Waiting for the Ripple Effect in Semiconductor Small and Mid-Cap Stocks, Boosted by Earnings Expectations

[Asia Economy Reporter Oh Ju-yeon] Expectations for the trickle-down effect on semiconductor equipment and materials companies are rising in line with the semiconductor growth virtuous cycle this year. Although the recent stock market has risen mainly around large semiconductor stocks, leaving small and mid-cap stocks relatively neglected, their earnings are also likely to increase alongside the favorable industry conditions.

According to FnGuide, a financial information company, the operating profit of nine semiconductor and related equipment companies that have announced earnings estimates for Q1 this year from three or more securities firms is expected to reach 1.0483 trillion KRW, an 18.68% increase from 883.2 billion KRW in Q1 2020. Among them, seven companies showed both sales and operating profits increasing compared to the same period last year.

Recently, the domestic stock market has been skewed toward large-cap stocks, causing only Samsung Electronics and SK Hynix stock prices among semiconductor-related companies to rise distinctively. However, the momentum for stock price increases based on semiconductor earnings growth may shift to these small and mid-cap stocks in the future, drawing attention. In the securities industry, Solbrain and Dongjin Semichem were highlighted as notable semiconductor parts and materials companies within the NAND-related value chain for Samsung Electronics this year.

Solbrain, one of Samsung Electronics' key partners, is a producer of hydrogen fluoride, a material used in semiconductor circuit etching. It has developed 'high-selectivity phosphoric acid,' a core material in the 3D NAND flash etching process, which is utilized in Samsung Electronics' processes. High-selectivity phosphoric acid is a substance made by combining phosphoric acid with various chemicals to selectively dissolve only the target material. Solbrain's sales this year are expected to increase by 11.6% year-on-year to 975.7 billion KRW, and operating profit is projected to rise 16.4% to 242.8 billion KRW. However, Solbrain's stock price fell 4.95% from 295,000 KRW on the 5th closing to 280,400 KRW on the 13th closing.

Another Samsung Electronics materials partner, Dongjin Semichem, developed photoresist (PR) used in semiconductor and ultra-thin liquid crystal display (TFT LCD) exposure processes independently in 1989, becoming the fourth in the world to do so. Its long-standing experience has earned it high recognition for electronic materials development capabilities. It is considered a company that can successfully localize EUV (extreme ultraviolet) PR, an essential material for future semiconductor production. After its stock price rose about 36% in November and December last year, it has remained flat this year. It reached 38,400 KRW intraday on the 5th but dropped 5.73% to 36,200 KRW as of 9:30 AM that day.

Among equipment companies, Wonik IPS, TES, and PSK are mentioned. Among them, Wonik IPS is expected to achieve its highest performance since its founding this year. The operating profit estimate for Q1 this year from three or more securities firms is 44.3 billion KRW, a 206% increase compared to the same period last year. Recently, KTB Investment & Securities, which released a performance forecast, projected sales of 1.4045 trillion KRW and operating profit of 259.6 billion KRW this year, up 28.9% and 45.0% year-on-year respectively, expecting record-high performance. However, the stock price momentum has weakened this year, falling about 8% from 48,000 KRW intraday on the 5th to 44,000 KRW that day.

Additionally, Silicon Works, a display panel supplier for LG Electronics, is expected to record an operating profit of 17.4 billion KRW in Q1 this year, a 48.6% increase year-on-year. Operating profits of semiconductor process-related companies such as Techwing and Wonik Materials are also expected to increase by 12% and 7% respectively compared to the same period last year, raising expectations for future stock price increases.

Kim Yang-jae, a researcher at KTB Investment & Securities, said, "Earnings growth is expected due to expanded investments in semiconductors and displays by downstream companies and the fruits of equipment localization."