EV and Data Centers Drive Long-Term Outlook for Delta Electronics

We raise our fair value estimate on narrow-moat Delta Electronics 2308 to TWD 342 from TWD 300, corresponding to 24 times 2023 P/E, after fine tuning 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.

We are unfazed by a lack of comments on Delta’s long-term strategy as the firm is reaping first fruits in EVs, and its exposure in data centers and networking are multiyear drivers. Since Delta has been/is getting design wins of newly electrified models from traditional carmakers and these wins predate revenue by about four years, we believe Delta can extend about 30% CAGR in the EV segment up to 2027, benefiting from model gains and content growth. We also recognize a need for more capable cooling and energy management systems at data centers as their power consumptions grow with their complexity. We expect Delta’s data center-related sales can growth in tandem with Taiwan Semiconductor’s high performance computing segment at over 20% for the next five years. For more on growth drivers behind data centers, please refer to our special report “The Chips Are Down, but It Is Time to Buy TSMC” dated Nov. 25, 2022.

Delta Electronics’ fourth-quarter 2022 revenue and earnings mostly met our expectations. Revenue grew 26% year on year, but was down 0.6% sequentially to TWD 106 billion. Gross and operating margins retreated 226 and 254 basis points from the previous quarter to 28% and 10.2%. Larger than usual inventory write-downs dragged profitability by 71 basis points.