LG Innotek's Cheongju factory, which produces the main PCBs, has plummeted to 51% last year. This is far lower than the 80% of the previous years. The pressure on the Substrate Material Segment's profitability is expected to increase further.
According to the LG Innotek business report on the 2nd, the Cheongju plant's utilization rate was 51%. It is much lower than in 2016 (78.5%) and 2017 (77.1%). The Cheongju factory mainly produces HDI (High-Density Interconnect) for smartphones.
The decline in capacity utilization seems to be due to slowing sales of smartphones from HDI customers, Apple and LG Electronics. Apple lowered its recent quarter revenue guidance due to sluggish new iPhone sales in China. According to research firm Strategy Analytics, LG Electronics' market share in domestic and North American markets was reduced last year. The major parts production of the Cheongju plant of LG Innotek, whose key customers are the two companies, could not escape the influence.
It has also been suggested that HDI is causing a decline in the substrate material division's profit. "In the fourth quarter of 2018, the substrate material division suffered a loss in profitability due to a deficit in HDI products," said Park Hyung-Woo, a researcher at Shinhan Financial Investment Corporation. Other than HDI, the substrate material segment's products include photomask, tape substrate, and semiconductor substrate package. These are high-value products produced at the Gumi factory. Last year's utilization rate was 87.3% for the photomask, 97.3% for the tape substrate, and 90.5% for the semiconductor package. The outlook for these products is bright from the standpoint of the security market.
Kim Ji-San, a researcher at Kiwoom Securities, defined HDI and LED as "limited businesses" and expressed the expectation that, "If bold business decisions are made to increase the efficiency of HDI and LED business under the new CEO system, it will become an important catalyst for corporate value improvement." LED is also a division that is recording losses.
In its recent 2018 sales report, LG Innotek said, "For the low-margin business, high-level innovation will be implemented to upgrade the business structure." This statement is stronger than the statements made in 2016 and 2017 that said, "we will strengthen profitability-centered internal management and continue to discover and foster prospective new businesses." Last year, the substrate material segment posted 1.159 trillion won, 14.5% of total sales (7.982 trillion won), and operating profit of 92.0 billion won.
Meanwhile, an LG Innotek official answered, "Nothing can be officially disclosed about customers as a component company, except for the content released on the business report for a specific business site" when asked about the Cheongju Plant.