High Conviction DELTA - Fears DeepSeek will hurt AI demand

DELTA's share price has been pulled down by concern over the low-cost DeepSeek AI, which could undermine high-end GPU chip demand, since DELTA plays a key role in the powering and cooling of Nvidia GPUs in AI and data centers. We also see potential for consensus to revise down DELTA's 4Q24 projections due to weak EV demand and also bring down 2025 estimates to reflect the implementation of the GMT. The market is also likely to derate DELTA's valuation, currently trading at a high 74x 2025 PE, in view of slower growth expectations. We maintain our Underperform rating with a 2025 TP of Bt103.0 based on +0.5 SD above its 5-year historical PE mean.

Issue #1: Concern over the low-cost DeepSeek AI platform. DELTA's share price has been hurt by concerns over the impact of the new DeepSeek AI, which may undermine high-end GPU chip demand. DELTA plays a key role in the powering and cooling of Nvidia GPUs in AI and data centers, producing DC power supply, power modules, thermal management and energy efficiency within the high-end GPU ecosystems for Nvidia. The US restrictions on the export of artificial intelligence chips made by Nvidia, specifically the H20 and chips of similar sophistication (in addition to bans on Nvidia's most advanced AI chips, the A100 and H100, since September 2022 and the A800 and H800 since October 2023), are a significant concern. Notably, the H20 chip features lower specifications than the H100, with 41% fewer GPU cores and 28% lower performance. If demand for Nvidia's high-end GPU chips declines, it will also damage demand for DELTA's AI-related products. We thus see a chance the contribution of DELTA's AI-related products will be lower than our estimate of 20% by end-2025 (end-2024F: 10%).

Issue #2: 4Q24 earnings to be hurt by low EV demand. 4Q24 earnings will be eroded by low EV demand. We estimate 4Q24 core profit at Bt5.0bn in 4Q24, below the Bloomberg consensus of Bt5.5bn, down 15.4% QoQ but up 6% YoY. The YoY increase reflects strong high-margin AI-related demand, while the QoQ decline reflects weak EV-related product demand as well as the absence of one-time inventory adjustments seen in 2Q24 and 3Q24. In 2025, we expect DELTA's core earnings to increase by only 1.5% due to the implementation of the GMT. We also expect earnings downgrades by the market.

Issue #3: Expect a valuation derating. DELTA currently trades at a high valuation of 74x 2025 PE, reflecting high expectations for strong growth in AI-related product demand. However, investors are likely to derate DELTA's valuation in the next couple of quarters due to lowered growth expectations for AI-related product demand and the implementation of GMT. We also expect consensus to revise their 2025 earnings forecasts down to reflect the implementation of the GMT.

Action/Recommendation. We maintain our Underperform rating with a 2025 TP of Bt103.0 based on PE of 61x or at +0.5 SD above 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.