Foundry Market to Grow on Intel’s 7nm Chip Delay
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and sungjun.na@shinhan.com, respectively. -- Ed.
2Q20 preview: Record-high OP of KRW70.5bn (+43.1% YoY)
DB HiTek is expected to have posted record-high earnings for 2Q20 with sales of KRW238.3bn (+5.5% QoQ, +11.3% YoY) and operating profit of KRW70.5bn (+8.9% QoQ, +43.1% YoY). Robust earnings were likely driven by strong foundry market conditions and favorable forex rates.
For full-year 2020, earnings should hit an all-time high with sales of KRW929.7bn (+15.1% YoY) and operating profit of KRW261.7bn (+44.4% YoY).
Foundry market to grow sharply on Intel’s 7nm chip delay
We believe Intel’s delays in the 7nm process will lead to a marked growth in demand for foundry services. The foundry market should expand sharply if Advanced Micro Devices (AMD), a key rival of Intel that relies on foundries like TSMC to produce its chips, succeeds in increasing market share or Intel decides to use foundry fabs instead of its own fabs.
New orders from AMD or Intel, if any, should mostly flow to top-tier suppliers such as TSMC. Considering limited resources at TSMC, however, other foundries are expected to enjoy trickle-down benefits. DB HiTek will likely secure a stable flow of orders for CIS (CMOS image sensor) and DDI (display driver IC). There is also a possibility that product ASPs will increase if supply shortages in the 8-inch foundry market are prolonged.
Target price raised to KRW42,000; re-rating of shares possible
We raise our target price for DB HiTek by 16.7% to KRW42,000 on upward adjustment of earnings forecasts. Our revised target is based on 2020F EPS and an easily-reachable target PER of 10.0x (past five-year average PER high). Foundries have recently seen their share prices and valuation multiples rise on expectations for stable market growth.
We expect to see a re-rating of DB HiTek shares based on: 1) solid earnings stability amid an extended boom in the 8-inch foundry market; 2) improvement in financial health with a debt ratio of 56% projected for 2020; and 3) attractive valuations vs. global peers with shares trading at 2020F PER of 7.9x.