Expected to Retain a Market-leading Position
The author is an analyst of NH Investment & Securities. He can be reached at ys.hwang@nhqv.com. -- Ed.
With the split-off of its battery division, LG Chem is to gain access to a fresh range of options for securing cash. Buoyed by full-scale EV market expansion, OP at the rechargeable battery business should increase 95% y-y next year. Earnings at the petrochemical division are expected to concentrate in 1H21, considering a likely weakening in Covid-19.
EV battery business showing robust competitiveness
Adhering to a Buy rating, we raise our TP on LG Chem by 29% from W850,000 to W1,100,000. Our TP adjustment is mainly attributable to: 1) a shift in the base year used for calculation (2020E → 2021F); and 2) a hike in our target multiple in reflection of share price rise at peers. If LG Energy Solutions achieves IPO or secures a strategic investor to accelerate its battery business growth, further TP improvement is possible.
On Dec 1, LG Chem’s battery division was split off and re-launched as LG Energy Solutions, a venture which will include LG Chem’s overseas rechargeable battery manufacturing operations. Of note, existing plans for JVs are expected to be continued by the new company. Expecting cooperation among the old and new ventures, we note that the materials business is to be run by LG Chem (existing). As battery business growth currently requires astronomical levels of capex, LG Energy Solutions looks set to retain a market-leading position via the securing of greater funds than its peers.
Going forward, LG Energy Solutions’ influence in the rechargeable battery arena should only strengthen further, backed by the diversification of production sites, reinforcement of client bases, and development of rechargeable battery technologies. Its fundamentals should continue to improve as well, as the company looks to possess the necessary competitiveness to secure robust demand for its products from downstream industry plays.
Earnings to concentrate in 1H21 at petrochemical division, 2H21 at battery division
We now expect LG Chem to log 4Q20 OP of W669.7bn (TTP y-y, -25.8% q-q), lowering our previous forecast to reflect opportunity cost of W150bn stemming from a halting in operations at the Yeosu plant (NCC; capacity of 1.2mn tons). LG Chem’s earnings are also to be negatively impacted by the recent sharp deterioration in forex rates. On the other hand, we note that spread expansion being witnessed for main products thus far in December should help to boost OPM. Such strong spreads are likely to cool somewhat once Lotte Chemical’s Daesan plant and LG Chem’s Yeosu plant resume business in late December and early January, respectively.
In 2021, earnings are expected to concentrate in 1H21 at the petrochemical division and 2H21 at the battery division. Assuming that Covid-19 vaccine dispersal is spread out across 2021, the effects of favorable seasonality for petrochemical products will likely be weakened next year to some extent. However, any decline in demand for petrochemical products should materialize slowly. Considering that effects from Yeosu plant expansion (planned NCC capacity addition of 800,000 tons) are to contribute to the firm’s 2H21 earnings, any difference in earnings between 1H21 and 2H21 should remain within reason.