To Benefit from Government’s Fine Dust Reduction Efforts
The author is an analyst of NH Investment & Securities. He can be reached at hyundong.lee@nhqv.com. -- Ed.
As ESG-related investments increase, interest in E&D, an environmental company, is growing. In 2021, we expect to see: 1) rising sales at the environment division, led by the government’s expanded particulate matter reduction budget; and 2) valuation re-rating on the addition of rechargeable battery materials capacity.
Government’s particulate matter reduction budget to grow in 2021
In 2020, as ESG (environment, social, and governance) emerged as a keyword among investors, interest in E&D, an environmental company, rose. On Nov 24, we conducted an NDR for institutional investors. The main issues of interest were: 1) the 2021 outlook for the environment (catalyst system, catalyst) business; and 2) rechargeable battery cathode precursor capacity additions.
The government’s 2020 budget for particulate matter reduction in Class 5 vehicles (80,000 units) has risen to W350.0bn (+62% y-y), a move that has boosted earnings at E&D’s environmental business. We expect the business to report 2020 sales of W95.8bn (+64.2% y-y) and OP of W19.3bn (+97.1% y-y).
In 2021, the government’s budget is expected to grow by more than 15% amid restrictions on the operation of Class 5 vehicles in the metropolitan area and the expansion of regulations to Class 4 vehicles in Seoul. The firm also plans to diversify its business lineup via the addition of new businesses (including the engine replacement business for construction machinery and the B2C replacement catalyst business). We expect sales at the environment business division to reach W112.3bn next year.
Capacity expansion begins for rechargeable battery precursor
In the rechargeable battery industry, E&D’s core competitiveness lies in the manufacturing of cathode precursors with uniform particle size distribution. The use of small-diameter precursors increases when high-density and high-nickel batteries are applied, and domestic and overseas cathode materials players, which are major customers, are already expanding capacity.
E&D plans to use W22bn of its W34.4bn in IPO funds to grow its cathode active material precursor capacity to 3,000 tons, a figure that is earmarked to rise further to 10,000 tons. With full-scale sales set to be generated from 2H21, we expect E&D to be re-evaluated as a rechargeable battery materials player next year.