Large-scale Capacity Additions Needed to Solve Supply Shortages
The author is an analyst of Shinhan Investment Corp. He can be reached at doyeon@shinhan.com. -- Ed.
Unprecedented shortages in non-memory semiconductors
Governments around the world are seeking measures to address non-memory chip shortages. With plans for another CEO summit on semiconductor and supply chain resilience set for 20 May following the previous April 12 meeting, US President Biden has signed an executive order that includes a review of the semiconductor supply chain and is pushing for large-scale support to chipmakers building new plants in the country. During the summit with industry leaders, Biden called for aggressive capex investment by non-memory chipmakers such as TSMC and Samsung Electronics.
Non-memory supply shortages are expected to ease from end-2Q21,with fabs that were temporarily shut down (including the Austin fab of Samsung Electronics) resuming operations from April and shipments to recover from June. Foundries are also focusing on optimal allocation of capacity to non-memory lines. However, supply shortages are likely to linger until aggressive capacity additions lead to an actual increase in production volume.
Large-scale capacity additions needed to solve supply shortages
Demand for vision placement systems, Hanmi Semiconductor’s mainstay product, hinges on capacity additions by non-memory chipmakers such as TSMC. As a result, the equipment supplier has always followed in the same direction as the Taiwanese chipmaker in earnings and share price, albeit moving in a wider range. With TSMC’s earnings highly likely to continue on an uptrend in the near term, the outlook remains bright for steady growth in earnings at Hanmi Semiconductor.
We also expect to see an increase in orders for the company's new products going forward. Further growth in earnings should be driven by EMI shield and camera module equipment, which are currently supplied to major overseas clients under long-term contracts, and TC bonder equipment, which should see orders resume on upturn in server demand.
Retain BUY and raise target price to KRW40,000
We raise our target price for Hanmi Semiconductor by 11.1% to KRW40,000, with the valuation base shifted from 2021F to 12-month forward EPS. Our target PER remains unchanged at 24x. Current share valuations are seen undemanding, given the decline in market discount rate, supply shortages in non-memory chips, and growing sales contribution from new products.
Recent tech sector correction helped to remove short-term fatigue built up from the sharp rally. Hanmi Semiconductor is the only semiconductor small/mid-cap stock in the domestic market with earnings and share price moving in sync with TSMC. In light of unprecedented supply shortages in non-memory chips, we recommend a buy-and-hold strategy for the stock.