Battery materials
The author is an analyst for Shinhan Securities. He can be reached at wonyong.sim@shinhan.com -- Ed.
1Q23 review: Brisk earnings across the board
Jeio posted sales of KRW22.6bn (+16% QoQ) and operating profit of KRW3.3bn (+198% QoQ) for 1Q23. Plant engineering and secondary battery materials both delivered top-line growth of 16% QoQ with sales coming in at KRW17.7bn and KRW4.9bn, respectively. Growth was driven by sales booked on Ecopro's Hungary project order secured at the start of the year and increase in multi-walled carbon nanotube (CNT) shipments. Gross margin remained near the 18.6% reported for 4Q22 at 17.4% in 1Q23, while operating margin improved to 14.7% (+9.0%p QoQ) and net margin to 13.5% (+4.8%p QoQ) from the reversal of bad debt provisions and forex rate hikes.
Capacity expansion and production ramp-up to add a boost
CNT demand appears solid with Jeio’s battery material output reaching 113 tons in 1Q23, indicating that production facilities have been running above full capacity of 350 tons per annum before the expansion at end-2022. We believe ASP remained steady despite the increase in output, with the decline in prices likely delayed due to supply shortages in the market. Going forward, steady demand for CNT should continue on adoption of high-performance materials such as thin-walled CNT and client efforts to secure domestic suppliers in order to reduce reliance on China for the supply of key materials. Jeio continues to move forward on its capacity expansion plans, despite slight delays in the execution. Annual capacity of 700 tons newly added at the end of 2022 should come on line in earnest by end-2Q23 upon the removal of approval issues. The plant acquired in February this year will add 1,000 tons to annual capacity by the year's end, but actual production ramp- up is expected in 1H24. The company's total capacity should expand by more than 1,000 tons per year, or even faster on growth in demand for thin-walled CNT. All in all, we expect CNT sales to reach KRW78.4bn (+122% YoY) in 2024 and KRW134.1bn (+71% YoY) in 2025.
Target price raised to KRW39,00
We retain BUY on Jeio and raise our target price to KRW39,000, based on 2025F EPS of KRW963 and a target PER of 40.8x. Raw materials are in high demand, unaffected by the earnings volatility of CNT dispersion solution producers. The ownership structure as of end-1Q23 shows that pre-IPO shareholders have sold off all shares that were in one-month lock-up (average share price of KRW23,150) following the IPO. With the overhang from IPO shares in two- or three-month lock-up also starting to dissipate, we expect visible progress reported by the battery materials business to lead to share price gains going forward.