Asicland IPO Analysis: The Only Value Chain Alliance (VCA) Company of TSMC in Korea

• Asicland is one of eight companies in the world and the only TSMC VCA (Value Chain Alliance) company in Korea.

• The IPO price range is from 19,100 won to 21,400 won. The IPO offering amount is from 50.4 billion won to 56.4 billion won.

• Asicland's sales and operating profit increased at a CAGR of 71.8% and 220%, respectively from 2020 to 2022. Operating margin improved from 4.7% in 2020 to 16.5% in 2022.

Asicland is getting ready to complete its IPO on KOSDAQ in November. Asicland is an application specific semiconductor (ASIC) design solution company in Korea. The IPO price range is from 19,100 won to 21,400 won. The company is offering 2.636 million shares in this IPO. The IPO offering amount is from 50.4 billion won to 56.4 billion won. The book building for the institutional investors will last from 23 to 27 October. Samsung Securities is the main underwriter of this IPO.

Company Background

Asicland is one of eight companies in the world and the only TSMC VCA (Value Chain Alliance) company in Korea. Asicland is a leading company in ASIC (Application-Specific Integrated Circuit) design services and SoC(System on Chip) development.

The company's key strengths include its superior technology which has been tested and approved by TSMC. Asicland's partnership with TSMC, providing turnkey services based on in-depth understanding of TSMC's processes is another key competitive advantage. The company has also developed its own SoC automation design platform and has a proven track record of successful scale-up from development to volume manufacturing. Asicland has also been selected as an Approved Design Partner(ADP) of ARM Holdings (ARM US).

Asicland has been able to mass produce one of the world's first 5G RF chip for high-bandwidth base stations. The company is also one of the first companies in Korea to commercialize AI based semiconductor. The company also possesses TSMC's various front-end process references.

Asicland is the only semiconductor design company for Taiwan Semiconductor Co. (5425 TT) in Korea. Asicland is one of TSMC's eight business partners in the world for designing advanced semiconductors. It is estimated that about 70% of Korea's fabless companies use TSMC's foundry process.

Asicland was chosen by TSMC to be one of its official business partners in 2019 to design advanced semiconductor chips for fabless and original equipment manufacturers. Asicland provides both front-end and back-end design services, covering the entire chip design processes including wafer manufacturing, packaging, and testing.

The founder and CEO of Asicland Lee Jong-Min owns a 32.5% stake in the company. Other insiders and related parties own additional 26.9% stake in the company. Prior to establishing Asicland, CEO Lee worked at Hynix which was later spun off from the Hyundai Group and later became SK Hynix (000660 KS).

Customers - The top seven customers accounted for 59.6% of total sales in 2022 and 77.4% of total sales in 1H 2023. The top three customers accounted for 53.6% of total sales in 2022 and 56.9% of total sales in 1H 2023.

Leading fabless companies around the world that aim to produce semiconductors through TSMC are Asicland's main customers. As the demand for advanced semiconductors including AI and autonomous vehicles related semiconductors has expanded recently, Asicland's order volume and sales have also increased significantly.

Application Segments of Company's Products - The table below provides the major application segments of the company's products. In 2022, IoT & 5G segment accounted for 53% of the company's total sales and the second largest segment was AI at 15.2% of total sales. In 1H 2023, AI accounted for 53.4% of total sales, followed by IoT & 5G (16.5% of total).

The company considers the AI semiconductor to be the most important strategic application market. This is because the AI semiconductors have very important characteristics in terms of performance and power consumption. AI semiconductors contributed to more than half of its revenues in 1H 2023 and when mass production sales of AI semiconductors begin to be reflected in earnest in 2024, the company expects its sales to grow even more significantly.

How the Bankers Priced the IPO

The bankers used three companies including Alchip Technologies (3661 TT), Global Unichip (3443 TT), and Faraday Technology (3035 TT) to value Asicland. All three companies are based in Taiwan. Using their recent prices and annualized net profit from 3Q 2022 to 2Q 2023, the bankers derived average P/E of 53.7x.

The bankers then took the company's annualized net profit of 6.2 billion won from 3Q 2022 to 2Q 2023 and applied P/E multiple of 53.7x to derive implied market cap of 332 billion won. After applying outstanding shares of 10.69 million, this results in implied price per share of 30,998 won. After applying IPO discount rate of 30.96% to 38.38%, this resulted in the IPO price range of 19,100 won to 21,400 won per share.

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Asicland Company Background (Source: Asicland, Youtube)

Asicland's SoC business unit (Source: Company data)

Asicland's Design Service business unit (Source: Company data)

Comparable Companies Valuation Analysis

Our base case valuation of Asicland is implied market cap of 434 billion won or target price of 40,571 won per share, which is 90% higher than the high end of the IPO price range (21,400 won). Given the strong upside relative to the IPO price range, we have a positive view of Asicland IPO.

Our valuation sensitivity analysis suggests a range of 32,863 won to 49,091 won per share for Asicland. Our target price of 40,571 won is based on 43x P/E using our estimated net profit of 10.1 billion won in 2024. The target multiple of 43x P/E is based on a 20% premium to the comps' P/E valuation of 35.8x in 2024.

We believe that this premium valuation multiple relative to the comps is appropriate due to higher sales growth and expected net profit growth for Asicland relative to its peers. For example, Asicland had an average annual sales growth of 72.9% from 2020 to 2022. On the other hand, the comps had an average annual sales growth of 43% from 2020 to 2022. Also, from 2020 to 2022, Asicland's net profit increased by 764%. In the same period, the comps' net profit increased by 424% on average.

We used the same three comps that the bankers used to value Asicland. One of the concerns that some investors may have whether the comps used by the bankers appropriate to value Asicland Corp. In this case, the three Taiwanese comps are competitors to Asicland in the design of advanced ASIC semiconductor chips.

Sometimes, we are wary of bankers using overseas companies with fat valuation multiples to value Korean IPOs. However, in this case, we think that these Taiwanese companies are appropriate as comps for Asicland.

Comparable Companies Description

• Alchip Technologies - This is a fabless semiconductor company founded in 2003 and headquartered in Taipei, Taiwan. Alchip specializes in the design and manufacture of digital CMOS ASICs.

• Global Unichip Corporation - Global Unichip is a global fabless ASIC design service company, with its headquarters located in Hsinchu, Taiwan.

• Faraday Technology Corporation - This company is a fabless ASIC / SoC and silicon IP provider based in Hsinchu, Taiwan.

Income Statement Estimates

We estimate Asicland to generate sales of 88.2 billion won (up 26.7% YoY) and operating profit of 7.9 billion won (down 31.4% YoY) in 2023. We estimate its sales and profit to improve further in 2024 as the company increases mass production of AI semiconductor chips.

We estimate Asicland's sales to increase by 38.5% YoY to reach 122.2 billion won and operating profit of 14.5 billion won (up 84.7% YoY) in 2024. We estimate the company's operating margin to decline from 16.5% in 2022 to 8.9% in 2023 but increase to 11.9% in 2024.

Asicland posted impressive growth in sales and profits from 2020 to 2022. Its sales and operating profit increased at a CAGR of 71.8% and 220%, respectively from 2020 to 2022. Operating margin improved from 4.7% in 2020 to 6.1% in 2021 to 16.5% in 2022.

Source: Company data, Our Estimates

Source: Company data, Our Estimates

Source: Company data, Our Estimates

Balance Sheet Analysis - The company has a moderately leveraged balance sheet. It had a debt ratio of 119%, net debt to equity ratio of 21%, and current ratio of 122% at the end of 1H 2023. The company had total assets of 68.6 billion won, total liabilities of 37.2 billion won, and equity of 31.4 billion won at the end of 1H 2023.

Cash Flow Statement Analysis - The company generated positive cash flow from operations and free cash flow in 2021 and 2022. However, its cash flow from operations and free cash flow turned negative in 1H 2023. In 2022, the company generated cash flow from operations of 15.7 billion won and free cash flow of 13.5 billion won. However, cash flow from operations worsened to -17.9 billion won and free cash flow declined to -28.8 billion won in 1H 2023.

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