[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 stated on the 1st that dependency on outsourced semiconductor assembly and test (OSAT) companies is increasing, and recommended overweighting related stocks.

Korea Investment & Securities suggested that the recent correction was unrelated to fundamentals, calling it a buying opportunity. Among approximately 120 semiconductor materials, components, and equipment (hereafter, "so-bu-jang") stocks, the average maximum drawdown (MDD) reached 60%, indicating an oversold phase, while domestic OSAT stocks fell by an average of 64% from their peak, showing a larger decline. Researcher Nam Chaemin of Korea Investment & Securities said, "As the advanced packaging capacity (CAPA) of front-end integrated device manufacturers (IDMs) becomes concentrated on high bandwidth memory (HBM), the structural reliance on OSATs for conventional back-end processes is expected to rise."

During the ongoing memory supply shortage, limited capital expenditure (Capex) is being allocated first to front-end processes and high value-added advanced packaging such as HBM. Researcher Nam explained, "Additional Capex for internalizing back-end processes of generic (conventional) products increases fixed cost burdens and market volatility risks, but offers little room for differentiation, so IDMs are increasingly incentivized to shift generic volumes to OSATs." He added, "Ultimately, as the production scale of IDMs and foundries grows, demand for back-end processes will flow toward OSATs, leading to long-term performance growth trends covering both memory and non-memory sectors."

While some are concerned that new IDM back-end fabs could reduce domestic OSAT outsourcing volume, SK hynix's Cheongju fab P&T7 is operating with a focus on advanced packaging, and Samsung Electronics' new Vietnam fab is scheduled to run by transferring existing domestic site equipment. Korea Investment & Securities communicated that this is part of an effort to convert existing domestic lines to HBM lines.

The firm further analyzed that, due to the current focus on meeting HBM orders, the possibility of internalizing generic volumes is actually shrinking. For example, Hana Micron is conducting turnkey back-end processing of SK hynix's generic memory at its Vietnam Vina plant, and increased outsourcing has driven earnings growth since the first quarter. Second-quarter operating profit is also projected to reach 90 billion won (a +198.1% increase year-on-year), likely meeting market expectations.

Korea Investment & Securities further emphasized that, for non-memory OSAT, the only change has been the share price. Researcher Nam stated, "Doosan Tesna and Nepes Ark have declined 72.8% and 67.7%, respectively, from their highs following recent corrections. However, Samsung Electronics' second-quarter results confirmed foundry utilization rates have improved across all nodes, and expanding new clients is expected to double 2nm orders this year compared to last year." He continued, "As of the July 30 closing price, the 12-month forward price-to-earnings ratios for Doosan Tesna and Nepes Ark are 13x and 10x, respectively. Considering the future growth momentum, the current valuation is clearly a buying opportunity."

Of the OSAT stocks, SFA Semicon was presented as the top pick, given that the earnings recovery had been least reflected in its valuation. SFA Semicon recorded an MDD of 64.7% and is down 15.1% year-to-date. Korea Investment & Securities explained that results were sluggish until the first half of this year due to the transfer of Samsung's memory test equipment, but predicted that from the second half, utilization rates will recover and full-fledged earnings acceleration will begin this year.

Researcher Nam said, "Next year, earnings are expected to reach sales of 800.5 billion won (a +51.3% increase year-on-year), while operating profit will reach 86.9 billion won (operating margin 10.9%), achieving a rapid normalization of previously delayed profits compared to peers. This is the most attractive stock to enter during this market bottom-building phase," he explained.

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