20160712-三星证券-Tech_OVERWEIGHT__2Q_preview__Time_to_bottom_fish_for_parts_makers__13页_519kb

Sector Update Summary

Core Content

This document provides an analysis of Samsung Electro-Mechanics (Semco) and LG Innotek, focusing on their current stock performance, valuation multiples, and investment outlook. The report is authored by Jongwook Lee, an analyst at Samsung Securities, and dated 2016.7.12.

Main Points

Investment Strategy

• Investors should not adopt a bottom-fishing approach for Semco and Innotek due to continued poor operating results and lack of industry recovery.
• Semco is advised to be held with a BUY rating and a target price of KRW65,000 (upside of 34.4%).
• Innotek is advised to be held with a HOLD rating and a target price of KRW100,000 (upside of 20.2%).

Valuation Trends

• Semco is trading at a 0.8x forward P/B, while Innotek is at 1x forward P/B.
• These valuations are considered low, but the report warns that bottom-fishing based solely on P/B is risky as valuation multiples have trended downward over recent years.
• The report emphasizes the need for clear signs of industry recovery before considering a rally in these stocks.

Industry Conditions

• The recent tech sector rally has been driven by Samsung Electronics' (SEC) improvement in parts competitiveness, which has positively impacted other tech firms like SK Hynix and LG Display, but not Semco and Innotek.
• Semco and Innotek are not involved in the areas benefiting from the rally, such as low-end smartphones, semiconductors, and OLEDs.
• The report suggests that improvement in earnings visibility is a prerequisite for any rally in these stocks.

Key Information

Semco Overview

• Current Price: KRW47,600

• Target Price: KRW65,000

• Market Cap: KRW3.6t/USD3.1b

• Shares (float): 74,693,696

• 52-week high/low: KRW71,500/KRW46,700

• Avg daily trading value (60-day): KRW17.5b/USD15.2m

• Performance (1-year):

  • Semco: -5.4%
  • Kospi: -3.5%

• Earnings Forecasts:

  • 2016E: Net profit of KRW116b, EPS of KRW1,345
  • 2017E: Net profit of KRW215b, EPS of KRW2,497
  • 2016E EPS growth: 833.0% y-y

• Earnings Visibility:

  • Semco's 2Q16 sales are expected to be KRW1.6t, with an operating profit of KRW16b.
  • The report expects the dual-lens camera and panel-level packaging (PLP) businesses to drive earnings improvement in the year.

• Costs and Margins:

  • SG&A expenses are expected to decrease significantly, with a focus on cost-cutting.
  • Operating profit margin is projected to improve from 2.4% to 4.3% in 2017.

• Financial Ratios:

  • P/B: 0.8x
  • P/E: 35.4x (2016E)
  • ROE: 2.4% (2016E)
  • Net debt to equity: 24.1%

Innotek Overview

• Current Price: KRW83,200

• Target Price: KRW100,000

• Market Cap: KRW2.0t/USD1.7b

• Shares (float): 23,667,107 (59.2%)

• 52-week high/low: Not provided

• Earnings Forecasts:

  • 2016E: Net profit of KRW116b, EPS of KRW1,345
  • 2017E: Net profit of KRW215b, EPS of KRW2,497
  • 2016E EPS growth: 833.0% y-y

• Earnings Visibility:

  • The report suggests that Innotek's earnings may have hit a bottom in 2Q16, with potential for a short-term rally based on 3Q16 results.
  • The firm's dual-lens camera business is expected to be a key driver, but the success of the next iPhone is critical for share price movement.

• Costs and Margins:

  • Labor and depreciation costs have fallen significantly, but the firm still needs to cut losses in the LED and touch-panel businesses.
  • Operating profit margin is expected to improve from 2.4% to 4.3% in 2017.

• Financial Ratios:

  • P/B: 1x
  • P/E: 35.4x (2016E)
  • ROE: 2.4% (2016E)
  • Net debt to equity: 24.1%

Key Issues and Outlook

• Semco is expected to improve earnings before Innotek due to its restructuring efforts and the potential of new businesses like dual-lens cameras and PLP.
• Innotek is expected to see earnings improvement in 2Q16, but the report cautions that it may not be enough to trigger a rally without positive sales forecasts for the next iPhone.
• The report also highlights the importance of cost-cutting for both firms, with Semco expected to have more significant cost reductions.
• Valuation multiples for both firms have declined over time, making a P/B-based bottom-fishing strategy less attractive.

Financial Highlights

Summary Financial Data (Semco)

Metric	2015	2016E	2017E	2018E
Revenue (KRWb)	6,176	6,303	6,512	6,762
Net profit (KRWb)	21	116	215	259
EPS (adj) (KRW)	144	1,345	2,497	3,004
Net margin (%)	0.3	1.8	3.3	3.8
P/B (x)	0.9	0.8	0.8	0.8
P/E (adj) (x)	330.1	35.4	19.1	15.8
ROE (%)	0.3	2.4	4.4	5.0

Summary Financial Data (Innotek)

Metric	2015	2016E	2017E	2018E
Revenue (KRWb)	6,176	6,303	6,512	6,762
Net profit (KRWb)	21	116	215	259
EPS (adj) (KRW)	144	1,345	2,497	3,004
Net margin (%)	0.3	1.8	3.3	3.8
P/B (x)	0.9	0.8	0.8	0.8
P/E (adj) (x)	330.1	35.4	19.1	15.8
ROE (%)	0.3	2.4	4.4	5.0

Conclusion

• The report emphasizes patience in investing in Semco and Innotek, as they are still in the process of restructuring and the success of their new businesses is uncertain.
• Semco is expected to outperform Innotek in terms of earnings improvement due to its more aggressive restructuring and new business growth.
• Valuation multiples are low, but investors should not assume that low valuations alone are a guarantee for stock performance.
• The broader tech sector has seen improvement, but it is not directly related to the performance of Semco and Innotek.
• Clear signs of industry recovery are necessary for these stocks to rally.