Earnings to Remain Strong amid 8-inch Foundry Boom
The author is an analyst of Shinhan Investment Corp. He can be reached at doyeon@shinhan.com. -- Ed.
Earnings to remain strong amid 8-inch foundry boom
According to foreign media reports, 8-inch foundry prices are forecast to increase beyond previous expectations in 3Q. Clients are preemptively stocking up on non-memory inventory amid prolonged supply shortages.
The non-memory shortage should ease from 3Q, but may not be fully resolved until 2022. After taking a hit from failed predictions for post-pandemic recovery in demand, clients are holding higher levels of inventory than in the past. Fair inventory levels should be kept high until a macroeconomic shock occurs, or demand growth slows down.
8-inch foundry shortages to continue through 2022
We expect DB HiTek to post sales of KRW270.8bn (+11.1% QoQ) and operating profit of KRW77.9bn (+28.5% QoQ) for 2Q. Earnings should continue on an uptrend in 3Q with sales of KRW290.6bn (+7.3% QoQ) and operating profit of KRW91.1bn (+17.0% QoQ). Our 3Q projections are highly likely to be upward-adjusted, with the 8-inch foundry price hike assumed conservatively at 3% QoQ.
For full-year 2021, earnings are forecast to hit an all-time high with sales of KRW1.09tr (+16.4% YoY) and operating profit of KRW300.7bn (+25.7% YoY). Even after exceeding the KRW1tr and KRW300bn marks, earnings should grow further in 2022. We thus believe concerns over a possible earnings peak are premature at this point.
Retain BUY for a target price of KRW71,000
The Korean government recently announced a massive support package for the semiconductor industry, which includes tax breaks, financial incentives, and deregulation. Benefits expected from the so-called K-semiconductor strategy and unprecedented non-memory shortages should create a favorable environment for DB HiTek to ramp up growth.
DB HiTek shares are currently trading at 2021F PER of just 11.6x, weighed down by concerns over a possible earnings peak. Key investment points are: 1) momentum expected from price hikes caused by supply shortages in the 8-inch foundry market; 2) attractive valuations at 2021F EV/EBITDA of 4.4x; and 3) improvement in financial health with the debt ratio forecast at 39.1% for 2021.