The author is an analyst for NH Investment & Securities. He can be reached at minwoo.ju@nhqv.com -- Ed.
Near-term earnings are likely to remain tepid at LGES due to ASP decline and fixed cost burden resulting from low operating rates. As such earnings weakness has been foreseen from 2023, however, it is expected that the firm’s share price will be more sensitive to variables such as ASP, government policy, and interest rates rather than lackluster results.
2024 to be challenging
We maintain a Buy rating and TP of W530,000 on LG Energy Solution (LGES). We forecast 2024 sales of W34.5tn (+3% y-y) and OP of W3.1tn (+44% y-y; OPM of 9.1%), expecting sales and OP to arrive 13% and 22%, respectively, short of the consensus of W39tn and W4.0tn. Advanced manufacturing production credit (AMPC) should reach W1.9tn (+176% y-y). Assuming global EV sales of 17.7mn units (+26% y-y), sales volume growth at LGES is projected at +17% y-y. Considering the reflection of metal prices, however, ASP will likely slip 9% y-y, resulting in sluggish sales growth.
4Q23 preliminary review: Misses consensus due to ASP decline and operating rate decrease
On a preliminary basis, LGES posted 4Q23 sales of W8.0tn (-6% y-y, -2% q-q) and OP of W338.2bn (+42% y-y; OPM of 4.2%), with sales and OP arriving short of consensus by 5% and 42%, respectively. AMPC totaled W250.1bn (+16% q-q), with OP excluding AMPC reaching W88.1bn (OPM of 1.1%). One-off costs were minimal. We mainly attribute the languid result to margin deterioration stemming from ASP decline (about -7% q-q), which is likely to continue into 1Q24, and fixed cost burden caused by operating rate decrease. By business, sales are estimated as: automotive battery W5.0tn (-9% q-q; OPM of 4%), small battery W2.0tn (-15% q-q; OPM of 1%), and ESS W1.0tn (+200% q-q; OPM of 9%).
We forecast 1Q24 sales of W7.4tn (-15% y-y, -7% q-q) and OP of W304.7bn (-52% y-y; OPM of 4.1%), expecting sales and OP to miss consensus by 11% and 52%, respectively. OP excluding AMPC is projected at W37.2bn. It is predicted that the effects of high-priced raw material (purchased in 4Q23) input will continue into 1Q24. In addition, low operating rates due to off-peak seasonality will inevitably result in continued fixed cost burden.