2022 Outlook: Capacity Additions, Structural Growth
The authors are analysts of Shinhan Investment Corp. They can be reached at snowKH@shinhan.com and hyungwou@shinhan.com, respectively. -- Ed.
2Q22 OP up 197% YoY to KRW54.1bn
Haesung DS posted operating profit of KRW54.1bn (+197% YoY) on sales of KRW216.2bn (+36% YoY) for 2Q22. The earnings surprise was driven by the strong performance of lead frames and package substrates, with sales estimated to reach KRW142bn (+31% YoY) and KRW74.2bn (+45% YoY), respectively.
The key drivers behind earnings growth were: 1) production capacity running at high utilization levels on strong demand; and 2) favorable forex rates. Operating margin came in at 25% (+13.6%p YoY, +0.8%p QoQ) thanks to brisk sales of high value-added products and operating leverage.
2022 outlook: Capacity additions, structural growth
Our earnings forecast revision for 2022 brings sales up to KRW863.1bn (+32% YoY) and operating profit to KRW212bn (+146% YoY). Prospects are bright for 2H22. Capacity additions are scheduled to be completed in 4Q, of which the effects will be felt in stages in 2023. Annual production capacity is projected to increase by about KRW150bn-200bn upon completion. Haesung DS announced in May a KRW64bn capex plan for further expansion, laying the foundation for mid/long-term growth.
The company stands to enjoy structural growth, benefiting from the expanding market for automotive electronic components. The paradigm shift in the mobility industry is driving improvement in specifications of electronics for self-driving cars, resulting in a rise in memory content per device. Lead frames, which are a basic component of semiconductor packaging, should continue to deliver sales growth. We expect to see earnings gains going forward based on robust demand.
Retain BUY and upgrade target price to KRW81,000
We retain our BUY rating on Haesung DS and upgrade our target price to KRW81,000, based on 2022F EPS and a target PER of 7.9x (average PER low of 2018-2021). EPS is revised up from KRW5,896 to KRW10,268 due to our earnings forecast revision.
The company’s earnings growth is secured with capacity additions and solid demand from the rising market for automotive electronics. It is capable of delivering stable growth based on its proven track record of supplying products to global companies. We focus on the company’s growth potential as a leading lead frame vendor in the domestic market.