Secondary battery
The author is an analyst for Shinhan Securities. He can be reached at yjjung86@shinhan.com -- Ed.
2Q OP meets expectations at KRW16.7bn (+14% YoY, +4% QoQ)
W-Scope Chungju Plant (WCP) posted operating profit of KRW16.7bn (+14% YoY, +4% QoQ) on sales of KRW76bn (+21% YoY, +1% QoQ) for 2Q23, coming in line with market expectations. Profitability remained high at an operating margin of 22.1% (-1.3%p YoY, +0.7%p QoQ), with growing demand for separators used in EV batteries offsetting weaker-than-anticipated demand for those used in small cylindrical batteries. At present, the Chungju plant’s production lines 1-6 are used mainly for the supply of EV battery separators to key client Samsung SDI. As newly added production lines 7 and 8 are scheduled to ramp up production in 1H24, we expect to see no significant changes in company-wide sales in the near term. Coating lines newly acquired from affiliate W-Scope Korea should begin to contribute to consolidated sales from September onwards.
Beginning of strong new order inflows
Since the implementation of the US Inflation Reduction Act (IRA), investor interest has been high for new client additions and mid/long-term growth potential in North America. Upon confirmation of larger order inflows from biggest client Samsung SDI and the addition of new client companies, WCP will be able to use the order intake data to finalize investment plans for overseas markets centering on North America. The company's current plans point to an expansion of production capacity from 0.8bn ㎡ to 2.4bn ㎡ over the next three years, but further upward adjustment is expected according to the scale of long-term supply agreements signed this year.
The recent signing of a large-scale memorandum of understanding (MOU), disclosed by parent W-Scope Corp. on July 31, marks the beginning of a series of new order inflows expected for WCP. According to the disclosure, the Chungju plant will supply around 4bn ㎡ of separators to Samsung SDI over the next five years (2023-2027) for use in the client's EV battery production in Korea, North America, and other regions. Translating into sales of KRW3.5tr based on simple calculation, the value of the supply agreement is over tenfold our full-year 2023 sales forecast for WCP. Although the disclosure was made by the parent listed on the Japanese bourse, most of the orders for EV battery-use separators are expected to be handled by WCP.
Retain BUY and raise target price to KRW105,000
We maintain BUY and raise our target price to KRW105,000. In our view, WCP has just entered a phase of strong order inflows, driven by brisk demand from North America. Our projections for capacity expansion and earnings will likely be revised upward upon confirmation of new client additions.