5G Components Sales Expected to Drop
The authors are analysts of Shinhan Investment Corp. They can be reached at changmin.yoon86@shinhan.com and kimkyuri@shinhan.com, respectively. -- Ed.
4Q19 OP in line with market consensus at KRW12bn (+367% YoY)
OptoElectronics Solutions posted operating profit of KRW12bn (+367%YoY) on sales of KRW50.2bn (+97.6% YoY) for 4Q19, meeting market expectations. Sales of 5G components came in at KRW37.6bn (-18.5%QoQ), including KRW27bn from domestic telcos and KRW10.6bn from overseas clients. Operating margin fell 9%p QoQ to 24%, with sales declining QoQ on decreased 5G investments at domestic telcos and delays in overseas investments.
1Q20 outlook: Sales of KRW20.2bn (-54% YoY), OP at break-even levels
We forecast sales at KRW20.2bn (-53.6% YoY) for 1Q20, with 5G components sales to drop 75% YoY to KRW7.9bn. Sales are set to fall QoQ for a second consecutive quarter with domestic telcos cutting back on investments and overseas investments (US, Japan) postponed. The sales drop should drive down profitability given the company’s high fixed-cost portion. Operating profit will likely come in at break-even levels.
After pouring investment into 5G networks in1H19, domestic telcos started to cut back from 4Q19. While the theoretical capex spend for 5G networks is at least 3x higher vs. 4G, the companies have yet to find the 5G device or content with enough drive to push up ARPU levels. Concerns over recovery of investments should remain until the advent of new technologies such as self-driving vehicles, smart factory, and AR/VR starts to drive actual growth. As such, 5G investments may slow down in the near term, taking longer than initially expected as a result.
Retain BUY for a revised-down target price of KRW55,000
Our target price for OptoElectronics Solutions is lowered to KRW55,000 on downward revision of earnings forecasts. Global 5G investments are still on an uptrend, although the pace of growth is expected to slow down. OptoElectronics Solutions shares rallied last year, reflecting expectations for earnings growth from domestic 5G investments. With investor focus now shifting to much larger investments expected from overseas telcos, we believe news of a significant overseas order will trigger an upturn in the company’s share price going forward.