Business Diversification Sustains Fast Growth Pace

The authors are analysts of Shinhan Investment Corp. They can be reached at johnsoh@shinhan.com and chank@shinhan.com, respectively. -- Ed.

 

2020 sales forecast at KRW925.7bn (+19.9% YoY)

For 2Q20, SK Materials is expected to report earnings improvement on increased capacity utilization of semiconductor manufacturing, despite falling utilization rates of LCD and OLED lines. Operating profit is projected to come in at KRW56.5bn (+6.5% QoQ, +2.5% YoY) on sales of KRW221bn (+4.1% QoQ, +20.8% YoY), slightly surpassing the market consensus of KRW55.2bn. Additional improvement can be expected from the recent rise in the USD/KRW exchange rate. For 3Q20, we expect steep growth in demand for semiconductor/display specialty gases along with the full-fledged production of Apple-bound OLED panels, Samsung Electronics’ P2L DRAM line (Hwaseong) going into production, and ramp-up of Samsung Electronics’ XiAn2 NAND line (Xian, China) and SK Hynix’s M15 NAND line (Cheongju). SK Airgas should also see strong demand for industrial specialty gases. We forecast full-year sales of KRW925.7bn (+19.9% YoY) and operating profit of KRW243.4bn (+13.3% YoY).

Falling sales share of NF3 → Business diversification sustains fast growth pace

In 2015, NF3 accounted for more than 80% of the company’s sales and display specialty gases generated bigger sales than semiconductor specialty gases. Precursors, etching gases, and industrial gases were added after its acquisition by the SK Group. Business diversification helped sustain its fast-paced growth. With increasing sales share of other businesses, that of NF3 has continued to shrink from 58% in 1Q17 to 52% in 1Q18, 41% in 1Q19, and 31% in 1Q20. The company should be able to maintain high profitability levels, considering that WF6 and precursors carry far higher margins than NF3.

Retain BUY and raise target price by 4.8% to KRW220,000

We raise our target price for SK Materials by 4.8% to KRW220,000 in view of: 1) 2020F operating profit of KRW243.4bn (+13.3% YoY); and 2) 2020F ROE of 27.7% and PER of 12.1x. The PHLX Semiconductor Sector Index is on the rise. Semiconductor materials companies should benefit from improvement in semiconductor manufacturing. SK Airgas recently decided on a new investment worth KRW215.8bn, which we believe is a preemptive move to cater to future demand from SK Hynix’s semiconductor cluster in Yongin. An opportunity has opened up.

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