Company Reports

We maintain our fair value estimate on narrow-moat Delta Electronics at TWD 331 per share after minor changes to our model. There is no change in our long-term view. Shares look fairly valued, as a rosy outlook for artificial intelligence servers is offset by a disappointing recovery in the automation business. We view more clarity as to the end of inventory clearance among automakers and China’s macroeconomic recovery as being positives for the stock.

We retain our fair value estimates on Taiwanese technology companies in our coverage following a powerful earthquake and multiple strong aftershocks near the eastern city of Hualien on April 3, namely: Advantech at TWD 337; Delta Electronics at TWD 331; GlobalWafers at TWD 710; Largan at TWD 3,000; MediaTek at TWD 1,400; Sino-American Silicon at TWD 281; Taiwan Semiconductor Manufacturing Co at TWD 950 (USD 151 per ADR); United Microelectronics Corp at TWD 70; and Win Semiconductors at TWD 245 per share.

We maintain our fair value estimate of TWD 331 for narrow-moat Delta Electronics despite short-term headwinds in the electric vehicle business. Shares look slightly undervalued as better-than-expected demand in artificial intelligence servers and a recovery in the automation business outweigh milder EV growth in 2024. Though some carmakers have second thoughts on EV adoption, we believe this is merely a speed bump in the electrification trend.

Delta Electronics' competitiveness and reputation are built on its expertise in power management. It enables the firm to offer energy-efficient solutions that conform to standards of different industries and regions. The stringent requirements of telecom, server and data center applications are perfect showcases of Delta’s moat. Together they contribute about 30% of revenue. We think growth of the data center business will be driven by accelerating data generation and upselling of cooling, power management, and monitoring systems to existing enterprise customers. For telecom products, 5G rollouts should last years, as 3 times more base stations are needed compared with 4G. We believe Delta’s reputation should reassure data center customers of optimized energy usage; and telecom clients of reliability in adverse conditions.

We lower our fair value estimate for narrow-moat Delta Electronics to TWD 331 from TWD 357 to account for higher minority interests in the electric vehicle business. After falling 23% over the past three months, shares have become attractive after pricing in near-term negatives for sluggish demand in non-artificial intelligence servers and factory automation. We think Delta’s shares are undervalued, and a combination of China’s recovery, the end of the United Auto Workers union strikes in the U.S., and secular EV adoption will be the catalysts.

Delta Electronics' competitiveness and reputation are built on its expertise in power management. It enables the firm to offer energy-efficient solutions that conform to standards of different industries and regions. The stringent requirements of telecom, server and data center applications are perfect showcases of Delta’s moat. Together they contribute about 30% of revenue. We think growth of the data center business will be driven by accelerating data generation and upselling of cooling, power management, and monitoring systems to existing enterprise customers. For telecom products, 5G rollouts should last years, as 3 times more base stations are needed compared with 4G. We believe Delta’s reputation should reassure data center customers of optimized energy usage; and telecom clients of reliability in adverse conditions.

In 2022, battery electric vehicles represented nearly 10% of global auto sales, up from a little less than 6% in 2021. Much of the growth occurred in China, which has been a leader in EV sales over the past decade. However, with national EV subsidies in China expiring in 2022 and far lower sales in the U.S. and Europe, the market questions if EV sales can continue to grow without subsides.

We nudge our fair value estimate on narrow-moat Delta Electronics up by 5% to TWD 357, corresponding to 22 times 2024 P/E, after incorporating a more bullish view on electric vehicle and artificial intelligence server demand. However, after Delta’s shares rallied 25% in the last three months, we think EVs and server-related upside is priced in.

Delta Electronics' competitiveness and reputation are built on its expertise in power management. It enables the firm to offer energy-efficient solutions that conform to standards of different industries and regions. The stringent requirements of telecom, server and data center applications are perfect showcases of Delta’s moat. Together they contribute about 30% of revenue. We think growth of the data center business will be driven by accelerating data generation and upselling of cooling, power management, and monitoring systems to existing enterprise customers. For telecom products, 5G rollouts should last years, as 3 times more base stations are needed compared with 4G. We believe Delta’s reputation should reassure data center customers of optimized energy usage; and telecom clients of reliability in adverse conditions.

We maintain our fair value estimate for narrow-moat Delta Electronics at TWD 342, corresponding to 24 times 2023 P/E, as there were few surprises in March-quarter numbers. We see Delta being undervalued, as it continues to benefit from electric vehicles, components chargers, incremental cooling, and power supply demands of servers. While we have not explicitly modeled artificial intelligence, or AI, servers, their scale and complexity are potential upsides to our forecasts.

We raise our fair value estimate on narrow-moat Delta Electronics to TWD 342 from TWD 300, corresponding to 24 times 2023 P/E, after finetuning operating expenses assumptions and making small adjustments to our model. We still find Delta undervalued, as it continues to benefit from fast-growing businesses like electric vehicles, or EVs, data centers, and networking. In particular, we see accelerating investments in artificial intelligence spurred by ChatGPT’s popularity will drive Delta’s sales in cooling and energy management systems. We prefer Delta to fellow automation vendors like Han’s Laser and Hikvision because it is more exposed to data centers and EVs and its revenue less concentrated in China.

Delta Electronics' competitiveness and reputation are built on its expertise in power management. It enables the firm to offer energy-efficient solutions that conform to standards of different industries and regions. The stringent requirements of telecom and data center applications are perfect showcases of Delta’s moat. Together they contribute about 30% of revenue. We think growth of the data center business will be driven by accelerating data generation and upselling of cooling, power management, and monitoring systems to existing enterprise customers. For telecom products, 5G rollouts should last years, as 3 times more base stations are needed compared with 4G. We believe Delta’s reputation should reassure data center customers of optimized energy usage; and telecom clients of reliability in adverse conditions.

We increase our fair value estimate on narrow-moat Delta Electronics to TWD 300, corresponding to 26 times 2023 P/E, after raising 2022-26 revenue and 2022, 2025-26 EPS forecasts upon higher conviction in its fast-growing electric vehicle, or EV, and data center businesses. Delta is undervalued, in our view, as we anticipate the fast-growing businesses to maintain the above-corporate-average growth rates after contributing a larger slice of firmwide sales. Although we are confident in Delta’s long-term growth opportunities, there is some near-term downward revision risk to the stock because PitchBook consensus gross margin is near all-time highs at 29.6%, having not adjusted for potential recession in 2023. We forecast 28% gross margin for 2023.

Delta Electronics' competitiveness and reputation are built on its expertise in power management. It enables the firm to offer energy-efficient solutions that conform to standards of different industries and regions. The stringent requirements of telecom and data center applications are perfect showcases of Delta’s moat. Together they contribute about 30% of revenue. We think growth of the data center business will be driven by accelerating data generation and upselling of cooling, power management, and monitoring systems to existing enterprise customers. For telecom products, 5G rollouts should last years, as 3 times more base stations are needed compared with 4G. We believe Delta’s reputation should reassure data center customers of optimized energy usage; and telecom clients of reliability in adverse conditions.

We retain our fair value estimate of TWD 285 for narrow-moat Delta Electronics , corresponding to 22 times 2023 P/E. Delta is fairly valued in our view, having priced in most long-term prospects in electric vehicles, or EV, automation, infrastructure, and energy storage system, or ESS, businesses. As a result of its diversified operations, we think Delta will outperform other cyclical stocks that are more exposed to consumer electronics markets should sentiment continues to sour. We believe the share price implies worries of Delta’s short-term outlook in the industrial automation market after China reported lackluster GDP. Economic stimuli from China, and additional progress in Delta’s EV business are short-term catalysts to watch for, in our opinion.

We retain our fair value Estimate on Delta Electronics at TWD 285, corresponding to 27 times 2022 P/E and 22 times 2023 P/E, after finetuning 2022 forecasts. The company’s sequential increases in gross and operating margins are the best proof that both the company’s clientele and production are very well diversified, a fact that is never more important amid the turbulence catalyzed by China lockdowns, global macro headwinds, and soft consumer electronics outlook. We continue to view Delta as undervalued due to long-term prospects in electric vehicles, or EV, automation, and energy storage system, or ESS, businesses. We think higher margins coming from moderation of raw material costs from mid-2022 may be a catalyst for the stock price.

We lift our fair value estimate on Delta Electronics to TWD 285, corresponding to 27 times 2022 P/E, backed by a robust gross margin recovery in 2023 and more aggressive expansion that we reckon is justified by better visibility in electric vehicle, or EV, automation, and energy storage system, or ESS, businesses. Shares are undervalued as Delta’s rising costs should ease in mid-2022. Upside surprise for the stock lies in faster commercialization of international automakers, and better-than-expected progress in its reorganized ESS business.

Delta Electronics' competitiveness and reputation are built on its expertise in power management. It enables the firm to offer energy-efficient solutions that conform to standards of different industries and regions. The stringent requirements of telecom and data center applications are perfect showcases of Delta’s moat. Together they contribute about 30% of revenue. We think growth of the data center business will be driven by accelerating data generation and upselling of cooling, power management, and monitoring systems to existing enterprise customers. For telecom products, 5G rollouts should last years, as 3 times more base stations are needed compared with 4G. We believe Delta’s reputation should reassure data center customers of optimized energy usage; and telecom clients of reliability in adverse conditions.

Delta Electronics' competitiveness and reputation are built on its expertise in power management. It enables the firm to offer energy-efficient solutions that conform to standards of different industries and regions. The stringent requirements of telecom and data center applications are perfect showcases of Delta’s moat. Together they contribute about 30% of revenue. We think growth of the data center business will be driven by accelerating data generation and upselling of cooling, power management, and monitoring systems to existing enterprise customers. For telecom products, 5G rollouts should last years, as 3 times more base stations are needed compared with 4G. We believe Delta’s reputation should reassure data center customers of optimized energy usage; and telecom clients of reliability in adverse conditions.

We maintain our fair value estimate for Delta Electronics at TWD 252, corresponding to 21 times 2022 P/E. Although we trim 2021 margin assumptions due to a longer-than-expected wave of raw material cost increases, 2022-25 forecasts remain unchanged for now. Shares look fairly valued after rising costs and worries of China’s electricity curtailments pressured the share price. Upside surprise for the stock lies in the company’s electric vehicle business, which helps sales of onboard chargers, charging stations, and passive component products.