Transistor and Amplifier supplier for Telecom/defense Applications
The authors are analysts of Shinhan Investment Corp. They can be reached at ym.ko@shinhan.com and hyungwou@shinhan.com, respectively. -- Ed.
Transistor and amplifier supplier for telecom/defense applications
RFHIC manufactures GaN transistors and amplifiers. By application, we expect telecom to account for 72% and defense 25% of total sales in 2021. The company generated 47% of total sales from Huawei Technologies until 2019, but no sales to the Chinese client have been booked this year amid trade conflicts between the US and China. Shifting its focus from Huawei, RFHIC expects to ramp up sales to Samsung Electronics in earnest from 2021.
Investment points: 1) growth in sales to Samsung; 2) widening adoption of GaN transistors; and 3) technology gap vs. rivals
1) Growth in sales to Samsung: Global investment in telecom equipment is expected to resume in the near term and Samsung Electronics stands to benefit from the setbacks of Huawei Technologies and Nokia. Adding to the recent order secured from Verizon, Samsung Electronics is highly likely to win massive orders from AT&T and T-Mobile. GaN adoption by global telecom equipment companies is set to rise in 2021, and RFHIC is expected to supply 70-80% of all GaN transistors used by Samsung Electronics going forward.
2) Widening adoption of GaN transistors: In addition to telecom, the shift to GaN transistors should become visible in a wider range of industries including defense, healthcare and aviation on advantages offered in performance and efficiency vs. conventional vacuum tubes. Following the success of the vacuum tube replacement project carried out with Airbus in 2013, RFHIC has become a vendor for the world’s top 10 defense companies.
3) Technology gap vs. rivals: RFHIC plans to mass produce GaN-on-diamond transistors from 2H21. Application of the new technology, which offers fivefold improvement in thermal conductivity vs. GaN-on-SiC, will start off in the defense industry. Low production yields, the last hurdle for RFHIC to overcome, should improve as the company begins to mass produce defense-use products. As a result, we expect RFHIC to maintain its technology gap with rivals. In the long term, the company also plans to expand into the market for power device semiconductors using diamond substrates.
Initiate coverage with BUY for a target price of KRW54,000
We initiate coverage of RFHIC with BUY for a target price of KRW54,000, based on 2021F EPS of KRW1,203 and a target PER of 45x (average PER high of 2017-2018, a period of high expectations for earnings gains backed by5G investment). In 2021, we expect RFHIC to deliver the highest earnings growth in the telecom equipment sector.