(117 KS) Future lies in automotive components Technology Company Report December 3, 215 (Maintain) Buy Target Price (12M, W) 123, Share Price (12/2/15, W) 11, Expected Return 22% OP (15F, Wbn) 241 Consensus OP (15F, Wbn) 254 EPS Growth (15F, %) -.4 Market EPS Growth (15F, %) 22.6 P/E (15F, x) 2.2 Market P/E (15F, x) 11.6 KOSPI 2,9.29 Market Cap (Wbn) 2,39 Shares Outstanding (mn) 24 Free Float (%) 59.2 Foreign Ownership (%) 11.4 Beta (12M).65 52-Week Low 79, 52-Week High 117, (%) 1M 6M 12M Absolute 7.9 3.7-2.4 Relative 9.3 7.3-4.5 12 KOSPI 11 1 9 8 7 6 12.14 4.15 8.15 12.15 215: Camera modules perform well, but LED continues to struggle After a strong performance in 214, has shown stagnation in 215. For the full year, we estimate s revenue and operating profit to fall to W6.26tr (-3.1% YoY) and W241.5bn (-23.1% YoY), respectively. The optics solutions (camera module) division has continued to show earnings improvement, driven by increasing shipments to its US smartphone customer. The US customer s adoption of 12MP cameras for its newest smartphones (vs. 8MP cameras for previous models) lifted ASP, leading to top-line growth and margin expansion. The substrate/materials and automotive components/electronics divisions have also performed in line with expectations The problem lies in the LED division. In 3Q15, LED revenue plunged 33.5% YoY to W188.7bn, missing our estimate by 7.4%. This was largely attributable to a sharp fall in LED backlight unit ASP due to depressed TV market conditions. We estimate the LED division s full-year operating loss to widen to W136.8bn. 216: Smaller LED losses and growth of automotive components Looking to 216, we forecast revenue and operating profit to grow to W6.4tr (+2.2% YoY) and W321.9bn (+33.3% YoY), respectively. We expect the camera modules and substrate/materials divisions to deliver robust earnings. In particular, the possible introduction of dual cameras suggests upside potential to camera module ASP. We are also bullish on the automotive component business. Shipments of automotive communication modules to the US are continuing to grow, and the company s automotive motors and LEDs are being adopted in an increasing number of new vehicle models. As of end-3q15, order backlog stood at W5.2tr, up W1.2tr from W4.tr at end- 4Q14. The automotive component business is an attractive growth engine, as it allows LG Innotek to diversify not only its product portfolio, but its customer base as well. We believe the company already has more than 55 automotive customers, compared to just four to five customers in smartphones. As for LED, we do not see any meaningful improvement, given the flagging TV industry and intense competition in lighting. That said, we expect operating loss to narrow to W61.2bn (down W75.6bn) in 216 on the back of reduced depreciation expenses and cost efficiency. Reiterate Buy and TP of W123, We keep our Buy rating and target price of W123,, which equals 1.5x (five-year average; unchanged) our 12-month forward BPS of W83,262. Daewoo Securities Co., Ltd. [Telecom equipment/electronic components] Wonjae Park +822-768-3372 william.park@dwsec.com FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 5,316 6,212 6,466 6,263 6,4 6,692 OP (Wbn) 77 136 314 241 322 379 OP margin (%) 1.4 2.2 4.9 3.8 5. 5.7 NP (Wbn) -25 16 113 118 194 243 EPS (W) -1,237 77 5,2 5,1 8,185 1,276 ROE (%) -1.9 1.2 7.5 6.7 1.2 11.5 P/E (x) - 18.6 22.4 2.2 12.3 9.8 P/B (x) 1.3 1.3 1.6 1.3 1.2 1.1 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the t U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Key charts Figure 1. Share price Source: Figure 2. Quarterly earnings (Wbn) (%) 4Q15F OP: W62.9bn 2,1 Revenue (L) (+3.6% QoQ; +8.4% YoY) 1 OP margin (R) 1,4 5 7 1Q5 1Q6 1Q7 1Q8 1Q9 1Q1 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16F -5 Source: Figure 3. 12-month forward P/B band (W) 3, Figure 4. 12-month forward P/E band (W) 3, 29.x 2, 2.4x 2, 24.x 1, 2.x 1.7x 1.3x 1.x 1, 19.x 13.x 9.x 1 11 12 13 14 15 16 Source: 1 11 12 13 14 15 16 Source: 2
Table 1.. Quarterly and annual earnings Revenue Operating profit OP margin (%) 1Q 2Q 215 216F 3Q 4QF FY 1QF 2QF 3QF 4QF FY (Wbn, %, %p) 4Q15 Q15F Optical solutions 711.9 76.1 774.7 937.6 3,13.2 732.5 761.1 835.1 918.8 3,247.6. 21. Substrates & materials 383.1 356.8 37.3 324.8 1,434.9 331. 356.2 368. 332.4 1,387.6-23. -12.3 LED 221. 197.3 188.7 189.6 796.6 18.6 186.3 181.6 182.5 731. -13.8.5 Automotive components & electronics 262.1 234.6 273.2 34.3 1,74.2 299.8 266.6 292.2 35.4 1,29. 15.2 11.4 Other -36.7-47.7-48.1-4.2-172.7-43.2-44.8-44.1-43.1-175.1 41.7-16.4 Total 1,541.3 1,447.1 1,558.8 1,716. 6,263.2 1,5.7 1,525.4 1,632.9 1,741.1 6,4.1-5.5 1.1 Optical solutions 45.1 46.3 52.7 56.3 2.3 45.2 45.9 53.9 52.8 197.8 9.1 6.8 Substrates & materials 46.9 34.8 35.6 29.1 146.5 32.3 38. 38.5 32. 14.7-26.2-18.2 LED -33. -37.6-35.9-3.3-136.8-23.5-18.6-9.1-1. -61.2-21.2-15.4 Automotive components & electronics 1. 5.4 8.2 7.8 31.5 11.4 1. 12.6 1.6 44.6 42.4-4.9 Other 69. 48.9 6.7 62.9 241.5 65.3 75.3 95.8 85.4 321.9 8.4 3.6 Optical solutions 6.3 6.6 6.8 6. 6.4 6.2 6. 6.5 5.8 6.1.5 -.8 Substrates & materials 12.3 9.8 9.6 9. 1.2 9.8 1.7 1.5 9.6 1.1 -.4 -.7 LED -14.9-19.1-19. -16. -17.2-13. -1. -5. -5.5-8.4 1.5 3. Automotive components & electronics 3.8 2.3 3. 2.6 2.9 3.8 3.8 4.3 3. 3.7.5 -.4 Other 4.5 3.4 3.9 3.7 3.9 4.4 4.9 5.9 4.9 5..5 -.2 Pretax profit 47.6 27.7 31.8 46.7 153.9 49.1 59.2 8. 7.4 258.6 68.5 46.9 Net profit 28.1 31.4 23.8 35. 118.4 36.8 44.4 59.9 52.7 193.7-715.5 46.9 Pretax margin 3.1 1.9 2. 2.7 2.5 3.3 3.9 4.9 4. 4. 1.2.7 Net margin 1.8 2.2 1.5 2. 1.9 2.4 2.9 3.7 3. 3. 2.4.5 Source: Company data, estimates YoY QoQ Figure 5. Motors & sensor ensors Figure 6. Connectivity & ADAS Figure 7. XEV components Source: Company materials Source: Company materials Source: Company materials Figure 8. Wireless charging Figure 9. Heat transfer modules Figure 1. LED lighting Source: Company materials Source: Company materials Source: Company materials 3
(117 KS/Buy/TP: W123,) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 6,466 6,263 6,4 6,692 Current Assets 2,82 1,885 2,7 2,227 Cost of Sales 5,63 5,485 5,532 5,742 Cash and Cash Equivalents 396 291 382 566 Gross Profit 863 778 868 95 AR & Other Receivables 1,262 1,186 1,25 1,231 SG&A Expenses 549 536 546 571 Inventories 354 341 353 361 Operating Profit (Adj) 314 241 322 379 Other Current Assets 7 67 67 69 Operating Profit 314 241 322 379 Non-Current Assets 2,347 2,139 2,2 1,912 Non-Operating Profit -122-87 -63-54 Investments in Associates Net Financial Income -66-39 -28-19 Property, Plant and Equipment 1,898 1,76 1,618 1,535 Net Gain from Inv in Associates Intangible Assets 181 167 136 11 Pretax Profit 192 154 259 325 Total Assets 4,429 4,24 4,27 4,139 Income Tax 79 36 65 82 Current Liabilities 1,647 1,348 1,313 1,286 Profit from Continuing Operations 113 118 194 243 AP & Other Payables 965 913 926 946 Profit from Discontinued Operations Short-Term Financial Liabilities 495 266 216 166 Net Profit 113 118 194 243 Other Current Liabilities 187 169 171 174 Controlling Interests 113 118 194 243 Non-Current Liabilities 1,86 861 713 615 Non-Controlling Interests Long-Term Financial Liabilities 965 748 598 498 Total Comprehensive Profit 11 124 194 243 Other Non-Current Liabilities 121 113 115 117 Controlling Interests 11 124 194 243 Total Liabilities 2,732 2,29 2,26 1,92 Non-Controlling Interests Controlling Interests 1,696 1,815 2,1 2,237 EBITDA 849 744 783 89 Capital Stock 118 118 118 118 FCF (Free Cash Flow) 482 366 298 343 Capital Surplus 1,134 1,134 1,134 1,134 EBITDA Margin (%) 13.1 11.9 12.2 12.1 Retained Earnings 451 559 746 982 Operating Profit Margin (%) 4.9 3.8 5. 5.7 Non-Controlling Interests Net Profit Margin (%) 1.7 1.9 3. 3.6 Stockholders' Equity 1,696 1,815 2,1 2,237 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 743 722 64 664 P/E (x) 22.4 18.7 11.4 9.1 Net Profit 113 118 194 243 P/CF (x) 3.2 3.1 3. 2.9 Non-Cash Income and Expense 677 6 555 531 P/B (x) 1.6 1.2 1.1 1. Depreciation 498 464 43 44 EV/EBITDA (x) 4.4 4. 3.4 2.9 Amortization 36 38 31 26 EPS (W) 5,2 5,1 8,185 1,276 Others 143 98 94 11 CFPS (W) 35,193 3,333 31,624 32,696 Chg in Working Capital -45 6-15 -9 BPS (W) 71,695 76,691 84,576 94,552 Chg in AR & Other Receivables -91 94-19 -26 DPS (W) 25 3 4 5 Chg in Inventories 24 14-12 -8 Payout ratio (%) 5.3 6. 4.9 4.9 Chg in AP & Other Payables 97-71 9 13 Dividend Yield (%).2.3.4.5 Income Tax Paid -3-33 -65-82 Revenue Growth (%) 4.1-3.1 2.2 4.6 Cash Flows from Inv Activities -39-372 -343-322 EBITDA Growth (%) 27.7-12.4 5.2 3.3 Chg in PP&E -244-355 -342-321 Operating Profit Growth (%) 13.9-23.2 33.6 17.7 Chg in Intangible Assets -56-2 EPS Growth (%) 551.9 -.4 63.7 25.5 Chg in Financial Assets -11 2-1 -1 Accounts Receivable Turnover (x) 5.4 5.2 5.4 5.6 Others 2 1 Inventory Turnover (x) 17.7 18. 18.4 18.7 Cash Flows from Fin Activities -44-455 -27-157 Accounts Payable Turnover (x) 9.2 8.6 8.9 9.1 Chg in Financial Liabilities -7-446 -2-15 ROA (%) 2.5 2.8 4.8 6. Chg in Equity 279 ROE (%) 7.5 6.7 1.2 11.5 Dividends Paid -6-7 -7 ROIC (%) 6.5 7.2 9.9 12.2 Others -19-3 Liability to Equity Ratio (%) 161.1 121.7 11.2 85. Increase (Decrease) in Cash -3-15 91 185 Current Ratio (%) 126.4 139.9 152.9 173.1 Beginning Balance 4 396 291 382 Net Debt to Equity Ratio (%) 62.7 39.8 21.6 4.3 Ending Balance 396 291 382 566 Interest Coverage Ratio (x) 4.1 5.3 9.2 13.5 Source: Company data, estimates 4
APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (117) 4/29/215 Buy 136, 1/29/214 Buy 14, 1/1/214 Buy 164, 7/21/214 Buy 17, 4/29/214 Buy 138, 3/27/214 Buy 13, 7/25/213 Buy 114, (W) 2, 15, 1, 5, Jul 13 Jul 14 Jul 15 Stock Ratings Industry Ratings Buy : Relative performance of 2% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 1% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -1% and 1% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -1% Ratings and Target Price History (Share price ( ), Target price ( ), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within 5
Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo 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. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 15-716 Korea Two International Finance Centre Suites 25-212 8 Finance Street, Central Hong Kong, China 32 Park Avenue 31st Floor New York, NY 122 United States Tel: 82-2-768-326 Tel: 85-2-2845-6332 Tel: 1-212-47-1 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 25 Old Broad St. London EC2N 1HQ United Kingdom Six Battery Road #11-1 Singapore, 4999 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 1-5 Japan Tel: 44-2-7982-8 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 241A, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue Chaoyang District, Beijing 122 China Room 38T31, 38F SWFC 1 Century Avenue Pudong New Area, Shanghai 212 China Suite 213, Saigon Trade Center 37 Ton Duc Thang St, Dist. 1, Ho Chi Minh City, Vietnam Tel: 86-1-6567-9299 Tel: 86-21-513-6392 Tel: 84-8-391-6 Daewoo Investment Advisory (Beijing) Co., Ltd. 241B, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue, Chaoyang District, Beijing 122 China Daewoo Securities (Mongolia) LLC #46, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar 1424 Mongolia PT. Daewoo Securities Indonesia Tel: 86-1-6567-9699 Tel: 976-711-87 Tel: 62-21-515-114 Equity Tower Building Lt.5 Sudirman Central Business District Jl. Jendral Sudirman Kav. 52-53, Jakarta Selatan Indonesia 1219 6