Target Price Raised to KRW19,500
The author is an analyst of Shinhan Securities Co. He can be reached at hyungwou@shinhan.com. -- Ed.
4Q22 preview: Earnings shock, changes in 2023 will be key
KH Vatec is expected to have recorded operating profit of KRW3.8bn (-66% YoY, -81% QoQ) on sales of KRW62.3bn (-46% YoY, -65% QoQ) in 4Q22. The reasons behind the earnings slide are: 1) sluggish foldable smartphone sales at a major client; 2) aggressive order cutbacks and cancellations; and 3) decline in the USD/KRW exchange rate. About 70% of annual hinge shipments were concentrated in 3Q, resulting in a steep drop in 4Q sales despite favorable seasonality. However, we believe the earnings shock is already priced in, with the share price down by 58% from peak levels.
2023 outlook: Growth in foldable phone sales, hinge upgrades
For 2023, we forecast sales at KRW436.5bn (+21% YoY) and operating profit at KRW47.2bn (+41% YoY) and see room for upward adjustments.
1) Sales volume (+32% YoY): Foldable phone sales at the client are estimated to increase from 9.5mn units in 2022 to 12.5mn in 2023 on a conservative basis. Demand for hinges should rise accordingly from 12.5mn to 16.5mn this year.
2) Market share (-18%p YoY): KH Vatec is expected to supply 74% of the client’s hinge demand in 2023, down from 92% last year. The decline in its share should be seen in 2H23 with the market entry by Fine M-Tec and S-Connect, which are highly likely to be added as new vendors.
3) Price (+30% YoY): KH Vatec’s hinges are projected to be upgraded in 2023. Guangdong OPPO Mobile Telecommunications (OPPO) has already adopted high value-added hinges in its foldable devices. The unit prices are several times higher than the hinges made by domestic manufacturers. We assume a 30% YoY rise in the ASP of the company’s products in 3Q23.
TP raised to KRW19,500 in view of growth momentum for 2023
We revise our target price for KH Vatec to KRW19,500, based on 2023F EPS and a target multiple of 11.9x (PER low of 2021 when the company was on a growth track). KH Vatec is expected to perform better than its peers in 2023 for the following reasons. First, there is a high possibility that its mainstay hinge products will undergo upgrades this year. Second, inventory adjustment at the client is now over with massive order cutbacks on smartphone and foldable phone parts made in 4Q. Third, the company has sufficient funds for investment with earnings returning to normal levels in the past two years. New growth businesses are currently under review.