Friday, October 5, 2007

[GS] Powertech Technology (6239.TW): Record high Sept. sales at NT$2.17bn, despite DRAM weakness

What's changed

Powertech (PTI) reported record high September sales of NT$2.17bn, up 4.3%
mom and up 39.1% yoy.  3Q2007 sales of NT$6.2bn, up 12% qoq, came in 2.6%
higher than GS estimate of NT$6.1bn.  We believe the main reason PTI
continues to outperform despite DRAM industry weakness is mainly a result of:
(1) testing time extension for 70nm technology products; (2) CAPEX
discipline leading to industry capacity shortage. 

Implications

PTI's capacity is currently running at 100% utilization due to incremental
demand resulting from 70nm technology migration from PTI's major customers,
such as Elpida, ProMOS and Rexchip.  As a result of memory back-end
discipline on capacity expansion, PTI was able to enjoy a slight ASP hike in
3Q and also to negotiate with customers for a flattish ASP settlement qoq in
4Q.  In addition, according to Bloomberg (Oct. 04, 2007), Elpida management
has publicly announced that it will reduce the numbers of chips sold into the
spot market.  This will also remove investors' concerns of a repetition of
2Q2007 earnings softness, when most of PTI's customers were dumping Ett/Utt
DRAM chips into the spot market resulting in a sharp reduction in testing
times.  On the back of strong demand, we would expect PTI revenues to grow in
4Q2007E by another 10% qoq.  We expect PTI to deliver its guidance of gross
margins of around 30%-32% for both 3Q and 4Q.  

Valuation

We maintain our Neutral rating, but raise our 12-month target price to NT$157
(3.9x 2008E P/B), from NT$139.2, to reflect better earnings growth momentum,
and have raised our 2007E EPS by 17.7%, 2008E by 5.4% and 2009 by 8.7%. 

Key risks

Faster than expected DRAM pricing decline with more customers shifting to
Ett/Utt chips in the spot market.