony Ericsson.
          Amid intensifying price competition, failure to achieve economies of scale will inevitably be an
          additional burden for LGE in the smartphone market.




                                                                                                               9
Handset                                                                                                    April 4, 2011




          2. Share of CDMA iPhone sales increasing; domestic handset
              makers negatively impacted
                                         –
          Domestic handset market in 1Q11– SK Telecom becomes new iPhone provider
          Domestic consumption provides a first glimpse into how the market will be impacted by
          Apple’s departure from a single-carrier strategy per country and its launch of CDMA iPhones.

          The size of the domestic handset market in 1Q11 is expected to grow to 6.38 million units
          (+13.3% q-q from 5.63 million units or +16.4% y-y from 5.48 million units), largely driven by
          increased smartphone sales. Smartphones account for 88% of total handsets, confirming a
          major shift in the industry.

          Despite market expansion, however, the number of handsets sold by SEC and LGE has
          dropped 2.0% and 5.6% y-y, respectively. This is likely attributable to sales acquisition by
          overseas handset makers such as Apple, Motorola and HTC.

          To illustrate, when SK Telecom (SKT) began selling the iPhone in March, handset sales for
          SEC and LGE dropped 10.3% and 11.4% y-y, respectively. With Apple’s recent adoption of a
          multi-carrier strategy and its release of CDMA iPhones, mobile carriers are now choosing the
          iPhone as their main smartphone. This is expected to intensify competition between Apple’s
          iOS platform and Google’s Android platform and among handset makers that use Android.

          As such, key market changes in the future include 1) superior market positioning for the
          iPhone, 2) further price reductions and 3) stronger competition among Android-based handset
          makers. In addition, the addition of Korea’s top mobile carrier as an iPhone provider seems to
          have shrunk the market for Android-based handsets.



           Figure 2. Domestic consumption: downward trend in market share of domestic handset makers

             (000 units)
                                               내수
                                            Domestic     SEC
                                                         삼성전자        LG전자
                                                                     LGE      SEC MS          LGE MS
             3,500                          Consumpt                                                             70%
                                            ion                                        D eclining M/S of
             3,000                                                                      domestic firms           60%

             2,500                                                                                               50%

             2,000                                                                                               40%

             1,500                                                                                               30%

             1,000                                                                                               20%

               500                                                                                               10%

                  0                                                                                              0%
                      2003      2004         2005      2006   2007    2008   2009      2010       2011

           Source: Hana Daetoo Securities




                                                                                                                       10
Handset                                                                                                       April 4, 2011




          Meanwhile, domestic mobile carriers are looking to broaden the line-up of Android-based
          smartphones to compete against the iPhone. This is attracting an increasing number of
          overseas handset makers into the Korean market. As a result, the larger the iPhone market
          becomes, the stronger the competition will be among Android-based handset makers and the
          more companies will compete on pricing. A case in point is Motorola: the price of its
          smartphone Atrix, which will be available in the domestic market in April through Korea
          Telecom (KT), is forecast to be priced 30% lower than average smartphone prices in Korea.

          The use of multi-carriers for the iPhone will inevitably weaken the premiums that domestic
          handset makers have enjoyed compared to their rivals. Recently, SKT reportedly diminished
          its subsidies for SEC and LGE while keeping that of the iPhone unchanged. SKT’s move
          seems to be driven by the Korea Communications Commission’s recent investigation into the
          fairness of the pricing structure of handsets. As a result, domestic handset makers will face
          the challenge of having to choose between 1) releasing their handsets at lower prices and 2)
          offsetting their higher prices with competitive after-sales service. Either choice, however, will
          weaken margins.

          Weaker margins will have little impact on SEC (currently ranked second or third in the
          smartphone market) given its domestic sales’ relatively low margin contribution. For LGE, the
          margin contribution is rather high, thus a price reduction would weigh on the company’s
          margins considerably.



           Figure 3. Trend of LGE domestic handset sales’ contribution to margins

             (000 units)                    LG전자 내수 판매대수(좌)
                                             Domestic                        LG전자 LGE's 영업이익률(우)
                                                                             OPM of 휴대폰Handset division (R)
             1,200                           Sales units of LGE (L)                                                16%

             1,000                                                                                                 12%

                                                                                                                   8%
               800
                                                                                                                   4%
               600
                                                                                                                   0%
               400
                                                                                                                   -4%
               200                                                                                                 -8%

                 0                                                                                                 -12%
                     2006            2007           2008              2009          2010           2011

           Source: Hana Daetoo Securities




                                                                                                                          11
 Handset                                                                                                                      April 4, 2011




                                   North American market in 1Q11 – market competition changes after
                                    release of Verizon iPhone
                                   A similar trend exists in the North American handset market. Verizon, the largest US mobile
                                   carrier, recently launched the iPhone. But unlike the domestic market, market share for
                                   Android-based handsets rose after the iPhone release. In contrast, RIM’s BlackBerry saw its
                                   substantial market share in the smartphone market decline.

                                   The drop in sales for RIM has been accelerating since Verizon launched its iPhone in
                                   February. If RIM’s market share declines to a meaningful level, the North American market
                                   could parallel trends in the two-platform-dominated domestic market, where competition
                                   among Android-based handset makers is set to heat up.



 Table 4. US market share of handset makers
                                                                     Table 5. US share of smartphone OS (as of Feb. 2011):
           (as of Feb. 2011)
                                                                               Large share of Android and Apple
                           Share (%) of Mobile Subscribers                                         Share (%) of Mobile Subscribers
                           2010. 11     2011. 02     Point Change                                  2010. 11     2011. 02     Point Change
Total mobile subscribers   100.0%       100.0%       N/A            Total smartphone subscribers   100.0%       100.0%       N/A
Samsung                    24.5%        24.8%        0.3            Google                         26.0%        33.0%        7.0
LG                         20.9%        20.9%        0.0            RIM                            33.5%        28.9%        -4.6
Motorola                   17.0%        16.1%        -0.9           Apple                          25.0%        25.2%        0.2
RIM                        8.8%         8.6%         -0.2           Microsoft                      9.0%         7.7%         -1.3
Apple                      6.6%         7.5%         0.9            Palm                           3.9%         2.8%         -1.1
 Source: ComScore                                                    Source: ComScore




                                   In Figure 8, the change in US market share for handsets in 1Q11 was largely driven by Apple.
                                   Declining market shares for Motorola and RIM seem attributable to Verizo’s launch of the
                                   iPhone.

                                   Domestic handset makers fared well. SEC maintained its market position via increased sales
                                   of its Galaxy S, while LGE did so through feature-phone sales despite low smartphone sales.

                                   If the iPhone 5 is released in June via numerous mobile carriers in North America such as
                                   Verizon and AT&T, the market is expected to follow a growth pattern similar to that of the
                                   domestic market. That is, growth led by the iPhone. Apple’s iPhone 5 is expected to be
                                   multiband and perform in both CDMA 2X and WCDMA environments.

                                   As a result, domestic handset makers must strategize to develop handsets with similar specs
                                   to the iPhone while also successfully competing on prices with Android-based handset
                                   makers. Although more iPhone mobile carriers pose a challenge to domestic handset makers,
                                   they do not seem to as disadvantaged as other Androd-based handset makers.




                                                                                                                                         12
Handset                                                                                      April 4, 2011




          3. Summary of impact on domestic handset makers

          First economies of scale, then compete with Android-based phones
          The following is a summary of the tasks presented by a changing handset market to domestic
          companies.

          Following the introduction of smartphones, the handset market has shifted from technological
          competition to hardware spec competition. A narrowing technology gap tends to trigger further
          competition, resulting in similar margins among handset makers at a lower level.

          Spec competition will soon be determined by cost competitiveness, as 1) most specifications
          can easily be reproduced and 2) the release of handsets with similar specs usually leads to a
          drop in prices.

          As such, securing smartphone competitiveness should be of the highest priority for domestic
          handset makers at this juncture. SEC, a leader among Android-based smartphone makers,
          should strive to defend its current position, while LGE should release a new model shortly
          after its Optimus 2X.

          In addition, handset makers should prepare themselves for a changing market structure
          following spec competition. Strong price competition in the smartphone market is forecast in
          the next two years to three years, whereupon most Android-based handset makers should
          face weaker margins from economies of scale due to their focus on smartphones.

          In this regard, handset makers should retain economies of scale, such as stronger
          manufacturing capacity and bargaining power on components, which will allow them to be
          cost competitive. As such, stronger capacity in the production of feature phones is necessary
          in order to secure a stable handset sales base.

          Apple’s multi-carrier strategy for its iPhone is forecast to intensify competition in the
          smartphone market, mainly between Android-based smartphones and Apple’s iPhone.
          Competition will then be based on cost competitiveness.

          Over the short term, the market position of the RIM Blackberry and Windows 7 will weaken. In
          the long term, however, competition will boil down to an Android vs. Apple scenario, where
          Android handset makers will face tougher competition.

          We believe that SEC is highly likely to see a drop in its operating margin to less than 10% in
          2011 from 12% in 4Q10 given to the removal of early-mover benefits. Yet, the company
          should achieve top market share in the handset market over the long term given its product
          portfolio.

          LGE should record losses until 2Q11 because of a delay in overseas market expansion.
          Market expansion should begin from 3Q, when LGE releases a new model after gaining
          recognition from small-sized mobile carriers via the Optimus 2x. Thus, the company is
          expected to turnaround in 3Q.

          As a late starter, LGE faces the burden of having to realize economies of scale for both
          smartphones and feature phones. Although it faces a harder challenge than others, LGE
          could gain an upper hand in cost competition if successful.




                                                                                                        13
 Handset                                                                                                                                                                                   April 4, 2011




                    Rating & target price changes

                        LG Electronics
                         Date                      Rating            Target price (W)
                         11.4.4                    Neutral           100,000
                         10.11.29                  Neutral           100,000
                         10.10.29                  Neutral           100,000
                         10.9.14                   Neutral           100,000
                                                Sector analyst changed
                         10.1.28                   BUY               170,000
                         10.1.19                   BUY               170,000
                         10.1.12                   BUY               170,000
                         09.12.24                  BUY               170,000                                    (W)                  LG Electronics         Target price
                         09.11.16                  BUY               170,000                              200,000
                         09.11.13                  BUY               170,000                              150,000
                         09.10.22                  BUY               170,000                              100,000
                         09.10.19                  BUY               170,000                                50,000
                         09.9.21                   BUY               170,000
                                                                                                                 0
                         09.7.23                   BUY               170,000
                                                                                                                     09.4   09.7   09.10   10.1   10.4   10.7   10.10    11.1    11.4
                         09.7.6                    BUY               170,000
                         09.6.16                   BUY               150,000
                         09.6.1                    BUY               150,000
                         09.5.30                   BUY               150,000
                         09.5.19                   BUY               150,000
                         09.4.22                   BUY               150,000
                         09.4.20                   BUY               150,000
                         09.4.17                   BUY               115,000
                         09.4.6                    BUY               115,000



Hana Research Center Rating Definitions
      Stock ratings for the next twelve months                                                              Sector ratings for the next twelve months
      Rating       Definition                                                                               Rating        Definition
      BUY          Target Price implies at least 15% upside potential                                       Overweight    Sector index implies at least 15% upside potential
                   Target Price implies less than 15% upside or downside                                                  Sector index implies less than 15% upside or downside
      Neutral                                                                                               Neutral
                   potential                                                                                              potential
      Reduce       Target Price implies at least 15% downside potential                                     Underweight Sector index implies at least 15% downside potential




Compliance Notice
      •   As of April 4, 2011, Hana Daetoo Securities does not own over 1% of the outstanding shares of the company covered in this report.
      •   This report accurately reflects the research analyst’s personal views and was written without any undue external influence or interference, and no part of his or her compensation was, is, or
          will be, directly or indirectly, related to the specific recommendations or views expressed by that analyst in the report.
      •   As of April 4, 2011, the analyst does not own any shares of the company covered in this report.
      •   As of April 4, 2011, this report was not provided in advance to an institutional investor or other third party.




Compliance Notice
  •   As of April 4, 2011, Hana Daetoo Securities does not own over 1% of the outstanding shares of the company covered in this report.
  •   This report accurately reflects the research analyst’s personal views and was written without any undue external influence or interference, and no part of his or her compensation was, is, or
      will be, directly or indirectly, related to the specific recommendations or views expressed by that analyst in the report.
  •   As of April 4, 2011, the analyst does not own any shares of the company covered in this report.
  •   As of April 4, 2011, this report was not provided in advance to an institutional investor or other third party.
  •   This report is written and distributed by Hana Daetoo Securities only for information purpose, and may not be reproduced, redistributed, and forwarded to any other person. This report is
      not intended as an offer or solicitation for the purchase or sale of any securities, and neither this report nor anything contained herein shall form the basis of or be relied upon in connection
      with any contract or commitment whatsoever. Information and statistical data contained herein were taken from sources believed to be reliable but in no way can be guaranteed. The
      company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment,
      and this report cannot be used as evidence in any legal dispute related to investment decisions.




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