LGES
The author is an analyst of NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com -- Ed.
We raise our 2025 OP forecast by 77% to reflect tax credit estimates under the AMPC program. Further US capacity additions by automakers are expected within the year, which should benefit LGES.
Raise earnings forecasts to reflect AMPC effects
We maintain a Buy rating and raise our TP on LG Energy Solution (LGES) by 28% to W830,000. As the US IRA Advanced Manufacturing Production Tax Credit (AMPC) program took effect on Jan 1, related tax credits began to be reflected in the firm’s OP from 1Q23. Consequently, we raise our OP forecasts by 40% for 2023, 67% for 2024, and 77% for 2025.
In the case of AMPCs, given that the company’s Ultium and Arizona plants produce cells (US$35/KWh) and its other US plants produce modules (US$45/KWh), we foresee related tax credits of W871.5bn (21GWh) in 2023, W2.7tn (66GWh) in 2024, and W4.8tn in 2025 (115GWh). Based on NP (excluding minority interest) considering the stakes in JVs (GM and Honda), contributions of W435.8bn in 2023, W1.3tn in 2024, and W2.5tn in 2025 are predicted. Reflecting this, we raise our 2025 NP estimate by 48% to W3.4tn. AMPCs will be paid out over 2023~2029, before being phased out over 2030~2032 and completely abolished in 2033. With additional US capacity expansions (including at Tesla, HMG, and Toyota) likely to be announced within the year, we believe that AMPC effects will continue to rise.
1Q23 review: Earnings surprise on solid demand and reflection of AMPCs
LGES booked 1Q23 sales of W8.7tn (+101% y-y, +3% q-q) and OP of W633.2bn (+145% y-y, OPM of 7.2%), beating consensus by 5% and 31%, respectively. Automotive battery sales came to W5.8tn (+6% q-q) thanks to solid customer demand. Meanwhile, despite low seasonality for IT devices and power tools, small-sized battery sales reached W2.6tn (+5% q-q) thanks to improving demand from Tesla. ESS sales dropped to W364.6bn (-39% q-q) due to low seasonality. In 2Q23, we expect AMPCs of W100.3bn to be reflected in OP. Excluding AMPC effects, 1Q23 OPM came to 6.1%, similar to the 6.0% recorded during 1Q22.