Duksan Hi-Metal: Beneficiary of Packaging Substrate Market Growth

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The authors are analysts of Shinhan Investment Corp. They can be reached at chank@shinhan.com and doyeon@shinhan.com, respectively. — Ed.

Supplier of solder balls used in semiconductor packaging

Duksan Hi-Metal produces and sells solder balls, micro solder balls (MSB), and core solder balls (CSB) for use in semiconductor packaging. The company’s major subsidiaries include Duk San Neolux (stake: 36.2%), DS Navcours (60%), and DS Myanmar (100%).

Main businesses to benefit from packaging substrate market growth

For 2022, we forecast sales at KRW149bn (+60.1% YoY) and operating profit at KRW27.3bn (+182.8% YoY). Steep top-line growth should be driven by: 1) earnings improvement at main businesses; 2) recognition of sales from DS Navcours for the full year; and 3) ramp-up of plant operations at DS Myanmar.

Demand for solder balls, the company’s core products, will likely expand as packaging substrate demand continues to grow on: 1) shipment growth at semiconductor companies; and 2) strong demand for ball grid array (BGA) and flip chip packaging from the increase in chip density. Margin gains are also expected from rising sales of high-margin MSB and CSB.

New business expansion is another investment point, with Duksan Hi-Metal expected to start domestic production of type 6 and type 7 solder pastes in 2022. DS Myanmar, which ramped-up plant operations in 4Q21, should contribute to the stable supply of tin concentrates as well as margin gains.

Initiate coverage with BUY for a target price of KRW27,000

We initiate coverage of Duksan Hi-Metal with BUY for a target price of KRW27,000 based on sum-of-the-parts valuation. The company’s fair market cap of KRW618.6bn reflects the value of main businesses (KRW299bn), stakes in Duk San Neolux (KRW256.6bn) and DS Navcours (KRW14.9bn), and net cash holdings (KRW48bn).

We find Duksan Hi-Metal attractive with: 1) main businesses expected to report improvement in earnings; and 2) current market valuation of main businesses seen excessively low when considering the value of the company’s equity stake in subsidiaries.

The current market cap of KRW408.9bn implies a 2022F PER of 3.1x for the company’s main businesses, even after reflecting the value of equity stake in DS Navcours at half of the purchase price. With Duksan Hi-Metal no longer recording slow top-line growth or 10%-level operating margins as in the past, we believe the company’s shares deserve a re-rating in light of visible improvement in the value of main businesses.

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