SEOUL, KOREA - Added more capacity than anticipated in early 2013 Last week, we visited BH’s wholly-owned production subsidiary, BH Electronics (BHE), located in Haiyang, Shandong province, China. BHE handles the front and the back processes including surface mount technology, and manufactures touchscreen panel flexible printed circuit boards (TSP FPCBs) for flagship smartphones produced by BH’s biggest client with the same specifications and processes used at the parent company. Despite being a weekend, employees were working hard. After touring the plant, we confirmed that BHE’s technological capacity and integrity equal that of the parent. We also understood the need for greater production capacity given the high utilization of more than 95%. In early 2013, BH’s capacity was estimated at W33.5bn/month (based on double-sided PCBs) but from Jun, it has grown ~20% to W40bn/month via concurrent expansion at the parent and the China plant. In terms of area-based capacity, it has increased from 120,000m2 in early 2013 to 140,000m2 at present.
Top- and bottom-line growth continue in 2Q13 on more smartphone parts orders Shares dropped 8.7% on Jun 7 on concerns that sales of the new flagship smartphone at the world’s leading handset maker will fail to meet market expectations. Contrary to concerns, the major client’s orders of smartphone parts increased in 2Q13. As such, BH should see its added capacity translating into earnings growth. Reduced handset subsidies by mobile telcos may hinder domestic sales, but overseas sales remain solid. We estimate 2Q13F sales at W85.1bn (+15.0% QoQ, +55.2% YoY) and OP at W7.3bn (+25.6% QoQ, +63.4% YoY), which we consider very conservative based on our visit to the plant in China. Taking into account the added capacity, we believe record earnings are achievable with sales of W100bn and OP of W8bn-9bn in 2Q13F.
2013F earnings to far exceed our previous forecast We will likely lift our 2013F earnings forecasts of sales W338.1bn (+49.9% YoY) and OP W28.5bn (+54.5% YoY) for three reasons. 1) From Jul, the largest customer should order ~15% more parts than 2Q13 for the fourth version of its flagship smartphone. 2) If BH mass produces parts for the new touch pen-enabled smartphone from Jun, high-tech parts production should continue and bolster product mix. 3) BH should become the no. 1 supplier by market share (40%) as Korea’s no. 2 smartphone maker should adopt most of the products offered by BH. Compared to peers, we believe valuations are attractive as BH trades at only 6.7x 2013 PE despite a conservative earnings forecast. We maintain BUY and a TP of W19,000 based on 10x PE, the average of the KIS Universe handset components makers and small caps.
*Source: Korea Investment & Securities Co.
