PI Film Shipments for IT Industry Increasing
The author is an analyst of NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com. -- Ed.
In light of recovery in the Chinese market and increasing shipments of PI film for the IT industry, we raise our earnings estimates and TP for SKC Kolon PI, believing that its strong product diversification and higher profit margins versus competitors justify a valuation premium. Expecting the firm to enjoy earnings growth through 3Q20, we view SKC Kolon PI’s current share price as attractive.
Product diversification and strong profit margins justify valuation premium
Maintaining a Buy rating, we raise our TP on SKC Kolon PI by 14.3% from W35,000 to W40,000. While we revise up our 2020E EPS by 15.3%, we adhere to a target P/E multiple of 27x.
Viewing the firm’s robust product diversification towards high-tech sectors (foldable smartphones, 5G, rechargeable batteries, etc) and stronger profitability versus competitors as justifying a valuation premium, we believe that an additional premium (P/E in excess of 30x) will be warranted if downstream industry demand recovers in the future.
Positives include faster-than-expected recovery in Chinese market and increasing shipments of PI film for IT industry
We revise up our 2020 sales forecast by 4.8% to W260.7bn (+16.5% y-y) and our OP estimate by 12.6% to W60.1bn (+78.7% y-y; OPM of 23%). The upwards adjustments to our annual earnings projections are primarily attributable to: 1) a faster-than-expected recovery of the Chinese smartphone market; and 2) an increase in shipments of PI film for the IT industry (eg, foldable smartphones and 5G).
Although 2020 global smartphone shipments are expected to record a sharp drop (-22.4% y-y), shipments are predicted to recover from 3Q20. SKC Kolon PI’s 1Q20 earnings should represent a bottoming out, with IT industry growth driving earnings improvement through 3Q20. We view the current share price level as attractive.
1Q20 review: Earnings beat market expectations
SKC Kolon PI’s 1Q20 results surpassed both our estimates and consensus. Shipment growth for graphite sheet and PI film for the IT industry (fueled by Chinese smartphone market recovery) pushed up sales, and OPM improved significantly compared to the previous quarter (+13.2%p q-q) on favorable forex rate effects and lower raw material costs. Reduced litigation costs also had a positive impact on NP.