We maintain BUY and our six-month-forward target price of KRW124,000 (applying a target P/B of 1.8x to 2019F BPS) on SEMCO. We believe SEMCO’s 3Q19 sales and operating profit will come in at KRW2.1tn and KRW160.7bn, similar to our previous estimates. Seasonal parts inventory adjustments take place in 4Q but the expected earnings improvements in three divisions from 1Q20 should lead to a meaningful rebound of shares. In the case of MLCCs, SEMCO’s major cash cow, we are still witnessing a decline of commodity MLCC prices. However, price declines should soon come to an end, and demand is recovering, especially for premium MLCCs, on the back of soaring demand from 5G cell towers, data centers, and automakers. Most importantly, the memory semiconductor sector is expected to regain momentum from 4Q19 onwards as PC DRAM contract prices turned around in August, and given that the memory semiconductor market leads the MLCC market by six to nine months, the growth of the MLCC market should begin in earnest in 1H20. Meanwhile, Japan’s Ibiden (OTCPK:IBIDF) is beefing up its capacity by 50% with plans to start operations in 2020, encouraged by soaring demand for CPUs and GPUs for deep learning, silicon bridges connecting DRAM, and FC- BGAs for server CPUs. The move inevitably drives Ibiden to cut its production of FC-CSPs and BGAs, which benefits SEMCO. Furthermore, as Samsung Electronics (OTC:SSNLF) has secured a number of major foundry clients, demand for FC-BGAs (bound for AMD (AMD)) and BGAs (bound for NVIDA (NVDA) ) is growing. Indeed, SEMCO’s semiconductor PCB sales surged 32% YoY in 2Q19 and the margin is on the rise too.
Major issues and earnings outlook
- Camera module makers should benefit from earnings growth going forward on: 1) an increase in modules (e.g., triple or quadruple camera modules); 2) growing demand for high resolution images (40 megapixels or higher); and 3) the use of depth cameras. Sony predicted that lens and sensor size would expand at a 15% and 20% CAGR, respectively, from 2016 to 2020. To be able to support high resolution in image sensors, actuators (OIS, AF) and lens are enjoying greater added value. We expect profitability to improve for SEMCO as the company has internalized the production of these parts.
Share price outlook and valuation
The stock offers a great bargain hunting opportunity given the prospect of an earnings increase in the two divisions and the likely rebound of the MLCC market in 2020.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Hyundai Motor Company is a passive shareholder in our bank.