IT parts/electronics
The author is an analyst for Shinhan Securities. He can be reached at snowKH@shinhan.com -- Ed.
Earnings stability improving on subsidiary growth, client diversification
We believe two major points indicate that the timing is right to accumulate shares in Wonik QnC. The first is solid earnings stability. Despite weakening semiconductor market conditions, the company posted operating profit of KRW33.2bn (-2% YoY) for 1Q23 with: 1) subsidiary Momentive Performance Materials Quartz delivering strong earnings backed by price hikes; and 2) earnings fundamentals strengthening on the increase in quartz ware sales to semiconductor equipment companies and non-memory chipmakers at home and abroad. Total sales rose 22% YoY to KRW221.9bn in 1Q23, contrasting with the 13% YoY decline at peer companies. For full-year 2023, operating profit from subsidiaries and others are forecast at KRW60.8bn (+27% YoY).
Valuation attractiveness rising alongside growth in earnings
The second point is valuation attractiveness. Wonik QnC has emerged as a steady grower among semiconductor materials/parts/equipment suppliers, backed by a successfully diversified product portfolio with quartz ware for non-memory production now contributing to roughly 20% of company-wide sales. Yet, Wonik QnC shares are currently trading under the 2020-2022 average PER of 13.3x at a 2023F PER of 9.8x. Expectations are thus on the rise for a re-rating (PER↑) of the company's shares going forward.
Semiconductor parts peers are currently trading at a 2023F PER of 14.9x on average. Amid the brightening outlook for chip market recovery as well as the industry-wide paradigm shift led by AI, investor focus is turning to stocks ranking high on valuation attractiveness. We believe now is the time to focus on the growth story of Wonik QnC, driven by: 1) addition of clients following improvement in product quality; 2) reduction of costs through vertical integration; and 3) expansion into the supply of components used in non-memory production.
Retain BUY and raise target price to KRW43,000
We retain BUY and raise our target price by 8% to KRW43,000, based on 2023F EPS of KRW2,906 and a target PER of 14.9x. Following solid earnings in 2023, Wonik QnC is expected to enjoy a 35% YoY jump in operating profit to KRW154.3bn in 2024. Given the short replacement cycle of the company's products at three to six months, earnings growth stands to accelerate further upon the upturn in overall demand.
The company's successful vertical integration also warrants attention, in our view. Operational synergy with subsidiaries and subsequent increase in order intake should drive improvement in earnings fundamentals through 2023. We thus urge investors to focus on Wonik QnC's valuation attractiveness and mid/long-term growth potential as a leading supplier of semiconductor components in the domestic market.