[Company Insight] Telechips Shines with Technology... Turns Profitable with Sales Growth

The shortage of automotive semiconductors continues. Due to the semiconductor supply shortage, the production volume of finished cars has decreased, leading to a decline in car sales. Automotive semiconductors are essential components for future vehicles such as autonomous cars. They are manufactured for purposes such as computation and inference for information processing. With the expansion of intelligent automotive electronic component applications and major automakers setting the commercialization target for autonomous vehicles at 2025, the related semiconductor market is expected to experience rapid growth. Accordingly, Asia Economy analyzed the management status and growth potential of Telechips and Haesung DS, which are expected to benefit from the increased demand for automotive semiconductors.

[Asia Economy Reporter Jang Hyowon] Telechips is gaining attention due to the automotive semiconductor supply crisis. Telechips, which recorded losses in 2020 due to COVID-19, succeeded in turning a profit last year thanks to increased sales of automotive semiconductors. It is analyzed that the technological capabilities secured by investing more than 30% of annual sales in research and development (R&D) every year, even during loss periods, have shone through.

‘Turnaround’ Through Technological Capability

Telechips is a company specializing in the design of intelligent automotive semiconductors. It sells digital media processors (DMP) applied to in-vehicle infotainment such as car audio, video, and navigation, mobile TV receiver chips supporting various mobile broadcasting standards, and connectivity modules used in set-top boxes and vehicles, including Bluetooth, Wi-Fi, and GPS.

As of last year, DMPs supporting multimedia functions and application processors (AP) applied to smart devices accounted for 87.9% of total sales. Mobile TV receiver chips accounted for 1.5%, and connectivity modules and services accounted for 10.6% of sales.

Telechips recorded consolidated sales of 136.4 billion KRW and operating profit of 8.1 billion KRW last year. Sales increased by 35.4% compared to the same period last year, and operating profit turned positive. Since the end of 2020, the supply shortage of automotive semiconductors, which belong to non-memory semiconductors, has continued, increasing sales of Telechips’ automotive infotainment AP products both domestically and overseas.

According to the industry, Telechips is known to have the ability to develop and design automotive semiconductors desired by customers faster than competitors, enabling active response to customer orders. This is attributed to the company’s aggressive R&D investment.

Last year, Telechips’ R&D expenses accounted for 34.3% of sales. Considering that other system semiconductor companies’ R&D expenses are around 10%, this is a very high level. In 2020, despite recording losses, R&D expenses were not reduced, increasing the R&D expense ratio to 38.6% of sales.

Telechips is expected to continue solid performance growth this year. Park Jongseon, a researcher at Eugene Investment & Securities, analyzed, "Along with maintaining stable domestic customers such as Hyundai Kia Motors with increased demand, the company will pursue securing new global customers. Expectations for market entry are also growing due to the localization of automotive semiconductor microcontroller units (MCU)."

Increase in Borrowings... Higher Possibility of CB Conversion

Telechips’ financial stability has somewhat declined as borrowings increased from 2020 due to expanded investments. However, since last year, operating cash flow has been generated, and the current ratio is high, so the financial situation is evaluated as sound.

In 2020, Telechips increased external borrowings to build a new office building and R&D center, increasing short-term borrowings and long-term borrowings by 10 billion KRW and 21.5 billion KRW, respectively. Additionally, last year, it issued convertible bonds (CB) worth 20 billion KRW. During this process, the debt ratio rose from 51% in 2019 to 94.6% last year. However, with recent cash flow improvements, the current ratio has been maintained above 200%. The company holds cash equivalents of 35.9 billion KRW, and net borrowings are only about 10.8 billion KRW.

Jung Wonho, a senior researcher at NICE Investors Service, analyzed, "Telechips continues to invest a significant amount annually in development costs, resulting in a heavy burden of amortization expenses on development assets. However, excluding this, the EBITDA ratio to sales is about 10%, which has been favorable almost every year."

The overhang issue of the CB issued last year is expected to somewhat burden the stock price. The 20 billion KRW CB issued by Telechips became convertible into shares starting January 14. The CB’s coupon rate is 0%, indicating it was issued with stock conversion in mind. The conversion price per share is 15,524 KRW, and with the recent stock price moving between 17,000 and 19,000 KRW, there is a strong incentive for stock conversion. The currently convertible shares amount to 1,288,327 shares, which corresponds to 10% of the total outstanding shares available for trading.