lotte-data-communication:-set-for-a-rebound-in-2h22
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The authors are analysts of Shinhan Investment Corp. They can be reached at snowKH@shinhan.com and wonyong.sim@shinhan.com, respectively. — Ed.

Stronger 2H vs. 1H: Earnings to rebound from 2Q bottom

Lotte Data Communication recorded operating profit of KRW2.6bn (-78% YoY)for 2Q22, falling short of our estimate of KRW6.3bn. Sluggish earnings were attributable to SG&A hikes and weak performance of its subsidiaries. SG&A expenses are estimated at KRW16.5bn (+82% YoY) due to increases in labor costs and other expenses. Combined operating loss of subsidiaries JoongAng Control and Caliverse likely came to around KRW3bn.

In 2H22, the company should see a rise in order intake from group affiliates as well as improvements in subsidiary earnings. A turnaround in earnings can be expected given increasing new orders for the electric vehicle (EV) charging station business. We forecast operating profit to jump from KRW7.7bnin 1H to KRW17.2bn in 2H.

2022 outlook: Order intake increase based on technological prowess, subsidiary earnings growth

Investments in IT services will grow in the wake of macro impacts and raw material price hikes seen in 2022, with emphasis placed on the stability and efficiency of the industry value chain. Full-year sales from the system integration (SI) business is projected to climb 7% YoY to KRW828.4bn, backed by increasing order intake in 2H.

The paradigm shift to the fourth industrial revolution continues to drive demand for cloud computing and big data. Advanced technology is needed to secure market foothold in the SI industry. The rising portion of sales from data centers is particularly noteworthy. Lotte Data Communication generated 45% of sales from non-captive clients in 2021, far higher than the 31% average of domestic listed peers. Order intake is expected to increase further in the mid-to-long term based on the company’s solid track record in public and private projects.

We also find the growth story intact for new businesses. EV charging station, metaverse, and other new businesses stand to enjoy operational synergy with group affiliates, laying the foundation for further growth. We need to keep an eye out for earnings growth from new businesses.

Retain BUY for a target price of KRW41,000

Our target price is kept unchanged at KRW41,000, based on 2023F EPS of KRW2,558 and a target PER of 16.3x (5% premium to the past average). We retain our BUY rating on Lotte Data Communication with new businesses (metaverse, infrastructure for self-driving cars) set to drive ample growth momentum in the mid-to-long term.

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