SEOUL, KOREA - Why LGE’s smartphone supply chain merits attention: We recommend paying attention to LG Electronics’ (LGE) smartphone component vendors that have been relatively sidelined by market participants.We have three reasons for our recommendation. 1) LGE’s smartphone supply chain should directly benefit from the handset maker’s rising competitiveness. 2) The benefits should be significant given only a few suppliers. 3) Component vendors for LGE’s smartphones have lower PE than those for Samsung Electronics (SEC) and look relatively undervalued.
- Three factors that trigger a revival for LGE handsets: We believe the revival for LGE handsets will be driven by 1) their structural strengths, 2) stable growth of the smartphone market and 3) the collapse of second-tier handset makers. From 1Q13 earnings, we found evidence of LGE’s handsets regaining an edge. Considering a strong chance that new iPhone models slated for a release in 2H13 will likely post sluggish sales, we believe LGE's handsets recovery is certain.
- Strong correlation between LGE’s smartphone shipments and vendors’ share prices: The correlation coefficient between LGE’s smartphone shipments and handset parts makers’ share prices since 2009 is high at 0.80. That means LGE smartphone suppliers’ shares climbed when LGE’s smartphone shipments increased. With a turnaround by LGE’s mobile communication (MC) division in 2H12, the weighting of LGE-bound sales at major vendors increased significantly. Accordingly, the share price correlation between LGE and suppliers began to tighten from 2012.
- With few LGE suppliers, benefits are concentrated: While the number of parts suppliers has gradually increased for SEC along with steadily mounting smartphone shipments, the number is very limited at LGE. Although LGE’s handset shipments turned upward YoY from 4Q12, related parts makers have not been fully analyzed. In terms of share prices, handset parts stocks rose 23% YTD in 2013 and outperformed the Kosdaq by 9%p. Since the upswing has been limited to
SEC suppliers, we believe it is time to draw our attention to LGE’s supply chain.
- Our favorites are LG Innotek, Newflex and Amotech: Among suppliers for LGE handsets, companies that make antenna and flexible printed circuit boards (FPCBs) look promising as beneficiaries of short supply. We recommend LG Innotek (camera modules, touch-panels), Newflex Technology (Newflex, FPCBs) and Amotech (near-field communication or NFC antenna, common-mode filters) as our top picks. We also like EMW (main antenna, NFC antenna), DK UIL (UIL, subsidiary materials and accessories for handsets) and InnoChips Technology (InnoChips, electro-static discharge (ESD) and electro-magnetic interference (EMI) filters).
*Source: Korea Investment & Securities Co.
