The author is an analyst of NH Investment & Securities. He can be reached at midas.sohn@nhqv.com. — Ed.
Due to factors such as inflation, interest rates, liquidity crunches, and war, 2023 is to be a year of uncertainty. Given such external variables, earnings volatility at small/mid-cap companies is to exacerbate throughout 2023. Nevertheless, there are always individual plays for which share prices will rise. Herein, NH I&S’s small/mid-cap team identifies three opportunities set to emerge in 2023 despite the uncertain external environment, presenting 10 companies that are well situated to benefit thanks to their improved fundamentals.
First, with the data center fire that occurred in 2H22 highlighting the importance of data centers, data center/cloud service investment is predicted to expand. Related beneficiaries are to include KINX, Exem, and Piolink.
Second, production of cars, which had been stagnating due to semicon supply issues, is now on the rise. Given both an easing of bottleneck woes and an expanding market sales portion of EVs, we advise looking at players that manufacture EV-related parts. We like Tovis and Obigo.
Third, even in a phase of high earnings volatility, share prices should re-rate for companies expected to enjoy accelerated earnings growth on the back of new businesses added to their stable existing domains. We suggest Elentec, AVACO, Kencoa Aerospace, SBB Tech, and i3system.
I. Elentec
Elentec is a comprehensive IT manufacturer with a product portfolio encompassing wire harnesses, mobile phone/TV cases, battery packs, chargers, and e-cigarettes. Traditionally, Elentec’s product portfolio has consisted mainly of mobile phone cases, TV frames, and battery packs for mobile phones and laptops. However, backed by technological development, certification increase, and manufacturing capability strengthening, the company is expanding its business areas into e-cigarettes and ESS/mobility battery packs. Over the near term, top-line growth is likely to slow slightly due to sluggish earnings at the firm’s case and mobile phone battery pack business amid a downturn in sales at clients, in addition to weakening e-cigarette sales growth. But, from next year, earnings should pick up steadily on facility expansion to meet growing demand for ESS battery packs for home use in North America and Europe, as well as demand for mobility battery packs in Southeast Asia.
II. AVACO
AVACO is expanding its business from display equipment to rechargeable battery & semiconductor equipment. As of 2022, orders for rechargeable battery-related equipment have increased significantly, and orders for roll press equipment from major customers are expected to begin in 2023. Given that the company has formed close relationships with major customers, we believe that its rechargeable battery equipment sales are highly likely to expand in the future. It also boasts sound financial health.
III. KINX
KINX provides B2B customers with Internet infrastructure (eg, IDC, IX, and cloud). KINX’s earnings have trended up since it was founded, thanks to: 1) an uptick in domestic IDC demand; and 2) customer appetite for its network-neutral data center service. The firm is expected to complete the construction of Gwacheon IDC in 1H24. The new IDC, for which W160bn in investment has been made, is to be 1.4x larger than its existing IDC and consume 3x more power. Once the IDC’s operations normalize, the firm’s earnings are to level up.
IV. Kencoa Aerospace
Kencoa Aerospace is an aircraft fuselage and parts maker. Its new PTF conversion business turned to profit in 2Q22, with OP set to expand from 2023. The firm also engages in UAM business and supplies materials for use in space aircraft. With UAM and space aircraft promoted as new growth industries by the government, Kencoa Aerospace is well positioned to benefit from its new ventures.
V. Tovis
Tovis produces industrial monitors for casino gaming machines, etc, and touch panels and TFT-LCD modules for mobile devices. After key client LG Electronics withdrew its smartphone business, Tovis shifted its business focus from mobile devices to auto display modules. A friendlier cost ratio amid drops in panel prices and maritime freight costs has started to be reflected from 3Q22. In addition, we believe that order backlog at the company’s automobile display modules domain is rising backed by an easing of auto semiconductor supply.
VI. SBB Tech
Having succeeded in in-house production of harmonic drive reducers, SBB Tech is to benefit from growing demand for locally-produced reducers to replace Japanese-made products. Its core product (Harmonic drive reducer) requires high precision design and advanced technological prowess. In the near term, sales of reducers for industrial robots should grow; over the long term, reducers for service robots are to drive overall sales growth.
VII. Exem
As a database SW player, Exem is showing steady earnings growth by launching various products necessary for the IT environment, such as its DB performance management solution, application performance management, big data integrated management, and cloud infrastructure integrated control products. As the IT environment is becoming more sophisticated, the importance of DB management systems is being highlighted, putting a spotlight on the firm’s solutions. The new government’s core national task, the ‘realization of the world’s best digital platform government’, is an additional positive, as the firm should benefit from the expansion of data infrastructure.
VIII. i3system
We draw attention to i3system’s sophisticated technology for manufacturing cooled infrared image sensors. The technology is possessed by only 7 countries worldwide, and i3system is the only domestic player in the space. With overseas interest in Korean weapons rising, exports of weapons (K2 tanks, Hyeongung, Shingung, etc) equipped with the company’s products are expected to expand. In addition, sales diversification is expected, as utilization of the firm’s sensors is expanding to areas such as X-ray image sensors and infrared cameras mounted on satellites.
IX. Obigo
Obigo develops and sells automotive software. Obigo’s automotive software solutions are broadly comprised of the AGB browser, app framework, development toolkit, and app store. Having entered a full-fledged growth stage, in line with mass-production contracts with two of the global top-3 automakers and domestic automakers, Obigo is expected to enjoy strong operating leverage effects, backed by license & royalty revenue.
X. Piolink
Piolink is a company that develops solutions for cloud data center optimization. Its major solutions include application delivery controllers (ADCs), security switches, web application firewalls, and security control/consulting products. In the wake of the recent fire at a major data center, the establishment of disaster recovery (DR) systems, including data center redundancy and cloud conversion policies for administrative/public institutions, is to act favorably on demand for the company’s network equipment.
