Expanding Semiconductor Materials Business
The authors are analysts of Shinhan Investment Corp. They can be reached at johnsoh@shinhan.com and chank@shinhan.com, respectively. -- Ed.
2Q20 OP exceeds the consensus at KRW56.6bn
SK Materials posted 2Q20 operating profit of KRW56.6bn (+6.7% QoQ, +2.7% YoY) on sales of KRW227.5bn (+7.1% QoQ, +24.3% YoY). Results turned out better than the consensus (KRW55.2bn) thanks to: 1) higher capacity utilization rates at display manufacturers; 2) increased shipments of high value-added semiconductor precursors and WF6; and 3) NF3 price stabilization.
Operating profit will likely reach KRW66.4bn (+17.2% QoQ, +18.3% YoY) on sales of KRW247.8bn (+8.9% QoQ, +22.7% YoY) in 3Q20. Earnings growth should be driven by: 1) ramp-up of new memory chip production lines; 2) production of OLED panels for Apple; and 3) normalization of LG Display’s OLED TV panel line in China.
OP outlook: 2020F KRW250.5bn (16.6% YoY) à 2021F KRW292.7bn (16.8% YoY)
We forecast full-year sales at KRW942.5bn (+22.1% YoY) and operating profit at KRW250.5bn (+16.6%YoY) in view of the following reasons. SK Materials has started to mass produce high-purity hydrogen fluoride used in the semiconductor production. The photoresist business acquired from Kumho Petrochemical will be recognized in sales. Precursors, which carry a high operating margin of 40%, are expected to rake in KRW133.8bn in sales (+33.5% YoY) this year. For 2021, we project sales at KRW1.04tr (+10.3% YoY) and operating profit at KRW292.7bn (+16.8%YoY).
Retain BUY and raise target price by 8% to KRW270,000
We raise our target price for SK Materials by 8% to KRW270,000 in light of: 1) 2020F operating profit of KRW250.5bn (+16.6%YoY); and 2) mass production of high-purity hydrogen fluoride and expansion of the photoresist business. Our target price is based on 2021F EPS of KRW15,981 and a target PER of 16.9x. SK Materials shares have recently gone up sharply following the June 16 news of hydrogen fluoride production, expansion of the photoresist business, and development of spin-on-carbon (SOC) hard masks used in the lithography process of semiconductor production. We see further upside for the shares as the company should continue to seek new business opportunities going forward.