Malaysian Subsidiary to Drive Growth
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Initiate coverage with BUY for a target price of KRW 50,000
We initiate our coverage of Iljin Materials with a BUY rating and a target price of KRW50,000. Our target price is derived by applying a 12-month forward PER of 29x, the average multiple of 2018-2019 when the growth potential of EV battery elecfoil was confirmed. With threat of new entrants into the EV battery elecfoil market, concerns are rising over intensifying competition. However, high specifications of EV battery elecfoil have tightened the supply of thin elecfoil. We thus need to focus on strengthening market presence and growth potential of the top-tiers rather than worrying over market competition.
Malaysian subsidiary to drive growth
Since its foundation in 1987, Iljin Materials has focused on manufacturing elecfoil based on its global-level copper foil technology. It manufactures high value-added ultra-thin elecfoil (6-10 micron). Growth of EV battery-related sales increased from 41% in 2015 to 74% in 2019.
The company’s future growth driver is its Malaysian subsidiary, IMM Tech. Starting with a production capacity of 10,000 tons in 2019, the plant is expected to expand capacity to 100,000 tons going forward. Funds for the investment have already been secured: issuance of perpetual convertible bonds worth KRW600bn (treated as equity) via a domestic PEF. The first round of issuance worth KRW300bn was completed in 2019. The second issuance will be planned in step with the future investment schedule.
2020 OP forecast at KRW76.9bn (+64.1% YoY), room for further investment
For 2020, we project sales at KRW657.6bn (+19.5% YoY)and operating profit at KRW76.9bn (+64.1% YoY). Earnings improvement should pick up as the Malaysian plant (completed in 2019) goes into full operation from 2H20. The plant’s production capacity is forecast to increase from 10,000 tons at end-2019 to 20,000 tons in 1H20, with 10,000-15,000 tons to be added annually. Production capacity of the domestic plant currently stands at around 16,000 tons (based on I2B). With net cash holdings of KRW341.8bn as of end-2019, the company should be able to make investment decision flexibly in response to market conditions.