Emerging as Key Player in EV Parts Market
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Raise target price to KRW220,000 given growth potential of EV parts
We maintain BUY on LGE and raise our 12m TP by 10% to KRW220,000 (27% upside). Our TP change is based on upward revisions to 2021E/2022E NP (attributable to controlling interests) of 5%/15%: (1) the growth potential of EV parts is considerable and (2) we anticipate an earnings surprise in 1Q21. VS (order backlog estimated at KRW60tn) is likely to see the order backlog of subsidiary ZKW (LGE/LG Corp. stakes at 70%/30%) reach a historic high of KRW11.0tn. Meanwhile, we forecast 1Q21 OP to also hit an all-time high, at KRW1.14tn (+77% QoQ)—surpassing 1Q20 OP of KRW1.09tn—on the back of an increase in sales of premium home appliances for H&A and HE.
To become key player in EV parts
Having secured technologies and mass-production capabilities for essential EV parts, LGE is emerging as a key player in the market for future electric mobility and should likely become the partner of choice for global tech giants such as Apple, Microsoft and Google. We expect the company to lead the formation of the global EV ecosystem based on the following: (1) A newly formed JV between LGE and Magna (a vehicle component maker for BMW/Mercedes-Benz/Toyota/Jaguar) has allowed LGE to secure e-powertrain technologies, bolstering LGE’s auto electronic component portfolio that includes automotive lamps (via ZKW) and EV charging modules/infotainment (via VS). (2) Strategic alliances with group affiliates LG Chem/LG Display/LG Innotek in batteries/display/auto electronic components have allowed LGE to develop its most efficient value chain yet.
Strategic shift involving MC unit to be positive; Enterprise value to rise by KRW10tn
We expect LGE to undergo a strategic shift regarding MC (i.e., disposal, shut down or downsizing of operations) given that the division has been in the red for six consecutive years. Without MC losses (-KRW800.0bn-1.0tn annually), we estimate LGE’s enterprise value would increase by KRW10.0tn. However, although MC accounts for only 1% of the global market and has been loss-making, it still offers relatively solid enterprise value with its patent holdings, in our view, ranking third globally in terms of smartphone patents (incl. 1,700 5G phone-related patents).