To Create EV Parts JV with Magna International
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
Portion of VS business (EV parts) to be spun off to create JV with Magna
LG Electronics, on December 23, disclosed plans to spin off a portion of EV parts operations from its VS (vehicle component solutions) business to create a joint venture (JV) with Magna International. Magna will hold a 49% stake in the EV parts JV, tentatively named LG Magna e-Powertrain. The announcement came after the news that a North American IT giant is reportedly moving forward on development of a self-driving car. As a component development partner of the North American IT company, Magna could help to open doors for LG Electronics to potentially supply vehicle parts to the client. Teaming up with Magna is also likely to help expand the client base for vehicle components to European automakers.
VS business on a recovery track and set to enjoy synergy with Magna
Combined sales from the remaining VS business after the spin-off and the EV parts JV with Magna are forecast at KRW6.85tr (+23% YoY) for 2021.
Cumulative order backlog of the VS business is estimated at KRW60tr as of end-2020, up from KRW53tr at end-2019.
EV components are accounting for an increasingly larger portion of orders and sales of the VS business. Infotainment parts now account for roughly 50% of total orders vs. 70% in the past, while the sales share of EV parts has more than doubled compared to the past.
The JV with Magna should drive even faster growth in order backlog and sales portion of EV components going forward.
Retain BUY and raise target price by 17% to KRW144,000
Our revised target price is based on 2021F BPS and a target PBR of 1.45x, the PBR high of 2018 reached on momentum from the VS business.
In our view, LG Electronics deserves a re-rating as a leading vehicle components supplier instead of just an IT product manufacturer. Share prices of Japan’s Nidec, TDK, and Murata Manufacturing have been hitting new highs in reflection of sharp growth in sales of automotive electronics parts. We believe that LG Electronics could also trade above its historical PBR high (1.45x) going forward.
News of the EV parts JV with Magna and the North American IT giant's self-driving car have sparked strong momentum for LG Electronics shares. With global focus expected to shift to Korean IT companies as a whole in light of recent developments, we also recommend looking into other domestic automotive electronics parts suppliers alongside LG Electronics.