Margins-oriented Business Strategy
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com. -- Ed.
Samsung SDI’s business strategy of centering on margins rather than its top line is starting to pay off.
To eliminate value discount gradually
We stick to a Buy rating and a TP of W1,000,000 on Samsung SDI. The firm’s capacity is set to expand from 84GWh in 2022 (cylindrical 31GWh + mid-large prismatic 53GWh) to 183GWh by 2025 (cylindrical 64GWh + mid-large prismatic 118GWh). In addition to existing customers, new supply to multiple OEMs is being discussed. If confirmed, the capacity target for 2025 looks likely to be boosted. Demand for Samsung SDI’s batteries is unlikely to be impacted by the Inflation Reduction Act (IRA) slated for implementation in 2023. Noting that consumers who purchase premium vehicles are typically less sensitive to subsidies, we point out that most of the automobile models for which Samsung SDI provides supply are priced higher than the subsidy standards (US$55,000 for passenger cars and US$80,000 for other vehicle types). On the other hand, the firm’s JV with Stellantis (production to begin in 2025) is expected to manufacture many of the car models to be covered by subsidies, and thus, the JV is forecast to take countermeasures. Samsung SDI’s battery division is showing a 2024F EV/EBITDA of 8.3x, a level around 50% below the domestic competitor average of 16.1x. Moving ahead, we believe that this hefty discount will fade gradually as capacity expansion plans to secure new customers come to unfold step by step.
3Q22 review: Margins-oriented business strategy starting to pay off
Samsung SDI announced consolidated 3Q22 sales of W5.4tn (+56% y-y, +13% q-q) and OP of W565.9bn (+52% y-y, +32% q-q), setting new record highs for the firm and topping the market projections by 1% and 15%, respectively. We mainly attribute these promising results to: 1) favorable forex market conditions; 2) ASP hikes; and 3) increased sales to Rivian and BMW. Rivian, a major customer of cylindrical batteries, produced 7,363 units (+67% q-q) in 3Q22, leading to earnings growth at Samsung SDI’s cylindrical battery domain. We estimate OPM of 12% for small-sized batteries, 7% for EV batteries, and 12% for ESSs. We believe that OPM for the battery domain reached 10%, the loftiest mark in the firm’s history. Given that 3Q22 OPM levels at rivals CATL and LGES are being sized at 11.1% and 6.8%, respectively, Samsung SDI’s profitability-focused business strategy appears to be beginning to bear fruit.
For 4Q22, we estimate sales of W6.1tn (+59% y-y, +13% q-q) and OP of W661.2bn (+148% y-y, +16% q-q), with the figures expected to beat consensus by 4% and 22%, respectively. Aided by peak seasonality for EV sales, shipments to existing customers (BMW and Rivian) are likely to rise, and the effects the recent start of operations of at the firm’s second plant in Hungary (10GWh) should be added. Despite the costs entailed for operating the new plant, we believe that OPM for the battery domain will sustain at around 10%.