LG Innotek, Samsung Electro-Mechanics mixed on different earnings outlook

Samsung Electro-Mechanics Co. headquarters in Suwon [Courtesy of Samsung Electro-Mechanics]

Stocks of LG Innotek Co. and Samsung Electro-Mechanics Co., South Korea’s two major electronic materials and parts makers, are mixed despite the fact that they both reported poor first-quarter performances amid the sluggish global economy and weak demand for smartphones and information technology (IT) devices.

According to the Korea Exchange on Thursday, shares of LG Innotek rose 3.64 percent over the past month while those of Samsung Electro-Mechanics fell 11.41 percent.

Institutional investors also net purchased 92.1 billion won ($69.2 million) worth of LG Innotek shares even though they net sold 1.76 trillion won worth of shares in the entire Korean stock markets.

Institutions also offloaded 136.8 billion won in Samsung Electro-Mechanics shares during the same period.

The two companies reported poor first-quarter earnings due to sluggish demand for smartphones and IT products amid the global economic downturn.

LG Innotek raised 4.37 trillion won in sales in the first quarter, up 10.7 percent from a year ago, but its operating profit fell 60.4 percent to 145.3 billion won to remain in the 100 billion won range following the fourth quarter of last year.

Samsung Electro-Mechanics posted 2.22 trillion won in first-quarter sales, down 22.7 percent from the same period last year. Its operating profit also plummeted 65.9 percent to 140.1 billion won.

Institutions are continuing their buying spree of LG Innotek shares despite the poor performance as its earnings are expected to rebound in the second half of this year, according to sources from the financial investment industry.

LG Innotek’s first-quarter earnings fell as sales of iPhone 14 manufactured by its largest customer Apple Inc. released in the second half of last year were lower than expected.

Apple was unable to enjoy the usual strong year-end demand for smartphones due to disruptions in iPhone production led by China’s Covid-19 restrictions and worker protests at its supplier Foxconn’s factory in central China.

The Foxconn factory resumed its operations earlier this year, but the delayed demand for its smartphones fell short of expectations.

LG Innotek Co. headquarters in Seoul [Courtesy of LG Innotek]

LG Innotek’s earnings, however, are expected to rebound in the second half following the launch of the iPhone 15 after reaching the low end in the second quarter as Apple’s new models in the second half of the year are expected to feature different form factors from its previous models.

There are rising hopes that the demand for iPhone 12 replacement and the delayed demand for the iPhone 14 will increase.

In addition, LG Innotek plans to exclusively supply its folded zoom camera modules for the iPhone 15.

The average selling price (ASP) of the iPhone is expected to increase as Apple plans to apply 48 million pixels to general models.

Institutions, however, are relatively not attracted to Samsung Electro-Mechanics shares despite the fact that its first-quarter operating profit was 10.5 percent higher than the market consensus of 126.8 billion won.

They are wary of the gloomy earnings outlook of Samsung Electro-Mechanics.

According to financial market tracker FnGuide Inc., Samsung Electro-Mechanics’ operating profit for the second quarter is projected at 189.3 billion won, down 47.43 percent from a year earlier.

There are also concerns that Samsung Electro-Mechanics’ earnings growth will be limited despite the launch of new models by Chinese companies as the recovery of smartphone demand in China is being delayed.

“The performance of its optics & communication solutions division will be affected by the weak demand for smartphones due to the off-season in the second quarter,” said Choi Bo-young, an analyst at Kyobo Securities Co. “The performance of the package solution division will also be affected by the sluggish sales of PCs and other sets due to the overall industry downturn.”