Test Portfolio Diversified
The authors are analysts of Shinhan Investment Corp. They can be reached at snowKH@shinhan.com and wonyong.sim@shinhan.com, respectively. -- Ed.
1Q22 operating profit comes in at KRW17bn (+59% YoY)
LB Semicon registered operating profit of KRW17bn (+59% YoY) on sales of KRW132.7bn (+17% YoY) for 1Q22, recovering from the sharp drop seen in 4Q21. Earnings growth was driven by sales gains on: 1) steady demand for DDI (display driver IC) test services; and 2) rise in capacity utilization of new test facilities (CIS, AP, etc.). Consolidated operating margin rose 3.5%p YoY to 12.8%, backed by diversification of test portfolio.
2022 outlook: 1) Test portfolio diversification, capacity expansion effects; 2) DDI growth
We expect the ramp-up of newly added capacity to give a boost to earnings growth in 2022. LB Semicon had announced plans to invest KRW58bn into new test facilities for CIS (CMOS image sensor) and SoC (system on chip) in September 2020, and additional investment of KRW95.5bn into non-memory test facilities in September 2021. With the construction now completed, the company is ramping up operations in earnest. Capacity utilization rates currently reach 70% levels. On the back of capacity expansion, it is highly likely to enjoy growth in both the topline and profitability.
We also find it positive that the diversification of LB Semicon's test portfolio from DDI and PMIC (power management IC) to CIS and AP (application processor) will ensure steady order intake from major clients. For full-year 2022, sales are forecast at KRW582.5bn (+17% YoY) and operating profit at KRW67.7bn (+53% YoY).
Mainstay sales of the DDI testing business should continue on a steady growth path, with demand for the IC chips that control the display of colors rising alongside display market growth. The market environment will likely remain favorable for LB Semicon in view of: 1) expanding applications; and 2) increasing number of DDI chips per application.
Retain BUY for a revised-down target price of KRW16,000
We lower our target price for LB Semicon to KRW16,000 due to a decline in domestic peer valuations (2022F average 19.9x →13.2x). Our revised target is based on 2022F EPS of KRW1,190 and a target PER of 13.2x (10% premium to PER average of domestic and overseas peers).
The company should see strong growth momentum in 2022, backed by: 1) growing demand for DDI test services on diversification of applications; and 2) test capacity expansion. Profitability is expected to improve in the mid-to-long term with the rise in gold prices (main raw material) passed onto clients. We thus retain our BUY rating on LB Semicon.