Automakers May Internalize Battery Production
The author is an analyst of KB Securities. He can be reached at cm.lee@kbfg.com. -- Ed.
Initiate coverage with BUY and target price of KRW560,000
We initiate coverage of Samsung SDI with a BUY rating and TP of KRW560,000 (upside of 29.8%). We expect 2019-22 CAGR OP of 51% (vs. WMI500 CAGR OP of 19%). Our DCF-derived TP (5.21% WACC; 1.60% TGR) represents 44.2x implied P/E and 14.25x EV/EBITDA.
Key investment point: Growth of EV/ESS battery business
EV/ESS batteries are at the center of Samsung SDI’s earnings growth. We expect EV/ESS battery OP to reach KRW1tn (5y CAGR of 79% after turn to black)/KRW151.6bn (5y CAGR of 62% after turn to black): (1) EV/ESS battery demand should register 5y CAGRs of 37%/29% on the back of increasing EV production at European automakers and global green initiatives. (2) The resulting rise in capacity utilization rates will lighten fixed-cost burdens, boosting EV/ESS battery OPM (-7%/-32% in 2019→+9%/+5% in 2024). We expect earnings contributions from EV/ESS batteries will jump to 49%/7% in 2024 from -33%/-70% in 2019, stabilizing Samsung SDI earnings.
Key risk factor: Automakers may internalize battery production
Samsung SDI’s main EV battery clients are global automakers. The market for lithium-ion batteries has a high entry barrier because of the massive investments in technology needed to satisfy various government requirements related to areas such as efficiency and safety. However, if automakers successfully internalize EV battery production in their bid to lower production costs, Samsung SDI’s top-line growth will slow considerably.