Pi STOCK UPDATE : HANA (SELL : FAIR PRICE Bt47.60)

" High gross margin should be unsustainable "

We very slightly raise our fair price by 1% to Bt47.60, based on Gordon Growth Model (Ke: 10%, LT-growth: 5.50%), but downrate our rating to SELL from HOLD as we believe the recent price surge has made share prices expensive. Core earnings in 2Q23 came out at Bt750m (+26% YoY, +154% QoQ), driven mainly by gross margin recovery. The result was slightly above our expectations. Despite the strong 2Q23 performance, we believe that gross margin levels will not be sustainable in for long. Additionally, while the U.S. (21% of sales in 2022) economy seems to be stabilizing, the uncertainty in the Chinese (12% of sales in 2022) economy poses a downside risk. Thus, we still expect HANA’s core earnings in 23E to decline by 9% YoY to Bt2.2bn.

Analyst meeting details

• Analyst meeting came with a neutral tone. Overall, company still faces some demand headwinds in 2H23 compared to last year as the Chinese economy is facing uncertainties. However, HANA still maintains that sales should improve HoH in 2H23, in-line with their annual seasonal trend, as they expect the U.S. economy will fare better than previously expected. We still remain on the conservative side as the U.S. could enter a recession in late 2H23 or early 1H24, which would slow orders down. Thus, our 23E forecast for Bt26.7bn (flat YoY) is roughly 5% lower than Bloomberg consensus’ forecast.

• Management believes that customer inventory levels in China have reached a bottom in 1H23, but is uncertain on whether customers are willing to stock-up further. We believe that this issue will unlikely persist past 1H24 as the decline for consumer electronics demand has shown signs of slowing down in 2Q23.

• The company believes gross margin of 15% can be maintained, assuming stable US$/Bt rates, as the expansion was from higher efficiency of scale. We remain conservative as HANA’s gross margin has averaged roughly 13.3% since 2010 (our 23E and 24E gross margin assumptions are 12.9% and 13.5%, respectively).

• New equipment is gradually being added in the Korean PMS factory to raise production capacity to prepare for mass production in 2024-25.

2H23 core earnings to improve from seasonality

• We expect HANA’s 2H23 core earnings to improve by 8% HoH to Bt1.1bn, based off seasonality and the continued solid demand in HANA’s automotive and RFID segments.