[PCB Leading Stock Analysis①] Samsung Electro-Mechanics... Leading New Growth in the 'Best Boom'

[Asia Economy Reporter Lee Seon-ae] #The domestic PCB industry is being reorganized around high value-added semiconductor PCBs such as FC BGA, showing a boom. The sales and operating profits of a total of eight companies, including six covered by Daishin Securities (Samsung Electro-Mechanics, LG Innotek, SEMCO, Daeduck Electronics, Korea Circuit, Interflex) and two consensus companies (BH, Isu Petasys), are estimated to increase by 25.7% and 165.1%, respectively, compared to the previous quarter. Compared to the previous year, sales and operating profits are expected to increase by 20.6% and 77.6%, respectively. The strong performance in the third quarter of 2021 can be attributed not only to the boom in the upstream industries (semiconductors, 5G, contactless due to COVID-19) but also to the restructuring of low-profit sectors by each PCB company in response to the paradigm shift in the PCB industry, i.e., a result of selection and concentration. Various PCB industries such as semiconductor substrates, flexible PCBs, and communication equipment are expected to enter a continuous growth phase over the next 1-2 years rather than just short-term profit increases. On an annual basis, the total sales and operating profits of the eight companies in 2021 are estimated to increase by 19.7% (yoy) and 107% (yoy), respectively. While sales growth is high, the increase in operating profit is relatively higher. This is analyzed as a mix effect maximized by reducing low-profit products and expanding sales centered on high value-added products.

Companies focused on semiconductor substrates are expected to achieve record performance this year and next. Amid rising demand and supply shortages for FC BGA, FCCSP, SiP, and AiP, with some products experiencing price increases, overall profitability is judged to have entered a long-term growth phase due to high utilization rates, mix effects, and restructuring of low-profit sectors. Preferred stocks include Samsung Electro-Mechanics, LG Innotek, SEMCO, Daeduck Electronics, Korea Circuit, and Interflex.

According to Daishin Securities on the 9th, Samsung Electro-Mechanics is embracing new growth by focusing on semiconductor substrates (Package Substrate) with increased capital investment and expansion of non-memory proportions. Reflecting the discontinuation of the rigid PCB business and the potential discontinuation of the flexible PCB business, Samsung Electro-Mechanics will operate only the semiconductor substrate business. The semiconductor substrate portfolio is diversifying from memory-centric to non-memory fields, with expanding applications in PC CPU-oriented FC BGA, SiP and AiP markets expanded in 5G smartphones. In particular, FC BGA has a technological entry barrier creating an oligopoly structure, and the market share gap between the leading Japanese companies Ibiden, Shinko, and Samsung Electro-Mechanics is narrowing.

First, due to the impact of COVID-19, the global PC (desktop + notebook) market is estimated to have grown from 268 million units in 2019 to 355 million units in 2021, with supply shortages in PC CPU-oriented FC BGA. The leading Japanese companies have invested newly in the server and network sectors, which have higher growth than the previously stagnant PC sector, resulting in relatively concentrated benefits for Samsung Electro-Mechanics. Samsung Electro-Mechanics has a high sales proportion of FC BGA for PCs, and after the current boom period, the portfolio is expected to shift to the server and network sectors. Samsung Electro-Mechanics plans to invest about 1 trillion KRW in facilities (focused on FC BGA) as a strategic cooperation with PC CPU companies (AMD, Intel).

Park Kang-ho, a researcher at Daishin Securities, said, "Since 2020, semiconductor substrates have shown high growth, and the SiP and AiP sectors are being driven by Korean companies like Samsung Electro-Mechanics and LG Innotek, outperforming Japanese companies."