The authors are analysts of Shinhan Investment Corp. They can be reached at firstname.lastname@example.org and email@example.com, respectively. -- Ed.
1H20 earnings forecasts revised down on conservative demand outlook
LG Innotek is expected to post sales of KRW1.5tr (+12% YoY) and operating profit of KRW39.6bn (positive swing YoY) for 1Q20. We have revised down our sales and operating profit forecasts by 14% each from previous projections made on January 30, reflecting disruptions in Chinese production caused by the COVID-19 outbreak. LG Innotek’s North American client relies on China for more than 90% of its smartphone assembly operations. However, the drop in 1Q20 component orders should be smaller than initially feared, considering capacity utilization rates at ODMs. We expect a limited decline in profitability thanks to favorable foreign exchange rates.
For 2Q20, sales are forecast at KRW1.5tr (+1% YoY) and operating profit at KRW33bn (+76% YoY). Our 2Q20 projections have also been adjusted downward based on a conservative outlook on demand, but may be revised up if the key client launches a new low-end model within 2Q20.
2020 outlook: Another evolution of smartphone cameras
Operating profit is projected at KRW72.5bn for 1H20 and KRW477.4bn for 2H20. The North American client is stocking up on parts in preparation for aggressive marketing efforts in 2H20. With such efforts likely leading to market share gains, companies in the client’s value chain should see their earnings rebound in 2H20.
We expect another evolution of smartphone cameras in 2020, including: 1) upgrade to triple-lens cameras with concerns over module price cuts limited; and 2) adoption of 3D time-of-flight (ToF) camera modules. We believe 3D ToF modules will be adopted on 40% of the major client’s new smartphone models slated for 2H20, and conservatively expect LG Innotek to secure a 55% share among vendors supplying the modules.
Retain BUY for a target price of KRW175,000
Our target price for LG Innotek is kept unchanged at KRW175,000, based on 2020F BPS and a target PBR of 1.6x (average PBR of 2017-2018 during the growth phase driven by dual-lens cameras and 3D sensing modules). LG Innotek shares are currently trading at 2020F PER of7.5x. Our target price translates to 2020F PER of 10.9x. LG Innotek is seen attractive on: 1) 2Q20 earnings forecasts highly likely to be upward-adjusted, with current projections reflecting conservative demand outlook; and 2) big cycle expected from the adoption of ToF modules in 2020, with the key client aiming to differentiate its smartphone models through 5G and ToF features in 2H20.