The author is an analyst of Shinhan Investment Corp. He can be reached at firstname.lastname@example.org. -- Ed.
Earnings likely solid in 1Q vs. sluggish 2Q
Domestic IT parts makers are expected to have recorded solid earnings for 1Q20, excluding those with high exposure to China. Despite the negative impact of COVID-19, we believe that earnings were supported by a favorable USD/KRW exchange rate and limited adjustment of parts inventories at Samsung Electronics and Apple. But the outlook is bleak for 2Q20.
Samsung likely to reduce parts orders in 2Q like Chinese peers did in 1Q
Chinese IT companies struggled in 1Q20, but their supply chains are now recovering ahead of others. For 2Q20, concerns are rising over adjustment of parts inventories at Samsung Electronics, which should be hit hard by demand shock in North America and Europe. The Apple value chain is faring well but facing mounting uncertainties. As such, 2Q20 earnings projections for IT parts makers will highly likely be revised down going forward.
Shock scenario: 2020 IT parts sales falling short by 20%, net profit by 40%
We looked at the valuation attractiveness of IT parts stocks based on pessimistic assumptions. Even when assuming that 2020 net profit falls below our projections by 40%, LG Innotek shares still seem undervalued at 2020F PER of 11.5x along with BH (9.6x), Simmtech (8.9x), and Intops (8x).
Shares of IT parts makers are set to fluctuate more widely until the extent of 2Q20 earnings decline is confirmed. However, we see no reason for excessive pessimism, given that: 1) demand slowdown had been expected; and 2) consensus forecasts for major companies are already on a downtrend.