Investment positives
　　We initiate coverage on LK Technology Holdings with an OUTPERFORM rating and a target price of HK$15.71, corresponding to 22x FY2024e P/E, implying 16.7% upside.
　　Why OUTPERFORM rating?
　　Integrated die-casting promising, to benefit from "a pick-and-shovel play”. Integrated die-casting shows competitive edges in terms of light weight, efficiency enhancement and cost reduction, structural improvement, etc., with application scenarios extending from rear underbody to front underbody and battery holder tray, and the customer base expanding from Tesla to a number of emerging carmakers, die-casting companies, and traditional carmakers. We believe as integrated die-casting becomes widely adopted, demand for its key manufacturing equipment, i.e., 6,000t or above ultra-large die-casting machines, will likely increase rapidly. According to our calculation, taking into account the application of integrated die-casting in manufacturing the underbodies of alternative fuel vehicles (AFV), the market for large die-casting machines could reach Rmb6.12bn by 2025, with a CAGR of 103% over 2021-2025.
　　A leader in the market for ultra-large die-casting machines with considerable first-mover advantage. LK Technology took the lead in accessing Tesla’s integrated die-casting supply chain, having started to accumulate project experience 1.5-2 years earlier than its rivals. The firm currently captures more than 90% share of the market for 6,000t or above ultra-large die-casting machines. In our view, its industry know-how and one-stop solution could increase the success rate of investments by downstream die-casting companies, boding well for its acquisition of new clients. Over the long run, considering the firm has acquired strong capabilities in aspects of technology, brand strength, supply chain, and delivery, we believe it would be able to maintain a large market share among market competition. In addition, as the market for ultra-large die-casting machines has high barriers to entry, we expect the gross margin to hit about 40%, higher than those of traditional die-casting machines.
　　AFV-related application scenarios to drive growth of <6,000t die-casting machine business; plastic injection molding machine and computerized numerical controlled (CNC) machine businesses could grow steadily. Although the application of die-casting machines could reduce in traditional ICE vehicles, amid the transition towards light-weight, electric vehicles, the market for traditional die-casting machines could grow steadily driven by EV electric motor, battery, electronic control systems, and EV structural parts-related die-casting demand. We expect the domestic traditional die-casting machine market to reach Rmb5.76bn by 2025, implying a CAGR of 4.1% over 2020-2025. Meanwhile, the firm’s plastic injection molding machine and CNC businesses still create a relatively small amount of revenue and feature low profitability. Looking ahead, they could record steady growth, in our view.
　　How do we differ from the market? The market is concerned that market competition could intensify amid increase in shipments from other suppliers of ultra-large die-casting machines. However, we believe leveraging its extensive project experience and competitive advantages in aspects of technology, band strength, supply chain, and delivery, LK Technology will be able to maintain a large market share.
　　Potential catalysts: Acquisition of new ultra-large die-casting machine customers and capacity expansion.
　　Financials and valuation
　　Our EPS forecast is HK$0.55 and HK$0.71 in FY2023 and FY2024, corresponding to a CAGR of 25.4%. The stock is trading at 24.3x FY2023E and 18.8x 2024e P/E. We value the firm at 22x FY2024e P/E, corresponding to a TP of HK$15.71 and implying 16.7% upside. Initiate with OUTPERFORM.
　　Risks
　　Lower-than-expected penetration rate of integrated die-casting process; fiercer market competition; and disappointing profitability growth.