Power Facility Investment Now Resuming
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
After having slowed due to Covid-19, power facility investment in ASEAN countries (including Vietnam), Europe, and North America is now resuming in earnest and is expected to increase rapidly this year. In keeping, LS C&S Asia’s earnings should normalize from 2Q21. Renewable energy-related orders from LS C&S and LS Electric represent additional growth engines. LS C&S Asia is currently trading at a 2021F P/E of 13x.
Market starting to recover following temporary Covid-19 slowdown
Adhering to a Buy rating, we raise our TP on LS C&S Asia from W8,500 to W9,600, reflecting a 10% upward adjustment to 2021E EPS made in light of an ongoing increase in orders from the Vietnam Electric Power Authority (in line with a recovery of the power cable market in Vietnam, which had slowed temporarily due to the Covid-19 crisis). Another positive is likely higher sales of bus duct. (Note1)
LS C&S Asia posted consolidated 1Q21 sales of W163.2bn (+23% y-y) and OP of W6.1bn (-17% y-y). Although earnings proved somewhat sluggish, it appears to be emerging from a difficult business environment due to the pandemic. From 2Q21, we believe that the firm will attract more: 1) high-voltage (HV) product orders from the Vietnam Electric Power Authority; and 2) mid/low-voltage (MV/LV) product orders for both power system projects in Vietnam and solar/wind power plant projects. (Note2)
Note1) Bus duct is a next-generation electricity distribution system that can transmit large currents without the use of cables
Note2) The firm’s HV business is run at subsidiary LS VINA. Its MV/LV business is run through subsidiaries LS VINA and LS CV
Earnings to normalize this year
Looking at full-year 2021, we see consolidated sales of W681.0bn (+18%, y-y) and OP of W22.8bn (+78% y-y), driven by anticipated sales recoveries spreading evenly across all of LS C&S Asia’s business divisions, rather than being driven by additional production line expansion. However, despite the completion of a plant expansion project at the Myanmar subsidiary, operations there continue to be disrupted amid political turmoil in the country. That said, although not fully operational, the plant is still running.
Earnings at the UTP and optical cable domains have been tepid since 2020 on both decreased sales in Europe and North America and product mix deterioration (ie, weakened portion of high-margin products). However, an earnings recovery is expected from 2H21. (Note3)
Synergies between LS C&S and LS Electric continue to be witnessed for offshore wind power projects in Vietnam. In particular, an expansion in LS C&S’s submarine cable business should spur sales across all of LS C&S Asia’s business arms.
Note3) The firm’s UTP and optical cable businesses are run through LS CV