Stands to Benefit from US-China Trade Disputes
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
3Q21earnings surprise in store
LG Innotek is expected to post sales of KRW3.3tr (+48% YoY) and operating profit of KRW317.4bn (+193% YoY) for 3Q21, yet another quarter of record high earnings. It is enjoying benefits from its camera module rival’s production disruptions in Vietnam caused by the spread of COVID-19. Favorable forex rates are also reflected in our projection.
Growth drivers: Telephoto lens, XR, self-driving
We believe LG Innotek’s share performance will depend on mid/long-term growth drivers rather than2H21 earnings. We focus on the following three momenta from technological changes.
First, mobile device manufacturers are working on the development and application of sensor-shift image stabilization and folded zoom camera modules. Samsung Electronics and Huawei have already adopted advanced multi-folded camera modules in their products, setting themselves apart from peers. We keep an eye on the North American client’s adoption of a folded telephoto lens module.
Second, global manufacturers are preparing to roll out XR (extended reality) devices, following in the footstep of Facebook. This should lead to demand for camera and 3D modules. Development of the XR technology is mostly spearheaded by North American companies, who are likely to opt for parts vendors outside of China.
Third, camera is the key component of self-driving systems. LG Innotek is a top-tier 3D module manufacturer. As Korea’s leading supplier of automotive cameras, it is already collaborating with a number of global automakers in development and supply.
Retain BUY for a target price of KRW287,000
Our target price of KRW287,000 for LG Innotek is based on 2021F BPS and a target PBR of 2.1x (average of the PBR highs of 2014and 2017 recorded during past boom cycles). There are some concerns over the company’s growth prospect from 2022 onwards, but we focus on its role in telephoto lens camera module, XR, and self-driving markets. LG Innotek sits to benefit from US-China trade disputes as its camera module competitors are mostly Chinese companies. We believe the value of its automotive electronics parts business needs to be reevaluated. The current share price seems to reflect just the value of its mobile-related and substrates & materials businesses.