Win Semi Earnings: Smartphone Recovery Takes Longer To Gain Steam, Another Upgrade Cycle Incoming

Our fair value estimate on Win Semiconductors 3105 is shaved 3% to TWD 245 after factoring in higher operating expenses and smartphone demand to be in slow recovery up to mid-2024. The stock remains attractive as smartphone recovery should help Win Semi climb back into operating profit in early 2024, and drive 2024-27 revenue to grow by 30% each year with help from satellite, autonomous driving, and artificial intelligence, or AI, application demand.

We think management is being conservative on third-quarter guidance with revenue growing up to 3% sequentially to TWD 4 billion, and core gross margins hovering at the midteens. Our view stems from continual but small rush orders from Chinese smartphone brands, significant upgrades to the iPhone (adding attractiveness), and more confidence in Wi-Fi 7 migration. The Chinese government has recently encouraged electronic device consumption, but the lack of details has us concluding that local smartphone demand will take up to a year to pick up. Thus, we cut 2023 and 2024 sales projections by over 12% and EPS estimates by over 50%. We maintain our long-term view that Win Semi’s growth will be fueled by smartphone evolution, complemented by growth in demand for satellite and autonomous driving applications.

While our base-case forecasts do not include photonics, AI-induced photonics product demand may present an unlikely but large upside to Win Semi’s long-term demand. Photonics products use light instead of electricity to conduct signals, allowing faster and more energy-efficient data transmissions in theory. Win Semi has minimal indirect exposure to AI for now, mainly to connectors used in data centers.

Win Semi’s second-quarter revenue rose 38% from the previous quarter to TWD 3.94 billion, above our projections, due to the early restocking of phones stimulating Wi-Fi chip demand. Gross margin excluding revaluation was a pleasant surprise at 18.7%, as the temporary Wi-Fi boost helped double utilization to 40%.