Initiate at Buy: Strong earnings growth and market share gains
Silergy Corp is an Asian analog IC player with a unique business model to gain market share; we forecast a 29.3% sales CAGR and a 28.5% earnings CAGR in 2014-17e The company has a net cash balance sheet, good FCF generation (2016e: 5% yield) and a strong ROE of 30% Initiate at Buy with a target price of TWD373, based on a 20x PE on 2016e earnings Asian player with a unique business model in analog IC. Silergy Corp is a fabless provider of analog integrated circuits (IC). It focuses on power management IC in diversified end-applications, which is the largest segment in standard (high performance) analog IC and provides, in our view, the best growth opportunities (a 6% 2014-17e CAGR vs. 3% for analog IC). The fact that the company is not reliant on a single end-application reduces the volatility of the business. Silergy is a fabless player but runs a virtual fab with its proprietary process, which is important for analog IC but difficult for other fabless players to duplicate. Improving margin profile. Silergy’s gross margin suffered in 2014 from the success of its power management IC for notebooks (categorised under computing-related IC), which generate a lower margin among the company’s product lines. However, we should see a sequential improvement in gross margin from 45.5% in 2014 to 47.3% in 2016e and 47.6% in 2017e, driven by fast-growing, industrial-related IC. We believe strong sales growth and margin expansion should drive earnings growth of 28.5% in 2014-17e. Valuation and risks. PE multiples reflect the earnings growth outlook, so we choose this approach to derive our target price. Silergy has been trading at a 15-20x PE, above Taiwan-listed peers but on par with global peers, which we think is justified, given its similar ROE and earnings growth profile. Richtek (6286 TT, Not Rated), once the market leader in Taiwan, traded at a 15-24x PE in 2009-10, when it enjoyed strong earnings growth of 27% on the back of market share gains from US companies. We think Silergy should trade in the 15-24x PE range, given its current growth momentum. We, as such, take the mid-point of the range (rounded to 20x; also the high end of its trading range since the IPO) as our target PE multiple and derive our target price of TWD373 based on 2016e earnings. Key downside risks include a weakening global economy and missing market trends and technologies that change the competitive landscape. We note that venture capital (VC) shareholders have gradually reduced their holdings from close to 48% before the IPO (in October 2013) to 6% now. Silergy Corp (6415 TT) Initiate at Buy: Strong earnings growth and market share gains Telecoms, Media & Technology Semiconductors Equity – Taiwan Company report Index^ TAIWAN WEIGHTED INIndex level 8,495RIC 6415.TWBloomberg 6415 TTSource: HSBC Buy Target price (TWD) 373.00 Share price (TWD) 309.50 Upside/Downside (%) 20.5 Dec 2014 a 2015 e 2016 e HSBC EPS 10.55 14.34 18.65 HSBC PE 29.3 21.6 16.6 Performance 1M 3M 12M Absolute (%) 9.8 -0.2 29.0 Relative^ (%) 3.4 5.5 35.9 Free float (%) 70Market cap (USDm) 743Market cap (TWDm) 24,088Source: HSBC 9 October 2015 Yolanda Wang* Analyst HSBC Securities (Taiwan) Corporation Limited +886 2 6631 2867 yolandayywang@hsbc.com.tw Joyce Chen* Analyst HSBC Securities (Taiwan) Corporation Limited +886 2 6631 2862 joycechchen@hsbc.com.tw View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Securities (Taiwan) Corporation Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it 2 Silergy Corp (6415 TT) Semiconductors 9 October 2015 abc Financials & valuation Financial statements Year to 12/2014a 12/2015e 12/2016e 12/2017eProfit & loss summary (TWDm) Revenue 3,273 4,573 5,975 7,073EBITDA 786 1,074 1,446 1,732Depreciation & amortisation -23 -16 -19 -23Operating profit/EBIT 763 1,058 1,426 1,709Net interest 13 -43 -100 -100PBT 787 1,117 1,486 1,769HSBC PBT 787 1,117 1,486 1,769Taxation 13 -22 -59 -71Net profit 801
