Outstanding Results in Q4 of 2019
The authors are analysts of Shinhan Investment. They can be reached at doyeon@shinhan.com and sungjun.na@shinhan.com, respectively. -- Ed.
4Q19 results seen strong considering incentive payments
DB HiTek recorded sales of KRW212bn (+22.5% YoY, -4.6% QoQ) and operating profit of KRW48.3bn (+87.4% YoY, -21.7% QoQ) for 4Q19, meeting our forecasts (sales of KRW213.3bn,operating profit of KRW47.6bn).
These are outstanding results considering: 1) typically low seasonality in the non-memory market at the end of the year; and 2) incentives (estimated above KRW10bn) for record-high earnings in 2019 paid in 4Q.
Uncertainty exists over short-term demand but should be short-lived
For 1Q20, we forecast sales at KRW199.4bn (+24.9% YoY, -6.0% QoQ) and operating profit at KRW45bn (+101.0% YoY, -7.0% QoQ). Capacity utilization rates have remained high, backed by solid demand for CIS (CMOS image sensor) and PMIC (power management IC) in a typically slow season at the start of the year. However, DB HiTek may have to postpone shipments temporarily if the coronavirus outbreak disrupts IT product manufacturing in China. We thus hold a conservative outlook on 1Q20 earnings.
Retain BUY for a target price of KRW34,000
Coronavirus is causing uncertainty over demand from China, which should have a short-term impact on DB HiTek’s earnings and share price. With structural growth in 8-inch foundry demand (CIS, PMIC, etc.), however, quarterly earnings should improve after bottoming out in 1Q20.
Key investment points for DB HiTek are: 1) upbeat forecasts for mid/long-term growth in demand for 8-inch foundry services driven by IoT and big data technologies; 2) solid financials with a debt ratio of 55.4% projected for 2020; and 3) attractive valuations vs. global peers with shares trading at 2020F PER of 8.9x.