A Declining Market as a Goldmine... The Art of Timely Investment

DB HiTek Using '8-inch' Wafers
Last Year's Operating Profit Margin 45%
Kolon Plastics Walks the POM Path
Operating Profit Soars in the Electric Vehicle Era

"Timing Is the Most Important Factor in Investment"

Companies compete to create the latest products by introducing cutting-edge equipment with new technologies. Usually, it is said that falling behind in this competition means no future. However, the world does not always operate according to common sense. There are companies that achieve huge success with products made using outdated equipment.

DB HiTek posted record-high results last year. Operating profit reached 768.7 billion won, a 92.62% increase from the previous year (399.1 billion won). Last year's sales also rose 38% to 1.6753 trillion won. The operating profit margin reached 45%. In this industry, an operating profit margin above 10% is considered good business. An operating profit margin of 45% is an extraordinary level.

The reason DB HiTek achieved such record-breaking results is paradoxically because it did not introduce cutting-edge equipment. Nowadays, semiconductor raw materials used in factories built by semiconductor companies are 12-inch (300 mm) wafers. The wafers are cut and circuits are etched to make chips. Previously, 8-inch wafers were used. Using 12-inch wafers allows for producing more semiconductors. The production equipment also changes. High-priced advanced equipment is used to etch finer circuits. The 12-inch wafers and equipment are mainly used for mass production of the latest memory semiconductors, central processing units (CPUs), and graphics processing units (GPUs). The 8-inch wafers are considered outdated.

The 8-inch production lines mainly produce semiconductors used in products like home appliances, which have relatively less complex circuits. Simply put, 8-inch production lines produce a wide variety of relatively easy-to-make semiconductors in small quantities, while 12-inch lines mass-produce a small variety of advanced products with higher manufacturing difficulty. The construction cost of an 8-inch production line is under 1 trillion won. However, the construction cost of a 12-inch production line built by Samsung Electronics nowadays exceeds 30 trillion won. The latest line being built in Pyeongtaek is even estimated to cost 50 trillion won. Samsung Electronics earns a lot but reinvests heavily in building the latest production lines. Despite high sales, profits may not be realized immediately due to this structure.

Since starting mass production at its 8-inch factory in April 2001, DB HiTek has operated only 8-inch production lines to this day. The products DB HiTek manufactures are older analog semiconductors (DDI, image sensors, power management semiconductors, etc.), mainly used in home appliances, laptops, and PCs. With the increase in remote work due to COVID-19, sales of home appliances increased. Additionally, semiconductor demand for electric vehicles exploded. Semiconductors used in home appliances or electric vehicles do not require complex circuits. Simply put, they can be sufficiently produced on 8-inch production lines.

Thanks to this, DB HiTek posted an operating profit of 82.9 billion won in the first quarter of this year, even as large companies like Samsung Electronics and SK Hynix suffered trillion-won losses due to the semiconductor downturn. Its operating profit margin was 27.8%, ranking second in the world after Taiwan's TSMC. Large semiconductor companies have mainly built production lines using 12-inch wafers since the late 2000s. The industry estimates that Samsung Electronics' current 8-inch to 12-inch production ratio is about 30 to 70. This shows that rapid large-scale investment is not necessarily the right answer.

There are also products that were thought to be outdated but have reignited as the world changes. Kolon Plastics' plastic material 'Polyoxymethylene (POM)' is a representative example. Since its establishment in 1996, Kolon Plastics has steadily produced POM. It is an engineering plastic material with excellent heat resistance and strength, showing growth potential, but it had not been very profitable until recently.

POM used for parts in electric vehicle and hydrogen vehicle platforms. Photo by Kolon

However, electric vehicles changed the fate of the product. Because the battery in electric vehicles is heavy, POM was needed for weight reduction. Instead of steel products previously used, POM, which has strength comparable to steel but is lighter, began to be used in electric vehicles. The increase in home appliance sales due to more remote work during COVID-19 also contributed to the surge in POM demand. Until 2016, the price of POM was about $1,392 per ton, but recently it has soared to about $2,700 per ton. The price has nearly doubled compared to 6-7 years ago. Considering that material prices usually decrease over time, POM is a unique product that is demonstrating its true value belatedly.

Kolon Plastics' operating profit soared 11 times over two years after 2020. The company recorded sales of 295.2 billion won and operating profit of 3.9 billion won in 2020, 405.3 billion won in sales and 27.7 billion won in operating profit in 2021, and posted record-high results last year with sales of 518.1 billion won and operating profit of 46 billion won. A Kolon executive evaluated, "By steadily and diligently producing products, the market exploded at an unexpected time." However, it is not easy for other companies to build factories and produce products now just because the market conditions are good. It is difficult to predict how the market will change a few years after investing.

Companies that invest one step ahead of the market hit the jackpot, but those that invest too hastily or excessively suffer losses. For example, memory semiconductor companies like Samsung Electronics and SK Hynix are struggling due to inventory buildup caused by overinvestment. They brought about the semiconductor downturn themselves by getting caught up in investment competition. Of course, new investments cannot be postponed indefinitely.

Industry insiders say, "The most important thing in investment is timing." They are watching when DB HiTek and Kolon Plastics, which have accumulated cash, will start investing in new businesses. The securities industry expects that DB HiTek will need a certain period to transition to 12-inch wafers.

Seungwoo Lee, a researcher at Eugene Investment & Securities, said, "It is expected to take at least three years or more to enter the 12-inch business," adding, "For the time being, the business is expected to proceed centered on 8-inch wafers." A DB HiTek official explained, "We plan to gradually expand the business scale of the 12-inch foundry by comprehensively considering investment scale, demand sources, and technology partners," and added, "We will enter the market step by step through government support, fabless demand sources, and partnerships with technology partners possessing semiconductor intellectual property (IP)."

This content was produced with the assistance of AI translation services.