Semiconductor equipment
The author is an analyst for Shinhan Securities. He can be reached at ym.ko@shinhan.com -- Ed.
2Q23 outlook: Earnings to bottom out amid improving sentiment
Jusung Engineering is expected to report operating profit of KRW0.8bn (-98% YoY) on sales of KRW31.8bn (-73% YoY) for 2Q23. Earnings should fall short of 1Q23 results as the delivery of equipment to a Chinese client, set to be completed within 1H23, made a larger-than-anticipated contribution to sales in the first quarter. On a positive note, the second quarter will be significant for the company as its earnings are strongly expected to reach the bottom of the current cycle, given: 1) market conditions on a recovery path; and 2) growing earnings momentum from non-semiconductor businesses in 2H23.
2023 outlook: Sharp upturn in 3Q, further upside in 4Q
For full-year 2023, we forecast sales at KRW268.6bn (-39% YoY) and operating profit at KRW48.4bn (-61% YoY). There are solid reasons to expect earnings improvement in 2H23. First, sales contribution from Chinese clients should be concentrated in 2H23 given the timing of order placements, with its portion in total sales estimated to reach 80%. Second, one of the company’s key clients SK Hynix is poised to enjoy faster earnings recovery than sector peers thanks to DDR5 and HBM effects. This may allow the chipmaker to flexibly expand investment in 4Q23. Lastly, Jusung Engineering is highly likely to recognize sales from the solar cell business in the second half of the year. In 3Q23, the company is expected to book solar cell sales (roughly KRW47bn) deferred from 2022 considering discussions underway with clients. Backed by the gradual increase in sales contribution from Chinese and other overseas clients, the company stands to see a sharper upturn in earnings vs. 2Q23. In 4Q23, Jusung Engineering is projected to maximize the booking of sales from China and other overseas markets. Expectations are also rising for an increase in supply to SK Hynix. Should the chipmaker make any investment decision, it will prioritize migration to finer processes. And since Jusung Engineering supplies equipment for the high-k capacitor fabrication process, which is key to the technological migration, it may enjoy additional upside to earnings faster than any other supplier in the value chain.
Shares to rise along with upturn in SK Hynix earnings and shares
We maintain BUY on Jusung Engineering and keep our target price unchanged at KRW22,000 (target PER of 11.3x). Business conditions at clients, one of the reasons behind weakening investor sentiment toward the company, have now taken a turn for the better. It should be noted that earnings forecasts for 4Q23 and 2024 are highly likely to be revised upward going forward. We expect the company’s shares to reach a meaningful inflection point in June or July when SK Hynix’s ASP levels for 2Q23 will be confirmed. We thus recommend Jusung Engineering as our sector top pick.