We lower our TP on SK Innovation to W190,000. Although operating losses at the battery business narrowed in 3Q23, expectations for the pace of earnings improvement need to be reduced. Nevertheless, profitability remains on an uptrend thanks to battery facility yield improvement and US sales expansion. We maintain a Buy rating.
Lower TP to W190,000
Although maintaining a Buy rating, we lower our TP on SK Innovation by 10% to W190,000. We cut our estimate for the operating value of the battery business by 11% to reflect downwardly adjusted OP forecasts in line with slowing demand for rechargeable batteries and falling ASPs. However, SK On’s competitiveness is still strengthening on rising battery plant yields and increased AMPC from greater production and sales in the US. Profitability improvement should prove rapid once the battery business environment rebounds (eg, reaching of price bottom and growth in downstream demand).
3Q23 review: Significantly above consensus, but still disappointing
SK Innovation logged 3Q23 sales of W19.9tn (+6.2% q-q) and OP of W1.56tn (TTP q-q; OPM of 7.9%). Backed by rising oil prices and refining margins, OP at the oil division reached W1.1tn (OPM of 9.0%). At both the chemical and lubricant divisions, despite deteriorating business conditions, OP improved q-q thanks to valuation gains reflecting price increase. At the battery division, sales came to W317.3bn (-14.2% q-q), impacted by falling ASPs and slowing demand, with operating loss of W86.1bn (RR q-q; OPM of -2.7%). In 3Q23, related operating loss narrowed q-q on an increase in received AMPC (W209.9bn) in line with yield growth at US plants. However, actual battery OPM (excluding AMPC effect of W119.8bn) slid by 2.5%p from -6.8% in 2Q23 to -9.3% in 3Q23.
In 4Q23, profitability should continue to recover at the battery business on increases in AMPC (4Q23E: W235.4bn) and sales. On a consolidated basis, however, OP will likely shrink due to operating losses at the oil business.