Demand for Battery Materials Forecast to Increase

The author is an analyst of NH Investment & Securities. He can be reached at jangjaeho@nhqv.com. -- Ed.

 

 

 

Increasing demand from downstream industries and Chunbo’s large-scale capacity additions for rechargeable battery materials should make up for sluggish electronic materials sales, allowing the company’s earnings to continue to rise.

Rechargeable battery materials division progressing smoothly

We maintain a Buy rating on Chunbo, but lower our TP from W78,000 to W70,000 as we downwardly adjust our target P/E multiple from 23x to 21x (10% discount to the peer companies’ average 2020 P/E of 24x) due to worsening investment sentiment amid the Covid-19 outbreak.

Chunbo’s LiFSi (electrolyte) improves battery life-span problems that occur when high-nickel cathode is applied. Noting the rising penetration of high-nickel-based batteries, we expect the mixing ratio for the company’s electrolyte LiFSi to increase, resulting in a greater demand for its products. Against this backdrop, the firm is undertaking large-scale capacity expansion this year: 1) LiFSI capacity is to grow 35 tons/month from April; 2) LiPO2F2 capacity is to rise 15 tons/month from 3Q20; and 3) LiDFOP capacity is to climb 20 tons/ month from 2Q20 and year-end, respectively. Total capacity should jump from 660 tons/pa in 2019 to 1,740 tons/pa in 2020.

4Q19 results meet expectations

Chunbo’s 4Q19 results met consensus and our estimates, with sales of W33.7bn (-2.6% q-q, -7.7% y-y) and OP of W6.9bn (+12.9% q-q, -26.0% y-y). The main reason for the earnings drop is reduced LCD etchant additive shipments owing to the conversion of production lines at domestic display makers (LCD → OLED). Also, the Covid-19 outbreak is believed to have lowered the utilization rate at the company’s LCD etchant additives business in 1Q20, which has a high portion of sales to China. That said, the impact on other business divisions should be limited.

Earnings at the rechargeable battery materials division are projected to rise each quarter thanks to: 1) normalized operation rates at the firm’s LiPO2F2 facility, which was expanded in 4Q19; and 2) additional capacity expansions scheduled for this year. Rechargeable battery sales are set to grow 97% y-y to W103.2bn this year, accounting for 56% of sales and offsetting a decline in electronic materials sales. We note that Chunbo is trading at a 2020 P/E of 18x, which is undervalued versus the average P/E of 24x for rechargeable battery players.

 

 

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