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L.K. Technology (558 HK) Summary

Core Content

L.K. Technology (558 HK) is a leading manufacturer of die-casting and machining equipment, with a focus on serving the automotive and industrial sectors. The company has been highlighted for its integrated die-casting solutions that provide significant advantages to auto manufacturers, including cost reduction, lightweighting, and improved production efficiency. In addition, the company is expanding its production capacity and diversifying its product offerings to capitalize on the growing demand for new energy vehicles (NEVs) and other applications.

Main Points

Integrated Die-Casting Solutions

• Cost Reduction: Integrated die-casting solutions can reduce capital expenditure (capex) by up to 40% and decrease the floor area required for production lines by 30%.
• Lightweighting: These solutions help reduce the total weight of a car by 10–20%, which translates into a 14% improvement in driving range/charging for NEVs.
• Production Efficiency: The production cycle is significantly shortened, from 120 minutes to 110–120 seconds, when integrated die-casting technology is applied.

Market Potential for Ultra-Large Die-Casting Machinery

• Each ultra-large size die-casting machine (6000T and above) can produce approximately 155,000 units of components annually.
• Assuming 12.5 million NEVs are demanded in China by 2025E, and with 80% utilization rate, the total operating volume of die-casting machines could reach ~300 sets.
• The estimated market size for ultra-large size die-casting machinery by 2025E is ~RMB19bn, based on an average selling price (ASP) of RMB63mn per machine.

Capacity Expansion

• LK is launching a new production plant in Hangzhou Bay, expected to start operations in July/August 2023.
• Upon completion, the monthly capacity of ultra-large size die-casting machines will increase from 2–3 sets to 8 sets.

Product Launches and Cross-Selling Strategy

• Two ultra-large size die-casting units with tonnage >12,000T will be launched in 2HFY24E.
• These units are specifically designed for the production of:
  • Front, middle, and rear chassis for A00 class models.
  • Mid-floor battery trays for NEVs.
• LK also plans to boost the sales of CNC machines through a cross-selling strategy, based on the standard combination of one die-casting machine with four CNC machines.

Earnings Outlook

• LK experienced a strong recovery in sales during 2HFY23E (October 2022 – March 2023), with a revenue growth of 10–20% YoY and stable net profit.
• The company targets a 30% YoY revenue growth in FY24E, driven primarily by the rising contribution of ultra-large size die-casting machinery.
• The ASP for 6,000–9,000T models is RMB40–50mn, while for 12,000T models it is RMB63mn.

Financial Overview

LK's revenue has shown volatility over the years, with notable growth in FY21 and FY22, driven by increased demand for die-casting machines in the NEV sector.

Key Financial Metrics

Strategic Initiatives

• New Plant: The Hangzhou Bay plant is expected to significantly increase production capacity for ultra-large size die-casting machines.
• Product Diversification: LK is focusing on launching new die-casting units and enhancing cross-selling with CNC machines.
• Market Growth: The company is positioned to benefit from the growing demand for NEVs and the shift from welding to die-casting in automotive manufacturing.

Analyst Ratings and Outlook

• CMBIGM Ratings:

  • BUY: Potential return of over 15% over the next 12 months.
  • HOLD: Potential return of +15% to -10% over the next 12 months.
  • SELL: Potential loss of over 10% over the next 12 months.
  • NOT RATED: Not rated by CMBIGM.

• Industry Outlook:

  • OUTPERFORM: Industry is expected to outperform the broad market benchmark.
  • MARKET-PERFORM: Industry is expected to perform in line with the broad market benchmark.
  • UNDERPERFORM: Industry is expected to underperform the broad market benchmark.

Important Disclosures

• This report is prepared for informational purposes only and does not constitute investment advice.
• CMBIGM does not provide individually tailored investment advice.
• The information may be subject to change without notice.
• There are risks involved in transacting in any securities, and actual events may differ materially from those in the report.
• CMBIGM may have conflicts of interest and is not liable for any loss or damage incurred from relying on the information.

Analyst Contact

• Wayne Fung, CFA: (852) 3900 0826 | waynefung@cmbi.com.hk
• Katherine Ng: (852) 3761 8725 | katherineng@cmbi.com.hk

Company Information

• Current Price: HK$9.40
• Market Cap (HK$ mn): 12,938
• Avg 3 mths t/o (HK$ mn): 125.27
• Total Issued Shares (mn): 1,370.4

Shareholding Structure

• Liu's family: 62.3%
• Others: 37.7%

Share Performance (12-Month)

Auditor

• PricewaterhouseCoopers

Conclusion

LK Technology is well-positioned to benefit from the increasing adoption of integrated die-casting solutions in the automotive industry, particularly in the NEV sector. The company's strategic expansion, product launches, and cross-selling initiatives are expected to drive significant revenue and profit growth in the coming fiscal year. The financial performance and market outlook suggest a positive trajectory, with the potential for a strong return on investment. However, investors should be aware of the inherent risks and consider seeking professional financial advice before making any investment decisions.