Top Picks: Ecopro BM and Chunbo
The author is an analyst of Shinhan Investment Corp. He can be reached at yjjung86@shinhan.com. -- Ed.
3Q21 preview: Earnings continuing on a sharp uptrend
We now expect POSCO Chemical to post operating profit of KRW33.5bn (+73.0% YoY) on sales of KRW503.8bn (+29.6% YoY) for 3Q21, falling short of the consensus estimate of KRW36.9bn. The company's key growth driver, secondary battery materials, should report sales of KRW180.6bn (+71.6% YoY, +7.7% QoQ) from cathode materials and KRW45.1bn (+3.0% YoY, +5.5% QoQ) from anode materials. Sales growth likely dipped in 3Q21, due to the disruption in EV production at certain client companies.
Ecopro BM is expected to have secured operating profit of KRW34.6bn (+93.6% YoY) on sales of KRW377.6bn (+50.9% YoY) in 3Q21, meeting the market consensus of KRW35bn. Earnings growth was likely driven by: 1) solid demand from clients; and 2) ASP hike to reflect rising prices of raw materials amid favorable market conditions. Prices of metals used to produce NCM cathode materials continued on a steep uptrend, with nickel priced at USD19,000/ton (+34.9% YoY, +10.9% QoQ) as of end-3Q21, cobalt at USD52,000/ton (+64.2% YoY, +13.1% QoQ), and manganese at USD11,000/ton (+43.1% YoY, +21.1% QoQ). Higher metal prices should be reflected into product prices in 4Q21.
Iljin Materials is likely to have generated operating profit of KRW25.1bn (+110.9% YoY) on sales of KRW193.9bn (+47.2% YoY) in3Q21, meeting the consensus estimate of KRW26.9bn. The uptrend in copper foil ASP, which was linked to copper prices, has come to an end. Copper foil export ASP increased from USD14,000/ton in 1Q21 to USD15,000/ton in 2Q21 and USD16,000/ton in 3Q21. We expect 3Q21 results to come in line with market consensus with sales from key subsidiary IMM Technology’s second production line booked in full for the first time.
Top picks: Ecopro BM and Chunbo
In 3Q21, the secondary battery sector enjoyed growth driven by US momentum (capacity expansion, supply deals, etc.). Market conditions in 4Q21 should hinge on: 1) passing on the rise in raw material costs to product prices (profitability); 2) easing of automotive semiconductor shortages; and 3) ramp-up of Tesla’s Berlin gigafactory. We believe the pass-through of raw material cost hikes to product prices will continue in 4Q21, with market conditions remaining favorable for metal and battery materials suppliers. We recommend Ecopro BM as our top pick among cathode materials suppliers, given its strong margins from high-quality, high-nickel products and potential improvement in cost competitiveness through value chain integration at the group level.
Chip shortages and Tesla issues will be the key factors to affect demand for secondary battery materials in the near term. Investors need to focus on companies that can overcome uncertainties in demand. We expect to see growth in demand for materials with increasing applications in secondary batteries (additives, silicon, etc.) to outpace capacity expansion at battery cell makers. Chunbo is thus our top pick in the secondary battery materials sector. We also believe market focus will return to potential beneficiaries of Tesla’s factory ramp-up toward the year’s end.