A Beneficiary of Increased Investment in 5G Networks

The author is an analyst of NH Investment & Securities. He can be reached at hyundong.lee@nhqv.com. -- Ed.

 

Innowireless enjoyed strong 1Q20 earnings growth on increased investment in 5G networks. In 2H20, expanding global (Japan/US/Europe) 5G investment and the arrival of a small cell supply cycle should drive earnings improvement at the company.

1Q20 review: Registers strong growth, backed by overseas sales expansion

Innowireless surpassed our estimates, with 1Q20 sales of W27.9bn (+41.9% y-y), OP of W6.0bn (+181.2% y-y), and OPM of 21.4%.

Innowireless’s rapid sales growth stands in contrast to that of station equipment makers, who are likely to announce sluggish 1H20 results due to delays in global 5G investment to 2H20 amid the Covid-19 crisis. We attribute Innowireless’s favorable performance to the fact that: 1) network test-related investment is proving especially strong amid the switch to 5G; and 2) sales at the wireless network optimization and T&M divisions climbed 73% y-y and 423% y-y, respectively, in 1Q20. In 1Q20, overseas (Japan/Europe) sales upped to W20.1bn (+73.7% y-y), accounting for 72% of overall sales.

2H20 preview: To continue benefiting from full-scale global 5G investment

We estimate Innowireless’s 2Q20 sales at W26.4bn (-16.8% y-y) and OP at W4.9bn (-16.4% y-y). Rather than resulting from industry slowdown, our expectations for a decline in earnings are attributable to high-base effect from the company’s record-high 2Q19 sales of W31.8bn and T&M sales of W11.1bn.

Backed by the anticipated start of full-fledged global 5G investment, Innowireless is projected to see sales growth of over 30% y-y from 2H20. In particular, we note that: 1) the beginning of a second phase of upgrades to high frequency bands (above 28Ghz) is scheduled at domestic telcos; 2) frequency auctions are to start in June in Europe and the US; 3) 5G commercialization from major Japanese carriers should kick off from 3Q20; and 4) having been established last year, subsidiary Accuver Shanghai’s operations in China should begin in earnest this year.

Going forward, a projected surge in network traffic on expanding 5G network deployment and greater investment in 28Ghz (millimeter wave) technology should serve as an opportunity for the firm’s small cell division. Currently, the company is preparing to supply small cells to India’s largest telecom player in 2H20, and supply of 5G small cells for domestic telecommunications use is expected in 2021—two factors which promise to drive up earnings growth going forward.

 

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