IT/Electronics Parts: History shows that parts suppliers have benefited from moving to newer devices

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The authors are analysts from Shinhan Investment Corp. They can be reached at [email protected] and [email protected] respectively. — Ed.

Foldable devices to give momentum in 2H22

In 2H22, we recommend focusing on businesses that stand to benefit from the shift to foldable devices. Shipments of foldable devices are expected to jump more than 70% year-on-year this year, while demand for other tech products is expected to fall 10% year-on-year. Strong 2S versus weak 1S profits are projected for companies supplying parts for foldable devices, but weaker 2S versus 1S profits are projected for computer component suppliers. Companies that generate more than 50% of their sales from foldable device parts are expected to post significantly higher profits than others for the full year. Additionally, we expect to see Chinese companies expanding into foldable devices from 2023 and adopting new form factors for foldable devices in the future.

History shows that parts suppliers have benefited from the move to new devices

1) iPhone X in 2017: Strong demand for new components driven by a new form factor

The adoption of a new form factor raised expectations for the 2017 release of the iPhone X, but actual demand was lacking due to the high price of the new smartphone. Domestic spare parts suppliers LG Innotek and BH saw their actions correct following reports of weak iPhone X sales. Shortly thereafter, however, spare parts supplier inventories rebounded and continued their upward trend rise, as the introduction of a new form factor contributed to the industry-wide adoption of new components (OLED, multi-camera systems, 3D modules) in smartphones. For foldable devices, we look beyond Samsung Electronics’ 2022 shipments to the growth potential and market size increase expected from 2023. We see a strong upside for foldable devices with total shipments in 2021 remaining at 7 million units worldwide compared to 1.4 billion for smartphones, 250 million for laptops and 180 million for tablet PCs.

2) Multi-camera smartphones in 2019: strong growth despite concerns about price pressure and loss of market share

Samsung Electronics launched its first multi-camera smartphone in late 2018. Initial investor interest in parts suppliers for the product was limited, with most expecting no consumer reaction to the change due to concerns over pressure. increased prices and loss of market share due to intense competition. However, Samsung’s supply chain camera parts suppliers enjoyed combined operating profit growth of 176% YoY from 2018 and price gains of 288% YoY. year-over-year from 2018 lows driven by increased global demand for smartphone cameras. Companies supplying parts for foldable devices are also likely to face pricing pressure from customers and competition from competing vendors in the future, but should benefit from growth in demand across the country. industry, with the foldable device market expected to grow 50-100% over the period. coming years.

Focus on foldable device parts suppliers with profit momentum

Among the foldable parts suppliers, we continue to favor Fine Technix, KH Vatec, Interflex and Segyung Hitech.

1) Fine Technix trades at a higher PER (taking into account convertible bonds) than its peers. However, expectations are high in terms of diversification towards Chinese customers and new products.

2) KH Vatec (hinge suppliers) and Interflex (digitizers) face limits in expanding their customer base, but have stronger operating leverage supported by high operating margins.

3) Segyung Hitech provides coins with relatively lower unit prices than the products of its peers mentioned above, but the shares appear undervalued in terms of PSR and PER given the strong earnings momentum of the company.

These four companies, which are expected to generate 60-95% of 2022 operating profit from supplying parts for foldable devices, are expected to stand out as other vendors battle slowing overall demand for tech products this year. . The visible improvement in earnings is expected to continue over the next few years, with total foldable device shipments expected to surpass 2022 levels in 2023 and 2024.

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