Bargain Buying Opportunity
The author is an analyst of NH Investment & Securities. He can be reached at kyuha.lee@nhqv.com. -- Ed.
LGI’s share price has recently fallen despite solid earnings and a favorable outlook. We mainly attribute the decline to concerns over slowing new product sales growth at its main client and doubts towards future growth potential. However, considering the low 5G penetration rate at the client and the possibility of benefiting from XR device rollouts, we recommend leveraging this moment as a low-priced buying opportunity.
Recent share price correction offers bargain buying opportunity
LG Innotek (LGI)’s share price has recently declined despite strong 2Q21 results and a favorable 2H21 earnings outlook. We mainly attribute this development to concerns over slowing sales of new smartphone products at a North American client and doubts towards mid/long-term earnings growth.
However, given the still low 5G penetration rate of smartphones in North America and easing of the competitive environment, sales of new products should exceed market expectations in 2H21. With the firm also set to benefit from anticipated XR device rollouts by the client, we recommend leveraging this moment as a bargain buying opportunity.
To benefit from North American client’s still low 5G penetration rate
Given the cumulative total for activated smartphone devices of its North American client (slightly over 1bn units) and cumulative sales of its previous smartphone lineup, as of end-2Q21, the 5G penetration rate of the North American customer stands at about 14.2%. For reference, this is similar to the 5G penetration rate for Android devices of 11.5%.
LGI’s North American customer boasts a much higher share of the high-end smartphones sold in developed countries such as North America, Europe, and China compared to Android devices. As a result, the client’s 5G penetration rate is expected to increase rapidly in the future. Helped by this factor, new smartphone sales by the North American customer should outpace market forecasts moving ahead thanks to accelerating 5G-motivated replacement demand.
Chances look good that LGI will exceed market expectations in 2H21 on the back of strong customer sales and favorable forex rates. Due to excessive concerns, however, LGI shares have reached a historical valuation low point. Considering its solid earnings growth and potential to benefit from metaverse trends (XR devices), we view the recent share price decline as being excessive.