Third-quarter operating profit seen halving; target price cut 59%... Can LG Innotek rebound?

[Financial News] Hana Securities lowered its target price for LG Innotek by 59.2%, from 1.3 million won to 530,000 won, forecasting that the company’s third- and fourth-quarter results would fall short of market expectations. Concerns over a decline in the won-dollar exchange rate and slowing smartphone demand weighed on the outlook, but the recent share-price decline appears excessive given the growth potential of its semiconductor package substrate business, the firm said. It maintained its Buy rating.
Kim Min-kyung, a researcher at Hana Securities, said on the 23rd, “Earnings volatility stemming from exchange-rate and mobile-demand pressures is unavoidable, but we believe much of it has already been reflected in the current share price.” She assessed that “this is an oversold period when investors should refocus on the value of the substrate business over the medium to long term, rather than on short-term concerns about mobile.”
Hana Securities forecast third- and fourth-quarter revenue of 5.9494 trillion won and operating profit of 90.7 billion won for LG Innotek. That would represent an 11% increase in revenue but a 56% decline in operating profit from a year earlier. Compared with the previous quarter, operating profit is expected to fall 63%, leaving an operating margin of just 1.5%.
The decline in the exchange rate was cited as a major cause of the weak results. The analysis said that, because of the time lag between purchasing raw materials and using them in production, compounded by inventory effects, the resulting deterioration in profitability was greater than expected.
Concerns are also growing that higher smartphone component prices could slow demand. Rising component costs could increase pressure to raise smartphone retail prices, weighing on consumer demand. However, Hana Securities viewed it as positive that the company’s major customer has a strong foothold in the premium smartphone market and enjoys high customer loyalty.
Meanwhile, the semiconductor package substrate business is drawing attention as a new growth driver. With supply shortages continuing for Flip Chip Ball Grid Array (FC-BGA) substrates used in high-performance semiconductors, LG Innotek is reportedly nearing the completion of discussions with multiple global big tech companies on expanding production facilities and supply.
“Production capacity is being lost as substrates become larger and more multilayered to meet the rising performance requirements of AI accelerators and server central processing units (CPUs),” Kim said. “Supply shortages are expected to persist for a long time, even with new capacity additions.”
She particularly noted that moves to raise substrate prices are spreading from products for high-performance servers to relatively lower-spec products such as those for PCs. Mass production of some products at the new facilities is expected to begin next year.
Accordingly, the Package Solution division’s contribution to overall operating profit is projected to rise to 29% next year and 39% in 2028. The analysis said that as the substrate business accounts for a larger share, changes in smartphone demand will have less impact on the company’s overall results.
However, Hana Securities cut its operating profit forecast for next year by 11% to reflect uncertainty about global smartphone demand. LG Innotek’s share price has fallen 21% over the past month, while its projected price-to-earnings ratio (PER) for next year stands at 11.5 times, below the five-year average of 12.7 times.
Kim said, “As the Package Solution division’s contribution to profit is expected to grow rapidly in 2027–2028, the company’s overall earnings sensitivity to changes in mobile demand is also expected to decline,” pointing to the possibility of a medium- to long-term reassessment of the company’s value.
[email protected] Bae Han-geul Reporter