The author is an analyst for Shinhan Securities. He can be reached at hyon@shinhan.com -- Ed.
Seasonal demand from new smartphone release to concentrate in 4Q
LX Semicon registered operating profit of KRW14.9bn (+91% QoQ) on sales of KRW412.8bn (-9% QoQ) for 3Q23. With its client hit by delays in the quality test for production of iPhone 15 panels, LX Semicon saw limited seasonal demand despite the release of the new smartphone model. Sales from display driver IC (DDI) for small-size panels tumbled from a quarter earlier to KRW123.8bn, pulling down company-wide earnings in 3Q23. The company also preemptively set aside roughly KRW13bn in provisions for product warranties with quality issues arising for its products. Operating margin was weak at 3.6% due to the increase in one-off SG&A expenses.
For 4Q23, sales are expected to reach KRW493bn (+20% QoQ) and operating profit KRW42.2bn (+183% QoQ). With the client's quality test issues finally resolved, LX Semicon is poised to enjoy the seasonal boost in demand from the new smartphone release. Small-panel DDI sales are thus likely to see a sharp increase to KRW222.7bn in 4Q23.
Focus on OPM improvement to 10% levels in 2024
For full-year 2024, we forecast sales at KRW2.1tr (+14% YoY) and operating profit at KRW214.3bn (+106% YoY). Earnings recovery should start in earnest in 2024, with: 1) inventory adjustment nearing completion following the depletion of client inventories in 2023; and 2) shipments of tech products expected to turn upward for the first time in three years. Yet, margins are unlikely to rebound to the mid-10% and higher levels seen in 2021-2022 during 8-inch wafer capacity shortages, considering that DDI prices are now on a downtrend after continuing upward over the past two years. Nevertheless, we expect LX Semicon to post operating margins in the 10% range in 2024, marking improvement from pre-pandemic levels on the back of increasing adoption of OLED panels on cars and tech products.
Shares undervalued; limited impact expected from added competition
We maintain our BUY rating and target price of KRW111,000 for LX Semicon. The company stands to benefit from the rising penetration rate of OLED panels with adoption on tech products to pick up pace in earnest from 2024. Trading at a 12-month forward PER of 8.1x, LX Semicon shares are currently undervalued vs. rivals Novatek Microelectronics and Himax Technologies. The risk of new competition is on the rise with a US client focused on diversifying its supply of DDI. However, with a new supplier unlikely to secure large orders for OLED DDI, actual impact on LX Semicon in 2024 should be limited.