Focus on Potential for Mid/long-term Growth
The author is an analyst of NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com. -- Ed.
Weighed upon by slowing demand for IT devices due to Covid-19, Innox AMC is likely to report weak 1H20 earnings. However, the firm’s earnings should improve in 2H20 on recovering demand and cost reductions. Considering OLED market growth, we recommend focusing on prospects for mid/long-term improvement, rather than short-term results.
Considering OLED market growth, focus on mid/long-term improvement rather than likely weak short-term results
Impacted by slowing global demand for smartphones and OLED TVs (Innox AMC’s major downstream industries) due to Covid-19, Innox AMC is likely to report weaker-than-expected 1H20 earnings. However, its earnings should recover in earnest in 2H20 and 2021 thanks to recovering demand for IT devices. In light of prospects for future OLED market growth (including for foldable smartphones and automotive applications), we see justification for increasing exposure to Innox AMC shares from a mid/long-term perspective.
Demand for IT devices such as smartphones and OLED TVs has slowed as of late due to Covid-19, which is expected to weigh upon utilization rates at major clients through 2Q20. As a result, earnings decline for Innox AMC looks inevitable in 1H20. Accordingly, an easing in the Covid-19 crisis and economic normalization are to serve as the biggest variables for global IT device demand and Innox AMC’s earnings recovery. We advise focusing on the potential for mid/long-term growth rather than short-term concerns.
Expect 2H20 earnings improvement on cost reductions and global IT demand recovery
Hampered by slowing global demand for IT devices and delays in mass production at Guangzhou plants, Innox AMC recorded 1Q20 sales of W71.2bn (-16.9% y-y, -17.1% q-q) and OP of W5.3bn (-55.8% y-y, -52.7% q-q; OPM of 7.5%), slightly missing both our expectations and consensus.
Due to Covid-19, Innox AMC is likely to post lower-than-expected 2Q20 earnings as well. However, helped by cost reduction from the activation of an emergency management system from April, the firm’s OPM should improve slightly (+0.4%p q-q) even amid a likely drop in sales (-7.8% q-q).
In 2H20, Innox AMC’s earnings should improve, backed by the launch of new smartphone models by domestic and North American clients, normalizing operations at Guangzhou plants, and recovering global IT device demand.