Automotive Components Expected to Begin Turning Profit in 2H22
The author is an analyst of KB Securities. He can be reached at jeff.kim@kbfg.com. -- Ed.
Leading manufacturer of components for self-driving vehicles
We maintain BUY and TP of KRW400,000 (10.0x 2022 P/E) on LG Innotek. We remain optimistic about the company given the following:
(1) LG Innotek is likely to become a vendor to global automakers (e.g., Apple, Tesla) for components of self-driving vehicles, as it is the only automotive parts manufacturer with technological prowess in both optical components (e.g., lidar, radar, camera) and communication components (V2X module).
(2) Automotive Components earnings should turn around in 2H22 on the back of increasing shipment of components of self-driving vehicles.
Given the future value of Automotive Components, we believe LG Innotek’s market cap could reach KRW13.0tn (KRW550,000 per share; 13.8x 2022E P/E) in the longer term.
Automotive Components expected to begin turning profit in 2H22
We expect Automotive Components (order backlog of KRW10tn) to begin turning a profit in 2H22, which would mark the first time in six years. In 2019, after a five-year subpar streak (annual avg. loss of KRW200bn), the unit began purging itself of low-margin orders and improving cost efficiency (process completed in 2020). Thanks to such efforts, Automotive Components is positioned to benefit from the easing of shortages in automotive semiconductors and achieve earnings growth. It currently generates only KRW1.4tn in annual revenue, but it has the potential to earn over KRW3.0tn (current avg. at KRW2.0-3.0tn) as its order intake grows.
Current stock price does not reflect value of future growth businesses
Even after its recent rally, LG Innotek stock does not reflect the value of future growth businesses (e.g., metaverse, self-driving cars). We believe the stock’s upside is larger than expected in the longer term because (1) the company possesses lidar technology, which is crucial for self-driving vehicles, and an array of optical products (e.g., 3D sensing modules, cameras) used for generating 3D images for self-driving vehicles and metaverse devices (e.g., XR headset, AR glasses) and (2) the stock is trading at a historical low of 8.7x P/E (based on 2022E earnings).