Cathode Materials Market Leader
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Initiate coverage with BUY for a target price of KRW90,000
We initiate our coverage of Ecopro BM with BUY for a target price of KRW90,000, based on 12-month forward EPS and the global peer average PER of 25x. Shares are currently trading below the 12-month forward PER high of 40x, low of 22x, and average of 29x recorded since the company's IPO. EV-related sales accounted for just 18% of annual sales in 2018 but should surge to 46% in 2020. Given its strengths in high-nickel cathode materials, we believe Ecopro BM deserves to trade at valuations on par with global peers.
Cathode materials market leader + synergy with group affiliates
Ecopro BM was spun off from Ecopro to focus on the supply of cathode materials to group affiliates. The group is remaining ahead of domestic cathode materials peers on vertical integration from battery manufacturing to recycling, with cathode material precursors supplied by Ecopro GEM, lithium processed by Ecopro Innovation, oxygen and nitrogen for battery production provided by Ecopro AP, and waste batteries recycled by Ecopro CnG.
Drawing on its advanced technology and dominance in the value chain, Ecopro BM has secured a large-scale order for high-nickel NCM (nickel, cobalt, manganese) cathode materials used in third generation EVs from SK Innovation, one of three major domestic battery makers. The company is also proceeding on establishing a joint venture with Samsung SDI. Ecopro BM’s cathode materials production capacity is expected to jump from 29,000 tons at end-2019 to 56,000 tons in 2020, with large-scale orders to drive a speedy ramp-up of operations at the company's new plant.
2020 OP to reach KRW56.3bn (+51.8% YoY) on ramp-up of CAM5 plant
For 2020, we forecast sales at KRW830.1bn (+34.7% YoY) and operating profit at KRW56.3bn (+51.8% YoY). Ecopro BM completed construction on its new CAM5 plant (annual capacity of 27,000 tons, equivalent to 93% of current capacity) at end-2019. With operations at the new plant to ramp up in earnest from 2Q20, we expect the sales share of EV-related materials to surge from 28% in 1Q20 to 60% in 4Q20. With orders already secured, earnings volatility should hinge mainly on the price of feedstock (nickel, cobalt, manganese) going forward. Feedstock prices are on a slight decline in 2Q20 but are expected to rebound in 2H20.