The author is an analyst of KB Securities. He can be reached at firstname.lastname@example.org. — Ed.
TP raised 23% to KRW160,000
We maintain BUY on LGE and raise our 12m target price by 23% to KRW160,000 (1.2x 12m fwd P/B). LGE, which ranks third in the world in terms of communication technology patents held, has continued to engage in R&D for communication technologies even after its exit from the smartphone business in 2021, and now has around 30k related patents (e.g., 4G, 5G, 6G), a third of which are rated “S” or “A.” The patented technology will likely be used to create synergy in future growth businesses (e.g., automotive electronics, self-driving systems, robotics, home electronics, IoT); in the longer term, the monetization of such assets should also be possible (i.e., patent/IP licensing announced as a new business during Mar 24, 2022 shareholder meeting).
VS: Synergy with communication technology patents
VS (Vehicle Component Solutions), which has ranked within the top two in the market for telematics and GPS navigation systems, has been seeing annual increase in order backlog of KRW20tn on the back of synergy with communication technologies (e.g., 5G, V2X, OTA) amid growth in the market for autonomous electric vehicles. We see order backlog coming close to KRW100tn at end-2023 (vs. KRW60tn at end-2021, KRW80tn at end-2022), given: (1) greater-than-expected orders for in-vehicle infotainment systems (communication modules + display) stemming from the increase in electric vehicles with auto-pilot systems; and (2) increase in orders for drivetrain (i.e., LG Magna e-Powertrain) from EV makers. We expect 2023E OP for VS at KRW335.7bn (+98% YoY), accounting for a greater proportion of company-wide OP (8.3% in 2023 vs. 4.9% in 2022).
Shares trading at 0.9x P/B; Re-rating expected
Despite the recent rise in share price, shares in LGE are trading at just 0.85x 12m fwd P/B and 8.4x P/E, which suggests the potential growth of the company’s VS business has yet to be priced in, and that this is only the beginning of an upgrade in valuations. Moreover, we see LGE as an earnings standout as we expect the company to post 2023E standalone OP of KRW2.7tn, marking a 110% YoY improvement when excluding one-off gains in 2022. As a powerhouse in communication technology patents, LGE should see greater synergy in its future growth businesses (e.g., automotive electronics, self-driving systems, IoT, robotics), as well as benefit from the monetization of its patents in the longer term.