DELTA reported 3Q24 net profit of Bt5.9bn, -10.0% QoQ but +8.9% YoY, slightly above INVX and market estimates on stronger AI-related contribution and reversal of inventory provisions. We expect 4Q24 to grow further on continued growth in AI-related products. We preliminarily estimate the impact from the global minimum tax at 12.4% of 2025 core profit. We rate Neutral with a TP of Bt109.0 based on +0.5SD of its 5-year PE mean.
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DELTA – 3Q24: Strong Core Earnings Driven by AI
Strong 3Q24 core profit driven by AI-related demand. DELTA reported a 3Q24 net profit of Bt5.9bn, down 10% QoQ on FX losses but up 8.9% YoY on continued strong performance of nearly all products. This was 6% above our estimate and 5% above the market due to a slightly better gross margin from more high-margin products, especially AI-related. Core profit stood at Bt6.0bn, up 6.3% QoQ and 18.7% YoY, on 3.5% QoQ and 6.8% YoY revenue growth (+8% in US dollar terms) due to strong demand for power electronics on AI-related demand, infrastructure products and mobility products on EV power electronic recovery demand. Gross margin improved to 27.6% in 3Q24 from 26.9% in 2Q24 and 22.6% in 3Q23, primarily on more sales of high-margin AI-related products, including power systems for data centers and DC power products. SG&A/sales increased to 13.7% in 3Q24 from 12.9% in 2Q24 and 10.1% in 3Q23 due to the increased sales of AI-related products developed by DELTA Taiwan which meant it had to pay higher technical service fees to DELTA Taiwan.
4Q24 supported by AI demand. DELTA has adjusted its 2024 sales growth target to 10-15% from 10-20% (INVX: 14%). It expects AI-related products to be key to growth, driven by strong demand for generative AI and co-location services, especially a DC power system product that supports GPU data center demand. The proportion of revenue contributed by AI-related products is still in the high single digits. New products related to rack-level power systems developed by DELTA Thailand as well as liquid cooling systems, are expected to be introduced in 4Q24 and will become more significant in 2025. Mobility EV power may experience lower growth than anticipated, leading to a downward adjustment in growth expectations to single-digit growth in 2024 (previously +/- 20% YoY vs. 9M24 +7.4% YoY). Currently, it has a clear picture for orders for only the next 3-6 months. DELTA has also raised its 2024 gross margin target to 24-25% from 23-24%; INVX forecasts 24.2%. SG&A expenses are likely to continue increasing due to royalty fees paid to DELTA Taiwan, but the company is trying to keep them below 13%. Note that 9M24 core profit accounted for 73% of our full year forecast and we leave our 2024-25 forecasts unchanged.
Impact from the implementation of global minimum tax. Regarding the global minimum tax, which requires multinational corporations with annual revenue exceeding 770mn euros to pay a minimum tax of 15%, the Thai government is currently considering a global minimum tax act. There has been progress suggesting that this might be changed to a royal decree, which is easier to issue. If this happens soon, the tax could start next year, leading DELTA to pay a 15% tax rate compared to the current effective tax rate of only 2.4%. The BoI may provide measures to mitigate the impact, although there are as yet no details. Currently we assume an effective tax rate of 3% for 2025. If the global minimum tax takes effect, we expect our 2025 core earnings forecast to shrink by 12.4% from our current projection.
Action/Recommendation. We maintain our recommendation of Neutral with a target price of Bt109.0 based on PE of 59x or at +0.5 SD of its 5-year historical PE mean.
Key risks are changes in purchasing power, a weaker-than-expected automotive industry and exchange rate volatility. Key ESG are labor management and supplier management.