Samsung Display’s Resumption of Investments Holds the Key
The authors are analysts of Shinhan Investment Corp. They can be reached at johnsoh@shinhan.com and chank@shinhan.com, respectively. -- Ed.
2020 operating profit to reach KRW219bn (+2.2% YoY)
SFA Engineering is expected to earn operating profit of KRW60.6bn (+23.9% QoQ, +32.2% YoY) on sales of KRW448.6bn (+7.1% QoQ, +9.7% YoY) in 3Q20. Earnings growth should be driven by: 1) recognition of sales from Chinese display makers; 2) logistics system sales; and 3) earnings improvement at the subsidiary SFA Semicon.
For 2020, we forecast sales at KRW1.74tr (+10.3% YoY) and operating profit at KRW219bn (+2.2% YoY), based on: 1) recognition of OLED equipment sales mainly from Chinese display makers; and 2) sales of logistics systems and test equipment from secondary battery makers, including SK Innovation.
Samsung Display’s resumption of new investments holds the key
Samsung Display is currently investing in the 8G quantum-dot OLED TV panel line. It will likely decide whether to make further investment if the initial production yield is obtained in 1H21 as scheduled. The Samsung Galaxy Z Fold 2, set for release in September, is expected to be warmly received in the global smartphone market. Samsung Display is highly likely to resume investments in new foldable OLED panel lines if Apple’s launch of foldable phones comes in sight.
We believe Chinese smartphone makers will adopt OLED screens on most of their 5G smartphones by 2025. BOE Technology, China Star Optoelectronics Technology (CSOT), and Tianma Microelectronics should aggressively invest in small/mid-size OLED panels.
Retain BUY for a target price of KRW47,000
We retain our BUY rating on SFA Engineering for a target price of KRW47,000 in light of: 1) 2020F operating profit margin of 12.6%; and 2) expanding equipment portfolio, including logistics systems and test equipment for secondary batteries. Our target price, based on 2020F target PER of 12.4x, is equivalent to 2021F PER of 10.5x.
The company’s share performance hinges on whether Samsung Display will expand investment in OLED panel production. Along with the shift to 5G smartphones, further investment in small/mid-size OLED and foldable OLED lines should be necessary in the mid-to-long term. We recommend a long-term approach to SFA Engineering.