LG Innotek (011070) Company Note. Concerns unjustified, 3Q14 results to beat consensus. BUY (Maintain)

Transcription

1 Company Note August 29, 214 LG Innotek (117) 12M rating BUY (Maintain) 12M TP W17, from W17, Up/downside +29% Stock Data KOSPI (Aug 28, pt) 2,76 Stock price (Aug 28, KRW) 132, Market cap (USD mn) 3,22 Shares outstanding (mn) Week high/low (KRW) 15,/75, 6M avg. daily turnover (USD mn) 19.1 Free float / Foreign ownership (%) 59.2/11.8 Major shareholders (%) LG Electronics INC. and 3 others 4.8 National Pension Service (NPS) 12.7 Performance 1M 6M 12M Absolute (%) Relative to KOSPI (%p) MF PE trend 9. (X) 12MF PER (LHS) (W' ) price (RHS) Concerns unjustified, 3Q14 results to beat consensus Despite recent pullback, 2H14 earnings momentum intact We maintain BUY on LG Innotek (LGI) with a TP of W17,. Since peaking at W15, on July 8, shares have been sluggish. But, we maintain a positive outlook, as: 1) 3Q14 NP should reach W12bn, beating the consensus (W15bn), on strong handset momentum (2H14 OP to reach W215bn, up 6% HoH), 2) heavy LED losses finally turned around on a monthly basis in August, which may justify the higher LED peer multiple, and 3) LGI should benefit from robust G3 smartphone sales. Concern 1: Core competitiveness improves despite strong KRW Concerns over 2H14 earnings are growing due to the strong KRW. But, 1) LGI s handset and TV component product yield has improved and gained more market share, and 2) the customer base has been diversified away from captive buyers to Chinese buyers for camera modules, touch panels and packages. 3) LGI has the largest auto component backlog among electronic component companies (forecast W4.3tn at yearend), which should bolster earnings. Concern 2: Problems at other LED players, but LGI s LED to rebound Other domestic LED players posted poor 2Q14 results on company-specific problems. However, LGI s LED operating loss narrowed significantly in 2Q14, and turned around on a monthly basis in August. While cost cutting has contributed to the improvements, earnings should stabilize going forward on a higher weighting of lighting LED and high power LED products. With the turnaround, LGI may warrant the higher LED sector valuation multiples.. Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Source: WISEfn consensus Concern 3: Component supplies stable despite iphone rumors Speculation is mounting regarding the timing of the next iphone release. But, LGI has supplied related components since August, as scheduled. While initial shipments were smaller than anticipated, supplies should grow sharply once product yield normalizes. As such, we maintain our 2H14 component earnings outlook. Specifically, we maintain a 214 full-year OP forecast of W368bn for the company as a whole. Kevin Lee kein.lee@truefriend.com Jaehoon Choi jaehoon.choi@truefriend.com Yr to Sales OP NP EPS % chg EBITDA PE EV/EBITDA PB ROE DY Dec (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%) (%) 212A 5, (25) (1,237) NM 549 NM (1.9) - 213A 6, NM F 6, ,618 1, F 6, , F 7, , Note: Net profit and EPS are based on figures attributed to controlling interest Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS AT THE END OF THIS REPORT.

2 LG Innotek (117) Table 1. Quarterly earnings by division (revised) (W bn, %) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14F 4Q14F F 215F Sales 1,551 1,521 1,595 1,544 1,459 1,543 1,8 1,854 4,886 6,211 6,656 7,386 LED ,13 1,125 1,275 Optics Solution ,662 2,523 2,758 3,134 Substrate Material ,89 1,162 Display/Network Automotive Components OP LED (56) (34) (32) (42) (29) (19) (9) (11) (154) (165) (68) (38) Optics Solution Substrate Material Display/Network Automotive Components OP margin (%) LED (21.9) (1.8) (11.2) (17.4) (11.) (6.6) (3.) (4.) (15.5) (15.) (6.1) (3.) Optics Solution Substrate Material Display/Network Automotive Components Table 2. Quarterly earnings by division (previous) (W bn, %) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14F 4Q14F F 215F Sales 1,551 1,521 1,595 1,544 1,459 1,543 1,97 1,96 4,886 6,211 6,98 7,612 LED ,13 1,196 1,355 Optics Solution ,662 2,523 2,889 3,261 Substrate Material ,137 1,196 Display/Network Automotive Components OP LED (56) (34) (32) (42) (29) (19) (2) (15) (154) (165) (88) (47) Optics Solution Substrate Material Display/Network Automotive Components OP margin (%) LED (21.9) (1.8) (11.2) (17.4) (11.) (6.6) (6.) (5.) (15.5) (15.) (7.4) (3.5) Optics Solution Substrate Material Display/Network Automotive Components Table 3. Earnings revisions (W bn, %, %p) Previous Revised Change 3Q14F 214F 3Q14F 214F 3Q14F 214F Sales 1,97 6,98 1,8 6,656 (8.6) (3.6) OP OPM Source: Korea Investment & Securities: 2

3 LG Innotek (117) Figure 1. LED division utilization Figure 2. Quarterly LED losses (W bn) 9% 8% 7% 78% (1) 6% (2) 5% 4% (3) 3% (4) 2% 1% (5) % 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14F (6) 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14F Source: LG Innotek, Korea Investment & Securities Figure 3. Apple s iphone shipment forecast Figure 4. LGI s package sales and OPM forecast 8 (mn units) 1 (W bn) Package Sales OPM (R) 4% 7 8 2% 6 % 5 6 (2%) (4%) (6%) (8%) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14F 4Q14F 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14F (1%) Source: SA, Korea Investment & Securities Figure 5. PE band Figure 6. PB band 2, (KRW) 16x 2, (KRW) 2.6x 2.1x 14x 15, 12x 15, 1.6x 1x 1, 8x 1, 1.1x 5, 5,.6x Jul-8 Jul-9 Jul-1 Jul-11 Jul-12 Jul-13 Jul-14 Jul-8 Jul-9 Jul-1 Jul-11 Jul-12 Jul-13 Jul-14 Source: Datastream, Korea Investment & Securities Source: Datastream, Korea Investment & Securities 3

4 LG Innotek (117) Table 4. Global LED peer comparison (USD, USD mn, x, %) Seoul LG Innotek Toyota Gosei Epistar Everlight Cree Rubicon Philips Veeco Sanan Semiconductor Share price Market cap 3,98 1,544 2,516 1, , ,31 1,43 5,738 Sales 213A 6,13 1,14 6, , , , F 6,4 1,31 6,682 1, , , , F 7,13 1,172 6,943 1,27 1,91 2, , ,887 OP 213A (35) 1,991 (72) F (39) 1,882 (28) 1,42 215F (13) 2, ,56 EBITDA 213A (22) 3,34 (53) 1,61 214F (23) 2,975 (11) 2, F , ,82 NP 213A (3) 1,169 (42) 1,36 214F (39) 1,233 (15) 1,47 215F (13) 1, ,4 EPS 213A (1) (1) 1 (1) 214F (2) 1 () 1 215F (1) BPS 213A F F Net debt 213A 1, (144) (1,162) (35) 1,426 (49) 3,413 (-net cash) 214F 1, (271) (969) (57) 1,481 (339) 3, F 1, (367) 4 (1,24) (49) 1,161 (435) 3,678 PE (x) 213A NM 17.9 NM F NM 16.3 NM F NM PB (x) 213A F F EV/EBITDA (x) 213A (5.8) 7. (17.6) F (4.8) 7.9 (96.7) F ROE (%) 213A (14.4) 1.5 (5.3) F (18.7) 11.2 (3.1) F (3.3) ROA (%) 213A (13.5) 4.2 (4.5) F (18.4) 3.9 (2.3) F (2.7) Div yield (%) 213A F F Source: Bloomberg, Korea Investment & Securities Comment: As of Aug 27 Company overview & Glossary LG Innotek Co., Ltd. is a Korea-based company owned by LG Electronics (44.8% stake), and is engaged in the manufacture of electronic components for mobile phones, TV, computers, network communication products and cars. The company operates in four categories of business: LED, optics solution, package substrate (package, substrate, touch panel, tape substrate, lead frame) and application components (power, tuner and automotive components) LED: Light-emitting diode Touch panel: electronic visual display that can detect the presence and location of a touch within the display area BLU: Back light unit HDI: High Density Interconnects 4

5 LG Innotek (117) Balance sheet FY-ending Dec. (W bn) 212A 213A 214F 215F 216F Current assets 2,73 2,7 2,34 2,62 3,12 Cash & cash equivalent Accounts & other receivables 1,147 1,166 1,18 1,265 1,632 Inventory Non-current assets 2,813 2,574 2,393 2,259 2,188 Investment assets Tangible assets 2,375 2,15 1,929 1,787 1,665 Intangible assets Total assets 4,886 4,581 4,697 4,861 5,29 Current liabilities 2,9 1,629 1,48 1,396 1,55 Accounts & other payables 1, ,56 1,131 1,256 ST debt & bond Current portion of LT debt Non-current liabilities 1,69 1,635 1,435 1,281 1,233 Debentures LT debt & financial liabilities Total liabilities 3,618 3,264 2,843 2,676 2,739 Controlling interest 1,268 1,317 1,855 2,185 2,551 Capital stock Capital surplus ,155 1,155 1,155 Other Reserves () () () () () Retained earnings ,259 Minority interest Shareholders' equity 1,268 1,317 1,855 2,185 2,551 Income statement FY-ending Dec. (W bn) 212A 213A 214F 215F 216F Sales 5,316 6,212 6,211 6,656 7,386 COGS 4,754 5,522 5,26 5,637 6,245 Gross profit ,5 1,19 1,141 SG&A expense Operating profit Financial income Interest income Financial expense Interest expense Other non-operating profit (2) (2) 7 Gains (Losses) in associates, subsidiaries and JV Earnings before tax (18) Income taxes Net profit (25) Net profit of controlling interest (25) Other comprehensive profit (33) Total comprehensive profit (58) Total comprehensive profit of controlling interest (58) EBITDA Cash flow FY-ending Dec. (W bn) 212A 213A 214F 215F 216F C/F from operating Net profit (25) Depreciation Amortization Net incr. in W/C (13) (172) (175) (144) (364) Others C/F from investing (383) (45) (369) (35) (352) CAPEX (35) (383) (35) (35) (35) Decr. in fixed assets Incr. in investment Net incr. in intangible assets (38) (45) (25) (39) (48) Others (37) 2 (21) C/F from financing (79) 16 (22) (212) (78) Incr. in equity 3 Incr. in debts (79) 16 (52) (212) (78) Dividends Others C/F from others (2) () Increase in cash (83) 47 (2) Key financial data FY-ending Dec. 212A 213A 214F 215F 216F per share data (KRW) EPS (1,237) 771 9,618 13,51 15,34 BPS 62,892 65,33 91,974 18, ,481 DPS Growth (%) Sales growth (.) OP growth NM NP growth NM NM 1, EPS growth NM NM 1, EBITDA growth Profitability (%) OP margin NP margin (.5) EBITDA margin ROA (.5) ROE (1.9) Dividend yield Dividend payout ratio..... Stability Net debt (W bn) 1,89 1,758 1, Debt/equity ratio (%) Valuation (X) PE NM PB EV/EBITDA Note: Based on K-IFRS (consolidated) 5

6 LG Innotek (117) Changes to recommendation and price target Company (Code) Date Recommendation Price target LG Innotek (117) BUY W95, Hold BUY W11, Hold BUY W15, BUY W17, 18, 16, 14, 12, 1, 8, 6, 4, 2, Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 6

7 LG Innotek (117) Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and 15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Distribution United States: This report is distributed in the U.S. by Korea Investment & Securities America, Inc., a member of FINRA/SIPC, and is only intended for major U.S. institutional investors as defined in Rule 15a-6(a)(2) under the U.S. Securities Exchange Act of All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Korea Investment & Securities, Co., Ltd. or its affiliates. Pursuant to Rule 15a-6(a)(3), any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Korea Investment & Securities America, Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. person absent registration or an applicable exemption from the registration requirement. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 1 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of LG Innotek. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for LG Innotek in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from LG Innotek in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from LG Innotek in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in LG Innotek s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of LG Innotek shares as of August 29, 214. Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of August 29, 214. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of LG Innotek and is the liquidity provider. Prepared by: Kevin Lee This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 7