Potential for Direct Sales to Tesla, New Deal with Panasonic
The author is an analyst of KB Securities. He can be reached at cm.lee@kbfg.com. -- Ed.
Maintain BUY, TP of KRW370,000
We maintain BUY and TP of KRW370,000 for L&F. Derived using the DCF model assuming 9.29% WACC (9.67% COE, 5.63% after-tax COD, 1.12 60m adj. beta), our TP implies 39.6x 12m fwd P/E and 8.11x P/B, and offers 63% potential upside (vs. Feb 23 close).
Price to remain flat QoQ; Quantity to grow 20%
We forecast 1Q23 revenue of KRW1.42tn (+157% YoY) and OP of KRW71.0bn (+34% YoY; 5.0% OPM).
(1) Price: ASP should remain flat QoQ as the KRW/USD rate rebounded in February after continuing to decline through January and nickel prices have climbed.
(2) Quantity: Shipments should grow 20% QoQ thanks to Phase 2 at Guji Plant 2 (annual production capacity of 30k tons) commencing operation in February.
(3) Profitability: Profit margins are likely to see some weakness due to the rise in fixed costs (e.g., labor, D&A expenses) stemming from the operation of new production lines, but should recover as all lines at Guji Plant 2 become fully operational (i.e., 2Q23E OPM of 6.3%).
Share valuations attractive; Potential for direct sales to Tesla, new deal with Panasonic
We recommend L&F as our top pick for Korea Battery Materials.
(1) Shares in L&F are trading at attractive valuations compared to competing cathode material makers (2023 P/E of 26.3x vs. POSCO Chemical’s 56.7x and Ecopro BM’s 37.8x).
(2) During its upcoming Investor Day event (Mar 1), Tesla is expected to provide an update on its plan to internalize production of its 4680 battery; L&F is likely to emerge as a beneficiary since the company is on Tesla’s shortlist of direct cathode material suppliers.
(3) L&F also has the potential for winning a new deal with Panasonic, which supplies batteries to Tesla. At the moment, Japan’s Sumitomo Metal Mining (SMM) supplies cathode material to Panasonic, but SMM has yet to be capable of mass producing cathode material with more than 90% nickel content. We believe L&F stands to benefit as mass production of such high-nickel cathode material will likely be crucial for reducing costs to suit Tesla’s 4680 battery plan.