[PCB Leading Stock Analysis③] Simtek... Operating Profit Explodes, Both Scale and Profitability Strong

[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, Semtech, 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, untact 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 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 background where the mix effect was maximized based on the reduction of low-profit products and the expansion of sales centered on high value-added products.

Companies focused on semiconductor substrates are expected to achieve record performance this year and next year. Amid increasing demand and supply shortages centered on FC BGA, FCCSP, SiP, and AiP, with some price increases in certain products, 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 are Samsung Electro-Mechanics, LG Innotek, Semtech, Daeduck Electronics, Korea Circuit, and Interflex.

According to Daishin Securities on the 11th, Semtech is shifting its portfolio toward high value-added products through MSAP investment. MSAP investment implements miniaturization, densification, and multi-layering of circuits applied to semiconductor substrates to respond to the high integration and large capacity of semiconductors. Among semiconductor substrate companies, the portfolio with a high proportion of memory modules has shown high growth with a 20.1% (yoy) sales increase in 2020 and 9.7% (yoy) in 2021 after acquiring the Japanese subsidiary (Semtech Graphic) and executing MSAP investments, expanding the proportions of FC CSP (for mobile AP), GDDR6 (graphics), and mobile MCP. The MSAP sales proportion increased from 49% in 2019 to 55% in 2020 and is expected to expand to 65% by the end of 2021.

In particular, the FC CSP market is an oligopoly in the premium segment among Samsung Electro-Mechanics, LG Innotek, and Taiwan's Kinseus and Unimicron, while Semtech secured competitiveness in the low-price segment. During the transition to 5G in the smartphone market, the global market share of Chinese companies increased, leading to increased orders from Semtech's client MediaTek. The expansion of the mid-price segment FC CSP proportion rather than the low-price segment raised the overall average selling price (ASP), turning operating profit positive in 2020 (KRW 89.7 billion) compared to a loss in 2019 (KRW -17.9 billion). Operating profit in 2021 is expected to grow significantly by 54% (yoy) to KRW 138.2 billion.

In 2022, the transition of PC memory modules from DDR4 to DDR5 will begin, and the average selling price of memory modules and semiconductor substrates (FC BOC) is expected to rise, sustaining overall growth in size and profitability.

Daishin Securities researcher Park Kang-ho said, "Sales (KRW 350.5 billion) and operating profit (KRW 43.1 billion) in the third quarter of 2021 are estimated to increase by 7.9% and 37.9%, respectively, compared to the previous quarter, marking a quarterly record," and forecasted, "Total sales in 2022 will be KRW 1.47 trillion, and operating profit will be KRW 158.1 billion, growing by 11.9% and 14.4%, respectively."