[This Week's Industry Insight] HBM Beneficiary IOTECHNICS... Structural Growth Expected

Specialized in Laser and Equipment Development for Semiconductor and Display Manufacturing Processes
Growth Potential Highlighted by Increasing Demand for High Bandwidth Memory (HBM)
Performance Expected to Improve Significantly from Q4... Securities Firms Raise Target Prices Consecutively

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Recently, investors' perspectives on Eotechnique have changed considerably. Despite poor earnings, growth potential is expected due to the rising demand for high-bandwidth memory (HBM). In particular, after Samsung Electronics announced its Q2 earnings on July 27, Eotechnique's stock price surged 27.1% at closing. This was because it was recognized as a beneficiary of Samsung Electronics' HBM. Eotechnique is considered the stock most likely to benefit from HBM due to its significant exposure to Samsung Electronics' DRAM.

Semiconductor Equipment Accounts for 50% of Sales

Eotechnique is a comprehensive laser specialist company that develops and manufactures laser equipment used in semiconductor, display, printed circuit board (PCB), and macro (secondary battery) manufacturing processes. In the laser marking field, it holds a 95% market share domestically and 60-70% overseas, ranking first. Based on core technologies such as laser sources, it is expanding its sales into laser application equipment.

Semiconductor equipment accounts for more than 50% of sales, followed by PCB, display, and secondary batteries. In the semiconductor sector, marking and annealing equipment serve as cash cows. Laser markers are devices that mark manufacturers and manufacturing dates on wafers, packages, and PCBs.

However, a decline in profits is inevitable this year. This is because the production volume of memory customers and outsourced semiconductor package and test (OSAT) is expected to decrease, leading to reduced demand for marking. Nevertheless, sales of various laser application equipment, including laser annealing equipment, are increasing. In particular, laser annealing equipment, which was previously imported, has been localized by Eotechnique through joint research and development with large memory companies and is currently supplied to these companies for 1ynm to 1znm DRAM manufacturing.

The company is also pursuing new growth with grooving and stealth dicing equipment. Additionally, the light sources for marking and annealing equipment, which account for most of semiconductor sales, have been internalized or are in the process of internalization, enabling cost reduction and easier procurement of raw materials. In the PCB sector, Co2 drilling equipment acts as a cash cow, and growth is being prepared with UV drilling.

Samsung Electronics HBM Benefits and Grooving Sales Expansion

Eotechnique supplies laser annealing equipment to Samsung Electronics, and stealth dicing equipment is undergoing pilot production testing. Laser annealing equipment is used in DRAM processes below 1Z nm. HBM3 is expected to be produced at the 1Z nm process, and HBM3e at the 1a nm process. If production capacity and facility investment (CAPA) for 1Z nm or 1a nm processes expand, demand for laser annealing equipment is expected to increase.

Eotechnique is conducting pilot production testing of laser stealth dicing equipment for Samsung Electronics' DRAM. If the pilot production test is completed in October, orders may be possible in Q4. Grooving equipment sales are expected to expand through OSAT. As of last year, the grooving equipment market size is estimated at about 400 billion KRW, with Eotechnique's market share expected to expand up to 20%.

Due to these benefits, securities firms have raised Eotechnique's target stock price. Hana Securities raised the target price from 107,000 KRW to 208,000 KRW. The target price was calculated based on the 2024 estimated EPS, and the target price-to-earnings ratio (PER) applied a 10% premium to the 2024 average PER of 26 times from global dicing equipment company Disco and laser annealing equipment company Veeco. Researcher Byun Woonji of Hana Securities explained, "The 10% premium was applied because annealing equipment sales are expected to increase with the expansion of HBM production capacity, and laser equipment (grooving + stealth) sales growth is also expected from 2024." Eotechnique has localized laser grooving and laser stealth dicing equipment, which were monopolized by overseas companies. The laser equipment (grooving + stealth) market size was estimated at about 500 billion KRW in 2022. Researcher Byun predicted, "Eotechnique's laser equipment (grooving + stealth) sales alone will exceed 70 billion KRW annually in 2024."

Hi Investment & Securities also raised Eotechnique's target price from 110,000 KRW to 136,000 KRW. Researcher Song Myungseop of Hi Investment & Securities interpreted the HBM benefit as still minimal but positively viewed the potential for future growth. Song said, "Despite poor earnings, the recent sharp rise in stock price seems to be due to expectations that Eotechnique's UV driller could benefit from HBM growth alongside the semiconductor industry recovery outlook." He added, "They are developing TSV hole formation equipment for HBM, currently monopolized by the largest etching equipment company, and if successful, sales from localization are expected from 2025."

Growth Potential Highlighted Amid Earnings Slump

Securities firms expect Eotechnique's earnings slump to continue through Q3 but highly value its growth potential thereafter. Hi Investment & Securities forecast Eotechnique's Q3 sales and operating profit to be 84.5 billion KRW and 10 billion KRW (operating margin 11.8%), respectively, similar to the previous quarter. They believe the proportion of high-margin core products and related parts and materials sales will remain low, as in the first half.

However, the poor performance compared to the same period last year is expected to continue until Q3, with improvements starting in Q4 due to semiconductor industry recovery, increased semiconductor equipment orders, and orders for 8.6 generation line display equipment. This year, sales and operating profit are projected to decline 18% and 42% year-on-year to 366.9 billion KRW and 53.7 billion KRW, respectively.

The reason for the high growth outlook is the increase in semiconductor equipment orders. First, annealing equipment performance is expected to rebound from next year due to the major customer's process transition, semiconductor industry recovery, and increased equipment prices and profit margins from adopting in-house laser sources. Also, by the end of this year, orders for grooving and stealth dicing equipment from OSAT companies and the largest domestic customer are expected to increase. The UV driller segment is also expected to receive major domestic customer orders in the first half of next year. In the display equipment sector, which has been stagnant, sales are expected to increase by about 35% next year due to customers' investments in the 8.6 generation line. Researcher Song Myungseop said, "With the sustained growth of Eotechnique's equipment, sales and operating profit next year are estimated to increase 27% and 67% year-on-year to 464.4 billion KRW and 89.6 billion KRW, respectively."

Researcher Kim Mincheol of Kyobo Securities said, "Eotechnique's equipment is used in advanced semiconductor processes and next-generation packaging (Advanced PKG) for system semiconductors, and structural growth is expected due to semiconductor advancement." He added, "Marking and Co2 drilling are expected to grow with the spread of chiplet structures in semiconductor packages, and annealing is expected to grow structurally with semiconductor pattern miniaturization." Researcher Kim Rokho of Hana Securities stated, "Eotechnique's 2023 earnings slump is already reflected in the stock price, and attention should be paid to new equipment orders rather than earnings downgrades." This is because expectations remain for new sales from new equipment such as grooving and stealth dicing.

Meanwhile, the company's sales are vulnerable to semiconductor industry conditions. The main cause of the first half's earnings decline was the contraction of semiconductor back-end (OSAT and IDM) investments, which significantly impacted the demand for markers that act as cash cows. Researcher Kim Mincheol noted, "Eotechnique's markers hold 70% of the global market, so they are highly correlated with the semiconductor industry." However, he added, "Demand for front-end annealing equipment is expected to be favorable." Annealing equipment is used in advanced processes to improve yield, and demand for advanced process equipment is expected to be stable. Even if customers reduce production, reductions in advanced processes are limited, and annealing is used during complementary investments (Tech Migration: natural reduction).