Daily Brief TMT/Internet: Appier Group, Sindoh Co Ltd, Sea , Samsung SDI, Lenovo, Taiwan Semiconductor (TSMC) – ADR, Freee KK, KLA-Tencor Corp, Hon Hai Precision Industry, Semiconductor Manufacturing International Corp (SMIC) and more

• Strong Q2 results with revenue +42% yoy versus +33% in Q1
• Gross margin expansion to 51.3% on improving AI algorithm performance
• Stock down around 20% over past couple of months, No change to bullish growth forecasts.

• Sindoh Co Ltd (029530 KS) is the 24th company in our Korea Small Cap Gems series. 
• Sindoh has one of the highest net cash/market cap ratios in the entire Korean stock market. Net cash at end of 1Q 2023 was 226% of its market cap. 
• Sindoh’s operations turned around in 1Q 2023. It had sales of 105.5 billion won (up 26.6% YoY) and operating profit of 9.8 billion won (turned black) in 1Q 2023.

• We remain bearish on Sea (SE US) leading upto Q2 results on 15th August 2023.
• Our analysis suggests Sea Ltd could hit around $3.25bn revenue in 2Q23, in line with consensus. However, profitability could fall short of consensus expectations.
• Nonetheless, any downside stemming from a minor earnings shortfall could be rather limited given the existing low consensus and the lackluster price performance leading up to the Q2 earnings announcement.

• Samsung SDI is currently facing legal challenges in the United States stemming from a scooter fire during charging and a separate incident involving a lithium-ion battery fire. 
• These incidents are part of a series of recurring battery fire controversies involving Samsung SDI dating back to 2016. 
• Notably, the ESG (Environmental, Social, and Governance) risk level for Samsung SDI has been assessed as ‘High,’ supported by an ESG risk score of 2.7.

We view Lenovo as “Low Risk” on the LARA scale, mainly due to the business’ large size, track record and strong balance sheet. Lenovo is the world’s largest PC maker, with the PC segment being the company’s key profit centre. The Mobile segment has been scaled back to certain markets, and has turned profitable. The Data Centre/Server business is promising and has grown impressively, albeit still suffering losses.

Negatively, all three of the company’s market segments are becoming commoditised. The PC markets, having previously experienced a structural decline due to changes in user behaviour as well as substitutes (smartphones and tablets), has enjoyed strong demand as more people have been working from home amid the pandemic.

Our Credit Bias on Lenovo remains “Stable”, as the growth outlook is subdued due to weak post-COVID-19 PC demand. We do not expect the credit to improve further. That said, the strong balance sheet, sound liquidity and solid working-capital management would cushion Lenovo from the PC segment’s inventory adjustment period.

Controversies are “Immaterial” and the ESG Impact on Credit is “Moderately Positive”. ESG-compliant funds may find Lenovo attractive due to its strong ESG. The company has done very well in terms of environmental factors, with a strong management team as well as a long and positive track record. Lenovo is mainly exposed to geopolitical risk, albeit it has managed this very well amid the US-China trade war.

• Hon Hai beat expecations by nearly 30% but reduced 2023E sales guidance. However, the company’s AI server business is expected to take market share and its EV business is developing.
• Asustek management provided some clarity on when AI PCs might turn from dream into reality — 3Q24E is when the company believes they will contribute significantly to sales volume.
• Himax reported some improvement in demand from China beleaguered automotive industry and said it expects its dominant global market position for automotive display drivers to continue.

• Freee reported 4QFY06/23 results today. Revenue increased 39.6% YoY to ¥5.4bn (vs consensus ¥5.32bn) while operating losses increased to ¥3.0bn from ¥724m in 4QFY06/2022 (vs consensus ¥2.5bn).
• Freee KK (4478 JP) ’s full-year revenues and operating losses were in line with the company’s guidance, and increased losses were due to investments related to growth and customer acquisition.
• The company’s medium-term plan expects revenues of more than ¥50.0bn by FY06/2027E and operating profits by FY06/2025E which seems attainable to us.

• KLA Corporation delivered a positive result and managed an all-around beat in the last quarter.
• KLA demonstrated consistent execution amid a competitive market by delivering results at the upper end of the guidance and commitment range.
• We give KLA Corporation a ‘Hold rating with a revised target price.

• Hon Hai’s 2Q23 results beat earnings street expectations by nearly 30%, thanks to AI server demand and gross margin rising.
• Tightening China tech restrictions highlight Hon Hai’s advantageous position for EV development.
• Structural Long. Any weakness over worries about Apple/consumer products demand is an opportunity to accumulate. Investors shouldn’t let cyclical expectations fluctuations blur their focus on Hon Hai’s structural story.

• SMIC reported C2Q23 top-line, EBIT, and non-IFRS net profit in-line, (10%), and (20%) vs. our est., and in-line, (35%), and (8%) vs. cons., respectively.
• SMIC guided 3Q revenues up 3-5% QoQ, but gross profit flattish QoQ. This suggests SMIC is shipping 8” wafers with low, or negative profit per wafer.
• We maintain BUY on Huawei exposure but cut our TP to HK$ 24 to reflect the low profitability of 8” wafer orders that could persist given weak demand.