Rebounding NAND Flash And DRAM Demand Will Improve Future Market Position

Key Takeaways

• Strategic focus on improving utilization rates and conservative CapEx aligns investments with demand, potentially boosting margins and earnings.
  
• OLED and stable display panel penetration in automotive and shareholder returns indicate strong revenue growth and solid balance sheet management.
  
• Operational challenges and declining product demand are affecting profitability, utilization rates, and overall market position, risking future revenue growth and competitive strength.

Catalysts

Engages in the research, development, manufacture, and sale of high-integration and high-precision integrated circuits, and related assembly and testing services in the People’s Republic of China, Taiwan, Japan, Singapore, and internationally.

• ChipMOS is showing signs of improvement in NAND flash and Niche DRAM demand, suggesting potential revenue growth as these markets rebound and stabilize.
  
• The company is strategically prioritizing improving its utilization rate, which could lead to better net margins by optimizing production efficiency and reducing underutilization costs.
  
• A conservative approach to CapEx in 2025 allows ChipMOS to maintain cash flow strength, decrease future depreciation pressure, and improve earnings by aligning investments with customer demand.
  
• ChipMOS plans to benefit from an increase in OLED penetration and stable display panel penetration in the automotive segment, driving revenue growth in high-demand sectors.
  
• The implementation of a share repurchase program and dividend distribution reflects strong balance sheet management, potentially enhancing earnings per share by reducing the number of shares outstanding.

ChipMOS TECHNOLOGIES Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ChipMOS TECHNOLOGIES's revenue will grow by 10.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 9.2% in 3 years time.
• Analysts expect earnings to reach NT$2.8 billion (and earnings per share of NT$3.85) by about March 2028, up from NT$1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, down from 16.4x today. This future PE is lower than the current PE for the US Semiconductor industry at 29.8x.
• 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 10.08%, as per the Simply Wall St company report.

ChipMOS TECHNOLOGIES Future Earnings Per Share Growth

Risks

• The decrease in gross margin by 360 basis points compared to 2023, and further decrease by 440 basis points compared to Q3 2024, indicates cost pressures or pricing challenges, impacting profitability.
  
• A major 51.8% decrease in profit attributable to the company compared to Q4 2023 reflects operational difficulties or reduced financial performance, significantly affecting net earnings.
  
• The continual decrease in utilization rates from Q3 2024 to Q4 2024, with an overall rate falling to 59%, raises concerns about excess capacity and inefficiency, potentially reducing future revenue capabilities.
  
• Memory product revenue experienced year-over-year decreases, particularly DRAM revenue dropping 15.9%, which highlights declining demand in key product lines impacting total revenue and market position.
  
• The company’s cautious approach with CapEx planning due to economic uncertainties and fluctuating demand levels poses a risk of underinvestment, potentially hindering long-term revenue growth and competitive edge.

Valuation

• The analysts have a consensus price target of NT$40.25 for ChipMOS TECHNOLOGIES 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$55.0, and the most bearish reporting a price target of just NT$29.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$30.5 billion, earnings will come to NT$2.8 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of NT$32.05, the analyst price target of NT$40.25 is 20.4% 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.