[Click eStock] "Yeonwoo, Prolonged Front-end Demand Slump... Target Price Down 9%"

KB Securities Report

[Asia Economy Reporter Minji Lee] KB Securities maintained a buy rating on Yeonwoo on the 26th and set a target price of 30,000 KRW, down 9% from the previous target.

In the first quarter, Yeonwoo recorded sales of 67.5 billion KRW and operating profit of 2.9 billion KRW, down 5% and 55% respectively compared to the same period last year. While sales met market expectations, operating profit fell short by 32%. Shin-ae Park, a researcher at KB Securities, explained, “Operating profit margin decreased by 4.8 percentage points to 4.3% due to a decline in sales, lower factory utilization rates, and deferred performance bonuses.”

Domestic sales amounted to 64.7 billion KRW with an operating profit of 2.5 billion KRW, down 7% and 63% year-on-year. Domestic sales dropped 22% to 32.3 billion KRW, mainly due to sales declines of 63% and 8% from the largest clients, Company L and Company A, respectively. Export sales grew 13% to 32.4 billion KRW. Sales in the United States showed a solid growth of 14%, and European sales also grew significantly by 108%, supported by a low base effect. Chinese sales increased by 38%, improving to a breakeven level.

This year, consolidated sales are expected to reach 287.9 billion KRW, with operating profit at 23.9 billion KRW. Sales are projected to increase by 0.3%, while operating profit is expected to decline by 20% over the same period. Domestic sales are forecasted to decrease by 11%. Due to the Chinese government’s stringent COVID-19 lockdown policies, front-end demand has contracted, causing major clients’ sales to China to decline from the first quarter, and this impact is expected to continue into the third quarter.

Export sales are predicted to grow steadily by 13% year-on-year. While the United States continues stable growth, Europe is also expected to expand its sales contribution, benefiting from changes in its business operations.

Researcher Park stated, “As the downturn in the front-end market is expected to last longer than anticipated, we have lowered our operating profit estimates for 2023 and 2024 by 4%, resulting in a reduced target price. However, risks related to the Chinese lockdown are expected to ease in the second half of the year, leading to a ‘low in the first half, high in the second half’ earnings trend.”