Product Diversification and Subsidiary Growth to Continue
The authors are analysts of Shinhan Investment Corp. They can be reached at snowKH@shinhan.com and wonyong.sim@shinhan.com, respectively. -- Ed.
2Q22 operating profit comes in at KRW35.9bn (+47% YoY)
Wonik QnC reported operating profit of KRW35.9bn (+47% YoY) on sales of KRW192.2bn (+20% YoY) for 2Q22, with growth driven mainly by solid demand from major clients. By business, quartz ware generated sales of KRW73.4bn (+7% YoY), ceramic ware KRW23.6bn (+33% YoY), and subsidiary Momentive Performance Materials KRW87.4bn (+32% YoY). Operating margin jumped 3.5%p YoY to 18.7% on operating leverage effect driven by the growth in sales of key products.
Product diversification and subsidiary growth to continue
We expect strong sales of quartz ware, Wonik QnC's main product, to continue. Despite concerns over weakening demand for semiconductors, we believe the company's mid/long-term growth trajectory remains intact. Wonik QnC disclosed in August that it is raising its capex investment budget to KRW95.5bn with an extended timeline from KRW59.5bn for 2022 announced in April. The upward adjustment is attributable to construction cost hikes caused by changes in design and reinforcement of safety facilities. The larger capex investment should help to strengthen the company’s market standing even further. Expansion of overseas facilities (including non-memory) is projected to proceed as originally planned.
Meanwhile, the diversification of products supplied for use in non-memory production is also seen positive. Non-memory products are expected to contribute to roughly 15% of company-wide sales in 2022, and even more upon capacity expansion. Wonik QnC's overall earnings are less likely to fluctuate alongside memory market cycles as improvement in technology quality continues to drive growth. In all, we expect quartz ware sales to reach KRW291bn (+8% YoY) in 2022 and KRW343.4bn (+18% YoY) in 2023.
After delivering an earnings surprise for 1Q22, subsidiary Momentive Performance Materials continued to see steady growth in 2Q22 with demand for key products remaining solid despite price hikes carried out in 4Q21. Earnings growth will likely continue into 2H22 with capacity utilization rates expected to rise on brisk demand and forex conditions to work in favor of the company. We anticipate full-year operating profit of KRW47.4bn (+281% YoY) from the subsidiary in 2022.
Retain BUY for a revised-down target price of KRW40,000
We maintain BUY for Wonik QnC, but lower our target price to KRW40,000 in reflection of the recent decline in peer valuations. Our revised target price is based on 2022F EPS of KRW3,223 and a target PER of 12.6x. With a boost expected from clientele expansion and product diversification, we believe now is the time to focus on Wonik QnC's mid/long-term growth potential.