EQUITY RESEARCH

Technology | Asia ex-Japan Semiconductors | 21 November 2011

HYNIX SEMICONDUCTOR Initiate with a 1-OW: Re-armed and ready

We initiate on Hynix with a 1-OW rating and PT of KRW27,000 based on 1.92x 2012E P/B, the 5-year average. The DRAM industry is experiencing its worst slowdown since 2008 due to falling global PC demand growth, exacerbated by recent flooding in Thailand, which has affected the whole PC supply-chain. Although the global DRAM industry is undergoing a structural de-rating, we have confidence that Hynix will emerge stronger from these changes for a number of reasons, including increased scale and use of more advanced technology, a shift towards greater NAND exposure, a reinvigorated balance sheet following the recent rights issue, and a well capitalized majority shareholder in SK Telecom. HDD supply disruption to deepen trough but quicken turnaround: We expect the DRAM cycle to start to recover in 2Q12 following a severe downturn during 4Q11-1Q12E due to the impact of HDD shortage on PC production. Our view is based on: 1) significant pent-up demand for PC DRAM from 2Q12 after the material contraction during 4Q111Q12E; and 2) further supply cuts by DRAM manufacturers, especially when DRAM spot prices reach the variable cost level of second-tier players. Well positioned in DRAM survival game: We expect stronger DRAM manufacturers like Hynix to increase market share into the recovery. We look for: 1) increasing earnings contribution from NAND; 2) better execution in DRAM compared with peers (other than Samsung Electronics [SEC]); and 3) significantly improved balance sheet due to the recent rights offering to SK Telecom. Target P/B of 1.92x 2012E BVPS: For valuation, we use historical P/B for the cyclical context, applying the mid-cycle average, as we expect an upcycle for NAND and a downcycle for DRAM. Our price target represents 54.0x 2012E P/E and 11.4x 2013E P/E. Key risks include: 1) potential new owner SK Telecoms lack of experience in running a highly cyclical business; 2) mistimed execution of DRAM and NAND production. 000660.KS: Financial and Valuation Metrics KRW
FY Dec EPS Previous EPS P/E BPS ROE
Source: Barclays Capital

Stock Rating

1-OVERWEIGHT
from N/A

Sector View

3-NEGATIVE
Unchanged

Price Target

KRW 27000.00
from N/A

Price (17-Nov-2011) Potential Upside/Downside Tickers

KRW 23200.00 +16% 000660 KS / 000660.KS 13738381 592.17 89.73 10.6 N/A N/A 0.00

Market Cap (KRW mn) Shares Outstanding (mn) Free Float (%) 52 Wk Avg Daily Volume (mn) Dividend Yield (%) Return on Equity TTM (%) Current BVPS (KRW)
Source: FactSet Fundamentals

Price Performance 52 Week range

40K 36K 32K 28K 24K 20K 16K 12K Jan- 11 Apr- 11

Exchange-KRX KRW 37400.0015500.00

Jul- 11

Oct- 11

Link to Barclays Capital Live for interactive charting

2009 -590.00A N/A N/A 8,897 -6.6

2010 4486.00A N/A 5.2 12,914 32.4

2011 -23.00E N/A N/A 12,014 -0.2

2012 430.00E N/A 54.0 13,956 3.3

2013 2034.00E N/A 11.4 15,779 12.7

Asia ex-Japan Semiconductors SC Bae +82 2 2126 2932 [email protected] BCSL, Seoul Sunwoo Kim +82 2 2126 2934 [email protected] BCSL, Seoul

Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 37 FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 37 FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 38.

Barclays Capital | Hynix Semiconductor

COMPANY SNAPSHOT Hynix Semiconductor Income statement (KRWbn) Revenue EBITDA EBIT Pre-tax income Net income EPS (KRW) Diluted EPS (KRW) Diluted shares (mn) Dividend per share (KRW) Margin and return data (%) Gross margin EBITDA margin EBIT margin Pre-tax margin Net margin ROIC ROA ROE 2010A 12,099 6,100 3,273 2,696 2,656 4,486 4,487 590.3 150 2011E 10,039 3,643 224 7 (12) (23) (23) 591.8 0 2012E 9,782 3,758 227 300 300 430 430 693.6 50 2013E 11,954 4,905 1,538 1,413 1,413 2,034 2,034 693.6 100 CAGR -0.4% -7.0% -22.3% -19.4% -19.0% -23.2% -23.2% 5.5% -12.6% Average 23.6 41.5 11.1 9.3 9.2 7.3 6.2 12.1 Asia ex-Japan Semiconductors

Stock Rating Sector View Price (17-Nov-2011) Price Target Ticker Investment case

1-OVERWEIGHT 3-NEGATIVE KRW23,200 KRW27,000 000660 KS

39.5 50.4 27.1 22.3 22.0 18.8 15.6 32.4

14.3 36.3 2.2 0.1 (0.1) 1.5 (0.1) (0.2)

14.9 38.4 2.3 3.1 3.1 1.3 1.8 3.3

25.5 41.0 12.9 11.8 11.8 7.7 7.5 12.7

Why a 1-Overweight? Well positioned to come out ahead in the game of survival in the DRAM industry given: 1) its relatively advanced process technology and better product mix in DRAM; and material exposure (32% of total revenue) to NAND flash, which we believe has a much brighter supplydemand outlook. Upside case

Balance sheet and cash flow statement (KRWbn) Tangible fixed assets 10,817 10,494 Intangible fixed assets 549 691 Cash and equivalents 2,196 1,711 Total assets 17,584 16,235 Short and long-term debt 6,160 6,173 Net debt/(funds) 3,963 4,461 Other long-term liabilities 53 66 Total liabilities 9,415 8,434 Shareholders' equity 8,169 7,801 Change in working capital 96 (488) Cash flow from operations 5,908 3,033 Capital expenditure (3,421) (3,400) Free cash flow 2,487 (367) Valuation and leverage metrics P/E (x) EV/EBITDA (x) FCF yield (%) P/B (x) Dividend yield (%) Total debt/capital (%) Net debt/equity (%) Selected operating metrics Inventory days Accounts receivable days Accounts payable days Cash-conversion cycle

10,378 754 2,517 17,525 4,418 1,901 66 7,091 10,435 (270) 3,848 (3,400) 448

CAGR 10,529 -0.9% 815 14.1% 3,852 20.6% 20,048 4.5% 4,933 -7.1% 1,081 -35.1% 66 7.6% 8,289 -4.2% 11,760 12.9% (494) NA 4,629 -7.8% (3,500) NA 1,129 -23.1% Average 11.4 (231.0) 3.0 3.8 8.2 6.7 1.5 1.7 0.4 0.3 29.6 36.6 9.2 33.3

KRW32,000 Assumes: 1) higher-than-expected global PC shipments; 2) much faster-than-expected penetration of Ultrabooks, leading to higer demand for SSD; and 3) stronger-than-expected execution of new owner. Based on 2.3x 2012E BVPS of KRW13,956. KRW18,100 Assumes: 1) double dip in the global economy, which would impact demand across the board; 2) slower-than-expected normalization of HDD production resulting in severe disruption of PC supply; 3) any failure of technology migration. Based on 1.1x 2012E BVPS of KRW13,956. Upside/downside scenarios
40000 35000 30000 25000 20000 15000 10000 7-Dec-10 17-Nov-11
KRW32000 KRW2700KRW3200 0 0 KRW27000 (43.1%) KRW1810 (20.8%) (43.1%)

Downside case

0 KRW18100 (-19.0%)
Downside Case Price Target Upside Case

5.2 2.9 18.1 1.8 0.6 43.0 48.5

(994.4) 5.0 (2.7) 1.9 0.0 44.2 57.2

54.0 4.2 3.3 1.7 0.2 29.7 18.2

Source: Thomson Reuters Datastream, Barclays Capital est.

Operating profit forecast by product

4,000 3,000 2,000 1,000 0 (1,000) (KRWbn)

57.9 50.3 40.2 67.9

49.0 53.2 33.8 68.3

49.5 53.4 34.2 68.7

56.4 53.2 39.0 70.7

2010

2011E DRAM

2012E NAND

2013E

Source: Company data, Barclays Capital estimates

Note: FY end Dec.

21 November 2011

Barclays Capital | Hynix Semiconductor

INVESTMENT SUMMARY
We initiate coverage of Hynix with a 1-Overweight rating and a price target of KRW27,000, applying a historical average P/B of 1.92x to 2012E BVPS. While we anticipate potential weakness in the shares in the next few months, we believe the shares look attractive on a 12-month horizon. We expect the DRAM industry downcycle to extend into 1Q12 due to the negative impact of the flooding in Thailand on the PC industry, in addition to structural decline in PC DRAM demand growth. But we expect this should be followed by quick recovery in pent-up demand with normalization of HDD production. We believe Hynix is well positioned to come out ahead in the game of survival in the DRAM industry given: 1) its relatively advanced process technology and better product mix in DRAM; and 2) material exposure (32% of total revenue) to NAND flash, which we believe has a much brighter supply-demand outlook.

Expect a deeper trough but quicker turnaround of DRAM cycle

Near-term negative impact from Thailands floods on PC DRAM demand
According to our channel checks, as well as comments from our colleague Masaru Koshita, who covers the Japan Electronic Components sector, in Nidec (6594.OS, 1-OW): Takeaway from the briefing; aiming for a sharp HDD-SPM recovery in 4Q, dated 26 October, disruption of global HDD production due to flooding in Thailand will significantly limit global PC production during 4Q11-1Q12E. Our global PC forecasts assume 92.9mn and 97.3mn units of PC shipments during the period, which implies 10.7% and 4.8% q/q growth; however, we believe growth in production could be well below this due to the HDD shortage (we expect a significant inventory reduction of PCs during the period). In addition to shrinking PC production, we are especially concerned about growth in DRAM content per box during the period, as we think a significantly inflated HDD price (up by 3040%) will decrease the motivation for PC OEMs to increase DRAM content regardless of the DRAM price. We forecast that the price of 2Gb DDR3 chips will bottom in 1Q12 at US$0.9 on a quarterly average basis. However, we are concerned that the commodity DRAM price might even reach the variable cost of second-tier players on a temporary basis of US$0.7, compared with the current spot price of US$0.72, on our estimates.

21 November 2011

Barclays Capital | Hynix Semiconductor

Figure 1: Variable and cash cost of 3x/4xnm DRAM

1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 3xnm Variable cost
Source: Barclays Capital estimates

(US$) Current contract price Current spot price

4xnm Cash cost

Quick recovery expected from 2Q12 on production cut and pent-up demand
However, as has been the case in the past, we believe a deeper trough in the cycle will be followed by a quicker turnaround, even amid a secular downturn. We think most of the second-tier players will have difficulty with the 3xnm transition and will have to cut utilization rates in 1Q11, especially when the DRAM price reaches their variable cost, in which case cash burn will happen on a real-time basis. We estimate roughly 30% of global commodity DRAM supply is exposed to such risk. On the other hand, we expect PC DRAM demand to show a strong recovery from 2Q12 into 3Q12 (although it might be regarded as a temporary recovery from a long-term perspective), given: 1) inventory-building demand for PCs with the normalization of HDD supply and the launch of Windows 8 in 2H12; and 2) resumption in growth of DRAM content per box with the normalization of the HDD price, which will expand DRAM budget. We forecast the price of 2Gb DDR3 chips will recover to the US$1.1 level in 2H12, leading to our estimate of 4.7% DRAM budget per PC COGS.

21 November 2011

Barclays Capital | Hynix Semiconductor

Figure 2: Historical average of DRAM costs as a percentage of a total cost of a PC

12% 10% 8% 6% 4% 2% 0% 1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11 1Q12E

Source: Barclays Capital estimates

Well positioned in the DRAM survival game

However, on a longer-term basis, we believe the DRAM industry is still on a secular downcycle regardless of the near-term up and down given: 1) the lack of a driver for growth in DRAM content per box; 2) the nature of the DRAM industry whereby cost cutting is achievable only through supply growth; and 3) a still crowded supply side, with five suppliers. Therefore, we think the DRAM industry will have to undergo a game of survival until the weakest players give up. We think Hynix will be one of the players to survive, for the following reasons.

One of the lowest-cost producers in DRAM with superior product mix

With its recent successful migration to 38nm technology, we believe Hynix has proven itself as one of the technology leaders in the DRAM industry, second only to Samsung Electronics. We estimate that Hynix is roughly 6-9 months behind Samsung Electronics in technology migration, but is more advanced than Elpida by 2-3 months and Inotera by 6-12 months. We believe Hynix has competitive advantage in costs of around a 30% over its second-tier peers. Figure 3: Portion of 3xnm DRAM technology by vendor
4Q11E SEC Hynix Micron Elpida
Source: Barclays Capital estimates

3xnm and below 55% 30% 1% 20%

A well-diversified product mix also gives Hynix a distinctive edge over its peers. We estimate that commodity DRAM revenue accounts for only 30% of the total DRAM revenue of Hynix, while higher value-add products of specialty DRAM, such as mobile DRAM, server DRAM and graphic DRAM, account for 25%, 21% and 12% of total DRAM revenue respectively. We think this is why Hynix has recorded relatively better profitability in DRAM compared to its peers, except for Samsung. Given that supply of specialty DRAM is much less crowded
21 November 2011 5

Barclays Capital | Hynix Semiconductor

than for commodity DRAM, with only 2-3 major players, we think specialty DRAM will continue to have a higher-value profile compared to commodity DRAM. Figure 4: DRAM technology node at Hynix
1Q11 66nm 54nm 44nm 38nm 29nm
Note: On a wafer basis. Source: Company data, Barclays Capital estimates

2Q11 0% 25% 70% 5% 0%

3Q11 0% 20% 70% 10% 0%

4Q11E 0% 10% 60% 30% 0%

1Q12E 0% 0% 60% 40% 0%

2Q12E 0% 0% 45% 50% 5%

3Q12E 0% 0% 40% 50% 10%

4Q12E 0% 0% 30% 50% 20%

10% 40% 50% 0% 0%

Figure 5: DRAM makers operating profits and margins for 3Q11

800 600 400 200 0 (200) (400) (600) (800) SEC Hynix Nanya Inotera Elpida (USDmn) (%) 150 120 90 60 30 0 (30) (60) (90) (120) (150)

Operating profit (LHS)

Note: SEC and Hynix DRAM operating profit only. Source: Company data, Barclays Capital estimates

Operating margin (RHS)

Getting better positioned to benefit from secular growth of NAND flash

In good contrast to DRAM, we think the global NAND flash industry is on secular growth trend on the back of supply discipline by the leading suppliers and robust DRAM growth from new applications such as smart devices and SSDs. We think Hynix is also set to benefit from the secular growth of the industry although it might not be the biggest beneficiary. As of 3Q11, the revenue from NAND flash accounts for roughly 30% of total revenue and we estimate that the operating margin from NAND flash was well exceeding that of DRAM at 13% vs -26% for DRAM. We think the revenue and profit contribution from NAND will increase further as: 1) Apple, the global no.1 NAND flash consumer, is trying to diversify NAND suppliers, while we believe SEC is not aggressive about supplying NAND to Apple; and 2) Hynix has shown better-than-expected execution in technology migration in NAND, although it is not the lowest-cost producer. As shown in Figure 6, we estimate that the difference in profitability of NAND flash among players is relatively less than for DRAM.

21 November 2011

Barclays Capital | Hynix Semiconductor

Figure 6: NAND flash operating margin by vendor in 3Q11E

25% 20% 15% 10% 5% 0% SEC

Source: Barclays Capital estimates

Hynix

Toshiba

Figure 7: Revenue contribution from DRAM/NAND flash at Hynix

120% 100% 80% 60% 40% 20% 0% 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E

% revenue contribution (DRAM)

Source: Company data, Barclays Capital estimates

% revenue contribution (NAND)

Figure 8: OP contribution from DRAM/NAND flash at Hynix

250% 200% 150% 100% 50% 0% -50% -100% -150% -200% 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E

% OP contribution (DRAM)
Source: Company data, Barclays Capital estimates

% OP contribution (NAND)

21 November 2011

Barclays Capital | Hynix Semiconductor

Recent rights offering a significant help for balance sheet

Hynix announced on 14 November that it would issue 101,850,000 new shares at KRW23,000 to SK Telecom, which has been chosen as a preferred bidder for a stake sale by existing major shareholders of creditor banks. After these deals (new shares plus the purchase of existing shares from creditor banks), SK Telecom would secure a 21.1% stake of Hynix, as the major shareholder, and Hynix would get a cash injection of about KRW2.34trn. With this cash injection and some free cash flow, we estimate that the companys net debt would be lowered to KRW1.90trn until 4Q12E, from KRW5.12trn in 3Q11, assuming the company would not be aggressive about capacity expansion. We then estimate Hynixs net debt-to-equity ratio would be lowered to 18% at end-2012E from 64% in 3Q11, enhancing its balance sheet substantially. Please refer to page 37 for Barclays Capitals credit view on Hynix and recommendation on the convertible bond. Figure 9: Net debt-to-equity ratio comparison among DRAM makers (3Q11)
160 140 120 100 80 60 40 20 0 Inotera Elpida Hynix (before rights offering) Hynix (after rights offering, 1Q12E) (%)

Source: Company data, Barclays Capital estimates

Historical valuation suggests upside from here

For valuation, we use historical P/B for the cyclical context, applying the mid-cycle average as we expect an upcycle for NAND and a downcycle for DRAM. Our price target represents 54.0x 2012E P/E and 11.4x 2013E P/E. We acknowledge the shares may not appear attractive to some investors from the perspective of ROE rather than P/B or P/E. However, we focus on the fact that the share price performance of DRAM manufacturers has been driven by a relatively short-term earnings outlook. Therefore, we recommend investors focus on the companys quarterly earnings outlook.

21 November 2011

Barclays Capital | Hynix Semiconductor

Figure 10: P/B target multiple in a historical quarterly context

3.0 2.5 2.0 1.5 1.0 0.5 ROE 0.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% Current share price P/B (x) Target multiple based on 4Q12E ROE: 12.3%

Note: Based on estimated quarter-end BVPS and quarterly average P/B multiple Source: Barclays Capital estimates

Key risks include: 1) potential new owner SK Telecoms lack of experience in running a highly cyclical business; 2) mistimed execution in DRAM and NAND production; and 3) too aggressive capacity expansion on NAND could drive market share competition.

21 November 2011

Barclays Capital | Hynix Semiconductor

Figure 11: Hynix Peer valuation comparison

Price Ticker Hynix Peers' AVG Samsung Electronics Micron Elpida Inotera Sandisk 000660 KS 005930 KS MU US AAPL US 3474 TT SNDK US Rating 1-OW/3-Neg 1-OW/3-Neg 2-EW/1-Pos NR NR NR (Local) 23,200 980,000 6.74 348 4.47 51.07 Potential up/ downside PT to PT (%) 27,000 1,250,00 0 8.00 n/a n/a n/a 16.4 27.6 18.7 nm nm nm P/E (x) 2010 2011E 2012E 5.2 (994.4) 21.9 55.9 10.6 3.6 64.3 n/a 9.1 12.3 144.0 n/a n/a 11.4 54.0 18.7 9.7 36.2 n/a n/a 10.1 P/B (x) 2010 2011E 2012E 1.80 1.1 2.01 0.84 0.29 0.39 2.09 1.93 1.1 1.74 0.82 0.43 0.56 1.80 1.66 1.0 1.49 ROE (%) 2010 2011E 2012E 32.4 8.7 20.4 (0.2) (8.8) 14.7 3.3 (9.7) 16.1

0.81 16.3 0.6 2.2 0.47 0.8 (31.2) (5.1) 0.91 (20.9) (44.9) (77.3) 1.55 26.8 16.9 15.6

Note: Stock Rating: 1-OW: 1-Overweight, 2-EW: 2-Equal Weight, 3-UW: 3-Underweight. Sector View: 1-Pos: 1-Positive, 2-Neu: 2-Neutral, 3-Neg: 3-Negative. Estimates for not rated stocks (NR) are Bloomberg estimates. For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Share prices as of the close on 17 November 2011 in local currency. Source: Bloomberg, Barclays Capital estimates

Figure 12: Asia Pacific semiconductors valuation comparison

Pot. up/ downside EPS P/E (x) P/BV (x) ROE (%) to PT Mkt Cap PT (%) (US$bn) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E 16.4 27.6 430 (994.4) 101,47 7 147.9 79,932 10.6 64.9 5.6 0.6 6.2 3.0 1.5 1.6 0.9 3.3 2.8 11.8 3.1 5.2 0.8 0.4 2.1 1.5 6.4 6.0 14.0 97.3 124.8 12.7 12.9 5.2 0.8 0.5 2.4 1.7 6.6 7.8 33.9 164.3 106.4 16.8 14.7 14.7 16.6 30.2 13.4 19.1 15.3 12.6 36.8 17.1 7.7 24.2 13.5 12.1 (23) 54.0 12.3 14.5 16.2 21.4 11.8 17.3 14.8 9.6 15.1 10.1 9.1 18.4 11.8 1.93 1.74 3.09 0.79 0.88 1.93 1.45 1.92 1.28 0.52 0.85 0.95 3.27 2.40 1.66 1.49 2.83 0.78 0.85 1.77 1.42 1.70 1.13 0.51 0.79 0.92 3.16 2.00 (0.2) 14.7 21.1 4.8 2.9 14.4 7.6 12.5 10.2 1.4 5.0 12.3 13.5 17.8 3.3 16.1 19.5 4.8 4.0 15.0 8.2 11.5 11.8 3.4 7.8 10.1 17.2 16.9

Stock Hynix Samsung Electronics TSMC UMC Vanguard ASE SPIL Kinsus Nan Ya PCB Shinko Ibiden Mediatek MStar

Sector IDM IDM

Ticker

Rating

Price (Local)

23,200 27,000 1,250, 000 005930 KS 1-OW/3-Neg 980,000 2-EW/3-Neg 3-UW/3-Neg 3-UW/3-Neg 2-EW/3-Neg 2-EW/3-Neg 3-UW/3-Neg 1-OW/3-Neg 3-UW/1-Pos 1-OW/1-Pos 2-EW/1-Pos 1-OW/3-Neg 1-OW/3-Neg 75.7 12.85 11.4 27.95 28.6 98.5 75.1 513 1,667 967 308.5 174

000660 KS 1-OW/3-Neg

Foundry 2330 TT Foundry 2303 TT Foundry 5347 TT OSAT OSAT 2311 TT 2325 TT

63 (16.8) 10.5 (18.3) 10.5 (7.9) 27 (3.4) 30 97 2,400 1,190 400 210 4.9 29.2 44.0 23.1 29.7 20.7 85 (13.7) 490 (4.5)

Substrate 3189 TT Substrate 8046 TT Substrate 6967 JP Substrate 4062 JP Fabless Fabless 2454 TT 3697 TT

NGK Spark Plug Substrate 5334 JP

Note: For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Share prices as of the close on 17 November 2011 in local currency. Source: Bloomberg, Barclays Capital estimates

21 November 2011

10

Barclays Capital | Hynix Semiconductor

GLOBAL MEMORY INDUSTRY OUTLOOK IN 2012

DRAM: Deeper trough but quicker recovery likely

We expect the overall supply/demand situation of the global DRAM industry to stabilise in 2012 as supply growth continues to slow down. However, we do not expect a Vshaped recovery in 2012 due to the muted DRAM demand growth from PC applications despite the strong growth from mobile DRAM. We believe the disparity between PC DRAM and specialty DRAM (servers and mobile) will be continued. Supply We forecast that global DRAM supply will increase by 33% in 2012 vs our estimate of 43% for 2011, which is quite low in an historical context. We expect none of the DRAM makers to add new wafer capacity in 2012 while some of them, such as Powerchip and ProMos, have lowered their utilisation rates dramatically. We assume that most of the supply growth is coming from technology migration in 2012; therefore, our bit growth forecast could be vulnerable to changes depending on the execution of the DRAM makers. And, we believe, there could be some downside risk to our supply forecasts on a further decline of DRAM prices given that the current DRAM price is already lower than that of most of DRAM makers. By vendor, we forecast that SEC will still outgrow the market; however, its market share gains will be relatively smaller than that in 2011. Demand We forecast that global DRAM bit demand will increase 34% in 2012, slightly lower than our forecast of 40% for 2011. However, because our demand growth forecast for 2012 is more than our supply growth forecast of 33%, we expect the oversupply issue to moderately ease in 2012. By application, we forecast that PC-related DRAM demand (including that for tablet PCs) will increase 29%, driven by servers and tablet PCs. We believe DRAM demand from servers and tablet PCs will outgrow the market, supported by the robust growth in content per box. However, we expect desktop and notebook PC DRAM demand will under grow the market due to the muted growth in content per box and slow growth in PC units. Figure 13: Global PC shipments (excluding tablets)
450 400 350 300 250 200 150 100 50 0 2005 2007 Desktops Netbook
Source: IDC, Gartner, Barclays Capital estimates

Figure 14: Global PC shipments (including tablets)

18 16 14 12 10 8 6 4 2 0 600 500 400 300 200 100 0 2005 2007 2009 Notebooks Growth (%) 2011E 2013E Netbook 10 5 0 (Mn units) 25 20 15

(Mn units)

2009

2011E Notebooks Growth (%)

2013E

Desktops Tablet

Source: IDC, Gartner, Barclays Capital estimates

21 November 2011

11

Barclays Capital | Hynix Semiconductor

We forecast global PC demand (excluding tablet PCs) to increase 5% in unit terms in 2012 following our forecast of 4% growth for 2011, which is still quite lower than the five-year average growth rate of 9.2%. We are concerned that consumer PC demand will be continue to remain slow due to potential cannibalisation by tablet PCs and macro issues, and we are also concerned that the growth momentum for corporate PC demand will also slow as the replacement cycle peaks and macro risks emerge. However, we believe that the real swing factor in PC DRAM demand lies in the growth rate of content per box, which we believe faces structural challenges. We expect the consumer need for PC DRAM will not increase significantly from here (3.6GB on an average basis) as 4GB should be just enough near term to run current operating systems and applications. We also believe that PC OEMs will not be as aggressive in increasing DRAM content as they have been in the past because the DRAM impact on PC performance is not as powerful as it has been in the past and they have to deal with the rise in the cost of other components such as for storage, batteries and screens. We expect DRAM not to be prioritised in ultrabooks as manufacturers have to spend more on SSDs, polymer batteries and ultra-thin screens. As shown in Figure 15 and Figure 16, DRAM content per box for desktop PCs has not shown meaningful growth since 2010, according to US electrical goods retailer Best Buy, despite the collapse in DRAM prices, while for notebooks, it is showing some growth, indicating that the consumer need for DRAM has basically topped out at the 4GB level.

21 November 2011

12

Barclays Capital | Hynix Semiconductor

Figure 15: Historical DRAM content per box, and y/y growth
5 4 3 2 1 0 2006 2007 2008 2009 2010 2011E 2012E 2013E

(GB)

(%)

60 50 40 30 20 10 0

GB/System (LHS)
Source: Barclays Capital estimates

Growth (% y-y, RHS)

Figure 16: Simple average of DRAM content per box at Best Buy
6 (GB)

3 May 10 Sep 10 Desktop NBPC Jan 11 May 11 Sep 11

Linear (Desktop)

Linear (NBPC)

Source: Best Buy, Barclays Capital estimates

However, we forecast that DRAM demand from handsets will continue to show robust growth in 2012 thanks to the strong demand for smartphones. We forecast that handsetrelated demand for DRAMs will increase 81% in 2012 following our forecast of 121% for 2011 under the assumptions of 650mm smartphone shipments and 750MB of average content per box in 2012 vs our forecast of 480mn units and 500MB for 2011. Given our assumptions, we forecast that aggregated DRAM bit demand from handsets could account for 23% of total DRAM demand in 2012 and 25% in 2013 vs our estimate of 17% in 2011 and 11% in 2010. In terms of the growth rate in DRAM content per box for handsets, we are optimistic near term given that most of the high-end smartphones are adopting 1GB of DRAM. However, on a longer term basis, we believe content will top out at the 1GB~1.5GB level on average as the proportion of low-end phones increases and even high-end phones may not need more than 2GB given the multi-tasking needs for 3-5 inch screens will not likely be significant and the efficiencies of operating systems are likely to increase.

21 November 2011

13

Barclays Capital | Hynix Semiconductor

Figure 17: Global DRAM demand for handsets and tablet PCs
(Mn units, 1GB) Non-smartphones (mn, GB) Units (mn) Content per box (GB) Smartphones (mn, GB) Units (mn) Content per box (GB) Tablet PCs (mn, GB) Units (mn) Content per box (GB) Total Mobile DRAM demand (mn, GB) Units (mn) Content per box (GB)
Source: Barclays Capital estimates

2010 114 1,136 0.10 85 283 0.30 5 18 0.28 203 1,437 0.14

2011E 168 1,121 0.15 233 467 0.50 43 62 0.70 445 1,649 0.27

2012E 216 1,082 0.20 501 668 0.75 95 79 1.20 812 1,829 0.44

2013E 260 1,040 0.25 802 845 0.95 149 100 1.50 1,212 1,984 0.61

Figure 18: Percentage of handset-related DRAM bit demand out of total DRAM demand
1,400 1,200 1,000 800 15 600 400 200 0 2010 2011E Global DRAM demand (mn,GB)
Source: Barclays Capital estimates

(Mn units, 1GB)

(%)

30 25 20

10 5 0 2012E 2013E % of global demand

Price In terms of price, we do not forecast a radical decline for DRAM prices in 2012 given that prices are already below the cash cost level for most DRAM manufactures except for SEC. We forecast that the price of 2GB DDR3 chips will hit bottom at US$0.90 in 1Q12 (vs the current price of US$1.06) and will show a moderate recovery to US$1.10 in 2H12. We do not expect price of 2GB DDR3 chips to fall below $0.80 as it is the variable cost for second-tier players for which a production cut would then become much compelling. And we do not expect the price to go up beyond US$1.11-1.20 because we believe PC OEMs would not spend more than 5% of total COGS on DRAM given that DRAM demand is not as compelling as it has been in the past and that they will have to spend more on storage and displays than before to meet the specs of ultrabooks.

21 November 2011

14

Barclays Capital | Hynix Semiconductor

Figure 19: Forecasts of average sell prices for 2Gb DDR3

3 2 2 1 1 0 1Q11 (US$)

2Q11

3Q11

4Q11E

1Q12E

2Q12E

3Q12E

4Q12E

Source: Barclays Capital estimates

Figure 20: Historical average of DRAM costs as a percentage of a total cost of a PC

12% 10% 8% 6% 4% 2% 0% 1Q02

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11 1Q12E

Source: Barclays Capital estimates

21 November 2011

15

Barclays Capital | Hynix Semiconductor

Figure 21: Global DRAM supply/demand model

(Mn units, 1Gb equiv) Global demand PC related demand PC shipment including Tablet (mn units) PC shipment excluding Tablet (mn units) Desktops NBPC Netbook Tablet Servers and workstations Avg PC contents per box (MB) Desktops NBPC Netbook Tablet Servers and workstations Demand from other applications Global supply SEC Hynix Micron Elpida Nanya Winbond ProMOS Powerchip Supply/Demand (%)
Source: Barclays Capital estimates

1Q11 4,455 2,966 90.5 84.0 33.6 42.0 5.7 6.4 2.8 3,265 3,355 3,321 1,127 383 27,056 1,489 5,014 881 568 262 421 163 79 40 94 12.6

2Q11 4,984 3,271 100.4 86.8 35.5 42.2 6.2 13.6 2.9 3,382 3,500 3,420 1,227 575 30,085 1,712 5,229 926 568 259 482 167 81 38 95 4.9

3Q11E 5,653 3,770 113.5 95.3 37.0 49.3 6.1 18.2 3.0 3,569 3,675 3,591 1,301 604 31,589 1,884 5,671 1,013 619 316 570 155 80 23 60 0.3

4Q11E 6,315 4,300 123.0 98.6 37.3 50.9 6.5 24.4 3.9 3,744 3,859 3,771 1,340 634 33,169 2,015 6,456 1,175 773 354 622 170 81 13 40 2.2

1Q12E 6,126 3,909 101.6 87.1 33.2 45.8 5.2 14.4 2.9 4,014 4,129 4,034 1,340 761 36,486 2,217 6,632 1,222 789 372 663 179 79 13 0 8.3

2Q12E 6,774 4,335 107.9 91.3 36.3 45.9 6.0 16.6 3.0 4,196 4,335 4,236 1,353 1,027 39,040 2,439 7,025 1,296 836 372 714 206 77 13 0 3.7

3Q12E 7,567 4,836 121.1 101.2 38.0 54.7 5.4 19.9 3.2 4,232 4,335 4,236 1,353 1,099 41,772 2,731 7,709 1,425 886 424 792 247 76 5 0 1.9

4Q12E 8,279 5,411 131.6 103.9 37.9 55.8 6.0 27.8 4.2 4,230 4,335 4,236 1,367 1,154 44,696 2,868 8,347 1,568 931 483 822 296 74 0 0 0.8

2010 15,332 10,562 370.2 352.2 140.5 169.0 31.0 18.0 11.7 2,941 3,027 2,976 1,038 261 17,183 4,770 15,696 2,599 1,699 879 1,423 414 334 198 304 2.4

2011E 21,407 14,307 427.4 364.7 143.3 184.4 24.5 61.7 12.5 3,501 3,604 3,532 1,252 553 30,566 7,100 22,370 3,996 2,527 1,191 2,094 655 321 113 289 4.5

2012E 28,746 18,491 462.2 383.5 145.4 202.2 22.6 78.8 13.3 4,173 4,288 4,190 1,354 1,019 40,646 10,255 29,714 5,511 3,442 1,650 2,989 928 307 30 0 3.4

10 y-y 48% 42% 21% 15% 11% 24% -3% n.a. 18% 9% 12% 13% -3% n.a. 101% 61% 53% 70% 38% 49% 35% 15% 286% 117% 53%

11E y-y 40% 35% 15% 4% 2% 9% -21% 248% 6% 19% 19% 19% 21% 112% 78% 49% 43% 54% 49% 36% 47% 59% -4% -43% -5%

12E y-y 34% 29% 8% 5% 1% 10% -8% 26% 6% 19% 19% 19% 8% 84% 33% 44% 33% 38% 36% 39% 43% 42% -4% -73% -100%

21 November 2011

16

Barclays Capital | Hynix Semiconductor

NAND: Secular growth to continue

We believe the cyclical fluctuations of the NAND industry have been significantly lowered since 2009 when supply dynamics entered into a duopoly status and new demand growth drivers such as smartphones and tablet PCs started to emerge. We believe such a situation should continue for a while given that supply dynamics still remain stable with no irrational market share competition and new growth drivers such as SSD emerge driven by the MacBook Air, ultrabooks and Windows 8 PCs. Supply We forecast global NAND supply will increase 78% in 2012 vs our estimate of 77% for 2011, which is quite stable in an historical context. We expect most of the NAND manufactures to expand their wafer capacity to meet the strong demand from smartphones and SSD. In terms of geometry node, we expect SEC to advance past Toshiba again as SEC started to ramp up its 16nm output starting in late 3Q11 with Toshiba remaining at 19nm. By vendor, we believe Hynix should emerge as a dark horse given that its execution has been stronger than we expected and that it has a strategic purpose given the demand from Apple. We assume that Hynix will not make any aggressive capacity expansion in 2012 due to the sluggish DRAM market, which should limit its capex budget. However, Hynix could turn out to be more aggressive that we assume if it secures a large enough capex budget through various sources of funding. Demand In terms of demand, we forecast 70% y-y growth in 2012 following our forecast of 76% for 2011, which would be largely in line with supply growth. By application, we expect mobile handsets and SSDs to continue to drive demand growth in 2012, accounting for 66% of total demand compared with our estimate of 58% for 2011 and 47% for 2010. We especially focus on demand growth for the SSD segment in 2012. We believe the takeoff of ultrabook will give a strong push to increase the penetration rate of SSDs in the PC storage space. And we expect the ongoing flood in Thailand to possibly result in severe supply shortages of HDD from early next year, which could result in increased sales of SSD next year based on the narrowing price gap between two devices. We forecast that SSD demand (from PCs and tablets) will grow by 128% in 2012 to account for 25% of total demand, becoming the second-largest NAND consuming application after the 41% share for mobile handsets. We assume 50mn units of SSD shipment for PCs (including, notebooks, net-books and standalones but excluding tablet PCs) in 2012 with an average density of 100GB. However, as shown in Figure 22, our SSD sensitivity analysis suggests shipment growth of 10mn SSDs in 2012 will create an additional 3% of total NAND demand. Figure 22: Global NAND demand sensitivity analysis of SSD demand on total demand
Average NAND capacity of SSD (GB) Unit sales (Mn units) 2012E 10 30 50 70 90
Source: Barclays Capital estimates

50 2% 7% 12% 17% 22%

75 3% 10% 16% 23% 29%

100 4% 12% 20% 28% 37%

21 November 2011

17

Barclays Capital | Hynix Semiconductor

Figure 23: SSD demand forecasts

20 (Mn units) (% y-y) 40 30 20 10 10 5 0 (10) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11E 4Q11E Total SSD (LHS)
Source: Barclays Capital estimates

15

Growth (RHS)

Figure 24: Demand by application

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 DSC 2006 MP3P UFD 2007 2008 2009 2010 2011E PC / SSD 2012E Others

Digital camcorder

Mobile handsets

Source: Barclays Capital estimates

21 November 2011

18

Barclays Capital | Hynix Semiconductor

Figure 25: Global NAND flash supply/demand model

(1GB equiv, Mn units) Demand DSC MP3P UFD Digital camcorder Mobile handsets PC / SSD Others Total Demand Demand breakdown (%) DSC MP3P UFD Digital camcorder Mobile handsets PC / SSD Others Supply SEC Toshiba+ Sandisk Hynix IM Flash Others Total Supply Supply/Demand (%) 1,407 1,555 1,402 1,408 375 593 20 509 593 21 1,866 1,696 611 670 22 4,865 2.8 2,090 1,936 721 764 23 5,534 1.1 2,340 2,168 793 879 24 6,205 7.6 2,809 2,512 889 1,019 26 7,254 7.3 3,370 3,188 1,040 1,182 27 3,707 3,920 1,196 1,372 28 3,725 3,752 956 1,817 65 6,917 12,226 6,442 11,787 2,216 2,621 86 3,917 4,452 105 66% 61% 112% 55% 32% 65% 86% 72% 132% 44% 32% 77% 77% 83% 77% 70% 22% 78% 11% 14% 8% 1% 38% 12% 15% 12% 14% 8% 1% 39% 18% 9% 12% 13% 8% 1% 39% 19% 9% 10% 11% 8% 1% 40% 23% 7% 11% 10% 8% 1% 42% 19% 8% 9% 10% 7% 1% 43% 22% 8% 9% 9% 7% 1% 40% 25% 9% 7% 8% 7% 1% 39% 30% 9% 15% 18% 9% 1% 35% 12% 11% 11% 13% 8% 1% 39% 19% 10% 9% 9% 7% 1% 41% 25% 9% 436 544 320 23 471 565 486 560 321 27 720 358 553 597 372 32 1,835 909 433 4,731 556 626 418 41 2,172 1,258 404 5,475 635 598 453 43 2,444 1,111 480 5,764 633 656 489 47 2,913 1,463 555 6,758 715 731 608 55 3,370 2,126 733 8,337 731 770 694 68 3,871 2,950 864 1,515 1,872 917 71 3,587 1,202 1,088 2,031 2,327 1,431 123 3,358 1,760 2,715 2,755 2,244 213 7,650 2,631 37% 18% 33% 128% 99% 391% 40% 64% 34% 24% 56% 74% 96% 179% 62% 76% 34% 18% 57% 73% 79% 128% 50% 70% 1Q11 2Q11 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2010 2011E 2012E 10E y-y 11E y-y 12E y-y

1,459 1,577

7,042 12,597

3,817 4,049

9,946 10,252 18,072 30,806

3,797 4,086 (0.5) 0.9

8,807 10,222 10,314 18,283 32,488 5.6 2.8 0.6 1.2 5.5

Source: Barclays Capital estimates

21 November 2011

19

Barclays Capital | Hynix Semiconductor

EARNINGS FORECASTS
We expect Hynixs operating profit to show moderate recovery in 2012E and more meaningful recovery in 2013E. We estimate operating profit of the company at KRW227bn for 2012E and KRW1,538bn for 2013E. On a quarterly basis, we expect OP to bottom in 1Q12E at -KRW286bn and show a turnaround from 3Q12E. By division, we expect DRAM will remain unprofitable in 2012E with a full-year loss of KRW242bn but will turn profitable from 3Q12E on pent-up demand for PC DRAM with the normalization of HDD supply. For NAND flash, we forecast OP will continue to expand to KRW469bn in 2012E and KRWW715bn in 2013E on continued demand growth from smartphones and the new growth driver, SSD. Figure 26: Hynix earnings forecast (annual)
(KRWbn) Revenue DRAM NAND Gross Profit SG&A Operating Profit DRAM NAND Others Pre-tax Profit Net Profit Operating margin DRAM NAND
Source: Company data, Barclays Capital estimates

2010 12,099 9,959 2,175 4,779 1,506 3,273 2,981 240 52 2,696 2,656 27% 30% 11%

2011E 10,039 7,212 2,827 1,436 1,417 224 (331) 356 199 7 (12) 2% -5% 13%

2012E 9,782 6,452 3,330 1,458 1,272 227 (242) 469 0 300 300 2% -4% 14%

2013E 11,954 7,289 4,664 3,051 1,554 1,538 823 715 0 1,413 1,413 13% 11% 15%

Figure 27: Assumptions for Hynix earnings forecast (annual)

2010 Shipment (Mn, 1Gb equiv.) DRAM y/y growth NAND y/y growth ASP (1Gb, US$) DRAM y/y growth NAND y/y growth
Source: Company data, Barclays Capital estimates

2011E

2012E

2013E

3,405 38% 7,649 105%

4,921 44% 17,204 125%

6,838 39% 31,568 83%

9,277 36% 65,220 107%

2.55 28% 0.25 -25%

1.34 -47% 0.15 -39%

0.89 -33% 0.10 -34%

0.79 -12% 0.07 -28%

21 November 2011

20

Barclays Capital | Hynix Semiconductor

Figure 28: OP contribution by division

4,000 3,000 2,000 1,000 0 (1,000) (2,000) (3,000) 2004 2005 2006 2007 2008 DRAM
Source: Company data, Barclays Capital estimates

(KRWbn)

2009 NAND

2010

2011E

2012E

2013E

Figure 29: OP contribution by division (portion)

100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% 2004 2005 2006 2007 2008 DRAM
Source: Company data, Barclays Capital estimates

2009 NAND

2010

2011E

2012E

2013E

21 November 2011

21

Barclays Capital | Hynix Semiconductor

Figure 30: Hynix earnings forecast (quarterly)

(KRWbn) Revenue DRAM NAND Gross Profit SG&A Operating Profit DRAM NAND Others Pre-tax Profit Net Profit Operating margin DRAM NAND 1Q11 2,793 2,103 659 681 348 323 233 90 (0) 281 274 12% 11% 14% 2Q11 2,758 2,018 703 631 374 447 182 65 200 472 473 16% 9% 9% 3Q11 2,291 1,593 698 108 400 (277) (365) 89 (0) (553) (563) -12% -23% 13% 4Q11E 2,266 1,498 768 15 295 (269) (381) 112 0 (195) (195) -12% -25% 15% 1Q12E 2,184 1,437 746 (12) 284 (286) (383) 97 0 (355) (355) -13% -27% 13% 2Q12E 2,346 1,579 767 253 305 (42) (113) 71 0 58 58 -2% -7% 9% 3Q12E 2,609 1,757 852 637 339 308 190 118 0 283 283 12% 11% 14% 4Q12E 2,644 1,679 964 580 344 246 63 184 0 315 315 9% 4% 19% 2011E 10,039 7,212 2,827 1,436 1,417 224 (331) 356 199 7 (12) 2% -5% 13% 2012E 9,782 6,452 3,330 1,458 1,272 227 (242) 469 0 300 300 2% -4% 14% 2013E 11,954 7,289 4,664 3,051 1,554 1,538 823 715 0 1,413 1,413 13% 11% 15% y/y 11E -17% -28% 30% -70% -6% -93% -111% 48% 283% -100% -100% y/y 12E -3% -11% 18% 2% -10% 1% -27% 32% nm 4514% -2685% y-y 13E 22% 13% 40% 109% 22% 578% -440% 52% nm 370% 370%

Source: Company data, Barclays Capital estimates

Figure 31: Assumptions for earnings forecast (quarterly)

1Q11 Shipment (Mn, 1Gb equiv.) DRAM q/q growth y/y growth NAND q/q growth y/y growth ASP (1Gb, US$) DRAM q/q growth y/y growth NAND q/q growth y/y growth 1.68 -13% -40% 0.20 0% -36% 1.65 -1% -44% 0.16 -20% -45% 1.17 -29% -56% 0.14 -15% -40% 0.94 -19% -51% 0.12 -10% -38% 0.85 -10% -49% 0.11 -10% -44% 0.91 7% -45% 0.10 -8% -36% 0.95 4% -19% 0.10 -5% -29% 0.87 -9% -8% 0.09 -5% -25% -39% -34% -28% -47% 0.15 -33% 0.10 -12% 0.07 1.34 0.89 0.79 1,139 15% 49% 2,983 15% 134% 1,135 0% 39% 4,042 36% 160% 1,231 9% 47% 4,669 16% 111% 1,416 15% 43% 5,509 18% 111% 1,529 8% 34% 6,060 10% 103% 1,651 8% 46% 7,091 17% 75% 1,767 7% 44% 8,296 17% 78% 1,891 7% 34% 10,121 22% 84% 125% 83% 107% 44% 17,204 39% 31,568 36% 65,220 4,921 6,838 9,277 2Q11 3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E 2011E 2012E 2013E

Source: Company data, Barclays Capital estimates

21 November 2011

22

Barclays Capital | Hynix Semiconductor

DRAM: Deeper trough on HDD, but snap back likely in 2H12

We expect the DRAM division to remain unprofitable in 2012E on a full-year basis due to continued loss in 1H on seasonal demand weakness and disruption in HDD supply. However, on a quarterly basis, we expect a sharp turnaround from 3Q12 given 1) significant pent-up demand for PC production after the normalization of HDD supply and 2) further supply cut by second-tier players, especially after the DRAM price reaches their variable cost level, likely in 1Q12. In terms of shipment, we forecast 36% bit shipment growth in 2012E, which is slightly higher than the industry average of 33%. We believe that Hynixs bit shipment growth could be higher than our forecast of 36% in 2012E given significant net-die growth (of about 70%) coming from both node migration and 6F2 adoption through 38nm transition. However, we think Hynix would not try to maximize DRAM bit growth due to sluggish DRAM demand and the poor profitability of commodity DRAM. We assume Hynix will use some of the M10 line (20kwpm-30kwpm), which is currently producing DRAM, for NAND flash production to meet robust demand growth. However, if DRAM demand turns out to be stronger than expected, especially in 2H12, our bit growth assumption for Hynixs DRAM might have further upside potential. In terms of ASP, we expect blended ASP to decline by 33% in 2012E vs 47% in 2011E on an average full-year basis. By applications, we assume the commodity DRAM price to decline by 36%, a slightly steeper drop than for blended ASP. In the case of specialty DRAM, we think the ASP will continue to decline, but by a much lower magnitude compared to commodity DRAM. We estimate roughly 50% of total bit shipments are still from commodity DRAM, with the remainder from specialty DRAM, such as server DRAM, mobile DRAM, graphic DRAM and consumer DRAM. However, on a revenue basis, commodity DRAM accounted for roughly 30% of total DRAM revenue due to the significant difference in the ASP. We believe mobile DRAM offers the highest margin and commodity DRAM the least. Given that the price of specialty DRAM is less volatile than that for commodity DRAM, higher exposure to specialty DRAM would moderate the volatility of blended ASP, which would be favourable in a downturn and vice versa.

21 November 2011

23

Barclays Capital | Hynix Semiconductor

Figure 32: DRAM revenue mix of Hynix

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q10 2Q10 3Q10 4Q10 Server 1Q11 Graphic 2Q11 Consumer 3Q11 Mobile

Commodity (revenue basis)

Source: Barclays Capital estimates

Figure 33: DRAM technology node at Hynix

1Q11 66nm 54nm 44nm 38nm 29nm
Note: On a wafer basis Source: Barclays Capital estimates

2Q11 0% 25% 70% 5% 0%

3Q11 0% 20% 70% 10% 0%

4Q11E 0% 10% 60% 30% 0%

1Q12E 0% 0% 60% 40% 0%

2Q12E 0% 0% 45% 50% 5%

3Q12E 0% 0% 40% 50% 10%

4Q12E 0% 0% 30% 50% 20%

10% 40% 50% 0% 0%

NAND: Emerging as a new earnings contributor

We expect the NAND divisions operating profit to show meaningful growth in 2012E and 2013E. We estimate OP would reach KRW469bn in 2012E and KRW715bn in 2013E vs. KRW356bn in 2011E given: 1) favourable supply-demand dynamics in the NAND industry on the back of robust demand growth from new drivers such as SSD and still welldisciplined supply dynamics; 2) a relatively smaller gap in cost structure to first-tier players such as SEC and Toshiba; and 3) the potential opportunity if Apple will diversify its NAND flash supply source. We focus on two facts about Hynixs NAND flash business: 1) Hynix is supplying NAND flash to Apple for its iPhone4S, which implies that Hynix is technologically ready to supply other smartphone makers; and 2) operating margin was not materially different to that of SEC and Toshiba in its recent earnings result. We expect 83% supply bit growth in 2012E and 107% in 2013E. We assume that a substantial part of bit growth in 2012E will be achievable from geometry migration to 26nm node and 20K-30K of wafer capacity increase helped by M10. Hynix could be a bit more aggressive about NAND flash capacity expansion from 2H12, in our opinion, given the recently increased capex budget due to the rights offering to SK Telecom. (Hynix made a public announcement on 14 November that it will raise roughly 101.9mn shares at KRW23,000, which is equivalent to rights of KRW2.34trn being offered to SK Telecom.)

21 November 2011

24

Barclays Capital | Hynix Semiconductor

Figure 34: DRAM technology node at Hynix

1Q11 16nm MLC 64G 20nm MLC 64G 26nm MLC 64G 32nm MLC 32G 41nm MLC 32G 48nm MLC 16G
Note: On a wafer basis Source: Barclays Capital estimates

2Q11 0% 0% 40% 50% 5% 5%

3Q11 0% 0% 50% 45% 0% 5%

4Q11E 0% 5% 60% 35% 0% 0%

1Q12E 0% 20% 50% 30% 0% 0%

2Q12E 0% 30% 50% 20% 0% 0%

3Q12E 0% 40% 45% 15% 0% 0%

4Q12E 5% 50% 40% 5% 0% 0%

0% 0% 20% 65% 10% 5%

Figure 35: NAND flash operating margin by vendor in 3Q11E

25% 20% 15% 10% 5% 0% SEC

Source: Barclays Capital estimates

Hynix

Toshiba

21 November 2011

25

Barclays Capital | Hynix Semiconductor

VALUATION AND RISKS

Historical valuation suggests upside from here

For valuation, we use historical P/B for the cyclical context, applying the mid-cycle average as we expect an upcycle for NAND and a downcycle for DRAM. Our price target represents 54.0x 2012E P/E and 11.4x 2013E P/E. We acknowledge that the stock may not appear attractive to some investors from the perspective of ROE rather than P/B or P/E. However, we focus on the fact that the share price performance of DRAM manufacturers has been driven by a relatively short-term earnings outlook. Therefore, we recommend investors focus on the quarterly earnings outlook. As shown in Figure 36, Hynixs P/B multiple is not very sensitive to ROE change. We attribute this to the highly cyclical and volatile nature of the companys earnings, which investors discount as extraordinarily higher or lower earnings. In our earnings model, we forecast ROE of 12.3% in 4Q12 and, based on our 2012E BVPS assumption, Hynix is trading at 1.66x, which is obviously lower than the historical trend line. Given our target P/B multiple of 1.92x is generally in line with the historical trend, we believe our price target is reasonable. Figure 36: P/B target multiple in a historical quarterly context
3.0 2.5 2.0 1.5 1.0 0.5 ROE 0.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% Current share price P/B (x) Target multiple based on 4Q12E ROE: 12.3%

Note: Based on estimated quarter-end BVPS and quarterly average P/B multiple Source: Barclays Capital estimates

We believe Hynixs share price has moved largely in correlation with DRAM ASP changes (Figure 37). In this regard, the anticipated DRAM ASP recovery from 2Q12 could be another indication of potential upward movement in the share price.

21 November 2011

26

Barclays Capital | Hynix Semiconductor

Figure 37: Hynix historical share price vs DRAM ASP change

60,000 50,000 40,000 30,000 20% 20,000 10,000 0 Jan 02 0% -20% -40% Jan 04 Jan 06 Jan 08 Jan 10 (KRW) 100% 80% 60% 40%

Share price (LHS)

DRAM ASP change (3MMA, RHS)

Note: DRAM ASP change based on 3 month moving average of m/m ASP change Source: Barclays Capital

Risks
The key risks that could prevent our 12-month price target from being achieved, in our view, include the following: Potential new owner SK Telecoms lack of experience in running a highly cyclical business. Mistimed execution in DRAM and NAND production. Too aggressive capacity expansion on NAND could drive market share competition among players. Figure 38: Hynix Peer valuation comparison
Price Ticker Hynix Peers' AVG Samsung 005930 KS Electronics Micron Elpida Inotera Sandisk MU US AAPL US 3474 TT SNDK US 1-OW/3-Neg 2-EW/1-Pos NR NR NR 980,000 6.74 348 4.47 51.07 1,250,00 0 8.00 n/a n/a n/a 27.6 18.7 nm nm nm 000660 KS Rating 1-OW/3-Neg (Local) 23,200 Potential up/ downside PT to PT (%) 27,000 16.4 P/E (x) 2010 2011E 2012E 5.2 (994.4) 21.9 10.6 3.6 64.3 n/a 9.1 55.9 12.3 144.0 n/a n/a 11.4 54.0 18.7 9.7 36.2 n/a n/a 10.1 P/B (x) 2010 2011E 2012E 1.80 1.1 2.01 0.84 0.29 0.39 2.09 1.93 1.1 1.74 0.82 0.43 0.56 1.80 1.66 1.0 1.49 0.81 0.47 1.55 ROE (%) 2010 2011E 2012E 32.4 8.7 20.4 16.3 (0.2) (8.8) 14.7 0.6 3.3 (9.7) 16.1 2.2 (5.1) 15.6

0.8 (31.2) 26.8 16.9

0.91 (20.9) (44.9) (77.3)

Note: Stock Rating: 1-OW: 1-Overweight, 2-EW: 2-Equal Weight, 3-UW: 3-Underweight. Sector View: 1-Pos: 1-Positive, 2-Neu: 2-Neutral, 3-Neg: 3-Negative. Estimates for not rated stocks (NR) are Bloomberg estimates. For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Share prices as of the close on 17 November 2011 in local currency. Source: Bloomberg, Barclays Capital estimates

21 November 2011

27

Barclays Capital | Hynix Semiconductor

Figure 39: Asia Pacific semiconductors valuation comparison

Pot. up/ downside to PT Mkt Cap EPS P/E (x) P/BV (x) ROE (%) PT (%) (US$bn) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E 16.4 27.6 430 101,47 7 147.9 79,932 64.9 5.6 0.6 6.2 3.0 1.5 1.6 0.9 3.3 2.8 11.8 3.1 5.2 0.8 0.4 2.1 1.5 6.4 6.0 14.0 97.3 124.8 12.7 12.9 5.2 0.8 0.5 2.4 1.7 6.6 7.8 33.9 164.3 106.4 16.8 14.7 12.1 (23) (994.4 ) 10.6 14.7 16.6 30.2 13.4 19.1 15.3 12.6 36.8 17.1 7.7 24.2 13.5 54.0 12.3 14.5 16.2 21.4 11.8 17.3 14.8 9.6 15.1 10.1 9.1 18.4 11.8 1.93 1.74 3.09 0.79 0.88 1.93 1.45 1.92 1.28 0.52 0.85 0.95 3.27 2.40 1.66 1.49 2.83 0.78 0.85 1.77 1.42 1.70 1.13 0.51 0.79 0.92 3.16 2.00 (0.2) 14.7 21.1 4.8 2.9 14.4 7.6 12.5 10.2 1.4 5.0 12.3 13.5 17.8 3.3 16.1 19.5 4.8 4.0 15.0 8.2 11.5 11.8 3.4 7.8 10.1 17.2 16.9

Stock Hynix Samsung Electronics TSMC UMC Vanguard ASE SPIL Kinsus Nan Ya PCB Shinko Ibiden Mediatek MStar

Sector IDM IDM

Ticker

Rating

Price (Local)

23,200 27,000 1,250, 000 005930 KS 1-OW/3-Neg 980,000 2-EW/3-Neg 3-UW/3-Neg 3-UW/3-Neg 2-EW/3-Neg 2-EW/3-Neg 3-UW/3-Neg 1-OW/3-Neg 3-UW/1-Pos 1-OW/1-Pos 2-EW/1-Pos 1-OW/3-Neg 1-OW/3-Neg 75.7 12.85 11.4 27.95 28.6 98.5 75.1 513 1,667 967 308.5 174

000660 KS 1-OW/3-Neg

Foundry 2330 TT Foundry 2303 TT Foundry 5347 TT OSAT OSAT 2311 TT 2325 TT

63 (16.8) 10.5 (18.3) 10.5 (7.9) 27 (3.4) 30 97 2,400 1,190 400 210 4.9 29.2 44.0 23.1 29.7 20.7 85 (13.7) 490 (4.5)

Substrate 3189 TT Substrate 8046 TT Substrate 6967 JP Substrate 4062 JP Fabless Fabless 2454 TT 3697 TT

NGK Spark Plug Substrate 5334 JP

Note: For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Share prices as of the close on 17 November 2011 in local currency. Source: Bloomberg, Barclays Capital estimates

Figure 40: Hynix historical valuations

2003 Share price (KRW) High Low Average PER (x) High Low Average EPS (KRW) PBR (x) High Low Average BVPS (KRW) PBR/ROE (x) High Low Average ROE (%)
Source: Barclays Capital

2004

2005

2006

2007

2008

2009

2010

5-Yr AVG

10,000 2,625 5,930

15,150 5,560 10,761

35,300 11,350 18,628

40,300 26,150 33,428

40,000 22,100 31,348

31,950 5,770 21,140

23,400 6,430 15,293

29,400 20,100 24,099

nm nm nm (4,755)

3.9 1.4 2.8 3,867

8.6 2.7 4.5 4,128

9.0 5.8 7.5 4,477

53.0 29.3 41.6 754

nm nm nm (10,269)

nm nm nm (590)

6.6 4.5 5.4 4,486

34.4 23.3 28.9

2.13 0.56 1.26 4,697

1.78 0.65 1.26 8,527

2.80 0.90 1.48 12,617

2.29 1.49 1.90 17,568

2.16 1.19 1.69 18,546

3.20 0.58 2.11 9,999

2.63 0.72 1.72 8,897

2.28 1.56 1.87 12,914

2.51 1.25 1.92

(3.81) (1.00) (2.26) -55.9%

3.71 1.36 2.63 47.9%

8.08 2.60 4.26 34.6%

8.24 5.35 6.83 27.8%

54.74 30.24 42.90 3.9%

(0.86) (0.16) (0.57) -370.9%

(39.86) (10.95) (26.05) -6.6%

7.02 4.80 5.76 32.4%

21 November 2011

28

Barclays Capital | Hynix Semiconductor

COMPANY BACKGROUND

Organizational structure
Figure 41: Hynix organizational structure

CEO

General Charge of R&D and Manufacturing

R&D Division

Flash Development Division

FAB Manufacturing Division

M8 Division

Quality Assurance & Reliability Division

Corporate Finance Division

Administration Division

DRAM Development Division

Mobile Division

PKG&TEST Manufacturing Division

Marketing & Sales Division

Corporate Strategy Division

Business Transformation Division

HSCL
Source: Company data, Barclays Capital

Business Cooperation Division

Procurement Division

Figure 42: Hynix sales breakdown by region, 2Q11

Europe 10% Korea China 7% 2%

Figure 43: Hynix sales breakdown by product, 3Q11

Others 3% NAND flash 30%

America 31% South-East Asia 50%

DRAM 67%

Source: Company data, Barclays Capital

Source: Company data, Barclays Capital

21 November 2011

29

Barclays Capital | Hynix Semiconductor

Figure 44: Hynix key events in the companys history

Year 1983 1985 1996 1999 2001 Event Established Hyundai Electronics Co., Ltd Started pilot production of semiconductor Listed on Korea Exchange Took over large stockholder's share of LG Semiconductor and Merged Hyundai Semiconductor Co,. Ltd. Changed the Company name to 'Hynix Semiconductor Inc.' and completed separation from Hyundai Group

Early-to- Creditor financial institutions co-managed the company according to articles of the mid 2001 Corporate Restructuring Promotion Act from October 4, 2001 to July 12, 2005 2011 Stock Management Council announced its plan to receive preliminary bids for their controlling stake of Hynix in July. SK Telecom was named preferred bidder in November.

Source: Company data

21 November 2011

30

Barclays Capital | Hynix Semiconductor

Management team and major shareholders

Figure 45: Hynix board members
Name Oh Chul Kwon Sung Wook Park Min Chul Kim Boo Whan Han Kab Jong Paek In Baik Jeon Byung Tae Jung Jae Yong Song Hyun Myung Cho Dal Gon Lee Kap Hoi Kim
Source: Company data

Figure 46: Hynix major shareholders

Shareholders Stock Management Council * National Pension Mirae Asset Investment Management AllianceBerstein Vanguard Group Blackrock Fund Advisors Samsung Investment Trust MGNT Fidelity International Maps Investment Other
Note: * Creditor banks Source: Bloomberg, FSS, Barclays Capital

Title President & CEO Executive VP / CTO Chief Financial Officer Outside Director Outside Director Outside Director Outside Director Outside Director Outside Director Outside Director Outside Director

Stake (%) 15.0 9.2 5.0 4.3 3.1 1.5 1.1 1.1 1.1 1.0

Figure 47: Hynix share price performance

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Nov 10 Jan 11 Mar 11 Jun 11 Aug 11 5,000 0 Nov 11 20,000 15,000 (KRW) ('000) 30,000 25,000

Figure 48: Hynix sales and EBITDA forecasts

14,000 12,000 10,000 8,000 30% 6,000 10,000 4,000 2,000 0 2009 2010 2011E 2012E 2013E 20% 10% 0% (KRWbn) 60% 50% 40%

Volume 5d Avg (RHS)

Source: Barclays Capital, DataStream

Price (LHS)

Sales (LHS)

EBITDA margin (RHS)

Source: Company data, Barclays Capital estimates

21 November 2011

31

Barclays Capital | Hynix Semiconductor

FINANCIAL STATEMENTS
Figure 49: Hynix income statement (2009-13E)
(KRWbn) Total Revenue COGS Gross Profit Operating Expenses EBITDA Depreciation and Amortization EBIT Interest income Interest expense Net Interest Income/ Expense FX Gains Net gain in subsidiaries Other net gains/losses Pre-tax Profit Tax Discontinued operation Net Profit Minority Interest Average weighted # of ordinary shares (Mil) Basic EPS (KRW) Fully diluted EPS (KRW)
Note: K-GAAP based until 2010; K-IFRS based 2011 onward Source: Company data, Barclays Capital estimates

2009 7,906 6,280 1,627 1,435 2,988 2,796 192 51 451 (400) 275 0 (438) (371) (38) 0 (333) 15 590 (590) (620)

2010 12,099 7,319 4,779 1,506 6,100 2,827 3,273 81 441 (360) (54) 0 (163) 2,696 40 0 2,656 9 590 4,486 4,487

2011E 10,039 8,603 1,436 1,417 3,643 3,419 224 41 329 (288) 27 9 36 7 18 0 (12) 2 592 (23) (23)

2012E 9,782 8,325 1,458 1,272 3,758 3,531 227 75 297 (221) 258 6 31 300 0 0 300 2 694 430 430

2013E 11,954 8,903 3,051 1,554 4,905 3,367 1,538 69 240 (171) (1) 6 41 1,413 0 0 1,413 2 694 2,034 2,034

21 November 2011

32

Barclays Capital | Hynix Semiconductor

Figure 50: Hynix balance sheet (2009-13E)

(KRWbn) Cash and Equivalent Short-term investments Account receivables Accrued receivables Inventory Other current assets Total current assets Investment assets Tangible assets Intangible assets Other fixed assets Total fixed assets Total assets 2009 1,209 310 1,730 238 1,057 373 4,917 163 10,143 462 619 11,386 16,304 2010 1,247 949 1,604 152 1,265 475 5,692 156 10,817 549 371 11,892 17,584 2011E 675 1,036 1,322 125 1,043 391 4,593 152 10,494 691 306 11,642 16,235 2012E 1,483 1,035 1,542 146 1,217 457 5,879 158 10,378 754 357 11,646 17,525 2013E 2,819 1,033 1,945 185 1,535 576 8,092 163 10,529 815 450 11,956 20,048

Account payables Accrued payables Short term debt Current portion of LT liabilities Other current liabilities Total current liabilities Bonds LT debt Non-Current Provisions for Employee Benefits Other liabilities Total non-current liabilities Total liabilities Paid-in Capital Capital Surplus Retained Earning Other reserves Non-Controlling Interests Equity Other Total equity Total liabilities and equity
Note: K-GAAP based until 2010; K-IFRS based 2011 onward Source: Company data, Barclays Capital estimates

740 577 1,419 1,552 1,482 5,769 1,931 2,152 352 180 4,615 10,384 2,966 1,304 1,006 6 467 171 5,919 16,304

874 655 511 2,044 1,257 5,342 1,768 1,836 416 53 4,073 9,415 2,969 1,415 3,654 6 (0) 126 8,169 17,584

721 540 1,278 1,685 592 4,815 2,240 971 343 66 3,619 8,434 2,978 1,231 3,726 6 0 (141) 7,801 16,235

841 630 500 1,966 736 4,672 1,065 887 400 66 2,418 7,091 3,488 3,064 4,018 6 0 (141) 10,435 17,525

1,061 794 500 2,480 931 5,765 1,066 887 505 66 2,524 8,289 3,488 3,064 5,343 6 0 (141) 11,760 20,048

21 November 2011

33

Barclays Capital | Hynix Semiconductor

Figure 51: Hynix cash flow statement, 2009-13E

(KRWbn) Net profit Depreciation Deductions from Net Profit Total gross cash flow Change in total working capital Other Total operating cash flow Net Tangible Asset (Increase) / Decrease Capex Net Current Financial Assets (Increase) / Decrease Net Investment Asset (Increase) / Decrease Intangible Asset (Increase) / Decrease Other Total investment cash flow St. Debt Increase (Decrease) Lt. Debt Increase (Decrease) Bond Increase (Decrease) Current Portion of Lt. Debt Increase (Decrease) IPO Issues Dividend Paid Other Total financing cash flow Other Cash Flows from Operating, Investing, Financing Activities Change of Consolidated Scope Total cash flow Cash balance at beginning of the Year Cash balance at end of the Year Free Cash Flow
Note: K-GAAP based until 2010; K-IFRS based 2011 onward Source: Company data, Barclays Capital estimates

2009 (333) 2,654 (1,041) 1,280 (894) 954 1,340 (734) (1,013) (125) (130) (22) 7 (1,004) (110) (467) 199 (357) 1,031 0 58 355 (8) 0 682 527 1,209 328

2010 2,656 2,737 (229) 5,165 96 647 5,908 (3,383) (3,421) (662) (56) (149) (459) (4,709) (904) (145) 857 (949) 0 0 0 (1,140) (20) 0 38 1,209 1,247 2,487

2011E (12) 3,400 (331) 3,058 (488) 463 3,033 (3,395) (3,400) (86) (6) (207) 10 (3,685) 0 354 69 (255) 0 (89) 0 79 (12) 0 (585) 1,247 662 (367)

2012E 300 3,516 (250) 3,566 (270) 552 3,848 (3,400) (3,400) 2 0 (229) 8 (3,619) (778) (84) (1,174) 281 2,343 (9) 0 579 0 0 807 662 1,470 448

2013E 1,413 3,349 (250) 4,512 (494) 611 4,629 (3,500) (3,500) 2 0 (229) 8 (3,719) 0 0 0 514 0 (89) 0 426 0 0 1,336 1,470 2,805 1,129

21 November 2011

34

Barclays Capital | Hynix Semiconductor

Figure 52: Hynix key ratios (2009-13E)

(KRWbn) Profitability Gross margin (%) Operating margin (%) Pre-tax margin (%) Net margin (%) Financial Cash and Cash-equivalents (KRWbn) ST Debt (KRWbn) LT Debt (KRWbn) Net Debt (KRWbn) Net Debt/Equity (%) Debt/Equity (%) Current Ratio (x) Quick Ratio (x) Economic Value NOPAT (KRWbn) Total Capital (KRWbn) Gross Debt/Capital (%) Equity/Capital (%) Valuation P/E (X) P/BV (X) P/CFPS (X) EV/Sales (X) EV/EBITDA (X) EV/EBIT (X) Performance ROA (%) ROE (%) ROIC (%) Asset Turnover (X) Working Capital/Sales (%) Inventory processing days A/R collection days A/P payment days Coverage Interest Coverage Value Per Share (KRW) Earnings Per Share Book Value Per Share Sales Per Share Cash Flow Per Share Gross Cash Per Share Net Cash Per Share 2009 20.6 2.4 (4.7) (4.2) 1,519 2,971 4,083 5,535 93.5 119.2 0.9 0.6 154 12,973 54.4 45.6 (39.3) 2.6 10.2 2.4 6.4 100.4 (2.1) (6.6) 0.9 0.5 (10.8) 62.5 57.2 42.4 (0.4) (590) 8,897 13,409 2,273 2,576 (9,387) 2010 39.5 27.1 22.3 22.0 2,196 2,555 3,604 3,963 48.5 75.4 1.1 0.7 3,313 14,329 43.0 57.0 5.2 1.8 2.3 1.5 2.9 5.4 15.6 32.4 18.8 0.7 2.9 57.9 50.3 40.2 (7.4) 4,486 12,914 20,497 10,008 3,721 (6,714) 2011E 14.3 2.2 0.1 (0.1) 1,711 2,963 3,210 4,461 57.2 79.1 1.0 0.7 242 13,973 44.2 55.8 (994.4) 1.9 4.5 1.8 5.0 81.3 (0.1) (0.2) 1.5 0.6 (2.2) 49.0 53.2 33.8 (0.7) (23) 12,014 16,964 5,126 2,892 (7,539) 2012E 14.9 2.3 3.1 3.1 2,517 2,466 1,952 1,901 18.2 42.3 1.3 0.9 227 14,853 29.7 70.3 54.0 1.7 4.2 1.6 4.2 68.9 1.8 3.3 1.3 0.6 12.3 49.5 53.4 34.2 (0.8) 430 13,956 14,103 5,547 3,629 (2,740) 2013E 25.5 12.9 11.8 11.8 3,852 2,980 1,953 1,081 9.2 41.9 1.4 1.0 1,538 16,692 29.6 70.4 11.4 1.5 3.5 1.2 3.0 9.6 7.5 12.7 7.7 0.6 19.5 56.4 53.2 39.0 (6.4) 2,034 15,779 17,234 6,674 5,553 (1,558)

Note: K-GAAP based until 2010; K-IFRS based 2011 onward Source: Company data, Barclays Capital estimates

21 November 2011

35

Barclays Capital | Hynix Semiconductor

CREDIT AND CONVERTIBLE BOND PERSPECTIVE

CREDIT: Hynix 17 bonds

CREDIT RESEARCH Jit Ming Tan, CFA +65 6308 3210 [email protected]

From a credit perspective, Hynixs (B1/B+/BB-) rights offering to SK Telecom is clearly positive for the companys financial profile, especially if proceeds are used to deleverage. Indeed, all three rating agencies placed their ratings on review for upgrade on expectation that the capital increase will improve Hynixs capital structure and financial flexibility. Yields on the Hynix 17s tightened 47bp following the announcement. Notwithstanding the positive credit trajectory, we currently have an Underweight recommendation on the Hynix 17 bonds due to rich valuations and weak near-term (3-6 months) operating outlook. Indicated at a mid-YTW of 6.68% (priced to June 2015 call), the bond trades closer to mid- to high-BB levels in the Asian high yield market context. Compared to its global technology peers, the Hynix 17s also trade closer to mid-BB yields despite its weaker high-B/low-BB credit profile.

CONVERTIBLES: Hynix $500mn 2.65% convertible due 2015

CONVERTIBLES RESEARCH Heather Beattie +44 (0) 20 7773 5859 [email protected] Barclays Capital, London

Hynixs $500mn 2.65% convertible due 2015 is currently trading at 99.3 on mids versus a share price of KRW23,200 or parity, the value of the underlying shares, of 67.6, resulting in a conversion premium of 47%. The convertible is yielding 3.2% to its May 2013 put date, and has a 2.7% running yield, greater than the current 0.6% dividend yield on its shares. Using a 500bp credit spread assumption, 1.5% stock borrow fee and 33% volatility (credit calibrated or 28% in a non-calibrated model) we value the 2015 convertible at 99.9, which equates to an implied volatility of 31% and a bond floor of 98.5. The bond has an equity delta of 32%. Hence we find the bond fair value at current levels. Using our equity analysts KRW27,000 12-month price target, our valuation would increase to 102.7, approximately 3% of potential upside. Therefore, rather than an outright equity alternative we find value in the convertible due to its asymmetry. Our convexity analysis indicates potential projected convertible total returns of +5.3%/-0.6% for +25%/-25% (approximately in line with our equity analysts upside and downside cases) potential moves in Hynixs share price over a 12-month time horizon. These equate to participation rates of 0.21x/0.02x the equity moves, or an overall participation upside/downside ratio of 10.5x driven by the short-dated nature of the bond and its bondholder put option. On a hedged basis we find the convertible attractive given its appealing asymmetric profile. In addition, we could see upside if Hynix credit tightens further due to the SK Telecom stake; an indication a 100bp tightening in credit spread would result in an increase of 1.8 points to theoretical valuation. We also view the bond as a potential short-term switch for equity investors given our analysts view that we could see some potential weakness in the shares in the next few months; the convertible has lower equity sensitivity and limited downside.

21 November 2011

36

Barclays Capital | Hynix Semiconductor

ANALYST(S) CERTIFICATION(S)
In relation to our respective sections, we, SC Bae, Jitming Tan and Heather Beattie, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT FIXED INCOME DISCLOSURES On September 20, 2008, Barclays Capital Inc. acquired Lehman Brothers' North American investment banking, capital markets, and private investment management businesses. During the transition period, disclosure information will be provided via the sources listed below. For complete information, investors are requested to consult both sources listed below. https://ecommerce.barcap.com/research/cgi-bin/public/disclosuresSearch.pl or call 1-212-526-1072; http://www.lehman.com/USFIdisclosures/ Clients can access Barclays Capital research produced after the acquisition date either through Barclays Capital's research website or through LehmanLive. Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its affiliates. Barclays Capital and/or an affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm's proprietary trading accounts may have either a long and / or short position in such securities and / or derivative instruments, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays Capital produces a variety of different types of fixed income research, including fundamental credit analysis, quantitative credit analysis and trade ideas. Recommendations contained in one type of research may differ from recommendations contained in other types, whether as a result of differing time horizons, methodologies, or otherwise. Explanation of the High Yield Sector Weighting System Overweight: Expected six-month total return of the sector exceeds the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: Expected six-month total return of the sector is in line with the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: Expected six-month total return of the sector is below the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Explanation of the High Yield Research Rating System The High Yield Research team employs a relative return based rating system that, depending on the company under analysis, may be applied to either some or all of the company's debt securities, bank loans, or other instruments. Please review the latest report on a company to ascertain the application of the rating system to that company. Overweight: The analyst expects the six-month total return of the rated debt security or instrument to exceed the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Market Weight: The analyst expects the six-month total return of the rated debt security or instrument to be in line with the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: The analyst expects the six-month total return of the rated debt security or instrument to be below the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating

21 November 2011

37

Barclays Capital | Hynix Semiconductor

IMPORTANT EQUITY DISCLOSURES When an equity research report covers six or more subject companies, Barclays Capital generally does not include specific conflict of interest disclosures regarding the subject companies and instead provides the reader with instructions about how to view or obtain the applicable conflict of interest disclosures. In order to comply with the requirements of the Korea Financial Investment Association, specific disclosures about subject companies with securities listed on the Korea Exchange are included herein. To access important disclosures, including, where relevant, price targets, regarding other companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysts account. Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Convertible Risk Disclosure(s) The convertible valuations are based on Barclays Capital proprietary convertible valuation model, under which key assumptions relate to credit spread and equity volatility metrics. Material changes in any of these variables can have a significant impact on valuation. Upside/downside analysis takes into consideration likely future valuation and expected trading patterns, among others. It is based on a total return participation of the convertible relative to a +/- 25% (unless otherwise specified) change in the common stocks price over a oneyear investment horizon. A material change in the companys financial situation can significantly alter this assessment. Primary Stocks (Ticker, Date, Price) Hynix Semiconductor (000660.KS, 17-Nov-2011, KRW 23200.00), 1-Overweight/3-Negative Materially Mentioned Stocks (Ticker, Date, Price) Advanced Semiconductor Engineering (2311.TW, 17-Nov-2011, TWD 27.95), 2-Equal Weight/3-Negative Kinsus Interconnect Technology (3189.TW, 17-Nov-2011, TWD 98.50), 3-Underweight/3-Negative MediaTek Inc. (2454.TW, 17-Nov-2011, TWD 308.50), 1-Overweight/3-Negative Micron Technology, Inc. (MU, 17-Nov-2011, USD 6.33), 2-Equal Weight/1-Positive MStar Semiconductor, Inc. (3697.TW, 17-Nov-2011, TWD 174.00), 1-Overweight/3-Negative Nan Ya Printed Circuit Board (8046.TW, 17-Nov-2011, TWD 75.10), 1-Overweight/3-Negative Samsung Electronics (005930.KS, 17-Nov-2011, KRW 980000.00), 1-Overweight/3-Negative Siliconware Precision Industries (2325.TW, 17-Nov-2011, TWD 28.60), 2-Equal Weight/3-Negative TSMC (2330.TW, 17-Nov-2011, TWD 75.70), 2-Equal Weight/3-Negative United Microelectronics Corp. (2303.TW, 17-Nov-2011, TWD 12.85), 3-Underweight/3-Negative Vanguard International Semiconductor (5347.TWO, 17-Nov-2011, TWD 11.40), 3-Underweight/3-Negative Guide to the Barclays Capital Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the sector coverage universe). In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating 1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12month investment horizon. 3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company.

21 November 2011

38

Barclays Capital | Hynix Semiconductor

Sector View 1-Positive - sector coverage universe fundamentals/valuations are improving. 2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "sector coverage universe": Asia ex-Japan Semiconductors Advanced Semiconductor Engineering (2311.TW) MediaTek Inc. (2454.TW) Samsung Electronics (005930.KS) United Microelectronics Corp. (2303.TW) U.S. Semiconductors Advanced Micro Devices (AMD) Atmel Corp. (ATML) Cavium Inc. (CAVM) Freescale Semiconductor Holdings (FSL) Linear Technology (LLTC) Marvell Technology Group, Ltd. (MRVL) Micron Technology, Inc. (MU) NXP Semiconductors NV (NXPI) Skyworks Solutions, Inc. (SWKS) Triquint Semiconductor (TQNT) Distribution of Ratings: Barclays Capital Inc. Equity Research has 1991 companies under coverage. 43% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 56% of companies with this rating are investment banking clients of the Firm. 42% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 50% of companies with this rating are investment banking clients of the Firm. 12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 37% of companies with this rating are investment banking clients of the Firm. Guide to the Barclays Capital Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Barclays Capital offices involved in the production of equity research: London Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Capital Japan Limited (BCJL, Tokyo) So Paulo Banco Barclays S.A. (BBSA, So Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Toronto Barclays Capital Canada Inc. (BCC, Toronto) Altera Corp. (ALTR) Avago Technologies Ltd. (AVGO) Cypress Semiconductor Corp. (CY) Integrated Device Technology, Inc. (IDTI) LSI Corp. (LSI) Maxim Integrated Products (MXIM) Netlogic Microsystems (NETL) RF Micro Devices (RFMD) Spansion Inc. (CODE) Volterra Semiconductor Corp. (VLTR) Analog Devices (ADI) Broadcom Corp. (BRCM) Entropic Communications Inc. (ENTR) Intel Corp. (INTC) MagnaChip Semiconductor (MX) Microchip Technology (MCHP) NVIDIA Corp. (NVDA) Silicon Laboratories, Inc. (SLAB) Texas Instruments, Inc. (TXN) Xilinx, Inc. (XLNX) Hynix Semiconductor (000660.KS) MStar Semiconductor, Inc. (3697.TW) Siliconware Precision Industries (2325.TW) Vanguard International Semiconductor (5347.TWO) Kinsus Interconnect Technology (3189.TW) Nan Ya Printed Circuit Board (8046.TW) TSMC (2330.TW)

21 November 2011

39

Barclays Capital | Hynix Semiconductor

Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

21 November 2011

40

Barclays Capital | Hynix Semiconductor

IMPORTANT DISCLOSURES CONTINUED

Hynix Semiconductor (000660 KS / 000660.KS)

KRW 23200.00 (17-Nov-2011) Rating and Price Target Chart - KRW (as of 17-Nov-2011)
38K 36K 34K 32K 30K 28K 26K 24K 22K 20K 18K 16K 14K 12K 10K 8K 6K 4K Jan- 09 Jul- 09 Jan- 10 Jul- 10 Closing Price Jan- 11 Jul- 11

Stock Rating 1-OVERWEIGHT Currency=KRW Date Closing Price Rating

Sector View 3-NEGATIVE

Price Target

Link to Barclays Capital Live for interactive charting

Barclays Bank PLC and/or an affiliate trades regularly in the securities of Hynix Semiconductor. Valuation Methodology: We use P/B valuation for the cyclical context, where we apply the historical mid-cycle (average) P/B of 1.92x to our 2012E BVPS since we expect an upcycle for NAND and downcycle for DRAM. Risks which May Impede the Achievement of the Price Target: 1) Potential new owner SK Telecom's lack of experience in running a highly cyclical business. 2) Mistimed execution in DRAM and NAND production. 3) Too aggressive capacity expansion on NAND could drive market share competition.

21 November 2011

41

Barclays Capital | Hynix Semiconductor

IMPORTANT DISCLOSURES CONTINUED

Samsung Electronics (005930 KS / 005930.KS)

KRW 980000.00 (17-Nov-2011) Rating and Price Target Chart - KRW (as of 17-Nov-2011)

Stock Rating 1-OVERWEIGHT Currency=KRW Date Closing Price 993000.00 Rating 1-Overweight

Sector View 3-NEGATIVE

Price Target 1250000.00

1.3M 1.2M 1.1M 1.0M

08-Nov-2011

900.0K 800.0K 700.0K

600.0K 500.0K 400.0K

Jan- 09

Jul- 09 Closing Price

Jan- 10

Jul- 10

Jan- 11

Jul- 11

Target Price

Rating Change

Link to Barclays Capital Live for interactive charting

Barclays Bank PLC and/or an affiliate trades regularly in the securities of Samsung Electronics. Valuation Methodology: Our 12-month price target of KRW1.25mn for SEC is based on a cyclical context historical P/B valuation. In our valuation, we apply a target P/B multiple of 1.9x to our estimate for the BVPS for 2012. Our target multiple is the stock's historical average for the past five years. We use the average P/B since 2006 to reflect the ongoing de-rating of the P/B multiple since 2006. However, we believe that the de-rating will stop from 2012 and that a re-rating will start from 2013 assuming a successful launch of a large-size OLED business, which might significantly improve SEC's ROE profile on a long-term basis. Our price target is roughly equivalent to a P/E of 12.3x for 2012, which is slightly lower than the stock's historical average P/E for the past five years of 12.9x. Risks which May Impede the Achievement of the Price Target: Key risks to our positive call on SEC include: 1) double dip in global economy, which might impact demand across the board; 2) much slower-than-expected (flexible) OLED ramp up, which is the key to market share gains in smart devices, in our view; and 3) materially negative results from any kind of lawsuit.

21 November 2011

42

DISCLAIMER: This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It is provided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays Capital, nor any affiliate, nor any of their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication. The analyst recommendations in this publication reflect solely and exclusively those of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays Capital and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays Capital recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. This communication is being made available in the UK and Europe primarily to persons who are investment professionals as that term is defined in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion Order) 2005. It is directed at, and therefore should only be relied upon by, persons who have professional experience in matters relating to investments. The investments to which it relates are available only to such persons and will be entered into only with such persons. Barclays Capital is authorized and regulated by the Financial Services Authority ('FSA') and member of the London Stock Exchange. Barclays Capital Inc., U.S. registered broker/dealer and member of FINRA (www.finra.org), is distributing this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019. Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise. This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC (www.iiroc.ca). To access Barclays Capital policy on the dissemination of research reports, please go to http://www.barcap.com/Client+offering/Research/Research+Policy. Subject to the conditions of this publication as set out above, Absa Capital, the Investment Banking Division of Absa Bank Limited, an authorised financial services provider (Registration No.: 1986/004794/06), is distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This publication is not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or entity wishing to effect a transaction in any security discussed herein should do so only by contacting a representative of Absa Capital in South Africa, 15 Alice Lane, Sandton, Johannesburg, Gauteng 2196. Absa Capital is an affiliate of Barclays Capital. In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research reports are distributed to institutional investors in Japan by Barclays Capital Japan Limited. Barclays Capital Japan Limited is a joint-stock company incorporated in Japan with registered office of 6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143. Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong. This material is issued in Taiwan by Barclays Capital Securities Taiwan Limited. This material on securities not traded in Taiwan is not to be construed as 'recommendation' in Taiwan. Barclays Capital Securities Taiwan Limited does not accept orders from clients to trade in such securities. This material may not be distributed to the public media or used by the public media without prior written consent of Barclays Capital. This material is distributed in South Korea by Barclays Capital Securities Limited, Seoul Branch. All equity research material is distributed in India by Barclays Securities (India) Private Limited (SEBI Registration No: INB/INF 231292732 (NSE), INB/INF 011292738 (BSE), Registered Office: 208 | Ceejay House | Dr. Annie Besant Road | Shivsagar Estate | Worli | Mumbai - 400 018 | India, Phone: + 91 22 67196363). Other research reports are distributed in India by Barclays Bank PLC, India Branch. Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin). This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd. This material is distributed in Brazil by Banco Barclays S.A. This material is distributed in Mexico by Barclays Bank Mexico, S.A. Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Barclays Bank PLCDIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporated outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi). Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory Authority (QFCRA). Barclays Bank PLCQFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar. This material is distributed in Dubai, the UAE and Qatar by Barclays Bank PLC. Related financial products or services are only available to Professional Clients as defined by the DFSA, and Business Customers as defined by the QFCRA.

This material is distributed in Saudi Arabia by Barclays Saudi Arabia ('BSA'). It is not the intention of the Publication to be used or deemed as recommendation, option or advice for any action (s) that may take place in future. Barclays Saudi Arabia is a Closed Joint Stock Company, (CMA License No. 09141-37). Registered office Al Faisaliah Tower | Level 18 | Riyadh 11311 | Kingdom of Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number: 1010283024. This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177-11850-100000; Dealer License #177-11855-010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21. This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose registered address is One Raffles Quay Level 28, South Tower, Singapore 048583. Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed at 'wholesale clients' as defined by Australian Corporations Act 2001. IRS Circular 230 Prepared Materials Disclaimer: Barclays Capital and its affiliates do not provide tax advice and nothing contained herein should be construed to be tax advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Barclays Capital is not responsible for, and makes no warranties whatsoever as to, the content of any third-party web site accessed via a hyperlink in this publication and such information is not incorporated by reference. Copyright Barclays Bank PLC (2011). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of Barclays Capital or any of its affiliates. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request.

US08-000001