Taking Lead in Global EV Battery Market
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Initiate coverage with BUY and target price of KRW474,000
We initiate our coverage of LG Chem with a BUY rating and a target price of KRW474,000, equivalent to 2020F target PER of 65.6x and target EV/EBITDA of 13.1x. Based on 2021 earnings, our target price equals a PER of 38.7x and an EV/EBITDA of 10.8x. The secondary battery business is valued at KRW27.9tr (2020F EV/EBITDA of 31x, 50% of Contemporary Amperex Technology’s market cap) and petrochemicals/other operations at KRW9.3tr (2020F EBITDA of 4.5x). With secondary batteries accounting for 75% of valuation, the share price going forward should hinge on battery earnings rather than cyclical petrochemical earnings.
Taking the lead in the global EV market with a diversified business portfolio
LG Chem is aggressively expanding the secondary battery business. It appears to have the world’s largest production capacity of small/mid-size EV batteries at 70GWh as of end-2019. A diversified business portfolio provides a stable source of funding for investment. Petrochemicals account for 54% of sales, secondary batteries 29%, advanced materials 17%, and life science 4%.
Fears of a global recession have increased due to COVID-19. However, the pandemic has created two opportunities for LG Chem. First, the company should be able to take the lead in the secondary battery market with its preemptive investment. Latecomers hit by a global credit crunch are likely to delay their capex spend. Second, low oil prices for an extended period have brought naphtha cracking-based operations back into competitive zone. The price of naphtha is estimated to drop 29% from USD447/ton in 1Q to USD316/ton in 2Q.
2020F OP of KRW1.4tr (+52.4% YoY) on strong chemicals in 1H, EV batteries in 2H
For 2020, we forecast sales at KRW32.8tr (+14.6% YoY) and operating profit at KRW1.4tr (+52.4% YoY). Earnings in 1H20 should be weighed down by sluggish demand for petrochemical products (capacity utilization rate of 95% in 2019 vs. 88% in 1Q20) and capex spend in secondarybatteries (1H20F battery operating margin of -3%). A rebound looks possible in 2H. Profitability is expected to improve on naphtha price declines and full-fledged EV battery shipments (assuming capacity utilization rate of 45% in 1Q20, 60% in 4Q20). The YoY base is also lowered from provisions booked last year related to ESS fire accidents.