Inventories at LG Innotek, the electronic components affiliate of LG Group, swelled by more than 1 trillion won in the first half from a year earlier to near 2.5 trillion won. In particular, finished products and goods secured for sale jumped 123.8%, accounting for 88.7% of the total increase. A sharp rise in product and goods inventories is usually seen as a sign of deteriorating management, indicating weak sales or a working capital burden. But at business-to-business (B2B) companies like LG Innotek, which supply parts in line with customer production plans, it can be interpreted differently. Because they prepare shipment volumes in advance according to customers' demand outlooks and production schedules, it is also viewed as a leading indicator of performance improvement.
Apple accounted for 80.3% of LG Innotek's total sales in the first half. Of total sales of 11.0621 trillion won, 8.8882 trillion won came from Apple. It is analyzed that inventories surged as the company prepared volumes in advance ahead of Apple's new product supply in the second half.
According to the Financial Supervisory Service's electronic disclosure system on the 19th, LG Innotek's inventories at the end of the first half on a consolidation basis totaled 2.486 trillion won. That was up 70.2% from 1.4605 trillion won a year earlier, an increase of about 1.0256 trillion won in amount. During the same period, first-half sales rose 24.1% from 8.9174 trillion won to 11.0621 trillion won. The book value of inventories grew at a much faster pace than sales.
Most of the increase came from "products and goods." This item jumped 123.8% from 734.6 billion won to 1.6444 trillion won. The increase in product and goods inventories over the year was 909.8 billion won, accounting for 88.7% of the total inventory increase. The share of products and goods in total inventories also rose by 15.8 percentage points (P), from 50.3% to 66.1%. On a relative basis using last year's 50.3% share as the benchmark, the products and goods share itself expanded by 31.4%.
In addition, work in progress during the same period increased 17.7%, from 314.6 billion won to 370.4 billion won, and materials and supplies to be投入 into production rose 17.1%, from 370.2 billion won to 433.5 billion won. Goods still in transit fell 7.9%, from 41.0 billion won to 37.8 billion won. The structure shows a concentrated increase in assets at stages closer to actual delivery than raw materials or in-process volumes. A LG Innotek official said, "As we preemptively stockpiled products and raw materials to respond to growing customer demand in businesses such as optics and packages, inventories increased."
In the first half, optical solutions inventories were 1.9426 trillion won, accounting for 78.1% of the total. That was 90.3% higher than 1.0210 trillion won at the end of June last year. Package solutions inventories also increased 30.5% during the same period, from 184.3 billion won to 240.5 billion won. It is interpreted that the expansion of the package solutions business alongside rising artificial intelligence (AI) demand also partly affected the inventory increase.
◇ Inventories that used to build in the third quarter expanded from the second quarter this year
The market is focusing on the fact that the timing when LG Innotek began to increase inventories has shifted from previous years. LG Innotek has shown a "weak first half, strong second half" pattern in which results grow in the second half when Apple's new product supply is concentrated, and inventories likewise surged around the third quarter in line with this.
Last year, inventories that were 1.526 trillion won at the end of the first quarter fell to 1.4605 trillion won in the second quarter. They then jumped 62.0% to 2.3657 trillion won in the third quarter before dropping to 1.7888 trillion won at year-end. Ahead of second-half new product supply, holdings increased and then decreased as shipments progressed.
This year, that pattern moved forward. Inventories at the end of the first quarter reached 2.2933 trillion won, up 28.2% from the end of last year, and increased a further 8.4% in the second quarter.
Kim Un-ho, an analyst at IBK Securities, said in a recent report, "We expect seasonality to weaken due to changes in production strategies at major parts customers." Kim analyzed that second-quarter optical solutions sales far exceeded previous forecasts and that fixed costs for new product production also increased.
Production indicators showed the same trend. In the first half, camera module production reached 241,743,000 units, 26.2% more than 191,601,000 units a year earlier. The average utilization rate of production facilities rose by 9.2 percentage points, from 76.0% to 85.2%. Optical solutions sales also increased 26.9%, from 7.1911 trillion won to 9.1285 trillion won.
◇ Smartphone demand faces headwinds; soaring memory prices are a variable
While expectations for earnings growth are rising as LG Innotek builds up inventories earlier than in previous years, the decline in smartphone demand due to "chipflation" (chip + inflation) is cited as a variable. As demand for memory used in AI data centers has surged, supplies of DRAM and NAND for smartphones have tightened. As memory prices rose, smartphone manufacturing costs also increased, leading to higher finished goods prices and weaker demand.
According to market research firm Omdia, global smartphone shipments in the second quarter were 272 million units, down 6% from a year earlier. Omdia analyzed that as high memory prices push up component expenses, manufacturers are adjusting product prices, lineups and distribution strategies.
However, the premium smartphone market where Apple has strengths is relatively resilient. Both Omdia and Counterpoint Research put Apple's global smartphone shipment share at 20% in the second quarter. The fact that Apple is maintaining a high share even as the overall market contracts is cited as a positive factor for LG Innotek's results.
However, a 70.2% increase in inventories does not mean shipment volumes rose by the same magnitude. The average selling price (ASP) of camera modules in the first half rose 4.5% from last year's annual average, and the price of image sensors, a key material, also increased 4.1% on the same basis. That is because changes in product specifications and component unit prices are reflected in the inventory book value.
An industry official said, "B2C corporations produce products by forecasting final consumer demand, but B2B component makers like LG Innotek prepare the necessary volumes after discussing production plans and expected demand with customers in advance," adding, "That is why it is difficult to interpret an increase in inventories alone as weak sales or deteriorating demand."
A market research firm official said, "If sales of Apple's new products proceed as expected, the product inventories secured by LG Innotek could quickly convert into second-half sales."