HANA - 3Q24: Core profit missed on weak sales

3Q24 core profit was only Bt21mn, far below INVX and consensus, on weak earnings across the board. 4Q24 outlook is challenging as demand continues weak for EMS, IC and PMS businesses on concerns over new US tariff policies. We revise down our 2024F core profit by 39% and 2025F by 29% to reflect the weaker sales and gross margin. On expectation of continued weak demand YoY in 1Q25, we downgrade our recommendation to Neutral from Outperform with a new 2025 TP of Bt33 (from Bt42) based 5-year historical PE mean of 19x.

Recap 3Q24. HANA reported a net profit of Bt406mn in 3Q24, -44.7% YoY but +7.9% QoQ. Excluding extraordinary gains from a refund on investment in the supply chain of US$8.54mn (Bt299.4mn) and FX gain of Bt55mn in 3Q24, core profit was only Bt21mn, significantly below INVX and consensus, plummeting more than 97% YoY and 96% QoQ due to weak sales across almost all product groups on weak China EV demand: PCBA (-5% YoY), IC (-15% YoY) and micro display (+18% YoY). Overall gross margin fell 950 bps YoY and 620 bps QoQ to 6.2% on: 1) a one-time inventory revaluation to accommodate the significant strengthening of the baht against US dollar to Bt32/US$ from Bt36/US$ and 2) the impact on material costs brought by the appreciation of the baht as key raw materials were purchased 2-3 months prior to production.

Takeaway from analyst meeting. HANA's management believes that election of Trump, given his stated intention of raising tariffs on imports, will lead its customers to slash their inventory levels. This will eat into order volume for both IC and EMS businesses in the short term, with effects continuing into 4Q24. Simultaneously, demand for EV-related products, particularly PMS (silicon carbide products), declined on the slowdown in the Chinese economy. Demand is expected to recover around mid-2025, pushing EBTIDA breakeven to late 2025 from the previously estimated mid-2025. The OSAT (outsourced semiconductor assembly and test) business was hurt by a one-time inventory revaluation due to the significant strengthening of the baht against US dollar to Bt32/US$ from Bt36/US$ on the purchase of key raw materials 2-3 months prior to production. Excluding the inventory revaluation, IC gross margin in 3Q24 would have been around +6% instead of the reported -6.2%. The RFID business (13% of total revenue) is expected to grow in 4Q24 and 2025 after obtaining the Auburn Certificate. RFID revenue is projected to grow 20% in 2025. FT1 is a joint venture (JV) between HANA (49%) and PTT (51%) to study a possible investment in a wafer fabrication plant. HANA will reassess the timeline and investment size after observing demand and overall market situation for the next six months.

Downward revision of 2024-25F. We have cut our 2024F core earnings by 39% and 2025 by 29% to reflect the lower revenue and gross margin. Although we expect a slight recovery in core profit in 4Q24 without an inventory revaluation, demand outlook remains weak across the EMS, IC and PMS businesses. We expect demand to remain sluggish in 1Q25 before improving in 2Q25. We thus downgrade our recommendation to Neutral from Outperform with a new 2025 target price of Bt33 (from Bt44), based on 5-year historical PE mean of 19x.

Key risks are changes in purchasing power, and exchange rate volatility. Key ESG risk are labor management and suppliers (S).