Investing W9.0bn to Ramp up Capacity for Healthcare Products
The author is an analyst of NH Investment & Securities. He can be reached at midas.sohn@nhqv.com. -- Ed.
Dreamtech saw sluggish smartphone parts earnings in 2Q21 due to reduced new smartphone launch effects at a main client and disrupted handset production due to semiconductor shortages. Earnings should recover in 3Q21 on the back of normalization for smartphone parts supply. From 4Q21, the pace of earnings growth for FDA-approved healthcare products should enter the spotlight.
2Q21 review: Earnings sluggish due to disrupted smartphone production
Dreamtech logged 2Q21 sales of W249.5bn (-28.7% q-q, +17.4% y-y) and OP of W14bn (-45.3% q-q, TTP y-y). By division, sales broke down as IMC (smartphone PBA module business) W64.6bn (-31.9% q-q, +45.3% y-y), BHC (fingerprint recognition module and healthcare business) W61.3bn (-5.8% q-q, +31.3% y-y), AES (vehicle LED module business) W20.5bn (-4.6% q-q, -11.2% y-y), and CMS (camera module division) W103.1bn (-38.7% q-q, +5.8% y-y).
We attribute the weaker-than-expected earnings to reduced effects from the launch of premium smartphones at a main client, decreased handset production due to semiconductor supply shortages, and production disruptions owing to the resurgence of Covid-19 in Vietnam.
However, earnings should recover in 3Q21 on the normalization of smartphone production and a likely increase in FDA-approved healthcare product sales.
Look to earnings growth at healthcare business from 4Q21
Moving ahead, we believe that attention should turn to the pace of Dreamtech’s healthcare-related earnings growth. Among the wireless ECG patches manufactured by the company, 1Ax (electrocardiogram + body temperature + respiration rate measurement) has been approved by the FDA, and investments amounting to W9.0bn are underway to ramp up capacity for healthcare products. Currently, its production facility is operating at maximum capacity thanks to a robust uptick in orders. Healthcare sales should reach approximately W42bn in 2021 and W77bn in 2022.
As its products should see successful application in patients with severe Covid-19, Dreamtech stands to enjoy rapid earnings expansion from 4Q21. Valuation re-rating should follow in line with the pace of healthcare earnings growth.