[Weekend Money] "For Non-Memory OSAT Companies, Only Share Price Has Changed"

"Overweight on OSATs... SFA Semicon as Top Pick"


Incentives Growing for Shifting Conventional Volumes to OSATs

Korea Investment & Securities suggested on the 1st that this is a period when dependence on Outsourced Semiconductor Assembly and Test (OSAT) companies is increasing, and recommended expanding exposure to related stocks.

Korea Investment & Securities noted that the recent market correction has occurred independently of fundamentals and advised viewing this as a buying opportunity. While approximately 120 domestic semiconductor materials, components, and equipment stocks have entered an oversold phase with an average maximum drawdown (MDD) of 60%, domestic OSAT-related stocks have fallen even further, dropping an average of 64% from their peaks. Researcher Nam Chaemin at Korea Investment & Securities commented, “As the advanced packaging production capacity (CAPA) of front-end Integrated Device Manufacturers (IDMs) is increasingly focused on High Bandwidth Memory (HBM), the structural dependence on OSATs for conventional back-end processes is expected to rise.”

As the memory supply shortage continues, limited capital expenditure (capex) is being prioritized for front-end processes and high-value advanced packaging such as HBM. Researcher Nam said, “Additional capital expenditure for in-house back-end production of conventional products increases the burden of fixed costs and the risk of market volatility, but offers little opportunity for differentiation, thus giving IDMs greater incentive to shift conventional volumes to OSATs. Ultimately, as the production scale of both IDMs and foundries increases, the demand for back-end processing will increasingly flow to OSATs, and the trend of performance growth spanning both memory and non-memory segments is expected to last for an extended period.”

While some have raised concerns that the expansion of back-end manufacturing facilities (fabs) by IDMs could reduce outsourcing volumes for domestic OSATs, SK hynix’s Cheongju fab P&T7 is being operated with a focus on advanced packaging, and Samsung Electronics’ new Vietnam fab is scheduled to be operated by transferring existing equipment from domestic sites. Korea Investment & Securities explained that this is part of the process of converting existing domestic lines into HBM lines.

It further analyzed that, currently, the potential for in-house production of conventional volumes is being diminished in favor of responding to HBM orders. For example, Hanamicron is conducting the turn-key back-end process for SK hynix’s conventional memory at its Vietnam Vina plant, and the increase in outsourced volumes has led to strong earnings growth since the first quarter. Second-quarter results are also expected to meet market expectations, with operating profit forecast at 90 billion won (a 198.1% increase year-on-year).

Regarding non-memory OSATs, Korea Investment & Securities emphasized that the only thing that has changed is the stock price. Researcher Nam said, “Despite the recent correction, Doosan Tesna and Nepes Ark have declined 72.8% and 67.7%, respectively, from their peaks; however, Samsung Electronics’ second-quarter results confirmed that foundry utilization rates are improving across all nodes. With the expansion of new customers, the number of orders for 2-nanometer manufacturing is expected to more than double year-on-year,” adding, “As of the market close on June 30, the 12-month forward price-to-earnings ratios of Doosan Tesna and Nepes Ark were 13 and 10, respectively. Considering future growth momentum, the current valuations are certainly a buying opportunity.”

Among OSAT stocks, Korea Investment & Securities pointed to SFA Semicon as its top pick, as the company’s recovery expectations have been the least reflected in its stock price. SFA Semicon recorded a 64.7% maximum drawdown and is down 15.1% year-to-date. The company explained that although SFA Semicon’s earnings were weak in the first half of this year due to the transfer of Samsung’s memory test facilities, a recovery in utilization rates is expected from the second half, leading to a full-fledged improvement in earnings starting this year.

Researcher Nam stated, “Next year’s projected earnings indicate sales of 800.5 billion won (a 51.3% increase year-on-year) and operating profit of 86.9 billion won (an operating margin of 10.9%), suggesting that the normalization of profits that was delayed relative to peers will accelerate. SFA Semicon is considered the most attractive stock to enter during the market bottom,” he explained.

This content was produced with the assistance of AI translation services.