Ample Upside
The author is an analyst of NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com. -- Ed.
LGI shares have performed sluggish of late, weighed upon by: 1) the possibility of new competitors entering the camera module market; and 2) unit price cuts for camera modules. However, its shares currently appear excessively undervalued, considering: 1) upgrades to 3D sensing module specifications for front cameras; and 2) rising expectations for strong sales at its client company.
Time for greater focus on new opportunities
LG Innotek (LGI) shares have performed sluggish of late, weighed upon by: 1) the possibility of new competitors entering the camera module market; and 2) reductions in camera module unit prices—its main client is considering whether to request that LGI supply individual camera modules instead of triple-lens camera modules. That said, we believe its current share price (2021F P/E of
8.9x) represents an excessive undervaluation, considering: 1) likely upgrades in
3D sensing module specifications for front cameras in 2021; 2) rising ToF penetration for rear cameras; and 3) strong substrate business.
With regard to the potential entry of new players, we believe that such events will materialize in earnest only from 2022. In addition, considering that its existing Chinese competitor (O-Film) is losing M/S due to US sanctions, the eventual impact on LGI’s earnings may prove negligible. Meanwhile, a decision has yet to be made regarding SDI’s supply of individual camera modules (instead of triple-lens camera modules).
Overshadowed by the above-mentioned negatives, potential positives have largely been ignored by the market, including: 1) a likely unit price hike in 2021 upon specification upgrades for 3D sensing modules for front cameras and rising ToF technology penetration for rear cameras; 2) strong substrate business earnings; and 3) recovering shipments at its major client. However, with these factors set to gradually push up the firm’s earnings going forward, LGI’s share price should rebound.
Sound earnings and strong sales at client suggest ample upside
We expect LGI’s 3Q20 OP to reach W79.6bn (-57.3% y-y, +85.3% q-q; OPM of
24.1%), missing consensus by 24.1%, due mainly to delayed new product rollouts by its North American client.
However, LGI is expected to deliver forecast-meeting 4Q20 earnings. In
addition, noting rising market expectations for 5G smartphone models from its
North American client, we believe that actual smartphone sales may exceed market projections, which in turn would likely justify upwards revisions to earnings forecasts.