Horizontal and Vertical Expansions Underway
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
Horizontal and vertical expansions underway
POSCO Chemical has aggressively increased capex in secondary battery materials, backed by solid cash inflows from existing operations and support from POSCO Group. The company has the most diversified line-up of products (cathode and anode materials) among domestic peers. Quantitative growth going forward will likely hinge on vertical expansion.
The addition of new clients and vertical integration of the value chain will be key to the cathode materials business. POSCO Chemical has proven its product competitiveness with the development of next-generation NCMA (nickel-cobalt-manganese-aluminum) cathode materials. The success of vertical integration (rare earth, precursor, etc.), which is being promoted as a long-term strategy, is expected to help diversify the client base and increase profitability. The anode materials business has already secured a pool of diverse clients, and thus needs to focus on developing next-generation materials, such as synthetic graphite and silicone additives. POSCO Chemical is likely to start mass production of synthetic graphite at a new plant in Pohang in around 2022-2023.
Strong growth expected for both existing and new businesses
Mid/long-term capex plans should be supported by strong short-term earnings delivery. Existing businesses (refractories, quicklime) are expected to report sales of KRW266.6bn (+13.9% YoY) and steady margins for 2Q21, with capacity utilization rates remaining high thanks to the boom in downstream industries. The energy materials division will likely keep on a steep growth track with sales of KRW203bn (+114.6% YoY), despite concerns over output cutbacks amid the global chip shortage. Cathode materials sales have been solid with no disruption in the production of flagship models at automotive clients. As for anode materials, a drop in shipments to EV makers has been offset by robust demand from IT and ESS companies. We forecast POSCO Chemical to post operating profit of KRW37.6bn (+822.9% YoY) on sales of KRW481bn (+41.4% YoY) in 2Q21, meeting market expectations.
Retain BUY for a target price of KRW170,000
We retain our BUY rating on POSCO Chemical for a target price of KRW170,000, based on 2023F EBITDA and a target EV/EBITDA of 31.8x. The phase 3 and 4 expansions for the cathode materials plant in Gwangyang should be completed for operation in 2023. With mid/long-term capex plans already announced earlier this year, the company will need to either attract new cathode materials clients or find new momentum such as overseas investment to drive a share price rally.