LG Innotek
The author is an analyst of Shinhan Securities. He can be reached at snowKH@shinhan.com -- Ed.
1Q23 OP comes in at KRW145.3bn (-60% YoY, -15% QoQ)
LG Innotek posted operating profit of KRW145.3bn (-60% YoY, -15% QoQ) on sales of KRW4.4tr (+11% YoY, -33% QoQ) for 1Q23, slightly exceeding the market consensus of KRW137.6bn. Operating margin came in at 3.3% (- 5%p YoY, +0.7%p QoQ).
Optics solutions generated sales of KRW3.5tr (+15% YoY, -37% QoQ) in 1Q23, with the QoQ drop caused by the slowdown in smartphone demand. Earnings are expected to remain sluggish in 2Q23 due to weak seasonality.
Substrates and materials registered sales of KRW330.2bn (-20% YoY, -16% QoQ) in 1Q23, hit by slower demand for tech products. Falling demand for semiconductor substrates and inventory correction at clients contributed to the decline in sales.
Automotive components secured sales of KRW381.7bn (+22% YoY, -9% QoQ), with the QoQ dip caused by weak downstream demand. In 2Q23, profitability will likely improve on order intake from high-margin/strategic clients.
Earnings expected to turn around in 2H23
We recommend shifting focus from weak earnings in 1H23 to a potential turnaround in earnings in 2H23. As the supplier of camera modules for the key client’s high-end smartphones, LG Innotek stands to see visible growth in earnings from new product releases by the client in 2H23. Facility investment for optics solutions, set to be completed by December 2023, is also well underway. The investment worth roughly KRW1.7tr will expand its production capacity for new products, such as folded zoom camera modules and actuators. Earnings growth should accelerate further once the capacity utilization rate of the substrate business rises in 2H23.
Retain BUY and target price of KRW350,000
We retain BUY on LG Innotek and keep our target price unchanged at KRW350,000, based on 2023F EPS of KRW35,510 and a target PER of 9.8x (past 5-year average PER low). Share valuations look cheap at the current PER of 7.3x to 2023 earnings forecasts vs. the past 5-year PER average of 14.7x. Starting with an upturn in 2H23, the company’s main businesses are set to deliver visible earnings growth in 2024. Now is the time to focus on the extent of the expected upturn in 2H23, rather than worry about slowing demand. Earnings recovery accompanied by stronger sales of high value-added products should lead to a re-rating of shares going forward.