Taiwan Information Technology 26 October 2022

LandMark Optoelectronics (3081 TT)

Target price: TWD200.00 (from TWD222.00)

Share price (26 Oct): TWD121.00 | Up/downside: +65.3%

Turnaround confirmed, although weaker than expected

Rick Hsu
 3Q22 results and 4Q22 guidance miss but… (886) 2 8758 6261
[email protected]

 … intact turnaround despite slower margin recovery Elina Lin

(886) 2 8758 6262
 Reaffirming our Buy (1) rating; cutting 12-month TP to TWD200 [email protected]

What’s new: LandMark Opto (LMO) delivered downbeat 3Q22 results and Forecast revisions (%)
4Q22 guidance, mainly due to its slower-than-expected margin recovery, Year to 31 Dec 22E 23E 24E
Revenue change (2.7) (14.0) (15.1)
despite intact top-line trajectory. Nevertheless, our thesis remains that LMO Net profit change (21.1) (30.4) (26.9)
has successfully turned around in terms of bottom-line growth, entering a Core EPS (FD) change (21.1) (30.4) (26.9)
strong earnings cycle, thanks to its 3 demand drivers of telecom, datacom Source: Daiwa forecasts
and consumer firing on all cylinders to drive high growth in 2023E. We
reaffirm our Buy (1) call and suggest investors take advantage of the recent
share-price pullback to accumulate into weakness.

What’s the impact: Results and guidance miss but... LMO reported
3Q22 EPS of TWD1.13, 13%/10% below our/consensus estimates, on
weaker core operations partially offset by FX gains. While 3Q22 opex was
intact, gross margin (GM) missed our estimate by 6.9pp despite intact top-
line turnaround, attributable to unfavourable mix and substrate yield issue.
The lower-margin PD/APD accounted for 33-36% of 3Q22 revenue (20-
25% in 3Q21), dragging down GM, while LMO incurred a one-off loss of 12-month range 96.50-211.50
Market cap (USDbn) 0.34
>TWD10m (c.2pp GM impact) on low-yield substrates used in its epiwafer 3m avg daily turnover (USDm) 13.64
ramp-up for consumer applications. LMO expects 4Q22 revenue to be Shares outstanding (m) 91
similar to that in 2Q22, below our expectation due likely to slower recovery Major shareholder Hwa Sheng Int'l Investment (8.0%)
in its telecom business. This will lead to lower GM, but LMO expects it to
improve QoQ when its substrate vendors cover the loss on the yield issue, Financial summary (TWD)
Year to 31 Dec 22E 23E 24E
with improved mix when consumer applications enter low season.
Revenue (m) 2,318 2,898 3,863
Operating profit (m) 302 745 1,243
… intact turnaround despite lower GM trajectory. We cut our 2022-24E Net profit (m) 299 623 1,027
EPS by 21-30% to reflect the 4Q22 miss and a prolonged turnaround in Core EPS (fully-diluted) 3.268 6.819 11.237
EPS change (%) (11.5) 108.6 64.8
margins. Yet we reaffirm our positive stance on LMO’s sustained recovery Daiwa vs Cons. EPS (%) (14.9) 12.9 19.4
into 2023E, when we expect its 3 business units (BU) of telecom (5G and PER (x) 37.0 17.7 10.8
10GPON), datacom (SiPh diversification) and consumer (smartphone, Dividend yield (%) 2.9 2.0 2.6
DPS 3.5 2.4 3.1
wearable and XR device) to fire on all cylinders for growth. LMO tallied with
PBR (x) 2.6 2.4 2.0
our view as it sees recovery in telecom BU, which would outgrow the rest in EV/EBITDA (x) 12.2 6.8 4.7
2023E, with demand focusing on 10/25G, which are margin accretive. We ROE (%) 7.0 13.9 20.3
believe this will be followed by continued growth of its SiPh business after Source: FactSet, Daiwa forecasts
this year’s recovery after its key customer’s product transition over 2020-
21, thanks to the diversification where another key customer is migrating to
800G in 4Q22 from 400G, which is ASP accretive. As for the consumer BU,
LMO expects 15-20% YoY revenue growth in 2023, when its key customer
expands adoption of LMO’s InP-based wafers in its smartphone models.

What we recommend: We reduce our 12M TP to TWD200 (from TWD222)

based on a lower ROE-adjusted PBR of 3.9x (previous: 4.4x), resulting
from our forecast cuts. Reaffirm Buy (1). Downside risk: margin execution.

How we differ: Our 2022E EPS is 15% below the consensus, as we

believe the street has yet to factor in LMO’s prolonged margin recovery.

See important disclosures, including any required research certifications, beginning on page 6
 LandMark Optoelectronics (3081 TT): 26 October 2022

LMO: quarterly P&L forecasts

TWDm 1Q22 2Q22 3Q22 4Q22E 1Q23E 2Q23E 3Q23E 4Q23E 2021 2022E 2023E 2024E
Revenue 451 601 661 606 600 652 800 846 1,873 2,318 2,898 3,863
COGS 338 405 458 408 400 401 456 462 1,104 1,609 1,719 2,052
Gross profit 113 196 203 198 200 252 343 384 768 709 1,178 1,811
Opex 102 104 105 96 96 99 117 123 356 407 434 568
Operating profit 11 92 97 102 104 153 226 261 412 302 745 1,243
EBITDA 137 211 216 233 237 293 368 404 904 796 1,301 1,821
Pretax profit 25 106 127 104 106 156 230 265 418 361 758 1,258
Income taxes 5 16 24 18 21 39 35 40 80 63 135 231
Net profit 20 90 103 86 85 117 196 226 338 299 623 1,027
EPS (TWD, basic) 0.22 0.98 1.13 0.94 0.93 1.28 2.14 2.47 3.69 3.27 6.82 11.24
EPS (TWD, fully diluted) 0.22 0.98 1.13 0.94 0.93 1.28 2.14 2.47 3.69 3.27 6.82 11.24
Margin
Gross 25% 33% 31% 33% 33% 39% 43% 45% 41% 31% 41% 47%
Operating 2% 15% 15% 17% 17% 23% 28% 31% 22% 13% 26% 32%
EBITDA 30% 35% 33% 38% 40% 45% 46% 48% 48% 34% 45% 47%
Net 4% 15% 16% 14% 14% 18% 25% 27% 18% 13% 22% 27%
Growth (QoQ)
Revenue 30% 33% 10% -8% -1% 9% 23% 6%
Gross profit 38% 74% 4% -2% 1% 26% 36% 12%
Operating profit nm 744% 6% 5% 2% 48% 48% 15%
Net profit nm 352% 15% -17% -2% 38% 67% 15%
EPS (basic) nm 351% 15% -17% -2% 38% 67% 15%
EPS (FD) nm 352% 15% -17% -2% 38% 67% 15%
Growth (YoY)
Revenue -25% 11% 73% 75% 33% 9% 21% 40% -19% 24% 25% 33%
Gross profit -65% -18% 62% 143% 77% 29% 69% 94% -34% -8% 66% 54%
Operating profit -95% -36% 201% nm nm 67% 133% 157% -42% -27% 147% 67%
Net profit -90% -15% 224% nm 327% 31% 90% 162% -43% -12% 109% 65%
EPS (basic) -90% -15% 225% nm 326% 31% 90% 162% -43% -12% 109% 65%
EPS (FD) -90% -15% 224% nm 327% 31% 90% 162% -43% -12% 109% 65%
Source: Company, Daiwa estimates and forecasts

LMO: 3Q22 results and 4Q22 guidance comparison

3Q22 Growth 4Q22E
TWDm Actual Daiwa Variance QoQ YoY Guidance Daiwa (previous)
Revenue 661 651 2% 10% 73% revenue similar to 2Q22 level ~TWD680m
Gross profit 203 245 -17% 4% 62% better than 3Q22 level 41%
Operating profit 97 139 -30% 6% 200%
Pretax profit 127 141 -9% 21% 220%
Net profit 103 118 -13% 15% 224%
Adjusted EPS (TWD) 1.13 1.29 -13% 15% 224%
Margin
Gross 30.7% 37.5% -6.9%
Operating 14.7% 21.3% -6.6%
Net 15.6% 18.1% -2.5%
Revenue mix*
Telecom 35-40% 45%
Datacom 15-20% 28%
Others 40-45% 28%
Source: Company, Daiwa estimates and forecasts
Note: * Telecom includes PON and cellular interconnectivity; Datacom includes SiPh and datacentre connectivity; Others include consumer, industrial and other applications

LMO: revenue mix by application* LMO: PBR trend

X
100%
12 10.8
11 10.4
80% 10
9
8
60% 7 7.6
6 6.5
40% 5 5.5
4 4.8 4.9
3 4.5
20% 2 2.2
1
0%
Dec-15

Nov-18

Dec-20
Sep-19

Aug-22
Aug-17
Oct-16

Oct-21
Apr-19
Mar-17

Mar-22
Feb-20
Jan-18
Jun-18

Jan-23
Jul-15

Jul-20
May-16

May-21
1Q23E
3Q23E
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
3Q19
1Q20
3Q20
1Q21
3Q21
1Q22
3Q22

P/BV Mean Mean + s

Telecom Datacom Others* Mean - s Mean + 2s Mean - 2s

Source: Company, Daiwa estimates and forecasts Source: Company, TEJ, Daiwa forecasts
Note: * Others include consumer, industrial and other applications

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 LandMark Optoelectronics (3081 TT): 26 October 2022

Financial summary
Key assumptions
Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
Wafer shipment ('000) 43 53 48 54 49 63 69 88
Capacity utilization (%) 64 67 56 61 53 62 65 75
Blended ASP (USD) 1,546 1,482 1,449 1,441 1,366 1,234 1,325 1,400

Profit and loss (TWDm)

Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
PON 671 1,044 720 735 564 508 605 773
SiPhotonics 978 977 1,008 442 289 346 501 773
Other Revenue 390 341 409 1,132 1,019 1,464 1,792 2,318
Total Revenue 2,039 2,362 2,136 2,309 1,873 2,318 2,898 3,863
Other income 0 0 0 0 0 0 0 0
COGS (936) (1,086) (1,109) (1,145) (1,104) (1,609) (1,719) (2,052)
SG&A (132) (140) (164) (182) (153) (154) (170) (220)
Other op.expenses (177) (293) (329) (274) (203) (253) (264) (348)
Operating profit 794 842 534 708 412 302 745 1,243
Net-interest inc./(exp.) 11 16 8 4 3 5 13 15
Assoc/forex/extraord./others (13) 21 (3) 2 3 55 0 0
Pre-tax profit 791 880 539 714 418 361 758 1,258
Tax (136) (183) (88) (123) (80) (63) (135) (231)
Min. int./pref. div./others 0 0 0 0 0 0 0 0
Net profit (reported) 656 697 450 591 338 299 623 1,027
Net profit (adjusted) 656 697 450 591 338 299 623 1,027
EPS (reported)(TWD) 7.265 7.716 4.967 6.465 3.694 3.268 6.819 11.237
EPS (adjusted)(TWD) 7.265 7.716 4.967 6.465 3.694 3.268 6.819 11.237
EPS (adjusted fully-diluted)(TWD) 7.238 7.663 4.949 6.465 3.694 3.268 6.819 11.237
DPS (TWD) 8.000 5.000 5.000 4.000 5.000 3.500 2.386 3.137
EBIT 794 842 534 708 412 302 745 1,243
EBITDA 1,070 1,184 928 1,170 904 796 1,301 1,821

Cash flow (TWDm)

Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
Profit before tax 791 880 539 714 418 361 758 1,258
Depreciation and amortisation 276 341 394 462 492 495 557 578
Tax paid (136) (183) (88) (123) (80) (63) (135) (231)
Change in working capital (201) (140) 159 (218) 207 (470) 160 (670)
Other operational CF items 15 165 (102) 182 (15) (0) (0) 0
Cash flow from operations 746 1,063 901 1,017 1,022 323 1,340 934
Capex (319) (655) (1,136) (419) (206) (470) (242) (292)
Net (acquisitions)/disposals 0 0 0 0 0 0 0 0
Other investing CF items (213) 34 (8) (37) (127) 0 0 0
Cash flow from investing (532) (621) (1,144) (456) (333) (470) (242) (292)
Change in debt 0 0 0 0 0 0 0 0
Net share issues/(repurchases) 0 0 0 5 0 0 0 0
Dividends paid (725) (453) (455) (364) (457) (320) (218) (287)
Other financing CF items (3) 16 (9) 6 (8) 0 0 0
Cash flow from financing (728) (437) (463) (353) (465) (320) (218) (287)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash (514) 5 (706) 208 225 (467) 880 356
Free cash flow 427 408 (235) 598 816 (147) 1,098 642
Source: FactSet, Daiwa forecasts

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 LandMark Optoelectronics (3081 TT): 26 October 2022

Financial summary continued …

Balance sheet (TWDm)
Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
Cash & short-term investment 2,043 2,049 1,341 1,547 1,771 1,304 2,184 2,540
Inventory 218 251 193 208 289 369 339 489
Accounts receivable 415 495 430 630 297 777 567 1,227
Other current assets 39 29 21 23 24 35 36 36
Total current assets 2,715 2,824 1,984 2,408 2,381 2,486 3,127 4,292
Fixed assets 1,112 1,561 2,474 2,387 2,123 2,303 2,024 1,766
Goodwill & intangibles 15 15 12 11 6 0 0 0
Other non-current assets 208 50 360 386 471 350 350 350
Total assets 4,050 4,450 4,831 5,191 4,981 5,139 5,500 6,408
Short-term debt 0 0 0 0 0 0 0 0
Accounts payable 83 57 91 111 89 179 99 239
Other current liabilities 242 357 357 408 302 361 395 420
Total current liabilities 325 414 448 519 391 540 494 659
Long-term debt 0 0 0 0 0 0 0 0
Other non-current liabilities 3 3 316 323 318 325 330 330
Total liabilities 329 417 764 842 709 865 824 989
Share capital 906 910 910 914 914 914 914 914
Reserves/R.E./others 2,815 3,123 3,157 3,435 3,359 3,360 3,762 4,505
Shareholders' equity 3,721 4,033 4,066 4,349 4,272 4,273 4,676 5,419
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 4,050 4,450 4,831 5,191 4,981 5,139 5,500 6,408
EV 9,012 9,007 9,715 9,509 9,285 9,751 8,872 8,516
Net debt/(cash) (2,043) (2,049) (1,341) (1,547) (1,771) (1,304) (2,184) (2,540)
BVPS (TWD) 41.240 44.639 44.867 47.597 46.759 46.771 51.178 59.308

Key ratios (%)

Year to 31 Dec 2017 2018 2019 2020 2021 2022E 2023E 2024E
Sales (YoY) (3.4) 15.9 (9.6) 8.1 (18.9) 23.8 25.0 33.3
EBITDA (YoY) (15.1) 10.6 (21.6) 26.2 (22.7) (12.0) 63.4 39.9
Operating profit (YoY) (24.3) 6.2 (36.6) 32.6 (41.8) (26.8) 146.7 67.0
Net profit (YoY) (25.1) 6.3 (35.4) 31.2 (42.9) (11.5) 108.6 64.8
Core EPS (fully-diluted) (YoY) (24.4) 5.9 (35.4) 30.6 (42.9) (11.5) 108.6 64.8
Gross-profit margin 54.1 54.0 48.1 50.4 41.0 30.6 40.7 46.9
EBITDA margin 52.5 50.1 43.4 50.7 48.3 34.4 44.9 47.1
Operating-profit margin 38.9 35.7 25.0 30.7 22.0 13.0 25.7 32.2
Net profit margin 32.2 29.5 21.1 25.6 18.0 12.9 21.5 26.6
ROAE 17.6 18.0 11.1 14.0 7.8 7.0 13.9 20.3
ROAA 16.1 16.4 9.7 11.8 6.6 5.9 11.7 17.2
ROCE 21.3 21.7 13.2 16.8 9.6 7.1 16.6 24.6
ROIC 46.1 36.4 19.0 21.2 12.5 9.1 22.4 37.8
Net debt to equity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Effective tax rate 17.2 20.8 16.4 17.2 19.2 17.4 17.8 18.4
Accounts receivable (days) 59.7 70.3 79.0 83.8 90.4 84.5 84.6 84.7
Current ratio (x) 8.3 6.8 4.4 4.6 6.1 4.6 6.3 6.5
Net interest cover (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net dividend payout 83.5 69.1 65.3 80.8 77.3 94.7 73.0 46.0
Free cash flow yield 3.9 3.7 n.a. 5.4 7.4 n.a. 9.9 5.8
Source: FactSet, Daiwa forecasts

Company profile

Founded in June 1997, LandMark Optoelectronics Corporation (LMO) is a dedicated compound

semiconductor epiwafer supplier for optical communication (OC), with end-applications focusing
primarily on telecom and datacom, including passive optical network (PON), datacentre and cellular
infrastructure, as well as industrial and consumer electronics. LMO is one of the largest pure OC
epiwafer suppliers globally by revenue.

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 LandMark Optoelectronics (3081 TT): 26 October 2022

ESG analysis
ESG risks
Risks Management Analyst comments

LMO’s Board of Directors (BoD) has 7 members with diversified expertise ranging from
industrial, academic, financial, accounting and management. Among its BoD, 3 members are
independent directors, representing 43% of total directors, which is higher than the regulatory
requirement of at least 20%. Although its chairman and president are not the same person,
LMO’s executive management, namely its CSO, CTO and CFO are also directors, which may
Executive/board
2 increase the possibility of agency problems, though we believe its higher percentage of
quality
independent directors could help mitigate this issue.
In addition, LMO formulated “Policy of Risk Management” in October 2020 to enhance the
G
company’s operations and risk management. In the future, LMO plans to include at least one
female on the board when the directors are re-elected, compared with its current all-male board.

In the past 5 years, LMO’s dividend payout ratio has been above 65%. Despite the payout ratio
Capital management 2 decreasing to 65-70% during 2018-19 due to a decrease in earnings from a high level of above
80% over 2015-17, the payout ratio returned to above 75% during 2020-21.
Related party &
1 The company does not engage in any meaningful related-party transactions.
transaction
LMO has established a “Supplier Management Procedure” to shortlist qualified business
partners and evaluates suppliers annually based on its suppliers' environmental protection
procedures as well as health management system. Also, LMO requires its suppliers to sign a
“Letter of Commitment of Supplier for Corporate Social Responsibility” and establish an RBA
Supply chain (Responsible Business Alliance). If its suppliers have a significant impact on society due to their
S 2
management inappropriate conduct relating to labour, human rights and environmental pollution, LMO would
investigate and consider the possibility of terminating the contract.
In 2021, 100% of its raw material and package material suppliers have signed the “Declaration of
Hazardous Substance Free” agreement (23 suppliers in total).

LMO’s water consumption was 53,678 tonnes and 51,037 tonnes in 2020 and 2021,
Water & wastewater respectively, down 5% YoY in 2021 (vs. revenue decline of 19% YoY in 2021). To ensure
E 3
management emitted water fulfils waste water regulations, LMO plans to treat waste water by a waste water
system before it is emitted.
LMO’s total waste (including hazardous and regular business waste) was 129 tonnes and 110
Waste & hazardous tonnes in 2020 and 2021, respectively, down 15% YoY for 2020 and 2021. The company has
E materials 1 obtained permission for a fixed source of pollutant emissions. LMO’s emitted waste, such as
management volatile organic compounds, acidic gas and particulate matters, are be emitted according to
environmental protection laws.
LMO’s GHG emissions (CO2) were 10,656 tonnes and 10,657 tonnes in 2020 and 2021,
respectively, flat YoY in 2021 (vs. revenue decline of 19% YoY in 2021).
E GHG emissions 3
It has some measures in place to reduce carbon emissions and targets to reduce its paper
consumption by 20% annually by setting a limit for access to the use of copy machines.
Note: Management score represents a company's ability to manage/benefit from certain ESG topics. The scores range from 1 to 3, with 1 being the strongest.
Source: Daiwa

5
 LandMark Optoelectronics (3081 TT): 26 October 2022

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 LandMark Optoelectronics (3081 TT): 26 October 2022

Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contai ned in this report shall be at the sole discretion and risk of the user.
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Disclosure of investment ratings

Rating Percentage of total
Buy* 80.62%
Hold** 16.42%
Sell*** 2.96%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2022.
* comprised of Daiwa’s Buy and Outperform ratings.
** comprised of Daiwa’s Hold ratings.
*** comprised of Daiwa’s Underperform and Sell ratings.
Additional information may be available upon request.
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*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of
each transaction etc.

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When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding
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