Higher Earnings Than Peers Expected in 2023
The author is an analyst of Shinhan Securities Co. He can be reached at hyungwou@shinhan.com. -- Ed.
2023 earnings consensus: Analysts vs. investors
Despite a slump in demand, the analysts’ consensus calls for LG Innotek’s operating profit to increase by 8% YoY to KRW1.8tr (Shinhan KRW1.9tr) in 2023.
Some market watchers disagree with the consensus, expecting sales to stagnate and profit to fall next year due to concerns of: 1) market share loss; 2) possibility of weak iPhone sales and order cuts; and 3) slowdown in demand for tech products.
However, LG Innotek offers the highest visibility of earnings growth for 2023 among the large-cap IT parts/electronics stocks given ASP hikes for camera modules. High-resolution and front-facing camera modules should make a larger contribution to sales next year, and folded zoom camera modules will begin to be shipped out. We project iPhone sales will need to drop by at least 10-15% to see a dip in sales. Concerns over market share loss are also overblown as capacity expansion is expected in line with growing new product applications.
Sector top pick: Higher earnings than peers expected in 2023
LG Innotek shares have corrected by 30% from peak levels, faring the best among the three large-cap stocks in the IT parts/electronics sector. Some have argued that the company will face stronger downward pressure going forward as it has so far suffered the least. However, camera market conditions are looking stronger than anticipated, and LG Innotek is forecast to deliver better earnings than its peers.
The consensus on large-cap tech companies’ 2022 operating profits has been revised down by 14-32% from those made at the beginning of the year. But LG Innotek has seen a 29% upgrade in the consensus estimate. It is expected to be the only company delivering YoY profit growth in the sector.
Retain BUY for a target price of KRW450,000
LG Innotek, currently undervalued at 2022F PER of 5.7x, has higher visibility of earnings improvement in 2023 than its large-cap peers. Shares have been largely affected by the performance of its client Apple. We need to focus on the company’s fundamentals rather than the share price. The camera market should continue to expand even when assuming sluggish iPhone sales. There is a big potential in folded zoom camera modules, EV-use camera modules, and mixed reality (MR) camera modules. We believe the capex burden will decline, while cash inflows will increase from 2023 onwards.