Saturday, June 6, 2020
Iljin Materials: Need to wait
Still in Good Position to Grow
Iljin Materials: Need to wait
  • By John Ko
  • April 6, 2020, 17:20
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The author is an analyst of NH Investment & Securities. He can be reached at j.ko@nhqv.com. -- Ed.

 

We expect Iljin Materials’ 1Q20 results to miss consensus. Recently, Covid-19 has increased production uncertainties in downstream industries, leading to greater volatility in Iljin’s short-term earnings. When the crisis eases, the firm’s enterprise value should stabilize on improving business conditions. We stick to a Buy rating.

Still in a good position to grow

We lower our TP on Iljin Materials from W60,000 to W46,000, as we: 1) cut our shipment forecasts for battery elecfoil to reflect production issues in downstream industries (EV and rechargeable batteries); and 2) reduce our blended ASP estimates for battery elecfoil and copper foil to reflect a likely drop in copper prices.

That said, we stick to our Buy rating, believing that the issues at the elecfoil business due to the spread of Covid-19 have already been reflected in the company’s share price. In addition, noting its relatively high exposure to global rechargeable battery players (Samsung SDI, LG Chem, etc) and EV markets, and the expansion of its overseas production base, we believe that Iljin will benefit from a recovery of the rechargeable battery industry. Once the Covid-19 outbreak blows over, Iljin’s business conditions should improve rapidly and its earnings should recover. All things considered, a buying strategy remains valid from a long-term perspective.

Lower 1Q20 earnings forecasts

We expect Iljin’s 1Q20 results to miss consensus, with sales of W127.7bn (+1% q-q, +6% y-y) and OP of W10.5bn (+427% q-q, -11% y-y). The firm’s elecfoil shipments are predicted to drop 18% q-q, versus our previous estimate of a 6% q-q decline. As domestic rechargeable battery makers (Samsung SDI, LG Chem) have announced that some plants will temporarily close due to Covid-19, the outlook for Iljin’s elecfoil business is currently negative. As domestic battery makers account for more than half of Iljin’s shipments, the business conditions and outlooks for such firms are key to estimating Iljin’s earnings.

Although the drop in company’s battery elecfoil ASP is unlikely to be significant in 1Q20, further decline is inevitable in 2Q20, as the price of copper, which accounts for about 70% of the firm’s COGS, is falling due to Covid-19.