EV Battery Growth Story Reigniting
The author is an analyst of NH Investment & Securities. He can be reached at j.ko@nhqv.com. -- Ed.
Considering that plant operations are resuming for clients of the EV battery business, and that fundamentals should continue improving at the electronic materials domain, we believe that many of the discount factors recently affecting Samsung SDI due to Covid-19 have been resolved. We raise our TP.
Valuation discount factors fading + EV battery growth story reigniting
We raise our TP on Samsung SDI from W285,000 to W330,000, as: 1) we remove the 10% discount applied in valuating each division due to Covid-19; and 2) we upwardly adjust our 2H20 earnings estimates for the EV battery business, as major auto plants in Europe are now restarting production.
Looking first at the rechargeable battery business, we remove the discount applied due to Covid-19 risk factors. Regarding the EV battery sector, which is driving the rise in Samsung SDI’s corporate value, it should be noted that: 1) major automobile factories in Europe are expected to re-open in 2Q20; 2) no moves to deregulate CO2 emissions have surfaced in Europe; and 3) scheduled launches of new EVs largely remain on track. Accordingly, we upwardly adjust our EV battery earnings estimates. However, given the impact of preemptive inventory buildup by clients in 1Q20, EV battery earnings improvement will likely begin from 2H20. We hike our 2H20 sales and OP projections for the EV battery business by 13% and 48%, respectively.
At the electronic materials business, fundamentals appear intact, and the slowdown in earnings due to Covid-19 should end in 2Q20, with earnings likely recovering from 2H20. In particular, the OLED materials business should benefit from new smartphone releases slated for 2H20.
1Q20 review: Earnings defended thanks to preemptive inventory buildup effects at EV battery business
Samsung SDI reported 1Q20 OP of W54bn (+168% q-q), surpassing our estimate of W39.2bn. We mainly attribute this favorable result to the effects of preemptive inventory buildup by clients at the EV battery business in 1Q20. On the other hand, the small-sized battery business suffered due to reduced sales of cylindrical batteries, and the ESS battery domain faced a slowdown in domestic ESS demand. Despite sluggish shipments of OLED materials, the electronic materials business looks to have prevented profitability decline via increased sales of other materials.