Earnings Expected to Show Visible Upturn in 2H20
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
1Q20 review: Visible upturn in short-term parts demand amid COVID-19 concerns
LG Innotek posted operating profit of KRW138bn (positive swing YoY) on sales of KRW2tr (+47% YoY) for 1Q20, topping the consensus estimate of KRW79.2bn by a wide margin and meeting the market’s heightened expectations.
First, parts orders from the North American client remained steady. Growing concerns over parts supply disruptions caused by the COVID-19 outbreak led to the build-up of inventories at smartphone manufacturers. The launch of new budget smartphones also helped boost parts demand during the slow season. Second, favorable forex rates had a positive impact on earnings.
2Q20-2020 outlook: Triple-lens cameras, ToF modules, package substrates
Operating profit is expected to drop 53% YoY to KRW8.9bn in 2Q. Earnings should also decline QoQ due to the shipment of some parts orders in March ahead of the original schedule in 2Q.
We expect to see a visible upturn in 2H20 earnings. Operating profit is forecast to jump 43% YoY to KRW575bn for the full year. First, triple-lens cameras are likely to be upgraded. ASP should rise in double digits as a result. Second, the supply of 3D time-of-flight (ToF) modules should be in full swing with the release of flagship smartphones in 2H, starting with new tablets. LG Innotek will likely enjoy an oligopolistic position in the market. Third, the package substrate business remains solid. Market conditions improved in 2019. System in package (SiP) shipments are forecast to rise on wide adoption of 5G smartphones in 2020.
Retain BUY and raise target price by 7% to KRW160,000
We revise up our target price for LG Innotek to KRW160,000, based on 2020F BPS and a target PBR of 1.5x (average PBR of 2017-2019). First, we focus on the direction of growth in 2H, rather than the lackluster 2Q. Second, demand for ToF modules and 5G SiP should continue on an uptrend. Third, a possible delay in new smartphone releases in 2H will not be a major issue. After all, there is only one iOS-based smartphone brand.