IT services corporation LG CNS successfully recorded a competition rate exceeding 100 to 1 in the institutional investor demand forecasting ahead of its listing on the 5th of next month. However, it remains uncertain whether the stock price will perform as positively as expected after the listing. The IT services sector is generally highly dependent on group companies, and the recent poor performance of LG Group affiliates inevitably affects this. Without a value-up roadmap, concerns are rising that LG CNS might follow the poor track record experienced by Samsung SDS and POSCO DX.
◇ "Limited funds inflow effects despite successful demand forecasting"
According to industry sources on the 20th, LG CNS will offer a total of 19.38 million shares through this initial public offering (IPO) and has finalized the offering price at the upper band of 61,900 won. The size of the offering is about 1.1994 trillion won, with the expected market capitalization after listing projected to be around 6 trillion won.
LG CNS's price-to-earnings ratio (PER) is about 15.6 times, which is lower than the industry average (about 22 times). While this could be seen as an attractive factor for investors, the absence of a concrete value-up roadmap is also noted as a concern for investors. LG CNS is emphasizing expansion into artificial intelligence (AI) and cloud businesses, but it is currently evaluated as lacking specific achievements or long-term growth strategies.
During the IPO briefing held on the 9th, it was pointed out that detailed plans for long-term growth, which investors were eager to know, were insufficient. As a result, there is a fair amount of skepticism in the market regarding the stock price movement after the IPO.
In particular, LG CNS's dependence on affiliates within the group is cited as a weakness. As of the third quarter of last year, 62.4% of LG CNS's revenue came from LG Electronics, LG Energy Solution, LG CHEM, and other LG Group affiliates. While this is lower than the average for the IT services sector, it has increased from 58.3% in 2021.
The problem is that the performance of major LG Group affiliates is deteriorating. If LG CNS continues to rely more on its affiliates without expanding its external revenue share, the possibility of a decline in stock prices after the listing is likely to increase.
LG Electronics reported an operating profit decrease of 53.3% in the fourth quarter compared to the same period last year, while LG Energy Solution recorded its first quarterly loss due to slowing demand for electric vehicles and rising fixed costs. LG CHEM faced an operating loss of 143.5 billion won due to the stagnation in the petrochemical market, and its credit rating outlook was also downgraded to 'negative.'
◇ Samsung SDS and POSCO DX: Results and stock price stagnation due to structural dependence on affiliates
The precedents set by Samsung SDS and POSCO DX hold significant meaning for LG CNS. Samsung SDS derives more than 60% of its revenue from Samsung Electronics and Samsung affiliates, and is directly affected by the worsening performance of Samsung Electronics. Samsung SDS's results for the fourth quarter of last year fell 11.2% below market consensus, and after Samsung Electronics' provisional earnings announcement, its stock price fell 4.3% within a week, nearing its 52-week low of 122,500 won.
POSCO DX previously moved its listing from KOSDAQ to KOSPI last year, gaining expectations, but its stock price has recently plummeted by 68% compared to its 52-week high. This has led to a dramatic decrease in market capitalization from 10 trillion won to 3 trillion won, raising discussions about the possibility of being excluded from the Morgan Stanley Capital International (MSCI) index. POSCO DX is also significantly dependent on POSCO's performance for its revenue structure, receiving direct hits from the downturn in the steel market and a decrease in crude steel production.
Lee Sang-heon, a researcher at iM Securities, stated, "Despite the system integration (SI) and IT outsourcing (ITO) businesses being in peak season, sales may be somewhat sluggish due to the investment direction of captive (group) clients," adding that, "Sales in the SI business are expected to slow somewhat due to economic slowdown this year."
In contrast, Hyundai AutoEver is experiencing a rise in stock prices due to the global electric vehicle market expansion and performance improvement driven by its parent company, Hyundai Motor Group. Recently, Hyundai signed a strategic partnership with NVIDIA to innovate in the AI-based mobility sector, resulting in Hyundai's stock price rising over 6%, while Hyundai AutoEver's stock also surged by over 7%.
An industry source in the IT services sector noted, "It cannot be ruled out that LG CNS may experience sluggish stock prices post-listing depending on the performance and market conditions of its affiliates, just like other competitors," and stated that "Increasing external revenue share and reducing dependence on the group will be key to success."