An Infrared Image Sensor Manufacturer
The author is an analyst of NH Investment & Securities. He can be reached at jack.baek@nhqv.com. -- Ed.
i3system is an infrared image sensor manufacturer that boasts special chemical compound semicon technology. While the firm has been undervalued due to sluggish earnings, its current share price is attractive amid expectations for: 1) exports of Korea’s Hyeongung and Shingung weapons, for which the company is an exclusive supplier of cooled infrared image sensors; 2) domestic defense projects such as LAH and K1E1; and 3) increasing orders for non-defense products such as X-ray imaging sensors.
Infrared image sensor company with three investment points
i3system is the only infrared image sensor company in Korea with global-level technology. Its main products are infrared image sensors, X-ray image sensors, and optical camera parts for space satellites. Infrared image sensors account for about 90% of total sales. Infrared image sensor technology is highly advanced technology that is possessed by only seven countries worldwide.
Infrared image sensors are classified into cooled-type and uncooled-type sensors. Cooled-type sensors are mainly used for military purposes, and are adopted in Korea’s K2 tank and infantry weapons such as Hyeongung (ground-to-ground) and Shingung (ground-to-air). The uncooled-type are used for military items such as small firearms, or for security and surveillance devices such as thermal imaging cameras, in addition to self-driving cars.
Key investment points for i3system include: 1) the expansion of the firm’s exports, amid increased interest in Korean weapons in the global market (although no export contracts have been announced yet, the firm is an exclusive vendor for Hyeongung and Shingung); 2) the preparation of defense projects such as LAH (light armed helicopter) and K1E1 (tank improvement project); and 3) sound demand for X-ray imaging sensors and satellite cameras.
Earnings growth to accelerate as Korea’s defense exports expand
In 2023, we expect i3system to overcome a long period of earnings sluggishness and record sales of W108.3bn (+40.9% y-y) and OP of W10.4bn (+86.0% y-y) thanks to increased defense-related exports. In 2022, the Korean defense industry is experiencing an unprecedented boom, with orders exceeding US$20bn. Of note, exports offer significant profit upside as there are no margin limits (limited to around 10% under the Defense Acquisition Act). With an earnings upcycle likely to begin in earnest from 2023, the shares appear undervalued, trading at a 2023F P/E of 10.9x.