Self-developed Semiconductor And DDR5 Migration Will Improve Efficiency

Key Takeaways

• Transitioning to new technologies and increasing bit shipments aim to lower costs, improve margins, and enhance profitability amid rising AI demand.
  
• Development of advanced DRAM products and reduced depreciation expenses promise better operating margins and new revenue streams.
  
• Transitioning to new technology amidst geopolitical tensions and increasing costs poses significant financial challenges for Nanya, affecting liquidity and market position.

Catalysts

Research, develops, manufactures, and sells semiconductor products in Taiwan, Japan, Malaysia, China, the United States, Thailand, Germany, Singapore, Poland and internationally.

• Nanya Technology is transitioning to self-developed 1B and next-generation 10-nanometer technologies, which should lower production costs and improve gross margins once the migration is complete. This is anticipated to enhance profitability in the coming quarters.
  
• The company expects a 30% year-to-year increase in bit shipments, driven by the introduction of new technologies like 16-gigabit DDR5, aligning with the rising demand for AI-related applications. This growth in bit shipments is likely to boost overall revenue.
  
• Improved market demand is anticipated due to the AI boom and inventory reduction, which should provide upward momentum on ASP (average selling price) recovery. This can positively impact revenue and margins.
  
• Depreciation expenses are expected to decrease significantly by Q4 2025 as existing equipment reaches the end of its depreciation cycle, leading to improved operating margins and net income.
  
• The ongoing development and sampling of higher-specification DRAM products like 6400-speed DDR5 and possible TSV 3D integration for AI applications present potential new revenue streams and margin improvements as these innovations meet growing market needs.

Nanya Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nanya Technology's revenue will grow by 37.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -28.1% today to 21.2% in 3 years time.
• Analysts expect earnings to reach NT$17.8 billion (and earnings per share of NT$2.8) by about August 2028, up from NT$-9.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from -14.7x today. This future PE is lower than the current PE for the TW Semiconductor industry at 24.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.26%, as per the Simply Wall St company report.

Nanya Technology Future Earnings Per Share Growth

Risks

• Nanya is experiencing ongoing financial losses, with Q1 2025 net income at a loss of NT$1.941 billion and an increase in net loss year-over-year, impacting its earnings potential.
  
• The company is facing increased costs due to transitioning to new 1B technology, resulting in higher gross profit losses and impacting net margins due to inefficiencies during this migration period.
  
• There are tariff conflicts and uncertainties that could potentially threaten global economic recovery and impact DRAM demand, thus affecting future revenue.
  
• The company's current capacity utilization rates and significant CapEx for technology migration could strain cash flows, as indicated by the negative free cash flow of minus NT$8.432 billion, affecting liquidity and financial stability.
  
• Dependence on indirect economic impacts from tariff and geopolitical issues could lead to unpredictabilities in demand and pricing that may adversely affect market position and revenues.

Valuation

• The analysts have a consensus price target of NT$53.155 for Nanya Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$75.0, and the most bearish reporting a price target of just NT$28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$83.9 billion, earnings will come to NT$17.8 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 10.3%.
• Given the current share price of NT$43.35, the analyst price target of NT$53.15 is 18.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.