DELTA - 4Q24: Results far below all estimates

4Q24: Results far below all estimates

DELTA reported a 4Q24 net profit of Bt2.2bn, sinking 78% YoY and 64% QoQ, 52% below INVX and 60% below consensus, due to lower-than-expected gross margin (weak EV demand) and higher-than-expected SG&A expenses (higher royalty fees on non-AI products). We expect 2025 to be challenged by concerns that the new DeepSeek AI may cap high-end GPU demand, a slowdown in EV demand, and the impact of GMT implementation. We cut our 2025F by 3.8% and 2026F by 3.9% to reflect higher royalty expenses, raising SG&A/sales to 13% from the previous 12.5%. We stay Underperform with a new target price of Bt80 (from Bt103), based on its 5-year PE mean.

4Q24 pressured by lower gross margin, higher SG&A, higher taxes. DELTA reported a 4Q24 net profit of Bt2.2bn, sinking 78% YoY and 63.5% QoQ, missing INVX estimate by 52% and consensus by 60%. Behind this was lower-than-expected gross margin (weak EV demand and warranty provisions in the MSB or magnetics solutions business), higher-than-expected SG&A expenses (retroactive royalty fees from non-AI products) and higher tax expenses on operations in India, as well as a large FX loss of Bt329mn in 4Q24. Extra items in 4Q24 were: 1) FX loss of US$13.3mn, 2) expenses of US$6.8mn in rebates to data center customers; 3) warranty provisions of US$16.2mn on a defect case in the MSB unit; 4) a one-time legal fee (booked in administration expenses) of around Bt400mn recorded in 4Q24; 5) retroactive royalty fees related to non-AI products of US$26mn recorded in 4Q24; and 6) additional tax expenses of INR400mn (Bt156mn) recorded in the India business related to corporate tax law. Excluding the extraordinary items, core profit was Bt5.0bn, also below our estimate, down 49.3% YoY and 16.5% QoQ, due to: 1) weaker gross margin of 24.3% in 4Q24 (4Q23: 24.5%, 3Q24: 27.6%) due to weak EV-related product demand and increased inventory provisions for the mobility business; 2) higher SG&A expenses due to higher royalty fees for non-AI products; and 3) a higher effective tax rate of 10% in 4Q24 from 4.9% in 4Q23 and 2.3% in 3Q24.

Dividend yield 0.4% on 2024, XD Feb 27. DELTA’s board has approved an annual dividend of Bt0.46/share, 30.4% dividend payout on 2024 or 0.4% annualized yield.

2025 challenged by GMT and concerns over high-end AI GPU demand. DELTA faces challenges in 2025. While demand for AI-related products remains solid, there are some concerns that the new DeepSeek AI model may undermine high-end GPU chip demand. We thus see a chance that contribution of DELTA's AI-related products will be lower than our estimate of 20% at end-2025 (end-2024F: 10%). We also expect continued weakness in EV demand to pressure DELTA’s mobility business (which accounts for 27% of total revenue). Note that DELTA did not book any top-up tax expenses for 2024 related to Pillar Two, as Thailand has not yet enacted the relevant legislation. However, it says that it will begin implementing the top-up tax regime from 1Q25. Management is in the process of assessing the potential impact and has engaged tax specialists to assist in evaluating the relevant tax implications. We assume an effective tax rate of 15% in 2025-26. We have revised down our 2025F by 3.8% and 2026F by 3.9% to reflect higher royalty fees, which bring SG&A/sales to 13% from the previous 12.5%.

Action/Recommendation. We maintain our Underperform rating with a new target price of Bt80.0 (from Bt103) based on PE of 49x or at its 5-year historical PE mean from +0.5SD of its 5-year historical PE mean.
Key risks are changes in purchasing power, a weaker-than-expected automotive industry and exchange rate volatility. Key ESG are labor management and supplier management.