[Corporate Insight] Haesung DS Drives Growth in Supply and Demand Environment with Electric Vehicles and Autonomous Driving

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 Park So-yeon] Haesung DS is a manufacturer of lead frames and semiconductor substrates. Lead frames are used in automotive semiconductors and mobile devices, while semiconductor substrates are used as packaging materials for memory semiconductors in PCs and servers. As a core affiliate of the Haesung Group, its shareholder composition includes Haesung Industry Co., Ltd. with 24.38%, Kyeyang Electric Co., Ltd. with 9.62%, and other related parties holding 36.19%. The National Pension Service holds 6.2%, and the employee stock ownership association holds 2.69%.

According to the Financial Supervisory Service’s electronic disclosure system, Haesung DS’s 2021 sales on a consolidated basis were 655.4 billion KRW, and operating profit was 86.3 billion KRW, representing increases of 42.8% and 97.9% respectively compared to the previous year. The operating profit margin improved by 3.7 percentage points to the 13% range. Growth in performance was driven by increased demand for semiconductors for electric and autonomous vehicles, a tight supply environment, and price increases due to rising copper costs, a raw material. The factory operating rate also rose from 72.7% in 2020 to 89.1% in 2021, contributing to improved profitability. Financial soundness is also improving. Interest-bearing debt at the end of 2021 was 77.9 billion KRW, down about 9.4% from the previous year. The debt ratio also decreased by 3.92 percentage points to 61.37%. For technology development, about 2 to 2.25% of annual sales have been invested in research and development over the past three years.

As of the end of 2021, Haesung DS holds a total of 442 intellectual property rights related to semiconductors. The semiconductor materials industry is characterized by high entry barriers for new competitors because products affect the overall performance of semiconductors. Haesung DS possesses differentiated business competitiveness by continuously growing in the automotive semiconductor materials sector, which demands strict quality standards due to its direct connection to human life. Since most major integrated device manufacturers (IDMs) such as Samsung Electronics and SK Hynix, as well as outsourced assembly and test (OSAT) companies, have production plants in China and Southeast Asia where labor cost competitiveness is advantageous, over 97% of Haesung DS’s sales are export sales. By product, lead frames account for about 68%, and semiconductor substrates about 32% of sales.

Lead Frame and Semiconductor Substrate Manufacturer
97% of Sales from Production Plants in China and Southeast Asia, Export-Oriented
Facility Expansion Expected to Generate Additional Annual Sales of 150 to 200 Billion KRW
Haesung Group’s Corporate Governance Restructuring Remains a Pending Issue

Haesung DS can be seen as a beneficiary of the paradigm shift in the mobility sector. The amount of semiconductors installed inevitably increases with autonomous driving and expanded functions, which is expected to lead to increased sales of its main product, lead frames. The shortage of automotive semiconductors continues to disrupt finished car production, and demand for automotive semiconductors is rising due to the acceleration of electric and autonomous vehicle adoption. According to TechSearch, an electronics industry research institute, the packaging materials market size was estimated at 17.68 billion USD in 2019 and is expected to grow by about 3.78% until 2024. In particular, the semiconductor materials sector produced by Haesung DS is forecasted to grow by approximately 2.08% for lead frames and 5.73% for semiconductor substrates by 2024. In the long term, the number of semiconductors in fully autonomous vehicles is expected to increase about 3.3 times compared to internal combustion engine vehicles. Haesung DS is currently expanding its facilities, with effects expected to begin in the second half of this year. Additional annual sales of 150 to 200 billion KRW are anticipated. Kim Rok-ha, a researcher at Hana Financial Investment, said, “Demand for high value-added products is increasing in the upstream industry, and both package substrates and lead frames are in short supply, making product expansion easier. Based on this, profitability continues to improve.”

Paradoxically, as the semiconductor industry boom raises Haesung DS’s corporate value, the challenges in restructuring Haesung Group’s corporate governance increase. Haesung Group has been undergoing corporate governance restructuring since April last year. The remaining task is handling the Haesung DS shares held by Kyeyang Electric. Kyeyang Electric currently holds 9.62% of Haesung DS shares. Since both Kyeyang Electric and Haesung DS are subsidiaries of the holding company Haesung Industry, they should not hold shares in each other. The simplest method is for Haesung Industry to purchase the Haesung DS shares from Kyeyang Electric at market price. This would allow the holding company to expand its control over Haesung DS, and Kyeyang Electric to secure liquidity through asset disposal. However, a large cash outflow is inevitable. In the market, a ‘split merger’ method is also mentioned as a way to acquire shares without large cash outflows, where Kyeyang Electric separates the Haesung DS shares to establish an investment company and immediately merges it with Haesung Industry.