Heightened Expectations for Earnings Growth in 2023
The author is an analyst of Shinhan Securities. He can be reached at phw@shinhan.com. -- Ed.
4Q22 preview: Earnings shock
LG Innotek is expected to have recorded operating profit of KRW184.1bn (-57% YoY, -59% QoQ) for 4Q22, falling short of our previous estimate (KRW442.6bn) which took into account most of the negative impact from the decline in the USD/KRW exchange rate and production disruptions in China’s smartphone supply chain. Massive one-off expenses may have been booked at the year’s end. The parent company LG Electronics released lackluster 4Q preliminary consolidated results on January 6.
It is disappointing that LG Innotek’s 4Q earnings missed our expectations, but low base effect should come into play in 2023.
Heightened expectations for earnings growth in 2023
For 2023, we forecast operating profit at KRW1.48tr (+15% YoY). LG Innotek has the highest visibility of earnings growth in 2023 among large-cap IT parts/electronics stocks. Earnings may fall YoY in 1H23 due to weak demand and production disruptions caused by the COVID-19 pandemic, but should improve in 2H23 on base effect.
We are upbeat on a change in the portfolio of camera modules. Folded zoom camera modules will begin to be shipped out this year, resulting in ASP hikes. High-resolution and front-facing camera modules should make a larger contribution to sales. Despite uncertainties in demand and declining sales of tech products as a whole, we believe LG Innotek will see earnings improve on a YoY basis in 2023.
Retain BUY for a revised-down target of KRW400,000
We retain our BUY rating on LG Innotek, while lowering our target price to KRW400,000, based on 2023F EPS and a target PER of 9.0x.
First, expectations for stronger earnings this year have been raised by a low base of comparison with 4Q22.
Second, negatives have come to light with LG Innotek’s 4Q earnings shock already known through the parent company’s preliminary results. Order cutbacks on smartphone parts from production restrictions at Foxconn’s Zhengzhou campus sparked a faster start to inventory adjustments normally seen at the year’s end or beginning.
Third, LG Innotek shares have corrected by 34% from peak levels due to concerns over weak demand and production disruptions, and have suffered the steepest loss among large-cap peers since June 30, 2022. The shares are currently trading at a PER of 6.2x.