20161020-三星证券-Patience_needed_11页_483kb

Sector Update Summary

Core Content

This document provides an update on the performance and outlook for Samsung Electro-Mechanics (Semco) and LG Innotek in the context of the broader smartphone component supply chain. The analysis is conducted by Jongwook Lee, an analyst at Samsung Securities, and highlights the challenges and opportunities facing both companies amid the aftermath of the Note 7 fiasco.

Main Points

• Market Outlook: The smartphone parts sector is expected to turn around in the next year, but investors should exercise patience before accumulating shares in Semco and LG Innotek due to seasonal slowdowns, revised earnings forecasts, and downstream demand slowness.
• Company Performance: Both companies have been undergoing restructuring to adapt to new business demands, but the process has not yet yielded the expected earnings improvements.
• Share Price Trends: Shares of both companies are near the bottom of their P/B bands, indicating potential for recovery, but the timing and magnitude of this recovery remain uncertain.

Key Information

Samsung Electro-Mechanics (Semco)

• Current Price: KRW47,350
• Target Price: KRW65,000 (37.4% upside)
• Recommendation: BUY
• Earnings Outlook:
  • 3Q16E Operating Profit: KRW16.1b (revised down from KRW31b)
  • 2016E Net Profit: KRW80.9b (down 18.4% from previous forecast)
  • 2017E Net Profit: KRW200.0b (down 7.1% from previous forecast)
• Growth Drivers: Focus on dual-lens camera and MLCC for the Galaxy S7 successor, and China-bound market expansion.
• Financials:
  • Revenue: Expected to remain stable in 2016 and grow slightly in 2017.
  • ROE: Improved from 0.3% to 4.9% by 2017.
  • P/E Ratio: Drops from 328.4 to 50.4 by 2017.
• Restructuring Impact: Restructuring efforts are ongoing and may affect 4Q16 performance.

LG Innotek

• Current Price: KRW77,300
• Target Price: KRW100,000 (29.4% upside)
• Recommendation: HOLD
• Earnings Outlook:
  • 3Q16E Operating Profit: KRW18.7b (revised down from KRW31b)
  • 2016E Net Profit: KRW43.4b (down 62.9% from previous forecast)
  • 2017E Net Profit: KRW294.1b (down 38% from previous forecast)
• Growth Drivers: Dual-lens camera and LED businesses, as well as OLED-related operations (FMM and COF).
• Financials:
  • Revenue: Expected to decrease in 2016 but increase in 2017.
  • ROE: Expected to improve from -1.6% to 9.3% by 2017.
  • P/E Ratio: Drops from 19.2 to 10.9 by 2017.
• Restructuring Impact: Aggressive restructuring is ongoing, but growth is premature due to market conditions and human resource challenges.

Strategic Outlook

• Semco is more attractive than LG Innotek due to:
  • Room for growth
  • Pace of restructuring
  • Position in the China dual-lens camera market
• LG Innotek is still a HOLD due to:
  • Uncertain restructuring outcomes
  • Need for new growth drivers
  • Current earnings momentum has disappointed
• Both companies are expected to benefit from Samsung Electronics' efforts to improve component safety and rationalize supply chains for upcoming Galaxy models.

Summary of Financial Metrics

Conclusion

• Semco remains a BUY due to its growth potential and strategic restructuring.
• LG Innotek is a HOLD as it still faces challenges in turning around its loss-making operations and gaining market traction.
• Investors are advised to monitor the companies' cost-cutting efforts and restructuring progress during the 3Q earnings season.
• The smartphone parts sector is expected to recover in 2017, but short-term patience is required.