The authors are analysts of Shinhan Investment Corp. They can be reached at email@example.com and firstname.lastname@example.org, respectively. — Ed.
3Q22 preview: Clients’ infrastructure projects on track
We now expect STI to post operating profit of KRW13.6bn (+11% YoY) on sales of KRW120.7bn (+47% YoY) for 3Q22, coming in line with our initial expectations. Investments into infrastructure equipment at client companies are remaining on track, with STI set to secure a major portion of sales from phase 2 and 3 investments for the P3 fab at Samsung Electronics and from Intel’s fab in Dalian, China. We also note progress on client diversification, with the company securing its first order from SK Siltron for central chemical supply systems (CCSS) and likely to book sales from 4Q22.
2022 & 2023 outlook: Unaffected by slowdown in memory demand
For 2022, sales are projected at KRW448bn (+40% YoY) and operating profit at KRW45bn (+76% YoY). Earnings visibility should remain high through 3Q and 4Q with demand for infrastructure equipment (CCSS) driving growth. STI should clearly stand out vs. sector peers on strong earnings in 4Q22.
For 2023, we forecast sales at KRW510.9bn (+14% YoY) and operating profit at KRW65.4bn (+45% YoY). Samsung Electronics is expected to aggressively increase investments in infrastructure through 2023 with over five projects in the works. In addition, other clients including SK Group, Micron Technology, and Intel are also planning significant investments into infrastructure, raising expectations for record-high earnings from CCSS.
Order intake and sales of new equipment launched in 2022 should grow in earnest from 2023. STI has secured an order for OCR inkjet printing equipment for foldable displays and another for mid-size displays, and is currently undergoing mass-production tests at client production lines. Bidding for a large-scale order is currently underway and could add over KRW100bn in sales next year if successful. Meanwhile, reflow equipment sales are expected to reach KRW15bn in 2022. Mass-production tests are ongoing at client companies for fluxless reflow systems, pointing to a potential large-scale order in 4Q22 and sales exceeding KRW30bn in 2023.
Investment strategy: Accumulate shares at current cheap prices
Investor confidence in 2023 sales forecasts for memory chips is very low at the moment, but visibility remains high for infrastructure-related sales. In order to flexibly respond to future changes in demand, chipmakers have been proceeding on infrastructure investments despite the recent slump in memory demand. With infrastructure investments at client companies on track, STI shares look excessively undervalued at current levels (2022F PER of 4.6x, 2023F PER of 3.6x). Furthermore, we have yet to factor in the upside in earnings expected from the newly launched equipment. With new equipment momentum likely to become visible from 4Q22, we recommend accumulating shares at current undemanding valuations.