Earnings to Rebound in 2Q21

The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.

 

1Q21 results in line with expectations

Simmtech reported operating profit of KRW15.3bn (+12% YoY) on sales of KRW283.1bn (-2% YoY) for 1Q21, in line with our estimate (KRW15.4bn). The first quarter is typically a weak season. Inventory adjustments for server-use memory substrates continued from 4Q20. But solid orders for mobile components and earnings improvement of the Japanese subsidiary (operating profit of KRW1.5bn) buttressed overall earnings.

Earnings rebound in 2Q21, big cycle of memory substrates in 2022

We forecast 2Q21 operating profit of KRW30.5bn (-1% YoY). With clients wrapping up inventory adjustments in 1Q21, signs of a market rebound have been witnessed since April. Sales of MSAP substrates have increased and orders for server-use substrates have started to come in.

Full-year operating profit is projected to reach KRW110.2bn (+23% YoY) in 2021 and KRW131.5bn (+19% YoY) in 2022. Momentum from technological changes should become visible from 2022.

Simmtech announced in February that added capacity for MSAP (SiP, etc.) will go into production at the end of 2021. Contribution to earnings should be felt from 2022, adding around KRW100bn in sales of high value-added substrates per year. Combined sales of FCSSP and SiP are expected to climb from KRW109.9bn in 2020 to KRW158.7bn in 2021.

The industry adoption of DDR5 should pick up from 2022. Simmtech saw a boost in earnings when the industry transitioned to DDR3 in 2008 and DDR4 in 2014. We believe it will emerge as a major beneficiary of the transition to DDR5 in 2022-2023. The shift should result in ASP hikes in about 30% of the company’s total product mix.

Retain BUY for a target price of KRW31,000; domestic package substrate bellwether

We plan to change the valuation base from 2021 to 2022 EPS forecasts when sales start to flow in from the industry's shift to DDR5.

First, Simmtech is one of a handful of IT parts suppliers expected to deliver strong results for 2Q21, given its low exposure to mobile devices. Second, while eyes are on the supply and demand of substrates used in system semiconductors (FCBGA, FCCSP, SiP, etc.), we focus on possible changes in demand for memory-use substrates in 2022 from the adoption of DDR5 and supply constraints. Third, along with growth of EBITDA, we expect further improvement in the company’s financial standing (debt ratio) and an increase in dividends.

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