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Recovery to take some time

Recommendation and valuation

We maintain our Buy rating on DB HiTek but cut our target price to W39,200 (from W57,000), applying a P/E of 8.7x to our 2025F EPS of W4,510. Our target multiple represents a 20% discount to the consensus 2025F P/E of United Microelectronics Corp. (UMC), which is trading at the lowest valuation among global peers. While DB HiTek’s stock has fallen to a 12-month forward P/B of 0.5x, we expect ROE (which is also at a historical low) to improve gradually from 2025. As concerns over weak market conditions appear to be fully priced in, we recommend accumulating shares from a medium- to long-term perspective.

Market conditions and investment points

While demand for AI chips is solid, 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 levels are improving, and there is a broad consensus that the industry is likely to enjoy solid growth over the medium/long term. As DB HiTek holds primary vendor status for over 80% of its customers, we think it is positioned to see the fastest recovery in orders (vs. peers) once demand picks up.

For 3Q24, the company posted revenue of W287.8bn (+7.5% YoY, -3.6% QoQ) and operating profit of W47bn (-6.4% YoY, -30% QoQ). Expectations for a market recovery had increased following solid results in 2Q24 (when revenue picked up 14% QoQ), but the improvement proved to be short-lived. In 3Q24, shipments stalled at 339,000 units (-0.2% QoQ), while ASP slid 2.3% QoQ. In 4Q24, we forecast revenue to decline 4.2% QoQ to W275.7bn and operating profit to fall 18% QoQ to W39bn amid a further fall in utilization.

On Oct. 11, the company announced plans to invest W250bn in facilities (e.g., clean rooms and utilities infrastructure) through Oct. 2027 in anticipation of potential capacity shortages. We believe this expansion will translate to additional wafer capacity of 30,000 units. As such, revenue could grow visibly once the new facilities are fully operational. While new businesses such as Si capacitors and GaN have experienced slight delays recently, the company is continuing R&D efforts to secure new growth drivers.