Samsung Display's OLED Capacity Expansion to Drive Momentum
The authors are analysts of Shinhan Investment Corp. They can be reached at johnsoh@shinhan.com and chank@shinhan.com, respectively. -- Ed.
Advanced Process Systems started to develop LCD equipment with Samsung Display in 2004, and since then has transformed into an equipment supplier for small/mid-size OLED lines. The company now supplies ELA (excimer laser annealing) systems, encapsulation equipment, and LLO (laser lift off) systems used in the flexible OLED manufacturing process to Samsung Display and Chinese display makers. The company also provides RTP (rapid thermal processing) equipment to chipmakers. Advanced Process Systems remains the unrivalled leader in ELA equipment, which is the company’s cash cow business.
2020 sales forecast at KRW658.9bn (+42.6% YoY)
Advanced Process Systems received orders from China-based BOE (KRW149.3bn) and CSOT (KRW84.8bn) in 1Q20, and could secure additional orders from Tianma Microelectronics and Visionox in 2H20. As a result, we expect the company to enjoy steep earnings growth to sales of KRW658.9bn (+42.6% YoY) and operating profit of KRW50.7bn (+78.3% YoY) in 2020.
Samsung Display's OLED capacity expansion to drive momentum
Samsung Electronics is gearing up for the release of Galaxy Fold 2 in 3Q20. The new model will likely feature a 7.6-inch main foldable OLED display and a 6.2-inch secondary screen. Meanwhile, Apple is expected to adopt OLED screens on most of its smartphones over the next two years. The company is also highly likely to launch a foldable iPhone going forward.
Samsung Display plans to convert its 7G or 8G LCD TV panel lines to the production of small/mid-size OLED panels. As a result, we expect Advanced Process Systems to receive orders for high-margin ELA, encapsulation, and LLO equipment from Samsung Display in 1H21.
Initiate coverage with BUY for a target price of KRW31,000
We initiate coverage of AP Systems with BUY for a target price of KRW31,000 on forecasts for: 1) sales of KRW658.9bn (+42.6% YoY) in 2020; and 2) new order intake from Samsung Display in 1H21. Our target price is based on 2020F EPS of KRW2,448 and a target PER of 12.8x.
Investor sentiment has been hit by Samsung Display’s recent decision to suspend construction of its A5 line. However, adoption of OLED screens on all upcoming smartphones will require more than double the investment completed up to present. With shares trading at bottom and orders to flow in from 1H21, we believe now is the best time to buy shares on a mid/long-term view.