Big Cycle of Package Substrates to Arrive in 2023
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and michlshim94@shinhan.com, respectively. -- Ed.
2Q22 review: Solid sales and brisk new order intake
Simmtech posted sales of KRW477.4bn (+47% YoY) and operating profit of KRW114.7bn (+267% YoY) for 2Q22. Strong earnings were driven by: 1) 34% QoQ growth in sales of FCCSP and SiP substrates; 2) tight market supply of package substrates; and 3) favorable forex conditions.
New order intake was brisk, showing an improvement in the product mix. High value-added products carrying a high price tag accounted for a larger share of new orders.
Big cycle of package substrates to arrive in 2023
There are no signs of a surplus building up. We need to look toward earnings for 2023.
1) Increasing supply for new applications carrying higher ASP: Key clients for Simmtech’s package substrates used to be memory chipmakers for smartphones, PCs, and servers. Their portion has been reducing at a fast pace. From 2023, applications should expand to communication chips, antenna in package, SSD controllers, wearable devices, and DDR5. ASP of package substrates for these products is 30-150% higher than that of memory package substrates.
2) Supply of new mobile chip package substrates to a North American client: Simmtech will begin supplying new package substrates to a North American client in 2023 after three years of preparations. It plans to ship the first batch in 1H and increase its supply in earnest from 2H.
3) Capacity erosion of high-end FCBGA: Intel’s Sapphire Rapids CPUs for servers and Advanced Micro Devices’ Genoa CPUs are expected to go into mass production in early 2023. These new products use high-end FCBGA, which is a large-area, high multi-layer, and high-density integration substrate. Capacity erosion caused by this next-gen substrate is 10-20 times higher than a typical FCBGA substrate. Sector leaders will likely focus on producing high-end FCBGA going forward.
Retain BUY for a target price of KRW60,000
Demand for high-end FCBGA should increase sharply in 2023. While substrate shortages are expected to continue, competitors are focusing investments on high-end FCBGA and not even considering capacity expansion for low value-added package substrates. We should be reminded that Murata Manufacturing and Samsung Electro-Mechanics were not the ones that enjoyed the sharpest share price gains during the MLCC boom of 2017.
Concerns are rising over the inventory levels of memory package substrates, but the suppliers have been reducing production on the grounds of low prices. We need to keep an eye out for a possible supply disruption of BOC substrates in the mid-to-long term.