The author is an analyst of KB Securities. He can be reached at firstname.lastname@example.org. — Ed.
Maintain BUY, lower target price to KRW170,000
We lower our 12m TP by 15.0% to KRW170,000 for LGE to reflect downward revisions to 2021E/2022E/2023E NP (attributable to controlling interests) of 16.8%/2.4%/18.0% based on delays in profitability pickup at VS and BS. However, we maintain BUY given the following:
(1) Uncertainty regarding battery modules for GM’s Bolt EV has been removed with provisions booked in 3Q21.
(2) VS has secured long-term growth potential, with revenue CAGR until 2024 estimated at 15-20%.
(3) H&A and HE should ease concerns over earnings peaking next year, as their premium products are gaining traction.
Provisions for Bolt EV recall booked in 3Q21
LGE reported 3Q21 consolidated preliminary revenue of KRW18.8tn (+9.8% QoQ, +11.0% YoY) and OP of KRW540.7bn (-38.4% QoQ, -43.6% YoY; 2.9% OPM). OP missed the market consensus (KRW1.1tn) because of KRW480.0bn in provisions booked for the recall of GM’s Bolt EV. Joint research by GM and LG Corp. revealed that a combination of a torn anode tab and folded separator was behind the Bolt battery fire. We estimate LGE will pay 44% of the group’s total recall-related cost of KRW1.1tn. We forecast 4Q21 OP at KRW864.7bn (+59.9% QoQ, +33.0% YoY; 4.7% OPM).
Near-term uncertainty removed
Over the past three months, LGE stock skidded 21.8% amid uncertainty involving the Bolt EV recall. With provisions booked and uncertainty removed, the stock is ready to rebound. In particular, we expect VS revenue CAGR of 15-20% until 2024 (KRW5.8tn in 2020 → KRW7.7tn in 2021E → KRW9.1tn in 2022E), supported by a KRW55tn order backlog and an increase in turnkey–based supply of EV components. We believe VS has secured growth potential given the amount and value of its order backlog, though it will be difficult for the business to turn profitable in the near term.