Investment positives
　　We initiate coverage on LK Technology Holdings Ltd. with an OUTPERFORM rating and a target price of HK$15.71, corresponding to 22x FY24e P/E, implying 16.7% upside.
　　Why OUTPERFORM rating?
　　Integrated die-casting promising. Integrated die-casting shows competitive edges in that it is light weight, more efficient, reduces costs, and structural improvement. Application scenarios include the rear underbody, front underbody and battery holder tray, and the firm’s customer base is expanding from Tesla to a number of emerging carmakers, die-casting companies, and traditional carmakers. We believe as integrated die-casting is adopted more widely, demand for the firm’s key manufacturing equipment - i.e., 6,000t or above ultra-large die-casting machines - will increase rapidly. According to our calculations, 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.
　　Leader in market for ultra-large die-casting machines with a considerable first-mover advantage. LK Technology took the lead in accessing Tesla’s integrated die-casting supply chain, and began accumulating project experience 1.5-2.0 years earlier than its rivals. The firm has a market share of more than 90% for 6,000t and above ultra-large die-casting machines. The firm’s know-how and one-stop solutions could help increase the rate of success for downstream investments by die-casting companies, boding well for its acquisition of new clients, in our view. Over the long run, considering the firm has acquired strong capabilities in technology, branding, supply chain, and delivery, we believe it can retain a large market share. As the market for ultra-large die-casting machines has high barriers to entry, we expect the GM for this segment to reach about 40%, higher than for traditional die-casting machines.
　　AFV application scenarios to drive growth of large die-casting machine business; machinery for plastic injection molding and CNC could grow steadily. Applications for die-casting machines may decrease in traditional internal combustion engine （ICE） vehicles amid the transition to lightweight, electric vehicles. However, we think the market for traditional die-casting machines could grow steadily, driven by EV electric motors, batteries, electronic control systems, and other structural parts for EVs. We expect the market for domestic traditional die-casting machines to reach Rmb5.76bn by 2025, implying a CAGR of 4.1% over 2020-2025. The firm’s plastic injection molding machine and computerized numerical controlled （CNC） businesses generate low levels of revenue and profit but, looking ahead, we think they may record steady growth.
　　How do we differ from the market? The market is concerned that competition could intensify amid an increase in shipments from other suppliers of ultra-large die-casting machines. However, we believe that by leveraging its extensive project experience and competitive advantages in technology, branding, supply chain, and delivery, LK Technology will maintain a large share of the market.
　　Potential catalysts: Acquisition of new customers for ultra-large die-casting machines; capacity expansion.
　　Financials and valuation
　　Our EPS forecast is HK$0.55 in FY23 and HK$0.71 in FY24, a CAGR of 25.4%. The stock is trading at 24.3x FY23e and 18.8x FY24e P/E. We value the firm at 22x FY24e 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; more intense market competition; and disappointing profitability growth.