Potential Capacity Increase at Mexico Factory
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Maintain target price of KRW540,000; solid choice amid uncertainty
We maintain BUY and TP of KRW540,000 on LG Innotek. We remain positive given the following:
(1) Despite current uncertainty, we believe the stock is a solid choice because of high earnings visibility coming from pending iPhone releases in 2022-23.
(2) The automotive camera segment is on the verge of becoming profitable thanks to the growing market for self-driving vehicles.
(3) Demand for iPhones with high-performance cameras is likely to jump alongside the anticipated rise in travel demand following the easing of pandemic measures.
Potential capacity increase at Mexico factory; output to be shipped to North American companies
Media reports suggest that LG Innotek is considering increasing output capacity at its Mexico factory to accommodate North American EV/self-driving auto companies’ strong interest in the company’s cameras. Automotive Components has seen its order receipts increase by an avg. of KRW3tn per year (order backlog at KRW10tn); the business’ earnings should turn to black in 2H22, which would mark the first time in six years. LG Innotek supplies automotive components (e.g., camera, lidar, radar) to 25 automakers around the world. Also, it is the only company in the world that employs V2X technology —5G communication between self-driving vehicles and other entities—with both optical (cameras) and communication technology.
Expect 2023 to be better than 2022 as economies reopen
Despite the decline in global smartphone demand, iPhone 13 sales (Pro, Pro Max) have continued to be robust since product release nine months ago, suggesting that iPhone demand is somewhat insensitive to rising inflation and economy volatility. This bolsters sentiment that iPhone sales stand to benefit from the reopening of economies. As such, we expect 2023 earnings to surpass 2022 earnings:
(1) Smartphone camera ASP should enjoy a boost from an increase in camera specs for iPhone 14 (expected 2022 release) and iPhone 15 (expected 2023 release).
(2) LG Innotek is expected to produce key components for iPhone 15 alongside its camera modules.
Thus, we expect the stock, which currently trades at 8.0x P/E, to be re-rated.