Seoul Semiconductor: Discontinuation of Coverage – Final Underweight on Structural LED Oversupply

Core Conclusion

We are discontinuing coverage of Seoul Semiconductor with a final Underweight rating and W12,000 price target, implying 26% downside from the current W16,120. Despite nearing completion of Chinese LED industry consolidation, persistent oversupply continues to pressure ASPs and margins. The company’s revenue is stagnant, EBITDA is deteriorating, and free cash flow is negligible. The stock’s recent rally has pushed it above our fundamental valuation, and we see no catalyst for re-rating without a meaningful improvement in supply-demand balance.

Evidence Chain

1. Chinese LED consolidation is nearly complete, yet oversupply remains the dominant theme. Major Chinese suppliers still face excess capacity, sustaining downward pressure on ASPs and margins across the industry. This directly limits pricing power for all Korean LED makers, including Seoul Semiconductor.

2. Revenue growth is anaemic and margins remain deeply depressed. 2025A revenue fell 7.1% YoY to W1,014bn. We forecast only 6.4% growth in 2026E to W1,079bn. Operating margin stayed negative at -3.1% in 2025A and is expected to recover to just 1.3% in 2026E, 2.7% in 2027E, and 3.0% in 2028E. Such low margins offer negligible buffer against any demand shock.

3. EBITDA is collapsing and cash generation is inadequate. EBITDA plunged from W579bn in 2024A to W188bn in 2025A, and we project further decline to W125bn in 2026E. Operating cash flow in 2025A was only W88bn, barely covering capex of W46bn, leaving almost no free cash flow. The lack of internal funding capacity limits the ability to invest in new technology or weather a prolonged downturn.

4. The current stock price already exceeds our valuation target by 26%. Our W12,000 target comes from a residual income model using an 11.3% cost of equity and 2% terminal growth, implying a 2027E P/B of 1x – already above the stock’s 10-year average. With coverage discontinued, there will be no future fundamental support. The upside scenarios (W25,000 bull case) rely on unproven new products (EUV, micro-LED) gaining traction quickly, which we view as low probability.

Key Disagreements and Risks

• Upside risks: Slower OLED cost decline could slow TV/mobile penetration, benefiting LED backlight demand. WICOP technology could see faster adoption in automotive lighting. Higher auto-LED demand could lift utilization. However, none of these offset the core oversupply headwind.

• Downside risks: General lighting demand slowdown could trigger aggressive price cuts. Loss of share in mobile backlight units (BLU) is a real threat. Continued Chinese demand weakness could lead to order cuts and further margin compression. We believe the downside risks are more likely to materialize given the structural imbalance.

Valuation or Trade Implication

Maintain Underweight. The stock trades at W16,120 (as of May 15, 2026), 26% above our W12,000 target. Our residual income model assumes a terminal growth rate of only 2% (down from 5% previously) to reflect intense competition. The implied 2027E P/B of 1x already exceeds historical norms. We do not recommend investment; wait for concrete evidence of industry supply rationalization before reconsidering.

Appendix Data Summary (High-Value Tables)

Exhibit 1: Earnings Estimate Changes (W bn)

Exhibit 2: Key Financial Summary (W bn, except ratios)