KB Securities said on the 27th that the prolonged shortage in supplies of artificial intelligence (AI) substrates resembles the memory semiconductor cycle, and that steady earnings improvement is expected for LG Innotek. The firm maintained its Buy rating and raised its target price to 1.6 million won from 1.2 million won. The previous trading day's closing price for LG Innotek was 1,068,000 won.
Kim Dong-Won, head of research at KB Securities, said, "The substrate business, facing an acute supply shortage, resembles the memory semiconductor industry, where more than 1,000 trillion won in AI investment has created supply bottlenecks," and noted, "Supply of AI substrates next year is expected to become even tighter than this year, so the pace of upward revisions to earnings forecasts is likely to outstrip the speed of share-price gains for the time being."
According to KB Securities, big tech companies are simultaneously discussing binding long-term agreements (LTAs) and prepayment-based support for facility investments in response to worsening supply shortages.
Kim said, "With the spread of agentic AI (AI that makes autonomous judgments and solves complex problems), annual token usage is expected to increase sevenfold," and explained, "As cloud providers face more urgent needs to expand AI data centers and secure memory capacity, the shortage of large-area, high-layer substrates is unlikely to be resolved within the next one to two years."
Despite the recent sharp share-price rise, LG Innotek's 2027 price-earnings ratio (PER) stands at 20 times and its price-to-book ratio (PBR) at 3.2 times, which it said leaves room for gains given the deep discount versus the 2027 averages of 40 times PER and 8 times PBR for top global substrate makers.
KB Securities analyzed that LG Innotek is poised to benefit directly from the AI substrate supply shortage.
Kim said, "On Nvidia's Vera Rubin platform, the cost share accounted for by substrates is expected to more than double compared with the previous Blackwell (GB300)," adding, "LG Innotek's substrate business (package solutions) is expected to benefit directly from the AI substrate supply shortage, similar to memory semiconductors."
LG Innotek's substrate production lines are running at full utilization of 100% even in the second quarter, typically the weakest season.
Kim said, "Big tech companies are believed to be proposing prepayment-backed support for new facility investments to LG Innotek's substrate division, while LTAs are also being discussed," and added, "This is expected to enhance the long-term earnings visibility of the substrate business going forward."
KB Securities projected that revenue from LG Innotek's substrate business will rise by about 1 trillion won in two years, from 1.7 trillion won last year to 2.7 trillion won next year. Although the substrate business is expected to account for only about 10% of companywide revenue in 2027, its share of operating profit is estimated to reach 30% of the total. Accordingly, the operating profit contribution of the substrate business is forecast to expand roughly threefold in three years, from 11% in 2024 to 30% in 2027.
Kim explained, "Due to GPU upgrades at AI data centers and greater CPU adoption, memory capacity is expanding, driving a surge in demand for large-area, high-layer substrates whose average selling prices are more than 50% higher than before."