Earnings Improvement Prominent
The author is an analyst of NH Investment & Securities. He can be reached at ys.hwang@nhqv.com. -- Ed.
LG Chem is expected to post forecast-beating 2Q20 OP thanks to rising OP at the basic chemicals division and a turnaround at the battery business. In particular, with the xEV battery business likely having reached BEP in 2Q20, expectations are rising that LG Chem’s earnings will grow strongly in line with the global xEV market’s expansion.
Earnings improvement prominent at basic chemicals and battery businesses
Reiterating a Buy rating, we raise our TP on LG Chem by 18% from W550,000 to W650,000, as: 1) our 2020 OP forecast is hiked to reflect faster-than-expected earnings recovery at the basic chemicals and battery divisions; and 2) our SOTP-derived EV for the firm widens on a rise in the average valuation multiple for global EV rechargeable battery companies.
We estimate the firm’s 2Q20 OP at W442.7bn (+65.5% y-y, +87.2% q-q). By business, while the basic chemicals division likely saw a dip in sales due to lower oil prices, product spreads likely widened, as: 1) the drop in raw material (naphtha) prices outpaced that for oil; and 2) strong demand for PE/PP and ABS in Asian markets (including China) helped to limit product price decline. With the above-mentioned trends sustaining, we predict that the basic chemicals division will continue to enjoy strong earnings in 3Q20, a peak season for petrochemical products.
xEV rechargeable battery business likely reached BEP in 2Q20
Believed to have logged OP of W36.6bn (OPM of 1.2%), the battery division likely saw a turnaround in 2Q20. In particular, backed by rising production yield, improving product mix, and shipment growth, the xEV battery business likely reached BEP. Given that European countries began giving out greater subsidies for xEV purchases from June, we expect xEV sales volume to expand in 2H20. LG Chem’s xEV battery margins should improve gradually as well.
To meet rising demand for EV rechargeable batteries, LG Chem is preparing to boost capacity by simultaneously expanding its own facilities and signing JVs with automakers. We note that China-based SMGA and US GM have set up a JV for rechargeable batteries, and HMC and Tesla are in discussions over a potential rechargeable battery JV deal. LG Chem’s EV rechargeable battery capacity looks set to reach 100GWh by end-2020 and 120GWh by end-2021.