Balanced Portfolio of 4 Business Divisions
The authors are analysts of Shinhan Investment Corp. They can be reached at hsh0628@shinhan.com and wonyong.sim@shinhan.com, respectively, -- Ed.
Balanced portfolio of four business divisions
Innox Advanced Materials was spun off from Innox in 2017 to focus on advanced films. Producing over 50 types of films and materials, the company's operations are divided into four business divisions according to client industry: INNOLED, SMARTFLEX, INNOFLEX, and INNOSEM. INNOLED manufactures protective films to reinforce the base of mobile-use flexible OLED panels, as well as encapsulation films for use in OLED TV panels. SMARTFLEX provides mobile device-use films that prevent electromagnetic interference and block foreign substances. INNOFLEX supplies FPCB-use films and INNOSEM produces films used in the semiconductor packaging process.
Earnings continuing upward on development of new materials
Companies supplying advanced films for use in IT devices tend to enjoy solid growth once they successfully penetrate into the market protected by high entry barriers. Innox Advanced Materials has steadily expanded its portfolio of advanced materials from 31 types of products in 2016 to 52 in 2021. The sales share of new materials used in OLED panels, semiconductor packaging, and foldable smartphones surged from 54% in 2016 to 66% in 2020.
Alongside increasing OLED TV panel shipments at a major client company, sales contribution of the INNOLED division rose sharply from 33.0% in 2018 and 37.1% in 2019 to 46.5% in 2020. We expect to see stable earnings growth continue through 2H21, on: 1) increasing supply of encapsulation films for use in OLED TV panels; and 2) full-fledged sales contribution from magnetic films used in foldable smartphone digitizers.
For full-year 2021, sales are forecast at KRW435.6bn (+29.5% YoY) and operating profit at KRW73bn (+66.6% YoY). Operating margin should improve markedly to 16.8% in 2021 vs. 13.3% in 2019 and 13.0% in 2020 thanks to steep growth in supply of encapsulation films for OLED TV panels, which are larger in production area vs. smartphone or notebook panels.
Initiate coverage with BUY for a target price of KRW92,000
We initiate our coverage on Innox Advanced Materials with BUY for a target price of KRW92,000. We applied a target PER of 15.0x to our 12-month forward EPS forecast of KRW6,122 in reflection of: 1) high entry barriers for specialty films produced by the company; and 2) steep uptrend expected in encapsulation film sales, the company’s main driver of top-line growth, backed by expansion of the OLED TV market as a whole.