A Beneficiary of Korea’s Localization Drive
The author is an analyst of NH Investment & Securities. He can be reached at midas.sohn@nhqv.com. -- Ed.
Despite the Covid-19 outbreak, S&S Tech’s 1Q20 sales satisfied our estimate. As S&S Tech is a beneficiary of Korea’s localization drive and also a non-memory-related stock, a recent drop in its share price offers a good buying opportunity from a long-term perspective.
1Q20 sales satisfy estimate
S&S Tech posted 1Q20 consolidated sales of W25.1bn (+2.0% q-q, 42.8% y-y), OP of W3.8bn (+34.1% q-q, +90.4% y-y), and OPM of 15.3%. Sales met our estimate, but OPM arrived slightly below our forecast. We attribute the narrowing in OPM to higher R&D expenses stemming from the company’s search for new growth drivers.
We size the portion of display-related sales amongst S&S Tech’s total sales at about 70%. With no domestic display makers investing, S&S Tech’s sales to China are increasing in line with greater investment at Chinese display makers. Of note, the firm added a new local customer in China in 3Q18—previously, it had only one Chinese photomask client.
Covid-19 crisis to accelerate demand for localization
Covid-19 crisis effects on IT downstream industries (including semiconductor and display) are to influence S&S Tech’s earnings. Taking a long-term perspective, we view a recent drop in S&S Tech’s share price as representing a good opportunity to load up on the firm’s shares, noting that as the only blank mask manufacturer in Korea, it is set to benefit from; 1) resuming display investment in China; 2) the anticipated restart of non-memory investment at a major client once the Covid-19 pandemic stabilizes; and 3) likely valuation re-rating upon S&S Tech achieving success in developing EUV pellicle.
As a result of the recent Covid-19 crisis, procurement risks for parts and materials are emerging, with the extent of these risks varying according to individual countries in supply chains. Going forward, this development is to accelerate supply chain diversification and localization of parts and materials. In particular, as S&S Tech’s main competitor is a Japanese company, S&S Tech should be in spotlight as a localization-related play.