[Edaily Reporter Shin Ha-yeon ] On the 16th, Shinhan Investment Securities projected that FADU INC.(440110)will see accelerated earnings improvement starting in the third quarter of this year as the full effects of operating leverage begin to materialize. However, reflecting concerns over NAND flash memory supply and the decline in valuations across the semiconductor sector, the firm lowered its target price from 130,000 won to 100,000 won. It maintained its “Buy” rating.

In a report released that day, Heo Seong-gyu, an analyst at Shinhan Investment Securities, stated, “The current stock price has fallen excessively, and earnings in the second half of the year are expected to increase significantly compared to the first half, based on the order timeline,” adding, “Operating leverage is expected to take full effect starting with third-quarter earnings.”

Analyst Heo projected that FADU INC.’s third-quarter revenue would reach 129.4 billion won, a 404.6% increase year-over-year. He expected operating profit to reach 31.7 billion won, marking a return to profitability from the 11.4 billion won loss recorded in the same period last year. The operating profit margin is projected to reach 24.5%.

In particular, he estimated that third-quarter revenue would rise 76.8% from the previous quarter’s 73.2 billion won. He also predicted that profitability would begin to improve in earnest, with operating profit increasing 95.4% from the second quarter’s 16.2 billion won.

By business division, revenue from enterprise solid-state drive (eSSD) controllers—the company’s flagship product—is expected to reach 83.3 billion won, a 470.2% increase year-over-year. Other revenue is also projected to rise by 317.8% to 46.1 billion won.

Analyst Heo emphasized, “The increase in earnings in the second half compared to the first half was anticipated based on order trends,” adding, “Attention should now focus on earnings visibility beyond 2027.”

The key to this earnings improvement lies in expanding the base of global hyperscaler clients. This year, FADU INC.’s major clients consist primarily of two large hyperscalers, and newly acquired clients are expected to begin contributing significantly to revenue starting next year.

In particular, growth is expected to continue starting in 2027 as revenue from the next-generation 6th-generation eSSD begins to materialize. The research team assessed that FADU INC.’s 6th-generation controller will be competitive in terms of total cost of ownership (TCO) compared to competitors’ products.

TCO is a concept that encompasses not only the initial cost of purchasing a product but also the direct and indirect costs incurred during use, maintenance, and disposal. Given that power and cooling costs account for a significant portion of data center operating expenses, the efficiency of the controller could be a key factor in customer selection.

Researcher Heo stated, “We expect sales of the 6th-generation eSSD to begin in 2027 and believe it will offer a TCO advantage over competitors’ 6th-generation controllers.”

He also offered a positive assessment of the potential for increased investment by the company’s largest existing client. While he estimated that this client’s share of revenue would decline from 70% last year to around 30% this year, he analyzed that additional demand could arise as investment in artificial intelligence (AI) infrastructure expands in the future.

Researcher Heo explained, “We expect the largest customer to increase its subsequent capital expenditures (CapEx) on AI infrastructure as the number of users surges following the launch of its Agent AI.”

The firm also forecast that new growth drivers will emerge by 2028. Key examples include shipments of in-house manufactured eSSDs from a potential major hyperscaler client and expanded mass-production orders from space-related clients.

In particular, the volume of eSSDs manufactured in-house by potential customers is estimated to account for more than 5% of the total market. Shinhan Investment Securities assessed that there is potential for further upward revisions to earnings forecasts, as its current 2028 earnings projections do not yet reflect both of these growth factors.

The firm also anticipated that concerns over intensifying competition would have a limited impact. Since Taiwanese NAND manufacturers’ entry into the eSSD market is centered on boot drivers, it was judged that there would be little direct competition with FADU INC.’s core business.

Analyst Heo noted, “We believe that competition from Taiwanese NAND manufacturers entering the eSSD market will be limited, as their focus is on boot drivers,” adding, “In the long term, there is also the possibility of acquiring new NAND clients.”

Shinhan Investment Securities estimated that FADU INC.’s annual revenue this year would reach 395.1 billion won—a 327.5% increase from the previous year—and that the company would return to profitability with an operating profit of 86.9 billion won. For next year, the firm projected revenue of 613.2 billion won and an operating profit of 182.4 billion won, representing increases of 55.2% and 109.9%, respectively.

In 2028, the firm expects revenue to reach 838.4 billion won and operating profit to reach 282.9 billion won. The operating profit margin is also projected to rise from 22.0% this year to 29.7% next year and 33.7% in 2028.

However, the outlook for next year’s performance was revised downward from previous estimates. Reflecting NAND supply issues, the 2027 revenue estimate was lowered by 18.1% from 748.6 billion won to 613.2 billion won, and the operating profit forecast was also reduced by 15.5% from 215.8 billion won to 182.4 billion won.

The downward revision of the target price was also influenced by a decline in industry-wide valuations. The firm explained that due to concerns over China’s expansion of memory mass production, the 12-month forward average price-to-earnings ratio (P/E ratio) of comparable companies fell by 29.3%, from 36.4x to 25.7x.

Consequently, the target P/E ratio was lowered from 28x to 23.1x. This figure represents a 10% discount applied to the peer group’s average P/E ratio of 25.7x. However, compared to the closing price of 57,100 won on the 15th, the stock still has upside potential of 75.1% to reach the new target price.

Analyst Heo explained, “We lowered the target price because the average P/E ratio for the industry declined due to concerns over the expansion of memory mass production in China, and we revised down our 2027 earnings estimates due to concerns over NAND supply.”

He went on to emphasize, “Given that the company is expected to enter a phase of adding new clients and expanding mass production by 2028, we believe the current decline in the stock price is excessive relative to improving fundamentals.”