The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. — Ed.
Raise target price 25% to KRW500,000
We maintain BUY on LG Innotek and raise our TP by 25% from KRW400,000 to KRW500,000 (12.2x 2022 P/E). We see the company playing a key role within self-driving vehicle and metaverse hardware supply chains as well as adding more Big Tech companies (e.g., Microsoft, Google, Meta) to its client base, which already includes Apple. As such, we revise up 2022E/2023E/2024E NP (attributable to controlling interests) by 2%/14%/15%. We view LG Innotek as the only company with both optical technologies (e.g., lidars, radars, cameras) and communications technologies (V2X systems) essential for self-driving vehicles and metaverse hardware.
Automotive Components to turn to black in 2H22
We see earnings improving across the board, with 2022 revenue estimated at KRW15.2tn (+8% YoY) and OP at KRW1.4tn (+12% YoY). Automotive Components (KRW10tn order backlog) should see an earnings turnaround in 2H22 thanks to the completed purge of low-margin orders and a projected annual avg. order intake of KRW3tn. Substrates should enjoy top-line growth and margin improvements amid the semiconductor shortage, which is likely to continue for three years. Optic Solutions should see increases in both ASP and market share thanks to camera upgrades for the new iPhone. In particular, Substrates & Materials OP should double, from KRW300.0bn in 2021 to KRW600.0bn in 2024.
Largest beneficiary of self-driving vehicles
The growth potential of Automotive Components should be larger than we initially expected. LG Innotek offers an array of automotive components that seem tailored for self-driving vehicle parts/solutions. It is also likely to expand its client base, which already includes 20 global automakers; there is good potential for the company to win orders from Intel subsidiary Mobileye, which is likely to launch a self-driving system project to raise capital following its IPO this summer. We believe LG Innotek stock (8.6x 2022E P/E) has plenty of upside, as its current price does not seem to reflect the value of future growth businesses.