Record-breaking Earnings Streak to Continue into 2Q22
The authors are analysts of Shinhan Investment Corp. They can be reached at doyeon@shinhan.com and hyon@shinhan.com, respectively. – Ed.
Record-breaking earnings streak to continue into 2Q22
DB HiTek generated operating profit of KRW181.5bn (+31.4% QoQ) on sales of KRW395bn (+7.4% QoQ) in 1Q22, once again setting new highs in earnings on the back of ASP hikes. We expect the record-breaking streak to continue in 2Q22, with earnings forecast at sales of KRW417.7bn (+5.7% QoQ) and operating profit of KRW200bn (+10.2% QoQ).
For full-year 2022, we believe operating profit will reach up to KRW781.6bn (+95.8% YoY) on sales of KRW1.69tr (+38.8% YoY).
Market peak concerns continue but oversupply unlikely in the near term
DB HiTek shares, despite reports of record-high earnings, have been weighed down by concerns that market conditions for 8-inch foundries are nearing a peak. Shortages in non-memory chip supply through 2020-2021 were caused mostly by one-offs, including incorrect demand forecasts in the wake of COVID-19, power outages at the Austin fab of Samsung Electronics, decline in capacity utilization rates at TSMC caused by a severe drought in Taiwan, halted production at Japan-based Renesas Electronics due to a fab fire, and impact from the Delta variant's spread in Malaysia. The removal of all major one-offs that had limited the market supply of non-memory chips over the past couple years, added with growing macro uncertainties in recent months, have been the main cause of investor concern over foundries such as DB HiTek, which has already seen its YoY profit growth peak out in 4Q21.
Meanwhile, recent data point toward slowing demand for PCs due to the reopening of economies and declining demand for smartphones caused by lockdowns in China. Concerns are rising further that the weaker demand will lead to an increase in chip inventories at tech product manufacturers. Nevertheless, we believe it is too early to worry about a possible oversupply of 8-inch foundries given supply constraints, with semiconductor equipment makers struggling with increasing lead times and unlikely to find spare time to manufacture the 8-inch equipment needed to expand foundry capacities.
Relief rally imminent; Retain BUY for a revised target of KRW100,000
We revise up our earnings forecasts for full-year 2022 but sharply lower the target PER for DB HiTek to 7x, in view of macro uncertainties and slowing YoY growth in earnings. Share valuations are currently as low as 2022F PER of 5.4x and PBR of 1.9x (ROE 44%). We believe market peak concerns stoked by macro uncertainties are fully priced in at current share price levels, and expect to see a relief rally upon confirmation of decent market conditions in contrast with investor concerns. Shares should also enjoy further upside upon the easing of macro uncertainties going forward.