[Into the Stocks] LG Innotek, Attractive Undervaluation... All Business Divisions Are Strong

[Asia Economy Reporter Minji Lee] LG Innotek is expected to continue its performance improvement trend, supported by strong results across all business divisions. While some predict a slowdown in performance starting next year, the securities industry still considers the stock undervalued even after factoring this in.

LG Innotek is an electronic components company under the LG Group, producing camera modules for smartphones, semiconductor substrates, and automotive electronic components. Recently, the sales composition by business division shows that the Optical Solutions Division (camera modules) accounts for 71%, followed by the Substrate Materials Division (14%) and the Automotive Components Division (14%).

◆Strong Q3 Performance... Annual Profit Estimates Also Up

The securities industry expects LG Innotek to surpass both the previous quarter and the same period last year in Q3 performance. According to financial information provider FnGuide, Q3 operating profit is projected at KRW 268.3 billion, a 220% increase compared to KRW 89.4 billion in the same period last year. Sales are expected to grow 49% to KRW 3.3237 trillion.

The factors supporting Q3 performance include balanced profit forecasts from the Optical Solutions and Semiconductor Substrate divisions. Hi Investment & Securities, which forecasts the highest sales of KRW 3.544 trillion for Q3, expects the Optical Solutions and Substrate Materials divisions to record KRW 2.644 trillion and KRW 425 billion respectively, representing increases of 81% and 33% compared to the same period last year. The Automotive Components division is estimated to grow about 8% to KRW 354 billion compared to the previous year. Annual estimates are also expected to improve following last year, with total sales projected at KRW 12.4925 trillion and operating profit at KRW 1.1225 trillion, marking increases of 31% and 64% year-over-year, respectively.

◆Dual Growth in Optical Solutions and Substrate Divisions

The Optical Solutions division is expected to see significant performance improvement due to the full-scale supply of camera modules following the launch of new models by a strategic North American customer. The major North American client has revised upward its shipment plans for new products and production plans for existing models. The market also places weight on positive demand forecasts for the new iPhone, coinciding with 5G replacement demand. Although the supply method shifted from integrated modules to individual camera supplies, the expansion from a single model to all models equipped with sensor shift, the extension of the 3D sensing module area (including the receiver), and the absolute increase in ToF module volume are expected to drive strong performance.

Issues with competitors' production disruptions should also be considered. Recently, due to yield problems with competitors' sensor shift technology and the suspension of operations at their Vietnam plant, LG Innotek's Q3 parts shipments are expected to exceed initial estimates. The expectation of market share expansion in high value-added camera modules based on technological competitiveness is also positive. Go Eui-young, a researcher at Hi Investment & Securities, said, “The production difficulty of camera modules is increasing with sensor shift OIS and the integration of 3D sensing module transmitter and receiver parts,” adding, “LG Innotek has maintained a dominant position within its customers based on superior technology compared to competitors, and this market share is expected to expand more than initially anticipated.”

The Substrate Materials division is expected to benefit structurally from expanding demand in 5G, OLED, and electric vehicle upstream industries. This division is divided into display tape substrates (components connecting DDI chips to main circuit boards), photomasks, and semiconductor substrates, all of which are experiencing tight supply and demand. Notably, the increase in the proportion of 28GHz support models (equipped with mmWave antenna substrates) for the customer (iPhone 13) is driving up the average selling prices of core products such as System in Package (SiP) and Antenna in Package (AiP), which is expected to significantly boost the division's performance. Furthermore, the potential new entry into the high-margin Flip Chip Ball Grid Array (FC-BGA) market is also likely to lead to a reevaluation of the Substrate Materials division.

The Automotive Components division is expected to improve its profit margin by turning profitable next year. Although it showed weakness this year due to semiconductor supply issues, orders continue to accumulate, suggesting positive changes next year. The division is also expected to expand collaboration into the smart car sector, focusing on autonomous driving cameras.

◆Historically Low Valuation... Why?

Despite improved earnings estimates, the company's stock price recently showed a sluggish trend. The stock reached a yearly high of KRW 245,500 in July last year but fell to KRW 193,000 on August 23 due to external factors and concerns over valuation peaks. At that time, foreign investors significantly changed their holdings, selling KRW 86 billion worth of shares in August alone. Recently, expectations of cooperation with Apple Car have been reflected in investor sentiment, recovering the stock price to around KRW 220,000.

Despite the strong performance outlook, the muted stock price rise is analyzed to be due to concerns that the North American customer's new product may record weaker-than-expected sales. The previous iPhone 12 series sold 151 million units in 10 months after launch, making it the second best-selling after the iPhone 6 (167 million units). The new product launching this month is expected to face a high base effect.

Accordingly, the price-to-earnings ratio (PER), which divides the stock price by earnings per share, is at a historically low level. The company's average PER this year is 7 times, not even reaching 10 times. Compared to other large IT companies including Samsung Electronics, it is considered undervalued by securities experts. Lee Kyu-ha, a researcher at NH Investment & Securities, said, “Considering the recent technological competitiveness gap with competitors in camera modules, favorable substrate market conditions, and continuous camera module upgrades, earnings growth is possible next year,” adding, “The potential exclusivity of 3D sensing modules when the North American customer launches mixed reality (XR) devices also increases the investment appeal due to high mid-to-long-term growth prospects related to the metaverse.”

This content was produced with the assistance of AI translation services.