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Negatives already priced in

Recommendation and valuation

We maintain our Buy rating on DB HiTek but lower our target price to W57,000 (from W76,600), applying a P/E of 10.2x to our 2024F EPS of W4,893. Our target multiple represents a 30% discount to the consensus 2024F P/E of United Microelectronics Corp. (UMC), which is trading at the lowest valuation among global peers.

Market conditions and investment points

While demand for IT and AI chips has been improving markedly, we have yet to see a significant demand recovery for chips used in consumer electronics and industrial equipment (DB HiTek’s main products). Nevertheless, a number of players in the global semiconductor value chain note that inventory destocking at customers is in the final stage. Even if a full recovery in end-market demand is delayed, we could see a pickup in inventory stocking demand if inventories remain at healthy levels. Notably, the firm holds primary vendor status for over 80% of its customers, and we think it is positioned to see the fastest recovery in orders (vs. peers) once demand picks up.

In addition, according to a market research firm, Taiwanese foundries'' utilization rates have rebounded since the US government increased tariffs on Chinese semiconductors (25% to 50%). Utilization rates are expected to rise to 75% for Vanguard, 85-90% for PSMC, and 70-75% for UMC. We believe rising utilization rates could benefit DB HiTek over the medium to long term.

Earnings outlook

For 1Q24, DB HiTek reported revenue of W261.5bn (-12.3% YoY, -6.4% QoQ) and operating profit of W41bn (-50.5% YoY, -2.8% QoQ). Wafer shipments were healthy at 332,000 (-1.1% QoQ) thanks to unexpected orders from a domestic customer. That said, ASP continued to decline (-6.1% QoQ). In 2Q24, we expect utilization to recover slightly and look for revenue of W264bn (+1.1% QoQ) and operating profit of W32bn (-21.7% QoQ). The stock has fallen to a 12-month forward P/B of 0.8x . However, ROE, which is hovering near historical lows, will likely pick up modestly in 2025. As the current valuation seems to already price in the worst-case scenario, we maintain our Buy rating.







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