Business Diversification Leading to Earnings Growth
The author is an analyst of NH Investment & Securities. He can be reached at hyundong.lee@nhqv.com. -- Ed.
Dawonsys’s current order backlog for electric trains stands at W1.1tn. Sales are expected to grow by around 70% in 2Q20 on the completion of a new plant. In addition, business diversification (semiconductors and medical devices) should drive growth in 2021.
Earnings growth being driven electric train division’s order backlog of W1.1tn
On Jun 15, Dawonsys won a W245.1bn order to replace the old rolling stock (electric trains) on Seoul’s subway Line 4. Accordingly, the firm’s electric train order backlog, which stood at W842.3bn in 1Q20, has now risen to W1.1tn.
With a new factory in Jeongeup and a new straight test line (1.2km) in Gimcheon set to start operations in April, the order backlog should rapidly convert to sales. We forecast 2Q20 sales of W70.3bn (+67.2% y-y) and OP of W5.3bn (+90.1% y-y).
Due to the strengthened domestic safety regulations, replacement and new demand for electric trains is expanding. Orders of more than W1.0tn pa are expected over the next five years, which should drive the company’s earnings growth. In addition, the start of the GTX project and an increase in exports to Myanmar and India are likely to act as additional growth drivers.
Business diversification leading to earnings growth; corporate value set to rise
Dawonsys’s new core power electronics technology controls power semiconductors. We expect the firm’s business diversification efforts to boost the contribution of non-railroad divisions in 2021.
The company plans to deliver new power supply systems for front-end semiconductor equipment to domestic firms. In 2021, when delivery begins, sales of about W100bn are expected. Boasting higher profitability than electric trains, the new power supply systems should lead to margin growth.
Meanwhile, subsidiary Dawon Medax (37% stake)’s boron neutron capture therapy (BNCT) system was selected as an innovative medical device by the Ministry of Food and Drug Safety in July. Accordingly, the system should be subject to the fast track procedure for evaluation of clinical trials. Dawon Medax’s IPO in 2021 should drive up Dawonsys’s corporate value as well.