Hana Microelectronics: m analyst briefing
- Operations should continue to improve modestly q-o-q
- But China’s slowing economy is a key risk
- Share price jumped 14% since our upgrade, leaving only 3% upside to our TP
- Downgrade to HOLD with an unchanged TP of Bt62
HANA saw revenue improvement in key operations in 2Q23. Microelectronics (PCBA) revenue (60% of total revenue) rose 20% y-o-y and 5% q-o-q. Growth was driven mainly by the automotive, medical (particularly hearing aids due to new regulations that allow over-the-counter sales) and IOT sectors.
The IC division (33% of revenue) fell 12% y-o-y but bounced strongly by 9% q-o-q. With improved volume, together with successful cost cutting and productivity enhancements, the division has turned from a loss into profit in 2Q23.
Ohio business (5% of total revenue) rose 9% y-o-y but declined 1% q-o-q. The q-o-q drop was due to a drop in inlay growth due to overstocking by retailers but should improve in 2H23.
The PMS business (+316% y-o-y, -11% q-o-q) fell q-o-q as the weak Chinese economy continues to impact demand for silicon devices, which accounts for 80% of PMS revenue. Demand for SiC MOSFET remains strong, but single-line equipment downtime continued to impact its output. The new line of equipment has arrived but will start production in 4Q23. Demand for SiC devices remains very strong.
Outlook
Expect modest sequential revenue growth in 3Q23. Growth should be supported by the PCBA business in Lampoon, automotive industry, and RFID business in Ohio as retail inventory reduces.
The slowing China economy is a key risk. The Outsourced Semiconductor Assembly and Test (OSAT) business may face some drag in 2H23, given customers’ rising concerns on a slowdown in China’s economic growth.
While US-China decoupling is driving changes, the impact is largely to be seen in 2024. Negotiations are underway with a number of US clients who would like to shift/expand their orders from China. But the impact will be seen more clearly in 2024.
New Silicon medium voltage (MV) devices to be shipped in 4Q23. HANA has successfully developed new Si MV devices, which should help offset the weakening demand for Si devices. The products will start to be shipped in 4Q23.
Management lowered guidance for PMS in Korea. Management has revised down its revenue guidance for PMS to US$20m in 2023, US$45m-48m in 2024, US$90m-94m in 2025, and over US$110m in 2026.
The downward revision reflects (i) the slowing Chinese economy which negatively affects demand for Silicon devices, and (ii) the equipment lead time which means PMS has to depend on only single equipment. Nonetheless, management expects the unit to breakeven at the EBITDA level in 1Q24 and at the bottom line in 2025. Note that management’s revised guidance is in line with our forecast, so we keep our forecast unchanged.
Started to take on debts in 2Q23. During 2Q23, HANA’s overseas subsidiary has started to borrow short-term loans amounting to Bt800.8m from a commercial bank. The loans carry an interest rate of 5.60-5.95% and are due for repayment within 3Q23. The company is looking to take on new loans with an interest rate of 7.5% soon to fund its capex.
In addition, another subsidiary in China has started to borrow long-term loans amounting to 9.8m yuan or equivalent to Bt48m. The loans carry a floating interest rate benchmarked to one-year lending rate of People’s Bank of China (PBOC) throughout the agreement and are repayable within 2026.
Expect final decision on funding for PMS’ capex by end 2023. PMS will require an additional US$70-80m capex over 3Q23-1Q24. HANA has received approval from the AGM to increase capital under a general mandate in the amount of not more than 80.5m shares via private placement (PP). The offer price must be the best price with a possible discount of no more than 10% of market price. Another alternative is to do a private placement directly at Power Master Semiconductor (PMS), its Korean subsidiary. This will probably take time. In addition, the company may opt for debt financing to fund its capex rather than issuing new shares.
Recommendation
Downgrade to HOLD from Buy with an unchanged TP of Bt62. The stock price has jumped 14% since we upgraded the stock to a BUY last week, leaving only 4% upside to our unchanged TP of Bt62, based on 18x 2024F PE, in line with historical average. We therefore downgrade our rating on the stock to HOLD from Buy.
| FY Dec | 2Q2022 | 1Q2023 | 2Q2023 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Revenue | 6,390 | 6,466 | 6,910 | 8.1 | 6.9 |
| Cost of Goods Sold | (5,512) | (5,913) | (5,871) | 6.5 | (0.7) |
| Gross Profit | 878 | 553 | 1,039 | 18.3 | 87.8 |
| Other Oper. (Exp)/Inc | (401) | (382) | (392) | (2.1) | 2.8 |
| Operating Profit | 477 | 171 | 646 | 35.5 | 277.2 |
| Other Non Opg (Exp)/Inc | 120 | 120 | 123 | 2.7 | 2.7 |
| Associates & JV Inc | 0.00 | 0.00 | 0.00 | - | - |
| Net Interest (Exp)/Inc | 20.8 | 15.3 | 12.8 | (38.4) | (16.6) |
| Exceptional Gain/(Loss) | (358) | (28.4) | (114) | 68.1 | 302.6 |
| Pre-tax Profit | 260 | 278 | 668 | 157.1 | 140.2 |
| Tax | (15.0) | (11.7) | (32.9) | 119.3 | 180.9 |
| Minority Interest | 0.00 | 0.00 | 0.00 | - | - |
| Net Profit | 245 | 266 | 635 | 159.4 | 138.4 |
| Net profit bef Except. | 603 | 295 | 749 | 24.3 | 154.2 |
| EBITDA | 979 | 712 | 1,163 | 18.7 | 63.3 |
| Margins | |||||
| Gross Margins (%) | 13.7 | 8.6 | 15.0 | ||
| Opg Profit Margins (%) | 7.5 | 2.7 | 9.4 | ||
| Net Profit Margins (%) | 3.8 | 4.1 | 9.2 |
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