[This Week's Kwan.Jong] The Buzzing 'ChatGPT' Boosts Isupetasis

Surging Demand for Multi-layer Semiconductor Printed Circuit Boards
Steep Performance Improvement Trend... Stock Remains Undervalued

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Isupetasys supplies the essential semiconductor component "high-density multilayer MLB PCB," used in fields such as network infrastructure, servers and storage, supercomputers, and aerospace, to big tech companies. (Source: Isupetasys)

[Asia Economy Reporter Lim Jeong-su] Isu Petasys, a semiconductor printed circuit board (PCB) manufacturing company affiliated with the Isu Group, has rapidly emerged as a focus of interest in the securities market due to the explosive increase in usage of the AI chatbot 'ChatGPT.' Amid sluggish performance of major domestic semiconductor companies such as Samsung Electronics and SK Hynix, what is the reason behind the sharp rise in Isu Petasys' stock price and the market's attention to this company that produces PCB, a fundamental semiconductor component?

Love Calls from US Big Tech like Google, MS, and Nvidia

Isu Petasys was established in 1972 and has been producing PCB-related products for 50 years. As of the end of Q3 last year, Isu Corporation, the group's holding company, holds a 21.19% stake and is the largest shareholder. Including shares held by related parties, the total ownership is 26.61%. The National Pension Service is the second-largest shareholder with 6.73%. Subsidiaries include Isu Exaboard and entities in the US and Hong Kong.

Recently, Isu Petasys has attracted major US big tech companies such as Google, Nvidia, Microsoft (MS), and Intel as clients. Its existing client list is also impressive. Global telecommunications equipment companies such as Nokia from Finland, and Cisco Systems, Juniper Networks, and Arista from the US are existing customers. Thus, Isu Petasys has secured clients ranging from major global telecommunications equipment companies to leading US big tech firms.

The products ordered by these companies are Isu Petasys' flagship high-layer MLB PCBs. High-layer MLB substrates refer to semiconductor substrates (Multi-Layer Boards) with 18 or more layers. Isu Petasys mainly produces high-layer MLBs used in communication network equipment and servers. As AI investments by global big tech companies increase, demand for MLB substrates is also rising significantly. For this reason, companies like Meta (Facebook) are also mentioned as new demand sources.

With a more diversified customer base, dependence on existing major clients is decreasing. Ji-san Kim, an analyst at Kiwoom Securities, said, "As orders from US big tech companies increase, dependence on two major US clients that have been long-term customers is expected to drop from 67% in 2017 to below 30% last year," adding, "The growing demand from big tech data centers is acting as a growth driver for the company."

Gil-hyun Park, a researcher at Yuanta Securities, stated, "Training and running AI models like ChatGPT require large-scale data storage devices, so global tech companies' cloud investments will continue to increase," and predicted, "If demand for graphics processing units (GPUs) rises to improve AI computing speed, related orders will also increase significantly."

Benefiting from US-China Trade Dispute... Market Share Up

Isu Petasys is also benefiting from the US-China trade dispute. Due to the trade conflict, US telecommunications network equipment companies are reducing orders to Chinese substrate manufacturers. As a result, the MLB substrate volumes previously produced by Chinese companies like Shenan have shifted to Isu Petasys. With an increase in global market share and an expanding client base, the company is showing a steep growth trend.

Isu Petasys holds a mid-to-high teens percentage market share in this field. It ranks second after the US-based TTM Technologies, which holds the largest global market share of over 30%. Competitors include China's Shenan and WUS, and Taiwan's GCE. Domestic substrate competitors include Simtek, Daeduck Electronics, Korea Circuit, and Haesung DS, but most of these companies mainly produce PC server-specific substrates.

To respond to increased order volumes, Isu Petasys is also increasing capital investment. It invested a total of 95 billion KRW, with 54 billion KRW in April last year and 41 billion KRW in October. With new clients secured and order volumes rising, further investments are anticipated. The order backlog increased to 179 billion KRW as of the end of Q3 last year, more than double the 84 billion KRW backlog at the end of Q3 2021.

Analyst Ji-san Kim said, "This year, the first phase of investment to improve production efficiency, including front-end process investments and replacement of aging equipment, will be completed, and next year, the second phase focusing on new equipment investment will be finished," forecasting, "By the end of next year, the company will have a production system capable of increasing sales in response to growing orders."

Performance is also showing an improving trend. As of the end of Q3 last year, cumulative sales reached 477 billion KRW, and operating profit was 86 billion KRW. Sales increased by 38% compared to a year earlier, and operating profit rose by nearly 200%, an increase of 56 billion KRW. The securities industry expects Isu Petasys' full-year sales and operating profit last year to be around 650 billion KRW and 120 billion KRW, respectively. This represents about a 40% increase in sales and more than a 150% increase in operating profit. Operating profit margin is also expected to rise from around 10% to near 20%.

An asset management official analyzed, "Since last year, demand for high-layer MLB substrates has exploded, leading to orders exceeding production capacity and improving pricing power," adding, "The expansion of orders is creating a virtuous cycle that leads to improved profit margins."

Despite improvements in sales and profitability, the stock price is still considered undervalued. According to the securities industry, the price-to-earnings ratio (PER) was only 3.9 times at the end of last year. The average PER of global high-layer MLB suppliers is about 13 times. Particularly, US-based TTM and Taiwan's GCE, which are benefiting from the US-China trade dispute, have PERs of approximately 9.6 and 8.6 times, respectively.

Need for Business Diversification into High-Value-Added Products

However, experts point out that Isu Petasys' failure to diversify its business is a weakness. MLB substrates are generally not regarded as technologically advanced products within the domestic PCB industry. Although the market environment is favorable, orders are exploding, and performance is positive, there are concerns that the emergence of competitors with superior technology or competing products could pose a significant threat.

The subsidiary Isu Exaboard attempted to enter the SLP (Substrate Like PCB) business applying HDI semiconductor processes used in smartphones and also ventured into FPCB (Flexible Printed Circuit Board). However, after five consecutive years of operating losses, the business was withdrawn. While the withdrawal of loss-making businesses improved Isu Petasys' consolidated profitability, there are currently no new businesses underway.

A semiconductor industry insider said, "Isu Petasys has gained financial strength and time to invest in new businesses as orders and performance improve," and pointed out, "They should not be complacent with MLB substrates but invest in high-value-added products to discover future revenue sources."