Target Price Lowered to KRW620,000
The author is an analyst of Shinhan Securities. He can be reached at yjjung86@shinhan.com. -- Ed.
4Q22 OP to come in at KRW300.3bn (+297% YoY, -42% QoQ)
We now expect LG Energy Solution to post 4Q22 sales in line with market expectations at KRW8.2tr (+84% YoY, +7% QoQ), but believe operating profit will fall short of consensus by 36% at KRW300.3bn (+297% YoY, -42% QoQ). In October-November 2022, sales of battery electric vehicles (BEVs) worldwide excluding China reached 530,000 units. ASP hikes carried out in 3Q22 and growth in shipment volume likely led to a steep increase in sales for LG Energy Solution in 4Q22. However, one-off expenses should have reached around KRW200bn with employee bonuses paid out for strong 2022 performance and inventory adjustment carried out at the end of the year. Excluding one-offs, operating profit was likely in line with market consensus.
Focus on benefits expected from US EV market growth
Efforts to expand market foothold in the US are underway in earnest, with several of LG Energy Solution's clients in the country set to secure Inflation Reduction Act (IRA) subsidies in 2023 from local production of EVs. Adding to the boost from demand pent up from 2022, growth of the US BEV market is forecast to start in earnest with sales projected to jump from 800,000 units in 2022 to 1.4mn in 2023. General Motors, which has yet to make it to the top 10 in global EV sales volume, is expected to see visible gains in EV sales this year, led by rising demand in the US market. In response, Ultium Cells, the joint venture between the automaker and LG Energy Solution, has been working on the ramp-up of production at its first plant in Ohio (end-2022) and second plant in Tennessee (2023F).
Retain BUY for a revised-down target price of KRW620,000
We retain BUY on LG Energy Solution but lower our target price by 9% to KRW620,000, in reflection of the recent decline in peer valuations caused by concerns over slowing EV demand.
IRA details to be finalized in March should once again confirm the US government's commitment to building a localized value chain for its EV industry. Guidelines recently released by the US Department of Treasury and Internal Revenue Service revealed efforts made to modify unreasonable terms. Going forward, IRA implementation should continue to pressure companies into focusing on local production of key components such as battery cells and cathode materials.