Semiconductor Equipment Sales Expected to Strengthen
The author is an analyst of NH Investment & Securities. He can be reached at hyundong.lee@nhqv.com. -- Ed.
While Device ENG has seen increasing orders from Chinese OLED makers, concerns towards delayed delivery owing to Covid-19 have been mounting. However, the majority of related sales should be recognized in 2Q20. Backed by greater semicon investment at its largest client, Device ENG is expected to record its all-time highest earnings this year.
Impact of Covid-19 to be limited
Boasting world-leading players as clients, Device ENG is a supplier of Fine Metal Mask (FMM) cleaning equipment used in the OLED display deposition process. Affected by the outbreak of Covid-19, delivery to Chinese OLED makers TIANMA and Visionox has been delayed, raising concerns over 1Q20 earnings. However, according to the firm’s latest announcement, delivery dates have been delayed by just two to three months, and the majority of delayed sales should be recognized in 2Q20. Therefore, we believe Covid-19’s impact on annual earnings will be limited.
As of end-2019, order backlog was estimated at W120bn, with most related sales set to be recognized in 2020. In 1H20, we expect additional orders stemming from Chinese BOE’s capacity addition for its B12 fab (30K/month). And, the decision by the firm’s largest client to invest in A5 facilities should serve as an additional growth driver.
Earnings growth expected, thanks to rising semiconductor equipment sales
Increasing sales of semiconductor front opening unified pod (FOUP; a storage container used in the semiconductor manufacturing process) cleaning equipment, driven by anticipated investment at major clients, should make a healthy contribution to Device ENG’s earnings over the next two to three years. Of note, FOUP cleaning equipment is essential in tech migration for the securing of sound production yields. Going forward, we expect Device ENG’s semiconductor equipment sales to strengthen, as: 1) its market share rises on a shift at clients to domestic equipment; 2) clients’ memory (DRAM) capacity expands; and 3) EUV equipment adoption accelerates on new investment for non-memory facilities.
We estimate Device ENG’s 2020 sales at W133.6bn (+209.1% y-y) and OP at W27.5bn (+523.1% y-y), upwardly adjusting our earnings forecasts in light of: 1) the possibility of additional OLED equipment orders from China; and 2) likely strong semiconductor equipment sales (predicted to widen by over W10.0bn y-y). Currently trading at a 2020E P/E of 4.7x, Device ENG’s shares look undervalued.
NH Investment & Securities