Secondary battery
The author is an analyst for Shinhan Securities. He can be reached at yjjung86@shinhan.com -- Ed.
Concerns over weakening policy momentum in North America
In the secondary battery sector, we had previously recommended battery separator makers as our top picks based on the following reasons: 1) benefits expected from the Inflation Reduction Act (IRA); 2) earnings turnaround of bellwether secondary battery manufacturers; and 3) investors taking interest in battery separators which have been overlooked for a long time. Recently, momentum from forays into North America, the main driver behind share price movements, has been negatively affected by US policy issues including the IRA. Gotion High-Tech, in which Volkswagen holds the largest stake, has been given the green light by the Committee on Foreign Investment in the United States (CFIUS). The decision allows the Chinese battery maker to bypass the IRA regulations and go ahead with its planned capex project in the country. Policy momentum could weaken if the US Treasury Department limits the definition of foreign entity of concern (FEOC) in its guidance set to be released this year to ensure more EVs can quality for IRA tax credits.
Upbeat outlook on domestic suppliers of battery separators
As emphasized in our 2H23 outlook report, policy momentum is a variable that is liable to change depending on political issues. If the US Treasury Department’s definition of FEOC is broad and bans Chinese EV battery components from the US market, Korean suppliers would be able to secure more orders. This also means that they would need to move away from the Chinese supply chain. On the other hand, a limited definition would allow Chinese companies to compete for orders in North America.
For battery separator makers, policy momentum is a constant that remains intact regardless of changing political circumstances. Battery separators are made of commodity resins, and therefore have no China exposure. With Chinese battery separator giants Yunnan Energy New Materials and Sinoma Science & Technology likely to be designated as FEOCs, the competition in the US should be waged between Korean and Japanese separators. We believe SK IE Technology and W-Scope Chungju Plant (WCP) will secure massive orders from North America in 2H23.
Retain BUY on SK IE Technology and WCP, target prices revised up
We raise our target price for SK IE Technology by 14% to KRW120,000, based on 2025F EV/EBITDA of 24x (average multiple of domestic secondary battery materials companies). Our target price for WCP is revised up by 21% to KRW85,000. We applied 2025F EV/EBITDA of 16x, which is a 30% discount to the domestic peer average, as investment in an overseas subsidiary starts this year and will take time to secure initial yield. The discount will be reduced if it ramps up fast enough