GaN Business to Grow Visibly in 2022
The authors are analysts of Shinhan Investment Corp. They can be reached at ym.ko@shinhan.com and hyungwou@shinhan.com, respectively. -- Ed.
3Q21review: Earnings sluggish but continuing on a YoY uptrend
RFHIC posted operating loss of KRW100mn (continued loss YoY) on sales of KRW19.1bn (+96% YoY) for 3Q21, missing the market consensus (KRW2bn profit) and our estimate (KRW200mn profit). Weak earnings are attributable to: 1) key client Samsung Electronics’ decreased supply of telecom equipment to Verizon; and 2) some domestic defense sales deferred to 4Q21.
Earnings rebound in 4Q, GaN business to grow visibly in 2022
For 4Q21, sales are forecast at KRW31.2bn (+23% YoY) and operating profit at KRW3.1bn (+72% YoY). Decreased equipment shipments bound for Verizon should continue to weigh on earnings in 4Q. We nevertheless expect to see a solid rebound, with defense sales rising to KRW16.3bn (vs. KRW11.6bn estimated for 3Q).
For 2022, we project sales at KRW177.3bn (+75% YoY) and operating profit at KRW25.6bn (+334% YoY). RFHIC should visibly expand its supply of components for Samsung Electronics’ equipment bound for overseas markets, with capex investments at its telco clients in Canada and Japan proceeding as planned this year. We expect RFHIC’s supply of components to significantly increase for equipment bound for Verizon and other telcos in Canada, Japan, Europe, and India in 2022.
RFHIC also plans to expand into the GaN semiconductor market by establishing a joint venture with a domestic SiC wafer manufacturer with global presence in 2022. The detailed business plan and scale will likely be confirmed within the year. Sales from GaN power semiconductors are forecast to rise sharply from KRW5.6bn in 2022 to KRW68.6bn in 2025. The numbers have yet to be reflected in our projection, creating upside in future earnings.
Transforming into an all-around GaN player, best time to buy shares
In 2022, we expect to see sharp sales recovery at the mainstay telecom equipment parts business and visible progress on expansion into power semiconductor business. RFHIC should attract attention for its technological leadership in GaN semiconductors from 2022, given: 1) expanding application of GaN in various industries (power semiconductor, RF energy, etc.); and 2) high entry barriers due to technological difficulties.
With shares currently trading at 2022F PER of 33x, we believe now is the best time to buy RFHIC shares considering: 1) PER high of over 50x seen in the past when the upbeat future outlook was properly reflected in valuations; and 2) imminent transformation into a GaN semiconductor player.