[Edaily Reporter Shin Ha-yeon ] On the 28th, IBK Investment & Securities lowered its target price for LG Innotek(011070)by 34.1%, from 850,000 won to 560,000 won, citing a sharper-than-expected deterioration in profitability in the third quarter due to exchange rate fluctuations. However, the firm maintained its “Buy” rating, citing the potential for earnings recovery starting in the fourth quarter and growth in the package substrate business.

Kim Un-ho, an analyst at IBK Investment & Securities, stated in a report released that day, “Company-wide operating profit is still significantly affected by the volatility in mobile component earnings,” adding, “It will take some time before the much-anticipated package solutions division gains full momentum.”

LG Innotek’s third-quarter revenue totaled 6.3671 trillion won, a 15.2% increase from the previous quarter. However, operating profit fell 61.4% year-over-year to 94.8 billion won, falling 62.6% short of the previous operating profit estimate of 253.4 billion won.

Analyst Kim explained, “This is believed to be due to the impact of the won-dollar exchange rate,” adding, “While all business divisions were affected by the exchange rate, the impact on the Optical Solutions division was the greatest.”

The Optical Solutions division’s third-quarter revenue was 5.4042 trillion won, a 19.6% increase from the previous quarter. While revenue growth was driven by new product launches and robust shipment volumes, operating profit fell 67.2% to 55.9 billion won.

Analyst Kim pointed out the reason behind the deterioration in the Optical Solutions division’s profitability, stating, “This was due to a significant difference in exchange rates between the time components were purchased and the time revenue was recognized.”

The Packaging Solutions division also underperformed. Third-quarter revenue was 481.8 billion won, down 3.3% from the previous quarter, and operating profit fell 42.9% to 33.3 billion won. While revenue from flip-chip ball grid array (FC-BGA) components remained at the previous quarter’s level, profitability did not improve, and revenue from high-margin display components also declined. Operating profit for the Mobility Solutions division fell 66.9% to 5.6 billion won.

However, the company expects profitability to recover somewhat in the fourth quarter. IBK Investment & Securities forecasts fourth-quarter revenue at 6.718 trillion won, a 5.5% increase from the previous quarter. Operating profit is projected to nearly double to 189.4 billion won.

Analyst Kim stated, “We did not factor in a deterioration in profitability caused by sharp fluctuations in the won-dollar exchange rate,” adding, “Although it will not reach previous years’ levels, we expect profitability to recover slightly.”

The firm projected that the Optical Solutions division would see increased volume and a recovery in operating profit margins, while the Package Solutions division is expected to benefit from expanded FC-BGA volume, contributing to improved profitability. Similarly, the Mobility Solutions division is expected to see a significant increase in operating profit, assuming exchange rates stabilize.

However, the business structure centered on mobile components and weaker-than-in-the-past seasonality were cited as concerns. Accordingly, IBK Investment & Securities revised its full-year revenue forecast for this year down by 6.6% from the previous estimate to 24.1471 trillion won, and lowered its operating profit forecast by 29.9% to 825.2 billion won.

Analyst Kim stated, “Volatility in the won-dollar exchange rate has already been factored in, and we anticipate strong earnings starting in the fourth quarter.” He added, “We expect the Package Solutions division to see improved profitability through a better product mix driven by new customers, while the Mobility Solutions division is already showing tangible improvements in profitability due to an optimized product mix.”

He added, “It is positive that profit volatility is easing as seasonality subsides, that the direction of revenue growth is shifting from mobile to AI, and that the company is expected to establish a foothold in the supply-constrained packaged substrate market.”