The author is an analyst for NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com -- Ed.
Sales of the recently released smartphones of LGI’s main North American customer may prove slower than initially expected. In line, we lower our earnings forecasts and TP. However, considering both the firm’s reduced valuations and mid/long-term new device momentum, we maintain a Buy rating.
Lower TP on possibility of weak new product sales at customers
Considering both the possibility of a slowdown in sales of new products from its main North American customer and pressure to cut costs, we trim our earnings forecasts for LG Innotek (LGI), in turn lowering our TP from W360,000 to W300,000. However, given both its already subdued valuations and potential benefits from XR and self-driving cars over the mid/long term, we maintain a Buy rating.
We see chances that sales of the recently released smartphones of LGI’s main North American client may prove weaker than anticipated. In particular, the resurgence of local brands such as Huawei in China presents a burden. For new products set to be released in 2024, hardware upgrades will likely be limited, and LGI’s main client is likely to increase its efforts to cut costs. Such possibilities are additional risk factors.
Considering the potential for a downturn in sales of the new smartphones of its main North American client, we forecast LGI’s new product shipment in 2023 at around 65mn units, down about 10% from our previous estimate, with shipments to North America in 2024 projected at 215mn units (-4.2% y-y), down about 6.5%. In line, we chop LGI’s 2023E and 2024F OP by 21.7% and 21.9%, respectively.
3Q23 review: Earnings to miss expectations
LGI posted 3Q23 OP of W183.4bn (-58.8% y-y), missing our prediction. We mainly attribute the shortfall to worsening profitability at the substrate business amid weakening demand for IT devices. We forecast 4Q23 OP of W444.1bn (+161.3% y-y), conservatively estimating the smartphone sales of clients.
Although near-term momentum is lacking, the launch of XR devices in early-2024 combined with mid/long-term self-driving car developments should contribute to valuation growth.