IT small/mid-cap
The author is an analyst for Shinhan Securities. He can be reached at hyon@shinhan.com -- Ed.
3Q23 operating profit to miss consensus at KRW13.2bn (-28% QoQ)
Doosan Tesna is expected to post operating profit of KRW13.2bn (-27.5% QoQ) on sales of KRW90.3bn (+1.5% QoQ) for 3Q23, falling short of the market consensus of KRW17.5bn. Demand for mobile chips has partially recovered since July with the launch of new foldable phone models and a change in sales strategy at the company’s smartphone-making client (shift of focus from low/mid-range to high-end smartphones in India, ultra-high-priced models in Japan). Sales should continue on an uptrend in 3Q driven by strong demand for test services for mobile AP (application processors) and CIS (CMOS image sensors) along with higher chipmaker output levels. However, profitability will likely drop by 5.8%p QoQ, weighed down by cost hikes from capacity expansion, new hires, and equipment maintenance/repair works.
2023 operating margin likely to fall to 17.2%
We expect Doosan Tesna to record operating profit of KRW60.8bn (-9.5% YoY) on sales of KRW354bn (+27.5% YoY) for full-year 2023, missing the consensus estimate of KRW65.9bn. The semiconductor market, which entered a down-cycle in 2H22, is gradually moving upward from the 1H23 bottom with a decline in inventory levels. Even in the absence of a visible improvement in demand this year, the company is seeing sales growth on the expansion of applications. The smartphone-making client may start the production of new flagship models, set for release in February 2024, earlier than scheduled, and re-introduce its in-house developed AP for high-end models in certain markets. Doosan Tesna should be able to secure orders from the client given its experience in test services for high-end AP wafers. A rise in the ASP of CIS test services is also expected with improvement in the product mix. Nevertheless, operating margin is likely to fall to 17.2% in 2023 due to: 1) lower capacity utilization in 1H23; 2) costs incurred from capacity expansion (delays from 4Q22 and new addition in 2023); and 3) labor cost increases.
Beneficiary of demand growth from high-end applications and cars
We retain BUY on Doosan Tesna for a target price of KRW53,000. The company has a diversified business portfolio of test services for high value-added chips, which sets itself apart from other Korean non-memory OSAT (outsourced semiconductor assembly and test) providers that focus mainly on low-end mobile chips. It currently provides test services for CIS, and is expected to secure additional orders for AP in 4Q. It also offers test services for chips used in cars and PCs with significant earnings growth seen from the latter this year. With clients placing more weight on automotive chips and self-driving technology driving demand for CIS, Doosan Tesna stands to benefit from the CIS supply chain diversification at automakers.