Innox Advanced Materials: Excessive Concerns Create Buying

The author is an analyst of Shinhan Investment Corp. He can be reached at [email protected] — Ed.


2Q22 Preview: Earnings on a solid growth trajectory

We now expect Innox Advanced Materials to post sales of KRW135.8bn (+25.2% YoY) and operating profit of KRW31.9bn (+60.3% YoY, operating margin of 23.5%) for 2Q22. Adding to steady earnings from the INNOLED TV business, solid growth of the SMARTFLEX business likely continued in 2Q22 alongside rising shipments of the major client’s foldable smartphones.

2H22 outlook: Decent earnings despite weak client demand

The company’s main businesses (INNOLED, INNOFLEX, SMARTFLEX, and INNOSEM) supply advanced materials to the manufacturers of intermediate goods for semiconductors, smartphones, OLED panels and other electronics. For that reason, the recent downward revision of shipment forecasts for smartphones, TVs and home appliances in reflection of high inflation caused extreme short-term correction of Innox Advanced Materials shares. However, we believe the company’s earnings will continue on a steady uptrend, backed by strong seasonal demand in 3Q22, market share gains for existing products, and new foldable smartphone releases by client companies. Operating margin should remain stable thanks to favorable forex rates.

Innox Advanced Materials is expected to launch new materials targeting niche markets in 2023 and expand its clientele for INNOSEM. The INNOLED TV business, which recently recorded a notable increase in sales share, should continue to serve as the cash cow with client companies enjoying brisk sales of OLED TVs.

Retain BUY for a revised down target of KRW68,000

Full-year earnings are expected to once again reach new historical highs in 2022 at sales of KRW525.1bn (+7.8% YoY) and operating profit of KRW122.8bn (+26.9% YoY). Our target price, however, is adjusted downward to KRW68,000 with the target PER lowered to 13x from 15x in reflection of broad stock market correction.

In order to meet rising demand from clients, Innox Advanced Materials is currently building a new production line for ramp-up in 1Q23. The expansion of capacity shows the company’s confidence in new product releases and vendor share gains. Despite forecasts for high operating margins backed by product portfolio diversification, Innox Advanced Materials shares remain extremely undervalued vs. peers at a 2022F PER of 6.6x. We believe concerns are overblown and recommend using the share price correction as an opportunity to accumulate shares at cheap valuations.