[Click eStock] "LX Semicon, Stock Price Drops Due to Peak-Out Logic... Target Price Up"

[Asia Economy Reporter Myunghwan Lee] Hana Financial Investment announced on the 27th that it maintains a buy rating on LX Semicon and raises the target price from the previous 170,000 KRW to 204,000 KRW, citing undervaluation due to concerns over peak-out.

LX Semicon's sales in the first quarter of this year were 585.1 billion KRW, and operating profit was 127.9 billion KRW. Both increased by 44% and 116% respectively compared to the same period last year, exceeding market expectations. The initial market forecast for operating profit was 95.6 billion KRW.

Sales in the TV segment, which accounts for 37% of total sales, increased by 37% year-on-year and 22% quarter-on-quarter. Despite demand slowdown, the semiconductor supply shortage reduced the supply of Display Driver ICs (DDI), leading to an increase in average selling price (ASP), and strong demand in China contributed to sales growth. Sales in the Organic Light Emitting Diode (OLED) smartphone segment decreased by 8% quarter-on-quarter as the effect of the new iPhone launch faded. However, by exclusively supplying Apple’s OLED DDI to LG Display and BOE, sales increased by 16% year-on-year due to increased panel shipments from both companies.

Despite the first quarter earnings surprise, the stock price declined due to peak-out concerns. It is explained that during the reopening process, the decline in DDI demand caused by weakening TV and PC demand and prolonged semiconductor supply shortages increased cost burdens, raising concerns that both sales and operating profit margins may have reached their current peak. However, the demand decline rate in the TV and PC markets remains in the single digits, maintaining a market size larger than before the COVID-19 pandemic. In the case of DDI, the semiconductor supply shortage offsets the demand decline, keeping prices stable.

Hana Financial Investment forecasts the company’s second quarter sales to increase by 31% year-on-year to 586.3 billion KRW, and operating profit to increase by 17% year-on-year to 111.9 billion KRW. Operating profit margin is expected to decrease by 2.8 percentage points from the previous quarter to 19.1%. It is noted that sales growth year-on-year is expected due to higher price levels and increased market share in the high-end DDI market. However, due to the mobile off-season and a decrease in the proportion of high-end sales, quarter-on-quarter sales decline and operating profit margin drop are inevitable.

Hyunsoo Kim, a researcher at Hana Financial Investment, diagnosed, "Amid the huge trend of reopening, display component companies are likely to remain trapped in a value trap for some time due to peak-out logic on their earnings, meaning their stock prices will continue to be undervalued."