Focus on Improvement from 2H21
The author is an analyst of NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com. -- Ed.
BH Flex’s 1H21 earnings are being hampered by a widened sales portion for domestic customers’ low-margin smartphones, inefficient production line operations, and North American customer mix deterioration. But, when considering likely 2H21 earnings improvement and healthy mid/long-term growth potential (driven by the 5G, EV, and foldable device markets), we deem a recent drop in the firm’s share price as being excessive.
Despite trimmed back earnings outlook, mid/long-term growth expectations (5G, EVs, and foldable devices) still valid
Although adhering to a Buy rating, we lower our TP on BH Flex from W25,000 to W20,000. Our new TP is calculated by applying a target P/E of 10.6x (10% hike from previous target P/E of 9.6x) to a revised 2021E NP estimate (27.3% cut).
The main reasons for trimming back our EPS estimate are: 1) significant margin dilution due to a higher-than-expected sales portion for domestic clients’ low/mid-priced smartphones amid worsened production line efficiency; and 2) further North American customer mix deterioration in 1H21. Given such, operating losses will likely continue through the rest of the half.
However, despite cutting down our earnings forecasts, we stick to a Buy rating as we boost our target P/E, noting: 1) the firm will likely escape its sluggish earnings trend in 2H21; and 2) strengthening expectations towards mid/long-term growth engines, including 5G antenna cables, EV FPCBs, and foldable smartphones.
Moving past disappointing 1H21, earnings to recover from 2H21 on improved mix and normalized operations
BH Flex posted 1Q21 consolidated operating losses of W15bn (TTL y-y, q-q), sharply disappointing our expectations and consensus on: 1) a wider sales portion for domestic customers’ low/mid-priced models; 2) a worsened North American customer mix; and 3) margins damage amid production line inefficiencies.
However, we anticipate an earnings upswing from 2H21, backed by likely: 1) higher ASPs and an improved sales mix (including a wider sales portion for high value-added FPCBs for use in 6.1-inch models) in line with a North American client’s new product releases in 2H21; and 2) improved operational efficiency thanks to the planned separation of production lines between domestic clients and North American clients.
Drawing attention to the ongoing expansion of its new businesses (including its 5G antenna cables and EV FPCB domains), we believe that BH Flex’s mid/long-term earnings growth potential will be secured by a North American customer’s upcoming releases of foldable smartphone models.