LG Innotek
The author is an analyst of NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com -- Ed.
Earnings at LGI are likely to remain sluggish in 1H23, with replacement demand having slowed ahead of a wealth of product developments set to be rolled out by clients in 2H23. However, as a significant portion of related concerns has already been reflected in the share price, we recommend increasing exposure at this likely share price low, considering the potential for earnings growth and XR momentum in 2H23.
Earnings to remain sluggish in 1H23 amid weak replacement demand
Demand for existing products has proved weaker than expected as of late, with several changes set to be applied to the new smartphones of LG Innotek (LGI)’s main North American client that are scheduled to be released in 2H23. We lower our TP from W500,000 to W450,000 to reflect a downward revision in earnings forecasts, as we believe that demand will inevitably slow through 1H23.
However, we maintain a Buy rating, as we expect LGI to record its highest earnings ever in 2H23 thanks to component shipment growth driven by both increased replacement demand for smartphones and ASP hikes following foldable zoom/pixel upgrades set for 2H23. Also noting that momentum related to new XR products is predicted to kick off in earnest after 2Q23, we believe that the recent share price decline offers a good bargain buying opportunity.
We trim our 2023 OP forecast by 16.1% to W1,224bn (-3.7% y-y). We also cut our projection for 1H23 shipments at LGI’s main North American client by 12% and reduce our OPM estimate (-0.8%p) to reflect a slowdown in the substrate industry.
Low-price buying opportunity in play, considering prospects for record-high earnings and XR momentum in 2H23
Despite the likelihood of sluggish 1H23 earnings, we view the recent share price decline as offering a low-price buying opportunity, as sales of the new smartphones of its main North American client should prove solid in 2H23, in line with a variety of planned upgrades (reduced camera module size thanks to folded zoom, USB-C port, etc). In 2H23, LGI is expected to achieve its highest earnings ever on the back of sales volume increase and ASP hikes.
In addition, we draw attention to the strong chances that new XR products will be released in 2H23 as a further driver of valuation expansion.