The author is an analyst of Shinhan Securities Co. He can be reached at hyungwou@shinhan.com. — Ed.
4Q preview: OP to fall short due to unfavorable forex conditions
We now expect LG Innotek to post operating profit of KRW442.6bn for 4Q22, falling short of our previous estimate of KRW596.3bn. We believe the decline in USD/KRW exchange rate and production disruptions in China’s smartphone supply chain weighed heavily on the company’s earnings. Near-term earnings may disappoint, but we remain upbeat with shares already trading lower and weak 4Q22 results to provide a low base for growth in 2023.
Standing out among IT large-caps
Earnings could dip on a YoY basis in 1H23 due to the high base created from inventory buildup in 2022. The pace of economic reopening in China will likely be an important factor affecting overall earnings in the near term.
However, LG Innotek boasts the highest visibility of earnings growth for 2023 among large-cap IT parts/electronics stocks, backed by new product supply and ASP hikes for camera modules. High-resolution and front-facing camera modules should make a larger contribution to sales next year, adding to the boost from newly-starting shipments of folded zoom camera modules. Despite uncertainties in demand and declining sales of tech products as a whole, we believe LG Innotek is poised to record stronger results vs. IT large-cap peers, with earnings highly likely to improve on a YoY basis in 2H23.
For the full-year, we expect the company’s operating profit to increase from KRW1.5tr in 2022 to KRW1.7tr in 2023.
Retain BUY and target price of KRW450,000
LG Innotek shares have corrected by 32% from the previous peak recorded on March 22, 2022. We believe expectations for weak 4Q22 results due to unfavorable forex conditions are mostly priced in at current levels.
Despite down-adjustments made to EPS forecasts, shares are still trading at cheap valuations at a 2022F PER of 6.3x following recent correction, amid expectations for an uptrend in earnings in 2023. Even in the event of a decline in smartphone sales as a whole, camera module and parts suppliers should continue to see growth backed by demand for folded zoom camera modules, EV-use camera modules, and mixed reality (MR) camera modules. Meanwhile, order cutbacks on smartphone parts from production restrictions at Foxconn’s Zhengzhou campus sparked a faster start to inventory adjustments normally seen at the year’s end or beginning, but recovery has already started on the recent easing of restrictions. In these times of macro uncertainties, we believe investors should focus on companies capable of expanding market share, raising prices, or supplying new products to clients. In our view, LG Innotek fits the bill among IT large-caps.
