The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
Samsung SDI is expected to report sluggish 1Q20 results. The recent shutdown of European auto plants due to Covid-19 is undermining the short-term growth potential of the battery business. However, once the Covid-19 outbreak is under control, normalization should proceed rapidly across all businesses, with the firm predicted to benefit greatly thanks to its high sales exposure to Europe (EV battery business). We maintain a Buy rating.
Short-term growth undermined, but long-term prospects remain strong
We lower our TP for Samsung SDI from W330,000 to W285,000, in light of downward adjustments to our EV battery shipment estimates due to the shutdown of major European auto factories. In addition, a discount was applied to each business division in consideration of greater macro-related earnings forecast uncertainty.
Currently, investor concerns are rising towards the short-term growth outlook for the EV battery business, the main driver of Samsung SDI’s enterprise value. In particular, the shutdown of major auto plants and the possibility of EV launch delays (due to the spread of Covid-19 in Europe) are being viewed as factors affecting the business’s short-term growth potential. However, with no move to deregulate CO2 emissions in Europe on the horizon and European automakers strengthening their EV lineup expansion strategies, we believe that the long-term growth prospects for the rechargeable battery industry remain robust.
Believing that the Covid-19 situation in Europe will ease from 2H20, we anticipate seeing rapid improvement in the variables affecting Samsung SDI as well as earnings recovery, as Europe represents a key region for the firm’s EV battery business (in terms of client number and production capacity). We advise approaching Samsung SDI shares from a long-term investment perspective.
1Q20 preview: To report sluggish earnings, as expected
We estimate Samsung SDI’s 1Q20 sales at W2.31tn (-18% q-q) and OP at W3.92bn (+95% q-q). By business, we believe that: 1) small-sized battery earnings were weighed upon by decreased shipments of polymer batteries for smartphones; 2) mid/large-sized battery earnings improvement was temporarily restrained by deterioration in EV battery product mix amid slow domestic demand for energy storage systems (ESSs); and 3) given no fundamental changes (despite weak seasonality), the electronic materials business continued to make a strong contribution to overall profits.