Chinese Subsidies And Tech Shifts Will Shrink Addressable Markets

Key Takeaways

• Slowing demand growth and rising competition threaten Novatek's top-line performance and could compress margins in key segments.
  
• Advanced technology shifts and stricter global regulations risk eroding core market relevance and driving up operational costs.
  
• Expansion into high-margin and diversified product areas, strong technological competitiveness, and improving investor confidence position Novatek for sustainable growth and enhanced shareholder returns.

Catalysts

Engages in research and development, manufacture, and sale of integrated circuit chips for speech, communication, computer peripheral, LCD driver IC system, embedded MCU, DSP, and system applications in Taiwan, Asia, and internationally.

• The expected deceleration in shipment demand due to the pull-forward effect of Chinese subsidy policies and ongoing uncertainty over global tariffs signals that the recent revenue growth rate will be unsustainable, which is likely to result in stagnant or even declining top-line growth over the next several quarters.
  
• Competition from low-cost Chinese IC producers, along with a slow ramp in higher-value new markets like automotive and non-phone OLED, will intensify price pressure on display driver ICs, likely leading to sustained downward pressure on gross and operating margins.
  
• The rapid technological evolution to advanced display technologies such as mini/micro-LED and OLED on silicon risks rendering Novatek's traditional DDIC products less relevant, causing erosion of their core addressable market and impacting long-term revenue growth and market share.
  
• Intensifying global supply chain localization and diversification efforts threaten to undermine the competitive advantages of Taiwan-based fabless firms, which could restrict Novatek's ability to secure global design wins and diminish both revenue consistency and customer stickiness.
  
• The escalation in regulatory and compliance risks, driven by rising geopolitical tensions and increasingly stringent ESG requirements, threatens to burden Novatek with higher operating costs and capex, compressing net margins and posing long-term risks to profitability.

Novatek Microelectronics Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Novatek Microelectronics compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Novatek Microelectronics's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 17.9% today to 18.4% in 3 years time.
• The bearish analysts expect earnings to reach NT$20.1 billion (and earnings per share of NT$33.52) by about August 2028, up from NT$19.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.6x on those 2028 earnings, up from 14.0x today. This future PE is lower than the current PE for the TW Semiconductor industry at 25.7x.
• 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 8.86%, as per the Simply Wall St company report.

Novatek Microelectronics Future Earnings Per Share Growth

Risks

• Novatek is experiencing continued revenue and gross profit growth across both quarter-over-quarter and year-over-year periods, with first quarter revenue, gross margin, and net income each reaching or exceeding the upper end of company guidance, which may support future increases in earnings and bolster the share price.
  
• The company is expanding into high-margin areas such as OLED TDDI for smartphones and tablets, with mass production underway and customer adoption accelerating, suggesting long-term growth potential and likely positive impact on revenue and operating margin.
  
• Market share gains in key product categories, including tablet DDIC and automotive driver ICs, demonstrate technological competitiveness and successful diversification strategies, which increase overall revenue resilience and support sustainable margin performance.
  
• Novatek continues to invest in AI-enabled SoC products and is receiving positive feedback from international customers, opening avenues for expansion into smart home, computer vision, and image recognition markets, thus positioning the company for future earnings and revenue growth.
  
• Consistent recognition for corporate governance and improvements in ESG scores, along with a stable and rising dividend payout ratio, enhance investor confidence and may result in stronger share price performance through higher valuations and robust net cash returns to shareholders.

Valuation

• The assumed bearish price target for Novatek Microelectronics is NT$400.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Novatek Microelectronics's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$600.0, and the most bearish reporting a price target of just NT$400.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NT$109.3 billion, earnings will come to NT$20.1 billion, and it would be trading on a PE ratio of 15.6x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of NT$440.0, the bearish analyst price target of NT$400.0 is 10.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.