Planning to Expand Production Capacity for EV Battery Materials
The authors are analysts of Shinhan Investment Corp. They can be reached at yjjung86@shinhan.com and ik.jung@shinhan.com, respectively. -- Ed.
4Q20 operating profit forecast at KRW24bn (+3.3% YoY)
POSCO Chemical is expected to have recorded operating profit of KRW24bn (+3.3% YoY) on sales of KRW477bn (+23.3% YoY) for 4Q20, slightly missing the market consensus (KRW25.3bn) by 5.1%. Sales from existing businesses (refractories, quicklime, chemicals) should have recovered to KRW278.6bn (-9.7% YoY) after 3Q20’s steep decline (-24.8% YoY). Sales of cathode and anode materials likely continued on an uptrend to reach KRW186.1bn, up by 181.8% YoY and 22.6% QoQ. With economies of scale in full force, we expect to see visible improvement in profitability going forward.
Focus on signals of growth
POSCO Chemical shares have gained 65.7% since the company announced a rights offering worth KRW1tr on November 6. Considering the dilution effect, shares have actually increased more than 90%. Instead of focusing on the short-term dilution of shareholder value, investors appear to have bet on: 1) long-term investment funds secured through solid financials; 2) expectations for group-wide collaboration from the largest shareholder’s participation in the rights issue; and 3) the company’s confidence in winning massive new orders confirmed in its long-term guidance through 2030. POSCO Chemical plans to expand its production capacity for cathode and anode materials to 400,000 and 260,000 tons by 2030, respectively, which is enough to make over 5mn electric vehicles.
Retain BUY and raise target price to KRW145,000
We retain our BUY rating on POSCO Chemical and raise our target price by 81% to KRW145,000 due to a change in valuation method to sum-of-the-parts. We applied a target EV/EBITDA of 7.2x (average of 2012-2016 before energy materials rose to prominence) to existing operations. For the energy materials division, a target EV/EBITDA of 49x (15% premium to average of Ecopro BM and L&F, two pure-play cathode materials peers) is applied to 2021F EBITDA.