Rise of Metaverse Presents New Opportunities
The author is an analyst of NH Investment & Securities. He can be reached at kyeongkeun.kang@nhqv.com. -- Ed.
A turnaround is on the horizon for NewFlex’s main FPCB business, thanks to weakening market competition and restructuring effects. With NewFlex supplying its PCBs for use in Oculus devices, the firm is also set to benefit from expansion of the global metaverse industry. An earnings growth cycle should take off in earnest from 2022, as fundamentals are to improve on portfolio diversification (VR/automotive electronics) and restructuring.
Main business turning around on weakening competition and restructuring effects
NewFlex’s main FPCB business is to make a turnaround on weakening market competition and restructuring effects. Looking at the market landscape, the situation is turning favorable for NewFlex, as: 1) due to low margins, SEMCO recently decided to again outsource its camera module FPCBs; 2) NewFlex’s main competitor is in the process of withdrawing from the FPCB business; and 3) with factory operations at its competitor suffering disruptions due to Covid-19, orders have been concentrating on NewFlex. Meanwhile, the firm is pursuing a relocation of its production facilities to Vietnam. For reference, the number of employees at headquarters declined from 497 in 2018 to 314 in 1Q21, while the sales portion of the firm’s Vietnam business expanded from 1.7% in 2018 to 43.5% in 1Q21. Moving ahead, COGS-to-sales ratio is anticipated to improve on the back of lower labor costs.
Rise of metaverse presents new opportunities (Oculus)
NewFlex supplies PCBs to Oculus via the largest Chinese smartphone camera module maker. Oculus VR holds a dominant position in the market, with 1Q21 sales of 2.29mn units and market share of 75%. Considering Oculus’s explosive sales volume, rising PCB content per unit, and higher OPM (vs existing VR products), the firm’s VR-related business should lead overall top-line expansion and profit improvement going forward.
NewFlex’s 2021 and 2022 sales for Oculus are estimated at W26.4bn (+128.1% y-y) and W40.4bn (+53.0% y-y), respectively, with the related portion out total 2021 and 2022 sales to climb rapidly to 17.0% and 22.3%, respectively.
NewFlex is expected to display 2022 sales of W181.6bn (+17.1% y-y) and OP of W17.2bn (+1,942% y-y; OPM of 9.5%), driven by: 1) product portfolio diversification (eg, VR and automotive electronics PCBs); and 2) business restructuring. The company is trading at a 2022F P/E of 3.9x. Given that this multiple is significantly below the PCB company average of 9.8x and that NewFlex’s growth potential should be bolstered by sales for Oculus, a leader in metaverse devices, the firm appears strongly undervalued.