Delta Electronics Earnings: EV Strength Makes up for Near-Term Woes in Automation and Telecom

We lower our fair value estimate for narrow-moat Delta Electronics 2308 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.

We reduce our revenue by 2% to 5% for 2023-27 on more cautious telecom and networking infrastructure sales assumptions since we see less chance for 5G investments to pick up. The 2023-27 EPS forecasts are cut by 3% to 11% to factor in a higher share of profits attributable to minority shareholders of the EV businesses, of which a large portion is conducted through its listed subsidiary Delta Thailand. Despite these adjustments, we remain confident that Delta Electronics benefits from a structural shift to EVs, benefiting both its powertrain and charging facilities operations. We also expect that after a slow 2023, server operators could be more rational in allocating their spending between conventional central processing unit-based servers and AI-oriented graphics processing unit servers.

Management expects ex-charger EV revenue to top USD 1.4 billion in 2023, compared with 2022′s USD 800 million, and grow another 40%-50% in 2024. EV revenue will be disclosed separately starting in 2024, which we welcome as the EV operations have midteens gross margin, and lumping them into the power segment could be misleading. Their confidence is backed by new factories to be built in Thailand, India, and China. We think the figures are achievable given Delta’s track record and the settlement between UAW and U.S. automakers should quell concerns about interruptions for the next few years.